CLEVELAND, April 17 /PRNewswire-FirstCall/ -- KeyCorp today announced first quarter income from continuing operations of $358 million, or $0.89 per diluted common share. This compares to income from continuing operations - before the cumulative effect of an accounting change - of $274 million, or $0.66 per share, for the first quarter of 2006 and income from continuing operations of $311 million, or $0.76 per share, for the fourth quarter of 2006.
Net income totaled $350 million, or $0.87 per diluted common share, for the first quarter of 2007, compared to net income of $289 million, or $0.70 per share, for the first quarter of 2006 and $146 million, or $0.36 per share, for the fourth quarter of 2006.
The following table shows Key's continuing and discontinued operating results for the three-month periods ended March 31, 2007, December 31, 2006, and March 31, 2006.
Results of Operations Three months ended in millions, except per share amounts 3-31-07 12-31-06 3-31-06 Summary of operations Income from continuing operations before cumulative effect of accounting change $358 $311 $274 Income (loss) from discontinued operations, net of taxes (8) (165)(a) 10 Cumulative effect of accounting change, net of taxes -- -- 5 Net income $350 $146 $289 Per common share - assuming dilution (b) Income from continuing operations before cumulative effect of accounting change $.89 $.76 $.66 Income (loss) from discontinued operations (.02) (.40)(a) .02 Cumulative effect of accounting change -- -- .01 Net income $.87 $.36 $.70 (a) Includes a net after-tax charge of $165 million, or $.40 per share, consisting of: (1) a $170 million, or $.42 per share, write-off of goodwill associated with Key's 1997 acquisition of Champion and (2) a net after-tax credit of $5 million, or $.01 per share, from the net gain on sale of the Champion Mortgage loan portfolio and disposal transaction costs. (b) Earnings per share may not foot due to rounding.
In February, Key sold the McDonald Investments branch network. First quarter results were also impacted by actions taken to reposition the securities portfolio. In March, Key sold $2.4 billion of shorter-maturity, agency-issued collateralized mortgage obligations and reinvested the proceeds in agency-issued securities with higher yields and longer expected average maturities. Key continues to maintain a relatively neutral exposure to changes in near-term interest rates. Neither funding nor capital levels were affected materially by this portfolio repositioning. In addition, as previously disclosed, Key recorded a gain from the settlement of the automobile residual value insurance litigation during the current quarter.
The following Summary of Operations shows Key's results for the first quarter of 2007 as reported and on an adjusted basis after excluding the McDonald Investments branch network, the loss resulting from the repositioning of the securities portfolio and the gain associated with the litigation settlement.
"The first quarter sales of the McDonald Investments branch network and the Champion Mortgage loan origination platform improve our risk profile and focus on the company's core relationship businesses," said Chairman and Chief Executive Officer Henry L. Meyer III. "During the quarter, we also repositioned the securities portfolio to respond to changing market conditions. We expect this change to enhance the company's future performance, particularly in the event of a decline in interest rates.
"The current rate environment has continued to pressure Key's net interest margin and, although asset quality has declined slightly from a year ago, it is still very good compared to historical measures. We also are pleased to have resolved the automobile residual value insurance litigation during the first quarter."
Based on adjusted earnings of $0.68 per share for the first quarter, the company expects earnings to be in the range of $2.80 to $2.95 per share for the full year.
Taxable-equivalent net interest income was $700 million for the first quarter of 2007, compared to $722 million for the year-ago quarter. Key's net interest margin for the current quarter declined to 3.50% from 3.72% for the first three months of 2006. The reductions in net interest income and the net interest margin were due to tighter interest rate spreads on deposits caused by a continuation of the inverted yield curve, and a continued shift in deposit mix from transaction accounts and money market deposit accounts to higher-cost certificates of deposit. Additionally, as part of the sale of the McDonald Investments branch network, Key transferred approximately $1.3 billion of money market deposit accounts to the buyer. Average earning assets were up 3% from the year-ago quarter, due primarily to an increase in commercial loans.
Compared to the fourth quarter of 2006, taxable-equivalent net interest income decreased by $44 million and the net interest margin declined by 16 basis points. During the fourth quarter of 2006, Key's net interest margin benefited from a $16 million lease accounting adjustment resulting from a change in effective state tax rates, and an $8 million principal investing distribution received in the form of a dividend. These two items added approximately 12 basis points to the taxable-equivalent net interest margin for the fourth quarter. The level of average earning assets decreased slightly due to the annual securitization of education loans completed in the fourth quarter of 2006.
Excluding the $171 million gain associated with the sale of the McDonald Investments branch network, the $49 million loss recorded in connection with the repositioning of the securities portfolio and the $26 million gain from the settlement of the automobile residual value insurance litigation, Key's noninterest income was $506 million for the first quarter of 2007, compared to $481 million for the year-ago quarter. A $32 million improvement in principal investing results accounted for the increase. Income from investment banking and capital markets activities was down due to a $25 million gain recorded in the first quarter of 2006 from the initial public offering completed by the New York Stock Exchange.
Compared to the fourth quarter of 2006, adjusted noninterest income decreased by $52 million. Normal seasonal fluctuations and the McDonald sale caused reductions in several components of noninterest income. These reductions were moderated by higher net gains from principal investing. Additionally, results for the fourth quarter of 2006 included a $24 million charge to miscellaneous income recorded in connection with the redemption of certain trust preferred securities.
Key's noninterest expense for the first quarter of 2007 was $784 million, compared to $752 million for the same period last year. Personnel expense rose by $28 million, due to higher salaries expense and stock-based compensation. Nonpersonnel expense was up $4 million, due to additional costs incurred in connection with the sale of the McDonald Investments branch network. These additional costs were offset in part by an $8 million reduction in Key's liability for credit losses on lending-related commitments recorded during the first quarter.
Compared to the fourth quarter of 2006, noninterest expense decreased by $25 million. Reductions in personnel expense, marketing expense, professional fees and net occupancy expense were offset in part by higher franchise taxes. In the fourth quarter of 2006, Key's franchise taxes were a credit of $7 million as a result of settlements reached with regard to disputed amounts.
Key's provision for loan losses from continuing operations was $44 million for the first quarter of 2007, compared to $39 million for the year-ago quarter and $53 million for the fourth quarter of 2006.
Net loan charge-offs for the quarter totaled $44 million, or 0.27% of average loans from continuing operations, compared to $39 million, or 0.24%, for the same period last year and $54 million, or 0.33%, for the previous quarter.
At March 31, 2007, Key's nonperforming loans totaled $254 million and represented 0.39% of period-end portfolio loans, compared to 0.33% at December 31, 2006, and 0.44% at March 31, 2006. At March 31, 2007, nonperforming assets totaled $353 million and represented 0.54% of portfolio loans, other real estate owned and other nonperforming assets, compared to 0.41% at December 31, 2006, and 0.48% at March 31, 2006. The increase in nonperforming assets during the first quarter of 2007 reflected a higher level of nonperforming credits in the Equipment Finance line of business. In addition, Key placed a real estate-related investment in Key's Private Equity unit within the Real Estate Capital line of business on nonperforming status.
Key's allowance for loan losses was $944 million, or 1.44% of loans outstanding, at March 31, 2007, compared to $944 million, or 1.43%, at December 31, 2006, and $966 million, or 1.44%, at March 31, 2006.
Key's capital ratios continued to exceed all "well-capitalized" regulatory benchmarks at March 31, 2007. Key's tangible equity to tangible assets ratio was 6.97% at quarter end, compared to 7.01% at December 31, 2006, and 6.71% at March 31, 2006.
Key repurchased 8.0 million of its common shares and reissued 3.3 million shares under employee benefit and dividend reinvestment plans during the first quarter of 2007. At March 31, 2007, Key had 22.0 million common shares remaining for repurchase under the current authorization.
Share repurchases and other activities that caused the change in Key's outstanding common shares over the past five quarters are summarized in the table below.
The following table shows the contribution made by each major business group to Key's taxable-equivalent revenue and income from continuing operations for the periods presented. The specific lines of business that comprise each of the major business groups are described under the heading "Line of Business Descriptions." For more detailed financial information pertaining to each business group and its respective lines of business, see the last two pages of this release. Key's line of business results for all periods presented reflect a new organizational structure that took effect January 1, 2007.
Net income for Community Banking was $198 million for the first quarter of 2007, up from $103 million for the year-ago quarter. The improvement was attributable primarily to growth in noninterest income resulting from the gain associated with the sale of the McDonald Investments branch network during the first quarter of 2007. In addition, Community Banking experienced a lower provision for loan losses. The positive effects of these items were offset in part by a decrease in net interest income and higher noninterest expense.
Taxable-equivalent net interest income decreased by $11 million, or 3%, from the first quarter of 2006. The decrease was attributable to a reduction in, and a tighter interest rate spread on, average earning assets, along with a continued shift from transaction accounts and money market deposit accounts to higher-cost certificates of deposit.
Excluding the $171 million gain associated with the sale of the McDonald Investments branch network, noninterest income decreased by $10 million, or 5%, from the year-ago quarter. A reduction in brokerage commissions caused by the McDonald sale was offset in part by an increase in service charges on deposit accounts.
Noninterest expense grew by $13 million, or 3%, reflecting additional costs incurred in connection with the McDonald sale. Personnel expense and net occupancy expense also contributed to the growth.
Income from continuing operations for National Banking was $163 million for the first quarter of 2007, compared to $171 million for the same period last year. A decrease in net interest income, along with increases in the provision for loan losses and noninterest expense, accounted for the reduction and more than offset an increase in noninterest income.
Taxable-equivalent net interest income decreased by $6 million, or 2%, from the first quarter of 2006, due primarily to a tighter interest rate spread on average earning assets.
Noninterest income for the first quarter of 2007 included a $26 million gain from the settlement of the automobile residual value insurance litigation. In the first quarter of 2006, income from investment banking and capital markets activities included a $25 million gain from the initial public offering completed by the New York Stock Exchange. Excluding these gains, noninterest income increased by $26 million, or 12%, from the first quarter of 2006. Higher income from operating leases, trust and investment services, and investment banking and capital markets activities drove the improvement.
Noninterest expense grew by $14 million, or 5%, due to increases in personnel expense and costs associated with operating leases. These increases were partially offset by decreases in a variety of other expense categories.
Other segments consist of Corporate Treasury and Key's Principal Investing unit. These segments generated a net loss of $9 million for the first quarter of 2007, compared to net income of less than $1 million for the same period last year. A $49 million loss recorded in the current quarter in connection with the repositioning of the securities portfolio was offset in part by a $32 million improvement in principal investing results.
Regional Banking provides individuals with branch-based deposit and investment products, personal finance services and loans, including residential mortgages, home equity and various types of installment loans. This line of business also provides small businesses with deposit, investment and credit products, and business advisory services.
Regional Banking also offers financial, estate and retirement planning, and asset management services to assist high-net-worth clients with their banking, trust, portfolio management, insurance, charitable giving and related needs.
Commercial Banking provides midsize businesses with products and services that include commercial lending, cash management, equipment leasing, investment and employee benefit programs, succession planning, access to capital markets, derivatives and foreign exchange.
Real Estate Capital provides construction and interim lending, permanent debt placements and servicing, and equity and investment banking services to developers, brokers and owner-investors. This line of business deals exclusively with nonowner-occupied properties (i.e., generally properties in which at least 50% of the debt service is provided by rental income from nonaffiliated third parties).
Equipment Finance meets the equipment leasing needs of companies worldwide and provides equipment manufacturers, distributors and resellers with financing options for their clients. Lease financing receivables and related revenues are assigned to other lines of business (primarily Institutional and Capital Markets, and Commercial Banking) if those businesses are principally responsible for maintaining the relationship with the client.
Institutional and Capital Markets provides products and services to large corporations, middle-market companies, financial institutions, government entities and not-for-profit organizations. These products and services include commercial lending, treasury management, investment banking, derivatives and foreign exchange, equity and debt underwriting and trading, and syndicated finance.
Through its Victory Capital Management unit, Institutional and Capital Markets also manages or gives advice regarding investment portfolios for a national client base, including corporations, labor unions, not-for-profit organizations, governments and individuals. These portfolios may be managed in separate accounts, common funds or the Victory family of mutual funds.
Indirect Lending offers loans to consumers through dealers. This business unit also provides federal and private education loans to students and their parents, and processes payments on loans that private schools make to parents.
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