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KeyCorp Reports Third Quarter 2019 Net Income Of $383 Million, Or $.38 Per Diluted Common Share

Diluted earnings per common share of $.48(a), excluding $.10 per diluted common share from a previously disclosed fraud loss

Reached targeted cash efficiency ratio range: 56.0%(a) in 3Q19

Positive operating leverage compared to the prior year and prior quarter

Revenue momentum continues: solid balance sheet growth and strength in fee income

Company Release - 10/17/2019 6:30 AM ET

CLEVELAND, Oct. 17, 2019 /PRNewswire/ -- KeyCorp (NYSE: KEY) today announced net income from continuing operations attributable to Key common shareholders of $383 million, or $.38 per diluted common share for the third quarter of 2019, compared to $403 million, or $.40 per diluted common share, for the second quarter of 2019 and $468 million, or $.45 per diluted common share, for the third quarter of 2018. Key's third quarter 2019 diluted earnings per share was $.48(a), excluding $.10 per diluted common share related to a previously disclosed fraud loss. Key's results in the second quarter of 2019 included notable items; additional detail can be found on page 24 of this release.

"Our results this quarter reflect positive revenue momentum and strong expense management that drove our cash efficiency ratio to its lowest level in over a decade. This places us within our targeted cash efficiency ratio range of 54% to 56% and reflects the successful execution of our cost initiatives and ongoing commitment to continuous improvement. While expenses declined 3% from the year-ago period, we have continued to invest a portion of our cost savings back in to the business to drive future growth.

We generated positive operating leverage compared to the prior year and previous quarter, supported by strong balance sheet growth, as well as continued momentum in our fee-based businesses, including record third quarter investment banking and debt placement fees. We produced another quarter of strong, broad-based growth in commercial and industrial loans and saw higher consumer loan balances, driven by Laurel Road and residential mortgage lending.

We have remained disciplined with credit underwriting and managing our strong capital position. In the third quarter, we increased our quarterly common stock dividend by 9% − from $.17 to $.185. We remain committed to delivering results for our shareholders, while maintaining our moderate risk profile as we move through different parts of the business cycle."

- Beth Mooney, Chairman and CEO

(a) Non-GAAP measure; please refer to page 14 of this release for additional detail and reconciliation


Selected Financial Highlights















dollars in millions, except per share data





Change 3Q19 vs.



3Q19

2Q19

3Q18


2Q19

3Q18

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

$

383


$

403


$

468



(5.0)

%

(18.2)

%

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

.38


.40


.45



(5.0)


(15.6)


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

12.38

%

13.69

%

16.81

%


N/A


N/A


Return on average total assets from continuing operations

1.14


1.19


1.40



N/A


N/A


Common Equity Tier 1 ratio (b)

9.52


9.57


9.95



N/A


N/A


Book value at period end

$

15.44


$

15.07


$

13.33



2.5

%

15.8

%

Net interest margin (TE) from continuing operations

3.00

%

3.06

%

3.18

%


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)

9/30/19 ratio is estimated.

TE = Taxable Equivalent, N/A = Not Applicable

INCOME STATEMENT HIGHLIGHTS














Revenue














dollars in millions





Change 3Q19 vs.


3Q19

2Q19

3Q18


2Q19

3Q18

Net interest income (TE)

$

980


$

989


$

993



(.9)

%

(1.3)

%

Noninterest income

650


622


609



4.5


6.7


Total revenue

$

1,630


$

1,611


$

1,602



1.2

%

1.7

%


TE = Taxable Equivalent


Taxable-equivalent net interest income was $980 million for the third quarter of 2019, compared to taxable-equivalent net interest income of $993 million for the third quarter of 2018. The decrease in net interest income reflects a lower net interest margin, driven by higher interest-bearing deposit costs, and lower loan fees. Additionally, purchase accounting accretion declined $9 million. These declines were partially offset by higher earning asset balances.

Compared to the second quarter of 2019, taxable-equivalent net interest income decreased by $9 million. The decrease was driven by a lower net interest margin, resulting from a decline in interest rates, and lower loan fees. These declines were partially offset by higher earning asset balances, driven by solid consumer and commercial loan growth, and one additional day in the quarter.

Noninterest Income














dollars in millions





Change 3Q19 vs.


3Q19

2Q19

3Q18


2Q19

3Q18

Trust and investment services income

$

118


$

122


$

117



(3.3)

%

.9

%

Investment banking and debt placement fees

176


163


166



8.0


6.0


Service charges on deposit accounts

86


83


85



3.6


1.2


Operating lease income and other leasing gains

42


44


35



(4.5)


20.0


Corporate services income

63


53


52



18.9


21.2


Cards and payments income

69


73


69



(5.5)



Corporate-owned life insurance income

32


33


34



(3.0)


(5.9)


Consumer mortgage income

14


10


9



40.0


55.6


Mortgage servicing fees

23


24


19



(4.2)


21.1


Other income

27


17


23



58.8


17.4


Total noninterest income

$

650


$

622


$

609



4.5

%

6.7

%



Key's noninterest income was $650 million for the third quarter of 2019, compared to $609 million for the year-ago quarter. The increase reflects growth in investment banking and debt placement fees, which reached a record third quarter level, as well as growth in corporate services income, due to higher derivatives income. Investments made in Key's mortgage business continue to drive consumer mortgage income and mortgage servicing fees.

Compared to the second quarter of 2019, noninterest income increased by $28 million, due to growth in investment banking and debt placement fees and corporate services income, due to higher derivatives income, as well as consumer mortgage income.

Noninterest Expense














dollars in millions





Change 3Q19 vs.


3Q19

2Q19

3Q18


2Q19

3Q18

Personnel expense

$

547


$

589


$

553



(7.1)

%

(1.1)

%

Nonpersonnel expense

392


430


411



(8.8)


(4.6)


Total noninterest expense

$

939


$

1,019


$

964



(7.9)

%

(2.6)

%










Key's noninterest expense was $939 million for the third quarter of 2019, compared to $964 million in the year-ago quarter and $1.0 billion in the prior quarter. The prior quarter included notable items of $52 million, primarily efficiency-related expenses, while no notable items were reported in the current quarter or the year-ago period.

Noninterest expense decreased by $25 million from the year-ago period, reflecting the successful implementation of Key's expense initiatives and the elimination of the FDIC surcharge. These expenses were partially offset by Laurel Road acquisition expenses.

Excluding notable items, noninterest expense decreased $28 million from the prior quarter, reflecting the successful implementation of Key's expense initiatives, which drove lower salaries and declines across most non-personnel expenses.


BALANCE SHEET HIGHLIGHTS














Average Loans














dollars in millions





Change 3Q19 vs.


3Q19

2Q19

3Q18


2Q19

3Q18

Commercial and industrial (a)

$

48,322


$

47,227


$

44,749



2.3

%

8.0

%

Other commercial loans

19,016


19,765


20,471



(3.8)


(7.1)


Total consumer loans

24,618


23,793


23,247



3.5


5.9


Total loans

$

91,956


$

90,785


$

88,467



1.3

%

3.9

%








(a)

Commercial and industrial average loan balances include $144 million, $141 million, and $128 million of assets from commercial
credit cards at September 30, 2019, June 30, 2019, and September 30, 2018, respectively.


Average loans were $92.0 billion for the third quarter of 2019, an increase of $3.5 billion compared to the third quarter of 2018. Commercial loans increased $2.1 billion, reflecting broad-based growth in commercial and industrial loans, partially offset by declines in commercial mortgage and construction loans. Consumer loans increased $1.4 billion, driven by solid growth from Laurel Road, residential mortgage loans, and indirect auto lending. Home equity loans declined $927 million, largely the result of continued paydowns in home equity lines of credit.

Compared to the second quarter of 2019, average loans increased by $1.2 billion, driven by solid growth in commercial and industrial loans, partially offset by a decline in commercial mortgage loans. Consumer loans increased $825 million from the prior quarter, as growth from Laurel Road, residential mortgage, and indirect auto more than offset the decline in home equity loans. Laurel Road originations were $500 million in the current quarter.


Average Deposits














dollars in millions





Change 3Q19 vs.


3Q19

2Q19

3Q18


2Q19

3Q18

Non-time deposits

$

97,205


$

95,885


$

92,414



1.4

%

5.2

%

Certificates of deposit ($100,000 or more)

7,625


8,147


8,186



(6.4)


(6.9)


Other time deposits

5,449


5,569


5,026



(2.2)


8.4


Total deposits

$

110,279


$

109,601


$

105,626



.6

%

4.4

%








Cost of total deposits

.82

%

.82

%

.53

%


N/A


N/A









N/A = Not Applicable

Average deposits totaled $110.3 billion for the third quarter of 2019, an increase of $4.7 billion compared to the year-ago quarter, reflecting growth from consumer and commercial relationships.

Compared to the second quarter of 2019, average deposits increased by $678 million, primarily driven by continued growth from consumer relationships, as well as short-term commercial deposits.


ASSET QUALITY














dollars in millions





Change 3Q19 vs.


3Q19

2Q19

3Q18


2Q19

3Q18

Net loan charge-offs

$

196


$

65


$

60



201.5

%

226.7

%

Net loan charge-offs to average total loans

.85

%

.29

%

.27

%


N/A


N/A


Nonperforming loans at period end (a)

$

585


$

561


$

645



4.3


(9.3)


Nonperforming assets at period end (a)

711


608


674



16.9


5.5


Allowance for loan and lease losses

893


890


887



.3


.7


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

152.6

%

158.6

%

137.5

%


N/A


N/A


Provision for credit losses

$

200


$

74


$

62



170.3

%

222.6

%








(a)

Nonperforming loan balances exclude $497 million, $518 million, and $606 million of purchased credit impaired loans at September 30, 2019, June 30, 2019, and
September 30, 2018, respectively.

N/A = Not Applicable

In the third quarter of 2019, Key realized a $123 million pre-tax loss related to a previously disclosed fraud incident. Excluding the fraud loss, Key's provision for credit losses was $77 million for the third quarter of 2019, compared to $62 million for the third quarter of 2018 and $74 million for the second quarter of 2019. Key's allowance for loan and lease losses was $893 million, or .96% of total period-end loans at September 30, 2019, compared to .99% at September 30, 2018, and .97% at June 30, 2019.

Excluding the fraud loss, net loan charge-offs for the third quarter of 2019 totaled $73 million, or .31% of average total loans. These results compare to $60 million, or .27%, for the third quarter of 2018, and $65 million, or .29%, for the second quarter of 2019.

At September 30, 2019, Key's nonperforming loans totaled $585 million, which represented .63% of period-end portfolio loans. These results compare to .72% at September 30, 2018, and .61% at June 30, 2019. Nonperforming assets at September 30, 2019, totaled $711 million, and represented .77% of period-end portfolio loans and OREO and other nonperforming assets. These results compare to .75% at September 30, 2018, and .66% at June 30, 2019.

CAPITAL

Key's estimated risk-based capital ratios included in the following table continued to exceed all "well-capitalized" regulatory benchmarks at September 30, 2019.

Capital Ratios









9/30/2019

6/30/2019

9/30/2018

Common Equity Tier 1 (a)

9.52

%

9.57

%

9.95

%

Tier 1 risk-based capital (a)

10.96


11.01


11.11


Total risk based capital (a)

12.96


13.03


12.99


Tangible common equity to tangible assets (b)

8.58


8.59


8.05


Leverage (a)

9.92


10.00


10.03
















(a)

9/30/2019 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 of 2019. As shown in the preceding table, at September 30, 2019, Key's estimated Common Equity Tier 1 and Tier 1 risk-based capital ratios stood at 9.52% and 10.96%, respectively. Key's tangible common equity ratio was 8.58% at September 30, 2019.

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. Key's estimated Common Equity Tier 1 ratio as calculated under the fully phased-in Regulatory Capital Rules was 9.44% at September 30, 2019. 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 3Q19 vs.



3Q19

2Q19

3Q18


2Q19

3Q18

Shares outstanding at beginning of period

1,003,114


1,013,186


1,058,944



(1.0)

%

(5.3)

%

Open market repurchases and return of shares under employee
compensation plans

(15,076)


(10,412)


(25,418)



44.8


(40.7)


Shares issued under employee compensation plans (net of cancellations)

500


340


761



47.1


(34.3)


Shares outstanding at end of period

988,538


1,003,114


1,034,287



(1.5)

%

(4.4)

%









Consistent with Key's 2019 Capital Plan, during the third quarter of 2019, Key declared a dividend of $.185 per common share, representing a 9% increase from the prior quarter. Key also completed $248 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 3Q19 vs.



3Q19

2Q19

3Q18


2Q19

3Q18

Revenue from continuing operations (TE)







Consumer Bank

$

833


$

825


$

809



1.0

%

3.0

%

Commercial Bank

779


760


753



2.5


3.5


Other (a)

18


26


40



(30.8)


(55.0)

%

Total

$

1,630


$

1,611


$

1,602



1.2

%

1.7

%








Income (loss) from continuing operations attributable to Key







Consumer Bank

$

194


$

177


$

168



9.6

%

15.5

%

Commercial Bank

304


277


274



9.7


10.9


Other (a), (b)

(82)


(29)


40



N/M


N/M


Total

$

416


$

425


$

482



(2.1)

%

(13.7)

%









(a)

Other includes other segments that consists of corporate treasury, our principal investing unit, and various exit portfolios as well as reconciling items which primarily represents the unallocated portion of nonearning assets of corporate support functions. Charges related to the funding of these assets are part of net interest income and are allocated to the business segments through noninterest expense. Reconciling items also includes intercompany eliminations and certain items that are not allocated to the business segments because they do not reflect their normal operations.

(b)

Other segments included $94 million, after tax, of notable items related to a previously disclosed fraud loss for the third quarter of 2019; additional detail can be found on page 24 of this release.

TE = Taxable Equivalent, N/M = Not Meaningful


Consumer Bank





















dollars in millions





Change 3Q19 vs.


3Q19

2Q19

3Q18


2Q19

3Q18

Summary of operations







Net interest income (TE)

$

595


$

594


$

583



.2

%

2.1

%

Noninterest income

238


231


226



3.0


5.3


Total revenue (TE)

833


825


809



1.0


3.0


Provision for credit losses

48


40


32



20.0


50.0


Noninterest expense

531


552


557



(3.8)


(4.7)


Income (loss) before income taxes (TE)

254


233


220



9.0


15.5


Allocated income taxes (benefit) and TE adjustments

60


56


52



7.1


15.4


Net income (loss) attributable to Key

$

194


$

177


$

168



9.6

%

15.5

%








Average balances







Loans and leases

$

32,760


$

31,881


$

31,172



2.8

%

5.1

%

Total assets

36,417


35,469


34,368



2.7


6.0


Deposits

72,995


72,303


69,124



1.0


5.6









Assets under management at period end

$

39,416


$

38,942


$

40,575



1.2

%

(2.9)

%








TE = Taxable Equivalent


Additional Consumer Bank Data














dollars in millions





Change 3Q19 vs.


3Q19

2Q19

3Q18


2Q19

3Q18

Noninterest income







Trust and investment services income

$

90


$

91


$

89



(1.1)

%

1.1


Service charges on deposit accounts

58


56


57



3.6


1.8

%

Cards and payments income

52


54


52



(3.7)


.0


Other noninterest income

38


30


28



26.7


35.7


Total noninterest income

$

238


$

231


$

226



3.0

%

5.3

%








Average deposit balances







NOW and money market deposit accounts

$

43,638


$

42,800


$

40,540



2.0

%

7.6

%

Savings deposits

4,406


4,506


4,749



(2.2)


(7.2)


Certificates of deposit ($100,000 or more)

6,488


6,644


5,384



(2.3)


20.5


Other time deposits

5,430


5,549


5,014