Updated from 9:52 a.m. EDT

KeyCorp ( KEY) reported a far wider first-quarter loss on Tuesday than the market expected, citing a sharp decline in asset values and a build to reserves for additional losses ahead.

The Cleveland-based bank lost $536 million, or $1.09 per common share, compared with a profit of $218 million, or 55 cents per share, a year earlier. The loss was five times greater than the average analyst estimate of 21 cents per share, according to Thomson Reuters.

In light of the results, Key's board of directors intends to slash its quarterly dividend to a penny per share from 6.25 cents per share, beginning with the second quarter, to retain an additional $100 million in capital each year.

Executives were also asked on a conference call whether Key would consider converting any of its $675 million in convertible preferred stock into common shares, a move that would boost capital metrics and tangible common equity, but dilute existing investors. CFO Jeff Weeden said management is "certainly looking at all the different opportunities that may be out there, and that is one that we have had discussions on."

Key's shares slid nearly 17% to $6.15 in recent trading.

"Our results reflect an extremely challenging operating environment and the expedient steps we continue to take to identify problem loans and to build Key's loan loss reserves," CEO Henry Meyer said in a statement.

Key added $857 million to its provision for loan losses, as net loan charge-offs climbed to $492 million, or 2.65% of average loans, from $121 million, or 0.67% a year ago, and $342 million, or 1.77%, at the end of 2008.

The company also determined during the quarter that the estimated fair value of its National Banking unit declined by $187 million after taxes, as the firm wrote off all goodwill associated with the division. Key posted $72 million in losses from principal investing as well.

Key is in the process of shedding assets with low returns, but Meyer said on the conference call that progress has been "slower than we would have liked" over the past several quarters due to the economic situation. He added that management was "disappointed" with progress on selling mortgage-backed security portfolios, which has been hindered by a lack of liquidity in the debt market.

Key's core banking operations also appeared to be under stress, as net interest income fell to $620 million -- down 12% from a year ago and 4% from the previous quarter. Net interest margins, or the difference between the rates at which a bank borrows and lends, fell to 2.77% from 3.14% a year ago, as a drop in Key's borrowing rates failed to offset a sharper decline in rates on earnings assets. The company said margins were also hurt by competition for deposits, which forced higher CD rate offerings for consumers.

While the trend is quite different from that seen at larger competitors like Wells Fargo ( WFC), Bank of America ( BAC), JPMorgan Chase ( JPM) and Citigroup ( C), Meyer said that the core banking franchise is striking "a careful balance between managing risk effectively and doing our part to help the country regain its financial viability."