XNYS:KEY KeyCorp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

Form 10-Q

[Ö] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2012

or

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From           To          

Commission File Number 1-11302

 

LOGO

 

KeyCorp

 
  (Exact name of registrant as specified in its charter)  

 

Ohio

    

34-6542451

(State or other jurisdiction of

incorporation or organization)

    

(I.R.S. Employer

Identification No.)

127 Public Square, Cleveland, Ohio

    

44114-1306

(Address of principal executive offices)      (Zip Code)

 

  

(216) 689-3000

 
   (Registrant’s 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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ  No ¨

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):

 

Large accelerated filer  þ    Accelerated filer  ¨  
Non-accelerated filer  ¨ (Do not check if a smaller reporting company)    Smaller reporting company  ¨  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨  No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Common Shares with a par value of $1 each

    

943,463,119 Shares

  
(Title of class)      (Outstanding at July 31, 2012)   


Table of Contents

KEYCORP

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

 

Item 1.   Financial Statements    Page Number    
 

Consolidated Balance Sheets —
June 30, 2012 (Unaudited), December 31, 2011, and
June 30, 2011 (Unaudited)

     5   
 

Consolidated Statements of Income (Unaudited) —
Three and six months ended June 30, 2012 and 2011

     6   
 

Consolidated Statements of Comprehensive Income (Unaudited) —
Three and six months ended June 30, 2012 and 2011

     7   
 

Consolidated Statements of Changes in Equity (Unaudited) —
Six months ended June 30, 2012 and 2011

     8   
 

Consolidated Statements of Cash Flows (Unaudited) —
Six months ended June 30, 2012 and 2011

     9   
 

Notes to Consolidated Financial Statements (Unaudited)

     10   
 

Note 1. Basis of Presentation

     10   
 

Note 2. Earnings Per Common Share

     13   
 

Note 3. Loans and Loans Held for Sale

     14   
 

Note 4. Asset Quality

     15   
 

Note 5. Fair Value Measurements

     26   
 

Note 6. Securities

     39   
 

Note 7. Derivatives and Hedging Activities

     43   
 

Note 8. Mortgage Servicing Assets

     50   
 

Note 9. Variable Interest Entities

     51   
 

Note 10. Income Taxes

     53   
 

Note 11. Acquisition and Discontinued Operations

     54   
 

Note 12. Contingent Liabilities and Guarantees

     60   
 

Note 13. Trust Preferred Securities Issued by Unconsolidated Subsidiaries

     63   
 

Note 14. Employee Benefits

     65   
 

Note 15. Shareholders’ Equity

     66   
 

Note 16. Line of Business Results

     67   
 

Report of Independent Registered Public Accounting Firm

     72   

 

2


Table of Contents
Item 2.  

  Management’s Discussion & Analysis of Financial Condition

  
 

  & Results of Operations

     73   
  Introduction      73   
 

Terminology

     73   
 

Selected Financial Data

     74   
 

Forward-looking statements

     75   
 

Economic overview

     76   
 

Long-term financial goals

     76   
 

Strategic developments

     77   
 

Demographics

     78   
 

Supervision and regulation

     80   
 

Regulatory reform developments

     80   
 

Stress Testing

     80   
 

Interchange fees

     80   
 

Enhanced prudential standards and early remediation requirements

     80   
 

U.S. implementation of Basel III

     80   
 

Highlights of Our Performance

     81   
 

Results of Operations

     85   
 

Net interest income

     85   
 

Noninterest income

     89   
 

Trust and investment services income

     91   
 

Operating lease income

     91   
 

Investment banking and capital markets income (loss)

     91   
 

Other income

     92   
 

Noninterest expense

     92   
 

Personnel

     93   
 

Operating lease expense

     93   
 

FDIC Assessment

     93   
 

Other Expense

     93   
 

Income taxes

     94   
 

Line of Business Results

     95   
 

Key Community Bank summary of operations

     95   
 

Key Corporate Bank summary of operations

     96   
 

Other Segments

     97   
 

Financial Condition

     98   
 

Loans and loans held for sale

     98   
 

Commercial loan portfolio

     98   
 

Commercial, financial and agricultural

     98   
 

Commercial real estate loans

     98   
 

Commercial lease financing

     99   
 

Commercial loan modification and restructuring

     99   
 

Extensions

     101   
 

Guarantors

     101   
 

Consumer loan portfolio

     102   
 

Loans held for sale

     103   
 

Loan sales

     103   
 

Securities

     103   
 

Securities available-for-sale

     104   
 

Held-to-maturity securities

     105   
 

Other investments

     106   
 

Deposits and other sources of funds

     106   
 

Capital

     107   
 

Comprehensive capital assessment review and capital actions

     107   

 

3


Table of Contents
 

Repurchase of TARP CPP preferred stock, warrant and completion of equity and debt offerings

     108   
 

Dividends

     108   
 

Common shares outstanding

     108   
 

Capital adequacy

     109   
 

Basel III

     110   
 

Risk Management

     112   
 

Overview

     112   
 

Market risk management

     113   
 

Interest rate risk management

     113   
 

Net interest income simulation analysis

     113   
 

Economic value of equity modeling

     114   
 

Management of interest rate exposure

     115   
 

Derivatives not designated in hedge relationships

     115   
 

Liquidity risk management

     115   
 

Governance structure

     116   
 

Factors affecting liquidity

     116   
 

Managing liquidity risk

     116   
 

Long-term liquidity strategy

     117   
 

Sources of liquidity

     117   
 

Liquidity programs

     117   
 

Liquidity for KeyCorp

     117   
 

Our liquidity position and recent activity

     118   
 

Credit risk management

     118   
 

Credit policy, approval and evaluation

     118   
 

Allowance for loan and lease losses

     119   
 

Net loan charge-offs

     122   
 

Nonperforming assets

     124   
 

Operational risk management

     127   
 

Critical Accounting Policies and Estimates

     127   
 

European Sovereign Debt Exposure

     129   
Item 3.  

Quantitative and Qualitative Disclosure about Market Risk

     130   
Item 4.  

Controls and Procedures

     130   
PART II. OTHER INFORMATION   
Item 1.  

Legal Proceedings

     130   
Item 1A.  

Risk Factors

     130   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     131   
Item 6.  

Exhibits

     131   
 

Signature

     132   
 

Exhibits

     133   

Throughout the Notes to Consolidated Financial Statements (Unaudited) and Management’s Discussion & Analysis of Financial Condition & Results of Operations, we use certain acronyms and abbreviations as defined in Note 1 (“Basis of Presentation”), that begins on page 10.

 

4


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements

Consolidated Balance Sheets

 

in millions, except per share data   

June 30,   

2012   

    

December 31,   

2011   

    

June 30,   

2011   

 

 

 
     (Unaudited)               (Unaudited)    

ASSETS

        

Cash and due from banks

    $ 717          $ 694          $ 853     

Short-term investments

     2,216           3,519           4,563     

Trading account assets

     679           623           769     

Securities available for sale

     13,205           16,012           18,680     

Held-to-maturity securities (fair value: $4,396, $2,133 and $19)

     4,352           2,109           19     

Other investments

     1,186           1,163           1,195     

Loans, net of unearned income of $1,155, $1,388 and $1,460

     49,605           49,575           47,840     

Less: Allowance for loan and lease losses

     888           1,004           1,230     

 

 

Net loans

     48,717           48,571           46,610     

Loans held for sale

     656           728           381     

Premises and equipment

     931           944           919     

Operating lease assets

     318           350           453     

Goodwill

     917           917           917     

Other intangible assets

     15           17           19     

Corporate-owned life insurance

     3,285           3,256           3,208     

Derivative assets

     818           945           900     

Accrued income and other assets (including $91 of consolidated LIHTC guaranteed funds VIEs, see Note 9)(a)

     2,978           3,077           2,968     

Discontinued assets (including $2,611 of consolidated education loan securitization trust VIEs (see Note 9) and $73 of loans in portfolio at fair value)(a)

     5,533           5,860           6,328     

 

 

Total assets

    $ 86,523          $ 88,785          $ 88,782     
  

 

 

    

 

 

    

 

 

 

LIABILITIES

        

Deposits in domestic offices:

        

  NOW and money market deposit accounts

    $ 28,957          $ 27,954          $ 26,277     

  Savings deposits

     2,103           1,962           1,973     

  Certificates of deposit ($100,000 or more)

     3,669           4,111           4,939     

  Other time deposits

     5,385           6,243           7,167     

 

 

Total interest-bearing

     40,114           40,270           40,356     

  Noninterest-bearing

     21,435           21,098           19,318     

Deposits in foreign office — interest-bearing

     618           588           736     

 

 

Total deposits

     62,167           61,956           60,410     

Federal funds purchased and securities sold under repurchase agreements

     1,716           1,711           1,668     

Bank notes and other short-term borrowings

     362           337           511     

Derivative liabilities

     763           1,026           991     

Accrued expense and other liabilities

     1,417           1,763           1,518     

Long-term debt

     7,521           9,520           10,997     

Discontinued liabilities (including $2,401 of consolidated education loan securitization trust VIEs at fair value, see Note 9)(a)

     2,401           2,550           2,950     

 

 

Total liabilities

     76,347           78,863           79,045     

EQUITY

        

Preferred stock, $1 par value, authorized 25,000,000 shares:

        

7.75% Noncumulative Perpetual Convertible Preferred Stock, Series A, $100 liquidation preference; authorized 7,475,000 shares; issued 2,904,839, 2,904,839 and 2,904,839 shares

     291           291           291     

Common shares, $1 par value; authorized 1,400,000,000 shares; issued 1,016,969,905, 1,016,969,905 and 1,016,969,905 shares

     1,017           1,017           1,017     

Capital surplus

     4,120           4,194           4,191     

Retained earnings

     6,595           6,246           5,926     

Treasury stock, at cost (71,496,550, 63,962,113 and 63,147,538)

     (1,796)           (1,815)           (1,815)     

Accumulated other comprehensive income (loss)

     (72)           (28)           109     

 

 

Key shareholders’ equity

     10,155           9,905           9,719     

Noncontrolling interests

     21           17           18     

 

 

Total equity

     10,176           9,922           9,737     

 

 

Total liabilities and equity

    $             86,523          $             88,785          $ 88,782     
  

 

 

    

 

 

    

 

 

 

 

 

 

(a) The assets of the VIEs can only be used by the particular VIE and there is no recourse to Key with respect to the liabilities of the consolidated LIHTC or education loan securitization trust VIEs.

See Notes to Consolidated Financial Statements (Unaudited).

 

5


Table of Contents

Consolidated Statements of Income (Unaudited)

 

                    Three months ended  June 30,                       Six months ended  June 30,    
dollars in millions, except per share amounts       2012      2011           2012      2011    

 

 

INTEREST INCOME

              

Loans

   $     518        $ 551       $      1,054        $ 1,121    

Loans held for sale

                      10         7    

Securities available for sale

      105         149           221         315    

Held-to-maturity securities

      17                  29         1    

Trading account assets

                      11         16    

Short-term investments

                             2    

Other investments

      10         12           18         24    

 

 

Total interest income

      662         726           1,346         1,486    

INTEREST EXPENSE

              

Deposits

      71         100           148         210    

Federal funds purchased and securities sold under repurchase agreements

                             3    

Bank notes and other short-term borrowings

                             6    

Long-term debt

      50         57           101         106    

 

 

Total interest expense

      124         162           255         325    

 

 

NET INTEREST INCOME

      538         564           1,091         1,161    

Provision (credit) for loan and lease losses

      21         (8)           63         (48)    

 

 

Net interest income (expense) after provision for loan and lease losses

      517         572           1,028         1,209    

NONINTEREST INCOME

              

Trust and investment services income

      102         113           211         223    

Service charges on deposit accounts

      70         69           138         137    

Operating lease income

      20         32           42         67    

Letter of credit and loan fees

      56         47           110         102    

Corporate-owned life insurance income

      30         28           60         55    

Net securities gains (losses)(a)

      —                   —          1    

Electronic banking fees

      19         33           36         63    

Gains on leased equipment

      36                  63         9    

Insurance income

      11         14           23         29    

Net gains (losses) from loan sales

      32         11           54         30    

Net gains (losses) from principal investing

      24         17           59         52    

Investment banking and capital markets income (loss)

      37         42           80         85    

Other income

      48         41           81         58    

 

 

Total noninterest income

      485         454           957         911    

NONINTEREST EXPENSE

              

Personnel

      389         380           774         751    

Net occupancy

      62         62           126         127    

Operating lease expense

      15         25           32         53    

Computer processing

      43         42           84         84    

Business services and professional fees

      51         44           89         82    

FDIC assessment

                      16         38    

OREO expense, net

             (3)           13         7    

Equipment

      27         26           53         52    

Marketing

      17         10           30         20    

Provision (credit) for losses on lending-related commitments

             (12)                  (16)    

Other expense

      89         97           194         183    

 

 

Total noninterest expense

      714         680           1,417         1,381    

 

 

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

      288         346           568         739    

Income taxes

      57         94           132         205    

 

 

INCOME (LOSS) FROM CONTINUING OPERATIONS

      231         252           436         534    

Income (loss) from discontinued operations, net of taxes of $6, ($6), $3 and ($12) (see Note 11)

      10         (9)                  (20)    

 

 

NET INCOME (LOSS)

      241         243           441         514    

Less: Net income (loss) attributable to noncontrolling interests

                             11    

 

 

NET INCOME (LOSS) ATTRIBUTABLE TO KEY

   $     236        $ 240       $      436        $ 503    
 

 

    

 

 

    

 

 

 

Income (loss) from continuing operations attributable to Key common shareholders

   $     221        $ 243       $      420        $ 427    

Net income (loss) attributable to Key common shareholders

      231         234           425         407    

Per common share:

              

Income (loss) from continuing operations attributable to Key common shareholders

   $     .23        $ .26       $      .44        $ .47    

Income (loss) from discontinued operations, net of taxes

      .01         (.01)           .01         (.02)    

Net income (loss) attributable to Key common shareholders

      .24         .25           .45         .44    

Per common share — assuming dilution:

              

Income (loss) from continuing operations attributable to Key common shareholders

   $     .23        $ .26       $      .44        $ .46    

Income (loss) from discontinued operations, net of taxes

      .01         (.01)           .01         (.02)    

Net income (loss) attributable to Key common shareholders (c)

      .24         .25           .45         .44    

Cash dividends declared per common share

   $     .05        $ .03       $      .08        $ .04    

Weighted-average common shares outstanding (000) (b)

      944,648         947,565           946,995         914,911    

Weighted-average common shares and potential common shares outstanding (000)

      948,087         952,133           951,029         920,162    

 

 

 

(a) For the three months ended June 30, 2012 and 2011, we did not have any impairment losses related to securities.

 

(b) Assumes conversion of stock options and/or Preferred Series A, as applicable.

 

(c) EPS may not foot due to rounding.

See Notes to Consolidated Financial Statements (Unaudited).

 

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Table of Contents

Consolidated Statements of Comprehensive Income (Unaudited)

 

                    Three months ended June  30,                     Six months ended June  30,  
in millions         2012        2011             2012        2011    

 

 

Net income (loss)

    $      241         $ 243         $      441         $ 514    

Other comprehensive income (loss):

                 

Net unrealized gains (losses) on securities available for sale, net of income taxes of ($25), $73, ($31), and $61

        (42)          123             (53)          103    

Net unrealized gains (losses) on derivative financial instruments, net of income taxes of ($2), $9, $5, and $4

        (4)          15             8          7    

Foreign currency translation adjustments

        (10)          4             (4)          13    

Net pension and postretirement benefit costs, net of income taxes

        3          2             5          3    

 

 

Other comprehensive income (loss), net of tax:

        188          387             397          640    

Net contribution to (distribution from) noncontrolling interests

        4          (254)             4          (239)    

 

 

Total comprehensive income (loss) attributable to Key

    $                      192         $                 133         $                      401         $                 401    
  

 

    

 

 

    

 

    

 

 

 

 

 

See Notes to Consolidated Financial Statements (Unaudited).

 

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Consolidated Statements of Changes in Equity (Unaudited)

 

    Key Shareholders’ Equity        
dollars in millions, except per share amounts   Preferred
Shares
Outstanding
(000)
    Common
Shares
Outstanding
(000)
    Preferred
Stock
    Common
Shares
    Common
Stock
Warrant
    Capital
Surplus
    Retained
Earnings
    Treasury
Stock,
at Cost
    Accumulated
Other
Comprehensive
Income (Loss)
    Noncontrolling
Interests
 

 

 

BALANCE AT DECEMBER 31, 2010

    2,930        880,608      $ 2,737      $ 946      $ 87      $ 3,711      $ 5,557      $ (1,904)      $ (17)      $ 257   

Net income (loss)

                503            11   

Net unrealized gains (losses) on securities available for sale, net of income taxes of $61

                    103     

Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $4

                       

Net distribution to noncontrolling interests

                      (250)   

Foreign currency translation adjustments

                    13     

Net pension and postretirement benefit costs, net of income taxes

                       

Deferred compensation

              (2)           

Cash dividends declared on common shares ($.04 per share)

                (38)         

Cash dividends declared on Noncumulative Series A Preferred Stock ($3.875 per share)

                (12)         

Cash dividends accrued on Cumulative Series B Preferred Stock (5% per annum)

                (31)         

Series B Preferred Stock - TARP redemption

    (25)          (2,451)              (49)         

Repurchase of common stock warrant

            (87)        17           

Amortization of discount on Series B Preferred Stock

                    (4)         

Common shares issuance

      70,621          71          533           

Common shares reissued for stock options and other employee benefit plans

      2,593              (68)          89       

Other

                       

 

 

BALANCE AT JUNE 30, 2011

    2,905        953,822      $ 291      $ 1,017        —       $ 4,191      $ 5,926      $ (1,815)      $ 109      $ 18   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

BALANCE AT DECEMBER 31, 2011

    2,905        953,008      $ 291      $ 1,017        —       $ 4,194      $ 6,246      $ (1,815)      $ (28)      $ 17   

Net income (loss)

                436             

Other comprehensive income (loss):

                   

Net unrealized gains (losses) on securities available for sale, net of income taxes of ($31)

                    (53)     

Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $5

                       

Net distribution from noncontrolling interests

                      (1)   

Foreign currency translation adjustments

                    (4)     

Net pension and postretirement benefit costs, net of income taxes

                       

Deferred compensation

                       

Cash dividends declared on common shares ($.08 per share)

                (76)         

Cash dividends declared on Noncumulative Series A Preferred Stock ($3.875 per share)

                (11)         

Common shares repurchased

      (10,468)                  (82)       

Common shares reissued (returned) for stock options and other employee benefit plans

      2,933              (82)          101      

 

 

BALANCE AT JUNE 30, 2012

    2,905        945,473      $ 291      $ 1,017        —       $ 4,120      $ 6,595      $ (1,796)      $ (72)      $ 21   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

See Notes to Consolidated Financial Statements (Unaudited).

 

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Consolidated Statements of Cash Flows (Unaudited)

 

     Six months ended June 30,  
in millions    2012        2011    

 

 

OPERATING ACTIVITIES

     

Net income (loss)

   $ 441        $ 514    

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

     

Provision (credit) for loan and lease losses

     63          (48)    

Depreciation and amortization expense

     119          143    

FDIC (payments) net of FDIC expense

     13          35    

Deferred income taxes (benefit)

     38          157    

Net losses (gains) and writedown on OREO

     12          5    

Provision (credit) for customer derivative losses

     1          (12)    

Net losses (gains) from loan sales

     (54)          (30)    

Net losses (gains) from principal investing

     (59)          (52)    

Provision (credit) for losses on lending-related commitments

     6          (16)    

(Gains) losses on leased equipment

     (63)          (9)    

Net securities losses (gains)

     —           (1)    

Net decrease (increase) in loans held for sale excluding loan transfers from continuing operations

     (5)          140    

Net decrease (increase) in trading account assets

     (57)          216    

Other operating activities, net

     (220)          412    

 

 

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

     235          1,454    

INVESTING ACTIVITIES

     

Net decrease (increase) in short-term investments

     1,303          (3,219)    

Purchases of securities available for sale

     (10)          (619)    

Proceeds from sales of securities available for sale

     —           1,587    

Proceeds from prepayments and maturities of securities available for sale

     2,733          2,448    

Proceeds from prepayments and maturities of held-to-maturity securities

     238          —     

Purchases of held-to-maturity securities

     (2,481)          (2)    

Purchases of other investments

     (39)          (104)    

Proceeds from sales of other investments

     3          43    

Proceeds from prepayments and maturities of other investments

     72          41    

Net decrease (increase) in loans, excluding acquisitions, sales and transfers

     (217)          1,775    

Proceeds from loan sales

     135          94    

Purchases of premises and equipment

     (53)          (74)    

Proceeds from sales of premises and equipment

     1          —     

Proceeds from sales of other real estate owned

     45          94    

 

 

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

     1,730          2,064    

FINANCING ACTIVITIES

     

Net increase (decrease) in deposits

     211          (200)    

Net increase (decrease) in short-term borrowings

     30          (1,017)   

Net proceeds from issuance of long-term debt

     4           1,020  

Payments on long-term debt

     (2,019)          (684)   

Repurchase of Treasury Shares

     (82)          —     

Net proceeds from issuance of common shares

     —           604    

Net proceeds from reissuance of common shares

     1          —     

Series B Preferred Stock - TARP redemption

     —           (2,500)    

Repurchase of common stock warrant

     —           (70)    

Cash dividends paid

     (87)          (96)    

 

 

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

     (1,942)          (2,943)    

 

 

NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS

     23          575    

CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD

     694          278    

 

 

CASH AND DUE FROM BANKS AT END OF PERIOD

   $ 717        $ 853    
  

 

 

    

 

 

 

 

 

Additional disclosures relative to cash flows:

     

Interest paid

   $ 249        $ 317    

Income taxes paid (refunded)

     26          (319)    

Noncash items:

     

Loans transferred to portfolio from held for sale

   $ 93          —     

Loans transferred to held for sale from portfolio

     16        $ 54    

Loans transferred to other real estate owned

     21          23    

 

 

See Notes to Consolidated Financial Statements (Unaudited).

 

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Notes to Consolidated Financial Statements (Unaudited)

1. Basis of Presentation

As used in these Notes, references to “Key,” “we,” “our,” “us” and similar terms refer to the consolidated entity consisting of KeyCorp and its subsidiaries. KeyCorp refers solely to the parent holding company, and KeyBank refers to KeyCorp’s subsidiary, KeyBank National Association.

The acronyms and abbreviations identified below are used in the Notes to Consolidated Financial Statements (Unaudited) as well as in the Management’s Discussion & Analysis of Financial Condition & Results of Operations. You may find it helpful to refer back to this page as you read this report.

References to our “2011 Annual Report on Form 10-K” refer to our Annual Report on Form 10-K for the year ended December 31, 2011, that has been filed with the U.S. Securities and Exchange Commission and is available on its website (www.sec.gov) or on our website (www.key.com/ir).

 

ABO: Accumulated benefit obligation.   N/A: Not applicable.
AICPA: American Institute of Certified Public Accountants.   NASDAQ: National Association of Securities Dealers
ALCO: Asset/Liability Management Committee.   Automated Quotation System.
ALLL: Allowance for loan and lease losses.   N/M: Not meaningful.
A/LM: Asset/liability management.   NOW: Negotiable Order of Withdrawal.
AOCI: Accumulated other comprehensive income (loss).   NPR: Notice of proposed rulemaking.
APBO: Accumulated postretirement benefit obligation.   NYSE: New York Stock Exchange.
Austin: Austin Capital Management, Ltd.   OCC: Office of the Comptroller of the Currency.
BHCs: Bank holding companies.   OCI: Other comprehensive income (loss).
CCAR: Comprehensive Capital Analysis and Review.   OREO: Other real estate owned.
CMO: Collateralized mortgage obligation.   OTTI: Other-than-temporary impairment.
Common Shares: Common Shares, $1 par value.   QSPE: Qualifying special purpose entity.
CPP: Capital Purchase Program of the U.S. Treasury.   PBO: Projected Benefit Obligation.
DIF: Deposit Insurance Fund.   S&P: Standard and Poor’s Ratings Services, a Division of The
Dodd-Frank Act: Dodd-Frank Wall Street Reform and   McGraw-Hill Companies, Inc.
Consumer Protection Act of 2010.   SCAP: Supervisory Capital Assessment Program administered
ERISA: Employee Retirement Income Security Act of 1974.   by the Federal Reserve.
ERM: Enterprise risk management.   SEC: U.S. Securities & Exchange Commission.
EVE: Economic value of equity.   Series A Preferred Stock: KeyCorp’s 7.750% Noncumulative
FASB: Financial Accounting Standards Board.   Perpetual Convertible Preferred Stock, Series A.
FDIC: Federal Deposit Insurance Corporation.   Series B Preferred Stock: KeyCorp’s Fixed-Rate Cumulative
Federal Reserve: Board of Governors of the Federal Reserve   Perpetual Preferred Stock, Series B issued to the U.S. Treasury
System.   under the CPP.
FHLMC: Federal Home Loan Mortgage Corporation.   SILO: Sale in, lease out transaction.
FNMA: Federal National Mortgage Association.   SPE: Special purpose entity.
FVA: Fair Value of pension plan assets.   TAG: Transaction Account Guarantee program of the FDIC.
GAAP: U.S. generally accepted accounting principles.   TARP: Troubled Asset Relief Program.
GNMA: Government National Mortgage Association.   TDR: Troubled debt restructuring.
IRS: Internal Revenue Service.   TE: Taxable equivalent.
ISDA: International Swaps and Derivatives Association.   TLGP: Temporary Liquidity Guarantee Program of the FDIC.
KAHC: Key Affordable Housing Corporation.   U.S. Treasury: United States Department of the Treasury.
LIBOR: London Interbank Offered Rate.   VAR: Value at risk.
LIHTC: Low-income housing tax credit.   VEBA: Voluntary Employee Beneficiary Association.
LILO: Lease in, lease out transaction.   VIE: Variable interest entity.
Moody’s: Moody’s Investor Services, Inc.   XBRL: eXtensible Business Reporting Language.

 

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The consolidated financial statements include the accounts of KeyCorp and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Some previously reported amounts have been reclassified to conform to current reporting practices.

The consolidated financial statements include any voting rights entities in which we have a controlling financial interest. In accordance with the applicable accounting guidance for consolidations, we consolidate a VIE if we have: (i) a variable interest in the entity; (ii) the power to direct activities of the VIE that most significantly impact the entity’s economic performance; and (iii) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE (i.e., we are 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 9 (“Variable Interest Entities”) for information on our involvement with VIEs.

We use the equity method to account for unconsolidated investments in voting rights entities or VIEs if we have significant influence over the entity’s operating and financing decisions (usually defined as a voting or economic interest of 20% to 50%, but not controlling). Unconsolidated investments in voting rights entities or VIEs in which we have a voting or economic interest of less than 20% generally are carried at cost. Investments held by our registered broker-dealer and investment company subsidiaries (primarily principal investments) are carried at fair value.

We believe that the unaudited 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. 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 our 2011 Annual Report on Form 10-K. See Note 11 (“Acquisition and Discontinued Operations”) for further information regarding an error correction that was made during the third quarter of 2011.

In preparing these financial statements, subsequent events were evaluated through the time the financial statements were issued. Financial statements are considered issued when they are widely distributed to all shareholders and other financial statement users, or filed with the SEC.

On August 1, 2012, we announced certain new strategic actions to further strengthen our consumer and commercial payments businesses. We have acquired Key-branded credit card assets from Elan Financial Services and will begin to self-issue credit cards. The acquired credit card portfolio of approximately 400,000 consumer and business accounts is comprised of current and former Key clients and has approximately $725 million in credit card assets. We also announced that we entered into a new third party processing agreement with Elavon, Inc. This new agreement continues the legacy arrangement with Elavon while providing Key the opportunity to more fully integrate merchant processing services into our overall payment solutions for business clients. This new arrangement with Elavon is expected to become effective in the first half of 2013.

Offsetting Derivative Positions

In accordance with the applicable accounting guidance, we take into account the impact of bilateral collateral and master netting agreements that allow us to settle all derivative contracts held with a single counterparty on a net basis, and to offset the net derivative position with the related collateral when recognizing derivative assets and liabilities. Additional information regarding derivative offsetting is provided in Note 7 (“Derivatives and Hedging Activities”).

Accounting Guidance Adopted in 2012

 

Fair value measurement. In May 2011, the FASB issued accounting guidance that changed the wording used to describe many of the current accounting requirements for measuring fair value and disclosing information about fair value measurements. This accounting guidance clarified the FASB’s intent about the application of existing fair value measurement requirements. It was effective for the interim and annual periods beginning on or after December 15, 2011 (effective January 1, 2012, for us). The adoption of this accounting guidance did not have a material effect on our financial condition or results of operations. As required by this accounting guidance, additional information regarding the classification is provided in Note 5 (“Fair Value Measurements”).

 

Presentation of comprehensive income. In June 2011, the FASB issued new accounting guidance that required all nonowner changes in shareholders’ equity to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This new accounting guidance did not change any of the components currently recognized in net income or comprehensive income. It was effective for public entities for interim and annual periods beginning after December 15, 2011 (effective January 1, 2012, for us) as well as interim and annual periods thereafter. As required by this accounting guidance, Consolidated Statements of Comprehensive Income (Unaudited) are now included as part of our financial statements.

 

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Testing goodwill for impairment. In September 2011, the FASB issued new accounting guidance that simplified how an entity tests goodwill for impairment. It permits an entity to first assess qualitative factors to determine whether additional goodwill impairment testing is required. This accounting guidance was effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 (effective January 1, 2012, for us). The adoption of this accounting guidance did not have a material effect on our financial condition or results of operations.

Repurchase agreements. In April 2011, the FASB issued accounting guidance that changed the accounting for repurchase agreements and other similar arrangements by eliminating the collateral maintenance requirement when assessing effective control in these transactions. This change could result in more of these transactions being accounted for as secured borrowings instead of sales. This accounting guidance was effective for new transactions and transactions modified on or after the first interim or annual period beginning after December 15, 2011 (effective January 1, 2012, for us). The adoption of this accounting guidance did not have a material effect on our financial condition or results of operations since we do not account for these types of arrangements as sales.

Accounting Guidance Pending Adoption at June 30, 2012

Testing indefinite-lived intangible assets for impairment. In July 2012, the FASB issued new accounting guidance that simplifies how an entity tests indefinite-lived intangible assets other than goodwill for impairment. It permits an entity to first assess qualitative factors to determine whether further testing for impairment of indefinite-lived intangible assets other than goodwill is required. This accounting guidance will be effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 (January 1, 2013, for us). Early adoption is permitted. The adoption of this accounting guidance is not expected to have a material effect on our financial condition or results of operations.

Offsetting disclosures. In December 2011, the FASB issued new accounting guidance that requires an entity to disclose information about offsetting and related arrangements to enable financial statement users to understand the effect of those arrangements on the entity’s financial position. This new accounting guidance will be effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods (effective January 1, 2013, for us).

 

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2. Earnings Per Common Share

Our basic and diluted earnings per Common Share are calculated as follows:

 

        Three months ended June 30,     Six months ended June 30,    
 dollars in millions, except per share amounts   2012      2011      2012      2011   

 

 

 EARNINGS

       

 Income (loss) from continuing operations

    $ 231        $ 252        $ 436        $ 534   

 Less:

  Net income (loss) attributable to noncontrolling interests                       11   

 

 

 Income (loss) from continuing operations attributable to Key

    226        249        431        523   

 Less:

  Dividends on Series A Preferred Stock                 11        12   
  Cash dividends on Series B Preferred Stock (b)     —         —         —         31   
  Amortization of discount on Series B Preferred Stock(b)     —         —         —         53   

 

 

 Income (loss) from continuing operations attributable to Key common shareholders

    221        243        420        427   

 Income (loss) from discontinued operations, net of taxes(a)

    10        (9)              (20)   

 

 

 Net income (loss) attributable to Key common shareholders

    $ 231        $ 234        $ 425        $ 407   
   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 WEIGHTED-AVERAGE COMMON SHARES

       

 Weighted-average common shares outstanding (000)

    944,648        947,565        946,995        914,911   

 Effect of dilutive convertible preferred stock, common share options and other stock awards (000)

    3,439        4,568        4,034        5,251   

 

 

 Weighted-average common shares and potential common shares outstanding (000)

    948,087        952,133        951,029        920,162   
   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 EARNINGS PER COMMON SHARE

       

 Income (loss) from continuing operations attributable to Key common shareholders

    $ .23        $ .26        $ .44        $ .47   

 Income (loss) from discontinued operations, net of taxes (a)

    .01        (.01)        .01        (.02)   

 Net income (loss) attributable to Key common shareholders(c)

    .24        .25        .45        .44   

 Income (loss) from continuing operations attributable to Key common shareholders — assuming dilution

    $ .23        $ .26        $ .44        $ .46   

 Income (loss) from discontinued operations, net of taxes (a)

    .01        (.01)        .01        (.02)   

 Net income (loss) attributable to Key common shareholders — assuming dilution (c)

    .24        .25        .45        .44   

 

 

 

(a) In April 2009, we decided to wind down the operations of Austin, a subsidiary that specialized in managing hedge fund investments for institutional customers. In September 2009, we decided to discontinue the education lending business conducted through Key Education Resources, the education payment and financing unit of KeyBank. As a result of these decisions, we have accounted for these businesses as discontinued operations. The income from discontinued operations for the quarter ended June 30, 2012, and the six months ended June 30, 2012, was primarily attributable to fair value adjustments related to the education lending securitization trusts.

 

(b) Includes a $49 million deemed dividend recorded in the first quarter of 2011 related to the repurchase of the $2.5 billion Series B Preferred Stock.

 

(c) EPS may not foot due to rounding.

 

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3. Loans and Loans Held for Sale

Our loans by category are summarized as follows:

 

    June 30,     December 31,     June 30,   
 in millions   2012      2011      2011    

 

 

 Commercial, financial and agricultural

    $ 20,386        $ 19,378        $ 16,883    

 Commercial real estate:

     

Commercial mortgage

    7,409        8,037        8,069    

Construction

    1,172        1,312        1,631    

 

 

Total commercial real estate loans

    8,581        9,349        9,700    

 Commercial lease financing

    5,636        6,055        6,105    

 

 

Total commercial loans

    34,603        34,782        32,688    

 Residential — prime loans:

     

Real estate — residential mortgage

    2,016        1,946        1,838    

Home equity:

     

Key Community Bank

    9,601        9,229        9,431    

Other

    479        535        595    

 

 

Total home equity loans

    10,080        9,764        10,026    

 

 

 Total residential — prime loans

    12,096        11,710        11,864    

 Consumer other — Key Community Bank

    1,263        1,192        1,157    

 Consumer other:

     

Marine

    1,542        1,766        1,989    

Other

    101        125        142    

 

 

Total consumer other

    1,643        1,891        2,131    

 

 

Total consumer loans

    15,002        14,793        15,152    

 

 

Total loans (a)

    $                     49,605        $                     49,575        $                     47,840    
 

 

 

   

 

 

   

 

 

 

 

 

 

(a) Excluded at June 30, 2012, December 31, 2011, and June 30, 2011, are loans in the amount of $5.5 billion, $5.8 billion and $6.3 billion, respectively, related to the discontinued operations of the education lending business.

Our loans held for sale are summarized as follows:

 

    June 30,     December 31,     June 30,   
 in millions   2012      2011      2011    

 

 

 Commercial, financial and agricultural

   $ 18       $ 19       $ 80    

 Real estate — commercial mortgage

    523        567        198    

 Real estate — construction

    12        35        39    

 Commercial lease financing

    13        12        6    

 Real estate — residential mortgage

    90        95        58    

 

 

Total loans held for sale

   $                     656       $                     728       $                     381    
 

 

 

   

 

 

   

 

 

 

 

 

 

Our quarterly summary of changes in loans held for sale as follows:

 

     
    June 30,     December 31,     June 30,   
 in millions   2012      2011      2011    

 

 

 Balance at beginning of the period

   $ 511       $ 479       $ 426    

New originations

    1,308        1,235        914    

Transfers from held to maturity, net

          19        16    

Loan sales

    (1,165)        (932)        (1,039)    

Loan draws (payments), net

    (4)        (72)        73    

Transfers to OREO / valuation adjustments

    (1)        (1)        (9)    

 

 

 Balance at end of perod

   $                     656       $                     728       $                     381    
 

 

 

   

 

 

   

 

 

 

 

 

 

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4. Asset Quality

We manage our exposure to credit risk by closely monitoring loan performance trends and general economic conditions. A key indicator of the potential for future credit losses is the level of nonperforming assets and past due loans.

Our nonperforming assets and past due loans were as follows:

 

     June 30,      December 31,      June 30,  
in millions    2012       2011       2011   

 

 

Total nonperforming loans (a)

    $                              657        $                              727        $                              842   

Nonperforming loans held for sale

     38         46         42   

OREO

     28         65         52   

Other nonperforming assets

     28         21         14   

 

 

Total nonperforming assets

    $ 751        $ 859        $ 950   
  

 

 

    

 

 

    

 

 

 

 

 

Restructured loans included in nonperforming loans (b)

    $ 163        $ 191        $ 144   

Restructured loans with an allocated specific allowance (c)

     71         50         19   

Specifically allocated allowance for restructured loans (d)

     34         10          

 

 

Accruing loans past due 90 days or more

    $ 131        $ 164        $ 118   

Accruing loans past due 30 through 89 days

     362         441         465   

 

 

 

(a) Includes $36 million of performing home equity second liens at June 30, 2012, that are: subordinate to first liens that are 120 days or more past due; in foreclosure; or when the first mortgage delinquency timeframe is unknown. Such second liens are now being reported as nonperforming loans based upon regulatory guidance issued in January, 2012. This policy related to the classification of second lien home equity loans was implemented prospectively, and therefore prior periods were not presented.

 

(b) A loan is “restructured” (i.e., TDRs) when the borrower is experiencing financial difficulty and we grant a concession that we would not otherwise have considered to improve the collectability of the loan. Typical concessions include: reducing the interest rate, extending the maturity date, or reducing the principal balance.

 

(c) Included in individually impaired loans allocated a specific allowance.

 

(d) Included in allowance for individually evaluated impaired loans.

At June 30, 2012, the approximate carrying amount of our commercial nonperforming loans outstanding represented 59% of their original contractual amount, total nonperforming loans outstanding represented 70% of their original contractual amount owed, and nonperforming assets in total were carried at 64% of their original contractual amount.

At June 30, 2012, our twenty largest nonperforming loans totaled $220 million, representing 33% of total loans on nonperforming status from continuing operations. At June 30, 2011, the twenty largest nonperforming loans totaled $276 million, representing 33% of total loans on nonperforming status.

The amount by which nonperforming loans and loans held for sale reduced expected interest income was $12 million for the six months ended June 30, 2012, and $31 million for the year ended December 31, 2011.

 

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The following tables set forth a further breakdown of individually impaired loans as of June 30, 2012, December 31, 2011 and June 30, 2011:

 

                Unpaid                 Average  
June 30, 2012    Recorded          Principal          Specific      Recorded  
in millions    Investment     (a)    Balance     (b)    Allowance      Investment  

 

 

With no related allowance recorded:

               

Commercial, financial and agricultural

    $                              59          $                              142           —         $                              68   

Commercial real estate:

               

Commercial mortgage

     112           199           —          113   

Construction

     51           204           —          49   

 

 

Total commercial real estate loans

     163           403           —          162   

 

 

Total commercial loans with no related allowance recorded

     222           545           —          230   

Real estate — residential mortgage

                       —           

 

 

Total consumer loans

                       —           

 

 

Total loans with no related allowance recorded

     223           546           —          231   

With an allowance recorded:

               

Commercial, financial and agricultural

     43           53          $                              12         46   

Commercial real estate:

               

Commercial mortgage

     56           98           15         63   

Construction

                               

 

 

Total commercial real estate loans

     60           102           18         67   

 

 

Total commercial loans with an allowance recorded

     103           155           30         113   

 

 

Real estate — residential mortgage

     16           17                   

Home equity:

               

Key Community Bank

     11           11                   

Other

                               

 

 

Total home equity loans

     17           17                   

Consumer other — Key Community Bank

                               

Consumer other:

               

Marine

     50           50           11         25   

Other

     —            —            —          —    

 

 

Total consumer other

     50           50           11         25   

 

 

Total consumer loans

     85           86           18         43   

 

 

Total loans with an allowance recorded

     188           241           48          156   

 

 

Total

    $ 411          $ 787          $ 48        $ 387   
  

 

 

      

 

 

      

 

 

    

 

 

 

 

 

 

(a)

The Recorded Investment in impaired loans represents the face amount of the loan increased or decreased by applicable accrued interest, net deferred loan fees and costs, unamortized premium or discount, and reflects direct charge-offs. This amount is a component of total loans on our consolidated balance sheet.

 

(b) The Unpaid Principal Balance represents the customer’s legal obligation to us.

 

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                Unpaid                 Average   
December 31, 2011    Recorded           Principal          Specific       Recorded   
in millions    Investment      (a)    Balance      (b)   Allowance       Investment   

 

 

With no related allowance recorded:

              

Commercial, financial and agricultural

    $ 88          $ 195          —         $ 75   

Commercial real estate:

              

Commercial mortgage

     100           240          —          131   

Construction

     30           113          —          98   

 

 

Total commercial real estate loans

     130           353          —          229   

 

 

Total loans with no related allowance recorded

     218           548          —          304   

With an allowance recorded:

              

Commercial, financial and agricultural

     62           70         $ 26         75   

Commercial real estate:

              

Commercial mortgage

     96           115          21         91   

Construction

     12           18                 29   

 

 

Total commercial real estate loans

     108           133          25         120   

 

 

Total loans with an allowance recorded

     170           203          51         201   

 

 

Total

    $                         388          $                     751         $                     51        $                     505   
  

 

 

      

 

 

     

 

 

    

 

 

 

 

 

 

(a) The Recorded Investment in impaired loans represents the face amount of the loan increased or decreased by applicable accrued interest, net deferred loan fees and costs, unamortized premium or discount, and reflects direct charge-offs. This amount is a component of total loans on our consolidated balance sheet.

 

(b) The Unpaid Principal Balance represents the customer’s legal obligation to us.

 

                Unpaid                 Average   
June 30, 2011    Recorded           Principal          Specific       Recorded   
in millions    Investment      (a)    Balance      (b)   Allowance       Investment   

 

 

With no related allowance recorded:

              

Commercial, financial and agricultural

    $ 116          $ 217          —         $ 89   

Commercial real estate:

              

Commercial mortgage

     123           207          —          143   

Construction

     83           226          —          124   

 

 

Total commercial real estate loans

     206           433          —          267   

 

 

Total loans with no related allowance recorded

     322           650          —          356   

With an allowance recorded:

              

Commercial, financial and agricultural

     43           71         $ 14         66   

Commercial real estate:

              

Commercial mortgage

     89           174          21         88   

Construction

     34           73          11         39   

 

 

Total commercial real estate loans

     123           247          32         127   

Commercial lease financing

     —            —           —           

 

 

Total loans with an allowance recorded

     166           318          46         199   

 

 

Total

    $                         488          $                     968         $                 46        $                     555   
  

 

 

      

 

 

     

 

 

    

 

 

 

 

 

 

(a) The Recorded Investment in impaired loans represents the face amount of the loan increased or decreased by applicable accrued interest, net deferred loan fees and costs, unamortized premium or discount, and reflects direct charge-offs. This amount is a component of total loans on our consolidated balance sheet.

 

(b) The Unpaid Principal Balance represents the customer’s legal obligation to us.

For the six months ended June 30, 2012 and 2011, interest income recognized on the outstanding balances of accruing impaired loans totaled $2 million for each period presented.

At June 30, 2012, aggregate restructured loans (accrual, nonaccrual and held-for-sale loans) totaled $274 million, compared to $276 million at December 31, 2011, and $252 million at June 30, 2011. We added $109 million in restructured loans during the first six months of 2012, which were partially offset by $111 million in payments and charge-offs.

 

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A further breakdown of restructured loans (TDRs) included in nonperforming loans by loan category as of June 30, 2012, follows:

 

                   Pre-modification             Post-modification  
                   Outstanding             Outstanding  
June 30, 2012    Number             Recorded             Recorded  
dollars in millions    of loans             Investment             Investment  

 

 

LOAN TYPE

              

Nonperforming:

              

Commercial, financial and agricultural

     95       $           108       $           59   

Commercial real estate:

              

Real estate — commercial mortgage

     16            47            31   

Real estate — construction

     11            60            43   

 

 

Total commercial real estate loans

     27            107            74   

 

 

Total commercial loans

     122            215            133   

Real estate — residential mortgage

     56                       

Home equity:

              

Key Community Bank

     50                       

Other

     74                       

 

 

Total home equity loans

     124                       

Consumer other — Key Community Bank

     11                       

Consumer other:

              

Marine

     139            17            17   

Other

     11                      —    

 

 

Total consumer other

     150            18            17   

 

 

Total consumer loans

     341            32            30   

 

 

Total nonperforming TDRs

     463            247            163   

Prior-year accruing (a)

              

Commercial, financial and agricultural

     115                       

Commercial real estate:

              

Real estate — commercial mortgage

               71            48   

Real estate — construction

               15             

 

 

Total commercial real estate loans

               86            49   

 

 

Total commercial loans

     123            94            55   

Real estate — residential mortgage

     111            11            11   

Home equity:

              

Key Community Bank

     88                       

Other

     101                       

 

 

Total home equity loans

     189            10            10   

Consumer other — Key Community Bank

     20                      —    

Consumer other:

              

Marine

     135            34            33   

Other

     53                       

 

 

Total consumer other

     188            36            35   

 

 

Total consumer loans

     508            58            56   

 

 

Total prior-year accruing TDRs

     631            152            111   

 

 

Total TDRs

                     1,094        $                               399        $                               274   
  

 

 

    

 

 

    

 

 

 

 

 

 

(a) All TDRs that were restructured prior to January 1, 2012 and are fully accruing.

We classify loan modifications as TDRs when a borrower is experiencing financial difficulties and we have granted a concession to the borrower without commensurate financial, structural, or legal consideration. All commercial and consumer loan TDRs, regardless of size, are evaluated for impairment individually to determine the probable loss content and are assigned a specific loan allowance if deemed appropriate. The financial effects of TDRs are reflected in the components that comprise the allowance for loan and lease losses in either the amount of charge-offs or loan loss provision and appropriately impact the ultimate allowance level.

Commercial and consumer loan TDRs are considered subsequently defaulted at 90 days past due and when they are greater than 60 days past due, respectively, for principal and interest payments. There were no significant commercial or consumer loans that were designated as TDRs during calendar year 2011, for which there was a payment default during the first six months of 2012.

Our loan modifications are handled on a case by case basis and are negotiated to achieve mutually agreeable terms that maximize loan collectability and meet our client’s financial needs. A majority of our concessions granted to borrowers are in the form of interest rate reductions. Other concession types include forgiveness of principal and other modifications of loan terms. Consumer loan concessions include Home Affordable Modification Program (“HAMP”) loans of approximately $4

 

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million as of June 30, 2012. These loan concessions have successfully completed the required trial period under HAMP and as a result have been permanently modified and are included in consumer TDRs.

The following table shows the concession types for our commercial accruing and nonaccruing TDRs.

 

     June 30,     December 31,     June 30,  
dollars in millions    2012      2011      2011   

 

 

Interest rate reduction

    $ 155       $ 177       $ 175   

Forgiveness of principal

     13        23        10   

Other modification of loan terms

     20               

 

 

Total

    $ 188       $ 208       $ 191   
  

 

 

   

 

 

   

 

 

 

Total commercial and consumer TDRs (a)

    $ 274       $ 276       $ 252   

Total commercial TDRs to total commercial loans

     .54      .60      .58 

Total commercial TDRs to total loans

     .38        .42        .40   

Total commercial loans

    $         34,603       $         34,782       $         32,688   

Total loans

     49,605        49,575        47,840   

 

 

 

(a) Commitments outstanding to lend additional funds to borrowers whose terms have been modified in TDRs are $45 million, $25 million, and $45 million at June 30, 2012, December 31, 2011, and June 30, 2011, respectively.

Our policies for determining past due loans, placing loans on nonaccrual, applying payments on nonaccrual loans and resuming accrual of interest for our commercial and consumer loan portfolios are disclosed in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Nonperforming Loans” on page 117 of our 2011 Annual Report on Form 10-K. Pursuant to regulatory guidance issued in January 2012, the above-mentioned policy for nonperforming loans was revised effective for the second quarter of 2012. As of June 30, 2012, any second lien home equity loan with an associated first lien that is: 120 days or more past due; in foreclosure; or when the first mortgage delinquency timeframe is unknown, is reported as a nonperforming loan. This policy was implemented prospectively, and, therefore, prior periods were not presented.

At June 30, 2012, approximately $48.5 billion, or 98%, of our total loans are current. At June 30, 2012, total past due loans and nonperforming loans of $1.2 billion represent approximately 2% of total loans.

The following aging analysis as of June 30, 2012 and 2011, of past due and current loans provides further information regarding Key’s credit exposure.

 

            30-59      60-89      90 and Greater            Total Past Due
and
        
June 30, 2012           Days Past      Days Past      Days Past      Nonperforming     Nonperforming      Total  
in millions    Current      Due      Due      Due      Loans (a)     Loans      Loans  

 

 

LOAN TYPE

                   

Commercial, financial and agricultural

    $ 20,148        $ 60        $ 13        $ 24        $ 141        $ 238        $ 20,386   

Commercial real estate:

                   

Commercial mortgage

     7,182         15         16         24         172         227         7,409   

Construction

     1,033         12         24         35         68         139         1,172   

 

 

Total commercial real estate loans

     8,215         27         40         59         240         366         8,581   

Commercial lease financing

     5,581         22                       18         55         5,636   

 

 

Total commercial loans

    $         33,944        $         109        $ 61        $ 90        $ 399        $ 659        $ 34,603   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Real estate — residential mortgage

    $ 1,895        $ 24        $ 10        $       $ 78        $ 121        $ 2,016   

Home equity:

                   

Key Community Bank

     9,361         56         26         17         141         240         9,601   

Other

     445         10                       17         34         479   

 

 

Total home equity loans

     9,806         66         30         20         158         274         10,080   

Consumer other — Key Community Bank

     1,237         13                              26         1,263   

Consumer other:

                   

Marine

     1,478         31         10                19         64         1,542   

Other

     95                                            101   

 

 

Total consumer other

     1,573         33         12                20         70         1,643   

 

 

Total consumer loans

    $ 14,511        $ 136        $ 56        $ 41        $ 258        $ 491        $ 15,002   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total loans

    $ 48,455        $ 245        $         117        $         131        $         657        $         1,150        $     49,605   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

 

 

(a) Includes $36 million of performing home equity second liens at June 30, 2012, that are subordinate to first liens that are 120 days or more past due; in foreclosure; or when the first mortgage delinquency is unknown. Such second liens are now being reported as nonperforming loans based upon regulatory guidance issued in January 2012.

 

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            30-59      60-89      90 and Greater             Total Past Due
and
        
June 30, 2011           Days Past      Days Past      Days Past      Nonperforming      Nonperforming      Total  
in millions    Current      Due      Due      Due      Loans      Loans      Loans  

 

 

LOAN TYPE

                    

Commercial, financial and agricultural

    $ 16,599        $ 35        $ 17        $ 19        $ 213        $ 284        $ 16,883   

Commercial real estate:

                    

Commercial mortgage

     7,743         34         51         11         230         326         8,069   

Construction

     1,437         11         24         28         131         194         1,631   

 

 

Total commercial real estate loans

     9,180         45         75         39         361         520         9,700   

Commercial lease financing

     5,983         20         40         21         41         122         6,105   

 

 

Total commercial loans

    $ 31,762        $ 100        $ 132        $ 79        $ 615        $ 926        $ 32,688   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Real estate — residential mortgage

    $ 1,713        $ 24        $ 14        $       $ 79        $ 125        $ 1,838   

Home equity:

                    

Key Community Bank

     9,216         66         32         16         101         215         9,431   

Other

     559         13                       11         36         595   

 

 

Total home equity loans

     9,775         79         39         21         112         251         10,026   

Consumer other — Key Community Bank

     1,129         14                              28         1,157   

Consumer other:

                    

Marine

     1,898         42         14                32         91         1,989   

Other

     138                       —                        142   

 

 

Total consumer other

     2,036         44         15                33         95         2,131   

 

 

Total consumer loans

    $ 14,653        $ 161        $ 72        $ 39        $ 227        $ 499        $ 15,152   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

    $         46,415        $         261        $         204        $         118        $         842        $         1,425        $         47,840   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

The risk characteristic prevalent to both commercial and consumer loans is the risk of loss arising from an obligor’s inability or failure to meet contractual payment or performance terms. Evaluation of this risk is stratified and monitored by the assigned loan risk rating grades for the commercial loan portfolios and the regulatory risk ratings assigned for the consumer loan portfolios. This risk rating stratification assists in the determination of the ALLL. Loan grades are assigned at the time of origination, verified by credit risk management, and periodically reevaluated thereafter.

Most extensions of credit are subject to loan grading or scoring. This risk rating methodology blends our judgment with quantitative modeling. Commercial loans generally are assigned two internal risk ratings. The first rating reflects the probability that the borrower will default on an obligation; the second rating reflects expected recovery rates on the credit facility. Default probability is determined based on, among other factors, the financial strength of the borrower, an assessment of the borrower’s management, the borrower’s competitive position within its industry sector, and our view of industry risk within the context of the general economic outlook. Types of exposure, transaction structure, and collateral, including credit risk mitigants, affect the expected recovery assessment.

Credit quality indicators for loans are updated on an ongoing basis. Bond rating classifications are indicative of the credit quality of our commercial loan portfolios and are determined by converting our internally assigned risk rating grades to bond rating categories. Payment activity and the regulatory classifications of pass and substandard are indicators of the credit quality of our consumer loan portfolios.

 

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Credit quality indicators for our commercial and consumer loan portfolios based on bond rating, regulatory classification and payment activity as of June 30, 2012, and June 30, 2011, are as follows:

Commercial Credit Exposure

Credit Risk Profile by Creditworthiness Category (a) 

 

 

June 30,                                                            
in millions                                                            

 

 
    Commercial, financial and 
agricultural 
    RE — Commercial       RE — Construction      Commercial Lease      Total   
RATING (b) (c)  

 

2012 

    2011      2012      2011       2012      2011      2012      2011      2012      2011   

 

 
AAA — AA   $ 165      $ 100        —       $ 2      $     $     $ 605      $ 655      $ 771      $ 760   

 

A

    680        671      $ 64        63                    992        1,245        1,737        1,980   

 

BBB — BB

    17,652        13,546        5,925        5,553        791        747        3,709        3,590        28,077        23,436   

 

B

    868        955        553        941        58        262        197        343        1,676        2,501   

 

CCC — C

    1,021        1,611        867        1,510        321        618        133        272        2,342        4,011   

 

 

Total

  $       20,386      $     16,883      $       7,409      $         8,069      $         1,172      $         1,631      $         5,636      $         6,105      $     34,603      $     32,688   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(a)  Credit quality indicators are updated on an ongoing basis and reflect credit quality information as of the dates indicated.

(b)  Our bond rating to internal loan grade conversion system is as follows: AAA - AA = 1, A = 2, BBB - BB = 3 - 13, B = 14 - 16, and CCC - C = 17 - 20.

(c)  Our internal loan grade to regulatory-defined classification is as follows: Pass = 1-16, Special Mention = 17, Substandard = 18, Doubtful = 19, and Loss = 20.

Consumer Credit Exposure

Credit Risk Profile by Regulatory Classifications (a) (b)

 

June 30,            
in millions            

 

 
    Residential — Prime   
GRADE   2012      2011   

 

 

Pass

  $ 11,831      $ 11,644    

Substandard

    265        220    

 

 

Total

  $           12,096      $           11,864    
 

 

 

   

 

 

 

 

 

Credit Risk Profile Based on Payment Activity (a) (b)

 

June 30,    Consumer — Key Community 
Bank 
     Consumer — Marine      Consumer — Other       Total   
in millions   

 

2012 

     2011       2012       2011      2012       2011       2012       2011   

 

 

 

Performing

   $ 1,261       $ 1,154       $ 1,523       $ 1,957       $ 100       $ 141       $ 2,884       $ 3,252   

 

Nonperforming

                   19         32                       22         36   

 

    Total

   $ 1,263       $ 1,157       $     1,542       $     1,989       $       101       $         142       $     2,906       $         3,288   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

(a) Credit quality indicators are updated on an ongoing basis and reflect credit quality information as of the dates indicated.

 

(b) Our past due payment activity to regulatory classification conversion is as follows: pass = less than 90 days; and substandard = 90 days and greater plus nonperforming loans. As of June 30, 2012, any second lien home equity loan with an associated first lien: that is 120 days or more past due; in foreclosure; or when the first mortgage delinquency timeframe is unknown, is reported as a nonperforming loan in accordance with regulatory guidance issued in January 2012.

We determine the appropriate level of the ALLL on at least a quarterly basis. The methodology is described in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Allowance for Loan and Lease Losses” beginning on page 117 of our 2011 Annual Report on Form 10-K. We apply expected loss rates to existing loans with similar risk characteristics as noted in the credit quality indicator table above and exercise judgment to assess the impact of factors such as changes in economic conditions, changes in credit policies or underwriting standards, and changes in the level of credit risk associated with specific industries and markets.

For all commercial and consumer loan TDRs, regardless of size, as well as impaired commercial loans with an outstanding balance greater than $2.5 million, we conduct further analysis to determine the probable loss content and assign a specific allowance to the loan if deemed appropriate. We estimate the extent of impairment by comparing the recorded investment of the loan with the estimated present value of its future cash flows, the fair value of its underlying collateral, or the loan’s observable market price. A specific allowance also may be assigned — even when sources of repayment appear sufficient — if we remain uncertain about whether the loan will be repaid in full. On at least a quarterly basis, we evaluate the appropriateness of our loss estimation methods to reduce differences between estimated incurred losses and actual losses. The ALLL at June 30, 2012 represents our best estimate of the probable credit losses inherent in the loan portfolio at that date

 

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Table of Contents

While quantitative modeling factors such as default probability and expected recovery rates are constantly changing as the financial strength of the borrower and overall economic conditions change, there have been no changes to the accounting policies or methodology we used to estimate the ALLL.

Commercial loans generally are charged off in full or charged down to the fair value of the underlying collateral when the borrower’s payment is 180 days past due. Our charge-off policy for most consumer loans is similar but takes effect when payments are 120 days past due. Home equity and residential mortgage loans generally are charged down to the fair value of the underlying collateral when payment is 180 days past due.

At June 30, 2012, the ALLL was $888 million, or 1.79% of loans, compared to $1.2 billion, or 2.57% of loans, at June 30, 2011. At June 30, 2012, the ALLL was 135.16% of nonperforming loans compared to 146.08% at June 30, 2011.

A summary of the allowance for loan and lease losses for the periods indicated is presented in the table below:

 

                    Three months ended  June 30,                      Six months ended  June 30,   
 in millions       2012        2011           2012        2011    

 

 

 Balance at beginning of period — continuing operations

   $     944         $ 1,372        $     1,004         $ 1,604    

 Charge-offs

      (131)          (177)           (263)          (409)    

 Recoveries

      54          43           85          82    

 

 

 Net loans charged off

      (77)          (134)           (178)          (327)    

 Provision for loan and lease losses from continuing operations

      21          (8)           63          (48)    

 Foreign currency translation adjustment

      —           —            (1)          1    

 

 

 Balance at end of period — continuing operations

   $     888         $ 1,230        $     888         $ 1,230