KeyCorp Reports Second Quarter 2014 Net Income Of $242 Million, Or $.27 Per Common Share, Earnings Per Share Up 29% From Prior Year

By PR Newswire,  July 17, 2014, 06:30:00 AM EDT


Positive operating leverage

Continued growth in commercial loans and investment banking and debt placement fees affirms strength of business model

Disciplined capital management with common share repurchases of $108 million and dividend increase of 18%

Entered into an agreement to acquire Pacific Crest Securities, a leading technology-focused investment bank and capital markets firm

CLEVELAND, July 17, 2014 /PRNewswire/ -- KeyCorp (NYSE:KEY) today announced second quarter net income from continuing operations attributable to Key common shareholders of $242 million, or $.27 per common share, compared to $232 million, or $.26 per common share, for the first quarter of 2014, and $193 million, or $.21 per common share, for the second quarter of 2013.

For the six months ended June 30, 2014, net income from continuing operations attributable to Key common shareholders was $474 million, or $.53 per common share, compared to $389 million, or $.42 per common share, for the same period one year ago.

"Second quarter results demonstrate the successful execution of our strategy and continued efforts across our company to drive growth," said Chairman and Chief Executive Officer Beth Mooney.  "We delivered positive operating leverage by growing revenue and reducing expense from one year ago.  Further, we maintained strong risk management practices, as evidenced by a continued low net charge-offs to average loans ratio of .22% and declining nonperforming asset and loan levels.  We continue to execute on our commitment to return capital to our shareholders by repurchasing $108 million in common shares and increasing our dividend by 18%." 

"Total average loans continued to grow at a solid pace, driven by commercial, financial and agricultural loan growth of 13% from the prior year.   Investment banking and debt placement fees were also strong, up 18% from one year ago.  The growth of these two items reflects the strength of our distinctive business model and our ability to capitalize on revenue opportunities either through on-balance sheet or capital markets alternatives," added Mooney.

"We also continue to invest in growth opportunities that are consistent with our business model and strategy," said Mooney. "Today, we announced that we have entered into an agreement to acquire Pacific Crest Securities, a leading technology-focused investment bank and capital markets firm. Adding technology expertise to our Corporate Bank will enhance our model and capabilities to accelerate growth while also underscoring our commitment to be the leading corporate and investment bank serving middle market companies. This transaction is subject to regulatory approval and is expected to close in the third quarter of 2014."

SECOND QUARTER 2014 FINANCIAL RESULTS, from continuing operations

Compared to Second Quarter of 2013

  • Average loans up 5.5%, driven by a 12.6% growth in commercial, financial and agricultural loans
  • Average deposits up 2.5% due to commercial mortgage servicing acquisitions and growth in commercial deposits offsetting declines in certificates of deposit
  • Positive operating leverage with growth in revenues and decline in expenses
  • Net interest income (taxable-equivalent) down $7 million, primarily due to lower asset yields and lower loan fees caused by an early termination of a leveraged lease
  • Noninterest income up $26 million, reflecting growth in investment banking and debt placement fees, higher principal investing gains, and an increase in operating lease income and other leasing gains mostly due to an early termination of a leveraged lease
  • Noninterest expense down $22 million, reflecting $13 million in lower efficiency-related charges, and continued focus on expense management
  • Asset quality improved, with net loan charge-offs to average loans declining from .34% to .22%
  • Disciplined capital management, repurchasing $108 million of common shares during the second quarter of 2014 and maintaining a top tier capital position with Tier 1 common equity of 11.33%

Compared to First Quarter of 2014

  • Average loans up 1.6%, driven by a 4.2% growth in commercial, financial and agricultural loans
  • Average deposits up 1.3% due to the growth in commercial mortgage servicing and commercial and consumer client inflows
  • Net interest income (taxable-equivalent) up $10 million due to an increase in asset levels, higher loan fees, and more days in the quarter
  • Noninterest income up $20 million, with higher investment banking and debt placement fees and an increase in operating lease income and other leasing gains mostly due to the early termination of a leveraged lease
  • Noninterest expense up $27 million due to increased marketing expense and $14 million in higher efficiency-related charges
  • Asset quality remains strong, with net loan charge-offs to average loans remaining well below targeted range and improving levels of nonperforming assets and loans

Selected Financial Highlights































































dollars in millions, except per share data





















Change 2Q14 vs.









2Q14





1Q14





2Q13





1Q14





2Q13



Income (loss) from continuing operations attributable to Key common shareholders

$

242



$

232



$

193





4.3

%



25.4

%

Income (loss) from continuing operations attributable to Key common shareholders per

     common share — assuming dilution



.27





.26





.21





3.8





28.6



Return on average total assets from continuing operations



1.14

%



1.13

%



.95

%



N/A





N/A



Tier 1 common equity (a)



11.33





11.27





11.18





N/A





N/A



Book value at period end

$

11.65



$

11.43



$

10.89





1.9

%



7.0

%

Net interest margin (TE) from continuing operations



2.98

%



3.00

%



3.13

%



N/A





N/A







































































 (a)  The table entitled "GAAP to Non-GAAP Reconciliations" in the attached financial supplement presents the computations of certain financial measures related to "Tier 1 common equity."  The table reconciles the GAAP performance measures to the corresponding non-GAAP measures, which provides a basis for period-to-period comparisons.





































TE = Taxable Equivalent, N/A = Not Applicable

































































INCOME STATEMENT HIGHLIGHTS

































































Revenue

































































dollars in millions





















Change 2Q14 vs.









2Q14





1Q14





2Q13





1Q14





2Q13



Net interest income (TE)

$

579



$

569



$

586





1.8

%



(1.2)

%

Noninterest income



455





435





429





4.6





6.1





Total revenue

$

1,034



$

1,004



$

1,015





3.0

%



1.9

%





































































TE = Taxable Equivalent































Taxable-equivalent net interest income was $579 million for the second quarter of 2014, and the net interest margin was 2.98%.  These results compare to taxable-equivalent net interest income of $586 million and a net interest margin of 3.13% for the second quarter of 2013.  These decreases in net interest income and net interest margin were attributable to lower asset yields and a decrease in loan fees mostly due to the early termination of a leveraged lease.  These decreases were partially offset by loan growth, the maturity of higher-rate certificates of deposit, and a more favorable mix of lower-cost deposits. 

Compared to the first quarter of 2014, taxable-equivalent net interest income increased by $10 million, and the net interest margin declined by two basis points.  The increase in net interest income was primarily due to higher asset levels and loan fees, a lower cost of funds as higher-rate certificates of deposit matured, and more days in the second quarter.  The net interest margin was negatively impacted by the early termination of a leveraged lease.    

Noninterest Income





































































dollars in millions























Change 2Q14 vs.











2Q14 





1Q14 





2Q13 





1Q14 





2Q13 



Trust and investment services income



$

94



$

98



$

100





(4.1)

%



(6.0)

%

Investment banking and debt placement fees





99





84





84





17.9





17.9



Service charges on deposit accounts





66





63





71





4.8





(7.0)



Operating lease income and other leasing gains





35





29





22





20.7





59.1



Corporate services income





41





42





43





(2.4)





(4.7)



Cards and payments income





43





38





42





13.2





2.4



Corporate-owned life insurance income





28





26





31





7.7





(9.7)



Consumer mortgage income





2





2





6









(66.7)



Mortgage servicing fees





11





15





13





(26.7)





(15.4)



Net gains (losses) from principal investing





27





24





7





12.5





285.7



Other income





9





14





10





(35.7)





(10.0)





Total noninterest income



$

455



$

435



$

429





4.6

%



6.1

%









































































Key's noninterest income was $455 million for the second quarter of 2014, compared to $429 million for the year-ago quarter.  Key continued to see the benefits of its business model - focusing on targeted industries - with investment banking and debt placement fees increasing $15 million from the prior year.  In addition, net gains from principal investing increased $20 million.  Operating lease income and other leasing gains increased $13 million, due to a $17 million gain from the early termination of a leveraged lease.  These increases were partially offset by a decrease of $6 million in trust and investment services income, a decline in service charges on deposit accounts of $5 million due to lower non-sufficient funds and overdraft charges, and decreases in various other items.   

Compared to the first quarter of 2014, noninterest income increased by $20 million.  Investment banking and debt placement fees increased $15 million from prior quarter.  Operating lease income and other leasing gains increased $6 million, due to a $17 million gain from the early termination of a leveraged lease.  Key also benefitted from seasonal pickup in activity levels, with cards and payments income up $5 million and service charges on deposit accounts up $3 million.  These increases were partially offset by a $5 million decrease in other income related to lower trading income.   

Noninterest Expense





































































dollars in millions























Change 2Q14 vs.











2Q14





1Q14





2Q13





1Q14





2Q13



Personnel expense



$

389



$

388



$

406





.3

%



(4.2)

%

Nonpersonnel expense





300





274





305





9.5





(1.6)





Total noninterest expense



$

689



$

662



$

711





4.1

%



(3.1)

%









































































Key's noninterest expense was $689 million for the second quarter of 2014, compared to $711 million for the same period last year.  This decline reflects lower efficiency charges of $13 million.  Excluding the impact of efficiency charges, the $9 million decrease in expenses was mostly due to a decline in salaries and employee benefits.       

Compared to the first quarter of 2014, noninterest expense increased by $27 million.  The increase in expenses reflected $14 million in higher efficiency-related charges.  Marketing expense increased $8 million from the prior quarter related to normal seasonal increases in spend.  In addition, the provision (credit) for losses on lending-related commitments increased $4 million from the prior quarter.

BALANCE SHEET HIGHLIGHTS

As of June 30, 2014, Key had total assets of $91.8 billion compared to $90.8 billion at March 31, 2014, and $90.6 billion at June 30, 2013.

Average Loans





































































dollars in millions





















Change 6-30-14 vs.









6-30-14



3-31-14



6-30-13



3-31-14



6-30-13



Commercial, financial and agricultural (a)



$

26,444



$

25,390



$

23,480





4.2

%



12.6

%

Other commercial loans





13,186





13,337





13,290





(1.1)





(.8)



Total home equity loans





10,627





10,630





10,381









2.4



Other consumer loans





5,354





5,389





5,545





(.6)





(3.4)





Total loans



$

55,611



$

54,746



$

52,696





1.6

%



5.5

%





































(a)  Commercial, financial and agricultural average loan balances include $95 million, $94 million, and $96 million of assets from commercial credit cards at June 30, 2014, March 31, 2014, and June 30, 2013, respectively.



Average loans were $55.6 billion for the second quarter of 2014, an increase of $2.9 billion compared to the second quarter of 2013.  The loan growth occurred primarily in the commercial, financial and agricultural portfolio, which increased $3 billion and was broad-based across Key's commercial lines of business.  Consumer loans remained stable, as increases in home equity loans and direct term loans were mostly offset by run-off in Key's designated consumer exit portfolio.  The growth in home equity and direct term loans was balanced across Key's geographic footprint.    

Compared to the first quarter of 2014, average loans increased by $865 million.  Commercial, financial and agricultural loans increased $1.1 billion, mostly within Key Corporate Bank.  Consumer loans reflected a decrease in Key's consumer exit portfolio, which offset core consumer loan growth during the second quarter.

Average Deposits





































































dollars in millions





















Change 6-30-14 vs.









6-30-14



3-31-14



6-30-13



3-31-14



6-30-13



Non-time deposits (a)



$

60,066



$

59,197



$

57,691





1.5

%



4.1

%

Certificates of deposit ($100,000 or more)





2,808





2,758





2,975





1.8





(5.6)



Other time deposits





3,587





3,679





4,202





(2.5)





(14.6)





Total deposits



$

66,461



$

65,634



$

64,868





1.3

%



2.5

%





































Cost of total deposits (a)





.18

%



.20

%



.26

%



N/A





N/A











































































(a)  Excludes deposits in foreign office.

























































N/A = Not Applicable



















Average deposits, excluding deposits in foreign office, totaled $66.5 billion for the second quarter of 2014, an increase of $1.6 billion compared to the year-ago quarter.  Demand deposits increased by $993 million, and NOW and money market deposit accounts increased $1.4 billion, mostly due to growth related to commercial client inflows as well as increases related to the commercial mortgage servicing business.  These increases were partially offset by run-off in certificates of deposit. 

Compared to the first quarter of 2014, average deposits, excluding deposits in foreign office, increased by $827 million.  Demand deposits were up $632 million, driven by increases of escrow deposits in the commercial mortgage servicing business and inflows related to both commercial and consumer clients.  NOW and money market deposit accounts increased $219 million mostly due to higher interest-bearing demand deposits with inflows across Key's commercial lines of business.  These increases were partially offset by decreases in other interest-bearing deposit accounts.

ASSET QUALITY



































































dollars in millions























Change 2Q14 vs.









2Q14





1Q14





2Q13





1Q14





2Q13



Net loan charge-offs



$

30



$

20



$

45





50.0

%



(33.3)

%

Net loan charge-offs to average total loans





.22

%



.15

%



.34

%



N/A





N/A



Nonperforming loans at period end (a)



$

396



$

449



$

652





(11.8)





(39.3)



Nonperforming assets at period end





410





469





693





(12.6)





(40.8)



Allowance for loan and lease losses





814





834





876





(2.4)





(7.1)



Allowance for loan and lease losses to nonperforming loans





205.6

%



185.7

%



134.4

%



N/A





N/A



Provision (credit) for loan and lease losses



$

10



$

6



$

28





66.7

%



(64.3)

%





































































(a)  Loan balances exclude $15 million, $16 million, and $19 million of purchased credit impaired loans at June 30, 2014, March 31, 2014, and June 30, 2013, respectively.



































N/A = Not Applicable



























Key's provision for loan and lease losses was $10 million for the second quarter of 2014, compared to $6 million for the first quarter of 2014 and $28 million for the year-ago quarter.  Key's allowance for loan and lease losses was $814 million, or 1.46%, of total period-end loans at June 30, 2014, compared to 1.50% at March 31, 2014, and 1.65% at June 30, 2013. 

Net loan charge-offs for the second quarter of 2014 totaled $30 million, or .22%, of average total loans.  These results compare to $20 million, or .15%, for the first quarter of 2014, and $45 million, or .34%, for the same period last year.  

At June 30, 2014, Key's nonperforming loans totaled $396 million and represented .71% of period-end portfolio loans, compared to .81% at March 31, 2014, and 1.23% at June 30, 2013.  Nonperforming assets at June 30, 2014, totaled $410 million and represented .74% of period-end portfolio loans and OREO and other nonperforming assets, compared to .85% at March 31, 2014, and 1.30% at June 30, 2013.  

CAPITAL

Key's estimated risk-based capital ratios included in the following table continued to exceed all "well-capitalized" regulatory benchmarks at June 30, 2014.

Capital Ratios











































6-30-14





3-31-14





6-30-13



Tier 1 common equity (a), (b)



11.33

%



11.27

%



11.18

%

Tier 1 risk-based capital (a)



12.07





12.01





11.93



Total risk based capital (a)



14.24





14.23





14.65



Tangible common equity to tangible assets (b)



10.15





10.14





9.96



Leverage (a)



11.25





11.30





11.25



























(a) 6-30-14 ratio is estimated.







(b) The table entitled "GAAP to Non-GAAP Reconciliations" in the attached financial supplement presents the computations of certain financial measures related to "tangible common equity" and "Tier 1 common equity." The table reconciles the GAAP performance measures to the corresponding non-GAAP measures, which provides a basis for period-to-period comparisons.



As shown in the preceding table, at June 30, 2014, Key's estimated Tier 1 common equity and Tier 1 risk-based capital ratios stood at 11.33% and 12.07%, respectively.  In addition, the tangible common equity ratio was 10.15% at June 30, 2014.

In October 2013, federal banking regulators published the final Basel III capital framework for U.S. banking organizations (the "Regulatory Capital Rules").  While the Regulatory Capital Rules became effective January 1, 2014, the mandatory compliance date for Key as a "standardized approach" banking organization begins on January 1, 2015, subject to transitional provisions extending to January 1, 2019.  Key's estimated Common Equity Tier 1 as calculated under the Regulatory Capital Rules was 10.77% at June 30, 2014.  This estimate exceeds the fully phased-in required minimum Common Equity Tier 1 and Capital Conservation Buffer of 7.00%.

Summary of Changes in Common Shares Outstanding

























































in thousands























Change 2Q14 vs.











2Q14





1Q14





2Q13





1Q14





2Q13



Shares outstanding at beginning of period





884,869





890,724





922,581





(.7)

%



(4.1)

%

Common shares repurchased





(7,824)





(9,845)





(10,786)





(20.5)





(27.5)



Shares reissued (returned) under employee benefit plans





(222)





3,990





1,088





N/M





N/M





Shares outstanding at end of period





876,823





884,869





912,883





(.9)

%



(4.0)

%









































































As previously reported, Key's 2014 CCAR capital plan includes common share repurchases of up to $542 million, which are expected to be executed through the first quarter of 2015.  During the second quarter of 2014, Key completed $108 million of common share repurchases.

LINE OF BUSINESS RESULTS

The following table shows the contribution made by each major business segment to Key's taxable-equivalent revenue from continuing operations and income (loss) from continuing operations attributable to Key for the periods presented.  For more detailed financial information pertaining to each business segment, see the tables at the end of this release. 

Major Business Segments





































































dollars in millions























Change 2Q14 vs.











2Q14





1Q14





2Q13





1Q14





2Q13



Revenue from continuing operations (TE)

































Key Community Bank



$

550



$

541



$

583





1.7

%



(5.7)

%

Key Corporate Bank





394





391





378





.8





4.2



Other Segments





91





70





56





30.0





62.5





Total segments





1,035





1,002





1,017





3.3





1.8



Reconciling Items





(1)





2





(2)





N/M





N/M





Total



$

1,034



$

1,004



$

1,015





3.0

%



1.9

%





































Income (loss) from continuing operations attributable to Key

































Key Community Bank



$

55



$

62



$

52





(11.3)

%



5.8

%

Key Corporate Bank





118





121





121





(2.5)





(2.5)



Other Segments





72





55





49





30.9





46.9





Total segments





245





238





222





2.9





10.4



Reconciling Items





2









(23)





N/M





N/M





Total



$

247



$

238



$

199





3.8

%



24.1

%









































































TE = Taxable equivalent, N/M = Not Meaningful

































 

Key Community Bank









































































































dollars in millions























Change 2Q14 vs.











2Q14





1Q14





2Q13





1Q14





2Q13



Summary of operations

































Net interest income (TE)



$

362



$

363



$

383





(.3)

%



(5.5)

%

Noninterest income





188





178





200





5.6





(6.0)





Total revenue (TE)





550





541





583





1.7





(5.7)



Provision (credit) for loan and lease losses





23





9





41





155.6





(43.9)



Noninterest expense





440





433





459





1.6





(4.1)





Income (loss) before income taxes (TE)





87





99





83





(12.1)





4.8



Allocated income taxes (benefit) and TE adjustments





32





37





31





(13.5)





3.2





Net income (loss) attributable to Key



$

55



$

62



$

52





(11.3)

%



5.8

%





































Average balances

































Loans and leases



$

30,025



$

29,793



$

29,161





.8

%



3.0

%

Total assets





32,145





31,943





31,571





.6





1.8



Deposits





50,146





49,824





49,473





.6





1.4







































Assets under management at period end



$

27,319



$

26,549



$

23,213





2.9

%



17.7

%









































































TE = Taxable Equivalent

































 

Additional Key Community Bank Data





































































dollars in millions























Change 2Q14 vs.











2Q14





1Q14





2Q13





1Q14





2Q13



Noninterest income 

































Trust and investment services income 



$

67



$

67



$

68









(1.5)

%

Service charges on deposit accounts 





55





52





60





5.8

%



(8.3)



Cards and payments income 





38





35





38





8.6







Other noninterest income 





28





24





34





16.7





(17.6)





Total noninterest income 



$

188



$

178



$

200





5.6

%



(6.0)

%





































Average deposit balances

































NOW and money market deposit accounts



$

27,574



$

27,428



$

26,341





.5

%



4.7

%

Savings deposits





2,483





2,465





2,536





.7





(2.1)



Certificates of deposit ($100,000 or more)





2,169





2,163





2,443





.3





(11.2)



Other time deposits





3,580





3,673





4,195





(2.5)





(14.7)



Deposits in foreign office





294





309





284





(4.9)





3.5



Noninterest-bearing deposits





14,046





13,786





13,674





1.9





2.7





Total deposits 



$

50,146



$

49,824



$

49,473





.6

%



1.4

%





































Home equity loans 

































Average balance



$

10,321



$

10,305



$

9,992















Weighted-average loan-to-value ratio (at date of origination)





71

%



71

%



71

%













Percent first lien positions





59





58





57



















































Other data

































Branches





1,009





1,027





1,052















Automated teller machines





1,311





1,330





1,359



















































 

Key Community Bank Summary of Operations

  • Average loan balances up 3.0% from prior year
  • Average core deposits up 3.6% from prior year
  • Net income attributable to Key Community Bank up 5.8% from the prior year

Key Community Bank recorded net income attributable to Key of $55 million for the second quarter of 2014, compared to net income attributable to Key of $52 million for the year-ago quarter.

Taxable-equivalent net interest income decreased by $21 million, or 5.5%, from the second quarter of 2013.  Average loans and leases grew 3.0% driven by increases in commercial, financial and agricultural loans, while average deposits increased 1.4% from one year ago.  However, these volume-related increases were offset by declines in the deposit spread as a result of the continued low-rate environment.   

Noninterest income declined by $12 million, or 6%, from the year-ago quarter.  Other noninterest income decreased $6 million from prior year primarily due to declines in consumer mortgage income, corporate services income, and trading income.  Service charges on deposit accounts declined $5 million due to lower non-sufficient funds and overdraft charges. 

The provision for loan and lease losses decreased by $18 million, or 43.9%, from the second quarter of 2013.  Net loan charge-offs decreased $9 million from the same period one year ago.

Noninterest expense declined by $19 million, or 4.1%, from the year-ago quarter as a result of Key's continued focus on expense management.  Personnel expense decreased $6 million primarily due to declines in salaries and employee benefits.  Nonpersonnel expense decreased $13 million primarily due to decreases in outside loan servicing, and computer processing, equipment, and other miscellaneous costs related to branch closures.

Key Corporate Bank









































































































dollars in millions























Change 2Q14 vs.











2Q14





1Q14





2Q13





1Q14





2Q13



Summary of operations

































Net interest income (TE)



$

207



$

194



$

196





6.7

%



5.6

%

Noninterest income





187





197





182





(5.1)





2.7





Total revenue (TE)





394





391





378





.8





4.2



Provision (credit) for loan and lease losses









(1)





(7)





N/M





N/M



Noninterest expense





208





200





194





4.0





7.2





Income (loss) before income taxes (TE)





186





192





191





(3.1)





(2.6)



Allocated income taxes and TE adjustments





66





71





70





(7.0)





(5.7)





Net income (loss)





120





121





121





(.8)





(.8)



Less: Net income (loss) attributable to noncontrolling interests





2













N/M





N/M





Net income (loss) attributable to Key



$

118



$

121



$

121





(2.5)

%



(2.5)

%





































Average balances

































Loans and leases   



$

22,361



$

21,445



$

19,536





4.3

%



14.5

%

Loans held for sale   





429





429





466









(7.9)



Total assets





26,194





25,363





23,251





3.3





12.7



Deposits





16,127





15,800





15,606





2.1





3.3







































Assets under management at period end



$

12,350



$

12,344



$

12,331









.2

%









































































TE = Taxable Equivalent, N/M = Not Meaningful

































 

Additional Key Corporate Bank Data





































































dollars in millions























Change 2Q14 vs.











2Q14





1Q14





2Q13





1Q14





2Q13



Noninterest income

































Trust and investment services income



$

28



$

31



$

33





(9.7)

%



(15.2)

%

Investment banking and debt placement fees





97





84





82





15.5





18.3



Operating lease income and other leasing gains





11





21





13





(47.6)





(15.4)







































Corporate services income





30





28





30





7.1







Service charges on deposit accounts





11





11





11











Cards and payments income





4





3





4





33.3









Payments and services income





45





42





45





7.1











































Mortgage servicing fees





11





15





13





(26.7)





(15.4)



Other noninterest income





(5)





4





(4)





N/M





N/M





Total noninterest income



$

187



$

197



$

182





(5.1)

%



2.7

%









































































N/M = Not Meaningful

































Key Corporate Bank Summary of Operations

  • Average loan balances up 14.5% from the prior year
  • Average deposits up 3.3% from the prior year
  • Investment banking and debt placement fees increased 18.3% from the prior year

Key Corporate Bank recorded net income attributable to Key of $118 million for the second quarter of 2014, compared to $121 million for the same period one year ago. 

Taxable-equivalent net interest income increased by $11 million, or 5.6%, compared to the second quarter of 2013.  Average earning assets increased $3.1 billion, or 14.6%, from the year-ago quarter, primarily driven by loan growth in commercial, financial and agricultural and real estate commercial mortgage.  This growth in earning assets drove an increase of $7 million in earning asset spread and a $2 million increase in loan fees.  Average deposit balances increased $521 million, or 3.3%, from the year-ago quarter, driven by increases in Public Sector as well as increases related to the commercial mortgage servicing acquisition.       

Noninterest income increased by $5 million, or 2.7%, from the second quarter of 2013.  The increase in investment banking and debt placement fees of $15 million was partially offset by declines in trust and investment services income, mortgage servicing fees, and other miscellaneous fees from the year-ago quarter.    

The provision for loan and lease losses increased $7 million compared to the second quarter of 2013.   There were net recoveries of $2 million for the second quarter of 2014 compared to net recoveries of $4 million for the same period one year ago.

Noninterest expense increased by $14 million, or 7.2%, from the second quarter of 2013.  Increased personnel costs and higher expenses related to low-income housing tax credit investments were the primary drivers.       

Other Segments

Other Segments consist of Corporate Treasury, Community Development, Key's Principal Investing unit, and various exit portfolios.  Other Segments generated net income attributable to Key of $72 million for the second quarter of 2014, compared to net income attributable to Key of $49 million for the same period last year.  These results were primarily attributable to an increase in net gains (losses) from principal investing of $20 million and higher operating lease income and other leasing gains of $17 million due to the early termination of a leveraged lease.   

Discontinued Operations

Discontinued Operations consists of Education Lending, Victory Capital Management and Victory Capital Advisors, and Austin Capital Management, Ltd.  During the second quarter of 2014, Key recognized a net after-tax loss of $22 million related to the fair value of the loans and securities in Key's ten education loan securitization trusts.  Certain assumptions related to the valuing of the loans in these securitization trusts were adjusted based on market information and Key's related internal analysis resulting in this net after-tax loss.

*****

KeyCorp was organized more than 160 years ago and is headquartered in Cleveland, Ohio.  One of the nation's largest bank-based financial services companies, Key had assets of approximately $91.8 billion at June 30, 2014.

Key provides deposit, lending, cash management and investment services to individuals and small and mid-sized businesses in 12 states under the name KeyBank National Association.  Key also provides a broad range of sophisticated corporate and investment banking products, such as merger and acquisition advice, public and private debt and equity, syndications and derivatives to middle market companies in selected industries throughout the United States under the KeyBanc Capital Markets trade name.  For more information, visit https://www.key.com/.  KeyBank is Member FDIC.

INVESTOR RELATIONS: www.key.com/ir

KEY MEDIA NEWSROOM: www.key.com/newsroom

This earnings release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about Key's financial condition, results of operations, and profitability.  Forward-looking statements can be identified by words such as "outlook," "goal," "objective," "plan," "expect," "anticipate," "intend," "project," "believe," or "estimate."  Forward-looking statements represent management's current expectations and forecasts regarding future events. If underlying assumptions prove to be inaccurate or unknown risks or uncertainties arise, actual results could vary materially from these projections or expectations.  Factors that could cause Key's actual results to differ from those described in the forward-looking statements can be found in KeyCorp's Form 10-K for the year ended December 31, 2013, which has been filed with the Securities and Exchange Commission and is available on Key's website (www.key.com/ir) and on the Securities and Exchange Commission's website (www.sec.gov).  These factors may include, among others: deterioration of commercial real estate market fundamentals, adverse changes in credit quality trends, declining asset prices, changes in local, regional and international business, economic or political conditions, and the extensive and increasing regulation of the U.S. financial services industry.  Forward looking statements speak only as of the date they are made and Key does not undertake any obligation to update the forward-looking statements to reflect new information or future events.

Notes to Editors:

A live Internet broadcast of KeyCorp's conference call to discuss quarterly results and currently anticipated earnings trends and to answer analysts' questions can be accessed through the Investor Relations section at https://www.key.com/ir at 9:00 a.m. ET, on Thursday, July 17, 2014.  An audio replay of the call will be available through July 24, 2014.

For up-to-date company information, media contacts, and facts and figures about Key's lines of business, visit our Media Newsroom at https://www.key.com/newsroom.

*****

Financial Highlights 



(dollars in millions, except per share amounts)





































Three months ended









6-30-14





3-31-14





6-30-13



Summary of operations 

























Net interest income (TE)

$

579





$

569





$

586





Noninterest income



455







435







429







Total revenue (TE) 



1,034







1,004







1,015





Provision (credit) for loan and lease losses



10







6







28





Noninterest expense



689







662







711





Income (loss) from continuing operations attributable to Key



247







238







199





Income (loss) from discontinued operations, net of taxes (a)



(28)







4







5





Net income (loss) attributable to Key 



219







242







204

































Income (loss) from continuing operations attributable to Key common shareholders

$

242





$

232





$

193





Income (loss) from discontinued operations, net of taxes (a)



(28)







4







5





Net income (loss) attributable to Key common shareholders



214







236







198































Per common share 

























Income (loss) from continuing operations attributable to Key common shareholders 

$

.28





$

.26





$

.21





Income (loss) from discontinued operations, net of taxes  (a)



(.03)













.01





Net income (loss) attributable to Key common shareholders  (b)



.24







.27







.22

































Income (loss) from continuing operations attributable to Key common shareholders — assuming dilution  



.27







.26







.21





Income (loss) from discontinued operations, net of taxes — assuming dilution  (a)



(.03)













.01





Net income (loss) attributable to Key common shareholders — assuming dilution   (b)



.24







.26







.22

































Cash dividends paid 



.065







.055







.055





Book value at period end 



11.65







11.43







10.89





Tangible book value at period end 



10.50







10.28







9.77





Market price at period end 



14.33







14.24







11.04































Performance ratios 

























From continuing operations: 

























Return on average total assets 



1.14

%





1.13

%





.95

%



Return on average common equity 



9.55







9.33







7.72





Return on average tangible common equity  (c)



10.60







10.38







8.60





Net interest margin (TE) 



2.98







3.00







3.13





Cash efficiency ratio  (c)



65.8







64.9







69.1

































From consolidated operations: 

























Return on average total assets 



.96

%





1.09

%





.92

%



Return on average common equity 



8.44







9.50







7.92





Return on average tangible common equity  (c)



9.37







10.56







8.82





Net interest margin (TE) 



2.94







2.95







3.07





Loan to deposit  (d)



87.1







87.5







83.6































Capital ratios at period end 

























Key shareholders' equity to assets  



11.44

%





11.46

%





11.29

%



Key common shareholders' equity to assets 



11.13







11.14







10.96





Tangible common equity to tangible assets  (c)



10.15







10.14







9.96





Tier 1 common equity  (c), (e)



11.33







11.27







11.18





Tier 1 risk-based capital  (e)



12.07







12.01







11.93





Total risk-based capital  (e)



14.24







14.23







14.65





Leverage  (e)



11.25







11.30







11.25































Asset quality — from continuing operations 

























Net loan charge-offs 

$

30





$

20





$

45





Net loan charge-offs to average loans  



.22

%





.15

%





.34

%



Allowance for loan and lease losses 

$

814





$

834





$

876





Allowance for credit losses



851







869







913





Allowance for loan and lease losses to period-end loans 



1.46

%





1.50

%





1.65

%



Allowance for credit losses to period-end loans 



1.53







1.57







1.72





Allowance for loan and lease losses to nonperforming loans 



205.6







185.7







134.4





Allowance for credit losses to nonperforming loans  



214.9







193.5







140.0





Nonperforming loans at period end  (f)

$

396





$

449





$

652





Nonperforming assets at period end 



410







469







693





Nonperforming loans to period-end portfolio loans 



.71

%





.81

%





1.23

%



Nonperforming assets to period-end portfolio loans plus OREO and other nonperforming assets 



.74







.85







1.30































Trust and brokerage assets 

























Assets under management 

$

39,669





$

38,893





$

35,544





Nonmanaged and brokerage assets  



48,728







47,396







37,759































Other data 

























Average full-time equivalent employees 



13,867







14,055







14,999





Branches 



1,009







1,027







1,052































Taxable-equivalent adjustment 

$

6





$

6





$

5



 

Financial Highlights (continued) 

(dollars in millions, except per share amounts) 



























Six months ended









6-30-14





6-30-13



Summary of operations 

















Net interest income (TE) 

$

1,148





$

1,175





Noninterest income 



890







854







Total revenue (TE) 



2,038







2,029





Provision (credit) for loan and lease losses 



16







83





Noninterest expense 



1,351







1,392





Income (loss) from continuing operations attributable to Key 



485







400





Income (loss) from discontinued operations, net of taxes  (a)



(24)







8





Net income (loss) attributable to Key   



461







408

























Income (loss) from continuing operations attributable to Key common shareholders 

$

474





$

389





Income (loss) from discontinued operations, net of taxes  (a)



(24)







8





Net income (loss) attributable to Key common shareholders 



450







397























Per common share 

















Income (loss) from continuing operations attributable to Key common shareholders 

$

.54





$

.42





Income (loss) from discontinued operations, net of taxes  (a)



(.03)







.01





Net income (loss) attributable to Key common shareholders  (b)



.51







.43

























Income (loss) from continuing operations attributable to Key common shareholders — assuming dilution  



.53







.42





Income (loss) from discontinued operations, net of taxes — assuming dilution  (a)



(.03)







.01





Net income (loss) attributable to Key common shareholders — assuming dilution   (b)



.51







.43

























Cash dividends paid 



.12







.105























Performance ratios  

















From continuing operations:  

















Return on average total assets  



1.13

%





.97

%



Return on average common equity  



9.44







7.84





Return on average tangible common equity   (c)



10.49







8.73





Net interest margin (TE)  



2.99







3.18





Cash efficiency ratio  (c)



65.4







67.5

























From consolidated operations: 

















Return on average total assets 



1.03

%





.93

%



Return on average common equity 



8.96







8.00





Return on average tangible common equity   (c)



9.96







8.91





Net interest margin (TE) 



2.95







3.12























Asset quality — from continuing operations 

















Net loan charge-offs 

$

50





$

94





Net loan charge-offs to average total loans  



.18

%





.36

%





















Other data 

















Average full-time equivalent employees 



13,961







15,197























Taxable-equivalent adjustment 

$

12





$

11



(a)  In April 2009, management decided to wind down the operations of Austin Capital Management, Ltd., a subsidiary that specialized in managing hedge fund investments for institutional customers.  In September 2009, management decided to discontinue the education lending business conducted through Key Education Resources, the education payment and financing unit of KeyBank National Association.  In February 2013, Key decided to sell its investment subsidiary, Victory Capital Management, and its broker-dealer affiliate, Victory Capital Advisors, to a private equity fund.  As a result of these decisions, Key has accounted for these businesses as discontinued operations.



(b)  Earnings per share may not foot due to rounding.



(c)  The following table entitled "GAAP to Non-GAAP Reconciliations" presents the computations of certain financial measures related to "tangible common equity,"  "Tier 1 common equity," and "cash efficiency."  The table reconciles the GAAP performance measures to the corresponding non-GAAP measures, which provides a basis for period-to-period comparisons.



(d)  Represents period-end consolidated total loans and loans held for sale (excluding education loans in the securitization trusts) divided by period-end consolidated total deposits (excluding deposits in foreign office).



(e)  6-30-14 ratio is estimated.



(f)  Loan balances exclude $15 million, $16 million, and $19 million of purchased credit impaired loans at June 30, 2014, March 31, 2014, and June 30, 2013, respectively.



TE = Taxable Equivalent, GAAP = U.S. generally accepted accounting principles   

GAAP to Non-GAAP Reconciliations

(dollars in millions)

The table below presents certain non-GAAP financial measures related to "tangible common equity," "return on tangible common equity," "Tier 1 common equity," "pre-provision net revenue," and "cash efficiency ratio."

The tangible common equity ratio and the return on tangible common equity ratio have been a focus for some investors, and management believes these ratios may assist investors in analyzing Key's capital position without regard to the effects of intangible assets and preferred stock.  Traditionally, the banking regulators have assessed bank and bank holding company capital adequacy based on both the amount and the composition of capital, the calculation of which is prescribed in federal banking regulations.  Since the commencement of the Comprehensive Capital Analysis and Review process in early 2009, the Federal Reserve has focused its assessment of capital adequacy on a component of Tier 1 risk-based capital known as Tier 1 common equity, a non-GAAP financial measure.  Because the Federal Reserve has long indicated that voting common shareholders' equity (essentially Tier 1 risk-based capital less preferred stock, qualifying capital securities, and noncontrolling interests in subsidiaries) generally should be the dominant element in Tier 1 risk-based capital, this focus on Tier 1 common equity is consistent with existing capital adequacy categories. 

Tier 1 common equity is neither formally defined by GAAP nor prescribed in amount by federal banking regulations; this measure is considered to be a non-GAAP financial measure.  Since analysts and banking regulators may assess Key's capital adequacy using tangible common equity and Tier 1 common equity, management believes it is useful to enable investors to assess Key's capital adequacy on these same bases.  The table also reconciles the GAAP performance measures to the corresponding non-GAAP measures.

The table also shows the computation for pre-provision net revenue, which is not formally defined by GAAP.  Management believes that eliminating the effects of the provision for loan and lease losses makes it easier to analyze the results by presenting them on a more comparable basis.

The cash efficiency ratio is a ratio of two non-GAAP performance measures. As such, there is no directly comparable GAAP performance measure.  The cash efficiency ratio performance measure removes the impact of Key's intangible asset amortization from the calculation.  Management believes this ratio provides greater consistency and comparability between Key's results and those of its peer banks.  Additionally, this ratio is used by analysts and investors as they develop earnings forecasts and peer bank analysis.

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited.  Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.







Three months ended  









6-30-14





3-31-14





6-30-13



Tangible common equity to tangible assets at period end 

























Key shareholders' equity (GAAP) 

$

10,504





$

10,403





$

10,229





Less:  

Intangible assets  (a)



1,008







1,012







1,021







Preferred Stock, Series A  (b)



282







282







282







Tangible common equity (non-GAAP)   

$

9,214





$

9,109





$

8,926

































Total assets (GAAP) 

$

91,798





$

90,802





$

90,639





Less:  

Intangible assets  (a)



1,008







1,012







1,021







Tangible assets (non-GAAP) 

$

90,790





$

89,790





$

89,618

































Tangible common equity to tangible assets ratio (non-GAAP) 



10.15

%





10.14

%





9.96

%





























Tier 1 common equity at period end 

























Key shareholders' equity (GAAP)  

$

10,504





$

10,403





$

10,229





Qualifying capital securities  



339







339







339





Less: 

Goodwill  



979







979







979







Accumulated other comprehensive income (loss)  (c)



(325)







(367)







(359)







Other assets  (d)



81







84







101







Total Tier 1 capital (regulatory) 



10,108







10,046







9,847





Less:  

Qualifying capital securities  



339







339







339







Preferred Stock, Series A  (b)



282







282







282







Total Tier 1 common equity (non-GAAP)   

$

9,487





$

9,425





$

9,226

































Net risk-weighted assets (regulatory)  (e)

$

83,729





$

83,637





$

82,528

































Tier 1 common equity ratio (non-GAAP)  (e)



11.33

%





11.27

%





11.18

%





























Pre-provision net revenue 

























Net interest income (GAAP) 

$

573





$

563





$

581





Plus: 

Taxable-equivalent adjustment 



6







6







5







Noninterest income (GAAP) 



455







435







429





Less: 

Noninterest expense (GAAP) 



689







662







711





Pre-provision net revenue from continuing operations (non-GAAP) 

$

345





$

342





$

304



 

GAAP to Non-GAAP Reconciliations (continued)

(dollars in millions)



































Three months ended









6-30-14





3-31-14





6-30-13



Average tangible common equity

























Average Key shareholders' equity (GAAP)

$

10,459





$

10,371





$

10,314





Less:

Intangible assets (average) (f)



1,010







1,013







1,023







Preferred Stock, Series A (average)



291







291







291







Average tangible common equity (non-GAAP)

$

9,158





$

9,067





$

9,000































Return on average tangible common equity from continuing operations

























Net income (loss) from continuing operations attributable to Key common shareholders (GAAP)

$

242





$

232





$

193





Average tangible common equity (non-GAAP)



9,158







9,067







9,000

































Return on average tangible common equity from continuing operations (non-GAAP)



10.60

%





10.38

%





8.60

%





























Return on average tangible common equity consolidated

























Net income (loss) attributable to Key common shareholders (GAAP)

$

214





$

236





$

198





Average tangible common equity (non-GAAP)



9,158







9,067







9,000

































Return on average tangible common equity consolidated (non-GAAP)



9.37

%





10.56

%





8.82

%





























Cash efficiency ratio

























Noninterest expense (GAAP)

$

689





$

662





$

711





Less:

Intangible asset amortization (GAAP)



9







10







10







Adjusted noninterest expense (non-GAAP)

$

680





$

652





$

701

































Net interest income (GAAP)

$

573





$

563





$

581





Plus:

Taxable-equivalent adjustment



6







6







5







Noninterest income (GAAP)



455







435







429







Total taxable-equivalent revenue (non-GAAP)

$

1,034





$

1,004





$

1,015

































Cash efficiency ratio (non-GAAP)



65.8

%





64.9

%





69.1

%



































Three months ended

















6-30-14





3-31-14











Common Equity Tier 1 under the Regulatory Capital Rules (estimates)

























Tier 1 common equity under current regulatory rules

$

9,487





$

9,425













Adjustments from current regulatory rules to the Regulatory Capital Rules:



























Deferred tax assets and other (g)



(106)







(114)















Common Equity Tier 1 anticipated under the Regulatory Capital Rules (h)

$

9,381





$

9,311









































Net risk-weighted assets under current regulatory rules

$

83,729





$

83,637













Adjustments from current regulatory rules to the Regulatory Capital Rules:



























Loan commitments less than one year



1,037







1,023















Past due loans



155







154















Mortgage servicing assets (i)



484







480















Deferred tax assets (i)



215







139















Other



1,457







1,466















Total risk-weighted assets anticipated under the Regulatory Capital Rules

$

87,077





$

86,899









































Common Equity Tier 1 ratio under the Regulatory Capital Rules (h)



10.77

%





10.71

%









 

GAAP to Non-GAAP Reconciliations (continued)

(dollars in millions)











































Six months ended

















6-30-14





6-30-13



Pre-provision net revenue

























Net interest income (GAAP)









$

1,136





$

1,164





Plus:

Taxable-equivalent adjustment











12







11







Noninterest income (GAAP)











890







854





Less:

Noninterest expense (GAAP)











1,351







1,392





Pre-provision net revenue from continuing operations (non-GAAP)









$

687





$

637































Average tangible common equity

























Average Key shareholders' equity (GAAP)









$

10,415





$

10,297





Less:

Intangible assets (average) (j)











1,011







1,025







Preferred Stock, Series A (average)











291







291







Average tangible common equity (non-GAAP)









$

9,113





$

8,981































Return on average tangible common equity from continuing operations

























Net income (loss) from continuing operations attributable to Key common shareholders (GAAP)









$

474





$

389





Average tangible common equity (non-GAAP)











9,113







8,981

































Return on average tangible common equity from continuing operations (non-GAAP)











10.49

%





8.73

%





























Return on average tangible common equity consolidated

























Net income (loss) attributable to Key common shareholders (GAAP)









$

450





$

397





Average tangible common equity (non-GAAP)











9,113







8,981

































Return on average tangible common equity consolidated (non-GAAP)











9.96

%





8.91

%





























Cash efficiency ratio

























Noninterest expense (GAAP)









$

1,351





$

1,392





Less:

Intangible asset amortization (GAAP)











19







22







Adjusted noninterest expense (non-GAAP)









$

1,332





$

1,370

































Net interest income (GAAP)









$

1,136





$

1,164





Plus:

Taxable-equivalent adjustment











12







11







Noninterest income (GAAP)











890







854







Total taxable-equivalent revenue (non-GAAP)









$

2,038





$

2,029

































Cash efficiency ratio (non-GAAP)











65.4

%





67.5

%

 

(a)  For the three months ended June 30, 2014, March 31, 2014, and June 30, 2013, intangible assets exclude $79 million, $84 million, and $107 million, respectively, of period-end purchased credit card receivables. 



(b)  Net of capital surplus for the three months ended June 30, 2014, March 31, 2014, and June 30, 2013.



(c)  Includes net unrealized gains or losses on securities available for sale (except for net unrealized losses on marketable equity securities), net gains or losses on cash flow hedges, and amounts resulting from the application of the applicable accounting guidance for defined benefit and other postretirement plans.  



(d)  Other assets deducted from Tier 1 capital and net risk-weighted assets consist of disallowed intangible assets (excluding goodwill) and deductible portions of nonfinancial equity investments.  There were no disallowed deferred tax assets at June 30, 2014, March 31, 2014, and June 30, 2013.



(e)  6-30-14 amount is estimated.



(f)  For the three months ended June 30, 2014, March 31, 2014, and June 30, 2013, average intangible assets exclude $82 million, $89 million, and $110 million, respectively, of average purchased credit card receivables. 



(g)  Includes the deferred tax asset subject to future taxable income for realization, primarily tax credit carryforwards, as well as the deductible portion of purchased credit card receivables.



(h)  The anticipated amount of regulatory capital and risk-weighted assets is based upon the federal banking agencies' Regulatory Capital Rules (as fully phased-in on January 1, 2019); Key is subject to the Regulatory Capital Rules under the "standardized approach."



(i)  Item is included in the 10%/15% exceptions bucket calculation and is risk-weighted at 250%.



(j)  For the six months ended June 30, 2014, and June 30, 2013, average intangible assets exclude $85 million and $114 million, respectively, of average ending purchased credit card receivables.



GAAP = U.S. generally accepted accounting principles

Consolidated Balance Sheets 

(dollars in millions) 





































6-30-14





3-31-14





6-30-13

Assets 

























Loans 



$

55,600





$

55,445





$

53,101



Loans held for sale 





435







401







402



Securities available for sale 





12,224







12,359







13,253



Held-to-maturity securities  





5,233







4,826







4,750



Trading account assets 





890







840







592



Short-term investments 





3,176







2,922







3,582



Other investments 





899







899







1,037





Total earning assets 





78,457







77,692







76,717



Allowance for loan and lease losses 





(814)







(834)







(876)



Cash and due from banks 





604







409







696



Premises and equipment 





844







862







900



Operating lease assets 





306







294







303



Goodwill 





979







979







979



Other intangible assets 





108







117







149



Corporate-owned life insurance 





3,438







3,425







3,362



Derivative assets 





549







427







461



Accrued income and other assets 





3,090







3,004







2,864



Discontinued assets 





4,237







4,427







5,084





Total assets 



$

91,798





$

90,802





$

90,639





























Liabilities 

























Deposits in domestic offices: 



























NOW and money market deposit accounts 



$

33,637





$

34,373





$

32,689





Savings deposits 





2,450







2,513







2,542





Certificates of deposit ($100,000 or more) 





2,743







2,849







2,918





Other time deposits 





3,505







3,682







4,089





     Total interest-bearing deposits 





42,335







43,417







42,238





Noninterest-bearing deposits 





24,781







23,244







24,939



Deposits in foreign office — interest-bearing 





683







605







544





     Total deposits 





67,799







67,266







67,721



Federal funds purchased and securities

       sold under repurchase agreements 





1,213







1,417







1,647



Bank notes and other short-term borrowings 





521







464







298



Derivative liabilities 





451







408







456



Accrued expense and other liabilities 





1,400







1,297







1,421



Long-term debt 





8,213







7,712







6,666



Discontinued liabilities  





1,680







1,819







2,169





Total liabilities 





81,277







80,383







80,378





























Equity 

























Preferred stock, Series A 





291







291







291



Common shares 





1,017







1,017







1,017



Capital surplus 





3,987







3,961







4,045



Retained earnings 





7,950







7,793







7,214



Treasury stock, at cost 





(2,452)







(2,335)







(2,020)



Accumulated other comprehensive income (loss) 





(289)







(324)







(318)





Key shareholders' equity 





10,504







10,403







10,229



Noncontrolling interests 





17







16







32





Total equity 





10,521







10,419







10,261

Total liabilities and equity 



$

91,798





$

90,802





$

90,639





























Common shares outstanding (000) 





876,823







884,869







912,883

 

Consolidated Statements of Income   

(dollars in millions, except per share amounts) 













































Three months ended 





Six months ended 







6-30-14



3-31-14



6-30-13