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 |
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For the Quarterly Period Ended March 31, 2008
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the Transition Period From To
Commission File Number 1-11302
KeyCorp
(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
incorporation or organization)
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(I.R.S. Employer
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, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer: þ
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Accelerated filer: o
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Non-accelerated filer: o
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Smaller reporting company: o |
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(Do not check if a smaller reporting company) |
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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 $1 each
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400,418,741 Shares |
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(Title of class)
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(Outstanding at April 30, 2008) |
KEYCORP
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
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March 31, |
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December 31, |
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March 31, |
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dollars in millions |
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2008 |
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2007 |
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2007 |
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(Unaudited) |
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(Unaudited) |
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ASSETS |
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Cash and due from banks |
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$ |
1,730 |
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$ |
1,814 |
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$ |
2,052 |
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Short-term investments |
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577 |
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516 |
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1,313 |
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Trading account assets |
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1,015 |
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1,056 |
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671 |
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Securities available for sale |
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8,419 |
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7,860 |
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7,789 |
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Held-to-maturity securities (fair value: $29,$28 and $38) |
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29 |
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28 |
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38 |
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Other investments |
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1,561 |
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1,538 |
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1,466 |
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Loans, net of unearned income of $2,168,$2,202 and $2,186 |
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76,444 |
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70,823 |
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65,711 |
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Less: Allowance for loan losses |
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1,298 |
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1,200 |
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944 |
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Net loans |
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75,146 |
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69,623 |
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64,767 |
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Loans held for sale |
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1,674 |
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4,736 |
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4,175 |
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Premises and equipment |
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712 |
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681 |
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590 |
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Operating lease assets |
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1,070 |
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1,128 |
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1,074 |
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Goodwill |
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1,599 |
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1,252 |
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1,202 |
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Other intangible assets |
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164 |
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123 |
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115 |
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Corporate-owned life insurance |
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2,894 |
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2,872 |
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2,805 |
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Derivative assets |
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1,508 |
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879 |
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413 |
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Accrued income and other assets |
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3,394 |
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4,122 |
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3,786 |
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Total assets |
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$ |
101,492 |
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$ |
98,228 |
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$ |
92,256 |
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LIABILITIES |
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Deposits in domestic offices: |
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NOW and money market deposit accounts |
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$ |
26,527 |
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$ |
27,635 |
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$ |
23,317 |
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Savings deposits |
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1,826 |
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1,513 |
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1,654 |
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Certificates of deposit ($100,000 or more) |
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8,330 |
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6,982 |
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6,094 |
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Other time deposits |
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12,933 |
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11,615 |
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12,086 |
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Total interest-bearing |
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49,616 |
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47,745 |
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43,151 |
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Noninterest-bearing |
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10,896 |
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11,028 |
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13,473 |
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Deposits in foreign office interest-bearing |
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4,190 |
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4,326 |
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3,149 |
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Total deposits |
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64,702 |
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63,099 |
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59,773 |
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Federal funds purchased and securities sold under repurchase agreements |
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3,503 |
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3,927 |
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5,770 |
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Bank notes and other short-term borrowings |
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5,464 |
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5,861 |
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922 |
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Derivative liabilities |
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465 |
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252 |
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173 |
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Accrued expense and other liabilities |
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4,429 |
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5,386 |
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4,838 |
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Long-term debt |
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14,337 |
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11,957 |
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13,061 |
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Total liabilities |
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92,900 |
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90,482 |
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84,537 |
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SHAREHOLDERS EQUITY |
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Preferred stock, $1 par value; authorized 25,000,000 shares, none issued |
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Common shares, $1 par value; authorized 1,400,000,000 shares;
issued 491,888,780 shares |
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492 |
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492 |
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492 |
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Capital surplus |
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1,659 |
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1,623 |
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1,614 |
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Retained earnings |
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8,737 |
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8,522 |
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8,528 |
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Treasury stock, at cost (91,818,259, 103,095,907 and 97,405,506 shares) |
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(2,689 |
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(3,021 |
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(2,801 |
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Accumulated other comprehensive income (loss) |
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393 |
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130 |
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(114 |
) |
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Total shareholders equity |
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8,592 |
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7,746 |
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7,719 |
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Total liabilities and shareholders equity |
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$ |
101,492 |
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$ |
98,228 |
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$ |
92,256 |
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See Notes to Consolidated Financial Statements (Unaudited).
3
Consolidated Statements of Income (Unaudited)
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Three months ended |
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March 31, |
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dollars in millions, except per share amounts |
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2008 |
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2007 |
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INTEREST INCOME |
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Loans |
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$ |
1,123 |
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$ |
1,161 |
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Loans held for sale |
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87 |
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75 |
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Securities available for sale |
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109 |
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100 |
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Held-to-maturity securities |
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1 |
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1 |
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Trading account assets |
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13 |
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7 |
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Short-term investments |
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9 |
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11 |
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Other investments |
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12 |
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13 |
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Total interest income |
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1,354 |
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1,368 |
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INTEREST EXPENSE |
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Deposits |
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428 |
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433 |
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Federal funds purchased and securities sold under
repurchase agreements |
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28 |
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49 |
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Bank notes and other short-term borrowings |
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39 |
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11 |
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Long-term debt |
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146 |
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196 |
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Total interest expense |
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641 |
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689 |
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NET INTEREST INCOME |
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713 |
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679 |
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Provision for loan losses |
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187 |
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44 |
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Net interest income after provision for loan losses |
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526 |
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635 |
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NONINTEREST INCOME |
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Trust and investment services income |
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129 |
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125 |
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Service charges on deposit accounts |
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88 |
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75 |
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Investment banking and capital markets income |
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8 |
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44 |
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Operating lease income |
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69 |
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64 |
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Letter of credit and loan fees |
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37 |
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38 |
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Corporate-owned life insurance income |
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28 |
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25 |
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Electronic banking fees |
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24 |
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24 |
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Net (losses) gains from loan securitizations and sales |
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(101 |
) |
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9 |
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Net securities gains (losses) |
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3 |
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(47 |
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Net gains from principal investing |
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9 |
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29 |
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Gain from redemption of Visa Inc. shares |
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165 |
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Gain from sale of McDonald Investments branch network |
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171 |
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Other income |
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69 |
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97 |
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Total noninterest income |
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528 |
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654 |
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NONINTEREST EXPENSE |
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Personnel |
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409 |
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428 |
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Net occupancy |
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66 |
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63 |
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Computer processing |
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47 |
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51 |
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Operating lease expense |
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58 |
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52 |
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Professional fees |
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23 |
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26 |
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Equipment |
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24 |
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25 |
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Marketing |
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14 |
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19 |
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Other expense |
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91 |
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120 |
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Total noninterest expense |
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732 |
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784 |
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INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |
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322 |
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505 |
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Income taxes |
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104 |
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147 |
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INCOME FROM CONTINUING OPERATIONS |
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218 |
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358 |
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Loss from discontinued operations, net of taxes
of ($5) (see Note 3) |
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(8 |
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NET INCOME |
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$ |
218 |
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$ |
350 |
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Per common share: |
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Income from continuing operations |
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$ |
.55 |
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$ |
.90 |
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Net income |
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.55 |
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|
.88 |
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Per common share assuming dilution: |
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Income from continuing operations |
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$ |
.54 |
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$ |
.89 |
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Net income |
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|
.54 |
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|
.87 |
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Cash dividends declared per common share |
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$ |
.365 |
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Weighted-average common shares outstanding (000) |
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399,121 |
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397,875 |
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Weighted-average common shares and potential common
shares outstanding (000) |
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399,769 |
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403,478 |
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See Notes to Consolidated Financial Statements (Unaudited).
4
Consolidated Statements of Changes in Shareholders Equity (Unaudited)
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Accumulated |
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Treasury |
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Other |
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Common Shares |
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Common |
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Capital |
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Retained |
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Stock, |
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Comprehensive |
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Comprehensive |
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dollars in millions, except per share amounts |
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Outstanding (000) |
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Shares |
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Surplus |
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Earnings |
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at Cost |
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Income (Loss) |
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Income |
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BALANCE AT DECEMBER 31, 2006 |
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399,153 |
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|
$ |
492 |
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$ |
1,602 |
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$ |
8,377 |
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|
$ |
(2,584 |
) |
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$ |
(184 |
) |
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Cumulative effect of adopting FSP 13-2,
net of income taxes of ($2) (see Note 1) |
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(52 |
) |
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Cumulative effect of adopting FIN 48,
net of income taxes of ($1) (see Note 1) |
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(1 |
) |
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BALANCE AT JANUARY 1, 2007 |
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8,324 |
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Net income |
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350 |
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$ |
350 |
|
Other comprehensive income: |
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Net unrealized gains on securities available
for sale, net of income taxes of $32 a |
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52 |
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52 |
|
Net unrealized gains on derivative financial
instruments, net of income taxes of $7 |
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|
11 |
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|
11 |
|
Foreign currency translation adjustments |
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2 |
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2 |
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Net pension and postretirement benefit costs, net of income taxes |
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5 |
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5 |
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Total comprehensive income |
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$ |
420 |
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Deferred compensation |
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2 |
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(1 |
) |
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Cash dividends declared on common shares ($.365 per share) |
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(145 |
) |
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Issuance of common shares for stock options and other
employee benefit plans |
|
|
3,330 |
|
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10 |
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|
91 |
|
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Repurchase of common shares |
|
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(8,000 |
) |
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|
|
|
|
|
|
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(308 |
) |
|
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|
BALANCE AT MARCH 31, 2007 |
|
|
394,483 |
|
|
$ |
492 |
|
|
$ |
1,614 |
|
|
$ |
8,528 |
|
|
$ |
(2,801 |
) |
|
$ |
(114 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT DECEMBER 31, 2007 |
|
|
388,793 |
|
|
$ |
492 |
|
|
$ |
1,623 |
|
|
$ |
8,522 |
|
|
$ |
(3,021 |
) |
|
$ |
130 |
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
218 |
|
|
|
|
|
|
|
|
|
|
$ |
218 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains on securities available
for sale, net of income taxes of $68 a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113 |
|
|
|
113 |
|
Net unrealized gains on derivative financial
instruments, net of income taxes of $91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138 |
|
|
|
138 |
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
10 |
|
Net pension and postretirement benefit costs, net of income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation |
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
Issuance of common shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of U.S.B. Holding Co., Inc. |
|
|
9,895 |
|
|
|
|
|
|
|
58 |
|
|
|
|
|
|
|
290 |
|
|
|
|
|
Stock options and other employee benefit plans |
|
|
1,383 |
|
|
|
|
|
|
|
(20 |
) |
|
|
|
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT MARCH 31, 2008 |
|
|
400,071 |
|
|
$ |
492 |
|
|
$ |
1,659 |
|
|
$ |
8,737 |
|
|
$ |
(2,689 |
) |
|
$ |
393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Net of reclassification adjustments.
See Notes to Consolidated Financial Statements (Unaudited).
5
Consolidated Statements of Cash Flows (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
in millions |
|
2008 |
|
|
2007 |
|
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net income |
|
$ |
218 |
|
|
$ |
350 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
187 |
|
|
|
44 |
|
Depreciation and amortization expense |
|
|
110 |
|
|
|
105 |
|
Net securities (gains) losses |
|
|
(3 |
) |
|
|
47 |
|
Liability to Visa |
|
|
(64 |
) |
|
|
|
|
Gain from redemption of Visa Inc. shares |
|
|
(165 |
) |
|
|
|
|
Gain from sale of McDonald Investments branch network |
|
|
|
|
|
|
(171 |
) |
Loss from sale of discontinued operations |
|
|
|
|
|
|
2 |
|
Net gains from principal investing |
|
|
(9 |
) |
|
|
(29 |
) |
Net losses (gains) from loan securitizations and sales |
|
|
101 |
|
|
|
(9 |
) |
Deferred income taxes |
|
|
(87 |
) |
|
|
(54 |
) |
Net increase in loans held for sale from continuing
operations |
|
|
(222 |
) |
|
|
(538 |
) |
Net decrease in trading account assets |
|
|
41 |
|
|
|
241 |
|
Other operating activities, net |
|
|
182 |
|
|
|
(315 |
) |
|
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES |
|
|
289 |
|
|
|
(327 |
) |
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Proceeds from redemption of Visa Inc. shares |
|
|
165 |
|
|
|
|
|
Proceeds from sale of McDonald Investments branch network, net of retention payments |
|
|
|
|
|
|
199 |
|
Cash used in acquisitions, net of cash acquired |
|
|
(184 |
) |
|
|
|
|
Net decrease (increase) in short-term investments |
|
|
5 |
|
|
|
(918 |
) |
Purchases of securities available for sale |
|
|
(331 |
) |
|
|
(3,431 |
) |
Proceeds from sales of securities available for sale |
|
|
825 |
|
|
|
2,406 |
|
Proceeds from prepayments and maturities of securities available for sale |
|
|
354 |
|
|
|
1,100 |
|
Purchases of held-to-maturity securities |
|
|
(2 |
) |
|
|
|
|
Proceeds from prepayments and maturities of held-to-maturity securities |
|
|
|
|
|
|
3 |
|
Purchases of other investments |
|
|
(174 |
) |
|
|
(219 |
) |
Proceeds from sales of other investments |
|
|
84 |
|
|
|
107 |
|
Proceeds from prepayments and maturities of other investments |
|
|
37 |
|
|
|
36 |
|
Net increase in loans, excluding acquisitions, sales and transfers |
|
|
(1,163 |
) |
|
|
(62 |
) |
Purchases of loans |
|
|
(17 |
) |
|
|
(22 |
) |
Proceeds from loan securitizations and sales |
|
|
144 |
|
|
|
120 |
|
Purchases of premises and equipment |
|
|
(46 |
) |
|
|
(23 |
) |
Proceeds from sales of premises and equipment |
|
|
|
|
|
|
1 |
|
Proceeds from sales of other real estate owned |
|
|
2 |
|
|
|
29 |
|
|
NET CASH USED IN INVESTING ACTIVITIES |
|
|
(301 |
) |
|
|
(674 |
) |
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Net (decrease) increase in deposits |
|
|
(202 |
) |
|
|
654 |
|
Net (decrease) increase in short-term borrowings |
|
|
(1,610 |
) |
|
|
2,043 |
|
Net proceeds from issuance of long-term debt |
|
|
2,241 |
|
|
|
13 |
|
Payments on long-term debt |
|
|
(356 |
) |
|
|
(1,556 |
) |
Purchases of treasury shares |
|
|
|
|
|
|
(308 |
) |
Net proceeds from issuance of common stock |
|
|
3 |
|
|
|
79 |
|
Tax benefits in excess of recognized compensation cost for stock-based awards |
|
|
|
|
|
|
9 |
|
Cash dividends paid |
|
|
(148 |
) |
|
|
(145 |
) |
|
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES |
|
|
(72 |
) |
|
|
789 |
|
|
NET DECREASE IN CASH AND DUE FROM BANKS |
|
|
(84 |
) |
|
|
(212 |
) |
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD |
|
|
1,814 |
|
|
|
2,264 |
|
|
CASH AND DUE FROM BANKS AT END OF PERIOD |
|
$ |
1,730 |
|
|
$ |
2,052 |
|
|
|
|
|
|
|
|
|
Additional disclosures relative to cash flow: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
693 |
|
|
$ |
750 |
|
Income taxes paid |
|
|
15 |
|
|
|
15 |
|
Noncash items: |
|
|
|
|
|
|
|
|
Assets acquired |
|
$ |
2,810 |
|
|
|
|
|
Liabilities assumed |
|
|
2,648 |
|
|
|
|
|
Loans transferred to portfolio from held for sale |
|
|
3,284 |
|
|
|
|
|
Loans transferred to other real estate owned |
|
|
12 |
|
|
$ |
16 |
|
|
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:
w |
|
KeyCorp refers solely to the parent holding company. |
|
w |
|
KeyBank refers to KeyCorps subsidiary bank, KeyBank National Association. |
|
w |
|
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 21, 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
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 2007 Annual Report to Shareholders under the heading Loan
Securitizations on page 67.
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
2007 Annual Report to Shareholders.
Derivatives
Effective January 1, 2008, Key adopted the accounting guidance in FASB Staff Position FIN 39-1,
Amendment of FASB Interpretation 39, and as a result, also adopted the provisions of
Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts. As a result of
adopting this accounting guidance, Key changed its accounting policy pertaining to the recognition
of derivative assets and liabilities to take into account the impact of master netting agreements
that allow Key to settle all derivative contracts held with a single counterparty on a net basis
and to offset the net derivative position with the related cash collateral. Additional information
regarding Keys adoption of this accounting guidance is provided in Note 14 (Derivatives and
Hedging Activities), which begins on page 29, and under the heading Accounting Pronouncements
Adopted in 2008 on page 9 of this note.
7
Fair Value Measurements
Effective January 1, 2008, Key adopted SFAS No. 157, Fair Value Measurements, for all applicable
financial and nonfinancial assets and liabilities. This accounting guidance defines fair value,
establishes a framework for measuring fair value, and expands disclosures about fair value
measurements. SFAS No. 157 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.
As defined in SFAS No. 157, fair value is the price to sell an asset or transfer a liability in an
orderly transaction between market participants. It represents an exit price at the measurement
date. Market participants are buyers and sellers, who are independent, knowledgeable, and willing
and able to transact in the principal (or most advantageous) market for the asset or liability
being measured. Current market conditions, including imbalances between supply and demand, are
considered in determining fair value.
Key values its assets and liabilities in the principal market where it exchanges the particular
asset or transfers the liability with the greatest volume and level of activity. In the absence of
a principal market, the valuation is based on the most advantageous market for the asset or
liability (i.e., the market where the asset could be sold or the liability transferred at a price
that maximizes the amount to be received for the asset or minimizes the amount to be paid to
transfer the liability).
In measuring fair value, Key assumes the highest and best use of the asset by a market participant
to maximize the value of the asset and does not consider the intended use of the asset.
In-exchange is generally the valuation premise used to measure financial assets while in-use is
the valuation premise generally used to measure nonfinancial assets.
When fair valuing liabilities, Key assumes that the nonperformance risk associated with the
liability is the same before and after the transfer. Nonperformance risk is the risk that an
obligation will not be fulfilled and encompasses not only Keys own credit risk, but also other
risks such as settlement risk. Key considers the effect of its own credit risk (credit standing)
on the fair value for any period in which fair value is measured.
There are three acceptable valuation techniques that can be used to measure fair value: the market
approach, the income approach and the cost approach. Selection of the appropriate technique for
valuing a particular asset or liability takes into consideration the exit market, the nature of the
asset or liability being valued, and how a market participant would value the same asset or
liability. Ultimately, determination of the appropriate valuation method requires significant
judgment, and sufficient knowledge and expertise are required to apply the valuation techniques.
Valuation inputs refer to the assumptions market participants would use in pricing a given asset or
liability using one of the three valuation techniques. Inputs can be observable or unobservable.
Observable inputs are those assumptions which market participants would use in pricing the
particular asset or liability. These inputs are based on market data and are obtained from a
source independent of Key.
Unobservable inputs are assumptions based on Keys own information or estimate of what a market
participant would use in pricing the asset or liability. Unobservable inputs are based on the best
and most current information available on the measurement date.
All inputs, whether observable or unobservable, are ranked in accordance with a prescribed fair
value hierarchy which gives the highest ranking to quoted prices (unadjusted) in active markets for
identical assets or liabilities (Level 1) and the lowest ranking to unobservable inputs (Level 3).
Fair values for assets or liabilities classified as Level 2 are based on one or a combination of
the following factors: (i) quoted prices for similar assets; (ii) observable inputs for the asset
or liability, such as interest rates or yield curves; or (iii) inputs derived principally from or
corroborated by observable market data. The level in the fair value hierarchy within which the
fair value measurement in its entirety falls is determined based on the lowest level input that is
significant to the fair value measurement in its entirety. Key considers an input to be
significant if it drives 10% or more of the total fair value of a particular asset or liability.
8
Assets and liabilities are considered to be fair valued on a recurring basis if fair value is
measured regularly (i.e., daily, weekly, monthly or quarterly). Recurring valuation occurs at a
minimum on the measurement date.
Assets and liabilities are considered to be fair valued on a nonrecurring basis if the fair value
measurement of the instrument does not necessarily result in a change in the amount recorded on the
balance sheet. Generally, nonrecurring valuation is the result of the application of other
accounting pronouncements which require assets or liabilities to be assessed for impairment or
recorded at the lower of cost or fair value.
The fair value of assets or liabilities transferred in or out of Level 3 is measured on the
transfer date, with any additional changes in fair value subsequent to the transfer considered to
be realized or unrealized gains or losses.
Additional information regarding fair value measurements and Keys adoption of SFAS No. 157 is
provided in Note 15 (Fair Value Measurements), which begins on page 32, and under the heading
Accounting Pronouncements Adopted in 2008 below.
Accounting Pronouncements Adopted in 2008
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 is effective for fiscal years beginning after
November 15, 2007 (effective January 1, 2008, for Key). In February 2008, the FASB issued Staff
Position FAS 157-2, which delayed the effective date of SFAS No. 157 for all nonfinancial assets
and liabilities, except those recognized or disclosed at fair value in the financial statements on
a recurring basis (at least annually), to fiscal years beginning after November 15, 2008. However,
early adoption of SFAS No. 157 for nonfinancial assets and liabilities within the scope of the new
guidance is permitted. Keys January 1, 2008, adoption of SFAS No. 157 for all financial and
nonfinancial assets and liabilities did not have a material effect on Keys financial condition or
results of operations. Additional information regarding fair value measurements and Keys adoption
of this accounting guidance is provided in Note 15 and under the heading Fair Value Measurements
on page 8.
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 is effective for fiscal years beginning after November 15, 2007 (effective January 1,
2008, for Key). Key has elected to not apply this fair value option to any of its existing assets
or liabilities. However, Key may apply this guidance to assets or liabilities in the future as
permitted under SFAS No. 159.
Offsetting of amounts related to certain contracts. In April 2007, the FASB issued Staff Position
FIN 39-1, Amendment of FASB Interpretation 39, which supplements Interpretation No. 39 by
allowing reporting entities to offset fair value amounts recognized for the right to reclaim cash
collateral (a receivable) or the obligation to return cash (a payable) arising from derivative
instruments with the same counterparty. Interpretation No. 39 allowed reporting entities to offset
fair value amounts recognized for derivative instruments executed with the same counterparty under
a master netting agreement. Key did not previously adopt the provisions of Interpretation No. 39
that were permitted but not required. The accounting guidance in Staff Position FIN 39-1 is
effective for fiscal years beginning after November 15, 2007 (January 1, 2008, for Key). Key has
elected to adopt the accounting guidance in Staff Position FIN 39-1, and as a result, also adopted
the provisions of Interpretation No. 39. The adoption of this accounting guidance did not have a
material effect on Keys financial condition or results of operations. Additional information
regarding Keys adoption of this accounting guidance is provided in Note 14 and under the heading
Derivatives on page 7 of this note.
9
Accounting Pronouncements Pending Adoption at March 31, 2008
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 Pending Adoption at December 31, 2007 on page 71 of Keys 2007 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 (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.
Business combinations. In December 2007, the FASB issued SFAS No. 141(R), Business Combinations.
The new pronouncement requires the acquiring entity in a business combination to recognize only
the assets acquired and liabilities assumed in a transaction (e.g., acquisition costs must be
expensed when incurred), establishes the fair value at the date of acquisition as the initial
measurement for all assets acquired and liabilities assumed, and requires expanded disclosures.
SFAS No. 141(R) will be effective for fiscal years beginning after December 15, 2008 (January 1,
2009, for Key). Early adoption is prohibited.
Noncontrolling interests. In December 2007, the FASB issued SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements, an Amendment of ARB No. 51. The new pronouncement
requires all entities to report noncontrolling (minority) interests in subsidiaries as a component
of shareholders equity. SFAS No. 160 will be effective for fiscal years beginning after December
15, 2008 (January 1, 2009, for Key). Early adoption is prohibited. Management is evaluating the
potential effect this guidance may have on Keys financial condition and results of operations.
Accounting for transfers of financial assets and repurchase financing transactions.
In February 2008, the FASB issued Staff Position No. FAS 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions,
which provides guidance on accounting for a transfer of a financial asset and a repurchase financing. This accounting guidance presumes that an initial
transfer of a financial asset and a repurchase financing are considered part of the same arrangement (linked transaction) under
SFAS No. 140. However, if certain criteria are met, the initial transfer and repurchase financing shall be evaluated separately under SFAS No. 140.
Staff Position No. FAS 140-3 will be effective for financial statements issued for fiscal years beginning after November 15, 2008
(effective January 1, 2009, for Key), and for interim periods within those fiscal years. Early adoption is prohibited. Management
is evaluating the potential effect this guidance may have on Keys financial condition and results of operations.
Disclosures about derivative instruments and hedging activities.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities,
which amends and expands the disclosure requirements of SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. This accounting guidance will require qualitative disclosures about objectives and strategies for using
derivatives, quantitative disclosures about fair value amounts and gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in derivative agreements. SFAS No. 161 will be effective
for fiscal years beginning after November 15, 2008 (January 1, 2009, for Key).
10
2. Earnings Per Common Share
Keys basic and diluted earnings per common share are calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
dollars in millions, except per share amounts |
|
2008 |
|
|
2007 |
|
|
EARNINGS |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
218 |
|
|
$ |
358 |
|
Loss from discontinued operations, net of taxes |
|
|
|
|
|
|
(8 |
) |
Net income |
|
|
218 |
|
|
|
350 |
|
|
WEIGHTED-AVERAGE COMMON SHARES |
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding (000) |
|
|
399,121 |
|
|
|
397,875 |
|
Effect of dilutive common stock options and other stock awards (000) |
|
|
648 |
|
|
|
5,603 |
|
|
Weighted-average common shares and potential common shares outstanding (000) |
|
|
399,769 |
|
|
|
403,478 |
|
|
|
|
|
|
|
|
|
EARNINGS PER COMMON SHARE |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
.55 |
|
|
$ |
.90 |
|
Loss from discontinued operations |
|
|
|
|
|
|
(.02 |
) |
Net income |
|
|
.55 |
|
|
|
.88 |
|
|
Income from continuing operations assuming dilution |
|
$ |
.54 |
|
|
$ |
.89 |
|
Loss from discontinued operations assuming dilution |
|
|
|
|
|
|
(.02 |
) |
Net income assuming dilution |
|
|
.54 |
|
|
|
.87 |
|
|
3. Acquisitions and Divestitures
Acquisitions and divestitures completed by Key during 2007 and the first three months of 2008 are
summarized below. In the case of each acquisition, the terms of the transaction were not material.
Acquisitions
U.S.B. Holding Co., Inc.
On January 1, 2008, Key acquired U.S.B. Holding Co., Inc., the holding company for Union State
Bank, a 31-branch state-chartered commercial bank headquartered in Orangeburg, New York. U.S.B.
Holding Co. had assets of $2.8 billion and deposits of $1.8 billion at the date of acquisition.
Under the terms of the agreement, 9,895,000 KeyCorp common shares, with a value of $348 million,
and $194 million in cash were exchanged for all of the outstanding shares of U.S.B. Holding Co.
The acquisition expanded Keys presence in markets both within and contiguous to its current
operations in the Hudson Valley.
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.
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.
11
On November 29, 2006, Key sold the subprime 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.
Key has applied discontinued operations accounting to the Champion Mortgage finance business. The
results of this discontinued business are presented on one line as loss from discontinued
operations, net of taxes in the Consolidated Statements of Income on page 4. The components of
loss from discontinued operations are as follows:
|
|
|
|
|
Three months ended March 31, 2007 |
|
|
|
in millions |
|
|
|
|
Loss, net of taxes of ($3) |
|
$ |
(4 |
) |
Loss on disposal, net of taxes of ($1) |
|
|
(1 |
) |
Disposal transaction costs, net of taxes of ($1) a |
|
|
(3 |
) |
|
Loss from discontinued operations |
|
$ |
(8 |
) |
|
|
|
|
|
(a) Includes an after-tax charge of $.6 million for the three-month period ended March 31, 2007, determined by applying a matched funds transfer pricing methodology to the liabilities assumed necessary to support Champions operations.
The discontinued assets and liabilities of Champion Mortgage included in the Consolidated Balance
Sheets on page 3 are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
March 31, |
|
in millions |
|
2007 |
|
|
2007 |
|
|
Loans |
|
$ |
8 |
|
|
$ |
10 |
|
Accrued income and other assets |
|
|
|
|
|
|
3 |
|
|
Total assets |
|
$ |
8 |
|
|
$ |
13 |
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
$ |
1 |
|
Accrued expense and other liabilities |
|
$ |
10 |
|
|
|
14 |
|
|
Total liabilities |
|
$ |
10 |
|
|
$ |
15 |
|
|
|
|
|
|
|
|
|
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 McDonald Investments 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 the registered broker/dealer
through which its corporate and institutional investment banking and securities businesses operate.
The new name is KeyBanc Capital Markets Inc.
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 certain small businesses with deposit,
investment and credit products, and business advisory services.
Regional Banking also offers financial, estate and retirement planning, and asset management
services to assist high-net-worth clients with their banking, trust, portfolio management,
insurance, charitable giving and related needs.
Commercial Banking provides midsize businesses with products and services that include commercial
lending, cash management, equipment leasing, investment and employee benefit programs, succession
planning, access to capital markets, derivatives and foreign exchange.
National Banking
Real Estate Capital and Corporate Banking Services consists of two business units. Real Estate
Capital is a national business that provides construction and interim lending, permanent debt
placements and servicing, equity and investment banking, and other commercial banking products and
services to developers, brokers and owner-investors. This unit deals primarily with
nonowner-occupied properties (i.e., generally properties in which at least 50% of the debt service
is provided by rental income from nonaffiliated third parties). Particular emphasis has been
placed on providing clients with finance solutions through access to the capital markets.
Corporate Banking Services provides cash management, interest rate derivatives, and foreign
exchange products and services to clients throughout the Community Banking and National Banking
groups. Through its Public Sector and Financial Institutions businesses, Corporate Banking
Services provides a full array of commercial banking products and services to government and
not-for-profit entities, and to community banks.
Equipment Finance meets the equipment leasing needs of companies worldwide and provides equipment
manufacturers, distributors and resellers with financing options for their clients. Lease
financing receivables and related revenues are assigned to other lines of business (primarily
Institutional and Capital Markets, and Commercial Banking) if those businesses are principally
responsible for maintaining the relationship with the client.
Institutional and Capital Markets, through its KeyBanc Capital Markets unit, provides commercial
lending, treasury management, investment banking, derivatives and foreign exchange, equity and debt
underwriting and trading, and syndicated finance products and services to large corporations and
middle-market companies.
Through its Victory Capital Management unit, Institutional and Capital Markets also manages or
offers advice regarding investment portfolios for a national client base, including corporations,
labor unions, not-for-profit organizations, governments and individuals. These portfolios may be
managed in separate accounts, common funds or the Victory family of mutual funds.
Consumer Finance includes Indirect Lending and Commercial Floor Plan Lending.
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 tuition payments
for private schools.
Commercial Floor Plan Lending finances inventory for automobile, recreation and marine dealers.
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-month periods ended March 31, 2008 and 2007. 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
accounting the way management uses its judgment and experience to make reporting decisions.
Consequently, the line of business results Key reports may not be comparable with line of business
results presented by other companies.
The selected financial data are based on internal accounting policies designed to compile results
on a consistent basis and in a manner that reflects the underlying economics of the businesses.
According to Keys policies:
w |
|
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. |
|
w |
|
Indirect expenses, such as computer servicing costs and corporate
overhead, are allocated based on assumptions regarding the extent
to which each line actually uses the services. |
|
w |
|
Keys consolidated provision for loan losses is allocated among
the lines of business primarily based on their actual net
charge-offs, adjusted periodically for loan growth and changes in
risk profile. The amount of the consolidated provision is based
on the methodology that management uses to estimate Keys
consolidated allowance for loan losses. This methodology is
described in Note 1 (Summary of Significant Accounting Policies)
under the heading Allowance for Loan Losses on page 67 of Keys
2007 Annual Report to Shareholders. |
|
w |
|
Income taxes are allocated based on the statutory federal income
tax rate of 35% (adjusted for tax-exempt interest income, income
from corporate-owned life insurance, and tax credits associated
with investments in low-income housing projects) and a blended
state income tax rate (net of the federal income tax benefit) of
2.5%. |
|
w |
|
Capital is assigned based on managements assessment of economic
risk factors (primarily credit, operating and market risk)
directly attributable to each line. |
Developing and applying the methodologies that management uses to allocate items among Keys lines
of business is a dynamic process. Accordingly, financial results may be revised periodically to
reflect accounting enhancements, changes in the risk profile of a particular business or changes in
Keys organizational structure.
Effective January 1, 2008, Key moved the Public Sector, Bank Capital Markets and Global Treasury
Management units from the Institutional and Capital Markets line of business to the Real Estate
Capital and Corporate Banking Services (previously known as Real Estate Capital) line of business
within the National Banking group.
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
Community Banking |
|
|
National Banking |
|
dollars in millions |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
SUMMARY OF OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (TE) |
|
$ |
423 |
|
|
$ |
418 |
|
|
$ |
340 |
|
|
$ |
340 |
|
Noninterest income |
|
|
206 |
|
|
|
387 |
c |
|
|
101 |
|
|
|
259 |
d |
|
Total revenue (TE) a |
|
|
629 |
|
|
|
805 |
|
|
|
441 |
|
|
|
599 |
|
Provision for loan losses |
|
|
18 |
|
|
|
14 |
|
|
|
169 |
|
|
|
30 |
|
Depreciation and amortization expense |
|
|
36 |
|
|
|
35 |
|
|
|
74 |
|
|
|
70 |
|
Other noninterest expense |
|
|
394 |
|
|
|
431 |
|
|
|
235 |
|
|
|
247 |
|
|
Income (loss) from continuing operations before income
taxes (TE) |
|
|
181 |
|
|
|
325 |
|
|
|
(37 |
) |
|
|
252 |
|
Allocated income taxes and TE adjustments |
|
|
68 |
|
|
|
122 |
|
|
|
(14 |
) |
|
|
95 |
|
|
Income (loss) from continuing operations |
|
|
113 |
|
|
|
203 |
|
|
|
(23 |
) |
|
|
157 |
|
Loss from discontinued operations, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8 |
) |
|
Net income (loss) |
|
$ |
113 |
|
|
$ |
203 |
|
|
$ |
(23 |
) |
|
$ |
149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of consolidated income from continuing operations |
|
|
52 |
% |
|
|
57 |
% |
|
|
(11 |
)% |
|
|
44 |
% |
Percent of total segments income from continuing operations |
|
|
101 |
|
|
|
58 |
|
|
|
(21 |
) |
|
|
44 |
|
|
AVERAGE BALANCES b |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases |
|
$ |
28,255 |
|
|
$ |
26,456 |
|
|
$ |
44,021 |
|
|
$ |
38,839 |
|
Total assets a |
|
|
31,404 |
|
|
|
29,293 |
|
|
|
56,079 |
|
|
|
48,411 |
|
Deposits |
|
|
50,089 |
|
|
|
46,524 |
|
|
|
11,849 |
|
|
|
11,291 |
|
|
OTHER FINANCIAL DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan charge-offs |
|
$ |
30 |
|
|
$ |
19 |
|
|
$ |
91 |
|
|
$ |
25 |
|
Return on average allocated equity b |
|
|
15.15 |
% |
|
|
33.36 |
% |
|
|
(1.89 |
)% |
|
|
15.22 |
% |
Return on average allocated equity |
|
|
15.15 |
|
|
|
33.36 |
|
|
|
(1.89 |
) |
|
|
14.44 |
|
Average full-time equivalent employees |
|
|
8,779 |
|
|
|
9,529 |
|
|
|
3,727 |
|
|
|
4,157 |
|
|
|
|
(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 quarter 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 quarter of 2007 include a $26 million ($17 million
after tax) gain from the settlement of the residual value insurance litigation. |
|
(e) |
Other Segments results for the first quarter of 2007 include a $49 million ($31 million
after tax) loss from the repositioning of the securities portfolio. |
|
(f) |
Reconciling Items for the first quarter of 2008 include a $165 million ($103 million after
tax) gain from the partial redemption of Keys equity interest in Visa Inc. |
|
TE = Taxable Equivalent |
|
N/A = Not Applicable |
|
N/M = Not Meaningful |
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Segments |
|
|
Total Segments |
|
|
Reconciling Items |
|
|
Key |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
$ |
(26 |
) |
|
$ |
(27 |
) |
|
$ |
737 |
|
|
$ |
731 |
|
|
$ |
(33 |
) |
|
$ |
(31 |
) |
|
$ |
704 |
|
|
$ |
700 |
|
|
|
|
53 |
|
|
|
7 |
e |
|
|
360 |
|
|
|
653 |
|
|
|
168 |
f |
|
|
1 |
|
|
|
528 |
|
|
|
654 |
|
|
|
|
|
|
|
27 |
|
|
|
(20 |
) |
|
|
1,097 |
|
|
|
1,384 |
|
|
|
135 |
|
|
|
(30 |
) |
|
|
1,232 |
|
|
|
1,354 |
|
|
|
|
|
|
|
|
|
|
|
|
187 |
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
187 |
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
|
110 |
|
|
|
105 |
|
|
|
|
|
|
|
|
|
|
|
110 |
|
|
|
105 |
|
|
|
|
9 |
|
|
|
9 |
|
|
|
638 |
|
|
|
687 |
|
|
|
(16 |
) |
|
|
(8 |
) |
|
|
622 |
|
|
|
679 |
|
|
|
|
|
|
|
18 |
|
|
|
(29 |
) |
|
|
162 |
|
|
|
548 |
|
|
|
151 |
|
|
|
(22 |
) |
|
|
313 |
|
|
|
526 |
|
|
|
|
(4 |
) |
|
|
(21 |
) |
|
|
50 |
|
|
|
196 |
|
|
|
45 |
|
|
|
(28 |
) |
|
|
95 |
|
|
|
168 |
|
|
|
|
|
|
|
22 |
|
|
|
(8 |
) |
|
|
112 |
|
|
|
352 |
|
|
|
106 |
|
|
|
6 |
|
|
|
218 |
|
|
|
358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
$ |
22 |
|
|
$ |
(8 |
) |
|
$ |
112 |
|
|
$ |
344 |
|
|
$ |
106 |
|
|
$ |
6 |
|
|
$ |
218 |
|
|
$ |
350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
% |
|
|
(2 |
)% |
|
|
51 |
% |
|
|
99 |
% |
|
|
49 |
% |
|
|
1 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
20 |
|
|
|
(2 |
) |
|
|
100 |
|
|
|
100 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
238 |
|
|
$ |
279 |
|
|
$ |
72,514 |
|
|
$ |
65,574 |
|
|
$ |
174 |
|
|
$ |
95 |
|
|
$ |
72,688 |
|
|
$ |
65,669 |
|
|
|
|
14,201 |
|
|
|
12,290 |
|
|
|
101,684 |
|
|
|
89,994 |
|
|
|
1,672 |
|
|
|
2,102 |
|
|
|
103,356 |
|
|
|
92,096 |
|
|
|
|
4,801 |
|
|
|
2,148 |
|
|
|
66,739 |
|
|
|
59,963 |
|
|
|
(453 |
) |
|
|
(201 |
) |
|
|
66,286 |
|
|
|
59,762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
121 |
|
|
$ |
44 |
|
|
|
|
|
|
|
|
|
|
$ |
121 |
|
|
$ |
44 |
|
|
|
|
N/M |
|
|
|
N/M |
|
|
|
5.35 |
% |
|
|
20.10 |
% |
|
|
N/M |
|
|
|
N/M |
|
|
|
10.38 |
% |
|
|
19.06 |
% |
|
|
|
N/M |
|
|
|
N/M |
|
|
|
5.35 |
|
|
|
19.64 |
|
|
|
N/M |
|
|
|
N/M |
|
|
|
10.38 |
|
|
|
18.63 |
|
|
|
|
43 |
|
|
|
43 |
|
|
|
12,549 |
|
|
|
13,729 |
|
|
|
5,877 |
|
|
|
6,072 |
|
|
|
18,426 |
|
|
|
19,801 |
|
|
|
|
Supplementary information (Community Banking lines of business)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
Regional Banking |
|
|
Commercial Banking |
|
dollars in millions |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
Total revenue (TE) |
|
$ |
530 |
|
|
$ |
713 |
|
|
$ |
99 |
|
|
$ |
92 |
|
Provision for loan losses |
|
|
11 |
|
|
|
16 |
|
|
|
7 |
|
|
|
(2 |
) |
Noninterest expense |
|
|
386 |
|
|
|
417 |
|
|
|
44 |
|
|
|
49 |
|
Net income |
|
|
83 |
|
|
|
175 |
|
|
|
30 |
|
|
|
28 |
|
Average loans and leases |
|
|
19,653 |
|
|
|
18,499 |
|
|
|
8,602 |
|
|
|
7,957 |
|
Average deposits |
|
|
46,499 |
|
|
|
43,056 |
|
|
|
3,590 |
|
|
|
3,468 |
|
Net loan charge-offs |
|
|
29 |
|
|
|
18 |
|
|
|
1 |
|
|
|
1 |
|
Return on average allocated equity |
|
|
15.28 |
% |
|
|
40.63 |
% |
|
|
14.80 |
% |
|
|
15.75 |
% |
Average full-time equivalent employees |
|
|
8,430 |
|
|
|
9,156 |
|
|
|
349 |
|
|
|
373 |
|
|
Supplementary information (National Banking lines of business)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Capital and |
|
|
|
|
|
|
|
|
|
|
Institutional and |
|
|
|
|
Three months ended March 31, |
|
Corporate Banking Services |
|
|
Equipment Finance |
|
|
Capital Markets |
|
|
Consumer Finance |
|
dollars in millions |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
Total revenue (TE) |
|
$ |
79 |
|
|
$ |
191 |
|
|
$ |
100 |
|
|
$ |
134 |
|
|
$ |
158 |
|
|
$ |
158 |
|
|
$ |
104 |
|
|
$ |
116 |
|
Provision for loan losses |
|
|
45 |
|
|
|
1 |
|
|
|
24 |
|
|
|
13 |
|
|
|
16 |
|
|
|
___ |
|
|
|
84 |
|
|
|
16 |
|
Noninterest expense |
|
|
61 |
|
|
|
85 |
|
|
|
97 |
|
|
|
86 |
|
|
|
102 |
|
|
|
102 |
|
|
|
49 |
|
|
|
44 |
|
(Loss) income from continuing operations |
|
|
(17 |
) |
|
|
66 |
|
|
|
(13 |
) |
|
|
22 |
|
|
|
25 |
|
|
|
34 |
|
|
|
(18 |
) |
|
|
35 |
|
Net (loss) income |
|
|
(17 |
) |
|
|
66 |
|
|
|
(13 |
) |
|
|
22 |
|
|
|
25 |
|
|
|
34 |
|
|
|
(18 |
) |
|
|
27 |
|
Average loans and leases a |
|
|
16,358 |
|
|
|
13,636 |
|
|
|
10,595 |
|
|
|
10,479 |
|
|
|
7,631 |
|
|
|
6,550 |
|
|
|
9,437 |
|
|
|
8,174 |
|
Average loans held for sale a |
|
|
989 |
|
|
|
1,146 |
|
|
|
32 |
|
|
|
4 |
|
|
|
555 |
|
|
|
139 |
|
|
|
3,356 |
|
|
|
2,628 |
|
Average deposits a |
|
|
9,749 |
|
|
|
8,538 |
|
|
|
14 |
|
|
|
13 |
|
|
|
1,459 |
|
|
|
2,168 |
|
|
|
627 |
|
|
|
572 |
|
Net loan charge-offs (recoveries) |
|
|
38 |
|
|
|
1 |
|
|
|
24 |
|
|
|
13 |
|
|
|
2 |
|
|
|
1 |
|
|
|
27 |
|
|
|
10 |
|
Return on average allocated equity a |
|
|
(3.74 |
)% |
|
|
19.04 |
% |
|
|
(5.49 |
)% |
|
|
9.75 |
% |
|
|
8.37 |
% |
|
|
12.76 |
% |
|
|
(7.87 |
)% |
|
|
18.15 |
% |
Return on average allocated equity |
|
|
(3.74 |
) |
|
|
19.04 |
|
|
|
(5.49 |
) |
|
|
9.75 |
|
|
|
8.37 |
|
|
|
12.76 |
|
|
|
(7.87 |
) |
|
|
14.00 |
|
Average full-time equivalent employees |
|
|
1,235 |
|
|
|
1,278 |
|
|
|
872 |
|
|
|
891 |
|
|
|
905 |
|
|
|
925 |
|
|
|
715 |
|
|
|
1,063 |
|
|
|
|
|
(a) |
|
From continuing operations. |
|
TE = Taxable Equivalent |
16
5. Securities
Securities available for sale. These are securities that Key intends to hold for an indefinite
period of time but that may be sold in response to changes in interest rates, prepayment risk,
liquidity needs or other factors. Securities available for sale are reported at fair value.
Unrealized gains and losses (net of income taxes) deemed temporary are recorded in shareholders
equity as a component of accumulated other comprehensive income (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.
Held-to-maturity securities. These are debt securities that Key has the intent and ability to hold
until maturity. Debt securities are carried at cost, adjusted for amortization of premiums and
accretion of discounts using the interest method. This method produces a constant rate of return
on the adjusted carrying amount. Other securities held in the held-to-maturity portfolio are
primarily foreign bonds.
The amortized cost, unrealized gains and losses, and approximate fair value of Keys securities
available for sale and held-to-maturity securities are presented in the following tables. Gross
unrealized gains and losses 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.
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
in millions |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
SECURITIES AVAILABLE FOR SALE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury, agencies and
corporations |
|
$ |
18 |
|
|
|
|
|
|
|
|
|
|
$ |
18 |
|
States and political subdivisions |
|
|
92 |
|
|
$ |
1 |
|
|
|
|
|
|
|
93 |
|
Collateralized mortgage obligations |
|
|
6,355 |
|
|
|
170 |
|
|
$ |
8 |
|
|
|
6,517 |
|
Other mortgage-backed securities |
|
|
1,486 |
|
|
|
37 |
|
|
|
1 |
|
|
|
1,522 |
|
Retained interests in securitizations |
|
|
153 |
|
|
|
33 |
|
|
|
|
|
|
|
186 |
|
Other securities |
|
|
84 |
|
|
|
4 |
|
|
|
5 |
|
|
|
83 |
|
|
Total securities available for sale |
|
$ |
8,188 |
|
|
$ |
245 |
|
|
$ |
14 |
|
|
$ |
8,419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HELD-TO-MATURITY SECURITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions |
|
$ |
8 |
|
|
|
|
|
|
|
|
|
|
$ |
8 |
|
Other securities |
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
21 |
|
|
Total held-to-maturity securities |
|
$ |
29 |
|
|
|
|
|
|
|
|
|
|
$ |
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
in millions |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
SECURITIES AVAILABLE FOR SALE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury, agencies and
corporations |
|
$ |
19 |
|
|
|
|
|
|
|
|
|
|
$ |
19 |
|
States and political subdivisions |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
10 |
|
Collateralized mortgage obligations |
|
|
6,167 |
|
|
$ |
33 |
|
|
$ |
33 |
|
|
|
6,167 |
|
Other mortgage-backed securities |
|
|
1,393 |
|
|
|
13 |
|
|
|
3 |
|
|
|
1,403 |
|
Retained interests in securitizations |
|
|
149 |
|
|
|
36 |
|
|
|
|
|
|
|
185 |
|
Other securities |
|
|
72 |
|
|
|
8 |
|
|
|
4 |
|
|
|
76 |
|
|
Total securities available for sale |
|
$ |
7,810 |
|
|
$ |
90 |
|
|
$ |
40 |
|
|
$ |
7,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HELD-TO-MATURITY SECURITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions |
|
$ |
9 |
|
|
|
|
|
|
|
|
|
|
$ |
9 |
|
Other securities |
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
19 |
|
|
Total held-to-maturity securities |
|
$ |
28 |
|
|
|
|
|
|
|
|
|
|
$ |
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
in millions |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
SECURITIES AVAILABLE FOR SALE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury, agencies and
corporations |
|
$ |
13 |
|
|
|
|
|
|
|
|
|
|
$ |
13 |
|
States and political subdivisions |
|
|
12 |
|
|
$ |
1 |
|
|
|
|
|
|
|
13 |
|
Collateralized mortgage obligations |
|
|
6,519 |
|
|
|
29 |
|
|
$ |
43 |
|
|
|
6,505 |
|
Other mortgage-backed securities |
|
|
889 |
|
|
|
5 |
|
|
|
3 |
|
|
|
891 |
|
Retained interests in securitizations |
|
|
146 |
|
|
|
53 |
|
|
|
|
|
|
|
199 |
|
Other securities |
|
|
157 |
|
|
|
11 |
|
|
|
|
|
|
|
168 |
|
|
Total securities available for sale |
|
$ |
7,736 |
|
|
$ |
99 |
|
|
$ |
46 |
|
|
$ |
7,789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HELD-TO-MATURITY SECURITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions |
|
$ |
18 |
|
|
|
|
|
|
|
|
|
|
$ |
18 |
|
Other securities |
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
20 |
|
|
Total held-to-maturity securities |
|
$ |
38 |
|
|
|
|
|
|
|
|
|
|
$ |
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
6. Loans and Loans Held for Sale
Keys loans by category are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
in millions |
|
2008 |
|
|
2007 |
|
|
2007 |
|
|
Commercial, financial and agricultural |
|
$ |
25,777 |
|
|
$ |
24,797 |
|
|
$ |
21,476 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage |
|
|
10,479 |
|
|
|
9,630 |
|
|
|
8,519 |
|
Construction |
|
|
8,473 |
|
|
|
8,102 |
|
|
|
8,355 |
|
|
Total commercial real
estate loans |
|
|
18,952 |
|
|
|
17,732 |
|
|
|
16,874 |
|
Commercial lease financing |
|
|
10,000 |
|
|
|
10,176 |
|
|
|
10,036 |
|
|
Total commercial loans |
|
|
54,729 |
|
|
|
52,705 |
|
|
|
48,386 |
|
Real estate residential mortgage |
|
|
1,954 |
|
|
|
1,594 |
|
|
|
1,440 |
|
Home equity |
|
|
10,898 |
|
|
|
10,917 |
|
|
|
10,669 |
|
Consumer direct |
|
|
1,266 |
|
|
|
1,298 |
|
|
|
1,375 |
|
Consumer indirect: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
3,653 |
|
|
|
3,637 |
|
|
|
3,203 |
|
Education |
|
|
3,608 |
a |
|
|
331 |
|
|
|
336 |
|
Other |
|
|
336 |
|
|
|
341 |
|
|
|
302 |
|
|
Total consumer indirect
loans |
|
|
7,597 |
|
|
|
4,309 |
|
|
|
3,841 |
|
|
Total consumer loans |
|
|
21,715 |
|
|
|
18,118 |
|
|
|
17,325 |
|
|
Total loans |
|
$ |
76,444 |
|
|
$ |
70,823 |
|
|
$ |
65,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
On March 31, 2008, Key transferred $3.3 billion of education loans from loans held for sale to
the loan portfolio. |
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 2007 Annual Report to Shareholders.
Keys loans held for sale by category are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
in millions |
|
2008 |
|
|
2007 |
|
|
2007 |
|
|
Commercial, financial and agricultural |
|
$ |
291 |
|
|
$ |
250 |
|
|
$ |
68 |
|
Real estate commercial mortgage |
|
|
1,139 |
|
|
|
1,219 |
|
|
|
1,224 |
|
Real estate construction |
|
|
25 |
|
|
|
35 |
|
|
|
163 |
|
Commercial lease financing |
|
|
31 |
|
|
|
1 |
|
|
|
1 |
|
Real estate residential mortgage |
|
|
58 |
|
|
|
47 |
|
|
|
26 |
|
Home equity |
|
|
1 |
|
|
|
1 |
|
|
|
|
|
Education |
|
|
123 |
a |
|
|
3,176 |
|
|
|
2,681 |
|
Automobile |
|
|
6 |
|
|
|
7 |
|
|
|
12 |
|
|
Total loans held for sale |
|
$ |
1,674 |
|
|
$ |
4,736 |
|
|
$ |
4,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
On March 31, 2008, Key transferred $3.3 billion of education loans from loans held for sale to
the loan portfolio. |
19
Changes in the allowance for loan losses are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
in millions |
|
2008 |
|
|
2007 |
|
|
Balance at beginning of period |
|
$ |
1,200 |
|
|
$ |
944 |
|
Charge-offs |
|
|
(148 |
) |
|
|
(64 |
) |
Recoveries |
|
|
27 |
|
|
|
20 |
|
|
Net loans charged off |
|
|
(121 |
) |
|
|
(44 |
) |
Provision for loan losses from continuing operations |
|
|
187 |
|
|
|
44 |
|
Allowance related to loans acquired, net |
|
|
32 |
|
|
|
|
|
|
Balance at end of period |
|
$ |
1,298 |
|
|
$ |
944 |
|
|
|
|
|
|
|
|
|
Changes in the liability for credit losses on lending-related commitments are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
in millions |
|
2008 |
|
|
2007 |
|
|
Balance at beginning of period |
|
$ |
80 |
|
|
$ |
53 |
|
Credit for losses on lending-related commitments |
|
|
(27 |
) |
|
|
(8 |
) |
|
Balance at end of period a |
|
$ |
53 |
|
|
$ |
45 |
|
|
|
|
|
|
|
|
|
(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 but continues to service those
loans 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:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
in millions |
|
2008 |
|
|
2007 |
|
|
Balance at beginning of period |
|
$ |
313 |
|
|
$ |
247 |
|
Servicing retained from loan sales |
|
|
2 |
|
|
|
13 |
|
Purchases |
|
|
|
|
|
|
15 |
|
Amortization |
|
|
(28 |
) |
|
|
(18 |
) |
|
Balance at end of period |
|
$ |
287 |
|
|
$ |
257 |
|
|
|
|
|
|
|
|
|
Fair value at end of period |
|
$ |
425 |
|
|
$ |
336 |
|
|
|
|
|
|
|
|
|
The fair value of mortgage servicing assets is determined by calculating the present value of
future cash flows associated with servicing the loans. This calculation uses a number of
assumptions that are based on current market conditions. Primary economic assumptions used to
measure the fair value of Keys mortgage servicing assets at March 31, 2008, and 2007, are as
follows:
w |
|
prepayment speed generally at an annual rate of 0.00% to 25.00%; |
|
w |
|
expected credit losses at a static rate of 2.00%; and |
|
w |
|
residual cash flows discount rate of 8.50% to 15.00%. |
20
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
March 31, 2008, would cause a $9 million decrease in the fair value of Keys mortgage servicing
assets.
Contractual fee income from servicing commercial mortgage loans totaled $17 million and $16 million
for the three-month periods ended March 31, 2008 and 2007, respectively. The amortization of
servicing assets for each year, as shown in the preceding table, is recorded as a reduction to fee
income. Both the contractual fee income and the amortization are recorded in other income on the
income statement.
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 FASB 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 |
|
|
March 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Low-income housing
tax credit
(LIHTC) funds |
|
$ |
268 |
|
|
$ |
158 |
|
|
|
|
|
LIHTC investments |
|
|
N/A |
|
|
|
726 |
|
|
$ |
289 |
|
|
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 March 31, 2008, the settlement value of these
noncontrolling interests was estimated to be between $252 million and $298 million, while the
recorded value, including reserves, totaled $284 million.
Keys Principal Investing unit and the Real Estate Capital and Corporate Banking Services 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.
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 2007 Annual Report to Shareholders under the heading
Variable Interest Entities on page 82.
21
9. Nonperforming Assets and Past Due Loans
Impaired loans totaled $839 million at March 31, 2008, compared to $519 million at December 31,
2007, and $110 million at March 31, 2007. Impaired loans had an average balance of $679 million
for the first quarter of 2008 and $102 million for the first quarter of 2007.
Keys nonperforming assets and past due loans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
in millions |
|
2008 |
|
|
2007 |
|
|
2007 |
|
|
Impaired loans |
|
$ |
839 |
|
|
$ |
519 |
|
|
$ |
110 |
|
Other nonaccrual loans |
|
|
215 |
|
|
|
168 |
|
|
|
144 |
|
|
Total nonperforming loans |
|
|
1,054 |
|
|
|
687 |
|
|
|
254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans held for sale |
|
|
9 |
|
|
|
25 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned (OREO) |
|
|
29 |
|
|
|
21 |
|
|
|
42 |
|
Allowance for OREO losses |
|
|
(2 |
) |
|
|
(2 |
) |
|
|
(2 |
) |
|
OREO, net of allowance |
|
|
27 |
|
|
|
19 |
|
|
|
40 |
|
Other nonperforming assets a |
|
|
25 |
|
|
|
33 |
|
|
|
56 |
|
|
Total nonperforming assets |
|
$ |
1,115 |
|
|
$ |
764 |
|
|
$ |
353 |
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with a specifically allocated allowance |
|
$ |
789 |
|
|
$ |
426 |
|
|
$ |
46 |
|
Specifically allocated allowance for impaired loans |
|
|
177 |
|
|
|
126 |
|
|
|
22 |
|
|
Accruing loans past due 90
days or more |
|
$ |
283 |
|
|
$ |
231 |
|
|
$ |
146 |
|
Accruing loans past due 30
through 89 days |
|
|
1,169 |
|
|
|
843 |
|
|
|
626 |
|
|
|
|
(a) |
Primarily investments held by the Private Equity unit within Keys Real Estate Capital and
Corporate Banking Services line of business. |
At March 31, 2008, 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 67 of Keys
2007 Annual Report to Shareholders.
22
10. Capital Securities Issued by Unconsolidated Subsidiaries
KeyCorp owns the outstanding common stock of business trusts that issued corporation-obligated
mandatorily redeemable preferred capital securities. The trusts used the proceeds from the
issuance of their capital securities and common stock to buy debentures issued by KeyCorp. These
debentures are the trusts only assets; the interest payments from the debentures finance the
distributions paid on the capital securities.
The capital securities provide an attractive source of funds: they constitute Tier 1 capital for
regulatory reporting purposes, but have the same tax advantages as debt for federal income tax
purposes. During the first quarter of 2005, the 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 |
|
|
|
¨
|
|
the amounts due if a trust is liquidated or terminated. |
During the first three months of 2008, the KeyCorp Capital X trust issued $740 million of
securities. Additionally, KeyCorp obtained $80 million of capital securities in conjunction with
the January 1 acquisition of U.S.B. Holding Co., Inc. These securities are held by the Union State
Capital I, Union State Statutory II and Union State Statutory IV business trusts shown in the table
below.
The capital securities, common stock and related debentures are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal |
|
|
Interest Rate |
|
|
Maturity |
|
|
|
Capital |
|
|
|
|
|
|
Amount of |
|
|
of Capital |
|
|
of Capital |
|
|
|
Securities, |
|
|
Common |
|
|
Debentures, |
|
|
Securities and |
|
|
Securities and |
|
dollars in millions |
|
Net of Discount |
a |
|
Stock |
|
|
Net of Discount |
b |
|
Debentures |
c |
|
Debentures |
|
|
March 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KeyCorp Capital I |
|
$ |
197 |
|
|
$ |
8 |
|
|
$ |
201 |
|
|
|
5.469 |
% |
|
|
2028 |
|
KeyCorp Capital II |
|
|
190 |
|
|
|
8 |
|
|
|
179 |
|
|
|
6.875 |
|
|
|
2029 |
|
KeyCorp Capital III |
|
|
240 |
|
|
|
8 |
|
|
|
217 |
|
|
|
7.750 |
|
|
|
2029 |
|
KeyCorp Capital V |
|
|
173 |
|
|
|
5 |
|
|
|
195 |
|
|
|
5.875 |
|
|
|
2033 |
|
KeyCorp Capital VI |
|
|
77 |
|
|
|
2 |
|
|
|
83 |
|
|
|
6.125 |
|
|
|
2033 |
|
KeyCorp Capital VII |
|
|
250 |
|
|
|
8 |
|
|
|
279 |
|
|
|
5.700 |
|
|
|
2035 |
|
KeyCorp Capital VIII |
|
|
272 |
|
|
|
|
|
|
|
292 |
|
|
|
7.000 |
|
|
|
2066 |
|
KeyCorp Capital IX |
|
|
532 |
|
|
|
|
|
|
|
533 |
|
|
|
6.750 |
|
|
|
2066 |
|
KeyCorp Capital X |
|
|
772 |
|
|
|
|
|
|
|
740 |
|
|
|
8.000 |
|
|
|
2068 |
|
Union State Capital I |
|
|
21 |
|
|
|
1 |
|
|
|
29 |
|
|
|
9.580 |
|
|
|
2027 |
|
Union State Statutory II |
|
|
20 |
|
|
|
|
|
|
|
29 |
|
|
|
6.824 |
|
|
|
2031 |
|
Union State Statutory IV |
|
|
9 |
|
|
|
|
|
|
|
22 |
|
|
|
7.058 |
|
|
|
2034 |
|
|
Total |
|
$ |
2,753 |
|
|
$ |
40 |
|
|
$ |
2,799 |
|
|
|
6.985 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
$ |
1,848 |
|
|
$ |
39 |
|
|
$ |
1,896 |
|
|
|
6.599 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
$ |
1,804 |
|
|
$ |
39 |
|
|
$ |
1,845 |
|
|
|
6.611 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
March 31, 2008, December 31, 2007, and March 31, 2007, are basis adjustments of $170 million,
$55 million and $11 million, respectively, related to fair value hedges. See Note 19
(Derivatives and Hedging Activities), which begins on page 100 of Keys 2007 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 31, 2006 (for |
23
|
|
|
|
|
debentures owned by
Union State Statutory II); February 1, 2007 (for debentures owned by Union State Capital I);
July 21, 2008 (for debentures owned by Capital V); December 15, 2008 (for debentures owned by
Capital VI); April 7, 2009 (for debentures owned by Union State Statutory IV); June 15, 2010
(for debentures owned by Capital VII); June 15, 2011 (for debentures owned by Capital VIII);
December 15, 2011 (for debentures owned by Capital IX); and March 15, 2013 (for debentures
owned by Capital X); 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 Union State
Statutory IV, Capital I, Capital V, Capital VI, Capital VII, Capital VIII, Capital IX or
Capital X are redeemed before they mature, the redemption price will be the principal amount,
plus any accrued but unpaid interest. If the debentures purchased by Union State Capital I
are redeemed before they mature, the redemption price will be 104.31% of the principal amount,
plus any accrued but unpaid interest. If the debentures purchased by Union State Statutory II
are redeemed before they mature, the redemption price will be 106.00% of 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. Included in the
principal amount of debentures at March 31, 2008, December 31, 2007, and March 31, 2007, are
adjustments relating to hedging with financial instruments totaling $176 million, $64 million
and $13 million, respectively. |
|
(c) |
|
The interest rates for Capital II, Capital III, Capital V, Capital VI, Capital VII, Capital
VIII, Capital IX, Capital X and Union State Capital I are fixed. Capital I has a floating
interest rate equal to three-month LIBOR plus 74 basis points that reprices quarterly. Union
State Statutory II has a floating interest rate equal to three-month LIBOR plus 358 basis
points that reprices quarterly. Union State Statutory IV has a floating interest rate equal
to three-month LIBOR plus 280 basis points that reprices quarterly. The rates shown as the
totals at March 31, 2008, December 31, 2007, and March 31, 2007, are weighted-average rates. |
11. Employee Benefits
Pension Plans
The components of net pension cost and the amount recognized in comprehensive income for all funded
and unfunded plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
in millions |
|
2008 |
|
|
2007 |
|
|
Service cost of benefits earned |
|
$ |
13 |
|
|
$ |
14 |
|
Interest cost on projected benefit
obligation |
|
|
16 |
|
|
|
15 |
|
Expected return on plan assets |
|
|
(23 |
) |
|
|
(22 |
) |
Amortization of losses |
|
|
3 |
|
|
|
8 |
|
Curtailment gain |
|
|
|
|
|
|
(3 |
) |
|
Net pension cost |
|
$ |
9 |
|
|
$ |
12 |
|
|
|
|
|
|
|
|
|
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.
The components of net postretirement benefit cost and the amount recognized in comprehensive income
for all funded and unfunded plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
in millions |
|
2008 |
|
|
2007 |
|
|
Service cost of benefits earned |
|
|
|
|
|
$ |
1 |
|
Interest cost on accumulated
postretirement benefit obligation |
|
$ |
1 |
|
|
|
1 |
|
Expected return on plan assets |
|
|
(1 |
) |
|
|
(1 |
) |
|
Net postretirement benefit cost |
|
|
|
|
|
$ |
1 |
|
|
|
|
|
|
|
|
|
24
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 KEF leases the property rather than purchasing it. 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.
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. However, in subsequent years, 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 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 the 1995-1997 tax years. Key paid the final assessment and filed a refund
claim for the total amount. Key also has 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. Key and the Appeals Division of the IRS have ongoing discussions
regarding these transactions, as well as the LILOs entered into for the tax years 1995 through
1997. Management continues to believe that Keys treatment of these lease financing 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. The case proceeded to a
bench trial on January 21, 2008, and post-trial briefing was completed on March 25, 2008. The
parties are awaiting a decision.
Management believes Keys tax position is correct and well-supported by applicable statutes,
regulations and judicial authority, but litigation is inherently uncertain. Consequently,
management cannot predict the outcome of the AWG Leasing Litigation or Keys other disputes with
the IRS related to 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 at March 31, 2008, Key would owe interest on any
25
taxes, and possibly penalties.
In the event these matters do not come to a favorable resolution, management estimates that, at
March 31, 2008, the after-tax interest cost on any taxes due could reach $435 million, exclusive of
additional interest accrued during the first quarter of 2008 for LILO transactions as described
below. This amount would vary based upon the then applicable interest rates, and grow over the
period any tax assessments remain outstanding. Management has not established reserves 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 capital, as discussed
below.
During the first quarter of 2008, Key increased the amount of unrecognized tax benefits associated
with its LILO transactions by $46 million. This adjustment resulted from an updated assessment of
Keys tax position performed by management in accordance with the provisions of FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes. The adjustment reflects a change in the
projected timing of the recognition of certain LILO tax deductions. During the first quarter, Key
accrued associated interest charges of $27 million ($17 million after tax), which are included in
income taxes on the income statement.
The increase in unrecognized tax benefits associated with Keys LILO transactions necessitated a
recalculation of Keys lease income under FASB Staff Position No. 13-2, Accounting for a Change or
Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged
Lease Transaction. The recalculation resulted in a $21 million reduction to Keys earnings for
the first quarter of 2008, including a $3 million reduction to lease income and an $18 million
increase to the provision for income taxes.
An adverse outcome in the AWG Leasing Litigation, certain settlement scenarios or other factors,
including the outcomes in leveraged lease litigation involving taxpayers other than Key, 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 determine 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 required 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.
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 three months ended March
31, 2008, Key recognized $28 million of interest, of which $27 million was attributable to the
increase in unrecognized tax benefits associated with its LILO transactions. Keys liability for
accrued interest payable was $49 million at March 31, 2008.
Key files United States federal income tax returns, as well as returns in various state and foreign
jurisdictions. With the exception of the California and New York jurisdictions, Key is not subject
to 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.
26
13. Contingent Liabilities and Guarantees
Legal Proceedings
Tax disputes. In the ordinary course of business, Key enters into 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), which begins on page 25.
Honsador litigation. In November 2004, Key Principal Partners, LLC (KPP), a Key affiliate, was
sued in Hawaii state court in connection with KPPs investment in a Hawaiian business. On May 23,
2007, in the case of Honsador Holdings LLC v. KPP, the jury returned a verdict in favor of the
plaintiffs. On June 13, 2007, the state court entered a final judgment in favor of the plaintiffs
in the amount of $38.25 million. During the three months ended June 30, 2007, Key established a
$42 million reserve for the verdict, legal costs and other expenses associated with this lawsuit.
As previously reported, Key has filed a notice of appeal with the Intermediate Court of Appeals for
the State of Hawaii (the ICA), and the appeal is currently pending before the ICA.
Other litigation. In the ordinary course of business, Key is subject to other legal actions that
involve claims for substantial monetary relief. Based on information presently known to
management, management does not believe there is any legal action to which KeyCorp or any of its
subsidiaries is a party, or involving any of their properties, that, individually or in the
aggregate, would reasonably be expected to have a material adverse effect on Keys financial
condition.
Guarantees
Key is a guarantor in various agreements with third parties. The following table shows the types
of guarantees that Key had outstanding at March 31, 2008. 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 69 of Keys
2007 Annual Report to Shareholders.
|
|
|
|
|
|
|
|
|
|
|
Maximum Potential |
|
|
|
|
|
|
Undiscounted |
|
|
Liability |
|
in millions |
|
Future Payments |
|
|
Recorded |
|
|
Financial Guarantees: |
|
|
|
|
|
|
|
|
Standby letters of credit |
|
$ |
14,413 |
|
|
$ |
44 |
|
Recourse agreement with FNMA |
|
|
575 |
|
|
|
4 |
|
Return guarantee agreement with LIHTC investors |
|
|
298 |
|
|
|
56 |
|
Written interest rate caps a |
|
|
126 |
|
|
|
30 |
|
Default guarantees |
|
|
30 |
|
|
|
1 |
|
|
Total |
|
$ |
15,442 |
|
|
$ |
135 |
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
As of March 31, 2008, the weighted-average interest rate of written interest rate caps was 3.1%, and the weighted-average
strike rate was 5.6%. Maximum potential undiscounted future payments were calculated assuming
a 10% interest rate. |
Standby letters of credit. Many of Keys lines of business issue standby letters of credit to
address clients financing needs. These instruments obligate Key to pay a specified third party
when a client fails to repay an outstanding loan or debt instrument, or fails to perform some
contractual nonfinancial obligation. Any amounts drawn under standby letters of credit are treated
as loans: they bear interest (generally at variable rates) and pose the same credit risk to Key as
a loan. At March 31, 2008, Keys standby letters of credit had a remaining weighted-average life
of approximately 2.4 years, with remaining actual lives ranging from less than one year to as many
as eleven years.
27
Recourse agreement with Federal National Mortgage Association. KeyBank participates as a lender in
the Federal National Mortgage Association (FNMA) Delegated Underwriting and Servicing program.
As a condition to FNMAs delegation of responsibility for originating, underwriting and servicing
mortgages, KeyBank has agreed to assume a limited portion of the risk of loss during the remaining
term on each commercial mortgage loan KeyBank sells to FNMA. Accordingly, KeyBank maintains a
reserve for such potential losses in an amount estimated by management to approximate the fair
value of KeyBanks liability. At March 31, 2008, the outstanding commercial mortgage loans in this
program had a weighted-average remaining term of 7.6 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 KeyBank may be required
to make under this program is equal to approximately one-third of the principal balance of loans
outstanding at March 31, 2008. If KeyBank is required to make a payment it 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 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.
Additional information regarding these partnerships is included in Note 8 (Variable Interest
Entities) on page 21.
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 27, KAHC maintained a reserve in the amount of $56 million at March
31, 2008, 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.
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 March 31, 2008, these caps had a weighted-average life of
approximately 2.0 years.
Key is obligated to pay the client if the applicable benchmark interest rate exceeds a specified
level (known as the strike rate). These instruments are accounted for as derivatives. Key
mitigates its potential future payments by entering into offsetting positions with third parties.
Default guarantees. Some lines of business provide or participate in guarantees that obligate Key
to perform if the debtor fails to satisfy all of its payment obligations to third parties. Key
generally undertakes these guarantees to support or protect its underlying investment or where the
risk profile of the debtor should provide an investment return. The terms of these default
guarantees range from less than one year to as many as fifteen years. Although no collateral is
held, Key would have recourse against the debtor for any payments made under a default guarantee.
28
Other Off-Balance Sheet Risk
Other off-balance sheet risk stems from financial instruments that do not meet the definition of a
guarantee as specified in Interpretation No. 45 and from other relationships.
Significant liquidity facilities that support asset-backed commercial paper conduits. Key provides
liquidity facilities to several unconsolidated third-party commercial paper conduits. These
facilities obligate Key to provide funding if there is a disruption in credit markets or other
factors exist that preclude the issuance of commercial paper by the conduits. The liquidity
facilities, all of which expire by November 10, 2010, obligate Key to provide aggregate funding of
up to $805 million, with individual facilities ranging from $10 million to $125 million. The
aggregate amount available to be drawn is based on the amount of current commitments to borrowers
and totaled $653 million at March 31, 2008. Keys commitments to provide liquidity are
periodically evaluated by management.
Indemnifications provided in the ordinary course of business. Key provides certain
indemnifications primarily through representations and warranties in contracts that are entered
into in the ordinary course of business in connection with loan sales and other ongoing activities,
as well as in connection with purchases and sales of businesses. Key maintains reserves, when
appropriate, with respect to liability it reasonably expects to incur in connection with these
indemnities.
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.
Derivatives instruments are contracts between two or more parties. They have a notional amount and
underlying variable, require no net investment and allow for the net settlement of positions. The
notional amount serves as the basis for the payment provision of the contract and takes the form of
units, such as shares or dollars. The underlying variable represents a specified interest rate,
index or other component. The interaction between the notional amount and the underlying variable
determines the number of units to be exchanged between the parties and drives the market value of
the derivative contract.
The primary derivatives that Key uses are interest rate swaps, caps and futures, credit derivatives
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.
Derivative assets and liabilities are recorded at fair value on the balance sheet, after taking
into account the effects of master netting agreements. These agreements allow Key to settle all
derivative contracts held with a single counterparty on a net basis, and to offset net derivative
positions with the related cash collateral. As a result, Key could have derivative contracts with
negative fair values included in derivative assets on the balance sheet and contracts with positive
fair values included in derivative liabilities. As indicated below, at March 31, 2008, some of
Keys hedging derivative contracts with positive fair values were included in derivative
liabilities.
At March 31, 2008, Key had $622 million of derivative assets and a $138 million debit balance in
derivative liabilities that relate to contracts entered into for hedging purposes. As of the same
date, Key had trading derivative assets of $886 million and trading derivative liabilities of $603
million.
29
Counterparty Credit Risk
The following table summarizes the fair value of Keys derivative assets by type. These assets
represent Keys exposure to potential loss after taking into account the effects of master netting
agreements and other means used to mitigate risk.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
in millions |
|
2008 |
|
|
2007 |
|
|
2007 |
|
|
Interest rate |
|
$ |
1,513 |
|
|
$ |
850 |
|
|
$ |
469 |
|
Foreign exchange |
|
|
255 |
|
|
|
492 |
|
|
|
74 |
|
Energy |
|
|
196 |
|
|
|
52 |
|
|
|
12 |
|
Credit |
|
|
5 |
|
|
|
13 |
|
|
|
2 |
|
Equity |
|
|
25 |
|
|
|
34 |
|
|
|
44 |
|
|
Derivative assets before
cash collateral |
|
|
1,994 |
|
|
|
1,441 |
|
|
|
601 |
|
Less: Related cash collateral |
|
|
486 |
|
|
|
562 |
|
|
|
188 |
|
|
Total derivative assets |
|
$ |
1,508 |
|
|
$ |
879 |
|
|
$ |
413 |
|
|
|
|
|
|
|
|
|
|
|
|
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, 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 agreements. 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 securities issued
by the U.S. Treasury, government sponsored enterprises or the Government National Mortgage
Association. The cash collateral netted against derivative assets on the balance sheet was $486
million at March 31, 2008, $562 million at December 31, 2007, and $188 million at March 31, 2007.
The cash collateral netted against derivative liabilities was $309 million at March 31, 2008, $254
million at December 31, 2007, and $102 million at March 31, 2007.
At March 31, 2008, Key was party to derivative contracts with 54 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 loss associated with contracts entered into to accommodate clients. Key had aggregate
exposure of $791 million on these instruments to 32 of the 54 counterparties. However, at March
31, 2008, Key held approximately $790 million in pooled collateral to mitigate that exposure,
resulting in net exposure of $1 million. The largest exposure to an individual counterparty was
approximately $308 million, which is secured with approximately $265 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 2007 Annual
Report to Shareholders.
30
The change in accumulated other comprehensive income (loss) resulting from cash flow hedges is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification |
|
|
|
|
|
|
December 31, |
|
|
2008 |
|
|
of Gains to |
|
|
March 31, |
|
in millions |
|
2007 |
|
|
Hedging Activity |
|
|
Net Income |
|
|
2008 |
|
|
Accumulated other comprehensive income
(loss) resulting from cash flow hedges |
|
$ |
103 |
|
|
$ |
139 |
|
|
$ |
(1 |
) |
|
$ |
241 |
|
|
Key reclassifies gains and losses from accumulated other comprehensive income (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. If interest rates, yield
curves and notional amounts remain at current levels, management expects to reclassify an estimated
$15 million of net gains on derivative instruments from accumulated other comprehensive income
(loss) to earnings during the next twelve months. The maximum length of time over which
forecasted transactions are hedged is 20 years.
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 March 31, 2008, 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
March 31, 2008, the notional amount of credit default swaps sold by Key was $200 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.
Trading Portfolio
Keys trading portfolio includes:
w |
|
interest rate swap contracts entered into to accommodate the needs of clients; |
|
w |
|
positions with third parties that are intended to offset or mitigate the interest rate risk of client positions; |
|
w |
|
foreign exchange forward contracts entered into to accommodate the needs of clients; and |
|
w |
|
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 $14 million at March 31, 2008, 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 2007 Annual
Report to Shareholders.
31
15. Fair Value Measurements
Effective January 1, 2008, Key adopted SFAS No. 157, Fair Value Measurements, for all applicable
financial and nonfinancial assets and liabilities. This accounting guidance defines fair value,
establishes a framework for measuring fair value, and expands disclosures about fair value
measurements. SFAS No. 157 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. Additional information pertaining to Keys accounting policy for fair value
measurements is summarized in Note 1 (Basis of Presentation) under the heading Fair Value
Measurements on page 8.
Fair Value Determination
As defined in SFAS No. 157, fair value is the price to sell an asset or transfer a liability in an
orderly transaction between market participants in Keys principal market. Key has established and
documented its process for determining the fair values of its assets and liabilities, where
applicable. Fair value is based on quoted market prices, when available, for identical or similar
assets or liabilities. In the absence of quoted market prices, management determines the fair
value of Keys assets and liabilities using valuation models or third-party pricing services, both
of which rely on market-based parameters when available, such as interest rate yield curves, option
volatilities and credit spreads, or unobservable inputs. Unobservable inputs may be based on
managements judgment, assumptions and estimates related to credit quality, liquidity, interest
rates and other relevant inputs.
Valuation adjustments, such as those pertaining to counterparty and Keys own credit quality and
liquidity, may be necessary to ensure that assets and liabilities are recorded at fair value.
Credit valuation adjustments are made when market pricing is not indicative of the counterpartys
credit quality. Most classes of derivative contracts are valued using internally-developed models
based on market-standard derivative pricing conventions, which rely primarily on observable market
inputs, such as interest rate yield curves and volatilities. Market convention implies a credit
rating of AA equivalent in the pricing of derivative contracts, which assumes all counterparties
have the same creditworthiness. In determining the fair value of derivatives, management applies
cash collateral and/or a default reserve to reflect the credit quality of the counterparty.
Liquidity valuation adjustments are made when management is unable to observe recent market
transactions for identical or similar instruments. Management adjusts the fair value to reflect
the uncertainty in the pricing and trading of the instrument. Liquidity valuation adjustments are
based on the following factors:
w |
|
the amount of time since the last relevant valuation; |
|
w |
|
whether there is an actual trade or relevant external quote available at the measurement date; and |
|
w |
|
volatility associated with the primary pricing components. |
Key has various controls in place to ensure that fair value measurements are accurate and
appropriate. These controls include:
w |
|
an independent review and approval of valuation models; |
|
w |
|
a detailed review of profit and loss conducted on a regular basis; and |
|
w |
|
validation of valuation model components against benchmark data and similar products, where possible. |
Any changes to valuation methodologies are reviewed by management to ensure they are relevant and
justified. Valuation methodologies are refined as more market-based data becomes available.
32
Fair Value Hierarchy
SFAS No. 157 establishes a three-level valuation hierarchy for determining fair value that is based
on the transparency of the inputs used in the valuation process. The inputs used in determining
fair value in each of the three levels of the hierarchy are as follows:
w |
|
Level 1. Quoted prices (unadjusted) in active markets for identical assets or liabilities. |
|
w |
|
Level 2. Either: (i) quoted market prices for similar assets or liabilities; (ii) observable inputs, such as interest
rates or yield curves; or (iii) inputs derived principally from or corroborated by observable market data. |
|
w |
|
Level 3. Unobservable inputs. |
The hierarchy gives the highest ranking to Level 1 inputs and the lowest ranking to Level 3 inputs.
The level in the fair value hierarchy within which the fair value measurement in its entirety
falls is determined based on the lowest level input that is significant to the overall fair value
measurement.
Qualitative Disclosures of Valuation Techniques
Loans. Loans recorded as trading account assets are valued based on market spreads for identical
or similar assets. Generally, these loans are classified as Level 2 since the fair value recorded
is based on observable market data. Key corroborates these inputs periodically through a pricing
service, which obtains data about actual transactions in the marketplace for identical or similar
assets.
Securities (trading and available for sale). Where quoted prices are available in an active
market, securities are classified as Level 1. Level 1 instruments include highly liquid government
bonds, securities issued by the U.S. Treasury and exchange-traded equity securities. If quoted
prices are not available, management determines fair value using pricing models, quoted prices of
similar securities or discounted cash flows. These instruments include assets such as municipal
bonds and certain agency collateralized mortgage obligations and are classified as Level 2. In
certain cases where there is limited activity in the market for a particular instrument,
assumptions must be made to determine fair value. Such instruments include certain mortgage-backed
securities and restricted stock, and are classified as Level 3.
Private equity and mezzanine investments. Valuations of private equity and mezzanine investments,
held primarily within Keys Real Estate Capital and Corporate Banking Services line of business,
are based primarily on managements judgment due to the lack of readily determinable fair values,
inherent illiquidity and the long-term nature of these assets. These investments are initially
valued based upon the transaction price. The carrying amount is then adjusted upward or downward
based upon the estimated future cash flows associated with the investments. Factors used in
determining future cash flows include, but are not limited to, the cost of build-out, future
selling prices, current market outlook and operating performance of the particular investment. The
valuation of private equity and mezzanine investments is classified as Level 3.
Principal investments. Valuations of principal investments, made by KPP, are based on the
underlying investments of the fund. In the case of equity securities where readily available
market quotes exist, those market quotes are utilized, and the related investments are classified
as Level 1. Most of KPPs investments are in private companies without readily available market
data. For these investments, the inputs are classified as Level 3 and are used in valuation
methodologies such as discounted cash flows, price/earnings ratios, and multiples of earnings
before interest, tax, depreciation and amortization.
33
Derivatives. Exchange-traded derivatives are valued using quoted prices and, therefore, are
classified as Level 1. Only a few types of derivatives are exchange-traded; thus, the majority of
Keys derivative positions are valued using internally-developed models that use observable market
inputs. These derivative contracts are classified as Level 2 and include interest rate swaps,
options and credit default swaps. Market convention implies a credit rating of AA equivalent in
the pricing of derivative contracts, which assumes all counterparties have the same
creditworthiness. In order to reflect the actual exposure on Keys derivative contracts related to
both counterparty and Keys own creditworthiness, management records a fair value adjustment in the
form of a reserve. The credit component is valued on a counterparty-by-counterparty basis and
considers master netting agreements and collateral.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities are considered to be fair valued on a recurring basis if fair value is
measured regularly (i.e., daily, weekly, monthly or quarterly). The following table shows Keys
assets and liabilities measured at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Netting |
|
|
|
|
in millions |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Adjustments |
a |
|
Total |
|
|
ASSETS MEASURED ON A RECURRING BASIS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading account assets |
|
$ |
16 |
|
|
$ |
701 |
|
|
$ |
298 |
|
|
|
|
|
|
$ |
1,015 |
|
Securities available for sale |
|
|
66 |
|
|
|
8,162 |
|
|
|
3 |
|
|
|
|
|
|
|
8,231 |
|
Other investments |
|
|
51 |
|
|
|
241 |
|
|
|
1,173 |
|
|
|
|
|
|
|
1,465 |
|
Derivative assets |
|
|
349 |
|
|
|
3,298 |
|
|
|
9 |
|
|
$ |
(2,148 |
) |
|
|
1,508 |
|
Accrued income and other assets |
|
|
11 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
22 |
|
|
Total assets on a recurring basis at fair value |
|
$ |
493 |
|
|
$ |
12,413 |
|
|
$ |
1,483 |
|
|
$ |
(2,148 |
) |
|
$ |
12,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES MEASURED ON A RECURRING BASIS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank notes and other short-term borrowings |
|
$ |
21 |
|
|
$ |
215 |
|
|
|
|
|
|
|
|
|
|
$ |
236 |
|
Derivative liabilities |
|
|
356 |
|
|
|
2,079 |
|
|
$ |
1 |
|
|
$ |
(1,971 |
) |
|
|
465 |
|
|
Total liabilities on a recurring basis at fair value |
|
$ |
377 |
|
|
$ |
2,294 |
|
|
$ |
1 |
|
|
$ |
(1,971 |
) |
|
$ |
701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Netting adjustments represent the amounts recorded to convert Keys derivative assets and
liabilities from a gross basis to a net basis in conjunction with Keys January 1, 2008,
adoption of FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts,
and FASB Staff Position FIN 39-1, Amendment of FASB Interpretation 39. The net basis takes
into account the impact of master netting agreements which allow Key to settle all derivative
contracts with a single counterparty
on a net basis and to offset the net derivative position with the related cash collateral. |
Changes in Level 3 Fair Value Measurements
The following table shows the change in the fair values of Keys Level 3 financial instruments for
the three months ended March 31, 2008. Classification in Level 3 is based on the significance of
unobservable inputs relative to the overall fair value measurement of the instrument. In addition
to unobservable inputs, Level 3 instruments also may have inputs that are observable within the
market. Management mitigates the credit risk, interest rate risk and risk of loss related to many
of these Level 3 instruments through the use of securities and derivative positions classified as
Level 1 or Level 2. Level 1 or Level 2 instruments are not included in the following table;
therefore, the gains or losses shown do not include the impact of Keys risk management activities
related to these Level 3 instruments.
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31, 2008 |
|
|
|
Trading |
|
|
Securities |
|
|
|
|
|
|
|
|
|
Account |
|
|
Available |
|
|
Other |
|
|
Derivative |
|
in millions |
|
Assets |
|
|
for Sale |
|
|
Investments |
|
|
Instruments |
a |
|
Balance at beginning of period |
|
$ |
338 |
|
|
$ |
4 |
|
|
$ |
1,161 |
|
|
$ |
6 |
|
Gains (losses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings |
|
|
(35 |
) b |
|
|
1 |
c |
|
|
16 |
d |
|
|
2 |
b |
Included in other comprehensive income |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
Purchases, sales, issuances and settlements |
|
|
(5 |
) |
|
|
(1 |
) |
|
|
(4 |
) |
|
|
|
|
|
Balance at end of period |
|
$ |
298 |
|
|
$ |
3 |
|
|
$ |
1,173 |
|
|
$ |
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) included in earnings |
|
$ |
(32 |
) b |
|
|
|
|
|
$ |
(6 |
) d |
|
$ |
2 |
b |
|
|
|
|
(a) |
|
Amount represents Level 3 derivative assets less Level 3 derivative liabilities. |
|
(b) |
|
Realized and unrealized gains and losses on trading account assets and derivative
instruments are reported in
investment banking and capital markets income on the income statement. |
|
(c) |
|
Realized gains and losses on securities available for sale are reported in net securities
(losses) gains on the income
statement. |
|
(d) |
|
Other investments consist of principal investments, and private equity and mezzanine
investments. Realized and
unrealized gains and losses on principal investments are reported in net gains from
principal investments on the
income statement. Realized and unrealized gains and losses on private equity and
mezzanine investments are
reported in investment banking and capital markets income on the income statement. |
Assets Measured at Fair Value on a Nonrecurring Basis
Assets and liabilities are considered to be fair valued on a nonrecurring basis if the fair value
measurement of the instrument does not necessarily result in a change in the amount recorded on the
balance sheet. Generally, nonrecurring valuation is the result of the application of other
accounting pronouncements which require assets or liabilities to be assessed for impairment or
recorded at the lower of cost or fair value. The following table presents Keys assets measured at
fair value on a nonrecurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
in millions |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
ASSETS MEASURED ON A NONRECURRING BASIS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale |
|
|
|
|
|
|
|
|
|
$ |
866 |
|
|
$ |
866 |
|
Accrued income and other assets |
|
|
|
|
|
$ |
5 |
|
|
|
30 |
|
|
|
35 |
|
|
Total assets on a
nonrecurring basis at fair
value |
|
|
|
|
|
$ |
5 |
|
|
$ |
896 |
|
|
$ |
901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the first quarter of 2008, Key recorded a $79 million write-down of its commercial loans
held for sale as a result of secondary market illiquidity and the absence of market data. As Keys
traditional exit markets for these loans have become less active, Key has begun to look for other
means of exiting and valuing these loans. In the absence of market data, Key has begun to employ
other valuation methodologies, including the use of third-party broker quotes, where available, and
the application of liquidity adjustments to existing market data. The valuation methodologies
employed are based primarily on Level 3 inputs.
Other real estate owned and other repossessed properties are valued based on appraisals and
third-party price opinions, less estimated selling costs. Assets that are acquired through, or in
lieu of, loan foreclosures are recorded as held for sale initially at the lower of the loan balance
or fair value upon the date of foreclosure. Subsequent to foreclosure, valuations are updated
periodically, and the assets may be marked down further, reflecting a new cost basis. These
assets, which totaled $35 million at March 31, 2008, are considered to be nonrecurring items in the
fair value hierarchy.
35
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 March 31, 2008 and 2007, and the related condensed consolidated statements of income, changes in
shareholders equity and cash flows for the three-month periods then ended. 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, 2007, 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 22, 2008, 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, 2007, 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
May 5, 2008
36
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 first three months of 2008 and 2007. Some tables may include additional
periods to comply with disclosure requirements or to illustrate trends in greater depth. When you
read this discussion, you should also refer to the consolidated financial statements and related
notes that appear on pages 3 through 35. A description of Keys business is included under the
heading Description of Business on page 14 of Keys 2007 Annual Report to Shareholders. This
description does not reflect the reorganization within some of Keys lines of business that took
effect January 1, 2008. 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 so you can better understand the discussion that follows.
w |
|
KeyCorp refers solely to the parent holding company. |
|
w |
|
KeyBank refers to KeyCorps subsidiary bank, KeyBank National Association. |
|
w |
|
Key refers to the consolidated entity consisting of KeyCorp and its subsidiaries. |
|
w |
|
In November 2006, Key sold the subprime mortgage loan portfolio held by the Champion Mortgage finance business and
announced a separate agreement to sell Champions 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. |
|
w |
|
Key engages in capital markets activities primarily through business conducted by the National Banking group. These
activities encompass a variety of products and services. Among other things, Key trades securities as a dealer, enters
into derivative contracts (both to accommodate clients financing needs and for proprietary trading purposes), and
conducts transactions in foreign currencies (both to accommodate clients needs and to benefit from fluctuations in
exchange rates). |
|
w |
|
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. |
|
w |
|
For regulatory purposes, capital is divided into two classes. Federal regulations prescribe that at least one-half of
a bank or bank holding companys total risk-based capital must qualify as Tier 1. Both total and Tier 1 capital serve
as bases for several measures of capital adequacy, which is an important indicator of financial stability and
condition. You will find a more detailed explanation of total and Tier 1 capital and how they are calculated in the
section entitled Capital, which begins on page 66. |
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 Keys long-term goals, financial
condition, results of operations, earnings, levels of net loan charge-offs and nonperforming
assets, interest rate exposure and profitability. These statements usually can be identified by the
use of forward-looking language such as 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.
37
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:
w |
|
Interest rates could change more quickly or more significantly than management expects, which may have an adverse
effect on Keys financial results. |
|
w |
|
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. |
|
w |
|
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. |
|
w |
|
Recent problems in the housing markets and related conditions in the financial markets, or other issues, such as the
high price of oil or other commodities, could cause further 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. |
|
w |
|
Increasing interest rates or further weakening economic conditions could constrain borrowers ability to repay
outstanding loans or diminish the value of the collateral securing those loans. Additionally, the allowance for loan
losses may be insufficient if the estimates and judgments management used to establish that allowance prove to be
inaccurate. |
|
w |
|
Increased competitive pressure among financial services companies may adversely affect Keys ability to market its
products and services. |
|
w |
|
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. |
|
w |
|
Acquisitions and dispositions of assets, business units or affiliates could adversely affect Key in ways that
management has not anticipated. |
|
w |
|
Key may experience operational or risk management failures due to technological or other factors. |
|
w |
|
Changes in accounting principles, or in tax laws, rules and regulations could have an adverse effect on Keys financial
results or its capital. |
|
w |
|
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. |
|
w |
|
Key may become subject to new or heightened regulatory practices, requirements or expectations which may impede its
profitability. |
|
w |
|
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. |
38
Long-term goals
Keys long-term financial goals are to grow its earnings per common share and achieve a return on
average equity, each at or above the respective median of its peer group. The strategy for
achieving these goals is described under the heading Corporate Strategy on page 16 of Keys 2007
Annual Report to Shareholders.
Key occasionally uses capital that is not needed to meet 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 399.8 million shares for the first three months of 2008 from 403.5 million shares for
the same period last year. Reducing the share count can foster both earnings per share growth and
improved returns on average equity, but Keys share repurchase activity has never been significant
enough to have a material effect on either of these profitability measures.
Economic overview
Real estate values and home sales continued to decline during the first quarter of 2008. March new
home sales were down 37% and existing home sales were down 19% from the respective sales levels
reported for the same month last year, while the median price of existing homes fell by more than
7%. The decline in home sales has caused builders to slow construction, as housing starts were
down 36% from March 2007, and the volume of building permits hit a seventeen-year low.
Additionally, home foreclosure filings rose by 57%, as adjustable-rate mortgages reset to higher
monthly payments and property owners have found it difficult to sell their homes or refinance their
mortgages.
Continued concern over mortgage defaults and declining real estate prices caused disruptions in the
secondary mortgage markets and further diminished asset values on the balance sheets of financial
institutions. These distressed valuations strained already depleted capital levels at banks.
Additionally, some institutions that had large amounts of funding tied to the value of those
mortgage assets found themselves under extreme liquidity pressures. The Federal Reserve took
unprecedented actions to preserve the stability of the financial markets as liquidity pressures and
credit availability worsened. In response to these conditions, the Federal Reserve lowered the
federal funds target rate to 2.25% from 4.25% during the first quarter of 2008, including an
emergency inter-meeting reduction of 75 basis points in January. The Federal Reserve also
broadened the types of collateral it accepts for loans and created a variety of new facilities to
enhance market liquidity. Nonetheless, for regional banking institutions such as Key, access to
the capital markets for unsecured term debt continues to be severely restricted, with investors
requiring much wider spreads over risk-free U.S. Treasury obligations to make new investments.
Signs of continued financial stress on consumers were also present during the first quarter of
2008. During the first three months of the year, the economy lost 240,000 jobs and the average
unemployment rate rose to 4.9% from the 2007 average of 4.6%. The price of oil rose from $66 per
barrel one year ago to $102 per barrel at March 31, 2008, an unprecedented level, the full impact
of which has not yet been fully realized or possibly understood. Through March, consumer spending
slowed to an average monthly rate of .3%, compared to an average monthly rate of .5% in 2007, and
March consumer confidence dropped to a five-year low. Consumer prices in March increased 4.0% from
March 2007, compared to a 4.1% increase for all of 2007. While mortgage rates were essentially
unchanged, the benchmark ten-year Treasury yield declined to 3.41% at March 31, 2008, from 4.02% at
December 31, 2007. The two-year Treasury yield began 2008 at 3.05% and closed the first quarter at
1.59%.
39
Demographics. The extent to which Keys business has been affected by continued volatility and
weakness in the housing market is directly related to the state of the economy in the regions in
which its two major business groups, Community Banking and National Banking, operate.
Keys Community Banking group serves consumers and small to mid-sized businesses by offering a
variety of deposit, investment, lending and wealth management products and services. These
products and services are provided through a 14-state branch network organized into four geographic
regions as defined by management: Northwest, Rocky Mountains, Great Lakes and Northeast. Figure 1
shows the geographic diversity of the Community Banking groups average core deposits, commercial
loans and home equity loans.
Figure 1. Community Banking Geographic Diversity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic Region |
|
|
|
|
|
|
|
Three months ended March 31, 2008 |
|
|
|
|
|
Rocky |
|
|
|
|
|
|
|
|
|
|
|
|
|
dollars in millions |
|
Northwest |
|
|
Mountains |
|
|
Great Lakes |
|
|
Northeast |
|
|
Nonregion |
a |
|
Total |
|
|
Average core deposits |
|
$ |
9,687 |
|
|
$ |
3,558 |
|
|
$ |
14,059 |
|
|
$ |
13,398 |
|
|
$ |
1,678 |
|
|
$ |
42,380 |
|
Percent of total |
|
|
22.8 |
% |
|
|
8.4 |
% |
|
|
33.2 |
% |
|
|
31.6 |
% |
|
|
4.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average commercial loans |
|
$ |
4,088 |
|
|
$ |
2,032 |
|
|
$ |
4,782 |
|
|
$ |
3,302 |
|
|
$ |
1,389 |
|
|
$ |
15,593 |
|
Percent of total |
|
|
26.2 |
% |
|
|
13.0 |
% |
|
|
30.7 |
% |
|
|
21.2 |
% |
|
|
8.9 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average home equity loans |
|
$ |
2,721 |
|
|
$ |
1,251 |
|
|
$ |
2,924 |
|
|
$ |
2,665 |
|
|
$ |
132 |
|
|
$ |
9,693 |
|
Percent of total |
|
|
28.1 |
% |
|
|
12.9 |
% |
|
|
30.2 |
% |
|
|
27.5 |
% |
|
|
1.3 |
% |
|
|
100.0 |
% |
|
|
|
|
(a) |
|
Represents core deposit, commercial loan and home equity loan products centrally managed
outside of the four Community Banking regions. |
Keys National Banking group includes those corporate and consumer business units that operate
nationally, within and beyond the 14-state branch network, as well as internationally. The
specific products and services offered by the National Banking group are described in Note 4 (Line
of Business Results), which begins on page 13.
The diversity of Keys commercial real estate lending business based on industry type and location
is shown in Figure 16 on page 59. The homebuilder loan portfolio within the National Banking group
has been adversely affected by the downturn in the U.S. housing market. As a result of
deteriorating market conditions in the residential properties segment of Keys commercial real
estate construction portfolio, principally in Florida and southern California, and the significant
increase in the level of related nonperforming loans since mid-2007, management has taken action to
increase Keys allowance for loan losses.
Results for the National Banking group have also been affected adversely by continued volatility in
the capital markets, which led to declines in the market values at which certain assets (primarily
commercial real estate loans and securities held for sale or trading) are recorded. During the
first quarter of 2008, management placed hedges on Keys remaining previously unhedged commercial
real estate mortgage loans held for sale to protect against further declines in market values that
may result from changes in credit spreads and other market-driven factors. Additionally,
management transferred $3.3 billion of Keys
education loans held for sale to the held-to-maturity loan portfolio in response to the continued
disruption in the student loan securitization market.
During the first quarter of 2008, the banking industry, including Key, continued to experience
commercial and industrial loan growth, due in part to increased reliance by borrowers on commercial
lines of credit in the volatile capital markets environment.
40
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 critical; not
only are they necessary to comply with U.S. generally accepted accounting principles (GAAP); they
also reflect managements view of the appropriate way to record and report Keys overall financial
performance. All accounting policies are important, and all policies described in Note 1 (Summary
of Significant Accounting Policies), which begins on page 65 of Keys 2007 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.
Management relies heavily on the use of judgment, assumptions and estimates to make a number of
core decisions, including accounting for the allowance for loan losses; loan securitizations;
contingent liabilities, guarantees and income taxes; derivatives and related hedging activities;
and assets and liabilities that involve valuation methodologies. A brief discussion of each of
these areas appears on pages 17 through 19 of Keys 2007 Annual Report to Shareholders.
Effective January 1, 2008, Key adopted Statement of Financial Accounting Standards (SFAS) No.
157, Fair Value Measurements, which defines fair value, establishes a framework for measuring
fair value and expands disclosures about fair value measurements. In the absence of quoted market
prices, management determines the fair value of Keys assets and liabilities using
internally-developed models which are based on managements judgment, assumptions and estimates
regarding credit quality, liquidity, interest rates and other relevant inputs. Keys adoption of
this accounting guidance and the process used in determining fair values is more fully described in
Note 1 (Basis of Presentation) under the heading Fair Value Measurements on page 8, and Note 15
(Fair Value Measurements), which begins on page 32.
Highlights of Keys Performance
Financial performance
Keys first quarter 2008 income from continuing operations was $218 million, or $.54 per diluted
common share. This compares to income from continuing operations of $358 million, or $.89 per
share, for the first quarter of 2007, and $22 million, or $.06 per share, for the fourth quarter of
2007.
Net income totaled $218 million, or $.54 per diluted common share, for the first quarter of 2008, compared to net income of $350 million, or $.87 per share, for the first quarter of 2007 and $25
million, or $.06 per share, for the fourth quarter of 2007.
Figure 2 shows Keys continuing and discontinued operating results and related performance ratios
for the three-month periods ended March 31, 2008, December 31, 2007, and March 31, 2007. Keys
financial performance for each of the past five quarters is summarized in Figure 4 on page 45.
41
Figure 2. Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
dollars in millions, except per share amounts |
|
3-31-08 |
|
|
12-31-07 |
|
|
3-31-07 |
|
|
SUMMARY OF OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
218 |
|
|
$ |
22 |
|
|
$ |
358 |
|
Income (loss) from discontinued operations, net of taxes a |
|
|
|
|
|
|
3 |
|
|
|
(8 |
) |
|
Net income |
|
$ |
218 |
|
|
$ |
25 |
|
|
$ |
350 |
|
|
|
|
|
|
|
|
|
|
|
|
PER COMMON SHARE ASSUMING DILUTION b |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
.54 |
|
|
$ |
.06 |
|
|
$ |
.89 |
|
Income (loss) from discontinued operations a |
|
|
|
|
|
|
.01 |
|
|
|
(.02 |
) |
|
Net income |
|
$ |
.54 |
|
|
$ |
.06 |
|
|
$ |
.87 |
|
|
|
|
|
|
|
|
|
|
|
|
PERFORMANCE RATIOS |
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Return on average total assets |
|
|
.85 |
% |
|
|
.09 |
% |
|
|
1.58 |
% |
Return on average equity |
|
|
10.38 |
|
|
|
1.11 |
|
|
|
19.06 |
|
From consolidated operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Return on average total assets |
|
|
.85 |
% |
|
|
.10 |
% |
|
|
1.54 |
% |
Return on average equity |
|
|
10.38 |
|
|
|
1.26 |
|
|
|
18.63 |
|
|
(a) |
|
Key sold the subprime 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. |
|
(b) |
|
Earnings per share may not foot due to rounding. |
Keys earnings for the first three months of 2008 were adversely affected by volatility in the
capital markets and rising credit costs facing the financial services industry as a whole. In
response to these conditions, during the first quarter, Key continued to take actions to mitigate
the effects of future market volatility on its held-for-sale and trading portfolios. These actions
include the placement of hedges on Keys remaining previously unhedged commercial real estate
mortgage loans held for sale to protect against declines in market values that may result from
changes in credit spreads and other market-driven factors, and the transfer of $3.3 billion of
education loans held for sale to the held-to-maturity loan portfolio in response to the continued
disruption in the student loan securitization market.
With nonperforming assets continuing to rise in this challenging credit environment, Key also
continued to add to its allowance for loan losses, which represented 1.70% of total loans and
123.15% of Keys nonperforming loans at March 31, 2008. Management believes that this increase to
the allowance, along with the actions taken in the fourth quarter of 2007 to bolster Keys
allowance, reduce expenses and curtail certain higher risk or nonrelationship businesses, place Key
in a better position to weather the current softness in the economy.
While current market conditions remain challenging, management intends to continue to focus on
Keys relationship business model, carefully manage expenses and upgrade delivery platforms to
maintain Keys readiness to respond to business opportunities as they emerge.
As shown in the following table, the comparability of Keys earnings for the current, prior and
year-ago quarters is affected by several significant items.
42
Figure 3. Significant Items Affecting the Comparability of Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Three months ended |
|
|
Three months ended |
|
|
|
March 31, 2008 |
|
|
December 31, 2007 |
|
|
March 31, 2007 |
|
|
|
Pre-tax |
|
|
After-tax |
|
|
Impact |
|
|
Pre-tax |
|
|
After-tax |
|
|
Impact |
|
|
Pre-tax |
|
|
After-tax |
|
|
Impact |
|
in millions, except per share amounts |
|
Amount |
|
|
Amount |
|
|
on EPS |
|
|
Amount |
|
|
Amount |
|
|
on EPS |
|
|
Amount |
|
|
Amount |
|
|
on EPS |
|
|
Gain from redemption of Visa Inc. shares |
|
$ |
165 |
|
|
$ |
103 |
|
|
$ |
.26 |
|
|
|
___ |
|
|
|
___ |
|
|
|
___ |
|
|
|
___ |
|
|
|
___ |
|
|
|
___ |
|
Liability to Visa |
|
|
___ |
|
|
|
___ |
|
|
|
___ |
|
|
$ |
(64 |
) |
|
$ |
(40 |
) |
|
$ |
(.10 |
) |
|
|
___ |
|
|
|
___ |
|
|
|
___ |
|
Realized and unrealized (losses) gains on loan and
securities portfolios held for sale or trading |
|
|
(128 |
) |
|
|
(80 |
) |
|
|
(.20 |
) |
|
|
(30 |
) |
|
|
(19 |
) |
|
|
(.05 |
) |
|
$ |
22 |
|
|
$ |
14 |
|
|
$ |
.03 |
|
Additional reserve for LILO transactions |
|
|
(3 |
) |
|
|
(38 |
) |
|
|
(.10 |
) |
|
|
___ |
|
|
|
___ |
|
|
|
___ |
|
|
|
___ |
|
|
|
___ |
|
|
|
___ |
|
McDonald Investments branch network a |
|
|
___ |
|
|
|
___ |
|
|
|
___ |
|
|
|
___ |
|
|
|
___ |
|
|
|
___ |
|
|
|
159 |
|
|
|
99 |
|
|
|
.25 |
|
Gain from settlement of automobile residual value
insurance litigation |
|
|
___ |
|
|
|
___ |
|
|
|
___ |
|
|
|
___ |
|
|
|
___ |
|
|
|
___ |
|
|
|
26 |
|
|
|
17 |
|
|
|
.04 |
|
Loss from repositioning of securities portfolio |
|
|
___ |
|
|
|
___ |
|
|
|
___ |
|
|
|
___ |
|
|
|
___ |
|
|
|
___ |
|
|
|
(49 |
) |
|
|
(31 |
) |
|
|
(.08 |
) |
|
(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. |
LILO = Lease in, lease out transactions
EPS = Earnings per diluted common share
Keys provision for loan losses was $187 million for the first quarter of 2008, up from $44 million
for the same period one year ago. The increase was due primarily to continued weakness in the
housing market and the related impact on the residential properties segment of Keys commercial
real estate construction portfolio, as well as an additional loan loss provision recorded in
connection with the transfer of education loans from held-for-sale status to the loan portfolio.
Also, during the first quarter of 2008, credit spreads continued to widen, causing the market
values of Keys loan and securities portfolios held for sale or trading to decrease. During the
first quarter, Key recorded net losses of $101 million from loan sales and write-downs, $21 million
from dealer trading and derivatives, and $6 million from certain real estate-related investments,
for a total of $128 million in net losses. This compares to net gains of $22 million from these
activities for the first quarter of 2007 and net losses of $30 million for the fourth quarter of
2007.
Events leading to the recognition of other items presented in Figure 3, as well as other factors
that contributed to the changes in Keys revenue and expense components from those reported for the
first quarter of 2007, are reviewed in detail throughout the remainder of the Managements
Discussion & Analysis section.
Financial outlook
As discussed above, during the first quarter of 2008, Key added to its provision for loan losses in
response to deteriorating market conditions in the residential properties segment of the commercial
real estate construction portfolio. Also, since July 2007, the fixed income markets have
experienced extraordinary volatility, rapidly widening credit spreads and significantly reduced
liquidity. Key participates in these markets through business conducted by its National Banking
group and through principal investing activities, and Key is also impacted by activity in these
markets in other important ways. Changes in market conditions, including most significantly the
widening of credit spreads, can adversely affect the market values of Keys loan and securities
portfolios held for sale or trading, resulting in the recognition of both realized and unrealized
losses. Additionally, the widening of credit spreads and the overall reduction in liquidity have
exerted pressure on Keys net interest margin. As discussed earlier, during the first quarter of
2008, management continued to take actions to mitigate the effects of future capital markets
volatility on Keys held-for-sale and trading portfolios.
43
Management expects that in 2008 Key will experience:
¨ |
|
a net interest margin of around 3.30%; |
|
¨ |
|
a low- to mid-single digit percentage increase in loans, excluding acquired balances; |
|
¨ |
|
a low single digit percentage increase in core deposits; |
|
¨ |
|
net loan charge-offs in the range of .65% to .90% of average loans; |
|
¨ |
|
a low single digit percentage increase in expenses, excluding the 2007 charges for Keys liability to Visa and
for losses on lending-related commitments; and |
|
¨ |
|
an effective tax rate of around 32% on a taxable-equivalent basis. |
Strategic developments
Management initiated a number of specific actions during 2008 and 2007 to support Keys corporate
strategy.
¨ |
|
On January 1, 2008, Key acquired U.S.B. Holding Co., Inc.,
the holding company for Union State Bank, a 31-branch
state-chartered commercial bank headquartered in Orangeburg,
New York. The acquisition doubles Keys branch penetration
in the attractive Lower Hudson Valley area. Assets and
deposits acquired in this transaction were assigned to both
the Community Banking and National Banking groups. |
|
¨ |
|
On December 20, 2007, Key announced its decision to exit
dealer-originated home improvement lending activities, which
involve prime loans but are largely out-of-footprint. Key
also announced that it will cease offering Payroll Online
services, which are not of sufficient size to provide
economies of scale to compete profitably. Additionally, Key
has moved to cease conducting business with nonrelationship
homebuilders outside of its 14-state Community Banking
footprint. |
|
¨ |
|
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
combination of the payment plan systems and technology in
place at Tuition Management Systems and the array of payment
plan products offered by Keys Consumer Finance line of
business created one of the largest payment plan providers
in the nation. |
|
¨ |
|
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 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
the registered broker/dealer through which our corporate and
institutional investment banking and securities businesses
operate. The new name is KeyBanc Capital Markets Inc. |
44
Figure 4. Selected Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
dollars in millions, except per share amounts |
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
|
First |
|
|
FOR THE PERIOD |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
1,354 |
|
|
$ |
1,447 |
|
|
$ |
1,434 |
|
|
$ |
1,395 |
|
|
$ |
1,368 |
|
Interest expense |
|
|
641 |
|
|
|
737 |
|
|
|
740 |
|
|
|
709 |
|
|
|
689 |
|
Net interest income |
|
|
713 |
|
|
|
710 |
|
|
|
694 |
|
|
|
686 |
|
|
|
679 |
|
Provision for loan losses |
|
|
187 |
|
|
|
363 |
|
|
|
69 |
|
|
|
53 |
|
|
|
44 |
|
Noninterest income |
|
|
528 |
|
|
|
488 |
|
|
|
438 |
|
|
|
649 |
|
|
|
654 |
|
Noninterest expense |
|
|
732 |
|
|
|
896 |
|
|
|
753 |
|
|
|
815 |
|
|
|
784 |
|
Income (loss) from continuing operations before income taxes |
|
|
322 |
|
|
|
(61 |
) |
|
|
310 |
|
|
|
467 |
|
|
|
505 |
|
Income from continuing operations |
|
|
218 |
|
|
|
22 |
|
|
|
224 |
|
|
|
337 |
|
|
|
358 |
|
Income (loss) from discontinued operations, net of taxes |
|
|
___ |
|
|
|
3 |
|
|
|
(14 |
) |
|
|
(3 |
) |
|
|
(8 |
) |
Net income |
|
|
218 |
|
|
|
25 |
|
|
|
210 |
|
|
|
334 |
|
|
|
350 |
|
|
PER COMMON SHARE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
.55 |
|
|
$ |
.06 |
|
|
$ |
.58 |
|
|
$ |
.86 |
|
|
$ |
.90 |
|
Income (loss) from discontinued operations |
|
|
___ |
|
|
|
.01 |
|
|
|
(.03 |
) |
|
|
(.01 |
) |
|
|
(.02 |
) |
Net income |
|
|
.55 |
|
|
|
.06 |
|
|
|
.54 |
|
|
|
.85 |
|
|
|
.88 |
|
|
Income from continuing operations assuming dilution |
|
|
.54 |
|
|
|
.06 |
|
|
|
.57 |
|
|
|
.85 |
|
|
|
.89 |
|
Income (loss) from discontinued operations assuming dilution |
|
|
___ |
|
|
|
.01 |
|
|
|
(.03 |
) |
|
|
(.01 |
) |
|
|
(.02 |
) |
Net income assuming dilution |
|
|
.54 |
|
|
|
.06 |
|
|
|
.54 |
|
|
|
.84 |
|
|
|
.87 |
|
|
Cash dividends paid |
|
|
.375 |
|
|
|
.365 |
|
|
|
.365 |
|
|
|
.365 |
|
|
|
.365 |
|
Book value at period end |
|
|
21.48 |
|
|
|
19.92 |
|
|
|
20.12 |
|
|
|
19.78 |
|
|
|
19.57 |
|
Market price: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
|
27.23 |
|
|
|
34.05 |
|
|
|
37.09 |
|
|
|
38.96 |
|
|
|
39.90 |
|
Low |
|
|
19.00 |
|
|
|
21.04 |
|
|
|
31.38 |
|
|
|
34.15 |
|
|
|
35.94 |
|
Close |
|
|
21.95 |
|
|
|
23.45 |
|
|
|
32.33 |
|
|
|
34.33 |
|
|
|
37.47 |
|
Weighted-average common shares outstanding (000) |
|
|
399,121 |
|
|
|
388,940 |
|
|
|
389,319 |
|
|
|
392,045 |
|
|
|
397,875 |
|
Weighted-average common shares and potential
common shares outstanding (000) |
|
|
399,769 |
|
|
|
389,911 |
|
|
|
393,164 |
|
|
|
396,918 |
|
|
|
403,478 |
|
|
AT PERIOD END |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
76,444 |
|
|
$ |
70,823 |
|
|
$ |
68,999 |
|
|
$ |
66,692 |
|
|
$ |
65,711 |
|
Earning assets |
|
|
89,719 |
|
|
|
86,557 |
|
|
|
84,838 |
|
|
|
82,161 |
|
|
|
81,163 |
|
Total assets |
|
|
101,492 |
|
|
|
98,228 |
|
|
|
96,137 |
|
|
|
92,967 |
|
|
|
92,256 |
|
Deposits |
|
|
64,702 |
|
|
|
63,099 |
|
|
|
63,714 |
|
|
|
60,599 |
|
|
|
59,773 |
|
Long-term debt |
|
|
14,337 |
|
|
|
11,957 |
|
|
|
11,549 |
|
|
|
12,581 |
|
|
|
13,061 |
|
Shareholders equity |
|
|
8,592 |
|
|
|
7,746 |
|
|
|
7,820 |
|
|
|
7,701 |
|
|
|
7,719 |
|
|
PERFORMANCE RATIOS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average total assets |
|
|
.85 |
% |
|
|
.09 |
% |
|
|
.93 |
% |
|
|
1.45 |
% |
|
|
1.58 |
% |
Return on average equity |
|
|
10.38 |
|
|
|
1.11 |
|
|
|
11.50 |
|
|
|
17.66 |
|
|
|
19.06 |
|
Net interest margin (taxable equivalent) |
|
|
3.14 |
|
|
|
3.48 |
|
|
|
3.40 |
|
|
|
3.46 |
|
|
|
3.50 |
|
From consolidated operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return of average total assets |
|
|
.85 |
% |
|
|
.10 |
% |
|
|
.88 |
% |
|
|
1.43 |
% |
|
|
1.54 |
% |
Return of average equity |
|
|
10.38 |
|
|
|
1.26 |
|
|
|
10.79 |
|
|
|
17.50 |
|
|
|
18.63 |
|
Net interest margin (taxable equivalent) |
|
|
3.14 |
|
|
|
3.48 |
|
|
|
3.40 |
|
|
|
3.46 |
|
|
|
3.51 |
|
|
CAPITAL RATIOS AT PERIOD END |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity to assets |
|
|
8.47 |
% |
|
|
7.89 |
% |
|
|
8.13 |
% |
|
|
8.28 |
% |
|
|
8.37 |
% |
Tangible equity to tangible assets |
|
|
6.85 |
|
|
|
6.58 |
|
|
|
6.87 |
|
|
|
6.97 |
|
|
|
7.04 |
|
Tier 1 risk-based capital |
|
|
8.33 |
|
|
|
7.44 |
|
|
|
7.94 |
|
|
|
8.14 |
|
|
|
8.15 |
|
Total risk-based capital |
|
|
12.34 |
|
|
|
11.38 |
|
|
|
11.76 |
|
|
|
12.15 |
|
|
|
12.20 |
|
Leverage |
|
|
9.15 |
|
|
|
8.39 |
|
|
|
8.96 |
|
|
|
9.11 |
|
|
|
9.17 |
|
|
TRUST AND BROKERAGE ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets under management |
|
$ |
80,453 |
|
|
$ |
85,442 |
|
|
$ |
88,100 |
|
|
$ |
85,592 |
|
|
$ |
82,388 |
|
Nonmanaged and brokerage assets |
|
|
30,532 |
|
|
|
33,918 |
|
|
|
33,273 |
|
|
|
33,485 |
|
|
|
32,838 |
|
|
OTHER DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average full-time equivalent employees |
|
|
18,426 |
|
|
|
18,500 |
|
|
|
18,567 |
|
|
|
18,888 |
|
|
|
19,801 |
|
Branches |
|
|
985 |
|
|
|
955 |
|
|
|
954 |
|
|
|
954 |
|
|
|
950 |
|
|
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 2007 and the first three months of 2008 to help in understanding how those transactions may
have impacted Keys financial condition and results of operations.
45
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 5 summarizes the contribution made by each major business group to Keys taxable-equivalent
revenue and income from continuing operations for the three-month periods ended March 31, 2008 and
2007. Keys line of business results for each of these periods reflect a new organizational
structure that took effect January 1, 2008.
Figure 5. Major Business Groups Taxable-Equivalent Revenue and Income (Loss) from Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31, |
|
|
Change |
|
dollars in millions |
|
2008 |
|
|
2007 |
|
|
Amount |
|
|
Percent |
|
|
REVENUE FROM CONTINUING OPERATIONS
(TE) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community Banking a |
|
$ |
629 |
|
|
$ |
805 |
|
|
$ |
(176 |
) |
|
|
(21.9 |
)% |
National Banking b |
|
|
441 |
|
|
|
599 |
|
|
|
(158 |
) |
|
|
(26.4 |
) |
Other Segments c |
|
|
27 |
|
|
|
(20 |
) |
|
|
47 |
|
|
|
N/M |
|
|
Total Segments |
|
|
1,097 |
|
|
|
1,384 |
|
|
|
(287 |
) |
|
|
(20.7 |
) |
Reconciling Items d |
|
|
135 |
|
|
|
(30 |
) |
|
|
165 |
|
|
|
N/M |
|
|
Total |
|
$ |
1,232 |
|
|
$ |
1,354 |
|
|
$ |
(122 |
) |
|
|
(9.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM
CONTINUING OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community Banking a |
|
$ |
113 |
|
|
$ |
203 |
|
|
$ |
(90 |
) |
|
|
(44.3 |
)% |
National Banking b |
|
|
(23 |
) |
|
|
157 |
|
|
|
(180 |
) |
|
|
N/M |
|
Other Segments c |
|
|
22 |
|
|
|
(8 |
) |
|
|
30 |
|
|
|
N/M |
|
|
Total Segments |
|
|
112 |
|
|
|
352 |
|
|
|
(240 |
) |
|
|
(68.2 |
) |
Reconciling Items d |
|
|
106 |
|
|
|
6 |
|
|
|
100 |
|
|
|
N/M |
|
|
Total |
|
$ |
218 |
|
|
$ |
358 |
|
|
$ |
(140 |
) |
|
|
(39.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Community Banking results for the first quarter 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. |
|
(b) |
|
National Banking results for the first quarter of 2007 include a $26 million ($17 million
after tax) gain from the settlement of the
residual value insurance litigation. |
|
(c) |
|
Other Segments results for the first quarter of 2007 include a $49 million ($31 million
after tax) loss from the repositioning of the
securities portfolio. |
|
(d) |
|
Reconciling Items for the first quarter of 2008 include a $165 million ($103 million after
tax) gain from the partial redemption of
Keys equity interest in Visa Inc. |
TE = Taxable Equivalent
N/M = Not Meaningful
Community Banking summary of operations
As shown in Figure 6, Community Banking recorded net income of $113 million for the first quarter
of 2008, compared to $203 million for the year-ago quarter. Excluding the impact of the sale of
the McDonald
Investments branch network during the first quarter of 2007, net income for Community Banking was
up $9 million, or 9%, from the comparable quarter last year. Increases in both net interest income
and noninterest income, and a reduction in noninterest expense drove the improvement and more than
offset a higher provision for loan losses.
46
Taxable-equivalent net interest income rose by $5 million, or 1%, from the first quarter of 2007.
The increase was attributable to a $2.0 billion, or 7%, rise in average earning assets, due largely
to growth in the commercial loan portfolio, and a $3.6 billion, or 8%, increase in average
deposits. Both loan and deposit growth benefited from the January 1 acquisition of U.S.B. Holding
Co., Inc. described below. The positive effect of this growth was offset in part by the impact of
tighter loan and deposit spreads.
Excluding the impact of the McDonald Investments sale, noninterest income rose by $9 million, or
5%, from the same period one year ago, due to growth in deposit service charge income, higher
income from derivatives and growth in bank channel investment product sales commission income.
The provision for loan losses increased by $4 million, or 29%, compared to the first quarter of
2007.
Excluding the impact of the McDonald Investments sale, noninterest expense declined by $9 million,
or 2%, from the year-ago quarter, reflecting a decrease in personnel expense, due primarily to
reduced headcount. Additionally, Community Banking results for the current quarter benefited from
a reduction to the liability for credit losses on lending-related commitments.
On January 1, 2008, Key acquired U.S.B. Holding Co., Inc., the holding company for Union State
Bank, a 31-branch state-chartered commercial bank headquartered in Orangeburg, New York. The
acquisition doubles Keys branch penetration in the attractive Lower Hudson Valley area. Assets
and deposits acquired in this transaction were assigned to both the Community Banking and National
Banking groups.
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 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.
Figure 6. Community Banking
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31, |
|
|
Change |
|
dollars in millions |
|
2008 |
|
|
2007 |
|
|
Amount |
|
|
Percent |
|
|
SUMMARY OF OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (TE) |
|
$ |
423 |
|
|
$ |
418 |
|
|
$ |
5 |
|
|
|
1.2 |
% |
Noninterest income |
|
|
206 |
|
|
|
387 |
a |
|
|
(181 |
) |
|
|
(46.8 |
) |
|
Total revenue (TE) |
|
|
629 |
|
|
|
805 |
|
|
|
(176 |
) |
|
|
(21.9 |
) |
Provision for loan losses |
|
|
18 |
|
|
|
14 |
|
|
|
4 |
|
|
|
28.6 |
|
Noninterest expense |
|
|
430 |
|
|
|
466 |
|
|
|
(36 |
) |
|
|
(7.7 |
) |
|
Income before income taxes (TE) |
|
|
181 |
|
|
|
325 |
|
|
|
(144 |
) |
|
|
(44.3 |
) |
Allocated income taxes and TE adjustments |
|
|
68 |
|
|
|
122 |
|
|
|
(54 |
) |
|
|
(44.3 |
) |
|
Net income |
|
$ |
113 |
|
|
$ |
203 |
|
|
$ |
(90 |
) |
|
|
(44.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of consolidated income from continuing operations |
|
|
52 |
% |
|
|
57 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVERAGE BALANCES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases |
|
$ |
28,255 |
|
|
$ |
26,456 |
|
|
$ |
1,799 |
|
|
|
6.8 |
% |
Total assets |
|
|
31,404 |
|
|
|
29,293 |
|
|
|
2,111 |
|
|
|
7.2 |
|
Deposits |
|
|
50,089 |
|
|
|
46,524 |
|
|
|
3,565 |
|
|
|
7.7 |
|
|
Assets under management at period end |
|
$ |
20,049 |
|
|
$ |
20,634 |
|
|
$ |
(585 |
) |
|
|
(2.8 |
)% |
|
(a) |
|
Community Banking results for the first quarter 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
47
ADDITIONAL COMMUNITY BANKING DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31, |
|
|
Change |
|
dollars in millions |
|
2008 |
|
|
2007 |
|
|
Amount |
|
|
Percent |
|
|
AVERAGE DEPOSITS OUTSTANDING |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW and money market deposit accounts |
|
$ |
19,886 |
|
|
$ |
19,616 |
|
|
$ |
270 |
|
|
|
1.4 |
% |
Savings deposits |
|
|
2,042 |
|
|
|
1,618 |
|
|
|
424 |
|
|
|
26.2 |
|
Certificates of deposits ($100,000 or more) |
|
|
6,452 |
|
|
|
4,551 |
|
|
|
1,901 |
|
|
|
41.8 |
|
Other time deposits |
|
|
12,765 |
|
|
|
12,051 |
|
|
|
714 |
|
|
|
5.9 |
|
Deposits in foreign office |
|
|
1,257 |
|
|
|
960 |
|
|
|
297 |
|
|
|
30.9 |
|
Noninterest-bearing deposits |
|
|
7,687 |
|
|
|
7,728 |
|
|
|
(41 |
) |
|
|
(.5 |
) |
|
Total deposits |
|
$ |
50,089 |
|
|
$ |
46,524 |
|
|
$ |
3,565 |
|
|
|
7.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HOME EQUITY LOANS |
|
|
|
|
|
|
|
|
Average balance |
|
$ |
9,693 |
|
|
$ |
9,677 |
|
|
|
|
|
|
|
|
|
Weighted-average loan-to-value ratio |
|
|
70 |
% |
|
|
70 |
% |
Percent first lien positions |
|
|
56 |
|
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER DATA |
|
|
|
|
|
|
|
|
On-line households/household penetration |
|
|
749,512 / 45 |
% |
|
|
719,736 / 43 |
% |
|
|
|
|
|
|
|
|
Branches |
|
|
985 |
|
|
|
950 |
|
Automated teller machines |
|
|
1,479 |
|
|
|
1,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National Banking summary of continuing operations
As shown in Figure 7, National Banking recorded a net loss of $23 million from continuing
operations for the first quarter of 2008, compared to net income of $157 million from continuing
operations for the same period last year. Lower noninterest income and an increase in the
provision for loan losses accounted for the reduction and more than offset a decrease in
noninterest expense. Net interest income was essentially unchanged from the year-ago quarter.
During the first quarter of 2008, National Banking increased its tax reserves for certain lease in,
lease out (LILO) transactions and, as a result, recalculated its lease income in accordance with
FASB Staff Position No. 13-2, Accounting for a Change or Projected Change in the Timing of Cash
Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction. Excluding the
additional charges associated with these actions, taxable-equivalent net interest income grew by
$34 million, or 10%, from the first quarter of 2007 as a result of increases in average earning
assets and deposits, offset in part by tighter interest rate spreads. Average loans and leases
grew by $5.2 billion, or 13%, while average deposits rose by $558 million, or 5%, from the year-ago
quarter.
Noninterest income declined by $158 million, or 61%, as several capital markets-driven businesses
were adversely affected by continued volatility in the financial markets. Results for the current
quarter include $105 million in net losses from loan sales and write-downs, related primarily to
commercial real estate loans held for sale. This compares to net gains of $5 million for the same
period last year. Income from investment banking and capital markets activities decreased by $47
million, due primarily to a $38 million reduction from dealer trading and derivatives. These
decreases were offset in part by a $19 million increase in trust and investment services income.
Additionally, results for the first quarter of 2007 included a $26 million gain from the settlement
of the automobile residual value insurance litigation.
The provision for loan losses rose by $139 million, reflecting continued deterioration of market
conditions in the residential properties segment of Keys commercial real estate construction
portfolio, principally in Florida and southern California, and an additional loan loss provision
recorded in the Consumer Finance line of business in connection with the March 2008 transfer of
$3.3 billion of education loans from held-for-sale status to the loan portfolio.
Noninterest expense decreased by $8 million, or 3%, from the year-ago quarter. Contributing to the
improvement was a $22 million reduction to the liability for credit losses on lending-related
commitments in the current quarter, compared to a reduction of $7 million recorded in the first
quarter of 2007. This positive effect of this change was offset in part by a $6 million increase
in costs associated with operating leases.
48
Figure 7. National Banking
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31, |
|
|
Change |
|
dollars in millions |
|
2008 |
|
|
2007 |
|
|
Amount |
|
|
Percent |
|
|
SUMMARY OF OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (TE) |
|
$ |
340 |
|
|
$ |
340 |
|
|
|
___ |
|
|
|
___ |
|
Noninterest income |
|
|
101 |
|
|
|
259 |
a |
|
$ |
(158 |
) |
|
|
(61.0 |
)% |
|
Total revenue (TE) |
|
|
441 |
|
|
|
599 |
|
|
|
(158 |
) |
|
|
(26.4 |
) |
Provision for loan losses |
|
|
169 |
|
|
|
30 |
|
|
|
139 |
|
|
|
463.3 |
|
Noninterest expense |
|
|
309 |
|
|
|
317 |
|
|
|
(8 |
) |
|
|
(2.5 |
) |
|
(Loss) income from continuing operations before income taxes (TE) |
|
|
(37 |
) |
|
|
252 |
|
|
|
(289 |
) |
|
|
N/M |
|
Allocated income taxes and TE adjustments |
|
|
(14 |
) |
|
|
95 |
|
|
|
(109 |
) |
|
|
N/M |
|
|
(Loss) income from continuing operations |
|
|
(23 |
) |
|
|
157 |
|
|
|
(180 |
) |
|
|
N/M |
|
Loss from discontinued operations, net of taxes |
|
|
___ |
|
|
|
(8 |
) |
|
|
8 |
|
|
|
100.0 |
% |
|
Net (loss) income |
|
$ |
(23 |
) |
|
$ |
149 |
|
|
$ |
(172 |
) |
|
|
N/M |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of consolidated income from continuing operations |
|
|
N/M |
|
|
|
44 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVERAGE BALANCES FROM CONTINUING OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases |
|
$ |
44,021 |
|
|
$ |
38,839 |
|
|
$ |
5,182 |
|
|
|
13.3 |
% |
Loans held for sale |
|
|
4,932 |
|
|
|
3,917 |
|
|
|
1,015 |
|
|
|
25.9 |
|
Total assets |
|
|
56,079 |
|
|
|
48,411 |
|
|
|
7,668 |
|
|
|
15.8 |
|
Deposits |
|
|
11,849 |
|
|
|
11,291 |
|
|
|
558 |
|
|
|
4.9 |
|
|
Assets under management at period end |
|
$ |
60,404 |
|
|
$ |
61,754 |
|
|
$ |
(1,350 |
) |
|
|
(2.2 |
)% |
|
(a) |
|
National Banking results for the first quarter 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 $22 million for the first quarter of 2008, compared to a net loss of $8
million for the same period last year. The improvement was due primarily to a $49 million loss
recorded in the first quarter of 2007 in connection with the repositioning of the securities
portfolio, offset in part by a decrease in net gains from principal investing.
49
Results of Operations
Net interest income
One of Keys principal sources of revenue is net interest income. Net interest income is the
difference between interest income received on earning assets (such as loans and securities) and
loan-related fee income, and interest expense paid on deposits and borrowings. There are several
factors that affect net interest income, including:
¨ |
|
the volume, pricing, mix and maturity of earning assets and interest-bearing liabilities; |
|
¨ |
|
the volume and value of net free funds, such as noninterest-bearing deposits and equity capital; |
|
¨ |
|
the use of derivative instruments to manage interest rate risk; |
|
¨ |
|
interest rate fluctuations and competitive conditions within the marketplace; and |
|
¨ |
|
asset quality. |
To make it easier to compare results among several periods and the yields on various types of
earning assets (some taxable, some not), we present net interest income in this discussion on a
taxable-equivalent basis (i.e., as if it were all taxable and at the same rate). For example,
$100 of tax-exempt income would be presented as $154, an amount that if taxed at the statutory
federal income tax rate of 35% would yield $100.
Taxable-equivalent net interest income for the first quarter of 2008 was $704 million, compared to
$700 million for the first quarter of 2007. Figure 8, which spans pages 52 and 53, shows the
various components of Keys balance sheet that affect interest income and expense, and their
respective yields or rates over the past five quarters. This figure also presents a reconciliation
of taxable-equivalent net interest income for each of those quarters to net interest income
reported in accordance with GAAP.
The net interest margin, which is an indicator of the profitability of the earning assets
portfolio, is calculated by dividing net interest income by average earning assets. Compared to
the year-ago quarter, Keys net interest margin declined by 36 basis points to 3.14%. A basis
point is equal to one one-hundredth of a percentage point, meaning 36 basis points equal .36%.
The reduction in the net interest margin reflected tighter interest rate spreads on both loans and
deposits, caused by competitive pricing; client preferences for deposit products with more
attractive interest rates, heavier reliance on short-term wholesale borrowings to support earning
asset growth, a higher level of nonaccrual loans and a lease accounting adjustment described below.
During the first quarter of 2008, Key increased its tax reserves for certain LILO transactions, the
deductions for which have been disallowed by the Internal Revenue Service (IRS). The change in
the level of LILO reserves also necessitated a recalculation of lease income under Financial
Accounting Standards Board (FASB) Staff Position No. 13-2, Accounting for a Change or Projected
Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease
Transaction. These actions reduced Keys taxable-equivalent net interest income and net interest
margin for the first quarter of 2008 by $34 million and 15 basis points, respectively, and reduced
Keys earnings by $38 million, or $.10 per diluted common share. As previously reported, the LILO
transactions represent a portion of Keys overall leveraged lease financing portfolio, the tax
deductions for which are being challenged by the IRS. Additional information related to these
lease financing transactions, the status of Keys response to the IRS disallowance, and the
potential effect on Keys results of operations and capital in the event of an adverse outcome is
included in Note 12 (Income Taxes), which begins on page 25.
50
Excluding the effect of the lease accounting adjustment, Keys net interest margin for the first
quarter of 2008 was 3.29%. Over the remainder of the year, management expects the net interest
margin to remain at this approximate level, as the company benefits from a modestly
liability-sensitive interest rate risk position and new loans with more favorable interest rate
spreads. Management expects the positive effects of these factors to be offset in part by a higher
level of nonperforming assets, the continuation of competitive pressure on deposit pricing and
wider interest rate spreads on long-term wholesale funding.
Average earning assets for the first quarter of 2008 totaled $89.9 billion, which was $9.7 billion,
or 12%, higher than the first quarter 2007 level, due primarily to strong growth in commercial
loans and the January 1 acquisition of U.S.B. Holding Co., Inc., which added approximately $1.5
billion to Keys total average loan portfolio. The growth in commercial loans was due in part to
the higher demand for credit caused by the volatile capital markets environment.
Since January 1, 2007, the growth and composition of Keys earning assets have been affected by the
following actions:
¨ |
|
As discussed above, during the first quarter of 2008, Key
increased its loan portfolio (primarily commercial real estate and
consumer loans) through the acquisition of U.S.B. Holding Co.,
Inc., the holding company for Union State Bank, a 31-branch
state-chartered commercial bank headquartered in Orangeburg, New
York. |
|
¨ |
|
Key sold commercial mortgage loans of $204 million during the
first quarter of 2008 and $3.8 billion ($238 million through a
securitization) during all of 2007. 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 28. |
|
¨ |
|
Key sold education loans of $72 million during the first quarter
of 2008 and $247 million during all of 2007. In March 2008, Key
transferred $3.3 billion of education loans from held-for-sale
status to the held-to-maturity loan portfolio. The secondary
markets for these loans have been adversely affected by market
liquidity issues, prompting the companys decision to move them to
a held-to-maturity classification. |
|
¨ |
|
Key sold other loans (primarily residential mortgage loans)
totaling $213 million during the first quarter of 2008 and $1.2
billion during all of 2007. |
51
Figure 8. Average Balance Sheets, Net Interest Income and Yields/Rates
From Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter 2008 |
|
|
Fourth Quarter 2007 |
|
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
dollars in millions |
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans a, b |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and
agricultural |
|
$ |
25,411 |
|
|
$ |
392 |
|
|
|
6.21 |
% |
|
$ |
23,825 |
|
|
$ |
419 |
|
|
|
6.98 |
% |
Real estate commercial mortgage |
|
|
10,283 |
|
|
|
175 |
|
|
|
6.84 |
|
|
|
9,351 |
|
|
|
175 |
|
|
|
7.42 |
|
Real estate construction |
|
|
8,468 |
|
|
|
134 |
|
|
|
6.36 |
|
|
|
8,192 |
|
|
|
153 |
|
|
|
7.42 |
|
Commercial lease financing |
|
|
10,004 |
|
|
|
98 |
|
|
|
3.91 |
|
|
|
10,252 |
|
|
|
171 |
|
|
|
6.65 |
|
|
Total commercial loans |
|
|
54,166 |
|
|
|
799 |
|
|
|
5.93 |
|
|
|
51,620 |
|
|
|
918 |
|
|
|
7.06 |
|
Real estate residential |
|
|
1,916 |
|
|
|
30 |
|
|
|
6.29 |
|
|
|
1,596 |
|
|
|
27 |
|
|
|
6.72 |
|
Home equity |
|
|
10,953 |
|
|
|
178 |
|
|
|
6.54 |
|
|
|
10,917 |
|
|
|
192 |
|
|
|
7.02 |
|
Consumer direct |
|
|
1,305 |
|
|
|
34 |
|
|
|
10.59 |
|
|
|
1,308 |
|
|
|
35 |
|
|
|
10.73 |
|
Consumer indirect |
|
|
4,348 |
|
|
|
72 |
|
|
|
6.61 |
|
|
|
4,276 |
|
|
|
73 |
|
|
|
6.76 |
|
|
Total consumer loans |
|
|
18,522 |
|
|
|
314 |
|
|
|
6.81 |
|
|
|
18,097 |
|
|
|
327 |
|
|
|
7.20 |
|
|
Total loans |
|
|
72,688 |
|
|
|
1,113 |
|
|
|
6.15 |
|
|
|
69,717 |
|
|
|
1,245 |
|
|
|
7.10 |
|
Loans held for sale |
|
|
4,984 |
|
|
|
87 |
|
|
|
7.01 |
|
|
|
4,748 |
|
|
|
89 |
|
|
|
7.53 |
|
Securities available for sale a, c |
|
|
8,419 |
|
|
|
110 |
|
|
|
5.28 |
|
|
|
7,858 |
|
|
|
115 |
|
|
|
5.89 |
|
Held-to-maturity securities a |
|
|
29 |
|
|
|
1 |
|
|
|
11.02 |
|
|
|
30 |
|
|
|
1 |
|
|
|
6.24 |
|
Trading account assets |
|
|
1,075 |
|
|
|
13 |
|
|
|
4.84 |
|
|
|
1,042 |
|
|
|
12 |
|
|
|
4.40 |
|
Short-term investments |
|
|
1,165 |
|
|
|
9 |
|
|
|
3.18 |
|
|
|
1,226 |
|
|
|
13 |
|
|
|
3.94 |
|
Other investments c |
|
|
1,552 |
|
|
|
12 |
|
|
|
3.05 |
|
|
|
1,589 |
|
|
|
12 |
|
|
|
3.02 |
|
|
Total earning assets |
|
|
89,912 |
|
|
|
1,345 |
|
|
|
6.01 |
|
|
|
86,210 |
|
|
|
1,487 |
|
|
|
6.86 |
|
Allowance for loan losses |
|
|
(1,236 |
) |
|
|
|
|
|
|
|
|
|
|
(966 |
) |
|
|
|
|
|
|
|
|
Accrued income and other assets |
|
|
14,680 |
|
|
|
|
|
|
|
|
|
|
|
13,547 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
103,356 |
|
|
|
|
|
|
|
|
|
|
$ |
98,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW and money market deposit
accounts |
|
$ |
26,996 |
|
|
|
139 |
|
|
|
2.07 |
|
|
$ |
25,687 |
|
|
|
197 |
|
|
|
3.05 |
|
Savings deposits |
|
|
1,865 |
|
|
|
3 |
|
|
|
.62 |
|
|
|
1,523 |
|
|
|
1 |
|
|
|
.19 |
|
Certificates of deposit ($100,000 or
more) d |
|
|
8,072 |
|
|
|
95 |
|
|
|
4.72 |
|
|
|
6,887 |
|
|
|
86 |
|
|
|
4.98 |
|
Other time deposits |
|
|
12,759 |
|
|
|
146 |
|
|
|
4.59 |
|
|
|
11,455 |
|
|
|
135 |
|
|
|
4.68 |
|
Deposits in foreign office |
|
|
5,853 |
|
|
|
45 |
|
|
|
3.13 |
|
|
|
5,720 |
|
|
|
64 |
|
|
|
4.42 |
|
|
Total interest-bearing deposits |
|
|
55,545 |
|
|
|
428 |
|
|
|
3.10 |
|
|
|
51,272 |
|
|
|
483 |
|
|
|
3.74 |
|
Federal funds purchased and securities
sold under repurchase agreements |
|
|
3,863 |
|
|
|
28 |
|
|
|
2.91 |
|
|
|
4,194 |
|
|
|
45 |
|
|
|
4.23 |
|
Bank notes and other short-term borrowings |
|
|
4,934 |
|
|
|
39 |
|
|
|
3.22 |
|
|
|
4,233 |
|
|
|
45 |
|
|
|
4.15 |
|
Long-term debt d,e |
|
|
13,238 |
|
|
|
146 |
|
|
|
4.71 |
|
|
|
11,851 |
|
|
|
164 |
|
|
|
5.72 |
|
|
Total interest-bearing liabilities |
|
|
77,580 |
|
|
|
641 |
|
|
|
3.36 |
|
|
|
71,550 |
|
|
|
737 |
|
|
|
4.11 |
|
Noninterest-bearing deposits |
|
|
10,741 |
|
|
|
|
|
|
|
|
|
|
|
12,948 |
|
|
|
|
|
|
|
|
|
Accrued expense and other liabilities |
|
|
6,590 |
|
|
|
|
|
|
|
|
|
|
|
6,405 |
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
8,445 |
|
|
|
|
|
|
|
|
|
|
|
7,888 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders
equity |
|
$ |
103,356 |
|
|
|
|
|
|
|
|
|
|
$ |
98,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread (TE) |
|
|
|
|
|
|
|
|
|
|
2.65 |
% |
|
|
|
|
|
|
|
|
|
|
2.75 |
% |
|
Net interest income (TE) and net
interest margin (TE) |
|
|
|
|
|
|
704 |
|
|
|
3.14 |
% |
|
|
|
|
|
|
750 |
|
|
|
3.48 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TE adjustment a |
|
|
|
|
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
40 |
|
|
|
|
|
|
Net interest income, GAAP basis |
|
|
|
|
|
$ |
713 |
|
|
|
|
|
|
|
|
|
|
$ |
710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balances have not been restated to reflect Keys January
1, 2008, adoption of FASB Interpretation No. 39, Offsetting
of Amounts Related to Certain Contracts, and FASB Staff
Position FIN 39-1, Amendment of FASB Interpretation 39.
Keys adoption of this accounting guidance is described in Note
1 (Basis of Presentation) under the heading
Accounting Pronouncements Adopted in 2008 on page 9.
(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
N/M = Not Meaningful
GAAP = U.S. generally accepted accounting principles
52
Figure 8. Average Balance Sheets, Net Interest Income and Yields/Rates
From Continuing Operations (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2007 |
|
|
|
|
Second Quarter 2007 |
|
|
First Quarter 2007 |
|
Average |
|
|
|
|
|
|
Yield / |
|
|
|
|
Average |
|
|
|
|
|
|
Yield / |
|
|
Average |
|
|
Yield / |
|
|
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
22,393 |
|
|
$ |
410 |
|
|
|
7.25 |
% |
|
|
|
$ |
21,856 |
|
|
$ |
401 |
|
|
|
7.36 |
% |
|
$ |
21,562 |
|
|
$ |
392 |
|
|
|
7.38 |
% |
|
8,855 |
|
|
|
172 |
|
|
|
7.69 |
|
|
|
|
|
8,565 |
|
|
|
165 |
|
|
|
7.75 |
|
|
|
8,426 |
|
|
|
163 |
|
|
|
7.83 |
|
|
8,285 |
|
|
|
167 |
|
|
|
8.01 |
|
|
|
|
|
8,243 |
|
|
|
167 |
|
|
|
8.09 |
|
|
|
8,227 |
|
|
|
166 |
|
|
|
8.20 |
|
|
10,172 |
|
|
|
147 |
|
|
|
5.80 |
|
|
|
|
|
10,096 |
|
|
|
142 |
|
|
|
5.62 |
|
|
|
10,094 |
|
|
|
146 |
|
|
|
5.78 |
|
|
|
49,705 |
|
|
|
896 |
|
|
|
7.16 |
|
|
|
|
|
48,760 |
|
|
|
875 |
|
|
|
7.19 |
|
|
|
48,309 |
|
|
|
867 |
|
|
|
7.26 |
|
|
1,586 |
|
|
|
26 |
|
|
|
6.68 |
|
|
|
|
|
1,472 |
|
|
|
24 |
|
|
|
6.57 |
|
|
|
1,444 |
|
|
|
24 |
|
|
|
6.60 |
|
|
10,883 |
|
|
|
199 |
|
|
|
7.22 |
|
|
|
|
|
10,752 |
|
|
|
193 |
|
|
|
7.22 |
|
|
|
10,706 |
|
|
|
191 |
|
|
|
7.22 |
|
|
1,342 |
|
|
|
36 |
|
|
|
10.66 |
|
|
|
|
|
1,370 |
|
|
|
37 |
|
|
|
10.64 |
|
|
|
1,450 |
|
|
|
36 |
|
|
|
10.15 |
|
|
4,164 |
|
|
|
70 |
|
|
|
6.79 |
|
|
|
|
|
3,961 |
|
|
|
67 |
|
|
|
6.76 |
|
|
|
3,760 |
|
|
|
64 |
|
|
|
6.79 |
|
|
|
17,975 |
|
|
|
331 |
|
|
|
7.33 |
|
|
|
|
|
17,555 |
|
|
|
321 |
|
|
|
7.33 |
|
|
|
17,360 |
|
|
|
315 |
|
|
|
7.32 |
|
|
|
67,680 |
|
|
|
1,227 |
|
|
|
7.20 |
|
|
|
|
|
66,315 |
|
|
|
1,196 |
|
|
|
7.23 |
|
|
|
65,669 |
|
|
|
1,182 |
|
|
|
7.28 |
|
|
4,731 |
|
|
|
91 |
|
|
|
7.59 |
|
|
|
|
|
4,415 |
|
|
|
82 |
|
|
|
7.50 |
|
|
|
3,940 |
|
|
|
75 |
|
|
|
7.70 |
|
|
7,825 |
|
|
|
106 |
|
|
|
5.45 |
|
|
|
|
|
7,793 |
|
|
|
106 |
|
|
|
5.45 |
|
|
|
7,548 |
|
|
|
100 |
|
|
|
5.27 |
|
|
36 |
|
|
|
|
|
|
|
6.43 |
|
|
|
|
|
39 |
|
|
|
|
|
|
|
6.72 |
|
|
|
39 |
|
|
|
1 |
|
|
|
7.21 |
|
|
1,055 |
|
|
|
11 |
|
|
|
4.39 |
|
|
|
|
|
813 |
|
|
|
8 |
|
|
|
3.58 |
|
|
|
754 |
|
|
|
7 |
|
|
|
3.78 |
|
|
633 |
|
|
|
5 |
|
|
|
3.32 |
|
|
|
|
|
671 |
|
|
|
8 |
|
|
|
4.93 |
|
|
|
853 |
|
|
|
11 |
|
|
|
5.22 |
|
|
1,563 |
|
|
|
12 |
|
|
|
2.99 |
|
|
|
|
|
1,541 |
|
|
|
15 |
|
|
|
3.68 |
|
|
|
1,400 |
|
|
|
13 |
|
|
|
3.65 |
|
|
|
83,523 |
|
|
|
1,452 |
|
|
|
6.92 |
|
|
|
|
|
81,587 |
|
|
|
1,415 |
|
|
|
6.95 |
|
|
|
80,203 |
|
|
|
1,389 |
|
|
|
6.99 |
|
|
(942 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
(942 |
) |
|
|
|
|
|
|
|
|
|
|
(942 |
) |
|
|
|
|
|
|
|
|
|
12,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
12,767 |
|
|
|
|
|
|
|
|
|
|
|
12,835 |
|
|
|
|
|
|
|
|
|
|
$ |
95,162 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
93,412 |
|
|
|
|
|
|
|
|
|
|
$ |
92,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
24,190 |
|
|
|
209 |
|
|
|
3.41 |
|
|
|
|
$ |
22,953 |
|
|
|
179 |
|
|
|
3.14 |
|
|
$ |
23,424 |
|
|
|
177 |
|
|
|
3.06 |
|
|
1,581 |
|
|
|
|
|
|
|
.19 |
|
|
|
|
|
1,633 |
|
|
|
1 |
|
|
|
.19 |
|
|
|
1,629 |
|
|
|
1 |
|
|
|
.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,274 |
|
|
|
80 |
|
|
|
5.06 |
|
|
|
|
|
6,237 |
|
|
|
79 |
|
|
|
5.03 |
|
|
|
6,151 |
|
|
|
76 |
|
|
|
5.03 |
|
|
11,512 |
|
|
|
136 |
|
|
|
4.68 |
|
|
|
|
|
12,047 |
|
|
|
141 |
|
|
|
4.70 |
|
|
|
12,063 |
|
|
|
138 |
|
|
|
4.64 |
|
|
4,540 |
|
|
|
57 |
|
|
|
5.00 |
|
|
|
|
|
3,600 |
|
|
|
47 |
|
|
|
5.20 |
|
|
|
3,258 |
|
|
|
41 |
|
|
|
5.12 |
|
|
|
48,097 |
|
|
|
482 |
|
|
|
3.98 |
|
|
|
|
|
46,470 |
|
|
|
447 |
|
|
|
3.85 |
|
|
|
46,525 |
|
|
|
433 |
|
|
|
3.77 |
|
|
|
4,470 |
|
|
|
55 |
|
|
|
4.85 |
|
|
|
|
|
4,748 |
|
|
|
59 |
|
|
|
5.04 |
|
|
|
3,903 |
|
|
|
49 |
|
|
|
5.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,539 |
|
|
|
30 |
|
|
|
4.70 |
|
|
|
|
|
1,771 |
|
|
|
18 |
|
|
|
4.14 |
|
|
|
1,113 |
|
|
|
11 |
|
|
|
3.98 |
|
|
11,801 |
|
|
|
173 |
|
|
|
5.89 |
|
|
|
|
|
12,909 |
|
|
|
185 |
|
|
|
5.83 |
|
|
|
13,617 |
|
|
|
196 |
|
|
|
5.90 |
|
|
|
66,907 |
|
|
|
740 |
|
|
|
4.40 |
|
|
|
|
|
65,898 |
|
|
|
709 |
|
|
|
4.33 |
|
|
|
65,158 |
|
|
|
689 |
|
|
|
4.29 |
|
|
14,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
13,927 |
|
|
|
|
|
|
|
|
|
|
|
13,237 |
|
|
|
|
|
|
|
|
|
|
6,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
5,933 |
|
|
|
|
|
|
|
|
|
|
|
6,083 |
|
|
|
|
|
|
|
|
|
|
7,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
7,654 |
|
|
|
|
|
|
|
|
|
|
|
7,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
95,162 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
93,412 |
|
|
|
|
|
|
|
|
|
|
$ |
92,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.52 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
2.62 |
% |
|
|
|
|
|
|
|
|
|
|
2.70 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
712 |
|
|
|
3.40 |
% |
|
|
|
|
|
|
|
|
706 |
|
|
|
3.46 |
% |
|
|
|
|
|
|
700 |
|
|
|
3.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
$ |
694 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
686 |
|
|
|
|
|
|
|
|
|
|
$ |
679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
Figure 9 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 59, contains
more discussion about changes in earning assets and funding sources.
Figure 9. Components of Net Interest Income Changes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From three months ended March 31, 2007 |
|
|
|
to three months ended March 31, 2008 |
|
|
|
Average |
|
|
Yield / |
|
|
Net |
|
in millions |
|
Volume |
|
|
Rate |
|
|
Change |
|
|
INTEREST INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
118 |
|
|
$ |
(187 |
) |
|
$ |
(69 |
) |
Loans held for sale |
|
|
19 |
|
|
|
(7 |
) |
|
|
12 |
|
Securities available for sale |
|
|
11 |
|
|
|
(1 |
) |
|
|
10 |
|
Trading account assets |
|
|
4 |
|
|
|
2 |
|
|
|
6 |
|
Short-term investments |
|
|
3 |
|
|
|
(5 |
) |
|
|
(2 |
) |
Other investments |
|
|
1 |
|
|
|
(2 |
) |
|
|
(1 |
) |
|
Total interest income (TE) |
|
|
156 |
|
|
|
(200 |
) |
|
|
(44 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
NOW and money market deposit accounts |
|
|
24 |
|
|
|
(62 |
) |
|
|
(38 |
) |
Savings deposits |
|
|
|
|
|
|
2 |
|
|
|
2 |
|
Certificates of deposit ($100,000 or more) |
|
|
23 |
|
|
|
(4 |
) |
|
|
19 |
|
Other time deposits |
|
|
8 |
|
|
|
|
|
|
|
8 |
|
Deposits in foreign office |
|
|
24 |
|
|
|
(20 |
) |
|
|
4 |
|
|
Total interest-bearing deposits |
|
|
79 |
|
|
|
(84 |
) |
|
|
(5 |
) |
Federal funds purchased and securities sold
under repurchase agreements |
|
|
|
|
|
|
(21 |
) |
|
|
(21 |
) |
Bank notes and other short-term borrowings |
|
|
31 |
|
|
|
(3 |
) |
|
|
28 |
|
Long-term debt |
|
|
(5 |
) |
|
|
(45 |
) |
|
|
(50 |
) |
|
Total interest expense |
|
|
105 |
|
|
|
(153 |
) |
|
|
(48 |
) |
|
Net interest income (TE) |
|
$ |
51 |
|
|
$ |
(47 |
) |
|
$ |
4 |
|
|
|
|
|
|
|
|
|
|
|
|
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 first quarter of 2008 was $528 million, representing a $126 million, or
19%, decrease from the same period last year.
Included in current year results is a $165 million gain from the partial redemption of Visa Inc.
shares, and both realized and unrealized losses associated with several of Keys capital
markets-driven businesses. Noninterest income for the first quarter of 2007 included a $171
million gain associated with the sale of the McDonald Investments branch network, a $26 million
gain from the settlement of the automobile residual value insurance litigation and a $49 million
loss recorded in connection with the repositioning of the securities portfolio.
During the first quarter of 2008, Key recorded $101 million in net losses from loan sales and
write-downs, related primarily to commercial real estate loans held for sale. This compares to net
gains of $9 million for the same period last year. Additionally, income from investment banking
and capital markets activities decreased by $36 million, due primarily to a $29 million reduction
from dealer trading and derivatives, and net gains from principal investing were down $20 million
from the year-ago quarter.
54
As shown in Figure 10, trust and investment services income increased by $4 million from the same
period one year ago. Last years first quarter results included $16 million of income generated by
the McDonald Investments branch network. Adjusting for this revenue, trust and investment services
income rose by $20 million, or 18%, driven by growth in institutional asset management income. The
company also experienced a $13 million increase in income from deposit service charges.
Figure 10. Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31, |
|
|
Change |
|
dollars in millions |
|
2008 |
|
|
2007 |
|
|
Amount |
|
|
Percent |
|
|
Trust and investment services income |
|
$ |
129 |
|
|
$ |
125 |
|
|
$ |
4 |
|
|
|
3.2 |
% |
Service charges on deposit accounts |
|
|
88 |
|
|
|
75 |
|
|
|
13 |
|
|
|
17.3 |
|
Investment banking and capital markets income |
|
|
8 |
|
|
|
44 |
|
|
|
(36 |
) |
|
|
(81.8 |
) |
Operating lease income |
|
|
69 |
|
|
|
64 |
|
|
|
5 |
|
|
|
7.8 |
|
Letter of credit and loan fees |
|
|
37 |
|
|
|
38 |
|
|
|
(1 |
) |
|
|
(2.6 |
) |
Corporate-owned life insurance income |
|
|
28 |
|
|
|
25 |
|
|
|
3 |
|
|
|
12.0 |
|
Electronic banking fees |
|
|
24 |
|
|
|
24 |
|
|
|
|
|
|
|
|
|
Net (losses) gains from loan securitizations and sales |
|
|
(101 |
) |
|
|
9 |
|
|
|
(110 |
) |
|
|
N/M |
|
Net securities gains (losses) |
|
|
3 |
|
|
|
(47 |
) |
|
|
50 |
|
|
|
N/M |
|
Net gains from principal investing |
|
|
9 |
|
|
|
29 |
|
|
|
(20 |
) |
|
|
(69.0 |
) |
Gain from redemption of Visa Inc. shares |
|
|
165 |
|
|
|
|
|
|
|
165 |
|
|
|
N/M |
|
Gain from sale of McDonald Investments branch network |
|
|
|
|
|
|
171 |
|
|
|
(171 |
) |
|
|
(100.0 |
) |
Other income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance income |
|
|
15 |
|
|
|
14 |
|
|
|
1 |
|
|
|
7.1 |
|
Loan securitization servicing fees |
|
|
4 |
|
|
|
5 |
|
|
|
(1 |
) |
|
|
(20.0 |
) |
Credit card fees |
|
|
4 |
|
|
|
3 |
|
|
|
1 |
|
|
|
33.3 |
|
Litigation settlement automobile residual value insurance |
|
|
|
|
|
|
26 |
|
|
|
(26 |
) |
|
|
(100.0 |
) |
Miscellaneous income |
|
|
46 |
|
|
|
49 |
|
|
|
(3 |
) |
|
|
(6.1 |
) |
|
Total other income |
|
|
69 |
|
|
|
97 |
|
|
|
(28 |
) |
|
|
(28.9 |
) |
|
Total noninterest income |
|
$ |
528 |
|
|
$ |
654 |
|
|
$ |
(126 |
) |
|
|
(19.3) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 are Keys largest
source of noninterest income. The primary components of revenue generated by these services are
shown in Figure 11. The increase from the first quarter of 2007 was attributable to strong growth
in institutional asset management and custody fees. Excluding the results of the McDonald
Investment branch network, income from brokerage commissions and fees was up $9 million from the
first three months of 2007.
Figure 11. Trust and Investment Services Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31, |
|
|
Change |
|
dollars in millions |
|
2008 |
|
|
2007 |
|
|
Amount |
|
|
Percent |
|
|
Brokerage commissions and fee income |
|
$ |
33 |
|
|
$ |
40 |
|
|
$ |
(7 |
) |
|
|
(17.5) |
% |
Personal asset management and custody fees |
|
|
41 |
|
|
|
40 |
|
|
|
1 |
|
|
|
2.5 |
|
Institutional asset management and custody fees |
|
|
55 |
|
|
|
45 |
|
|
|
10 |
|
|
|
22.2 |
|
|
Total trust and investment services income |
|
$ |
129 |
|
|
$ |
125 |
|
|
$ |
4 |
|
|
|
3.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A significant portion of Keys trust and investment services income depends on the value and mix of
assets under management. At March 31, 2008, Keys bank, trust and registered investment advisory
subsidiaries had assets under management of $80.5 billion, compared to $82.4 billion at March 31,
2007. As shown in Figure 12, most of the decrease was attributable to the securities lending
portfolio, due in part to increased
volatility in the fixed income markets and actions taken by management to maintain sufficient
liquidity within the portfolio. When clients securities are lent 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.
55
Figure 12. Assets Under Management
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
in millions |
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
|
First |
|
|
Assets under management by investment type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
$ |
39,800 |
|
|
$ |
42,868 |
|
|
$ |
44,465 |
|
|
$ |
42,462 |
|
|
$ |
40,065 |
|
Securities lending |
|
|
18,476 |
|
|
|
20,228 |
|
|
|
22,056 |
|
|
|
22,595 |
|
|
|
21,608 |
|
Fixed income |
|
|
10,598 |
|
|
|
11,357 |
|
|
|
11,372 |
|
|
|
11,187 |
|
|
|
11,420 |
|
Money market |
|
|
9,746 |
|
|
|
9,440 |
|
|
|
8,861 |
|
|
|
8,069 |
|
|
|
8,260 |
|
Hedge funds |
|
|
1,833 |
|
|
|
1,549 |
|
|
|
1,346 |
|
|
|
1,279 |
|
|
|
1,035 |
|
|
Total |
|
$ |
80,453 |
|
|
$ |
85,442 |
|
|
$ |
88,100 |
|
|
$ |
85,592 |
|
|
$ |
82,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proprietary mutual funds included in assets under management: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market |
|
$ |
7,131 |
|
|
$ |
7,298 |
|
|
$ |
6,888 |
|
|
$ |
6,280 |
|
|
$ |
6,459 |
|
Equity |
|
|
6,556 |
|
|
|
6,957 |
|
|
|
6,748 |
|
|
|
6,392 |
|
|
|
5,788 |
|
Fixed income |
|
|
631 |
|
|
|
631 |
|
|
|
629 |
|
|
|
615 |
|
|
|
621 |
|
|
Total |
|
$ |
14,318 |
|
|
$ |
14,886 |
|
|
$ |
14,265 |
|
|
$ |
13,287 |
|
|
$ |
12,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts. Service charges on deposit accounts were up from the first
quarter of 2007, 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. Also contributing to the improvement
was an increase in deposit service charges from cash management.
Investment banking and capital markets income. As shown in Figure 13, investment banking and
capital markets income declined from the year-ago quarter. The decline was caused by less
favorable results from dealer trading and derivatives and from certain real estate-related
investments, both of which reflected extraordinary volatility in the fixed income markets.
Figure 13. Investment Banking and Capital Markets Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31, |
|
|
Change |
|
dollars in millions |
|
2008 |
|
|
2007 |
|
|
Amount |
|
|
Percent |
|
|
Investment banking income |
|
$ |
22 |
|
|
$ |
21 |
|
|
$ |
1 |
|
|
|
4.8 |
% |
(Loss) income from other investments |
|
|
(6 |
) |
|
|
5 |
|
|
|
(11 |
) |
|
|
N/M |
|
Dealer trading and derivatives (loss) income |
|
|
(21 |
) |
|
|
8 |
|
|
|
(29 |
) |
|
|
N/M |
|
Foreign exchange income |
|
|
13 |
|
|
|
10 |
|
|
|
3 |
|
|
|
30.0 |
|
|
Total investment banking and capital markets income |
|
$ |
8 |
|
|
$ |
44 |
|
|
$ |
(36 |
) |
|
|
(81.8) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/M = Not Meaningful
Operating lease income. The increase in operating lease income compared to the first three months
of 2007 was attributable to higher volumes of activity in the Equipment Finance line of business.
Depreciation expense related to the leased equipment is presented in Figure 14 as operating lease
expense.
Net gains from loan securitizations and sales. Key sells or securitizes loans to achieve desired
interest rate and credit risk profiles, to improve the profitability of the overall loan portfolio
or to diversify funding sources. During the first quarter of 2008, Key recorded $101 million of
net losses from loan sales and write-downs, of which $84 million pertains to commercial real estate
loans held for sale, due primarily to continued volatility in the fixed income markets and the
related housing correction. This compares to net gains of $9 million for the first quarter of
2007. The types of loans sold during 2008 and 2007 are presented in Figure 19 on page 62. In
March 2008, Key transferred $3.3 billion of education loans from held-for-sale status to the
held-to-maturity loan portfolio. The secondary markets for these loans have been adversely
affected by market liquidity issues, precluding any recent securitizations and prompting the
companys decision to move them to a held-to-maturity classification.
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
56
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 ($1.0 billion at
March 31, 2008, $993 million at December 31, 2007, and $916 million at March 31, 2007). The net
gains presented in Figure 10 derive from changes in fair values as well as gains resulting from the
sales of principal investments.
Noninterest expense
Noninterest expense for the first quarter of 2008 was $732 million, representing a $52 million, or
7%, decrease from the first quarter of 2007.
As shown in Figure 14, personnel expense decreased by $19 million. Approximately $13 million of
the reduction was attributable to the sale of the McDonald Investments branch network.
Nonpersonnel expense decreased by $33 million from the year-ago quarter, reflecting a $27 million
reduction in the liability for credit losses on lending-related commitments in the current quarter,
compared to an $8 million reduction recorded in the first quarter of 2007. Also contributing to
the improvement were declines in marketing expense and computer processing expense of $5 million
and $4 million, respectively, offset in part by a $6 million increase in operating lease expense.
The sale of the McDonald Investments branch network reduced Keys total nonpersonnel expense by
approximately $14 million.
The decline in total noninterest expense was moderated by additional expenses recorded during the
first quarter of 2008 as a result of the January 1, 2008, acquisition of U.S.B. Holding Co., Inc.
and the October 1, 2007, acquisition of Tuition Management Systems, Inc.
Figure 14. Noninterest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31, |
|
|
Change |
|
dollars in millions |
|
2008 |
|
|
2007 |
|
|
Amount |
|
|
Percent |
|
|
Personnel |
|
$ |
409 |
|
|
$ |
428 |
|
|
$ |
(19 |
) |
|
|
(4.4) |
% |
Net occupancy |
|
|
66 |
|
|
|
63 |
|
|
|
3 |
|
|
|
4.8 |
|
Computer processing |
|
|
47 |
|
|
|
51 |
|
|
|
(4 |
) |
|
|
(7.8 |
) |
Operating lease expense |
|
|
58 |
|
|
|
52 |
|
|
|
6 |
|
|
|
11.5 |
|
Professional fees |
|
|
23 |
|
|
|
26 |
|
|
|
(3 |
) |
|
|
(11.5 |
) |
Equipment |
|
|
24 |
|
|
|
25 |
|
|
|
(1 |
) |
|
|
(4.0 |
) |
Marketing |
|
|
14 |
|
|
|
19 |
|
|
|
(5 |
) |
|
|
(26.3 |
) |
Other expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postage and delivery |
|
|
11 |
|
|
|
12 |
|
|
|
(1 |
) |
|
|
(8.3 |
) |
Franchise and business taxes |
|
|
8 |
|
|
|
9 |
|
|
|
(1 |
) |
|
|
(11.1 |
) |
Telecommunications |
|
|
8 |
|
|
|
7 |
|
|
|
1 |
|
|
|
14.3 |
|
Credit for losses on lending-related commitments |
|
|
(27 |
) |
|
|
(8 |
) |
|
|
(19 |
) |
|
|
237.5 |
|
Miscellaneous expense |
|
|
91 |
|
|
|
100 |
|
|
|
(9 |
) |
|
|
(9.0 |
) |
|
Total other expense |
|
|
91 |
|
|
|
120 |
|
|
|
(29 |
) |
|
|
(24.2 |
) |
|
Total noninterest expense |
|
$ |
732 |
|
|
$ |
784 |
|
|
$ |
(52 |
) |
|
|
(6.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average full-time equivalent employees |
|
|
18,426 |
|
|
|
19,801 |
a |
|
|
(1,375 |
) |
|
|
(6.9 |
)% |
|
(a) |
|
The number of average full-time equivalent employees has not been adjusted for discontinued
operations. |
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 15, personnel expense, the largest category of Keys noninterest
expense, decreased by $19 million, or 4%, from the first three months of 2007. This improvement
was attributable to lower stock-based compensation, as well as decreases in costs associated with
salaries and employee
benefits stemming from a 7% reduction in the average number of full-time equivalent employees. The
McDonald Investments branch network accounted for $2 million of Keys personnel expense in the
first quarter of 2008, compared to $15 million for the same period last year. More than half of
the reduction resulting from the sale of the McDonald Investments branch network relates to
incentive compensation.
57
Figure 15. Personnel Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31, |
|
|
Change |
|
dollars in millions |
|
2008 |
|
|
2007 |
|
|
Amount |
|
|
Percent |
|
|
Salaries |
|
$ |
239 |
|
|
$ |
245 |
|
|
$ |
(6 |
) |
|
|
(2.4 |
)% |
Incentive compensation |
|
|
74 |
|
|
|
75 |
|
|
|
(1 |
) |
|
|
(1.3 |
) |
Employee benefits |
|
|
76 |
|
|
|
82 |
|
|
|
(6 |
) |
|
|
(7.3 |
) |
Stock-based compensation a |
|
|
14 |
|
|
|
24 |
|
|
|
(10 |
) |
|
|
(41.7 |
) |
Severance |
|
|
6 |
|
|
|
2 |
|
|
|
4 |
|
|
|
200.0 |
|
|
Total personnel expense |
|
$ |
409 |
|
|
$ |
428 |
|
|
$ |
(19 |
) |
|
|
(4.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Excludes directors stock-based compensation of $.4 million for the three-month period ended
March 31, 2008, and $.8 million for the three-month period ended March 31, 2007. Directors
stock-based compensation is included in the miscellaneous expense component shown in Figure
14. |
Operating lease expense. The increase in operating lease expense compared to the first quarter of
2007 reflects a higher volume of activity in the Equipment Finance line of business. Income
related to the rental of leased equipment is presented in Figure 10 as operating lease income.
Income taxes
The provision for income taxes from continuing operations was $104 million for the first quarter of
2008, compared to $147 million for the comparable period in 2007. 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 32.3% for the first quarter of 2008, compared to 29.1% for the
year-ago quarter.
During the first quarter of 2008, Key increased the amount of unrecognized tax benefits associated
with its LILO transactions by $46 million. This adjustment resulted from an updated assessment of
Keys tax position performed by management in accordance with the provisions of FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes. The increase in unrecognized tax benefits
associated with Keys LILO transactions necessitated a recalculation of Keys lease income under
FASB Staff Position No. 13-2, Accounting for a Change or Projected Change in the Timing of Cash
Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction, as well as an increase
to Keys tax reserves. These actions reduced Keys first quarter 2008 after-tax earnings by $38
million, or $.10 per diluted common share, including a $3 million reduction to lease income, an $18
million increase to the provision for income taxes and a $17 million increase to Keys tax reserves
related to associated interest charges included in the provision for income taxes. Excluding these
items, the effective tax rate for the first quarter of 2008 was 21.6%.
In the ordinary course of business, Key enters into certain types of lease financing transactions,
including the LILO transaction discussed above, that result in tax deductions. The IRS has
completed audits of Keys income tax returns for a number of prior years and has disallowed the tax
deductions taken in connection with these transactions. Key is contesting the IRS position.
Additional information related to the specific types of lease financing transactions involved, the
status of Keys response to the IRS ruling, the potential effect on Keys results of operations and
capital in the event of an adverse outcome, and the actions discussed above is included in Note 12
(Income Taxes), which begins on page 25.
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 the 401(k) savings plan. In addition, a lower tax rate is
applied to portions of the equipment lease portfolio that are managed by a foreign subsidiary in a
lower tax jurisdiction. Since Key intends to permanently reinvest the earnings of this foreign
subsidiary overseas, no deferred income taxes are recorded on those earnings in accordance with
SFAS No. 109, Accounting for Income Taxes.
58
Financial Condition
Loans and loans held for sale
At March 31, 2008, total loans outstanding were $76.4 billion, compared to $70.8 billion at
December 31, 2007, and $65.7 billion at March 31, 2007. The increase in Keys loan portfolio over
the past twelve months was primarily attributable to strong growth in the commercial portfolio and
the March 2008 transfer of $3.3 billion of education loans from held-for-sale status to a
held-to-maturity classification.
Commercial loan portfolio
Commercial loans outstanding increased by $6.3 billion, or 13%, from the year ago quarter, due
largely to a higher volume of originations in the commercial mortgage portfolio, and in the
commercial, financial and agricultural portfolio. This growth reflected greater reliance by
borrowers on commercial lines of credit in this volatile capital markets environment, as well as
the January 1 acquisition of U.S.B. Holding Co., Inc., which added approximately $900 million to
Keys commercial loan portfolio. The overall growth in the commercial loan portfolio was
geographically broad-based and spread among a number of industry sectors.
Commercial real estate loans. Commercial real estate loans for both owner- and nonowner-occupied
properties constitute one of the largest segments of Keys commercial loan portfolio. At March 31,
2008, Keys commercial real estate portfolio included mortgage loans of $10.5 billion and
construction loans of $8.5 billion. The average mortgage loan originated during the first quarter
of 2008 was $1 million, and the largest mortgage loan at March 31, 2008, had a balance of $77
million. At March 31, 2008, the average construction loan commitment was $5 million. The largest
construction loan commitment was $77 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 14-state
banking franchise and Real Estate Capital and Corporate Banking Services, a national line of
business that cultivates relationships both within and beyond the branch system. This line of
business deals exclusively with nonowner-occupied properties (generally properties for which at
least 50% of the debt service is provided by rental income from nonaffiliated third parties) and
accounted for approximately 63% of Keys average commercial real estate loans during the first
quarter of 2008. Keys commercial real estate business generally focuses on larger real estate
developers and, as shown in Figure 16, is diversified by both industry type and geographic location
of the underlying collateral.
Figure 16. Commercial Real Estate Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
Geographic Region |
|
|
Total |
|
|
Percent of |
|
dollars in millions |
|
Northeast |
|
|
Southeast |
|
|
Southwest |
|
|
Midwest |
|
|
Central |
|
|
West |
|
|
Amount |
|
|
Total |
|
|
Nonowner-occupied: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential properties |
|
$ |
449 |
|
|
$ |
977 |
|
|
$ |
251 |
|
|
$ |
183 |
|
|
$ |
418 |
|
|
$ |
1,360 |
|
|
$ |
3,638 |
|
|
|
19.2 |
% |
Retail properties |
|
|
176 |
|
|
|
813 |
|
|
|
238 |
|
|
|
517 |
|
|
|
346 |
|
|
|
346 |
|
|
|
2,436 |
|
|
|
12.9 |
|
Multifamily properties |
|
|
239 |
|
|
|
498 |
|
|
|
389 |
|
|
|
300 |
|
|
|
411 |
|
|
|
477 |
|
|
|
2,314 |
|
|
|
12.2 |
|
Office buildings |
|
|
224 |
|
|
|
232 |
|
|
|
65 |
|
|
|
193 |
|
|
|
188 |
|
|
|
403 |
|
|
|
1,305 |
|
|
|
6.9 |
|
Land and development |
|
|
143 |
|
|
|
210 |
|
|
|
159 |
|
|
|
48 |
|
|
|
156 |
|
|
|
143 |
|
|
|
859 |
|
|
|
4.5 |
|
Health facilities |
|
|
168 |
|
|
|
120 |
|
|
|
25 |
|
|
|
149 |
|
|
|
91 |
|
|
|
172 |
|
|
|
725 |
|
|
|
3.8 |
|
Warehouses |
|
|
92 |
|
|
|
209 |
|
|
|
29 |
|
|
|
152 |
|
|
|
69 |
|
|
|
196 |
|
|
|
747 |
|
|
|
3.9 |
|
Hotels/Motels |
|
|
53 |
|
|
|
75 |
|
|
|
|
|
|
|
21 |
|
|
|
36 |
|
|
|
55 |
|
|
|
240 |
|
|
|
1.3 |
|
Manufacturing facilities |
|
|
3 |
|
|
|
28 |
|
|
|
17 |
|
|
|
12 |
|
|
|
1 |
|
|
|
15 |
|
|
|
76 |
|
|
|
.4 |
|
Other |
|
|
186 |
|
|
|
22 |
|
|
|
2 |
|
|
|
184 |
|
|
|
219 |
|
|
|
228 |
|
|
|
841 |
|
|
|
4.4 |
|
|
|
|
|
1,733 |
|
|
|
3,184 |
|
|
|
1,175 |
|
|
|
1,759 |
|
|
|
1,935 |
|
|
|
3,395 |
|
|
|
13,181 |
|
|
|
69.5 |
|
Owner-occupied |
|
|
1,193 |
|
|
|
236 |
|
|
|
102 |
|
|
|
2,074 |
|
|
|
510 |
|
|
|
1,656 |
|
|
|
5,771 |
|
|
|
30.5 |
|
|
Total |
|
$ |
2,926 |
|
|
$ |
3,420 |
|
|
$ |
1,277 |
|
|
$ |
3,833 |
|
|
$ |
2,445 |
|
|
$ |
5,051 |
|
|
$ |
18,952 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonowner-occupied: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans |
|
$ |
14 |
|
|
$ |
226 |
|
|
$ |
66 |
|
|
$ |
40 |
|
|
$ |
23 |
|
|
$ |
309 |
|
|
$ |
678 |
|
|
|
N/M |
|
Accruing loans past due 90 days or more |
|
|
6 |
|
|
|
16 |
|
|
|
13 |
|
|
|
2 |
|
|
|
4 |
|
|
|
79 |
|
|
|
120 |
|
|
|
N/M |
|
Accruing loans past due 30 through 89 days |
|
|
68 |
|
|
|
140 |
|
|
|
19 |
|
|
|
10 |
|
|
|
6 |
|
|
|
265 |
|
|
|
508 |
|
|
|
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
59
During the first quarter of 2008, nonperforming loans related to Keys nonowner-occupied properties
rose by $658 million, from the year ago quarter, 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 came from loans outstanding in Florida and southern
California.
Commercial lease financing. Management believes Key has both the scale and array of products to
compete in the specialty of equipment lease financing. Key conducts these financing arrangements
through the Equipment Finance line of business. Commercial lease financing receivables represented
18% of commercial loans at March 31, 2008, compared to 21% at March 31, 2007.
Consumer loan portfolio
Consumer loans outstanding increased by $4.4 billion, or 25%, from one year ago. As stated
previously, in March 2008, Key transferred $3.3 billion of education loans from held-for-sale
status to the held-to-maturity portfolio. The secondary markets for these loans have been
adversely affected by market liquidity issues, prompting the companys decision to move them to a
held-to-maturity classification. Adjusting for this transfer, consumer loans were up $1.1 million,
or 6%, from the year ago quarter. The growth was driven by new originations in Keys real estate
residential mortgage and indirect marine loan portfolios (loans to support dealer financing of
purchases of boats and related equipment), offset in part by a decline in Keys consumer direct
loan portfolio (conventional loans to individuals).
The home equity portfolio is by far the largest segment of Keys consumer loan portfolio. A
significant amount of this portfolio (89% at March 31, 2008) is derived primarily from the Regional
Banking line of business; the remainder originated from the Consumer Finance line of business.
Management expects the level of the home equity portfolio to decrease in the future as a result of
Keys December 2007 decision to exit dealer-originated home improvement lending activities, which
are largely out-of-footprint.
Figure 17 summarizes Keys home equity loan portfolio by source at the end of the last five
quarters, as well as certain asset quality statistics and yields on the portfolio as a whole.
Figure 17. Home Equity Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
dollars in millions |
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
|
First |
|
|
SOURCES OF LOANS OUTSTANDING |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional Banking |
|
$ |
9,678 |
|
|
$ |
9,655 |
|
|
$ |
9,674 |
|
|
$ |
9,736 |
|
|
$ |
9,623 |
|
Consumer Finance |
|
|
1,220 |
|
|
|
1,262 |
|
|
|
1,230 |
|
|
|
1,143 |
|
|
|
1,046 |
|
|
Total |
|
$ |
10,898 |
|
|
$ |
10,917 |
|
|
$ |
10,904 |
|
|
$ |
10,879 |
|
|
$ |
10,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans at period end |
|
$ |
74 |
|
|
$ |
66 |
|
|
$ |
61 |
|
|
$ |
55 |
|
|
$ |
52 |
|
Net loan charge-offs for the period |
|
|
15 |
|
|
|
12 |
|
|
|
8 |
|
|
|
6 |
|
|
|
7 |
|
Yield for the period a |
|
|
6.54 |
% |
|
|
7.02 |
% |
|
|
7.22 |
% |
|
|
7.22 |
% |
|
|
7.22 |
% |
|
(a) |
|
From continuing operations. |
Loans held for sale
As shown in Note 6 (Loans and Loans Held for Sale), which begins on page 19, Keys loans held for
sale were $1.7 billion at March 31, 2008, compared to $4.7 billion at December 31, 2007, and $4.2
billion at March 31, 2007. The decrease was attributable to the transfer of education loans from
held-for-sale status to the held-to-maturity portfolio as discussed above.
At March 31, 2008, Keys loans held for sale included $1.1 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 the volatility in the financial markets, management
has reviewed Keys assumptions and determined they reflect current market conditions. As a result,
no significant adjustments to the assumptions were required during the first quarter of 2008.
60
During the first quarter, Key recorded net unrealized losses of $97 million and a net realized gain
of $1 million on its loans held for sale portfolio. Key records these transactions in net
(losses) gains from loan securitizations and sales on the income statement. Key has not been
significantly impacted by market volatility in the subprime mortgage lending industry because it
sold the $2.5 billion subprime mortgage loan portfolio held by the Champion Mortgage finance
business in November 2006.
Sales and securitizations
Key continues to use alternative funding sources like loan sales and securitizations to support its
loan origination capabilities. In addition, certain acquisitions completed over the past several
years have improved Keys ability under favorable market conditions 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 $3.3 billion of commercial real estate loans ($238 million
through a securitization), $258 million of education loans, $533 million of residential real estate
loans, and $397 million of commercial loans and leases. Most of these sales came from the
held-for-sale portfolio. Due to unfavorable market conditions, Key did not proceed with an
education loan securitization during 2007 and does not anticipate entering into any further
securitizations of this type during the remainder of 2008.
Among the factors that Key considers in determining which loans to sell or securitize are:
|
|
|
¨
|
|
whether particular lending businesses meet established performance standards or fit with Keys relationship banking strategy; |
|
|
|
¨
|
|
Keys asset/liability management needs; |
|
|
|
¨
|
|
whether the characteristics of a specific loan portfolio make it conducive to securitization; |
|
|
|
¨
|
|
the cost of alternative funding sources; |
|
|
|
¨
|
|
the level of credit risk; |
|
|
|
¨
|
|
capital requirements; and |
|
|
|
¨
|
|
market conditions and pricing. |
Figure 18 summarizes Keys loan sales (including securitizations) for the first three months of
2008 and all of 2007.
Figure 18. 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 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter |
|
$ |
14 |
|
|
$ |
204 |
|
|
$ |
29 |
|
|
$ |
170 |
|
|
|
|
|
|
|
|
|
|
$ |
72 |
|
|
$ |
489 |
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth quarter |
|
$ |
38 |
|
|
$ |
965 |
|
|
$ |
130 |
|
|
$ |
118 |
|
|
|
|
|
|
|
|
|
|
$ |
24 |
|
|
$ |
1,275 |
|
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 |
|
$ |
106 |
|
|
$ |
3,791 |
|
|
$ |
268 |
|
|
$ |
463 |
|
|
$ |
233 |
|
|
$ |
90 |
|
|
$ |
247 |
|
|
$ |
5,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
Figure 19 shows loans that are either administered or serviced by Key, but not recorded on the
balance sheet. The table includes loans that have been both securitized and sold, or simply sold
outright.
Figure 19. Loans Administered or Serviced
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
September 30, |
|
|
June 30, |
|
|
March 31, |
|
in millions |
|
2008 |
|
|
2007 |
|
|
2007 |
|
|
2007 |
|
|
2007 |
|
|
Commercial real estate loans a |
|
$ |
130,645 |
|
|
$ |
134,982 |
|
|
$ |
134,510 |
|
|
$ |
121,384 |
|
|
$ |
108,303 |
|
Education loans |
|
|
4,592 |
|
|
|
4,722 |
|
|
|
4,984 |
|
|
|
5,118 |
|
|
|
5,251 |
|
Commercial lease financing |
|
|
762 |
|
|
|
790 |
|
|
|
657 |
|
|
|
529 |
|
|
|
458 |
|
Commercial loans |
|
|
227 |
|
|
|
229 |
|
|
|
228 |
|
|
|
242 |
|
|
|
243 |
|
|
Total |
|
$ |
136,226 |
|
|
$ |
140,723 |
|
|
$ |
140,379 |
|
|
$ |
127,273 |
|
|
$ |
114,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Key acquired the servicing for commercial mortgage loan portfolios with an aggregate
principal balance of $345 million for the first quarter 2008, $5.3 billion for the fourth
quarter 2007, $21.1 billion for the third quarter 2007, $6.4 billion for the second quarter
2007 and $12.7 billion for the first quarter 2007. |
In the event of default by a borrower, Key is subject to recourse with respect to approximately
$575 million of the $136.2 billion of loans administered or serviced at March 31, 2008. 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 28.
Key derives income from several sources when retaining the right to administer or service loans
that are securitized or sold. Key earns noninterest income (recorded as other income) from fees
for servicing or administering loans. This fee income is reduced by the amortization of related
servicing assets. In addition, Key earns interest income from securitized assets retained and from
investing funds generated by escrow deposits collected in connection with the servicing of
commercial real estate loans. These deposits have contributed to the growth in Keys average total
deposits over the past twelve months, thereby moderating Keys overall cost of funds.
Securities
At March 31, 2008, the securities portfolio totaled $8.4 billion, compared to $7.9 billion at
December 31, 2007, and $7.8 billion at March 31, 2007. At each of these dates, almost the entire
securities portfolio was securities available for sale, with the remainder consisting of
held-to-maturity securities of less than $40 million.
Securities available for sale. The majority of Keys securities available-for-sale portfolio
consists of collateralized mortgage obligations (CMOs). 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 March 31, 2008, Key had $8.0
billion invested in CMOs and other mortgage-backed securities in the available-for-sale portfolio,
compared to $7.6 billion at December 31, 2007, and $7.4 billion at March 31, 2007.
Management periodically evaluates Keys securities available-for-sale portfolio in light of
established asset/liability management objectives, changing market conditions that could affect the
profitability of the portfolio, and the level of interest rate risk to which Key is exposed. These
evaluations may cause management to take steps to improve Keys overall balance sheet positioning.
In 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 CMOs and reinvested the proceeds in mortgage-backed
securities with higher yields and longer expected average maturities. The repositioning also
reduced Keys exposure to prepayment risk if interest rates decline by replacing the CMOs sold with
CMOs whose underlying mortgage loans have 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.
62
As a result of the sale of CMOs, Key recorded a net realized loss of $49 million ($31 million after
tax, or $.08 per diluted common share) during the first quarter of 2007. This net loss was
previously recorded in net unrealized losses on securities available for sale in the accumulated
other comprehensive income (loss) component of shareholders equity.
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 Key generally uses debt securities for this purpose, other assets, such as
securities purchased under resale agreements, are occasionally used when they provide more
favorable yields or risk profiles.
As shown in Figure 20, all of Keys mortgage-backed securities are issued by government sponsored
enterprises or the Government National Mortgage Association and are traded in highly liquid
secondary markets. For more than 99% of these securities, management employs an outside bond
pricing service to determine the fair value at which they should be recorded on the balance sheet.
In performing the valuations, the pricing service relies on models that consider security-specific
details as well as relevant industry and economic factors. The most significant of these inputs
are quoted market prices, interest rate spreads on relevant benchmark securities and certain
prepayment assumptions. Management uses a purchased pricing model, along with inputs similar to
those described above to value a small portion (less than $5 million) of Keys mortgage-backed
securities. Management must make additional assumptions, beyond those relied upon by the pricing
service for these aged securities. The valuations derived from the models are reviewed by
management for reasonableness to ensure they are consistent with the values placed on similar
securities traded in the secondary markets.
Figure 20. Mortgage-Backed Securities by Issuer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
in millions |
|
2008 |
|
|
2007 |
|
|
2007 |
|
|
Federal Home Loan Mortgage Corporation |
|
$ |
4,680 |
|
|
$ |
4,566 |
|
|
$ |
4,642 |
|
Federal National Mortgage Association |
|
|
2,951 |
|
|
|
2,748 |
|
|
|
2,518 |
|
Government National Mortgage Association |
|
|
408 |
|
|
|
256 |
|
|
|
236 |
|
|
Total |
|
$ |
8,039 |
|
|
$ |
7,570 |
|
|
$ |
7,396 |
|
|
|
|
|
|
|
|
|
|
|
|
For the first quarter of 2008, net gains from Keys mortgage-backed securities totaled $189
million. These net gains include net unrealized gains of $188 million, caused by the decline in
benchmark Treasury yields, offset in part by the widening of interest rate spreads on these
securities. Key records the net unrealized gains in the accumulated other comprehensive income
(loss) component of shareholders equity and records the net realized gains in net securities
gains (losses) on the income statement.
Figure 21 shows the composition, yields and remaining maturities of Keys securities available for
sale. For more information about securities, including gross unrealized gains and losses by type
of security, see Note 5 (Securities), which begins on page 17.
63
Figure 21. Securities Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury, |
|
|
States and |
|
|
Collateralized |
|
|
Mortgage- |
|
|
Retained |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Agencies and |
|
|
Political |
|
|
Mortgage |
|
|
Backed |
|
|
Interests in |
|
|
Other |
|
|
|
|
|
|
Average |
|
dollars in millions |
|
Corporations |
|
|
Subdivisions |
|
|
Obligations |
a |
|
Securities |
a |
|
Securitizations |
a |
|
Securities |
b |
|
Total |
|
|
Yield |
c |
|
MARCH 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year or less |
|
$ |
3 |
|
|
|
|
|
|
$ |
37 |
|
|
$ |
8 |
|
|
|
|
|
|
$ |
13 |
|
|
$ |
61 |
|
|
|
5.06 |
% |
After one through five years |
|
|
8 |
|
|
$ |
6 |
|
|
|
6,480 |
|
|
|
1,251 |
|
|
$ |
86 |
|
|
|
67 |
|
|
|
7,898 |
|
|
|
5.09 |
|
After five through ten years |
|
|
6 |
|
|
|
52 |
|
|
|
|
|
|
|
241 |
|
|
|
100 |
|
|
|
1 |
|
|
|
400 |
|
|
|
7.19 |
|
After ten years |
|
|
1 |
|
|
|
35 |
|
|
|
|
|
|
|
22 |
|
|
|
|
|
|
|
2 |
|
|
|
60 |
|
|
|
5.84 |
|
|
Fair value |
|
$ |
18 |
|
|
$ |
93 |
|
|
$ |
6,517 |
|
|
$ |
1,522 |
|
|
$ |
186 |
|
|
$ |
83 |
|
|
$ |
8,419 |
|
|
|
|
|
Amortized cost |
|
|
18 |
|
|
|
92 |
|
|
|
6,355 |
|
|
|
1,486 |
|
|
|
153 |
|
|
|
84 |
|
|
|
8,188 |
|
|
|
5.20 |
% |
Weighted-average yield c |
|
|
4.12 |
% |
|
|
5.79 |
% |
|
|
4.89 |
% |
|
|
5.11 |
% |
|
|
18.77 |
% |
|
|
5.12 |
% d |
|
|
5.20 |
% d |
|
|
|
|
Weighted-average maturity |
|
5.2 years |
|
|
8.8 years |
|
|
2.8 years |
|
|
4.7 years |
|
|
5.2 years |
|
|
3.2 years |
|
|
3.3 years |
|
|
|
|
|
|
DECEMBER 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
19 |
|
|
$ |
10 |
|
|
$ |
6,167 |
|
|
$ |
1,403 |
|
|
$ |
185 |
|
|
$ |
76 |
|
|
$ |
7,860 |
|
|
|
|
|
Amortized cost |
|
|
19 |
|
|
|
10 |
|
|
|
6,167 |
|
|
|
1,393 |
|
|
|
149 |
|
|
|
72 |
|
|
|
7,810 |
|
|
|
5.22 |
% |
|
MARCH 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
13 |
|
|
$ |
13 |
|
|
$ |
6,505 |
|
|
$ |
891 |
|
|
$ |
199 |
|
|
$ |
168 |
|
|
$ |
7,789 |
|
|
|
|
|
Amortized cost |
|
|
13 |
|
|
|
12 |
|
|
|
6,519 |
|
|
|
889 |
|
|
|
146 |
|
|
|
157 |
|
|
|
7,736 |
|
|
|
5.25 |
% |
|
|
|
(a) |
Maturity is based upon expected average lives rather than contractual terms. |
|
(b) |
Includes primarily marketable equity securities. |
|
(c) |
Weighted-average yields are calculated based on amortized cost. Such yields have been
adjusted to a taxable-equivalent basis using the statutory federal income tax rate of 35%. |
|
(d) |
Excludes securities of $77 million at March 31, 2008, that have no stated yield. |
Held-to-maturity securities. Commercial paper and securities issued by states and political
subdivisions constitute most of Keys held-to-maturity securities. Figure 22 shows the
composition, yields and remaining maturities of these securities.
Figure 22. Held-to-Maturity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Political |
|
|
Other |
|
|
|
|
|
|
Average |
|
dollars in millions |
|
Subdivisions |
|
|
Securities |
|
|
Total |
|
|
Yield |
a |
|
MARCH 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year or less |
|
$ |
4 |
|
|
$ |
12 |
|
|
$ |
16 |
|
|
|
6.47 |
% |
After one through five years |
|
|
4 |
|
|
|
9 |
|
|
|
13 |
|
|
|
6.32 |
|
|
Amortized cost |
|
$ |
8 |
|
|
$ |
21 |
|
|
$ |
29 |
|
|
|
6.42 |
% |
Fair value |
|
|
8 |
|
|
|
21 |
|
|
|
29 |
|
|
|
|
|
Weighted-average yield |
|
|
8.62 |
% |
|
|
4.97 |
% b |
|
|
6.42 |
% b |
|
|
|
|
Weighted-average maturity |
|
1.6 years |
|
|
1.5 years |
|
|
1.5 years |
|
|
|
|
|
|
DECEMBER 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost |
|
$ |
9 |
|
|
$ |
19 |
|
|
$ |
28 |
|
|
|
6.84 |
% |
Fair value |
|
|
9 |
|
|
|
19 |
|
|
|
28 |
|
|
|
|
|
|
MARCH 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost |
|
$ |
18 |
|
|
$ |
20 |
|
|
$ |
38 |
|
|
|
7.23 |
% |
Fair value |
|
|
18 |
|
|
|
20 |
|
|
|
38 |
|
|
|
|
|
|
|
|
(a) |
Weighted-average yields are calculated based on amortized cost. Such yields have
been adjusted to a taxable-equivalent basis using the statutory federal income tax
rate of 35%. |
|
(b) |
Excludes securities of $8 million at March 31, 2008, that have no stated yield. |
64
Other investments
Most of Keys other investments (primarily principal investments) are not traded on a ready market.
Management determines the fair value at which these investments should be recorded based on the
nature of the specific investment and all available information and relevant facts about the
issuers performance. Managements review may encompass such factors as the issuers past
financial performance and future potential, the values of public companies in comparable
businesses, the risks associated with the particular business or investment type, current market
conditions, the nature and duration of resale restrictions, the issuers payment history,
managements knowledge of the industry and other relevant factors. For the first three months of
2008, net gains from Keys principal investing activities totaled $9 million, which included $7
million of net unrealized losses. Key records these net gains as net gains from principal
investing on the income statement.
Principal investments ¾ investments in equity and mezzanine instruments made by Keys
Principal Investing unit ¾ represent 65% of other investments at March 31, 2008. They
include direct investments (investments made in a particular company), as well as indirect
investments (investments made through funds that include other investors). Principal investments
are predominantly made in privately held companies and are carried at fair value ($1.0 billion at
March 31, 2008, and $993 million at December 31, 2007, and $916 million at March 31, 2007).
In addition to principal investments, other investments include other equity and mezzanine
instruments, such as certain real estate-related investments that are carried at fair value, as
well as other types of investments that generally are carried at cost.
Deposits and other sources of funds
Core deposits ___ domestic deposits other than certificates of deposit of $100,000 or
more ___ are Keys primary source of funding. These deposits generally are stable, have
a relatively low cost and typically react more slowly to changes in interest rates than
market-based deposits. During the first quarter of 2008, core deposits averaged $52.4 billion, and
represented 58% of the funds Key used to support loans and other earning assets, compared to $50.4
billion and 63% during the same quarter in 2007. The composition of Keys deposits is shown in
Figure 8, which spans pages 52 and 53.
The increase in average core deposits compared to the first quarter of 2007 was attributable to
growth in Negotiable Order of Withdrawal (NOW) and money market deposits accounts, savings
deposits, and certificates of deposit, offset in part by a decline in noninterest-bearing deposits.
The growth in and change in composition of core deposits were attributable to several factors.
|
|
|
¨
|
|
The January 1, 2008, acquisition of U.S.B. Holding Co., Inc. added
approximately $1.7 billion to Keys average core deposits for the
current quarter, while average core deposits for the year-ago
quarter included approximately $700 million of deposits related to
the McDonald Investments branch network. Adjusting for the
acquisition of U.S.B. Holding Co., Inc. and the February 2007 sale
of the McDonald Investments branch network, average core deposits
were up approximately $1.0 billion, or 2%, from the first quarter
of 2007. |
|
|
|
¨
|
|
The increase in NOW and money market deposits accounts and the
decrease in noninterest-bearing deposits reflect actions taken by
Key in November 2007 to reduce its deposit reserve requirement by
converting approximately $3.4 billion of noninterest-bearing
deposits to NOW and money market deposit accounts. |
|
|
|
¨
|
|
Competition for deposits in the markets in which Key operates
remains strong and consumer preferences shifted more to
certificates of deposit as a result of the declining interest rate
environment. |
65
Purchased funds, comprising large certificates of deposit, deposits in the foreign office and
short-term borrowings, averaged $22.7 billion in the first quarter of 2008, compared to $14.4
billion during the year-ago quarter. The significant increase was attributable to growth in large
certificate of deposits, foreign office deposits, and bank notes and other short-term borrowings.
During the current year, Key has used purchased funds more heavily to accommodate borrowers
increased reliance on commercial lines of credit in the volatile capital markets environment and to
compensate for the transfer of approximately $1.3 billion of core deposits to the buyer in
connection with the sale of the McDonald Investments branch network.
Capital
Shareholders equity. Total shareholders equity at March 31, 2008, was $8.6 billion, up $846
million from December 31, 2007. Factors contributing to the change in shareholders equity during
the first three months of 2008 are shown in the Consolidated Statements of Changes in Shareholders
Equity presented on page 5.
Common shares outstanding. Figure 23 shows activities that caused the change in Keys outstanding
common shares over the past five quarters.
Figure 23. Changes in Common Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
in thousands |
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
|
First |
|
|
Shares outstanding at beginning of period |
|
|
388,793 |
|
|
|
388,708 |
|
|
|
389,362 |
|
|
|
394,483 |
|
|
|
399,153 |
|
Shares issued to acquire U.S.B. Holding Co., Inc. |
|
|
9,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares under employee benefit plans |
|
|
1,383 |
|
|
|
85 |
|
|
|
1,346 |
|
|
|
879 |
|
|
|
3,330 |
|
Repurchase of common shares |
|
|
|
|
|
|
|
|
|
|
(2,000 |
) |
|
|
(6,000 |
) |
|
|
(8,000 |
) |
|
Shares outstanding at end of period |
|
|
400,071 |
|
|
|
388,793 |
|
|
|
388,708 |
|
|
|
389,362 |
|
|
|
394,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key repurchases its common shares periodically in the open market or through privately negotiated
transactions under a repurchase program authorized by the Board of Directors. The program does not
have an expiration date. Key did not repurchase any shares during the first quarter of 2008 and
does not anticipate any share repurchases during the second quarter. At March 31, 2008, 14.0
million shares were remaining for repurchase.
At March 31, 2008, Key had 91.8 million treasury shares. Management expects to reissue those
shares as needed in connection with stock-based compensation awards and for other corporate
purposes. On January 1, 2008, Key reissued 9.9 million of its common shares in connection with the
acquisition of U.S.B. Holding Co., Inc. Additionally, during the first quarter, Key reissued 1.4
million shares under employee benefit plans.
Capital availability. As a result of the market disruption that has occurred, the availability of
capital (principally to financial services companies) has become significantly restricted. While
some companies have been successful in raising additional capital, the cost of that capital has
been substantially higher than the prevailing market rate prior to the volatility. Management
cannot predict when or if the markets will return to more favorable conditions. However, if the
need for additional capital should arise under current market conditions, management anticipates
there may be limited accessibility, or accessibility only at substantially higher costs than
experienced in recent years.
Capital adequacy. Capital adequacy is an important indicator of financial stability and
performance. Keys ratio of total shareholders equity to total assets was 8.47% at March 31,
2008, compared to 7.89% at December 31, 2007, and 8.37% at March 31, 2007. Keys ratio of tangible
equity to tangible assets was 6.85% at March 31, 2008, above Keys targeted range of 6.25% to
6.75%. Management believes Keys capital position provides sufficient flexibility to take
advantage of investment opportunities, to repurchase shares when appropriate and to pay dividends.
66
Banking industry regulators prescribe minimum capital ratios for bank holding companies and their
banking subsidiaries. Note 14 (Shareholders Equity), which begins on page 87 of Keys 2007
Annual Report to Shareholders, explains the implications of failing to meet these specific capital
requirements.
Risk-based capital guidelines require a minimum level of capital as a percent of risk-weighted
assets. Risk-weighted assets consist of total assets plus certain off-balance sheet items, subject
to adjustment for predefined credit risk factors. Currently, banks and bank holding companies must
maintain, at a minimum, Tier 1 capital as a percent of risk-weighted assets of 4.00%, and total
capital as a percent of risk-weighted assets of 8.00%. As of March 31, 2008, Keys Tier 1 capital
ratio was 8.33%, and its total capital ratio was 12.34%.
Another indicator of capital adequacy, the leverage ratio, is defined as Tier 1 capital as a
percentage of average quarterly tangible assets. Leverage ratio requirements vary with the
condition of the financial institution. Bank holding companies that either have the highest
supervisory rating or have implemented the Federal Reserves risk-adjusted measure for market risk
as KeyCorp has must maintain a minimum leverage ratio of 3.00%. All other bank holding
companies must maintain a minimum ratio of 4.00%. As of March 31, 2008, Key had a leverage ratio
of 9.15%.
Federal bank regulators group FDIC-insured depository institutions into five categories, ranging
from critically undercapitalized to well capitalized. Keys affiliate bank, KeyBank, qualified
as well capitalized at March 31, 2008, since it exceeded the prescribed thresholds of 10.00% for
total capital, 6.00% for Tier 1 capital and 5.00% for the leverage ratio. If these provisions
applied to bank holding companies, Key also would qualify as well capitalized at March 31, 2008.
The FDIC-defined capital categories serve a limited supervisory function. Investors should not
treat them as a representation of the overall financial condition or prospects of KeyCorp or
KeyBank.
67
Figure 24 presents the details of Keys regulatory capital position at March 31, 2008, December 31,
2007, and March 31, 2007.
Figure 24. Capital Components and Risk-Weighted Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
dollars in millions |
|
2008 |
|
|
2007 |
|
|
2007 |
|
|
TIER 1 CAPITAL |
|
|
|
|
|
|
|
|
|
|
|
|
Common shareholders equity a |
|
$ |
8,278 |
|
|
$ |
7,687 |
|
|
$ |
7,873 |
|
Qualifying capital securities |
|
|
2,759 |
|
|
|
1,857 |
|
|
|
1,792 |
|
Less: Goodwill |
|
|
1,599 |
|
|
|
1,252 |
|
|
|
1,202 |
|
Other assets b |
|
|
238 |
|
|
|
197 |
|
|
|
175 |
|
|
Total Tier 1 capital |
|
|
9,200 |
|
|
|
8,095 |
|
|
|
8,288 |
|
|
TIER 2 CAPITAL |
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for losses on loans and liability for losses on
lending-related commitments |
|
|
1,351 |
|
|
|
1,280 |
|
|
|
989 |
|
Net unrealized gains on equity securities available for sale |
|
|
|
|
|
|
2 |
|
|
|
5 |
|
Qualifying long-term debt |
|
|
3,074 |
|
|
|
3,003 |
|
|
|
3,127 |
|
|
Total Tier 2 capital |
|
|
4,425 |
|
|
|
4,285 |
|
|
|
4,121 |
|
|
Total risk-based capital |
|
$ |
13,625 |
|
|
$ |
12,380 |
|
|
$ |
12,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RISK-WEIGHTED ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Risk-weighted assets on balance sheet |
|
$ |
85,917 |
|
|
$ |
83,758 |
|
|
$ |
78,154 |
|
Risk-weighted off-balance sheet exposure |
|
|
25,745 |
|
|
|
25,676 |
|
|
|
24,686 |
|
Less: Goodwill |
|
|
1,599 |
|
|
|
1,252 |
|
|
|
1,202 |
|
Other assets b |
|
|
1,008 |
|
|
|
962 |
|
|
|
659 |
|
Plus: Market risk-equivalent assets |
|
|
1,382 |
|
|
|
1,525 |
|
|
|
718 |
|
|
Total risk-weighted assets |
|
$ |
110,437 |
|
|
$ |
108,745 |
|
|
$ |
101,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVERAGE QUARTERLY TOTAL ASSETS |
|
$ |
103,202 |
|
|
$ |
98,728 |
|
|
$ |
92,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAPITAL RATIOS |
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 risk-based capital ratio |
|
|
8.33 |
% |
|
|
7.44 |
% |
|
|
8.15 |
% |
Total risk-based capital ratio |
|
|
12.34 |
|
|
|
11.38 |
|
|
|
12.20 |
|
Leverage ratio c |
|
|
9.15 |
|
|
|
8.39 |
|
|
|
9.17 |
|
|
|
|
(a) |
Common shareholders equity does not include net unrealized gains or losses on securities
available for sale (except for net unrealized losses on marketable equity securities), net
gains or losses on cash flow hedges, or the amount resulting from the adoption of SFAS No.
158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans. |
|
(b) |
Other assets deducted from Tier 1 capital and risk-weighted assets consist of intangible
assets (excluding goodwill) recorded after February 19, 1992, and deductible portions of
nonfinancial equity investments. |
|
(c) |
This ratio is Tier 1 capital divided by average quarterly total assets less: (i) goodwill, (ii)
the nonqualifying intangible assets described in footnote (b), (iii) deductible portions of
nonfinancial equity investments, and (iv) net unrealized gains or losses on securities available
for sale; plus assets derecognized as an offset to accumulated other comprehensive income resulting
from the adoption and application of SFAS No. 158. |
68
Risk Management
Overview
Like other financial services companies, Key engages in business activities with inherent risks.
The ability to properly and effectively identify, measure, monitor and report such risks is
essential to maintaining safety and soundness and to maximizing profitability. Management believes
that the most significant risks facing Key are market risk, liquidity risk, credit risk and
operational risk, and that these risks must be managed across the entire enterprise. Key continues
to evolve and strengthen its Enterprise Risk Management practices and uses a risk adjusted capital
framework to manage these risks. This framework is approved and managed by the Risk Capital
Committee, which consists of senior finance, risk management and business executives. Each type of
risk is defined and discussed in greater detail in the remainder of this section.
Keys Board of Directors has established and follows a corporate governance program that serves as
the foundation for managing and mitigating risk. In accordance with this program, the Board
focuses on the interests of shareholders, encourages strong internal controls, demands management
accountability, mandates adherence to Keys code of ethics and administers an annual
self-assessment process. The Audit and Risk Management committees help the Board meet these risk
oversight responsibilities. The responsibilities of these two committees are summarized on page 46
of Keys 2007 Annual Report to Shareholders.
Market risk management
The values of some financial instruments vary not only with changes in market interest rates but
also with changes in foreign exchange rates. Financial instruments also are susceptible to factors
influencing valuations in the equity securities markets and other market-driven rates or prices.
For example, the value of a fixed-rate bond will decline if market interest rates increase.
Similarly, the value of the U.S. dollar regularly fluctuates in relation to other currencies. When
the value of an instrument is tied to such external factors, the holder faces market risk. Most
of Keys market risk is derived from interest rate fluctuations.
Interest rate risk management
Interest rate risk, which is inherent in the banking industry, is measured by the potential for
fluctuations in net interest income and the economic value of equity. Such fluctuations may result
from changes in interest rates and differences in the repricing and maturity characteristics of
interest-earning assets and interest-bearing liabilities. To minimize the volatility of net
interest income and the economic value of equity, Key manages exposure to interest rate risk in
accordance with guidelines established by the Asset/Liability Management Committee (ALCO). This
committee, which consists of senior finance and business executives, meets monthly and periodically
reports Keys interest rate risk positions to the Risk Management Committee of the Board of
Directors.
Interest rate risk positions can be influenced by a number of factors other than changes in market
interest rates, including economic conditions, the competitive environment within Keys markets,
consumer preferences for specific loan and deposit products, and the level of interest rate
exposure arising from basis risk, gap risk, yield curve risk and option risk. Each of these types
of risk is defined in the discussion of market risk management, which begins on page 46 of Keys
2007 Annual Report to Shareholders.
Net interest income simulation analysis. The primary tool management uses to measure Keys
interest rate risk is simulation analysis. For purposes of this analysis, management estimates
Keys net interest income based on the composition of its on- and off-balance sheet positions and
the current interest rate environment. The simulation assumes that growth in Keys on- and
off-balance sheet positions will reflect recent product trends, as well as consensus economic
forecasts.
69
The amount of net interest income at risk is measured by simulating the change in the level of net
interest income that would occur if the Federal Funds Target rate were to gradually increase or
decrease by 200 basis points over the next twelve months, and term rates were to move in a similar
fashion, but not as dramatically. Management then compares the amount of net interest income at
risk to the base case of an unchanged interest rate environment. The analysis also considers
sensitivity to changes in a number of other variables, including other market interest rates and
deposit mix. In addition, management assesses the potential effect of different shapes in the
yield curve, including a sustained flat yield curve and an inverted slope yield curve. (The yield
curve depicts the relationship between the yield on a particular type of security and its term to
maturity.) Management also performs stress tests to measure the effect on net interest income of
an immediate change in market interest rates, as well as changes in assumptions related to the
pricing of deposits without contractual maturities, prepayments on loans and securities, and loan
and deposit growth.
Simulation analysis produces only a sophisticated estimate of interest rate exposure based on
assumptions and judgments related to balance sheet growth, customer behavior, new products, new
business volume, pricing and anticipated hedging activities. Management tailors the assumptions to
the specific interest rate environment and yield curve shape being modeled, and validates those
assumptions on a periodic basis. Consistent with current practice, simulations are performed with
the assumption that interest rate risk positions will be actively managed through the use of on-
and off-balance sheet financial instruments to achieve the desired risk profile. Actual
results may differ from those derived in simulation analysis due to the timing, magnitude and
frequency of interest rate changes, actual hedging strategies employed, changes in balance sheet
composition, and the possible effects of unanticipated or unknown events.
Figure 25 presents the results of the simulation analysis at March 31, 2008 and 2007. At March 31,
2008, Keys simulated exposure to a change in short-term rates was modestly liability-sensitive and
slightly higher than the comparable risk measure at March 31, 2007. ALCO policy guidelines for
risk management call for corrective measures if simulation modeling demonstrates that a gradual 200
basis point increase or decrease in short-term rates over the next twelve months would adversely
affect net interest income over the same period by more than 2%. As shown in Figure 25, Key is
operating within these guidelines.
Figure 25. Simulated Change in Net Interest Income
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|
Basis point change assumption (short-term rates) |
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-200 |
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|
+200 |
|
ALCO policy guidelines |
|
|
-2.00 |
% |
|
|
-2.00 |
% |
|
INTEREST RATE RISK ASSESSMENT |
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|
March 31, 2008 |
|
|
+2.19 |
% |
|
|
-1.10 |
% |
March 31, 2007 |
|
|
+1.32 |
|
|
|
-.15 |
|
|
Throughout 2007, Keys interest rate risk exposure gradually changed from relatively neutral to
modestly liability-sensitive, with the potential to fluctuate between higher or lower levels of
risk, depending on the assumed change in short-term interest rates (i.e., -200 basis points or +200
basis points) and the accuracy of managements assumptions related to product pricing and customer
behavior. From September 2007 through April 2008, the Federal Reserve reduced the federal funds
target rate by 325 basis points. Although the timing and magnitude of further interest rate
reductions is uncertain, Keys current positioning is consistent with its long-term bias to be
modestly liability-sensitive, which will help protect net interest income in a declining interest
rate environment. Key proactively evaluates the need to revise its interest rate risk profile as
changes occur in business flows and the outlook for the economy.
Management also conducts simulations that measure the effect of changes in market interest rates in
the second year of a two-year horizon. These simulations are conducted in a manner similar to
those based on a twelve-month horizon. To capture longer-term exposures, management simulates
changes to the economic value of equity as discussed in the following section.
70
Economic value of equity modeling. Economic value of equity (EVE) complements net interest
income simulation analysis since it provides estimates of risk exposure beyond twelve and
twenty-four month horizons. EVE measures the extent to which the economic values of assets,
liabilities and off-balance sheet instruments may change in response to changes in interest rates.
EVE is calculated by subjecting the balance sheet to an immediate 200 basis point increase or
decrease in interest rates, and measuring the resulting change in the values of assets and
liabilities. This analysis is highly dependent upon assumptions applied to assets and liabilities
with noncontractual maturities. Those assumptions are based on historical behaviors, as well as
managements expectations. Management takes corrective measures so that Keys EVE will not
decrease by more than 15% in response to an immediate 200 basis point increase or decrease in
interest rates. Key is operating within these guidelines.
Management of interest rate exposure. Management uses the results of its various simulation
analyses to formulate strategies to achieve the desired risk profile within the parameters of Keys
capital and liquidity guidelines. Specifically, management actively manages interest rate risk
positions by purchasing securities, issuing term debt with floating or fixed interest rates, and
using derivatives predominantly in the form of interest rate swaps, which modify the interest
rate characteristics of certain assets and liabilities.
Figure 26 shows all swap positions held by Key for asset/liability management (A/LM) purposes.
These positions are used to convert the contractual interest rate index of agreed-upon amounts of
assets and liabilities (i.e., notional amounts) to another interest rate index. For example,
fixed-rate debt is converted to a floating rate through a receive fixed, pay variable interest
rate swap. The volume, maturity and mix of portfolio swaps changes frequently with changes in
balance sheet positions selected to be hedged, and with changes to broader asset/liability
management objectives. For more information about how Key uses interest rate swaps to manage its
balance sheet, see Note 14 (Derivatives and Hedging Activities), which begins on page 29.
Figure 26. Portfolio Swaps by Interest Rate Risk Management Strategy
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|
March 31, 2008 |
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|
March 31, 2007 |
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|
Notional |
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Fair |
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|
Maturity |
|
|
Weighted-Average Rate |
|
|
Notional |
|
|
Fair |
|
dollars in millions |
|
Amount |
|
|
Value |
|
|
(Years) |
|
|
Receive |
|
|
Pay |
|
|
Amount |
|
|
Value |
|
|
Receive fixed/pay variableconventional A/LM a |
|
$ |
12,513 |
|
|
$ |
328 |
|
|
|
1.5 |
|
|
|
4.4 |
% |
|
|
2.9 |
% |
|
$ |
8,038 |
|
|
$ |
14 |
|
Receive fixed/pay variableconventional debt |
|
|
5,489 |
|
|
|
406 |
|
|
|
22.0 |
|
|
|
5.8 |
|
|
|
3.7 |
|
|
|
5,163 |
|
|
|
2 |
|
Receive fixed/pay variableforward starting |
|
|
2,100 |
|
|
|
96 |
|
|
|
2.1 |
|
|
|
4.8 |
|
|
|
4.7 |
|
|
|
|
|
|
|
|
|
Pay fixed/receive variableconventional debt |
|
|
1,047 |
|
|
|
(31 |
) |
|
|
3.9 |
|
|
|
4.5 |
|
|
|
4.6 |
|
|
|
855 |
|
|
|
(9 |
) |
Foreign currencyconventional debt |
|
|
2,660 |
|
|
|
162 |
|
|
|
2.7 |
|
|
|
1.6 |
|
|
|
.8 |
|
|
|
3,301 |
|
|
|
199 |
|
|
Total portfolio swaps |
|
$ |
23,809 |
|
|
$ |
961 |
|
|
|
6.5 |
|
|
|
4.5 |
% |
|
|
3.1 |
% |
|
$ |
17,357 |
|
|
$ |
206 |
|
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|
(a) |
|
Portfolio swaps designated as A/LM are used to manage interest rate risk tied to both assets
and liabilities. |
Trading portfolio risk management
Keys trading derivatives portfolio is described in Note 14. Management uses a value at risk
(VAR) simulation model to measure the potential adverse effect of changes in interest rates,
foreign exchange rates, equity prices and credit spreads on the fair value of Keys trading
portfolio. Using two years of historical information, the model estimates the maximum potential
one-day loss with a 95% confidence level. Statistically, this means that losses will exceed VAR,
on average, five out of 100 trading days, or three to four times each quarter.
Key manages exposure to market risk in accordance with VAR limits for trading activity that have
been approved by the Risk Capital Committee. At March 31, 2008, the aggregate one-day trading
limit set by the committee was $6.4 million. Key is operating within these constraints. During the first
quarter of 2008, Keys aggregate daily average, minimum and maximum VAR amounts were $2.8 million,
$1.7 million and $3.8 million, respectively. During the same period one year ago, Keys aggregate
daily average, minimum and maximum VAR amounts were $1.0 million, $.7 million and $1.4 million,
respectively.
71
In addition to comparing VAR exposure against limits on a daily basis, management monitors loss
limits, uses sensitivity measures and conducts stress tests. Risk Management reports Keys market
risk exposure to Keys Risk Capital Committee and the Risk Management Committee of the Board of
Directors.
Liquidity risk management
Key defines liquidity as the ongoing ability to accommodate liability maturities and deposit
withdrawals, meet contractual obligations, and fund asset growth and new business transactions at a
reasonable cost, in a timely manner and without adverse consequences. Liquidity management
involves maintaining sufficient and diverse sources of funding to accommodate planned as well as
unanticipated changes in assets and liabilities under both normal and adverse conditions. In
addition, Key occasionally guarantees a subsidiarys obligations in transactions with third
parties. Management closely monitors the extension of such guarantees to ensure that Key retains
ample liquidity to satisfy these obligations.
Key manages liquidity for all of its affiliates on an integrated basis. This approach considers
the unique funding sources available to each entity, as well as each entitys capacity to manage
through adverse conditions. It also recognizes that adverse market conditions or other events that
could negatively affect the availability or cost of liquidity will affect the access of all
affiliates to money market funding.
Under ordinary circumstances, management monitors Keys funding sources and measures its capacity
to obtain funds in a variety of situations in an effort to maintain an appropriate mix of available
and affordable cash. Management has established guidelines or target ranges for various types of
wholesale borrowings, such as money market funding and term debt, at various maturities. In
addition, management assesses whether Key will need to rely on wholesale borrowings in the future
and develops strategies to address those needs.
Key uses several tools as described on page 49 of the 2007 Annual Report to Shareholders to
actively manage and maintain liquidity on an ongoing basis.
Key generates cash flows from operations and from investing and financing activities. Since
December 31, 2006, prepayments and maturities of securities available for sale have been the
primary sources of cash from investing activities. Securities sold in connection with the
repositioning of the securities portfolio also provided significant cash inflow during the first
quarter of 2007. Investing activities such as lending and purchases of new securities have
required the greatest use of cash.
Key relies on financing activities, such as increasing short-term or long-term borrowings, to
provide the cash flow needed to support operating and investing activities if that need is not
satisfied by deposit growth. Conversely, excess cash generated by operating, investing and
deposit-gathering activities may be used to repay outstanding debt. For example, during 2007, Key
used short-term borrowings to pay down long-term debt, while the net increase in deposits funded
the growth in portfolio loans and loans held for sale.
Keys liquidity could be adversely affected by both direct and indirect circumstances. An example
of a direct (but hypothetical) event would be a downgrade in Keys public credit rating by a rating
agency due to deterioration in asset quality, a large charge to earnings, a decline in
profitability or other financial measures, or a significant merger or acquisition. Examples of
indirect (but hypothetical) events unrelated to Key that could have an effect on Keys access to
liquidity would be terrorism or war, natural disasters, political events, or the default or
bankruptcy of a major corporation, mutual fund or hedge fund. Similarly, market speculation or
rumors about Key or the banking industry in general may adversely affect the cost and availability
of normal funding sources.
Management performs stress tests to determine the effect that a potential downgrade in Keys debt
ratings or other market disruptions could have on liquidity over various time periods. These debt
ratings, which are presented in Figure 27 on page 75, have a direct impact on Keys cost of funds
and ability to raise funds under normal as well as adverse conditions. The results of the stress tests indicate that,
following the occurrence of an adverse event, Key could continue to meet its financial obligations
and to fund its
72
operations for at least one year. The stress test scenarios include major disruptions to Keys
access to funding markets and consider the potential adverse effect of core client activity on cash
flows. To compensate for the effect of these assumed liquidity pressures, management considers
alternative sources of liquidity over different time periods to project how fluctuations on the
balance sheet would be managed. Key actively manages several alternatives for enhancing liquidity,
including generating client deposits, securitizing or selling loans, extending the level or
maturity of wholesale borrowings, purchasing deposits from other banks, and developing
relationships with fixed income investors in a variety of markets. Management also measures Keys
capacity to borrow using various debt instruments and funding markets.
Certain credit markets that Key participates in and relies upon as sources of funding have been
significantly disrupted and highly volatile since July 2007. As a means of maintaining adequate
liquidity, Key, like many other financial institutions, has relied more heavily on the liquidity
and stability present in the short-term and secured credit markets since access to unsecured term
debt has been restricted. Short-term funding has been available and cost effective. However, if
further market disruption were to also reduce the cost effectiveness and availability of these
funds for a prolonged period of time, management may need to secure other funding alternatives.
Key maintains a liquidity contingency plan that outlines the process for addressing a liquidity
crisis. The plan provides for an evaluation of funding sources under various market conditions.
It also assigns specific roles and responsibilities for effectively managing liquidity through a
problem period. Key has access to various sources of money market funding (such as federal funds
purchased, securities sold under repurchase agreements, eurodollars and commercial paper), and also
has secured borrowing facilities established at the Federal Home Loan Bank of Cincinnati and the
Federal Reserve Bank of Cleveland to facilitate short-term liquidity requirements.
The Consolidated Statements of Cash Flows on page 6 summarize Keys sources and uses of cash by
type of activity for the three-month periods ended March 31, 2008 and 2007.
Liquidity for KeyCorp (the parent company)
The parent company has sufficient liquidity when it can service its debt; support customary
corporate operations and activities (including acquisitions) at a reasonable cost, in a timely
manner and without adverse consequences; and pay dividends to shareholders.
Managements primary tool for assessing parent company liquidity is the net short-term cash
position, which measures the ability to fund debt maturing in twelve months or less with existing
liquid assets. Another key measure of parent company liquidity is the liquidity gap, which
represents the difference between projected liquid assets and anticipated financial obligations
over specified time horizons. Key generally relies upon the issuance of term debt to manage the
liquidity gap within targeted ranges assigned to various time periods.
The parent has met its liquidity requirements principally through receiving regular dividends from
KeyBank. Federal banking law limits the amount of capital distributions that a bank can make to
its holding company without prior regulatory approval. A national banks dividend-paying capacity
is affected by several factors, including net profits (as defined by statute) for the two previous
calendar years and for the current year up to the date of dividend declaration. During the first
quarter of 2008, KeyBank did not pay any dividends to the parent, and nonbank subsidiaries paid the
parent a total of $3 million in dividends. As of the close of business on March 31, 2008, KeyBank
would have been permitted to pay an additional $378 million in dividends to the parent without
prior regulatory approval and without affecting its status as well-capitalized under FDIC-defined
capital categories.
The parent company generally maintains excess funds in interest-bearing deposits in an amount
sufficient to meet projected debt maturities over the next twelve months. At March 31, 2008, the
parent company held $1.3 billion in short-term investments, which management projected to be sufficient to meet
debt repayment obligations over a period of approximately 31 months.
73
During the first three months of 2008, the KeyCorp Capital X trust issued $740 million of capital
securities. In addition to increasing Keys Tier I capital, this transaction also created
additional liquidity for the parent company.
Additional sources of liquidity
Management has implemented several programs, as described below, that enable the parent company and
KeyBank to raise funding in the public and private markets when the capital markets are functioning
normally. The proceeds from most of these programs can be used for general corporate purposes,
including acquisitions. Each of the programs is replaced or renewed as needed. There are no
restrictive financial covenants in any of these programs. In addition, certain KeyCorp
subsidiaries maintain credit facilities with the parent company or third parties, which provide
alternative sources of funding in light of current market conditions. KeyCorp is the guarantor of
some of the third-party facilities.
Bank note program. KeyBanks bank note program provides for the issuance of both long- and
short-term debt of up to $20.0 billion. These notes have original maturities in excess of one year
and are included in long-term debt on the balance sheet. KeyBank did not issue any notes under
this program during the first three months of 2008. At March 31, 2008, $18.1 billion was available
for future issuance.
Euro medium-term note program. Under Keys euro medium-term note program, the parent company and
KeyBank may issue both long- and short-term debt of up to $10.0 billion in the aggregate ($9.0
billion by KeyBank and $1.0 billion by the parent company). The notes are offered exclusively to
non-U.S. investors and can be denominated in U.S. dollars or foreign currencies. Key did not issue
any notes under this program during the first three months of 2008. At March 31, 2008, $7.3
billion was available for future issuance.
KeyCorp medium-term note program. In January 2005, the parent company registered $2.9 billion of
securities under a shelf registration statement filed with the Securities and Exchange Commission.
Of this amount, $1.9 billion has been allocated for the issuance of both long- and short-term debt
in the form of medium-term notes. The parent company did not issue any notes under this program
during the first quarter of 2008. At March 31, 2008, unused capacity under this medium-term note
program totaled $900 million, with an additional $1.0 billion remaining for other issuances under
the shelf registration.
Commercial paper. The parent company has a commercial paper program that provides funding
availability of up to $500 million. As of March 31, 2008, there were no borrowings outstanding
under this program.
KeyBank has a separate commercial paper program at a Canadian subsidiary that provides funding
availability of up to C$1.0 billion in Canadian currency. The borrowings under this program can be
denominated in Canadian or U.S. dollars. As of March 31, 2008, borrowings outstanding under this
commercial paper program totaled C$394 million in Canadian currency and $132 million in U.S.
currency (equivalent to C$136 million in Canadian currency).
Keys debt ratings are shown in Figure 27. Management believes that these debt ratings, under
normal conditions in the capital markets, will enable the parent company or KeyBank to effect
future offerings of securities that would be marketable to investors at a competitive cost.
74
Figure 27. Debt Ratings
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Enhanced |
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Senior |
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Subordinated |
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Trust |
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Short-Term |
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Long-Term |
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Long-Term |
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Capital |
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Preferred |
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March 31, 2008 |
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Borrowings |
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Debt |
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Debt |
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Securities |
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Securities |
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KEYCORP (THE PARENT
COMPANY) |
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Standard & Poors |
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A-2 |
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A- |
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BBB+ |
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BBB |
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BBB |
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Moodys |
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P-1 |
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A2 |
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A3 |
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A3 |
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A3 |
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F1 |
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A |
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A- |
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A- |
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A- |
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DBRS |
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R-1 (low) |
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A |
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A (low) |
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N/A |
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A (low) |
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KEYBANK |
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Standard & Poors |
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A-1 |
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A |
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A- |
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N/A |
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N/A |
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Moodys |
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P-1 |
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A1 |
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A2 |
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N/A |
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N/A |
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Fitch |
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F1 |
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A |
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A- |
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N/A |
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N/A |
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DBRS |
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R-1 (middle) |
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A (high) |
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A |
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N/A |
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N/A |
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