Updated from 8:56 a.m. ET with market reaction and comment from Jefferies analyst Ken Usdin.
NEW YORK ( TheStreet) -- KeyCorp (KEY - Get Report) of Cleveland on Thursday reported fourth-quarter operating results slightly ahead of expectations, but the real story is the company's significant increase in fee income and measures to trim expenses, which have more than offset net interest margin pressure.
The company reported fourth-quarter net income from continuing operations available to common shareholders of $229 million, or 26 cents a share, coming in a penny ahead of the consensus estimate among analysts polled by Thomson Reuters. Those results compare to net income from continuing operations available to common shareholders of $229 million, or 25 cents a share, during the third quarter, and $190 million, or 20 cents a share, during the fourth quarter of 2012. The higher fourth-quarter EPS reflected a lower share count. KeyCorp repurchased $474 million worth of common shares during 2013, including $99 billion in buybacks during the fourth quarter. This reduced the share count by 0.8% sequentially and 3.8% from a year earlier.
KeyCorp reported fourth-quarter net interest income of $589 million, increasing slightly from $584 million the previous quarter, but down from $607 million a year earlier, as the net interest margin narrowed. The fourth-quarter margin was a tax-adjusted 3.01%, down from 3.11% in the third quarter and 3.37% in the fourth quarter of 2012.
Average total loans grew 0.6% during the fourth quarter and 3.4% from a year earlier to $53.608 billion. Following the trend for many large regional banks, the strongest growth category was commercial and industrial loans, which were up 1.5% sequentially and 7.9% year-over-year to an average of $24.218 billion during the fourth quarter.
The bank's noninterest income totaled $453 million during the fourth quarter, down slightly from $459 million the previous quarter, but up from $439 million a year earlier. The sequential decline reflected a "decline of $19 million in gains related to leveraged lease terminations," according to the company. The fee income category showing the largest increase was mortgage servicing fees, which rose to $22 million during the fourth quarter from $15 million in the third quarter and $7 million during the fourth quarter of 2012.
"We also had a record year for investment banking and debt placement fees, with five consecutive years of growth," said KeyCorp CEO Beth Mooney in the company's earnings press release.
KeyCorp's noninterest expense totaled $712 million during the fourth quarter, declining from $716 million the previous quarter and $734 million a year earlier.
"We achieved the goal we set in June 2012, by implementing annualized cost savings of $241 million. With increased cost discipline embedded in our culture, we are poised to drive further improvements in efficiency and productivity," Mooney said.
KeyCorp's efficiency ratio -- overhead expenses as a percentage of revenue -- improved to 67.4% during the fourth quarter from 67.5% the previous quarter and 69.0% a year earlier.
The bank's shares were down 3.5% in premarket trading to $14.09, indicating disappointment with the bank's sequential results.
Jefferies analyst Ken Usdin in a note to clients Thursday wrote "For 4Q, loan, deposit, net interest income, and credit trends were positive, but expenses were higher-than-guided."
"Overall, Usdin added, "pre-provision [for loan losses] income was slightly softer-than-expected in 4Q due to the expense step-up, but the '14 outlook ([net interest income] stable, fees up low single-digits, costs down low single-digits) looks supportive of numbers."
Udsin rates KeyCorp a "hold," with a $14 price target.
The following table shows the performance of KeyCorp's stock against the KBW Bank Index (I:BKX) and the S&P 500 (^GSPC) since the end of 2011:
data by YCharts
-- Written by Philip van Doorn in Jupiter, Fla.