KeyBank 2014 Annual Report Download - page 46

(d) Assumes conversion of common share options and other stock awards and/or convertible preferred stock, as applicable.
(e) See Figure 4 entitled “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.
(f) Represents period-end consolidated total loans and loans held for sale (excluding education loans in securitizations trusts for periods
prior to 2014) divided by period-end consolidated total deposits (excluding deposits in foreign office).
Economic overview
The economy continued its modest recovery in 2014, with overall GDP starting slowly and accelerating as the
year progressed, resulting in 2.4% growth. The year began with GDP contracting 2.1% in the first quarter, due to
extreme weather halting consumer spending and investment. In the second quarter, growth of 4.6% more than
reversed the first quarter’s decline. Pent-up consumer demand was the largest contributor to the growth, as the
impact of extreme weather conditions in the first quarter faded. In the third quarter, growth accelerated as
consumers spent money saved at the gas pump. Oil prices dropped 46% over the last half of the year, giving
consumers a boost in discretionary income. The fourth quarter saw growth slow to 2.6% as consumer spending
continued to be a bright spot. The stock market continued its climb in 2014, with the S&P 500 equity index
increasing 11%, compared to a 30% increase in 2013. Globally, the economic recovery slowed; central banks in
developed nations maintained easy money policies. In Europe, the recovery stalled and the risk of deflation rose,
leading the European Central Bank to consider further action. Emerging markets struggled as well — demand
decreased, exports dropped, and China grew at its slowest rate in 24 years.
For 2014, 2.95 million new jobs were added in the U.S. The unemployment rate fell further, from 6.97% at
December 31, 2013, to 5.70% at December 31, 2014. 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, indicative of slack in
the labor market. However, consumer spending held up reasonably well, resulting in a falling savings rate. A
slowing rate of inflation supported real incomes, and therefore spending, throughout the year. By December 2014,
headline inflation was down to .8%, compared to 1.5% one year ago, mainly due to the decline in fuel prices. Core
inflation also remained low throughout the year, ending 2014 at 1.6%, down from 1.7% in 2013.
As the economy expanded further and job growth accelerated, the housing market gained traction, with slight
improvement across nearly all metrics in 2014. Slow household formation continues to be a factor, however, and
sales growth remains relatively modest. Existing home sales finished 2014 at a seasonally adjusted annual rate of
5.04 million, up slightly from December 2013. New home sales ended the year on a solid note, reaching a
seasonally adjusted annual rate of 481,000 in December 2014, up 8.8% from 2013. The pace of price
appreciation slowed, with the median price for existing homes up 5.5% year-over-year in November 2014,
compared to 9.9% in 2013. Housing starts accelerated further, up 9% over 2013, driven primarily by substantial
gains in both single and multi-family construction.
The Federal Reserve remained active and accommodative in 2014, keeping the federal funds target rate near
zero, expanding its balance sheet further, and making significant changes to its communications. Janet Yellen
replaced Ben Bernanke as the Federal Reserve Chairman in February 2014. The Federal Reserve started tapering
the pace of asset purchases by $10 billion, from $85 billion per month to $75 billion per month, in January and
concluded purchasing securities in October. However, the Federal Open Market Committee (“FOMC”) decided
to maintain the existing policy of reinvesting principal payments to help accommodate financial conditions. In
addition, the Federal Reserve kept its forward guidance unchanged in December, explicitly stating that the
federal funds rate will be kept near zero for a considerable time. Low inflation remains a concern; the FMOC
acknowledged lower energy prices were a factor in holding inflation under their longer-run objective of 2.0%.
The 10-year U.S. Treasury yield began the year at 3.0%, and was range-bound from 2.7% to 2.9% for the first
quarter of the year, driven by disappointing weather-related economic data. Around the year’s halfway point,
with rising concerns over global growth, the 10-year U.S. Treasury yield began to decrease, approaching 2.0% by
the end of the year as the stock market continued to rally.
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