KeyCorp Reports First Quarter 2020 Net Income Of $118 Million, Or $.12 Per Diluted Common Share

CLEVELAND, April 16, 2020 /PRNewswire/ -- KeyCorp (NYSE: KEY) today announced net income from continuing operations attributable to Key common shareholders of $118 million, or $.12 per diluted common share for the first quarter of 2020, compared to $439 million, or $.45 per diluted common share, for the fourth quarter of 2019 and $386 million, or $.38 per diluted common share, for the first quarter of 2019. Key's results in the first quarter of 2020 reflect the Current Expected Credit Losses ("CECL") accounting methodology, as well as the impact of COVID-19 and market-related valuation adjustments.

Key's results reflect the extraordinary events that have unfolded as a result of COVID-19 and the efforts to contain its spread.  At Key, we stand with those we serve and as leaders we are focused on demonstrating the strength and resiliency that will carry our company and our country through this challenging period.

As previously announced, Chris Gorman will assume the role of CEO on May 1st.  Our leadership transition has been seamless, and I am confident in Chris and the talented and diverse team at Key.  I know that they will navigate this current environment and take the company's performance to the next level.  I have been proud and privileged to serve as CEO of a company that always puts our clients, our colleagues and our communities first.

-  Beth Mooney, Chairman and CEO

We are prepared to operate under challenging circumstances and we proudly recognize that Key plays a critical role in the health of our financial system and our economy.  Over the past decade, under Beth's leadership, we have transformed our company, including significantly improving our risk profile.

Today, Key is stronger, better capitalized and more liquid and we stand ready to support our clients, our teammates and our communities in managing through these difficult times.  The team at Key appreciates the trust and confidence that all of our stakeholders place in us and we take great pride in knowing that Key is part of the solution and the path forward for all those whom we serve.

-  Chris Gorman, President and COO

Taxable-equivalent net interest income was $989 million for the first quarter of 2020, compared to taxable-equivalent net interest income of $985 million for the first quarter of 2019. The increase in net interest income reflects higher earning asset balances, which was partially offset by a lower net interest margin. The net interest margin was impacted by a lag in deposit pricing as interest rates declined.

Compared to the fourth quarter of 2019, taxable-equivalent net interest income increased by $2 million, reflecting a higher net interest margin, partially offset by one less day in the first quarter of 2020. The net interest margin benefited from lower interest-bearing deposit costs and a favorable mix of earning asset balances, partially offset by lower earning asset yields.

Key's noninterest income was $477 million for the first quarter of 2020, compared to $536 million for the year-ago quarter and $651 million in the prior quarter. In the first quarter of 2020, other income was impacted by market-related valuation adjustments totaling $92 million, comprised of $73 million from customer derivatives and $19 million related to trading losses. Both were negatively impacted by wider credit spreads in the quarter.

Compared to the first quarter of 2019, noninterest income decreased by $59 million, due to a decline in other income, as well as lower operating lease income. The decrease was partially offset by growth in several fee categories: trust and investment services income, investment banking and debt placement fees, consumer mortgage income, and corporate services income.

Compared to the fourth quarter of 2019, noninterest income decreased by $174 million, due to a decline in other income, as well as lower investment banking and debt placement fees, due to a disruption in the capital markets related to COVID-19 and increased market volatility. The decrease was partially offset by higher trust and investment services income.

Key's noninterest expense was $931 million for the first quarter of 2020, compared to $963 million in the year-ago quarter and $980 million in the prior quarter. There were no notable items in the first quarter of 2020. The year-ago period included notable items of $26 million, which were efficiency-related expenses, while the prior period included notable items of $22 million, which consisted of a pension settlement charge and professional fees related to a previously disclosed fraud loss.

Excluding notable items in the year-ago period, noninterest expense decreased $6 million, reflecting the successful implementation of Key's expense initiatives, which drove personnel expenses lower, including lower incentive compensation expense, as well as a decline in intangible asset amortization. These expenses were partially offset by additional expenses from Laurel Road, which was acquired in April 2019.

Excluding notable items in the prior period, noninterest expense decreased $27 million. The decrease was primarily driven by a decline in personnel expenses, including lower incentive compensation expense, as well as a seasonal decline in marketing costs. These expenses were partially offset by an increase in employee benefits and higher operating lease expense.

Average loans were $96.2 billion for the first quarter of 2020, an increase of $6.5 billion compared to the first quarter of 2019. Commercial loans increased $2.9 billion, reflecting broad-based growth in commercial and industrial loans, partially offset by declines in commercial mortgage. Consumer loans increased $3.7 billion, driven by solid growth from Laurel Road, residential mortgage loans, and indirect auto lending.

Compared to the fourth quarter of 2019, average loans increased by $2.6 billion. Commercial loans increased $1.6 billion, reflecting an increase in commercial and industrial utilization rates. Consumer loans increased $979 million, driven by growth from Laurel Road, residential mortgage, and indirect auto loans. On a period-end basis, total loans increased $8.6 billion compared to the linked quarter, largely the result of a $7.7 billion increase in commercial and industrial loans, due to higher utilization rates in March.

Average deposits totaled $110.3 billion for the first quarter of 2020, an increase of $2.8 billion compared to the year-ago quarter, reflecting growth from consumer and commercial relationships, partially offset by a decline in time deposits.

Compared to the fourth quarter of 2019, average deposits decreased by $2.3 billion, primarily driven by short-term and seasonal deposit outflows, which more than offset growth from the penetration of existing retail and commercial relationships. On a period-end basis, deposit inflows in March were commensurate to loan growth.

On January 1, 2020, Key adopted a new accounting standard, often referred to as Current Expected Credit Losses ("CECL"), which establishes a single allowance framework for all financial assets carried at amortized cost and certain off-balance sheet exposures. This framework requires that management estimate credit losses over the full remaining expected life and consider expected future changes in macroeconomic conditions.

Upon adoption, Key's ALLL from continuing operations increased by $204 million, or 23%, and the reserve for off-balance sheet exposures increased by $66 million, or 88%, as compared to December 31, 2019. The increase in the total allowance for credit losses resulted in a $230 million decrease to retained earnings, net of deferred tax balances.

Net loan charge-offs for the first quarter of 2020 totaled $84 million, or .35% of average total loans. These results compare to $64 million, or .29%, for the first quarter of 2019, and $83 million, excluding the fraud loss, or .35%, for the fourth quarter of 2019. In the fourth quarter of 2019, Key realized pre-tax losses related to a previously disclosed fraud incident of $16 million.

 Key's provision for credit losses was $359 million for the first quarter of 2020. These results compare to $62 million for the first quarter of 2019 and $93 million, excluding the fraud loss, for the fourth quarter of 2019. The increase in provision for credit losses is mainly attributable to the significant change in the economic scenario from the COVID-19 pandemic. Key's allowance for loan and lease losses was $1.4 billion, or 1.32% of total period-end loans at March 31, 2020, compared to .98% at March 31, 2019, and .95% at December 31, 2019.

At March 31, 2020, Key's nonperforming loans totaled $632 million, which represented .61% of period-end portfolio loans. These results compare to .61% at March 31, 2019, and .61% at December 31, 2019. Purchased credit impaired ("PCI") loans and leases meeting nonperforming criteria were historically excluded from Key's nonperforming disclosures. As a result of CECL implementation on January 1, 2020, PCI loans became purchased credit deteriorated ("PCD") loans. PCD loans that meet the definition of nonperforming are now included in nonperforming disclosures, resulting in a $45 million increase in NPLs in the first quarter of 2020.

Nonperforming assets at March 31, 2020, totaled $844 million, and represented .82% of period-end portfolio loans and OREO and other nonperforming assets. These results compare to .66% at March 31, 2019, and .75% at December 31, 2019.

CAPITAL

Key's estimated risk-based capital ratios included in the following table continued to exceed all "well-capitalized" regulatory benchmarks at March 31, 2020.

Key's capital position remained strong in the first quarter of 2020. As shown in the preceding table, at March 31, 2020, Key's estimated Common Equity Tier 1 and Tier 1 risk-based capital ratios stood at 8.95% and 10.30%, respectively. Key's tangible common equity ratio was 8.44% at March 31, 2020.

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 8.84% at March 31, 2020.  This estimate exceeds the fully phased-in required minimum Common Equity Tier 1 and Capital Conservation Buffer of 7.00%.

Key has elected the CECL phase-in option provided by regulatory guidance which delays for two years the estimated impact of CECL on regulatory capital and phases it in over three years beginning in 2022. On a fully phased-in basis, Key's Common Equity Tier 1 ratio would be reduced by 20 basis points.

Consistent with Key's 2019 Capital Plan, during the first quarter of 2020, Key declared a dividend of $.185 per common share. Key also completed $120 million of common share repurchases. These repurchases included $117 million of common share repurchases in the open market and $3 million of share repurchases related to employee equity compensation programs. These repurchases were completed prior to Key's announcement on March 17, 2020 to temporarily suspend share repurchase activity in response to the COVID-19 pandemic.

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.

Consumer Bank Summary of Operations (1Q20 vs. 1Q19)

• Net income attributable to Key of $105 million for the first quarter of 2020, compared to $168 million for the year-ago quarter
• Taxable equivalent net interest income decreased by $1 million from the first quarter of 2019, with balance sheet growth offset by lower loan fees and a lower interest rate environment
• Average loans and leases increased $3.9 billion, or 12.4%. This was driven by strong loan growth in Laurel Road, residential mortgage, and indirect auto lending
• Average deposits increased $2 billion, or 2.9%, from the first quarter of 2019. This was driven by growth in money market deposits, partially offset by a decrease in time deposits
• Provision for credit losses increased $95 million compared to the first quarter of 2019. The increase in provision for credit losses is mainly attributable to the significant change in the economic scenario from the COVID-19 pandemic, as well as balance sheet growth
• Noninterest income increased $16 million, or 7.5%, from the year ago quarter, driven by growth in trust and investment services income and consumer mortgage income
• Noninterest expense increased $3 million, or 0.6%, from the year ago quarter. The increase reflects the addition of Laurel Road, partially offset by strong expense management

Commercial Bank Summary of Operations (1Q20 vs. 1Q19)

• Net income attributable to Key of $70 million for the first quarter of 2020, compared to $250 million for the year-ago quarter
• Taxable-equivalent net interest income increased by $8 million, compared to the first quarter of 2019, with balance sheet growth partially offset by a lower interest rate environment
• Average loan and lease balances increased $2.8 billion, or 4.9%, compared to the first quarter of 2019, driven by broad-based growth in commercial and industrial loans and partially offset by a decline in commercial mortgage balances due to disciplined risk management
• Average deposit balances increased $1.6 billion, or 4.8%, compared to the first quarter of 2019, driven by growth in core deposits
• Provision for credit losses increased $198 million compared to the first quarter of 2019. The increase in provision for credit losses is mainly attributable to the significant change in the economic scenario from the COVID-19 pandemic, as well as balance sheet growth
• Noninterest income decreased $81 million from the prior year, driven by market-related valuation adjustments of customer derivatives, as well as fixed income trading losses
• Noninterest expense decreased $20 million, or 5.4%, from the first quarter of 2019. The decline reflects the continued benefit of efficiency initiatives undertaken throughout 2019, as well as strong expense discipline

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KeyCorp's roots trace back 190 years to Albany, New York. Headquartered in Cleveland, Ohio, Key is one of the nation's largest bank-based financial services companies, with assets of approximately $156.2 billion at March 31, 2020.

Key provides deposit, lending, cash management, and investment services to individuals and businesses in 15 states under the name KeyBank National Association through a network of more than 1,000 branches and approximately 1,400 ATMs. Key also provides a broad range of sophisticated corporate and investment banking products, such as merger and acquisition advice, public and private debt and equity, syndications and derivatives to middle market companies in selected industries throughout the United States under the KeyBanc Capital Markets trade name. For more information, visit https://www.key.com/. KeyBank is Member FDIC.

Notes to Editors:
A live Internet broadcast of KeyCorp's conference call to discuss quarterly results and currently anticipated earnings trends and to answer analysts' questions can be accessed through the Investor Relations section at https://www.key.com/ir at 9:00 a.m. ET, on Thursday, April 16, 2020.  An audio replay of the call will be available through April 26, 2020.

GAAP to Non-GAAP Reconciliations
(dollars in millions)

The table below presents certain non-GAAP financial measures related to "tangible common equity," "return on average tangible common equity," "Common Equity Tier 1," "pre-provision net revenue," "cash efficiency ratio," "net loan charge-offs to average loans excluding notable items," and "provision for credit losses excluding notable items."

Notable items include certain revenue or expense items that may occur in a reporting period which management does not consider indicative of ongoing financial performance. Management believes it is useful to consider certain financial metrics with and without notable items, in order to enable a better understanding of company results, increase comparability of period-to-period results, and to evaluate and forecast those results.

The tangible common equity ratio and the return on average tangible common equity ratio have been a focus for some investors, and management believes these ratios may assist investors in analyzing Key's capital position without regard to the effects of intangible assets and preferred stock. Traditionally, the banking regulators have assessed bank and bank holding company capital adequacy based on both the amount and the composition of capital, the calculation of which is prescribed in federal banking regulations. In October 2013, the federal banking regulators published the final Basel III capital framework for U.S. banking organizations (the "Regulatory Capital Rules"). The Regulatory Capital Rules require higher and better-quality capital and introduced a new capital measure, "Common Equity Tier 1," a non-GAAP financial measure. The mandatory compliance date for Key as a "standardized approach" banking organization began on January 1, 2015, subject to transitional provisions.

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

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

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

SOURCE KeyCorp

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