UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
December 31, 2013
Commission file number: 1-11302
Exact name of Registrant as specified in its charter:
(216) 689-3000 |
||||
Registrants Telephone Number, including area code: |
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class |
Name of each exchange on which registered |
|
Common Shares, $1 par value |
New York Stock Exchange | |
7.750% Non-Cumulative Perpetual Convertible Preferred Stock, Series A |
New York Stock Exchange |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ü No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No ü
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 ü No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ü No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ü
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.
Large accelerated filer ü | Accelerated filer | Non-accelerated filer | Smaller reporting company | |||
(Do not check if a 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 ü
The aggregate market value of voting stock held by nonaffiliates of the Registrant was $10,078,228,828 (based on the June 28, 2013, closing price of KeyCorp common shares of $11.04 as reported on the New York Stock Exchange). As of February 24, 2014, there were 889,398,493 common shares outstanding.
Certain specifically designated portions of KeyCorps definitive Proxy Statement for its 2014 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.
Forward-looking Statements
From time to time, we have made or will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements do not relate strictly to historical or current facts. Forward-looking statements usually can be identified by the use of words such as goal, objective, plan, expect, anticipate, intend, project, believe, estimate, or other words of similar meaning. Forward-looking statements provide our current expectations or forecasts of future events, circumstances, results or aspirations. Our disclosures in this report contain forward-looking statements. We may also make forward-looking statements in other documents filed with or furnished to the Securities and Exchange Commission (the SEC). In addition, we may make forward-looking statements orally to analysts, investors, representatives of the media and others.
Forward-looking statements, by their nature, are subject to assumptions, risks, and uncertainties, many of which are outside of our control. Our actual results may differ materially from those set forth in our forward-looking statements. There is no assurance that any list of risks and uncertainties or risk factors is complete. Factors that could cause actual results to differ from those described in forward-looking statements include, but are not limited to:
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deterioration of commercial real estate market fundamentals; |
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defaults by our loan counterparties or clients; |
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adverse changes in credit quality trends; |
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declining asset prices; |
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changes in local, regional and international business, economic or political conditions; |
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the extensive and increasing regulation of the U.S. financial services industry; |
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changes in accounting policies, rules and interpretations; |
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increasing capital and liquidity standards under applicable regulatory rules; |
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unanticipated changes in our liquidity position, including but not limited to, changes in the cost of liquidity, our ability to enter the financial markets and to secure alternative funding sources; |
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our ability to receive dividends from our subsidiary, KeyBank; |
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downgrades in our credit ratings or those of KeyBank; |
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breaches of security or failures of our technology systems due to technological or other factors and cybersecurity threats; |
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operational or risk management failures by us or critical third-parties; |
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adverse judicial proceedings; |
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the occurrence of natural or man-made disasters or conflicts or terrorist attacks; |
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a reversal of the U.S. economic recovery due to financial, political or other shocks; |
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our ability to anticipate interest rate changes and manage interest rate risk; |
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deterioration of economic conditions in the geographic regions where we operate; |
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the soundness of other financial institutions; |
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our ability to attract and retain talented executives and employees and to manage our reputational risks; |
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our ability to timely and effectively implement our strategic initiatives; |
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increased competitive pressure due to industry consolidation; |
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unanticipated adverse effects of acquisitions and dispositions of assets or businesses; and |
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our ability to develop and effectively use the quantitative models we rely upon in our business planning. |
Any forward-looking statements made by us or on our behalf speak only as of the date they are made, and we do not undertake any obligation to update any forward-looking statement to reflect the impact of subsequent events or circumstances. Before making an investment decision, you should carefully consider all risks and uncertainties disclosed in our SEC filings, including this report on Form 10-K and our subsequent reports on Forms 10-Q and 8-K and our registration statements under the Securities Act of 1933, as amended, all of which are or will upon filing be accessible on the SECs website at www.sec.gov and on our website at www.key.com/ir.
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KEYCORP
2013 FORM 10-K ANNUAL REPORT
Item
|
Page
Number |
|||||
PART I | ||||||
1 | 4 | |||||
1A | 18 | |||||
1B | 28 | |||||
2 | 29 | |||||
3 | 29 | |||||
4 | 29 | |||||
PART II | ||||||
5 | 30 | |||||
6 | 31 | |||||
7 |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
32 | ||||
7A | 105 | |||||
8 | 106 | |||||
Managements Annual Report on Internal Control over Financial Reporting |
107 | |||||
108 | ||||||
110 | ||||||
110 | ||||||
111 | ||||||
112 | ||||||
113 | ||||||
114 | ||||||
115 | ||||||
9 |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
215 | ||||
9A | 215 | |||||
9B | 215 | |||||
PART III | ||||||
10 | 216 | |||||
11 | 216 | |||||
12 |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
216 | ||||
13 |
Certain Relationships and Related Transactions, and Director Independence |
216 | ||||
14 | 216 | |||||
PART IV | ||||||
15 | 217 | |||||
220 | ||||||
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PART I
Overview
KeyCorp, organized in 1958 under the laws of the State of Ohio, is headquartered in Cleveland, Ohio. We are a bank holding company under the Bank Holding Company Act of 1956, as amended (BHCA), and are one of the nations largest bank-based financial services companies, with consolidated total assets of approximately $92.9 billion at December 31, 2013. KeyCorp is the parent holding company for KeyBank National Association (KeyBank), its principal subsidiary, through which most of our banking services are provided. Through KeyBank and certain other subsidiaries, we provide a wide range of retail and commercial banking, commercial leasing, investment management, consumer finance, commercial mortgage servicing and special servicing, and investment banking products and services to individual, corporate, and institutional clients through two major business segments: Key Community Bank and Key Corporate Bank.
As of December 31, 2013, these services were provided across the country through KeyBanks 1,028 full-service retail banking branches and a network of 1,335 automated teller machines (ATMs) in 12 states, as well as additional offices, online and mobile banking capabilities, and a telephone banking call center. Additional information pertaining to our two business segments is included in the Line of Business Results section in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations of this report, and in Note 23 (Line of Business Results) of the Notes to Consolidated Financial Statements presented in Item 8. Financial Statements and Supplementary Data, which are incorporated herein by reference. KeyCorp and its subsidiaries had an average of 14,783 full-time equivalent employees for 2013.
In addition to the customary banking services of accepting deposits and making loans, our bank and trust company subsidiaries offer personal, securities lending and custody services, personal financial services, access to mutual funds, treasury services, investment banking and capital markets products, and international banking services. Through our bank, trust companies and registered investment adviser subsidiaries, we provide investment management services to clients that include large corporate and public retirement plans, foundations and endowments, high-net-worth individuals, and multi-employer trust funds established for providing pension or other benefits to employees.
We provide other financial services both within and outside of our primary banking markets through various nonbank subsidiaries. These services include community development financing, securities underwriting, and brokerage. We also provide merchant services to businesses directly and through an equity participation in a joint venture.
KeyCorp is a legal entity separate and distinct from its banks and other subsidiaries. Accordingly, the right of KeyCorp, its security holders and its creditors to participate in any distribution of the assets or earnings of its banks and other subsidiaries is subject to the prior claims of the creditors of such banks and other subsidiaries, except to the extent that KeyCorps claims in its capacity as a creditor may be recognized.
Important Terms Used in this Report
As used in this report, 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 solely to KeyCorps subsidiary bank, KeyBank National Association.
The acronyms and abbreviations identified in Part II, Item 8. Note 1 (Summary of Significant Accounting Policies) hereof are used throughout this report, particularly in the Notes to Consolidated Financial Statements as well as in Managements Discussion and Analysis of Financial Condition and Results of Operations. You may find it helpful to refer to that section as you read this report.
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Demographics
We have two major business segments: Key Community Bank and Key Corporate Bank.
Key Community Bank serves individuals and small to mid-sized businesses by offering a variety of deposit, investment, lending, credit card, and personalized wealth management products and business advisory services. These products and services are provided through our relationship managers and specialists working in our 12-state branch network, which was reorganized during 2013 into nine internally-defined geographic regions: Oregon and Alaska, Washington, Rocky Mountains, Indiana, Western Ohio and Michigan, Eastern Ohio, Eastern New York, New England, and Western New York.
The following table presents the geographic diversity of Key Community Banks average deposits, commercial loans, and home equity loans.
Geographic Region | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Year ended
dollars in millions |
Oregon & Alaska |
Washington |
Rocky Mountains |
Indiana |
West Ohio/ Michigan |
East Ohio |
Eastern New York |
New England |
Western New York |
NonRegion | (a) | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Average deposits |
$ | 4,289 | $ | 6,597 | $ | 4,768 | $ | 2,312 | $ | 4,461 | $ | 8,675 | $ | 8,055 | $ | 2,913 | $ | 5,005 | $ | 2,648 | $ | 49,723 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Percent of total |
8.6 | % | 13.3 | % | 9.6 | % | 4.6 | % | 9.0 | % | 17.4 | % | 16.2 | % | 5.9 | % | 10.1 | % | 5.3 | % | 100.0 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Average commercial loans |
$ | 1,649 | $ | 1,815 | $ | 1,620 | $ | 806 | $ | 1,179 | $ | 2,064 | $ | 1,753 | $ | 790 | $ | 526 | $ | 2,839 | $ | 15,041 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Percent of total |
11.0 | % | 12.1 | % | 10.8 | % | 5.4 | % | 7.8 | % | 13.7 | % | 11.6 | % | 5.2 | % | 3.5 | % | 18.9 | % | 100.0 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Average home equity loans |
$ | 1,338 | $ | 1,861 | $ | 1,553 | $ | 467 | $ | 832 | $ | 1,255 | $ | 1,284 | $ | 625 | $ | 760 | $ | 111 | $ | 10,086 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Percent of total |
13.3 | % | 18.5 | % | 15.4 | % | 4.6 | % | 8.3 | % | 12.4 | % | 12.7 | % | 6.2 | % | 7.5 | % | 1.1 | % | 100.0 | % |
(a) | Represents average deposits and commercial loan and home equity loan products centrally managed outside of our nine Key Community Bank regions. |
Key Corporate Bank is a full-service corporate and investment bank focused principally on serving the needs of middle market clients in six industry sectors: consumer, energy, healthcare, industrial, public sector and real estate. Key Corporate Bank delivers a broad product suite of banking and capital markets products to its clients, including syndicated finance, debt and equity capital markets, commercial payments, equipment finance, commercial mortgage banking, derivatives, foreign exchange, financial advisory, and public finance. Key Corporate Bank is also a significant servicer of commercial mortgage loans and a significant special servicer of CMBS. Key Corporate Bank delivers many of its product capabilities to clients of Key Community Bank.
Further information regarding the products and services offered by our Key Community Bank and Key Corporate Bank segments is included in this report in Note 23 (Line of Business Results).
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Additional Information
The following financial data is included in this report in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations, and Item 8. Financial Statements and Supplementary Data, and is incorporated herein by reference as indicated below:
Our executive offices are located at 127 Public Square, Cleveland, Ohio 44114-1306, and our telephone number is (216) 689-3000. Our website is www.key.com, and the investor relations section of our website may be reached through www.key.com/ir. We make available free of charge, on or through the investor relations section of our website, annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act), as well as proxy statements, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Also posted on our website, and available in print upon request from any shareholder to our Investor Relations Department, are the charters for our Audit Committee, Compensation and Organization Committee, Executive Committee, Nominating and Corporate Governance Committee, and Risk Committee; our Corporate Governance Guidelines; the Code of Ethics for our directors, officers and employees; our Standards for Determining Independence of Directors; our Policy for Review of Transactions Between KeyCorp and Its Directors, Executive Officers and Other Related Persons; our Limitation on Luxury Expenditures Policy; and our Statement of Political Activity. Within the time period required by the SEC and the New York Stock Exchange, we will post on our website any amendment to the Code of Ethics and any waiver applicable to any senior executive officer or director. We also make available a summary of filings made with the SEC of statements of beneficial ownership of our equity securities filed by our directors and officers under Section 16 of the Exchange Act. The Regulatory Disclosure tab of the investor relations section of our website includes public disclosures concerning our annual and mid-year stress-testing activities under the Dodd-Frank Act.
Information contained on or accessible through our website or any other website referenced in this report is not part of this report.
Shareholders may obtain a copy of any of the above-referenced corporate governance documents by writing to our Investor Relations Department at Investor Relations, KeyCorp, 127 Public Square, Mailcode OH-01-27-1113, Cleveland, Ohio 44114-1306; by calling (216) 689-3000; or by sending an e-mail to investor_relations@keybank.com.
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Acquisitions and Divestitures
The information presented in Note 13 (Acquisitions and Discontinued Operations) is incorporated herein by reference.
Competition
The market for banking and related financial services is highly competitive. Key competes with other providers of financial services, such as bank holding companies, commercial banks, savings associations, credit unions, mortgage banking companies, finance companies, mutual funds, insurance companies, investment management firms, investment banking firms, broker-dealers, and other local, regional, and national institutions that offer financial services. Many of our competitors enjoy fewer regulatory constraints and some may have lower cost structures. The financial services industry is likely to become more competitive as further technology advances enable more companies to provide financial services. Technological advances may diminish the importance of depository institutions and other financial institutions. We compete by offering quality products and innovative services at competitive prices, and by maintaining our products and services offerings to keep pace with customer preferences and industry standards.
In recent years, mergers and acquisitions have led to greater concentration in the banking industry, placing added competitive pressure on Keys core banking products and services. Consolidation continued during 2013 and led to redistribution of deposits and certain banking assets to larger financial institutions, including through the FDIC least-cost resolution process, albeit at a far slower pace than during 2012 and 2011. Financial institutions with liquidity challenges sought mergers and other resolutions, and the deposits and certain banking assets of the 167 banks that failed between 2011 and 2013, representing $52.6 billion in total assets, were redistributed through the FDICs least-cost resolution process.
Supervision and Regulation
The regulatory framework applicable to BHCs and banks is intended primarily to protect customers and depositors, the DIF and the banking system as a whole, rather than to protect the security holders and creditors of financial services companies. Comprehensive reform of the legislative and regulatory environment for financial services companies occurred in 2010 and remains ongoing. We cannot predict changes in applicable laws, regulations or regulatory agency policies, but such changes may materially affect our business, financial condition, results of operations, or access to liquidity or credit.
Overview
As a BHC, KeyCorp is subject to regulation, supervision, and examination by the Federal Reserve under the BHCA. Under the BHCA, BHCs generally may not directly or indirectly own or control more than 5% of the voting shares, or substantially all of the assets, of any bank, without prior approval by the Federal Reserve. In addition, BHCs are generally prohibited from engaging in commercial or industrial activities.
Under federal law, a BHC must serve as a source of financial strength to its subsidiary depository institutions by providing financial assistance to them in the event of their financial distress. This support may be required when we do not have the resources to, or would prefer not to, provide it. Certain loans by a BHC to a subsidiary bank are subordinate in right of payment to deposits in, and certain other indebtedness of, the subsidiary bank. In addition, federal law provides that in the bankruptcy of a BHC, any commitment by the BHC to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment.
Federal law establishes a system of regulation under which the Federal Reserve is the umbrella regulator for BHCs, while their subsidiaries are principally regulated by prudential and functional regulators such as the OCC
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for national banks and federal savings associations, the FDIC for non-member state banks and savings associations, the Federal Reserve for member state banks, the CFPB for consumer financial products or services, the SEC and FINRA for securities broker/dealer activities, the SEC and CFTC for swaps and other derivatives, and state insurance regulators for insurance activities. Certain specific activities, including traditional bank trust and fiduciary activities, may be conducted in a bank without the bank being deemed a broker or a dealer in securities for purposes of securities functional regulation. Although the states generally must regulate bank insurance activities in a nondiscriminatory manner, the states may continue to adopt and enforce rules that specifically regulate bank insurance activities in certain identifiable risks.
Our national bank subsidiaries and their subsidiaries are subject to regulation, supervision and examination by the OCC. At December 31, 2013, we operated one full-service, FDIC-insured national bank subsidiary, KeyBank, and two national bank subsidiaries that are limited to fiduciary activities. The FDIC also has certain regulatory, supervisory and examination authority over KeyBank and KeyCorp under the FDIA and the Dodd-Frank Act.
We have other financial services subsidiaries that are subject to regulation, supervision and examination by the Federal Reserve, as well as other applicable state and federal regulatory agencies and self-regulatory organizations. Our securities brokerage and asset management subsidiaries are subject to supervision and regulation by the SEC, FINRA and state securities regulators, and our insurance subsidiaries are subject to regulation by the insurance regulatory authorities of the states in which they operate. Our other nonbank subsidiaries are subject to laws and regulations of both the federal government and the various states in which they are authorized to do business.
Regulatory capital and liquidity
Current regulatory capital requirements
Federal banking regulators have promulgated risk-based capital and leverage ratio requirements applicable to Key and KeyBank. The adequacy of regulatory capital is assessed periodically by federal banking agencies in their examination and supervision processes, and in the evaluation of applications in connection with certain expansion activities.
The current minimum risk-based capital requirements adopted by federal banking regulators are based on a 1988 international accord (Basel I) developed by the Basel Committee on Banking Supervision (the Basel Committee). Under current requirements, Key and KeyBank generally must maintain a minimum ratio of total capital to risk-weighted assets of 8%. At least half of the total capital must be Tier 1 capital, comprised of qualifying perpetual preferred stock, common shareholders equity (excluding AOCI other than the cumulative effect of foreign currency translation), a limited amount of qualifying trust preferred securities, and certain mandatorily convertible preferred securities. The remainder may consist of Tier 2 capital, including qualifying subordinated debt, certain hybrid capital instruments, perpetual debt, mandatory convertible debt instruments, qualifying perpetual preferred stock, and a limited amount of the allowance for credit losses.
BHCs and banks with securities and commodities trading activities exceeding specified levels are required to maintain capital to cover their market risk exposure in accordance with regulations adopted by federal banking regulators. Market risk includes changes in the market value of trading account, foreign exchange and commodity positions, whether resulting from broad market movements (such as movements in interest rates, equity prices, foreign exchange rates, or commodity prices) or from position specific factors (such as idiosyncratic variation, event risk, and default risk). Because Key and KeyBank each have trading assets and liabilities of at least $1 billion or 10% of total assets, Key is subject to the Federal Reserves rule and KeyBank is subject to the OCCs rule on market risk regulatory capital, which became effective in January 2013. In December 2013, the Federal Reserve revised, effective April 1, 2014 (or earlier if a BHC elects to adopt it earlier), its market risk capital rule relating to the treatment of certain securitization, sovereign, and investment company exposures as well as the timing of disclosures to align the rule to the Regulatory Capital Rules
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described below until they become fully effective for all BHCs. As part of the Regulatory Capital Rules described below, the OCC included in its market risk capital rule revisions relating to the treatment of the securitization and sovereign exposures addressed in the Federal Reserves revisions.
Federal banking regulators also have established a minimum leverage ratio requirement for banking organizations. The leverage ratio is Tier 1 capital divided by adjusted average total assets. The minimum leverage ratio is currently 3% for BHCs and national banks that are considered strong by the Federal Reserve or the OCC, respectively, 3% for any BHC that has implemented the Federal Reserves risk-based capital measure for market risk, and 4% for all other BHCs and national banks. The current minimum leverage ratio for Key and KeyBank is 3% and 4%, respectively.
BHCs and national banks may be expected to maintain ratios well above the minimum levels, depending upon their particular condition, risk profile or growth plans. At December 31, 2013, Key and KeyBank had regulatory capital in excess of all current minimum risk-based capital (including all adjustments for market risk) and leverage ratio requirements.
The FDIA requires the relevant federal banking regulator to take prompt corrective action with respect to a FDIC-insured depository institution that does not meet certain capital adequacy standards. Such institutions are grouped into one of five prompt corrective action capital categories well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized using the Tier 1 risk-based, total risk-based, and Tier 1 leverage capital ratios as the relevant capital measures. Restrictions on operations, management and capital distributions begin to apply at adequately capitalized status and become progressively stricter as the insured depository institution approaches critically undercapitalized status. An institution is considered well capitalized if it has a total risk-based capital ratio of at least 10.00%, a Tier 1 risk-based capital ratio of at least 6.00% and a Tier 1 leverage capital ratio of at least 5.00%, and is not subject to any written agreement, order or capital directive to meet and maintain a specific capital level for any capital measure. While the prompt corrective action requirements only apply to FDIC-insured depository institutions and not to BHCs, the mandatory prompt corrective action capital restoration plan required of an undercapitalized institution by its relevant regulator must be guaranteed to a limited extent by the institutions parent BHC.
Basel III capital and liquidity frameworks
In December 2010, the Basel Committee released its final framework to strengthen international capital regulation of banks, and revised it in June 2011 (as revised, the Basel III capital framework). The Basel III capital framework requires higher and better-quality capital, better risk coverage, the introduction of a new leverage ratio as a backstop to the risk-based requirement, and measures to promote the buildup of capital that can be drawn down in periods of stress. The Basel III capital framework, among other things, introduces a new capital measure, Common Equity Tier 1, to be included in Tier 1 capital with other capital instruments meeting specified requirements.
For banks with regulators adopting Basel III capital framework in full, implementation of the Basel III capital framework commenced January 1, 2013, to be fully phased in on January 1, 2019. Beginning January 2013, such banks are required to meet the following minimum capital ratios: 3.5% Common Equity Tier 1 to risk-weighted assets; 4.5% Tier 1 capital to risk-weighted assets; and 8.0% total (that is, Tier 1 plus Tier 2) capital to risk-weighted assets. A capital conservation buffer, effectively raising each of the minimum capital requirements by 2.5%, will be phased-in pro rata over a four-year period beginning January 1, 2016, reaching the full 2.5% on January 1, 2019. Accordingly, such banks subject to the fully phased-in Basel III capital framework would be required to maintain effective minimum capital ratios of: 7% Common Equity Tier 1 to risk-weighted assets, 8.5% Tier 1 capital to risk-weighted assets and 10.5% total capital to risk-weighted assets. A minimum leverage ratio of 3%, calculated as the ratio of Tier 1 capital to total exposure (including on- and certain off-balance sheet exposures), is also imposed on such banks beginning January 1, 2018. The Basel III capital framework also provides for a countercyclical capital buffer, generally to be imposed when national regulators determine that excess aggregate credit growth becomes associated with a buildup of systemic risk. The countercyclical capital
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buffer, if imposed, would impose an additional 0% to 2.5% buffer to the capital conservation buffer for Common Equity Tier 1 when fully implemented. The Basel III capital framework also provides for a number of adjustments to and deductions from Tier 1 capital, which began on January 1, 2014. In January 2014, the Basel Committees oversight body endorsed certain revisions to the leverage ratio framework and disclosure requirements of the Basel III capital framework (the January 2014 Basel III leverage ratio revisions).
The Basel Committee published its international liquidity standards in 2010, and revised these standards in January 2013 (as revised, the Basel III liquidity framework). It established quantitative standards for liquidity by introducing a liquidity coverage ratio (Basel III LCR) and a net stable funding ratio (Basel III NSFR). The Basel III LCR, calculated as the ratio of the stock of high-quality liquid assets divided by total net cash outflows over 30 consecutive calendar days, must be at least 100%. The Basel III NSFR, calculated as the ratio of the available amount of stable funding divided by the required amount of stable funding, must also be at least 100%. The implementation of Basel III LCR begins on January 1, 2015, with minimum requirements beginning at 60%, rising in annual steps of 10% until full implementation on January 1, 2019. The Basel Committee has indicated that revisions to the Basel III NSFR will be made by mid-2016, and the net stable funding ratio will be introduced as a requirement on January 1, 2018. In January 2014, the Basel Committees oversight body endorsed certain final Basel III LCR disclosure standards and certain proposed Basel III NSFR revisions (the January 2014 Basel III liquidity framework revisions).
U.S. implementation of the Basel III capital framework
In October 2013, the federal banking regulators published the final Basel III capital framework for U.S. banking organizations (the Regulatory Capital Rules). The Regulatory Capital Rules generally implement the Basel III capital framework as described above in the United States, but set a minimum leverage ratio of 4% to be calculated consistently with currently applicable regulatory capital requirements (calculated as Tier 1 capital to average total consolidated assets less any amounts that were also deducted from Tier 1 capital). In addition, the Regulatory Capital Rules address two capital-related provisions of the Dodd-Frank Act: first, the provision that general risk-based and leverage capital requirements applicable to FDIC-insured deposit institutions that are not advanced approaches depository institutions (like KeyBank) act as a floor for the requirements applicable to all BHCs (like KeyCorp) as well as to all advanced approaches banking organizations; and, second, the provision that references to external credit ratings be removed from the regulators rules and replaced with alternative standards of creditworthiness.
The impact of the January 2014 Basel III leverage ratio revisions on U.S. banking organizations, including Key and KeyBank, will be determined by the extent to which they are implemented by the federal banking agencies. Neither the Federal Reserve nor the OCC have proposed any rule to implement these revisions.
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New minimum capital requirements
Under the Regulatory Capital Rules, standardized approach banking organizations, like Key, will be required to meet the minimum capital and leverage ratios set forth in the table below. At December 31, 2013, Key had an estimated Common Equity Tier 1 Capital Ratio of 10.7% under Basel III. Also at December 31, 2013, based on the fully phased-in Regulatory Capital Rules, Key estimates that its capital and leverage ratios would be as set forth in the table below.
Estimated Ratios vs. Minimum Capital Ratios Calculated Under the Fully Phased-In
Regulatory Capital Rules
Ratios (including Capital conservation buffer) |
Key December 31, 2013 Estimated |
Minimum
January 1,
|
Phase-in Period |
Minimum
January 1,
|
||||||||||||||||||||||
Common Equity Tier 1 |
10.7 | % | 4.5 | % | None | 4.5 | % | |||||||||||||||||||
Capital conservation buffer (a) |
| 1/1/16 - 1/1/19 | 2.5 | |||||||||||||||||||||||
Common Equity Tier 1 + Capital conservation buffer |
4.5 | 1/1/16 - 1/1/19 | 7.0 | |||||||||||||||||||||||
Tier 1 Capital |
11.0 | 6.0 | None | 6.0 | ||||||||||||||||||||||
Tier 1 Capital + Capital conservation buffer |
6.0 | 1/1/16 - 1/1/19 | 8.5 | |||||||||||||||||||||||
Total Capital |
13.4 | 8.0 | None | 8.0 | ||||||||||||||||||||||
Total Capital + Capital conservation buffer |
8.0 | 1/1/16 - 1/1/19 | 10.5 | |||||||||||||||||||||||
Leverage (b) |
10.3 | 4.0 | None | 4.0 |
(a) | Capital conservation buffer must consist of Common Equity Tier 1 capital. Key is not subject to the countercyclical capital buffer of up to 2.5% imposed under the advanced approaches portion of the Regulatory Capital Rules. |
(b) | Key is not subject to the proposed 3% supplemental leverage ratio requirement imposed under the advanced approaches portion of the Regulatory Capital Rules or to the supplemental leverage buffer of at least 2% proposed for advanced approaches banks under an NPR published by the federal banking agencies in August 2013 (the August 2013 NPR). |
Revised prompt corrective action standards
Under the Regulatory Capital Rules, the prompt corrective action capital category threshold ratios applicable to FDIC-insured depository institutions such as KeyBank will be revised, effective January 1, 2015. The Revised Prompt Corrective Action table, below, identifies the capital category threshold ratios for a well capitalized and an adequately capitalized institution under the current rule and the Regulatory Capital Rules.
Well Capitalized and Adequately Capitalized Capital Category Ratios under Current and
Revised Prompt Corrective Action Rules
Prompt Corrective Action |
Capital Category | |||||||||||||||||||||||||||||||
Well Capitalized | Adequately Capitalized | |||||||||||||||||||||||||||||||
Ratio | Revised | Current | Revised | Current | ||||||||||||||||||||||||||||
Common Equity Tier 1 Risk-Based |
6.5 | % | N/A | 4.5 | % | N/A | ||||||||||||||||||||||||||
Tier 1 Risk-Based |
8.0 | 6.0 | % | 6.0 | 4.0 | % | ||||||||||||||||||||||||||
Total Risk-Based |
10.0 | 10.0 | 8.0 | 8.0 | ||||||||||||||||||||||||||||
Tier 1 Leverage (a) |
5.0 | 5.0 | 4.0 | 3.0 or 4.0 |
(a) | KeyBank is not subject to the enhanced supplementary leverage ratio proposed under the August 2013 NPR. |
We believe that, as of December 31, 2013, KeyBank would meet all well capitalized capital adequacy requirements under the Regulatory Capital Rules if such requirements were currently effective. As previously indicated, the prompt corrective action requirements only apply to FDIC-insured depository institutions and not to BHCs (like KeyCorp).
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U.S. implementation of the Basel III liquidity framework
In November 2013, the federal banking agencies published a joint NPR seeking comment on proposed rules that would create a minimum liquidity coverage ratio (LCR) for certain internationally active bank and nonbank financial companies (not including Key) and a modified version of the LCR (Modified LCR) for certain depository institution holding companies that are not internationally active (including Key). The LCR and Modified LCR created by the NPR are based on the Basel III liquidity framework and would be an enhanced prudential liquidity standard consistent with the Dodd-Frank Act. Comments on the NPR were due by January 31, 2014.
Under the NPR, KeyCorp would be required to maintain high-quality liquid assets of at least 100% of its total net cash outflow amount determined by prescribed assumptions in a hypothetical stress scenario over a 21-calendar day period. Implementation of the LCR and Modified LCR would begin January 1, 2015, with minimum requirements of 80% rising in equal annual steps of 10% to reach full implementation on January 1, 2017. KeyBank will not be subject to the LCR or the Modified LCR under the NPR unless the OCC determines that application to KeyBank is appropriate in light of its asset size, level of complexity, risk profile, scope of operations, affiliation with foreign or domestic covered entities, or risk to the financial system. KeyCorp is confident that it will be able to comply with the Modified LCR once the proposed rule is finalized and implemented. Notwithstanding the foregoing, there are two components of the NPR that could present some challenges for KeyCorp. If the NPR is implemented as proposed, KeyBank would likely limit the amount of collateralized deposits it accepts from states and municipalities (i.e., preferred deposits), further reduce the amount of interest it pays on those deposits, or eliminate the earnings credits it extends to states and municipalities. Securities issued by U.S. government-sponsored enterprises (GSEs) are a primary tool for liquidity management at Key and currently constitute a significant amount of our stock of high quality liquid assets. The NPR would treat these securities as Level 2A liquid assets instead of Level 1 liquid assets while the GSEs are under conservatorship, limiting our ability to rely on them as high quality liquid assets. Key continues to manage in the direction to be Modified LCR compliant by the end of 2014 through changes to the composition of our investment portfolio and by focusing on growing our client deposits that are not preferred deposits. The impact of the January 2014 Basel III liquidity framework revisions on U.S. banking organizations, including Key and KeyBank, will be determined by the extent to which they are implemented by the federal banking agencies.
Capital planning and stress testing
The Federal Reserves capital plan rule requires each U.S.-domiciled, top-tier BHC with total consolidated assets of at least $50 billion (like KeyCorp) to develop and maintain a written capital plan supported by a robust internal capital adequacy process. The capital plan must be submitted annually to the Federal Reserve for supervisory review in connection with its annual CCAR. The supervisory review includes an assessment of many factors, including Keys ability to maintain capital above each minimum regulatory capital ratio and above a Tier 1 common ratio of 5% on a pro forma basis under expected and stressful conditions throughout the planning horizon. KeyCorp is also subject to the Federal Reserve capital plan rule and supervisory guidance regarding the declaration and payment of dividends and capital redemptions repurchases, including the supervisory expectation in certain circumstances for prior notification to, and consultation with, Federal Reserve supervisory staff.
The Federal Reserves annual CCAR is an intensive assessment of the capital adequacy of large, complex U.S. BHCs and of the policies and practices these BHCs use to assess their capital needs. Through CCAR, the Federal Reserve assesses the capital plans of these BHCs to ensure that they have both sufficient capital to continue operations throughout times of financial and economic stress and robust, forward-looking capital planning processes that account for their unique risks. The Federal Reserve expects BHCs subject to CCAR to have sufficient capital to withstand a severely adverse operating environment and to be able to continue operations, maintain ready access to funding, meet obligations to creditors and counterparties, and serve as credit intermediaries. In addition, the Federal Reserve evaluates the planned capital actions of these BHCs, including planned capital distributions such as dividend payments or stock repurchases.
KeyCorp filed its 2014 CCAR capital plan on January 6, 2014. Under the Federal Reserves November 2013 CCAR instructions and guidance, KeyCorps 2014 capital plan was required to reflect the Regulatory Capital
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Rules, including their minimum regulatory capital ratios and transition arrangements, as well as Keys Tier 1 common ratio for each quarter of the planning horizon using the definitions of Tier 1 capital and total risk-weighted assets as in effect in 2013, as well as a transition plan for full implementation of the Regulatory Capital Rules. Results from 2014 CCAR, which will include the 2014 supervisory stress test methodology and certain firm-specific results for the participating 30 covered companies (including KeyCorp), are expected to be released in March 2014.
As part of the annual CCAR, the Federal Reserve conducts an annual supervisory stress test on KeyCorp. As part of this test, the Federal Reserve projects revenue, expenses, losses, and resulting post-stress capital levels, regulatory capital ratios, and the Tier 1 common ratio under conditions that affect the U.S. economy or the financial condition of KeyCorp, including baseline, adverse, and severely adverse scenarios, that are determined annually by the Federal Reserve.
KeyCorp and KeyBank must also conduct their own company-run stress tests to assess the impact of stress scenarios on their consolidated earnings, losses, and capital over a nine-quarter planning horizon, taking into account their current condition, risks, exposures, strategies, and activities. While KeyBank must only conduct an annual stress test, KeyCorp must conduct both an annual and a mid-cycle stress test. KeyCorp and KeyBank are required to report the results of their annual stress tests to the Federal Reserve and OCC in early January of each year, and KeyCorp is required to report the results of its mid-cycle stress test to the Federal Reserve in early July of each year. Summaries of the results of these tests are disclosed, in March of each year for the annual tests and September of each year for the mid-cycle test, on the Regulatory Disclosure tab of Keys Investor Relations website: http://www.key.com/ir.
Dividend restrictions
Federal banking law and regulations impose limitations on the payment of dividends by our national bank subsidiaries (like KeyBank). Historically, dividends paid by KeyBank have been an important source of cash flow for KeyCorp to pay dividends on its equity securities and interest on its debt. Dividends by our national bank subsidiaries are limited to the lesser of the amounts calculated under an earnings retention test and an undivided profits test. Under the earnings retention test, without the prior approval of the OCC, a dividend may not be paid if the total of all dividends declared by a bank in any calendar year is in excess of the current years net income combined with the retained net income of the two preceding years. Under the undivided profits test, a dividend may not be paid in excess of a banks undivided profits. Moreover, under the FDIA, an insured depository institution may not pay a dividend if the payment would cause it to be in a less than adequately capitalized prompt corrective action capital category or if the institution is in default in the payment of an assessment due to the FDIC. For more information about the payment of dividends by KeyBank to KeyCorp, please see Note 3 (Restrictions on Cash, Dividends and Lending Activities) in this report.
FDIA, Resolution Authority and Financial Stability
Deposit insurance and assessments
The DIF provides insurance coverage for domestic deposits funded through assessments on insured depository institutions like KeyBank. Pursuant to the Dodd-Frank Act, the amount of deposit insurance coverage for deposits increased permanently from $100,000 to $250,000 per depository.
Under the Dodd-Frank Act, the FDIC must assess the premium based on an insured depository intuitions assessment base, calculated as its average consolidated total assets minus its average tangible equity. KeyBanks current annualized premium assessments can range from $.025 to $.45 for each $100 of its assessment base. The rate charged depends on KeyBanks performance on the FDICs large and highly complex institution risk-assessment scorecard, which includes factors such as KeyBanks regulatory rating, its ability to withstand asset and funding-related stress, and the relative magnitude of potential losses to the FDIC in the event of KeyBanks failure.
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Conservatorship and receivership of insured depository institutions
Upon the insolvency of an insured depository institution, the FDIC will be appointed as receiver or, in rare circumstances, conservator for the insolvent institution under the FDIA. In an insolvency, the FDIC may repudiate or disaffirm any contract to which the institution is a party if the FDIC determines that performance of the contract would be burdensome and that disaffirming or repudiating the contract would promote orderly administration of the institutions affairs. If the contractual counterparty made a claim against the receivership (or conservatorship) for breach of contract, the amount paid to the counterparty would depend upon, among other factors, the receivership assets available to pay the claim and the priority of the claim relative to others. In addition, the FDIC may enforce most contracts entered into by the insolvent institution, notwithstanding any provision that would terminate, cause a default, accelerate or give other rights under the contract solely because of the insolvency, the appointment of the receiver (or conservator), or the exercise of rights or powers by the receiver (or conservator). The FDIC may also transfer any asset or liability of the insolvent institution without obtaining approval or consent from the institutions shareholders or creditors. These provisions would apply to obligations and liabilities of Keys insured depository institution subsidiaries, such as KeyBank, including obligations under senior or subordinated debt issued to public investors.
Receivership of certain SIFIs
The Dodd-Frank Act created a new resolution regime, as an alternative to bankruptcy, known as the orderly liquidation authority (OLA) for certain SIFIs, including BHCs and their affiliates. Under the OLA, the FDIC would generally be appointed as receiver to liquidate and wind up a failing SIFI. The determination that a SIFI should be placed into OLA receivership is made by the U.S. Treasury Secretary, who must conclude that the SIFI is in default or in danger of default and that the SIFIs failure poses a risk to the stability of the U.S. financial system. This determination must come after supermajority recommendations by the Federal Reserve and the FDIC, and consultation between the U.S. Treasury Secretary and the President.
If the FDIC is appointed as receiver under the OLA, its powers and the rights and obligations of creditors and other relevant parties would be determined exclusively under the OLA. The powers of a receiver under the OLA are generally based on the FDICs powers as receiver for insured depository institutions under the FDIA. Certain provisions of the OLA were modified to reduce disparate treatment of creditors claims between the U.S. Bankruptcy Code and the OLA. However, substantial differences between the two regimes remain, including the FDICs right to disregard claim priority in some circumstances, the use of an administrative claims procedure under OLA to determine creditors claims (rather than a judicial procedure in bankruptcy), the FDICs right to transfer claims to a bridge entity, and limitations on the ability of creditors to enforce contractual cross-defaults against potentially viable affiliates of the entity in receivership. OLA liquidity would be provided through credit support from the U.S. Treasury and assessments made, first, on claimants against the receivership that received more in the OLA resolution than they would have received in ordinary liquidation (to the full extent of the excess), and second, if necessary, on SIFIs, like KeyCorp, utilizing a risk-based methodology.
In December 2013, the FDIC published a notice for comment regarding its single point of entry resolution strategy under the OLA. This strategy involves the appointment of the FDIC as receiver for the SIFIs top-level U.S. holding company only, while permitting the operating subsidiaries of the failed holding company to continue operations uninterrupted. As receiver, the FDIC would establish a bridge financial company for the failed holding company and would transfer the assets and a very limited set of liabilities of the receivership estate. The claims of unsecured creditors and other claimants in the receivership would be satisfied by the exchange of their claims for the securities of one or more new holding companies emerging from the bridge company. Comments on the notice are due by February 18, 2014.
Depositor preference
The FDIA provides that, in the event of the liquidation or other resolution of an insured depository institution, the claims of its depositors (including claims of its depositors that have subrogated to the FDIC) and certain claims for administrative expenses of the FDIC as receiver have priority over other general unsecured claims. If an
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insured depository institution fails, insured and uninsured depositors, along with the FDIC, will be placed ahead of unsecured, nondeposit creditors, including the institutions parent BHC and subordinated creditors, in order of priority of payment.
Resolution plans
BHCs with at least $50 billion in total consolidated assets, like KeyCorp, are required to periodically submit to the Federal Reserve and FDIC a plan discussing how the company could be rapidly and orderly resolved if the company failed or experienced material financial distress. Insured depository institutions with at least $50 billion in total consolidated assets, like KeyBank, are also required to submit a resolution plan to the FDIC. These plans are due annually by December 31 of each year. For 2013, KeyCorp and KeyBank elected to submit a joint resolution plan given Keys organizational structure and business activities and the significance of KeyBank to Key. This resolution plan, the first required from KeyCorp and KeyBank, was submitted on December 9, 2013. In January 2014, the Federal Reserve and FDIC made available on their websites the public sections of resolution plans for the companies that submitted plans for the first time in December 2013. The public section of the joint resolution plan of KeyCorp and KeyBank is available at http://www.federalreserve.gov/bankinforeg/resolution-plans.htm.
Financial Stability Oversight Council
The Dodd-Frank Act created the FSOC, a systemic risk oversight body, to (i) identify risks to U.S. financial stability that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected SIFIs, or that could arise outside the financial services marketplace, (ii) promote market discipline, by eliminating expectations that the U.S. government will shield shareholders, creditors, and counterparties from losses in the event of failure, and (iii) respond to emerging threats to the stability of the U.S. financial system. The FSOC is responsible for facilitating regulatory coordination, information collection and sharing, designating nonbank financial companies for consolidated supervision by the Federal Reserve, designating systemic financial market utilities and systemic payment, clearing, and settlement activities requiring prescribed risk management standards and heightened federal regulatory oversight, recommending stricter standards for SIFIs, and, together with the Federal Reserve, determining whether action should be taken to break up firms that pose a grave threat to U.S. financial stability.
The Bank Secrecy Act
The BSA requires all financial institutions (including banks and securities broker-dealers) to, among other things, maintain a risk-based system of internal controls reasonably designed to prevent money laundering and the financing of terrorism. It includes a variety of recordkeeping and reporting requirements (such as cash and suspicious activity reporting) as well as due diligence and know-your-customer documentation requirements. Key has established and maintains an anti-money laundering program to comply with the BSAs requirements.
Other Regulatory Developments under the Dodd-Frank Act
Consumer Financial Protection Bureau
Title X of the Dodd-Frank Act created the CFPB, a consumer financial services regulator with supervisory authority over banks and their affiliates with assets of more than $10 billion, like Key, for compliance with federal consumer protection laws. The CFPB also regulates financial products and services sold to consumers and has rulemaking authority with respect to federal consumer financial laws. Any new regulatory requirements promulgated by the CFPB or modifications in the interpretations of existing regulations could require changes to our consumer-facing businesses. The Dodd-Frank Act also gives the CFPB broad data collecting powers for fair lending for both small business and mortgage loans, as well as extensive authority to prevent unfair, deceptive and abusive practices.
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During 2013, the CFPB issued a series of final rules related to residential mortgage loan origination and servicing. In particular, in January 2013, the CFPB issued a final rule implementing the ability-to-repay rules and qualified mortgage provisions of the Truth in Lending Act, as amended by the Dodd-Frank Act. Under these rules, a lender must make a reasonable, good faith determination that a borrower is able to repay a mortgage before extending the credit, based on a number of factors and consideration of financial information about the borrower. Loans meeting the definition of qualified mortgage are granted a presumption that the lender satisfied the ability-to-repay requirements. The CFPB has also issued rules affecting other aspects of the residential mortgage loan process, ranging from the customer application to servicing of the loan. These changes and additions to consumer mortgage banking rules have required enhancements to our compliance programs, as well as changes to Keys systems and loan processing practices. The ability to repay and qualified mortgage rules became effective on January 10, 2014.
Debit Card Interchange
Federal Reserve Regulation II Debit Card Interchange Fees and Routing (the Interchange Rule) limits debit card interchange fees and eliminates exclusivity arrangements between issuers and networks for debit card transactions. The relevant portions of the Interchange Rule became effective October 1, 2011.
On July 31, 2013, the U.S. District Court for the District of Columbia issued a ruling in NACS v. Board of Governors of the Federal Reserve System , vacating the Interchange Rule. Retail merchants and merchant groups challenged the Federal Reserves final rule, which allowed debit card issuers to recover from merchants an interchange fee of $.21 per transaction, a fee of five basis points of the value of the transaction, and an additional $.01 fraud prevention adjustment. The district court held that this fee structure, and the Interchange Rules requirements regarding the number of networks over which each debit card transaction can be processed, did not comply with the Durbin Amendment to the Dodd-Frank Act. On September 19, 2013, the Court of Appeals for the D.C. Circuit granted a joint motion by the parties for expedited appeal of the district courts opinion. The parties filed briefs with the court in December 2013, and oral arguments were held in January 2014. The Interchange Rule remains in effect until resolution of the appeal by the circuit court. We continue to monitor these developments.
Volcker Rule
In December 2013, federal banking regulators issued a joint final rule (the Final Rule) implementing Section 619 of the Dodd-Frank Act, known as the Volcker Rule. The Final Rule prohibits banking entities, such as KeyCorp, KeyBank and their affiliates and subsidiaries, from owning, sponsoring, or having certain relationships with hedge funds and private equity funds (referred to as covered funds) and engaging in short-term proprietary trading of securities, derivatives, commodity futures and options on these instruments.
The Final Rule excepts certain transactions from the general prohibition against proprietary trading, including: transactions in government securities (e.g., U.S. Treasuries or any instruments issued by the GNMA, FNMA, FHLMC, a Federal Home Loan Bank, or any state or a political division of any state, among others); transactions in connection with underwriting or market-making activities; and, transactions as a fiduciary on behalf of customers. Banking entities may also engage in risk-mitigating hedges if the entity can demonstrate that the hedge reduces or mitigates a specific, identifiable risk or aggregate risk position of the entity. The banking entity is required to conduct an analysis supporting its hedging strategy and the effectiveness of the hedges must be monitored and, if necessary, adjusted on an ongoing basis. Banking entities with more than $50 billion in total consolidated assets and liabilities, like Key, that engage in permitted trading transactions are required to implement enhanced compliance programs, to regularly report data on trading activities to the regulators, and to provide a CEO attestation that the entitys compliance program is reasonably designed to comply with the Final Rule.
Although the Final Rule will take effect April 1, 2014, the Federal Reserve exercised its unilateral authority to extend the compliance deadline until July 21, 2015. Key does not anticipate that the proprietary trading restrictions in the Final Rule will have a material impact on its business, but it may be required to divest certain fund investments as discussed in more detail under the heading Other investments in Item 7 of this report.
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Derivatives
Title VII of the Dodd-Frank Act imposes a new, comprehensive regulatory regime on the U.S. derivatives markets, subjecting nearly all derivative transactions to CFTC or SEC regulation. In May 2012, the CFTC and the SEC issued joint final rules defining the terms swap dealer and security-based swap dealer. The final rules specified that, generally, a swap dealer is an entity engaging in $3 billion in notional value of non-exempt swap activity in any 12-month period commencing October 12, 2012, subject to an initial phase-in threshold of $8 billion in notional value. As a result, in November 2013, KeyBank provisionally registered as a swap dealer with the CFTC and became a member of the National Futures Association, the self-regulatory organization for participants in the U.S. derivatives industry. As a provisionally-registered swap dealer, KeyBank is required to develop and adhere to a specified compliance program.
The CFTC has also finalized regulations establishing recordkeeping requirements, swap data reporting requirements, swap dealer business conduct standards, mandatory swap clearing requirements, and swap trade execution requirements. Other regulations required by the Dodd-Frank Act, including capital and margin requirements, additional mandatory clearing designations, and position limits, have not been finalized and the timeframe for their completion remains unclear.
Enhanced prudential standards and early remediation requirements
Under the Dodd-Frank Act, the Federal Reserve must impose enhanced prudential standards and early remediation requirements upon BHCs with at least $50 billion in total consolidated assets (like KeyCorp). Prudential standards must include enhanced risk-based capital requirements and leverage limits, enhanced liquidity requirements, a single-counterparty credit limit, enhanced risk management and risk committee requirements, both supervisory and company-run stress tests and, for certain financial companies, a debt-to-equity limit. Early remediation requirements must include limits on capital distributions, acquisitions, and asset growth in early stages of financial decline and capital restoration plans, capital raising requirements, limits on transactions with affiliates, management changes, and asset sales in later stages of financial decline, which are to be triggered by forward-looking indicators including regulatory capital and liquidity measures. On February 18, 2014, the Federal Reserve issued its final rule implementing a number of enhanced prudential standards regarding liquidity, risk management, and capital. Key is currently reviewing the final rule to determine its impact.
Bank transactions with affiliates
Federal banking law and regulation imposes qualitative standards and quantitative limitations upon certain transactions by a bank with its affiliates, including the banks parent BHC and certain companies the parent BHC may be deemed to control for these purposes. Transactions covered by these provisions must be on arms-length terms, and cannot exceed certain amounts which are determined with reference to the banks regulatory capital. Moreover, if the transaction is a loan or other extension of credit, it must be secured by collateral in an amount and quality expressly prescribed by statute, and if the affiliate is unable to pledge sufficient collateral, the BHC may be required to provide it. These provisions materially restrict the ability of KeyBank to fund its affiliates, including KeyCorp, KeyBanc Capital Markets Inc., certain of the Victory mutual funds with which we continue to have a relationship, and KeyCorps nonbanking subsidiaries engaged in making merchant banking investments (and certain companies in which these subsidiaries have invested).
Provisions added by the Dodd-Frank Act expanded the scope of (i) the definition of affiliate to include any investment fund having any bank or BHC-affiliated company as an investment adviser, (ii) credit exposures subject to the prohibition on the acceptance of low-quality assets or securities issued by an affiliate as collateral, the quantitative limits, and the collateralization requirements to now include credit exposures arising out of derivative, repurchase agreement, and securities lending/borrowing transactions, and (iii) transactions subject to quantitative limits to now also include credit collateralized by affiliate-issued debt obligations that are not securities. In addition, these provisions require that a credit extension to an affiliate remain secured in accordance
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with the collateral requirements at all times that it is outstanding, rather than the previous requirement of only at the inception or upon material modification of the transaction. They also raise significantly the procedural and substantive hurdles required to obtain a regulatory exemption from the affiliate transaction requirements. While these provisions became effective on July 21, 2012, the Federal Reserve has not yet issued a proposed rule to implement them.
New assessments, fees and other charges
Certain provisions of the Dodd-Frank Act require or authorize certain U.S. governmental departments, agencies and instrumentalities to collect new assessments, fees and other charges from BHCs and banks, like KeyCorp and KeyBank. The U.S. Treasury has adopted a final rule establishing an assessment schedule to collect from SIFIs, including KeyCorp, based on their average total consolidated assets semiannual assessments to pay the expenses of the OFR, including the expenses of the FSOC and certain expenses for implementing the orderly liquidation activities of the FDIC. The Federal Reserve has established an annual assessment upon SIFIs, including KeyCorp, based on their average total consolidated assets for the Federal Reserves examination, supervision, and regulation of such companies.
ITEM 1A. | RISK FACTORS |
As a financial services organization, we are subject to a number of risks inherent in our transactions and present in the business decisions we make. Described below are the primary risks and uncertainties that if realized could have a material and adverse effect on our business, financial condition, results of operations or cash flows, and our access to liquidity. The risks and uncertainties described below are not the only risks we face.
Our ERM program incorporates risk management throughout our organization to identify, understand, and manage the risks presented by our business activities. Our ERM program identifies Keys major risk categories as: credit risk, compliance risk, liquidity risk, operational risk, market risk, reputation risk, strategic risk, and model risk. These risk factors, and other risks we may face, are discussed in more detail in other sections of this report.
I. Credit Risk
Should the fundamentals of the commercial real estate market deteriorate, our financial condition and results of operations could be adversely affected.
The U.S. economy remains vulnerable, and any reversal in broad macro trends would threaten the nascent recovery in commercial real estate. The improvement of certain economic factors, such as unemployment and real estate asset values and rents, has continued to lag behind the overall economy. These economic factors generally affect certain industries like real estate and financial services more significantly. A significant portion of our clients are active in these industries. Furthermore, financial services companies with a substantial lending business, like ours, are dependent upon the ability of their borrowers to make debt service payments on loans.
A portion of our commercial real estate loans are construction loans. Typically these properties are not fully leased at loan origination; the borrower may require additional leasing through the life of the loan to provide cash flow to support debt service payments. If we experienced weaknesses similar to those experienced at the height of the economic downturn, then we would experience a slowing in the execution of new leases, which may also lead to existing lease turnover.
We are subject to the risk of defaults by our loan counterparties and clients.
Many of our routine transactions expose us to credit risk in the event of default of our counterparty or client. Our credit risk may be exacerbated when the collateral held cannot be realized upon or is liquidated at prices insufficient to recover the full amount of the loan or derivative exposure due to us. In deciding whether to extend
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credit or enter into other transactions, we may rely on information furnished by or on behalf of counterparties and clients, including financial statements, credit reports and other information. We may also rely on representations of those counterparties, clients, or other third parties as to the accuracy and completeness of that information. The inaccuracy of that information or those representations affects our ability to accurately evaluate the default risk of a counterparty or client.
Various factors may cause our allowance for loan and lease losses to increase.
We maintain an ALLL (a reserve established through a provision for loan and lease losses charged to expense) that represents our estimate of losses based on our evaluation of risks within our existing portfolio of loans. The level of the allowance reflects our ongoing evaluation of industry concentrations, specific credit risks, loan and lease loss experience, current loan portfolio quality, present economic, political and regulatory conditions, and incurred losses inherent in the current loan portfolio. The determination of the appropriate level of the ALLL inherently involves a degree of subjectivity and requires that we make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, the stagnation of certain economic indicators that we are more susceptible to, such as unemployment and real estate values, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the ALLL. Bank regulatory agencies periodically review our ALLL and, based on judgments that can differ somewhat from those of our own management, may require an increase in the provision for loan and lease losses or the recognition of further loan charge-offs. In addition, if charge-offs in future periods exceed the ALLL (i.e., if the loan and lease allowance is inadequate), we will need additional loan and lease loss provisions to increase the ALLL, which would decrease our net income and capital.
Declining asset prices could adversely affect us.
During the recession from December 2007 to June 2009, the volatility and disruption that the capital and credit markets experienced reached extreme levels. The severe market disruption in 2008 led to the failure of several substantial financial institutions, causing the widespread liquidation of assets and constraining the credit markets. These asset sales, along with asset sales by other leveraged investors, including some hedge funds, rapidly drove down prices and valuations across a wide variety of traded asset classes. Asset price deterioration has a negative effect on the valuation of many of the asset categories represented on our balance sheet, and reduces our ability to sell assets at prices we deem acceptable. A further recession would likely reverse recent positive trends in asset prices.
We have heightened credit exposure in high-balance loans and loans in environmentally sensitive industries.
As of December 31, 2013, approximately 70% of our loan portfolio consisted of commercial, financial and agricultural loans, commercial real estate loans, including commercial mortgage and construction loans, and commercial leases. These types of loans are typically larger than residential real estate loans and consumer loans.
We also do business with environmentally sensitive industries and in connection with the development of Brownfield sites that provide appropriate business opportunities. We monitor and evaluate our borrowers for compliance with environmental-related covenants, which include covenants requiring compliance with applicable law. Should political or other changes make it difficult for certain of our customers to maintain compliance with applicable covenants, our credit quality could be adversely affected. The deterioration of a larger loan or a group of our loans could cause a significant increase in nonperforming loans, which could result in net loss of earnings from these loans, an increase in the provision for loan and lease losses, and an increase in loan charge-offs.
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II. Compliance Risks
We are subject to extensive government regulation and supervision.
We are subject to extensive federal and state regulation and supervision, which has increased in recent years due to the implementation of the Dodd-Frank Act and other financial reform initiatives. Banking regulations are primarily intended to protect depositors funds, the DIF and the banking system as a whole, not our debtholders or shareholders. These regulations affect our lending practices, capital structure, investment practices, dividend policy, ability to repurchase our common shares, and growth, among other things.
Changes to statutes, regulations or regulatory policies or their interpretation or implementation, and continuing to become subject to heightened regulatory practices, requirements or expectations, could affect us in substantial and unpredictable ways. These changes may subject us to additional compliance costs and increase our litigation and regulatory costs should we fail to appropriately comply. Such changes may also limit the types of financial services and products we may offer, affect the investments we make, and change the manner in which we operate. For more information, see Supervision and Regulation in Item 1 of this report.
Additionally, federal banking law grants substantial enforcement powers to federal banking regulators. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to initiate injunctive actions against banking organizations and affiliated parties. These enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices.
The regulatory environment for the financial services industry is being significantly affected by financial regulatory reform initiatives, including the Dodd-Frank Act.
The United States and other governments have undertaken major reforms of the regulatory oversight structure of the financial services industry. We have faced increased regulation of our industry, and will continue to face such regulation into 2014, as a result of current and future initiatives intended to provide financial market stability and enhance the liquidity and solvency of financial institutions. We also faced increased regulation from efforts designed to protect consumers from financial abuse.
We expect continued intense scrutiny from our bank supervisors in the examination process and aggressive enforcement of regulations on the federal and state levels, particularly due to KeyBanks and KeyCorps status as covered institutions under the enhanced prudential standards promulgated under the Dodd-Frank Act. Although many parts of the Dodd-Frank Act are now in effect, other parts will continue to be implemented over the next few years. As a result, some uncertainty remains as to the aggregate impact upon Key of the Dodd-Frank Act as fully implemented. Compliance with these new regulations and supervisory initiatives has and will continue to increase our costs, may reduce our revenue and limit our ability to pursue certain desirable business opportunities, and limit our ability to take certain types of corporate actions. For more detailed information on the regulatory environment and the laws, rules and regulations that may affect us, see Supervision and Regulation in Item 1 of this report.
Changes in accounting policies, rules and interpretations could materially affect how we report our financial results and condition.
The FASB, regulatory agencies, and other bodies that establish accounting standards from time to time change the financial accounting and reporting standards governing the preparation of Keys financial statements. Additionally, those bodies that establish and interpret the accounting standards (such as the FASB, SEC, and banking regulators) may change or even reverse prior interpretations or positions on how these standards should be applied. These changes can be difficult to predict and can materially affect how Key records and reports its financial condition and results of operations. In some cases, Key could be required to apply a new or revised standard retroactively, resulting in changes to previously reported financial results.
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III. Capital and Liquidity Risk
Capital and liquidity requirements imposed by the Dodd-Frank Act will require banks and BHCs to maintain more and higher quality capital than has historically been the case.
New and evolving capital standards resulting from the Dodd-Frank Act and the Regulatory Capital Rules adopted by our regulators will have a significant impact on banks and BHCs, including Key. For a detailed explanation of recently adopted capital and liquidity rules, see the section titled Regulatory capital and liquidity under the heading Supervision and Regulation in Item 1 of this report.
The full effect of the Federal Reserves proposed liquidity standards on Key is uncertain at this time. However, the need to maintain more and higher quality capital, together with new requirements for greater liquidity, could limit our business activities, including lending, and our ability to expand organically or through acquisitions. It could also result in our taking steps to increase our capital that may be dilutive to shareholders or limit our ability to pay dividends or otherwise return capital to shareholders. In addition, new liquidity standards could require us to increase our holdings of highly liquid short- term investments, or change our mix of funding alternatives, and may impact business relationships with certain customers. It could reduce our ability to invest in longer-term assets even if more desirable from a balance sheet management perspective.
In addition, the Federal Reserve requires bank holding companies to obtain approval before making a capital distribution, such as paying or increasing dividends, implementing common stock repurchase programs, or redeeming or repurchasing capital instruments. The Federal Reserve has detailed the processes that bank holding companies should maintain to ensure they hold adequate capital under severely adverse conditions and have ready access to funding before engaging in any capital activities. These rules could limit Keys ability to make distributions, including paying out dividends or buying back shares. For more information, see Supervision and Regulation in Item 1 of this report.
Federal agencies may no longer support current initiatives or may not implement new initiatives to support the stability of the U.S. financial system.
Since 2008, the federal government has taken unprecedented steps to provide stability to and confidence in the financial markets. For example, the Federal Reserve maintains a variety of stimulus policy measures designed to maintain a low interest rate environment, including its monthly purchases of treasury bonds and mortgage-backed securities, to help stabilize the economy given the FOMCs legal mandates to maximize employment, maintain stable prices, and moderate long-term interest rates. In light of recent moderate improvements in the U.S. economy, federal agencies may no longer continue to support current initiatives. The Federal Reserve announced in December 2013 it will taper its monthly purchases of treasury bonds and mortgage-backed securities as the economy continues to improve. The discontinuation of market-supporting government and agency initiatives, particularly a sudden discontinuation, may have a negative impact, perhaps severe, on the financial markets. These effects could include a sudden move to higher debt yields, which could have a chilling effect on borrowing. In addition, new initiatives or legislation may not be implemented to counter any negative effects of discontinuing programs or, in the event of an economic downturn, to support and stabilize a troubled economy. Even if new legislation or initiatives were necessary, it is uncertain that any legislation or initiative could be implemented in a timely fashion or at all in the current political climate. Additionally, any program implemented or legislation enacted to counter the effects of program discontinuation or a sudden economic downturn may be insufficient to support financial market stability or promote U.S. economic recovery.
We rely on dividends by our subsidiaries for most of our funds.
We are a legal entity separate and distinct from our subsidiaries. With the exception of cash that we raise from debt and equity issuances, we receive substantially all of our cash flow from dividends by our subsidiaries. These dividends are the principal source of funds to pay dividends on our equity securities and interest and principal on
21
our debt. Federal banking law and regulations limit the amount of dividends that KeyBank (KeyCorps largest subsidiary) can pay. For further information on the regulatory restrictions on the payment of dividends by KeyBank, see Supervision and Regulation in Item 1 of this report.
In the event KeyBank is unable to pay dividends to us, we may not be able to service debt, pay obligations or pay dividends on our equity securities. In addition, our right to participate in a distribution of assets upon a subsidiarys liquidation or reorganization is subject to the prior claims of the subsidiarys creditors.
We are subject to liquidity risk, which could negatively affect our funding levels.
Market conditions or other events could negatively affect the level or cost of funding, affecting our 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.
Although we have implemented strategies to maintain sufficient and diverse sources of funding to accommodate planned as well as unanticipated changes in assets and liabilities under both normal and adverse conditions (including by reducing our reliance on wholesale funding sources), a substantial, unexpected or prolonged change in the level or cost of liquidity could have a material adverse effect on us. Certain credit markets that we participate in and rely upon as sources of funding experienced significant disruption and volatility during the 2008 financial crisis. While these disrupted markets have shown signs of recovery, if the cost effectiveness or the availability of supply in these credit markets is reduced for a prolonged period of time, our funding needs may require us to access funding and manage liquidity by other means. These alternatives may include generating client deposits, securitizing or selling loans, extending the maturity of wholesale borrowings, purchasing deposits from other banks, borrowing under certain secured wholesale facilities, using relationships developed with a variety of fixed income investors, and further managing loan growth and investment opportunities. These alternative means of funding may not be available under stressed conditions similar to those experienced in the liquidity crisis of 2007-2009.
Our credit ratings affect our liquidity position.
Our rating agencies regularly evaluate the securities of KeyCorp and KeyBank, and their ratings of our long-term debt and other securities are based on a number of factors, including our financial strength, ability to generate earnings, and other factors. Some of these factors are not entirely within our control, such as conditions affecting the financial services industry and the economy and changes in rating methodologies as a result of the Dodd-Frank Act. There can be no assurance that we will maintain our current credit ratings. A downgrade of the securities of KeyCorp or KeyBank could adversely affect our access to liquidity and could significantly increase our cost of funds, trigger additional collateral or funding requirements, and decrease the number of investors and counterparties willing to lend to us, reducing our ability to generate income.
IV. Operational Risk
Our information systems may experience an interruption or breach in security.
We rely heavily on communications, information systems (both internal and provided by third parties) and the internet to conduct our business. Our business is dependent on our ability to process and monitor large numbers of daily transactions in compliance with legal, regulatory and internal standards and specifications. In addition, a significant portion of our operations relies heavily on the secure processing, storage and transmission of personal and confidential information, such as the personal information of our customers and clients. These risks may increase in the future as we continue to increase mobile payments and other internet-based product offerings and expand our internal usage of web-based products and applications.
In the event of a failure, interruption or breach of our information systems, we may be unable to avoid impact to our customers. Other U.S. financial service institutions and companies have reported breaches in the security of
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their websites or other systems and several financial institutions, including Key, experienced significant distributed denial-of-service attacks, some of which involved sophisticated and targeted attacks intended to disable or degrade service, or sabotage systems. Other potential attacks have attempted to obtain unauthorized access to confidential information or destroy data, often through the introduction of computer viruses or malware, cyberattacks and other means. To date, none of these efforts has had a material adverse effect on our business or operations. Such security attacks can originate from a wide variety of sources, including persons who are involved with organized crime or who may be linked to terrorist organizations or hostile foreign governments. Those same parties may also attempt to fraudulently induce employees, customers or other users of our systems to disclose sensitive information in order to gain access to our data or that of our customers or clients. Our security systems may not be able to protect our information systems from similar attacks due to the rapid evolution and creation of sophisticated cyberattacks. We are also subject to the risk that our employees may intercept and transmit unauthorized confidential or proprietary information. An interception, misuse or mishandling of personal, confidential or proprietary information being sent to or received from a customer or third party could result in legal liability, remediation costs, regulatory action and reputational harm.
We rely on third parties to perform significant operational services for us.
Third parties perform significant operational services on our behalf. These third-party vendors are subject to similar risks as Key relating to cybersecurity, breakdowns or failures of their own systems or employees. One or more of our vendors may experience a cybersecurity event or operational disruption and, if any such event does occur, it may not be adequately addressed, either operationally or financially, by the third-party vendor. Certain of our vendors may have limited indemnification obligations or may not have the financial capacity to satisfy their indemnification obligations. Financial or operational difficulties of a vendor could also impair our operations if those difficulties interfere with the vendors ability to serve us. Additionally, some of our outsourcing arrangements are located overseas and, therefore, are subject to risks unique to the regions in which they operate. If a critical vendor is unable to meet our needs in a timely manner or if the services or products provided by such a vendor are terminated or otherwise delayed and if we are not able to develop alternative sources for these services and products quickly and cost-effectively, it could have a material adverse effect on our business. Federal banking regulators recently issued regulatory guidance on how banks select, engage and manage their outside vendors. These regulations may affect the circumstances and conditions under which we work with third parties and the cost of managing such relationships.
We are subject to claims and litigation.
From time to time, customers, vendors or other parties may make claims and take legal action against us. We maintain reserves for certain claims when deemed appropriate based upon our assessment that a loss is probable, consistent with applicable accounting guidance. At any given time we have a variety of legal actions asserted against us in various stages of litigation. Resolution of a legal action can often take years. Whether any particular claims and legal actions are founded or unfounded, if such claims and legal actions are not resolved in our favor, they may result in significant financial liability and adversely affect how the market perceives us and our products and services as well as impact customer demand for those products and services.
We are also involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental and self-regulatory agencies regarding our business, including, among other things, accounting and operational matters, certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. The number and risk of these investigations and proceedings has increased in recent years with regard to many firms in the financial services industry due to legal changes to the consumer protection laws provided for by the Dodd-Frank Act and the creation of the CFPB.
There have also been a number of highly publicized legal claims against financial institutions involving fraud or misconduct by employees, and we run the risk that employee misconduct could occur. It is not always possible to deter or prevent employee misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases.
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We are subject to operational risk.
We are subject to operational risk, which represents the risk of loss resulting from human error, inadequate or failed internal processes and systems, and external events. Operational risk includes the risk of fraud by employees, clerical and record-keeping errors, nonperformance by vendors, threats to cybersecurity, and computer/telecommunications malfunctions. Operational risk also encompasses compliance and legal risk, which is the risk of loss from violations of, or noncompliance with, laws, rules, regulations, prescribed practices or ethical standards, as well as the risk of our noncompliance with contractual and other obligations. We are also exposed to operational risk through our outsourcing arrangements, and the effect that changes in circumstances or capabilities of our outsourcing vendors can have on our ability to continue to perform operational functions necessary to our business, such as certain loan processing functions. For example, breakdowns or failures of our vendors systems or employees could be a source of operational risk to us. Resulting losses from operational risk could take the form of explicit charges, increased operational costs, harm to our reputation, inability to secure insurance, litigation, regulatory intervention or sanctions or foregone business opportunities.
Our controls and procedures may fail or be circumvented, and our methods of reducing risk exposure may not be effective.
We regularly review and update our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. We also maintain an ERM program. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Additionally, instruments, systems and strategies used to hedge or otherwise manage exposure to various types of market compliance, credit, liquidity, operational and business risks and enterprise-wide risk could be less effective than anticipated. As a result, we may not be able to effectively mitigate our risk exposures in particular market environments or against particular types of risk.
Severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact our business.
Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on our ability to conduct business. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue or cause us to incur additional expenses.
V. Market Risk
A reversal of the fragile U.S. economic recovery and a return to volatile or recessionary conditions in the U.S. or abroad could negatively affect our business or our access to capital markets.
The slow economic recovery, and multiple downside shocks, have presented a challenge for Key and adversely affected our business and financial performance. These economic conditions may persist for some time, and continue to have a negative impact on us. A worsening of conditions could aggravate the adverse effects of these difficult economic and market conditions on Key and others in the financial services industry. Risks related to the global economy have eased somewhat, but challenges remain.
In particular, we would face some of the following risks, and other unforeseeable risks, in connection with a downturn in the economic and market environment, whether in domestic or international markets:
¿ |
A loss of confidence in the financial services industry and the equity markets by investors, placing pressure on the price of Keys common shares or decreasing the credit or liquidity available to Key; |
¿ |
A decrease in consumer and business confidence levels, generally, decreasing credit usage and investment or increasing delinquencies and defaults; |
24
¿ |
A decrease in household or corporate incomes, reducing demand for Keys products and services; |
¿ |
A decrease in the value of collateral securing loans to Keys borrowers or a decrease in the quality of Keys loan portfolio, increasing loan charge-offs and reducing Keys net income; |
¿ |
A decrease in our ability to liquidate positions at market prices; |
¿ |
The prolonged continuation of a very low interest rate environment, increasing downward pressure to our net interest income; |
¿ |
A decrease in the accuracy and viability of our quantitative models; |
¿ |
An increase in competition and consolidation in the financial services industry; |
¿ |
Increased concern over and scrutiny of the capital and liquidity levels of financial institutions, generally, and those of our transaction counterparties, specifically; |
¿ |
A decrease in confidence in the creditworthiness of the United States or other governments whose securities we hold; and |
¿ |
An increase in limitations on or the regulation of financial services companies like Key. |
We are subject to interest rate risk, which could adversely affect our earnings on loans and other interest-earning assets.
Our earnings and cash flows are largely dependent upon our net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions, the competitive environment within our markets, consumer preferences for specific loan and deposit products and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve. Changes in monetary policy, including changes in interest rates, could influence the amount of interest we receive on loans and securities, the amount of interest we pay on deposits and borrowings, our ability to originate loans and obtain deposits, and the fair value of our financial assets and liabilities. If the interest we pay on deposits and other borrowings increases at a faster rate than the interest we receive on loans and other investments, net interest income, and therefore our earnings, could be adversely affected. Earnings could also be adversely affected if the interest we receive on loans and other investments falls more quickly than the interest we pay on deposits and other borrowings.
Our methods for simulating and analyzing our interest rate exposure are discussed more fully under the heading Risk Management Management of interest risk exposure found in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation.
Our profitability depends upon economic conditions in the geographic regions where we have significant operations and on certain market segments with which we conduct significant business.
We have concentrations of loans and other business activities in geographic regions where our bank branches are located Oregon and Alaska; Washington; Rocky Mountains; Indiana; West Ohio/Michigan; East Ohio; Eastern New York; New England; and Western New York and potential exposure to geographic regions outside of our branch footprint. The moderate U.S. economic recovery has been experienced unevenly in the various regions where we operate, and there can be no assurance that continued improvement in the overall U.S. economy will result in similar improvement, or any improvement at all, in the economy of any particular geographic region. Adverse conditions in a geographic region such as inflation, unemployment, recession, natural disasters, or other factors beyond our control could impact the ability of borrowers in these regions to repay their loans, decrease the value of collateral securing loans made in these regions, or affect the ability of our customers in these regions to continue conducting business with us.
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Additionally, a significant portion of our business activities are concentrated with the real estate, health care and utilities market segments. The profitability of some of these market segments depends upon the health of the overall economy, seasonality, the impact of regulation, and other factors that are beyond our control and may be beyond the control of our customers in these market segments.
An economic downturn in one or more geographic regions where we conduct our business, or any significant or prolonged impact on the profitability of one or more of the market segments with which we conduct significant business activity, could adversely affect the demand for our products and services, the ability of our customers to repay loans, the value of the collateral securing loans, and the stability of our deposit funding sources.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. We have exposure to many different industries and counterparties in the financial services industries, and we routinely execute transactions with such counterparties, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. Financial services institutions, however, are interrelated as a result of trading, clearing, counterparty or other relationships. Defaults by one or more financial services institutions have led to, and may cause, market-wide liquidity problems and losses. Many of our transactions with other financial institutions expose us to credit risk in the event of default of a counterparty or client. In addition, our credit risk may be affected when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivatives exposure due us.
VI. Reputation Risk
Damage to our reputation could significantly harm our businesses.
Our ability to attract and retain customers, clients, investors, and highly-skilled management and employees is affected by our reputation. Public perception of the financial services industry has declined since the 2008 financial crisis. We face increased public and regulatory scrutiny resulting from the financial crisis and economic downturn. Significant harm to our reputation can also arise from other sources, including employee misconduct, actual or perceived unethical behavior, litigation or regulatory outcomes, failing to deliver minimum or required standards of service and quality, compliance failures, disclosure of confidential information, and the activities of our clients, customers and counterparties, including vendors. Actions by the financial services industry generally or by certain members or individuals in the industry can also significantly adversely affect our reputation. We could also suffer significant reputational harm if we fail to properly identify and manage potential conflicts of interest. Management of potential conflicts of interests has become increasingly complex as we expand our business activities through more numerous transactions, obligations and interests with and among our clients. The actual or perceived failure to adequately address conflicts of interest could affect the willingness of clients to deal with us, which could adversely affect our businesses.
VII. Strategic Risk
We may not realize the expected benefits of our strategic initiatives.
Our ability to compete successfully depends on a number of factors, including among others, our ability to develop and execute strategic plans and initiatives. Our strategic priorities include growing revenue, building and maintaining long-term customer relationships, maintaining financial strength, and building on our culture of efficiency. Enhancing relationships with our customers, including by cross-selling additional or new products to them, is very important to our business model and our ability to grow revenue and earnings. Our inability to execute on or achieve the anticipated outcomes of our strategic priorities may affect how the market perceives us and could impede our growth and profitability.
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We operate in a highly competitive industry.
We face substantial competition in all areas of our operations from a variety of competitors, some of which are larger and may have more financial resources than us. Our competitors primarily include national and super-regional banks as well as smaller community banks within the various geographic regions in which we operate. We also face competition from many other types of financial institutions, including, without limitation, savings associations, credit unions, mortgage banking companies, finance companies, mutual funds, insurance companies, investment management firms, investment banking firms, broker-dealers and other local, regional and national financial services firms. In addition, technology has lowered barriers to entry and made it possible for nonbanks to offer products and services traditionally provided by banks. In recent years, mergers and acquisitions have led to greater concentration in the banking industry, placing added competitive pressure on Keys core banking products and services. We expect the competitive landscape of the financial services industry to become even more intensified as a result of legislative, regulatory, structural and technological changes.
Our ability to compete successfully depends on a number of factors, including: our ability to develop and execute strategic plans and initiatives; our ability to develop, maintain and build long-term customer relationships based on quality service and competitive prices; maintaining our high ethical standards and safe and sound assets; and industry and general economic trends. Increased competition in the financial services industry, and our failure to perform in any of these areas, could significantly weaken our competitive position, which could adversely affect our growth and profitability.
Maintaining or increasing our market share depends upon our ability to adapt our products and services to evolving industry standards and consumer preferences, while maintaining competitive prices.
The continuous, widespread adoption of new technologies, including internet services and smart phones, requires us to evaluate our product and service offerings to ensure they remain competitive. Our success depends, in part, on our ability to adapt our products and services, as well as our distribution of them, to evolving industry standards and consumer preferences. New technologies have altered consumer behavior by allowing consumers to complete transactions such as paying bills or transferring funds directly without the assistance of banks. New products allow consumers to maintain funds in brokerage accounts or mutual funds that would have historically been held as bank deposits. The process of eliminating banks as intermediaries, known as disintermediation, could result in the loss of fee income, as well as the loss of customer deposits and related income generated from those deposits.
The increasing pressure from our competitors, both bank and nonbank, to keep pace and adopt new technologies and products and services requires us to incur substantial expense. We may be unsuccessful in developing or introducing new products and services, modifying our existing products and services, adapting to changing consumer preferences and spending and saving habits, achieving market acceptance or regulatory approval, sufficiently developing or maintaining a loyal customer base or offering products and services at prices lower than the prices offered by our competitors. These risks may affect our ability to achieve growth in our market share and could reduce both our revenue streams from certain products and services and our revenues from our net interest margin.
We may not be able to attract and retain skilled people.
Our success depends, in large part, on our ability to attract and retain key people. Competition for the best people in most of our business activities can be intense, and we may not be able to retain or hire the people we want or need. To attract and retain qualified employees, we must compensate such employees at market levels. Typically, those levels have caused employee compensation to be our greatest expense.
Various restrictions on compensation of certain executive officers were imposed under the Dodd-Frank Act and other legislation and regulations. In addition, our incentive compensation structure is subject to review by the
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Federal Reserve, which may identify deficiencies in the structure, causing us to make changes that may affect our ability to offer competitive compensation to these individuals. Our ability to attract and retain talented employees may be affected by these developments, or any new executive compensation limits and regulations.
Potential acquisitions may disrupt our business and dilute shareholder value.
Acquiring other banks, bank branches, or other businesses involves various risks commonly associated with acquisitions, including exposure to unknown or contingent liabilities of the target company, diversion of our managements time and attention, and the possible loss of key employees and customers of the target company. We regularly evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions. As a result, mergers or acquisitions involving cash, debt or equity securities may occur at any time. Acquisitions may involve the payment of a premium over book and market values. Therefore, some dilution of our tangible book value and net income per common share could occur in connection with any future transaction. Additionally, if an acquisition were to occur, we may fail to realize the expected revenue increases, cost savings, increases in geographic or product presence, or other projected benefits.
VIII. Model Risk
We rely on quantitative models to manage certain accounting, risk management and capital planning functions.
We use quantitative models to help manage certain aspects of our business and to assist with certain business decisions, including estimating probable loan losses, measuring the fair value of financial instruments when reliable market prices are unavailable, estimating the effects of changing interest rates and other market measures on our financial condition and results of operations, managing risk, and for capital planning purposes (including during the CCAR capital planning process). Our measurement methodologies rely on many assumptions, historical analyses and correlations. These assumptions may be incorrect, particularly in times of market distress, and the historical correlations on which we rely may no longer be relevant. Additionally, as businesses and markets evolve, our measurements may not accurately reflect this evolution. Even if the underlying assumptions and historical correlations used in our models are adequate, our models may be deficient due to errors in computer code, bad data, misuse of data, or the use of a model for a purpose outside the scope of the models design.
As a result, our models may not capture or fully express the risks we face, may suggest that we have sufficient capitalization when we do not, or may lead us to misjudge the business and economic environment in which we will operate. If our models fail to produce reliable results on an ongoing basis, we may not make appropriate risk management, capital planning, or other business or financial decisions. Furthermore, strategies that we employ to manage and govern the risks associated with our use of models may not be effective or fully reliable.
Banking regulators continue to focus on the models used by banks and bank holding companies in their businesses. The failure or inadequacy of a model may result in increased regulatory scrutiny on us or may result in an enforcement action or proceeding against us by one of our regulators.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES |
The headquarters of KeyCorp and KeyBank are located in Key Tower at 127 Public Square, Cleveland, Ohio 44114-1306. At December 31, 2013, Key leased approximately 686,002 square feet of the complex, encompassing the first twenty-three floors and the 54th through 56th floors of the 57-story Key Tower. As of the same date, KeyBank owned 570 and leased 458 branches. The lease terms for applicable branches are not individually material, with terms ranging from month-to-month to 99 years from inception.
Branches and ATMs by Region
Oregon & Alaska |
Washington |
Rocky
Mountains |
Indiana |
West Ohio/ Michigan |
East Ohio |
Eastern New York |
New England |
Western New York |
Total | |||||||||||||||||||||||||||||||
Branches |
101 | 156 | 134 | 67 | 104 | 151 | 154 | 67 | 94 | 1,028 | ||||||||||||||||||||||||||||||
ATMs |
107 | 196 | 165 | 73 | 132 | 251 | 196 | 84 | 131 | 1,335 |
ITEM 3. LEGAL | PROCEEDINGS |
As of December 31, 2013, KeyCorp and its subsidiaries and its employees, directors and officers are defendants or putative defendants in a variety of legal proceedings, in the form of regulatory/government investigations as well as private, civil litigation and arbitration proceedings. The private, civil litigations range from individual actions involving a single plaintiff to putative class action lawsuits with potentially thousands of class members. Investigations involve both formal and informal proceedings, by both government agencies and self-regulatory bodies. These legal proceedings are at varying stages of adjudication, arbitration or investigation and involve a variety of claims (including common law tort, contract claims, securities, ERISA, and consumer protection claims). At times, these legal proceedings present novel claims or legal theories.
On at least a quarterly basis, we assess our liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. Where it is probable that we will incur a loss and the amount of the loss can be reasonably estimated, we record a liability in our consolidated financial statements. These legal reserves may be increased or decreased to reflect any relevant developments on a quarterly basis. Where a loss is not probable or the amount of the loss is not estimable, we have not accrued legal reserves, consistent with applicable accounting guidance. Based on information currently available to us, advice of counsel, and available insurance coverage, we believe that our established reserves are adequate and the liabilities arising from the legal proceedings will not have a material adverse effect on our consolidated financial condition. We note, however, that in light of the inherent uncertainty in legal proceedings there can be no assurance that the ultimate resolution will not exceed established reserves. As a result, the outcome of a particular matter or a combination of matters, may be material to our results of operations for a particular period, depending upon the size of the loss or our income for that particular period.
The information in the Legal Proceedings section of Note 20 (Commitments, Contingent Liabilities and Guarantees) of the Notes to Consolidated Financial Statements is incorporated herein by reference.
ITEM 4. MINE | SAFETY DISCLOSURES |
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The dividend restrictions discussion in the Supervision and Regulation section in Item 1. Business of this report, and the disclosures included in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to Consolidated Financial Statements contained in Item 8 of this report, are incorporated herein by reference:
Page(s) | ||||
69 | ||||
35, 69, 97 | ||||
85, 130, 208 | ||||
70 |
From time to time, KeyCorp or its principal subsidiary, KeyBank, may seek to retire, repurchase or exchange outstanding debt of KeyCorp or KeyBank and capital securities or preferred stock of KeyCorp through cash purchase, privately negotiated transactions or otherwise. Such transactions, if any, depend on prevailing market conditions, our liquidity and capital requirements, contractual restrictions and other factors. The amounts involved may be material.
As authorized by our Board of Directors and pursuant to our 2013 capital plan submitted to and not objected to by the Federal Reserve, we had authority to repurchase up to $426 million of our common shares in the open market or through privately negotiated transactions. Subsequently, we received no objection from the Federal Reserve to use, and our Board approved the use of, the cash portion of the net after-tax gain from the sale of Victory (approximately $72 million) for additional common share repurchases. During the fourth quarter of 2013, we completed $99 million of common share repurchases. Common share repurchases under the remaining 2013 capital plan authorization are expected to be executed through the first quarter of 2014.
Calendar month |
Total number of shares
repurchased |
(a) |
Average price paid
per share |
Total number of shares purchased as
part of publicly announced plans or programs |
Maximum number of shares that may
yet be purchased under the plans or programs |
(b) | ||||||||||||||
October 1 31 |
1,787,398 | $ | 12.65 | 1,777,805 | 26,750,589 | |||||||||||||||
November 1 30 |
3,439,775 | 12.81 | 3,434,250 | 23,082,362 | ||||||||||||||||
December 1 31 |
2,454,813 | 12.94 | 2,447,268 | 20,246,482 | ||||||||||||||||
Total |
7,681,986 | $ | 12.82 | 7,659,323 | ||||||||||||||||
|
|
|||||||||||||||||||
|
|
(a) | Includes common shares repurchased in the open market and common shares deemed surrendered by employees in connection with Keys stock compensation and benefit plans to satisfy tax obligations. |
(b) | Calculated using the remaining general repurchase amount divided by the closing price of KeyCorp common shares on October 31, 2013, at $12.54, November 30, 2013, at $12.75, and December 31, 2013, at $13.42, plus 13,557,897 shares available under our previously existing program. |
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ITEM 6. | SELECTED FINANCIAL DATA |
The information included under the caption Selected Financial Data in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations beginning on page 32 is incorporated herein by reference.
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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (the MD&A)
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64 | ||
Maturities and sensitivity of certain loans to changes in interest rates |
65 | |
65 | ||
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68 | ||
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69 | ||
69 | ||
69 | ||
71 |
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Off-Balance Sheet Arrangements and Aggregate Contractual Obligations |
74 | |||
74 | ||||
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74 | ||||
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104 |
Throughout the Notes to Consolidated Financial Statements and Managements Discussion and Analysis of Financial Condition and Results of Operations, we use certain acronyms and abbreviations. These terms are defined in Note 1 (Summary of Significant Accounting Policies), which begins on page 115.
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This section reviews the financial condition and results of operations of KeyCorp and its subsidiaries for each of the past three years. Some tables 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 in this report. The page locations of specific sections that we refer to are presented in the table of contents.
Throughout this discussion, 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 KeyCorps subsidiary bank, KeyBank National Association.
We want to explain some industry-specific terms at the outset so you can better understand the discussion that follows.
¿ | We use the phrase continuing operations in this document to mean all of our businesses other than the education lending business, Victory, and Austin. The education lending business and Austin have been accounted for as discontinued operations since 2009. Victory was classified as a discontinued operation in our first quarter 2013 financial reporting as a result of the sale of this business as announced on February 21, 2013, and closed on July 31, 2013. |
¿ | Our exit loan portfolios are separate from our discontinued operations . These portfolios, which are in a run-off mode, stem from product lines we decided to cease because they no longer fit with our corporate strategy. These exit loan portfolios are included in Other Segments. |
¿ | We engage in capital markets activities primarily through business conducted by our Key Corporate Bank segment . These activities encompass a variety of products and services. Among other things, we trade securities as a dealer, enter into derivative contracts (both to accommodate clients financing needs and to mitigate certain risks), and conduct transactions in foreign currencies (both to accommodate clients needs and to benefit from fluctuations in exchange rates). |
¿ | For regulatory purposes, capital is divided into two classes. Federal regulations currently prescribe that at least one-half of a bank or BHCs total risk-based capital must qualify as Tier 1 capital . Both total and Tier 1 capital serve as bases for several measures of capital adequacy, which is an important indicator of financial stability and condition. As described under the heading Regulatory capital and liquidity Capital planning and stress testing in the section entitled Supervision and Regulation in Item 1. Business of this report, the regulators are required to conduct a supervisory capital assessment of all BHCs with assets of at least $50 billion, including KeyCorp. As part of this capital adequacy review, banking regulators evaluate a component of Tier 1 capital, known as Tier 1 common equity . The section entitled Regulatory capital and liquidity under Item 1 of this report provides more information on total capital, Tier 1 capital, and Tier 1 common equity and describes how the three measures are calculated. |
Additionally, a comprehensive list of the acronyms and abbreviations used throughout this discussion is included in Note 1 (Summary of Significant Accounting Policies).
34
Figure 1. Selected Financial Data
(a) | Financial data was not adjusted to reflect the treatment of Victory as a discontinued operation. |
(b) | 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. In February 2013, we decided to sell Victory to a private equity fund. As a result of these decisions, we have accounted for these businesses as discontinued operations. For further discussion regarding the income (loss) from discontinued operations, see Note 13 (Acquisitions and Discontinued Operations). |
(c) | EPS may not foot due to rounding. |
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(d) | See Figure 4 entitled GAAP to Non-GAAP Reconciliations, which presents the computations of certain financial measures to tangible common equity, Tier 1 common equity and cash efficiency ratio. The table reconciles the GAAP performance to the corresponding non-GAAP measures, which provides a basis for period-to-period comparisons. |
(e) | Represents period-end consolidated total loans and loans held for sale (excluding education loans in securitizations trusts) divided by period-end consolidated total deposits (excluding deposits in foreign office). |
The economy continued its modest recovery in 2013, with overall GDP starting slowly and accelerating as the year progressed, resulting in 1.9% growth in 2013. U.S. economic growth during 2013 was plagued by policy and political headwinds. The year began with uncertainty around the potential effects of the looming sequester and a large payroll tax increase. In the second quarter, the Federal Reserve sent mixed messages regarding when it would begin scaling back its latest round of quantitative easing, inadvertently causing interest rates to increase and hindering the housing recovery. In the fourth quarter, the federal government endured a 16-day shutdown, and briefly approached a breach of the federal debt ceiling. In spite of these issues, growth accelerated in the second half of the year. Although the shutdown temporarily disrupted positive momentum, consumer confidence increased, financial markets continued to rise and the housing market rebounded from a summer slump to close out the year. The stock market boomed in 2013, with the S&P 500 equity index increasing 30%, compared to a 13% increase in 2012. Globally, the modest recovery continued; central banks in developed nations maintained easy money policies. In the second half of the year, Europes recession ended. Emerging markets did not fare as well demand decreased, exports dropped, and China grew at its slowest rate in 20 years.
For the year, 2.19 million new jobs were added in the U.S. The unemployment rate fell further, from 7.9% at December 31, 2012, to 6.7% at December 31, 2013. While job growth was a factor, the majority of the improvement was driven by a decrease in the labor force participation rate, which declined to its lowest level in over 35 years. Wage growth deteriorated through much of the year and income growth was weak, both due in part to the payroll tax hikes and the sequester. However, consumer spending held up reasonably well, resulting in a falling savings rate. A slowing rate of inflation supported incomes, and therefore spending, throughout the year; by December 2013, headline inflation was down to 1.5% (compared to 1.7% one year earlier). Core inflation also remained low through the year, ending 2013 at 1.7% (down from 1.9% in 2012).
The housing market provided another boost in 2013, with improvement in nearly all metrics. With the economy continuing its modest expansion, and home prices appearing to stabilize, demand for for-sale housing posted steady gains throughout the year. As mortgage rates rose, sales of existing homes began to diminish, finishing 2013 at a seasonally adjusted annual rate of 4.87 million (down slightly from December 2012). New home sales improved, reaching a seasonally adjusted annual rate of 414,000 in December 2013 (up 4.5% from 2012). As the share of distressed transactions fell, the pace of price appreciation increased, with the median price for existing homes up 9.9% year-over-year in December 2013. Housing starts accelerated further, with starts up 18% over 2012s totals, driven primarily by substantial gains in both single and multi-family construction.
The Federal Reserve remained active and accommodative in 2013, keeping the federal funds target rate near zero, expanding its balance sheet further, and making significant changes to its communications. The latest round of quantitative easing was held constant until December, driven by mixed economic results, troubling inflation data and the government shutdown. In December, the Federal Reserve announced it would begin tapering the pace of asset purchases by $10 billion (from $85 billion per month to $75 billion per month) in January 2014, with the expectation that the pace of purchases will continue to drop throughout 2014. In addition, the Federal Reserve updated its forward guidance in December, explicitly stating that the federal funds rate will be kept near zero well past a 6.5% unemployment rate; low inflation remains a concern and will be monitored closely. Long-time Chairman Ben Bernanke also made his exit, with Vice-Chair Janet Yellen replacing Bernanke starting in February 2014. The 10-year U.S. Treasury yield began the year at 1.9%, and was range bound from 1.5-2.0% for the first half of the year, driven by disappointing economic data. Around the years halfway point, with more positive data, rates began to increase, approaching 3.0% in September on expectations that the Federal Reserve would soon begin to
36
taper quantitative easing asset purchases. The taper did not begin as expected, and the October government shutdown helped to keep rates down in the 2.5-2.6% range for the majority of the fourth quarter, until surprisingly positive economic data prompted the Federal Reserve to reduce asset purchases by $10 billion at the December meeting. Rates subsequently rose, and closed the year at 3.0%.
Our long-term financial goals are as follows:
¿ | Target a loan-to-core deposit ratio range of 90% to 100%; |
¿ | Maintain a moderate risk profile by targeting a net loan charge-off ratio range of .40% to .60%; |
¿ | Grow high quality and diverse revenue streams by targeting a net interest margin in excess of 3.50%, and ratio of noninterest income to total revenue of greater than 40%; |
¿ | Create positive operating leverage and target a cash efficiency ratio in the range of 60% to 65%; and |
¿ | Achieve a return on average assets in the range of 1.00% to 1.25%. |
Figure 2 shows the evaluation of our long-term financial goals for the fourth quarter of 2013 and the year ended 2013.
Figure 2. Evaluation of Our Long-Term Financial Goals
KEY Business Model |
Key Metrics (a) | 4Q13 | 2013 | Targets | Action Plans | |||||||||||
Core funded |
Loan to deposit ratio (b) | 84 | % | 84 | % | 90 - 100 | % |
Use integrated model to grow relationships and loans |
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Improve deposit mix |
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Maintain a moderate
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NCOs to average loans | .27 | % | .32 | % | .40 - .60 | % |
Focus on relationship clients |
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Exit noncore portfolios |
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Provision to average loans | .14 | % | .25 | % |
Limit concentrations |
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Focus on risk-adjusted returns |
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Growing high quality, diverse
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Net interest margin | 3.01 | % | 3.12 | % | > 3.50 | % |
Improve funding mix |
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Focus on risk-adjusted returns |
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Noninterest income to total revenue | 43 | % | 43 | % | > 40 | % |
Grow client relationships |
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Capitalize on Keys total client solutions and cross-selling capabilities |
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Creating positive
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Cash efficiency ratio (c) | 67 | % | 68 | % | 60 - 65 | % |
Improve efficiency and effectiveness |
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Better utilize technology |
||||||||||||||||
Adj. cash efficiency ratio (ex. efficiency initiative charges) (c), (d) | 65 | % | 65 | % |
Change cost base to more variable from fixed |
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Executing our strategies |
Return on average assets | 1.08 | % | 1.03 | % | 1.00 - 1.25 | % |
Execute our client insight-driven relationship model |
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Focus on operating leverage |
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Improved funding mix with lower cost core deposits |
(a) | Calculated from continuing operations, unless otherwise noted. |
(b) | Represents period-end consolidated total loans and loans held for sale (excluding education loans in the securitization trusts) divided by period-end consolidated total deposits (excluding deposits in foreign office). |
(c) | Excludes intangible asset amortization; Non-GAAP measures: see Figure 4 for reconciliation. |
(d) | Efficiency initiative charges include pension settlement. |
37
We remain committed to enhancing long-term shareholder value by continuing to execute our relationship business model, growing our franchise, and being disciplined in our management of capital. Our 2013/2014 strategic focus is to add new clients and to expand our relationship with existing clients. We intend to pursue this strategy by continuing to control and reduce expenses; being more productive from the front office to the back office; effectively balancing risk and rewards within our moderate risk profile; and engaging, retaining and inspiring our diverse and high performing workforce. Our strategic priorities for enhancing long-term shareholder value are described below.
¿ | Grow profitably We will continue to focus on growing revenue and creating a more efficient operating environment. Our relationship business model sets us apart from our competitors. We expect the model to keep generating organic growth as it helps us expand engagement with existing clients and attract new customers. We will leverage our continuous improvement culture to create a more efficient cost structure that is aligned, sustainable and consistent with the current operating environment and supports our relationship business model. |
¿ | Acquire and expand targeted relationships We have taken purposeful steps to enhance our ability to acquire and expand targeted relationships. Our local delivery of broad product set and industry expertise allows us to match client needs and market conditions to deliver the best solutions. |
¿ | Effectively manage risk and rewards Our risk management activities are focused on ensuring we properly identify, measure, and manage risks across the entire company to maintain safety and soundness and maximize profitability. |
¿ | Maintain financial strength With the foundation of a strong balance sheet, we will remain focused on sustaining strong reserves, liquidity and capital. We will work closely with our Board of Directors and regulators to manage capital to support our clients needs and create shareholder value. Our capital remains a competitive advantage for us in both the intermediate and long term. |
¿ | Engage a high performing, talented and diverse workforce Every day our employees provide our clients with great ideas, extraordinary service and smart solutions. We will continue to engage our high performing, talented and diverse workforce to create an environment where they can make a difference, own their careers, be respected and feel a sense of pride. |
We initiated the following actions during 2013 to support our corporate strategy:
¿ | We completed our acquisition of a commercial real estate servicing portfolio and special servicing business. This acquisition brought in over $1 billion in low-cost escrow deposits and further leverages our existing servicing platforms. We are now the third largest servicer of commercial and multi-family loans and the fifth largest special servicer of CMBS in the U.S. |
¿ | Our revenue benefited from solid loan growth, driven by a 7.4% increase from the prior year in commercial, financial and agricultural loans, as well as improved trends in several of our fee-based businesses. These results reflect the success of our distinctive business model and our progress implementing our growth initiatives. |
¿ | We achieved annualized run rate savings of $241 million, exceeding our announced expense target set in June 2012 to achieve annualized savings of $200 million. We consolidated 62 branches during 2013, reaching 81 total consolidated branches since the launch of the efficiency initiative, and realigned our Community Bank organization to strengthen our relationship-based business model, while responding to economic factors and evolving client expectations. |
¿ | On July 31, 2013, we completed the divestiture of Victory. This sale resulted in an after-tax gain of $92 million; the cash portion of this gain was $72 million. |
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¿ | In the first quarter of 2013, we completed $65 million of common share repurchases on the open market under our 2012 capital plan, and in the second through fourth quarters of 2013 we completed $409 million of common share repurchases on the open market under our 2013 capital plan. The amount repurchased under our 2013 capital plan included repurchases related to the cash portion of the net after-tax gain from the sale of Victory. Common share repurchases under the 2013 capital plan authorization are expected to be executed through the first quarter of 2014. |
¿ | In May 2013, our Board of Directors approved an increase in our quarterly cash dividend to $.055 per common share, or $.22 on an annualized basis, in accordance with our 2013 capital plan. |
¿ | At December 31, 2013, our capital ratios remained strong with a Tier 1 common equity ratio of 11.22%, our loan loss reserves were adequate at 1.56% to period-end loans, and we were core funded with a loan-to-deposit ratio of 84%. We believe our strong capital position provides us with the flexibility to support our clients and our business needs, and to evaluate other appropriate capital deployment opportunities. |
Highlights of Our 2013 Performance
For 2013, we announced net income from continuing operations attributable to Key common shareholders of $847 million, or $.93 per common share. These results compare to net income from continuing operations attributable to Key common shareholders of $813 million, or $.86 per common share, for 2012.
Figure 3 shows our continuing and discontinued operating results for the past three years.
Figure 3. Results of Operations
Year ended December 31, |
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in millions, except per share amounts |
2013 | 2012 | 2011 | |||||||||
SUMMARY OF OPERATIONS |
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Income (loss) from continuing operations attributable to Key |
$ | 870 | $ | 835 | $ | 955 | ||||||
Income (loss) from discontinued operations, net of taxes (a) |
40 | 23 | (35) | |||||||||
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Net income (loss) attributable to Key |
$ | 910 | $ | 858 | $ | 920 | ||||||
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Income (loss) from continuing operations attributable to Key |
$ | 870 | $ | 835 | $ | 955 | ||||||
Less: Dividends on Series A Preferred Stock |
23 | 22 | 23 | |||||||||
Cash dividends on Series B Preferred Stock |
| | 31 | |||||||||
Amortization of discount on Series B Preferred Stock (b) |
| | 53 | |||||||||
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Income (loss) from continuing operations attributable to Key common shareholders |
847 | 813 | 848 | |||||||||
Income (loss) from discontinued operations, net of taxes (a) |
40 | 23 | (35) | |||||||||
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Net income (loss) attributable to Key common shareholders |
$ | 887 | $ | 836 | $ | 813 | ||||||
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PER COMMON SHAREASSUMING DILUTION |
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Income (loss) from continuing operations attributable to Key common shareholders |
$ | .93 | $ | .86 | $ | .91 | ||||||
Income (loss) from discontinued operations, net of taxes (a) |
.04 | .02 | (.04) | |||||||||
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Net income (loss) attributable to Key common shareholders (c) |
$ | .97 | $ | .89 | $ | .87 | ||||||
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(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. In February 2013, we decided to sell Victory to a private equity fund. As a result of these decisions, we have accounted for these businesses as discontinued operations. For further discussion regarding the income (loss) from discontinued operations, see Note 13 (Acquisitions and Discontinued Operations). |
(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. |
39
Our full-year results for 2013 reflect success in executing our strategies by growing loans, acquiring a commercial real estate servicing portfolio and special servicing business, and achieving annualized run rate savings in excess of our goal.
We ended 2013 with annual run rate savings of approximately $241 million as a result of our efficiency initiative. We continue to invest in future revenue growth by upgrading our technology to meet the needs of our clients and looking for opportunities to rationalize and optimize our existing branch network. In 2013, we shifted our focus related to our branch network more toward relocations and consolidations to reposition our branch footprint into more attractive markets. During 2013, we consolidated 62 branches as part of our efficiency initiative. We also realigned our Community Bank organization to strengthen our relationship-based business model, while responding to economic factors and evolving client expectations. We remain committed to delivering on our goal of achieving a cash efficiency ratio in the range of 60% to 65% as we enter 2014.
The net interest margin from continuing operations was 3.12% for 2013, a decrease of nine basis points from 2012. This decrease was primarily attributable to the impact of lower asset yields combined with a significant increase in liquidity levels from strong deposit inflows. In 2014, we expect the net interest margin will continue to be under pressure from elevated levels of liquidity and the impact of low interest rates.
Average total loans increased $2.7 billion, or 5.3%, during 2013 compared to 2012. The average balances of commercial, financial and agricultural loans increased from $21.1 billion to $23.7 billion, or approximately 12.2%. We continued to have success in growing our commercial loan portfolio by acquiring new clients in our focus industries as well as expanding existing relationships. For 2014, we anticipate average total loans to grow in the mid-single digit range, continuing to be led by growth in our commercial, financial and agricultural loans.
We continued to improve the mix of deposits during 2013, as we experienced a $6.3 billion, or 12.1%, increase in non-time deposits. Approximately $4.4 billion of our certificates of deposit outstanding at December 31, 2013, with an average cost of .93%, are scheduled to mature over the next twelve months. The maturation of these certificates of deposit and other liability repricing opportunities will continue to help offset repricing pressure on our assets. This improved funding mix reduced the cost of interest-bearing deposits during 2013 compared to 2012. Our consolidated loan to deposit ratio was 83.8% at December 31, 2013, compared to 85.8% at December 31, 2012.
Our asset quality statistics continued to improve during 2013. Net loan charge-offs declined to $168 million, or .32%, of average loan balances for 2013, compared to $345 million, or .69%, for 2012. In addition, our nonperforming loans declined to $508 million, or .93%, of period-end loans at December 31, 2013, compared to $674 million, or 1.28%, at December 31, 2012. Our ALLL was $848 million, or 1.56%, of period-end loans, compared to $888 million, or 1.68%, at December 31, 2012, and represented 166.9% and 131.8% coverage of nonperforming loans at December 31, 2013, and December 31, 2012, respectively. We expect net loan charge-offs to average loans during 2014 to remain at the lower end or below our long-term targeted range of 40 to 60 basis points.
Our tangible common equity ratio and Tier 1 common ratio both remain strong at December 31, 2013, at 9.80% and 11.22% respectively, compared to 10.15% and 11.36%, respectively, at December 31, 2012. These ratios have placed us in the top quartile of our peer group for these measures. We have identified four primary uses of capital:
1. | investing in our businesses, supporting our clients, and loan growth; |
2. | maintaining or increasing our common share dividend; |
3. | returning capital in the form of common share repurchases to our shareholders; and |
4. | remaining disciplined and opportunistic about how we invest in our franchise to include selective acquisitions over time. |
40
Our capital management remains focused on creating value. To that end, we returned approximately 76% of our net income to shareholders through both common share repurchases and dividends in 2013. We also used our capital to acquire a commercial real estate servicing portfolio and special servicing business.
The Federal Reserve is currently reviewing of our 2014 capital plan under the CCAR process. Until such time as it has completed its review and has no objection to our plan, we are not permitted to implement our capital plan for periods after the first quarter of 2014. Should we receive an objection to our plan, it would likely delay any actions on capital management until later in the calendar year. For more information about the CCAR process, see Capital planning and stress testing under Supervision and Regulation in Item 1 of this report.
Figure 4 presents certain non-GAAP financial measures related to tangible common equity, return on tangible common equity, Tier 1 common equity, pre-provision net revenue, cash efficiency ratio, and adjusted cash efficiency ratio.
The tangible common equity ratio and the return on tangible common equity ratio have been a focus for some investors, and management believes these ratios may assist investors in analyzing Keys capital position without regard to the effects of intangible assets and preferred stock. Tier 1 common equity, a non-GAAP financial measure, is a component of Tier 1 risk-based capital. Tier 1 common equity is not formally defined by GAAP or prescribed in amount by federal banking regulations applicable to us before January 1, 2015. However, since analysts and banking regulators may assess our capital adequacy using tangible common equity and Tier 1 common equity, we believe it is useful to enable investors to assess our capital adequacy on these same bases. Figure 4 also reconciles the GAAP performance measures to the corresponding non-GAAP measures.
Traditionally, the banking regulators have assessed bank and BHC capital adequacy based on both the amount and the composition of capital, the calculation of which is prescribed in federal banking regulations. Since early 2009, the Federal Reserve has focused its assessment of capital adequacy on a component of Tier 1 capital known as Tier 1 common equity. Because the Federal Reserve has long indicated that voting common shareholders equity (essentially Tier 1 risk-based capital less preferred stock, qualifying capital securities and noncontrolling interests in subsidiaries) generally should be the dominant element in Tier 1 risk-based capital, this focus on Tier 1 common equity is consistent with existing capital adequacy categories. The Regulatory Capital Rules, described in more detail under the section Supervision and Regulation in Item 1 of this report, also make Tier 1 common equity a priority. The Regulatory Capital Rules change the regulatory capital standards that apply to BHCs by, among other changes, phasing out the treatment of trust preferred securities and cumulative preferred securities as Tier 1 eligible capital. By 2016, our trust preferred securities will only be included in Tier 2 capital.
Figure 4 also shows the computation for pre-provision net revenue, which is not formally defined by GAAP. We believe that eliminating the effects of the provision for loan and lease losses makes it easier to analyze our results by presenting them on a more comparable basis.
The cash efficiency ratio and adjusted cash efficiency ratio are ratios of two non-GAAP performance measures. Accordingly, there are no directly comparable GAAP performance measures. The cash efficiency ratio performance measure removes the impact of our intangible asset amortization from the calculation. The adjusted cash efficiency ratio further removes the impact of the efficiency initiative and pension settlement charges. We believe these ratios provide greater consistency and comparability between our results and those of our peer banks. Additionally, these ratios are used by analysts and investors as they develop earnings forecasts and peer bank analysis.
Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.
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Figure 4. GAAP to Non-GAAP Reconciliations
Year ended December 31,
dollars in millions | 2013 | 2012 | 2011 | 2010 | (a) | 2009 | (a) | |||||||||||||||||||||||||||||||||||
Tangible common equity to tangible assets at period end |
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Key shareholders equity (GAAP) |
$ | 10,303 | $ | 10,271 | $ | 9,905 | $ | 11,117 | $ | 10,663 | ||||||||||||||||||||||||||||||||
Less: |
Intangible assets (b) |
1,014 | 1,027 | 934 | 938 | 967 | ||||||||||||||||||||||||||||||||||||
Series B Preferred Stock |
| | | 2,446 | 2,430 | |||||||||||||||||||||||||||||||||||||
Series A Preferred Stock (c) |
282 | 291 | 291 | 291 | 291 | |||||||||||||||||||||||||||||||||||||
Tangible common equity (non-GAAP) |
$ | 9,007 | $ | 8,953 | $ | 8,680 | $ | 7,442 | $ | 6,975 | ||||||||||||||||||||||||||||||||
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Total assets (GAAP) |
$ | 92,934 | $ | 89,236 | $ | 88,785 | $ | 91,843 | $ | 93,287 | ||||||||||||||||||||||||||||||||
Less: |
Intangible assets (b) |
1,014 | 1,027 | 934 | 938 | 967 | ||||||||||||||||||||||||||||||||||||
Tangible assets (non-GAAP) |
$ | 91,920 | $ | 88,209 | $ | 87,851 | $ | 90,905 | $ | 92,320 | ||||||||||||||||||||||||||||||||
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Tangible common equity to tangible assets ratio (non-GAAP) |
9.80 | % | 10.15 | % | 9.88 | % | 8.19 | % | 7.56 | % | ||||||||||||||||||||||||||||||||
Tier 1 common equity at period end |
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Key shareholders equity (GAAP) |
$ | 10,303 | $ | 10,271 | $ | 9,905 | $ | 11,117 | $ | 10,663 | ||||||||||||||||||||||||||||||||
Qualifying capital securities |
339 | 339 | 1,046 | 1,791 | 1,791 | |||||||||||||||||||||||||||||||||||||
Less: |
Goodwill |
979 | 979 | 917 | 917 | 917 | ||||||||||||||||||||||||||||||||||||
Accumulated other comprehensive income (loss) (d) |
(394 | ) | (172 | ) | (72 | ) | (66 | ) | (48 | ) | ||||||||||||||||||||||||||||||||
Other assets (e) |
89 | 114 | 72 | 248 | 632 | |||||||||||||||||||||||||||||||||||||
Total Tier 1 capital (regulatory) |
9,968 | 9,689 | 10,034 | 11,809 | 10,953 | |||||||||||||||||||||||||||||||||||||
Less: |
Qualifying capital securities |
339 | 339 | 1,046 | 1,791 | 1,791 | ||||||||||||||||||||||||||||||||||||
Series B Preferred Stock |
| | | 2,446 | 2,430 | |||||||||||||||||||||||||||||||||||||
Series A Preferred Stock (c) |
282 | 291 | 291 | 291 | 291 | |||||||||||||||||||||||||||||||||||||
Total Tier 1 common equity (non-GAAP) |
$ | 9,347 | $ | 9,059 | $ | 8,697 | $ | 7,281 | $ | 6,441 | ||||||||||||||||||||||||||||||||
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Net risk-weighted assets (regulatory) |
$ | 83,328 | $ | 79,734 | $ | 77,214 | $ | 77,921 | $ | 85,881 | ||||||||||||||||||||||||||||||||
Tier 1 common equity ratio (non-GAAP) |
11.22 | % | 11.36 | % | 11.26 | % | 9.34 | % | 7.50 | % | ||||||||||||||||||||||||||||||||
Pre-provision net revenue |
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Net interest income (GAAP) |
$ | 2,325 | $ | 2,264 | $ | 2,267 | $ | 2,511 | $ | 2,380 | ||||||||||||||||||||||||||||||||
Plus: |
Taxable-equivalent adjustment |
23 | 24 | 25 | 26 | 26 | ||||||||||||||||||||||||||||||||||||
Noninterest income (GAAP) |
1,766 | 1,856 | 1,688 | 1,954 | 2,035 | |||||||||||||||||||||||||||||||||||||
Less: |
Noninterest expense (GAAP) |
2,820 | 2,818 | 2,684 | 3,034 | 3,554 | ||||||||||||||||||||||||||||||||||||
Pre-provision net revenue from continuing operations (non-GAAP) |
$ | 1,294 | $ | 1,326 | $ | 1,296 | $ | 1,457 | $ | 887 | ||||||||||||||||||||||||||||||||
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Average tangible common equity |
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Average Key shareholders equity (GAAP) |
$ | 10,276 | $ | 10,144 | $ | 10,133 | $ | 10,895 | $ | 10,592 | ||||||||||||||||||||||||||||||||
Less: |
Intangible assets (average) (f) |
1,021 | 978 | 935 | 959 | 1,068 | ||||||||||||||||||||||||||||||||||||
Series B Preferred Stock (average) |
| | 590 | 2,438 | 2,578 | |||||||||||||||||||||||||||||||||||||
Series A Preferred Stock (average) |
291 | 291 | 291 | 291 | 291 | |||||||||||||||||||||||||||||||||||||
Average tangible common equity (non-GAAP) |
$ | 8,964 | $ | 8,875 | $ | 8,317 | $ | 7,207 | $ | 6,655 | ||||||||||||||||||||||||||||||||
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Return on average tangible common equity from continuing operations |
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Net income (loss) from continuing operations attributable to Key common shareholders (GAAP) |
$ | 847 | $ | 813 | $ | 848 | $ | 413 | $ | (1,581 | ) | |||||||||||||||||||||||||||||||
Average tangible common equity (non-GAAP) |
8,964 | 8,875 | 8,317 | 7,207 | 6,655 | |||||||||||||||||||||||||||||||||||||
Return on average tangible common equity from continuing operations
|
9.45 | % | 9.16 | % | 10.20 | % | 5.73 | % | (23.8 | ) | % | |||||||||||||||||||||||||||||||
Return on average tangible common equity consolidated |
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Net income (loss) attributable to Key common shareholders (GAAP) |
$ | 887 | $ | 836 | $ | 813 | $ | 390 | $ | (1,629 | ) | |||||||||||||||||||||||||||||||
Average tangible common equity (non-GAAP) |
8,964 | 8,875 | 8,317 | 7,207 | 6,655 | |||||||||||||||||||||||||||||||||||||
Return on average tangible common equity consolidated (non-GAAP) |
9.90 | % | 9.42 | % | 9.78 | % | 5.41 | % | (24.5 | ) | % | |||||||||||||||||||||||||||||||
Cash efficiency ratio |
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Noninterest expense (GAAP) |
$ | 2,820 | $ | 2,818 | $ | 2,684 | $ | 3,034 | $ | 3,554 | ||||||||||||||||||||||||||||||||
Less: |
Intangible asset amortization on credit cards (GAAP) |
30 | 14 | | | | ||||||||||||||||||||||||||||||||||||
Other intangible asset amortization (GAAP) |
14 | 9 | 4 | 14 | 77 | |||||||||||||||||||||||||||||||||||||
Intangible asset impairment (GAAP) |
| | | | 214 | |||||||||||||||||||||||||||||||||||||
Adjusted noninterest expense (non-GAAP) |
$ | 2,776 | $ | 2,795 | $ | 2,680 | $ | 3,020 | $ | 3,263 | ||||||||||||||||||||||||||||||||
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Net interest income (GAAP) |
$ | 2,325 | $ | 2,264 | $ | 2,267 | $ | 2,511 | $ | 2,380 | ||||||||||||||||||||||||||||||||
Plus: |
Taxable-equivalent adjustment |
23 | 24 | 25 | 26 | 26 | ||||||||||||||||||||||||||||||||||||
Noninterest income (GAAP) |
1,766 | 1,856 | 1,688 | 1,954 | 2,035 | |||||||||||||||||||||||||||||||||||||
Total taxable-equivalent revenue (non-GAAP) |
$ | 4,114 | $ | 4,144 | $ | 3,980 | $ | 4,491 | $ | 4,441 | ||||||||||||||||||||||||||||||||
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Cash efficiency ratio (non-GAAP) |
67.5 | % | 67.4 | % | 67.3 | % | 67.3 | % | 73.5 | % | ||||||||||||||||||||||||||||||||
Adjusted cash efficiency ratio net of efficiency initiative charges |
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Adjusted noninterest expense (non-GAAP) |
$ | 2,776 | $ | 2,795 | $ | 2,680 | $ | 3,020 | $ | 3,263 | ||||||||||||||||||||||||||||||||
Less: |
Efficiency initiative and pension settlement charges (non-GAAP) |
117 | 25 | | | | ||||||||||||||||||||||||||||||||||||
Net adjusted noninterest expense (non-GAAP) |
$ | 2,659 | $ | 2,770 | $ | 2,680 | $ | 3,020 | $ | 3,263 | ||||||||||||||||||||||||||||||||
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Total taxable-equivalent revenue (non-GAAP) |
$ | 4,114 | $ | 4,144 | $ | 3,980 | $ | 4,491 | $ | 4,441 | ||||||||||||||||||||||||||||||||
Adjusted cash efficiency ratio net of efficiency initiative charges (non-GAAP) |
64.6 | % | 66.8 | % | 67.3 | % | 67.3 | % | 73.5 | % | ||||||||||||||||||||||||||||||||
42
Figure 4. GAAP to Non-GAAP Reconciliations, continued
Three months ended | ||||||||||||||||||
dollars in millions | 12-31-13 | 9-30-13 | ||||||||||||||||
Common Equity Tier 1 under the Regulatory Capital Rules (estimates) |
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Tier 1 common equity under current regulatory rules |
$ | 9,347 | $ | 9,258 | ||||||||||||||
Adjustments from current regulatory rules to the Regulatory Capital Rules: |
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Deferred tax assets and other (g) |
(129 | ) | (140 | ) | ||||||||||||||
Common Equity Tier 1 anticipated under the Regulatory Capital Rules (h) |
$ | 9,218 | $ | 9,118 | ||||||||||||||
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Net risk-weighted assets under current regulatory rules |
$ | 83,328 | $ | 82,913 | ||||||||||||||
Adjustments from current regulatory rules to the Regulatory Capital Rules: |
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Loan commitments less than one year |
784 | 496 | ||||||||||||||||
Past due loans |
164 | 244 | ||||||||||||||||
Mortgage servicing assets (i) |
497 | 576 | ||||||||||||||||
Deferred tax assets (i) |
182 | 240 | ||||||||||||||||
Other |
1,413 | 1,451 | ||||||||||||||||
Total risk-weighted assets anticipated under the Regulatory Capital Rules |
$ | 86,368 | $ | 85,920 | ||||||||||||||
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Common Equity Tier 1 ratio under the Regulatory Capital Rules (h) |
10.67 | % | 10.61 | % | ||||||||||||||
(a) | Financial data was not adjusted to reflect the treatment of Victory as a discontinued operation. |
(b) | Years ended December 31, 2013, and December 31, 2012, exclude $92 million and $123 million, respectively, of period-end purchased credit card receivable intangible assets. |
(c) | Net of capital surplus for the year ended December 31, 2013. |
(d) | Includes net unrealized gains or losses on securities available for sale (except for net unrealized losses on marketable equity securities), net gains or losses on cash flow hedges, and amounts resulting from the application of the applicable accounting guidance for defined benefit and other postretirement plans. |
(e) | Other assets deducted from Tier 1 capital and net risk-weighted assets consist of disallowed intangible assets (excluding goodwill) and deductible portions of nonfinancial equity investments. There were no disallowed deferred tax assets at December 31, 2013, December 31, 2012, and December 31, 2011. There were disallowed deferred tax assets of $158 million at December 31, 2010, and $514 million at December 31, 2009. |
(f) | Years ended December 31, 2013, and December 31, 2012, exclude $107 million and $55 million, respectively, of average ending purchased credit card receivable intangible assets. |
(g) | Includes the deferred tax asset subject to future taxable income for realization, primarily tax credit carryforwards, as well as the deductible portion of purchased credit card receivables. |
(h) | The anticipated amount of regulatory capital and risk-weighted assets is based upon the federal banking agencies Regulatory Capital Rules (as fully phased-in on January 1, 2019); Key is subject to the Regulatory Capital Rules under the standardized approach. |
(i) | Item is included in the 10%/15% exceptions bucket calculation and is risk-weighted at 250%. |
One of our 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. |
43
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 taxable rate). For example, $100 of tax-exempt income would be presented as $154, an amount that if taxed at the statutory federal income tax rate of 35% would yield $100.
Figure 5 shows the various components of our balance sheet that affect interest income and expense, and their respective yields or rates over the past five years. This figure also presents a reconciliation of taxable-equivalent net interest income to net interest income reported in accordance with GAAP for each of those years. The net interest margin, which is an indicator of the profitability of the earning assets portfolio less cost of funding, is calculated by dividing net interest income by average earning assets.
Taxable-equivalent net interest income for 2013 was $2.3 billion, and the net interest margin was 3.12%. These results compare to taxable-equivalent net interest income of $2.3 billion and a net interest margin of 3.21% for the prior year. Total 2013 net interest income increased compared to the prior year because the interest expense associated with lower deposit costs declined by more than interest income. The decrease in interest income is primarily attributable to a change in the mix of average earning assets: higher-yielding loans were paid down and replaced by new originations with lower yields. Yields on the investment portfolio also declined. The decrease in interest expense is primarily attributable to continued improvements in the mix of deposits: the volume of low cost non-time and noninterest bearing deposit balances increased and higher costing certificates of deposit and long-term debt matured.
Average earning assets for 2013 totaled $75.4 billion, which was $3.5 billion, or 4.9%, higher than the 2012 level. The increase reflects $2.7 billion of loan growth primarily in commercial, financial and agricultural loans, as well as the 2012 acquisitions of credit cards and other loans. Our investment portfolio increased $900 million as a result of our strategy to increase our liquidity position.
44
Figure 5. Consolidated Average Balance Sheets, Net Interest Income and Yields/Rates from Continuing Operations
(a) | Results are from continuing operations. Interest excludes the interest associated with the liabilities referred to in (g) below, calculated using a matched funds transfer pricing methodology. |
(b) | Financial data was not adjusted to reflect the treatment of Victory as a discontinued operation. |
(c) | 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%. |
(d) | For purposes of these computations, nonaccrual loans are included in average loan balances. |
(e) | Yield is calculated on the basis of amortized cost. |
(f) | Rate calculation excludes basis adjustments related to fair value hedges. |
(g) | A portion of long-term debt and the related interest expense is allocated to discontinued liabilities as a result of applying our matched funds transfer pricing methodology to discontinued operations. |
45
Figure 5. Consolidated Average Balance Sheets, Net Interest Income and Yields/Rates from Continuing Operations (Continued)
2011 | 2010 | 2009 |
Compound Annual Rate of
Change (2009-2013) |
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Average | Yield/ | Average | Yield/ | Average | Yield/ | Average | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance | Interest | (a) | Rate | (a) | Balance | (b) | Interest | (a), (b) | Rate | (a), (b) | Balance | (b), (j) | Interest | (a), (b) | Rate | (a), (b) | Balance | Interest | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
$ | 17,507 | $ | 705 | 4.03 | % | $ | 17,500 | $ | 813 | 4.64 | % | $ | 23,181 | $ | 1,038 | 4.48 | % | .5 | % | (3.8 | ) | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
8,437 | 380 | 4.50 | 10,027 | 491 | 4.90 | 11,310 | (i | ) | 557 | 4.93 | (7.7 | ) | (10.9 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
1,677 | 73 | 4.36 | 3,495 | 149 | 4.26 | 6,206 | (i | ) | 294 | 4.74 | (29.8 | ) | (31.3 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
5,846 | 293 | 5.01 | 6,754 | 352 | 5.21 | 8,220 | 369 | 4.48 | (10.6 | ) | (14.2 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
33,467 | 1,451 | 4.34 | 37,776 | 1,805 | 4.78 | 48,917 | 2,258 | 4.61 | (5.4 | ) | (9.3 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
1,850 | 97 | 5.25 | 1,828 | 102 | 5.57 | 1,764 | 104 | 5.91 | 4.4 | (1.2 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
9,390 | 387 | 4.12 | 9,773 | 411 | 4.20 | 10,214 | 445 | 4.36 | (.3 | ) | (2.3 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
598 | 46 | 7.66 | 751 | 57 | 7.59 | 945 | 71 | 7.52 | (16.8 | ) | (16.4 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
9,988 | 433 | 4.34 | 10,524 | 468 | 4.45 | 11,159 | 516 | 4.63 | (1.3 | ) | (3.8 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
1,167 | 113 | 9.62 | 1,158 | 132 | 11.44 | 1,202 | 127 | 10.62 | 3.2 | (4.1 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | | | | | | | N/M | N/M | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
1,992 | 125 | 6.28 | 2,497 | 155 | 6.23 | 3,097 | 193 | 6.22 | (17.7 | ) | (17.4 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
142 | 11 | 7.87 | 188 | 15 | 7.87 | 247 | 20 | 7.93 | (21.4 | ) | (21.4 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2,134 | 136 | 6.38 | 2,685 | 170 | 6.34 | 3,344 | 213 | 6.35 | (17.9 | ) | (17.8 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
15,139 | 779 | 5.14 | 16,195 | 872 | 5.39 | 17,469 | 960 | 5.50 | (1.7 | ) | (3.8 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
48,606 | 2,230 | 4.59 | 53,971 | 2,677 | 4.96 | 66,386 | 3,218 | 4.85 | (4.4 | ) | (7.5 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
387 | 14 | 3.58 | 453 | 17 | 3.62 | 650 | 29 | 4.37 | (3.9 | ) | (7.2 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
18,766 | 584 | 3.20 | 18,800 | 646 | 3.50 | 11,169 | 462 | 4.19 | 2.6 | (7.6 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
514 | 12 | 2.35 | 20 | 2 | 10.56 | 25 | 2 | 8.17 | N/M | 110.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
878 | 26 | 2.97 | 1,068 | 37 | 3.47 | 1,238 | 47 | 3.83 | (9.4 | ) | (14.9 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2,543 | 6 | .25 | 2,684 | 6 | .24 | 4,149 | 12 | .28 | (6.6 | ) | (12.9 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
1,264 | 42 | 3.14 | 1,442 | 49 | 3.08 | 1,478 | 51 | 3.11 | (7.0 | ) | (10.7 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
72,958 | 2,914 | 4.02 | 78,438 | 3,434 | 4.39 | 85,095 | 3,821 | 4.49 | (2.4 | ) | (7.1 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(1,250 | ) | (2,207 | ) | (2,273 | ) | (17.3 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
10,341 | 11,243 | 12,349 | (4.8 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
6,247 | 6,677 | 4,269 | 3.4 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
$ | 88,296 | $ | 94,151 | $ | 99,440 | (2.1 | ) | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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$ | 27,001 | 71 | .26 | $ | 25,712 | 91 | .35 | $ | 24,345 | 124 | .51 | 6.2 | % | (15.6 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
1,958 | 1 | .06 | 1,867 | 1 | .06 | 1,787 | 2 | .07 | 7.0 | (12.9 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
4,931 | 149 | 3.02 | 8,486 | 275 | 3.24 | 12,612 | 462 | 3.66 | (25.8 | ) | (35.9 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
7,185 | 166 | 2.31 | 10,545 | 301 | 2.86 | 14,535 | 529 | 3.64 | (22.4 | ) | (36.9 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
807 | 3 | .30 | 926 | 3 | .34 | 802 | 2 | .27 | (6.7 | ) | (12.9 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
41,882 | 390 | 0.93 | 47,536 | 671 | 1.41 | 54,081 | 1,119 | 2.07 | (4.6 | ) | (32.4 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
1,981 | 5 | .27 | 2,044 | 6 | .31 | 1,618 | 5 | .31 | 2.2 | (16.7 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
619 | 11 | 1.84 | 545 | 14 | 2.63 | 1,907 | 16 | .84 | (27.0 | ) | (12.9 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
7,293 | 216 | 3.18 | 7,211 | 206 | 3.09 | 9,455 | 275 | 3.16 | (15.0 | ) | (14.3 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
51,775 | 622 | 1.21 | 57,336 | 897 | 1.58 | 67,061 | 1,415 | 2.13 | (6.0 | ) | (26.9 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
17,381 | 15,856 | 12,964 | 12.2 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2,658 | 3,131 | 4,340 | (17.5 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
6,232 | 6,677 | 4,269 | 3.2 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
78,046 | 83,000 | 88,634 | (2.3 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
10,133 | 10,895 | 10,592 | (.6 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
117 | 256 | 214 | (33.0 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
10,250 | 11,151 | 10,806 | (.9 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
$ | 88,296 | $ | 94,151 | $ | 99,440 | (2.1 | ) | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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2.81 | % | 2.81 | % | 2.36 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2,292 | 3.16 | % | 2,537 | 3.26 | % | 2,406 | 2.83 | % | (.5 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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25 | 26 | 26 | (2.4 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
$ | 2,267 | $ | 2,511 | $ | 2,380 | (.5 | ) | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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(h) | Commercial, financial and agricultural average balances for the years ended December 31, 2013, and December 31, 2012, include $95 million and $36 million, respectively, of assets from commercial credit cards. |
(i) | In late March 2009, Key transferred $1.5 billion of loans from the construction portfolio to the commercial mortgage portfolio in accordance with regulatory guidelines pertaining to the classification of loans that have reached a completed status. |
(j) | Prior to the third quarter of 2009, average balances have not been adjusted to reflect our January 1, 2008, adoption of the applicable accounting guidance related to offsetting certain derivative contracts on the consolidated balance sheet. |
46
Figure 6 shows how the changes in yields or rates and average balances from the prior year affected net interest income. The section entitled Financial Condition contains additional discussion about changes in earning assets and funding sources.
Figure 6. Components of Net Interest Income Changes from Continuing Operations
2013 vs. 2012 | 2012 vs. 2011 | |||||||||||||||||||||||||||
Average | Yield/ | Net | Average | Yield/ | Net | |||||||||||||||||||||||
in millions | Volume | Rate | Change | (a) | Volume | Rate | Change | (a) | ||||||||||||||||||||
INTEREST INCOME |
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Loans |
$ | 113 | $ | (118 | ) | $ | (5 | ) | $ | 79 | $ | (130 | ) | $ | (51 | ) | ||||||||||||
Loans held for sale |
(2 | ) | 2 | | 7 | (1 | ) | 6 | ||||||||||||||||||||
Securities available for sale |
(21 | ) | (67 | ) | (88 | ) | (160 | ) | (25 | ) | (185 | ) | ||||||||||||||||
Held-to-maturity securities |
17 | (4 | ) | 13 | 59 | (2 | ) | 57 | ||||||||||||||||||||
Trading account assets |
1 | 2 | 3 | (4 | ) | (4 | ) | (8 | ) | |||||||||||||||||||
Short-term investments |
2 | (2 | ) | | (1 | ) | 1 | | ||||||||||||||||||||
Other investments |
(4 | ) | (5 | ) | (9 | ) | (4 | ) | | (4 | ) | |||||||||||||||||
Total interest income (TE) |
106 | (192 | ) | (86 | ) | (24 | ) | (161 | ) | (185 | ) | |||||||||||||||||
INTEREST EXPENSE |
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NOW and money market deposit accounts |
6 | (9 | ) | (3 | ) | 7 | (22 | ) | (15 | ) | ||||||||||||||||||
Certificates of deposit ($100,000 or more) |
(17 | ) | (27 | ) | (44 | ) | (37 | ) | (18 | ) | (55 | ) | ||||||||||||||||
Other time deposits |
(22 | ) | (29 | ) | (51 | ) | (37 | ) | (25 | ) | (62 | ) | ||||||||||||||||
Deposits in foreign office |
| (1 | ) | (1 | ) | | (1 | ) | (1 | ) | ||||||||||||||||||
Total interest-bearing deposits |
(33 | ) | (66 | ) | (99 | ) | (67 | ) | (66 | ) | (133 | ) | ||||||||||||||||
Federal funds purchased and securities sold under repurchase agreements |
| (2 | ) | (2 | ) | | (1 | ) | (1 | ) | ||||||||||||||||||
Bank notes and other short-term borrowings |
| 1 | 1 | (4 | ) | | (4 | ) | ||||||||||||||||||||
Long-term debt |
(17 | ) | (29 | ) | (46 | ) | (89 | ) | 46 | (43 | ) | |||||||||||||||||
Total interest expense |
(50 | ) | (96 | ) | (146 | ) | (160 | ) | (21 | ) | (181 | ) | ||||||||||||||||
Net interest income (TE) |
$ | 156 | $ | (96 | ) | $ | 60 | $ | 136 | $ | (140 | ) | $ | (4 | ) | |||||||||||||
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(a) | The change in interest not due solely to volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each. |
Noninterest income for 2013 was $1.8 billion, down $90 million, or 4.8%, from 2012. In 2012, noninterest income increased by $168 million, or 10%, compared to 2011.
Operating lease income and other leasing gains decreased $87 million from 2012, primarily due to fewer early terminations in the leveraged lease portfolio. Consumer mortgage income declined $21 million, and net gains (losses) from principal investing decreased $20 million. Other income also declined $43 million, primarily due to gains on the redemption of trust preferred securities in the prior year. These decreases were partially offset by increases of $34 million in mortgage servicing fees, $27 million in cards and payments income, and $18 million in trust and investment services income.
Noninterest income for 2012 increased $168 million from 2011. Investment banking and debt placement fees increased $103 million. Operating lease income and other leasing gains increased $38 million, primarily due to the early terminations of leveraged leases. Trust and investment services income increased $22 million. Other income also increased $55 million, primarily due to gains on the redemption of trust preferred securities. These increases were partially offset by decreases in corporate services income of $29 million and cards and payments income of $28 million.
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Figure 7. Noninterest Income
Year ended December 31, | Change 2013 vs. 2012 | |||||||||||||||||||||||
dollars in millions | 2013 | 2012 | 2011 | Amount | Percent | |||||||||||||||||||
Trust and investment services income |
$ | 393 | $ | 375 | $ | 353 | $ | 18 | 4.8 | % | ||||||||||||||
Investment banking and debt placement fees |
333 | 327 | 224 | 6 | 1.8 | |||||||||||||||||||
Service charges on deposit accounts |
281 | 287 | 281 | (6 | ) | (2.1 | ) | |||||||||||||||||
Operating lease income and other leasing gains |
108 | 195 | 157 | (87 | ) | (44.6 | ) | |||||||||||||||||
Corporate services income |
172 | 168 | 197 | 4 | 2.4 | |||||||||||||||||||
Cards and payments income |
162 | 135 | 163 | 27 | 20.0 | |||||||||||||||||||
Corporate-owned life insurance income |
120 | 122 | 121 | (2 | ) | (1.6 | ) | |||||||||||||||||
Consumer mortgage income |
19 | 40 | 32 | (21 | ) | (52.5 | ) | |||||||||||||||||
Mortgage servicing fees |
58 | 24 | 26 | 34 | 141.7 | |||||||||||||||||||
Net gains (losses) from principal investing |
52 | 72 | 78 | (20 | ) | (27.8 | ) | |||||||||||||||||
Other income (a) |
68 | 111 | 56 | (43 | ) | (38.7 | ) | |||||||||||||||||
Total noninterest income |
$ | 1,766 | $ | 1,856 | $ | 1,688 | $ | (90 | ) | (4.8 | ) | % | ||||||||||||
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(a) | Included in this line item is our Dealer trading and derivatives income (loss). Additional detail is provided in Figure 8. |
Figure 8. Dealer Trading and Derivatives Income (Loss)
Year ended December 31, | Change 2013 vs. 2012 | |||||||||||||||||||||||
dollars in millions | 2013 | 2012 | 2011 | Amount | Percent | |||||||||||||||||||
Dealer trading and derivatives income (loss), proprietary (a), (b) |
$ | (14) | $ | (2) | $ | (24) | $ (12) | N/M | ||||||||||||||||
Dealer trading and derivatives income (loss), nonproprietary (b) |
27 | 6 | 2 | 21 | 350.0 | % | ||||||||||||||||||
Total dealer trading and derivatives income (loss) |
$ | 13 | $ | 4 | $ | (22) | $ 9 | 225.0 | % | |||||||||||||||
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(a) | For the year ended December 31, 2013, income of $3 million related to foreign exchange and interest rate derivative trading was offset by losses related to fixed income, equity securities trading, commodity derivative trading, and credit portfolio management activities. For the year ended December 31, 2012, equity securities trading and credit portfolio management securities trading constitute the majority of this amount. These losses were partially offset by income of $6 million related to fixed income, foreign exchange, interest rate, and commodity derivative trading activities. For the year ended December 31, 2011, fixed income, equity securities trading, and credit portfolio management activities constitute the majority of this amount. These losses were partially offset by income of $3 million related to foreign exchange and interest rate derivative trading activities. |
(b) | The allocation between proprietary and nonproprietary is made based upon whether the trade is conducted for the benefit of Key or Keys clients rather than based upon rulemaking under the Volcker Rule. The prohibitions and restrictions on proprietary trading activities contemplated by the Volcker Rule were detailed in a final rule approved by federal banking regulators in December 2013, which is effective April 1, 2014. For more information, see the discussion under the heading Other regulatory developments under the Dodd-Frank Act Volcker Rule in the section entitled Supervision and Regulation in Item 1 of this report. |
The following discussion explains the composition of certain elements of our noninterest income and the factors that caused those elements to change.
Trust and investment services income
Trust and investment services income is our largest source of noninterest income and consists of brokerage commissions, trust and asset management commissions, and insurance income. The assets under management that primarily generate these revenues are shown in Figure 9. For 2013, trust and investment services income increased $18 million, or 4.8%, from the prior year. For 2012, trust and investment services income increased $22 million, or 6.2%, from the prior year.
A significant portion of our trust and investment services income depends on the value and mix of assets under management. At December 31, 2013, our bank, trust and registered investment advisory subsidiaries had assets under management of $36.9 billion, compared to $34.7 billion at December 31, 2012, and $34.3 billion at December 31, 2011. As shown in Figure 9, increases in the equity and securities lending portfolios from 2012 to 2013 were primarily attributable to market appreciation. These increases were partially offset by a decrease in the fixed income portfolio as the market value of this portfolio declined. Increases in the equity, fixed income and
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money market portfolios from 2011 to 2012 were mostly offset by a decrease in the securities lending portfolio. Our securities lending business declined from 2011 to 2012; we reduced emphasis on this business, which resulted in lower transaction volumes, client departures, and fewer assets under management.
Figure 9. Assets Under Management
December 31, | Change 2013 vs. 2012 | |||||||||||||||||||||||
dollars in millions | 2013 | 2012 | 2011 | Amount | Percent | |||||||||||||||||||
Assets under management by investment type: |
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Equity |
$ | 20,971 | $ | 18,013 | $ | 17,464 | $ | 2,958 | 16.4 | % | ||||||||||||||
Securities lending |
3,422 | 3,147 | 4,950 | 275 | 8.7 | |||||||||||||||||||
Fixed income |
9,767 | 10,872 | 10,556 | (1,105 | ) | (10.2 | ) | |||||||||||||||||
Money market |
2,745 | 2,712 | 1,285 | 33 | 1.2 | |||||||||||||||||||
Total |
$ | 36,905 | $ | 34,744 | $ | 34,255 | $ | 2,161 | 6.2 | % | ||||||||||||||
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Investment banking and debt placement fees
Investment banking and debt placement fees consist of syndication fees, debt and equity financing fees, financial advisor fees, gains on sales of commercial mortgages, and agency origination fees. In 2013, investment banking and debt placement fees increased $6 million, or 1.8%, from one year ago. In 2012, investment banking and debt placement fees increased $103 million, or 46%, from 2011, primarily due to increased levels of debt and equity financings and advisor fees.
Operating lease income and other leasing gains
Operating lease income and other leasing gains decreased $87 million during 2013 and increased $38 million in 2012 compared to 2011 due to gains on the early terminations of leveraged leases. Product run-off also contributed to the decrease from 2012 to 2013. Accordingly, as shown in Figure 10, operating lease expense also declined from 2012 to 2013.
Cards and payments income, which consists of debit card, consumer and commercial credit card, and merchant services income, increased $27 million, or 20%, from 2012 to 2013, and decreased $28 million, or 17.2%, from 2011 to 2012. The increase from 2012 to 2013 was primarily due to the third quarter 2012 credit card portfolio acquisition. The decrease from 2011 to 2012 was primarily due to government pricing controls on debit transactions that went into effect October 1, 2011.
Consumer mortgage income decreased $21 million, or 52.5%, from 2012 to 2013, and increased $8 million, or 25%, from 2011 to 2012. The decrease from 2012 to 2013 was primarily due to lower mortgage originations.
Mortgage servicing fees increased $34 million, or 141.7%, from 2012 to 2013, and decreased $2 million, or 7.7%, from 2011 to 2012. The increase in mortgage servicing fees from 2012 to 2013 was due to higher levels of core servicing fees and special servicing fees as a result of the 2013 acquisition of a commercial mortgage servicing portfolio.
Other income, which consists primarily of gain on sale of certain loans, other service charges, and certain dealer trading income, decreased $43 million, or 38.7%, from 2012 to 2013, and increased $55 million, or 98.2%, from 2011 to 2012. Other income was higher in 2012 than it was in 2011 or 2013 due to a $54 million gain on the redemption of trust preferred securities.
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As shown in Figure 10, noninterest expense for 2013 was $2.8 billion, up $2 million, or .1%, from 2012. In 2013, expenses attributable to the 2012 acquisitions of the credit card portfolios and Western New York branches increased $40 million, and we recognized $117 million of expenses related to our efficiency initiative and a pension settlement charge. Noninterest expense increased by $134 million, or 5%, from 2011 to 2012, of which $61 million was attributable to the 2012 acquisitions of the credit card portfolios and Western New York branches and $25 million was attributable to our efficiency initiative.
As shown in Figure 11, personnel expense increased by $39 million in 2013, driven by higher levels of incentive compensation, employee benefits, and severance expense, partially offset by declines in stock-based compensation. Nonpersonnel expense decreased $37 million, primarily due to declines in several expense categories: $39 million in business services and professional fees, $17 million in marketing, $11 million in other expense, and $10 million in operating lease expense. These declines in nonpersonnel expense were partially offset by increases of $24 million in provision (credit) for losses on lending-related commitments, $21 in intangible asset amortization, and $15 million in net occupancy costs.
Personnel expense increased by $110 million in 2012, driven by higher levels of expense in each category shown in Figure 11. Nonpersonnel expense increased $24 million, primarily due to increases in several expense categories: $19 million in intangible asset amortization, $12 million in the provision (credit) for losses on lending-related commitments, $30 million in other expense, $8 million in marketing, and $7 million in business services and professional fees. These increases in nonpersonnel expense were partially offset by a $37 million decrease in operating lease expense due to product run-off and a $21 million decrease in the FDIC assessment.
Figure 10. Noninterest Expense
Year ended December 31, dollars in millions |
Change 2013 vs. 2012 | |||||||||||||||||||
2013 | 2012 | 2011 | Amount | Percent | ||||||||||||||||
Personnel |
$ | 1,609 | $ | 1,570 | $ | 1,460 | $ | 39 | 2.5 | % | ||||||||||
Net occupancy |
275 | 260 | 258 | 15 | 5.8 | |||||||||||||||
Computer processing |
156 | 164 | 166 | (8 | ) | (4.9 | ) | |||||||||||||
Business services and professional fees |
151 | 190 | 183 | (39 | ) | (20.5 | ) | |||||||||||||
Equipment |
104 | 107 | 103 | (3 | ) | (2.8 | ) | |||||||||||||
Operating lease expense |
47 | 57 | 94 | (10 | ) | (17.5 | ) | |||||||||||||
Marketing |
51 | 68 | 60 | (17 | ) | (25.0 | ) | |||||||||||||
FDIC assessment |
30 | 31 | 52 | (1 | ) | (3.2 | ) | |||||||||||||
Intangible asset amortization on credit cards |
30 | 14 | | 16 | 114.3 | |||||||||||||||
Other intangible asset amortization |
14 | 9 | 4 | 5 | 55.6 | |||||||||||||||
Provision (credit) for losses on lending-related commitments |
8 | (16 | ) | (28 | ) | 24 | N/M | |||||||||||||
OREO expense, net |
7 | 15 | 13 | (8 | ) | (53.3 | ) | |||||||||||||
Other expense |
338 | 349 | 319 | (11 | ) | (3.2 | ) | |||||||||||||
Total noninterest expense |
$ | 2,820 | $ | 2,818 | $ | 2,684 | $ | 2 | .1 | % | ||||||||||
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Average full-time equivalent employees (a) |
14,783 | 15,589 | 15,381 | (806 | ) | (5.2 | ) % |
(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 our noninterest expense and the factors that caused those elements to change.
As shown in Figure 11, personnel expense, the largest category of our noninterest expense, increased by $39 million, or 2.5%, from 2012 to 2013. Incentive compensation increased $28 million. Severance expense and employee benefits increased $15 million and $12 million, respectively, as a result of staff reductions related to our efficiency initiative. Employee benefits included a $27 million pension settlement charge. These increases in personnel expense were partially offset by a decrease of $14 million in stock-based compensation.
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Personnel expense increased $110 million from 2011 to 2012 due to several factors. Salaries increased $40 million due to increased hiring of client-facing personnel, including our acquisition of 37 branches in Western New York, and increases in base salaries. Technology contract labor, net increased $34 million due to higher levels of contract labor for technology investments attributable to the credit card portfolio acquisitions and the related implementation of new payment systems and merchant services processing. Employee benefits increased $14 million, primarily due to pension expense and higher medical claims. Incentive compensation increased $12 million as a result of higher commission expenses driven by increased activity in debt and equity placements. Stock-based compensation also increased $8 million while severance expense increased $2 million.
Figure 11. Personnel Expense
Year ended December 31, dollars in millions |
Change 2013 vs. 2012 | |||||||||||||||||||||||
2013 | 2012 | 2011 | Amount | Percent | ||||||||||||||||||||
Salaries |
$ | 897 | $ | 902 | $ | 862 | $ | (5 | ) | (.6 | ) | % | ||||||||||||
Technology contract labor, net |
72 | 69 | 35 | 3 | 4.3 | |||||||||||||||||||
Incentive compensation |
318 | 290 | 278 | 28 | 9.7 | |||||||||||||||||||
Employee benefits |
249 | 237 | 223 | 12 | 5.1 | |||||||||||||||||||
Stock-based compensation (a) |
35 | 49 | 41 | (14 | ) | (28.6 | ) | |||||||||||||||||
Severance |
38 | 23 | 21 | 15 | 65.2 | |||||||||||||||||||
Total personnel expense |
$ | 1,609 | $ | 1,570 | $ | 1,460 | $ | 39 | 2.5 | % | ||||||||||||||
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(a) | Excludes directors stock-based compensation of $3 million in 2013, $4 million in 2012, and less than $1 million in 2011, reported as other expense in Figure 10. |
The decrease in operating lease expense in both 2013 and 2012 compared to the prior year is primarily attributable to product run-off. Income related to the rental of leased equipment is presented in Figure 7 as operating lease income and other leasing gains.
FDIC assessment expense declined $1 million, or 3.2%, from 2012 to 2013, and decreased $21 million, or 40.4%, from 2011 to 2012. The decline from 2011 to 2012 was a result of the change in the calculation method for deposit insurance assessments.
Intangible asset amortization increased $21 million in 2013 compared to 2012, and $19 million in 2012 compared to 2011. The increases are a result of the third quarter 2012 acquisitions of the credit card portfolio and Western New York branches.
Other expense comprises various miscellaneous expense items. Other expense declined $11 million from 2012 to 2013 due to fluctuations in several of those line items. Other expense increased $30 million from 2011 to 2012, which included $14 million in recurring expenses associated with the acquisitions of the credit card portfolios and Western New York branches.
We recorded a tax provision from continuing operations of $271 million for 2013, compared to a tax provision of $231 million for 2012 and $364 million for 2011. The effective tax rate, which is the provision for income taxes as a percentage of income from continuing operations before income taxes, was 23.7% for 2013, compared to 21.4% for 2012, and 27.4% for 2011.
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Our federal tax (benefit) expense differs from the amount that would be calculated using the federal statutory tax rate, primarily because we generate income from investments in tax-advantaged assets, such as corporate-owned life insurance, earn credits associated with investments in low-income housing projects, and make periodic adjustments to our tax reserves. In addition, in 2013 and 2012, our effective tax rate was lower due to the early termination of certain leveraged leases that resulted in nontaxable gains pursuant to a prior settlement with the IRS.
We recorded a valuation allowance of $1 million and $3 million at December 31, 2013, and 2012, respectively, against the gross deferred tax assets for certain state net operating loss and state credit carryforwards.
This section summarizes the financial performance and related strategic developments of our two major business segments (operating segments): Key Community Bank and Key Corporate Bank. Note 23 (Line of Business Results) describes the products and services offered by each of these business segments, provides more detailed financial information pertaining to the segments and certain lines of business, and explains Other Segments and Reconciling Items.
Figure 12 summarizes the contribution made by each major business segment to our taxable-equivalent revenue from continuing operations and income (loss) from continuing operations attributable to Key for each of the past three years.
Figure 12. Major Business Segments - Taxable-Equivalent (TE) Revenue from Continuing Operations and Income (Loss) from Continuing Operations Attributable to Key
Key Community Bank summary of operations
As shown in Figure 13, Key Community Bank recorded net income attributable to Key of $151 million for 2013, compared to $129 million for 2012, and $191 million for 2011. The increase in 2013 was primarily due to Keys efficiency initiative.
Taxable-equivalent net interest income declined by $47 million, or 3.2%, from 2012. Average loans and leases grew $2.1 billion, or 7.8%, while average deposits increased by $1.1 billion, or 2.2%, compared to 2012. The positive contribution to net interest income from loan and deposit growth was offset by a reduction in the value of deposits in 2013 compared to one year ago.
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Noninterest income increased by $13 million, or 1.7%, from 2012. Trust and investment services income increased $17 million due to an increase in assets under management resulting from market appreciation and increased production. Cards and payments income increased $26 million due to the full year impact of the credit card portfolio acquisition in 2012. These increases in noninterest income were partially offset by a $21 million decrease in consumer mortgage income primarily due to lower originations and a $5 million decline in other income.
The provision for loan and lease losses increased by $6 million, or 4%, from 2012. Net loan charge-offs declined $48 million, or 24.6%, from 2012, as a result of continued progress in the economic environment and further improvement in the credit quality of the portfolio.
Noninterest expense declined by $76 million, or 4.1%, from 2012 due to Keys efficiency initiative. Personnel expense decreased $21 million, primarily due to declines in salaries and employee benefits. Nonpersonnel expense declined $55 million, primarily due to decreases in business services and professional fees, computer processing, and other support costs.
Key Community Bank recorded net income attributable to Key of $129 million for 2012, compared to net income of $191 million for 2011. Taxable-equivalent net interest income increased by $16 million, or 1.1%, from 2011. Average loans and leases grew $1.6 billion, or 6.3%, while average deposits increased by $1 billion, or 2.1%, compared to 2011. The Western New York branch and credit card portfolio acquisitions contributed $61 million to net interest income, $454 million to average loans and leases, and $932 million to deposits. The positive contribution to net interest income from the acquisitions was offset by the impact of lower value on deposits driven by the prolonged low rate environment. Noninterest income increased by $3 million, or .4%, from 2011. The Western New York branch and credit card portfolio acquisitions contributed $25 million mainly in credit card fees, brokerage commissions, and service charges on deposit accounts. Trust and investment services income increased $12 million primarily due to an increase in assets under management resulting from market appreciation and increased production. These increases in noninterest income were partially offset by a $26 million decline in cards and payment income resulting from government pricing controls on debit transactions that went into effect October 1, 2011. The provision for loan and lease losses increased by $2 million, or 1.4%, from 2011. Net loan charge-offs declined $79 million, or 28.8%, from 2011 as a result of continued progress in the economic environment and further improvement in credit quality of the portfolio. Noninterest expense increased by $116 million, or 6.6%, from 2011. The Western New York branch and credit card portfolio acquisitions contributed $62 million to the increase in noninterest expense spread across several expense categories including personnel, loan servicing and intangible amortization.
Figure 13. Key Community Bank
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ADDITIONAL KEY COMMUNITY BANK DATA
Key Corporate Bank summary of operations
As shown in Figure 14, Key Corporate Bank recorded net income attributable to Key of $444 million for 2013, compared to $409 million for 2012, and $554 million for 2011. The 2013 increase was driven by an increase in noninterest income and a decrease in the provision for loan and lease losses, partially offset by a decrease in taxable-equivalent net interest income and an increase in noninterest expense.
Taxable-equivalent net interest income decreased by $14 million, or 1.8%, in 2013 compared to 2012. The decline was driven by a $15 million, or 6.5%, decrease in the deposit spread, as the decline in rates due to the continued low-rate environment offset a $3.1 billion increase in deposit balances. The earning asset spread increased $16 million, or 3.3%, from 2012, as increased earning asset balances of $1.6 billion, or 7.6%, were partially offset by a decrease in the spread rate year over year.
Noninterest income increased by $31 million, or 4.1%, from 2012. This increase was driven by a $33 million increase in mortgage servicing fees, related to increases in core mortgage servicing fees, special servicing fees, and investments in commercial mortgage servicing. In addition, there was an $11 million increase in gains realized on the disposition of certain investments held by the Real Estate Capital line of business and a $9 million increase in investment banking and debt placement fees. These increases were partially offset by a $20 million decrease in operating lease income and other leasing gains.
The provision for loan and lease losses was a credit of $6 million in 2013, compared to a charge of $24 million in 2012. The 2013 credit was driven by improved credit quality within the portfolio, as the quality of new business volume exceeded that of the legacy portfolio. Net loan charge-offs decreased from $64 million in 2012 to $1 million in 2013.
Noninterest expense increased by $8 million, or .9%, from 2012. This increase was driven by a $7 million charge in the provision (credit) for losses on lending-related commitments for 2013, compared to a credit of $17 million
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for 2012, and an increase in personnel expense. These increases were partially offset by decreases in operating lease expense due to product run-off, net OREO expense, and other expense categories.
The 2012 decline in net income from continuing operations attributable to Key compared to 2011 resulted from increases in the provision for loan and lease losses and noninterest expense, partially offset by increases in net interest income and noninterest income. Taxable-equivalent net interest income increased by $13 million, or 1.7%, in 2012 compared to 2011, as a reduction in the value of deposits due to historically low interest rates was offset by increases in both deposit balances and earning assets. Noninterest income increased $9 million, or 1.2%, as increases in investment banking and debt placement fees were partially offset by decreases in operating lease income and other leasing gains due to product runoff, loan fees and gains on the disposition of certain investments held by the Real Estate Capital line of business, and changes in the derivative reserve. The provision for loan and lease losses increased $222 million due to a charge of $24 million taken in 2012 compared to a credit of $198 million in 2011. Noninterest expense increased $21 million, or 2.5%, driven by higher corporate overhead, net OREO expenses recorded in 2012 versus net OREO gains in 2011, and increases in personnel expense. These expenses were partially offset by decreases in operating lease expense due to product run-off and declines in other expense categories.
Figure 14. Key Corporate Bank
ADDITIONAL KEY CORPORATE BANK DATA
Year ended December 31, | Change 2013 vs. 2012 | |||||||||||||||||||||||||
dollars in millions | 2013 | 2012 | 2011 | Amount | Percent | |||||||||||||||||||||
NONINTEREST INCOME |
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Trust and investment services income |
$ | 128 | $ | 127 | $ | 136 | $ | 1 | .8 | % | ||||||||||||||||
Investment banking and debt placement fees |
329 | 320 | 224 | 9 | 2.8 | |||||||||||||||||||||
Operating lease income and other leasing gains |
64 | 84 | 116 | (20 | ) | (23.8 | ) | |||||||||||||||||||
Corporate services income |
126 | 126 | 150 | | | |||||||||||||||||||||
Service charges on deposit accounts |
44 | 49 | 46 | (5 | ) | (10.2 | ) | |||||||||||||||||||
Cards and payments income |
18 | 20 | 23 | (2 | ) | (10.0 | ) | |||||||||||||||||||
Payments and services income |
188 | 195 | 219 | (7 | ) | (3.6 | ) | |||||||||||||||||||
Mortgage servicing fees |
58 | 25 | 27 | 33 | 132.0 | |||||||||||||||||||||
Other noninterest income |
15 | | 20 | 15 | N/M | |||||||||||||||||||||
Total noninterest income |
$ | 782 | $ | 751 | $ | 742 | $ | 31 | 4.1 | % | ||||||||||||||||
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Other Segments consists of Corporate Treasury, our Principal Investing unit, and various exit portfolios. Other Segments generated net income attributable to Key of $314 million for 2013, compared to $256 million for 2012. The 2013 results reflect an increase in taxable-equivalent net interest income of $127 million compared to 2012. The provision for loan and lease losses for 2013 was a credit of $21 million compared to a charge of $55 million for 2012. These improvements were partially offset by a decrease in noninterest income of $154 million.
In 2012, Other Segments generated net income attributable to Key of $256 million, compared to $209 million for 2011. The 2012 results reflected a $137 million increase in noninterest income, partially offset by a decrease in taxable-equivalent net interest income of $22 million and an increase in the provision for loan and lease losses of $60 million.
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Figure 15 shows the composition of our loan portfolio at December 31 for each of the past five years.
Figure 15. Composition of Loans
2013 | 2012 | 2011 | ||||||||||||||||||||||||||||||||||||||||||
December 31, dollars in millions |
Amount |
Percent
of Total |
Amount |
Percent
of Total |
Amount |
Percent
of Total |
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COMMERCIAL |
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Commercial, financial and agricultural (a), (b) |
$ | 24,963 | 45.8 | % | $ | 23,242 | 44.0 | % | $ | 19,759 | 39.9 | % | ||||||||||||||||||||||||||||||||
Commercial real estate: (c) |
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Commercial mortgage |
7,720 | 14.2 | 7,720 | 14.6 | 8,037 | 16.2 | ||||||||||||||||||||||||||||||||||||||
Construction |
1,093 | 2.0 | 1,003 | 1.9 | 1,312 | 2.6 | ||||||||||||||||||||||||||||||||||||||
Total commercial real estate loans |
8,813 | 16.2 | 8,723 | 16.5 | 9,349 | 18.8 | ||||||||||||||||||||||||||||||||||||||
Commercial lease financing |
4,551 | (d | ) | 8.4 | 4,915 | 9.3 | 5,674 | 11.4 | ||||||||||||||||||||||||||||||||||||
Total commercial loans |
38,327 | 70.4 | 36,880 | 69.8 | 34,782 | 70.1 | ||||||||||||||||||||||||||||||||||||||
CONSUMER |
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Real estate residential mortgage |
2,187 | 4.0 | 2,174 | 4.1 | 1,946 | 3.9 | ||||||||||||||||||||||||||||||||||||||
Home equity: |
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Key Community Bank |
10,340 | 19.0 | 9,816 | 18.6 | 9,229 | 18.6 | ||||||||||||||||||||||||||||||||||||||
Other |
334 | .6 | 423 | .8 | 535 | 1.1 | ||||||||||||||||||||||||||||||||||||||
Total home equity loans |
10,674 | 19.6 | 10,239 | 19.4 | 9,764 | 19.7 | ||||||||||||||||||||||||||||||||||||||
Consumer other Key Community Bank |
1,449 | 2.7 | 1,349 | 2.5 | 1,192 | 2.4 | ||||||||||||||||||||||||||||||||||||||
Credit cards |
722 | 1.3 | 729 | 1.4 | | | ||||||||||||||||||||||||||||||||||||||
Consumer other: |
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Marine |
1,028 | 1.9 | 1,358 | 2.6 | 1,766 | 3.6 | ||||||||||||||||||||||||||||||||||||||
Other |
70 | .1 | 93 | .2 | 125 | .3 | ||||||||||||||||||||||||||||||||||||||
Total consumer other |
1,098 | 2.0 | 1,451 | 2.8 | 1,891 | 3.9 | ||||||||||||||||||||||||||||||||||||||
Total consumer loans |
16,130 | 29.6 | 15,942 | 30.2 | 14,793 | 29.9 | ||||||||||||||||||||||||||||||||||||||
Total loans (e), (f) |
$ | 54,457 | 100.0 | % | $ | 52,822 | 100.0 | % | $ | 49,575 | 100.0 | % | ||||||||||||||||||||||||||||||||
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2010 | 2009 | |||||||||||||||||||||||||||||||||||||||||||
Amount |
Percent
of Total |
Amount |
Percent
of Total |
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COMMERCIAL |
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Commercial, financial and agricultural |
$ | 16,441 | 32.8 | % | $ | 19,248 | 32.7 | % | ||||||||||||||||||||||||||||||||||||
Commercial real estate: |
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Commercial mortgage |
9,502 | 19.0 | 10,457 | (g | ) | 17.8 | ||||||||||||||||||||||||||||||||||||||
Construction |
2,106 | 4.2 | 4,739 | (g | ) | 8.1 | ||||||||||||||||||||||||||||||||||||||
Total commercial real estate loans |
11,608 | 23.2 | 15,196 | 25.9 | ||||||||||||||||||||||||||||||||||||||||
Commercial lease financing |
6,471 | 12.9 | 7,460 | 12.7 | ||||||||||||||||||||||||||||||||||||||||
Total commercial loans |
34,520 | 68.9 | 41,904 | 71.3 | ||||||||||||||||||||||||||||||||||||||||
CONSUMER |
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Real estate residential mortgage |
1,844 | 3.7 | 1,796 | 3.1 | ||||||||||||||||||||||||||||||||||||||||
Home equity: |
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Key Community Bank |
9,514 | 19.0 | 10,048 | 17.1 | ||||||||||||||||||||||||||||||||||||||||
Other |
666 | 1.3 | 838 | 1.4 | ||||||||||||||||||||||||||||||||||||||||
Total home equity loans |
10,180 | 20.3 | 10,886 | 18.5 | ||||||||||||||||||||||||||||||||||||||||
Consumer other Key Community Bank |
1,167 | 2.3 | 1,181 | 2.0 | ||||||||||||||||||||||||||||||||||||||||
Credit cards |
| | | | ||||||||||||||||||||||||||||||||||||||||
Consumer other: |
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Marine |
2,234 | 4.5 | 2,787 | 4.7 | ||||||||||||||||||||||||||||||||||||||||
Other |
162 | .3 | 216 | .4 | ||||||||||||||||||||||||||||||||||||||||
Total consumer other |
2,396 | 4.8 | 3,003 | 5.1 | ||||||||||||||||||||||||||||||||||||||||
Total consumer loans |
15,587 | 31.1 | 16,866 | 28.7 | ||||||||||||||||||||||||||||||||||||||||
Total loans (e) |
$ | 50,107 | 100.0 | % | $ | 58,770 | 100.0 | % | ||||||||||||||||||||||||||||||||||||
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(a) | Loan balances include $94 million and $90 million of commercial credit card balances at December 31, 2013, and 2012, respectively. |
(b) | See Figure 16 for a more detailed breakdown of our commercial, financial and agricultural loan portfolio at December 31, 2013, and December 31, 2012. |
(c) | See Figure 17 for a more detailed breakdown of our commercial real estate loan portfolio at December 31, 2013. |
(d) | December 31, 2013, includes commercial lease financing receivables of $58 million held as collateral for a secured borrowing. Additional information pertaining to this secured borrowing is included in Note 18 (Long-Term Debt). |
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(e) | Excludes loans in the amount of $4.5 billion at December 31, 2013, $5.2 billion at December 31, 2012, $5.8 billion at December 31, 2011, $6.5 billion at December 30, 2010, and $3.5 billion at December 30, 2009, related to the discontinued operations of the education lending business. |
(f) | December 31, 2013, includes purchased loans of $166 million, of which $16 million were PCI loans. December 31, 2012, includes purchased loans of $217 million, of which $23 million were PCI loans. |
(g) | In late March 2009, we transferred $1.5 billion of loans from the construction portfolio to the commercial mortgage portfolio in accordance with regulatory guidelines pertaining to the classification of loans for projects that have reached a completed status. |
At December 31, 2013, total loans outstanding from continuing operations were $54.5 billion, compared to $52.8 billion at the end of 2012, and $49.6 billion at the end of 2011. Loans related to the discontinued operations of the education lending business and excluded from total loans were $4.5 billion at December 31, 2013, $5.2 billion at December 31, 2012, and $5.8 billion at December 31, 2011. Further information regarding our discontinued operations is provided in the section titled Consumer loan portfolio within this discussion. The increase in our outstanding loans from continuing operations over the past year results primarily from increased lending activity in our commercial, financial and agricultural portfolio, along with the credit card portfolio and Western New York branch acquisitions. For more information on balance sheet carrying value, see Note 1 (Summary of Significant Accounting Policies) under the headings Loans and Loans Held for Sale.
Commercial loans outstanding were $38.3 billion at December 31, 2013, an increase of $1.4 billion, or 3.9%, compared to December 31, 2012.
Commercial, financial and agricultural. As shown in Figure 15, our commercial, financial and agricultural loans, also referred to as commercial and industrial, represent 45.8% and 44.0% of our total loan portfolio at December 31, 2013, and 2012, respectively, and are the largest component of our total loans. The loans consist of fixed and variable rate loans to our large, middle market and small business clients. These loans increased $1.7 billion, or 7.4%, from one year ago. Growth in our commercial and industrial portfolio is primarily attributable to increased loans to clients in the manufacturing, technology, and healthcare industries. Additionally, we are increasing loans to real estate investment trust (REIT) clients and institutionally-backed commercial real estate (CRE) funds. REITs and institutional CRE funds effectively enable us to lend to entities that generally have more diverse cash flows, lower debt levels and better access to the capital markets than private owners or developers.
Figure 16. Commercial, Financial and Agricultural Loans
December 31, 2013 | December 31, 2012 | |||||||||||||||||||||||
dollars in millions | Amount |
Percent
of Total |
Amount |
Percent
of Total |
||||||||||||||||||||
Industry classification: |
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Services |
$ | 6,036 | 24.2 | % | $ | 5,610 | 24.1 | % | ||||||||||||||||
Manufacturing |
4,238 | 17.0 | 4,196 | 18.1 | ||||||||||||||||||||
Public utilities |
1,838 | 7.4 | 1,424 | 6.1 | ||||||||||||||||||||
Financial services |
2,155 | 8.6 | 2,236 | 9.6 | ||||||||||||||||||||
Wholesale trade |
1,838 | 7.4 | 1,604 | 6.9 | ||||||||||||||||||||
Retail trade |
993 | 4.0 | 889 | 3.8 | ||||||||||||||||||||
Mining |
634 | 2.5 | 761 | 3.3 | ||||||||||||||||||||
Dealer floor plan |
1,345 | 5.4 | 1,216 | 5.2 | ||||||||||||||||||||
Property management |
877 | 3.5 | 798 | 3.4 | ||||||||||||||||||||
Transportation |
953 | 3.8 | 851 | 3.7 | ||||||||||||||||||||
Building contractors |
526 | 2.1 | 459 | 2.0 | ||||||||||||||||||||
Agriculture/forestry/fishing |
542 | 2.2 | 584 | 2.5 | ||||||||||||||||||||
Insurance |
169 | .7 | 112 | .5 | ||||||||||||||||||||
Public administration |
432 | 1.7 | 446 | 1.9 | ||||||||||||||||||||
Communications |
204 | .8 | 183 | .8 | ||||||||||||||||||||
Other |
2,183 | 8.7 | 1,873 | 8.1 | ||||||||||||||||||||
Total |
$ | 24,963 | 100.0 | % | $ | 23,242 | 100.0 | % | ||||||||||||||||
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Commercial, financial and agricultural loans increased $1.7 billion, or 7.4%, from the same period last year, with Key Corporate Bank increasing $1.6 billion and Key Community Bank up $98 million. We have experienced
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growth in new high credit quality loan commitments, and utilization with clients in our middle market segment, and as well as in our Institutional and Capital Markets business. Our two largest industry classifications services and manufacturing increased by 7.6% and 1.0%, respectively, when compared to one year ago. The services and manufacturing industries represented 24.2% and 17.0%, respectively, of the total commercial, financial and agricultural loan portfolio at December 31, 2013, compared to 24.1% and 18.1%, respectively, at December 31, 2012. At the end of each period provided in Figure 16 above, loans in the services and manufacturing industry classifications accounted for over 40% of our total commercial, financial and agricultural loan portfolio.
Services, manufacturing, and public utilities are focus areas where we maintain dedicated industry verticals that are staffed by relationship managers who possess deep industry experience and knowledge. Our loans in the services classification grew by $426 million, or 7.6%, compared to last year. The growth in the services loan portfolio was largely related to increases in lending to large corporate, middle market, and business banking clients and was partially offset by decreases in loans to clients in private bank and real estate. Loans in the manufacturing classification grew by $42 million, or 1.0%, compared to the same period one year ago. Increases in lending to large corporate, middle market, and business banking clients accounted for the majority of the growth in this classification. Loans in the public utilities classification grew by $414 million, or 29.1%, compared to last year.
Commercial real estate loans. CRE loans represent 16.2% of our total loan portfolio at December 31, 2013, compared to 16.5% one year ago. These CRE loans, including both owner- and nonowner-occupied properties, represented 23.0% of our commercial loan portfolio at December 31, 2013, compared to 23.7% one year ago. These loans have increased $90 million, or 1.0%, to $8.8 billion at December 31, 2013, from $8.7 billion at December 31, 2012. Our CRE lending business is conducted through two primary sources: our 12-state banking franchise, and KeyBank Real Estate Capital, a national line of business that cultivates relationships with owners of CRE located both within and beyond the branch system. This line of business deals primarily 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 55.8% of our average year-to-date CRE loans, compared to 54.3% one year ago. KeyBank Real Estate Capital generally focuses on larger owners and operators of CRE.
Figure 17 includes commercial mortgage and construction loans in both Key Community Bank and Key Corporate Bank. As shown in Figure 17, this loan portfolio is diversified by both property type and geographic location of the underlying collateral.
As presented in Figure 17, at December 31, 2013, our CRE portfolio included mortgage loans of $7.7 billion and construction loans of $1.1 billion, representing 14.2% and 2.0%, respectively, of our total loans. Nonowner-occupied loans represented 10.8% of our total loans and owner-occupied loans represented 5.4% of our total loans. The average size of mortgage loans originated during 2013 was $3.7 million, and our largest mortgage loan at December 31, 2013, had a balance of $101.3 million. At December 31, 2013, our average construction loan commitment was $6.0 million. Our largest construction loan commitment was $58.0 million, and our largest construction loan amount outstanding was $55.7 million.
Also shown in Figure 17, at December 31, 2013, 66.6% of our CRE loans were for nonowner-occupied properties, compared to 64.0% at December 31, 2012. Approximately 15.9% and 14.9% of these loans were construction loans at December 31, 2013, and 2012, respectively. Typically, these properties are not fully leased at the origination of the loan. The borrower relies upon additional leasing through the life of the construction loan to provide the cash flow necessary to support debt service payments. A significant decline in economic growth, and in turn, in rental rates and occupancy, would adversely affect our portfolio of construction loans.
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Figure 17. Commercial Real Estate Loans
December 31, 2013 dollars in millions |
Geographic Region |
Percent of Total |
Commercial Mortgage |
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West | Southwest | Central | Midwest | Southeast | Northeast | Total | Construction | |||||||||||||||||||||||||||||||||||||||||
Nonowner-occupied: |
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Retail properties |
$ | 154 | $ | 133 | $ | 109 | $ | 128 | $ | 311 | $ | 118 | $ | 953 | 10.8 | % | $ | 143 | $ | 810 | ||||||||||||||||||||||||||||
Multifamily properties |
415 | 140 | 348 | 409 | 603 | 147 | 2,062 | 23.4 | 571 | 1,491 | ||||||||||||||||||||||||||||||||||||||
Health facilities |
238 | | 107 | 239 | 184 | 216 | 984 | 11.2 | 15 | 969 | ||||||||||||||||||||||||||||||||||||||
Office buildings |
159 | 10 | 91 | 142 | 60 | 94 | 556 | 6.3 | 43 | 513 | ||||||||||||||||||||||||||||||||||||||
Warehouses |
209 | | 19 | 73 | 119 | 98 | 518 | 5.9 | 50 | 468 | ||||||||||||||||||||||||||||||||||||||
Manufacturing facilities |
1 | | 2 | 5 | 66 | 7 | 81 | .9 | 2 | 79 | ||||||||||||||||||||||||||||||||||||||
Hotels/Motels |
10 | 5 | | 25 | 62 | 6 | 108 | 1.2 | | 108 | ||||||||||||||||||||||||||||||||||||||
Residential properties |
9 | | 25 | 14 | 21 | 21 | 90 | 1.0 | 47 | 43 | ||||||||||||||||||||||||||||||||||||||
Land and development |
14 | | 10 | 9 | 16 | 17 | 66 | .7 | 42 | 24 | ||||||||||||||||||||||||||||||||||||||
Other |
95 | | 38 | 88 | 79 | 155 | 455 | 5.2 | 22 | 433 | ||||||||||||||||||||||||||||||||||||||
Total nonowner-occupied |
1,304 | 288 | 749 | 1,132 | 1,521 | 879 | 5,873 | 66.6 | 935 | 4,938 | ||||||||||||||||||||||||||||||||||||||
Owner-occupied |
1,179 | 17 | 348 | 725 | 39 | 632 | 2,940 | 33.4 | 158 | 2,782 | ||||||||||||||||||||||||||||||||||||||
Total |
$ | 2,483 | $ | 305 | $ | 1,097 | $ | 1,857 | $ | 1,560 | $ | 1,511 | $ | 8,813 | 100.0 | % | $ | 1,093 | $ | 7,720 | ||||||||||||||||||||||||||||
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Nonowner-occupied: |
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Nonperforming loans |
$ | 2 | | | $ | 8 | $ | 1 | $ | 12 | $ | 23 | N/M | $ | 11 | $ | 12 | |||||||||||||||||||||||||||||||
Accruing loans past due 90 days or more |
7 | | $ | 2 | 3 | | | 12 | N/M | 1 | 11 | |||||||||||||||||||||||||||||||||||||
Accruing loans past due 30 through 89 days |
1 | | | | 10 | 7 | 18 | N/M | 10 | 8 |
West |
Alaska, California, Hawaii, Idaho, Montana, Oregon, Washington, and Wyoming | |
Southwest |
Arizona, Nevada, and New Mexico | |
Central |
Arkansas, Colorado, Oklahoma, Texas, and Utah | |
Midwest |
Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, and Wisconsin | |
Southeast |
Alabama, Delaware, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, South Carolina, Tennessee, Virginia, Washington, D.C., and West Virginia | |
Northeast |
Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, and Vermont |
During 2013, nonperforming loans related to our nonowner-occupied properties decreased by $104 million from $127 million at December 31, 2012, to $23 million at December 31, 2013, as a result of continued improvement in asset quality and market conditions. This category of loans declined by $47 million during 2012.
Since December 31, 2012, our nonowner-occupied CRE portfolio has increased by approximately $287 million, or 5.1%, as many of our clients have taken advantage of opportunities to permanently refinance their loans at historically low interest rates.
If the economic recovery stalls, it may weaken the CRE market fundamentals (i.e., vacancy rates, the stability of rental income and asset values), leading to reduced cash flow to support debt service payments. Reduced client cash flow would adversely affect our ability to collect such payments. Accordingly, the value of CRE loan portfolio could be adversely affected.
Commercial lease financing. We conduct commercial lease financing arrangements through our Key Equipment Finance line of business and have both the scale and array of products to compete in the equipment lease financing business. Commercial lease financing receivables represented 11.9% of commercial loans at December 31, 2013, and 13.3% at December 31, 2012.
Commercial loan modification and restructuring
We modify and extend certain commercial loans in the normal course of business for our clients. Loan modifications vary and are handled on a case by case basis with strategies responsive to the specific circumstances of each loan and borrower. In many cases, borrowers have other resources and can reinforce the credit with additional capital, collateral, guarantees or income sources.
Modifications are negotiated to achieve mutually agreeable terms that maximize loan credit quality while at the same time meeting our clients financing needs. Modifications made to loans of creditworthy borrowers not experiencing financial difficulties and under circumstances where ultimate collection of all principal and interest is not in doubt are not classified as TDRs. In accordance with applicable accounting guidance, a loan is classified as a TDR only when the borrower is experiencing financial difficulties and a creditor concession has been granted.
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Our concession types are primarily interest rate reductions, forgiveness of principal, and other modifications. Loan extensions are sometimes coupled with these primary concession types. Because economic conditions have improved modestly and we have restructured loans to provide the optimal opportunity for successful repayment by the borrower, certain of our restructured loans have returned to accrual status and consistently performed under the restructured loan terms over the past year.
If loan terms are extended at less than normal market rates for similar lending arrangements, our Asset Recovery Group is consulted to help determine if any concession granted would result in designation as a TDR. Transfer to our Asset Recovery Group is considered for any commercial loan determined to be a TDR. During 2013, there were $69 million of new restructured commercial loans.
For more information on concession types for our commercial accruing and nonaccruing TDRs, see Note 5 (Asset Quality).
Figure 18. Commercial TDRs by Note Type and Accrual Status
We often use an A-B note structure for our TDRs, breaking the existing loan into two tranches. First, we create an A note. Since the objective of this TDR note structure is to achieve a fully performing and well-rated A note, we focus on sizing that note to a level that is supported by cash flow available to service debt at current market terms and consistent with our customary underwriting standards. This note structure typically will include a debt coverage ratio of 1.2 or better of cash flow to monthly payments of market interest, and principal amortization of generally not more than 25 years. (These metrics are adjusted from time to time based upon changes in long-term markets and take-out underwriting standards of our various lines of business.) Appropriately sized A notes are more likely to return to accrual status, allowing us to resume recognizing interest income. As the borrowers payment performance improves, these restructured notes typically also allow for an upgraded internal quality risk rating classification. Moreover, the borrower retains ownership and control of the underlying collateral (typically, CRE), the borrowers capital structure is strengthened (often to the point that fresh capital is attracted to the transaction), and local markets are spared distressed/fire sales.
The B note typically is an interest-only note with no required amortization until the property stabilizes and generates excess cash flow. This excess cash flow customarily is applied directly to the principal of the A note. We evaluate the B note when we consider returning the A note to accrual status. In many cases, the B note is charged off at the same time the A note is returned to accrual status. Alternatively, both A and B notes may be simultaneously returned to accrual if credit metrics are supportive.
Restructured nonaccrual loans may be returned to accrual status based on a current, well-documented evaluation of the credit, which would include analysis of the borrowers financial condition, prospects for repayment under the modified terms, and alternate sources of repayment such as the value of loan collateral. We wait a reasonable period (generally a minimum of six months) to establish the borrowers ability to sustain historical repayment performance before returning the loan to accrual status. Sustained historical repayment performance prior to the restructuring also may be taken into account. The primary consideration for returning a restructured loan to
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accrual status is the reasonable assurance that the full contractual principal balance of the loan and the ongoing contractually-required interest payments will be fully repaid. Although our policy is a guideline, considerable judgment is required to review each borrowers circumstances.
All loans processed as TDRs, including A notes and any non-charged-off B notes, are reported as TDRs during the calendar year in which the restructure took place.
Additional information regarding TDRs is provided in Note 5 (Asset Quality).
Extensions. Project loans typically are refinanced into the permanent commercial loan market at maturity, but sometimes they are modified and extended. Extension terms take into account the specific circumstances of the client relationship, the status of the project, and near-term prospects for both the client and the collateral. In all cases, pricing and loan structure are reviewed and, where necessary, modified to ensure the loan has been priced to achieve a market rate of return and loan terms that are appropriate for the risk. Typical enhancements include one or more of the following: principal paydown, increased amortization, additional collateral, increased guarantees, and a cash flow sweep. Some maturing construction loans have automatic extension options built in; in those cases, pricing and loan terms cannot be altered.
Loan pricing is determined based on the strength of the borrowing entity and the strength of the guarantor, if any. Therefore, pricing for an extended loan may remain the same because the loan is already priced at or above current market.
We do not consider loan extensions in the normal course of business (under existing loan terms or at market rates) as TDRs, particularly when ultimate collection of all principal and interest is not in doubt and no concession has been made. In the case of loan extensions where either collection of all principal and interest is uncertain or a concession has been made, we would analyze such credit under the accounting guidance to determine whether it qualifies as a TDR. Extensions that qualify as TDRs are measured for impairment under the applicable accounting guidance.
Guarantors. We conduct a detailed guarantor analysis (1) for all new extensions of credit, (2) at the time of any material modification/extension, and (3) typically annually, as part of our on-going portfolio and loan monitoring procedures. This analysis requires the guarantor entity to submit all appropriate financial statements, including balance sheets, income statements, tax returns, and real estate schedules.
While the specific steps of each guarantor analysis may vary, the high level objectives include determining the overall financial conditions of the guarantor entities, including size, quality, and nature of asset base; net worth (adjusted to reflect our opinion of market value); leverage; standing liquidity; recurring cash flow; contingent and direct debt obligations; and near term debt maturities.
Borrower and guarantor financial statements are required at least annually within 90-120 days of the calendar/fiscal year end. Income statements and rent rolls for project collateral are required quarterly. We may require certain information, such as liquidity, certifications, status of asset sales or debt resolutions, and real estate schedules, to be provided more frequently.
We routinely seek performance from guarantors of impaired debt if the guarantor is solvent. We may not seek to enforce the guaranty if we are precluded by bankruptcy or we determine the cost to pursue a guarantor exceeds the value to be returned given the guarantors verified financial condition. We often are successful in obtaining either monetary payment or the cooperation of our solvent guarantors to help mitigate loss, cost and the expense of collections.
As of December 31, 2013, we had $3.4 million of mortgage and construction loans that had a loan-to-value ratio greater than 1.0, and were accounted for as performing loans. These loans were not considered impaired due to
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one or more of the following factors: (i) underlying cash flow adequate to service the debt at a market rate of return with adequate amortization; (ii) a satisfactory borrower payment history; and (iii) acceptable guarantor support.
Consumer loans outstanding increased by $188 million, or 1.2%, from one year ago. The home equity portfolio is the largest segment of our consumer loan portfolio. Approximately 96.9% of this portfolio at December 31, 2013, is originated from Key Community Bank within our 12-state footprint. The remainder of the portfolio, which has been in an exit mode since the fourth quarter of 2007, was originated from the Consumer Finance line of business and is now included in Other Segments. Home equity loans in Key Community Bank increased by $524 million, or 5.3%, over the past twelve months as a result of stabilized home values, improved employment, and favorable borrowing conditions.
As shown in Figure 13, we hold the first lien position for approximately 58% of the Key Community Bank home equity portfolio at December 31, 2013, and 55% at December 31, 2012. For consumer loans with real estate collateral, we track borrower performance monthly. Regardless of the lien position, credit metrics are refreshed quarterly, including recent Fair Isaac Corporation scores as well as original and updated loan-to-value ratio. This information is used in establishing the ALLL. Our methodology is described in Note 1 (Summary of Significant Accounting Policies) under the heading Allowance for Loan and Lease Losses.
Regulatory guidance issued in January 2012 addressed specific risks and required actions within home equity portfolios associated with second lien loans. This regulatory guidance related to the classification of second lien home equity loans was implemented prospectively, and therefore prior periods were not adjusted. At December 31, 2013, 42% of our home equity portfolio is secured by second lien mortgages. On at least a quarterly basis, we continue to monitor the risk characteristics of these loans when determining whether our loss estimation methods are appropriate.
Figure 19 summarizes our home equity loan portfolio by source at the end of each of the last five years, as well as certain asset quality statistics and yields on the portfolio as a whole.
Figure 19. Home Equity Loans
December 31, dollars in millions |
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||||||
SOURCES OF YEAR END LOANS |
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Key Community Bank |
$ | 10,340 | $ | 9,816 | $ | 9,229 | $ | 9,514 | $ | 10,048 | ||||||||||||||
Other |
334 | 423 | 535 | 666 | 838 | |||||||||||||||||||
Total |
$ | 10,674 | $ | 10,239 | $ | 9,764 | $ | 10,180 | $ | 10,886 | ||||||||||||||
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Nonperforming loans at year end |
$ | 220 | $ | 231 | (a), (b) | $ | 120 | $ | 120 | $ | 128 | |||||||||||||
Net loan charge-offs for the year |
66 | 118 | 130 | 175 | 165 | |||||||||||||||||||
Yield for the year |
4.07 | % | 4.21 | % | 4.34 | % | 4.45 | % | 4.63 | % |
(a) | Includes $48 million of performing home equity second liens that are subordinate to first liens and 120 days or more past due or in foreclosure, or for which 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. |
(b) | Includes $72 million of performing secured loans that were discharged through Chapter 7 bankruptcy and not formally re-affirmed as addressed in regulatory guidance that was updated in the third quarter of 2012. Such loans have been designated as nonperforming and TDRs. |
As shown in Note 4 (Loans and Loans Held for Sale), our loans held for sale were $611 million at December 31, 2013, compared to $599 million at December 31, 2012. During 2013, we recorded net gains
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(losses) from loan sales of $125 million on the income statement. There were no loans held for sale related to the discontinued operations of the education lending business at December 31, 2013, and 2012.
At December 31, 2013, loans held for sale included $307 million of commercial mortgages, which decreased by $170 million from December 31, 2012, $278 million of commercial, financial and agricultural loans, which increased $249 million from December 31, 2012, $17 million of residential mortgage loans, which decreased by $68 million from December 31, 2012, and $9 million of commercial lease financing, which increased $1 million from December 31, 2012. Valuations are conducted using internal models that rely on market data from sales or nonbinding bids on similar assets, including credit spreads, treasury rates, interest rate curves and risk profiles, as well as our own assumptions about the exit market for the loans and details about individual loans within the respective portfolios. We review our assumptions quarterly. For additional information related to the valuation of loans held for sale, see Note 6 (Fair Value Measurements).
As shown in Figure 20, during 2013, we sold $4.1 billion of CRE loans, $840 million of residential real estate loans, and $275 million of commercial loans. Most of these sales came from the held-for-sale portfolio. Additionally, there were $147 million of education loans sold (included in discontinued assets on the balance sheet).
Among the factors that we consider in determining which loans to sell are:
¿ | our business strategy for particular lending areas; |
¿ | whether particular lending businesses meet established performance standards or fit with our relationship banking strategy; |
¿ | our A/LM needs; |
¿ | the cost of alternative funding sources; |
¿ | the level of credit risk; |
¿ | capital requirements; and |
¿ | market conditions and pricing. |
Figure 20 summarizes our loan sales for 2013 and 2012.
Figure 20. Loans Sold (Including Loans Held for Sale)
in millions | Commercial |
Commercial
Real Estate |
Commercial
Lease Financing |
Residential
Real Estate |
Total | |||||||||||||||
2013 |
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Fourth quarter |
$ | 39 | $ | 1,504 | $ | 141 | $ | 102 | $ | 1,786 | ||||||||||
Third quarter |
17 | 923 | 129 | 184 | 1,253 | |||||||||||||||
Second quarter |
181 | 815 | 90 | 226 | 1,312 | |||||||||||||||
First quarter |
38 | 880 | 69 | 328 | 1,315 | |||||||||||||||
Total |
$ | 275 | $ | 4,122 | $ | 429 | $ | 840 | $ | 5,666 | (a) | |||||||||
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2012 |
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Fourth quarter |
$ | 38 | $ | 1,233 | $ | 53 | $ | 493 | $ | 1,817 | ||||||||||
Third quarter |
46 | 787 | 47 | 503 | 1,383 | |||||||||||||||
Second quarter |
24 | 808 | 26 | 379 | 1,237 | |||||||||||||||
First quarter |
36 | 715 | 22 | 400 | 1,173 | |||||||||||||||
Total |
$ | 144 | $ | 3,543 | $ | 148 | $ | 1,775 | $ | 5,610 | ||||||||||
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(a) | Excludes education loans of $147 million sold during 2013 that relate to the discontinued operations of the education lending business. There were no education loans sold during 2012. |
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Figure 21 shows loans that are either administered or serviced by us but not recorded on the balance sheet. The table includes loans that have been sold.
Figure 21. Loans Administered or Serviced
December 31, in millions |
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
Commercial real estate loans (a) |
$ | 177,731 | $ | 107,630 | $ | 99,608 | $ | 117,071 | $ | 123,599 | ||||||||||
Education loans (b) |
| | | | 3,810 | |||||||||||||||
Commercial lease financing |
717 | 520 | 521 | 706 | 649 | |||||||||||||||
Commercial loans |
327 | 343 | 306 | 269 | 247 | |||||||||||||||
Total |
$ | 178,775 | $ | 108,493 | $ | 100,435 | $ | 118,046 | $ | 128,305 | ||||||||||
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(a) | We acquired the servicing for commercial mortgage loan portfolios with an aggregate principal balance of $105.9 billion during 2013, $11.8 billion during 2012, $3.5 billion during 2011, $1.6 billion during 2010, and $7.2 billion during 2009. |
(b) | We adopted new accounting guidance on January 1, 2010, which required us to consolidate our education loan securitization trusts and resulted in the addition of approximately $2.8 billion of assets, and the same amount of liabilities and equity, to our balance sheet. |
In the event of default by a borrower, we are subject to recourse with respect to approximately $1.4 billion of the $179 billion of loans administered or serviced at December 31, 2013. Additional information about this recourse arrangement is included in Note 20 (Commitments, Contingent Liabilities and Guarantees) under the heading Recourse agreement with FNMA.
We derive income from several sources when retaining the right to administer or service loans that are sold. We earn 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, we earn interest income from investing funds generated by escrow deposits collected in connection with the servicing of CRE loans. Additional information about our mortgage servicing assets is included in Note 9 (Mortgage Servicing Assets).
Maturities and sensitivity of certain loans to changes in interest rates
Figure 22 shows the remaining maturities of certain commercial and real estate loans, and the sensitivity of those loans to changes in interest rates. At December 31, 2013, approximately 27.4% of these outstanding loans were scheduled to mature within one year.
Figure 22. Remaining Maturities and Sensitivity of Certain Loans to Changes in Interest Rates
December 31, 2013 in millions |
Within One Year | One - Five Years | Over Five Years | Total | ||||||||||||
Commercial, financial and agricultural |
$ | 7,551 | $ | 13,957 | $ | 3,455 | $ | 24,963 | ||||||||
Real estate construction |
444 | 534 | 115 | 1,093 | ||||||||||||
Real estate residential and commercial mortgage |
1,858 | 4,365 | 3,684 | 9,907 | ||||||||||||
$ | 9,853 | $ | 18,856 | $ | 7,254 | $ | 35,963 | |||||||||
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Loans with floating or adjustable interest rates (a) |
$ | 15,533 | $ | 3,605 | $ | 19,138 | ||||||||||
Loans with predetermined interest rates (b) |
3,323 | 3,649 | 6,972 | |||||||||||||
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$ | 18,856 | $ | 7,254 | $ | 26,110 | |||||||||||
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(a) | Floating and adjustable rates vary in relation to other interest rates (such as the base lending rate) or a variable index that may change during the term of the loan. |
(b) | Predetermined interest rates either are fixed or may change during the term of the loan according to a specific formula or schedule. |
Our securities portfolio totaled $17.1 billion at December 31, 2013, compared to $16 billion at December 31, 2012. Available-for-sale securities were $12.3 billion at December 31, 2013, compared to $12.1 billion at
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December 31, 2012. Held-to-maturity securities were $4.8 billion at December 31, 2013, compared to $3.9 billion at December 31, 2012. Essentially all of our held-to-maturity securities portfolio was invested in CMOs at December 31, 2013.
As shown in Figure 23, all of our mortgage-backed securities, which include both securities available for sale and held-to-maturity securities, are issued by government-sponsored enterprises or GNMA, and are traded in liquid secondary markets. These securities are recorded on the balance sheet at fair value for the available-for-sale portfolio and at cost for the held-to-maturity portfolio. For more information about these securities, see Note 6 (Fair Value Measurements) under the heading Qualitative Disclosures of Valuation Techniques, and Note 7 (Securities).
Figure 23. Mortgage-Backed Securities by Issuer
December 31, in millions |
2013 | 2012 | 2011 | |||||||||
FHLMC |
$ | 7,047 | $ | 7,923 | $ | 8,984 | ||||||
FNMA |
5,978 | 5,246 | 5,583 | |||||||||
GNMA |
3,997 | 2,746 | 3,464 | |||||||||
Total (a) |
$ | 17,022 | $ | 15,915 | $ | 18,031 | ||||||
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(a) | Includes securities held in the available-for-sale and held-to-maturity portfolios. |
The majority of our securities available-for-sale portfolio consists of CMOs, which are debt securities secured by a pool of mortgages or mortgage-backed securities. CMOs generate interest income and serve as collateral to support certain pledging agreements. At December 31, 2013, we had $12.3 billion invested in CMOs and other mortgage-backed securities in the available-for-sale portfolio, compared to $12 billion at December 31, 2012.
We periodically evaluate our securities available-for-sale portfolio in light of established A/LM objectives, changing market conditions that could affect the profitability of the portfolio, and the level of interest rate risk to which we are exposed. These evaluations may cause us to take steps to adjust our overall balance sheet positioning.
In addition, the size and composition of our securities available-for-sale portfolio could vary with our needs for liquidity and the extent to which we are required (or elect) to hold these assets as collateral to secure public funds and trust deposits. Although we generally use debt securities for this purpose, other assets, such as securities purchased under resale agreements or letters of credit, are used occasionally when they provide a lower cost of collateral or more favorable risk profiles.
Throughout 2012 and 2013, our investing activities continued to complement other balance sheet developments and provide for our ongoing liquidity management needs. Our actions to not reinvest the monthly security cash flows at various times during this time period served to provide the liquidity necessary to address our funding requirements. These funding requirements included ongoing loan growth and occasional debt maturities, as well as the Western New York branch acquisition in July 2012 (including credit card assets obtained in September 2012) and the acquisition of Key-branded credit card assets in August 2012.
Figure 24 shows the composition, yields and remaining maturities of our securities available for sale. For more information about these securities, including gross unrealized gains and losses by type of security and securities pledged, see Note 7 (Securities).
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Figure 24. Securities Available for Sale
dollars in millions |
States and
Political Subdivisions |
Collateralized
Mortgage Obligations |
(a) |
Other
Mortgage- Backed Securities |
(a) |
Other
Securities |
(b) | Total |
Weighted-
Average Yield |
(c) | ||||||||||||||||||||||||||
December 31, 2013 |
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Remaining maturity: |
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One year or less |
$ | 2 | $ | 463 | $ | 1 | | $ | 466 | 3.30 | % | |||||||||||||||||||||||||
After one through five years |
16 | 10,152 | 1,274 | $ | 20 | 11,462 | 2.31 | |||||||||||||||||||||||||||||
After five through ten years |
22 | 385 | 7 | | 414 | 1.79 | ||||||||||||||||||||||||||||||
After ten years |
| | 4 | | 4 | 5.75 | ||||||||||||||||||||||||||||||
Fair value |
$ | 40 | $ | 11,000 | $ | 1,286 | $ | 20 | $ | 12,346 | | |||||||||||||||||||||||||
Amortized cost |
39 | 11,120 | 1,270 | 17 | 12,446 | 2.33 | % | |||||||||||||||||||||||||||||
Weighted-average yield (c) |
6.06 | % | 2.30 | % | 2.70 | % | | 2.33 | % (d) | | ||||||||||||||||||||||||||
Weighted-average maturity |
4.8 years | 3.6 years | 3.3 years | 4.0 years | 3.5 years | | ||||||||||||||||||||||||||||||
December 31, 2012 |
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Fair value |
$ | 49 | $ | 11,464 | $ | 538 | $ | 43 | $ | 12,094 | | |||||||||||||||||||||||||
Amortized cost |
47 | 11,148 | 491 | 42 | 11,728 | 2.91 | % | |||||||||||||||||||||||||||||
December 31, 2011 |
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Fair value |
$ | 63 | $ | 15,162 | $ | 778 | $ | 9 | $ | 16,012 | | |||||||||||||||||||||||||
Amortized cost |
60 | 14,707 | 715 | 8 | 15,490 | 3.19 | % |
(a) | Maturity is based upon expected average lives rather than contractual terms. |
(b) | Includes primarily marketable equity securities. |
(c) | Weighted-average yields are calculated based on amortized cost. Such yields have been adjusted to a taxable-equivalent basis using the statutory federal income tax rate of 35%. |
(d) | Excludes $20 million of securities at December 31, 2013, that have no stated yield. |
Federal Agency CMOs constitute essentially all of our held-to-maturity securities. The remaining balance comprises foreign bonds and capital securities. Figure 25 shows the composition, yields and remaining maturities of these securities.
Figure 25. Held-to-Maturity Securities
dollars in millions |
Collateralized
Mortgage Obligations |
Other
Securities |
Total |
Weighted-
Average Yield |
(a) | |||||||||||||||||||||||||||
December 31, 2013 |
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Remaining maturity: |
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One year or less |
| $ | 7 | $ | 7 | 4.14 | % | |||||||||||||||||||||||||
After one through five years |
$ | 144 | | 144 | 1.84 | |||||||||||||||||||||||||||
After five through ten years |
4,592 | 13 | 4,605 | 1.83 | ||||||||||||||||||||||||||||
Amortized cost |
$ | 4,736 | $ | 20 | $ | 4,756 | 1.83 | % | ||||||||||||||||||||||||
Fair value |
4,597 | 20 | 4,617 | | ||||||||||||||||||||||||||||
Weighted-average yield |
1.83 | % | 2.57 | % (b) | 1.83 | % (b) | | |||||||||||||||||||||||||
Weighted-average maturity |
3.7 years | 1.8 years | 3.7 years | | ||||||||||||||||||||||||||||
December 31, 2012 |
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Amortized cost |
$ | 3,913 | $ | 18 | $ | 3,931 | 1.92 | % | ||||||||||||||||||||||||
Fair value |
3,974 | 18 | 3,992 | | ||||||||||||||||||||||||||||
December 31, 2011 |
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Amortized cost |
$ | 2,091 | $ | 18 | $ | 2,109 | 2.06 | % | ||||||||||||||||||||||||
Fair value |
2,115 | 18 | 2,133 | |
(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 $5 million of securities at December 31, 2013, that have no stated yield. |
Principal investments investments in equity and mezzanine instruments made by our Principal Investing unit represented 57.1% of other investments at December 31, 2013. They include direct investments
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(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. The fair value of the direct investments was $141 million at December 31, 2013, and $191 million at December 31, 2012, while the fair value of the indirect investments was $413 million at December 31, 2013, and $436 million at December 31, 2012. Under the requirements of the Volcker Rule, we will be required to dispose of some or all of our indirect principal investments. The implementation date of the Volcker Rule is July 21, 2015. Key is permitted to file for two one-year extensions, and an additional extension of up to five years for illiquid funds, to retain the indirect investments for a longer period of time. We plan to apply for the extensions and hold the investments. As of December 31, 2013, we have not committed to a plan to sell these investments.
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. There are indirect real-estate-related investments valued at $23 million at December 31, 2013, and $41 million at December 31, 2012, that may be subject to the disposal requirements under the Volcker Rule, as described in the previous paragraph.
Most of our other investments are not traded on an active market. We determine the fair value at which these investments should be recorded based on the nature of the specific investment and all available relevant information. This 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, our knowledge of the industry, third-party data, and other relevant factors. During 2013, net gains from our principal investing activities (including results attributable to noncontrolling interests) totaled $52 million, which includes $8 million of net unrealized gains. These net gains are recorded as net gains (losses) from principal investing on the income statement. Additional information regarding these investments is provided in Note 6 (Fair Value Measurements).
Deposits and other sources of funds
Domestic deposits are our primary source of funding. During 2013, average domestic deposits were $65.3 billion and represented 86.6% of the funds we used to support loans and other earning assets, compared to $61.1 billion and 85.0% during 2012. The composition of our average deposits is shown in Figure 5 in the section entitled Net interest income.
The increase in average domestic deposits from 2012 to 2013 was driven by corporate clients and the addition of escrow deposits from our commercial mortgaging servicing business acquisition, resulting in increases in demand deposits of $2.8 billion and interest-bearing non-time deposits of $3.5 billion. Improved funding mix and maturities of our certificates of deposit have reduced the cost of total domestic deposits, which is down from 2012.
Wholesale funds, consisting of deposits in our foreign office and short-term borrowings, averaged $2.8 billion during 2013, compared to $3.0 billion during 2012. The change from 2012 was caused by a $200 million decrease in foreign office deposits, a $19 million decrease in bank notes and other short-term borrowings, and a $12 million decrease in federal funds purchased and securities sold under agreements to repurchase.
At December 31, 2013, Key had $3.2 billion in time deposits of $100,000 or more. Figure 26 shows the maturity distribution of these deposits.
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Figure 26. Maturity Distribution of Time Deposits of $100,000 or More
December 31, 2013 in millions |
Domestic
Offices |
Foreign
Offices |
Total | |||||||||
Remaining maturity: |
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Three months or less |
$ | 781 | $ | 558 | $ | 1,339 | ||||||
After three through six months |
416 | | 416 | |||||||||
After six through twelve months |
593 | | 593 | |||||||||
After twelve months |
841 | | 841 | |||||||||
Total |
$ | 2,631 | $ | 558 | $ | 3,189 | ||||||
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At December 31, 2013, our shareholders equity was $10.3 billion, up $32 million from December 31, 2012. The following sections discuss certain factors that contributed to this change. For other factors that contributed to the change, see the Consolidated Statements of Changes in Equity.
As part of its ongoing supervisory process, the Federal Reserve requires BHCs like KeyCorp to submit an annual comprehensive capital plan and to update that plan to reflect material changes in the BHCs risk profile, business strategies, or corporate structure, including but not limited to changes in planned capital actions. As previously reported, on January 7, 2013, we submitted to the Federal Reserve and provided to the OCC our 2013 capital plan under the annual CCAR process. On March 14, 2013, the Federal Reserve announced that it did not object to our 2013 capital plan. At its March 2013 meeting, our Board authorized up to $426 million of common share repurchases in the open market or through privately negotiated transactions. Subsequently, we received no objection from the Federal Reserve to use, and our Board approved the use of, the cash portion of the net after-tax gain from the sale of Victory (approximately $72 million) for additional common share repurchases.
Through the fourth quarter of 2013, we completed $409 million of common share repurchases on the open market under our 2013 capital plan. In the first quarter of 2013, we completed $65 million of common share repurchases on the open market under our 2012 capital plan. Common share repurchases under the 2013 capital plan are expected to be executed through the first quarter of 2014.
Consistent with the 2013 capital plan, we made a dividend payment of $.055 per share, or $49 million, on our common shares during each of the second, third, and fourth quarters of 2013, and a dividend payment of $.05 per common share, or $47 million, during the first quarter of 2013. Changes to future dividends may be evaluated by the Board of Directors based upon our earnings, financial condition, and other factors, including regulatory review. Further information regarding the capital planning process and CCAR is included in the Supervision and Regulation section of Item 1 of this report under the heading Regulatory capital and liquidity.
During 2013, we also made four quarterly dividend payments of $1.9375 per share, or $5.75 million, on our Series A Preferred Stock.
Our common shares are traded on the New York Stock Exchange under the symbol KEY with 30,418 holders of record at December 31, 2013. Our book value per common share was $11.25 based on 890.7 million shares outstanding at December 31, 2013, compared to $10.78 based on 925.8 million shares outstanding at December 31, 2012. At December 31, 2013, our tangible book value per common share was $10.11, compared to $9.67 at December 31, 2012.
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Figure 45 in the section entitled Fourth Quarter Results shows the market price ranges of our common shares, per common share earnings, and dividends paid by quarter for each of the last two years.
Figure 27 compares the price performance of our common shares (based on an initial investment of $100 on December 31, 2008, and assuming reinvestment of dividends) with that of the Standard & Poors 500 Index and a group of other banks that constitute our peer group. The peer group consists of the banks that make up the Standard & Poors 500 Regional Bank Index and the banks that make up the Standard & Poors 500 Diversified Bank Index. We are included in the Standard & Poors 500 Index and the peer group.
Figure 27. Common Share Price Performance (2009 2013) (a)
(a) | Share price performance is not necessarily indicative of future price performance. |
Figure 28 shows activities that caused the change in our outstanding common shares over the past two years.
Figure 28. Changes in Common Shares Outstanding
2013 Quarters | ||||||||||||||||||||||||
in thousands | 2013 | Fourth | Third | Second | First | 2012 | ||||||||||||||||||
Shares outstanding at beginning of period |
925,769 | 897,821 | 912,883 | 922,581 | 925,769 | 953,008 | ||||||||||||||||||
Common shares issued (repurchased) |
(41,599) | (7,659) | (16,364) | (10,786) | (6,790) | (30,637) | ||||||||||||||||||
Shares reissued (returned) under employee benefit plans |
6,554 | 562 | 1,302 | 1,088 | 3,602 | 3,398 | ||||||||||||||||||
Shares outstanding at end of period |
890,724 | 890,724 | 897,821 | 912,883 | 922,581 | 925,769 | ||||||||||||||||||
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At December 31, 2013, we had 126.2 million treasury shares, compared to 91.2 million treasury shares at December 31, 2012. During 2013, common shares outstanding decreased by 35 million shares from share repurchases under our 2012 and 2013 capital plans and the net activity in our employee benefit plans. Going forward, we expect to reissue treasury shares as needed in connection with stock-based compensation awards and for other corporate purposes.
As discussed in further detail in the Supervision and Regulation section in Item 1 of this report, we are required to annually submit a capital plan to the Federal Reserve setting forth planned capital actions, including any share repurchases our Board of Directors and management intend to make during the year (subject to the Federal Reserves notice of non-objection). Pursuant to that requirement, we have submitted to the Federal Reserve for review our 2014 capital plan.
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Capital adequacy is an important indicator of financial stability and performance. All of our capital ratios remain in excess of regulatory requirements at December 31, 2013. Our capital and liquidity levels are intended to position us to weather an adverse credit cycle while continuing to serve our clients needs, as well as to meet the Regulatory Capital Rules described under the heading Regulatory capital and liquidity in the Supervision and Regulation section of Item 1 of this report. Our shareholders equity to assets ratio was 11.09% at December 31, 2013, compared to 11.51% at December 31, 2012. Our tangible common equity to tangible assets ratio was 9.80% at December 31, 2013, compared to 10.15% at December 31, 2012.
Banking industry regulators prescribe minimum capital ratios for BHCs like KeyCorp and their banking subsidiaries. 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 and market risk items, subject to adjustment for predefined credit risk factors. Currently, banks and BHCs 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 December 31, 2013, our Tier 1 risk-based capital ratio and our total risk-based capital ratios were 11.96% and 14.33%, respectively, compared to 12.15% and 15.13%, respectively, at December 31, 2012.
Another indicator of capital adequacy, the leverage ratio, is defined as Tier 1 capital as a percentage of average quarterly tangible assets. BHCs that either have the highest supervisory rating or have implemented the Federal Reserves risk-adjusted measure for market risk as we have must maintain a minimum leverage ratio of 3.00%. All other BHCs must maintain a minimum ratio of 4.00%. As of December 31, 2013, our leverage ratio was 11.11%, compared to 11.41% at December 31, 2012.
The adoption of the Regulatory Capital Rules changes the regulatory capital standards that apply to BHCs by phasing out the treatment of capital securities and cumulative preferred securities as eligible Tier 1 capital. The phase-out period, beginning January 1, 2015, for standardized approaches banking organizations such as Key, will result in our trust preferred securities issued by the KeyCorp capital trusts being treated only as Tier 2 capital by 2016. These changes apply the same leverage and risk-based capital requirements that apply to depository institutions to BHCs, savings and loan holding companies, and nonbank financial companies identified as systemically important. Given our strong capital position, we expect to be able to satisfy the capital framework established under the Regulatory Capital Rules by our compliance date of January 1, 2015. The section titled Supervision and Regulation in Item 1 of this report contains more detailed information regarding the Regulatory Capital Rules.
As of December 31, 2013, our Tier 1 risk-based capital ratio, leverage ratio, and total risk-based capital ratio were 11.96%, 11.11%, and 14.33%, respectively. The trust preferred securities issued by the KeyCorp capital trusts contribute $339 million, or 41, 38, and 41 basis points, to our Tier 1 risk-based capital ratio, Tier 1 leverage ratio, and total risk-based capital ratio, respectively, as of December 31, 2013. The new minimum capital ratios under the Regulatory Capital Rules together with the estimated capital ratios of Key at December 31, 2013, calculated on a fully phased-in basis are set forth under the heading New minimum capital requirements in the Supervision and Regulation section in Item 1 of this report.
Federal banking regulations group FDIC-insured depository institutions into one of five prompt corrective action capital categories, ranging from well capitalized to critically undercapitalized. A well capitalized institution must meet or exceed the prescribed threshold ratios of 6.00% for Tier 1 risk-based capital, 5.00% for Tier 1 leverage capital, and 10.00% for total risk-based capital and must not be subject to any written agreement, order or directive to meet and maintain a specific capital level for any capital measure. If these provisions applied to BHCs, we believe we would qualify as well capitalized at December 31, 2013, and we believe there has not been any change in condition or event since that date that would cause a change in capital category. Analysis on an estimated basis, accounting for the phase-out of our trust preferred securities as Tier 1 eligible (and therefore as Tier 2 instead) as of December 31, 2013, also determines that we would qualify as well capitalized under
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current regulatory guidelines (Basel I), with the estimated Tier 1 risk-based capital ratio, estimated leverage ratio, and estimated total risk-based capital ratio being 11.56%, 10.73%, and 14.33%, respectively. The Revised prompt corrective action standards section in the Supervision and Regulation section of Item 1 of this report describes the new threshold capital ratios for a well capitalized and an adequately capitalized institution under the Regulatory Capital Rules. The regulatory defined capital categories serve a limited supervisory function. Investors should not use our estimated ratios as a representation of our overall financial condition or prospects of KeyCorp. A discussion of the regulatory capital standards and other related capital adequacy regulatory standards is included in the section Regulatory capital and liquidity in Supervision and Regulation under Item 1 of this report.
Traditionally, the banking regulators have assessed bank and BHC capital adequacy based on both the amount and composition of capital, the calculation of which is prescribed in federal banking regulations. As a result of the financial crisis, the Federal Reserve has intensified its assessment of capital adequacy on a component of Tier 1 risk-based capital, known as Tier 1 common equity, and its review of the consolidated capitalization of systemically important financial companies, including KeyCorp. The capital modifications mandated by the Regulatory Capital Rules are consistent with the renewed focus on Tier 1 common equity and the consolidated capitalization of banks, BHCs, and covered nonbank financial companies, which resulted from the financial crisis. Tier 1 common equity is neither formally defined by GAAP nor prescribed in amount by federal banking regulations; this measure is considered to be a non-GAAP financial measure. Figure 4 in the Highlights of Our 2013Performance section reconciles Key shareholders equity, the GAAP performance measure, to Tier 1 common equity, the corresponding non-GAAP measure. Our Tier 1 common equity ratio was 11.22% at December 31, 2013, compared to 11.36% at December 31, 2012.
Generally, for risk-based capital purposes, deferred tax assets that are dependent upon future taxable income are limited to the lesser of: (i) the amount of deferred tax assets that a financial institution expects to realize within one year of the calendar quarter-end date, based on its projected future taxable income for the year, or (ii) 10% of the amount of an institutions Tier 1 capital. At December 31, 2013, and December 31, 2012, we had no net deferred tax assets deducted from Tier 1 capital and risk-weighted assets. At December 31, 2013, for Keys consolidated operations, we had a federal net deferred tax asset of $184 million and a state deferred tax asset of $7 million, compared to a federal deferred tax asset of $83 million and a state deferred tax liability of $13 million at December 31, 2012. We have recorded a valuation allowance of $1 million against the gross deferred tax assets associated with certain state net operating loss carryforwards and state credit carryforwards.
Figure 29 represents the details of our regulatory capital position at December 31, 2013, and December 31, 2012, under the existing regulatory capital standards.
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Figure 29. Capital Components and Risk-Weighted Assets
December 31, dollars in millions |
2013 | 2012 | ||||||||
TIER 1 CAPITAL |
||||||||||
Key shareholders equity |
$ | 10,303 | $ | 10,271 | ||||||
Qualifying capital securities |
339 | 339 | ||||||||
Less: |
Goodwill | 979 | 979 | |||||||
Accumulated other comprehensive income (a) | (394) | (172) | ||||||||
Other assets (b) | 89 | 114 | ||||||||
Total Tier 1 capital | 9,968 | 9,689 | ||||||||
TIER 2 CAPITAL |
||||||||||
Allowance for losses on loans and liability for losses on
|
924 | 972 | ||||||||
Net unrealized gains on equity securities available for sale |
1 | | ||||||||
Qualifying long-term debt |
1,048 | 1,405 | ||||||||
Total Tier 2 capital | 1,973 | 2,377 | ||||||||
Total risk-based capital | $ | 11,941 | $ | 12,066 | ||||||
|
|
|
|
|||||||
TIER 1 COMMON EQUITY |
||||||||||
Tier 1 capital |
$ | 9,968 | $ | 9,689 | ||||||
Less: |
Qualifying capital securities | 339 | 339 | |||||||
Series A Preferred Stock (d) | 282 | 291 | ||||||||
Total Tier 1 common equity | $ | 9,347 | $ | 9,059 | ||||||
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|
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RISK-WEIGHTED ASSETS |
||||||||||
Risk-weighted assets on balance sheet |
$ | 65,505 | $ | 63,995 | ||||||
Risk-weighted off-balance sheet exposure |
17,778 | 16,575 | ||||||||
Less: |
Goodwill | 979 | 979 | |||||||
Other assets (b) | 458 | 368 | ||||||||
Plus: |
Market risk-equivalent assets | 1,482 | 511 | |||||||
Gross risk-weighted assets | 83,328 | 79,734 | ||||||||
Less: |
Excess allowance for loan and lease losses | | | |||||||
Net risk-weighted assets | $ | 83,328 | $ | 79,734 | ||||||
|
|
|
|
|||||||
AVERAGE QUARTERLY TOTAL ASSETS |
$ | 91,141 | $ | 86,239 | ||||||
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|
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CAPITAL RATIOS |
||||||||||
Tier 1 risk-based capital |
11.96 | % | 12.15 | % | ||||||
Total risk-based capital |
14.33 | 15.13 | ||||||||
Leverage (e) |
11.11 | 11.41 | ||||||||
Tier 1 common equity |
11.22 | 11.36 | ||||||||
(a) | Includes net unrealized gains or losses on securities available for sale (except for net unrealized losses on marketable equity securities), net gains or losses on cash flow hedges, and amounts resulting from the application of the applicable accounting guidance for defined benefit and other postretirement plans. |
(b) | Other assets deducted from Tier 1 capital and risk-weighted assets consist of disallowed intangible assets (excluding goodwill) and deductible portions of nonfinancial equity investments. There were no disallowed deferred tax assets at December 31, 2013, and December 31, 2012. |
(c) | The ALLL included in Tier 2 capital is limited by regulation to 1.25% of the sum of gross risk-weighted assets plus low level exposures and residual interests calculated under the direct reduction method, as defined by the Federal Reserve. The ALLL includes $39 million and $55 million at December 31, 2013, and December 31, 2012, respectively, of allowance classified as discontinued assets on the balance sheet. |
(d) | Net of capital surplus for the year ended December 31, 2013. |
(e) | This ratio is Tier 1 capital divided by average quarterly total assets as defined by the Federal Reserve less: (i) goodwill, (ii) the disallowed intangible assets described in footnote (b), and (iii) deductible portions of nonfinancial equity investments; plus assets derecognized as an offset to AOCI resulting from the adoption and subsequent application of the applicable accounting guidance for defined benefit and other postretirement plans. |
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Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Off-balance sheet arrangements
We are party to various types of off-balance sheet arrangements, which could lead to contingent liabilities or risks of loss that are not reflected on the balance sheet.
A VIE is a partnership, limited liability company, trust or other legal entity that meets any one of the following criteria:
¿ | The entity does not have sufficient equity to conduct its activities without additional subordinated financial support from another party. |
¿ | The entitys investors lack the power to direct the activities that most significantly impact the entitys economic performance. |
¿ | The entitys equity at risk holders do not have the obligation to absorb losses or the right to receive residual returns. |
¿ | The voting rights of some investors are not proportional to their economic interests in the entity, and substantially all of the entitys activities involve, or are conducted on behalf of, investors with disproportionately few voting rights. |
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 entitys 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). Additional information regarding the nature of VIEs and our involvement with them is included in Note 1 (Summary of Significant Accounting Policies) under the heading Basis of Presentation, and in Note 11 (Variable Interest Entities).
We use the equity method to account for unconsolidated investments in voting rights entities or VIEs if we have significant influence over the entitys 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.
Commitments to extend credit or funding
Loan commitments provide for financing on predetermined terms as long as the client continues to meet specified criteria. These commitments generally carry variable rates of interest and have fixed expiration dates or other termination clauses. We typically charge a fee for our loan commitments. Since a commitment may expire without resulting in a loan or being fully utilized, the total amount of an outstanding commitment may significantly exceed any related cash outlay. Further information about our loan commitments at December 31, 2013, is presented in Note 20 (Commitments, Contingent Liabilities and Guarantees) under the heading Commitments to Extend Credit or Funding. Figure 30 shows the remaining contractual amount of each class of commitment to extend credit or funding. For loan commitments and commercial letters of credit, this amount represents our maximum possible accounting loss if the borrower were to draw upon the full amount of the commitment and then default on payment for the total amount of the then outstanding loan.
Other off-balance sheet arrangements
Other off-balance sheet arrangements include financial instruments that do not meet the definition of a guarantee in accordance with the applicable accounting guidance, and other relationships, such as liquidity support
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provided to asset-backed commercial paper conduits, indemnification agreements and intercompany guarantees. Information about such arrangements is provided in Note 20 under the heading Other Off-Balance Sheet Risk.
Figure 30 summarizes our significant contractual obligations, and lending-related and other off-balance sheet commitments at December 31, 2013, by the specific time periods in which related payments are due or commitments expire.
Figure 30. Contractual Obligations and Other Off-Balance Sheet Commitments
December 31, 2013 in millions |
Within 1
year |
After 1
through 3 years |
After 3
through 5 years |
After 5
years |
Total | |||||||||||||||||
Contractual obligations: (a) |
||||||||||||||||||||||
Deposits with no stated maturity |
$ | 62,425 | | | | $ | 62,425 | |||||||||||||||
Time deposits of $100,000 or more |
2,348 | $ | 615 | $ | 165 | $ | 61 | 3,189 | ||||||||||||||
Other time deposits |
2,619 | 745 | 183 | 101 | 3,648 | |||||||||||||||||
Federal funds purchased and securities sold under repurchase agreements |
1,534 | | | | 1,534 | |||||||||||||||||
Bank notes and other short-term borrowings |
343 | | | | 343 | |||||||||||||||||
Long-term debt |
816 | 2,513 | 2,095 | 2,226 | 7,650 | |||||||||||||||||
Noncancelable operating leases |
120 | 209 | 158 | 411 | 898 | |||||||||||||||||
Liability for unrecognized tax benefits |
6 | | | | 6 | |||||||||||||||||
Purchase obligations: |
||||||||||||||||||||||
Banking and financial data services |
58 | 107 | 57 | 5 | 227 | |||||||||||||||||
Telecommunications |
22 | 22 | 3 | | 47 | |||||||||||||||||
Professional services |
22 | 24 | 10 | | 56 | |||||||||||||||||
Technology equipment and software |
68 | 57 | 49 | 2 | 176 | |||||||||||||||||
Other |
7 | 3 | | | 10 | |||||||||||||||||
Total purchase obligations |
177 | 213 | 119 | 7 | 516 | |||||||||||||||||
Total |
$ | 70,388 | $ | 4,295 | $ | 2,720 | $ | 2,806 | $ | 80,209 | ||||||||||||
|
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|
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|
|
|
|
|
|
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Lending-related and other off-balance sheet commitments: |
||||||||||||||||||||||
Commercial, including real estate |
$ | 8,259 | $ | 7,840 | $ | 8,980 | $ | 636 | $ | 25,715 | ||||||||||||
Home equity |
248 | 653 | 1,283 | 5,009 | 7,193 | |||||||||||||||||
Credit cards |
3,457 | | | | 3,457 | |||||||||||||||||
When-issued and to-be-announced securities commitments |
140 | | | | 140 | |||||||||||||||||
Commercial letters of credit |
106 | 9 | 4 | | 119 | |||||||||||||||||
Principal investing commitments |
26 | 13 | 25 | 11 | 75 | |||||||||||||||||
Liabilities of certain limited partnerships and other commitments |
2 | | | | 2 | |||||||||||||||||
Total |
$ | 12,238 | $ | 8,515 | $ | 10,292 | $ | 5,656 | $ | 36,701 | ||||||||||||
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(a) | Deposits and borrowings exclude interest. |
We are a guarantor in various agreements with third parties. As guarantor, we may be contingently liable to make payments to the guaranteed party based on changes in a specified interest rate, foreign exchange rate or other variable (including the occurrence or nonoccurrence of a specified event). These variables, known as underlyings, may be related to an asset or liability, or another entitys failure to perform under a contract. Additional information regarding these types of arrangements is presented in Note 20 under the heading Guarantees.
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Like all financial services companies, we engage in business activities and assume the related risks. The most significant risks we face are credit, liquidity, market, compliance, operational, strategic, and reputation risks. Our risk management activities are focused on ensuring we properly identify, measure and manage such risks across the entire enterprise to maintain safety and soundness and maximize profitability. Certain of these risks are defined and discussed in greater detail in the remainder of this section.
The KeyCorp Board of Directors (the Board) serves in an oversight capacity ensuring that Keys risks are managed in a manner that is effective and balanced and adds value for the shareholders. The Board understands Keys risk philosophy, approves the risk appetite, inquires about risk practices, reviews the portfolio of risks, compares the actual risks to the risk appetite and is apprised of significant risks, both actual and emerging, and determines whether management is responding appropriately. The Board challenges management and ensures accountability.
The Boards Audit Committee assists the Board in oversight of financial statement integrity, regulatory and legal compliance, independent auditors qualifications and independence and all risk review functions, including internal audit. The Audit Committee discusses policies related to risk assessment and risk management and the processes related to risk review and compliance. The Audit Committee has responsibility over financial reporting, compliance risk and legal matters, the implementation, management and evaluation of operational risk controls and information, security and fraud risk, and associated reputation and strategic risks.
The Boards Risk Committee assists the Board in oversight of strategies, policies, procedures and practices relating to the management of credit risk, market risk, interest rate risk, and liquidity risk, including the actions taken to mitigate these risks, as well as reputational and strategic risks. The Risk Committee also oversees the maintenance of appropriate regulatory and economic capital, reviews the Enterprise Risk Management (ERM) reports, and approves any material changes to the charter of the ERM Committee.
The Audit and Risk Committees meet jointly, as appropriate, to discuss matters that relate to each committees responsibilities. In addition to regularly scheduled bi-monthly meetings, the Audit Committee convenes to discuss the content of our financial disclosures and quarterly earnings releases. Committee chairpersons routinely meet with management during interim months to plan agendas for upcoming meetings and to discuss emerging trends and events that have transpired since the preceding meeting. All members of the Board receive formal reports designed to keep them abreast of significant developments during the interim months.
Our ERM Committee, chaired by the Chief Executive Officer and comprised of other senior level executives, is responsible for managing risk and ensuring that the corporate risk profile is managed in a manner consistent with our risk appetite. The ERM Program encompasses our risk philosophy, policy, framework and governance structure for the management of risks across the entire company. The ERM Committee reports to the Boards Risk Committee. Annually, the Board reviews and approves the ERM Program, as well as the risk appetite and corporate risk tolerances for major risk categories. We use a risk-adjusted capital framework to manage risks. This framework is approved and managed by the ERM Committee.
Tier 2 Risk Governance Committees support the ERM Committee by identifying early warning events and trends, escalating emerging risks and discussing forward-looking assessments. Membership of the Risk Governance Committees includes representatives from each of the Three Lines of Defense. The First Line of Defense is the Line of Business primarily responsible to accept, own, proactively identify, monitor and manage risk. The Second Line of Defense comprises Risk Management representatives who provide independent, centralized oversight over all risk categories by aggregating, analyzing and reporting risk information. Risk Review provides the Third Line of Defense in their role to provide independent assessment and testing of the effectiveness, appropriateness and adherence to KeyCorps risk management policies, practices and controls.
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The Chief Risk Officer ensures that relevant risk information is properly integrated into strategic and business decisions, ensures appropriate ownership of risks, provides input into performance and compensation decisions, assesses aggregate enterprise risk, monitors capabilities to manage critical risks, and executes appropriate Board and stakeholder reporting.
Federal banking regulators continue to emphasize with financial institutions the importance of relating capital management strategy to the level of risk at each institution. We believe our internal risk management processes help us achieve and maintain capital levels that are commensurate with our business activities and risks, and conform to regulatory expectations.
Market risk is the risk that movements in market risk factors, including interest rates, foreign exchange rates, equity prices, commodity prices, credit spreads and volatilities will reduce Keys income and the value of its portfolios. These factors influence prospective yields, values, or prices associated with the instrument. For example, the value of a fixed-rate bond will decline when market interest rates increase, while the cash flows associated with a variable rate loan will increase when interest rates increase. The holder of a financial instrument is exposed to market risk when either the cash flows or the value of the instrument is tied to such external factors.
We are exposed to market risk both in our trading and nontrading activities, which includes asset and liability management activities. Our trading positions are carried at fair value with changes recorded in the income statement. These positions are subject to various market-based risk factors that impact the fair value of the financial instruments in the trading category. Our traditional banking loan and deposit products as well as long-term debt and certain short-term borrowings are nontrading positions. These positions are generally carried at the principal amount outstanding for assets and the amount owed for liabilities. The nontrading positions are subject to changes in economic value due to varying market conditions, primarily changes in interest rates.
Key incurs market risk as a result of trading, investing, and client facilitation activities, principally within our investment banking and capital markets business. Key has exposures to a wide range of interest rates, equity prices, foreign exchange rates, credit spreads, and commodity prices, as well as the associated implied volatilities and spreads. Our primary market risk exposures are a result of trading activities in the derivative and fixed income markets and maintaining positions in these instruments. We maintain modest trading inventories to facilitate customer flow, make markets in securities, and hedge certain risks. The majority of our positions are traded in active markets.
Management of trading market risks . Market risk management is an integral part of Keys risk culture. Oversight of trading market risks is governed by the Risk Committee of our Board, the ERM Committee, and the Market Risk Committee (collectively, the Committees). Market risk policies and procedures have been defined and approved by the Market Risk Committee, a Tier 2 Risk Governance Committee, and take into account our tolerance for risk and consideration for the business environment. The Committees regularly review and discuss market risk reports prepared by our Market Risk Management group (MRM) that contain our market risk exposures and results of monitoring activities.
MRM is an independent risk management function that partners with the lines of business to identify, measure, and monitor market risks throughout our company. MRM is responsible for ensuring transparency of significant market risks, monitoring compliance with established limits, and escalating limit exceptions to appropriate senior management. The various business units and trading desks are responsible for ensuring that market risk exposures are well-managed and prudent. Market risk is monitored through various measures, such as VaR, and through routine stress testing, sensitivity, and scenario analyses. MRM conducts stress tests for each covered position using historical worst case and standard shock scenarios. VaR, stressed VaR, and other analyses are prepared daily and distributed to appropriate management.
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Covered positions. We monitor the market risk of our covered positions, which includes all of our trading positions as well as all foreign exchange and commodity positions, regardless of whether the position is in a trading account. The trading account includes on- and off-balance sheet positions in financial instruments acquired with the intent to profit from price variations. All positions in the trading account are recorded at fair value, and changes in fair value are reflected in our consolidated statements of income. Information regarding our fair value policies, procedures and methodologies is provided in Note 1 (Summary of Significant Accounting Policies) under the heading Fair Value Measurements and Note 6 (Fair Value Measurements) in this report. Instruments that are used to hedge nontrading activities, such as bank-issued debt and loan portfolios, equity positions that are not actively traded, and securities financing activities, do not meet the definition of a covered position. MRM is responsible for identifying our portfolios as either covered or non-covered. The Covered Position Working Group develops the final list of covered positions, and a summary is provided to the Market Risk Committee.
Our significant portfolios of covered positions are detailed below. We analyze market risk by portfolios of covered positions, and do not separately measure and monitor our portfolios by risk type. The descriptions below incorporate the respective risk types associated with each of these portfolios.
¿ |
Fixed income includes those instruments associated with our capital markets business and the trading of securities as a dealer. These instruments include positions in municipal bonds, bonds backed by the U.S. government, agency and corporate bonds, certain mortgage-backed securities, securities issued by the U.S. Treasury, money markets, and certain CMOs. The activities and instruments within the fixed income portfolio create exposures to interest rate and credit spread risks. |
¿ |
Foreign exchange includes foreign currency spots, forwards and options. We enter into contracts for these types of instruments primarily to accommodate the needs of clients. These activities result in exposures to foreign currency risk. |
¿ |
Interest rate derivatives include interest rate swaps, caps and floors, which are transacted primarily to accommodate the needs of commercial loan clients. In addition, we enter into interest rate derivatives to offset or mitigate the interest rate risk related to the client positions. The activities within this portfolio create exposures to interest rate risk. |
¿ |
Credit derivatives include credit default swaps, which are used to mitigate loan portfolio credit risk, and credit default swap indexes, which are used to manage the credit risk exposure associated with anticipated sales of certain commercial real estate loans. The transactions within the credit derivatives portfolio result in exposure to credit risk. |
VaR and stressed VaR. VaR is the estimate of the maximum amount of loss on an instrument or portfolio due to adverse market conditions during a given time interval within a stated confidence level. Stressed VaR is used to assess the extreme conditions on market risk within our trading portfolios. MRM calculates VaR and stressed VaR on a daily basis, and the results are distributed to appropriate management. VaR and stressed VaR results are also provided to our regulators and utilized in regulatory capital calculations.
We use a historical 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 our covered positions. Historical scenarios are customized for specific covered positions, and numerous risk factors are incorporated in the calculation. VaR is calculated using daily observations over a one-year time horizon, and approximates a 95% confidence level. Statistically, this means that we would expect to incur losses greater than VaR, on average, five out of 100 trading days, or three to four times each quarter. We also calculate VaR and stressed VaR at a 99% confidence level. Two years of historical data were used in the simulation during 2012. Beginning in February 2013, the simulation uses historical data from the previous year, as we believe it more appropriately reflects the current market conditions and the risks associated with our portfolios. This change resulted in a decrease in VaR exposure of approximately 2% at the 95% confidence level and 15% at the 99% confidence level. We also utilize factors to estimate the exposures that contain optionality features, such as options and cancellable provisions.
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The VaR model is an effective tool in estimating ranges of possible gains and losses on our covered positions. However, there are limitations inherent in the VaR model since it uses historical results over a given time interval to estimate future performance. Historical results may not be indicative of future results, and changes in the market or composition of our portfolios could have a significant impact on the accuracy of the VaR model. We regularly review and enhance the modeling techniques, inputs and assumptions used. Our market risk policy includes the independent validation of our VaR model by Keys Risk Management Group on an annual basis. The Model Risk Management Committee oversees the Model Validation Program, and results of validations are discussed with the ERM Committee.
MRM backtests our VaR model on a daily basis to evaluate its predictive power. The test compares VaR model results at the 99% confidence level to observed daily profit and loss. Results of backtesting are provided to the Market Risk Committee. Backtesting exceptions occur when trading losses exceed VaR. Actual losses did not exceed daily trading VaR on any day during the quarters ended December 31, 2013, and December 31, 2012.
We do not engage in correlation trading, or utilize the internal model approach for measuring default and credit migration risk. Our net VaR approach incorporates diversification, but our VaR calculation does not include the impact of counterparty risk and our own credit spreads on derivatives.
The aggregate VaR at the 99% confidence level for all covered positions was $1.0 million at December 31, 2013, and $1.2 million at December 31, 2012. The decrease in aggregate VaR was primarily due to reduced exposures in credit derivatives as well as the change from using two years of historical data to one year for the VaR simulation, which was partially offset by an increase in fixed income VaR. Figure 31 summarizes our VaR at the 99% confidence level for significant portfolios of covered positions for the three months ended December 31, 2013, and 2012.
Figure 31. VaR for Significant Portfolios of Covered Positions
2013 | 2012 | |||||||||||||||||||||||||||||||
Three months ended December 31, | Three months ended December 31, | |||||||||||||||||||||||||||||||
in millions | High | Low | Mean | December 31, | High | Low | Mean | December 31, | ||||||||||||||||||||||||
Trading account assets: |
||||||||||||||||||||||||||||||||
Fixed income |
$ | 1.2 | $ | .5 | $ | .8 | $ | .6 | $ | 1.0 | $ | .1 | $ | .6 | $ | .5 | ||||||||||||||||
Derivatives: |
||||||||||||||||||||||||||||||||
Interest rate |
$ | .5 | $ | .2 | $ | .3 | $ | .2 | $ | .3 | $ | .1 | $ | .1 | $ | .2 | ||||||||||||||||
Foreign exchange |
.1 | | | | .1 | | | | ||||||||||||||||||||||||
Credit |
.4 | .1 | .3 | .1 | 1.6 | .2 | .9 | .3 |
Stressed VaR is calculated using our general VaR results at the 99% confidence level and applying certain assumptions. The aggregate stressed VaR for all covered positions was $2.9 million at December 31, 2013. Figure 32 summarizes our stressed VaR for significant portfolios of covered positions for the three months ended December 31, 2013, as used for market risk capital charge calculation purposes. Stressed VaR was not calculated for market risk regulatory capital purposes during 2012.
Figure 32. Stressed VaR for Significant Portfolios of Covered Positions
2013 | ||||||||||||||||
Three months ended December 31, | ||||||||||||||||
in millions | High | Low | Mean | December 31, | ||||||||||||
Trading account assets: |
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Fixed income |
$ | 3.7 | $ | 1.4 | $ | 2.4 | $ | 1.7 | ||||||||
Derivatives: |
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Interest rate |
$ | 1.5 | $ | .5 | $ | 1.0 | $ | .5 | ||||||||
Foreign exchange |
.2 | | .1 | | ||||||||||||
Credit |
1.2 | .4 | .8 | .4 |
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Internal capital adequacy assessment. Market risk is a component of our internal capital adequacy assessment. Our risk-weighted assets include a market risk-equivalent asset position, which consists of a VaR component, stressed VaR component, a de minimis exposure amount, and a specific risk add-on, which are added together to arrive at total market risk equivalent assets. Specific risk is the price risk of individual financial instruments, which is not accounted for by changes in broad market risk factors. Specific risk is measured through a standardized approach for positions where the VaR model does not capture specific risk. Specific risk calculations are run quarterly by MRM, and approved by the Chief Market Risk Officer.
Most of our nontrading market risk is derived from interest rate fluctuations and its impacts on our traditional loan and deposit products, as well as investments, hedging relationships, long-term debt, and certain short-term borrowings. Interest rate risk, which is inherent in the banking industry, is measured by the potential for fluctuations in net interest income and the EVE. 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. We manage the exposure to changes in net interest income and the EVE in accordance with our risk appetite, and within Board approved policy limits.
Interest rate risk positions are influenced by a number of factors including the balance sheet positioning that arises out of consumer preferences for loan and deposit products, economic conditions, the competitive environment within our markets, and changes in market interest rates that affect client activity and our hedging, investing, funding and capital positions. The primary components of interest rate risk exposure consist of gap risk, basis risk, yield curve risk and option risk.
The management of nontrading market risk is centralized within Corporate Treasury. Oversight and governance is provided by the Risk Committee of our Board, the ERM Committee and the ALCO. These committees review reports on the components of interest rate risk described above as well as sensitivity analyses of these exposures. These committees have various responsibilities related to managing nontrading market risk, including recommending, approving and monitoring strategies that maintain risk positions within approved tolerance ranges. The Asset Liability Management policy provides the framework for the oversight and management of interest rate risk and is administered by the ALCO. Internal and external emerging issues are monitored on a daily basis. The Market Risk Management Group, as the second line of defense, provides additional oversight.
¿ |
Gap risk is the exposure to changes in interest rates and occurs when the volume of interest-bearing liabilities and the volume of interest-earning assets they fund (for example, deposits used to fund loans) do not mature or reprice at the same time. |
¿ |
Basis risk is the exposure to asymmetrical changes in interest rate indexes and occurs when floating-rate assets and floating-rate liabilities reprice at the same time, but in response to different market factors or indexes. |
¿ |
Yield curve risk is the exposure to non-parallel changes in the slope of the yield curve (where the yield curve depicts the relationship between the yield on a particular type of security and its term to maturity) and occurs when interest-bearing liabilities and the interest-earning assets they fund do not price or reprice to the same term point on the yield curve. |
¿ |
Option risk is the exposure to a customer or counterpartys ability to take advantage of the interest rate environment and terminate or reprice one of our assets, liabilities or off-balance sheet instruments prior to contractual maturity without a penalty. Option risk occurs when exposures to customer and counterparty early withdrawals or early prepayments are not mitigated with an offsetting position or appropriate compensation. |
Net interest income simulation analysis. The primary tool we use to measure our interest rate risk is simulation analysis. For purposes of this analysis, we estimate our net interest income based on the current and projected
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composition of our on- and off-balance sheet positions, accounting for recent and anticipated trends in customer activity. The analysis also incorporates assumptions for the current and projected interest rate environments, including a most likely macro-economic scenario. Simulation modeling assumes that residual risk exposures will be managed to within the risk appetite.
We measure the amount of net interest income at risk by simulating the change in net interest income that would occur if the federal funds target rate were to gradually increase or decrease over the next twelve months, and term rates were to move in a similar fashion. Our standard rate scenarios encompass a gradual increase or decrease of 200 basis points, but due to the low interest rate environment, we have modified the standard to a gradual decrease of 25 basis points over two months with no change over the following ten months. After calculating the amount of net interest income at risk to interest rate changes, we compare that amount with the base case of an unchanged interest rate environment. We also perform regular stress tests and sensitivities on the model inputs that could materially change the resulting risk assessments. One set of stress tests and sensitivities assesses the effect of interest rate inputs on simulated exposures. Assessments are performed using different shapes of the yield curve, including a sustained flat yield curve, an inverted slope yield curve, changes in credit spreads, an immediate parallel change in market interest rates, and changes in the relationship of money market interest rates. Another set of stress tests and sensitivities assesses the effect of loan and deposit assumptions and assumed discretionary strategies on simulated exposures. Assessments are performed on changes to the following assumptions: the pricing of deposits without contractual maturities; changes in lending spreads; prepayments on loans and securities; other loan and deposit balance shifts; investment, funding and hedging activities; and liquidity and capital management strategies.
Simulation analysis produces only a sophisticated estimate of interest rate exposure based on judgments related to assumption inputs into the simulation model. We tailor assumptions to the specific interest rate environment and yield curve shape being modeled, and validate those assumptions on a regular basis. Our 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 residual risk profile. However, actual results may differ from those derived in simulation analysis due to unanticipated changes to the balance sheet composition, customer behavior, product pricing, market interest rates, investment, funding and hedging activities, and repercussions from unanticipated or unknown events.
Figure 33 presents the results of the simulation analysis at December 31, 2013, and 2012. At December 31, 2013, our simulated exposure to changes in interest rates was moderately asset sensitive, and net interest income would benefit over time from either an increase in short-term or intermediate-term interest rates. Tolerance levels for risk management require the development of remediation plans to maintain residual risk within tolerance if simulation modeling demonstrates that a gradual increase or decrease in short-term interest rates over the next twelve months would adversely affect net interest income over the same period by more than 4%. As shown in Figure 33, we are operating within these levels.
Figure 33. Simulated Change in Net Interest Income
December 31, 2013 |
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Basis point change assumption (short-term rates) |
-25 | +200 | ||||||||
Tolerance level |
-4.00 | % | -4.00 | % | ||||||
Interest rate risk assessment |
-1.33 | % | 3.00 | % | ||||||
December 31, 2012 |
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Basis point change assumption (short-term rates) |
-25 | +200 | ||||||||
Tolerance level |
-4.00 | % | -4.00 | % | ||||||
Interest rate risk assessment |
-.76 | % | 1.25 | % |
The results of additional sensitivity analysis of alternate interest rate paths and loan and deposit behavior assumptions indicates that net interest income could increase or decrease from the base simulation results
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presented in Figure 33. Net interest income is highly dependent on the timing, magnitude, frequency, and path of interest rate increases and the associated assumptions for deposit repricing relationships, lending spreads, and the balance behavior of transaction accounts. The unprecedented low level of interest rates increases the uncertainty of assumptions for deposit balance behavior and deposit repricing relationships to market interest rates. The sensitivity testing of these assumptions supports our confidence that actual results are likely to be within a 75 basis point range of modeled results.
To support continued progress toward maximum employment and price stability, the FOMC expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens, and in particular expects to keep the federal funds rate at exceptionally low levels. Key will continue to monitor balance sheet flows and expects the benefit from rising rates to increase prior to any increase in the federal funds rate. Our current interest rate risk position could fluctuate to higher or lower levels of risk depending on the competitive environment and client behavior that may affect the actual volume, mix, maturity, and repricing characteristics of loan and deposit flows. As changes occur to both the configuration of the balance sheet and the outlook for the economy, management proactively evaluates hedging opportunities that may change our interest rate risk profile.
We also conduct simulations that measure the effect of changes in market interest rates in the second and third years of a three-year horizon. These simulations are conducted in a manner similar to those based on a twelve-month horizon. To capture longer-term exposures, we calculate exposures to changes to the EVE as discussed in the following section.
Economic value of equity modeling. EVE complements net interest income simulation analysis as it estimates risk exposure beyond twelve-, twenty-four and thirty-six month horizons. EVE modeling measures the extent to which the economic values of assets, liabilities and off-balance sheet instruments may change in response to fluctuations in interest rates. EVE is calculated by subjecting the balance sheet to an immediate 200 basis point increase or decrease in interest rates, measuring the resulting change in the values of assets, liabilities and off-balance sheet instruments, and comparing those amounts with the base case of an unchanged interest rate environment. Because the calculation of EVE under an immediate 200 basis point decrease in interest rates in the current low rate environment results in certain interest rates declining to zero and a less than 200 basis point decrease in certain yield curve term points, we have modified the standard declining rate scenario to an immediate 100 basis point decrease. This analysis is highly dependent upon assumptions applied to assets and liabilities with non-contractual maturities. Those assumptions are based on historical behaviors, as well as our expectations. We develop remediation plans that would maintain residual risk within tolerance if this analysis indicates that our EVE will decrease by more than 15% in response to an immediate increase or decrease in interest rates. We are operating within these guidelines.
Management of interest rate exposure. We use the results of our various interest rate risk analyses to formulate A/LM strategies to achieve the desired risk profile while managing to our objectives for capital adequacy and liquidity risk exposures. Specifically, we manage 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 34 shows all swap positions that we hold for A/LM purposes. These positions are used to convert the contractual interest rate index of agreed-upon amounts of assets and liabilities (i.e., notional amounts) to another interest rate index. For example, fixed-rate debt is converted to a floating rate through a receive fixed/pay variable interest rate swap. The volume, maturity and mix of portfolio swaps change frequently as we adjust our broader A/LM objectives and the balance sheet positions to be hedged. For more information about how we use interest rate swaps to manage our risk profile, see Note 8 (Derivatives and Hedging Activities).
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Figure 34. Portfolio Swaps by Interest Rate Risk Management Strategy
December 31, 2013 | ||||||||||||||||||||||||||||
Weighted-Average |
December 31, 2012 | |||||||||||||||||||||||||||
dollars in millions |
Notional Amount |
Fair Value |
Maturity (Years) |
Receive Rate |
Pay Rate |
Notional Amount |
Fair Value |
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Receive fixed/pay variable conventional A/LM (a) |
$ | 9,300 | $ | 6 | 2.2 | .7 | % | .2 | % | $ | 15,290 | $ | 83 | |||||||||||||||
Receive fixed/pay variable conventional debt |
5,074 | 201 | 4.1 | 2.8 | .2 | 3,519 | 426 | |||||||||||||||||||||
Pay fixed/receive variable conventional debt |
105 | | 7.3 | .3 | 2.4 | 259 | (26) | |||||||||||||||||||||
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Total portfolio swaps |
$ | 14,479 | $ | 207 | (b) | 2.9 | 1.4 | % | .2 | % | $ | 19,068 | $ | 483 | (b) | |||||||||||||
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(a) | Portfolio swaps designated as A/LM are used to manage interest rate risk tied to both assets and liabilities. |
(b) | Excludes accrued interest of $61 million and $66 million for December 31, 2013, and 2012, respectively. |
We define 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.
We manage liquidity for all of our 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. The approach 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 sufficient wholesale funding.
The management of consolidated liquidity risk is centralized within Corporate Treasury. Oversight and governance is provided by the Risk Committee of our Board, the ERM Committee, and the ALCO (collectively, the Committees). The Asset Liability Management Policy provides the framework for the oversight and management of liquidity risk and is administered by the ALCO. The Market Risk Management group, as the second line of defense, provides additional oversight.
These Committees regularly review liquidity and funding summaries, liquidity trends, peer comparisons, variance analyses, liquidity projections, hypothetical funding erosion stress tests and goal tracking reports. The reviews generate a discussion of positions, trends and directives on liquidity risk and shape a number of our decisions. When liquidity pressure is elevated, positions are monitored more closely and reporting is more intensive. To ensure that emerging issues are identified, we also communicate with individuals inside and outside of the company on a daily basis.
Our liquidity could be adversely affected by both direct and indirect events. An example of a direct event would be a downgrade in our public credit ratings by a rating agency. Examples of indirect events (events unrelated to us) that could impair our access to liquidity would be an act of 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 us or the banking industry in general may adversely affect the cost and availability of normal funding sources.
Our credit ratings at December 31, 2013, are shown in Figure 35. We believe these credit ratings, under normal conditions in the capital markets, will enable the parent company or KeyBank to issue fixed income securities to investors.
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Figure 35. Credit Ratings
December 31, 2013 |
Short-Term
Borrowings |
Senior
Long-Term Debt |
Subordinated
Long-Term Debt |
Capital
Securities |
Series A
Preferred Stock |
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KEYCORP (THE PARENT COMPANY) |
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Standard & Poors |
A-2 | BBB+ | BBB | BBB- | BBB- | |||||||||||||||
Moodys |
P-2 | Baa1 | Baa2 | Baa3 | Ba1 | |||||||||||||||
Fitch |
F1 | A- | BBB+ | BB+ | BB | |||||||||||||||
DBRS |
R-2(high) | BBB(high) | BBB | BBB | N/A | |||||||||||||||
KEYBANK |
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|
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Standard & Poors |
A-2 | A- | BBB+ | N/A | N/A | |||||||||||||||
Moodys |
P-2 | A3 | Baa1 | N/A | N/A | |||||||||||||||
Fitch |
F1 | A- | BBB+ | N/A | N/A | |||||||||||||||
DBRS |
R-1(low) | A(low) | BBB(high) | N/A | N/A | |||||||||||||||
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Most of our liquidity risk is derived from our lending activities, which inherently places funds into illiquid assets. Liquidity risk is also derived from our deposit gathering activities and the ability of our customers to withdraw funds that do not have a stated maturity or to withdraw funds before their contractual maturity. Liquidity risk, which is inherent in the banking industry, is measured by our ability to accommodate liability maturities, deposit withdrawals, meet contractual obligations, and fund new business opportunities at a reasonable cost, in a timely manner, and without adverse consequences. These assessments are measured under the assumption of normal operating conditions as well as under a stressed environment. We manage these exposures in accordance with our risk appetite, and within Board approved policy limits.
We regularly monitor our liquidity position and funding sources and measure our capacity to obtain funds in a variety of hypothetical scenarios in an effort to maintain an appropriate mix of available and affordable funding. In the normal course of business, we perform a monthly hypothetical funding erosion stress test for both KeyCorp and KeyBank. In a heightened monitoring mode, we may conduct the hypothetical funding erosion stress tests more frequently, and use assumptions to reflect the changed market environment. Our testing incorporates estimates for loan and deposit lives based on our historical studies. Erosion stress tests analyze potential liquidity scenarios under various funding constraints and time periods. Ultimately, they determine the periodic effects that major direct and indirect events would have on our access to funding markets and our ability to fund our normal operations. To compensate for the effect of these assumed liquidity pressures, we consider alternative sources of liquidity and maturities over different time periods to project how funding needs would be managed.
We maintain a Contingency Funding Plan that outlines the process for addressing a liquidity crisis. The plan provides for an evaluation of funding sources under various market conditions. It also assigns specific roles and responsibilities for managing liquidity through a problem period. As part of the plan, we maintain a liquidity reserve through balances in our liquid asset portfolio. During a problem period, that reserve could be used as a source of funding to provide time to develop and execute a longer-term strategy. The liquid asset portfolio at December 31, 2013, totaled $11.6 billion, consisting of $6.0 billion of unpledged securities, $1.0 billion of securities available for secured funding at the Federal Home Loan Bank of Cincinnati, and $4.6 billion of net balances of federal funds sold and balances in our Federal Reserve account. The liquid asset portfolio can fluctuate due to excess liquidity, heightened risk, or prefunding of expected outflows, such as debt maturities. Additionally, as of December 31, 2013, our unused borrowing capacity secured by loan collateral was $15.5 billion at the Federal Reserve Bank of Cleveland and $2.5 billion at the Federal Home Loan Bank of Cincinnati. In 2013, Keys outstanding FHLB advances decreased by $750 million, due to repayment of advances.
Our long-term liquidity strategy is to be predominantly funded by core deposits. However, we may use wholesale funds to sustain an adequate liquid asset portfolio, meet daily cash demands, and allow management flexibility to
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execute business initiatives. Keys client-based relationship strategy provides for a strong core deposit base which, in conjunction with intermediate and long-term wholesale funds managed to a diversified maturity structure and investor base, supports our liquidity risk management strategy. We use the loan to deposit ratio as a metric to monitor these strategies. Our target loan to deposit ratio is 90-100% (at December 31, 2013, our loan to deposit ratio was 84%), which we calculate as total loans, loans held for sale, and nonsecuritized discontinued loans divided by domestic deposits.
Our primary sources of liquidity include customer deposits, wholesale funding and liquid assets. If the cash flows needed to support operating and investing activities are not satisfied by deposit balances, we rely on wholesale funding or liquid assets. Conversely, excess cash generated by operating, investing and deposit-gathering activities may be used to repay outstanding debt or invest in liquid assets.
We have several liquidity programs, which are described in Note 18 (Long-Term Debt), that enable the parent company and KeyBank to raise funds in the public and private markets when the capital markets are functioning normally. The proceeds from most of these programs can be used for general corporate purposes, including acquisitions. During 2013, both KeyCorp and KeyBank issued debt under these programs. These liquidity programs are reviewed from time to time by the Board of Directors and are renewed and replaced as necessary. There are no restrictive financial covenants in any of these programs.
In 2013, Keys aggregate outstanding note balance, net of unamortized discounts and adjustments related to hedging with derivative financial instruments, increased by $1.5 billion. On February 1, 2013, KeyBank issued $1 billion of 1.65% Senior Bank Notes due February 1, 2018, under its Global Bank Note Program. On November 26, 2013, KeyBank issued $350 million of 1.10% Senior Bank Notes and $400 million of Floating Rate Senior Notes, each due November 25, 2016. On November 13, 2013, KeyCorp issued $750 million of 2.30% Medium-Term Notes due December 13, 2018. In 2013, $750 million of KeyCorps medium-term notes matured.
The primary source of liquidity for KeyCorp is from subsidiary dividends, primarily from KeyBank. KeyCorp has sufficient liquidity when it can service its debt; support customary corporate operations and activities (including acquisitions); support occasional guarantees of subsidiaries obligations in transactions with third parties at a reasonable cost, in a timely manner, and without adverse consequences; and pay dividends to shareholders.
We use a cash coverage metric as the primary measure to assess parent company liquidity. The cash coverage metric measures the months into the future where projected obligations can be met with the current amount of liquidity to meet all projected obligations. We generally issue term debt to supplement dividends from KeyBank to manage our liquidity position at or above our targeted levels. The parent company generally maintains cash and short-term investments in an amount sufficient to meet projected debt maturities over at least the next 24 months. At December 31, 2013, KeyCorp held $2.5 billion in short-term investments, which we projected to be sufficient to meet our projected obligations, including the repayment of our maturing debt obligations for the periods prescribed by our risk tolerance.
Typically, KeyCorp meets its liquidity requirements through regular dividends from KeyBank, supplemented with term debt. 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,
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up to the date of dividend declaration. During 2013, KeyBank paid KeyCorp $600 million in dividends, while the nonbank subsidiaries did not make any dividend payments to the parent. KeyCorp did not make any cash capital infusions to KeyBank during 2013. As of December 31, 2013, KeyBank had fully utilized its regulatory capacity to pay dividends to KeyCorp.
Our liquidity position and recent activity
Over the past twelve months our liquid asset portfolio, which includes overnight and short-term investments, as well as unencumbered, high quality liquid securities held as protection against a range of potential liquidity stress scenarios, has increased as a result of an increase in unpledged securities, growth in deposits related to the acquisition of the commercial mortgage servicing portfolio and special servicing business, and net customer loan and deposit flows. The liquid asset portfolio continues to exceed the amount that we estimate would be necessary to manage through an adverse liquidity event by providing sufficient time to develop and execute a longer-term solution. The issuance of $1 billion of Senior Bank Notes in February 2013, $750 million of Senior Bank Notes in November 2013, and $750 million of parent Medium-Term Notes in November 2013 provided additional liquidity to support normal business flows and maintain our liquid asset portfolio within target levels.
From time to time, KeyCorp or KeyBank may seek to retire, repurchase or exchange outstanding debt, capital securities, preferred shares or common shares through cash purchase, privately negotiated transactions or other means. Additional information on repurchases of common shares by KeyCorp is included in Part II, Item 5. Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities of this report. Such transactions depend on prevailing market conditions, our liquidity and capital requirements, contractual restrictions, regulatory requirements and other factors. The amounts involved may be material, individually or collectively.
We generate cash flows from operations and from investing and financing activities. We have approximately $236 million of cash and cash equivalents and short-term investments in international tax jurisdictions as of December 31, 2013. As we consider alternative long-term strategic and liquidity plans, opportunities to repatriate these amounts would result in approximately $16 million in taxes to be paid. If we were to cease operations in all international tax jurisdictions, the total amount of taxes to be paid would increase to approximately $31 million. Accordingly, we have included the total amount as a deferred tax liability at December 31, 2013.
The consolidated statements of cash flows summarize our sources and uses of cash by type of activity for the years ended December 31, 2013, and 2012.
Credit risk is the risk of loss to us arising from an obligors inability or failure to meet contractual payment or performance terms. Like other financial services institutions, we make loans, extend credit, purchase securities and enter into financial derivative contracts, all of which have related credit risk.
Credit policy, approval and evaluation
We manage credit risk exposure through a multifaceted program. The Credit Risk Committee approves both retail and commercial credit policies. These policies are communicated throughout the organization to foster a consistent approach to granting credit.
Our credit risk management team is responsible for credit approval, is independent of our lines of business, and consists of senior officers who have extensive experience in structuring and approving loans. Only credit risk management members are authorized to grant significant exceptions to credit policies. It is not unusual to make exceptions to established policies when mitigating circumstances dictate, but most major lending units have been assigned specific thresholds to keep exceptions at a manageable level.
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Loan grades are assigned at the time of origination, verified by the credit risk management team 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 borrowers management, the borrowers 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.
Our credit risk management team uses risk models to evaluate consumer loans. These models, known as scorecards, forecast the probability of serious delinquency and default for an applicant. The scorecards are embedded in the application processing system, which allows for real-time scoring and automated decisions for many of our products. We periodically validate the loan grading and scoring processes.
We maintain an active concentration management program to encourage diversification in our credit portfolios. For individual obligors, we employ a sliding scale of exposure, known as hold limits, which is dictated by the strength of the borrower. Our legal lending limit is approximately $1.6 billion for any individual borrower. However, internal hold limits generally restrict the largest exposures to less than 20% of that amount. As of December 31, 2013, we had four client relationships with loan commitments net of credit default swaps of more than $200 million. The average amount outstanding on these four individual net obligor commitments was $56 million at December 31, 2013. In general, our philosophy is to maintain a diverse portfolio with regard to credit exposures.
We actively manage the overall loan portfolio in a manner consistent with asset quality objectives and concentration risk tolerances to mitigate credit risk. We utilize credit default swaps to transfer a portion of the credit risk associated with a particular extension of credit to a third party. At December 31, 2013, we used credit default swaps with a notional amount of $689 million to manage the credit risk associated with specific commercial lending obligations. We may also sell credit derivatives primarily single name credit default swaps to offset our purchased credit default swap position prior to maturity. At December 31, 2013, we had sold credit default swaps outstanding with a total notional amount of $55 million.
Credit default swaps are recorded on the balance sheet at fair value. Related gains or losses, as well as the premium paid or received for credit protection, are included in the corporate services income and other income components of noninterest income.
We may also manage the loan portfolio using portfolio swaps and bulk purchases and sales. Our overarching goal is to manage the loan portfolio within a specified range of asset quality.
Allowance for loan and lease losses
At December 31, 2013, the ALLL was $848 million, or 1.56% of loans, compared to $888 million, or 1.68%, at December 31, 2012. The allowance includes $42 million that was specifically allocated for impaired loans of $358 million at December 31, 2013, compared to $35 million that was allocated for impaired loans of $411 million one year ago. For more information about impaired loans, see Note 5 (Asset Quality). At December 31, 2013, the ALLL was 166.9% of nonperforming loans, compared to 131.8% at December 31, 2012.
Selected asset quality statistics for each of the past five years are presented in Figure 36. The factors that drive these statistics are discussed in the remainder of this section.
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Figure 36. Selected Asset Quality Statistics from Continuing Operations
Year ended December 31, | ||||||||||||||||||||
dollars in millions | 2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
Net loan charge-offs |
$ | 168 | $ | 345 | $ | 541 | $ | 1,570 | $ | 2,257 | ||||||||||
Net loan charge-offs to average loans |
.32 | % | .69 | % | 1.11 | % | 2.91 | % | 3.40 | % | ||||||||||
Allowance for loan and lease losses |
$ | 848 | $ | 888 | $ | 1,004 | $ | 1,604 | $ | 2,534 | ||||||||||
Allowance for credit losses (a) |
885 | 917 | 1,049 | 1,677 | 2,655 | |||||||||||||||
Allowance for loan and lease losses to period-end loans |
1.56 | % | 1.68 | % | 2.03 | % | 3.20 | % | 4.31 | % | ||||||||||
Allowance for credit losses to period-end loans |
1.63 | 1.74 | 2.12 | 3.35 | 4.52 | |||||||||||||||
Allowance for loan and lease losses to nonperforming loans |
166.9 | 131.8 | 138.1 | 150.2 | 115.9 | |||||||||||||||
Allowance for credit losses to nonperforming loans |
174.2 | 136.1 | 144.3 | 157.0 | 121.4 | |||||||||||||||
Nonperforming loans at period end (b) |
$ | 508 | $ | 674 | $ | 727 | $ | 1,068 | $ | 2,187 | ||||||||||
Nonperforming assets at period end |
531 | 735 | 859 | 1,338 | 2,510 | |||||||||||||||
Nonperforming loans to period-end portfolio loans |
.93 | % | 1.28 | % | 1.47 | % | 2.13 | % | 3.72 | % | ||||||||||
Nonperforming assets to period-end portfolio loans plus |
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OREO and other nonperforming assets |
.97 | 1.39 | 1.73 | 2.66 | 4.25 |
(a) | Includes the ALLL plus the liability for credit losses on lending-related unfunded commitments. |
(b) | December 31, 2013, and December 31, 2012, amounts exclude $16 million and $23 million, respectively, of PCI loans acquired in July 2012. |
We estimate the appropriate level of the ALLL on at least a quarterly basis. The methodology used is described in Note 1 (Summary of Significant Accounting Policies) under the heading Allowance for Loan and Lease Losses. Briefly, our general allowance applies expected loss rates to existing loans with similar risk characteristics. We exercise judgment to assess any adjustment to the expected loss rates for the impact of factors such as changes in economic conditions, lending policies including underwriting standards, and 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 of $2.5 million and greater, 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 the individual impairment for commercial loans and TDRs 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 loans observable market price. Secured consumer loan balances of TDRs that are discharged through Chapter 7 bankruptcy and not formally re-affirmed are adjusted to reflect the fair value of the underlying collateral, less costs to sell. Other consumer loan TDRs are combined in homogenous pools and assigned a specific allocation based on the estimated present value of future cash flows using the effective interest rate. 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 December 31, 2013, represents our best estimate of the probable credit losses inherent in the loan portfolio at that date.
As shown in Figure 37, our ALLL decreased by $40 million, or 5%, during the past twelve months. This contraction was associated with the improvement in credit quality of the loan portfolio. The quality of new loan originations and decreasing NPLs and net loan charge-offs has resulted in a reduction in our general allowance. Our delinquency trends have declined during 2013 due to a modest level of loan growth, relatively stable economic conditions, and continued run off in our exit loan portfolio reflecting our effort to maintain a moderate enterprise risk tolerance. Our liability for credit losses on lending-related commitments increased by $8 million to $37 million at December 31, 2013, compared to the same period one year ago. When combined with our ALLL, our total allowance for credit losses represented 1.63% of loans at December 31, 2013, compared to 1.74% at December 31, 2012.
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Figure 37. Allocation of the Allowance for Loan and Lease Losses
2013 | 2012 | 2011 | ||||||||||||||||||||||||||||||||||
December 31, dollars in millions |
Total
Allowance |
Percent
of
Allowance |
Percent of Loan Type to Total Loans |
Total
Allowance |
Percent of
to Total Allowance |
Percent of Loan Type to Total Loans |
Total
Allowance |
Percent of
to Total
|
Percent of
to Total Loans |
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Commercial, financial and agricultural |
$ | 362 | 42.7 | % | 45.8 | % | $ | 327 | 36.8 | % | 44.0 | % | $ | 334 | 33.2 | % | 39.1 | % | ||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||||||||||||||
Commercial mortgage |
165 | 19.4 | 14.2 | 198 | 22.3 | 14.6 | 272 | 27.1 | 16.2 | |||||||||||||||||||||||||||
Construction |
32 | 3.8 | 2.0 | 41 | 4.6 | 1.9 | 63 | 6.3 | 2.7 | |||||||||||||||||||||||||||
Total commercial real estate loans |
197 | 23.2 | 16.2 | 239 | 26.9 | 16.5 | 335 | 33.4 | 18.9 | |||||||||||||||||||||||||||
Commercial lease financing |
62 | 7.3 | 8.4 | 55 | 6.2 | 9.3 | 78 | 7.8 | 12.2 | |||||||||||||||||||||||||||
Total commercial loans |
621 | 73.2 | 70.4 | 621 | 69.9 | 69.8 | 747 | 74.4 | 70.2 | |||||||||||||||||||||||||||
Real estate residential mortgage |
37 | 4.4 | 4.0 | 30 | 3.4 | 4.1 | 37 | 3.7 | 3.9 | |||||||||||||||||||||||||||
Home equity: |
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Key Community Bank |
84 | 9.9 | 19.0 | 105 | 11.8 | 18.6 | 103 | 10.2 | 18.6 | |||||||||||||||||||||||||||
Other |
11 | 1.3 | .6 | 25 | 2.8 | .8 | 29 | 2.9 | 1.1 | |||||||||||||||||||||||||||
Total home equity loans |
95 | 11.2 | 19.6 | 130 | 14.6 | 19.4 | 132 | 13.1 | 19.7 | |||||||||||||||||||||||||||
Consumer other Key Community Bank |
29 | 3.4 | 2.7 | 38 | 4.3 | 2.5 | 41 | 4.1 | 2.4 | |||||||||||||||||||||||||||
Credit cards |
34 | 4.0 | 1.3 | 26 | 2.9 | 1.4 | | | | |||||||||||||||||||||||||||
Consumer other: |
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Marine |
29 | 3.4 | 1.9 | 39 | 4.4 | 2.6 | 46 | 4.6 | 3.5 | |||||||||||||||||||||||||||
Other |
3 | .4 | .1 | 4 | .5 | .2 | 1 | .1 | .3 | |||||||||||||||||||||||||||
Total consumer other |
32 | 3.8 | 2.0 | 43 | 4.9 | 2.8 | 47 | 4.7 | 3.8 | |||||||||||||||||||||||||||
Total consumer loans |
227 | 26.8 | 29.6 | 267 | 30.1 | 30.2 | 257 | 25.6 | 29.8 | |||||||||||||||||||||||||||
Total (a) |
$ | 848 | 100.0 | % | 100.0 | % | $ | 888 | 100.0 | % | 100.0 | % | $ | 1,004 | 100.0 | % | 100.0 | % | ||||||||||||||||||
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2010 | 2009 | |||||||||||||||||||||||||||||||||||
|
Total
Allowance |
|
|
Percent of
Allowance
to Total
|
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|
Percent of
Loan Type
to Total
|
|
|
Total
Allowance |
|
|
Percent of
Allowance to Total Allowance |
|
|
Percent of
Loan Type
to Total
|
|
|||||||||||||||||||
Commercial, financial and agricultural |
$ | 485 | 30.2 | % | 32.8 | % | $ | 796 | 31.4 | % | 32.7 | % | ||||||||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||||||||||||||
Commercial mortgage |
416 | 25.9 | 19.0 | 578 | 22.8 | 17.8 | ||||||||||||||||||||||||||||||
Construction |
145 | 9.1 | 4.2 | 418 | 16.5 | 8.1 | ||||||||||||||||||||||||||||||
Total commercial real estate loans |
561 | 35.0 | 23.2 | 996 | 39.3 | 25.9 | ||||||||||||||||||||||||||||||
Commercial lease financing |
175 | 10.9 | 12.9 | 280 | 11.1 | 12.7 | ||||||||||||||||||||||||||||||
Total commercial loans |
1,221 | 76.1 | 68.9 | 2,072 | 81.8 | 71.3 | ||||||||||||||||||||||||||||||
Real estate residential mortgage |
49 | 3.1 | 3.7 | 30 | 1.2 | 3.1 | ||||||||||||||||||||||||||||||
Home equity: |
||||||||||||||||||||||||||||||||||||
Key Community Bank |
120 | 7.5 | 19.0 | 130 | 5.1 | 17.1 | ||||||||||||||||||||||||||||||
Other |
57 | 3.5 | 1.3 | 78 | 3.1 | 1.4 | ||||||||||||||||||||||||||||||
Total home equity loans |
177 | 11.0 | 20.3 | 208 | 8.2 | 18.5 | ||||||||||||||||||||||||||||||
Consumer other Key Community Bank |
57 | 3.6 | 2.3 | 73 | 2.9 | 2.0 | ||||||||||||||||||||||||||||||
Credit cards |
| | | | | | ||||||||||||||||||||||||||||||
Consumer other: |
||||||||||||||||||||||||||||||||||||
Marine |
89 | 5.5 | 4.5 | 140 | 5.5 | 4.7 | ||||||||||||||||||||||||||||||
Other |
11 | .7 | .3 | 11 | .4 | .4 | ||||||||||||||||||||||||||||||
Total consumer other |
100 | 6.2 | 4.8 | 151 | 5.9 | 5.1 | ||||||||||||||||||||||||||||||
Total consumer loans |
383 | 23.9 | 31.1 | 462 | 18.2 | 28.7 | ||||||||||||||||||||||||||||||
Total (a) |
$ | 1,604 | 100.0 | % | 100.0 | % | $ | 2,534 | 100.0 | % | 100.0 | % | ||||||||||||||||||||||||
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(a) | Excludes allocations of the ALLL in the amount of $39 million at December 31, 2013, $55 million at December 31, 2012, $104 million at December 31, 2011, $114 million at December 31, 2010, and $157 million at December 31, 2009, related to the discontinued operations of the education lending business. |
Our provision (credit) for loan and lease losses was $130 million for 2013, compared to $229 million for 2012. Our net loan charge-offs were $168 million for 2013, compared to $345 million for 2012. Our net loan charge-offs for 2012 included $33 million of charge-offs reported in accordance with updated regulatory guidance requiring loans and leases discharged through Chapter 7 bankruptcy and not reaffirmed by the borrower to be charged-off to the collaterals fair market value less selling costs and classified as nonaccrual regardless of their delinquency. Additionally, we continue to reduce our exit loans and leases, as well as our exposure in our higher-risk businesses, including the residential properties portion of our construction loan portfolio, Marine/RV financing, and other selected leasing portfolios through the sale of certain loans, payments from borrowers, or net loan charge-offs. We anticipate that net loan charge-offs will remain at, or below, the lower end of our targeted range of 40 to 60 basis points of average loans for the balance of the current year.
89
Net loan charge-offs for 2013 totaled $168 million, or .32% of average loans, compared to net loan charge-offs of $345 million, or .69%, for the same period last year. Our 2012 net loan charge-offs included $33 million of incremental net loan charge-offs reported in accordance with updated regulatory guidance requiring loans discharged through Chapter 7 bankruptcy and not reaffirmed by the borrower to be charged off to the collaterals fair market value less selling costs and classified as nonaccrual regardless of their delinquency status. In addition, we incurred $13 million of net loan charge-offs related to our two acquisitions completed in 2012. Figure 38 shows the trend in our net loan charge-offs by loan type, while the composition of loan charge-offs and recoveries by type of loan is presented in Figure 39.
Over the past twelve months, net loan charge-offs decreased $177 million. This decrease is attributable to continued improvement in asset quality statistics as shown in Figure 36 as well as the classification of certain loans from updated regulatory guidance that went into effect for us during the second half of 2012. As shown in Figure 41, our exit loan portfolio contributed a total of $17 million in net loan charge-offs for 2013. Net loan charge-offs for 2012 in our exit loan portfolio were $78 million. The decrease in net loan charge-offs in our exit loan portfolio were primarily driven by lower levels of nonperforming loans and continued run off in the consumer exit loan portfolios.
Figure 38. Net Loan Charge-offs from Continuing Operations
Year ended December 31, | ||||||||||||||||||||
dollars in millions | 2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
Commercial, financial and agricultural |
$ | 23 | $ | 17 | $ | 119 | $ | 478 | $ | 786 | ||||||||||
Real estate commercial mortgage |
(7) | 79 | 103 | 330 | 354 | |||||||||||||||
Real estate construction |
(11) | 19 | 56 | 336 | 634 | |||||||||||||||
Commercial lease financing |
12 | 5 | 17 | 63 | 106 | |||||||||||||||
Total commercial loans |
17 | 120 | 295 | 1,207 | 1,880 | |||||||||||||||
Home equity Key Community Bank |
52 | 88 | 89 | 116 | 93 | |||||||||||||||
Home equity Other |
14 | 30 | 41 | 59 | 72 | |||||||||||||||
Credit cards |
27 | 11 | | | | |||||||||||||||
Marine |
14 | 37 | 48 | 86 | 119 | |||||||||||||||
Other |
44 | 59 | 68 | 102 | 93 | |||||||||||||||
Total consumer loans |
151 | 225 | 246 | 363 | 377 | |||||||||||||||
Total net loan charge-offs |
$ | 168 | $ | 345 | $ | 541 | $ | 1,570 | $ | 2,257 | ||||||||||
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Net loan charge-offs to average loans |
.32 | % | .69 | % | 1.11 | % | 2.91 | % | 3.40 | % | ||||||||||
Net loan charge-offs from discontinued operations education lending business |
$ | 37 | $ | 58 | $ | 123 | $ | 121 | $ | 143 | ||||||||||
90
Figure 39. Summary of Loan and Lease Loss Experience from Continuing Operations
Year ended December 31, dollars in millions |
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
Average loans outstanding |
$ | 53,054 | $ | 50,362 | $ | 48,606 | $ | 53,971 | $ | 66,386 | ||||||||||
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Allowance for loan and lease losses at beginning of period |
$ | 888 | $ | 1,004 | $ | 1,604 | $ | 2,534 | $ | 1,629 | ||||||||||
Loans charged off: |
||||||||||||||||||||
Commercial, financial and agricultural (a) |
62 | 80 | 169 | 565 | 838 | |||||||||||||||
Real estate commercial mortgage |
20 | 102 | 113 | 360 | 356 | |||||||||||||||
Real estate construction |
3 | 24 | 83 | 380 | 643 | |||||||||||||||
|
||||||||||||||||||||
Total commercial real estate loans (b) |
23 | 126 | 196 | 740 | 999 | |||||||||||||||
Commercial lease financing |
27 | 27 | 42 | 88 | 128 | |||||||||||||||
|
||||||||||||||||||||
Total commercial loans |
112 | 233 | 407 | 1,393 | 1,965 | |||||||||||||||
Real estate residential mortgage |
20 | 27 | 29 | 36 | 20 | |||||||||||||||
Home equity: |
||||||||||||||||||||
Key Community Bank |
62 | 99 | 100 | 123 | 97 | |||||||||||||||
Other |
20 | 35 | 45 | 62 | 74 | |||||||||||||||
|
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Total home equity loans |
82 | 134 | 145 | 185 | 171 | |||||||||||||||
Consumer other Key Community Bank |
31 | 38 | 45 | 64 | 67 | |||||||||||||||
Credit cards |
30 | 11 | | | | |||||||||||||||
Consumer other: |
||||||||||||||||||||
Marine |
29 | 59 | 80 | 129 | 154 | |||||||||||||||
Other |
4 | 6 | 9 | 15 | 19 | |||||||||||||||
|
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Total consumer other |
33 | 65 | 89 | 144 | 173 | |||||||||||||||
|
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Total consumer loans |
196 | 275 | 308 | 429 | 431 | |||||||||||||||
|
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Total loans charged off |
308 | 508 | 715 | 1,822 | 2,396 | |||||||||||||||
Recoveries: |
||||||||||||||||||||
Commercial, financial and agricultural (a) |
39 | 63 | 50 | 87 | 52 | |||||||||||||||
Real estate commercial mortgage |
27 | 23 | 10 | 30 | 2 | |||||||||||||||
Real estate construction |
14 | 5 | 27 | 44 | 9 | |||||||||||||||
|
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Total commercial real estate loans (b) |
41 | 28 | 37 | 74 | 11 | |||||||||||||||
Commercial lease financing |
15 | 22 | 25 | 25 | 22 | |||||||||||||||
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Total commercial loans |
95 | 113 | 112 | 186 | 85 | |||||||||||||||
Real estate residential mortgage |
2 | 3 | 3 | 2 | 1 | |||||||||||||||
Home equity: |
||||||||||||||||||||
Key Community Bank |
10 | 11 | 11 | 7 | 4 | |||||||||||||||
Other |
6 | 5 | 4 | 3 | 2 | |||||||||||||||
|
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Total home equity loans |
16 | 16 | 15 | 10 | 6 | |||||||||||||||
Consumer other Key Community Bank |
7 | 6 | 8 | 7 | 7 | |||||||||||||||
Credit cards |
3 | | | | | |||||||||||||||
Consumer other: |
||||||||||||||||||||
Marine |
15 | 22 | 32 | 43 | 35 | |||||||||||||||
Other |
2 | 3 | 4 | 4 | 5 | |||||||||||||||
|
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Total consumer other |
17 | 25 | 36 | 47 | 40 | |||||||||||||||
|
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Total consumer loans |
45 | 50 | 62 | 66 | 54 | |||||||||||||||
|
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Total recoveries |
140 | 163 | 174 | 252 | 139 | |||||||||||||||
|
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Net loans charged off |
(168 | ) | (345 | ) | (541 | ) | (1,570 | ) | (2,257) | |||||||||||
Provision (credit) for loan and lease losses |
130 | 229 | (60 | ) | 638 | 3,159 | ||||||||||||||
Foreign currency translation adjustment |
(2 | ) | | 1 | 2 | 3 | ||||||||||||||
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Allowance for loan and lease losses at end of year |
$ | 848 | $ | 888 | $ | 1,004 | $ | 1,604 | $ | 2,534 | ||||||||||
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Liability for credit losses on lending-related commitments at beginning of the year |
$ | 29 | $ | 45 | $ | 73 | $ | 121 | $ | 54 | ||||||||||
Provision (credit) for losses on lending-related commitments |
8 | (16 | ) | (28 | ) | (48 | ) | 67 | ||||||||||||
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Liability for credit losses on lending-related commitments at end of the year (c) |
$ | 37 | $ | 29 | $ | 45 | $ | 73 | $ | 121 | ||||||||||
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Total allowance for credit losses at end of the year |
$ | 885 | $ | 917 | $ | 1,049 | $ | 1,677 | $ | 2,655 | ||||||||||
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Net loan charge-offs to average loans |
.32 | % | .69 | % | 1.11 | % | 2.91 | % | 3.40 | % | ||||||||||
Allowance for loan and lease losses to period-end loans |
1.56 | 1.68 | 2.03 | 3.20 | 4.31 | |||||||||||||||
Allowance for credit losses to period-end loans |
1.63 | 1.74 | 2.12 | 3.35 | 4.52 | |||||||||||||||
Allowance for loan and lease losses to nonperforming loans |
166.9 | 131.8 | 138.1 | 150.2 | 115.9 | |||||||||||||||
Allowance for credit losses to nonperforming loans |
174.2 | 136.1 | 144.3 | 157.0 | 121.4 | |||||||||||||||
Discontinued operations education lending business: |
||||||||||||||||||||
Loans charged off |
$ | 55 | $ | 75 | $ | 138 | $ | 129 | $ | 147 | ||||||||||
Recoveries |
18 | 17 | 15 | 8 | 4 | |||||||||||||||
|
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Net loan charge-offs |
$ | (37 | ) | $ | (58 | ) | $ | (123 | ) | $ | (121 | ) | $ | (143) | ||||||
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91
(a) | See Figure 16 and the accompanying discussion in the Loans and loans held for sale section for more information related to our commercial, financial and agricultural loan portfolio. |
(b) | See Figure 17 and the accompanying discussion in the Loans and loans held for sale section for more information related to our commercial real estate loan portfolio. |
(c) | Included in accrued expense and other liabilities on the balance sheet. |
Figure 40 shows the composition of our nonperforming assets. These assets totaled $531 million at December 31, 2013, and represented .97% of portfolio loans, OREO and other nonperforming assets, compared to $735 million, or 1.39%, at December 31, 2012. See Note 1 under the headings Nonperforming Loans, Impaired Loans, and Allowance for Loan and Lease Losses for a summary of our nonaccrual and charge-off policies.
Figure 40. Summary of Nonperforming Assets and Past Due Loans from Continuing Operations
December 31, | ||||||||||||||||||||
dollars in millions | 2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
Commercial, financial and agricultural (a) |
$ | 77 | $ | 99 | $ | 188 | $ | 242 | $ | 586 | ||||||||||
Real estate commercial mortgage |
37 | 120 | 218 | 255 | 614 | |||||||||||||||
Real estate construction |
14 | 56 | 54 | 241 | 641 | |||||||||||||||
|
||||||||||||||||||||
Total commercial real estate loans (b) |
51 | 176 | 272 | 496 | 1,255 | |||||||||||||||
Commercial lease financing |
19 | 16 | 27 | 64 | 113 | |||||||||||||||
|
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Total commercial loans |
147 | 291 | 487 | 802 | 1,954 | |||||||||||||||
Real estate residential mortgage |
107 | 103 | 87 | 98 | 73 | |||||||||||||||
Home equity: |
||||||||||||||||||||
Key Community Bank |
205 | 210 | 108 | 102 | 107 | |||||||||||||||
Other |
15 | 21 | 12 | 18 | 21 | |||||||||||||||
|
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Total home equity loans |
220 | 231 | 120 | 120 | 128 | |||||||||||||||
Consumer other Key Community Bank |
3 | 2 | 1 | 4 | 4 | |||||||||||||||
Credit cards |
4 | 11 | | | | |||||||||||||||
Consumer other: |
||||||||||||||||||||
Marine |
26 | 34 | 31 | 42 | 26 | |||||||||||||||
Other |
1 | 2 | 1 | 2 | 2 | |||||||||||||||
|
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Total consumer other |
27 | 36 | 32 | 44 | 28 | |||||||||||||||
|
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Total consumer loans |
361 | 383 | 240 | 266 | 233 | |||||||||||||||
|
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Total nonperforming loans (c) |
508 | 674 | 727 | 1,068 | 2,187 | |||||||||||||||
Nonperforming loans held for sale |
1 | 25 | 46 | 106 | 116 | |||||||||||||||
OREO |
15 | 22 | 65 | 129 | 168 | |||||||||||||||
Other nonperforming assets |
7 | 14 | 21 | 35 | 39 | |||||||||||||||
|
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Total nonperforming assets |
$ | 531 | $ | 735 | $ | 859 | $ | 1,338 | $ | 2,510 | ||||||||||
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Accruing loans past due 90 days or more |
$ | 71 | $ | 78 | $ | 164 | $ | 239 | $ | 331 | ||||||||||
Accruing loans past due 30 through 89 days |
318 | 424 | 441 | 476 | 933 | |||||||||||||||
Restructured loans accruing and nonaccruing (d) |
338 | 320 | 276 | 297 | 364 | |||||||||||||||
Restructured loans included in nonperforming loans (d) |
214 | 249 | 191 | 202 | 364 | |||||||||||||||
Nonperforming assets from discontinued operations education lending business |
25 | 20 | 23 | 40 | 14 | |||||||||||||||
Nonperforming loans to year-end portfolio loans |
.93 | % | 1.28 | % | 1.47 | % | 2.13 | % | 3.72 | % | ||||||||||
Nonperforming assets to year-end portfolio loans plus OREO and other nonperforming assets |
.97 | 1.39 | 1.73 | 2.66 | 4.25 | |||||||||||||||
(a) | See Figure 16 and the accompanying discussion in the Loans and loans held for sale section for more information related to our commercial, financial and agricultural loan portfolio. |
(b) | See Figure 17 and the accompanying discussion in the Loans and loans held for sale section for more information related to our commercial real estate loan portfolio. |
(c) | December 31, 2013, and December 31, 2012, amounts exclude $16 million and $23 million, respectively, of purchased credit impaired loans acquired in July 2012. |
(d) | Restructured loans (i.e., TDRs) are those for which Key, for reasons related to a borrowers financial difficulties, grants a concession to the borrower that it would not otherwise consider. These concessions are made to improve the collectability of the loan and generally take the form of a reduction of the interest rate, extension of the maturity date or reduction in the principal balance. |
92
As shown in Figure 40, nonperforming assets decreased during 2013, having declined for the past four years. Most of the reduction came from nonperforming loans in our commercial loan portfolio and nonperforming loans held for sale. As shown in Figure 41, our exit loan portfolio accounted for $56 million, or 11%, of total nonperforming assets at December 31, 2013, compared to $83 million, or 11%, at December 31, 2012.
At December 31, 2013, the carrying amount of our commercial nonperforming loans outstanding represented 57% of their original contractual amount owed, total nonperforming loans outstanding represented 72% of their contractual amount owed, and total nonperforming assets represented 70% of their original contractual amount owed. At the same date, OREO represented 46% of its original contractual amount owed, while loans held for sale and other nonperforming assets in the aggregate represented 38% of their contractual amount owed.
At December 31, 2013, our 20 largest nonperforming loans totaled $86 million, representing 17% of total loans on nonperforming status from continuing operations, compared to $179 million representing 27% in the prior year.
Figure 41 shows the composition of our exit loan portfolio at December 31, 2013, and 2012, the net loan charge-offs recorded on this portfolio, and the nonperforming status of those loans at these dates. The exit loan portfolio represented 4% of total loans and loans held for sale at December 31, 2013, compared to 5% at December 31, 2012. Additional information about loan sales is included in the Loans and loans held for sale section under Loan sales.
Figure 41. Exit Loan Portfolio from Continuing Operations
Balance
Outstanding |
Change
12-31-12 |
Net
Loan
Charge-offs |
Balance
on
Nonperforming Status |
|||||||||||||||||||||||||
in millions | 12-31-13 | 12-31-12 | 12-31-13 (c) | 12-31-12 (c) | 12-31-13 | 12-31-12 | ||||||||||||||||||||||
Residential properties homebuilder |
$ | 20 | $ | 24 | $ | (4) | $ | 1 | $ | 3 | $ | 7 | $ | 10 | ||||||||||||||
Marine and RV floor plan |
24 | 33 | (9) | (3 | ) | 8 | 6 | 10 | ||||||||||||||||||||
Commercial lease financing (a) |
782 | 997 | (215) | (11 | ) | (3 | ) | | 6 | |||||||||||||||||||
Total commercial loans |
826 | 1,054 | (228) | (13 | ) | 8 | 13 | 26 | ||||||||||||||||||||
Home equity Other |
334 | 423 | (89) | 14 | 30 | 16 | 21 | |||||||||||||||||||||
Marine |
1,028 | 1,358 | (330) | 14 | 37 | 26 | 34 | |||||||||||||||||||||
RV and other consumer |
70 | 93 | (23) | 2 | 3 | 1 | 2 | |||||||||||||||||||||
Total consumer loans |
1,432 | 1,874 | (442) | 30 | 70 | 43 | 57 | |||||||||||||||||||||
Total exit loans in loan portfolio |
$ | 2,258 | $ | 2,928 | $ | (670) | $ | 17 | $ | 78 | $ | 56 | $ | 83 | ||||||||||||||
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Discontinued operations education lending business
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$ | 4,497 | $ | 5,201 | $ (704) | $ | 37 | $ | 58 | $ | 25 | $ | 20 | |||||||||||||||
(a) | Includes (1) the business aviation, commercial vehicle, office products, construction and industrial leases; (2) Canadian lease financing portfolios; and (3) all remaining balances related to lease in, lease out; sale in, lease out; service contract leases; and qualified technological equipment leases. |
(b) | Includes loans in Keys education loan securitization trusts. |
(c) | Credit amounts indicate recoveries exceeded charge-offs. |
Figure 42 shows the types of activity that caused the change in our nonperforming loans during each of the last four quarters and for the years ended December 31, 2013, and 2012. Loans placed on nonaccrual status decreased $400 million during 2013 compared to 2012 due to the 2012 classification of loans discharged through Chapter 7 bankruptcy previously discussed, as well as continued improvement in market liquidity.
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Figure 42. Summary of Changes in Nonperforming Loans from Continuing Operations
2013 Quarters | ||||||||||||||||||||||||
in millions | 2013 | Fourth | Third | Second | First | 2012 | ||||||||||||||||||
Balance at beginning of period |
$ | 674 | $ | 541 | $ | 652 | $ | 650 | $ | 674 | $ | 727 | ||||||||||||
Loans placed on nonaccrual status |
728 | 129 | 161 | 160 | 278 | 1,128 | ||||||||||||||||||
Charge-offs |
(309) | (66) | (78) | (74) | (91) | (508) | ||||||||||||||||||
Loans sold |
(127) | (19) | (61) | (5) | (42) | (163) | ||||||||||||||||||
Payments |
(208) | (46) | (43) | (36) | (83) | (327) | ||||||||||||||||||
Transfers to OREO |
(21) | (5) | (2) | (7) | (7) | (38) | ||||||||||||||||||
Transfers to nonperforming loans held for sale |
| | | | | (24) | ||||||||||||||||||
Transfers to other nonperforming assets |
| | | | | (15) | ||||||||||||||||||
Loans returned to accrual status |
(229) | (26) | (88) | (36) | (79) | (106) | ||||||||||||||||||
Balance at end of period (a) |
$ | 508 | $ | 508 | $ | 541 | $ | 652 | $ | 650 | $ | 674 | ||||||||||||
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(a) | December 31, 2013, and December 31, 2012, amounts exclude $16 million and $23 million, respectively, of PCI loans acquired in July 2012. |
Figure 43 shows the types of activity that caused the change in our nonperforming loans held for sale during each of the last four quarters and years ended December 31, 2013, and 2012.
Figure 43. Summary of Changes in Nonperforming Loans Held for Sale from Continuing Operations
2013 Quarters | ||||||||||||||||||||||||
in millions | 2013 | Fourth | Third | Second | First | 2012 | ||||||||||||||||||
Balance at beginning of period |
$ | 25 | $ | 13 | $ | 14 | $ | 23 | $ | 25 | $ | 46 | ||||||||||||
Transfers in |
| | | | | 24 | ||||||||||||||||||
Net advances / (payments) |
(3) | (1) | (1) | (1) | | (3) | ||||||||||||||||||
Loans sold |
(19) | (11) | | (8) | | (20) | ||||||||||||||||||
Transfers to OREO |
| | | | | (1) | ||||||||||||||||||
Valuation adjustments |
(2) | | | | (2) | (2) | ||||||||||||||||||
Loans returned to accrual status / other |
| | | | | (19) | ||||||||||||||||||
Balance at end of period |
$ | 1 | $ | 1 | $ | 13 | $ | 14 | $ | 23 | $ | 25 | ||||||||||||
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Figure 44 shows the factors that contributed to the change in our OREO during 2013 and 2012. As shown in this figure, the decrease in 2013 was primarily attributable to properties sold during 2013.
Figure 44. Summary of Changes in Other Real Estate Owned, Net of Allowance, from Continuing Operations
2013 Quarters | ||||||||||||||||||||||||
in millions | 2013 | Fourth | Third | Second | First | 2012 | ||||||||||||||||||
Balance at beginning of period |
$ | 22 | $ | 15 | $ | 18 | $ | 21 | $ | 22 | $ | 65 | ||||||||||||
Properties acquired nonperforming loans |
21 | 5 | 2 | 7 | 7 | 39 | ||||||||||||||||||
Valuation adjustments |
(6) | | (1) | (2) | (3) | (18) | ||||||||||||||||||
Properties sold |
(22) | (5) | (4) | (8) | (5) | (64) | ||||||||||||||||||
Balance at end of period |
$ | 15 | $ | 15 | $ | 15 | $ | 18 | $ | 21 | $ | 22 | ||||||||||||
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Like all businesses, we are subject to operational risk, which is the risk of loss resulting from human error or malfeasance, inadequate or failed internal processes and systems, and external events. These events include, among other things, threats to our cybersecurity, as we are reliant upon information systems and the internet to conduct our business activities.
Operational risk also encompasses compliance risk, which is the risk of loss from violations of, or noncompliance with, laws, rules and regulations, prescribed practices, and ethical standards. Under the Dodd-Frank Act, large financial companies like Key will be subject to heightened prudential standards and regulation
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due to their systemic importance. This heightened level of regulation will increase our operational risk. We have created work teams to respond to and analyze the regulatory requirements that have been or will be promulgated as a result of the enactment of the Dodd-Frank Act. Resulting operational risk losses and/or additional regulatory compliance costs could take the form of explicit charges, increased operational costs, harm to our reputation or foregone opportunities.
We seek to mitigate operational risk through identification and measurement of risk, alignment of business strategies with risk appetite and tolerance, and a system of internal controls and reporting. We continuously strive to strengthen our system of internal controls to improve the oversight of our operational risk and to ensure compliance with laws, rules and regulations. For example, an operational event database tracks the amounts and sources of operational risk and losses. This tracking mechanism helps to identify weaknesses and to highlight the need to take corrective action. We also rely upon software programs designed to assist in assessing operational risk and monitoring our control processes. This technology has enhanced the reporting of the effectiveness of our controls to senior management and the Board.
The Operational Risk Management Program provides the framework for the structure, governance, roles and responsibilities as well as the content to manage operational risk for Key. Primary responsibility for managing and monitoring internal control mechanisms lies with the managers of our various lines of business. The Operational Risk Committee, a senior management committee, oversees our level of operational risk and directs and supports our operational infrastructure and related activities. This committee and the Operational Risk Management function are an integral part of our ERM Program. Our Risk Review function periodically assesses the overall effectiveness of our Operational Risk Management Program and our system of internal controls. Risk Review reports the results of reviews on internal controls and systems to senior management and the Audit Committee, and independently supports the Audit Committees oversight of these controls.
Key devotes significant time and resources to maintaining and regularly updating its technology systems and processes to protect the security of its computer systems, software, networks and other technology assets against attempts by third parties to obtain unauthorized access to confidential information, destroy data, disrupt or degrade service, sabotage systems or cause other damage. Key and many other U.S. financial institutions have experienced distributed denial-of-service attacks from technologically sophisticated third parties. These attacks are intended to disrupt or disable consumer online banking services and prevent banking transactions. Key also periodically experiences other attempts to breach the security of its systems and data. These cyberattacks have not, to date, resulted in any material disruption of Keys operations, material harm to Key customers, and have not had a material adverse effect on Keys results of operations.
Cyberattack risks may also occur with Keys third party technology service providers, and may interfere with their ability to fulfill their contractual obligations to Key, with attendant potential for financial loss or liability that could adversely affect Keys financial condition or results of operations. Recent high-profile cyberattacks have targeted retailers and other businesses for the purpose of acquiring the confidential information (including personal, financial and credit card information) of customers, some of whom are customers of Key. We may incur expenses related to the investigation of such attacks or related to the protection of our customers from identity theft as a result of such attacks. Risks and exposures related to cyberattacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by Key and our clients.
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Figure 45 shows our financial performance for each of the past eight quarters. Highlights of our results for the fourth quarter of 2013 are summarized below.
Our fourth quarter net income from continuing operations attributable to Key common shareholders was $229 million, or $.26 per common share, compared to $190 million, or $.20 per common share, for the fourth quarter of 2012. During the fourth quarter of 2013, we incurred $24 million, or $.02 per common share, of costs related to our previously announced efficiency initiative and a pension settlement charge. Fourth quarter 2013 net income attributable to Key common shareholders was $224 million, compared to $197 million for the same quarter one year ago.
On an annualized basis, our return on average total assets from continuing operations for the fourth quarter of 2013 was 1.08%, compared to .96% for the fourth quarter of 2012. The annualized return on average common equity from continuing operations was 9.10% for the fourth quarter of 2013, compared to 7.58% for the year-ago quarter.
Our taxable-equivalent net interest income was $589 million for the fourth quarter of 2013, and the net interest margin was 3.01%. These results compare to taxable-equivalent net interest income of $607 million and a net interest margin of 3.37% for the fourth quarter of 2012. The decrease in net interest income and net interest margin is attributable to the impact of lower interest rates on asset yields combined with a significant increase in liquidity levels resulting from strong deposit inflows. The decreases were partially offset by the maturity of higher-rate certificates of deposit and a more favorable mix of lower-cost deposits.
Our noninterest income was $453 million for the fourth quarter of 2013, compared to $439 million for the year-ago quarter. The fourth quarter reflects the benefits from Keys recent investments in payments and commercial mortgage servicing, with cards and payments income up $2 million and mortgage servicing fees up $15 million. In addition, net gains from principal investing increased $18 million. These increases were partially offset by decreases in investment banking and debt placement fees of $26 million and consumer mortgage income of $8 million.
Our noninterest expense was $712 million for the fourth quarter of 2013, compared to $734 million for the same period last year. Excluding the $22 million in expenses related to our efficiency initiative and the pension settlement charge of $2 million in the fourth quarter of 2013 and the $16 million in efficiency initiative expenses one year ago, noninterest expense was down $30 million from the prior year. Personnel expense decreased $24 million, due to the realization of expense efficiencies. Nonpersonnel expense increased $2 million. The provision (credit) for losses on lending-related commitments increased $11 million, offset by a $12 million decrease in business services and professional fees.
Provision for loan and lease losses
Our provision for loan and lease losses was $19 million for the fourth quarter of 2013, compared to $57 million for the year-ago quarter. Our ALLL was $848 million, or 1.56%, of total period-end loans at December 31, 2013, compared to $888 million, or 1.68%, at December 31, 2012.
Net loan charge-offs for the fourth quarter of 2013 totaled $37 million, or .27% of average loans, compared to $58 million, or .44%, for the same period last year.
For the fourth quarter of 2013, we recorded a tax provision from continuing operations of $70 million, compared to a tax provision of $53 million for the fourth quarter of 2012. The effective tax rate for the fourth quarter of 2013 was 23%, compared with 21.3% for the same quarter one year ago. For the fourth quarter of 2013, the tax rate was higher due to higher pre-tax income and slightly lower tax credits earned during the period.
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Figure 45. Selected Quarterly Financial Data
2013 Quarters | 2012 Quarters | |||||||||||||||||||||||||||||||||
dollars in millions, except per share amounts |
Fourth | Third | Second | First | Fourth | Third | Second | First | ||||||||||||||||||||||||||
FOR THE PERIOD |
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Interest income |
$ | 649 | $ | 647 | $ | 657 | $ | 667 | $ | 688 | $ | 671 | $ | 662 | $ | 684 | ||||||||||||||||||
Interest expense |
66 | 69 | 76 | 84 | 87 | 99 | 124 | 131 | ||||||||||||||||||||||||||
Net interest income |
583 | 578 | 581 | 583 | 601 | 572 | 538 | 553 | ||||||||||||||||||||||||||
Provision (credit) for loan and lease losses |
19 | 28 | 28 | 55 | 57 | 109 | 21 | 42 | ||||||||||||||||||||||||||
Noninterest income |
453 | 459 | 429 | 425 | 439 | 518 | 457 | 442 | ||||||||||||||||||||||||||
Noninterest expense |
712 | 716 | 711 | 681 | 734 | 712 | 693 | 679 | ||||||||||||||||||||||||||
Income (loss) from continuing operations before income taxes |
305 | 293 | 271 | 272 | 249 | 269 | 281 | 274 | ||||||||||||||||||||||||||
Income (loss) from continuing operations attributable to Key |
235 | 235 | 199 | 201 | 196 | 216 | 222 | 201 | ||||||||||||||||||||||||||
Income (loss) from discontinued operations, net of taxes (a) |
(5 | ) | 37 | 5 | 3 | 7 | 3 | 14 | (1) | |||||||||||||||||||||||||
Net income (loss) attributable to Key |
230 | 272 | 204 | 204 | 203 | 219 | 236 | 200 | ||||||||||||||||||||||||||
Income (loss) from continuing operations attributable to Key common shareholders |
229 | 229 | 193 | 196 | 190 | 211 | 217 | 195 | ||||||||||||||||||||||||||
Income (loss) from discontinued operations, net of taxes (a) |
(5 | ) | 37 | 5 | 3 | 7 | 3 | 14 | (1) | |||||||||||||||||||||||||
Net income (loss) attributable to Key common shareholders |
224 | 266 | 198 | 199 | 197 | 214 | 231 | 194 | ||||||||||||||||||||||||||
PER COMMON SHARE |
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Income (loss) from continuing operations attributable to Key common shareholders |
$ | .26 | $ | .25 | $ | .21 | $ | .21 | $ | .21 | $ | .23 | $ | .23 | $ | .21 | ||||||||||||||||||
Income (loss) from discontinued operations, net of taxes (a) |
(.01 | ) | .04 | .01 | | .01 | | .01 | | |||||||||||||||||||||||||
Net income (loss) attributable to Key common shareholders (b) |
.25 | .29 | .22 | .22 | .21 | .23 | .24 | .20 | ||||||||||||||||||||||||||
Income (loss) from continuing operations attributable to Key common shareholders assuming dilution |
.26 | .25 | .21 | .21 | .20 | .22 | .23 | .20 | ||||||||||||||||||||||||||
Income (loss) from discontinued operations, net of taxes assuming dilution (a) |
(.01 | ) | .04 | .01 | | .01 | | .01 | | |||||||||||||||||||||||||
Net income (loss) attributable to Key common shareholders assuming dilution (b) |
.25 | .29 | .22 | .21 | .21 | .23 | .24 | .20 | ||||||||||||||||||||||||||
Cash dividends paid |
.055 | .055 | .055 | .05 | .05 | .05 | .05 | .03 | ||||||||||||||||||||||||||
Book value at period end |
11.25 | 11.05 | 10.89 | 10.89 | 10.78 | 10.64 | 10.43 | 10.26 | ||||||||||||||||||||||||||
Tangible book value at period end |
10.11 | 9.92 | 9.77 | 9.78 | 9.67 | 9.54 | 9.45 | 9.28 | ||||||||||||||||||||||||||
Market price: |
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High |
13.55 | 12.63 | 11.09 | 10.19 | 9.01 | 9.12 | 8.54 | 8.82 | ||||||||||||||||||||||||||
Low |
11.24 | 11.05 | 9.29 | 8.29 | 7.96 | 7.46 | 6.80 | 7.26 | ||||||||||||||||||||||||||
Close |
13.42 | 11.40 | 11.04 | 9.96 | 8.42 | 8.74 | 7.74 | 8.50 | ||||||||||||||||||||||||||
Weighted-average common shares outstanding (000) |
890,516 | 901,904 | 913,736 | 920,316 | 925,725 | 936,223 | 944,648 | 949,342 | ||||||||||||||||||||||||||
Weighted-average common shares and potential common shares outstanding (000) |
897,712 | 928,854 | 918,628 | 926,051 | 930,382 | 940,764 | 948,087 | 953,971 | ||||||||||||||||||||||||||
AT PERIOD END |
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Loans |
$ | 54,457 | $ | 53,597 | $ | 53,101 | $ | 52,574 | $ | 52,822 | $ | 51,419 | $ | 49,605 | $ | 49,226 | ||||||||||||||||||
Earning assets |
79,467 | 77,085 | 76,717 | 75,066 | 75,055 | 72,139 | 71,899 | 72,796 | ||||||||||||||||||||||||||
Total assets |
92,934 | 90,708 | 90,639 | 89,198 | 89,236 | 86,950 | 86,523 | 87,431 | ||||||||||||||||||||||||||
Deposits |
69,262 | 68,535 | 67,721 | 64,654 | 65,993 | 64,188 | 62,167 | 61,494 | ||||||||||||||||||||||||||
Long-term debt |
7,650 | 6,154 | 6,666 | 7,785 | 6,847 | 6,119 | 7,521 | 8,898 | ||||||||||||||||||||||||||
Key common shareholders equity |
10,012 | 9,915 | 9,938 | 10,049 | 9,980 | 9,960 | 9,864 | 9,808 | ||||||||||||||||||||||||||
Key shareholders equity |
10,303 | 10,206 | 10,229 | 10,340 | 10,271 | 10,251 | 10,155 | 10,099 | ||||||||||||||||||||||||||
PERFORMANCE RATIOS FROM CONTINUING OPERATIONS |
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Return on average total assets |
1.08 | % | 1.12 | % | .95 | % | .99 | % | .96 | % | 1.06 | % | 1.10 | % | 1.01 | % | ||||||||||||||||||
Return on average common equity |
9.10 | 9.13 | 7.72 | 7.96 | 7.58 | 8.45 | 8.90 | 8.08 | ||||||||||||||||||||||||||
Return on average tangible common equity (c) |
10.13 | 10.18 | 8.60 | 8.87 | 8.45 | 9.43 | 9.83 | 8.94 | ||||||||||||||||||||||||||
Net interest margin (TE) |
3.01 | 3.11 | 3.13 | 3.24 | 3.37 | 3.23 | 3.06 | 3.16 | ||||||||||||||||||||||||||
Cash efficiency ratio (c) |
67.4 | 67.5 | 69.1 | 66.0 | 69.0 | 64.1 | 69.1 | 67.7 | ||||||||||||||||||||||||||
PERFORMANCE RATIOS FROM CONSOLIDATED OPERATIONS |
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Return on average total assets |
1.00 | % | 1.22 | % | .92 | % | .94 | % | .93 | % | 1.01 | % | 1.10 | % | .93 | % | ||||||||||||||||||
Return on average common equity |
8.90 | 10.61 | 7.92 | 8.08 | 7.86 | 8.57 | 9.47 | 8.04 | ||||||||||||||||||||||||||
Return on average tangible common equity (c) |
9.91 | 11.82 | 8.82 | 9.01 | 8.77 | 9.56 | 10.46 | 8.90 | ||||||||||||||||||||||||||
Net interest margin (TE) |
2.91 | 3.06 | 3.07 | 3.16 | 3.29 | 3.14 | 2.99 | 3.08 | ||||||||||||||||||||||||||
Loan to deposit (d) |
83.8 | 83.8 | 83.6 | 86.9 | 85.8 | 86.2 | 86.4 | 87.0 | ||||||||||||||||||||||||||
CAPITAL RATIOS AT PERIOD END |
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Key shareholders equity to assets |
11.09 | % | 11.25 | % | 11.29 | % | 11.59 | % | 11.51 | % | 11.79 | % | 11.74 | % | 11.55 | % | ||||||||||||||||||
Key common shareholders equity to assets |
10.78 | 10.94 | 10.96 | 11.27 | 11.18 | 11.45 | 11.40 | 11.22 | ||||||||||||||||||||||||||
Tangible common equity to tangible assets (c) |
9.80 | 9.93 | 9.96 | 10.24 | 10.15 | 10.39 | 10.44 | 10.26 | ||||||||||||||||||||||||||
Tier 1 common equity (c) |
11.22 | 11.17 | 11.18 | 11.40 | 11.36 | 11.30 | 11.63 | 11.55 | ||||||||||||||||||||||||||
Tier 1 risk-based capital |
11.96 | 11.92 | 11.93 | 12.19 | 12.15 | 12.10 | 12.45 | 13.29 | ||||||||||||||||||||||||||
Total risk-based capital |
14.33 | 14.37 | 14.65 | 15.02 | 15.13 | 15.17 | 15.83 | 16.68 | ||||||||||||||||||||||||||
Leverage |
11.11 | 11.33 | 11.25 | 11.36 | 11.41 | 11.37 | 11.35 | 12.12 | ||||||||||||||||||||||||||
TRUST AND BROKERAGE ASSETS |
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Assets under management |
$ | 36,905 | $ | 36,110 | $ | 35,544 | $ | 35,714 | $ | 34,744 | $ | 35,587 | $ | 35,148 | $ | 35,862 | ||||||||||||||||||
Nonmanaged and brokerage assets |
47,418 | 38,525 | 37,759 | 37,115 | 35,550 | 34,322 | 33,803 | 33,021 | ||||||||||||||||||||||||||
OTHER DATA |
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Average full-time-equivalent employees |
14,197 | 14,555 | 14,999 | 15,396 | 15,589 | 15,833 | 15,455 | 15,404 | ||||||||||||||||||||||||||
Branches |
1,028 | 1,044 | 1,052 | 1,084 | 1,088 | 1,087 | 1,062 | 1,059 |
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(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. In February 2013, we decided to sell Victory to a private equity fund. As a result of these decisions, we have accounted for these businesses as discontinued operations. For further discussion regarding the income (loss) from discontinued operations, see Note 13 (Acquisitions and Discontinued Operations). |
(b) | EPS may not foot due to rounding. |
(c) | See Figure 46 entitled Selected Quarterly GAAP to Non-GAAP Reconciliations, which presents the computations of certain financial measures related to tangible common equity, Tier 1 common equity, and cash efficiency. The table reconciles the GAAP performance measures to the corresponding non-GAAP measures, which provides a basis for period-to-period comparisons. |
(d) | Represents period-end consolidated total loans and loans held for sale (excluding education loans in securitizations trusts) divided by period-end consolidated total deposits (excluding deposits in foreign office). |
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Figure 46. Selected Quarterly GAAP to Non-GAAP Reconciliations
Three months ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
dollars in millions | 12-31-13 | 9-30-13 | 6-30-13 | 3-31-13 | 12-31-12 | 9-30-12 | 6-30-12 | 3-31-12 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tangible common equity to tangible assets at period end |
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Key shareholders equity (GAAP) |
$ | 10,303 | $ | 10,206 | $ | 10,229 | $ | 10,340 | $ | 10,271 | $ | 10,251 | $ | 10,155 | $ | 10,099 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Less: |
Intangible assets (a) |
1,014 | 1,017 | 1,021 | 1,024 | 1,027 | 1,031 | 932 | 932 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Series A Preferred Stock (b) |
282 | 282 | 282 | 291 | 291 | 291 | 291 | 291 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tangible common equity (non-GAAP) |
$ | 9,007 | $ | 8,907 | $ | 8,926 | $ | 9,025 | $ | 8,953 | $ | 8,929 | $ | 8,932 | $ | 8,876 | ||||||||||||||||||||||||||||||||||||||||||||||||||
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Total assets (GAAP) |
$ | 92,934 | $ | 90,708 | $ | 90,639 | $ | 89,198 | $ | 89,236 | $ | 86,950 | $ | 86,523 | $ | 87,431 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Less: |
Intangible assets (a) |
1,014 | 1,017 | 1,021 | 1,024 | 1,027 | 1,031 | 932 | 932 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tangible assets (non-GAAP) |
$ | 91,920 | $ | 89,691 | $ | 89,618 | $ | 88,174 | $ | 88,209 | $ | 85,919 | $ | 85,591 | $ | 86,499 | ||||||||||||||||||||||||||||||||||||||||||||||||||
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Tangible common equity to tangible assets ratio (non-GAAP) |
9.80 | % | 9.93 | % | 9.96 | % | 10.24 | % | 10.15 | % | 10.39 | % | 10.44 | % | 10.26 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
Tier 1 common equity at period end |
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Key shareholders equity (GAAP) |
$ | 10,303 | $ | 10,206 | $ | 10,229 | $ | 10,340 | $ | 10,271 | $ | 10,251 | $ | 10,155 | $ | 10,099 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Qualifying capital securities |
339 | 340 | 339 | 339 | 339 | 339 | 339 | 1,046 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Less: |
Goodwill |
979 | 979 | 979 | 979 | 979 | 979 | 917 | 917 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accumulated other comprehensive income (loss) (c) |
(394 | ) | (409 | ) | (359 | ) | (204 | ) | (172 | ) | (109 | ) | (109 | ) | (70 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Other assets (d) |
89 | 96 | 101 | 106 | 114 | 121 | 71 | 69 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Tier 1 capital (regulatory) |
9,968 | 9,880 | 9,847 | 9,798 | 9,689 | 9,599 | 9,615 | 10,229 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Less: |
Qualifying capital securities |
339 | 340 | 339 | 339 | 339 | 339 | 339 | 1,046 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Series A Preferred Stock (b) |
282 | 282 | 282 | 291 | 291 | 291 | 291 | 291 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Tier 1 common equity (non-GAAP) |
$ | 9,347 | $ | 9,258 | $ | 9,226 | $ | 9,168 | $ | 9,059 | $ | 8,969 | $ | 8,985 | $ | 8,892 | ||||||||||||||||||||||||||||||||||||||||||||||||||
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Net risk-weighted assets (regulatory) |
$ | 83,328 | $ | 82,913 | $ | 82,528 | $ | 80,400 | $ | 79,734 | $ | 79,363 | $ | 77,236 | $ | 76,956 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Tier 1 common equity ratio (non-GAAP) |
11.22 | % | 11.17 | % | 11.18 | % | 11.40 | % | 11.36 | % | 11.30 | % | 11.63 | % | 11.55 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
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Average tangible common equity |
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Average Key shareholders equity (GAAP) |
$ | 10,272 | $ | 10,237 | $ | 10,314 | $ | 10,279 | $ | 10,261 | $ | 10,222 | $ | 10,100 | $ | 9,992 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Less: |
Intangible assets (average) (e) |
1,016 | 1,019 | 1,023 | 1,027 | 1,030 | 1,026 | 931 | 932 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Series A Preferred Stock (average) |
291 | 291 | 291 | 291 | 291 | 291 | 291 | 291 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Average tangible common equity (non-GAAP) |
$ | 8,965 | $ | 8,927 | $ | 9,000 | $ | 8,961 | $ | 8,940 | $ | 8,905 | $ | 8,878 | $ | 8,769 | ||||||||||||||||||||||||||||||||||||||||||||||||||
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Return on average tangible common equity from continuing operations |
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Net income (loss) from continuing operations attributable to Key common shareholders (GAAP) |
$ | 229 | $ | 229 | $ | 193 | $ | 196 | $ | 190 | $ | 211 | $ | 217 | $ | 195 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Average tangible common equity (non-GAAP) |
8,965 | 8,927 | 9,000 | 8,961 | 8,940 | 8,905 | 8,878 | 8,769 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Return on average tangible common equity from continuing operations (non-GAAP) |
10.13 | % | 10.18 | % | 8.60 | % | 8.87 | % | 8.45 | % | 9.43 | % | 9.83 | % | 8.94 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
Return on average tangible common equity consolidated |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) attributable to Key common shareholders (GAAP) |
$ | 224 | $ | 266 | $ | 198 | $ | 199 | $ | 197 | $ | 214 | $ | 231 | $ | 194 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Average tangible common equity (non-GAAP) |
8,965 | 8,927 | 9,000 | 8,961 | 8,940 | 8,905 | 8,878 | 8,769 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Return on average tangible common equity consolidated (non-GAAP) |
9.91 | % | 11.82 | % | 8.82 | % | 9.01 | % | 8.77 | % | 9.56 | % | 10.46 | % | 8.90 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
Cash efficiency ratio |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Noninterest expense (GAAP) |
$ | 712 | $ | 716 | $ | 711 | $ | 681 | $ | 734 | $ | 712 | $ | 693 | $ | 679 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Less: |
Intangible asset amortization on credit cards (GAAP) |
7 | 8 | 7 | 8 | 8 | 6 | | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other intangible asset amortization (GAAP) |
3 | 4 | 3 | 4 | 4 | 3 | 1 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Adjusted noninterest expense (non-GAAP) |
$ | 702 | $ | 704 | $ | 701 | $ | 669 | $ | 722 | $ | 703 | $ | 692 | $ | 678 | ||||||||||||||||||||||||||||||||||||||||||||||||||
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Net interest income (GAAP) |
$ | 583 | $ | 578 | $ | 581 | $ | 583 | $ | 601 | $ | 572 | $ | 538 | $ | 553 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Plus: |
Taxable-equivalent adjustment |
6 | 6 | 5 | 6 | 6 | 6 | 6 | 6 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Noninterest income (GAAP) |
453 | 459 | 429 | 425 | 439 | 518 | 457 | 442 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total taxable-equivalent revenue (non-GAAP) |
$ | 1,042 | $ | 1,043 | $ | 1,015 | $ | 1,014 | $ | 1,046 | $ | 1,096 | $ | 1,001 | $ | 1,001 | ||||||||||||||||||||||||||||||||||||||||||||||||||
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Cash efficiency ratio (non-GAAP) |
67.4 | % | 67.5 | % | 69.1 | % | 66.0 | % | 69.0 | % | 64.1 | % | 69.1 | % | 67.7 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
Adjusted cash efficiency ratio net of efficiency initiative charges |
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Adjusted noninterest expense (non-GAAP) |
$ | 702 | $ | 704 | $ | 701 | $ | 669 | $ | 722 | $ | 703 | $ | 692 | $ | 678 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Less: |
Efficiency initiative and pension settlement charges (non-GAAP) |
24 | 41 | 37 | 15 | 16 | 9 | | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net adjusted noninterest expense (non-GAAP) |
$ | 678 | $ | 663 | $ | 664 | $ | 654 | $ | 706 | $ | 694 | $ | 692 | $ | 678 | ||||||||||||||||||||||||||||||||||||||||||||||||||
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Total taxable-equivalent revenue (non-GAAP) |
$ | 1,042 | $ | 1,043 | $ | 1,015 | $ | 1,014 | $ | 1,046 | $ | 1,096 | $ | 1,001 | $ | 1,001 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Adjusted cash efficiency ratio net of efficiency initiative charges (non-GAAP) |
65.1 | % | 63.6 | % | 65.4 | % | 64.5 | % | 67.5 | % | 63.3 | % | 69.1 | % | 67.7 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
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99
(a) | Three months ended December 31, 2013, September 30, 2013, June 30, 2013, and March 31, 2013, exclude $92 million, $99 million, $107 million, and $114 million, respectively, of period-end purchased credit card receivable intangible assets. Three months ended December 31, 2012, and September 30, 2012, exclude $123 million and $130 million, respectively, of period-end purchased credit card receivable intangible assets. |
(b) | Net of capital surplus for the three months ended December 31, 2013, September 30, 2013, and June 30, 2013. |
(c) | Includes net unrealized gains or losses on securities available for sale (except for net unrealized losses on marketable equity securities), net gains or losses on cash flow hedges, and amounts resulting from the application of the applicable accounting guidance for defined benefit and other postretirement plans. |
(d) | Other assets deducted from Tier 1 capital and net risk-weighted assets consist of disallowed intangible assets (excluding goodwill) and deductible portions of nonfinancial equity investments. There were no disallowed deferred tax assets at any quarter-end during 2013 and 2012. |
(e) | Three months ended December 31, 2013, September 30, 2013, June 30, 2013, and March 31, 2013, exclude $96 million, $103 million, $110 million, and $118 million, respectively, of average purchased credit card receivable intangible assets. Three months ended December 31, 2012, and September 30, 2012, exclude $126 million and $86 million, respectively, of average purchased credit card receivable intangible assets. |
Critical Accounting Policies and Estimates
Our business is dynamic and complex. Consequently, we must exercise judgment in choosing and applying accounting policies and methodologies. These choices are critical; not only are they necessary to comply with GAAP, they also reflect our view of the appropriate way to record and report our overall financial performance. All accounting policies are important, and all policies described in Note 1 (Summary of Significant Accounting Policies) should be reviewed for a greater understanding of how we record and report our financial performance.
In our opinion, some accounting policies are more likely than others to have a critical effect on our financial results and to expose those results to potentially greater volatility. These policies apply to areas of relatively greater business importance, or require us 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 prove to be inaccurate, or we may find it necessary to change them.
As described below, we rely heavily on the use of judgment, assumptions and estimates to make a number of core decisions. We have reviewed these critical accounting estimates and related disclosures with the Audit Committee.
Allowance for loan and lease losses
The loan portfolio is the largest category of assets on our balance sheet. We consider a variety of data to determine probable losses incurred in the loan portfolio and to establish an allowance that is sufficient to absorb those losses. For example, we apply expected loss rates to existing loans with similar risk characteristics and exercise judgment to assess the impact of factors such as changes in economic conditions, underwriting standards, and concentrations of credit. Other considerations include expected cash flows and estimated collateral values.
For all commercial and consumer TDRs, regardless of size, as well as all other impaired commercial loans with an outstanding balances of $2.5 million and greater, we conduct further analysis to determine the probable loss and assign a specific allowance to the loan if deemed appropriate. For example, a specific allowance may be assigned even when sources of repayment appear sufficient if we remain uncertain that an impaired loan will be repaid in full.
We continually assess the risk profile of the loan portfolio and adjust the ALLL when appropriate. The economic and business climate in any given industry or market is difficult to gauge and can change rapidly, and the effects of those changes can vary by borrower. However, since our total loan portfolio is well diversified in many
100
respects, and the risk profile of certain segments of the loan portfolio may be improving while the risk profile of others is deteriorating, we may decide to change the level of the allowance for one segment of the portfolio without changing it for any other segment.
In addition to adjusting the ALLL to reflect market conditions, we also may adjust the allowance because of unique events that are likely to cause actual losses to vary abruptly and significantly from expected losses. For example, class action lawsuits brought against an industry segment (e.g., one that used asbestos in its product) can cause a precipitous deterioration in the risk profile of borrowers doing business in that segment. Conversely, the dismissal of such lawsuits can improve the risk profile. In either case, historical loss rates for that industry segment would not have provided a precise basis for determining the appropriate level of allowance.
Even minor changes in the level of estimated losses can significantly affect managements determination of the appropriate allowance because those changes must be applied across a large portfolio. To illustrate, an increase in estimated losses equal to one-tenth of one percent of our consumer loan portfolio as of December 31, 2013, would indicate the need for a $16 million increase in the allowance. The same increase in estimated losses for the commercial loan portfolio would result in a $38 million increase in the allowance. Such adjustments to the ALLL can materially affect financial results. Following the above examples, a $16 million increase in the consumer loan portfolio allowance would have reduced our earnings on an after-tax basis by approximately $10 million, or $.01 per common share; a $38 million increase in the commercial loan portfolio allowance would have reduced earnings on an after-tax basis by approximately $24 million, or $.03 per common share.
As we make decisions regarding the allowance, we benefit from a lengthy organizational history and experience with credit evaluations and related outcomes. Nonetheless, if our underlying assumptions later prove to be inaccurate, the ALLL would likely need to be adjusted, possibly having an adverse effect on our results of operations.
Our accounting policy related to the allowance is disclosed in Note 1 under the heading Allowance for Loan and Lease Losses.
We follow the applicable accounting guidance for fair value measurements and disclosures, 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, we determine the fair value of our assets and liabilities using internally developed models, which are based on third-party data as well as our judgment, assumptions and estimates regarding credit quality, liquidity, interest rates and other relevant market available inputs. We describe our application of this accounting guidance, the process used to determine fair values, and the fair value hierarchy in Note 1 under the heading Fair Value Measurements, and in Note 6 (Fair Value Measurements).
Valuation methodologies often involve significant judgment, particularly when there are no observable active markets for the items being valued. To determine the values of assets and liabilities, as well as the extent to which related assets may be impaired, we make assumptions and estimates related to discount rates, asset returns, prepayment rates and other factors. The use of different discount rates or other valuation assumptions could produce significantly different results. The outcomes of valuations that we perform have a direct bearing on the recorded amounts of assets and liabilities, including loans held for sale, principal investments, goodwill, and pension and other postretirement benefit obligations.
At December 31, 2013, $14.5 billion, or 15.6%, of our total assets were measured at fair value on a recurring basis. Substantially all of these assets were classified as Level 1 or Level 2 within the fair value hierarchy. At December 31, 2013, $1.3 billion, or 1.5%, of our total liabilities were measured at fair value on a recurring basis. Substantially all of these liabilities were classified as Level 1 or Level 2.
101
At December 31, 2013, $30 million, or .1%, of our total assets were measured at fair value on a nonrecurring basis. All of these assets were classified as Level 3. At December 31, 2013, there were no liabilities measured at fair value on a nonrecurring basis.
A discussion of the valuation methodology applied to our loans held for sale is included in Note 1 under the heading Loans Held for Sale.
Our principal investments include direct and indirect investments, predominantly in privately-held companies. The fair values of these investments are determined by considering a number of factors, including the target companys financial condition and results of operations, values of public companies in comparable businesses, market liquidity, and the nature and duration of resale restrictions. The fair value of principal investments was $554 million at December 31, 2013. A 10% positive or negative variance in that fair value would have increased or decreased our 2013 earnings by approximately $55 million ($35 million after tax, or $.04 per common share).
The valuation and testing methodologies used in our analysis of goodwill impairment are summarized in Note 1 under the heading Goodwill and Other Intangible Assets. Accounting guidance that was effective for us on January 1, 2012, permits an entity to first assess qualitative factors to determine whether additional goodwill impairment testing is required. We did not choose to utilize this qualitative assessment in our annual goodwill impairment testing in the fourth quarter of 2013. Therefore, the first step in testing for impairment is to determine the fair value of each reporting unit. Our reporting units for purposes of this testing are our two major business segments: Key Community Bank and Key Corporate Bank. Fair values are estimated using comparable external market data (market approach) and discounted cash flow modeling that incorporates an appropriate risk premium and earnings forecast information (income approach). We believe the estimates and assumptions used in the goodwill impairment analysis for our reporting units are reasonable. However, if actual results and market conditions differ from the assumptions or estimates used, the fair value of each reporting unit could change in the future.
The second step of impairment testing is necessary only if the carrying amount of either reporting unit exceeds its fair value, suggesting goodwill impairment. In such a case, we would estimate a hypothetical purchase price for the reporting unit (representing the units fair value) and then compare that hypothetical purchase price with the fair value of the units net assets (excluding goodwill). Any excess of the estimated purchase price over the fair value of the reporting units net assets represents the implied fair value of goodwill. An impairment loss would be recognized as a charge to earnings if the carrying amount of the reporting units goodwill exceeds the implied fair value of goodwill. Because the strength of the economic recovery remained uncertain during 2013, we continued to monitor the impairment indicators for goodwill and other intangible assets, and to evaluate the carrying amount of these assets quarterly. The acquisition of 37 retail banking branches in Western New York resulted in a $62 million increase in the goodwill at the Key Community Bank unit. At December 31, 2013, the Key Community Bank reporting unit had $979 million in goodwill, while the Key Corporate Bank reporting unit had no recorded goodwill. Additional information is provided in Note 10 (Goodwill and Other Intangible Assets).
The primary assumptions used in determining our pension and other postretirement benefit obligations and related expenses, including sensitivity analysis of these assumptions, are presented in Note 16 (Employee Benefits).
When potential asset impairment is identified, we must exercise judgment to determine the nature of the potential impairment (i.e., temporary or other-than-temporary) to apply the appropriate accounting treatment. For example, unrealized losses on securities available for sale that are deemed temporary are recorded in shareholders equity; those deemed other-than-temporary are recorded in either earnings or shareholders equity based on certain factors. Additional information regarding temporary and other-than-temporary impairment on securities available for sale at December 31, 2013, is provided in Note 7 (Securities).
102
We use primarily interest rate swaps to hedge interest rate risk for asset and liability management purposes. These derivative instruments modify the interest rate characteristics of specified on-balance sheet assets and liabilities. Our accounting policies related to derivatives reflect the current accounting guidance, which provides that all derivatives should be recognized as either assets or liabilities on the balance sheet at fair value, after taking into account the effects of master netting agreements. Accounting for changes in the fair value (i.e., gains or losses) of a particular derivative depends on whether the derivative has been designated and qualifies as part of a hedging relationship, and further, on the type of hedging relationship.
The application of hedge accounting requires significant judgment to interpret the relevant accounting guidance, as well as to assess hedge effectiveness, identify similar hedged item groupings, and measure changes in the fair value of the hedged items. We believe our methods of addressing these judgments and applying the accounting guidance are consistent with both the guidance and industry practices. However, interpretations of the applicable accounting guidance continue to change and evolve. In the future, these evolving interpretations could result in material changes to our accounting for derivative financial instruments and related hedging activities. Although such changes may not have a material effect on our financial condition, a change could have a material adverse effect on our results of operations in the period in which it occurs. Additional information relating to our use of derivatives is included in Note 1 under the heading Derivatives, and Note 8 (Derivatives and Hedging Activities).
Contingent liabilities, guarantees and income taxes
Note 20 (Commitments, Contingent Liabilities and Guarantees) summarizes contingent liabilities arising from litigation and contingent liabilities arising from guarantees in various agreements with third parties under which we are a guarantor, and the potential effects of these items on the results of our operations. We record a liability for the fair value of the obligation to stand ready to perform over the term of a guarantee, but there is a risk that our actual future payments in the event of a default by the guaranteed party could exceed the recorded amount. See Note 20 for a comparison of the liability recorded and the maximum potential undiscounted future payments for the various types of guarantees that we had outstanding at December 31, 2013.
It is not always clear how the Internal Revenue Code and various state tax laws apply to transactions that we undertake. In the normal course of business, we may record tax benefits and then have those benefits contested by the IRS or state tax authorities. We have provided tax reserves that we believe are adequate to absorb potential adjustments that such challenges may necessitate. However, if our judgment later proves to be inaccurate, the tax reserves may need to be adjusted, which could have an adverse effect on our results of operations and capital.
Additionally, we conduct quarterly assessments that determine the amount of deferred tax assets that are more-likely-than-not to be realized, and therefore recorded. The available evidence used in connection with these assessments includes taxable income in prior periods, projected future taxable income, potential tax-planning strategies, and projected future reversals of deferred tax items. These assessments are subjective and may change. Based on these criteria, and in particular our projections for future taxable income, we currently believe it is more-likely-than-not that we will realize our net deferred tax asset in future periods. However, if our assessments prove incorrect, they could have a material adverse effect on our results of operations in the period in which they occur. For further information on our accounting for income taxes, see Note 12 (Income Taxes).
During 2013, we did not significantly alter the manner in which we applied our critical accounting policies or developed related assumptions and estimates.
103
European Sovereign and Non-Sovereign Debt Exposures
Our total European sovereign and non-sovereign debt exposure is presented in Figure 47.
Figure 47. European Sovereign and Non-Sovereign Debt Exposures
December 31, 2013 in millions |
Short and Long- Term Commercial Total (a) |
Foreign Exchange and Derivatives with Collateral (b) |
Net Exposure |
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France: |
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Sovereigns |
| | | |||||||||||
Non-sovereign financial institutions |
| $ | (8 | ) | $ | (8 | ) | |||||||
Non-sovereign non-financial institutions |
$ | 74 | | 74 | ||||||||||
Total |
74 | (8 | ) | 66 | ||||||||||
Germany: |
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Sovereigns |
| | | |||||||||||
Non-sovereign financial institutions |
| 4 | 4 | |||||||||||
Non-sovereign non-financial institutions |
316 | | 316 | |||||||||||
Total |
316 | 4 | 320 | |||||||||||
Greece: |
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Sovereigns |
| | | |||||||||||
Non-sovereign financial institutions |
| | | |||||||||||
Non-sovereign non-financial institutions |
| | | |||||||||||
Total |
| | | |||||||||||
Iceland: |
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Sovereigns |
| | | |||||||||||
Non-sovereign financial institutions |
| | | |||||||||||
Non-sovereign non-financial institutions |
| | | |||||||||||
Total |
| | | |||||||||||
Ireland: |
||||||||||||||
Sovereigns |
| | | |||||||||||
Non-sovereign financial institutions |
| | | |||||||||||
Non-sovereign non-financial institutions |
7 | | 7 | |||||||||||
Total |
7 | | 7 | |||||||||||
Italy: |
||||||||||||||
Sovereigns |
| | | |||||||||||
Non-sovereign financial institutions |
| | | |||||||||||
Non-sovereign non-financial institutions |
125 | | 125 | |||||||||||
Total |
125 | | 125 | |||||||||||
Netherlands: |
||||||||||||||
Sovereigns |
| | | |||||||||||
Non-sovereign financial institutions |
| | | |||||||||||
Non-sovereign non-financial institutions |
121 | | 121 | |||||||||||
Total |
121 | | 121 | |||||||||||
Portugal: |
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Sovereigns |
| | | |||||||||||
Non-sovereign financial institutions |
| | | |||||||||||
Non-sovereign non-financial institutions |
| | | |||||||||||
Total |
| | | |||||||||||
Spain: |
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Sovereigns |
| | | |||||||||||
Non-sovereign financial institutions |
| | | |||||||||||
Non-sovereign non-financial institutions |
104 | | 104 | |||||||||||
Total |
104 | | 104 | |||||||||||
Switzerland: |
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Sovereigns |
| | | |||||||||||
Non-sovereign financial institutions |
| 2 | 2 | |||||||||||
Non-sovereign non-financial institutions |
74 | | 74 | |||||||||||
Total |
74 | 2 | 76 | |||||||||||
United Kingdom: |
||||||||||||||
Sovereigns |
| | | |||||||||||
Non-sovereign financial institutions |
| 2 | 2 | |||||||||||
Non-sovereign non-financial institutions |
218 | | 218 | |||||||||||
Total |
218 | 2 | 220 | |||||||||||
Other Europe: (c) |
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Sovereigns |
| | | |||||||||||
Non-sovereign financial institutions |
| | | |||||||||||
Non-sovereign non-financial institutions |
136 | | 136 | |||||||||||
Total |
136 | | 136 | |||||||||||
Total Europe: |
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Sovereigns |
| | | |||||||||||
Non-sovereign financial institutions |
| | | |||||||||||
Non-sovereign non-financial institutions |
1,175 | | 1,175 | |||||||||||
Total |
$ | 1,175 | $ | | $ | 1,175 | ||||||||
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(a) | This column represents our outstanding leases. |
(b) | This column represents contracts to hedge our balance sheet asset and liability needs, and to accommodate our clients trading and/or hedging needs. Our derivative mark-to-market exposures are calculated and reported on a daily basis. These exposures are largely covered by cash or highly marketable securities collateral with daily collateral calls. |
(c) | Other Europe consists of the following countries: Austria, Belarus, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Finland, Hungary, Lithuania, Luxembourg, Malta, Norway, Poland, Romania, Russia, Slovakia, Slovenia, Sweden, and Ukraine. Approximately 95% of our exposure in Other Europe is in Belgium, Finland, and Sweden. |
104
Our credit risk exposure is largely concentrated in developed countries with emerging market exposure essentially limited to commercial facilities; these exposures are actively monitored by management. We do not have at-risk exposures in the rest of the world.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information included under the caption Risk Management Market risk management in the MD&A beginning on page 77 is incorporated herein by reference.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial performance for each of the past eight quarters is summarized in Figure 45 contained in the Fourth Quarter Results section in the MD&A.
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Managements Annual Report on Internal Control over Financial Reporting |
107 | |||
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting |
108 | |||
109 | ||||
110 | ||||
111 | ||||
112 | ||||
113 | ||||
114 | ||||
115 | ||||
115 | ||||
129 | ||||
Note 3. Restrictions on Cash, Dividends and Lending Activities |
130 | |||
131 | ||||
132 | ||||
145 | ||||
159 | ||||
161 | ||||
170 | ||||
171 | ||||
172 | ||||
175 | ||||
177 | ||||
185 | ||||
186 | ||||
190 | ||||
199 | ||||
200 | ||||
Note 19. Trust Preferred Securities Issued by Unconsolidated Subsidiaries |
202 | |||
203 | ||||
207 | ||||
208 | ||||
209 | ||||
Note 24. Condensed Financial Information of the Parent Company |
213 |
106
Managements Annual Report on Internal Control over Financial Reporting
We are responsible for the preparation, content and integrity of the financial statements and other statistical data and analyses compiled for this annual report. The financial statements and related notes have been prepared in conformity with U.S. generally accepted accounting principles and reflect our best estimates and judgments. We believe the financial statements and notes present fairly our financial position, results of operations and cash flows in all material respects.
We are responsible for establishing and maintaining a system of internal control that is designed to protect our assets and the integrity of our financial reporting. This corporate-wide system of controls includes self-monitoring mechanisms and written policies and procedures, prescribes proper delegation of authority and division of responsibility, and facilitates the selection and training of qualified personnel.
All employees are required to comply with our code of ethics. We conduct an annual certification process to ensure that our employees meet this obligation. Although any system of internal control can be compromised by human error or intentional circumvention of required procedures, we believe our system provides reasonable assurance that financial transactions are recorded and reported properly, providing an adequate basis for reliable financial statements.
The Board of Directors discharges its responsibility for our financial statements through its Audit Committee. This committee, which draws its members exclusively from the non-management directors, also hires the independent registered public accounting firm.
Managements Assessment of Internal Control over Financial Reporting
We are responsible for establishing and maintaining adequate internal control over our financial reporting. We have assessed the effectiveness of our internal control and procedures over financial reporting using criteria described in Internal Control Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework). Based on that assessment, we believe we maintained an effective system of internal control over financial reporting as of December 31, 2013. Our independent registered public accounting firm has issued an attestation report, dated February 26, 2014, on our internal control over financial reporting, which is included in this annual report.
Beth E. Mooney
Chairman, Chief Executive Officer and President
Donald R. Kimble
Chief Financial Officer
107
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
The Board of Directors and Shareholders of KeyCorp
We have audited KeyCorps internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). KeyCorps management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Managements Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on KeyCorps internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, KeyCorp maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of KeyCorp as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2013 and our report dated February 26, 2014 expressed an unqualified opinion thereon.
Cleveland, Ohio
February 26, 2014
108
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of KeyCorp
We have audited the accompanying consolidated balance sheets of KeyCorp as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2013. These financial statements are the responsibility of KeyCorps management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of KeyCorp at December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), KeyCorps internal control over financial reporting as of December 31, 2013, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework), and our report dated February 26, 2014 expressed an unqualified opinion thereon.
Cleveland, Ohio
February 26, 2014
109
December 31, | ||||||||
in millions, except per share data | 2013 | 2012 | ||||||
|
||||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 617 | $ | 584 | ||||
Short-term investments |
5,590 | 3,940 | ||||||
Trading account assets |
738 | 605 | ||||||
Securities available for sale |
12,346 | 12,094 | ||||||
Held-to-maturity securities (fair value: $4,617 and $3,992) |
4,756 | 3,931 | ||||||
Other investments |
969 | 1,064 | ||||||
Loans, net of unearned income of $805 and $957 |
54,457 | 52,822 | ||||||
Less: Allowance for loan and lease losses |
848 | 888 | ||||||
|
||||||||
Net loans |
53,609 | 51,934 | ||||||
Loans held for sale |
611 | 599 | ||||||
Premises and equipment |
885 | 965 | ||||||
Operating lease assets |
305 | 288 | ||||||
Goodwill |
979 | 979 | ||||||
Other intangible assets |
127 | 171 | ||||||
Corporate-owned life insurance |
3,408 | 3,333 | ||||||
Derivative assets |
407 | 693 | ||||||
Accrued income and other assets (including $22 of consolidated
|
3,015 | 2,774 | ||||||
Discontinued assets (including $1,980 of consolidated education
|
4,572 | 5,282 | ||||||
|
||||||||
Total assets |
$ | 92,934 | $ | 89,236 | ||||
|
|
|
|
|||||
LIABILITIES |
||||||||
Deposits in domestic offices: |
||||||||
NOW and money market deposit accounts |
$ | 33,952 | $ | 32,380 | ||||
Savings deposits |
2,472 | 2,433 | ||||||
Certificates of deposit ($100,000 or more) |
2,631 | 2,879 | ||||||
Other time deposits |
3,648 | 4,575 | ||||||
|
||||||||
Total interest-bearing |
42,703 | 42,267 | ||||||
Noninterest-bearing |
26,001 | 23,319 | ||||||
Deposits in foreign office interest-bearing |
558 | 407 | ||||||
|
||||||||
Total deposits |
69,262 | 65,993 | ||||||
Federal funds purchased and securities sold under repurchase agreements |
1,534 | 1,609 | ||||||
Bank notes and other short-term borrowings |
343 | 287 | ||||||
Derivative liabilities |
414 | 584 | ||||||
Accrued expense and other liabilities |
1,557 | 1,387 | ||||||
Long-term debt |
7,650 | 6,847 | ||||||
Discontinued liabilities (including $1,854 of consolidated education
|
1,854 | 2,220 | ||||||
|
||||||||
Total liabilities |
82,614 | 78,927 | ||||||
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 and 2,904,839 shares |
291 | 291 | ||||||
Common shares, $1 par value; authorized 1,400,000,000 shares; issued 1,016,969,905 and 1,016,969,905 shares |
1,017 | 1,017 | ||||||
Capital surplus |
4,022 | 4,126 | ||||||
Retained earnings |
7,606 | 6,913 | ||||||
Treasury stock, at cost (126,245,538 and 91,201,285 shares) |
(2,281) | (1,952) | ||||||
Accumulated other comprehensive income (loss) |
(352) | (124) | ||||||
|
||||||||
Key shareholders equity |
10,303 | 10,271 | ||||||
Noncontrolling interests |
17 | 38 | ||||||
|
||||||||
Total equity |
10,320 | 10,309 | ||||||
|
||||||||
Total liabilities and equity |
$ | 92,934 | $ | 89,236 | ||||
|
|
|
|
|||||
|
(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.
110
Consolidated Statements of Income
Year ended December 31, | ||||||||||||
dollars in millions, except per share amounts | 2013 | 2012 | 2011 | |||||||||
|
||||||||||||
INTEREST INCOME |
||||||||||||
Loans |
$ | 2,151 | $ | 2,155 | $ | 2,206 | ||||||
Loans held for sale |
20 | 20 | 14 | |||||||||
Securities available for sale |
311 | 399 | 583 | |||||||||
Held-to-maturity securities |
82 | 69 | 12 | |||||||||
Trading account assets |
21 | 18 | 26 | |||||||||
Short-term investments |
6 | 6 | 6 | |||||||||
Other investments |
29 | 38 | 42 | |||||||||
|
||||||||||||
Total interest income |
2,620 | 2,705 | 2,889 | |||||||||
INTEREST EXPENSE |
||||||||||||
Deposits |
158 | 257 | 390 | |||||||||
Federal funds purchased and securities sold under repurchase agreements |
2 | 4 | 5 | |||||||||
Bank notes and other short-term borrowings |
8 | 7 | 11 | |||||||||
Long-term debt |
127 | 173 | 216 | |||||||||
|
||||||||||||
Total interest expense |
295 | 441 | 622 | |||||||||
|
||||||||||||
NET INTEREST INCOME |
2,325 | 2,264 | 2,267 | |||||||||
Provision (credit) for loan and lease losses |
130 | 229 | (60) | |||||||||
|
||||||||||||
Net interest income (expense) after provision for loan and lease losses |
2,195 | 2,035 | 2,327 | |||||||||
NONINTEREST INCOME |
||||||||||||
Trust and investment services income |
393 | 375 | 353 | |||||||||
Investment banking and debt placement fees |
333 | 327 | 224 | |||||||||
Service charges on deposit accounts |
281 | 287 | 281 | |||||||||
Operating lease income and other leasing gains |
108 | 195 | 157 | |||||||||
Corporate services income |
172 | 168 | 197 | |||||||||
Cards and payments income |
162 | 135 | 163 | |||||||||
Corporate-owned life insurance income |
120 | 122 | 121 | |||||||||
Consumer mortgage income |
19 | 40 | 32 | |||||||||
Mortgage servicing fees |
58 | 24 | 26 | |||||||||
Net gains (losses) from principal investing |
52 | 72 | 78 | |||||||||
Other income (a) |
68 | 111 | 56 | |||||||||
|
||||||||||||
Total noninterest income |
1,766 | 1,856 | 1,688 | |||||||||
NONINTEREST EXPENSE |
||||||||||||
Personnel |
1,609 | 1,570 | 1,460 | |||||||||
Net occupancy |
275 | 260 | 258 | |||||||||
Computer processing |
156 | 164 | 166 | |||||||||
Business services and professional fees |
151 | 190 | 183 | |||||||||
Equipment |
104 | 107 | 103 | |||||||||
Operating lease expense |
47 | 57 | 94 | |||||||||
Marketing |
51 | 68 | 60 | |||||||||
FDIC assessment |
30 | 31 | 52 | |||||||||
Intangible asset amortization on credit cards |
30 | 14 | | |||||||||
Other intangible asset amortization |
14 | 9 | 4 | |||||||||
Provision (credit) for losses on lending-related commitments |
8 | (16) | (28) | |||||||||
OREO expense, net |
7 | 15 | 13 | |||||||||
Other expense |
338 | 349 | 319 | |||||||||
|
||||||||||||
Total noninterest expense |
2,820 | 2,818 | 2,684 | |||||||||
|
||||||||||||
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |
1,141 | 1,073 | 1,331 | |||||||||
Income taxes |
271 | 231 | 364 | |||||||||
|
||||||||||||
INCOME (LOSS) FROM CONTINUING OPERATIONS |
870 | 842 | 967 | |||||||||
Income (loss) from discontinued operations, net of taxes of $26, $14 and ($21) (see Note 13) |
40 | 23 | (35) | |||||||||
|
||||||||||||
NET INCOME (LOSS) |
910 | 865 | 932 | |||||||||
Less: Net income (loss) attributable to noncontrolling interests |
| 7 | 12 | |||||||||
|
||||||||||||
NET INCOME (LOSS) ATTRIBUTABLE TO KEY |
$ | 910 | $ | 858 | $ | 920 | ||||||
|
|
|
|
|
|
|||||||
Income (loss) from continuing operations attributable to Key common shareholders |
$ | 847 | $ | 813 | $ | 848 | ||||||
Net income (loss) attributable to Key common shareholders |
887 | 836 | 813 | |||||||||
Per common share: |
||||||||||||
Income (loss) from continuing operations attributable to Key common shareholders |
$ | .93 | $ | .87 | $ | .91 | ||||||
Income (loss) from discontinued operations, net of taxes |
.04 | .02 | (.04) | |||||||||
Net income (loss) attributable to Key common shareholders (b) |
.98 | .89 | .87 | |||||||||
Per common share assuming dilution: |
||||||||||||
Income (loss) from continuing operations attributable to Key common shareholders |
$ | .93 | $ | .86 | $ | .91 | ||||||
Income (loss) from discontinued operations, net of taxes |
.04 | .02 | (.04) | |||||||||
Net income (loss) attributable to Key common shareholders (b) |
.97 | .89 | .87 | |||||||||
Cash dividends declared per common share |
$ | .215 | $ | .18 | $ | .10 | ||||||
Weighted-average common shares outstanding (000) (c) |
906,524 | 938,941 | 931,934 | |||||||||
Weighted-average common shares and potential common shares outstanding (000) |
912,571 | 943,259 | 935,801 | |||||||||
|
(a) | For the years ended December 31, 2013, 2012, and 2011, net securities gains (losses) totaled $1 million, less than $1 million, and $1 million, respectively. For 2013, 2012, and 2011, we did not have any impairment losses related to securities. |
(b) | EPS may not foot due to rounding. |
(c) | Assumes conversion of stock options and/or Series A Preferred Stock, as applicable. |
See Notes to Consolidated Financial Statements.
111
Consolidated Statements of Comprehensive Income
Year ended December 31, | ||||||||||||
in millions | 2013 | 2012 | 2011 | |||||||||
|
||||||||||||
Net income (loss) |
$ | 910 | $ | 865 | $ | 932 | ||||||
Other comprehensive income (loss), net of tax: |
||||||||||||
Net unrealized gains (losses) on securities available for sale, net of income taxes of ($173), ($58), and $46 |
(292) | (98) | 77 | |||||||||
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of ($17), $12, and ($6) |
(29) | 20 | (10) | |||||||||
Foreign currency translation adjustments, net of income taxes of ($3), ($3), and $5 |
(13) | 10 | (4) | |||||||||
Net pension and postretirement benefit costs, net of income taxes of $63, ($17), and ($44) |
106 | (28) | (74) | |||||||||
Total other comprehensive income (loss), net of tax |
(228) | (96) | (11) | |||||||||
|
||||||||||||
Comprehensive income (loss) |
682 | 769 | 921 | |||||||||
Less: Comprehensive income attributable to noncontrolling interests |
| 7 | 12 | |||||||||
|
||||||||||||
Comprehensive income (loss) attributable to Key |
$ | 682 | $ | 762 | $ | 909 | ||||||
|
|
|
|
|
|
|||||||
|
See Notes to Consolidated Financial Statements.
112
Consolidated Statements of Changes in Equity
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 | ||||||||||||||||||||||
Correction of an error in cumulative effect adjustment |
(30 | ) | ||||||||||||||||||||||||||||||||||||||
Net income (loss) |
920 | 12 | ||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss): |
||||||||||||||||||||||||||||||||||||||||
Net unrealized gains (losses) on securities available for sale, net of income taxes of $46 |
77 | |||||||||||||||||||||||||||||||||||||||
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of ($6) |
(10 | ) | ||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments, net of income taxes of $5 |
(4 | ) | ||||||||||||||||||||||||||||||||||||||
Net pension and postretirement benefit costs, net of income taxes of ($44) |
(74 | ) | ||||||||||||||||||||||||||||||||||||||
Deferred compensation |
(2 | ) | ||||||||||||||||||||||||||||||||||||||
Cash dividends declared on common shares ($.10 per share) |
(94 | ) | ||||||||||||||||||||||||||||||||||||||
Cash dividends declared on Noncumulative Series A Preferred Stock ($7.75 per share) |
(23 | ) | ||||||||||||||||||||||||||||||||||||||
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 | (4 | ) | |||||||||||||||||||||||||||||||||||||
Common shares issuance |
70,621 | 71 | 533 | |||||||||||||||||||||||||||||||||||||
Common shares reissued for stock options and other employee benefit plans |
1,779 | (65 | ) | 89 | ||||||||||||||||||||||||||||||||||||
Other |
1 | |||||||||||||||||||||||||||||||||||||||
Net contribution from (distribution to) noncontrolling interests |
(252 | ) | ||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
BALANCE AT DECEMBER 31, 2011 |
2,905 | 953,008 | $ | 291 | $ | 1,017 | | $ | 4,194 | $ | 6,246 | $ | (1,815 | ) | $ | (28 | ) | $ | 17 | |||||||||||||||||||||
Net income (loss) |
858 | 7 | ||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss): |
||||||||||||||||||||||||||||||||||||||||
Net unrealized gains (losses) on securities available for sale, net of income taxes of ($58) |
(98 | ) | ||||||||||||||||||||||||||||||||||||||
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $12 |
20 | |||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments, net of income taxes of ($3) |
10 | |||||||||||||||||||||||||||||||||||||||
Net pension and postretirement benefit costs, net of income taxes of ($17) |
(28 | ) | ||||||||||||||||||||||||||||||||||||||
Deferred compensation |
17 | |||||||||||||||||||||||||||||||||||||||
Cash dividends declared on common shares ($.18 per share) |
(169 | ) | ||||||||||||||||||||||||||||||||||||||
Cash dividends declared on Noncumulative Series A Preferred Stock ($7.75 per share) |
(22 | ) | ||||||||||||||||||||||||||||||||||||||
Common shares repurchased |
(30,637 | ) | (251 | ) | ||||||||||||||||||||||||||||||||||||
Common shares reissued (returned) for stock options and other employee benefit plans |
3,398 | (85 | ) | 114 | ||||||||||||||||||||||||||||||||||||
Net contribution from (distribution to) noncontrolling interests |
14 | |||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
BALANCE AT DECEMBER 31, 2012 |
2,905 | 925,769 | $ | 291 | $ | 1,017 | | $ | 4,126 | $ | 6,913 | $ | (1,952 | ) | $ | (124 | ) | $ | 38 | |||||||||||||||||||||
Net income (loss) |
910 | | ||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss): |
||||||||||||||||||||||||||||||||||||||||
Net unrealized gains (losses) on securities available for sale, net of income taxes of ($173) |
(292 | ) | ||||||||||||||||||||||||||||||||||||||
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of ($17) |
(29 | ) | ||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments, net of income taxes of ($3) |
(13 | ) | ||||||||||||||||||||||||||||||||||||||
Net pension and postretirement benefit costs, net of income taxes of $63 |
106 | |||||||||||||||||||||||||||||||||||||||
Cash dividends declared on common shares ($.215 per share) |
(194 | ) | ||||||||||||||||||||||||||||||||||||||
Cash dividends declared on Noncumulative Series A Preferred Stock ($7.75 per share) |
(23 | ) | ||||||||||||||||||||||||||||||||||||||
Common shares repurchased |
(41,599 | ) | (474 | ) | ||||||||||||||||||||||||||||||||||||
Common shares reissued (returned) for stock options and other employee benefit plans |
6,554 | (104 | ) | 145 | ||||||||||||||||||||||||||||||||||||
Net contribution from (distribution to) noncontrolling interests |
(21 | ) | ||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
BALANCE AT DECEMBER 31, 2013 |
2,905 | 890,724 | $ | 291 | $ | 1,017 | | $ | 4,022 | $ | 7,606 | $ | (2,281 | ) | $ | (352 | ) | $ | 17 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
See Notes to Consolidated Financial Statements.
113
Consolidated Statements of Cash Flows
Year ended December 31, | ||||||||||||
in millions | 2013 | 2012 | 2011 | |||||||||
|
||||||||||||
OPERATING ACTIVITIES |
||||||||||||
Net income (loss) |
$ | 910 | $ | 865 | $ | 932 | ||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
||||||||||||
Provision (credit) for loan and lease losses |
130 | 229 | (60) | |||||||||
Provision (credit) for losses on lending-related commitments |
8 | (16) | (28) | |||||||||
Provision (credit) for losses on LIHTC guaranteed funds |
4 | | (5) | |||||||||
Depreciation, amortization and accretion expense, net |
193 | 204 | 201 | |||||||||
Increase in cash surrender value of corporate-owned life insurance |
(106) | (110) | (111) | |||||||||
Stock-based compensation expense |
35 | 49 | 41 | |||||||||
FDIC reimbursement (payments), net of FDIC expense |
296 | 26 | 46 | |||||||||
Deferred income taxes (benefit) |
29 | 35 | 317 | |||||||||
Proceeds from sales of loans held for sale |
5,605 | 5,541 | 3,796 | |||||||||
Originations of loans held for sale, net of repayments |
(5,440) | (5,189) | (3,922) | |||||||||
Net losses (gains) from sale of loans held for sale |
(125) | (150) | (75) | |||||||||
Net losses (gains) from principal investing |
(52) | (72) | (78) | |||||||||
Net losses (gains) and writedown on OREO |
6 | 13 | 9 | |||||||||
Net losses (gains) on leased equipment |
(43) | (111) | (25) | |||||||||
Net losses (gains) on sales of fixed assets |
12 | 2 | 2 | |||||||||
Net securities losses (gains) |
(1) | | (1) | |||||||||
Gain on sale of Victory |
(92) | | | |||||||||
Net decrease (increase) in trading account assets |
(133) | 18 | 362 | |||||||||
Other operating activities, net |
343 | (66) | 392 | |||||||||
|
||||||||||||
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES |
1,579 | 1,268 | 1,793 | |||||||||
INVESTING ACTIVITIES |
||||||||||||
Cash received (used) in acquisitions, net of cash acquired |
601 | 776 | | |||||||||
Proceeds from sale of Victory |
72 | | | |||||||||
Net decrease (increase) in short-term investments |
(1,650) | (421) | (2,175) | |||||||||
Purchases of securities available for sale |
(5,222) | (1,772) | (624) | |||||||||
Proceeds from sales of securities available for sale |
35 | 1 | 1,667 | |||||||||
Proceeds from prepayments and maturities of securities available for sale |
4,470 | 5,551 | 5,000 | |||||||||
Proceeds from prepayments and maturities of held-to-maturity securities |
847 | 660 | 83 | |||||||||
Purchases of held-to-maturity securities |
(1,672) | (2,481) | (2,175) | |||||||||
Purchases of other investments |
(46) | (66) | (138) | |||||||||
Proceeds from sales of other investments |
187 | 28 | 90 | |||||||||
Proceeds from prepayments and maturities of other investments |
6 | 197 | 111 | |||||||||
Net decrease (increase) in loans, excluding acquisitions, sales and transfers |
(1,999) | (2,904) | (297) | |||||||||
Proceeds from sales of portfolio loans |
185 | 277 | 218 | |||||||||
Proceeds from corporate-owned life insurance |
31 | 33 | 22 | |||||||||
Purchases of premises, equipment, and software |
(100) | (164) | (180) | |||||||||
Proceeds from sales of premises and equipment |
8 | 1 | 1 | |||||||||
Proceeds from sales of other real estate owned |
23 | 67 | 120 | |||||||||
|
||||||||||||
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES |
(4,224) | (217) | 1,723 | |||||||||
FINANCING ACTIVITIES |
||||||||||||
Net increase (decrease) in deposits, excluding acquisitions |
2,333 | 1,989 | 1,346 | |||||||||
Net increase (decrease) in short-term borrowings |
(18) | (152) | (1,148) | |||||||||
Net proceeds from issuance of long-term debt |
2,573 | 837 | 1,046 | |||||||||
Payments on long-term debt |
(1,545) | (3,394) | (2,215) | |||||||||
Repurchase of common shares |
(474) | (251) | | |||||||||
Net proceeds from issuance of common shares |
| | 604 | |||||||||
Net proceeds from reissuance of common shares |
26 | 2 | | |||||||||
Series B Preferred Stock TARP redemption |
| | (2,500) | |||||||||
Repurchase of common stock warrant |
| | (70) | |||||||||
Cash dividends paid |
(217) | (191) | (164) | |||||||||
|
||||||||||||
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES |
2,678 | (1,160) | (3,101) | |||||||||
|
||||||||||||
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS |
33 | (109) | 415 | |||||||||
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR |
584 | 693 | 278 | |||||||||
|
||||||||||||
CASH AND DUE FROM BANKS AT END OF YEAR |
$ | 617 | $ | 584 | $ | 693 | ||||||
|
|
|
|
|
|
|||||||
|
||||||||||||
Additional disclosures relative to cash flows: |
||||||||||||
Interest paid |
$ | 293 | $ | 464 | $ | 605 | ||||||
Income taxes paid (refunded) |
185 | 84 | (305) | |||||||||
Noncash items: |
||||||||||||
Assets acquired |
$ | 41 | $ | 1,283 | | |||||||
Liabilities assumed |
| 2,059 | | |||||||||
Loans transferred to portfolio from held for sale |
9 | 41 | $ | 13 | ||||||||
Loans transferred to held for sale from portfolio |
61 | 118 | 103 | |||||||||
Loans transferred to other real estate owned |
21 | 38 | 49 | |||||||||
|
See Notes to Consolidated Financial Statements.
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1. Summary of Significant Accounting Policies
The acronyms and abbreviations identified below are used in the Notes to Consolidated Financial Statements as well as in the Managements Discussion and Analysis of Financial Condition and Results of Operations. You may find it helpful to refer back to this page as you read this report.
ABO: Accumulated benefit obligation. AICPA: American Institute of Certified Public Accountants. ALCO: Asset/Liability Management Committee. ALLL: Allowance for loan and lease losses. A/LM: Asset/liability management. AOCI: Accumulated other comprehensive income (loss). APBO: Accumulated postretirement benefit obligation. Austin: Austin Capital Management, Ltd. BHCA: Bank Holding Company Act of 1956, as amended. BHCs: Bank holding companies. CCAR: Comprehensive Capital Analysis and Review. CFPB: Consumer Financial Protection Bureau. CFTC: Commodities Futures Trading Commission. CMBS: Commercial mortgage-backed securities. CMO: Collateralized mortgage obligation. Common shares: Common Shares, $1 par value. CPP: Capital Purchase Program of the U.S. Treasury. DIF: Deposit Insurance Fund of the FDIC. Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. EPS: Earnings per share. ERISA: Employee Retirement Income Security Act of 1974. ERM: Enterprise risk management. EVE: Economic value of equity. FASB: Financial Accounting Standards Board. FDIA: Federal Deposit Insurance Act, as amended. FDIC: Federal Deposit Insurance Corporation. Federal Reserve: Board of Governors of the Federal Reserve System. FHLMC: Federal Home Loan Mortgage Corporation. FINRA: Financial Industry Regulatory Authority. FNMA: Federal National Mortgage Association. FOMC: Federal Open Market Committee of the Federal Reserve Board. FSOC: Financial Stability Oversight Council. FVA: Fair value of pension plan assets. GAAP: U.S. generally accepted accounting principles. GNMA: Government National Mortgage Association. IRS: Internal Revenue Service. ISDA: International Swaps and Derivatives Association. KAHC: Key Affordable Housing Corporation. |
KEF: Key Equipment Finance. LIBOR: London Interbank Offered Rate. LIHTC: Low-income housing tax credit. Moodys: Moodys Investor Services, Inc. MSRs: Mortgage servicing rights. N/A: Not applicable. NASDAQ: The NASDAQ Stock Market LLC. N/M: Not meaningful. NOW: Negotiable Order of Withdrawal. NPLs: Nonperforming loans. NPR: Notice of proposed rulemaking. NYSE: New York Stock Exchange. OCC: Office of the Comptroller of the Currency. OCI: Other comprehensive income (loss). OFR: Office of Financial Research of the U.S. Department of Treasury. OREO: Other real estate owned. OTTI: Other-than-temporary impairment. QSPE: Qualifying special purpose entity. PBO: Projected benefit obligation. PCCR: Purchased credit card relationship. PCI: Purchased credit impaired. S&P: Standard and Poors Ratings Services, a Division of The McGraw-Hill Companies, Inc. SEC: U.S. Securities & Exchange Commission. Series A Preferred Stock: KeyCorps 7.750% Noncumulative Perpetual Convertible Preferred Stock, Series A. SIFIs: Systemically important financial institutions, including BHCs with total consolidated assets of at least $50 billion and nonbank financial companies designated by FSOC for supervision by the Federal Reserve. TARP: Troubled Asset Relief Program. TDR: Troubled debt restructuring. TE: Taxable equivalent. U.S. Treasury: United States Department of the Treasury. VaR: Value at risk. VEBA: Voluntary Employee Beneficiary Association. Victory: Victory Capital Management and/or Victory Capital Advisors. VIE: Variable interest entity. XBRL: eXtensible Business Reporting Language. |
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Organization
We are one of the nations largest bank-based financial services companies, with consolidated total assets of $92.9 billion at December 31, 2013. We provide deposit, lending, cash management and investment services to individuals and to small and medium-sized businesses through our subsidiary, KeyBank. We also provide a broad range of sophisticated corporate and investment banking products, such as merger and acquisition advice, public
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and private debt and equity, syndications, and derivatives to middle market companies in selected industries throughout the United States through our subsidiary, KeyBanc Capital Markets. As of December 31, 2013, KeyBank operated 1,028 full-service retail banking branches and 1,335 automated teller machines in 12 states, as well as additional offices, online and mobile banking capabilities, and a telephone banking call center. Additional information pertaining to our two major business segments, Key Community Bank and Key Corporate Bank, is included in Note 23 (Line of Business Results).
Use of Estimates
Our accounting policies conform to GAAP and prevailing practices within the financial services industry. We must make certain estimates and judgments when determining the amounts presented in our consolidated financial statements and the related notes. If these estimates prove to be inaccurate, actual results could differ from those reported.
Basis of Presentation
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 entitys 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 11 (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 entitys 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.
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.
Noncontrolling Interests
Our Principal Investing unit and the Real Estate Capital and Corporate Banking Services line of business have noncontrolling interests that are accounted for in accordance with the applicable accounting guidance, which allows us to report noncontrolling interests in subsidiaries as a component of equity on the balance sheet. Net income (loss) on the income statement includes Keys revenues, expenses, gains and losses, together with revenues, expenses, gains and losses pertaining to the noncontrolling interests. The portion of net results attributable to the noncontrolling interests is disclosed separately on the face of the income statement to arrive at the net income (loss) attributable to Key.
Statements of Cash Flows
Cash and due from banks are considered cash and cash equivalents for financial reporting purposes.
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Loans
Loans are carried at the principal amount outstanding, net of unearned income, including net deferred loan fees and costs. We defer certain nonrefundable loan origination and commitment fees, and the direct costs of originating or acquiring loans. The net deferred amount is amortized over the estimated lives of the related loans as an adjustment to the yield.
Direct financing leases are carried at the aggregate of the lease receivable plus estimated unguaranteed residual values, less unearned income and deferred initial direct fees and costs. Unearned income on direct financing leases is amortized over the lease terms using a method approximating the interest method that produces a constant rate of return. Deferred initial direct fees and costs are amortized over the lease terms as an adjustment to the yield.
Leveraged leases are carried net of nonrecourse debt. Revenue on leveraged leases is recognized on a basis that produces a constant rate of return on the outstanding investment in the leases, net of related deferred tax liabilities, during the years in which the net investment is positive.
The residual value component of a lease represents the fair value of the leased asset at the end of the lease term. We rely on industry data, historical experience, independent appraisals and the experience of the equipment leasing asset management team to value lease residuals. Relationships with a number of equipment vendors give the asset management team insight into the life cycle of the leased equipment, pending product upgrades and competing products.
In accordance with applicable accounting guidance for leases, residual values are reviewed at least annually to determine if an other-than-temporary decline in value has occurred. In the event of such a decline, the residual value is adjusted to its fair value. Impairment charges are included in noninterest expense, while net gains or losses on sales of lease residuals are included in other income on the income statement.
Loans Held for Sale
Our loans held for sale at December 31, 2013, and December 31, 2012, are disclosed in Note 4 (Loans and Loans Held for Sale). These loans, which we originated and intend to sell, are carried at the lower of aggregate cost or fair value. Fair value is determined based on available market data for similar assets, expected cash flows, and appraisals of underlying collateral or the credit quality of the borrower. If a loan is transferred from the loan portfolio to the held-for-sale category, any write-down in the carrying amount of the loan at the date of transfer is recorded as a charge-off. Subsequent declines in fair value are recognized as a charge to noninterest income. When a loan is placed in the held-for-sale category, we stop amortizing the related deferred fees and costs. The remaining unamortized fees and costs are recognized as part of the cost basis of the loan at the time it is sold.
Nonperforming Loans
Nonperforming loans are loans for which we do not accrue interest income, and include commercial and consumer loans and leases, as well as current year TDRs and nonaccruing TDR loans from prior years. Nonperforming loans do not include loans held for sale or PCI loans.
We generally will classify commercial loans as nonperforming and stop accruing interest (i.e., designate the loan nonaccrual) when the borrowers principal or interest payment is 90 days past due or the loan is well-secured and in the process of collection. Commercial loans are also placed on nonaccrual status when payment is not past due but we have serious doubts about the borrowers ability to comply with existing repayment terms. Once a loan is designated nonaccrual (and as a result impaired), the interest accrued but not collected generally is charged against the ALLL, and payments subsequently received generally are applied to principal. However, if we believe that all principal and interest on a commercial nonaccrual loan ultimately are collectible, interest income may be recognized as received. Commercial loans generally are charged off in full or charged down to the fair value of the underlying collateral when the borrowers payment is 180 day past due.
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We generally will classify consumer loans as nonperforming and stop accruing interest when the borrowers payment is 120 days past due, unless the loan is well-secured and in the process of collection. Any second lien home equity loan with an associated first lien that is 120 days or more past due or in foreclosure, or for which the first mortgage delinquency timeframe is unknown, is reported as a nonperforming loan. Secured loans that are discharged through Chapter 7 bankruptcy and not formally re-affirmed are designated as nonperforming and TDRs. Our charge-off policy for most consumer loans 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. Credit card loans, and similar unsecured products, continue to accrue interest until the account is charged off at 180 days past due.
Commercial and consumer loans may be returned to accrual status if we are reasonably assured that all contractually due principal and interest are collectible and the borrower has demonstrated a sustained period (generally 6 months) of repayment performance under the contracted terms of the loan and applicable regulation.
Impaired Loans
A nonperforming loan is considered to be impaired and assigned a specific reserve when, based on current information and events, it is probable that we will be unable to collect all amounts due (both principal and interest) according to the contractual terms of the loan agreement.
All commercial and consumer TDRs regardless of size and all impaired commercial loans with an outstanding balance $2.5 million or greater are individually evaluated for impairment. Nonperforming loans of less than $2.5 million and smaller-balance homogeneous loans (residential mortgage, home equity loans, marine, etc.) are aggregated and collectively evaluated for impairment. The amount of the reserve is estimated based on the criteria outlined in the Allowance for Loan and Lease Losses section of this note.
Allowance for Loan and Lease Losses
The ALLL represents our estimate of probable credit losses inherent in the loan portfolio at the balance sheet date. We establish the amount of this allowance by analyzing the quality of the loan portfolio at least quarterly, and more often if deemed necessary. When developing and documenting our methodology to determine the ALLL, we segregate our loan portfolio between commercial and consumer loans. We believe these portfolio segments represent the most appropriate level for determining our historical loss experience, as well as the level at which we monitor credit quality and risk characteristics of the portfolios. Commercial loans, which generally have larger individual balances, constitute a significant portion of our total loan portfolio. The consumer portfolio typically includes smaller balance, homogeneous loans.
We estimate the appropriate level of our ALLL by applying expected loss rates to existing loans with similar risk characteristics. Expected loss rates for commercial loans are derived from a statistical analysis of our historical default and loss severity experience. The analysis utilizes probability of default and loss given default to assign loan grades using our internal risk rating system. Our expected loss rates are reviewed quarterly and updated as necessary. As of December 31, 2013, the probability of default ratings were based on our default data for the period from January 2008 through October 2013, which encompasses the last downturn period as well as some of our more recent credit experience. We adjust expected loss rates based on calculated estimates of the average time period from initial loss indication to the initial loss recorded for an individual loan.
Expected loss rates for consumer loans are derived from a statistical analysis of our historical default and loss severity experience. Consumer loans are analyzed quarterly in homogeneous product type pools that share similar attributes and are assigned an expected loss rate that represents expected losses over the next 12 months. The estimate of the average time period from initial loss indication to initial loss recorded for consumer loans is one to one and one-half years.
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The ALLL may be adjusted to reflect our current assessment of many qualitative factors that may not be directly measured in the statistical analysis of expected loss, including:
¿ |
changes in international, national, regional, and local economic and business conditions; |
¿ |
changes in the experience, ability and depth of our lending management and staff; |
¿ |
changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off and recovery practices; |
¿ |
changes in the nature and volume of the loan portfolio, including the existence and effect of any concentrations of credit, and changes in the level of such concentrations; |
¿ |
changes in the volume and/or severity of past due, nonaccrual and adversely classified or graded loans; and |
¿ |
external factors, such as competition, legal developments and regulatory requirements. |
For all commercial and consumer loan TDRs, regardless of size, as well as impaired commercial loans with an outstanding balance of $2.5 million and greater, 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 the individual impairment for commercial loans and TDRs 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 loans observable market price. Secured consumer loan balances of TDRs that are discharged through Chapter 7 bankruptcy and not formally re-affirmed are adjusted to reflect the fair value of the underlying collateral, less costs to sell. Other consumer loan TDRs are combined in homogenous pools and assigned a specific allocation based on the estimated present value of future cash flows using the effective interest rate. 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.
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.
Liability for Credit Losses on Lending-Related Commitments
The liability for credit losses inherent in lending-related commitments, such as letters of credit and unfunded loan commitments, is included in accrued expense and other liabilities on the balance sheet. This liability totaled $37 million at December 31, 2013, and $29 million at December 31, 2012. We establish the amount of this allowance by considering both historical trends and current market conditions quarterly, or more often if deemed necessary.
Fair Value Measurements
We follow the applicable accounting guidance for fair value measurements and disclosures for all applicable financial and nonfinancial assets and liabilities. This guidance defines fair value, establishes a framework for measurement, and addresses disclosures about fair value measurements. Fair value-related 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 to any new circumstances.
Accounting guidance defines fair value as the price to sell an asset or transfer a liability in an orderly transaction between market participants in our principal market. In other words, fair value 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.
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We value our assets and liabilities based on the principal market where each would be sold (in the case of assets) or transferred (in the case of liabilities). The principal market is the forum with the greatest volume and level of activity. In the absence of a principal market, valuation is based on the most advantageous market (i.e., the market where the asset could be sold at a price that maximizes the amount to be received or the liability transferred at a price that minimizes the amount to be paid). In the absence of observable market transactions, we consider liquidity valuation adjustments to reflect the uncertainty in pricing the instruments.
In measuring the fair value of an asset, we assume the highest and best use of the asset by a market participant not just the intended use to maximize the value of the asset. We also consider whether any credit valuation adjustments are necessary based on the counterpartys credit quality.
When measuring the fair value of a liability, we assume that the transfer will not affect the associated nonperformance risk. Nonperformance risk is the risk that an obligation will not be satisfied, and encompasses not only our own credit risk (i.e., the risk that we will fail to meet our obligation), but also other risks such as settlement risk (i.e., the risk that upon termination or sale, the contract will not settle). We consider the effect of our own credit risk on the fair value for any period in which fair value is measured.
There are three acceptable techniques for measuring fair value: the market approach, the income approach and the cost approach. The appropriate technique for valuing a particular asset or liability depends on 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, selecting the appropriate valuation method requires significant judgment, and applying the valuation technique requires sufficient knowledge and expertise.
Valuation inputs refer to the assumptions market participants would use in pricing a given asset or liability. Inputs can be observable or unobservable. Observable inputs are assumptions based on market data obtained from an independent source. Unobservable inputs are assumptions based on our own information or assessment of assumptions used by other market participants in pricing the asset or liability. Our 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 that gives the highest ranking to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest ranking to unobservable inputs (Level 3). Fair values for Level 2 assets or liabilities are based on one or a combination of the following factors: (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. The level in the fair value hierarchy ascribed to a fair value measurement in its entirety is based on the lowest level input that is significant to the measurement. We consider an input to be significant if it drives 10% or more of the total fair value of a particular asset or liability. Assets and liabilities may transfer between levels based on the observable and unobservable inputs used at the valuation date, as the inputs may be influenced by certain market conditions. We recognize transfers between levels of the fair value hierarchy at the end of the reporting period.
Typically, assets and liabilities are considered to be fair valued on a recurring basis if fair value is measured regularly. However, if the fair value measurement of an instrument does not necessarily result in a change in the amount recorded on the balance sheet, assets and liabilities are considered to be fair valued on a nonrecurring basis. This generally occurs when we apply accounting guidance that requires assets and liabilities to be recorded at the lower of cost or fair value, or assessed for impairment.
At a minimum, we conduct our valuations quarterly. Additional information regarding fair value measurements and disclosures is provided in Note 6 (Fair Value Measurements).
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Trading Account Assets
Trading account assets are debt and equity securities, as well as commercial loans that we purchase and hold but intend to sell in the near term. These assets are reported at fair value. Realized and unrealized gains and losses on trading account assets are reported in investment banking and capital markets income (loss) on the income statement.
Securities
Securities available for sale. These are securities that we intend to hold for an indefinite period of time but that may be sold in response to changes in interest rates, prepayment risk, liquidity needs or other factors. Securities available for sale are reported at fair value. Unrealized gains and losses (net of income taxes) deemed temporary are recorded in equity as a component of AOCI on the balance sheet. Unrealized losses on equity securities deemed other-than-temporary, and realized gains and losses resulting from sales of securities using the specific identification method, are included in net securities gains (losses) on the income statement. Unrealized losses on debt securities deemed other-than-temporary are included in net securities gains (losses) on the income statement or in AOCI in accordance with the applicable accounting guidance, as further described under the heading Other-than-Temporary Impairments in this note and in Note 7 (Securities).
Other securities held in the available-for-sale portfolio are primarily marketable equity securities that are traded on a public exchange such as the NYSE or NASDAQ.
Held-to-maturity securities. These are debt securities that we have the intent and ability to hold until maturity. Debt securities are carried at cost and adjusted for amortization of premiums and accretion of discounts using the interest method. This method produces a constant rate of return on the adjusted carrying amount.
Other securities held in the held-to-maturity portfolio consist of foreign bonds and capital securities.
Other-than-Temporary Impairments
If the amortized cost of a debt security is greater than its fair value and we intend to sell it, or more-likely-than-not will be required to sell it, before the expected recovery of the amortized cost, then the entire impairment is recognized in earnings. If we have no intent to sell the security, or it is more-likely-than-not that we will not be required to sell it, before expected recovery, then the credit portion of the impairment is recognized in earnings, while the remaining portion attributable to factors such as liquidity and interest rate changes is recognized in equity as a component of AOCI on the balance sheet. The credit portion is equal to the difference between the cash flows expected to be collected and the amortized cost of the debt security.
Generally, if the amortized cost of an equity security is greater than its fair value, the difference is considered to be other-than-temporary.
Other Investments
Principal investments investments in equity and mezzanine instruments made by our Principal Investing unit represented 57% and 59% of other investments at December 31, 2013, and 2012, respectively, and included both direct investments (investments made in a particular company), and 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 ($554 million at December 31, 2013, and $627 million at December 31, 2012). Changes in fair values and realized gains and losses on sales of principal investments are reported as net gains (losses) from principal investing on the income statement.
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
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generally are carried at cost. The carrying amounts of the investments carried at cost are adjusted for declines in value if they are considered to be other-than-temporary. These adjustments are included in net gains (losses) from principal investing on the income statement.
Repurchase agreements
We enter into repurchase and reverse repurchase agreements primarily to acquire securities to cover short positions, to accommodate customers financing needs, and to settle other securities obligations. Repurchase and reverse repurchase agreements are accounted for as collateralized financing transactions and recorded on our balance sheet at the amounts at which the securities will be subsequently sold or repurchased. The value of our repurchase and reverse repurchase agreements is based on the valuation of the underlying securities, as further described under the Other assets and liabilities heading in Note 6 (Fair Value Measurements). Fees received in connection with these transactions are recorded in interest income; fees paid are recorded in interest expense.
Derivatives
In accordance with applicable accounting guidance, all derivatives are recognized as either assets or liabilities on the balance sheet at fair value. The net increase or decrease in derivatives is included in other operating activities, net within the statement of cash flows.
Accounting for changes in fair value (i.e., gains or losses) of derivatives differs depending on whether the derivative has been designated and qualifies as part of a hedge relationship, and further, on the type of hedge relationship. For derivatives that are not designated as hedging instruments, any gain or loss is recognized immediately in earnings. A derivative that is designated and qualifies as a hedging instrument must be designated as a fair value hedge, a cash flow hedge or a hedge of a net investment in a foreign operation.
A fair value hedge is used to limit exposure to changes in the fair value of existing assets, liabilities and commitments caused by changes in interest rates or other economic factors. The effective portion of a change in the fair value of an instrument designated as a fair value hedge is recorded in earnings at the same time as a change in fair value of the hedged item, resulting in no effect on net income. The ineffective portion of a change in the fair value of such a hedging instrument is recognized in other income on the income statement, with no corresponding offset.
A cash flow hedge is used to minimize the variability of future cash flows that is caused by changes in interest rates or other economic factors. The effective portion of a gain or loss on a cash flow hedge is recorded as a component of AOCI on the balance sheet, and reclassified to earnings in the same period in which the hedged transaction affects earnings. The ineffective portion of a cash flow hedge is included in other income on the income statement.
A net investment hedge is used to hedge the exposure of changes in the carrying value of investments as a result of changes in the related foreign exchange rates. The effective portion of a gain or loss on a net investment hedge is recorded as a component of AOCI on the balance sheet when the terms of the derivative match the notional and currency risk being hedged. The effective portion is subsequently reclassified into income when the hedged transaction affects earnings. The ineffective portion of a net investment hedge is included in other income on the income statement.
Hedge effectiveness is determined by the extent to which changes in the fair value of a derivative instrument offset changes in the fair value, cash flows, or carrying value attributable to the risk being hedged. If the relationship between the change in the fair value of the derivative instrument and the change in the hedged item falls within a range considered to be the industry norm, the hedge is considered highly effective and qualifies for hedge accounting. A hedge is ineffective if the relationship between the changes falls outside the acceptable range. In that case, hedge accounting is discontinued on a prospective basis. Hedge effectiveness is tested at least quarterly.
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Additional information regarding the accounting for derivatives is provided in Note 8 (Derivatives and Hedging Activities).
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 cash collateral when recognizing derivative assets and liabilities. Additional information regarding derivative offsetting is provided in Note 8.
Servicing Assets
We service commercial real estate loans. Servicing assets related to all commercial real estate loan servicing totaled $332 million at December 31, 2013, and $204 million at December 31, 2012, and are included in accrued income and other assets on the balance sheet.
Servicing assets and liabilities purchased or retained initially are measured at fair value, if practical. When no ready market value (such as quoted market prices, or prices based on sales or purchases of similar assets) is available to determine the fair value of servicing assets, fair value is determined by calculating the present value of future cash flows associated with servicing the loans. This calculation is based on a number of assumptions, including the market cost of servicing, the discount rate, the prepayment rate and the default rate.
We remeasure our servicing assets using the amortization method at each reporting date. The amortization of servicing assets is determined in proportion to, and over the period of, the estimated net servicing income, and is recorded in mortgage fees on the income statement.
Servicing assets are evaluated quarterly for possible impairment. This process involves classifying the assets based on the types of loans serviced and their associated interest rates, and determining the fair value of each class. If the evaluation indicates that the carrying amount of the servicing assets exceeds their fair value, the carrying amount is reduced by recording a charge to income in the amount of such excess and establishing a valuation allowance. No impairment of servicing assets recorded for the years ended December 31, 2013, 2012, and 2011, was material in amount. Additional information pertaining to servicing assets is included in Note 9 (Mortgage Servicing Assets).
Business Combinations
We account for our business combinations using the acquisition method of accounting. Under this accounting method, the acquired companys net assets are recorded at fair value at the date of acquisition, and the results of operations of the acquired company are combined with Keys results from that date forward. Acquisition costs are expensed when incurred. The difference between the purchase price and the fair value of the net assets acquired (including intangible assets with finite lives) is recorded as goodwill. Our accounting policy for intangible assets is summarized in this note under the heading Goodwill and Other Intangible Assets.
Additional information regarding acquisitions is provided in Note 13 (Acquisitions and Discontinued Operations).
Goodwill and Other Intangible Assets
Goodwill represents the amount by which the cost of net assets acquired in a business combination exceeds their fair value. Other intangible assets primarily are the net present value of future economic benefits to be derived from the purchase of credit card receivable assets and core deposits. Other intangible assets are amortized on either an accelerated or straight-line basis over periods ranging from seven to thirty years. Goodwill and other types of intangible assets deemed to have indefinite lives are not amortized.
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Relevant accounting guidance provides that goodwill and certain other intangible assets must be subjected to impairment testing at least annually. We perform quantitative goodwill impairment testing in the fourth quarter of each year. Our reporting units for purposes of this testing are our two business segments, Key Community Bank and Key Corporate Bank. Because the strength of the economic recovery remained uncertain during 2013, we continued to monitor the impairment indicators for goodwill and other intangible assets, and to evaluate the carrying amount of these assets quarterly.
The first step in goodwill impairment testing is to determine the fair value of each reporting unit. This amount is estimated using comparable external market data (market approach) and discounted cash flow modeling that incorporates an appropriate risk premium and earnings forecast information (income approach). If the carrying amount of a reporting unit exceeds its fair value, goodwill impairment may be indicated. In such a case, we would perform a second step of goodwill impairment testing, and we would estimate a hypothetical purchase price for the reporting unit (representing the units fair value). Then we would compare that hypothetical purchase price with the fair value of the units net assets (excluding goodwill). Any excess of the estimated purchase price over the fair value of the reporting units net assets represents the implied fair value of goodwill. If the carrying amount of the reporting units goodwill exceeds the implied fair value of goodwill, the impairment loss represented by this difference is charged to earnings.
Effective October 1, 2013, and on a prospective basis, the amount of capital being allocated to our reporting units as a proxy for the carrying value will be based on risk-based regulatory capital requirements. Prior year methodology utilized allocated economic equity as a proxy for the carrying value of the reporting units.
Additional information pertaining to goodwill and other intangible assets is included in Note 10 (Goodwill and Other Intangible Assets).
Purchased Loans
We evaluate purchased loans for impairment in accordance with the applicable accounting guidance. Purchased performing loans that do not have evidence of deterioration in credit quality at acquisition are recorded at fair value at the acquisition date. Any premium or discount associated with purchased performing loans is recognized as an expense or income based on the effective yield method of amortization. Purchased loans that have evidence of deterioration in credit quality since origination and for which it is probable, at acquisition, that all contractually required payments will not be collected, are deemed PCI. These loans are initially recorded at fair value without recording an allowance for loan losses. Fair value of these loans is determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected, as adjusted for an estimate of future credit losses and prepayments, and then a market-based discount rate is applied to those cash flows. PCI loans are generally accounted for on a pool basis, with pools formed based on the common characteristics of the loans, such as loan collateral type or loan product type. Each pool is accounted for as a single asset with one composite interest rate and an aggregate expectation of cash flows.
Under the accounting model for PCI loans, the excess of cash flows expected to be collected over the carrying amount of the loans, referred to as the accretable amount, is accreted into interest income over the life of the loans in each pool using the effective yield method. Accordingly, PCI loans are not subject to classification as nonaccrual (and nonperforming) in the same manner as originated loans. Rather, acquired PCI loans are considered to be accruing loans because their interest income relates to the accretable yield recognized at the pool level and not to contractual interest payments at the loan level. The difference between contractually required principal and interest payments and the cash flows expected to be collected, referred to as the nonaccretable amount, includes estimates of both the impact of prepayments and future credit losses expected to be incurred over the life of the loans in each pool.
After we acquire loans determined to be PCI loans, actual cash collections are monitored to determine if they conform to managements expectations. Revised cash flow expectations are prepared, as necessary. A decrease in expected cash flows in subsequent periods may indicate that the loan pool is impaired, which would require us to
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establish an allowance for loan losses by recording a charge to the provision for loan losses. An increase in expected cash flows in subsequent periods initially reduces any previously established allowance for loan losses by the increase in the present value of cash flows expected to be collected, and require us to recalculate the amount of accretable yield for the loan pool. The adjustment of accretable yield due to an increase in expected cash flows is accounted for as a change in estimate. The additional cash flows expected to be collected are reclassified from the nonaccretable difference to the accretable yield, and the amount of periodic accretion is adjusted accordingly over the remaining life of the loans in the pool.
A purchased loan may be resolved either through receipt of payment (in full or in part) from the borrower, the sale of the loan to a third party, or foreclosure of the collateral. If the loan is sold, a gain or loss on sale is recognized and reported within noninterest income based on the difference between the sales proceeds and the carrying amount of the loan. In the case of a foreclosure, an individual loan is removed from the pool at an amount received from its resolution (fair value of the underlying collateral less costs to sell). Any difference between this amount and the loan carrying value is absorbed by the nonaccretable difference established for the entire pool. For loans resolved by payment in full, there is no difference between the amount received at resolution and the outstanding balance of the loan. In these cases, the remaining accretable amount balance is unaffected and any material change in remaining effective yield caused by removing the loan from the pool is addressed in connection with the subsequent cash flow re-assessment for the pool. PCI loans subject to modification are not removed from the pool even if those loans would otherwise be deemed TDRs since the pool, and not the individual loan, represents the unit of account.
Premises and Equipment
Premises and equipment, including leasehold improvements, are stated at cost less accumulated depreciation and amortization. We determine depreciation of premises and equipment using the straight-line method over the estimated useful lives of the particular assets. Leasehold improvements are amortized using the straight-line method over the terms of the leases. Accumulated depreciation and amortization on premises and equipment totaled $1.2 billion at December 31, 2013, and 2012.
Internally Developed Software
We rely on company personnel and independent contractors to plan, develop, install, customize and enhance computer systems applications that support corporate and administrative operations. Software development costs, such as those related to program coding, testing, configuration and installation, are capitalized and included in accrued income and other assets on the balance sheet. The resulting asset ($60 million at December 31, 2013, and $53 million at December 31, 2012) is amortized using the straight-line method over its expected useful life (not to exceed five years). Costs incurred during the planning and post-development phases of an internal software project are expensed as incurred.
Software that is no longer used is written off to earnings immediately. When we decide to replace software, amortization of the phased-out software is accelerated to the expected replacement date.
Guarantees
In accordance with the applicable accounting guidance, we recognize liabilities, which are included in accrued expense and other liabilities on the balance sheet, for the fair value of our obligations under certain guarantees issued.
If we receive a fee for a guarantee requiring liability recognition, the amount of the fee represents the initial fair value of the stand ready obligation. If there is no fee, the fair value of the stand ready obligation is determined using expected present value measurement techniques, unless observable transactions for comparable guarantees are available. The subsequent accounting for these stand ready obligations depends on the nature of the
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underlying guarantees. We account for our release from risk under a particular guarantee when the guarantee expires or is settled, or by a systematic and rational amortization method, depending on the risk profile of the guarantee.
Additional information regarding guarantees is included in Note 20 (Commitments, Contingent Liabilities and Guarantees) under the heading Guarantees.
Revenue Recognition
We recognize revenues as they are earned based on contractual terms, as transactions occur, or as services are provided and collectibility is reasonably assured. Our principal source of revenue is interest income, which is recognized on an accrual basis primarily according to nondiscretionary formulas in written contracts, such as loan agreements or securities contracts.
Stock-Based Compensation
Stock-based compensation is measured using the fair value method of accounting. The measured cost is recognized over the period during which the recipient is required to provide service in exchange for the award. We estimate expected forfeitures when stock-based awards are granted and record compensation expense only for awards that are expected to vest.
We recognize compensation cost for stock-based, mandatory deferred incentive compensation awards using the accelerated method of amortization over a period of approximately five years (the current year performance period and a four-year vesting period, which generally starts in the first quarter following the performance period) for awards granted in 2012 and after, and over a period of approximately four years (the current year performance period and a three-year vesting period, which generally starts in the first quarter following the performance period) for awards granted prior to 2012.
Employee stock options typically become exercisable at the rate of 25% per year for options granted in 2011 and after, or 33-1/3% per year for options granted prior to 2011, beginning one year after the grant date. Options expire no later than ten years after their grant date. We recognize stock-based compensation expense for stock options with graded vesting using an accelerated method of amortization.
We use shares repurchased under our annual capital plan submitted to our regulators (treasury shares) for share issuances under all stock-based compensation programs other than the discounted stock purchase plan. Shares issued under the discounted stock purchase plan are purchased on the open market.
We estimate the fair value of options granted using the Black-Scholes option-pricing model, as further described in Note 15 (Stock-Based Compensation).
Marketing Costs
We expense all marketing-related costs, including advertising costs, as incurred.
Accounting Guidance Adopted in 2013
Benchmark interest rate. In July 2013, the FASB issued new accounting guidance allowing entities to designate the Federal Funds Effective Swap Rate (which is the Overnight Index Swap rate, or OIS rate, in the U.S.) as a benchmark interest rate, in addition to U.S. Treasury and LIBOR rates, for hedge accounting purposes. This new accounting guidance was effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013 (effective July 17, 2013, for us). Note 8 (Derivatives and Hedging Activities) provides information regarding our use of derivatives and hedge accounting.
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Reporting of amounts reclassified out of AOCI. In February 2013, the FASB issued new accounting guidance that requires reclassifications of amounts out of AOCI to be reported in a new format. It does not require the reporting of any information that is not currently required to be disclosed under existing GAAP. This accounting guidance was effective prospectively for reporting periods beginning after December 15, 2012 (effective January 1, 2013, for us). The disclosures required by this accounting guidance are provided in Note 21 (Accumulated Other Comprehensive Income).
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 impairment testing is required. This accounting guidance was effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 (January 1, 2013, for us). The adoption of this accounting guidance did not 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 entitys financial position. In January 2013, the FASB issued new accounting guidance that clarified the scope of the guidance to include derivatives, repurchase and reverse repurchase agreements, and securities lending and borrowing transactions. This accounting guidance was 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). Information about our offsetting and related arrangements is provided in Note 14 (Securities Financing Activities).
Accounting Guidance Pending Adoption at December 31, 2013
Presentation of unrecognized tax benefits. In July 2013, the FASB issued new accounting guidance that requires unrecognized tax benefits to be presented as a decrease in a net operating loss, similar tax loss or tax credit carryforward if certain criteria are met. This accounting guidance will be applied prospectively to unrecognized tax benefits that exist at the effective date. It will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 (effective January 1, 2014, for us). Early adoption and/or retrospective application are permitted. The adoption of this accounting guidance is not expected to have a material effect on our financial condition or results of operations.
Investment companies. In June 2013, the FASB issued new accounting guidance that modifies the criteria used to define an investment company. It also sets forth certain measurement and disclosure requirements for an investment company. This accounting guidance will be effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013 (effective January 1, 2014, for us). Early application is prohibited. The adoption of this accounting guidance is not expected to have a material effect on our financial condition or results of operations.
Liquidation basis of accounting. In April 2013, the FASB issued new accounting guidance that specifies when and how an entity should prepare its financial statements using the liquidation basis of accounting when liquidation is imminent, as defined in the guidance, and describes the related disclosures that should be made. This new accounting guidance will be effective for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013, and interim reporting periods therein (effective January 1, 2014, for us). Entities should apply the requirements prospectively from the day that liquidation becomes imminent. Early adoption is permitted.
Reporting of cumulative translation adjustments upon the derecognition of certain investments. In March 2013, the FASB issued new accounting guidance that addresses the accounting for the cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity, or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a
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foreign entity. This accounting guidance will be effective prospectively for reporting periods beginning after December 15, 2013 (effective January 1, 2014, for us). The adoption of this accounting guidance is not expected to have a material effect on our financial condition or results of operations.
Investments in qualified affordable housing projects. In January 2014, the FASB issued new accounting guidance that modifies the conditions that must be met to make an election to account for investments in qualified affordable housing projects using the proportional amortization method. This accounting guidance will be effective retrospectively for reporting periods beginning after December 15, 2014 (effective January 1, 2015, 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.
Troubled debt restructurings. In January 2014, the FASB issued new accounting guidance that clarifies the definition of when an in substance repossession or foreclosure occurs for purposes of creditor reclassification of residential real estate collateralized consumer mortgage loans by derecognizing the loan and recognizing the collateral asset. This accounting guidance will be effective for reporting periods beginning after December 15, 2014 (effective January 1, 2015, for us) and can be implemented using either a modified retrospective method or prospective method. 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.
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Basic earnings per share is the amount of earnings (adjusted for dividends declared on our preferred stock) available to each common share outstanding during the reporting periods. Diluted earnings per share is the amount of earnings available to each common share outstanding during the reporting periods adjusted to include the effects of potentially dilutive common shares. Potentially dilutive common shares include incremental shares issued for the conversion of our convertible Series A Preferred Stock, stock options, and other stock-based awards. Potentially dilutive common shares are excluded from the computation of diluted earnings per share in the periods where the effect would be antidilutive. For diluted earnings per share, net income available to common shareholders can be affected by the conversion of our convertible Series A Preferred Stock. Where the effect of this conversion would be dilutive, net income available to common shareholders is adjusted by the amount of preferred dividends associated with our Series A Preferred Stock. For the year ended December 31, 2013, weighted-average common shares and potential common shares outstanding included six million shares associated with common share options and other stock awards.
Our basic and diluted earnings per common share are calculated as follows:
Year ended December 31, | ||||||||||||
dollars in millions, except per share amounts | 2013 | 2012 | 2011 | |||||||||
EARNINGS |
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Income (loss) from continuing operations |
$ | 870 | $ | 842 | $ | 967 | ||||||
Less: Net income (loss) attributable to noncontrolling interests |
| 7 | 12 | |||||||||
Income (loss) from continuing operations attributable to Key |
870 | 835 | 955 | |||||||||
Less: Dividends on Series A Preferred Stock |
23 | 22 | 23 | |||||||||
Cash dividends on Series B Preferred Stock |
| | 31 | |||||||||
Amortization of discount on Series B Preferred Stock (a) |
| | 53 | |||||||||
Income (loss) from continuing operations attributable to Key common shareholders |
847 | 813 | 848 | |||||||||
Income (loss) from discontinued operations, net of taxes (b) |
40 | 23 | (35) | |||||||||
Net income (loss) attributable to Key common shareholders |
$ | 887 | $ | 836 | $ | 813 | ||||||
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WEIGHTED-AVERAGE COMMON SHARES |
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Weighted-average common shares outstanding (000) |
906,524 | 938,941 | 931,934 | |||||||||
Effect of dilutive convertible preferred stock, common stock options and other stock awards (000) |
6,047 | 4,318 | 3,867 | |||||||||
Weighted-average common shares and potential common shares outstanding (000) |
912,571 | 943,259 | 935,801 | |||||||||
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EARNINGS PER COMMON SHARE |
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Income (loss) from continuing operations attributable to Key common shareholders |
$ | .93 | $ | .87 | $ | .91 | ||||||
Income (loss) from discontinued operations, net of taxes (b) |
.04 | .02 | (.04) | |||||||||
Net income (loss) attributable to Key common shareholders (c) |
.98 | .89 | .87 | |||||||||
Income (loss) from continuing operations attributable to Key common shareholders
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$ | .93 | $ | .86 | $ | .91 | ||||||
Income (loss) from discontinued operations, net of taxes (b) |
.04 | .02 | (.04) | |||||||||
Net income (loss) attributable to Key common shareholders assuming dilution (c) |
.97 | .89 | .87 |
(a) | 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. |
(b) | 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. In February 2013, we decided to sell Victory to a private equity fund. As a result of these decisions, we have accounted for these businesses as discontinued operations. For further discussion regarding the income (loss) from discontinued operations, see Note 13 (Acquisitions and Discontinued Operations). |
(c) | EPS may not foot due to rounding. |
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3. Restrictions on Cash, Dividends and Lending Activities
Federal law requires a depository institution to maintain a prescribed amount of cash or deposit reserve balances with its Federal Reserve Bank. KeyBank maintained average reserve balances aggregating $291 million in 2013 to fulfill these requirements.
Capital distributions from KeyBank and other subsidiaries are our principal source of cash flows for paying dividends on our common and preferred shares, servicing our debt, and financing corporate operations. 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 the dividend is declared.
During 2013, KeyBank paid KeyCorp a total of $600 million in dividends; nonbank subsidiaries did not pay any cash dividends or noncash dividends to KeyCorp. As of December 31, 2013, KeyBank had fully utilized its regulatory capacity to pay dividends to KeyCorp. During 2013, KeyCorp did not make any cash capital infusions to KeyBank. At December 31, 2013, KeyCorp held $2.5 billion in short-term investments, which can be used to pay dividends to shareholders, service debt, and finance corporate operations.
As indicated in the Supervision and Regulation section of Item 1 of this report under the heading Bank transactions with affiliates, federal law and regulation also restricts loans and advances from bank subsidiaries to their parent companies (and to nonbank subsidiaries of their parent companies), and requires those transactions to be secured.
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4. Loans and Loans Held for Sale
Our loans by category are summarized as follows:
December 31, | ||||||||
in millions | 2013 | 2012 | ||||||
Commercial, financial and agricultural (a) |
$ | 24,963 | $ | 23,242 | ||||
Commercial real estate: |
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Commercial mortgage |
7,720 | 7,720 | ||||||
Construction |
1,093 | 1,003 | ||||||
Total commercial real estate loans |
8,813 | 8,723 | ||||||
Commercial lease financing (b) |
4,551 | 4,915 | ||||||
Total commercial loans |
38,327 | 36,880 | ||||||
Residential Prime Loans: |
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Real estate residential mortgage |
2,187 | 2,174 | ||||||
Home equity: |
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Key Community Bank |
10,340 | 9,816 | ||||||
Other |
334 | 423 | ||||||
Total home equity loans |
10,674 | 10,239 | ||||||
Total residential prime loans |
12,861 | 12,413 | ||||||
Consumer other Key Community Bank |
1,449 | 1,349 | ||||||
Credit cards |
722 | 729 | ||||||
Consumer other: |
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Marine |
1,028 | 1,358 | ||||||
Other |
70 | 93 | ||||||
Total consumer other |
1,098 | 1,451 | ||||||
Total consumer loans |
16,130 | 15,942 | ||||||
Total loans (c) (d) |
$ | 54,457 | $ | 52,822 | ||||
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(a) | December 31, 2013, and December 31, 2012, loan balances include $94 million and $90 million of commercial credit card balances, respectively. |
(b) | December 31, 2013, commercial lease financing includes receivables of $58 million held as collateral for a secured borrowing. Additional information pertaining to this secured borrowing is included in Note 18 (Long-Term Debt). |
(c) | December 31, 2013, total loans include purchased loans of $166 million, of which $16 million were PCI loans. December 31, 2012, total loans include purchased loans of $217 million, of which $23 million were PCI loans. |
(d) | Excludes loans in the amount of $4.5 billion at December 31, 2013, and $5.2 billion at December 31, 2012, related to the discontinued operations of the education lending business. |
We use interest rate swaps, which modify the repricing characteristics of certain loans, to manage interest rate risk. For more information about such swaps, see Note 8 (Derivatives and Hedging Activities).
Our loans held for sale by category are summarized as follows:
December 31, | ||||||||
in millions | 2013 | 2012 | ||||||
Commercial, financial and agricultural |
$ | 278 | $ | 29 | ||||
Real estate commercial mortgage |
307 | 477 | ||||||
Commercial lease financing |
9 | 8 | ||||||
Real estate residential mortgage |
17 | 85 | ||||||
Total loans held for sale |
$ | 611 | $ | 599 | ||||
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Our summary of changes in loans held for sale follows:
Year ended December 31, | ||||||||
in millions | 2013 | 2012 | ||||||
Balance at beginning of the period |
$ | 599 | $ | 728 | ||||
New originations |
5,452 | 5,209 | ||||||
Transfers from held to maturity, net |
52 | 77 | ||||||
Loan sales |
(5,480) | (5,391) | ||||||
Loan draws (payments), net |
(12) | (20) | ||||||
Transfers to OREO / valuation adjustments |
| (4) | ||||||
Balance at end of period |
$ | 611 | $ | 599 | ||||
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Commercial and consumer leasing financing receivables primarily are direct financing leases, but also include leveraged leases. The composition of the net investment in direct financing leases is as follows:
December 31, | ||||||||
in millions | 2013 | 2012 | ||||||
Direct financing lease receivables |
$ | 3,176 | $ | 3,429 | ||||
Unearned income |
(219) | (260) | ||||||
Unguaranteed residual value |
231 | 261 | ||||||
Deferred fees and costs |
21 | 25 | ||||||
Net investment in direct financing leases |
$ | 3,209 | $ | 3,455 | ||||
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At December 31, 2013, minimum future lease payments to be received are as follows: 2014 $1.1 billion; 2015 $853 million; 2016 $515 million; 2017 $287 million; 2018 $134 million; and all subsequent years $173 million. The allowance related to lease financing receivables is $62 million at December 31, 2013.
We assess the credit quality of the loan portfolio by monitoring net credit losses, levels of nonperforming assets and delinquencies, and credit quality ratings as defined by management.
Our nonperforming assets and past due loans were as follows:
December 31, | ||||||||
in millions | 2013 | 2012 | ||||||
Total nonperforming loans (a), (b) |
$ | 508 | $ | 674 | ||||
Nonperforming loans held for sale |
1 | 25 | ||||||
OREO |
15 | 22 | ||||||
Other nonperforming assets |
7 | 14 | ||||||
Total nonperforming assets |
$ | 531 | $ | 735 | ||||
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Nonperforming assets from discontinued operations education lending (c) |
$ | 25 | $ | 20 | ||||
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Restructured loans included in nonperforming loans (a) |
$ | 214 | $ | 249 | ||||
Restructured loans with an allocated specific allowance (d) |
71 | 114 | ||||||
Specifically allocated allowance for restructured loans (e) |
35 | 33 | ||||||
Accruing loans past due 90 days or more |
$ | 71 | $ | 78 | ||||
Accruing loans past due 30 through 89 days |
318 | 424 |
(a) | December 31, 2012, loan balance includes $72 million of current, paying as originally agreed, secured loans that were discharged through Chapter 7 bankruptcy and not formally re-affirmed, as addressed in updated regulatory guidance issued in the third quarter of 2012. Such loans have been designated as nonperforming and TDRs. |
(b) | December 31, 2013, and December 31, 2012, loan balances exclude $16 million and $23 million of PCI loans, respectively. |
(c) | Includes restructured loans of approximately $13 million and $3 million at December 31, 2013, and December 31, 2012, respectively. See Note 13 (Acquisitions and Discontinued Operations) for further discussion. |
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(d) | Included in individually impaired loans allocated a specific allowance. |
(e) | Included in allowance for individually evaluated impaired loans. |
We evaluate purchased loans for impairment in accordance with the applicable accounting guidance. Purchased loans that have evidence of deterioration in credit quality since origination and for which it is probable, at acquisition, that all contractually required payments will not be collected are deemed PCI and initially recorded at fair value without recording an allowance for loan losses. At the date of acquisition, the estimated gross contractual amount receivable of PCI loans totaled $41 million. The estimated cash flows not expected to be collected (the nonaccretable amount) were $11 million, and the accretable amount was approximately $5 million. The difference between the fair value and the cash flows expected to be collected from the purchased loans is accreted to interest income over the remaining term of the loans.
At December 31, 2013, the outstanding unpaid principal balance and carrying value of all PCI loans was $24 million and $16 million, respectively. Changes in the accretable yield during 2013 included accretion of $2 million and net reclassifications of $3 million, resulting in an ending balance of $5 million at December 31, 2013.
At December 31, 2013, the approximate carrying amount of our commercial nonperforming loans outstanding represented 57% of their original contractual amount, total nonperforming loans outstanding represented 72% of their original contractual amount owed, and nonperforming assets in total were carried at 70% of their original contractual amount.
At December 31, 2013, our twenty largest nonperforming loans totaled $86 million, representing 17% of total loans on nonperforming status from continuing operations. At December 31, 2012, the twenty largest nonperforming loans totaled $179 million, representing 27% of total loans on nonperforming status.
Nonperforming loans and loans held for sale reduced expected interest income by $23 million for the year ended December 31, 2013, and $25 million for the year ended December 31, 2012.
133
The following tables set forth a further breakdown of individually impaired loans as of December 31, 2013, and December 31, 2012:
December 31, 2013 in millions |
Recorded Investment |
(a) |
Unpaid
Principal
|
(b) |
Specific
Allowance |
Average
Recorded Investment |
||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||
Commercial, financial and agricultural |
$ | 33 | $ | 69 | | $ | 33 | |||||||||||||
Commercial real estate: |
||||||||||||||||||||
Commercial mortgage |
21 | 25 | | 55 | ||||||||||||||||
Construction |
48 | 131 | | 48 | ||||||||||||||||
Total commercial real estate loans |
69 | 156 | | 103 | ||||||||||||||||
Total commercial loans with no related allowance recorded |
102 | 225 | | 136 | ||||||||||||||||
Real estate residential mortgage |
27 | 27 | | 24 | ||||||||||||||||
Home equity: |
||||||||||||||||||||
Key Community Bank |
67 | 67 | | 66 | ||||||||||||||||
Other |
2 | 2 | | 2 | ||||||||||||||||
Total home equity loans |
69 | 69 | | 68 | ||||||||||||||||
Consumer other: |
||||||||||||||||||||
Marine |
3 | 3 | | 2 | ||||||||||||||||
Total consumer other |
3 | 3 | | 2 | ||||||||||||||||
Total consumer loans |
99 | 99 | | 94 | ||||||||||||||||
Total loans with no related allowance recorded |
201 | 324 | | 230 | ||||||||||||||||
With an allowance recorded: | ||||||||||||||||||||
Commercial, financial and agricultural |
17 | 20 | $ | 8 | 25 | |||||||||||||||
Commercial real estate: |
||||||||||||||||||||
Commercial mortgage |
6 | 6 | 2 | 7 | ||||||||||||||||
Construction |
2 | 12 | | 1 | ||||||||||||||||
Total commercial real estate loans |
8 | 18 | 2 | 8 | ||||||||||||||||
Total commercial loans with an allowance recorded |
25 | 38 | 10 | 33 | ||||||||||||||||
Real estate residential mortgage |
29 | 29 | 9 | 23 | ||||||||||||||||
Home equity: |
||||||||||||||||||||
Key Community Bank |
35 | 35 | 10 | 29 | ||||||||||||||||
Other |
10 | 11 | 1 | 9 | ||||||||||||||||
Total home equity loans |
45 | 46 | 11 | 38 | ||||||||||||||||
Consumer other Key Community Bank |
3 | 3 | 1 | 2 | ||||||||||||||||
Credit cards |
5 | 5 | 1 | 3 | ||||||||||||||||
Consumer other: |
||||||||||||||||||||
Marine |
49 | 49 | 10 | 55 | ||||||||||||||||
Other |
1 | 1 | | 1 | ||||||||||||||||
Total consumer other |
50 | 50 | 10 | 56 | ||||||||||||||||
Total consumer loans |
132 | 133 | 32 | 122 | ||||||||||||||||
Total loans with an allowance recorded |
157 | 171 | 42 | 155 | ||||||||||||||||
Total |
$ | 358 | $ | 495 | $ | 42 | $ | 385 | ||||||||||||
|
|
|
|
|
|
|
|
(a) | The Recorded Investment represents the face amount of the loan increased or decreased by applicable accrued interest, net deferred loan fees and costs, and 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 customers legal obligation to us. |
134
December 31, 2012 in millions |
Recorded
Investment |
(a) |
Unpaid
Principal Balance |
(b) |
Specific
Allowance |
Average
Recorded Investment |
||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||
Commercial, financial and agricultural |
$ | 32 | $ | 64 | | $ | 60 | |||||||||||||
Commercial real estate: |
||||||||||||||||||||
Commercial mortgage |
89 | 142 | | 95 | ||||||||||||||||
Construction |
48 | 182 | | 39 | ||||||||||||||||
Total commercial real estate loans |
137 | 324 | | 134 | ||||||||||||||||
Total commercial loans with no related allowance recorded |
169 | 388 | | 194 | ||||||||||||||||
Real estate residential mortgage |
21 | 21 | | 10 | ||||||||||||||||
Home equity: |
||||||||||||||||||||
Key Community Bank |
65 | 65 | | 33 | ||||||||||||||||
Other |
3 | 3 | | 1 | ||||||||||||||||
Total home equity loans |
68 | 68 | | 34 | ||||||||||||||||
Total consumer loans |
89 | 89 | | 44 | ||||||||||||||||
Total loans with no related allowance recorded |
258 | 477 | | 238 | ||||||||||||||||
With an allowance recorded: |
||||||||||||||||||||
Commercial, financial and agricultural |
33 | 42 | $ | 12 | 48 | |||||||||||||||
Commercial real estate: |
||||||||||||||||||||
Commercial mortgage |
7 | 7 | 1 | 51 | ||||||||||||||||
Construction |
| | | 6 | ||||||||||||||||
Total commercial real estate loans |
7 | 7 | 1 | 57 | ||||||||||||||||
Total commercial loans with an allowance recorded |
40 | 49 | 13 | 105 | ||||||||||||||||
Real estate residential mortgage |
17 | 17 | 1 | 8 | ||||||||||||||||
Home equity: |
||||||||||||||||||||
Key Community Bank |
22 | 22 | 11 | 11 | ||||||||||||||||
Other |
9 | 9 | 1 | 5 | ||||||||||||||||
Total home equity loans |
31 | 31 | 12 | 16 | ||||||||||||||||
Consumer other Key Community Bank |
2 | 2 | 2 | 1 | ||||||||||||||||
Credit cards |
2 | 2 | | 1 | ||||||||||||||||
Consumer other: |
||||||||||||||||||||
Marine |
60 | 60 | 7 | 30 | ||||||||||||||||
Other |
1 | 1 | | 1 | ||||||||||||||||
Total consumer other |
61 | 61 | 7 | 31 | ||||||||||||||||
Total consumer loans |
113 | 113 | 22 | 57 | ||||||||||||||||
Total loans with an allowance recorded |
153 | 162 | 35 | 162 | ||||||||||||||||
Total |
$ | 411 | $ | 639 | $ | 35 | $ | 400 | ||||||||||||
|
|
|
|
|
|
|
|
(a) | The Recorded Investment represents the face amount of the loan increased or decreased by applicable accrued interest, net deferred loan fees and costs, and 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 customers legal obligation to us. |
For the years ended December 31, 2013, and 2012, interest income recognized on the outstanding balances of accruing impaired loans totaled $6 million and $5 million, respectively.
At December 31, 2013, aggregate restructured loans (accrual and nonaccrual loans) totaled $338 million, compared to $320 million at December 31, 2012. We added $182 million in restructured loans during 2013, which were offset by $164 million in payments and charge-offs.
135
A further breakdown of TDRs included in nonperforming loans by loan category as of December 31, 2013, follows:
December 31, 2013 dollars in millions |
Number of loans |
Pre-modification Outstanding Recorded Investment |
Post-modification Outstanding Recorded Investment |
|||||||||
LOAN TYPE |
||||||||||||
Nonperforming: |
||||||||||||
Commercial, financial and agricultural |
33 | $ | 72 | $ | 34 | |||||||
Commercial real estate: |
||||||||||||
Real estate commercial mortgage |
11 | 41 | 14 | |||||||||
Real estate construction |
6 | 19 | 4 | |||||||||
Total commercial real estate loans |
17 | 60 | 18 | |||||||||
Total commercial loans |
50 | 132 | 52 | |||||||||
Real estate residential mortgage |
676 | 43 | 43 | |||||||||
Home equity: |
||||||||||||
Key Community Bank |
1,708 | 91 | 86 | |||||||||
Other |
227 | 6 | 6 | |||||||||
Total home equity loans |
1,935 | 97 | 92 | |||||||||
Consumer other Key Community Bank |
49 | 2 | 1 | |||||||||
Credit cards |
629 | 5 | 4 | |||||||||
Consumer other: |
||||||||||||
Marine |
360 | 24 | 21 | |||||||||
Other |
50 | 1 | 1 | |||||||||
Total consumer other |
410 | 25 | 22 | |||||||||
Total consumer loans |
3,699 | 172 | 162 | |||||||||
Total nonperforming TDRs |
3,749 | 304 | 214 | |||||||||
Prior-year accruing (a) |
||||||||||||
Commercial, financial and agricultural |
50 | 7 | 3 | |||||||||
Commercial real estate: |
||||||||||||
Real estate commercial mortgage |
4 | 18 | 10 | |||||||||
Real estate construction |
1 | 23 | 42 | |||||||||
Total commercial real estate loans |
5 | 41 | 52 | |||||||||
Total commercial loans |
55 | 48 | 55 | |||||||||
Real estate residential mortgage |
119 | 12 | 12 | |||||||||
Home equity: |
||||||||||||
Key Community Bank |
161 | 17 | 17 | |||||||||
Other |
212 | 7 | 6 | |||||||||
Total home equity loans |
373 | 24 | 23 | |||||||||
Consumer other Key Community Bank |
31 | 1 | 1 | |||||||||
Credit cards |
240 | 2 | 1 | |||||||||
Consumer other: |
||||||||||||
Marine |
272 | 51 | 31 | |||||||||
Other |
54 | 1 | 1 | |||||||||
Total consumer other |
326 | 52 | 32 | |||||||||
Total consumer loans |
1,089 | 91 | 69 | |||||||||
Total prior-year accruing TDRs |
1,144 | 139 | 124 | |||||||||
Total TDRs |
4,893 | $ | 443 | $ | 338 | |||||||
|
|
|
|
|
|
(a) | All TDRs that were restructured prior to January 1, 2013, and are fully accruing. |
136
A further breakdown of TDRs included in nonperforming loans by loan category as of December 31, 2012, follows:
December 31, 2012 dollars in millions |
Number of loans |
Pre-modification Outstanding Recorded Investment |
Post-modification Outstanding Recorded Investment |
|||||||||
LOAN TYPE |
||||||||||||
Nonperforming: |
||||||||||||
Commercial, financial and agricultural |
82 | $ | 76 | $ | 39 | |||||||
Commercial real estate: |
||||||||||||
Real estate commercial mortgage |
15 | 62 | 25 | |||||||||
Real estate construction |
8 | 53 | 33 | |||||||||
Total commercial real estate loans |
23 | 115 | 58 | |||||||||
Total commercial loans |
105 | 191 | 97 | |||||||||
Real estate residential mortgage |
372 | 28 | 28 | |||||||||
Home equity: |
||||||||||||
Key Community Bank |
1,577 | 87 | 82 | |||||||||
Other |
322 | 9 | 8 | |||||||||
Total home equity loans |
1,899 | 96 | 90 | |||||||||
Consumer other Key Community Bank |
28 | 1 | 1 | |||||||||
Credit cards |
405 | 3 | 3 | |||||||||
Consumer other: |
||||||||||||
Marine |
251 | 30 | 29 | |||||||||
Other |
34 | 1 | 1 | |||||||||
Total consumer other |
285 | 31 | 30 | |||||||||
Total consumer loans |
2,989 | 159 | 152 | |||||||||
Total nonperforming TDRs |
3,094 | 350 | 249 | |||||||||
Prior-year accruing (a) |
||||||||||||
Commercial, financial and agricultural |
122 | 12 | 6 | |||||||||
Commercial real estate: |
||||||||||||
Real estate commercial mortgage |
4 | 22 | 15 | |||||||||
Total commercial real estate loans |
4 | 22 | 15 | |||||||||
Total commercial loans |
126 | 34 | 21 | |||||||||
Real estate residential mortgage |
101 | 10 | 10 | |||||||||
Home equity: |
||||||||||||
Key Community Bank |
76 | 5 | 5 | |||||||||
Other |
84 | 3 | 3 | |||||||||
Total home equity loans |
160 | 8 | 8 | |||||||||
Consumer other Key Community Bank |
16 | | | |||||||||
Consumer other: |
||||||||||||
Marine |
117 | 31 | 31 | |||||||||
Other |
43 | 1 | 1 | |||||||||
Total consumer other |
160 | 32 | 32 | |||||||||
Total consumer loans |
437 | 50 | 50 | |||||||||
Total prior-year accruing TDRs |
563 | 84 | 71 | |||||||||
Total TDRs |
3,657 | $ | 434 | $ | 320 | |||||||
|
|
|
|
|
|
(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 without commensurate financial, structural, or legal consideration. All commercial and consumer loan TDRs, regardless of size, are individually evaluated for impairment to determine the probable loss content and are assigned a specific loan allowance if deemed appropriate. This designation has the effect of moving the loan from the general reserve methodology (i.e., collectively evaluated) to the specific reserve methodology (i.e. individually evaluated) and may impact the ALLL through a charge-off or increased loan loss provision. These components affect the ultimate allowance level. Additional information regarding TDRs for discontinued operations is provided in Note 13 (Acquisitions and Discontinued Operations).
Commercial loan TDRs are considered defaulted when principal and interest payments are 90 days past due. Consumer loan TDRs are considered defaulted when principal and interest payments are more than 60 days past due. There were 672 consumer loan TDRs with a combined recorded investment of $31 million that experienced
137
payment defaults during the year ended December 31, 2013, from modifications resulting in TDR status during 2012. As TDRs are individually evaluated for impairment under the specific reserve methodology, subsequent defaults do not generally have a significant additional impact on the ALLL. There were no significant payment defaults during 2013 arising from commercial loans that were designated as TDRs during 2012. There were no significant payment defaults during 2012 arising from commercial or consumer loans that were designated as TDRs during 2011.
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 the borrowers financial needs. Our concession types are primarily interest rate reductions, forgiveness of principal and other modifications. Other modification of loan terms for consumer TDRs include those made under the terms of updated regulatory guidance issued in the third quarter of 2012.
The following table shows the concession types for our commercial and consumer accruing and nonaccruing TDRs and other selected financial data.
December 31, in millions |
2013 | 2012 | ||||||
Commercial loans: |
||||||||
Interest rate reduction |
$ | 95 | $ | 104 | ||||
Forgiveness of principal |
5 | 7 | ||||||
Other modification of loan terms |
7 | 7 | ||||||
Total |
$ | 107 | $ | 118 | ||||
|
|
|
|
|||||
Consumer loans: |
||||||||
Interest rate reduction |
$ | 130 | $ | 122 | ||||
Forgiveness of principal |
5 | 6 | ||||||
Other modification of loan terms |
96 | 74 | ||||||
Total |
$ | 231 | $ | 202 | ||||
|
|
|
|
|||||
Total commercial and consumer TDRs (a) |
$ | 338 | $ | 320 | ||||
Total loans |
54,457 | 52,822 |
(a) | Commitments outstanding to lend additional funds to borrowers whose loan terms have been modified in TDRs are $15 million and $32 million at December 31, 2013, and December 31, 2012, 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.
At December 31, 2013, approximately $53.5 billion, or 98.3%, of our total loans are current. At December 31, 2013, total past due loans and nonperforming loans of $897 million represent approximately 1.7% of total loans.
138
The following aging analysis as of December 31, 2013, and December 31, 2012, of past due and current loans provides further information regarding Keys credit exposure.
December 31, 2013 in millions |
Current |
30-59
Days Past Due |
60-89
Days Past Due |
90 and Greater
Due |
Nonperforming
Loans |
Total Past Due
and Nonperforming Loans |
Purchased
Credit Impaired |
Total Loans |
||||||||||||||||||||||||
LOAN TYPE |
||||||||||||||||||||||||||||||||
Commercial, financial and agricultural |
$ | 24,823 | $ | 39 | $ | 8 | $ | 16 | $ | 77 | $ | 140 | | $ | 24,963 | |||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||||||||||
Commercial mortgage |
7,638 | 20 | 7 | 17 | 37 | 81 | $ | 1 | 7,720 | |||||||||||||||||||||||
Construction |
1,068 | 10 | | 1 | 14 | 25 | | 1,093 | ||||||||||||||||||||||||
Total commercial real estate loans |
8,706 | 30 | 7 | 18 | 51 | 106 | 1 | 8,813 | ||||||||||||||||||||||||
Commercial lease financing |
4,463 | 32 | 33 | 4 | 19 | 88 | | 4,551 | ||||||||||||||||||||||||
Total commercial loans |
$ | 37,992 | $ | 101 | $ | 48 | $ | 38 | $ | 147 | $ | 334 | $ | 1 | $ | 38,327 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Real estate residential mortgage |
$ | 2,038 | $ | 19 | $ | 5 | $ | 4 | $ | 107 | $ | 135 | $ | 14 | $ | 2,187 | ||||||||||||||||
Home equity: |
||||||||||||||||||||||||||||||||
Key Community Bank |
10,038 | 51 | 31 | 14 | 205 | 301 | 1 | 10,340 | ||||||||||||||||||||||||
Other |
308 | 6 | 4 | 1 | 15 | 26 | | 334 | ||||||||||||||||||||||||
Total home equity loans |
10,346 | 57 | 35 | 15 | 220 | 327 | 1 | 10,674 | ||||||||||||||||||||||||
Consumer other Key Community Bank |
1,426 | 8 | 5 | 7 | 3 | 23 | | 1,449 | ||||||||||||||||||||||||
Credit cards |
698 | 11 | 5 | 4 | 4 | 24 | | 722 | ||||||||||||||||||||||||
Consumer other: |
||||||||||||||||||||||||||||||||
Marine |
979 | 15 | 6 | 2 | 26 | 49 | | 1,028 | ||||||||||||||||||||||||
Other |
65 | 2 | 1 | 1 | 1 | 5 | | 70 | ||||||||||||||||||||||||
Total consumer other |
1,044 | 17 | 7 | 3 | 27 | 54 | | 1,098 | ||||||||||||||||||||||||
Total consumer loans |
$ | 15,552 | $ | 112 | $ | 57 | $ | 33 | $ | 361 | $ | 563 | $ | 15 | $ | 16,130 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total loans |
$ | 53,544 | $ | 213 | $ | 105 | $ | 71 | $ | 508 | $ | 897 | $ | 16 | $ | 54,457 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
December 31, 2012 in millions |
Current |
30-59
Days Past Due |
60-89
Days Past Due |
90 and Greater
Due |
Nonperforming
Loans (a) |
Total Past Due
and Nonperforming Loans |
Purchased
Credit Impaired |
Total
Loans |
||||||||||||||||||||||||
LOAN TYPE |
||||||||||||||||||||||||||||||||
Commercial, financial and agricultural |
$ | 23,030 | $ | 56 | $ | 34 | $ | 22 | $ | 99 | $ | 211 | $ | 1 | $ | 23,242 | ||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||||||||||
Commercial mortgage |
7,556 | 21 | 11 | 9 | 120 | 161 | 3 | 7,720 | ||||||||||||||||||||||||
Construction |
943 | 1 | 2 | 1 | 56 | 60 | | 1,003 | ||||||||||||||||||||||||
Total commercial real estate loans |
8,499 | 22 | 13 | 10 | 176 | 221 | 3 | 8,723 | ||||||||||||||||||||||||
Commercial lease financing |
4,772 | 88 | 31 | 8 | 16 | 143 | | 4,915 | ||||||||||||||||||||||||
Total commercial loans |
$ | 36,301 | $ | 166 | $ | 78 | $ | 40 | $ | 291 | $ | 575 | $ | 4 | $ | 36,880 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Real estate residential mortgage |
$ | 2,023 | $ | 16 | $ | 10 | $ | 6 | $ | 103 | $ | 135 | $ | 16 | $ | 2,174 | ||||||||||||||||
Home equity: |
||||||||||||||||||||||||||||||||
Key Community Bank |
9,506 | 54 | 26 | 17 | 210 | 307 | 3 | 9,816 | ||||||||||||||||||||||||
Other |
387 | 9 | 4 | 2 | 21 | 36 | | 423 | ||||||||||||||||||||||||
Total home equity loans |
9,893 | 63 | 30 | 19 | 231 | 343 | 3 | 10,239 | ||||||||||||||||||||||||
Consumer other Key Community Bank |
1,325 | 9 | 5 | 8 | 2 | 24 | | 1,349 | ||||||||||||||||||||||||
Credit cards |
706 | 7 | 5 | | 11 | 23 | | 729 | ||||||||||||||||||||||||
Consumer other: |
||||||||||||||||||||||||||||||||
Marine |
1,288 | 23 | 9 | 4 | 34 | 70 | | 1,358 | ||||||||||||||||||||||||
Other |
87 | 2 | 1 | 1 | 2 | 6 | | 93 | ||||||||||||||||||||||||
Total consumer other |
1,375 | 25 | 10 | 5 | 36 | 76 | | 1,451 | ||||||||||||||||||||||||
Total consumer loans |
$ | 15,322 | $ | 120 | $ | 60 | $ | 38 | $ | 383 | $ | 601 | $ | 19 | $ | 15,942 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total loans |
$ | 51,623 | $ | 286 | $ | 138 | $ | 78 | $ | 674 | $ | 1,176 | $ | 23 | $ | 52,822 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
139
(a) | Includes $72 million of performing secured loans that were discharged through Chapter 7 bankruptcy and not formally re-affirmed, as addressed in updated regulatory guidance issued in the third quarter of 2012. Such loans have been designated as nonperforming and TDRs. |
The prevalent risk characteristic for both commercial and consumer loans is the risk of loss arising from an obligors inability or failure to meet contractual payment or performance terms. Evaluation of this risk is stratified and monitored by the loan risk rating grades assigned for the commercial loan portfolios and the regulatory risk ratings assigned for the consumer loan portfolios.
Most extensions of credit are subject to loan grading or scoring. Loan grades are assigned at the time of origination, verified by credit risk management, and periodically reevaluated thereafter. 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 borrowers management, the borrowers competitive position within its industry sector, and our view of industry risk in 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.
Credit quality indicators for our commercial and consumer loan portfolios, excluding $16 million and $23 million of PCI loans at December 31, 2013, and 2012, respectively, based on bond rating, regulatory classification and payment activity as of December 31, 2013, and 2012, are as follows:
Commercial Credit Exposure
Credit Risk Profile by Creditworthiness Category (a)
December 31, in millions |
||||||||||||||||||||||||||||||||||||||||
Commercial, financial and
agricultural |
RE Commercial | RE Construction | Commercial Lease | Total | ||||||||||||||||||||||||||||||||||||
RATING (b), (c) |
2013 | 2012 | 2013 | 2012 | 2013 | 2012 | 2013 | 2012 | 2013 | 2012 | ||||||||||||||||||||||||||||||
AAA AA |
$ | 402 | $ | 200 | $ | 2 | $ | 1 | $ | 1 | $ | 1 | $ | 656 | $ | 554 | $ | 1,061 | $ | 756 | ||||||||||||||||||||
A |
882 | 607 | 56 | 77 | 1 | 1 | 631 | 978 | 1,570 | 1,663 | ||||||||||||||||||||||||||||||
BBB BB |
22,368 | 20,834 | 7,129 | 6,549 | 920 | 783 | 3,080 | 3,118 | 33,497 | 31,284 | ||||||||||||||||||||||||||||||
B |
521 | 787 | 282 | 456 | 32 | 20 | 117 | 175 | 952 | 1,438 | ||||||||||||||||||||||||||||||
CCC C |
790 | 813 | 250 | 634 | 139 | 198 | 67 | 90 | 1,246 | 1,735 | ||||||||||||||||||||||||||||||
Total |
$ | 24,963 | $ | 23,241 | $ | 7,719 | $ | 7,717 | $ | 1,093 | $ | 1,003 | $ | 4,551 | $ | 4,915 | $ | 38,326 | $ | 36,876 | ||||||||||||||||||||
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(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)
December 31, in millions |
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Residential Prime | ||||||||||
GRADE |
2013 | 2012 | ||||||||
Pass |
$ | 12,500 | $ | 12,035 | ||||||
Substandard |
346 | 359 | ||||||||
Total |
$ | 12,846 | $ | 12,394 | ||||||
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140
Credit Risk Profile Based on Payment Activity (a), (b)
December 31, in millions |
Consumer Key
Community Bank |
Credit cards | Consumer Marine | Consumer Other | Total | |||||||||||||||||||||||||||||||||||||
2013 | 2012 | 2013 | 2012 | 2013 | 2012 | 2013 | 2012 | 2013 | 2012 | |||||||||||||||||||||||||||||||||
Performing |
$ | 1,446 | $ | 1,347 | $ | 718 | $ | 718 | $ | 1,002 | $ | 1,324 | $ | 69 | $ | 91 | $ | 3,235 | $ | 3,480 | ||||||||||||||||||||||
Nonperforming |
3 | 2 | 4 | 11 | 26 | 34 | 1 | 2 | 34 | 49 | ||||||||||||||||||||||||||||||||
Total |
$ | 1,449 | $ | 1,349 | $ | 722 | $ | 729 | $ | 1,028 | $ | 1,358 | $ | 70 | $ | 93 | $ | 3,269 | $ | 3,529 | ||||||||||||||||||||||
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(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. |
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. 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 of $2.5 million and greater, 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 the individual impairment for commercial loans and TDRs 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 loans observable market price. Secured consumer loan TDRs that are discharged through Chapter 7 bankruptcy and not formally re-affirmed are adjusted to reflect the fair value of the underlying collateral, less costs to sell. Other consumer loan TDRs are combined in homogenous pools and assigned a specific allocation based on the estimated present value of future cash flows using the effective interest rate. 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 December 31, 2013, represents our best estimate of the probable credit losses inherent in the loan portfolio at that date.
Although 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, we have not changed the accounting policies or methodology that we use 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 borrowers payment is 180 days past due. Most consumer loans are charged off 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. Credit card loans, and similar unsecured products, are charged off when payments are 180 days past due.
At December 31, 2013, the ALLL was $848 million, or 1.56% of loans, compared to $888 million, or 1.68% of loans, at December 31, 2012. At December 31, 2013, the ALLL was 166.9% of nonperforming loans, compared to 131.8% at December 31, 2012.
141
A summary of the ALLL at the end of the past three years is presented in the table below:
in millions | 2013 | 2012 | 2011 | |||||||||
Balance at beginning of period continuing operations |
$ | 888 | $ | 1,004 | $ | 1,604 | ||||||
Charge-offs |
(308 | ) | (508 | ) | (715 | ) | ||||||
Recoveries |
140 | 163 | 174 | |||||||||
Net loans and leases charged off |
(168 | ) | (345 | ) | (541 | ) | ||||||
Provision for loan and lease losses from continuing operations |
130 | 229 | (60 | ) | ||||||||
Foreign currency translation adjustment |
(2 | ) | | 1 | ||||||||
Balance at end of period continuing operations |
$ | 848 | $ | 888 | $ | 1,004 | ||||||
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The changes in the ALLL by loan category for the periods indicated are as follows:
December 31, | December 31, | |||||||||||||||||||
in millions | 2012 | Provision | Charge-offs | Recoveries | 2013 | |||||||||||||||
Commercial, financial and agricultural |
$ | 327 | $ | 58 | $ | (62 | ) | $ | 39 | $ | 362 | |||||||||
Real estate commercial mortgage |
198 | (40 | ) | (20 | ) | 27 | 165 | |||||||||||||
Real estate construction |
41 | (20 | ) | (3 | ) | 14 | 32 | |||||||||||||
Commercial lease financing |
55 | 19 | (27 | ) | 15 | 62 | ||||||||||||||
Total commercial loans |
621 | 17 | (112 | ) | 95 | 621 | ||||||||||||||
Real estate residential mortgage |
30 | 25 | (20 | ) | 2 | 37 | ||||||||||||||
Home equity: |
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Key Community Bank |
105 | 31 | (62 | ) | 10 | 84 | ||||||||||||||
Other |
25 | | (20 | ) | 6 | 11 | ||||||||||||||
Total home equity loans |
130 | 31 | (82 | ) | 16 | 95 | ||||||||||||||
Consumer other Key Community Bank |
38 | 15 | (31 | ) | 7 | 29 | ||||||||||||||
Credit cards |
26 | 35 | (30 | ) | 3 | 34 | ||||||||||||||
Consumer other: |
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Marine |
39 | 4 | (29 | ) | 15 | 29 | ||||||||||||||
Other |
4 | 1 | (4 | ) | 2 | 3 | ||||||||||||||
Total consumer other: |
43 | 5 | (33 | ) | 17 | 32 | ||||||||||||||
Total consumer loans |
267 | 111 | (196 | ) | 45 | 227 | ||||||||||||||
Total ALLL continuing operations |
888 | 128 | (a) | (308 | ) | 140 | 848 | |||||||||||||
Discontinued operations |
55 | 21 | (55 | ) | 18 | 39 | ||||||||||||||
Total ALLL including discontinued operations |
$ | 943 | $ | 149 | $ (363 | ) | $ | 158 | $ | 887 | ||||||||||
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(a) | Includes $2 million of foreign currency translation adjustment. |
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December 31, | December 31, | |||||||||||||||||||
in millions | 2011 | Provision | Charge-offs | Recoveries | 2012 | |||||||||||||||
Commercial, financial and agricultural |
$ | 334 | $ | 10 | $ | (80 | ) | $ | 63 | $ | 327 | |||||||||
Real estate commercial mortgage |
272 | 5 | (102 | ) | 23 | 198 | ||||||||||||||
Real estate construction |
63 | (3 | ) | (24 | ) | 5 | 41 | |||||||||||||
Commercial lease financing |
78 | (18 | ) | (27 | ) | 22 | 55 | |||||||||||||
Total commercial loans |
747 | (6 | ) | (233 | ) | 113 | 621 | |||||||||||||
Real estate residential mortgage |
37 | 17 | (27 | ) | 3 | 30 | ||||||||||||||
Home equity: |
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Key Community Bank |
103 | 90 | (99 | ) | 11 | 105 | ||||||||||||||
Other |
29 | 26 | (35 | ) | 5 | 25 | ||||||||||||||
Total home equity loans |
132 | 116 | (134 | ) | 16 | 130 | ||||||||||||||
Consumer other Key Community Bank |
41 | 29 | (38 | ) | 6 | 38 | ||||||||||||||
Credit cards |
| 37 | (11 | ) | | 26 | ||||||||||||||
Consumer other: |
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Marine |
46 | 30 | (59 | ) | 22 | 39 | ||||||||||||||
Other |
1 | 6 | (6 | ) | 3 | 4 | ||||||||||||||
Total consumer other: |
47 | 36 | (65 | ) | 25 | 43 | ||||||||||||||
Total consumer loans |
257 | 235 | (275 | ) | 50 | 267 | ||||||||||||||
Total ALLL continuing operations |
1,004 | 229 | (508 | ) | 163 | 888 | ||||||||||||||
Discontinued operations |
104 | 9 | (75 | ) | 17 | 55 | ||||||||||||||
Total ALLL including discontinued operations |
$ | 1,108 | $ | 238 | $ (583 | ) | $ | 180 | $ | 943 | ||||||||||
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December 31, | December 31, | |||||||||||||||||||
in millions | 2010 | Provision | Charge-offs | Recoveries | 2011 | |||||||||||||||
Commercial, financial and agricultural |
$ | 485 | $ | (32 | ) | $ | (169 | ) | $ | 50 | $ | 334 | ||||||||
Real estate commercial mortgage |
416 | (41 | ) | (113 | ) | 10 | 272 | |||||||||||||
Real estate construction |
145 | (26 | ) | (83 | ) | 27 | 63 | |||||||||||||
Commercial lease financing |
175 | (80 | ) | (42 | ) | 25 | 78 | |||||||||||||
Total commercial loans |
1,221 | (179 | ) | (407 | ) | 112 | 747 | |||||||||||||
Real estate residential mortgage |
49 | 14 | (29 | ) | 3 | 37 | ||||||||||||||
Home equity: |
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Key Community Bank |
120 | 72 | (100 | ) | 11 | 103 | ||||||||||||||
Other |
57 | 13 | (45 | ) | 4 | 29 | ||||||||||||||
Total home equity loans |
177 | 85 | (145 | ) | 15 | 132 | ||||||||||||||
Consumer other Key Community Bank |
57 | 21 | (45 | ) | 8 | 41 | ||||||||||||||
Consumer other: |
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Marine |
89 | 5 | (80 | ) | 32 | 46 | ||||||||||||||
Other |
11 | (5 | ) | (9 | ) | 4 | 1 | |||||||||||||
Total consumer other: |
100 | | (89 | ) | 36 | 47 | ||||||||||||||
Total consumer loans |
383 | 120 | (308 | ) | 62 | 257 | ||||||||||||||
Total ALLL continuing operations |
1,604 | (59 | ) (a) | (715 | ) | 174 | 1,004 | |||||||||||||
Discontinued operations |
114 | 113 | (138 | ) | 15 | 104 | ||||||||||||||
Total ALLL including discontinued operations |
$ | 1,718 | $ | 54 | $ | (853 | ) | $ | 189 | $ | 1,108 | |||||||||
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(a) | Includes $1 million of foreign currency translation adjustment. |
Our ALLL decreased by $40 million, or 5%, since 2012 primarily because of the improvement in the credit quality of our loan portfolios. The quality of new loan originations and decreasing NPLs and net loan charge-offs have resulted in a reduction in our general allowance as well. Our general allowance applies expected loss rates to our existing loans with similar risk characteristics as well as any adjustments to reflect our current assessment of qualitative factors such as changes in economic conditions, underwriting standards, and concentrations of credit. Our delinquency trends declined during 2012 and 2013 due to a modest level of loan growth, relatively stable economic conditions, and continued run-off in our exit loan portfolio, reflecting our effort to maintain a moderate enterprise risk tolerance.
For continuing operations, the loans outstanding individually evaluated for impairment totaled $358 million, with a corresponding allowance of $42 million at December 31, 2013. Loans outstanding collectively evaluated for impairment totaled $54.1 billion, with a corresponding allowance of $805 million at December 31, 2013. At
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December 31, 2013, PCI loans evaluated for impairment totaled $16 million, with a corresponding allowance of $1 million. There was no provision for loan and lease losses on these PCI loans during the year ended December 31, 2013.
A breakdown of the individual and collective ALLL and the corresponding loan balances as of December 31, 2013, follows:
Allowance | Outstanding | |||||||||||||||||||||||||||
December 31, 2013 in millions |
Individually
Evaluated for Impairment |
Collectively
Evaluated for Impairment |
Purchased
Credit Impaired |
Loans |
Individually
Evaluated for Impairment |
Collectively
Evaluated for Impairment |
Purchased
Credit Impaired |
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Commercial, financial and agricultural |
$ | 8 | $ | 354 | | $ | 24,963 | $ | 50 | $ | 24,913 | | ||||||||||||||||
Commercial real estate: |
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Commercial mortgage |
2 | 163 | | 7,720 | 27 | 7,692 | $ | 1 | ||||||||||||||||||||
Construction |
| 32 | | 1,093 | 50 | 1,043 | | |||||||||||||||||||||
Total commercial real estate loans |
2 | 195 | | 8,813 | 77 | 8,735 | 1 | |||||||||||||||||||||
Commercial lease financing |
| 62 | | 4,551 | | 4,551 | | |||||||||||||||||||||
Total commercial loans |
10 | 611 | | 38,327 | 127 | 38,199 | 1 | |||||||||||||||||||||
Real estate residential mortgage |
9 | 27 | $ | 1 | 2,187 | 56 | 2,117 | 14 | ||||||||||||||||||||
Home equity: |
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Key Community Bank |
10 | 74 | | 10,340 | 102 | 10,237 | 1 | |||||||||||||||||||||
Other |
1 | 10 | | 334 | 12 | 322 | | |||||||||||||||||||||
Total home equity loans |
11 | 84 | | 10,674 | 114 | 10,559 | 1 | |||||||||||||||||||||
Consumer other Key Community Bank |
1 | 28 | | 1,449 | 3 | 1,446 | | |||||||||||||||||||||
Credit cards |
1 | 33 | | 722 | 5 | 717 | | |||||||||||||||||||||
Consumer other: |
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Marine |
10 | 19 | | 1,028 | 52 | 976 | | |||||||||||||||||||||
Other |
| 3 | | 70 | 1 | 69 | | |||||||||||||||||||||
Total consumer other |
10 | 22 | | 1,098 | 53 | 1,045 | | |||||||||||||||||||||
Total consumer loans |
32 | 194 | 1 | 16,130 | 231 | 15,884 | 15 | |||||||||||||||||||||
Total ALLL continuing operations |
42 | 805 | 1 | 54,457 | 358 | 54,083 | 16 | |||||||||||||||||||||
Discontinued operations |
1 | 38 | | 4,497 | (a) | 13 | 4,484 | (a) | | |||||||||||||||||||
Total ALLL including discontinued operations |
$ | 43 | $ | 843 | $ | 1 | $ | 58,954 | $ | 371 | $ | 58,567 | $ | 16 | ||||||||||||||
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(a) | Amount includes $2.1 billion of loans carried at fair value that are excluded from ALLL consideration. |
A breakdown of the individual and collective ALLL and the corresponding loan balances as of December 31, 2012, follows:
Allowance | Outstanding | |||||||||||||||||||||||||||
December 31, 2012 in millions |
Individually
Evaluated for Impairment |
Collectively
Evaluated for Impairment |
Purchased
Credit Impaired |
Loans |
Individually
Evaluated for Impairment |
Collectively
Evaluated for Impairment |
Purchased
Credit Impaired |
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Commercial, financial and agricultural |
$ | 12 | $ | 314 | | $ | 23,242 | $ | 65 | $ | 23,176 | $ | 1 | |||||||||||||||
Commercial real estate: |
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Commercial mortgage |
1 | 198 | | 7,720 | 96 | 7,621 | 3 | |||||||||||||||||||||
Construction |
| 41 | | 1,003 | 48 | 955 | | |||||||||||||||||||||
Total commercial real estate loans |
1 | 239 | | 8,723 | 144 | 8,576 | 3 | |||||||||||||||||||||
Commercial lease financing |
| 55 | | 4,915 | | 4,915 | | |||||||||||||||||||||
Total commercial loans |
13 | 608 | | 36,880 | 209 | 36,667 | 4 | |||||||||||||||||||||
Real estate residential mortgage |
1 | 29 | $ | 1 | 2,174 | 38 | 2,120 | 16 | ||||||||||||||||||||
Home equity: |
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Key Community Bank |
11 | 94 | | 9,816 | 87 | 9,726 | 3 | |||||||||||||||||||||
Other |
1 | 24 | | 423 | 12 | 411 | | |||||||||||||||||||||
Total home equity loans |
12 | 118 | | 10,239 | 99 | 10,137 | 3 | |||||||||||||||||||||
Consumer other Key Community Bank |
2 | 36 | | 1,349 | 2 | 1,347 | | |||||||||||||||||||||
Credit cards |
| 26 | 729 | 2 | 727 | | ||||||||||||||||||||||
Consumer other: |
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Marine |
7 | 32 | | 1,358 | 60 | 1,298 | | |||||||||||||||||||||
Other |
| 3 | | 93 | 1 | 92 | | |||||||||||||||||||||
Total consumer other |
7 | 35 | | 1,451 | 61 | 1,390 | | |||||||||||||||||||||
Total consumer loans |
22 | 244 | 1 | 15,942 | 202 | 15,721 | 19 | |||||||||||||||||||||
Total ALLL continuing operations |
35 | 852 | 1 | 52,822 | 411 | 52,388 | 23 | |||||||||||||||||||||
Discontinued operations |
| 55 | | 5,201 | (a) | 3 | 5,198 | (a) | | |||||||||||||||||||
Total ALLL including discontinued operations |
$ | 35 | $ | 907 | $ | 1 | $ | 58,023 | $ | 414 | $ | 57,586 | $ | 23 | ||||||||||||||
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(a) | Amount includes $2.5 billion of loans carried at fair value that are excluded from ALLL consideration. |
The liability for credit losses inherent in lending-related unfunded commitments, such as letters of credit and unfunded loan commitments, is included in accrued expense and other liabilities on the balance sheet. We establish the amount of this reserve by considering both historical trends and current market conditions quarterly, or more often if deemed necessary. Our liability for credit losses on lending-related commitments has increased by $8 million since 2012 to $37 million at December 31, 2013. When combined with our ALLL, our total allowance for credit losses represented 1.63% of loans at December 31, 2013, compared to 1.74% at December 31, 2012.
Changes in the liability for credit losses on unfunded lending-related commitments are summarized as follows:
in millions | 2013 | 2012 | 2011 | |||||||||
Balance at beginning of period |
$ | 29 | $ | 45 | $ | 73 | ||||||
Provision (credit) for losses on lending-related commitments |
8 | (16 | ) | (28 | ) | |||||||
Balance at end of period |
$ | 37 | $ | 29 | $ | 45 | ||||||
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Fair Value Determination
As defined in the applicable accounting guidance, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in our principal market. We have established and documented our process for determining the fair values of our 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, we determine the fair value of our assets and liabilities using valuation models or third-party pricing services. Both of these approaches rely on market-based parameters, when available, such as interest rate yield curves, option volatilities, and credit spreads, or unobservable inputs. Unobservable inputs may be based on our judgment, assumptions, and estimates related to credit quality, liquidity, interest rates, and other relevant inputs.
Valuation adjustments, such as those pertaining to counterparty and our 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 does not accurately reflect the counterpartys or our own credit quality. We make liquidity valuation adjustments to the fair value of certain assets to reflect the uncertainty in the pricing and trading of the instruments when we are unable to observe recent market transactions for identical or similar instruments. Liquidity valuation adjustments are based on the following factors:
¿ |
the amount of time since the last relevant valuation; |
¿ |
whether there is an actual trade or relevant external quote available at the measurement date; and |
¿ |
volatility associated with the primary pricing components. |
We ensure that our fair value measurements are accurate and appropriate by relying upon various controls, including:
¿ |
an independent review and approval of valuation models and assumptions; |
¿ |
recurring detailed reviews of profit and loss; and |
¿ |
a validation of valuation model components against benchmark data and similar products, where possible. |
We recognize transfers between levels of the fair value hierarchy at the end of the reporting period. Quarterly, we review any changes to our valuation methodologies to ensure they are appropriate and justified, and refine our
145
valuation methodologies if more market-based data becomes available. The Fair Value Committee, which is governed by ALCO, oversees the valuation process for all lines of business and support areas, as applicable. Various Working Groups that report to the Fair Value Committee analyze and approve the valuation methodologies used to fair value assets and liabilities managed within specific areas. The Working Groups are discussed in more detail in the qualitative disclosures within this footnote and in Note 13 (Acquisitions and Discontinued Operations). Formal documentation of the fair valuation methodologies is prepared by the lines of business and support areas as appropriate. The documentation details the asset or liability class and related general ledger accounts, valuation techniques, fair value hierarchy level, market participants, accounting methods, valuation methodology, group responsible for valuations, and valuation inputs.
Additional information regarding our accounting policies for determining fair value is provided in Note 1 (Summary of Significant Accounting Policies) under the heading Fair Value Measurements.
Qualitative Disclosures of Valuation Techniques
Loans . Most loans recorded as trading account assets are valued based on market spreads for similar assets since they are actively traded. Therefore, these loans are classified as Level 2 because the fair value recorded is based on observable market data for similar assets.
Securities (trading and available for sale) . We own several types of securities, requiring a range of valuation methods:
¿ |
Securities are classified as Level 1 when quoted market prices are available in an active market for the identical securities. Level 1 instruments include exchange-traded equity securities. |
¿ |
Securities are classified as Level 2 if quoted prices for identical securities are not available, and fair value is determined using pricing models (either by a third-party pricing service or internally) or quoted prices of similar securities. These instruments include municipal bonds; bonds backed by the U.S. government; corporate bonds; certain mortgage-backed securities; securities issued by the U.S. Treasury; money markets; and certain agency and corporate CMOs. Inputs to the pricing models include: standard inputs, such as yields, benchmark securities, bids, and offers; actual trade data (i.e., spreads, credit ratings, and interest rates) for comparable assets; spread tables; matrices; high-grade scales; and option-adjusted spreads. |
¿ |
Securities are classified as Level 3 when there is limited activity in the market for a particular instrument. In such cases, we use internal models based on certain assumptions to determine fair value. Our Level 3 instruments consist of certain commercial mortgage-backed securities. Our Real Estate Capital line of business is responsible for the quarterly valuation process for these securities. The methodology incorporates a loan-by-loan credit review in combination with discounting the risk-adjusted bond cash flows. A detailed credit review of the underlying loans involves a screening process using a multitude of filters to identify the highest risk loans associated with these commercial mortgage-backed securities. Each of the highest risk loans identified is re-underwritten and loan-specific defaults and recoveries are assigned. A matrix approach is used to assign an expected default and recovery percentage for the remaining loans. Bond classes are then run through a discounted cash flow analysis, taking into account the expected default and recovery percentages as well as discount rates developed by our Finance area. Inputs for the Level 3 internal models include expected cash flows from the underlying loans, which take into account expected default and recovery percentages, market research, and discount rates commensurate with current market conditions. Changes in the credit quality of the underlying loans or market discount rate would impact the value of the bonds. An increase in the underlying loan credit quality or decrease in the market discount rate would positively impact the bond value. A decrease in the underlying loan credit quality or increase in the market discount rate would negatively impact the bond value. |
The fair values of our Level 2 securities available for sale are determined by a third-party pricing service. The valuations provided by the third-party pricing service are based on observable market inputs, which include benchmark yields, reported trades, issuer spreads, benchmark securities, bids, offers, and reference data obtained
146
from market research publications. Inputs used by the third-party pricing service in valuing CMOs and other mortgage-backed securities also include new issue data, monthly payment information, whole loan collateral performance, and To Be Announced prices. In valuations of securities issued by state and political subdivisions, inputs used by the third-party pricing service also include material event notices.
On a monthly basis, we validate the pricing methodologies utilized by our third-party pricing service to ensure the fair value determination is consistent with the applicable accounting guidance and that our assets are properly classified in the fair value hierarchy. To perform this validation, we:
¿ |
review documentation received from our third-party pricing service regarding the inputs used in their valuations and determine a level assessment for each category of securities; |
¿ |
substantiate actual inputs used for a sample of securities by comparing the actual inputs used by our third-party pricing service to comparable inputs for similar securities; and |
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substantiate the fair values determined for a sample of securities by comparing the fair values provided by our third-party pricing service to prices from other independent sources for the same and similar securities. We analyze variances and conduct additional research with our third-party pricing service and take appropriate steps based on our findings. |
Private equity and mezzanine investments . Private equity and mezzanine investments consist of investments in debt and equity securities through our Real Estate Capital line of business. They include direct investments made in specific properties, as well as indirect investments made in funds that pool assets of many investors to invest in properties. There is no active market for these investments, so we employ other valuation methods.
Private equity and mezzanine investments are classified as Level 3 assets since our judgment significantly influences the determination of fair value. Our Fund Management, Asset Management, and Accounting groups are responsible for reviewing the valuation models and determining the fair value of these investments on a quarterly basis. Direct investments in properties are initially valued based upon the transaction price. This amount is then adjusted to fair value based on current market conditions using the discounted cash flow method based on the expected investment exit date. The fair values of the assets are reviewed and adjusted quarterly. Periodically, we obtain a third-party appraisal for the investments to validate the specific inputs for determining fair value.
Inputs used in calculating future cash flows include the cost of build-out, future selling prices, current market outlook, and operating performance of the investment. Investment income and expense assumptions are based on market inputs, such as rental/leasing rates and vacancy rates for the geographic- and property type-specific markets. For investments under construction, investment income and expense assumptions are determined using expected future build-out costs and anticipated future rental prices based on current market conditions, discount rates, holding period, the terminal cap rate and sales commissions paid in the terminal cap year. For investments that are in lease-up or are fully leased, income and expense assumptions are based on the geographic markets current lease rates, underwritten expenses, market lease terms, and historical vacancy rates. Asset Management validates these inputs on a quarterly basis through the use of industry publications, third-party broker opinions, and comparable property sales, where applicable. Changes in the significant inputs (rental/leasing rates, vacancy rates, valuation capitalization rate, discount rate, and terminal cap rate) would significantly affect the fair value measurement. Increases in rental/leasing rates would increase fair value while increases in the vacancy rates, the valuation capitalization rate, the discount rate, and the terminal cap rate would decrease fair value.
Consistent with accounting guidance, indirect investments are valued using a methodology that allows the use of statements from the investment manager to calculate net asset value per share. A primary input used in estimating fair value is the most recent value of the capital accounts as reported by the general partners of the funds in which we invest. The calculation to determine the investments fair value is based on our percentage ownership in the fund multiplied by the net asset value of the fund, as provided by the fund manager. Under the requirements of the Volcker Rule, we will be required to dispose of some or all of our indirect investments. As of December 31, 2013, management has not committed to a plan to sell these investments. Therefore, these investments continue to be valued using the net asset value per share methodology.
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Investments in real estate private equity funds are included within private equity and mezzanine investments. The main purpose of these funds is to acquire a portfolio of real estate investments that provides attractive risk-adjusted returns and current income for investors. Certain of these investments do not have readily determinable fair values and represent our ownership interest in an entity that follows measurement principles under investment company accounting. The following table presents the fair value of our indirect investments and related unfunded commitments at December 31, 2013:
December 31, 2013 in millions |
Fair Value |
Unfunded
Commitments |
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INVESTMENT TYPE |
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Passive funds (a) |
$ | 11 | $ | 1 | ||||||
Co-managed funds (b) |
12 | | ||||||||
Total |
$ | 23 | $ | 1 | ||||||
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(a) | We invest in passive funds, which are multi-investor private equity funds. These investments can never be redeemed. Instead, distributions are received through the liquidation of the underlying investments in the funds. Some funds have no restrictions on sale, while others require investors to remain in the fund until maturity. The funds will be liquidated over a period of one to five years. |
(b) | We are a manager or co-manager of these funds. These investments can never be redeemed. Instead, distributions are received through the liquidation of the underlying investments in the funds. In addition, we receive management fees. We can sell or transfer our interest in any of these funds with the written consent of a majority of the funds investors. In one instance, the other co-manager of the fund must consent to the sale or transfer of our interest in the fund. The funds will mature over a period of one to four years. |
Principal investments . Principal investments consist of investments in equity and debt instruments made by our principal investing entities. They include direct investments (investments made in a particular company) and indirect investments (investments made through funds that include other investors).
Each investment is adjusted to fair value with any net realized or unrealized gain/loss recorded in the current periods earnings. This process is a coordinated and documented effort by the Principal Investing Entities Deal Team (individuals from one of the independent investment managers who oversee these instruments), finance and accounting staff, and the Investment Committee (individuals from Key and one of the independent investment managers). This process involves an in-depth review of the condition of each investment depending on the type of investment.
Our direct investments include investments in debt and equity instruments of both private and public companies. When quoted prices are available in an active market for the identical direct investment, we use the quoted prices in the valuation process, and the related investments are classified as Level 1 assets. However, in most cases, quoted market prices are not available for our direct investments, and we must perform valuations using other methods. These direct investment valuations are an in-depth analysis of the condition of each investment and are based on the unique facts and circumstances related to each individual investment. There is a certain amount of subjectivity surrounding the valuation of these investments due to the combination of quantitative and qualitative factors that are used in the valuation models. Therefore, these direct investments are classified as Level 3 assets. The specific inputs used in the valuations of each type of direct investment are described below.
Interest-bearing securities (i.e., loans) are valued on a quarterly basis. Valuation adjustments are determined by the Principal Investing Entities Deal Team and are subject to approval by the Investment Committee. Valuations of debt instruments are based on the Principal Investing Entities Deal Teams knowledge of the current financial status of the subject company, which is regularly monitored throughout the term of the investment. Significant unobservable inputs used in the valuations of these investments include the companys payment history, adequacy of cash flows from operations, and current operating results, including market multiples and historical and forecast earnings before interest, taxation, depreciation, and amortization (EBITDA). Inputs can also include the seniority of the debt, the nature of any pledged collateral, the extent to which the security interest is perfected and the net liquidation value of collateral.
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Valuations of equity instruments of private companies, which are prepared on a quarterly basis, are based on current market conditions and the current financial status of each company. A valuation analysis is performed to value each investment. The valuation analysis is reviewed by the Principal Investing Entities Deal Team Member, and reviewed and approved by the Chief Administrative Officer of one of the independent investment managers. Significant unobservable inputs used in these valuations include adequacy of the companys cash flows from operations, any significant change in the companys performance since the prior valuation, and any significant equity issuances by the company. Equity instruments of public companies are valued using quoted prices in an active market for the identical security. If the instrument is restricted, the fair value is determined considering the number of shares traded daily, the number of the companys total restricted shares, and price volatility.
Our indirect investments are classified as Level 3 assets since our significant inputs are not observable in the marketplace. Indirect investments include primary and secondary investments in private equity funds engaged mainly in venture- and growth-oriented investing. These investments do not have readily determinable fair values. Indirect investments are valued using a methodology that is consistent with accounting guidance that allows us to estimate fair value based upon net asset value per share (or its equivalent, such as member units or an ownership interest in partners capital to which a proportionate share of net assets is attributed). The significant unobservable input used in estimating fair value is primarily the most recent value of the capital accounts as reported by the general partners of the funds in which we invest. Under the requirements of the Volcker Rule, we will be required to dispose of some or all of our indirect investments. As of December 31, 2013, management has not committed to a plan to sell these investments. Therefore, these investments continue to be valued using the net asset value per share methodology.
For indirect investments, management may make adjustments it deems appropriate to the net asset value if it is determined that the net asset value does not properly reflect fair value. In determining the need for an adjustment to net asset value, management performs an analysis of the private equity funds based on the independent fund managers valuations as well as managements own judgment. Significant unobservable inputs used in these analyses include current fund financial information provided by the fund manager, an estimate of future proceeds expected to be received on the investment, and market multiples. Management also considers whether the independent fund manager adequately marks down an impaired investment, maintains financial statements in accordance with GAAP, or follows a practice of holding all investments at cost.
At December 31, 2013, the fair value of our indirect investments was $413 million, and the related unfunded commitments was $75 million. Our indirect investments consist of buyout funds, venture capital funds, and fund of funds. These investments can never be redeemed. Instead, distributions are received through the liquidation of the underlying investments of the fund. An investment in any one of these funds can be sold only with the approval of the funds general partners. We estimate that the underlying investments of the funds will be liquidated over a period of one to nine years.
Derivatives . Exchange-traded derivatives are valued using quoted prices and, therefore, are classified as Level 1 instruments. However, only a few types of derivatives are exchange-traded. The majority of our derivative positions are valued using internally developed models based on market convention that use observable market inputs, such as interest rate curves, yield curves, LIBOR and Overnight Index Swap (OIS) discount rates and curves, index pricing curves, foreign currency curves, and volatility surfaces (a three-dimensional graph of implied volatility against strike price and maturity). These derivative contracts, which are classified as Level 2 instruments, include interest rate swaps, certain options, cross currency swaps, and credit default swaps.
In addition, we have several customized derivative instruments and risk participations that are classified as Level 3 instruments. These derivative positions are valued using internally developed models, with inputs consisting of available market data, such as bond spreads and asset values, as well as unobservable internally-derived assumptions, such as loss probabilities and internal risk ratings of customers. These derivatives are priced monthly by our Market Risk Management group using a credit valuation adjustment methodology. Swap
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details with the customer and our related participation percentage, if applicable, are obtained from our derivatives accounting system, which is the system of record. Applicable customer rating information is obtained from the particular loan system and represents an unobservable input to this valuation process. Using these various inputs, a valuation of these Level 3 derivatives is performed using a model that was acquired from a third party. In summary, the fair value represents an estimate of the amount that the risk participation counterparty would need to pay/receive as of the measurement date based on the probability of customer default on the swap transaction and the fair value of the underlying customer swap. Therefore, a higher loss probability and a lower credit rating would negatively affect the fair value of the risk participations and a lower loss probability and higher credit rating would positively affect the fair value of the risk participations.
Market convention implies a credit rating of AA equivalent in the pricing of derivative contracts, which assumes all counterparties have the same creditworthiness. To reflect the actual exposure on our derivative contracts related to both counterparty and our own creditworthiness, we record a fair value adjustment in the form of a default reserve. The credit component is determined by individual counterparty based on the probability of default, and considers master netting and collateral agreements. The default reserve is classified as Level 3. Our Market Risk Management group is responsible for the valuation policies and procedure related to this default reserve. A weekly reconciliation process is performed to ensure that all applicable derivative positions are covered in the calculation, which includes transmitting customer exposures and reserve reports to trading management, derivative traders and marketers, derivatives middle office, and corporate accounting personnel. On a quarterly basis, Market Risk Management prepares the reserve calculation which includes a detailed reserve comparison with the previous quarter, an analysis for change in reserve, and a reserve forecast to ensure that the default reserve recorded at period end is sufficient.
Other assets and liabilities. The value of our repurchase and reverse repurchase agreements, trade date receivables and payables, and short positions is driven by the valuation of the underlying securities. The underlying securities may include equity securities, which are valued using quoted market prices in an active market for identical securities, resulting in a Level 1 classification. If quoted prices for identical securities are not available, fair value is determined by using pricing models or quoted prices of similar securities, resulting in a Level 2 classification. For the interest rate-driven products, such as government bonds, U.S. Treasury bonds and other products backed by the U.S. government, inputs include spreads, credit ratings and interest rates. For the credit-driven products, such as corporate bonds and mortgage-backed securities, inputs include actual trade data for comparable assets, and bids and offers.
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Assets and Liabilities Measured at Fair Value on a Recurring Basis
Certain assets and liabilities are measured at fair value on a recurring basis in accordance with GAAP. The following tables present these assets and liabilities at December 31, 2013, and December 31, 2012.
(a) | Netting adjustments represent the amounts recorded to convert our derivative assets and liabilities from a gross basis to a net basis in accordance with applicable accounting guidance. The net basis takes into account the impact of bilateral collateral and master netting agreements that allow us 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. Total derivative assets and liabilities include these netting adjustments. |
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(a) | Netting adjustments represent the amounts recorded to convert our derivative assets and liabilities from a gross basis to a net basis in accordance with applicable accounting guidance. The net basis takes into account the impact of bilateral collateral and master netting agreements that allow us 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. Total derivative assets and liabilities include these netting adjustments. |
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Changes in Level 3 Fair Value Measurements
The following table shows the change in the fair values of our Level 3 financial instruments for the years ended December 31, 2013, and 2012. We mitigate the credit risk, interest rate risk, and risk of loss related to many of these Level 3 instruments by using securities and derivative positions classified as Level 1 or Level 2. Level 1 and Level 2 instruments are not included in the following table. Therefore, the gains or losses shown do not include the impact of our risk management activities.
in millions |
Beginning
of Period Balance |
Gains
(Losses)
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Purchases | Sales | Settlements |
Transfers
into Level 3 |
(e) |
Transfers
out of Level 3 |
(e) |
End of
Period Balance |
(g) |
Unrealized
Gains (Losses) Included in Earnings |
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Year ended December 31, 2013 |
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Trading account assets |
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Other mortgage-backed securities |
| $ | 4 | (b | ) | | $ | (4) | | | | | | |||||||||||||||||||||||||||||||||||||||||
Other securities |
| 4 | (b | ) | | | $ | (4 | ) | | | | $ | (1 | ) | (b | ) | |||||||||||||||||||||||||||||||||||||
State and political subdivisions |
$ | 3 | | | (3 | ) | | | | | | |||||||||||||||||||||||||||||||||||||||||||
Other investments |
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Principal investments |
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Direct |
191 | (11 | ) | (c | ) | $ | 8 | (47 | ) | | | | $ | 141 | (23 | ) | (c | ) | ||||||||||||||||||||||||||||||||||||
Indirect |
436 | 58 | (c | ) | 23 | (104 | ) | | | | 413 | 18 | (c | ) | ||||||||||||||||||||||||||||||||||||||||
Equity and mezzanine investments |
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Direct |
| | | | | | | | 8 | (c | ) | |||||||||||||||||||||||||||||||||||||||||||
Indirect |
41 | 2 | (c | ) | | | (20 | ) | | | 23 | 2 | (c | ) | ||||||||||||||||||||||||||||||||||||||||
Derivative instruments (a) |
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Interest rate |
19 | (10 | ) | (d | ) | 1 | (2 | ) | | $ | 46 | (f | ) | $ | (29 | ) | (f | ) | 25 | | ||||||||||||||||||||||||||||||||||
Commodity |
1 | (1 | ) | (d | ) | | | | | | | | ||||||||||||||||||||||||||||||||||||||||||
Credit |
4 | (8 | ) | (d | ) | | | 7 | | | 3 | |
in millions |
Beginning
of Period Balance |
Gains
(Losses) Included in Earnings |
Purchases | Sales | Settlements |
Transfers
into Level 3 |
(e) |
Transfers
out of Level 3 |
(e) |
End of
Period Balance |
(g) |
Unrealized
Gains (Losses) Included in Earnings |
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Year ended December 31, 2012 |
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Trading account assets |
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Other mortgage-backed securities |
$ | 35 | $ | 1 | (b | ) | | $ | (32 | ) | | | $ | (4 | ) | | | |||||||||||||||||||||||||||||||||||
State and political subdivisions |
| 3 | (b | ) | | (7 | ) | $ | (50 | ) | $ | 57 | (h | ) | | $ | 3 | $ | 4 | (b | ) | |||||||||||||||||||||||||||||||
Other investments |
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Principal investments |
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Direct |
225 | 11 | (c | ) | $ | 12 | (57 | ) | | | | 191 | 14 | (c | ) | |||||||||||||||||||||||||||||||||||||
Indirect |
473 | 52 | (c | ) | 34 | (123 | ) | | | | 436 | 5 | (c | ) | ||||||||||||||||||||||||||||||||||||||
Equity and mezzanine investments |
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Direct |
15 | 2 | (c | ) | | | (17 | ) | | | | 10 | (c | ) | ||||||||||||||||||||||||||||||||||||||
Indirect |
36 | 8 | (c | ) | 4 | | (7 | ) | | | 41 | 8 | (c | ) | ||||||||||||||||||||||||||||||||||||||
Derivative instruments (a) |
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Interest rate |
38 | (5 | ) | (d | ) | 2 | (7 | ) | | 8 | (17 | ) | 19 | | ||||||||||||||||||||||||||||||||||||||
Commodity |
(1 | ) | 1 | (d | ) | (1 | ) | | | 2 | | 1 | | |||||||||||||||||||||||||||||||||||||||
Credit |
(21 | ) | (13 | ) | (d | ) | | | 38 | | | 4 | |
(a) | Amounts represent Level 3 derivative assets less Level 3 derivative liabilities. |
(b) | Realized and unrealized gains and losses on trading account assets are reported in other income on the income statement. |
(c) | Realized and unrealized gains and losses on principal investments and private equity and mezzanine investments are reported in net gains (losses) from principal investing on the income statement. |
(d) | Realized and unrealized gains and losses on derivative instruments are reported in corporate services income and other income on the income statement. |
(e) | Our policy is to recognize transfers into and transfers out of Level 3 as of the end of the reporting period. |
(f) | Certain derivatives previously classified as Level 2 were transferred to Level 3 because Level 3 unobservable inputs became significant. Certain derivatives previously classified as Level 3 were transferred to Level 2 because Level 3 unobservable inputs became less significant. |
(g) | There were no issuances for the years ended December 31, 2013, and 2012. |
(h) | These securities were transferred because of decreased observable market activity for these securities. |
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Assets Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis in accordance with GAAP. The adjustments to fair value generally result from the application of accounting guidance that requires assets and liabilities to be recorded at the lower of cost or fair value, or assessed for impairment. The following table presents our assets measured at fair value on a nonrecurring basis at December 31, 2013, and 2012:
December 31, 2013 | December 31, 2012 | |||||||||||||||||||||||||||||||
in millions | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||
ASSETS MEASURED ON A NONRECURRING BASIS |
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Impaired loans |
| | $ | 16 | $ | 16 | | | $ | 25 | $ | 25 | ||||||||||||||||||||
Loans held for sale (a) |
| | | | | | 9 | 9 | ||||||||||||||||||||||||
Accrued income and other assets |
| | 14 | 14 | | $ | 2 | 20 | 22 | |||||||||||||||||||||||
Total assets on a nonrecurring basis at fair value |
| | $ | 30 | $ | 30 | | $ | 2 | $ | 54 | $ | 56 | |||||||||||||||||||
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(a) | During 2013, we transferred $9 million of commercial and consumer loans and leases at their current fair value from held-for-sale status to the held-to-maturity portfolio, compared to $17 million during 2012. |
Impaired loans . We typically adjust the carrying amount of our impaired loans when there is evidence of probable loss and the expected fair value of the loan is less than its contractual amount. The amount of the impairment may be determined based on the estimated present value of future cash flows, the fair value of the underlying collateral, or the loans observable market price. Impaired loans with a specifically allocated allowance based on cash flow analysis or the value of the underlying collateral are classified as Level 3 assets. Impaired loans with a specifically allocated allowance based on an observable market price that reflects recent sale transactions for similar loans and collateral are classified as Level 2 assets.
The evaluations for impairment are prepared by the responsible relationship managers in our Asset Recovery Group and are reviewed and approved by the Asset Recovery Group Executive. The Asset Recovery Group is part of the Risk Management Group and reports to our Chief Risk Officer. These evaluations are performed in conjunction with the quarterly ALLL process.
Loans are evaluated for impairment on a quarterly basis. Loans included in the previous quarters review are re-evaluated and if their values have changed materially, the underlying information (loan balance and in most cases, collateral value) is compared. Material differences are evaluated for reasonableness, and the relationship managers and their senior managers consider these differences and determine if any adjustment is necessary. The inputs are developed and substantiated on a quarterly basis, based on current borrower developments, market conditions and collateral values.
The following two internal methods are used to value impaired loans:
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Cash flow analysis considers internally developed inputs, such as discount rates, default rates, costs of foreclosure and changes in collateral values. |
¿ |
The fair value of the collateral, which may take the form of real estate or personal property, is based on internal estimates, field observations and assessments provided by third-party appraisers. We perform or reaffirm appraisals of collateral-dependent impaired loans at least annually. Appraisals may occur more frequently if the most recent appraisal does not accurately reflect the current market, the debtor is seriously delinquent or chronically past due, or there has been a material deterioration in the performance of the project or condition of the property. Adjustments to outdated appraisals that result in an appraisal value less than the carrying amount of a collateral-dependent impaired loan are reflected in the ALLL. |
Impairment valuations are back-tested each quarter, based on a look-back of actual incurred losses on closed deals previously evaluated for impairment. The overall percent variance of actual net loan charge-offs on closed deals compared to the specific allocations on such deals is considered in determining each quarters specific allocations.
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Loans held for sale . Through a quarterly analysis of our loan portfolios held for sale, which include both performing and nonperforming loans, we determine any adjustments necessary to record the portfolios at the lower of cost or fair value in accordance with GAAP. Our analysis concluded that there were no loans held for sale portfolios adjusted to fair value at December 31, 2013. Loans held for sale portfolios adjusted to fair value totaled $9 million at December 31, 2012.
Market inputs, including updated collateral values, and reviews of each borrowers financial condition influenced the inputs used in our internal models and other valuation methodologies, resulting in these adjustments. The valuations are prepared by the responsible relationship managers or analysts in our Asset Recovery Group and are reviewed and approved by the Asset Recovery Group Executive. Actual gains or losses realized on the sale of various loans held for sale provide a back-testing mechanism for determining whether our valuations of these loans held for sale that are adjusted to fair value are appropriate.
Valuations of performing commercial mortgage and construction loans held for sale are conducted using internal models that rely on market data from sales or nonbinding bids on similar assets, including credit spreads, treasury rates, interest rate curves and risk profiles, as well as our own assumptions about the exit market for the loans and details about individual loans within the respective portfolios. Therefore, we have classified these loans as Level 3 assets. The inputs related to our assumptions and other internal loan data include changes in real estate values, costs of foreclosure, prepayment rates, default rates and discount rates.
Valuations of nonperforming commercial mortgage and construction loans held for sale are based on current agreements to sell the loans or approved discounted payoffs. If a negotiated value is not available, we use third-party appraisals, adjusted for current market conditions. Since valuations are based on unobservable data, these loans have been classified as Level 3 assets.
Direct financing leases and operating lease assets held for sale . Our KEF Accounting and Capital Markets groups are responsible for the valuation policies and procedures related to these assets. The Managing Director of the KEF Capital Markets group reports to the President of the KEF line of business. A weekly report is distributed to both groups that lists all equipment finance deals booked in the warehouse portfolio. On a quarterly basis, the KEF Accounting group prepares a detailed held-for-sale roll-forward schedule that is reconciled to the general ledger and the above mentioned weekly report. KEF management uses the held-for-sale roll-forward schedule to determine if an impairment adjustment is necessary in accordance with lower of cost or fair value guidelines.
Valuations of direct financing leases and operating lease assets held for sale are performed using an internal model that relies on market data, such as swap rates and bond ratings, as well as our own assumptions about the exit market for the leases and details about the individual leases in the portfolio. The inputs based on our assumptions include changes in the value of leased items and internal credit ratings. These leases have been classified as Level 3 assets. Leases for which we receive a current nonbinding bid, and the sale is considered probable, may be classified as Level 2. In a distressed market where market data is not available, an estimate of the fair value of the leased asset may be used to value the lease, resulting in a Level 3 classification. In an inactive market, the market value of the assets held for sale is determined as the present value of the future cash flows discounted at the current buy rate. KEF Accounting calculates an estimated fair value buy rate based on the credit premium inherent in the relevant bond index and the appropriate swap rate on the measurement date. The amount of the adjustment is calculated as book value minus the present value of future cash flows discounted at the calculated buy rate.
Goodwill and other intangible assets. On a quarterly basis, we review impairment indicators to determine whether we need to evaluate the carrying amount of the goodwill and other intangible assets assigned to Key Community Bank and Key Corporate Bank. We also perform an annual impairment test for goodwill. Accounting guidance that permits an entity to first assess qualitative factors to determine whether additional goodwill impairment testing is required became effective for us on January 1, 2012. We did not choose to utilize
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a qualitative assessment in our annual goodwill impairment testing performed during the fourth quarter of 2013. Fair value of our reporting units is determined using both an income approach (discounted cash flow method) and a market approach (using publicly traded company and recent transactions data), which are weighted equally.
Inputs used include market-available data, such as industry, historical and expected growth rates, and peer valuations, as well as internally driven inputs, such as forecasted earnings and market participant insights. Since this valuation relies on a significant number of unobservable inputs, we have classified goodwill as Level 3. We use a third-party valuation services provider to perform the annual, and if necessary, any interim, Step 1 valuation process, and to perform a Step 2 analysis, if needed, on our reporting units. Annual and any interim valuations prepared by the third-party valuation services provider are reviewed by the appropriate individuals within Key to ensure that the assumptions used in preparing the analysis are appropriate and properly supported. For additional information on the results of recent goodwill impairment testing, see Note 10 (Goodwill and Other Intangible Assets).
The fair value of other intangible assets is calculated using a cash flow approach. While the calculation to test for recoverability uses a number of assumptions that are based on current market conditions, the calculation is based primarily on unobservable assumptions. Accordingly, these assets are classified as Level 3. Our lines of business, with oversight from our Accounting group, are responsible for routinely, at least quarterly, assessing whether impairment indicators are present. All indicators that signal impairment may exist are appropriately considered in this analysis. An impairment loss is only recognized for a held and used long lived asset if the sum of its estimated future undiscounted cash flows used to test for recoverability is less than its carrying value.
Our primary assumptions include attrition rates, alternative costs of funds and rates paid on deposits. For additional information on the results of other intangible assets impairment testing, see Note 10.
Other assets. OREO and other repossessed properties are valued based on inputs such as appraisals and third-party price opinions, less estimated selling costs. Generally, we classify these assets as Level 3, but OREO and other repossessed properties for which we receive binding purchase agreements are classified as Level 2. Returned lease inventory is valued based on market data for similar assets and is classified as Level 2. Assets that are acquired through, or in lieu of, loan foreclosures are recorded initially as held for sale at fair value less estimated selling costs at the date of foreclosure. After foreclosure, valuations are updated periodically, and current market conditions may require the assets to be marked down further to a new cost basis.
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Commercial Real Estate Valuation Process: When a loan is reclassified from loan status to OREO because we took possession of the collateral, the Asset Recovery Group Loan Officer, in consultation with our OREO group, obtains a broker price opinion or a third-party appraisal, which is used to establish the fair value of the underlying collateral. The determined fair value of the underlying collateral less estimated selling costs becomes the carrying value of the OREO asset. In addition to valuations from independent third-party sources, our OREO group also writes down the carrying balance of OREO assets once a bona fide offer is contractually accepted, where the accepted price is lower than the current balance of the particular OREO asset. The fair value of OREO property is re-evaluated every 90 days and the OREO asset is adjusted as necessary. |
¿ |
Consumer Real Estate Valuation Process: The Asset Management team within our Risk Operations group is responsible for valuation policies and procedures in this area. The current vendor partner provides monthly reporting of all broker price opinion evaluations, appraisals and the monthly market plans. Market plans are reviewed monthly, and valuations are reviewed and tested monthly to ensure proper pricing has been established and guidelines are being met. Risk Operations Compliance validates and provides periodic testing of the valuation process. The Asset Management team reviews changes in fair value measurements. Third-party broker price opinions are reviewed every 90 days, and the fair value is written down based on changes to the valuation. External factors are documented and monitored as appropriate. |
Mortgage servicing assets are valued based on inputs such as prepayment speeds, earn rates, credit default rates, discount rates and servicing advances. We classify these assets as Level 3. Additional information regarding the valuation of mortgage servicing assets is provided in Note 9 (Mortgage Servicing Assets).
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Quantitative Information about Level 3 Fair Value Measurements
The range and weighted-average of the significant unobservable inputs used to fair value our material Level 3 recurring and nonrecurring assets at December 31, 2013, and December 31, 2012, along with the valuation techniques used, are shown in the following table:
December 31, 2013 dollars in millions |
Fair Value of
Level 3 Assets |
Valuation Technique |
Significant Unobservable Input |
Range (Weighted-Average) |
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Recurring |
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Other investments principal investments direct: |
$ | 141 | Individual analysis of the condition of each investment | |||||||||
Debt instruments |
EBITDA multiple | 6.00 - 7.00 (6.10) | ||||||||||
Equity instruments of private companies |
EBITDA multiple (where applicable) | 4.80 - 10.40 (6.20) | ||||||||||
Revenue multiple (where applicable) | 1.10 - 4.70 (4.00) | |||||||||||
Nonrecurring |
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Impaired loans |
16 | Fair value of underlying collateral | Discount | 10.00 - 100.00% (36.00%) | ||||||||
Goodwill |
979 | Discounted cash flow and market data | Earnings multiple of peers | 10.10 - 14.40 (11.59) | ||||||||
Equity multiple of peers | 1.17 - 1.29 (1.24) | |||||||||||
Control premium | N/A (35.00%) | |||||||||||
Weighted-average cost of capital | N/A (13.00%) |
December 31, 2012 dollars in millions |
Fair Value of
Level 3 Assets |
Valuation Technique |
Significant Unobservable Input |
Range
(Weighted-Average) |
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Recurring |
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Other investments principal investments direct: |
$ | 191 | Individual analysis of the condition of each investment | |||||||||
Debt instruments |
EBITDA multiple | 5.50 - 6.00 (5.90) | ||||||||||
Equity instruments of private companies |
EBITDA multiple (where applicable) | 5.00 - 8.50 (6.10) | ||||||||||
Revenue multiple (where applicable) | 0.30 - 5.70 (4.80) | |||||||||||
Nonrecurring |
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Impaired loans |
25 | Fair value of underlying collateral | Discount | 0.00 - 100.00% (45.00%) | ||||||||
Goodwill |
979 | Discounted cash flow and market data | Earnings multiple of peers | 9.70 - 14.20 (11.25) | ||||||||
Equity multiple of peers | .95 - 1.17 (1.09) | |||||||||||
Control premium | N/A (30.00%) | |||||||||||
Weighted-average cost of capital | N/A (13.00%) |
Fair Value Disclosures of Financial Instruments
The levels in the fair value hierarchy ascribed to our financial instruments and the related carrying amounts at December 31, 2013, and December 31, 2012, are shown in the following table.
December 31, 2013 | ||||||||||||||||||||||||
Fair Value | ||||||||||||||||||||||||
in millions |
Carrying
Amount |
Level 1 | Level 2 | Level 3 |
Netting Adjustment |
Total | ||||||||||||||||||
ASSETS |
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Cash and short-term investments (a) |
$ | 6,207 | $ | 5,860 | $ | 347 | | | $ | 6,207 | ||||||||||||||
Trading account assets (b) |
738 | 4 | 734 | | | 738 | ||||||||||||||||||
Securities available for sale (b) |
12,346 | 20 | 12,326 | | | 12,346 | ||||||||||||||||||
Held-to-maturity securities (c) |
4,756 | | 4,617 | | | 4,617 | ||||||||||||||||||
Other investments (b) |
969 | | 392 | $ | 577 | | 969 | |||||||||||||||||
Loans, net of allowance (d) |
53,609 | | | 52,102 | | 52,102 | ||||||||||||||||||
Loans held for sale (b) |
611 | | | 611 | | 611 | ||||||||||||||||||
Mortgage servicing assets (e) |
332 | | | 386 | | 386 | ||||||||||||||||||
Derivative assets (b) |
407 | 56 | 1,134 | 29 | $ | (812 | ) (f) | 407 | ||||||||||||||||
LIABILITIES |
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Deposits with no stated maturity (a) |
$ | 62,425 | | $ | 62,425 | | | $ | 62,425 | |||||||||||||||
Time deposits (e) |
6,837 | $ | 558 | 6,368 | | | 6,926 | |||||||||||||||||
Short-term borrowings (a) |
1,877 | 2 | 1,875 | | | 1,877 | ||||||||||||||||||
Long-term debt (e) |
7,650 | 7,611 | 397 | | | 8,008 | ||||||||||||||||||
Derivative liabilities (b) |
414 | 49 | 864 | $ | 1 | $ | (500 | ) (f) | 414 |
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December 31, 2012 | ||||||||||||||||||||||||
Fair Value | ||||||||||||||||||||||||
in millions |
Carrying
Amount |
Level 1 | Level 2 | Level 3 |
Netting Adjustment |
Total | ||||||||||||||||||
ASSETS |
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Cash and short-term investments (a) |
$ | 4,525 | $ | 4,254 | $ | 271 | | | $ | 4,525 | ||||||||||||||
Trading account assets (b) |
605 | 2 | 600 | $ | 3 | | 605 | |||||||||||||||||
Securities available for sale (b) |
12,094 | 43 | 12,051 | | | 12,094 | ||||||||||||||||||
Held-to-maturity securities (c) |
3,931 | | 3,992 | | | 3,992 | ||||||||||||||||||
Other investments (b) |
1,064 | | 396 | 668 | | 1,064 | ||||||||||||||||||
Loans, net of allowance (d) |
51,934 | | | 51,046 | | 51,046 | ||||||||||||||||||
Loans held for sale (b) |
599 | | | 599 | | 599 | ||||||||||||||||||
Mortgage servicing assets (e) |
204 | | | 238 | | 238 | ||||||||||||||||||
Derivative assets (b) |
693 | 54 | 1,883 | 26 | $ | (1,270 | ) (f) | 693 | ||||||||||||||||
LIABILITIES |
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Deposits with no stated maturity (a) |
$ | 58,132 | | $ | 58,132 | | | $ | 58,132 | |||||||||||||||
Time deposits (e) |
7,861 | $ | 408 | 7,612 | | | 8,020 | |||||||||||||||||
Short-term borrowings (a) |
1,896 | | 1,896 | | | 1,896 | ||||||||||||||||||
Long-term debt (e) |
6,847 | 2,807 | 4,585 | | | 7,392 | ||||||||||||||||||
Derivative liabilities (b) |
584 | 54 | 1,331 | $ | 2 | $ | (803 | ) (f) | 584 |
Valuation Methods and Assumptions
(a) | Fair value equals or approximates carrying amount. The fair value of deposits with no stated maturity does not take into consideration the value ascribed to core deposit intangibles. |
(b) | Information pertaining to our methodology for measuring the fair values of these assets and liabilities is included in the sections entitled Qualitative Disclosures of Valuation Techniques and Assets Measured at Fair Value on a Nonrecurring Basis in this note. |
(c) | Fair values of held-to-maturity securities are determined by using models that are based on security-specific details, as well as relevant industry and economic factors. The most significant of these inputs are quoted market prices, interest rate spreads on relevant benchmark securities, and certain prepayment assumptions. We review the valuations derived from the models to ensure they are reasonable and consistent with the values placed on similar securities traded in the secondary markets. |
(d) | The fair value of loans is based on the present value of the expected cash flows. The projected cash flows are based on the contractual terms of the loans, adjusted for prepayments and use of a discount rate based on the relative risk of the cash flows, taking into account the loan type, maturity of the loan, liquidity risk, servicing costs, and a required return on debt and capital. In addition, an incremental liquidity discount is applied to certain loans, using historical sales of loans during periods of similar economic conditions as a benchmark. The fair value of loans includes lease financing receivables at their aggregate carrying amount, which is equivalent to their fair value. |
(e) | Fair values of mortgage servicing assets, time deposits, and long-term debt are based on discounted cash flows utilizing relevant market inputs. |
(f) | Netting adjustments represent the amounts recorded to convert our derivative assets and liabilities from a gross basis to a net basis in accordance with applicable accounting guidance. The net basis takes into account the impact of bilateral collateral and master netting agreements that allow us 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. Total derivative assets and liabilities include these netting adjustments. |
We use valuation methods based on exit market prices in accordance with applicable accounting guidance. We determine fair value based on assumptions pertaining to the factors that a market participant would consider in valuing the asset. A substantial portion of our fair value adjustments are related to liquidity. During 2013, the fair values of our loan portfolios have generally remained stable, primarily due to increasing liquidity in the loan markets. If we were to use different assumptions, the fair values shown in the preceding table could change. Also, because the applicable accounting guidance for financial instruments excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements, the fair value amounts shown in the table above do not, by themselves, represent the underlying value of our company as a whole.
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Education lending business . The discontinued education lending business consists of assets and liabilities (recorded at fair value) in the securitization trusts, as well as loans in portfolio (recorded at fair value), and loans in portfolio (recorded at carrying value with appropriate valuation reserves) that are outside the trusts. All of these loans were excluded from the table above as follows:
¿ |
Loans at carrying value, net of allowance, of $2.4 billion ($2.0 billion at fair value) at December 31, 2013, and $2.6 billion ($2.3 billion at fair value) at December 31, 2012; |
¿ |
Portfolio loans at fair value of $147 million at December 31, 2013, and $157 million at December 31, 2012; and |
¿ |
Loans in the trusts at fair value of $2.0 billion at December 31, 2013, and $2.4 billion at December 31, 2012. |
Securities issued by the education lending securitization trusts, which are the primary liabilities of the trusts, totaling $1.8 billion in fair value at December 31, 2013, and $2.2 billion in fair value at December 31, 2012, are also excluded from the above table.
These loans and securities are classified as Level 3 because we rely on unobservable inputs when determining fair value since observable market data is not available.
Residential real estate mortgage loans. Residential real estate mortgage loans with carrying amounts of $2.2 billion at December 31, 2013, and $2.2 billion at December 31, 2012, are included in Loans, net of allowance in the above table.
Short-term financial instruments. For financial instruments with a remaining average life to maturity of less than six months, carrying amounts were used as an approximation of fair values.
The amortized cost, unrealized gains and losses, and fair value of our securities available for sale and held-to-maturity securities are presented in the following table. Gross unrealized gains and losses represent the difference between the amortized cost and the fair value of securities on the balance sheet as of the dates indicated. Accordingly, the amount of these gains and losses may change in the future as market conditions change. For more information about our securities available for sale and held-to-maturity securities and the related accounting policies, see Note 1 (Summary of Significant Accounting Policies).
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The following table summarizes our securities that were in an unrealized loss position as of December 31, 2013, and 2012.
Duration of Unrealized Loss Position | ||||||||||||||||||||||||||||||
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||||||||
in millions | Fair Value |
Gross
Unrealized Losses |
(a) | Fair Value |
Gross
Unrealized Losses |
(a) | Fair Value |
Gross
Unrealized Losses |
(a) | |||||||||||||||||||||
December 31, 2013 |
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Securities available for sale: |
||||||||||||||||||||||||||||||
Collateralized mortgage obligations |
$ | 5,122 | $ | 261 | $ | 157 | $ | 11 | $ | 5,279 | $ | 272 | ||||||||||||||||||
Other mortgage-backed securities |
856 | 11 | | | 856 | 11 | ||||||||||||||||||||||||
Other securities |
2 | | | | 2 | | ||||||||||||||||||||||||
Held-to-maturity: |
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Collateralized mortgage obligations |
3,969 | 145 | | | 3,969 | 145 | ||||||||||||||||||||||||
Other securities |
2 | | | | 2 | | ||||||||||||||||||||||||
Total temporarily impaired securities |
$ | 9,951 | $ | 417 | $ | 157 | $ | 11 | $ | 10,108 | $ | 428 | ||||||||||||||||||
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December 31, 2012 |
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Securities available for sale: |
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Other securities |
$ | 31 | | $ | 3 | | $ | 34 | | |||||||||||||||||||||
Total temporarily impaired securities |
$ | 31 | | $ | 3 | | $ | 34 | | |||||||||||||||||||||
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(a) | Gross unrealized losses totaled less than $1 million for the year ended December 31, 2012. |
At December 31, 2013, we had $272 million of gross unrealized losses related to 60 fixed-rate collateralized mortgage obligations that we invested in as part of our overall A/LM strategy. These securities have a weighted-average maturity of 5.1 years at December 31, 2013. Since these securities have a fixed interest rate, their fair value is sensitive to movements in market interest rates. We also had $11 million of gross unrealized losses related to 32 other mortgage-backed securities positions, which have a weighted-average maturity of 3.8 years at December 31, 2013. These unrealized losses are considered temporary since we expect to collect all contractually due amounts from these securities. Accordingly, these investments have been reduced to their fair value through OCI, not earnings.
We regularly assess our securities portfolio for OTTI. The assessments are based on the nature of the securities, the underlying collateral, the financial condition of the issuer, the extent and duration of the loss, our intent related to the individual securities, and the likelihood that we will have to sell securities prior to expected recovery.
The debt securities identified to have OTTI are written down to their current fair value. For those debt securities that we intend to sell, or more-likely-than-not will be required to sell, prior to the expected recovery of the amortized cost, the entire impairment (i.e., the difference between amortized cost and the fair value) is recognized in earnings. For those debt securities that we do not intend to sell, or more-likely-than-not will not be required to sell, prior to expected recovery, the credit portion of OTTI is recognized in earnings, while the remaining OTTI is recognized in equity as a component of AOCI on the balance sheet. As shown in the following table, we did not have any impairment losses recognized in earnings for the year ended December 31, 2013.
Year ended December 31, 2013 |
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in millions | ||||
Balance at December 31, 2012 |
$ | 4 | ||
Impairment recognized in earnings |
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Balance at December 31, 2013 |
$ | 4 | ||
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Realized gains and losses related to securities available for sale were as follows:
Year ended December 31, 2013 in millions |
2013 | 2012 | 2011 | |||||||||||
Realized gains |
$ | 1 | | $ | 23 | |||||||||
Realized losses (a) |
| | 22 | |||||||||||
Net securities gains (losses) |
$ | 1 | | $ | 1 | |||||||||
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(a) | Realized losses totaled less than $1 million for the year ended December 31, 2013. |
At December 31, 2013, securities available for sale and held-to-maturity securities totaling $11.1 billion were pledged to secure securities sold under repurchase agreements, to secure public and trust deposits, to facilitate access to secured funding, and for other purposes required or permitted by law.
The following table shows securities by remaining maturity. CMOs and other mortgage-backed securities (both of which are included in the securities available-for-sale portfolio) as well the CMOs in the held-to-maturity portfolio are presented based on their expected average lives. The remaining securities, in both the available-for-sale and held-to-maturity portfolios, are presented based on their remaining contractual maturity. Actual maturities may differ from expected or contractual maturities since borrowers have the right to prepay obligations with or without prepayment penalties.
Securities
Available for Sale |
Held-to-Maturity
Securities |
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December 31, 2013 in millions |
Amortized
Cost |
Fair
Value |
Amortized
Cost |
Fair
Value |
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Due in one year or less |
$ | 457 | $ | 466 | $ | 7 | $ | 6 | ||||||||
Due after one through five years |
11,550 | 11,462 | 4,605 | 4,475 | ||||||||||||
Due after five through ten years |
435 | 414 | 144 | 136 | ||||||||||||
Due after ten years |
4 | 4 | | | ||||||||||||
Total |
$ | 12,446 | $ | 12,346 | $ | 4,756 | $ | 4,617 | ||||||||
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8. Derivatives and Hedging Activities
We are a party to various derivative instruments, mainly through our subsidiary, KeyBank. Derivative instruments are contracts between two or more parties that have a notional amount and an underlying variable, require a small or no net investment, and allow for the net settlement of positions. A derivatives notional amount serves as the basis for the payment provision of the contract, and takes the form of units, such as shares or dollars. A derivatives underlying variable is a specified interest rate, security price, commodity price, foreign exchange rate, index, or other variable. The interaction between the notional amount and the underlying variable determines the number of units to be exchanged between the parties and influences the fair value of the derivative contract.
The primary derivatives that we use are interest rate swaps, caps, floors, and futures; foreign exchange contracts; commodity derivatives; and credit derivatives. Generally, these instruments help us manage exposure to interest rate risk, mitigate the credit risk inherent in the loan portfolio, hedge against changes in foreign currency exchange rates, and meet client financing and hedging needs. As further discussed in this note:
¿ |
interest rate risk represents the possibility that the EVE or net interest income will be adversely affected by fluctuations in interest rates; |
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credit risk is the risk of loss arising from an obligors inability or failure to meet contractual payment or performance terms; and |
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foreign exchange risk is the risk that an exchange rate will adversely affect the fair value of a financial instrument. |
Derivative assets and liabilities are recorded at fair value on the balance sheet, after taking into account the effects of bilateral collateral and master netting agreements. These agreements allow us to settle all derivative contracts held with a single counterparty on a net basis, and to offset net derivative positions with related cash collateral, where applicable. As a result, we could have derivative contracts with negative fair values included in derivative assets on the balance sheet and contracts with positive fair values included in derivative liabilities.
At December 31, 2013, after taking into account the effects of bilateral collateral and master netting agreements, we had $91 million of derivative assets and a positive $7 million of derivative liabilities that relate to contracts entered into for hedging purposes. Our hedging derivative liabilities are in an asset position largely because we have contracts with positive fair values as a result of master netting agreements. As of the same date, after taking into account the effects of bilateral collateral and master netting agreements and a reserve for potential future losses, we had derivative assets of $316 million and derivative liabilities of $421 million that were not designated as hedging instruments.
The Dodd-Frank Act, which is currently being implemented, may limit the types of derivative activities that KeyBank and other insured depository institutions may conduct. As a result, we may not continue to use all of the types of derivatives noted above in the future. For further information, please see the section entitled Supervision and Regulation in Item 1 of this report.
Additional information regarding our accounting policies for derivatives is provided in Note 1 (Summary of Significant Accounting Policies) under the heading Derivatives.
Derivatives Designated in Hedge Relationships
Net interest income and the EVE change in response to changes in the mix of assets, liabilities, and off-balance sheet instruments; associated interest rates tied to each instrument; differences in the repricing and maturity characteristics of interest-earning assets and interest-bearing liabilities; and changes in interest rates. We utilize derivatives that have been designated as part of a hedge relationship in accordance with the applicable accounting guidance to minimize the exposure and volatility of net interest income and EVE to interest rate fluctuations. The primary derivative instruments used to manage interest rate risk are interest rate swaps, which convert the contractual interest rate index of agreed-upon amounts of assets and liabilities (i.e., notional amounts) to another interest rate index.
We designate certain receive fixed/pay variable interest rate swaps as fair value hedges. These contracts convert certain fixed-rate long-term debt into variable-rate obligations, thereby modifying our exposure to changes in interest rates. As a result, we receive fixed-rate interest payments in exchange for making variable-rate payments over the lives of the contracts without exchanging the notional amounts.
Similarly, we designate certain receive fixed/pay variable interest rate swaps as cash flow hedges. These contracts effectively convert certain floating-rate loans into fixed-rate loans to reduce the potential adverse effect of interest rate decreases on future interest income. Again, we receive fixed-rate interest payments in exchange for making variable-rate payments over the lives of the contracts without exchanging the notional amounts.
We also designate certain pay fixed/receive variable interest rate swaps as cash flow hedges. These swaps convert certain floating-rate debt into fixed-rate debt. We also use these swaps to manage the interest rate risk associated with anticipated sales of certain commercial real estate loans. The swaps protect against the possible short-term decline in the value of the loans that could result from changes in interest rates between the time they are originated and the time they are sold.
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Interest rate swaps are also used to hedge the floating-rate debt that funds fixed-rate leases entered into by our equipment finance line of business. These swaps are designated as cash flow hedges to mitigate the interest rate mismatch between the fixed-rate lease cash flows and the floating-rate payments on the debt.
We use foreign currency forward transactions to hedge the foreign currency exposure of our net investment in various foreign equipment finance entities. These entities are denominated in a non-U.S. currency. These swaps are designated as net investment hedges to mitigate the exposure of measuring the net investment at the spot foreign exchange rate.
During the first quarter of 2012 and in prior years, Key had outstanding issuances of medium-term notes that were denominated in foreign currencies. The notes were subject to translation risk, which represented the possibility that the fair value of the foreign-denominated debt would change based on movement of the underlying foreign currency spot rate. The derivatives used for managing foreign currency exchange risk were cross currency swaps. The hedge converted the notes to a variable-rate U.S. currency-denominated debt, which was designated as a fair value hedge of foreign currency exchange risk.
Derivatives Not Designated in Hedge Relationships
On occasion, we enter into interest rate swap contracts to manage economic risks but do not designate the instruments in hedge relationships. Excluding contracts addressing customer exposures, the amount of derivatives hedging risks on an economic basis at December 31, 2013, was not significant.
Like other financial services institutions, we originate loans and extend credit, both of which expose us to credit risk. We actively manage our overall loan portfolio and the associated credit risk in a manner consistent with asset quality objectives and concentration risk tolerances to mitigate portfolio credit risk. Purchasing credit default swaps enables us to transfer to a third party a portion of the credit risk associated with a particular extension of credit. We may also sell credit derivatives to offset our purchased credit default swap position prior to maturity. Although we use credit default swaps for risk management purposes, they are not treated as hedging instruments.
We also enter into derivative contracts for other purposes, including:
¿ |
interest rate swap, cap, and floor contracts entered into generally to accommodate the needs of commercial loan clients; |
¿ |
energy and base metal swap and options contracts entered into to accommodate the needs of clients; |
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futures contracts and positions with third parties that are intended to offset or mitigate the interest rate or market risk related to client positions discussed above; and |
¿ |
foreign exchange forward contracts and options entered into primarily to accommodate the needs of clients. |
These contracts are not designated as part of hedge relationships.
Fair Values, Volume of Activity and Gain/Loss Information Related to Derivative Instruments
The following table summarizes the fair values of our derivative instruments on a gross and net basis as of December 31, 2013, and December 31, 2012. The change in the notional amounts of these derivatives by type from December 31, 2012, to December 31, 2013, indicates the volume of our derivative transaction activity during 2013. The notional amounts are not affected by bilateral collateral and master netting agreements. The balances are presented on a gross basis, prior to the application of bilateral collateral and master netting agreements. Total derivative assets and liabilities are adjusted to take into account the impact of legally enforceable master netting agreements that allow us 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. Where master netting agreements are not in effect or are not enforceable under bankruptcy laws, we do not adjust those derivative
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assets and liabilities with counterparties. Securities collateral related to legally enforceable master netting agreements is not offset on the balance sheet. Our derivative instruments are included in derivative assets or derivative liabilities on the balance sheet, as indicated in the following table:
December 31, 2013 | December 31, 2012 | |||||||||||||||||||||||
Fair Value | Fair Value | |||||||||||||||||||||||
in millions |
Notional
Amount |
Derivative
Assets |
Derivative
Liabilities |
Notional
Amount |
Derivative
Assets |
Derivative
Liabilities |
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Derivatives designated as hedging instruments: |
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Interest rate |
$ | 14,487 | $ | 306 | $ | 37 | $ | 19,085 | $ | 579 | $ | 30 | ||||||||||||
Foreign exchange |
190 | 4 | 1 | 196 | | 7 | ||||||||||||||||||
Total |
14,677 | 310 | 38 | 19,281 | 579 | 37 | ||||||||||||||||||
Derivatives not designated as hedging instruments: |
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Interest rate |
46,173 | 733 | 702 | 51,633 | 1,144 | 1,122 | ||||||||||||||||||
Foreign exchange |
4,701 | 59 | 56 | 5,025 | 75 | 68 | ||||||||||||||||||
Commodity |
1,616 | 112 | 106 | 1,688 | 156 | 150 | ||||||||||||||||||
Credit |
910 | 5 | 12 | 955 | 9 | 10 | ||||||||||||||||||
Equity |
| | | 7 | | | ||||||||||||||||||
Total |
53,400 | 909 | 876 | 59,308 | 1,384 | 1,350 | ||||||||||||||||||
Netting adjustments (a) |
| (812 | ) | (500 | ) | | (1,270 | ) | (803 | ) | ||||||||||||||
Net derivatives in the balance sheet |
68,077 | 407 | 414 | 78,589 | 693 | 584 | ||||||||||||||||||
Other collateral (b) |
| (72 | ) | (287 | ) | | (163 | ) | (475 | ) | ||||||||||||||
Net derivative amounts |
$ | 68,077 | $ | 335 | $ | 127 | $ | 78,589 | $ | 530 | $ | 109 | ||||||||||||
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(a) | Netting adjustments represent the amounts recorded to convert our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance. |
(b) | Other collateral represents the amount that cannot be used to offset our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance. The other collateral consists of securities and is exchanged under bilateral collateral and master netting agreements that allow us to offset the net derivative position with the related collateral. The application of the other collateral cannot reduce the net derivative position below zero. Therefore, excess other collateral, if any, is not reflected above. |
Fair value hedges. Instruments designated as fair value hedges are recorded at fair value and included in derivative assets or derivative liabilities on the balance sheet. The effective portion of a change in the fair value of an instrument designated as a fair value hedge is recorded in earnings at the same time as a change in fair value of the hedged item, resulting in no effect on net income. The ineffective portion of a change in the fair value of such a hedging instrument is recorded in other income on the income statement with no corresponding offset. During the year ended December 31, 2013, we did not exclude any portion of these hedging instruments from the assessment of hedge effectiveness. While there is some immaterial ineffectiveness in our hedging relationships, all of our fair value hedges remained highly effective as of December 31, 2013.
The following table summarizes the pre-tax net gains (losses) on our fair value hedges for the years ended December 31, 2013, and 2012, and where they are recorded on the income statement.
Year ended December 31, 2013 |
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in millions |
Income Statement Location of
Net Gains (Losses) on Derivative |
Net Gains
(Losses) on Derivative |
Hedged Item |
Income Statement Location of
Net Gains (Losses) on Hedged Item |
Net Gains
(Losses) on Hedged Item |
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Interest rate |
Other income | $ | (222) | Long-term debt | Other income | $ | 222 | (a | ) | |||||||||
Interest rate |
Interest expense Long-term debt | 129 | ||||||||||||||||
Total |
$ | (93) | $ | 222 | ||||||||||||||
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Year ended December 31, 2012 |
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in millions |
Income Statement Location of
Net Gains (Losses) on Derivative |
Net Gains
(Losses) on Derivative |
Hedged Item |
Income Statement Location of
Net Gains (Losses) on Hedged Item |
Net Gains
(Losses) on Hedged Item |
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Interest rate |
Other income | $ | (52 | ) | Long-term debt | Other income | $ | 45 | (a | ) | ||||||||
Interest rate |
Interest expense Long-term debt | 155 | ||||||||||||||||
Foreign exchange |
Other income | 5 | Long-term debt | Other income | (6) | (a | ) | |||||||||||
Foreign exchange |
Interest expense Long-term debt | 1 | Long-term debt | Interest expense Long-term debt | (1) | (b | ) | |||||||||||
Total |
$ | 109 | $ | 38 | ||||||||||||||
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(a) | Net gains (losses) on hedged items represent the change in fair value caused by fluctuations in interest rates. |
(b) | Net gains (losses) on hedged items represent the change in fair value caused by fluctuations in foreign currency exchange rates. |
Cash flow hedges. Instruments designated as cash flow hedges are recorded at fair value and included in derivative assets or derivative liabilities on the balance sheet. Initially, the effective portion of a gain or loss on a cash flow hedge is recorded as a component of AOCI on the balance sheet. This amount is subsequently reclassified into income when the hedged transaction affects earnings (e.g., when we pay variable-rate interest on debt, receive variable-rate interest on commercial loans, or sell commercial real estate loans). The ineffective portion of cash flow hedging transactions is included in other income on the income statement. During the year ended December 31, 2013, we did not exclude any portion of these hedging instruments from the assessment of hedge effectiveness. While there is some immaterial ineffectiveness in our hedging relationships, all of our cash flow hedges remained highly effective as of December 31, 2013.
Considering the interest rates, yield curves, and notional amounts as of December 31, 2013, we would expect to reclassify an estimated $22 million of net losses on derivative instruments from AOCI to income during the next twelve months for our cash flow hedges. In addition, we expect to reclassify approximately $5 million of net gains related to terminated cash flow hedges from AOCI to income during the next twelve months. As of December 31, 2013, the maximum length of time over which we hedge forecasted transactions is 15 years.
Net investment hedges. In May 2012, we began entering into foreign currency forward contracts to hedge our exposure to changes in the carrying value of our investments as a result of changes in the related foreign exchange rates. Instruments designated as net investment hedges are recorded at fair value and included in derivative assets or derivative liabilities on the balance sheet. Initially, the effective portion of a gain or loss on a net investment hedge is recorded as a component of AOCI on the balance sheet when the terms of the derivative match the notional and currency risk being hedged. The effective portion is subsequently reclassified into income when the hedged transaction affects earnings (e.g., when we dispose of a foreign subsidiary). At December 31, 2013, AOCI reflected unrecognized after-tax gains totaling less than $1 million related to cumulative changes in the fair value of our net investment hedge, which offset the unrecognized after-tax gains on net investment balances. The ineffective portion of net investment hedging transactions is included in other income on the income statement, but there was no net investment hedge ineffectiveness as of December 31, 2013. We did not exclude any portion of our hedging instruments from the assessment of hedge effectiveness while these hedges were outstanding during the year ended December 31, 2013.
The following table summarizes the pre-tax net gains (losses) on our cash flow and net investment hedges for the years ended December 31, 2013, and 2012, and where they are recorded on the income statement. The table includes the effective portion of net gains (losses) recognized in OCI during the period, the effective portion of net gains (losses) reclassified from OCI into income during the current period, and the portion of net gains (losses) recognized directly in income, representing the amount of hedge ineffectiveness.
Year ended December 31, 2013 | ||||||||||||||||||||
in millions |
Net Gains (Losses)
Recognized in OCI (Effective Portion) |
Income Statement Location of Net Gains
(Losses) Reclassified From OCI Into Income (Effective Portion) |
Net Gains
(Losses) Reclassified From OCI Into Income (Effective Portion) |
Income Statement Location of
Net Gains (Losses) Recognized in Income (Ineffective Portion) |
Net Gains
(Losses) Recognized in Income (Ineffective Portion) |
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Cash Flow Hedges |
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Interest rate |
$ | (19 | ) | Interest income Loans | $ | 67 | Other income | | ||||||||||||
Interest rate |
20 | Interest expense Long-term debt | (8 | ) | Other income | | ||||||||||||||
Interest rate |
| Investment banking and debt placement fees | | Other income | | |||||||||||||||
Net Investment Hedges |
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Foreign exchange contracts |
9 | Other Income | (3 | ) | Other income | | ||||||||||||||
Total |
$ | 10 | $ | 56 | | |||||||||||||||
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Year ended December 31, 2012 | ||||||||||||||||||||
in millions |
Net Gains (Losses)
Recognized in OCI (Effective Portion) |
Income Statement Location of
Net Gains (Losses)
|
Net Gains
(Losses) Reclassified From OCI Into Income (Effective Portion) |
Income Statement Location of
Net Gains (Losses) Recognized in Income (Ineffective Portion) |
Net Gains
(Losses) Recognized
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Cash Flow Hedges |
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Interest rate |
$ | 105 | Interest income Loans | $ | 66 | Other income | | |||||||||||||
Interest rate |
(6 | ) | Interest expense Long-term debt | (10 | ) | Other income | | |||||||||||||
Interest rate |
| Investment banking and debt placement fees | | Other income | | |||||||||||||||
Net Investment Hedges |
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Foreign exchange contracts |
(14 | ) | Other Income | | Other income | | ||||||||||||||
Total |
$ | 85 | $ | 56 | | |||||||||||||||
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The after-tax change in AOCI resulting from cash flow and net investment hedges is as follows:
in millions |
December 31,
2012 |
2013 Hedging
Activity |
Reclassification
of Gains to Net Income |
December 31,
2013 |
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AOCI resulting from cash flow and net investment hedges |
$ | 18 | $ | 6 | $ | (35) | $ | (11 | ) |
Nonhedging instruments. Our derivatives that are not designated as hedging instruments are recorded at fair value in derivative assets and derivative liabilities on the balance sheet. Adjustments to the fair values of these instruments, as well as any premium paid or received, are included in corporate services income and other income on the income statement.
The following table summarizes the pre-tax net gains (losses) on our derivatives that are not designated as hedging instruments for the years ended December 31, 2013, 2012, and 2011, and where they are recorded on the income statement.
2013 | 2012 | 2011 | ||||||||||||||||||||||||||||||||||
in millions |
Corporate
Services Income |
Other
Income |
Total |
Corporate
Services Income |
Other
Income |
Total |
Corporate
Services Income |
Other
Income |
Total | |||||||||||||||||||||||||||
NET GAINS (LOSSES) |
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Interest rate |
$ | 17 | | $ | 17 | $ | 24 | $ | (2 | ) | $ | 22 | $ | 19 | | $ | 19 | |||||||||||||||||||
Foreign exchange |
38 | | 38 | 36 | | 36 | 42 | | 42 | |||||||||||||||||||||||||||
Commodity |
5 | | 5 | 9 | | 9 | 4 | | 4 | |||||||||||||||||||||||||||
Credit |
1 | $ | (15 | ) | (14 | ) | | (20 | ) | (20 | ) | (3 | ) | $ | (42 | ) | (45 | ) | ||||||||||||||||||
Total net gains (losses) |
$ | 61 | $ | (15 | ) | $ | 46 | $ | 69 | $ | (22 | ) | $ | 47 | $ | 62 | $ | (42 | ) | $ | 20 | |||||||||||||||
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Counterparty Credit Risk
Like other financial instruments, derivatives contain an element of credit risk. This risk is measured as the expected positive replacement value of the contracts. We use several means to mitigate and manage exposure to credit risk on derivative contracts. We generally enter into bilateral collateral and master netting agreements that provide for the net settlement of all contracts with a single counterparty in the event of default. Additionally, we monitor counterparty credit risk exposure on each contract to determine appropriate limits on our total credit exposure across all product types. We review our collateral positions on a daily basis and exchange collateral with our counterparties in accordance with ISDA and other related agreements. We generally hold collateral in the form of cash and highly-rated securities issued by the U.S. Treasury, government-sponsored enterprises or GNMA. The cash collateral netted against derivative assets on the balance sheet totaled $308 million at December 31, 2013, and $494 million at December 31, 2012. The cash collateral netted against derivative
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liabilities totaled $4 million at December 31, 2013, and $27 million at December 31, 2012. The relevant agreements with clearing organization counterparties are not considered to be qualified master netting agreements. Therefore, we cannot net derivative contracts or offset those contracts with related cash collateral with these counterparties. At December 31, 2013, we posted $25 million of cash collateral with clearing organizations. This additional cash collateral is included in accrued income and other assets and accrued expense and other liabilities on the balance sheet.
The following table summarizes our largest exposure to an individual counterparty at the dates indicated.
December 31, in millions |
2013 | 2012 | ||||||
Largest gross exposure (derivative asset) to an individual counterparty |
$ | 121 | $ | 182 | ||||
Collateral posted by this counterparty |
42 | 66 | ||||||
Derivative liability with this counterparty |
106 | 191 | ||||||
Collateral pledged to this counterparty |
33 | 82 | ||||||
Net exposure after netting adjustments and collateral |
6 | 7 |
The following table summarizes the fair value of our derivative assets by type. These assets represent our gross exposure to potential loss after taking into account the effects of bilateral collateral and master netting agreements and other means used to mitigate risk.
December 31, in millions |
2013 | 2012 | ||||||
Interest rate |
$ | 633 | $ | 1,114 | ||||
Foreign exchange |
23 | 23 | ||||||
Commodity |
58 | 47 | ||||||
Credit |
1 | 3 | ||||||
Derivative assets before collateral |
715 | 1,187 | ||||||
Less: Related collateral |
308 | 494 | ||||||
Total derivative assets |
$ | 407 | $ | 693 | ||||
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We enter into derivative transactions with two primary groups: broker-dealers and banks, and clients. Since these groups have different economic characteristics, we have different methods for managing counterparty credit exposure and credit risk.
We enter into transactions with broker-dealers and banks for various risk management purposes. These types of transactions generally are high dollar volume. We generally enter into bilateral collateral and master netting agreements with these counterparties. At December 31, 2013, for derivatives that have associated bilateral collateral and master netting agreements, we had gross exposure of $534 million to broker-dealers and banks. We had net exposure of $99 million after the application of master netting agreements and cash collateral, and we were in an over-collateralized net position of $1 million after considering $100 million of additional collateral held in the form of securities.
We enter into transactions with clients to accommodate their business needs. These types of transactions generally are low dollar volume. We generally enter into master netting agreements with these counterparties. In addition, we mitigate our overall portfolio exposure and market risk by buying and selling U.S. Treasuries and Eurodollar futures, and entering into offsetting positions and other derivative contracts. Due to the smaller size and magnitude of the individual contracts with clients, we generally do not exchange collateral in connection with these derivative transactions. To address the risk of default associated with the uncollateralized contracts, we have established a default reserve (included in derivative assets) in the amount of $14 million at December 31, 2013, which we estimate to be the potential future losses on amounts due from client counterparties in the event of default. At December 31, 2012, the default reserve was $19 million. At December 31, 2013, we had gross exposure of $358 million to client counterparties for derivatives that have associated master netting agreements. We had net exposure of $308 million on our derivatives with clients after the application of master netting agreements, collateral and the related reserve.
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Credit Derivatives
We are both a buyer and seller of credit protection through the credit derivative market. We purchase credit derivatives to manage the credit risk associated with specific commercial lending and swap obligations. We may also sell credit derivatives, mainly single-name credit default swaps, to offset our purchased credit default swap position prior to maturity.
The following table summarizes the fair value of our credit derivatives purchased and sold by type as of December 31, 2013, and 2012. The fair value of credit derivatives presented below does not take into account the effects of bilateral collateral or master netting agreements.
December 31, in millions |
2013 | 2012 | ||||||||||||||||||||||
Purchased | Sold | Net | Purchased | Sold | Net | |||||||||||||||||||
Single-name credit default swaps |
$ | (7) | $ | 1 | $ | (6) | $ | (1) | $ | 1 | | |||||||||||||
Traded credit default swap indices |
| | | | | | ||||||||||||||||||
Other |
| (1) | (1) | | (1) | $ | (1) | |||||||||||||||||
Total credit derivatives |
$ | (7) | | $ | (7) | $ | (1) | | $ | (1) | ||||||||||||||
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Single-name credit default swaps are bilateral contracts whereby the seller agrees, for a premium, to provide protection against the credit risk of a specific entity (the reference entity) in connection with a specific debt obligation. The protected credit risk is related to adverse credit events, such as bankruptcy, failure to make payments, and acceleration or restructuring of obligations, identified in the credit derivative contract. As the seller of a single-name credit derivative, we may settle in one of two ways if the underlying reference entity experiences a predefined credit event. We may be required to pay the purchaser the difference between the par value and the market price of the debt obligation (cash settlement) or receive the specified referenced asset in exchange for payment of the par value (physical settlement). If we effect a physical settlement and receive our portion of the related debt obligation, we will join other creditors in the liquidation process, which may enable us to recover a portion of the amount paid under the credit default swap contract. We also may purchase offsetting credit derivatives for the same reference entity from third parties that will permit us to recover the amount we pay should a credit event occur.
A traded credit default swap index represents a position on a basket or portfolio of reference entities. As a seller of protection on a credit default swap index, we would be required to pay the purchaser if one or more of the entities in the index had a credit event. Upon a credit event, the amount payable is based on the percentage of the notional amount allocated to the specific defaulting entity. During 2012, we suspended trading in traded credit default swap indices that had the purpose of diversifying concentration risk within our loan portfolio.
The majority of transactions represented by the other category shown in the above table are risk participation agreements. In these transactions, the lead participant has a swap agreement with a customer. The lead participant (purchaser of protection) then enters into a risk participation agreement with a counterparty (seller of protection), under which the counterparty receives a fee to accept a portion of the lead participants credit risk. If the customer defaults on the swap contract, the counterparty to the risk participation agreement must reimburse the lead participant for the counterpartys percentage of the positive fair value of the customer swap as of the default date. If the customer swap has a negative fair value, the counterparty has no reimbursement requirements. If the customer defaults on the swap contract and the seller fulfills its payment obligations under the risk participation agreement, the seller is entitled to a pro rata share of the lead participants claims against the customer under the terms of the swap agreement.
The following table provides information on the types of credit derivatives sold by us and held on the balance sheet at December 31, 2013, and 2012. The notional amount represents the maximum amount that the seller could be required to pay. The payment/performance risk assessment is based on the default probabilities for the
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underlying reference entities debt obligations using a Moodys credit ratings matrix known as Moodys Idealized Cumulative Default Rates. The payment/performance risk shown in the table represents a weighted-average of the default probabilities for all reference entities in the respective portfolios. These default probabilities are directly correlated to the probability that we will have to make a payment under the credit derivative contracts.
2013 | 2012 | |||||||||||||||||||||||||||
December 31, dollars in millions |
Notional
Amount |
Average
(Years) |
Payment /
Performance Risk |
Notional
Amount |
Average
(Years) |
Payment /
Performance Risk |
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Single-name credit default swaps |
$ | 55 | .77 | 22.28 | % | $ | 146 | .92 | 11.62 | % | ||||||||||||||||||
Traded credit default swap indices |
| | | | | | ||||||||||||||||||||||
Other |
13 | 5.03 | 8.82 | 23 | 5.35 | 10.77 | ||||||||||||||||||||||
Total credit derivatives sold |
$ | 68 | | | $ | 169 | | | ||||||||||||||||||||
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Credit Risk Contingent Features
We have entered into certain derivative contracts that require us to post collateral to the counterparties when these contracts are in a net liability position. The amount of collateral to be posted is based on the amount of the net liability and thresholds generally related to our long-term senior unsecured credit ratings with Moodys and S&P. Collateral requirements also are based on minimum transfer amounts, which are specific to each Credit Support Annex (a component of the ISDA Master Agreement) that we have signed with the counterparties. In a limited number of instances, counterparties have the right to terminate their ISDA Master Agreements with us if our ratings fall below a certain level, usually investment-grade level (i.e., Baa3 for Moodys and BBB- for S&P). At December 31, 2013, KeyBanks ratings were A3 with Moodys and A- with S&P, and KeyCorps ratings were Baa1 with Moodys and BBB+ with S&P. As of December 31, 2013, the aggregate fair value of all derivative contracts with credit risk contingent features (i.e., those containing collateral posting or termination provisions based on our ratings) held by KeyBank that were in a net liability position totaled $298 million, which includes $315 million in derivative assets and $613 million in derivative liabilities. We had $304 million in cash and securities collateral posted to cover those positions as of December 31, 2013. The aggregate fair value of all derivative contracts with credit risk contingent features held by KeyCorp as of December 31, 2013, that were in a net liability position totaled $1 million, which consists solely of derivative liabilities. We had no collateral posted to cover those positions as of December 31, 2013.
The following table summarizes the additional cash and securities collateral that KeyBank would have been required to deliver under the ISDA Master Agreements had the credit risk contingent features been triggered for the derivative contracts in a net liability position as of December 31, 2013, and 2012. The additional collateral amounts were calculated based on scenarios under which KeyBanks ratings are downgraded one, two or three ratings as of December 31, 2013, and take into account all collateral already posted. A similar calculation was performed for KeyCorp, and less than $1 million of additional collateral would have been required as of December 31, 2013, and $3 million as of December 31, 2012.
December 31, in millions |
2013 | 2012 | ||||||||||||||
Moodys | S&P | Moodys | S&P | |||||||||||||
KeyBanks long-term senior
|
A3 | A- | A3 | A- | ||||||||||||
One rating downgrade |
$ | 6 | $ | 6 | $ | 6 | $ | 6 | ||||||||
Two rating downgrades |
11 | 11 | 11 | 11 | ||||||||||||
Three rating downgrades |
11 | 11 | 11 | 11 |
KeyBanks long-term senior unsecured credit rating is currently four ratings above noninvestment grade at Moodys and S&P. If KeyBanks ratings had been downgraded below investment grade as of December 31, 2013, payments of up to $13 million would have been required to either terminate the contracts or post additional
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collateral for those contracts in a net liability position, taking into account all collateral already posted. If KeyCorps ratings had been downgraded below investment grade as of December 31, 2013, payments of $1 million would have been required to either terminate the contracts or post additional collateral for those contracts in a net liability position, taking into account all collateral already posted.
We originate and periodically sell commercial mortgage loans but continue to service those loans for the buyers. We also may purchase the right to service commercial mortgage loans for other lenders. A servicing asset is recorded if we purchase or retain the right to service loans in exchange for servicing fees that exceed the going market rate. Changes in the carrying amount of mortgage servicing assets are summarized as follows:
Year ended December 31, in millions |
2013 | 2012 | ||||||
Balance at beginning of period |
$ | 204 | $ | 173 | ||||
Servicing retained from loan sales |
48 | 47 | ||||||
Purchases |
150 | (a) | 44 | |||||
Amortization |
(70 | ) | (60 | ) | ||||
Balance at end of period |
$ | 332 | $ | 204 | ||||
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Fair value at end of period |
$ | 386 | $ | 238 | ||||
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(a) | Amount includes $120 million in mortgage servicing assets that were acquired from Bank of Americas Global Mortgages & Securitized Products business during 2013. See Note 13 (Acquisitions and Discontinued Operations) for further details regarding this acquisition. |
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. The range and weighted-average of the significant unobservable inputs used to fair value our mortgage servicing assets at December 31, 2013, and 2012, along with the valuation techniques, are shown in the following table:
December 31, 2013 dollars in millions |
Valuation Technique |
Significant Unobservable Input |
Range (Weighted-Average) |
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Mortgage servicing assets |
Discounted cash flow | Prepayment speed | 0.9 - 72.8%(11.0%) | |||
Expected defaults | 1.1 - 3.0%(2.1%) | |||||
Residual cash flows discount rate | 7.0 - 15.0%(7.9%) | |||||
Escrow earn rate | 0.3 - 3.3%(1.5%) | |||||
Servicing cost | $150 - $9,296($962) | |||||
Loan assumption rate | 0.0 - 3.0%(1.43%) | |||||
Percentage late | 0.0 - 2.0%(0.35%) | |||||
December 31, 2012 dollars in millions |
Valuation Technique |
Significant Unobservable Input |
Range (Weighted-Average) |
|||
Mortgage servicing assets |
Discounted cash flow | Prepayment speed | 0.9 - 75.8%(8.60%) | |||
Expected defaults | 1.00 - 3.00%(2.40%) | |||||
Residual cash flows discount rate | 7.00 - 15.00%(9.00%) | |||||
Escrow earn rate | 0.24 - 2.56%(1.50%) | |||||
Servicing cost | $916 - $16,604($2,483) | |||||
Loan assumption rate | 0.00 - 3.00%(2.32%) | |||||
Percentage late | 0.00 - 2.00%(0.22%) |
If these economic assumptions change or prove incorrect, the fair value of mortgage servicing assets may also change. The volume of loans serviced, expected credit losses, and the value assigned to escrow deposits are critical to the valuation of servicing assets. At December 31, 2013, a 1.00% decrease in the value assigned to the
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escrow deposits would cause a $54 million decrease in the fair value of our mortgage servicing assets. An increase in the assumed default rate of commercial mortgage loans of 1.00% would cause a $4 million decrease in the fair value of our mortgage servicing assets.
Contractual fee income from servicing commercial mortgage loans totaled $58 million for the year ended December 31, 2013, and $25 million for the year ended December 31, 2012. We have elected to account for servicing assets using the amortization method. The amortization of servicing assets is determined in proportion to, and over the period of, the estimated net servicing income. The amortization of servicing assets for each period, as shown in the table at the beginning of this note, is recorded as a reduction to fee income. Both the contractual fee income and the amortization are recorded in mortgage servicing fees on the income statement.
Additional information pertaining to the accounting for mortgage and other servicing assets is included in Note 1 (Summary of Significant Accounting Policies) under the heading Servicing Assets, and Note 13 (Acquisitions and Discontinued Operations) under the heading Education lending in this report.
10. Goodwill and Other Intangible Assets
Goodwill represents the amount by which the cost of net assets acquired in a business combination exceeds their fair value. Other intangible assets are primarily the net present value of future economic benefits to be derived from the purchase of credit card receivable assets and core deposits. Additional information pertaining to our accounting policy for goodwill and other intangible assets is summarized in Note 1 (Summary of Significant Accounting Policies) under the heading Goodwill and Other Intangible Assets.
Our annual goodwill impairment testing is performed as of October 1 each year. On that date in 2013, we determined that the estimated fair value of the Key Community Bank unit was 23% greater than its carrying amount; in 2012, the excess was 10%. If actual results, market conditions, and economic conditions were to differ from the assumptions and data used in this goodwill impairment testing, the estimated fair value of the Key Community Bank unit could change. The carrying amount of the Key Community Bank and Key Corporate Bank units represents the average equity based on risk-weighted regulatory capital for goodwill impairment testing and management reporting purposes. There has been no goodwill associated with our Key Corporate Bank unit since the first quarter of 2009, when we recorded a $223 million pre-tax impairment charge and wrote off all of the remaining goodwill that had been assigned to that unit.
Based on our quarterly review of impairment indicators during 2013 and 2012, it was not necessary to perform further reviews of goodwill recorded in our Key Community Bank unit. We will continue to monitor the Key Community Bank unit as appropriate since it is particularly dependent upon economic conditions that impact consumer credit risk and behavior.
Changes in the carrying amount of goodwill by reporting unit are presented in the following table.
in millions |
Key
Community Bank |
Key
Corporate Bank |
Total | |||||||||
BALANCE AT DECEMBER 31, 2011 |
$ | 917 | | $ | 917 | |||||||
Impairment losses based on results of interim impairment testing |
| | | |||||||||
Acquisition of Western New York branches |
62 | | 62 | |||||||||
BALANCE AT DECEMBER 31, 2012 |
979 | | 979 | |||||||||
Impairment losses based on results of interim impairment testing |
| | | |||||||||
BALANCE AT DECEMBER 31, 2013 |
$ | 979 | | $ | 979 | |||||||
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The acquisition of 37 retail banking branches in Western New York during 2012 resulted in a $62 million increase in the goodwill at the Key Community Bank unit. Additional information regarding the acquisition is provided in Note 13 (Acquisitions and Discontinued Operations).
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As of December 31, 2013, we expected goodwill in the amount of $129 million to be deductible for tax purposes in future periods.
Accumulated impairment losses related to the Key Corporate Bank reporting unit totaled $665 million at December 31, 2013, 2012, and 2011. There were no accumulated impairment losses related to the Key Community Bank unit at December 31, 2013, 2012, and 2011.
The following table shows the gross carrying amount and the accumulated amortization of intangible assets subject to amortization.
2013 | 2012 | |||||||||||||||
December 31, in millions |
Gross Carrying
Amount |
Accumulated
Amortization |
Gross Carrying
Amount |
Accumulated
Amortization |
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Intangible assets subject to amortization: |
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Core deposit intangibles |
$ | 105 | $ | 70 | $ | 105 | $ | 56 | ||||||||
PCCR intangibles (a) |
136 | 44 | 136 | 14 | ||||||||||||
Other intangible assets (b) |
135 | 135 | 135 | 135 | ||||||||||||
Total |
$ | 376 | $ | 249 | $ | 376 | $ | 205 | ||||||||
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(a) | PCCR intangible assets related to the 2012 acquisition of credit card receivables from Elan Financial Services, Inc. ($135 million of PCCR at acquisition date) and Western New York Branches ($1 million of PCCR at acquisition date). |
(b) | Carrying amount and accumulated amortization excludes $18 million and $25 million at December 31, 2013, and December 31, 2012, respectively, related to the discontinued operations of Austin and the sale of Victory. |
As a result of the Western New York branches acquisition on July 13, 2012, a core deposit intangible asset was recognized at its acquisition date fair value of $40 million. This core deposit intangible asset is being amortized on an accelerated basis over its useful life of 7 years. A second closing of this acquisition on September 14, 2012, relating exclusively to the purchase of credit card receivables, resulted in a PCCR intangible asset of $1 million that is being amortized on an accelerated basis over its useful life of 8 years.
As a result of the purchase of Key-branded credit card assets from Elan Financial Services, Inc. on August 1, 2012, a PCCR intangible asset was recognized at its acquisition date fair value of $135 million. This PCCR asset is being amortized on an accelerated basis over its useful life of 8 years.
Additional information regarding these acquisitions is provided in Note 13.
Intangible asset amortization expense was $44 million for 2013, $23 million for 2012 and $4 million for 2011. Estimated amortization expense for intangible assets for each of the next five years is as follows: 2014 $37 million; 2015 $31 million; 2016 $24 million; 2017 $18 million; and 2018 $11 million.
11. Variable Interest Entities
A VIE is a partnership, limited liability company, trust or other legal entity that meets any one of the following criteria:
¿ | The entity does not have sufficient equity to conduct its activities without additional subordinated financial support from another party. |
¿ | The entitys investors lack the power to direct the activities that most significantly impact the entitys economic performance. |
¿ | The entitys equity at risk holders do not have the obligation to absorb losses or the right to receive residual returns. |
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¿ | The voting rights of some investors are not proportional to their economic interests in the entity, and substantially all of the entitys activities involve, or are conducted on behalf of, investors with disproportionately few voting rights. |
Our VIEs are summarized below. We define a significant interest in a VIE as a subordinated interest that exposes us to a significant portion, but not the majority, of the VIEs expected losses or residual returns, even though we do not have the power to direct the activities that most significantly impact the entitys economic performance.
Consolidated VIEs | Unconsolidated VIEs | |||||||||||||||||||
in millions |
Total
Assets |
Total
Liabilities |
Total
Assets |
Total
Liabilities |
Maximum
Exposure to Loss |
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December 31, 2013 |
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LIHTC funds |
$ | 22 | $ | 22 | $ | 97 | | | ||||||||||||
Education loan securitization trusts |
1,980 | 1,854 | N/A | N/A | N/A | |||||||||||||||
LIHTC investments |
N/A | N/A | 774 | | $ | 503 |
Our involvement with VIEs is described below.
Consolidated VIEs
LIHTC guaranteed funds . KAHC formed limited partnerships known as funds that invested in LIHTC operating partnerships. Interests in these funds were offered in syndication to qualified investors who paid a fee to KAHC for a guaranteed return. We also earned syndication fees from the funds and continue to earn asset management fees. The funds assets, primarily investments in LIHTC operating partnerships, totaled $13 million at December 31, 2013. These investments are recorded in accrued income and other assets on the balance sheet and serve as collateral for the funds limited obligations.
We have not formed new funds or added LIHTC partnerships since October 2003. However, we continue to act as asset manager and to provide occasional funding for existing funds under a guarantee obligation. As a result of this guarantee obligation, we have determined that we are the primary beneficiary of these funds. Additional information on return guarantee agreements with LIHTC investors is presented in Note 20 (Commitments, Contingent Liabilities and Guarantees) under the heading Guarantees.
In accordance with the applicable accounting guidance for distinguishing liabilities from equity, third-party interests associated with our LIHTC guaranteed funds are considered mandatorily redeemable instruments and are recorded in accrued expense and other liabilities on the balance sheet. However, the FASB has indefinitely deferred the measurement and recognition provisions of this accounting guidance for mandatorily redeemable third-party interests associated with finite-lived subsidiaries, such as our LIHTC guaranteed funds. We adjust our financial statements each period for the third-party investors share of the funds profits and losses. At December 31, 2013, we estimated the settlement value of these third-party interests to be between zero and $11 million, while the recorded value, including reserves, totaled $22 million. The partnership agreement for each of our guaranteed funds requires the fund to be dissolved by a certain date.
Education loan securitization trusts. In September 2009, we decided to exit the government-guaranteed education lending business. Therefore, we have accounted for this business as a discontinued operation. In the past, as part of our education lending business model, we originated and securitized education loans. As the transferor, we retained a portion of the risk in the form of a residual interest and also retained the right to service the securitized loans and receive servicing fees. We have not securitized any education loans since 2006.
We consolidated our ten outstanding education loan securitization trusts as of January 1, 2010. We were required to consolidate these trusts because we hold the residual interests and, as the master servicer, we have the power
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to direct the activities that most significantly influence the trusts economic performance. We elected to consolidate these trusts at fair value. The trust assets can be used only to settle the obligations or securities that the trusts issue; we cannot sell the assets or transfer the liabilities. The security holders or beneficial interest holders do not have recourse to us, and we do not have any liability recorded related to their securities. Further information regarding these education loan securitization trusts is provided in Note 13 (Acquisitions and Discontinued Operations) under the heading Education lending.
Unconsolidated VIEs
LIHTC nonguaranteed funds . Although we hold interests in certain nonguaranteed funds that we formed and funded, we have determined that we are not the primary beneficiary because we do not absorb the majority of the funds expected losses and do not have the power to direct activities that most significantly influence the economic performance of these entities. At December 31, 2013, assets of these unconsolidated nonguaranteed funds totaled $97 million. Our maximum exposure to loss in connection with these funds is minimal, and we do not have any liability recorded related to the funds. We have not formed nonguaranteed funds since October 2003.
LIHTC investments . Through Key Community Bank, we have made investments directly in LIHTC operating partnerships formed by third parties. As a limited partner in these operating partnerships, we are allocated tax credits and deductions associated with the underlying properties. We have determined that we are not the primary beneficiary of these investments because the general partners have the power to direct the activities that most significantly influence the economic performance of their respective partnerships and have the obligation to absorb expected losses and the right to receive benefits. At December 31, 2013, assets of these unconsolidated LIHTC operating partnerships totaled approximately $774 million. At December 31, 2013, our maximum exposure to loss in connection with these partnerships is the unamortized investment balance of $400 million plus $103 million of tax credits claimed but subject to recapture. We do not have any liability recorded related to these investments because we believe the likelihood of any loss is remote. During 2013, we did not obtain significant direct investments (either individually or in the aggregate) in LIHTC operating partnerships.
We have additional investments in unconsolidated LIHTC operating partnerships that are held by the consolidated LIHTC guaranteed funds. Total assets of these operating partnerships were approximately $773 million at December 31, 2013. The tax credits and deductions associated with these properties are allocated to the funds investors based on their ownership percentages. We have determined that we are not the primary beneficiary of these partnerships because the general partners have the power to direct the activities that most significantly impact their economic performance and the obligation to absorb expected losses and right to receive residual returns. Information regarding our exposure to loss in connection with these guaranteed funds is included in Note 20 under the heading Return guarantee agreement with LIHTC investors.
Commercial and residential real estate investments and principal investments . Our Principal Investing unit and the Real Estate Capital line of business make equity and mezzanine investments, some of which are in VIEs. These investments are held by nonregistered investment companies subject to the provisions of the AICPA Audit and Accounting Guide, Audits of Investment Companies. We are not currently applying the accounting or disclosure provisions in the applicable accounting guidance for consolidations to these investments, which remain unconsolidated. The FASB has indefinitely deferred the effective date of this guidance for such nonregistered investment companies.
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Income taxes included in the income statement are summarized below. We file a consolidated federal income tax return.
Year ended December 31, in millions |
2013 | 2012 | 2011 | |||||||||
Currently payable: |
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Federal |
$ | 216 | $ | 178 | $ | 78 | ||||||
State |
26 | 18 | (31) | |||||||||
Total currently payable |
242 | 196 | 47 | |||||||||
Deferred: |
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Federal |
39 | 41 | 287 | |||||||||
State |
(10) | (6) | 30 | |||||||||
Total deferred |
29 | 35 | 317 | |||||||||
Total income tax (benefit) expense (a) |
$ | 271 | $ | 231 | $ | 364 | ||||||
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(a) | The income tax (benefit) expense on securities transactions totaled $1 million in 2013 and $.4 million in 2011. There was no income tax (benefit) expense on securities transactions in 2012. Income tax expense excludes equity- and gross receipts-based taxes, which are assessed in lieu of an income tax in certain states in which we operate. These taxes, which are recorded in noninterest expense on the income statement, totaled $23 million in 2013, $29 million in 2012, and $21 million in 2011. |
Significant components of our deferred tax assets and liabilities included in accrued income and other assets and accrued expense and other liabilities, respectively, on the balance sheet, are as follows:
December 31, in millions |
2013 | 2012 | ||||||
Allowance for loan and lease losses |
$ | 334 | $ | 354 | ||||
Employee benefits |
187 | 232 | ||||||
Net unrealized securities losses |
45 | | ||||||
Federal credit carryforwards |
226 | 339 | ||||||
State net operating losses and credits |
11 | 15 | ||||||
Other |
302 | 327 | ||||||
Gross deferred tax assets |
1,105 | 1,267 | ||||||
Less: valuation allowance |
1 | 3 | ||||||
Total deferred tax assets |
1,104 | 1,264 | ||||||
Leasing transactions |
753 | 830 | ||||||
Net unrealized securities gains |
| 156 | ||||||
Other |
141 | 156 | ||||||
Total deferred tax liabilities |
894 | 1,142 | ||||||
Net deferred tax assets (liabilities) (a) |
$ | 210 | $ | 122 | ||||
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(a) | From continuing operations |
We conduct quarterly assessments of all available evidence to determine the amount of deferred tax assets that are more-likely-than-not to be realized, and therefore recorded. The available evidence used in connection with these assessments includes taxable income in prior periods, projected future taxable income, potential tax-planning strategies and projected future reversals of deferred tax items. These assessments involve a degree of subjectivity and may undergo significant change. Based on these criteria, we have recorded a valuation allowance of $1 million against the gross deferred tax assets associated with certain state net operating loss carryforwards and state credit carryforwards.
At December 31, 2013, we had a federal credit carryforward of $226 million. Additionally, we had state net operating loss carryforwards of $136 million and state credit carryforwards of $6 million, resulting in a net state deferred tax asset of $10 million. These carryforwards are subject to limitations imposed by tax laws and, if not utilized, will gradually expire through 2031.
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The following table shows how our total income tax expense (benefit) and the resulting effective tax rate were derived:
Year ended December 31, dollars in millions |
2013 | 2012 | 2011 | |||||||||||||||||||||
Amount | Rate | Amount | Rate | Amount | Rate | |||||||||||||||||||
Income (loss) before income taxes times 35%
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$ | 399 | 35.0 | % | $ | 376 | 35.0 | % | $ | 466 | 35.0 | % | ||||||||||||
Amortization of tax-advantaged investments |
63 | 5.5 | 64 | 6.0 | 65 | 4.9 | ||||||||||||||||||
Foreign tax adjustments |
(4) | (.3 | ) | 1 | .1 | 17 | 1.3 | |||||||||||||||||
Reduced tax rate on lease financing income |
(13) | (1.2 | ) | (50) | (4.7) | | | |||||||||||||||||
Tax-exempt interest income |
(15) | (1.3 | ) | (16) | (1.5) | (16) | (1.2) | |||||||||||||||||
Corporate-owned life insurance income |
(42) | (3.7 | ) | (43) | (4.0) | (42) | (3.2) | |||||||||||||||||
Increase (decrease) in tax reserves |
| | | | 2 | .2 | ||||||||||||||||||
Interest refund (net of federal tax benefit) |
(1) | (.1 | ) | | | (24) | (1.8) | |||||||||||||||||
State income tax, net of federal tax benefit |
10 | .9 | 8 | .7 | (1) | (.1) | ||||||||||||||||||
Tax credits |
(130) | (11.4 | ) | (119) | (11.1) | (125) | (9.4) | |||||||||||||||||
Other |
4 | .3 | 10 | .9 | 22 | 1.7 | ||||||||||||||||||
Total income tax expense (benefit) |
$ | 271 | 23.7 | % | $ | 231 | 21.4 | % | $ | 364 | 27.4 | % | ||||||||||||
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During 2011, we received after-tax interest refunds from the IRS of $23 million related to the timing of tax payments previously made in tax years 2001-2006. Approximately $16 million of this amount was a recovery of interest assessments previously paid that were recorded as part of our tax reserves in prior years.
Liability for Unrecognized Tax Benefits
The change in our liability for unrecognized tax benefits is as follows:
Year ended December 31, in millions |
2013 | 2012 | ||||||
Balance at beginning of year |
$ | 7 | $ | 8 | ||||
Decrease related to other settlements with taxing authorities |
(1) | (1) | ||||||
Balance at end of year |
$ | 6 | $ | 7 | ||||
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Each quarter, we review the amount of unrecognized tax benefits recorded in accordance with the applicable accounting guidance. Any adjustment to unrecognized tax benefits is recorded in income tax expense. The amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate was $6 million at December 31, 2013, and $7 million at December 31, 2012. We do not currently anticipate that the amount of unrecognized tax benefits will significantly change over the next twelve months.
As permitted under the applicable accounting guidance, it is our policy to record interest and penalties related to unrecognized tax benefits in income tax expense. We recorded net interest credits of $1.4 million in 2013, interest expense of $.2 million in 2012, and net interest credits of $52 million in 2011. The portion of the respective interest credit attributable to our leveraged lease transactions was $25 million in 2011. We recovered state tax penalties of $.2 million in 2013 and did not recover any penalties in 2012. At December 31, 2013, we had an accrued interest payable of $1.1 million, compared to $1.5 million at December 31, 2012. Our liability for accrued state tax penalties was $.3 million at December 31, 2013, and $.5 million at December 31, 2012.
We file federal income tax returns, as well as returns in various state and foreign jurisdictions. We are subject to income tax examination by the IRS for the tax years 2009 and forward. Currently, we are under audit for the tax years 2009-2011. As of December 31, 2013, the IRS has not proposed any significant adjustments. We are not subject to income tax examinations by other tax authorities for years prior to 2003.
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13. Acquisitions and Discontinued Operations
Acquisitions
Mortgage Servicing Rights. On June 24, 2013, in the first of multiple closings, we acquired substantially all third-party commercial loan servicing rights consisting of CMBS Master, Primary and Special Servicing as well as other servicing from Bank of Americas Global Mortgages & Securitized Products business. Simultaneously, we entered into a subservicing agreement with Berkadia Commercial Mortgage LLC related to all CMBS primary servicing. This acquisition was accounted for as a business combination and aligned with our strategy to drive growth. The acquisition resulted in KeyBank becoming the third largest servicer of commercial/multifamily loans in the U.S. and the fifth largest special servicer of CMBS. The acquisition date fair value of the MSRs acquired on June 24, 2013, which were included on our balance sheet at June 30, 2013, was approximately $117 million. Three additional and related closings occurred on July 22, 2013, August 26, 2013, and October 7, 2013. The acquisition date fair value of the MSRs acquired in these transactions was $3 million. As a result of this acquisition, the total fair value of the MSRs acquired during 2013 and included in our December 31, 2013, financial results was $120 million. In addition to the MSRs acquired, Key as a master servicer acquired $216 million of principal and interest advances. These principal and interest advances recorded at fair value were primarily associated with the June 24, 2013, acquisition of MSRs. No goodwill was recognized as a result of this acquisition. Additional information regarding our mortgage servicing assets is provided in Note 9 (Mortgage Servicing Assets).
Key-Branded Credit Card Portfolio . On August 1, 2012, we acquired Key-branded credit card assets from Elan Financial Services, Inc. This acquisition was accounted for as an asset purchase. The fair value of the credit card assets purchased was approximately $718 million at the acquisition date. We also recorded a PCCR intangible asset of approximately $135 million and a rewards liability of approximately $9 million in the Community Bank reporting unit.
Western New York Branches . On July 13, 2012, we acquired 37 retail banking branches in Western New York. This acquisition was accounted for as a business combination. The acquisition date fair value of the assets and deposits acquired was approximately $2 billion. We received loans with a fair value of $244 million (including $25 million of PCI loans) and premises and equipment valued at $8 million, and assumed $2 billion of deposits. Cash of $1.8 billion was received to assume the net liabilities, and we recorded a core deposit intangible asset of $40 million and a goodwill asset of $62 million in the Key Community Bank reporting unit during the third quarter of 2012. All of the goodwill related to this acquisition is expected to be deductible for tax purposes.
A second closing of this acquisition occurred on September 14, 2012, when we acquired credit card assets with a fair value of approximately $68 million and remitted a cash payment of $68 million to the seller. We also recorded a PCCR intangible asset of approximately $1 million and a rewards liability of approximately $1 million in the Key Community Bank reporting unit. No additional goodwill resulted from the acquisition of these credit card assets.
Discontinued operations
Education lending. In September 2009, we decided to exit the government-guaranteed education lending business. As a result, we have accounted for this business as a discontinued operation.
Income (loss) from discontinued operations, net of taxes on the income statement includes (i) the changes in fair value of the assets and liabilities of the education loan securitization trusts and the loans at fair value in portfolio (discussed later in this note), and (ii) the interest income and expense from the loans and the securities of the trusts and the loans in portfolio at both amortized cost and fair value. These amounts are shown separately in the following table. Gains and losses attributable to changes in fair value are recorded as a component of noninterest income or expense. Interest income and expense related to the loans and securities are shown as a component of Net interest income.
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The components of income (loss) from discontinued operations, net of taxes for the education lending business are as follows:
Year ended December 31, in millions |
2013 | 2012 | 2011 | |||||||||
Net interest income |
$ | 105 | $ | 119 | $ | 138 | ||||||
Provision (credit) for loan and lease losses |
20 | 9 | 113 | |||||||||
Net interest income (expense) after provision for loan and lease losses |
85 | 110 | 25 | |||||||||
Noninterest income |
(136) | (49) | (55) | |||||||||
Noninterest expense |
28 | 36 | 39 | |||||||||
Income (loss) before income taxes |
(79) | 25 | (69) | |||||||||
Income taxes |
(29) | 9 | (26) | |||||||||
Income (loss) from discontinued operations, net of taxes (a) |
$ | (50) | $ | 16 | $ | (43) | ||||||
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(a) | Includes after-tax charges of $40 million for 2013, $50 million for 2012, and $50 million for 2011, determined by applying a matched funds transfer pricing methodology to the liabilities assumed necessary to support the discontinued operations. |
The discontinued assets and liabilities of our education lending business included on the balance sheet are as follows:
December 31, in millions |
2013 | 2012 | ||||||
Trust loans at fair value |
$ | 1,960 | $ | 2,369 | ||||
Portfolio loans at fair value |
147 | 157 | ||||||
Loans, net of unearned income of ($6) and ($5) |
2,390 | 2,675 | ||||||
Less: Allowance for loan and lease losses |
39 | 55 | ||||||
Net loans |
4,458 | 5,146 | ||||||
Trust accrued income and other assets at fair value |
20 | 26 | ||||||
Accrued income and other assets |
45 | 60 | ||||||
Total assets |
$ | 4,523 | $ | 5,232 | ||||
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Trust accrued expense and other liabilities at fair value |
$ | 20 | $ | 22 | ||||
Trust securities at fair value |
1,834 | 2,159 | ||||||
Total liabilities |
$ | 1,854 | $ | 2,181 | ||||
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The discontinued education lending business consists of assets and liabilities in the securitization trusts (recorded at fair value), as well as loans in portfolio (recorded at fair value) and loans in portfolio (recorded at carrying value with appropriate valuation reserves) that are held outside the trusts.
At December 31, 2013, education loans include 1,041 TDRs with a recorded investment of approximately $13 million (pre-modification and post-modification). A specifically allocated allowance of $1 million was assigned to these loans as of December 31, 2013. There have been no significant payment defaults. There are no significant commitments outstanding to lend additional funds to these borrowers. Additional information regarding TDR classification and ALLL methodology is provided in Note 5 (Asset Quality).
In the past, as part of our education lending business model, we originated and securitized education loans. The process of securitization involved taking a pool of loans from our balance sheet and selling them to a bankruptcy-remote QSPE, or trust. This trust then issued securities to investors in the capital markets to raise funds to pay for the loans. The interest generated on the loans pays holders of the securities issued. As the transferor, we retain a portion of the risk in the form of a residual interest and also retain the right to service the securitized loans and receive servicing fees.
As of January 1, 2010, we consolidated our ten outstanding securitization trusts since we hold the residual interests and are the master servicer with the power to direct the activities that most significantly influence the economic performance of the trusts.
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The trust assets can be used only to settle the obligations or securities the trusts issue; we cannot sell the assets or transfer the liabilities. The loans in the consolidated trusts consist of both private and government-guaranteed loans. The security holders or beneficial interest holders do not have recourse to Key. Our economic interest or risk of loss associated with these education loan securitization trusts is approximately $126 million as of December 31, 2013. During the third quarter of 2013, additional market participant information about projected trends for default and recovery rates became available. Based on this information and our related internal analysis, we adjusted certain assumptions related to valuing the loans and securities in the securitization trusts. As a result, a $48 million after-tax loss was recognized during the third quarter of 2013 related to the fair value of the loans and securities in the education loan securitization trusts. This loss resulted in a reduction in the value of our economic interest in these trusts. We record all income and expense (including fair value adjustments) through the income (loss) from discontinued operations, net of tax line item in our income statement.
On October 27, 2013, we purchased the government-guaranteed education loans from one of the education loan securitization trusts pursuant to the legal terms of the particular trust. The trust used the cash proceeds from the sale of these loans to retire the outstanding securities related to the government-guaranteed education loans. This particular trust remains in existence and continues to maintain the private education loan portfolio and has securities related to these loans outstanding. On December, 20, 2013, we sold substantially all of the loans we purchased for $147 million and recognized a gain on the sale of $3 million.
At December 31, 2013, there are $140 million of loans that were purchased from three of the outstanding securitizations trusts pursuant to the legal terms of these particular trusts. These loans are held as portfolio loans and continue to be accounted for at fair value. These portfolio loans were valued using an internal discounted cash flow model, which was affected by assumptions for defaults, loss severity, discount rates and prepayments. These portfolio loans are considered to be Level 3 assets since we rely on unobservable inputs when determining fair value. Our valuation process for these loans as well as the trust loans and securities is discussed in more detail below. Portfolio loans accounted for at fair value had a value of $147 million at December 31, 2013, and $157 million at December 31, 2012.
We elected to consolidate these trusts at fair value. Carrying the assets and liabilities of the trusts at fair value better depicts our economic interest. The fair value of the assets and liabilities of the trusts is determined by calculating the present value of the future expected cash flows. We rely on unobservable inputs (Level 3) when determining the fair value of the assets and liabilities of the trusts because observable market data is not available. Our valuation process is described in more detail below.
Corporate Treasury, within our Finance area, is responsible for the quarterly valuation process that determines the fair value of the loans and securities in our education loan securitization trusts as well as our student loans held in portfolio that are accounted for at fair value. Corporate Treasury provides these fair values to a Working Group Committee (the Working Group) comprising representatives from the line of business, Credit and Market Risk Management, Accounting, Business Finance (part of our Finance area), and Corporate Treasury. The Working Group is a subcommittee of the Fair Value Committee that is discussed in more detail in Note 6 (Fair Value Measurements). The Working Group reviews all significant inputs and assumptions and approves the resulting fair values.
The Working Group reviews actual performance trends of the loans and securities on a quarterly basis and uses statistical analysis and qualitative measures to determine assumptions for future performance. Predictive models that incorporate delinquency and charge-off trends along with economic outlooks assist the Working Group to forecast future defaults. The Working Group uses this information to formulate the credit outlook for each of the securitization trusts. Higher projected defaults, fewer expected recoveries, elevated prepayment speeds and higher discount rates would be expected to result in a lower fair value of the loans and securities in these securitization trusts as well as the portfolio loans at fair value. Default expectations and discount rate changes have the most significant impact on the fair values of the loans and securities. Increased cash flow uncertainty, whether through higher defaults and prepayments or fewer recoveries, can result in higher discount rates for use in the fair value process for these loans and securities.
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The valuation process for the education loan securitization trust and portfolio loans that are accounted for at fair value is based on a discounted cash flow analysis using a model purchased from a third party that is maintained by Corporate Treasury. The valuation process begins with loan-by-loan level data that is aggregated into pools based on underlying loan structural characteristics (i.e., current unpaid principal balance, contractual term, interest rate). Cash flows for these loan pools are developed using a financial model that reflects certain assumptions for defaults, recoveries, status change and prepayments. A net earnings stream, taking into account cost of funding, is calculated and discounted back to the measurement date using an appropriate discount rate. This resulting amount is used to determine the present value of the loans, which represents their fair value to a market participant.
The unobservable inputs set forth in the following table are reviewed and approved by the Working Group on a quarterly basis. The Working Group determines these assumptions based on available data, discussions with appropriate individuals within and outside of Key, and the knowledge and experience of the Working Group members.
A similar discounted cash flow approach to that described above is used on a quarterly basis by Corporate Treasury to determine the fair value of the trust securities. In valuing these securities, the discount rates used are provided by a third-party valuation consultant. These discount rates are based primarily on secondary market spread indices for similar student loans and asset-backed securities and are developed by the consultant using market-based data. On a quarterly basis, the Working Group reviews the discount rate inputs used in the valuation process for reasonableness.
A quarterly variance analysis reconciles valuation changes in the model used to calculate the fair value of the trust loans and securities and the portfolio loans at fair value. This quarterly analysis considers loan and securities runoff, yields, future default and recovery changes, and the timing of cash releases to us from the trusts. We also perform back testing to compare expected defaults to actual experience; the impact of future defaults can significantly affect the fair value of these loans and securities over time. In addition, our internal model validation group periodically performs a review to ensure the accuracy and validity of the model for determining the fair value of these loans and securities.
The following table shows the significant unobservable inputs used to measure the fair value of the education loan securitization trust loans and securities and the portfolio loans accounted for at fair value as of December 31, 2013, and 2012:
December 31, 2013 dollars in millions
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Fair Value of Level
3
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Valuation
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Significant
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Range
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Trust loans and |
$ | 2,107 | Discounted cash flow | Prepayment speed | 4.00 13.50%(6.47%) | |||||||
portfolio loans |
Loss severity | 2.00 79.50%(54.21%) | ||||||||||
accounted for at fair |
Discount rate | 2.40 10.50%(3.50%) | ||||||||||
value |
Default rate | 8.01 23.71%(18.43%) | ||||||||||
Trust securities |
1,834 | Discounted cash flow | Discount rate | 1.60 3.50%(2.55%) | ||||||||
December 31, 2012 dollars in millions
|
Fair Value of Level 3
|
Valuation
|
Significant
|
Range
|
||||||||
Trust loans and |
$ | 2,526 | Discounted cash flow | Prepayment speed | 4.00 26.00%(9.74%) | |||||||
portfolio loans |
Loss severity | 2.00 80.00%(49.61%) | ||||||||||
accounted for at fair |
Discount rate | 2.40 10.50%(5.12%) | ||||||||||
value |
Default rate | 8.13 21.50%(13.44%) | ||||||||||
Trust securities |
2,159 | Discounted cash flow | Discount rate | 1.50 6.10%(4.14%) | ||||||||
The following table shows the principal and fair value amounts for our trust loans at fair value, portfolio loans at fair value, and portfolio loans at carrying value at December 31, 2013, and 2012. Our policies for determining
180
past due loans, placing loans on nonaccrual, applying payments on nonaccrual loans, and resuming accrual of interest are disclosed in Note 1 (Summary of Significant Accounting Policies) under the heading Nonperforming Loans.
dollars in millions
|
December 31, 2013 | December 31, 2012 | ||||||||||||||
Principal | Fair Value | Principal | Fair Value | |||||||||||||
Trust loans at fair value |
||||||||||||||||
Accruing loans past due 90 days or more |
$ | 25 | $ | 25 | $ | 35 | $ | 34 | ||||||||
Loans placed on nonaccrual status |
12 | 12 | 14 | 14 | ||||||||||||
Portfolio loans at fair value |
||||||||||||||||
Accruing loans past due 90 days or more |
$ | 8 | $ | 8 | $ | 5 | $ | 6 | ||||||||
Loans placed on nonaccrual status |
| | | | ||||||||||||
Portfolio loans at carrying value |
||||||||||||||||
Accruing loans past due 90 days or more |
$ | 35 | N/A | $ | 44 | N/A | ||||||||||
Loans placed on nonaccrual status |
10 | N/A | 6 | N/A | ||||||||||||
The following table shows the consolidated trusts assets and liabilities at fair value and the portfolio loans at fair value and their related contractual values as of December 31, 2013, and 2012.
December 31, 2013 in millions |
Contractual
Amount |
Fair Value |
||||||
ASSETS |
||||||||
Portfolio loans |
$ | 140 | $ | 147 | ||||
Trust loans |
1,964 | 1,960 | ||||||
Trust other assets |
20 | 20 | ||||||
LIABILITIES |
||||||||
Trust securities |
$ | 1,958 | $ | 1,834 | ||||
Trust other liabilities |
20 | 20 |
December 31, 2012 in millions |
Contractual
Amount |
Fair Value |
||||||
ASSETS |
||||||||
Portfolio loans |
$ | 151 | $ | 157 | ||||
Trust loans |
2,443 | 2,369 | ||||||
Trust other assets |
26 | 26 | ||||||
LIABILITIES |
||||||||
Trust securities |
$ | 2,473 | $ | 2,159 | ||||
Trust other liabilities |
22 | 22 |
181
The following tables present the assets and liabilities of the consolidated securitization trusts measured at fair value, as well as the portfolio loans that are measured at fair value on a recurring basis at December 31, 2013, and 2012.
The following table shows the change in the fair values of the Level 3 consolidated education loan securitization trusts and portfolio loans for the years ended December 31, 2013, and 2012.
in millions |
Portfolio
Student Loans |
Trust
Student Loans |
Trust
Other Assets |
Trust
Securities |
Trust
Other Liabilities |
|||||||||||||||
Balance at December 31, 2011 |
$ | 76 | $ | 2,726 | $ | 34 | $ | 2,522 | $ | 28 | ||||||||||
Gains (losses) recognized in earnings (a) |
3 | 83 | | 143 | | |||||||||||||||
Purchases |
86 | | | | | |||||||||||||||
Sales |
| (86 | ) | | | | ||||||||||||||
Issuances |
| | | | | |||||||||||||||
Settlements |
(8 | ) | (354 | ) | (8 | ) | (506 | ) | (6 | ) | ||||||||||
Balance at December 31, 2012 |
$ | 157 | $ | 2,369 | $ | 26 | $ | 2,159 | $ | 22 | ||||||||||
Gains (losses) recognized in earnings (a) |
| 53 | | 191 | | |||||||||||||||
Purchases |
152 | | | | | |||||||||||||||
Sales |
(147 | ) | (152 | ) | | | | |||||||||||||
Issuances |
| | | | | |||||||||||||||
Settlements |
(15 | ) | (310 | ) | (6 | ) | (516 | ) | (2 | ) | ||||||||||
Balance at December 31, 2013 |
$ | 147 | $ | 1,960 | $ | 20 | $ | 1,834 | $ | 20 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
(a) | Gains (losses) were driven primarily by fair value adjustments. |
182
Victory Capital Management and Victory Capital Advisors. On July 31, 2013, we completed the sale of Victory to a private equity fund. As a result of this sale, we recorded an after-tax gain of $92 million as of September 30, 2013. The cash portion of the gain was $72 million. An additional gain may be recognized based on client consents received through January 31, 2014. Because it was not certain we could secure these remaining consents, there was no accrual for the consents included in the gain as of December 31, 2013. We are currently waiting to finalize the consents received and the remaining assets under management as of January 31, 2014, in order to be able to recognize any additional gain. Since February 21, 2013, when we agreed to sell Victory, we have accounted for this business as a discontinued operation.
The results of this discontinued business are included in income (loss) from discontinued operations, net of taxes on the income statement. The components of income (loss) from discontinued operations, net of taxes for Victory, which includes the gain on the sale of this business on July 31, 2013, are as follows:
Year ended December 31, in millions |
2013 | 2012 | 2011 | |||||||||
Noninterest income |
$ | 212 | $ | 111 | $ | 120 | ||||||
Noninterest expense |
66 | 89 | 106 | |||||||||
Income (loss) before income taxes |
146 | 22 | 14 | |||||||||
Income taxes |
54 | 8 | 5 | |||||||||
Income (loss) from discontinued operations, net of taxes |
$ | 92 | $ | 14 | $ | 9 | ||||||
|
|
|
|
|
|
|||||||
|
|
|
|
|
|
The discontinued assets and liabilities of Victory included on the balance sheet are as follows:
December 31, in millions |
2013 | 2012 | ||||||||
Cash and due from banks |
| $ | 1 | |||||||
Accrued income and other assets |
$ | 29 | 27 | |||||||
Total assets |
$ | 29 | $ | 28 | ||||||
|
|
|
|
|||||||
Accrued expense and other liabilities |
| $ | 38 | |||||||
Total liabilities |
| $ | 38 | |||||||
|
|
|
|
|||||||
The only remaining asset of Victory is a $29 million Seller note that is accounted for at fair value and is classified as a Level 3 asset. The Seller note was accounted for at fair value through December 31, 2013. Since the contingency involving certain fund outflows was resolved, the Seller note will no longer be accounted for at fair value subsequent to December 31, 2013. Corporate Treasury was responsible for the quarterly valuation process that determined the fair value of the Seller note and determined the fair value of the Seller note at closing on December 31, 2013. The Seller note was valued using a discounted cash flow methodology that incorporated an appropriate discount rate based on the credit, market, and interest risks associated with this note. The discount rate used in valuing the Seller note was determined by using the Capital Asset Pricing Model, which was derived using adjusted quarterly changes in the seven-year U.S. Treasury Rate and an average beta of Victorys peers. The alpha used was equal to the one-year probability of default for similar risk-rated loans calculated under our internal risk rating system and credit policy. The discount rate used for the Seller note at December 31, 2013, was 13.25%. A Mergers & Acquisitions Working Group, which is a subcommittee of the Fair Value Committee that is discussed in more detail in Note 6, reviewed the determination of the discount rate and approved the resulting fair value.
183
The following table presents the Victory Seller note that is measured at fair value on a recurring basis through December 31, 2013.
December 31, 2013 in millions |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
ASSETS MEASURED ON A RECURRING BASIS |
||||||||||||||||
Seller note |
| | $ | 29 | $ | 29 | ||||||||||
Total assets on a recurring basis at fair value |
| | $ | 29 | $ | 29 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
The following table shows the change in the fair value of the Level 3 Victory Seller note for the year ended December 31, 2013.
in millions | Seller note | |||
Balance at December 31, 2012 |
| |||
Gains (losses) recognized in earnings (a) |
$ | (3 | ) | |
Purchases |
| |||
Sales |
| |||
Issuances |
32 | |||
Settlements |
| |||
Balance at December 31, 2013 |
$ | 29 | ||
|
|
|||
(a) | Gains (losses) were driven primarily by fair value adjustments. |
Austin Capital Management, Ltd. In April 2009, we decided to wind down the operations of Austin, a subsidiary that specialized in managing hedge fund investments for institutional customers. As a result, we have accounted for this business as a discontinued operation.
The results of this discontinued business are included in income (loss) from discontinued operations, net of taxes on the income statement. The components of income (loss) from discontinued operations, net of taxes for Austin are as follows:
Year ended December 31, in millions |
2013 | 2012 | 2011 | |||||||||
Noninterest income |
| | $ | 1 | ||||||||
Noninterest expense |
$ | 1 | $ | 10 | 2 | |||||||
Income (loss) before income taxes |
(1 | ) | (10 | ) | (1 | ) | ||||||
Income taxes |
1 | (3 | ) | | ||||||||
Income (loss) from discontinued operations, net of taxes |
$ | (2 | ) | $ | (7 | ) | $ | (1 | ) | |||
|
|
|
|
|
|
|||||||
|
|
|
|
|
|
The discontinued assets and liabilities of Austin included on the balance sheet are as follows:
December 31, in millions |
2013 | 2012 | ||||||||
Cash and due from banks |
$ | 20 | $ | 22 | ||||||
Total assets |
$ | 20 | $ | 22 | ||||||
|
|
|
|
|||||||
Accrued expense and other liabilities |
| $ | 1 | |||||||
Total liabilities |
| $ | 1 | |||||||
|
|
|
|
|||||||
184
Combined discontinued operations. The combined results of the discontinued operations are as follows:
Year ended December 31, in millions |
2013 | 2012 | 2011 | |||||||||
Net interest income |
$ | 105 | $ | 119 | $ | 138 | ||||||
Provision (credit) for loan and lease losses |
20 | 9 | 113 | |||||||||
Net interest income (expense) after provision for loan and lease losses |
85 | 110 | 25 | |||||||||
Noninterest income |
76 | 62 | 66 | |||||||||
Noninterest expense |
95 | 135 | 147 | |||||||||
Income (loss) before income taxes |
66 | 37 | (56 | ) | ||||||||
Income taxes |
26 | 14 | (21 | ) | ||||||||
Income (loss) from discontinued operations, net of taxes (a) |
$ | 40 | $ | 23 | $ | (35 | ) | |||||
|
|
|
|
|
|
|||||||
(a) | Includes after-tax charges of $40 million for 2013, $50 million for 2012, and $50 million for 2011, determined by applying a matched funds transfer pricing methodology to the liabilities assumed necessary to support the discontinued operations. |
The combined assets and liabilities of the discontinued operations are as follows:
December 31, in millions |
2013 | 2012 | ||||||
|
|
|
|
|||||
Cash and due from banks |
$ | 20 | $ | 23 | ||||
Trust loans at fair value |
1,960 | 2,369 | ||||||
Portfolio loans at fair value |
147 | 157 | ||||||
Loans, net of unearned income of ($6) and ($5) |
2,390 | 2,675 | ||||||
Less: Allowance for loan and lease losses |
39 | 55 | ||||||
Net loans |
4,458 | 5,146 | ||||||
Trust accrued income and other assets at fair value |
20 | 26 | ||||||
Accrued income and other assets |
74 | 87 | ||||||
Total assets |
$ | 4,572 | $ | 5,282 | ||||
|
|
|
|
|||||
Trust accrued expense and other liabilities at fair value |
$ | 20 | $ | 22 | ||||
Accrued expense and other liabilities |
| 39 | ||||||
Trust securities at fair value |
1,834 | 2,159 | ||||||
Total liabilities |
$ | 1,854 | $ | 2,220 | ||||
|
|
|
|
|||||
14. Securities Financing Activities
We enter into repurchase and reverse repurchase agreements and securities borrowed transactions (securities financing agreements) primarily to finance our inventory positions, acquire securities to cover short positions, accommodate customers financing needs, and to settle other securities obligations. We account for these securities financing agreements as collateralized financing transactions. Repurchase and reverse repurchase agreements are recorded on the balance sheet at the amounts at which the securities will be subsequently sold or repurchased. Securities borrowed transactions are recorded on the balance sheet at the amounts of cash collateral advanced. While our securities financing agreements incorporate a right of set off, the assets and liabilities are reported on a gross basis. Repurchase agreements and securities borrowed transactions are included in Accrued income and other assets on the balance sheet; reverse repurchase agreements are included in Federal funds purchased and securities sold under repurchase agreements.
185
The following table summarizes our securities financing agreements as of December 31, 2013, and 2012:
December 31, 2013 | ||||||||||||||||||
in millions |
Gross Amount
Presented in Balance Sheet |
Netting
Adjustments |
(a) |
Collateral (b) |
Net
Amounts |
|||||||||||||
Offsetting of financial assets: |
||||||||||||||||||
Reverse repurchase agreements |
$ | 347 | $ | (278 | ) | $ | (66 | ) | $ | 3 | ||||||||
Securities borrowed |
12 | | (12 | ) | | |||||||||||||
Total |
$ | 359 | $ | (278 | ) | $ | (78 | ) | $ | 3 | ||||||||
|
|
|
|
|
|
|
|
|||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Offsetting of financial liabilities: |
||||||||||||||||||
Repurchase agreements |
$ | 517 | $ | (278 | ) | $ | (239 | ) | | |||||||||
Total |
$ | 517 | $ | (278 | ) | $ | (239 | ) | | |||||||||
|
|
|
|
|
|
|
|
|||||||||||
|
|
|
|
|
|
|
|
|||||||||||
December 31, 2012 | ||||||||||||||||||
in millions |
Gross Amount
Presented in Balance Sheet |
Netting
Adjustments |
(a) |
Collateral (b) |
Net
Amounts |
|||||||||||||
Offsetting of financial assets: |
||||||||||||||||||
Reverse repurchase agreements |
$ | 271 | $ | (95 | ) | $ | (172 | ) | $ | 4 | ||||||||
Securities borrowed |
| | | | ||||||||||||||
Total |
$ | 271 | $ | (95 | ) | $ | (172 | ) | $ | 4 | ||||||||
|
|
|
|
|
|
|
|
|||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Offsetting of financial liabilities: |
||||||||||||||||||
Repurchase agreements |
$ | 228 | $ | (95 | ) | $ | (133 | ) | | |||||||||
Total |
$ | 228 | $ | (95 | ) | $ | (133 | ) | | |||||||||
|
|
|
|
|
|
|
|
|||||||||||
|
|
|
|
|
|
|
|
(a) | Netting adjustments take into account the impact of master netting agreements that allow us to settle with a single counterparty on a net basis. |
(b) | These adjustments take into account the impact of bilateral collateral agreements that allow us to offset the net positions with the related collateral. The application of collateral cannot reduce the net position below zero. Therefore, excess collateral, if any, is not reflected above. |
Like other financing transactions, securities financing agreements contain an element of credit risk. To mitigate and manage credit risk exposure, we generally enter into master netting agreements and other collateral arrangements that give us the right, in the event of default, to liquidate collateral held and to offset receivables and payables with the same counterparty. Additionally, we establish and monitor limits on our counterparty credit risk exposure by product type. For the reverse repurchase agreements, we monitor the value of the underlying securities we have received from counterparties and either request additional collateral or return a portion of the collateral based on the value of those securities. We generally hold collateral in the form of highly rated securities issued by the U.S. Treasury and fixed income securities. In addition, we may need to provide collateral to counterparties under our repurchase agreements and securities borrowed transactions. In general, the collateral we pledge and receive can be sold or repledged by the secured parties.
We maintain several stock-based compensation plans, which are described below. Total compensation expense for these plans was $38 million for 2013, $53 million for 2012, and $41 million for 2011. The total income tax benefit recognized in the income statement for these plans was $14 million for 2013, $20 million for 2012, and $15 million for 2011. Stock-based compensation expense related to awards granted to employees is recorded in personnel expense on the income statement; compensation expense related to awards granted to directors is recorded in other expense.
186
Our compensation plans allow us to grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, other awards which may not be denominated or payable in or valued by reference to our common shares or other factors, discounted stock purchases, and deferred compensation to eligible employees and directors. At December 31, 2013, we had 89,016,390 common shares available for future grant under our compensation plans. In accordance with a resolution adopted by the Compensation and Organization Committee of KeyCorps Board of Directors, we may not grant options to purchase common shares, restricted stock or other shares under any long-term compensation plan in an aggregate amount that exceeds 6% of our outstanding common shares in any rolling three-year period.
Stock Options
Stock options granted to employees generally become exercisable at the rate of 25% per year for options granted prior to 2011 and after, and at the rate of 33-1/3% per year for options granted in years prior to 2011. No option granted by KeyCorp will be exercisable less than one year after, or expire later than ten years from, the grant date. The exercise price is the closing price of our common shares on the grant date.
We determine the fair value of options granted using the Black-Scholes option-pricing model. This model was originally developed to determine the fair value of exchange-traded equity options, which (unlike employee stock options) have no vesting period or transferability restrictions. Because of these differences, the Black-Scholes model does not precisely value an employee stock option, but it is commonly used for this purpose. The model assumes that the estimated fair value of an option is amortized as compensation expense over the options vesting period.
The Black-Scholes model requires several assumptions, which we developed and update based on historical trends and current market observations. Our determination of the fair value of options is only as accurate as the underlying assumptions. The assumptions pertaining to options issued during 2013, 2012, and 2011 are shown in the following table.
Year ended December 31, | 2013 | 2012 | 2011 | |||||||||||
|
||||||||||||||
Average option life |
6.3 years | 6.3 years | 6.2 years | |||||||||||
Future dividend yield |
2.14 | % | 1.50 | % | .43 | % | ||||||||
Historical share price volatility |
.495 | .489 | .479 | |||||||||||
Weighted-average risk-free interest rate |
1.1 | % | 1.2 | % | 2.6 | % | ||||||||
|
The Compensation and Organization Committee has authority to approve all stock option grants, but may delegate some of its authority to grant awards from time to time under KeyCorps 2013 Equity Compensation Plan. The committee has delegated to our Chief Executive Officer the authority to grant equity awards, including stock options, to any employee who is not designated an officer for purposes of Section 16 of the Exchange Act. No more than 3,000,000 common shares may be issued under this authority.
The following table summarizes activity, pricing and other information for our stock options for the year ended December 31, 2013.
Number of
Options |
Weighted-Average
Exercise Price Per Option |
Weighted-Average
Remaining Life (Years) |
Aggregate
Intrinsic Value (a) |
|||||||||||||
Outstanding at December 31, 2012 |
32,619,819 | $ | 19.36 | |||||||||||||
Granted |
1,141,294 | 9.33 | ||||||||||||||
Exercised |
(3,574,354 | ) | 7.26 | |||||||||||||
Lapsed or canceled |
(4,480,817 | ) | 24.47 | |||||||||||||
Outstanding at December 31, 2013 |
25,705,942 | $ | 19.83 | 4.2 | $ | 68 | ||||||||||
|
|
|||||||||||||||
|
|
|||||||||||||||
Expected to vest |
4,233,326 | $ | 8.51 | 8.1 | $ | 21 | ||||||||||
Exercisable at December 31, 2013 |
21,042,678 | $ | 22.34 | 3.3 | $ | 45 | ||||||||||
(a) | The intrinsic value of a stock option is the amount by which the fair value of the underlying stock exceeds the exercise price of the option. At December 31, 2013, the fair value of the underlying stock was less than the weighted-average exercise price per option. |
187
The weighted-average grant-date fair value of options was $3.55 for options granted during 2013, $3.23 for options granted during 2012, and $4.11 for options granted during 2011. Stock option exercises numbered 3,574,354 in 2013, 421,846 in 2012, and 121,089 in 2011. The aggregate intrinsic value of exercised options was $13 million for 2013, $1 million for 2012, and less than $1 million for 2011. As of December 31, 2013, unrecognized compensation cost related to nonvested options expected to vest under the plans totaled $6 million. We expect to recognize this cost over a weighted-average period of 2.3 years.
Cash received from options exercised was $26 million, $2 million, and $1 million in 2013, 2012, and 2011, respectively. The actual tax benefit realized for the tax deductions from options exercised totaled $1 million for 2013 and less than $1 million for each of 2012 and 2011.
Long-Term Incentive Compensation Program
Our Long-Term Incentive Compensation Program (the Program) rewards senior executives critical to our long-term financial success. Awards are granted annually in a variety of forms:
¿ | deferred cash payments that generally vest at the rate of 25% per year; |
¿ | time-lapsed restricted stock units payable in stock, which generally vest at the rate of 25% per year; |
¿ | performance units payable in stock, which vest at the end of the three-year performance cycle and will not vest unless Key attains defined performance levels; and |
¿ | performance units payable in cash, which vest at the end of the three-year performance cycle and will not vest unless Key attains defined performance levels. |
No performance units were scheduled to vest during 2013, 2012, and 2011; therefore, no corresponding payments were made.
The following table summarizes activity and pricing information for the nonvested shares in the Program for the year ended December 31, 2013.
Vesting Contingent on
Service Conditions |
Vesting Contingent on
Performance and Service Conditions |
|||||||||||||||
Number of
|
Weighted-
|
Number of
|
Weighted-
|
|||||||||||||
Outstanding at December 31, 2012 |
5,145,713 | $ | 8.27 | 4,092,563 | $ | 8.21 | ||||||||||
Granted |
2,452,490 | 9.33 | 1,632,641 | 13.42 | ||||||||||||
Vested |
(2,392,842 | ) | 7.90 | (570,125 | ) | 8.01 | ||||||||||
Forfeited
|
|
(446,985
|
)
|
|
8.90
|
|
|
(511,969
|
)
|
|
11.91
|
|
||||
Outstanding at December 31, 2013 |
4,758,376 | $ | 8.94 | 4,643,110 | $ | 11.56 | ||||||||||
|
|
|
|
|||||||||||||
|
|
|
|
The compensation cost of time-lapsed and performance-based restricted stock or unit awards granted under the Program is calculated using the closing trading price of our common shares on the grant date.
Unlike time-lapsed and performance-based restricted stock or units, we do not pay dividends during the vesting period for performance shares or units that may become payable in excess of targeted performance.
The weighted-average grant-date fair value of awards granted under the Program was $10.96 during 2013, $8.07 during 2012, and $9.12 during 2011. As of December 31, 2013, unrecognized compensation cost related to nonvested shares expected to vest under the Program totaled $43 million. We expect to recognize this cost over a weighted-average period of 2.3 years. The total fair value of shares vested was $23 million in 2013, $8 million during 2012, and $10 million during 2011.
188
Other Restricted Stock Awards
We also may grant, upon approval by the Compensation and Organization Committee (or our Chief Executive Officer with respect to her designated authority), other time-lapsed restricted stock or unit awards under various programs to recognize outstanding performance.
The following table summarizes activity and pricing information for the nonvested shares granted under these restricted stock or unit awards for the year ended December 31, 2013.
Number of
Nonvested Shares |
Weighted-Average
Fair Value |
|||||||||
Outstanding at December 31, 2012 |
2,716,654 | $ | 7.84 | |||||||
Granted |
261,679 | 9.33 | ||||||||
Vested |
(1,588,427 | ) | 7.51 | |||||||
Forfeited
|
|
(23,436
|
)
|
|
8.55
|
|
||||
Outstanding at December 31, 2013 |
1,366,470 | $ | 8.48 | |||||||
|
|
|||||||||
|
|
The weighted-average grant-date fair value of awards granted was $9.33 during 2013, $7.98 during 2012, and $9.25 during 2011. As of December 31, 2013, unrecognized compensation cost related to nonvested restricted stock or units expected to vest under these special awards totaled $4 million. We expect to recognize this cost over a weighted-average period of 2.4 years. The total fair value of restricted stock or units vested was $12 million during 2013, $14 million during 2012, and $29 million during 2011.
Deferred Compensation Plans
Our deferred compensation arrangements include voluntary and mandatory deferral programs for common shares awarded to certain employees and directors. Mandatory deferred incentive awards vest at the rate of 25% per year beginning one year after the deferral date for awards granted in 2012 and after, and 33-1/3% per year beginning one year after the deferral date for awards granted prior to 2012. Deferrals under the voluntary programs are immediately vested.
Several of our deferred compensation arrangements allow participants to redirect deferrals from common shares into other investments that provide for distributions payable in cash. We account for these participant-directed deferred compensation arrangements as stock-based liabilities and re-measure the related compensation cost based on the most recent fair value of our common shares. The compensation cost of all other nonparticipant-directed deferrals is measured based on the closing price of our common shares on the deferral date. We did not pay any stock-based liabilities during 2013, 2012, or 2011.
The following table summarizes activity and pricing information for the nonvested shares in our deferred compensation plans for the year ended December 31, 2013.
Number of
Nonvested Shares |
Weighted-Average
Fair Value |
|||||||||
Outstanding at December 31, 2012 |
1,195,849 | $ | 7.00 | |||||||
Granted |
774,028 | 11.18 | ||||||||
Dividend equivalents |
53,213 | 11.18 | ||||||||
Vested |
(661,372 | ) | 8.48 | |||||||
Forfeited
|
|
(17,620
|
)
|
|
7.94
|
|
||||
Outstanding at December 31, 2013 |
1,344,098 | $ | 9.06 | |||||||
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The weighted-average grant-date fair value of awards granted was $11.18 during 2013, $6.63 during 2012, and $8.03 during 2011. As of December 31, 2013, unrecognized compensation cost related to nonvested shares expected to vest under our deferred compensation plans totaled $6 million. We expect to recognize this cost over
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a weighted-average period of 2.2 years. The total fair value of shares vested was $7 million during 2013, $7 million during 2012, and $5 million during 2011. Dividend equivalents presented in the preceding table represent the value of dividends accumulated during the vesting period.
Discounted Stock Purchase Plan
Our Discounted Stock Purchase Plan provides employees the opportunity to purchase our common shares at a 10% discount through payroll deductions or cash payments. Purchases are limited to $10,000 in any month and $50,000 in any calendar year, and are immediately vested. To accommodate employee purchases, we either issue treasury shares or acquire common shares on the open market on or around the fifteenth day of the month following the month employee payments are received. We issued 264,775 common shares at a weighted-average cost to the employee of $9.83 during 2013, 301,794 common shares at a weighted-average cost to the employee of $7.30 during 2012, and 297,091 common shares at a weighted-average cost to the employee of $7.71 during 2011.
Information pertaining to our method of accounting for stock-based compensation is included in Note 1 (Summary of Significant Accounting Policies) under the heading Stock-Based Compensation.
In accordance with the applicable accounting guidance for defined benefit and other postretirement plans, we measure plan assets and liabilities as of the end of the fiscal year.
Pension Plans
Effective December 31, 2009, we amended our cash balance pension plan and other defined benefit plans to freeze all benefit accruals and close the plans to new employees. We will continue to credit participants existing account balances for interest until they receive their plan benefits. We changed certain pension plan assumptions after freezing the plans.
Pre-tax AOCI not yet recognized as net pension cost was $529 million at December 31, 2013, and $681 million at December 31, 2012, consisting entirely of net unrecognized losses. During 2014, we expect to recognize $16 million of net unrecognized losses in pre-tax AOCI as net pension cost.
During 2013, lump sum payments made under certain pension plans triggered settlement accounting. In accordance with the applicable accounting guidance for defined benefit plans, we performed a remeasurement of the affected plans in conjunction with the settlement and recognized the settlement loss as reflected in the following table.
The components of net pension cost and the amount recognized in OCI for all funded and unfunded plans are as follows:
Year ended December 31, in millions |
2013 | 2012 | 2011 | |||||||||||
Interest cost on PBO |
$ | 42 | $ | 47 | $ | 57 | ||||||||
Expected return on plan assets |
(67 | ) | (70 | ) | (81 | ) | ||||||||
Amortization of losses |
19 | 16 | 11 | |||||||||||
Settlement loss
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27
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Net pension cost (benefit) |
$ | 21 | $ | (7 | ) | $ | (13 | ) | ||||||
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Other changes in plan assets and benefit obligations recognized in OCI: |
||||||||||||||
Net (gain) loss |
$ | (106 | ) | $ | 63 | $ | 120 | |||||||
Amortization of losses
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(46
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)
|
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(16
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)
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(11
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)
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Total recognized in comprehensive income |
$ | (152 | ) | $ | 47 | $ | 109 | |||||||
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Total recognized in net pension cost and comprehensive income |
$ | (131 | ) | $ | 40 | $ | 96 | |||||||
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The information related to our pension plans presented in the following tables is based on current actuarial reports using measurement dates of December 31, 2013, and 2012.
The following table summarizes changes in the PBO related to our pension plans.
Year ended December 31, in millions
|
2013
|
2012
|
||||||||
PBO at beginning of year |
$ | 1,277 | $ | 1,228 | ||||||
Interest cost |
42 | 47 | ||||||||
Actuarial losses (gains) |
(54 | ) | 86 | |||||||
Benefit payments |
(109 | ) | (84 | ) | ||||||
PBO at end of year |
$ | 1,156 | $ | 1,277 | ||||||
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The following table summarizes changes in the FVA.
Year ended December 31, in millions |
2013 | 2012 | ||||||||
FVA at beginning of year |
$ | 942 | $ | 918 | ||||||
Actual return on plan assets |
119 | 92 | ||||||||
Employer contributions |
18 | 16 | ||||||||
Benefit payments |
(109 | ) | (84 | ) | ||||||
FVA at end of year |
$ | 970 | $ | 942 | ||||||
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The following table summarizes the funded status of the pension plans, which equals the amounts recognized in the balance sheets at December 31, 2013, and 2012.
December 31, in millions |
2013 | 2012 | ||||||||
Funded status (a) |
$ | (186 | ) | $ | (335 | ) | ||||
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Net prepaid pension cost recognized consists of: |
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Current liabilities |
$ | (14 | ) | $ | (14 | ) | ||||
Noncurrent liabilities |
(172 | ) | (321 | ) | ||||||
Net prepaid pension cost recognized (b) |
$ | (186 | ) | $ | (335 | ) | ||||
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(a) | The shortage of the FVA under the PBO. |
(b) | Represents the accrued benefit liability of the pension plans. |
At December 31, 2013, our primary qualified cash balance pension plan was sufficiently funded under the requirements of ERISA. Consequently, we are not required to make a minimum contribution to that plan in 2014. We also do not expect to make any significant discretionary contributions during 2014.
At December 31, 2013, we expect to pay the benefits from all funded and unfunded pension plans as follows: 2014 $100 million; 2015 $97 million; 2016 $104 million; 2017 $90 million; 2018 $86 million; and $386 million in the aggregate from 2019 through 2023.
The ABO for all of our pension plans was $1.2 billion at December 31, 2013, and $1.3 billion at December 31, 2012. As indicated in the table below, collectively our plans had an ABO in excess of plan assets as follows:
December 31, | ||||||||||
in millions | 2013 | 2012 | ||||||||
PBO |
$ | 1,156 | $ | 1,277 | ||||||
ABO |
1,156 | 1,277 | ||||||||
Fair value of plan assets |
970 | 942 |
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To determine the actuarial present value of benefit obligations, we assumed the following weighted-average rates.
December 31, | 2013 | 2012 | ||||||||
Discount rate |
4.25 | % | 3.25 | % | ||||||
Compensation increase rate |
N/A | N/A |
To determine net pension cost, we assumed the following weighted-average rates.
Year ended December 31, | 2013 | 2012 | 2011 | |||||||||||
Discount rate |
3.25 | % | 4.00 | % | 4.75 | % | ||||||||
Compensation increase rate |
N/A | N/A | N/A | |||||||||||
Expected return on plan assets |
7.25 | 7.25 | 7.75 |
We estimate that we will recognize a $3 million credit in net pension cost for 2014, compared to an expense of $21 million for 2013 and a credit of $7 million for 2012. Costs are expected be less in 2014 than in 2013 unless the 2014 lump sum payments made under our primary qualified cash balance pension plan are greater than the plans interest cost component of net pension cost for the year. If this situation occurs during 2014, in accordance with the applicable accounting guidance for defined benefit plans, we will recognize in earnings a portion of the aggregate gain or loss recorded in AOCI. Costs increased in 2013 because the amount of lump sum payments made under certain pension plans triggered settlement accounting, resulting in a settlement loss of $27 million. Costs were less in 2012 than they were in 2013 due to the 2013 settlement loss.
We determine the expected return on plan assets using a calculated market-related value of plan assets that smoothes what might otherwise be significant year-to-year volatility in net pension cost. Changes in the value of plan assets are not recognized in the year they occur. Rather, they are combined with any other cumulative unrecognized asset- and obligation-related gains and losses, and are reflected evenly in the market-related value during the five years after they occur as long as the market-related value does not vary more than 10% from the plans FVA.
We estimate that a 25 basis point increase or decrease in the expected return on plan assets would either decrease or increase, respectively, our net pension cost for 2014 by approximately $2 million. Pension cost also is affected by an assumed discount rate. We estimate that a 25 basis point change in the assumed discount rate would change net pension cost for 2014 by approximately $1 million.
We determine the assumed discount rate based on the rate of return on a hypothetical portfolio of high quality corporate bonds with interest rates and maturities that provide the necessary cash flows to pay benefits when due.
The expected return on plan assets is determined by considering a number of factors, the most significant of which are:
¿ |
Our expectations for returns on plan assets over the long term, weighted for the investment mix of the assets. These expectations consider, among other factors, historical capital market returns of equity, fixed income, convertible and other securities, and forecasted returns that are modeled under various economic scenarios. |
¿ |
Historical returns on our plan assets. Based on an annual reassessment of current and expected future capital market returns, our expected return on plan assets was 7.25% for both 2013 and 2012, and 7.75% for 2011. As part of an annual reassessment of current and expected future capital market returns, we deemed a rate of 7.25% to be appropriate in estimating 2014 pension cost. |
The investment objectives of the pension funds are developed to reflect the characteristics of the plans, such as pension formulas and cash lump sum distribution features, and the liability profiles created by the plans participants. An executive oversight committee reviews the plans investment performance at least quarterly, and
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compares performance against appropriate market indices. The pension funds investment objectives are to achieve an annualized rate of return equal to or greater than our expected return on plan assets over ten to twenty-year periods; to realize annual and three- and five-year annualized rates of return consistent with specific market benchmarks at the individual asset class level; and to maximize ten- to twenty-year annualized rates of return while maintaining prudent levels of risk, consistent with our asset allocation policy. The following table shows the asset target allocations prescribed by the pension funds investment policies.
Asset Class |
Target
Allocation 2013 |
|||||
Equity securities |
46 | % | ||||
Fixed income securities |
28 | |||||
Convertible securities |
5 | |||||
Other assets |
21 | |||||
Total |
100 | % | ||||
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Equity securities include common stocks of domestic and foreign companies, as well as foreign company stocks traded as American Depositary Shares on U.S. stock exchanges. Debt securities include investments in domestic- and foreign-issued corporate bonds, U.S. government and agency bonds, international government bonds, and mutual funds. Convertible securities include investments in convertible bonds. Other assets include deposits under insurance company contracts and investments in multi-strategy investment funds.
Although the pension funds investment policies conditionally permit the use of derivative contracts, we have not entered into any such contracts, and we do not expect to employ such contracts in the future.
The valuation methodologies used to measure the fair value of pension plan assets vary depending on the type of asset, as described below. For an explanation of the fair value hierarchy, see Note 1 (Summary of Significant Accounting Policies) under the heading Fair Value Measurements.
Equity securities. Equity securities traded on securities exchanges are valued at the closing price on the exchange or system where the security is principally traded. These securities are classified as Level 1 since quoted prices for identical securities in active markets are available.
Debt securities. Substantially all debt securities are investment grade and include domestic- and foreign-issued corporate bonds and U.S. government and agency bonds. These securities are valued using evaluated prices based on observable inputs, such as dealer quotes, available trade information, spreads, bids and offers, prepayment speeds, U.S. Treasury curves, and interest rate movements. Debt securities are classified as Level 2.
Mutual funds. Exchange-traded mutual funds listed or traded on securities exchanges are valued at the closing price on the exchange or system where the security is principally traded. These securities are classified as Level 1 because quoted prices for identical securities in active markets are available. All other investments in mutual funds are valued at their closing net asset values. Because net asset values are based primarily on observable inputs, most notably quoted prices for the underlying assets, these nonexchange-traded investments are classified as Level 2.
Collective investment funds. Investments in collective investment funds are valued at their closing net asset values. Because net asset values are based primarily on observable inputs, most notably quoted prices for the underlying assets, these investments are classified as Level 2.
Insurance investment contracts and pooled separate accounts. Deposits under insurance investment contracts and pooled separate accounts with insurance companies do not have readily determinable fair values and are valued using a methodology that is consistent with accounting guidance that allows the plan to estimate fair value based upon net asset value per share (or its equivalent, such as member units or an ownership in partners capital
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to which a proportionate share of net assets is attributed). The significant unobservable input used in estimating fair value is primarily the most recent value of the investment as reported by the insurance company; thus, these investments are classified as Level 3.
Other assets. Other assets include an investment in a multi-strategy investment fund and an investment in a limited partnership. These investments do not have readily determinable fair values and are valued using a methodology consistent with accounting guidance that allows the plan to estimate fair value based upon net asset value per share (or its equivalent, such as member units or an ownership in partners capital to which a proportionate share of net assets is attributed). The significant unobservable input used in estimating fair value is primarily the most recent value of the investment as reported by the investment manager or general partner of the investment fund; thus, these investments are classified as Level 3.
The following tables show the fair values of our pension plan assets by asset class at December 31, 2013, and 2012.
December 31, 2013 | ||||||||||||||||||
in millions | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||
ASSET CLASS |
||||||||||||||||||
Equity securities: |
||||||||||||||||||
U.S. |
$ | 216 | | | $ | 216 | ||||||||||||
International |
24 | | | 24 | ||||||||||||||
Debt securities: |
||||||||||||||||||
Corporate bonds U.S. |
| $ | 74 | | 74 | |||||||||||||
Corporate bonds International |
| 11 | | 11 | ||||||||||||||
Government and agency bonds U.S. |
| 73 | | 73 | ||||||||||||||
Government bonds International |
| 1 | | 1 | ||||||||||||||
State and municipal bonds |
| 3 | | 3 | ||||||||||||||
Mutual funds: |
||||||||||||||||||
U.S. equity |
11 | | | 11 | ||||||||||||||
International equity |
34 | | | 34 | ||||||||||||||
Fixed income U.S. |
3 | | | 3 | ||||||||||||||
Fixed income International |
2 | | | 2 | ||||||||||||||
Collective investment funds: |
||||||||||||||||||
U.S. equity |
| 31 | | 31 | ||||||||||||||
International equity |
| 151 | | 151 | ||||||||||||||
Convertible securities |
| 54 | | 54 | ||||||||||||||
Fixed income securities |
| 7 | | 7 | ||||||||||||||
Short-term investments |
| 44 | | 44 | ||||||||||||||
Emerging markets |
| 44 | | 44 | ||||||||||||||
Real assets |
| 112 | | 112 | ||||||||||||||
Insurance investment contracts and pooled separate accounts |
| | $ | 13 | 13 | |||||||||||||
Other assets |
| | 62 | 62 | ||||||||||||||
|
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Total net assets at fair value |
$ | 290 | $ | 605 | $ | 75 | $ | 970 | ||||||||||
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December 31, 2012 | ||||||||||||||||||
in millions | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||
ASSET CLASS |
||||||||||||||||||
Equity securities: |
||||||||||||||||||
U.S. |
$ | 216 | | | $ | 216 | ||||||||||||
International |
29 | | | 29 | ||||||||||||||
Debt securities: |
||||||||||||||||||
Corporate bonds U.S. |
| $ | 73 | | 73 | |||||||||||||
Corporate bonds International |
| 10 | | 10 | ||||||||||||||
Government and agency bonds U.S. |
| 79 | | 79 | ||||||||||||||
Government bonds International |
| 3 | | 3 | ||||||||||||||
State and municipal bonds |
| 1 | | 1 | ||||||||||||||
Mutual funds: |
||||||||||||||||||
U.S. equity |
13 | | | 13 | ||||||||||||||
International equity |
6 | 2 | | 8 | ||||||||||||||
Fixed Income U.S. |
4 | | | 4 | ||||||||||||||
Fixed Income International |
2 | | | 2 | ||||||||||||||
Collective investment funds: |
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U.S. equity |
| 24 | | 24 | ||||||||||||||
International equity |
| 147 | | 147 | ||||||||||||||
Convertible securities |
| 47 | | 47 | ||||||||||||||
Fixed income securities |
| 5 | | 5 | ||||||||||||||
Short-term investments |
| 48 | | 48 | ||||||||||||||
Emerging markets |
| 47 | | 47 | ||||||||||||||
Real assets |
| 118 | | 118 | ||||||||||||||
Insurance investment contracts and pooled separate accounts |
| | $ | 12 | 12 | |||||||||||||
Other assets |
| | 56 | 56 | ||||||||||||||
|
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Total net assets at fair value |
$ | 270 | $ | 604 | $ | 68 | $ | 942 | ||||||||||
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The following table shows the changes in the fair values of our Level 3 plan assets for the years ended December 31, 2013, and 2012.
in millions |
Insurance
Investment Contracts and Pooled Separate Accounts |
Other
Assets |
Total | |||||||||||
Balance at December 31, 2011 |
$ | 12 | $ | 4 | $ | 16 | ||||||||
Actual return on plan assets: |
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Relating to assets held at reporting date |
1 | 2 | 3 | |||||||||||
Relating to assets sold during the period |
| (3) | (3) | |||||||||||
Purchases |
| 55 | 55 | |||||||||||
Sales |
(1) | (2) | (3) | |||||||||||
Balance at December 31, 2012 |
$ | 12 | $ | 56 | $ | 68 | ||||||||
Actual return on plan assets: |
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Relating to assets held at reporting date |
1 | 6 | 7 | |||||||||||
Balance at December 31, 2013 |
$ | 13 | $ | 62 | $ | 75 | ||||||||
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Other Postretirement Benefit Plans
We sponsor a retiree healthcare plan in which all employees age 55 with five years of service (or employees age 50 with 15 years of service who are terminated under conditions that entitle them to a severance benefit) are eligible to participate. Participant contributions are adjusted annually. Key may provide a subsidy toward the cost of coverage for certain employees hired before 2001 with a minimum of 15 years of service at the time of termination. We use a separate VEBA trust to fund the retiree healthcare plan.
We also maintained a death benefit plan that provided a death benefit for a very limited number of (i) former Key employees who retired from their employment with Key prior to 1994; (ii) former Key employees who elect a
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grandfathered pension benefit under the KeyCorp Cash Balance Pension Plan; and (iii) Key employees who otherwise were provided a historical death benefit at the time of their termination. The death benefit plan was noncontributory, and was funded by a separate VEBA trust. In the fourth quarter of 2012, we used the assets of the VEBA trust to purchase an insurance policy issued by a third-party insurance provider to fully fund the death benefits under the plan. Death benefits for all grandfathered employees are fully funded, administered, and paid by the third-party insurance provider, and the insurance company accepted all related funding obligations and administrative liability. Consequently, we terminated the death benefit plan and the VEBA trust effective December 31, 2012.
The components of pre-tax AOCI not yet recognized as net postretirement benefit cost are shown below.
December 31, | ||||||||||
in millions | 2013 | 2012 | ||||||||
Net unrecognized losses (gains) |
$ | (12 | ) | $ | 5 | |||||
Net unrecognized prior service benefit |
(5 | ) | (7) | |||||||
Total unrecognized AOCI |
$ | (17 | ) | $ | (2) | |||||
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During 2014, we expect to recognize $2 million of pre-tax AOCI resulting from prior service benefits and net actuarial gains as a reduction of other postretirement benefit cost.
The components of net postretirement benefit cost and the amount recognized in OCI for all funded and unfunded plans are as follows:
December 31, | ||||||||||||||
in millions | 2013 | 2012 | 2011 | |||||||||||
Service cost of benefits earned |
$ | 1 | $ | 1 | $ | 1 | ||||||||
Interest cost on APBO |
3 | 3 | 3 | |||||||||||
Expected return on plan assets |
(3 | ) | (3 | ) | (3) | |||||||||
Amortization of prior service credit |
(1 | ) | (1 | ) | (1) | |||||||||
Net postretirement benefit cost |
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Other changes in plan assets and benefit obligations recognized in OCI: |
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Net (gain) loss |
$ | (17 | ) | $ | (3 | ) | $ | 8 | ||||||
Amortization of prior service credit |
1 | 1 | 1 | |||||||||||
Total recognized in comprehensive income |
$ | (16 | ) | $ | (2 | ) | $ | 9 | ||||||
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Total recognized in net postretirement benefit cost and comprehensive income |
$ | (16 | ) | $ | (2 | ) | $ | 9 | ||||||
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The information related to our postretirement benefit plans presented in the following tables is based on current actuarial reports using measurement dates of December 31, 2013, and 2012.
The following table summarizes changes in the APBO.
Year ended December 31, | ||||||||||
in millions | 2013 | 2012 | ||||||||
APBO at beginning of year |
$ | 74 | $ | 81 | ||||||
Service cost |
1 | 1 | ||||||||
Interest cost |
3 | 3 | ||||||||
Plan participants contributions |
1 | 2 | ||||||||
Actuarial losses (gains) |
(6) | 1 | ||||||||
Benefit payments |
(8) | (7) | ||||||||
Liability (gain)/loss due to settlement |
| (7) | ||||||||
APBO at end of year |
$ | 65 | $ | 74 | ||||||
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The following table summarizes changes in FVA.
Year ended December 31, | ||||||||||
in millions | 2013 | 2012 | ||||||||
FVA at beginning of year |
$ | 51 | $ | 57 | ||||||
Employer contributions |
| (1) | ||||||||
Plan participantscontributions |
1 | 2 | ||||||||
Benefit payments |
(8) | (7) | ||||||||
Transfer to insurer |
| (7) | ||||||||
Actual return on plan assets |
13 | 7 | ||||||||
FVA at end of year |
$ | 57 | $ | 51 | ||||||
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The following table summarizes the funded status of the postretirement plans, which corresponds to the amounts recognized in the balance sheets at December 31, 2013, and 2012.
December 31, | ||||||||||
in millions | 2013 | 2012 | ||||||||
Funded status (a) |
$ | (8 | ) | $ | (23 | ) | ||||
Accrued postretirement benefit cost recognized (b) |
(8 | ) | (23 | ) |
(a) | The shortage of the FVA under the APBO. |
(b) | Consists entirely of noncurrent liabilities. |
There are no regulations that require contributions to the VEBA trust that funds our retiree healthcare plan, so there is no minimum funding requirement. We are permitted to make discretionary contributions to the VEBA trust, subject to certain IRS restrictions and limitations. We anticipate that our discretionary contributions in 2014, if any, will be minimal.
At December 31, 2013, we expect to pay the benefits from all funded and unfunded other postretirement plans as follows: 2014 $5 million; 2015 $5 million; 2016 $5 million; 2017 $5 million; 2018 $5 million; and $23 million in the aggregate from 2019 through 2023.
To determine the APBO, we assumed discount rates of 4.50% at December 31, 2013, and 3.50% at December 31, 2012.
To determine net postretirement benefit cost, we assumed the following weighted-average rates.
Year ended December 31, | 2013 | 2012 | 2011 | |||||||||||
Discount rate |
3.50 | % | 4.00 | % | 4.75 | % | ||||||||
Expected return on plan assets |
5.25 | 5.58 | 5.45 |
The realized net investment income for the postretirement healthcare plan VEBA trust is subject to federal income taxes, which are reflected in the weighted-average expected return on plan assets shown above.
Assumed healthcare cost trend rates do not have a material impact on net postretirement benefit cost or obligations since the postretirement plan has cost-sharing provisions and benefit limitations.
We estimate that we will recognize a credit of $1 million in net postretirement benefit cost for 2014, compared to a credit of less than $1 million for 2013 and a cost of less than $1 million for 2012.
We estimate the expected returns on plan assets for the VEBA trust much the same way we estimate returns on our pension funds. The primary investment objectives of the VEBA trust are to obtain a market rate of return and
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to diversify the portfolio in order to satisfy the trusts anticipated liquidity requirements. The following table shows the asset target allocation ranges prescribed by the trusts investment policy.
Asset Class |
Target Allocation Range 2013 |
|||||
Equity securities |
70 - 90 | % | ||||
Fixed income securities |
0 - 10 | |||||
Convertible securities |
0 - 10 | |||||
Cash equivalents and other assets |
10 - 30 |
Investments consist of mutual funds and common investment funds that invest in underlying assets in accordance with the target asset allocation ranges shown above. Exchange-traded mutual funds are valued using quoted prices and, therefore, are classified as Level 1. Investments in common investment funds are valued at their closing net asset value. Because net asset values are based primarily on observable inputs, most notably quoted prices for the underlying assets, these nonexchange-traded investments are classified as Level 2.
Although the VEBA trusts investment policy conditionally permits the use of derivative contracts, we have not entered into any such contracts, and we do not expect to employ such contracts in the future.
The following tables show the fair values of our postretirement plan assets by asset class at December 31, 2013, and 2012.
December 31, 2013 | ||||||||||||||||||
in millions | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||
ASSET CLASS |
||||||||||||||||||
Mutual funds U.S. equity |
$ | 6 | | | $ | 6 | ||||||||||||
Common investment funds: |
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U.S. equity |
| $ | 29 | | 29 | |||||||||||||
International equity |
| 9 | | 9 | ||||||||||||||
Convertible securities |
| 3 | | 3 | ||||||||||||||
Fixed income |
| 2 | | 2 | ||||||||||||||
Short-term investments |
| 8 | | 8 | ||||||||||||||
Total net assets at fair value |
$ | 6 | $ | 51 | | $ | 57 | |||||||||||
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December 31, 2012 | ||||||||||||||||||
in millions | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||
ASSET CLASS |
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Mutual funds U.S. equity |
$ | 7 | | | $ | 7 | ||||||||||||
Common investment funds: |
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U.S. equity |
| $ | 26 | | 26 | |||||||||||||
International equity |
| 8 | | 8 | ||||||||||||||
Convertible securities |
| 4 | | 4 | ||||||||||||||
Fixed income |
| 2 | | 2 | ||||||||||||||
Short-term investments |
| 4 | | 4 | ||||||||||||||
Total net assets at fair value |
$ | 7 | $ | 44 | | $ | 51 | |||||||||||
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The Medicare Prescription Drug, Improvement and Modernization Act of 2003 introduced a prescription drug benefit under Medicare and prescribes a federal subsidy to sponsors of retiree healthcare benefit plans that offer prescription drug coverage that is actuarially equivalent to the benefits under Medicare Part D. Based on our application of the relevant regulatory formula, we determined that the prescription drug coverage related to our retiree healthcare benefit plan is not actuarially equivalent to the Medicare benefit for the vast majority of retirees. For the years ended December 31, 2013, and 2012, we did not receive federal subsidies. For the year ended December 31, 2011, federal subsidies received did not have a material effect on our APBO and net postretirement benefit cost.
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The Patient Protection and Affordable Care Act and the Education Reconciliation Act of 2010, which were both signed into law in March 2010, changed the tax treatment of the federal subsidies described above. As a result of these laws, these subsidy payments become taxable in tax years beginning after December 31, 2012. The accounting guidance applicable to income taxes requires the impact of a change in tax law to be immediately recognized in the period that includes the enactment date. However, these tax law changes did not affect us, as we did not have a deferred tax asset recorded for Medicare Part D subsidies received.
Employee 401(k) Savings Plan
A substantial number of our employees are covered under a savings plan that is qualified under Section 401(k) of the Internal Revenue Code. The plan permits employees to contribute from 1% to 100% of eligible compensation, with up to 6% being eligible for matching contributions. Commencing January 1, 2010, an automatic enrollment feature was added to the plan for all new employees. The initial default contribution percentage for employees is 2% and will increase by 1% at the beginning of each plan year until the default contribution is 10% for plan years on and after January 1, 2012. The plan also permits us to provide a discretionary annual profit sharing contribution. We accrued a 2% contribution for 2013 and made contributions of 2.4% for 2012 and 3% for 2011 on eligible compensation for employees eligible on the last business day of the respective plan years. We also maintain a deferred savings plan that provides certain employees with benefits they otherwise would not have been eligible to receive under the qualified plan once their compensation for the plan year reached the IRS contribution limits. Total expense associated with the above plans was $68 million in 2013, $68 million in 2012, and $79 million in 2011.
Selected financial information pertaining to the components of our short-term borrowings is as follows:
December 31, | ||||||||||||||
dollars in millions | 2013 | 2012 | 2011 | |||||||||||
FEDERAL FUNDS PURCHASED |
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Balance at year end |
$ | 18 | $ | 8 | $ | 25 | ||||||||
Average during the year |
164 | 111 | 120 | |||||||||||
Maximum month-end balance |
1,486 | 613 | 844 | |||||||||||
Weighted-average rate during the year |
.09 | % | .14 | % | .13 | % | ||||||||
Weighted-average rate at December 31 |
.10 | .15 | .08 | |||||||||||
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS |
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Balance at year end |
$ | 1,516 | $ | 1,601 | $ | 1,686 | ||||||||
Average during the year |
1,638 | 1,703 | 1,861 | |||||||||||
Maximum month-end balance |
2,099 | 2,455 | 2,286 | |||||||||||
Weighted-average rate during the year |
.13 | % | .19 | % | .28 | % | ||||||||
Weighted-average rate at December 31 |
.15 | .14 | .25 | |||||||||||
OTHER SHORT-TERM BORROWINGS |
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Balance at year end |
$ | 343 | $ | 287 | $ | 337 | ||||||||
Average during the year |
394 | 413 | 619 | |||||||||||
Maximum month-end balance |
466 | 599 | 1,007 | |||||||||||
Weighted-average rate during the year |
1.89 | % | 1.69 | % | 1.84 | % | ||||||||
Weighted-average rate at December 31 |
2.00 | 1.81 | 1.60 |
Rates exclude the effects of interest rate swaps and caps, which modify the repricing characteristics of certain short-term borrowings. For more information about such financial instruments, see Note 8 (Derivatives and Hedging Activities).
As described below and in Note 18 (Long-Term Debt), KeyCorp and KeyBank have a number of programs and facilities that support our short-term financing needs. Certain subsidiaries maintain credit facilities with third parties, which provide alternative sources of funding. KeyCorp is the guarantor of some of the third-party facilities.
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Short-term credit facilities. We maintain cash on deposit in our Federal Reserve account, which has reduced our need to obtain funds through various short-term unsecured money market products. This account, which was maintained at $4.6 billion at December 31, 2013, and the unpledged securities in our investment portfolio provide a buffer to address unexpected short-term liquidity needs. We also have secured borrowing facilities at the Federal Home Loan Bank of Cincinnati and the Federal Reserve Bank of Cleveland to satisfy short-term liquidity requirements. As of December 31, 2013, our unused secured borrowing capacity was $15.5 billion at the Federal Reserve Bank of Cleveland and $3.5 billion at the Federal Home Loan Bank of Cincinnati.
The following table presents the components of our long-term debt, net of unamortized discounts and adjustments related to hedging with derivative financial instruments. We use interest rate swaps and caps, which modify the repricing characteristics of certain long-term debt, to manage interest rate risk. For more information about such financial instruments, see Note 8 (Derivatives and Hedging Activities).
December 31, | ||||||||
dollars in millions | 2013 | 2012 | ||||||
Senior medium-term notes due through 2021 (a) |
$ | 2,553 | $ | 2,653 | ||||
0.988% Subordinated notes due 2028 (b) |
162 | 162 | ||||||
6.875% Subordinated notes due 2029 (b) |
103 | 117 | ||||||
7.750% Subordinated notes due 2029 (b) |
133 | 152 | ||||||
Total parent company |
2,951 | 3,084 | ||||||
Senior medium-term notes due through 2039 (c) |
1,858 | 129 | ||||||
Senior Euro medium-term notes due through 2013 (d) |
| 26 | ||||||
7.413% Subordinated remarketable notes due 2027 (e) |
270 | 268 | ||||||
5.80% Subordinated notes due 2014 (e) |
768 | 803 | ||||||
4.95% Subordinated notes due 2015 (e) |
251 | 251 | ||||||
5.45% Subordinated notes due 2016 (e) |
544 | 564 | ||||||
5.70% Subordinated notes due 2017 (e) |
229 | 241 | ||||||
4.625% Subordinated notes due 2018 (e) |
104 | 108 | ||||||
6.95% Subordinated notes due 2028 (e) |
298 | 300 | ||||||
Lease financing debt due through 2016 (f) |
5 | 9 | ||||||
Secured borrowing due through 2018 (g) |
58 | | ||||||
Federal Home Loan Bank advances due through 2036 (h) |
224 | 974 | ||||||
Investment Fund Financing due through 2052 (i) |
90 | 90 | ||||||
Total subsidiaries |
4,699 | 3,763 | ||||||
Total long-term debt |
$ | 7,650 | $ | 6,847 | ||||
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(a) | The senior medium-term notes had weighted-average interest rates of 3.89% at December 31, 2013, and 5.11% at December 31, 2012. These notes had a combination of fixed and floating interest rates during 2012; however, these notes had fixed interest rates at December 31, 2013, and 2012. One of the three notes can be redeemed one month prior to its maturity date, while the other two notes may not be redeemed prior to their maturity dates. |
(b) | See Note 19 (Trust Preferred Securities Issued by Unconsolidated Subsidiaries) for a description of these notes. |
(c) | Senior medium-term notes had weighted-average interest rates of 1.58% at December 31, 2013, and 5.03% at December 31, 2012. These notes had a combination of fixed and floating interest rates. Two of the five notes can be redeemed one month prior to their maturity dates, while the other three notes may not be redeemed prior to their maturity dates. 2013 issuances were at considerably lower rates than existing debt. |
(d) | Senior Euro medium-term notes matured during 2013 and had weighted-average interest rates of .64% at December 31, 2012. These notes had a combination of fixed and floating interest rates based on LIBOR. |
(e) | These notes are all obligations of KeyBank. Only the subordinated remarketable notes due 2027 may be redeemed prior to their maturity dates. |
(f) | Lease financing debt had weighted-average interest rates of 5.99% at December 31, 2013, and 6.20% at December 31, 2012. This category of debt consists primarily of nonrecourse debt collateralized by leased equipment under operating, direct financing and sales-type leases. |
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(g) | The secured borrowing had weighted-average interest rates of 4.79% at December 31, 2013. This borrowing is collateralized by commercial lease financing receivables, and principal reductions are based on the cash payments received from the related receivables. Additional information pertaining to these commercial lease financing receivables is included in Note 4 (Loans and Loans Held for Sale). |
(h) | Long-term advances from the Federal Home Loan Bank had weighted-average interest rates of 3.47% at December 31, 2013, and 1.09% at December 31, 2012. These advances, which had a combination of fixed and floating interest rates, were secured by real estate loans and securities totaling $337 million at December 31, 2013, and $1.6 billion at December 31, 2012. |
(i) | Investment Fund Financing had a weighted-average interest rate of 2.01% at December 31, 2013, and 2012. |
At December 31, 2013, scheduled principal payments on long-term debt were as follows:
in millions | Parent | Subsidiaries | Total | |||||||||||
2014 |
| $ | 816 | $ | 816 | |||||||||
2015 |
$ | 764 | 506 | 1,270 | ||||||||||
2016 |
| 1,243 | 1,243 | |||||||||||
2017 |
| 255 | 255 | |||||||||||
2018 |
739 | 1,101 | 1,840 | |||||||||||
All subsequent years |
1,448 | 778 | 2,226 |
As described below, KeyCorp and KeyBank have a number of programs that support our long-term financing needs.
Global bank note program and predecessor programs. In August 2012, KeyBank adopted a Global Bank Note Program permitting the issuance of up to $20 billion of notes domestically and abroad. Under the program, KeyBank is authorized to issue notes with original maturities of seven days or more for senior notes or five years or more for subordinated notes. Notes may be denominated in U.S. dollars or in foreign currencies. Amounts outstanding under the program are classified as long-term debt on the balance sheet.
For the purpose of issuing bank notes, the Global Bank Note Program replaces KeyBanks prior bank note programs and KeyBanks prior Euro medium-term note program. Amounts outstanding under prior programs remain outstanding in accordance with their original terms and conditions and at their original stated maturities, and are classified as long-term debt on the balance sheet.
On February 1, 2013, KeyBank issued $1 billion of 1.65% Senior Bank Notes due February 1, 2018, under the Global Bank Note Program. On November 26, 2013, KeyBank issued $350 million of 1.10% Senior Notes and $400 million of Floating Rate Senior Notes, each due November 25, 2016. At December 31, 2013, $18.25 billion remained available for future issuance under the Global Bank Note Program.
KeyCorp shelf registration, including Medium-Term Note Program. KeyCorp has a shelf registration statement on file with the SEC under rules that allow companies to register various types of debt and equity securities without limitations on the aggregate amounts available for issuance. KeyCorp also maintains a Medium-Term Note Program that permits KeyCorp to issue notes with original maturities of nine months or more. On November 13, 2013, KeyCorp issued $750 million of 2.30% Medium-Term Notes due December 13, 2018. At December 31, 2013, KeyCorp had authorized and available for issuance up to $875 million of additional debt securities under the Medium-Term Note Program.
Actual issuances of capital securities or preferred stock by KeyCorp must be approved by the Board and cannot be objected to by the Federal Reserve.
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19. Trust Preferred Securities Issued by Unconsolidated Subsidiaries
We own the outstanding common stock of business trusts formed by us that issued corporation-obligated mandatorily redeemable trust preferred securities. The trusts used the proceeds from the issuance of their trust preferred 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 mandatorily redeemable trust preferred securities.
We unconditionally guarantee the following payments or distributions on behalf of the trusts:
¿ | required distributions on the trust preferred securities; |
¿ | the redemption price when a capital security is redeemed; and |
¿ | the amounts due if a trust is liquidated or terminated. |
The Regulatory Capital Rules, discussed in Supervision and Regulation in Item 1 of this report, implement a phase-out of trust preferred securities as Tier 1 capital, consistent with the requirements of the Dodd-Frank Act. For standardized approach banking organizations such as Key, the phase-out period begins on January 1, 2015, and by 2016 will require us to treat our mandatorily redeemable trust preferred securities as Tier 2 capital.
As of December 31, 2013, the trust preferred securities issued by the KeyCorp capital trusts represent $339 million, or 3.4%, of our total qualifying Tier 1 capital, net of goodwill.
The trust preferred securities, common stock, and related debentures are summarized as follows:
dollars in millions |
Trust Preferred Securities, Net of Discount (a) |
Common Stock |
Principal Amount of Debentures, Net of Discount (b) |
Interest Rate
Securities and Debentures (c) |
Maturity of Trust Preferred Securities and Debentures |
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December 31, 2013 |
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KeyCorp Capital I |
$ | 156 | $ | 6 | $ | 162 | .988 | % | 2028 | |||||||||||
KeyCorp Capital II |
99 | 4 | 103 | 6.875 | 2029 | |||||||||||||||
KeyCorp Capital III |
129 | 4 | 133 | 7.750 | 2029 | |||||||||||||||
Total |
$ | 384 | $ | 14 | $ | 398 | 4.777 | % | | |||||||||||
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December 31, 2012 |
$ | 417 | $ | 14 | $ | 431 | 5.025 | % | | |||||||||||
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(a) | The trust preferred securities must be redeemed when the related debentures mature, or earlier if provided in the governing indenture. Each issue of trust preferred securities carries an interest rate identical to that of the related debenture. Certain trust preferred securities include basis adjustments related to fair value hedges totaling $44 million at December 31, 2013, and $77 million at December 31, 2012. See Note 8 (Derivatives and Hedging Activities) for an explanation of fair value hedges. |
(b) | We have the right to redeem these debentures. If the debentures purchased by KeyCorp Capital I are redeemed before they mature, the redemption price will be the principal amount, plus any accrued but unpaid interest. If the debentures purchased by KeyCorp Capital II or KeyCorp Capital III are redeemed before they mature, the redemption price will be the greater of: (a) the principal amount, plus any accrued but unpaid interest, or (b) the sum of the present values of principal and interest payments discounted at the Treasury Rate (as defined in the applicable indenture), plus 20 basis points for KeyCorp Capital II or 25 basis points for KeyCorp Capital III or 50 basis points in the case of redemption upon either a tax or a capital treatment event for either KeyCorp Capital II or KeyCorp Capital III, plus any accrued but unpaid interest. The principal amount of certain debentures includes basis adjustments related to fair value hedges totaling $44 million at December 31, 2013, and $77 million at December 31, 2012. See Note 8 for an explanation of fair value hedges. The principal amount of debentures, net of discounts, is included in Long-Term Debt on the balance sheet. |
(c) | The interest rates for the trust preferred securities issued by KeyCorp Capital II and KeyCorp Capital III are fixed. KeyCorp Capital I has a floating interest rate, equal to three-month LIBOR plus 74 basis points, that reprices quarterly. The total interest rates are weighted-average rates. |
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20. Commitments, Contingent Liabilities and Guarantees
Obligations under Noncancelable Leases
We are obligated under various noncancelable operating leases for land, buildings and other property, consisting principally of data processing equipment. Rental expense under all operating leases totaled $122 million in 2013, $121 million in 2012, and $120 million in 2011. Minimum future rental payments under noncancelable operating leases at December 31, 2013, are as follows: 2014 $120 million; 2015 $114 million; 2016 $95 million; 2017 $87 million; 2018 $71 million; all subsequent years $411 million.
Commitments to Extend Credit or Funding
Loan commitments provide for financing on predetermined terms as long as the client continues to meet specified criteria. These agreements generally carry variable rates of interest and have fixed expiration dates or termination clauses. We typically charge a fee for our loan commitments. Since a commitment may expire without resulting in a loan, our aggregate outstanding commitments may significantly exceed our eventual cash outlay.
Loan commitments involve credit risk not reflected on our balance sheet. We mitigate exposure to credit risk with internal controls that guide how we review and approve applications for credit, establish credit limits and, when necessary, demand collateral. In particular, we evaluate the creditworthiness of each prospective borrower on a case-by-case basis and, when appropriate, adjust the allowance for credit losses on lending-related commitments. Additional information pertaining to this allowance is included in Note 1 (Summary of Significant Accounting Policies) under the heading Liability for Credit Losses on Lending-Related Commitments, and in Note 5 (Asset Quality).
The following table shows the remaining contractual amount of each class of commitment related to extending credit or funding principal investments as of December 31, 2013, and 2012. For loan commitments and commercial letters of credit, this amount represents our maximum possible accounting loss if the borrower were to draw upon the full amount of the commitment and subsequently default on payment for the total amount of the outstanding loan.
December 31,
in millions |
2013 | 2012 | ||||||||
Loan commitments: |
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Commercial and other |
$ | 23,611 | $ | 20,804 | ||||||
Commercial real estate and construction |
2,104 | 1,537 | ||||||||
Home equity |
7,193 | 7,255 | ||||||||
Credit cards |
3,457 | 3,611 | ||||||||
Total loan commitments |
36,365 | 33,207 | ||||||||
When-issued and to be announced securities commitments |
140 | 96 | ||||||||
Commercial letters of credit |
119 | 100 | ||||||||
Principal investing commitments |
75 | 94 | ||||||||
Liabilities of certain limited partnerships and other commitments |
2 | 5 | ||||||||
Total loan and other commitments |
$ | 36,701 | $ | 33,502 | ||||||
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Legal Proceedings
Austin Madoff-Related Claims . Austin, a subsidiary that specialized in managing hedge fund investments for institutional customers, determined that its funds had suffered investment losses of up to approximately $186 million resulting from the crimes perpetrated by Bernard L. Madoff and entities that he controlled. The
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investment losses borne by Austins funds stemmed from investments in a certain Madoff-advised hedge fund. Several lawsuits pending against Austin, KeyCorp, Victory and certain employees and former employees (collectively the KeyCorp defendants) alleging various claims, including negligence, fraud, breach of fiduciary duties, and violations of federal securities laws and ERISA, were consolidated into one action styled In re Austin Capital Management, Ltd., Securities & Employee Retirement Income Security Act (ERISA) Litigation , pending in the United States District Court for the Southern District of New York. The KeyCorp defendants filed a motion to dismiss all of the claims in the consolidated amended complaint. On December 21, 2012, the court dismissed 14 of the plaintiffs 16 claims, including all of the plaintiffs securities law and state law claims. The plaintiffs two remaining claims are claims under ERISA. Following mediation in October 2013, the parties reached an agreement in principle to settle the litigation, subject to the preparation of definitive settlement documentation and approval by the court following notice to the class members. We believe that the settlement will be covered under our insurance policies and will not have a material impact on our financial condition.
Metyk litigation. Two putative class actions were filed on September 21, 2010, in the United States District Court for the Northern District of Ohio (the Northern District of Ohio). The plaintiffs in these cases sought to represent a class of all participants in our 401(k) Savings Plan and alleged that the defendants in the lawsuit breached fiduciary duties owed to them under ERISA. These two putative class action lawsuits were substantively consolidated with each other in a proceeding styled Thomas Metyk, et al. v. KeyCorp, et al. (Metyk). A substantially similar class action, Taylor v. KeyCorp, et al., was dismissed from the Northern District of Ohio on August 12, 2010. This dismissal was affirmed by the United States Court of Appeals for the Sixth Circuit (the Sixth Circuit) on May 25, 2012. On January 29, 2013, the Northern District of Ohio entered its order granting the defendants motion to dismiss the plaintiffs consolidated complaint for failure to state a claim and entered its final judgment terminating the Metyk proceeding. On February 19, 2013, plaintiffs filed a motion to set aside the final judgment and to permit the plaintiffs to file an amended complaint. On April 30, 2013, the Northern District of Ohio denied the motion to set aside the final judgment. Metyk is currently on appeal before the Sixth Circuit.
Checking Account Overdraft Litigation. KeyBank was named a defendant in a putative class action seeking to represent a national class of KeyBank customers allegedly harmed by KeyBanks overdraft practices. The case was transferred and consolidated for purposes of pretrial discovery and motion proceedings to a multidistrict proceeding styled In Re: Checking Account Overdraft Litigation pending in the United States District Court for the Southern District of Florida (the District Court). KeyBank filed a notice of appeal in regard to the denial of its motion to compel arbitration. On August 21, 2012, the United States Court of Appeals for the Eleventh Circuit (the Eleventh Circuit) vacated the District Courts order denying KeyBanks motion to compel arbitration and remanded the case for further consideration. On June 21, 2013, KeyBank filed with the District Court its renewed motion to compel arbitration and stay or dismiss litigation. On August 27, 2013, the District Court granted KeyBanks renewed motion to compel arbitration and dismissed the case. The case is currently on appeal before the Eleventh Circuit.
Other litigation. In the ordinary course of business, we are subject to various other litigation, investigations and administrative proceedings. These other matters may involve claims for substantial monetary relief. Due to the complex nature of these various other matters, it may be years before some matters are resolved. While it is impossible to ascertain the ultimate resolution or range of financial liability, based on information presently known to us, we do not believe there is any other matter to which we are a party, or involving any of our properties that, individually or in the aggregate, would reasonably be expected to have a material adverse effect on our financial condition. We note, however, that in light of the inherent uncertainty in legal proceedings there can be no assurance that the ultimate resolution will not exceed established reserves. As a result, the outcome of a particular matter, or a combination of matters, may be material to our results of operations for a particular period, depending upon the size of the loss or our income for that particular period.
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Guarantees
We are a guarantor in various agreements with third parties. The following table shows the types of guarantees that we had outstanding at December 31, 2013. 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).
December 31, 2013 in millions
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Maximum Potential Undiscounted Future Payments
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Liability Recorded
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Financial guarantees: |
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Standby letters of credit |
$ | 10,630 | $ | 72 | ||||
Recourse agreement with FNMA |
1,360 | | ||||||
Return guarantee agreement with LIHTC investors |
11 | 11 | ||||||
Written put options (a) |
2,741 | 22 | ||||||
Total |
$ | 14,742 | $ | 105 | ||||
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(a) | The maximum potential undiscounted future payments represent notional amounts of derivatives qualifying as guarantees. |
We determine the payment/performance risk associated with each type of guarantee described below based on the probability that we could be required to make the maximum potential undiscounted future payments shown in the preceding table. We use a scale of low (0-30% probability of payment), moderate (31-70% probability of payment), or high (71-100% probability of payment) to assess the payment/performance risk, and have determined that the payment/performance risk associated with each type of guarantee outstanding at December 31, 2013, is low.
Standby letters of credit. KeyBank issues standby letters of credit to address clients financing needs. These instruments obligate us 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 to the client; they bear interest (generally at variable rates) and pose the same credit risk to us as a loan. At December 31, 2013, our standby letters of credit had a remaining weighted-average life of 3.2 years, with remaining actual lives ranging from less than one year to as many as eleven years.
Recourse agreement with FNMA. We participate as a lender in the FNMA Delegated Underwriting and Servicing program. FNMA delegates responsibility for originating, underwriting, and servicing mortgages, and we assume a limited portion of the risk of loss during the remaining term on each commercial mortgage loan that we sell to FNMA. We maintain a reserve for such potential losses in an amount that we believe approximates the fair value of our liability. At December 31, 2013, the outstanding commercial mortgage loans in this program had a weighted-average remaining term of 7.2 years, and the unpaid principal balance outstanding of loans sold by us as a participant was $4.2 billion. As shown in the preceding table, the maximum potential amount of undiscounted future payments that we could be required to make under this program is equal to approximately one-third of the principal balance of loans outstanding at December 31, 2013. If we are required to make a payment, we would have an interest in the collateral underlying the related commercial mortgage loan; any loss we incur could be offset by the amount of any recovery from the collateral.
Return guarantee agreement with LIHTC investors. KAHC, a subsidiary of KeyBank, offered limited partnership interests to qualified investors. Partnerships formed by KAHC invested in low-income residential rental properties that qualify for federal low income housing tax credits under Section 42 of the Internal Revenue Code. In certain partnerships, investors paid a fee to KAHC for a guaranteed return that is based on the financial performance of the property and the propertys confirmed LIHTC status throughout a fifteen-year compliance period. Typically, KAHC fulfills these guaranteed returns by distributing tax credits and deductions associated with the specific properties. If KAHC defaults on its obligation to provide the guaranteed return, KeyBank is obligated to make any necessary payments to investors. No recourse or collateral is available to offset our guarantee obligation other than the underlying income stream from the properties and the residual value of the operating partnership interests.
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As shown in the previous table, KAHC maintained a reserve in the amount of $11 million at December 31, 2013, which we believe 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.
These guarantees have expiration dates that extend through 2018, but KAHC has not formed any new partnerships under this program since October 2003. Additional information regarding these partnerships is included in Note 11 (Variable Interest Entities).
Written put options. In the ordinary course of business, we write put options for clients that wish to mitigate their exposure to changes in interest rates and commodity prices. At December 31, 2013, our written put options had an average life of 2.2 years. These instruments are considered to be guarantees, as we are required to make payments to the counterparty (the client) based on changes in an underlying variable that is related to an asset, a liability, or an equity security that the client holds. We are obligated to pay the client if the applicable benchmark interest rate or commodity price is above or below a specified level (known as the strike rate). These written put options are accounted for as derivatives at fair value, as further discussed in Note 8 (Derivatives and Hedging Activities). We mitigate our potential future payment obligations by entering into offsetting positions with third parties.
Written put options where the counterparty is a broker-dealer or bank are accounted for as derivatives at fair value but are not considered guarantees since these counterparties typically do not hold the underlying instruments. In addition, we are a purchaser and seller of credit derivatives, which are further discussed in Note 8.
Default guarantees. Some lines of business participate in guarantees that obligate us to perform if the debtor (typically a client) fails to satisfy all of its payment obligations to third parties. We generally undertake these guarantees for one of two possible reasons: either the risk profile of the debtor should provide an investment return, or we are supporting our underlying investment in the debtor. The terms of these default guarantees range from less than one year to as many as 5.5 years; some default guarantees do not have a contractual end date. We do not hold collateral for the default guarantees. If we were required to make a payment under a guarantee, we would receive a pro rata share should the third party collect some or all of the amounts due from the debtor.
Other Off-Balance Sheet Risk
Other off-balance sheet risk stems from financial instruments that do not meet the definition of a guarantee as specified in the applicable accounting guidance, and from other relationships.
Liquidity facilities that support asset-backed commercial paper conduits. At December 31, 2013, we did not have any liquidity facilities remaining outstanding with any unconsolidated third-party commercial paper conduits.
Indemnifications provided in the ordinary course of business. We provide certain indemnifications, primarily through representations and warranties in contracts that we execute in the ordinary course of business in connection with loan and lease sales and other ongoing activities, as well as in connection with purchases and sales of businesses. We maintain reserves, when appropriate, with respect to liability that reasonably could arise as a result of these indemnities.
Intercompany guarantees. KeyCorp, KeyBank, and certain of our affiliates are parties to various guarantees that facilitate the ongoing business activities of other affiliates. These business activities encompass issuing debt, assuming certain lease and insurance obligations, purchasing or issuing investments and securities, and engaging in certain leasing transactions involving clients.
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21. Accumulated Other Comprehensive Income
Our changes in AOCI for the year ended December 31, 2013, are as follows:
in millions |
Unrealized gains
(losses) on available for sale securities |
Unrealized gains
(losses) on derivative financial instruments |
Foreign currency
translation adjustment |
Net pension and
postretirement benefit costs |
Total | |||||||||||||||
Balance at December 31, 2012 |
$ | 229 | $ | 18 | $ | 55 | $ | (426 | ) | $ | (124 | ) | ||||||||
Other comprehensive income before reclassification, net of income taxes |
(291 | ) | 6 | (9 | ) | 78 | (216 | ) | ||||||||||||
Amounts reclassified from accumulated other comprehensive income, net of income taxes (a) |
(1 | ) | (35 | ) | (4 | ) | 28 | (12 | ) | |||||||||||
Net current-period other comprehensive income, net of income taxes |
(292 | ) | (29 | ) | (13 | ) | 106 | (228 | ) | |||||||||||
Balance at December 31, 2013 |
$ | (63 | ) | $ | (11 | ) | $ | 42 | $ | (320 | ) | $ | (352 | ) | ||||||
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(a) | See table below for details about these reclassifications. |
Our reclassifications out of AOCI for the year ended December 31, 2013, are as follows:
Year ended December 31, 2013
in millions |
Amount Reclassified from
Accumulated Other Comprehensive Income |
Affected Line Item in the Statement Where Net Income is Presented |
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Unrealized gains (losses) on available for sale securities |
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Realized gains |
$ | 1 | Other income | |||
1 | Income (loss) from continuing operations before income taxes | |||||
| Income taxes | |||||
$ | 1 | Income (loss) from continuing operations | ||||
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Unrealized gains (losses) on derivative financial instruments |
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Interest rate |
$ | 67 | Interest income Loans | |||
Interest rate |
(8 | ) | Interest expense Long term debt | |||
Foreign exchange contracts |
(3 | ) | Other income | |||
56 | Income (loss) from continuing operations before income taxes | |||||
21 | Income taxes | |||||
$ | 35 | Income (loss) from continuing operations | ||||
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Foreign currency translation adjustment |
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$ | 7 | Corporate services income | ||||
7 | Income (loss) from continuing operations before income taxes | |||||
3 | Income taxes | |||||
$ | 4 | Income (loss) from continuing operations | ||||
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Net pension and postretirement benefit costs |
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Amortization of losses |
$ | (46 | ) | Personnel expense | ||
Amortization of prior service credit |
1 | Personnel expense | ||||
(45 | ) | Income (loss) from continuing operations before income taxes | ||||
(17 | ) | Income taxes | ||||
$ | (28 | ) | Income (loss) from continuing operations | |||
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Comprehensive Capital Plan
As authorized by our Board of Directors and pursuant to our 2013 capital plan submitted to and not objected to by the Federal Reserve, we had authority to repurchase up to $426 million of our common shares in the open market or through privately negotiated transactions. Subsequently, we received no objection from the Federal Reserve to use, and our Board approved the use of, the cash portion of the net after-tax gain from the sale of Victory (approximately $72 million) for additional common share repurchases. In 2013, we completed $409 million of common share repurchases under the 2013 capital plan. Common share repurchases under the remaining 2013 capital plan authorization are expected to be executed through the first quarter of 2014. In addition, we completed $65 million of common share repurchases in the first quarter of 2013 under our 2012 capital plan for a total of $474 million of open market common share repurchases during 2013.
Capital Adequacy
KeyCorp and KeyBank must meet specific capital requirements imposed by federal banking regulators. Sanctions for failure to meet applicable capital requirements may include regulatory enforcement actions that restrict dividend payments, require the adoption of remedial measures to increase capital, terminate FDIC deposit insurance, and mandate the appointment of a conservator or receiver in severe cases. In addition, failure to maintain a well capitalized status affects how regulators evaluate applications for certain endeavors, including acquisitions, continuation and expansion of existing activities, and commencement of new activities, and could make clients and potential investors less confident. As of December 31, 2013, KeyCorp and KeyBank met all regulatory capital requirements.
Federal banking regulations group FDIC-insured depository institutions to one of five prompt corrective action capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. KeyCorps affiliate bank, KeyBank, qualified as well capitalized at December 31, 2013, because it exceeded the prescribed threshold ratios of 10.00% for total risk-based capital, 6.00% for Tier 1 risk-based capital, and 5.00% for Tier 1 leverage capital, and was not subject to any written agreement, order or directive to meet and maintain a specific capital level for any capital measure. We believe there has not been any change in condition or event since that date that would cause KeyBanks capital classification to change.
Bank holding companies are not assigned to any of the five prompt corrective action capital categories applicable to insured depository institutions. However, if those categories applied to bank holding companies, we believe that KeyCorp would satisfy the criteria for a well capitalized institution at December 31, 2013. The capital categories defined in the FDIA serve a limited regulatory function and may not accurately represent our overall financial condition or prospects.
208
For additional information on capital adequacy, see Supervision and Regulation in Item 1 of this report.
The specific lines of business that constitute each of the major business segments (operating segments) are described below.
Key Community Bank
Key Community Bank serves individuals and small to mid-sized businesses through its 12-state branch network.
Individuals are provided branch-based deposit and investment products, personal finance services and loans, including residential mortgages, home equity, credit card and various types of installment loans. In addition, financial, estate and retirement planning, asset management services, and Delaware Trust capabilities are offered to assist high-net-worth clients with their banking, trust, portfolio management, insurance, charitable giving, and related needs.
Small businesses are provided deposit, investment and credit products, and business advisory services. Mid-sized businesses are provided 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.
Key Corporate Bank
Key Corporate Bank is a full-service corporate and investment bank focused principally on serving the needs of middle market clients in six industry sectors: consumer, energy, healthcare, industrial, public sector and real estate. Key Corporate Bank delivers a broad product suite of banking and capital markets products to its clients,
209
including syndicated finance, debt and equity capital markets, commercial payments, equipment finance, commercial mortgage banking, derivatives, foreign exchange, financial advisory and public finance. Key Corporate Bank is also a significant servicer of commercial mortgage loans and a significant special servicer of CMBS. Key Corporate Bank also delivers many of its product capabilities to clients of Key Community Bank.
Other Segments
Other Segments consist of Corporate Treasury, Community Development, Principal Investing and various exit portfolios.
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 on the following pages shows selected financial data for our two major business segments for the years ended December 31, 2013, and 2012.
The information was derived from the internal financial reporting system that we use to monitor and manage our financial performance. GAAP guides financial accounting, but there is no authoritative guidance for management accounting the way we use our judgment and experience to make reporting decisions. Consequently, the line of business results we report may not be comparable to line of business results presented by other companies.
The selected financial data are based on internal accounting policies designed to compile results on a consistent basis and in a manner that reflects the underlying economics of the businesses. In accordance with our policies:
¿ |
Net interest income is determined by assigning a standard cost for funds used or a standard credit for funds provided based on their assumed maturity, prepayment and/or repricing characteristics. |
¿ |
Indirect expenses, such as computer servicing costs and corporate overhead, are allocated based on assumptions regarding the extent to which each line of business actually uses the services. |
¿ |
The consolidated provision for loan and lease losses is allocated among the lines of business primarily based on their actual net loan charge-offs, adjusted periodically for loan growth and changes in risk profile. The amount of the consolidated provision is based on the methodology that we use to estimate our consolidated ALLL. This methodology is described in Note 1 (Summary of Significant Accounting Policies) under the heading Allowance for Loan and Lease Losses. |
¿ |
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 2.2%. |
¿ |
Capital is assigned to each line of business based on regulatory requirements. |
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Developing and applying the methodologies that we use to allocate items among our lines of business is a dynamic process. Accordingly, financial results may be revised periodically to reflect enhanced alignment of expense base allocation drivers, changes in the risk profile of a particular business, or changes in our organizational structure.
(a) | Substantially all revenue generated by our major business segments is derived from clients that reside in the United States. Substantially all long-lived assets, including premises and equipment, capitalized software, and goodwill held by our major business segments, are located in the United States. |
(b) | From continuing operations. |
(c) | The number of average full-time equivalent employees has not been adjusted for discontinued operations. |
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Other Segments | Total Segments | Reconciling Items | Key | |||||||||||||||||||||||||||||||||||||||||||||
2013 | 2012 | 2011 | 2013 | 2012 | 2011 | 2013 | 2012 | 2011 | 2013 | 2012 | 2011 | |||||||||||||||||||||||||||||||||||||
$ | 166 | $ | 39 | $ 61 | $ | 2,347 | $ | 2,281 | $ | 2,274 | $ | 1 | $ | 7 | $ 18 | $ | 2,348 | $ | 2,288 | $ | 2,292 | |||||||||||||||||||||||||||
221 | 375 | 238 | 1,769 | 1,879 | 1,730 | (3 | ) | (23 | ) | (42) | 1,766 | 1,856 | 1,688 | |||||||||||||||||||||||||||||||||||
387 | 414 | 299 | 4,116 | 4,160 | 4,004 | (2 | ) | (16 | ) | (24 | ) | 4,114 | 4,144 | 3,980 | ||||||||||||||||||||||||||||||||||
(21 | ) | 55 | (5 | ) | 129 | 229 | (55 | ) | 1 | | (5 | ) | 130 | 229 | (60 | ) | ||||||||||||||||||||||||||||||||
6 | 9 | 18 | 125 | 119 | 145 | 134 | 131 | 125 | 259 | 250 | 270 | |||||||||||||||||||||||||||||||||||||
67 | 100 | 95 | 2,596 | 2,706 | 2,547 | (35 | ) | (138 | ) | (133 | ) | 2,561 | 2,568 | 2,414 | ||||||||||||||||||||||||||||||||||
335 | 250 | 191 | 1,266 | 1,106 | 1,367 | (102 | ) | (9 | ) | (11 | ) | 1,164 | 1,097 | 1,356 | ||||||||||||||||||||||||||||||||||
21 | (10 | ) | (30 | ) | 357 | 305 | 401 | (63 | ) | (50 | ) | (12 | ) | 294 | 255 | 389 | ||||||||||||||||||||||||||||||||
314 | 260 | 221 | 909 | 801 | 966 | (39 | ) | 41 | 1 | 870 | 842 | 967 | ||||||||||||||||||||||||||||||||||||
| | | | | | 40 | 23 | (35 | ) | 40 | 23 | (35 | ) | |||||||||||||||||||||||||||||||||||
314 | 260 | 221 | 909 | 801 | 966 | 1 | 64 | (34 | ) | 910 | 865 | 932 | ||||||||||||||||||||||||||||||||||||
| 4 | 12 | | 7 | 12 | | | | | 7 | 12 | |||||||||||||||||||||||||||||||||||||
$ | 314 | $ | 256 | $ | 209 | $ | 909 | $ | 794 | $ | 954 | $ | 1 | $ | 64 | $ | (34 | ) | $ | 910 | $ | 858 | $ | 920 | ||||||||||||||||||||||||
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$ | 3,242 | $ | 4,234 | $ | 5,544 | $ | 52,998 | $ | 50,313 | $ | 48,553 | $ | 56 | $ | 49 | $ | 53 | $ | 53,054 | $ | 50,362 | $ | 48,606 | |||||||||||||||||||||||||
27,676 | 27,630 | 31,629 | 83,665 | 80,229 | 80,952 | 512 | 613 | 1,097 | 84,177 | 80,842 | 82,049 | |||||||||||||||||||||||||||||||||||||
729 | 703 | 971 | 66,230 | 61,984 | 59,412 | (353 | ) | (149 | ) | (149 | ) | 65,877 | 61,835 | 59,263 | ||||||||||||||||||||||||||||||||||
| | | $ | 15 | $ | 328 | $ | 132 | $ | 73 | $ | 76 | $ | 79 | $ | 88 | $ | 404 | $ | 211 | ||||||||||||||||||||||||||||
$ | 20 | $ | 86 | $ | 129 | 168 | 345 | 541 | | | | 168 | 345 | 541 | ||||||||||||||||||||||||||||||||||
46.66 | % | 32.32 | % | 22.19 | % | 17.67 | % | 14.87 | % | 15.36 | % | (.76 | )% | .85 | % | .02 | % | 8.44 | % | 8.21 | % | 9.32 | % | |||||||||||||||||||||||||
46.66 | 32.32 | 22.19 | 17.67 | 14.87 | 15.36 | .02 | 1.33 | (.84 | ) | 8.83 | 8.44 | 8.98 | ||||||||||||||||||||||||||||||||||||
54 | 53 | 75 | 10,224 | 10,834 | 10,480 | 4,559 | 4,755 | 4,901 | 14,783 | 15,589 | 15,381 |
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24. Condensed Financial Information of the Parent Company
CONDENSED BALANCE SHEETS
December 31, in millions |
2013 | 2012 | ||||||
ASSETS |
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Cash and due from banks and interest-bearing deposits |
$ | 2,453 | $ | 2,206 | ||||
Loans and advances to: |
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Banks |
90 | 90 | ||||||
Nonbank subsidiaries |
482 | 619 | ||||||
Total loans and advances |
572 | 709 | ||||||
Investment in subsidiaries: |
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Banks |
9,310 | 9,155 | ||||||
Nonbank subsidiaries |
739 | 707 | ||||||
Total investment in subsidiaries |
10,049 | 9,862 | ||||||
Accrued income and other assets |
611 | 1,151 | ||||||
Total assets |
$ | 13,685 | $ | 13,928 | ||||
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LIABILITIES |
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Accrued expense and other liabilities |
$ | 431 | $ | 573 | ||||
Long-term debt due to: |
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Subsidiaries |
398 | 431 | ||||||
Unaffiliated companies |
2,553 | 2,653 | ||||||
Total long-term debt |
2,951 | 3,084 | ||||||
Total liabilities |
3,382 | 3,657 | ||||||
SHAREHOLDERS EQUITY (a) |
10,303 | 10,271 | ||||||
Total liabilities and shareholders equity |
$ | 13,685 | $ | 13,928 | ||||
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(a) | See Keys Consolidated Statements of Changes in Equity. |
CONDENSED STATEMENTS OF INCOME
Year ended December 31,
in millions | 2013 | 2012 | 2011 | |||||||||
INCOME |
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Dividends from subsidiaries: |
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Bank subsidiaries |
$ | 600 | $ | 1,775 | | |||||||
Nonbank subsidiaries |
| | $ | 345 | ||||||||
Interest income from subsidiaries |
26 | 36 | 67 | |||||||||
Other income |
15 | 66 | 18 | |||||||||
Total income |
641 | 1,877 | 430 | |||||||||
EXPENSE |
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Interest on long-term debt with subsidiary trusts |
14 | 29 | 53 | |||||||||
Interest on other borrowed funds |
59 | 86 | 89 | |||||||||
Personnel and other expense |
85 | 91 | 178 | |||||||||
Total expense |
158 | 206 | 320 | |||||||||
Income (loss) before income taxes and equity in net income (loss) less dividends from subsidiaries |
483 | 1,671 | 110 | |||||||||
Income tax (expense) benefit |
40 | 57 | 73 | |||||||||
Income (loss) before equity in net income (loss) less dividends from subsidiaries |
523 | 1,728 | 183 | |||||||||
Equity in net income (loss) less dividends from subsidiaries (a) |
387 | (863 | ) | 749 | ||||||||
NET INCOME (LOSS) |
910 | 865 | 932 | |||||||||
Less: Net income attributable to noncontrolling interests |
| 7 | 12 | |||||||||
NET INCOME (LOSS) ATTRIBUTABLE TO KEY |
$ | 910 | $ | 858 | $ | 920 | ||||||
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(a) | Includes results of discontinued operations described in Note 13 (Acquisitions and Discontinued Operations). |
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CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31,
in millions | 2013 | 2012 | 2011 | |||||||||
OPERATING ACTIVITIES |
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Net income (loss) attributable to Key |
$ | 910 | $ | 858 | $ 920 | |||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
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Deferred income taxes |
| 17 | (39 | ) | ||||||||
Equity in net (income) loss less dividends from subsidiaries (a) |
(387 | ) | 863 | (749 | ) | |||||||
Net (increase) decrease in other assets |
245 | (158 | ) | (130 | ) | |||||||
Net increase (decrease) in other liabilities |
103 | 85 | (43 | ) | ||||||||
Other operating activities, net |
20 | 13 | 83 | |||||||||
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES |
891 | 1,678 | 42 | |||||||||
INVESTING ACTIVITIES |
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Net (increase) decrease in interest-bearing deposits (b) |
2,115 | (2,048 | ) | 3,207 | ||||||||
Purchases of securities available for sale |
(14 | ) | (34 | ) | (18 | ) | ||||||
Proceeds from sales, prepayments and maturities of securities available for sale |
39 | 1 | 32 | |||||||||
Net (increase) decrease in loans and advances to subsidiaries |
(4 | ) | 36 | 939 | ||||||||
Net (increase) decrease in investments in subsidiaries |
| | 2 | |||||||||
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES |
2,136 | (2,045 | ) | 4,162 | ||||||||
FINANCING ACTIVITIES |
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Net proceeds from issuance of long-term debt |
750 | | 1,000 | |||||||||
Payments on long-term debt |
(750 | ) | (1,149 | ) | (1,043 | ) | ||||||
Repurchase of Treasury Shares |
(474 | ) | (251 | ) | | |||||||
Series B Preferred Stock TARP redemption |
| | (2,500 | ) | ||||||||
Repurchase of common share warrant |
| | (70 | ) | ||||||||
Net proceeds from the issuance of common shares and preferred stock |
26 | 2 | 604 | |||||||||
Cash dividends paid |
(217 | ) | (191 | ) | (164 | ) | ||||||
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES |
(665 | ) | (1,589 | ) | (2,173 | ) | ||||||
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (b) |
2,362 | (1,956 | ) | 2,031 | ||||||||
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR |
75 | 2,031 | | |||||||||
CASH AND DUE FROM BANKS AT END OF YEAR |
$ | 2,437 | $ | 75 | $ | 2,031 | ||||||
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(a) | Includes results of discontinued operations described in Note 13 (Acquisitions and Discontinued Operations). |
(b) | During 2011, we shut down the Eurosweep (interest-bearing) deposit account and moved the deposits to an interest-bearing account within KeyCorp. |
KeyCorp paid interest on borrowed funds totaling $76 million in 2013, $118 million in 2012, and $133 million in 2011.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, KeyCorp carried out an evaluation, under the supervision and with the participation of KeyCorps management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of KeyCorps disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act), to ensure that information required to be disclosed by KeyCorp in reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to KeyCorps management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. Based upon that evaluation, KeyCorps Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective, in all material respects, as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
No changes were made to KeyCorps internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, KeyCorps internal control over financial reporting. Managements Annual Report on Internal Control over Financial Reporting, the Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting, and the Report of Independent Registered Public Accounting Firm are included in Item 8 on pages 107, 108, and 109, respectively.
Not applicable.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is set forth in the following sections of KeyCorps Definitive Proxy Statement for the 2014 Annual Meeting of Shareholders to be held May 22, 2014 (the 2014 Proxy Statement) and these sections are incorporated herein by reference:
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Proposal One: Election of Directors |
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Executive Officers |
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Ownership of KeyCorp Equity Securities Section 16(a) Beneficial Ownership Reporting Compliance |
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Corporate Governance Documents Code of Ethics |
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Audit Matters Audit Committee Independence and Financial Experts |
KeyCorp expects to file the 2014 Proxy Statement with the SEC on or before April 4, 2014. Any amendment to, or waiver from a provision of, the Code of Ethics that applies to its Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer, or any other executive officer or director, will be promptly disclosed on its website (www.key.com/ir) as required by laws, rules and regulations of the SEC.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth in the following sections of the 2014 Proxy Statement and these sections are incorporated herein by reference:
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Compensation Discussion and Analysis |
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Compensation of Executive Officers and Directors |
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Compensation and Organization Committee Report |
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The Board of Directors and Its Committees Oversight of Compensation Related Risks |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is set forth in the section captioned Ownership of KeyCorp Equity Securities contained in the 2014 Proxy Statement, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is set forth in the following sections of the 2014 Proxy Statement and these sections are incorporated herein by reference:
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The Board of Directors and Its Committees Director Independence |
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The Board of Directors and Its Committees Related Party Transactions |
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is set forth in the sections captioned Audit Matters Ernst & Youngs Fees contained in the 2014 Proxy Statement, and is incorporated herein by reference.
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PART IV
ITEM 15. EXHIBITS | AND FINANCIAL STATEMENTS |
The following financial statements of KeyCorp and its subsidiaries, and the auditors report thereon are filed as part of this report under Item 8. Financial Statements and Supplementary Data:
(a) (2) Financial Statement Schedules
All financial statement schedules for KeyCorp and its subsidiaries have been included in this Form 10-K in the consolidated financial statements or the related footnotes, or they are either inapplicable or not required.
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10.11 | Letter Agreement between KeyBank National Association and Jeffrey B. Weeden, dated as of June 30, 2013, filed as Exhibit 10.3 to Form 10-Q for the quarter ended June 30, 2013.* | |
10.12 | Amended Employment Agreement between KeyCorp and Henry L. Meyer III, dated as of September 1, 2009, filed as Exhibit 10.1 to Form 8-K filed December 4, 2009.* | |
10.13 | Letter Agreement between Henry L. Meyer III and KeyCorp, dated as of March 24, 2011, filed as Exhibit 10.1 to Form 8-K filed March 25, 2011.* | |
10.14 | Form of Change of Control Agreement (Tier I) between KeyCorp and Certain Executive Officers of KeyCorp, dated as of March 8, 2012, filed as Exhibit 10.1 to Form 8-K filed March 8, 2012.* | |
10.15 | Form of Change of Control Agreement (Tier II Executives) between KeyCorp and Certain Executive Officers of KeyCorp, dated as of April 15, 2012, filed as Exhibit 10.1 to Form 10-Q for the quarter ended March 31, 2012.* | |
10.16 | KeyCorp Annual Incentive Plan (January 1, 2011 Restatement), filed as Exhibit 10.15 to Form 10-K for the year ended December 31, 2011.* | |
10.17 | KeyCorp 2011 Annual Performance Plan, filed as Appendix A to Schedule 14A filed on April 5, 2011.* | |
10.18 | Amended and Restated 1991 Equity Compensation Plan (amended as of March 13, 2003). | |
10.19 | KeyCorp 2004 Equity Compensation Plan filed as Exhibit 10.15 to Form 10-K for the year ended December 31, 2009.* | |
10.20 | KeyCorp 2010 Equity Compensation Plan filed as Appendix A to Schedule 14A filed on April 2, 2010.* | |
10.21 | Director Deferred Compensation Plan (May 18, 2000 Amendment and Restatement). | |
10.22 | Amendment to the Director Deferred Compensation Plan filed as Exhibit 10.19 to Form 10-K for the year ended December 31, 2009.* | |
10.23 | KeyCorp Amended and Restated Second Director Deferred Compensation Plan. | |
10.24 | KeyCorp Directors Deferred Share Plan (December 31, 2008). | |
10.25 | KeyCorp Directors Deferred Share Sub-Plan (September 18, 2013). | |
10.26 | KeyCorp Excess Cash Balance Pension Plan. | |
10.27 | First Amendment to the KeyCorp Excess Cash Balance Pension Plan. | |
10.28 | Second Amendment to the KeyCorp Excess Cash Balance Pension Plan. | |
10.29 | Restated Amendment to KeyCorp Excess Cash Balance Pension Plan filed as Exhibit 10.26 to Form 10-K for the year ended December 31, 2009.* | |
10.30 | Disability Amendment to KeyCorp Excess Cash Balance Pension Plan, filed as Exhibit 10.27 to Form 10-K for the year ended December 31, 2012.* | |
10.31 | KeyCorp Second Excess Cash Balance Pension Plan filed as Exhibit 10.28 to Form 10-K for the year ended December 31, 2009.* | |
10.32 | Trust Agreement for certain amounts that may become payable to certain executives and directors of KeyCorp, dated April 1, 1997, and amended as of August 25, 2003. | |
10.33 | KeyCorp 2013 Equity Compensation Plan, filed as Appendix A to Schedule 14A filed on March 29, 2013.* | |
10.34 | KeyCorp Deferred Savings Plan filed as Exhibit 10.48 to Form 10-K for the year ended December 31, 2009.* | |
10.35 | KeyCorp Deferred Equity Allocation Plan filed as Exhibit 10.47 to Form 10-K for the year ended December 31, 2009.* | |
12 | Computation of Consolidated Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends. | |
21 | Subsidiaries of the Registrant. | |
23 | Consent of Independent Registered Public Accounting Firm. | |
24 | Power of Attorney. | |
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101.INS | XBRL Instance Document. | |
101.SCH | XBRL Taxonomy Extension Schema Document. | |
101.CAL | XBRL Taxonomy Extension Label Calculation Linkbase Document. | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase. | |
101.DEF | XBRL Taxonomy Definition Linkbase. |
* | Incorporated by reference. Copies of these Exhibits have been filed with the SEC. Exhibits that are not incorporated by reference are filed with this report. Shareholders may obtain a copy of any exhibit, upon payment of reproduction costs, by writing KeyCorp Investor Relations, 127 Public Square, Mail Code OH-01-27-1113, Cleveland, OH 44114-1306. |
KeyCorp hereby agrees to furnish the SEC upon request, copies of instruments, including indentures, which define the rights of long-term debt security holders. All documents listed as Exhibits 10.1 through 10.34 constitute management contracts or compensatory plans or arrangements.
219
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the date indicated.
KEYCORP |
/s/ Donald R. Kimble |
Donald R. Kimble |
Chief Financial Officer (Principal Financial Officer) |
February 26, 2014 |
/s/ Robert L. Morris |
Robert L. Morris |
Chief Accounting Officer (Principal Accounting Officer) |
February 26, 2014 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
Signature | Title | |
*Beth E. Mooney |
Chairman, Chief Executive Officer (Principal Executive Officer), President and Director |
|
*Donald R. Kimble |
Chief Financial Officer (Principal Financial Officer) | |
*Robert L. Morris |
Chief Accounting Officer (Principal Accounting Officer) | |
*Edward P. Campbell |
Director | |
*Joseph A. Carrabba |
Director | |
*Charles P. Cooley |
Director | |
*Alexander M. Cutler |
Director | |
*H. James Dallas |
Director | |
*Elizabeth R. Gile |
Director | |
*Ruth Ann M. Gillis |
Director | |
*William G. Gisel, Jr. |
Director | |
*Richard J. Hipple |
Director | |
*Kristen L. Manos |
Director | |
*Demos Pameros |
Director | |
*Barbara R. Snyder |
Director |
/s/ Paul N. Harris |
* By Paul N. Harris, attorney-in-fact |
February 26, 2014 |
220
EXHIBIT 10.5
PERFORMANCE SHARES AWARD AGREEMENT
KeyCorp grants to the Participant named below, in accordance with the terms, and subject to the conditions, of the KeyCorp 2013 Equity Compensation Plan (the Plan ), this Performance Shares Award Agreement (the Award Agreement ) and the attached Acceptance Agreement, an award of the target number of performance shares ( Performance Shares or Award ), on the Date of Grant, each as set forth below. Capitalized terms used herein without definition shall have the meanings assigned to them in the Plan.
Each Performance Share represents the contingent right to receive one Common Share, subject to the terms and conditions set forth in the Plan, this Award Agreement and the Acceptance Agreement. The Participants right to receive payment of all, a portion, or a multiple of the Performance Shares shall be contingent upon the level of achievement of the Performance Goals and the Participants continued employment, each as provided herein, in all cases subject to the other terms and conditions of this Award Agreement, the Plan and the Acceptance Agreement, including, if the Participant is a 162(m) Covered Employee (as defined in Appendix A ) the additional terms and conditions set forth in Appendix A .
Name of Participant: |
[] |
Target Number of Performance Shares: |
[] |
Date of Grant: |
February 17, 2014 |
Vesting Date: |
February 17, 2017, subject to your continued employment on this date and the achievement of the Performance Goals set forth below (except as otherwise provided in this Award Agreement) |
Performance Period: |
January 1, 2014 through December 31, 2016 |
Performance Goals: |
The Participant may vest in between 0% and 150% of the target number of Performance Shares subject to this Award based on the weighted level of achievement of the following Performance Goals during the Performance Period: |
Performance Goals |
Other Factors (Vesting Reduction Only) |
|||||||||
Performance Metric |
Weight | Threshold | Target | Maximum | ||||||
25%
Weighted Vesting |
100%
Weighted Vesting |
150%
Weighted Vesting |
||||||||
Total Shareholder Return vs. Peers |
25% | 25% ile | 50% ile | 75% ile | ERM Dashboard | |||||
Return on Assets vs. Peers |
25% | 25% ile | 50% ile | 75% ile | Execution of Strategic Priorities | |||||
Cumulative Earnings Per Share |
50% | $2.55 | $3.43 | $4.30 | Other factors, as appropriate |
Straight line interpolation applies for performance between Threshold and Maximum levels.
The Committee shall determine the level of achievement of the Performance Goals within two and one-half months after the end of the Performance Period in accordance with the provisions of this Award Agreement, the Plan and the Acceptance Agreement. Notwithstanding any other provision of the Award Agreement, the Committee may reduce the number of Performance Shares otherwise vesting based on the Other Factors set forth above, as determined by the Committee in its sole discretion.
For purposes of this Award Agreement:
Total Shareholder Return vs. Peers: |
KeyCorps percentile ranking among the companies in the Peer Group (as defined below) for total shareholder return for the Performance Period, calculated based on the average closing share price over the last 20 trading days in 2013 |
compared to the average closing share price over the last 20 days in 2016 plus investment of dividends paid during the Performance Period. |
Return on Assets vs. Peers: |
KeyCorps percentile ranking among the companies in the Peer Group (as defined below) for average annual return on assets during the three fiscal years of (or ending during) the Performance Period, with return on assets calculated as net income from continuing operations divided by average assets from continuing operations. |
Cumulative Earnings Per Share: |
The sum of KeyCorps annual earnings per share for the three fiscal years in the Performance Period, as reported in the Form 10-Ks filed by KeyCorp for such fiscal years. |
Peer Group: |
The companies in the S&P Banks Index on the Date of Grant, excluding Wells Fargo & Company and Hudson City Bancorp, with such adjustments to the composition of the Peer Group as may be determined by the Committee, in its sole discretion. The Committee reviews the companies in the Peer Group annually. |
The Participant must accept the Award online in accordance with the procedures established by KeyCorp and the Award administrator or this Award Agreement may be cancelled by KeyCorp, in its sole discretion. By accepting the Award in accordance with these procedures, the Participant acknowledges that:
| This Award is subject to the KeyCorp Incentive Compensation Program and Policy, as amended from time to time. The Participant understands and agrees that the Award is subject to risk adjustment in accordance with the procedures set forth in the Incentive Compensation Program and Policy. These procedures permit Key, in its sole discretion, to decrease, forfeit, or initiate a clawback, of all or any part of the Award under certain circumstances, including in the event that the Participant receives a Does Not Meet risk rating as part of his or her annual performance review, and/or in the event that the Participants business unit experiences negative pre-provision net revenue (before allocated costs) or significant credit, market or operational losses. If a significant risk event occurs, whether at the individual or business level, a root cause analysis may be conducted, which may result in a risk adjustment of the Award. |
| The Participant understands that as a condition to receiving the Award, the Participant must agree to be bound by and comply with the terms and conditions of the Plan, the Award Agreement and related Acceptance Agreement. As soon as the Participant accepts the Award, the terms and conditions of the Award Agreement and Acceptance Agreement will constitute a legal contract that will bind both the Participant and KeyCorp. |
Additional Terms
1. Effect of Termination .
(a) In General . The Award shall be forfeited automatically without further action or notice if the Participant ceases to be continuously employed by Key prior to the Vesting Date, except as otherwise provided in this Section 1. For purposes of this Section 1, the continuous employment of the Participant shall not be deemed to have been interrupted, and the Participant shall not be deemed to have ceased to be an employee of Key, by reason of the transfer of employment among KeyCorp and its affiliates.
(b) Certain Terminations . Notwithstanding Section 1(a), if, prior to the Vesting Date, the Participants continuous employment is terminated as a result of the Participants death, Disability, Termination Under Limited Circumstances or Retirement, the Participant will vest in a pro rata portion of the Performance Shares.
The pro rata vesting provided for under this Section 1(b) shall be determined by multiplying the target number of Performance Shares granted under this Agreement by a fraction, the numerator of which shall be the
number of full months of Participants continuous employment from the Date of Grant through the date of termination and the denominator of which shall be 36, and adjusting this number at the end of the Performance Period based on the level of achievement of the Performance Goals (and the satisfaction of the other terms and conditions of this Award Agreement, the Plan and the Acceptance Agreement, including, as applicable, the additional terms and conditions of Appendix A ).
For purposes of this Award Agreement, a Participants Retirement shall mean the Participants Voluntary Resignation on or after attaining age 55 and completion of at least 5 years of service (inclusive of termination after attaining age 60 and completion of at least 10 years of service).
(c) Certain Terminations Within Two Years After a Change of Control . Notwithstanding the foregoing provisions of Section 1, if, prior to the Vesting Date, the Participants continuous employment with Key is terminated within two years following the date of a Change of Control for any reason other than a Voluntary Resignation (excluding a Voluntary Resignation constituting a Retirement, as defined above) or a Termination for Cause, the target number of Performance Shares (or if such Change of Control and termination of employment occurs after the end of the Performance Period, the number of Performance Shares earned under this Award Agreement based upon achievement of the Performance Goals) shall become immediately vested (without pro ration).
2. Payment of Vested Performance Shares . Except as otherwise provided in Sections 1(b) or 1(c), any Performance Shares earned pursuant to this Award Agreement shall become vested only if the Participant remains continuously employed by Key from the Date of Grant through the Vesting Date. Payment of any earned and vested Performance Shares shall be made in the form of whole Common Shares, rounded down to the nearest Common Share, for each vested Performance Share. Payment shall occur as soon as practicable following the vesting of the Performance Shares but in no event later than two and one-half months after the Vesting Date.
3. Dividend Equivalents . Dividend equivalents shall be credited on the target number of Performance Shares which shall be deemed reinvested and be subject to the same terms and restrictions otherwise applicable to the Performance Shares (including but not limited to vesting requirements) under this Award Agreement, the Plan and the Acceptance Agreement.
4. Harmful Activity . Notwithstanding any other provision of this Award Agreement to the contrary, if the Participant engages in any Harmful Activity prior to or within twelve months after the Participants termination of employment with Key, then the Performance Shares shall be immediately forfeited without further action or notice, and any Common Shares delivered in payment of the Award within one year prior to the Participants termination of employment, and any Profits realized by the Participant from the sale of such Common Shares, shall become immediately due and payable to KeyCorp on KeyCorps demand. This Section 4 shall survive the termination of Participants employment.
5. KeyCorps Reservation of Rights . As a condition of receiving this Award, the Participant acknowledges and agrees that Key intends to comply with the requirements of (a) the Dodd-Frank Wall Street Reform and Consumer Protection Act (including clawback provisions), as the same may be amended from time to time; (b) the banking regulatory agencies Guidance on Sound Incentive Compensation Policies ; and (c) KeyCorps risk requirements and policies. As a condition of receiving this Award, the Participant understands and agrees that KeyCorp may, in its sole discretion, (x) decrease or cause the forfeiture of all or any part of this Award, (y) initiate a clawback of all or any part of this Award, and/or (z) demand the Participants repayment to KeyCorp of any Common Shares paid to the Participant under this Award, or the Profits realized from the sale of such Common Shares, if KeyCorp determines that such action is necessary or desirable.
6. Relation to Other Benefits . Any economic or other benefit to the Participant under this Award Agreement shall not be taken into account in determining any benefits to which the Participant may be entitled under any profit-sharing, retirement or other benefit or compensation plan maintained by Key and shall not affect the amount of any life insurance coverage available to any beneficiary under any life insurance plan covering employees of Key.
7. KeyCorp Stock Ownership Guidelines . If the Participant is subject to and has not met the KeyCorp Stock Ownership Guidelines, the Participant may not sell or otherwise transfer the Common Shares provided upon vesting of the Award (if any) until and unless the Participant meets the Stock Ownership Guidelines or terminates employment with Key; provided, however, that notwithstanding the foregoing, the Participant may sell the number of Common Shares necessary to satisfy any withholding tax obligation that may arise in connection with the vesting of this Award even the Participant has not met the Stock Ownership Guidelines.
8. Taxes and Withholding . To the extent that Key is required to withhold any federal, state, local or other taxes in connection with the delivery of Common Shares under this Award Agreement, then Key shall retain a number of Common Shares otherwise deliverable hereunder with a value equal to the required withholding (based on the Fair Market Value of the Common Shares on the date of delivery); provided that in no event shall the value of the Common Shares retained exceed the minimum amount of taxes required to be withheld or such other amount that will not result in a negative accounting impact. To the extent that Key is required to withhold any federal, state, local or other taxes at any time other than upon delivery of Common Shares under this Award Agreement, then Key shall have the right in its sole discretion to (a) require the Participant to pay or provide for payment of the required tax withholding, or (b) deduct the required tax withholding from any other compensation payable in cash to the Participant.
9. Entire Agreement; Amendments . This Award Agreement, along with the Plan and the related Acceptance Agreement, contains the entire agreement and understanding of the parties with respect to the subject matter contained therein, and supersedes all prior written or oral communications, representations and negotiations in respect thereto. KeyCorp may modify or amend this Award Agreement at any time upon written notice to the Participant, provided that KeyCorp may not amend this Award Agreement in a manner adverse to the interests of the Participant without the Participants consent. Notwithstanding any other provision of this Award Agreement, if the Committee determines that a change in the business, operations, corporate structure or capital structure of KeyCorp, the manner in which it conducts business or other events or circumstances render the Performance Goals to be unsuitable, the Committee may modify the Performance Goals and/or the related threshold, target and maximum levels of achievement, in whole or in part, as the Committee deems appropriate. In the event of any inconsistency between the provisions of this Award Agreement or the related Acceptance Agreement, on the one hand, and the Plan, on the other, the Plan shall govern.
10. Administration . KeyCorp shall have the right, in accordance with the Plan, to determine any questions which arise in connection with the Award. All such determinations and decisions shall be final, conclusive and binding on all persons, including Key, the Participant and the Participants estate and beneficiaries.
11. Successors and Assigns . Without limiting Section 14.1 of the Plan, the provisions of this Award Agreement shall inure to the benefit of, and be binding upon, the successors, administrators, heirs, legal representatives and assigns of the Participant, and the successors and assigns of KeyCorp.
12. Compliance with Section 409A of the Internal Revenue Code . To the extent applicable, it is intended that this Award comply with the provisions of Section 409A of the Code ( Section 409A ). The Award shall accordingly be administered in a manner consistent with this intent, and any provision that would cause the Award to fail to satisfy Section 409A shall have no force and effect until amended to comply with Section 409A. In particular, to the extent that the Participants right to receive payment under the Award becomes vested and the event triggering the Participants right to payment is the Participants termination of employment, then notwithstanding anything herein to the contrary, payment will be made to the Participant, to the extent necessary to comply with Section 409A, on the earlier of (a) the Participants separation from service (determined in accordance with Section 409A); provided, however, that if the Participant is a specified employee (determined in accordance with KeyCorps policies), the date of payment shall not occur until the first business day of the seventh month following the date of the Participants separation from service with Key, or (b) the Participants death. Further, to the extent necessary to comply with Section 409A, a transaction shall be considered a Change of Control only if it also qualifies as a change in the ownership a change in the effective control or a change in the ownership of a substantial portion of the assets of KeyCorp within the meaning of Section 409A.
APPENDIX A
ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO 162(m) COVERED EMPLOYEES
This Appendix A sets forth certain additional terms and conditions which shall apply to the Participants Award if and only if the Participant is a 162(m) Covered Employee (as defined in Section A, below). This Appendix A is intended to provide for the qualification of a 162(m) Covered Employees Award as performance-based compensation within the meaning of Section 162(m)(4)(C) of the Code, and this Appendix A shall be interpreted and administered in accordance with such intent.
A. Notwithstanding any other provision of the Award Agreement, if the Participant is a 162(m) Covered Employee, then the Award shall be forfeited automatically without further action or notice if the Initial Performance Objective (as defined below) is not achieved, except as otherwise provided in Section 1(c) of the Award Agreement. For purposes of the Award Agreement, a 162(m) Covered Employee means an individual who is a covered employee as defined in Section 162(m)(3) of the Code (and applicable Treasury Department regulations and other guidance published thereunder) for the taxable year in which KeyCorp would be entitled to deduct the payment of the Performance Shares for federal income tax purposes (disregarding any limitations on deductibility under Sections 162(m) or 280G of the Code).
B. For purposes of this Award Agreement, the Initial Performance Objective shall be achieved if and only if the ratio of KeyCorps average Pre-Provision Net Revenue for the three fiscal years in the Performance Period to KeyCorps Average Assets for the three fiscal years in the Performance Period equals or exceeds seventy-five percent (75%) of the ratio of KeyCorps average Pre-Provision Net Revenue for the three fiscal years in the period from January 1, 2011 through December 31, 2013 to KeyCorps Average Assets for the three fiscal years in the period from January 1, 2011 through December 31, 2013. For purposes of this Award Agreement, Pre-Provision Net Revenue shall mean KeyCorps pre-provision net revenue from continuing operations for the relevant fiscal years, and Average Assets shall mean KeyCorps average assets of continuing operations for the relevant fiscal years, each as reported in the Form 10-Ks filed by KeyCorp for the relevant fiscal years. If the Participant is a 162(m) Covered Employee, KeyCorps achievement of the Initial Performance Objective shall be certified by the Committee in writing within two and one-half months after the end of the Performance Period and prior to the payment of any Performance Shares under the Award Agreement.
C. Notwithstanding any other provision of the Award Agreement, if the Participant is a 162(m) Covered Employee, then subject to potential reduction by the Committee pursuant to paragraph D below, if the Initial Performance Objective is achieved, then KeyCorp shall credit to the Participants account a number of Performance Shares equal to 150% of the target number of Performance Shares, or such lesser number of Performance Shares as may be determined by the Committee, in its discretion, in accordance with paragraph D below.
D. Notwithstanding paragraph C above, if the Participant is a 162(m) Covered Employee, the actual number of Performance Shares credited to the Participants account pursuant to the Award Agreement may be reduced by the Committee in its discretion below the number of Performance Shares, if any, earned based upon achievement of the Initial Performance Objective (including a reduction to zero). It is the current intention of the Committee that any such reduction shall be made based on the level of achievement of the performance goals described in the Award Agreement, as determined by the Committee.
ACCEPTANCE AGREEMENT
I acknowledge receipt of the attached Award and in consideration thereof, I accept such Award subject to the terms and conditions of the Plan, the Award Agreement, and the restrictions that are set forth in this Acceptance Agreement.
I also understand and agree that the restrictions set forth in this Acceptance Agreement are (i) in addition to, and do not in any way limit or vary the restrictions that are contained in any other agreement, plan, policy, or practice that are applicable to me as an employee of Key, and (ii) binding upon me regardless of whether I vest, sell, transfer, pledge, hypothecate, or otherwise dispose of the Award or any of the Common Shares to be paid to me pursuant to the Award.
1. I recognize the importance of preserving the confidentiality of Non-Public Information of Key, and I acknowledge and agree that: (a) during my employment with Key, I will acquire, reproduce, and use such Non-Public Information only to the extent reasonably necessary for the proper performance of my duties; (b) both during and after my employment with Key, I will not use, publish, sell, trade or otherwise disclose such Non-Public Information; and (c) upon the termination of my employment with Key, I will immediately return to Key all documents, data, and things in my possession or to which I have access that involve such Non-Public Information. I also agree to enter into and to execute nondisclosure agreements in favor of Key and others doing business with Key with whom Key has a confidential relationship.
2. I acknowledge and agree that the duties of my position at Key may include the development of Intellectual Property, and that any Intellectual Property which I create with any of Keys resources or assistance, or which pertains to the business of Key is the property of Key. I hereby agree and I hereby assign to Key all right, title, and interest in and absolute title to such Intellectual Property, including, without limitation, copyrights, trademarks, service marks, and patents in or to (or associated with) such Intellectual Property and I agree that I will execute all patent applications and assignments thereof on Keys behalf without additional compensation.
3. Except in the proper performance of my duties for Key, I acknowledge and agree that from the date hereof through a period of one (1) year after the termination of my employment with Key for any reason, I will not, directly or indirectly, for myself or on behalf of any other person or entity, hire or solicit or entice for employment any Key Employee, without the written consent of Key (which consent Key may grant or withhold in its discretion). Key Employees shall include (i) all current Key employees, and (ii) all persons who were employed by Key at any time during the six (6) month period prior to my termination from Key.
4. (a) Except in the proper performance of my duties for Key, I acknowledge and agree that from the date hereof through a period of one (1) year after the termination of my employment with Key for any reason, I will not, directly or indirectly, for myself or on behalf of any other person or entity, call upon, solicit, or do business with any Key customer or potential customer with whom I interacted, became acquainted, or learned of through access to information while employed at Key, without the written consent of Key (which consent Key may grant or withhold in its discretion).
(b) In the event that my employment with Key is terminated as a result of a Termination Under Limited Circumstances, the restrictions in paragraph 4(a) of this Acceptance Agreement shall become inapplicable to me; however, the restrictions in paragraphs 1, 2, and 3 of this Acceptance Agreement shall remain in full force and effect.
5. The aforementioned restrictions in paragraphs 1, 2, 3 and 4(a) shall not apply in the event that, within the 2-year period commencing on a Change of Control: (i) my employment with Key is terminated as a result of a Termination Under Limited Circumstances, or (ii) I terminate employment with Key after a relocation of my principal place of employment more than 35 miles from my principal place of employment immediately prior to the Change of Control, or after a reduction in my base salary after a Change of Control.
6. I agree that the Plan, the Award Agreement and this Acceptance Agreement will be governed by Ohio law without regard to conflicts of laws principles, and that if any term, condition, clause or provision of the Plan, the
Award Agreement or this Acceptance Agreement is determined by a Court of competent jurisdiction to be void or invalid at law, then only that term, condition, clause or provision determined to be void or invalid shall be stricken, and the remainder of the Plan, the Award Agreement and this Acceptance Agreement shall remain in full force and effect in all other aspects.
I also understand and agree that if I engage in any activity that is in violation of the Plan, the Award Agreement or this Acceptance Agreement, such conduct may cause serious damage and irreparable injury to Key, and Key at its election may terminate my employment (if I am still employed), seek monetary damages and attorney fees, and injunctive relief without the necessity of posting bond, as well as any and all other equitable relief to which it may be entitled under the law, the Plan, the Award Agreement and this Acceptance Agreement.
* * * * *
EXHIBIT 10.18
AMENDED AND RESTATED
1991 EQUITY COMPENSATION PLAN
(Amended as of March 13, 2003)
1. Purpose. The KeyCorp Amended and Restated 1991 Equity Compensation Plan is intended to promote the interests of the Corporation and its shareholders by providing equity-based incentives for effective service and high levels of performance to Employees selected by the Committee. To achieve these purposes, the Corporation may grant Awards of Options, Stock Appreciation Rights, Limited Stock Appreciation Rights, Restricted Stock, and Performance Shares to selected Employees, all in accordance with the terms and conditions hereinafter set forth.
2. Definitions.
2.1 1934 Act. The term 1934 Act shall mean the Securities Exchange Act of 1934, as amended.
2.2 Acquisition Price. The term Acquisition Price with respect to Restricted Stock shall mean such amount, if any, required by applicable law and as may be specified by the Committee in the Award Instrument with respect to that Restricted Stock as the consideration to be paid by the Employee for that Restricted Stock.
2.3 Award. The term Award shall mean an award granted under the Plan of an Option, of Stock Appreciation Rights, of Limited Stock Appreciation Rights, of Restricted Stock, or of Performance Shares.
2.4 Award Instrument. The term Award Instrument shall mean a written instrument evidencing an Award in such form and with such provisions as the Committee may prescribe, including, without limitation, an agreement to be executed by the Employee and the Corporation, a certificate issued by the Corporation, or a letter executed by the Committee or its designee. Acceptance of the Award Instrument by an Employee constitutes agreement to the terms of the Award evidenced thereby.
2.5 Change of Control. A Change of Control shall be deemed to have occurred if, at any time after the date of the grant of the relevant Award, there is a Change of Control under any of clauses (a), (b), (c), or (d) below. For these purposes, the Corporation will be deemed to have become a subsidiary of another corporation if any other corporation (which term shall include, in addition to a corporation, a limited liability company, partnership, trust, or other organization) owns, directly or indirectly, 50 percent or more of the total combined outstanding voting power of all classes of stock of the Corporation or any successor to the Corporation.
(a) | A Change of Control will have occurred under this clause (a) if the Corporation is a party to a transaction pursuant to which the Corporation is merged with or into, or is consolidated with, or becomes the subsidiary of another corporation and either |
(i) | immediately after giving effect to that transaction, less than 65% of the then outstanding voting securities of the surviving or resulting corporation or (if the Corporation becomes a subsidiary in the transaction) of the ultimate parent of the Corporation represent or were issued in exchange for voting securities of the Corporation outstanding immediately prior to the transaction, or |
(ii) | immediately after giving effect to that transaction, individuals who were directors of the Corporation on the day before the first public announcement of (A) the pendency of the transaction or (B) the intention of any person or entity to cause the transaction to occur, cease for any reason to constitute at least 51% of the directors of the surviving or resulting corporation or (if the Corporation becomes a subsidiary in the transaction) of the ultimate parent of the Corporation. |
(b) |
A Change of Control will have occurred under this clause (b) if a tender or exchange offer shall be made and consummated for 35% or more of the outstanding voting stock of the Corporation or any person (as the term person is used in Section 13(d) and Section 14(d)(2) of the 1934 Act) is or |
becomes the beneficial owner of 35% or more of the outstanding voting stock of the Corporation or there is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as adopted under the 1934 Act, disclosing the acquisition of 35% or more of the outstanding voting stock of the Corporation in a transaction or series of transactions by any person (as defined earlier in this clause (b)). |
(c) | A Change of Control will have occurred under this clause (c) if either |
(i) | without the prior approval, solicitation, invitation, or recommendation of the Corporations Board of Directors any person or entity makes a public announcement of a bona fide intention (A) to engage in a transaction with the Corporation that, if consummated, would result in a Change Event (as defined below in this clause (c)), or (B) to solicit (as defined in Rule 14a-1 under the 1934 Act) proxies in connection with a proposal that is not approved or recommended by the Corporations Board of Directors, or |
(ii) | any person or entity publicly announces a bona fide intention to engage in an election contest relating to the election of directors of the Corporation (pursuant to Regulation 14A, including Rule 14a-11, under the 1934 Act), |
and, at any time within the 24 month period immediately following the date of the announcement of that intention, individuals who, on the day before that announcement, constituted the directors of the Corporation (the Incumbent Directors) cease for any reason to constitute at least a majority thereof unless both (A) the election, or the nomination for election by the Corporations shareholders, of each new director was approved by a vote of at least two-thirds of the Incumbent Directors in office at the time of the election or nomination for election of such new director, and (B) prior to the time that the Incumbent Directors no longer constitute a majority of the Board of Directors, the Incumbent Directors then in office, by a vote of at least 75% of their number, reasonably determine in good faith that the change in Board membership that has occurred before the date of that determination and that is anticipated to thereafter occur within the balance of the 24 month period to cause the Incumbent Directors to no longer be a majority of the Board of Directors was not caused by or attributable to, in whole or in any significant part, directly or indirectly, proximately or remotely, any event under subclause (i) or (ii) of this clause (c).
For purposes of this clause (c), the term Change Event shall mean any of the events described in the following subclauses (x), (y), or (z) of this clause (c):
(x) | A tender or exchange offer shall be made for 25% or more of the outstanding voting stock of the Corporation or any person (as the term person is used in Section 13(d) and Section 14(d)(2) of the 1934 Act) is or becomes the beneficial owner of 25% or more of the outstanding voting stock of the Corporation or there is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form, or report), each as adopted under the 1934 Act, disclosing the acquisition of 25% or more of the outstanding voting stock of the Corporation in a transaction or series of transactions by any person (as defined earlier in this subclause (x)). |
(y) | The Corporation is a party to a transaction pursuant to which the Corporation is merged with or into, or is consolidated with, or becomes the subsidiary of another corporation and, after giving effect to such transaction, less than 50% of the then outstanding voting securities of the surviving or resulting corporation or (if the Corporation becomes a subsidiary in the transaction) of the ultimate parent of the Corporation represent or were issued in exchange for voting securities of the Corporation outstanding immediately prior to such transaction or less than 51% of the directors of the surviving or resulting corporation or (if the Corporation becomes a subsidiary in the transaction) of the ultimate parent of the Corporation were directors of the Corporation immediately prior to such transaction. |
(z) | There is a sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets of the Corporation. |
(d) | A Change of Control will have occurred under this clause (d) if there is a sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Corporation. |
2.6 Committee. The term Committee shall mean a committee appointed by the Board of Directors of the Corporation to administer the Plan. The Committee shall be composed of not less than three directors of the Corporation. The Board of Directors may also appoint one or more directors as alternate members of the Committee. No officer or Employee of the Corporation or of any Subsidiary shall be a member or alternate member of the Committee. The Committee shall at all times be so comprised (a) as to satisfy the disinterested administration standard contained in Rule 16b-3, if required to qualify for the Rule 16b-3 Exemption and (b) as to satisfy the outside director standard under Section 162(m) of the Internal Revenue Code of 1986, as amended, if required to qualify compensation paid under one or more of the provisions of the Plan as performance-based compensation within the meaning of that section.
2.7 Common Shares. The term Common Shares shall mean common shares of the Corporation, with a par value of $1 each.
2.8 Corporation. The term Corporation shall mean KeyCorp and its successors, including the surviving or resulting corporation of any merger of KeyCorp with or into, or any consolidation of KeyCorp with, any other corporation or corporations.
2.9 Disability. The term Disability with respect to an Employee shall mean physical or mental impairment which entitles the Employee to receive disability payments under any long-term disability plan maintained by the Corporation.
2.10 Employee. The term Employee shall mean any individual employed by the Corporation or by any Subsidiary and shall include officers as well as all other employees of the Corporation or of any Subsidiary (including employees who are members of the Board of Directors of the Corporation or any Subsidiary).
2.11 Employment Termination Date. The term Employment Termination Date with respect to an Employee shall mean the first date on which the Employee is no longer employed by the Corporation or any Subsidiary.
2.12 Exercise Price. The term Exercise Price with respect to an Option shall mean the price specified in the Option at which the Common Shares subject to the Option may be purchased by the holder of the Option.
2.13 Fair Market Value. Except as otherwise determined by the Committee at the time of the grant of an Award, the term Fair Market Value with respect to Common Shares shall mean: (a) if the Common Shares are traded on a national exchange, the mean between the high and low sales price per Common Share on that national exchange on the date for which the determination of fair market value is made or, if there are no sales of Common Shares on that date, then on the next preceding date on which there were any sales of Common Shares, or (b) if the Common Shares are not traded on a national exchange, the mean between the high and low sales price per Common Share in the over-the-counter market, National Market System, as reported by the National Quotations Bureau, Inc. and NASDAQ on the date for which the determination of fair market value is made or, if there are no sales of Common Shares on that date, then on the next preceding date on which there were any sales of Common Shares.
2.14 Incentive Stock Option. The term Incentive Stock Option shall mean an Option intended by the Committee to qualify as an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended.
2.15 Limited Stock Appreciation Right. The term Limited Stock Appreciation Right or Limited SAR shall mean an Award granted to an Employee with respect to all or any part of any Option, that entitles the holder thereof to receive from the Corporation, upon exercise of the Limited SAR and surrender of the related Option, or any portion of the Limited SAR and the related Option, an amount equal to (unless the Committee specifies a lesser amount at the time of the grant of the Award):
(a) |
in the case of a Limited SAR granted with respect to an Incentive Stock Option, 100% of the excess, if any, measured at the time of the exercise of the Limited SAR, of (i) the Fair Market Value of the |
Common Shares subject to the Incentive Stock Option with respect to which the Limited SAR is exercised over (ii) the Exercise Price of those Common Shares under the Incentive Stock Option, or |
(b) | in the case of a Limited SAR granted with respect to a Nonqualified Option, 100% of the highest of: |
(i) | the excess, measured at the time of the exercise of the Limited SAR, of (A) the Fair Market Value of the Common Shares subject to the Nonqualified Option with respect to which the Limited SAR is exercised over (B) the Exercise Price of those Common Shares under the Nonqualified Option, |
(ii) | the excess of (A) the highest gross price (before brokerage commissions and soliciting dealers fees) paid or to be paid for a Common Share (whether in cash or in property and whether by way of exchange, conversion, distribution upon liquidation, or otherwise) in connection with any Change of Control multiplied by the number of Common Shares subject to the Nonqualified Option with respect to which the Limited SAR is exercised over (B) the Exercise Price of those Common Shares under the Nonqualified Option, or |
(iii) | the excess of (A) the highest Fair Market Value of the Common Shares subject to the Nonqualified Option with respect to which the Limited SAR is exercised on any one day during the period beginning on the sixtieth day prior to the date on which the Limited SAR is exercised multiplied by the number of Common Shares subject to the Nonqualified Option with respect to which the Limited SAR is exercised over (B) the Exercise Price of those Common Shares under the Nonqualified Option. |
2.16 Nonqualified Option. The term Nonqualified Option shall mean an Option intended by the Committee not to qualify as an incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended.
2.17 Option. The term Option , (a) when used otherwise than in connection with the term Stock Appreciation Right or Limited Stock Appreciation Right, shall mean an Award entitling the holder thereof to purchase a specified number of Common Shares at a specified price during a specified period of time, and (b) when used in connection with the term Stock Appreciation Right or Limited Stock Appreciation Right, shall mean (i) any such Award or (ii) any award under any other plan maintained or assumed by the Corporation entitling the holder thereof to purchase a specified number of Common Shares at a specified price during a specified period of time.
2.18 Option Expiration Date. The term Option Expiration Date with respect to any Option shall mean the date selected by the Committee after which, except as provided in Section 10.4 in the case of the death of the Employee to whom the option was granted, the Option may not be exercised.
2.19 Performance Goal. The term Performance Goal shall mean a performance goal specified by the Committee in connection with the potential grant of Performance Shares and may include, without limitation, goals based upon cumulative earnings per Common Share, return on investment, return on shareholders equity, or achievement of any other goals, whether or not readily expressed in financial terms, that are related to the performance by the Corporation, by any Subsidiary, or by any Employee or group of Employees in connection with services performed by that Employee or those Employees for the Corporation, a Subsidiary, or any one or more subunits of the Corporation or of any Subsidiary.
2.20 Performance Period. The term Performance Period shall mean such one or more periods of time, which may be of varying and overlapping durations, as the Committee may select, over which the attainment of one or more Performance Goals will be relevant in connection with one or more Awards of Performance Shares.
2.21 Performance Shares. The term Performance Shares shall mean an Award denominated in Common Shares and contingent upon attainment of one or more Performance Goals by the Corporation or a Subsidiary or any subunit of the Corporation or of any Subsidiary over a Performance Period.
2.22 Plan. The term Plan shall mean this KeyCorp Amended and Restated 1991 Equity Compensation Plan as from time to time hereafter amended in accordance with Section 20.
2.23 Restricted Stock. The term Restricted Stock shall mean Common Shares of the Corporation delivered to an Employee pursuant to an Award subject to such restrictions, conditions and contingencies as the Committee may provide in the relevant Award Instrument, including (a) the restriction that the Employee not sell, transfer, otherwise dispose of, or pledge or otherwise hypothecate the Restricted Stock during the applicable Restriction Period, (b) the requirement that, subject to the provisions of Section 10, if the Employees employment terminates so that the Employee is no longer employed by the Corporation or any Subsidiary before the end of the applicable Restriction Period, the Employee will offer to sell to the Corporation at the Acquisition Price each Common Share of Restricted Stock held by the Employee at the Employment Termination Date with respect to which, as of that date, any restrictions, conditions, or contingencies have not lapsed, and (c) such other restrictions, conditions, and contingencies, if any, as the Committee may provide in the Award Instrument with respect to that Restricted Stock.
2.24 Restriction Period. The term Restriction Period with respect to an Award of Restricted Stock shall mean the period selected by the Committee and specified in the Award Instrument with respect to that Restricted Stock during which the Employee may not sell, transfer, otherwise dispose of, or pledge or otherwise hypothecate that Restricted Stock.
2.25 Rule 16b-3. Term Rule 16b-3 shall mean Rule 16b-3 or any rule promulgated in replacement thereof or in substitution therefor under the 1934 Act.
2.26 Rule 16b-3 Exemption. The term Rule 16b-3 Exemption shall mean the exemption from Section 16(b) of the 1934 Act that is available under Rule 16b-3.
2.27 Section 16(b) Employee. The term Section 16(b) Employee shall mean an individual who is, or at any time within the preceding six months was, a director, officer, or 10% shareholder of the Corporation within the meaning of Section 16(b) of the 1934 Act.
2.28 Stock Appreciation Right. The term Stock Appreciation Right or SAR shall mean an Award granted to an Employee with respect to all or any part of any Option that entitles the holder thereof to receive from the Corporation, upon exercise of the SAR and surrender of the related Option, or any portion of the SAR and the related Option, an amount equal to 100%, or such lesser percentage as the Committee may determine at the time of the grant of the Award, of the excess, if any, measured at the time of the exercise of the SAR, of (a) the Fair Market Value of the Common Shares subject to the Option with respect to which the SAR is exercised over (b) the Exercise Price of those Common Shares under the Option.
2.29 Subsidiary. The term Subsidiary shall mean any corporation, partnership, joint venture, or other business entity in which the Corporation owns, directly or indirectly, 50 percent or more of the total combined voting power of all classes of stock (in the case of a corporation) or other ownership interest (in the case of any entity other than a corporation).
2.30 Tandem Award. The term Tandem Award shall mean any two or more Awards that are linked by the terms of any such Awards so that the exercise of one such Award, in whole or in part, requires or will automatically result in the surrender or cancellation, in whole or in proportionate part, of the other such Awards.
2.31 Transferee. The term Transferee shall mean, with respect to Nonqualified Options only, any person or entity to which an Employee is permitted by the Committee to transfer or assign all or part of his or her Options.
3. Administration. The Plan shall be administered by the Committee. No Award may be made under the Plan to any member or alternate member of the Committee. The Committee shall have authority, subject to the terms of the Plan, (a) to determine the Employees who are eligible to participate in the Plan, the type, size, and terms of Awards to be granted to any Employee, the time or times at which Awards shall be exercisable or at which restrictions, conditions, and contingencies shall lapse, and the terms and provisions of the instruments by
which Awards shall be evidenced, (b) to establish any other restrictions, conditions, and contingencies on Awards in addition to those prescribed by the Plan, (c) to interpret the Plan, and (d) to make all determinations necessary for the administration of the Plan.
The construction and interpretation by the Committee of any provision of the Plan or any Award Instrument delivered pursuant to the Plan and any determination by the Committee pursuant to any provision of the Plan or any Award Instrument shall be final and conclusive. No member or alternate member of the Committee shall be liable for any such action or determination made in good faith.
The Committee may act only by a majority of its members. Any determination of the Committee may be made, without a meeting, by a writing or writings signed by all of the members of the Committee. In addition, the Committee may authorize any one or more of their number or any officer of the Corporation to execute and deliver documents on behalf of the Committee and the Committee may delegate to one or more employees, agents, or officers of the Corporation, or to one or more third party consultants, accountants, lawyers, or other advisors, such ministerial duties related to the operation of the Plan as it may deem appropriate.
4. Eligibility. Awards may be granted to Employees of the Corporation or any Subsidiary selected by the Committee in its sole discretion. The granting of any Award to an Employee shall not entitle that Employee to, nor disqualify the Employee from, participation in any other grant of an Award. The maximum number of Common Shares with respect to which any Employee may receive Awards during any calendar year shall be the lesser of 400,000 Common Shares or .2% of the outstanding Common Shares of the Corporation on the date such award was made, which maximum number shall be subject to adjustment as provided in Section 13 of the Plan.
5. Stock Subject to the Plan. The stock that may be issued and distributed to Employees in connection with Awards granted under the Plan shall be Common Shares and may be authorized and unissued Common Shares, treasury Common Shares, or Common Shares acquired on the open market specifically for distribution under the Plan, as the Board of Directors may from time to time determine.
Subject to adjustment as provided in Section 13, the number of Common Shares available for grant of Awards under the Plan shall be determined from time to time as follows: (a) on the date of the 1994 Annual Meeting of Shareholders of the Corporation (at which meeting an amendment and restatement of the Plan was submitted for approval of the shareholders of the Corporation), the number of Common Shares available for grant of Awards under the Plan shall equal two percent of the total number of Common Shares outstanding on March 31, 1994, and (b) on January 2, 1995 and on each January 2 occurring thereafter through January 2, 2009, the number of Common Shares available for grant of Awards under the Plan shall be increased by adding to the number of Common Shares then available for grant of Awards under the Plan, the number of Common Shares of the Corporation that, when added to the number of Common Shares that otherwise remain available for grant of additional Awards under the Plan on that January 2, equals two percent of the total number of Common Shares of the Corporation outstanding on December 31st of the next proceeding year.
The number of Common Shares remaining available for grants of additional Awards under the Plan at any particular time during a calendar year shall be reduced, upon the granting thereafter of any Award under the Plan, by the full number of Common Shares subject to that Award except that, in the case of any particular Tandem Award, the number of Common Shares counted as being subject to such Tandem Award shall be the maximum number of Common Shares with respect to which the Employee may receive value under such Tandem Award. If any Award for any reason expires or is terminated, in whole or in part, without the receipt by an Employee of Common Shares (or the equivalent thereof in cash or other property), the Common Shares subject to that part of the Award that has so expired or terminated shall again be available for the future grant of Awards under the Plan.
Notwithstanding any other provision of the Plan, but subject to adjustment under Section 13, (a) the maximum number of Common Shares that may be issued under the Plan pursuant to Incentive Stock Options shall be 9,600,000 Common Shares, and (b) the maximum number of Common Shares that may be issued under
the Plan as Restricted Stock during any calendar year shall be that number of Common Shares that is equal to five percent of the total number of Common Shares available for grant of Awards under the Plan as of January 2 of that calendar year.
6. Stock Options.
6.1 Type and Date of Grant of Options.
(a) | The Award Instrument pursuant to which any Incentive Stock Option is granted shall specify that the Option granted thereby shall be treated as an Incentive Stock Option. The Award Instrument pursuant to which any Nonqualified Option is granted shall specify that the Option granted thereby shall not be treated as an Incentive Stock Option. |
(b) | The day on which the Committee authorizes the grant of an Incentive Stock Option shall be the date on which that Option is granted. No Incentive Stock Option may be granted on any date after the tenth anniversary of the date of adoption, on March 17, 1994, by the Board of Directors of the Corporation, of the Plan as amended and restated. |
(c) | The day on which the Committee authorizes the grant of a Nonqualified Option shall be considered the date on which that Option is granted, unless the Committee specifies a later date. |
6.2 Exercise Price. The Exercise Price under any Option shall be not less than the Fair Market Value of the Common Shares subject to the Option on the date the Option is granted.
6.3 Option Expiration Date. The Option Expiration Date under any Incentive Stock Option shall be not later than ten years from the date on which the Option is granted. The Option Expiration Date under any Nonqualified Option shall not be later than ten years and one month from the date on which the Option is granted.
6.4 Exercise of Options.
(a) | Except as otherwise provided in Section 10, an Option may be exercised only while the Employee to whom the Option was granted is in the employ of the Corporation or of a Subsidiary. Subject to this requirement, each Option shall become exercisable in one or more installments at the time or times provided in the Award Instrument evidencing the Option. Once any portion of an Option becomes exercisable, that portion shall remain exercisable until expiration or termination of the Option. An Employee to whom an Option is granted or, with respect to Nonqualified Options, the Employees Transferee may exercise the Option from time to time, in whole or in part, up to the total number of Common Shares with respect to which the Option is then exercisable, except that no fraction of a Common Share may be purchased upon the exercise of any Option. |
(b) | An Employee or, with respect to Nonqualified Options, any Transferee electing to exercise an Option shall deliver to the Corporation (i) the Exercise Price payable in accordance with Section 6.5 and (ii) written notice of the election that states the number of whole Common Shares with respect to which the Employee is exercising the Option. |
6.5 Payment For Common Shares. Upon exercise of an Option by an Employee or, with respect to Nonqualified Options, any Transferee, the Exercise Price shall be payable by the Employee or Transferee in cash or in such other form of consideration as the Committee determines may be accepted, including without limitation, securities or other property, or any combination of cash, securities or other property, or by delivery by the Employee or Transferee (with the written notice of election to exercise) of irrevocable instructions to a broker registered under the 1934 Act promptly to deliver to the Corporation the amount of sale or loan proceeds to pay the Exercise Price. The Committee, in its sole discretion, may grant to an Employee or, with respect to Nonqualified Options, any Transferee the right to transfer Common Shares acquired upon the exercise of a part of an Option in payment of the Exercise Price payable upon immediate exercise of a further part of the Option.
6.6 Conversion of Incentive Stock Options. The Committee may at any time in its sole discretion take such actions as may be necessary to convert any outstanding Incentive Stock Option (or any installments or portions of installments thereof) into a Nonqualified Option with or without the consent of the Employee to whom that Incentive Stock Option was granted and whether or not that Employee is an Employee at the time of the conversion.
7. Stock Appreciation Rights and Limited Stock Appreciation Rights.
7.1 Grant of SARs and Limited SARs. An SAR may be granted only in connection with an Option. An SAR granted in connection with an Incentive Stock Option may be granted only when the Incentive Stock Option is granted. An SAR granted in connection with a Nonqualified Option may be granted either when the related Nonqualified Option is granted or at any time thereafter including, in the case of any Nonqualified Option resulting from the conversion of an Incentive Stock Option, simultaneously with or after the conversion. Similarly, a Limited SAR may be granted only in connection with an Option. A Limited SAR granted in connection with an Incentive Stock Option may be granted only when the Incentive Stock Option is granted. A Limited SAR granted in connection with a Nonqualified Option may be granted either when the related Nonqualified Option is granted or at any time thereafter including, in the case of any Nonqualified Option resulting from the conversion of an Incentive Stock Option, simultaneously with or after the conversion.
7.2 Exercise of SARs and Limited SARs.
(a) | An Employee electing to exercise an SAR or a Limited SAR shall deliver written notice to the Corporation of the election identifying the SAR or Limited SAR and the related Option with respect to which the SAR or Limited SAR was granted to the Employee and specifying the number of whole Common Shares with respect to which the Employee is exercising the SAR or Limited SAR. Upon exercise of the SAR or Limited SAR, the related Option shall be deemed to be surrendered to the extent that the SAR or Limited SAR is exercised. |
(b) | SARs and Limited SARs may be exercised only (i) after the expiration of six months from the date of grant of the SAR or Limited SAR, (ii) on a date when the SAR or Limited SAR is in the money (i.e., when there would be positive consideration received upon exercise of the SAR or Limited SAR), (iii) at a time and to the same extent as the related Option is exercisable, (iv) unless otherwise provided in the relevant Award Instrument, by surrender to the Corporation, unexercised, of the related Option or any applicable portion thereof, and (v) in compliance with all restrictions set forth in or specified by the Committee pursuant to Section 7.2(c) (in the case of SARs) or Section 7.2(d) (in the case of Limited SARs). |
(c) | The Committee may specify in the Award Instrument pursuant to which any SAR is granted waiting periods and restrictions on permissible exercise periods in addition to the restrictions on exercise set forth in Section 7.2(b), including, without limitation, any restriction necessary to make applicable the Rule 16b-3 Exemption. |
7.3 Payment for SARs and Limited SARs. The amount payable upon exercise of an SAR or Limited SAR may be paid by the Corporation in cash, or, if the Committee shall determine in its sole discretion, in whole Common Shares (taken at their Fair Market Value at the time of exercise of the SAR or Limited SAR) or in a combination of cash and whole Common Shares; provided, however, that in no event shall the total number of Common Shares that may be paid to an Employee pursuant to the exercise of an SAR or Limited SAR exceed the total number of Common Shares subject to the related Option.
7.4 Termination, Amendment, or Suspension of SARs and Limited SARs. SARs and Limited SARs shall terminate and may no longer by exercised upon the first to occur of (a) exercise or termination of the related Option, (b) any termination date specified by the Committee at the time of grant of the SAR or Limited SAR, or (c) the transfer by the Employee of the related Option. In addition, the Committee may in its sole discretion at any time before the occurrence of a Change of Control amend, suspend, or terminate any SAR or Limited SAR theretofore granted under the Plan without the holders consent; provided that, in the case of amendment, no provision of the SAR or Limited SAR, as amended, shall be in conflict with any provision of the Plan.
8. Restricted Stock.
8.1 Additional Conditions on Restricted Stock. In addition to the restrictions on disposition of Restricted Stock during the Restriction Period and the requirement to offer Restricted Stock to the Corporation if the Employees employment terminates during the Restriction Period, the Committee may provide in the Award Instrument with respect to any Award of Restricted Stock other restrictions, conditions, and contingencies, which other restrictions, conditions, and contingencies, if any, may relate to, in addition to such other matters as the Committee may deem appropriate, the Employees personal performance, corporate performance, or the performance of any subunit of the Corporation or any Subsidiary, in each case measured in such manner as may be specified by the Committee. The Committee may impose different restrictions, conditions, and contingencies on separate Awards of Restricted Stock granted to different Employees, whether at the same or different times, and on separate Awards of Restricted Stock granted to the same Employee, whether at the same or different times. The Committee may specify a single Restriction Period for all of the Restricted Stock subject to any particular Award Instrument or may specify multiple Restriction Periods so that the restrictions with respect to the Restricted Stock subject to the Award will expire in stages according to a schedule specified by the Committee and set forth in the Award Instrument; provided, however, that no Restriction Period with respect to any Restricted Stock shall end earlier than one year after the date on which that Restricted Stock is granted.
8.2 Payment for Restricted Stock. Each Employee to whom an Award of Restricted Stock is made shall pay the Acquisition Price with respect to that Restricted Stock to the Corporation not later than 30 days after the delivery to the Employee of the Award Instrument with respect to that Restricted Stock. If any Employee fails to pay the Acquisition Price with respect to any Award of Restricted Stock within that 30 day period, the Employees right under that Award shall be forfeited.
8.3 Rights as a Shareholder. Upon payment by an Employee in full of the Acquisition Price for Restricted Stock under an Award, the Employee shall have all of the rights of a shareholder with respect to the Restricted Stock, including voting and dividend rights, subject only to such restrictions and requirements referred to in Section 8.1 as may be incorporated in the Award Instrument with respect to that Restricted Stock.
9. Performance Shares.
9.1 Discretion of Committee with Respect to Performance Shares. The Committee shall have full discretion to select the Employees to whom Awards of Performance Shares are made, the number of Performance Shares to be granted to any Employee so selected, the kind and level of the Performance Goals and whether those Performance Goals are to apply to the Corporation, a Subsidiary, or any one or more subunits of the Corporation or of any Subsidiary, and the dates on which each Performance Period shall begin and end, and to determine the form and provisions of the Award Instrument to be used in connection with any Award of Performance Shares.
9.2 Conditions to Payment for Performance Shares.
(a) | Unless otherwise provided in the relevant Award Instrument, an Employee must be employed by the Corporation or a Subsidiary on the last day of a Performance Period to be entitled to payment for any Performance Shares. |
(b) | The Committee may establish, from time to time, one or more formulas to be applied against the Performance Goals to determine whether all, some portion but less than all, or none of the Performance Shares granted with respect to a Performance Period are treated as earned pursuant to any Award. An Employee will be entitled to receive payments with respect to any Performance Shares only to the extent that those Performance Shares are treated as earned under one or more such formulas. |
9.3 Payment for Performance Shares. The Corporation shall pay each Employee who is entitled to payment for Performance Shares earned with respect to any Performance Period an amount for those Performance Shares (a) in cash (based upon the per share Fair Market Value of Common Shares on the last day of the Performance Period), (b) in Common Shares (one Common Share for each Performance Share earned), (c) in Restricted Stock (one Common Share of Restricted Stock for each Performance Share earned), or (d) any combination of the foregoing, in such proportions as the Committee may determine. Restricted Stock issued by the Corporation in payment of Performance Shares shall be subject to all the provisions of Section 8.
10. Termination of Employment. After an Employees Employment Termination Date, the rules set forth in this Section 10 shall apply. All factual determinations with respect to the termination of an Employees employment that may be relevant under this Section 10 shall be made by the Committee in its sole discretion.
10.1 Termination Other Than Upon Death, Disability, or Certain Retirements. Upon any termination of an Employees employment for any reason other than the Employees retirement (under any retirement plan of the Corporation or of a Subsidiary) as provided in Section 10.2, disability as provided on Section 10.3, or death as provided in Section 10.4:
(a) | Unless otherwise provided in the relevant Award Instrument, the Employee or, with respect to Nonqualified Options, any Transferee shall have the right (i) during the period ending six months after the Employment Termination Date, but not later than the Option Expiration Date, to exercise any Nonqualified Options and related SARs that were outstanding on the Employment Termination Date, if and to the same extent as those Options and SARs were exercisable by the Employee or Transferee (as the case may be) on the Employment Termination Date, and (ii) during the period ending three months after the Employment Termination Date, but not later that the Option Expiration Date, to exercise any Incentive Stock Options and related SARs that were outstanding on the Employment Termination Date, if and to the same extent as those Options and SARs were exercisable by the Employee on the Employment Termination Date. Notwithstanding the preceding sentence, if within two years after a Change of Control an Employees Employment Termination Date occurs other than as a result of a Voluntary Resignation, unless otherwise provided in the relevant Award Instrument, the Employee or, with respect to Nonqualified Options, any Transferee shall have the right, during the Extended Period, but not later than the Option Expiration Date, to exercise any Options and related SARs that were outstanding on the Employment Termination Date, if and to the same extent as those Options and SARs were exercisable by the Employee or Transferee (as the case may be) on the Employment Termination Date (even though, in the case of Incentive Stock Options, exercise of those Options more than three months after the Employment Termination Date may cause the Option to fail to qualify for Incentive Stock Option treatment under the Internal Revenue Code of 1986, as amended). As used in the immediately preceding sentence, the term Extended Period means the longer of the period that the Option or SAR would otherwise be exercisable in the absence of the immediately preceding sentence or the period ending with the second anniversary date of the Change of Control last occurring before the Employment Termination Date and the term Voluntary Resignation means that the Employee shall have terminated his or her employment with the Corporation and its Subsidiaries by voluntarily resigning at his or her own instance without having been requested to so resign by the Corporation or its Subsidiaries except that any resignation by the Employee will not be deemed to be a Voluntary Resignation if, after the Change of Control, the Employees base salary was reduced or the Employee was required to relocate his or her principal place of employment more than 35 miles, |
(b) | Unless otherwise provided in the relevant Award Instrument, the Employee shall offer for resale at the Acquisition Price to the Corporation each Common Share of Restricted Stock held by the Employee at the Employment Termination Date with respect to which, as of that date, any restrictions, conditions, or contingencies have not lapsed, and |
(c) | Unless otherwise provided in the relevant Award Instrument, the Employee shall forfeit each Performance Share with respect to which, as of that date, any restrictions, conditions, or contingencies have not lapsed. |
10.2 Termination Due To Certain Retirements. Upon any termination of an Employees employment with the Corporation or any Subsidiary under circumstances entitling the Employee to immediate payment of normal retirement or early retirement benefits under any retirement plan of the Corporation or of a Subsidiary (whether the Employee elects to commence or defer receipt of such payment):
(a) |
Unless otherwise provided in the relevant Award Instrument, the Employee or, with respect to Nonqualified Options, any Transferee shall have the right (i) to exercise, from time to time during the period ending three years (two years if the Option was granted prior to January 1, 2002) after the Employment Termination Date, but not later than the Option Expiration Date, any Nonqualified |
Options and related SARs that were outstanding on the Employment Termination Date, if and to the same extent as those Options and SARs were exercisable by the Employee or Transferee (as the case may be) on the Employment Termination Date, and (ii) to exercise, from time to time during the period ending three years (two years if the Option was granted prior to January 1, 2002) after the Employment Termination Date, but no later than the Option Expiration Date, any Incentive Stock Options and related SARs that were outstanding on the Employment Termination Date, if and to the same extent as those Options and SARs were exercisable by the Employee on the Employment Termination Date (even though exercise of the Incentive Stock Option more than three months after the Employment Termination Date may cause the Option to fail to qualify for Incentive Stock Option treatment under the Internal Revenue Code of 1986, as amended), |
(b) | The relevant Award Instrument may provide that the Employee or, with respect to Nonqualified Options, any Transferee will have the right to exercise, from time to time until not later than the Option Expiration Date, Nonqualified Stock Options and SARs and Incentive Stock Options and SARs to the extent such Options and SARs become exercisable by their terms prior to the Option Expiration Date (or such earlier date as specified in the relevant Award Instrument), notwithstanding the fact that such Options and SARs were not exercisable in whole or in part (whether because a condition to exercise had not yet occurred or a specified time period had not yet elapsed or otherwise) on the Employment Termination Date, |
(c) | Unless otherwise provided in the relevant Award Instrument, the Employee shall offer for resale at the Acquisition Price to the Corporation each Common Share of Restricted Stock held by the Employee at the Employment Termination Date with respect to which, as of that date, any restrictions, conditions, or contingencies have not lapsed, and |
(d) | Unless otherwise provided in the relevant Award Instrument, the Employee shall forfeit each Performance Share with respect to which, as of that date, any restrictions, conditions, or contingencies have not lapsed. |
10.3 Termination Due To Disability. Upon any termination of an Employees employment due to disability:
(a) | Unless otherwise provided in the relevant Award Instrument, the Employee, the Employees attorney in fact or legal guardian or, with respect to Nonqualified Options, any Transferee shall have the right (i) to exercise, from time to time during the period ending three years (two years if the Option was granted prior to January 1, 2002) after the Employment Termination Date, but not later than the Option Expiration Date, any Nonqualified Options and related SARs that were outstanding on the Employment Termination Date, if and to the same extent those Options and SARs were exercisable by the Employee or Transferee (as the case may be) on the Employment Termination Date, and (ii) to exercise, from time to time during the period ending three years (two years if the Option was granted prior to January 1, 2002) after the Employment Termination Date, but no later than the Option Expiration Date, any Incentive Stock Options and related SARs that were outstanding on the employment Termination Date, if and to the same extent as those Options and SARs were exercisable by the Employee on the Employment Termination Date (even though exercise of the Incentive Stock Option more than one year after the Employment Termination Date may cause the Option to fail to qualify for Incentive Stock Option treatment under the Internal Revenue Code of 1986, as amended), |
(b) | Unless otherwise provided in the relevant Award Instrument, the Employee shall offer for resale at the Acquisition Price to the Corporation each Common Share of Restricted Stock held by the Employee at the Employment Termination Date with respect to which, as of that date, any restrictions, conditions, or contingencies have not lapsed, and |
(c) | Unless otherwise provided in the relevant Award Instrument, the Employee shall forfeit each Performance Share with respect to which, as of that date, any restrictions, conditions, or contingencies have not lapsed. |
10.4. Death of an Employee. Upon the death of an Employee while employed by the Corporation or any Subsidiary or within any of the periods referred to in any Section 10.1, 10.2, or 10.3 during which any particular Option or SAR remains potentially exercisable:
(a) | Unless otherwise provided in the relevant Award Instrument, if the Option Expiration Date of any Nonqualified Option that had not expired before the Employees death would otherwise expire before the first anniversary of the Employees death, that Option Expiration Date shall automatically be extended to the first anniversary of the Employees death or such other date as provided in the relevant Award Instrument, |
(b) | Unless otherwise provided in the relevant Award Instrument, the Employees executor or administrator, the person or persons to whom the Employees rights under any Option or SAR are transferred by will or the laws of descent and distribution or, with respect to Nonqualified Options, any Transferee shall have the right to exercise, from time to time during the period ending three years (two years if the Option was granted prior to January 1, 2002) after the date of the Employees death, but not later than the Option Expiration Date, any Options and related SARs that were outstanding on the date of the Employees death, if and to the same extent as those Options and SARs were exercisable by the Employee or Transferee (as the case may be) on the date of the Employees death, |
(c) | Unless otherwise provided in the relevant Award Instrument, the Employee shall offer for resale at the Acquisition Price to the Corporation each Common Share of Restricted Stock held by the Employee at the Employment Termination Date with respect to which, as of that date, any restrictions, conditions, or contingencies have not lapsed, and |
(d) | Unless otherwise provided in the relevant Award Instrument, the Employee shall forfeit each Performance Share with respect to which, as of that date, any restrictions, conditions, or contingencies have not lapsed. |
11. Acceleration Upon Change of Control. Unless otherwise specified in the relevant Award Instrument, upon the occurrence of a Change of Control of the Corporation, each Award theretofore granted to any Employee that then remains outstanding shall be automatically treated as follows: (a) any outstanding Option shall become immediately exercisable in full, (b) SARs and Limited SARs related to any such Options shall also become immediately exercisable in full, (c) the Restriction Period with respect to all outstanding Awards of Restricted Stock shall immediately terminate, and (d) the restrictions, conditions, or contingencies on any Performance Shares shall be modified in such manner as the Committee may specify to give the Employee the benefit of those Performance Shares through the date of Change of Control.
12. Assignability. Nonqualified Options may not be assigned or transferred (other than by will or by the laws of descent and distribution) unless the Committee, in its sole discretion, determines to allow such assignment or transfer and, if the Committee determines to allow any such assignment or transfer, the Transferee shall have the power to exercise such Nonqualified Option in accordance with the terms of the Award and the provisions of this Plan. No Incentive Stock Option, SAR, Limited SAR, Restricted Stock during the Restriction Period, or Performance Share may be transferred other than by will or by the laws of descent and distribution. During an Employees lifetime, only the Employee (or in the case of incapacity of an Employee, the Employees attorney in fact or legal guardian) may exercise any Incentive Stock Option, SAR, Limited SAR, Restricted Stock during the Restriction Period, or Performance Share requiring or permitting exercise
13. Adjustment Upon Changes in Common Shares. Automatically and without Committee action, in the event of any stock dividend, stock split, or share combination of the Common Shares, or by appropriate Committee action in the event of any reclassification, recapitalization, merger, consolidation, other form of business combination, liquidation, or dissolution involving the Corporation or any spin-off or other distribution to shareholders of the Corporation (other than normal cash dividends), appropriate adjustments to (a) the maximum number of Common Shares that may be issued under the Plan pursuant to Section 5, the maximum number of Common Shares that may be issued under the Plan pursuant to Incentive Stock Options as provided in Section 5, and the maximum number of Common Shares with respect to which any Employee may receive Awards during any calendar year as provided in Section 4, and (b) the number and kind of shares subject to, the
price per share under, and the terms and conditions of each then outstanding Award shall be made to the extent necessary and in such manner that the benefits of Employees under all then outstanding Awards shall be maintained substantially as before the occurrence of such event. Any such adjustment shall be conclusive and binding for all purposes of the Plan and shall be effective, in the event of any stock dividend, stock split, or share combination, as of the date of such stock dividend, stock split, or share combination, and in all other cases, as of such date as the Committee may determine.
14. Purchase For Investment. Each person acquiring Common Shares pursuant to any Award may be required by the Corporation to furnish a representation that he or she is acquiring the Common Shares so acquired as an investment and not with a view to distribution thereof if the Corporation, in its sole discretion, determines that such representation is required to insure that a resale or other disposition of the Common Shares would not involve a violation of the Securities Act of 1933, as amended, or of applicable blue sky laws. Any investment representation so furnished shall no longer be applicable at any time such representation is no longer necessary for such purposes.
15. Withholding of Taxes. The Corporation will withhold from any payments of cash made pursuant to the Plan such amount as is necessary to satisfy all applicable federal, state, and local withholding tax obligations. The Committee may, in its discretion and subject to such rules as the Committee may adopt from time to time, permit or require an Employee (or other person exercising an Option with respect to withholding taxes upon exercise of such Option) to satisfy, in whole or in part, any withholding tax obligation that may arise in connection with the grant of an Award, the lapse of any restrictions with respect to an Award, the acquisition of Common Shares pursuant to any Award, or the disposition of any Common Shares received pursuant to any Award by having the Corporation hold back some portion of the Common Shares that would otherwise be delivered pursuant to the Award or by delivering to the Corporation an amount equal to the withholding tax obligation arising with respect to such grant, lapse, acquisition, or disposition in (a) cash, (b) Common Shares, or (c) such combination of cash and Common Shares as the Committee may determine. The Fair Market Value of the Common Shares to be so held back by the Company or delivered by the Employee shall be determined as of the date on which the obligation to withhold first arose.
16. Harmful Activity. If an Employee shall engage in any harmful activity prior to or within six months after termination of employment with Key, then any Profits realized upon the exercise of any Covered Option on or after one year prior to the termination of employment with Key shall inure to the Corporation. The aforementioned restriction shall not apply in the event that employment with Key terminates within two years after a Change of Control of the Corporation if any of the following have occurred: a relocation of an Employees principal place of employment more than 35 miles from an Employees principal place of employment immediately prior to the Change of Control, a reduction in an Employees base salary after a Change of Control, or termination of employment under circumstances in which an Employee is entitled to severance benefits or salary continuation or similar benefits under a change of control agreement, employment agreement, or severance or separation pay plan. If any Profits realized upon the exercise of any Covered Option inure to the benefit of the Corporation in accordance with the first sentence of this paragraph, an Employee shall pay all such Profits to the Corporation within 30 days after first engaging in any harmful activity and all unexercised Covered Options shall immediately be forfeited and canceled. Consistent with the provisions of Section 3 of the Plan, the determination by the Committee as to whether an Employee engaged in harmful activity prior to or within six months after termination of employment with Key shall be final and conclusive.
A harmful activity shall have occurred if an Employee shall do any one or more of the following:
a. Use, publish, sell, trade or otherwise disclose Non-Public Information of the Key unless such prohibited activity was inadvertent, done in good faith and did not cause significant harm to Key.
b. After notice from the Corporation, fail to return to Key any document, data, or thing in an Employees possession or to which an Employee has access that may involve Non-Public Information of Key.
c. After notice from the Corporation, fail to assign to Key all right, title, and interest in and to any confidential or non-confidential Intellectual Property which an Employee created, in whole or in part, during employment with Key, including, without limitation, copyrights, trademarks, service marks, and patents in or to (or associated with) such Intellectual Property.
d. After notice from the Corporation, fail to agree to do any acts and sign any document reasonably requested by Key to assign and convey all right, title, and interest in and to any confidential or non-confidential Intellectual Property which an Employee created, in whole or in part, during employment with Key, including, without limitation, the signing of patent applications and assignments thereof.
e. Upon an Employees own behalf or upon behalf of any other person or entity that competes or plans to compete with Key, solicit or entice for employment or hire any Employee of Key.
f. Upon an Employees own behalf or upon behalf of any other person or entity that competes or plans to compete with Key, call upon, solicit, or do business with (other than business which does not compete with any business conducted by Key) any customer of Key an Employee called upon, solicited, interacted with, or became acquainted with, or learned of through access to information (whether or not such information is or was non-public) while employed at Key unless such prohibited activity was inadvertent, done in good faith, and did not involve a customer whom an Employee should have reasonably known was a customer of Key.
g. Upon an Employees own behalf or upon behalf of any other person or entity that competes or plans to compete with Key, engage in any business activity in competition with Key in the same or a closely related activity that an Employee was engaged in for Key during the one year period prior to the termination of employment.
For purposes of this Section 16:
Covered Option means any Option granted on or after January 1, 2001 unless the granting resolution expressly excludes the Option from the provisions of this Section 16.
Intellectual Property shall mean any invention, idea, product, method of doing business, market or business plan, process, program, software, formula, method, work of authorship, or other information, or thing.
Key shall mean the Corporation and its Subsidiaries collectively.
Non-Public Information shall mean, but is not limited to, trade secrets, confidential processes, programs, software, formulas, methods, business information or plans, financial information, and listings of names (e.g., employees, customers, and suppliers) that are developed, owned, utilized, or maintained by an employer such as Key, and that of its customers or suppliers, and that are not generally known by the public.
Profit shall mean, with respect to any Covered Option, the spread between the Fair Market Value of a Common Share on the date of exercise and the exercise price multiplied by the number of shares exercised under the Covered Option.
17. Awards in Substitution for Awards Granted by Other Companies. Awards, whether Incentive Stock Options, Nonqualified Options, SARs, Limited SARs Restricted Stock, or Performance Shares, may be granted under the Plan in substitution for awards held by employees of a company who become Employees of the Corporation or a Subsidiary as a result of the merger or consolidation of the employer company with the Corporation or a Subsidiary, or the acquisition by the Corporation or a Subsidiary of the assets of the employer company, or the acquisition by the Corporation or a Subsidiary of stock of the employer company as a result of which it becomes a Subsidiary. The terms, provisions, and benefits of the substitute Awards so granted may vary from the terms, provisions and benefits set forth in or authorized by the Plan to such extent as the Committee at the time of the grant may deem appropriate to conform, in whole or in part, to the terms, provisions, and benefits of the awards in substitution for which they are granted.
18. Legal Requirements. No Awards shall be granted and the Corporation shall have no obligation to make any payment under the Plan, whether in Common Shares, cash, or any combination thereof, unless such payment
is, without further action by the Committee, in compliance with all applicable Federal and state laws and regulations, including, without limitation, the United States Internal Revenue Code and Federal and state securities laws.
19. Duration and Termination of the Plan. The Plan shall become effective and shall be deemed to have been adopted on the date on which it is approved by the shareholders of the Corporation and shall remain in effect thereafter until terminated by action of the Board of Directors. No termination of the Plan shall adversely affect the rights of any Employee with respect to any Award granted before the effective date of the termination.
20. Amendments. The Board of Directors, or a duly authorized committee thereof, may alter or amend the Plan from time to time prior to its termination in any manner the Board of Directors, or such duly authorized committee, may deem to be in the best interests of the Corporation and its shareholders, except that no amendment may be made without shareholder approval if shareholder approval is required under Rule 16b-3 to qualify for the Rule 16b-3 Exemption, is required by any applicable securities law or tax law, or is required by the rules of any exchange on which the Common Shares of the Corporation are traded or, if the Common Shares are not listed on an exchange, by the rules of the registered national securities association through whose inter-dealer quotation system the Common Shares are quoted. The Committee shall have the authority to amend these terms and conditions applicable to outstanding Awards (a) in any case where expressly permitted by the terms of the Plan or of the relevant Award Instrument or (b) in any other case with the consent of the Employee to whom the Award was granted. Except as expressly provided in the Plan or in the Award Instrument evidencing the Award, the Committee may not, without the consent of the holder of an Award granted under the Plan, amend the terms and conditions applicable to that Award in a manner adverse to the interests of the Employee.
21. Plan Noncontractual. Nothing herein contained shall be construed as a commitment to or agreement with any person employed by the Corporation or a Subsidiary to continue such persons employment with the Corporation or the Subsidiary, and nothing herein contained shall be construed as a commitment or agreement on the part of the Corporation or any Subsidiary to continue the employment or the annual rate of compensation of any such person for any period. All Employees shall remain subject to discharge to the same extent as if the Plan had never been put into effect.
22. Interest of Employees. Any obligation of the Corporation under the Plan to make any payment at any future date merely constitutes the unsecured promise of the Corporation to make such payment from its general assets in accordance with the Plan, and no Employee shall have any interest in, or lien or prior claim upon, any property of the Corporation or any Subsidiary by reason of that obligation.
23. Claims of Other Persons. The provisions of the Plan shall in no event be construed as giving any person, firm, or corporation any legal or equitable right against the Corporation or any Subsidiary, their officers, employees, agents, or directors, except any such rights as are specifically provided for in the Plan or are hereafter created in accordance with the terms and provisions of the Plan.
24. Absence of Liability. No member of the Board of Directors of the Corporation or a Subsidiary, of the Committee, of any other committee of the Board of Directors, or any officer or Employee of the Corporation or a Subsidiary shall be liable for any act or action under the Plan, whether of commission or omission, taken by any other member, or by any officer, agent, or Employee, or except in circumstances involving his bad faith or willful misconduct, for anything done or omitted to be done by himself.
25. Severability. The invalidity or unenforceability of any particular provision of the Plan shall not affect any other provision hereof, and the Plan shall be construed in all respects as if such invalid or unenforceable provision were omitted herefrom.
26. Governing Law. The provisions of the Plan shall be governed and construed in accordance with the laws of the State of Ohio.
27. Duration and Termination of the Plan. The Plan shall remain in effect through June 30, 2012, and shall then terminate, unless terminated at an earlier date by action of the Board of Directors or a duly authorized
Committee thereof; provided, however, that termination of the Plan shall not affect Awards granted prior thereto.
28. Plan Effective Date. The Plan, originally named the Society Corporation 1991 Equity Compensation Plan, was approved by the Corporations shareholders at the Annual Meeting of Shareholders held on April 16, 1991 and became effective on that date. On March 17, 1994, the Corporations Board of Directors adopted, subject to shareholder approval, certain amendments to the Plan, then renamed the KeyCorp Amended and Restated 1991 Equity Compensation Plan. The shareholders approved these amendments at the Corporations Annual Meeting of Shareholders held on May 19, 1994. The Plan was further amended by action of the Committee on July 17, 1996 to amend the definition of Change of Control as set forth in Section 2.5 of the Plan, which amendment was effective as of January 1, 1996. If the Corporation hereafter enters into a transaction intended to be accounted for as a pooling of interests and the Committee determines, based on the written advice of the Corporations independent accountants, that the July 17, 1996 amendment or the operation thereof would conflict with or jeopardize the pooling of interests accounting treatment for such transaction, then the July 17, 1996 amendment shall be inoperative and shall be treated as if it had never been effected so that the definition of Change of Control would be as in effect prior to such amendment. The Plan was further amended and restated as of September 19, 1996, to provide for the transferability of Options granted hereunder. The Plan was further amended by action of the Equity Based Compensation Subcommittee of the Compensation and Organization Committee on May 6, 1998 to amend Section 10.1(a) of the Plan to extend the option exercise period for terminated employees upon a change of control in certain circumstances. The amendment to Section 10.1(a) only applies to Awards and Award Instruments granted or entered into on or after January 1, 1999. If the Corporation enters into a transaction intended to qualify as a pooling of interests for accounting purposes prior to January 1, 1999, the amendment to Section 10.1(a) shall become null and void. The Subcommittee also amended the Plan to delete Section 17 of the Plan and all cross-references thereto. References in the Plan to specific numbers of Common Shares have been adjusted pursuant to Section 13 to reflect the two-for-one split in the Common Shares effective March 6, 1998. With respect to clause (a) of the last paragraph of Section 5, as of May 6, 1998, Incentive Stock Options covering 451,823 Common Shares had been theretofore granted and not expired or terminated unexercised, leaving 9,148,177 Common Shares then available for future grant of Incentive Stock Options (subject to increase in the event that outstanding Incentive Stock Options expire or terminate unexercised). The Plan was further amended by action of the Compensation and Organization Committee on March 15, 2000 to amend Section 1 of the Plan to clarify that Awards under the Plan may be made to any Employee of the Corporation. The Plan was amended on January 17, 2001 to amend Section 6.4(a) to remove the requirement that an Option will not become exercisable unless an Optionee has been continuously employed by the Corporation for at least six months from the date of grant. The Plan was also amended to add a new Section 16 entitled Harmful Activity which states that, if an Optionee engages in a harmful activity prior to or within six months of termination of employment, profits from the exercise of a Covered Option will inure to the benefit of the Corporation in certain circumstances. Section 16 does not apply to Options granted prior to January 1, 2001. The Plan was amended on March 14, 2001 to amend Sections 10.2, 10.3, and 10.4 to extend the period during which Options are exercisable pursuant to these sections to three years after retirement, disability, or death. The amendment only applies to Options granted on or after January 1, 2002. The Plan was amended on November 14, 2001 to amend Section 2.2 to change the consideration required for Restricted Stock. The Plan was amended on November 21, 2002 to terminate the Plan on June 30, 2012. The Plan was amended on March 13, 2003 to amend Section 5 to terminate on January 2, 2009 the automatic replenishment of available Common Shares.
EXHIBIT 10.21
KEYCORP
DIRECTOR DEFERRED COMPENSATION PLAN
(MAY 18, 2000 RESTATEMENT)
The KeyCorp Director Deferred Compensation Plan, originally established as of January 1, 1984, is hereby amended and restated in its entirety, effective May 18, 2000.
KeyCorp hereby establishes this Director Deferred Compensation Plan for directors of KeyCorp and its subsidiaries to provide directors with the opportunity to defer payment of their directors fees in accordance with the provisions of this Plan.
ARTICLE I
DEFINITIONS
For the purposes hereof, the following words and phrases shall have the meanings indicated.
1. | Account shall mean the bookkeeping account established in accordance with Article II hereof. |
2. | Beneficiary shall mean any person designated by a Participant in accordance with the Plan to receive payment of all or a portion of the remaining balance of the Participants Account in the event of the death of the Participant prior to receipt by the Participant of the entire amount credited to the Participants Account. |
3. | Change of Control shall be deemed to have occurred if under any rabbi trust arrangement maintained by the Corporation, the Corporation is required under the terms of such arrangement to fund such rabbi trust to secure the payment of any Participants Plan benefits payable hereunder because a Change of Control as defined in such rabbi trust has occurred. |
4. | Corporation shall mean KeyCorp, a bank holding company and its corporate successors, including the surviving corporation resulting from any merger of KeyCorp with any other corporation or corporations. |
5. | Director shall mean (i) any member of the Board of Directors of the Corporation and (ii) any member of the Board of Directors of a Subsidiary. |
6. | Election Agreement shall mean a written election to defer Fees signed in writing by the Director and in the form provided by the Corporation. |
7. | Fees shall mean the fees earned as a Director. |
8. | Participant shall mean any Director who has at any time elected to defer the receipt of Fees in accordance with the Plan. |
9. | Plan shall mean this Director Deferred Compensation Plan, together with all amendments hereto. |
10. | Subsidiary shall mean a corporation organized and existing under the laws of the United States or of any state or the District of Columbia of which more than 50% percent of the issued and outstanding stock is owned by the Corporation or by a Subsidiary of the Corporation, and which has been designated by the Board of Directors or Chief Executive Officer of the Corporation as a Subsidiary eligible to participate in the Plan. |
11. | Year shall mean the calendar year. |
ARTICLE II
ELECTION TO DEFER
1. Eligibility . Any Director may elect to defer receipt of all or a specified portion of his or her Fees for any Year in accordance with Section 2 of this Article.
2. Election to Defer . A Director who desires to defer the payment of all or a portion of his or her Fees for any Year must complete and deliver an Election Agreement to the Corporation no later than the last day of the Year prior to the Year for which the Fees would otherwise be paid; provided, however, that any Director hereafter elected to the Board of Directors of the Corporation or a Subsidiary who was not a Director on the preceding December 31 may make an election to defer payment of Fees for the Year in which he or she is elected to the Board of Directors by delivering the Election Agreement to the Corporation within 30 days of such election. A Director who timely delivers the Election Agreement to the Corporation shall be a Participant. A Participants Election Agreement shall continue to be effective from Year to Year until terminated or modified by written notice to the Corporation. A revocation or modification must be delivered prior to the beginning of the Year for which it is to be effective.
3. Amount Deferred; Date of Deferral . A Participant shall designate on the Election Agreement (a) the amount of his or her Fees that are to be deferred, (b) the date to which the Participants Fees shall be deferred, (c) whether the distribution of deferred fees is to be paid in its entirety or whether all or a portion of such fees shall be paid in installments, (d) if in installments, the number of quarterly installments, and (e) if in installments, whether installments or payment in full shall be made upon his or her death. Deferral shall be until the earlier to occur of (i) the date specified by the Participant which may be not later than the date on which the Participant would attain age 72, or (ii) the date of death of the Participant, at which time payment of the amount deferred shall be made in accordance with Section 7 or 10 of this Article. A Participant may select not more than one date upon which full distribution shall be made or when installments shall begin; distribution dates shall be the first business day of a calendar quarter.
4. Account . The Corporation shall maintain an Account of the Fees deferred by each Participant. A Participant shall designate on the Election Agreement whether to have the Account valued on the basis of KeyCorp Common Shares in accordance with Section 5 of this Article or receive interest in accordance with Section 6 of this Article. The Corporation may, if necessary or desirable, establish separate Accounts for a Participant to properly account for amounts deferred under the different alternatives and years; all such Accounts are collectively referred to herein as the Account. The Account based on KeyCorp Common Shares shall be known as the Common Shares Account, and the interest bearing account shall be known as the Interest Bearing Account; a Participant may defer a portion of his or her Fees into each type of Account.
5. Common Shares Account . If a Participant elects to have all or a portion of his or her Fees deferred into the Common Shares Account, as of the last business day of any quarter, there shall be added to such Account the number of Common Shares (whole and fractional, rounded to the nearest one-hundredth of a share) equal to the dollar amount of such Fees payable for such calendar quarter plus all dividends payable during such quarter on the Common Shares held in the Account on the first day of such quarter divided by the market value of the Common Shares at the close of business on the last business day of such quarter.
6. Interest Bearing Account . Effective January 1, 1995, if a Participant elects to have all or a portion of his or her Fees deferred into the Interest Bearing Account, there shall be added to the Account as of the last business day of each calendar quarter the dollar amount of such Fees payable for such calendar quarter plus all interest payable on such Interest Bearing Account for such quarter as follows: A Participants account will receive interest on the average daily balance in the Interest Bearing Account during each month at a rate equal to 50 basis points higher than the effective annual yield of the average of the Moodys Average Corporate Bond Yield Index for the preceding month, as published by Moodys Investor Service, Inc. (or any successor publisher thereto), or, if such index is no longer published, a substantially similar index selected by the Board.
7. Payment of Account; Period of Deferral . The amount of a Participants Account shall be paid to the Participant in a single payment and/or in a number of substantially equal consecutive quarterly installments (not to exceed 40), as elected by the Participant in his or her Election Agreement. Distributions from the Interest Bearing Account shall be in cash. Distributions from the Common Shares Account made or commenced prior to January 1, 1999 shall be in cash and thereafter distributions from the Common Shares Account shall be in Common Shares; provided however, that in the event that the Corporation shall enter into a transaction intended to qualify as a pooling of interests for accounting purposes prior to January 1, 1999, all distributions from the Common Shares Account at any time shall be in cash. The amount of the Account remaining after payment of an installment shall continue to be valued in accordance with Section 5 of this Article or bear interest in accordance with Section 6 of this Article. Full payment or the first quarterly installment, as the case may be, shall be made as soon as reasonably possible after (i) the date specified in Section 3 of this Article, or (ii) the date of the Participants death.
Any installment payment shall be made pro rata from the Common Shares Account and the Interest Bearing Account. The election as to the time for and method of payment of the amount of the Account relating to Fees deferred for a particular Year shall be made on the Election Agreement(s) and may not thereafter be altered except as provided in Section l0 or Section 13 of this Article.
In the event that a Participant elects to receive installment payments under this Section 7,
(a) | The amount of the distribution from the Common Shares Account shall be valued based on the fair market value of the Common Shares on the last business day of the calendar quarter immediately prior to the distribution date; |
(b) | The amount of the distribution from the Interest Bearing Account shall be valued based on the value of such Account on the last business day of the calendar quarter immediately prior to such distribution date; |
(c) | The amount of each installment shall be determined by dividing the value of the Common Shares Account, the Interest Bearing Account, or both, as the case may be, by the number of installments remaining to be paid to the Participant. |
8. Small Payments . Notwithstanding the foregoing, if the quarterly installment payments elected by a Participant hereunder would result in a quarterly payment of less than $500 in cash or Common Shares, as the case may be, the Corporation shall have the right in its sole discretion to pay the entire amount of the Account to the Participant on the day the installment payments were to begin.
9. Death of Participant . In the event of the death of a Participant, the amount of the Participants Account shall be paid to the Beneficiary or Beneficiaries designated in writing signed by the Participant in the form provided by the Corporation; in the event there is more than one Beneficiary, such form shall include the proportion to be paid to each Beneficiary and indicate the disposition of such share if a Beneficiary does not survive the Participant; in the absence of any such designation, payment from the Account shall be divided equally among all other Beneficiaries. A Participants Beneficiary designation may be changed at any time prior to the Participants death by execution and delivery of a new Beneficiary designation form. The form on file with the Corporation at the time of the Participants death which bears the latest date shall govern. In the absence of a Beneficiary designation or the failure of any Beneficiary to survive the Participant, the amount of the Participants Account shall be paid to the Participants estate in its entirety ninety days after the appointment of an executor or administrator. In the event of the death of any Beneficiary after the death of a Participant, the remaining amount of the Account payable to such Beneficiary shall be paid in its entirety to the estate of such Beneficiary ninety days after the appointment of an executor or administrator for such estate.
10. Acceleration .
(a) |
Notwithstanding any other provision of the Plan to the contrary, upon the occurrence of a Change of Control, a Participant shall be entitled to receive from the Corporation the payment of his or her Account in the manner selected as follows: Not later than the later of December 31, 1998, or 30 |
days after the date a person first becomes a Participant, a Participant shall be entitled to make an election which will be applicable in the event of a Change of Control (the Change of Control Election). The Change of Control Election will provide the following payment alternatives to a Participant in the event of a Change of Control: |
(i) | upon the occurrence of a Change of Control, the entire amount of the Participants Account will be immediately paid in full, regardless of whether the Participant continues as a Director after the Change of Control; |
(ii) | upon and after the occurrence of a Change of Control, the entire amount of the Participants Account will be immediately paid in full, but only if either the Participant is not a Director as of immediately after the Change of Control or the Participant ceases to be a Director within two years after the Change of Control; or |
(iii) | upon the occurrence of a Change of Control, the payment elections specified in the Election Agreement shall govern irrespective of the Change of Control. |
A Change of Control Election once made may thereafter be amended by a subsequent Change of Control Election, but such subsequent Change of Control Election shall only become effective if no Change of Control occurs within one year after making such subsequent Change of Control Election.
(b) | The Corporation may, in its sole discretion, accelerate the making of payment of the amount of a Participants Account to a Participant in the event of an unforeseeable emergency of the Participant; unforeseeable emergency is defined as an unanticipated emergency that is caused by an event beyond the control of the Participant that would result in severe financial hardship to the individual if such withdrawal were not permitted; provided, however, that the amount of the withdrawal under this subsection is limited to the amount necessary to meet such emergency. |
(c) | The Corporation may, in its sole discretion, accelerate the making of payment of all or any portion of the amount of a Participants Account to a Participant upon the written request of a Participant, provided that the Corporation determines that such withdrawal would not be adverse to the best interests of the Corporation and further provided that the Participant shall forfeit an amount equal to 10% of the amount requested and that the Participant shall be disqualified from deferring Fees during the remainder of the calendar year in which the payment is made and the next succeeding year thereafter. |
11. Change of Control . Notwithstanding any other provision of the Plan to the contrary, in the event of a Change of Control, no amendment or modification of this Plan may be made at any time on or after such Change of Control (1) to reduce or modify a Participants Pre-Change of Control Account Balance, (2) to reduce or modify the Interest Bearing Accounts rate of earnings on or method of crediting such earnings to a Participants Pre-Change of Control Account Balance, (3) to reduce or modify the Common Shares Accounts method of calculating all earnings, gains, and/or losses on a Participants Pre-Change of Control Account Balance, or (4) to reduce or modify the Participants deferrals to be credited to a Participants Plan Account for the applicable deferral period. For purposes of this Section 11, the term Pre-Change of Control Account Balance shall mean, with regard to any Plan Participant, the aggregate amount of such Participants prior deferrals with all earnings, gains, and losses thereon which are credited to the Participants Plan Account through the close of the calendar year in which such Change of Control occurs.
12. Interest Bearing Account After Change of Control . In accordance with the provisions of Section 6 hereof, in the event that Moodys Average Corporate Bond Yield Index ceases to be published on or after a Change of Control, the Corporation shall reasonably select a substantially similar index to be used in crediting earnings on Participants Pre-Change of Control Account Balances held in the Plans Interest Bearing Account.
13. Common Stock Conversion . In the event of a Change of Control in which the Common Shares of the Corporation are converted into or exchanged for securities, cash and/or other property as a result of any capital reorganization or reclassification of the capital stock of the Corporation, or as a result of the consolidation or
merger of the Corporation with or into another corporation or entity, or the sale of all or substantially all of its assets to another corporation or entity, the Corporation shall cause the Common Shares Account to reflect the securities, cash and other property to be received in such reorganization, reclassification, consolidation, merger or sale on the balance in the Common Shares Account and, from and after such reorganization, reclassification, consolidation, merger or sale, the Common Shares Account shall reflect all dividends, interest, earnings and losses attributable to such securities, cash, and other property (with any cash earning interest at the rate applicable to the Interest Bearing Account).
14. Amendment in the Event of a Change of Control . On or after a Change of Control, the provisions of Article I and Article II may not be amended or modified as such provisions apply to Participants Pre-Change of Control Account Balances.
15. Statement . Each Participant shall receive a statement of his or her Account not less than annually.
16. Valuation of the Account . Each Account shall be valued as of the last day of each calendar quarter until payment of a Participants Fees in full.
If a Participant has elected to have his or her Fees deferred into the Common Shares Account, the Corporation shall ascertain the number of shares in the Account (whole and fractional, rounded to the nearest one-hundredth of a share) after taking into account additions to the Account under this Article and distributions from the Account under this Article, based on the fair market value of the Common Shares on the last business day of such calendar quarter. Automatically and without further action by the Corporation, in the event of any stock dividend or split, recapitalization, merger, consolidation, spin-off, reorganization, combination, exchange of shares, or a similar corporate change, appropriate adjustments in the number and kind of shares held in a Participants Account shall be made by the Corporation to reflect such change.
If a Participant has elected to have his or her Fees deferred into the Interest Bearing Account, the Corporation shall ascertain the value of such Interest Bearing Account by adding to the value of the Account at the beginning of such calendar quarter the dollar amount of the Fees deferred into the Account for such quarter, plus the value of any interest paid on the Account in accordance with this Article, less any distributions made from the Account in accordance with this Article.
ARTICLE III
ADMINISTRATION
The Corporation shall be responsible for the general administration of the Plan and for carrying out the provisions hereof. The Corporation shall have all such powers as may be necessary to carry out its duties under the Plan, including the power to determine all questions relating to eligibility for and the amount in an Account, all questions pertaining to claims for benefits and procedures for claim review, and the power to resolve all other questions arising under the Plan, including any questions of construction. The Corporation may take such further action as the Corporation shall deem advisable in the administration of the Plan. The actions taken and the decisions made by the Corporation hereunder shall be final and binding upon all interested parties.
ARTICLE IV
AMENDMENT AND TERMINATION
The Corporation reserves the right to amend or terminate the Plan at any time by action of its Board of Directors, the Compensation and Organization Committee or any other duly authorized Committee of the Board of Directors; provided, however, that no such action shall adversely affect any Participant or Beneficiary with respect to the amount credited to a Deferred Compensation Account and further provided that any such action shall be subject to the limitations set forth in Article II, Sections 11 and 14, hereof.
ARTICLE V
PRIOR PLANS
The Plan incorporates the merger of the KeyCorp Deferred Compensation Plan for Directors (the Old KeyCorp Plan), the Deferred Compensation Plan for Board of Directors of Trustcorp, Inc. (Revised November, l986) (the Trustcorp Plan), the Centran Corporation Deferred Director Compensation Plan (the Centran Plan), and the Society Bank, Michigan Directors Deferred Compensation Plan (Michigan Plan) in their entirety and all accounts existing under such Trustcorp Plan and Centran Plan on September 30, l990, under such Michigan Plan on June 30, 1993, and under such Old KeyCorp Plan on June 30, 1994, shall become Accounts (or, if a Participant has accounts under the Plan and any of such Plans, shall be merged into the Account under the Plan) fully subject to all terms and conditions hereof. All accounts under the Trustcorp Plan and the Centran Plan will be valued as of September 30, l990, all accounts under the Michigan Plan will be valued as of June 30, 1993, and all accounts under such Old KeyCorp Plan will be valued as of June 30, 1994 and this will constitute the initial balance of the Account under this Plan. Participants in the Trustcorp Plan, the Centran Plan, the Michigan Plan, or Old KeyCorp Plan will be given the opportunity to indicate the type of election and the type of account(s) into which their Trustcorp Plan, Centran Plan, Michigan Plan, or Old KeyCorp Plan account will be converted. In the absence of any such designation, such Participants in the Trustcorp Plan, the Centran Plan, the Michigan Plan or the Old KeyCorp Plan shall be deemed to have elected the Interest Bearing Account and the payout method and payment year indicated on their Trustcorp Plan, Centran Plan, Michigan Plan and Old KeyCorp Plan elections, unless they have an Account under this Plan, in which case the Trustcorp Plan, the Centran Plan, the Michigan Plan or Old KeyCorp Plan account will merge into such Account and be subject to the distribution elections made with regard to such Account.
ARTICLE VI
MISCELLANEOUS
1. Nonalienation of Deferred Compensation Account . No Participant or Beneficiary shall encumber or dispose of the right to receive any payment of the amount of an Account hereunder without the written consent of the Corporation. If a Participant or Beneficiary without the written consent of the Corporation attempts to assign, transfer, alienate, or encumber the right to receive the amount of a Deferred Compensation Account hereunder or permits the same to be subject to alienation, garnishment, attachment, execution, or levy of any kind, then the Corporation, in its discretion, may hold or pay such amount or any part thereof to or for the benefit of such Participant or Beneficiary, the Participants or Beneficiarys spouse, children, blood relatives, or other dependents, or any of them, in such manner and in such proportions as the Corporation may consider proper. Any such application of the amount of an Account may be made without the intervention of a guardian. The receipt by the payee(s) of such payment(s) shall constitute a complete acquittance to the Corporation with respect thereto, and neither the Corporation, nor any Subsidiary, nor any officer, member, employee, or agent thereof, shall have any responsibility for the proper application thereof.
2. Plan Noncontractual . Nothing herein contained shall be construed as a commitment to or agreement with any Director of the Corporation or a Subsidiary to continue such persons directorship with the Corporation or Subsidiary, and nothing herein contained shall be construed as a commitment or agreement on the part of the Corporation or any Subsidiary to continue the directorship or the rate of director compensation of any such person for any period. All Directors shall remain subject to removal to the same extent as if the Plan had never been put into effect.
3. Interest of Director . The obligation of the Corporation under the Plan to make payment of amounts reflected on an Account merely constitutes the unsecured promise of only the Corporation to make payments from its general assets as provided herein. Further, no Participant or Beneficiary shall have any claim whatsoever against any Subsidiary for amounts reflected on an Account. At its discretion, the Corporation may establish one or more trusts, with such trustees as the Corporation may approve, for the purpose of providing for the payment of benefits owed under the Plan. Although such a trust may be irrevocable, in the event of insolvency or bankruptcy of the Corporation, such assets will be subject to the claims of the Corporations general creditors. To
the extent any benefits provided under the Plan are paid from any such trust, the Corporation shall have no further obligation to pay them. If not paid from the trust, such benefits shall remain the obligation of the Corporation.
4. Claims of Other Persons . The provisions of the Plan shall in no event be construed as giving any person, firm, or corporation any legal or equitable rights against the Corporation or any Subsidiary, or the officers, employees, or directors of the Corporation or any Subsidiary, except any such rights as are specifically provided for in the Plan or are hereafter created in accordance with the terms and provisions of the Plan.
5. Delegation of Authority . Any action to be taken by the Corporations Board of Directors under this Plan may be taken by such Boards Compensation and Organization Committee, Executive Committee or any other duly authorized Committee of the Board of Directors.
6. Severability . The invalidity and unenforceability of any particular provision of the Plan shall not affect any other provision hereof, and the Plan shall be construed in all respects as if such invalid or unenforceable provisions were omitted herefrom.
7. Governing Law . The provisions of the Plan shall be governed and construed in accordance with the laws of the State of Ohio.
EXECUTED at Cleveland, Ohio as of the 18th day of May 2000.
KEYCORP | ||
By: | /s/ Thomas E. Helfrich | |
Thomas E. Helfrich, Executive Vice President |
EXHIBIT 10.23
KEYCORP AMENDED AND RESTATED
SECOND DIRECTOR DEFERRED COMPENSATION PLAN
The KeyCorp Amended and Restated Second Director Deferred Compensation Plan (the Plan) as previously amended and restated, is hereby amended and restated in its entirety as of September 18, 2013. The Plan is designed to provide Directors of KeyCorp with the opportunity to defer the payment of their directors fees in accordance with the provisions of this Plan. It is the intention of KeyCorp and it is the understanding of the Directors participating in the Plan that the Plan constitutes a nonqualified plan of deferred compensation that is subject to the provisions of Section 409A of the Code and the applicable regulations issued thereunder.
ARTICLE I
DEFINITIONS
For the purposes hereof, the following words and phrases shall have the meanings indicated.
1. | Account shall mean the bookkeeping account established in accordance with Article II hereof. |
2. | Beneficiary shall mean any person designated by a Participant in accordance with the Plan to receive payment of all or a portion of the remaining balance of the Participants Account in the event of the death of the Participant prior to receipt by the Participant of the entire amount credited to the Participants Account. |
3. | Change of Control shall be deemed to have occurred if, and only if, under any rabbi trust arrangement maintained by the Corporation (the Trust), as such Trust may from time to time be amended or substituted, the Corporation is required to fund the Trust to secure the payment of any Deferred Shares or Account balances because a Change of Control, as defined in the Trust, has occurred on or after the effective date of the Plan; provided that the Change of Control transaction also constitutes the occurrence of a change in the ownership, a change in the effective control or a change in the ownership of a substantial portion of the assets of the Corporation within the meaning of Section 409A of the Code. |
4. | Code shall mean the Internal Revenue Code of 1986, as amended. |
5. | Corporation shall mean KeyCorp, a bank holding company and its corporate successors, including the surviving corporation resulting from any merger of KeyCorp with any other corporation or corporations. |
6. | Director shall mean (i) any member of the Board of Directors of the Corporation and (ii) any member of the Board of Directors of a Subsidiary. |
7. | Election Agreement shall mean the written election to defer Fees signed in writing by the Director and in the form provided by the Corporation. Election Agreements shall be irrevocable. |
8. | Fees shall mean the fees earned as a Director. |
9. | Participant shall mean any Director who has at any time elected to defer the receipt of his or her Fees in accordance with the terms of the Plan. |
10. | Plan shall mean this Second Director Deferred Compensation Plan, as the same may be amended or substituted from time to time. |
11. | Subsidiary shall mean a corporation organized and existing under the laws of the United States or of any state or the District of Columbia of which more than 50% percent of the issued and outstanding stock is owned by the Corporation or by a Subsidiary of the Corporation, and which has been designated by the Board of Directors or the Chief Executive Officer of the Corporation as a Subsidiary eligible to participate in the Plan. |
12. | Year shall mean the calendar year. |
ARTICLE II
ELECTION TO DEFER
1. Eligibility . Any Director may elect to defer receipt of all or a specified portion of his or her Fees for any Year prior to 2014 in accordance with Section 2 of this Article. The opportunity to defer Fees earned for 2014 and later Years shall be provided under the terms, and subject to the conditions, of the KeyCorp Directors Deferred Share Sub-Plan.
2. Election to Defer . A Director who desires to defer the payment of all or a portion of his or her Fees for any Year must complete and deliver an Election Agreement to the Corporation no later than the last day of the Year prior to the Year in which the Fees will be earned by the Director; provided, however, that any Director hereafter elected to the Board of Directors of the Corporation or a Subsidiary who was not a previously a Participant in the Plan may make an election to defer the payment of Fees for the Year in which he or she is elected to the Board of Directors by delivering the Election Agreement to the Corporation within 30 days of first becoming a Director.
3. Amount Deferred; Date of Deferral . A Participant shall designate on the Election Agreement (a) the amount of his or her Fees that are to be deferred to the Plan for any Year, (b) the date on which the Participants Fees shall be distributed, (c) whether the distribution of deferred Fees is to be paid in its entirety or whether such Fees shall be paid in installments, and (d) if in installments, the number of quarterly installments. Deferrals shall be until the earlier to occur: (i) the date specified by the Participant which may be not later than the date on which the Participant would attain age 72, or (ii) the date of death of the Participant, at which time payment of the amount deferred shall be made in accordance with Section 7 or 10 of this Article. A Participant may not select more than one date in each Election Agreement upon which distribution shall be made or when installments shall begin; distribution dates shall be the first business day of a calendar quarter.
4. Account . The Corporation shall maintain an Account for the Fees deferred by each Participant. A Participant shall designate on the Election Agreement whether to have the deferred Fees valued on the basis of KeyCorp Common Shares in accordance with Section 5 of this Article or based on an interest accrual in accordance with Section 6 of this Article. The Corporation may, if necessary or desirable, establish separate Accounts for the Participant to properly account for amounts deferred under the different alternatives and Years; all such Accounts are collectively referred to herein as the Account. The Account based on KeyCorp Common Shares shall be known as the Common Shares Account, and the interest bearing account shall be known as the Interest Bearing Account; a Participant may defer a portion of his or her Fees into each type of Account.
5. Common Shares Account . If a Participant elects to have all or a portion of his or her Fees deferred into the Common Shares Account, as of the last business day of any quarter, there shall be added to such Account the number of Common Shares (whole and fractional, rounded to the nearest one-hundredth of a share) equal to the dollar amount of such Fees payable for such calendar quarter plus all dividends payable during such quarter on the Common Shares held in the Account on the first day of such quarter divided by the market value of the Common Shares at the close of business on the last business day of such quarter.
6. Interest Bearing Account . If a Participant elects to have all or a portion of his or her Fees deferred into the Interest Bearing Account, there shall be added to the Account as of the last business day of each calendar quarter the dollar amount of such Fees payable for such calendar quarter plus all interest payable on such Interest Bearing Account for such quarter as follows: A Participants account will receive interest as of each month equal to 120% of the applicable long term federal rate as published by the Internal Revenue Service for that month, compounded monthly, and divided by 12.
7. Payment of Account; Period of Deferral . The amount of a Participants Account shall be paid to the Participant in a single payment and/or in a number of individual, substantially equal consecutive quarterly installments (not to exceed 40), as elected by the Participant in his or her Election Agreement. Distributions from the Interest Bearing Account shall be made in cash. Distributions from the Common Shares Account shall be made in Common Shares. The amount of the Account remaining after payment of each individual installment
shall continue to be valued in accordance with Section 5 of this Article or bear interest in accordance with Section 6 of this Article. Full payment or the first quarterly installment, as the case may be, shall be made in accordance with the terms of the Participants Election Agreement as soon as administratively practicable following the Participants designated payment date, but in any event no later than 90 days following the date (i) on which the Participant has elected to commence distribution of his or her Account, or (ii) of the Participants death.
Any installment payment shall be made pro rata from the Common Shares Account and the Interest Bearing Account. The election as to the time for and method of payment of the amount of the Account relating to Fees deferred for a particular Year shall be made on the Election Agreement(s) and thereafter shall not be altered except as provided in Section 10 of this Article.
In the event that a Participant elects to receive installment payments under this Section 7,
(a) | The amount of the distribution from the Common Shares Account shall be valued based on the fair market value of the Common Shares on the last business day of the calendar quarter immediately prior to the distribution date; |
(b) | The amount of the distribution from the Interest Bearing Account shall be valued based on the value of such Account on the last business day of the calendar quarter immediately prior to such distribution date; |
(c) | The amount of each installment shall be determined by dividing the value of the Common Shares Account, the Interest Bearing Account, or both, as the case may be, by the number of installments remaining to be paid to the Participant. |
8. Small Accounts . If the quarterly installment payment elected under any Election Agreement would result in a quarterly payment of less than $500 in cash or Common Shares, as the case may be, the Participant shall receive an immediate lump sum payment of the entire amount of the Account but in any event no later than 90 days following such distribution date. Further, notwithstanding any other provision of this Plan, the Corporation may, to the extent permitted under Section 409A of the Code, accelerate payment of a Participants Account if, at any time, the balance of the Participants Account (and the value of any other nonqualified deferred compensation arrangement that is aggregated with the Participants Account under Treasury Regulation Section 1.409A-1(c)) is less than or equal to the applicable dollar amount then in effect under Section 402(g)(1)(B) of the Code.
9. Death of Participant . In the event of the death of a Participant, the amount of the Participants Account shall be paid to the Beneficiary or Beneficiaries designated in writing signed by the Participant in the form provided by the Corporation; in the event there is more than one Beneficiary, such form shall include the proportion to be paid to each Beneficiary and indicate the disposition of such share if a Beneficiary does not survive the Participant; in the absence of any such designation, payment from the Account shall be divided equally among all other Beneficiaries. A Participants Beneficiary designation may be changed at any time prior to the Participants death by execution and delivery of a new Beneficiary designation form. The form on file with the Corporation at the time of the Participants death which bears the latest date shall govern. In the absence of a Beneficiary designation or the failure of any Beneficiary to survive the Participant, the amount of the Participants Account shall be paid to the Participants estate. Unless a Participant elects otherwise, in the event of the Participants death after December 31, 2014, payment of the Participants Account shall be made in a single lump sum to the Participants Beneficiary(ies).
10. Acceleration .
(a) | Change of Control Distribution Election . A Participant may elect at the time that he or she first elects to participate in the Plan, to receive a special Change of Control distribution of the Participants Account in the event of a Change of Control. The Participant shall elect from one of the following special Change of Control distribution options: |
(i) |
upon the occurrence of a Change of Control, the entire amount of the Participants Account will be immediately paid in full to the Participant regardless of whether the Participant continues as a |
Director after the Change of Control, but in any event no later than 90 days following such Change of Control; |
(ii) | upon and after the occurrence of a Change of Control, the entire amount of the Participants Account will be immediately paid in full to the Participant, but only if either (a) the Participant is not a Director as of immediately after the Change of Control, or (b) the Participant ceases to be a Director within two Years after the Change of Control. Such payment under (a) or (b) hereof shall be made no later than 90 days following such applicable distribution date; or |
(iii) | upon the occurrence of a Change of Control, the payment elections specified in the Participants Election Agreement shall govern irrespective of the Change of Control. |
(b) | Unforseeable Emergency . The Corporation may accelerate the distribution of all or any portion of the Participants Account to the Participant in the event of a Participants unforeseeable emergency. For purposes of this Section 10(b), the term unforeseeable emergency shall mean a severe financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant, the Participants spouse, or the Participants dependent (as defined in Section 152 of the Code, without regard to Sections 152(b)(1), (b)(2), and (d)(1)(B)), the loss of the Participants property due to casualty, or such other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. The determination of an unforeseeable emergency shall be determined in accordance with the requirements of Section 409A of the Code and the applicable regulations issued thereunder. Distribution of the Participants Account shall be limited to the amount reasonably necessary to satisfy the emergency, and it shall include any applicable taxes that are or will be owed by the Participant as a result of the distribution. |
11. Change of Control . Notwithstanding any other provision of the Plan to the contrary, in the event of a Change of Control, no amendment or modification of this Plan may be made at any time on or after such Change of Control (1) to reduce or modify a Participants Pre-Change of Control Account Balance, (2) to reduce or modify the Interest Bearing Accounts rate of earnings on or method of crediting such earnings to a Participants Pre-Change of Control Account Balance, (3) to reduce or modify the Common Shares Accounts method of calculating all earnings, gains, and/or losses on a Participants Pre-Change of Control Account Balance, or (4) to reduce or modify the Participants deferrals to be credited to a Participants Plan Account for the applicable deferral period. For purposes of this Section 11, the term Pre-Change of Control Account Balance shall mean, with regard to any Plan Participant, the aggregate amount of such Participants prior deferrals with all earnings, gains, and losses thereon which are credited to the Participants Plan Account through the close of the calendar Year in which such Change of Control occurs.
12. Common Stock Conversion . In the event of a Change of Control in which the Common Shares of the Corporation are converted into or exchanged for securities, cash and/or other property as a result of any capital reorganization or reclassification of the capital stock of the Corporation, or as a result of the consolidation or merger of the Corporation with or into another corporation or entity, or the sale of all or substantially all of its assets to another corporation or entity, the Corporation shall cause the Common Shares Account to reflect the securities, cash and other property to be received in such reorganization, reclassification, consolidation, merger or sale on the balance in the Common Shares Account and, from and after such reorganization, reclassification, consolidation, merger or sale, the Common Shares Account shall reflect all dividends, interest, earnings and losses attributable to such securities, cash, and other property (with any cash earning interest at the rate applicable to the Interest Bearing Account).
13. Amendment in the Event of a Change of Control . On or after a Change of Control, the provisions of Article I and Article II may not be amended or modified as such provisions apply to the Participants Pre-Change of Control Account Balances.
14. Statement . Each Participant shall receive a statement of his or her Account not less than annually.
15. Valuation of the Account . Each Account shall be valued as of the last day of each calendar quarter until payment of a Participants Fees is made in full. If a Participant has elected to have his or her Fees deferred into
the Common Shares Account, the Corporation shall ascertain the number of shares in the Account (whole and fractional, rounded to the nearest one-hundredth of a share) after taking into account earnings to the Account under this Article and distributions from the Account under this Article, based on the fair market value of the Common Shares on the last business day of such calendar quarter. Automatically and without further action by the Corporation, in the event of any stock dividend or split, recapitalization, merger, consolidation, spin-off, reorganization, combination, exchange of shares, or a similar corporate change, appropriate adjustments in the number and kind of shares held in a Participants Account shall be made by the Corporation to reflect such change. If a Participant has elected to have his or her Fees deferred into the Interest Bearing Account, the Corporation shall ascertain the value of such Interest Bearing Account by adding to the value of the Account at the beginning of such calendar quarter the dollar amount of the Fees deferred into the Account for such quarter, plus the value of any interest paid on the Account in accordance with this Article, less any distributions made from the Account in accordance with this Article.
16. Plan Transfers . Participants may elect to transfer equity awards (other than stock option awards) granted prior to 2014 under the KeyCorp Directors Deferred Share Plan to the Plan, provided, the Participants election to transfer such vested award is made in accordance with the requirements of the grant agreement under which the award was issued and in accordance with the subsequent deferral election requirements of Section 409A of the Code. Transferred awards shall be fully vested under the Plan and shall be subject to the distribution requirements contained within the Participants transfer election form provided, however, that such Plan transfers shall be deferred under the Plan for a minimum of five (5) full calendar years from the date of the transfer. Transferred awards shall be subject to full investment diversification if cash based, and transferred awards shall be invested in the in the Plans Common Stock Account if equity based. Awards invested in the Plans Common Stock Account will not be subject to investment direction or diversification. Transferred awards shall be separately maintained under the Plan.
ARTICLE III
ADMINISTRATION
The Corporation shall be responsible for the general administration of the Plan and for carrying out the provisions hereof. The Corporation shall have all such powers as may be necessary to carry out its duties under the Plan, including the power to determine all questions relating to eligibility for and the amount in an Account, all questions pertaining to claims for benefits and procedures for claim review, and the power to resolve all other questions arising under the Plan, including any questions of construction. The Corporation may take such further action as the Corporation shall deem advisable in the administration of the Plan. The actions taken and the decisions made by the Corporation hereunder shall be final and binding upon all interested parties.
ARTICLE IV
AMENDMENT AND TERMINATION
The Corporation reserves the right to amend or terminate the Plan at any time by action of its Board of Directors, the Compensation and Organization Committee, the Nominating and Corporate Governance Committee or any other duly authorized Committee of the Board of Directors; provided, however, that no such action shall adversely affect any Participant or Beneficiary with respect to the amount credited to a Participants Account and further provided that any such action shall be subject to the limitations set forth in Article II hereof. No amendment or termination of the Plan shall result in an acceleration of Plan benefits in violation of Section 409A of the Code.
ARTICLE V
MISCELLANEOUS
1. No Present Interest . Subject to any federal statute to the contrary, no right or benefit under the Plan and no right or interest in each Participants Plan Account shall be subject to anticipation, alienation, sale,
assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge any right or benefit under the Plan, or Participants Plan Account shall be void. No right, interest, or benefit under the Plan or Participants Plan Account shall be liable for or subject to the debts, contracts, liabilities, or torts of the Participant or Beneficiary. If the Participant or Beneficiary becomes bankrupt or attempts to alienate, sell, assign, pledge, encumber, or charge any right under the Plan or Participants Plan Account, such attempt shall be void and unenforceable.
2. Plan Noncontractual . Nothing herein contained shall be construed as a commitment to or agreement with any Director of the Corporation or a Subsidiary to continue such persons directorship with the Corporation or Subsidiary, and nothing herein contained shall be construed as a commitment or agreement on the part of the Corporation or any Subsidiary to continue the directorship or the rate of director compensation of any such person for any period. All Directors shall remain subject to removal to the same extent as if the Plan had never been put into effect.
3. Interest of Director . The obligation of the Corporation under the Plan to make payment of amounts reflected on an Account merely constitutes the unsecured promise of only the Corporation to make payments from its general assets as provided herein. Further, no Participant or Beneficiary shall have any claim whatsoever against any Subsidiary for amounts reflected on an Account. At its discretion, the Corporation may establish one or more trusts, with such trustees as the Corporation may approve, for the purpose of providing for the payment of benefits owed under the Plan. Although such a trust may be irrevocable, in the event of insolvency or bankruptcy of the Corporation, such assets will be subject to the claims of the Corporations general creditors. To the extent any benefits provided under the Plan are paid from any such trust, the Corporation shall have no further obligation to pay them. If not paid from the trust, such benefits shall remain the obligation of the Corporation.
4. Claims of Other Persons . The provisions of the Plan shall in no event be construed as giving any person, firm, or corporation any legal or equitable rights against the Corporation or any Subsidiary, or the officers, employees, or directors of the Corporation or any Subsidiary, except any such rights as are specifically provided for in the Plan or are hereafter created in accordance with the terms and provisions of the Plan.
5. Delegation of Authority . Any action to be taken by the Corporations Board of Directors under this Plan may be taken by such Boards Compensation and Organization Committee, Executive Committee, Nominating and Corporate Governance Committee or any other duly authorized Committee of the Board of Directors.
6. Severability . The invalidity and unenforceability of any particular provision of the Plan shall not affect any other provision hereof, and the Plan shall be construed in all respects as if such invalid or unenforceable provisions were omitted herefrom.
7. Governing Law . The provisions of the Plan shall be governed and construed in accordance with the laws of the State of Ohio.
ARTICLE VI
COMPLIANCE WITH
SECTION 409A CODE
The Plan is intended to provide for the deferral of compensation in accordance with the provisions of Section 409A of the Code and regulations and published guidance issued pursuant thereto. Accordingly, the Plan shall be construed in a manner consistent with those provisions and may at any time be amended to facilitate compliance with such provisions.
Notwithstanding any provision of the Plan to the contrary, no, deferral, accrual, transfer or distribution shall be made or given effect under the Plan that would result in early taxation or assessment of penalties or interest of any amount under Section 409A of the Code.
EXHIBIT 10.24
KEYCORP DIRECTORS DEFERRED SHARE PLAN (December 31, 2008)
ARTICLE I
PURPOSE
The purpose of this KeyCorp Directors Deferred Share Plan (Plan) is to attract, retain and compensate highly qualified individuals to serve as Directors and to align the interests of Directors with the shareholders of the Corporation further and thereby promote the long-term success and growth of the Corporation.
ARTICLE II
DEFINITIONS
For purposes of this Plan, the following words and phrases shall have the meanings hereinafter set forth, unless a different meaning is clearly required by the context:
(a) | Account : A bookkeeping account in which Deferred Shares shall be recorded and to which dividends may be credited in accordance with the Plan. |
(b) | Beneficiary or Beneficiaries : The person or persons designated by a Director in accordance with the Plan to receive payment of the Directors Account in the event of the death of the Director. |
(c) | Beneficiary Designation : An agreement in substantially the form adopted and modified from time to time by the Corporation pursuant to which a Director may designate a Beneficiary or Beneficiaries. |
(d) | Board : The Board of Directors of the Corporation. |
(e) | Change of Control : A Change of Control shall be deemed to have occurred if, under any rabbi trust arrangement maintained by the Corporation (the Trust), as such Trust may from time to time be amended or substituted, the Corporation is required to fund the Trust to secure the payment of any Deferred Shares because a Change of Control, as defined in the Trust, has occurred on or after the effective date of the Plan. |
(f) | Change of Control Election : The meaning set forth in Section 4.6(a). |
(g) | Committee : The Nominating and Corporate Governance Committee of the Board or any successor committee designated by the Board. |
(h) | Common Shares : The Corporations common shares, $1.00 par value per share. Common Shares may be shares of original issuance or treasury shares or a combination of the foregoing. |
(i) | Common Shares Account : The meaning of such term as set forth in the Corporations Director Deferred Compensation Plan. |
(j) | Corporation : KeyCorp or any successor or successors thereto. |
(k) | Deferral Period : The meaning set forth in Section 4.2. |
(l) | Deferred Shares : A right to receive Common Shares or the equivalent cash value thereof granted pursuant to Article III. |
(m) | Director : An individual duly elected or chosen as a Director of the Corporation who is not also an employee of the Corporation or any of its subsidiaries. |
(n) | Director Deferred Compensation Plan shall mean the KeyCorp Second Director Deferred Compensation Plan, as the same may be amended or substituted from time to time. |
(o) |
Fair Market Value : The price per share at which the Common Shares were last sold (i.e. the closing price) on the New York Stock Exchange for a day specified herein for which such fair market value is to be |
calculated, or if there was no sale of Common Shares so reported for such day, on the most recently preceding day on which there was such a sale, or if the Common Shares are not listed or admitted for trading on the New York Stock Exchange on the day as of which the determination is being made, the amount determined by the Board to be the Fair Market Value on that date. |
(p) | Plan : The Plan set forth in this instrument as it may from time to time be amended. |
(q) | Plan Year : The fiscal year of the Corporation. |
(r) | Retainer : The portion of a Directors annual cash compensation that is payable on a current basis without regard to the number of Board or committee meetings attended or committee positions. |
(s) | Settlement Date : The date on which the three-year Deferral Period ends, provided that the Director has not elected to transfer his or her Deferred Shares to his or her Common Shares Account under the Director Deferred Compensation Plan, as provided in Section 4.2(b). |
ARTICLE III
ANNUAL DEFERRED SHARE AWARDS
Each Director shall receive, after the date of approval of the Plan by the Corporations shareholders in 2003, and each Plan Year thereafter, an annual award of Deferred Shares. The number of Deferred Shares to be awarded shall be equal to a number of Common Shares having an aggregate Fair Market Value of the date of the award equal to 200% of the Directors Retainer, unless a lesser number of Deferred Shares is determined by the Committee. To the extent that the application of any formula in computing the number of Deferred Shares to be granted would result in fractional shares of stock, the number of shares shall be rounded down to the nearest whole share. Unless the Committee from time to time determines another date for the annual award due to unusual circumstances or otherwise, such annual award shall be made the later of the July Committee meeting or the third business day following the second quarter earnings release. At the time of making the annual award, the Committee shall determine, in its sole discretion, whether the Directors Account shall be distributed pursuant to Section 5.3 in the form of Common Shares (with fractional shares being rounded down to the nearest whole share), cash, or a combination of Common Shares and cash.
ARTICLE IV
DIRECTORS ACCOUNTS
4.1 Grant of Deferred Shares . All of a Directors Deferred Shares granted pursuant to Article III above shall be credited on a bookkeeping basis to the Directors Account. The number of Deferred Shares, which shall be credited to a Directors Account effective as of the day such Deferred Shares were awarded, shall be equal to the number of Deferred Shares granted pursuant to such award. Separate sub-accounts may be established to reflect on a bookkeeping basis all earnings, gains, or losses attributable to the Deferred Shares.
4.2 Deferral Period .
(a) | Minimum Three-Year Deferral Period . Each grant of Deferred Shares shall be subject to a required deferral period (a Deferral Period) beginning on the Deferred Shares grant date and ending on the third anniversary of such grant date; provided , however , that the Deferral Period will end prior to the third anniversary of the grant date (i) in the event of a Change of Control pursuant to a Directors Change of Control Election as provided in Section 4.6(a)(i); (ii) if the Director dies or (iii) the Directors service as a Director is terminated (unless the termination follows a Change of Control and the Director has elected in a Change of Control Election to receive his or her Account pursuant to Section 4.6(a)(iii)). |
(b) | Directors Option to Transfer the Deferred Shares . Notwithstanding Section 4.2(a), a Director may elect at any time, provided that his or her election is no later than twelve full calendar months prior to the close of the applicable Deferral Period to transfer his or her Deferred Shares into the Common Shares Account maintained under the Director Deferred Compensation Plan. Such transfer will become effective at the conclusion of the applicable three-year Deferral Period. |
(c) | Evergreen Deferral Election . Once a Director elects to transfer Deferred Shares into his or her Common Shares Account maintained under the Directors Deferred Compensation Plan, his or her transfer election will continue to be effective from Plan Year to Plan Year and the Deferred Shares for which the applicable three-year Deferral Period lapses following such election will also be transferred to his or her Directors Deferred Compensation Plans Common Shares Account. To modify this evergreen deferral election with respect to Deferred Shares otherwise granted in a particular Plan Year, the Directors revocation or modification of his or her evergreen election shall be delivered to the Corporation no later than twelve full calendar months prior to the date on which the applicable Deferral Period ends. |
(d) | No Rights During Deferral Period . During the Deferral Period, the Director shall have no right to transfer any rights under his or her Deferred Shares and shall have no other rights of ownership therein. |
4.3 Dividend Equivalents . A Directors Account will be credited, on the date of the Corporations dividend payment, with that number of additional Deferred Shares (including fractional shares) equal to the amount of cash dividends paid by the Corporation on the number of Deferred Shares in the Directors Account divided by the Fair Market Value of one Common Share on that date. Such dividend equivalents, which shall likewise be credited with dividend equivalents, shall be deferred until the end of the Deferral Period for the Deferred Shares with respect to which the dividend equivalents were credited and, if the Director has so elected, such dividend equivalents shall be transferred, along with the Deferred Shares, into the Directors Common Shares Account under the Director Deferred Compensation Plan.
4.4 Death of a Director . Notwithstanding anything to the contrary contained in this Plan, in the event of the death of a Director, the three-year Deferral Period will be deemed to have ended, and the Settlement Date will be deemed to have occurred, on the date of the Directors death. The Directors Account shall be paid, as soon as practicable following the Settlement Date, but in no event later than 90 days following the Settlement Date, to the Beneficiary or Beneficiaries designated on the Directors Beneficiary Designation or, if no such designation is in effect or no Beneficiary is then living, then to the Directors estate.
4.5 Acceleration .
(a) | Change of Control. Notwithstanding anything to the contrary contained in this Plan, upon the occurrence of a Change of Control, a Director shall be entitled to receive from the Corporation the payment of his or her Account in the manner selected as follows: Not later than the later of 30 calendar days after the effective date of this Plan, or 30 calendar days after the date a person first becomes a Director, a Director shall be entitled to make an election which will be applicable in the event of a Change of Control (the Change of Control Election). The Change of Control Election will provide the following payment alternatives to a Director in the event of a Change of Control: |
(i) | upon the occurrence of a Change of Control, the entire amount of the Directors Account will be immediately paid in full, regardless of whether the Director continues as a Director after the Change of Control; |
(ii) | upon and after the occurrence of a Change of Control and in accordance with Section 4.2(a), the entire amount of the Directors Account will be immediately paid in full if and when the Directors service as a Director is terminated; or |
(iii) | upon the occurrence of a Change of Control, the payment elections specified by the Director prior to the Change of Control shall govern irrespective of the Change of Control. . |
(b) |
Hardship in the event of an unforeseeable emergency , the Corporation may accelerate the payment of all or any portion of the Directors Account to the Director but only up to the amount necessary to meet the emergency. For purposes of this Section 4.6(b), the term unforeseeable emergency shall mean a severe financial hardship to the Director resulting from a sudden and unexpected illness or accident of the Director, the Directors spouse, or the Directors dependent (as defined in Section 152 of the Code, without regard to Section 152(b)(1), (b)(2), and (d)(1)(B)), the loss of the Directors property due to casualty, or such other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the |
Director. The determination of an unforeseeable emergency and the ability of the Corporation to accelerate the Directors Account distribution shall be determined in accordance with the requirements of Section 409A of the Code and the applicable regulations issued thereunder. Payment of the Directors Account shall be limited only to such amount as is necessary to satisfy the emergency, which shall include all applicable taxes owed or to be owed by the Director as a result of the distribution. |
ARTICLE V
DISTRIBUTION OF ACCOUNTS
5.1 Settlement Date . A Director, or in the event of such Directors death, his or her Beneficiary, shall be entitled to a distribution of such Directors Account, as provided in this Article V, following such Directors Settlement Date.
5.2 Amount to be Distributed . The amount to which a Director, or in the event of such Directors death, his or her Beneficiary, is entitled in accordance with the following provisions of this Article V, shall be based on the Directors balance in his or her Account determined as of the Settlement Date.
5.3 Form of Distribution . As soon as practicable following the Settlement Date, but in no event later than 90 days following the Directors Settlement Date, the Corporation shall distribute or cause to be distributed, to the Director or, in the case of the death of the Director, his or her Beneficiary, the balance of the Directors Account. Distribution of a Directors Account shall be made in a lump sum in the form determined pursuant to Article III. If distribution of an Account is made in the form of Common Shares, the Corporation will provide procedures to facilitate the sale of such Common Shares following distribution upon the request of the Director. If distribution of an Account is made in cash, the amount distributed shall be equal to the Fair Market Value on the Settlement Date.
5.4 Fractional Shares . The Corporation will not be required to issue any fractional Common Shares pursuant to this Plan.
5.5 Transfer of Deferred Shares . In accordance with the provisions of Section 4.2(b) and 4.2(c) hereof, if a Director elects to transfer his or her Deferred Shares to the Director Deferred Compensation Plan, such Deferred Shares when transferred shall be subject to the terms and conditions of the Director Deferred Compensation Plan, provided, however, that in no event shall such Deferred Shares be transferred unless the Directors transfer election has been made a minimum of twelve months prior to the close of the applicable Deferral Period for such Shares, and provided further, that the transferred Deferred Shares are deferred under the Director Deferred Compensation Plan for a minimum of five (5) years from the date of the Deferred Shares transfer, regardless of the Directors termination or retirement, and regardless of the distribution instructions contained in the Directors transfer election form (as required under the subsequent deferral requirements of Section 409A of the Code).
ARTICLE VI
BENEFICIARY DESIGNATION
6.1 Beneficiary Designation . Each Director shall have the right, at any time, to designate one or more persons or an entity as Beneficiary (both primary as well as secondary) to whom benefits under this Plan shall be paid in the event of the Directors death prior to distribution of the Directors Account. Each Beneficiary Designation shall be in a written form prescribed by the Corporation and shall be effective only when filed with the Corporation during the Directors lifetime.
6.2 Changing Beneficiary . Any Beneficiary Designation may be changed by the Director without the consent of the previously named Beneficiary by the Directors filing of a new Beneficiary Designation with the Corporation. The filing of a new Beneficiary Designation shall cancel all Beneficiary Designations previously filed by the Director.
ARTICLE VII
SHARES SUBJECT TO PLAN; ADJUSTMENTS
7.1 Shares Subject to Plan . Subject to adjustment as provided in this Plan, the total number of Common Shares which may be delivered to Directors upon distribution of their Accounts shall not in the aggregate exceed 500,000 Common Shares. Any Common Shares delivered to Directors by a trust that is treated as a grantor trust within the meaning of Sections 671-679 of the Internal Revenue Code of 1986, as amended, shall be treated as delivered by the Corporation under this Plan.
7.2 Forfeitures; Etc.; Payment in Cash . The number of Common Shares available under Section 7.1 shall be adjusted to account for shares credited to the Accounts that are forfeited, surrendered or relinquished to the Corporation, to provide for the payment of taxes or otherwise, paid or distributed to Directors or their Beneficiaries in the form of cash, or transferred to a Directors Common Shares Account pursuant to Sections 4.2(b) and 4.2(c). Upon forfeiture, surrender or relinquishment, upon payment or distribution in cash, or upon transfer to a Directors Common Shares Account, of Common Shares credited to an Account, such Common Shares shall again be available for delivery upon distribution of an Account under this Plan.
7.3 Adjustments .
(a) | Adjustments . The Committee may make or provide for such adjustments in the (i) number of Common Shares covered by this Plan, (ii) number of Deferred Shares granted or credited to Accounts hereunder, and (ii) kind of shares covered thereby, as the Committee in its sole discretion may in good faith determine to be equitably required in order to prevent dilution or enlargement of the rights of Directors that otherwise would result from (x) any stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of the Corporation, (y) any merger, consolidation, spin-off, spin-out, split-off, split-up, reorganization, partial or complete liquidation of the Corporation or other distribution of assets, issuance of rights or warrants to purchase securities of the Corporation, or (z) any other corporate transaction or event having an effect similar to any of the foregoing. In the event of any such transaction or event, the Committee may provide in substitution for any or all outstanding grants or awards under this Plan such alternative consideration as it may in good faith determine to be equitable under the circumstances and may require in connection therewith the surrender of all awards so replaced. Moreover, the Committee may on or after the date of grant provide that the holder of the grant or award may elect to receive an equivalent grant or award in respect of securities of the surviving entity of any merger, consolidation or other transaction or event having a similar effect, or the Committee may provide that the holder will automatically be entitled to receive such an equivalent grant or award. |
(b) | Change of Control . Notwithstanding Section 8.2 hereof, in the event of a Change of Control as defined in accordance with Section 2.1(e) of the Plan, no amendment or modification of the Plan may be made at any time on or after such Change of Control (1) to reduce or modify a Directors Pre-Change of Control Account balance, or (2) to reduce or modify the Accounts method of calculating earnings, gains, and/or losses on the Directors Pre-Change of Control Account balance. For purposes of this Section 7.3(b), the term Pre-Change of Control Account Balance shall mean, with regard to any Director, the aggregate amount of the Directors Deferred Shares with all earnings, gains, and losses thereon which are credited to the Directors Account through the close of the calendar year in which such Change of Control occurs. |
ARTICLE VIII
ADMINISTRATION, AMENDMENT AND TERMINATION
8.1 Administration . The Plan shall be administered by the Corporation. The Corporation shall have such powers as may be necessary to discharge its duties hereunder. The Corporation may, from time to time, employ, appoint or delegate to an agent or agents (who may be an officer or officers of the Corporation) and delegate to them such administrative duties as it sees fit, and may from time to time consult with legal counsel who may be counsel to the Corporation. No agent appointed by the Corporation to perform administrative duties hereunder shall be liable for any action taken or determination made in good faith. All elections, notices and directions under the Plan by a Director shall be made on such forms as the Corporation shall prescribe.
8.2 Amendment and Termination . The Committee may alter or amend this Plan from time to time or may terminate it in its entirety; provided , however , that no such action, except for an acceleration of benefits, shall, without the consent of a Director, impair the rights in any Deferred Shares issued or to be issued to such Director under the Plan; and further provided , that any amendment that must be approved by the shareholders of the Corporation in order to comply with applicable law or the rules of the principal exchange upon which the Common Shares are traded or quoted shall not be effective unless and until such approval has been obtained in compliance with such applicable law or rules. Presentation of this Plan or any amendment hereof for shareholder approval shall not be construed to limit the Corporations authority to offer similar or dissimilar benefits through plans or other arrangements that are not subject to shareholder approval unless otherwise limited by applicable law or stock exchange rules.
ARTICLE IX
FINANCING OF BENEFITS
9.1 Financing of Benefits . The Deferred Shares payable under the Plan to a Director or, in the event of his or her death, to his or her Beneficiary, shall be paid by the Corporation from its general assets, including treasury shares. The right to receive payment of the Deferred Shares represents an unfunded, unsecured obligation of the Corporation.
9.2 Security for Benefits . Notwithstanding the provisions of Section 9.1, nothing in this Plan shall preclude the Corporation from setting aside Common Shares or funds in a so-called grantor trust pursuant to one or more trust agreements between a trustee and the Corporation. However, no Director or Beneficiary shall have any secured interest or claim in any assets or property of the Corporation or any such trust and all Common Shares or funds contained in such trust shall remain subject to the claims of the Corporations general creditors.
ARTICLE X
GENERAL PROVISIONS
10.1 Governing Law . The provisions of this Plan shall be governed by and construed in accordance with the laws of the State of Ohio.
10.2 Shareholder Approval . Notwithstanding the foregoing provisions of the Plan, no Common Shares shall be issued or transferred pursuant to the Plan before the date of the approval of this Plan by the Corporations shareholders.
10.3 Miscellaneous . Headings are given to the sections of this Plan solely as a convenience to facilitate reference. Such headings, numbering and paragraphing shall not in any case be deemed in any way material or relevant to the construction of this Plan or any provisions thereof.
10.4 No Right to Continue as Director . Neither the Plan, nor the granting of Deferred Shares nor any other action taken pursuant to the Plan, shall constitute or be evidence of any agreement or understanding, express or implied, that a Director has a right to continue as a Director for any period of time, or at any particular rate of compensation.
10.5 Compliance with Section 409A Requirements . The Plan is intended to provide for the deferral of compensation in accordance with the provisions of Section 409A of the Code and regulations and published guidance issued pursuant thereto. Accordingly, the Plan shall be administered in a manner consistent with those provisions. Notwithstanding any provision of the Plan to the contrary, no otherwise permissible election, deferral, accrual, transfer or distribution shall be made or given effect under the Plan that would result in a violation of Section 409A of the Code.
EXHIBIT 10.25
KEYCORP DIRECTORS DEFERRED SHARE SUB-PLAN
(September 18, 2013)
ARTICLE I
PURPOSE
The KeyCorp Directors Deferred Share Sub-Plan (Sub-Plan) has been established as a sub-plan under the KeyCorp 2013 Equity Compensation Plan (Equity Compensation Plan). The Sub-Plan is a successor to the KeyCorp Directors Deferred Share Plan, adopted as of December 31, 2008 (the Prior Plan), which terminated in its entirety effective on May 16, 2013, the date that the Corporations shareholders approved the Equity Compensation Plan (provided that all outstanding awards under the Prior Plan as of such date shall remain outstanding and shall be administered and settled in accordance with the terms of the Prior Plan). The purpose of the Sub-Plan is to attract, retain and compensate highly qualified individuals to serve as Directors and to align the interests of Directors with the shareholders of the Corporation further and thereby promote the long-term success and growth of the Corporation. The Sub-Plan is hereby amended and restated in its entirety as set forth herein, effective as of September 18, 2013.
ARTICLE II
DEFINITIONS
Capitalized terms used in the Sub-Plan but not defined herein shall have the same meanings as defined in the Equity Compensation Plan. In addition to those terms and the terms defined in Article I hereof, the following terms shall have the meanings hereinafter set forth, unless a different meaning is clearly required by the context:
(a) | Account : The meaning set forth in Section 4.3. |
(b) | Beneficiary or Beneficiaries: The person or persons designated by a Director in accordance with the Sub-Plan to receive payment of the Directors unpaid Deferred Shares and the Directors Account in the event of the death of the Director. |
(c) | Beneficiary Designation: An agreement in substantially the form adopted and modified from time to time by the Corporation pursuant to which a Director may designate a Beneficiary or Beneficiaries. |
(d) | Change of Control: Notwithstanding any provision of the Equity Compensation Plan, a Change of Control shall be deemed to have occurred if and only if, under any rabbi trust arrangement maintained by the Corporation (the Trust), as such Trust may from time to time be amended or substituted, the Corporation is required to fund the Trust to secure the payment of any Deferred Shares or Account balances because a Change of Control, as defined in the Trust, has occurred on or after the effective date of the Sub-Plan; provided that the Change of Control transaction also constitutes the occurrence of a change in the ownership, a change in the effective control or a change in the ownership of a substantial portion of the assets of the Corporation within the meaning of Section 409A of the Code. |
(e) | Change of Control Election: The meaning set forth in Section 6.1. |
(f) | Deferral Period: The meaning set forth in Section 3.2(a). |
(g) | Deferred Shares: A right to receive Common Shares or the equivalent cash value thereof granted pursuant to Section 11 of the Equity Compensation Plan and Article III of this Sub-Plan. |
(h) | Election Agreement: The written election to defer payment of Fees and/or Deferred Shares in accordance with Section 3.2(b) or Article IV signed in writing by the Director and in the form provided by the Corporation. Election Agreements shall be irrevocable. |
(i) | Fees: The fees earned as Director. |
(j) | Nominating and Corporate Governance Committee: The Nominating and Corporate Governance Committee of the Board or any successor committee designated by the Board. |
(k) | Participant: Any Director who has at any time elected to defer the receipt of his or her Fees and/or Deferred Shares in accordance with the terms of the Sub-Plan. |
(l) | Retainer: The portion of a Directors annual cash compensation that is payable on a current basis without regard to the number of Board or committee meetings attended or committee positions. |
(m) | Second Director Plan: The KeyCorp Second Director Deferred Compensation Plan, as the same may be amended from time to time. |
(n) | Settlement Date: The date on which the three-year Deferral Period with respect to an award of Deferred Shares ends, provided that the Director has not elected to defer payment of his or her Deferred Shares pursuant to Section 3.2(b). |
(o) | Year: The calendar year. |
ARTICLE III
ANNUAL DEFERRED SHARE AWARDS
3.1 Annual Awards . Each Director shall receive, after the date of approval of the Equity Compensation Plan by the Corporations shareholders in 2013, and each Year thereafter, an annual award of Deferred Shares. The number of Deferred Shares to be awarded shall be equal to a number of Common Shares having an aggregate Fair Market Value as of the date of the award equal to 200% of the Directors Retainer, unless a lesser number of Deferred Shares is determined by the Nominating and Corporate Governance Committee. To the extent that the application of any formula in computing the number of Deferred Shares to be granted would result in fractional shares of stock, the number of shares shall be rounded down to the nearest whole share. Unless the Nominating and Corporate Governance Committee from time to time determines another date for the annual award due to unusual circumstances or otherwise, beginning with the annual award made during 2014, such annual award shall be made on the day of the Corporations annual meeting of shareholders, in accordance with the Corporations normal equity granting policies and only to those Directors serving as of the conclusion of such annual meeting. At the time of making the annual award, the Nominating and Corporate Governance Committee shall determine, in its sole discretion, whether Deferred Shares shall be payable in the form of Common Shares (with fractional shares being rounded down to the nearest whole share), cash, or a combination of Common Shares and cash.
3.2 Deferral Period .
(a) | Minimum Three-Year Deferral Period . Each grant of Deferred Shares shall be subject to a required deferral period (a Deferral Period) beginning on the Deferred Shares grant date and ending on the earlier of the third anniversary of such grant date or the date of the Corporations annual meeting of shareholders that occurs in the third Year following the Year in which such grant date occurs (the Vesting Date); provided, however, that the Deferral Period will end (and the Deferred Shares will become fully vested) prior to the Vesting Date (i) in the event of a Change of Control pursuant to a Directors Change of Control Election as provided in Section 6.1(a); (ii) if the Director dies; or (iii) if the Directors service as a Director is terminated (unless the termination follows a Change of Control and the Director has elected in a Change of Control Election to receive his or her Deferred Shares pursuant to Section 6.1(c)). |
(b) | Directors Option to Defer Payment of Deferred Shares . Notwithstanding Section 3.2(a), a Director may elect, during the period specified by the Corporation in accordance with this Section 3.2(b) and Section 409A of the Code, to defer the payment of his or her Deferred Shares. Any deferral election pursuant to this Section 3.2(b) shall specify (x) the date on which the Deferred Shares shall be distributed, which shall be the first day of a calendar quarter commencing after the end of the Deferral Period, (y) whether the distribution of Deferred Shares is to be paid in its entirety or whether Deferred Shares shall be paid in installments, and (z) if in installments, the number of annual installments (not to exceed 10). Deferred Shares being deferred pursuant to this Section 3.2(b) will be paid in the form (cash or Common Shares) originally granted. Any deferral of Deferred Shares pursuant to an election under this Section 3.2(b) will become effective at the conclusion of the applicable Deferral Period. |
(i) | With respect to any Deferred Shares granted after 2013, any such election shall be made no later than December 31 of the Year ending immediately prior to the Year in which the Deferred Shares are granted and shall result in the crediting of the applicable Deferred Shares to the Directors Account maintained under Article IV of this Sub-Plan. |
(ii) | With respect to any Deferred Shares granted prior to 2014, any such election shall be made no later than twelve full calendar months prior to the close of the applicable Deferral Period and shall result in the transfer of the applicable Deferred Shares into the Common Shares Account maintained for the Director under the Second Director Plan or the Directors Account maintained under Article IV of this Sub-Plan, as the case may be. |
(c) | Evergreen Deferral Election . Once a Director elects under Section 3.2(b) of this Sub-Plan to defer Deferred Shares into his or her Account maintained under Article IV of this Sub-Plan (or, as applicable, to transfer such Deferred Shares into the Common Shares Account maintained for the Director under the Second Director Plan), his or her deferral election will continue to be effective from Year to Year to the extent provided in this Section 3.2(c). |
(i) | Any election with respect to Deferred Shares granted after 2013 will continue to be effective from Year to Year with respect to Deferred Shares granted after such Year and the Deferred Shares granted in subsequent Years will also be credited to the Directors Account maintained under Article IV of this Sub-Plan in accordance with such election, unless and until the election is revoked or modified, on a form provided by the Corporation, in accordance with this Section 3.2(c)(i). To revoke or modify an evergreen deferral election under this Section 3.2(c)(i) with respect to Deferred Shares otherwise granted in a particular Year, the Directors revocation or modification of his or her evergreen election shall be delivered to the Corporation during the period specified by the Corporation and no later than December 31 of the Year ending immediately prior to the Year in which the Deferred Shares are granted. |
(ii) | Any election with respect to Deferred Shares granted prior to 2014 will continue to apply to such Deferred Shares for which the applicable three-year Deferral Period lapses after 2013, and such Deferred Shares will be transferred to the Directors Common Shares Account maintained under the Second Director Plan in accordance with such election, unless and until the election is revoked or modified, on a form provided by the Corporation, in accordance with this Section 3.2(c)(ii). No such election shall have any effect upon Deferred Shares granted after 2013. To revoke or modify an evergreen deferral election under this Section 3.2(c)(ii) with respect to Deferred Shares otherwise granted in a particular Year, the Directors revocation or modification of his or her evergreen election shall be delivered to the Corporation during the period specified by the Corporation and no later than twelve full calendar months prior to the date on which the applicable Deferral Period ends. |
(d) | No Rights During Deferral Period . During the Deferral Period, the Director shall have no right to transfer any rights under his or her Deferred Shares and shall have no other rights of ownership therein. |
3.3 Dividend Equivalents . Each award of Deferred Shares will provide for dividend equivalents, such that, on the date of the Corporations dividend payment, each participating Director will be credited with a number of additional Deferred Shares (including fractional shares) equal to the amount of cash dividends paid by the Corporation on the number of outstanding Deferred Shares divided by the Fair Market Value of one Common Share on that date. Such dividend equivalents, which shall likewise be credited with dividend equivalents, shall be deferred until the end of the Deferral Period for the Deferred Shares with respect to which the dividend equivalents were credited and, if the Director has so elected, pursuant to Section 3.2(b), such dividend equivalents shall be credited to the Directors Account maintained under Article IV of this Sub-Plan.
3.4 Payment of Deferred Share Awards . Except as otherwise provided pursuant to a Directors election to defer payment of his or her Deferred Shares in accordance with Section 3.2(b), each Directors Deferred Shares (including dividend equivalents) shall be shall be paid after the conclusion of the applicable Deferral Period in accordance with this Section 3.4.
(a) | Settlement Date . A Director, or in the event of such Directors death, his or her Beneficiary, shall be entitled to payment of such Directors Deferred Shares following such Directors Settlement Date. |
(b) | Time and Form of Distribution . As soon as practicable following the Settlement Date, but in no event later than 90 days following the Directors Settlement Date, the Corporation shall pay each outstanding award of Deferred Shares to the Director or, in the case of the death of the Director, his or her Beneficiary. Such distribution shall be made in a lump sum in the form determined pursuant to Section 3.1. If payment of Deferred Shares is made in the form of Common Shares, the Corporation will provide procedures to facilitate the sale of such Common Shares following distribution upon the request of the Director. If payment of Deferred Shares is made in cash, the amount distributed shall be equal to the Fair Market Value on the Settlement Date. |
(d) | Fractional Shares . The Corporation will not be required to issue any fractional Common Shares pursuant to this Sub-Plan. |
3.5 Shares Subject to Sub-Plan . The Common Shares which may be delivered to Directors upon payment of their Deferred Shares shall be issued or delivered under the Equity Compensation Plan, or any successor equity compensation plan maintained by the Corporation and approved by its shareholders. Any Common Shares delivered to Directors by a trust that is treated as a grantor trust within the meaning of Sections 671-679 of the Code shall be treated as delivered by the Corporation pursuant to this Sub-Plan.
3.6 Adjustments . The number of Deferred Shares granted to a Director hereunder, and the kind of shares covered thereby, are subject to adjustment as provided in Section 15 of the Equity Compensation Plan (or the corresponding provision of any successor equity compensation plan maintained by the Corporation and approved by its shareholders under which Common Shares may be delivered pursuant to this Sub-Plan).
3.7 Death of a Director . Notwithstanding anything to the contrary contained in this Sub-Plan, and except in the case of Deferred Shares deferred pursuant to Section 3.2(b), in the event of the death of a Director, the three-year Deferral Period will be deemed to have ended, and the Settlement Date will be deemed to have occurred, on the date of the Directors death. The Directors Deferred Shares shall be paid as soon as practicable following the Settlement Date, but in no event later than 90 days following the Settlement Date, to the Beneficiary or Beneficiaries designated on the Directors Beneficiary Designation or, if no such designation is in effect or no Beneficiary is then living, then to the Directors estate.
ARTICLE IV
DEFERRAL OF FEES; ACCOUNTS
4.1 Election to Defer Fees . Any Director may elect to defer (i) payment of his receipt of all or a specified portion of his or her Fees for any Year in accordance with this Section 4.1 with such deferred Fees deemed invested in KeyCorp Common Shares. A Director who desires to defer the payment of all or a portion of his or her Fees for any Year must complete and deliver an Election Agreement to the Corporation during the period specified by the Corporation and no later than the last day of the Year prior to the Year in which the Fees will be earned by the Director; provided, however, that any Director hereafter elected to the Board of Directors of the Corporation or a subsidiary who was not previously a Participant in the Sub-Plan may make an election to defer the payment of Fees for the Year in which he or she is elected to the Board of Directors by delivering the Election Agreement to the Corporation within 30 days of first becoming a Director (or during such shorter period as may be specified by the Corporation), with any such Election Agreement being effective with respect to Fees earned commencing after the date that the Election Agreement becomes irrevocable.
4.2 Amount of Fees Deferred; Date of Deferral . A Participant shall designate on the Election Agreement (a) the amount of his or her Fees that are to be deferred under this Sub-Plan for any Year, (b) the date on which the deferred Fees shall be distributed, (c) whether the distribution of deferred Fees is to be paid in its entirety or whether such Fees shall be paid in installments, and (d) if in installments, the number of annual installments (not
to exceed 10). Deferrals shall be until the earlier to occur of: (x) the date specified by the Participant, or (y) the date of death of the Participant, at which time payment of the amount deferred shall be made in accordance with Section 4.4 or Section 6.1. A Participant may not select more than one date in each Election Agreement upon which distribution shall be made or when installments shall begin. Distribution dates shall be the first business day of a calendar quarter.
4.3 Account . The Corporation shall maintain a bookkeeping account for each Participant to which shall be credited (a) the amount of Fees deferred by the Participant pursuant to this Article IV, (b) the Deferred Shares deferred by the Participant pursuant to Section 3.2(b) of this Sub-Plan, and (c) dividend equivalents credited in accordance with this Sub-Plan. (an Account). All amounts credited to a Directors Account shall be credited in the form of notional Common Shares. With respect to deferred Fees, as of the last business day of any quarter, there shall be added to each Account the number of Common Shares (whole and fractional, rounded to the nearest one-hundredth of a share) equal to the dollar amount of deferred Fees payable for such quater plus all dividends payable during such quarter on the Common Shares credited to the Account on the first day of such quarter divided by the Fair Market Value of the Common Shares at the close of business on the last business day of such quarter.
4.4 Payment of Account; Period of Deferral . The balance of a Participants Account shall be paid to the Participant in a single payment and/or in a number of individual, substantially equal consecutive annual installments (not to exceed 10), as elected by the Participant in his or her Election Agreement. Distributions of deferred Fees shall be made in Common Shares, and distributions of deferred Deferred Shares shall be made as described in Section 3.2(b). The amount of the Account remaining after payment of each individual installment shall continue to be valued in accordance with Section 4.5 of this Article. Full payment or the first annual installment, as the case may be, shall be made in accordance with the terms of the Participants Election Agreement as soon as administratively practicable following the Participants designated payment date, but in any event no later than 90 days following the date (i) on which the Participant has elected to commence distribution of his or her Account, or (ii) of the Participants death. Any installment payment shall be made pro rata.
The election as to the time for and method of payment of the amount of the Account relating to Fees deferred for a particular Year shall be made on the Election Agreement(s) and thereafter shall not be altered except as provided in Article VI of this Sub-Plan.
In the event that a Participant elects to receive installment payments under this Section 4.4,
(a) | The amount of the distribution from the Account shall be valued based on the Fair Market Value of the Common Shares on the last business day of the quarter immediately prior to the distribution date; |
(b) | The amount of each installment shall be determined by dividing the value of the Account by the number of installments remaining to be paid to the Participant. |
4.5 Valuation of the Account . Each Participants Account shall be valued as of the last day of each quarter until payment of the Participants Account is made in full. The Corporation shall ascertain the number of shares in the Account (whole and fractional, rounded to the nearest one-hundredth of a share) after taking into account dividend equivalents credited to the Account and deemed reinvested in Common Shares and distributions from the Account under this Article, based on the Fair Market Value of the Common Shares on the last business day of such quarter. Automatically and without further action by the Corporation, in the event of any stock dividend or split, recapitalization, merger, consolidation, spin-off, reorganization, combination, exchange of shares, or a similar corporate change, appropriate adjustments in the number and kind of shares credited to a Participants Account shall be made by the Corporation to reflect such change.
4.7 Statement . Each Participant shall receive a statement of his or her Account not less than annually.
4.8 Change of Control .
(a) |
Adjustments . Notwithstanding any other provision of the Sub-Plan to the contrary, in the event of a Change of Control, no amendment or modification of this Sub-Plan may be made at any time on or |
after such Change of Control (i) to reduce or modify a Participants Pre-Change of Control Account Balance, (ii) to reduce or modify the method of calculating all earnings, gains, and/or losses on a Participants Pre-Change of Control Account Balance, or (iii) to reduce or modify the Participants deferrals to be credited to the Participants Account for the applicable deferral period. For purposes of this Section 4.8, the term Pre-Change of Control Account Balance shall mean, with regard to any Participant, the aggregate amount of such Participants prior deferrals with all earnings, gains, and losses thereon which are credited to the Participants Account through the close of the Year in which such Change of Control occurs. |
(b) | Common Stock Conversion . In the event of a Change of Control in which the Common Shares of the Corporation are converted into or exchanged for securities, cash and/or other property as a result of any capital reorganization or reclassification of the capital stock of the Corporation, or as a result of the consolidation or merger of the Corporation with or into another corporation or entity, or the sale of all or substantially all of its assets to another corporation or entity, the Corporation shall cause each Participants Account to reflect the securities, cash and other property to be received in such reorganization, reclassification, consolidation, merger or sale on the balance in the Account and, from and after such reorganization, reclassification, consolidation, merger or sale, the Account shall reflect all dividends, interest, earnings and losses attributable to such securities, cash, and other property. |
(c) | Amendment in the Event of a Change of Control . On or after a Change of Control, the provisions of this Article IV may not be amended or modified as such provisions apply to the Participants Pre-Change of Control Account Balances. |
4.10 Death of a Participant . In the event of the death of a Participant, the amount of the Participants Account shall be paid to the Beneficiary or Beneficiaries designated in writing signed by the Participant in the form provided by the Corporation; in the event there is more than one Beneficiary, such form shall include the proportion to be paid to each Beneficiary and indicate the disposition of such share if a Beneficiary does not survive the Participant; in the absence of any such designation, payment from the Account shall be divided equally among all other Beneficiaries. Unless a Participant elects otherwise, in the event of the Participants death after December 31, 2014, payment of the Participants Account shall be made in a single lump sum to the Participants Beneficiary(ies).
ARTICLE V
BENEFICIARY DESIGNATION
5.1 Beneficiary Designation . Each Director shall have the right, at any time, to designate one or more persons or an entity as Beneficiary (both primary as well as secondary) to whom benefits under this Sub-Plan shall be paid in the event of the Directors death prior to payment of the Directors Deferred Shares or the Directors Account. Each Beneficiary Designation shall be in a written form prescribed by the Corporation and shall be effective only when filed with the Corporation during the Directors lifetime.
5.2 Changing Beneficiary . Any Beneficiary Designation may be changed by the Director without the consent of the previously named Beneficiary by the Directors filing of a new Beneficiary Designation with the Corporation. The filing of a new Beneficiary Designation shall cancel all Beneficiary Designations previously filed by the Director.
ARTICLE VI
ACCELERATION
6.1 Change of Control . Notwithstanding anything to the contrary contained in this Sub-Plan, upon the occurrence of a Change of Control, a Director shall be entitled to receive from the Corporation the payment of his or her Deferred Shares and the balance of his or her Account in the manner selected as follows: Not later than 30 calendar days after the date a person first becomes a Director, a Director shall be entitled to make an election which will be applicable in the event of a Change of Control (the Change of Control Election). For purposes of
clarity, notwithstanding any other provision of the Sub-Plan to the contrary, a Directors Change of Control Election in effect immediately prior to September 18, 2013 shall continue in effect on and after such date. The Change of Control Election will provide the following payment alternatives to a Director in the event of a Change of Control:
(a) | upon the occurrence of a Change of Control, the entire amount of the Directors Deferred Shares and the balance of the Directors Account will be immediately paid in full, regardless of whether the Director continues as a Director after the Change of Control; |
(b) | upon and after the occurrence of a Change of Control and in accordance with Section 3.2(a), the entire amount of the Directors Deferred Shares and the balance of the Directors Account will be immediately paid in full if and when the Directors service as a Director is terminated within two years after the Change of Control; or |
(c) | upon the occurrence of a Change of Control, the payment elections specified by the Director prior to the Change of Control shall govern irrespective of the Change of Control. |
6.2 Hardship . In the event of an unforeseeable emergency, the Corporation may accelerate the payment of all or any portion of the Directors Deferred Shares and the Directors Account to the Director, but only up to the amount necessary to meet the emergency. For purposes of this Section 6.2, the term unforeseeable emergency shall mean a severe financial hardship to the Director resulting from a sudden and unexpected illness or accident of the Director, the Directors spouse, or the Directors dependent (as defined in Section 152 of the Code, without regard to Section 152(b)(1), (b)(2), and (d)(1)(B)), the loss of the Directors property due to casualty, or such other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Director. The determination of an unforeseeable emergency and the ability of the Corporation to accelerate payment of the Directors Deferred Shares and the Directors Account shall be determined in accordance with the requirements of Section 409A of the Code and the applicable regulations issued thereunder. Payment of the Directors Deferred Shares and the Directors Account shall be limited only to such amount as is necessary to satisfy the emergency, which shall include all applicable taxes owed or to be owed by the Director as a result of the distribution.
6.3 Small Accounts . Notwithstanding any other provision of this Sub-Plan, the Corporation may, to the extent permitted under Section 409A of the Code, accelerate payment of a Directors Account if, at any time, the balance of the Directors Account (and the value of any other nonqualified deferred compensation arrangement that is aggregated with the Directors Account under Treasury Regulation Section 1.409A-1(c)) is less than or equal to the applicable dollar amount then in effect under Section 402(g)(1)(B) of the Code.
ARTICLE VII
ADMINISTRATION, AMENDMENT AND TERMINATION
7.1 Administration . Notwithstanding any provision of the Equity Compensation Plan, the Sub-Plan shall be administered by the Corporation. The Corporation shall have such powers as may be necessary to discharge its duties hereunder. The Corporation may, from time to time, employ, appoint or delegate to an agent or agents (who may be an officer or officers of the Corporation) and delegate to them such administrative duties as it sees fit, and may from time to time consult with legal counsel who may be counsel to the Corporation. No agent appointed by the Corporation to perform administrative duties hereunder shall be liable for any action taken or determination made in good faith. All elections, notices and directions under the Sub-Plan by a Director shall be made on such forms as the Corporation shall prescribe.
7.2 Amendment and Termination . Notwithstanding any provision of the Equity Compensation Plan, the Nominating and Corporate Governance Committee may alter or amend this Sub-Plan from time to time or may terminate it in its entirety; provided , however , that no such action, except for an acceleration of benefits, shall, without the consent of a Director, impair the Directors rights with respect to the amount credited to the Directors Account or with respect to any Deferred Shares issued or to be issued to such Director under the Sub-Plan; and further provided , that any amendment that must be approved by the shareholders of the Corporation in order to comply with applicable law or the rules of the principal exchange upon which the Common Shares are
traded or quoted shall not be effective unless and until such approval has been obtained in compliance with such applicable law or rules. Presentation of this Sub-Plan or any amendment hereof for shareholder approval shall not be construed to limit the Corporations authority to offer similar or dissimilar benefits through plans or other arrangements that are not subject to shareholder approval unless otherwise limited by applicable law or stock exchange rules.
ARTICLE VIII
FINANCING OF BENEFITS
8.1 Financing of Benefits . The Deferred Shares and the balance of a Directors Account payable under the Sub-Plan to a Director or, in the event of his or her death, to his or her Beneficiary, shall be paid by the Corporation from its general assets, including treasury shares. The right to receive payment of the Deferred Shares or an Account balance represents an unfunded, unsecured obligation of the Corporation.
8.2 Security for Benefits . Notwithstanding the provisions of Section 8.1, nothing in this Sub-Plan shall preclude the Corporation from setting aside Common Shares or funds in a so-called grantor trust pursuant to one or more trust agreements between a trustee and the Corporation. However, no Director or Beneficiary shall have any secured interest or claim in any assets or property of the Corporation or any such trust and all Common Shares or funds contained in such trust shall remain subject to the claims of the Corporations general creditors.
ARTICLE IX
GENERAL PROVISIONS
9.1 Governing Law . The provisions of this Sub-Plan shall be governed by and construed in accordance with the laws of the State of Ohio.
9.2 Shareholder Approval . Notwithstanding the foregoing provisions of the Sub-Plan, no Common Shares shall be issued or transferred pursuant to the Sub-Plan before the date of the approval of the Equity Compensation Plan by the Corporations shareholders.
9.3 Miscellaneous . Headings are given to the sections of this Sub-Plan solely as a convenience to facilitate reference. Such headings, numbering and paragraphing shall not in any case be deemed in any way material or relevant to the construction of this Sub-Plan or any provisions thereof.
9.4 No Right to Continue as Director . Neither the Sub-Plan, nor the granting of Deferred Shares nor any other action taken pursuant to the Sub-Plan, shall constitute or be evidence of any agreement or understanding, express or implied, that a Director has a right to continue as a Director for any period of time, or at any particular rate of compensation.
9.5 Compliance with Section 409A Requirements . The Sub-Plan is intended to provide for the deferral of compensation in accordance with the provisions of Section 409A of the Code and regulations and published guidance issued pursuant thereto. Accordingly, the Sub-Plan shall be administered in a manner consistent with those provisions. Notwithstanding any provision of the Sub-Plan to the contrary, no otherwise permissible election, deferral, accrual, transfer or distribution shall be made or given effect under the Sub-Plan that would result in a violation of Section 409A of the Code.
9.6 Elections Under Prior Plan . Each Directors Account hereunder shall remain subject to the same Change of Control elections, elections under Section 4.2(b) of the Prior Plan that are described in Sections 3.2(b)(ii) and 3.2(c)(ii) of this Sub-Plan to transfer the Deferred Shares to the Directors Common Shares Account under the Second Director Plan, and Beneficiary Designations that were controlling under the Prior Plan immediately prior to the approval of the Equity Compensation Plan by the Corporations shareholders for the remainder of the period or periods for which such elections or designations are by their original terms applicable or, in the case of Beneficiary Designations and elections under Section 4.2(b) of the Prior Plan that are described in Sections 3.2(b)(ii) and 3.2(c)(ii) of this Sub-Plan, until such time as such designations and elections are revoked or modified or otherwise cease to be effective in accordance with this Sub-Plan.
EXHIBIT 10.26
KEYCORP
EXCESS CASH BALANCE PENSION PLAN
ARTICLE I
THE PLAN
The KeyCorp Excess Cash Balance Pension Plan (Plan) originally established effective January 1, 1995, is hereby amended and restated in its entirety effective January 1, 1998. The Plan as amended and restated is intended to provide certain key Employees of KeyCorp with a Plan benefit that is generally equal to the benefit that the Participant would have been eligible to receive under the KeyCorp Cash Balance Pension Plan but for the limitations imposed by Section 401(a)(17) and Section 415 of the Internal Revenue Code of 1986, as amended. It is the intention of the Plan and it is the understanding of those Participants covered under the Plan that the Plan is unfunded for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended.
ARTICLE II
DEFINITIONS
2.1 Meanings of Definitions. As used herein, the following words and phrases shall have the meanings hereinafter set forth, unless a different meaning is plainly required by the context:
(a) Beneficiary shall mean the Participants surviving spouse who is entitled to receive any Plan benefits in the event the Participant dies before his or her Excess Pension Benefit shall have been distributed to him or her in full.
(b) Credited Service shall be calculated by measuring the period of service commencing on the Participants Employment Commencement Date and Re-Employment Commencement Date, if applicable, and ending on the Participants Severance from Service Date, and shall be computed based on each full month during which time the Employee is employed by an Employer.
(c) Compensation of a Participant for any Plan Year or any partial Plan Year in which the Participant incurs a Severance From Service Date shall mean the entire amount of compensation paid to such Participant during such period by reason of his employment as an Employee, as reported for federal income tax purposes, or which would have been paid except for (1) the timing of an Employers payroll processing operations, (2) the Participants written election to defer the receipt of compensation during the Plan Year, (3) the provisions of the KeyCorp 401(k) Savings Plan, or (4) the provisions of the KeyCorp Flexible Benefits Plan provided, however, the term shall not include:
(i) | any amount attributable to the Participants exercise of stock appreciation rights and the amount of any gain to the Participant upon the exercise of stock options; |
(ii) | any amount attributable to the Participants receipt of non-cash remuneration whether or not it is included in the Participants income for federal income tax purposes; |
(iii) | any amount attributable to the Participants receipt of moving expenses and any relocation bonus paid to the Participant during the Plan Year; |
(iv) | any amount attributable to any severance paid by an Employer or the Corporation to the Participant; |
(v) | any amount attributable to fringe benefits (cash and non-cash), |
(vi) | any amount attributable to any bonus or payment made as an inducement for the Participant to accept employment with an Employer, |
(vii) | any amount attributable to salary deferrals paid to the Participant during the Plan Year, which have been previously included as Compensation under the Plan during the Plan Year or any prior Plan Year, |
(viii) | any amount paid to the Participant during the Plan Year which is attributable to interest earned on Compensation deferred under a plan of an Employer or the Corporation; and |
(ix) | any amount paid for any period after the Participants Termination or Retirement date; and |
In determining a Participants Compensation under the provisions of this Section 2.1(c), for those Plan Participants who participate in a line of business incentive plan (other than the KeyCorp Annual Incentive Plan, the KeyCorp Long Term Incentive Plan and/or the KeyCorp Staff Incentive Plan), compensation up to a Plan maximum of $500,000 minus the amount of the Participants compensation utilized in computing his or her Pension Plan benefit in accordance with Section 401(a)(17) of the Code shall be utilized in calculating the Participants benefit under the Plan.
In the case of a Disabled Participant, such Participants Compensation for each year while Disabled shall equal an amount which shall reflect the Participants Compensation for the calendar year preceding the date of the Participants Disability.
(d) Corporation shall mean KeyCorp, an Ohio corporation, its corporate successors, and any corporation or corporations into or with which it may be merged or consolidated.
(e) Employee shall mean a common law employee who is employed by an Employer; provided, however, the term Employee shall not include any person who at the time services are performed is not classified as a common law employee by the Employer even though such person may for federal income tax purposes, federal employment tax purposes, or any other purpose be reclassified by the Employer as a common law employee retroactive to when such services were performed by reason of administrative, judicial, regulatory or other governmental action.
(f) Employer shall mean KeyCorp and all of its subsidiaries or affiliates unless specifically excluded as an Employer for Plan purposes by written action by an officer of the Corporation. An Employers participation shall be subject to any and all conditions and requirements made by the Corporation as the Plan Administrator, and each Employer shall be deemed to have appointed the Plan Administrator as its exclusive agent under the Plan.
(g) Excess Pension Benefit shall mean the vested pension benefit payable pursuant to the terms of this Plan to a Participant meeting the eligibility requirements of Section 3.1 of the Plan.
(h) Interest Credit shall mean the rate at which a Participants Opening Account Balance as provided for under Section 3.3 of the Plan is periodically increased on a bookkeeping basis. The Interest Credit allocated to a Participants Opening Account Balance shall be determined based on one-quarter of the effective annual calendar-year interest rate equal to the average (rounded to the nearest one-hundredth of one percent) 5-year United States Treasury Bill rate in effect each month during the twelve (12) month period ending on October 31 or the last business day in October of the preceding calendar year. The procedures to determine such Interest Credit shall be determined by the Pension Trust Oversight Committee, and the Pension Trust Oversight Committee in its sole and exclusive discretion may modify the Interest Credit to be allocated under the Plan.
(i) Participant shall mean an Employee who is a participant in the Pension Plan and who is selected by the Corporation to become a Participant in the Plan, and whose participation in the Plan has not been terminated by the Corporation.
(j) Pension Plan shall mean the KeyCorp Cash Balance Pension Plan as the same shall be in effect on the date of a Participants Retirement, death, Disability or other termination of employment.
(k) Retirement shall mean the termination of employment of a Participant under circumstances in which the Participant begins to receive an Early Retirement or Normal Retirement Date benefit under the KeyCorp Cash Balance Pension Plan.
(l) Supplemental Retirement Plan shall mean the KeyCorp Supplemental Retirement Plan (formerly known as the Society Corporation Supplemental Retirement Plan), the KeyCorp Supplemental Retirement Benefit Plan, and the KeyCorp Supplemental Retirement Benefit Plan for Key Executives, with all amendments, modifications, and supplements which may be made thereto.
(m) Termination shall mean the voluntary or involuntary and permanent termination of a Participants employment from his or her Employer and any other Employer, whether by resignation or otherwise.
All other capitalized and undefined terms used herein shall have the meanings given them in the Pension Plan, unless a different meaning is plainly required by the context.
The masculine gender includes the feminine, and singular references include the plural, unless the context clearly requires otherwise.
ARTICLE III
EXCESS PENSION BENEFIT
3.1 Eligibility . Subject to the provisions of Article V hereof, a Participant shall be eligible for an Excess Pension Benefit hereunder if the Participant (i) retires on or after age 65 with five or more years of Credited Service, (ii) terminates employment with an Employer on or after age 55 with ten or more years of Credited Service, (iii) terminates his active employment with an Employer upon becoming Disabled after completing five or more years of Credited Service and disability benefits have ceased under the KeyCorp Long-Term Disability Plan due to the Participants election of an Early or Normal Retirement under the Pension Plan, or (iv) dies after completing five years of Credited Service, and has a Beneficiary who is eligible for a benefit under the Pension Plan.
3.2 Amount of Excess Pension Benefit . The Excess Pension Benefit payable to a Participant shall be in such amount as is required, when added to the Accrued Benefit payable in lump sum form to the Participant under the Pension Plan as of the Participants Retirement or Termination date, to produce a lump sum cash aggregate benefit equal to the benefit which would have been payable under the Pension Plan formula in lump sum form to the Participant if the limitations of Section 401(a)(17) of the Code and the limitations of Section 415 of the Code had not been in effect. For purposes of this Section 3.2 hereof, the term Pension Plan formula means the method of calculating a Participants pension benefit as reflected in Article IV of the Pension Plan, and shall not include any Predecessor Plan Grandfathered Benefits formula.
3.3 | Opening Account Balance . |
(1) Effective January 1, 1995, all Employees (other than Grandfathered Employees) as defined in the Society Corporation Supplemental Retirement Plan, as amended and restated as the KeyCorp Supplemental Retirement Plan (Supplemental Retirement Plan) whose Supplemental Retirement Plan benefit was valued as of January 1, 1995 in the form of a lump sum cash benefit and thereafter the value of which was transferred to the Plan pursuant to the provisions of Article IX of the Supplemental Retirement Plan, shall have the value of such lump sum cash benefit reflected in a bookkeeping opening account balance (Opening Account Balance) established for such Participant. Such Opening Account Balance shall be credited with Interest Credit as of the last day of each calendar quarter, based on the value of the Participants Opening Account Balance as of the first day of the applicable quarter. A Participants entitlement to such Opening Account Balance shall be governed by the eligibility provisions of Section 3.1 of this Plan, and the value of the Opening Account Balance shall be added to and become a part of such Participants Excess Pension Benefit, if any, which shall be payable in accordance with the terms of this Plan.
(2) Effective January 1, 1995, all participants in the Ameritrust Corporation Excess Benefit Plan and all participants in the Ameritrust Corporation Deferred Compensation Plan (augmented retirement benefit) (hereinafter collectively referred to as Ameritrust Plan), whose Ameritrust Plan benefit was valued as of January 1, 1995, in the form of a lump sum cash benefit and thereafter the value of which was transferred to this Plan shall have the value of such lump sum cash benefit reflected in a bookkeeping opening account balance (Opening Account Balance) established for such Participant. Such Opening Account Balance shall be credited with Interest Credit as of the last day of each calendar quarter, based on the value of the Participants Opening Account Balance as of the first day of the applicable quarter. A Participant shall be fully vested in such Opening Account Balance, and the value of the Opening Account Balance shall be added to and become a part of such Participants Excess Pension Benefit, if any, which shall be payable in accordance with the terms of this Plan. If the Participant fails to meet eligibility requirements of Section 3.1 entitling Participant to an Excess Pension Benefit accruing under this Plan on and after January 1, 1995, the Participant shall nonetheless receive, at his or her Termination date, the Participants vested Opening Account Balance valued as of the Participants Termination date, which shall be paid pursuant to the benefit distribution (payment) options contained in Article IV of this Plan.
ARTICLE IV
PAYMENT OF EXCESS PENSION BENEFIT
4.1 Immediate Payment Upon Termination or Retirement of Participant. Subject to the provisions of Section 4.2 hereof, a Participant meeting the age and service eligibility requirements of Section 3.1 shall receive an immediate distribution of his or her Excess Pension Benefit upon the Participants Retirement or Termination date. Such Excess Pension Benefit shall be paid as a lump sum payment, unless the Participant elects in writing, a minimum of one year prior to his or her Retirement or Termination date to receive his or her distribution under a different form of payment. The forms of payment from which a Participant may elect shall be identical to those forms of payment provided under the Pension Plan.
The Excess Pension Benefit payable to a Participant in a form other than a lump sum payment shall be the actuarial equivalent to such lump sum cash payment. In making this determination as provided for in this Article IV, the Corporation shall rely upon calculations made by independent actuaries for the Pension Plan, who shall apply the actuarial assumptions and interest rate then in use under the Pension Plan for converting to the form of payment elected by the Participant.
4.2 | Payment Upon Death of Participant . |
(a) Upon the death of a Participant who has met the service requirement of Section 3.1, but who has not yet commenced distribution of his or her Excess Pension Benefit, there shall be paid to the Participants Beneficiary the Excess Pension Benefit which the Participant would have been entitled to receive had the Participant retired on his or her date of death and commenced distribution of his or her Excess Pension Benefit. Such Excess Pension Benefit shall be paid in the form of a lump sum cash payment.
(b) In the event of a Participants death after the Participant has commenced distribution of his or her Excess Pension Benefit, there shall be paid to the Participants Beneficiary only those survivor benefits provided under the form of benefit payment elected by the Participant.
ARTICLE V
ELECTION BETWEEN PLAN BENEFITS
5.1 Participants Election Between Plan Benefits . A Participant who meets the eligibility requirements for an Excess Pension Benefit who is also a participant in and meets the eligibility requirements for a benefit under the KeyCorp Executive Supplemental Pension Plan, shall be required prior to the Participants Retirement or Termination date to elect a benefit from either the Plan or from the KeyCorp Executive Supplemental Pension Plan. A Participants failure to elect between Plan benefits prior to the Participants Retirement or Termination
date shall result in an automatic default election by the Participant of an Excess Pension Benefit under the Plan (and shall extinguish all rights to a benefit under the KeyCorp Executive Supplemental Pension Plan). Such Excess Pension Benefit shall be paid to the Participant as of his or her Retirement or Termination date in the form of a lump sum cash payment.
5.2 Beneficiary Election Between Plan Benefits . If a Participant dies after having met the eligibility requirements for an Excess Pension Benefit and the Participant at the time of his or her death is also a Participant in the KeyCorp Executive Supplemental Pension Plan and eligible for a benefit under the KeyCorp Executive Supplemental Pension Plan, the Participants Beneficiary shall be required to elect a death benefit from either the Plan or from the KeyCorp Executive Supplemental Pension Plan, but in no event may the Participants Beneficiary elect a benefit under both the Plan and the KeyCorp Executive Supplemental Pension Plan. The terms of each respective Plan shall control the form of payment which may be elected by the Participants Beneficiary.
A Beneficiarys failure to elect between Plan benefits within 120 days from the date of the Participants death shall result in an automatic default election by the Beneficiary of an Excess Pension Benefit under the Plan to be paid to the Beneficiary in a cash lump sum payment.
ARTICLE VI
ADMINISTRATION
6.1 Administration . The Corporation, which shall be the Administrator of the Plan for purposes of ERISA and the Plan Administrator for purposes of the Code, shall be responsible for the general administration of the Plan, for carrying out the provisions hereof, and for making payments hereunder. The Corporation shall have the sole and absolute discretionary authority and power to carry out the provisions of the Plan, including, but not limited to, the authority and power (a) to determine all questions relating to the eligibility for and the amount of any benefit to be paid under the Plan, (b) to determine all questions pertaining to claims for benefits and procedures for claim review, (c) to resolve all other questions arising under the Plan, including any questions of construction and/or interpretation, and (d) to take such further action as the Corporation deems necessary or advisable in the administration of the Plan. All findings, decisions and determinations of any kind made by the Plan Administrator shall not be disturbed unless the Plan Administrator has acted in an arbitrary and capricious manner. Subject to the requirements of law, the Plan Administrator shall be the sole judge of the standard of proof required in any claim for benefits and in any determination of eligibility for a benefit. All decisions of the Plan Administrator shall be final and binding on all parties. The Plan Administrator may employ such attorneys, investment counsel, agents, and accountants as it may deem necessary or advisable to assist it in carrying out its duties hereunder. The actions taken and the decisions made by the Plan Administrator hereunder shall be final and binding upon all interested parties subject, however, to the provisions of Section 6.2. The Plan Year, for purposes of Plan administration, shall be the calendar year.
6.2 Claims Review Procedure . Whenever the Plan Administrator decides for whatever reason to deny, whether in whole or in part, a claim for benefits under the Plan filed by any person (herein referred to as the Claimant), the Plan Administrator shall transmit a written notice of its decision to the Claimant, which notice shall be written in a manner calculated to be understood by the Claimant and shall contain a statement of the specific reasons for the denial of the claim and a statement advising the Claimant that, within 60 days of the date on which the Claimant receives such notice, Claimant may obtain review of the decision of the Plan Administrator in accordance with the procedures hereinafter set forth. Within such 60-day period, the Claimant or Claimants authorized representative may request that the claim denial be reviewed by filing with the Plan Administrator a written request therefore, which request shall contain the following information:
(i) | the date on which the request was filed with the Plan Administrator; provided, however, that the date on which the request for review was in fact filed with the Plan Administrator shall control in the event that the date of the actual filing is later than the date stated by the Claimant pursuant to this paragraph (i); |
(ii) | the specific portions of the denial of the Claimants claim which the Claimant requests the Plan Administrator to review; |
(iii) | a statement by the Claimant setting forth the basis upon which Claimant believes the Plan Administrator should reverse its previous denial of the Claimants claim and accept the Claimants claim as made; |
(iv) | any written material which the Claimant desires the Plan Administrator to examine in its consideration of the Claimants position as stated pursuant to paragraph (iii) above. |
In accordance with this Section, if the Claimant requests a review of the Plan Administrators decision, such review shall be made by the Plan Administrator, which shall, within sixty (60) days after receipt of the request form, review and render a written decision on the claim containing the specific reasons for the decision including reference to Plan provisions upon which the decision is based. All findings, decisions, and determinations of any kind made by the Plan Administrator shall not be modified unless the Plan Administrator has acted in an arbitrary and capricious manner. Subject to the requirements of law, the Plan Administrator shall be the sole judge of the standard of proof required in any claim for benefits, and any determination of eligibility for a benefit. All decisions of the Plan Administrator shall be binding on the Claimant and upon all other Persons. If the Participant or Beneficiary shall not file written notice with the Plan Administrator at the times set forth above, such individual shall have waived all benefits under the Plan other than as already provided, if any, under the Plan.
ARTICLE VII
CORPORATE ASSETS
All benefits paid under the Plan shall be payable solely out of the general assets of the Corporation. The Corporation shall have no obligation to establish a trust or fund to fund its obligation to pay benefits under the Plan or to insure any benefits under the Plan and nothing contained in the Plan shall create or be construed as creating a trust of any kind or any other fiduciary relationship between the Participant, the Corporation or any other person. It is the intention of the Corporation and the Participant that the Plan be unfunded for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended. The Corporation may, in its sole discretion, combine the payment due and owing under the Plan with one or more other payments owing to the Participant or the Participants Beneficiary under any other plan, contract, or otherwise (other than any payment due under the Pension Plan) in one check, direct deposit, wire transfer, or other means of payment.
ARTICLE VIII
AMENDMENT AND TERMINATION
8.1 Termination or Amendment . The Corporation reserves the right to amend or terminate the Plan at any time by action of its Board of Directors, or any duly authorized Committee thereof; provided, however, that no such action shall adversely affect any Participant who has met the age and service requirements of Section 3.1 or any Participant or Participants Beneficiary who is receiving or who is eligible to receive an Excess Pension Benefit hereunder, unless an equivalent benefit is provided under another plan maintained by an Employer.
8.2 Effect of Plan Termination . Notwithstanding anything to the contrary contained in the Plan, the termination of the Plan shall terminate the liability of the Corporation and all Employers to provide for future benefits under the Plan.
ARTICLE IX
MISCELLANEOUS
9.1 Interest of Participant . The obligation of the Employer and of the Corporation to provide a Participant or the Participants Beneficiary with an Excess Pension Benefit under the Plan merely constitutes the unsecured promise of the Employer and the Corporation to make payments as provided herein and no person shall have any interest in, or a lien or prior claim on any property of the Employer or Corporation.
9.2 Benefits . Nothing in the Plan shall be construed to confer any right or claim upon any person, firm, or corporation other than the Participant and the Participants Beneficiary who may become entitled to an Excess Pension Benefit under the Plan.
9.3 No Present Interest . Subject to any federal statute to the contrary, no right or benefit under the Plan and no right or interest in each Participants Plan benefit shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge any right or benefit under the Plan, or Participants Plan Account shall be void. No right, interest, or benefit under the Plan or Participants Plan benefit shall be liable for or subject to the debts, contracts, liabilities, or torts of the Participant or Beneficiary. If the Participant or Beneficiary becomes bankrupt or attempts to alienate, sell, assign, pledge, encumber, or charge any right under the Plan or Participants Plan benefit, such attempt shall be void and unenforceable.
9.4 Unfunded Plan . This Plan is an unfunded plan maintained primarily to provide deferred compensation benefits for a select group of management or highly-compensated employees within the meaning of Sections 201, 301, and 401 of ERISA, and therefore is exempt from the provisions of Parts 2, 3, and 4 of Title I of ERISA.
9.5 No Commitment as to Employment . Nothing herein contained shall be construed as a commitment or agreement upon the part of any Employee hereunder to continue his or her employment with an Employer, and nothing herein contained shall be construed as a commitment on the part of any Employer to continue the employment, rate of compensation or terms and conditions of employment of any Employee hereunder for any period. All Participants shall remain subject to discharge to the same extent as if the Plan had never been put into effect.
9.6 Absence of Liability . No member of the Board of Directors of the Corporation or a subsidiary or committee authorized by the Board of Directors, or any officer of the Corporation or a subsidiary shall be liable for any act or action hereunder, whether of commission or omission, taken by any other member, or by any officer, agent, or Employee, except in circumstances involving bad faith or willful misconduct for anything done or omitted to be done.
9.7 | Expenses . The expenses of administration of the Plan shall be paid by the Corporation. |
9.8 Precedent . Except as otherwise specifically agreed to by the Corporation in writing, no action taken in accordance with the Plan by the Corporation shall be construed or relied upon as a precedent for similar action under similar circumstances.
9.9 Withholding . The Corporation shall withhold any tax which the Corporation in its discretion deems necessary to be withheld from any payment to any Participant, former Participant, or Beneficiary hereunder, by reason of any present or future law.
9.10 Validity of Plan . The validity of the Plan shall be determined and the Plan shall be construed and interpreted in accordance with the provisions of ERISA, the Code, and, to the extent applicable, the laws of the State of Ohio. The invalidity or illegality of any provision of the Plan shall not affect the validity or legality of any other part thereof.
9.11 Parties Bound . The Plan shall be binding upon the Employers, Participants, former Participants, and Beneficiaries hereunder, and, as the case may be, the heirs, executors, administrators, successors, and assigns of each of them.
9.12 Headings . All headings used in the Plan are for convenience of reference only and are not part of the substance of the Plan.
9.13 Duty to Furnish Information . The Corporation shall furnish to each Participant, former Participant, or Beneficiary any documents, reports, returns, statements, or other information that it reasonably deems necessary to perform its duties imposed hereunder or otherwise imposed by law.
9.14 Trust Fund . At its discretion, the Corporation may establish one or more trusts, with such trustees as the Corporation may approve, for the purpose of providing for the payment of benefits owed under the Plan. Although such a trust may be irrevocable, in the event of insolvency or bankruptcy of the Corporation, such assets will be subject to the claims of the Corporations general creditors. To the extent any benefits provided under the Plan are paid from any such trust, the Employer shall have no further obligation to pay them. If not paid from the trust, such benefits shall remain the obligation of the Employer.
9.15 Notice . Any notice required or permitted under the Plan shall be deemed sufficiently provided if such notice is in writing and hand delivered or sent by registered or certified mail. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark or on the receipt for registration or certification. Mailed notice to the Corporation shall be directed to the Corporations address, attention: KeyCorp Compensation and Benefits Department. Mailed notice to a Participant or Beneficiary shall be directed to the individuals last known address in the Employers records.
9.16 Successors . The provisions of this Plan shall bind and inure to the benefit of each Employer and its successors and assigns. The term successors as used herein shall include any corporate or other business entity which shall, whether by merger, consolidation, purchase or otherwise, acquire all or substantially all of the business and assets of an Employer.
Executed at Cleveland, Ohio, to be effective as of the first day of January, 1998.
KEYCORP | ||
By: |
/s/ Thomas E. Helfrich |
|
Title: Executive Vice President |
EXHIBIT 10.27
FIRST AMENDMENT
TO THE KEYCORP
EXCESS CASH BALANCE PENSION PLAN
WHEREAS , KeyCorp has established the KeyCorp Excess Cash Balance Pension Plan (the Plan), and
WHEREAS , the Board of Directors of KeyCorp has authorized its Compensation and Organization Committee to permit amendments to the Plan, and
WHEREAS , the Compensation and Organization Committee of the Board of Directors of KeyCorp has determined it desirable to amend the Plan and has accordingly authorized the execution of this First Amendment,
NOW, THEREFORE , pursuant to such action of the Compensation Committee, the Plan is hereby amended as follows:
1. | Article III , Section 3.1 shall be amended to delete it in its entirety and to substitute therefore the following: |
3.1 Eligibility . Subject to the provisions of Article V hereof, a Participant shall be eligible for an Excess Pension Benefit hereunder if the Participant (i) terminates employment with an Employer on or after age 55 with five or more years of Credited Service, (ii) terminates his or her active employment with an Employer upon becoming Disabled after completing five or more years of Credited Service and disability benefits have ceased under the KeyCorp Long-Term Disability Plan due to the Participants election of an Early or Normal Retirement under the Pension Plan, or (iii) dies after completing five years of Credited Service, and has a Beneficiary who is eligible for a benefit under the Pension Plan.
2. | Article IV , Section 4.1 shall be amended to add the following new paragraph at the end of such Section: |
Notwithstanding the foregoing provisions of this Section 4.1, however, in the event of the Participants termination, Retirement or Disability and within twelve months of such termination, Retirement, or Disability date the Participant engages in any Harmful Activity, such Participants distribution election (if other than a lump sum distribution) shall become null and void, and the Participant shall receive an immediate lump sum distribution of his or her vested Excess Pension Benefit.
For purposes of this Section 4.1, a Harmful Activity shall have occurred if the Participant shall do any one or more of the following:
(i) | Use, publish, sell, trade or otherwise disclose Non-Public Information of KeyCorp unless such prohibited activity was inadvertent, done in good faith and did not cause significant harm to KeyCorp. |
(ii) | After notice from KeyCorp, fail to return to KeyCorp any document, data, or thing in his or her possession or to which the Participant has access that may involve Non-Public Information of KeyCorp. |
(iii) | After notice from KeyCorp, fail to assign to KeyCorp all right, title, and interest in and to any confidential or non-confidential Intellectual Property which the Participant created, in whole or in part, during employment with KeyCorp, including, without limitation, copyrights, trademarks, service marks, and patents in or to (or associated with) such Intellectual Property. |
(iv) | After notice from KeyCorp, fail to agree to do any acts and sign any document reasonably requested by KeyCorp to assign and convey all right, title, and interest in and to any confidential or non-confidential Intellectual Property which the Participant created, in whole or in part, during employment with KeyCorp, including, without limitation, the signing of patent applications and assignments thereof. |
(v) | Upon the Participants own behalf or upon behalf of any other person or entity that competes or plans to compete with KeyCorp, solicit or entice for employment or hire any KeyCorp employee. |
(vi) | Upon the Participants own behalf or upon behalf of any other person or entity that competes or plans to compete with KeyCorp, call upon, solicit, or do business with (other than business which does not compete with any business conducted by KeyCorp) any KeyCorp customer the Participant called upon, solicited, interacted with, or became acquainted with, or learned of through access to information (whether or not such information is or was non-public) while the Participant was employed at KeyCorp unless such prohibited activity was inadvertent, done in good faith, and did not involve a customer whom the Participant should have reasonably known was a customer of KeyCorp. |
(vii) | Upon the Participants own behalf or upon behalf of any other person or entity that competes or plans to compete with KeyCorp, after notice from KeyCorp, continue to engage in any business activity in competition with KeyCorp in the same or a closely related activity that the Participant was engaged in for KeyCorp during the one year period prior to the termination of the Participants employment. |
For purposes of this Section 4.1 the term:
Intellectual Property shall mean any invention, idea, product, method of doing business, market or business plan, process, program, software, formula, method, work of authorship, or other information, or thing relating to KeyCorp or any of its businesses.
Non-Public Information shall mean, but is not limited to, trade secrets, confidential processes, programs, software, formulas, methods, business information or plans, financial information, and listings of names (e.g., employees, customers, and suppliers) that are developed, owned, utilized, or maintained by an employer such as KeyCorp, and that of its customers or suppliers, and that are not generally known by the public
KeyCorp shall include KeyCorp, its subsidiaries, and its affiliates.
3. | The Plan is hereby amended to add a new Article X to the Plan to read in its entirety as follows: |
Article X
Change of Control
Notwithstanding any other provision of the Plan to the contrary, in the event of a Change of Control, a Participants interest in his or her Excess Pension Benefit shall vest, and the Participant shall be entitled to receive an immediate distribution of his or her Excess Pension Benefit, if on and after a Change of Control the Participant has at least five (5) years of Credited Service, and (i) the Participants employment is terminated by his or her Employer and any other Employer without cause, or (ii) the Participant resigns within two years following a Change of Control as a result of the Participants mandatory relocation, reduction in the Participants base salary, reduction in the Participants average annual incentive compensation (unless such reduction is attributable to the overall corporate or business unit performance), or the Participants exclusion from stock option programs as compared to comparably situated Employees.
For purposes of this Article X hereof, a Change of Control shall be deemed to have occurred if under a rabbi trust arrangement established by KeyCorp (Trust), as such Trust may from time to time be amended or substituted, the Corporation is required to fund the Trust to secure the payment of any Participants Plan benefits payable hereunder because a Change of Control as defined in the Trust has occurred on and after January 1, 1999.
4. | The amendments set forth in Paragraphs 1 through 3 shall be effective as of January 1, 1999. |
5. | Except as otherwise amended herein, the Plan shall remain in full force and effect. |
IN WITNESS WHEREOF , KeyCorp has caused this First Amendment to the Plan to be executed by its duly authorized officer to be effective as of the 1 st day of July, 1999.
KEYCORP | ||
By: |
/s/ Steven N. Bulloch |
|
Title: Assistant Secretary |
EXHIBIT 10.28
SECOND AMENDMENT
TO THE KEYCORP
EXCESS CASH BALANCE PENSION PLAN
WHEREAS , KeyCorp has established the KeyCorp Excess Cash Balance Pension Plan (the Plan), and
WHEREAS , the Board of Directors of KeyCorp has authorized its Compensation Committee to permit amendments to the Plan, and
WHEREAS , the Compensation Committee of the Board of Directors of KeyCorp has determined it desirable to amend the Plan and has accordingly authorized the execution of this Second Amendment,
NOW, THEREFORE , pursuant to such action of the Compensation Committee, the Plan is hereby amended as follows:
1. | Article III , Section 3.1 shall be amended to delete it in its entirety and to substitute therefore the following: |
3.1 Eligibility . A Participant shall be eligible for an Excess Pension Benefit hereunder if the Participant (i) terminates employment with an Employer on or after age 55 with five or more years of Credited Service, (ii) terminates his or her active employment with an Employer upon becoming Disabled after completing five or more years of Credited Service and disability benefits have ceased under the KeyCorp Long-Term Disability Plan due to the Participants election of an Early or Normal Retirement under the Pension Plan, or (iii) dies after completing five years of Credited Service, and has a Beneficiary who is eligible for a benefit under the Pension Plan.
Effective January 1, 2003 a Participant shall also be eligible for an Excess Pension Benefit if the Participant becomes involuntarily terminated from his or her employment with an Employer for reasons other than the Participants Discharge for Cause, and (i) as of the Participants termination date the Participant has a minimum of twenty-five (25) or more years of Credited Service, and (ii) the Participant enters into a written non-solicitation and non-compete agreement under terms that are satisfactory to the Employer.
For purposes of this Section 3.1, hereof, the term Discharge for Cause shall mean a Participants employment termination that is the result of the Participants violation of the Employers policies, practices or procedures, violation of city, state, or federal law, or failure to perform his or her assigned job duties in a satisfactory manner. The Employer in its sole and absolute discretion shall determine whether a Participant has been Discharged for Cause.
Notwithstanding any of the forgoing provisions of this Section 3.1, however, a Participants eligibility for an Excess Pension Benefit shall be subject to the election requirements of Article V of the Plan.
2. | The amendment set forth in Paragraph 1 shall be effective as of January 1, 2003. |
3. | Except as otherwise amended herein, the Plan shall remain in full force and effect. |
IN WITNESS WHEREOF , KeyCorp has caused this Second Amendment to the Plan to be executed by its duly authorized officer to be effective as of the first day of January, 2003.
KEYCORP | ||
By: |
/s/ Steven N. Bulloch |
|
Title: Assistant Secretary |
EXHIBIT 10.32
TRUST AGREEMENT
This Trust Agreement (Trust Agreement) made this 3rd day of November, 1988 by and between AMERITRUST CORPORATION, a Delaware corporation (Ameritrust) and WACHOVIA BANK AND TRUST COMPANY, N.A, a national banking association (the Trustee);
WITNESSETH:
WHEREAS, in addition to benefits payable under the Ameritrust Retirement Income Plan and the Ameritrust Indiana Retirement Income Plan, as the same have been or may hereafter be supplemented, amended or restated or any successor thereto (the Retirement Plans), and under the Ameritrust Corporation Employees Savings and Investment Plan, and the Ameritrust Indiana Corporation Employees Profit Sharing and Savings Plan, as the same has been or may hereafter be supplemented, amended or restated or any successor thereto (the Savings Plans), to certain employees and former employees listed on Exhibit A-1 hereto or to the beneficiaries of such employees, as the case may be, the employees and their beneficiaries are entitled to certain other benefits under (1) the Ameritrust Corporation Deferred Compensation Plan, which plan became effective on August 1, 1988, as the same has been or may hereafter be supplemented, amended or restated or any successor thereto (the Deferred Compensation Plan), (2) the Ameritrust Corporation Excess Benefits Plan, which plan became effective on June 17, 1988, as the same has been or may hereafter be supplemented, amended or restated or any successor thereto (the Excess Plan), (3) any unpaid second installment of an Award payment under the Ameritrust Corporation Long-Term Cash Incentive Plan, which plan became effective on September 1, 1988, as the same may hereafter be supplemented, amended or restated or any successor thereto (the Long Term Plan), and (4) the post-retirement benefits payable under the Executive Life Insurance Program (the Life Program) which Deferred Compensation Plan, Excess Plan, Long Term Plan and Life Program are sometimes referred to herein as the Plans;
WHEREAS, each of certain employees listed on Exhibit A-2 hereto has entered into an employment agreement with Ameritrust or one of its Participating Subsidiaries (as hereinafter defined) (the agreements are referred to herein singularly as an Agreement or collectively as the Agreements);
WHEREAS, the Plans and the Agreements provide for certain employment, severance, retirement income, deferred income, death, disability and survivor and/or other benefits, and Ameritrust and its Participating Subsidiaries wish specifically to assure the payment to the individuals listed on Exhibits A-1 and A-2 (the Executives) and their beneficiaries (the Executives and their respective beneficiaries are referred to collectively as the Trust Beneficiaries) of amounts due thereunder (the amounts so payable being collectively referred to herein as the Benefits);
WHEREAS, subject to Section 9 hereof, the amounts and timing of Benefits to which each Trust Beneficiary is presently or may become entitled are as provided in and determined under the Agreements and the Plans, and, where appropriate, the retirement Plans or the Savings Plans;
WHEREAS, Ameritrust wishes to establish a trust (the Trust) under which Ameritrust and each of its subsidiaries that executes a Participating Subsidiary Deposit Agreement (Deposit Agreement) as provided in Section 13 hereof (a Participating Subsidiary; and Participating Employer shall mean Ameritrust or any Participating Subsidiary) may transfer to the Trust assets which shall be held therein subject to the claims of the creditors of each Participating Employer to the extent set forth in Section 3 hereof until paid in full to all Trust Beneficiaries as Benefits in such manner and at such times as specified herein unless the Participating Employer with respect to a Trust Beneficiary is Insolvent (as defined herein) at the time that such Benefits become payable;
WHEREAS, each Participating Subsidiary that executes a Deposit Agreement has irrevocably appointed Ameritrust its agent and attorney for purposes of acting on its behalf with respect to this Trust; and
WHEREAS, a Participating Employer shall be considered Insolvent for purposes of this Trust Agreement at such time as such Participating Employer (i) is subject to a pending voluntary or involuntary proceeding as a
debtor under the United States Bankruptcy Code, as heretofore or hereafter amended, or (ii) is unable to pay its debts as they mature or (iii) if a Participating Employer is a bank, whenever a receiver is appointed by the appropriate regulatory authority.
NOW, THEREFORE, the parties do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows:
1. TRUST FUND: (a) Subject to the claims of creditors of Participating Employers to the extent set forth in Section 3 hereof, Ameritrust hereby deposits with the Trustee in trust $100.00, which shall become the principal of this Trust, to be held, administered and disposed of by the Trustee as herein provided.
(b) The Trust hereby established shall be revocable by Ameritrust at any time prior to the date on which occurs a Change of Control, as that term is defined in this Section l(b); on or after such date, this Trust shall be irrevocable. In the event that a Change of Control has occurred, Ameritrust shall, and an Executive may, so notify the Trustee promptly. The Trustee may rely on such notice or on any other actual notice, satisfactory to the Trustee, of such a Change of Control which the Trustee may receive. The Trustee shall have no obligation to make an independent determination as to the occurrence of a Change of Control.
(i) As used herein, the term Change of Control shall mean:
(A) the acquisition or ownership of 20% or more of the voting stock of Ameritrust by any person (as the term person is used in Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the Exchange Act)), other than Ameritrust or its subsidiaries of a tender offer or offer to purchase, market or privately negotiated purchases or any other event or circumstance, as disclosed or required to be disclosed in a report or an amendment to a report on Schedule 13D, Schedule 14D-1 or Form 8-X (or any successor schedule, form or report under the Exchange Act);
(B) the merger or consolidation of Ameritrust with another corporation, the sale of all or substantially all of Ameritrusts assets to another entity, or any other fundamental change with respect to Ameritrust (which agreement, sale or change is subject in any event to shareholder approval) to the extent that, as a result of such merger or consolidation, sale, or change, either (A) less than 80% of the outstanding voting securities of the surviving or resulting corporation will be owned in the aggregate by the persons who were the shareholders of Ameritrust immediately prior to such merger or consolidation, sale, or change, or (B) Ameritrust will cease to be required, and any such surviving or resulting corporation will not be required, to file information, documents and reports under Section 13(e) of the Exchange Act; or
(C) individuals who, as of the date hereof, constitute the Board of Directors of Ameritrust (the Board generally and as of the date hereof the Incumbent Board) cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by Ameritrusts shareholders, was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the Directors of Ameritrust, as such terms are used in Rule 14a-11 of Regulation 15A promulgated under the Exchange Act) shall be, for purposes of this Plan, considered as though such person were a member of the Incumbent Board.
(c) The principal of the Trust and any earnings thereon shall be held in trust separate and apart from other funds of each Participating Employer exclusively for the uses and purposes herein set forth. No Trust Beneficiary shall have any preferred claim on, or any beneficial ownership interest in, any assets of the Trust prior to the time that such assets are paid to a Trust Beneficiary as Benefits as provided herein. Each Trust Beneficiary shall have the status of a general unsecured creditor with respect to the assets of the Trust. The obligation of the Trustee to pay Benefits pursuant to the Trust Agreement constitutes merely an unfunded and unsecured promise to pay such Benefits.
(d) Ameritrust and any Participating Subsidiary may at any time or from time to time make additional deposits of cash or other property in the Trust to augment the principal to be held, administered and disposed of by the Trustee as herein provided, but no payment of all or any portion of the principal of the Trust or earnings thereon shall be made to any Participating Employer or any other person or entity on behalf of any Participating Employer except as herein expressly provided.
(e) Not later than the date on which the Trust has become irrevocable, Ameritrust shall (i) specify the amounts and timing of the Benefits to which each Trust Beneficiary may become entitled, as provided in and subject to Section 9 hereof, in an exhibit (Exhibit B), and (ii) provide any corresponding revisions to Exhibits A-1 and A-2 that may be required.
(f) The Trust is intended, with respect to each Participating Employer, to be a grantor trust, within the meaning of section 671 of the Internal Revenue Code of 1986, as amended (the Code), or any successor provision thereto, and shall be construed accordingly. The Trust is not designed to qualify under section 401(a) of the Code or to be subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended (ERISA).
2. PAYMENTS TO TRUST BENEFICIARIES: (a) Provided that a Trust Beneficiarys Participating Employer is not Insolvent and commencing with the earlier to occur of (i) appropriate notice by Ameritrust to the Trustee, or (ii) the date on which the Trust becomes irrevocable, the Trustee shall make payments of Benefits to the Trust Beneficiaries from the assets of the Trust in accordance with the terms of the Agreements and Plans and subject to Section 9 hereof. The Trustee shall be permitted to withhold from any payment due to a Trust Beneficiary hereunder the amount required by law to be so withheld under federal, state and local withholding requirements or otherwise, and shall pay over to the appropriate government authority the amount so withheld. The Trustee may rely on instructions from Ameritrust as to any required withholding and shall be fully protected under Section 8(f) hereof in relying on such instructions.
(b) If the balance of an Executives separate account maintained pursuant to Section 7(b) hereof is not sufficient to provide for full payment of Benefits to which such Executives Trust Beneficiaries are entitled as provided herein, the Executives Participating Employer shall make the balance of each such payment as provided in the applicable provision of the Agreement or the Plans. No payment from the Trust assets to a Trust Beneficiary shall exceed the balance of such separate account.
3. THE TRUSTEES RESPONSIBILITY REGARDING PAYMENTS TO A TRUST BENEFICIARY WHEN A PARTICIPATING EMPLOYER IS INSOLVENT: (a) At all times during the continuance of this Trust, the principal and income of the Trust with respect to accounts maintained hereunder on behalf of a Participating Employer shall be subject to claims of creditors of such Participating Employer as set forth in this Section 3(a). The Board of Directors (Board) of Ameritrust and of each Participating Subsidiary and the Chief Executive Officer of Ameritrust and of each Participating Subsidiary (CEO) shall have the duty to inform the Trustee if either the Board or the CEO believes that his or their respective Participating Employer is Insolvent. If the Trustee receives a notice from the Board, the CEO, or a creditor of a Participating Employer alleging that such Participating Employer is Insolvent, the Trustee will independently determine within 30 days after receipt of such notice whether the Participating Employer is Insolvent. Pending such determination or if the Trustee has actual knowledge that a Participating Employer is Insolvent, the Trustee shall (i) discontinue payments to any Trust Beneficiary from accounts maintained hereunder on behalf of such Participating Employer (the Identified Participating Employer), (ii) determine and allocate all Account Excesses in accordance with Sections 4 and 7(b) hereof for the accounts of Executives then employed by the Identified Participating Employer, or for whom such Identified Participating Employer has obligations and liabilities or has assumed obligations and liabilities pursuant to a Deposit Agreement, treating such accounts solely for this purpose as if they comprised all of the accounts of the Trust, and provided that for this purpose the Threshold Percentage shall be equal to 100%, and (iii) hold the Trust assets attributable to accounts maintained hereunder on behalf of Executives then employed by the Identified Participating Employer, or for whom such Identified Participating Employer has obligations and liabilities or has assumed obligations and liabilities pursuant to a Deposit Agreement, for the benefit of the general creditors of such Identified Participating Employer. The Trustee shall deliver any undistributed principal and income in the Trust to the extent of the balances of the accounts maintained hereunder on behalf of the
Identified Participating Employer to the extent necessary to satisfy the claims of the creditors of such Identified Participating Employer as a court of competent jurisdiction may direct. Such payments of principal and income shall be borne by the separate accounts of the Trust Beneficiaries maintained hereunder on behalf of the Identified Participating Employer in proportion to the balances on the date of such court order of their respective accounts maintained hereunder on behalf of such Identified Participating Employer and maintained pursuant to Section 7(b) hereof. If payments to any Trust Beneficiary have been discontinued pursuant to this Section 3(a), the Trustee shall resume payments to such Trust Beneficiary in accordance with this Trust Agreement if the Trustee has determined that the Executives Participating Employer is not Insolvent, or is no longer Insolvent (if the Trustee initially determined such Participating Employer to be Insolvent), or pursuant to the order of a court of competent jurisdiction. The Trustee shall have no duty to inquire as to whether a Participating Employer is Insolvent and may rely on information concerning the Insolvency of a Participating Employer which has been furnished to the Trustee by any creditor of a Participating Employer or by any person (other than an employee or director of Ameritrust or a Subsidiary) acting with apparent or actual authority with respect to Ameritrust or a Subsidiary. Nothing in this Trust Agreement shall in any way diminish any rights of any Trust Beneficiary to pursue his rights as a general creditor of the Executives Participating Employer or any other Participating Employer with respect to Benefits or otherwise, and the rights of each Trust Beneficiary under the respective Agreement or Plans shall in no way be affected or diminished by any provision of this Trust Agreement or action taken pursuant to this Trust Agreement except that any payment actually received by any Trust Beneficiary from the Trust shall reduce dollar-per-dollar amounts otherwise due to such Trust Beneficiary pursuant to the respective Agreement or Plans.
(b) If the Trustee discontinues payments of Benefits from the Trust pursuant to Section 3(a) hereof, and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments which would have been made to the Trust Beneficiaries in accordance with this Trust Agreement during the period of such discontinuance, less the aggregate amount of payments made to any Trust Beneficiary by the Participating Employer pursuant to the Agreement or the Plans during any such period of discontinuance, together with interest on the net amount delayed determined at a rate equal to the rate actually earned during such period with respect to the assets of the Trust corresponding to such net amount delayed; provided, however, that no such payment shall exceed the balance of the respective Trust Beneficiarys account as provided in Section 7(b) hereof.
4. PAYMENTS TO PARTICIPATING EMPLOYERS: Except to the extent expressly contemplated by Section 1(b) and this Section 4, no Participating Employer shall have any right or power to direct the Trustee to return any of the Trust assets to such Participating Employer before all payments of Benefits have been made to all Trust Beneficiaries of such Participating Employer as herein provided. Upon the written request of a Participating Employer made prior to the date on which the Trust becomes irrevocable, the Trustee shall return to the Participating Employer any Trust assets in accounts for Executives then employed by the Participating Employer, or for whom such Participating Employer has obligations and liabilities or has assumed obligations and liabilities pursuant to a Deposit Agreement, in excess of One Hundred Dollars ($100) as may be specified in such request by such Participating Employer. From time to time, but in no event before the third anniversary of the date on which the Trust has become irrevocable, if and when requested by Ameritrust to do so, the Trustee shall engage the services of The Wyatt Company, or such other independent actuary as may be mutually satisfactory to Ameritrust and to the Trustee, to determine the maximum actuarial present values of the future Benefits that could become payable by each Participating Employer under the Agreements and the Plans with respect to the Trust Beneficiaries. The Trustee shall determine the fair market values of the Trust assets allocated to the account of each Executive pursuant to Section 7(b) hereof. Ameritrust shall pay the fees of such independent actuary and of any appraiser engaged by the Trustee to value any property held in the Trust. The independent actuary shall make its calculations based upon the assumptions set forth in Exhibit C hereto, or such other assumptions as are recommended by such actuary and approved by Ameritrust and, if the Trust is irrevocable, by two-thirds of the Executive Participants, as hereafter defined (subject to the provisions of Sections 10(b)(i) and (b)(ii) hereof). For purposes of this Trust Agreement, (a) Executive Participants shall mean the individuals listed on Exhibit A-2 hereto; (b) the Fully Funded amount with respect to the account of an Executive maintained pursuant to Section 7(b) hereof shall be equal to the Threshold Percentage, as defined below, multiplied by the maximum actuarial present value of the future Benefits that could become payable under the Agreement and the Plans with respect to the Trust Beneficiaries of such Executive, (c) the Account
Excess with respect to such account shall be equal to the excess, if any, of the fair market value of the assets held in the Trust allocated to an Executives account over the respective Fully Funded amount, and (d) the Aggregate Account Excess with respect to a Participating Employer shall be equal to the excess, if any, of the aggregate account balances of Executives then employed by the Participating Employer, or for whom such Participating Employer has obligations and liabilities or has assumed obligations and liabilities pursuant to a Deposit Agreement, over their aggregate Fully Funded amounts. Unless otherwise provided, the Threshold Percentage shall be equal to 125%. The Trustee shall allocate any Account Excess in accordance with Section 7(b) hereof. Thereafter, upon the request of Ameritrust, the Trustee shall pay to the Participating Employer its Aggregate Account Excess; provided, however, that if such payment would leave the Trustee with insufficient liquid assets to pay all premiums due and to become due on any life insurance policies held in the Trust, the Trustee shall retain sufficient liquid assets to pay such premiums.
5. INVESTMENT OF TRUST FUND: Prior to the date on which the Trust becomes irrevocable, the Trustee shall invest and reinvest the assets of the Trust as Ameritrust or its designee shall prescribe from time to time. Thereafter, or in the absence of such instructions from Ameritrust, the Trustee shall have sole power to invest the assets of the Trust; provided, however, that except as provided in Section 8(j) hereof, the Trustee shall retain any insurance policies in the Trust. The investment objective of the Trustee shall be to preserve the principal of the Trust while obtaining a reasonable total rate of return, measurement of which shall include market appreciation or depreciation plus receipt of interest and dividends. The Trustee shall be mindful, in the course of its management of the Trust, of the liquidity demands on the Trust and any actuarial assumptions that may be communicated to it from time to time in accordance with the provisions of this Trust Agreement. The Trustee shall not be liable for any failure to maximize income on such portion of the Trust assets as may be from time to time invested or reinvested as set forth above, nor for any loss of income due to the liquidation of any investment which the Trustee, in its sole discretion, believes necessary to make payments or to reimburse expenses under the terms of this Trust Agreement. The Trustee shall have the right to invest assets of the Trust as the Trustee may deem proper and suitable in non-interest bearing deposit accounts (including any such accounts offered or maintained by the Trustee or any successor or affiliated corporation).
6. INCOME OF THE TRUST: Except as provided in Section 3 hereof, during the continuance of this Trust all net income (or loss) of the Trust shall be allocated quarterly among the Trust Beneficiaries separate accounts in accordance with Section 7(b) hereof. Net income (or loss) of the Trust shall be determined by taking into account (i) receipt of interest and dividends, (ii) any increase or decrease in the value of the Trust assets attributable to market appreciation or depreciation and (iii) any increase in the cash surrender value of any life insurance policy held in the Trust other than the portion of such increase attributable to the payment of the premiums due thereon.
7. ACCOUNTING BY TRUSTEE: (a) The Trustee shall maintain such books, records and accounts as may be necessary for the proper administration of the Trust assets, including such specific records as shall be agreed upon in writing by Ameritrust and the Trustee, and shall render to each Participating Employer, within 60 days following the close of each calendar year following the date of this Trust until the termination of this Trust or the removal or resignation of the Trustee (and within 60 days after the date of such termination, removal or resignation), an accounting with respect to the Trust assets as of the end of the then most recent calendar year (and as of the date of such termination, removal or resignation as the case may be). The Trustee shall furnish to each Participating Employer on a monthly basis and in a timely manner such information regarding the Trust as each Participating Employer shall require for purposes of preparing its statements of financial condition. The Trustee shall at all times maintain a separate bookkeeping account for each Participating Employer and for each Executive as prescribed by Section 7(b) hereof. Upon the written request of an Executive or Ameritrust, the Trustee shall deliver to such Executive or Ameritrust, as the case may be, a written report setting forth the amount held in the Trust for such Executive (or each Executive if such request is made by Ameritrust) and a record of the deposits made with respect thereto by each Participating Employer. Unless Ameritrust or any Executive shall have filed with the Trustee written exceptions or objections to any such statement and account within one hundred eighty (180) days after receipt thereof, Ameritrust or the Executive shall be deemed to have approved such statement and account, and in such case the Trustee shall be forever released and discharged with respect to all matters and things reported in such statement and account as though it had been settled by a decree of a court of competent jurisdiction in an action or proceeding to which each Participating Employer and the Executive were parties.
(b) The Trustee shall maintain a separate account (i) for each Participating Employer (a Participating Employer Account) and (ii) within such Participating Employer Account, a separate account for each Executive who performs services for such Participating Employer and from whom such Executive is entitled to Benefits (an Executives account). Each asset of the Trust shall be allocated to the account of a Participating Employer. Executive accounts within a Participating Employer Account shall reflect undivided portions of each asset in such Account. The Trustee shall credit or debit each Executives account as appropriate to reflect such Executives allocable portion of the Trust assets allocated to each Participating Employer Account, as such Trust assets may be adjusted from time to time pursuant to the terms of this Trust Agreement. Except as otherwise provided in this Section 7(b), the Trustee shall allocate the income (or loss) of the Trust with respect to each Participating Employer Account, and within such Account, to the separate Executive accounts maintained thereunder in proportion to the balances of the separate accounts of the Executives. All deposits of principal pursuant to Sections 1(a) and 1(d) shall be allocated and reallocated as directed by the Participating Employer making such deposit until such time as the Trust has become irrevocable; thereafter, deposits of principal may be allocated, but not reallocated, by a Participating Employer. The net proceeds of any life insurance policies held in the Trust in excess of the cash surrender values thereof shall be treated and allocated as income for purposes of this Section 7(b). Any increase in the cash surrender value of any such policies attributable solely to the payment by a Participating Employer of premiums due thereon pursuant to Section 8(j) hereof shall be treated as a deposit of principal that may be allocated by such Participating Employer for purposes of this Section 7(b).
For purposes of this Trust Agreement
(a) Accumulated Benefit for a Trust Beneficiary shall mean the Benefits to which such Trust Beneficiary may become entitled as of each March 31 with respect to service by an Executive to such date;
(b) Projected Benefit for a Trust Beneficiary shall mean the Benefits to which such Trust Beneficiary may become entitled projected as of the date three years after the date for determination of the Accumulated Benefit with respect to projected service by an Executive to such date, which Projected Benefit shall include the Accumulated Benefit;
(c) the Projected Benefit Account Excess with respect to an Executive account maintained pursuant to this Section 7(b) shall be equal to the excess, if any, of the fair market value of the assets held in the Trust allocated to such Executives account over the respective Projected Benefit; and
(d) the Aggregate Projected Benefit Account Excess with respect to a Participating Employer shall be equal to the excess, if any, of the aggregate account balances of Executives then employed by the Participating Employer, or for whom such Participating Employer has obligations and liabilities or has assumed obligations and liabilities pursuant to a Deposit Agreement, over their aggregate Projected Benefits.
If any deposit of principal is not allocated by the Participating Employer such amount shall be allocated by the Trustee as if it were a Projected Benefit Account Excess with respect to Executives then employed by such Participating Employer, or for whom such Participating Employer has obligations and liabilities or has assumed obligations and liabilities pursuant to a Deposit Agreement, in accordance with this Section 7(b). The Trustee shall determine annually the amount of all Projected Benefit Account Excesses. The Trustee shall allocate the Aggregate Projected Benefit Account Excess of a Participating Employer to any accounts of Executives then employed by such Participating Employer, or for whom such Participating Employer has obligations and liabilities or has assumed obligations and liabilities pursuant to a Deposit Agreement, that do not have a Projected Benefit Account Excess, in proportion to the differences between the respective Projected Benefit amount and account balance, insofar as possible until all accounts are not less than the Projected Benefit for such Executive. Any then remaining Aggregate Projected Benefit Account Excess of a Participating Employer allocated to all the accounts of Executives then employed by such Participating Employer, or for whom such Participating Employer has obligations and liabilities or has assumed obligations and liabilities pursuant to a Deposit Agreement, in proportion to the respective Projected Benefit amounts.
(c) Nothing in this Section 7 shall preclude the commingling of Trust assets for investment.
8. RESPONSIBILITY OF TRUSTEE: (a) The duties and responsibilities of the Trustee shall be limited to those expressly set forth in this Trust, and no implied covenants or obligations shall be read into this Trust against Trustee.
(b) If all or any part of the Trust assets are at any time attached, garnished, or levied upon by any court order, or in case the payment, assignment, transfer, conveyance or delivery of any such property shall be stayed or enjoined by any court order, or in case any order, judgment or decree shall be made or entered by a court affecting such property or any part thereof, then and in any of such events the Trustee is authorized, in its sole discretion, to rely upon and comply with any such order, judgment or decree, and it shall not be liable to any Participating Employer or any Executive by reason of such compliance even though such order, judgment or decree subsequently may be reversed, modified, annulled, set aside or vacated.
(c) The Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; provided, however, that the Trustee shall incur no liability to anyone for any action taken pursuant to a direction, request, or approval given by any Participating Employer, or any Executive, contemplated by and complying with the terms of this Trust Agreement. The Trustee shall discharge its responsibility for the investment, management and control of the Trust assets solely in the interests of the Executives and for the exclusive purpose of assuring that, to the extent of available Trust assets and in accordance with the terms of this Trust Agreement, all payments of Benefits are made when due to the Executives.
(d) The Trustee may consult with legal counsel (who may be counsel for any Participating Employer) to be selected by it, and the Trustee shall not be liable for any action taken or suffered by it in accordance with the advice of such counsel.
(e) The Trustee shall be reimbursed jointly and severally by Ameritrust and each Participant Subsidiary for its reasonable expenses incurred in connection with the performance of its duties hereunder (including, but not limited to the fees and expenses of counsel incurred pursuant to Section 8(d) or 8(f) hereof) and shall be paid reasonable fees for the performance of such duties in the manner provided by Section 8(f) hereof.
(f) Ameritrust and each Participating Subsidiary agrees jointly and severally to indemnify and hold harmless the Trustee from and against any and all damages, losses, claims or expenses as incurred (including expenses of investigation and fees and disbursements of counsel to the Trustee and any taxes imposed on the Trust assets or income of the Trust) arising out of or in connection with the performance by the Trustee of its duties hereunder, other than such damages, losses, claims or expenses arising out of the Trustees gross negligence or willful misconduct. The Trustee shall not be required to undertake or to defend any litigation arising in connection with this Trust Agreement unless it be first indemnified by Ameritrust or a Participating Subsidiary against its prospective costs, expenses and liabilities (including without limitation attorneys fees and expenses) relating thereto, and Ameritrust and each Participating Subsidiary hereby jointly and severally to indemnify the Trustee and be primarily liable for such costs, expenses, and liabilities. Any amount payable to the Trustee under Section 8(e) hereof or this Section 8(f) shall be paid by Ameritrust or a Participating Subsidiary promptly upon demand therefor by the Trustee or, in the event that Ameritrust or a Participating Subsidiary fails to make such payment, from the Trust assets, pro rata with respect to account balances. In the event that payment is made hereunder to the Trustee from the Trust assets, the Trustee shall promptly notify Ameritrust in writing of the amount of such payment. Ameritrust agrees that, upon receipt of such notice, it will, jointly and severally, deliver or cause to be delivered to the Trustee to be held in the Trust an amount in cash equal to any payments made from the Trust assets to the Trustee pursuant to Section 8(e) hereof or this Section 8(f). The failure of Ameritrust to transfer any such amount shall not in any way impair the Trustees right to indemnification, reimbursement and payment pursuant to Section 8(e) hereof or this Section 8(f).
(g) The Trustee may vote any stock or other securities and exercise any right appurtenant to any stock, other securities or other property held hereunder, either in person or by general or limited proxy, power of attorney or other instrument.
(h) The Trustee may hold securities in bearer form and may register securities and other property held in the trust fund in its own name or in the name of a nominee, combine certificates representing securities with certificates of the same issue held by the Trustee in other fiduciary capacities, and deposit, or arrange for deposit of property with any depository; provided that the books and records of the Trustee shall at all times show that all such securities are part of the trust fund.
(i) The Trustee may hire agents, accountants, actuaries, and financial consultants, who may be agent, accountant, actuary, or financial consultant, as the case may be, for Ameritrust or with respect to any Plan.
(j) (i) The Trustee is empowered to take all actions necessary or advisable in order to collect any life insurance, annuity, or other benefits or payments of which the Trustee is the designated beneficiary. The Trustee shall maintain in force all life insurance policies held in the Trust (A) by requesting that the Participating Employers pay directly all premiums and other charges due thereon in a timely manner, and (B) by paying all such premiums and charges that are not so paid by the Participating Employers. To the extent the Trustee has cash or its equivalent readily available for such purpose or policy loans and/or dividends are available, the Trustee shall pay premiums due with such cash or its equivalent or policy loans and/or dividends, as the Trustee may deem best. If the Trustee does not have sufficient cash or its equivalent readily available and policy loans and dividends are not available, then the Trustee (C) shall first liquidate other assets held by it in the Trust to generate the necessary cash for the payment of such premiums and charges and for the payment of Benefits, and then (D) shall surrender and liquidate policies in an Executives account as necessary to pay Benefits to the Trust Beneficiaries with respect to such account.
(ii) The Trustee shall be named sole owner and beneficiary of each life insurance policy held in the Trust and shall have full authority and power to exercise all rights of ownership relating to the policy, (x) except that the Trustee shall have no power, other than in accordance with Sections 1(b), 4, and 11 hereof, to name a beneficiary of the policy other than the Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor Trustee, or to loan to any person the proceeds of any borrowing against such policy or, except as provided in the immediately preceding sentence, to surrender any policy or allow any policy to lapse at any time when there are other assets in the Trust that can be disposed of or otherwise used to generate any cash necessary to maintain the policy or for the payment of Benefits, and (y) except to the extent necessary to give effect to the provisions of any split-dollar life insurance arrangement. The Trustee shall have the power, with the consent of Ameritrust, to exchange that portion, if any, of the life insurance coverage on any Executive that is in excess of the amount of such coverage necessary to provide sufficient proceeds to pay the corresponding amount of Benefits, for additional life insurance coverage on other Executives. The Trustee shall also have the power to acquire additional life insurance coverage on Executives through application for new life insurance.
(k) The Trustee shall have, without exclusion, all powers conferred on trustees by applicable law unless expressly provided otherwise herein.
(l) Notwithstanding any other provision of this Trust Agreement, in the event of the termination of the Trust, or the resignation or discharge of the Trustee, the Trustee shall have the right to a settlement of its accounts, which accounting may be made, at the option of the Trustee, either (i) by a judicial settlement in a court of competent jurisdiction, or (ii) by agreement of settlement, release and indemnity from the Participating Employers to the Trustee.
9. AMENDMENTS, ETC. TO EXHIBITS, AGREEMENT AND PLANS; COOPERATION OF PARTICIPATING EMPLOYERS: (a) Prior to the date on which the Trust becomes irrevocable, the provisions of this Section 9(a) shall apply.
(i) Ameritrust shall furnish the Trustee with any amendments, restatements or other changes in the Agreements and the Plans, and Ameritrust shall prescribe or amend, as the case may be, Exhibit B hereto to reflect any such amendment, restatement, or other change, or any changes in the compensation of the Executives, or otherwise. Exhibit B shall prescribe, among other things, the
amounts and timing (i) of Benefits to which each Trust Beneficiary may become entitled as of each March 31 for service to such date (the Accumulated Benefit) and (ii) Benefits to which each Trust Beneficiary may become entitled projected as of the date three years after the date in (i) (the Projected Benefit). The Projected Benefit shall be inclusive of the Accumulated Benefit.
(ii) At such time as may in the judgment of Ameritrust be appropriate, Ameritrust shall furnish to the Trustee any amendment to Exhibits A-1 or A-2 and any corresponding amendment to Exhibit B required as a result of such amendment to Exhibits A-1 or A-2.
(b) On or after the date on which the Trust becomes irrevocable, the provisions of this Section 9(b) shall apply.
(i) Not later than forty-five (45) calendar days after the end of each calendar year and at such other time as may in the judgment of Ameritrust be appropriate in view of a change in circumstances, Ameritrust and each Executive (or his personal representative (including his guardian, executor or administrator) (hereafter, his Successor) shall agree upon and furnish any amendment to Exhibit B hereto as shall be required to reflect:
(A) any required change in the amounts of Benefits (including Accumulated Benefits and Projected Benefits) as a result of any change in such Executives compensation during the prior calendar year, or
(B) any amendment, restatement or other change in or to the Plans which agreements to amendments to such Exhibit B shall be furnished to the Trustee by Ameritrust or the Executives (or their Successors) and thereafter be deemed to be a part of, and to amend to the extent thereof, this Trust Agreement; provided, however, that in the event of the failure of Ameritrust and the Executive (or Successor) to reach such agreement, the provisions of Section 9(b)(ii) hereof shall control.
(ii) Ameritrust has previously furnished the Trustee complete and correct copies of the Agreements and the Plans, and Ameritrust shall, and any Trust Beneficiary may, promptly furnish the Trustee true and correct copies of any amendment, restatement or successor to any of the Agreements or the Plans. Ameritrust shall, and any Trust Beneficiary may, also furnish the Trustee, upon the Trustees request, such evidence of changes in compensation of the Executives as the Trustee shall deem necessary for its determination under this Section 9(b)(ii). Upon written notification to the Trustee by Ameritrust or any Executive (or Successor) of the failure of Ameritrust or any Executive (or Successor) to agree as provided in Section 9(b)(i), the Trustee shall, to the extent necessary in the sole judgment of the Trustee,
(A) recompute the amount payable hereunder as set forth in Exhibit B hereto to any Trust Beneficiary; and
(B) notify Ameritrust and the Executive (or Successor) in writing of its computations. Thereafter, this Trust Agreement and all Exhibits thereto shall be amended to the extent of such Trustee determinations without further action; provided, however, that the failure of Ameritrust to furnish any such amendment, restatement, successor or compensation information shall in no way diminish the rights of any Trust Beneficiary hereunder or thereunder.
(iii) Any amendment to Exhibit A-1 must be
(A) agreed to by two-thirds of the Executive Participants, subject to the provisions of Sections 10(b)(i) and (b)(ii) hereof, and
(B) in the case of an amendment that adds a new Executive as a Trust Beneficiary, accompanied by the deposit into the Trust by a Participating Employer on or before the effective date on which the new Executive would become a Trust Beneficiary, an amount certified by The Wyatt Company, or such other actuary acceptable to Ameritrust and two-thirds of the Executive Participants (as determined prior to the effective date of the amendment and subject to Sections 10(b)(i) and (b)(ii) hereof) as sufficient to pay such new Executives Benefits hereunder (with such sufficiency determined on the same actuarial basis as that used to determine sufficiency with respect to the Benefits as in effect hereunder immediately prior to the addition of such new Executive).
(C) Notwithstanding the foregoing provisions of this Section 9, any amendment, restatement, successor or other change in an Agreement or a Plan that would materially increase the responsibilities or liabilities of the Trustee or materially change its duties shall also require the consent of the Trustee, which consent shall not be unreasonably withheld.
10. REPLACEMENT OF THE TRUSTEE: (a) The Trustee shall continue to serve until its successor accepts the Trust and receives delivery of the Trust assets. The Trustee may resign and be discharged from its duties hereunder after providing not less than ninety (90) days notice in writing to Ameritrust and the Executive Participants. Prior to the date on which the Trust becomes irrevocable, the Trustee may be removed at any time upon notice in writing by Ameritrust. On or after such date, such removal shall also require the agreement of two thirds of the Executive Participants. Prior to the date on which the Trust becomes irrevocable, a replacement or successor trustee shall be appointed by Ameritrust. On or after such date, such appointment shall also require the agreement of two thirds of the Executive Participants. No such removal or resignation shall be effective until the acceptance of the Trust by a successor trustee designated in accordance with this Section 10. If the Trustee should resign, and within forty-five (45) days of the notice of such resignation Ameritrust and, if required, two thirds of the Executive Participants, shall not have notified the Trustee of an agreement as to a replacement trustee, the Trustee shall apply to a court of competent jurisdiction for the appointment of a successor trustee, which shall be such bank or trust company (A) that the court in its discretion considers an appropriate trustee for the Trust, having due regard for the objectives, magnitude and expected duration of the Trust; (B) (x) whose trust assets under investment would place it among the 100 largest trust companies in the United States, or (y) which is a national banking association or established under the laws of one of the states of the United States, and which has equity in excess of $100 million; and (C) that is independent and not subject to the control of either Ameritrust or the Executives. The court in its discretion may transfer jurisdiction of the Trust to the jurisdiction in which the successor trustee has its principal place of business. The preceding determinations shall be made as of the time of appointment of the successor trustee. Upon the acceptance of the trust by a successor trustee, the Trustee shall release all of the moneys and other property in the Trust to its successor, who shall thereafter for all purposes of this Agreement be considered to be the Trustee. In the event of its removal or resignation, the Trustee shall duly file with Ameritrust and, after the Trust becomes irrevocable, the Executives, a written statement or statements of accounts and proceedings as provided in Section 7(a) hereof for the period since the last previous annual accounting of the Trust, and if written objection to such account is not filed as provided in Section 7(a) hereof, the Trustee shall to the maximum extent permitted by applicable law be forever released and discharged from all liability and accountability with respect to the propriety of its acts and transactions shown in such account.
(b) For purposes of the removal or appointment of a Trustee under this Section 10, (i) if any Executive Participant shall be deceased or adjudged incompetent, such Executive Participants Successor (or if no Successor, his Trust Beneficiaries) shall participate in such Executive Participants stead, and (ii) no Successor or Trust Beneficiary shall participate if all payments of Benefits have been made with respect to such Executive Participant (including his Trust Beneficiaries).
11. AMENDMENT OR TERMINATION: (a) This Trust Agreement may be amended at any time and to any extent by a written instrument executed by the Trustee, Ameritrust and, after the Trust has become irrevocable, two thirds of the Executive Participants; provided, however, that no amendment shall have the effect of (i) making the Trust revocable after it has become irrevocable in accordance with Section 1(b) hereof; or (ii) altering Section 8(j) (ii) or 11(b) hereof. Notwithstanding the previous sentence, (x) amendments contemplated by Section 9 hereof shall be made as therein provided, and (y) the approval by Ameritrust or by two thirds of the Executive Participants shall not be required for any amendment necessary in order to obtain a favorable private letter ruling from the Internal Revenue Service regarding the effect of the Trust on the taxation of the Participating Employers or the Trust Beneficiaries.
(b) After the Trust has become irrevocable, the Trust shall not terminate until the date on which the Trust no longer contains any assets, or, if earlier, the date on which each Trust Beneficiary is entitled to no further payments hereunder.
(i) Notwithstanding any other provision of this Trust Agreement, if the payments under an Agreement or Plan with respect to an Executive subject of litigation, or arbitration, and if the balance of such Executives separate account maintained pursuant to Section 7(b) is greater than zero, the Trust shall not terminate and the funds held in the Trust with respect to such Executive shall continue to be held by the Trustee until the final resolution of such litigation or arbitration. The Trustee may assume that no Agreement or Plan is the subject of such litigation or arbitration unless the Trustee receives written notice from any Executive or Ameritrust with respect to such litigation or arbitration. The Trustee may rely upon written notice from an Executive as to the final resolution of such litigation or arbitration. Following such final resolution, the Trust shall terminate with respect to each Executive described in this Section 11(b)(i) upon the earlier of either of the following events: (x) the exhaustion of the Trust assets held by the Trustee with respect to such Executive; or (y) the final payment of all amounts payable to the Executive pursuant to the Plans, as certified to the Trustee by such Executive.
(c) Upon termination of the Trust as provided in Section 11(b) hereof, any assets remaining in the Trust, less all payments, expenses, taxes and other charges under this Trust Agreement as of such date of termination, shall be returned to Ameritrust or as it directs.
12. SPECIAL DISTRIBUTION: (a) It is intended that (i) the creation of, transfer of assets to, and irrevocability of, the Trust will not cause any of the Agreements or the Plans to be other than unfunded for purposes of Title I of ERISA; (ii) transfers of assets to the Trust or the Trust becoming irrevocable will not be transfers of property for purposes of section 83 of the Code, or any successor provision thereto, nor will such transfers or irrevocability cause a currently taxable benefit to be realized by a Trust Beneficiary pursuant to the economic benefit doctrine; and (iii) pursuant to section 451 of the Code, or any successor provision thereto, amounts will be includable as compensation in the gross income of a Trust Beneficiary in the taxable year or years in which such amounts are actually distributable or made available to such Trust Beneficiary by the Trustee.
(b) Notwithstanding anything to the contrary contained in this Agreement, if, based upon a change in the federal tax or revenue laws, a published ruling or similar announcement issued by the Internal Revenue Service, a regulation issued by the Secretary of the Treasury, a decision by a court of competent jurisdiction involving a Trust Beneficiary, or a closing agreement made under section 7121 of the Code that is approved by the Internal Revenue Service and involves a Trust Beneficiary, the Trustee determines that amounts are includible as compensation in the gross income of a Trust Beneficiary in a taxable year that is prior to the taxable year or years in which such amounts would, but for this Section 12, otherwise actually be distributed or made available to such Trust Beneficiary by the Trustee, then (i) the assets held in trust shall be allocated in accordance with Section 7(b) hereof, and (ii) subject to the last sentence of Section 2(b) hereof, the Trustee shall promptly make a distribution to each affected Trust Beneficiary which, after taking into account the federal, state and local income tax consequences of the special distribution itself, is equal to the sum of any federal, state and local income taxes, interest due thereon, and penalties assessed with respect thereto which are attributable to amounts that are so includible in the income of such Trust Beneficiary.
13. PARTICIPATING SUBSIDIARY DEPOSIT AGREEMENT: (a) Upon execution of a Deposit Agreement in the form of Exhibit D hereto, a Subsidiary may at any time or from time to time make deposits of cash or other property in the Trust pursuant to Section 1(d) hereof. Such Deposit Agreement shall provide, among other things, for the designation of Ameritrust as agent and attorney for the Participating Subsidiary for all purposes under this Trust Agreement, including consenting to any amendments hereto, consenting to any Trustee accounts and consenting to anything requiring the approval or consent of a Participating Employer hereunder.
(b) Ameritrust is the sponsoring grantor for the Trust Agreement. It reserves to itself, and each Subsidiary by execution of a Deposit Agreement delegates to Ameritrust, the power to amend or terminate the Trust Agreement in accordance with its terms.
14. GENERAL PROVISIONS: (a) Ameritrust and each Participating Subsidiary shall, at any time and from time to time, upon the reasonable request of the Trustee, execute and deliver such further instruments and do such further act as may be necessary or proper to effectuate the purposes of this Trust.
(b) Each Exhibit referred to in this Trust Agreement shall become a part hereof and is expressly incorporated herein by reference.
(c) This Trust Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof and supersedes any and all prior agreements, arrangements and understandings relating thereto. This Trust Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and legal representatives.
(d) This Trust Agreement shall be governed by and construed in accordance with the laws of the State of Ohio, other than and without reference to any provisions of such laws regarding choice of laws or conflict of laws.
(e) In the event that any provision of this Trust Agreement or the application thereof to any person or circumstances shall be determined by a court of competent jurisdiction to be invalid or unenforceable to any extent, the remainder of this Trust Agreement, or the application of such provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each provision of this Trust Agreement shall be valid and enforced to the maximum extent permitted by law.
(f) The headings contained in this Trust Agreement are solely for the purpose of reference, are not part of the agreement of the parties and shall not in any way affect the meaning or interpretation of this Trust Agreement.
(g) No right or interest under this Trust Agreement of a Trust Beneficiary (or any person claiming through or under any of them) other than the surviving spouse of any Executive shall be assignable or transferable in any manner or be subject to alienation, anticipation, sale, pledge, encumbrance or other legal process or in any manner be liable for or subject to the debts or liabilities of any such Trust Beneficiary. If any Trust Beneficiary (other than the surviving spouse of any deceased Executive) shall attempt to or shall transfer, assign, alienate, anticipate, sell, pledge or otherwise encumber his Benefits hereunder or any part thereof, or if by reason of his bankruptcy or other event happening at any time such Benefits would devolve upon anyone else or would not be enjoyed by him, then the Trustee, in its discretion, may terminate his interest in any such Benefit to the extent the Trustee considers necessary or advisable to prevent or limit the effects of such occurrence. Termination shall be effected by filing a written termination declaration with the Trusts records and making reasonable efforts to deliver a copy to the Trust Beneficiary (the Terminated Beneficiary) whose interest is adversely affected.
As long as the Terminated Beneficiary is alive, any benefits affected by the termination shall be retained by the Trustee and, in the Trustees sole and absolute judgment, may be paid to or expended for the benefit of the Terminated Beneficiary, his spouse, his children or any other person or persons in fact dependent upon him in such a manner as the Trustee shall deem proper. Upon the death of the Terminated Beneficiary, all benefits withheld from him and not paid to others in accordance with the preceding sentence shall be disposed of according to the provisions of the Plans that would apply if he died prior to the time that all Benefits to which he was entitled were paid to him; provided, however, that if such provisions provide for distribution to the Terminated Beneficiarys estate or to his creditors and if the Terminated Beneficiary shall have descendants, including adopted children, then living, distribution shall be made to the Terminated Beneficiarys then living descendants, including adopted children, PER STIRPES.
(h) Any dispute between the Executives and Ameritrust or the Trustee as to the interpretation or application of the provisions of this Trust and amounts payable hereunder may, at the election of any party to such dispute (or, if more than one Executive is such a party, at the election of two-thirds of such Executives), be determined by binding arbitration within the greater Cleveland metropolitan area in accordance with the rules of
the American Arbitration Association then in effect. Judgment may be entered on the arbitrators award in any court of competent jurisdiction. All fees and expenses of such arbitration shall be paid by the Trustee and considered an expense of the Trust under Section 8(f) hereof.
(i) Each Executive (and, where applicable, each Successor) is an intended beneficiary under this Trust, and as an intended beneficiary shall be entitled to enforce all terms and provisions hereof with the same force and effect as if such person had been a party hereto.
(j) Each action taken by Ameritrust hereunder shall, unless otherwise designated in such action by Ameritrust or unless the context or this Trust Agreement requires otherwise, be deemed to be an action of Ameritrust on behalf of each Participating Subsidiary pursuant to the authority granted to Ameritrust by such Participating Subsidiary in the Deposit Agreement.
15. NOTICES; IDENTIFICATION OF CERTAIN TRUST BENEFICIARIES: (a) All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been duly given when received:
If to the Trustee, to:
Wachovia Bank and Trust Company, N.A.
301 North Main Street
Winston-Salem, N.C. 27150
Attention: Trust Department
If to Ameritrust, to:
Ameritrust Corporation
900 Euclid Avenue
Cleveland, Ohio 44115
Attention: Secretary
If to the Trust Beneficiaries, to the addresses
listed on Exhibits A-1 and A-2 hereto
provided, however, that if any party or any Trust Beneficiary or his, her or its successors shall have designated a different address by written notice to the other parties, then to the last address so designated.
(b) Ameritrust shall provide the Trustee with the names of the beneficiary or beneficiaries designated by deceased Executives under the Plans (and who are, therefore, Trust Beneficiaries hereunder).
IN WITNESS WHEREOF, each of Ameritrust and the Trustee has caused counterparts of this Trust Agreement to be executed on its behalf on November 3, 1988.
AMERITRUST CORPORATION | ||
By: | /s/ E. William Haffke, Jr. | |
Its: Executive Vice President |
WACHOVIA BANK AND TRUST COMPANY, N.A. | ||
By | /s/ Thomas R. McAllister | |
Its: Senior Vice President |
/s/ Charles Haskins |
ASSISTANT SECRETARY |
KEYCORP
COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(dollars in millions)
(unaudited)
Year ended December 31, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 (a) | 2009 (a) | ||||||||||||||||
Computation of Earnings |
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Net income (loss) attributable to Key |
$ | 910 | $ | 858 | $ | 920 | $ | 554 | $ | (1,335 | ) | |||||||||
Add: Provision for income taxes |
271 | 231 | 364 | 186 | (1,035 | ) | ||||||||||||||
Less: Income (loss) from discontinued operations, net of taxes |
40 | 23 | (35 | ) | (23 | ) | (48 | ) | ||||||||||||
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Income (loss) before income taxes and cumulative effect of accounting change |
1,141 | 1,066 | 1,319 | 763 | (2,322 | ) | ||||||||||||||
Fixed charges, excluding interest on deposits |
154 | 200 | 248 | 244 | 314 | |||||||||||||||
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Total earnings for computation, excluding interest on deposits |
1,295 | 1,266 | 1,567 | 1,007 | (2,008 | ) | ||||||||||||||
Interest on deposits |
158 | 257 | 390 | 671 | 1,119 | |||||||||||||||
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Total earnings for computation, including interest on deposits |
$ | 1,453 | $ | 1,523 | $ | 1,957 | $ | 1,678 | $ | (889 | ) | |||||||||
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Computation of Fixed Charges |
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Net rental expense |
$ | 111 | $ | 109 | $ | 106 | $ | 120 | $ | 122 | ||||||||||
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Portion of net rental expense deemed representative of interest |
$ | 17 | $ | 16 | $ | 16 | $ | 18 | $ | 18 | ||||||||||
Interest on short-term borrowed funds |
10 | 11 | 16 | 20 | 21 | |||||||||||||||
Interest on long-term debt |
127 | 173 | 216 | 206 | 275 | |||||||||||||||
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Total fixed charges, excluding interest on deposits |
154 | 200 | 248 | 244 | 314 | |||||||||||||||
Interest on deposits |
158 | 257 | 390 | 671 | 1,119 | |||||||||||||||
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Total fixed charges, including interest on deposits |
$ | 312 | $ | 457 | $ | 638 | $ | 915 | $ | 1,433 | ||||||||||
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Combined Fixed Charges and Preferred Stock Dividends |
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Preferred stock dividend requirement on a pre-tax basis |
$ | 23 | $ | 22 | $ | 107 | $ | 164 | $ | 294 | ||||||||||
Total fixed charges, excluding interest on deposits |
154 | 200 | 248 | 244 | 314 | |||||||||||||||
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Combined fixed charges and preferred stock dividends, excluding interest on deposits |
177 | 222 | 355 | 408 | 608 | |||||||||||||||
Interest on deposits |
158 | 257 | 390 | 671 | 1,119 | |||||||||||||||
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Combined fixed charges and preferred stock dividends, including interest on deposits |
$ | 335 | $ | 479 | $ | 745 | $ | 1,079 | $ | 1,727 | ||||||||||
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Ratio of Earnings to Fixed Charges |
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Excluding deposit interest |
8.41 | 6.33 | 6.32 | 4.13 | (6.39 | ) | ||||||||||||||
Including deposit interest |
4.66 | 3.33 | 3.07 | 1.83 | (.62 | ) | ||||||||||||||
Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends |
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Excluding deposit interest |
7.32 | 5.70 | 4.41 | 2.47 | (3.30 | ) | ||||||||||||||
Including deposit interest |
4.34 | 3.18 | 2.63 | 1.56 | (.51 | ) |
(a) | Financial data was not adjusted to reflect the treatment of Victory as a discontinued operation. |
EXHIBIT 21
KEYCORP
SUBSIDIARIES OF THE REGISTRANT AT DECEMBER 31, 2013
Subsidiaries (a) |
Jurisdiction of Incorporation or Organization |
Parent Company |
||
KeyBank National Association |
United States | KeyCorp |
(a) | Subsidiaries of KeyCorp other than KeyBank National Association are not listed above since, in the aggregate, they would not constitute a significant subsidiary. KeyBank National Association is 100% owned by KeyCorp. |
EXHIBIT 23
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements of KeyCorp of our reports dated February 26, 2014, with respect to the consolidated financial statements of KeyCorp and the effectiveness of internal control over financial reporting of KeyCorp, included in this Annual Report (Form 10-K) of KeyCorp for the year ended December 31, 2013:
Form S-3 No. 333-55959 |
Form S-3 No. 333-59175 |
Form S-3 No. 333-64601 |
Form S-3 No. 333-76619 |
Form S-3 No. 333-151608 |
Form S-3 No. 333-174865 |
Form S-4 No. 333-146456 |
Form S-8 No. 333-49609 |
Form S-8 No. 333-49633 |
Form S-8 No. 333-70669 |
Form S-8 No. 333-70703 |
Form S-8 No. 333-70775 |
Form S-8 No. 333-72189 |
Form S-8 No. 333-92881 |
Form S-8 No. 333-45320 |
Form S-8 No. 333-45322 |
Form S-8 No. 333-99493 |
Form S-8 No. 333-107074 |
Form S-8 No. 333-107075 |
Form S-8 No. 333-107076 |
Form S-8 No. 333-109273 |
Form S-8 No. 333-112225 |
Form S-8 No. 333-116120 |
Form S-8 No. 333-167093 |
Form S-8 No. 333-188703 |
/s/ Ernst & Young LLP
Cleveland, Ohio
February 26, 2014
EXHIBIT 24
KEYCORP
POWER OF ATTORNEY
Each of the undersigned, an officer, a director, or both of KeyCorp, an Ohio corporation, hereby constitutes and appoints Paul N. Harris, Michelle L. Potter, and Frank P. Esposito, Jr., and each of them, as his or her true and lawful attorney-in fact with full power of substitution and resubstitution, to sign in his or her name, place, and stead and to file with the United States Securities and Exchange Commission in accordance with Securities Exchange Act of 1934, as amended, KeyCorps Annual Report on Form 10-K for the fiscal year ended December 31, 2013, and all exhibits, amendments and supplements thereto, with full power and authority to take such actions that the attorney-in-fact deems necessary in connection with the execution and filing of such Annual Report on Form 10-K.
This Power of Attorney may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
* * * * *
IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as of February 26, 2014.
/s/ Beth E. Mooney | /s/ Donald R. Kimble | |||
Beth E. Mooney Chairman and Chief Executive Officer, and Director |
Donald R. Kimble Chief Financial Officer |
|||
(Principal Executive Officer) |
(Principal Financial Officer) |
/s/ Robert L. Morris | /s/ Edward P. Campbell | |||
Robert L. Morris Chief Accounting Officer (Principal Accounting |
Edward P. Campbell, Director | |||
Officer) |
/s/ Joseph A. Carrabba | /s/ Charles P. Cooley | |||
Joseph A. Carrabba, Director | Charles P. Cooley, Director |
/s/ Alexander M. Cutler | /s/ H. James Dallas | |||
Alexander M. Cutler, Director | H. James Dallas, Director |
/s/ Elizabeth R. Gile | /s/ Ruth Ann M. Gillis | |||
Elizabeth R. Gile, Director | Ruth Ann M. Gillis, Director |
/s/ William G. Gisel, Jr. | /s/ Richard J. Hipple | |||
William G. Gisel, Jr., Director | Richard J. Hipple, Director |
/s/ Kristen L. Manos | /s/ Demos Parneros | |||
Kristen L. Manos, Director | Demos Parneros, Director |
/s/ Barbara R. Snyder | ||||
Barbara R. Snyder, Director |
EXHIBIT 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Beth E. Mooney, certify that:
1. | I have reviewed this annual report on Form 10-K of KeyCorp; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: February 26, 2014
Beth E. Mooney |
Chairman, Chief Executive Officer and President |
EXHIBIT 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Donald R. Kimble, certify that:
1. | I have reviewed this annual report on Form 10-K of KeyCorp; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: February 26, 2014
Donald R. Kimble |
Chief Financial Officer |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. 1350, the undersigned officer of KeyCorp (the Company), hereby certifies that the Companys Annual Report on Form 10-K for the year ended December 31, 2013 (the Report) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: February 26, 2014
Beth E. Mooney |
Chairman, Chief Executive Officer and President |
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. 1350, the undersigned officer of KeyCorp (the Company), hereby certifies that the Companys Annual Report on Form 10-K for the year ended December 31, 2013 (the Report) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: February 26, 2014
Donald R. Kimble |
Chief Financial Officer |
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.