KeyBank 2007 Annual Report Download - page 45

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43
MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES
Figure 27 shows activities that caused the change in Key’s outstanding common shares over the past two years.
2007 Quarters
in thousands 2007 Fourth Third Second First 2006
SHARES OUTSTANDING AT
BEGINNING OF PERIOD 399,153 388,708 389,362 394,483 399,153 406,624
Issuance of shares under employee
benefit plans 5,640 85 1,346 879 3,330 10,029
Repurchase of common shares (16,000) — (2,000) (6,000) (8,000) (17,500)
SHARES OUTSTANDING AT
END OF PERIOD 388,793 388,793 388,708 389,362 394,483 399,153
FIGURE 27. CHANGES IN COMMON SHARES OUTSTANDING
Key repurchases its common shares periodically in the open market or
through privately negotiated transactions under a repurchase program
authorized by the Board of Directors. The program does not have an
expiration date. Key repurchased 16.0 million shares during the first three
quarters of 2007. At December 31, 2007, 14.0 million shares were
remaining for repurchase.
At December 31, 2007, Key had 103.1 million treasury shares.
Management expects to reissue those shares as needed in connection with
stock-based compensation awards and for other corporate purposes.
During 2007, Key reissued 5.6 million treasury shares.
Capital availability. As a result of the market disruption that has
occurred, the availability of capital (principally to financial services
companies) has become significantly restricted. While some companies
have been successful in raising additional capital, the cost of that
capital has been substantially higher than the prevailing market rate prior
to the volatility. Management cannot predict when or if the markets will
return to more favorable conditions. However, if the need for additional
capital should arise under current market conditions, management
anticipates there may be limited accessibility, or accessibility only at
substantially higher costs than experienced in recent years.
Capital adequacy. Capital adequacy is an important indicator of financial
stability and performance. Key’s ratio of total shareholders’ equity to total
assets was 7.75% at December 31, 2007, compared to 8.34% at
December 31, 2006. Key’s ratio of tangible equity to tangible assets was
6.46% at December 31, 2007, compared to 7.01% at December 31,
2006. Management believes Key’s capital position provides sufficient
flexibility to take advantage of investment opportunities, to repurchase
shares when appropriate and to pay dividends.
Banking industry regulators prescribe minimum capital ratios for
bank holding companies and their banking subsidiaries. Note 14
(“Shareholders’ Equity”), which begins on page 87, explains the
implications of failing to meet these specific capital requirements.
Risk-based capital guidelines require a minimum level of capital as a
percent of “risk-weighted assets.” Risk-weighted assets consist of total
assets plus certain off-balance sheet items, subject to adjustment for
predefined credit risk factors. Currently, banks and bank holding
companies must maintain, at a minimum, Tier 1 capital as a percent of
risk-weighted assets of 4.00%, and total capital as a percent of risk-
weighted assets of 8.00%. As of December 31, 2007, Key’s Tier 1
capital ratio was 7.44%, and its total capital ratio was 11.38%.
Another indicator of capital adequacy, the leverage ratio, is defined as
Tier 1 capital as a percentage of average quarterly tangible assets.
Leverage ratio requirements vary with the condition of the financial
institution. Bank holding companies that either have the highest
supervisory rating or have implemented the Federal Reserve’s risk-
adjusted measure for market risk — as KeyCorp has — must maintain
a minimum leverage ratio of 3.00%. All other bank holding companies
must maintain a minimum ratio of 4.00%. As of December 31, 2007,
Key had a leverage ratio of 8.39%.
Federal bank regulators group FDIC-insured depository institutions
into five categories, ranging from “critically undercapitalized” to “well
capitalized.” Key’s affiliate bank, KeyBank, qualified as “well capitalized”
at December 31, 2007, since it exceeded the prescribed thresholds of
10.00% for total capital, 6.00% for Tier 1 capital and 5.00% for the
leverage ratio. If these provisions applied to bank holding companies,
Key also would qualify as “well capitalized” at December 31, 2007. The
FDIC-defined capital categories serve a limited supervisory function.
Investors should not treat them as a representation of the overall
financial condition or prospects of KeyCorp or KeyBank.