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, 2007
or
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o |
|
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):
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Large accelerated filer þ
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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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388,768,905 |
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(Title of class)
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(Outstanding at October 31, 2007) |
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 |
|
2007 |
|
|
2006 |
|
|
2006 |
|
|
|
(Unaudited) |
|
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|
|
|
|
(Unaudited) |
|
ASSETS |
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|
|
|
|
|
|
|
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|
Cash and due from banks |
|
$ |
2,016 |
|
|
$ |
2,264 |
|
|
$ |
2,957 |
|
Short-term investments |
|
|
1,723 |
|
|
|
1,407 |
|
|
|
1,582 |
|
Securities available for sale |
|
|
7,915 |
|
|
|
7,827 |
|
|
|
7,441 |
|
Investment securities (fair value: $36, $42 and $42) |
|
|
36 |
|
|
|
41 |
|
|
|
41 |
|
Other investments |
|
|
1,509 |
|
|
|
1,352 |
|
|
|
1,367 |
|
Loans, net of unearned income of $2,227, $2,136 and $2,075 |
|
|
68,999 |
|
|
|
65,826 |
|
|
|
65,551 |
|
Less: Allowance for loan losses |
|
|
955 |
|
|
|
944 |
|
|
|
944 |
|
|
Net loans |
|
|
68,044 |
|
|
|
64,882 |
|
|
|
64,607 |
|
Loans held for sale |
|
|
4,791 |
|
|
|
3,637 |
|
|
|
7,150 |
|
Premises and equipment |
|
|
631 |
|
|
|
595 |
|
|
|
567 |
|
Operating lease assets |
|
|
1,135 |
|
|
|
1,124 |
|
|
|
1,076 |
|
Goodwill |
|
|
1,202 |
|
|
|
1,202 |
|
|
|
1,372 |
|
Other intangible assets |
|
|
105 |
|
|
|
120 |
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|
|
127 |
|
Corporate-owned life insurance |
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|
2,845 |
|
|
|
2,782 |
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|
2,754 |
|
Derivative assets |
|
|
1,497 |
|
|
|
1,091 |
|
|
|
915 |
|
Accrued income and other assets |
|
|
3,917 |
|
|
|
4,013 |
|
|
|
4,199 |
|
|
Total assets |
|
$ |
97,366 |
|
|
$ |
92,337 |
|
|
$ |
96,155 |
|
|
|
|
|
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LIABILITIES |
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Deposits in domestic offices: |
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NOW and money market deposit accounts |
|
$ |
24,198 |
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$ |
24,340 |
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|
$ |
25,150 |
|
Savings deposits |
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|
1,544 |
|
|
|
1,642 |
|
|
|
1,672 |
|
Certificates of deposit ($100,000 or more) |
|
|
6,672 |
|
|
|
5,941 |
|
|
|
5,734 |
|
Other time deposits |
|
|
11,403 |
|
|
|
11,956 |
|
|
|
11,848 |
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|
Total interest-bearing deposits |
|
|
43,817 |
|
|
|
43,879 |
|
|
|
44,404 |
|
Noninterest-bearing deposits |
|
|
14,003 |
|
|
|
13,553 |
|
|
|
13,396 |
|
Deposits in foreign office interest-bearing |
|
|
5,894 |
|
|
|
1,684 |
|
|
|
3,629 |
|
|
Total deposits |
|
|
63,714 |
|
|
|
59,116 |
|
|
|
61,429 |
|
Federal funds purchased and securities sold under repurchase agreements |
|
|
5,398 |
|
|
|
3,643 |
|
|
|
4,701 |
|
Bank notes and other short-term borrowings |
|
|
2,743 |
|
|
|
1,192 |
|
|
|
2,594 |
|
Derivative liabilities |
|
|
1,063 |
|
|
|
922 |
|
|
|
844 |
|
Accrued expense and other liabilities |
|
|
5,079 |
|
|
|
5,228 |
|
|
|
4,986 |
|
Long-term debt |
|
|
11,549 |
|
|
|
14,533 |
|
|
|
13,654 |
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|
Total liabilities |
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|
89,546 |
|
|
|
84,634 |
|
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|
88,208 |
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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 |
|
|
492 |
|
|
|
492 |
|
|
|
492 |
|
Capital surplus |
|
|
1,617 |
|
|
|
1,602 |
|
|
|
1,588 |
|
Retained earnings |
|
|
8,788 |
|
|
|
8,377 |
|
|
|
8,371 |
|
Treasury stock, at cost (103,180,446, 92,735,595 and 89,140,338 shares) |
|
|
(3,023 |
) |
|
|
(2,584 |
) |
|
|
(2,434 |
) |
Accumulated other comprehensive loss |
|
|
(54 |
) |
|
|
(184 |
) |
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|
(70 |
) |
|
Total shareholders equity |
|
|
7,820 |
|
|
|
7,703 |
|
|
|
7,947 |
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|
Total liabilities and shareholders equity |
|
$ |
97,366 |
|
|
$ |
92,337 |
|
|
$ |
96,155 |
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
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|
INTEREST INCOME |
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|
|
|
|
|
|
|
|
|
|
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|
Loans |
|
$ |
1,209 |
|
|
$ |
1,178 |
|
|
$ |
3,546 |
|
|
$ |
3,374 |
|
Loans held for sale |
|
|
91 |
|
|
|
94 |
|
|
|
248 |
|
|
|
235 |
|
Investment securities |
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
Securities available for sale |
|
|
106 |
|
|
|
84 |
|
|
|
312 |
|
|
|
251 |
|
Short-term investments |
|
|
16 |
|
|
|
16 |
|
|
|
50 |
|
|
|
47 |
|
Other investments |
|
|
12 |
|
|
|
16 |
|
|
|
40 |
|
|
|
58 |
|
|
Total interest income |
|
|
1,434 |
|
|
|
1,389 |
|
|
|
4,197 |
|
|
|
3,967 |
|
|
|
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|
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INTEREST EXPENSE |
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|
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|
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Deposits |
|
|
482 |
|
|
|
428 |
|
|
|
1,362 |
|
|
|
1,136 |
|
Federal funds purchased and securities sold under repurchase agreements |
|
|
55 |
|
|
|
30 |
|
|
|
163 |
|
|
|
70 |
|
Bank notes and other short-term borrowings |
|
|
30 |
|
|
|
24 |
|
|
|
59 |
|
|
|
75 |
|
Long-term debt |
|
|
173 |
|
|
|
202 |
|
|
|
554 |
|
|
|
583 |
|
|
Total interest expense |
|
|
740 |
|
|
|
684 |
|
|
|
2,138 |
|
|
|
1,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME |
|
|
694 |
|
|
|
705 |
|
|
|
2,059 |
|
|
|
2,103 |
|
Provision for loan losses |
|
|
69 |
|
|
|
35 |
|
|
|
166 |
|
|
|
97 |
|
|
Net interest income after provision for loan losses |
|
|
625 |
|
|
|
670 |
|
|
|
1,893 |
|
|
|
2,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
NONINTEREST INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Trust and investment services income |
|
|
119 |
|
|
|
137 |
|
|
|
359 |
|
|
|
411 |
|
Service charges on deposit accounts |
|
|
88 |
|
|
|
78 |
|
|
|
247 |
|
|
|
227 |
|
Investment banking and capital markets income |
|
|
9 |
|
|
|
44 |
|
|
|
105 |
|
|
|
161 |
|
Operating lease income |
|
|
70 |
|
|
|
58 |
|
|
|
200 |
|
|
|
166 |
|
Letter of credit and loan fees |
|
|
51 |
|
|
|
48 |
|
|
|
134 |
|
|
|
133 |
|
Corporate-owned life insurance income |
|
|
27 |
|
|
|
23 |
|
|
|
84 |
|
|
|
74 |
|
Electronic banking fees |
|
|
25 |
|
|
|
27 |
|
|
|
74 |
|
|
|
78 |
|
Net gains (losses) from loan securitizations and sales |
|
|
(53 |
) |
|
|
14 |
|
|
|
(11 |
) |
|
|
34 |
|
Net securities gains (losses) |
|
|
4 |
|
|
|
(7 |
) |
|
|
(41 |
) |
|
|
(2 |
) |
Gain on sale of McDonald Investments branch network |
|
|
|
|
|
|
|
|
|
|
171 |
|
|
|
|
|
Other income |
|
|
98 |
|
|
|
121 |
|
|
|
419 |
|
|
|
287 |
|
|
Total noninterest income |
|
|
438 |
|
|
|
543 |
|
|
|
1,741 |
|
|
|
1,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel |
|
|
383 |
|
|
|
418 |
|
|
|
1,222 |
|
|
|
1,245 |
|
Net occupancy |
|
|
60 |
|
|
|
62 |
|
|
|
182 |
|
|
|
182 |
|
Computer processing |
|
|
49 |
|
|
|
52 |
|
|
|
149 |
|
|
|
157 |
|
Operating lease expense |
|
|
58 |
|
|
|
48 |
|
|
|
165 |
|
|
|
134 |
|
Professional fees |
|
|
27 |
|
|
|
28 |
|
|
|
79 |
|
|
|
101 |
|
Equipment |
|
|
22 |
|
|
|
26 |
|
|
|
71 |
|
|
|
78 |
|
Marketing |
|
|
21 |
|
|
|
32 |
|
|
|
60 |
|
|
|
70 |
|
Other expense |
|
|
133 |
|
|
|
124 |
|
|
|
424 |
|
|
|
373 |
|
|
Total noninterest expense |
|
|
753 |
|
|
|
790 |
|
|
|
2,352 |
|
|
|
2,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE |
|
|
310 |
|
|
|
423 |
|
|
|
1,282 |
|
|
|
1,235 |
|
Income taxes |
|
|
86 |
|
|
|
118 |
|
|
|
363 |
|
|
|
353 |
|
|
INCOME FROM CONTINUING OPERATIONS BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE |
|
|
224 |
|
|
|
305 |
|
|
|
919 |
|
|
|
882 |
|
(Loss) income from discontinued operations, net of taxes
of ($8), $4, ($15) and $14, respectively (see Note 3) |
|
|
(14 |
) |
|
|
7 |
|
|
|
(25 |
) |
|
|
22 |
|
|
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE |
|
|
210 |
|
|
|
312 |
|
|
|
894 |
|
|
|
904 |
|
Cumulative effect of accounting change, net of taxes (see Note 1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
NET INCOME |
|
$ |
210 |
|
|
$ |
312 |
|
|
$ |
894 |
|
|
$ |
909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before cumulative
effect of accounting change |
|
$ |
.58 |
|
|
$ |
.76 |
|
|
$ |
2.34 |
|
|
$ |
2.18 |
|
Income before cumulative effect of accounting change |
|
|
.54 |
|
|
|
.77 |
|
|
|
2.28 |
|
|
|
2.23 |
|
Net income |
|
|
.54 |
|
|
|
.77 |
|
|
|
2.28 |
|
|
|
2.24 |
|
Per common share assuming dilution: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before cumulative
effect of accounting change |
|
$ |
.57 |
|
|
$ |
.74 |
|
|
$ |
2.31 |
|
|
$ |
2.15 |
|
Income before cumulative effect of accounting change |
|
|
.54 |
|
|
|
.76 |
|
|
|
2.25 |
|
|
|
2.20 |
|
Net income |
|
|
.54 |
|
|
|
.76 |
|
|
|
2.25 |
|
|
|
2.21 |
|
Cash dividends declared per common share |
|
$ |
.365 |
|
|
$ |
.345 |
|
|
$ |
1.095 |
|
|
$ |
1.035 |
|
Weighted-average common shares outstanding (000) |
|
|
389,319 |
|
|
|
403,780 |
|
|
|
393,048 |
|
|
|
405,218 |
|
Weighted-average common shares and potential common
shares outstanding (000) |
|
|
393,164 |
|
|
|
409,428 |
|
|
|
397,816 |
|
|
|
411,029 |
|
|
See Notes to Consolidated Financial Statements (Unaudited).
4
Consolidated Statements of Changes in Shareholders Equity (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury |
|
|
Other |
|
|
|
|
|
|
Common Shares |
|
|
Common |
|
|
Capital |
|
|
Retained |
|
|
Stock, |
|
|
Comprehensive |
|
|
Comprehensive |
|
dollars in millions, except per share amounts |
|
Outstanding (000) |
|
|
Shares |
|
|
Surplus |
|
|
Earnings |
|
|
at Cost |
|
|
Loss |
|
|
Income |
|
|
BALANCE AT DECEMBER 31, 2005 |
|
|
406,624 |
|
|
$ |
492 |
|
|
$ |
1,534 |
|
|
$ |
7,882 |
|
|
$ |
(2,204 |
) |
|
$ |
(106 |
) |
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
909 |
|
|
|
|
|
|
|
|
|
|
$ |
909 |
|
Other comprehensive income (losses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 investments 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 for stock options and other
employee benefit 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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT DECEMBER 31, 2006 |
|
|
399,153 |
|
|
$ |
492 |
|
|
$ |
1,602 |
|
|
$ |
8,377 |
|
|
$ |
(2,584 |
) |
|
$ |
(184 |
) |
|
|
|
|
Cumulative
effect of adopting FSP 13-2,
net of income taxes of ($2) (see Note 1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(52 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of adopting FIN 48,
net of income taxes of ($1) (see Note 1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT JANUARY 1, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
894 |
|
|
|
|
|
|
|
|
|
|
$ |
894 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains on securities available
for sale, net of income taxes of $31a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50 |
|
|
|
50 |
|
Net unrealized gains on derivative financial instruments,
net of income taxes of $25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42 |
|
|
|
42 |
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23 |
|
|
|
23 |
|
Net pension and postretirement benefit costs, net of income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation |
|
|
|
|
|
|
|
|
|
|
12 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared on common shares ($1.095 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(427 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares for stock options and other
employee benefit plans |
|
|
5,555 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
156 |
|
|
|
|
|
|
|
|
|
Repurchase of common shares |
|
|
(16,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(595 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT SEPTEMBER 30, 2007 |
|
|
388,708 |
|
|
$ |
492 |
|
|
$ |
1,617 |
|
|
$ |
8,788 |
|
|
$ |
(3,023 |
) |
|
$ |
(54 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Net of reclassification adjustments. |
See Notes to Consolidated Financial Statements (Unaudited).
5
Consolidated Statements of Cash Flows (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
September 30, |
in millions |
|
2007 |
|
|
2006 |
|
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net income |
|
$ |
894 |
|
|
$ |
909 |
|
Adjustments to reconcile net income to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
166 |
|
|
|
94 |
|
Depreciation and amortization expense |
|
|
316 |
|
|
|
292 |
|
Litigation reserve |
|
|
42 |
|
|
|
|
|
Net securities losses |
|
|
41 |
|
|
|
2 |
|
Gain from sale of McDonald Investments branch network |
|
|
(171 |
) |
|
|
|
|
Gains related to MasterCard Incorporated shares |
|
|
(67 |
) |
|
|
(9 |
) |
Proceeds from settlement of automobile residual value insurance litigation |
|
|
279 |
|
|
|
|
|
Gain from settlement of automobile residual value insurance litigation |
|
|
(26 |
) |
|
|
|
|
Net gains from principal investing |
|
|
(128 |
) |
|
|
(48 |
) |
Net gains (losses) from loan securitizations and sales |
|
|
11 |
|
|
|
(34 |
) |
Loss from sale of discontinued operations |
|
|
2 |
|
|
|
|
|
Deferred income taxes |
|
|
(53 |
) |
|
|
(230 |
) |
Net increase in loans held for sale |
|
|
(1,154 |
) |
|
|
(1,295 |
) |
Net (increase) decrease in trading account assets |
|
|
(148 |
) |
|
|
33 |
|
Other operating activities, net |
|
|
(603 |
) |
|
|
(232 |
) |
|
NET CASH USED IN OPERATING ACTIVITIES |
|
|
(599 |
) |
|
|
(518 |
) |
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Cash used in acquisitions, net of cash acquired |
|
|
|
|
|
|
(34 |
) |
Proceeds from sale of McDonald Investments branch network, net of retention payments |
|
|
199 |
|
|
|
|
|
Proceeds from sale of MasterCard Incorporated shares |
|
|
67 |
|
|
|
9 |
|
Net increase in other short-term investments |
|
|
(168 |
) |
|
|
(23 |
) |
Purchases of securities available for sale |
|
|
(4,333 |
) |
|
|
(2,730 |
) |
Proceeds from sales of securities available for sale |
|
|
2,506 |
|
|
|
154 |
|
Proceeds from prepayments and maturities of securities available for sale |
|
|
1,788 |
|
|
|
2,421 |
|
Purchases of investment securities |
|
|
|
|
|
|
(2 |
) |
Proceeds from prepayments and maturities of investment securities |
|
|
5 |
|
|
|
53 |
|
Purchases of other investments |
|
|
(500 |
) |
|
|
(401 |
) |
Proceeds from sales of other investments |
|
|
275 |
|
|
|
189 |
|
Proceeds from prepayments and maturities of other investments |
|
|
138 |
|
|
|
209 |
|
Net increase in loans, excluding acquisitions, sales and transfers |
|
|
(3,723 |
) |
|
|
(1,990 |
) |
Purchases of loans |
|
|
(61 |
) |
|
|
(64 |
) |
Proceeds from loan securitizations and sales |
|
|
306 |
|
|
|
298 |
|
Purchases of premises and equipment |
|
|
(123 |
) |
|
|
(68 |
) |
Proceeds from sales of premises and equipment |
|
|
9 |
|
|
|
4 |
|
Proceeds from sales of other real estate owned |
|
|
61 |
|
|
|
20 |
|
|
NET CASH USED IN INVESTING ACTIVITIES |
|
|
(3,554 |
) |
|
|
(1,955 |
) |
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Net increase in deposits |
|
|
4,594 |
|
|
|
2,674 |
|
Net increase in short-term borrowings |
|
|
3,306 |
|
|
|
680 |
|
Net proceeds from issuance of long-term debt |
|
|
393 |
|
|
|
1,609 |
|
Payments on long-term debt |
|
|
(3,490 |
) |
|
|
(1,997 |
) |
Purchases of treasury shares |
|
|
(595 |
) |
|
|
(457 |
) |
Net proceeds from issuance of common stock |
|
|
111 |
|
|
|
207 |
|
Tax benefits in excess of recognized compensation cost for stock-based awards |
|
|
13 |
|
|
|
26 |
|
Cash dividends paid |
|
|
(427 |
) |
|
|
(420 |
) |
|
NET CASH PROVIDED BY FINANCING ACTIVITIES |
|
|
3,905 |
|
|
|
2,322 |
|
|
NET DECREASE IN CASH AND DUE FROM BANKS |
|
|
(248 |
) |
|
|
(151 |
) |
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD |
|
|
2,264 |
|
|
|
3,108 |
|
|
CASH AND DUE FROM BANKS AT END OF PERIOD |
|
$ |
2,016 |
|
|
$ |
2,957 |
|
|
|
|
|
|
|
|
|
Additional disclosures relative to cash flows: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
2,211 |
|
|
$ |
2,042 |
|
Income taxes paid |
|
|
276 |
|
|
|
328 |
|
Noncash items: |
|
|
|
|
|
|
|
|
Loans transferred from portfolio to held for sale |
|
|
|
|
|
$ |
2,474 |
|
Loans transferred to other real estate owned |
|
$ |
31 |
|
|
|
52 |
|
|
See Notes to Consolidated Financial Statements (Unaudited).
6
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The unaudited condensed consolidated interim financial statements include the accounts of KeyCorp
and its subsidiaries. All significant intercompany accounts and transactions have been eliminated
in consolidation.
As used in these Notes, KeyCorp refers solely to the parent company and Key refers to the
consolidated entity consisting of KeyCorp and its subsidiaries.
The consolidated financial statements include any voting rights entity in which Key has a
controlling financial interest. In accordance with Financial Accounting Standards Board (FASB)
Revised Interpretation No. 46, Consolidation of Variable Interest Entities, a variable interest
entity (VIE) is consolidated if Key has a variable interest in the entity and is exposed to the
majority of its expected losses and/or residual returns (i.e., Key is considered to be the primary
beneficiary). Variable interests can include equity interests, subordinated debt, derivative
contracts, leases, service agreements, guarantees, standby letters of credit, loan commitments, and
other contracts, agreements and financial instruments. See Note 8 (Variable Interest Entities)
on page 22 for information on Keys involvement with VIEs.
Management uses the equity method to account for unconsolidated investments in voting rights
entities or VIEs in which Key has significant influence over operating and financing decisions
(usually defined as a voting or economic interest of 20% to 50%, but not 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 registered
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 2006 Annual Report to Shareholders under the heading Loan
Securitizations on page 69.
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.
The results of operations for the interim period are not necessarily indicative of the results of
operations to be expected for the full year. The interim financial statements should be read in
conjunction with the audited consolidated financial statements and related notes included in Keys
2006 Annual Report to Shareholders.
Servicing Assets
Keys servicing assets, which totaled $352 million at September 30, 2007, $282 million at December
31, 2006, and $263 million at September 30, 2006, are included in accrued income and other assets
on the balance sheet. Key services both mortgage and education loans. Servicing assets at
September 30, 2007, include $322 million related to mortgage loan servicing and $30 million related
to education loan servicing.
Effective January 1, 2007, Key adopted SFAS No. 156, Accounting for Servicing of Financial Assets
an Amendment of FASB Statement No. 140, which requires that newly purchased or retained
servicing assets and liabilities be initially measured at fair value, if practicable. SFAS No. 156
also requires the subsequent remeasurement of servicing assets and liabilities at each reporting
date using one of two methods: amortization over the servicing period or measurement at fair
value.
7
When no ready market value such as quoted market prices or prices based on sales or purchases of
similar assets is available to determine the fair value of servicing assets, the fair value is
determined by estimating the present value of future cash flows associated with servicing the
loans. The estimate is based on a number of assumptions, including the cost of servicing, discount
rate, prepayment rate and default rate.
Key has elected to subsequently remeasure servicing assets using the amortization method. The
amortization of servicing assets is determined in proportion to, and over the period of, the
estimated net servicing income and is recorded in other income on the income statement.
In accordance with SFAS No. 140, the initial value of servicing assets purchased or retained prior
to January 1, 2007, was determined by allocating the amount of the assets sold or securitized to
the retained interests and the assets sold based on their relative fair values at the date of
transfer. These servicing assets are reported at the lower of amortized cost or fair value.
Servicing assets are evaluated quarterly for possible impairment by classifying the assets based on
the types of loans serviced and their associated interest rates, and estimating the fair value of
each class. If the evaluation indicates that the carrying amount of the servicing assets exceeds
their fair value, the carrying amount is reduced through a charge to income in the amount of such
excess. For the nine-month periods ended September 30, 2007 and 2006, no servicing asset
impairment occurred. Additional information pertaining to servicing assets is included in Note 7
(Mortgage Servicing Assets), which begins on page 21.
Stock-Based Compensation
Effective January 1, 2006, Key adopted SFAS No. 123R, Share-Based Payment, which replaced SFAS
No. 123. SFAS 123R requires stock-based compensation to be measured using the fair value method of
accounting, with the measured cost to be recognized over the period during which the recipient is
required to provide service in exchange for the award. SFAS No. 123R also 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. Instead, companies that had been 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 had to estimate expected forfeitures and reduce their related
compensation obligation for expense previously recognized in the financial statements. The
after-tax amount of this reduction is 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.
Accounting Pronouncements Adopted in 2007
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 affects when earnings from leveraged lease
transactions will be recognized, and requires a lessor to recalculate its recognition of lease
income when there are changes or projected changes in the timing of cash flows, including changes
due to final or expected settlements of tax matters. Previously, leveraged lease transactions were
required to be recalculated only when a change in the total projected net income from the lease
occurred. This guidance became effective for fiscal years beginning after December 15, 2006
(effective January 1, 2007, for Key).
Adoption of this guidance resulted in a cumulative after-tax charge of $52 million to Keys
retained earnings. Future earnings are expected to increase over the remaining term of the
affected leases by a similar amount. Additional information related to Staff Position No. 13-2 is
included in Note 12 (Income Taxes) under the heading Tax-Related Accounting Pronouncements
Adopted in 2007 on page 26.
8
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 for
the associated tax benefit to be recognized in a companys financial statements. It also provides
guidance on measurement and derecognition of tax benefits, and requires expanded disclosures. The
interpretation became effective for fiscal years beginning after December 15, 2006 (effective
January 1, 2007, for Key). Adoption of this guidance did not have a material impact on Keys
financial condition or results of operations. Additional information related to this
interpretation is included in Note 12 under the heading Tax-Related Accounting Pronouncements
Adopted in 2007.
Accounting for servicing of financial assets. As discussed under the heading Servicing Assets on
page 7, effective January 1, 2007, Key adopted SFAS No. 156, which requires that servicing assets
and liabilities be initially measured at fair value, if practicable. SFAS No. 156 also requires
the subsequent remeasurement of servicing assets and liabilities at each reporting date using one
of two methods: amortization over the servicing period or measurement at fair value. Adoption of
this guidance did not have a material effect on Keys financial condition or results of operations.
Additional information related to SFAS No. 156 is included in Note 7.
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
in which a derivative is embedded in another financial instrument. SFAS No. 155 permits fair value
measurement for any hybrid financial instrument that contains an embedded derivative that otherwise
would require the financial instrument and derivative to be separated. This guidance eliminates
the prohibition on a qualifying SPE from holding certain derivative financial instruments. SFAS
No. 155 became 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 did not
have a material effect on Keys financial condition or results of operations.
Accounting Pronouncements Pending Adoption
Accounting for investment companies. In June 2007, the Accounting Standards Executive Committee,
under the auspices of the FASB, issued Statement of Position (SOP) No. 07-1, Clarification of
the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies
and Equity Method Investors for Investments in Investment Companies. The new pronouncement
provides guidance for determining whether an entity is within the scope of the Guide and whether
the specialized industry accounting principles of the Guide should be applied by a parent company
in accounting for an investment company subsidiary. SOP No. 07-1 will be effective for fiscal
years beginning on or after December 15, 2007 (effective January 1, 2008, for Key). Management is
evaluating the potential effect this guidance may have on Keys financial condition or results of
operations.
Investment companies under Revised Interpretation No. 46. In May 2007, the FASB issued Staff
Position FIN 46(R)-7, Application of FASB Interpretation No. 46(R) to Investment Companies. The
new pronouncement provides an exception to the scope of Revised Interpretation No. 46 for
investment companies within the scope of SOP No. 07-1. Staff Position FIN 46(R)-7 will be
effective for fiscal years beginning on or after December 15, 2007 (effective January 1, 2008, for
Key). Management is evaluating the potential effect this guidance may have on Keys financial
condition or results of operations.
Fair value option for financial assets and financial liabilities. In February 2007, the FASB
issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This
guidance provides an option to selectively report financial assets and liabilities at fair value,
and establishes presentation and disclosure requirements designed to facilitate comparisons between
entities that choose different measurement attributes for similar types of assets and liabilities.
SFAS No. 159 will be effective for fiscal years beginning after November 15, 2007 (effective
January 1, 2008, for Key). Management is evaluating whether this fair value option will be used
for any of Keys financial assets or liabilities, and the resulting effect on Keys financial
condition or results of operations.
9
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. This guidance applies only when other guidance
requires or permits assets or liabilities to be measured at fair value; it does not expand the use
of fair value in any new
circumstances. SFAS No. 157 will be effective for fiscal years beginning after November 15, 2007
(effective January 1, 2008, for Key). Management is evaluating the potential effect this guidance
may have on Keys financial condition or results of operations.
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. Except for the measurement requirement, Key adopted this accounting
guidance as of December 31, 2006. Additional information regarding the adoption of SFAS No. 158 is
included in Note 1 (Summary of Significant Accounting Policies) under the heading Accounting
Pronouncements Adopted in 2006 on page 72 of Keys 2006 Annual Report to Shareholders. The
requirement to measure plan assets and benefit obligations as of the end of an employers fiscal
year is effective for years ending after December 15, 2008 with earlier application encouraged (no
later than December 31, 2008, 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
Keys basic and diluted earnings per common share are calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
dollars in millions, except per share amounts |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
EARNINGS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from
continuing operations before cumulative effect of accounting change |
|
$ |
224 |
|
|
$ |
305 |
|
|
$ |
919 |
|
|
$ |
882 |
|
(Loss) income from discontinued operations, net of taxes |
|
|
(14 |
) |
|
|
7 |
|
|
|
(25 |
) |
|
|
22 |
|
Income before cumulative effect of accounting change |
|
|
210 |
|
|
|
312 |
|
|
|
894 |
|
|
|
904 |
|
Net income |
|
|
210 |
|
|
|
312 |
|
|
|
894 |
|
|
|
909 |
|
|
WEIGHTED-AVERAGE COMMON SHARES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding (000) |
|
|
389,319 |
|
|
|
403,780 |
|
|
|
393,048 |
|
|
|
405,218 |
|
Effect of dilutive common stock options and other stock awards (000) |
|
|
3,845 |
|
|
|
5,648 |
|
|
|
4,768 |
|
|
|
5,811 |
|
|
Weighted-average common shares and potential
common shares outstanding (000) |
|
|
393,164 |
|
|
|
409,428 |
|
|
|
397,816 |
|
|
|
411,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER COMMON SHARE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share from continuing operations before
cumulative effect
of accounting change |
|
$ |
.58 |
|
|
$ |
.76 |
|
|
$ |
2.34 |
|
|
$ |
2.18 |
|
(Loss) income per common share from discontinued operations |
|
|
(.03 |
) |
|
|
.02 |
|
|
|
(.06 |
) |
|
|
.05 |
|
Income per
common share before cumulative effect of accounting change |
|
|
.54 |
|
|
|
.77 |
|
|
|
2.28 |
|
|
|
2.23 |
|
Net income per common share |
|
|
.54 |
|
|
|
.77 |
|
|
|
2.28 |
|
|
|
2.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share from continuing operations before
cumulative effect
of accounting change assuming dilution |
|
$ |
.57 |
|
|
$ |
.74 |
|
|
$ |
2.31 |
|
|
$ |
2.15 |
|
(Loss) income per common share from discontinued operations
assuming dilution |
|
|
(.03 |
) |
|
|
.02 |
|
|
|
(.06 |
) |
|
|
.05 |
|
Income per common share before cumulative effect of accounting
change assuming dilution |
|
|
.54 |
|
|
|
.76 |
|
|
|
2.25 |
|
|
|
2.20 |
|
Net income per common share assuming dilution |
|
|
.54 |
|
|
|
.76 |
|
|
|
2.25 |
|
|
|
2.21 |
|
|
10
3. Acquisitions and Divestitures
Acquisitions and divestitures either completed by Key during 2006 and the first nine months of
2007, or pending completion, are summarized below.
Acquisitions
Tuition Management Systems, Inc.
On October 1, 2007, Key acquired Tuition Management Systems, Inc., one of the nations largest
providers of outsourced tuition planning, billing, counseling and payment services. Headquartered
in Warwick, Rhode Island, Tuition Management Systems serves more than 700 colleges, universities,
elementary and secondary educational institutions. The terms of the acquisition were not material.
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. Austin specializes in selecting and managing hedge fund investments for its
principally institutional customer base. The terms of the acquisition were not material.
Divestitures
Champion Mortgage
On February 28, 2007, Key sold the Champion Mortgage loan origination platform to an affiliate of
Fortress Investment Group LLC, a global alternative investment and asset management firm, for cash
proceeds of $.5 million.
On November 29, 2006, Key sold the nonprime mortgage loan portfolio held by the Champion Mortgage
finance business to a wholly-owned subsidiary of HSBC Finance Corporation for cash proceeds of $2.5
billion. The loan portfolio totaled $2.5 billion at the date of sale.
As a result of these actions, Key has applied discontinued operations accounting to this business
for all periods presented in this report. The results of the discontinued Champion Mortgage
finance business are presented on one line as (loss) income from discontinued operations, net of
taxes in the Consolidated Statements of Income on page 4. The components of (loss) income from
discontinued operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
September 30, |
|
|
September 30, |
in millions |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
(Loss) income, net of taxes of ($2), $4, ($5) and $14, respectively a |
|
$ |
(3 |
) |
|
$ |
7 |
|
|
$ |
(9 |
) |
|
$ |
22 |
|
Loss on disposal, net of taxes of ($1) |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
Disposal transaction costs, net of taxes of ($6) and ($9), respectively b |
|
|
(11 |
) |
|
|
|
|
|
|
(15 |
) |
|
|
|
|
|
(Loss) income from discontinued operations |
|
$ |
(14 |
) |
|
$ |
7 |
|
|
$ |
(25 |
) |
|
$ |
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes after-tax charges of $.06 million and $19 million for the three-month periods ended
September 30, 2007 and 2006, respectively, and $.7 million and $54 million for the nine-month periods ended September 30,
2007 and 2006, respectively, determined by applying a matched funds transfer pricing methodology to the liabilities assumed
necessary to support Champions operations. |
|
(b) |
|
Disposal transaction costs were attributable largely to a write-down on the building lease
for the former Champion headquarters recorded during the third quarter of 2007. |
11
The discontinued assets and liabilities of Champion Mortgage included in the Consolidated Balance
Sheets on page 3 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
September 30, |
|
in millions |
|
2007 |
|
|
2006 |
|
|
2006 |
|
|
Loans |
|
$ |
9 |
|
|
$ |
10 |
|
|
$ |
11 |
|
Loans held for sale |
|
|
|
|
|
|
179 |
|
|
|
2,484 |
|
Accrued income and other assets |
|
|
2 |
|
|
|
22 |
|
|
|
230 |
|
|
Total assets |
|
$ |
11 |
|
|
$ |
211 |
|
|
$ |
2,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
$ |
88 |
|
|
$ |
8 |
|
Accrued expense and other liabilities |
|
$ |
14 |
|
|
|
17 |
|
|
|
5 |
|
|
Total liabilities |
|
$ |
14 |
|
|
$ |
105 |
|
|
$ |
13 |
|
|
|
|
|
|
|
|
|
|
|
|
McDonald Investments branch network
On February 9, 2007, McDonald Investments Inc., a wholly-owned subsidiary of KeyCorp, sold its
branch network, which included approximately 570 financial advisors and field support staff, and
certain fixed assets, to UBS Financial Services Inc., a subsidiary of UBS AG. Key received cash
proceeds of $219 million and recorded a gain of $171 million ($107 million after tax, $.26 per
diluted common share) in connection with the sale. Key retained the corporate and institutional
businesses, including Institutional Equities and Equity Research, Debt Capital Markets and
Investment Banking. In addition, KeyBank National Association (KeyBank), KeyCorps subsidiary
bank, continues to conduct its Wealth Management, Trust and Private Banking businesses. On April
16, 2007, Key renamed its registered broker/dealer through which its corporate and institutional
investment banking and securities businesses operate. The new name is KeyBanc Capital Markets Inc.
Acquisition Pending
U.S.B. Holding Co., Inc.
On July 26, 2007, Key entered into a definitive agreement to acquire U.S.B. Holding Co., Inc., the
holding company for Union State Bank, a state-chartered commercial bank headquartered in
Orangeburg, New York, with 31 branches. U.S.B. Holding Co. has assets of approximately $3 billion
and deposits of approximately $2 billion. Under the terms of the agreement, each share of U.S.B.
Holding Co. common stock will be exchanged at the closing for .455 KeyCorp common shares and $8.925
in cash. Based on the closing price of KeyCorp common shares on July 26, 2007 (the last trading
day preceding the announcement of the agreement), the transaction would be valued at approximately
$575 million. The transaction is expected to close early in 2008, subject to approval by U.S.B.
Holding Co. shareholders and the banking regulators. After the close, Key plans to merge Union
State Bank into KeyBank. The acquisition will expand Keys presence in markets both within and
contiguous to its current operations in the Hudson Valley.
12
4. Line of Business Results
Community Banking
Regional Banking provides individuals with branch-based deposit and investment products, personal
finance services and loans, including residential mortgages, home equity and various types of
installment loans. This line of business also provides small businesses with deposit, investment
and credit products, and business advisory services.
Regional Banking also offers financial, estate and retirement planning, and asset management
services to assist high-net-worth clients with their banking, trust, portfolio management,
insurance, charitable giving and related needs.
Commercial Banking provides midsize businesses with products and services that include commercial
lending, cash management, equipment leasing, investment and employee benefit programs, succession
planning, access to capital markets, derivatives and foreign exchange.
National Banking
Real Estate Capital 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 at least 50% of the debt service is provided by rental income from
nonaffiliated third parties).
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, Home Equity Services and
Business Services.
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.
Home Equity Services works with home improvement contractors to provide home equity and home
improvement financing solutions.
Business Services provides payroll processing solutions for businesses of all sizes.
Other Segments
Other Segments consist of Corporate Treasury and Keys Principal Investing unit.
13
Reconciling Items
Total assets included under Reconciling Items primarily represent the unallocated portion of
nonearning assets of corporate support functions. Charges related to the funding of these assets
are part of net interest income and are allocated to the business segments through noninterest
expense. Reconciling Items also includes intercompany eliminations and certain items that are not
allocated to the business segments because they do not reflect their normal operations.
The table that spans pages 15 and 16 shows selected financial data for each major business group
for the three- and nine-month periods ended September 30, 2007 and 2006. This table is accompanied
by supplementary information for each of the lines of business that make up these groups. The
information was derived from the internal financial reporting system that management uses to
monitor and manage Keys financial performance. 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 Keys policies:
¨ |
|
Net interest income is determined by assigning a standard cost for
funds used or a standard credit for funds provided based on their
assumed maturity, prepayment and/or repricing characteristics.
The net effect of this funds transfer pricing is charged to the
lines of business based on the total loan and deposit balances of
each line. |
|
¨ |
|
Indirect expenses, such as computer servicing costs and corporate
overhead, are allocated based on assumptions regarding the extent
to which each line actually uses the services. |
|
¨ |
|
Keys consolidated provision for loan losses is allocated among
the lines of business primarily based on their actual net
charge-offs, adjusted periodically for loan growth and changes in
risk profile. The 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 69 of Keys
2006 Annual Report to Shareholders. |
|
¨ |
|
Income taxes are allocated based on the statutory federal income
tax rate of 35% (adjusted for tax-exempt interest income, income
from corporate-owned life insurance and tax credits associated
with investments in low-income housing projects) and a blended
state income tax rate (net of the federal income tax benefit) of
2.5%. |
|
¨ |
|
Capital is assigned based on managements assessment of economic
risk factors (primarily credit, operating and market risk)
directly attributable to each line. |
Developing and applying the methodologies that management uses to allocate items among Keys lines
of business is a dynamic process. Accordingly, financial results may be revised periodically to
reflect accounting enhancements, changes in the risk profile of a particular business or changes in
Keys organizational structure.
Effective January 1, 2007, Key reorganized the following business units within its lines of
business:
¨ |
|
The Mortgage Services unit, previously included under the Consumer
Finance line of business within the National Banking group, has
been moved to the Regional Banking line of business within the
Community Banking group. |
|
¨ |
|
In light of the Champion divestiture, the National Home Equity
unit, previously included under the Consumer Finance line of
business within the National Banking group, has been eliminated
and replaced by the remaining Home Equity Services unit. |
|
¨ |
|
Business Services has been added as a unit under the Consumer
Finance line of business within the National Banking group. |
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
Community Banking |
|
|
National Banking |
|
|
Other Segments |
dollars in millions |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
SUMMARY OF OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (TE) |
|
$ |
409 |
|
|
$ |
443 |
|
|
$ |
359 |
|
|
$ |
348 |
|
|
$ |
(24 |
) |
|
$ |
(31 |
) |
Noninterest income |
|
|
217 |
|
|
|
244 |
|
|
|
152 |
|
|
|
238 |
|
|
|
38 |
|
|
|
56 |
|
|
Total revenue (TE) a |
|
|
626 |
|
|
|
687 |
|
|
|
511 |
|
|
|
586 |
|
|
|
14 |
|
|
|
25 |
|
Provision for loan losses |
|
|
1 |
|
|
|
22 |
|
|
|
68 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense |
|
|
34 |
|
|
|
37 |
|
|
|
73 |
|
|
|
62 |
|
|
|
|
|
|
|
|
|
Other noninterest expense |
|
|
383 |
|
|
|
449 |
|
|
|
255 |
|
|
|
242 |
|
|
|
6 |
|
|
|
7 |
|
|
Income (loss) from continuing operations before income taxes (TE) |
|
|
208 |
|
|
|
179 |
|
|
|
115 |
|
|
|
269 |
|
|
|
8 |
|
|
|
18 |
|
Allocated income taxes and TE adjustments |
|
|
77 |
|
|
|
67 |
|
|
|
43 |
|
|
|
100 |
|
|
|
(8 |
) |
|
|
(2 |
) |
|
Income from continuing operations |
|
|
131 |
|
|
|
112 |
|
|
|
72 |
|
|
|
169 |
|
|
|
16 |
|
|
|
20 |
|
(Loss) income from discontinued operations, net of taxes |
|
|
|
|
|
|
|
|
|
|
(14 |
) |
|
|
7 |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
131 |
|
|
$ |
112 |
|
|
$ |
58 |
|
|
$ |
176 |
|
|
$ |
16 |
|
|
$ |
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of consolidated income from continuing operations |
|
|
59 |
% |
|
|
37 |
% |
|
|
32 |
% |
|
|
55 |
% |
|
|
7 |
% |
|
|
7 |
% |
Percent of total segments income from continuing operations |
|
|
60 |
|
|
|
37 |
|
|
|
33 |
|
|
|
56 |
|
|
|
7 |
|
|
|
7 |
|
|
AVERAGE BALANCES b |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases |
|
$ |
26,947 |
|
|
$ |
26,794 |
|
|
$ |
40,277 |
|
|
$ |
37,871 |
|
|
$ |
245 |
|
|
$ |
282 |
|
Total assets a |
|
|
29,716 |
|
|
|
29,871 |
|
|
|
50,954 |
|
|
|
48,530 |
|
|
|
12,523 |
|
|
|
11,503 |
|
Deposits |
|
|
46,727 |
|
|
|
46,939 |
|
|
|
12,633 |
|
|
|
11,106 |
|
|
|
3,203 |
|
|
|
2,224 |
|
|
OTHER FINANCIAL DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan charge-offs |
|
$ |
20 |
|
|
$ |
21 |
|
|
$ |
39 |
|
|
$ |
22 |
|
|
|
|
|
|
|
|
|
Return on average allocated equityb |
|
|
20.77 |
% |
|
|
17.73 |
% |
|
|
6.90 |
% |
|
|
17.27 |
% |
|
|
N/M |
|
|
|
N/M |
|
Return on average allocated equity |
|
|
20.77 |
|
|
|
17.73 |
|
|
|
5.56 |
|
|
|
16.92 |
|
|
|
N/M |
|
|
|
N/M |
|
Average full-time equivalent employees |
|
|
8,632 |
|
|
|
9,836 |
|
|
|
3,841 |
|
|
|
4,305 |
|
|
|
43 |
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
Community Banking |
|
|
National Banking |
|
|
Other Segments |
dollars in millions |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
SUMMARY OF OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (TE) |
|
$ |
1,242 |
|
|
$ |
1,309 |
|
|
$ |
1,045 |
|
|
$ |
1,039 |
|
|
$ |
(72 |
) |
|
$ |
(91 |
) |
Noninterest income |
|
|
818 |
c |
|
|
714 |
|
|
|
682 |
d |
|
|
709 |
|
|
|
167 |
e |
|
|
129 |
|
|
Total revenue (TE) a |
|
|
2,060 |
|
|
|
2,023 |
|
|
|
1,727 |
|
|
|
1,748 |
|
|
|
95 |
|
|
|
38 |
|
Provision for loan losses |
|
|
36 |
|
|
|
71 |
|
|
|
130 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense |
|
|
105 |
|
|
|
112 |
|
|
|
211 |
|
|
|
178 |
|
|
|
|
|
|
|
|
|
Other noninterest expense |
|
|
1,231 |
|
|
|
1,323 |
|
|
|
757 |
|
|
|
734 |
|
|
|
49 |
e |
|
|
21 |
|
|
Income (loss) from continuing operations before income taxes and
cumulative effect of accounting change (TE) |
|
|
688 |
|
|
|
517 |
|
|
|
629 |
|
|
|
810 |
|
|
|
46 |
|
|
|
17 |
|
Allocated income taxes and TE adjustments |
|
|
258 |
|
|
|
194 |
|
|
|
236 |
|
|
|
301 |
|
|
|
(16 |
) |
|
|
(22 |
) |
|
Income from continuing operations before cumulative effect
of accounting change |
|
|
430 |
|
|
|
323 |
|
|
|
393 |
|
|
|
509 |
|
|
|
62 |
|
|
|
39 |
|
(Loss) income from discontinued operations, net of taxes |
|
|
|
|
|
|
|
|
|
|
(25 |
) |
|
|
22 |
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of accounting change |
|
|
430 |
|
|
|
323 |
|
|
|
368 |
|
|
|
531 |
|
|
|
62 |
|
|
|
39 |
|
Cumulative effect of accounting change, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
430 |
|
|
$ |
323 |
|
|
$ |
368 |
|
|
$ |
531 |
|
|
$ |
62 |
|
|
$ |
39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of consolidated income from continuing operations |
|
|
47 |
% |
|
|
37 |
% |
|
|
43 |
% |
|
|
58 |
% |
|
|
6 |
% |
|
|
4 |
% |
Percent of total segments income from continuing operations |
|
|
49 |
|
|
|
37 |
|
|
|
44 |
|
|
|
59 |
|
|
|
7 |
|
|
|
4 |
|
|
AVERAGE BALANCES b |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases |
|
$ |
26,661 |
|
|
$ |
26,803 |
|
|
$ |
39,485 |
|
|
$ |
37,545 |
|
|
$ |
263 |
|
|
$ |
302 |
|
Total assets a |
|
|
29,454 |
|
|
|
29,883 |
|
|
|
49,665 |
|
|
|
47,659 |
|
|
|
12,401 |
|
|
|
11,456 |
|
Deposits |
|
|
46,458 |
|
|
|
46,459 |
|
|
|
12,009 |
|
|
|
10,597 |
|
|
|
2,575 |
|
|
|
2,042 |
|
|
OTHER FINANCIAL DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan charge-offs |
|
$ |
65 |
|
|
$ |
74 |
|
|
$ |
91 |
|
|
$ |
42 |
|
|
|
|
|
|
|
|
|
Return on average allocated equity b |
|
|
23.23 |
% |
|
|
17.27 |
% |
|
|
12.83 |
% |
|
|
17.83 |
% |
|
|
N/M |
|
|
|
N/M |
|
Return on average allocated equity |
|
|
23.23 |
|
|
|
17.27 |
|
|
|
12.02 |
|
|
|
17.47 |
|
|
|
N/M |
|
|
|
N/M |
|
Average full-time equivalent employees |
|
|
9,043 |
|
|
|
9,697 |
|
|
|
3,955 |
|
|
|
4,235 |
|
|
|
43 |
|
|
|
40 |
|
|
(a) |
|
Substantially all revenue generated by Keys major business groups is derived from clients
with residency in the United States. Substantially all long-lived assets, including premises
and equipment, capitalized software and goodwill held by Keys major business groups are located in the United States. |
|
(b) |
|
From continuing operations. |
|
(c) |
|
Community Banking results for the first nine months of 2007 include a $171 million ($107
million after tax) gain from the February 9, 2007, sale of the McDonald Investments branch network.
See Note 3 (Acquisitions and Divestitures), which begins on page 11, for more information
pertaining to this transaction. |
|
(d) |
|
National Banking results for the first nine months of 2007 include a $26 million ($17
million after tax) gain from the settlement of the residual value insurance litigation during the
first quarter. |
|
(e) |
|
Other Segments results for the first nine months of 2007 include a $26 million ($16 million
after tax) charge for litigation recorded during the second quarter. This charge and the
litigation charge referred to in note (f) below comprise the $42 million charge recorded in
connection with the Honsador litigation disclosed in Note 13 (Contingent Liabilities and
Guarantees), which begins on page 28. Results for the current year-to-date period also
include a $49 million ($31 million after tax) loss recorded during the first quarter in
connection with the repositioning of the securities portfolio. |
|
(f) |
|
Reconciling Items include gains of $27 million ($17 million after tax) recorded during
the third quarter of 2007, $40 million ($25 million after tax) recorded
during the second quarter of 2007 and $9 million ($6 million after tax) recorded during the
second quarter of 2006 related to MasterCard Incorporated shares. Results for the first nine
months of 2007 also include a $16 million ($10 million after tax) charge for litigation
recorded during the second quarter. |
|
TE = Taxable Equivalent, N/A = Not Applicable, N/M = Not Meaningful |
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segments |
|
|
Reconciling Items |
|
|
Key |
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
744 |
|
|
$ |
760 |
|
|
$ |
(32 |
) |
|
$ |
(34 |
) |
|
$ |
712 |
|
|
$ |
726 |
|
|
407 |
|
|
|
538 |
|
|
|
31 |
f |
|
|
5 |
|
|
|
438 |
|
|
|
543 |
|
|
|
1,151 |
|
|
|
1,298 |
|
|
|
(1 |
) |
|
|
(29 |
) |
|
|
1,150 |
|
|
|
1,269 |
|
|
69 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
69 |
|
|
|
35 |
|
|
107 |
|
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
107 |
|
|
|
99 |
|
|
644 |
|
|
|
698 |
|
|
|
2 |
|
|
|
(7 |
) |
|
|
646 |
|
|
|
691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
331 |
|
|
|
466 |
|
|
|
(3 |
) |
|
|
(22 |
) |
|
|
328 |
|
|
|
444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112 |
|
|
|
165 |
|
|
|
(8 |
) |
|
|
(26 |
) |
|
|
104 |
|
|
|
139 |
|
|
|
219 |
|
|
|
301 |
|
|
|
5 |
|
|
|
4 |
|
|
|
224 |
|
|
|
305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14 |
) |
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
(14 |
) |
|
|
7 |
|
|
$ |
205 |
|
|
$ |
308 |
|
|
$ |
5 |
|
|
$ |
4 |
|
|
$ |
210 |
|
|
$ |
312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98 |
% |
|
|
99 |
% |
|
|
2 |
% |
|
|
1 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
|
|
|
100 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
67,469 |
|
|
$ |
64,947 |
|
|
$ |
211 |
|
|
$ |
233 |
|
|
$ |
67,680 |
|
|
$ |
65,180 |
|
|
93,193 |
|
|
|
89,904 |
|
|
|
1,969 |
|
|
|
2,359 |
|
|
|
95,162 |
|
|
|
92,263 |
|
|
62,563 |
|
|
|
60,269 |
|
|
|
(42 |
) |
|
|
(229 |
) |
|
|
62,521 |
|
|
|
60,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
59 |
|
|
$ |
43 |
|
|
|
|
|
|
|
|
|
|
$ |
59 |
|
|
$ |
43 |
|
|
12.14 |
% |
|
|
17.48 |
% |
|
|
N/M |
|
|
|
N/M |
|
|
|
11.50 |
% |
|
|
15.52 |
% |
|
11.37 |
|
|
|
17.27 |
|
|
|
N/M |
|
|
|
N/M |
|
|
|
10.79 |
|
|
|
15.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,516 |
|
|
|
14,182 |
|
|
|
6,051 |
|
|
|
6,082 |
|
|
|
18,567 |
|
|
|
20,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segments |
|
|
Reconciling Items |
|
|
Key |
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,215 |
|
|
$ |
2,257 |
|
|
$ |
(97 |
) |
|
$ |
(83 |
) |
|
$ |
2,118 |
|
|
$ |
2,174 |
|
|
1,667 |
|
|
|
1,552 |
|
|
|
74 |
f |
|
|
17 |
f |
|
|
1,741 |
|
|
|
1,569 |
|
|
|
3,882 |
|
|
|
3,809 |
|
|
|
(23 |
) |
|
|
(66 |
) |
|
|
3,859 |
|
|
|
3,743 |
|
|
166 |
|
|
|
97 |
|
|
|
|
|
|
|
|
|
|
|
166 |
|
|
|
97 |
|
|
316 |
|
|
|
290 |
|
|
|
|
|
|
|
|
|
|
|
316 |
|
|
|
290 |
|
|
2,037 |
|
|
|
2,078 |
|
|
|
(1) |
f |
|
|
(28 |
) |
|
|
2,036 |
|
|
|
2,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,363 |
|
|
|
1,344 |
|
|
|
(22 |
) |
|
|
(38 |
) |
|
|
1,341 |
|
|
|
1,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
478 |
|
|
|
473 |
|
|
|
(56 |
) |
|
|
(49 |
) |
|
|
422 |
|
|
|
424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
885 |
|
|
|
871 |
|
|
|
34 |
|
|
|
11 |
|
|
|
919 |
|
|
|
882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25 |
) |
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
(25 |
) |
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
860 |
|
|
|
893 |
|
|
|
34 |
|
|
|
11 |
|
|
|
894 |
|
|
|
904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
5 |
|
|
$ |
860 |
|
|
$ |
893 |
|
|
$ |
34 |
|
|
$ |
16 |
|
|
$ |
894 |
|
|
$ |
909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96 |
% |
|
|
99 |
% |
|
|
4 |
% |
|
|
1 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
|
|
|
100 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
66,409 |
|
|
$ |
64,650 |
|
|
$ |
153 |
|
|
$ |
152 |
|
|
$ |
66,562 |
|
|
$ |
64,802 |
|
|
91,520 |
|
|
|
88,998 |
|
|
|
2,048 |
|
|
|
2,249 |
|
|
|
93,568 |
|
|
|
91,247 |
|
|
61,042 |
|
|
|
59,098 |
|
|
|
(139 |
) |
|
|
(162 |
) |
|
|
60,903 |
|
|
|
58,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
156 |
|
|
$ |
116 |
|
|
|
|
|
|
|
|
|
|
$ |
156 |
|
|
$ |
116 |
|
|
16.78 |
% |
|
|
17.25 |
% |
|
|
N/M |
|
|
|
N/M |
|
|
|
16.03 |
% |
|
|
15.44 |
% |
|
16.31 |
|
|
|
17.06 |
|
|
|
N/M |
|
|
|
N/M |
|
|
|
15.59 |
|
|
|
15.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,041 |
|
|
|
13,972 |
|
|
|
6,040 |
|
|
|
6,002 |
|
|
|
19,081 |
|
|
|
19,974 |
|
|
16
Supplementary Information (Community Banking lines of business)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
Regional Banking |
|
|
Commercial Banking |
dollars in millions |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Total revenue (TE) |
|
$ |
532 |
|
|
$ |
587 |
|
|
$ |
94 |
|
|
$ |
100 |
|
Provision (credit) for loan losses |
|
|
12 |
|
|
|
19 |
|
|
|
(11 |
) |
|
|
3 |
|
Noninterest expense |
|
|
371 |
|
|
|
436 |
|
|
|
46 |
|
|
|
50 |
|
Net income |
|
|
94 |
|
|
|
83 |
|
|
|
37 |
|
|
|
29 |
|
Average loans and leases |
|
|
18,661 |
|
|
|
18,822 |
|
|
|
8,286 |
|
|
|
7,972 |
|
Average deposits |
|
|
43,229 |
|
|
|
43,495 |
|
|
|
3,498 |
|
|
|
3,444 |
|
Net loan charge-offs |
|
|
18 |
|
|
|
19 |
|
|
|
2 |
|
|
|
2 |
|
Return on average allocated equity |
|
|
21.38 |
% |
|
|
18.52 |
% |
|
|
19.37 |
% |
|
|
15.80 |
% |
Average full-time equivalent employees |
|
|
8,322 |
|
|
|
9,516 |
|
|
|
310 |
|
|
|
320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
Regional Banking |
|
|
Commercial Banking |
dollars in millions |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Total revenue (TE) |
|
$ |
1,781 |
|
|
$ |
1,730 |
|
|
$ |
279 |
|
|
$ |
293 |
|
Provision (credit) for loan losses |
|
|
51 |
|
|
|
60 |
|
|
|
(15 |
) |
|
|
11 |
|
Noninterest expense |
|
|
1,192 |
|
|
|
1,283 |
|
|
|
144 |
|
|
|
152 |
|
Net income |
|
|
336 |
|
|
|
242 |
|
|
|
94 |
|
|
|
81 |
|
Average loans and leases |
|
|
18,535 |
|
|
|
18,860 |
|
|
|
8,126 |
|
|
|
7,943 |
|
Average deposits |
|
|
42,994 |
|
|
|
43,009 |
|
|
|
3,464 |
|
|
|
3,450 |
|
Net loan charge-offs |
|
|
56 |
|
|
|
61 |
|
|
|
9 |
|
|
|
13 |
|
Return on average allocated equity |
|
|
25.85 |
% |
|
|
18.28 |
% |
|
|
17.05 |
% |
|
|
14.84 |
% |
Average full-time equivalent employees |
|
|
8,726 |
|
|
|
9,378 |
|
|
|
317 |
|
|
|
319 |
|
|
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 |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Total revenue (TE) |
|
$ |
104 |
|
|
$ |
170 |
|
|
$ |
139 |
|
|
$ |
137 |
|
|
$ |
183 |
|
|
$ |
190 |
|
|
$ |
85 |
|
|
$ |
89 |
|
Provision (credit) for loan losses |
|
|
43 |
|
|
|
7 |
|
|
|
16 |
|
|
|
11 |
|
|
|
(3 |
) |
|
|
3 |
|
|
|
12 |
|
|
|
(8 |
) |
Noninterest expense |
|
|
77 |
|
|
|
70 |
|
|
|
94 |
|
|
|
81 |
|
|
|
118 |
|
|
|
110 |
|
|
|
39 |
|
|
|
43 |
|
Income (loss) from continuing operations |
|
|
(10 |
) |
|
|
58 |
|
|
|
18 |
|
|
|
28 |
|
|
|
42 |
|
|
|
48 |
|
|
|
22 |
|
|
|
35 |
|
Net income (loss) |
|
|
(10 |
) |
|
|
58 |
|
|
|
18 |
|
|
|
28 |
|
|
|
42 |
|
|
|
48 |
|
|
|
8 |
|
|
|
42 |
|
Average loans and leasesa |
|
|
13,187 |
|
|
|
12,854 |
|
|
|
10,681 |
|
|
|
10,100 |
|
|
|
7,693 |
|
|
|
7,390 |
|
|
|
8,716 |
|
|
|
7,527 |
|
Average loans held for sale a |
|
|
1,584 |
|
|
|
1,022 |
|
|
|
6 |
|
|
|
6 |
|
|
|
373 |
|
|
|
454 |
|
|
|
2,729 |
|
|
|
3,071 |
|
Average deposits a |
|
|
5,559 |
|
|
|
3,593 |
|
|
|
16 |
|
|
|
19 |
|
|
|
6,633 |
|
|
|
7,042 |
|
|
|
425 |
|
|
|
452 |
|
Net loan charge-offs |
|
|
7 |
|
|
|
|
|
|
|
16 |
|
|
|
11 |
|
|
|
5 |
|
|
|
5 |
|
|
|
11 |
|
|
|
6 |
|
Return on average allocated equity a |
|
|
(2.96 |
)% |
|
|
19.06 |
% |
|
|
7.92 |
% |
|
|
13.02 |
% |
|
|
14.34 |
% |
|
|
16.46 |
% |
|
|
11.81 |
% |
|
|
20.85 |
% |
Return on average allocated equity |
|
|
(2.96 |
) |
|
|
19.06 |
|
|
|
7.92 |
|
|
|
13.02 |
|
|
|
14.34 |
|
|
|
16.46 |
|
|
|
4.29 |
|
|
|
18.29 |
|
Average full-time equivalent employees |
|
|
1,007 |
|
|
|
970 |
|
|
|
985 |
|
|
|
927 |
|
|
|
1,320 |
|
|
|
1,385 |
|
|
|
529 |
|
|
|
1,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
Real Estate Capital |
|
|
Equipment Finance |
|
|
Institutional and Capital Markets |
|
|
Consumer Finance |
dollars in millions |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Total revenue (TE) |
|
$ |
458 |
|
|
$ |
502 |
|
|
$ |
427 |
|
|
$ |
397 |
|
|
$ |
557 |
|
|
$ |
589 |
|
|
$ |
285 |
|
|
$ |
260 |
|
Provision (credit) for loan losses |
|
|
51 |
|
|
|
9 |
|
|
|
45 |
|
|
|
16 |
|
|
|
(1 |
) |
|
|
(4 |
) |
|
|
35 |
|
|
|
5 |
|
Noninterest expense |
|
|
226 |
|
|
|
205 |
|
|
|
272 |
|
|
|
230 |
|
|
|
349 |
|
|
|
343 |
|
|
|
121 |
|
|
|
134 |
|
Income from continuing operations |
|
|
113 |
|
|
|
180 |
|
|
|
69 |
|
|
|
95 |
|
|
|
130 |
|
|
|
157 |
|
|
|
81 |
|
|
|
77 |
|
Net income |
|
|
113 |
|
|
|
180 |
|
|
|
69 |
|
|
|
95 |
|
|
|
130 |
|
|
|
157 |
|
|
|
56 |
|
|
|
99 |
|
Average loans and leases a |
|
|
12,925 |
|
|
|
12,682 |
|
|
|
10,590 |
|
|
|
9,849 |
|
|
|
7,529 |
|
|
|
7,605 |
|
|
|
8,441 |
|
|
|
7,409 |
|
Average loans held for sale a |
|
|
1,325 |
|
|
|
765 |
|
|
|
7 |
|
|
|
16 |
|
|
|
327 |
|
|
|
236 |
|
|
|
2,672 |
|
|
|
3,005 |
|
Average deposits a |
|
|
4,910 |
|
|
|
3,422 |
|
|
|
15 |
|
|
|
16 |
|
|
|
6,683 |
|
|
|
6,729 |
|
|
|
401 |
|
|
|
430 |
|
Net loan charge-offs (recoveries) |
|
|
11 |
|
|
|
4 |
|
|
|
45 |
|
|
|
18 |
|
|
|
5 |
|
|
|
(3 |
) |
|
|
30 |
|
|
|
23 |
|
Return on average allocated equity a |
|
|
11.65 |
% |
|
|
20.21 |
% |
|
|
10.39 |
% |
|
|
15.30 |
% |
|
|
14.70 |
% |
|
|
18.63 |
% |
|
|
14.90 |
% |
|
|
15.41 |
% |
Return on average allocated equity |
|
|
11.65 |
|
|
|
20.21 |
|
|
|
10.39 |
|
|
|
15.30 |
|
|
|
14.70 |
|
|
|
18.63 |
|
|
|
10.30 |
|
|
|
14.47 |
|
Average full-time equivalent employees |
|
|
990 |
|
|
|
977 |
|
|
|
969 |
|
|
|
926 |
|
|
|
1,325 |
|
|
|
1,321 |
|
|
|
671 |
|
|
|
1,011 |
|
|
(a) |
|
From continuing operations. |
|
TE = Taxable Equivalent |
17
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 Key purchases and holds with
the intent of selling them in the near term. Trading account securities are reported at fair value
($1.1 billion at September 30, 2007, $912 million at December 31, 2006, and $817 million at
September 30, 2006) 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
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
primarily foreign bonds.
Other investments. Principal investments ¾ investments in equity and mezzanine instruments
made by Keys Principal Investing unit ¾ represent 64% of other investments at September 30,
2007. 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 ($970 million at September 30, 2007, $830 million at December 31, 2006, and $843 million at
September 30, 2006). 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. Neither these securities nor principal investments have stated maturities.
The amortized cost, unrealized gains and losses, and approximate fair value of Keys securities
available for sale and investment securities are presented in the following tables. Gross
unrealized gains and losses are represented by the difference between the amortized cost and the
fair value of securities on the balance sheet as of the dates
indicated. Accordingly, the amount of these gains and losses may change in the future as market
conditions improve or worsen.
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
in millions |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
SECURITIES AVAILABLE FOR SALE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury, agencies and corporations |
|
$ |
18 |
|
|
|
|
|
|
|
|
|
|
$ |
18 |
|
States and political subdivisions |
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
12 |
|
Collateralized mortgage obligations |
|
|
6,357 |
|
|
$ |
32 |
|
|
$ |
37 |
|
|
|
6,352 |
|
Other mortgage-backed securities |
|
|
1,188 |
|
|
|
4 |
|
|
|
7 |
|
|
|
1,185 |
|
Retained interests in securitizations |
|
|
149 |
|
|
|
43 |
|
|
|
|
|
|
|
192 |
|
Other securities |
|
|
141 |
|
|
|
17 |
|
|
|
2 |
|
|
|
156 |
|
|
Total securities available for sale |
|
$ |
7,865 |
|
|
$ |
96 |
|
|
$ |
46 |
|
|
$ |
7,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTMENT SECURITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions |
|
$ |
15 |
|
|
|
|
|
|
|
|
|
|
$ |
15 |
|
Other securities |
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
21 |
|
|
Total investment securities |
|
$ |
36 |
|
|
|
|
|
|
|
|
|
|
$ |
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
in millions |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
SECURITIES AVAILABLE FOR SALE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury, agencies and corporations |
|
$ |
94 |
|
|
|
|
|
|
|
|
|
|
$ |
94 |
|
States and political subdivisions |
|
|
14 |
|
|
$ |
1 |
|
|
|
|
|
|
|
15 |
|
Collateralized mortgage obligations |
|
|
7,098 |
|
|
|
13 |
|
|
$ |
110 |
|
|
|
7,001 |
|
Other mortgage-backed securities |
|
|
336 |
|
|
|
2 |
|
|
|
4 |
|
|
|
334 |
|
Retained interests in securitizations |
|
|
151 |
|
|
|
57 |
|
|
|
|
|
|
|
208 |
|
Other securities |
|
|
165 |
|
|
|
10 |
|
|
|
|
|
|
|
175 |
|
|
Total securities available for sale |
|
$ |
7,858 |
|
|
$ |
83 |
|
|
$ |
114 |
|
|
$ |
7,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTMENT SECURITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions |
|
$ |
20 |
|
|
$ |
1 |
|
|
|
|
|
|
$ |
21 |
|
Other securities |
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
21 |
|
|
Total investment securities |
|
$ |
41 |
|
|
$ |
1 |
|
|
|
|
|
|
$ |
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
6. Loans and Loans Held for Sale
Keys loans by category are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
September 30, |
|
in millions |
|
2007 |
|
|
2006 |
|
|
2006 |
|
|
Commercial, financial and agricultural |
|
$ |
23,192 |
|
|
$ |
21,412 |
|
|
$ |
21,556 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage |
|
|
9,272 |
|
|
|
8,426 |
|
|
|
8,266 |
|
Construction |
|
|
8,214 |
|
|
|
8,209 |
|
|
|
8,272 |
|
|
Total commercial real estate loans |
|
|
17,486 |
|
|
|
16,635 |
|
|
|
16,538 |
|
Commercial lease financing |
|
|
10,309 |
|
|
|
10,259 |
|
|
|
9,860 |
|
|
Total commercial loans |
|
|
50,987 |
|
|
|
48,306 |
|
|
|
47,954 |
|
Real estate residential mortgage |
|
|
1,583 |
|
|
|
1,442 |
|
|
|
1,407 |
|
Home equity |
|
|
10,904 |
|
|
|
10,826 |
|
|
|
10,988 |
|
Consumer direct |
|
|
1,308 |
|
|
|
1,536 |
|
|
|
1,576 |
|
Consumer indirect: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
3,549 |
|
|
|
3,077 |
|
|
|
2,982 |
|
Other |
|
|
668 |
|
|
|
639 |
|
|
|
644 |
|
|
Total consumer indirect loans |
|
|
4,217 |
|
|
|
3,716 |
|
|
|
3,626 |
|
|
Total consumer loans |
|
|
18,012 |
|
|
|
17,520 |
|
|
|
17,597 |
|
|
Total loans |
|
$ |
68,999 |
|
|
$ |
65,826 |
|
|
$ |
65,551 |
|
|
|
|
|
|
|
|
|
|
|
|
Key uses interest rate swaps to manage interest rate risk; these swaps modify the repricing
(characteristics of certain loans. For more information about such swaps, see Note 19 (Derivatives
and Hedging Activities), which begins on page 100 of Keys 2006 Annual Report to Shareholders.
Keys loans held for sale by category are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
September 30, |
|
in millions |
|
2007 |
|
|
2006 |
|
|
2006 |
|
|
Commercial, financial and agricultural |
|
$ |
67 |
|
|
$ |
47 |
|
|
$ |
219 |
|
Real estate commercial mortgage |
|
|
1,560 |
|
|
|
946 |
|
|
|
1,062 |
|
Real estate construction |
|
|
237 |
|
|
|
36 |
|
|
|
198 |
|
Commercial lease financing |
|
|
5 |
|
|
|
3 |
|
|
|
2 |
|
Real estate residential mortgage |
|
|
36 |
|
|
|
21 |
|
|
|
21 |
|
Home equity a |
|
|
1 |
|
|
|
180 |
|
|
|
2,485 |
|
Education |
|
|
2,877 |
|
|
|
2,390 |
|
|
|
3,147 |
|
Automobile |
|
|
8 |
|
|
|
14 |
|
|
|
16 |
|
|
Total loans held for sale |
|
$ |
4,791 |
|
|
$ |
3,637 |
|
|
$ |
7,150 |
|
|
|
|
|
|
|
|
|
|
|
|
(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 the anticipated November 29, 2006, sale of the
Champion Mortgage finance business. |
20
Changes in the allowance for loan losses are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
September 30, |
|
|
September 30, |
in millions |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Balance at beginning of period |
|
$ |
945 |
|
|
$ |
956 |
|
|
$ |
944 |
|
|
$ |
966 |
|
Charge-offs |
|
|
(82 |
) |
|
|
(70 |
) |
|
|
(218 |
) |
|
|
(194 |
) |
Recoveries |
|
|
23 |
|
|
|
27 |
|
|
|
62 |
|
|
|
78 |
|
|
Net loans charged off |
|
|
(59 |
) |
|
|
(43 |
) |
|
|
(156 |
) |
|
|
(116 |
) |
Provision for loan losses from continuing operations |
|
|
69 |
|
|
|
35 |
|
|
|
166 |
|
|
|
97 |
|
Provision for loan losses from discontinued operations |
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
(3 |
) |
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
Balance at end of period |
|
$ |
955 |
|
|
$ |
944 |
|
|
$ |
955 |
|
|
$ |
944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in the liability for credit losses on lending-related commitments are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
September 30, |
|
|
September 30, |
in millions |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Balance at beginning of period |
|
$ |
50 |
|
|
$ |
59 |
|
|
$ |
53 |
|
|
$ |
59 |
|
Provision for losses on lending-related commitments |
|
|
5 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
Charge-offs |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
Balance at end of period a |
|
$ |
55 |
|
|
$ |
59 |
|
|
$ |
55 |
|
|
$ |
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Included in accrued expense and other liabilities on the consolidated balance sheet. |
7. Mortgage Servicing Assets
Key originates and periodically sells commercial mortgage loans which it continues to service for
the buyers. Key may also purchase the right to service commercial mortgage loans for other
lenders. Changes in the carrying amount of mortgage servicing assets are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
September 30, |
in millions |
|
2007 |
|
|
2006 |
|
|
Balance at beginning of period |
|
$ |
247 |
|
|
$ |
248 |
|
Servicing retained from loan sales |
|
|
16 |
|
|
|
10 |
|
Purchases |
|
|
122 |
|
|
|
29 |
|
Amortization |
|
|
(63 |
) |
|
|
(48 |
) |
|
Balance at end of period |
|
$ |
322 |
|
|
$ |
239 |
|
|
|
|
|
|
|
|
|
Fair value at beginning of period |
|
$ |
332 |
|
|
$ |
301 |
|
Fair value at end of period |
|
|
420 |
|
|
|
329 |
|
|
The fair value of mortgage servicing assets is estimated by calculating the present value of future
cash flows associated with servicing the loans. This calculation uses a number of assumptions that
are based on current market conditions. Primary economic assumptions used to measure the fair
value of Keys mortgage servicing assets at September 30, 2007 and 2006, are as follows:
¨ |
|
prepayment speed generally at an annual rate of 0.00% to 25.00%; |
|
¨ |
|
expected credit losses at a static rate of 2.00%; and |
|
¨ |
|
residual cash flows discount rate of 8.50% to 15.00%. |
Changes in these assumptions could cause the fair value of mortgage servicing assets to change in
the future. The volume of loans serviced and expected credit losses are critical to the valuation
of servicing assets. A 1.00% increase in the assumed default rate of commercial mortgage loans at
September 30, 2007, would cause a $7 million decrease in the fair value of Keys mortgage servicing
assets.
21
Contractual fee income from servicing commercial mortgage loans totaled $54 million for each of the
nine-month periods ended September 30, 2007 and 2006. The amortization of servicing assets for the
respective nine-month periods, as shown in the table above, is recorded as a reduction to fee
income. Both the contractual fee income and the amortization are recorded in other income on the
income statement.
Additional information pertaining to the accounting for mortgage and other servicing assets is
included in Note 1 (Basis of Presentation) under the heading Servicing Assets on page 7.
8. 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 a VIE
to be consolidated by the party that is exposed to a 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, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper conduit |
|
|
$ 151 |
|
|
|
N/A |
|
|
|
N/A |
|
Low-income housing tax credit (LIHTC) funds |
|
|
281 |
|
|
$ |
186 |
|
|
|
|
|
LIHTC investments |
|
|
N/A |
|
|
|
781 |
|
|
$ |
273 |
|
|
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
interests as minority interests and adjusts the financial statements each period for the investors
share of the funds profits and losses. At September 30, 2007, the settlement value of these
noncontrolling interests was estimated to be between $295 million and $347 million, while the
recorded value, including reserves, totaled $283 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) 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 equity and mezzanine investments, which remain unconsolidated. As
discussed in Note 1 (Basis of Presentation) under the heading Accounting Pronouncements Pending
Adoption on page 9, in May 2007, the FASB issued Staff Position FIN 46(R)-7, which provides an
exception to the scope of Revised Interpretation No. 46 for investment companies within the scope
of SOP No. 07-1. Staff Position FIN 46(R)-7 will be effective for fiscal years beginning on or
after December 15, 2007 (effective January 1, 2008, for Key). Management is evaluating the
potential effect this guidance may have on Keys financial condition or results of operations.
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 2006 Annual Report to Shareholders under the heading
Variable Interest Entities on page 84.
22
9. Nonperforming Assets and Past Due Loans
Impaired loans totaled $344 million at September 30, 2007, compared to $95 million at December 31,
2006, and $122 million at September 30, 2006. Impaired loans averaged $240 million for the third
quarter of 2007 and $121 million for the third quarter of 2006.
Keys nonperforming assets and past due loans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
September 30, |
|
in millions |
|
2007 |
|
|
2006 |
|
|
2006 |
|
|
Impaired loans |
|
$ |
344 |
|
|
$ |
95 |
|
|
$ |
122 |
|
Other nonaccrual loans |
|
|
154 |
|
|
|
120 |
|
|
|
101 |
|
|
Total nonperforming loans |
|
|
498 |
|
|
|
215 |
|
|
|
223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans held for salea |
|
|
6 |
|
|
|
3 |
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned (OREO) |
|
|
21 |
|
|
|
57 |
|
|
|
52 |
|
Allowance for OREO losses |
|
|
(1 |
) |
|
|
(3 |
) |
|
|
(3 |
) |
|
OREO, net of allowance |
|
|
20 |
|
|
|
54 |
|
|
|
49 |
|
Other nonperforming assets |
|
|
46 |
b |
|
|
1 |
|
|
|
1 |
|
|
Total nonperforming assets |
|
$ |
570 |
|
|
$ |
273 |
|
|
$ |
329 |
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with a specifically allocated allowance |
|
$ |
35 |
|
|
$ |
34 |
|
|
$ |
27 |
|
Specifically allocated allowance for impaired loans |
|
|
11 |
|
|
|
14 |
|
|
|
12 |
|
|
Accruing loans past due 90 days or more |
|
$ |
190 |
|
|
$ |
120 |
|
|
$ |
125 |
|
Accruing loans past due 30 through 89 days |
|
|
717 |
|
|
|
644 |
|
|
|
715 |
|
|
(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 the anticipated
November 29, 2006, sale of the Champion Mortgage finance business. |
(b) |
|
Primarily investments held by the Private Equity unit within Keys Real Estate Capital line
of business. |
At September 30, 2007, Key did not have any significant commitments to lend additional funds to
borrowers with loans on nonperforming status.
Management evaluates the collectibility of Keys loans as described in Note 1 (Summary of
Significant Accounting Policies) under the heading Allowance for Loan Losses on page 69 of Keys
2006 Annual Report to Shareholders.
23
10. Capital Securities Issued by Unconsolidated Subsidiaries
KeyCorp owns the outstanding common securities of business trusts that issued corporation-obligated
mandatorily redeemable preferred capital securities. The trusts used the proceeds from the
issuance of their capital securities and common securities to buy debentures issued by KeyCorp.
These debentures are the trusts only assets; the interest payments from the debentures finance the
distributions paid on the capital securities.
The capital securities provide an attractive source of funds; they constitute Tier 1 capital for
regulatory reporting purposes, but have the same tax advantages as debt for federal income tax
purposes. During the first quarter of 2005, the Federal Reserve Board adopted a rule that allows
bank holding companies to continue to treat capital securities as Tier 1 capital, but imposed
stricter quantitative limits that take effect after a five-year transition period ending March 31,
2009. Management believes the new rule will not have any material effect on Keys financial
condition.
KeyCorp unconditionally guarantees the following payments or distributions on behalf of the trusts:
¨ |
|
required distributions on the capital securities; |
|
¨ |
|
the redemption price when a capital security is redeemed; and |
|
¨ |
|
amounts due if a trust is liquidated or terminated. |
During the first nine months of 2007, the business trusts did not repurchase any capital securities
and KeyCorp did not repurchase any of the related debentures.
The capital securities, common securities and related debentures are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal |
|
|
Interest Rate |
|
|
Maturity |
|
|
|
Capital |
|
|
|
|
|
|
Amount of |
|
|
of Capital |
|
|
of Capital |
|
|
|
Securities, |
|
|
Common |
|
|
Debentures, |
|
|
Securities and |
|
|
Securities and |
|
dollars in millions |
|
Net of
Discount a |
|
|
Securities |
|
|
Net of Discount b |
|
|
Debentures c |
|
|
Debentures |
|
|
September 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KeyCorp Capital I |
|
$ |
197 |
|
|
$ |
8 |
|
|
$ |
205 |
|
|
|
6.100 |
% |
|
|
2028 |
|
KeyCorp Capital II |
|
|
171 |
|
|
|
8 |
|
|
|
165 |
|
|
|
6.875 |
|
|
|
2029 |
|
KeyCorp Capital III |
|
|
218 |
|
|
|
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 |
|
|
224 |
|
|
|
8 |
|
|
|
258 |
|
|
|
5.700 |
|
|
|
2035 |
|
KeyCorp Capital VIII |
|
|
251 |
|
|
|
|
|
|
|
250 |
|
|
|
7.000 |
|
|
|
2066 |
|
KeyCorp Capital IX |
|
|
488 |
|
|
|
|
|
|
|
500 |
|
|
|
6.750 |
|
|
|
2066 |
|
|
Total |
|
$ |
1,782 |
|
|
$ |
39 |
|
|
$ |
1,832 |
|
|
|
6.611 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
$ |
1,804 |
|
|
$ |
39 |
|
|
$ |
1,832 |
|
|
|
6.613 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
$ |
1,830 |
|
|
$ |
54 |
|
|
$ |
1,847 |
|
|
|
6.977 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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, 2007, December 31, 2006, and September 30,
2006, are basis adjustments of ($11) million, $11 million and $37 million, respectively, related
to fair value hedges. See Note 19 (Derivatives and Hedging Activities), which begins on page
100 of Keys 2006 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 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), June 15, 2010 (for
debentures owned by Capital VII), June 15, 2011 (for debentures owned by Capital VIII) and
December 15, 2011 (for debentures owned by Capital IX); 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 I, Capital V, Capital VI, Capital VII, Capital VIII or Capital IX 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 II, Capital III, Capital V, Capital VI, Capital VII, Capital
VIII and Capital IX 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, 2007, December 31, 2006, and September 30, 2006, are weighted-average rates. |
24
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 |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Service cost of benefits earned |
|
$ |
12 |
|
|
$ |
12 |
|
|
$ |
38 |
|
|
$ |
36 |
|
Interest cost on projected benefit obligation |
|
|
15 |
|
|
|
13 |
|
|
|
44 |
|
|
|
41 |
|
Expected return on plan assets |
|
|
(22 |
) |
|
|
(22 |
) |
|
|
(66 |
) |
|
|
(66 |
) |
Amortization of losses |
|
|
7 |
|
|
|
8 |
|
|
|
21 |
|
|
|
23 |
|
|
Net pension cost |
|
|
12 |
|
|
|
11 |
|
|
|
37 |
|
|
|
34 |
|
Curtailment gain |
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
Total pension cost |
|
$ |
12 |
|
|
$ |
11 |
|
|
$ |
34 |
|
|
$ |
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement Benefit Plans
Key sponsors a contributory postretirement healthcare plan that covers substantially all active and
retired employees hired before 2001 who meet certain eligibility criteria. Retirees contributions
are adjusted annually to reflect certain cost-sharing provisions and benefit limitations. Key also
sponsors life insurance plans covering certain grandfathered employees. These plans are
principally noncontributory. Separate Voluntary Employee Beneficiary Association trusts are used
to fund the healthcare plan and one of the life insurance plans.
Net postretirement benefit cost for all funded and unfunded plans includes the following
components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
in millions |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Service cost of benefits earned |
|
$ |
2 |
|
|
$ |
1 |
|
|
$ |
6 |
|
|
$ |
4 |
|
Interest cost on accumulated postretirement benefit obligation |
|
|
2 |
|
|
|
2 |
|
|
|
5 |
|
|
|
6 |
|
Expected return on plan assets |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(3 |
) |
|
|
(3 |
) |
Amortization of unrecognized transition obligation |
|
|
1 |
|
|
|
1 |
|
|
|
3 |
|
|
|
3 |
|
Amortization of losses |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
2 |
|
|
Net postretirement benefit cost |
|
$ |
4 |
|
|
$ |
4 |
|
|
$ |
11 |
|
|
$ |
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 three types
of lease financing transactions with both foreign and domestic customers (primarily municipal
authorities) for terms ranging from ten to fifty years. Lease in, Lease out (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. Qualified Technological Equipment
Leases (QTEs) 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. LILO and Service Contract
Lease 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. 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 Lease transactions generate rental income, as well as deductions
from the depreciation of the property, interest expense on nonrecourse debt incurred to fund the
transaction, and transaction costs.
25
Prior to 2004, 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. 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 2003 tax years and
has disallowed all net deductions taken in those tax years that relate to LILOs, QTEs and Service
Contract Leases. Key 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,
discussions with the Appeals Division were discontinued without a resolution. In April 2006, Key
received a final assessment from the IRS, consisting of taxes, interest and penalties, disallowing
all LILO deductions taken in those tax years. Key paid the assessment and filed a refund claim for
the total amount. Key has also filed appeals with the Appeals Division of the IRS with regard to
the proposed disallowance of the LILO, QTE and Service Contract Lease deductions taken in the 1998
through 2003 tax years.
Management continues to believe that Keys treatment of these LILO, QTE and Service Contract Lease
transactions is appropriate and in compliance with applicable tax law and regulations. Key intends
to vigorously pursue the IRS appeals process and litigation alternatives. In addition, in
connection with one Service Contract Lease transaction entered into by AWG Leasing Trust (AWG
Leasing), in which Key is a partner, the IRS completed its audit for the 1998 through 2003 tax
years, disallowed all deductions related to the transaction for those years and assessed penalties.
In March 2007, Key filed a lawsuit in the United States District Court for the Northern District
of Ohio (captioned AWG Leasing Trust, KSP Investments, Inc., as Tax Matters Partner v. United
States of America, and referred to herein as the AWG Leasing Litigation) claiming that the
disallowance of the deductions and assessment of penalties were erroneous. A trial date has been
set for January 21, 2008.
Management believes Keys tax position is correct and well-supported by applicable statutes,
regulations and judicial authority, but tax litigation is inherently uncertain. Consequently,
management cannot predict the outcome of the AWG Leasing Litigation or its other disputes with the
IRS related to its LILO, QTE or Service Contract Lease transactions. If Key were not to prevail in
these efforts, in addition to accrued deferred taxes of approximately $1.7 billion reflected on
Keys balance sheet as of September 30, 2007, Key would owe interest on any taxes and possibly
penalties. In the event of an unfavorable resolution of this issue, management estimates that, as
of September 30, 2007, the after-tax interest cost on any taxes due could be up to approximately
$385 million. This amount would vary based upon the then applicable interest rates, and grow over
the period any tax assessments remain outstanding. No reserves have been established for any such
interest or penalties. An adverse outcome in these disputes could have a material adverse effect
on Keys results of operations and a potentially substantial impact on its capital as discussed in
the following section.
Tax-Related Accounting Pronouncements Adopted in 2007
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 affects when earnings from leveraged lease
transactions (such as LILOs, QTEs and Service Contract Leases) will be recognized, and requires a
lessor to recalculate its recognition of lease income when there are changes or projected changes
in the timing of cash flows, including changes due to final or expected settlements of tax matters.
Previously, leveraged lease transactions were required to be recalculated only when a change in
the total projected net income from the lease occurred. Key adopted this guidance on January 1,
2007, and recorded a cumulative after-tax charge of $52 million to retained earnings related to the
LILO transactions. Future earnings are expected to increase over the remaining term of the
affected leases by a similar amount.
26
An adverse outcome in the AWG Leasing Litigation, certain settlement scenarios or other factors
could change managements current assumptions pertaining to the expected timing of the cash flows
related to income taxes for some or all of the leveraged lease transactions previously described.
In the event of such a change in managements assumptions, in accordance with Staff Position No.
13-2, Key would be required to recalculate its lease income from the inception of the affected
leases and recognize a reduction in its net investment with a corresponding charge to earnings in
the period in which the recalculation occurs. Management is currently unable to make a
determination regarding the ultimate financial impact, if any, of these events because of the
uncertainty of the outcome of the AWG Leasing Litigation, the range of possible settlement
opportunities that might be available to Key and other factors. Management believes that under
certain outcomes, the recalculation would result in a charge that could have a material adverse
effect on Keys results of operations and a potentially substantial impact on its capital.
However, management would expect future earnings to increase over the remaining term of the
affected leases by an amount equal to a substantial portion of the charge.
Accounting for uncertain tax positions. 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 for
the associated tax benefit to be recognized in a companys financial statements. In accordance
with this guidance, a company may recognize a 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 measured as the largest amount of
such benefit that is greater than 50% likely to be realized upon ultimate settlement. This
interpretation also provides guidance on measurement and derecognition of tax benefits, and
requires expanded disclosures.
Key adopted FASB Interpretation No. 48 on January 1, 2007, which resulted in an immaterial increase
in Keys liability for unrecognized tax benefits and was accounted for as a reduction to retained
earnings. The total amount of unrecognized tax benefits was $27 million at January 1, 2007, and
$21 million at September 30, 2007. The decrease in unrecognized tax benefits was a result of $6
million of tax payments made in connection with tax positions taken in prior years. The amount of
unrecognized tax benefits, if recognized, would impact Keys effective tax rate. Additionally, the
amount of unrecognized tax benefits could materially increase or decrease over the next twelve
months as a result of developments in the AWG Leasing Litigation or any possible settlement of tax
matters related to the leveraged lease transactions. However, management cannot currently estimate
the range of possible change.
As permitted under FASB Interpretation No. 48, Key continues to recognize interest and penalties
related to unrecognized tax benefits in income tax expense. During the nine-month period ended
September 30, 2007, Key recognized $4 million of interest. At September 30, 2007, Key had a $19
million liability for accrued interest payable on the balance sheet.
Key files income tax returns in the United States federal jurisdiction, as well as various state
and foreign jurisdictions. With the exception of the California and New York jurisdictions, Key is
not subject to U.S. federal, state and local, and foreign income tax examinations by tax
authorities for years prior to 2001. Income tax returns filed in California and New York are
subject to examination beginning with the years 1995 and 2000, respectively. As previously
discussed, the audits of the 1998 through 2003 federal income tax returns are currently on appeal
to the Appeals Division of the IRS. The outcomes of these appeals could impact the recognition of
benefits related to Keys tax positions.
27
13. Contingent Liabilities and Guarantees
Legal Proceedings
Residual value insurance litigation. Key has previously reported on its on-going litigation with
Swiss Reinsurance America Corporation (Swiss Re) in the United States Federal District Court in
Ohio relating to insurance coverage of the residual value of certain automobile leases through Key
Bank USA (the Residual Value Litigation).
As previously reported, on February 13, 2007, Key and Swiss Re entered into an agreement to settle
the Residual Value Litigation, subject to certain conditions. On February 16, 2007, the conditions
to settlement were satisfied. Under the settlement agreement, Swiss Re agreed to pay Key $279
million in two installments: $50 million, which was paid on March 15, 2007, and $229 million, which
was paid on June 29, 2007. As a result of the settlement, during the first quarter of 2007, Key
recorded a one-time gain of $26 million ($17 million after tax, or $.04 per diluted common share),
representing the difference between the proceeds received and the receivable recorded on Keys
balance sheet.
Tax disputes. 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 audits of Keys income tax returns for the 1995 through 2003 tax years and has
disallowed all deductions taken in those tax years that relate to certain lease financing
transactions. Further information 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 25.
Honsador litigation. On May 23, 2007, in the case of Honsador Holdings LLC v. Key Principal
Partners, LLC (KPP), pending in the Circuit Court of the First Circuit, a Hawaii state court, the
jury returned a verdict in favor of the plaintiffs in a lawsuit relating to KPPs investment in a
Hawaiian business, and on June 13, 2007, the state court entered a final judgment in favor of the
plaintiffs in the amount of $38.25 million (Final Judgment). During the three months ended June
30, 2007, Key established a $42 million reserve for this case for the verdict, legal costs and
other expenses associated with the lawsuit.
On September 27, 2007, KPP filed a notice of appeal with the Intermediate Court of Appeals for the
State of Hawaii, contesting the Final Judgment. On October 4, 2007, the trial court issued an
amended final judgment in which the court modified the Final Judgment (the Amended Final
Judgment). On October 22, 2007, KPP filed an amended notice of appeal, challenging both the Final
Judgment and the Amended Final Judgment.
Other litigation. In the ordinary course of business, Key is subject to other legal actions that
involve claims for substantial monetary relief. Based on information presently known to
management, management believes there are no such legal actions to which KeyCorp or any of its
subsidiaries is a party, or involving any of their properties, that, individually or in the
aggregate, could reasonably be expected to have a material adverse effect on Keys financial
condition.
Guarantees
Key is a guarantor in various agreements with third parties. The following table shows the types
of guarantees that Key had outstanding at September 30, 2007. 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 71 of Keys
2006 Annual Report to Shareholders.
28
|
|
|
|
|
|
|
|
|
|
|
Maximum Potential |
|
|
|
|
|
|
Undiscounted |
|
|
Liability |
|
in millions |
|
Future Payments |
|
|
Recorded |
|
|
Financial guarantees: |
|
|
|
|
|
|
|
|
Standby letters of credit |
|
$ |
12,974 |
|
|
$ |
35 |
|
Credit enhancement for asset-backed commercial paper conduit |
|
|
28 |
|
|
|
|
|
Recourse agreement with FNMA |
|
|
579 |
|
|
|
6 |
|
Return guarantee agreement with LIHTC investors |
|
|
347 |
|
|
|
41 |
|
Default guarantees |
|
|
12 |
|
|
|
1 |
|
Written interest rate caps a |
|
|
105 |
|
|
|
7 |
|
|
Total |
|
$ |
14,045 |
|
|
$ |
90 |
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
At September 30, 2007, the weighted-average interest rate on written interest rate caps was
5.3%, and the weighted-average strike rate was 5.7%. 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. Many of Keys lines of business issue standby
letters of credit 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, 2007, Keys standby letters of credit had a
remaining weighted-average life of approximately 2.6 years, with remaining actual lives ranging
from less than one year to as many as eleven 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 November 30, 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, 2007, Keys maximum potential funding requirement under the credit enhancement
facility totaled $28 million, but there were no drawdowns under the facility during the quarter.
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. KeyBank 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, KeyBank has agreed to assume a limited portion of the risk of loss during the
remaining term on each commercial mortgage loan KeyBank sells to FNMA. Accordingly, KeyBank
maintains a reserve for such potential losses in an amount estimated by management to approximate
the fair value of KeyBanks liability. At September 30, 2007, the outstanding commercial mortgage
loans in this program had a remaining weighted-average term of 7.8 years, and the unpaid principal
balance outstanding of loans sold by KeyBank as a participant in this program was approximately
$1.8 billion. The maximum potential amount of undiscounted future payments that may be required
under this program is generally equal to approximately one-third of the principal balance of loans
outstanding at September 30, 2007. 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 KeyBank, 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
29
throughout a fifteen-year compliance period. If KAHC defaults on its
obligation to provide the guaranteed return, Key is obligated to make any necessary payments to
investors. In October 2003, management elected to discontinue new partnerships under this program.
No recourse or collateral is available to offset Keys 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 by
distributing tax credits and deductions associated with the specific properties.
As shown in the table on page 29, KAHC maintained a reserve in the amount of $41 million at
September 30, 2007, which management believes will be sufficient to cover estimated future
obligations under the guarantees. The maximum exposure to loss reflected in the table represents
undiscounted future payments due to investors for the return on and of their investments. In
accordance with FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others, 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 as a component of the recorded
liability.
Default guarantees. Some lines of business provide or participate in various types of 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 fifteen 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, 2007, these caps had a weighted-average life of
approximately 2.1 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 facilities to various asset-backed commercial paper conduits. These facilities obligate
Key to provide funding in the event of a disruption in credit markets or other factors that
preclude the issuance of commercial paper by the conduits. Keys commitments to provide liquidity
are periodically evaluated by management. Three of these liquidity facilities, all of which expire
by September 29, 2008, obligate Key to provide funding of up to $166 million in total to a
commercial paper conduit that is consolidated in accordance with Keys consolidation policy
described in Note 1 (Basis of Presentation), which begins on page 7. The aggregate amount
available to be drawn by the conduit, which is based on the amount of current commitments to
borrowers, was $128 million at September 30, 2007, but there were no drawdowns under these
committed facilities at that date. Additional information pertaining to this conduit is included
in this note under the heading Guarantees on page 28 and in Note 8 (Loan Securitizations,
Servicing and Variable Interest Entities) of Keys 2006 Annual Report to Shareholders under the
heading Consolidated VIEs on page 84.
Key also provides liquidity facilities to several unconsolidated third-party commercial paper
conduits. These liquidity facilities, all of which expire by November 10, 2010, obligate Key to
provide funding of up to $687 million in total, with individual facilities ranging from $10 million
to $100 million. The amounts
available to be drawn, which are based on the amount of current commitments to borrowers, totaled
$494 million at September 30, 2007, but there were no drawdowns under these committed facilities at
that date.
30
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. Amounts paid, if any, with
respect to these indemnifications did not have 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, KeyBank, is party to various derivative instruments that
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. Generally, these instruments help Key manage exposure to market risk, mitigate
the credit risk inherent in the loan portfolio and meet client 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, 2007, Key had $464 million of derivative assets and $112 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 $1.0 billion and $951 million, respectively. Derivative assets and liabilities are
recorded at fair value on the balance sheet.
Counterparty Credit Risk
The following table summarizes the fair value of Keys derivative assets by type. These assets
represent Keys exposure to potential loss, as described below, before taking into account the
effects of master netting arrangements and other means used to mitigate risk.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
September 30, |
|
in millions |
|
2007 |
|
|
2006 |
|
|
2006 |
|
|
Interest rate |
|
$ |
713 |
|
|
$ |
697 |
|
|
$ |
635 |
|
Credit |
|
|
44 |
|
|
|
43 |
|
|
|
45 |
|
Foreign exchange |
|
|
643 |
|
|
|
321 |
|
|
|
172 |
|
Equity |
|
|
36 |
|
|
|
45 |
|
|
|
46 |
|
Energy |
|
|
61 |
|
|
|
29 |
|
|
|
17 |
|
|
Total |
|
$ |
1,497 |
|
|
$ |
1,135 |
|
|
$ |
915 |
|
|
|
|
|
|
|
|
|
|
|
|
Like other financial instruments, derivatives contain an element of credit risk the possibility
that Key will incur a loss because a counterparty, which may be a bank or a broker/dealer, fails to
meet its contractual obligations. This risk is measured as the expected positive replacement value
of contracts. To mitigate credit risk when managing 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 derivative 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 contract 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.
31
At September 30, 2007, Key was party to derivative contracts with 53 different counterparties.
These derivatives include interest rate swaps and caps, credit derivatives, foreign exchange
contracts, equity derivatives and energy derivatives. Among these were contracts entered into to
offset the risk of client exposure. Key had aggregate exposure of $448 million on these
instruments to 26 of the 53 counterparties. However, at September 30, 2007, Key held approximately
$309 million in pooled collateral to mitigate that exposure, resulting in net exposure of $139
million. The largest exposure to an individual counterparty was approximately $229 million, which
Key secured with approximately $211 million in collateral.
Asset and Liability Management
Key uses fair value and cash flow hedging strategies to manage its exposure to interest rate risk.
These strategies reduce the potential adverse impact of interest rate movements on future net
interest income. For more information about these asset and liability management strategies, see
Note 19 (Derivatives and Hedging Activities), which begins on page 100 of Keys 2006 Annual
Report to Shareholders.
The change in accumulated other comprehensive loss resulting from cash flow hedges is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification |
|
|
|
|
|
|
December 31, |
|
|
2007 |
|
|
of Gains to |
|
|
September 30, |
|
in millions |
|
2006 |
|
|
Hedging Activity |
|
|
Net Income |
|
|
2007 |
|
|
Accumulated other comprehensive (loss)
income resulting from cash flow hedges |
|
$ |
(19 |
) |
|
$ |
48 |
|
|
$ |
(6 |
) |
|
$ |
23 |
|
|
Key reclassifies gains and losses from accumulated other comprehensive loss to earnings when a
hedged item causes Key to pay variable-rate interest on debt, receive variable-rate interest on
commercial loans, or sell or securitize commercial real estate loans. Key expects to reclassify an
estimated $8 million of net losses on derivative instruments from accumulated other comprehensive
loss to earnings during the next twelve months.
Credit Risk Management
Key uses credit derivatives ¾ primarily credit default swaps ¾ to mitigate credit risk
by transferring a portion of the risk associated with the underlying extension of credit to a third
party. These instruments are also used to manage portfolio concentration and correlation risks.
At September 30, 2007, the notional amount of credit default swaps purchased by Key was $1.1
billion. Key also provides credit protection to other lenders through the sale of credit default
swaps. These transactions may generate fee income and can diversify overall exposure to credit
loss. At September 30, 2007, the notional amount of credit default swaps sold by Key was $50
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 credit protection, are included in investment banking and capital markets income on
the income statement. Key does not apply hedge accounting to credit derivatives.
32
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 derivative assets or derivative
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 $12 million at September 30, 2007, 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 2006 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, 2007 and 2006, 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 flows for the nine-month periods ended September 30, 2007 and
2006. 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, 2006, and
the related consolidated statements of income, changes in shareholders equity, and cash flows for
the year then ended not presented herein, and in our report dated February 23, 2007, 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, 2006, 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 7, 2007
34
Item 2. Managements Discussion & Analysis of Financial Condition & Results of Operations
Introduction
This section generally reviews the financial condition and results of operations of KeyCorp and its
subsidiaries for the quarterly and year-to-date periods ended September 30, 2007 and 2006. Some
tables may include additional periods to comply with disclosure requirements or to illustrate
trends in greater depth. When reading this discussion, 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 18 of Keys 2006 Annual Report to
Shareholders. This description does not reflect the reorganization within some of Keys lines of
business that took effect January 1, 2007. For a current description of Keys lines of business,
see Note 4 (Line of Business Results), which begins on page 13.
Terminology
This report contains some shortened names and industry-specific terms. We want to explain some of
these terms at the outset to provide a better understanding of the discussion that follows.
¨ |
|
KeyCorp refers solely to the parent holding company. |
|
¨ |
|
KeyBank refers to KeyCorps subsidiary bank, KeyBank National Association. |
|
¨ |
|
Key refers to the consolidated entity consisting of KeyCorp and its subsidiaries. |
|
¨ |
|
In November 2006, Key sold the nonprime mortgage loan portfolio held by the Champion Mortgage finance business and
announced a separate agreement to sell Champions loan origination platform. As a result of these actions, Key has
accounted for this business as a discontinued operation. We use the phrase continuing operations in this document to
mean all of Keys business other than Champion. Key completed the sale of Champions origination platform in February
2007. |
|
¨ |
|
Key engages in capital markets activities. These activities encompass a variety of products and services. Among other
things, Key trades securities as a dealer, enters into derivative contracts (both to accommodate clients financing
needs and for proprietary trading purposes), and conducts transactions in foreign currencies (both to accommodate
clients needs and to benefit from fluctuations in exchange rates). |
|
¨ |
|
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. A more detailed explanation of total and Tier 1 capital and how they are calculated is presented in the
section entitled Capital, which begins on page 61. |
Long-term goals
Keys long-term financial goals are to achieve an annual return on average equity at or above the
median of its peer group and to grow earnings per common share at an annual rate of 8% to 10%. The
strategy for achieving these goals is described under the heading Corporate Strategy on page 20
of Keys 2006 Annual Report to Shareholders.
35
Key from time-to-time uses capital that exceeds internal guidelines and minimum regulatory
requirements to repurchase common shares in the open market or through privately-negotiated
transactions. As a result of such repurchases, Keys weighted-average fully-diluted common shares
decreased to 397.8 million shares for the first nine months of 2007 from 411.0 million shares for
the first nine months of 2006. Reducing the share count can foster both earnings per share growth
and improved returns on average equity, but Keys share repurchase activity was not significant
enough to cause 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 management expects, which may have an adverse
effect on Keys financial results. |
|
¨ |
|
Trade, monetary and fiscal policies of various governmental bodies may affect the economic environment in which Key
operates, as well as its financial condition and results of operations. |
|
¨ |
|
Recent problems in the mortgage markets and related conditions in the financial markets, or other issues could cause a
deterioration in general economic conditions, or in the condition of the local economies or industries in which Key has
significant operations or assets, and, among other things, materially impact credit quality in existing portfolios
and/or Keys ability to generate loans in the future. |
|
¨ |
|
Increased competitive pressure among financial services companies may adversely affect Keys ability to market its
products and services. |
|
¨ |
|
It could take Key longer than anticipated to implement strategic initiatives, including those designed to grow revenue
or manage expenses; Key may be unable to implement certain initiatives; or the initiatives may be unsuccessful. |
|
¨ |
|
Acquisitions and dispositions of assets, business units or affiliates could adversely affect Key in ways that
management has not anticipated. |
|
¨ |
|
Key may experience operational or risk management failures due to technological or other factors. |
|
¨ |
|
Key may continue to become subject to heightened regulatory practices, requirements or expectations. |
|
¨ |
|
Key may become subject to new legal obligations or liabilities, or the unfavorable resolution of pending litigation may
have an adverse effect on its financial results or its capital. |
|
¨ |
|
Changes in the stock markets, public debt markets and other capital markets, including continued disruption in the
fixed income markets, could adversely affect Keys ability to raise capital or other funding for liquidity and business
purposes, as well as its revenues from client-based underwriting, investment banking and other capital markets-driven
businesses. |
36
¨ |
|
Terrorist activities or military actions could disrupt the economy and the general business climate, which may have an
adverse effect on Keys financial results or condition and that of its borrowers. |
|
¨ |
|
Key may become subject to new accounting, tax or regulatory practices or requirements, which impede its profitability. |
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 67 of Keys 2006
Annual Report to Shareholders, should be reviewed for a greater understanding of how Keys
financial performance is recorded and reported.
In managements opinion, some accounting policies are more likely than others to have a significant
effect on Keys financial results and to expose those results to potentially greater volatility.
These policies apply to areas of relatively greater business importance, or require management to
exercise judgment, and to make assumptions and estimates that affect amounts reported in the
financial statements. Because these assumptions and estimates are based on current circumstances,
they may change over time or prove to be inaccurate.
Key relies heavily on the use of judgment, assumptions and estimates in a number of important
areas, including accounting for the allowance for loan losses; loan securitizations; contingent
liabilities, guarantees and income taxes; derivatives and related hedging activities; principal
investments; goodwill; and pension and other postretirement obligations. A brief discussion of
each of these areas appears on pages 20 through 22 of Keys 2006 Annual Report to Shareholders.
During the first nine months of 2007, 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. Additionally, no new critical accounting policies were adopted.
Highlights of Keys Performance
Financial performance
Keys third quarter income from continuing operations was $224 million, or $.57 per diluted common
share, compared to $305 million, or $.74 per share, for the third quarter of 2006. Keys income
from continuing operations for the first nine months of 2007 was $919 million, or $2.31 per diluted
common share. This compares to income from continuing operations before the cumulative effect of
an accounting change of $882 million, or $2.15 per share, for the first nine months of 2006.
Net income totaled $210 million, or $.54 per diluted common share, for the third quarter of 2007,
compared to net income of $312 million, or $.76 per share, for the third quarter of 2006. Keys
net income for the first nine months of 2007 was $894 million, or $2.25 per diluted common share,
compared to $909 million, or $2.21 per share, for the same period last year.
Figure 1 shows Keys continuing and discontinued operating results and related performance ratios
for the three- and nine-month periods ended September 30, 2007 and 2006. Keys financial
performance for each of the past five quarters and the nine-month periods ended September 30, 2007
and 2006, is summarized in Figure 3 on page 41.
37
Figure 1. Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
in millions, except per share amounts |
|
9-30-07 |
|
|
9-30-06 |
|
|
9-30-07 |
|
|
9-30-06 |
|
|
SUMMARY OF OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before cumulative
effect of accounting change |
|
$ |
224 |
|
|
$ |
305 |
|
|
$ |
919 |
|
|
$ |
882 |
|
(Loss) income from discontinued operations, net of taxes a |
|
|
(14 |
) |
|
|
7 |
|
|
|
(25 |
) |
|
|
22 |
|
Cumulative effect of accounting change, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
Net income |
|
$ |
210 |
|
|
$ |
312 |
|
|
$ |
894 |
|
|
$ |
909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PER COMMON SHARE ASSUMING DILUTION |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before cumulative
effect of accounting change |
|
$ |
.57 |
|
|
$ |
.74 |
|
|
$ |
2.31 |
|
|
$ |
2.15 |
|
(Loss) income from discontinued operations a |
|
|
(.03 |
) |
|
|
.02 |
|
|
|
(.06 |
) |
|
|
.05 |
|
Cumulative effect of accounting change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.01 |
|
|
Net income |
|
$ |
.54 |
|
|
$ |
.76 |
|
|
$ |
2.25 |
|
|
$ |
2.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PERFORMANCE RATIOS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average total assets |
|
|
.93 |
% |
|
|
1.31 |
% |
|
|
1.31 |
% |
|
|
1.30 |
% |
Return on average equity |
|
|
11.50 |
|
|
|
15.52 |
|
|
|
16.03 |
|
|
|
15.44 |
|
From consolidated operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average total assets |
|
|
.88 |
% |
|
|
1.30 |
% |
|
|
1.28 |
% |
|
|
1.29 |
% |
Return on average equity |
|
|
10.79 |
|
|
|
15.88 |
|
|
|
15.59 |
|
|
|
15.82 |
|
|
|
|
|
(a) |
|
Key sold the nonprime mortgage loan portfolio held by the Champion Mortgage finance business
in November 2006, and
completed the sale of Champions origination platform in February 2007. As a result of these
actions, Key has accounted
for this business as a discontinued operation. The loss from discontinued operations
recorded in the third quarter of 2007
was attributable largely to a write-down on the building lease for the former Champion
headquarters. |
As shown in Figure 2, the comparability of Keys income from continuing operations for the three-
and nine-month periods ended September 30, 2007 and 2006, is affected by several significant items,
certain of which were the result of strategic actions described on page 39 that were taken to
improve Keys business mix and to reposition the balance sheet.
Figure 2. Significant Items Affecting the Comparability of Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Three months ended |
|
|
Nine months ended |
|
|
Nine months ended |
|
|
|
September 30, 2007 |
|
|
September 30, 2006 |
|
|
September 30, 2007 |
|
|
September 30, 2006 |
|
|
|
Pre-tax |
|
|
After-tax |
|
|
Pre-tax |
|
|
After-tax |
|
|
Pre-tax |
|
|
After-tax |
|
|
Pre-tax |
|
|
After-tax |
|
in millions, except per share amounts |
|
Amount |
|
|
Amount |
|
|
Amount |
|
|
Amount |
|
|
Amount |
|
|
Amount |
|
|
Amount |
|
|
Amount |
|
|
INCOME FROM CONTINUING OPERATIONS
GAAP BASIS |
|
$ |
310 |
|
|
$ |
224 |
|
|
$ |
423 |
|
|
$ |
305 |
|
|
$ |
1,282 |
|
|
$ |
919 |
|
|
$ |
1,235 |
|
|
$ |
882 |
|
Significant items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
McDonald Investments branch network a |
|
|
5 |
|
|
|
3 |
|
|
|
6 |
|
|
|
4 |
|
|
|
(146 |
) |
|
|
(92 |
) |
|
|
23 |
|
|
|
14 |
|
Gains related to MasterCard Incorporated shares |
|
|
(27 |
) |
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
(67 |
) |
|
|
(42 |
) |
|
|
(9 |
) |
|
|
(6 |
) |
Litigation reserve |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
Gain from settlement of automobile residual value
insurance litigation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26 |
) |
|
|
(17 |
) |
|
|
|
|
|
|
|
|
Loss from repositioning of securities portfolio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS ADJUSTED BASIS |
|
$ |
288 |
|
|
$ |
210 |
|
|
$ |
429 |
|
|
$ |
309 |
|
|
$ |
1,134 |
|
|
$ |
825 |
|
|
$ |
1,249 |
|
|
$ |
890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PER COMMON SHARE ASSUMING DILUTION |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations GAAP basis |
|
|
N/M |
|
|
$ |
.57 |
|
|
|
N/M |
|
|
$ |
.74 |
|
|
|
N/M |
|
|
$ |
2.31 |
|
|
|
N/M |
|
|
$ |
2.15 |
|
Income from continuing operations adjusted basis |
|
|
N/M |
|
|
|
.53 |
|
|
|
N/M |
|
|
|
.75 |
|
|
|
N/M |
|
|
|
2.07 |
|
|
|
N/M |
|
|
|
2.17 |
|
|
|
|
|
(a) |
|
Represents the financial effect of the McDonald Investments branch network, including a gain
of $171 million ($107 million after tax) from the February 9, 2007, sale of that network. |
N/M = Not Meaningful
GAAP = U.S. generally accepted accounting principles
38
During the first quarter of 2007, Key completed the previously announced sales of the McDonald
Investments branch network and the Champion Mortgage loan origination platform. Both transactions
are consistent with Keys strategy of focusing on core relationship businesses and exiting those
areas in which it does not have either the scale or opportunity to build profitable client
relationships.
During the same period, Key repositioned the securities portfolio in response to changing market
conditions. Management initiated this change to enhance Keys future financial performance,
particularly in the event of a decline in interest rates. For more detailed information regarding
the repositioning and composition of the securities portfolio, see the section entitled
Securities, which begins on page 58.
Keys top four priorities for 2007 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 of 2007:
¨ |
|
Keys noninterest income decreased by $105 million from the third
quarter of 2006. The adverse impact of fixed income market
volatility on several of Keys capital markets-driven businesses,
the sale of the McDonald Investments branch network completed in
the first quarter of this year and lower net gains from principal
investing activities caused the decrease. The reduction in
noninterest income was moderated by a $27 million gain from the
sale of MasterCard Incorporated shares in the current quarter,
growth in deposit service charge income and higher income from
Keys asset management business. Net interest income decreased by
$11 million from the year-ago quarter as interest rate spreads on
both loans and deposits remained under pressure due to the
continuation of competitive pricing. The tightening of interest
rate spreads more than offset the positive effect of a 4% increase
in average earning assets. |
|
¨ |
|
Keys nonperforming assets rose by $192 million and were up $241
million from the level reported one year ago. The increase was
due primarily to the impact of deteriorating market conditions on
the residential property segment of the commercial real estate
construction portfolio with the majority of the growth coming from
nonperforming loans outstanding in Florida and southern
California. Outside of this portfolio, Key experienced only
modest increases in nonperforming loans during the third quarter.
For the third quarter of 2007, net loan charge-offs totaled $59
million, or .35% of average total loans. |
|
¨ |
|
Key continued to manage expenses effectively. Keys total
noninterest expense decreased by 5% from the third quarter of
2006, largely as a result of the sale of the McDonald Investments
branch network and lower incentive compensation accruals. |
|
¨ |
|
Key continued to effectively manage its equity capital through
dividends paid to shareholders, share repurchases and investing in
its businesses. During the third quarter, Key repurchased 2.0
million of its common shares. At September 30, 2007, Keys
tangible equity to tangible assets ratio was 6.78%. |
The primary reasons that Keys revenue and expense components changed from those reported for the
three- and nine-month periods ended September 30, 2006, are reviewed in greater detail throughout
the remainder of the Managements Discussion & Analysis section.
Financial outlook
During the third quarter of 2007, the fixed income markets experienced extraordinary volatility,
rapidly widening credit spreads and significantly reduced liquidity. Key participates in these
markets primarily through business conducted by its National Banking group and through its
principal investing activities. The widening of credit spreads had an adverse impact on the market
values of Keys loans held-for-sale, trading account securities and certain real estate-related
investments included in other investments on the balance sheet. During the third quarter of
2007, Key recorded net losses of $77 million on these assets,
compared to net gains of $26 million in the third quarter of 2006. Net gains from principal
investing activities were $9 million for the current quarter, down from $28 million for the same
period last year.
39
Although the fixed income markets continue to remain under pressure heading into the fourth
quarter, management believes most of the financial impact on Keys market-sensitive portfolios has
already been experienced and expects the performance of these portfolios to improve over the
remainder of the year. Based on current market conditions, management expects earnings per common
share for the fourth quarter of 2007 to be in the range of $.68 to $.74. Managements expectations
for the fourth quarter of 2007 with regard to certain other financial performance measures include:
¨ |
|
a net interest margin in the low- to mid-3.30% range; |
|
¨ |
|
an upper-single digit percentage increase in commercial loans, and a low-single digit percentage increase in consumer
loans; |
|
¨ |
|
a low- to mid-single digit percentage increase in core deposits; |
|
¨ |
|
net loan charge-offs in the range of .35% to .45% of average loans; and |
|
¨ |
|
an effective tax rate of approximately 32% on a taxable-equivalent basis. |
Strategic developments
Key has taken a number of specific actions during 2007 and 2006 to support its corporate strategy.
¨ |
|
On October 1, 2007, Key acquired Tuition Management Systems, Inc.,
one of the nations largest providers of outsourced tuition
planning, billing, counseling and payment services. Headquartered
in Warwick, Rhode Island, Tuition Management Systems serves more
than 700 colleges, universities, elementary and secondary
educational institutions. The payment plan systems and technology
in place at Tuition Management Systems and the array of payment
plan products offered by Key will create one of the largest
payment plan providers in the nation. |
|
¨ |
|
On July 27, 2007, Key entered into an agreement to acquire U.S.B.
Holding Co., Inc., the holding company for Union State Bank, a
state-chartered commercial bank headquartered in Orangeburg, New
York, with 31 branches. U.S.B. Holding Co. has assets of
approximately $3 billion and deposits of approximately $2 billion.
This acquisition will expand Keys presence in markets both
within and contiguous to its current operations in the Hudson
Valley. See Note 3 (Acquisitions and Divestitures), which
begins on page 11, for more information pertaining to this pending
acquisition. |
|
¨ |
|
On February 9, 2007, McDonald Investments Inc., a wholly-owned
subsidiary of KeyCorp, sold its branch network, which included
approximately 570 financial advisors and field support staff, and
certain fixed assets. Key has retained the corporate and
institutional businesses, including Institutional Equities and
Equity Research, Debt Capital Markets and Investment Banking. In
addition, KeyBank continues to operate the Wealth Management,
Trust and Private Banking businesses. On April 16, 2007, Key
renamed its registered broker/dealer through which its corporate
and institutional investment banking and securities businesses
operate. The new name is KeyBanc Capital Markets Inc. |
|
¨ |
|
On November 29, 2006, Key sold the nonprime mortgage loan
portfolio held by the Champion Mortgage finance business. Key
completed the sale of the Champion loan origination platform on
February 28, 2007. |
|
¨ |
|
On April 1, 2006, Key broadened its 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. Austin
specializes in selecting and managing hedge fund investments for
its principally institutional customer base. |
40
Figure 3. Selected Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
2007 |
|
|
2006 |
|
|
September 30, |
|
dollars in millions, except per share amounts |
|
Third |
|
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
2007 |
|
|
2006 |
|
|
FOR THE PERIOD |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
1,434 |
|
|
$ |
1,395 |
|
|
$ |
1,368 |
|
|
$ |
1,413 |
|
|
$ |
1,389 |
|
|
$ |
4,197 |
|
|
$ |
3,967 |
|
Interest expense |
|
|
740 |
|
|
|
709 |
|
|
|
689 |
|
|
|
701 |
|
|
|
684 |
|
|
|
2,138 |
|
|
|
1,864 |
|
Net interest income |
|
|
694 |
|
|
|
686 |
|
|
|
679 |
|
|
|
712 |
|
|
|
705 |
|
|
|
2,059 |
|
|
|
2,103 |
|
Provision for loan losses |
|
|
69 |
|
|
|
53 |
|
|
|
44 |
|
|
|
53 |
|
|
|
35 |
|
|
|
166 |
|
|
|
97 |
|
Noninterest income |
|
|
438 |
|
|
|
649 |
|
|
|
654 |
|
|
|
558 |
|
|
|
543 |
|
|
|
1,741 |
|
|
|
1,569 |
|
Noninterest expense |
|
|
753 |
|
|
|
815 |
|
|
|
784 |
|
|
|
809 |
|
|
|
790 |
|
|
|
2,352 |
|
|
|
2,340 |
|
Income from continuing operations before income taxes and
cumulative effect of accounting change |
|
|
310 |
|
|
|
467 |
|
|
|
505 |
|
|
|
408 |
|
|
|
423 |
|
|
|
1,282 |
|
|
|
1,235 |
|
Income from continuing operations before cumulative
effect of accounting change |
|
|
224 |
|
|
|
337 |
|
|
|
358 |
|
|
|
311 |
|
|
|
305 |
|
|
|
919 |
|
|
|
882 |
|
(Loss) income from discontinued operations, net of taxes |
|
|
(14 |
) |
|
|
(3 |
) |
|
|
(8 |
) |
|
|
(165 |
) |
|
|
7 |
|
|
|
(25 |
) |
|
|
22 |
|
Income before cumulative effect of accounting change |
|
|
210 |
|
|
|
334 |
|
|
|
350 |
|
|
|
146 |
|
|
|
312 |
|
|
|
894 |
|
|
|
904 |
|
Net income |
|
|
210 |
|
|
|
334 |
|
|
|
350 |
|
|
|
146 |
|
|
|
312 |
|
|
|
894 |
|
|
|
909 |
|
|
PER COMMON SHARE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before cumulative
effect of accounting change |
|
$ |
.58 |
|
|
$ |
.86 |
|
|
$ |
.90 |
|
|
$ |
.77 |
|
|
$ |
.76 |
|
|
$ |
2.34 |
|
|
$ |
2.18 |
|
(Loss) income from discontinued operations |
|
|
(.03 |
) |
|
|
(.01 |
) |
|
|
(.02 |
) |
|
|
(.41 |
) |
|
|
.02 |
|
|
|
(.06 |
) |
|
|
.05 |
|
Income before cumulative effect of accounting change |
|
|
.54 |
|
|
|
.85 |
|
|
|
.88 |
|
|
|
.36 |
|
|
|
.77 |
|
|
|
2.28 |
|
|
|
2.23 |
|
Net income |
|
|
.54 |
|
|
|
.85 |
|
|
|
.88 |
|
|
|
.36 |
|
|
|
.77 |
|
|
|
2.28 |
|
|
|
2.24 |
|
|
Income from continuing operations before cumulative effect
of accounting change assuming dilution |
|
|
.57 |
|
|
|
.85 |
|
|
|
.89 |
|
|
|
.76 |
|
|
|
.74 |
|
|
|
2.31 |
|
|
|
2.15 |
|
(Loss) income from discontinued operations assuming dilution |
|
|
(.03 |
) |
|
|
(.01 |
) |
|
|
(.02 |
) |
|
|
(.40 |
) |
|
|
.02 |
|
|
|
(.06 |
) |
|
|
.05 |
|
Income before cumulative effect of accounting
change assuming dilution |
|
|
.54 |
|
|
|
.84 |
|
|
|
.87 |
|
|
|
.36 |
|
|
|
.76 |
|
|
|
2.25 |
|
|
|
2.20 |
|
Net income assuming dilution |
|
|
.54 |
|
|
|
.84 |
|
|
|
.87 |
|
|
|
.36 |
|
|
|
.76 |
|
|
|
2.25 |
|
|
|
2.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared |
|
|
.365 |
|
|
|
.365 |
|
|
|
.365 |
|
|
|
.345 |
|
|
|
.345 |
|
|
|
1.095 |
|
|
|
1.035 |
|
Book value at period end |
|
|
20.12 |
|
|
|
19.78 |
|
|
|
19.57 |
|
|
|
19.30 |
|
|
|
19.73 |
|
|
|
20.12 |
|
|
|
19.73 |
|
Market price: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
|
37.09 |
|
|
|
38.96 |
|
|
|
39.90 |
|
|
|
38.63 |
|
|
|
38.15 |
|
|
|
39.90 |
|
|
|
38.31 |
|
Low |
|
|
31.38 |
|
|
|
34.15 |
|
|
|
35.94 |
|
|
|
35.73 |
|
|
|
34.48 |
|
|
|
31.38 |
|
|
|
32.68 |
|
Close |
|
|
32.33 |
|
|
|
34.33 |
|
|
|
37.47 |
|
|
|
38.03 |
|
|
|
37.44 |
|
|
|
32.33 |
|
|
|
37.44 |
|
Weighted-average common shares outstanding (000) |
|
|
389,319 |
|
|
|
392,045 |
|
|
|
397,875 |
|
|
|
402,329 |
|
|
|
403,780 |
|
|
|
393,048 |
|
|
|
405,218 |
|
Weighted-average common shares and potential
common shares outstanding (000) |
|
|
393,164 |
|
|
|
396,918 |
|
|
|
403,478 |
|
|
|
407,828 |
|
|
|
409,428 |
|
|
|
397,816 |
|
|
|
411,029 |
|
|
AT PERIOD END |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
68,999 |
|
|
$ |
66,692 |
|
|
$ |
65,711 |
|
|
$ |
65,826 |
|
|
$ |
65,551 |
|
|
$ |
68,999 |
|
|
$ |
65,551 |
|
Earning assets |
|
|
84,973 |
|
|
|
82,328 |
|
|
|
81,263 |
|
|
|
80,090 |
|
|
|
83,132 |
|
|
|
84,973 |
|
|
|
83,132 |
|
Total assets |
|
|
97,366 |
|
|
|
94,076 |
|
|
|
93,219 |
|
|
|
92,337 |
|
|
|
96,155 |
|
|
|
97,366 |
|
|
|
96,155 |
|
Deposits |
|
|
63,714 |
|
|
|
60,599 |
|
|
|
59,773 |
|
|
|
59,116 |
|
|
|
61,429 |
|
|
|
63,714 |
|
|
|
61,429 |
|
Long-term debt |
|
|
11,549 |
|
|
|
12,581 |
|
|
|
13,061 |
|
|
|
14,533 |
|
|
|
13,654 |
|
|
|
11,549 |
|
|
|
13,654 |
|
Shareholders equity |
|
|
7,820 |
|
|
|
7,701 |
|
|
|
7,719 |
|
|
|
7,703 |
|
|
|
7,947 |
|
|
|
7,820 |
|
|
|
7,947 |
|
|
PERFORMANCE RATIOS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average total assets |
|
|
.93 |
% |
|
|
1.45 |
% |
|
|
1.58 |
% |
|
|
1.33 |
% |
|
|
1.31 |
% |
|
|
1.31 |
% |
|
|
1.30 |
% |
Return on average equity |
|
|
11.50 |
|
|
|
17.66 |
|
|
|
19.06 |
|
|
|
15.63 |
|
|
|
15.52 |
|
|
|
16.03 |
|
|
|
15.44 |
|
Net interest margin (taxable equivalent) |
|
|
3.40 |
|
|
|
3.46 |
|
|
|
3.50 |
|
|
|
3.66 |
|
|
|
3.61 |
|
|
|
3.46 |
|
|
|
3.67 |
|
From consolidated operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return of average total assets |
|
|
.88 |
% |
|
|
1.43 |
% |
|
|
1.54 |
% |
|
|
.61 |
% |
|
|
1.30 |
% |
|
|
1.28 |
% |
|
|
1.29 |
% |
Return of average equity |
|
|
10.79 |
|
|
|
17.50 |
|
|
|
18.63 |
|
|
|
7.34 |
|
|
|
15.88 |
|
|
|
15.59 |
|
|
|
15.82 |
|
Net interest margin (taxable equivalent) |
|
|
3.40 |
|
|
|
3.46 |
|
|
|
3.51 |
|
|
|
3.69 |
|
|
|
3.63 |
|
|
|
3.46 |
|
|
|
3.69 |
|
|
CAPITAL RATIOS AT PERIOD END |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity to assets |
|
|
8.03 |
% |
|
|
8.19 |
% |
|
|
8.28 |
% |
|
|
8.34 |
% |
|
|
8.26 |
% |
|
|
8.03 |
% |
|
|
8.26 |
% |
Tangible equity to tangible assets |
|
|
6.78 |
|
|
|
6.89 |
|
|
|
6.97 |
|
|
|
7.01 |
|
|
|
6.81 |
|
|
|
6.78 |
|
|
|
6.81 |
|
Tier 1 risk-based capital |
|
|
7.94 |
|
|
|
8.14 |
|
|
|
8.15 |
|
|
|
8.24 |
|
|
|
8.02 |
|
|
|
7.94 |
|
|
|
8.02 |
|
Total risk-based capital |
|
|
11.76 |
|
|
|
12.15 |
|
|
|
12.20 |
|
|
|
12.43 |
|
|
|
12.13 |
|
|
|
11.76 |
|
|
|
12.13 |
|
Leverage |
|
|
8.96 |
|
|
|
9.11 |
|
|
|
9.17 |
|
|
|
8.98 |
|
|
|
8.89 |
|
|
|
8.96 |
|
|
|
8.89 |
|
|
TRUST AND BROKERAGE ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets under management |
|
$ |
88,100 |
|
|
$ |
85,592 |
|
|
$ |
82,388 |
|
|
$ |
84,699 |
|
|
$ |
84,060 |
|
|
$ |
88,100 |
|
|
$ |
84,060 |
|
Nonmanaged and brokerage assets |
|
|
33,273 |
|
|
|
33,485 |
|
|
|
32,838 |
|
|
|
56,292 |
|
|
|
55,221 |
|
|
|
33,273 |
|
|
|
55,221 |
|
|
OTHER DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average full-time equivalent employees |
|
|
18,567 |
|
|
|
18,888 |
|
|
|
19,801 |
|
|
|
20,100 |
|
|
|
20,264 |
|
|
|
19,081 |
|
|
|
19,974 |
|
Branches |
|
|
954 |
|
|
|
954 |
|
|
|
950 |
|
|
|
950 |
|
|
|
949 |
|
|
|
954 |
|
|
|
949 |
|
|
Acquisitions and divestitures completed by Key during the periods shown in this table may have had
a significant effect on Keys results, making it difficult to compare results from one period to
the next. Note 3 (Acquisitions and Divestitures), which begins
on page 11, contains specific information about the acquisition and divestitures that Key completed
during 2006 and the first nine months of 2007 to help in understanding how those transactions may
have impacted Keys financial condition and results of operations.
41
Line of Business Results
This section summarizes the financial performance and related strategic developments of Keys two
major business groups: Community Banking and National Banking. To better understand this
discussion, see Note 4 (Line of Business Results), which begins on page 13. Note 4 describes the
products and services offered by each of these business groups, provides more detailed financial
information pertaining to the groups and their respective lines of business, and explains Other
Segments and Reconciling Items.
Figure 4 summarizes the contribution made by each major business group to Keys taxable-equivalent
revenue and income from continuing operations for the three- and nine-month periods ended September
30, 2007 and 2006. Keys line of business results for each of these periods reflect a new
organizational structure that took effect January 1, 2007.
Figure 4. Major Business Groups Taxable-Equivalent Revenue and Income from Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
September 30, |
|
|
Change |
|
|
September 30, |
|
|
Change |
|
dollars in millions |
|
2007 |
|
|
2006 |
|
|
Amount |
|
|
Percent |
|
|
2007 |
|
|
2006 |
|
|
Amount |
|
|
Percent |
|
|
REVENUE FROM CONTINUING OPERATIONS (TE) a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community Banking |
|
$ |
626 |
|
|
$ |
687 |
|
|
$ |
(61 |
) |
|
|
(8.9) |
% |
|
$ |
2,060 |
|
|
$ |
2,023 |
|
|
$ |
37 |
|
|
|
1.8 |
% |
National Banking |
|
|
511 |
|
|
|
586 |
|
|
|
(75 |
) |
|
|
(12.8 |
) |
|
|
1,727 |
|
|
|
1,748 |
|
|
|
(21 |
) |
|
|
(1.2 |
) |
Other Segments |
|
|
14 |
|
|
|
25 |
|
|
|
(11 |
) |
|
|
(44.0 |
) |
|
|
95 |
|
|
|
38 |
|
|
|
57 |
|
|
|
150.0 |
|
|
Total Segments |
|
|
1,151 |
|
|
|
1,298 |
|
|
|
(147 |
) |
|
|
(11.3 |
) |
|
|
3,882 |
|
|
|
3,809 |
|
|
|
73 |
|
|
|
1.9 |
|
Reconciling Items |
|
|
(1 |
) |
|
|
(29 |
) |
|
|
28 |
|
|
|
96.6 |
|
|
|
(23 |
) |
|
|
(66 |
) |
|
|
43 |
|
|
|
65.2 |
|
|
Total |
|
$ |
1,150 |
|
|
$ |
1,269 |
|
|
$ |
(119 |
) |
|
|
(9.4) |
% |
|
$ |
3,859 |
|
|
$ |
3,743 |
|
|
$ |
116 |
|
|
|
3.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING
OPERATIONS a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community Banking |
|
$ |
131 |
|
|
$ |
112 |
|
|
$ |
19 |
|
|
|
17.0 |
% |
|
$ |
430 |
|
|
$ |
323 |
|
|
$ |
107 |
|
|
|
33.1 |
% |
National Banking |
|
|
72 |
|
|
|
169 |
|
|
|
(97 |
) |
|
|
(57.4 |
) |
|
|
393 |
|
|
|
509 |
|
|
|
(116 |
) |
|
|
(22.8 |
) |
Other Segments |
|
|
16 |
|
|
|
20 |
|
|
|
(4 |
) |
|
|
(20.0 |
) |
|
|
62 |
|
|
|
39 |
|
|
|
23 |
|
|
|
59.0 |
|
|
Total Segments |
|
|
219 |
|
|
|
301 |
|
|
|
(82 |
) |
|
|
(27.2 |
) |
|
|
885 |
|
|
|
871 |
|
|
|
14 |
|
|
|
1.6 |
|
Reconciling Items |
|
|
5 |
|
|
|
4 |
|
|
|
1 |
|
|
|
25.0 |
|
|
|
34 |
|
|
|
11 |
|
|
|
23 |
|
|
|
209.1 |
|
|
Total |
|
$ |
224 |
|
|
$ |
305 |
|
|
$ |
(81 |
) |
|
|
(26.6) |
% |
|
$ |
919 |
|
|
$ |
882 |
|
|
$ |
37 |
|
|
|
4.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Community Banking results for the first nine months of 2007 include a $171 million ($107
million after tax) gain from the
February 9, 2007, sale of the McDonald Investments branch network. See Note 3 (Acquisitions
and Divestitures), which
begins on page 11, for more information pertaining to this transaction. |
|
|
|
National Banking results for the first nine months of 2007 include a $26 million ($17 million
after tax) gain from the settlement
of the residual value insurance litigation during the first quarter. |
|
|
|
Other Segments results for the first nine months of 2007 include a $26 million ($16 million
after tax) charge for litigation
recorded during the second quarter. This charge and the litigation charge referred to in the
comment related to Reconciling Items
below comprise the $42 million charge recorded in connection with the Honsador litigation
disclosed in Note 13 (Contingent Liabilities and Guarantees), which begins on page 28. Results for the current year-to-date
period also include a $49 million ($31 million after tax) loss recorded during the first
quarter in connection with the repositioning of the securities portfolio. |
|
|
|
|
Reconciling Items include gains of $27 million ($17 million after tax) recorded during the third
quarter of 2007, $40 million ($25 million after tax) recorded during the second quarter of 2007
and $9 million ($6 million after tax) recorded during the second quarter of 2006 related to
MasterCard Incorporated shares. Results for the first nine months of 2007 also include a $16
million ($10 million after tax) charge for litigation recorded during the second quarter. |
TE = Taxable Equivalent
Community Banking summary of operations
As shown in Figure 5, net income for Community Banking was $131 million for the third quarter
of 2007, up from $112 million for the year-ago quarter. Declines in both net interest income
and noninterest income were more than offset by decreases in the provision for loan losses and
noninterest expense.
42
Taxable-equivalent net interest income decreased by $34 million, or 8%, from the third quarter
of 2006, as interest rate spreads on both average earning assets and deposits have remained
under pressure due to the continuation of competitive pricing. The decrease also reflected the
effect of the February 2007 sale of the McDonald Investments branch network in which Key
transferred approximately $1.3 billion of Negotiable Order of Withdrawal (NOW) and money
market deposit accounts to the buyer. McDonald Investments NOW and money market deposit
accounts averaged $1.7 billion for the third quarter of 2006.
Noninterest income decreased by $27 million, or 11%. The decrease was attributable to the McDonald
Investments sale. Excluding the impact of this sale, noninterest income rose by $13 million, or
6%, from the same period one year ago, due largely to growth in deposit service charge income.
The provision for loan losses decreased by $21 million, compared to the third quarter of 2006.
Noninterest expense declined by $69 million, or 14%, from the year-ago quarter. Reductions in
costs resulting from the sale of the McDonald Investments branch network accounted for $46 million
of the decline, including a $27 million decrease in personnel expense. The remainder of the
decline in total noninterest expense reflected decreases in various direct and indirect charges,
due in part to a reduction in the number of average full-time equivalent employees.
On July 27, 2007, Key entered into an agreement to acquire U.S.B. Holding Co., Inc., the holding
company for Union State Bank, a state-chartered commercial bank headquartered in Orangeburg, New
York, with 31 branches. U.S.B. Holding Company has assets of approximately $3 billion and deposits
of approximately $2 billion. Key expects to complete this acquisition early in 2008, subject to
approval by U.S.B. Holding Company shareholders and the banking regulators. The acquisition will
expand Keys presence in markets both within and contiguous to its current operations in the Hudson
Valley. See Note 3 (Acquisitions and Divestitures), which begins on page 11, for more
information pertaining to this transaction.
Figure 5. Community Banking
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
September 30, |
|
|
Change |
|
|
September 30, |
|
|
Change |
|
dollars in millions |
|
2007 |
|
|
2006 |
|
|
Amount |
|
|
Percent |
|
|
2007 |
|
|
2006 |
|
|
Amount |
|
|
Percent |
|
|
SUMMARY OF OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (TE) |
|
$ |
409 |
|
|
$ |
443 |
|
|
$ |
(34 |
) |
|
|
(7.7 |
)% |
|
$ |
1,242 |
|
|
$ |
1,309 |
|
|
$ |
(67 |
) |
|
|
(5.1 |
)% |
Noninterest income |
|
|
217 |
|
|
|
244 |
|
|
|
(27 |
) |
|
|
(11.1 |
) |
|
|
818 |
a |
|
|
714 |
|
|
|
104 |
|
|
|
14.6 |
|
|
Total revenue (TE) |
|
|
626 |
|
|
|
687 |
|
|
|
(61 |
) |
|
|
(8.9 |
) |
|
|
2,060 |
|
|
|
2,023 |
|
|
|
37 |
|
|
|
1.8 |
|
Provision for loan losses |
|
|
1 |
|
|
|
22 |
|
|
|
(21 |
) |
|
|
(95.5 |
) |
|
|
36 |
|
|
|
71 |
|
|
|
(35 |
) |
|
|
(49.3 |
) |
Noninterest expense |
|
|
417 |
|
|
|
486 |
|
|
|
(69 |
) |
|
|
(14.2 |
) |
|
|
1,336 |
|
|
|
1,435 |
|
|
|
(99 |
) |
|
|
(6.9 |
) |
|
Income before income taxes (TE) |
|
|
208 |
|
|
|
179 |
|
|
|
29 |
|
|
|
16.2 |
|
|
|
688 |
|
|
|
517 |
|
|
|
171 |
|
|
|
33.1 |
|
Allocated income taxes and TE adjustments |
|
|
77 |
|
|
|
67 |
|
|
|
10 |
|
|
|
14.9 |
|
|
|
258 |
|
|
|
194 |
|
|
|
64 |
|
|
|
33.0 |
|
|
Net income |
|
$ |
131 |
|
|
$ |
112 |
|
|
$ |
19 |
|
|
|
17.0 |
% |
|
$ |
430 |
|
|
$ |
323 |
|
|
$ |
107 |
|
|
|
33.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of consolidated income from continuing operations |
|
|
59 |
% |
|
|
37 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
47 |
% |
|
|
37 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVERAGE BALANCES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases |
|
$ |
26,947 |
|
|
$ |
26,794 |
|
|
$ |
153 |
|
|
|
.6 |
% |
|
$ |
26,661 |
|
|
$ |
26,803 |
|
|
$ |
(142 |
) |
|
|
(.5 |
)% |
Total assets |
|
|
29,716 |
|
|
|
29,871 |
|
|
|
(155 |
) |
|
|
(.5 |
) |
|
|
29,454 |
|
|
|
29,883 |
|
|
|
(429 |
) |
|
|
(1.4 |
) |
Deposits |
|
|
46,727 |
|
|
|
46,939 |
|
|
|
(212 |
) |
|
|
(.5 |
) |
|
|
46,458 |
|
|
|
46,459 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
(a) |
|
Community Banking results for the first nine months of 2007 include a $171 million ($107
million after tax) gain from the
February 9, 2007, sale of the McDonald Investments branch network. See Note 3 (Acquisitions
and Divestitures), which
begins on page 11, for more information pertaining to this transaction. |
TE = Taxable Equivalent
N/A = Not Applicable
43
ADDITIONAL COMMUNITY BANKING DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
September 30, |
|
|
Change |
|
|
September 30, |
|
|
Change |
|
dollars in millions |
|
2007 |
|
|
2006 |
|
|
Amount |
|
|
Percent |
|
|
2007 |
|
|
2006 |
|
|
Amount |
|
|
Percent |
|
|
AVERAGE DEPOSITS OUTSTANDING |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW and money market deposit accounts |
|
$ |
20,305 |
|
|
$ |
20,688 |
|
|
$ |
(383 |
) |
|
|
(1.9 |
)% |
|
$ |
19,632 |
|
|
$ |
20,564 |
|
|
$ |
(932 |
) |
|
|
(4.5 |
)% |
Savings deposits |
|
|
1,569 |
|
|
|
1,688 |
|
|
|
(119 |
) |
|
|
(7.0 |
) |
|
|
1,602 |
|
|
|
1,721 |
|
|
|
(119 |
) |
|
|
(6.9 |
) |
Certificates of deposits ($100,000 or more) |
|
|
4,566 |
|
|
|
4,101 |
|
|
|
465 |
|
|
|
11.3 |
|
|
|
4,609 |
|
|
|
4,023 |
|
|
|
586 |
|
|
|
14.6 |
|
Other time deposits |
|
|
11,485 |
|
|
|
11,696 |
|
|
|
(211 |
) |
|
|
(1.8 |
) |
|
|
11,856 |
|
|
|
11,472 |
|
|
|
384 |
|
|
|
3.3 |
|
Deposits in foreign office |
|
|
1,128 |
|
|
|
694 |
|
|
|
434 |
|
|
|
62.5 |
|
|
|
1,044 |
|
|
|
617 |
|
|
|
427 |
|
|
|
69.2 |
|
Noninterest-bearing deposits |
|
|
7,674 |
|
|
|
8,072 |
|
|
|
(398 |
) |
|
|
(4.9 |
) |
|
|
7,715 |
|
|
|
8,062 |
|
|
|
(347 |
) |
|
|
(4.3 |
) |
|
Total deposits |
|
$ |
46,727 |
|
|
$ |
46,939 |
|
|
$ |
(212 |
) |
|
|
(.5 |
)% |
|
$ |
46,458 |
|
|
$ |
46,459 |
|
|
$ |
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HOME EQUITY LOANS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance |
|
$ |
9,690 |
|
|
$ |
10,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average loan-to-value ratio |
|
|
70 |
% |
|
|
70 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent first lien positions |
|
|
58 |
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-line households/household penetration |
|
|
743,909 / 45 |
% |
|
|
646,993 / 52 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branches |
|
|
954 |
|
|
|
949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automated teller machines |
|
|
1,439 |
|
|
|
2,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National Banking summary of continuing operations
As shown in Figure 6, income from continuing operations for National Banking was $72 million for
the third quarter of 2007, compared to $169 million for the same period last year. Lower
noninterest income along with increases in the provision for loan losses and noninterest expense
accounted for the reduction, and more than offset an increase in net interest income.
Taxable-equivalent net interest income rose by $11 million, or 3%, from the third quarter of 2006.
Increases in average earning assets and deposits, and a more favorable interest rate spread on
deposits more than offset the adverse effect of a tighter interest rate spread on average earning
assets.
Noninterest income declined by $86 million, or 36%, as several capital markets-driven businesses
were adversely affected by volatility in the financial markets. Results for the current quarter
included net losses of $57 million from the sales and write-downs of primarily commercial real
estate loans held for sale, compared to net gains of $10 million for the year-ago quarter. Income
from investment banking and capital markets activities decreased by $39 million, due primarily to a
$25 million decline in the fair values of two real estate-related investments held by the Private
Equity unit within the Real Estate
Capital line of business, and less favorable results related to trading activities conducted in the
Debt Capital markets area.
The provision for loan losses rose by $55 million, reflecting increases in nonperforming loans in
the Real Estate Capital and Consumer Finance lines of business.
Noninterest expense grew by $24 million, or 8%, from the year-ago quarter, reflecting a $12 million
rise in costs associated with operating leases, and smaller increases in a variety of other expense
components.
On October 1, 2007, Key acquired Tuition Management Systems, Inc., one of the nations largest
providers of outsourced tuition planning, billing, counseling and payment services. Headquartered
in Warwick, Rhode Island, Tuition Management Systems serves more than 700 colleges, universities,
elementary and secondary educational institutions. The payment plan systems and technology in
place at Tuition Management Systems and the array of payment plan products offered by Key will
create one of the largest payment plan providers in the nation.
44
Figure 6. National Banking
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
September 30, |
|
|
Change |
|
|
September 30, |
|
|
Change |
|
dollars in millions |
|
2007 |
|
|
2006 |
|
|
Amount |
|
|
Percent |
|
|
2007 |
|
|
2006 |
|
|
Amount |
|
|
Percent |
|
|
SUMMARY OF OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (TE) |
|
$ |
359 |
|
|
$ |
348 |
|
|
$ |
11 |
|
|
|
3.2 |
% |
|
$ |
1,045 |
|
|
$ |
1,039 |
|
|
$ |
6 |
|
|
|
.6 |
% |
Noninterest income |
|
|
152 |
|
|
|
238 |
|
|
|
(86 |
) |
|
|
(36.1 |
) |
|
|
682 |
a |
|
|
709 |
|
|
|
(27 |
) |
|
|
(3.8 |
) |
|
Total revenue (TE) |
|
|
511 |
|
|
|
586 |
|
|
|
(75 |
) |
|
|
(12.8 |
) |
|
|
1,727 |
|
|
|
1,748 |
|
|
|
(21 |
) |
|
|
(1.2 |
) |
Provision for loan losses |
|
|
68 |
|
|
|
13 |
|
|
|
55 |
|
|
|
423.1 |
|
|
|
130 |
|
|
|
26 |
|
|
|
104 |
|
|
|
400.0 |
|
Noninterest expense |
|
|
328 |
|
|
|
304 |
|
|
|
24 |
|
|
|
7.9 |
|
|
|
968 |
|
|
|
912 |
|
|
|
56 |
|
|
|
6.1 |
|
|
Income from continuing operations before income
taxes (TE) |
|
|
115 |
|
|
|
269 |
|
|
|
(154 |
) |
|
|
(57.2 |
) |
|
|
629 |
|
|
|
810 |
|
|
|
(181 |
) |
|
|
(22.3 |
) |
Allocated income taxes and TE adjustments |
|
|
43 |
|
|
|
100 |
|
|
|
(57 |
) |
|
|
(57.0 |
) |
|
|
236 |
|
|
|
301 |
|
|
|
(65 |
) |
|
|
(21.6 |
) |
|
Income from continuing operations |
|
|
72 |
|
|
|
169 |
|
|
|
(97 |
) |
|
|
(57.4 |
) |
|
|
393 |
|
|
|
509 |
|
|
|
(116 |
) |
|
|
(22.8 |
) |
(Loss) income from discontinued operations, net of taxes |
|
|
(14 |
) |
|
|
7 |
|
|
|
(21 |
) |
|
|
N/M |
|
|
|
(25 |
) |
|
|
22 |
|
|
|
(47 |
) |
|
|
N/M |
|
|
Net income |
|
$ |
58 |
|
|
$ |
176 |
|
|
$ |
(118 |
) |
|
|
(67.0 |
)% |
|
$ |
368 |
|
|
$ |
531 |
|
|
$ |
(163 |
) |
|
|
(30.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of consolidated income from continuing
operations |
|
|
32 |
% |
|
|
55 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
43 |
% |
|
|
58 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVERAGE BALANCES FROM CONTINUING OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases |
|
$ |
40,277 |
|
|
$ |
37,871 |
|
|
$ |
2,406 |
|
|
|
6.4 |
% |
|
$ |
39,485 |
|
|
$ |
37,545 |
|
|
$ |
1,940 |
|
|
|
5.2 |
% |
Loans held for sale |
|
|
4,692 |
|
|
|
4,553 |
|
|
|
139 |
|
|
|
3.1 |
|
|
|
4,331 |
|
|
|
4,022 |
|
|
|
309 |
|
|
|
7.7 |
|
Total assets |
|
|
50,954 |
|
|
|
48,530 |
|
|
|
2,424 |
|
|
|
5.0 |
|
|
|
49,665 |
|
|
|
47,659 |
|
|
|
2,006 |
|
|
|
4.2 |
|
Deposits |
|
|
12,633 |
|
|
|
11,106 |
|
|
|
1,527 |
|
|
|
13.7 |
|
|
|
12,009 |
|
|
|
10,597 |
|
|
|
1,412 |
|
|
|
13.3 |
|
|
|
|
|
(a) |
|
National Banking results for the first nine months of 2007 include a $26 million ($17 million
after tax) gain from the settlement
of the residual value insurance litigation during the first quarter. |
TE = Taxable Equivalent
N/A = Not Applicable
N/M = Not Meaningful
Other Segments
Other segments consist of Corporate Treasury and Keys Principal Investing unit. These segments
generated net income of $16 million for the third quarter of 2007, compared to $20 million for the
same period last year. A reduction in net gains from principal investing caused the decrease.
45
Results of Operations
Net interest income
One of Keys principal sources of revenue is net interest income. Net interest income is the
difference between interest income received on earning assets (such as loans and securities) and
loan-related fee income, and interest expense paid on deposits and borrowings. There are several
factors that affect net interest income, including:
¨ the volume, pricing, mix and maturity of earning assets and interest-bearing liabilities;
¨ the volume and value of net free funds, such as noninterest-bearing deposits and equity capital;
¨ the use of derivative instruments to manage interest rate risk;
¨ interest rate fluctuations and competitive conditions within the marketplace; and
¨ asset quality.
To make it easier to compare results among several periods and the yields on various types of
earning assets (some taxable, some not), we present net interest income in this discussion on a
taxable-equivalent basis (i.e., as if it were all taxable and at the same rate). For example,
$100 of tax-exempt income would be presented as $154, an amount thatif taxed at the statutory
federal income tax rate of 35%would yield $100.
Figure 7, which spans pages 48 and 49, 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 was $712 million for the third quarter of 2007, compared to
$726 million for the year-ago quarter. 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. Keys net interest margin declined by 21 basis points from the third
quarter of 2006 to 3.40% for the third quarter of 2007. A basis point is equal to one
one-hundredth of a percentage point, meaning 21 basis points equal .21%.
The reductions in net interest income and the net interest margin were due primarily to tighter
interest rate spreads on both loans and deposits, reflecting the continuation of competitive
pricing, and client preferences for deposit products with more attractive interest rates.
Additionally, as part of the February 2007 sale of the McDonald Investments branch network, Key
transferred approximately $1.3 billion of NOW and money market deposit accounts to the buyer.
McDonald Investments NOW and money market deposit accounts averaged $1.7 billion for the third
quarter of 2006. The decrease in the net interest margin was moderated by the impact of a 14% rise
in the volume of noninterest-bearing funds. The growth in these funds added approximately 12 basis
points to the net interest margin.
Average earning assets for the third quarter of 2007 totaled $83.5 billion, which was $3.6 billion,
or 4%, higher than the third quarter 2006 level. Increases in commercial loans and securities
available for sale drove the growth.
46
Since December 31, 2005, the growth and composition of Keys earning assets have been affected by
the following loan sales, most of which came from the held-for-sale portfolio:
¨ |
|
Key sold commercial mortgage loans of $2.8 billion ($238 million
through a securitization) during the first nine months of 2007 and
$2.6 billion during all of 2006. Since some of these loans have
been sold with limited recourse (i.e., there is a risk that Key
will be held accountable for certain events or representations
made in the sales agreements), Key established and has maintained
a loss reserve in an amount 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 29. |
|
¨ |
|
Key sold education loans of $223 million during the first nine
months of 2007 and $1.4 billion ($1.1 billion through a
securitization) during all of 2006. Key uses the securitization
market for education loans to diversify funding sources. |
|
¨ |
|
Key sold other loans totaling $874 million during the first nine
months of 2007 and $3.2 billion during all of 2006. This included
the fourth quarter 2006 sale of the $2.5 billion nonprime mortgage
loan portfolio held by the Champion Mortgage finance business.
The Champion business no longer fit strategically with Keys
longer-term business goals and continued focus on Community
Banking and relationship-oriented businesses. |
47
Figure 7. Average Balance Sheets, Net Interest Income and Yields/Rates
From Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2007 |
|
|
Second Quarter 2007 |
|
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
dollars in millions |
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans a,b |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural |
|
$ |
22,393 |
|
|
$ |
410 |
|
|
|
7.25 |
% |
|
$ |
21,856 |
|
|
$ |
401 |
|
|
|
7.36 |
% |
Real estate commercial mortgage |
|
|
8,855 |
|
|
|
172 |
|
|
|
7.69 |
|
|
|
8,565 |
|
|
|
165 |
|
|
|
7.75 |
|
Real estate construction |
|
|
8,285 |
|
|
|
167 |
|
|
|
8.01 |
|
|
|
8,243 |
|
|
|
167 |
|
|
|
8.09 |
|
Commercial lease financing |
|
|
10,172 |
|
|
|
147 |
|
|
|
5.80 |
|
|
|
10,096 |
|
|
|
142 |
|
|
|
5.62 |
|
|
Total commercial loans |
|
|
49,705 |
|
|
|
896 |
|
|
|
7.16 |
|
|
|
48,760 |
|
|
|
875 |
|
|
|
7.19 |
|
Real estate residential |
|
|
1,586 |
|
|
|
26 |
|
|
|
6.68 |
|
|
|
1,472 |
|
|
|
24 |
|
|
|
6.57 |
|
Home equity |
|
|
10,883 |
|
|
|
199 |
|
|
|
7.22 |
|
|
|
10,752 |
|
|
|
193 |
|
|
|
7.22 |
|
Consumer direct |
|
|
1,342 |
|
|
|
36 |
|
|
|
10.66 |
|
|
|
1,370 |
|
|
|
37 |
|
|
|
10.64 |
|
Consumer indirect |
|
|
4,164 |
|
|
|
70 |
|
|
|
6.79 |
|
|
|
3,961 |
|
|
|
67 |
|
|
|
6.76 |
|
|
Total consumer loans |
|
|
17,975 |
|
|
|
331 |
|
|
|
7.33 |
|
|
|
17,555 |
|
|
|
321 |
|
|
|
7.33 |
|
|
Total loans |
|
|
67,680 |
|
|
|
1,227 |
|
|
|
7.20 |
|
|
|
66,315 |
|
|
|
1,196 |
|
|
|
7.23 |
|
Loans held for sale |
|
|
4,731 |
|
|
|
91 |
|
|
|
7.59 |
|
|
|
4,415 |
|
|
|
82 |
|
|
|
7.50 |
|
Investment securities a |
|
|
36 |
|
|
|
|
|
|
|
6.43 |
|
|
|
39 |
|
|
|
|
|
|
|
6.72 |
|
Securities available for sale c |
|
|
7,825 |
|
|
|
106 |
|
|
|
5.45 |
|
|
|
7,793 |
|
|
|
106 |
|
|
|
5.45 |
|
Short-term investments |
|
|
1,688 |
|
|
|
16 |
|
|
|
3.99 |
|
|
|
1,484 |
|
|
|
16 |
|
|
|
4.19 |
|
Other investments c |
|
|
1,563 |
|
|
|
12 |
|
|
|
2.99 |
|
|
|
1,541 |
|
|
|
15 |
|
|
|
3.68 |
|
|
Total earning assets |
|
|
83,523 |
|
|
|
1,452 |
|
|
|
6.92 |
|
|
|
81,587 |
|
|
|
1,415 |
|
|
|
6.95 |
|
Allowance for loan losses |
|
|
(942 |
) |
|
|
|
|
|
|
|
|
|
|
(942 |
) |
|
|
|
|
|
|
|
|
Accrued income and other assets |
|
|
12,581 |
|
|
|
|
|
|
|
|
|
|
|
12,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
95,162 |
|
|
|
|
|
|
|
|
|
|
$ |
93,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW and money market deposit accounts |
|
$ |
24,190 |
|
|
|
209 |
|
|
|
3.41 |
|
|
$ |
22,953 |
|
|
|
179 |
|
|
|
3.14 |
|
Savings deposits |
|
|
1,581 |
|
|
|
|
|
|
|
.19 |
|
|
|
1,633 |
|
|
|
1 |
|
|
|
.19 |
|
Certificates of deposit ($100,000 or more) d |
|
|
6,274 |
|
|
|
80 |
|
|
|
5.06 |
|
|
|
6,237 |
|
|
|
79 |
|
|
|
5.03 |
|
Other time deposits |
|
|
11,512 |
|
|
|
136 |
|
|
|
4.68 |
|
|
|
12,047 |
|
|
|
141 |
|
|
|
4.70 |
|
Deposits in foreign office e |
|
|
4,540 |
|
|
|
57 |
|
|
|
5.00 |
|
|
|
3,600 |
|
|
|
47 |
|
|
|
5.20 |
|
|
Total interest-bearing deposits |
|
|
48,097 |
|
|
|
482 |
|
|
|
3.98 |
|
|
|
46,470 |
|
|
|
447 |
|
|
|
3.85 |
|
Federal funds purchased and securities
sold under repurchase agreements e |
|
|
4,470 |
|
|
|
55 |
|
|
|
4.85 |
|
|
|
4,748 |
|
|
|
59 |
|
|
|
5.04 |
|
Bank notes and other short-term borrowings |
|
|
2,539 |
|
|
|
30 |
|
|
|
4.70 |
|
|
|
1,771 |
|
|
|
18 |
|
|
|
4.14 |
|
Long-term debt d, e |
|
|
11,801 |
|
|
|
173 |
|
|
|
5.89 |
|
|
|
12,909 |
|
|
|
185 |
|
|
|
5.83 |
|
|
Total interest-bearing liabilities |
|
|
66,907 |
|
|
|
740 |
|
|
|
4.40 |
|
|
|
65,898 |
|
|
|
709 |
|
|
|
4.33 |
|
Noninterest-bearing deposits |
|
|
14,424 |
|
|
|
|
|
|
|
|
|
|
|
13,927 |
|
|
|
|
|
|
|
|
|
Accrued expense and other liabilities |
|
|
6,106 |
|
|
|
|
|
|
|
|
|
|
|
5,933 |
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
7,725 |
|
|
|
|
|
|
|
|
|
|
|
7,654 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
95,162 |
|
|
|
|
|
|
|
|
|
|
$ |
93,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread (TE) |
|
|
|
|
|
|
|
|
|
|
2.52 |
% |
|
|
|
|
|
|
|
|
|
|
2.62 |
% |
|
Net interest income (TE) and net
interest margin (TE) |
|
|
|
|
|
|
712 |
|
|
|
3.40 |
% |
|
|
|
|
|
|
706 |
|
|
|
3.46 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TE adjustment a |
|
|
|
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
20 |
|
|
|
|
|
|
Net interest income, GAAP basis |
|
|
|
|
|
$ |
694 |
|
|
|
|
|
|
|
|
|
|
$ |
686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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) |
|
Yield is calculated on the basis of amortized cost. |
|
(d) |
|
Rate calculation excludes basis adjustments related to fair value hedges. |
|
(e) |
|
Results from continuing operations exclude the dollar amount of liabilities assumed
necessary to support interest-earning assets held by the discontinued Champion Mortgage
finance business. The interest expense related to these liabilities, which also is excluded
from continuing operations, was calculated using a matched funds transfer pricing methodology. |
|
TE = Taxable Equivalent |
|
GAAP = U.S. generally accepted accounting principles |
48
Figure 7. Average Balance Sheets, Net Interest Income and Yields/Rates
From Continuing Operations (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter 2007 |
|
|
Fourth Quarter 2006 |
|
|
Third Quarter 2006 |
|
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
21,562 |
|
|
$ |
392 |
|
|
|
7.38 |
% |
|
$ |
21,384 |
|
|
$ |
400 |
|
|
|
7.42 |
% |
|
$ |
21,648 |
|
|
$ |
400 |
|
|
|
7.34 |
% |
|
|
|
8,426 |
|
|
|
163 |
|
|
|
7.83 |
|
|
|
8,399 |
|
|
|
167 |
|
|
|
7.86 |
|
|
|
8,106 |
|
|
|
164 |
|
|
|
8.04 |
|
|
|
|
8,227 |
|
|
|
166 |
|
|
|
8.20 |
|
|
|
8,347 |
|
|
|
174 |
|
|
|
8.25 |
|
|
|
7,965 |
|
|
|
171 |
|
|
|
8.51 |
|
|
|
|
10,094 |
|
|
|
146 |
|
|
|
5.78 |
|
|
|
9,891 |
|
|
|
160 |
|
|
|
6.47 |
|
|
|
9,850 |
|
|
|
144 |
|
|
|
5.83 |
|
|
|
|
|
|
|
48,309 |
|
|
|
867 |
|
|
|
7.26 |
|
|
|
48,021 |
|
|
|
901 |
|
|
|
7.44 |
|
|
|
47,569 |
|
|
|
879 |
|
|
|
7.34 |
|
|
|
|
1,444 |
|
|
|
24 |
|
|
|
6.60 |
|
|
|
1,428 |
|
|
|
24 |
|
|
|
6.59 |
|
|
|
1,415 |
|
|
|
23 |
|
|
|
6.49 |
|
|
|
|
10,706 |
|
|
|
191 |
|
|
|
7.22 |
|
|
|
10,896 |
|
|
|
197 |
|
|
|
7.22 |
|
|
|
11,017 |
|
|
|
200 |
|
|
|
7.19 |
|
|
|
|
1,450 |
|
|
|
36 |
|
|
|
10.15 |
|
|
|
1,557 |
|
|
|
34 |
|
|
|
8.63 |
|
|
|
1,585 |
|
|
|
36 |
|
|
|
9.07 |
|
|
|
|
3,760 |
|
|
|
64 |
|
|
|
6.79 |
|
|
|
3,671 |
|
|
|
62 |
|
|
|
6.85 |
|
|
|
3,594 |
|
|
|
61 |
|
|
|
6.83 |
|
|
|
|
|
|
|
17,360 |
|
|
|
315 |
|
|
|
7.32 |
|
|
|
17,552 |
|
|
|
317 |
|
|
|
7.21 |
|
|
|
17,611 |
|
|
|
320 |
|
|
|
7.23 |
|
|
|
|
|
|
|
65,669 |
|
|
|
1,182 |
|
|
|
7.28 |
|
|
|
65,573 |
|
|
|
1,218 |
|
|
|
7.38 |
|
|
|
65,180 |
|
|
|
1,199 |
|
|
|
7.31 |
|
|
|
|
3,940 |
|
|
|
75 |
|
|
|
7.70 |
|
|
|
4,547 |
|
|
|
90 |
|
|
|
7.86 |
|
|
|
4,578 |
|
|
|
94 |
|
|
|
8.17 |
|
|
|
|
39 |
|
|
|
1 |
|
|
|
7.21 |
|
|
|
38 |
|
|
|
1 |
|
|
|
7.68 |
|
|
|
42 |
|
|
|
1 |
|
|
|
8.12 |
|
|
|
|
7,548 |
|
|
|
100 |
|
|
|
5.27 |
|
|
|
7,765 |
|
|
|
96 |
|
|
|
4.88 |
|
|
|
7,216 |
|
|
|
84 |
|
|
|
4.61 |
|
|
|
|
1,607 |
|
|
|
18 |
|
|
|
4.55 |
|
|
|
1,584 |
|
|
|
16 |
|
|
|
4.04 |
|
|
|
1,588 |
|
|
|
16 |
|
|
|
3.78 |
|
|
|
|
1,400 |
|
|
|
13 |
|
|
|
3.65 |
|
|
|
1,351 |
|
|
|
24 |
|
|
|
6.76 |
|
|
|
1,363 |
|
|
|
16 |
|
|
|
4.67 |
|
|
|
|
|
|
|
80,203 |
|
|
|
1,389 |
|
|
|
6.99 |
|
|
|
80,858 |
|
|
|
1,445 |
|
|
|
7.09 |
|
|
|
79,967 |
|
|
|
1,410 |
|
|
|
7.00 |
|
|
|
|
(942 |
) |
|
|
|
|
|
|
|
|
|
|
(941 |
) |
|
|
|
|
|
|
|
|
|
|
(951 |
) |
|
|
|
|
|
|
|
|
|
|
|
12,835 |
|
|
|
|
|
|
|
|
|
|
|
13,129 |
|
|
|
|
|
|
|
|
|
|
|
13,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
92,096 |
|
|
|
|
|
|
|
|
|
|
$ |
93,046 |
|
|
|
|
|
|
|
|
|
|
$ |
92,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
23,424 |
|
|
|
177 |
|
|
|
3.06 |
|
|
$ |
25,136 |
|
|
|
198 |
|
|
|
3.13 |
|
|
$ |
25,230 |
|
|
|
194 |
|
|
|
3.05 |
|
|
|
|
1,629 |
|
|
|
1 |
|
|
|
.19 |
|
|
|
1,651 |
|
|
|
1 |
|
|
|
.19 |
|
|
|
1,700 |
|
|
|
1 |
|
|
|
.19 |
|
|
|
|
6,151 |
|
|
|
76 |
|
|
|
5.03 |
|
|
|
6,013 |
|
|
|
75 |
|
|
|
4.93 |
|
|
|
5,517 |
|
|
|
67 |
|
|
|
4.82 |
|
|
|
|
12,063 |
|
|
|
138 |
|
|
|
4.64 |
|
|
|
11,921 |
|
|
|
136 |
|
|
|
4.50 |
|
|
|
11,700 |
|
|
|
127 |
|
|
|
4.29 |
|
|
|
|
3,258 |
|
|
|
41 |
|
|
|
5.12 |
|
|
|
2,245 |
|
|
|
30 |
|
|
|
5.55 |
|
|
|
2,820 |
|
|
|
39 |
|
|
|
5.55 |
|
|
|
|
|
|
|
46,525 |
|
|
|
433 |
|
|
|
3.77 |
|
|
|
46,966 |
|
|
|
440 |
|
|
|
3.72 |
|
|
|
46,967 |
|
|
|
428 |
|
|
|
3.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,903 |
|
|
|
49 |
|
|
|
5.04 |
|
|
|
2,816 |
|
|
|
37 |
|
|
|
5.21 |
|
|
|
2,315 |
|
|
|
30 |
|
|
|
5.05 |
|
|
|
|
1,113 |
|
|
|
11 |
|
|
|
3.98 |
|
|
|
1,814 |
|
|
|
19 |
|
|
|
4.17 |
|
|
|
2,285 |
|
|
|
24 |
|
|
|
4.29 |
|
|
|
|
13,617 |
|
|
|
196 |
|
|
|
5.90 |
|
|
|
14,092 |
|
|
|
205 |
|
|
|
5.80 |
|
|
|
13,763 |
|
|
|
202 |
|
|
|
5.83 |
|
|
|
|
|
|
|
65,158 |
|
|
|
689 |
|
|
|
4.29 |
|
|
|
65,688 |
|
|
|
701 |
|
|
|
4.24 |
|
|
|
65,330 |
|
|
|
684 |
|
|
|
4.15 |
|
|
|
|
13,237 |
|
|
|
|
|
|
|
|
|
|
|
13,424 |
|
|
|
|
|
|
|
|
|
|
|
13,073 |
|
|
|
|
|
|
|
|
|
|
|
|
6,083 |
|
|
|
|
|
|
|
|
|
|
|
6,041 |
|
|
|
|
|
|
|
|
|
|
|
6,063 |
|
|
|
|
|
|
|
|
|
|
|
|
7,618 |
|
|
|
|
|
|
|
|
|
|
|
7,893 |
|
|
|
|
|
|
|
|
|
|
|
7,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
92,096 |
|
|
|
|
|
|
|
|
|
|
$ |
93,046 |
|
|
|
|
|
|
|
|
|
|
$ |
92,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.70 |
% |
|
|
|
|
|
|
|
|
|
|
2.85 |
% |
|
|
|
|
|
|
|
|
|
|
2.85 |
% |
|
|
|
|
|
|
|
|
|
|
700 |
|
|
|
3.50 |
% |
|
|
|
|
|
|
744 |
|
|
|
3.66 |
% |
|
|
|
|
|
|
726 |
|
|
|
3.61 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
679 |
|
|
|
|
|
|
|
|
|
|
$ |
712 |
|
|
|
|
|
|
|
|
|
|
$ |
705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
Figure 8 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 55, contains
more discussion about changes in earning assets and funding sources.
Figure 8. Components of Net Interest Income Changes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From three months ended September 30, 2006 |
|
From nine months ended September 30, 2006 |
|
|
to three months ended September 30, 2007 |
|
to nine months ended September 30, 2007 |
|
|
Average |
|
|
Yield/ |
|
|
Net |
|
|
Average |
|
|
Yield/ |
|
|
Net |
|
in millions |
|
Volume |
|
|
Rate |
|
|
Change |
|
|
Volume |
|
|
Rate |
|
|
Change |
|
|
INTEREST INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
46 |
|
|
$ |
(18 |
) |
|
$ |
28 |
|
|
$ |
95 |
|
|
$ |
65 |
|
|
$ |
160 |
|
Loans held for sale |
|
|
3 |
|
|
|
(6 |
) |
|
|
(3 |
) |
|
|
19 |
|
|
|
(6 |
) |
|
|
13 |
|
Investment securities |
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
Securities available for sale |
|
|
7 |
|
|
|
15 |
|
|
|
22 |
|
|
|
21 |
|
|
|
40 |
|
|
|
61 |
|
Short-term investments |
|
|
1 |
|
|
|
(1 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
5 |
|
|
|
3 |
|
Other investments |
|
|
2 |
|
|
|
(6 |
) |
|
|
(4 |
) |
|
|
5 |
|
|
|
(23 |
) |
|
|
(18 |
) |
|
Total interest income (TE) |
|
|
59 |
|
|
|
(17 |
) |
|
|
42 |
|
|
|
137 |
|
|
|
81 |
|
|
|
218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW and money market deposit accounts |
|
|
(8 |
) |
|
|
23 |
|
|
|
15 |
|
|
|
(32 |
) |
|
|
85 |
|
|
|
53 |
|
Savings deposits |
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
Certificates of deposit ($100,000 or more) |
|
|
10 |
|
|
|
3 |
|
|
|
13 |
|
|
|
28 |
|
|
|
21 |
|
|
|
49 |
|
Other time deposits |
|
|
(2 |
) |
|
|
11 |
|
|
|
9 |
|
|
|
12 |
|
|
|
58 |
|
|
|
70 |
|
Deposits in foreign office |
|
|
22 |
|
|
|
(4 |
) |
|
|
18 |
|
|
|
56 |
|
|
|
(1 |
) |
|
|
55 |
|
|
Total interest-bearing deposits |
|
|
22 |
|
|
|
32 |
|
|
|
54 |
|
|
|
64 |
|
|
|
162 |
|
|
|
226 |
|
Federal funds purchased and securities sold
under repurchase agreements |
|
|
27 |
|
|
|
(2 |
) |
|
|
25 |
|
|
|
88 |
|
|
|
5 |
|
|
|
93 |
|
Bank notes and other short-term borrowings |
|
|
3 |
|
|
|
3 |
|
|
|
6 |
|
|
|
(20 |
) |
|
|
4 |
|
|
|
(16 |
) |
Long-term debt |
|
|
(29 |
) |
|
|
|
|
|
|
(29 |
) |
|
|
(50 |
) |
|
|
21 |
|
|
|
(29 |
) |
|
Total interest expense |
|
|
23 |
|
|
|
33 |
|
|
|
56 |
|
|
|
82 |
|
|
|
192 |
|
|
|
274 |
|
|
Net interest income (TE) |
|
$ |
36 |
|
|
$ |
(50 |
) |
|
$ |
(14 |
) |
|
$ |
55 |
|
|
$ |
(111 |
) |
|
$ |
(56 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
TE = Taxable Equivalent
Noninterest income
Noninterest income for the third quarter of 2007 was $438 million, compared to $543 million for the
same period last year. For the first nine months of the year, noninterest income was $1.7 billion,
representing an increase of $172 million, or 11%, from the first nine months of 2006.
The decrease from the year-ago quarter was attributable to the impact of market volatility on
several of Keys capital markets-driven businesses, as well as the sale of the McDonald Investments
branch network completed in the first quarter of this year. As shown in Figure 9, results for the
current quarter included $53 million in net losses from the sales and write-downs of primarily
commercial real estate loans held for sale, compared to net gains of $14 million for the same
period last year. Income from investment banking and capital markets activities decreased by $35
million, due primarily to a $25 million decline in the fair values of two real estate-related
investments held by the Private Equity unit within the Real Estate Capital line of business. Net
gains from principal investing declined by $19 million from the third quarter of 2006, and trust
and investment services income was down $18 million, due to lower brokerage income resulting from
the sale of the McDonald Investments branch network. The reduction in noninterest income was
moderated by a $27 million gain from the sale of MasterCard Incorporated shares in the current
quarter and growth in deposit service charge income.
For the year-to-date period, the growth in noninterest income from the same period last year
reflected several significant items. During the first quarter of 2007, Key recorded a $171 million
gain associated with the February 9, 2007, sale of the McDonald Investments branch network, a $49
million loss recorded in connection with the repositioning of the securities portfolio and a $26
million gain from the settlement of the automobile residual value insurance litigation. Excluding
these items, Keys noninterest income was $1.6 billion for the first nine months of 2007,
representing a $24 million increase from the first nine months
50
of 2006. As shown in Figure 9, an
$80 million increase in net gains from principal investing, a $58 million increase in gains
associated with the sale of MasterCard Incorporated shares, higher income from operating leases,
and an increase in deposit service charge income drove the growth. These positive results were
substantially offset by decreases in income from trust and investment services, and investment
banking and capital markets activities. In addition, Key recorded net losses from loan
securitizations and sales in the current year, compared to net gains for the first nine months of
2006.
Figure 9. Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
September 30, |
|
|
Change |
|
|
September 30, |
|
|
Change |
|
dollars in millions |
|
2007 |
|
|
2006 |
|
|
Amount |
|
|
Percent |
|
|
2007 |
|
|
2006 |
|
|
Amount |
|
|
Percent |
|
|
Trust and investment services income |
|
$ |
119 |
|
|
$ |
137 |
|
|
$ |
(18 |
) |
|
|
(13.1 |
)% |
|
$ |
359 |
|
|
$ |
411 |
|
|
$ |
(52 |
) |
|
|
(12.7 |
)% |
Service charges on deposit accounts |
|
|
88 |
|
|
|
78 |
|
|
|
10 |
|
|
|
12.8 |
|
|
|
247 |
|
|
|
227 |
|
|
|
20 |
|
|
|
8.8 |
|
Investment banking and capital markets income |
|
|
9 |
|
|
|
44 |
|
|
|
(35 |
) |
|
|
(79.5 |
) |
|
|
105 |
|
|
|
161 |
|
|
|
(56 |
) |
|
|
(34.8 |
) |
Operating lease income |
|
|
70 |
|
|
|
58 |
|
|
|
12 |
|
|
|
20.7 |
|
|
|
200 |
|
|
|
166 |
|
|
|
34 |
|
|
|
20.5 |
|
Letter of credit and loan fees |
|
|
51 |
|
|
|
48 |
|
|
|
3 |
|
|
|
6.3 |
|
|
|
134 |
|
|
|
133 |
|
|
|
1 |
|
|
|
.8 |
|
Corporate-owned life insurance income |
|
|
27 |
|
|
|
23 |
|
|
|
4 |
|
|
|
17.4 |
|
|
|
84 |
|
|
|
74 |
|
|
|
10 |
|
|
|
13.5 |
|
Electronic banking fees |
|
|
25 |
|
|
|
27 |
|
|
|
(2 |
) |
|
|
(7.4 |
) |
|
|
74 |
|
|
|
78 |
|
|
|
(4 |
) |
|
|
(5.1 |
) |
Net gains (losses) from loan securitizations and sales |
|
|
(53 |
) |
|
|
14 |
|
|
|
(67 |
) |
|
|
N/M |
|
|
|
(11 |
) |
|
|
34 |
|
|
|
(45 |
) |
|
|
N/M |
|
Net securities gains (losses) |
|
|
4 |
|
|
|
(7 |
) |
|
|
11 |
|
|
|
N/M |
|
|
|
(41 |
) |
|
|
(2 |
) |
|
|
(39 |
) |
|
|
N/M |
|
Gain on sale of McDonald Investments branch network |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
171 |
|
|
|
|
|
|
|
171 |
|
|
|
N/M |
|
Other income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance income |
|
|
16 |
|
|
|
18 |
|
|
|
(2 |
) |
|
|
(11.1 |
) |
|
|
45 |
|
|
|
49 |
|
|
|
(4 |
) |
|
|
(8.2 |
) |
Loan securitization servicing fees |
|
|
5 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
16 |
|
|
|
15 |
|
|
|
1 |
|
|
|
6.7 |
|
Credit card fees |
|
|
4 |
|
|
|
8 |
|
|
|
(4 |
) |
|
|
(50.0 |
) |
|
|
10 |
|
|
|
14 |
|
|
|
(4 |
) |
|
|
(28.6 |
) |
Net gains from principal investing |
|
|
9 |
|
|
|
28 |
|
|
|
(19 |
) |
|
|
(67.9 |
) |
|
|
128 |
|
|
|
48 |
|
|
|
80 |
|
|
|
166.7 |
|
Gains related to MasterCard Incorporated shares |
|
|
27 |
|
|
|
|
|
|
|
27 |
|
|
|
N/M |
|
|
|
67 |
|
|
|
9 |
|
|
|
58 |
|
|
|
644.4 |
|
Litigation settlement automobile residual value insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
26 |
|
|
|
N/M |
|
Miscellaneous income |
|
|
37 |
|
|
|
62 |
|
|
|
(25 |
) |
|
|
(40.3 |
) |
|
|
127 |
|
|
|
152 |
|
|
|
(25 |
) |
|
|
(16.4 |
) |
|
Total other income |
|
|
98 |
|
|
|
121 |
|
|
|
(23 |
) |
|
|
(19.0 |
) |
|
|
419 |
|
|
|
287 |
|
|
|
132 |
|
|
|
46.0 |
|
|
Total noninterest income |
|
$ |
438 |
|
|
$ |
543 |
|
|
$ |
(105 |
) |
|
|
(19.3 |
)% |
|
$ |
1,741 |
|
|
$ |
1,569 |
|
|
$ |
172 |
|
|
|
11.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/M = Not Meaningful
The following discussion explains the composition of certain elements of Keys noninterest income
and the factors that caused those elements to change.
Trust and investment services income. Trust and investment services generally is Keys largest
source of noninterest income. The primary components of revenue generated by these services are
shown in Figure 10. The decreases compared to 2006 results were attributable to lower brokerage
income resulting from the sale of the McDonald Investments branch network. Excluding the impact of
the sale, brokerage commissions and fee income was up $3 million from the third quarter of last
year and $5 million from the
first nine months of 2006. As shown in Figure 10, growth was also experienced in both personal and
institutional asset management and custody fees.
Figure 10. Trust and Investment Services Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
September 30, |
|
|
Change |
|
|
September 30, |
|
|
Change |
|
dollars in millions |
|
2007 |
|
|
2006 |
|
|
Amount |
|
|
Percent |
|
|
2007 |
|
|
2006 |
|
|
Amount |
|
|
Percent |
|
|
Brokerage commissions and fee income |
|
$ |
26 |
|
|
$ |
56 |
|
|
$ |
(30 |
) |
|
|
(53.6 |
)% |
|
$ |
94 |
|
|
$ |
177 |
|
|
$ |
(83 |
) |
|
|
(46.9 |
)% |
Personal asset management and custody fees |
|
|
41 |
|
|
|
39 |
|
|
|
2 |
|
|
|
5.1 |
|
|
|
122 |
|
|
|
116 |
|
|
|
6 |
|
|
|
5.2 |
|
Institutional asset management and custody fees |
|
|
52 |
|
|
|
42 |
|
|
|
10 |
|
|
|
23.8 |
|
|
|
143 |
|
|
|
118 |
|
|
|
25 |
|
|
|
21.2 |
|
|
Total trust and investment services income |
|
$ |
119 |
|
|
$ |
137 |
|
|
$ |
(18 |
) |
|
|
(13.1 |
)% |
|
$ |
359 |
|
|
$ |
411 |
|
|
$ |
(52 |
) |
|
|
(12.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A significant portion of Keys trust and investment services income depends on the value and mix of
assets under management. At September 30, 2007, Keys bank, trust and registered investment
advisory subsidiaries had assets under management of $88.1 billion, compared to $84.1 billion at
September 30, 2006. As shown in Figure 11, the increase was due primarily to Keys equity
portfolio, reflecting improvement in the equity markets in general. Keys fixed income portfolio
and the higher-yielding hedge
51
funds also contributed to the increase. The decrease in assets under
management during the first quarter of 2007 was attributable to assets transferred in connection
with the sale of the McDonald Investments branch network.
The growth in total assets under management was moderated by declines in the money market portfolio
and Keys securities lending business. 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
shared with the lending client. This business, although profitable, generates a significantly
lower rate of return (commensurate with the lower level of risk) than other types of assets under
management.
Figure 11. Assets Under Management
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
in millions |
|
Third |
|
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Assets under management by investment type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
$ |
44,465 |
|
|
$ |
42,462 |
|
|
$ |
40,065 |
|
|
$ |
41,877 |
|
|
$ |
39,831 |
|
Securities lending |
|
|
22,056 |
|
|
|
22,595 |
|
|
|
21,608 |
|
|
|
21,146 |
|
|
|
22,699 |
|
Fixed income |
|
|
11,372 |
|
|
|
11,187 |
|
|
|
11,420 |
|
|
|
11,242 |
|
|
|
11,311 |
|
Money market |
|
|
8,861 |
|
|
|
8,069 |
|
|
|
8,260 |
|
|
|
9,402 |
|
|
|
9,298 |
|
Hedge funds |
|
|
1,346 |
|
|
|
1,279 |
|
|
|
1,035 |
|
|
|
1,032 |
|
|
|
921 |
|
|
Total |
|
$ |
88,100 |
|
|
$ |
85,592 |
|
|
$ |
82,388 |
|
|
$ |
84,699 |
|
|
$ |
84,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proprietary mutual funds included in assets under
management: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market |
|
$ |
6,888 |
|
|
$ |
6,280 |
|
|
$ |
6,459 |
|
|
$ |
7,579 |
|
|
$ |
7,520 |
|
Equity |
|
|
6,748 |
|
|
|
6,392 |
|
|
|
5,788 |
|
|
|
5,713 |
|
|
|
5,250 |
|
Fixed income |
|
|
629 |
|
|
|
615 |
|
|
|
621 |
|
|
|
629 |
|
|
|
639 |
|
|
Total |
|
$ |
14,265 |
|
|
$ |
13,287 |
|
|
$ |
12,868 |
|
|
$ |
13,921 |
|
|
$ |
13,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts. Service charges on deposit accounts were up from the prior
year, due primarily to an increase in overdraft fees resulting from higher transaction volume, a
rate increase instituted during the second quarter of 2007 and growth in the number of transaction
accounts within Keys Community Banking group.
Investment banking and capital markets income. As shown in Figure 12, the decreases in investment
banking and capital markets income compared to the prior year were due primarily to less favorable
results from other investments and from dealer trading and derivatives activities, reflecting
extraordinary volatility in the fixed income markets during the third quarter of 2007. The loss
recorded from other investments in the third quarter of 2007 was due largely to a $25 million
decline in the fair values of two real estate-related investments held by the Private Equity unit
within the Real Estate Capital line of business. The year-to date reduction in this revenue
component was attributable to this decline and a $25 million gain from the initial public offering
completed by the New York Stock Exchange during the first quarter of last year.
Figure 12. Investment Banking and Capital Markets Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30, |
|
|
Change |
|
|
Nine months ended
September 30, |
|
|
Change |
|
dollars in millions |
|
2007 |
|
|
2006 |
|
|
Amount |
|
|
Percent |
|
|
2007 |
|
|
2006 |
|
|
Amount |
|
|
Percent |
|
|
Investment banking income |
|
$ |
22 |
|
|
$ |
21 |
|
|
$ |
1 |
|
|
|
4.8 |
% |
|
$ |
65 |
|
|
$ |
69 |
|
|
$ |
(4 |
) |
|
|
(5.8 |
)% |
Income (loss) from other investments |
|
|
(22 |
) |
|
|
5 |
|
|
|
(27 |
) |
|
|
N/M |
|
|
|
(11 |
) |
|
|
37 |
|
|
|
(48 |
) |
|
|
N/M |
|
Dealer trading and derivatives income (loss) |
|
|
(2 |
) |
|
|
7 |
|
|
|
(9 |
) |
|
|
N/M |
|
|
|
18 |
|
|
|
23 |
|
|
|
(5 |
) |
|
|
(21.7 |
) |
Foreign exchange income |
|
|
11 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
33 |
|
|
|
32 |
|
|
|
1 |
|
|
|
3.1 |
|
|
Total investment banking and capital
markets income |
|
$ |
9 |
|
|
$ |
44 |
|
|
$ |
(35 |
) |
|
|
(79.5 |
)% |
|
$ |
105 |
|
|
$ |
161 |
|
|
$ |
(56 |
) |
|
|
(34.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/M = Not Meaningful
Operating lease income. The increase in operating lease income compared to the third quarter and
first nine months of 2006 reflected a higher volume of activity in the Equipment Finance line of
business. Depreciation expense related to the leased equipment is presented in Figure 13 as
operating lease expense.
52
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 third quarter of 2007, Key recorded $53 million of net
losses from loan sales as well as changes in the estimated fair values of primarily commercial real
estate loans held for sale. Recent volatility in the fixed income markets and the related housing
correction caused a significant decrease in the value of these loans. The types of loans sold
during 2007 and 2006 are presented in Figure 17 on page 57.
Net gains from principal investing. Principal investments consist of direct and indirect
investments in predominantly privately-held companies. Keys principal investing income is
susceptible to volatility since most of it is derived from mezzanine debt and equity investments in
small- to medium-sized businesses. These investments are carried on the balance sheet at fair
value ($970 million at September 30, 2007, $830 million at December 31, 2006, and $843 million at
September 30, 2006). The net gains presented in Figure 9 stem from changes in estimated fair
values as well as gains resulting from the sales of principal investments.
Noninterest expense
Noninterest expense for the third quarter of 2007 was $753 million, down from $790 million for the
third quarter of 2006. For the first nine months of the year, noninterest expense was $2.4
billion, essentially unchanged from the level reported one year ago.
As shown in Figure 13, personnel expense decreased by $35 million from the year-ago quarter, due to
lower incentive compensation accruals. Nonpersonnel expense was down $2 million. Reductions in
costs resulting from the sale of the McDonald Investments branch network accounted for a $46
million decline in total noninterest expense, including $27 million of the decrease in personnel
expense.
For the year-to-date period, personnel expense decreased by $23 million from the same period last
year, due to lower incentive compensation accruals stemming from the sale of the McDonald
Investments branch network. Excluding a $42 million charge to litigation (included in
miscellaneous expense) recorded in the second quarter of 2007, nonpersonnel expense was down $7
million. Reductions in professional fees, marketing expense and certain costs associated with the
McDonald Investments branch network more than offset a substantial increase in operating lease
expense. See Note 13 (Contingent Liabilities and Guarantees), which begins on page 28, for more
information pertaining to the litigation charge.
Figure 13. Noninterest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
September 30, |
|
|
Change |
|
|
September 30, |
|
|
Change |
|
dollars in millions |
|
2007 |
|
|
2006 |
|
|
Amount |
|
|
Percent |
|
|
2007 |
|
|
2006 |
|
|
Amount |
|
|
Percent |
|
|
Personnel |
|
$ |
383 |
|
|
$ |
418 |
|
|
$ |
(35 |
) |
|
|
(8.4 |
)% |
|
$ |
1,222 |
|
|
$ |
1,245 |
|
|
$ |
(23 |
) |
|
|
(1.8 |
)% |
Net occupancy |
|
|
60 |
|
|
|
62 |
|
|
|
(2 |
) |
|
|
(3.2 |
) |
|
|
182 |
|
|
|
182 |
|
|
|
|
|
|
|
|
|
Computer processing |
|
|
49 |
|
|
|
52 |
|
|
|
(3 |
) |
|
|
(5.8 |
) |
|
|
149 |
|
|
|
157 |
|
|
|
(8 |
) |
|
|
(5.1 |
) |
Operating lease expense |
|
|
58 |
|
|
|
48 |
|
|
|
10 |
|
|
|
20.8 |
|
|
|
165 |
|
|
|
134 |
|
|
|
31 |
|
|
|
23.1 |
|
Professional fees |
|
|
27 |
|
|
|
28 |
|
|
|
(1 |
) |
|
|
(3.6 |
) |
|
|
79 |
|
|
|
101 |
|
|
|
(22 |
) |
|
|
(21.8 |
) |
Equipment |
|
|
22 |
|
|
|
26 |
|
|
|
(4 |
) |
|
|
(15.4 |
) |
|
|
71 |
|
|
|
78 |
|
|
|
(7 |
) |
|
|
(9.0 |
) |
Marketing |
|
|
21 |
|
|
|
32 |
|
|
|
(11 |
) |
|
|
(34.4 |
) |
|
|
60 |
|
|
|
70 |
|
|
|
(10 |
) |
|
|
(14.3 |
) |
Other expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postage and delivery |
|
|
11 |
|
|
|
13 |
|
|
|
(2 |
) |
|
|
(15.4 |
) |
|
|
34 |
|
|
|
38 |
|
|
|
(4 |
) |
|
|
(10.5 |
) |
Franchise and business taxes |
|
|
8 |
|
|
|
9 |
|
|
|
(1 |
) |
|
|
(11.1 |
) |
|
|
25 |
|
|
|
29 |
|
|
|
(4 |
) |
|
|
(13.8 |
) |
Telecommunications |
|
|
7 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
Provision for losses on lending-related
commitments |
|
|
5 |
|
|
|
|
|
|
|
5 |
|
|
|
N/M |
|
|
|
3 |
|
|
|
|
|
|
|
3 |
|
|
|
N/M |
|
Miscellaneous expense |
|
|
102 |
|
|
|
95 |
|
|
|
7 |
|
|
|
7.4 |
|
|
|
341 |
|
|
|
285 |
|
|
|
56 |
|
|
|
19.6 |
|
|
Total other expense |
|
|
133 |
|
|
|
124 |
|
|
|
9 |
|
|
|
7.3 |
|
|
|
424 |
|
|
|
373 |
|
|
|
51 |
|
|
|
13.7 |
|
|
Total noninterest expense |
|
$ |
753 |
|
|
$ |
790 |
|
|
$ |
(37 |
) |
|
|
(4.7 |
)% |
|
$ |
2,352 |
|
|
$ |
2,340 |
|
|
$ |
12 |
|
|
|
.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
full-time equivalent employees a |
|
|
18,567 |
|
|
|
20,264 |
|
|
|
(1,697 |
) |
|
|
(8.4 |
)% |
|
|
19,081 |
|
|
|
19,974 |
|
|
|
(893 |
) |
|
|
(4.5 |
)% |
|
|
|
|
(a) |
|
The number of average full-time equivalent employees has not been adjusted for discontinued
operations. |
N/M = Not Meaningful
53
The following discussion explains the composition of certain elements of Keys noninterest expense
and the factors that caused those elements to change.
Personnel. As shown in Figure 14, personnel expense, the largest category of Keys noninterest
expense, decreased by $23 million, or 2%, from the first nine months of 2006. The decrease, which
was attributable to the sale of the McDonald Investments branch network, was moderated by normal
salary adjustments and higher stock-based compensation. The McDonald Investments branch network
accounted for $20 million of Keys personnel expense in the current year, compared to $88 million
for the first nine months of 2006. For the third quarter of 2007, the average number of full-time
equivalent employees was 18,567, compared to 18,888 for the second quarter of 2007 and 20,264 for
the third quarter of 2006.
Figure 14. Personnel Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
September 30, |
|
|
Change |
|
|
September 30, |
|
|
Change |
|
dollars in millions |
|
2007 |
|
|
2006 |
|
|
Amount |
|
|
Percent |
|
|
2007 |
|
|
2006 |
|
|
Amount |
|
|
Percent |
|
|
Salaries |
|
$ |
240 |
|
|
$ |
240 |
|
|
|
|
|
|
|
|
|
|
$ |
721 |
|
|
$ |
703 |
|
|
$ |
18 |
|
|
|
2.6 |
% |
Incentive compensation |
|
|
55 |
|
|
|
93 |
|
|
$ |
(38 |
) |
|
|
(40.9 |
)% |
|
|
212 |
|
|
|
268 |
|
|
|
(56 |
) |
|
|
(20.9 |
) |
Employee benefits |
|
|
67 |
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
222 |
|
|
|
222 |
|
|
|
|
|
|
|
|
|
Stock-based compensation a |
|
|
17 |
|
|
|
15 |
|
|
|
2 |
|
|
|
13.3 |
|
|
|
57 |
|
|
|
47 |
|
|
|
10 |
|
|
|
21.3 |
|
Severance |
|
|
4 |
|
|
|
3 |
|
|
|
1 |
|
|
|
33.3 |
|
|
|
10 |
|
|
|
5 |
|
|
|
5 |
|
|
|
100.0 |
|
|
Total personnel expense |
|
$ |
383 |
|
|
$ |
418 |
|
|
$ |
(35 |
) |
|
|
(8.4 |
)% |
|
$ |
1,222 |
|
|
$ |
1,245 |
|
|
$ |
(23 |
) |
|
|
(1.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Excludes directors stock-based compensation of $.4 million and $.3 million for the
three-month periods ended September 30,
2007 and 2006, respectively, and $1.7 million and $.9 million for the nine-month periods ended
September 30, 2007 and 2006, respectively. Directors stock-based compensation is included in
the miscellaneous expense component shown in Figure 13. |
Operating lease expense. The increase in operating lease expense compared to the third quarter and
first nine months of 2006 reflected a higher volume of activity in the Equipment Finance line of
business. Income related to the rental of leased equipment is presented in Figure 9 as operating
lease income.
Professional fees. The decrease in professional fees for the year-to-date period was due in part
to a reduction in costs associated with Keys efforts to strengthen compliance controls, for which
substantial investment has already been made.
Marketing expense. The decreases in marketing expense for both the quarterly and year-to-date
periods were attributable to additional costs incurred during 2006 to promote Keys free checking
products.
Income taxes
The provision for income taxes from continuing operations was $86 million for the third quarter of
2007, compared to $118 million for the comparable period in 2006. The effective tax rate, which is
the provision for income taxes from continuing operations as a percentage of income from continuing
operations before income taxes, was 27.7% for the third quarter of 2007, compared to 27.9% for the
year-ago quarter. For the first nine months of 2007, the provision for income taxes was $363
million, compared to $353 million for the first nine months of 2006. The effective tax rates for
these periods were 28.3% and 28.6%, 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%, primarily because Key generates income from investments in
tax-advantaged assets such as corporate-owned life insurance, earns credits associated with
investments in low-income housing projects and records tax deductions associated with dividends
paid 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
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
54
Financial Condition
Loans and loans held for sale
At September 30, 2007, total loans outstanding were $69.0 billion, compared to $65.8 billion at
December 31, 2006, and $65.6 billion at September 30, 2006. 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 20. The increase in Keys loan portfolio over the past twelve months was primarily
attributable to strong growth in the commercial mortgage, and commercial, financial and
agricultural portfolios.
Commercial loan portfolio. Commercial loans outstanding grew by $3.0 billion, or 6%, from one year
ago, largely due to a higher volume of originations in the commercial mortgage, and commercial,
financial and agricultural portfolios. Greater reliance by borrowers on commercial lines of credit
in a volatile capital markets environment also contributed to the increase. 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, 2007, Keys commercial real
estate portfolio included mortgage loans of $9.3 billion and construction loans of $8.2 billion.
The average mortgage loan originated during the first nine months of 2007 was $2 million, and the
largest mortgage loan at September 30, 2007, had a balance of $83 million. At September 30, 2007,
the average construction loan commitment was $6 million. The largest construction loan commitment
was $95 million, of which the entire amount was outstanding and on nonperforming status.
Keys commercial real estate lending business is conducted 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 at least 50% of the
debt service is provided by rental income from nonaffiliated third parties) and accounted for
approximately 63% of Keys total average commercial real estate loans during the third quarter of
2007. Keys commercial real estate business generally focuses on larger real estate developers
and, as shown in Figure 15, is diversified by both industry type and geographic location of the
underlying collateral.
Figure 15. Commercial Real Estate Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
Geographic Region |
|
|
|
|
|
|
Percent of |
|
dollars in millions |
|
Northeast |
|
|
Southeast |
|
|
Southwest |
|
|
Midwest |
|
|
Central |
|
|
West |
|
|
Total |
|
|
Total |
|
|
Nonowner-occupied: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential properties |
|
$ |
234 |
|
|
$ |
1,093 |
|
|
$ |
309 |
|
|
$ |
185 |
|
|
$ |
477 |
|
|
$ |
1,445 |
|
|
$ |
3,743 |
|
|
|
21.4 |
% |
Multi-family properties |
|
|
330 |
|
|
|
293 |
|
|
|
243 |
|
|
|
263 |
|
|
|
471 |
|
|
|
449 |
|
|
|
2,049 |
|
|
|
11.7 |
|
Retail properties |
|
|
167 |
|
|
|
652 |
|
|
|
175 |
|
|
|
389 |
|
|
|
338 |
|
|
|
255 |
|
|
|
1,976 |
|
|
|
11.3 |
|
Land and development |
|
|
60 |
|
|
|
247 |
|
|
|
207 |
|
|
|
113 |
|
|
|
227 |
|
|
|
202 |
|
|
|
1,056 |
|
|
|
6.1 |
|
Office buildings |
|
|
165 |
|
|
|
244 |
|
|
|
91 |
|
|
|
194 |
|
|
|
138 |
|
|
|
309 |
|
|
|
1,141 |
|
|
|
6.5 |
|
Warehouses |
|
|
79 |
|
|
|
161 |
|
|
|
12 |
|
|
|
81 |
|
|
|
80 |
|
|
|
176 |
|
|
|
589 |
|
|
|
3.4 |
|
Health facilities |
|
|
142 |
|
|
|
146 |
|
|
|
14 |
|
|
|
125 |
|
|
|
56 |
|
|
|
123 |
|
|
|
606 |
|
|
|
3.5 |
|
Manufacturing facilities |
|
|
4 |
|
|
|
57 |
|
|
|
22 |
|
|
|
23 |
|
|
|
|
|
|
|
18 |
|
|
|
124 |
|
|
|
.7 |
|
Hotels/Motels |
|
|
1 |
|
|
|
39 |
|
|
|
|
|
|
|
15 |
|
|
|
50 |
|
|
|
52 |
|
|
|
157 |
|
|
|
.9 |
|
Other |
|
|
179 |
|
|
|
22 |
|
|
|
2 |
|
|
|
211 |
|
|
|
92 |
|
|
|
199 |
|
|
|
705 |
|
|
|
4.0 |
|
|
|
|
|
1,361 |
|
|
|
2,954 |
|
|
|
1,075 |
|
|
|
1,599 |
|
|
|
1,929 |
|
|
|
3,228 |
|
|
|
12,146 |
|
|
|
69.5 |
|
Owner-occupied |
|
|
1,044 |
|
|
|
204 |
|
|
|
109 |
|
|
|
2,006 |
|
|
|
483 |
|
|
|
1,494 |
|
|
|
5,340 |
|
|
|
30.5 |
|
|
Total |
|
$ |
2,405 |
|
|
$ |
3,158 |
|
|
$ |
1,184 |
|
|
$ |
3,605 |
|
|
$ |
2,412 |
|
|
$ |
4,722 |
|
|
$ |
17,486 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonowner-occupied: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans |
|
$ |
9 |
|
|
$ |
106 |
|
|
|
|
|
|
$ |
25 |
|
|
$ |
7 |
|
|
$ |
81 |
|
|
$ |
228 |
|
|
|
N/M |
|
Accruing loans past due 90 days or more |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
32 |
|
|
|
36 |
|
|
|
N/M |
|
Accruing loans past due 30 through 89
days |
|
|
29 |
|
|
|
20 |
|
|
$ |
16 |
|
|
|
14 |
|
|
|
1 |
|
|
|
33 |
|
|
|
113 |
|
|
|
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
55
During the third quarter of 2007, nonperforming loans related to Keys nonowner-occupied properties
rose by $200 million, due primarily to deteriorating market conditions in the residential
properties segment of Keys commercial real estate construction portfolio. The majority of the
increase in this segment relates to loans outstanding in Florida and southern California.
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. These financing arrangements are conducted through
the Equipment Finance line of business. Commercial lease financing receivables increased by $449
million, or 5%, over the past twelve months.
Consumer loan portfolio. Consumer loans outstanding increased by $415 million, or 2%, from one
year ago. The growth was largely attributable to new originations in Keys indirect marine loan
portfolio, offset in part by a decline in Keys consumer direct loan portfolio. The growth of
the consumer loan portfolio also was moderated by a general slowdown in the level of home equity
loan originations over the past year. Excluding loan sales and acquisitions, consumer loans would
have increased by $486 million, or 3%, during the past twelve months.
The home equity portfolio is by far the largest segment of Keys consumer loan portfolio. This
portfolio is derived primarily from the Regional Banking line of business (responsible for 89% of
home equity loans at September 30, 2007); the remainder originated from the Home Equity Services
unit within Keys Consumer Finance line of business, which works with home improvement contractors
to provide home equity and home improvement financing solutions.
Figure 16 summarizes Keys home equity loan portfolio by source at the end of each of the last five
quarters, as well as certain asset quality statistics and yields on the portfolio as a whole.
Figure 16. Home Equity Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
dollars in millions |
|
Third |
|
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
SOURCES OF LOANS OUTSTANDING |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional Banking |
|
$ |
9,674 |
|
|
$ |
9,736 |
|
|
$ |
9,623 |
|
|
$ |
9,805 |
|
|
$ |
9,990 |
|
Home Equity Services unit |
|
|
1,230 |
|
|
|
1,143 |
|
|
|
1,046 |
|
|
|
1,021 |
|
|
|
998 |
|
|
Total |
|
$ |
10,904 |
|
|
$ |
10,879 |
|
|
$ |
10,669 |
|
|
$ |
10,826 |
|
|
$ |
10,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans at period end |
|
$ |
61 |
|
|
$ |
55 |
|
|
$ |
52 |
|
|
$ |
50 |
|
|
$ |
46 |
|
Net loan charge-offs for the period |
|
|
8 |
|
|
|
6 |
|
|
|
7 |
|
|
|
6 |
|
|
|
4 |
|
Yield for the period a |
|
|
7.22 |
% |
|
|
7.22 |
% |
|
|
7.22 |
% |
|
|
7.22 |
% |
|
|
7.19 |
% |
|
|
|
|
(a) |
|
From continuing operations. |
Loans held for sale. As shown in Note 6, Keys loans held for sale were $4.8 billion at September
30, 2007, compared to $3.6 billion at December 31, 2006, and $7.2 billion at September 30, 2006.
The decline over the past twelve months was due primarily to the November 2006 sale of the $2.5
billion nonprime mortgage loan portfolio held by the Champion Mortgage finance business, which was
transferred to the held-for-sale portfolio during the third quarter of 2006 in anticipation of the
sale.
At September 30, 2007, Keys loans held for sale included $2.9 billion of education loans and $1.6
billion of commercial mortgage loans. In the absence of quoted market prices, management uses
valuation models to measure the fair value of these loans and adjusts the amount recorded on the
balance sheet if fair value falls below recorded cost. The models are based on assumptions related
to prepayment speeds, default rates, funding cost and discount rates. In light of recent
volatility in the financial markets, management has reviewed Keys assumptions and determined they
are representative of current market conditions. As a result, no significant adjustments to the
assumptions were required during the third quarter of 2007. During the third quarter, net losses
pertaining to Keys loans held for sale totaled $74 million, of which $37 million were unrealized.
These losses are recorded in net gains (losses) from loan securitizations and sales on the income
statement. Key has not been significantly impacted by market volatility in the nonprime mortgage
lending industry due to the sale of the Champion Mortgage finance business discussed above.
56
Sales and securitizations. Key continues to use alternative funding sources like loan sales and
securitizations to support its loan origination capabilities. In addition, several acquisitions
completed over the past several years have improved Keys 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 $3.9 billion of commercial mortgage loans ($238 million
through a securitization), $2.7 billion of home equity loans, $1.2 billion of education loans ($963
million through a securitization), $445 million of residential real estate loans, $299 million of
commercial loans and leases, and $90 million of consumer direct loans. Most of these sales came
from the held-for-sale portfolio.
Among the factors Key considers in determining whether to sell or securitize certain loans or
portfolios are:
|
|
|
¨
|
|
whether particular lending businesses meet established performance standards or fit with Keys relationship banking
strategy; |
|
|
|
¨
|
|
Keys asset/liability management needs; |
|
|
|
¨
|
|
whether the characteristics of a specific loan portfolio make it conducive to securitization; |
|
|
|
¨
|
|
the cost of alternative funding sources; |
|
|
|
¨
|
|
the level of credit risk; |
|
|
|
¨
|
|
capital requirements; and |
|
|
|
¨
|
|
market conditions and pricing. |
Key typically completes an annual securitization and sale of education loans during the second half
of the year. In light of recent volatility in the financial markets, this securitization has not
yet occurred in 2007 and may be delayed until the first half of 2008.
Figure 17 summarizes Keys loan sales (including securitizations) for the first nine months of 2007
and all of 2006.
Figure 17. Loans Sold (Including Loans Held for Sale)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
Commercial |
|
|
Residential |
|
|
Home |
|
|
Consumer |
|
|
|
|
|
|
|
in millions |
|
Commercial |
|
|
Real Estate |
|
|
Lease Financing |
|
|
Real Estate |
|
|
Equity |
|
|
Direct |
|
|
Education |
|
|
Total |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third quarter |
|
$ |
17 |
|
|
$ |
1,059 |
|
|
$ |
35 |
|
|
$ |
127 |
|
|
|
|
|
|
|
|
|
|
$ |
44 |
|
|
$ |
1,282 |
|
Second quarter |
|
|
36 |
|
|
|
1,079 |
|
|
|
98 |
|
|
|
118 |
|
|
|
|
|
|
|
|
|
|
|
118 |
|
|
|
1,449 |
|
First quarter |
|
|
15 |
|
|
|
688 |
|
|
|
5 |
|
|
|
100 |
|
|
$ |
233 |
|
|
$ |
90 |
|
|
|
61 |
|
|
|
1,192 |
|
|
Total |
|
$ |
68 |
|
|
$ |
2,826 |
|
|
$ |
138 |
|
|
$ |
345 |
|
|
$ |
233 |
|
|
$ |
90 |
|
|
$ |
223 |
|
|
$ |
3,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth quarter |
|
$ |
80 |
|
|
$ |
1,070 |
|
|
$ |
13 |
|
|
$ |
100 |
|
|
$ |
2,474 |
|
|
|
|
|
|
$ |
983 |
|
|
$ |
4,720 |
|
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 |
|
$ |
221 |
|
|
$ |
2,638 |
|
|
$ |
134 |
|
|
$ |
360 |
|
|
$ |
2,476 |
|
|
|
|
|
|
$ |
1,408 |
|
|
$ |
7,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Figure 18 shows loans that are either administered or serviced by Key, but not recorded on the
balance sheet. Included are loans that have been both securitized and sold, or simply sold
outright.
Figure 18. Loans Administered or Serviced
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
June 30, |
|
|
March 31, |
|
|
December 31, |
|
|
September 30, |
|
in millions |
|
2007 |
|
|
2007 |
|
|
2007 |
|
|
2006 |
|
|
2006 |
|
|
Commercial real estate loans a |
|
$ |
134,510 |
|
|
$ |
121,384 |
|
|
$ |
108,303 |
|
|
$ |
93,611 |
|
|
$ |
81,873 |
|
Education loans |
|
|
4,984 |
|
|
|
5,118 |
|
|
|
5,251 |
|
|
|
5,475 |
|
|
|
4,640 |
|
Home equity loans b |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,360 |
|
|
|
4 |
|
Commercial lease financing |
|
|
657 |
|
|
|
529 |
|
|
|
458 |
|
|
|
479 |
|
|
|
479 |
|
Commercial loans |
|
|
228 |
|
|
|
242 |
|
|
|
243 |
|
|
|
268 |
|
|
|
252 |
|
|
Total |
|
$ |
140,379 |
|
|
$ |
127,273 |
|
|
$ |
114,255 |
|
|
$ |
102,193 |
|
|
$ |
87,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Key acquired the servicing for commercial mortgage loan portfolios with an aggregate
principal balance of $21.1 billion for the third quarter 2007, $6.4 billion for the second
quarter 2007, $12.7 billion for the first quarter 2007 and $9.0 billion for the fourth quarter
2006. |
|
(b) |
|
In November 2006, Key sold the $2.5 billion nonprime mortgage loan portfolio held by the
Champion Mortgage finance business but continued to provide servicing through various dates in
March 2007. |
57
In the event of default by a borrower, Key is subject to recourse with respect to $579 million of
the $140.4 billion of loans administered or serviced at September 30, 2007. 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 29.
Key derives income from several sources when loans are securitized or sold, but Key retains the
right to administer or service them. Key earns noninterest income (recorded as other income)
from fees for servicing or administering loans. In addition, Key earns interest income from
securitized assets retained and from lending 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, thereby
moderating Keys overall cost of funds.
Securities
At September 30, 2007, the securities portfolio totaled $10.5 billion, including $7.9 billion of
securities available for sale, $36 million of investment securities, $1.1 billion of trading
account securities included in short-term investments on the balance sheet and $1.5 billion of
other investments (primarily principal investments). In comparison, the total portfolio at
December 31, 2006, was $10.1 billion and included $7.8 billion of securities available for sale,
$41 million of investment securities, $912 million of trading account securities and $1.4 billion
of other investments. At September 30, 2006, the securities portfolio totaled $9.7 billion and
included $7.4 billion of securities available for sale, $41 million of investment securities, $817
million of trading account securities and $1.4 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, 2007, Key had $7.5
billion invested in CMOs and other mortgage-backed securities, compared to $7.3 billion at December
31, 2006, and $6.9 billion at September 30, 2006. Substantially all of Keys mortgage-backed
securities are issued or backed by federal agencies.
Management periodically evaluates Keys securities available-for-sale portfolio in light of
established asset/liability management objectives, and changing market conditions which could
affect the profitability of the portfolio, as well as the level of interest rate risk to which Key
is exposed. As a result of these evaluations, management may take steps to improve Keys overall
balance sheet positioning.
In March 2007, management completed a comprehensive evaluation of the securities available-for-sale
portfolio and determined that a repositioning of the portfolio was appropriate to enhance future
financial performance, particularly in the event of a decline in interest rates. As a result, Key
sold $2.4 billion of shorter-maturity, agency-issued CMOs and reinvested the proceeds in
agency-issued securities with higher yields and longer expected average maturities. The
weighted-average yield of Keys available-for-sale portfolio increased from 4.78% at December 31,
2006, to 5.25% at September 30, 2007, and the weighted-average maturity of the portfolio increased
from 2.6 years at December 31, 2006, to 3.5 years at September 30, 2007. The repositioning also
served to reduce Keys exposure to prepayment risk in a declining interest rate scenario. This was
accomplished by replacing the CMOs sold with those that have underlying mortgage loans with shorter
maturities and lower coupon rates. Key maintains a modest liability-sensitive exposure to
near-term changes in interest rates. Neither funding nor capital levels were affected materially
by this portfolio repositioning.
As a result of the sale, Key recorded a loss of $49 million ($31 million after tax, $.08 per
diluted common share) during the first quarter of 2007. This loss was previously recorded in net
unrealized losses on securities available for sale in the accumulated other comprehensive loss
component of shareholders equity.
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In addition to changing market conditions, the size and composition of Keys securities
available-for-sale portfolio could vary with Keys needs for liquidity and the extent to which Key
is required (or elects) to hold these assets as collateral to secure public funds and trust
deposits. Although 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 risk profiles.
For most of Keys mortgage-backed securities, management employs an outside bond pricing service to
assist in measuring the fair value at which they should be recorded on the balance sheet. In
performing the valuations, the pricing service relies on models which are based on a number of
economic observations, including quoted market prices and interest rate spreads on relevant
benchmark securities, along with certain economic assumptions. For certain mortgage-backed
securities, the pricing service is unable to provide pricing. In those instances, management uses
a purchased pricing model and inputs data similar to that described above. All of the
mortgage-backed security valuations are reviewed by Keys management for reasonableness to ensure
they are representative of current market conditions. During the third quarter of 2007, net gains
from Keys mortgage-backed securities totaled $120 million, reflecting the decline in benchmark
Treasury yields, offset in part by the widening of interest rate spreads on these securities.
Substantially all of the net gains were unrealized and, therefore, recorded in the accumulated
other comprehensive loss component of shareholders equity. Realized gains and losses, which are
recorded in net securities gains (losses) on the income statement, were not significant.
Figure 19 shows the composition, yields and remaining maturities of Keys securities available for
sale. For more information about Keys securities, including gross unrealized gains and losses by
type of security, see Note 5 (Securities), which begins on page 18.
Figure 19. Securities Available for Sale