KeyCorp Reports Third Quarter 2008 Results.
- Net loss of $36 million ($0.10 per common share) for the third quarter
- Loan loss reserve increased $133 million to $1.554 billion, or 2.03% of total loans
- Capital ratios remain strong; costs well controlled
- Actions taken to exit certain businesses
- Opted-in to IRS global tax settlement; after-tax recovery of up to $100 million anticipated
CLEVELAND, Oct. 21 /PRNewswire-FirstCall/ -- KeyCorp today announced a third quarter loss from continuing operations of $36 million, or $0.10 per common share, compared to income from continuing operations of $224 million, or $0.57 per diluted common share, for the third quarter of 2007.
The continuation of a difficult economic environment and a resulting increase in Key's loan loss reserves contributed to the loss recorded for the current quarter. The Company's third quarter results reflect a $133 million increase in reserves to $1.554 billion, or 2.03% of total loans. Additionally, third quarter results were adversely impacted by $33 million of after-tax losses on derivative contracts that resulted from market disruption caused by the failure of Lehman Brothers.
"We have experienced the most severe financial crisis any of us has known in our business lifetime," said Chief Executive Officer Henry L. Meyer, III. "However, in my 35 years in the banking industry, we have successfully managed through a number of troublesome credit cycles, each of which seemed daunting at the time. As I reflect back on those past cycles, I cannot recall a time when we were more prepared than today. Key has strong capital ratios (8.48% Tier 1 capital) and a strong loan loss reserve (2.03% of total loans; 161% coverage of nonperforming loans). In the third quarter, the increase in nonperforming assets slowed -- up only 2.4%. Key does not have a subprime mortgage portfolio, credit card portfolio, or consumer automobile loan portfolio -- the epicenters of consumer credit issues. Also, in both the second and third quarters we were aggressive in reducing our exposure to the homebuilder segment of our commercial real estate business. As of the end of the third quarter, our total residential property exposure in commercial real estate, including loans held for sale, has been reduced by $1.3 billion, or 34%, from one year ago, with the majority of this reduction coming from the weakest, or most susceptible, portion of the portfolio.
"Additionally, we have elected to reduce uncertainty surrounding our previously disclosed leveraged lease tax issue with the IRS. While we continue to believe that our initial tax position was correct, it would have taken years of effort and expense to resolve this matter through litigation. Consequently, Key has opted-in to the IRS' global settlement initiative, which is essentially an offer by the federal tax authorities to resolve all such disputed cases. We expect that the definitive settlement documents will be executed as soon as the fourth quarter and that Key should realize an after- tax recovery of between $75 million and $100 million for previously accrued interest on disputed tax balances."
Key continued to take decisive steps in the third quarter to exit low- return, indirect businesses so that the company can focus its capital and resources on its best relationship customers. Key is in the process of exiting direct and indirect retail and floor-plan lending for marine and recreational vehicle products and will limit new student loans to those backed by government guarantee. These actions are the result of a series of decisions made over several years that have seen the Company exit subprime mortgage and automobile financing, broker-originated home equity lending as well as dispose of a segment of its residential homebuilder portfolio.
"With respect to our relationship businesses, our Community Banking group continues to perform solidly, with higher revenue and deposit growth across our branch network. Despite the market turmoil, we are building a relationship-based, customer-focused business model which will serve us well as the economy ultimately recovers," Meyer concluded.
As shown in the following table, the comparability of Key's earnings for the current, prior and year-ago quarters is affected by several significant items.
Significant Items Affecting the Comparability of Earnings
Third Quarter 2008 Second Quarter 2008
in millions, except Pre-tax After-tax Impact Pre-tax After-tax Impact
per share amounts Amount Amount on EPS Amount Amount on EPS
Provision for loan
losses in excess of
net charge-offs $(134) $(83) $(.17) $(123) $(77) $(.18)
Realized and unrealized
(losses) gains on
loan and securities
portfolios held for
sale or trading (94)(a) (59)(a) (.12) 62 39 .09
Net (losses) gains from
principal investing (24) (15) (.03) (14) (8) (.02)
Severance and other
exit costs (19) (14) (.03) (8) (5) (.01)
Reversal of litigation
reserve 23 14 .03 -- -- --
Charges related to
leveraged lease tax
litigation -- (30) (.06) (359) (1,011) (2.43)
Gain related to MasterCard
Incorporated shares -- -- -- -- -- --
Third Quarter 2007
Pre-tax After-tax Impact
in millions, except per share amounts Amount Amount on EPS
Provision for loan losses in excess
of net charge-offs $(10) $(6) $(.02)
Realized and unrealized (losses)
gains on loan and securities portfolios
held for sale or trading (77) (49) (.12)
Net (losses) gains from principal investing 9 6 .01
Severance and other exit costs (4) (3) (.01)
Reversal of litigation reserve -- -- --
Charges related to leveraged lease tax
litigation -- -- --
Gain related to MasterCard Incorporated
shares 27 17 .04
(a) Includes $54 million ($33 million after tax) of derivative-related
charges recorded as a result of market disruption caused by the
failure of Lehman Brothers and $31 million ($19 million after tax) of
realized and unrealized losses from the residential properties segment
of the construction loan portfolio.
EPS = Earnings per diluted common share
SUMMARY OF CONTINUING OPERATIONS
Key's taxable-equivalent net interest income was $705 million for the third quarter of 2008, compared to $712 million for the year-ago quarter. Average earning assets rose by $6.6 billion, or 8%, due primarily to growth in commercial loans and the January 1 acquisition of U.S.B. Holding Co., Inc., which added approximately $1.5 billion to Key's loan portfolio. The net interest margin for the current quarter declined to 3.13% from 3.40% for the third quarter of 2007. Approximately 13 basis points of the reduction was attributable to the prospective decrease in net interest income caused by the second quarter 2008 recalculation of income previously recognized on all leveraged leases being contested by the Internal Revenue Service ("IRS"). Also contributing to the lower net interest margin were tighter loan and deposit spreads caused by competitive pricing, and a higher level of nonperforming assets.
Compared to the second quarter of 2008, taxable-equivalent net interest income decreased by $33 million and the net interest margin declined by 19 basis points, using adjusted second quarter results, which exclude the effects of the charges recorded in connection with the tax litigation pertaining to Key's leveraged lease financing portfolio. As previously reported, Key's taxable-equivalent net interest income for the second quarter of 2008 was reduced significantly as a result of an adverse federal court decision on the company's tax treatment of a Service Contract Lease transaction entered into by AWG Leasing Trust, in which Key is a partner. In accordance with the applicable accounting guidance, Key recalculated the lease income recognized from inception for all of the leveraged leases being contested by the IRS, not just the single leveraged lease subject to the Court decision. Key's second quarter results also reflect a $475 million charge to income taxes for the interest cost associated with the contested tax liabilities. These actions reduced Key's taxable-equivalent net interest income and net interest margin for the second quarter of 2008 by $838 million and 376 basis points, respectively, and reduced Key's earnings by $1.011 billion, or $2.43 per common share.
On August 6, 2008, the IRS announced an initiative for the settlement of all transactions, including the contested leveraged leases entered into by Key, which the IRS has characterized as LILO/SILO transactions (the "LILO/SILO Settlement Initiative"). As preconditions to its participation, Key was required to provide written acceptance to the IRS of the terms of the LILO/SILO Settlement Initiative and to dismiss its appeal of the AWG Leasing Trust litigation. Key has complied with these preconditions and was accepted into the LILO/SILO Settlement Initiative by the IRS on October 6, 2008. However, Key's acceptance into this initiative is not binding until a closing agreement is executed by both Key and the IRS. Management believes that, upon the execution of a closing agreement, Key should realize an after-tax recovery of between $75 million and $100 million for previously accrued interest on disputed tax balances.
Key's noninterest income was $388 million for the third quarter of 2008, compared to $438 million for the year-ago quarter. Noninterest income for the current quarter includes $54 million of derivative-related charges recorded as a result of market disruption caused by the failure of Lehman Brothers and $31 million of realized and unrealized losses from the residential properties segment of the construction loan portfolio, while results for the third quarter of 2007 benefited from a $27 million gain from the sale of MasterCard Incorporated shares. Excluding these items, noninterest income was up $62 million. The improvement reflected a $14 million increase in income from trust and investment services, a $6 million increase in deposit service charges and a $15 million decrease in losses attributable to changes in the fair values of certain real estate related investments held by the Private Equity unit within the Real Estate Capital and Corporate Banking Services line of business. Excluding the loan-related losses mentioned above, Key had net gains of $1 million from loan sales and write-downs in the current quarter, compared to net losses of $53 million for the same period last year. These favorable results were offset in part by net losses of $24 million from principal investing in the third quarter of 2008, compared to net gains of $9 million for the year-ago quarter.
The major components of Key's fee-based income for the past five quarters are shown in the following table.
Fee-Based Income - Major Components in millions 3Q08 2Q08 1Q08 4Q07 3Q07 Trust and investment services income $133 $138 $129 $131 $119 Service charges on deposit accounts 94 93 88 90 88 Investment banking and capital markets (loss) income (31) 80 8 12 9 Operating lease income 69 68 69 72 70 Letter of credit and loan fees 53 51 37 58 51 Corporate-owned life insurance income 28 28 28 37 27 Electronic banking fees 27 27 24 25 25
Compared to the second quarter of 2008, noninterest income decreased by $167 million, reflecting the continued effects of adverse conditions in the financial markets. Results from investment banking and capital markets activities decreased by $111 million, due primarily to an $85 million reduction from dealer trading and derivatives activities, including the third quarter charges resulting from market disruption caused by the failure of Lehman Brothers. Additionally, Key recorded $30 million in net losses from loan sales and write-downs, related primarily to commercial real estate loans held for sale, compared to net gains of $33 million for the prior quarter. Net losses from principal investing increased by $10 million from the second quarter of 2008.
Key's noninterest expense was $762 million for the third quarter of 2008, compared to $753 million for the same period last year. Personnel expense decreased by $2 million as increases in both salaries and severance expense were more than offset by reductions in costs associated with employee benefits and stock-based compensation. Nonpersonnel expense rose by $11 million, reflecting increases of $8 million in professional fees, $6 million in marketing expense, $5 million in net occupancy expense and $7 million resulting from the write-down or amortization of intangible assets. Included in noninterest expense for the third quarter of 2008 is $19 million of severance and other exit costs, including $10 million of expense recorded in connection with Key's third quarter 2008 decision to exit direct and indirect retail and floor-plan lending for marine and recreational vehicle products. Key expects to record additional exit-related costs in the fourth quarter. The increase in noninterest expense relative to the year-ago quarter was moderated by a $23 million credit to miscellaneous expense, representing the reversal of the remaining litigation reserve associated with the previously reported Honsador litigation, which was settled in September.
Compared to the second quarter of 2008, noninterest expense decreased by $19 million. Personnel expense decreased by $23 million, due primarily to lower incentive compensation accruals. Nonpersonnel expense was up $4 million, reflecting an $8 million provision for losses on lending-related commitments in the current quarter, compared to a $2 million credit in the prior quarter, a $6 million increase in marketing expense and a $4 million write-off of goodwill recorded during the third quarter in connection with Key's decision to exit certain businesses. These increases were offset by the reversal of the remaining Honsador litigation reserve.
ASSET QUALITY
Key's provision for loan losses from continuing operations was $407 million for the third quarter of 2008, compared to $69 million for the year- ago quarter and $647 million for the second quarter of 2008. Key's provision for loan losses for the third quarter of 2008 exceeded its net loan charge- offs by $134 million, as the company continued to build reserves.
As previously reported, Key has undertaken a process to aggressively reduce its exposure in the residential properties segment of its construction loan portfolio through the planned sale of certain loans. In conjunction with these efforts, Key transferred $384 million of commercial real estate loans ($719 million, net of $335 million in net charge-offs) from the held-to-maturity loan portfolio to held-for-sale status in June. As of June 30, 2008, sales had closed on $44 million of these loans, and $340 million remained to be sold. During the third quarter, Key continued to work with bidders to finalize sales terms and documentation. However, continued disruption in the financial markets has precluded the ability of certain potential buyers to obtain the necessary funding. As shown in the following table, the balance of this portfolio was reduced to $133 million at September 30, 2008, as a result of cash proceeds received from loan sales, transfers to other real estate owned ("OREO") and both realized and unrealized losses. Key is continuing to pursue the sale of the remaining loans, all of which are on nonperforming status.
Loans Held for Sale - Residential Properties Segment of Construction Loan Portfolio in millions Balance at June 30, 2008 $340 Cash proceeds from loan sales (135) Loans transferred to OREO (35) Realized and unrealized losses (31) Payments (6) Balance at September 30, 2008 $133
Selected asset quality statistics for Key for each of the past five quarters are presented in the following table.
Selected Asset Quality Statistics
dollars in millions 3Q08 2Q08 1Q08 4Q07 3Q07
Net loan charge-offs $273 $524 $121 $119 $59
Net loan charge-offs to average
loans from continuing operations 1.43% 2.75% .67% .67% .35%
Nonperforming loans at period end $967 $814 $1,054 $687 $498
Nonperforming loans to period-end
portfolio loans 1.26% 1.07% 1.38% .97% .72%
Nonperforming assets at period
end $1,239 $1,210 $1,115 $764 $570
Nonperforming assets to
period-end portfolio loans plus
OREO and other nonperforming
assets 1.61% 1.59% 1.46% 1.08% .83%
Allowance for loan losses $1,554 $1,421 $1,298 $1,200 $955
Allowance for loan losses to
period-end loans 2.03% 1.87% 1.70% 1.69% 1.38%
Allowance for loan losses to
nonperforming loans 160.70 174.57 123.15 174.67 191.77
Net loan charge-offs for the quarter totaled $273 million, or 1.43% of average loans from continuing operations, compared to $59 million, or 0.35%, for the same period last year and $524 million, or 2.75%, for the previous quarter. Net loan charge-offs from the commercial, commercial real estate and education loan portfolios totaled $62 million, $99 million and $40 million, respectively, in the current quarter. The net charge-offs in the commercial real estate portfolio reflect continued weakness in the housing market, while the education loan charge-offs are attributable to a weakening economic environment.
Key's net loan charge-offs by loan type for each of the past five quarters are shown in the following table.
Net Loan Charge-offs
dollars in millions 3Q08 2Q08 1Q08 4Q07 3Q07
Commercial, financial and
agricultural $62 $61 $36 $35 $22
Real estate -- commercial mortgage 20 15 4 1 2
Real estate -- construction 79 339 (a) 25 44 6
Commercial lease financing 19 14 9 6 8
Total commercial loans 180 429 74 86 38
Home equity -- Community Banking 9 9 8 6 4
Home equity -- National Banking 12 10 7 6 4
Marine 16 10 16 8 5
Education 40 54 (b) 2 2 1
Other 16 12 14 11 7
Total consumer loans 93 95 47 33 21
Total net loan charge-offs $273 $524 $121 $119 $59
Net loan charge-offs to average
loans from continuing operations 1.43% 2.75% .67% .67% .35%
(a) During the second quarter of 2008, Key transferred $384 million of
commercial real estate loans ($719 million of primarily construction
loans, net of $335 million in net charge-offs) from the loan portfolio
to held-for-sale status.
(b) On March 31, 2008, Key transferred $3.3 billion of education loans
from loans held for sale to the loan portfolio.
The company expects net loan charge-offs for the fourth quarter to be in the range of 1.20% to 1.60% of average loans.
At September 30, 2008, Key's nonperforming loans totaled $967 million and represented 1.26% of period-end portfolio loans, compared to 1.07% at June 30, 2008, and 0.72% at September 30, 2007. At the same time, nonperforming assets totaled $1.239 billion and represented 1.61% of portfolio loans, other real estate owned and other nonperforming assets, compared to 1.59% at June 30, 2008, and 0.83% at September 30, 2007. The decrease in nonperforming loans held for sale and the increase in OREO and other nonperforming assets during the third quarter were largely attributable to the previously discussed activity in the residential properties segment of Key's construction loan portfolio.
The following table illustrates the trend in Key's nonperforming assets by loan type over the past five quarters.
Nonperforming Assets
dollars in millions 3Q08 2Q08 1Q08 4Q07 3Q07
Commercial, financial and
agricultural $309 $259 $147 $84 $94
Real estate - commercial
mortgage 119 107 113 41 41
Real estate - construction 334 256 610 415 228
Commercial lease financing 55 57 38 28 30
Total consumer loans 150 135 146 119 105
Total nonperforming loans 967 814 1,054 687 498
Nonperforming loans held for
sale 169 342 9 25 6
OREO and other nonperforming
assets 103 54 52 52 66
Total nonperforming assets $1,239 $1,210 $1,115 $764 $570
Nonperforming loans to
period-end portfolio loans 1.26% 1.07 1.38% .97% .72%
Nonperforming assets to
period-end portfolio loans,
plus OREO and other
nonperforming assets 1.61 1.59 1.46 1.08 .83
Key's allowance for loan losses was $1.554 billion, or 2.03% of loans outstanding, at September 30, 2008, compared to $1.421 billion, or 1.87%, at June 30, 2008, and $955 million, or 1.38%, at September 30, 2007.
CAPITAL
Key's capital ratios, as presented in the following table, continued to exceed all "well-capitalized" regulatory benchmarks at September 30, 2008.
Capital Ratios
9-30-08 6-30-08 3-31-08 12-31-07 9-30-07
Tier 1 risk-based capital (a) 8.48% 8.53% 8.33% 7.44% 7.94%
Total risk-based capital (a) 12.31 12.41 12.34 11.38 11.76
Tangible equity to tangible
assets 6.95 6.98 6.85 6.58 6.87
(a) 9-30-08 ratio is estimated.
Key issued 7 million additional common shares and 75,000 additional shares of noncumulative perpetual convertible preferred stock on July 11, 2008. These shares were issued as part of the over allotment granted by Key to the underwriters in connection with the issuances of common shares and preferred stock completed during the second quarter.
During the third quarter, Key reissued 2 million of its common shares under employee benefit plans. There was no repurchase activity by Key during the third quarter, and the company currently does not anticipate any share repurchase activity during the remainder of 2008.
Share issuances and repurchases that caused the change in Key's outstanding common shares over the past five quarters are summarized in the following table.
Summary of Changes in Common Shares Outstanding
in thousands 3Q08 2Q08 1Q08 4Q07 3Q07
Shares outstanding at
beginning of period 485,662 400,071 388,793 388,708 389,362
Common shares issued 7,066 85,106 -- -- --
Shares reissued to acquire
U.S.B. Holding Co., Inc. -- -- 9,895 -- --
Shares reissued under
employee benefit plans 2,037 485 1,383 85 1,346
Common shares repurchased -- -- -- -- (2,000)
Shares outstanding at end
of period 494,765 485,662 400,071 388,793 388,708
LINE OF BUSINESS RESULTS
The following table shows the contribution made by each major business group to Key's taxable-equivalent revenue and (loss) income from continuing operations for the periods presented. The specific lines of business that comprise each of the major business groups are described under the heading "Line of Business Descriptions." For more detailed financial information pertaining to each business group and its respective lines of business, see the tables at the end of this release. Key's line of business results for all periods presented reflect a new organizational structure that took effect January 1, 2008.
Major Business Groups
Percent change
3Q08 vs.
dollars in millions 3Q08 2Q08 3Q07 2Q08 3Q07
Revenue from continuing
operations (TE)
Community Banking $658 $661 $629 (.5)% 4.6%
National Banking (a) 482 (130) 507 N/M (4.9)
Other Segments (17) (31) 15 45.2 N/M
Total Segments 1,123 500 1,151 124.6 (2.4)
Reconciling Items (c) (30) (45) (1) 33.3 N/M
Total $1,093 $455 $1,150 140.2% (5.0)%
(Loss) income from
continuing operations
Community Banking $98 $105 $134 (6.7)% (26.9)%
National Banking (a) (133) (672) 70 80.2 N/M
Other Segments (b) 9 (13) 16 N/M (43.8)
Total Segments (26) (580) 220 95.5 N/M
Reconciling Items (c) (10) (546) 4 98.2 N/M
Total $(36) $(1,126) $224 96.8% N/M
(a) National Banking's results for the third quarter of 2008 include
$54 million ($33 million after tax) of derivative-related charges
recorded as a result of market disruption caused by the failure of
Lehman Brothers and $31 million ($19 million after tax) of realized
and unrealized losses from the residential properties segment of the
construction loan portfolio. During the second quarter of 2008,
National Banking's taxable-equivalent net interest income and net
income were reduced by $838 million and $536 million, respectively, as
a result of an adverse federal court decision on the tax treatment of
a Service Contract Lease transaction.
(b) Other Segments' results for the third quarter of 2008 include a
$23 million ($14 million after tax) credit, representing the reversal
of the remaining litigation reserve associated with the Honsador
litigation, which was settled in September.
(c) Reconciling Items for the third and second quarters of 2008 include
charges of $30 million and $475 million, respectively, to income taxes
for the interest cost associated with the leveraged lease tax litigation.
Reconciling Items for the third quarter of 2007 include a $27 million
($17 million after tax) gain related to MasterCard Incorporated
shares.
TE = Taxable Equivalent, N/M = Not Meaningful
Community Banking
Percent change
3Q08 vs.
dollars in millions 3Q08 2Q08 3Q07 2Q08 3Q07
Summary of operations
Net interest income (TE) $445 $439 $412 1.4% 8.0%
Noninterest income 213 222 217 (4.1) (1.8)
Total revenue (TE) 658 661 629 (.5) 4.6
Provision for loan losses 56 44 2 27.3 N/M
Noninterest expense 445 449 413 (.9) 7.7
Income before income
taxes (TE) 157 168 214 (6.5) (26.6)
Allocated income taxes and
TE adjustments 59 63 80 (6.3) (26.3)
Net income $98 $105 $134 (6.7)% (26.9)%
Percent of consolidated
income from continuing
operations N/M N/M 60% N/A N/A
Average balances
Loans and leases $28,872 $28,477 $26,944 1.4% 7.2%
Total assets 31,934 31,304 29,708 2.0 7.5
Deposits 50,384 49,948 46,729 .9 7.8
Assets under management
at period end $18,278 $19,366 $21,903 (5.6)% (16.6)%
TE = Taxable Equivalent, N/M = Not Meaningful, N/A = Not Applicable
Additional Community Banking Data Percent change
3Q08 vs.
dollars in millions 3Q08 2Q08 3Q07 2Q08 3Q07
Average deposits outstanding
NOW and money market deposit
accounts $19,507 $19,656 $20,307 (.8)% (3.9)%
Savings deposits 1,752 1,804 1,569 (2.9) 11.7
Certificates of deposit
($100,000 or more) 6,875 6,661 4,566 3.2 50.6
Other time deposits 13,103 12,735 11,485 2.9 14.1
Deposits in foreign office 1,193 1,306 1,128 (8.7) 5.8
Noninterest-bearing deposits 7,954 7,786 7,674 2.2 3.6
Total deposits $50,384 $49,948 $46,729 .9% 7.8%
Home equity loans
Average balance $9,887 $9,766 $9,690
Weighted-average
loan-to-value ratio 70% 70% 70%
Percent first lien positions 54 55 58
Other data
Branches 986 985 954
Automated teller machines 1,479 1,479 1,439
Community Banking Summary of Operations
Community Banking recorded net income of $98 million for the third quarter of 2008, compared to $134 million for the year-ago quarter. Increases in the provision for loan losses and noninterest expense were the primary causes of the decline, and more than offset an increase in net interest income.
Taxable-equivalent net interest income rose by $33 million, or 8%, from the third quarter of 2007. The increase was attributable to a $1.9 billion, or 7%, rise in average earning assets, due largely to growth in the commercial loan portfolio, and a $3.7 billion, or 8%, increase in average deposits. Both loans and deposits experienced organic growth and benefited from the January 1 acquisition of U.S.B. Holding Co., Inc. described below.
The provision for loan losses rose by $54 million compared to the third quarter of 2007, reflecting a $51 million increase in net loan charge-offs, almost half of which was attributable to two specific commercial loans.
Noninterest expense rose by $32 million or 8%, from the year-ago quarter as a result of increases in personnel expense, marketing expense, professional fees, costs associated with other real estate owned, and smaller increases in a variety of other expense components. Overall, the increase in noninterest expense was largely attributable to initiatives undertaken with regard to branch modernization, deposit growth and the acquisition of U.S.B. Holding Co., Inc.
On January 1, 2008, Key acquired U.S.B. Holding Co., Inc., the holding company for Union State Bank, a 31-branch state-chartered commercial bank headquartered in Orangeburg, New York. The acquisition doubles Key's branch penetration in the attractive Lower Hudson Valley area. Assets and deposits acquired in this transaction were assigned to both the Community Banking and National Banking groups.
National Banking
Percent change
3Q08 vs.
dollars in millions 3Q08 2Q08 3Q07 2Q08 3Q07
Summary of operations
Net interest income (loss)
(TE) $322 $(476)(a) $355 N/M (9.3)%
Noninterest income 160(a) 346 152 (53.8)% 5.3
Total revenue (TE) 482 (130) 507 N/M (4.9)
Provision for loan losses 350 609 69 (42.5) 407.2
Noninterest expense 342 337 327 1.5 4.6
(Loss) income from
continuing operations
before income taxes (TE) (210) (1,076) 111 80.5 N/M
Allocated income taxes
and TE adjustments (77) (404) 41 80.9 N/M
(Loss) income from
continuing operations (133) (672) 70 80.2 N/M
Loss from discontinued
operations, net of taxes -- -- (14) -- 100.0
Net (loss) income $(133) $(672) $56 80.2% N/M
Percent of consolidated
income from continuing
operations N/M N/M 31% N/A N/A
Average balances from
continuing operations
Loans and leases $47,075 $47,877 $40,279 (1.7)% 16.9 %
Loans held for sale 1,651 1,282 4,692 28.8 (64.8)
Total assets 56,183 56,323 50,961 (.2) 10.2
Deposits 12,439 12,289 12,631 1.2 (1.5)
Assets under management
at period end $58,398 $61,632 $66,197 (5.2)% (11.8)%
(a) National Banking's results for the third quarter of 2008 include
$54 million ($33 million after tax) of derivative-related charges
recorded as a result of market disruption caused by the failure of
Lehman Brothers and $31 million ($19 million after tax) of realized
and unrealized losses from the residential properties segment of the
construction loan portfolio. During the second quarter of 2008,
National Banking's taxable-equivalent net interest income and net
income were reduced by $838 million and $536 million, respectively,
as a result of an adverse federal court decision on the tax treatment
of a Service Contract Lease transaction.
TE = Taxable Equivalent, N/M = Not Meaningful, N/A = Not Applicable
National Banking Summary of Continuing Operations
National Banking recorded a loss of $133 million from continuing operations for the third quarter of 2008, compared to income of $70 million from continuing operations for the same period last year. A substantially higher provision for loan losses, lower net interest income and an increase in noninterest expense were offset in part by growth in noninterest income.
Taxable-equivalent net interest income decreased by $33 million, or 9%, from the third quarter of 2007 as a result of tighter loan and deposit spreads caused by competitive pricing, and a higher level of nonperforming assets. Also contributing to the decrease was the prospective reduction in net interest income caused by the second quarter 2008 recalculation of income previously recognized on all leveraged leases being contested by the IRS. Average loans and leases grew by $6.8 billion, or 17%, while the level of average deposits was down slightly from the year-ago quarter. Contributing to the loan growth was the March 31, 2008, transfer of $3.3 billion of education loans from loans held for sale to the loan portfolio.
Excluding $54 million of derivative-related charges recorded in the current quarter as a result of market disruption caused by the failure of Lehman Brothers, noninterest income rose by $62 million, or 41%, from the third quarter of 2007. The improvement reflected a $15 million increase in income from trust and investment services, a $23 million reduction in net losses from loan sales and write-downs, and a $15 million decrease in losses attributable to changes in the fair values of certain real estate related investments held by the Private Equity unit within the Real Estate Capital and Corporate Banking Services line of business. Noninterest income also benefited from an increase in fee income generated from tuition payment plan processing.
The provision for loan losses rose by $281 million, due primarily to higher levels of net loan charge-offs from the commercial, commercial real estate and education loan portfolios. National Banking's provision for loan losses for the third quarter of 2008 exceeded its net loan charge-offs by $147 million, as the company continued to build reserves.
Noninterest expense increased by $15 million, or 5%, from the third quarter of 2007, reflecting $10 million of additional expense attributable to severance and other costs recorded during the current quarter in connection with Key's decision to exit direct and indirect retail and floor-plan lending for marine and recreational vehicle products.
Other Segments
Other segments consist of Corporate Treasury and Key's Principal Investing unit. These segments generated net income of $9 million for the third quarter of 2008, compared to $16 million for the same period last year. These results reflect less favorable results from principal investing in the current year.
Line of Business Descriptions Community Banking
Regional Banking provides individuals with branch-based deposit and investment products, personal finance services and loans, including residential mortgages, home equity and various types of installment loans. This line of business also provides small businesses with deposit, investment and credit products, and business advisory services.
Regional Banking also offers financial, estate and retirement planning, and asset management services to assist high-net-worth clients with their banking, trust, portfolio management, insurance, charitable giving and related needs.
Commercial Banking provides midsize businesses with products and services that include commercial lending, cash management, equipment leasing, investment and employee benefit programs, succession planning, access to capital markets, derivatives and foreign exchange.
National Banking
Real Estate Capital and Corporate Banking Services consists of two business units. Real Estate Capital is a national business that provides construction and interim lending, permanent debt placements and servicing, equity and investment banking, and other commercial banking products and services to developers, brokers and owner-investors. This unit deals primarily with nonowner-occupied properties (i.e., generally properties in which at least 50% of the debt service is provided by rental income from nonaffiliated third parties). Particular emphasis has been placed on providing clients with finance solutions through access to the capital markets.
Corporate Banking Services provides cash management, interest rate derivatives, and foreign exchange products and services to clients throughout the Community Banking and National Banking groups. Through its Public Sector and Financial Institutions businesses, Corporate Banking Services provides a full array of commercial banking products and services to government and not- for-profit entities, and to community banks.
Equipment Finance meets the equipment leasing needs of companies worldwide and provides equipment manufacturers, distributors and resellers with financing options for their clients. Lease financing receivables and related revenues are assigned to other lines of business (primarily Institutional and Capital Markets, and Commercial Banking) if those businesses are principally responsible for maintaining the relationship with the client.
Institutional and Capital Markets through its KeyBanc Capital Markets unit, provides commercial lending, treasury management, investment banking, derivatives and foreign exchange, equity and debt underwriting and trading, and syndicated finance products and services to large corporations and middle- market companies.
Through its Victory Capital Management unit, Institutional and Capital Markets also manages or offers advice regarding investment portfolios for a national client base, including corporations, labor unions, not-for-profit organizations, governments and individuals. These portfolios may be managed in separate accounts, common funds or the Victory family of mutual funds.
Consumer Finance provides government guaranteed education loans to students and their parents, and processes tuition payments for private schools. Through its Commercial Floor Plan Lending unit, this line of business also finances inventory for automobile dealers. Starting in October 2008, Consumer Finance will exit direct and indirect retail and floor-plan lending for marine and recreational vehicle products and will limit new education loans to those backed by government guarantee. It will continue to service existing loans in these portfolios and to honor existing education loan commitments. These actions are consistent with Key's strategy of de-emphasizing nonrelationship or out-of-footprint businesses.
Cleveland-based KeyCorp is one of the nation's largest bank-based financial services companies, with assets of $101 billion. Key companies provide investment management, retail and commercial banking, consumer finance, and investment banking products and services to individuals and companies throughout the United States and, for certain businesses, internationally. The company's businesses deliver their products and services through 986 branches and additional offices; a network of 1,479 ATMs; telephone banking centers (1.800.KEY2YOU); and a Web site, https://www.key.com/ (R), that provides account access and financial products 24 hours a day.
This earnings release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about our financial condition, results of operations, earnings outlook, asset quality trends and profitability. Forward-looking statements are not historical facts but instead represent only management's current expectations and forecasts regarding future events, many of which, by their nature, are inherently uncertain and outside of Key's control. Key's actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements.
Although management believes that the expectations and forecasts reflected in these forward-looking statements are reasonable, actual results could differ materially due to a variety of factors including: (1) changes in interest rates; (2) changes in trade, monetary or fiscal policy; (3) continued disruption in the fixed income markets; (4) adverse capital markets conditions; (5) changes in general economic conditions, or in the condition of the local economies or industries in which we have significant operations or assets, which could, among other things, materially impact credit quality trends and our ability to generate loans; (6) continued disruption in the housing markets and related conditions in the financial markets; (7) increased competitive pressure among financial services companies due to the recent consolidation of competing financial institutions and the conversion of certain investment banks to bank holding companies; (8) heightened legal standards and regulatory practices, requirements or expectations;(9) the inability to successfully execute strategic initiatives designed to grow revenues and/or manage expenses; (10) increased FDIC deposit premiums; (11) consummation of significant business combinations or divestitures; (12) operational or risk management failures due to technological or other factors; (13) changes in accounting or tax practices or requirements; (14) new legal obligations or liabilities or unfavorable resolution of litigation; and (15) disruption in the economy and general business climate as a result of terrorist activities or military actions. For additional information on the factors that could cause Key's actual results or financial condition to differ materially from those described in the forward-looking statements consult Key's Quarterly Reports on Form 10-Q for the quarters ended March 31, 2008, and June 30, 2008, Annual Report on Form 10-K for the year ended December 31, 2007, and Current Reports on Form 8-K, filed with the Securities and Exchange Commission and available on the Securities and Exchange Commission's website (http://www.sec.gov/). Forward-looking statements are not guarantees of future performance and should not be relied upon as representing management's views as of any subsequent date. We do not assume any obligation to update these forward-looking statements. For further information regarding KeyCorp, please read KeyCorp's reports that are filed with the Securities and Exchange Commission and are available at http://www.sec.gov/.
CONTACT: Analysts, Vernon L. Patterson, +1-216-689-0520, Vernon_Patterson@KeyBank.com, or Christopher F. Sikora, +1-216-689-3133, Chris_F_Sikora@KeyBank.com, or Media, William C. Murschel, +1-216-828-7416, William_C_Murschel@KeyBank.com, all of KeyCorp
Web site: http://www.key.com/ http://www.key.com/newsroom https://www.key.com/ir
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