CLEVELAND, July 22, 2009 /PRNewswire-FirstCall/ --
- Net loss from continuing operations of $.69 per common share
- Loan loss reserve increased to $2.5 billion, or 3.53% of total loans
- Raised $1.8 billion of Tier 1 common equity; fulfilled stress test requirement
- $8.2 billion in new or renewed loans and commitments originated
- Costs well controlled; Keyvolution initiative underway
KeyCorp (NYSE: KEY) today announced a second quarter net loss from continuing operations attributable to Key of $236 million, or $.69 per common share. Per share results for the current quarter are after cash and deemed preferred stock dividends of $164 million, or $.28 per common share. These dividends include a noncash deemed dividend of $114 million related to the exchange of Key common shares for Key's Series A Preferred Stock as part of the company's efforts to raise an additional $1.8 billion of Tier 1 common equity, and a cash dividend payment of $31 million made to the U.S. Treasury Department under the Capital Purchase Program. Results for the current quarter compare to a net loss from continuing operations of $1.128 billion, or $2.71 per common share, for the second quarter of 2008.
The loss for the current quarter is largely the result of an increase in the provision for loan losses. During the second quarter, Key continued to build its loan loss reserves by taking an $850 million provision for loan losses, which exceeded net charge-offs by $311 million. As of the end of the quarter, Key's allowance for loan losses was $2.5 billion, or 3.53% of total loans, up from $1.4 billion, or 1.87% one year ago. The loss for the year-ago quarter was largely attributable to a $1.011 billion after-tax charge recorded as a result of an adverse federal tax court ruling that impacted Key's accounting for certain lease financing transactions.
"Our results continue to reflect the weak economic environment and the aggressive steps we've taken to address credit quality, strengthen our capital position and control costs as we manage through this difficult credit cycle," said Chief Executive Officer Henry L. Meyer III.
During the second quarter, Key successfully raised more than $1.8 billion in new Tier 1 common equity as required by the Supervisory Capital Assessment Program ("SCAP") initiated by the U.S. Treasury and, as of today, is well on its way to further supplement that amount through an additional offer to exchange common shares for retail capital securities, which is currently in progress. The additional capital will serve as a "buffer" in the event the U.S. economy worsens considerably through 2010. Throughout the current financial crisis, Key's capital ratios have remained in excess of the "well-capitalized" levels established by the federal regulators. At June 30, 2009, Key had a Tier 1 risk-based capital ratio of 12.42% and a Tier 1 common equity ratio of 7.27%.
Meyer continued: "Key's fortified capital position will also enable us to support our clients' borrowing needs and benefit from other business opportunities when the economy recovers. During the second quarter, Key originated approximately $8.2 billion in new or renewed loans and commitments to consumers and businesses.
"In conjunction with our efforts to improve Key's competitive position, late last year we initiated a process known as 'Keyvolution,' a corporate-wide initiative designed to build a consistently superior experience for clients, simplify processes, improve speed to market and enhance Key's ability to seize growth and profit opportunities," Meyer said. "Through this initiative, we expect to achieve annualized cost savings of $300 million to $375 million by 2012. Over the past fifteen months, we have been addressing certain noncore businesses, such as retail marine and private student lending activities. We have also deployed new teller platform technology throughout our company. These and other efforts have resulted in a reduction in our employee workforce of approximately 8%, or 1,500 positions, over the fifteen month period. Compared to the year-ago quarter, our personnel costs are down 6%.
"Additionally, we have continued to build upon our relationship-based, client-focused business model. Our Community Banking business continues to benefit from these efforts as evidenced by a $2.7 billion, or 5%, increase in deposits compared to the second quarter of 2008."
The following table shows Key's continuing and discontinued operating results for comparative quarters and for the six-month periods ended June 30, 2009 and 2008.
Results of Operations
in millions, except Three months ended Six months ended
per share amounts 6-30-09 3-31-09 6-30-08 6-30-09 6-30-08
Summary of operations
Loss from continuing
operations
attributable to Key $(236) $(466) $(1,128) $(702) $(911)
Income (loss) from
discontinued
operations, net of
taxes (a) 10 (22) 2 (12) 3
Net loss attributable
to Key $(226) $(488) $(1,126) $(714) $(908)
Loss from continuing
operations
attributable to Key $(236) $(466) $(1,128) $(702) $(911)
Less: Dividends on
Series A
Preferred Stock 15 12 -- 27 --
Noncash deemed
dividend -
common shares
exchanged for
Series A
Preferred Stock 114 -- -- 114 --
Cash dividends on
Series B
Preferred Stock 31 32 -- 63 --
Amortization of
discount on
Series B
Preferred Stock 4 4 -- 8 --
Loss from continuing
operations
attributable to Key
common shareholders (400) (514) (1,128) (914) (911)
Income (loss) from
discontinued
operations, net of
taxes (a) 10 (22) 2 (12) 3
Net loss attributable
to Key common
shareholders $(390) $(536) $(1,126) $(926) $(908)
Per common share -
assuming dilution
Loss from continuing
operations
attributable to Key
common shareholders $(.69) $(1.04) $(2.71) $(1.71) $(2.23)
Income (loss) from
discontinued
operations, net of
taxes (a) .02 (.04) -- (.02) .01
Net loss attributable
to Key common
shareholders $(.68)(b) $(1.09)(b) $(2.70)(b) $(1.73) $(2.23)(b)
(a) In April 2009, management made the strategic decision to curtail the
operations of Austin Capital Management, Ltd., an investment
subsidiary that specializes in managing hedge fund investments for
its institutional customer base. As a result of this decision, Key
has accounted for this business as a discontinued operation. The
loss from discontinued operations for the first quarter of 2009 was
attributable to a $23 million after tax, or $.05 per common share,
charge for intangible assets impairment.
(b) Earnings per share may not foot due to rounding.
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
Second Quarter 2009 First Quarter 2009
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 $(311) $(195) $(.34) $(383) $(239) $(.49)
Noncash deemed
dividend - common
shares exchanged
for Series A
Preferred Stock -- -- (.20)(a) -- -- --
FDIC special
assessment (44) (27) (.05) -- -- --
Realized and
unrealized (losses)
gains on loan and
securities
portfolios held
for sale or trading (20) (13) (.02) 2 1 --
Severance and other
exit costs (14) (9) (.02) (8) (5) (.01)
Net losses from
principal investing (6) (4) (.01) (72) (45) (.09)
Net gains from
repositioning of
securities portfolio 125 78 .13 -- -- --
Gain related to
exchange of common
shares for capital
securities 95 59 .10 -- -- --
Gain from sale of
Key's claim
associated with the
Lehman Brothers'
bankruptcy 32 20 .03 -- -- --
Noncash charge for
intangible assets
impairment -- -- -- (196)(b) (164)(b) (.33)(b)
Gain from sale of
Visa Inc. shares -- -- -- 105 65 .13
Charges related to
leveraged lease tax
litigation -- -- -- -- -- --
Second Quarter 2008
in millions, except Pre-tax After-tax Impact
per share amounts Amount Amount on EPS
Provision for loan losses in excess of
net charge-offs $(123) $(77) $(.18)
Noncash deemed dividend - common shares
exchanged for Series A Preferred Stock -- -- --
FDIC special assessment -- -- --
Realized and unrealized (losses) gains on loan
and securities portfolios held for sale
or trading 62 39 .09
Severance and other exit costs (8) (5) (.01)
Net losses from principal investing (14) (8) (.02)
Net gains from repositioning of securities
portfolio -- -- --
Gain related to exchange of common shares for
capital securities -- -- --
Gain from sale of Key's claim associated
with the Lehman Brothers' bankruptcy -- -- --
Noncash charge for intangible assets
impairment -- -- --
Gain from sale of Visa Inc. shares -- -- --
Charges related to leveraged lease tax
litigation (359) (1,011) (2.43)
(a) The deemed dividend related to the exchange of Key common shares for
Series A Preferred Stock is subtracted from earnings to derive the
numerator used in the calculation of per share results; it is not
recorded as a reduction to equity.
(b) Excludes a $27 million ($23 million after tax, or $.05 per common
share) charge for intangible assets impairment related to the
discontinued operations of Austin Capital Management, Ltd.
EPS = Earnings per common share
SUMMARY OF OPERATIONS
Taxable-equivalent net interest income was $598 million for the second quarter of 2009 and the net interest margin was 2.67%. These results compare to taxable-equivalent net interest income of $738 million and a net interest margin of 3.32% for the second quarter of 2008, after adjusting for the effects of charges recorded one year ago in connection with subsequently resolved 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. 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 Internal Revenue Service, not just the single leveraged lease subject to the Court decision. Key's results for the year-ago quarter 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.
During the past twelve months, the net interest margin has remained under pressure as the decrease in the federal funds target rate has caused interest rates on earning assets to decline more rapidly than the rates paid for interest-bearing liabilities. Competition for deposits and a shift in deposit mix to higher costing, longer term certificates of deposit have also contributed to a lower net interest margin. During the same period, earning asset yields have been compressed as a result of the higher levels of nonperforming loans. In addition, during the second quarter of 2009, Key terminated certain leveraged lease financing arrangements, which reduced net interest income by $16 million and lowered the net interest margin by approximately 7 basis points.
Compared to the first quarter of 2009, taxable-equivalent net interest income decreased by $22 million, and the net interest margin was down 10 basis points. The reduction in the net interest margin reflects an increase in lower-yielding liquid assets, due in part to the weak demand for credit; a higher level of nonperforming loans; and the impact of actions described below to reposition Key's securities portfolio.
During May 2009, Key sold approximately $2.8 billion of collateralized mortgage obligations ("CMOs"), resulting in net gains of $125 million for the second quarter. These securities were sold as part of the company's overall plan to generate additional capital required under the SCAP, and to reposition the securities available-for-sale portfolio to better support Key's strategies for managing interest rate and liquidity risk. The proceeds from the sale were reinvested in CMOs issued by government-sponsored entities or GNMA.
The reduction in the net interest margin caused by the above factors was moderated by the impact of new or renewed loans with more favorable interest rate spreads.
Key's noninterest income was $715 million for the second quarter of 2009, compared to $547 million for the year-ago quarter. The increase was attributable to three primary factors. In addition to the $125 million of net gains recorded in connection with the repositioning of the securities portfolio, in the current quarter Key recorded a $95 million gain related to the exchange of common shares for capital securities and a $32 million gain from the sale of Key's claim associated with the Lehman Brothers' bankruptcy. Additionally, net gains on leased equipment rose by $29 million, which more than offset the reduction to net interest income associated with the termination of lease financing arrangements. The increase attributable to the above factors was offset in part by a $63 million reduction in income from investment banking and capital markets activities, and net losses of $3 million from loan sales in the current quarter, compared to net gains of $33 million for the second quarter of 2008. Key also experienced lower income from trust and investment services, service charges on deposit accounts and operating leases.
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 2Q09 1Q09 4Q08 3Q08 2Q08
Trust and investment services income $119 $110 $131 $125 $130
Service charges on deposit accounts 83 82 90 94 93
Operating lease income 59 61 64 69 68
Letter of credit and loan fees 45 38 42 53 51
Corporate-owned life insurance income 25 27 33 28 28
Electronic banking fees 27 24 25 27 27
Insurance income 16 18 15 15 20
Investment banking and capital
markets income (loss) 17 18 6 (31) 80
Net losses from principal investing (6) (72) (37) (14) (14)
Compared to the first quarter of 2009, noninterest income increased by $230 million, due primarily to the gains recorded during the second quarter of 2009 in connection with the repositioning of the securities portfolio, the exchange of common shares for capital securities and the sale of Key's claim associated with the Lehman Brothers' bankruptcy. Also contributing to the improvement was a $66 million decrease in net losses from principal investing and a $9 million increase in income from trust and investment services. Noninterest income for the first quarter of 2009 includes a $105 million gain from the sale of Visa Inc. shares.
Key's noninterest expense was $870 million for the second quarter of 2009, compared to $777 million for the same period last year. Personnel expense decreased by $25 million as a result of lower incentive compensation accruals and a reduction in salaries expense caused by a 7% decline in the number of average full-time equivalent employees. These reductions were offset in part by an increase in severance expense and higher costs associated with employee benefits, primarily pension expense. The reduction in personnel expense was more than offset by a $118 million rise in nonpersonnel expense, due largely to a $68 million increase in the FDIC deposit insurance assessment. The higher assessment is a result of an across-the-board increase in the assessment rate that took effect during the first quarter of 2009 and a special assessment imposed during the second quarter of 2009, under which Key recorded $44 million of additional expense. Professional fees rose by $15 million due to increased collection efforts on loans, the outsourcing of certain services and the Keyvolution initiative. Additionally, Key recorded an $11 million provision for losses on lending-related commitments during the current quarter, compared to a $2 million credit for the second quarter of 2008.
Compared to the first quarter of 2009, noninterest expense declined by $72 million. Personnel expense increased by $16 million, as increases in all major components were offset in part by a reduction in costs associated with employee benefits. Nonpersonnel expense decreased by $88 million from the prior quarter. Excluding the intangible assets impairment charge of $196 million recorded in the first quarter of 2009, nonpersonnel expense was up $108 million, due to increases in the FDIC deposit insurance assessment, professional fees, the provision for losses on lending-related commitments, expenses associated with other real estate owned ("OREO") and a variety of other miscellaneous expense components.
ASSET QUALITY
Key's provision for loan losses was $850 million for the second quarter of 2009, compared to $647 million for the year-ago quarter and $875 million for the first quarter of 2009. Credit migration, particularly in the commercial real estate portfolio, continues to result in higher levels of net charge-offs and nonperforming loans, and more reserve building. Key's provision for loan losses for the second quarter of 2009 exceeded net loan charge-offs by $311 million. As a result, Key's allowance for loan losses rose to $2.5 billion, or 3.53% of total loans at June 30 2009, up from $2.2 billion, or 2.97% at March 31, 2009.
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 2Q09 1Q09 4Q08 3Q08 2Q08
Net loan charge-offs $539 $492 $342 $273 $524
Net loan charge-offs to
average loans 2.99 % 2.65 % 1.77 % 1.43 % 2.75 %
Nonperforming loans at
period end $2,188 $1,738 $1,225 $967 $814
Nonperforming loans to
period-end portfolio
loans 3.09 % 2.36 % 1.60 % 1.26 % 1.07 %
Nonperforming assets at
period end $2,551 $1,997 $1,464 $1,239 $1,210
Nonperforming assets to
period-end portfolio
loans plus OREO and other
nonperforming assets 3.58 % 2.70 % 1.91 % 1.61 % 1.59 %
Allowance for loan
losses $2,499 $2,186 $1,803 $1,554 $1,421
Allowance for loan losses
to period-end loans 3.53 % 2.97 % 2.36 % 2.03 % 1.87 %
Allowance for loan losses
to nonperforming loans 114.21 125.78 147.18 160.70 174.57
Net loan charge-offs for the quarter totaled $539 million, or 2.99% of average loans. These results compare to $524 million, or 2.75%, for the same period last year and $492 million, or 2.65%, for the previous quarter. 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 2Q09 1Q09 4Q08 3Q08 2Q08
Commercial, financial and
agricultural $168 $232 $119 $62 $61
Real estate - commercial
mortgage 87 21 43 20 15
Real estate - construction 133 104 49 79 339 (a)
Commercial lease financing 22 18 21 19 14
Total commercial loans 410 375 232 180 429
Home equity - Community Banking 24 17 14 9 9
Home equity - National Banking 18 15 17 12 10
Marine 29 32 25 16 10
Education 37 32 33 40 54
Other 21 21 21 16 12
Total consumer loans 129 117 110 93 95
Total net loan charge-offs $539 $492 $342 $273 $524
Net loan charge-offs to
average loans 2.99 % 2.65 % 1.77 % 1.43 % 2.75 %
(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.
Compared to the first quarter of 2009, net loan charge-offs in the commercial loan portfolio rose by $35 million, due primarily to a $95 million rise in net charge-offs in the commercial mortgage and construction loan portfolios, offset in part by a $64 million reduction in the commercial and financial portfolio. The Real Estate Capital and Corporate Banking Services line of business within the National Banking group accounted for virtually all of the growth in net charge-offs in the commercial real estate portfolios and $46 million of the reduction in the commercial and financial portfolio. The level of net charge-offs in the consumer portfolio rose by $12 million, due to losses incurred in the home equity and education portfolios. As shown in the table below, Key's exit loan portfolio accounted for $156 million, or 29%, of Key's total net loan charge-offs for the second quarter of 2009.
At June 30, 2009, Key's nonperforming loans totaled $2.2 billion and represented 3.09% of period-end portfolio loans, compared to 2.36% at March 31, 2009, and 1.07% at June 30, 2008. Nonperforming assets at June 30, 2009, totaled $2.6 billion and represented 3.58% of portfolio loans, OREO and other nonperforming assets, compared to 2.70% at March 31, 2009, and 1.59% at June 30, 2008. The following table illustrates the trend in Key's nonperforming assets by loan type over the past five quarters.
Nonperforming Assets
dollars in millions 2Q09 1Q09 4Q08 3Q08 2Q08
Commercial, financial and
agricultural $700 $595 $415 $309 $259
Real estate - commercial
mortgage 454 310 128 119 107
Real estate - construction 716 546 436 334 256
Commercial lease financing 122 109 81 55 57
Total consumer loans 196 178 165 150 135
Total nonperforming loans 2,188 1,738 1,225 967 814
Nonperforming loans held for
sale 145 72 90 169 342
OREO and other nonperforming
assets 218 187 149 103 54
Total nonperforming
assets $2,551 $1,997 $1,464 $1,239 $1,210
Nonperforming loans to
period-end portfolio loans 3.09 % 2.36 % 1.60 % 1.26 % 1.07 %
Nonperforming assets to
period-end portfolio loans,
plus OREO and other
nonperforming assets 3.58 2.70 1.91 1.61 1.59
As shown in the preceding table, all categories of nonperforming assets experienced increases during the second quarter of 2009, compared to the prior quarter. Nonperforming loans in the commercial and financial, and commercial real estate portfolios experienced the largest increases. The increase in the commercial and financial portfolio reflects the impact of general weakness in the economic environment and was principally attributable to loans in the Equipment Finance, Institutional and Capital Markets, and Middle Market lines of business. The increase in the commercial real estate portfolio was caused in part by the continuation of deteriorating market conditions in both the residential properties and income properties segments. As shown in the following table, Key's exit loan portfolio accounted for $559 million, or 22%, of Key's total nonperforming assets at June 30, 2009, compared to $502 million, or 25%, at March 31, 2009.
The composition of Key's exit loan portfolio at June 30, 2009, and March 31, 2009, the net charge-offs recorded on this portfolio for the second and first quarters of 2009, and the nonperforming status of these loans at June 30, 2009, and March 31, 2009, are shown in the following table.
Exit Loan Portfolio
Change Balance on
Balance 6-30-09 Net Loan Nonperforming
Outstanding vs. Charge-offs Status
in millions 6-30-09 3-31-09 3-31-09 2Q09 1Q09 6-30-09 3-31-09
Residential properties -
homebuilder $614 $766 $(152) $62 $44 $298 $306
Residential properties -
held for sale 65 70 (5) -- -- 65 70
Total residential
properties 679 836 (157) 62 44 363 376
Marine and RV floor plan 696 817 (121) 8 11 149 80
Total commercial loans 1,375 1,653 (278) 70 55 512 456
Private education 2,847 2,897 (50) 37 32 2 --
Home equity - National
Banking 934 998 (64) 18 15 20 19
Marine 3,095 3,256 (161) 29 32 19 21
RV and other consumer 245 262 (17) 2 5 6 6
Total consumer loans 7,121 7,413 (292) 86 84 47 46
Total loans in exit
portfolio $8,496 $9,066 $(570) $156 $139 $559 $502
Key's allowance for loan losses was $2.5 billion, or 3.53% of loans outstanding, at June 30, 2009, compared to $2.2 billion, or 2.97%, at March 31, 2009, and $1.4 billion, or 1.87%, at June 30, 2008. The company has continued to build its allowance for loan losses as the current credit cycle progresses, and at June 30, 2009, had a coverage ratio of 114%.
CAPITAL
Key's risk-based capital ratios included in the following table continued to exceed all "well-capitalized" regulatory benchmarks at June 30, 2009.
Capital Ratios
6-30-09 3-31-09 12-31-08 9-30-08 6-30-08
Tier 1 common equity (a) 7.27 % 5.62 % 5.62 % 5.58 % 5.60 %
Tier 1 risk-based capital (a) 12.42 11.22 10.92 8.55 8.53
Total risk-based capital (a) 16.47 15.18 14.82 12.40 12.41
Tangible Key shareholders'
equity to tangible assets 10.16 9.23 8.92 6.95 6.98
Tangible common equity to
tangible assets 7.35 6.06 5.95 6.29 6.32
(a) 6-30-09 ratio is estimated.
During the second quarter of 2009, Key successfully raised more than $1.8 billion in new Tier 1 common equity as required by the SCAP initiated by the U.S. Treasury Department and the federal banking regulators. The additional capital will serve as a "buffer" in the event the U.S. economy worsens considerably through 2010. As shown in the above table, at June 30, 2009, Key had a Tier 1 risk-based capital ratio of 12.42%, a Tier 1 common equity ratio of 7.27%, and a tangible common equity ratio of 7.35%. On June 2, 2009, Key announced it had sold $1 billion of newly issued common stock through an at-the-market offering. In addition, Key has raised a significant portion of the additional Tier 1 common equity through the exchange of Key common shares for Key's Noncumulative Perpetual Convertible Preferred Stock, Series A and for certain capital (i.e., trust preferred) securities. As a result of these exchange offers, Key will reduce its future dividend and interest obligations on the exchanged securities by approximately $70 million through the SCAP assessment period, which ends December 31, 2010.
Although management believes Key has now complied with the requirements of the SCAP assessment, as it has generated additional Tier 1 common equity in excess of $1.8 billion, management intends to further augment Key's capital base. On July 8, 2009, KeyCorp commenced an offer to exchange (the "Trust Preferred Exchange Offer") Key common shares for any and all outstanding retail capital securities issued by a number of affiliated capital trusts. The Early Tender Period for the Trust Preferred Exchange Offer expired at 11:59 p.m., New York City time, on July 21, 2009, and will not be extended. The Final Tender Period and the Trust Preferred Exchange Offer will expire at 11:59 p.m., New York City time, on August 4, 2009 (unless we extend it or terminate it earlier). As of July 21, 2009, prior to the end of the Early Tender Period, holders of approximately $534 million aggregate liquidation preference of trust preferred securities had indicated that they would be tendering securities in the Trust Preferred Exchange Offer, subject to applicable withdrawal rights. As a result of the success of this exchange offer, management has made a determination to limit the total aggregate liquidation preference of trust preferred securities that it will accept in the Trust Preferred Exchange Offer to $500 million. The Trust Preferred Exchange Offer will be amended and disseminated accordingly, pursuant to Securities and Exchange Commission rules.
Transactions 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 2Q09 1Q09 4Q08 3Q08 2Q08
Shares outstanding at
beginning of period 498,573 495,002 494,765 485,662 400,071
Common shares exchanged for
capital securities 46,338 -- -- -- --
Common shares exchanged for
Series A Preferred Stock 46,602 -- -- -- --
Common shares issued 205,439 -- -- 7,066 85,106
Shares reissued under
employee benefit plans 294 3,571 237 2,037 485
Shares outstanding at end of
period 797,246 498,573 495,002 494,765 485,662
During the second quarter of 2009, Key made a $31 million cash dividend payment to the U.S. Treasury Department. This is the second of such quarterly payments that Key has made after having raised $2.5 billion of additional capital during the fourth quarter of 2008 as a participant in the U.S. Treasury's Capital Purchase Program.
On July 17, the Board of Directors declared a cash dividend of $1.9375 per share of Key's 7.750% Series A Preferred Stock. The dividend is payable September 15, 2009, to shareholders of record on August 28, 2009. The Board also declared a cash dividend of $.01 per share on the company's common shares payable September 15, 2009, to shareholders of record on September 1, 2009.
LINE OF BUSINESS RESULTS
The following table shows the contribution made by each major business group to Key's taxable-equivalent revenue from continuing operations and (loss) income from continuing operations attributable to Key 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.
Major Business Groups
Percent change
2Q09 vs.
dollars in millions 2Q09 1Q09 2Q08 1Q09 2Q08
Revenue from continuing operations (TE)
Community Banking $592 $599 $654 (1.2)% (9.5)%
National Banking (a) 547 533 (133) 2.6 N/M
Other Segments (b) 183 (79) (31) N/M N/M
Total Segments 1,322 1,053 490 25.5 169.8
Reconciling Items (c) (9) 52 (43) N/M 79.1
Total $1,313 $1,105 $447 18.8 % 193.7 %
(Loss) income from continuing operations attributable to Key
Community Banking $(57) $30 $103 N/M N/M
National Banking (a) (294) (548) (674) 46.4 % 56.4 %
Other Segments (b) 112 (37) (14) N/M N/M
Total Segments (239) (555) (585) 56.9 59.1
Reconciling Items (c) 3 89 (543) (96.6) N/M
Total $(236) $(466) $(1,128) 49.4 79.1
(a) National Banking's results for the first quarter of 2009 include a
noncash charge for goodwill and other intangible assets impairment
of $196 million ($164 million after tax). During the second quarter
of 2008, National Banking's taxable-equivalent net interest income and
net results were reduced by $838 million and $536 million,
respectively, as a result of its involvement with certain leveraged
lease financing transactions which were challenged by the Internal
Revenue Service.
(b) Other Segments' results for the second quarter of 2009 include net
gains of $125 million ($78 million after tax) in connection with the
repositioning of the securities portfolio and a $95 million ($59
million after tax) gain related to the exchange of Key common shares
for capital securities.
(c) Reconciling Items for the second quarter of 2009 include a $32 million
($20 million after tax) gain from the sale of Key's claim associated
with the Lehman Brothers' bankruptcy. For the first quarter of 2009,
Reconciling Items include a $105 million ($65 million after tax) gain
from the sale of Key's remaining equity interest in Visa Inc.
Reconciling Items for the second quarter of 2008 include a $475
million charge to income taxes for the interest cost associated with
the previously disclosed leveraged lease tax litigation.
TE = Taxable Equivalent, N/M = Not Meaningful
Community Banking
Percent change
2Q09 vs.
dollars in millions 2Q09 1Q09 2Q08 1Q09 2Q08
Summary of operations
Net interest income (TE) $397 $410 $433 (3.2)% (8.3)%
Noninterest income 195 189 221 3.2 (11.8)
Total revenue (TE) 592 599 654 (1.2) (9.5)
Provision for loan losses 187 81 44 130.9 325.0
Noninterest expense 497 470 445 5.7 11.7
(Loss) income before income
taxes (TE) (92) 48 165 N/M N/M
Allocated income taxes and TE
adjustments (35) 18 62 N/M N/M
Net (loss) income attributable
to Key $(57) $30 $103 N/M N/M
Average balances
Loans and leases $28,237 $28,940 $28,470 (2.4)% (.8)%
Total assets 31,183 31,948 31,414 (2.4) (.7)
Deposits 52,689 51,560 49,944 2.2 5.5
Assets under management at
period end $15,815 $14,205 $19,366 11.3 % (18.3)%
TE = Taxable Equivalent, N/M = Not Meaningful
Additional Community Banking Data
Percent change
2Q09 vs.
dollars in millions 2Q09 1Q09 2Q08 1Q09 2Q08
Average deposits outstanding
NOW and money market
deposit accounts $17,361 $17,368 $19,656 -- (11.7)%
Savings deposits 1,785 1,721 1,804 3.7 % (1.1)
Certificates of deposit
($100,000 or more) 8,974 8,490 6,661 5.7 34.7
Other time deposits 14,898 14,723 12,735 1.2 17.0
Deposits in foreign office 548 713 1,308 (23.1) (58.1)
Noninterest-bearing
deposits 9,123 8,545 7,780 6.8 17.3
Total deposits $52,689 $51,560 $49,944 2.2 % 5.5 %
Home equity loans
Average balance $10,287 $10,273 $9,766
Weighted-average loan-to-
value ratio (at date of
origination) 70 % 70 % 70 %
Percent first lien
positions 53 53 55
Other data
Branches 993 989 985
Automated teller machines 1,485 1,479 1,479
Community Banking Summary of Operations
Community Banking recorded a net loss attributable to Key of $57 million for the second quarter of 2009, compared to net income attributable to Key of $103 million for the year-ago quarter. Increases in the provision for loan losses and FDIC expense, coupled with decreases in net interest income and noninterest income, caused the decline.
Taxable-equivalent net interest income declined by $36 million, or 8%, from the second quarter of 2008, due primarily to tighter loan spreads and a slight decline in the volume of average earning assets. While average deposits increased by $2.7 billion, or 5%, the composition and value of deposits have been impacted by the declining interest rate environment. Growth was centered in noninterest-bearing deposits and a shift from money market deposit accounts into higher-yielding certificates of deposit, reflecting consumer preferences.
Noninterest income decreased by $26 million, or 12%, from the year-ago quarter, largely from declines in service charges on deposit accounts, trust and investment services income, and branch-based investment income, coupled with an increase in the reserve for credit losses from client derivatives. The reductions in service charges on deposit accounts, and trust and investment services income are the results of changing client behavior and lower levels of assets under management resulting from declining market conditions, respectively. These reductions were partially offset by higher mortgage loan sale gains.
The provision for loan losses rose by $143 million compared to the second quarter of 2008, reflecting a $49 million increase in net loan charge-offs, primarily from the commercial and home equity loan portfolios. Community Banking's provision for loan losses for the second quarter of 2009 exceeded its net loan charge-offs by $100 million as the company continued to build reserves, in light of the challenging credit conditions brought on by a weak economy.
Noninterest expense grew by $52 million, or 12%, from the year-ago quarter, as a result of a $52 million increase in the FDIC deposit insurance assessment. The higher assessment is a result of the across-the-board increase in the assessment rate that took effect during the first quarter of 2009 and the special assessment imposed during the second quarter of 2009. A decline in personnel expense, due primarily to a decrease in incentive compensation accruals and a reduction in the number of average full-time equivalent employees, was offset by increases in various other components of noninterest expense.
National Banking
Percent change
2Q09 vs.
dollars in millions 2Q09 1Q09 2Q08 1Q09 2Q08
Summary of operations
Net interest income
(expense) (TE) $282 $289 $(471)(a) (2.4)% N/M
Noninterest income 265 244 338 8.6 (21.6)%
Total revenue (TE) 547 533 (133) 2.6 N/M
Provision for loan losses 662 789 609 (16.1) 8.7
Noninterest expense 358 506 (a) 335 (29.2) 6.9
Loss from continuing
operations before
income taxes (TE) (473) (762) (1,077) 37.9 56.1
Allocated income taxes
and TE adjustments (178) (212) (403) 16.0 55.8
Loss from continuing
operations (295) (550) (674) 46.4 56.2
Income (loss) from
discontinued operations,
net of taxes 10 (22) 2 N/M 400.0
Net loss (285) (572) (672) 50.2 57.6
Less: Net loss
attributable to
noncontrolling
interests (1) (2) -- 50.0 N/M
Net loss attributable
to Key $(284) $(570) $(672) 50.2 57.7
Loss from continuing
operations attributable
to Key $(294) $(548) $(674) 46.4 % 56.4 %
Average balances
Loans and leases $43,943 $46,197 $47,872 (4.9)% (8.2)%
Loans held for sale 910 1,078 1,282 (15.6) (29.0)
Total assets 50,998 54,799 56,316 (6.9) (9.4)
Deposits 13,260 12,214 12,287 8.6 7.9
Assets under management at
period end $47,567 $45,959 $61,632 3.5 % (22.8)%
(a) National Banking's results for the first quarter of 2009 include a
noncash charge for goodwill and other intangible assets impairment of
$196 million ($164 million after tax). During the second quarter of
2008, National Banking's taxable-equivalent net interest income and
net results were reduced by $838 million and $536 million,
respectively, as a result of its involvement with certain leveraged
lease financing transactions which were challenged by the Internal
Revenue Service.
TE = Taxable Equivalent, N/M = Not Meaningful
National Banking Summary of Continuing Operations
National Banking recorded a loss from continuing operations attributable to Key of $294 million for the second quarter of 2009, compared to $674 million for the same period one year ago. During the second quarter of 2008, net results were reduced by $536 million as a result of an adverse federal court decision on the company's tax treatment of a segment of Key's leveraged lease financing portfolio. Excluding this charge, net results decreased by $156 million from the second quarter of 2008, due to lower net interest income and noninterest income, coupled with increases in the provision for loan losses and noninterest expense.
As a result of the federal court decision, National Banking reduced its taxable-equivalent net interest income by $838 million during the second quarter of 2008. Excluding this charge, taxable-equivalent net interest income decreased by $85 million, or 23%, from the second quarter of 2008, due primarily to a decrease in average earning assets and a higher level of nonperforming loans, offset in part by more favorable deposit spreads and an increase in average deposits. Average earning assets decreased by $4.2 billion, or 8%, from the year-ago quarter, reflecting reductions in the commercial, home equity and held-for-sale loan portfolios. Average deposits rose by $1 billion, or 8%, as growth in certificates of deposit, NOW accounts and noninterest-bearing deposits more than offset a decline in money market deposit accounts.
Noninterest income declined by $73 million, or 22%, from the second quarter of 2008, due primarily to a $60 million reduction in income from investment banking and capital markets activities, which was largely attributable to a $27 million decrease in dealer trading and derivatives income and a $23 million decrease in investment banking income. A decline in net loan sale gains of $37 million also contributed to the reduction in noninterest income. The adverse effect of the above factors was offset in part by a $29 million increase in gains on leased equipment and a $15 million increase in mortgage fees.
The provision for loan losses rose by $53 million. National Banking's provision for loan losses for the second quarter of 2009 exceeded its net loan charge-offs by $210 million as the company continued to build reserves in a weak economy.
Noninterest expense grew by $23 million, or 7%, from the second quarter of 2008, reflecting an increase in the FDIC deposit insurance assessment as a result of the same factors that contributed to the increase in Community Banking. Also contributing to higher noninterest expense was an increase in the reserve for low-income housing tax credit funds, a provision for losses on lending-related commitments compared to a credit in the year-ago quarter, and higher expenses associated with OREO. The adverse effect of these factors was offset in part by lower personnel expense, reflecting a reduction in incentive compensation accruals and a decrease in the number of average full-time equivalent employees.
In April 2009, Key made the strategic decision to curtail the operations of Austin Capital Management, Ltd., an investment subsidiary that specializes in managing hedge fund investments for its institutional customer base. As a result of this decision, Key has accounted for this business as a discontinued operation.
Other Segments
Other Segments consist of Corporate Treasury and Key's Principal Investing unit. These segments generated net income attributable to Key of $112 million for the second quarter of 2009, compared to a net loss attributable to Key of $14 million for the same period last year. The improvement was attributable to net gains of $125 million recorded during the second quarter of 2009 in connection with the repositioning of the securities portfolio, and a $95 million gain related to the exchange of Key common shares for capital securities.
.
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.
