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KeyCorp Profits Drop Sharply

And the bank increases its provision for loan losses in the first quarter.

Updated from 3:24 p.m. EDT

KeyCorp

(KEY) - Get KeyCorp Report

shares tumbled Thursday after the company said its first-quarter earnings plunged 38% amid turmoil in the housing and credit markets.

The banking company's stock was recently trading down $1.08, or 4.5%, at $23.12.

KeyCorp posted $218 million, or 54 cents per share, in earnings, down from $350 million, or 87 cents per share, a year earlier. Though results were helped by redeeming stock from

Visa's

(V) - Get Visa Inc. Report

$17.3 billion initial public offering last month, it was not enough to offset significant losses from the tanking housing market.

The Visa IPO contributed $103 million after taxes, or 26 cents per share, to KeyCorp's profit. But the company lost $118 million, or 30 cents per share, from devalued loans and securities and from boosting reserves to cover such losses.

Analysts had expected a profit of 35 cents per share, on average, according to Thomson Financial. Those estimates typically exclude special items.

KeyCorp's net interest margins fell due to tighter loan and deposit spreads as nonperforming assets and net charge-offs continued to climb. The portion of assets considered "nonperforming" rose to 1.46% from 0.54% a year earlier, and 1.08% at the end of last year. KeyCorp's commercial real-estate holdings in Florida and Southern California -- which also have residential segments -- were principally responsible for the trend.

Oppenheimer analyst Terry McEvoy called the company's results "sloppy with a lot of moving pieces" in a note Thursday morning. He added that the increase in nonperforming assets came primarily in all the wrong areas and will not go unnoticed."

CEO Henry Meyer said KeyCorp's weak results "reflect the market volatility and rising credit costs facing the financial services industry." In a morning conference call, the CEO predicted a further rise in nonperforming assets, perhaps through the third quarter, but said "things are very difficult to predict."

Meyer also said it would be "inappropriate" to shed any light on continued speculation that KeyCorp has been considering a takeover of nearby competitor National City. The latter company has indicated it may put itself on the block due to the mortgage crisis and its lagging share price.

However, Meyer said KeyCorp is not closing off any options. It has particular interest in companies where KeyCorp does not have "the optimal market share to be competitive," he added.

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. These stocks were recently trading at $8.35, +6.37%, $33.26, +0.51%, $20.40, +1.49% and $37.57, +1.60% respectively. For more on the value of knowing what you own, visit TheStreet.com's

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