KeyCorp Reports First Quarter 2006 Earnings

- First quarter EPS of $0.70, up 9% from the year-ago quarter CLEVELAND, April 18 /PRNewswire-FirstCall/ -- KeyCorp today announced first quarter net income of $289 million, or $0.70 per diluted common share, compared with $264 million, or $0.64 per share, for the first quarter of 2005. For the fourth quarter of 2005, net income was $296 million, or $0.72 per diluted common share. Return on average equity was 15.48% for the first quarter of 2006, compared with 15.09% for the same period last year and 15.59% for the fourth quarter of 2005. "Key's first quarter results reflect continued strength in the bank's business fundamentals," said Chairman and Chief Executive Officer Henry L. Meyer III. "Compared with last year's first quarter, taxable-equivalent net interest income rose by $42 million, reflecting a better net interest margin, solid commercial loan growth and an increase in core deposits. Asset quality also remained solid. The level of our nonperforming loans was down slightly from the year-ago quarter, and net loan charge-offs represented 0.23 percent of average total loans. "We recently announced that Beth Mooney, a highly respected industry executive, will be joining the company as vice chair and leader of our Community Bank. In addition, on April 1, we completed the acquisition of Austin Capital Management, which broadened our asset management product line. These actions demonstrate our continuing commitment to build the strong management team required to succeed in an intensely competitive market and to expand our product offerings." The company expects earnings to be in the range of $0.69 to $0.73 per share for the second quarter of 2006 and $2.80 to $2.90 per share for the full year. SUMMARY OF CONSOLIDATED RESULTS Taxable-equivalent net interest income increased to $756 million for the first quarter of 2006 from $714 million for the same period last year. Average earning assets rose by 3% as a result of commercial loan growth, and the net interest margin increased by 11 basis points to 3.77%. Compared with the fourth quarter of 2005, taxable-equivalent net interest income rose by $8 million. This growth was attributable to an increase in average earning assets and a 6 basis point improvement in the net interest margin. During the first quarter of 2006, net interest income benefited from the call of certain securitization trusts, which added approximately 3 basis points to the margin. Key's noninterest income was $481 million for the first quarter of 2006, compared with $500 million for the year-ago quarter. Last year's first quarter results benefited from income related to the sale of the indirect automobile loan portfolio, including a $19 million gain recorded in net gains from loan securitizations and sales, and $11 million of derivative income recorded in investment banking and capital markets revenue. In addition, Key recorded net losses of $3 million from principal investing in the current year, compared with net gains of $12 million one year ago. The reduction in noninterest income caused by these factors was substantially offset by a $25 million gain recorded in investment banking and capital markets revenue that resulted from the initial public offering completed by the New York Stock Exchange in March 2006. The gain represents the difference between the value of shares and other consideration received, and the carrying amount of the exchange seats owned by Key. Compared with the fourth quarter of 2005, noninterest income decreased by $80 million, due primarily to declines of $24 million in net gains from loan securitizations and sales, $19 million in principal investing results, $9 million in letter of credit and loan fees, and $15 million in miscellaneous income, due to a variety of items. The decrease in noninterest income is attributable in part to normal seasonal fluctuations. Key's noninterest expense was $770 million for the first quarter of 2006, essentially unchanged from the level reported one year ago. Personnel expense rose by $15 million, due to additional costs incurred in connection with business expansion, and an increase in employee benefits expense. Nonpersonnel expense was down $14 million, reflecting a $28 million decrease in net occupancy expense and a $20 million reduction in charitable contributions included in miscellaneous expense. The favorable effects of these factors were substantially offset by increases in computer processing expense, professional fees, and a variety of miscellaneous expense components. In addition, results for the first quarter of 2005 included an $11 million credit to the provision for losses on lending-related commitments. Compared with the fourth quarter of 2005, noninterest expense decreased by $64 million. Personnel expense declined by $11 million, due primarily to lower incentive compensation accruals, offset in part by an increase in costs associated with employee benefits. Nonpersonnel expense decreased by $53 million as a result of reductions in marketing expense, professional fees, net occupancy expense and charitable contributions. CHANGE IN ACCOUNTING FOR SHARE-BASED PAYMENTS Effective January 1, 2006, Key adopted Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based Payment." SFAS No. 123R changes the manner in which forfeited share-based awards must be accounted for. Under the new standard, companies are no longer permitted to account for forfeitures as they occur. Those, such as Key, that have been expensing share-based awards and using this alternative method of accounting must now estimate expected forfeitures at the date the awards are granted and record compensation expense only for those that are expected to vest. As of the effective date, companies must estimate the forfeitures they expect to occur and reduce their related compensation obligation for expense previously recognized in the financial statements. The after-tax amount of this reduction must also be presented on the income statement as a cumulative effect of a change in accounting principle. Key's cumulative after-tax adjustment increased first quarter 2006 earnings by $5 million, or $0.01 per diluted common share. ASSET QUALITY Key's provision for loan losses was $39 million for the first quarter of 2006, compared with $44 million for the year-ago quarter and $36 million for the fourth quarter of 2005. Net loan charge-offs for the quarter totaled $39 million, or 0.23% of average loans, compared with $54 million, or 0.34%, for the same period last year and $164 million, or 0.98%, for the previous quarter. Included in net charge-offs for the fourth quarter of 2005 were $127 million of commercial passenger airline leases. At March 31, 2006, Key's nonperforming loans stood at $295 million and represented 0.44% of period-end loans, compared with 0.47% at March 31, 2005, and 0.42% at December 31, 2005. Key's allowance for loan losses stood at $966 million, or 1.44% of loans outstanding at March 31, 2006, compared with $1.128 billion, or 1.76%, at March 31, 2005, and $966 million, or 1.45%, at December 31, 2005. At March 31, 2006, the allowance for loan losses represented 327% of nonperforming loans, compared with 377% a year ago and 349% at December 31, 2005. CAPITAL Key's capital ratios continued to exceed all "well-capitalized" regulatory benchmarks at March 31, 2006. Key's tangible equity to tangible assets ratio was 6.71% at quarter end, compared with 6.43% at March 31, 2005, and 6.68% at December 31, 2005. The ratio is currently within management's targeted range of 6.25% to 6.75%. Key's capital position provides it with the flexibility to take advantage of future investment opportunities, to repurchase shares when appropriate and to pay dividends. During the first quarter of 2006, Key repurchased 6,000,000 of its common shares. At March 31, 2006, there were 16,461,248 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. Summary of Changes in Common Shares Outstanding in thousands 1Q06 4Q05 3Q05 2Q05 1Q05 Shares outstanding at beginning of period 406,624 408,542 408,231 407,297 407,570 Issuance of shares under employee benefit and dividend reinvestment plans 4,649 1,332 1,561 934 2,227 Repurchase of common shares (6,000) (3,250) (1,250) - (2,500) Shares outstanding at end of period 405,273 406,624 408,542 408,231 407,297 LINE OF BUSINESS RESULTS The following table shows the contribution made by each major business group to Key's taxable-equivalent revenue and net income 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 earlier this year. Major Business Groups Percent change 1Q06 vs. dollars in millions 1Q06 4Q05 1Q05 4Q05 1Q05 Revenue (taxable equivalent) Community Banking $643 $666 $624 (3.5)% 3.0% National Banking 624 644 591 (3.1) 5.6 Other Segments (6) 18 13 N/M N/M Total segments 1,261 1,328 1,228 (5.0) 2.7 Reconciling Items (24) (19) (14) (26.3) (71.4) Total $1,237 $1,309 $1,214 (5.5)% 1.9% Net income (loss) ` Community Banking $108 $95 $89 13.7 % 21.3% National Banking 177 175 168 1.1 5.4 Other Segments 1 20 13 (95.0) (92.3) Total segments 286 290 270 (1.4) 5.9 Reconciling Items 3 6 (6) (50.0) N/M Total $289 $296 $264 (2.4)% 9.5% N/M = Not Meaningful Community Banking Percent change 1Q06 vs. dollars in millions 1Q06 4Q05 1Q05 4Q05 1Q05 Summary of operations Net interest income (TE) $430 $441 $411 (2.5)% 4.6% Noninterest income 213 225 213 (5.3) - Total revenue (TE) 643 666 624 (3.5) 3.0 Provision for loan losses 29 30 28 (3.3) 3.6 Noninterest expense 441 484 454 (8.9) (2.9) Income before income taxes (TE) 173 152 142 13.8 21.8 Allocated income taxes and TE adjustments 65 57 53 14.0 22.6 Net income $108 $95 $89 13.7% 21.3% Percent of consolidated net income 37% 32% 34% N/A N/A Average balances Loans and leases $26,739 $27,267 $26,794 (1.9)% (.2)% Total assets 29,656 30,217 29,708 (1.9) (.2) Deposits 45,835 45,730 43,185 .2 6.1 TE = Taxable Equivalent, N/A = Not Applicable Percent change Additional Community Banking Data 1Q06 vs. dollars in millions 1Q06 4Q05 1Q05 4Q05 1Q05 Average deposits outstanding Noninterest-bearing $8,105 $8,458 $7,936 (4.2)% 2.1 % Money market deposit accounts and other savings 21,978 22,037 20,856 (.3) 5.4 Time 15,752 15,235 14,393 3.4 9.4 Total deposits $45,835 $45,730 $43,185 .2 % 6.1 % Home equity loans Average balance $10,151 $10,289 $10,475 Average loan-to-value ratio 70 % 71 % 72 % Percent first lien positions 61 61 61 Other data On-line households / household penetration 631,523/51% 622,957/50% 581,737/47% KeyCenters 946 947 940 Automated teller machines 2,169 2,180 2,211 Net income for Community Banking was $108 million for the first quarter of 2006, up from $89 million for the year-ago quarter. An increase in net interest income and lower noninterest expense drove the improvement. Both noninterest income and the provision for loan losses were essentially unchanged. Taxable-equivalent net interest income increased by $19 million, or 5%, from the first quarter of 2005, due to growth in average deposits and commercial loans. The positive effects of these factors were moderated by tighter interest rate spreads on average earning assets and deposits. Noninterest expense decreased by $13 million, or 3%. Higher costs associated with personnel, marketing and computer processing were more than offset by reductions in various indirect charges. National Banking Percent change 1Q06 vs. dollars in millions 1Q06 4Q05 1Q05 4Q05 1Q05 Summary of operations Net interest income (TE) $378 $365 $358 3.6% 5.6% Noninterest income 246 279 233 (11.8) 5.6 Total revenue (TE) 624 644 591 (3.1) 5.6 Provision for loan losses 10 6 16 66.7 (37.5) Noninterest expense 332 358 306 (7.3) 8.5 Income before income taxes (TE) 282 280 269 .7 4.8 Allocated income taxes and TE adjustments 105 105 101 - 4.0 Net income $177 $175 $168 1.1% 5.4% Percent of consolidated net income 61% 59% 63% N/A N/A Average balances Loans and leases $39,534 $38,398 $36,449 3.0% 8.5% Total assets 49,618 48,352 47,061 2.6 5.4 Deposits 9,962 8,580 6,658 16.1 49.6 TE = Taxable Equivalent, N/A = Not Applicable Additional National Banking Data dollars in millions 1Q06 4Q05 1Q05 Home equity loans Average balance $3,277 $3,471 $3,504 Average loan-to-value ratio 64 % 64 % 66 % Percent first lien positions 62 63 69 Net income for National Banking was $177 million for the first quarter of 2006, up from $168 million for the same period last year. Increases in both net interest income and noninterest income, along with a decrease in the provision for loan losses, drove the improvement and more than offset an increase in noninterest expense. Taxable-equivalent net interest income grew by $20 million, or 6%, reflecting strong growth in average loans and leases, as well as deposits. Average loans and leases rose by $3.1 billion, or 8%, with most of the growth coming from the Real Estate Capital line of business. Net interest income also benefited from the call of certain securitization trusts during the first quarter of 2006. Noninterest income increased by $13 million, or 6%, due primarily to higher income from investment banking and capital markets activities. The provision for loan losses decreased by $6 million, or 38%, as a result of an improved credit risk profile. Noninterest expense rose by $26 million, or 8%, reflecting higher costs associated with personnel and a $9 million credit to the provision for losses on lending-related commitments recorded during the year-ago quarter. Since the first quarter of 2005, we have completed two acquisitions that have helped us to build upon our success in commercial mortgage origination and servicing. In the fourth quarter of 2005, we continued the expansion of our commercial mortgage servicing business by acquiring the commercial mortgage-backed servicing business of ORIX Capital Markets, LLC, headquartered in Dallas, Texas. In the third quarter, we expanded our FHA financing and servicing capabilities by acquiring Malone Mortgage Company, also based in Dallas. Other Segments Other segments consist of Corporate Treasury and Key's Principal Investing unit. These segments generated net income of $1 million for the first quarter of 2006, compared with $13 million for the same period last year. Net losses from principal investing in the current year, compared with net gains recorded one year ago drove the decrease. Line of Business Descriptions Community Banking Regional Banking provides individuals with branch-based deposit and investment products, personal finance services and loans, including residential mortgages, home equity and various types of installment loans. This line of business also provides small businesses that typically have annual sales revenues of $5 million or less with deposit, investment and credit products, and business advisory services. Through McDonald Financial Group, Regional Banking also offers financial, estate and retirement planning, and asset management services to assist high- net-worth clients with their banking, brokerage, 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, investments and employee benefit programs, succession planning, capital markets, derivatives and foreign exchange. National Banking 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 the owner occupies less than 60% of the premises). 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. Consumer Finance includes Indirect Lending, Commercial Floor Plan Lending and National Home Equity. 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. Commercial Floor Plan Lending finances inventory for automobile and marine dealers. National Home Equity provides both prime and nonprime mortgage and home equity loan products to individuals. These products originate outside of Key's retail branch system. This business unit also works with home improvement contractors to provide home equity and home improvement solutions. Cleveland-based KeyCorp is one of the nation's largest bank-based financial services companies, with assets of approximately $93 billion. Key companies provide investment management, retail and commercial banking, consumer finance, and investment banking products and services to individuals and companies throughout the United States and, for certain businesses, internationally. The company's businesses deliver their products and services through 946 KeyCenters and offices; a network of 2,169 ATMs; telephone banking centers (1.800.KEY2YOU); and a Web site, Key.com(R), that provides account access and financial products 24 hours a day. Notes to Editors: A live Internet broadcast of KeyCorp's conference call to discuss quarterly earnings and currently anticipated earnings trends and to answer analysts' questions can be accessed through the Investor Relations section at http://www.key.com/ir at 9:00 a.m. ET, on Tuesday, April 18, 2006. A tape of the call will be available through April 25. For up-to-date company information, media contacts and facts and figures about Key's lines of business visit our Media Newsroom at http://www.key.com/newsroom. This news release contains forward-looking statements, including statements about our financial condition, results of operations, earnings outlook, asset quality trends and profitability. Forward-looking statements express management's current expectations or forecasts of future events and, by their nature, are subject to assumptions, risks and uncertainties. Although management believes that the expectations and forecasts reflected in these forward-looking statements are reasonable, actual results could differ materially due to a variety of factors including: (1) changes in interest rates; (2) changes in trade, monetary or fiscal policy; (3) changes in general economic conditions, or in the condition of the local economies or industries in which we have significant operations or assets, which could, among other things, materially impact credit quality trends and our ability to generate loans; (4) increased competitive pressure among financial services companies; (5) the inability to successfully execute strategic initiatives designed to grow revenues and/or manage expenses; (6) consummation of significant business combinations or divestitures; (7) operational or risk management failures due to technological or other factors; (8) heightened regulatory practices, requirements or expectations; (9) new legal obligations or liabilities or unfavorable resolution of litigation; (10) adverse capital markets conditions; (11) disruption in the economy and general business climate as a result of terrorist activities or military actions; and (12) changes in accounting or tax practices or requirements. Forward-looking statements are not guarantees of future performance and should not be relied upon as representing management's views as of any subsequent date. We do not assume any obligation to update these forward-looking statements. For further information regarding KeyCorp, please read KeyCorp's reports that are filed with the Securities and Exchange Commission and are available at http://www.sec.gov/. Financial Highlights (dollars in millions, except per share amounts) Three months ended 3-31-06 12-31-05 3-31-05 Summary of operations Net interest income (TE) $756 $748 $714 Noninterest income 481 561 500 Total revenue (TE) 1,237 1,309 1,214 Provision for loan losses 39 36 44 Noninterest expense 770 834 769 Net income 289 296 264 Per common share Net income $.71 $.72 $.65 Net income - assuming dilution .70 .72 .64 Cash dividends paid .345 .325 .325 Book value at period end 18.85 18.69 17.58 Market price at period end 36.80 32.93 32.45 Performance ratios Return on average total assets 1.26 % 1.27 % 1.18 % Return on average equity 15.48 15.59 15.09 Net interest margin (TE) 3.77 3.71 3.66 Capital ratios at period end Equity to assets 8.18 % 8.16 % 7.93 % Tangible equity to tangible assets 6.71 6.68 6.43 Tier 1 risk-based capital (a) 7.67 7.59 7.34 Total risk-based capital (a) 11.96 11.47 11.58 Leverage (a) 8.53 8.53 7.91 Asset quality Net loan charge-offs $39 $164 $54 Net loan charge-offs to average loans .23 % .98 % .34 % Allowance for loan losses $966 $966 $1,128 Allowance for loan losses to period- end loans 1.44 % 1.45 % 1.76 % Allowance for loan losses to nonperforming loans 327.46 348.74 377.26 Nonperforming loans at period end $295 $277 $299 Nonperforming assets at period end 320 307 371 Nonperforming loans to period-end loans .44 % .42 % .47 % Nonperforming assets to period-end loans plus OREO and other nonperforming assets .48 .46 .58 Trust and brokerage assets Assets under management $79,558 $77,144 $76,334 Nonmanaged and brokerage assets 56,944 56,509 61,375 Other data Average full-time equivalent employees 19,694 19,417 19,571 KeyCenters 946 947 940 Taxable-equivalent adjustment $28 $30 $28 (a) 3-31-06 ratio is estimated. TE = Taxable Equivalent Consolidated Balance Sheets (dollars in millions) 3-31-06 12-31-05 3-31-05 Assets Loans $66,980 $66,478 $64,018 Loans held for sale 3,631 3,381 3,531 Investment securities 46 91 68 Securities available for sale 7,086 7,269 7,123 Short-term investments 1,974 1,592 1,763 Other investments 1,370 1,332 1,434 Total earning assets 81,087 80,143 77,937 Allowance for loan losses (966) (966) (1,128) Cash and due from banks 2,486 3,108 2,991 Premises and equipment 564 575 587 Goodwill 1,355 1,355 1,341 Other intangible assets 120 125 105 Corporate-owned life insurance 2,711 2,690 2,623 Derivative assets 947 1,039 1,202 Accrued income and other assets 5,087 5,057 4,618 Total assets $93,391 $93,126 $90,276 Liabilities Deposits in domestic offices: NOW and money market deposit accounts $25,271 $24,241 $22,692 Savings deposits 1,850 1,840 2,011 Certificates of deposit ($100,000 or more) 5,411 5,156 4,809 Other time deposits 11,364 11,170 10,750 Total interest-bearing 43,896 42,407 40,262 Noninterest-bearing 12,748 13,335 11,891 Deposits in foreign office - interest-bearing 2,758 3,023 4,974 Total deposits 59,402 58,765 57,127 Federal funds purchased and securities sold under repurchase agreements 3,511 4,835 3,220 Bank notes and other short-term borrowings 2,508 1,780 2,820 Derivative liabilities 1,048 1,060 1,011 Accrued expense and other liabilities 5,252 5,149 4,836 Long-term debt 14,032 13,939 14,100 Total liabilities 85,753 85,528 83,114 Shareholders' equity Preferred stock -- -- -- Common shares 492 492 492 Capital surplus 1,535 1,534 1,481 Retained earnings 8,031 7,882 7,416 Treasury stock (2,299) (2,204) (2,156) Accumulated other comprehensive loss (121) (106) (71) Total shareholders' equity 7,638 7,598 7,162 Total liabilities and shareholders' equity $93,391 $93,126 $90,276 Common shares outstanding (000) 405,273 406,624 407,297 Consolidated Statements of Income (dollars in millions, except per share amounts) Three months ended 3-31-06 12-31-05 3-31-05 Interest income Loans $1,114 $1,085 $885 Loans held for sale 68 64 81 Investment securities -- -- 1 Securities available for sale 83 84 80 Short-term investments 22 19 10 Other investments 25 10 8 Total interest income 1,312 1,262 1,065 Interest expense Deposits 343 309 206 Federal funds purchased and securities sold under repurchase agreements 34 40 25 Bank notes and other short-term borrowings 24 24 17 Long-term debt 183 171 131 Total interest expense 584 544 379 Net interest income 728 718 686 Provision for loan losses 39 36 44 689 682 642 Noninterest income Trust and investment services income 135 134 138 Service charges on deposit accounts 72 76 70 Investment banking and capital markets income 60 62 55 Operating lease income 52 50 46 Letter of credit and loan fees 40 49 40 Corporate-owned life insurance income 25 31 28 Electronic banking fees 24 26 22 Net gains from loan securitizations and sales 10 34 19 Net securities gains (losses) 1 3 (6) Other income 62 96 88 Total noninterest income 481 561 500 Noninterest expense Personnel 405 416 390 Net occupancy 63 68 91 Computer processing 56 57 51 Operating lease expense 41 40 38 Professional fees 33 42 28 Marketing 18 30 25 Equipment 26 27 28 Other expense 128 154 118 Total noninterest expense 770 834 769 Income before income taxes and cumulative effect of accounting change 400 409 373 Income taxes 116 113 109 Income before cumulative effect of accounting change 284 296 264 Cumulative effect of accounting change, net of tax 5 -- -- Net income $289 $296 $264 Per common share: Income before cumulative effect of accounting change $.70 $.72 $.65 Net income .71 .72 .65 Per common share-assuming dilution: Income before cumulative effect of accounting change .69 .72 .64 Net income .70 .72 .64 Cash dividends declared per common share .345 .325 .325 Weighted-average common shares outstanding (000) 407,386 408,431 408,264 Weighted-average common shares and potential common shares outstanding (000) 413,140 412,542 413,762 Consolidated Average Balance Sheets, Net Interest Income and Yields/Rates (dollars in millions) First Quarter 2006 Average Balance Interest Yield/Rate Assets Loans: (a,b) Commercial, financial and agricultural (c) $21,720 $357 6.66 % Real estate -- commercial mortgage 8,089 144 7.23 Real estate -- construction 7,312 138 7.66 Commercial lease financing (c) 9,581 143 5.98 Total commercial loans 46,702 782 6.78 Real estate - residential 1,450 23 6.33 Home equity 13,433 238 7.19 Consumer -- direct 1,730 41 9.66 Consumer -- indirect 3,367 57 6.66 Total consumer loans 19,980 359 7.26 Total loans 66,682 1,141 6.92 Loans held for sale 3,692 68 7.44 Investment securities (a) 61 1 6.34 Securities available for sale (d) 7,148 83 4.61 Short-term investments 1,753 22 5.10 Other investments (d) 1,336 25 7.13 Total earning assets 80,672 1,340 6.70 Allowance for loan losses (963) Accrued income and other assets 13,206 Total assets $92,915 Liabilities NOW and money market deposit accounts $24,452 145 2.40 Savings deposits 1,812 1 .32 Certificates of deposit ($100,000 or more) (e) 5,407 58 4.34 Other time deposits 11,282 104 3.73 Deposits in foreign office 3,354 35 4.29 Total interest-bearing deposits 46,307 343 3.00 Federal funds purchased and securities sold under repurchase agreements 3,349 34 4.06 Bank notes and other short-term borrowings 2,550 24 3.89 Long-term debt (e) 13,991 183 5.27 Total interest-bearing liabilities 66,197 584 3.57 Noninterest-bearing deposits 12,707 Accrued expense and other liabilities 6,438 Total liabilities 85,342 Shareholders' equity 7,573 Total liabilities and shareholders' equity $92,915 Interest rate spread (TE) 3.13 % Net interest income (TE) and net interest margin (TE) 756 3.77 % TE adjustment (a) 28 Net interest income, GAAP basis $728 Fourth Quarter 2005 Average Balance Interest Yield/Rate Assets Loans: (a,b) Commercial, financial and agricultural (c) $19,992 $315 6.25 % Real estate -- commercial mortgage 8,580 151 6.98 Real estate -- construction 6,896 129 7.42 Commercial lease financing (c) 10,285 154 6.01 Total commercial loans 45,753 749 6.51 Real estate -- residential 1,460 23 6.22 Home equity 13,767 242 7.00 Consumer -- direct 1,785 44 9.68 Consumer -- indirect 3,340 56 6.71 Total consumer loans 20,352 365 7.13 Total loans 66,105 1,114 6.70 Loans held for sale 3,592 64 7.05 Investment securities (a) 95 1 5.81 Securities available for sale (d) 7,034 84 4.77 Short-term investments 2,091 19 3.53 Other investments (d) 1,297 10 3.09 Total earning assets 80,214 1,292 6.40 Allowance for loan losses (1,085) Accrued income and other assets 13,077 Total assets $92,206 Liabilities NOW and money market deposit accounts $23,947 127 2.11 Savings deposits 1,858 1 .27 Certificates of deposit ($100,000 or more) (e) 5,006 51 4.06 Other time deposits 10,951 96 3.46 Deposits in foreign office 3,316 34 4.03 Total interest-bearing deposits 45,078 309 2.72 Federal funds purchased and securities sold under repurchase agreements 4,309 40 3.72 Bank notes and other short-term borrowings 2,607 24 3.67 Long-term debt (e) 13,860 171 4.89 Total interest-bearing liabilities 65,854 544 3.28 Noninterest-bearing deposits 12,594 Accrued expense and other liabilities 6,224 Total liabilities 84,672 Shareholders' equity 7,534 Total liabilities and shareholders' equity $92,206 Interest rate spread (TE) 3.12 % Net interest income (TE) and net interest margin (TE) 748 3.71 % TE adjustment (a) 30 Net interest income, GAAP basis $718 First Quarter 2005 Average Balance Interest Yield/Rate Assets Loans: (a,b) Commercial, financial and agricultural (c) $19,195 $230 4.86 % Real estate - commercial mortgage 8,189 115 5.71 Real estate -- construction 5,636 81 5.81 Commercial lease financing (c) 10,055 158 6.31 Total commercial loans 43,075 584 5.49 Real estate -- residential 1,464 23 6.00 Home equity 13,986 213 6.19 Consumer -- direct 1,928 38 7.89 Consumer -- indirect 3,325 54 6.51 Total consumer loans 20,703 328 6.39 Total loans 63,778 912 5.78 Loans held for sale 4,281 81 7.64 Investment securities (a) 70 2 8.66 Securities available for sale (d) 7,226 80 4.43 Short-term investments 1,679 10 2.43 Other investments (d) 1,423 8 2.25 Total earning assets 78,457 1,093 5.62 Allowance for loan losses (1,133) Accrued income and other assets 13,634 Total assets $90,958 Liabilities NOW and money market deposit accounts $21,619 55 1.03 Savings deposits 1,957 1 .24 Certificates of deposit ($100,000 or more) (e) 4,895 44 3.65 Other time deposits 10,589 76 2.90 Deposits in foreign office 4,963 30 2.45 Total interest-bearing deposits 44,023 206 1.90 Federal funds purchased and securities sold under repurchase agreements 4,475 25 2.24 Bank notes and other short-term borrowings 2,947 17 2.38 Long-term debt (e) 14,785 131 3.77 Total interest-bearing liabilities 66,230 379 2.34 Noninterest-bearing deposits 11,534 Accrued expense and other liabilities 6,100 Total liabilities 83,864 Shareholders' equity 7,094 Total liabilities and shareholders' equity $90,958 Interest rate spread (TE) 3.28 % Net interest income (TE) and net interest margin (TE) 714 3.66 % TE adjustment (a) 28 Net interest income, GAAP basis $686 (a) Interest income on tax-exempt securities and loans has been adjusted to a taxable-equivalent basis using the statutory federal income tax rate of 35%. (b) For purposes of these computations, nonaccrual loans are included in average loan balances. (c) During the first quarter of 2006, Key reclassified $760 million of average loans and related interest income from the commercial lease financing component of the commercial loan portfolio to the commercial, financial and agricultural component to more accurately reflect the nature of these receivables. Balances presented for prior periods were not reclassified. (d) Yield is calculated on the basis of amortized cost. (e) Rate calculation excludes basis adjustments related to fair value hedges. TE = Taxable Equivalent GAAP = U.S. generally accepted accounting principles Noninterest Income (in millions) Three months ended 3-31-06 12-31-05 3-31-05 Trust and investment services income (a) $135 $134 $138 Service charges on deposit accounts 72 76 70 Investment banking and capital markets income (a) 60 62 55 Operating lease income 52 50 46 Letter of credit and loan fees 40 49 40 Corporate-owned life insurance income 25 31 28 Electronic banking fees 24 26 22 Net gains from loan securitizations and sales 10 34 19 Net securities gains (losses) 1 3 (6) Other income: Insurance income 14 15 11 Loan securitization servicing fees 5 5 5 Credit card fees 3 2 3 Net gains (losses) from principal investing (3) 16 12 Miscellaneous income 43 58 57 Total other income 62 96 88 Total noninterest income $481 $561 $500 (a) Additional detail provided in tables below. Trust and Investment Services Income (in millions) Three months ended 3-31-06 12-31-05 3-31-05 Brokerage commissions and fee income $62 $61 $63 Personal asset management and custody fees 39 38 38 Institutional asset management and custody fees 34 35 37 Total trust and investment services income $135 $134 $138 Investment Banking and Capital Markets Income (in millions) Three months ended 3-31-06 12-31-05 3-31-05 Investment banking income $22 $30 $17 Dealer trading and derivatives income 7 10 19 Income from other investments 21 11 10 Foreign exchange income 10 11 9 Total investment banking and capital markets income $60 $62 $55 Noninterest Expense (dollars in millions) Three months ended 3-31-06 12-31-05 3-31-05 Personnel (a) $405 $416 $390 Net occupancy 63 68 91 (b) Computer processing 56 57 51 Operating lease expense 41 40 38 Professional fees 33 42 28 Marketing 18 30 25 Equipment 26 27 28 Other expense: Postage and delivery 13 14 13 Franchise and business taxes 10 9 8 Telecommunications 7 7 7 OREO expense, net 1 2 2 Provision for losses on lending- related commitments -- -- (11) Miscellaneous expense 97 122 99 Total other expense 128 154 118 Total noninterest expense $770 $834 $769 Average full-time equivalent employees 19,694 19,417 19,571 (a) Additional detail provided in table below. (b) Includes a charge of $30 million to adjust the accounting for rental expense associated with operating leases from an escalating to a straight-line basis. Personnel Expense (in millions) Three months ended 3-31-06 12-31-05 3-31-05 Salaries $231 $219 $217 Incentive compensation 79 115 75 Employee benefits 81 55 74 Stock-based compensation 14 24 18 Severance -- 3 6 Total personnel expense $405 $416 $390 Loan Composition (dollars in millions) Percent change 3-31-06 vs. 3-31-06 12-31-05 3-31-05 12-31-05 3-31-05 Commercial, financial and agricultural (a) $21,681 $20,579 $19,275 5.4 % 12.5 % Commercial real estate: Commercial mortgage 8,145 8,360 8,259 (2.6) (1.4) Construction 7,507 7,109 5,839 5.6 28.6 Total commercial real estate loans 15,652 15,469 14,098 1.2 11.0 Commercial lease financing (a) 9,668 10,352 10,048 (6.6) (3.8) Total commercial loans 47,001 46,400 43,421 1.3 8.2 Real estate -- residential mortgage 1,435 1,458 1,489 (1.6) (3.6) Home equity 13,429 13,488 13,936 (.4) (3.6) Consumer -- direct 1,691 1,794 1,855 (5.7) (8.8) Consumer -- indirect: Automobile lease financing 10 19 64 (47.4) (84.4) Marine 2,804 2,715 2,641 3.3 6.2 Other 610 604 612 1.0 (.3) Total consumer -- indirect loans 3,424 3,338 3,317 2.6 3.2 Total consumer loans 19,979 20,078 20,597 (.5) (3.0) Total loans $66,980 $66,478 $64,018 .8 % 4.6 % (a) At March 31, 2006, Key reclassified $792 million of loans from the commercial lease financing component of the commercial loan portfolio to the commercial, financial and agricultural component to more accurately reflect the nature of these receivables. Balances presented for prior periods were not reclassified. Loans Held for Sale Composition (dollars in millions) Percent change 3-31-06 vs. 3-31-06 12-31-05 3-31-05 12-31-05 3-31-05 Commercial, financial and agricultural $189 $85 -- 122.4 % N/M Real estate -- commercial mortgage 411 525 $248 (21.7) 65.7 % Real estate -- residential mortgage 14 11 22 27.3 (36.4) Real estate -- construction 62 51 -- 21.6 N/M Commercial lease financing 4 -- -- N/M N/M Home equity 1 -- 1 N/M -- Education 2,930 2,687 2,514 9.0 16.5 Automobile 20 22 746 (9.1) (97.3) Total loans held for sale $3,631 $3,381 $3,531 7.4 % 2.8 % N/M = Not Meaningful Summary of Loan Loss Experience (dollars in millions) Three months ended 3-31-06 12-31-05 3-31-05 Average loans outstanding during the period $66,682 $66,105 $63,778 Allowance for loan losses at beginning of period $966 $1,093 $1,138 Loans charged off: Commercial, financial and agricultural 24 22 25 Real estate -- commercial mortgage 3 3 3 Real estate -- construction 2 -- 5 Total commercial real estate loans 5 3 8 Commercial lease financing 6 140 12 Total commercial loans 35 165 45 Real estate -- residential mortgage 1 2 2 Home equity 8 6 6 Consumer -- direct 10 10 8 Consumer -- indirect 11 4 17 Total consumer loans 30 22 33 65 187 78 Recoveries: Commercial, financial and agricultural 12 7 5 Real estate -- commercial mortgage 1 1 1 Real estate -- construction -- 1 -- Total commercial real estate loans 1 2 1 Commercial lease financing 5 8 10 Total commercial loans 18 17 16 Home equity 2 1 1 Consumer -- direct 2 2 2 Consumer -- indirect 4 3 5 Total consumer loans 8 6 8 26 23 24 Net loans charged off (39) (164) (54) Provision for loan losses 39 36 44 Foreign currency translation adjustment -- 1 -- Allowance for loan losses at end of period $966 $966 $1,128 Net loan charge-offs to average loans .23 % .98 % .34 % Allowance for loan losses to period- end loans 1.44 1.45 1.76 Allowance for loan losses to nonperforming loans 327.46 348.74 377.26 Changes in Allowance for Credit Losses on Lending-Related Commitments (in millions) Three months ended 3-31-06 12-31-05 3-31-05 Balance at beginning of period $59 $59 $66 Credit for losses on lending-related commitments -- -- (11) Balance at end of period (a) $59 $59 $55 (a) Included in accrued expenses and other liabilities on the consolidated balance sheet. Summary of Nonperforming Assets and Past Due Loans (dollars in millions) 3-31-06 12-31-05 9-30-05 6-30-05 3-31-05 Commercial, financial and agricultural $68 $63 $50 $58 $46 Real estate -- commercial mortgage 42 43 33 36 41 Real estate -- construction 4 2 3 3 5 Total commercial real estate loans 46 45 36 39 46 Commercial lease financing 29 39 151 73 75 Total commercial loans 143 147 237 170 167 Real estate -- residential mortgage 43 41 40 38 43 Home equity 97 79 75 74 76 Consumer -- direct 6 2 3 4 3 Consumer -- indirect 6 8 5 6 10 Total consumer loans 152 130 123 122 132 Total nonperforming loans 295 277 360 292 299 Nonperforming loans held for sale 2 3 2 1 6 OREO 21 25 29 33 58 Allowance for OREO losses (1) (2) (3) (2) (4) OREO, net of allowance 20 23 26 31 54 Other nonperforming assets 3 4 5 14 12 Total nonperforming assets $320 $307 $393 $338 $371 Accruing loans past due 90 days or more $107 $90 $94 $74 $79 Accruing loans past due 30 through 89 days 498 491 550 475 495 Nonperforming loans to period-end loans .44 % .42 % .55 % .45 % .47 % Nonperforming assets to period-end loans plus OREO and other nonperforming assets .48 .46 .60 .52 .58 Summary of Changes in Nonperforming Loans (in millions) 1Q06 4Q05 Balance at beginning of period $277 $360 Loans placed on nonaccrual status 100 142 Charge-offs (65) (187) Loans sold (2) (2) Payments (15) (27) Loans returned to accrual status -- (9) Balance at end of period $295 $277 Line of Business Results (dollars in millions) Community Banking 1Q06 4Q05 3Q05 2Q05 1Q05 Summary of operations Total revenue (TE) $643 $666 $659 $644 $624 Provision for loan losses 29 30 26 18 28 Noninterest expense 441 484 457 434 454 Net income 108 95 110 120 89 Average loans and leases 26,739 27,267 27,131 27,038 26,794 Average deposits 45,835 45,730 44,705 43,719 43,185 Net loan charge- offs 29 32 25 25 33 Return on average allocated equity 20.01 % 17.08 % 20.00 % 22.17 % 16.65 % Average full-time equivalent employees 8,873 8,747 8,785 8,698 8,827 Supplementary information (lines of business) Regional Banking Total revenue (TE) $547 $559 $557 $546 $535 Provision for loan losses 26 22 20 19 32 Noninterest expense 393 428 406 384 410 Net income 80 68 82 89 58 Average loans and leases 18,776 19,010 19,093 19,114 19,302 Average deposits 42,222 41,929 41,126 40,421 39,981 Net loan charge- offs 22 26 23 21 25 Return on average allocated equity 21.80 % 18.00 % 22.00 % 24.15 % 15.86 % Average full-time equivalent employees 8,519 8,386 8,419 8,316 8,416 Commercial Banking Total revenue (TE) $96 $107 $102 $98 $89 Provision for loan losses 3 8 6 (1) (4) Noninterest expense 48 56 51 50 44 Net income (loss) 28 27 28 31 31 Average loans and leases 7,963 8,257 8,038 7,924 7,492 Average deposits 3,613 3,801 3,579 3,298 3,204 Net loan charge-offs 7 6 2 4 8 Return on average allocated equity 16.20 % 15.13 % 15.80 % 17.94 % 18.35 % Average full-time equivalent employees 354 361 366 382 411 Community Banking Percent change 1Q06 vs. 4Q05 1Q05 Summary of operations Total revenue (TE) (3.5)% 3.0 % Provision for loan losses (3.3) 3.6 Noninterest expense (8.9) (2.9) Net income 13.7 21.3 Average loans and leases (1.9) (.2) Average deposits .2 6.1 Net loan charge-offs (9.4) (12.1) Return on average allocated equity N/A N/A Average full-time equivalent employees 1.4 .5 Supplementary information (lines of business) Regional Banking Total revenue (TE) (2.1)% 2.2 % Provision for loan losses 18.2 (18.8) Noninterest expense (8.2) (4.1) Net income 17.6 37.9 Average loans and leases (1.2) (2.7) Average deposits .7 5.6 Net loan charge-offs (15.4) (12.0) Return on average allocated equity N/A N/A Average full-time equivalent employees 1.6 1.2 Commercial Banking Total revenue (TE) (10.3)% 7.9 % Provision for loan losses (62.5) N/M Noninterest expense (14.3) 9.1 Net income (loss) 3.7 (9.7) Average loans and leases (3.6) 6.3 Average deposits (4.9) 12.8 Net loan charge-offs 16.7 (12.5) Return on average allocated equity N/A N/A Average full-time equivalent employees (1.9) (13.9) Line of Business Results (continued) (dollars in millions) National Banking 1Q06 4Q05 3Q05 2Q05 1Q05 Summary of operations Total revenue (TE) $624 $644 $601 $585 $591 Provision for loan losses 10 6 17 2 16 Noninterest expense 332 358 328 325 306 Net income 177 175 160 161 168 Average loans and leases 39,534 38,398 37,072 36,842 36,449 Average deposits 9,962 8,580 7,785 7,535 6,658 Net loan charge- offs 10 132 24 23 21 Return on average allocated equity 18.71 % 18.43 % 17.36 % 17.71 % 18.17 % Average full-time equivalent employees 4,455 4,403 4,419 4,502 4,590 Supplementary information (lines of business) Real Estate Capital Total revenue (TE) $154 $163 $149 $138 $103 Provision for loan losses 1 2 1 (5) 3 Noninterest expense 60 68 65 55 48 Net income 58 58 52 56 33 Average loans and leases 12,467 12,038 11,265 10,596 9,794 Average deposits 3,214 2,467 2,100 1,728 1,514 Net loan charge- offs 2 -- -- 3 4 Return on average allocated equity 21.90 % 22.38 % 20.73 % 23.74 % 14.06 % Average full-time equivalent employees 981 873 812 774 758 Equipment Finance Total revenue (TE) $123 $128 $123 $127 $126 Provision for loan losses 8 (5) 3 7 (4) Noninterest expense 70 79 72 75 74 Net income 28 33 30 28 36 Average loans and leases 9,569 9,458 9,133 8,892 8,951 Average deposits 15 15 14 11 11 Net loan charge- offs 3 132 11 2 1 Return on average allocated equity 14.04 % 16.59 % 15.66 % 14.82 % 19.36 % Average full-time equivalent employees 935 971 966 963 1,017 Institutional and Capital Markets Total revenue (TE) $205 $189 $178 $168 $178 Provision for loan losses -- 6 -- 1 (2) Noninterest expense 125 113 108 95 95 Net income 51 45 44 44 52 Average loans and leases 7,823 7,358 7,316 7,824 8,226 Average deposits 6,030 5,434 4,986 5,152 4,546 Net loan charge- offs (recoveries) (5) (4) -- 7 2 Return on average allocated equity 19.26 % 16.95 % 16.90 % 16.79 % 19.56 % Average full-time equivalent employees 1,234 1,224 1,256 1,213 1,195 Consumer Finance Total revenue (TE) $142 $164 $151 $152 $184 Provision for loan losses 1 3 13 (1) 19 Noninterest expense 77 98 83 100 89 Net income 40 39 34 33 47 Average loans and leases 9,675 9,544 9,358 9,530 9,478 Average deposits 703 664 685 644 587 Net loan charge- offs 10 4 13 11 14 Return on average allocated equity 18.43 % 17.23 % 15.52 % 14.86 % 19.73 % Average full-time equivalent employees 1,305 1,335 1,385 1,552 1,620 National Banking Percent change 1Q06 vs. 4Q05 1Q05 Summary of operations Total revenue (TE) (3.1)% 5.6 % Provision for loan losses 66.7 (37.5) Noninterest expense (7.3) 8.5 Net income 1.1 5.4 Average loans and leases 3.0 8.5 Average deposits 16.1 49.6 Net loan charge-offs (92.4) (52.4) Return on average allocated equity N/A N/A Average full-time equivalent employees 1.2 (2.9) Supplementary information (lines of business) Real Estate Capital Total revenue (TE) (5.5)% 49.5 % Provision for loan losses (50.0) (66.7) Noninterest expense (11.8) 25.0 Net income -- 75.8 Average loans and leases 3.6 27.3 Average deposits 30.3 112.3 Net loan charge-offs N/M (50.0) Return on average allocated equity N/A N/A Average full-time equivalent employees 12.4 29.4 Equipment Finance Total revenue (TE) (3.9)% (2.4)% Provision for loan losses N/M N/M Noninterest expense (11.4) (5.4) Net income (15.2) (22.2) Average loans and leases 1.2 6.9 Average deposits -- 36.4 Net loan charge-offs (97.7) 200.0 Return on average allocated equity N/A N/A Average full-time equivalent employees (3.7) (8.1) Institutional and Capital Markets Total revenue (TE) 8.5 % 15.2 % Provision for loan losses (100.0) 100.0 Noninterest expense 10.6 31.6 Net income 13.3 (1.9) Average loans and leases 6.3 (4.9) Average deposits 11.0 32.6 Net loan charge-offs (recoveries) 25.0 N/M Return on average allocated equity N/A N/A Average full-time equivalent employees .8 3.3 Consumer Finance Total revenue (TE) (13.4)% (22.8)% Provision for loan losses (66.7) (94.7) Noninterest expense (21.4) (13.5) Net income 2.6 (14.9) Average loans and leases 1.4 2.1 Average deposits 5.9 19.8 Net loan charge-offs 150.0 (28.6) Return on average allocated equity N/A N/A Average full-time equivalent employees (2.2) (19.4) TE = Taxable Equivalent N/A = Not Applicable N/M = Not Meaningful DATASOURCE: KeyCorp CONTACT: Analyst, Vernon L. Patterson, +1-216-689-0520, or Media, William C. Murschel, +1-216-689-0457, or Investor Relations, Key Media, http://www.key.com/ir Web site: http://www.key.com/ http://www.key.com/newsroom