KeyCorp (NYSE: KEY) CEO Sounds Cautiously Optimistic Tone; Reports First Quarterly Profit in 2 Years

KeyCorp (KEY) reported its first quarterly profit in two years.

The Cleveland-based banking company attributed the positive report to fewer non-performing loans, more income from fees and better cost controls.

“These results are encouraging and the return to profitability represents an important step forward for our company,” CEO Henry L. Meyer III said. “Continued improvement in credit quality across most of our businesses was the principal contributor to the quarterly performance.

However, looking ahead Meyer conceded there were challenges. “Key is now focusing on opportunities in a gradually improving economy. Some uncertainty remains in the markets, and consumer and business loan demand is soft,” he said. “Recognizing current economic conditions, we remain focused on investing in our relationship businesses, maintaining our strong capital and liquidity positions, reducing risk, and careful expense control as we navigate through the economic cycle.”

KeyCorp, which had been nagged by a flood of bad loans, said it earned $29 million, or 3 cents per share, in the second quarter.

KeyCorp lost $390 million, or 68 cents per share, in the April-June quarter of 2009.

The company easily beat the Wall Street forecast of an 11-cent loss.

Net charge-offs dropped by $87 million in the second quarter and bad loans decreased by $362 million during the period.

The provision for loan losses was $228 million in the most recent quarter, down from $823 million in the second quarter of 2009 and down from $413 million from the first quarter of 2010.

For the first six months of the year, KeyCorp lost $67 million, or 8 cents per share, compared with a January-June 2009 loss of $926 million, or $1.73 per share.

Meyer also noted that Key opened 18 new branches during the first six months and expects to open an additional 22 new branches during the remainder of 2010. The additional branches would increase its market presence in selected markets of its 14-state branch network.

In addition, Key continues with its plans to modernize its existing branches.

The earnings report comes on the heels of its announcement Wednesday of Key Coverage Checking, a new checking account that offers a variety of solutions based on a customer’s banking needs, including flexible overdraft fee options and ID Theft protection. The account will be available to clients on August 15, 2010.

Shares were up over 6.5 percent, or 50 cents, to $8.04 in early market trading.