FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2009
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From To
Commission File Number 1-11302
(Exact name of registrant as specified in its charter)
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Ohio
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34-6542451 |
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(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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127 Public Square, Cleveland, Ohio
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44114-1306 |
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(Address of principal executive offices)
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(Zip Code) |
(216) 689-6300
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer þ |
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Accelerated filer o |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
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Common Shares with a par value of $1 each
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878,544,699 Shares |
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(Title of class)
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(Outstanding at August 7, 2009) |
KEYCORP
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
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June 30, |
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December 31, |
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June 30, |
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in millions, except share data |
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2009 |
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2008 |
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2008 |
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(Unaudited) |
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(Unaudited) |
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ASSETS |
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Cash and due from banks |
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$ |
723 |
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$ |
1,257 |
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$ |
1,912 |
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Short-term investments |
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3,487 |
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5,221 |
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826 |
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Trading account assets |
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771 |
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1,280 |
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1,483 |
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Securities available for sale |
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12,174 |
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8,437 |
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8,312 |
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Held-to-maturity securities (fair value: $25, $25 and $25) |
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25 |
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25 |
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25 |
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Other investments |
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1,450 |
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1,526 |
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1,559 |
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Loans, net of unearned income of $1,995, $2,345 and $2,532 |
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70,803 |
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76,504 |
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75,855 |
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Less: Allowance for loan losses |
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2,499 |
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1,803 |
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1,421 |
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Net loans |
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68,304 |
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74,701 |
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74,434 |
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Loans held for sale |
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909 |
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1,027 |
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1,833 |
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Premises and equipment |
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858 |
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840 |
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748 |
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Operating lease assets |
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842 |
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990 |
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1,089 |
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Goodwill |
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917 |
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1,138 |
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1,598 |
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Other intangible assets |
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106 |
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128 |
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146 |
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Corporate-owned life insurance |
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3,016 |
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2,970 |
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2,917 |
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Derivative assets |
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1,182 |
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1,896 |
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1,693 |
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Accrued income and other assets |
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3,028 |
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3,095 |
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2,969 |
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Total assets |
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$ |
97,792 |
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$ |
104,531 |
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$ |
101,544 |
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LIABILITIES |
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Deposits in domestic offices: |
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NOW and money market deposit accounts |
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$ |
23,939 |
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$ |
24,191 |
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$ |
27,278 |
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Savings deposits |
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1,795 |
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1,712 |
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1,809 |
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Certificates of deposit ($100,000 or more) |
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13,486 |
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11,991 |
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8,699 |
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Other time deposits |
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15,055 |
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14,763 |
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12,541 |
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Total interest-bearing |
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54,275 |
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52,657 |
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50,327 |
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Noninterest-bearing |
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12,977 |
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11,485 |
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10,561 |
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Deposits in foreign office ¾ interest-bearing |
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632 |
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1,118 |
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3,508 |
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Total deposits |
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67,884 |
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65,260 |
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64,396 |
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Federal funds purchased and securities sold under repurchase agreements |
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1,530 |
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1,557 |
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2,088 |
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Bank notes and other short-term borrowings |
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1,710 |
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8,477 |
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5,985 |
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Derivative liabilities |
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530 |
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1,038 |
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637 |
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Accrued expense and other liabilities |
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1,616 |
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2,523 |
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4,447 |
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Long-term debt |
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13,462 |
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14,995 |
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15,106 |
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Total liabilities |
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86,732 |
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93,850 |
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92,659 |
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EQUITY |
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Preferred stock, $1 par value, authorized 25,000,000 shares: |
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7.750% Noncumulative Perpetual Convertible Preferred Stock, Series A, $100 liquidation
preference; authorized 7,475,000 shares;
issued 2,904,839, 6,575,000 and 6,500,000
shares |
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291 |
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658 |
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650 |
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Fixed-Rate Cumulative Perpetual Preferred Stock, Series B, $100,000 liquidation
preference; authorized and issued 25,000 shares |
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2,422 |
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2,414 |
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Common shares, $1 par value; authorized 1,400,000,000 shares;
issued 865,070,221, 584,061,120 and 576,995,163 shares |
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865 |
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584 |
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577 |
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Common stock warrant |
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87 |
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87 |
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Capital surplus |
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3,292 |
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2,553 |
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2,544 |
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Retained earnings |
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5,878 |
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6,727 |
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7,461 |
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Treasury stock, at cost (67,824,373, 89,058,634 and 91,333,157 shares) |
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(1,984 |
) |
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(2,608 |
) |
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(2,675 |
) |
Accumulated other comprehensive income |
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65 |
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|
149 |
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Key shareholders equity |
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10,851 |
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10,480 |
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8,706 |
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Noncontrolling interests |
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209 |
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201 |
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|
179 |
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Total equity |
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11,060 |
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10,681 |
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|
8,885 |
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Total liabilities and equity |
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$ |
97,792 |
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$ |
104,531 |
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$ |
101,544 |
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See Notes to Consolidated Financial Statements (Unaudited).
3
Consolidated Statements of Income (Unaudited)
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Three months ended June 30, |
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Six months ended June 30, |
dollars in millions, except per share amounts |
|
2009 |
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2008 |
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2009 |
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2008 |
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INTEREST INCOME |
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Loans |
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$ |
857 |
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|
$ |
717 |
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$ |
1,740 |
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$ |
1,840 |
|
Loans held for sale |
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9 |
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20 |
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21 |
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|
107 |
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Securities available for sale |
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99 |
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|
111 |
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|
207 |
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|
220 |
|
Held-to-maturity securities |
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|
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|
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1 |
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1 |
|
Trading account assets |
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13 |
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|
10 |
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26 |
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23 |
|
Short-term investments |
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3 |
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8 |
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6 |
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17 |
|
Other investments |
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13 |
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14 |
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25 |
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26 |
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|
Total interest income |
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994 |
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|
|
880 |
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|
2,026 |
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|
2,234 |
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INTEREST EXPENSE |
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Deposits |
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|
296 |
|
|
|
347 |
|
|
|
596 |
|
|
|
775 |
|
Federal funds purchased and securities sold under repurchase agreements |
|
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1 |
|
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15 |
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2 |
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|
43 |
|
Bank notes and other short-term borrowings |
|
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4 |
|
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|
27 |
|
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|
10 |
|
|
|
66 |
|
Long-term debt |
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|
101 |
|
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|
133 |
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|
|
212 |
|
|
|
279 |
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|
Total interest expense |
|
|
402 |
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|
|
522 |
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|
|
820 |
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|
1,163 |
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|
|
|
|
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|
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NET INTEREST INCOME |
|
|
592 |
|
|
|
358 |
|
|
|
1,206 |
|
|
|
1,071 |
|
Provision for loan losses |
|
|
850 |
|
|
|
647 |
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|
|
1,725 |
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|
|
834 |
|
|
Net interest (expense) income after provision for loan losses |
|
|
(258 |
) |
|
|
(289 |
) |
|
|
(519 |
) |
|
|
237 |
|
|
|
|
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|
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NONINTEREST INCOME |
|
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|
|
|
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|
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|
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|
|
|
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|
Trust and investment services income |
|
|
119 |
|
|
|
130 |
|
|
|
229 |
|
|
|
253 |
|
Service charges on deposit accounts |
|
|
83 |
|
|
|
93 |
|
|
|
165 |
|
|
|
181 |
|
Operating lease income |
|
|
59 |
|
|
|
68 |
|
|
|
120 |
|
|
|
137 |
|
Letter of credit and loan fees |
|
|
45 |
|
|
|
51 |
|
|
|
83 |
|
|
|
88 |
|
Corporate-owned life insurance income |
|
|
25 |
|
|
|
28 |
|
|
|
52 |
|
|
|
56 |
|
Electronic banking fees |
|
|
27 |
|
|
|
27 |
|
|
|
51 |
|
|
|
51 |
|
Insurance income |
|
|
16 |
|
|
|
20 |
|
|
|
34 |
|
|
|
35 |
|
Investment banking and capital markets income |
|
|
17 |
|
|
|
80 |
|
|
|
35 |
|
|
|
88 |
|
Net securities gains (losses) (a) |
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|
125 |
|
|
|
(1 |
) |
|
|
111 |
|
|
|
2 |
|
Net losses from principal investing |
|
|
(6 |
) |
|
|
(14 |
) |
|
|
(78 |
) |
|
|
(3 |
) |
Net (losses) gains from loan securitizations and sales |
|
|
(3 |
) |
|
|
33 |
|
|
|
5 |
|
|
|
(68 |
) |
Gain related to exchange of common shares for capital securities |
|
|
95 |
|
|
|
|
|
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|
95 |
|
|
|
|
|
Gain from sale/redemption of Visa Inc. shares |
|
|
|
|
|
|
|
|
|
|
105 |
|
|
|
165 |
|
Other income |
|
|
113 |
|
|
|
32 |
|
|
|
193 |
|
|
|
86 |
|
|
Total noninterest income |
|
|
715 |
|
|
|
547 |
|
|
|
1,200 |
|
|
|
1,071 |
|
|
|
|
|
|
|
|
|
|
|
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|
NONINTEREST EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel |
|
|
377 |
|
|
|
402 |
|
|
|
738 |
|
|
|
809 |
|
Net occupancy |
|
|
63 |
|
|
|
62 |
|
|
|
129 |
|
|
|
128 |
|
Operating lease expense |
|
|
49 |
|
|
|
55 |
|
|
|
99 |
|
|
|
113 |
|
Computer processing |
|
|
48 |
|
|
|
43 |
|
|
|
95 |
|
|
|
90 |
|
Professional fees |
|
|
47 |
|
|
|
32 |
|
|
|
81 |
|
|
|
55 |
|
FDIC assessment |
|
|
70 |
|
|
|
2 |
|
|
|
100 |
|
|
|
4 |
|
Equipment |
|
|
25 |
|
|
|
23 |
|
|
|
47 |
|
|
|
47 |
|
Marketing |
|
|
17 |
|
|
|
21 |
|
|
|
31 |
|
|
|
35 |
|
Intangible assets impairment |
|
|
|
|
|
|
|
|
|
|
196 |
|
|
|
|
|
Other expense |
|
|
174 |
|
|
|
137 |
|
|
|
296 |
|
|
|
225 |
|
|
Total noninterest expense |
|
|
870 |
|
|
|
777 |
|
|
|
1,812 |
|
|
|
1,506 |
|
|
|
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |
|
|
(413 |
) |
|
|
(519 |
) |
|
|
(1,131 |
) |
|
|
(198 |
) |
Income taxes |
|
|
(180 |
) |
|
|
610 |
|
|
|
(422 |
) |
|
|
713 |
|
|
LOSS FROM CONTINUING OPERATIONS |
|
|
(233 |
) |
|
|
(1,129 |
) |
|
|
(709 |
) |
|
|
(911 |
) |
Income
(loss) from discontinued operations, net of taxes of ($4), $1, ($6) and $2, respectively (see Note 3) |
|
|
10 |
|
|
|
2 |
|
|
|
(12 |
) |
|
|
3 |
|
|
NET LOSS |
|
|
(223 |
) |
|
|
(1,127 |
) |
|
|
(721 |
) |
|
|
(908 |
) |
Less: Net income (loss) attributable to noncontrolling interests |
|
|
3 |
|
|
|
(1 |
) |
|
|
(7 |
) |
|
|
|
|
|
NET LOSS ATTRIBUTABLE TO KEY |
|
$ |
(226 |
) |
|
$ |
(1,126 |
) |
|
$ |
(714 |
) |
|
$ |
(908 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to Key common shareholders |
|
$ |
(400 |
) |
|
$ |
(1,128 |
) |
|
$ |
(914 |
) |
|
$ |
(911 |
) |
Net loss attributable to Key common shareholders |
|
|
(390 |
) |
|
|
(1,126 |
) |
|
|
(926 |
) |
|
|
(908 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to Key
common shareholders |
|
$ |
(.69 |
) |
|
$ |
(2.71 |
) |
|
$ |
(1.71 |
) |
|
$ |
(2.23 |
) |
Income (loss) from discontinued operations, net of taxes |
|
|
.02 |
|
|
|
|
|
|
|
(.02 |
) |
|
|
.01 |
|
Net loss attributable to Key common shareholders |
|
|
(.68 |
) |
|
|
(2.70 |
) |
|
|
(1.73 |
) |
|
|
(2.23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share assuming dilution: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to Key
common shareholders |
|
$ |
(.69 |
) |
|
$ |
(2.71 |
) |
|
$ |
(1.71 |
) |
|
$ |
(2.23 |
) |
Income (loss) from discontinued operations, net of taxes |
|
|
.02 |
|
|
|
|
|
|
|
(.02 |
) |
|
|
.01 |
|
Net loss attributable to Key common shareholders |
|
|
(.68 |
) |
|
|
(2.70 |
) |
|
|
(1.73 |
) |
|
|
(2.23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share |
|
$ |
.01 |
|
|
$ |
.375 |
|
|
$ |
.0725 |
|
|
$ |
.375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding (000) |
|
|
576,883 |
|
|
|
416,629 |
|
|
|
535,080 |
|
|
|
407,875 |
|
Weighted-average common shares and potential common shares outstanding (000) |
|
|
576,883 |
|
|
|
416,629 |
|
|
|
535,080 |
|
|
|
407,875 |
|
|
|
|
|
(a) |
|
For the three months ended June 30, 2009, impairment losses totaled $7 million, of which $1
million was recognized in equity as a component of accumulated other comprehensive income on
the balance sheet (see Note 5). |
See Notes to Consolidated Financial Statements (Unaudited).
4
Consolidated Statements of Changes in Equity (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
Treasury |
|
|
Other |
|
|
|
|
|
|
|
|
|
Preferred Stock |
|
|
Common Shares |
|
|
Preferred |
|
|
Common |
|
|
Stock |
|
|
Capital |
|
|
Retained |
|
|
Stock, |
|
|
Comprehensive |
|
|
Noncontrolling |
|
|
Comprehensive |
|
dollars in millions, except per share amounts |
|
Outstanding (000) |
|
|
Outstanding (000) |
|
|
Stock |
|
|
Shares |
|
|
Warrant |
|
|
Surplus |
|
|
Earnings |
|
|
at Cost |
|
|
Income (Loss) |
|
|
Interests |
|
|
Income (Loss) |
|
|
BALANCE AT DECEMBER 31, 2007 |
|
|
|
|
|
|
388,793 |
|
|
|
|
|
|
|
$ 492 |
|
|
|
|
|
|
|
$ 1,623 |
|
|
|
$ 8,522 |
|
|
|
$ (3,021 |
) |
|
|
$ 130 |
|
|
|
$ 233 |
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(908 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ (908 |
) |
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains on securities available
for sale, net of income taxes of $10 (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
15 |
|
Net unrealized gains on derivative financial instruments,
net of income taxes of $1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
Net distribution to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54 |
) |
|
|
(54 |
) |
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
Net pension and postretirement benefit costs, net of income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ (943 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared on common shares ($.375 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock issued |
|
|
6,500 |
|
|
|
|
|
|
|
$ 650 |
|
|
|
|
|
|
|
|
|
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued |
|
|
|
|
|
|
85,106 |
|
|
|
|
|
|
|
85 |
|
|
|
|
|
|
|
893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares reissued: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of U.S.B. Holding Co., Inc. |
|
|
|
|
|
|
9,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58 |
|
|
|
|
|
|
|
290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and other employee benefit plans |
|
|
|
|
|
|
1,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13 |
) |
|
|
|
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT JUNE 30, 2008 |
|
|
6,500 |
|
|
|
485,662 |
|
|
|
$ 650 |
|
|
|
$ 577 |
|
|
|
|
|
|
|
$ 2,544 |
|
|
|
$ 7,461 |
|
|
|
$ (2,675 |
) |
|
|
$ 149 |
|
|
|
$ 179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT DECEMBER 31, 2008 |
|
|
6,600 |
|
|
|
495,002 |
|
|
|
$ 3,072 |
|
|
|
$ 584 |
|
|
|
$ 87 |
|
|
|
$ 2,553 |
|
|
|
$ 6,727 |
|
|
|
$ (2,608 |
) |
|
|
$ 65 |
|
|
|
$ 201 |
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(714 |
) |
|
|
|
|
|
|
|
|
|
|
(7 |
) |
|
|
$ (721 |
) |
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized losses on securities available
for sale, net of income taxes of ($23) (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38 |
) |
|
|
|
|
|
|
(38 |
) |
Net unrealized losses on derivative financial instruments,
net of income taxes of ($37) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(61 |
) |
|
|
|
|
|
|
(61 |
) |
Net contribution from noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15 |
|
|
|
15 |
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
|
|
|
|
21 |
|
Net pension and postretirement benefit costs, net of income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ (771 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared on common shares ($.0725 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared on Noncumulative Series A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock ($3.875 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends accrued on Cumulative Series B |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock (5% per annum) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(63 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of discount on Series B Preferred Stock |
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued |
|
|
|
|
|
|
205,439 |
|
|
|
|
|
|
|
206 |
|
|
|
|
|
|
|
781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares exchanged for Series A Preferred Stock |
|
|
(3,670 |
) |
|
|
46,602 |
|
|
|
(367 |
) |
|
|
29 |
|
|
|
|
|
|
|
(167 |
) |
|
|
(5 |
) |
|
|
508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares exchanged for capital securities |
|
|
|
|
|
|
46,338 |
|
|
|
|
|
|
|
46 |
|
|
|
|
|
|
|
196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares reissued for stock options and other
employee benefit plans |
|
|
|
|
|
|
3,865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(86 |
) |
|
|
|
|
|
|
116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT JUNE 30, 2009 |
|
|
2,930 |
|
|
|
797,246 |
|
|
|
$ 2,713 |
|
|
|
$ 865 |
|
|
|
$ 87 |
|
|
|
$ 3,292 |
|
|
|
$ 5,878 |
|
|
|
$ (1,984 |
) |
|
|
|
|
|
|
$ 209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Net of reclassification adjustments. |
See Notes to Consolidated Financial Statements (Unaudited).
5
Consolidated Statements of Cash Flows (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, |
|
in millions |
|
2009 |
|
|
2008 |
|
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(721 |
) |
|
$ |
(908 |
) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
1,725 |
|
|
|
834 |
|
Intangible assets impairment |
|
|
196 |
|
|
|
|
|
Depreciation and amortization expense |
|
|
200 |
|
|
|
217 |
|
Net securities gains |
|
|
(111 |
) |
|
|
(2 |
) |
Gain from sale/redemption of Visa Inc. shares |
|
|
(105 |
) |
|
|
(165 |
) |
Gain related to exchange of common shares for capital securities |
|
|
(95 |
) |
|
|
|
|
Gains on leased equipment |
|
|
(62 |
) |
|
|
(15 |
) |
Gain from sale of Keys claim associated with the Lehman Brothers bankruptcy |
|
|
(32 |
) |
|
|
|
|
Net (gains) losses from loan securitizations and sales |
|
|
(5 |
) |
|
|
68 |
|
Net losses from principal investing |
|
|
78 |
|
|
|
3 |
|
Provision for losses on LIHTC guaranteed funds |
|
|
16 |
|
|
|
6 |
|
Provision (credit) for losses on lending-related commitments |
|
|
11 |
|
|
|
(29 |
) |
Liability to Visa |
|
|
|
|
|
|
(64 |
) |
Deferred income taxes |
|
|
(413 |
) |
|
|
(151 |
) |
Net increase in loans held for sale |
|
|
73 |
|
|
|
48 |
|
Net decrease in trading account assets |
|
|
509 |
|
|
|
(427 |
) |
Other operating activities, net |
|
|
(676 |
) |
|
|
384 |
|
|
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES |
|
|
588 |
|
|
|
(201 |
) |
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Proceeds from sale/redemption of Visa Inc. shares |
|
|
105 |
|
|
|
165 |
|
Cash used in acquisitions, net of cash acquired |
|
|
|
|
|
|
(157 |
) |
Net decrease (increase) in short-term investments |
|
|
1,734 |
|
|
|
(244 |
) |
Purchases of securities available for sale |
|
|
(8,031 |
) |
|
|
(793 |
) |
Proceeds from sales of securities available for sale |
|
|
2,957 |
|
|
|
836 |
|
Proceeds from prepayments and maturities of securities available for sale |
|
|
1,404 |
|
|
|
760 |
|
Purchases of held-to-maturity securities |
|
|
(6 |
) |
|
|
(2 |
) |
Proceeds from prepayments and maturities of held-to-maturity securities |
|
|
6 |
|
|
|
4 |
|
Purchases of other investments |
|
|
(82 |
) |
|
|
(306 |
) |
Proceeds from sales of other investments |
|
|
14 |
|
|
|
111 |
|
Proceeds from prepayments and maturities of other investments |
|
|
41 |
|
|
|
71 |
|
Net decrease (increase) in loans, excluding acquisitions, sales and transfers |
|
|
4,902 |
|
|
|
(1,560 |
) |
Purchases of loans |
|
|
|
|
|
|
(18 |
) |
Proceeds from loan securitizations and sales |
|
|
80 |
|
|
|
221 |
|
Purchases of premises and equipment |
|
|
(73 |
) |
|
|
(87 |
) |
Proceeds from sales of premises and equipment |
|
|
2 |
|
|
|
1 |
|
Proceeds from sales of other real estate owned |
|
|
12 |
|
|
|
13 |
|
|
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES |
|
|
3,065 |
|
|
|
(985 |
) |
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Net increase (decrease) in deposits |
|
|
2,622 |
|
|
|
(509 |
) |
Net decrease in short-term borrowings |
|
|
(6,794 |
) |
|
|
(2,505 |
) |
Net proceeds from issuance of long-term debt |
|
|
456 |
|
|
|
3,900 |
|
Payments on long-term debt |
|
|
(1,331 |
) |
|
|
(910 |
) |
Net proceeds from issuance of common shares and preferred stock |
|
|
987 |
|
|
|
1,601 |
|
Net proceeds from reissuance of common shares |
|
|
|
|
|
|
6 |
|
Tax benefits under recognized compensation cost for stock-based awards |
|
|
(5 |
) |
|
|
(1 |
) |
Cash dividends paid |
|
|
(122 |
) |
|
|
(298 |
) |
|
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES |
|
|
(4,187 |
) |
|
|
1,284 |
|
|
NET (DECREASE) INCREASE IN CASH AND DUE FROM BANKS |
|
|
(534 |
) |
|
|
98 |
|
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD |
|
|
1,257 |
|
|
|
1,814 |
|
|
CASH AND DUE FROM BANKS AT END OF PERIOD |
|
$ |
723 |
|
|
$ |
1,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional disclosures relative to cash flows: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
855 |
|
|
$ |
1,144 |
|
Income taxes (refunded) paid |
|
|
(109 |
) |
|
|
322 |
|
Noncash items: |
|
|
|
|
|
|
|
|
Assets acquired |
|
|
|
|
|
$ |
2,810 |
|
Liabilities assumed |
|
|
|
|
|
|
2,648 |
|
Loans transferred to portfolio from held for sale |
|
$ |
92 |
|
|
|
3,284 |
|
Loans transferred to held for sale from portfolio |
|
|
47 |
|
|
|
429 |
|
Loans transferred to other real estate owned |
|
|
91 |
|
|
|
23 |
|
|
See Notes to Consolidated Financial Statements (Unaudited).
6
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The unaudited condensed consolidated interim financial statements include the accounts of
KeyCorp and its subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
As used in these Notes:
¨ |
|
KeyCorp refers solely to the parent holding company; |
|
¨ |
|
KeyBank refers to KeyCorps subsidiary bank, KeyBank National Association; and |
|
¨ |
|
Key refers to the consolidated entity consisting of KeyCorp and its subsidiaries. |
The consolidated financial statements include any voting rights entity in which Key has a
controlling financial interest. In accordance with Financial Accounting Standards Board (FASB)
Revised Interpretation No. 46, Consolidation of Variable Interest Entities, a variable interest
entity (VIE) is consolidated if Key has a variable interest in the entity and is exposed to the
majority of its expected losses and/or residual returns (i.e., Key is considered to be the primary
beneficiary). Variable interests can include equity interests, subordinated debt, derivative
contracts, leases, service agreements, guarantees, standby letters of credit, loan commitments, and
other contracts, agreements and financial instruments. See Note 8 (Variable Interest Entities),
which begins on page 26, for information on Keys involvement with VIEs.
Management uses the equity method to account for unconsolidated investments in voting rights
entities or VIEs in which Key has significant influence over operating and financing decisions
(usually defined as a voting or economic interest of 20% to 50%, but not controlling).
Unconsolidated investments in voting rights entities or VIEs in which Key has a voting or economic
interest of less than 20% generally are carried at cost. Investments held by KeyCorps registered
broker-dealer and investment company subsidiaries (primarily principal investments) are carried at
fair value.
Qualifying special purpose entities (SPEs), including securitization trusts, established by Key
under the provisions of Statement of Financial Accounting Standards (SFAS) No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, are not
consolidated. In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial
Assets, an amendment of FASB Statement No. 140. This guidance will change the way entities
account for securitizations and SPEs by eliminating the concept of a qualifying SPE, changing the
requirements for derecognition of financial assets and requiring additional disclosures.
Information on SFAS No. 140 is included in Note 7 (Loan Securitizations and Mortgage Servicing
Assets), which begins on page 23. For additional information regarding SFAS No. 166, which is
effective January 1, 2010, for Key, see the section entitled Accounting Pronouncements Pending
Adoption
on page 11.
Management believes that the unaudited condensed consolidated interim financial statements reflect
all adjustments of a normal recurring nature and disclosures that are necessary for a fair
presentation of the results for the interim periods presented. Some previously reported amounts
have been reclassified to conform to current reporting practices.
The results of operations for the interim period are not necessarily indicative of the results of
operations to be expected for the full year. The interim financial statements should be read in
conjunction with the audited consolidated financial statements and related notes included in Keys
2008 Annual Report to Shareholders.
In preparing these financial statements, subsequent events were evaluated through the time the
financial statements were issued on August 10, 2009. Financial statements are considered issued
when they are widely distributed to all shareholders and other financial statement users, or filed
with the Securities and Exchange Commission. In conjunction with applicable accounting standards,
all material subsequent events have been either recognized in the financial statements or disclosed
in the notes to the financial statements.
7
Goodwill and Other Intangible Assets
Under SFAS No. 142, Goodwill and Other Intangible Assets, goodwill and certain other intangible
assets are subject to impairment testing, which must be conducted at least annually. Key performs
the goodwill impairment testing in the fourth quarter of each year. Keys reporting units for
purposes of this testing are its major business segments, Community Banking and National Banking.
Due to the ongoing uncertainty regarding market conditions, which may continue to negatively impact
the performance of Keys reporting units, management continues to monitor the impairment indicators
for goodwill and other intangible assets and to evaluate the carrying amount of these assets, as
necessary.
During the first quarter of 2009, a review of impairment indicators prompted management to review
and evaluate the carrying amount of the goodwill and other intangible assets assigned to Keys
Community Banking and National Banking units. This review indicated that the estimated fair value
of the Community Banking unit was greater than its carrying amount, while the estimated fair value
of the National Banking unit was less than its carrying amount, reflecting continued weakness in
the financial markets and requiring additional impairment testing. Based on the results of
additional impairment testing for the National Banking unit, Key recorded an after-tax noncash
accounting charge of $187 million, or $.38 per common share, during the first quarter of 2009.
Keys regulatory and tangible capital ratios were not affected by this adjustment. As a result of
this charge, Key has now written off all of the goodwill that had been assigned to the National
Banking unit.
In April 2009, management made the decision to curtail the operations of Austin Capital Management,
Ltd., an investment subsidiary that specializes in managing hedge fund investments for its
institutional customer base. As a result of this decision, Key has accounted for this business as
a discontinued operation. Of the $187 million impairment charge recorded during the first quarter
of 2009, $23 million, or $.05 per common share, is related to the discontinued operation, and thus
has been reclassified to income (loss) from discontinued operations, net of taxes on the income
statement. See Note 3 (Acquisition and Divestiture) on page 12 for additional information
regarding the Austin Capital Management discontinued operations.
During the second quarter of 2009, based on a review of impairment indicators, management
determined that a further review of goodwill and other intangible assets for Keys Community
Banking unit was necessary. This further review indicated that the estimated fair value of the
Community Banking unit was greater than its carrying amount at June 30, 2009; therefore, no further
impairment testing was required. A review of other intangible assets in the National Banking unit
did not identify any impairment of these assets.
Other-than-Temporary Impairments
During the second quarter of 2009, Key adopted Staff Position No. FAS 115-2 and FAS 124-2,
Recognition and Presentation of Other-than-Temporary Impairments, which provides new guidance on
the recognition and presentation of other-than-temporary impairments (OTTI) of debt securities,
and requires additional disclosures for both debt and equity securities. In accordance with the
guidance, if the amortized cost of a debt security held by Key is greater than its fair value and
Key intends to sell it, or more-likely-than-not will be required to sell it, before the expected
recovery of the amortized cost, then the entire impairment is recognized in earnings. If Key has
no intent to sell the security, or it is more-likely-than-not that Key will not be required to sell
it, before expected recovery, then the credit portion of the impairment is recognized in earnings,
while the remaining portion attributable to liquidity, interest rate changes, etc. is recognized in
equity as a component of accumulated other comprehensive income (AOCI) on the balance sheet.
The credit portion is equal to the difference between the cash flows expected to be collected and
the amortized cost basis of the debt security. Additional information regarding this Staff
Position is provided in this note under the heading Accounting Pronouncements Adopted in 2009 and
in Note 5 (Securities), which begins on page 18.
8
Noncontrolling Interests
Keys Principal Investing unit and the Real Estate Capital and Corporate Banking Services line of
business have noncontrolling (minority) interests that are accounted for in accordance with SFAS
No. 160, Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No.
51. Key reports noncontrolling interests in subsidiaries as a component of equity on the
consolidated balance sheets. Net loss on the consolidated statements of income includes the
revenues, expenses, gains and losses pertaining to both Key and the noncontrolling interests. The
portion of net results attributable to the noncontrolling interests is disclosed separately on the
face of Keys income statements to arrive at the net loss attributable to Key.
Offsetting Derivative Positions
In accordance with FASB Staff Position No. FIN 39-1, Amendment of FASB Interpretation 39, and
Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts, Key takes into account
the impact of master netting agreements that allow Key to settle all derivative contracts held with
a single counterparty on a net basis and to offset the net derivative position with the related
cash collateral when recognizing derivative assets and liabilities. Additional information
regarding derivative offsetting is provided in Note 15 (Derivatives and Hedging Activities),
which begins on page 37.
Accounting Pronouncements Adopted in 2009
Business combinations. In December 2007, the FASB issued SFAS No. 141(R), Business Combinations.
The new pronouncement requires the acquiring entity in a business combination to recognize only
the assets acquired and liabilities assumed in a transaction (e.g., acquisition costs must be
expensed when incurred), establishes the fair value at the date of acquisition as the initial
measurement for all assets acquired and liabilities assumed, and requires expanded disclosures.
SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008 (effective January
1, 2009, for Key). Early adoption was prohibited.
Noncontrolling interests. In December 2007, the FASB issued SFAS No. 160, which requires all
entities to report noncontrolling interests in subsidiaries as a component of equity and sets forth
other presentation and disclosure requirements. This guidance is effective for fiscal years
beginning after December 15, 2008 (effective January 1, 2009, for Key). Early adoption was
prohibited. Additional information regarding this guidance is provided in this note under the
heading Noncontrolling Interests. Adoption of this guidance did not have a material effect on
Keys financial condition or results of operations.
Accounting for transfers of financial assets and repurchase financing transactions. In February
2008, the FASB issued Staff Position No. FAS 140-3, Accounting for Transfers of Financial Assets
and Repurchase Financing Transactions. This Staff Position provides guidance on accounting for a
transfer of a financial asset and a repurchase financing, and presumes that an initial transfer of
a financial asset and a repurchase financing are considered part of the same arrangement (linked
transaction) under SFAS No. 140. However, if certain criteria are met, the initial transfer and
repurchase financing shall be evaluated separately. Staff Position No. FAS 140-3 is effective for
fiscal years beginning after November 15, 2008 (effective January 1, 2009, for Key). Early
adoption was prohibited. Adoption of this guidance did not have a material effect on Keys
financial condition or results of operations.
Disclosures about derivative instruments and hedging activities. In March 2008, the FASB issued
SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, which amends and
expands the disclosure requirements of SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. This guidance requires qualitative disclosures about objectives and
strategies for using derivatives, quantitative disclosures about fair value amounts, and gains and
losses on derivative instruments, and disclosures about credit risk contingent features in
derivative agreements. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008
(effective January 1, 2009, for Key). The required disclosures are provided in Note 15.
9
Determination of the useful life of intangible assets. In April 2008, the FASB issued Staff
Position No. FAS 142-3, Determination of the Useful Life of Intangible Assets. This guidance
amends the factors that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other
Intangible Assets. This Staff Position is effective for fiscal years beginning after December 15,
2008 (effective January 1, 2009, for Key). Early adoption was prohibited. Adoption of
this guidance did not have a material effect on Keys financial condition or results of operations.
Accounting for convertible debt instruments. In May 2008, the FASB issued Staff Position No. APB
14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement). This guidance requires the issuer of certain convertible
debt instruments that may be settled in cash (or other assets) on conversion to separately account
for the liability (debt) and equity (conversion option) components of the instrument in a manner
that reflects the issuers nonconvertible debt borrowing rate. This Staff Position is effective
for fiscal years beginning after December 15, 2008 (effective January 1, 2009, for Key). Early
adoption was prohibited. Key has not issued and does not have any convertible debt instruments
outstanding that are subject to the accounting guidance in this Staff Position. Therefore,
adoption of this guidance did not have an effect on Keys financial condition or results of
operations.
Recognition and presentation of other-than-temporary impairments. In April 2009, the FASB issued
Staff Position No. FAS 115-2 and FAS 124-2, which provides new guidance on the recognition and
presentation of OTTI of debt securities, and requires additional disclosures for both debt and
equity securities. This guidance is effective for interim and annual periods ending after June 15,
2009 (effective June 30, 2009, for Key) with early adoption permitted. Additional information
regarding this guidance is provided in this note under the heading Other-than-Temporary
Impairments on page 8 and in Note 5.
Interim disclosures about fair value of financial instruments. In April 2009, the FASB issued
Staff Position No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial
Instruments. This guidance amends SFAS No. 107, Disclosures about Fair Value of Financial
Instruments, and APB Opinion No. 28, Interim Financial Reporting, to require disclosures about
the fair value of financial instruments in interim financial statements of publicly traded
companies. This Staff Position is effective for interim and annual periods ending after June 15,
2009 (effective June 30, 2009, for Key) with early adoption permitted. The required disclosures
are provided in Note 16 (Fair Value Measurements), which begins on page 44.
Determining fair value when volume and level of activity have significantly decreased and
identifying transactions that are not orderly. In April 2009, the FASB issued Staff Position No.
FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability
Have Significantly Decreased and Identifying Transactions That Are Not Orderly. This Staff
Position provides additional guidance for: (i) estimating fair value in accordance with SFAS No.
157, Fair Value Measurements, when the volume and level of activity for the asset or liability
have significantly decreased, and (ii) identifying circumstances that indicate that a transaction
is not orderly. This guidance emphasizes that fair value is the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date under current market conditions (i.e., not a forced liquidation or
distressed sale). Staff Position No. FAS 157-4 is effective for interim and annual periods ending
after June 15, 2009 (effective June 30, 2009, for Key) with early adoption permitted. Adoption of
this accounting guidance did not have a material effect on Keys financial condition or results of
operations.
Subsequent events. In May 2009, the FASB issued SFAS No. 165, Subsequent Events, which provides
authoritative accounting literature for a topic that was previously addressed only in the auditing
literature. This accounting guidance is similar to the guidance in the auditing literature with
some exceptions that will not result in significant changes in practice. SFAS No. 165 is effective
on a prospective basis for interim or annual financial periods ending after June 15, 2009
(effective June 30, 2009, for Key). In preparing these financial statements, subsequent events
were evaluated through the time the financial statements were issued on August 10, 2009.
10
Accounting Pronouncements Pending Adoption
Employers disclosures about postretirement benefit plan assets. In December 2008, the FASB issued
Staff Position No. FAS 132(R)-1, Employers Disclosures about Postretirement Benefit Plan Assets,
which amends SFAS No. 132 (revised 2003), Employers Disclosures about Pensions and Other
Postretirement Benefits. This guidance will require additional disclosures about assets held in
an employers defined benefit pension or other postretirement plan, including fair values of each
major asset category and the levels within the fair value hierarchy as set forth in SFAS No. 157.
This Staff Position will be effective for fiscal years ending after December 15, 2009 (effective
December 31, 2009, for Key).
FASB accounting standards codification. In June 2009, the FASB issued accounting guidance that
establishes the FASB Accounting Standards Codification as the single source of authoritative
nongovernmental U.S. generally accepted accounting principles (GAAP). As of the effective date,
all existing accounting standard documents will be superseded, and all other accounting literature
not included in the Codification will be considered non-authoritative. The Codification was
launched on July 1, 2009, and will be effective for interim and annual periods ending after
September 15, 2009 (effective September 30, 2009, for Key).
Transfers of financial assets. In June 2009, the FASB issued SFAS No. 166, which will change the
way entities account for securitizations and SPEs by eliminating the concept of a qualifying SPE,
changing the requirements for derecognition of financial assets and requiring additional
disclosures. This guidance will be effective at the start of an entitys first fiscal year
beginning after November 15, 2009 (effective January 1, 2010, for Key). Management is currently
evaluating the impact this guidance may have on Keys financial condition or results of operations.
Consolidation of variable interest entities. In June 2009, the FASB issued SFAS No. 167,
Amendments to FASB Interpretation No. 46(R). In addition to requiring additional disclosures,
this guidance changes how a company determines when an entity that is insufficiently capitalized or
is not controlled through voting (or similar rights) should be consolidated. The determination of
whether a company is required to consolidate an entity is based on, among other things, an entitys
purpose and design, and its ability to direct the activities that most significantly impact the
entitys economic performance. SFAS No. 167 will be effective at the start of a companys first
fiscal year beginning after November 15, 2009 (effective January 1, 2010, for Key). Management is
currently evaluating the impact this guidance may have on
Keys financial condition or results of operations.
2. Earnings Per Common Share
Keys basic and diluted earnings per common share are calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
dollars in millions, except per share amounts |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
EARNINGS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(233 |
) |
|
$ |
(1,129 |
) |
|
$ |
(709 |
) |
|
$ |
(911 |
) |
Less: Net income (loss) attributable to noncontrolling interests |
|
|
3 |
|
|
|
(1 |
) |
|
|
(7 |
) |
|
|
|
|
|
Loss from continuing operations attributable to Key |
|
|
(236 |
) |
|
|
(1,128 |
) |
|
|
(702 |
) |
|
|
(911 |
) |
Less: Dividends on Series A Preferred Stock |
|
|
15 |
|
|
|
|
|
|
|
27 |
|
|
|
|
|
Noncash deemed dividend common shares exchanged for Series A Preferred Stock |
|
|
114 |
|
|
|
|
|
|
|
114 |
|
|
|
|
|
Cash dividends on Series B Preferred Stock |
|
|
31 |
|
|
|
|
|
|
|
63 |
|
|
|
|
|
Amortization of discount on Series B Preferred Stock |
|
|
4 |
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
Loss from continuing operations attributable to Key common shareholders |
|
|
(400 |
) |
|
|
(1,128 |
) |
|
|
(914 |
) |
|
|
(911 |
) |
Income (loss) from discontinued operations, net of taxes (a) |
|
|
10 |
|
|
|
2 |
|
|
|
(12 |
) |
|
|
3 |
|
|
Net loss attributable to Key common shareholders |
|
$ |
(390 |
) |
|
$ |
(1,126 |
) |
|
$ |
(926 |
) |
|
$ |
(908 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED-AVERAGE COMMON SHARES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding (000) |
|
|
576,883 |
|
|
|
416,629 |
|
|
|
535,080 |
|
|
|
407,875 |
|
Effect of dilutive convertible preferred stock, common stock options and other stock awards (000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares and potential common shares outstanding (000) |
|
|
576,883 |
|
|
|
416,629 |
|
|
|
535,080 |
|
|
|
407,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER COMMON SHARE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to Key common shareholders |
|
$ |
(.69 |
) |
|
$ |
(2.71 |
) |
|
$ |
(1.71 |
) |
|
$ |
(2.23 |
) |
Income (loss) from discontinued operations, net of taxes (a) |
|
|
.02 |
|
|
|
|
|
|
|
(.02 |
) |
|
|
.01 |
|
Net loss attributable to Key common shareholders |
|
|
(.68 |
) |
|
|
(2.70 |
) |
|
|
(1.73 |
) |
|
|
(2.23 |
) |
|
Loss from continuing operations attributable to Key common shareholders assuming dilution |
|
$ |
(.69 |
) |
|
$ |
(2.71 |
) |
|
$ |
(1.71 |
) |
|
$ |
(2.23 |
) |
Income (loss) from discontinued operations, net of taxes (a) |
|
|
.02 |
|
|
|
|
|
|
|
(.02 |
) |
|
|
.01 |
|
Net loss attributable to Key common shareholders assuming dilution |
|
|
(.68 |
) |
|
|
(2.70 |
) |
|
|
(1.73 |
) |
|
|
(2.23 |
) |
|
|
|
|
(a) |
|
In April 2009, management made the decision to curtail the operations of Austin Capital
Management, Ltd., an investment subsidiary that specializes in managing hedge fund investments
for its institutional customer base. As a result of this decision, Key has accounted for this
business as a discontinued operation. The loss from discontinued operations for the first
quarter of 2009 was attributable to a $23 million after tax, or $.05 per common share, charge
for intangible assets impairment. |
11
3. Acquisition and Divestiture
Acquisition and divestiture activity entered into by Key during 2008 and the first six months
of 2009 is summarized below.
Acquisition
U.S.B. Holding Co., Inc. On January 1, 2008, Key acquired U.S.B. Holding Co., Inc., the holding
company for Union State Bank, a 31-branch state-chartered commercial bank headquartered in
Orangeburg, New York. U.S.B. Holding Co. had assets of $2.8 billion and deposits of $1.8 billion
at the date of acquisition. Under the terms of the agreement, Key exchanged 9,895,000 KeyCorp
common shares, with a value of $348 million, and $194 million in cash for all of the outstanding
shares of U.S.B. Holding Co. In connection with the acquisition, Key recorded goodwill of
approximately $350 million in the Community Banking reporting unit. The acquisition expanded Keys
presence in markets both within and contiguous to its current operations in the Hudson Valley.
Divestiture
Austin Capital Management, Ltd. In April 2009, Key made the decision to curtail the operations of
Austin Capital Management, Ltd., an investment subsidiary of KeyCorp that specializes in managing
hedge fund investments for its institutional customer base. As a result of this decision, Key has
accounted for this business as a discontinued operation.
The results of this discontinued business are presented on one line as income (loss) from
discontinued operations, net of taxes in the Consolidated Statements of Income on page 4. The
components of income (loss) from discontinued operations, net of taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
in millions |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Income (loss), net of taxes of ($4), $1, ($6) and $2, respectively |
|
$ |
10 |
|
|
$ |
2 |
|
|
$ |
(35 |
) |
|
$ |
3 |
|
Intangible assets impairment, net of taxes of $4 |
|
|
|
|
|
|
|
|
|
|
(23 |
) |
|
|
|
|
|
Income (loss) from discontinued operations, net of taxes |
|
$ |
10 |
|
|
$ |
2 |
|
|
$ |
(12 |
) |
|
$ |
3 |
|
|
The discontinued assets and liabilities of Austin Capital Management, Ltd. included in the
Consolidated Balance Sheets on page 3 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
June 30, |
|
in millions |
|
2009 |
|
|
2008 |
|
|
2008 |
|
|
Cash and due from banks |
|
$ |
17 |
|
|
$ |
12 |
|
|
$ |
14 |
|
Goodwill |
|
|
|
|
|
|
25 |
|
|
|
17 |
|
Other intangible assets |
|
|
2 |
|
|
|
12 |
|
|
|
13 |
|
Accrued income and other assets |
|
|
7 |
|
|
|
7 |
|
|
|
8 |
|
|
Total assets |
|
$ |
26 |
|
|
$ |
56 |
|
|
$ |
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expense and other liabilities |
|
$ |
3 |
|
|
$ |
18 |
|
|
$ |
9 |
|
|
Total liabilities |
|
$ |
3 |
|
|
$ |
18 |
|
|
$ |
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
12
4. Line of Business Results
Community Banking
Regional Banking provides individuals with branch-based deposit and investment products,
personal finance services, and loans, including residential mortgages, home equity and various
types of installment loans. This line of business also provides small businesses with deposit,
investment and credit products, and business advisory services.
Regional Banking also offers financial, estate and retirement planning, and asset management
services to assist high-net-worth clients with their banking, trust, portfolio management,
insurance, charitable giving and related needs.
Commercial Banking provides midsize businesses with products and services that include commercial
lending, cash management, equipment leasing, investment and employee benefit programs, succession
planning, access to capital markets, derivatives and foreign exchange.
National Banking
Real Estate Capital and Corporate Banking Services consists of two business units, Real Estate
Capital and Corporate Banking Services.
Real Estate Capital is a national business that provides construction and interim lending,
permanent debt placements and servicing, equity and investment banking, and other commercial
banking products and services to developers, brokers and owner-investors. This unit deals
primarily with nonowner-occupied properties (i.e., generally properties in which at least 50% of
the debt service is provided by rental income from nonaffiliated third parties). Real Estate
Capital emphasizes providing clients with finance solutions through access to the capital markets.
Corporate Banking Services provides cash management, interest rate derivatives, and foreign
exchange products and services to clients served by both the Community Banking and National Banking
groups. Through its Public Sector and Financial Institutions businesses, Corporate Banking
Services also provides a full array of commercial banking products and services to government and
not-for-profit entities, and to community banks.
Equipment Finance meets the equipment leasing needs of companies worldwide and provides equipment
manufacturers, distributors and resellers with financing options for their clients. Lease
financing receivables and related revenues are assigned to other lines of business (primarily
Institutional and Capital Markets, and Commercial Banking) if those businesses are principally
responsible for maintaining the relationship with the client.
Institutional and Capital Markets, through its KeyBanc Capital Markets unit, provides commercial
lending, treasury management, investment banking, derivatives, foreign exchange, equity and debt
underwriting and trading, and syndicated finance products and services to large corporations and
middle-market companies.
Through its Victory Capital Management unit, Institutional and Capital Markets also manages or
offers advice regarding investment portfolios for a national client base, including corporations,
labor unions, not-for-profit organizations, governments and individuals. These portfolios may be
managed in separate accounts, common funds or the Victory family of mutual funds.
Consumer Finance provides government-guaranteed education loans to students and their parents,
and processes tuition payments for private schools. Through its Commercial Floor Plan Lending
unit, this line of business also finances inventory for automobile dealers. In October 2008,
Consumer Finance exited retail and floor plan lending for marine and recreational vehicle products
and began to limit new education loans to those backed by government guarantee. This line of
business continues to service existing loans in these portfolios and to honor existing education
loan commitments. These actions are consistent with Keys strategy of de-emphasizing
nonrelationship or out-of-footprint businesses.
13
Other Segments
Other Segments consist of Corporate Treasury and Keys Principal Investing unit.
Reconciling Items
Total assets included under Reconciling Items primarily represent the unallocated portion of
nonearning assets of corporate support functions. Charges related to the funding of these assets
are part of net interest income and are allocated to the business segments through noninterest
expense. Reconciling Items also includes intercompany eliminations and certain items that are not
allocated to the business segments because they do not reflect their normal operations.
The table that spans pages 15 and 16 shows selected financial data for each major business group
for the three- and six-month periods ended June 30, 2009 and 2008. This table is accompanied by
supplementary information for each of the lines of business that make up these groups. The
information was derived from the internal financial reporting system that management uses to
monitor and manage Keys financial performance. GAAP guides financial accounting, but there is no
authoritative guidance for management accounting the way management uses its judgment and
experience to make reporting decisions. Consequently, the line of business results Key reports may
not be comparable with line of business results presented by other companies.
The selected financial data are based on internal accounting policies designed to compile results
on a consistent basis and in a manner that reflects the underlying economics of the businesses. In
accordance with Keys policies:
¨ |
|
Net interest income is determined by assigning a standard
cost for funds used or a standard credit for funds provided
based on their assumed maturity, prepayment and/or repricing
characteristics. The net effect of this funds transfer
pricing is charged to the lines of business based on the
total loan and deposit balances of each line. |
|
¨ |
|
Indirect expenses, such as computer servicing costs and
corporate overhead, are allocated based on assumptions
regarding the extent to which each line actually uses the
services. |
|
¨ |
|
Keys consolidated provision for loan losses is allocated
among the lines of business primarily based on their actual
net charge-offs, adjusted periodically for loan growth and
changes in risk profile. The amount of the consolidated
provision is based on the methodology that management uses to
estimate Keys consolidated allowance for loan losses. This
methodology is described in Note 1 (Summary of Significant
Accounting Policies) under the heading Allowance for Loan
Losses on page 79 of Keys 2008 Annual Report to
Shareholders. |
|
¨ |
|
Income taxes are allocated based on the statutory federal
income tax rate of 35% (adjusted for tax-exempt interest
income, income from corporate-owned life insurance and tax
credits associated with investments in low-income housing
projects) and a blended state income tax rate (net of the
federal income tax benefit) of 2.5%. |
|
¨ |
|
Capital is assigned based on managements assessment of
economic risk factors (primarily credit, operating and market
risk) directly attributable to each line. |
Developing and applying the methodologies that management uses to allocate items among Keys
lines of business is a dynamic process. Accordingly, financial results may be revised periodically
to reflect accounting enhancements, changes in the risk profile of a particular business or changes
in Keys organizational structure.
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
Community Banking |
|
|
National Banking |
dollars in millions |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
SUMMARY OF OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (expense) (TE) |
|
$ |
397 |
|
|
$ |
433 |
|
|
$ |
282 |
|
|
$ |
(471 |
)
(c) |
Noninterest income |
|
|
195 |
|
|
|
221 |
|
|
|
265 |
|
|
|
338 |
|
|
Total revenue (TE) (a) |
|
|
592 |
|
|
|
654 |
|
|
|
547 |
|
|
|
(133 |
) |
Provision for loan losses |
|
|
187 |
|
|
|
44 |
|
|
|
662 |
|
|
|
609 |
|
Depreciation and amortization expense |
|
|
37 |
|
|
|
36 |
|
|
|
62 |
|
|
|
71 |
|
Other noninterest expense |
|
|
460 |
|
|
|
409 |
|
|
|
296 |
|
|
|
264 |
|
|
(Loss) income from continuing operations before income taxes (TE) |
|
|
(92 |
) |
|
|
165 |
|
|
|
(473 |
) |
|
|
(1,077 |
) |
Allocated income taxes and TE adjustments |
|
|
(35 |
) |
|
|
62 |
|
|
|
(178 |
) |
|
|
(403 |
) |
|
(Loss) income from continuing operations |
|
|
(57 |
) |
|
|
103 |
|
|
|
(295 |
) |
|
|
(674 |
) |
Income from discontinued operations, net of taxes |
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
2 |
|
|
Net (loss) income |
|
|
(57 |
) |
|
|
103 |
|
|
|
(285 |
) |
|
|
(672 |
) |
Less: Net (loss) income attributable to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
Net (loss) income attributable to Key |
|
$ |
(57 |
) |
|
$ |
103 |
|
|
$ |
(284 |
) |
|
$ |
(672 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVERAGE BALANCES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases |
|
$ |
28,237 |
|
|
$ |
28,470 |
|
|
$ |
43,943 |
|
|
$ |
47,872 |
|
Total assets (a) |
|
|
31,183 |
|
|
|
31,414 |
|
|
|
50,998 |
|
|
|
56,316 |
|
Deposits |
|
|
52,689 |
|
|
|
49,944 |
|
|
|
13,260 |
|
|
|
12,287 |
|
|
OTHER FINANCIAL DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan charge-offs |
|
$ |
87 |
|
|
$ |
38 |
|
|
$ |
452 |
|
|
$ |
486 |
|
Return on average allocated equity (b) |
|
|
(6.81 |
)% |
|
|
13.28 |
% |
|
|
(21.41 |
)% |
|
|
(51.37 |
)% |
Return on average allocated equity |
|
|
(6.81 |
) |
|
|
13.28 |
|
|
|
(20.68 |
) |
|
|
(51.22 |
) |
Average full-time equivalent employees |
|
|
8,656 |
|
|
|
8,783 |
|
|
|
2,899 |
|
|
|
3,582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, |
|
Community Banking |
|
|
National Banking |
dollars in millions |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
SUMMARY OF OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (expense) (TE) |
|
$ |
807 |
|
|
$ |
855 |
|
|
$ |
572 |
|
|
$ |
(131 |
) (c) |
Noninterest income |
|
|
384 |
|
|
|
428 |
|
|
|
508 |
|
|
|
433 |
|
|
Total revenue (TE) (a) |
|
|
1,191 |
|
|
|
1,283 |
|
|
|
1,080 |
|
|
|
302 |
|
Provision for loan losses |
|
|
268 |
|
|
|
62 |
|
|
|
1,452 |
|
|
|
778 |
|
Depreciation and amortization expense |
|
|
74 |
|
|
|
74 |
|
|
|
126 |
|
|
|
143 |
|
Other noninterest expense |
|
|
893 |
|
|
|
797 |
|
|
|
737 |
(c) |
|
|
496 |
|
|
(Loss) income from continuing operations before income taxes (TE) |
|
|
(44 |
) |
|
|
350 |
|
|
|
(1,235 |
) |
|
|
(1,115 |
) |
Allocated income taxes and TE adjustments |
|
|
(17 |
) |
|
|
131 |
|
|
|
(389 |
) |
|
|
(418 |
) |
|
(Loss) income from continuing operations |
|
|
(27 |
) |
|
|
219 |
|
|
|
(846 |
) |
|
|
(697 |
) |
Loss (income) from discontinued operations, net of taxes |
|
|
|
|
|
|
|
|
|
|
(12 |
) |
|
|
3 |
|
|
Net (loss) income |
|
|
(27 |
) |
|
|
219 |
|
|
|
(858 |
) |
|
|
(694 |
) |
Less: Net loss attributable to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
Net (loss) income attributable to Key |
|
$ |
(27 |
) |
|
$ |
219 |
|
|
$ |
(855 |
) |
|
$ |
(694 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVERAGE BALANCES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases |
|
$ |
28,587 |
|
|
$ |
28,278 |
|
|
$ |
45,064 |
|
|
$ |
46,017 |
|
Total assets (a) |
|
|
31,564 |
|
|
|
31,215 |
|
|
|
52,888 |
|
|
|
56,260 |
|
Deposits |
|
|
52,128 |
|
|
|
49,860 |
|
|
|
12,740 |
|
|
|
12,082 |
|
|
OTHER FINANCIAL DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan charge-offs |
|
$ |
141 |
|
|
$ |
68 |
|
|
$ |
890 |
|
|
$ |
577 |
|
Return on average allocated equity (b) |
|
|
(1.64 |
)% |
|
|
14.51 |
% |
|
|
(31.03 |
)% |
|
|
(27.41 |
)% |
Return on average allocated equity |
|
|
(1.64 |
) |
|
|
14.51 |
|
|
|
(31.47 |
) |
|
|
(27.30 |
) |
Average full-time equivalent employees |
|
|
8,771 |
|
|
|
8,748 |
|
|
|
2,958 |
|
|
|
3,659 |
|
|
|
|
|
(a) |
|
Substantially all revenue generated by Keys major business groups is derived from clients
with residency in the United States. Substantially all long-lived assets, including premises
and equipment, capitalized software and goodwill held by Keys major business groups are
located in the United States. |
|
(b) |
|
From continuing operations. |
|
(c) |
|
National Bankings results for the first quarter of 2009 include a noncash charge for
goodwill and other intangible assets impairment of $196 million ($164 million after tax).
During the second quarter of 2008, National Bankings taxable-equivalent net interest income
and net results were reduced by $838 million and $536 million, respectively, as a result of
its involvement with certain leveraged lease financing transactions that were challenged by
the Internal Revenue Service (IRS). National Bankings taxable-equivalent net interest
income and net results were reduced by $34 million and $21 million, respectively, during the
first quarter of 2008 as a result of its involvement with these leveraged lease financing
transactions. |
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Segments |
|
|
|
|
Total Segments |
|
|
Reconciling Items |
|
|
Key |
2009 |
|
|
2008 |
|
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(48 |
) |
|
$ |
(32 |
) |
|
|
|
$ |
631 |
|
|
$ |
(70 |
) |
|
$ |
(33 |
) |
|
$ |
(30 |
) |
|
$ |
598 |
|
|
$ |
(100 |
) |
|
231 |
(d) |
|
|
1 |
|
|
|
|
|
691 |
|
|
|
560 |
|
|
|
24 |
(e) |
|
|
(13 |
) (e) |
|
|
715 |
|
|
|
547 |
|
|
|
183 |
|
|
|
(31 |
) |
|
|
|
|
1,322 |
|
|
|
490 |
|
|
|
(9 |
) |
|
|
(43 |
) |
|
|
1,313 |
|
|
|
447 |
|
|
|
|
|
|
|
|
|
|
|
|
849 |
|
|
|
653 |
|
|
|
1 |
|
|
|
(6 |
) |
|
|
850 |
|
|
|
647 |
|
|
|
|
|
|
|
|
|
|
|
|
99 |
|
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
99 |
|
|
|
107 |
|
|
13 |
|
|
|
9 |
|
|
|
|
|
769 |
|
|
|
682 |
|
|
|
2 |
|
|
|
(12 |
) |
|
|
771 |
|
|
|
670 |
|
|
|
170 |
|
|
|
(40 |
) |
|
|
|
|
(395 |
) |
|
|
(952 |
) |
|
|
(12 |
) |
|
|
(25 |
) |
|
|
(407 |
) |
|
|
(977 |
) |
|
54 |
|
|
|
(25 |
) |
|
|
|
|
(159 |
) |
|
|
(366 |
) |
|
|
(15 |
) |
|
|
518 |
(e) |
|
|
(174 |
) |
|
|
152 |
|
|
|
116 |
|
|
|
(15 |
) |
|
|
|
|
(236 |
) |
|
|
(586 |
) |
|
|
3 |
|
|
|
(543 |
) |
|
|
(233 |
) |
|
|
(1,129 |
) |
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
2 |
|
|
|
116 |
|
|
|
(15 |
) |
|
|
|
|
(226 |
) |
|
|
(584 |
) |
|
|
3 |
|
|
|
(543 |
) |
|
|
(223 |
) |
|
|
(1,127 |
) |
|
4 |
|
|
|
(1 |
) |
|
|
|
|
3 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
(1 |
) |
|
$ |
112 |
|
|
$ |
(14 |
) |
|
|
|
$ |
(229 |
) |
|
$ |
(583 |
) |
|
$ |
3 |
|
|
$ |
(543 |
) |
|
$ |
(226 |
) |
|
$ |
(1,126 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
148 |
|
|
$ |
177 |
|
|
|
|
$ |
72,328 |
|
|
$ |
76,519 |
|
|
$ |
53 |
|
|
$ |
133 |
|
|
$ |
72,381 |
|
|
$ |
76,652 |
|
|
18,099 |
|
|
|
14,098 |
|
|
|
|
|
100,280 |
|
|
|
101,828 |
|
|
|
578 |
|
|
|
1,462 |
|
|
|
100,858 |
|
|
|
103,290 |
|
|
1,931 |
|
|
|
3,092 |
|
|
|
|
|
67,880 |
|
|
|
65,323 |
|
|
|
(399 |
) |
|
|
(191 |
) |
|
|
67,481 |
|
|
|
65,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
539 |
|
|
$ |
524 |
|
|
|
|
|
|
|
|
|
|
$ |
539 |
|
|
$ |
524 |
|
|
N/M |
|
|
|
N/M |
|
|
|
|
|
(10.32 |
)% |
|
|
(26.62 |
)% |
|
|
N/M |
|
|
|
N/M |
|
|
|
(9.28 |
)% |
|
|
(52.65 |
)% |
|
N/M |
|
|
|
N/M |
|
|
|
|
|
(9.88 |
) |
|
|
(26.53 |
) |
|
|
N/M |
|
|
|
N/M |
|
|
|
(8.89 |
) |
|
|
(52.56 |
) |
|
41 |
|
|
|
43 |
|
|
|
|
|
11,596 |
|
|
|
12,408 |
|
|
|
5,341 |
|
|
|
5,756 |
|
|
|
16,937 |
|
|
|
18,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Segments |
|
|
|
|
Total Segments |
|
|
Reconciling Items |
|
|
Key |
2009 |
|
|
2008 |
|
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(94 |
) |
|
$ |
(60 |
) |
|
|
|
$ |
1,285 |
|
|
$ |
664 |
|
|
$ |
(67 |
) |
|
$ |
(60 |
) |
|
$ |
1,218 |
|
|
$ |
604 |
|
|
198 |
(d) |
|
|
56 |
|
|
|
|
|
1,090 |
|
|
|
917 |
|
|
|
110 |
(e) |
|
|
154 |
(e) |
|
|
1,200 |
|
|
|
1,071 |
|
|
|
104 |
|
|
|
(4 |
) |
|
|
|
|
2,375 |
|
|
|
1,581 |
|
|
|
43 |
|
|
|
94 |
|
|
|
2,418 |
|
|
|
1,675 |
|
|
|
|
|
|
|
|
|
|
|
|
1,720 |
|
|
|
840 |
|
|
|
5 |
|
|
|
(6 |
) |
|
|
1,725 |
|
|
|
834 |
|
|
|
|
|
|
|
|
|
|
|
|
200 |
|
|
|
217 |
|
|
|
|
|
|
|
|
|
|
|
200 |
|
|
|
217 |
|
|
23 |
|
|
|
20 |
|
|
|
|
|
1,653 |
|
|
|
1,313 |
|
|
|
(41 |
) |
|
|
(24 |
) |
|
|
1,612 |
|
|
|
1,289 |
|
|
|
81 |
|
|
|
(24 |
) |
|
|
|
|
(1,198 |
) |
|
|
(789 |
) |
|
|
79 |
|
|
|
124 |
|
|
|
(1,119 |
) |
|
|
(665 |
) |
|
10 |
|
|
|
(31 |
) |
|
|
|
|
(396 |
) |
|
|
(318 |
) |
|
|
(14 |
) |
|
|
564 |
(e) |
|
|
(410 |
) |
|
|
246 |
|
|
|
71 |
|
|
|
7 |
|
|
|
|
|
(802 |
) |
|
|
(471 |
) |
|
|
93 |
|
|
|
(440 |
) |
|
|
(709 |
) |
|
|
(911 |
) |
|
|
|
|
|
|
|
|
|
|
|
(12 |
) |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
(12 |
) |
|
|
3 |
|
|
|
71 |
|
|
|
7 |
|
|
|
|
|
(814 |
) |
|
|
(468 |
) |
|
|
93 |
|
|
|
(440 |
) |
|
|
(721 |
) |
|
|
(908 |
) |
|
(4 |
) |
|
|
|
|
|
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7 |
) |
|
|
|
|
|
$ |
75 |
|
|
$ |
7 |
|
|
|
|
$ |
(807 |
) |
|
$ |
(468 |
) |
|
$ |
93 |
|
|
$ |
(440 |
) |
|
$ |
(714 |
) |
|
$ |
(908 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
152 |
|
|
$ |
207 |
|
|
|
|
$ |
73,803 |
|
|
$ |
74,502 |
|
|
$ |
44 |
|
|
$ |
168 |
|
|
$ |
73,847 |
|
|
$ |
74,670 |
|
|
17,337 |
|
|
|
14,260 |
|
|
|
|
|
101,789 |
|
|
|
101,735 |
|
|
|
539 |
|
|
|
1,588 |
|
|
|
102,328 |
|
|
|
103,323 |
|
|
1,841 |
|
|
|
3,947 |
|
|
|
|
|
66,709 |
|
|
|
65,889 |
|
|
|
(271 |
) |
|
|
(180 |
) |
|
|
66,438 |
|
|
|
65,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,031 |
|
|
$ |
645 |
|
|
|
|
|
|
|
|
|
|
$ |
1,031 |
|
|
$ |
645 |
|
|
N/M |
|
|
|
N/M |
|
|
|
|
|
(17.37 |
)% |
|
|
(11.03 |
)% |
|
|
N/M |
|
|
|
N/M |
|
|
|
(13.78 |
)% |
|
|
(21.47 |
)% |
|
N/M |
|
|
|
N/M |
|
|
|
|
|
(17.63 |
) |
|
|
(10.96 |
) |
|
|
N/M |
|
|
|
N/M |
|
|
|
(14.01 |
) |
|
|
(21.40 |
) |
|
41 |
|
|
|
43 |
|
|
|
|
|
11,770 |
|
|
|
12,450 |
|
|
|
5,431 |
|
|
|
5,845 |
|
|
|
17,201 |
|
|
|
18,295 |
|
|
|
|
|
(d) |
|
Other Segments results for the second quarter of 2009 include net gains of $125 million
($78 million after tax) in connection with the repositioning of the securities portfolio and a
$95 million ($59 million after tax) gain related to the exchange of Key common shares for
capital securities. |
|
(e) |
|
Reconciling Items for the second quarter of 2009 include a $32 million ($20 million after
tax) gain from the sale of Keys claim associated with the Lehman Brothers bankruptcy. For
the first quarter of 2009, Reconciling Items include a $105 million ($65 million after tax)
gain from the sale of Keys remaining equity interest in Visa Inc. Reconciling Items for
the second quarter of 2008 include a $475 million charge to income taxes for the interest
cost associated with the previously disclosed leveraged lease tax litigation. For the first
quarter of 2008, Reconciling Items include a $165 million ($103 million after tax) gain from
the partial redemption of Keys equity interest in Visa Inc. and a $17 million charge to
income taxes for the interest cost associated with the increase to Keys tax reserves for
certain leveraged lease transactions. |
|
TE |
= Taxable Equivalent, N/M = Not Meaningful |
16
Supplementary information (Community Banking lines of business)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
Regional Banking |
|
|
Commercial Banking |
dollars in millions |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Total revenue (TE) |
|
$ |
502 |
|
|
$ |
552 |
|
|
$ |
90 |
|
|
$ |
102 |
|
Provision for loan losses |
|
|
165 |
|
|
|
25 |
|
|
|
22 |
|
|
|
19 |
|
Noninterest expense |
|
|
447 |
|
|
|
397 |
|
|
|
50 |
|
|
|
48 |
|
Net (loss) income attributable to Key |
|
|
(68 |
) |
|
|
81 |
|
|
|
11 |
|
|
|
22 |
|
Average loans and leases |
|
|
19,746 |
|
|
|
19,626 |
|
|
|
8,491 |
|
|
|
8,844 |
|
Average deposits |
|
|
48,716 |
|
|
|
46,253 |
|
|
|
3,973 |
|
|
|
3,691 |
|
Net loan charge-offs |
|
|
73 |
|
|
|
33 |
|
|
|
14 |
|
|
|
5 |
|
Net loan charge-offs to average loans |
|
|
1.48 |
% |
|
|
.68 |
% |
|
|
.66 |
% |
|
|
.23 |
% |
Nonperforming assets at period end |
|
$ |
245 |
|
|
$ |
157 |
|
|
$ |
135 |
|
|
$ |
61 |
|
Return on average allocated equity |
|
|
(11.71 |
)% |
|
|
14.62 |
% |
|
|
4.29 |
% |
|
|
9.92 |
% |
Average full-time equivalent employees |
|
|
8,339 |
|
|
|
8,453 |
|
|
|
317 |
|
|
|
330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, |
|
Regional Banking |
|
|
Commercial Banking |
dollars in millions |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Total revenue (TE) |
|
$ |
1,009 |
|
|
$ |
1,080 |
|
|
$ |
182 |
|
|
$ |
203 |
|
Provision for loan losses |
|
|
234 |
|
|
|
35 |
|
|
|
34 |
|
|
|
27 |
|
Noninterest expense |
|
|
865 |
|
|
|
780 |
|
|
|
102 |
|
|
|
91 |
|
Net (loss) income attributable to Key |
|
|
(56 |
) |
|
|
166 |
|
|
|
29 |
|
|
|
53 |
|
Average loans and leases |
|
|
19,875 |
|
|
|
19,595 |
|
|
|
8,712 |
|
|
|
8,683 |
|
Average deposits |
|
|
48,253 |
|
|
|
46,222 |
|
|
|
3,875 |
|
|
|
3,638 |
|
Net loan charge-offs |
|
|
126 |
|
|
|
62 |
|
|
|
15 |
|
|
|
6 |
|
Net loan charge-offs to average loans |
|
|
1.28 |
% |
|
|
.64 |
% |
|
|
.35 |
% |
|
|
.14 |
% |
Nonperforming assets at period end |
|
$ |
245 |
|
|
$ |
157 |
|
|
$ |
135 |
|
|
$ |
61 |
|
Return on average allocated equity |
|
|
(4.90 |
)% |
|
|
15.47 |
% |
|
|
5.80 |
% |
|
|
12.15 |
% |
Average full-time equivalent employees |
|
|
8,452 |
|
|
|
8,417 |
|
|
|
319 |
|
|
|
331 |
|
|
Supplementary information (National Banking lines of business)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Capital and |
|
|
|
|
|
|
|
|
|
|
Institutional and |
|
|
|
|
Three months ended June 30, |
|
Corporate Banking Services |
|
|
Equipment Finance |
|
|
Capital Markets |
|
|
Consumer Finance |
dollars in millions |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Total revenue (TE) |
|
$ |
183 |
|
|
$ |
236 |
|
|
$ |
101 |
|
|
$ |
(696 |
) |
|
$ |
185 |
|
|
$ |
223 |
|
|
$ |
78 |
|
|
$ |
104 |
|
Provision for loan losses |
|
|
462 |
|
|
|
366 |
|
|
|
72 |
|
|
|
36 |
|
|
|
37 |
|
|
|
36 |
|
|
|
91 |
|
|
|
171 |
|
Noninterest expense |
|
|
106 |
|
|
|
70 |
|
|
|
88 |
|
|
|
90 |
|
|
|
120 |
|
|
|
124 |
|
|
|
44 |
|
|
|
51 |
|
(Loss) income from continuing operations
attributable to Key |
|
|
(239 |
) |
|
|
(125 |
) |
|
|
(37 |
) |
|
|
(514 |
) |
|
|
18 |
|
|
|
39 |
|
|
|
(36 |
) |
|
|
(74 |
) |
Net (loss) income attributable to Key |
|
|
(239 |
) |
|
|
(125 |
) |
|
|
(37 |
) |
|
|
(514 |
) |
|
|
28 |
|
|
|
41 |
|
|
|
(36 |
) |
|
|
(74 |
) |
Average loans and leases |
|
|
15,873 |
|
|
|
17,086 |
|
|
|
8,769 |
|
|
|
10,326 |
|
|
|
8,388 |
|
|
|
7,898 |
|
|
|
10,913 |
|
|
|
12,562 |
|
Average loans held for sale |
|
|
231 |
|
|
|
616 |
|
|
|
40 |
|
|
|
51 |
|
|
|
193 |
|
|
|
494 |
|
|
|
446 |
|
|
|
121 |
|
Average deposits |
|
|
10,582 |
|
|
|
10,460 |
|
|
|
17 |
|
|
|
21 |
|
|
|
2,332 |
|
|
|
1,384 |
|
|
|
329 |
|
|
|
422 |
|
Net loan charge-offs |
|
|
274 |
|
|
|
376 |
|
|
|
46 |
|
|
|
28 |
|
|
|
11 |
|
|
|
5 |
|
|
|
121 |
|
|
|
77 |
|
Net loan charge-offs to average loans |
|
|
6.92 |
% |
|
|
8.85 |
% |
|
|
2.10 |
% |
|
|
1.09 |
% |
|
|
.53 |
% |
|
|
.25 |
% |
|
|
4.45 |
% |
|
|
2.47 |
% |
Nonperforming assets at period end |
|
$ |
1,460 |
|
|
$ |
779 |
|
|
$ |
270 |
|
|
$ |
105 |
|
|
$ |
88 |
|
|
$ |
26 |
|
|
$ |
331 |
|
|
$ |
82 |
|
Return on average allocated equity (a) |
|
|
(35.84 |
)% |
|
|
(23.04 |
)% |
|
|
(23.71 |
)% |
|
|
(225.69 |
)% |
|
|
6.33 |
% |
|
|
12.52 |
% |
|
|
(13.53 |
)% |
|
|
(32.14 |
)% |
Return on average allocated equity |
|
|
(35.84 |
) |
|
|
(23.04 |
) |
|
|
(23.74 |
) |
|
|
(225.69 |
) |
|
|
9.85 |
|
|
|
13.16 |
|
|
|
(13.53 |
) |
|
|
(32.14 |
) |
Average full-time equivalent employees (b) |
|
|
982 |
|
|
|
1,228 |
|
|
|
732 |
|
|
|
867 |
|
|
|
869 |
|
|
|
930 |
|
|
|
316 |
|
|
|
557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Capital and |
|
|
|
|
|
|
|
|
|
|
Institutional and |
|
|
|
|
Six months ended June 30, |
|
Corporate Banking Services |
|
|
Equipment Finance |
|
|
Capital Markets |
|
|
Consumer Finance |
dollars in millions |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Total revenue (TE) |
|
$ |
358 |
|
|
$ |
319 |
|
|
$ |
202 |
|
|
$ |
(602 |
) |
|
$ |
355 |
|
|
$ |
377 |
|
|
$ |
165 |
|
|
$ |
208 |
|
Provision for loan losses |
|
|
932 |
|
|
|
410 |
|
|
|
149 |
|
|
|
60 |
|
|
|
69 |
|
|
|
53 |
|
|
|
302 |
|
|
|
255 |
|
Noninterest expense |
|
|
221 |
|
|
|
131 |
|
|
|
173 |
|
|
|
185 |
|
|
|
323 |
|
|
|
224 |
|
|
|
146 |
|
|
|
99 |
|
(Loss) income from continuing operations
attributable to Key |
|
|
(508 |
) |
|
|
(139 |
) |
|
|
(75 |
) |
|
|
(529 |
) |
|
|
(61 |
) |
|
|
62 |
|
|
|
(199 |
) |
|
|
(91 |
) |
Net (loss) income attributable to Key |
|
|
(508 |
) |
|
|
(139 |
) |
|
|
(75 |
) |
|
|
(529 |
) |
|
|
(73 |
) |
|
|
65 |
|
|
|
(199 |
) |
|
|
(91 |
) |
Average loans and leases |
|
|
16,218 |
|
|
|
16,791 |
|
|
|
8,929 |
|
|
|
10,461 |
|
|
|
8,667 |
|
|
|
7,765 |
|
|
|
11,250 |
|
|
|
11,000 |
|
Average loans held for sale |
|
|
250 |
|
|
|
803 |
|
|
|
34 |
|
|
|
41 |
|
|
|
230 |
|
|
|
525 |
|
|
|
480 |
|
|
|
1,738 |
|
Average deposits |
|
|
10,286 |
|
|
|
10,122 |
|
|
|
17 |
|
|
|
17 |
|
|
|
2,054 |
|
|
|
1,422 |
|
|
|
383 |
|
|
|
521 |
|
Net loan charge-offs |
|
|
491 |
|
|
|
413 |
|
|
|
91 |
|
|
|
52 |
|
|
|
56 |
|
|
|
7 |
|
|
|
252 |
|
|
|
105 |
|
Net loan charge-offs to average loans |
|
|
6.11 |
% |
|
|
4.95 |
% |
|
|
2.06 |
% |
|
|
1.00 |
% |
|
|
1.30 |
% |
|
|
.18 |
% |
|
|
4.52 |
% |
|
|
1.92 |
% |
Nonperforming assets at period end |
|
$ |
1,460 |
|
|
$ |
779 |
|
|
$ |
270 |
|
|
$ |
105 |
|
|
$ |
88 |
|
|
$ |
26 |
|
|
$ |
331 |
|
|
$ |
82 |
|
Return on average allocated equity (a) |
|
|
(40.06 |
)% |
|
|
(13.70 |
)% |
|
|
(22.64 |
)% |
|
|
(115.38 |
)% |
|
|
(10.42 |
)% |
|
|
10.13 |
% |
|
|
(37.40 |
)% |
|
|
(19.91 |
)% |
Return on average allocated equity |
|
|
(40.06 |
) |
|
|
(13.70 |
) |
|
|
(22.64 |
) |
|
|
(115.38 |
) |
|
|
(12.46 |
) |
|
|
10.62 |
|
|
|
(37.40 |
) |
|
|
(19.91 |
) |
Average full-time equivalent employees (b) |
|
|
1,003 |
|
|
|
1,230 |
|
|
|
736 |
|
|
|
876 |
|
|
|
891 |
|
|
|
934 |
|
|
|
328 |
|
|
|
619 |
|
|
|
|
|
(a) |
|
From continuing operations. |
|
(b) |
|
The number of average full-time employees has not been adjusted for discontinued operations. |
|
TE |
|
= Taxable Equivalent |
17
5. Securities
Securities available for sale. These are securities that Key intends to hold for an
indefinite period of time but that may be sold in response to changes in interest rates, prepayment
risk, liquidity needs or other factors. Securities available for sale are reported at fair value.
Unrealized gains and losses (net of income taxes) deemed temporary are recorded in equity as a
component of AOCI on the balance sheet. Unrealized losses on equity securities deemed to be
other-than-temporary are included in net securities gains (losses) on the income statement, as
are actual gains and losses resulting from the sales of securities using the specific
identification method.
When Key retains an interest in loans it securitizes, it bears risk that the loans will be prepaid
(which would reduce expected interest income) or not be paid at all. Key accounts for these
retained interests as debt securities and classifies them as available for sale. Unrealized losses
on debt securities deemed to be other-than-temporary are included in net securities gains
(loss) or AOCI in accordance with Staff Position No. FAS 115-2 and FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments, as further described on page 20 of this note.
Other securities held in the available-for-sale portfolio are primarily marketable equity
securities that are traded on a public exchange such as the NYSE or NASDAQ.
Held-to-maturity securities. These are debt securities that Key has the intent and ability to hold
until maturity. Debt securities are carried at cost, adjusted for amortization of premiums and
accretion of discounts using the interest method. This method produces a constant rate of return
on the adjusted carrying amount.
Other securities held in the held-to-maturity portfolio consist of foreign bonds, trust preferred
securities and preferred equity securities.
The amortized cost, unrealized gains and losses, and approximate fair value of Keys securities
available for sale and held-to-maturity securities are presented in the following tables. Gross
unrealized gains and losses represent the difference between the amortized cost and the fair value
of securities on the balance sheet as of the dates indicated. Accordingly, the amount of these
gains and losses may change in the future as market conditions change.
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
in millions |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
SECURITIES AVAILABLE FOR SALE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury, agencies and corporations |
|
$ |
1,710 |
|
|
|
|
|
|
|
|
|
|
$ |
1,710 |
|
States and political subdivisions |
|
|
85 |
|
|
$ |
1 |
|
|
|
|
|
|
|
86 |
|
Collateralized mortgage obligations |
|
|
8,462 |
|
|
|
99 |
|
|
$ |
38 |
|
|
|
8,523 |
|
Other mortgage-backed securities |
|
|
1,525 |
|
|
|
74 |
|
|
|
|
|
|
|
1,599 |
|
Retained interests in securitizations |
|
|
167 |
|
|
|
19 |
|
|
|
|
|
|
|
186 |
|
Other securities |
|
|
66 |
|
|
|
6 |
|
|
|
2 |
|
|
|
70 |
|
|
Total securities available for sale |
|
$ |
12,015 |
|
|
$ |
199 |
|
|
$ |
40 |
|
|
$ |
12,174 |
|
|
HELD-TO-MATURITY SECURITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions |
|
$ |
4 |
|
|
|
|
|
|
|
|
|
|
$ |
4 |
|
Other securities |
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
21 |
|
|
Total held-to-maturity securities |
|
$ |
25 |
|
|
|
|
|
|
|
|
|
|
$ |
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
in millions |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
SECURITIES AVAILABLE FOR SALE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury, agencies and corporations |
|
$ |
9 |
|
|
$ |
1 |
|
|
|
|
|
|
$ |
10 |
|
States and political subdivisions |
|
|
90 |
|
|
|
1 |
|
|
|
|
|
|
|
91 |
|
Collateralized mortgage obligations |
|
|
6,380 |
|
|
|
148 |
|
|
$ |
5 |
|
|
|
6,523 |
|
Other mortgage-backed securities |
|
|
1,505 |
|
|
|
63 |
|
|
|
1 |
|
|
|
1,567 |
|
Retained interests in securitizations |
|
|
162 |
|
|
|
29 |
|
|
|
|
|
|
|
191 |
|
Other securities |
|
|
71 |
|
|
|
1 |
|
|
|
17 |
|
|
|
55 |
|
|
Total securities available for sale |
|
$ |
8,217 |
|
|
$ |
243 |
|
|
$ |
23 |
|
|
$ |
8,437 |
|
|
HELD-TO-MATURITY SECURITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions |
|
$ |
4 |
|
|
|
|
|
|
|
|
|
|
$ |
4 |
|
Other securities |
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
21 |
|
|
Total held-to-maturity securities |
|
$ |
25 |
|
|
|
|
|
|
|
|
|
|
$ |
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
in millions |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
SECURITIES AVAILABLE FOR SALE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury, agencies and corporations |
|
$ |
18 |
|
|
|
|
|
|
|
|
|
|
$ |
18 |
|
States and political subdivisions |
|
|
92 |
|
|
|
|
|
|
$ |
1 |
|
|
|
91 |
|
Collateralized mortgage obligations |
|
|
6,309 |
|
|
$ |
69 |
|
|
|
28 |
|
|
|
6,350 |
|
Other mortgage-backed securities |
|
|
1,583 |
|
|
|
10 |
|
|
|
9 |
|
|
|
1,584 |
|
Retained interests in securitizations |
|
|
153 |
|
|
|
34 |
|
|
|
|
|
|
|
187 |
|
Other securities |
|
|
82 |
|
|
|
6 |
|
|
|
6 |
|
|
|
82 |
|
|
Total securities available for sale |
|
$ |
8,237 |
|
|
$ |
119 |
|
|
$ |
44 |
|
|
$ |
8,312 |
|
|
HELD-TO-MATURITY SECURITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions |
|
$ |
8 |
|
|
|
|
|
|
|
|
|
|
$ |
8 |
|
Other securities |
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
17 |
|
|
Total held-to-maturity securities |
|
$ |
25 |
|
|
|
|
|
|
|
|
|
|
$ |
25 |
|
|
19
The following table summarizes Keys securities available for sale that were in an unrealized
loss position
as of June 30, 2009, December 31, 2008, and June 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Duration of Unrealized Loss Position |
|
|
|
|
|
|
Less than 12 Months |
|
|
12 Months or Longer |
|
|
Total |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
in millions |
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
JUNE 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury, agencies and corporations |
|
$ |
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3 |
|
|
|
|
|
States and political subdivisions |
|
|
4 |
|
|
|
|
|
|
$ |
2 |
|
|
|
|
|
|
|
6 |
|
|
|
|
|
Collateralized mortgage obligations |
|
|
1,660 |
|
|
$ |
38 |
|
|
|
|
|
|
|
|
|
|
|
1,660 |
|
|
$ |
38 |
|
Other mortgage-backed securities |
|
|
86 |
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
97 |
|
|
|
|
|
Other securities |
|
|
10 |
|
|
|
1 |
|
|
|
2 |
|
|
$ |
1 |
|
|
|
12 |
|
|
|
2 |
|
|
Total temporarily impaired securities |
|
$ |
1,763 |
|
|
$ |
39 |
|
|
$ |
15 |
|
|
$ |
1 |
|
|
$ |
1,778 |
|
|
$ |
40 |
|
|
DECEMBER 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions |
|
$ |
18 |
|
|
|
|
|
|
$ |
1 |
|
|
|
|
|
|
$ |
19 |
|
|
|
|
|
Collateralized mortgage obligations |
|
|
107 |
|
|
|
|
|
|
|
360 |
|
|
$ |
5 |
|
|
|
467 |
|
|
$ |
5 |
|
Other mortgage-backed securities |
|
|
3 |
|
|
|
|
|
|
|
15 |
|
|
|
1 |
|
|
|
18 |
|
|
|
1 |
|
Other securities |
|
|
40 |
|
|
$ |
13 |
|
|
|
5 |
|
|
|
4 |
|
|
|
45 |
|
|
|
17 |
|
|
Total temporarily impaired securities |
|
$ |
168 |
|
|
$ |
13 |
|
|
$ |
381 |
|
|
$ |
10 |
|
|
$ |
549 |
|
|
$ |
23 |
|
|
JUNE 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury, agencies and corporations |
|
$ |
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8 |
|
|
|
|
|
States and political subdivisions |
|
|
69 |
|
|
$ |
1 |
|
|
$ |
1 |
|
|
|
|
|
|
|
70 |
|
|
$ |
1 |
|
Collateralized mortgage obligations |
|
|
1,142 |
|
|
|
17 |
|
|
|
400 |
|
|
$ |
11 |
|
|
|
1,542 |
|
|
|
28 |
|
Other mortgage-backed securities |
|
|
653 |
|
|
|
7 |
|
|
|
42 |
|
|
|
2 |
|
|
|
695 |
|
|
|
9 |
|
Other securities |
|
|
44 |
|
|
|
6 |
|
|
|
1 |
|
|
|
|
|
|
|
45 |
|
|
|
6 |
|
|
Total temporarily impaired securities |
|
$ |
1,916 |
|
|
$ |
31 |
|
|
$ |
444 |
|
|
$ |
13 |
|
|
$ |
2,360 |
|
|
$ |
44 |
|
|
Of the $40 million of gross unrealized losses at June 30, 2009, $38 million relates to
fixed-rate collateralized mortgage obligations, which Key invests in as part of an overall
asset/liability management strategy. Since these instruments have fixed interest rates, their fair
value is sensitive to movements in market interest rates. During the first half of 2009, interest
rates generally increased, so the fair value of these 15 instruments, which had a weighted-average
maturity of 3.9 years at June 30, 2009, decreased below their amortized cost.
The unrealized losses within each investment category are considered temporary since Key has the
intent to hold the securities until they mature or recover in value, and it is likely that Key will
be able to hold these securities through the expected recovery period. Accordingly, these
investments have not been reduced to their fair value.
Management regularly assesses Keys securities portfolio for OTTI. The assessments are based on
the nature of the securities, underlying collateral, the financial condition of the issuer, the
extent and duration of the loss, Keys intent related to the securities and the likelihood that Key
will be able to hold these securities through the expected recovery period.
Debt securities identified by management to have OTTI are written down to their current fair value.
For those debt securities that Key intends to sell, or more-likely-than-not will be required to
sell, prior to expected recovery, the entire impairment (i.e., difference between amortized cost
and the fair value) is recognized in earnings. For those debt securities that Key does not intend
to sell, or it is more-likely-than-not that Key will not be required to sell, prior to expected
recovery, the credit portion of OTTI is recognized in earnings, while the remaining amount is
recognized in equity as a component of AOCI on the balance sheet.
20
The following table shows the OTTI losses recognized by Key during the second quarter of 2009:
|
|
|
|
|
Three months ended June 30, 2009 |
|
|
|
|
in millions |
|
|
|
|
|
Total OTTI losses recognized on debt securities which Key does not intend to sell or
more-likely-than-not will not be required to sell |
|
$ |
5 |
|
Less: Portion of OTTI losses recognized in AOCI, pre-tax |
|
|
1 |
|
|
Net OTTI losses recognized in earnings for debt securities which Key does not
intend
to sell or more-likely-than-not will not be required to sell |
|
|
4 |
|
OTTI losses on equity securities recognized in earnings |
|
|
2 |
|
|
Total OTTI losses recognized in earnings |
|
$ |
6 |
|
|
The following table shows changes in the cumulative credit portion of impairments on debt
securities held by Key. All credit-related impairments on debt securities relate to Keys
education loan securitization residual interests.
|
|
|
|
|
Three months ended June 30, 2009 |
|
|
|
|
in millions |
|
|
|
|
|
Balance at April 1, 2009 |
|
$ |
2 |
|
Impairment recognized in earnings |
|
|
4 |
|
|
Balance at June 30, 2009 |
|
$ |
6 |
|
|
Realized gains and losses related to securities available for sale were as follows:
|
|
|
|
|
Six months ended June 30, 2009 |
|
|
|
|
in millions |
|
|
|
|
|
Realized gains |
|
$ |
128 |
|
Realized losses |
|
|
17 |
|
|
Net securities gains |
|
$ |
111 |
|
|
At June 30, 2009, securities available for sale and held-to-maturity securities totaling $7.1 billion were pledged to secure public and trust deposits,
securities sold under repurchase agreements, and for other purposes required or permitted by law.
The following table shows securities by remaining maturity. Collateralized mortgage obligations,
other mortgage-backed securities and retained interests in securitizations all of which are
included in the securities available-for-sale portfolio are presented based on their expected
average lives. The remaining securities, including all of those in the held-to-maturity portfolio,
are presented based on their remaining contractual maturity. Actual maturities may differ from
expected or contractual maturities since
borrowers have the right to prepay obligations with or without prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
|
Held-to-Maturity |
|
|
Available for Sale |
|
|
Securities |
June 30, 2009 |
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
in millions |
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
Due in one year or less |
|
$ |
2,112 |
|
|
$ |
2,123 |
|
|
$ |
5 |
|
|
$ |
5 |
|
Due after one through
five years |
|
|
9,308 |
|
|
|
9,448 |
|
|
|
20 |
|
|
|
20 |
|
Due after five through
ten years |
|
|
567 |
|
|
|
574 |
|
|
|
|
|
|
|
|
|
Due after ten years |
|
|
28 |
|
|
|
29 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
12,015 |
|
|
$ |
12,174 |
|
|
$ |
25 |
|
|
$ |
25 |
|
|
21
6. Loans and Loans Held for Sale
Keys loans by category are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
in millions |
|
2009 |
|
|
2008 |
|
|
2008 |
|
|
Commercial, financial and agricultural |
|
$ |
23,542 |
|
|
$ |
27,260 |
|
|
$ |
25,929 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage |
|
|
11,761 |
(a) |
|
|
10,819 |
|
|
|
10,737 |
|
Construction |
|
|
6,119 |
(a) |
|
|
7,717 |
|
|
|
7,849 |
|
|
Total commercial real estate loans |
|
|
17,880 |
|
|
|
18,536 |
|
|
|
18,586 |
|
Commercial lease financing |
|
|
8,263 |
|
|
|
9,039 |
|
|
|
9,610 |
|
|
Total commercial loans |
|
|
49,685 |
|
|
|
54,835 |
|
|
|
54,125 |
|
Real estate residential mortgage |
|
|
1,753 |
|
|
|
1,908 |
|
|
|
1,928 |
|
Home equity: |
|
|
|
|
|
|
|
|
|
|
|
|
Community Banking |
|
|
10,256 |
|
|
|
10,124 |
|
|
|
9,851 |
|
National Banking |
|
|
934 |
|
|
|
1,051 |
|
|
|
1,153 |
|
|
Total home equity loans |
|
|
11,190 |
|
|
|
11,175 |
|
|
|
11,004 |
|
Consumer other Community Banking |
|
|
1,199 |
|
|
|
1,233 |
|
|
|
1,261 |
|
Consumer other National Banking: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
3,095 |
|
|
|
3,401 |
|
|
|
3,634 |
|
Education |
|
|
3,636 |
|
|
|
3,669 |
|
|
|
3,584 |
|
Other |
|
|
245 |
|
|
|
283 |
|
|
|
319 |
|
|
Total consumer other National
Banking |
|
|
6,976 |
|
|
|
7,353 |
|
|
|
7,537 |
|
|
Total consumer loans |
|
|
21,118 |
|
|
|
21,669 |
|
|
|
21,730 |
|
|
Total loans |
|
$ |
70,803 |
|
|
$ |
76,504 |
|
|
$ |
75,855 |
|
|
|
|
|
(a) |
|
In late March 2009, Key transferred $1.5 billion of loans from the construction portfolio
to the commercial mortgage portfolio in accordance with regulatory guidelines pertaining to
the classification of loans that have reached a completed status. |
Key uses interest rate swaps to manage interest rate risk; these swaps modify the repricing
characteristics of certain loans. For more information about such swaps, see Note 15 (Derivatives
and Hedging Activities), which begins on page 37.
Keys loans held for sale by category are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
in millions |
|
2009 |
|
|
2008 |
|
|
2008 |
|
|
Commercial, financial and
agricultural |
|
$ |
51 |
|
|
$ |
102 |
|
|
$ |
212 |
|
Real estate commercial mortgage |
|
|
288 |
|
|
|
273 |
|
|
|
994 |
|
Real estate construction |
|
|
146 |
|
|
|
164 |
|
|
|
398 |
|
Commercial lease financing |
|
|
30 |
|
|
|
7 |
|
|
|
42 |
|
Real estate residential mortgage |
|
|
245 |
|
|
|
77 |
|
|
|
79 |
|
Education |
|
|
148 |
|
|
|
401 |
|
|
|
103 |
|
Automobile |
|
|
1 |
|
|
|
3 |
|
|
|
5 |
|
|
Total loans held for sale |
|
$ |
909 |
|
|
$ |
1,027 |
|
|
$ |
1,833 |
|
|
22
Changes in the allowance for loan losses are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
in millions |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Balance at beginning of period |
|
$ |
2,186 |
|
|
$ |
1,298 |
|
|
$ |
1,803 |
|
|
$ |
1,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs |
|
|
(578 |
) |
|
|
(554 |
) |
|
|
(1,098 |
) |
|
|
(702 |
) |
Recoveries |
|
|
39 |
|
|
|
30 |
|
|
|
67 |
|
|
|
57 |
|
|
Net loans charged off |
|
|
(539 |
) |
|
|
(524 |
) |
|
|
(1,031 |
) |
|
|
(645 |
) |
Provision for loan losses |
|
|
850 |
|
|
|
647 |
|
|
|
1,725 |
|
|
|
834 |
|
Allowance related to loans acquired, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32 |
|
Foreign currency translation adjustment |
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
Balance at end of period |
|
$ |
2,499 |
|
|
$ |
1,421 |
|
|
$ |
2,499 |
|
|
$ |
1,421 |
|
|
Changes in the liability for credit losses on lending-related commitments are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
in millions |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Balance at beginning of period |
|
$ |
54 |
|
|
$ |
53 |
|
|
$ |
54 |
|
|
$ |
80 |
|
Provision (credit) for losses on lending-related commitments |
|
|
11 |
|
|
|
(2 |
) |
|
|
11 |
|
|
|
(29 |
) |
|
Balance at end of period (a) |
|
$ |
65 |
|
|
$ |
51 |
|
|
$ |
65 |
|
|
$ |
51 |
|
|
|
|
|
(a) |
|
Included in accrued expense and other liabilities on the consolidated balance sheet. |
7. Loan Securitizations and Mortgage Servicing Assets
Retained Interests in Loan Securitizations
A securitization involves the sale of a pool of loan receivables to investors through either a
public or private issuance (generally by a qualifying SPE) of asset-backed securities. Generally,
the assets are transferred to a trust that sells interests in the form of certificates of
ownership. In previous years, Key sold education loans in securitizations; however, Key has not
securitized any education loans since 2006 due to unfavorable market conditions.
When Key sells loans in securitizations, Key records a gain or loss when the net sale proceeds and
residual interests, if any, differ from the loans allocated carrying amount. Gains or losses
resulting from securitizations are recorded as one component of net (losses) gains from loan
securitizations and sales on the income statement.
A servicing asset is recorded if Key purchases or retains the right to service securitized loans,
and receives servicing fees that exceed the going market rate. Key generally retains an interest
in securitized loans in the form of an interest-only strip, residual asset, servicing asset or
security. Keys mortgage servicing assets are discussed under the heading Mortgage Servicing
Assets on page 25. All other retained interests are accounted for as debt securities and
classified as securities available for sale.
In accordance with Revised Interpretation No. 46, Consolidation of Variable Interest Entities,
qualifying SPEs, including securitization trusts, established by Key under SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
are exempt from consolidation. In June 2009, the FASB issued SFAS No. 166, Accounting for
Transfers of Financial Assets, an amendment of FASB Statement No. 140. This guidance will change
the way entities account for securitizations and SPEs. Information related to Revised
Interpretation No. 46 is included in Note 1 (Basis of Presentation), which begins on page 7. For
additional information regarding SFAS No. 166, which is effective January 1, 2010, for Key, see
Note 1 under the heading Accounting Pronouncements Pending Adoption
on page 11.
23
Management uses certain assumptions and estimates to determine the fair value to be allocated to
retained interests at the date of transfer and at subsequent measurement dates. Primary economic
assumptions used to measure the fair value of Keys retained interests in education loans and the
sensitivity of the current fair value of residual cash flows to immediate adverse changes in those
assumptions at June 30, 2009, are as
follows:
|
|
|
|
|
dollars in millions |
|
|
|
|
|
Fair value of retained interests |
|
$ |
187 |
|
Weighted-average life (years) |
|
|
.8 - 6.6 |
|
|
|
|
|
|
|
PREPAYMENT SPEED ASSUMPTIONS (ANNUAL RATE) |
|
|
4.00% - 26.00 |
% |
Impact on fair value of 1% CPR adverse change |
|
$ |
(5 |
) |
Impact on fair value of 10% CPR adverse change |
|
|
(54 |
) |
|
|
|
|
|
|
EXPECTED CREDIT LOSSES (STATIC RATE) |
|
|
2.00% - 80.00 |
% |
Impact on fair value of 5% adverse change |
|
$ |
(5 |
) |
Impact on fair value of 10% adverse change |
|
|
(24 |
) |
|
|
|
|
|
|
RESIDUAL CASH FLOWS DISCOUNT RATE (ANNUAL RATE) |
|
|
8.50% - 14.00 |
% |
Impact on fair value of 2% adverse change |
|
$ |
(30 |
) |
Impact on fair value of 5% adverse change |
|
|
(49 |
) |
|
|
|
|
|
|
EXPECTED STATIC DEFAULT (STATIC RATE) |
|
|
3.75% - 33.00 |
% |
Impact on fair value of 1% adverse change |
|
$ |
(9 |
) |
Impact on fair value of 10% adverse change |
|
|
(115 |
) |
|
|
|
|
|
|
VARIABLE RETURNS TO TRANSFEREES |
|
|
|
(a) |
|
|
|
|
|
|
These sensitivities are hypothetical and should be relied upon with caution. Sensitivity
analysis is based on the nature of the asset, the seasoning (i.e., age and payment history) of
the portfolio and historical results. Changes in fair value based on a 1% variation in
assumptions generally cannot be extrapolated because the relationship of the change in
assumption to the change in fair value may not be linear. Also, the effect of a variation in
a particular assumption on the fair value of the retained interest is calculated without
changing any other assumption. In reality, changes in one factor may cause changes in
another. For example, increases in market interest rates may result in lower prepayments and
increased credit losses, which might magnify or counteract the sensitivities.
|
|
|
(a) |
|
Forward London Interbank Offered Rate (LIBOR) plus contractual spread over LIBOR ranging
from .00% to 1.30%. |
|
CPR |
|
= Constant Prepayment Rate |
The fair value measurement of Keys mortgage servicing assets is described under the heading
Mortgage Servicing Assets on page 25. Management conducts a quarterly review of the fair values
of its other retained interests. The historical performance of each retained interest and the
assumptions used to project future cash flows are reviewed, assumptions are revised and present
values of cash flows are recalculated, as appropriate.
The present values of cash flows represent the fair value of the retained interests. If the fair
value of a retained interest exceeds its carrying amount, the increase in fair value is recorded in
equity as a component of AOCI on the balance sheet. Conversely, if the carrying amount of a
retained interest exceeds its fair value, impairment is indicated. If Key intends to sell the
retained interest, or more-likely-than-not will be required to sell it, before the expected
recovery of the amortized cost, then the entire impairment is recognized in earnings. If Key does
not have the intent to sell it, or it is more-likely-than-not that Key will not be required to sell
it, before expected recovery, then the credit portion of the impairment is recognized
in earnings, while the remaining portion is recognized in AOCI.
24
The table below shows the relationship between the education loans Key manages and those held
in the loan portfolio. Managed loans include those held in portfolio and those securitized and
sold, but still serviced by Key. Related delinquencies and net credit losses are also presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Credit Losses |
|
June 30, 2009 |
|
Loan |
|
|
Loans Past Due |
|
|
For the Six |
|
in millions |
|
Principal |
|
|
60 days or More |
|
|
Months Ended |
|
|
Education loans managed |
|
$ |
7,820 |
|
|
$ |
253 |
|
|
$ |
123 |
|
Less: Loans securitized |
|
|
4,036 |
|
|
|
156 |
|
|
|
54 |
|
Loans held for sale or securitization |
|
|
148 |
|
|
|
6 |
|
|
|
|
|
|
Loans held in portfolio |
|
$ |
3,636 |
|
|
$ |
91 |
|
|
$ |
69 |
|
|
Mortgage Servicing Assets
Key originates and periodically sells commercial mortgage loans but continues to service those
loans for the buyers. Key also may purchase the right to service commercial mortgage loans for
other lenders. Changes in the carrying amount of mortgage servicing assets are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, |
in millions |
|
2009 |
|
|
2008 |
|
|
Balance at beginning of period |
|
$ |
242 |
|
|
$ |
313 |
|
Servicing retained from loan sales |
|
|
4 |
|
|
|
9 |
|
Purchases |
|
|
15 |
|
|
|
3 |
|
Amortization |
|
|
(27 |
) |
|
|
(53 |
) |
|
Balance at end of period |
|
$ |
234 |
|
|
$ |
272 |
|
|
Fair value at end of period |
|
$ |
403 |
|
|
$ |
426 |
|
|
The fair value of mortgage servicing assets is determined by calculating the present value of
future cash flows associated with servicing the loans. This calculation uses a number of
assumptions that are based on current market conditions. Primary economic assumptions used to
measure the fair value of Keys
mortgage servicing assets at June 30, 2009 and 2008, are:
¨ |
|
prepayment speed generally at an annual rate of 0.00% to 25.00%; |
|
¨ |
|
expected credit losses at a static rate of 2.00%; and |
|
¨ |
|
residual cash flows discount rate of 8.50% to 15.00%. |
Changes in these assumptions could cause the fair value of mortgage servicing assets to change
in the future. The volume of loans serviced and expected credit losses are critical to the
valuation of servicing assets. A 1.00% increase in the assumed default rate of commercial mortgage
loans at June 30, 2009, would cause a $9 million decrease in the fair value of Keys mortgage
servicing assets.
Contractual fee income from servicing commercial mortgage loans totaled $34 million and $32 million
for the six-month periods ended June 30, 2009 and 2008, respectively. Key has elected to remeasure
servicing assets using the amortization method. The amortization of servicing assets is determined
in proportion to, and over the period of, the estimated net servicing income. The amortization of
servicing assets for each period, as shown in the preceding table, is recorded as a reduction to
fee income. Both the contractual fee income and the amortization are recorded in other income on
the income statement.
Servicing assets are evaluated quarterly for possible impairment. This process involves
classifying the assets based on the types of loans serviced and their associated interest rates,
and determining the fair value of each class. If the evaluation indicates that the carrying amount
of the servicing assets exceeds their fair value, the carrying amount is reduced through a charge
to income in the amount of such excess. For the six-month periods ended June 30, 2009 and 2008, no
servicing asset impairment occurred.
25
8. Variable Interest Entities
A VIE is a partnership, limited liability company, trust or other legal entity that meets any one
of the following criteria:
¨ |
|
The entity does not have sufficient equity to conduct its
activities without additional subordinated financial support from
another party. |
|
¨ |
|
The entitys investors lack the authority to make decisions about
the activities of the entity through voting rights or similar
rights, and do not have the obligation to absorb the entitys
expected losses or the right to receive the entitys expected
residual returns. |
|
¨ |
|
The voting rights of some investors are not proportional to their
economic interest in the entity, and substantially all of the
entitys activities involve or are conducted on behalf of
investors with disproportionately few voting rights. |
Keys VIEs, including those consolidated and those in which Key holds a significant interest,
are summarized below. Key defines a significant interest in a VIE as a subordinated interest
that exposes Key to a significant portion, but not the majority, of the VIEs expected losses or
residual returns.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated VIEs |
|
|
Unconsolidated VIEs |
June 30, 2009 |
|
Total |
|
|
Total |
|
|
Total |
|
|
Maximum |
|
in millions |
|
Assets |
|
|
Assets |
|
|
Liabilities |
|
|
Exposure to Loss |
|
|
Low-income housing tax credit (LIHTC) funds |
|
$ |
217 |
|
|
$ |
202 |
|
|
|
|
|
|
|
|
|
LIHTC investments |
|
|
N/A |
|
|
|
919 |
|
|
|
|
|
|
$ |
411 |
|
|
Keys involvement with VIEs is described below.
Consolidated VIEs
LIHTC guaranteed funds. Key Affordable Housing Corporation (KAHC) formed limited partnerships
(funds) that invested in LIHTC operating partnerships. Interests in these funds were offered in
syndication to qualified investors who paid a fee to KAHC for a guaranteed return. Key also earned
syndication fees from these funds and continues to earn asset management fees. The funds assets
primarily are investments in LIHTC operating partnerships, which totaled $207 million at June 30,
2009. These investments are recorded in accrued income and other assets on the balance sheet and
serve as collateral for the funds limited obligations. Key has not formed new funds or added
LIHTC partnerships since October 2003. However, Key continues to act as asset manager and provides
occasional funding for existing funds under a guarantee obligation. As a result of this guarantee
obligation, management has determined that Key is the primary beneficiary of these funds. Key
recorded expenses of $16 million related to this guarantee obligation during the first six months
of 2009. Additional information on return guarantee agreements with LIHTC investors is presented
in Note 14 (Contingent Liabilities and Guarantees) under the heading Guarantees on page 34.
The partnership agreement for each guaranteed fund requires the fund to be dissolved by a certain
date. In accordance with SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity, the third-party interests associated with these
funds are considered mandatorily redeemable instruments and are recorded in accrued expense and
other liabilities on the balance sheet. The FASB has indefinitely deferred the measurement and
recognition provisions of SFAS No. 150 for mandatorily redeemable third-party interests associated
with finite-lived subsidiaries, such as Keys LIHTC guaranteed funds. Key adjusts the financial
statements each period for the third-party investors share of the funds profits and losses. At
June 30, 2009, the settlement value of these third-party interests was estimated to be between $153
million and $167 million, while the recorded value, including reserves, totaled $222 million.
26
Unconsolidated VIEs
LIHTC nonguaranteed funds. Although Key holds significant interests in certain nonguaranteed funds
that Key formed and funded, management has determined that Key is not the primary beneficiary of
those funds because Key does not absorb the majority of the expected losses of the funds. At June
30, 2009, assets of these unconsolidated nonguaranteed funds totaled $202 million. Keys maximum
exposure to loss in connection with these funds is minimal, and Key does not have any liability
recorded related to the funds. Management elected to cease forming these funds in October 2003.
LIHTC investments. Through the Community Banking business group, Key has made investments directly
in LIHTC operating partnerships formed by third parties. As a limited partner in these operating
partnerships, Key is allocated tax credits and deductions associated with the underlying
properties. Management has determined that Key is not the primary beneficiary of these investments
because the general partners are more closely associated with the business activities of these
partnerships. At June 30, 2009, assets of these unconsolidated LIHTC operating partnerships
totaled approximately $919 million. Keys maximum exposure to loss in connection with these
partnerships is the unamortized investment balance of $339 million at June 30, 2009, plus $72
million of tax credits claimed but subject to recapture. Key does not have any liability recorded
related to these investments because Key believes the likelihood of any loss in connection with
these partnerships is remote. During the first six months of 2009, Key did not obtain significant
direct investments (either individually or in the aggregate) in LIHTC operating partnerships.
Key has additional investments in unconsolidated LIHTC operating partnerships that are held by the
consolidated LIHTC guaranteed funds. Total assets of these operating partnerships were
approximately $1.3 billion at June 30, 2009. The tax credits and deductions associated with these
properties are allocated to the funds investors based on their ownership percentages. Management
has determined that Key is not the primary beneficiary of these partnerships because the general
partners are more closely associated with the business activities of these partnerships.
Information regarding Keys exposure to loss in connection with these guaranteed funds is included
in Note 14 under the heading Return guarantee agreement with LIHTC investors on page 35.
Commercial and residential real estate investments and principal investments. Keys Principal
Investing unit and the Real Estate Capital and Corporate Banking Services line of business make
equity and mezzanine investments, some of which are in VIEs. These investments are held by
nonregistered investment companies subject to the provisions of the American Institute of Certified
Public Accountants (AICPA) Audit and Accounting Guide, Audits of Investment Companies. Key is
not currently applying the accounting or disclosure provisions of Revised Interpretation No. 46 to
these investments, which remain unconsolidated; the FASB deferred the effective date of Revised
Interpretation No. 46 for such nonregistered investment companies until the AICPA clarifies the
scope of the Audit Guide.
27
9. Nonperforming Assets and Past Due Loans
Impaired loans totaled $1.9 billion at June 30, 2009, compared to $985 million at December 31,
2008, and $628 million at June 30, 2008. Impaired loans had an average balance of $1.7 billion for
the second quarter of 2009 and $733 million for the second quarter of 2008.
Keys nonperforming assets and past due loans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
in millions |
|
2009 |
|
|
2008 |
|
|
2008 |
|
|
Impaired loans |
|
$ |
1,915 |
|
|
$ |
985 |
|
|
$ |
628 |
|
Other nonaccrual loans |
|
|
273 |
|
|
|
240 |
|
|
|
186 |
|
|
Total nonperforming loans |
|
|
2,188 |
|
|
|
1,225 |
|
|
|
814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans held for sale |
|
|
145 |
|
|
|
90 |
|
|
|
342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned (OREO) |
|
|
182 |
|
|
|
110 |
|
|
|
26 |
|
Allowance for OREO losses |
|
|
(11 |
) |
|
|
(3 |
) |
|
|
(2 |
) |
|
OREO, net of allowance |
|
|
171 |
|
|
|
107 |
|
|
|
24 |
|
Other nonperforming assets (a) |
|
|
47 |
|
|
|
42 |
|
|
|
30 |
|
|
Total nonperforming assets |
|
$ |
2,551 |
|
|
$ |
1,464 |
|
|
$ |
1,210 |
|
|
Impaired loans with a specifically allocated allowance |
|
$ |
1,731 |
|
|
$ |
876 |
|
|
$ |
564 |
|
Specifically allocated allowance for impaired loans |
|
|
393 |
|
|
|
178 |
|
|
|
166 |
|
|
Accruing loans past due 90 days or more |
|
$ |
581 |
|
|
$ |
433 |
|
|
$ |
367 |
|
Accruing loans past due 30 through 89 days |
|
|
1,169 |
|
|
|
1,314 |
|
|
|
852 |
|
|
|
|
|
(a) |
|
Primarily investments held by the Private Equity unit within Keys Real Estate Capital and
Corporate Banking Services line of business. |
At June 30, 2009, Key did not have any significant commitments to lend additional funds to
borrowers with loans on nonperforming status.
Management evaluates the collectability of Keys loans as described in Note 1 (Summary of
Significant Accounting Policies) under the heading Allowance for Loan Losses on page 79 of Keys
2008 Annual Report to Shareholders.
28
10. Capital Securities Issued by Unconsolidated Subsidiaries
KeyCorp owns the outstanding common stock of business trusts that issued corporation-obligated
mandatorily redeemable preferred capital securities. The trusts used the proceeds from the
issuance of their capital securities and common stock to buy debentures issued by KeyCorp. These
debentures are the trusts only assets; the interest payments from the debentures finance the
distributions paid on the capital securities.
The capital securities provide an attractive source of funds: they constitute Tier 1 capital for
regulatory reporting purposes, but have the same tax advantages as debt for federal income tax
purposes. During the first quarter of 2005, the Board of Governors of the Federal Reserve
(Federal Reserve) adopted a rule that allows bank holding companies to continue to treat capital
securities as Tier 1 capital, but imposed stricter quantitative limits that would have taken effect
March 31, 2009. On March 17, 2009, in light of continued stress in the financial markets, the
Federal Reserve Board delayed the effective date of these new limits until March 31, 2011.
Management believes the new rule will not have any material effect on Keys financial condition.
KeyCorp unconditionally guarantees the following payments or distributions on behalf of the trusts:
¨ |
|
required distributions on the capital securities; |
|
¨ |
|
the redemption price when a capital security is redeemed; and |
|
¨ |
|
the amounts due if a trust is liquidated or terminated. |
On June 3, 2009, KeyCorp commenced an offer to exchange KeyCorps common shares, $1 par value,
for any and all institutional capital securities issued by the KeyCorp Capital I, KeyCorp Capital
II, KeyCorp Capital III and KeyCorp Capital VII trusts. The institutional exchange offer, which
expired on June 30, 2009, is a component of KeyCorps comprehensive capital plan, which was
submitted to the Federal Reserve Bank of Cleveland on June 1, 2009, following the May 7, 2009,
announcement of the results of the forward-looking capital assessment, or stress test, conducted
pursuant to the Supervisory Capital Assessment Program (SCAP) initiated by the United States
Department of the Treasury (U.S. Treasury) and the federal banking regulators. As previously
disclosed, KeyCorps regulators determined that KeyCorp needed to increase its Tier 1 common equity
by $1.8 billion in order to satisfy the requirements of the SCAP.
In an effort to further enhance its Tier 1 common equity, on July 8, 2009, KeyCorp commenced a
separate offer to exchange KeyCorps common shares, $1 par value, for any and all retail capital
securities issued by the KeyCorp Capital V, KeyCorp Capital VI, KeyCorp Capital VIII, KeyCorp
Capital IX and KeyCorp Capital X trusts. On July 22, 2009, KeyCorp amended its retail exchange
offer, which expired on August 4, 2009, to reduce the maximum aggregate liquidation preference
amount that would be accepted from $1.740 billion to $500 million.
For further information related to the status of these exchange offers and other capital-generating
activities, see Note 11 (Shareholders Equity), which begins on page 31. Additional information
regarding the SCAP assessment is included in the Capital section under the heading Financial
Stability Plan on page 93.
29
The capital securities, common stock and related debentures are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal |
|
|
Interest Rate |
|
|
Maturity |
|
|
|
Capital |
|
|
|
|
|
|
Amount of |
|
|
of Capital |
|
|
of Capital |
|
|
|
Securities, |
|
|
Common |
|
|
Debentures, |
|
|
Securities and |
|
|
Securities and |
|
dollars in millions |
|
Net of Discount |
(a) |
|
Stock |
|
|
Net of Discount |
(b) |
|
Debentures |
(c) |
|
Debentures |
|
|
June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KeyCorp Capital I |
|
$ |
156 |
|
|
$ |
6 |
|
|
$ |
158 |
|
|
|
1.948 |
% |
|
|
2028 |
|
KeyCorp Capital II |
|
|
101 |
|
|
|
4 |
|
|
|
100 |
|
|
|
6.875 |
|
|
|
2029 |
|
KeyCorp Capital III |
|
|
136 |
|
|
|
4 |
|
|
|
127 |
|
|
|
7.750 |
|
|
|
2029 |
|
KeyCorp Capital V |
|
|
175 |
|
|
|
6 |
|
|
|
194 |
|
|
|
5.875 |
|
|
|
2033 |
|
KeyCorp Capital VI |
|
|
75 |
|
|
|
2 |
|
|
|
83 |
|
|
|
6.125 |
|
|
|
2033 |
|
KeyCorp Capital VII |
|
|
173 |
|
|
|
5 |
|
|
|
187 |
|
|
|
5.700 |
|
|
|
2035 |
|
KeyCorp Capital VIII |
|
|
271 |
|
|
|
|
|
|
|
278 |
|
|
|
7.000 |
|
|
|
2066 |
|
KeyCorp Capital IX |
|
|
534 |
|
|
|
|
|
|
|
531 |
|
|
|
6.750 |
|
|
|
2066 |
|
KeyCorp Capital X |
|
|
778 |
|
|
|
|
|
|
|
775 |
|
|
|
8.000 |
|
|
|
2068 |
|
Union State Capital I |
|
|
20 |
|
|
|
1 |
|
|
|
21 |
|
|
|
9.580 |
|
|
|
2027 |
|
Union State Statutory II |
|
|
20 |
|
|
|
1 |
|
|
|
21 |
|
|
|
4.619 |
|
|
|
2031 |
|
Union State Statutory IV |
|
|
10 |
|
|
|
|
|
|
|
10 |
|
|
|
3.931 |
|
|
|
2034 |
|
|
Total |
|
$ |
2,449 |
|
|
$ |
29 |
|
|
$ |
2,485 |
|
|
|
6.769 |
% |
|
|
|
|
|
December 31, 2008 |
|
$ |
3,042 |
|
|
$ |
40 |
|
|
$ |
3,084 |
|
|
|
6.931 |
% |
|
|
|
|
|
June 30, 2008 |
|
$ |
2,622 |
|
|
$ |
40 |
|
|
$ |
2,675 |
|
|
|
6.814 |
% |
|
|
|
|
|
|
|
|
(a) |
|
The capital securities must be redeemed when the related debentures mature, or earlier if
provided in the governing indenture. Each issue of capital securities carries an interest
rate identical to that of the related debenture. Included in certain capital securities at
June 30, 2009, December 31, 2008, and June 30, 2008, are basis adjustments of $158 million,
$459 million and $39 million, respectively, related to fair value hedges. See Note 15
(Derivatives and Hedging Activities), which begins on page 37, for an explanation of fair
value hedges. |
|
(b) |
|
KeyCorp has the right to redeem its debentures: (i) in whole or in part, on or after July 1,
2008 (for debentures owned by KeyCorp Capital I); March 18, 1999 (for debentures owned by
KeyCorp Capital II); July 16, 1999 (for debentures owned by KeyCorp Capital III); July 21,
2008 (for debentures owned by KeyCorp Capital V); December 15, 2008 (for debentures owned by
KeyCorp Capital VI); June 15, 2010 (for debentures owned by KeyCorp Capital VII); June 15,
2011 (for debentures owned by KeyCorp Capital VIII); December 15, 2011 (for debentures owned
by KeyCorp Capital IX); March 15, 2013 (for debentures owned by KeyCorp Capital X); February
1, 2007 (for debentures owned by Union State Capital I); July 31, 2006 (for debentures owned
by Union State Statutory II); and April 7, 2009 (for debentures owned by Union State Statutory
IV); and (ii) in whole at any time within 90 days after and during the continuation of a tax
event, an investment company event or a capital treatment event (as defined in the
applicable indenture). If the debentures purchased by KeyCorp Capital I, KeyCorp Capital V,
KeyCorp Capital VI, KeyCorp Capital VII, KeyCorp Capital VIII, KeyCorp Capital IX, KeyCorp
Capital X or Union State Statutory IV are redeemed before they mature, the redemption price
will be the principal amount, plus any accrued but unpaid interest. If the debentures
purchased by KeyCorp Capital II or KeyCorp Capital III are redeemed before they mature, the
redemption price will be the greater of: (a) the principal amount, plus any accrued but unpaid
interest or (b) the sum of the present values of principal and interest payments discounted at
the Treasury Rate (as defined in the applicable indenture), plus 20 basis points (25 basis
points for KeyCorp Capital III), plus any accrued but unpaid interest. If the debentures
purchased by Union State Capital I are redeemed before they mature, the redemption price will
be 104.31% of the principal amount, plus any accrued but unpaid interest. If the debentures
purchased by Union State Statutory II are redeemed before they mature, the redemption price
will be 104.50% of the principal amount, plus any accrued but unpaid interest. When
debentures are redeemed in response to tax or capital treatment events, the redemption price
generally is slightly more favorable to KeyCorp. Included in the principal amount of
debentures at June 30, 2009, December 31, 2008, and June 30, 2008, are adjustments related to
hedging with financial instruments totaling $165 million, $461 million and $52 million,
respectively. |
|
(c) |
|
The interest rates for KeyCorp Capital II, KeyCorp Capital III, KeyCorp Capital V, KeyCorp
Capital VI, KeyCorp Capital VII, KeyCorp Capital VIII, KeyCorp Capital IX, KeyCorp Capital X
and Union State Capital I are fixed. KeyCorp Capital I has a floating interest rate equal to
three-month LIBOR plus 74 basis points that reprices quarterly. Union State Statutory II has
a floating interest rate equal to three-month LIBOR plus 358 basis points that reprices
quarterly. Union State Statutory IV has a floating interest rate equal to three-month LIBOR
plus 280 basis points that reprices quarterly. The rates shown as the totals at June 30,
2009, December 31, 2008, and June 30, 2008, are weighted-average rates. |
30
11. Shareholders Equity
Preferred Stock Private Exchanges
During April and May 2009, KeyCorp entered into agreements with certain institutional shareholders
who had contacted KeyCorp to exchange KeyCorps 7.750% Noncumulative Perpetual Convertible
Preferred Stock, Series A (Series A Preferred Stock) held by the institutional shareholders for
KeyCorps common shares, $1 par value. In the aggregate, KeyCorp exchanged 17,369,926 common
shares, or 3.25% of the issued and outstanding KeyCorp common shares at May 18, 2009, the date on
which the last of the exchange transactions settled, for 1,539,700 shares of the Series A Preferred
Stock. The exchanges were conducted in reliance upon the exemption set forth in Section 3(a)(9) of
the Securities Act of 1933, as amended, for securities exchanged by the issuer and an existing
security holder where no commission or other remuneration is paid or given directly or indirectly
by the issuer for soliciting such exchange. KeyCorp utilized treasury shares to complete the
transactions.
Supervisory Capital Assessment Program and KeyCorps Capital-Generating Activities
To implement the U.S. Treasury Capital Assistance Program (CAP), the Federal Reserve, the Federal
Reserve Banks, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller
of the Currency commenced a review of the capital of the nineteen largest U.S. banking
institutions. This review, referred to as the SCAP, involved a forward-looking capital assessment,
or stress test, of all domestic bank holding companies with risk-weighted assets of more than
$100 billion, including KeyCorp, at December 31, 2008. As announced on May 7, 2009, under the SCAP
assessment, KeyCorps regulators determined that it needed to generate $1.8 billion in additional
Tier 1 common equity or contingent common equity (i.e., mandatorily convertible preferred shares).
Information regarding the CAP and KeyCorps final SCAP assessment is included in the Capital
section under the heading Financial Stability Plan on page 93.
Pursuant to the requirements of the SCAP assessment, KeyCorp submitted a comprehensive capital plan
to the Federal Reserve Bank of Cleveland on June 1, 2009, describing KeyCorps action plan for
raising the required amount of additional Tier 1 common equity from nongovernmental sources. In
conjunction with its action plan, during the second quarter of 2009, KeyCorp completed various
transactions to generate the additional capital, as discussed below.
Common stock offering. On May 11, 2009, KeyCorp launched a public at-the-market offering of up
to $750 million in aggregate gross proceeds of its common shares, $1 par value. KeyCorp
subsequently increased the aggregate gross sales price of the common shares to be issued to $1.0
billion on June 2, 2009, and on the same date, announced that it had successfully issued all $1.0
billion in additional common shares. In conjunction with the common stock offering, KeyCorp issued
205,438,975 common shares at an average price of $4.87 per share.
Series A Preferred Stock public exchange offer. On June 3, 2009, KeyCorp launched an offer to
exchange KeyCorps common shares, $1 par value, for any and all outstanding shares of KeyCorps
Series A Preferred Stock. In connection with the Series A Preferred Stock exchange offer, which
expired on June 30, 2009, KeyCorp issued 29,232,025 common shares, or 3.67% of the issued and
outstanding KeyCorp common shares at June 30, 2009, for 2,130,461 shares of the outstanding Series
A Preferred Stock, representing $213 million aggregate liquidation preference. The exchange ratio
for this exchange offer was 13.7210 common shares per share of Series A Preferred Stock.
Institutional capital securities exchange offer. On June 3, 2009, KeyCorp launched a separate
offer to exchange KeyCorps common shares, $1 par value, for any and all institutional capital
securities issued by the KeyCorp Capital I, KeyCorp Capital II, KeyCorp Capital III and KeyCorp
Capital VII trusts. In connection with the institutional capital securities exchange offer, which
expired on June 30, 2009, KeyCorp issued 46,338,101 common shares, or 5.81% of the issued and
outstanding KeyCorp common shares at June 30, 2009, for $294 million aggregate liquidation
preference of the outstanding capital securities in the aforementioned trusts. The exchange ratios
for this exchange offer, which ranged from
31
132.5732 to 160.9818 common shares per $1,000 liquidation preference of capital securities, were
based on the timing of each investors tender offer and the trust from which the capital securities
were tendered.
In the aggregate, the Series A Preferred Stock and the institutional capital securities exchange
offers generated $544 million of additional Tier 1 common equity. Both exchanges were conducted in
reliance upon the exemption set forth in Section 3(a)(9) of the Securities Act of 1933, as amended.
On July 1, 2009, KeyCorp announced that it believes that it has now complied with the requirements
of the SCAP assessment, having generated total Tier 1 common equity in excess of $1.8 billion.
KeyCorp raised: (i) $1.5 billion of capital through the three transactions discussed above, (ii)
$149 million of capital through other exchanges of Series A Preferred Stock, (iii) $125 million of
capital through the sale of certain securities, and (iv) approximately $70 million of capital
through the reduction of Keys dividend and interest obligations on the exchanged securities
through the SCAP assessment period, which ends on December 31, 2010. Successful completion of
these transactions has strengthened KeyCorps capital framework, having improved KeyCorps Tier 1
common equity ratio, which will benefit Key should economic conditions worsen.
In an effort to further enhance its Tier 1 common equity, on July 8, 2009, KeyCorp commenced a
separate, SEC-registered offer to exchange KeyCorps common shares, $1 par value, for any and all
retail capital securities issued by the KeyCorp Capital V, KeyCorp Capital VI, KeyCorp Capital
VIII, KeyCorp Capital IX and KeyCorp Capital X trusts. As of July 21, 2009, holders of
approximately $534 million aggregate liquidation preference of capital securities had indicated
that they would be tendering securities in the retail capital securities exchange offer, subject to
applicable withdrawal rights. As a result of the success of this exchange offer, management
announced on July 22, 2009, that it would limit the total aggregate liquidation preference of
capital securities that it will accept in this exchange offer to $500 million. In connection with
this exchange offer, which expired on August 4, 2009, KeyCorp
issued 81,278,214 common shares, or 9.25% of the issued and outstanding KeyCorp common shares at August 4, 2009. The exchange ratios
for this exchange offer, which ranged from 3.8289 to 4.1518 common shares per $25 liquidation
preference of capital securities, were based on the timing of each investors tender offer and the
trust from which the capital securities were tendered. The retail capital securities exchange
offer generated approximately $505 million of additional
Tier 1 common equity.
12. Employee Benefits
Pension Plans
The components of net pension cost for all funded and unfunded plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
in millions |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Service cost of benefits earned |
|
$ |
13 |
|
|
$ |
13 |
|
|
$ |
25 |
|
|
$ |
26 |
|
Interest cost on projected benefit obligation |
|
|
14 |
|
|
|
16 |
|
|
|
29 |
|
|
|
32 |
|
Expected return on plan assets |
|
|
(16 |
) |
|
|
(24 |
) |
|
|
(32 |
) |
|
|
(47 |
) |
Amortization of prior service cost |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
Amortization of losses |
|
|
11 |
|
|
|
3 |
|
|
|
21 |
|
|
|
6 |
|
|
Net pension cost |
|
$ |
22 |
|
|
$ |
9 |
|
|
$ |
43 |
|
|
$ |
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement Benefit Plans
Key sponsors a contributory postretirement healthcare plan that covers substantially all active and
retired employees hired before 2001 who meet certain eligibility criteria. Retirees contributions
are adjusted annually to reflect certain cost-sharing provisions and benefit limitations. Key also
sponsors life insurance plans covering certain grandfathered employees. These plans are
principally noncontributory. Separate Voluntary Employee Beneficiary Association trusts are used
to fund the healthcare plan and one of the life insurance plans.
32
The components of net postretirement benefit cost for all funded and unfunded plans are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
in millions |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Service cost of benefits earned |
|
|
|
|
|
|
$ 1 |
|
|
|
|
|
|
|
$ 1 |
|
Interest cost on accumulated postretirement benefit obligation |
|
|
$ 1 |
|
|
|
1 |
|
|
|
$ 2 |
|
|
|
2 |
|
Expected return on plan assets |
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(2 |
) |
Amortization of unrecognized: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service benefit |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
Cumulative net gain |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
Net postretirement benefit income |
|
|
|
|
|
|
$ (1 |
) |
|
|
|
|
|
|
$ (1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13. Income Taxes
Lease Financing Transactions
During the second quarter of 2009, Key and the IRS resolved all outstanding federal income tax
issues for tax years 1997-2003, including all outstanding lease in, lease out (LILO) and sale in,
sale out (SILO) tax issues for all open tax years through the execution of closing agreements in
the first and second quarter. Key and the IRS are currently completing the final tax calculations
for the tax years 1997-2003 and the IRS is continuing its audits of Keys 2004-2006 tax years. Key
has deposited $2.0 billion with the IRS to cover the anticipated amount of taxes and associated
interest cost due to the IRS for all tax years affected by the LILO/SILO tax settlement.
During 2009, Key will amend its state tax returns to reflect the impact of the settlement on prior
years state tax liabilities. While the settlement with the IRS provides a waiver of federal tax
penalties, management anticipates that certain statutory penalties under state tax laws will be
imposed on Key. Although Key intends to vigorously defend its position against the imposition of
any such penalties, Key accrued an additional $1 million of potential state tax penalties during
the second quarter of 2009, and has a total of $32 million accrued for potential penalties in
accordance with current accounting guidance.
Pursuant to FASB Staff Position No. 13-2, Accounting for a Change or Projected Change in the
Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction,
management updated its assessment of the timing of the tax payments associated with the LILO/SILO
settlement during both the second and first quarters of 2009. As a result, Key recognized a $4
million ($2 million after tax) increase to earnings during the second quarter and a $5 million ($3
million after tax) increase during the first quarter.
Unrecognized Tax Benefits
As permitted under FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, it is
Keys policy to recognize interest and penalties related to unrecognized tax benefits in income tax
expense.
14. Contingent Liabilities and Guarantees
Legal Proceedings
Tax disputes. The information pertaining to lease financing transactions presented in Note 13
(Income Taxes) is incorporated herein by reference.
Taylor litigation. On August 11, 2008, a purported class action case was filed against KeyCorp,
its directors and certain employees (collectively, the Key parties), captioned Taylor v. KeyCorp
et al., in the United States District Court for the Northern District of Ohio. On September 16,
2008, a second and related case was filed in the same district court, captioned Wildes v. KeyCorp
et al. The plaintiffs in these cases seek to represent a class of all participants in Keys 401(k)
Savings Plan and allege that the Key parties breached fiduciary duties owed to them under the
Employee Retirement Income Security Act (ERISA). On January 7, 2009, the Court consolidated the
Taylor and Wildes lawsuits into a single action. Plaintiffs have since filed their consolidated
complaint, which continues to name certain employees as defendants but no longer names any outside
directors. Key strongly disagrees with the allegations contained in the complaints and the
consolidated complaint, and intends to vigorously defend against them.
33
Madoff-related claims. In December 2008, Austin Capital Management, Ltd. (Austin), an
investment subsidiary that specializes in managing hedge fund investments for its institutional
customer base, determined that its funds had suffered investment losses of up to approximately $186
million resulting from the crimes perpetrated by Bernard L. Madoff and entities that he controls.
The investment losses borne by Austins clients stem from investments that Austin made in certain
Madoff-advised hedge funds. Several lawsuits, including putative class actions and direct
actions, and one arbitration proceeding were filed against Austin seeking to recover losses
incurred as a result of Madoffs crimes. The lawsuits and arbitration proceeding allege various
claims, including negligence, fraud, breach of fiduciary duties and violations of federal
securities laws and the ERISA. In the event Key were to incur any liability for this matter, Key
believes such liability would be covered under the terms and conditions of its insurance policy,
subject to a $25 million self-insurance deductible and usual policy exceptions.
In April 2009, management made the decision to curtail Austins operations and expects that the
related charges will not be material. Information regarding the Austin discontinued operations is
included in Note 3 (Acquisition and Divestiture), on page 12.
Other litigation. In the ordinary course of business, Key is subject to other legal actions that
involve claims for substantial monetary relief. Based on information presently known to
management, management does not believe there is any legal action to which KeyCorp or any of its
subsidiaries is a party, or involving any of their properties that, individually or in the
aggregate, would reasonably be expected to have a material adverse effect on Keys financial
condition.
Guarantees
Key is a guarantor in various agreements with third parties. The following table shows the types
of guarantees that Key had outstanding at June 30, 2009. Information pertaining to the basis for
determining the liabilities recorded in connection with these guarantees is included in Note 1
(Summary of Significant Accounting Policies) under the heading Guarantees on page 82 of Keys
2008 Annual Report to Shareholders.
|
|
|
|
|
|
|
|
|
|
|
Maximum Potential |
|
|
|
|
June 30, 2009 |
|
Undiscounted |
|
|
Liability |
|
in millions |
|
Future Payments |
|
|
Recorded |
|
|
Financial guarantees: |
|
|
|
|
|
|
|
|
Standby letters of credit |
|
|
$13,093 |
|
|
|
$100 |
|
Recourse agreement with FNMA |
|
|
706 |
|
|
|
6 |
|
Return guarantee agreement with LIHTC investors |
|
|
213 |
|
|
|
62 |
|
Written interest rate caps (a) |
|
|
188 |
|
|
|
31 |
|
Default guarantees |
|
|
51 |
|
|
|
2 |
|
|
Total |
|
|
$14,251 |
|
|
|
$201 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
As of June 30, 2009, the weighted-average interest rate on written interest rate
caps was .6%, and the weighted-average strike rate was 5.0%. Maximum potential
undiscounted future payments were calculated assuming a 10% interest rate. |
Management determines the payment/performance risk associated with each type of guarantee described
below based on the probability that Key could be required to make the maximum potential
undiscounted future payments shown in the preceding table. Management uses a scale of low (0-30%
probability of payment), moderate (31-70% probability of payment) or high (71-100% probability of
payment) to assess the payment/performance risk, and has determined that the payment/performance
risk associated with each type of guarantee outstanding at June 30, 2009, is low.
Standby letters of credit. Many of Keys lines of business issue standby letters of credit to
address clients financing needs. These instruments obligate Key to pay a specified third party
when a client fails to repay an outstanding loan or debt instrument, or fails to perform some
contractual nonfinancial obligation. Any amounts drawn under standby letters of credit are treated
as loans; they bear interest (generally at variable rates) and pose the same credit risk to Key as
a loan. At June 30, 2009, Keys standby letters of credit had a remaining weighted-average life of
approximately 1.9 years, with remaining actual lives ranging from less than one year to as many as
nine years.
34
Recourse agreement with Federal National Mortgage Association. KeyBank participates as a
lender in the Federal National Mortgage Association (FNMA) Delegated Underwriting and Servicing
program. As a condition to FNMAs delegation of responsibility for originating, underwriting and
servicing mortgages, KeyBank has agreed to assume a limited portion of the risk of loss during the
remaining term on each commercial mortgage loan KeyBank sells to FNMA. Accordingly, KeyBank
maintains a reserve for such potential losses in an amount estimated by management to approximate
the fair value of KeyBanks liability. At June 30, 2009, the outstanding commercial mortgage loans
in this program had a weighted-average remaining term of 6.8 years, and the unpaid principal
balance outstanding of loans sold by KeyBank as a participant in this program was approximately
$2.2 billion. As shown in the table on page 34, the maximum potential amount of undiscounted
future payments that KeyBank could be required to make under this program is equal to approximately
one-third of the principal balance of loans outstanding at June 30, 2009. If KeyBank is required
to make a payment, it would have an interest in the collateral underlying the related commercial
mortgage loan.
Return guarantee agreement with LIHTC investors. KAHC, a subsidiary of KeyBank, offered limited
partnership interests to qualified investors. Partnerships formed by KAHC invested in low-income
residential rental properties that qualify for federal low income housing tax credits under Section
42 of the Internal Revenue Code. In certain partnerships, investors paid a fee to KAHC for a
guaranteed return that is based on the financial performance of the property and the propertys
confirmed LIHTC status throughout a fifteen-year compliance period. If KAHC defaults on its
obligation to provide the guaranteed return, Key is obligated to make any necessary payments to
investors. These guarantees have expiration dates that extend through 2019, but there have been no
new partnerships under this program since October 2003. Additional information regarding these
partnerships is included in Note 8 (Variable Interest Entities), which begins on page 26.
No recourse or collateral is available to offset Keys guarantee obligation other than the
underlying income stream from the properties. Any guaranteed returns that are not met through
distribution of tax credits and deductions associated with the specific properties from the
partnerships remain Keys obligation.
As shown in the table on page 34, KAHC maintained a reserve in the amount of $62 million at June
30, 2009, which management believes will be sufficient to cover estimated future obligations under
the guarantees. The maximum exposure to loss reflected in the table represents undiscounted future
payments due to investors for the return on and of their investments.
Written interest rate caps. In the ordinary course of business, Key writes interest rate caps
for commercial loan clients that have variable rate loans with Key and wish to limit their exposure
to interest rate increases. At June 30, 2009, outstanding caps had a weighted-average life of
approximately 1.6 years.
Key is obligated to pay the client if the applicable benchmark interest rate exceeds a specified
level (known as the strike rate). These instruments are accounted for as derivatives. Key
typically mitigates its potential future payments by entering into offsetting positions with third
parties.
Default guarantees. Some lines of business participate in guarantees that obligate Key to perform
if the debtor fails to satisfy all of its payment obligations to third parties. Key generally
undertakes these guarantees in instances where the risk profile of the debtor should provide an
investment return or to support its underlying investment. The terms of these default guarantees
range from less than one year to as many as thirteen years, while some default guarantees do not
have a contractual end date. Although no collateral is held, Key would receive a pro rata share
should the third party collect some or all of the amounts due from the debtor.
Other Off-Balance Sheet Risk
Other off-balance sheet risk stems from financial instruments that do not meet the definition of a
guarantee as specified in Interpretation No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, and from
other relationships.
35
Liquidity facilities that support asset-backed commercial paper conduits. Key provides liquidity
facilities to several unconsolidated third-party commercial paper conduits. These facilities
obligate Key to provide funding if there is a credit market disruption or there are other factors
that would preclude the issuance of commercial paper by the conduits. The liquidity facilities,
all of which expire by November 10, 2010, obligate Key to provide aggregate funding of up to $728
million, with individual facilities ranging from $37 million to $100 million. The aggregate amount
available to be drawn is based on the amount of current commitments to borrowers and totaled $547
million at June 30, 2009. At that date, $111 million had been drawn under these committed
facilities. Management periodically evaluates Keys commitments to provide liquidity.
Indemnifications provided in the ordinary course of business. Key provides certain
indemnifications, primarily through representations and warranties in contracts that are entered
into in the ordinary course of business in connection with loan sales and other ongoing activities,
as well as in connection with purchases and sales of businesses. Key maintains reserves, when
appropriate, with respect to liability that reasonably could arise in connection with these
indemnities.
Intercompany guarantees. KeyCorp and certain Key affiliates are parties to various guarantees that
facilitate the ongoing business activities of other Key affiliates. These business activities
encompass debt issuance, certain lease and insurance obligations, the purchase or issuance of
investments and securities, and certain leasing transactions involving clients.
Heartland Payment Systems Matter. Under an agreement between KeyBank and Heartland Payment
Systems, Inc. (Heartland), Heartland utilizes KeyBanks membership in the Visa and MasterCard
networks to register as an Independent Sales Organization for Visa and a Member Service Provider
with MasterCard to provide merchant payment processing services for Visa and MasterCard
transactions. On January 20, 2009, Heartland publicly announced its discovery of an alleged
criminal breach of its credit card payment processing systems environment (the Intrusion) that
reportedly occurred during 2008 and is alleged to have involved the malicious collection of
in-transit, unencrypted payment card data that was being processed by Heartland.
In Heartlands Form 10-K filed with the Securities and Exchange Commission on March 16, 2009
(Heartlands 2008 Form 10-K), Heartland reported that it expects the major card brands, including
Visa and MasterCard, to assert claims seeking to impose fines, penalties, and/or other assessments
against Heartland and/or certain card brand members, such as KeyBank, as a result of the alleged
potential breach of the respective card brand rules and regulations and the Intrusion. Heartland
also indicated that it is likely that the overall costs associated with the Intrusion will be
material to it, and that it may need to seek financing in order to pay such costs. In Heartlands
Form 8-K filed with the Securities and Exchange Commission on August 4, 2009 (Earnings Release),
Heartland reported that it expensed a total of $19.4 million and $32.0 million for the three and
six months ended June 30, 2009, respectively, related to the Intrusion. Heartland also indicated
that $22.1 million of such charges relate to fines imposed by the card brands in April 2009 against
the company and its sponsor banks and a settlement offer made by Heartland to resolve certain of
the claims asserted against it. Heartlands Earnings Release also reported the accrual of a $14.4
million reserve in connection with the settlement offer. Heartland further reported that the
ultimate cost of resolving the claims that are the subject of the settlement offer may
substantially exceed the amount that Heartland has accrued. Furthermore, even if the claims that
are the subject of the settlement offer are resolved, Heartland indicated that most of the claims
asserted against Heartland would still remain unresolved. Heartland continues to report that it is
likely that the overall costs associated with the Intrusion will be material to it, and that they
could have a material adverse effect on the results of its operations and financial condition.
KeyBank has received letters from both Visa and MasterCard assessing fines, penalties or
assessments related to the Intrusion. KeyBank is in the process of pursuing appeals of such fines,
penalties or assessments. Visa and MasterCard (as well as Heartland and KeyBank) are each still
investigating the matter, and they may revise their respective assessments. Under its agreement
with Heartland, KeyBank has certain rights of indemnification from Heartland for costs assessed
against it by Visa and MasterCard and other associated costs, and KeyBank has notified Heartland of
its indemnification rights. In the event that Heartland is unable to fulfill its indemnification
obligations to KeyBank, the charges (net of any
36
indemnification) could be significant, although it is not possible to quantify at this time.
Accordingly, under applicable accounting rules, KeyBank has not established any reserve. For
further information on Heartland and the Intrusion, please review Heartlands 2008 Form 10-K,
Heartlands Form 10-Q filed with the Securities and Exchange Commission on May 11, 2009, and
Heartlands Earnings Release.
15. Derivatives and Hedging Activities
Key, mainly through its subsidiary bank, KeyBank, is party to various derivative instruments
that are used for interest rate risk management, credit risk management and trading purposes.
Derivative instruments are contracts between two or more parties that have a notional amount and
underlying variable, require no net investment and allow for the net settlement of positions. The
notional amount serves as the basis for the payment provision of the contract and takes the form of
units, such as shares or dollars. The underlying variable represents a specified interest rate,
index or other component. The interaction between the notional amount and the underlying variable
determines the number of units to be exchanged between the parties and influences the market value
of the derivative contract.
The primary derivatives that Key uses are interest rate swaps, caps, floors and futures, foreign
exchange contracts, energy derivatives, credit derivatives and equity derivatives. Generally,
these instruments help Key manage exposure to interest rate risk, mitigate the credit risk inherent
in the loan portfolio, and meet client financing and hedging needs. Interest rate risk represents
the possibility that economic value or net interest income will be adversely affected by
fluctuations in interest rates. Credit risk is defined as the risk of loss arising from an
obligors inability or failure to meet contractual payment or performance terms.
Derivative assets and liabilities are recorded at fair value on the balance sheet, after taking
into account the effects of master netting agreements. These master netting agreements allow Key
to settle all derivative contracts held with a single counterparty on a net basis, and to offset
net derivative positions with related cash collateral, where applicable. As a result, Key could
have derivative contracts with negative fair values included in derivative assets on the balance
sheet and contracts with positive fair values included in derivative liabilities.
At June 30, 2009, after taking into account the effects of bilateral collateral and master netting
agreements, Key had $250 million of derivative assets and $107 million of derivative liabilities
that relate to contracts entered into for hedging purposes. As of the same date, after taking into
account the effects of such agreements, and a reserve for potential future losses, Key had
derivative assets of $932 million and derivative liabilities of $423 million that were not
designated as hedging instruments.
Interest Rate Risk Management
Fluctuations in net interest income and the economic value of equity may result from changes in
interest rates, and differences in the repricing and maturity characteristics of interest-earning
assets and interest-bearing liabilities. To minimize the volatility of net interest income and the
economic value of equity, Key manages exposure to interest rate risk in accordance with guidelines
established by the Asset/Liability Management Committee. The primary derivative instruments used
to manage interest rate risk are interest rate swaps, which modify the interest rate
characteristics of certain assets and liabilities. These instruments are used to convert the
contractual interest rate index of agreed-upon amounts of assets and liabilities (i.e., notional
amounts) to another interest rate index.
Key has designated certain receive fixed/pay variable interest rate swaps as fair value hedges,
primarily to modify its exposure to interest rate risk. These contracts convert certain fixed-rate
long-term debt into variable-rate obligations. As a result, Key receives fixed-rate interest
payments in exchange for making variable-rate payments over the lives of the contracts without
exchanging the underlying notional amounts.
Additionally, Key has designated certain receive fixed/pay variable interest rate swaps as cash
flow hedges. These contracts effectively convert certain floating-rate loans into fixed-rate loans
to reduce the potential adverse impact from interest rate decreases on future interest income.
These contracts allow Key to receive fixed-rate interest payments in exchange for making
variable-rate payments over the lives of the contracts without exchanging the underlying notional
amounts. Similarly, Key has designated certain pay
37
fixed/receive variable interest rate swaps as cash flow hedges to convert certain floating-rate
debt into fixed-rate debt.
Key also uses interest rate swaps to hedge the floating-rate debt that funds fixed-rate leases
entered into by Keys Equipment Finance line of business. These swaps are designated as cash flow
hedges to mitigate the interest rate mismatch between the fixed-rate lease cash flows and the
floating-rate payments on the debt.
Key has used pay fixed/receive variable interest rate swaps as cash flow hedges to manage the
interest rate risk associated with anticipated sales of certain commercial real estate loans.
These swaps protected against a possible short-term decline in the value of the loans that could
result from changes in interest rates between the time they were originated and the time they were
sold. During the first quarter of 2009, these hedges were terminated. Therefore, Key did not have
any of these hedges outstanding at March 31 or June 30, 2009.
Foreign Currency Exchange Risk Management
The derivatives used for managing foreign currency exchange risk are cross currency swaps. Key has
several outstanding issues of medium-term notes that are denominated in a foreign currency. The
notes are subject to translation risk, which represents the possibility that changes in the fair
value of the foreign-denominated debt will occur based on movement of the underlying foreign
currency spot rate. It is Keys practice to hedge against potential fair value changes caused by
changes in foreign currency exchange rates and interest rates. The hedge converts the notes to a
variable-rate functional currency-denominated debt, which is designated as a fair value hedge of
foreign currency exchange risk.
Credit Risk Management
Like other financial services institutions, Key originates loans and extends credit, both of which
expose Key to credit risk. Key actively manages its overall loan portfolio, and the associated
credit risk, in a manner consistent with asset quality objectives. This process entails the use of
credit derivatives ¾ primarily credit default swaps ¾ to mitigate Keys credit risk.
Credit default swaps enable Key to transfer a portion of the credit risk associated with a
particular extension of credit to a third party, and to manage portfolio concentration and
correlation risks. Occasionally, Key also provides credit protection to other lenders through the
sale of credit default swaps. In most instances, this objective is accomplished through the use of
an investment-grade diversified dealer-traded basket of credit default swaps. These transactions
may generate fee income, and diversify and reduce overall portfolio credit risk volatility.
Although Key uses these instruments for risk management purposes, they are not treated as hedging
instruments as defined by SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities.
Trading Portfolio
Keys trading portfolio consists of the following instruments:
|
¨ |
|
interest rate swap, cap, floor and futures contracts entered into generally to accommodate
the needs of commercial loan clients; |
|
|
¨ |
|
energy swap and options contracts entered into to accommodate the needs of clients; |
|
|
¨ |
|
foreign exchange forward contracts entered into to accommodate the needs of clients; |
|
|
¨ |
|
positions with third parties that are intended to offset or mitigate the interest rate or
market risk related to client positions discussed above; and |
|
|
¨ |
|
interest rate swaps, foreign exchange forward contracts and credit default swaps used for
proprietary trading purposes. |
Key does not apply hedge accounting to any of these contracts.
38
Fair Values, Volume of Activity and Gain/Loss Information Related to Derivative Instruments
The following table summarizes the fair values of Keys derivative instruments on a gross basis as
of March 31 and June 30, 2009, and the volume of Keys derivative transaction activity during the
second quarter of 2009. The volume of activity is represented by the change from March 31, 2009,
to June 30, 2009, in the notional amounts of Keys gross derivatives by type. The notional amounts
are not affected by bilateral collateral and master netting agreements. Keys derivative
instruments are recorded in derivative assets or derivative liabilities on the balance sheet,
as indicated in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
March 31, 2009 |
|
|
|
|
|
|
Fair Value |
|
|
|
|
|
|
Fair Value |
|
|
Notional |
|
|
Derivative |
|
|
Derivative |
|
|
Notional |
|
|
Derivative |
|
|
Derivative |
|
in millions |
|
Amount |
|
|
Assets |
|
|
Liabilities |
|
|
Amount |
|
|
Assets |
|
|
Liabilities |
|
|
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate |
|
$ |
23,234 |
|
|
$ |
561 |
|
|
$ |
14 |
|
|
$ |
22,279 |
|
|
$ |
876 |
|
|
$ |
14 |
|
Foreign exchange |
|
|
2,550 |
|
|
|
68 |
|
|
|
324 |
|
|
|
2,309 |
|
|
|
46 |
|
|
|
434 |
|
|
Total |
|
|
25,784 |
|
|
|
629 |
|
|
|
338 |
|
|
|
24,588 |
|
|
|
922 |
|
|
|
448 |
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate |
|
|
78,564 |
|
|
|
1,664 |
|
|
|
1,525 |
|
|
|
85,314 |
|
|
|
2,284 |
|
|
|
2,075 |
|
Foreign exchange |
|
|
7,317 |
|
|
|
222 |
|
|
|
193 |
|
|
|
9,513 |
|
|
|
422 |
|
|
|
380 |
|
Energy and commodity |
|
|
2,155 |
|
|
|
533 |
|
|
|
562 |
|
|
|
1,896 |
|
|
|
721 |
|
|
|
751 |
|
Credit |
|
|
7,012 |
|
|
|
94 |
|
|
|
99 |
|
|
|
7,142 |
|
|
|
171 |
|
|
|
173 |
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
Total |
|
|
95,048 |
|
|
|
2,513 |
|
|
|
2,379 |
|
|
|
103,866 |
|
|
|
3,599 |
|
|
|
3,379 |
|
|
Netting adjustments
(a) |
|
|
N/A |
|
|
|
(1,960 |
) |
|
|
(2,187 |
) |
|
|
N/A |
|
|
|
(2,814 |
) |
|
|
(2,895 |
) |
|
Total derivatives |
|
$ |
120,832 |
|
|
$ |
1,182 |
|
|
$ |
530 |
|
|
$ |
128,454 |
|
|
$ |
1,707 |
|
|
$ |
932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Netting adjustments represent the amounts recorded to convert Keys derivative assets and
liabilities from a gross basis to a net basis in accordance with Keys January 1, 2008,
adoption of FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts,
and FASB Staff Position No. FIN 39-1, Amendment of FASB Interpretation 39. The net basis
takes into account the impact of master netting agreements that allow Key to settle all
derivative contracts with a single counterparty
on a net basis and to offset the net derivative position with the related cash collateral. |
N/A = Not Applicable
Fair value hedges. These hedging instruments are recorded at fair value and included in
derivative assets or derivative liabilities on the balance sheet. The effective portion of a
change in the fair value of a hedging instrument designated as a fair value hedge is recorded in
earnings at the same time as a change in fair value of the hedged item, resulting in no effect on
net income. The ineffective portion of a change in the fair value of such a hedging instrument is
recognized in other income on the income statement with no corresponding offset. During the
six-month period ended June 30, 2009, Key did not exclude any portion of hedging instruments from
the assessment of hedge effectiveness. While some ineffectiveness is present in Keys hedging
relationships, all of Keys fair value hedges remained highly effective during the second
quarter.
The following table summarizes the pre-tax net gains (losses) on Keys fair value hedges during the
six-month period ended June 30, 2009, and where they are recorded on the income statement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Gains |
|
|
|
|
|
|
|
|
Net Gains |
|
Six months ended June 30, 2009 |
|
Income Statement Location |
|
(Losses) |
|
|
|
|
Income Statement Location |
|
(Losses) |
|
in millions |
|
of Net Gains (Losses) on Derivative |
|
on Derivative |
|
|
Hedged Item |
|
of Net Gains (Losses) on Hedged Item |
|
on Hedged Item |
|
|
Interest rate |
|
Other income |
|
|
$(437 |
) |
|
Long-term debt |
|
Other income |
|
|
$439 |
(a) |
Interest rate |
|
Interest expense Long-term debt |
|
|
112 |
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange |
|
Other income |
|
|
66 |
|
|
Long-term debt |
|
Other income |
|
|
(69 |
) (a) |
Foreign exchange |
|
Interest expense Long-term debt |
|
|
12 |
|
|
Long-term debt |
|
Interest expense Long-term debt |
|
|
(31 |
) (b) |
|
Total |
|
|
|
|
|
|
$(247 |
) |
|
|
|
|
|
|
|
|
$339 |
|
|
|
|
|
|
(a) |
|
Net gains on hedged items represent the change in fair value caused by fluctuations in
interest rates. |
|
(b) |
|
Net losses on hedged items represent the change in fair value caused by fluctuations in foreign
currency exchange rates. |
Cash flow hedges. These hedging instruments are recorded at fair value and included in
derivative assets or derivative liabilities on the balance sheet. The effective portion of a
gain or loss on a cash flow hedge is recorded as a component of AOCI on the balance sheet. The
amounts are reclassified into earnings in the same period in which the hedged transaction impacts
earnings, such as when Key pays variable-rate interest on debt, receives variable-rate interest on
commercial loans or sells commercial real estate loans. The ineffective portion of cash flow
hedging transactions is included in other income on the
39
income statement. During the six-month period ended June 30, 2009, Key did not exclude any portion
of its hedging instruments from the assessment of hedge effectiveness. While some ineffectiveness
is present in Keys hedging relationships, all of Keys cash flow hedges remained highly
effective during the first half of 2009.
The following table summarizes the pre-tax net gains (losses) on Keys cash flow hedges during the
six-month period ended June 30, 2009, and where they are recorded on the income statement. The
table includes the effective portion of net gains (losses) recognized in other comprehensive
income (loss) (OCI) during the period, the effective portion of net gains (losses) reclassified
from OCI into income during the current period, and the portion of net gains (losses) recorded
directly in income, representing the amount of hedge ineffectiveness.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Statement |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Gains |
|
|
Location |
|
Net Gains |
|
|
|
Net Gains (Losses) |
|
|
|
|
|
|
(Losses) Reclassified |
|
|
of Net Gains (Losses) |
|
(Losses) Recognized |
|
Six months ended June 30, 2009 |
|
Recognized in OCI |
|
|
Income Statement Location of Net Gains (Losses) |
|
From OCI Into Income |
|
|
Recognized in Income |
|
in Income |
|
in millions |
|
(Effective Portion) |
|
|
Reclassified From OCI Into Income (Effective Portion) |
|
(Effective Portion) |
|
|
(Ineffective Portion) |
|
(Ineffective Portion) |
|
|
Interest rate |
|
$ |
102 |
|
|
Interest income Loans |
|
$ |
233 |
|
|
Other income |
|
$ |
(1 |
) |
Interest rate |
|
|
25 |
|
|
Interest expense Long-term debt |
|
|
(9 |
) |
|
Other income |
|
|
1 |
|
Interest rate |
|
|
4 |
|
|
Net (losses) gains from loan securitizations and sales |
|
|
5 |
|
|
Other income |
|
|
|
|
|
Total |
|
$ |
131 |
|
|
|
|
|
|
$ |
229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The after-tax change in AOCI resulting from cash flow hedges is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification |
|
|
|
|
|
|
December 31, |
|
|
2009 |
|
|
of Gains to |
|
|
June 30, |
|
in millions |
|
2008 |
|
|
Hedging Activity |
|
|
Net Income |
|
|
2009 |
|
|
Accumulated other comprehensive income
resulting from cash flow hedges |
|
$ |
238 |
|
|
$ |
82 |
|
|
$ |
(143 |
) |
|
$ |
177 |
|
|
Given the interest rates, yield curves and notional amounts as of June 30, 2009, management
would expect to reclassify an estimated $37 million of net losses on derivative instruments from
AOCI to earnings during the next twelve months. The maximum length of time over which forecasted
transactions are hedged is nineteen years.
Nonhedging instruments. Keys derivatives that are not used in hedging relationships are recorded
at fair value in derivative assets and derivative liabilities on the balance sheet.
Adjustments to the fair values of these instruments, as well as any premium paid or received, are
included in investment banking and capital markets income on the income statement.
The following table summarizes the pre-tax net gains (losses) on Keys derivative instruments that
are not used in hedging relationships for the six-month period ended June 30, 2009, and where they
are recorded on the income statement.
|
|
|
|
|
Six months ended June 30, 2009 |
|
Net Gains |
|
in millions |
|
(Losses) |
(a) |
|
Interest rate |
|
$ |
15 |
|
Foreign exchange |
|
|
31 |
|
Energy and commodity |
|
|
4 |
|
Credit |
|
|
(23 |
) |
Equity (b) |
|
|
|
|
|
Total |
|
$ |
27 |
|
|
|
|
|
|
(a) |
|
Recorded in investment banking and capital markets income on the
income statement. |
|
(b) |
|
Key enters into equity contracts to accommodate the needs of clients
and offsets these positions with third parties. Key did not enter into
any new equity contracts during the six months ended June 30, 2009. |
40
Counterparty Credit Risk
Like other financial instruments, derivatives contain an element of credit risk. This risk is
measured as the expected positive replacement value of the contracts. Key uses several means to
mitigate and manage exposure to credit risk on derivative contracts. Key generally enters into
bilateral collateral and master netting agreements using standard forms published by the
International Swaps and Derivatives Association (ISDA). These agreements provide for the net
settlement of all contracts with a single counterparty in the event of default. Additionally,
management monitors credit risk exposure to the counterparty on each contract to determine
appropriate limits on Keys total credit exposure across all product types. Management reviews
Keys collateral positions on a daily basis and exchanges collateral with its counterparties in
accordance with ISDA and other related agreements. Key generally holds collateral in the form of
cash and highly rated securities issued by the U.S. Treasury, government-sponsored enterprises or
the Government National Mortgage Association. The cash collateral netted against derivative assets
on the balance sheet totaled $533 million at June 30, 2009, $974 million at December 31, 2008, and
$196 million at June 30, 2008. The cash collateral netted against derivative liabilities totaled
$759 million at June 30, 2009, $586 million at December 31, 2008, and $531 million at June 30,
2008.
At June 30, 2009, the largest gross exposure to an individual counterparty was $308 million,
which was secured with $37 million in collateral. Additionally, Key had a derivative liability of
$348 million with this counterparty whereby Key pledged $95 million in collateral. After taking
into account the effects of a master netting agreement and collateral, Key had a net exposure of
$18 million.
The following table summarizes the fair value of Keys derivative assets by type. These assets
represent Keys gross exposure to potential loss after taking into account the effects of master
netting agreements and other means used to mitigate risk.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
in millions |
|
2009 |
|
|
2008 |
|
|
2008 |
|
|
Interest rate |
|
$ |
1,365 |
|
|
$ |
2,333 |
|
|
$ |
693 |
|
Foreign exchange |
|
|
141 |
|
|
|
279 |
|
|
|
245 |
|
Energy and commodity |
|
|
183 |
|
|
|
214 |
|
|
|
889 |
|
Credit |
|
|
26 |
|
|
|
42 |
|
|
|
37 |
|
Equity |
|
|
|
|
|
|
2 |
|
|
|
25 |
|
|
Derivative assets before cash collateral |
|
|
1,715 |
|
|
|
2,870 |
|
|
|
1,889 |
|
Less: Related cash collateral |
|
|
533 |
|
|
|
974 |
|
|
|
196 |
|
|
Total derivative assets |
|
$ |
1,182 |
|
|
$ |
1,896 |
|
|
$ |
1,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Key enters into derivative transactions with two primary groups: broker-dealers and banks, and
clients. Since these groups have different economic characteristics, Key manages counterparty
credit exposure and credit risk in a different manner for each group.
Key enters into transactions with broker-dealers and banks for purposes of asset/liability
management, risk management and proprietary trading purposes. These types of transactions
generally are high dollar volume. Key generally enters into bilateral collateral and master
netting agreements with these counterparties. At June 30, 2009, after taking into account the
effects of master netting agreements, Key had gross exposure of $1.3 billion to broker-dealers and
banks. Key had net exposure of $246 million after the application of master netting agreements and
cash collateral. Keys net exposure to broker-dealers and banks at June 30, 2009, was reduced to
$72 million by $174 million of additional collateral held in the form of securities.
Additionally, Key enters into transactions with clients to accommodate their business needs. These
types of transactions generally are low dollar volume. Key generally enters into master netting
agreements with these counterparties. In addition, Key mitigates its overall portfolio exposure
and market risk by entering into offsetting positions with other banks. Due to the smaller size
and magnitude of the individual contracts with clients, collateral is generally not exchanged on
these derivative transactions. In order to address the risk of default associated with the
uncollateralized contracts, Key has established a reserve (included in derivative assets) in the
amount of $52 million at June 30, 2009, which management
41
estimates to be the potential future losses on amounts due from client counterparties in the event
of default. At June 30, 2009, after taking into account the effects of master netting agreements,
Key had gross exposure of $1.1 billion to these counterparties. Key had net exposure of $937
million on its derivatives with clients after the application of master netting agreements, cash
collateral and the related reserve.
Credit Derivatives
Key is both a buyer and seller of credit protection through the credit derivative market. Key
purchases credit derivatives to manage the credit risk associated with specific commercial lending
obligations. Key also sells credit derivatives, mainly index credit default swaps, to diversify
the concentration risk within its loan portfolio. In addition, Key has entered into derivatives
for proprietary trading purposes.
The following table summarizes the fair value of Keys credit derivatives purchased and sold by
type as of June 30, 2009, and December 31, 2008. The fair value of credit derivatives presented
below does not take into account the effects of bilateral collateral or master netting agreements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
December 31, 2008 |
|
in millions |
|
Purchased |
|
|
Sold |
|
|
Net |
|
|
Purchased |
|
|
Sold |
|
|
Net |
|
|
Single name credit default swaps |
|
$ |
60 |
|
|
$ |
(36 |
) |
|
$ |
24 |
|
|
$ |
155 |
|
|
$ |
(104 |
) |
|
$ |
51 |
|
Traded credit default swap indices |
|
|
11 |
|
|
|
(18 |
) |
|
|
(7 |
) |
|
|
34 |
|
|
|
(47 |
) |
|
|
(13 |
) |
Other |
|
|
|
|
|
|
(11 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
(8 |
) |
|
|
(8 |
) |
|
Total credit derivatives |
|
$ |
71 |
|
|
$ |
(65 |
) |
|
$ |
6 |
|
|
$ |
189 |
|
|
$ |
(159 |
) |
|
$ |
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single name credit default swaps are bilateral contracts between a buyer and seller, whereby
protection against the credit risk of a reference entity is sold. The protected credit risk is
related to adverse credit events, such as bankruptcy, failure to make payments, and acceleration or
restructuring of obligations specified in the credit derivative contract using standard
documentation terms governed by the ISDA. The credit default swap contract will reference a
specific debt obligation of the reference entity. As the seller of a single name credit
derivative, Key would be required to pay the purchaser the difference between par value and the
market price of the debt obligation (cash settlement) or receive the specified referenced asset in
exchange for payment of the par value (physical settlement) if the underlying reference entity
experiences a certain, predefined credit event. For a single name credit derivative, the notional
amount represents the maximum amount that a seller could be required to pay under the credit
derivative. In the event that physical settlement occurs and Key receives its portion of the
related debt obligation, Key will join other creditors in the liquidation process, which may result
in the recovery of a portion of the amount paid under the credit default swap contract. Key also
may purchase offsetting credit derivatives for the same reference entity from third parties that
will permit Key to recover the amount it pays should a credit event occur.
A traded credit default swap index represents a position on a basket or portfolio of reference
entities. As a seller of protection on a credit default swap index, Key would be required to pay
the purchaser if one or more of the entities in the index has a credit event. For a credit default
swap index, the notional amount represents the maximum amount that a seller could be required to
pay under the credit derivative. Upon a credit event, the amount payable is based on the
percentage of the notional amount allocated to the specific defaulting entity.
The following table provides information on the types of credit derivatives sold by Key and held on
the balance sheet at June 30, 2009, and December 31, 2008. This table includes derivatives sold
both to diversify Keys credit exposure and for proprietary trading purposes. The
payment/performance risk assessment is based on the default probabilities for the underlying
reference entities debt obligations using the credit ratings matrix provided by Moodys Investors
Service, Inc. (Moodys), specifically Moodys Idealized Cumulative Default Rates, except as
noted. The payment/performance risk shown in the table represents a weighted-average of the
default probabilities for all reference entities in the respective portfolios. These default
probabilities are directly correlated to the probability of Key having to make a payment under the
credit derivative contracts.
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
Average |
|
|
Payment / |
|
|
|
|
|
|
Average |
|
|
Payment / |
|
|
|
Notional |
|
|
Term |
|
Performance |
|
|
Notional |
|
|
Term |
|
Performance |
|
dollars in millions |
|
Amount |
|
|
(Years) |
|
|
Risk |
|
|
Amount |
|
|
(Years) |
|
|
Risk |
|
|
Single name credit default swaps |
|
$ |
1,548 |
|
|
|
2.38 |
|
|
|
5.16 |
% |
|
$ |
1,476 |
|
|
|
2.44 |
|
|
|
4.75 |
% |
Traded credit default swap indices |
|
|
1,703 |
|
|
|
1.74 |
|
|
|
6.59 |
|
|
|
1,759 |
|
|
|
1.51 |
|
|
|
4.67 |
|
Other |
|
|
50 |
|
|
|
1.50 |
|
|
|
Low |
(a) |
|
|
59 |
|
|
|
1.50 |
|
|
|
Low |
(a) |
|
Total credit derivatives sold |
|
$ |
3,301 |
|
|
|
|
|
|
|
|
|
|
$ |
3,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The other credit derivatives are not referenced to an entitys debt obligation. Management
determined the payment/performance risk based on the probability that Key could be required to
pay the maximum amount under the credit derivatives. Key has determined that the
payment/performance risk associated with the other credit derivatives is low (i.e., less than
or equal to 30% probability of payment). |
Credit Risk Contingent Features
Key has entered into certain derivative contracts that require Key to post collateral to the
counterparties when these contracts are in a net liability position. The amount of collateral to
be posted is generally based on thresholds related to Keys long-term senior unsecured credit
ratings with Moodys and Standard and Poors Ratings Services, a Division of The McGraw-Hill
Companies, Inc. (S&P). The collateral to be posted is also based on minimum transfer amounts,
which are specific to each Credit Support Annex (a component of the ISDA Master Agreement) that Key
has signed with the counterparties. In a limited number of instances, counterparties also have the
right to terminate their ISDA Master Agreements with Key if Keys ratings fall below a certain
level, usually investment-grade level (i.e., Baa3 for Moodys and BBB- for S&P). At June 30,
2009, KeyBanks ratings with Moodys and S&P were A2 and A-, respectively, and KeyCorps
ratings with Moodys and S&P were Baa1 and BBB+, respectively. Upon a downgrade of Keys
ratings, Key could be required to post additional collateral under those ISDA Master Agreements
where Key is in a net liability position. As of June 30, 2009, the aggregate fair value of all
derivative contracts with credit risk contingent features (i.e., those containing collateral
posting or termination provisions based on Keys ratings) that were in a net liability position
totaled $935 million, which includes $759 million in derivative assets and $1.7 billion in
derivative liabilities. Key had $975 million in cash and securities collateral posted to cover
those positions as of June 30, 2009.
The following table summarizes the additional cash and securities collateral that KeyBank would
have been required to deliver had the credit risk contingent features been triggered for the
derivative contracts in a net liability position as of June 30, 2009. The additional collateral
amounts were calculated based on scenarios under which KeyBanks ratings are downgraded one, two or
three ratings as of June 30, 2009, and take into account all collateral already posted. At June
30, 2009, KeyCorp did not have any derivatives in a net liability position that contained credit
risk contingent features.
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
|
|
|
|
in millions |
|
Moodys |
|
|
S&P |
|
|
KeyBanks long-term senior
unsecured credit ratings |
|
|
A2 |
|
|
|
A- |
|
|
One rating downgrade |
|
$ |
33 |
|
|
$ |
26 |
|
Two rating downgrades |
|
|
59 |
|
|
|
39 |
|
Three rating downgrades |
|
|
72 |
|
|
|
45 |
|
|
If KeyBanks ratings had been downgraded below investment-grade as of June 30, 2009, payments of up
to $80 million would have been required to either terminate the contracts or post additional
collateral for those contracts in a net liability position, taking into account all collateral
already posted. To be downgraded below investment-grade, KeyBanks long-term senior unsecured
credit rating would need to be downgraded five ratings by Moodys and four ratings by S&P. At the
time of filing of this report on August 10, 2009, KeyCorps and KeyBanks ratings at June 30, 2009,
remained unchanged.
43
16. Fair Value Measurements
Fair Value Determination
As defined in SFAS No. 157, Fair Value Measurements, fair value is the price to sell an asset or
transfer a liability in an orderly transaction between market participants in Keys principal
market. Key has established and documented its process for determining the fair values of its
assets and liabilities, where applicable. Fair value is based on quoted market prices, when
available, for identical or similar assets or liabilities. In the absence of quoted market prices,
management determines the fair value of Keys assets and liabilities using valuation models or
third-party pricing services. Both of these approaches rely on market-based parameters when
available, such as interest rate yield curves, option volatilities and credit spreads, or
unobservable inputs. Unobservable inputs may be based on managements judgment, assumptions and
estimates related to credit quality, liquidity, interest rates and other relevant inputs.
Valuation adjustments, such as those pertaining to counterparty and Keys own credit quality and
liquidity, may be necessary to ensure that assets and liabilities are recorded at fair value.
Credit valuation adjustments are made when market pricing is not indicative of the counterpartys
credit quality. Most classes of derivative contracts are valued using internally developed models
based on market-standard derivative pricing conventions, which rely primarily on observable market
inputs, such as interest rate yield curves and volatilities. Market convention implies a credit
rating of AA equivalent in the pricing of derivative contracts, which assumes all counterparties
have the same creditworthiness. In determining the fair value of derivatives, management considers
the impact of master netting and cash collateral exchange agreements and, when appropriate,
establishes a default reserve to reflect the credit quality of the counterparty.
Liquidity valuation adjustments are made when management is unable to observe recent market
transactions for identical or similar instruments. Management adjusts the fair value to reflect
the uncertainty in the pricing and trading of the instrument. Liquidity valuation adjustments are
made based on the following factors:
¨ |
|
the amount of time since the last relevant valuation; |
|
¨ |
|
whether there is an actual trade or relevant external quote available at the measurement date; and |
|
¨ |
|
volatility associated with the primary pricing components. |
Key ensures that fair value measurements are accurate and appropriate through its various controls,
including:
¨ |
|
an independent review and approval of valuation models; |
|
¨ |
|
a detailed review of profit and loss conducted on a regular basis; and |
|
¨ |
|
a validation of valuation model components against benchmark data and similar products, where possible. |
Management reviews any changes to valuation methodologies to ensure they are appropriate and
justified, and refines valuation methodologies as more market-based data becomes available.
Fair Value Hierarchy
SFAS No. 157 establishes a three-level valuation hierarchy for determining fair value that is based
on the transparency of the inputs used in the valuation process. The inputs used in determining
fair value in each of the three levels of the hierarchy, from highest ranking to lowest, are as
follows:
¨ |
|
Level 1. Quoted prices in active markets for identical assets or liabilities. |
|
¨ |
|
Level 2. Either: (i) quoted market prices for similar assets or liabilities; (ii) observable inputs, such as interest
rates or yield curves; or (iii) inputs derived principally from or corroborated by observable market data. |
44
¨ |
|
Level 3. Unobservable inputs. |
The level in the fair value hierarchy ascribed to a fair value measurement in its entirety is based
on the lowest level input that is significant to the overall fair value measurement.
Qualitative Disclosures of Valuation Techniques
Loans. Loans recorded as trading account assets are valued based on market spreads for identical
or similar assets. Generally, these loans are classified as Level 2 since the fair value recorded
is based on observable market data. Key corroborates these inputs periodically through a pricing
service, which obtains data about actual transactions in the marketplace for identical or similar
assets. However, at June 30, 2009, Key valued the loans using an internal cash flow model because
market data was not readily available for these loans. The most significant inputs to Keys
internal model are actual and projected financial results for the individual borrowers.
Accordingly, these loans were classified as Level 3 at June 30, 2009.
Securities (trading and available for sale). Securities are classified as Level 1 where quoted
market prices are available in an active market. Level 1 instruments include highly liquid
government bonds, securities issued by the U.S. Treasury and exchange-traded equity securities. In
the absence of availability of quoted prices, management determines fair value using pricing models
or quoted prices of similar securities. These instruments include municipal bonds and certain
agency collateralized mortgage obligations, and are classified as Level 2. Inputs to the pricing
models include actual trade data (i.e., spreads, credit ratings and interest rates) for comparable
assets, spread tables, matrices, high-grade scales, option-adjusted spreads and standard inputs,
such as yields, broker/dealer quotes, bids and offers. Where there is limited activity in the
market for a particular instrument, management uses internal models based on certain assumptions to
determine fair value. Such instruments include certain mortgage-backed securities and certain
commercial paper, and are classified as Level 3. Inputs for the Level 3 internal models include
expected cash flows from the underlying loans, which takes into account expected default and
recovery percentages, and discount rates commensurate with current market conditions.
Private equity and mezzanine investments. Valuations of private equity and mezzanine investments
held primarily within Keys Real Estate Capital and Corporate Banking Services line of business are
based primarily on managements judgment because of the lack of readily determinable fair values,
inherent illiquidity and the long-term nature of these assets. These investments are initially
valued based upon the transaction price. The carrying amount is then adjusted based upon the
estimated future cash flows associated with the investments. Inputs used in determining future
cash flows include, but are not limited to, the cost of build-out, future selling prices, current
market outlook and operating performance of the particular investment. Private equity and
mezzanine investments are classified as Level 3.
Principal investments. Principal investments made by Key Principal Partners, LLC, an affiliate of
Key, include direct investments (investments made in a particular company), as well as indirect
investments (investments made through funds that include other investors). These investments
include both equity securities and those made in privately held companies. When quoted prices are
available in an active market, which is the case for most equity securities, they are used in the
valuation process and the related investments are classified as Level 1 assets. However, in most
cases, quoted market prices are not available, and management must rely upon other sources and
inputs, such as statements from the investment manager, price/earnings ratios and multiples of
earnings before interest, tax, depreciation and amortization, to perform the asset valuations.
These investments are classified as Level 3 assets since managements assumptions impact the
overall determination of fair value.
Derivatives. Exchange-traded derivatives are valued using quoted prices and, therefore, are
classified as Level 1. However, only a few types of derivatives are exchange-traded, so the
majority of Keys derivative positions are valued using internally-developed models based on market
convention that uses observable market inputs, such as interest rate curves, yield curves, the
LIBOR discount rates and curves, index pricing curves, foreign currency curves and volatility
curves. These derivative contracts are classified as Level 2 and include interest rate swaps,
options and credit default swaps. In addition, Key has a few
45
customized derivative instruments that are classified as Level 3. These derivative positions are
valued using internally developed models. Inputs to the models consist of market available data
such as bond spreads and property values, as well as management assumptions such as loss
probabilities and proxy prices. Market convention implies a credit rating of AA equivalent in
the pricing of derivative contracts, which assumes all counterparties have the same
creditworthiness. In order to reflect the actual exposure on Keys derivative contracts related to
both counterparty and Keys own creditworthiness, management records a fair value adjustment in the
form of a reserve. The credit component is valued on a counterparty-by-counterparty basis, and
considers master netting agreements and collateral.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities are considered to be fair valued on a recurring basis if fair value is
measured regularly (i.e., daily, weekly, monthly or quarterly). The following table shows Keys
assets and liabilities measured at fair value on a recurring basis at June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Netting |
|
|
|
|
in millions |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Adjustments |
(a) |
|
Total |
|
|
ASSETS MEASURED ON A RECURRING BASIS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term investments |
|
|
|
|
|
$ |
254 |
|
|
|
|
|
|
|
|
|
|
$ |
254 |
|
Trading account assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Treasury, agencies and corporations |
|
$ |
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21 |
|
Other mortgage-backed securities |
|
|
|
|
|
|
|
|
|
$ |
66 |
|
|
|
|
|
|
|
66 |
|
Other securities |
|
|
37 |
|
|
|
594 |
|
|
|
24 |
|
|
|
|
|
|
|
655 |
|
|
Total trading account securities |
|
|
58 |
|
|
|
594 |
|
|
|
90 |
|
|
|
|
|
|
|
742 |
|
Other trading account assets |
|
|
|
|
|
|
|
|
|
|
29 |
|
|
|
|
|
|
|
29 |
|
|
Total trading account assets |
|
|
58 |
|
|
|
594 |
|
|
|
119 |
|
|
|
|
|
|
|
771 |
|
Securities available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Treasury, agencies and corporations |
|
|
|
|
|
|
1,710 |
|
|
|
|
|
|
|
|
|
|
|
1,710 |
|
States and political subdivisions |
|
|
|
|
|
|
86 |
|
|
|
|
|
|
|
|
|
|
|
86 |
|
Collateralized mortgage obligations |
|
|
|
|
|
|
8,523 |
|
|
|
|
|
|
|
|
|
|
|
8,523 |
|
Other mortgage-backed securities |
|
|
|
|
|
|
1,599 |
|
|
|
|
|
|
|
|
|
|
|
1,599 |
|
Other securities |
|
|
57 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
69 |
|
|
Total securities available for sale |
|
|
57 |
|
|
|
11,930 |
|
|
|
|
|
|
|
|
|
|
|
11,987 |
|
Other investments |
|
|
|
|
|
|
3 |
|
|
|
1,073 |
|
|
|
|
|
|
|
1,076 |
|
Derivative assets |
|
|
|
|
|
|
3,051 |
|
|
|
91 |
|
|
$ |
(1,960 |
) |
|
|
1,182 |
|
Accrued income and other assets |
|
|
3 |
|
|
|
85 |
|
|
|
|
|
|
|
|
|
|
|
88 |
|
|
Total assets on a recurring basis at fair value |
|
$ |
118 |
|
|
$ |
15,917 |
|
|
$ |
1,283 |
|
|
$ |
(1,960 |
) |
|
$ |
15,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES MEASURED ON A RECURRING BASIS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased and securities sold
under repurchase agreements |
|
|
|
|
|
$ |
361 |
|
|
|
|
|
|
|
|
|
|
$ |
361 |
|
Bank notes and other short-term borrowings |
|
$ |
53 |
|
|
|
317 |
|
|
|
|
|
|
|
|
|
|
|
370 |
|
Derivative liabilities |
|
|
164 |
|
|
|
2,532 |
|
|
$ |
21 |
|
|
$ |
(2,187 |
) |
|
|
530 |
|
|
Total liabilities on a recurring basis at fair value |
|
$ |
217 |
|
|
$ |
3,210 |
|
|
$ |
21 |
|
|
$ |
(2,187 |
) |
|
$ |
1,261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Netting adjustments represent the amounts recorded to convert Keys derivative assets and
liabilities from a gross basis to a net
basis in accordance with Keys January 1, 2008, adoption of FASB Interpretation No. 39,
Offsetting of Amounts Related to
Certain Contracts, and FASB Staff Position No. FIN 39-1, Amendment of FASB Interpretation
39. The net basis takes into
account the impact of master netting agreements that allow Key to settle all derivative
contracts with a single counterparty on a
net basis and to offset the net derivative position with the related cash collateral. |
Changes in Level 3 Fair Value Measurements
The following table shows the change in the fair values of Keys Level 3 financial instruments for
the six months ended June 30, 2009. An instrument is classified as Level 3 if unobservable inputs
are significant relative to the overall fair value measurement of the instrument. In addition to
unobservable inputs, Level 3 instruments also may have inputs that are observable within the
market. Management mitigates the credit risk, interest rate risk and risk of loss related to many
of these Level 3 instruments through the use of securities and derivative positions classified as
Level 1 or Level 2. Level 1 or Level 2 instruments are not included in the following table.
Therefore, the gains or losses shown do not include the impact of Keys risk management activities.
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading Account Assets |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Mortgage- |
|
|
|
|
|
|
Trading |
|
|
|
|
|
|
|
|
|
Backed |
|
|
Other |
|
|
Account |
|
|
Other |
|
|
Derivative |
|
in millions |
|
Securities |
|
|
Securities |
|
|
Assets |
|
|
Investments |
|
|
Instruments |
(a) |
|
Balance at December 31, 2008 |
|
$ |
67 |
|
|
$ |
758 |
|
|
$ |
31 |
|
|
$ |
1,134 |
|
|
$ |
15 |
|
(Losses) gains: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings |
|
|
(1) |
(b) |
|
|
(1) |
(b) |
|
|
|
|
|
|
(96 |
) (c) |
|
|
(13 |
) (b) |
Included in other comprehensive income (loss) |
|
|
|
|
|
|
(733 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, sales, issuances and settlements |
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
35 |
|
|
|
(1 |
) |
Net transfers into Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69 |
|
|
Balance at June 30, 2009 |
|
$ |
66 |
|
|
$ |
24 |
|
|
$ |
29 |
|
|
$ |
1,073 |
|
|
$ |
70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses included in earnings |
|
$ |
(1 |
) (b) |
|
$ |
(1 |
) (b) |
|
|
|
|
|
$ |
(93 |
) (c) |
|
$ |
(2 |
) (b) |
|
|
|
|
(a) |
|
Amount represents Level 3 derivative assets less Level 3 derivative liabilities. |
|
(b) |
|
Realized and unrealized gains and losses on trading account assets and derivative
instruments are reported in investment banking and capital markets income on the income
statement. |
|
(c) |
|
Other investments consist of principal investments, and private equity and mezzanine
investments. Realized and unrealized gains and losses on principal investments are reported
in losses from principal investments on the income statement. Realized and unrealized gains
and losses on private equity and mezzanine investments are reported in investment banking and
capital markets income on the income statement. |
Assets Measured at Fair Value on a Nonrecurring Basis
Assets and liabilities are considered to be fair valued on a nonrecurring basis if the fair value
measurement of the instrument does not necessarily result in a change in the amount recorded on the
balance sheet. Generally, nonrecurring valuation is the result of applying other accounting
pronouncements that require assets or liabilities to be assessed for impairment, or recorded at the
lower of cost or fair value. The following table presents Keys assets measured at fair value on a
nonrecurring basis at June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
in millions |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
ASSETS MEASURED ON A NONRECURRING BASIS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale Retained interests
in securitizations |
|
|
|
|
|
|
|
|
|
$ |
19 |
|
|
$ |
19 |
|
Impaired loans |
|
|
|
|
|
$ |
20 |
|
|
|
735 |
|
|
|
755 |
|
Loans held for sale |
|
|
|
|
|
|
36 |
|
|
|
247 |
|
|
|
283 |
|
Goodwill and other intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued income and other assets |
|
|
|
|
|
|
9 |
|
|
|
63 |
|
|
|
72 |
|
|
Total assets on a nonrecurring basis at fair value |
|
|
|
|
|
$ |
65 |
|
|
$ |
1,064 |
|
|
$ |
1,129 |
|
|
Management typically adjusts the
carrying amount of Keys impaired loans when there is evidence of
probable loss and the expected fair value of the loan is less than its contractual amount. The amount of the
impairment may be determined based on the estimated present value of future cash flows, the fair value of
the underlying collateral or the loans observable market price. Cash flow analysis considers internally-
developed inputs such as discount rates, default rates, costs of foreclosure and changes in real estate values.
The fair value of the collateral, which may take the form of real estate or personal property, is based on
internal estimates, field observations and assessments provided by third party appraisers. Impaired loans
with a specifically allocated allowance based on cash flow analysis or the underlying collateral are
classified as Level 3, while those with a specifically allocated allowance based on an observable market
price that reflects recent sale transactions for similar loans and collateral are classified as Level 2.
Through a quarterly analysis of Keys commercial loan portfolios held for sale, management
determined that certain adjustments were necessary to record the portfolios at the lower of cost or
fair value in accordance with GAAP. After adjustments, these loans totaled $283 million at June
30, 2009. The valuations of commercial mortgage and construction loans are performed using
internal models that rely on market data from sales or nonbinding bids of similar assets, including
credit spreads, treasury rates, interest rate curves and risk profiles, as well as managements own
assumptions about the exit market for the loans and details about individual loans within the
respective portfolios. Therefore, Key has classified these loans as Level 3. The inputs related
to managements assumptions and other internal loan data include changes in real estate values,
costs of foreclosure, prepayment rates, default rates and discount rates. Keys loans held for
sale, which are measured at fair value on a nonrecurring basis, include the remaining $65 million
of commercial
47
real estate loans transferred from the loan portfolio to held-for-sale status in June
2008. The fair value of these loans was measured using inputs such as letters of intent, where
available, or third-party appraisals. The valuation of commercial leases is performed using an
internal model that relies on market data, such as swap rates and bond ratings, as well as
managements own assumptions about the exit market for the leases and details about the individual
leases in the portfolio. These leases have been classified as Level 3. The inputs related to
managements assumptions include changes in value of leased items and internal credit ratings. In
addition, commercial leases may be valued using nonbinding bids when they are available and
current. The leases valued under this methodology are classified as Level 2. Additionally, during
the first half of 2009, Key transferred $86 million of commercial loans from held for sale to the
loan portfolio at their current fair value.
During the first quarter of 2009, a review of impairment indicators prompted management to review
and evaluate the carrying amount of the goodwill and other intangible assets assigned to Keys
Community Banking and National Banking reporting units. Fair value of Keys reporting units is
determined using both a discounted cash flow method (income approach) and a historical publicly
traded company method (market approach), which are weighted equally. Inputs used include
market-available data, such as industry, historical and expected growth rates and peer valuations,
as well as internally-driven inputs, such as forecasted earnings and market participant insights.
Since this valuation uses a significant number of unobservable inputs, Key has classified these
assets as Level 3. The first quarter 2009 review indicated that the estimated fair value of the
Community Banking unit was greater than its carrying amount, while the estimated fair value of the
National Banking unit was less than its carrying amount, reflecting continued weakness in the
financial markets and requiring additional impairment testing. Based on the results of additional
impairment testing for the National Banking unit, Key recorded an after-tax noncash accounting
charge of $187 million, or $.38 per common share, during the first quarter of 2009. Consequently,
Key has now written off all of the goodwill that had been assigned to the National Banking unit.
During the second quarter of 2009, based on a review of impairment indicators, management
determined that a further review of goodwill and other intangible assets for Keys Community
Banking unit was necessary. This further review indicated that the estimated fair value of the
Community Banking unit was greater than its carrying amount at June 30, 2009; therefore, no further
impairment testing was required. The goodwill assigned to the Community Banking unit is recorded
at cost on Keys balance sheet and, therefore, not included in the preceding table. A review of
other intangible assets in the National Banking unit did not identify any impairment of these
assets as of June 30, 2009.
Other real estate owned and other repossessed properties are valued based on inputs such as
appraisals and third-party price opinions, less estimated selling costs. Therefore, Key has
classified these assets as Level 3. Assets that are acquired through, or in lieu of, loan
foreclosures are recorded as held for sale initially at the lower of the loan balance or fair value
upon the date of foreclosure. Subsequent to foreclosure, valuations are updated periodically, and
the assets may be marked down further, reflecting a new cost basis. These adjusted assets, which
totaled $58 million at June 30, 2009, are considered to be nonrecurring items in the fair value
hierarchy.
Education lending-related servicing rights and residual interests are valued using a discounted
cash flow analysis with internally-developed inputs such as discount rates, prepayment rates and
default rates. Therefore, Key has classified these assets as Level 3. Current market conditions,
including lower prepayments, interest rates and expected recovery rates, have impacted Keys
modeling assumptions and consequently resulted in write-downs of these assets. Education
lending-related servicing rights are included in accrued income and other assets and education
lending-related residual interests are included in the retained interests in securitizations
component of securities available for sale in the preceding table.
Fair Value Disclosures of Financial Instruments
Effective June 30, 2009, Key adopted Staff Position No. FAS 107-1 and APB 28-1, Interim
Disclosures about Fair Value of Financial Instruments. This guidance amends SFAS No. 107,
Disclosures about Fair Value of Financial Instruments, and APB Opinion No. 28, Interim Financial
Reporting, to require disclosures about the fair value of financial instruments in interim
financial statements of publicly traded companies. The carrying amount and fair value of Keys
financial instruments at June 30, 2009, and December 31, 2008, are shown in the following table.
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
December 31, 2008 |
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
in millions |
|
Amount |
|
|
Value |
|
|
Amount |
|
|
Value |
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and short-term investments (a) |
|
$ |
4,210 |
|
|
$ |
4,210 |
|
|
$ |
6,478 |
|
|
$ |
6,478 |
|
Trading account assets (b) |
|
|
771 |
|
|
|
771 |
|
|
|
1,280 |
|
|
|
1,280 |
|
Securities available for sale (b) |
|
|
12,015 |
|
|
|
12,174 |
|
|
|
8,217 |
|
|
|
8,437 |
|
Held-to-maturity securities (c) |
|
|
25 |
|
|
|
25 |
|
|
|
25 |
|
|
|
25 |
|
Other investments (d) |
|
|
1,450 |
|
|
|
1,450 |
|
|
|
1,526 |
|
|
|
1,526 |
|
Loans, net of allowance (e) |
|
|
68,304 |
|
|
|
59,672 |
|
|
|
74,701 |
|
|
|
65,860 |
|
Loans held for sale (e) |
|
|
909 |
|
|
|
909 |
|
|
|
1,027 |
|
|
|
1,027 |
|
Servicing assets (f) |
|
|
255 |
|
|
|
439 |
|
|
|
265 |
|
|
|
452 |
|
Derivative assets (g) |
|
|
1,182 |
|
|
|
1,182 |
|
|
|
1,896 |
|
|
|
1,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits with no stated maturity (a) |
|
$ |
38,711 |
|
|
$ |
38,711 |
|
|
$ |
37,388 |
|
|
$ |
37,388 |
|
Time deposits (f) |
|
|
29,173 |
|
|
|
30,072 |
|
|
|
27,872 |
|
|
|
28,528 |
|
Short-term borrowings (a) |
|
|
3,240 |
|
|
|
3,240 |
|
|
|
10,034 |
|
|
|
10,034 |
|
Long-term debt (f) |
|
|
13,462 |
|
|
|
11,786 |
|
|
|
14,995 |
|
|
|
12,859 |
|
Derivative liabilities (g) |
|
|
530 |
|
|
|
530 |
|
|
|
1,038 |
|
|
|
1,038 |
|
|
Valuation Methods and Assumptions
(a) |
|
Fair value equals or approximates carrying amount. The fair value of deposits with no
stated maturity does not take into
consideration the value ascribed to core deposit intangibles. |
(b) |
|
Fair values of trading securities and securities available for sale are determined based on
quoted prices when available in an active market. If quoted prices are not available,
management determines fair value using pricing models, quoted prices of similar securities or
discounted cash flows. Where there is limited activity in the market for a particular
instrument, management must make assumptions to determine fair value. |
(c) |
|
Fair values of held-to-maturity securities are determined through the use of models that are
based on security-specific details, as well as relevant industry and economic factors. The
most significant of these inputs are quoted market prices, interest rate spreads on relevant
benchmark securities and certain prepayment assumptions. The valuations derived from the
models are reviewed by management for reasonableness to ensure they are consistent with the
values placed on similar securities traded in the secondary markets. |
(d) |
|
Fair values of most instruments categorized as other investments are determined by
considering the issuers recent financial performance and future potential, the values of
companies in comparable businesses, the risks associated with the particular business or
investment type, current market conditions, the nature and duration of resale restrictions,
the issuers payment history, managements knowledge of the industry and other relevant
factors. |
(e) |
|
The fair value of the loans is based on the present value of the expected cash flows from the
loans. The projected cash flows are based on the contractual terms of the loans, adjusted for
prepayments and use of a discount rate based on the relative risk of the cash flows, taking
into account the loan type, maturity of the loan, liquidity risk, servicing costs, and a
required return on debt and capital. In addition, an incremental liquidity discount was
applied to certain loans using historical sales of loans during periods of similar economic
conditions as a benchmark. The fair value of loans includes lease financing receivables at
their aggregate carrying amount, which is equivalent to their fair value. In some cases, as
with loans held for sale, fair values are determined based on nonbinding quotes, when
available. |
(f) |
|
Fair values of servicing assets, time deposits and long-term debt are based on discounted
cash flows utilizing relevant market inputs. |
(g) |
|
Information pertaining to Keys methodology for measuring the fair values of derivative
assets and liabilities is included in Note 15 (Derivatives and Hedging Activities), which
begins on page 37. |
Residential real estate mortgage loans with carrying amounts of $1.8 billion at June 30, 2009, and
$1.9 billion at December 31, 2008, are included in the amount shown for Loans, net of allowance.
For financial instruments with a remaining average life to maturity of less than six months,
carrying amounts were used as an approximation of fair values.
Management uses valuation methods based on exit market prices in accordance with SFAS No. 157. In
certain instances, management determines fair value based on assumptions pertaining to the factors
a market participant would consider in valuing the asset. If management were to use different
assumptions, the fair values shown in the preceding table could change significantly. Also,
because SFAS No. 107, as amended, excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements, the fair value amounts shown in the table above do
not, by themselves, represent the underlying value of Key as a whole.
49
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
KeyCorp
We have reviewed the condensed consolidated balance sheets of KeyCorp and subsidiaries (Key) as
of June 30, 2009 and 2008, and the related condensed consolidated statements of income, changes in
equity and cash flows for the three- and six-month periods ended June 30, 2009 and 2008. These
financial statements are the responsibility of Keys management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight
Board (United States). A review of interim financial information consists principally of applying
analytical procedures, and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the
condensed consolidated interim financial statements referred to above for them to be in conformity
with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of Key as of December 31, 2008, and
the related consolidated statements of income, changes in shareholders equity and cash flows for
the year then ended not presented herein, and in our report dated February 25, 2009, we expressed
an unqualified opinion on those consolidated financial statements. In our opinion, the information
set forth in the accompanying condensed consolidated balance sheet as of December 31, 2008, is
fairly stated, in all material respects, in relation to the consolidated balance sheet from which
it has been derived.
/s/ Ernst & Young LLP
Cleveland, Ohio
August 10, 2009
50
Item 2. Managements Discussion & Analysis of Financial Condition & Results of Operations
Introduction
This section generally reviews the financial condition and results of operations of KeyCorp
and its subsidiaries for the quarterly and year-to-date periods ended June 30, 2009 and 2008. Some
tables may include additional periods to comply with disclosure requirements or to illustrate
trends in greater depth. When you read this discussion, you should also refer to the consolidated
financial statements and related notes that appear on pages 3 through 49. A description of Keys
business is included under the heading Description of Business on page 16 of Keys 2008 Annual
Report to Shareholders.
Terminology
This report contains some shortened names and industry-specific terms. We want to explain some of
these terms at the outset so you can better understand the discussion that follows.
¨ |
|
KeyCorp refers solely to the parent holding company. |
|
¨ |
|
KeyBank refers to KeyCorps subsidiary bank, KeyBank National Association. |
|
¨ |
|
Key refers to the consolidated entity consisting of KeyCorp and its subsidiaries. |
|
¨ |
|
In April 2009, management made the decision to curtail the operations of Austin Capital Management, Ltd., an investment
subsidiary that specializes in managing hedge fund investments for its institutional customer base. As a result of
this decision, Key has accounted for this business as a discontinued operation. We use the phrase continuing
operations in this document to mean all of Keys business other than Austin. |
|
¨ |
|
Key engages in capital markets activities primarily through business conducted by the National Banking group. These
activities encompass a variety of products and services. Among other things, Key trades securities as a dealer, enters
into derivative contracts (both to accommodate clients financing needs and for proprietary trading purposes), and
conducts transactions in foreign currencies (both to accommodate clients needs and to benefit from fluctuations in
exchange rates). |
|
¨ |
|
For regulatory purposes, capital is divided into two classes. Federal regulations prescribe that at least one-half of
a bank or bank holding companys total risk-based capital must qualify as Tier 1. Both total and Tier 1 capital serve
as bases for several measures of capital adequacy, which is an important indicator of financial stability and
condition. As a result of the Supervisory Capital Assessment Program (SCAP), the banking regulators began
supplementing their assessment of the capital adequacy of a bank based on a variation of Tier 1 capital, known as Tier
1 common equity. While not codified, analysts and banking regulators have assessed Keys capital adequacy using the
Tier 1 common equity measure. You will find a more detailed explanation of total capital, Tier 1 capital and Tier 1
common equity and how they are calculated in the section entitled Capital, which begins on page 87. |
Forward-looking statements
This report and other reports filed by Key under the Securities Exchange Act of 1934, as amended,
or registration statements filed by Key under the Securities Act of 1933, as amended, contain
statements that are considered forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, including statements about Keys long-term goals,
financial condition, results of operations, earnings, levels of net loan charge-offs and
nonperforming assets, interest rate exposure and profitability. These statements usually can be
identified by the use of forward-looking language such as goal, objective, plan, will
likely result, expects, plans, anticipates, intends, projects, believes, estimates
or other similar words, expressions or conditional verbs such as will, would, could and
should.
51
Forward-looking statements express managements current expectations, forecasts of future events or
long-term goals and, by their nature, are subject to assumptions, risks and uncertainties.
Although management believes that the expectations, forecasts and goals reflected in these
forward-looking statements are reasonable, actual results could differ materially for a variety of
reasons, including the following factors:
¨ |
|
Although management believes Key has fulfilled the requirement to generate $1.8 billion of
additional Tier 1 common equity pursuant to the United States governments SCAP, a component
of the United States Department of the Treasurys (the U.S. Treasury) Capital Assistance
Program (CAP), there can be no assurance that the regulators, including the U.S. Treasury
and the Board of Governors of the Federal Reserve (Federal Reserve), will not require Key to
generate additional capital, including Tier 1 common equity, in the future. Future capital
raising and augmentation efforts may be dilutive to KeyCorp common shareholders and reduce the
market price of KeyCorps common shares. |
|
¨ |
|
The credit ratings of KeyCorp and KeyBank are essential to maintaining liquidity. Further downgrades from the
major credit ratings agencies could mean that Keys debt ratings fall below investment-grade, which, in turn, could
have an adverse effect on access to liquidity sources, cost of funds, access to investors, and collateral or
funding requirements. |
|
¨ |
|
Unprecedented volatility in the stock markets, public debt markets and other capital markets, including continued
disruption in the fixed income markets, has affected and could continue to affect Keys ability to raise capital or
other funding for liquidity and business purposes, as well as revenue from client-based underwriting, investment
banking and other capital markets-driven businesses. |
|
¨ |
|
Interest rates could change more quickly or more significantly than management expects, which may have an adverse
effect on Keys financial results. |
|
¨ |
|
Trade, monetary and fiscal policies of various governmental bodies may affect the economic environment in which Key
operates, as well as its financial condition and results of operations. |
|
¨ |
|
Changes in foreign exchange rates, equity markets, and the financial soundness of bond insurers, sureties and even
other unrelated financial companies have the potential to affect current market values of financial instruments
which, in turn, could have a material adverse effect on Key. |
|
¨ |
|
Asset price deterioration has had (and may continue to have) a negative effect on the valuation of many of the
asset categories represented on Keys balance sheet. |
|
¨ |
|
The Emergency Economic Stabilization Act of 2008 (EESA), the American Recovery and Reinvestment Act of 2009, the
Financial Stability Plan (FSP) announced on February 10, 2009, by the Secretary of the U.S. Treasury, in
coordination with other financial institution regulators, and other initiatives undertaken by the U.S. government
may not have the intended effect on the financial markets; the current extreme volatility and limited credit
availability may persist. If these actions fail to help stabilize the financial markets and the current financial
market and economic conditions continue or deteriorate further, Keys business, financial condition, results of
operations, access to credit and the market price of KeyCorps common shares could all suffer a material decline. |
|
¨ |
|
The terms of the Capital Purchase Program (CPP), pursuant to which KeyCorp issued Fixed-Rate Cumulative Perpetual
Preferred Stock, Series B (Series B Preferred Stock) and a warrant to purchase common shares of KeyCorp to the
U.S. Treasury, may limit KeyCorps ability to return capital to shareholders and could be dilutive to KeyCorp
common shares. If KeyCorp is unable to redeem such Series B Preferred Stock within five years, the dividend rate
will increase substantially. In addition, redemption of the warrant could prove to be difficult or costly. |
|
¨ |
|
Keys ability to engage in routine funding transactions could be adversely affected by the actions and commercial
soundness of other financial institutions. |
52
¨ |
|
The problems in the housing markets, including issues related to the Federal National Mortgage Association and the
Federal Home Loan Mortgage Corporation, and related conditions in the financial markets, or other issues, such as
the price volatility of oil or other commodities, could cause general economic conditions to deteriorate further.
In addition, these problems may inflict further damage on the local economies or industries in which Key has
significant operations or assets, and, among other things, may materially impact credit quality in existing
portfolios and/or Keys ability to generate loans in the future. |
|
¨ |
|
Increases in interest rates or further weakening economic conditions could constrain borrowers ability to repay
outstanding loans or diminish the value of the collateral securing those loans. Additionally, Keys allowance for
loan losses may be insufficient if the estimates and judgments management used to establish the allowance prove to
be inaccurate. |
|
¨ |
|
Key may face increased competitive pressure due to the recent consolidation of certain competing financial
institutions and the conversion of certain investment banks to bank holding companies. |
|
¨ |
|
Key may become subject to new or heightened legal standards and regulatory requirements, practices or expectations,
which may impede its profitability or affect Keys financial condition, including new regulations and programs
imposed in connection with the Troubled Asset Relief Program (TARP) provisions of the EESA, such as the FSP and
the CPP, being implemented and administered by the U.S. Treasury in coordination with other federal regulatory
agencies, further laws enacted by the U.S. Congress in an effort to strengthen the fundamentals of the economy, or
other regulations promulgated by federal regulators to mitigate the systemic risk presented by the current
financial crisis, such as the Federal Deposit Insurance Corporations (FDIC) Temporary Liquidity Guarantee
Program (TLGP). |
|
¨ |
|
It could take Key longer than anticipated to implement strategic initiatives, including those designed to grow
revenue or manage expenses; Key may be unable to implement certain initiatives; or the initiatives Key employs may
be unsuccessful. |
|
¨ |
|
Increases in deposit insurance premiums imposed on KeyBank due to the FDICs restoration plan for the Deposit
Insurance Fund established on October 7, 2008, and continued difficulties experienced by financial
institutions may have an adverse effect on Keys results of operations. |
|
¨ |
|
Acquisitions and dispositions of assets, business units or affiliates could adversely affect Key in ways that
management has not anticipated. |
|
¨ |
|
Key is subject to voluminous and complex rules, regulations and guidelines imposed by a number of government
authorities; regulatory requirements appear to be expanding in the current environment. Implementing and
monitoring compliance with these requirements is a significant task, and failure to effectively do so may result in
penalties or related costs that could have an adverse effect on Keys results of operations. |
|
¨ |
|
Key may have difficulty attracting and/or retaining key executives and/or relationship managers at compensation
levels necessary to maintain a competitive market position. |
|
¨ |
|
Key may experience operational or risk management failures due to technological or other factors. |
|
¨ |
|
Changes in accounting principles or in tax laws, rules and regulations could have an adverse effect on Keys
financial results or capital. |
|
¨ |
|
Key may become subject to new legal obligations or liabilities, or the unfavorable resolution of pending litigation
may have an adverse effect on Keys financial results or capital. |
|
¨ |
|
Terrorist activities or military actions could disrupt the economy and the general business climate, which may have
an adverse effect on Keys financial results or condition and that of its borrowers. |
|
¨ |
|
Key has leasing offices and clients throughout the world. Economic and political uncertainties resulting from
terrorist attacks, military actions or other events that affect countries in which Key operates may have an adverse
effect on those leasing clients and their ability to make timely payments. |
53
Forward-looking statements are not historical facts but instead represent only managements
current expectations and forecasts regarding future events, many of which, by their nature, are
inherently uncertain and outside of Keys control. The factors discussed above are not intended to
be a complete summary of all risks and uncertainties that may affect Keys business, the financial
services industry and financial markets. Though management strives to monitor and mitigate risk,
management cannot anticipate all potential economic, operational and financial developments that
may have an adverse impact on Keys operations and financial results. Forward-looking statements
speak only as of the date they are made, and Key does not undertake any obligation to revise any
forward-looking statement to reflect subsequent events.
Before making an investment decision, you should carefully consider all risks and uncertainties
disclosed in Keys Securities and Exchange Commission (SEC) filings, including this and Keys
other reports on Forms 8-K, 10-K and 10-Q and Keys registration statements under the Securities
Act of 1933, as amended, all of which are accessible on the
SECs website at www.sec.gov.
Long-term goals
Keys long-term financial goal is to achieve a return on average common equity at or above the
respective median of its peer group. The strategy for achieving this goal is described under the
heading Corporate strategy on page 18 of Keys 2008 Annual Report to Shareholders.
Economic overview
During the second quarter of 2009, the United States economy showed signs of moderate improvement
after experiencing the worst two consecutive quarters of contraction in more than 50 years.
Consumers were constrained by further job losses in the second quarter, although the pace of job
losses slowed as the quarter progressed. During the current quarter, 1.3 million Americans lost
their jobs compared to 2.1 million in the first quarter of 2009. The unemployment rate reached
9.5%, its highest level in 26 years. The average unemployment rate rose to 9.3%, substantially
higher than the average rate of 8.1% for the first quarter of 2009 and the average rate of 5.8% for
all of 2008. Since the recession began in December 2007, 6.4 million jobs have been lost.
Even in the face of continued job losses, consumers began to show more confidence as spending
continued to show modest improvement. Spending rose at an average monthly rate of .1% for the
quarter, compared to an average monthly increase of .4% in the first quarter of 2009 and an average
monthly decline of .1% for all of 2008. The continuation of price discounts offered by retailers
fueled the demand for products and services. Consumer prices in June 2009 fell 1.4% from June
2008, compared to an annual increase of 5% in June 2008 compared to June 2007. While businesses
continued to reduce headcount and fixed investment, they were also successful in reducing inventory
levels to better align with sales, thereby creating the potential for future increases in orders.
Housing continued to drag on consumer wealth, confidence and spending levels; however, real estate
prices began to show some signs of stabilization during the second quarter. Historically low
mortgage rates, the slowed pace of foreclosures and perceived values by home buyers spurred
activity in the housing market. Foreclosures increased by 33% in June 2009 from one year ago, which
compares favorably to the 46% annual increase reported in March 2009. Existing homes sales rose by
7% and new home sales rose by 16% over the second quarter of 2008. While median prices in June
2009 for new and existing homes continued to decline year-over-year, prices rose on a
linked-quarter basis. The median price of existing and new homes rose by 7% and 1%, respectively,
from March 2009. Home building activity in June 2009 declined by 46% from the same month in 2008,
but improved modestly from the first quarter, rising more than 12%.
54
The Federal Reserve held the federal funds target rate near zero during the second quarter of 2009
as the downside risks to the economy remained elevated. In general, other market interest rates
increased for much of the quarter before declining slightly off their highs during the final days
of the quarter. Much of the rise in interest rates was due to increased near-term economic
optimism and heightened fears of
future inflation, both sentiments that gradually faded by quarter-end. The benchmark two-year
Treasury yield began the quarter at .80% and increased to 1.40% before settling at 1.11% on June
30, 2009. The ten-year Treasury yield, which began the quarter at 2.67%, reached 3.95% before
closing the quarter at 3.54%. As credit concerns continued to ease, short-term interbank lending
rates decreased by 60 basis points, and credit spreads for banks and financial firms narrowed
dramatically during the quarter.
Supervisory Capital Assessment Program
During the second quarter of 2009, the major U.S. banking organizations, including Key, were able
to generate a substantial amount of additional capital. A significant portion of such capital was
generated to strengthen the capitalization of the major U.S. banking organizations and to satisfy
any applicable capital buffer requirements of the SCAP, implemented as a component of the CAP,
which is part of the U.S. governments FSP announced in February 2009.
To implement the CAP, the Federal Reserve, the Federal Reserve Banks, the FDIC and the Office of
the Comptroller of the Currency commenced a review, referred to as SCAP, of the capital of the
nineteen largest U.S. banking institutions. As announced on May 7, 2009, the regulators determined
that ten of these institutions needed to generate an additional capital buffer of approximately $75
billion, in the aggregate, within six months. Through the first half of July, these ten financial
institutions have generated, in the aggregate, in excess of $75 billion of Tier 1 common equity
towards fulfillment of the SCAP requirements. Approximately $57 billion of such capital was
generated through equity offerings and exchange offers. Additionally, during this same period, the
other nine SCAP participants, which were not required to raise any additional capital buffer,
raised approximately $21 billion of capital from equity offerings.
Further information regarding the capital generated by KeyCorp is included in the Capital section
under the heading Financial Stability Plan on page 93.
Demographics
The extent to which Keys business has been affected by continued volatility and weakness in the
housing market is directly related to the state of the economy in the regions in which its two
major business groups, Community Banking and National Banking, operate.
Keys Community Banking group serves consumers and small to mid-sized businesses by offering a
variety of deposit, investment, lending and wealth management products and services. These
products and services are provided through a 14-state branch network organized into three
geographic regions defined by management: Rocky Mountains and Northwest, Great Lakes, and
Northeast. Keys National Banking group includes those corporate and consumer business units that
operate nationally, within and beyond our 14-state branch network, as well as internationally. The
specific products and services offered by the Community and National Banking groups are described
in Note 4 (Line of Business Results), which begins on page 13.
Figure 1 shows the geographic diversity of the Community Banking groups average core deposits,
commercial loans and home equity loans.
55
Figure 1. Community Banking Geographic Diversity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic Region |
|
|
|
|
|
|
|
|
|
Rocky |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2009 |
|
Mountains and |
|
|
|
|
|
|
|
|
|
|
|
|
|
dollars in millions |
|
Northwest |
|
|
Great Lakes |
|
|
Northeast |
|
|
Nonregion |
(a) |
|
Total |
|
|
Average core deposits |
|
$ |
13,726 |
|
|
$ |
14,454 |
|
|
$ |
13,380 |
|
|
$ |
1,607 |
|
|
$ |
43,167 |
|
Percent of total |
|
|
31.8 |
% |
|
|
33.5 |
% |
|
|
31.0 |
% |
|
|
3.7 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average commercial loans |
|
$ |
6,392 |
|
|
$ |
4,203 |
|
|
$ |
3,249 |
|
|
$ |
1,300 |
|
|
$ |
15,144 |
|
Percent of total |
|
|
42.2 |
% |
|
|
27.8 |
% |
|
|
21.4 |
% |
|
|
8.6 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average home equity loans |
|
$ |
4,539 |
|
|
$ |
2,937 |
|
|
$ |
2,666 |
|
|
$ |
145 |
|
|
$ |
10,287 |
|
Percent of total |
|
|
44.1 |
% |
|
|
28.6 |
% |
|
|
25.9 |
% |
|
|
1.4 |
% |
|
|
100.0 |
% |
|
|
|
|
(a) |
|
Represents core deposit, commercial loan and home equity loan products centrally managed
outside of the three Community Banking regions. |
Figure 18 on page 79 shows the diversity of Keys commercial real estate lending business based on
industry type and location. The homebuilder loan portfolio within the National Banking group has
been adversely affected by the downturn in the U.S. housing market. The deteriorating market
conditions in the residential properties segment of Keys commercial real estate construction
portfolio, principally in Florida and southern California, have caused Key to experience a
significant increase in the levels of nonperforming loans and net charge-offs since mid-2007.
Management has taken aggressive steps to reduce Keys exposure in this segment of the loan
portfolio. As previously reported, during the fourth quarter of 2007, Key announced its decision to
cease conducting business with nonrelationship homebuilders outside of its 14-state Community
Banking footprint. During the second quarter of 2008, Key initiated a process to further reduce
exposure through the sale of certain loans. As a result of these actions, Key has reduced the
outstanding balances in the residential properties segment of the commercial real estate loan
portfolio by $1.8 billion, or 51%, since December 31, 2007. Additional information about the loan
sales is included in the Credit risk management section, which begins on page 102.
Results for the National Banking group have also been affected adversely by increasing credit costs
and volatility in the capital markets, leading to declines in the market values of assets under
management and the market values at which Key records certain assets (primarily commercial real
estate loans and securities held for sale or trading).
Additionally, during the first quarter of 2009 management determined that the estimated fair value
of the National Banking reporting unit was less than the carrying amount, reflecting the impact of
continued weakness in the financial markets. As a result, Key recorded an after-tax noncash
accounting charge of $187 million, of which $23 million relates to the discontinued operations of
Austin Capital Management, Ltd. As a result of this charge and a similar after-tax charge of $420
million recorded during the fourth quarter of 2008, Key has now written off all of the goodwill
that had been assigned to its National Banking reporting unit.
Critical accounting policies and estimates
Keys business is dynamic and complex. Consequently, management must exercise judgment in choosing
and applying accounting policies and methodologies. These choices are critical; not only are they
necessary to comply with U.S. generally accepted accounting principles (GAAP), they also reflect
managements view of the appropriate way to record and report Keys overall financial performance.
All accounting policies are important, and all policies described in Note 1 (Summary of
Significant Accounting Policies), which begins on page 77 of Keys 2008 Annual Report to
Shareholders, should be reviewed for a greater understanding of how Keys financial performance is
recorded and reported.
In managements opinion, some accounting policies are more likely than others to have a significant
effect on Keys financial results and to expose those results to potentially greater volatility.
These policies apply to areas of relatively greater business importance, or require management to
exercise judgment and to make assumptions and estimates that affect amounts reported in the
financial statements. Because these assumptions and estimates are based on current circumstances,
they may change over time or prove to be inaccurate.
56
Management relies heavily on the use of judgment, assumptions and estimates to make a number
of core decisions, including accounting for the allowance for loan losses; contingent liabilities,
guarantees and income taxes; derivatives and related hedging activities; and assets and liabilities
that involve valuation methodologies. A brief discussion of each of these areas appears on pages
20 through 23 of Keys 2008 Annual Report to Shareholders. Information about Keys review of
goodwill and other intangible assets for impairment as of March 31 and June 30, 2009, is included
in Note 1 (Basis of Presentation) under the heading Goodwill and Other Intangible Assets on
page 8.
Effective January 1, 2008, Key adopted Statement of Financial Accounting Standards (SFAS) No.
157, Fair Value Measurements, which defines fair value, establishes a framework for measuring
fair value and expands disclosures about fair value measurements. In the absence of quoted market
prices, management determines the fair value of Keys assets and liabilities using internally
developed models, which are based on managements judgment, assumptions and estimates regarding
credit quality, liquidity, interest rates and other relevant inputs. Keys adoption of this
accounting guidance and the process used to determine fair values are more fully described in Note
1 under the heading Fair Value Measurements on page 82 of Keys 2008 Annual Report to
Shareholders and in Note 20 (Fair Value Measurements), which begins on page 118 of that report.
At June 30, 2009, $15.4 billion, or 16%, of Keys total assets were measured at fair value on a
recurring basis. Approximately 93% of these assets were classified as Level 1 or Level 2 within the
fair value hierarchy. At June 30, 2009, $1.3 billion, or 1%, of Keys total liabilities were
measured at fair value on a recurring basis. Substantially all of these liabilities were classified
as Level 1 or Level 2.
At
June 30, 2009, $1.1 billion, or 1%, of Keys total assets were measured at fair value
on a nonrecurring basis. Approximately 6% of these assets were classified as Level 1 or Level 2.
At June 30, 2009, there were no liabilities measured at fair value on a nonrecurring basis.
During the first six months of 2009, management did not significantly alter the manner in which it
applied Keys critical accounting policies or developed related assumptions and estimates.
Highlights of Keys Performance
Financial performance
For the second quarter of 2009, the net loss from continuing operations attributable to Key was
$236 million, or $.69 per common share. Per share results for the current quarter are after
preferred stock dividends of $164 million, or $.28 per common share. These dividends include a
noncash deemed dividend of $114 million related to the exchange of Key common shares for Keys
Noncumulative Perpetual Convertible Preferred Stock, Series A (Series A Preferred Stock) as part
of the companys efforts to raise an additional $1.8 billion of Tier 1 common equity, and a cash
dividend payment of $31 million made to the U.S. Treasury under the CPP. Results for the current
quarter compare to a net loss from continuing operations of $1.128 billion, or $2.71 per common
share, for the second quarter of 2008.
The loss for the current quarter is largely the result of an increase in the provision for loan
losses. During the second quarter of 2009, Key continued to build its loan loss reserves by taking
an $850 million provision for loan losses, which exceeded net charge-offs by $311 million. As of
the end of the quarter, Keys allowance for loan losses was $2.5 billion, or 3.53% of total loans,
up from $1.4 billion, or 1.87% one year ago. The loss for the year-ago quarter was largely
attributable to a $1.011 billion after-tax charge recorded as a result of an adverse federal tax
court ruling that impacted Keys accounting for certain lease financing transactions.
For the first six months of 2009, the net loss from continuing operations attributable to Key was
$702 million, or $1.71 per common share, compared to a net loss from continuing operations of $911
million, or $2.23 per common share, for the same period last year. Per share results for the first
half of 2009 are after preferred stock dividends of $212 million, or $.40 per common share.
57
Keys results continue to reflect the weak economic environment and the aggressive steps the
company has taken to address credit quality, strengthen its capital position and control costs as
Key manages through this difficult credit cycle.
During the second quarter of 2009, Key successfully raised more than $1.8 billion in new Tier 1
common equity as required by the SCAP. The additional capital will serve as a buffer in the
event the U.S. economy worsens considerably through 2010. Throughout the current financial crisis,
Keys capital ratios have remained in excess of the well-capitalized levels established by the
federal regulators. At June 30, 2009, Key had a Tier 1 risk-based capital ratio of 12.57% and a
Tier 1 common equity ratio of 7.36%. In July 2009, KeyCorp commenced an additional offer to
exchange common shares for retail capital securities that expired on August 4, 2009. In connection
with the retail capital securities exchange offer, KeyCorp accepted the maximum of $500 million
aggregate liquidation preference of retail capital securities and issued 81,278,214 common shares.
Further information regarding the actions taken by Key to generate additional capital is included
in the Capital section under the heading Financial Stability Plan on page 93.
Keys fortified capital position will also enable Key to support its clients borrowing needs while
carefully managing the associated risk, and to benefit from other business opportunities when the
economy recovers. During the first six months of 2009, Key originated approximately $16 billion in
new or renewed loans and commitments to consumers and businesses.
In conjunction with Keys efforts to improve its competitive position, late last year management
initiated a process known as Keyvolution, a corporate-wide initiative designed to build a
consistently superior experience for clients, simplify processes, improve speed to market and
enhance Keys ability to seize growth and profit opportunities. Through this initiative, Key
expects to achieve annualized cost savings of $300 million to $375 million by 2012. Over the past
fifteen months, Key has been addressing certain noncore businesses, such as retail marine and
private student lending activities. Management has also deployed new teller platform technology
throughout the company. These and other efforts have resulted in a reduction in Keys employee
workforce of approximately 8%, or 1,500 positions, over the fifteen month period. Compared to the
year-ago quarter, personnel costs are down 6%.
Additionally, Key has continued to build upon its relationship-based, client-focused business
model. Keys Community Banking business continues to benefit from these efforts as evidenced by a
$2.7 billion, or 5%, increase in deposits compared to the second quarter of 2008. In addition, Key
is continuing to work down the loan portfolios that have been identified for exit to improve its
risk-adjusted returns, although progress has been slower than anticipated due to general weakness
in the economy and restricted liquidity. Additional information pertaining to Keys exit loan
portfolio and the progress made in reducing total residential property exposure in commercial real
estate is presented in the section entitled Credit risk management, which begins on page 102.
Figure 2 shows Keys continuing and discontinued operating results for comparative quarters and for
the six-month periods ended June 30, 2009 and 2008.
58
Figure 2. Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
in millions, except per share amounts |
|
6-30-09 |
|
|
3-31-09 |
|
|
6-30-08 |
|
|
6-30-09 |
|
|
6-30-08 |
|
|
SUMMARY OF OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to Key |
|
$ |
(236 |
) |
|
$ |
(466 |
) |
|
$ |
(1,128 |
) |
|
$ |
(702 |
) |
|
$ |
(911 |
) |
Income (loss) from discontinued operations, net of taxes (a) |
|
|
10 |
|
|
|
(22 |
) |
|
|
2 |
|
|
|
(12 |
) |
|
|
3 |
|
|
Net loss attributable to Key |
|
$ |
(226 |
) |
|
$ |
(488 |
) |
|
$ |
(1,126 |
) |
|
$ |
(714 |
) |
|
$ |
(908 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to Key |
|
$ |
(236 |
) |
|
$ |
(466 |
) |
|
$ |
(1,128 |
) |
|
$ |
(702 |
) |
|
$ |
(911 |
) |
Less: Dividends on Series A Preferred Stock |
|
|
15 |
|
|
|
12 |
|
|
|
|
|
|
|
27 |
|
|
|
|
|
Noncash deemed dividend common shares exchanged
for Series A Preferred Stock |
|
|
114 |
|
|
|
|
|
|
|
|
|
|
|
114 |
|
|
|
|
|
Cash dividends on Series B Preferred Stock |
|
|
31 |
|
|
|
32 |
|
|
|
|
|
|
|
63 |
|
|
|
|
|
Amortization of discount on Series B Preferred Stock |
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
Loss from continuing operations attributable to Key common shareholders |
|
|
(400 |
) |
|
|
(514 |
) |
|
|
(1,128 |
) |
|
|
(914 |
) |
|
|
(911 |
) |
Income (loss) from discontinued operations, net of taxes (a) |
|
|
10 |
|
|
|
(22 |
) |
|
|
2 |
|
|
|
(12 |
) |
|
|
3 |
|
|
Net loss attributable to Key common shareholders |
|
$ |
(390 |
) |
|
$ |
(536 |
) |
|
$ |
(1,126 |
) |
|
$ |
(926 |
) |
|
$ |
(908 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PER COMMON SHARE ASSUMING DILUTION |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to Key common shareholders |
|
$ |
(.69 |
) |
|
$ |
(1.04 |
) |
|
$ |
(2.71 |
) |
|
$ |
(1.71 |
) |
|
$ |
(2.23 |
) |
Income (loss) from discontinued operations, net of taxes (a) |
|
|
.02 |
|
|
|
(.04 |
) |
|
|
|
|
|
|
(.02 |
) |
|
|
.01 |
|
|
Net loss attributable to Key common shareholders |
|
$ |
(.68 |
) (b) |
|
$ |
(1.09 |
) (b) |
|
$ |
(2.70 |
) (b) |
|
$ |
(1.73 |
) |
|
$ |
(2.23 |
) (b) |
|
|
|
|
(a) |
|
In April 2009, management made the decision to curtail the operations of Austin Capital
Management, Ltd., an investment subsidiary that specializes in managing hedge fund investments
for its institutional customer base. As a result of this decision, Key has accounted for this
business as a discontinued operation. The loss from discontinued operations for the first
quarter of 2009 was attributable to a $23 million after tax, or $.05 per common share, charge
for intangible assets impairment. |
|
(b) |
|
Earning per share may not foot due to rounding. |
Shown in Figure 3 below are significant items that affect the comparability of Keys financial
performance for the quarterly and year-to-date periods ended June 30, 2009 and 2008. Events
leading to the recognition of these items, as well as other factors that contributed to the changes
in Keys revenue and expense components, are reviewed in detail throughout the remainder of the
Managements Discussion & Analysis section.
Figure 3. Significant Items Affecting the Comparability of Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Three months ended |
|
|
Six months ended |
|
|
Six months ended |
|
|
June 30, 2009 |
|
|
June 30, 2008 |
|
|
June 30, 2009 |
|
|
June 30, 2008 |
|
|
Pre-tax |
|
|
After-tax |
|
|
Impact |
|
|
Pre-tax |
|
|
After-tax |
|
|
Impact |
|
|
Pre-tax |
|
|
After-tax |
|
|
Impact |
|
|
Pre-tax |
|
|
After-tax |
|
|
Impact |
|
in millions, except per share amounts |
|
Amount |
|
|
Amount |
|
|
on EPS |
|
|
Amount |
|
|
Amount |
|
|
on EPS |
|
|
Amount |
|
|
Amount |
|
|
on EPS |
|
|
Amount |
|
|
Amount |
|
|
on EPS |
|
|
Provision for loan losses in excess of net charge-offs |
|
$ |
(311 |
) |
|
$ |
(195 |
) |
|
$ |
(.34 |
) |
|
$ |
(123 |
) |
|
$ |
(77 |
) |
|
$ |
(.18 |
) |
|
$ |
(694 |
) |
|
$ |
(434 |
) |
|
$ |
(.81 |
) |
|
$ |
(189 |
) |
|
$ |
(119 |
) |
|
$ |
(.29 |
) |
Noncash deemed dividend common shares
exchanged for Series A Preferred Stock |
|
|
|
|
|
|
|
|
|
|
(.20 |
) (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(.21 |
) (a) |
|
|
|
|
|
|
|
|
|
|
|
|
FDIC special assessment |
|
|
(44 |
) |
|
|
(27 |
) |
|
|
(.05 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44 |
) |
|
|
(27 |
) |
|
|
(.05 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Realized and unrealized (losses) gains on loan and securities
portfolios held for sale or trading |
|
|
(20 |
) |
|
|
(13 |
) |
|
|
(.02 |
) |
|
|
62 |
|
|
|
39 |
|
|
|
.09 |
|
|
|
(18 |
) |
|
|
(12 |
) |
|
|
(.02 |
) |
|
|
(66 |
) |
|
|
(41 |
) |
|
|
(.10 |
) |
Severance and other exit costs |
|
|
(14 |
) |
|
|
(9 |
) |
|
|
(.02 |
) |
|
|
(8 |
) |
|
|
(5 |
) |
|
|
(.01 |
) |
|
|
(22 |
) |
|
|
(14 |
) |
|
|
(.03 |
) |
|
|
(14 |
) |
|
|
(9 |
) |
|
|
(.02 |
) |
Net losses from principal investing |
|
|
(6 |
) |
|
|
(4 |
) |
|
|
(.01 |
) |
|
|
(14 |
) |
|
|
(8 |
) |
|
|
(.02 |
) |
|
|
(78 |
) |
|
|
(49 |
) |
|
|
(.09 |
) |
|
|
(3 |
) |
|
|
(1 |
) |
|
|
|
|
Net gains from repositioning of securities portfolio |
|
|
125 |
|
|
|
78 |
|
|
|
.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125 |
|
|
|
78 |
|
|
|
.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain related to exchange of common shares
for capital securities |
|
|
95 |
|
|
|
59 |
|
|
|
.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95 |
|
|
|
59 |
|
|
|
.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain from sale of Keys claim associated with the
Lehman Brothers bankruptcy |
|
|
32 |
|
|
|
20 |
|
|
|
.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32 |
|
|
|
20 |
|
|
|
.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash charge for intangible assets impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(196 |
) (b |
) |
|
(164 |
) (b |
) |
|
(.31 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Gain from sale/redemption of Visa Inc. shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105 |
|
|
|
65 |
|
|
|
.12 |
|
|
|
165 |
|
|
|
103 |
|
|
|
.25 |
|
Charges related to leveraged lease tax litigation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(359 |
) |
|
|
(1,011 |
) |
|
|
(2.43 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(362 |
) |
|
|
(1,049 |
) |
|
|
(2.57 |
) |
|
|
|
|
(a) |
|
The deemed dividend related to the exchange of Key common shares for Series A Preferred
Stock is subtracted from earnings to derive the numerator used in the calculation of per
share results; it is not recorded as a reduction to equity. |
|
(b) |
|
Excludes a $27 million ($23 million after tax, or $.05 per common share) charge for
intangible assets impairment related to the discontinued operations of Austin Capital
Management, Ltd. |
EPS = Earnings per common share
59
Keys financial performance for each of the past five quarters and for the six-month periods
ended June 30, 2009 and 2008, is summarized in Figure 4.
Figure 4. Selected Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Six months ended June 30, |
dollars in millions, except per share amounts |
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
|
2009 |
|
|
2008 |
|
|
FOR THE PERIOD |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
994 |
|
|
$ |
1,032 |
|
|
$ |
1,163 |
|
|
$ |
1,232 |
|
|
$ |
880 |
|
|
$ |
2,026 |
|
|
$ |
2,234 |
|
Interest expense |
|
|
402 |
|
|
|
418 |
|
|
|
524 |
|
|
|
533 |
|
|
|
522 |
|
|
|
820 |
|
|
|
1,163 |
|
Net interest income |
|
|
592 |
|
|
|
614 |
|
|
|
639 |
|
|
|
699 |
|
|
|
358 |
(a) |
|
|
1,206 |
|
|
|
1,071 |
(a) |
Provision for loan losses |
|
|
850 |
|
|
|
875 |
|
|
|
594 |
|
|
|
407 |
|
|
|
647 |
|
|
|
1,725 |
|
|
|
834 |
|
Noninterest income |
|
|
715 |
|
|
|
485 |
|
|
|
388 |
|
|
|
390 |
|
|
|
547 |
|
|
|
1,200 |
|
|
|
1,071 |
|
Noninterest expense |
|
|
870 |
|
|
|
942 |
|
|
|
1,297 |
|
|
|
756 |
|
|
|
777 |
|
|
|
1,812 |
|
|
|
1,506 |
|
Loss from continuing operations before income taxes |
|
|
(413 |
) |
|
|
(718 |
) |
|
|
(864 |
) |
|
|
(74 |
) |
|
|
(519 |
) |
|
|
(1,131 |
) |
|
|
(198 |
) |
Loss from continuing operations attributable to Key |
|
|
(236 |
) |
|
|
(466 |
) |
|
|
(525 |
) |
|
|
(38 |
) |
|
|
(1,128 |
) |
|
|
(702 |
) |
|
|
(911 |
) |
Income (loss) from discontinued operations, net of taxes (b) |
|
|
10 |
|
|
|
(22 |
) |
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
|
|
(12 |
) |
|
|
3 |
|
Net loss attributable to Key |
|
|
(226 |
) |
|
|
(488 |
) (a) |
|
|
(524 |
) |
|
|
(36 |
) |
|
|
(1,126 |
) (a) |
|
|
(714 |
) (a) |
|
|
(908 |
) (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to Key common shareholders |
|
|
(400 |
) |
|
|
(514 |
) |
|
|
(555 |
) |
|
|
(50 |
) |
|
|
(1,128 |
) |
|
|
(914 |
) |
|
|
(911 |
) |
Income (loss) from discontinued operations, net of taxes (b) |
|
|
10 |
|
|
|
(22 |
) |
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
|
|
(12 |
) |
|
|
3 |
|
Net loss attributable to Key common shareholders |
|
|
(390 |
) |
|
|
(536) |
(a) |
|
|
(554 |
) |
|
|
(48 |
) |
|
|
(1,126 |
) (a) |
|
|
(926 |
) (a) |
|
|
(908 |
) (a) |
|
PER COMMON SHARE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to Key common shareholders |
|
$ |
(.69 |
) |
|
$ |
(1.04 |
) |
|
$ |
(1.13 |
) |
|
$ |
(.10 |
) |
|
$ |
(2.71 |
) |
|
$ |
(1.71 |
) |
|
$ |
(2.23 |
) |
Income (loss) from discontinued operations, net of taxes (b) |
|
|
.02 |
|
|
|
(.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(.02 |
) |
|
|
.01 |
|
Net loss attributable to Key common shareholders |
|
|
(.68 |
) |
|
|
(1.09 |
) |
|
|
(1.13 |
) |
|
|
(.10 |
) |
|
|
(2.70 |
) |
|
|
(1.73 |
) |
|
|
(2.23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to Key common
shareholders assuming dilution |
|
|
(.69 |
) |
|
|
(1.04 |
) |
|
|
(1.13 |
) |
|
|
(.10 |
) |
|
|
(2.71 |
) |
|
|
(1.71 |
) |
|
|
(2.23 |
) |
Income (loss) from discontinued operations, net of taxes assuming dilution (b) |
|
|
.02 |
|
|
|
(.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(.02 |
) |
|
|
.01 |
|
Net loss attributable to Key common shareholders assuming dilution |
|
|
(.68 |
) |
|
|
(1.09 |
) (a) |
|
|
(1.13 |
) |
|
|
(.10 |
) |
|
|
(2.70 |
) (a) |
|
|
(1.73) |
(a) |
|
|
(2.23 |
) (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid |
|
|
.01 |
|
|
|
.0625 |
|
|
|
.0625 |
|
|
|
.1875 |
|
|
|
.375 |
|
|
|
.0725 |
|
|
|
.75 |
|
Book value at period end |
|
|
10.21 |
|
|
|
13.82 |
|
|
|
14.97 |
|
|
|
16.16 |
|
|
|
16.59 |
|
|
|
10.21 |
|
|
|
16.59 |
|
Tangible book value at period end |
|
|
8.92 |
|
|
|
11.76 |
|
|
|
12.41 |
|
|
|
12.66 |
|
|
|
13.00 |
|
|
|
8.92 |
|
|
|
13.00 |
|
Market price: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
|
9.82 |
|
|
|
9.35 |
|
|
|
15.20 |
|
|
|
15.25 |
|
|
|
26.12 |
|
|
|
9.82 |
|
|
|
27.23 |
|
Low |
|
|
4.40 |
|
|
|
4.83 |
|
|
|
4.99 |
|
|
|
7.93 |
|
|
|
10.00 |
|
|
|
4.40 |
|
|
|
10.00 |
|
Close |
|
|
5.24 |
|
|
|
7.87 |
|
|
|
8.52 |
|
|
|
11.94 |
|
|
|
10.98 |
|
|
|
5.24 |
|
|
|
10.98 |
|
Weighted-average common shares
outstanding (000) |
|
|
576,883 |
|
|
|
492,813 |
|
|
|
492,311 |
|
|
|
491,179 |
|
|
|
416,629 |
|
|
|
535,080 |
|
|
|
407,875 |
|
Weighted-average common shares and potential
common shares
outstanding (000) |
|
|
576,883 |
|
|
|
492,813 |
|
|
|
492,311 |
|
|
|
491,179 |
|
|
|
416,629 |
|
|
|
535,080 |
|
|
|
407,875 |
|
|
AT PERIOD END |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
70,803 |
|
|
$ |
73,703 |
|
|
$ |
76,504 |
|
|
$ |
76,705 |
|
|
$ |
75,855 |
|
|
$ |
70,803 |
|
|
$ |
75,855 |
|
Earning assets |
|
|
89,619 |
|
|
|
89,042 |
|
|
|
94,020 |
|
|
|
90,257 |
|
|
|
89,893 |
|
|
|
89,619 |
|
|
|
89,893 |
|
Total assets |
|
|
97,792 |
|
|
|
97,834 |
|
|
|
104,531 |
|
|
|
101,290 |
|
|
|
101,544 |
|
|
|
97,792 |
|
|
|
101,544 |
|
Deposits |
|
|
67,884 |
|
|
|
65,996 |
|
|
|
65,260 |
|
|
|
64,678 |
|
|
|
64,396 |
|
|
|
67,884 |
|
|
|
64,396 |
|
Long-term debt |
|
|
13,462 |
|
|
|
14,978 |
|
|
|
14,995 |
|
|
|
15,597 |
|
|
|
15,106 |
|
|
|
13,462 |
|
|
|
15,106 |
|
Key common shareholders equity |
|
|
8,138 |
|
|
|
6,892 |
|
|
|
7,408 |
|
|
|
7,993 |
|
|
|
8,056 |
|
|
|
8,138 |
|
|
|
8,056 |
|
Key shareholders equity |
|
|
10,851 |
|
|
|
9,968 |
|
|
|
10,480 |
|
|
|
8,651 |
|
|
|
8,706 |
|
|
|
10,851 |
|
|
|
8,706 |
|
|
PERFORMANCE RATIOS FROM CONTINUING OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average total assets |
|
|
(.94 |
)% |
|
|
(1.82 |
)% |
|
|
(1.94 |
)% |
|
|
(.15 |
)% |
|
|
(4.39 |
)% |
|
|
(1.38 |
)% |
|
|
(1.77 |
)% |
Return on average common equity |
|
|
(15.87 |
) |
|
|
(28.65 |
) |
|
|
(27.70 |
) |
|
|
(2.46 |
) |
|
|
(53.44 |
) |
|
|
(22.25 |
) |
|
|
(21.64 |
) |
Net interest margin (taxable equivalent) |
|
|
2.67 |
|
|
|
2.77 |
|
|
|
2.76 |
|
|
|
3.13 |
|
|
|
(.44 |
) |
|
|
2.72 |
|
|
|
1.35 |
|
|
PERFORMANCE RATIOS FROM CONSOLIDATED OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average total assets |
|
|
(.90 |
)% |
|
|
(1.91 |
)% (a) |
|
|
(1.93 |
)% |
|
|
(.14 |
)% |
|
|
(4.38 |
)% (a) |
|
|
(1.41 |
)% (a) |
|
|
(1.77 |
)% (a) |
Return on average common equity |
|
|
(15.32 |
) |
|
|
(29.87 |
) (a) |
|
|
(27.65 |
) |
|
|
(2.36 |
) |
|
|
(53.35 |
) (a) |
|
|
(22.58 |
) (a) |
|
|
(21.57 |
) (a) |
Net interest margin (taxable equivalent) |
|
|
2.67 |
|
|
|
2.77 |
|
|
|
2.76 |
|
|
|
3.13 |
|
|
|
(.44 |
) (a) |
|
|
2.72 |
(a) |
|
|
1.35 |
(a) |
|
CAPITAL RATIOS AT PERIOD END |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key shareholders equity to assets |
|
|
11.10 |
% |
|
|
10.19 |
% |
|
|
10.03 |
% |
|
|
8.54 |
% |
|
|
8.57 |
% |
|
|
11.10 |
% |
|
|
8.57 |
% |
Tangible Key shareholders equity to tangible assets |
|
|
10.16 |
|
|
|
9.23 |
|
|
|
8.92 |
|
|
|
6.95 |
|
|
|
6.98 |
|
|
|
10.16 |
|
|
|
6.98 |
|
Tangible common equity to tangible assets |
|
|
7.35 |
|
|
|
6.06 |
|
|
|
5.95 |
|
|
|
6.29 |
|
|
|
6.32 |
|
|
|
7.35 |
|
|
|
6.32 |
|
Tier 1 common equity |
|
|
7.36 |
|
|
|
5.62 |
|
|
|
5.62 |
|
|
|
5.58 |
|
|
|
5.60 |
|
|
|
7.36 |
|
|
|
5.60 |
|
Tier 1 risk-based capital |
|
|
12.57 |
|
|
|
11.22 |
|
|
|
10.92 |
|
|
|
8.55 |
|
|
|
8.53 |
|
|
|
12.57 |
|
|
|
8.53 |
|
Total risk-based capital |
|
|
16.67 |
|
|
|
15.18 |
|
|
|
14.82 |
|
|
|
12.40 |
|
|
|
12.41 |
|
|
|
16.67 |
|
|
|
12.41 |
|
Leverage |
|
|
12.26 |
|
|
|
11.19 |
|
|
|
11.05 |
|
|
|
9.28 |
|
|
|
9.34 |
|
|
|
12.26 |
|
|
|
9.34 |
|
|
TRUST AND BROKERAGE ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets under management |
|
$ |
63,382 |
|
|
$ |
60,164 |
|
|
$ |
64,717 |
|
|
$ |
76,676 |
|
|
$ |
80,998 |
|
|
$ |
63,382 |
|
|
$ |
80,998 |
|
Nonmanaged and brokerage assets |
|
|
23,261 |
|
|
|
21,786 |
|
|
|
22,728 |
|
|
|
27,187 |
|
|
|
29,905 |
|
|
|
23,261 |
|
|
|
29,905 |
|
|
OTHER DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average full-time-equivalent employees |
|
|
16,937 |
|
|
|
17,468 |
|
|
|
17,697 |
|
|
|
18,098 |
|
|
|
18,164 |
|
|
|
17,201 |
|
|
|
18,295 |
|
Branches |
|
|
993 |
|
|
|
989 |
|
|
|
986 |
|
|
|
986 |
|
|
|
985 |
|
|
|
993 |
|
|
|
985 |
|
|
|
|
|
(a) |
|
See Figure 5 on pages 62 and 63, which presents certain earnings data and performance
ratios, excluding charges related to goodwill and other intangible assets impairment, and the
tax treatment of certain leveraged lease financing transactions disallowed by the IRS.
Figure 5 reconciles certain GAAP performance measures to the corresponding non-GAAP measures,
which provides a basis for period-to-period comparisons. |
|
(b) |
|
In April 2009, management made the decision to curtail the operations of Austin Capital
Management, Ltd., an investment subsidiary that specializes in managing hedge fund investments
for its institutional customer base. As a result of this decision, Key has accounted for
this business as a discontinued operation. |
60
Figure 5 presents certain earnings data and performance ratios, excluding charges related to
intangible assets impairment and the tax treatment of certain leveraged lease financing
transactions disallowed by the Internal Revenue Service (IRS). Management believes that
eliminating the effects of significant items that are generally nonrecurring facilitates the
analysis of results by presenting them on a more comparable basis.
As shown in Figure 5, during the first quarter of 2009, Key recorded an after-tax charge of $164
million, or $.33 per common share, for the impairment of goodwill and other intangible assets
related to the National Banking reporting unit. Key has now written off all of the goodwill that
had been assigned to its National Banking reporting unit. During the second quarter of 2008, Key
recorded an after-tax charge of $1.011 billion, or $2.43 per common share, as a result of an
adverse federal court decision regarding Keys tax treatment of a leveraged sale-leaseback
transaction. In the first quarter of 2008, Key increased its tax reserves for certain lease in,
lease out transactions and recalculated its lease income in accordance with prescribed accounting
standards, resulting in after-tax charges of $38 million, or $.10 per diluted common share.
The figure also shows the computations of certain financial measures related to tangible common
equity and Tier 1 common equity. The tangible common equity ratio has become a focus of some
investors and management believes that this ratio may assist investors in analyzing Keys capital
position absent the effects of intangible assets and preferred stock. Traditionally, the banking
regulators have assessed bank and bank holding company capital adequacy based on both the amount
and composition of capital, the calculation of which is prescribed in federal banking regulations.
As a result of the SCAP, the Federal Reserve has focused its assessment of capital adequacy on a
component of Tier 1 capital, known as Tier 1 common equity. Because the Federal Reserve has long
indicated that voting common shareholders equity (essentially Tier 1 capital less preferred stock,
qualifying capital securities and minority interests in subsidiaries) generally should be the
dominant element in Tier 1 capital, such a focus is consistent with existing capital adequacy
guidelines and does not imply a new or ongoing capital standard. Because Tier 1 common equity is
neither formally defined by GAAP nor prescribed in amount by federal banking regulations, this
measure is considered to be a non-GAAP financial measure. Since analysts and banking regulators
may assess Keys capital adequacy using tangible common equity and Tier 1 common equity, management
believes it is useful to provide investors the ability to assess Keys capital adequacy on these
same bases. The figure also reconciles the GAAP performance measures to the corresponding non-GAAP
measures. Additional detail regarding Keys regulatory capital position at June 30, 2009, December
31, 2008, and June 30, 2008, is presented in Figure 26 on page 91.
Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and
are not audited. To mitigate these limitations, Key has procedures in place to ensure that these
measures are calculated using the appropriate GAAP or regulatory components and to ensure that
Keys performance is properly reflected to facilitate period-to-period comparisons. Although these
non-GAAP financial measures are frequently used by investors in the evaluation of a company, they
have limitations as analytical tools, and should not be considered in isolation, or as a substitute
for analyses of results as reported under GAAP.
61
Figure 5. GAAP to Non-GAAP Reconciliations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
dollars in millions, except per share amounts |
|
6-30-09 |
|
|
3-31-09 |
|
|
6-30-08 |
|
|
6-30-09 |
|
|
6-30-08 |
|
|
NET (LOSS) INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Key (GAAP) |
|
$ |
(226 |
) |
|
$ |
(488 |
) |
|
$ |
(1,126 |
) |
|
$ |
(714 |
) |
|
$ |
(908 |
) |
Charges related to intangible assets impairment, after tax |
|
|
|
|
|
|
164 |
|
|
|
|
|
|
|
164 |
|
|
|
|
|
Charges related to leveraged lease tax litigation, after tax |
|
|
|
|
|
|
|
|
|
|
1,011 |
|
|
|
|
|
|
|
1,049 |
|
|
Net (loss) income attributable to Key, excluding charges related to intangible
assets impairment and leveraged lease tax litigation (non-GAAP) |
|
$ |
(226 |
) |
|
$ |
(324 |
) |
|
$ |
(115 |
) |
|
$ |
(550 |
) |
|
$ |
141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash deemed dividend common shares exchanged for Series A Preferred Stock |
|
$ |
114 |
|
|
|
|
|
|
|
|
|
|
$ |
114 |
|
|
|
|
|
Other preferred dividends and amortization of discount on preferred stock |
|
|
50 |
|
|
$ |
48 |
|
|
|
|
|
|
|
98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Key common shareholders (GAAP) |
|
$ |
(390 |
) |
|
$ |
(536 |
) |
|
$ |
(1,126 |
) |
|
$ |
(926 |
) |
|
$ |
(908 |
) |
Net (loss) income attributable to Key common shareholders, excluding charges related to intangible assets
impairment and leveraged lease tax litigation (non-GAAP) |
|
|
(390 |
) |
|
|
(372 |
) |
|
|
(115 |
) |
|
|
(762 |
) |
|
|
141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PER COMMON SHARE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Key common shareholders assuming dilution (GAAP) |
|
$ |
(.68 |
) |
|
$ |
(1.09 |
) |
|
$ |
(2.70 |
) |
|
$ |
(1.73 |
) |
|
$ |
(2.23 |
) |
Net (loss) income attributable to Key common shareholders, excluding charges related to intangible assets impairment
and leveraged lease tax litigation assuming dilution (non-GAAP) |
|
|
(.68 |
) |
|
|
(.76 |
) |
|
|
(.28 |
) |
|
|
(1.42 |
) |
|
|
.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PERFORMANCE RATIOS FROM CONSOLIDATED OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average total assets: (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average total assets |
|
$ |
100,858 |
|
|
$ |
103,815 |
|
|
$ |
103,290 |
|
|
$ |
102,328 |
|
|
$ |
103,323 |
|
Return on average total assets (GAAP) |
|
|
(.90 |
)% |
|
|
(1.91 |
)% |
|
|
(4.38 |
)% |
|
|
(1.41 |
)% |
|
|
(1.77 |
)% |
Return on average total assets, excluding charges related to intangible assets impairment
and leveraged lease tax litigation (non-GAAP) |
|
|
(.90 |
) |
|
|
(1.27 |
) |
|
|
(.45 |
) |
|
|
(1.08 |
) |
|
|
.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average common equity: (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common equity |
|
$ |
7,227 |
|
|
$ |
7,277 |
|
|
$ |
8,489 |
|
|
$ |
7,252 |
|
|
$ |
8,467 |
|
Return on average common equity (GAAP) |
|
|
(15.32 |
)% |
|
|
(29.87 |
)% |
|
|
(53.35 |
)% |
|
|
(22.58 |
)% |
|
|
(21.57 |
)% |
Return on average common equity, excluding charges related to intangible assets
impairment and leveraged lease tax litigation (non-GAAP) |
|
|
(15.32 |
) |
|
|
(20.73 |
) |
|
|
(5.45 |
) |
|
|
(18.02 |
) |
|
|
3.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME AND MARGIN |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (GAAP) |
|
$ |
592 |
|
|
$ |
614 |
|
|
$ |
358 |
|
|
$ |
1,206 |
|
|
$ |
1,071 |
|
Charges related to leveraged lease tax litigation, pre-tax |
|
|
|
|
|
|
|
|
|
|
359 |
|
|
|
|
|
|
|
362 |
|
|
Net interest income, excluding charges related to leveraged lease tax
litigation (non-GAAP) |
|
$ |
592 |
|
|
$ |
614 |
|
|
$ |
717 |
|
|
$ |
1,206 |
|
|
$ |
1,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/margin (TE): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (expense) (TE) (as reported) |
|
$ |
598 |
|
|
$ |
620 |
|
|
$ |
(100 |
) |
|
$ |
1,218 |
|
|
$ |
604 |
|
Charges related to leveraged lease tax litigation, pre-tax (TE) |
|
|
|
|
|
|
|
|
|
|
838 |
|
|
|
|
|
|
|
872 |
|
|
Net interest income, excluding charges related to leveraged lease tax
litigation (TE) (adjusted basis) |
|
$ |
598 |
|
|
$ |
620 |
|
|
$ |
738 |
|
|
$ |
1,218 |
|
|
$ |
1,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (TE) (as reported) (a) |
|
|
2.67 |
% |
|
|
2.77 |
% |
|
|
(.44 |
)% |
|
|
2.72 |
% |
|
|
1.35 |
% |
Impact of charges related to leveraged lease tax litigation, pre-tax (TE) (a) |
|
|
|
|
|
|
|
|
|
|
3.76 |
|
|
|
|
|
|
|
1.95 |
|
|
Net interest margin, excluding charges related to leveraged lease tax
litigation (TE) (adjusted basis) (a) |
|
|
2.67 |
% |
|
|
2.77 |
% |
|
|
3.32 |
% |
|
|
2.72 |
% |
|
|
3.30 |
% |
|
62
Figure 5. GAAP to Non-GAAP Reconciliations (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
dollars in millions, except per share amounts |
|
6-30-09 |
|
|
3-31-09 |
|
|
6-30-08 |
|
|
TANGIBLE COMMON EQUITY TO TANGIBLE
ASSETS AT PERIOD END |
|
|
|
|
|
|
|
|
|
|
|
|
Key shareholders equity (GAAP) |
|
$ |
10,851 |
|
|
$ |
9,968 |
|
|
$ |
8,706 |
|
Less: Intangible assets |
|
|
1,023 |
|
|
|
1,029 |
|
|
|
1,744 |
|
Preferred Stock, Series B |
|
|
2,422 |
|
|
|
2,418 |
|
|
|
|
|
Preferred Stock, Series A |
|
|
291 |
|
|
|
658 |
|
|
|
650 |
|
|
Tangible common equity (non-GAAP) |
|
$ |
7,115 |
|
|
$ |
5,863 |
|
|
$ |
6,312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets (GAAP) |
|
$ |
97,792 |
|
|
$ |
97,834 |
|
|
$ |
101,544 |
|
Less: Intangible assets |
|
|
1,023 |
|
|
|
1,029 |
|
|
|
1,744 |
|
|
Tangible assets (non-GAAP) |
|
$ |
96,769 |
|
|
$ |
96,805 |
|
|
$ |
99,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity to tangible assets ratio (non-GAAP) |
|
|
7.35 |
% |
|
|
6.06 |
% |
|
|
6.32 |
% |
|
|
TIER 1 COMMON EQUITY AT PERIOD END |
|
|
|
|
|
|
|
|
|
|
|
|
Key shareholders equity (GAAP) |
|
$ |
10,851 |
|
|
$ |
9,968 |
|
|
$ |
8,706 |
|
Qualifying capital securities |
|
|
2,290 |
|
|
|
2,582 |
|
|
|
2,582 |
|
Less: Goodwill |
|
|
917 |
|
|
|
917 |
|
|
|
1,598 |
|
Accumulated other comprehensive (loss) income (b) |
|
|
(20 |
) |
|
|
111 |
|
|
|
79 |
|
Other assets (c) |
|
|
172 |
|
|
|
184 |
|
|
|
221 |
|
|
Total Tier 1 capital (regulatory) |
|
|
12,072 |
|
|
|
11,338 |
|
|
|
9,390 |
|
Less: Qualifying capital securities |
|
|
2,290 |
|
|
|
2,582 |
|
|
|
2,582 |
|
Preferred Stock, Series B |
|
|
2,422 |
|
|
|
2,418 |
|
|
|
|
|
Preferred Stock, Series A |
|
|
291 |
|
|
|
658 |
|
|
|
650 |
|
|
Total Tier 1 common equity (non-GAAP) |
|
$ |
7,069 |
|
|
$ |
5,680 |
|
|
$ |
6,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net risk-weighted assets (regulatory) (c) |
|
$ |
96,006 |
|
|
$ |
101,077 |
|
|
$ |
110,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 common equity ratio (non-GAAP) |
|
|
7.36 |
% |
|
|
5.62 |
% |
|
|
5.60 |
% |
|
|
|
|
(a) |
|
Income statement amount has been annualized in calculation of percentage. |
|
(b) |
|
Includes net unrealized gains or losses on securities available for sale (except for net
unrealized losses on marketable equity securities), net gains or losses on cash flow hedges,
and amounts resulting from the adoption or subsequent application of the provisions of SFAS
No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans. |
|
(c) |
|
Other assets deducted from Tier 1 capital and net risk-weighted assets consist of intangible
assets (excluding goodwill) recorded after February 19, 1992, and deductible portions of
nonfinancial equity investments. |
|
TE = Taxable Equivalent, GAAP = U.S. generally accepted accounting principles |
Strategic developments
Management initiated the following actions during 2008 and 2009 to support Keys corporate strategy
described under the heading Corporate Strategy on page 18 of Keys 2008 Annual Report to
Shareholders.
¨ |
|
During the second quarter of 2009, management made the decision to
curtail the operations of Austin Capital Management, Ltd., an
investment subsidiary that specializes in managing hedge fund
investments for its institutional customer base. As a result of
this decision, Key has accounted for this business as a
discontinued operation. |
|
¨ |
|
During the fourth quarter of 2008, management initiated a process
known as Keyvolution, a corporate-wide initiative designed to
build a consistently superior experience for clients, simplify
processes, improve speed to market and enhance Keys ability to
seize growth and profit opportunities. Through this initiative,
Key expects to achieve annualized cost savings of $300 million to
$375 million by 2012. |
|
¨ |
|
During the third quarter of 2008, Key decided to exit retail and
floor-plan lending for marine and recreational vehicle products,
and to limit new education loans to those backed by government
guarantee. Key also determined that it will cease lending to
homebuilders within its 14-state Community Banking footprint.
This came after Key began to reduce its business with
nonrelationship homebuilders outside that footprint in December
2007. |
|
¨ |
|
On January 1, 2008, Key acquired U.S.B. Holding Co., Inc., the
holding company for Union State Bank, a 31-branch state-chartered
commercial bank headquartered in Orangeburg, New York. The
acquisition doubles Keys branch presence in the attractive Lower
Hudson Valley area. |
63
Line of Business Results
This section summarizes the financial performance and related strategic developments of Keys two
major business groups, Community Banking and National Banking. To better understand this
discussion, see Note 4 (Line of Business Results), which begins on page 13. Note 4 describes the
products and services offered by each of these business groups, provides more detailed financial
information pertaining to the groups and their respective lines of business, and explains Other
Segments and Reconciling Items.
Figure 6 summarizes the contribution made by each major business group to Keys taxable-equivalent
revenue from continuing operations and (loss) income from continuing operations attributable to Key
for the three- and six-month periods ended June 30, 2009 and 2008.
Figure 6. Major Business Groups Taxable-Equivalent Revenue from Continuing Operations and (Loss)
Income from Continuing Operations Attributable to Key
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Change |
|
|
Six months ended June 30, |
|
|
Change |
|
dollars in millions |
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
|
REVENUE FROM CONTINUING OPERATIONS (TE) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community Banking |
|
$ |
592 |
|
|
$ |
654 |
|
|
$ |
(62 |
) |
|
|
(9.5 |
)% |
|
$ |
1,191 |
|
|
$ |
1,283 |
|
|
$ |
(92 |
) |
|
|
(7.2 |
)% |
National Banking (a) |
|
|
547 |
|
|
|
(133 |
) |
|
|
680 |
|
|
|
N/M |
|
|
|
1,080 |
|
|
|
302 |
|
|
|
778 |
|
|
|
257.6 |
|
Other Segments (b) |
|
|
183 |
|
|
|
(31 |
) |
|
|
214 |
|
|
|
N/M |
|
|
|
104 |
|
|
|
(4 |
) |
|
|
108 |
|
|
|
N/M |
|
|
Total Segments |
|
|
1,322 |
|
|
|
490 |
|
|
|
832 |
|
|
|
169.8 |
|
|
|
2,375 |
|
|
|
1,581 |
|
|
|
794 |
|
|
|
50.2 |
|
Reconciling Items (c) |
|
|
(9 |
) |
|
|
(43 |
) |
|
|
34 |
|
|
|
79.1 |
|
|
|
43 |
|
|
|
94 |
|
|
|
(51 |
) |
|
|
(54.3 |
) |
|
Total |
|
$ |
1,313 |
|
|
$ |
447 |
|
|
$ |
866 |
|
|
|
193.7 |
% |
|
$ |
2,418 |
|
|
$ |
1,675 |
|
|
$ |
743 |
|
|
|
44.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS) INCOME FROM CONTINUING OPERATIONS
ATTRIBUTABLE TO KEY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community Banking |
|
$ |
(57 |
) |
|
$ |
103 |
|
|
$ |
(160 |
) |
|
|
N/M |
|
|
$ |
(27 |
) |
|
$ |
219 |
|
|
$ |
(246 |
) |
|
|
N/M |
|
National Banking (a) |
|
|
(294 |
) |
|
|
(674 |
) |
|
|
380 |
|
|
|
56.4 |
% |
|
|
(843 |
) |
|
|
(697 |
) |
|
|
(146 |
) |
|
|
(20.9 |
)% |
Other Segments (b) |
|
|
112 |
|
|
|
(14 |
) |
|
|
126 |
|
|
|
N/M |
|
|
|
75 |
|
|
|
7 |
|
|
|
68 |
|
|
|
971.4 |
|
|
Total Segments |
|
|
(239 |
) |
|
|
(585 |
) |
|
|
346 |
|
|
|
59.1 |
|
|
|
(795 |
) |
|
|
(471 |
) |
|
|
(324 |
) |
|
|
(68.8 |
) |
Reconciling Items (c) |
|
|
3 |
|
|
|
(543 |
) |
|
|
546 |
|
|
|
N/M |
|
|
|
93 |
|
|
|
(440 |
) |
|
|
533 |
|
|
|
N/M |
|
|
Total |
|
$ |
(236 |
) |
|
$ |
(1,128 |
) |
|
$ |
892 |
|
|
|
79.1 |
% |
|
$ |
(702 |
) |
|
$ |
(911 |
) |
|
$ |
209 |
|
|
|
22.9 |
% |
|
|
|
|
(a) |
|
National Bankings results for the first quarter of 2009 include a noncash charge for
goodwill and other intangible assets impairment of $196 million ($164 million after tax).
During the second quarter of 2008, National Bankings taxable-equivalent net interest income
and net results were reduced by $838 million and $536 million, respectively, as a result of
its involvement with certain leveraged lease financing transactions which were challenged by
the IRS. National Bankings taxable-equivalent net interest income and net results were
reduced by $34 million and $21 million, respectively, during the first quarter of 2008 as a
result of its involvement with these leveraged lease financing transactions. |
|
(b) |
|
Other Segments results for the second quarter of 2009 include net gains of $125 million ($78
million after tax) in connection with the repositioning of the securities portfolio and a $95
million ($59 million after tax) gain related to the exchange of Key common shares for capital
securities. |
|
(c) |
|
Reconciling Items for the second quarter of 2009 include a $32 million ($20 million after
tax) gain from the sale of Keys claim associated with the Lehman Brothers bankruptcy. For
the first quarter of 2009, Reconciling Items include a $105 million ($65 million after tax)
gain from the sale of Keys remaining equity interest in Visa Inc. Reconciling Items for the
second quarter of 2008 include a $475 million charge to income taxes for the interest cost
associated with the previously disclosed leveraged lease tax litigation. For the first
quarter of 2008, Reconciling Items include a $165 million ($103 million after tax) gain from
the partial redemption of Keys equity interest in Visa Inc. and a $17 million charge to
income taxes for the interest cost associated with the increase to Keys tax reserves for
certain leveraged lease transactions. |
|
TE = Taxable Equivalent, N/M = Not Meaningful |
Community Banking summary of operations
As shown in Figure 7, Community Banking recorded a net loss attributable to Key of $57 million for
the second quarter of 2009, compared to net income attributable to Key of $103 million for the
year-ago quarter. Increases in the provision for loan losses and FDIC expense, coupled with
decreases in net interest income and noninterest income, caused the decline.
64
Taxable-equivalent net interest income declined by $36 million, or 8%, from the second quarter of
2008, due primarily to tighter loan spreads and a slight decline in the volume of average earning
assets. While average deposits increased by $2.7 billion, or 5%, the composition and value of
deposits have been impacted by the declining interest rate environment. Growth was centered in
noninterest-bearing deposits and a shift from money market deposit accounts into higher-yielding
certificates of deposit, reflecting consumer preferences.
Noninterest income decreased by $26 million, or 12%, from the year-ago quarter, largely from
declines in service charges on deposit accounts, trust and investment services income, and
branch-based investment income, coupled with an increase in the reserve for credit losses from
derivatives. The reductions in service charges on deposit accounts and trust and investment
services income are the results of changing client behavior and lower levels of assets under
management resulting from declining market conditions, respectively. These reductions were
partially offset by higher mortgage loan sale gains.
The provision for loan losses rose by $143 million compared to the second quarter of 2008,
reflecting a $49 million increase in net loan charge-offs, primarily from the commercial and home
equity loan portfolios. Community Bankings provision for loan losses for the second quarter of
2009 exceeded its net loan charge-offs by $100 million as the company continued to build reserves,
in light of the challenging credit conditions brought on by a weak economy.
Noninterest expense grew by $52 million, or 12%, from the year-ago quarter, as a result of a $52
million increase in the FDIC deposit insurance assessment. The higher assessment is a result of
the across-the-board increase in the assessment rate that took effect during the first quarter of
2009 and the special assessment imposed during the second quarter of 2009. A decline in personnel
expense, due primarily to a decrease in incentive compensation accruals and a reduction in the
number of average full-time equivalent employees, was offset by increases in various other
components of noninterest expense.
Figure 7. Community Banking
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Change |
|
|
Six months ended June 30, |
|
|
Change |
|
dollars in millions |
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
|
SUMMARY OF OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (TE) |
|
$ |
397 |
|
|
$ |
433 |
|
|
$ |
(36 |
) |
|
|
(8.3 |
)% |
|
$ |
807 |
|
|
$ |
855 |
|
|
$ |
(48 |
) |
|
|
(5.6 |
)% |
Noninterest income |
|
|
195 |
|
|
|
221 |
|
|
|
(26 |
) |
|
|
(11.8 |
) |
|
|
384 |
|
|
|
428 |
|
|
|
(44 |
) |
|
|
(10.3 |
) |
|
Total revenue (TE) |
|
|
592 |
|
|
|
654 |
|
|
|
(62 |
) |
|
|
(9.5 |
) |
|
|
1,191 |
|
|
|
1,283 |
|
|
|
(92 |
) |
|
|
(7.2 |
) |
Provision for loan losses |
|
|
187 |
|
|
|
44 |
|
|
|
143 |
|
|
|
325.0 |
|
|
|
268 |
|
|
|
62 |
|
|
|
206 |
|
|
|
332.3 |
|
Noninterest expense |
|
|
497 |
|
|
|
445 |
|
|
|
52 |
|
|
|
11.7 |
|
|
|
967 |
|
|
|
871 |
|
|
|
96 |
|
|
|
11.0 |
|
|
(Loss) income before income taxes (TE) |
|
|
(92 |
) |
|
|
165 |
|
|
|
(257 |
) |
|
|
N/M |
|
|
|
(44 |
) |
|
|
350 |
|
|
|
(394 |
) |
|
|
N/M |
|
Allocated income taxes and TE
adjustments |
|
|
(35 |
) |
|
|
62 |
|
|
|
(97 |
) |
|
|
N/M |
|
|
|
(17 |
) |
|
|
131 |
|
|
|
(148 |
) |
|
|
N/M |
|
|
Net (loss) income attributable to Key |
|
$ |
(57 |
) |
|
$ |
103 |
|
|
$ |
(160 |
) |
|
|
N/M |
|
|
$ |
(27 |
) |
|
$ |
219 |
|
|
$ |
(246 |
) |
|
|
N/M |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVERAGE BALANCES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases |
|
$ |
28,237 |
|
|
$ |
28,470 |
|
|
$ |
(233 |
) |
|
|
(.8 |
)% |
|
$ |
28,587 |
|
|
$ |
28,278 |
|
|
$ |
309 |
|
|
|
1.1 |
% |
Total assets |
|
|
31,183 |
|
|
|
31,414 |
|
|
|
(231 |
) |
|
|
(.7 |
) |
|
|
31,564 |
|
|
|
31,215 |
|
|
|
349 |
|
|
|
1.1 |
|
Deposits |
|
|
52,689 |
|
|
|
49,944 |
|
|
|
2,745 |
|
|
|
5.5 |
|
|
|
52,128 |
|
|
|
49,860 |
|
|
|
2,268 |
|
|
|
4.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets under management at period end |
|
$ |
15,815 |
|
|
$ |
19,366 |
|
|
$ |
(3,551 |
) |
|
|
(18.3 |
)% |
|
$ |
15,815 |
|
|
$ |
19,366 |
|
|
$ |
(3,551 |
) |
|
|
(18.3 |
)% |
|
TE = Taxable Equivalent, N/M = Not Meaningful
65
ADDITIONAL COMMUNITY BANKING DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Change |
|
|
Six months ended June 30, |
|
|
Change |
|
dollars in millions |
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
|
AVERAGE DEPOSITS OUTSTANDING |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW and money market deposit accounts |
|
$ |
17,361 |
|
|
$ |
19,656 |
|
|
$ |
(2,295 |
) |
|
|
(11.7 |
)% |
|
$ |
17,364 |
|
|
$ |
19,760 |
|
|
$ |
(2,396 |
) |
|
|
(12.1 |
)% |
Savings deposits |
|
|
1,785 |
|
|
|
1,804 |
|
|
|
(19 |
) |
|
|
(1.1 |
) |
|
|
1,753 |
|
|
|
1,779 |
|
|
|
(26 |
) |
|
|
(1.5 |
) |
Certificates of deposits ($100,000 or more) |
|
|
8,974 |
|
|
|
6,661 |
|
|
|
2,313 |
|
|
|
34.7 |
|
|
|
8,733 |
|
|
|
6,556 |
|
|
|
2,177 |
|
|
|
33.2 |
|
Other time deposits |
|
|
14,898 |
|
|
|
12,735 |
|
|
|
2,163 |
|
|
|
17.0 |
|
|
|
14,812 |
|
|
|
12,750 |
|
|
|
2,062 |
|
|
|
16.2 |
|
Deposits in foreign office |
|
|
548 |
|
|
|
1,308 |
|
|
|
(760 |
) |
|
|
(58.1 |
) |
|
|
630 |
|
|
|
1,285 |
|
|
|
(655 |
) |
|
|
(51.0 |
) |
Noninterest-bearing deposits |
|
|
9,123 |
|
|
|
7,780 |
|
|
|
1,343 |
|
|
|
17.3 |
|
|
|
8,836 |
|
|
|
7,730 |
|
|
|
1,106 |
|
|
|
14.3 |
|
|
Total deposits |
|
$ |
52,689 |
|
|
$ |
49,944 |
|
|
$ |
2,745 |
|
|
|
5.5 |
% |
|
$ |
52,128 |
|
|
$ |
49,860 |
|
|
$ |
2,268 |
|
|
|
4.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HOME EQUITY LOANS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance |
|
$ |
10,287 |
|
|
$ |
9,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average loan-to-value ratio (at
date of origination) |
|
|
70 |
% |
|
|
70 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent first lien positions |
|
|
53 |
|
|
|
55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branches |
|
|
993 |
|
|
|
985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automated teller machines |
|
|
1,485 |
|
|
|
1,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National Banking summary of continuing operations
As shown in Figure 8, National Banking recorded a loss from continuing operations attributable to
Key of $294 million for the second quarter of 2009, compared to $674 million for the same period
one year ago. During the second quarter of 2008, net results were reduced by $536 million as a
result of an adverse federal court decision on the companys tax treatment of a segment of Keys
leveraged lease financing portfolio. Excluding this charge, net results decreased by $156 million
from the second quarter of 2008, due to lower net interest income and noninterest income, coupled
with increases in the provision for loan losses and noninterest expense.
As a result of the federal court decision, National Banking reduced its taxable-equivalent net
interest income by $838 million during the second quarter of 2008. Excluding this charge,
taxable-equivalent net interest income decreased by $85 million, or 23%, from the second quarter of
2008, due primarily to a decrease in average earning assets and a higher level of nonperforming
loans, offset in part by more favorable deposit spreads and an increase in average deposits.
Average earning assets decreased by $4.2 billion, or 8%, from the year-ago quarter, reflecting
reductions in the commercial, home equity and held-for-sale loan portfolios. Average deposits rose
by $973 million, or 8%, as growth in certificates of deposit, NOW accounts and noninterest-bearing
deposits more than offset a decline in money market deposit accounts.
Noninterest income declined by $73 million, or 22%, from the second quarter of 2008, due primarily
to a $60 million reduction in income from investment banking and capital markets activities, which
was largely attributable to a $27 million decrease in dealer trading and derivatives income, and a
$23 million decrease in investment banking income. A decline in net loan sale gains of $37 million
also contributed to the reduction in noninterest income. The adverse effect of the above factors
was offset in part by a $29 million increase in net gains on leased equipment and a $15 million
increase in mortgage fees.
The provision for loan losses rose by $53 million. National Bankings provision for loan losses
for the second quarter of 2009 exceeded its net loan charge-offs by $210 million as the company
continued to build reserves in a weak economy.
Noninterest expense grew by $23 million, or 7%, from the second quarter of 2008, reflecting an
increase in the FDIC deposit insurance assessment as a result of the same factors that contributed
to the increase in Community Banking. Also contributing to higher noninterest expense was an
increase in the reserve for low-income housing tax credit funds, a provision for losses on
lending-related commitments compared to a credit in the year-ago quarter, and higher expenses
associated with other real estate owned (OREO). The adverse effect of these factors was offset
in part by lower personnel expense, reflecting a reduction in incentive compensation accruals and a
decrease in the number of average full-time equivalent employees.
66
In April 2009, Key made the decision to curtail the operations of Austin Capital Management, Ltd.,
an investment subsidiary that specializes in managing hedge fund investments for its institutional
customer base. As a result of this decision, Key has accounted for this business as a discontinued
operation.
Figure 8. National Banking
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Change |
|
|
Six months ended June 30, |
|
|
Change |
|
dollars in millions |
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
|
SUMMARY OF OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (TE) |
|
$ |
282 |
|
|
$ |
(471 |
) (a) |
|
$ |
753 |
|
|
|
N/M |
|
|
$ |
572 |
|
|
$ |
(131 |
) (a) |
|
$ |
703 |
|
|
|
N/M |
|
Noninterest income |
|
|
265 |
|
|
|
338 |
|
|
|
(73 |
) |
|
|
(21.6 |
)% |
|
|
508 |
|
|
|
433 |
|
|
|
75 |
|
|
|
17.3 |
% |
|
Total revenue (TE) |
|
|
547 |
|
|
|
(133 |
) |
|
|
680 |
|
|
|
N/M |
|
|
|
1,080 |
|
|
|
302 |
|
|
|
778 |
|
|
|
257.6 |
|
Provision for loan losses |
|
|
662 |
|
|
|
609 |
|
|
|
53 |
|
|
|
8.7 |
|
|
|
1,452 |
|
|
|
778 |
|
|
|
674 |
|
|
|
86.6 |
|
Noninterest expense |
|
|
358 |
|
|
|
335 |
|
|
|
23 |
|
|
|
6.9 |
|
|
|
863 |
(a) |
|
|
639 |
|
|
|
224 |
|
|
|
35.1 |
|
|
Loss from continuing operations before income taxes (TE) |
|
|
(473 |
) |
|
|
(1,077 |
) |
|
|
604 |
|
|
|
56.1 |
|
|
|
(1,235 |
) |
|
|
(1,115 |
) |
|
|
(120 |
) |
|
|
(10.8 |
) |
Allocated income taxes and TE adjustments |
|
|
(178 |
) |
|
|
(403 |
) |
|
|
225 |
|
|
|
55.8 |
|
|
|
(389 |
) |
|
|
(418 |
) |
|
|
29 |
|
|
|
6.9 |
|
|
Loss from continuing operations |
|
|
(295 |
) |
|
|
(674 |
) |
|
|
379 |
|
|
|
56.2 |
|
|
|
(846 |
) |
|
|
(697 |
) |
|
|
(149 |
) |
|
|
(21.4 |
) |
Income (loss) from discontinued operations, net of taxes |
|
|
10 |
|
|
|
2 |
|
|
|
8 |
|
|
|
400.0 |
|
|
|
(12 |
) |
|
|
3 |
|
|
|
(15 |
) |
|
|
N/M |
|
|
Net loss |
|
|
(285 |
) |
|
|
(672 |
) |
|
|
387 |
|
|
|
57.6 |
|
|
|
(858 |
) |
|
|
(694 |
) |
|
|
(164 |
) |
|
|
(23.6 |
) |
Less: Net loss attributable to noncontrolling interests |
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
N/M |
|
|
|
(3 |
) |
|
|
|
|
|
|
(3 |
) |
|
|
N/M |
|
|
Net loss attributable to Key |
|
$ |
(284 |
) |
|
$ |
(672 |
) |
|
$ |
388 |
|
|
|
57.7 |
% |
|
$ |
(855 |
) |
|
$ |
(694 |
) |
|
$ |
(161 |
) |
|
|
(23.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to Key |
|
$ |
(294 |
) |
|
$ |
(674 |
) |
|
$ |
380 |
|
|
|
56.4 |
% |
|
$ |
(843 |
) |
|
$ |
(697 |
) |
|
$ |
(146 |
) |
|
|
(20.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVERAGE BALANCES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases |
|
$ |
43,943 |
|
|
$ |
47,872 |
|
|
$ |
(3,929 |
) |
|
|
(8.2 |
)% |
|
$ |
45,064 |
|
|
$ |
46,017 |
|
|
$ |
(953 |
) |
|
|
(2.1 |
)% |
Loans held for sale |
|
|
910 |
|
|
|
1,282 |
|
|
|
(372 |
) |
|
|
(29.0 |
) |
|
|
994 |
|
|
|
3,107 |
|
|
|
(2,113 |
) |
|
|
(68.0 |
) |
Total assets |
|
|
50,998 |
|
|
|
56,316 |
|
|
|
(5,318 |
) |
|
|
(9.4 |
) |
|
|
52,888 |
|
|
|
56,260 |
|
|
|
(3,372 |
) |
|
|
(6.0 |
) |
Deposits |
|
|
13,260 |
|
|
|
12,287 |
|
|
|
973 |
|
|
|
7.9 |
|
|
|
12,740 |
|
|
|
12,082 |
|
|
|
658 |
|
|
|
5.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets under management at period end |
|
$ |
47,567 |
|
|
$ |
61,632 |
|
|
$ |
(14,065 |
) |
|
|
(22.8 |
)% |
|
$ |
47,567 |
|
|
$ |
61,632 |
|
|
$ |
(14,065 |
) |
|
|
(22.8 |
)% |
|
|
|
|
(a) |
|
National Bankings results for the first quarter of 2009 include a noncash charge for
goodwill and other intangible assets impairment of $196 million ($164 million after tax).
During the second quarter of 2008, National Bankings taxable-equivalent net interest income
and net results were reduced by $838 million and $536 million, respectively, as a result of
its involvement with certain leveraged lease financing transactions which were challenged by
the IRS. National Bankings taxable-equivalent net interest income and net results were
reduced by $34 million and $21 million, respectively, during the first quarter of 2008 as a
result of its involvement with these leveraged lease financing transactions. |
|
TE = Taxable Equivalent, N/M = Not Meaningful |
Other Segments
Other Segments consist of Corporate Treasury and Keys Principal Investing unit. These segments
generated net income attributable to Key of $112 million for the second quarter of 2009, compared
to a net loss attributable to Key of $14 million for the same period last year. The improvement
was attributable to net gains of $125 million recorded during the second quarter of 2009 in
connection with the repositioning of the securities portfolio, and a $95 million gain related to
the exchange of Key common shares for institutional capital securities.
67
Results of Operations
Net interest income
One of Keys principal sources of revenue is net interest income. Net interest income is the
difference between interest income received on earning assets (such as loans and securities) and
loan-related fee income, and interest expense paid on deposits and borrowings. There are several
factors that affect net interest income, including:
¨ |
|
the volume, pricing, mix and maturity of earning assets and interest-bearing liabilities; |
|
¨ |
|
the volume and value of net free funds, such as noninterest-bearing deposits and equity capital; |
|
¨ |
|
the use of derivative instruments to manage interest rate risk; |
|
¨ |
|
interest rate fluctuations and competitive conditions within the marketplace; and |
|
¨ |
|
asset quality. |
To make it easier to compare results among several periods and the yields on various types of
earning assets (some taxable, some not), we present net interest income in this discussion on a
taxable-equivalent basis (i.e., as if it were all taxable and at the same rate). For example,
$100 of tax-exempt income would be presented as $154, an amount that if taxed at the statutory
federal income tax rate of 35% would yield $100.
Figure 9, which spans pages 70 and 71, shows the various components of Keys balance sheet that
affect interest income and expense, and their respective yields or rates over the past five
quarters. This figure also presents a reconciliation of taxable-equivalent net interest income for
each of those quarters to net interest income reported in accordance with GAAP. The net interest
margin, which is an indicator of the profitability of the earning assets portfolio, is calculated
by dividing net interest income by average earning assets.
Taxable-equivalent net interest income was $598 million for the second quarter of 2009 and the net
interest margin was 2.67%. These results compare to taxable-equivalent net interest income of $738
million and a net interest margin of 3.32% for the second quarter of 2008, after adjusting for the
effects of charges recorded one year ago in connection with subsequently resolved tax litigation
pertaining to Keys leveraged lease financing portfolio. As previously reported, Keys
taxable-equivalent net interest income for the second quarter of 2008 was reduced significantly as
a result of an adverse federal court decision on the companys tax treatment of a service contract
lease transaction. In accordance with the applicable accounting guidance, Key recalculated the
lease income recognized from inception for all of the leveraged leases being contested by the IRS,
not just the single leveraged lease subject to the Court decision. Keys results for the year-ago
quarter also reflect a $475 million charge to income taxes for the interest cost associated with
the contested tax liabilities. These actions reduced Keys taxable-equivalent net interest income
and net interest margin for the second quarter of 2008 by $838 million and 376 basis points,
respectively, and reduced Keys earnings by $1.011 billion, or $2.43 per common share.
During the past twelve months, the net interest margin has remained under pressure as the decrease
in the federal funds target rate has resulted in a larger decrease in the interest rates on earning
assets than that experienced for interest-bearing liabilities. Competition for deposits and a
shift in deposit mix to higher costing, longer term certificates of deposit have also contributed
to a lower net interest margin. During the same period, earning asset yields have been compressed
as a result of the higher levels of nonperforming loans. In addition, during the second quarter of
2009, Key terminated certain leveraged lease financing arrangements, which reduced net interest
income by $16 million and lowered the net interest margin by approximately 7 basis points.
68
Compared to the first quarter of 2009, taxable-equivalent net interest income decreased by $22
million, and the net interest margin declined by 10 basis points. The reduction in the net
interest margin reflects an increase in lower-yielding liquid assets, due in part to the weak
demand for credit; a higher level of nonperforming loans; and the impact of actions described below
to reposition Keys securities portfolio.
During May 2009, Key sold approximately $2.8 billion of collateralized mortgage obligations
(CMOs), resulting in net gains of $125 million for the second quarter. These securities were
sold as part of the companys overall plan to generate additional capital required under the SCAP,
and to reposition the securities available-for-sale portfolio to better support Keys strategies
for managing interest rate and liquidity risk. The proceeds from the sale were reinvested in CMOs
issued by government-sponsored entities and the Government National Mortgage Association (GNMA).
Additional information regarding the repositioning of the securities portfolio is provided in the
section entitled Securities, which begins on page 82.
The reduction in the net interest margin caused by the above factors was moderated by the impact of
new or renewed loans with more favorable interest rate spreads.
Since January 1, 2008, the growth and composition of Keys loan portfolios have been affected by
the following actions:
¨ |
|
Key sold $602 million of commercial real estate loans during the
first six months of 2009 and $2.2 billion during all of 2008.
Since some of these loans have been sold with limited recourse
(i.e., there is a risk that Key will be held accountable for
certain events or representations made in the sales agreements),
Key established and has maintained a loss reserve in an amount
that management believes is appropriate. More information about
the related recourse agreement is provided in Note 14 (Contingent
Liabilities and Guarantees) under the heading Recourse agreement
with Federal National Mortgage Association on page 35. In late
March 2009, Key transferred $1.5 billion of loans from the
construction portfolio to the commercial mortgage portfolio in
accordance with regulatory guidelines for the classification of
loans that have reached a completed status. In June 2008, Key
transferred $384 million of commercial real estate loans ($719
million, net of $335 million in net charge-offs) from the
held-to-maturity loan portfolio to held-for-sale status as part of
a process undertaken to aggressively reduce Keys exposure in the
residential properties segment of the construction loan portfolio
through the sale of certain loans. Additional information about
the status of this process is included in the section entitled
Loans and loans held for sale under the heading Commercial real
estate loans on page 79. |
|
¨ |
|
Key sold $436 million of education loans during the first half of
2009 and $121 million during all of 2008. In March 2008, Key
transferred $3.3 billion of education loans from held-for-sale
status to the held-to-maturity loan portfolio in recognition of
the fact that the secondary markets for these loans have been
adversely affected by market liquidity issues. |
|
¨ |
|
Key sold $743 million of other loans (including $712 million of
residential mortgage loans) during the first six months of 2009
and $932 million during all of 2008. |
|
¨ |
|
During the first quarter of 2008, Key increased its loan portfolio
(primarily commercial real estate and consumer loans) through the
acquisition of U.S.B. Holding Co., Inc., the holding company for
Union State Bank, a 31-branch state-chartered commercial bank
headquartered in Orangeburg, New York. |
69
Figure 9. Average Balance Sheets, Net Interest Income and Yields/Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2009 |
|
|
First Quarter 2009 |
|
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
dollars in millions |
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (a),(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural |
|
$ |
24,468 |
|
|
$ |
273 |
|
|
|
4.48 |
% |
|
$ |
26,427 |
|
|
$ |
278 |
|
|
|
4.26 |
% |
Real estate commercial mortgage |
|
|
11,892 |
|
|
|
144 |
|
|
|
4.83 |
|
|
|
10,965 |
(c) |
|
|
140 |
|
|
|
5.20 |
|
Real estate construction |
|
|
6,264 |
|
|
|
76 |
|
|
|
4.89 |
|
|
|
7,511 |
(c) |
|
|
84 |
|
|
|
4.54 |
|
Commercial lease financing |
|
|
8,432 |
|
|
|
90 |
|
|
|
4.26 |
|
|
|
8,790 |
|
|
|
94 |
|
|
|
4.28 |
|
|
Total commercial loans |
|
|
51,056 |
|
|
|
583 |
|
|
|
4.58 |
|
|
|
53,693 |
|
|
|
596 |
|
|
|
4.50 |
|
Real estate residential mortgage |
|
|
1,750 |
|
|
|
26 |
|
|
|
5.96 |
|
|
|
1,776 |
|
|
|
27 |
|
|
|
6.00 |
|
Home equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community Banking |
|
|
10,289 |
|
|
|
112 |
|
|
|
4.36 |
|
|
|
10,273 |
|
|
|
114 |
|
|
|
4.49 |
|
National Banking |
|
|
974 |
|
|
|
18 |
|
|
|
7.47 |
|
|
|
1,040 |
|
|
|
19 |
|
|
|
7.52 |
|
|
Total home equity loans |
|
|
11,263 |
|
|
|
130 |
|
|
|
4.63 |
|
|
|
11,313 |
|
|
|
133 |
|
|
|
4.77 |
|
Consumer other Community Banking |
|
|
1,207 |
|
|
|
31 |
|
|
|
10.41 |
|
|
|
1,225 |
|
|
|
32 |
|
|
|
10.56 |
|
Consumer other National Banking: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
3,178 |
|
|
|
49 |
|
|
|
6.23 |
|
|
|
3,331 |
|
|
|
52 |
|
|
|
6.24 |
|
Education |
|
|
3,671 |
|
|
|
38 |
|
|
|
4.18 |
|
|
|
3,717 |
|
|
|
43 |
|
|
|
4.59 |
|
Other |
|
|
256 |
|
|
|
6 |
|
|
|
7.96 |
|
|
|
274 |
|
|
|
5 |
|
|
|
7.97 |
|
|
Total consumer other National Banking |
|
|
7,105 |
|
|
|
93 |
|
|
|
5.23 |
|
|
|
7,322 |
|
|
|
100 |
|
|
|
5.47 |
|
|
Total consumer loans |
|
|
21,325 |
|
|
|
280 |
|
|
|
5.27 |
|
|
|
21,636 |
|
|
|
292 |
|
|
|
5.43 |
|
|
Total loans |
|
|
72,381 |
|
|
|
863 |
|
|
|
4.78 |
|
|
|
75,329 |
|
|
|
888 |
|
|
|
4.77 |
|
Loans held for sale |
|
|
1,080 |
|
|
|
9 |
|
|
|
3.42 |
|
|
|
1,197 |
|
|
|
12 |
|
|
|
4.07 |
|
Securities available for sale (a),(e) |
|
|
8,535 |
|
|
|
99 |
|
|
|
4.72 |
|
|
|
8,310 |
|
|
|
109 |
|
|
|
5.33 |
|
Held-to-maturity securities (a) |
|
|
25 |
|
|
|
|
|
|
|
9.75 |
|
|
|
25 |
|
|
|
1 |
|
|
|
9.84 |
|
Trading account assets |
|
|
1,217 |
|
|
|
13 |
|
|
|
4.09 |
|
|
|
1,348 |
|
|
|
13 |
|
|
|
3.97 |
|
Short-term investments |
|
|
5,195 |
|
|
|
3 |
|
|
|
.26 |
|
|
|
2,450 |
|
|
|
3 |
|
|
|
.47 |
|
Other investments (e) |
|
|
1,463 |
|
|
|
13 |
|
|
|
3.19 |
|
|
|
1,523 |
|
|
|
12 |
|
|
|
2.80 |
|
|
Total earning assets |
|
|
89,896 |
|
|
|
1,000 |
|
|
|
4.46 |
|
|
|
90,182 |
|
|
|
1,038 |
|
|
|
4.64 |
|
Allowance for loan losses |
|
|
(2,375 |
) |
|
|
|
|
|
|
|
|
|
|
(2,067 |
) |
|
|
|
|
|
|
|
|
Accrued income and other assets |
|
|
13,337 |
|
|
|
|
|
|
|
|
|
|
|
15,700 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
100,858 |
|
|
|
|
|
|
|
|
|
|
$ |
103,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW and money market deposit accounts |
|
$ |
24,058 |
|
|
|
32 |
|
|
|
.52 |
|
|
$ |
23,957 |
|
|
|
38 |
|
|
|
.65 |
|
Savings deposits |
|
|
1,806 |
|
|
|
1 |
|
|
|
.07 |
|
|
|
1,744 |
|
|
|
|
|
|
|
.09 |
|
Certificates of deposit ($100,000 or more) (f) |
|
|
13,555 |
|
|
|
124 |
|
|
|
3.69 |
|
|
|
12,455 |
|
|
|
121 |
|
|
|
3.93 |
|
Other time deposits |
|
|
14,908 |
|
|
|
139 |
|
|
|
3.74 |
|
|
|
14,737 |
|
|
|
140 |
|
|
|
3.85 |
|
Deposits in foreign office |
|
|
579 |
|
|
|
|
|
|
|
.26 |
|
|
|
1,259 |
|
|
|
1 |
|
|
|
.21 |
|
|
Total interest-bearing deposits |
|
|
54,906 |
|
|
|
296 |
|
|
|
2.15 |
|
|
|
54,152 |
|
|
|
300 |
|
|
|
2.24 |
|
Federal funds purchased and securities
sold under repurchase agreements |
|
|
1,627 |
|
|
|
1 |
|
|
|
.31 |
|
|
|
1,545 |
|
|
|
1 |
|
|
|
.31 |
|
Bank notes and other short-term borrowings |
|
|
1,821 |
|
|
|
4 |
|
|
|
.79 |
|
|
|
4,405 |
|
|
|
6 |
|
|
|
.58 |
|
Long-term debt (f) |
|
|
14,372 |
|
|
|
101 |
|
|
|
2.99 |
|
|
|
14,760 |
|
|
|
111 |
|
|
|
3.20 |
|
|
Total interest-bearing liabilities |
|
|
72,726 |
|
|
|
402 |
|
|
|
2.24 |
|
|
|
74,862 |
|
|
|
418 |
|
|
|
2.29 |
|
Noninterest-bearing deposits |
|
|
12,575 |
|
|
|
|
|
|
|
|
|
|
|
11,232 |
|
|
|
|
|
|
|
|
|
Accrued expense and other liabilities |
|
|
5,152 |
|
|
|
|
|
|
|
|
|
|
|
7,163 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
90,453 |
|
|
|
|
|
|
|
|
|
|
|
93,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key shareholders equity |
|
|
10,201 |
|
|
|
|
|
|
|
|
|
|
|
10,352 |
|
|
|
|
|
|
|
|
|
Noncontrolling interests |
|
|
204 |
|
|
|
|
|
|
|
|
|
|
|
206 |
|
|
|
|
|
|
|
|
|
|
Total equity |
|
|
10,405 |
|
|
|
|
|
|
|
|
|
|
|
10,558 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
100,858 |
|
|
|
|
|
|
|
|
|
|
$ |
103,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread (TE) |
|
|
|
|
|
|
|
|
|
|
2.22 |
% |
|
|
|
|
|
|
|
|
|
|
2.35 |
% |
|
Net interest income (TE) and net
interest margin (TE) |
|
|
|
|
|
|
598 |
|
|
|
2.67 |
% |
|
|
|
|
|
|
620 |
|
|
|
2.77 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TE adjustment (a) |
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
Net interest income, GAAP basis |
|
|
|
|
|
$ |
592 |
|
|
|
|
|
|
|
|
|
|
$ |
614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balances have not been restated to reflect Keys January 1, 2008, adoption of Financial
Accounting Standards Board (FASB) Interpretation No. 39, Offsetting of Amounts Related to
Certain Contracts, and FASB Staff Position No. FIN 39-1, Amendment of FASB Interpretation 39.
(a) |
|
Interest income on tax-exempt securities and loans has been adjusted to a taxable-equivalent
basis using the statutory federal income tax rate of 35%. |
|
(b) |
|
For purposes of these computations, nonaccrual loans are included in average loan balances. |
|
(c) |
|
In late March 2009, Key transferred $1.5 billion of loans from the construction portfolio
to the commercial mortgage portfolio in accordance with regulatory guidelines for the
classification of loans that have reached a completed status. |
70
Figure 9. Average Balance Sheets, Net Interest Income and Yields/Rates
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter 2008 |
|
|
Third Quarter 2008 |
|
|
Second Quarter 2008 |
|
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
27,662 |
|
|
$ |
346 |
|
|
|
4.98 |
% |
|
$ |
26,345 |
|
|
$ |
356 |
|
|
|
5.38 |
% |
|
$ |
26,057 |
|
|
$ |
352 |
|
|
|
5.42 |
% |
|
|
|
10,707 |
|
|
|
151 |
|
|
|
5.63 |
|
|
|
10,718 |
|
|
|
158 |
|
|
|
5.87 |
|
|
|
10,593 |
|
|
|
156 |
|
|
|
5.91 |
|
|
|
|
7,686 |
|
|
|
100 |
|
|
|
5.16 |
|
|
|
7,806 |
|
|
|
109 |
|
|
|
5.53 |
|
|
|
8,484 |
|
|
|
118 |
|
|
|
5.61 |
|
|
|
|
9,186 |
|
|
|
78 |
|
|
|
3.38 |
(d) |
|
|
9,585 |
|
|
|
108 |
|
|
|
4.52 |
|
|
|
9,798 |
|
|
|
(709 |
) |
|
|
(28.94 |
) (d) |
|
|
|
|
|
|
55,241 |
|
|
|
675 |
|
|
|
4.87 |
|
|
|
54,454 |
|
|
|
731 |
|
|
|
5.35 |
|
|
|
54,932 |
|
|
|
(83 |
) |
|
|
(.58 |
) |
|
|
|
1,903 |
|
|
|
29 |
|
|
|
6.00 |
|
|
|
1,899 |
|
|
|
28 |
|
|
|
6.04 |
|
|
|
1,918 |
|
|
|
30 |
|
|
|
6.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,037 |
|
|
|
129 |
|
|
|
5.13 |
|
|
|
9,887 |
|
|
|
141 |
|
|
|
5.64 |
|
|
|
9,765 |
|
|
|
140 |
|
|
|
5.78 |
|
|
|
|
1,088 |
|
|
|
21 |
|
|
|
7.62 |
|
|
|
1,138 |
|
|
|
22 |
|
|
|
7.65 |
|
|
|
1,200 |
|
|
|
23 |
|
|
|
7.68 |
|
|
|
|
|
|
|
11,125 |
|
|
|
150 |
|
|
|
5.37 |
|
|
|
11,025 |
|
|
|
163 |
|
|
|
5.85 |
|
|
|
10,965 |
|
|
|
163 |
|
|
|
5.99 |
|
|
|
|
1,260 |
|
|
|
30 |
|
|
|
9.57 |
|
|
|
1,264 |
|
|
|
33 |
|
|
|
10.37 |
|
|
|
1,271 |
|
|
|
33 |
|
|
|
10.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,467 |
|
|
|
55 |
|
|
|
6.32 |
|
|
|
3,586 |
|
|
|
57 |
|
|
|
6.33 |
|
|
|
3,646 |
|
|
|
56 |
|
|
|
6.26 |
|
|
|
|
3,661 |
|
|
|
56 |
|
|
|
6.19 |
|
|
|
3,635 |
|
|
|
54 |
|
|
|
5.90 |
|
|
|
3,595 |
|
|
|
53 |
|
|
|
5.88 |
|
|
|
|
288 |
|
|
|
6 |
|
|
|
8.22 |
|
|
|
308 |
|
|
|
6 |
|
|
|
8.22 |
|
|
|
325 |
|
|
|
7 |
|
|
|
8.21 |
|
|
|
|
|
|
|
7,416 |
|
|
|
117 |
|
|
|
6.33 |
|
|
|
7,529 |
|
|
|
117 |
|
|
|
6.20 |
|
|
|
7,566 |
|
|
|
116 |
|
|
|
6.16 |
|
|
|
|
|
|
|
21,704 |
|
|
|
326 |
|
|
|
6.00 |
|
|
|
21,717 |
|
|
|
341 |
|
|
|
6.25 |
|
|
|
21,720 |
|
|
|
342 |
|
|
|
6.32 |
|
|
|
|
|
|
|
76,945 |
|
|
|
1,001 |
|
|
|
5.19 |
|
|
|
76,171 |
|
|
|
1,072 |
|
|
|
5.60 |
|
|
|
76,652 |
|
|
|
259 |
|
|
|
1.37 |
|
|
|
|
1,495 |
|
|
|
18 |
|
|
|
4.84 |
|
|
|
1,723 |
|
|
|
21 |
|
|
|
4.76 |
|
|
|
1,356 |
|
|
|
20 |
|
|
|
5.94 |
|
|
|
|
8,269 |
|
|
|
111 |
|
|
|
5.39 |
|
|
|
8,266 |
|
|
|
110 |
|
|
|
5.38 |
|
|
|
8,315 |
|
|
|
111 |
|
|
|
5.40 |
|
|
|
|
27 |
|
|
|
2 |
|
|
|
10.74 |
|
|
|
27 |
|
|
|
1 |
|
|
|
13.81 |
|
|
|
25 |
|
|
|
|
|
|
|
11.47 |
|
|
|
|
1,416 |
|
|
|
17 |
|
|
|
4.81 |
|
|
|
1,579 |
|
|
|
16 |
|
|
|
4.02 |
|
|
|
1,041 |
|
|
|
10 |
|
|
|
3.88 |
|
|
|
|
3,715 |
|
|
|
8 |
|
|
|
.88 |
|
|
|
794 |
|
|
|
6 |
|
|
|
3.44 |
|
|
|
773 |
|
|
|
8 |
|
|
|
3.83 |
|
|
|
|
1,557 |
|
|
|
13 |
|
|
|
3.06 |
|
|
|
1,563 |
|
|
|
12 |
|
|
|
2.87 |
|
|
|
1,580 |
|
|
|
14 |
|
|
|
3.09 |
|
|
|
|
|
|
|
93,424 |
|
|
|
1,170 |
|
|
|
4.98 |
|
|
|
90,123 |
|
|
|
1,238 |
|
|
|
5.47 |
|
|
|
89,742 |
|
|
|
422 |
|
|
|
1.89 |
|
|
|
|
(1,676 |
) |
|
|
|
|
|
|
|
|
|
|
(1,498 |
) |
|
|
|
|
|
|
|
|
|
|
(1,338 |
) |
|
|
|
|
|
|
|
|
|
|
|
15,987 |
|
|
|
|
|
|
|
|
|
|
|
14,531 |
|
|
|
|
|
|
|
|
|
|
|
14,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
107,735 |
|
|
|
|
|
|
|
|
|
|
$ |
103,156 |
|
|
|
|
|
|
|
|
|
|
$ |
103,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
24,919 |
|
|
|
78 |
|
|
|
1.24 |
|
|
$ |
26,657 |
|
|
|
108 |
|
|
|
1.61 |
|
|
$ |
27,158 |
|
|
|
102 |
|
|
|
1.51 |
|
|
|
|
1,722 |
|
|
|
1 |
|
|
|
.16 |
|
|
|
1,783 |
|
|
|
1 |
|
|
|
.21 |
|
|
|
1,815 |
|
|
|
1 |
|
|
|
.27 |
|
|
|
|
11,270 |
|
|
|
118 |
|
|
|
4.20 |
|
|
|
9,506 |
|
|
|
97 |
|
|
|
4.05 |
|
|
|
8,670 |
|
|
|
88 |
|
|
|
4.09 |
|
|
|
|
14,560 |
|
|
|
146 |
|
|
|
3.98 |
|
|
|
13,118 |
|
|
|
129 |
|
|
|
3.92 |
|
|
|
12,751 |
|
|
|
135 |
|
|
|
4.27 |
|
|
|
|
1,300 |
|
|
|
3 |
|
|
|
.90 |
|
|
|
2,762 |
|
|
|
12 |
|
|
|
1.77 |
|
|
|
4,121 |
|
|
|
21 |
|
|
|
1.95 |
|
|
|
|
|
|
|
53,771 |
|
|
|
346 |
|
|
|
2.56 |
|
|
|
53,826 |
|
|
|
347 |
|
|
|
2.57 |
|
|
|
54,515 |
|
|
|
347 |
|
|
|
2.56 |
|
|
|
|
1,727 |
|
|
|
4 |
|
|
|
.86 |
|
|
|
2,546 |
|
|
|
10 |
|
|
|
1.58 |
|
|
|
3,267 |
|
|
|
15 |
|
|
|
1.86 |
|
|
|
|
9,205 |
|
|
|
31 |
|
|
|
1.36 |
|
|
|
4,843 |
|
|
|
34 |
|
|
|
2.72 |
|
|
|
4,770 |
|
|
|
27 |
|
|
|
2.26 |
|
|
|
|
14,557 |
|
|
|
143 |
|
|
|
4.08 |
|
|
|
15,123 |
|
|
|
142 |
|
|
|
3.91 |
|
|
|
14,620 |
|
|
|
133 |
|
|
|
3.87 |
|
|
|
|
|
|
|
79,260 |
|
|
|
524 |
|
|
|
2.65 |
|
|
|
76,338 |
|
|
|
533 |
|
|
|
2.80 |
|
|
|
77,172 |
|
|
|
522 |
|
|
|
2.75 |
|
|
|
|
10,860 |
|
|
|
|
|
|
|
|
|
|
|
10,756 |
|
|
|
|
|
|
|
|
|
|
|
10,617 |
|
|
|
|
|
|
|
|
|
|
|
|
7,524 |
|
|
|
|
|
|
|
|
|
|
|
7,152 |
|
|
|
|
|
|
|
|
|
|
|
6,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97,644 |
|
|
|
|
|
|
|
|
|
|
|
94,246 |
|
|
|
|
|
|
|
|
|
|
|
94,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,888 |
|
|
|
|
|
|
|
|
|
|
|
8,734 |
|
|
|
|
|
|
|
|
|
|
|
8,617 |
|
|
|
|
|
|
|
|
|
|
|
|
203 |
|
|
|
|
|
|
|
|
|
|
|
176 |
|
|
|
|
|
|
|
|
|
|
|
178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,091 |
|
|
|
|
|
|
|
|
|
|
|
8,910 |
|
|
|
|
|
|
|
|
|
|
|
8,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
107,735 |
|
|
|
|
|
|
|
|
|
|
$ |
103,156 |
|
|
|
|
|
|
|
|
|
|
$ |
103,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.33 |
% |
|
|
|
|
|
|
|
|
|
|
2.67 |
% |
|
|
|
|
|
|
|
|
|
|
(.86 |
)% |
|
|
|
|
|
|
|
|
|
|
646 |
(d) |
|
|
2.76 |
% (d) |
|
|
|
|
|
|
705 |
|
|
|
3.13 |
% |
|
|
|
|
|
|
(100 |
) (d) |
|
|
(.44 |
)% (d) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
(458 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
639 |
|
|
|
|
|
|
|
|
|
|
$ |
699 |
|
|
|
|
|
|
|
|
|
|
$ |
358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) |
|
During the fourth quarter of 2008, Keys taxable-equivalent net interest income was
reduced by $18 million as a result of
an agreement reached with the IRS on all material aspects related to the IRS global tax
settlement pertaining to certain leveraged lease financing transactions. Excluding this
reduction, the taxable-equivalent yield on Keys commercial lease financing portfolio would
have been 4.17% for the fourth quarter of 2008, and Keys taxable-equivalent net interest
margin would have been 2.84%. During the second quarter of 2008, Keys taxable-equivalent net
interest income was reduced by $838 million following an adverse federal court decision on
Keys tax treatment of a leveraged sale-leaseback transaction. Excluding this reduction, the
taxable-equivalent yield on Keys commercial lease financing portfolio would have been 5.25%
for the second quarter of 2008, and Keys taxable-equivalent net interest margin would have
been 3.32%. |
|
(e) |
|
Yield is calculated on the basis of amortized cost. |
|
(f) |
|
Rate calculation excludes basis adjustments related to fair value hedges. |
|
TE = Taxable Equivalent, GAAP = U.S. generally accepted accounting principles |
71
Figure 10 shows how the changes in yields or rates and average balances from the prior year
affected net interest income. The section entitled Financial Condition, which begins on page 79,
contains more discussion about changes in earning assets and funding sources.
Figure 10. Components of Net Interest Income Changes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From three months ended June 30, 2008 |
|
|
From six months ended June 30, 2008 |
|
|
|
to three months ended June 30, 2009 |
|
|
to six months ended June 30, 2009 |
|
|
|
Average |
|
|
Yield/ |
|
|
Net |
|
|
Average |
|
|
Yield/ |
|
|
Net |
|
in millions |
|
Volume |
|
|
Rate |
|
|
Change |
|
|
Volume |
|
|
Rate |
|
|
Change |
|
|
INTEREST INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
(15 |
) |
|
$ |
619 |
|
|
$ |
604 |
|
|
$ |
(15 |
) |
|
$ |
394 |
|
|
$ |
379 |
|
Loans held for sale |
|
|
(4 |
) |
|
|
(7 |
) |
|
|
(11 |
) |
|
|
(50 |
) |
|
|
(36 |
) |
|
|
(86 |
) |
Securities available for sale |
|
|
3 |
|
|
|
(15 |
) |
|
|
(12 |
) |
|
|
1 |
|
|
|
(14 |
) |
|
|
(13 |
) |
Trading account assets |
|
|
2 |
|
|
|
1 |
|
|
|
3 |
|
|
|
5 |
|
|
|
(2 |
) |
|
|
3 |
|
Short-term investments |
|
|
9 |
|
|
|
(14 |
) |
|
|
(5 |
) |
|
|
15 |
|
|
|
(26 |
) |
|
|
(11 |
) |
Other investments |
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
Total interest income (TE) |
|
|
(6 |
) |
|
|
584 |
|
|
|
578 |
|
|
|
(45 |
) |
|
|
316 |
|
|
|
271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW and money market deposit accounts |
|
|
(11 |
) |
|
|
(59 |
) |
|
|
(70 |
) |
|
|
(25 |
) |
|
|
(146 |
) |
|
|
(171 |
) |
Savings deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
(3 |
) |
Certificates of deposit ($100,000 or more) |
|
|
45 |
|
|
|
(9 |
) |
|
|
36 |
|
|
|
90 |
|
|
|
(28 |
) |
|
|
62 |
|
Other time deposits |
|
|
21 |
|
|
|
(17 |
) |
|
|
4 |
|
|
|
42 |
|
|
|
(44 |
) |
|
|
(2 |
) |
Deposits in foreign office |
|
|
(10 |
) |
|
|
(11 |
) |
|
|
(21 |
) |
|
|
(31 |
) |
|
|
(34 |
) |
|
|
(65 |
) |
|
Total interest-bearing deposits |
|
|
45 |
|
|
|
(96 |
) |
|
|
(51 |
) |
|
|
76 |
|
|
|
(255 |
) |
|
|
(179 |
) |
Federal funds purchased and securities sold
under repurchase agreements |
|
|
(5 |
) |
|
|
(9 |
) |
|
|
(14 |
) |
|
|
(16 |
) |
|
|
(25 |
) |
|
|
(41 |
) |
Bank notes and other short-term borrowings |
|
|
(12 |
) |
|
|
(11 |
) |
|
|
(23 |
) |
|
|
(18 |
) |
|
|
(38 |
) |
|
|
(56 |
) |
Long-term debt |
|
|
(2 |
) |
|
|
(30 |
) |
|
|
(32 |
) |
|
|
12 |
|
|
|
(79 |
) |
|
|
(67 |
) |
|
Total interest expense |
|
|
26 |
|
|
|
(146 |
) |
|
|
(120 |
) |
|
|
54 |
|
|
|
(397 |
) |
|
|
(343 |
) |
|
Net interest income (TE) |
|
$ |
(32 |
) |
|
$ |
730 |
|
|
$ |
698 |
|
|
$ |
(99 |
) |
|
$ |
713 |
|
|
$ |
614 |
|
|
The change in interest not due solely to volume or rate has been allocated in proportion to the
absolute dollar amounts of the change in each.
Noninterest income
Keys noninterest income was $715 million for the second quarter of 2009, compared to $547 million
for the year-ago quarter. For the first six months of the year, noninterest income was $1.2
billion, representing an increase of $129 million, or 12%, from the first half of 2008.
As shown in Figure 12, the increase from the year-ago quarter was attributable to three primary
factors. In addition to the $125 million of net gains recorded in connection with the
repositioning of the securities portfolio, in the current quarter Key also recorded a $95 million
gain related to the exchange of common shares for capital securities and a $32 million gain from
the sale of Keys claim associated with the Lehman Brothers bankruptcy. Additionally, net gains
on leased equipment rose by $29 million, which more than offset the $16 million reduction to net
interest income associated with the termination of lease financing arrangements. The increase
attributable to the above factors was offset in part by a $63 million reduction in income from
investment banking and capital markets activities, and net losses of $3 million from loan sales in
the current quarter, compared to net gains of $33 million for the second quarter of 2008. Key also
experienced lower income from trust and investment services, service charges on deposit accounts
and operating leases.
72
For the year-to-date period, the increase in noninterest income was largely attributable to the
gains recorded during the second quarter of 2009 in connection with the repositioning of the
securities portfolio, the exchange of common shares for institutional capital securities and the
sale of Keys claim associated with the Lehman Brothers bankruptcy discussed above. Also
contributing to the growth was a $47 million increase in net gains on leased equipment, and net
gains of $5 million from loan sales in the current year, compared to net losses of $68 million for
the first six months of 2008. The increase attributable to these factors was offset in part by a
$75 million increase in net losses from principal investing, a $53 million reduction in income from
investment banking and capital markets activities, and lower income from trust and investment
services, service charges on deposit accounts and operating leases. Additionally, Key recorded a
$105 million gain from the sale of Visa Inc. shares during the first quarter of 2009, compared to a
$165 million gain from the partial redemption of shares during the first quarter of 2008.
The trend in the major components of Keys fee-based income over the past five quarters is shown in
Figure 11.
Figure 11. Fee-Based Income Major Components
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
in millions |
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
|
Trust and investment services income |
|
$ |
119 |
|
|
$ |
110 |
|
|
$ |
131 |
|
|
$ |
125 |
|
|
$ |
130 |
|
Service charges on deposit accounts |
|
|
83 |
|
|
|
82 |
|
|
|
90 |
|
|
|
94 |
|
|
|
93 |
|
Operating lease income |
|
|
59 |
|
|
|
61 |
|
|
|
64 |
|
|
|
69 |
|
|
|
68 |
|
Letter of credit and loan fees |
|
|
45 |
|
|
|
38 |
|
|
|
42 |
|
|
|
53 |
|
|
|
51 |
|
Corporate-owned life insurance income |
|
|
25 |
|
|
|
27 |
|
|
|
33 |
|
|
|
28 |
|
|
|
28 |
|
Electronic banking fees |
|
|
27 |
|
|
|
24 |
|
|
|
25 |
|
|
|
27 |
|
|
|
27 |
|
Insurance income |
|
|
16 |
|
|
|
18 |
|
|
|
15 |
|
|
|
15 |
|
|
|
20 |
|
Investment banking and capital markets income (loss) |
|
|
17 |
|
|
|
18 |
|
|
|
6 |
|
|
|
(31 |
) |
|
|
80 |
|
Net losses from principal investing |
|
|
(6 |
) |
|
|
(72 |
) |
|
|
(37 |
) |
|
|
(14 |
) |
|
|
(14 |
) |
|
The following discussion explains the composition of certain elements of Keys noninterest income
shown in Figure 12 and the factors that caused those elements to change.
Figure 12. Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Change |
|
|
Six months ended June 30, |
|
|
Change |
|
dollars in millions |
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
|
Trust and investment services income |
|
$ |
119 |
|
|
$ |
130 |
|
|
$ |
(11 |
) |
|
|
(8.5 |
)% |
|
$ |
229 |
|
|
$ |
253 |
|
|
$ |
(24 |
) |
|
|
(9.5 |
)% |
Service charges on deposit accounts |
|
|
83 |
|
|
|
93 |
|
|
|
(10 |
) |
|
|
(10.8 |
) |
|
|
165 |
|
|
|
181 |
|
|
|
(16 |
) |
|
|
(8.8 |
) |
Operating lease income |
|
|
59 |
|
|
|
68 |
|
|
|
(9 |
) |
|
|
(13.2 |
) |
|
|
120 |
|
|
|
137 |
|
|
|
(17 |
) |
|
|
(12.4 |
) |
Letter of credit and loan fees |
|
|
45 |
|
|
|
51 |
|
|
|
(6 |
) |
|
|
(11.8 |
) |
|
|
83 |
|
|
|
88 |
|
|
|
(5 |
) |
|
|
(5.7 |
) |
Corporate-owned life insurance income |
|
|
25 |
|
|
|
28 |
|
|
|
(3 |
) |
|
|
(10.7 |
) |
|
|
52 |
|
|
|
56 |
|
|
|
(4 |
) |
|
|
(7.1 |
) |
Electronic banking fees |
|
|
27 |
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
51 |
|
|
|
51 |
|
|
|
|
|
|
|
|
|
Insurance income |
|
|
16 |
|
|
|
20 |
|
|
|
(4 |
) |
|
|
(20.0 |
) |
|
|
34 |
|
|
|
35 |
|
|
|
(1 |
) |
|
|
(2.9 |
) |
Investment banking and capital markets income |
|
|
17 |
|
|
|
80 |
|
|
|
(63 |
) |
|
|
(78.8 |
) |
|
|
35 |
|
|
|
88 |
|
|
|
(53 |
) |
|
|
(60.2 |
) |
Net securities gains (losses) |
|
|
125 |
|
|
|
(1 |
) |
|
|
126 |
|
|
|
N/M |
|
|
|
111 |
|
|
|
2 |
|
|
|
109 |
|
|
|
N/M |
|
Net losses from principal investing |
|
|
(6 |
) |
|
|
(14 |
) |
|
|
8 |
|
|
|
57.1 |
|
|
|
(78 |
) |
|
|
(3 |
) |
|
|
(75 |
) |
|
|
N/M |
|
Net (losses) gains from loan securitizations and sales |
|
|
(3 |
) |
|
|
33 |
|
|
|
(36 |
) |
|
|
N/M |
|
|
|
5 |
|
|
|
(68 |
) |
|
|
73 |
|
|
|
N/M |
|
Gain related to exchange of common shares
for capital securities |
|
|
95 |
|
|
|
|
|
|
|
95 |
|
|
|
N/M |
|
|
|
95 |
|
|
|
|
|
|
|
95 |
|
|
|
N/M |
|
Gain from sale/redemption of Visa Inc. shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105 |
|
|
|
165 |
|
|
|
(60 |
) |
|
|
(36.4 |
) |
Other income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain from sale of Keys claim associated with
the Lehman Brothers bankruptcy |
|
|
32 |
|
|
|
|
|
|
|
32 |
|
|
|
N/M |
|
|
|
32 |
|
|
|
|
|
|
|
32 |
|
|
|
N/M |
|
Gains on leased equipment |
|
|
36 |
|
|
|
7 |
|
|
|
29 |
|
|
|
414.3 |
|
|
|
62 |
|
|
|
15 |
|
|
|
47 |
|
|
|
313.3 |
|
Loan securitization servicing fees |
|
|
4 |
|
|
|
5 |
|
|
|
(1 |
) |
|
|
(20.0 |
) |
|
|
8 |
|
|
|
9 |
|
|
|
(1 |
) |
|
|
(11.1 |
) |
Credit card fees |
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
7 |
|
|
|
(1 |
) |
|
|
(14.3 |
) |
Miscellaneous income |
|
|
38 |
|
|
|
17 |
|
|
|
21 |
|
|
|
123.5 |
|
|
|
85 |
|
|
|
55 |
|
|
|
30 |
|
|
|
54.5 |
|
|
Total other income |
|
|
113 |
|
|
|
32 |
|
|
|
81 |
|
|
|
253.1 |
|
|
|
193 |
|
|
|
86 |
|
|
|
107 |
|
|
|
124.4 |
|
|
Total noninterest income |
|
$ |
715 |
|
|
$ |
547 |
|
|
$ |
168 |
|
|
|
30.7 |
% |
|
$ |
1,200 |
|
|
$ |
1,071 |
|
|
$ |
129 |
|
|
|
12.0 |
% |
|
N/M = Not Meaningful
73
Trust and investment services income. Trust and investment services are Keys largest source of
noninterest income. The primary components of revenue generated by these services are shown in
Figure 13. The reductions from 2008 results are attributable to decreases in both personal and
institutional asset management income, offset in part by higher income from brokerage commissions
and fees.
Figure 13. Trust and Investment Services Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Change |
|
|
Six months ended June 30, |
|
|
Change |
|
dollars in millions |
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
|
Brokerage commissions and fee income |
|
|
$ 45 |
|
|
|
$ 41 |
|
|
|
$ 4 |
|
|
|
9.8 |
% |
|
|
$ 83 |
|
|
|
$ 74 |
|
|
|
$ 9 |
|
|
|
12.2 |
% |
Personal asset management and custody fees |
|
|
36 |
|
|
|
40 |
|
|
|
(4 |
) |
|
|
(10.8 |
) |
|
|
69 |
|
|
|
81 |
|
|
|
(12 |
) |
|
|
(14.8 |
) |
Institutional asset management and custody fees |
|
|
38 |
|
|
|
49 |
|
|
|
(11 |
) |
|
|
(22.4 |
) |
|
|
77 |
|
|
|
98 |
|
|
|
(21 |
) |
|
|
(21.4 |
) |
|
Total trust and investment services income |
|
|
$ 119 |
|
|
|
$ 130 |
|
|
|
$ (11 |
) |
|
|
(8.5 |
)% |
|
|
$ 229 |
|
|
|
$ 253 |
|
|
|
$ (24 |
) |
|
|
(9.5 |
)% |
|
A significant portion of Keys trust and investment services income depends on the value and mix of
assets under management. Excluding the hedge funds, which are related to the discontinued
operations of Austin Capital Management, Ltd., at June 30, 2009, Keys bank, trust and registered
investment advisory subsidiaries had assets under management of $61.4 billion, compared to $78.6
billion at June 30, 2008. As shown in Figure 14, most of the decrease was attributable to the
equity and securities lending portfolios. The value of the equity portfolio declined because of
weakness in the equity markets. The decline in the securities lending portfolio was due in part to
increased volatility in the fixed income markets and actions taken by management to maintain
sufficient liquidity within the portfolio. When clients securities are lent out, the borrower
must provide Key with cash collateral, which is invested during the term of the loan. The
difference between the revenue generated from the investment and the cost of the collateral is
shared with the lending client. This business, although profitable, generates a significantly
lower rate of return (commensurate with the lower level of risk) than other types of assets under
management. The decrease in the level of Keys portfolio of hedge funds is attributable in part to
managements second quarter 2009 decision to curtail the operations of Austin Capital Management,
Ltd.
Figure 14. Assets Under Management
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
in millions |
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
|
Assets under management by investment type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
$ |
31,036 |
|
|
$ |
26,508 |
|
|
$ |
29,384 |
|
|
$ |
37,131 |
|
|
$ |
40,446 |
|
Securities lending |
|
|
12,169 |
|
|
|
12,275 |
|
|
|
12,454 |
|
|
|
16,538 |
|
|
|
17,756 |
|
Fixed income |
|
|
9,745 |
|
|
|
9,892 |
|
|
|
9,819 |
|
|
|
10,461 |
|
|
|
10,823 |
|
Money market |
|
|
8,437 |
|
|
|
9,269 |
|
|
|
10,520 |
|
|
|
9,679 |
|
|
|
9,604 |
|
Hedge funds (a) |
|
|
1,995 |
|
|
|
2,220 |
|
|
|
2,540 |
|
|
|
2,867 |
|
|
|
2,369 |
|
|
Total |
|
$ |
63,382 |
|
|
$ |
60,164 |
|
|
$ |
64,717 |
|
|
$ |
76,676 |
|
|
$ |
80,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proprietary mutual funds included in assets under management: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market |
|
$ |
5,789 |
|
|
$ |
6,439 |
|
|
$ |
7,458 |
|
|
$ |
6,871 |
|
|
$ |
7,178 |
|
Equity |
|
|
6,293 |
|
|
|
5,149 |
|
|
|
5,572 |
|
|
|
6,771 |
|
|
|
7,202 |
|
Fixed income |
|
|
662 |
|
|
|
674 |
|
|
|
640 |
|
|
|
633 |
|
|
|
617 |
|
|
Total |
|
$ |
12,744 |
|
|
$ |
12,262 |
|
|
$ |
13,670 |
|
|
$ |
14,275 |
|
|
$ |
14,997 |
|
|
|
|
|
(a) |
|
Hedge funds are related to the discontinued operations of Austin Capital Management,
Ltd. |
Service charges on deposit accounts. The decrease in service charges on deposit accounts for both
the quarterly and year-to-date periods is due primarily to a reduction in overdraft fees resulting
from lower transaction volume. In addition, as a result of the low interest rate environment and
unlimited FDIC insurance, Keys corporate clients have been maintaining larger amounts on deposit
with Key, which has the effect of reducing their transaction service charges on their
noninterest-bearing deposit accounts.
Operating lease income. The decrease in operating lease income compared to the prior year periods
is attributable to a lower volume of activity in the Equipment Finance line of business. As shown
in Figure 16, the depreciation expense associated with these operating leases is also decreasing.
74
Investment banking and capital markets income. As shown in Figure 15, for both the quarterly and
year-to-date periods, Key experienced decreases in all components of investment banking and capital
markets income, largely as a result of the weak economy. Lower income from investment banking
activities, and losses from dealer trading and derivatives in the current year, compared to income
in the prior year accounted for most of the decline.
Figure 15. Investment Banking and Capital Markets Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Change |
|
|
Six months ended June 30, |
|
|
Change |
|
dollars in millions |
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
|
Investment banking income |
|
|
$ 21 |
|
|
|
$ 36 |
|
|
|
$ (15 |
) |
|
|
(40.5 |
)% |
|
|
$ 32 |
|
|
|
$ 58 |
|
|
|
$ (26 |
) |
|
|
(44.8 |
)% |
(Loss) income from other investments |
|
|
(6 |
) |
|
|
1 |
|
|
|
(7 |
) |
|
|
N/M |
|
|
|
(14 |
) |
|
|
(5 |
) |
|
|
(9 |
) |
|
|
(180.0 |
) |
Dealer trading and derivatives (loss) income |
|
|
(11 |
) |
|
|
28 |
|
|
|
(39 |
) |
|
|
N/M |
|
|
|
(9 |
) |
|
|
7 |
|
|
|
(16 |
) |
|
|
N/M |
|
Foreign exchange income |
|
|
13 |
|
|
|
15 |
|
|
|
(2 |
) |
|
|
(14.2 |
) |
|
|
26 |
|
|
|
28 |
|
|
|
(2 |
) |
|
|
(7.1 |
) |
|
Total investment banking and capital markets income |
|
|
$ 17 |
|
|
|
$ 80 |
|
|
|
$ (63 |
) |
|
|
(78.8 |
)% |
|
|
$ 35 |
|
|
|
$ 88 |
|
|
|
$ (53 |
) |
|
|
(60.2 |
)% |
|
N/M = Not Meaningful
Net losses from principal investing. Principal investments consist of direct and indirect
investments in predominantly privately held companies. Keys principal investing income is
susceptible to volatility since most of it is derived from mezzanine debt and equity investments in
small to medium-sized businesses. These investments are carried on the balance sheet at fair value
($930 million at June 30, 2009, $990 million at December 31, 2008, and $1.0 billion at June 30,
2008). The net losses presented in Figure 12 derive from changes in fair values as well as sales
of principal investments.
Net (losses) gains from loan securitizations and sales. Key sells or securitizes loans to achieve
desired interest rate and credit risk profiles, to improve the profitability of the overall loan
portfolio or to diversify funding sources. During the first six months of 2009, Key recorded $5
million of net gains from loan sales, compared to net losses of $68 million from loan sales and
write-downs during the first half of 2008. Results for the first six months of 2008 include $101
million of net losses from loan sales and write-downs recorded during the first quarter, due
primarily to volatility in the fixed income markets and the related housing correction.
Approximately $84 million of these losses pertained to commercial real estate loans held for sale.
The types of loans sold during 2009 and 2008 are presented in Figure 20 on page 82. In March 2008,
Key transferred $3.3 billion of education loans from held-for-sale status to the loan portfolio.
The secondary markets for these loans have been adversely affected by market liquidity issues,
making securitizations impractical and prompting the companys decision to move these loans to a
held-to-maturity classification.
Noninterest expense
Keys noninterest expense was $870 million for the second quarter of 2009, compared to $777 million
for the second quarter of 2008. For the first six months of the year, noninterest expense was
$1.812 billion, representing an increase of $306 million, or 20%, from the first six months of
2008.
As shown in Figure 16, personnel expense decreased by $25 million from the second quarter of 2008
as a result of lower incentive compensation accruals and a reduction in salaries expense. The
reduction in personnel expense was more than offset by a $118 million rise in nonpersonnel expense,
due largely to a $68 million increase in the FDIC deposit insurance assessment. The higher
assessment is a result of an across-the-board increase in the assessment rate that took effect
during the first quarter of 2009 and a special assessment imposed during the second quarter of
2009, under which Key recorded $44 million of additional expense. More specific information
regarding the FDICs actions is included in the section entitled Deposits and other sources of
funds, which begins on page 85. Other factors contributing to the growth in nonpersonnel expense
were a $16 million increase to the provision for losses on LIHTC guaranteed funds, a $15 million
increase in professional fees and a $12 million increase in costs associated with holding OREO. In
addition, Key recorded an $11 million provision for losses on lending-related commitments during
the current quarter, compared to a $2 million credit for the second quarter of 2008. Further
information regarding the LIHTC guaranteed funds is included in Note 8 (Variable Interest
75
Entities), under the heading LIHTC guaranteed funds on page 26, and in Note 14 (Contingent
Liabilities and Guarantees) under the heading Return guarantee agreement with LIHTC investors on
page 35.
For the year-to-date period, personnel expense decreased by $71 million. Excluding the intangible
assets impairment charge of $196 million recorded in the first quarter of 2009, nonpersonnel
expense was up $181 million, or 26%, due primarily to a $96 million increase in the FDIC deposit
insurance assessment, a $26 million increase in professional fees and an $11 million provision for
losses on lending-related commitments recorded during the current year, compared to a $29 million
credit recorded for the first six months of 2008.
The quarterly and year-to-date increases in total noninterest expense were moderated by decreases
in operating lease expense, marketing expense and postage.
Figure 16. Noninterest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Change |
|
|
Six months ended June 30, |
|
|
Change |
|
dollars in millions |
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
|
Personnel |
|
$ |
377 |
|
|
$ |
402 |
|
|
$ |
(25 |
) |
|
|
(6.2 |
)% |
|
$ |
738 |
|
|
$ |
809 |
|
|
$ |
(71 |
) |
|
|
(8.8 |
)% |
Net occupancy |
|
|
63 |
|
|
|
62 |
|
|
|
1 |
|
|
|
1.6 |
|
|
|
129 |
|
|
|
128 |
|
|
|
1 |
|
|
|
.8 |
|
Operating lease expense |
|
|
49 |
|
|
|
55 |
|
|
|
(6 |
) |
|
|
(10.9 |
) |
|
|
99 |
|
|
|
113 |
|
|
|
(14 |
) |
|
|
(12.4 |
) |
Computer processing |
|
|
48 |
|
|
|
43 |
|
|
|
5 |
|
|
|
11.6 |
|
|
|
95 |
|
|
|
90 |
|
|
|
5 |
|
|
|
5.6 |
|
Professional fees |
|
|
47 |
|
|
|
32 |
|
|
|
15 |
|
|
|
46.9 |
|
|
|
81 |
|
|
|
55 |
|
|
|
26 |
|
|
|
47.3 |
|
FDIC assessment |
|
|
70 |
|
|
|
2 |
|
|
|
68 |
|
|
|
N/M |
|
|
|
100 |
|
|
|
4 |
|
|
|
96 |
|
|
|
N/M |
|
Equipment |
|
|
25 |
|
|
|
23 |
|
|
|
2 |
|
|
|
8.7 |
|
|
|
47 |
|
|
|
47 |
|
|
|
|
|
|
|
|
|
Marketing |
|
|
17 |
|
|
|
21 |
|
|
|
(4 |
) |
|
|
(19.0 |
) |
|
|
31 |
|
|
|
35 |
|
|
|
(4 |
) |
|
|
(11.4 |
) |
Intangible assets impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
196 |
|
|
|
|
|
|
|
196 |
|
|
|
N/M |
|
Other expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OREO expense, net |
|
|
15 |
|
|
|
3 |
|
|
|
12 |
|
|
|
400.0 |
|
|
|
21 |
|
|
|
5 |
|
|
|
16 |
|
|
|
320.0 |
|
Postage and delivery |
|
|
8 |
|
|
|
12 |
|
|
|
(4 |
) |
|
|
(33.3 |
) |
|
|
16 |
|
|
|
23 |
|
|
|
(7 |
) |
|
|
(30.4 |
) |
Franchise and business taxes |
|
|
9 |
|
|
|
8 |
|
|
|
1 |
|
|
|
12.5 |
|
|
|
18 |
|
|
|
16 |
|
|
|
2 |
|
|
|
12.5 |
|
Telecommunications |
|
|
6 |
|
|
|
7 |
|
|
|
(1 |
) |
|
|
(14.3 |
) |
|
|
13 |
|
|
|
15 |
|
|
|
(2 |
) |
|
|
(13.3 |
) |
Provision for losses on LIHTC guaranteed funds |
|
|
16 |
|
|
|
|
|
|
|
16 |
|
|
|
N/M |
|
|
|
16 |
|
|
|
6 |
|
|
|
10 |
|
|
|
166.7 |
|
Provision (credit) for losses on lending-related
commitments |
|
|
11 |
|
|
|
(2 |
) |
|
|
13 |
|
|
|
N/M |
|
|
|
11 |
|
|
|
(29 |
) |
|
|
40 |
|
|
|
N/M |
|
Miscellaneous expense |
|
|
109 |
|
|
|
109 |
|
|
|
|
|
|
|
|
|
|
|
201 |
|
|
|
189 |
|
|
|
12 |
|
|
|
6.3 |
|
|
Total other expense |
|
|
174 |
|
|
|
137 |
|
|
|
37 |
|
|
|
27.0 |
|
|
|
296 |
|
|
|
225 |
|
|
|
71 |
|
|
|
31.6 |
|
|
Total noninterest expense |
|
$ |
870 |
|
|
$ |
777 |
|
|
$ |
93 |
|
|
|
12.0 |
% |
|
$ |
1,812 |
|
|
$ |
1,506 |
|
|
$ |
306 |
|
|
|
20.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average full-time equivalent employees (a) |
|
|
16,937 |
|
|
|
18,164 |
|
|
|
(1,227 |
) |
|
|
(6.8 |
)% |
|
|
17,201 |
|
|
|
18,295 |
|
|
|
(1,094 |
) |
|
|
(6.0 |
)% |
|
(a) |
|
The number of average full-time equivalent employees has not been adjusted for discontinued
operations. |
N/M = Not Meaningful
The following discussion explains the composition of certain elements of Keys noninterest expense
and the factors that caused those elements to change.
Personnel. As shown in Figure 17, personnel expense, the largest category of Keys noninterest
expense, decreased by $71 million, or 9%, from the first six months of 2008. The decrease was due
primarily to lower accruals for incentive compensation and a reduction in salaries expense stemming
from a 6% decline in the number of average full-time equivalent employees. These reductions were
offset in part by an increase in severance expense and higher costs associated with employee
benefits. As previously reported, Key expects to experience a substantial increase in pension
expense in 2009. The increase is due primarily to lower expected returns and an increase in the
amortization of losses resulting from the decrease in the value of pension plan assets caused by
steep declines in the equity markets in 2008.
76
Figure 17. Personnel Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Change |
|
|
Six months ended June 30, |
|
|
Change |
|
dollars in millions |
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
|
Salaries |
|
|
$ 226 |
|
|
|
$ 234 |
|
|
|
$ (8 |
) |
|
|
(3.4 |
)% |
|
|
$ 450 |
|
|
|
$ 472 |
|
|
|
$ (22 |
) |
|
|
(4.7 |
)% |
Incentive compensation |
|
|
52 |
|
|
|
78 |
|
|
|
(26 |
) |
|
|
(33.3 |
) |
|
|
89 |
|
|
|
151 |
|
|
|
(62 |
) |
|
|
(41.1 |
) |
Employee benefits |
|
|
70 |
|
|
|
65 |
|
|
|
5 |
|
|
|
7.7 |
|
|
|
153 |
|
|
|
141 |
|
|
|
12 |
|
|
|
8.5 |
|
Stock-based compensation |
|
|
15 |
|
|
|
17 |
|
|
|
(2 |
) |
|
|
(11.8 |
) |
|
|
24 |
|
|
|
31 |
|
|
|
(7 |
) |
|
|
(22.6 |
) |
Severance |
|
|
14 |
|
|
|
8 |
|
|
|
6 |
|
|
|
75.0 |
|
|
|
22 |
|
|
|
14 |
|
|
|
8 |
|
|
|
57.1 |
|
|
Total personnel expense |
|
|
$ 377 |
|
|
|
$ 402 |
|
|
|
$ (25 |
) |
|
|
(6.2 |
)% |
|
|
$ 738 |
|
|
|
$ 809 |
|
|
|
$ (71 |
) |
|
|
(8.8 |
)% |
|
Operating lease expense. The decrease in operating lease expense for both the quarterly and
year-to-date periods is attributable to a lower volume of activity in the Equipment Finance line of
business as Key de-emphasizes operating lease activities. Income related to operating lease
activities is presented in Figure 12 as operating lease income.
Professional fees. The increase in professional fees for both the quarterly and year-to-date
periods is due to increased collection efforts on loans, the outsourcing of certain services and
the Keyvolution initiative.
Intangible assets impairment. During the first quarter of 2009, Key determined that the estimated
fair value of its National Banking reporting unit was less than the carrying amount, reflecting
continued weakness in the financial markets. As a result, Key recorded a pre-tax noncash
accounting charge of $223 million, of which $27 million relates to the discontinued operations of
Austin Capital Management, Ltd. As a result of this charge, Key has now written off all of the
goodwill that had been assigned to its National Banking reporting unit.
As previously discussed, late last year Key initiated a process known as Keyvolution, a
corporate-wide initiative designed to build a consistently superior experience for clients,
simplify processes, improve speed to market and enhance Keys ability to seize growth and profit
opportunities. Through this initiative, Key expects to achieve annualized cost savings of $300
million to $375 million by 2012. Over the past fifteen months, management has been addressing
certain noncore businesses, such as retail marine and private student lending. We have also
deployed new teller platform technology throughout our company. These and other efforts have
resulted in a reduction in our employee workforce of approximately 8%, or 1,500 positions, over the
fifteen month period.
Income taxes
Key recorded a tax benefit from continuing operations of $180 million for the second quarter of
2009, compared to a provision of $610 million for the comparable period in 2008. For the first six
months of 2009, Key recorded a tax benefit from continuing operations of $422 million, compared to
a provision of $713 million for the same period last year.
The tax benefits recorded in 2009 are largely attributable to the continuation of a difficult
economic environment and the resulting increases in Keys provision for loan losses, which
contributed to the losses recorded for the quarterly and year-to-date periods. During the second
quarter of 2008, Key recorded a significant tax provision as a result of several developments
related to Keys tax treatment of certain leveraged lease financing transactions described below.
As previously reported, during the second quarter of 2008, Key received an adverse federal court
decision on the companys tax treatment of a service contract lease transaction. As a result, Key
was required to increase the amount of unrecognized tax benefits associated with all of the leases
under challenge by the IRS. The increase in unrecognized tax benefits necessitated a recalculation
of Keys lease income recognized from inception for all of the leveraged leases being contested by
the IRS, as well as an increase to Keys tax reserves. These actions reduced Keys second quarter
2008 after-tax earnings by $1.011 billion, or $2.43 per common share, including a $359 million
reduction to lease income, a $177 million
77
increase to the provision for income taxes and a $475
million charge to the tax provision for the interest cost associated with the contested tax
liabilities.
During the first quarter of 2008, Key increased the amount of its unrecognized tax benefits
associated with its lease in, lease out (LILO) transactions as a result of an updated assessment
of Keys tax position performed by management. The increase in unrecognized tax benefits
associated with Keys LILO transactions also necessitated a recalculation of Keys lease income and
an increase to Keys tax reserves. These actions reduced Keys first quarter 2008 after-tax
earnings by $38 million, or $.10 per diluted common share, including a $3 million reduction to
lease income, an $18 million increase to the provision for income taxes and a $17 million charge to
the tax provision for the associated interest charges.
In the ordinary course of business, Key enters into certain types of lease financing transactions
that result in tax deductions. The IRS has completed audits of Keys income tax returns for a
number of prior years and has disallowed the tax deductions taken in connection with these
transactions. On February 13, 2009, Key and the IRS entered into a closing agreement that resolved
substantially all outstanding leveraged lease
financing tax issues. During the second quarter, Key settled all remaining leveraged lease
financing tax issues with the IRS without incurring any additional tax or interest liability.
Additional information
pertaining to the contested lease financing transactions, the related charges and the settlement is
included in Note 17 (Income Taxes), which begins on page 110 of Keys 2008 Annual Report to
Shareholders.
During the first quarter of 2009, Keys results from continuing operations included a $196 million
charge for intangible assets impairment of which $110 million is not deductible for tax purposes.
Excluding this charge and the lease financing charges discussed above, Keys effective tax rate was
43.6% for the second quarter of 2009, compared to 26.3% for the second quarter of 2008. On an
adjusted basis, the effective tax rates for the first six months of 2009 and 2008 were 41.7% and
15.9%, respectively. The higher effective tax rates in 2009 reflect the combined effects of the
losses recorded in the current year and the permanent tax differences described below.
On an adjusted basis, the effective tax rates for both the current and prior year differ from Keys
combined federal and state statutory tax rate of 37.5%, primarily because Key generates income from
investments in tax-advantaged assets such as corporate-owned life insurance, earns credits
associated with investments in low-income housing projects, and records tax deductions associated
with dividends paid to Keys common shares held in the 401(k) savings plan.
78
Financial Condition
Loans and loans held for sale
As shown in Note 6 (Loans and Loans Held for Sale), which begins on page 22, total loans
outstanding were $70.8 billion at June 30, 2009, compared to $76.5 billion at December 31, 2008,
and $75.9 billion at June 30, 2008. The decrease over the past twelve months reflects reductions
in most of Keys loan portfolios, with the largest decline experienced in the commercial portfolio.
Commercial loan portfolio
Commercial loans outstanding decreased by $4.4 billion, or 8%, from the year ago quarter. The
decrease occurred during the current year as a result of soft demand for credit due to the weak
economic conditions, improved liquidity for clients in the commercial paper market, paydowns in
Keys exit loan portfolio and elevated net loan charge-offs.
Commercial real estate loans. Commercial real estate loans for both owner- and nonowner-occupied
properties constitute one of the largest segments of Keys commercial loan portfolio. At June 30,
2009, Keys commercial real estate portfolio included mortgage loans of $11.8 billion and
construction loans of $6.1 billion. The average mortgage loan originated during the first half of
2009 was $1 million, and the largest mortgage loan at June 30, 2009, had a balance of $123 million.
At June 30, 2009, the average construction loan commitment was $5 million. The largest
construction loan commitment was $65 million, all of which was outstanding.
Keys commercial real estate lending business is conducted through two primary sources: a 14-state
banking franchise, and Real Estate Capital and Corporate Banking Services, a national line of
business that cultivates relationships both within and beyond the branch system. This line of
business deals exclusively with nonowner-occupied properties (generally properties for which at
least 50% of the debt service is provided by rental income from nonaffiliated third parties) and
accounted for approximately 62% of Keys average commercial real estate loans during the second
quarter of 2009. Keys commercial real estate business generally focuses on larger real estate
developers and, as shown in Figure 18, is diversified by both industry type and geographic location
of the underlying collateral. Figure 18 includes commercial mortgage and construction loans in
both the Community Banking and National Banking units.
Figure 18. Commercial Real Estate Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
Geographic Region |
|
|
|
|
|
|
Percent of |
|
|
|
Commercial |
|
|
|
|
dollars in millions |
|
Northeast |
|
|
Southeast |
|
|
Southwest |
|
|
Midwest |
|
|
Central |
|
|
West |
|
|
Total |
|
|
Total |
|
|
|
Mortgage |
|
|
Construction |
|
|
|
|
|
Nonowner-occupied: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail properties |
|
$ |
224 |
|
|
$ |
776 |
|
|
$ |
236 |
|
|
$ |
732 |
|
|
$ |
427 |
|
|
$ |
476 |
|
|
$ |
2,871 |
|
|
|
16.1 |
% |
|
|
$ |
1,484 |
|
|
$ |
1,387 |
|
Multifamily properties |
|
|
340 |
|
|
|
657 |
|
|
|
483 |
|
|
|
253 |
|
|
|
530 |
|
|
|
473 |
|
|
|
2,736 |
|
|
|
15.3 |
|
|
|
|
1,564 |
|
|
|
1,172 |
|
Residential properties |
|
|
403 |
|
|
|
424 |
|
|
|
61 |
|
|
|
119 |
|
|
|
181 |
|
|
|
453 |
|
|
|
1,641 |
|
|
|
9.2 |
|
|
|
|
263 |
|
|
|
1,378 |
|
Office buildings |
|
|
362 |
|
|
|
185 |
|
|
|
110 |
|
|
|
181 |
|
|
|
217 |
|
|
|
381 |
|
|
|
1,436 |
|
|
|
8.0 |
|
|
|
|
882 |
|
|
|
554 |
|
Health facilities |
|
|
242 |
|
|
|
180 |
|
|
|
43 |
|
|
|
228 |
|
|
|
171 |
|
|
|
322 |
|
|
|
1,186 |
|
|
|
6.6 |
|
|
|
|
993 |
|
|
|
193 |
|
Land and development |
|
|
124 |
|
|
|
175 |
|
|
|
187 |
|
|
|
55 |
|
|
|
148 |
|
|
|
146 |
|
|
|
835 |
|
|
|
4.7 |
|
|
|
|
327 |
|
|
|
508 |
|
Warehouses |
|
|
114 |
|
|
|
210 |
|
|
|
24 |
|
|
|
86 |
|
|
|
63 |
|
|
|
168 |
|
|
|
665 |
|
|
|
3.7 |
|
|
|
|
480 |
|
|
|
185 |
|
Hotels/Motels |
|
|
77 |
|
|
|
117 |
|
|
|
|
|
|
|
16 |
|
|
|
56 |
|
|
|
58 |
|
|
|
324 |
|
|
|
1.8 |
|
|
|
|
241 |
|
|
|
83 |
|
Manufacturing facilities |
|
|
34 |
|
|
|
|
|
|
|
17 |
|
|
|
26 |
|
|
|
1 |
|
|
|
30 |
|
|
|
108 |
|
|
|
.6 |
|
|
|
|
64 |
|
|
|
44 |
|
Other |
|
|
242 |
|
|
|
224 |
|
|
|
2 |
|
|
|
107 |
|
|
|
160 |
|
|
|
130 |
|
|
|
865 |
|
|
|
4.8 |
|
|
|
|
721 |
|
|
|
144 |
|
|
|
|
|
|
|
|
2,162 |
|
|
|
2,948 |
|
|
|
1,163 |
|
|
|
1,803 |
|
|
|
1,954 |
|
|
|
2,637 |
|
|
|
12,667 |
|
|
|
70.8 |
|
|
|
|
7,019 |
|
|
|
5,648 |
|
Owner-occupied |
|
|
1,133 |
|
|
|
254 |
|
|
|
88 |
|
|
|
1,397 |
|
|
|
395 |
|
|
|
1,946 |
|
|
|
5,213 |
|
|
|
29.2 |
|
|
|
|
4,742 |
|
|
|
471 |
|
|
|
|
|
Total |
|
$ |
3,295 |
|
|
$ |
3,202 |
|
|
$ |
1,251 |
|
|
$ |
3,200 |
|
|
$ |
2,349 |
|
|
$ |
4,583 |
|
|
$ |
17,880 |
|
|
|
100.0 |
% |
|
|
$ |
11,761 |
|
|
$ |
6,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonowner-occupied: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans |
|
$ |
185 |
|
|
$ |
255 |
|
|
$ |
189 |
|
|
$ |
44 |
|
|
$ |
80 |
|
|
$ |
243 |
|
|
$ |
996 |
|
|
|
N/M |
|
|
|
$ |
292 |
|
|
$ |
704 |
|
Accruing loans past due 90 days or more |
|
|
9 |
|
|
|
108 |
|
|
|
98 |
|
|
|
8 |
|
|
|
53 |
|
|
|
83 |
|
|
|
359 |
|
|
|
N/M |
|
|
|
|
136 |
|
|
|
223 |
|
Accruing loans past due 30 through 89 days |
|
|
79 |
|
|
|
74 |
|
|
|
72 |
|
|
|
10 |
|
|
|
31 |
|
|
|
83 |
|
|
|
349 |
|
|
|
N/M |
|
|
|
|
93 |
|
|
|
256 |
|
|
|
|
|
|
|
|
Northeast |
|
Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island and Vermont |
|
Southeast |
|
Alabama, Delaware, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North
Carolina, South Carolina, Tennessee, Virginia, Washington D.C. and West Virginia |
|
Southwest |
|
Arizona, Nevada and New Mexico |
|
Midwest |
|
Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota and Wisconsin |
|
Central |
|
Arkansas, Colorado, Oklahoma, Texas and Utah
|
|
West |
|
Alaska, California, Hawaii, Idaho, Montana, Oregon, Washington and Wyoming |
|
N/M = Not Meaningful |
79
Since December 31, 2008, nonperforming loans related to Keys nonowner-occupied properties have
increased by $513 million, due in part to the continuation of deteriorating market conditions in
both the income properties and residential properties segments of Keys commercial real estate
construction portfolio. As previously reported, Key has undertaken a process to reduce its
exposure in the residential properties segment of its construction loan portfolio through the sale
of certain loans. In conjunction with these efforts, Key transferred $384 million of commercial
real estate loans ($719 million, net of $335 million in net charge-offs) from the held-to-maturity
loan portfolio to held-for-sale status in June 2008. Keys ability to sell these loans has been
hindered by continued disruption in the financial markets which has precluded the ability of
certain potential buyers to obtain the necessary funding. The balance of this portfolio has been
reduced to $65 million at June 30, 2009, primarily as a result of cash proceeds from loan sales,
transfers to OREO, and both realized and unrealized losses. Key will continue to pursue the sale
or foreclosure of the remaining loans, all of which are on nonperforming status.
During the last half of 2008, Key ceased lending to homebuilders within its 14-state Community
Banking footprint.
Commercial lease financing. Management believes Key has both the scale and array of products to
compete in the specialty of equipment lease financing. Key conducts these financing arrangements
through the Equipment Finance line of business. Commercial lease financing receivables represented
17% of commercial loans at June 30, 2009, compared to 18% at June 30, 2008.
Consumer loan portfolio
Consumer loans outstanding decreased by $612 million, or 3%, from one year ago. As shown in Figure
36 on page 108, $292 million, or 48%, of the reduction came from Keys exit loan portfolio during
the second quarter of 2009, while $193 million, or 32%, came from the exit loan portfolio during
the first quarter of 2009. Most of the year-to-date decrease is attributable to the marine
segment.
The home equity portfolio is by far the largest segment of Keys consumer loan portfolio. A
significant amount of this portfolio (92% at June 30, 2009) is derived primarily from the Regional
Banking line of business within the Community Banking group; the remainder originated from the
Consumer Finance line of business within the National Banking group and has been in a runoff mode
since the fourth quarter of 2007. Home equity loans within the Community Banking group have grown
by $405 million, or 4%, over the past twelve months.
Figure 19 summarizes Keys home equity loan portfolio by source at the end of each of the last five
quarters, as well as certain asset quality statistics and yields on the portfolio as a whole.
Figure 19. Home Equity Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
dollars in millions |
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
|
SOURCES OF PERIOD-END LOANS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community Banking |
|
$ |
10,256 |
|
|
$ |
10,290 |
|
|
$ |
10,124 |
|
|
$ |
9,970 |
|
|
$ |
9,851 |
|
National Banking |
|
|
934 |
|
|
|
998 |
|
|
|
1,051 |
|
|
|
1,101 |
|
|
|
1,153 |
|
|
Total |
|
$ |
11,190 |
|
|
$ |
11,288 |
|
|
$ |
11,175 |
|
|
$ |
11,071 |
|
|
$ |
11,004 |
|
|
Nonperforming loans at period end |
|
$ |
121 |
|
|
$ |
110 |
|
|
$ |
91 |
|
|
$ |
86 |
|
|
$ |
75 |
|
Net loan charge-offs for the period |
|
|
42 |
|
|
|
32 |
|
|
|
31 |
|
|
|
21 |
|
|
|
19 |
|
Yield for the period |
|
|
4.63 |
% |
|
|
4.77 |
% |
|
|
5.37 |
% |
|
|
5.85 |
% |
|
|
5.99 |
% |
|
Management expects the level of Keys consumer loan portfolio to decrease in the future as a result
of actions taken to exit low-return, indirect businesses. In December 2007, Key decided to exit
dealer-originated home improvement lending activities, which are largely out-of-footprint. During
the last half of 2008, Key exited retail and floor-plan lending for marine and recreational vehicle
products, and began to limit new education loans to those backed by government guarantee.
80
Loans held for sale
Keys loans held for sale were $909 million at June 30, 2009, compared to $1.0 billion at December
31, 2008, and $1.8 billion at June 30, 2008.
At June 30, 2009, Keys loans held for sale included $288 million of commercial mortgage and $245
million of residential mortgage loans. In the absence of quoted market prices, management uses
valuation models to measure the fair value of these loans and adjusts the amount recorded on the
balance sheet if fair value falls below recorded cost. The models are based on assumptions related
to prepayment speeds, default rates, funding cost and discount rates. In light of the volatility
in the financial markets, management has reviewed Keys assumptions and determined that they
reflect current market conditions. As a result, no significant adjustments to the assumptions were
required during the first six months of 2009.
During the first half of 2009, Key recorded net unrealized losses of $10 million and net realized
losses of $34 million on its loans held for sale portfolio. Key records these transactions in net
(losses) gains from loan securitizations and sales on the income statement. Key has not been
significantly impacted by market volatility in the subprime mortgage lending industry, having
exited this business in the fourth quarter of 2006.
Sales and securitizations
As market conditions allow, Key continues to utilize alternative funding sources like loan sales to
support its loan origination capabilities. In addition, certain acquisitions completed in past
years have improved Keys ability to originate and sell new loans, and to securitize and service
loans originated by others, especially in the area of commercial real estate.
During the past twelve months, Key sold $1.1 billion of residential real estate loans, $1.9 billion
of commercial real estate loans, $447 million of education loans and $52 million of commercial
loans. Most of these sales came from the held-for-sale portfolio. Due to unfavorable market
conditions, Key has not securitized any of its education loans since 2006 and does not anticipate
entering into any securitizations of this type in the foreseeable future.
Among the factors that Key considers in determining which loans to sell or securitize are:
¨ |
|
whether particular lending businesses meet established performance standards or fit with Keys relationship banking strategy; |
|
¨ |
|
Keys asset/liability management needs; |
|
¨ |
|
whether the characteristics of a specific loan portfolio make it conducive to securitization; |
|
¨ |
|
the cost of alternative funding sources; |
|
¨ |
|
the level of credit risk; |
|
¨ |
|
capital requirements; and |
|
¨ |
|
market conditions and pricing. |
81
Figure 20 summarizes Keys loan sales for the first six months of 2009 and all of 2008.
Figure 20. Loans Sold (Including Loans Held for Sale)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
Commercial |
|
|
Residential |
|
|
|
|
|
|
Consumer |
|
|
|
|
in millions |
|
Commercial |
|
|
Real Estate |
|
|
Lease Financing |
|
|
Real Estate |
|
|
Education |
|
|
Other |
|
|
Total |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second quarter |
|
$ |
22 |
|
|
$ |
410 |
|
|
|
|
|
|
$ |
410 |
|
|
$ |
327 |
|
|
|
|
|
|
$ |
1,169 |
|
First quarter |
|
|
9 |
|
|
|
192 |
|
|
|
|
|
|
|
302 |
|
|
|
109 |
|
|
|
|
|
|
|
612 |
|
|
Total |
|
$ |
31 |
|
|
$ |
602 |
|
|
|
|
|
|
$ |
712 |
|
|
$ |
436 |
|
|
|
|
|
|
$ |
1,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth quarter |
|
$ |
10 |
|
|
$ |
580 |
|
|
|
|
|
|
$ |
222 |
|
|
$ |
1 |
|
|
|
|
|
|
$ |
813 |
|
Third quarter |
|
|
11 |
|
|
|
699 |
|
|
|
|
|
|
|
197 |
|
|
|
10 |
|
|
$ |
9 |
|
|
|
926 |
|
Second quarter |
|
|
19 |
|
|
|
761 |
|
|
$ |
38 |
|
|
|
213 |
|
|
|
38 |
|
|
|
|
|
|
|
1,069 |
|
First quarter |
|
|
14 |
|
|
|
204 |
|
|
|
29 |
|
|
|
170 |
|
|
|
72 |
|
|
|
|
|
|
|
489 |
|
|
|
Total |
|
$ |
54 |
|
|
$ |
2,244 |
|
|
$ |
67 |
|
|
$ |
802 |
|
|
$ |
121 |
|
|
$ |
9 |
|
|
$ |
3,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Figure 21 shows loans that are either administered or serviced by Key, but not recorded on the
balance sheet. The table includes loans that have been both securitized and sold, or simply sold
outright.
Figure 21. Loans Administered or Serviced
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
March 31, |
|
|
December 31, |
|
|
Sepember 30, |
|
|
June 30, |
|
in millions |
|
2009 |
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
Commercial real estate loans |
|
$ |
126,369 |
|
|
$ |
122,678 |
|
|
$ |
123,256 |
|
|
$ |
124,125 |
|
|
$ |
128,010 |
|
Education loans |
|
|
4,036 |
|
|
|
4,146 |
|
|
|
4,267 |
|
|
|
4,365 |
|
|
|
4,474 |
|
Commercial lease financing |
|
|
652 |
|
|
|
663 |
|
|
|
713 |
|
|
|
762 |
|
|
|
782 |
|
Commercial loans |
|
|
202 |
|
|
|
198 |
|
|
|
208 |
|
|
|
219 |
|
|
|
225 |
|
|
Total |
|
$ |
131,259 |
|
|
$ |
127,685 |
|
|
$ |
128,444 |
|
|
$ |
129,471 |
|
|
$ |
133,491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the event of default by a borrower, Key is subject to recourse with respect to approximately
$706 million of the $131.3 billion of loans administered or serviced at June 30, 2009. Additional
information about this recourse arrangement is included in Note 14 (Contingent Liabilities and
Guarantees) under the heading Recourse agreement with Federal National Mortgage Association on
page 35.
Key derives income from several sources when retaining the right to administer or service loans
that are securitized or sold. Key earns noninterest income (recorded as other income) from fees
for servicing or administering loans. This fee income is reduced by the amortization of related
servicing assets. In addition, Key earns interest income from securitized assets retained and from
investing funds generated by escrow deposits collected in connection with the servicing of
commercial real estate loans.
Securities
As shown in Note 5 (Securities), which begins on page 18, Keys securities portfolio totaled
$12.2 billion at June 30, 2009, compared to $8.5 billion at December 31, 2008, and $8.3 billion at
June 30, 2008. At each of these dates, the majority of the securities portfolio consisted of
securities available for sale, with the remainder consisting of held-to-maturity securities of $25
million.
Securities available for sale. The majority of Keys securities available-for-sale portfolio
consists of CMOs, which are debt securities that are secured by a pool of mortgages or
mortgage-backed securities. Keys CMOs generate interest income and serve as collateral to support
certain pledging agreements. At June 30, 2009, Key had $10.1 billion invested in CMOs and other
mortgage-backed securities in the available-for-sale portfolio, compared to $8.1 billion at
December 31, 2008, and $7.9 billion at June 30, 2008.
82
As shown in Figure 22, all of Keys mortgage-backed securities are issued by government-sponsored
enterprises or GNMA, and are traded in highly liquid secondary markets. Management employs an
outside bond pricing service to determine the fair value at which these securities should be
recorded on the balance sheet. In performing the valuations, the pricing service relies on models
that consider security-specific details, as well as relevant industry and economic factors. The
most significant of these inputs are quoted market prices, interest rate spreads on relevant
benchmark securities and certain prepayment assumptions. Management reviews valuations derived
from the models to ensure they are consistent with the values placed on similar securities traded
in the secondary markets.
Figure 22. Mortgage-Backed Securities by Issuer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
in millions |
|
2009 |
|
|
2008 |
|
|
2008 |
|
|
Federal Home Loan Mortgage Corporation |
|
$ |
5,421 |
|
|
$ |
4,719 |
|
|
$ |
4,675 |
|
Federal National Mortgage Association |
|
|
2,643 |
|
|
|
3,002 |
|
|
|
2,875 |
|
Government National Mortgage Association |
|
|
2,058 |
|
|
|
369 |
|
|
|
384 |
|
|
Total |
|
$ |
10,122 |
|
|
$ |
8,090 |
|
|
$ |
7,934 |
|
|
|
|
|
|
|
|
|
|
|
|
During the first six months of 2009, net gains from Keys CMOs and other mortgage-backed securities
totaled $57 million, of which $127 million were net realized gains and $70 million were net
unrealized losses. Net realized gains include net gains of $125 million recorded in connection
with the second quarter 2009 repositioning of Keys securities portfolio as discussed below. The
net unrealized losses resulted from the increase in market interest rates and were recorded in the
accumulated other comprehensive income component of Key shareholders equity.
Net unrealized gains on retained interests in securitizations decreased from $29 million at
December 31, 2008, to $19 million at June 30, 2009, as a result of changes in certain assumptions
used to measure the fair value of Keys retained interests. During the first quarter of 2009,
management increased the expected credit loss estimates as well as the interest rate used to
discount the residual cash flows. Additional information on these economic assumptions is
presented in Note 7 (Loan Securitizations and Mortgage Servicing Assets), which begins on page
23. The net unrealized gains on retained interests in securitizations were recorded in the
accumulated other comprehensive income component of Key shareholders equity.
Management periodically evaluates Keys securities available-for-sale portfolio in light of
established asset/liability management objectives, changing market conditions that could affect the
profitability of the portfolio and the level of interest rate risk to which Key is exposed. These
evaluations may cause management to take steps to improve Keys overall balance sheet positioning.
In addition, the size and composition of Keys securities available-for-sale portfolio could vary
with Keys needs for liquidity and the extent to which Key is required (or elects) to hold these
assets as collateral to secure public funds and trust deposits. Although Key generally uses debt
securities for this purpose, other assets, such as securities purchased under resale agreements or
letters of credit, are used occasionally when they provide a lower cost of collateral or more
favorable risk profiles.
During May 2009, Key sold approximately $2.8 billion of CMOs as part of Keys overall plan to
generate additional capital required under the SCAP, and to reposition the securities
available-for-sale portfolio to better support Keys strategies for managing interest rate and
liquidity risk. The proceeds from the sale were reinvested in CMOs issued by government-sponsored
entities and GNMA. Additional CMOs were purchased during the second quarter of 2009 in excess of
the sale proceeds to support Keys strategies for interest rate risk management, and improving
overall balance sheet liquidity and access to secured funding sources. The repositioning improved
Keys interest rate risk position by replacing the shorter-maturity CMOs sold with CMOs that have
longer expected average maturities. The weighted-average maturity of
83
Keys available-for-sale
portfolio increased from 2.5 years at December 31, 2008, to 2.9 years at June 30, 2009. Key
continues to maintain a moderate asset-sensitive exposure to near-term changes in interest rates.
Additionally, the repositioning improved Keys liquidity risk by increasing the size of the
securities portfolio, which allows Key to hold more liquid assets in the form of unencumbered
securities. Key is able to pledge these securities to the Federal Reserve or Federal Home Loan
Bank for secured borrowing arrangements, sell these securities or enter into repurchase agreements
should liquidity be required in the future.
As a result of the sale of CMOs, Key recorded net realized gains of $125 million ($78 million after
tax) during the second quarter of 2009, which added to Keys Tier 1 common equity. These net gains
were previously recorded in net unrealized losses on securities available for sale in the
accumulated other comprehensive income component of Key shareholders equity.
Figure 23 shows the composition, yields and remaining maturities of Keys securities available for
sale. For more information about securities, including gross unrealized gains and losses by type
of security, see Note 5.
Figure 23. Securities Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury, |
|
|
States and |
|
|
Collateralized |
|
|
Mortgage- |
|
|
Retained |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Agencies and |
|
|
Political |
|
|
Mortgage |
|
|
Backed |
|
|
Interests in |
|
|
Other |
|
|
|
|
|
|
Average |
|
dollars in millions |
|
Corporations |
|
|
Subdivisions |
|
|
Obligations |
(a) |
|
Securities |
(a) |
|
Securitizations |
(a) |
|
Securities |
(b) |
|
Total |
|
|
Yield |
(c) |
|
JUNE 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year or less |
|
|
$1,704 |
|
|
|
$ 2 |
|
|
|
$ 400 |
|
|
|
$ 3 |
|
|
|
$ 5 |
|
|
|
$ 9 |
|
|
|
$ 2,123 |
|
|
|
1.03 |
% |
After one through five years |
|
|
3 |
|
|
|
8 |
|
|
|
7,921 |
|
|
|
1,404 |
|
|
|
53 |
|
|
|
59 |
|
|
|
9,448 |
|
|
|
4.10 |
|
After five through ten years |
|
|
3 |
|
|
|
60 |
|
|
|
202 |
|
|
|
180 |
|
|
|
128 |
|
|
|
1 |
|
|
|
574 |
|
|
|
6.67 |
|
After ten years |
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
12 |
|
|
|
|
|
|
|
1 |
|
|
|
29 |
|
|
|
5.90 |
|
|
Fair value |
|
|
$1,710 |
|
|
|
$ 86 |
|
|
|
$8,523 |
|
|
|
$ 1,599 |
|
|
|
$186 |
|
|
|
$70 |
|
|
|
$12,174 |
|
|
|
|
|
Amortized cost |
|
|
1,710 |
|
|
|
85 |
|
|
|
8,462 |
|
|
|
1,525 |
|
|
|
167 |
|
|
|
66 |
|
|
|
12,015 |
|
|
|
3.68 |
% |
Weighted-average
yield (c) |
|
|
.15 |
% |
|
|
5.65 |
% |
|
|
3.92 |
% |
|
|
4.89 |
% |
|
|
15.86 |
% |
|
|
5.46 |
% (d) |
|
|
3.68 |
% (d) |
|
|
|
|
Weighted-average maturity |
|
|
.1 year |
|
|
|
7.8 years |
|
|
|
3.2 years |
|
|
|
3.9 years |
|
|
|
4.9 years |
|
|
|
2.4 years |
|
|
|
2.9 years |
|
|
|
|
|
|
DECEMBER 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
|
$ 10 |
|
|
|
$ 91 |
|
|
|
$ 6,523 |
|
|
|
$ 1,567 |
|
|
|
$ 191 |
|
|
|
$ 55 |
|
|
|
$ 8,437 |
|
|
|
|
|
Amortized cost |
|
|
9 |
|
|
|
90 |
|
|
|
6,380 |
|
|
|
1,505 |
|
|
|
162 |
|
|
|
71 |
|
|
|
8,217 |
|
|
|
5.15 |
% |
|
JUNE 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
|
$ 18 |
|
|
|
$ 91 |
|
|
|
$ 6,350 |
|
|
|
$ 1,584 |
|
|
|
$ 187 |
|
|
|
$ 82 |
|
|
|
$ 8,312 |
|
|
|
|
|
Amortized cost |
|
|
18 |
|
|
|
92 |
|
|
|
6,309 |
|
|
|
1,583 |
|
|
|
153 |
|
|
|
82 |
|
|
|
8,237 |
|
|
|
5.19 |
% |
|
|
|
|
(a) |
|
Maturity is based upon expected average lives rather than contractual terms. |
|
(b) |
|
Includes primarily marketable equity securities. |
|
(c) |
|
Weighted-average yields are calculated based on amortized cost. Such yields have been
adjusted to a taxable-equivalent basis using the statutory federal income tax rate of 35%. |
|
(d) |
|
Excludes $66 million of securities at June 30, 2009, that have no stated yield. |
Held-to-maturity securities. Foreign bonds, trust preferred securities and securities issued by
states and political subdivisions constitute most of Keys held-to-maturity securities. Figure 24
shows the composition, yields and remaining maturities of these securities.
84
Figure 24. Held-to-Maturity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Political |
|
|
Other |
|
|
|
|
|
|
Average |
|
dollars in millions |
|
Subdivisions |
|
|
Securities |
|
|
Total |
|
|
Yield |
(a) |
|
JUNE 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year or less |
|
$ |
1 |
|
|
$ |
4 |
|
|
$ |
5 |
|
|
|
3.73 |
% |
After one through five years |
|
|
3 |
|
|
|
17 |
|
|
|
20 |
|
|
|
4.48 |
|
|
Amortized cost |
|
$ |
4 |
|
|
$ |
21 |
|
|
$ |
25 |
|
|
|
4.27 |
% |
Fair value |
|
|
4 |
|
|
|
21 |
|
|
|
25 |
|
|
|
|
|
Weighted-average yield (a) |
|
|
8.64 |
% |
|
|
3.02 |
% (b) |
|
|
4.27 |
% (b) |
|
|
|
|
Weighted-average maturity |
|
1.6 years |
|
|
2.6 years |
|
|
2.4 years |
|
|
|
|
|
|
DECEMBER 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost |
|
$ |
4 |
|
|
$ |
21 |
|
|
$ |
25 |
|
|
|
4.34 |
% |
Fair value |
|
|
4 |
|
|
|
21 |
|
|
|
25 |
|
|
|
|
|
|
JUNE 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost |
|
$ |
8 |
|
|
$ |
17 |
|
|
$ |
25 |
|
|
|
6.51 |
% |
Fair value |
|
|
8 |
|
|
|
17 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
(a) |
|
Weighted-average yields are calculated based on amortized cost. Such yields have
been adjusted to a taxable-equivalent basis using the statutory federal income tax
rate of 35%. |
|
(b) |
|
Excludes $8 million of securities at June 30, 2009, that have no stated yield. |
Other investments
Principal investments ¾ investments in equity and mezzanine instruments made by Keys
Principal Investing unit ¾ represented 64% of other investments at June 30, 2009. They
include direct investments (investments made in a particular company), as well as indirect
investments (investments made through funds that include other investors). Principal investments
are predominantly made in privately held companies and are carried at fair value ($930 million at
June 30, 2009, $990 million at December 31, 2008, and $1.0 billion at June 30, 2008).
In addition to principal investments, other investments include other equity and mezzanine
instruments, such as certain real estate-related investments that are carried at fair value, as
well as other types of investments that generally are carried at cost.
Most of Keys other investments are not traded on an active market. Management determines the fair
value at which these investments should be recorded based on the nature of the specific investment
and all available relevant information. Among other things, managements review may encompass such
factors as the issuers past financial performance and future potential, the values of public
companies in comparable businesses, the risks associated with the particular business or investment
type, current market conditions, the nature and duration of resale restrictions, the issuers
payment history and managements knowledge of the industry. During the first six months of 2009,
net losses from Keys principal investing activities totaled $78 million, which includes $71
million of net unrealized losses. These net losses are recorded as net losses from principal
investing on the income statement.
Deposits and other sources of funds
Domestic deposits are Keys primary source of funding. During the second quarter of 2009, these
deposits averaged $66.9 billion, and represented 74% of the funds Key used to support loans and
other earning assets, compared to $61.0 billion and 68% during the same quarter in 2008. The
composition of Keys deposits is shown in Figure 9, which spans pages 70 and 71.
85
The increase in average domestic deposits compared to the second quarter of 2008 was due to growth
in certificates of deposit of $100,000 or more, other time deposits and noninterest-bearing
deposits, offset in part by a decline in Negotiable Order of Withdrawal (NOW) and money market
deposit accounts. The change in the composition of domestic deposits was attributable to two
primary factors:
¨ |
|
Competition for deposits in the markets in which Key operates
remains strong, and consumer preferences shifted to
higher-yielding certificates of deposit from NOW and money market
deposit accounts as a result of the declining interest rate
environment. |
|
¨ |
|
Keys corporate clients focused on reducing their transaction
service charges by maintaining higher balances in their
noninterest-bearing deposit accounts, especially in light of the
low interest rate environment. The higher balances in these
accounts also reflect new FDIC rules that temporarily provide for
full insurance coverage for qualifying noninterest-bearing deposit
accounts in excess of the current standard maximum deposit
insurance amount of $250,000. More specific information regarding
this extended insurance coverage is included in the Capital
section under the heading Temporary Liquidity Guarantee Program
on page 92. |
Purchased funds, consisting of deposits in Keys foreign office and short-term borrowings, averaged
$4.0 billion during the second quarter of 2009, compared to $12.2 billion during the year-ago
quarter. The reduction from the second quarter of 2008 is attributable to a $3.5 billion decrease
in foreign office deposits, a $2.9 billion decline in bank notes and other short-term borrowings,
and a $1.6 billion reduction in federal funds purchased and securities sold under agreements to
repurchase. During the first half of 2008, Key used purchased funds more heavily to accommodate
borrowers increased reliance on commercial lines of credit in the volatile capital markets
environment in which the availability of long-term funding had been restricted. The first half of
2009 saw improved liquidity for borrowers in the commercial paper market and a reduction in the
demand for commercial lines of credit.
Substantially all of KeyBanks domestic deposits are insured up to applicable limits by the FDIC.
Accordingly, KeyBank is subject to deposit insurance premium assessments by the FDIC. Under
current law, the FDIC is required to maintain the Deposit Insurance Fund (DIF) reserve ratio
within the range of 1.15% to 1.50% of estimated insured deposits. Current law also requires the
FDIC to implement a restoration plan when it determines that the DIF reserve ratio has fallen, or
will fall within six months, below 1.15% of estimated insured deposits. As of March 31, 2009, the
DIF reserve ratio was .27%. Consequently, the FDIC has established a restoration plan under which
all depository institutions, regardless of risk, paid a $.07 additional annualized deposit
insurance assessment on June 30, 2009, for each $100 of assessable domestic deposits as of March
31, 2009. Under a final rule approved in May 2009, the FDIC also imposed on all insured depository
institutions a special assessment equal to five basis points of total assets less Tier 1 capital as
of June 30, 2009, not to exceed ten basis points of assessable domestic deposits as of June 30,
2009. Keys second quarter 2009 special assessment, which is payable September 30, 2009, totaled
$44 million. Under this rule, the FDIC may impose additional similarly calculated special
assessments for the third and fourth quarters of 2009 if they estimate the DIF reserve ratio to
fall to a level that the FDIC believes would adversely affect public confidence, or which is close
to zero or negative at the end of a quarter. The FDICs authority to impose additional special
assessments expires on January 1, 2010.
Additionally, effective April 1, 2009, under a revised risk-based assessment system, which is being
implemented as part of the FDICs restoration plan, annualized deposit insurance assessments for
all insured depository institutions will range from $.07 to $.775 for each $100 of assessable
domestic deposits as of June 30, 2009, and quarterly thereafter, based on the institutions risk
category, which, under the revised risk-based assessment program is determined and assessed on a quarterly basis by the FDIC. In addition to these assessments, an annualized fee of 10 basis points has been assessed
on qualifying noninterest-bearing transaction account balances in excess of $250,000 in conjunction
with the Transaction Account Guarantee part of the FDICs TLGP discussed in the Capital section
under the heading Temporary Liquidity Guarantee Program on page 92.
As a result of the above assessments, Keys total FDIC deposit insurance assessment increased by
$68 million during the second quarter of 2009 compared to the same period one year ago.
86
Capital
Total Key shareholders equity at June 30, 2009, was $10.9 billion, up $371 million from December
31, 2008. Factors contributing to the change in Keys shareholders equity during the first six
months of 2009 are shown in the Consolidated Statements of Changes in Equity presented on page 5.
During the second quarter of 2009, Key took the following actions to further strengthen its capital
position.
Preferred stock private exchanges
During April and May 2009, KeyCorp entered into agreements with certain institutional shareholders
who had contacted KeyCorp to exchange KeyCorps Series A Preferred Stock held by the institutional
shareholders for KeyCorps common shares, $1 par value. In the aggregate, KeyCorp exchanged
17,369,926 common shares, or 3.25% of the issued and outstanding KeyCorp common shares at May 18,
2009, the date on which the last of the exchange transactions settled, for 1,539,700 shares of the
Series A Preferred Stock. The exchanges were conducted in reliance upon the exemption set forth in
Section 3(a)(9) of the Securities Act of 1933, as amended, for securities exchanged by the issuer
and an existing security holder where no commission or other remuneration is paid or given directly
or indirectly by the issuer for soliciting such exchange. KeyCorp utilized treasury shares to
complete the transactions.
Supervisory Capital Assessment Program and KeyCorps capital-generating activities
During the second quarter of 2009, Key took several actions to further strengthen its capital
position in connection with the results of the SCAP assessment, which required Key to generate $1.8
billion of additional Tier 1 common equity. These actions, discussed below, included an at-
the-market offering of common shares, a Series A Preferred Stock exchange offer for KeyCorp common
shares, an institutional capital securities exchange offer for KeyCorp common shares, the sale of
certain securities, and a reduction of dividend and interest obligations on the exchanged
securities. More specific information on the SCAP assessment is included in this section under the
heading Financial Stability Plan on page 93.
Common stock offering. On May 11, 2009, KeyCorp launched a public at-the-market offering of up
to $750 million in aggregate gross proceeds of its common shares, $1 par value. KeyCorp
subsequently increased the aggregate gross sales price of the common shares to be issued to $1.0
billion on June 2, 2009, and on the same date, announced that it had successfully issued all $1.0
billion in additional common shares. In conjunction with the common stock offering, KeyCorp issued
205,438,975 common shares at an average price of $4.87 per share.
Series A Preferred Stock public exchange offer. On June 3, 2009, KeyCorp launched an offer to
exchange KeyCorps common shares, $1 par value, for any and all outstanding shares of KeyCorps
Series A Preferred Stock. In connection with the Series A Preferred Stock exchange offer, which
expired on June 30, 2009, KeyCorp issued 29,232,025 common shares, or 3.67% of the issued and
outstanding KeyCorp common shares at June 30, 2009, for 2,130,461 shares of the outstanding Series
A Preferred Stock, representing $213 million aggregate liquidation preference. The exchange ratio
for this exchange offer was 13.7210 common shares per share of Series A Preferred Stock.
Institutional capital securities exchange offer. On June 3, 2009, KeyCorp launched a separate
offer to exchange KeyCorps common shares, $1 par value, for any and all institutional capital
securities issued by the KeyCorp Capital I, KeyCorp Capital II, KeyCorp Capital III and KeyCorp
Capital VII trusts. In connection with the institutional capital securities exchange offer, which
expired on June 30, 2009, KeyCorp issued 46,338,101 common shares, or 5.81% of the issued and
outstanding KeyCorp common shares at June 30, 2009, for $294 million aggregate liquidation
preference of the outstanding capital securities in the aforementioned trusts. The exchange ratios
for this exchange offer, which ranged from 132.5732 to 160.9818 comon shares per $1,000 liquidation
preference of capital securities, were based on the timing of each investors tender offer and the
trust from which the capital securities were tendered.
87
In the aggregate, the Series A Preferred Stock and the institutional capital securities exchange
offers generated $544 million of additional Tier 1 common equity. Both exchanges were conducted in
reliance upon the exemption set forth in Section 3(a)(9) of the Securities Act of 1933, as amended.
On July 1, 2009, KeyCorp announced that it believes that it has now complied with the requirements
of the SCAP assessment, having generated total Tier 1 common equity in excess of $1.8 billion.
KeyCorp raised: (i) $1.5 billion of capital through the three transactions discussed above, (ii)
$149 million of capital through other exchanges of Series A Preferred Stock, (iii) $125 million of
capital through the sale of certain securities and (iv) approximately $70 million of capital
through the reduction of Keys dividend and interest obligations on the exchanged securities
through the SCAP assessment period, which ends on December 31, 2010. Successful completion of
these transactions has strengthened KeyCorps capital framework, having improved KeyCorps Tier 1
common equity ratio, which will benefit Key should economic conditions worsen.
In an effort to further enhance its Tier 1 common equity, on July 8, 2009, KeyCorp commenced a
separate, SEC-registered offer to exchange KeyCorps common shares, $1 par value, for any and all
capital securities issued by the KeyCorp Capital V, KeyCorp Capital VI, KeyCorp Capital VIII,
KeyCorp Capital IX and KeyCorp Capital X trusts. As of July 21, 2009, holders of approximately
$534 million aggregate liquidation preference of capital securities had indicated that they would
be tendering securities in the retail capital securities exchange offer, subject to applicable
withdrawal rights. As a result of the success of this exchange offer, management announced on July
22, 2009, that it would limit the total aggregate liquidation preference of capital securities that
it will accept in this exchange offer to $500 million. In connection with this exchange offer,
which expired on August 4, 2009, KeyCorp issued 81,278,214
common shares, or 9.25% of the issued
and outstanding KeyCorp common shares at August 4, 2009. The exchange ratios for this exchange
offer, which ranged from 3.8289 to 4.1518 common shares per $25 liquidation preference of capital
securities, were based on the timing of each investors tender offer and the trust from which the
capital securities were tendered. The retail capital securities exchange offer generated
approximately $505 million of additional Tier 1 common equity.
Dividends
During the second quarter of 2009, Key made a $31 million cash dividend payment to the U.S.
Treasury. This is the second of such quarterly payments that Key has made after having raised $2.5
billion of additional capital during the fourth quarter of 2008 as a participant in the U.S.
Treasurys CPP.
On July 17, 2009, the Board of Directors declared a cash dividend of $1.9375 per share of KeyCorps
Series A Preferred Stock. The dividend is payable September 15, 2009, to shareholders of record on
August 28, 2009. The Board also declared a cash dividend to $.01 per share on the companys common
shares payable September 15, 2009, to holders of record on September 1, 2009. In May 2009, the
Board resolved to reduce KeyCorps quarterly dividend on common shares to $.01 per share ($.04
annualized) from $.0625 per share ($.25 annualized), commencing in the second quarter of 2009.
88
Common shares outstanding
KeyCorps common shares are traded on the New York Stock Exchange under the symbol KEY. At June 30, 2009:
¨ |
|
Book value per common share was $10.21 based on 797.2 million shares outstanding, compared to $14.97, based on 495.0
million shares outstanding at December 31, 2008, and $16.59, based on 485.7 million shares outstanding at June 30,
2008. |
|
¨ |
|
Tangible book value per common share was $8.92, compared to $12.41 at December 31, 2008, and $13.00 at June 30, 2008. |
Figure 25 shows activities that caused the change in Keys outstanding common shares over the past
five quarters.
Figure 25. Changes in Common Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
in thousands |
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
|
Shares outstanding at beginning of period |
|
|
498,573 |
|
|
|
495,002 |
|
|
|
494,765 |
|
|
|
485,662 |
|
|
|
400,071 |
|
Common shares exchanged for capital securities
|
|
|
46,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares exchanged for Series A Preferred Stock
|
|
|
46,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued |
|
|
205,439 |
|
|
|
|
|
|
|
|
|
|
|
7,066 |
|
|
|
85,106 |
|
Shares reissued under employee benefit plans |
|
|
294 |
|
|
|
3,571 |
|
|
|
237 |
|
|
|
2,037 |
|
|
|
485 |
|
|
Shares outstanding at end of period |
|
|
797,246 |
|
|
|
498,573 |
|
|
|
495,002 |
|
|
|
494,765 |
|
|
|
485,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As shown above, common shares outstanding increased by 298.7 million shares during the second
quarter of 2009, due primarily to the capital-generating activities discussed on page 87.
At June 30, 2009, Key had 67.8 million treasury shares, compared to 89.1 million treasury shares at
December 31, 2008, and 91.3 million at June 30, 2008. During the second quarter of 2009, KeyCorp
reissued treasury shares in connection with the Series A Preferred Stock private exchanges.
Management expects to reissue those shares as needed in connection with stock-based compensation
awards and for other corporate purposes.
Key repurchases its common shares periodically in the open market or through privately negotiated
transactions under a repurchase program authorized by the Board of Directors. The program does not
have an expiration date, and Key has outstanding Board authority to repurchase 14.0 million shares.
Key did not repurchase any common shares during the first six months of 2009. Further, in
accordance with the terms of KeyCorps participation in the CPP, until the earlier of three years
after the issuance of, or such time as the U.S. Treasury no longer holds any, Series B Preferred
Stock issued by KeyCorp under that program, Key will not be able to repurchase any of its common
shares without the approval of the U.S. Treasury, subject to certain limited exceptions (e.g., for
purchases in connection with benefit plans). Additional information regarding KeyCorps
participation in the CPP is included under the heading Emergency Economic Stabilization Act of
2008 on page 92.
Capital availability and management
As a result of recent market disruptions, the availability of capital (principally to financial
services companies) has become severely restricted. While some companies, such as Key, have been
successful in raising additional capital, the cost of that capital has been substantially higher
than the prevailing market rates prior to the volatility. Management cannot predict when or if the
markets will return to more favorable conditions.
89
Keys senior management formed a Capital Allocation Committee in 2008, which consists of senior
finance, risk management and business executives. This committee determines how capital is to be
strategically allocated among Keys businesses to maximize returns and strengthen core relationship
businesses. The committee will continue to emphasize Keys relationship strategy and provide
capital to the areas that consistently demonstrate the ability to grow and show positive returns
above the cost of capital throughout the remainder of 2009.
Capital adequacy
Capital adequacy is an important indicator of financial stability and performance. Keys ratio of
total shareholders equity to total assets was 11.10% at June 30, 2009, compared to 10.03% at
December 31, 2008, and 8.57% at June 30, 2008. Keys ratio of tangible common equity to tangible
assets was 7.35% at June 30, 2009, compared to 5.95% at December 31, 2008, and 6.32% at June 30,
2008.
Banking industry regulators prescribe minimum capital ratios for bank holding companies and their
banking subsidiaries. See Note 14 (Shareholders Equity), which begins on page 102 of Keys 2008
Annual Report to Shareholders, for an explanation of the implications of failing to meet these
specific capital requirements.
Risk-based capital guidelines require a minimum level of capital as a percent of risk-weighted
assets. Risk-weighted assets consist of total assets plus certain off-balance sheet items, subject
to adjustment for predefined credit risk factors. Currently, banks and bank holding companies must
maintain, at a minimum, Tier 1 capital as a percent of risk-weighted assets of 4.00%, and total
capital as a percent of risk-weighted assets of 8.00%. As of June 30, 2009, Keys Tier 1
risk-based capital ratio was 12.57%, and its total risk-based capital ratio was 16.67%.
Another indicator of capital adequacy, the leverage ratio, is defined as Tier 1 capital as a
percentage of average quarterly tangible assets. Leverage ratio requirements vary with the
condition of the financial institution. Bank holding companies that either have the highest
supervisory rating or have implemented the Federal Reserves risk-adjusted measure for market risk
as KeyCorp has must maintain a minimum leverage ratio of 3.00%. All other bank holding
companies must maintain a minimum ratio of 4.00%. As of June 30, 2009, Key had a leverage ratio of
12.26%.
Traditionally, the banking regulators have assessed bank and bank holding company capital adequacy
based on both the amount and composition of capital, the calculation of which is prescribed in
federal banking regulations. As a result of the SCAP, the Federal Reserve has focused its
assessment of capital adequacy on a component of Tier 1 capital, known as Tier 1 common equity.
Because the Federal Reserve has long indicated that voting common shareholders equity (essentially
Tier 1 capital less preferred stock, qualifying capital securities and minority interests in
subsidiaries) generally should be the dominant element in Tier 1 capital, such a focus is
consistent with existing capital adequacy guidelines and does not imply a new or ongoing capital
standard. Because Tier 1 common equity is neither formally defined by GAAP nor prescribed in
amount by federal banking regulations, this measure is considered to be a non-GAAP financial
measure. Figure 5 on pages 62 and 63 reconciles Key shareholders equity, the GAAP performance
measure, to Tier 1 common equity, the corresponding non-GAAP measure.
Federal bank regulators group FDIC-insured depository institutions into five categories, ranging
from critically undercapitalized to well capitalized. Keys affiliate bank, KeyBank, qualified
as well capitalized at June 30, 2009, since it exceeded the prescribed thresholds of 10.00% for
total capital, 6.00% for Tier 1 capital and 5.00% for the leverage ratio. If these provisions
applied to bank holding companies, Key would qualify as well capitalized at June 30, 2009. The
FDIC-defined capital categories serve a limited supervisory function. Investors should not treat
them as a representation of the overall financial condition or prospects of KeyCorp or KeyBank.
90
Figure 26 presents the details of Keys regulatory capital position at June 30, 2009, December 31,
2008, and June 30, 2008.
Figure 26. Capital Components and Risk-Weighted Assets
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|
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|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
dollars in millions |
|
2009 |
|
|
2008 |
|
|
2008 |
|
|
TIER 1 CAPITAL |
|
|
|
|
|
|
|
|
|
|
|
|
Key shareholders equity |
|
$ |
10,851 |
|
|
$ |
10,480 |
|
|
$ |
8,706 |
|
Qualifying capital securities |
|
|
2,290 |
|
|
|
2,582 |
|
|
|
2,582 |
|
Less: Goodwill |
|
|
917 |
|
|
|
1,138 |
|
|
|
1,598 |
|
Accumulated other comprehensive (loss) income (a) |
|
|
(20 |
) |
|
|
76 |
|
|
|
79 |
|
Other assets (b) |
|
|
172 |
|
|
|
203 |
|
|
|
221 |
|
|
Total Tier 1 capital |
|
|
12,072 |
|
|
|
11,645 |
|
|
|
9,390 |
|
|
TIER 2 CAPITAL |
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for losses on loans and liability for losses on
lending-related commitments
(c) |
|
|
1,230 |
|
|
|
1,352 |
|
|
|
1,385 |
|
Net unrealized gains on equity securities available for sale
|
|
|
2 |
|
|
|
|
|
|
|
|
|
Qualifying long-term debt |
|
|
2,698 |
|
|
|
2,819 |
|
|
|
2,879 |
|
|
Total Tier 2 capital |
|
|
3,930 |
|
|
|
4,171 |
|
|
|
4,264 |
|
|
Total risk-based capital |
|
$ |
16,002 |
|
|
$ |
15,816 |
|
|
$ |
13,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TIER 1 COMMON EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital |
|
$ |
12,072 |
|
|
$ |
11,645 |
|
|
$ |
9,390 |
|
Less: Qualifying capital securities |
|
|
2,290 |
|
|
|
2,582 |
|
|
|
2,582 |
|
Series B Preferred Stock |
|
|
2,422 |
|
|
|
2,414 |
|
|
|
|
|
Series A Preferred Stock |
|
|
291 |
|
|
|
658 |
|
|
|
650 |
|
|
Total Tier 1 common equity |
|
$ |
7,069 |
|
|
$ |
5,991 |
|
|
$ |
6,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RISK-WEIGHTED ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Risk-weighted assets on balance sheet |
|
$ |
77,982 |
|
|
$ |
84,922 |
|
|
$ |
85,600 |
|
Risk-weighted off-balance sheet exposure |
|
|
19,609 |
|
|
|
22,979 |
|
|
|
25,510 |
|
Less: Goodwill |
|
|
917 |
|
|
|
1,138 |
|
|
|
1,598 |
|
Other assets (b) |
|
|
1,256 |
|
|
|
1,162 |
|
|
|
1,004 |
|
Plus: Market risk-equivalent assets |
|
|
1,922 |
|
|
|
1,589 |
|
|
|
1,606 |
|
|
Gross risk-weighted assets |
|
|
97,340 |
|
|
|
107,190 |
|
|
|
110,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Excess allowance for loan losses (c) |
|
|
1,334 |
|
|
|
505 |
|
|
|
87 |
|
|
Net risk-weighted assets |
|
$ |
96,006 |
|
|
$ |
106,685 |
|
|
$ |
110,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVERAGE QUARTERLY TOTAL ASSETS |
|
$ |
100,607 |
|
|
$ |
107,639 |
|
|
$ |
103,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAPITAL RATIOS |
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 risk-based capital |
|
|
12.57 |
% |
|
|
10.92 |
% |
|
|
8.53 |
% |
Total risk-based capital |
|
|
16.67 |
|
|
|
14.82 |
|
|
|
12.41 |
|
Leverage (d) |
|
|
12.26 |
|
|
|
11.05 |
|
|
|
9.34 |
|
Tier 1 common equity |
|
|
7.36 |
|
|
|
5.62 |
|
|
|
5.60 |
|
|
|
|
|
(a) |
|
Includes net unrealized gains or losses on securities available for sale (except for net
unrealized losses on marketable equity securities), net gains or losses on cash flow hedges,
and amounts resulting from the adoption or subsequent application of the provisions of SFAS
No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans. |
|
(b) |
|
Other assets deducted from Tier 1 capital and risk-weighted assets consist of intangible
assets (excluding goodwill) recorded after February 19, 1992, and deductible portions of
nonfinancial equity investments. |
|
(c) |
|
The allowance for loan losses included in Tier 2 capital is limited by regulation to 1.25%
of the sum of gross risk-weighted assets plus low level exposures and residual interests
calculated under the direct reduction method, as defined by the Federal Reserve. |
|
(d) |
|
This ratio is Tier 1 capital divided by average quarterly total assets as defined by the
Federal Reserve less: (i) goodwill, (ii) the nonqualifying intangible assets described in
footnote (b), and (iii) deductible portions of nonfinancial equity investments; plus assets
derecognized as an offset to accumulated other comprehensive income resulting from the
adoption and application of SFAS No. 158. |
91
Emergency Economic Stabilization Act of 2008
On October 3, 2008, former
President Bush signed into law the EESA. The TARP provisions of
the EESA provide broad authority to the Secretary of the U.S. Treasury to restore liquidity and
stability to the United States financial system, including the authority to purchase up to $700.0
billion of troubled assets" mortgages, mortgage-backed securities and certain other financial
instruments.
While the key feature of TARP provides
the Treasury Secretary the authority to purchase and
guarantee types of troubled assets, other programs have emerged out of the authority and resources
authorized by the EESA, as follows.
The TARP Capital
Purchase Program. Under the CPP, in November 2008, KeyCorp issued $2.4 billion
of cumulative preferred stock, which was purchased by the U.S. Treasury, and granted a warrant to
purchase 35.2 million common shares to the U.S. Treasury at a fair value of $87 million. Terms and
conditions of the program are available at the U.S. Treasury website,
www.ustreas.gov/initiatives/eesa. Currently, bank holding companies that issue preferred stock to
the U.S. Treasury under the CPP are permitted to include such capital instruments in Tier 1 capital
for purposes of the Federal Reserve Boards risk-based and leverage capital rules, and guidelines
for bank holding companies.
FDICs standard maximum deposit insurance coverage limit increase. The EESA, as amended by the
Helping Families Save Their Homes Act of 2009, provides for a temporary increase in the FDIC
standard maximum deposit insurance coverage limit for all deposit accounts from $100,000 to
$250,000. This temporary increase expires on December 31, 2013.
Temporary Liquidity Guarantee Program
On October 14, 2008, the FDIC announced its TLGP to strengthen confidence and encourage liquidity
in the banking system. Under the FDICs Final Rule, 12 C.F.R. 370, as amended, the TLGP has two
components: (1) a Transaction Account Guarantee for funds held at FDIC-insured depository
institutions in noninterest-bearing transaction accounts in excess of the current standard maximum
deposit insurance amount of $250,000, and (2) a Debt Guarantee for qualifying newly issued senior
unsecured debt of insured depository institutions, their holding companies and certain other
affiliates of insured depository institutions designated by the FDIC for debt issued until October
31, 2009.
The Transaction Account Guarantee is effective until January 1, 2010, for institutions that do not
opt out. KeyBank has opted in to the Transaction Account Guarantee, but KeyCorp is not eligible to
participate because it is not an insured depository institution.
Under the Debt Guarantee, debt issued prior to April 1, 2009, is guaranteed until the earlier of
maturity or June 30, 2012. Pursuant to an Interim Rule effective March 23, 2009, all insured
depository institutions and other participating entities that have issued guaranteed debt before
April 1, 2009, may issue FDIC-guaranteed debt during the extended issuance period that ends on
October 31, 2009. The guarantee on such debt will expire no later than December 31, 2012. On
March 16, 2009, KeyCorp issued $438 million of floating-rate senior notes due April 16, 2012, under
the Debt Guarantee. This brings the total amount of debt issued by Key under the TLGP to $1.9
billion. Key has no plans to issue any additional debt under the TLGP.
For further information on the Temporary Liquidity Guarantee Program, see the section entitled
Capital, which begins on page 48 of Keys 2008 Annual Report to Shareholders.
92
Financial Stability Plan
On February 10, 2009, the U.S. Treasury announced its FSP to alleviate uncertainty, restore
confidence, and address liquidity and capital constraints. The primary components of the FSP are
the CAP, including the SCAP, the Term Asset-Backed Securities Loan Facility (TALF), the
Public-Private Investment Program (PPIP), the Affordable Housing and Foreclosure Mitigation
Efforts Initiative, and the Small Business and Community Lending Initiative designed to increase
lending to small businesses. Additional information regarding certain primary aspects of the TALF
and PPIP is included in the section entitled Financial Stability Plan on page 46 of Keys Form
10-Q Report for the quarterly period ended March 31, 2009. More specific information regarding the
CAP, including the SCAP, is presented below.
Capital Assistance Program. As part of the U.S. governments FSP, on February 25, 2009, the U.S.
Treasury announced preliminary details of its CAP, which is designed to: (1) restore confidence
throughout the financial system by ensuring that the largest U.S. banking institutions have
sufficient capital to absorb higher than anticipated potential future losses that could occur as a
result of a more severe economic environment; and (2) support lending to creditworthy borrowers.
The CAP is comprised of two components: (1) a supervisory exercise that involves a forward-looking
capital assessment the SCAP to evaluate the capital needs of major U.S. financial institutions,
including KeyCorp, under a set of assumptions posing a more challenging economic environment, and
(2) access for qualifying financial institutions to capital from the U.S. government to provide
this buffer to the extent sufficient private (i.e., nongovernmental) sources of capital cannot be
found, should such assessment indicate that an additional capital buffer is warranted. For
eligible U.S. financial institutions with assets in excess of $100 billion, participation in the
SCAP was mandatory, whether or not they intend to access the government capital available under the
CAP.
To implement the U.S. Treasurys CAP, the Federal Reserve, the Federal Reserve Banks, the FDIC, and
the Office of the Comptroller of the Currency commenced a review of the capital of the nineteen
largest U.S. banking institutions. This review, referred to as the SCAP, involved a
forward-looking capital assessment, or stress test, of all domestic bank holding companies with
risk-weighted assets of more than $100 billion, including KeyCorp, at December 31, 2008. The SCAP
was intended to estimate 2009 and 2010 credit losses, revenues and reserve needs for each of these
bank holding companies under a macroeconomic scenario that reflects a consensus expectation for the
depth and duration of the recession, and a more adverse than expected scenario that reflects the
possibility of a longer, more severe recession than the so-called consensus expectation. Based
on the results of the SCAP review, regulators made a determination as to the extent to which a bank
holding company would need to augment its capital, by raising additional capital, effecting a
change in the composition of its capital, or both. The purpose of the SCAP was to ensure that the
institutions reviewed have sufficient capital to absorb higher than anticipated potential future
losses and remain sufficiently capitalized over the next two years to facilitate lending to
creditworthy borrowers should the more adverse than expected macroeconomic scenario become a
reality. Additional information related to the SCAP is available on the Federal Reserve Board
website, www.federalreserve.gov.
As announced on May 7, 2009, under the SCAP assessment, KeyCorps regulators determined that it
needed to generate $1.8 billion in additional Tier 1 common equity or contingent common equity
(i.e., mandatorily convertible preferred shares). As required by SCAP, KeyCorp submitted a
comprehensive capital plan to the Federal Reserve Bank of Cleveland on June 1, 2009, describing
KeyCorps action plan for raising the required amount of additional Tier 1 common equity from
nongovernmental sources. The steps outlined in Keys capital plan include the capital-generating
activities discussed under the heading Supervisory Capital Assessment Program and KeyCorps
capital-generating activities on page 87.
93
Risk Management
Overview
Like other financial services companies, Key engages in business activities with inherent risks.
The ability to properly and effectively identify, measure, monitor and report such risks is
essential to maintaining safety and soundness and maximizing profitability. Management believes
that the most significant risks facing Key are market risk, liquidity risk, credit risk and
operational risk, and that these risks must be managed across the entire enterprise. Key continues
to enhance its Enterprise Risk Management practices and program, and uses a risk-adjusted capital
framework to manage these risks. This framework is approved and managed by the Risk Capital
Committee, which consists of senior finance, risk management and business executives. Each type of
risk is defined and discussed in greater detail in the remainder of this section. Consistent with
the SCAP assessment, federal banking regulators are reemphasizing with financial institutions the
importance of a number of risk, capital and liquidity management issues as part of an institutions
overall capital management strategy. Key believes its internal risk management processes are
geared towards achieving and maintaining capital levels that are commensurate with Keys business
activities and risks, and comport with regulatory expectations in this environment. To further
enhance Keys risk management, capital and liquidity assessment processes, management and Keys
Board of Directors are engaged in a comprehensive review of policies and practices and expect to
implement a number of enhancements, including the refinement of appropriate risk tolerances, the
enhancement of existing early warning risk triggers and the modification of contingency planning
pertaining to capital and liquidity. In addition, management is working to refine reporting and
corporate governance practices relating to risk in order to enhance its identification, assessment
and reporting of risks.
Keys Board of Directors has established and follows a corporate governance program that serves as
the foundation for managing and mitigating risk. In accordance with this program, the Board
focuses on the interests of shareholders, encourages strong internal controls, demands management
accountability, mandates that employees adhere to Keys code of ethics and administers an annual
self-assessment process. The Audit and Risk Management committees help the Board meet these risk
oversight responsibilities. The responsibilities of these two committees are summarized on page 54
of Keys 2008 Annual Report to Shareholders.
Market risk management
The values of some financial instruments vary not only with changes in market interest rates but
also with changes in foreign exchange rates. Financial instruments also are susceptible to factors
influencing valuations in the equity securities markets and other market-driven rates or prices.
For example, the value of a fixed-rate bond will decline if market interest rates increase.
Similarly, the value of the U.S. dollar regularly fluctuates in relation to other currencies. The
holder of a financial instrument faces market risk when the value of the instrument is tied to
such external factors. Most of Keys market risk is derived from interest rate fluctuations.
Interest rate risk management
Interest rate risk, which is inherent in the banking industry, is measured by the potential for
fluctuations in net interest income and the economic value of equity. Such fluctuations may result
from changes in interest rates and differences in the repricing and maturity characteristics of
interest-earning assets and interest-bearing liabilities. To minimize the volatility of net
interest income and the economic value of equity, Key manages exposure to interest rate risk in
accordance with guidelines established by the Asset/Liability Management Committee (ALCO). This
committee, which consists of senior finance and business executives, meets monthly and periodically
reports Keys interest rate risk positions to the Risk Management Committee of the Board of
Directors.
Interest rate risk positions can be influenced by a number of factors other than changes in market
interest rates, including economic conditions, the competitive environment within Keys markets,
consumer preferences for specific loan and deposit products, and the level of interest rate
exposure arising from basis risk, gap risk, yield curve risk and option risk. Each of these risks
is defined in the discussion of market risk management, which begins on page 54 of Keys 2008
Annual Report to Shareholders.
94
Net interest income simulation analysis. The primary tool management uses to measure Keys
interest rate risk is simulation analysis. For purposes of this analysis, management estimates
Keys net interest income based on the composition of its on- and off-balance sheet positions, and
the current interest rate environment. The simulation assumes that changes in Keys on- and
off-balance sheet positions will reflect recent product trends, goals established by the Capital
Allocation Committee and consensus economic forecasts.
Typically, the amount of net interest income at risk is measured by simulating the change in net
interest income that would occur if the federal funds target rate were to gradually increase or
decrease by 200 basis points over the next twelve months, and term rates were to move in a similar
fashion. In light of the low interest rate environment, management modified the standard rate
scenario of a gradual decrease of 200 basis points over twelve months to a gradual decrease of 25
basis points over two months with no change over the following ten months. After calculating the
amount of net interest income at risk, management compares that amount with the base case of an
unchanged interest rate environment. The analysis also considers sensitivity to changes in a
number of other variables, including other market interest rates and deposit mix. In addition,
management assesses the potential effect of different shapes in the yield curve, including a
sustained flat yield curve and an inverted slope yield curve (the yield curve depicts the
relationship between the yield on a particular type of security and
its term to maturity).
Management also performs stress tests to measure the effect on net interest income of an immediate
change in market interest rates, as well as changes in assumptions related to the pricing of
deposits without contractual maturities, prepayments on loans and securities, loan and deposit
growth, and wholesale funding and capital management activities.
Simulation analysis produces only a sophisticated estimate of interest rate exposure based on
assumptions and judgments related to balance sheet growth, customer behavior, new products, new
business volume, product pricing, behavior of market interest rates and anticipated hedging
activities. Management tailors the assumptions to the specific interest rate environment and yield
curve shape being modeled, and validates those assumptions on a regular basis. Keys simulations
are performed with the assumption that interest rate risk positions will be actively managed
through the use of on- and off-balance sheet financial instruments to achieve the desired risk
profile. Actual results may differ from those derived in simulation analysis due to the timing,
magnitude and frequency of interest rate changes, actual hedging strategies employed, changes in
balance sheet composition, and repercussions from unanticipated or unknown events.
Figure 27 presents the results of the simulation analysis at June 30, 2009 and 2008. At June 30,
2009, Keys simulated exposure to a change in short-term rates was moderately asset-sensitive.
ALCO policy limits for risk management call for corrective measures if simulation modeling
demonstrates that a gradual increase or decrease in short-term rates over the next twelve months
would adversely affect net interest income over the same period by more than 4%. As shown in
Figure 27, Key is operating within these limits.
Figure 27. Simulated Change in Net Interest Income
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|
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|
|
|
|
June 30, 2009 |
|
|
|
|
|
|
|
|
|
Basis point change assumption (short-term rates) |
|
|
-25 |
|
|
|
+200 |
|
ALCO policy limits |
|
|
-4.00 |
% |
|
|
-4.00 |
% |
|
Interest rate risk assessment |
|
|
-.96 |
% |
|
|
+2.40 |
% |
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|
|
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|
|
June 30, 2008 |
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|
|
|
|
|
|
|
|
Basis point change assumption (short-term rates) |
|
|
-150 |
|
|
|
+200 |
|
ALCO policy limits |
|
|
-2.00 |
% |
|
|
-2.00 |
% |
|
Interest rate risk assessment |
|
|
+1.30 |
% |
|
|
-.96 |
% |
|
As interest rates declined throughout 2008 and remained at low levels through the first half of
2009, Key gradually shifted from a
liability-sensitive position to an asset-sensitive position
through increased client demand for fixed-rate certificates of deposit and a number of
capital-raising transactions. Keys current
95
interest rate risk position could fluctuate to higher or lower levels of risk depending on the
actual volume, mix and maturity of loan and deposit flows, and the execution of hedges. Additional
hedging activities are proactively evaluated based on managements decisions to adjust the interest
rate risk profile as changes occur to the configuration of the balance sheet and the outlook for
the economy.
Management also conducts simulations that measure the effect of changes in market interest rates in
the second year of a two-year horizon. These simulations are conducted in a manner similar to
those based on a twelve-month horizon. To capture longer-term exposures, management simulates
changes to the economic value of equity as discussed in the following section.
Economic value of equity modeling. Economic value of equity (EVE) complements net interest
income simulation analysis since it estimates risk exposure beyond twelve- and twenty-four month
horizons. EVE measures the extent to which the economic values of assets, liabilities and
off-balance sheet instruments may change in response to changes in interest rates. EVE is
calculated by subjecting the balance sheet to an immediate 200 basis point increase or decrease in
interest rates, and measuring the resulting change in the values of assets and liabilities. Under
the current level of market interest rates, the calculation of EVE under an immediate 200 basis
point decrease in interest rates results in certain interest rates declining to zero percent and a
less than 200 basis point decrease in certain yield curve term points. This analysis is highly
dependent upon assumptions applied to assets and liabilities with noncontractual maturities. Those
assumptions are based on historical behaviors, as well as managements expectations. Management
takes corrective measures if this analysis indicates that Keys EVE will decrease by more than 15%
in response to an immediate 200 basis point increase or decrease in interest rates. Key is
operating within these guidelines.
Management of interest rate exposure. Management uses the results of its various interest rate
risk analyses to formulate strategies to achieve the desired risk profile within the parameters of
Keys capital and liquidity guidelines. Specifically, management actively manages interest rate
risk positions by purchasing securities, issuing term debt with floating or fixed interest rates,
and using derivatives predominantly in the form of interest rate swaps, which modify the interest
rate characteristics of certain assets and liabilities.
Figure 28 shows all swap positions which Key holds for asset/liability management (A/LM)
purposes. These positions are used to convert the contractual interest rate index of agreed-upon
amounts of assets and
liabilities (i.e., notional amounts) to another interest rate index. For example, fixed-rate debt
is converted to a floating rate through a receive fixed/pay variable interest rate swap. The
volume, maturity and mix of portfolio swaps change frequently as management adjusts the balance
sheet positions to be hedged and Keys broader A/LM objectives. For more information about how Key
uses interest rate swaps to manage its balance sheet, see Note 15 (Derivatives and Hedging
Activities), which begins on page 37.
Figure 28. Portfolio Swaps by Interest Rate Risk Management Strategy
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|
June 30, 2009 |
|
June 30, 2008 |
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Notional |
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|
Fair |
|
|
Maturity |
|
|
Weighted-Average Rate |
|
Notional |
|
|
Fair |
|
dollars in millions |
|
Amount |
|
|
Value |
|
|
(Years) |
|
|
Receive |
|
|
Pay |
|
|
Amount |
|
|
Value |
|
|
Receive fixed/pay variable conventional A/LM (a) |
|
$ |
16,868 |
|
|
$ |
37 |
|
|
|
1.1 |
|
|
|
1.1 |
% |
|
|
.3 |
% |
|
$ |
12,488 |
|
|
$ |
162 |
|
Receive fixed/pay variable conventional debt |
|
|
5,631 |
|
|
|
410 |
|
|
|
18.5 |
|
|
|
5.4 |
|
|
|
1.2 |
|
|
|
6,119 |
|
|
|
125 |
|
Receive fixed/pay variable forward starting |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300 |
|
|
|
10 |
|
Pay fixed/receive variable conventional debt |
|
|
735 |
|
|
|
8 |
|
|
|
4.6 |
|
|
|
1.0 |
|
|
|
3.4 |
|
|
|
1,026 |
|
|
|
(18 |
) |
Foreign currency conventional debt |
|
|
2,550 |
|
|
|
(258 |
) |
|
|
1.7 |
|
|
|
1.4 |
|
|
|
1.0 |
|
|
|
2,659 |
|
|
|
135 |
|
|
Total portfolio swaps |
|
$ |
25,784 |
|
|
$ |
197 |
|
|
|
5.1 |
|
|
|
2.1 |
% |
|
|
.7 |
% |
|
$ |
22,592 |
|
|
$ |
414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
(a) |
|
Portfolio swaps designated as A/LM are used to manage interest rate risk tied to both
assets and liabilities. |
96
Trading portfolio risk management
Keys trading portfolio is described in Note 15. Management uses a value at risk (VAR)
simulation model to measure the potential adverse effect of changes in interest rates, foreign
exchange rates, equity prices and credit spreads on the fair value of Keys trading portfolio.
Using two years of historical information, the model estimates the maximum potential one-day loss
with a 95% confidence level. Statistically, this means that losses will exceed VAR, on average,
five out of 100 trading days, or three to four times each quarter.
Key manages exposure to market risk in accordance with VAR limits for trading activity that have
been approved by the Risk Capital Committee. At June 30, 2009, the aggregate one-day trading limit
set by the committee was $6.9 million. Key is operating within these constraints. During the
first six months of 2009, Keys aggregate daily average, minimum and maximum VAR amounts were $3.0
million, $2.6 million and $3.7 million, respectively. During the same period one year ago, Keys
aggregate daily average, minimum and maximum VAR amounts were $2.5 million, $1.7 million and $3.8
million, respectively.
In addition to comparing VAR exposure against limits on a daily basis, management monitors loss
limits, uses sensitivity measures and conducts stress tests. Management reports Keys market risk
exposure to Keys Risk Capital Committee and the Risk Management Committee of the Board of
Directors.
Liquidity risk management
Key defines liquidity as the ongoing ability to accommodate liability maturities and deposit
withdrawals, meet contractual obligations, and fund asset growth and new business transactions at a
reasonable cost, in a timely manner and without adverse consequences. Liquidity management
involves maintaining sufficient and diverse sources of funding to accommodate planned as well as
unanticipated changes in assets and liabilities under both normal and adverse conditions.
Governance structure
Key manages liquidity for all of its affiliates on an integrated basis. This approach considers
the unique funding sources available to each entity, as well as each entitys capacity to manage
through adverse conditions. It also recognizes that adverse market conditions or other events that
could negatively affect the availability or cost of liquidity will affect the access of all
affiliates to money market funding.
Oversight of the liquidity risk management process is governed by the Risk Management Committee of
the Board of Directors, the KeyBank Board of Directors and the ALCO. These committees regularly
review various liquidity reports, including liquidity and funding summaries, liquidity trends, peer
comparisons, variance analyses, liquidity projections, funding erosion analyses and goal tracking
reports. These committee reviews generate a discussion of positions, trends and directives on
liquidity risk. In addition, management uses a variety of daily liquidity reports to monitor the
daily flow of funds. In the current environment where liquidity pressures are elevated, a
heightened level of monitoring and management is in place.
Sources of liquidity
Keys primary sources of funding include customer deposits, wholesale funding and capital. If the
cash flows needed to support operating and investing activities is not satisfied by deposit
balances, Key relies on wholesale funding or liquid assets. Conversely, excess cash generated by
operating, investing and deposit-gathering activities may be used to repay outstanding debt or
invest in liquid assets. Key actively manages liquidity using a variety of non-deposit sources,
including short- and long-term debt, and secured borrowings.
97
Factors affecting liquidity
Keys liquidity could be adversely affected by both direct and indirect circumstances. Examples of
a direct event would be a downgrade in Keys public credit rating by a rating agency due to factors
such as deterioration in asset quality, a large charge to earnings, a decline in profitability or
in other financial measures, or a significant merger or acquisition. Examples of indirect events
unrelated to Key that could have an effect on Keys access to liquidity would be terrorism or war,
natural disasters, political events, or the default or bankruptcy of a major corporation, mutual
fund or hedge fund. Similarly, market speculation, or rumors about Key or the banking industry in
general may adversely affect the cost and availability of normal funding sources.
Managing liquidity risk
Key regularly monitors its funding sources and measures its capacity to obtain funds in a variety
of scenarios, in an effort to maintain an appropriate mix of available and affordable funding. In
the normal course of business, in order to better manage liquidity risk, management performs a
monthly hypothetical funding erosion analysis for both KeyCorp and KeyBank. This analysis
forecasts potential future liquidity scenarios under various funding constraints and time periods.
In a heightened monitoring mode, which Key is currently under, management conducts stress tests
on both KeyCorp and KeyBank. These stress tests, which are more strenuous and robust than the
erosion analysis, determine the periodic effects of major interruptions to Keys access to funding
markets and the adverse effect on Keys ability to fund its normal operations. To compensate for
the effect of these assumed liquidity pressures, management considers alternative sources of
liquidity and maturities over different time periods to project how funding needs would be managed.
In the current environment, these stress tests are performed monthly.
The results of the stress tests indicate that, under a severe stress scenario, Key could continue
to meet its financial obligations and fund its operations for at least one year without reliance on
extraordinary government intervention.
Most credit markets in which Key participates and relies upon as sources of funding have been
significantly disrupted and highly volatile since July 2007. Since that time, as a means of
maintaining adequate liquidity, Key, like many other financial institutions, has relied more
heavily on the liquidity and stability present in the short-term secured credit markets since
access to unsecured term debt has been severely restricted. For example, regional banking
institutions access to unsecured term debt has been limited to the issuance of FDIC-guaranteed
senior unsecured debt through the TLGP. By contrast, short-term secured funding has been available
and cost effective. If prolonged market disruption were to reduce the cost effectiveness and
availability of these sources of funds for an extended period of time, management may need to
secure funding alternatives. Management continues to reposition Keys balance sheet to reduce
future reliance on wholesale funding.
Key maintains a Contingency Funding Plan that outlines the process for addressing a liquidity
crisis. The plan provides for an evaluation of funding sources under various market conditions.
It also assigns specific roles and responsibilities for effectively managing liquidity through a
problem period. Key has access to various sources of wholesale funding (such as federal funds
purchased, securities sold under repurchase agreements and Eurodollars), and also has secured
borrowing facilities established at the Federal Home Loan Bank of Cincinnati and the Federal
Reserve Bank of Cleveland to facilitate short-term liquidity requirements. As of June 30, 2009,
Keys unused secured borrowing capacity was $15.3 billion at the Federal Reserve and $3.7 billion
at the Federal Home Loan Bank. Additionally, at June 30, 2009, Key maintained an excess federal
funds sold position of $2.4 billion at the Federal Reserve. During July 2009, Key continued to
increase its balance of unpledged securities. Key intends to pledge some or all of these
securities to its secured borrowing facility at the Federal Home Loan Bank in an effort to increase
its secured borrowing capacity, as well as its available short-term liquidity.
98
Long-term liquidity strategy
Keys long-term liquidity strategy is to reduce its reliance on wholesale funding. Keys Community
Banking unit, which represents Keys core business, supports Keys client-driven relationship
strategy, which will enable Key to achieve greater reliance on deposit-based funding, thus reducing
Keys liquidity risk.
Keys liquidity position and recent activity
Over the past twelve months, Key has increased its liquid asset portfolio, which includes overnight
and short-term investments as well as unencumbered, high quality liquid assets to be held as
insurance against a range of potential liquidity stress scenarios. Liquidity stress scenarios
include the loss of access to either unsecured or secured funding sources as well as draws on
unfunded commitments and significant deposit withdrawals. At June 30, 2009, Keys liquid asset
portfolio totaled $7.2 billion, consisting of $2.4 billion of federal funds sold and $4.8 billion
in unencumbered, high quality securities.
From time to time, KeyCorp or its principal subsidiary, KeyBank, may seek to retire, repurchase or
exchange outstanding debt of KeyCorp or KeyBank, and capital securities or preferred stock of
KeyCorp through cash purchase, privately negotiated transactions or otherwise. Such transactions,
if any, depend on prevailing market conditions, Keys liquidity and capital requirements,
contractual restrictions and other factors. The amounts involved may be material.
Key generates cash flows from operations, and from investing and financing activities. Securities
sold in connection with the repositioning of the securities portfolio provided a primary source of
cash from investing activities during the second quarter of 2009. Additionally, during the first
half of 2009, paydowns on loans, maturities of short-term investments, and prepayments and
maturities of securities available for sale provided significant cash inflows from investing
activities. Purchases of securities available for sale required the greatest use of cash during
the first half of 2009. Sales, prepayments and maturities of securities available for sale were
the greatest sources of cash from investing activities during the first half of 2008, while lending
and purchases of securities available for sale required the greatest use of cash.
During the first half of 2009, Key used the proceeds from the loan paydowns and maturities of
short-term investments, along with deposit growth and the issuance of common shares, to fund the
paydown of short-term borrowings and long-term debt. Key used long-term debt to pay down
short-term borrowings and partially fund the growth in portfolio loans during the first half of
2008. Issuances of common shares and preferred stock also provided a significant inflow of cash
from financing activities during the second quarter of 2008.
The Consolidated Statements of Cash Flows on page 6 summarize Keys sources and uses of cash by
type of activity for the six-month periods ended June 30, 2009 and 2008.
Liquidity for KeyCorp (the parent company or parent)
The parent company has sufficient liquidity when it can service its debt; support customary
corporate operations and activities (including acquisitions) at a reasonable cost, in a timely
manner and without adverse consequences; and pay dividends to shareholders.
99
Managements primary tool for assessing parent company liquidity is the net short-term cash
position, which measures the ability to fund debt maturing in twelve months or less with existing
liquid assets. Another key measure of parent company liquidity is the liquidity gap, which
represents the difference between projected liquid assets and anticipated financial obligations
over specified time horizons. Key generally relies upon the issuance of term debt to manage the
liquidity gap within targeted ranges assigned to various time periods.
In addition, Key occasionally guarantees a subsidiarys obligations in transactions with third
parties. Management closely monitors the extension of such guarantees to ensure that Key retains
ample liquidity to satisfy these obligations.
The parent company has typically met its liquidity requirements principally through receiving
regular dividends from KeyBank. Federal banking law limits the amount of capital distributions
that a bank can make to its holding company without prior regulatory approval. A national banks
dividend-paying capacity is affected by several factors, including net profits (as defined by
statute) for the two previous calendar years and for the current year, up to the date of dividend
declaration. During the first six months of 2009, KeyBank did not pay any dividends to the parent,
and nonbank subsidiaries paid the parent a total of $.8 million in dividends. As of the close of
business on June 30, 2009, KeyBank would not have been permitted to pay dividends to the parent
without prior regulatory approval. During the first half of 2009, the parent made a capital
infusion of $500 million to KeyBank.
The parent company generally maintains excess funds in interest-bearing deposits in an amount
sufficient to meet projected debt maturities over the next twelve months. At June 30, 2009, the
parent company held $4.6 billion in short-term investments, which management projected to be
sufficient to meet all of Keys debt repayment obligations.
During the first quarter of 2009, KeyCorp issued $438 million of FDIC-guaranteed floating-rate
senior notes under the TLGP, which are due April 16, 2012. More specific information regarding
this program and Keys participation is included in the Capital section under the heading
Temporary Liquidity Guarantee Program on page 92.
Liquidity programs
Management has several programs, as described below, which enable the parent company and KeyBank to
raise funds in the public and private markets when the capital markets are functioning normally.
The proceeds from most of these programs can be used for general corporate purposes, including
acquisitions. Each of the programs is replaced or renewed as needed. There are no restrictive
financial covenants in any of these programs.
Bank note program. KeyBanks note program provides for the issuance of up to $20.0 billion of
notes. These notes may have original maturities from thirty days up to thirty years. During the
first six months of 2009, KeyBank did not issue any notes under this program. At June 30, 2009,
$16.5 billion was available for future issuance.
Euro medium-term note program. Under Keys Euro medium-term note program, KeyCorp and KeyBank may,
subject to the completion of certain filings, issue both long- and short-term debt of up to $10.0
billion in the aggregate ($9.0 billion by KeyBank and $1.0 billion by KeyCorp). The notes are
offered exclusively to non-U.S. investors and can be denominated in U.S. dollars or foreign
currencies. Key did not issue any notes under this program during the first six months of 2009.
At June 30, 2009, $7.6 billion was available for future issuance.
100
KeyCorp shelf registration, including medium-term note program. In June 2008, KeyCorp filed an
updated shelf registration statement with the SEC under rules that allow companies to register
various types of debt and equity securities without limitations on the aggregate amounts available
for issuance. During the same month, KeyCorp filed an updated prospectus supplement, renewing a
medium-term note program that permits KeyCorp to issue notes with original maturities of nine
months or more. KeyCorp issued $438 million of medium-term notes during the first six months of
2009, all of which were FDIC-guaranteed under the TLGP.
KeyCorps Board of Directors has also authorized an equity shelf program pursuant to which KeyCorp
conducts at-the-market offerings of its common shares. On May 11, 2009, KeyCorp commenced a
public at-the-market offering of up to $750 million in aggregate gross proceeds of its common
shares, $1 par value, and filed a prospectus supplement to its existing automatic shelf
registration statement on file with the SEC in connection with such offering. KeyCorp subsequently
increased the aggregate gross sales price of the common shares to be issued to $1.0 billion on June
2, 2009, and on the same date, announced that it had successfully issued all $1.0 billion in
additional common shares. In conjunction with the common stock offering, KeyCorp issued
205,438,975 shares at an average price of $4.87 per share and raised a total of $987 million in net
proceeds. KeyCorp does not currently plan to seek additional authority from the Board of Directors
to conduct further at-the-market offerings. KeyCorps equity shelf program serves as an
available source of liquidity, subject to Board approval for future issuances of common shares and
the completion of certain supplemental SEC filings.
KeyCorp also maintains a shelf registration for the issuance of capital securities or preferred
stock, which serves as an additional source of liquidity. At June 30, 2009, KeyCorp had authorized
and available for issuance up to $1.5 billion of additional debt securities under the medium-term
note program and up to $1.3 billion of preferred stock or capital securities.
Commercial paper. KeyCorp has a commercial paper program that provides funding availability of up
to $500 million. At June 30, 2009, there were no borrowings outstanding under this program.
Keys credit ratings
Keys credit ratings at June 30, 2009, are shown in Figure 29. Management believes that these
credit ratings, under normal conditions in the capital markets, will enable the parent company or
KeyBank to effect future offerings of securities that would be marketable to investors. Current
conditions in the capital markets are not normal, and for regional banking institutions such as
Key, access to the capital markets for unsecured term debt continues to be severely restricted,
with investors requiring historically wide spreads over benchmark U.S. Treasury obligations and
LIBOR indices.
The credit ratings presented in Figure 29 reflect one-notch downgrades of certain KeyCorp and
KeyBank ratings by Standard & Poors on June 17, 2009, and by Fitch on June 23, 2009. Despite the
changes, all of Keys credit ratings remain investment-grade, with the exception of the KeyCorp
capital securities and Series A Preferred Stock.
If the securities of KeyCorp and/or KeyBank suffer additional ratings downgrades, such downgrades
could adversely affect access to liquidity and could significantly increase Keys cost of funds,
trigger additional collateral or funding requirements, and decrease the number of investors and
counterparties willing to lend to Key, thereby curtailing its business operations and reducing its
ability to generate income. Further downgrades of the credit ratings of Keys securities,
particularly if they are below investment-grade, could have a material adverse effect
on Key.
101
Figure 29. Credit Ratings
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Senior |
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Subordinated |
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Series A |
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TLGP |
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Short-Term |
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Long-Term |
|
Long-Term |
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Capital |
|
Preferred |
June 30, 2009 |
|
Debt |
|
Borrowings |
|
Debt |
|
Debt |
|
Securities |
|
Stock |
|
KEYCORP (THE PARENT COMPANY) |
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Standard & Poors
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AAA
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A-2
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BBB+
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BBB
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BB
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BB |
Moodys
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Aaa
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P-2
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Baa1
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Baa2
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Baa2
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Baa3 |
Fitch
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AAA
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F1
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A-
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BBB+
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BBB
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BBB |
DBRS
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AAA
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R-1 (low)
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A (low)
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BBB (high)
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BBB (high)
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BB (high) |
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KEYBANK |
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Standard & Poors
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AAA
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A-2
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A-
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BBB+
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N/A
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N/A |
Moodys
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Aaa
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P-1
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A2
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A3
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N/A
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N/A |
Fitch
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AAA
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F1
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A-
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BBB+
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N/A
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N/A |
DBRS
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AAA
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R-1 (low)
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A
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A (low)
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N/A
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N/A |
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KNSF (a) |
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DBRS (b)
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N/A
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R-1 (low)
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A
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N/A
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N/A
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N/A |
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(a) |
|
On March 1, 2009, KNSF merged with Key Canada Funding Ltd., an affiliated company, to
form Key Nova Scotia Funding Ltd. (KNSF Amalco) under the laws of Nova Scotia, Canada. The
KNSF commercial paper program is no longer active or utilized as a source of funding. KNSF
Amalco is subject to the obligations of KNSF under the terms of the indenture for KNSFs
medium-term note program. |
|
(b) |
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Reflects the guarantee by KeyBank of KNSFs issuance of medium-term notes. |
|
N/A = |
|
Not Applicable |
Temporary Liquidity Guarantee Program
On October 14, 2008, the FDIC announced its TLGP to strengthen confidence and encourage liquidity
in the banking system. Under the FDICs Final Rule, 12 C.F.R. 370, as amended, the TLGP has two
components: (1) a Transaction Account Guarantee for funds held at FDIC-insured depository
institutions in noninterest-bearing transaction accounts in excess of the current standard maximum
deposit insurance amount of $250,000, and (2) a Debt Guarantee for qualifying newly issued senior
unsecured debt of insured depository institutions, their holding companies and certain other
affiliates of insured depository institutions designated by the FDIC for debt issued until October
31, 2009. Debt issued prior to April 1, 2009, is guaranteed until the earlier of maturity or June
30, 2012. Pursuant to an Interim Rule effective March 23, 2009, all insured depository
institutions and other participating entities that have issued guaranteed debt before April 1,
2009, may issue
FDIC-guaranteed debt during the extended issuance period that ends on October 31,
2009. The guarantee on such debt will expire no later than December 31, 2012.
More specific information regarding this program and Keys participation is included in the
Capital section under the heading Temporary Liquidity Guarantee Program on page 92.
Financial Stability Plan
On February 10, 2009, the U.S. Treasury announced its FSP to alleviate uncertainty, restore
confidence, and address liquidity and capital constraints. The key components of the FSP are the
CAP, the TALF, the PPIP, the Affordable Housing and Foreclosure Mitigation Efforts Initiative, and
the Small Business and Community Lending Initiative designed to increase lending to small
businesses. Additional information regarding certain key aspects of the TALF and PPIP is included
in the section entitled Financial Stability Plan on page 46 of Keys
Form 10-Q Report for the
quarterly period ended March 31, 2009. Information regarding the CAP is included in the Capital
section under the heading Financial Stability Plan on page 93.
Credit risk management
Credit risk is the risk of loss arising from an obligors inability or failure to meet contractual
payment or performance terms. Like other financial service institutions, Key makes loans, extends
credit, purchases securities and enters into financial derivative contracts, all of which have
inherent credit risk.
102
Credit policy, approval and evaluation. Key manages credit risk exposure through a multifaceted
program. Independent committees approve both retail and commercial credit policies. These policies
are communicated throughout the organization to foster a consistent approach to granting credit.
For more information about Keys credit policies, as well as related approval and evaluation
processes, see the section entitled Credit policy, approval and evaluation on page 60 of Keys
2008 Annual Report to Shareholders.
Key actively manages the overall loan portfolio in a manner consistent with asset quality
objectives. One process entails the use of credit derivatives primarily credit default swaps
to mitigate Keys credit risk. Credit default swaps enable Key to transfer a portion of the credit
risk associated with a particular extension of credit to a third party. At June 30, 2009, Key used
credit default swaps with a notional amount of $1.0 billion to manage the credit risk associated
with specific commercial lending obligations. Key also sells credit derivatives primarily index
credit default swaps to diversify and manage portfolio concentration and correlation risks. At
June 30, 2009, the notional amount of credit default swaps sold by Key for the purpose of
diversifying Keys credit exposure was $416 million. Occasionally, Key will provide credit
protection to other lenders through the sale of credit default swaps. The transactions with other
lenders may generate fee income and can diversify the overall exposure to credit loss.
Credit default swaps are recorded on the balance sheet at fair value. Related gains or losses, as
well as the premium paid or received for credit protection, are included in the trading income
component of noninterest income. These swaps reduced Keys operating results by $23 million for
the six-month period ended June 30, 2009.
Key also manages the loan portfolio using loan securitizations, portfolio swaps, and bulk purchases
and sales. The overarching goal is to continually manage the loan portfolio within a desirable
range of asset quality.
Selected asset quality statistics for Key for each of the past five quarters are presented in
Figure 30. The factors that drive these statistics are discussed in the remainder of this section.
Figure 30. Selected Asset Quality Statistics
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
dollars in millions |
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
|
Net loan charge-offs |
|
$ |
539 |
|
|
$ |
492 |
|
|
$ |
342 |
|
|
$ |
273 |
|
|
$ |
524 |
|
Net loan charge-offs to average loans |
|
|
2.99 |
% |
|
|
2.65 |
% |
|
|
1.77 |
% |
|
|
1.43 |
% |
|
|
2.75 |
% |
Nonperforming loans at period end |
|
$ |
2,188 |
|
|
$ |
1,738 |
|
|
$ |
1,225 |
|
|
$ |
967 |
|
|
$ |
814 |
|
Nonperforming loans to period-end portfolio loans |
|
|
3.09 |
% |
|
|
2.36 |
% |
|
|
1.60 |
% |
|
|
1.26 |
% |
|
|
1.07 |
% |
Nonperforming assets at period end |
|
$ |
2,551 |
|
|
$ |
1,997 |
|
|
$ |
1,464 |
|
|
$ |
1,239 |
|
|
$ |
1,210 |
|
Nonperforming assets to period-end portfolio
loans plus
OREO and other nonperforming assets |
|
|
3.58 |
% |
|
|
2.70 |
% |
|
|
1.91 |
% |
|
|
1.61 |
% |
|
|
1.59 |
% |
Allowance for loan losses |
|
$ |
2,499 |
|
|
$ |
2,186 |
|
|
$ |
1,803 |
|
|
$ |
1,554 |
|
|
$ |
1,421 |
|
Allowance for loan losses to period-end loans |
|
|
3.53 |
% |
|
|
2.97 |
% |
|
|
2.36 |
% |
|
|
2.03 |
% |
|
|
1.87 |
% |
Allowance for loan losses to nonperforming loans |
|
|
114.21 |
|
|
|
125.78 |
|
|
|
147.18 |
|
|
|
160.70 |
|
|
|
174.57 |
|
|
Watch and criticized assets. Watch assets are troubled commercial loans with the potential to
deteriorate in quality due to the clients current financial condition and possible inability to
perform in accordance with the terms of the underlying contract. Criticized assets are troubled
loans and other assets that show additional signs of weakness that may lead, or have led, to an
interruption in scheduled repayments from primary sources, potentially requiring Key to rely on
repayment from secondary sources, such as collateral liquidation.
At June 30, 2009, the levels of watch assets and criticized assets were higher than they were a
year earlier. Both watch and criticized levels increased in most of the commercial lines of
business. The most significant increase occurred in the Real Estate Capital and Corporate Banking
Services line of business, due principally to deteriorating market conditions in various segments
of Keys commercial real estate portfolio.
103
Allowance for loan losses. The allowance for loan losses at June 30, 2009, was $2.5 billion, or
3.53% of loans, compared to $1.4 billion, or 1.87%, at June 30, 2008. The allowance includes $393
million that was specifically allocated for impaired loans of $1.7 billion at June 30, 2009,
compared to $166 million that was allocated for impaired loans of $564 million one year ago. For
more information about impaired loans, see Note 9 (Nonperforming Assets and Past Due Loans) on
page 28. At June 30, 2009, the allowance for loan losses was 114.21% of nonperforming loans,
compared to 174.57% at June 30, 2008.
Management estimates the appropriate level of the allowance for loan losses on at least a quarterly
basis. The methodology used is described in Note 1 (Summary of Significant Accounting Policies)
under the heading Allowance for Loan Losses on page 79 of Keys 2008 Annual Report to
Shareholders. Briefly, management applies historical loss rates to existing loans with similar
risk characteristics and exercises judgment to assess the impact of factors such as changes in
economic conditions, changes in credit policies or underwriting standards, and changes in the level
of credit risk associated with specific industries and markets. If an impaired loan has an
outstanding balance greater than $2.5 million, management conducts further analysis to determine
the probable loss content, and assigns a specific allowance to the loan if deemed appropriate. A
specific allowance also may be assigned even when sources of repayment appear sufficient if
management remains uncertain about whether the loan will be repaid in full. The allowance for loan
losses at June 30, 2009, represents managements best estimate of the losses inherent in the loan
portfolio at that date.
As shown in Figure 31, Keys allowance for loan losses increased by $1.1 billion, or 76%, during
the past twelve months. This increase was attributable primarily to deteriorating conditions in
the commercial real estate portfolio, and in the commercial and financial portfolio within the Real
Estate Capital and Corporate Banking Services line of business. Deterioration in the marine
lending portfolio (which experienced a higher level of net charge-offs as repossessions continued
to rise) and in the education loan portfolio also contributed to the increase. Key has continued
to experience deterioration in the credit quality of those education loans that are not guaranteed
by the federal government. In 2008, management determined that Key will limit new education loans
to those backed by government guarantee, but continue to honor existing loan commitments.
Figure 31. Allocation of the Allowance for Loan Losses
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
December 31, 2008 |
|
|
June 30, 2008 |
|
|
|
|
|
|
Percent of |
|
|
Percent of |
|
|
|
|
|
|
Percent of |
|
|
Percent of |
|
|
|
|
|
|
Percent of |
|
|
Percent of |
|
|
|
|
|
|
|
Allowance to |
|
|
Loan Type to |
|
|
|
|
|
|
Allowance to |
|
|
Loan Type to |
|
|
|
|
|
|
Allowance to |
|
|
Loan Type to |
|
dollars in millions |
|
Amount |
|
|
Total Allowance |
|
|
Total Loans |
|
|
Amount |
|
|
Total Allowance |
|
|
Total Loans |
|
|
Amount |
|
|
Total Allowance |
|
|
Total Loans |
|
|
Commercial, financial and agricultural |
|
$ |
769 |
|
|
|
30.8 |
% |
|
|
33.3 |
% |
|
$ |
572 |
|
|
|
31.7 |
% |
|
|
35.6 |
% |
|
$ |
504 |
|
|
|
35.5 |
% |
|
|
34.2 |
% |
Real estate commercial mortgage |
|
|
465 |
|
|
|
18.6 |
|
|
|
16.6 |
|
|
|
228 |
|
|
|
12.6 |
|
|
|
14.2 |
|
|
|
244 |
|
|
|
17.2 |
|
|
|
14.2 |
|
Real estate construction |
|
|
456 |
|
|
|
18.3 |
|
|
|
8.6 |
|
|
|
346 |
|
|
|
19.2 |
|
|
|
10.1 |
|
|
|
264 |
|
|
|
18.6 |
|
|
|
10.3 |
|
Commercial lease financing |
|
|
192 |
|
|
|
7.7 |
|
|
|
11.7 |
|
|
|
148 |
|
|
|
8.3 |
|
|
|
11.8 |
|
|
|
137 |
|
|
|
9.6 |
|
|
|
12.7 |
|
|
Total commercial loans |
|
|
1,882 |
|
|
|
75.4 |
|
|
|
70.2 |
|
|
|
1,294 |
|
|
|
71.8 |
|
|
|
71.7 |
|
|
|
1,149 |
|
|
|
80.9 |
|
|
|
71.4 |
|
Real estate residential mortgage |
|
|
19 |
|
|
|
.8 |
|
|
|
2.5 |
|
|
|
7 |
|
|
|
.4 |
|
|
|
2.5 |
|
|
|
5 |
|
|
|
.3 |
|
|
|
2.5 |
|
Home equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community Banking |
|
|
118 |
|
|
|
4.7 |
|
|
|
14.5 |
|
|
|
61 |
|
|
|
3.4 |
|
|
|
13.2 |
|
|
|
40 |
|
|
|
2.8 |
|
|
|
13.0 |
|
National Banking |
|
|
91 |
|
|
|
3.6 |
|
|
|
1.3 |
|
|
|
69 |
|
|
|
3.8 |
|
|
|
1.4 |
|
|
|
25 |
|
|
|
1.8 |
|
|
|
1.5 |
|
|
Total home equity loans |
|
|
209 |
|
|
|
8.3 |
|
|
|
15.8 |
|
|
|
130 |
|
|
|
7.2 |
|
|
|
14.6 |
|
|
|
65 |
|
|
|
4.6 |
|
|
|
14.5 |
|
Consumer other Community Banking |
|
|
65 |
|
|
|
2.6 |
|
|
|
1.7 |
|
|
|
51 |
|
|
|
2.8 |
|
|
|
1.6 |
|
|
|
32 |
|
|
|
2.2 |
|
|
|
1.7 |
|
Consumer other National Banking: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
151 |
|
|
|
6.0 |
|
|
|
4.4 |
|
|
|
132 |
|
|
|
7.3 |
|
|
|
4.4 |
|
|
|
35 |
|
|
|
2.5 |
|
|
|
4.8 |
|
Education |
|
|
160 |
|
|
|
6.4 |
|
|
|
5.1 |
|
|
|
174 |
|
|
|
9.7 |
|
|
|
4.8 |
|
|
|
133 |
|
|
|
9.4 |
|
|
|
4.7 |
|
Other |
|
|
13 |
|
|
|
.5 |
|
|
|
.3 |
|
|
|
15 |
|
|
|
.8 |
|
|
|
.4 |
|
|
|
2 |
|
|
|
.1 |
|
|
|
.4 |
|
|
Total consumer other
National Banking |
|
|
324 |
|
|
|
12.9 |
|
|
|
9.8 |
|
|
|
321 |
|
|
|
17.8 |
|
|
|
9.6 |
|
|
|
170 |
|
|
|
12.0 |
|
|
|
9.9 |
|
|
Total consumer loans |
|
|
617 |
|
|
|
24.6 |
|
|
|
29.8 |
|
|
|
509 |
|
|
|
28.2 |
|
|
|
28.3 |
|
|
|
272 |
|
|
|
19.1 |
|
|
|
28.6 |
|
|
Total |
|
$ |
2,499 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
$ |
1,803 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
$ |
1,421 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
Keys provision for loan losses was $850 million for the second quarter of 2009, compared to
$647 million for the year-ago quarter. Credit migration, particularly in the commercial real
estate portfolio, continues to result in higher levels of net charge-offs and nonperforming loans,
and more reserve building. Keys provision for loan losses for the second quarter of 2009 exceeded
net loan charge-offs by $311 million. As previously reported, Key has undertaken a process to
reduce its exposure in the residential properties segment of its construction loan portfolio
through the sale of certain loans. In conjunction with these efforts, Key transferred $384 million
of commercial real estate loans ($719 million, net of $335 million in net charge-offs) from the
held-to-maturity loan portfolio to held-for-sale status in June 2008. Keys ability
104
to sell these loans has been hindered by continued disruption in the financial markets that has
precluded the ability of certain potential buyers to obtain the necessary funding. As shown in
Figure 32, the balance of this portfolio has been reduced to $65 million at June 30, primarily as a
result of cash proceeds from loan sales, transfers to OREO, and both realized and unrealized
losses. Key will continue to pursue the sale or foreclosure of the remaining loans, all of which
are on nonperforming status.
Figure 32. Loans Held for Sale Residential
Properties Segment of Construction Loan Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
in millions |
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Balance at beginning of period |
|
$ |
70 |
|
|
$ |
88 |
|
|
$ |
133 |
|
|
$ |
340 |
|
Cash proceeds from loan sales |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(10 |
) |
|
|
(135 |
) |
Loans transferred to OREO |
|
|
(1 |
) |
|
|
(12 |
) |
|
|
(14 |
) |
|
|
(35 |
) |
Realized and unrealized losses |
|
|
(3 |
) |
|
|
(5 |
) |
|
|
(14 |
) |
|
|
(31 |
) |
Payments |
|
|
|
|
|
|
|
|
|
|
(7 |
) |
|
|
(6 |
) |
|
Balance at end of period |
|
$ |
65 |
|
|
$ |
70 |
|
|
$ |
88 |
|
|
$ |
133 |
|
|
Net loan charge-offs. Net loan charge-offs for the second quarter of 2009 totaled $539
million, or 2.99%
of average loans. These results compare to net charge-offs of $524 million, or 2.75%, for the same
period last year. Figure 33 shows the trend in Keys net loan charge-offs by loan type, while the
composition of Keys loan charge-offs and recoveries by type of loan is presented in Figure 34.
As shown in Figure 33, net loan charge-offs for the second quarter of 2008 include the $335 million
of net charge-offs resulting from the actions being taken by Key to reduce its exposure in the
residential properties segment of the construction loan portfolio. Excluding these net
charge-offs, over the past twelve months, net charge-offs in the commercial loan portfolio rose by
$316 million, due primarily to commercial real estate related credits within the Real Estate
Capital and Corporate Banking Services line of business. On an adjusted basis, net charge-offs for
this line of business were up $233 million from the second quarter of 2008 and $56 million from the
first quarter of 2009. As shown in Figure 36 on page 108, Keys exit loan portfolio accounted for
$156 million, or 29%, of Keys total net loan charge-offs for the second quarter of 2009.
Figure 33. Net Loan Charge-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
dollars in millions |
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
|
Commercial, financial and agricultural
|
|
$ |
168 |
|
|
$ |
232 |
|
|
$ |
119 |
|
|
$ |
62 |
|
|
$ |
61 |
|
Real estate ___ commercial mortgage
|
|
|
87 |
|
|
|
21 |
|
|
|
43 |
|
|
|
20 |
|
|
|
15 |
|
Real estate ___ construction
|
|
|
133 |
|
|
|
104 |
|
|
|
49 |
|
|
|
79 |
|
|
|
339 |
(a) |
Commercial lease financing
|
|
|
22 |
|
|
|
18 |
|
|
|
21 |
|
|
|
19 |
|
|
|
14 |
|
|
Total commercial loans
|
|
|
410 |
|
|
|
375 |
|
|
|
232 |
|
|
|
180 |
|
|
|
429 |
|
Home equity Community Banking
|
|
|
24 |
|
|
|
17 |
|
|
|
14 |
|
|
|
9 |
|
|
|
9 |
|
Home equity National Banking
|
|
|
18 |
|
|
|
15 |
|
|
|
17 |
|
|
|
12 |
|
|
|
10 |
|
Marine
|
|
|
29 |
|
|
|
32 |
|
|
|
25 |
|
|
|
16 |
|
|
|
10 |
|
Education
|
|
|
37 |
|
|
|
32 |
|
|
|
33 |
|
|
|
40 |
|
|
|
54 |
|
Other
|
|
|
21 |
|
|
|
21 |
|
|
|
21 |
|
|
|
16 |
|
|
|
12 |
|
|
Total consumer loans
|
|
|
129 |
|
|
|
117 |
|
|
|
110 |
|
|
|
93 |
|
|
|
95 |
|
|
Total net loan charge-offs
|
|
$ |
539 |
|
|
$ |
492 |
|
|
$ |
342 |
|
|
$ |
273 |
|
|
$ |
524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan charge-offs to average loans
|
|
|
2.99 |
% |
|
|
2.65 |
% |
|
|
1.77 |
% |
|
|
1.43 |
% |
|
|
2.75 |
% |
|
|
|
|
(a) |
|
During the second quarter of 2008, Key transferred $384 million of commercial real estate
loans ($719 million of primarily construction loans, net of $335 million in net charge-offs)
from the loan portfolio to held-for-sale status. |
105
Figure 34. Summary of Loan Loss Experience
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
Six months ended June 30, |
dollars in millions |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Average loans outstanding |
|
$ |
72,381 |
|
|
$ |
76,652 |
|
|
$ |
73,847 |
|
|
$ |
74,670 |
|
|
|
Allowance for loan losses at beginning of period |
|
$ |
2,186 |
|
|
$ |
1,298 |
|
|
$ |
1,803 |
|
|
$ |
1,200 |
|
Loans charged off: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural |
|
|
182 |
|
|
|
75 |
|
|
|
426 |
|
|
|
125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate commercial mortgage |
|
|
87 |
|
|
|
15 |
|
|
|
109 |
|
|
|
19 |
|
Real estate construction |
|
|
135 |
|
|
|
340 |
|
|
|
239 |
|
|
|
365 |
|
|
Total commercial real estate loans (a) |
|
|
222 |
|
|
|
355 |
|
|
|
348 |
|
|
|
384 |
|
Commercial lease financing |
|
|
29 |
|
|
|
18 |
|
|
|
51 |
|
|
|
33 |
|
|
Total commercial loans |
|
|
433 |
|
|
|
448 |
|
|
|
825 |
|
|
|
542 |
|
Real estate residential mortgage |
|
|
4 |
|
|
|
2 |
|
|
|
7 |
|
|
|
6 |
|
Home equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community Banking |
|
|
25 |
|
|
|
9 |
|
|
|
43 |
|
|
|
18 |
|
National Banking |
|
|
19 |
|
|
|
11 |
|
|
|
34 |
|
|
|
18 |
|
|
Total home equity loans |
|
|
44 |
|
|
|
20 |
|
|
|
77 |
|
|
|
36 |
|
Consumer other Community Banking |
|
|
17 |
|
|
|
11 |
|
|
|
31 |
|
|
|
20 |
|
Consumer other National Banking: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
39 |
|
|
|
16 |
|
|
|
78 |
|
|
|
35 |
|
Education
(b) |
|
|
38 |
|
|
|
55 |
|
|
|
71 |
|
|
|
57 |
|
Other |
|
|
3 |
|
|
|
2 |
|
|
|
9 |
|
|
|
6 |
|
|
Total consumer other National Banking |
|
|
80 |
|
|
|
73 |
|
|
|
158 |
|
|
|
98 |
|
|
Total consumer loans |
|
|
145 |
|
|
|
106 |
|
|
|
273 |
|
|
|
160 |
|
|
Total loans charged off |
|
|
578 |
|
|
|
554 |
|
|
|
1,098 |
|
|
|
702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural |
|
|
14 |
|
|
|
14 |
|
|
|
26 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate commercial mortgage |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
Real estate construction |
|
|
2 |
|
|
|
1 |
|
|
|
2 |
|
|
|
1 |
|
|
Total commercial real estate loans |
|
|
2 |
|
|
|
1 |
|
|
|
3 |
|
|
|
1 |
|
Commercial lease financing |
|
|
7 |
|
|
|
4 |
|
|
|
11 |
|
|
|
10 |
|
|
Total commercial loans |
|
|
23 |
|
|
|
19 |
|
|
|
40 |
|
|
|
39 |
|
Real estate residential mortgage |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
Home equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community Banking |
|
|
1 |
|
|
|
|
|
|
|
2 |
|
|
|
1 |
|
National Banking |
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
Total home equity loans |
|
|
2 |
|
|
|
1 |
|
|
|
3 |
|
|
|
2 |
|
Consumer other Community Banking |
|
|
2 |
|
|
|
1 |
|
|
|
3 |
|
|
|
3 |
|
|
Consumer other National Banking: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
10 |
|
|
|
6 |
|
|
|
17 |
|
|
|
9 |
|
Education |
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
|
1 |
|
Other |
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
|
Total consumer other National Banking |
|
|
12 |
|
|
|
8 |
|
|
|
21 |
|
|
|
12 |
|
|
Total consumer loans |
|
|
16 |
|
|
|
11 |
|
|
|
27 |
|
|
|
18 |
|
|
Total recoveries |
|
|
39 |
|
|
|
30 |
|
|
|
67 |
|
|
|
57 |
|
|
Net loans charged off |
|
|
(539 |
) |
|
|
(524 |
) |
|
|
(1,031 |
) |
|
|
(645 |
) |
Provision for loan losses |
|
|
850 |
|
|
|
647 |
|
|
|
1,725 |
|
|
|
834 |
|
Allowance related to loans acquired, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32 |
|
Foreign currency translation adjustment |
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
Allowance for loan losses at end of period |
|
$ |
2,499 |
|
|
$ |
1,421 |
|
|
$ |
2,499 |
|
|
$ |
1,421 |
|
|
|
Net loan charge-offs to average loans |
|
|
2.99 |
% |
|
|
2.75 |
% |
|
|
2.81 |
% |
|
|
1.74 |
% |
Allowance for loan losses to period-end loans |
|
|
3.53 |
|
|
|
1.87 |
|
|
|
3.53 |
|
|
|
1.87 |
|
Allowance for loan losses to nonperforming loans |
|
|
114.21 |
|
|
|
174.57 |
|
|
|
114.21 |
|
|
|
174.57 |
|
|
|
|
|
(a) |
|
During the second quarter of 2008, Key transferred $384 million of commercial real
estate loans ($719 million of primarily construction loans, net of $335 million in net
charge-offs) from the loan portfolio to held-for-sale status. |
|
(b) |
|
On March 31, 2008, Key transferred $3.3 billion of education loans from loans held for sale
to the loan portfolio. |
Nonperforming assets. Figure 35 shows the composition of Keys nonperforming assets. These
assets totaled $2.6 billion at June 30, 2009, and represented 3.58% of portfolio loans, OREO and
other nonperforming assets, compared to $1.5 billion, or 1.91%, at December 31, 2008, and $1.2
billion, or 1.59%, at June 30, 2008.
As shown in Figure 35, all categories of nonperforming assets experienced increases during the
second quarter of 2009, compared to the prior quarter. Nonperforming loans in the commercial and
financial, and commercial real estate portfolios experienced the largest increases. The increase
in the commercial and financial portfolio reflects the impact of general weakness in the economic
environment and was principally attributable to loans in the Equipment Finance, Institutional and
Capital Markets, and Middle Market lines of business. The increase in the commercial real estate
portfolio was caused in part by the continuation of deteriorating market conditions in both the
residential properties and income properties segments. As shown in Figure 37, Keys exit loan
portfolio accounted for $559 million, or 22%, of Keys total nonperforming assets at June 30, 2009,
compared to $502 million, or 25%, at March 31, 2009.
106
At June 30, 2009, the carrying amount of Keys commercial nonperforming loans outstanding
represented 79% of their original face value, and total nonperforming loans outstanding represented
80% of their face
value. At the same date, OREO represented 45% of its original face value, while loans held for
sale and other nonperforming assets in the aggregate represented 64% of their face value.
At
June 30, 2009, Keys 20 largest nonperforming loans totaled $693 million, representing 32% of
total loans on nonperforming status. The level of Keys delinquent loans has risen as a result of
deterioration in various segments of Keys commercial real estate portfolio.
Management anticipates that Keys nonperforming loans will continue to increase in 2009 and that
net loan charge-offs will remain elevated. As a result, the allowance for loan losses may be
increased in future periods until credit trends level off.
Figure 35. Summary of Nonperforming Assets and Past Due Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
March 31, |
|
|
December 31, |
|
|
September 30, |
|
June 30, |
|
dollars in millions |
|
2009 |
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
2008 |
|
|
Commercial, financial and agricultural |
|
$ |
700 |
|
|
$ |
595 |
|
|
$ |
415 |
|
|
$ |
309 |
|
|
$ |
259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate commercial mortgage |
|
|
454 |
|
|
|
310 |
|
|
|
128 |
|
|
|
119 |
|
|
|
107 |
|
Real estate construction |
|
|
716 |
|
|
|
546 |
|
|
|
436 |
|
|
|
334 |
|
|
|
256 |
|
|
Total commercial real estate loans |
|
|
1,170 |
|
|
|
856 |
|
|
|
564 |
|
|
|
453 |
|
|
|
363 |
(a) |
Commercial lease financing |
|
|
122 |
|
|
|
109 |
|
|
|
81 |
|
|
|
55 |
|
|
|
57 |
|
|
Total commercial loans |
|
|
1,992 |
|
|
|
1,560 |
|
|
|
1,060 |
|
|
|
817 |
|
|
|
679 |
|
Real estate residential mortgage |
|
|
46 |
|
|
|
39 |
|
|
|
39 |
|
|
|
35 |
|
|
|
32 |
|
Home equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community Banking |
|
|
101 |
|
|
|
91 |
|
|
|
76 |
|
|
|
70 |
|
|
|
61 |
|
National Banking |
|
|
20 |
|
|
|
19 |
|
|
|
15 |
|
|
|
16 |
|
|
|
14 |
|
|
Total home equity loans |
|
|
121 |
|
|
|
110 |
|
|
|
91 |
|
|
|
86 |
|
|
|
75 |
|
Consumer other Community Banking |
|
|
5 |
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
|
|
2 |
|
Consumer other National Banking: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
19 |
|
|
|
21 |
|
|
|
26 |
|
|
|
22 |
|
|
|
20 |
|
Education |
|
|
3 |
|
|
|
3 |
|
|
|
4 |
|
|
|
3 |
|
|
|
4 |
|
Other |
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
1 |
|
|
|
2 |
|
|
Total consumer other National Banking |
|
|
24 |
|
|
|
26 |
|
|
|
32 |
|
|
|
26 |
|
|
|
26 |
|
|
Total consumer loans |
|
|
196 |
|
|
|
178 |
|
|
|
165 |
|
|
|
150 |
|
|
|
135 |
|
|
Total nonperforming loans |
|
|
2,188 |
|
|
|
1,738 |
|
|
|
1,225 |
|
|
|
967 |
|
|
|
814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans held for sale |
|
|
145 |
|
|
|
72 |
|
|
|
90 |
|
|
|
169 |
|
|
|
342 |
(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OREO |
|
|
182 |
|
|
|
147 |
|
|
|
110 |
|
|
|
64 |
|
|
|
26 |
|
Allowance for OREO losses |
|
|
(11 |
) |
|
|
(4 |
) |
|
|
(3 |
) |
|
|
(4 |
) |
|
|
(2 |
) |
|
OREO, net of allowance |
|
|
171 |
|
|
|
143 |
|
|
|
107 |
|
|
|
60 |
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
nonperforming assets
(b) |
|
|
47 |
|
|
|
44 |
|
|
|
42 |
|
|
|
43 |
|
|
|
30 |
|
|
Total nonperforming assets |
|
$ |
2,551 |
|
|
$ |
1,997 |
|
|
$ |
1,464 |
|
|
$ |
1,239 |
|
|
$ |
1,210 |
|
|
Accruing loans past due 90 days or more |
|
$ |
581 |
|
|
$ |
458 |
|
|
$ |
433 |
|
|
$ |
328 |
|
|
$ |
367 |
|
Accruing loans past due 30 through 89 days |
|
|
1,169 |
|
|
|
1,407 |
|
|
|
1,314 |
|
|
|
937 |
|
|
|
852 |
|
|
Nonperforming loans to year-end portfolio loans |
|
|
3.09 |
% |
|
|
2.36 |
% |
|
|
1.60 |
% |
|
|
1.26 |
% |
|
|
1.07 |
% |
Nonperforming assets to year-end portfolio loans
plus OREO and other nonperforming assets |
|
|
3.58 |
|
|
|
2.70 |
|
|
|
1.91 |
|
|
|
1.61 |
|
|
|
1.59 |
|
|
|
|
|
(a) |
|
During the second quarter of 2008, Key transferred $384 million of commercial real estate
loans ($719 million of primarily construction loans, net of $335 million in net charge-offs)
from the loan portfolio to held-for-sale status. |
|
(b) |
|
Primarily investments held by the Private Equity unit within Keys Real Estate Capital and
Corporate Banking Services line of business. |
The composition of Keys exit loan portfolio at June 30, 2009, and March 31, 2009, the net
charge-offs recorded on this portfolio for the second quarter of 2009 and the first quarter of
2009, and the nonperforming status of these loans at June 30, 2009, and March 31, 2009, are shown
in Figure 36. At June 30, 2009, the exit loan portfolio represented 12% of Keys total loans and
loans held for sale.
107
Figure 36. Exit Loan Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance on |
|
|
|
Balance |
|
|
Change |
|
|
Net Loan |
|
|
Nonperforming |
|
|
|
Outstanding |
|
6-30-09 vs. |
|
|
Charge-offs |
|
Status |
in millions |
|
6-30-09 |
|
|
3-31-09 |
|
|
3-31-09 |
|
|
2Q09 |
|
|
1Q09 |
|
|
6-30-09 |
|
|
3-31-09 |
|
|
Residential properties homebuilder |
|
$ |
614 |
|
|
$ |
766 |
|
|
$ |
(152 |
) |
|
$ |
62 |
|
|
$ |
44 |
|
|
$ |
298 |
|
|
$ |
306 |
|
Residential properties held for sale |
|
|
65 |
|
|
|
70 |
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
65 |
|
|
|
70 |
|
|
Total residential properties |
|
|
679 |
|
|
|
836 |
|
|
|
(157 |
) |
|
|
62 |
|
|
|
44 |
|
|
|
363 |
|
|
|
376 |
|
Marine and RV floor plan |
|
|
696 |
|
|
|
817 |
|
|
|
(121 |
) |
|
|
8 |
|
|
|
11 |
|
|
|
149 |
|
|
|
80 |
|
|
Total commercial loans |
|
|
1,375 |
|
|
|
1,653 |
|
|
|
(278 |
) |
|
|
70 |
|
|
|
55 |
|
|
|
512 |
|
|
|
456 |
|
Private education |
|
|
2,847 |
|
|
|
2,897 |
|
|
|
(50 |
) |
|
|
37 |
|
|
|
32 |
|
|
|
2 |
|
|
|
|
|
Home equity National Banking |
|
|
934 |
|
|
|
998 |
|
|
|
(64 |
) |
|
|
18 |
|
|
|
15 |
|
|
|
20 |
|
|
|
19 |
|
Marine |
|
|
3,095 |
|
|
|
3,256 |
|
|
|
(161 |
) |
|
|
29 |
|
|
|
32 |
|
|
|
19 |
|
|
|
21 |
|
RV and other consumer |
|
|
245 |
|
|
|
262 |
|
|
|
(17 |
) |
|
|
2 |
|
|
|
5 |
|
|
|
6 |
|
|
|
6 |
|
|
Total consumer loans |
|
|
7,121 |
|
|
|
7,413 |
|
|
|
(292 |
) |
|
|
86 |
|
|
|
84 |
|
|
|
47 |
|
|
|
46 |
|
|
Total loans in exit portfolio |
|
$ |
8,496 |
|
|
$ |
9,066 |
|
|
$ |
(570 |
) |
|
$ |
156 |
|
|
$ |
139 |
|
|
$ |
559 |
|
|
$ |
502 |
|
|
Figure 37 shows credit exposure by industry classification in the largest sector of Keys loan
portfolio, commercial, financial and agricultural loans. Since December 31, 2008, total
commitments and loans outstanding in this sector have declined by $6.7 billion and $3.7 billion,
respectively. The types of activity that caused the change in Keys nonperforming loans during
each of the last five quarters are summarized in Figure 38.
Figure 37. Commercial, Financial and Agricultural Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming Loans |
June 30, 2009 |
|
Total |
|
|
Loans |
|
|
|
|
|
|
Percent of Loans |
|
dollars in millions |
|
Commitments (a) |
|
|
Outstanding |
|
|
Amount |
|
|
Outstanding |
|
|
Industry classification: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services |
|
$ |
11,187 |
|
|
$ |
4,526 |
|
|
$ |
117 |
|
|
|
2.6 |
% |
Manufacturing |
|
|
8,614 |
|
|
|
3,472 |
|
|
|
86 |
|
|
|
2.5 |
|
Public utilities |
|
|
4,794 |
|
|
|
1,277 |
|
|
|
1 |
|
|
|
.1 |
|
Financial services |
|
|
3,918 |
|
|
|
2,110 |
|
|
|
43 |
|
|
|
2.0 |
|
Wholesale trade |
|
|
3,433 |
|
|
|
1,355 |
|
|
|
10 |
|
|
|
.7 |
|
Dealer floor plan |
|
|
2,467 |
|
|
|
1,623 |
|
|
|
159 |
|
|
|
9.8 |
|
Retail trade |
|
|
2,319 |
|
|
|
960 |
|
|
|
28 |
|
|
|
2.9 |
|
Property management |
|
|
2,301 |
|
|
|
1,260 |
|
|
|
89 |
|
|
|
7.1 |
|
Building contractors |
|
|
1,769 |
|
|
|
808 |
|
|
|
56 |
|
|
|
6.9 |
|
Transportation |
|
|
1,674 |
|
|
|
1,192 |
|
|
|
73 |
|
|
|
6.1 |
|
Insurance |
|
|
1,611 |
|
|
|
275 |
|
|
|
6 |
|
|
|
2.2 |
|
Mining |
|
|
1,211 |
|
|
|
611 |
|
|
|
19 |
|
|
|
3.1 |
|
Public administration |
|
|
906 |
|
|
|
333 |
|
|
|
|
|
|
|
|
|
Agriculture/forestry/fishing |
|
|
893 |
|
|
|
531 |
|
|
|
13 |
|
|
|
2.4 |
|
Communications |
|
|
699 |
|
|
|
289 |
|
|
|
|
|
|
|
|
|
Individuals |
|
|
13 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
Other |
|
|
3,123 |
|
|
|
2,913 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
50,932 |
|
|
$ |
23,542 |
|
|
$ |
700 |
|
|
|
3.0 |
% |
|
|
|
|
(a) |
|
Total commitments include unfunded loan commitments, unfunded letters of credit (net of
amounts conveyed to others) and loans outstanding. |
108
Figure 38. Summary of Changes in Nonperforming Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
in millions |
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
|
Balance at beginning of period |
|
$ |
1,738 |
|
|
$ |
1,225 |
|
|
$ |
967 |
|
|
$ |
814 |
|
|
$ |
1,054 |
|
Loans placed on nonaccrual status |
|
|
1,218 |
|
|
|
1,175 |
|
|
|
734 |
|
|
|
530 |
|
|
|
789 |
|
Charge-offs |
|
|
(578 |
) |
|
|
(520 |
) |
|
|
(369 |
) |
|
|
(300 |
) |
|
|
(547 |
) |
Loans sold |
|
|
(12 |
) |
|
|
(15 |
) |
|
|
(5 |
) |
|
|
(1 |
) |
|
|
(48 |
) |
Payments |
|
|
(110 |
) |
|
|
(80 |
) |
|
|
(77 |
) |
|
|
(43 |
) |
|
|
(86 |
) |
Transfers to OREO |
|
|
(30 |
) |
|
|
(34 |
) |
|
|
(22 |
) |
|
|
|
|
|
|
|
|
Transfers to
nonperforming loans held for sale |
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
(30 |
) |
|
|
(342 |
) (a) |
Loans returned to accrual status |
|
|
(8 |
) |
|
|
(13 |
) |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
(6 |
) |
|
Balance at end of period |
|
$ |
2,188 |
|
|
$ |
1,738 |
|
|
$ |
1,225 |
|
|
$ |
967 |
|
|
$ |
814 |
|
|
|
|
|
(a) |
|
During the second quarter of 2008, Key transferred $384 million of commercial real
estate loans ($719 million of primarily construction loans, net of $335 million in net
charge-offs) from the loan portfolio to held-for-sale status. |
Operational risk management
Key, like all businesses, is subject to operational risk, which is the risk of loss resulting from
human error, inadequate or failed internal processes and systems, and external events. Operational
risk also encompasses compliance (legal) risk, which is the risk of loss from violations of, or
noncompliance with, laws, rules, regulations, prescribed practices or ethical standards. Resulting
losses could take the form of explicit charges, increased operational costs, harm to Keys
reputation or forgone opportunities. Key seeks to mitigate operational risk through a system of
internal controls.
Management continuously strives to strengthen Keys system of internal controls to ensure
compliance with laws, rules and regulations, and to improve the oversight of Keys operational
risk. For example, a loss-event database tracks the amounts and sources of operational losses.
This tracking mechanism helps to identify weaknesses and to highlight the need to take corrective
action. Management also relies upon sophisticated software programs designed to assist in
monitoring Keys control processes. This technology has enhanced the reporting of the
effectiveness of Keys controls to senior management and the Board of Directors.
Primary responsibility for managing and monitoring internal control mechanisms lies with the
managers of Keys various lines of business. Keys Risk Review function periodically assesses the
overall effectiveness of Keys system of internal controls. Risk Review reports the results of
reviews on internal controls and systems to senior management and the Audit Committee, and
independently supports the Audit Committees oversight of these controls. A senior management
committee, known as the Operational Risk Committee, oversees Keys level of operational risk, and
directs and supports Keys operational infrastructure and related activities.
|
|
|
Item 3. |
|
Quantitative and Qualitative Disclosure about Market Risk |
The information presented in the Market risk management section, which begins on page 94 of
the Managements Discussion & Analysis of Financial Condition & Results of Operations, is
incorporated herein by reference.
109
|
|
|
Item 4. |
|
Controls and Procedures |
As of the end of the period covered by this report, KeyCorp carried out an evaluation, under
the supervision and with the participation of KeyCorps management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and operation of KeyCorps
disclosure controls and procedures. Based upon that evaluation, KeyCorps Chief Executive Officer
and Chief Financial Officer concluded that the design and operation of these disclosure controls
and procedures were effective, in all material respects, as of the end of the period covered by
this report, in ensuring that information required to be disclosed in the reports that we file or
submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange Commissions rules
and forms and is accumulated and communicated to management, including our Chief Executive Officer
and our Chief Financial Officer, as appropriate to allow timely decisions regarding required
disclosure. No changes were made to KeyCorps internal control over financial reporting (as
defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the last fiscal quarter
that materially affected, or are reasonably likely to materially affect, KeyCorps internal control
over financial reporting.
PART II. OTHER INFORMATION
|
|
|
Item 1. |
|
Legal Proceedings |
The information presented in the Legal Proceedings section of Note 14 (Contingent Liabilities
and Guarantees), which begins on page 33 of the Notes to Consolidated Financial Statements, is
incorporated herein by reference.
An investment in KeyCorp common shares is subject to risks inherent to KeyCorp and its
subsidiaries (Keys) business, its industry and ownership of its equity securities. Before
making an investment decision, you should carefully consider the risks and uncertainties described
below relating to recent developments and the risk factors included in Keys Annual Report on Form
10-K for the year ended December 31, 2008, and its Quarterly Report on Form 10-Q for the period
ended March 31, 2009, together with all of the other information included or incorporated by
reference in this report. The risks and uncertainties that management has identified below are
material. Although Key has significant risk management policies, procedures and verification
processes in place, additional risks and uncertainties that management is not aware of, or focused
on, or that management currently deems immaterial may also impair its business operations. This
report is qualified in its entirety by these risk factors. This report also contains
forward-looking statements that involve risks and uncertainties.
IF ANY OF THE FOLLOWING RISK FACTORS ACTUALLY OCCUR, KEYS BUSINESS, FINANCIAL CONDITION, RESULTS
OF OPERATIONS, AND/OR ACCESS TO LIQUIDITY AND/OR CREDIT COULD BE MATERIALLY AND ADVERSELY AFFECTED
(MATERIAL ADVERSE EFFECT ON KEY). IF THIS WERE TO HAPPEN, THE VALUE OF KEYCORPS SECURITIES
COMMON SHARES, NONCUMULATIVE PERPETUAL CONVERTIBLE PREFERRED STOCK, SERIES A (SERIES A PREFERRED
STOCK), FIXED-RATE CUMULATIVE PERPETUAL PREFERRED STOCK, SERIES B (SERIES B PREFERRED STOCK) AND
KEYCORPS CAPITAL SECURITIES COULD DECLINE, PERHAPS SIGNIFICANTLY, AND YOU COULD LOSE ALL OR PART
OF YOUR INVESTMENT.
Risks Associated with Recent Developments
The United States Department of the Treasury (the U.S. Treasury) may require Key to raise
additional capital that would likely be dilutive to its common shares.
In Keys Annual Report on Form 10-K for the fiscal year ended December 31, 2008, it reported that
under the U.S. Treasurys Capital Assessment Program (CAP) Key was required to participate in the
110
Supervisory Capital Assessment Program (SCAP) to determine whether it would be required to raise
additional capital. As announced on May 7, 2009, under the SCAP assessment, Key is required to
increase the amount of its Tier 1 common equity by $1.8 billion within six months. As of July 6,
2009, Key believes that it has generated in excess of the $1.8 billion required by the SCAP
results. Although Key believes that it has now fulfilled the requirement to generate $1.8 billion
of additional Tier 1 common equity pursuant to the SCAP, there can be no assurance that its
regulators, including the U.S. Treasury and the Board of Governors of the Federal Reserve (Federal
Reserve), will not conduct additional stress test capital assessments, such as the SCAP, and/or
require Key to generate additional capital, including Tier 1 common equity, in the future in light
of changing economic circumstances. Any additional capital Key generates in the future, whether
through exchange offers, underwritten offerings of common shares, or other public or private
transactions, or through the conversion of KeyCorp Series B Preferred Stock issued under the
Capital Purchase Program (CPP) to mandatory convertible preferred shares under the CAP and the
issuance of warrants to the U.S. Treasury, would likely be dilutive to common shareholders and may
reduce the market price of KeyCorp common shares.
If so required by its regulators to raise additional capital, Key may not be able to raise private
(i.e., nongovernmental) capital in the amount required or at all, in which event Key may be
required to raise additional capital through the U.S. Treasurys CAP.
There can be no assurance that private capital will be available to Key on acceptable terms or at
all, or that sufficient holders of our Series A Preferred Stock, capital securities or other debt
securities will be willing to exchange such securities for KeyCorp common shares. If Key is unable
to raise such amount of additional capital required to be raised through private capital
transactions, Key may be required to obtain capital from the U.S. Treasury by converting KeyCorp
Series B Preferred Stock issued under the CPP to mandatory convertible preferred shares under the
CAP. To view the standard CAP term sheet, including a summary of the terms of the securities that
the U.S. Treasury receives in connection with any CAP issuance, see
www.financialstability.gov.
The issuance of mandatory convertible preferred shares under the CAP would likely impose additional
conditions and limitations related to executive compensation and corporate governance upon Key as
well as new public reporting obligations. Many of Keys competitors would not be subject to these
restrictions and would therefore gain a competitive advantage.
Furthermore, the CAP mandatory convertible preferred shares would accrue cumulative dividends at a
rate of 9% per annum until their mandatory conversion to common shares after seven years or prior
redemption. This would represent an increase in dividend payments over the current CPP rate of 5%
per annum (for the first five years), which could adversely impact Keys liquidity, limit its
ability to return capital to shareholders and have a material adverse effect on it.
Converting a large amount of KeyCorp Series B Preferred Stock issued under the CPP to mandatory
convertible preferred shares issued under the CAP could result in the U.S. Treasury becoming a
significant shareholder of Key. Even if the U.S. Treasury does not control a majority of voting
power, it may be able to exert significant influence on matters submitted to shareholders for
approval, including the election of directors and certain transactions. The U.S. Treasury may also
transfer all, or a portion, of its shares to another person or entity and, in the event of such a
transfer, that person or entity could become a significant shareholder of Key. In addition, any
issuance of a large amount of common equity or equity convertible
into common equity to a private investor
or group of investors may pose similar risks.
Having a significant shareholder may make some future transactions more difficult or perhaps
impossible to complete without the support of such shareholder. The interests of the significant
shareholder may not coincide with Keys interests or the interests of other shareholders. There
can be no assurance that any significant shareholder will exercise its influence in Keys best
interests as opposed to its best interests as a significant shareholder. A significant shareholder
may make it difficult to approve certain transactions even if they are supported by the other
shareholders, which may have an adverse effect on the market price of KeyCorp common shares.
111
Should Key decide to increase further its Tier 1 common equity, future issuances of common shares
will result in significant dilution to holders of KeyCorp common shares.
Although not currently contemplated, Key may elect in the future to increase further its Tier 1
common equity by exchanging (with the approval of the U.S. Treasury) a number of shares of the
Series B Preferred Stock Key issued to the U.S. Treasury under the CPP for shares of mandatory
convertible preferred stock issued under the CAP, or for common shares or another common equivalent
security that the U.S. Treasury otherwise agrees to purchase, directly or indirectly. Such an
exchange could also involve the issuance of a warrant to the U.S. Treasury to purchase additional
common shares as contemplated by the published terms of the CAP. In addition, in connection with
purchasing the Series B Preferred Stock, pursuant to a Letter Agreement dated November 14, 2008,
and the Securities Purchase AgreementStandard Terms attached thereto, the U.S. Treasury received a
warrant to purchase 35,244,361 KeyCorp common shares at an initial per share exercise price of
$10.64, subject to adjustment, which expires ten years from the issuance date, and KeyCorp has
agreed to provide the U.S. Treasury with registration rights covering the warrant and the
underlying common shares. Even if KeyCorp were to redeem the Series B Preferred Stock there is no
assurance that this warrant will be fully retired, and therefore that it will not be exercised,
prior to its expiration date. The issuance of additional common shares or common equivalent
securities in future equity offerings to the U.S. Treasury under the SCAP or otherwise, or as a
result of the exercise of the warrant the U.S. Treasury holds, will dilute the ownership interest of
KeyCorps existing common shareholders.
In addition, the terms of the warrant KeyCorp issued to the U.S. Treasury under the CPP provides
that, if KeyCorp issues common shares or securities convertible or exercisable into, or
exchangeable for, common shares at a price that is less than 90% of the market price of such shares
on the last trading day preceding the date of the agreement to sell such shares, the number and the
per share price of common shares to be purchased pursuant to the warrant will be adjusted pursuant
to its terms. KeyCorp may also choose to issue securities convertible into or exercisable for its
common shares and such securities may themselves contain anti-dilution provisions. Such
anti-dilution adjustment provisions may have a further dilutive effect on other holders of KeyCorp
common shares.
There can be no assurances that KeyCorp will not in the future determine that it is advisable, or
that KeyCorp will not encounter circumstances where it determines that it is necessary, to issue
additional common shares, securities convertible into or exchangeable for common shares or
common-equivalent securities to fund strategic initiatives or other business needs or to build
additional capital. The market price of KeyCorp common shares could decline as a result of such
exchange offerings, as well as other sales of a large block of KeyCorp common shares or similar
securities in the market thereafter, or the perception that such sales could occur.
KeyCorp may not be permitted to repurchase the U.S. Treasurys Troubled Asset Relief Program
(TARP) CPP investment if and when it requests approval to do so.
Although KeyCorp believes that it has generated in excess of the $1.8 billion in additional Tier 1
common equity required by the SCAP, it has not currently requested the approval of the U.S.
Treasury to repurchase the Series B Preferred Stock and warrant issued to the U.S. Treasury under
the TARP CPP. In order to repurchase one or both of such securities, in whole or in part, KeyCorp
must establish that it has satisfied all of the conditions to repurchase and must obtain the
approval of the U.S. Treasury. There can be no assurance that KeyCorp will be able to repurchase
the U.S. Treasurys TARP investment.
You may not receive dividends on the common shares.
Holders of KeyCorp common shares are only entitled to receive such dividends as the Board of
Directors may declare out of funds legally available for such payments. Furthermore, KeyCorps
common shareholders are subject to the prior dividend rights of any holders of its preferred stock
or depositary
112
shares representing such preferred stock then outstanding. As of July 6, 2009, there were
2,904,839 shares of KeyCorps Series A Preferred Stock with a liquidation preference of $100 per
share issued and outstanding and 25,000 shares of the Series B Preferred Stock, with a liquidation
preference of $100,000 per share, issued and outstanding.
In July 2009, KeyCorp reduced its quarterly dividend on its common shares to $0.01 per share and
does not expect to increase the quarterly dividend above $0.01 for the foreseeable future. KeyCorp
could determine to eliminate its common shares dividend altogether. Furthermore, as long as the
Series A Preferred Stock and the Series B Preferred Stock are outstanding, dividend payments and
repurchases or redemptions relating to certain equity securities, including its common shares, are
prohibited until all accrued and unpaid dividends are paid on such preferred stock, subject to
certain limited exceptions. In addition, prior to November 14, 2011, unless KeyCorp has redeemed
all of its Series B Preferred Stock or the U.S. Treasury has transferred all of the Series B
Preferred Stock to third parties, the consent of the U.S. Treasury will be required for KeyCorp to,
among other things, increase its common shares dividend above $.1875 except in limited
circumstances. This could adversely affect the market price of its common shares. Also, KeyCorp
is a bank holding company and its ability to declare and pay dividends is dependent on certain
federal regulatory considerations, including the guidelines of the Federal Reserve regarding
capital adequacy and dividends.
In addition, terms of Keys outstanding junior subordinated debt securities prohibit it from
declaring or paying any dividends or distributions on its capital stock, including its common
shares, or purchasing, acquiring, or making a liquidation payment on such stock, if an event of
default has occurred and is continuing under the applicable indenture, if Key is in default with
respect to a guarantee payment under the guarantee of the related capital securities or if Key has
given notice of its election to defer interest payments but the related deferral period has not yet
commenced or a deferral period is continuing.
The credit ratings of KeyCorp and KeyBank are important in order to maintain liquidity.
Although Keys long-term debt is currently rated investment-grade by the major rating agencies, the
ratings of Keys long-term debt (including capital securities) have been downgraded and/or put on
negative watch by those major rating agencies. These rating agencies regularly evaluate the
securities of KeyCorp and KeyBank, and their ratings of our long-term debt and other securities are
based on a number of factors, including Keys financial strength, ability to generate earnings, and
other factors, some of which are not entirely within Keys control, such as conditions affecting
the financial services industry and the economy. In light of the difficulties in the financial
services industry, the financial markets and the economy, there can be no assurance that Key will
maintain its current ratings.
If the securities of KeyCorp and/or KeyBank suffer additional ratings downgrades, such downgrades
could adversely affect access to liquidity and could significantly increase Keys cost of funds,
trigger additional collateral or funding requirements, and decrease the number of investors and
counterparties willing to lend to Key, thereby curtailing its business operations and reducing its
ability to generate income. Further downgrades of the credit ratings of Keys securities,
particularly if they are below investment-grade, could have a Material Adverse Effect
on Key.
113
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Item 4. |
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Submission of Matters to a Vote of Security Holders |
Institutional Exchange Offer Consent Solicitation
In connection with the Institutional Exchange Offer, Key successfully solicited consents, upon the
terms and conditions in the Institutional Exchange Offer and Solicitation Statement and its related
Letter of Transmittal and Consent, from holders of the floating rate capital securities issued by
KeyCorp Capital Trust I and the 6 7/8% capital securities issued by KeyCorp Capital Trust II to a
proposed amendment of the respective amended and restated trust agreements governing KeyCorp
Capital Trust I and KeyCorp Capital Trust II. The respective amendments approved by the holders of
KeyCorp Capital Trust I and KeyCorp Capital Trust II provide KeyCorp the right to reduce the size
of each such KeyCorp Capital Trust by exchanging the securities of KeyCorp Capital Trust I or
KeyCorp Capital Trust II, as applicable, owned by KeyCorp or its affiliates for a like amount of
junior subordinated debentures of KeyCorp that were deposited with the relevant KeyCorp Capital
Trust (the Amendment).
Holders who validly tendered their KeyCorp Capital Trust I or KeyCorp Capital Trust II securities,
by the terms of the consent solicitation, were deemed to have validly delivered their consent to
the proposed amendment by virtue of such tender. The Letter of Transmittal and Consent also
provided that holders could consent (but not tender) by returning the Letter of Transmittal.
Pursuant to the Letter of Transmittal, holders that did not wish to consent or tender their
securities did not need to take any action.
Regarding KeyCorp Capital Trust I, the Amendment was adopted; 103,450,000 votes were cast in favor
of the Amendment. Regarding KeyCorp Capital Trust II, the Amendment was adopted; 90,309,000 votes
were cast in favor of the Amendment. The consent solicitation provided that the holders may cast a
vote for, and that tendering holders were deemed to consent if they were holders on the record.
Key paid holders of KeyCorp Capital Trust I and KeyCorp Capital Trust II who validly consented a
consent fee of 0.25% of the liquidation preference amount of their holdings for their consent.
KeyCorp paid the consenting holders of KeyCorp Capital Trust I and KeyCorp Capital Trust II a
consent solicitation fee of $99,250 and $189,273, respectively.
Annual Meeting Results
At KeyCorps 2009 Annual Meeting of Shareholders held on May 21, 2009, the shareholders of
KeyCorps common shares: (i) elected four directors to serve for one-year terms expiring in 2010,
(ii) amended the Articles of Incorporation to require majority voting in uncontested director
elections, (iii) ratified the appointment by the Audit Committee of the Board of Directors of
Ernst & Young LLP as independent auditors of KeyCorp for the year ending December 31, 2009, and
(iv) provided advisory approval of KeyCorps executive compensation program. Director
nominees for terms expiring in 2010 were: William G. Bares, Carol A. Cartwright, Kristen L. Manos
and Thomas C. Stevens. Directors whose terms in office as directors continued after the Annual
Meeting of Shareholders were: Edward P. Campbell, Alexander M. Cutler, H. James Dallas, Lauralee
E. Martin, Eduardo R. Menascé, Henry L. Meyer III, Bill R. Sanford and
Peter G. Ten Eyck, II.
A proposed amendment to the Articles of Incorporation and Code of Regulations to conform the voting
rights of the Series B Preferred Stock issued to the U.S. Treasury with the standard terms mandated
by the U.S. Treasury under the TARP CPP was also presented to the holders of KeyCorps common
shares, Series A Preferred Stock, and Series B Preferred Stock at the Annual Meeting of
Shareholders (the Proposed Amendment to the Articles of Incorporation and Code of Regulations
concerning the voting rights of Series B Preferred Stock). Pursuant to the Articles of
Incorporation, (i) the affirmative vote of the holders of the common shares entitling them to
exercise a majority of the voting power of such shares, (ii) the affirmative vote of the holders of
the Series A Preferred Stock of KeyCorp entitling them to exercise two-thirds of the voting power
of such shares, and (iii) the affirmative vote of the holders of the Series B Preferred Stock
entitling them to exercise two-thirds of the voting power of such shares, is necessary to adopt the
Proposed Amendment to the Articles of Incorporation and Code of Regulations concerning the voting
rights of Series B Preferred Stock.
114
KeyCorps holders of its common shares and Series B Preferred Stock approved the Proposed Articles
Amendment, but the holders of its Series A Preferred Stock did not. The Proposed Amendment did not
receive the required vote by the Series A Preferred Stock and therefore it failed.
The vote on each issue was as follows:
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For |
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Against |
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Abstain |
Election of Directors |
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William G. Bares |
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380,095,760 |
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* |
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44,588,500 |
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Carol A. Cartwright |
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401,993,460 |
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* |
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22,690,800 |
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Kristen L. Manos |
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407,303,240 |
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* |
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17,381,020 |
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Thomas C. Stevens |
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402,599,188 |
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* |
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22,085,141 |
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Amendment to the Articles
of Incorporation to
Require Majority
Voting in Uncontested
Director Elections |
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396,020,558 |
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26,243,449 |
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2,420,252 |
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Ratification of the
Appointment of Ernst &
Young LLP as Independent
Auditors of KeyCorp for
Fiscal Year 2009 |
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411,406,276 |
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11,529,193 |
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1,748,790 |
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Advisory Approval of
KeyCorps Executive
Compensation Program |
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370,386,921 |
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42,843,407 |
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11,453,931 |
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Proposed Amendment
to the Articles of
Incorporation and Code of
Regulations
Concerning the Voting
Rights of Series B
Preferred Stock |
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Common Shares |
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349,751,102 |
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10,127,486 |
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4,932,878 |
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Series A Preferred Stock |
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2,699,135 |
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8,845 |
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30,893 |
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Series B Preferred Stock |
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25,000 |
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* |
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Proxies provide that shareholders may either cast a vote for, or abstain from voting for,
directors. |
15 |
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Acknowledgment of Independent Registered Public Accounting Firm. |
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31.1 |
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Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
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31.2 |
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Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
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32.1 |
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Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
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32.2 |
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Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. |
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101* |
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The following materials from KeyCorps Quarterly Report on Form 10-Q for the quarter ended
June 30, 2009, formatted in XBRL (Extensible Business Reporting Language): (i) the
Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the
Consolidated Statements of Changes in Equity, (iv) the Consolidated Statements of Cash Flows
and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text. |
Information Available on Website
KeyCorp makes available free of charge on its website, www.key.com , its annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these
reports as soon as reasonably practicable after KeyCorp electronically files such material with, or
furnishes it to, the Securities and Exchange Commission.
115
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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KEYCORP
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(Registrant)
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Date: August 10, 2009 |
By: |
/s/ Robert L. Morris
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Robert L. Morris |
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Executive Vice President and
Chief Accounting Officer |
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116