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KeyCorp Reports Third Quarter 2018 Net Income Of $468 Million, Or $.45 Per Common Share

Cash efficiency ratio of 58.7%

Return on average tangible common equity of 16.8%

Company Release - 10/18/2018 6:30 AM ET

CLEVELAND, Oct. 18, 2018 /PRNewswire/ -- KeyCorp (NYSE: KEY) today announced third quarter net income from continuing operations attributable to Key common shareholders of $468 million, or $.45 per common share, compared to $464 million, or $.44 per common share, for the second quarter of 2018 and $349 million, or $.32 per common share, for the third quarter of 2017.

"Our solid third quarter results reflect our success in growing and expanding client relationships, driving efficiency across the organization, and staying true to our moderate risk profile. This quarter, our return on tangible common equity ratio was 16.8%, and our cash efficiency ratio was 58.7%, both an improvement of over 300 basis points from last year.

"Our Community Bank and Corporate Bank both contributed to our year-over-year revenue growth of 3%, which demonstrates our competitive positioning and the success of our distinctive relationship-based business model. Expense management remains a priority, as we continue to execute on our cost initiatives, which allows us to reinvest into our businesses.

"Credit quality and capital remain strengths, with solid credit trends this quarter and disciplined capital management. Importantly, we increased our common share dividend 42% during the third quarter – from $.12 to $.17. We remain dedicated to delivering results for our shareholders, as we focus on maintaining our moderate risk profile, and staying diligent in managing credit quality as we move through different parts of the business cycle."

-       Beth Mooney, Chairman and CEO

Selected Financial Highlights















dollars in millions, except per share data





Change 3Q18 vs.



3Q18

2Q18

3Q17


2Q18

3Q17

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

$

468


$

464


$

349



.9

%

34.1

%

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

.45


.44


.32



2.3


40.6


Return on average tangible common equity from continuing operations (a)

16.81

%

16.73

%

12.21

%


N/A


N/A


Return on average total assets from continuing operations

1.40


1.41


1.07



N/A


N/A


Common Equity Tier 1 ratio (b)

9.93


10.13


10.26



N/A


N/A


Book value at period end

$

13.33


$

13.29


$

13.18



.3

%

1.1

%

Net interest margin (TE) from continuing operations

3.18

%

3.19

%

3.15

%


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 "Return on average tangible common equity from continuing operations." The table reconciles the GAAP performance measures to the corresponding non-GAAP measures, which provides a basis for period-to-period comparisons.

(b)

9/30/2018 ratio is estimated.

TE = Taxable Equivalent, N/A = Not Applicable

 

INCOME STATEMENT HIGHLIGHTS














Revenue














dollars in millions





Change 3Q18 vs.


3Q18

2Q18

3Q17


2Q18

3Q17

Net interest income (TE)

$

993


$

987


$

962



.6

%

3.2

%

Noninterest income

609


660


592



(7.7)


2.9


Total revenue

$

1,602


$

1,647


$

1,554



(2.7)

%

3.1

%








TE = Taxable Equivalent

Taxable-equivalent net interest income was $993 million for the third quarter of 2018, and the net interest margin was 3.18%, compared to taxable-equivalent net interest income of $962 million and a net interest margin of 3.15% for the third quarter of 2017, reflecting the benefit from higher interest rates and higher earning asset balances. Third quarter 2018 net interest income included $26 million of purchase accounting accretion, a decline of $22 million from the third quarter of 2017.

Compared to the second quarter of 2018, taxable-equivalent net interest income increased by $6 million, and the net interest margin declined by one basis point. Both net interest income and the net interest margin benefited from higher interest rates. One additional day in the third quarter further benefited net interest income. These benefits were offset by lower loan fees, an expected decline in purchase accounting accretion, and an elevated level of liquidity, reflecting higher short-term and seasonal deposits, as well as commercial loan paydowns.

Noninterest Income














dollars in millions





Change 3Q18 vs.


3Q18

2Q18

3Q17


2Q18

3Q17

Trust and investment services income

$

117


$

128


$

135



(8.6)

%

(13.3)

%

Investment banking and debt placement fees

166


155


141



7.1


17.7


Service charges on deposit accounts

85


91


91



(6.6)


(6.6)


Operating lease income and other leasing gains

35


(6)


16



N/M


118.8


Corporate services income

52


61


54



(14.8)


(3.7)


Cards and payments income

69


71


75



(2.8)


(8.0)


Corporate-owned life insurance income

34


32


31



6.3


9.7


Consumer mortgage income

9


7


7



28.6


28.6


Mortgage servicing fees

19


22


21



(13.6)


(9.5)


Other income

23


99


21



(76.8)


9.5


Total noninterest income

$

609


$

660


$

592



(7.7)

%

2.9

%








N/M = Not meaningful

Key's noninterest income was $609 million for the third quarter of 2018, compared to $592 million for the year-ago quarter. Growth was primarily driven by a $25 million increase in investment banking and debt placement fees, related to strength in advisory fees, including benefit from the acquisition of Cain Brothers, as well as organic growth. Operating lease and other leasing gains increased $19 million related to higher volume and lease residual losses in the year-ago period. A decline in trust and investment services income, impacted by the sale of Key Insurance and Benefits Services in the second quarter of 2018, partially offset the increases. Cards and payments income and service charges on deposit accounts both declined $6 million, driven by the 2018 adoption of the revenue recognition accounting standard.

Compared to the second quarter of 2018, noninterest income decreased by $51 million. The decline was primarily related to a $78 million gain from the sale of Key Insurance and Benefits Services in the prior quarter, reported in other income. Trust and investment services income declined $11 million, primarily impacted by the sale of Key Insurance and Benefits Services, and corporate services income declined $9 million from lower derivative income. Partially offsetting these items was a $41 million increase in operating lease income and other leasing gains, related to a lease residual loss in the prior quarter. Additionally, investment banking and debt placement fees continue to show momentum, as fees increased $11 million, largely related to strength in advisory and loan syndication fees.

Noninterest Expense














dollars in millions





Change 3Q18 vs.


3Q18

2Q18

3Q17


2Q18

3Q17

Personnel expense

$

553


$

586


$

559



(5.6)

%

(1.1)

%

Nonpersonnel expense

411


407


433



1.0


(5.1)


Total noninterest expense

$

964


$

993


$

992



(2.9)

%

(2.8)

%









Key's noninterest expense was $964 million for the third quarter of 2018, compared to $992 million in the year-ago quarter. The third quarter of 2017 included $36 million of merger-related charges. Excluding these charges, the increase in expenses from the year-ago period was largely related to growth from the Cain Brothers acquisition and other investments throughout the year. This growth offset the realization of cost savings efforts across the franchise.

Key's noninterest expense was $964 million for the third quarter of 2018, compared to $993 million in the prior quarter. The decrease was largely driven by a $33 million decline in personnel expense, including lower severance and incentive compensation expense. Additionally, business services and professional fees declined by $8 million, partially offset by an increase in other expense.

 BALANCE SHEET HIGHLIGHTS

Average Loans














dollars in millions





Change 3Q18 vs.


3Q18

2Q18

3Q17


2Q18

3Q17

Commercial and industrial (a)

$

44,749


$

45,030


$

41,416



(.6)

%

8.0

%

Other commercial loans

20,471


20,394


21,598



.4


(5.2)


Home equity loans

11,415


11,601


12,314



(1.6)


(7.3)


Other consumer loans

11,832


11,619


11,486



1.8


3.0


Total loans

$

88,467


$

88,644


$

86,814



(.2)

%

1.9

%








(a)

Commercial and industrial average loan balances include $128 million, $126 million, and $117 million of assets from commercial credit cards at September 30, 2018, June 30, 2018, and September 30, 2017, respectively.

Average loans were $88.5 billion for the third quarter of 2018, an increase of $1.7 billion compared to the third quarter of 2017, reflecting broad-based growth in commercial and industrial loans, partially offset by higher paydowns in commercial real estate balances and home equity lines of credit.

Compared to the second quarter of 2018, average loans decreased by $177 million, driven by continued levels of lower utilization and elevated paydowns. Period-end loan balances grew $1.0 billion compared to the prior quarter, reflecting increased momentum, as growth in commercial and industrial loans and commercial real estate balances increased near the end of the third quarter.

Average Deposits














dollars in millions





Change 3Q18 vs.


3Q18

2Q18

3Q17


2Q18

3Q17

Non-time deposits

$

92,414


$

91,538


$

92,039



1.0

%

.4

%

Certificates of deposit ($100,000 or more)

8,186


7,516


6,402



8.9


27.9


Other time deposits

5,026


4,949


4,664



1.6


7.8


Total deposits

$

105,626


$

104,003


$

103,105



1.6

%

2.4

%








Cost of total deposits

.53

%

.43

%

.28

%


N/A

N/A








N/A = Not Applicable

Average deposits totaled $105.6 billion for the third quarter of 2018, an increase of $2.5 billion compared to the year-ago quarter, reflecting growth in higher-yielding deposit products, as well as strength in Key's retail banking franchise and growth from commercial relationships.

Compared to the second quarter of 2018, average deposits increased by $1.6 billion, reflecting growth from retail and commercial relationships, as well as short-term and seasonal deposit inflows.

ASSET QUALITY














dollars in millions





Change 3Q18 vs.


3Q18

2Q18

3Q17


2Q18

3Q17

Net loan charge-offs

$

60


$

60


$

32




87.5

%

Net loan charge-offs to average total loans

.27

%

.27

%

.15

%


N/A


N/A


Nonperforming loans at period end (a)

$

645


$

545


$

517



18.3

%

24.8


Nonperforming assets at period end (a)

674


571


556



18.0


21.2


Allowance for loan and lease losses

887


887


880




.8


Allowance for loan and lease losses to nonperforming loans (a)

137.5

%

162.8

%

170.2

%


N/A


N/A


Provision for credit losses

$

62


$

64


$

51



(3.1)

%

21.6

%








(a)

Nonperforming loan balances exclude $606 million, $629 million, and $783 million of purchased credit impaired loans at September 30, 2018, June 30, 2018, and September 30, 2017, respectively.

N/A = Not Applicable

Key's provision for credit losses was $62 million for the third quarter of 2018, compared to $51 million for the third quarter of 2017 and $64 million for the second quarter of 2018. Key's allowance for loan and lease losses was $887 million, or .99% of total period-end loans at September 30, 2018, compared to 1.02% at September 30, 2017, and 1.01% at June 30, 2018.

Net loan charge-offs for the third quarter of 2018 totaled $60 million, or .27% of average total loans. These results compare to $32 million, or .15%, for the third quarter of 2017, and $60 million, or .27%, for the second quarter of 2018.

At September 30, 2018, Key's nonperforming loans totaled $645 million, which represented .72% of period-end portfolio loans. These results compare to .60% at September 30, 2017, and .62% at June 30, 2018. Nonperforming assets at September 30, 2018, totaled $674 million, and represented .75% of period-end portfolio loans and OREO and other nonperforming assets. These results compare to .64% at September 30, 2017, and .65% at June 30, 2018.

CAPITAL

Key's estimated risk-based capital ratios included in the following table continued to exceed all "well-capitalized" regulatory benchmarks at September 30, 2018.

Capital Ratios









9/30/2018


6/30/2018


9/30/2017


Common Equity Tier 1 (a)

9.93

%

10.13

%

10.26

%

Tier 1 risk-based capital (a)

11.09


10.95


11.11


Total risk based capital (a)

12.97


12.83


13.09


Tangible common equity to tangible assets (b)

8.05


8.32


8.49


Leverage (a)

10.05


9.87


9.83






(a)

9/30/2018 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." The table reconciles the GAAP performance measures to the corresponding non-GAAP measures, which provides a basis for period-to-period comparisons. See below for further information on the Regulatory Capital Rules.

Key's capital position remained strong in the third quarter. As shown in the preceding table, at September 30, 2018, Key's estimated Common Equity Tier 1 and Tier 1 risk-based capital ratios stood at 9.93% and 11.09%, respectively. Key's tangible common equity ratio was 8.05% at September 30, 2018.

As a "standardized approach" banking organization, Key's mandatory compliance with the final Basel III capital framework for U.S. banking organizations (the "Regulatory Capital Rules") began on January 1, 2015, subject to transitional provisions extending to January 1, 2019. Key's estimated Common Equity Tier 1 ratio as calculated under the fully phased-in Regulatory Capital Rules was 9.85% at September 30, 2018.  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 3Q18 vs.



3Q18

2Q18

3Q17


2Q18

3Q17

Shares outstanding at beginning of period

1,058,944


1,064,939


1,092,739



(.6)

%

(3.1)

%

Open market repurchases and return of shares under employee 
     compensation plans

(25,418)


(6,259)


(15,298)



306.1


66.2


Shares issued under employee compensation plans (net of cancellations)

761


264


1,598



188.3


(52.4)


     Shares outstanding at end of period

1,034,287


1,058,944


1,079,039



(2.3)

%

(4.1)

%









N/M = Not Meaningful

Consistent with Key's 2018 Capital Plan, during the third quarter of 2018, Key declared a dividend of $.17 per common share, reflecting a 42% increase from the prior quarter. Key also completed $542 million of common share repurchases during the quarter.

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 3Q18 vs.



3Q18

2Q18

3Q17


2Q18

3Q17

Revenue from continuing operations (TE)







Key Community Bank

$

994


$

997


$

945



(.3)

%

5.2

%

Key Corporate Bank

574


542


561



5.9


2.3


Other Segments

24


37


42



(35.1)


(42.9)



Total segments

1,592


1,576


1,548



1.0


2.8


Reconciling Items (a)

10


71


6



(85.9)


66.7



Total

$

1,602


$

1,647


$

1,554



(2.7)

%

3.1

%









Income (loss) from continuing operations attributable to Key







Key Community Bank

$

241


$

243


$

163



(.8)

%

47.9

%

Key Corporate Bank

199


167


190



19.2


4.7


Other Segments

22


25


21



(12.0)


4.8



Total segments

462


435


374



6.2


23.5


Reconciling Items (b)

20


44


(11)



(54.5)


N/M



Total

$

482


$

479


$

363



.6

%

32.8

%









(a)

Reconciling items consists primarily of the gain on the sale of Key Insurance and Benefits Services for the second quarter of 2018.

(b)

Reconciling items consists primarily of the gain on the sale of Key Insurance and Benefits Services for the second quarter of 2018, the unallocated portion of merger-related charges for the third quarter of 2017, and items not allocated to the business segments because they do not reflect their normal operations.

TE = Taxable Equivalent, N/M = Not Meaningful

 

Key Community Bank





















dollars in millions





Change 3Q18 vs.


3Q18

2Q18

3Q17


2Q18

3Q17

Summary of operations







Net interest income (TE)

$

726


$

715


$

673



1.5

%

7.9

%

Noninterest income

268


282


272



(5.0)


(1.5)


Total revenue (TE)

994


997


945



(.3)


5.2


Provision for credit losses

43


38


59



13.2


(27.1)


Noninterest expense

635


640


626



(.8)


1.4


Income (loss) before income taxes (TE)

316


319


260



(.9)


21.5


Allocated income taxes (benefit) and TE adjustments

75


76


97



(1.3)


(22.7)


Net income (loss) attributable to Key

$

241


$

243


$

163



(.8)

%

47.9

%








Average balances







Loans and leases

$

47,862


$

47,985


$

47,614



(.3)

%

.5

%

Total assets

51,740


51,867


51,642



(.2)


.2


Deposits

82,259


80,930


79,563



1.6


3.4









Assets under management at period end

$

40,575


$

39,663


$

38,660



2.3

%

5.0

%








TE = Taxable Equivalent

 

Additional Key Community Bank Data














dollars in millions





Change 3Q18 vs.


3Q18

2Q18

3Q17


2Q18

3Q17

Noninterest income







Trust and investment services income

$

90


$

92


$

85



(2.2)

%

5.9

%

Service charges on deposit accounts

72


77


78



(6.5)


(7.7)


Cards and payments income

59


59


65




(9.2)


Other noninterest income

47


54


44



(13.0)


6.8


Total noninterest income

$

268


$

282


$

272



(5.0)

%

(1.5)

%








Average deposit balances







NOW and money market deposit accounts

$

45,967


$

45,112


$

44,481



1.9

%

3.3

%

Savings deposits

4,923


5,078


5,165



(3.1)


(4.7)


Certificates of deposit ($100,000 or more)

5,608


5,232


4,195



7.2


33.7


Other ti