Market Overview

KeyCorp Reports Second Quarter 2019 Net Income Of $403 Million, Or $.40 Per Common Share

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CLEVELAND, July 23, 2019 /PRNewswire/ -- KeyCorp (NYSE:KEY) today announced net income from continuing operations attributable to Key common shareholders of $403 million, or $.40 per common share for the second quarter of 2019, compared to $386 million, or $.38 per common share, for the first quarter of 2019 and $464 million, or $.44 per common share, for the second quarter of 2018. Key's second quarter 2019 results included $.04 per common share of notable items, primarily related to efficiency initiative expenses. Key's results in the first quarter of 2019 and the second quarter of 2018 also included notable items; additional detail can be found on page 24 of this release.

Our second quarter results were driven by broad-based growth in our commercial and consumer businesses, along with disciplined expense management and strong credit quality. Revenue trends reflect growth in both loans and deposits, along with positive momentum in our fee-based businesses, including investment banking and debt placement and cards and payments. In addition to strong organic growth, we are also benefiting from the investments we continue to make across our franchise. Our recent acquisition of Laurel Road and the investments we have made in our residential mortgage business contributed to our top line results this quarter and position us well for the future.

Expenses this quarter were well-managed, as we continued to execute on our continuous improvement plans. We made meaningful progress toward our cash efficiency ratio target of 54% to 56%, which we expect to achieve in the second half of 2019. Maintaining our moderate risk profile through disciplined underwriting continues to be a priority. Credit quality and capital remain strong and position us to continue to deliver on our commitments of profitable growth and improved returns.

Beth Mooney, Chairman and CEO



Selected Financial Highlights















dollars in millions, except per share data





Change 2Q19 vs.



2Q19

1Q19

2Q18


1Q19

2Q18

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

$

403


$

386


$

464



4.4

%

(13.1)

%

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

.40


.38


.44



5.3


(9.1)


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

13.69

%

13.69

%

16.73

%


N/A


N/A


Return on average total assets from continuing operations

1.19


1.18


1.41



N/A


N/A


Common Equity Tier 1 ratio (b)

9.60


9.81


10.13



N/A


N/A


Book value at period end

$

15.07


$

14.31


$

13.29



5.3

%

13.4

%

Net interest margin (TE) from continuing operations

3.06

%

3.13

%

3.19

%


N/A


N/A











(a)

The table entitled "GAAP to Non-GAAP Reconciliations" in the attached financial supplement presents the computations of certain financial measures related to "Return on average tangible common equity from continuing operations." The table reconciles the GAAP performance measures to the corresponding non-GAAP measures, which provides a basis for period-to-period comparisons.

(b)

6/30/19 ratio is estimated.

TE = Taxable Equivalent, N/A = Not Applicable

 



INCOME STATEMENT HIGHLIGHTS














Revenue














dollars in millions





Change 2Q19 vs.


2Q19

1Q19

2Q18


1Q19

2Q18

Net interest income (TE)

$

989


$

985


$

987



.4

%

.2

%

Noninterest income

622


536


660



16.0


(5.8)


Total revenue

$

1,611


$

1,521


$

1,647



5.9

%

(2.2)

%









TE = Taxable Equivalent

Taxable-equivalent net interest income was $989 million for the second quarter of 2019, compared to taxable-equivalent net interest income of $987 million for the second quarter of 2018. The increase in net interest income reflects the benefit from higher earning asset balances and higher interest rates, partially offset by a lower net interest margin, driven by an elevated level of liquidity, higher interest-bearing deposit costs, lower loan fees, and a continued decline in purchase accounting accretion. Second quarter 2019 net interest income included $17 million of purchase accounting accretion, a decline of $11 million from the second quarter of 2018.

Compared to the first quarter of 2019, taxable-equivalent net interest income increased by $4 million. The increase was driven by higher earning asset balances and one additional day in the quarter. These benefits were partially offset by a decline in net interest margin, driven by an elevated level of liquidity, reflecting higher short-term deposits and higher interest-bearing deposit costs, as well as a decline in purchase accounting accretion of $5 million from the first quarter.



Noninterest Income














dollars in millions





Change 2Q19 vs.


2Q19

1Q19

2Q18


1Q19

2Q18

Trust and investment services income

$

122


$

115


$

128



6.1

%

(4.7)

%

Investment banking and debt placement fees

163


110


155



48.2


5.2


Service charges on deposit accounts

83


82


91



1.2


(8.8)


Operating lease income and other leasing gains

44


37


(6)



18.9


N/M


Corporate services income

53


55


61



(3.6)


(13.1)


Cards and payments income

73


66


71



10.6


2.8


Corporate-owned life insurance income

33


32


32



3.1


3.1


Consumer mortgage income

10


8


7



25.0


42.9


Mortgage servicing fees

24


21


22



14.3


9.1


Other income

17


10


99



70.0


(82.8)


Total noninterest income

$

622


$

536


$

660



16.0

%

(5.8)

%










Key's noninterest income was $622 million for the second quarter of 2019, compared to $660 million for the year-ago quarter and $536 million in the prior quarter. The year-ago quarter included notable items with a net impact of $36 million from the sale of Key Insurance and Benefit Services, included in other income, and a residual loss on an operating lease. There were no notable noninterest income items in the current and prior quarters.

Excluding notable items, noninterest income declined $2 million from the year-ago period. The decline reflects the sale of Key Insurance and Benefit Services, which resulted in a year-over-year reduction in trust and investment services income. Offsetting the decline was growth in investment banking and debt placement fees of $8 million and higher consumer mortgage income.

Compared to the first quarter of 2019, noninterest income increased by $86 million, due to growth in investment banking and debt placement fees, trust and investment services income, operating lease income, and cards and payments. Consumer mortgage and mortgage servicing fees increased from the prior quarter, primarily related to the growth in our residential mortgage business.



Noninterest Expense














dollars in millions





Change 2Q19 vs.


2Q19

1Q19

2Q18


1Q19

2Q18

Personnel expense

$

589


$

563


$

586



4.6

%

.5

%

Nonpersonnel expense

430


400


407



7.5


5.7


Total noninterest expense

$

1,019


$

963


$

993



5.8

%

2.6

%










Key's noninterest expense was $1.0 billion for the second quarter of 2019, compared to $993 million in the year-ago quarter and $963 million in the prior quarter. The second quarter of 2019 included notable items of $52 million, which were efficiency-related expenses, primarily personnel related. The year-ago quarter and prior quarter both included notable items, primarily efficiency-related expenses, which were $27 million and $26 million, respectively.

Excluding notable items, noninterest expense increased by $1 million from the year-ago period, reflecting the impact of Key's acquisition of Laurel Road in April 2019, offset by the successful implementation of Key's expense initiatives. The change also reflected an increase in charitable contributions and volume-driven expenses, which were partially offset by the elimination of the FDIC surcharge.

Excluding notable items, noninterest expense increased $30 million from the prior quarter, due to an increase in salaries and incentive compensation, a higher operating lease expense, and seasonally higher marketing costs; many of the increases reflected the impact of the Laurel Road acquisition. These expenses were partially offset by a seasonal decline in employee benefits expense.



BALANCE SHEET HIGHLIGHTS














Average Loans














dollars in millions





Change 2Q19 vs.


2Q19

1Q19

2Q18


1Q19

2Q18

Commercial and industrial (a)

$

47,227


$

45,998


$

45,030



2.7

%

4.9

%

Other commercial loans

19,765


20,383


20,394



(3.0)


(3.1)


Total consumer loans

23,793


23,268


23,220



2.3


2.5


Total loans

$

90,785


$

89,649


$

88,644



1.3

%

2.4

%










(a)

Commercial and industrial average loan balances include $141 million, $133 million, and $126 million of assets from commercial credit cards at June 30, 2019, March 31, 2019, and June 30, 2018, respectively.



Average loans were $90.8 billion for the second quarter of 2019, an increase of $2.1 billion compared to the second quarter of 2018. Commercial loans increased $1.6 billion, reflecting broad-based growth in commercial and industrial loans, partially offset by declines in commercial mortgage and construction loans. Consumer loans increased $573 million, driven by solid growth from Laurel Road, residential mortgage loans, and indirect auto lending.  Home equity loans declined $900 million, largely the result of continued paydowns in home equity lines of credit.

Compared to the first quarter of 2019, average loans increased by $1.1 billion, driven by solid growth in commercial and industrial loans, partly offset by declines in commercial mortgage and construction loans. Consumer loans increased $525 million from the prior quarter, as growth from Laurel Road and residential mortgage loans more than offset the decline in home equity loans. Laurel Road loan originations were over $400 million for the quarter.



Average Deposits














dollars in millions





Change 2Q19 vs.


2Q19

1Q19

2Q18


1Q19

2Q18

Non-time deposits

$

95,885


$

93,699


$

91,538



2.3

%

4.7

%

Certificates of deposit ($100,000 or more)

8,147


8,376


7,516



(2.7)


8.4


Other time deposits

5,569


5,501


4,949



1.2


12.5


Total deposits

$

109,601


$

107,576


$

104,003



1.9

%

5.4

%








Cost of total deposits

.82

%

.76

%

.43

%


N/A


N/A










N/A = Not Applicable

Average deposits totaled $109.6 billion for the second quarter of 2019, an increase of $5.6 billion compared to the year-ago quarter, reflecting growth from consumer and commercial relationships.

Compared to the first quarter of 2019, average deposits increased by $2 billion, primarily driven by continued growth from consumer and commercial relationships, as well as short-term deposits.



ASSET QUALITY














dollars in millions





Change 2Q19 vs.


2Q19

1Q19

2Q18


1Q19

2Q18

Net loan charge-offs

$

65


$

64


$

60



1.6

%

8.3

%

Net loan charge-offs to average total loans

.29

%

.29

%

.27

%


N/A


N/A


Nonperforming loans at period end (a)

$

561


$

548


$

545



2.4


2.9


Nonperforming assets at period end (a)

608


597


571



1.8


6.5


Allowance for loan and lease losses

890


883


887



.8


.3


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

158.6

%

161.1

%

162.8

%


N/A


N/A


Provision for credit losses

$

74


$

62


$

64



19.4

%

15.6

%









(a)

Nonperforming loan balances exclude $518 million, $551 million, and $629 million of purchased credit impaired loans at June 30, 2019, March 31, 2019, and June 30, 2018, respectively.

N/A = Not Applicable

Key's provision for credit losses was $74 million for the second quarter of 2019, compared to $64 million for the second quarter of 2018 and $62 million for the first quarter of 2019. Key's allowance for loan and lease losses was $890 million, or .97% of total period-end loans at June 30, 2019, compared to 1.01% at June 30, 2018, and .98% at March 31, 2019.

Net loan charge-offs for the second quarter of 2019 totaled $65 million, or .29% of average total loans. These results compare to $60 million, or .27%, for the second quarter of 2018, and $64 million, or .29%, for the first quarter of 2019.

At June 30, 2019, Key's nonperforming loans totaled $561 million, which represented .61% of period-end portfolio loans. These results compare to .62% at June 30, 2018, and .61% at March 31, 2019. Nonperforming assets at June 30, 2019, totaled $608 million, and represented .66% of period-end portfolio loans and OREO and other nonperforming assets. These results compare to .65% at June 30, 2018, and .66% at March 31, 2019.

CAPITAL

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

Capital Ratios









6/30/2019

3/31/2019

6/30/2018

Common Equity Tier 1 (a)

9.60

%

9.81

%

10.13

%

Tier 1 risk-based capital (a)

11.05


10.94


10.95


Total risk based capital (a)

13.07


12.98


12.83


Tangible common equity to tangible assets (b)

8.59


8.43


8.32


Leverage (a)

10.02


9.89


9.87







(a)

6/30/2019 ratio is estimated.

(b)

The table entitled "GAAP to Non-GAAP Reconciliations" in the attached financial supplement presents the computations of certain financial measures related to "tangible common equity." The table reconciles the GAAP performance measures to the corresponding non-GAAP measures, which provides a basis for period-to-period comparisons. See below for further information on the Regulatory Capital Rules.

Key's capital position remained strong in the second quarter of 2019. As shown in the preceding table, at June 30, 2019, Key's estimated Common Equity Tier 1 and Tier 1 risk-based capital ratios stood at 9.60% and 11.05%, respectively. Key's tangible common equity ratio was 8.59% at June 30, 2019.

As a "standardized approach" banking organization, Key's mandatory compliance with the final Basel III capital framework for U.S. banking organizations (the "Regulatory Capital Rules") began on January 1, 2015, subject to transitional provisions. Key's estimated Common Equity Tier 1 ratio as calculated under the fully phased-in Regulatory Capital Rules was 9.53% at June 30, 2019.  This estimate exceeds the fully phased-in required minimum Common Equity Tier 1 and Capital Conservation Buffer of 7.00%.



Summary of Changes in Common Shares Outstanding













in thousands





Change 2Q19 vs.



2Q19

1Q19

2Q18


1Q19

2Q18

Shares outstanding at beginning of period

1,013,186


1,019,503


1,064,939



(.6)

%

(4.9)

%

Open market repurchases and return of shares under employee 
     compensation plans

(10,412)


(11,791)


(6,259)



(11.7)


66.4


Shares issued under employee compensation plans (net of cancellations)

340


5,474


264



(93.8)


28.8


     Shares outstanding at end of period

1,003,114


1,013,186


1,058,944



(1.0)

%

(5.3)

%











Consistent with Key's 2018 Capital Plan, during the second quarter of 2019, Key declared a dividend of $.17 per common share and completed $180 million of common share repurchases. These repurchases included $179 million of common share repurchases in the open market and $1 million of share repurchases related to employee equity compensation programs.

LINE OF BUSINESS RESULTS

The following table shows the contribution made by each major business segment to Key's taxable-equivalent revenue from continuing operations and income (loss) from continuing operations attributable to Key for the periods presented. For more detailed financial information pertaining to each business segment, see the tables at the end of this release.



Major Business Segments















dollars in millions





Change 2Q19 vs.



2Q19

1Q19

2Q18


1Q19

2Q18

Revenue from continuing operations (TE)







Consumer Bank

$

825


$

805


$

810



2.5

%

1.9

%

Commercial Bank

759


701


721



8.3


5.3


Other (a)

27


15


116



80.0


(76.7)

%

     Total

$

1,611


$

1,521


$

1,647



5.9

%

(2.2)

%









Income (loss) from continuing operations attributable to Key







Consumer Bank

$

172


$

161


$

155



6.8

%

11.0

%

Commercial Bank

283


257


256



10.1


10.5


Other (a)

(30)


(11)


71



N/M


N/M


     Total

$

425


$

407


$

482



4.4

%

(11.8)

%










(a)

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

TE = Taxable Equivalent, N/M = Not Meaningful

 



Consumer Bank





















dollars in millions





Change 2Q19 vs.


2Q19

1Q19

2Q18


1Q19

2Q18

Summary of operations







Net interest income (TE)

$

594


$

591


$

574



.5

%

3.5

%

Noninterest income

231


214


236



7.9


(2.1)


Total revenue (TE)

825


805


810



2.5


1.9


Provision for credit losses

40


45


39



(11.1)


2.6


Noninterest expense

560


548


569



2.2


(1.6)


Income (loss) before income taxes (TE)

225


212


202



6.1


11.4


Allocated income taxes (benefit) and TE adjustments

53


51


47



3.9


12.8


Net income (loss) attributable to Key

$

172


$

161


$

155



6.8

%

11.0

%








Average balances







Loans and leases

$

31,881


$

31,321


$

31,276



1.8

%

1.9

%

Total assets

35,469


34,732


34,495



2.1


2.8


Deposits

72,303


71,288


68,279



1.4


5.9









Assets under management at period end

$

38,942


$

38,742


$

39,663



.5

%

(1.8)

%









TE = Taxable Equivalent

 



Additional Consumer Bank Data














dollars in millions





Change 2Q19 vs.


2Q19

1Q19

2Q18


1Q19

2Q18

Noninterest income







Trust and investment services income

$

91


$

85


$

91



7.1

%


Service charges on deposit accounts

56


53


62



5.7


(9.7)

%

Cards and payments income

54


48


52



12.5


3.8


Other noninterest income

30


28


31



7.1


(3.2)


Total noninterest income

$

231


$

214


$

236



7.9

%

(2.1)

%








Average deposit balances







NOW and money market deposit accounts

$

42,800


$

42,261


$

40,231



1.3

%

6.4

%

Savings deposits

4,506


4,524


4,883



(.4)


(7.7)


Certificates of deposit ($100,000 or more)

6,644


6,393


5,026



3.9


32.2


Other time deposits

5,549


5,484


4,929



1.2


12.6


Noninterest-bearing deposits

12,804


12,626


13,210



1.4


(3.1)


Total deposits

$

72,303


$

71,288


$

68,279



1.4

%

5.9

%








Home equity loans







Average balance

$

10,618


$

10,905


$

11,496





Combined weighted-average loan-to-value ratio (at date of origination)

70

%

70

%

70

%




Percent first lien positions

60


60


60












Other data







Branches

1,102


1,158


1,177





Automated teller machines

1,430


1,502


1,537












Consumer Bank Summary of Operations (2Q19 vs. 2Q18)

  • Net income of $172 million for the second quarter of 2019, compared to $155 million for the year-ago quarter
  • Taxable-equivalent net interest income increased by $20 million, or 3.5%, from the second quarter of 2018. The increase in net interest income was primarily driven by balance sheet growth
  • Average loans and leases increased $605 million, or 1.9%. This was driven by Laurel Road and strength in residential mortgage and indirect auto lending. This growth was partially offset by an $878 million, or 7.6%, decrease in home equity balances
  • Average deposits increased $4.0 billion, or 5.9%, from the second quarter of 2018. This was driven by growth in money market and certificates of deposit, reflecting Key's relationship strategy
  • Provision for credit losses increased $1 million compared to the second quarter of 2018, as credit quality remained stable
  • Noninterest income decreased $5 million, or 2.1%, from the year-ago quarter driven by lower service charges on deposit accounts
  • Noninterest expense decreased $9 million, or 1.6%, from the year-ago quarter. The decline reflects the benefit of efficiency initiatives, strong expense discipline, and the elimination of the FDIC quarterly surcharge. The decline in expense was partially offset by expenses related to the acquisition of Laurel Road

 



Commercial Bank





















dollars in millions





Change 2Q19 vs.


2Q19

1Q19

2Q18


1Q19

2Q18

Summary of operations







Net interest income (TE)

$

405


$

402


$

418



.7

%

(3.1)

%

Noninterest income

354


299


303



18.4


16.8


Total revenue (TE)

759


701


721



8.3


5.3


Provision for credit losses

33


16


25



106.3


32.0


Noninterest expense

381


364


391



4.7


(2.6)


Income (loss) before income taxes (TE)

345


321


305



7.5


13.1


Allocated income taxes and TE adjustments

62


64


49



(3.1)


26.5


Net income (loss) attributable to Key

$

283


$

257


$

256



10.1

%

10.5

%








Average balances







Loans and leases

$

57,924


$

57,292


$

56,175



1.1

%

3.1

%

Loans held for sale

1,168


1,066


1,301



9.6


(10.2)


Total assets

65,907


64,898


63,948



1.6


3.1


Deposits

35,961


34,418


33,169



4.5

%

8.4

%









TE = Taxable Equivalent, N/M = Not Meaningful

 



Additional Commercial Bank Data














dollars in millions





Change 2Q19 vs.


2Q19

1Q19

2Q18


1Q19

2Q18

Noninterest income







Trust and investment services income

$

31


$

30


$

30



3.3

%

3.3

%

Investment banking and debt placement fees

163


111


155



46.8


5.2


Operating lease income and other leasing gains

43


37


(8)



16.2


(637.5)









Corporate services income

50


48


53



4.2


(5.7)


Service charges on deposit accounts

27


27


28




(3.6)


Cards and payments income

17


18


16



(5.6)


6.3


Payments and services income

94


93


97



1.1


(3.1)









Mortgage servicing fees

20


17


19



17.6


5.3


Other noninterest income

4


12


10



(66.7)


(60.0)


Total noninterest income

$

355


$

300


$

303



18.3

%

17.2

%









N/M = Not Meaningful

Commercial Bank Summary of Operations (2Q19 vs. 2Q18)

  • Net income attributable to Key of $283 million for the second quarter of 2019, compared to $256 million for the year-ago quarter
  • Taxable-equivalent net interest income decreased by $13 million, or 3.1%, compared to the second quarter of 2018, driven by lower purchase accounting accretion and loan spread compression
  • Average loan and lease balances increased $1.7 billion, or 3.1%, compared to the second quarter of 2018 driven by broad-based growth in commercial and industrial loans
  • Average deposit balances increased $2.8 billion, or 8.4%, compared to the second quarter of 2018, driven by growth in core deposits and short-term transactional deposits
  • Provision for credit losses increased $8 million compared to the second quarter of 2018, driven by loan growth. Credit quality remained stable compared to the second quarter of 2018
  • Noninterest income increased $51 million, or 16.8%, from the prior year. The year-ago quarter included a notable item of $42 million related to a residual loss on an operating lease. Investment banking and debt placement fees increased $8 million, or 5.2%, from the prior year, primarily related to strength in loan syndication fees
  • Noninterest expense decreased by $10 million, or 2.6%, from the second quarter of 2018. The decline reflects the benefit of efficiency initiatives, strong expense discipline, and the elimination of the FDIC quarterly surcharge



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 $144.5 billion at June 30, 2019.

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 over 1,100 branches and more than 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.

This earnings release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements do not relate strictly to historical or current facts.  Forward-looking statements usually can be identified by the use of words such as "goal," "objective," "plan," "expect," "assume," "anticipate," "intend," "project," "believe," "estimate," or other words of similar meaning. Forward-looking statements provide our current expectations or forecasts of future events, circumstances, results, or aspirations. Forward-looking statements, by their nature, are subject to assumptions, risks and uncertainties, many of which are outside of our control. Our actual results may differ materially from those set forth in our forward-looking statements. There is no assurance that any list of risks and uncertainties or risk factors is complete.  Factors that could cause Key's actual results to differ from those described in the forward-looking statements can be found in KeyCorp's Form 10-K for the year ended December 31, 2018, as well as in KeyCorp's subsequent SEC filings, all of which have been or will be filed with the Securities and Exchange Commission (the "SEC") and are or will be available on Key's website (www.key.com/ir) and on the SEC's website (www.sec.gov).  These factors may include, among others: deterioration of commercial real estate market fundamentals, adverse changes in credit quality trends, declining asset prices, a reversal of the U.S. economic recovery due to financial, political, or other shocks, and the extensive regulation of the U.S. financial services industry. Any forward-looking statements made by us or on our behalf speak only as of the date they are made and we do not undertake any obligation to update any forward-looking statement to reflect the impact of subsequent events or circumstances.

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 10:00 a.m. ET, on Tuesday, July 23, 2019.  An audio replay of the call will be available through August 2, 2019.

KeyCorp
Second Quarter 2019
Financial Supplement

Financial Highlights

(dollars in millions, except per share amounts)




Three months ended




6/30/2019

3/31/2019

6/30/2018

Summary of operations





Net interest income (TE)

$

989


$

985


$

987



Noninterest income

622


536


660




Total revenue (TE)

1,611


1,521


1,647



Provision for credit losses

74


62


64



Noninterest expense

1,019


963


993



Income (loss) from continuing operations attributable to Key

423


406


479



Income (loss) from discontinued operations, net of taxes (a)

2


1


3



Net income (loss) attributable to Key

425


407


482









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

403


386


464



Income (loss) from discontinued operations, net of taxes (a)

2


1


3



Net income (loss) attributable to Key common shareholders

405


387


467








Per common share





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

$

.40


$

.38


$

.44



Income (loss) from discontinued operations, net of taxes (a)





Net income (loss) attributable to Key common shareholders (b)

.40


.38


.44









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

.40


.38


.44



Income (loss) from discontinued operations, net of taxes — assuming dilution (a)





Net income (loss) attributable to Key common shareholders — assuming dilution (b)

.40


.38


.44









Cash dividends declared

.17


.17


.12



Book value at period end

15.07


14.31


13.29



Tangible book value at period end

12.12


11.55


10.59



Market price at period end

17.75


15.75


19.54








Performance ratios





From continuing operations:





Return on average total assets

1.19

%

1.18

%

1.41

%


Return on average common equity

10.94


10.98


13.29



Return on average tangible common equity (c)

13.69


13.69


16.73



Net interest margin (TE)

3.06


3.13


3.19



Cash efficiency ratio (c)

61.9


61.9


58.8









From consolidated operations:





Return on average total assets

1.19

%

1.17

%

1.40

%


Return on average common equity

11.00


11.01


13.37



Return on average tangible common equity (c)

13.75


13.72


16.84



Net interest margin (TE)

3.05


3.12


3.17



Loan to deposit (d)

86.1


85.1


86.9








Capital ratios at period end





Key shareholders' equity to assets

11.74

%

11.25

%

10.96

%


Key common shareholders' equity to assets

10.46


10.25


10.21



Tangible common equity to tangible assets (c)

8.59


8.43


8.32



Common Equity Tier 1 (e)

9.60


9.81


10.13



Tier 1 risk-based capital (e)

11.05


10.94


10.95



Total risk-based capital (e)

13.07


12.98


12.83



Leverage (e)

10.02


9.89


9.87








Asset quality — from continuing operations





Net loan charge-offs

$

65


$

64


$

60



Net loan charge-offs to average loans

.29

%

.29

%

.27

%


Allowance for loan and lease losses

$

890


$

883


$

887



Allowance for credit losses

954


945


945



Allowance for loan and lease losses to period-end loans

.97

%

.98

%

1.01

%


Allowance for credit losses to period-end loans

1.04


1.05


1.07



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

158.6


161.1


162.8



Allowance for credit losses to nonperforming loans (f)

170.1


172.4


173.4



Nonperforming loans at period-end (f)

$

561


$

548


$

545



Nonperforming assets at period-end (f)

608


597


571



Nonperforming loans to period-end portfolio loans (f)

.61

%

.61

%

.62

%


Nonperforming assets to period-end portfolio loans plus OREO and other nonperforming assets (f)

.66


.66


.65








Trust assets





Assets under management

$

38,942


$

38,742


$

39,663








Other data





Average full-time equivalent employees

17,206


17,554


18,376



Branches

1,102


1,158


1,177








Taxable-equivalent adjustment

$

8


$

8


$

8


 

Financial Highlights (continued)

(dollars in millions, except per share amounts)



Six months ended



6/30/2019

6/30/2018

Summary of operations




Net interest income (TE)

$

1,974


$

1,939



Noninterest income

1,158


1,261



Total revenue (TE)

3,132


3,200



Provision for credit losses

136


125



Noninterest expense

1,982


1,999



Income (loss) from continuing operations attributable to Key

829


895



Income (loss) from discontinued operations, net of taxes (a)

3


5



Net income (loss) attributable to Key

832


900







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

$

789


$

866



Income (loss) from discontinued operations, net of taxes (a)

3


5



Net income (loss) attributable to Key common shareholders

792


871






Per common share




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

$

.79


$

.82



Income (loss) from discontinued operations, net of taxes (a)




Net income (loss) attributable to Key common shareholders (b)

.79


.82







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

.78


.81



Income (loss) from discontinued operations, net of taxes — assuming dilution (a)




Net income (loss) attributable to Key common shareholders — assuming dilution (b)

.78


.81







Cash dividends paid

.34


.225






Performance ratios




From continuing operations:




Return on average total assets

1.18

%

1.33

%


Return on average common equity

10.96


12.53



Return on average tangible common equity (c)

13.69


15.82



Net interest margin (TE)

3.10


3.17



Cash efficiency ratio (c)

61.9


60.8







From consolidated operations:




Return on average total assets

1.18

%

1.33

%


Return on average common equity

11.01


12.60



Return on average tangible common equity (c)

13.74


15.91



Net interest margin (TE)

3.08


3.15






Asset quality — from continuing operations




Net loan charge-offs

$

129


$

114



Net loan charge-offs to average total loans

.29

%

.26

%





Other data




Average full-time equivalent employees

17,379


18,458






Taxable-equivalent adjustment

16


16



(a)

In September 2009, management decided to discontinue the education lending business conducted through Key Education Resources, the education payment and financing unit of KeyBank National Association.

(b)

Earnings per share may not foot due to rounding.

(c)

The following table entitled "GAAP to Non-GAAP Reconciliations" presents the computations of certain financial measures related to "tangible common equity" and "cash efficiency." The table reconciles the GAAP performance measures to the corresponding non-GAAP measures, which provides a basis for period-to-period comparisons. For further information on the Regulatory Capital Rules, see the "Capital" section of this release.

(d)

Represents period-end consolidated total loans and loans held for sale divided by period-end consolidated total deposits.

(e)

June 30, 2019, ratio is estimated.

(f)

Nonperforming loan balances exclude $518 million, $551 million, and $629 million of purchased credit impaired loans at June 30, 2019, March 31, 2019, and June 30, 2018, respectively.

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" and "cash efficiency ratio 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, including the impact of tax reform and related actions, 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.


Three months ended


Six months ended


6/30/2019

3/31/2019

6/30/2018


6/30/2019

6/30/2018

Tangible common equity to tangible assets at period-end







Key shareholders' equity (GAAP)

$

16,969


$

15,924


$

15,100





Less: Intangible assets (a)

2,952


2,804


2,858





Preferred Stock (b)

1,856


1,421


1,009





Tangible common equity (non-GAAP)

$

12,161


$

11,699


$

11,233





Total assets (GAAP)

$

144,545


$

141,515


$

137,792





Less: Intangible assets (a)

2,952


2,804


2,858





Tangible assets (non-GAAP)

$

141,593


$

138,711


$

134,934





Tangible common equity to tangible assets ratio (non-GAAP)

8.59

%

8.43

%

8.32

%




Pre-provision net revenue







Net interest income (GAAP)

$

981


$

977


$

979



$

1,958


$

1,923


Plus: Taxable-equivalent adjustment

8


8


8



16


16


Noninterest income

622


536


660



1,158


1,261


Less: Noninterest expense

1,019


963


993



1,982


1,999


Pre-provision net revenue from continuing operations (non-GAAP)

$

592


$

558


$

654



$

1,150


$

1,201


Average tangible common equity







Average Key shareholders' equity (GAAP)

$

16,531


$

15,702


$

15,032



$

16,119


$

14,961


Less: Intangible assets (average) (c)

2,959


2,813


2,883



2,886


2,899


Preferred stock (average)

1,762


1,450


1,025



1,607


1,025


Average tangible common equity (non-GAAP)

$

11,810


$

11,439


$

11,124



$

11,626


$

11,037


Return on average tangible common equity from continuing operations







Net income (loss) from continuing operations attributable to Key common

     shareholders (GAAP)

$

403


$

386


$

464



$

789


$

866


Average tangible common equity (non-GAAP)

11,810


11,439


11,124



11,626


11,037









Return on average tangible common equity from continuing operations (non-GAAP)

13.69

%

13.69

%

16.73

%


13.69

%

15.82

%

Return on average tangible common equity consolidated







Net income (loss) attributable to Key common shareholders (GAAP)

$

405


$

387


$

467



$

792


$

871


Average tangible common equity (non-GAAP)

11,810


11,439


11,124



11,626


11,037









Return on average tangible common equity consolidated (non-GAAP)

13.75

%

13.72

%

16.84

%


13.74

%

15.91

%

Cash efficiency ratio







Noninterest expense (GAAP)

$

1,019


$

963


$

993



$

1,982


$

1,999


Less: Intangible asset amortization

22


22


25



44


54


Adjusted noninterest expense (non-GAAP)

$

997


$

941


$

968



$

1,938


$

1,945


Less: Notable items (d)

52


26


27



78


27


Adjusted noninterest expense excluding notable items (non-GAAP)

$

945


$

915


$

941



$

1,860


$

1,918









Net interest income (GAAP)

$

981


$

977


$

979



$

1,958


$

1,923


Plus: Taxable-equivalent adjustment

8


8


8



16


16


Noninterest income

622


536


660



1,158


1,261


Total taxable-equivalent revenue (non-GAAP)

$

1,611


$

1,521


$

1,647



$

3,132


$

3,200


Plus: Notable items (d)



(36)




(36)


Adjusted total taxable-equivalent revenue excluding notable items (non-GAAP)

$

1,611


$

1,521


$

1,611



$

3,132


$

3,164









Cash efficiency ratio (non-GAAP)

61.9

%

61.9

%

58.8

%


61.9

%

60.8

%








Cash efficiency ratio excluding notable items (non-GAAP)

58.7

%

60.2

%

58.4

%


59.4

%

60.6

%

 

GAAP to Non-GAAP Reconciliations (continued)

(dollars in millions)




Three
months
ended




6/30/2019

Common Equity Tier 1 under the Regulatory Capital Rules ("RCR") (estimates)



Common Equity Tier 1 under current RCR

$

12,283



Adjustments from current RCR to the fully phased-in RCR:




Deferred tax assets and other intangible assets (e)




Common Equity Tier 1 anticipated under the fully phased-in RCR (f)

$

12,283







Net risk-weighted assets under current RCR

$

127,912



Adjustments from current RCR to the fully phased-in RCR:




Mortgage servicing assets (g)

822




Deferred tax assets

165




All other assets




Total risk-weighted assets anticipated under the fully phased-in RCR (f)

$

128,899







Common Equity Tier 1 ratio under the fully phased-in RCR (f)

9.53

%


(a)

For the three months ended June 30, 2019, March 31, 2019, and June 30, 2018, intangible assets exclude $10 million, $12 million, and $20 million, respectively, of period-end purchased credit card receivables.

(b)

Net of capital surplus.

(c)

For the three months ended June 30, 2019, March 31, 2019, and June 30, 2018, average intangible assets exclude $11 million, $13 million, and $21 million, respectively, of average purchased credit card receivables. For the six months ended June 30, 2019, and June 30, 2018, average intangible assets exclude $12 million and $23 million, respectively, of average purchase credit card receivables.

(d)

Additional detail provided in Notable Items table on page 24 of this release.

(e)

Includes the deferred tax assets subject to future taxable income for realization, primarily tax credit carryforwards, as well as intangible assets (other than goodwill and mortgage servicing assets) subject to the transition provisions of the final rule.

(f)

The anticipated amount of regulatory capital and risk-weighted assets is based upon the federal banking agencies' Regulatory Capital Rules (fully phased-in); Key is subject to the Regulatory Capital Rules under the "standardized approach."

(g)

Item is included in the 25% exceptions bucket calculation and is risk-weighted at 250%.

GAAP = U.S. generally accepted accounting principles

 



Consolidated Balance Sheets

(dollars in millions)










6/30/2019

3/31/2019

6/30/2018

Assets





Loans

$

91,937


$

90,178


$

88,222



Loans held for sale

1,790


894


1,418



Securities available for sale

21,528


20,854


17,367



Held-to-maturity securities

10,878


11,234


12,277



Trading account assets

1,005


979


833



Short-term investments

2,443


2,511


2,646



Other investments

632


646


709




Total earning assets

130,213


127,296


123,472



Allowance for loan and lease losses

(890)


(883)


(887)



Cash and due from banks

607


611


784



Premises and equipment

829


849


892



Goodwill

2,664


2,516


2,516



Other intangible assets

298


300


361



Corporate-owned life insurance

4,201


4,184


4,147



Accrued income and other assets

5,633


5,596


5,285



Discontinued assets

990


1,046


1,222




Total assets

$

144,545


141,515


137,792








Liabilities





Deposits in domestic offices:






NOW and money market deposit accounts

$

63,619


$

61,380


$

55,059




Savings deposits

4,747


4,839


6,199




Certificates of deposit ($100,000 or more)

8,084


8,396


7,547




Other time deposits

5,524


5,573


4,943




Total interest-bearing deposits

81,974


80,188


73,748




Noninterest-bearing deposits

27,972


27,987


30,800




Total deposits

109,946


108,175


104,548



Federal funds purchased and securities sold under repurchase agreements

161


266


1,667



Bank notes and other short-term borrowings

720


679


639



Accrued expense and other liabilities

2,435


2,301


1,983



Long-term debt

14,312


14,168


13,853




Total liabilities

127,574


125,589


122,690








Equity





Preferred stock

1,900


1,450


1,025



Common shares

1,257


1,257


1,257



Capital surplus

6,266


6,259


6,315



Retained earnings

12,005


11,771


10,970



Treasury stock, at cost

(4,457)


(4,283)


(3,382)



Accumulated other comprehensive income (loss)

(2)


(530)


(1,085)




Key shareholders' equity

16,969


15,924


15,100



Noncontrolling interests

2


2


2




Total equity

16,971


15,926


15,102


Total liabilities and equity

$

144,545


$

141,515


$

137,792








Common shares outstanding (000)

1,003,114


1,013,186


1,058,944


 



Consolidated Statements of Income

(dollars in millions, except per share amounts)




Three months ended


Six months ended




6/30/2019

3/31/2019

6/30/2018


6/30/2019

6/30/2018

Interest income








Loans

$

1,082


$

1,066


$

1,000



$

2,148


$

1,940



Loans held for sale

15


13


16



28


28



Securities available for sale

135


129


97



264


192



Held-to-maturity securities

67


68


72



135


141



Trading account assets

9


8


7



17


14



Short-term investments

17


16


8



33


16



Other investments

4


4


5



8


11




Total interest income

1,329


1,304


1,205



2,633


2,342


Interest expense








Deposits

223


202


112



425


203



Federal funds purchased and securities sold under repurchase agreements


1


5



1


9



Bank notes and other short-term borrowings

5


4


7



9


13



Long-term debt

120


120


102



240


194




Total interest expense

348


327


226



675


419


Net interest income

981


977


979



1,958


1,923


Provision for credit losses

74


62


64



136


125


Net interest income after provision for credit losses

907


915


915



1,822


1,798


Noninterest income








Trust and investment services income

122


115


128



237


261



Investment banking and debt placement fees

163


110


155



273


298



Service charges on deposit accounts

83


82


91



165


180



Operating lease income and other leasing gains

44


37


(6)



81


26



Corporate services income

53


55


61



108


123



Cards and payments income

73


66


71



139


133



Corporate-owned life insurance income

33


32


32



65


64



Consumer mortgage income

10


8


7



18


14



Mortgage servicing fees

24


21


22



45


42



Other income (a)

17


10


99



27


120




Total noninterest income

622


536


660



1,158


1,261


Noninterest expense








Personnel

589


563


586



1,152


1,180



Net occupancy

73


72


79



145


157



Computer processing

56


54


51



110


103



Business services and professional fees

45


44


51



89


92



Equipment

24


24


26



48


52



Operating lease expense

32


26


30



58


57



Marketing

24


19


26



43


51



FDIC assessment

9


7


21



16


42



Intangible asset amortization

22


22


25



44


54



OREO expense, net

4


3




7


2



Other expense

141


129


98



270


209




Total noninterest expense

1,019


963


993



1,982


1,999


Income (loss) from continuing operations before income taxes

510


488


582



998


1,060



Income taxes

87


82


103



169


165


Income (loss) from continuing operations

423


406


479



829


895



Income (loss) from discontinued operations, net of taxes

2


1


3



3


5


Net income (loss)

425


407


482



832


900



Less:  Net income (loss) attributable to noncontrolling interests







Net income (loss) attributable to Key

$

425


$

407


$

482



$

832


$

900











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

$

403


$

386


$

464



$

789


$

866


Net income (loss) attributable to Key common shareholders

405


387


467



792


871


Per common share







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

$

.40


$

.38


$

.44



$

.79


$

.82


Income (loss) from discontinued operations, net of taxes







Net income (loss) attributable to Key common shareholders (b)

.40


.38


.44



.79


.82


Per common share — assuming dilution







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

$

.40


$

.38


$

.44



$

.78


$

.81


Income (loss) from discontinued operations, net of taxes







Net income (loss) attributable to Key common shareholders (b)

.40


.38


.44



.78


.81











Cash dividends declared per common share

$

.17


$

.17


$

.12



$

.34


$

.225











Weighted-average common shares outstanding (000)

999,163


1,006,717


1,052,652,000



1,003,047,000


1,054,378,000



Effect of common share options and other stock awards

8,801


9,787


13,141,000



9,318,000


14,561,000


Weighted-average common shares and potential common shares outstanding (000) (c)

1,007,964


1,016,504


1,065,793,000



1,012,365,000


1,068,939,000



(a)

For the three months ended June 30, 2019, March 31, 2019, and June 30, 2018, and the six months ended June 30, 2019 and June 30, 2018, net securities gains (losses) totaled less than $1 million. For the three months ended June 30, 2019, March 31, 2019, and June 30, 2018, and the six months ended June 30, 2019 and June 30, 2018, Key did not have any impairment losses related to securities.

(b)

Earnings per share may not foot due to rounding.

(c)

Assumes conversion of common share options and other stock awards, as applicable.

 



Consolidated Average Balance Sheets, and Net Interest Income and Yields/Rates From Continuing Operations

(dollars in millions)



Second Quarter 2019


First Quarter 2019


Second Quarter 2018



Average


Yield/


Average


Yield/


Average


Yield/



Balance

Interest (a)

Rate (a)


Balance

Interest (a)

Rate (a)


Balance

Interest (a)

Rate (a)

Assets













Loans: (b), (c)













Commercial and industrial (d)

$

47,227


$

547


4.65

%


$

45,998


$

532


4.68

%


$

45,030


$

485


4.32

%


Real estate — commercial mortgage

13,866


175


5.06



14,325


179


5.07



14,055


172


4.89



Real estate — construction

1,423


20


5.41



1,561


21


5.48



1,789


23


4.97



Commercial lease financing

4,476


41


3.65



4,497


41


3.66



4,550


41


3.61



Total commercial loans

66,992


783


4.69



66,381


773


4.71



65,424


721


4.41



Real estate — residential mortgage

5,790


58


4.03



5,543


56


4.02



5,451


54


3.97



Home equity loans

10,701


135


5.05



10,995


137


5.07



11,601


135


4.67



Consumer direct loans

2,352


43


7.39



1,862


37


8.06



1,768


33


7.54



Credit cards

1,091


31


11.26



1,105


32


11.80



1,080


30


11.21



Consumer indirect loans

3,859


40


4.15



3,763


39


4.13



3,320


35


4.26



Total consumer loans

23,793


307


5.17



23,268


301


5.23



23,220


287


4.97



Total loans

90,785


1,090


4.81



89,649


1,074


4.85



88,644


1,008


4.56



Loans held for sale

1,302


15


4.56



1,121


13


4.74



1,375


16


4.50



Securities available for sale (b), (e)

21,086


135


2.54



20,206


129


2.51



17,443


97


2.13



Held-to-maturity securities (b)

11,058


67


2.41



11,369


68


2.41



12,226


72


2.36



Trading account assets

1,124


9


3.28



957


8


3.36



943


7


3.21



Short-term investments

3,200


17


2.23



2,728


16


2.28



2,015


8


1.76



Other investments (e)

640


4


2.00



654


4


2.69



710


5


3.08



Total earning assets

129,195


1,337


4.14



126,684


1,312


4.17



123,356


1,213


3.92



Allowance for loan and lease losses

(881)





(878)





(875)





Accrued income and other assets

14,321





14,314





13,897





Discontinued assets

1,009





1,066





1,241





Total assets

$

143,644





$

141,186





$

137,619




Liabilities













NOW and money market deposit accounts

$

63,071


147


.93



$

60,773


130


.87



$

54,749


59


.44



Savings deposits

4,781


1


.09



4,811


1


.08



6,276


5


.35



Certificates of deposit ($100,000 or more)

8,147


48


2.37



8,376


47


2.25



7,516


32


1.70



Other time deposits

5,569


27


1.93



5,501


24


1.79



4,949


16


1.22



Total interest-bearing deposits

81,568


223


1.10



79,461


202


1.03



73,490


112


.61



Federal funds purchased and securities sold 
     under repurchase agreements

194



.20



409


1


.89



1,475


5


1.41



Bank notes and other short-term borrowings

842


5


2.46



649


4


2.75



1,116


7


2.27



Long-term debt (f), (g)

13,213


120


3.67



13,160


120


3.67



12,748


102


3.20



Total interest-bearing liabilities

95,817


348


1.46



93,679


327


1.42



88,829


226


1.02



Noninterest-bearing deposits

28,033





28,115





30,513





Accrued expense and other liabilities

2,253





2,622





2,002





Discontinued liabilities (g)

1,009





1,066





1,241





Total liabilities

127,112





125,482





122,585




Equity













Key shareholders' equity

16,531





15,702





15,032





Noncontrolling interests

1





2





2





Total equity

16,532





15,704





15,034





Total liabilities and equity

$

143,644





$

141,186





$

137,619




Interest rate spread (TE)



2.68

%




2.75

%




2.90

%

Net interest income (TE) and net interest margin 
     (TE)


989


3.06

%



985


3.13

%



987


3.19

%

TE adjustment (b)


8





8





8




Net interest income, GAAP basis


$

981





$

977