KeyCorp (NYSE: KEY) today announced a first quarter net loss attributable to Key of $488 million, or $1.09 per common share, compared to net income attributable to Key of $218 million, or $.54 per diluted common share, for the first quarter of 2008. The loss for the current quarter was primarily the result of an increase in the provision for loan losses and a noncash accounting charge for intangible assets impairment. In light of the prevailing economic environment during the first quarter of 2009, Key continued to build its loan loss reserves by taking an $875 million provision for loan losses, which exceeded net charge-offs by $383 million. As of the end of the quarter, Key s allowance for loan losses was $2.186 billion, or 2.97% of total loans, up from $1.298 billion, or 1.70% one year ago. Additionally, the company determined that the estimated fair value of its National Banking reporting unit was less than the carrying amount, reflecting continued weakness in the financial markets. As a result, Key recorded an after-tax noncash accounting charge of $187 million. Importantly, this adjustment did not affect Key s regulatory and tangible capital ratios. As a result of this charge, Key has now written off all of the goodwill that had been assigned to its National Banking reporting unit.
Net loss of $1.09 per common share
Loan loss reserve increased by $383 million to $2.186 billion, or 2.97% of total loans
Noncash after-tax charge of $187 million ($.38 per common share) taken for intangible assets
impairment
Capital ratios remain strong; 11.16% for Tier 1 capital and 6.06% for tangible common equity
Board declares dividend on Series A Preferred Stock; expresses intention to reduce common
share dividend
$32 million dividend paid to U.S. Treasury under Capital Purchase Program
$7.8 billion in new or renewed loans and commitments originated
Costs well controlled
In light of the prevailing economic environment during the first quarter of 2009, Key continued to build its loan loss reserves by taking an $875 million provision for loan losses, which exceeded net charge-offs by $383 million. As of the end of the quarter, Key s allowance for loan losses was $2.186 billion, or 2.97% of total loans, up from $1.298 billion, or 1.70% one year ago. Additionally, the company determined that the estimated fair value of its National Banking reporting unit was less than the carrying amount, reflecting continued weakness in the financial markets. As a result, Key recorded an after-tax noncash accounting charge of $187 million. Importantly, this adjustment did not affect Key s
regulatory and tangible capital ratios. As a result of this charge, Key has now written off all of the
goodwill that had been assigned to its National Banking reporting unit.
Our results reflect an extremely challenging operating environment and the expedient steps we continue to take to identify problem loans and to build Key s loan loss reserves, said Chief Executive
Officer Henry L. Meyer III. We believe building additional reserves is appropriate given the continued pressure on credit quality, as more businesses and consumers are affected by the persistent severity of the economic downturn.
Our top priorities are to manage through the credit cycle and maintain a strong capital position, Meyer noted, adding that Key s Board of Directors has expressed its intention to reduce Key s quarterly dividend on common shares to $.01 per share from $.0625, commencing in the second quarter of 2009, an action that will retain approximately $100 million of capital on an annual basis. At March 31, 2009, our Tier 1 capital ratio was 11.16% and our tangible common equity ratio was 6.06%. Additionally, we
remain focused on managing our costs.
During the first quarter, Key originated approximately $7.8 billion in new or renewed loans and
commitments to consumers and businesses. In the current environment, it is imperative that we strike a
careful balance between managing risk effectively and doing our part to help the country regain its
financial viability, said Meyer. Our commitment is to be part of the solution, as evidenced by our
participation in the U.S. Treasury s Capital Purchase Program, designed to provide capital to healthy
financial institutions to help restore stability to the financial sector and to increase the availability of
credit to individuals and businesses.
Key s Community Banking business continues to benefit from its relationship banking strategy as evidenced by solid loan and deposit growth. Compared to the first quarter of 2008, average loans grew by $855 million, or 3%, and average deposits rose by $1.783 billion, or 4%.
SUMMARY OF OPERATIONS
Key s taxable-equivalent net interest income was $620 million for the first quarter of 2009, compared to $704 million for the year-ago quarter. The net interest margin for the current quarter declined to 2.77% from 3.14% for the first quarter of 2008. During the past year, the net interest margin has remained under pressure as the fall in the federal funds target rate has caused interest rates on earning assets to decline more rapidly than the rates paid for interest-bearing liabilities. Competition for deposits and a shift in deposit mix to higher costing certificates of deposit have contributed to a lower net interest margin. In addition, earning asset yields have been compressed as a result of the higher levels of nonperforming assets.
Compared to the fourth quarter of 2008, taxable-equivalent net interest income decreased by $26
million, and the net interest margin was essentially unchanged. During the first quarter, the net interest
margin began to stabilize as deposits repriced and the volume of lower-yielding assets decreased as
liquidity improved in the commercial paper market for certain customer segments. These positive developments were moderated by a higher level of nonperforming assets. Average earning assets decreased by $3.242 billion, or 3%, reflecting improved liquidity for commercial customers in the
commercial paper market and a reduction in the demand for standby credit. Run-off in Key s exit
portfolio, net charge-offs and a lower federal funds sold position also contributed to the decrease in
earning assets compared to the fourth quarter of last year.
Key s noninterest income was $492 million for the first quarter of 2009, compared to $530 million for the year-ago quarter. The decrease was attributable to two primary factors. Key recorded net losses of $72 million from principal investing in the first quarter of 2009, compared to net gains of $11 million for the same period last year. In addition, Key recorded a $105 million gain from the sale of Visa Inc. shares during the first quarter of 2009, compared to a $165 million gain from the partial redemption of shares one year ago. Excluding principal investing activities and the gains associated with the Visa shares, Key s noninterest income was up $105 million from the first quarter of 2008. Contributing to this improvement was a $19 million increase in gains on leased equipment (included in miscellaneous income ) and a $10 million increase in income from investment banking and capital markets activities. In addition, Key had net gains of $8 million from loan sales in the current quarter, compared to net losses of $101 million for the same period last year. The increase attributable to these factors was offset in part by net losses of $14 million from securities in the current year and a $12 million reduction in income from trust and investment services.
Compared to the fourth quarter of 2008, noninterest income increased by $97 million, due primarily to the $105 million gain from the sale of Visa Inc. shares recorded during the first quarter and a $24 million reduction in net losses from investments made by the Private Equity unit within Key s Real Estate Capital and Corporate Banking Services line of business. Additionally, during the first quarter of 2009, Key recorded net gains (included in miscellaneous income ) of $11 million related to the volatility associated with the hedge accounting applied to debt instruments, compared to net losses of $39 million
recorded in the prior quarter. The increase in noninterest income attributable to these factors was offset in part by a $35 million increase in net losses from principal investing and a $21 million reduction in income from trust and investment services. Key s noninterest expense was $973 million for the first quarter of 2009, compared to $733 million for the same period last year. Excluding the intangible assets impairment charge of $223 million recorded in the current quarter, noninterest expense was up $17 million, or 2%. Personnel expense decreased by $47 million as a result of lower incentive compensation accruals and a reduction in salaries expense caused by a 5% decline in the number of average full-time equivalent employees. The reduction in personnel expense was more than offset by a $64 million increase in nonpersonnel expense (excluding the intangible assets impairment charge), due primarily to a $27 million credit for losses on lendingrelated commitments recorded in the first quarter of 2008 and a $28 million increase in the FDIC deposit insurance assessment. The higher deposit insurance assessment is a result of actions recently taken by the FDIC to restore the Deposit Insurance Fund to the minimum level acceptable under current law. Additionally, professional fees rose by $12 million as a result of higher costs associated with collection efforts and other corporate initiatives.
Compared to the fourth quarter of 2008, noninterest expense declined by $329 million. Personnel
expense decreased by $49 million, as lower incentive compensation accruals and decreases in salaries and severance expense more than offset a rise in costs associated with employee benefits. Included in
noninterest expense for the fourth quarter of 2008 is $31 million of severance and other exit costs.
Nonpersonnel expense decreased by $280 million from the prior quarter. Excluding the intangible assets
impairment charge recorded in the current quarter and an intangible assets impairment charge of $465
million recorded during the fourth quarter of 2008, nonpersonnel expense was down $38 million, due to
reductions in professional fees, marketing expense and a variety of other expense components. These
reductions were offset in part by a $27 million increase in the FDIC deposit insurance assessment.
ASSET QUALITY
Key s provision for loan losses was $875 million for the first quarter of 2009, compared to $187 million for the year-ago quarter and $594 million for the fourth quarter of 2008. The increase from the year-ago quarter reflects a higher level of net loan charge-offs in each of Key s major loan categories with the most significant growth experienced in the commercial loan portfolio. The increase in commercial loan net charge-offs is primarily attributable to commercial real estate related credits within the Real Estate Capital and Corporate Banking Services line of business. Net charge-offs for this line of business were up $180 million from the first quarter of 2008 and $137 million from the fourth quarter of 2008. Additionally, Key s provision for loan losses for the first quarter of 2009 exceeded net loan charge-offs by $383 million as the company continued to build reserves in a weak economy.
Net loan charge-offs for the quarter totaled $492 million, or 2.65% of average loans. These results compare to $121 million, or .67%, for the same period last year and $342 million, or 1.77%, for the previous quarter.
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Source: KeyCorp. CLEVELAND, April 21, 2009