KeyCorp 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 September 30, 2006
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 is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer 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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401,580,774 Shares |
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(Title of class)
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(Outstanding at October 31, 2006) |
KEYCORP
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
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September 30, |
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December 31, |
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September 30, |
|
dollars in millions |
|
2006 |
|
|
2005 |
|
|
2005 |
|
|
|
(Unaudited) |
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|
|
|
|
(Unaudited) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
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|
Cash and due from banks |
|
$ |
2,957 |
|
|
$ |
3,108 |
|
|
$ |
2,660 |
|
Short-term investments |
|
|
1,582 |
|
|
|
1,592 |
|
|
|
2,394 |
|
Securities available for sale |
|
|
7,441 |
|
|
|
7,269 |
|
|
|
7,124 |
|
Investment securities (fair value: $42, $92 and $99) |
|
|
41 |
|
|
|
91 |
|
|
|
98 |
|
Other investments |
|
|
1,367 |
|
|
|
1,332 |
|
|
|
1,310 |
|
Loans, net of unearned income of $2,075, $2,153 and $2,188 |
|
|
65,551 |
|
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|
66,478 |
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|
|
65,575 |
|
Less: Allowance for loan losses |
|
|
944 |
|
|
|
966 |
|
|
|
1,093 |
|
|
Net loans |
|
|
64,607 |
|
|
|
65,512 |
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|
|
64,482 |
|
Loans held for sale |
|
|
7,150 |
|
|
|
3,381 |
|
|
|
3,595 |
|
Premises and equipment |
|
|
567 |
|
|
|
575 |
|
|
|
593 |
|
Goodwill |
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|
1,372 |
|
|
|
1,355 |
|
|
|
1,344 |
|
Other intangible assets |
|
|
127 |
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|
|
125 |
|
|
|
109 |
|
Corporate-owned life insurance |
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|
2,754 |
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|
2,690 |
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|
2,658 |
|
Derivative assets |
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|
915 |
|
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|
1,039 |
|
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|
1,132 |
|
Accrued income and other assets |
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|
5,275 |
|
|
|
5,057 |
|
|
|
4,824 |
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|
Total assets |
|
$ |
96,155 |
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|
$ |
93,126 |
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|
$ |
92,323 |
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|
|
|
|
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|
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|
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LIABILITIES |
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Deposits in domestic offices: |
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NOW and money market deposit accounts |
|
$ |
25,150 |
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$ |
24,241 |
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|
$ |
23,541 |
|
Savings deposits |
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|
1,672 |
|
|
|
1,840 |
|
|
|
1,922 |
|
Certificates of deposit ($100,000 or more) |
|
|
5,734 |
|
|
|
5,156 |
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|
4,783 |
|
Other time deposits |
|
|
11,848 |
|
|
|
11,170 |
|
|
|
10,804 |
|
|
Total interest-bearing |
|
|
44,404 |
|
|
|
42,407 |
|
|
|
41,050 |
|
Noninterest-bearing |
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|
13,396 |
|
|
|
13,335 |
|
|
|
12,202 |
|
Deposits in foreign office interest-bearing |
|
|
3,629 |
|
|
|
3,023 |
|
|
|
4,819 |
|
|
Total deposits |
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|
61,429 |
|
|
|
58,765 |
|
|
|
58,071 |
|
Federal funds purchased and securities sold under repurchase agreements |
|
|
4,701 |
|
|
|
4,835 |
|
|
|
3,444 |
|
Bank notes and other short-term borrowings |
|
|
2,594 |
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|
1,780 |
|
|
|
3,001 |
|
Derivative liabilities |
|
|
844 |
|
|
|
1,060 |
|
|
|
1,075 |
|
Accrued expense and other liabilities |
|
|
4,986 |
|
|
|
5,149 |
|
|
|
5,173 |
|
Long-term debt |
|
|
13,654 |
|
|
|
13,939 |
|
|
|
14,037 |
|
|
Total liabilities |
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|
88,208 |
|
|
|
85,528 |
|
|
|
84,801 |
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|
SHAREHOLDERS EQUITY |
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Preferred stock, $1 par value; authorized 25,000,000 shares, none issued |
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Common shares, $1 par value; authorized 1,400,000,000 shares;
issued 491,888,780 shares |
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|
492 |
|
|
|
492 |
|
|
|
492 |
|
Capital surplus |
|
|
1,588 |
|
|
|
1,534 |
|
|
|
1,517 |
|
Retained earnings |
|
|
8,371 |
|
|
|
7,882 |
|
|
|
7,719 |
|
Treasury stock, at cost (89,140,338, 85,265,173 and 83,346,435 shares) |
|
|
(2,434 |
) |
|
|
(2,204 |
) |
|
|
(2,133 |
) |
Accumulated other comprehensive loss |
|
|
(70 |
) |
|
|
(106 |
) |
|
|
(73 |
) |
|
Total shareholders equity |
|
|
7,947 |
|
|
|
7,598 |
|
|
|
7,522 |
|
|
Total liabilities and shareholders equity |
|
$ |
96,155 |
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|
$ |
93,126 |
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|
$ |
92,323 |
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|
|
|
|
|
|
|
|
|
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|
See Notes to Consolidated Financial Statements (Unaudited).
3
Consolidated Statements of Income (Unaudited)
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Three months ended |
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Nine months ended |
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September 30, |
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|
September 30, |
|
dollars in millions, except per share amounts |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
INTEREST INCOME |
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|
|
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|
|
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|
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|
Loans |
|
$ |
1,196 |
|
|
$ |
1,006 |
|
|
$ |
3,500 |
|
|
$ |
2,837 |
|
Loans held for sale |
|
|
131 |
|
|
|
56 |
|
|
|
272 |
|
|
|
190 |
|
Investment securities |
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
|
3 |
|
Securities available for sale |
|
|
84 |
|
|
|
84 |
|
|
|
251 |
|
|
|
244 |
|
Short-term investments |
|
|
16 |
|
|
|
15 |
|
|
|
54 |
|
|
|
37 |
|
Other investments |
|
|
16 |
|
|
|
12 |
|
|
|
58 |
|
|
|
44 |
|
|
Total interest income |
|
|
1,444 |
|
|
|
1,174 |
|
|
|
4,137 |
|
|
|
3,355 |
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|
INTEREST EXPENSE |
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|
|
|
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|
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|
|
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|
|
|
|
|
|
Deposits |
|
|
443 |
|
|
|
273 |
|
|
|
1,178 |
|
|
|
717 |
|
Federal funds purchased and securities sold under repurchase agreements |
|
|
45 |
|
|
|
31 |
|
|
|
113 |
|
|
|
81 |
|
Bank notes and other short-term borrowings |
|
|
24 |
|
|
|
22 |
|
|
|
75 |
|
|
|
58 |
|
Long-term debt |
|
|
202 |
|
|
|
155 |
|
|
|
583 |
|
|
|
427 |
|
|
Total interest expense |
|
|
714 |
|
|
|
481 |
|
|
|
1,949 |
|
|
|
1,283 |
|
|
NET INTEREST INCOME |
|
|
730 |
|
|
|
693 |
|
|
|
2,188 |
|
|
|
2,072 |
|
Provision for loan losses |
|
|
31 |
|
|
|
43 |
|
|
|
94 |
|
|
|
107 |
|
|
Net interest income after provision for loan losses |
|
|
699 |
|
|
|
650 |
|
|
|
2,094 |
|
|
|
1,965 |
|
|
NONINTEREST INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust and investment services income |
|
|
137 |
|
|
|
135 |
|
|
|
411 |
|
|
|
408 |
|
Service charges on deposit accounts |
|
|
78 |
|
|
|
82 |
|
|
|
227 |
|
|
|
228 |
|
Investment banking and capital markets income |
|
|
44 |
|
|
|
62 |
|
|
|
163 |
|
|
|
168 |
|
Operating lease income |
|
|
58 |
|
|
|
47 |
|
|
|
166 |
|
|
|
141 |
|
Letter of credit and loan fees |
|
|
48 |
|
|
|
46 |
|
|
|
133 |
|
|
|
133 |
|
Corporate-owned life insurance income |
|
|
23 |
|
|
|
26 |
|
|
|
74 |
|
|
|
78 |
|
Electronic banking fees |
|
|
27 |
|
|
|
24 |
|
|
|
78 |
|
|
|
70 |
|
Net gains from loan securitizations and sales |
|
|
14 |
|
|
|
12 |
|
|
|
34 |
|
|
|
41 |
|
Net securities gains (losses) |
|
|
(7 |
) |
|
|
3 |
|
|
|
(2 |
) |
|
|
(2 |
) |
Other income |
|
|
121 |
|
|
|
94 |
|
|
|
287 |
|
|
|
252 |
|
|
Total noninterest income |
|
|
543 |
|
|
|
531 |
|
|
|
1,571 |
|
|
|
1,517 |
|
|
NONINTEREST EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel |
|
|
422 |
|
|
|
414 |
|
|
|
1,258 |
|
|
|
1,190 |
|
Net occupancy |
|
|
63 |
|
|
|
66 |
|
|
|
187 |
|
|
|
212 |
|
Computer processing |
|
|
52 |
|
|
|
54 |
|
|
|
157 |
|
|
|
155 |
|
Operating lease expense |
|
|
48 |
|
|
|
40 |
|
|
|
134 |
|
|
|
118 |
|
Professional fees |
|
|
29 |
|
|
|
29 |
|
|
|
102 |
|
|
|
87 |
|
Marketing |
|
|
37 |
|
|
|
29 |
|
|
|
83 |
|
|
|
88 |
|
Equipment |
|
|
26 |
|
|
|
28 |
|
|
|
78 |
|
|
|
84 |
|
Other expense |
|
|
131 |
|
|
|
121 |
|
|
|
395 |
|
|
|
369 |
|
|
Total noninterest expense |
|
|
808 |
|
|
|
781 |
|
|
|
2,394 |
|
|
|
2,303 |
|
|
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT
OF ACCOUNTING CHANGE |
|
|
434 |
|
|
|
400 |
|
|
|
1,271 |
|
|
|
1,179 |
|
Income taxes |
|
|
122 |
|
|
|
122 |
|
|
|
367 |
|
|
|
346 |
|
|
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE |
|
|
312 |
|
|
|
278 |
|
|
|
904 |
|
|
|
833 |
|
Cumulative effect of accounting change, net of tax (see Note 1) |
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
NET INCOME |
|
$ |
312 |
|
|
$ |
278 |
|
|
$ |
909 |
|
|
$ |
833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of accounting change |
|
$ |
.77 |
|
|
$ |
.68 |
|
|
$ |
2.23 |
|
|
$ |
2.04 |
|
Net income |
|
|
.77 |
|
|
|
.68 |
|
|
|
2.24 |
|
|
|
2.04 |
|
Income before cumulative effect of accounting
change assuming dilution |
|
|
.76 |
|
|
|
.67 |
|
|
|
2.20 |
|
|
|
2.01 |
|
Net income assuming dilution |
|
|
.76 |
|
|
|
.67 |
|
|
|
2.21 |
|
|
|
2.01 |
|
Cash dividends declared |
|
|
.345 |
|
|
|
.325 |
|
|
|
1.035 |
|
|
|
.975 |
|
Weighted-average common shares outstanding (000) |
|
|
403,780 |
|
|
|
410,456 |
|
|
|
405,218 |
|
|
|
409,166 |
|
Weighted-average common shares and potential common
shares outstanding (000) |
|
|
409,428 |
|
|
|
415,441 |
|
|
|
411,029 |
|
|
|
414,510 |
|
|
See Notes to Consolidated Financial Statements (Unaudited).
4
Consolidated Statements of Changes in Shareholders Equity (Unaudited)
|
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|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury |
|
|
Other |
|
|
|
|
|
|
Common Shares |
|
|
Common |
|
|
Capital |
|
|
Retained |
|
|
Stock, |
|
|
Comprehensive |
|
|
Comprehensive |
|
dollars in millions, except per share amounts |
|
Oustanding (000) |
|
|
Shares |
|
|
Surplus |
|
|
Earnings |
|
|
at Cost |
|
|
Loss |
|
|
Income |
|
|
BALANCE AT DECEMBER 31, 2004 |
|
|
407,570 |
|
|
$ |
492 |
|
|
$ |
1,491 |
|
|
$ |
7,284 |
|
|
$ |
(2,128 |
) |
|
$ |
(22 |
) |
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
833 |
|
|
|
|
|
|
|
|
|
|
$ |
833 |
|
Other comprehensive income (losses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized losses on securities available
for sale, net of income taxes of ($21)a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36 |
) |
|
|
(36 |
) |
Net unrealized gains on derivative financial instruments,
net of income taxes of $4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
8 |
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22 |
) |
|
|
(22 |
) |
Minimum pension liability adjustment,
net of income taxes of ($1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation |
|
|
|
|
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared on common shares ($.975 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(398 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares and stock options granted under
employee benefit and dividend reinvestment plans |
|
|
4,722 |
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
119 |
|
|
|
|
|
|
|
|
|
Repurchase of common shares |
|
|
(3,750 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(124 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT SEPTEMBER 30, 2005 |
|
|
408,542 |
|
|
$ |
492 |
|
|
$ |
1,517 |
|
|
$ |
7,719 |
|
|
$ |
(2,133 |
) |
|
$ |
(73 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT DECEMBER 31, 2005 |
|
|
406,624 |
|
|
$ |
492 |
|
|
$ |
1,534 |
|
|
$ |
7,882 |
|
|
$ |
(2,204 |
) |
|
$ |
(106 |
) |
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
909 |
|
|
|
|
|
|
|
|
|
|
$ |
909 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains on securities available
for sale, net of income taxes of $5a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
6 |
|
Net unrealized gains on derivative financial instruments,
net of income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
1 |
|
Net unrealized losses on common investment funds held in
employee welfare benefits trust, net of income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation |
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared on common shares ($1.035 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(420 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares and stock options granted under
employee benefit and dividend reinvestment plans |
|
|
8,624 |
|
|
|
|
|
|
|
33 |
|
|
|
|
|
|
|
227 |
|
|
|
|
|
|
|
|
|
Repurchase of common shares |
|
|
(12,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(457 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT SEPTEMBER 30, 2006 |
|
|
402,748 |
|
|
$ |
492 |
|
|
$ |
1,588 |
|
|
$ |
8,371 |
|
|
$ |
(2,434 |
) |
|
$ |
(70 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Net of reclassification adjustments.
See Notes to Consolidated Financial Statements (Unaudited).
5
Consolidated Statements of Cash Flow (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended September 30, |
in millions |
|
2006 |
|
|
2005 |
|
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net income |
|
$ |
909 |
|
|
$ |
833 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
94 |
|
|
|
107 |
|
Depreciation and amortization expense |
|
|
292 |
|
|
|
265 |
|
Net securities losses |
|
|
2 |
|
|
|
2 |
|
Net gains from principal investing |
|
|
(48 |
) |
|
|
(40 |
) |
Net gains from loan securitizations and sales |
|
|
(34 |
) |
|
|
(41 |
) |
Deferred income taxes |
|
|
(230 |
) |
|
|
137 |
|
Net (increase) decrease in loans held for sale |
|
|
(1,295 |
) |
|
|
758 |
|
Net (increase) decrease in trading account assets |
|
|
33 |
|
|
|
(255 |
) |
Other operating activities, net |
|
|
(232 |
) |
|
|
(306 |
) |
|
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES |
|
|
(509 |
) |
|
|
1,460 |
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Cash used in acquisitions, net of cash acquired |
|
|
(34 |
) |
|
|
(32 |
) |
Net increase in other short-term investments |
|
|
(23 |
) |
|
|
(667 |
) |
Purchases of securities available for sale |
|
|
(2,730 |
) |
|
|
(2,623 |
) |
Proceeds from sales of securities available for sale |
|
|
154 |
|
|
|
128 |
|
Proceeds from prepayments and maturities of securities available for sale |
|
|
2,421 |
|
|
|
2,707 |
|
Purchases of investment securities |
|
|
(2 |
) |
|
|
|
|
Proceeds from prepayments and maturities of investment securities |
|
|
53 |
|
|
|
17 |
|
Purchases of other investments |
|
|
(401 |
) |
|
|
(326 |
) |
Proceeds from sales of other investments |
|
|
189 |
|
|
|
226 |
|
Proceeds from prepayments and maturities of other investments |
|
|
209 |
|
|
|
199 |
|
Net increase in loans, excluding acquisitions, sales and transfer |
|
|
(1,990 |
) |
|
|
(2,492 |
) |
Purchases of loans |
|
|
(64 |
) |
|
|
(19 |
) |
Proceeds from loan securitizations and sales |
|
|
298 |
|
|
|
154 |
|
Purchases of premises and equipment |
|
|
(68 |
) |
|
|
(67 |
) |
Proceeds from sales of premises and equipment |
|
|
4 |
|
|
|
8 |
|
Proceeds from sales of other real estate owned |
|
|
20 |
|
|
|
58 |
|
|
NET CASH USED IN INVESTING ACTIVITIES |
|
|
(1,964 |
) |
|
|
(2,729 |
) |
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Net increase in deposits |
|
|
2,674 |
|
|
|
244 |
|
Net increase in short-term borrowings |
|
|
680 |
|
|
|
1,785 |
|
Net proceeds from issuance of long-term debt |
|
|
1,609 |
|
|
|
2,504 |
|
Payments on long-term debt |
|
|
(1,997 |
) |
|
|
(2,633 |
) |
Purchases of treasury shares |
|
|
(457 |
) |
|
|
(124 |
) |
Net proceeds from issuance of common stock |
|
|
207 |
|
|
|
97 |
|
Tax benefits in excess of recognized compensation cost for stock-based awards |
|
|
26 |
|
|
|
|
|
Cash dividends paid |
|
|
(420 |
) |
|
|
(398 |
) |
|
NET CASH PROVIDED BY FINANCING ACTIVITIES |
|
|
2,322 |
|
|
|
1,475 |
|
|
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS |
|
|
(151 |
) |
|
|
206 |
|
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD |
|
|
3,108 |
|
|
|
2,454 |
|
|
CASH AND DUE FROM BANKS AT END OF PERIOD |
|
$ |
2,957 |
|
|
$ |
2,660 |
|
|
|
|
|
|
|
|
|
|
Additional disclosures relative to cash flow: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
2,042 |
|
|
$ |
1,266 |
|
Income taxes paid |
|
|
328 |
|
|
|
193 |
|
Noncash items: |
|
|
|
|
|
|
|
|
Loans transferred from portfolio to held for sale |
|
$ |
2,474 |
|
|
|
|
|
Loans transferred to other real estate owned |
|
|
52 |
|
|
$ |
40 |
|
Assets acquired |
|
|
|
|
|
|
15 |
|
Liabilities assumed |
|
|
|
|
|
|
7 |
|
|
See Notes to Consolidated Financial Statements (Unaudited).
6
Notes to Consolidated Financial Statements
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 company and Key refers to the
consolidated entity consisting of KeyCorp and subsidiaries.
Key consolidates any voting rights entity in which it 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.
Key uses the equity method to account for unconsolidated investments in voting rights entities or
VIEs in which it has significant influence over operating and financing decisions (usually defined
as a voting or economic interest of 20% to 50%, but not a controlling interest). 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 broker/dealer and
investment company subsidiaries (primarily principal investments) are carried at estimated 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. Information on SFAS No. 140 is included in Note 1 (Summary of Significant
Accounting Policies) of Keys 2005 Annual Report to Shareholders under the heading Loan
Securitizations on page 59.
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 results
have been reclassified to conform to current reporting practices. During the first quarter of
2006, Key reclassified certain loans from the commercial lease financing portfolio to the
commercial, financial and agricultural portfolio to more accurately reflect the nature of these
receivables. Prior period balances were not reclassified as the historical data was not available.
The reclassification did not have any effect on Keys total loans or net income.
The results of operations for the interim periods are not necessarily indicative of the results of
operations to be expected for the full year. When you read these financial statements, you should
also look at the audited consolidated financial statements and related notes included in Keys 2005
Annual Report to Shareholders.
Stock-Based Compensation
Prior to January 1, 2006, Key used the fair value method of accounting as outlined in SFAS No. 123,
Accounting for Stock-Based Compensation. Key had voluntarily adopted this method of accounting
effective January 1, 2003, and opted to apply the new rules prospectively to all awards using one
of three alternative methods of transition permitted under SFAS No. 148, Accounting for
Stock-Based Compensation Transition and Disclosure.
Effective January 1, 2006, Key adopted SFAS No. 123R, Share-Based Payment, which replaces SFAS
No. 123. SFAS No. 123R requires stock-based compensation to be measured using the fair value
method of accounting and for the measured cost to be recognized over the period during which the
recipient is required to provide service in exchange for the award. As of the effective date, Key
did not have any
7
nonvested awards outstanding that had not been previously accounted for using the fair value
method. Consequently, the adoption of SFAS No. 123R did not have a significant impact on Keys
financial condition or results of operations. The adoption of the new accounting standard did,
however, result in a cumulative after-tax adjustment as discussed below.
SFAS No. 123R changes the manner of accounting for forfeited stock-based awards. Under the new
standard, companies are no longer permitted to account for forfeitures as they occur. Companies,
such as Key, that have been expensing stock-based awards and using this alternative method of
accounting for forfeitures must now estimate expected forfeitures at the date the awards are
granted and record compensation expense only for those that are expected to vest. As of the
effective date, companies must estimate the forfeitures they expect to occur and reduce their
related compensation obligation for expense previously recognized in the financial statements. The
after-tax amount of this reduction must also be presented on the income statement as a cumulative
effect of a change in accounting principle. Keys cumulative after-tax adjustment increased first
quarter 2006 earnings by $5 million, or $.01 per diluted common share.
Mandatory deferred incentive compensation awards vest at the rate of 33-1/3% per year. Prior to
the adoption of SFAS No. 123R, Key recognized total compensation cost for its stock-based,
mandatory deferred incentive compensation awards in the plan year that the performance-related
services necessary to earn the awards were rendered. Effective January 1, 2006, Key is recognizing
compensation cost for these awards using the accelerated method of amortization over a period of
approximately four years (the current year performance period and the three-year vesting period,
which starts generally in the first quarter following the performance period). The impact of this
change on Keys earnings was not material.
Also, prior to the adoption of SFAS No. 123R, Key presented all tax benefits of deductions
resulting from the exercise of stock options or the issuance of shares under other stock-based
compensation programs as operating cash flows in the statement of cash flows. SFAS No. 123R
requires the cash flows resulting from the tax benefits of deductions in excess of the compensation
cost recognized for stock-based awards to be classified as financing cash flows.
Generally, employee stock options granted by Key become exercisable at the rate of 33-1/3% per year
beginning one year from their grant date and expire no later than ten years from their grant date.
Key recognizes stock-based compensation expense for stock options with graded vesting using an
accelerated method of amortization.
Key uses shares repurchased from time to time in accordance with its authorized repurchase program
(treasury shares) for share issuances under stock-based compensation programs, other than the
discounted stock purchase plan. Shares issued under this plan are purchased on the open market.
Accounting Pronouncements Adopted in 2006
Consolidation of limited partnerships. In June 2005, the FASB ratified Emerging Issues Task Force
Issue No. 04-5, Determining Whether a General Partner, or the General Partners of a Group,
Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights.
Issue No. 04-5 was initially effective for all limited partnerships created or modified after June
29, 2005, and became effective for all other limited partnerships on January 1, 2006. Adoption of
this guidance did not have a material effect on Keys financial condition or results of operations.
Accounting changes and error corrections. In May 2005, the FASB issued SFAS No. 154, Accounting
Changes and Error Corrections, which addresses the accounting for and reporting of accounting
changes and error corrections. This guidance requires retrospective application for the reporting
of voluntary changes in accounting principles and changes required by an accounting pronouncement
when transition provisions are not specified. SFAS No. 154 was effective for accounting changes
and corrections of errors made after December 31, 2005. Adoption of this guidance did not have a
material effect on Keys financial condition or results of operations.
8
Stock-based compensation. As discussed under the heading Stock-Based Compensation on page 7,
effective January 1, 2006, Key adopted SFAS No. 123R, which replaced SFAS No. 123. This new
accounting standard changes the way in which stock-based compensation must be measured and
recognized in the financial statements, and the manner in which forfeited stock-based awards must
be accounted for. It also requires additional disclosures pertaining to stock-based compensation
plans. The required disclosures for Key are presented under the heading referred to above and in
Note 10 (Stock-Based Compensation), which begins on page 23.
Accounting Pronouncements Pending Adoption
Employers accounting for defined benefit pension and other postretirement plans. In September
2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans, which requires an employer to recognize an asset or liability for the
overfunded or underfunded status, respectively, of its defined benefit plans. The overfunded or
underfunded status is to be measured solely as the difference between the fair value of plan assets
and the projected benefit obligation. In addition, any change in a plans funded status must be
recognized in comprehensive income in the year in which it occurs. Most requirements of SFAS No.
158 will be effective for fiscal years ending after December 15, 2006 (effective December 31, 2006,
for Key). However, the requirement to measure plan assets and liabilities as of the end of an
employers fiscal year will not be effective until fiscal years ending after December 15, 2008
(effective December 31, 2008, for Key). Management estimates
that Key will record an after-tax charge
of approximately $145 million to the accumulated other comprehensive loss
component of shareholders equity as a result of adopting this guidance for the year ending
December 31, 2006. For more
information about Keys defined benefit plans, see Note 16 (Employee
Benefits), which begins on page 78 of Keys 2005 Annual Report to
Shareholders.
Fair value measurements. In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements, which defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. SFAS No. 157 provides guidance on how to
measure fair value when it is permitted or required under other accounting pronouncements. As
such, this guidance does not expand the use of fair value measurements. SFAS No. 157 will be
effective for fiscal years beginning after November 15, 2007 (effective January 1, 2008, for Key).
Management is currently evaluating the potential effect this guidance may have on Keys financial
condition or results of operations.
Accounting for uncertain tax positions. In July 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, which clarifies the application of SFAS No. 109,
Accounting for Income Taxes, by defining the minimum threshold that a tax position must meet
before any associated benefit may be recognized in a companys financial statements. This
interpretation also provides guidance on measurement and derecognition of tax benefits, and
requires expanded disclosures. The interpretation will be effective for fiscal years beginning
after December 15, 2006 (effective January 1, 2007, for Key). Management is currently evaluating
the potential effect this guidance may have on Keys financial condition or results of operations.
Additional information relating to this interpretation is included in Note 12 (Income Taxes),
which begins on page 27.
Accounting for leveraged leases. In July 2006, the FASB issued 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, which provides additional guidance on the application
of SFAS No. 13, Accounting for Leases. This guidance will affect when earnings from leveraged
lease transactions would be recognized when there are changes or projected changes in the timing of
cash flows, including changes due to or expected to be due to settlements of tax matters.
Previously, leveraged lease transactions were required to be recalculated only when a change in the
total cash flows occurred. This guidance will be effective for fiscal years beginning after
December 15, 2006 (effective January 1, 2007, for Key). Management currently estimates that the
adoption of this guidance will result in a cumulative after-tax charge to Keys retained earnings
in the range of $50 million to $65 million. However, future earnings are expected to increase over
the remaining term of the affected leases by a similar amount.
Accounting for servicing of financial assets. In March 2006, the FASB issued SFAS No. 156,
Accounting for Servicing of Financial Assets, which requires that servicing assets and
liabilities be initially measured at fair value, if practicable. SFAS No. 156 also requires the
subsequent remeasurement
9
of servicing assets and liabilities at each reporting date using one of two methods: amortization
over the servicing period or measurement at fair value. This guidance will be effective for fiscal
years beginning after September 15, 2006 (effective January 1, 2007, for Key). Adoption of this
guidance is not expected to have a material effect on Keys financial condition or results of
operations.
Accounting for certain hybrid financial instruments. In February 2006, the FASB issued SFAS No.
155, Accounting for Certain Hybrid Financial Instruments. A hybrid financial instrument is one
where a derivative is embedded in another financial instrument. SFAS No. 155 will permit fair
value remeasurement for any hybrid financial instrument that contains an embedded derivative that
otherwise would require bifurcation. This guidance will also eliminate the prohibition on a
qualifying SPE from holding certain derivative financial instruments. SFAS No. 155 will be
effective for all financial instruments acquired or issued in fiscal years beginning after
September 15, 2006 (effective January 1, 2007, for Key). Adoption of this guidance is not expected
to have a material effect on Keys financial condition or results of operations.
2. Earnings Per Common Share
Key calculates its basic and diluted earnings per common share as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended September 30, |
|
Nine
months ended September 30, |
dollars in millions, except per share amounts |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
EARNINGS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of accounting change |
|
$ |
312 |
|
|
$ |
278 |
|
|
$ |
904 |
|
|
$ |
833 |
|
Net income |
|
|
312 |
|
|
|
278 |
|
|
|
909 |
|
|
|
833 |
|
|
WEIGHTED-AVERAGE COMMON SHARES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding (000) |
|
|
403,780 |
|
|
|
410,456 |
|
|
|
405,218 |
|
|
|
409,166 |
|
Effect of dilutive common stock options and other stock awards (000) |
|
|
5,648 |
|
|
|
4,985 |
|
|
|
5,811 |
|
|
|
5,344 |
|
|
Weighted-average common shares and potential
common shares outstanding (000) |
|
|
409,428 |
|
|
|
415,441 |
|
|
|
411,029 |
|
|
|
414,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER COMMON SHARE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share before cumulative effect of accounting change |
|
$ |
.77 |
|
|
$ |
.68 |
|
|
$ |
2.23 |
|
|
$ |
2.04 |
|
Net income per common share |
|
|
.77 |
|
|
|
.68 |
|
|
|
2.24 |
|
|
|
2.04 |
|
Income per common share before cumulative effect of accounting change
assuming dilution |
|
|
.76 |
|
|
|
.67 |
|
|
|
2.20 |
|
|
|
2.01 |
|
Net income per common share assuming dilution |
|
|
.76 |
|
|
|
.67 |
|
|
|
2.21 |
|
|
|
2.01 |
|
|
3. Acquisitions and Divestitures
Acquisitions completed and divestitures announced by Key during 2005 and the first nine months
of 2006 are summarized below. In the case of each acquisition or divestiture, the terms of the
transaction either were not or are not expected to be material.
Acquisitions
Austin Capital Management, Ltd.
On April 1, 2006, Key acquired Austin Capital Management, Ltd., an investment firm headquartered in
Austin, Texas with approximately $900 million in assets under management at the date of
acquisition.
ORIX Capital Markets, LLC
On December 8, 2005, Key acquired the commercial mortgage-backed securities servicing business of
ORIX Capital Markets, LLC, headquartered in Dallas, Texas. ORIX had a servicing portfolio of
approximately $27 billion at the date of acquisition.
Malone Mortgage Company
On July 1, 2005, Key acquired Malone Mortgage Company, a mortgage company headquartered in Dallas,
Texas that serviced approximately $1.3 billion in loans at the date of acquisition.
10
Divestitures Pending as of September 30, 2006
McDonald Investments branch network
On September 6, 2006, Key announced that it has agreed to sell its McDonald Investments branch
network, which includes approximately 340 financial advisors in addition to field support staff and
certain fixed assets, to UBS Financial Services Inc., a subsidiary of UBS AG. Key will retain its
Private Banking, Wealth Management and Trust businesses. Key will also retain its Investment
Services business, which offers products such as mutual funds and annuities through its KeyCenters.
The sale is expected to be completed in the first quarter of 2007.
Champion Mortgage
On August 1, 2006, Key announced that it is considering the sale of its Champion Mortgage finance
business. Key has hired UBS Investment Bank to assist the Board of Directors and management with a
possible sale of this business. There is no assurance that Key will enter into an agreement
regarding, or consummate the sale of, this business.
11
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, brokerage, 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, investments and employee benefit programs, succession
planning, capital markets, derivatives and foreign exchange.
National Banking
Real Estate Capital provides construction and interim lending, permanent debt placements and
servicing, and equity and investment banking services to developers, brokers and owner-investors.
This line of business deals exclusively with nonowner-occupied properties (i.e., generally
properties in which the owner occupies less than 60% of the premises).
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 provides products and services to large corporations,
middle-market companies, financial institutions, government entities and not-for-profit
organizations. These products and services include commercial lending, treasury management,
investment banking, derivatives and foreign exchange, equity and debt underwriting and trading, and
syndicated finance.
Through its Victory Capital Management unit, Institutional and Capital Markets also manages or
gives 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 includes Indirect Lending, Commercial Floor Plan Lending and National Home Equity.
Indirect Lending offers loans to consumers through dealers. This business unit also provides
federal and private education loans to students and their parents and processes payments on loans
that private schools make to parents.
Commercial Floor Plan Lending finances inventory for automobile and marine dealers.
National Home Equity provides both prime and nonprime mortgage and home equity loan products to
individuals. This business unit also works with home improvement contractors to provide home
equity and home improvement financing solutions.
Other Segments
Other Segments consist of Corporate Treasury and Keys Principal Investing unit.
12
Reconciling Items
Total assets included under Reconciling Items represent primarily 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 are not reflective of their normal operations.
The table that spans pages 14 and 15 shows selected financial data for each major business group
for the three- and nine-month periods ended September 30, 2006 and 2005. This table is accompanied
by supplementary information for each of the lines of business that comprise these groups. The
information was derived from the internal financial reporting system that management uses to
monitor and manage Keys financial performance. U.S. generally accepted accounting principles
(GAAP) guide financial accounting, but there is no authoritative guidance for management
accountingthe 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.
According to our policies:
w |
|
Net interest income is determined by assigning a standard cost for
funds used to assets or a standard credit for funds provided to
liabilities 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. |
|
w |
|
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. |
|
w |
|
Keys consolidated provision for loan losses is allocated among
the lines of business based primarily on their actual net
charge-offs, adjusted periodically for loan growth and changes in
risk profile. The level 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 59 of Keys
2005 Annual Report to Shareholders. |
|
w |
|
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%. |
|
w |
|
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.
Effective January 1, 2006, Key reorganized and renamed its major business groups and some of its
lines of business. The Community Banking group now includes Key businesses which operate primarily
within our KeyCenter (branch) network. This groups activities are conducted through two primary
lines of business: Regional Banking (including McDonald Financial Group) and Commercial Banking.
Keys other major business group, National Banking, includes those corporate and consumer business
units that operate both within and outside of the branch network to serve customers across the
country and internationally through four primary lines of business: Real Estate Capital, Equipment
Finance, Institutional and Capital Markets, and Consumer Finance. These changes are reflected in the
financial data reported for all periods presented in the line of business tables.
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
Community Banking |
|
|
National Banking |
|
|
Other Segments |
|
dollars in millions |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
SUMMARY OF OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (TE) |
|
$ |
443 |
|
|
$ |
432 |
|
|
$ |
375 |
|
|
$ |
348 |
|
|
$ |
(31 |
) |
|
$ |
(28 |
) |
Noninterest income |
|
|
228 |
|
|
|
227 |
|
|
|
256 |
|
|
|
253 |
|
|
|
56 |
|
|
|
53 |
|
|
Total revenue (TE)a |
|
|
671 |
|
|
|
659 |
|
|
|
631 |
|
|
|
601 |
|
|
|
25 |
|
|
|
25 |
|
Provision for loan losses |
|
|
22 |
|
|
|
26 |
|
|
|
9 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense |
|
|
36 |
|
|
|
36 |
|
|
|
64 |
|
|
|
54 |
|
|
|
|
|
|
|
|
|
Other noninterest expense |
|
|
434 |
|
|
|
419 |
|
|
|
276 |
|
|
|
272 |
|
|
|
7 |
|
|
|
7 |
|
|
Income (loss) before income taxes (TE) |
|
|
179 |
|
|
|
178 |
|
|
|
282 |
|
|
|
258 |
|
|
|
18 |
|
|
|
18 |
|
Allocated income taxes and TE adjustments |
|
|
67 |
|
|
|
67 |
|
|
|
106 |
|
|
|
97 |
|
|
|
(2 |
) |
|
|
(3 |
) |
|
Income (loss) before cumulative effect
of accounting change |
|
|
112 |
|
|
|
111 |
|
|
|
176 |
|
|
|
161 |
|
|
|
20 |
|
|
|
21 |
|
Cumulative effect of accounting change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
112 |
|
|
$ |
111 |
|
|
$ |
176 |
|
|
$ |
161 |
|
|
$ |
20 |
|
|
$ |
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of consolidated net income |
|
|
36 |
% |
|
|
40 |
% |
|
|
57 |
% |
|
|
58 |
% |
|
|
6 |
% |
|
|
7 |
% |
Percent of total segments net income |
|
|
36 |
|
|
|
38 |
|
|
|
57 |
|
|
|
55 |
|
|
|
7 |
|
|
|
7 |
|
|
AVERAGE BALANCES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases |
|
$ |
26,737 |
|
|
$ |
27,131 |
|
|
$ |
38,767 |
|
|
$ |
37,072 |
|
|
$ |
282 |
|
|
$ |
377 |
|
Total assetsa |
|
|
29,718 |
|
|
|
30,026 |
|
|
|
51,347 |
|
|
|
46,708 |
|
|
|
11,503 |
|
|
|
11,645 |
|
Deposits |
|
|
46,987 |
|
|
|
44,705 |
|
|
|
11,068 |
|
|
|
7,785 |
|
|
|
3,543 |
|
|
|
4,589 |
|
|
OTHER FINANCIAL DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan charge-offs |
|
$ |
22 |
|
|
$ |
25 |
|
|
$ |
21 |
|
|
$ |
24 |
|
|
|
|
|
|
|
|
|
Return on average allocated equity |
|
|
19.20 |
% |
|
|
19.10 |
% |
|
|
17.52 |
% |
|
|
17.10 |
% |
|
|
N/M |
|
|
|
N/M |
|
Average full-time equivalent employees |
|
|
9,080 |
|
|
|
8,743 |
|
|
|
4,573 |
|
|
|
4,418 |
|
|
|
41 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
Community Banking |
|
|
National Banking |
|
|
Other Segments |
|
dollars in millions |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
SUMMARY OF OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (TE) |
|
$ |
1,311 |
|
|
$ |
1,260 |
|
|
$ |
1,126 |
|
|
$ |
1,051 |
|
|
$ |
(91 |
) |
|
$ |
(77 |
) |
Noninterest income |
|
|
667 |
|
|
|
663 |
|
|
|
761 |
|
|
|
724 |
|
|
|
130 |
|
|
|
130 |
|
|
Total revenue (TE)a |
|
|
1,978 |
|
|
|
1,923 |
|
|
|
1,887 |
|
|
|
1,775 |
|
|
|
39 |
|
|
|
53 |
|
Provision for loan losses |
|
|
71 |
|
|
|
77 |
|
|
|
23 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense |
|
|
110 |
|
|
|
106 |
|
|
|
182 |
|
|
|
159 |
|
|
|
|
|
|
|
|
|
Other noninterest expense |
|
|
1,276 |
|
|
|
1,220 |
|
|
|
836 |
|
|
|
792 |
|
|
|
21 |
|
|
|
24 |
|
|
Income (loss) before income taxes (TE) |
|
|
521 |
|
|
|
520 |
|
|
|
846 |
|
|
|
794 |
|
|
|
18 |
|
|
|
29 |
|
Allocated income taxes and TE adjustments |
|
|
195 |
|
|
|
195 |
|
|
|
317 |
|
|
|
298 |
|
|
|
(21 |
) |
|
|
(19 |
) |
|
Income (loss) before cumulative effect
of accounting change |
|
|
326 |
|
|
|
325 |
|
|
|
529 |
|
|
|
496 |
|
|
|
39 |
|
|
|
48 |
|
Cumulative effect of accounting change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
326 |
|
|
$ |
325 |
|
|
$ |
529 |
|
|
$ |
496 |
|
|
$ |
39 |
|
|
$ |
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of consolidated net income |
|
|
36 |
% |
|
|
39 |
% |
|
|
58 |
% |
|
|
59 |
% |
|
|
4 |
% |
|
|
6 |
% |
Percent of total segments net income |
|
|
37 |
|
|
|
37 |
|
|
|
59 |
|
|
|
57 |
|
|
|
4 |
|
|
|
6 |
|
|
AVERAGE BALANCES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases |
|
$ |
26,760 |
|
|
$ |
26,987 |
|
|
$ |
39,498 |
|
|
$ |
36,790 |
|
|
$ |
302 |
|
|
$ |
407 |
|
Total assetsa |
|
|
29,736 |
|
|
|
29,916 |
|
|
|
50,463 |
|
|
|
46,585 |
|
|
|
11,456 |
|
|
|
11,749 |
|
Deposits |
|
|
46,506 |
|
|
|
43,875 |
|
|
|
10,560 |
|
|
|
7,330 |
|
|
|
3,361 |
|
|
|
5,200 |
|
|
OTHER FINANCIAL DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan charge-offs |
|
$ |
74 |
|
|
$ |
83 |
|
|
$ |
42 |
|
|
$ |
68 |
|
|
|
|
|
|
|
|
|
Return on average allocated equity |
|
|
18.88 |
% |
|
|
18.92 |
% |
|
|
17.93 |
% |
|
|
17.63 |
% |
|
|
N/M |
|
|
|
N/M |
|
Average full-time equivalent employees |
|
|
8,961 |
|
|
|
8,705 |
|
|
|
4,507 |
|
|
|
4,502 |
|
|
|
40 |
|
|
|
39 |
|
|
(a) |
|
Substantially all revenue generated by Keys major business groups is derived from clients
resident 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) |
|
Other noninterest expense includes a $30 million ($19 million after tax) charge recorded
during the first quarter of 2005 to adjust the accounting for rental expense associated with
operating leases from an escalating to a straight-line basis. |
TE = Taxable Equivalent, N/A = Not Applicable, N/M = Not Meaningful
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segments |
|
|
Reconciling Items |
|
|
Key |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
$ |
787 |
|
|
$ |
752 |
|
|
$ |
(36 |
) |
|
$ |
(26 |
) |
|
$ |
751 |
|
|
$ |
726 |
|
|
540 |
|
|
|
533 |
|
|
|
3 |
|
|
|
(2 |
) |
|
|
543 |
|
|
|
531 |
|
|
|
1,327 |
|
|
|
1,285 |
|
|
|
(33 |
) |
|
|
(28 |
) |
|
|
1,294 |
|
|
|
1,257 |
|
|
31 |
|
|
|
43 |
|
|
|
|
|
|
|
|
|
|
|
31 |
|
|
|
43 |
|
|
100 |
|
|
|
90 |
|
|
|
|
|
|
|
|
|
|
|
100 |
|
|
|
90 |
|
|
717 |
|
|
|
698 |
|
|
|
(9 |
) |
|
|
(7 |
) |
|
|
708 |
|
|
|
691 |
|
|
|
479 |
|
|
|
454 |
|
|
|
(24 |
) |
|
|
(21 |
) |
|
|
455 |
|
|
|
433 |
|
|
|
171 |
|
|
|
161 |
|
|
|
(28 |
) |
|
|
(6 |
) |
|
|
143 |
|
|
|
155 |
|
|
|
|
308 |
|
|
|
293 |
|
|
|
4 |
|
|
|
(15 |
) |
|
|
312 |
|
|
|
278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
308 |
|
|
$ |
293 |
|
|
$ |
4 |
|
|
$ |
(15 |
) |
|
$ |
312 |
|
|
$ |
278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99 |
% |
|
|
105 |
% |
|
|
1 |
% |
|
|
(5 |
)% |
|
|
100 |
% |
|
|
100 |
% |
|
100 |
|
|
|
100 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
65,786 |
|
|
$ |
64,580 |
|
|
$ |
224 |
|
|
$ |
178 |
|
|
$ |
66,010 |
|
|
$ |
64,758 |
|
|
92,568 |
|
|
|
88,379 |
|
|
|
2,350 |
|
|
|
2,244 |
|
|
|
94,918 |
|
|
|
90,623 |
|
|
61,598 |
|
|
|
57,079 |
|
|
|
(227 |
) |
|
|
(245 |
) |
|
|
61,371 |
|
|
|
56,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
43 |
|
|
$ |
49 |
|
|
|
|
|
|
|
|
|
|
$ |
43 |
|
|
$ |
49 |
|
|
18.13 |
% |
|
|
17.96 |
% |
|
|
N/M |
|
|
|
N/M |
|
|
|
15.88 |
% |
|
|
14.84 |
% |
|
|
13,694 |
|
|
|
13,201 |
|
|
|
6,570 |
|
|
|
6,255 |
|
|
|
20,264 |
|
|
|
19,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segments |
|
|
Reconciling Items |
|
|
Key |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
$ |
2,346 |
|
|
$ |
2,234 |
|
|
$ |
(87 |
) |
|
$ |
(71 |
) |
|
$ |
2,259 |
|
|
$ |
2,163 |
|
|
1,558 |
|
|
|
1,517 |
|
|
|
13 |
|
|
|
|
|
|
|
1,571 |
|
|
|
1,517 |
|
|
|
3,904 |
|
|
|
3,751 |
|
|
|
(74 |
) |
|
|
(71 |
) |
|
|
3,830 |
|
|
|
3,680 |
|
|
94 |
|
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
94 |
|
|
|
107 |
|
|
292 |
|
|
|
265 |
|
|
|
|
|
|
|
|
|
|
|
292 |
|
|
|
265 |
|
|
2,133 |
|
|
|
2,036 |
|
|
|
(31 |
) |
|
|
2 |
b |
|
|
2,102 |
|
|
|
2,038 |
|
|
|
1,385 |
|
|
|
1,343 |
|
|
|
(43 |
) |
|
|
(73 |
) |
|
|
1,342 |
|
|
|
1,270 |
|
|
|
491 |
|
|
|
474 |
|
|
|
(53 |
) |
|
|
(37 |
) |
|
|
438 |
|
|
|
437 |
|
|
|
|
894 |
|
|
|
869 |
|
|
|
10 |
|
|
|
(36 |
) |
|
|
904 |
|
|
|
833 |
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
$ |
894 |
|
|
$ |
869 |
|
|
$ |
15 |
|
|
$ |
(36 |
) |
|
$ |
909 |
|
|
$ |
833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98 |
% |
|
|
104 |
% |
|
|
2 |
% |
|
|
(4 |
)% |
|
|
100 |
% |
|
|
100 |
% |
|
100 |
|
|
|
100 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
66,560 |
|
|
$ |
64,184 |
|
|
$ |
149 |
|
|
$ |
162 |
|
|
$ |
66,709 |
|
|
$ |
64,346 |
|
|
91,655 |
|
|
|
88,250 |
|
|
|
2,250 |
|
|
|
2,248 |
|
|
|
93,905 |
|
|
|
90,498 |
|
|
60,427 |
|
|
|
56,405 |
|
|
|
(159 |
) |
|
|
(224 |
) |
|
|
60,268 |
|
|
|
56,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
116 |
|
|
$ |
151 |
|
|
|
|
|
|
|
|
|
|
$ |
116 |
|
|
$ |
151 |
|
|
17.87 |
% |
|
|
17.91 |
% |
|
|
N/M |
|
|
|
N/M |
|
|
|
15.82 |
% |
|
|
15.36 |
% |
|
|
13,508 |
|
|
|
13,246 |
|
|
|
6,466 |
|
|
|
6,262 |
|
|
|
19,974 |
|
|
|
19,508 |
|
|
15
Supplementary information (Community Banking lines of business)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
Regional Banking |
|
|
Commercial Banking |
|
dollars in millions |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
Total revenue (TE) |
|
$ |
570 |
|
|
$ |
556 |
|
|
$ |
101 |
|
|
$ |
103 |
|
Provision for loan losses |
|
|
27 |
|
|
|
19 |
|
|
|
(5 |
) |
|
|
7 |
|
Noninterest expense |
|
|
420 |
|
|
|
406 |
|
|
|
50 |
|
|
|
49 |
|
Net income |
|
|
77 |
|
|
|
82 |
|
|
|
35 |
|
|
|
29 |
|
Average loans and leases |
|
|
18,722 |
|
|
|
19,093 |
|
|
|
8,015 |
|
|
|
8,038 |
|
Average deposits |
|
|
43,405 |
|
|
|
41,126 |
|
|
|
3,582 |
|
|
|
3,579 |
|
Net loan charge-offs |
|
|
19 |
|
|
|
23 |
|
|
|
3 |
|
|
|
2 |
|
Return on average allocated equity |
|
|
19.15 |
% |
|
|
20.55 |
% |
|
|
19.31 |
% |
|
|
15.91 |
% |
Average full-time equivalent employees |
|
|
8,761 |
|
|
|
8,420 |
|
|
|
319 |
|
|
|
323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
Regional Banking |
|
|
Commercial Banking |
|
dollars in millions |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
Total revenue (TE) |
|
$ |
1,681 |
|
|
$ |
1,634 |
|
|
$ |
297 |
|
|
$ |
289 |
|
Provision for loan losses |
|
|
73 |
|
|
|
70 |
|
|
|
(2 |
) |
|
|
7 |
|
Noninterest expense |
|
|
1,235 |
|
|
|
1,187 |
|
|
|
151 |
|
|
|
139 |
|
Net income |
|
|
233 |
|
|
|
235 |
|
|
|
93 |
|
|
|
90 |
|
Average loans and leases |
|
|
18,756 |
|
|
|
19,169 |
|
|
|
8,004 |
|
|
|
7,818 |
|
Average deposits |
|
|
42,910 |
|
|
|
40,514 |
|
|
|
3,596 |
|
|
|
3,361 |
|
Net loan charge-offs |
|
|
61 |
|
|
|
70 |
|
|
|
13 |
|
|
|
13 |
|
Return on average allocated equity |
|
|
19.62 |
% |
|
|
19.84 |
% |
|
|
17.25 |
% |
|
|
16.88 |
% |
Average full-time equivalent employees |
|
|
8,642 |
|
|
|
8,385 |
|
|
|
319 |
|
|
|
320 |
|
|
Supplementary information (National Banking lines of business)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
Real Estate Capital |
|
|
Equipment Finance |
|
|
Institutional and Capital Markets |
|
|
Consumer Finance |
|
dollars in millions |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
Total revenue (TE) |
|
$ |
169 |
|
|
$ |
148 |
|
|
$ |
137 |
|
|
$ |
122 |
|
|
$ |
188 |
|
|
$ |
180 |
|
|
$ |
137 |
|
|
$ |
151 |
|
Provision for loan losses |
|
|
14 |
|
|
|
4 |
|
|
|
4 |
|
|
|
5 |
|
|
|
(3 |
) |
|
|
(5 |
) |
|
|
(6 |
) |
|
|
13 |
|
Noninterest expense |
|
|
70 |
|
|
|
64 |
|
|
|
82 |
|
|
|
72 |
|
|
|
110 |
|
|
|
109 |
|
|
|
78 |
|
|
|
81 |
|
Net income |
|
|
53 |
|
|
|
50 |
|
|
|
32 |
|
|
|
28 |
|
|
|
50 |
|
|
|
48 |
|
|
|
41 |
|
|
|
35 |
|
Average loans and leasesa |
|
|
12,854 |
|
|
|
11,265 |
|
|
|
10,108 |
|
|
|
9,133 |
|
|
|
7,377 |
|
|
|
7,316 |
|
|
|
8,428 |
|
|
|
9,358 |
|
Average loans held for salea |
|
|
1,022 |
|
|
|
603 |
|
|
|
6 |
|
|
|
|
|
|
|
455 |
|
|
|
|
|
|
|
4,709 |
|
|
|
2,908 |
|
Average deposits |
|
|
3,598 |
|
|
|
2,100 |
|
|
|
19 |
|
|
|
14 |
|
|
|
6,704 |
|
|
|
4,986 |
|
|
|
747 |
|
|
|
685 |
|
Net loan charge-offs (recoveries) |
|
|
|
|
|
|
|
|
|
|
12 |
|
|
|
11 |
|
|
|
(1 |
) |
|
|
|
|
|
|
10 |
|
|
|
13 |
|
Return on average allocated equity |
|
|
18.64 |
% |
|
|
19.60 |
% |
|
|
14.73 |
% |
|
|
14.32 |
% |
|
|
18.10 |
% |
|
|
18.03 |
% |
|
|
18.09 |
% |
|
|
15.58 |
% |
Average full-time equivalent employees |
|
|
970 |
|
|
|
812 |
|
|
|
927 |
|
|
|
966 |
|
|
|
1,305 |
|
|
|
1,255 |
|
|
|
1,371 |
|
|
|
1,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
Real Estate Capital |
|
|
Equipment Finance |
|
|
Institutional and Capital Markets |
|
|
Consumer Finance |
|
dollars in millions |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
Total revenue (TE) |
|
$ |
498 |
|
|
$ |
389 |
|
|
$ |
397 |
|
|
$ |
375 |
|
|
$ |
578 |
|
|
$ |
524 |
|
|
$ |
414 |
|
|
$ |
487 |
|
Provision for loan losses |
|
|
28 |
|
|
|
4 |
|
|
|
25 |
|
|
|
6 |
|
|
|
(34 |
) |
|
|
(16 |
) |
|
|
4 |
|
|
|
36 |
|
Noninterest expense |
|
|
207 |
|
|
|
166 |
|
|
|
240 |
|
|
|
220 |
|
|
|
330 |
|
|
|
298 |
|
|
|
241 |
|
|
|
267 |
|
Net income |
|
|
164 |
|
|
|
137 |
|
|
|
83 |
|
|
|
93 |
|
|
|
176 |
|
|
|
151 |
|
|
|
106 |
|
|
|
115 |
|
Average loans and leasesa |
|
|
12,682 |
|
|
|
10,557 |
|
|
|
9,851 |
|
|
|
8,993 |
|
|
|
7,595 |
|
|
|
7,785 |
|
|
|
9,370 |
|
|
|
9,455 |
|
Average loans held for salea |
|
|
765 |
|
|
|
432 |
|
|
|
16 |
|
|
|
|
|
|
|
237 |
|
|
|
|
|
|
|
3,563 |
|
|
|
3,213 |
|
Average deposits |
|
|
3,428 |
|
|
|
1,783 |
|
|
|
16 |
|
|
|
12 |
|
|
|
6,394 |
|
|
|
4,896 |
|
|
|
722 |
|
|
|
639 |
|
Net loan charge-offs (recoveries) |
|
|
4 |
|
|
|
7 |
|
|
|
18 |
|
|
|
14 |
|
|
|
(6 |
) |
|
|
9 |
|
|
|
26 |
|
|
|
38 |
|
Return on average allocated equity |
|
|
19.65 |
% |
|
|
18.67 |
% |
|
|
13.16 |
% |
|
|
16.09 |
% |
|
|
21.69 |
% |
|
|
18.73 |
% |
|
|
15.73 |
% |
|
|
16.55 |
% |
Average full-time equivalent employees |
|
|
977 |
|
|
|
781 |
|
|
|
926 |
|
|
|
982 |
|
|
|
1,264 |
|
|
|
1,221 |
|
|
|
1,340 |
|
|
|
1,518 |
|
|
(a) |
|
On August 1, 2006, Key transferred $2.5 billion of home equity loans from the loan
portfolio to loans held for sale in connection with its intention to pursue a sale of the
Champion Mortgage finance business. This transfer reduced average home equity loans and
increased average loans held for sale by approximately $1.6 billion for the third quarter of
2006 and approximately $550 million for the first nine months of 2006. |
TE = Taxable Equivalent
16
5. Securities
Key classifies each security held into one of four categories: trading, available for sale,
investment or other investments.
Trading account securities. These are debt and equity securities that are purchased and held by Key
with the intent of selling them in the near term. Trading account securities are reported at fair
value ($817 million at September 30, 2006, $850 million at December 31, 2005, and $1.1 billion at
September 30, 2005) and are included in short-term investments on the balance sheet. Realized
and unrealized gains and losses on trading account securities are reported in investment banking
and capital markets income on the income statement.
Securities available for sale. These are securities that Key intends to hold for an indefinite
period of time and that may be sold in response to changes in interest rates, prepayment risk,
liquidity needs or other factors. Securities available for sale, which include debt and marketable
equity securities with readily determinable fair values, are reported at fair value. Unrealized
gains and losses (net of income taxes) deemed temporary are recorded in shareholders equity as a
component of accumulated other comprehensive loss on the balance sheet. Unrealized losses on
specific 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
specific securities.
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 paid at all. Key accounts for these retained
interests as debt securities and classifies them as available for sale.
Other securities held in the available-for-sale portfolio are primarily marketable equity
securities.
Investment 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 investment securities portfolio are
foreign bonds.
Other investments. Principal investments ¾ investments in equity and mezzanine instruments
made by Keys Principal Investing unit ¾ represent the majority of other investments. These
securities 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 ($843
million at September 30, 2006, and $800 million at December 31, 2005, and September 30, 2005).
Changes in estimated fair values and actual gains and losses on sales of principal investments are
included in other income on the income statement.
In addition to principal investments, other investments include other equity and mezzanine
instruments that do not have readily determinable fair values. These securities include certain
real estate-related investments that are carried at estimated fair value, as well as other types of
securities that generally are carried at cost. The carrying amount of the securities carried at
cost is adjusted for declines in value that are considered to be other-than-temporary. These
adjustments are included in investment banking and capital markets income on the income
statement.
The amortized cost, unrealized gains and losses, and approximate fair value of Keys investment
securities and securities available for sale are presented in the following tables. Gross
unrealized gains and losses are represented by the difference between the amortized cost and the
fair values 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 improve or worsen.
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
in millions |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
SECURITIES AVAILABLE FOR SALE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury, agencies and
corporations |
|
$ |
220 |
|
|
|
|
|
|
|
|
|
|
$ |
220 |
|
States and political subdivisions |
|
|
16 |
|
|
$ |
1 |
|
|
|
|
|
|
|
17 |
|
Collateralized mortgage obligations |
|
|
6,762 |
|
|
|
13 |
|
|
$ |
125 |
|
|
|
6,650 |
|
Other mortgage-backed securities |
|
|
210 |
|
|
|
2 |
|
|
|
3 |
|
|
|
209 |
|
Retained interests in securitizations |
|
|
122 |
|
|
|
35 |
|
|
|
|
|
|
|
157 |
|
Other securities |
|
|
179 |
|
|
|
9 |
|
|
|
|
|
|
|
188 |
|
|
Total securities available for sale |
|
$ |
7,509 |
|
|
$ |
60 |
|
|
$ |
128 |
|
|
$ |
7,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTMENT SECURITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions |
|
$ |
26 |
|
|
$ |
1 |
|
|
|
|
|
|
$ |
27 |
|
Other securities |
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
15 |
|
|
Total investment securities |
|
$ |
41 |
|
|
$ |
1 |
|
|
|
|
|
|
$ |
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
in millions |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
SECURITIES AVAILABLE FOR SALE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury, agencies and
corporations |
|
$ |
267 |
|
|
$ |
1 |
|
|
|
|
|
|
$ |
268 |
|
States and political subdivisions |
|
|
17 |
|
|
|
1 |
|
|
|
|
|
|
|
18 |
|
Collateralized mortgage obligations |
|
|
6,455 |
|
|
|
2 |
|
|
$ |
159 |
|
|
|
6,298 |
|
Other mortgage-backed securities |
|
|
233 |
|
|
|
5 |
|
|
|
4 |
|
|
|
234 |
|
Retained interests in securitizations |
|
|
115 |
|
|
|
67 |
|
|
|
|
|
|
|
182 |
|
Other securities |
|
|
261 |
|
|
|
8 |
|
|
|
|
|
|
|
269 |
|
|
Total securities available for sale |
|
$ |
7,348 |
|
|
$ |
84 |
|
|
$ |
163 |
|
|
$ |
7,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTMENT SECURITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions |
|
$ |
35 |
|
|
$ |
1 |
|
|
|
|
|
|
$ |
36 |
|
Other securities |
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
56 |
|
|
Total investment securities |
|
$ |
91 |
|
|
$ |
1 |
|
|
|
|
|
|
$ |
92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
in millions |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
SECURITIES AVAILABLE FOR SALE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury, agencies and
corporations |
|
$ |
283 |
|
|
|
|
|
|
|
|
|
|
$ |
283 |
|
States and political subdivisions |
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
19 |
|
Collateralized mortgage obligations |
|
|
6,390 |
|
|
$ |
1 |
|
|
$ |
125 |
|
|
|
6,266 |
|
Other mortgage-backed securities |
|
|
255 |
|
|
|
6 |
|
|
|
3 |
|
|
|
258 |
|
Retained interests in securitizations |
|
|
98 |
|
|
|
73 |
|
|
|
|
|
|
|
171 |
|
Other securities |
|
|
120 |
|
|
|
7 |
|
|
|
|
|
|
|
127 |
|
|
Total securities available for sale |
|
$ |
7,165 |
|
|
$ |
87 |
|
|
$ |
128 |
|
|
$ |
7,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTMENT SECURITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions |
|
$ |
42 |
|
|
$ |
1 |
|
|
|
|
|
|
$ |
43 |
|
Other securities |
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
56 |
|
|
Total investment securities |
|
$ |
98 |
|
|
$ |
1 |
|
|
|
|
|
|
$ |
99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
6. Loans and Loans Held for Sale
Keys loans by category are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
September 30, |
|
in millions |
|
2006 |
|
|
2005 |
|
|
2005 |
|
|
Commercial, financial and agricultural a |
|
$ |
21,556 |
|
|
$ |
20,579 |
|
|
$ |
19,451 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage |
|
|
8,266 |
|
|
|
8,360 |
|
|
|
8,618 |
|
Construction |
|
|
8,272 |
|
|
|
7,109 |
|
|
|
6,700 |
|
|
Total commercial real estate loans |
|
|
16,538 |
|
|
|
15,469 |
|
|
|
15,318 |
|
Commercial lease financing a |
|
|
9,860 |
|
|
|
10,352 |
|
|
|
10,339 |
|
|
Total commercial loans |
|
|
47,954 |
|
|
|
46,400 |
|
|
|
45,108 |
|
Real estate residential mortgage |
|
|
1,407 |
|
|
|
1,458 |
|
|
|
1,476 |
|
Home equity b |
|
|
10,988 |
|
|
|
13,488 |
|
|
|
13,872 |
|
Consumer direct |
|
|
1,576 |
|
|
|
1,794 |
|
|
|
1,792 |
|
Consumer indirect: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
2,982 |
|
|
|
2,715 |
|
|
|
2,676 |
|
Other |
|
|
644 |
|
|
|
623 |
|
|
|
651 |
|
|
Total consumer indirect loans |
|
|
3,626 |
|
|
|
3,338 |
|
|
|
3,327 |
|
|
Total consumer loans |
|
|
17,597 |
|
|
|
20,078 |
|
|
|
20,467 |
|
|
Total loans |
|
$ |
65,551 |
|
|
$ |
66,478 |
|
|
$ |
65,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key uses interest rate swaps to manage interest rate risk; these swaps modify the repricing and
maturity characteristics of certain loans. For more information about such swaps, see Note 19
(Derivatives and Hedging Activities), which begins on page 87 of Keys 2005 Annual Report to
Shareholders.
(a) |
|
At March 31, 2006, Key reclassified $792 million of loans from the commercial lease financing
component of the commercial loan portfolio to the commercial, financial and agricultural
component to more accurately reflect the nature of these receivables. Balances presented for
prior periods were not reclassified as the historical data was not available. |
|
(b) |
|
On August 1, 2006, Key transferred $2.5 billion of home equity loans from the loan portfolio
to loans held for sale in connection with its intention to pursue a sale of the Champion
Mortgage finance business. |
Keys loans held for sale by category are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
September 30, |
|
in millions |
|
2006 |
|
|
2005 |
|
|
2005 |
|
|
Commercial, financial and agricultural |
|
$ |
219 |
|
|
$ |
85 |
|
|
|
|
|
Real estate commercial mortgage |
|
|
1,062 |
|
|
|
525 |
|
|
$ |
416 |
|
Real estate construction |
|
|
198 |
|
|
|
51 |
|
|
|
5 |
|
Commercial lease financing |
|
|
2 |
|
|
|
|
|
|
|
|
|
Real estate residential mortgage |
|
|
21 |
|
|
|
11 |
|
|
|
21 |
|
Home equity a |
|
|
2,485 |
|
|
|
|
|
|
|
1 |
|
Education |
|
|
3,147 |
|
|
|
2,687 |
|
|
|
3,123 |
|
Automobile |
|
|
16 |
|
|
|
22 |
|
|
|
29 |
|
|
Total loans held for sale |
|
$ |
7,150 |
|
|
$ |
3,381 |
|
|
$ |
3,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
On August 1, 2006, Key transferred $2.5 billion of home equity loans from the loan
portfolio to loans held for sale in connection with its intention to pursue a sale of the
Champion Mortgage finance business. |
19
Changes in the allowance for loan losses are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended September 30, |
|
|
Nine
months ended September 30, |
|
in millions |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
Balance at beginning of period |
|
$ |
956 |
|
|
$ |
1,100 |
|
|
$ |
966 |
|
|
$ |
1,138 |
|
Charge-offs |
|
|
(70 |
) |
|
|
(69 |
) |
|
|
(194 |
) |
|
|
(222 |
) |
Recoveries |
|
|
27 |
|
|
|
20 |
|
|
|
78 |
|
|
|
71 |
|
|
Net loans charged off |
|
|
(43 |
) |
|
|
(49 |
) |
|
|
(116 |
) |
|
|
(151 |
) |
Provision for loan losses |
|
|
31 |
|
|
|
43 |
|
|
|
94 |
|
|
|
107 |
|
Foreign currency translation adjustment |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
Balance at end of period |
|
$ |
944 |
|
|
$ |
1,093 |
|
|
$ |
944 |
|
|
$ |
1,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in the allowance for credit losses on lending-related commitments are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended September 30, |
|
|
Nine
months ended September 30, |
|
in millions |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
Balance at beginning of period |
|
$ |
59 |
|
|
$ |
57 |
|
|
$ |
59 |
|
|
$ |
66 |
|
Provision (credit) for losses on
lending-related commitments |
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
(7 |
) |
|
Balance at end of period a |
|
$ |
59 |
|
|
$ |
59 |
|
|
$ |
59 |
|
|
$ |
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Included in accrued expense and other liabilities on the consolidated balance sheet. |
7. Variable Interest Entities
A VIE is a partnership, limited liability company, trust or other legal entity that meets any
one of certain criteria specified in Revised Interpretation No. 46. This interpretation requires
VIEs to be consolidated by the party who is exposed to the majority of the VIEs expected losses
and/or residual returns (i.e., the primary beneficiary).
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 |
|
|
|
|
|
|
|
|
|
|
|
Maximum |
|
in millions |
|
Total Assets |
|
|
Total Assets |
|
|
Exposure to Loss |
|
|
September 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper conduit |
|
$ |
190 |
|
|
|
N/A |
|
|
|
N/A |
|
Low-income housing tax credit (LIHTC) funds |
|
|
353 |
|
|
$ |
190 |
|
|
|
|
|
LIHTC investments |
|
|
N/A |
|
|
|
741 |
|
|
$ |
219 |
|
|
N/A = Not Applicable
The noncontrolling interests associated with the consolidated LIHTC guaranteed 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, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, for mandatorily redeemable noncontrolling
interests associated with finite-lived subsidiaries, such as Keys LIHTC guaranteed funds. Key
currently accounts for these noncontrolling interests as minority interests and adjusts the
financial statements each period for the investors share of the funds profits and losses. At
September 30, 2006, the settlement value of these noncontrolling interests was estimated to be
between $377 million and $448 million, while the recorded value, including reserves, totaled $346
million.
Keys Principal Investing unit and the Real Estate Capital line of business make equity and
mezzanine investments in entities, some of which are VIEs. These investments are held by
nonregistered investment companies subject to the provisions of the American Institute of Certified
Public Accountants (AICPA)
20
Audit and Accounting Guide, Audits of Investment Companies. 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. As a result, Key is not
currently applying the accounting or disclosure provisions of Revised Interpretation No. 46 to its
principal and real estate mezzanine and equity investments, which remain unconsolidated.
Additional information pertaining to Revised Interpretation No. 46 and the activities of the
specific VIEs with which Key is involved is provided in Note 8 (Loan Securitizations, Servicing
and Variable Interest Entities) of Keys 2005 Annual Report to Shareholders under the heading
Variable Interest Entities on page 71.
8. Nonperforming Assets and Past Due Loans
Impaired loans totaled $122 million at September 30, 2006, compared to $105 million at
December 31, 2005, and $194 million at September 30, 2005. Impaired loans averaged $121 million
for the third quarter of 2006 and $141 million for the third quarter of 2005.
Keys nonperforming assets and past due loans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
September 30, |
|
in millions |
|
2006 |
|
|
2005 |
|
|
2005 |
|
|
Impaired loans |
|
$ |
122 |
|
|
$ |
105 |
|
|
$ |
194 |
|
Other nonaccrual loans a |
|
|
101 |
|
|
|
172 |
|
|
|
166 |
|
|
Total nonperforming loans |
|
|
223 |
|
|
|
277 |
|
|
|
360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans held for sale a |
|
|
56 |
|
|
|
3 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned (OREO) |
|
|
52 |
|
|
|
25 |
|
|
|
29 |
|
Allowance for OREO losses |
|
|
(3 |
) |
|
|
(2 |
) |
|
|
(3 |
) |
|
OREO, net of allowance |
|
|
49 |
|
|
|
23 |
|
|
|
26 |
|
Other nonperforming assets |
|
|
1 |
|
|
|
4 |
|
|
|
5 |
|
|
Total nonperforming assets |
|
$ |
329 |
|
|
$ |
307 |
|
|
$ |
393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with a specifically allocated allowance |
|
$ |
27 |
|
|
$ |
9 |
|
|
$ |
8 |
|
Allowance for loan losses allocated to impaired loans |
|
|
12 |
|
|
|
6 |
|
|
|
4 |
|
|
Accruing loans past due 90 days or more |
|
$ |
125 |
|
|
$ |
90 |
|
|
$ |
94 |
|
Accruing loans past due 30 through 89 days |
|
|
715 |
|
|
|
491 |
|
|
|
550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
On August 1, 2006, Key transferred approximately $55 million of home equity loans from
nonperforming loans to nonperforming loans held for sale in connection with its intention to pursue a sale of the Champion
Mortgage finance business. |
At September 30, 2006, Key did not have any significant commitments to lend additional funds
to borrowers with loans on nonperforming status.
Key evaluates the collectibility of most impaired loans individually as described in Note 1
(Summary of Significant Accounting Policies) under the heading Allowance for Loan Losses on
page 59 of Keys 2005 Annual Report to Shareholders. Key does not perform a loan-specific
impairment valuation for smaller-balance, homogeneous, nonaccrual loans (shown in the preceding
table as Other nonaccrual loans). These typically are smaller-balance commercial loans and
consumer loans, including residential mortgages, home equity loans and various types of installment
loans. Management applies historical loss experience rates to these loans, adjusted to reflect
emerging credit trends and other factors, and then allocates a portion of the allowance for loan
losses to each loan type.
9. Capital Securities Issued by Unconsolidated Subsidiaries
KeyCorp owns the outstanding common stock of business trusts that issued corporation-obligated
mandatorily redeemable preferred capital securities (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 since 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 Federal Reserve Board adopted a rule that allows
bank holding companies to
21
continue to treat capital securities as Tier 1 capital, but with stricter
quantitative limits that take effect after a five-year transition period ending March 31, 2009.
Management believes that the new rule will not have any material effect on Keys financial
condition.
To the extent the trusts have funds available to make payments, KeyCorp continues to
unconditionally guarantee payment of:
w |
|
required distributions on the capital securities; |
|
w |
|
the redemption price when a capital security is redeemed; and |
|
w |
|
amounts due if a trust is liquidated or terminated. |
During the first nine months of 2006, the business trusts did not repurchase any capital securities
or related debentures. On June 20, 2006, $250 million of securities were issued by the KeyCorp
Capital VIII trust.
The debentures held by the KeyCorp Institutional Capital A and KeyCorp Institutional Capital B
trusts are redeemable at the option of KeyCorp, at a premium, on or after December 1, 2006, and
December 15, 2006, respectively. The capital securities are subject to mandatory redemption upon
repayment of the debentures. KeyCorp intends to exercise its option to redeem the debentures held
by the Capital A and Capital B trusts as soon as possible in order to minimize interest expense.
Management has determined that KeyCorp will remain well-capitalized following the redemptions.
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 Discounta |
|
|
Stock |
|
|
Net of Discountb |
|
|
Debenturesc |
|
|
Debentures |
|
|
September 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KeyCorp Institutional Capital A |
|
$ |
364 |
|
|
$ |
11 |
|
|
$ |
361 |
|
|
|
7.826 |
% |
|
|
2026 |
|
KeyCorp Institutional Capital B |
|
|
157 |
|
|
|
4 |
|
|
|
154 |
|
|
|
8.250 |
|
|
|
2026 |
|
KeyCorp Capital I |
|
|
197 |
|
|
|
8 |
|
|
|
205 |
|
|
|
6.248 |
|
|
|
2028 |
|
KeyCorp Capital II |
|
|
176 |
|
|
|
8 |
|
|
|
165 |
|
|
|
6.875 |
|
|
|
2029 |
|
KeyCorp Capital III |
|
|
225 |
|
|
|
8 |
|
|
|
197 |
|
|
|
7.750 |
|
|
|
2029 |
|
KeyCorp Capital V |
|
|
161 |
|
|
|
5 |
|
|
|
180 |
|
|
|
5.875 |
|
|
|
2033 |
|
KeyCorp Capital VI |
|
|
72 |
|
|
|
2 |
|
|
|
77 |
|
|
|
6.125 |
|
|
|
2033 |
|
KeyCorp Capital VII |
|
|
226 |
|
|
|
8 |
|
|
|
258 |
|
|
|
5.700 |
|
|
|
2035 |
|
KeyCorp Capital VIII |
|
|
252 |
|
|
|
|
|
|
|
250 |
|
|
|
7.000 |
|
|
|
2066 |
|
|
Total |
|
$ |
1,830 |
|
|
$ |
54 |
|
|
$ |
1,847 |
|
|
|
6.977 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
$ |
1,617 |
|
|
$ |
54 |
|
|
$ |
1,597 |
|
|
|
6.794 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 |
|
$ |
1,633 |
|
|
$ |
54 |
|
|
$ |
1,597 |
|
|
|
6.729 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
September 30, 2006, December 31, 2005, and September 30, 2005, are basis adjustments of $37
million, $74 million and $90 million, respectively, related to fair value hedges. See Note 19
(Derivatives and Hedging Activities), which begins on page 87 of Keys 2005 Annual Report to
Shareholders, 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
December 1, 2006 (for debentures owned by Capital A), December 15, 2006 (for debentures owned
by Capital B), July 1, 2008 (for debentures owned by Capital I), March 18, 1999 (for
debentures owned by Capital II), July 16, 1999 (for debentures owned by Capital III), July 21,
2008 (for debentures owned by Capital V), December 15, 2008 (for debentures owned by Capital
VI), and June 15, 2011 (for debentures owned by Capital VIII); 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 Capital A or Capital B are redeemed before they mature, the redemption
price will be the principal amount, plus a premium, plus any accrued but unpaid interest. If
the debentures purchased by Capital I, Capital V, Capital VI, Capital VII or Capital VIII are
redeemed before they mature, the redemption price will be the principal amount, plus any
accrued but unpaid interest. If the debentures purchased by Capital II or 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 Capital III), 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. |
(c) |
|
The interest rates for Capital A, Capital B, Capital II, Capital III, Capital V, Capital
VI, Capital VII and Capital VIII are fixed. Capital I has a floating interest rate equal to
three-month LIBOR plus 74 basis points; it reprices quarterly. The rates shown as the total
at September 30, 2006, December 31, 2005, and September 30, 2005, are weighted-average rates. |
22
10. Stock-Based Compensation
Key maintains several stock-based compensation plans, which are described below. Total
compensation expense for these plans was $48 million and $57 million for the nine-month periods
ended September 30, 2006 and 2005, respectively. The total income tax benefit recognized in the
income statement for these plans was $18 million and $21 million for the nine-month periods ended
September 30, 2006 and 2005, respectively. Stock-based compensation expense related to awards
granted to employees is recorded in personnel expense on the income statement, whereas
compensation expense related to awards granted to directors is recorded in other expense.
Keys compensation plans allow KeyCorp to grant stock options, restricted stock, performance
shares, discounted stock purchases and certain deferred compensation-related awards to eligible
employees and directors. At September 30, 2006, KeyCorp had 67,945,891 common shares available for
future grant under its compensation plans. In accordance with a resolution adopted by the
Compensation and Organization Committee of Keys Board of Directors, KeyCorp may not grant options
to purchase common shares, restricted stock or other shares under its long-term compensation plans
in an amount that exceeds 6% of KeyCorps outstanding common shares in any rolling three-year
period.
Stock Option Plans
Stock options granted to employees and directors generally become exercisable at the rate of
33-1/3% per year beginning one year from their grant date and expire no later than ten years from
their grant date. Exercise prices cannot be less than the fair market value of Keys common shares
on the grant date. The exercise price is the average of the high and low price of Keys common
shares on the date of grant by the Compensation and Organization Committee. Management estimates
the fair value of options granted using the Black-Scholes option-pricing model. This model was
originally developed to estimate the fair value of exchange-traded equity options, which (unlike
employee stock options) have no vesting period or transferability restrictions. Because of these
differences, the Black-Scholes model is not a perfect indicator of the value of an employee stock
option, but it is commonly used for this purpose. The model assumes that the estimated fair value
of an option is amortized as compensation expense over the options vesting period.
The Black-Scholes model requires several assumptions, which management developed and updates based
on historical trends and current market observations. The accuracy of these assumptions is
critical to managements ability to estimate the fair value of options accurately. The assumptions
pertaining to options issued during the nine-month periods ended September 30, 2006 and 2005, are
shown in the following table.
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
Average option life |
|
6.0 years |
|
|
5.0 years |
|
Future dividend yield |
|
|
3.79 |
% |
|
|
3.79 |
% |
Historical share price volatility |
|
|
.199 |
|
|
|
.274 |
|
Weighted-average risk-free interest rate |
|
|
5.0 |
% |
|
|
4.0 |
% |
|
Keys annual stock option grant to its executives and certain other employees occurs in July, upon
approval by the Compensation and Organization Committee.
The following table summarizes activity, pricing and other information for Keys stock options for
the nine-month period ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
Weighted-Average |
|
|
Aggregate |
|
|
|
Number of |
|
|
Exercise Price |
|
|
Remaining Life |
|
|
Intrinsic |
|
dollars in millions, except per share amounts |
|
Options |
|
|
Per Option |
|
|
(Years) |
|
|
Value a |
|
|
Outstanding at December 31, 2005 |
|
|
37,265,859 |
|
|
$ |
28.35 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
6,570,364 |
|
|
|
36.38 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(7,928,899 |
) |
|
|
26.90 |
|
|
|
|
|
|
|
|
|
Lapsed or canceled |
|
|
(889,383 |
) |
|
|
31.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2006 |
|
|
35,017,941 |
|
|
$ |
30.11 |
|
|
|
6.6 |
|
|
$ |
257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest |
|
|
31,582,749 |
|
|
$ |
29.80 |
|
|
|
6.7 |
|
|
$ |
241 |
|
|
Exercisable at September 30, 2006 |
|
|
22,103,729 |
|
|
$ |
27.82 |
|
|
|
5.7 |
|
|
$ |
213 |
|
|
(a) |
|
The intrinsic value of a stock option is the amount by which the fair value of the
underlying stock exceeds the exercise price of the option. |
23
The weighted-average grant-date fair value of options granted during the nine-month periods
ended September 30, 2006 and 2005, was $6.32 and $6.92, respectively. The total intrinsic value of
options exercised during the nine-month periods ended September 30, 2006 and 2005, was $76 million
and $30 million, respectively. As of September 30, 2006, unrecognized compensation cost related to
nonvested options expected to vest under the plans totaled $37 million. Management expects to
recognize this cost over a weighted-average period of 2.4 years.
The actual tax benefit realized for the tax deductions from options exercised totaled $24 million
and $9 million for the nine-month periods ended September 30, 2006 and 2005, respectively.
Long-Term Incentive Compensation Program
Keys Long-Term Incentive Compensation Program (Program) rewards senior executives who are
critical to Keys long-term financial success. The Program covers three-year performance cycles
with a new cycle beginning each year. Awards under the Program are primarily in the form of
time-lapsed restricted stock, performance-based restricted stock, and performance shares payable
primarily in stock. The time-lapsed restricted stock generally vests after the end of the
three-year cycle. The vesting of the performance-based restricted stock and performance shares is
contingent upon the attainment of defined performance levels.
The following table summarizes activity and pricing information for the nonvested shares in the
Program for the nine-month period ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting Contingent on |
|
|
|
Vesting Contingent on |
|
|
Performance and |
|
|
|
Service Conditions |
|
Service Conditions |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Weighted- |
|
|
|
Number of |
|
|
Average |
|
|
Number of |
|
|
Average |
|
|
|
Nonvested |
|
|
Grant-Date |
|
|
Nonvested |
|
|
Grant-Date |
|
|
|
Shares |
|
|
Fair Value |
|
|
Shares |
|
|
Fair Value |
|
|
Oustanding at December 31, 2005 |
|
|
476,034 |
|
|
$ |
31.43 |
|
|
|
1,190,458 |
|
|
$ |
31.05 |
|
Granted |
|
|
222,797 |
|
|
|
35.42 |
|
|
|
738,002 |
|
|
|
33.51 |
|
Vested |
|
|
(2,653 |
) |
|
|
33.73 |
|
|
|
(180 |
) |
|
|
35.42 |
|
Forfeited |
|
|
(49,648 |
) |
|
|
32.93 |
|
|
|
(85,116 |
) |
|
|
31.79 |
|
|
Outstanding at September 30, 2006 |
|
|
646,530 |
|
|
$ |
32.68 |
|
|
|
1,843,164 |
|
|
$ |
31.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The compensation cost of time-lapsed restricted stock awards granted under the Program is measured
based on the average of the high and low trading price of Keys common shares on the grant date.
The performance shares payable primarily in stock, unlike the time-lapsed and performance-based
restricted stock, do not pay dividends during the vesting period. Consequently, the fair value of
performance shares is measured by reducing the share price at the date of grant by the present
value of estimated future dividends forgone during the vesting period, discounted at an appropriate
risk-free interest rate. The weighted-average grant-date fair value of awards granted under the Program during the nine-month
periods ended September 30, 2006 and 2005, was $33.95 and $32.28, respectively. As of September
30, 2006, unrecognized compensation cost related to nonvested shares expected to vest under the
Program totaled $21 million. Management expects to recognize this cost over a weighted-average
period of 1.9 years. The total fair value of shares vested during the nine-month period ended
September 30, 2006, was $.1 million. There were no shares scheduled to vest during the nine-month
period ended September 30, 2005.
Other Restricted Stock Awards
Key may also grant special time-lapsed restricted stock awards to certain executives and employees
in recognition of high performance. These awards generally vest after three years of service.
The following table summarizes activity and pricing information for the nonvested shares under
these awards for the nine-month period ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
Number of |
|
|
Average |
|
|
|
Nonvested |
|
|
Grant-Date |
|
|
|
Shares |
|
|
Fair Value |
|
|
Outstanding at December 31, 2005 |
|
|
250,948 |
|
|
$ |
28.78 |
|
Granted |
|
|
13,379 |
|
|
|
33.22 |
|
Vested |
|
|
(50,801 |
) |
|
|
27.45 |
|
Forfeited |
|
|
(7,200 |
) |
|
|
27.77 |
|
|
Outstanding at September 30, 2006 |
|
|
206,326 |
|
|
$ |
29.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
The weighted-average grant-date fair value of awards granted during the nine-month periods ended
September 30, 2006 and 2005, was $33.22 and $31.68, respectively. As of September 30, 2006,
unrecognized compensation cost related to nonvested restricted stock expected to vest under these
special awards totaled $2 million. Management expects to recognize this cost over a
weighted-average period of 1.8 years. The total fair value of restricted stock vested during the
nine-month periods ended September 30, 2006 and 2005, was $2 million and $.4 million, respectively.
Deferred Compensation Plans
Keys deferred compensation arrangements include voluntary and mandatory deferral programs, which
award Key common shares to certain employees and directors. The mandatory deferral programs
require that incentive compensation awards meeting specified criteria be automatically deferred.
These deferred incentive awards, together with a 15% employer matching contribution, vest at the
rate of 33-1/3% per year beginning one year after the deferral date. Deferrals under the voluntary
programs, which include a nonqualified excess 401(k) savings plan, are immediately vested, except
for any employer match. Keys excess 401(k) savings plan permits certain employees to defer up to
6% of their eligible compensation, with the entire deferral eligible for an employee match in the
form of Key common shares. All other voluntary deferral programs provide an employer match ranging
from 6% to 15% of the deferral, depending on the plan. The employer match under all voluntary
programs generally vests after three years of service.
Several of Keys deferred compensation arrangements allow for deferrals to be redirected by
participants into other investment elections outside of Key common shares, which provide for
distributions payable in cash. Key accounts for these participant-directed deferred compensation
arrangements as stock-based liabilities and remeasures the related compensation cost based on the
most recent fair value of Keys common shares. Stock-based liabilities of $2 million were paid
during the nine-month periods ended September 30, 2006 and 2005. The compensation cost of all
other nonparticipant-directed deferrals are measured based on the average of the high and low
trading price of Keys common shares on the deferral date.
The following table summarizes activity and pricing information for the nonvested shares in Keys
deferred compensation plans for the nine-month period ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Weighted-Average |
|
|
|
Nonvested |
|
|
Grant-Date |
|
|
|
Shares |
|
|
Fair Value |
|
|
Outstanding at December 31, 2005 |
|
|
809,824 |
|
|
$ |
31.74 |
|
Granted |
|
|
687,217 |
|
|
|
36.37 |
|
Dividend equivalents |
|
|
94,729 |
|
|
|
36.62 |
|
Vested |
|
|
(580,818 |
) |
|
|
32.72 |
|
Forfeited |
|
|
(53,900 |
) |
|
|
33.29 |
|
|
Outstanding at September 30, 2006 |
|
|
957,052 |
|
|
$ |
34.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of awards granted during the nine-month periods ended
September 30, 2006 and 2005, was $36.37 and $32.92, respectively. As of September 30, 2006,
unrecognized compensation cost related to nonvested shares expected to vest under Keys deferred
compensation plans totaled $12 million. Management expects to recognize this cost over a
weighted-average period of 2.4 years. The total fair value of shares vested during the nine-month
periods ended September 30, 2006 and 2005, was $21 million and $20 million, respectively.
Discounted Stock Purchase Plan
Keys Discounted Stock Purchase Plan provides employees the opportunity to purchase Keys common
shares at a 10% discount through payroll deductions or cash payments. Purchases are limited to
$10,000 in any month and $50,000 in any calendar year and are immediately vested. To accommodate
employee purchases, Key acquires shares on the open market on or around the fifteenth day of the
month following the month of payment. During the nine-month period ended September 30, 2006, Key
issued 102,458 shares at a weighted-average cost of $35.86. During the nine-month period ended
September 30, 2005, Key issued 107,898 shares at a weighted-average cost of $33.07.
Information pertaining to Keys method of accounting for stock-based compensation is included in
Note 1 (Basis of Presentation) under the heading Stock-Based Compensation on page 7.
25
11. Employee Benefits
Pension Plans
Net pension cost for all funded and unfunded plans includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
in millions |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
Service cost of benefits earned |
|
$ |
12 |
|
|
$ |
20 |
|
|
$ |
36 |
|
|
$ |
37 |
|
Interest cost on projected benefit obligation |
|
|
13 |
|
|
|
22 |
|
|
|
41 |
|
|
|
43 |
|
Expected return on plan assets |
|
|
(22 |
) |
|
|
(39 |
) |
|
|
(66 |
) |
|
|
(70 |
) |
Amortization of prior service benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
Amortization of losses |
|
|
8 |
|
|
|
9 |
|
|
|
23 |
|
|
|
17 |
|
|
Net pension cost |
|
$ |
11 |
|
|
$ |
12 |
|
|
$ |
34 |
|
|
$ |
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. 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.
Net postretirement benefit cost for these plans includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
in millions |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
Service cost of benefits earned |
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
4 |
|
|
$ |
3 |
|
Interest cost on accumulated postretirement benefit obligation |
|
|
2 |
|
|
|
2 |
|
|
|
6 |
|
|
|
6 |
|
Expected return on plan assets |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(3 |
) |
|
|
(3 |
) |
Amortization of unrecognized transition obligation |
|
|
1 |
|
|
|
1 |
|
|
|
3 |
|
|
|
3 |
|
Amortization of cumulative net loss |
|
|
1 |
|
|
|
|
|
|
|
2 |
|
|
|
2 |
|
|
Net postretirement benefit cost |
|
$ |
4 |
|
|
$ |
3 |
|
|
$ |
12 |
|
|
$ |
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of
2003 was signed into law. The Act, which became effective January 1, 2006, introduces a
prescription drug benefit under Medicare, as well as a federal subsidy to sponsors of retiree
healthcare benefit plans that offer actuarially equivalent prescription drug coverage to
retirees.
Based on regulations regarding the manner in which actuarial equivalence must be determined,
management has determined that the prescription drug coverage related to Keys retiree healthcare
benefit plan is actuarially equivalent, and that the subsidy will not have a material effect on
Keys accumulated postretirement benefit obligation and net postretirement benefit cost.
Employee Benefits-Related Accounting Pronouncement Pending Adoption
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans, which requires an employer to recognize an asset or liability for
the overfunded or underfunded status, respectively, of its defined
benefit plans. The overfunded or underfunded status is to be measured
solely as the difference between the fair value of plan assets and
the projected benefit obligation. In addition, any
change in a plans funded status must be recognized in comprehensive income in the year in which it
occurs. Most requirements of SFAS No. 158 will be effective for fiscal years ending after December
15, 2006 (effective December 31, 2006, for Key). However, the requirement to measure plan assets
and liabilities as of the end of an employers fiscal year will not be effective until fiscal years
ending after December 15, 2008 (effective December 31,
2008, for Key). Management estimates that Key will record an
after-tax charge of approximately $145 million to the accumulated other comprehensive loss
component of shareholders equity as a result of adopting this
guidance for the year ending December 31, 2006. For more
information about Keys defined benefit plans, see Note 16 (Employee
Benefits), which begins on page 78 of Keys 2005 Annual Report to
Shareholders.
26
12. Income Taxes
Lease Financing Transactions
In the ordinary course of business, Keys equipment finance business unit (KEF) enters into
various types of lease financing transactions. Between 1996 and 2004, KEF entered into certain
lease financing transactions which may be characterized in three categories: Lease-In, Lease-Out
(LILO) transactions; Qualified Technological Equipment Leases (QTEs); and Service Contract
Leases.
LILO transactions are leveraged leasing transactions in which KEF leases property from an unrelated
third party and then leases the property back to that party. The transaction is similar to a
sale-leaseback, except that the property is leased by KEF, rather than purchased. QTE and Service
Contract Leases are even more like sale-leaseback transactions as KEF is considered to be the
purchaser of the equipment for tax purposes. KEF executed these three types of leasing
transactions with both foreign and domestic customers that are primarily municipal authorities.
LILO and Service Contract transactions involve commuter rail equipment, public utility facilities,
and commercial aircraft. QTE transactions involve sophisticated high technology hardware and
related software, such as telecommunications equipment. The terms of the leases range from ten to
fifty years.
Like other forms of leasing transactions, LILO transactions generate income tax deductions for Key
from net rental expense associated with the leased property, interest expense on nonrecourse debt
incurred to fund the transaction, and transaction costs. QTE and Service Contract transactions
generate rental income from the leasing of the property, as well as deductions from the
depreciation of the property, interest expense on nonrecourse debt incurred to fund the
transaction, and transaction costs.
LILO, QTE and Service Contract Leases were prevalent in the financial services industry and in
certain other industries. The tax treatment that Key applied was based on applicable statutes,
regulations, and judicial authority in effect at the time Key entered into these transactions.
Subsequently, the Internal Revenue Service (IRS) has challenged the tax treatment of these
transactions by a number of bank holding companies and other corporations.
The IRS has completed audits of Keys income tax returns for the 1995 through 2000 tax years and
has disallowed all deductions taken in tax years 1995 through 1997 pertaining to LILOs, and all
deductions in tax years 1998 through 2000 that relate to LILOs, QTEs and Service Contract Leases.
In addition, the IRS is currently conducting audits of Keys income tax returns for the 2001
through 2003 tax years, and Key expects that the IRS will disallow all similar deductions taken by
Key in those tax years.
Key had previously appealed the examination results for the tax years 1995 through 1997, which
pertained to LILOs only, to the Appeals Division of the IRS. During the fourth quarter of 2005,
ongoing discussions with the Appeals Division were discontinued without having reached a
resolution. In April 2006, Key received a final assessment from the IRS disallowing all LILO
deductions taken in those tax years. The assessment, which relates principally to the 1997 tax
year, consists of federal tax, interest and a penalty. Key paid the assessment and filed a refund
claim for the total amount. Key has also filed an appeal with the Appeals Division of the IRS with
regard to the proposed disallowance of LILO, QTE and Service Contract Lease deductions taken in the
1998 through 2000 tax years.
The payment of the 1997 tax year assessment did not impact Keys earnings since the taxes had been
included in previously recorded deferred taxes as required under GAAP. The payment of the interest
and penalty did not materially impact Keys earnings, in part due to Keys tax reserves, and also
because Key is recording a receivable on its balance sheet for amounts that are not charged to
Keys tax reserve.
Management believes that these LILO, QTE and Service Contract Lease transactions were entered into
in conformity with the tax laws in effect at the time, and Key intends to vigorously pursue the IRS
appeals process and its litigation alternatives. Key cannot currently estimate the financial
outcome of the appeals process and any ensuing litigation; however, if Key were not to prevail in
these efforts or were to enter into a settlement agreement with the IRS, in addition to previously
accrued tax amounts that would be due to the IRS, Key would owe interest and possibly penalties,
which could be material in amount. Such an outcome would not have a material effect on Keys
financial condition, but could have a material adverse effect on Keys results of operations in the
period it occurs.
27
Tax-Related Accounting Pronouncements Pending Adoption
In July 2006, the FASB issued 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,
which provides additional guidance on the application of SFAS No. 13, Accounting for Leases.
This guidance will affect when earnings from leveraged lease transactions would be recognized when
there are changes or projected changes in the timing of cash flows, including changes due to or
expected to be due to settlements of tax matters. Previously, leveraged lease transactions were
required to be recalculated only when a change in the total cash flows occurred. This guidance
will be effective for fiscal years beginning after December 15, 2006 (effective January 1, 2007,
for Key). Management currently estimates that the adoption of this guidance will result in a
cumulative after-tax charge to Keys retained earnings in the range of $50 million to $65 million.
However, future earnings are expected to increase over the remaining term of the affected leases by
a similar amount.
In July 2006, the FASB also issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, which clarifies the application of SFAS No. 109, Accounting for Income Taxes, by defining
the minimum threshold that a tax position must meet before any associated benefit may be recognized
in a companys financial statements. In accordance with this guidance, a company may recognize the
benefit if management concludes that the tax position, based solely on its technical merits, is
more likely than not to be sustained upon examination. If such a conclusion is reached, the tax
benefit is to be measured as the largest amount of benefit that is greater than 50% likely of being
realized upon ultimate settlement. This interpretation also provides guidance on measurement and
derecognition of tax benefits, and requires expanded disclosures. The interpretation will be
effective at the beginning of the fiscal year beginning after December 15, 2006 (effective January
1, 2007, for Key). Management is currently evaluating the potential effect this guidance may have
on Keys financial condition or results of operations.
13. Contingent Liabilities and Guarantees
Legal Proceedings
Residual value insurance litigation. Key Bank USA obtained two insurance policies from Reliance
Insurance Company (Reliance) insuring the residual value of certain automobiles leased through
Key Bank USA. The two policies (the Policies), the 4011 Policy and the 4019 Policy, together
covered leases entered into during the period from January 1, 1997, to January 1, 2001.
The 4019 Policy contains an endorsement (REINS-1 Endorsement) stating that Swiss Reinsurance
America Corporation (Swiss Re) will assume and reinsure 100% of Reliances obligations under the
4019 Policy in the event Reliance Group Holdings (Reliances parent) so-called claims-paying
ability were to fall below investment grade. Key Bank USA also entered into an agreement (Letter
Agreement) with Swiss Re and Reliance whereby Swiss Re agreed to issue to Key Bank USA an
insurance policy on the same terms and conditions as the 4011 Policy in the event the financial
condition of Reliance Group Holdings fell below a certain level. Around May 2000, the conditions
under both the 4019 Policy and the Letter Agreement were triggered.
The 4011 Policy was canceled and replaced as of May 1, 2000, by a policy issued by North American
Specialty Insurance Company (a subsidiary or affiliate of Swiss Re) (the NAS Policy). Tri-Arc
Financial Services, Inc. (Tri-Arc) acted as agent for Reliance, Swiss Re and NAS. From February
2000 through September 2004, Key Bank USA filed claims, and since October 2004, KeyBank National
Association (KBNA) (successor to Key Bank USA) has filed claims under the Policies, but none of
these claims has been paid.
In July 2000, Key Bank USA filed a claim for arbitration against Reliance, Swiss Re, NAS and
Tri-Arc seeking, among other things, a declaration of the scope of coverage under the Policies and
for damages. On January 8, 2001, Reliance filed an action (litigation) against Key Bank USA in
Federal District Court in Ohio seeking rescission or reformation of the Policies because they
allegedly do not reflect the intent of the parties with respect to the scope of coverage and how
and when claims were to be paid. Key filed an
28
answer and counterclaim against Reliance, Swiss Re,
NAS and Tri-Arc seeking, among other things, declaratory relief as to the scope of coverage under
the Policies, damages for breach of contract and failure to act in good faith, and punitive
damages. The parties agreed to proceed with this court action and to dismiss the arbitration
without prejudice.
On May 29, 2001, the Commonwealth Court of Pennsylvania entered an order placing Reliance in a
court supervised rehabilitation and purporting to stay all litigation against Reliance. On July
23, 2001, the Federal District Court in Ohio stayed the litigation to allow the rehabilitator to
complete her task. On October 3, 2001, the Court in Pennsylvania entered an order placing Reliance
into liquidation and canceling all Reliance insurance policies as of November 2, 2001. On November
20, 2001, the Federal District Court in Ohio entered an order that, among other things, required
Reliance to report to the Court on the progress of the liquidation. On January 15, 2002, Reliance
filed a status report requesting the continuance of the stay for an indefinite period. On February
20, 2002, Key Bank USA asked the Court to allow the case to proceed against the parties other than
Reliance, and the Court granted that motion on May 17, 2002. As of February 19, 2003, all claims
against Tri-Arc were dismissed through a combination of court action and voluntary dismissal by Key
Bank USA.
On August 4, 2004, the Court ruled on Keys and Swiss Res motions for summary judgment on issues
related to liability. In its written decision, which is publicly available, the Court held as a
matter of law that Swiss Re breached its Letter Agreement with Key by not issuing a replacement
policy covering the leases insured under Keys 4011 Policy that were booked between October 1,
1998, and April 30, 2000. With respect to Keys claims under the 4019 Policy, the Court held that
Swiss Re is not entitled to judgment as a matter of law on Keys claim that Swiss Re authorized
Tri-Arc to issue the REINS-1 Endorsement. The Court also held that Swiss Re is not entitled to
judgment as a matter of law on Keys claim that Swiss Re acted in bad faith.
On September 29, 2006, the Court ruled on Keys and Swiss Res motions for summary judgment on
damages and other issues. In its written decision, which is publicly available, the Court
dismissed Swiss Res affirmative defenses that Key had failed to mitigate its damages and that Key
had committed fraud in its submission of claims. The Court also substantially upheld Keys damages
claims for losses under the Policies, previously estimated by Key to be in the range of
approximately $342 million to $357 million.
Management believes that KBNA (successor to Key Bank USA) has valid insurance coverage or claims
for damages relating to the residual value of automobiles leased through Key Bank USA during the
four-year period ending January 1, 2001. Key has completed the process of submitting insurance
claims for its losses to Swiss Re.
In addition to seeking recovery of residual value losses under the Policies, Key expects to seek
recovery of interest, damages on Keys claim that Swiss Re acted in bad faith, and other damages
attributable to Swiss Res denial of coverage. The precise amount of those damages will be
determined through further legal proceedings.
As previously reported, Key has recorded on its balance sheet a portion of the amount of the
insurance claims as a receivable. Management continues to believe the amount being recorded as a
receivable due from the insurance carriers is appropriate to reflect the collectibility risk
associated with the insurance litigation; however, litigation is inherently not without risk, and
any actual recovery from the litigation
may be more or less than the receivable. While management does not expect an adverse decision, if
a court were to make an adverse final determination, such result would cause Key to record a
material one-time expense during the period when such determination is made. An adverse
determination would not have a material effect on Keys financial condition, but could have a
material adverse effect on Keys results of operations in the period it occurs.
Other litigation. In the ordinary course of business, Key is subject to 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.
29
Tax Contingency
In the ordinary course of business, Key enters into certain transactions that have tax
consequences. On occasion, the IRS may challenge a particular tax position taken by Key. The IRS
has completed its review of Keys tax returns for the 1995 through 2000 tax years and has
disallowed all LILO deductions taken in the 1995 through 1997 tax years and all deductions taken in
the 1998 through 2000 tax years that relate to certain lease financing transactions. In addition,
the IRS is currently conducting audits of the 2001 through 2003 tax years. Key expects that the
IRS will disallow all similar deductions taken in those years. Further information on Keys
position on these matters and on the potential implications to Key is included in Note 12 (Income
Taxes) under the heading Lease Financing Transactions on page 27.
Guarantees
Key is a guarantor in various agreements with third parties. The following table shows the types
of guarantees that Key had outstanding at September 30, 2006. 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 61 of Keys
2005 Annual Report to Shareholders.
|
|
|
|
|
|
|
|
|
|
|
Maximum Potential |
|
|
|
|
|
|
Undiscounted |
|
|
Liability |
|
in millions |
|
Future Payments |
|
|
Recorded |
|
|
Financial Guarantees: |
|
|
|
|
|
|
|
|
Standby letters of credit |
|
$ |
12,944 |
|
|
$ |
34 |
|
Credit enhancement for asset-backed commercial paper conduit |
|
|
28 |
|
|
|
|
|
Recourse agreement with FNMA |
|
|
630 |
|
|
|
8 |
|
Return guarantee agreement with LIHTC investors |
|
|
448 |
|
|
|
41 |
|
Default guarantees |
|
|
11 |
|
|
|
1 |
|
Written interest rate capsa |
|
|
71 |
|
|
|
7 |
|
|
Total |
|
$ |
14,132 |
|
|
$ |
91 |
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
As of September 30, 2006, the weighted-average interest rate of written interest rate caps
was 5.1%, and the weighted-average
strike rate was 5.2%. Maximum potential undiscounted future payments were calculated assuming
a 10% interest rate. |
Standby letters of credit. These instruments, issued on behalf of clients, 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. Standby letters of credit are issued by
many of Keys lines of business to address clients financing needs. 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 September 30, 2006, Keys standby letters of
credit had a remaining weighted-average life of 2.6 years, with remaining actual lives ranging from
less than one year to as many as twelve years.
Credit enhancement for asset-backed commercial paper conduit. Key provides credit enhancement in
the form of a committed facility to ensure the continuing operations of an asset-backed commercial
paper conduit that is owned by a third party and administered by an unaffiliated financial
institution. The commitment to provide credit enhancement extends until September 21, 2007, and
specifies that in the event of default by certain borrowers whose loans are held by the conduit,
Key will provide financial relief to the conduit in an amount that is based on defined criteria
that consider the level of credit risk involved and other factors.
At September 30, 2006, Keys maximum potential funding requirement under the credit enhancement
facility totaled $28 million. However, there were no drawdowns under the facility during the
nine-month period ended September 30, 2006. Key has no recourse or other collateral available to
offset any amounts that may be funded under this credit enhancement facility. Management
periodically evaluates Keys commitment to provide credit enhancement to the conduit.
Recourse agreement with Federal National Mortgage Association. KBNA participates as a lender in
the Federal National Mortgage Association (FNMA) Delegated Underwriting and Servicing (DUS)
program. As a condition to FNMAs delegation of responsibility for originating, underwriting and
servicing mortgages, KBNA has agreed to assume a limited portion of the risk of loss during the
remaining term on each commercial mortgage loan sold to FNMA. Accordingly, KBNA maintains a
reserve for such potential
30
losses in an amount estimated by management to approximate the fair
value of KBNAs liability. At September 30, 2006, the outstanding commercial mortgage loans in
this program had a weighted-average remaining term of 8.2 years, and the unpaid principal balance
outstanding of loans sold by KBNA as a participant in this program was approximately $2.0 billion.
The maximum potential amount of undiscounted future payments that may be required under this
program is generally equal to one-third of the principal balance of loans outstanding at September
30, 2006. If payment is required under this program, Key would have an interest in the collateral
underlying the commercial mortgage loan on which the loss occurred.
Return guarantee agreement with LIHTC investors. Key Affordable Housing Corporation (KAHC), a
subsidiary of KBNA, offered limited partnership interests to qualified investors. Partnerships
formed by KAHC invested in low-income residential rental properties that qualify for federal LIHTCs
under Section 42 of the Internal Revenue Code. In certain partnerships, investors pay 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, Key is obligated to make any necessary payments to investors to provide the
guaranteed return. In October 2003, management elected to discontinue new partnerships under this
program.
No recourse or collateral is available to offset the guarantee obligation other than the underlying
income stream from the properties. These guarantees have expiration dates that extend through
2018. Key meets its obligations pertaining to the guaranteed returns generally through the
distribution of tax credits and deductions associated with the specific properties.
As shown in the table on page 30, KAHC maintained a reserve in the amount of $41 million at
September 30, 2006, which management believes will be sufficient to cover estimated future
obligations under the guarantees. The maximum exposure to loss reflected in the preceding table
represents undiscounted future payments due to investors for the return on and of their
investments. In accordance with FASB Interpretation No. 45, the amount of all fees received in
consideration for any return guarantee agreements entered into or modified with LIHTC investors on
or after January 1, 2003, has been recognized in the liability recorded.
Various types of default guarantees. Some lines of business provide or 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 to support or protect its underlying investment
or where the risk profile of the debtor should provide an investment return. The terms of these
default guarantees range
from less than one year to as many as sixteen years. Although no collateral is held, Key would
have recourse against the debtor for any payments made under a default guarantee.
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 September 30, 2006, these caps had a weighted-average life of 2.4
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. Keys
potential amount of future payments under these obligations is mitigated by offsetting positions
with third parties.
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 FASB Interpretation No. 45 and from other relationships.
Significant liquidity facilities that support asset-backed commercial paper conduits. Key provides
liquidity to two asset-backed commercial paper conduits that are separately owned by third parties
and administered by unaffiliated financial institutions. These liquidity facilities obligate Key
through November 5, 2008, and September 27, 2007, to provide funding of up to $1.0 billion and $287
million, respectively, if required as a result of a disruption in credit markets or other factors
that preclude the issuance of
31
commercial paper by the conduits. The amounts available to be drawn,
which are based on the amount of current commitments to borrowers in each of the conduits, were
$296 million and $284 million, respectively, at September 30, 2006, but there were no drawdowns
under these committed facilities at that time. Keys commitments to provide liquidity are
periodically evaluated by management.
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. Managements past experience with
these indemnifications has been that the amounts paid, if any, have not had a significant effect on
Keys financial condition or results of operations.
Intercompany guarantees. KeyCorp and certain other 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, investments and
securities, and certain leasing transactions involving clients.
14. Derivatives and Hedging Activities
Key, mainly through its subsidiary bank, KBNA, is party to various derivative instruments
which are used for asset and liability management, credit risk management and trading purposes.
The primary derivatives that Key uses are interest rate swaps, caps and futures, and foreign
exchange forward contracts. All interest rate swaps and caps, and foreign exchange forward
contracts held are over-the-counter instruments. Generally, these instruments help Key manage
exposure to market risk, mitigate the credit risk inherent in our loan portfolio and meet clients
financing needs. Market risk represents the possibility that economic value or net interest income
will be adversely affected by changes in interest rates or other economic factors.
At September 30, 2006, Key had $111 million of derivative assets and $80 million of derivative
liabilities on its balance sheet that arose from derivatives that were being used for hedging
purposes. As of the same date, derivative assets and liabilities classified as trading derivatives
totaled $804 million and $764 million, respectively. Derivative assets and liabilities are
recorded at fair value on the balance sheet.
Counterparty Credit Risk
Like other financial instruments, derivatives contain an element of credit riskthe possibility
that Key will incur a loss because a counterparty, which may be a bank or a broker/dealer, may fail
to meet its contractual obligations. This risk is measured as the expected positive replacement
value of contracts. To mitigate credit risk when managing its asset, liability and trading
positions, Key deals exclusively with counterparties that have high credit ratings.
Key uses two additional means to manage exposure to credit risk on swap contracts. First, Key
generally enters into bilateral collateral and master netting arrangements. These agreements
provide for the net settlement of all contracts with a single counterparty in the event of default.
Second, Keys Credit Administration department monitors credit risk exposure to the counterparty
on each interest rate swap to determine appropriate limits on Keys total credit exposure and
decide whether to demand collateral. If Key determines that collateral is required, it is generally collected immediately. Key generally
holds collateral in the form of cash and highly rated treasury and agency-issued securities.
At September 30, 2006, Key was party to derivative contracts with 53 different counterparties.
These derivatives include interest rate swaps and caps, credit derivatives, energy derivatives and
foreign exchange contracts. Among these were contracts entered into to offset the risk of client
exposure. Key had aggregate exposure of $173 million on these instruments to 24 of the 53
counterparties. However, at September 30, 2006, Key held approximately $83 million in pooled
collateral to mitigate the credit exposure associated with all of its derivative contracts,
resulting in net exposure of $90 million. The largest exposure to an individual counterparty was
approximately $37 million, of which Key secured approximately $17 million in collateral.
32
Asset and Liability Management
Key uses a fair value hedging strategy to manage its exposure to interest rate risk and a cash flow
hedging strategy to reduce the potential adverse impact of interest rate increases on future
interest expense. For more information about these asset and liability management strategies, see
Note 19 (Derivatives and Hedging Activities), which begins on page 87 of Keys 2005 Annual Report
to Shareholders.
The change in accumulated other comprehensive loss resulting from cash flow hedges is as follows:
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
Reclassification |
|
|
|
|
|
|
December 31, |
|
|
2006 |
|
|
of Gains to |
|
|
September 30, |
|
in millions |
|
2005 |
|
|
Hedging Activity |
|
|
Net Income |
|
|
2006 |
|
|
Accumulated other comprehensive loss
resulting from cash flow hedges |
|
$ |
(31 |
) |
|
$ |
2 |
|
|
$ |
(1 |
) |
|
$ |
(30 |
) |
|
Reclassifications of gains and losses from accumulated other comprehensive loss to earnings
coincide with the income statement impact of the hedged item through the payment of variable-rate
interest on debt, the receipt of variable-rate interest on commercial loans and the sale or
securitization of commercial real estate loans. Key expects to reclassify an estimated $9 million
of net gains on derivative instruments from accumulated other comprehensive loss to earnings
during the next twelve months.
Credit Risk Management
Key uses credit derivatives, primarily credit default swaps, to mitigate our credit risk by
transferring a portion of the risk associated with the underlying extension of credit to a third
party. At September 30, 2006, the notional amount of credit default swaps purchased by Key was
$904 million. Key also provides credit protection through the sale of credit default swaps. These
transactions generate fee income and can also be used to diversify overall exposure to credit loss.
At September 30, 2006, the notional amount of credit default swaps sold by Key was $25 million.
These derivatives are recorded on the balance sheet at fair value, which is based on the
creditworthiness of the borrowers. Related gains or losses, as well as the premium paid or
received for the protection, are included in the trading income component of noninterest income.
Key does not apply hedge accounting to credit derivatives.
Trading Portfolio
Keys trading portfolio includes:
|
|
|
¨
|
|
interest rate swap contracts entered into to accommodate the needs of clients; |
|
|
|
¨
|
|
positions with third parties that are intended to offset or mitigate the interest rate risk of client positions; |
|
|
|
¨
|
|
foreign exchange forward contracts entered into to accommodate the needs of clients; and |
|
|
|
¨
|
|
proprietary trading positions in financial assets and liabilities. |
The fair values of these trading portfolio items are included in accrued income and other assets
or accrued expense and other liabilities on the balance sheet. Adjustments to the fair values
are included in investment banking and capital markets income on the income statement. Key has
established a reserve in the amount of $14 million at September 30, 2006, which management believes
will be sufficient to cover estimated future losses on the trading portfolio in the event of client
default. Additional information pertaining to Keys trading portfolio is summarized in Note 19 of
Keys 2005 Annual Report to Shareholders.
33
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 September 30, 2006 and 2005, and the related condensed consolidated statements of income for the
three-month and nine-month periods then ended, and the condensed consolidated statements of changes
in shareholders equity and cash flow for the nine-month periods ended September 30, 2006 and 2005.
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, 2005, and
the related consolidated statements of income, changes in shareholders equity, and cash flow for
the year then ended not presented herein, and in our report dated February 24, 2006, 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, 2005, 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
November 2, 2006
34
Item 2. Managements Discussion and Analysis of Financial Condition and 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 September 30, 2006 and 2005.
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 33. A description of Keys
business is included under the heading Description of Business on page 12 of Keys 2005 Annual
Report to Shareholders. This description does not reflect the reorganization and renaming of Keys
major business groups and some of its lines of business that took effect January 1, 2006. For a
description of these changes, see Note 4 (Line of Business Results), which begins on page 12.
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. |
|
|
|
¨
|
|
KBNA refers to Keys lead bank, KeyBank National Association. |
|
|
|
¨
|
|
Key refers to the consolidated entity consisting of KeyCorp and its subsidiaries. |
|
|
|
¨
|
|
A KeyCenter is one of Keys full-service retail banking facilities or branches. |
|
|
|
¨
|
|
Key engages in capital markets activities. These activities encompass a variety of products and services. Among other
things, we trade securities as a dealer, enter into derivative contracts (both to accommodate clients financing needs
and for proprietary trading purposes), and conduct transactions in foreign currencies (both to accommodate clients
needs and to benefit from fluctuations in exchange rates). |
|
|
|
¨
|
|
All earnings per share data included in this discussion are presented on a diluted basis, which takes into account all
common shares outstanding as well as potential common shares that could result from the exercise of outstanding stock
options and other stock awards. Some of the financial information tables also include basic earnings per share, which
takes into account only common shares outstanding. |
|
|
|
¨
|
|
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. You will find a more detailed explanation of total and Tier 1 capital and how they are calculated in the
section entitled Capital, which begins on page 58. |
Long-term goals
Keys long-term goals are to achieve an annual return on average equity in the range of 16% to 18%
and to grow earnings per common share at an annual rate of 8% to 10%. Our strategy for achieving
these goals is described under the heading Corporate Strategy on page 14 of Keys 2005 Annual
Report to Shareholders.
Keys earnings per common share for the first nine months of 2006 grew by 10% relative to the same
period last year. This improvement was accomplished by growing revenue faster than expenses. The
growth in earnings also reflected a reduction in the provision for loan losses and a prescribed
change in
35
accounting for forfeited stock-based awards that took effect on January 1, 2006. Capital that
exceeds internal guidelines and minimum requirements prescribed by the regulators can be used to
repurchase common shares in the open market. As a result of such repurchases, Keys
weighted-average fully-diluted common shares decreased to 411,028,805 shares for the first nine
months of 2006 from 414,510,144 shares for the first nine months of 2005. A lower share count can
contribute to both earnings per share growth and improved returns on average equity. The change in
the number of shares attributable to net share repurchase activity did not have a material effect
on either of these profitability measures in either the current or prior year periods.
Forward-looking statements
This report may contain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, including statements about our 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 our goal, our objective, our 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.
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:
|
|
|
¨
|
|
Interest rates could change more quickly or more significantly than we expect, which may have an adverse effect on our
financial results. |
|
|
|
¨
|
|
Trade, monetary and fiscal policies of various governmental bodies may affect the economic environment in which we
operate, as well as our financial condition and results of operations. |
|
|
|
¨
|
|
Adversity in general economic conditions, or in the condition of the local economies or industries in which we have
significant operations or assets, could, among other things, materially impact credit quality trends and our ability to
generate loans. |
|
|
|
¨
|
|
Increased competitive pressure among financial services companies may adversely affect our ability to market our
products and services. |
|
|
|
¨
|
|
It could take us longer than we anticipate to implement strategic initiatives designed to grow revenue or manage
expenses; we may be unable to implement certain initiatives; or the initiatives may be unsuccessful. |
|
|
|
¨
|
|
Acquisitions and dispositions of assets, business units or affiliates could adversely affect us in ways that management
has not anticipated. |
|
|
|
¨
|
|
We may experience operational or risk management failures due to technological or other factors. |
|
|
|
¨
|
|
We may continue to become subject to heightened regulatory practices, requirements or expectations. |
|
|
|
¨
|
|
We may become subject to new legal obligations or liabilities, or the unfavorable resolution of pending litigation may
have an adverse effect on our financial results. |
|
|
|
¨
|
|
Changes in the stock markets, public debt markets and other capital markets could adversely affect our ability to raise
capital or other funding for liquidity and business purposes, as well as our revenues from client-based underwriting,
investment banking and other capital markets businesses. |
|
|
|
¨
|
|
Terrorist activities or military actions could disrupt the economy and the general business climate, which may have an
adverse effect on our financial results or condition and that of our borrowers. |
|
|
|
¨
|
|
We may become subject to new accounting, tax or regulatory practices or requirements. |
36
Critical accounting policies and estimates
Keys business is dynamic and complex. Consequently, management must exercise judgment in choosing
and applying accounting policies and methodologies in many areas. These choices are important; not
only are they necessary to comply with U.S. generally accepted accounting principles (GAAP), they
also reflect managements view of the most appropriate manner in which 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 57 of Keys 2005
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
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. Key relies heavily on the use of assumptions and estimates in several
areas, including accounting for the allowance for loan losses; loan securitizations; contingent
liabilities, guarantees and income taxes; principal investments; goodwill; and pension and other
postretirement obligations. A brief discussion of each of these areas appears on pages 14 through
16 of Keys 2005 Annual Report to Shareholders.
During the first nine months of 2006, there were no significant changes in the manner in which
Keys critical accounting policies were applied or in which related assumptions and estimates were
developed.
However, as described in the section entitled Allowance for loan losses, which begins on page 65,
during the third quarter of 2006, Key revised its methodology for allocating the allowance for loan
losses by loan type within each of its specific lines of business. No new critical accounting
policies were adopted during the current year.
Highlights of Keys Performance
Financial performance
The primary measures of Keys financial performance for the three-month periods ended September 30,
2006, June 30, 2006, and September 30, 2005, and for the nine-month periods ended September 30,
2006 and 2005, are summarized below.
|
|
|
¨
|
|
Net income for the third quarter of 2006 was $312 million, or $.76
per common share, compared to $308 million, or $.75 per share, for
the previous quarter and $278 million, or $.67 per share, for the
third quarter of 2005. For the first nine months of 2006, net
income was $909 million, or $2.21 per common share, compared to
$833 million, or $2.01 per share, for the first nine months of
2005. |
|
|
|
¨
|
|
Keys return on average equity was 15.88% for the third quarter of
2006, compared to a return of 16.11% for the prior quarter and
14.84% for the year-ago quarter. For the first nine months of
2006, Keys return on average equity was 15.82%, compared to
15.36% for the first nine months of 2005. |
|
|
|
¨
|
|
Keys third quarter 2006 return on average total assets was 1.30%,
compared to a return of 1.32% for the previous quarter and 1.22%
for the third quarter of 2005. For the first nine months of 2006,
Keys return on average total assets was 1.29%, compared to 1.23%
for the same period last year. |
Keys top four priorities for 2006 are to profitably grow revenue, institutionalize a culture of
compliance and accountability, maintain a strong credit culture and improve operating leverage so
that revenue growth outpaces expense growth. During the third quarter:
|
|
|
¨
|
|
Total revenue rose by $49 million from the third quarter of 2005, due largely to solid
commercial loan growth, higher income from our fee-based businesses and growth in average core
deposits, which increased 8% from the third quarter of 2005. The growth in our commercial
loan portfolio was |
37
|
|
|
|
|
geographically broad-based and spread among a number of industry sectors. The increase in fee
income was attributable to a variety of sources, including trust and investment services
income, income from operating leases, electronic banking fees, credit card fees and several
other revenue components. |
|
|
|
¨
|
|
We continued to make progress in strengthening our compliance and
operations infrastructure designed to detect and prevent money
laundering in accordance with the requirements of the Bank Secrecy
Act. |
|
|
|
¨
|
|
Asset quality remained solid. Both nonperforming assets and net
loan charge-offs were down from the year-ago quarter. For the
third quarter of 2006, net loan charge-offs represented .25% of
Keys average total loans. |
|
|
|
¨
|
|
Our noninterest expense grew by $27 million from the third quarter
of 2005, due primarily to higher personnel costs, increases in
marketing and operating lease expense, and a $10 million
contribution made to Key Foundation during the third quarter of
2006. |
Further, we continue to effectively manage our capital through dividends paid to shareholders,
share repurchases, and investing in our higher-growth businesses. During the third quarter, Key
repurchased 2,500,000 of its common shares. At September 30, 2006, Keys tangible equity to
tangible assets ratio was 6.81%.
Considering recent trends, we expect Keys earnings to be in the range of $.72 to $.76 per share
for the fourth quarter of 2006.
The primary reasons that Keys revenue and expense components changed from those reported for the
three- and nine-month periods ended September 30, 2005, are reviewed in greater detail throughout
the remainder of the Managements Discussion & Analysis section.
Strategic developments
Keys financial performance has improved due in part to a number of specific actions taken during
2005 and 2006 that have strengthened our market share positions and support our corporate strategy.
|
|
|
¨
|
|
On September 6, 2006, we entered into an agreement to sell our
McDonald Investments branch network to UBS Financial Services
Inc., a subsidiary of UBS AG. This network includes approximately
340 financial advisors in addition to the field support staff who
work in fourteen states. The sale is expected to be completed in
the first quarter of 2007. |
|
|
|
¨
|
|
On August 1, 2006, we announced our intention to pursue a sale of
the Champion Mortgage finance business. |
|
|
|
¨
|
|
On April 1, 2006, we broadened our asset management product line
by acquiring Austin Capital Management, Ltd., an investment firm
headquartered in Austin, Texas with approximately $900 million in
assets under management at the date of acquisition. |
|
|
|
¨
|
|
On December 8, 2005, we acquired the commercial mortgage-backed
servicing business of ORIX Capital Markets, LLC, headquartered in
Dallas, Texas. The acquisition increased our commercial mortgage
servicing portfolio from $44 billion at September 30, 2005, to
more than $70 billion at December 31, 2005. This is the sixth
commercial real estate acquisition we have made since January 31,
2000, as part of our ongoing strategy to expand Keys commercial
mortgage finance and servicing capabilities. |
|
|
|
¨
|
|
On July 1, 2005, we expanded our Federal Housing Administration
(FHA) financing and servicing capabilities by acquiring Malone
Mortgage Company, based in Dallas, Texas. |
|
|
|
¨
|
|
During the first quarter of 2005, we completed the sale of $992
million of indirect automobile loans, representing the prime
segment of that portfolio. In April 2005, we completed the sale
of $635 million of loans, representing the nonprime segment. The
decision to sell these loans was driven by managements strategies
for improving Keys returns and achieving desired interest rate
and credit risk profiles. |
38
Figure 1 summarizes Keys financial performance for each of the past five quarters.
Figure 1. Selected Financial Data
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
Nine
months ended September 30, |
|
dollars in millions, except per share amounts |
|
Third |
|
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
2006 |
|
|
2005 |
|
|
FOR THE PERIOD |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
1,444 |
|
|
$ |
1,381 |
|
|
$ |
1,312 |
|
|
$ |
1,262 |
|
|
$ |
1,174 |
|
|
$ |
4,137 |
|
|
$ |
3,355 |
|
Interest expense |
|
|
714 |
|
|
|
651 |
|
|
|
584 |
|
|
|
544 |
|
|
|
481 |
|
|
|
1,949 |
|
|
|
1,283 |
|
Net interest income |
|
|
730 |
|
|
|
730 |
|
|
|
728 |
|
|
|
718 |
|
|
|
693 |
|
|
|
2,188 |
|
|
|
2,072 |
|
Provision for loan losses |
|
|
31 |
|
|
|
24 |
|
|
|
39 |
|
|
|
36 |
|
|
|
43 |
|
|
|
94 |
|
|
|
107 |
|
Noninterest income |
|
|
543 |
|
|
|
547 |
|
|
|
481 |
|
|
|
561 |
|
|
|
531 |
|
|
|
1,571 |
|
|
|
1,517 |
|
Noninterest expense |
|
|
808 |
|
|
|
816 |
|
|
|
770 |
|
|
|
834 |
|
|
|
781 |
|
|
|
2,394 |
|
|
|
2,303 |
|
Income before income taxes and cumulative effect
of accounting change |
|
|
434 |
|
|
|
437 |
|
|
|
400 |
|
|
|
409 |
|
|
|
400 |
|
|
|
1,271 |
|
|
|
1,179 |
|
Income before cumulative effect of accounting change |
|
|
312 |
|
|
|
308 |
|
|
|
284 |
|
|
|
296 |
|
|
|
278 |
|
|
|
904 |
|
|
|
833 |
|
Net income |
|
|
312 |
|
|
|
308 |
|
|
|
289 |
|
|
|
296 |
|
|
|
278 |
|
|
|
909 |
|
|
|
833 |
|
|
PER COMMON SHARE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of accounting change |
|
$ |
.77 |
|
|
$ |
.76 |
|
|
$ |
.70 |
|
|
$ |
.72 |
|
|
$ |
.68 |
|
|
$ |
2.23 |
|
|
$ |
2.04 |
|
Net income |
|
|
.77 |
|
|
|
.76 |
|
|
|
.71 |
|
|
|
.72 |
|
|
|
.68 |
|
|
|
2.24 |
|
|
|
2.04 |
|
Income before cumulative effect of accounting change
assuming dilution |
|
|
.76 |
|
|
|
.75 |
|
|
|
.69 |
|
|
|
.72 |
|
|
|
.67 |
|
|
|
2.20 |
|
|
|
2.01 |
|
Net income assuming dilution |
|
|
.76 |
|
|
|
.75 |
|
|
|
.70 |
|
|
|
.72 |
|
|
|
.67 |
|
|
|
2.21 |
|
|
|
2.01 |
|
Cash dividends declared |
|
|
.345 |
|
|
|
.345 |
|
|
|
.345 |
|
|
|
.325 |
|
|
|
.325 |
|
|
|
1.035 |
|
|
|
.975 |
|
Book value at period end |
|
|
19.73 |
|
|
|
19.21 |
|
|
|
18.85 |
|
|
|
18.69 |
|
|
|
18.41 |
|
|
|
19.73 |
|
|
|
18.41 |
|
Market price: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
|
38.15 |
|
|
|
38.31 |
|
|
|
37.67 |
|
|
|
34.05 |
|
|
|
35.00 |
|
|
|
38.31 |
|
|
|
35.00 |
|
Low |
|
|
34.48 |
|
|
|
34.24 |
|
|
|
32.68 |
|
|
|
30.10 |
|
|
|
31.65 |
|
|
|
32.68 |
|
|
|
31.00 |
|
Close |
|
|
37.44 |
|
|
|
35.68 |
|
|
|
36.80 |
|
|
|
32.93 |
|
|
|
32.25 |
|
|
|
37.44 |
|
|
|
32.25 |
|
Weighted-average common shares outstanding (000) |
|
|
403,780 |
|
|
|
404,528 |
|
|
|
407,386 |
|
|
|
408,431 |
|
|
|
410,456 |
|
|
|
405,218 |
|
|
|
409,166 |
|
Weighted-average common shares and potential
common shares outstanding (000) |
|
|
409,428 |
|
|
|
410,559 |
|
|
|
413,140 |
|
|
|
412,542 |
|
|
|
415,441 |
|
|
|
411,029 |
|
|
|
414,510 |
|
|
AT PERIOD END |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
65,551 |
|
|
$ |
67,408 |
|
|
$ |
66,980 |
|
|
$ |
66,478 |
|
|
$ |
65,575 |
|
|
$ |
65,551 |
|
|
$ |
65,575 |
|
Earning assets |
|
|
83,132 |
|
|
|
81,737 |
|
|
|
81,087 |
|
|
|
80,143 |
|
|
|
80,096 |
|
|
|
83,132 |
|
|
|
80,096 |
|
Total assets |
|
|
96,155 |
|
|
|
94,794 |
|
|
|
93,391 |
|
|
|
93,126 |
|
|
|
92,323 |
|
|
|
96,155 |
|
|
|
92,323 |
|
Deposits |
|
|
61,429 |
|
|
|
60,838 |
|
|
|
59,402 |
|
|
|
58,765 |
|
|
|
58,071 |
|
|
|
61,429 |
|
|
|
58,071 |
|
Long-term debt |
|
|
13,654 |
|
|
|
14,050 |
|
|
|
14,032 |
|
|
|
13,939 |
|
|
|
14,037 |
|
|
|
13,654 |
|
|
|
14,037 |
|
Shareholders equity |
|
|
7,947 |
|
|
|
7,737 |
|
|
|
7,638 |
|
|
|
7,598 |
|
|
|
7,522 |
|
|
|
7,947 |
|
|
|
7,522 |
|
|
PERFORMANCE RATIOS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average total assets |
|
|
1.30 |
% |
|
|
1.32 |
% |
|
|
1.26 |
% |
|
|
1.27 |
% |
|
|
1.22 |
% |
|
|
1.29 |
% |
|
|
1.23 |
% |
Return on average equity |
|
|
15.88 |
|
|
|
16.11 |
|
|
|
15.48 |
|
|
|
15.59 |
|
|
|
14.84 |
|
|
|
15.82 |
|
|
|
15.36 |
|
Net interest margin (taxable equivalent) |
|
|
3.63 |
|
|
|
3.69 |
|
|
|
3.77 |
|
|
|
3.71 |
|
|
|
3.67 |
|
|
|
3.69 |
|
|
|
3.68 |
|
|
CAPITAL RATIOS AT PERIOD END |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity to assets |
|
|
8.26 |
% |
|
|
8.16 |
% |
|
|
8.18 |
% |
|
|
8.16 |
% |
|
|
8.15 |
% |
|
|
8.26 |
% |
|
|
8.15 |
% |
Tangible equity to tangible assets |
|
|
6.81 |
|
|
|
6.68 |
|
|
|
6.71 |
|
|
|
6.68 |
|
|
|
6.68 |
|
|
|
6.81 |
|
|
|
6.68 |
|
Tier 1 risk-based capital |
|
|
8.02 |
|
|
|
7.90 |
|
|
|
7.64 |
|
|
|
7.59 |
|
|
|
7.72 |
|
|
|
8.02 |
|
|
|
7.72 |
|
Total risk-based capital |
|
|
12.13 |
|
|
|
12.08 |
|
|
|
11.91 |
|
|
|
11.47 |
|
|
|
11.83 |
|
|
|
12.13 |
|
|
|
11.83 |
|
Leverage |
|
|
8.89 |
|
|
|
8.82 |
|
|
|
8.52 |
|
|
|
8.53 |
|
|
|
8.60 |
|
|
|
8.89 |
|
|
|
8.60 |
|
|
TRUST AND BROKERAGE ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets under management |
|
$ |
84,060 |
|
|
$ |
80,349 |
|
|
$ |
79,558 |
|
|
$ |
77,144 |
|
|
$ |
76,341 |
|
|
$ |
84,060 |
|
|
$ |
76,341 |
|
Nonmanaged and brokerage assets |
|
|
55,221 |
|
|
|
57,682 |
|
|
|
56,944 |
|
|
|
56,509 |
|
|
|
57,313 |
|
|
|
55,221 |
|
|
|
57,313 |
|
|
OTHER DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average full-time equivalent employees |
|
|
20,264 |
|
|
|
19,931 |
|
|
|
19,694 |
|
|
|
19,417 |
|
|
|
19,456 |
|
|
|
19,974 |
|
|
|
19,508 |
|
KeyCenters |
|
|
949 |
|
|
|
946 |
|
|
|
945 |
|
|
|
947 |
|
|
|
946 |
|
|
|
949 |
|
|
|
946 |
|
|
39
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 12. Note 4 includes a
brief description of the products and services offered by each of the two major business groups,
more detailed financial information pertaining to the groups and their respective lines of
business, and explanations of Other Segments and Reconciling Items.
Figure 2 summarizes the contribution made by each major business group to Keys taxable-equivalent
revenue and net income for the three- and nine-month periods ended September 30, 2006 and 2005.
Keys line of business results for all periods presented reflect a new organizational structure
that took effect January 1, 2006. For a description of this change, see Note 4.
Figure 2. Major Business Groups Taxable-Equivalent Revenue and Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
September 30, |
|
|
Change |
|
|
September 30, |
|
|
Change |
|
dollars in millions |
|
2006 |
|
|
2005 |
|
|
Amount |
|
|
Percent |
|
|
2006 |
|
|
2005 |
|
|
Amount |
|
|
Percent |
|
|
Revenue (taxable equivalent) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community Banking |
|
$ |
671 |
|
|
$ |
659 |
|
|
$ |
12 |
|
|
|
1.8 |
% |
|
$ |
1,978 |
|
|
$ |
1,923 |
|
|
$ |
55 |
|
|
|
2.9 |
% |
National Banking |
|
|
631 |
|
|
|
601 |
|
|
|
30 |
|
|
|
5.0 |
|
|
|
1,887 |
|
|
|
1,775 |
|
|
|
112 |
|
|
|
6.3 |
|
Other Segments |
|
|
25 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
39 |
|
|
|
53 |
|
|
|
(14 |
) |
|
|
(26.4 |
) |
|
Total segments |
|
|
1,327 |
|
|
|
1,285 |
|
|
|
42 |
|
|
|
3.3 |
|
|
|
3,904 |
|
|
|
3,751 |
|
|
|
153 |
|
|
|
4.1 |
|
Reconciling items |
|
|
(33 |
) |
|
|
(28 |
) |
|
|
(5 |
) |
|
|
(17.9 |
) |
|
|
(74 |
) |
|
|
(71 |
) |
|
|
(3 |
) |
|
|
(4.2 |
) |
|
Total |
|
$ |
1,294 |
|
|
$ |
1,257 |
|
|
$ |
37 |
|
|
|
2.9 |
% |
|
$ |
3,830 |
|
|
$ |
3,680 |
|
|
$ |
150 |
|
|
|
4.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community Banking |
|
$ |
112 |
|
|
$ |
111 |
|
|
$ |
1 |
|
|
|
.9 |
% |
|
$ |
326 |
|
|
$ |
325 |
|
|
$ |
1 |
|
|
|
.3 |
% |
National Banking |
|
|
176 |
|
|
|
161 |
|
|
|
15 |
|
|
|
9.3 |
|
|
|
529 |
|
|
|
496 |
|
|
|
33 |
|
|
|
6.7 |
|
Other Segments |
|
|
20 |
|
|
|
21 |
|
|
|
(1 |
) |
|
|
(4.8 |
) |
|
|
39 |
|
|
|
48 |
|
|
|
(9 |
) |
|
|
(18.8 |
) |
|
Total segments |
|
|
308 |
|
|
|
293 |
|
|
|
15 |
|
|
|
5.1 |
|
|
|
894 |
|
|
|
869 |
|
|
|
25 |
|
|
|
2.9 |
|
Reconciling items |
|
|
4 |
|
|
|
(15 |
) |
|
|
19 |
|
|
|
N/M |
|
|
|
15 |
|
|
|
(36 |
)a |
|
|
51 |
|
|
|
N/M |
|
|
Total |
|
$ |
312 |
|
|
$ |
278 |
|
|
$ |
34 |
|
|
|
12.2 |
% |
|
$ |
909 |
|
|
$ |
833 |
|
|
$ |
76 |
|
|
|
9.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes a $30 million ($19 million after tax) charge recorded during the first quarter of
2005 to adjust the accounting for rental expense associated with operating leases from an escalating to a straight-line basis. |
N/M = Not Meaningful
Community Banking
As shown in Figure 3, net income for Community Banking was $112 million for the third quarter of
2006, up slightly from $111 million for the year-ago quarter. Growth in net interest income, a
decrease in the provision for loan losses and a slight rise in noninterest income were
substantially offset by an increase in noninterest expense.
Taxable-equivalent net interest income increased by $11 million, or 3%, from the third quarter of
2005, due to growth in average deposits, which also experienced a more favorable interest rate
spread. The
positive effects of these factors were moderated by a reduction in, and a tighter interest rate
spread on, earning assets.
The provision for loan losses decreased by $4 million, or 15%, as a result of an improved credit
risk profile.
Noninterest expense rose by $15 million, or 3%. Increases in personnel expense and various
indirect charges caused the rise.
40
During the third quarter of 2006, Key entered into an agreement to sell the McDonald Investments
branch network to UBS Financial Services Inc., a subsidiary of UBS AG. This network includes
approximately 340 financial advisors in addition to the field support staff who work in fourteen
states. The sale is expected to be completed in the first quarter of 2007.
Figure 3. Community Banking
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended September 30, |
|
|
Change |
|
|
Nine months ended September 30, |
|
|
Change |
|
dollars in millions |
|
2006 |
|
|
2005 |
|
|
Amount |
|
|
Percent |
|
|
2006 |
|
|
2005 |
|
|
Amount |
|
|
Percent |
|
|
Summary of operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (TE) |
|
$ |
443 |
|
|
$ |
432 |
|
|
$ |
11 |
|
|
|
2.5 |
% |
|
$ |
1,311 |
|
|
$ |
1,260 |
|
|
$ |
51 |
|
|
|
4.0 |
% |
Noninterest income |
|
|
228 |
|
|
|
227 |
|
|
|
1 |
|
|
|
.4 |
|
|
|
667 |
|
|
|
663 |
|
|
|
4 |
|
|
|
.6 |
|
|
Total revenue (TE) |
|
|
671 |
|
|
|
659 |
|
|
|
12 |
|
|
|
1.8 |
|
|
|
1,978 |
|
|
|
1,923 |
|
|
|
55 |
|
|
|
2.9 |
|
Provision for loan losses |
|
|
22 |
|
|
|
26 |
|
|
|
(4 |
) |
|
|
(15.4 |
) |
|
|
71 |
|
|
|
77 |
|
|
|
(6 |
) |
|
|
(7.8 |
) |
Noninterest expense |
|
|
470 |
|
|
|
455 |
|
|
|
15 |
|
|
|
3.3 |
|
|
|
1,386 |
|
|
|
1,326 |
|
|
|
60 |
|
|
|
4.5 |
|
|
Income before income taxes (TE) |
|
|
179 |
|
|
|
178 |
|
|
|
1 |
|
|
|
.6 |
|
|
|
521 |
|
|
|
520 |
|
|
|
1 |
|
|
|
.2 |
|
Allocated income taxes and TE adjustments |
|
|
67 |
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
195 |
|
|
|
195 |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
112 |
|
|
$ |
111 |
|
|
$ |
1 |
|
|
|
.9 |
% |
|
$ |
326 |
|
|
$ |
325 |
|
|
$ |
1 |
|
|
|
.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of consolidated net income |
|
|
36 |
% |
|
|
40 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
36 |
% |
|
|
39 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases |
|
$ |
26,737 |
|
|
$ |
27,131 |
|
|
$ |
(394 |
) |
|
|
(1.5 |
)% |
|
$ |
26,760 |
|
|
$ |
26,987 |
|
|
$ |
(227 |
) |
|
|
(.8 |
)% |
Total assets |
|
|
29,718 |
|
|
|
30,026 |
|
|
|
(308 |
) |
|
|
(1.0 |
) |
|
|
29,736 |
|
|
|
29,916 |
|
|
|
(180 |
) |
|
|
(.6 |
) |
Deposits |
|
|
46,987 |
|
|
|
44,705 |
|
|
|
2,282 |
|
|
|
5.1 |
|
|
|
46,506 |
|
|
|
43,875 |
|
|
|
2,631 |
|
|
|
6.0 |
|
|
TE = Taxable Equivalent, N/A = Not Applicable
Additional Community Banking Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Change |
|
|
Nine months ended September 30, |
|
|
Change |
|
dollars in millions |
|
2006 |
|
|
2005 |
|
|
Amount |
|
|
Percent |
|
|
2006 |
|
|
2005 |
|
|
Amount |
|
|
Percent |
|
|
Average deposits outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing |
|
$ |
8,111 |
|
|
$ |
8,411 |
|
|
$ |
(300 |
) |
|
|
(3.6 |
)% |
|
$ |
8,100 |
|
|
$ |
8,148 |
|
|
$ |
(48 |
) |
|
|
(.6 |
)% |
Money market and other savings |
|
|
22,390 |
|
|
|
21,448 |
|
|
|
942 |
|
|
|
4.4 |
|
|
|
22,299 |
|
|
|
21,080 |
|
|
|
1,219 |
|
|
|
5.8 |
|
Time |
|
|
16,486 |
|
|
|
14,846 |
|
|
|
1,640 |
|
|
|
11.0 |
|
|
|
16,107 |
|
|
|
14,647 |
|
|
|
1,460 |
|
|
|
10.0 |
|
|
Total deposits |
|
$ |
46,987 |
|
|
$ |
44,705 |
|
|
$ |
2,282 |
|
|
|
5.1 |
% |
|
$ |
46,506 |
|
|
$ |
43,875 |
|
|
$ |
2,631 |
|
|
|
6.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance |
|
$ |
10,048 |
|
|
$ |
10,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average loan-to-value ratio |
|
|
70 |
% |
|
|
71 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent first lien positions |
|
|
60 |
|
|
|
61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-line households / household penetration |
|
|
646,993 / 52 |
% |
|
|
607,127 / 49 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KeyCenters |
|
|
949 |
|
|
|
946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automated teller machines |
|
|
2,099 |
|
|
|
2,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National Banking
As shown in Figure 4, net income for National Banking was $176 million for the third quarter of
2006, up from $161 million for the same period last year. The improvement was due primarily to
higher net interest income and a decrease in the provision for loan losses, offset in part by a
rise in the level of noninterest expense.
Taxable-equivalent net interest income grew by $27 million, or 8%, from the third quarter of 2005,
reflecting strong growth in deposits, as well as average loans and leases. Deposits rose by $3.3
billion, or 42%, from the third quarter of 2005. Average loans and leases grew by $1.7 billion, or
5%, due largely to increases in the Real Estate Capital and Equipment Finance lines of business.
The positive effects of these factors were moderated by tighter interest rate spreads on average
earning assets in the Equipment Finance and Consumer Finance lines.
Noninterest income rose by $3 million, or 1%. Higher income from operating leases, trust and
investment services, and a number of other fee-based services were moderated by reductions in
income from dealer trading and derivatives, and other investments. In addition, Key recorded net
losses from the sales of securities, compared to net gains in the same period one year ago.
41
The provision for loan losses decreased by $8 million, or 47%, as a result of an improved credit
risk profile.
Noninterest expense increased by $14 million, or 4%, reflecting higher costs associated with
operating leases and various indirect charges.
In the current year, we have continued to take actions to improve our business mix and to support
our focus on relationship businesses. During the third quarter, we announced our plans to pursue a
sale of the Champion Mortgage finance business, and during the prior quarter, we expanded our asset
management product line by acquiring Austin Capital Management, Ltd., an investment firm
headquartered in Austin, Texas.
In addition, during the second half of 2005, we completed two acquisitions that have helped us to
build upon our success in commercial mortgage origination and servicing. In the fourth quarter of
2005, we continued the expansion of our commercial mortgage servicing business by acquiring the
commercial mortgage-backed servicing business of ORIX Capital Markets, LLC, headquartered in
Dallas, Texas. In the third quarter, we expanded our FHA financing and servicing capabilities by
acquiring Malone Mortgage Company, also based in Dallas.
Figure 4. National Banking
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
September 30, |
|
|
Change |
|
|
September 30, |
|
|
Change |
|
dollars in millions |
|
2006 |
|
|
2005 |
|
|
Amount |
|
|
Percent |
|
|
2006 |
|
|
2005 |
|
|
Amount |
|
|
Percent |
|
|
Summary of operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (TE) |
|
$ |
375 |
|
|
$ |
348 |
|
|
$ |
27 |
|
|
|
7.8 |
% |
|
$ |
1,126 |
|
|
$ |
1,051 |
|
|
$ |
75 |
|
|
|
7.1 |
% |
Noninterest income |
|
|
256 |
|
|
|
253 |
|
|
|
3 |
|
|
|
1.2 |
|
|
|
761 |
|
|
|
724 |
|
|
|
37 |
|
|
|
5.1 |
|
|
Total revenue (TE) |
|
|
631 |
|
|
|
601 |
|
|
|
30 |
|
|
|
5.0 |
|
|
|
1,887 |
|
|
|
1,775 |
|
|
|
112 |
|
|
|
6.3 |
|
Provision for loan losses |
|
|
9 |
|
|
|
17 |
|
|
|
(8 |
) |
|
|
(47.1 |
) |
|
|
23 |
|
|
|
30 |
|
|
|
(7 |
) |
|
|
(23.3 |
) |
Noninterest expense |
|
|
340 |
|
|
|
326 |
|
|
|
14 |
|
|
|
4.3 |
|
|
|
1,018 |
|
|
|
951 |
|
|
|
67 |
|
|
|
7.0 |
|
|
Income before income taxes (TE) |
|
|
282 |
|
|
|
258 |
|
|
|
24 |
|
|
|
9.3 |
|
|
|
846 |
|
|
|
794 |
|
|
|
52 |
|
|
|
6.5 |
|
Allocated income taxes and TE adjustments |
|
|
106 |
|
|
|
97 |
|
|
|
9 |
|
|
|
9.3 |
|
|
|
317 |
|
|
|
298 |
|
|
|
19 |
|
|
|
6.4 |
|
|
Net income |
|
$ |
176 |
|
|
$ |
161 |
|
|
$ |
15 |
|
|
|
9.3 |
% |
|
$ |
529 |
|
|
$ |
496 |
|
|
$ |
33 |
|
|
|
6.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of consolidated net income |
|
|
57 |
% |
|
|
58 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
58 |
% |
|
|
59 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leasesa |
|
$ |
38,767 |
|
|
$ |
37,072 |
|
|
$ |
1,695 |
|
|
|
4.6 |
% |
|
$ |
39,498 |
|
|
$ |
36,790 |
|
|
$ |
2,708 |
|
|
|
7.4 |
% |
Loans held for salea |
|
|
6,192 |
|
|
|
3,511 |
|
|
|
2,681 |
|
|
|
76.4 |
|
|
|
4,581 |
|
|
|
3,645 |
|
|
|
936 |
|
|
|
25.7 |
|
Total assets |
|
|
51,347 |
|
|
|
46,708 |
|
|
|
4,639 |
|
|
|
9.9 |
|
|
|
50,463 |
|
|
|
46,585 |
|
|
|
3,878 |
|
|
|
8.3 |
|
Deposits |
|
|
11,068 |
|
|
|
7,785 |
|
|
|
3,283 |
|
|
|
42.2 |
|
|
|
10,560 |
|
|
|
7,330 |
|
|
|
3,230 |
|
|
|
44.1 |
|
|
(a) |
|
On August 1, 2006, Key transferred $2.5 billion of home equity loans from the loan
portfolio to loans held for sale in connection with its intention to pursue a sale of the
Champion Mortgage finance business. This transfer reduced average home equity loans and
increased average loans held for sale by approximately $1.6 billion for the third quarter of
2006 and approximately $550 million for the first nine months of 2006. |
TE = Taxable Equivalent, N/A = Not Applicable
Other Segments
Other segments consist of Corporate Treasury and Keys Principal Investing unit. These segments
generated net income of $20 million for the third quarter of 2006, compared to $21 million for the
same period last year.
42
Results of Operations
Net interest income
One of Keys principal sources of earnings 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 of net free funds, such as noninterest-bearing deposits and 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 of which are taxable and others which are 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 thatif taxed
at the statutory federal income tax rate of 35%would yield $100.
Figure 5, which spans pages 45 and 46, 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.
Taxable-equivalent net interest income for the third quarter of 2006 was $751 million, representing
a $25 million, or 3%, increase from the year-ago quarter. The positive effects of a 5% increase in
average earning assets, an 8% increase in average core deposits and a 4% rise in average
noninterest-bearing funds, more than offset the effect of lower net interest margin, which
decreased 4 basis points to 3.63%. (A basis point is equal to one one-hundredth of a percentage
point, meaning 4 basis points equals .04%).
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 and annualizing
the result. The decline in the net interest margin reflected the effect of a tighter interest rate
spread, which represents the difference between the yield on average earning assets and the rate
paid for interest-bearing funds. As shown in Figure 5, Keys interest rate spread narrowed by 25
basis points from the third quarter of 2005 as a result of competitive pressure on loan and deposit
pricing, and a change in deposit mix caused by a shift in consumer funds from money market deposit
accounts to time deposits. Management expects these conditions and continuation of the
flat-to-inverted yield curve to maintain pressure on the net interest margin. The decrease in the
net interest margin caused by the above factors was substantially offset, however, by the positive
effect of an increase in the level of noninterest-bearing funds.
Average earning assets for the third quarter of 2006 totaled $82.4 billion, which was $3.6 billion,
or 5%, higher than the third quarter 2005 level, due primarily to a 7% rise in commercial loans.
43
Since December 31, 2004, the growth and composition of Keys loan portfolio has been affected by
the following loan sales, most of which came from the held-for-sale portfolio:
|
|
|
¨
|
|
Key sold commercial mortgage loans of $1.6 billion during the
first nine months of 2006 and $2.2 billion during all of 2005.
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), Key
established and has maintained a loss reserve in an amount
estimated by management to be appropriate. More information about
the related recourse agreement is provided in Note 13 (Contingent
Liabilities and Guarantees) under the heading Recourse agreement
with Federal National Mortgage Association on page 30. |
|
|
|
¨
|
|
Key sold education loans of $425 million ($90 million through
securitizations) during the first nine months of 2006 and $1.2
billion ($937 million through securitizations) during all of 2005.
Key has used the securitization market for education loans as a
means of diversifying our funding sources. |
|
|
|
¨
|
|
Key sold other loans totaling $524 million during the first nine
months of 2006 and $2.7 billion during all of 2005. During the
first quarter of 2005, Key completed the sale of $992 million of
indirect automobile loans, representing the prime segment of that
portfolio. In April 2005, Key completed the sale of $635 million
of loans, representing the nonprime segment. The decision to sell
these loans was driven by managements strategies for improving
Keys returns and achieving desired interest rate and credit risk
profiles. In addition to these completed transactions, during the
third quarter of 2006 Key announced its intention to pursue a sale
of the Champion Mortgage finance business. |
44
Figure 5. Average Balance Sheets, Net Interest Income and Yields/Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2006 |
|
|
Second Quarter 2006 |
|
|
|
Average |
|
|
|
|
|
Yield/ |
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
dollars in millions |
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans a,b |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial and agricultural c |
|
$ |
21,648 |
|
|
$ |
400 |
|
|
|
7.34 |
% |
|
$ |
21,970 |
|
|
$ |
390 |
|
|
|
7.12 |
% |
Real estate commercial mortgage |
|
|
8,106 |
|
|
|
164 |
|
|
|
8.04 |
|
|
|
8,071 |
|
|
|
153 |
|
|
|
7.59 |
|
Real estate construction |
|
|
7,965 |
|
|
|
171 |
|
|
|
8.51 |
|
|
|
7,570 |
|
|
|
152 |
|
|
|
8.07 |
|
Commercial lease financingc |
|
|
9,850 |
|
|
|
144 |
|
|
|
5.83 |
|
|
|
9,764 |
|
|
|
148 |
|
|
|
6.05 |
|
|
Total commercial loans |
|
|
47,569 |
|
|
|
879 |
|
|
|
7.34 |
|
|
|
47,375 |
|
|
|
843 |
|
|
|
7.13 |
|
Real estate residential |
|
|
1,415 |
|
|
|
23 |
|
|
|
6.49 |
|
|
|
1,430 |
|
|
|
24 |
|
|
|
6.54 |
|
Home equity d |
|
|
11,847 |
|
|
|
218 |
|
|
|
7.32 |
|
|
|
13,449 |
|
|
|
247 |
|
|
|
7.36 |
|
Consumer direct |
|
|
1,585 |
|
|
|
36 |
|
|
|
9.07 |
|
|
|
1,685 |
|
|
|
41 |
|
|
|
9.64 |
|
Consumer indirect |
|
|
3,594 |
|
|
|
61 |
|
|
|
6.83 |
|
|
|
3,503 |
|
|
|
57 |
|
|
|
6.66 |
|
|
Total consumer loans |
|
|
18,441 |
|
|
|
338 |
|
|
|
7.31 |
|
|
|
20,067 |
|
|
|
369 |
|
|
|
7.37 |
|
|
Total loans |
|
|
66,010 |
|
|
|
1,217 |
|
|
|
7.33 |
|
|
|
67,442 |
|
|
|
1,212 |
|
|
|
7.20 |
|
Loans held for sale d |
|
|
6,201 |
|
|
|
131 |
|
|
|
8.40 |
|
|
|
3,844 |
|
|
|
73 |
|
|
|
7.64 |
|
Investment securities a |
|
|
42 |
|
|
|
1 |
|
|
|
8.12 |
|
|
|
46 |
|
|
|
1 |
|
|
|
8.01 |
|
Securities available for sale e |
|
|
7,216 |
|
|
|
84 |
|
|
|
4.61 |
|
|
|
7,075 |
|
|
|
84 |
|
|
|
4.71 |
|
Short-term investments |
|
|
1,588 |
|
|
|
16 |
|
|
|
3.78 |
|
|
|
1,678 |
|
|
|
16 |
|
|
|
3.89 |
|
Other investments e |
|
|
1,363 |
|
|
|
16 |
|
|
|
4.67 |
|
|
|
1,398 |
|
|
|
17 |
|
|
|
4.60 |
|
|
Total earning assets |
|
|
82,420 |
|
|
|
1,465 |
|
|
|
7.06 |
|
|
|
81,483 |
|
|
|
1,403 |
|
|
|
6.89 |
|
Allowance for loan losses |
|
|
(954 |
) |
|
|
|
|
|
|
|
|
|
|
(963 |
) |
|
|
|
|
|
|
|
|
Accrued income and other assets |
|
|
13,452 |
|
|
|
|
|
|
|
|
|
|
|
13,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
94,918 |
|
|
|
|
|
|
|
|
|
|
$ |
93,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW and money market deposit accounts |
|
$ |
25,230 |
|
|
|
194 |
|
|
|
3.05 |
|
|
$ |
25,347 |
|
|
|
173 |
|
|
|
2.75 |
|
Savings deposits |
|
|
1,700 |
|
|
|
1 |
|
|
|
.19 |
|
|
|
1,752 |
|
|
|
1 |
|
|
|
.20 |
|
Certificates of deposit ($100,000 or more) f |
|
|
5,517 |
|
|
|
67 |
|
|
|
4.82 |
|
|
|
5,382 |
|
|
|
61 |
|
|
|
4.54 |
|
Other time deposits |
|
|
11,700 |
|
|
|
127 |
|
|
|
4.29 |
|
|
|
11,456 |
|
|
|
115 |
|
|
|
4.02 |
|
Deposits in foreign office |
|
|
4,139 |
|
|
|
54 |
|
|
|
5.22 |
|
|
|
3,429 |
|
|
|
42 |
|
|
|
4.88 |
|
|
Total interest-bearing deposits |
|
|
48,286 |
|
|
|
443 |
|
|
|
3.64 |
|
|
|
47,366 |
|
|
|
392 |
|
|
|
3.32 |
|
Federal funds purchased and securities
sold under repurchase agreements |
|
|
3,634 |
|
|
|
45 |
|
|
|
4.88 |
|
|
|
3,005 |
|
|
|
34 |
|
|
|
4.60 |
|
Bank notes and other short-term borrowings |
|
|
2,285 |
|
|
|
24 |
|
|
|
4.29 |
|
|
|
2,497 |
|
|
|
27 |
|
|
|
4.17 |
|
Long-term debt f |
|
|
13,763 |
|
|
|
202 |
|
|
|
5.83 |
|
|
|
14,088 |
|
|
|
198 |
|
|
|
5.59 |
|
|
Total interest-bearing liabilities |
|
|
67,968 |
|
|
|
714 |
|
|
|
4.17 |
|
|
|
66,956 |
|
|
|
651 |
|
|
|
3.89 |
|
Noninterest-bearing deposits |
|
|
13,085 |
|
|
|
|
|
|
|
|
|
|
|
13,027 |
|
|
|
|
|
|
|
|
|
Accrued expense and other liabilities |
|
|
6,068 |
|
|
|
|
|
|
|
|
|
|
|
6,211 |
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
7,797 |
|
|
|
|
|
|
|
|
|
|
|
7,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
94,918 |
|
|
|
|
|
|
|
|
|
|
$ |
93,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread (TE) |
|
|
|
|
|
|
|
|
|
|
2.89 |
% |
|
|
|
|
|
|
|
|
|
|
3.00 |
% |
|
Net interest income (TE) and net
interest margin (TE) |
|
|
|
|
|
|
751 |
|
|
|
3.63 |
% |
|
|
|
|
|
|
752 |
|
|
|
3.69 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TE adjustment a |
|
|
|
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
22 |
|
|
|
|
|
|
Net interest income, GAAP basis |
|
|
|
|
|
$ |
730 |
|
|
|
|
|
|
|
|
|
|
$ |
730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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) |
|
During the first quarter of 2006, Key reclassified $760 million of average loans and related
interest income from the commercial lease financing component of the commercial loan portfolio
to the commercial, financial and agricultural component to more accurately reflect the nature
of these receivables. Balances presented for prior periods were not reclassified as the
historical data was not available. |
|
(d) |
|
On August 1, 2006, Key transferred $2.5 billion of home equity loans from the loan portfolio
to loans held for sale in connection with its intention to pursue a sale of the Champion
Mortgage finance business. This transfer reduced average home equity loans and increased
average loans held for sale by approximately $1.6 billion for the third quarter of 2006. |
|
(e) |
|
Yield is calculated on the basis of amortized cost. |
|
(f) |
|
Rate calculation excludes basis adjustments related to fair value hedges. See Note 19
(Derivatives and Hedging Activities),
which begins on page 87 of Keys 2005 Annual Report to Shareholders, for an explanation of
fair value hedges. |
TE = Taxable Equivalent
45
Figure 5. Average Balance Sheets, Net Interest Income and Yields/Rates (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter 2006 |
|
|
Fourth Quarter 2005 |
|
|
Third Quarter 2005 |
|
Average |
|
|
|
|
|
Yield/ |
|
|
Average |
|
|
|
|
|
Yield/ |
|
|
Average |
|
|
|
|
|
Yield/ |
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
|
|
|
$ |
21,720 |
|
|
$ |
357 |
|
|
|
6.66 |
% |
|
$ |
19,992 |
|
|
$ |
315 |
|
|
|
6.25 |
% |
|
$ |
19,249 |
|
|
$ |
280 |
|
|
|
5.78 |
% |
|
8,089 |
|
|
|
144 |
|
|
|
7.23 |
|
|
|
8,580 |
|
|
|
151 |
|
|
|
6.98 |
|
|
|
8,467 |
|
|
|
136 |
|
|
|
6.42 |
|
|
7,312 |
|
|
|
138 |
|
|
|
7.66 |
|
|
|
6,896 |
|
|
|
129 |
|
|
|
7.42 |
|
|
|
6,388 |
|
|
|
110 |
|
|
|
6.81 |
|
|
9,581 |
|
|
|
143 |
|
|
|
5.98 |
|
|
|
10,285 |
|
|
|
154 |
|
|
|
6.01 |
|
|
|
10,161 |
|
|
|
158 |
|
|
|
6.19 |
|
|
|
46,702 |
|
|
|
782 |
|
|
|
6.78 |
|
|
|
45,753 |
|
|
|
749 |
|
|
|
6.51 |
|
|
|
44,265 |
|
|
|
684 |
|
|
|
6.15 |
|
|
1,450 |
|
|
|
23 |
|
|
|
6.33 |
|
|
|
1,460 |
|
|
|
23 |
|
|
|
6.22 |
|
|
|
1,472 |
|
|
|
23 |
|
|
|
6.13 |
|
|
13,433 |
|
|
|
238 |
|
|
|
7.19 |
|
|
|
13,767 |
|
|
|
242 |
|
|
|
7.00 |
|
|
|
13,888 |
|
|
|
236 |
|
|
|
6.72 |
|
|
1,730 |
|
|
|
41 |
|
|
|
9.66 |
|
|
|
1,785 |
|
|
|
44 |
|
|
|
9.68 |
|
|
|
1,794 |
|
|
|
40 |
|
|
|
8.96 |
|
|
3,367 |
|
|
|
57 |
|
|
|
6.66 |
|
|
|
3,340 |
|
|
|
56 |
|
|
|
6.71 |
|
|
|
3,339 |
|
|
|
56 |
|
|
|
6.67 |
|
|
|
19,980 |
|
|
|
359 |
|
|
|
7.26 |
|
|
|
20,352 |
|
|
|
365 |
|
|
|
7.13 |
|
|
|
20,493 |
|
|
|
355 |
|
|
|
6.86 |
|
|
|
66,682 |
|
|
|
1,141 |
|
|
|
6.92 |
|
|
|
66,105 |
|
|
|
1,114 |
|
|
|
6.70 |
|
|
|
64,758 |
|
|
|
1,039 |
|
|
|
6.37 |
|
|
3,692 |
|
|
|
68 |
|
|
|
7.44 |
|
|
|
3,592 |
|
|
|
64 |
|
|
|
7.05 |
|
|
|
3,521 |
|
|
|
56 |
|
|
|
6.43 |
|
|
61 |
|
|
|
1 |
|
|
|
6.34 |
|
|
|
95 |
|
|
|
1 |
|
|
|
5.81 |
|
|
|
76 |
|
|
|
1 |
|
|
|
7.00 |
|
|
7,148 |
|
|
|
83 |
|
|
|
4.61 |
|
|
|
7,034 |
|
|
|
84 |
|
|
|
4.77 |
|
|
|
7,131 |
|
|
|
84 |
|
|
|
4.65 |
|
|
1,753 |
|
|
|
22 |
|
|
|
5.10 |
|
|
|
2,091 |
|
|
|
19 |
|
|
|
3.53 |
|
|
|
1,972 |
|
|
|
15 |
|
|
|
3.15 |
|
|
1,336 |
|
|
|
25 |
|
|
|
7.13 |
|
|
|
1,297 |
|
|
|
10 |
|
|
|
3.09 |
|
|
|
1,342 |
|
|
|
12 |
|
|
|
3.25 |
|
|
|
80,672 |
|
|
|
1,340 |
|
|
|
6.70 |
|
|
|
80,214 |
|
|
|
1,292 |
|
|
|
6.40 |
|
|
|
78,800 |
|
|
|
1,207 |
|
|
|
6.08 |
|
|
(963 |
) |
|
|
|
|
|
|
|
|
|
|
(1,085 |
) |
|
|
|
|
|
|
|
|
|
|
(1,095 |
) |
|
|
|
|
|
|
|
|
|
13,206 |
|
|
|
|
|
|
|
|
|
|
|
13,077 |
|
|
|
|
|
|
|
|
|
|
|
12,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
92,915 |
|
|
|
|
|
|
|
|
|
|
$ |
92,206 |
|
|
|
|
|
|
|
|
|
|
$ |
90,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
24,452 |
|
|
|
145 |
|
|
|
2.40 |
|
|
$ |
23,947 |
|
|
|
127 |
|
|
|
2.11 |
|
|
$ |
22,886 |
|
|
|
101 |
|
|
|
1.75 |
|
|
1,812 |
|
|
|
1 |
|
|
|
.32 |
|
|
|
1,858 |
|
|
|
1 |
|
|
|
.27 |
|
|
|
1,952 |
|
|
|
2 |
|
|
|
.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,407 |
|
|
|
58 |
|
|
|
4.34 |
|
|
|
5,006 |
|
|
|
51 |
|
|
|
4.06 |
|
|
|
4,928 |
|
|
|
48 |
|
|
|
3.85 |
|
|
11,282 |
|
|
|
104 |
|
|
|
3.73 |
|
|
|
10,951 |
|
|
|
96 |
|
|
|
3.46 |
|
|
|
10,805 |
|
|
|
87 |
|
|
|
3.21 |
|
|
3,354 |
|
|
|
35 |
|
|
|
4.29 |
|
|
|
3,316 |
|
|
|
34 |
|
|
|
4.03 |
|
|
|
4,048 |
|
|
|
35 |
|
|
|
3.46 |
|
|
|
46,307 |
|
|
|
343 |
|
|
|
3.00 |
|
|
|
45,078 |
|
|
|
309 |
|
|
|
2.72 |
|
|
|
44,619 |
|
|
|
273 |
|
|
|
2.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,349 |
|
|
|
34 |
|
|
|
4.06 |
|
|
|
4,309 |
|
|
|
40 |
|
|
|
3.72 |
|
|
|
3,674 |
|
|
|
31 |
|
|
|
3.28 |
|
|
|
2,550 |
|
|
|
24 |
|
|
|
3.89 |
|
|
|
2,607 |
|
|
|
24 |
|
|
|
3.67 |
|
|
|
2,841 |
|
|
|
22 |
|
|
|
3.04 |
|
|
13,991 |
|
|
|
183 |
|
|
|
5.27 |
|
|
|
13,860 |
|
|
|
171 |
|
|
|
4.89 |
|
|
|
13,814 |
|
|
|
155 |
|
|
|
4.50 |
|
|
|
66,197 |
|
|
|
584 |
|
|
|
3.57 |
|
|
|
65,854 |
|
|
|
544 |
|
|
|
3.28 |
|
|
|
64,948 |
|
|
|
481 |
|
|
|
2.94 |
|
|
12,707 |
|
|
|
|
|
|
|
|
|
|
|
12,594 |
|
|
|
|
|
|
|
|
|
|
|
12,215 |
|
|
|
|
|
|
|
|
|
|
6,438 |
|
|
|
|
|
|
|
|
|
|
|
6,224 |
|
|
|
|
|
|
|
|
|
|
|
6,027 |
|
|
|
|
|
|
|
|
|
|
7,573 |
|
|
|
|
|
|
|
|
|
|
|
7,534 |
|
|
|
|
|
|
|
|
|
|
|
7,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
92,915 |
|
|
|
|
|
|
|
|
|
|
$ |
92,206 |
|
|
|
|
|
|
|
|
|
|
$ |
90,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.13 |
% |
|
|
|
|
|
|
|
|
|
|
3.12 |
% |
|
|
|
|
|
|
|
|
|
|
3.14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
756 |
|
|
|
3.77 |
% |
|
|
|
|
|
|
748 |
|
|
|
3.71 |
% |
|
|
|
|
|
|
726 |
|
|
|
3.67 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
$ |
728 |
|
|
|
|
|
|
|
|
|
|
$ |
718 |
|
|
|
|
|
|
|
|
|
|
$ |
693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
Figure 6 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 53,
contains more discussion about changes in earning assets and funding sources.
Figure 6. Components of Net Interest Income Changes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From three months ended September 30, 2005 |
|
|
From nine months ended September 30, 2005 |
|
|
|
to three months ended September 30, 2006 |
|
|
to nine months ended September 30, 2006 |
|
|
|
Average |
|
|
Yield/ |
|
|
Net |
|
|
Average |
|
|
Yield/ |
|
|
Net |
|
in millions |
|
Volume |
|
|
Rate |
|
|
Change |
|
|
Volume |
|
|
Rate |
|
|
Change |
|
|
INTEREST INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
21 |
|
|
$ |
157 |
|
|
$ |
178 |
|
|
$ |
111 |
|
|
$ |
533 |
|
|
$ |
644 |
|
Loans held for sale |
|
|
52 |
|
|
|
23 |
|
|
|
75 |
|
|
|
53 |
|
|
|
29 |
|
|
|
82 |
|
Investment securities |
|
|
(1 |
) |
|
|
1 |
|
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(2 |
) |
Securities available for sale |
|
|
1 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
7 |
|
Short-term investments |
|
|
(3 |
) |
|
|
4 |
|
|
|
1 |
|
|
|
(3 |
) |
|
|
20 |
|
|
|
17 |
|
Other investments |
|
|
|
|
|
|
4 |
|
|
|
4 |
|
|
|
(1 |
) |
|
|
15 |
|
|
|
14 |
|
|
Total interest income (taxable equivalent) |
|
|
70 |
|
|
|
188 |
|
|
|
258 |
|
|
|
159 |
|
|
|
603 |
|
|
|
762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW and money market deposit accounts |
|
|
11 |
|
|
|
82 |
|
|
|
93 |
|
|
|
31 |
|
|
|
248 |
|
|
|
279 |
|
Savings deposits |
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
Certificates of deposit ($100,000 or more) |
|
|
6 |
|
|
|
13 |
|
|
|
19 |
|
|
|
15 |
|
|
|
33 |
|
|
|
48 |
|
Other time deposits |
|
|
8 |
|
|
|
32 |
|
|
|
40 |
|
|
|
18 |
|
|
|
82 |
|
|
|
100 |
|
Deposits in foreign office |
|
|
1 |
|
|
|
18 |
|
|
|
19 |
|
|
|
(20 |
) |
|
|
55 |
|
|
|
35 |
|
|
Total interest-bearing deposits |
|
|
26 |
|
|
|
144 |
|
|
|
170 |
|
|
|
44 |
|
|
|
417 |
|
|
|
461 |
|
Federal funds purchased and securities sold
under repurchase agreements |
|
|
|
|
|
|
14 |
|
|
|
14 |
|
|
|
(15 |
) |
|
|
47 |
|
|
|
32 |
|
Bank notes and other short-term borrowings |
|
|
(5 |
) |
|
|
7 |
|
|
|
2 |
|
|
|
(9 |
) |
|
|
26 |
|
|
|
17 |
|
Long-term debt |
|
|
(1 |
) |
|
|
48 |
|
|
|
47 |
|
|
|
(7 |
) |
|
|
163 |
|
|
|
156 |
|
|
Total interest expense |
|
|
20 |
|
|
|
213 |
|
|
|
233 |
|
|
|
13 |
|
|
|
653 |
|
|
|
666 |
|
|
Net interest income (taxable equivalent) |
|
$ |
50 |
|
|
$ |
(25 |
) |
|
$ |
25 |
|
|
$ |
146 |
|
|
$ |
(50 |
) |
|
$ |
96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
Noninterest income for the third quarter of 2006 was $543 million, compared to $531 million for the
same period last year. For the first nine months of the year, noninterest income was $1.6 billion,
representing an increase of $54 million, or 4%, from the first nine months of 2005.
As shown in Figure 7, the growth in noninterest income from the year-ago quarter was attributable
to higher income from several of Keys fee-based businesses and a $21 million increase in
miscellaneous income, which resulted from a variety of factors. The overall increase in
noninterest income was offset in part by reductions in income from dealer trading and derivatives,
and other investments, both of which are included in investment banking and capital markets income.
In addition, Key recorded net losses from the sales of securities, compared to net gains in the
same period one year ago.
For the year-to-date period, the growth in noninterest income from the same period last year
included increases of $25 million in operating lease income, $12 million in insurance income, $8
million in both electronic banking fees and net gains from principal investing, and a $13 million
increase in miscellaneous income. These positive results were moderated by a $7 million reduction
in net gains from the sales of securities and a $5 million decrease in investment banking and
capital markets income.
47
Figure 7. Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended September 30, |
|
|
Change |
|
|
Nine months ended September 30, |
|
|
Change |
|
dollars in millions |
|
2006 |
|
|
2005 |
|
|
Amount |
|
|
Percent |
|
|
2006 |
|
|
2005 |
|
|
Amount |
|
|
Percent |
|
|
Trust and investment services income |
|
$ |
137 |
|
|
$ |
135 |
|
|
$ |
2 |
|
|
|
1.5 |
% |
|
$ |
411 |
|
|
$ |
408 |
|
|
$ |
3 |
|
|
|
.7 |
% |
Service charges on deposit accounts |
|
|
78 |
|
|
|
82 |
|
|
|
(4 |
) |
|
|
(4.9 |
) |
|
|
227 |
|
|
|
228 |
|
|
|
(1 |
) |
|
|
(.4 |
) |
Investment banking and capital markets income |
|
|
44 |
|
|
|
62 |
|
|
|
(18 |
) |
|
|
(29.0 |
) |
|
|
163 |
|
|
|
168 |
|
|
|
(5 |
) |
|
|
(3.0 |
) |
Operating lease income |
|
|
58 |
|
|
|
47 |
|
|
|
11 |
|
|
|
23.4 |
|
|
|
166 |
|
|
|
141 |
|
|
|
25 |
|
|
|
17.7 |
|
Letter of credit and loan fees |
|
|
48 |
|
|
|
46 |
|
|
|
2 |
|
|
|
4.3 |
|
|
|
133 |
|
|
|
133 |
|
|
|
|
|
|
|
|
|
Corporate-owned life insurance income |
|
|
23 |
|
|
|
26 |
|
|
|
(3 |
) |
|
|
(11.5 |
) |
|
|
74 |
|
|
|
78 |
|
|
|
(4 |
) |
|
|
(5.1 |
) |
Electronic banking fees |
|
|
27 |
|
|
|
24 |
|
|
|
3 |
|
|
|
12.5 |
|
|
|
78 |
|
|
|
70 |
|
|
|
8 |
|
|
|
11.4 |
|
Net gains from loan securitizations and sales |
|
|
14 |
|
|
|
12 |
|
|
|
2 |
|
|
|
16.7 |
|
|
|
34 |
|
|
|
41 |
|
|
|
(7 |
) |
|
|
(17.1 |
) |
Net securities gains (losses) |
|
|
(7 |
) |
|
|
3 |
|
|
|
(10 |
) |
|
|
N/M |
|
|
|
(2 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
Other income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance income |
|
|
18 |
|
|
|
15 |
|
|
|
3 |
|
|
|
20.0 |
|
|
|
49 |
|
|
|
37 |
|
|
|
12 |
|
|
|
32.4 |
|
Loan securitization servicing fees |
|
|
5 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
15 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
Credit card fees |
|
|
8 |
|
|
|
4 |
|
|
|
4 |
|
|
|
100.0 |
|
|
|
14 |
|
|
|
12 |
|
|
|
2 |
|
|
|
16.7 |
|
Net gains from principal investing |
|
|
28 |
|
|
|
29 |
|
|
|
(1 |
) |
|
|
(3.4 |
) |
|
|
48 |
|
|
|
40 |
|
|
|
8 |
|
|
|
20.0 |
|
Miscellaneous income |
|
|
62 |
|
|
|
41 |
|
|
|
21 |
|
|
|
51.2 |
|
|
|
161 |
|
|
|
148 |
|
|
|
13 |
|
|
|
8.8 |
|
|
Total other income |
|
|
121 |
|
|
|
94 |
|
|
|
27 |
|
|
|
28.7 |
|
|
|
287 |
|
|
|
252 |
|
|
|
35 |
|
|
|
13.9 |
|
|
Total noninterest income |
|
$ |
543 |
|
|
$ |
531 |
|
|
$ |
12 |
|
|
|
2.3 |
% |
|
$ |
1,571 |
|
|
$ |
1,517 |
|
|
$ |
54 |
|
|
|
3.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/M = Not Meaningful
The following discussion explains the composition of certain components of Keys noninterest
income and the factors that caused those components to change.
Trust and investment services income. Trust and investment services is Keys largest source of
noninterest income. The primary components of revenue generated by these services are shown in
Figure 8.
Figure 8. Trust and Investment Services Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
September 30, |
|
|
Change |
|
|
September 30, |
|
|
Change |
|
dollars in millions |
|
2006 |
|
|
2005 |
|
|
Amount |
|
|
Percent |
|
|
2006 |
|
|
2005 |
|
|
Amount |
|
|
Percent |
|
|
Brokerage commissions and fee income |
|
$ |
56 |
|
|
$ |
61 |
|
|
$ |
(5 |
) |
|
|
(8.2 |
)% |
|
$ |
177 |
|
|
$ |
186 |
|
|
$ |
(9 |
) |
|
|
(4.8 |
)% |
Personal asset management and custody fees |
|
|
39 |
|
|
|
39 |
|
|
|
|
|
|
|
|
|
|
|
116 |
|
|
|
115 |
|
|
|
1 |
|
|
|
.9 |
|
Institutional asset management and custody fees |
|
|
42 |
|
|
|
35 |
|
|
|
7 |
|
|
|
20.0 |
|
|
|
118 |
|
|
|
107 |
|
|
|
11 |
|
|
|
10.3 |
|
|
Total trust and investment services income |
|
$ |
137 |
|
|
$ |
135 |
|
|
$ |
2 |
|
|
|
1.5 |
% |
|
$ |
411 |
|
|
$ |
408 |
|
|
$ |
3 |
|
|
|
.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A significant portion of Keys trust and investment services income depends on the value and
mix of assets under management. At September 30, 2006, Keys bank, trust and registered investment
advisory subsidiaries had assets under management of $84.1 billion, representing a 10% increase
from $76.3 billion at September 30, 2005. As shown in Figure 9, the increase was due primarily to
Keys equity portfolio, reflecting improvement in the equity markets in general. Keys securities
lending business and the hedge funds obtained in the acquisition of Austin Capital Management, Ltd.
on April 1, 2006, also contributed to the increase.
When clients securities are lent to a borrower, 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 then shared with the client. This
business, although profitable, generates a significantly lower rate of return (commensurate with
the lower level of risk inherent in the business) than other types of assets under management.
48
Figure 9. Assets Under Management
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
in millions |
|
Third |
|
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Assets under management by investment type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
$ |
39,831 |
|
|
$ |
37,290 |
|
|
$ |
36,405 |
|
|
$ |
35,370 |
|
|
$ |
34,912 |
|
Securities lending |
|
|
22,699 |
|
|
|
22,827 |
|
|
|
22,985 |
|
|
|
20,938 |
|
|
|
20,702 |
|
Fixed income |
|
|
11,311 |
|
|
|
10,742 |
|
|
|
10,882 |
|
|
|
11,264 |
|
|
|
11,492 |
|
Money market |
|
|
9,298 |
|
|
|
8,590 |
|
|
|
9,286 |
|
|
|
9,572 |
|
|
|
9,235 |
|
Hedge funds |
|
|
921 |
|
|
|
900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
84,060 |
|
|
$ |
80,349 |
|
|
$ |
79,558 |
|
|
$ |
77,144 |
|
|
$ |
76,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proprietary mutual funds included in assets
under management: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market |
|
$ |
7,520 |
|
|
$ |
7,014 |
|
|
$ |
7,606 |
|
|
$ |
7,884 |
|
|
$ |
7,549 |
|
Equity |
|
|
5,250 |
|
|
|
5,039 |
|
|
|
5,063 |
|
|
|
4,594 |
|
|
|
4,331 |
|
Fixed income |
|
|
639 |
|
|
|
653 |
|
|
|
703 |
|
|
|
722 |
|
|
|
738 |
|
|
Total |
|
$ |
13,409 |
|
|
$ |
12,706 |
|
|
$ |
13,372 |
|
|
$ |
13,200 |
|
|
$ |
12,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts. Service charges on deposit accounts decreased from the prior
year, due primarily to reductions in the levels of maintenance fees and fees charged to commercial
clients for cash management services. Maintenance fees decreased because a higher proportion of
Keys clients have elected to use Keys free checking products. In addition, as interest rates
increase, commercial clients are able to cover a larger portion of their service charges with
credits earned on compensating balances.
Investment banking and capital markets income. As shown in Figure 10, the decrease in income from
investment banking and capital markets activities compared to the third quarter of 2005, was due to
lower income from dealer trading and derivatives, and other investments.
The decrease from the first nine months of last year was attributable to a reduction in income from
dealer trading and derivatives. Results for the first nine months of 2005 included $11 million of
derivative income recorded during the first quarter in connection with the sale of Keys indirect
automobile loan portfolio. This reduction was offset in part by growth in income from investment
banking activities. Included in income from other investments in the current year is a $25 million
gain that resulted from the initial public offering completed by the New York Stock Exchange in
March 2006. The favorable effect of this gain was offset in part during the second and third
quarters by an aggregate $4 million write-down to fair value of the shares obtained in the
transaction.
Figure 10. Investment Banking and Capital Markets Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
September 30, |
|
|
Change |
|
|
September 30, |
|
|
Change |
|
dollars in millions |
|
2006 |
|
|
2005 |
|
|
Amount |
|
|
Percent |
|
|
2006 |
|
|
2005 |
|
|
Amount |
|
|
Percent |
|
|
Investment banking income |
|
$ |
21 |
|
|
$ |
21 |
|
|
|
|
|
|
|
|
|
|
$ |
69 |
|
|
$ |
57 |
|
|
$ |
12 |
|
|
|
21.1 |
% |
Dealer trading and derivatives income |
|
|
7 |
|
|
|
16 |
|
|
$ |
(9 |
) |
|
|
(56.3 |
)% |
|
|
25 |
|
|
|
45 |
|
|
|
(20 |
) |
|
|
(44.4 |
) |
Income from other investments |
|
|
5 |
|
|
|
14 |
|
|
|
(9 |
) |
|
|
(64.3 |
) |
|
|
37 |
|
|
|
37 |
|
|
|
|
|
|
|
|
|
Foreign exchange income |
|
|
11 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
32 |
|
|
|
29 |
|
|
|
3 |
|
|
|
10.3 |
|
|
Total investment banking and capital markets income |
|
$ |
44 |
|
|
$ |
62 |
|
|
$ |
(18 |
) |
|
|
(29.0 |
)% |
|
$ |
163 |
|
|
$ |
168 |
|
|
$ |
(5 |
) |
|
|
(3.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net 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 quarter of 2005, Key completed the
sale of the prime segment of the indirect automobile loan portfolio, resulting in a gain of $19
million. However, this gain was partially offset by a $9 million impairment charge in the
education lending business recorded during the same quarter. The types of loans sold during 2005
and the first nine months of 2006 are presented in Figure 15 on page 55.
49
Net gains from principal investing. 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. Principal investments consist of direct and indirect investments in predominantly
privately held companies. These investments are carried on the balance sheet at fair value ($843
million at September 30, 2006, and $800 million at September 30, 2005). Thus, the net gains
presented in Figure 7 stem from changes in estimated fair values as well as actual gains on sales
of principal investments. During the second quarter of 2005, Key received a $15 million
distribution in the form of dividends and interest from principal investing activities. This
revenue was recorded in net interest income.
Noninterest expense
Noninterest expense for the third quarter of 2006 was $808 million, compared to $781 million for
the third quarter of 2005. For the first nine months of the year, noninterest expense was $2.4
billion, compared to $2.3 billion for the first nine months of last year.
As shown in Figure 11, personnel expense rose by $8 million, due primarily to higher costs incurred
in connection with business expansion. Nonpersonnel expense grew by $19 million, reflecting
increases of $8 million in both marketing and operating lease expense. In addition, miscellaneous
expense included a $10 million contribution made to Key Foundation during the third quarter of
2006.
For the year-to-date period, personnel expense grew by $68 million, and nonpersonnel expense rose
by $23 million from the first nine months of 2005. The increase in nonpersonnel expense was
attributable primarily to a $16 million increase in operating lease expense and a $15 million rise
in professional fees. In addition, results for the first nine months of 2005 included a $7
million credit to the provision for losses on lending-related commitments. These increases were
substantially offset by a $25 million reduction in net occupancy expense.
Figure 11. Noninterest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
September 30, |
|
|
Change |
|
|
September 30, |
|
|
Change |
|
dollars in millions |
|
2006 |
|
|
2005 |
|
|
Amount |
|
|
Percent |
|
|
2006 |
|
|
2005 |
|
|
Amount |
|
|
Percent |
|
|
Personnel |
|
$ |
422 |
|
|
$ |
414 |
|
|
$ |
8 |
|
|
|
1.9 |
% |
|
$ |
1,258 |
|
|
$ |
1,190 |
|
|
$ |
68 |
|
|
|
5.7 |
% |
Net occupancy |
|
|
63 |
|
|
|
66 |
|
|
|
(3 |
) |
|
|
(4.5 |
) |
|
|
187 |
|
|
|
212 |
a |
|
|
(25 |
) |
|
|
(11.8 |
) |
Computer processing |
|
|
52 |
|
|
|
54 |
|
|
|
(2 |
) |
|
|
(3.7 |
) |
|
|
157 |
|
|
|
155 |
|
|
|
2 |
|
|
|
1.3 |
|
Operating lease expense |
|
|
48 |
|
|
|
40 |
|
|
|
8 |
|
|
|
20.0 |
|
|
|
134 |
|
|
|
118 |
|
|
|
16 |
|
|
|
13.6 |
|
Professional fees |
|
|
29 |
|
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
102 |
|
|
|
87 |
|
|
|
15 |
|
|
|
17.2 |
|
Marketing |
|
|
37 |
|
|
|
29 |
|
|
|
8 |
|
|
|
27.6 |
|
|
|
83 |
|
|
|
88 |
|
|
|
(5 |
) |
|
|
(5.7 |
) |
Equipment |
|
|
26 |
|
|
|
28 |
|
|
|
(2 |
) |
|
|
(7.1 |
) |
|
|
78 |
|
|
|
84 |
|
|
|
(6 |
) |
|
|
(7.1 |
) |
Other expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postage and delivery |
|
|
13 |
|
|
|
12 |
|
|
|
1 |
|
|
|
8.3 |
|
|
|
38 |
|
|
|
37 |
|
|
|
1 |
|
|
|
2.7 |
|
Franchise and business taxes |
|
|
9 |
|
|
|
8 |
|
|
|
1 |
|
|
|
12.5 |
|
|
|
29 |
|
|
|
25 |
|
|
|
4 |
|
|
|
16.0 |
|
Telecommunications |
|
|
7 |
|
|
|
8 |
|
|
|
(1 |
) |
|
|
(12.5 |
) |
|
|
21 |
|
|
|
23 |
|
|
|
(2 |
) |
|
|
(8.7 |
) |
OREO expense, net |
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
6 |
|
|
|
(2 |
) |
|
|
(33.3 |
) |
Provision (credit) for losses on
lending-related commitments |
|
|
|
|
|
|
2 |
|
|
|
(2 |
) |
|
|
(100.0 |
) |
|
|
|
|
|
|
(7 |
) |
|
|
7 |
|
|
|
100.0 |
|
Miscellaneous expense |
|
|
100 |
|
|
|
89 |
|
|
|
11 |
|
|
|
12.4 |
|
|
|
303 |
|
|
|
285 |
|
|
|
18 |
|
|
|
6.3 |
|
|
Total other expense |
|
|
131 |
|
|
|
121 |
|
|
|
10 |
|
|
|
8.3 |
|
|
|
395 |
|
|
|
369 |
|
|
|
26 |
|
|
|
7.0 |
|
|
Total
noninterest expense |
|
$ |
808 |
|
|
$ |
781 |
|
|
$ |
27 |
|
|
|
3.5 |
% |
|
$ |
2,394 |
|
|
$ |
2,303 |
|
|
$ |
91 |
|
|
|
4.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average full-time equivalent employees |
|
|
20,264 |
|
|
|
19,456 |
|
|
|
808 |
|
|
|
4.2 |
% |
|
|
19,974 |
|
|
|
19,508 |
|
|
|
466 |
|
|
|
2.4 |
% |
|
(a) |
|
Includes a charge of $30 million recorded during the first quarter of 2005 to adjust the
accounting for rental expense
associated with operating leases from an escalating to a straight-line basis. |
The following discussion explains the composition of certain components of Keys noninterest
expense and the factors that caused those components to change.
50
Personnel. As shown in Figure 12, personnel expense, the largest category of Keys
noninterest expense, rose by $68 million, or 6%, from the first nine months of 2005. This growth
was due to additional costs incurred in connection with business expansion, offset in part by
reductions in stock-based compensation and severance expense.
Figure 12. Personnel Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
September 30, |
|
|
Change |
|
|
September 30, |
|
|
Change |
|
dollars in millions |
|
2006 |
|
|
2005 |
|
|
Amount |
|
|
Percent |
|
|
2006 |
|
|
2005 |
|
|
Amount |
|
|
Percent |
|
|
Salaries |
|
$ |
241 |
|
|
$ |
222 |
|
|
$ |
19 |
|
|
|
8.6 |
% |
|
$ |
706 |
|
|
$ |
657 |
|
|
$ |
49 |
|
|
|
7.5 |
% |
Incentive compensation |
|
|
95 |
|
|
|
99 |
|
|
|
(4 |
) |
|
|
(4.0 |
) |
|
|
274 |
|
|
|
262 |
|
|
|
12 |
|
|
|
4.6 |
|
Employee benefits |
|
|
68 |
|
|
|
66 |
|
|
|
2 |
|
|
|
3.0 |
|
|
|
226 |
|
|
|
204 |
|
|
|
22 |
|
|
|
10.8 |
|
Stock-based compensation a |
|
|
15 |
|
|
|
23 |
|
|
|
(8 |
) |
|
|
(34.8 |
) |
|
|
47 |
|
|
|
55 |
|
|
|
(8 |
) |
|
|
(14.5 |
) |
Severance |
|
|
3 |
|
|
|
4 |
|
|
|
(1 |
) |
|
|
(25.0 |
) |
|
|
5 |
|
|
|
12 |
|
|
|
(7 |
) |
|
|
(58.3 |
) |
|
Total personnel expense |
|
$ |
422 |
|
|
$ |
414 |
|
|
$ |
8 |
|
|
|
1.9 |
% |
|
$ |
1,258 |
|
|
$ |
1,190 |
|
|
$ |
68 |
|
|
|
5.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Excludes directors stock-based compensation of $.3 million and $.4 million for the
three-month periods ended September 30,
2006 and 2005, respectively, and $.9 million and $1.2 million for the nine-month periods ended
September 30, 2006 and 2005, respectively. Directors stock-based compensation is included in the
miscellaneous expense component shown in Figure 11. |
Effective January 1, 2006, Key adopted Statement of Financial Accounting Standards (SFAS)
No. 123R, Share-Based Payment. SFAS No. 123R changed the manner in which forfeited stock-based
awards must be accounted for and reduced Keys stock-based compensation expense for the first nine
months of 2006 by $5 million. Additional information pertaining to this accounting change is
presented in Note 1 (Basis of Presentation) under the heading Stock-Based Compensation on page
7.
For the third quarter of 2006, the average number of full-time equivalent employees was 20,264,
compared to 19,931 for the second quarter of 2006 and 19,456 for the year-ago quarter.
Net occupancy. During the first quarter of 2005, the Securities and Exchange Commission issued
interpretive guidance, applicable to all publicly held companies, related to the accounting for
operating leases. As a result of this guidance, Key recorded a net occupancy charge of $30 million
during the first quarter of last year to adjust the accounting for rental expense associated with
such leases from an escalating to a straight-line basis.
Professional fees. The $15 million, or 17%, increase in professional fees from the first nine
months of 2005 was due in part to higher costs associated with Keys efforts to strengthen its
compliance controls.
Income taxes
The provision for income taxes was $122 million for the third quarter of 2006, unchanged from the
comparable period in 2005. The effective tax rate, which is the provision for income taxes as a
percentage of income before income taxes, was 28.1% for the third quarter of 2006, compared to
30.5% for the year-ago quarter. For the first nine months of 2006, the provision for income taxes
was $367 million, compared to $346 million for the first nine months of 2005. The effective tax
rates for these periods were 28.9% and 29.3%, respectively.
The effective tax rates for both the current and prior year are substantially below Keys combined
federal and state tax rate of 37.5%, due primarily to income from investments in tax-advantaged
assets such as corporate-owned life insurance, credits associated with investments in low-income
housing projects and tax deductions associated with dividends paid on Key common shares held in
Keys 401(k) savings plan. In addition, a lower tax rate is applied to portions of the equipment
lease portfolio that are managed by a foreign subsidiary in a lower tax jurisdiction. Since Key
intends to permanently reinvest the earnings of
this foreign subsidiary overseas, no deferred income taxes are recorded on those earnings in
accordance with SFAS No. 109, Accounting for Income Taxes.
51
In the ordinary course of business, Key enters into certain transactions that have tax
consequences. On occasion, the Internal Revenue Service (IRS) may challenge a particular tax
position taken by Key. The IRS has completed its audits of Keys tax returns for the 1995 through
2000 tax years and has disallowed all LILO deductions taken in the 1995 through 1997 tax years and
all deductions taken in the 1998 through 2000 tax years that relate to certain lease financing
transactions. In addition, the IRS is currently conducting audits of the 2001 through 2003 tax
years. Key expects that the IRS will disallow all similar deductions taken in those years.
Further information on Keys position on these matters and on the potential implications is
included in Note 12 (Income Taxes) under the heading Lease Financing Transactions on page 27.
In July 2006, the Financial Accounting Standards Board (FASB) issued new guidance that will
change the manner in which income from a leveraged lease is accounted for when there is either a
change or projected change in the timing of cash flows relating to income taxes generated by the
lease. In addition, the FASB concurrently issued new guidance related to the accounting for
uncertain tax positions. The new guidance related to each of these matters and the anticipated
effect on Keys financial results are summarized in Note 12 under the heading Tax-Related
Accounting Pronouncements Pending Adoption on page 28.
52
Financial Condition
Loans and loans held for sale
Total loans outstanding were $65.6 billion at September 30, 2006 and 2005, compared to $66.5
billion at December 31, 2005. The composition of Keys loan portfolio at each of these dates is
presented in Note 6 (Loans and Loans Held for Sale), which begins on page 19. Growth in our
commercial loan portfolio over the past twelve months was substantially offset by a third quarter
2006 transfer of home equity loans to loans held for sale in connection with our intention to
pursue a sale of the Champion Mortgage finance business.
Commercial loan portfolio. Commercial loans outstanding increased by $2.8 billion, or 6%, from one
year ago, reflecting improvement in the economy. The overall growth in the commercial loan
portfolio was geographically broad-based and spread among a number of industry sectors.
Commercial real estate loans for both owner- and nonowner-occupied properties constitute one of the
largest segments of Keys commercial loan portfolio. At September 30, 2006, Keys commercial real
estate portfolio included mortgage loans of $8.3 billion and construction loans of $8.3 billion.
The average size of a mortgage loan was $.6 million, and the largest mortgage loan had a balance of
$70 million. The average size of a construction loan commitment was $5.8 million. The largest
construction loan commitment was $107 million, of which $106 million was outstanding.
Key conducts its commercial real estate lending business through two primary sources: a
thirteen-state banking franchise and Real Estate Capital, a national line of business that
cultivates relationships both within and beyond the branch system. Real Estate Capital deals
exclusively with nonowner-occupied properties (generally properties in which the owner occupies
less than 60% of the premises) and accounted for approximately 61% of Keys total average
commercial real estate loans during the third quarter of 2006. Our commercial real estate business
as a whole focuses on larger real estate developers and, as shown in Figure 13, is diversified by
both industry type and geographic location of the underlying collateral.
Figure 13. Commercial Real Estate Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
Geographic Region |
|
|
|
|
|
|
Percent of |
|
dollars in millions |
|
Northeast |
|
|
Southeast |
|
|
Southwest |
|
|
Midwest |
|
|
Central |
|
|
West |
|
|
Total |
|
|
Total |
|
|
Nonowner-occupied: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential properties |
|
$ |
319 |
|
|
$ |
1,544 |
|
|
$ |
209 |
|
|
$ |
160 |
|
|
$ |
522 |
|
|
$ |
1,671 |
|
|
$ |
4,425 |
|
|
|
26.8 |
% |
Multi-family properties |
|
|
223 |
|
|
|
270 |
|
|
|
166 |
|
|
|
260 |
|
|
|
491 |
|
|
|
487 |
|
|
|
1,897 |
|
|
|
11.5 |
|
Retail properties |
|
|
102 |
|
|
|
286 |
|
|
|
88 |
|
|
|
410 |
|
|
|
287 |
|
|
|
300 |
|
|
|
1,473 |
|
|
|
8.9 |
|
Land and development |
|
|
51 |
|
|
|
216 |
|
|
|
134 |
|
|
|
71 |
|
|
|
185 |
|
|
|
178 |
|
|
|
835 |
|
|
|
5.0 |
|
Office buildings |
|
|
58 |
|
|
|
101 |
|
|
|
33 |
|
|
|
84 |
|
|
|
126 |
|
|
|
246 |
|
|
|
648 |
|
|
|
3.9 |
|
Warehouses |
|
|
96 |
|
|
|
62 |
|
|
|
56 |
|
|
|
145 |
|
|
|
56 |
|
|
|
164 |
|
|
|
579 |
|
|
|
3.5 |
|
Health facilities |
|
|
49 |
|
|
|
91 |
|
|
|
|
|
|
|
47 |
|
|
|
24 |
|
|
|
77 |
|
|
|
288 |
|
|
|
1.7 |
|
Manufacturing facilities |
|
|
9 |
|
|
|
1 |
|
|
|
12 |
|
|
|
25 |
|
|
|
6 |
|
|
|
26 |
|
|
|
79 |
|
|
|
.5 |
|
Hotels/Motels |
|
|
1 |
|
|
|
10 |
|
|
|
|
|
|
|
2 |
|
|
|
12 |
|
|
|
2 |
|
|
|
27 |
|
|
|
.2 |
|
Other |
|
|
184 |
|
|
|
82 |
|
|
|
3 |
|
|
|
233 |
|
|
|
46 |
|
|
|
159 |
|
|
|
707 |
|
|
|
4.3 |
|
|
|
|
|
1,092 |
|
|
|
2,663 |
|
|
|
701 |
|
|
|
1,437 |
|
|
|
1,755 |
|
|
|
3,310 |
|
|
|
10,958 |
|
|
|
66.3 |
|
Owner-occupied |
|
|
1,128 |
|
|
|
99 |
|
|
|
50 |
|
|
|
1,872 |
|
|
|
514 |
|
|
|
1,917 |
|
|
|
5,580 |
|
|
|
33.7 |
|
|
Total |
|
$ |
2,220 |
|
|
$ |
2,762 |
|
|
$ |
751 |
|
|
$ |
3,309 |
|
|
$ |
2,269 |
|
|
$ |
5,227 |
|
|
$ |
16,538 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonowner-occupied: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans |
|
|
|
|
|
$ |
28 |
|
|
|
|
|
|
$ |
3 |
|
|
$ |
1 |
|
|
|
|
|
|
$ |
32 |
|
|
|
N/M |
|
Accruing loans past due 90 days or more |
|
|
|
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
31 |
|
|
|
N/M |
|
Accruing loans past due 30 through 89 days |
|
$ |
1 |
|
|
|
43 |
|
|
$ |
2 |
|
|
|
12 |
|
|
|
5 |
|
|
$ |
19 |
|
|
|
82 |
|
|
|
N/M |
|
|
|
|
|
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 -
|
|
Idaho, 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, Montana, Oregon, Washington and Wyoming |
N/M = Not Meaningful
53
In the second half of 2005, we continued to expand our FHA financing and mortgage servicing
capabilities by acquiring Malone Mortgage Company and the commercial mortgage-backed securities
servicing business of ORIX Capital Markets, LLC, both headquartered in Dallas, Texas. These
acquisitions added more than $28 billion to our commercial mortgage servicing portfolio and are
just two in a series of acquisitions that we have initiated over the past several years to build
upon our success in the commercial mortgage business.
Management believes Key has both the scale and array of products to compete on a world-wide basis
in the specialty of equipment lease financing. This business is conducted through the Equipment
Finance line of business and continues to benefit from the fourth quarter 2004 acquisition of
American Express Business Finance Corporation (AEBF), the equipment leasing unit of American
Express small business division. AEBF had commercial loan and lease financing receivables of
approximately $1.5 billion at the date of acquisition. During the first quarter of 2006, Key
reclassified $792 million of loans from the commercial lease financing portfolio to the commercial,
financial and agricultural portfolio to more accurately reflect the nature of these receivables.
Prior period balances were not reclassified as the historical data was not available.
Consumer loan portfolio. Consumer loans outstanding decreased by $2.9 billion, or 14%, from one
year ago. The decline was largely attributable to the third quarter 2006 transfer of $2.5 billion
of home equity loans to loans held for sale in connection with our intention to pursue a sale of
Champion Mortgage discussed below. Home equity loan sales of $266 million within Keys National
Home Equity unit, as well as a general slowdown in the level of home equity loan originations over
the past year, also contributed to the decline. Excluding loan sales, acquisitions and the
transfer to loans held for sale, consumer loans would have decreased by $217 million, or 1%, during
the past twelve months.
The home equity portfolio is by far the largest segment of Keys consumer loan portfolio. Keys
home equity portfolio is derived primarily from our Regional Banking line of business (responsible
for 91% of the home equity portfolio at September 30, 2006) and the National Home Equity unit
within our Consumer Finance line of business. The National Home Equity unit has two components:
Champion Mortgage, a home equity finance business, and Key Home Equity Services, which works with
home improvement contractors to provide home equity and home improvement financing solutions. On
August 1, 2006, Key announced that it is considering a sale of its Champion Mortgage business. Key
has hired UBS Investment Bank to assist the Board of Directors and management with the possible
sale of this business. There is no assurance that Key will enter into an agreement regarding, or
consummate the sale of, this business.
Figure 14 summarizes Keys home equity loan portfolio 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 14. Home Equity Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
dollars in millions |
|
Third |
|
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
SOURCES OF LOANS OUTSTANDING AT PERIOD END |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional Banking |
|
$ |
9,990 |
|
|
$ |
10,122 |
|
|
$ |
10,100 |
|
|
$ |
10,232 |
|
|
$ |
10,345 |
|
|
Champion Mortgage a |
|
|
|
|
|
|
2,458 |
|
|
|
2,483 |
|
|
|
2,465 |
|
|
|
2,770 |
|
Key Home Equity Services |
|
|
998 |
|
|
|
929 |
|
|
|
846 |
|
|
|
791 |
|
|
|
757 |
|
|
National Home Equity unit |
|
|
998 |
|
|
|
3,387 |
|
|
|
3,329 |
|
|
|
3,256 |
|
|
|
3,527 |
|
|
Total |
|
$ |
10,988 |
|
|
$ |
13,509 |
|
|
$ |
13,429 |
|
|
$ |
13,488 |
|
|
$ |
13,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans at period end a |
|
$ |
46 |
|
|
$ |
90 |
|
|
$ |
97 |
|
|
$ |
79 |
|
|
$ |
75 |
|
Net charge-offs for the period |
|
|
4 |
|
|
|
7 |
|
|
|
6 |
|
|
|
5 |
|
|
|
6 |
|
Yield for the period |
|
|
7.32 |
% |
|
|
7.36 |
% |
|
|
7.19 |
% |
|
|
7.00 |
% |
|
|
6.72 |
% |
|
(a) |
|
On August 1, 2006, Key transferred $2.5 billion of home equity loans from the loan
portfolio to loans held for sale and approximately $55 million of home equity loans from
nonperforming loans to nonperforming loans held for sale in connection with its intention to
pursue a sale of the Champion Mortgage finance business. |
54
Loans held for sale. As shown in Note 6, Keys loans held for sale rose to $7.2 billion at
September 30, 2006, from $3.4 billion at December 31, 2005, and $3.6 billion at September 30, 2005,
due primarily to the third quarter 2006 transfer of home equity loans to loans held for sale.
Originations in the commercial mortgage; commercial, financial and agricultural; and construction
loan portfolios also contributed to the increase.
Sales and securitizations. We have continued to use alternative funding sources like loan sales
and securitizations to support our loan origination capabilities. In addition, over the past
several years, several acquisitions have improved our ability to originate and sell new loans, and
to securitize and service loans generated by others, especially in the area of commercial real
estate.
During the past twelve months, Key sold $2.4 billion of commercial real estate loans, $1.3 billion
of education loans ($904 million through securitizations), $416 million of commercial loans and
leases, $355 million of residential real estate loans and $266 million of home equity loans. Most
of these sales came from the held-for-sale portfolio.
Among the factors that Key considers in determining which loans to sell or securitize are:
¨ whether particular lending businesses meet our performance standards or fit with our relationship banking strategy; |
|
¨ our asset/liability management needs; |
|
¨ whether the characteristics of a specific loan portfolio make it conducive to securitization; |
|
¨ the relative cost of funds; |
|
¨ the level of credit risk; and |
|
¨ capital requirements. |
Figure 15 summarizes Keys loan sales (including securitizations) for the first nine months of 2006
and all of 2005.
Figure 15. Loans Sold (Including Loans Held for Sale)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
Commercial |
|
|
Residential |
|
|
Home |
|
|
Consumer |
|
|
|
|
|
|
|
in millions |
|
Commercial |
|
|
Real Estate |
|
|
Lease Financing |
|
|
Real Estate |
|
|
Equity |
|
|
Indirect |
|
|
Education |
|
|
Total |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third quarter |
|
$ |
37 |
|
|
$ |
679 |
|
|
$ |
16 |
|
|
$ |
109 |
|
|
$ |
2 |
|
|
|
|
|
|
$ |
143 |
|
|
$ |
986 |
|
Second quarter |
|
|
64 |
|
|
|
483 |
|
|
|
|
|
|
|
97 |
|
|
|
|
|
|
|
|
|
|
|
110 |
|
|
|
754 |
|
First quarter |
|
|
40 |
|
|
|
406 |
|
|
|
105 |
|
|
|
54 |
|
|
|
|
|
|
|
|
|
|
|
172 |
|
|
|
777 |
|
|
Total |
|
$ |
141 |
|
|
$ |
1,568 |
|
|
$ |
121 |
|
|
$ |
260 |
|
|
$ |
2 |
|
|
|
|
|
|
$ |
425 |
|
|
$ |
2,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth quarter |
|
$ |
44 |
|
|
$ |
792 |
|
|
$ |
110 |
|
|
$ |
95 |
|
|
$ |
264 |
|
|
|
|
|
|
$ |
834 |
|
|
$ |
2,139 |
|
Third quarter |
|
|
40 |
|
|
|
710 |
|
|
|
|
|
|
|
99 |
|
|
|
3 |
|
|
$ |
111 |
|
|
|
48 |
|
|
|
1,011 |
|
Second quarter |
|
|
21 |
|
|
|
336 |
|
|
|
|
|
|
|
99 |
|
|
|
|
|
|
|
635 |
|
|
|
128 |
|
|
|
1,219 |
|
First quarter |
|
|
18 |
|
|
|
389 |
|
|
|
|
|
|
|
98 |
|
|
|
31 |
|
|
|
992 |
|
|
|
208 |
|
|
|
1,736 |
|
|
Total |
|
$ |
123 |
|
|
$ |
2,227 |
|
|
$ |
110 |
|
|
$ |
391 |
|
|
$ |
298 |
|
|
$ |
1,738 |
|
|
$ |
1,218 |
|
|
$ |
6,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Figure 16 shows loans that are either administered or serviced by Key, but not recorded on its
balance sheet. Included are loans that have been both securitized and sold, or simply sold
outright. As discussed previously, the acquisitions of Malone Mortgage Company and the commercial
mortgage-backed securities servicing business of ORIX Capital Markets, LLC added more than $28
billion to our commercial mortgage servicing portfolio during the second half of 2005.
55
Figure 16. Loans Administered or Serviced
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
June 30, |
|
|
March 31, |
|
|
December 31, |
|
|
September 30, |
|
in millions |
|
2006 |
|
|
2006 |
|
|
2006 |
|
|
2005 |
|
|
2005 |
|
|
Commercial real estate loans |
|
$ |
81,873 |
|
|
$ |
78,348 |
|
|
$ |
76,123 |
|
|
$ |
72,902 |
|
|
$ |
43,555 |
|
Education loans |
|
|
4,640 |
|
|
|
4,806 |
|
|
|
4,992 |
|
|
|
5,083 |
|
|
|
4,518 |
|
Commercial lease financing |
|
|
513 |
|
|
|
479 |
|
|
|
422 |
|
|
|
354 |
|
|
|
251 |
|
Commercial loans |
|
|
252 |
|
|
|
255 |
|
|
|
247 |
|
|
|
242 |
|
|
|
233 |
|
Home equity loans |
|
|
4 |
|
|
|
4 |
|
|
|
5 |
|
|
|
59 |
|
|
|
85 |
|
|
Total |
|
$ |
87,282 |
|
|
$ |
83,892 |
|
|
$ |
81,789 |
|
|
$ |
78,640 |
|
|
$ |
48,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the event of default, Key is subject to recourse with respect to approximately $656 million of
the $87.3 billion of loans administered or serviced at September 30, 2006. Additional information
about this recourse arrangement is included in Note 13 (Contingent Liabilities and Guarantees)
under the heading Recourse agreement with Federal National Mortgage Association on page 30.
Key derives income from several sources when we sell or securitize loans but retain the right to
administer or service them. We earn noninterest income (recorded as other income) from servicing
or administering the loans, and we earn interest income from any securitized assets we retain, and
from the investment of funds generated by escrow deposits collected in connection with the
servicing of commercial real estate loans. These deposits have contributed to the growth in Keys
average noninterest-bearing deposits over the past twelve months.
Securities
At September 30, 2006, the securities portfolio totaled $8.8 billion and included $7.4 billion of
securities available for sale, $41 million of investment securities and $1.4 billion of other
investments (primarily principal investments). In comparison, the total portfolio at December 31,
2005, was $8.7 billion, including $7.3 billion of securities available for sale, $91 million of
investment securities and $1.3 billion of other investments. At September 30, 2005, the securities
portfolio totaled $8.5 billion and included $7.1 billion of securities available for sale, $98
million of investment securities and $1.3 billion of other investments.
Securities available for sale. The majority of Keys securities available-for-sale portfolio
consists of collateralized mortgage obligations (CMO). A CMO is a debt security that is 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 September 30, 2006, Key had $6.9
billion invested in CMOs and other mortgage-backed securities, compared to $6.5 billion at December
31, 2005, and September 30, 2005. Substantially all of Keys mortgage-backed securities are issued
or backed by federal agencies. The CMO securities held by Key are shorter-duration class bonds
that are structured to have more predictable cash flows than longer-term class bonds.
The weighted-average maturity of Keys securities available-for-sale portfolio was 2.5 years at
September 30, 2006, compared to 2.4 years at December 31, 2005, and 2.2 years at September 30,
2005.
The size and composition of Keys securities available-for-sale portfolio depend largely on
managements assessment of current economic conditions, including the interest rate environment,
and our needs for liquidity, as well as the extent to which we are required (or elect) to hold
these assets as collateral to secure public funds and trust deposits. Although debt securities are
generally used for this purpose, other assets, such as securities purchased under resale
agreements, may be used temporarily when they provide more favorable yields or risks.
Figure 17 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 (Securities), which begins on page 17.
56
Figure 17. 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 |
|
|
SEPTEMBER 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year or less |
|
$ |
209 |
|
|
$ |
1 |
|
|
$ |
473 |
|
|
$ |
4 |
|
|
$ |
10 |
|
|
$ |
66 |
|
|
$ |
763 |
|
|
|
4.48 |
% |
After one through five years |
|
|
5 |
|
|
|
4 |
|
|
|
6,175 |
|
|
|
160 |
|
|
|
77 |
|
|
|
110 |
|
|
|
6,531 |
|
|
|
4.53 |
|
After five through ten years |
|
|
3 |
|
|
|
5 |
|
|
|
2 |
|
|
|
34 |
|
|
|
70 |
|
|
|
2 |
|
|
|
116 |
|
|
|
10.40 |
|
After ten years |
|
|
3 |
|
|
|
7 |
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
10 |
|
|
|
31 |
|
|
|
6.55 |
|
|
Fair value |
|
$ |
220 |
|
|
$ |
17 |
|
|
$ |
6,650 |
|
|
$ |
209 |
|
|
$ |
157 |
|
|
$ |
188 |
|
|
$ |
7,441 |
|
|
|
|
|
Amortized cost |
|
|
220 |
|
|
|
16 |
|
|
|
6,762 |
|
|
|
210 |
|
|
|
122 |
|
|
|
179 |
|
|
|
7,509 |
|
|
|
4.62 |
% |
Weighted-average yield c |
|
|
5.05 |
% |
|
|
7.25 |
% |
|
|
4.30 |
% |
|
|
5.47 |
% |
|
|
19.54 |
% |
|
|
5.70 |
%d |
|
|
4.62 |
%d |
|
|
|
|
Weighted-average maturity |
|
.4 years |
|
|
10.3 years |
|
|
2.4 years |
|
|
4.9 years |
|
|
5.2 years |
|
|
4.2 years |
|
|
2.5 years |
|
|
|
|
|
|
DECEMBER 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
268 |
|
|
$ |
18 |
|
|
$ |
6,298 |
|
|
$ |
234 |
|
|
$ |
182 |
|
|
$ |
269 |
|
|
$ |
7,269 |
|
|
|
|
|
Amortized cost |
|
|
267 |
|
|
|
17 |
|
|
|
6,455 |
|
|
|
233 |
|
|
|
115 |
|
|
|
261 |
|
|
|
7,348 |
|
|
|
4.42 |
% |
|
SEPTEMBER 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
283 |
|
|
$ |
19 |
|
|
$ |
6,266 |
|
|
$ |
258 |
|
|
$ |
171 |
|
|
$ |
127 |
|
|
$ |
7,124 |
|
|
|
|
|
Amortized cost |
|
|
283 |
|
|
|
19 |
|
|
|
6,390 |
|
|
|
255 |
|
|
|
98 |
|
|
|
120 |
|
|
|
7,165 |
|
|
|
4.39 |
% |
|
(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 securities of $166 million at September 30, 2006, that have no stated yield. |
Investment securities. Securities issued by states and political subdivisions constitute most
of Keys investment securities. Figure 18 shows the composition, yields and remaining maturities
of these securities.
Figure 18. Investment Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
Political |
|
|
Other |
|
|
|
|
|
|
Average |
|
dollars in millions |
|
Subdivisions |
|
|
Securities |
|
|
Total |
|
|
Yield a |
|
|
SEPTEMBER 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year or less |
|
$ |
9 |
|
|
$ |
2 |
|
|
$ |
11 |
|
|
|
8.45 |
% |
After one through five years |
|
|
16 |
|
|
|
13 |
|
|
|
29 |
|
|
|
6.52 |
|
After five through ten years |
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
8.23 |
|
|
Amortized cost |
|
$ |
26 |
|
|
$ |
15 |
|
|
$ |
41 |
|
|
|
7.07 |
% |
Fair value |
|
|
27 |
|
|
|
15 |
|
|
|
42 |
|
|
|
|
|
Weighted-average maturity |
|
1.6 years |
|
1.9 years |
|
|
1.7 years |
|
|
|
|
|
|
DECEMBER 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost |
|
$ |
35 |
|
|
$ |
56 |
|
|
$ |
91 |
|
|
|
5.25 |
% |
Fair value |
|
|
36 |
|
|
|
56 |
|
|
|
92 |
|
|
|
|
|
|
SEPTEMBER 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost |
|
$ |
42 |
|
|
$ |
56 |
|
|
$ |
98 |
|
|
|
5.39 |
% |
Fair value |
|
|
43 |
|
|
|
56 |
|
|
|
99 |
|
|
|
|
|
|
(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%. |
Other investments. Principal investments investments in equity and mezzanine instruments
made by Keys Principal Investing unit ___are carried at fair value, which aggregated
$843 million at September 30, 2006, and $800 million at December 31, 2005, and September 30, 2005.
Principal investments represent approximately 62% of other investments at September 30, 2006.
These investments include direct and indirect investments ___predominantly in
privately held companies. Direct investments are those made in a particular company, while
indirect investments are made through funds that include other investors.
57
In addition to principal investments, other investments include other equity and mezzanine
instruments that do not have readily determinable fair values. These securities include certain
real estate-related investments of $193 million at September 30, 2006, $209 million at December 31,
2005, and $233 million at September 30, 2005. The remaining securities consist primarily of
Federal Reserve and Federal Home Loan Bank stock. This stock, which is carried at cost, totaled
$192 million at September 30, 2006, $187 million at December 31, 2005, and $182 million at
September 30, 2005. Neither these securities nor principal investments have stated maturities.
Deposits and other sources of funds
Core deposits domestic deposits other than certificates of deposit of $100,000 or
more are Keys primary source of funding. These deposits generally are stable, have
a relatively low cost and typically react more slowly to changes in interest rates than
market-based deposits. During the third quarter of 2006, core deposits averaged $51.7 billion and
represented 63% of the funds Key used to support earning assets, compared to $47.9 billion and 61%,
respectively, during the same quarter in 2005. The composition of Keys deposits is shown in
Figure 5, which spans pages 45 and 46.
The increase in the level of Keys average core deposits during the past twelve months was due to
higher levels of money market deposit accounts, time deposits and noninterest-bearing deposits.
These results reflect client preferences for investments that provide high levels of liquidity in a
changing interest rate environment. The growth in money market deposit accounts also benefited
from the introduction of new products in 2005 and 2006. Average noninterest-bearing deposits also
increased because we intensified our cross-selling efforts, focused sales and marketing efforts on
our free checking products, and collected more escrow deposits associated with the servicing of
commercial real estate loans.
Purchased funds, comprising large certificates of deposit, deposits in the foreign branch and
short-term borrowings, averaged $15.6 billion in the third quarter of 2006, compared to $15.5
billion during the year-ago quarter. The increase was attributable to growth in large certificates
of deposits, offset in part by a decrease in bank notes and other short-term borrowings. The need
for purchased funds has diminished as a result of strong core deposit growth, a higher level of
capital and other interest-free funds, and loan sales.
We continue to consider loan sales and securitizations as a funding alternative when market
conditions are favorable.
Capital
Shareholders equity. Total shareholders equity at September 30, 2006, was $7.9 billion, up $349
million from December 31, 2005. Factors contributing to the change in shareholders equity during
the first nine months of 2006 are shown in the Consolidated Statements of Changes in Shareholders
Equity presented on page 5.
Changes in common shares outstanding. Figure 19 shows activities that caused the change in Keys
outstanding common shares over the past five quarters.
Figure 19. Changes in Common Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands |
|
3Q06 |
|
|
2Q06 |
|
|
1Q06 |
|
|
4Q05 |
|
|
3Q05 |
|
|
Shares outstanding at beginning of period |
|
|
402,672 |
|
|
|
405,273 |
|
|
|
406,624 |
|
|
|
408,542 |
|
|
|
408,231 |
|
Issuance of shares under employee benefit
and dividend reinvestment plans |
|
|
2,576 |
|
|
|
1,399 |
|
|
|
4,649 |
|
|
|
1,332 |
|
|
|
1,561 |
|
Repurchase of common shares |
|
|
(2,500 |
) |
|
|
(4,000 |
) |
|
|
(6,000 |
) |
|
|
(3,250 |
) |
|
|
(1,250 |
) |
|
Shares outstanding at end of period |
|
|
402,748 |
|
|
|
402,672 |
|
|
|
405,273 |
|
|
|
406,624 |
|
|
|
408,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key repurchases its common shares periodically under a repurchase program authorized by Keys
Board of Directors. Keys repurchase activity for each of the three months in the quarter ended
September 30, 2006, is summarized in Figure 20.
58
Figure 20. Share Repurchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Remaining Number |
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased |
|
|
of Shares that may |
|
|
|
Number of |
|
|
Average |
|
|
under a Publicly |
|
|
be Purchased Under |
|
|
|
Shares |
|
|
Price Paid |
|
|
Announced |
|
|
the Program as |
|
in thousands, except per share data |
|
Purchased |
|
|
per Share |
|
|
Program a |
|
|
of each Month-End a |
|
|
July 1-31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,461 |
|
August 1-31, 2006 |
|
|
2,000 |
|
|
$ |
37.28 |
|
|
|
2,000 |
|
|
|
10,461 |
|
September 1-30, 2006 |
|
|
500 |
|
|
|
36.74 |
|
|
|
500 |
|
|
|
9,961 |
|
|
Total |
|
|
2,500 |
|
|
$ |
37.17 |
|
|
|
2,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
In July 2004, the Board of Directors authorized the repurchase of 25,000,000 common shares,
in addition to the shares remaining from a repurchase program authorized in September 2003.
This action brought the total repurchase authorization to 31,961,248 shares. These shares may
be repurchased in the open market or through negotiated transactions. The program does not
have an expiration date. |
At September 30, 2006, Key had 89,140,338 treasury shares. Management expects to reissue
those shares from time-to-time to support the employee stock purchase, stock option and dividend
reinvestment plans, and for other corporate purposes. During the first nine months of 2006, Key
reissued 8,624,835 treasury shares.
Capital adequacy. Capital adequacy is an important indicator of financial stability and
performance. Overall, Keys capital position remains strong: the ratio of total shareholders
equity to total assets was 8.26% at September 30, 2006, compared to 8.16% at December 31, 2005, and
8.15% at September 30, 2005. Keys ratio of tangible equity to tangible assets was 6.81% at
September 30, 2006, slightly above our targeted range of 6.25% to 6.75%. Management believes that
Keys capital position provides the flexibility to take advantage of investment opportunities, to
repurchase shares when appropriate and to pay dividends.
Banking industry regulators prescribe minimum capital ratios for bank holding companies and their
banking subsidiaries. Note 14 (Shareholders Equity), which begins on page 76 of Keys 2005
Annual Report to Shareholders, explains the implications of failing to meet specific capital
requirements imposed by the banking regulators. Risk-based capital guidelines require a minimum
level of capital as a percent of risk-weighted assets, which is total assets plus certain
off-balance sheet items, both adjusted 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 September
30, 2006, Keys Tier 1 capital ratio was 8.02%, and its total
capital ratio was 12.13%.
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 September 30, 2006, Key had a leverage
ratio of 8.89%.
Federal bank regulators group FDIC-insured depository institutions into five categories, ranging
from critically undercapitalized to well capitalized. Keys affiliate bank, KBNA, qualified as
well capitalized at September 30, 2006, 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 also qualify as well capitalized at September 30,
2006. 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
KBNA.
Figure 21 presents the details of Keys regulatory capital position at September 30, 2006, December
31, 2005, and September 30, 2005.
59
Figure 21. Capital Components and Risk-Weighted Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
September 30, |
|
dollars in millions |
|
2006 |
|
|
2005 |
|
|
2005 |
|
|
TIER 1 CAPITAL |
|
|
|
|
|
|
|
|
|
|
|
|
Common shareholders equity a |
|
$ |
8,019 |
|
|
$ |
7,678 |
|
|
$ |
7,578 |
|
Qualifying capital securities |
|
|
1,792 |
|
|
|
1,542 |
|
|
|
1,542 |
|
Less: Goodwill |
|
|
1,372 |
|
|
|
1,355 |
|
|
|
1,344 |
|
Other assets b |
|
|
179 |
|
|
|
178 |
|
|
|
162 |
|
|
Total Tier 1 capital |
|
|
8,260 |
|
|
|
7,687 |
|
|
|
7,614 |
|
|
TIER 2 CAPITAL |
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for losses on loans and
lending-related commitments |
|
|
1,003 |
|
|
|
1,025 |
|
|
|
1,152 |
|
Net unrealized gains on equity securities available for sale |
|
|
4 |
|
|
|
4 |
|
|
|
3 |
|
Qualifying long-term debt |
|
|
3,229 |
|
|
|
2,899 |
|
|
|
2,899 |
|
|
Total Tier 2 capital |
|
|
4,236 |
|
|
|
3,928 |
|
|
|
4,054 |
|
|
Total risk-based capital |
|
$ |
12,496 |
|
|
$ |
11,615 |
|
|
$ |
11,668 |
|
|
|
|
|
|
|
|
|
|
|
RISK-WEIGHTED ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Risk-weighted assets on balance sheet |
|
$ |
79,764 |
|
|
$ |
76,724 |
|
|
$ |
75,594 |
|
Risk-weighted off-balance sheet exposure |
|
|
24,463 |
|
|
|
25,619 |
|
|
|
24,212 |
|
Less: Goodwill |
|
|
1,372 |
|
|
|
1,355 |
|
|
|
1,344 |
|
Other assets b |
|
|
778 |
|
|
|
785 |
|
|
|
769 |
|
Plus: Market risk-equivalent assets |
|
|
941 |
|
|
|
1,064 |
|
|
|
945 |
|
|
Risk-weighted assets |
|
$ |
103,018 |
|
|
$ |
101,267 |
|
|
$ |
98,638 |
|
|
|
|
|
|
|
|
|
|
|
AVERAGE QUARTERLY TOTAL ASSETS |
|
$ |
94,918 |
|
|
$ |
92,206 |
|
|
$ |
90,623 |
|
|
|
|
|
|
|
|
|
|
|
CAPITAL RATIOS |
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 risk-based capital ratio |
|
|
8.02 |
% |
|
|
7.59 |
% |
|
|
7.72 |
% |
Total risk-based capital ratio |
|
|
12.13 |
|
|
|
11.47 |
|
|
|
11.83 |
|
Leverage ratioc |
|
|
8.89 |
|
|
|
8.53 |
|
|
|
8.60 |
|
|
(a) |
|
Common shareholders equity does not include net unrealized gains or losses on securities
available for sale (except for
net unrealized losses on marketable equity securities) or net gains or losses on cash flow
hedges. |
|
(b) |
|
Other assets deducted from Tier 1 capital and risk-weighted assets consist of intangible
assets (excluding goodwill)
recorded after February 19, 1992, deductible portions of purchased mortgage servicing rights
and deductible portions of
nonfinancial equity investments. |
|
(c) |
|
This ratio is Tier 1 capital divided by average quarterly total assets less goodwill, the
nonqualifying intangible assets
described in footnote (b), deductible portions of nonfinancial equity investments and net
unrealized gains or losses on
securities available for sale. |
60
Risk Management
Overview
Certain risks are inherent in the business activities that financial services companies conduct.
The ability to properly and effectively identify, measure, monitor and report such risks is
essential to maintaining safety and soundness and to maximizing profitability. Management believes
that the most significant risks to which Key is exposed are market risk, credit risk, liquidity
risk and operational risk. Each type of risk is defined and discussed in greater detail in the
remainder of this section.
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 adherence to Keys code of ethics and administers an annual
self-assessment process. The Board has established Audit and Finance committees whose appointed
members play an integral role in helping the Board meet its risk oversight responsibilities. Those
committees meet jointly, as appropriate, to discuss matters that relate to each committees
responsibilities. The responsibilities of these two committees are summarized on page 38 of Keys
2005 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, 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. When the value of an instrument is tied to
such external factors, the holder faces market risk. Most of Keys market risk is derived from
interest rate fluctuations.
Interest rate risk management
Keys Asset/Liability Management Policy Committee (ALCO) has developed a program to measure and
manage interest rate risk. This senior management committee is also responsible for approving
Keys asset/liability management (A/LM) policies, overseeing the formulation and implementation
of strategies to improve balance sheet positioning and earnings, and reviewing Keys sensitivity to
changes in interest rates.
Factors contributing to interest rate exposure. Key uses interest rate exposure models to quantify
the potential impact that a variety of possible interest rate scenarios may have on earnings and
the economic value of equity. The various scenarios estimate the level of Keys interest rate
exposure arising from gap risk, option risk and basis risk. Each of these types of risk is defined
in the discussion of market risk management, which begins on page 38 of Keys 2005 Annual Report to
Shareholders.
Measurement of short-term interest rate exposure. Key uses a simulation model to measure interest
rate risk. The model estimates the impact that various changes in the overall level of market
interest rates would have on net interest income over one- and two-year time periods. The results
help Key develop strategies for managing exposure to interest rate risk.
Like any forecasting technique, interest rate simulation modeling is based on a large number of
assumptions and judgments. Primary among these for Key are those related to loan and deposit
growth, asset and liability prepayments, interest rate variations, product pricing, and on- and
off-balance sheet management strategies. Management believes its assumptions are reasonable.
Nevertheless, simulation modeling produces only a sophisticated estimate, not a precise calculation
of exposure.
61
Keys risk management guidelines call for preventive measures to be taken if simulation modeling
demonstrates that a gradual 200 basis point increase or decrease in short-term rates over the next
twelve months, defined as a stressed interest rate scenario, would adversely affect net interest
income over the same period by more than 2%. Key is operating within these guidelines.
When an increase in short-term interest rates is expected to generate lower net interest income,
the balance sheet is said to be liability-sensitive, meaning that rates paid on deposits and
other liabilities respond more quickly to market forces than yields on loans and other assets.
Conversely, when an increase in short-term interest rates is expected to generate greater net
interest income, the balance sheet is said to be asset-sensitive, meaning that yields on loans
and other assets respond more quickly to market forces than rates paid on deposits and other
liabilities. Key has historically maintained a modest liability-sensitive position to increasing
interest rates under our standard risk assessment. However, since mid-2004, Key has been
operating with a relatively neutral, to slight asset-sensitive, position. Management actively
monitors the risk of changes in interest rates and takes preventive actions, when deemed necessary,
with the objective of assuring that net interest income at risk does not exceed internal
guidelines. In addition, since rising rates typically reflect an improving economy, management
expects that Keys lines of business could increase their portfolios of market-rate loans and
deposits, which would mitigate the effect of rising rates on Keys interest expense.
As discussed above, since mid-2004, Key has been operating with a relatively neutral, to slight
asset-sensitive, position. Deposit growth, sales of fixed-rate consumer loans, and a smaller
portfolio of receive fixed A/LM interest rate swaps have contributed to this position.
Additionally, management has refined simulation model assumptions to address anticipated changes in
deposit pricing on select products in a very competitive marketplace. Key manages interest rate
risk with a long-term perspective. Although our rate risk guidelines currently call for a
relatively neutral position, our bias is to be modestly liability-sensitive in the long run.
For purposes of simulation modeling, we estimate net interest income starting with current market
interest rates, and assume that those rates will not change in future periods. Then we measure the
amount of net interest income at risk by assuming a gradual 200 basis point increase or decrease in
the Federal Funds target rate over the next twelve months. At the same time, we adjust other
market interest rates, such as U.S. Treasury, LIBOR, and interest rate swap rates, but not as
dramatically. These market interest rate assumptions form the basis for our standard risk
assessment in a stressed period for interest rate changes. We also assess rate risk assuming that
market interest rates move faster or slower, and that the magnitude of change results in steeper
or flatter yield curves. (The yield curve depicts the relationship between the yield on a
particular type of security and its term to maturity.)
In addition to modeling interest rates as described above, Key models the balance sheet in three
distinct ways to forecast changes over different periods and under different conditions. Our
initial simulation of net interest income assumes that the composition of the balance sheet will
not change over the next year. In other words, current levels of loans, deposits, investments, and
other related assets and liabilities are held constant, and loans, deposits and investments that
are assumed to mature or prepay are replaced with like amounts. Interest rate swaps and
investments used for A/LM purposes, and term debt used for liquidity management purposes are
allowed to mature without replacement. In this simulation, we are simplistically capturing the
effect of hypothetical changes in interest rates on future net interest income volatility.
Additionally, growth in floating-rate loans and fixed-rate deposits, which naturally reduces the
amount of net interest income at risk when interest rates are rising, is not captured in this
simulation.
Another simulation, using Keys most likely balance sheet, assumes that the balance sheet will
grow at levels consistent with consensus economic forecasts. Investments used for A/LM purposes
will be allowed to mature without replacement, and term debt used for liquidity management purposes
will be incorporated to ensure a prudent level of liquidity. Forecasted loan, security, and
deposit growth in the simulation model produces incremental risks, such as gap risk, option risk
and basis risk, which may
increase interest rate risk. To mitigate these risks, management makes assumptions about future
on- and off-balance sheet management strategies. In this simulation, we are testing the
sensitivity of net interest income to future
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balance sheet volume changes while simultaneously
capturing the effect of hypothetical changes in interest rates on future net interest income
volatility. As of September 30, 2006, based on the results of our simulation model, and assuming
that management does not take action to alter the outcome, Key would expect net interest income to
decrease by approximately .12% if short-term interest rates gradually increase by 200 basis points
over the next twelve months. Conversely, if short-term interest rates gradually decrease by 200
basis points over the next twelve months, net interest income would be expected to increase by
approximately .90% over the next year.
The results of the most likely balance sheet simulation form the basis for our standard risk
assessment that is performed monthly and reported to Keys risk governance committees in accordance
with ALCO policy. There are a variety of factors that can influence the results of the simulation.
Assumptions we make about loan and deposit growth strongly influence funding, liquidity, and
interest rate sensitivity. Figure 26 (Net Interest Income Volatility) on page 40 of Keys 2005
Annual Report to Shareholders illustrates the variability of the simulation results that can arise
from changing certain major assumptions.
As of September 30, 2006, based on the results of a model in which we simulate the effect of a
gradual 200 basis point increase in short-term interest rates only in the second year of a two-year
time horizon, using the most likely balance sheet, and assuming that management does not take
action to alter the outcome, Key would expect net interest income in the second year to decrease by
approximately .57%. Conversely, if short-term interest rates gradually decrease by 200 basis
points in the second year but remain unchanged in the first year, net interest income would be
expected to increase by approximately 1.62% during the second year.
The results of the above second year scenarios reflect managements intention to gradually move to
a slight liability-sensitive position to rising interest rates. Given the current expectations for
unchanged-to-lower short-term interest rates, we currently plan to add moderate amounts of receive
fixed/pay variable interest rate swaps during the