KeyCorp.’s (KEY - Analyst Report) third-quarter earnings from continuing operations came in at 23 cents per share, lagging the Zacks Consensus Estimate of 26 cents. This marks a break after six consecutive earnings beat. Moreover, the figure was down 14.8% from the year-ago figure of 27 cents.

Results were mainly influenced by a decline in revenues, partially offset by lower expenses and a fall in provision for loan and lease losses. Continued improvement in asset quality, growth in loan and deposit balances and strong capital ratios were other highlights of the quarter.

Net income from continuing operations attributable to common shareholders came in at $197 million, down 14% year over year.

Behind the Headlines

KeyCorp’s total revenue came in at $998 million, down 4.3% from the prior-year quarter. Further, it was lower than the Zacks Consensus Estimate of $1.04 billion.

Tax-equivalent net interest income fell 0.5% from the prior-year quarter to $581 million. Likewise, net interest margin (NIM) from continuing operations decreased 15 basis points (bps) year over year to 2.96%. The decline in both net interest income (NII) and NIM was mainly due to lower earning asset yields.

The drop in NII was partially offset by increased loan levels, a more favorable mix of lower-cost deposits and higher loan fees. Again, NIM was additionally impacted by higher levels of excess liquidity driven by commercial deposit growth.

Non-interest income declined 9.1% year over year to $417 million. The rise was mainly attributable to a decline in operating lease income and other leasing gains, net losses from principal investing and a fall in mortgage servicing fees. These were, however, partly offset by a rise in other income, and investment banking and debt placement fees.

Non-interest expense inched down 1.7% from the prior-year quarter to $704 million. The decrease was mainly due to a fall in personnel and business services, and professional fees, partly offset by a rise in other expenses.

As of Sep 30, 2014, average total deposits came in at $67.7 billion, up 3.6% year over year. Further, average total loans were $56.2 billion, up 4.8% from Sep 30, 2013.

Credit Quality

Credit quality continued to improve during the quarter. Nonperforming assets, as a percentage of period-end portfolio loans, Other Real Estate Owned Properties (OREO) assets and other nonperforming assets, were 0.74%, down 34 bps year over year. Moreover, net loan charge-offs, as a percentage of average loans, decreased 6 bps year over year to 0.22%.

KeyCorp’s allowance for loan and lease losses was $804 million, down 7.4% from the year-ago quarter. Further, provision for loan and lease losses came in at $21 million, plummeting 81.1% year over year.

Capital Ratios

Capital ratios were strong during the quarter. KeyCorp's tangible common equity to tangible assets ratio was 10.29% as of Sep 30, 2014, compared with 9.93% as of Sep 30, 2013. In addition, Tier 1 common equity ratio was 11.26% versus 11.17% as of Sep 30, 2013. Again, Tier 1 risk-based capital ratio was 12.00% versus 11.92% as on Sep 30, 2013.

The company’s estimated Basel III Tier 1 common ratio was 10.71% at the end of the quarter. This exceeded the fully phased-in required minimum Tier 1 common equity ratio of 7.00%.

Capital Deployment Activities

During the reported quarter, KeyCorp bought back $119 million worth of common shares.

KeyCorp’s 2014 capital plan includes share buyback of up to $542 million through first-quarter 2015.

Our Take

The sluggish economic recovery, lower interest rate environment and stringent regulatory restrictions remain as major concerns. These are putting pressure on the company’s top line.

However, a decline in expenses and an efficient organic growth strategy should continue supporting KeyCorp’s long-term performance. Also, we are optimistic about the company’s strong balance sheet and capital position.

At present, KeyCorp has a Zacks Rank #3 (Hold).

Performance of Other Major Banks

Among other major regional banks, Citigroup Inc. (C - Analyst Report) reported third-quarter 2014 adjusted earnings per share of $1.15, outpacing the Zacks Consensus Estimate of $1.12.

JPMorgan Chase & Co. (JPM - Analyst Report) posted third-quarter earnings of $1.62 per share, beating the Zacks Consensus Estimate of $1.39.

Wells Fargo & Co. (WFC - Analyst Report) earned $1.02 per share in third-quarter 2014, which came in line with the Zacks Consensus Estimate.

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