KeyBank 2006 Annual Report Download - page 45

45
MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES
Federal bank regulators group FDIC-insured depository institutions
into five categories, ranging from “critically undercapitalized” to “well
capitalized.” Key’s affiliate bank, KBNA, qualified as “well capitalized”
at December 31, 2006, 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, 2006. 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 KBNA.
Figure 26 presents the details of Key’s regulatory capital position at
December 31, 2006 and 2005.
December 31,
dollars in millions 2006 2005
TIER 1 CAPITAL
Common shareholders’ equity
a
$ 7,924 $ 7,678
Qualifying capital securities 1,792 1,542
Less: Goodwill 1,202 1,355
Other assets
b
176 178
Total Tier 1 capital 8,338 7,687
TIER 2 CAPITAL
Allowance for losses on loans and
lending-related commitments 997 1,025
Net unrealized gains on equity
securities available for sale 54
Qualifying long-termdebt 3,227 2,899
Total Tier 2 capital 4,229 3,928
Total risk-based capital $ 12,567 $ 11,615
RISK-WEIGHTED ASSETS
Risk-weighted assets
on balance sheet $ 77,490 $ 76,724
Risk-weighted off-balance
sheet exposure 24,968 25,619
Less: Goodwill 1,202 1,355
Other assets
b
819 785
Plus: Market risk-equivalent assets 698 1,064
Total risk-weighted assets $101,135 $101,267
AVERAGE QUARTERLY
TOTAL ASSETS $ 94,896 $ 92,278
CAPITAL RATIOS
Tier 1 risk-based capital ratio 8.24% 7.59%
Total risk-based capital ratio 12.43 11.47
Leverage ratio
c
8.98 8.53
a
Common shareholders’ equity does not include net unrealized gains or losses on securities
available for sale (except for net unrealized losses on marketable equity securities),
net gains or losses on cash flow hedges, or the amount resulting from the adoption
of SFAS No. 158.
b
Other assets deducted from Tier 1 capital and risk-weighted assets consist of intangible assets
(excluding goodwill) recorded after February 19, 1992, deductible portions of purchased
mortgage servicing rights and deductible portions of nonfinancial equity investments.
c
This ratio is Tier 1 capital divided by the difference between average quarterly total
assets and (i) goodwill, (ii) the nonqualifying intangible assets described in footnote (b),
(iii) deductible portions of nonfinancial equity investments, and (iv) net unrealized gains
or losses on securities available for sale.
FIGURE 26. CAPITAL COMPONENTS
AND RISK-WEIGHTED ASSETS
OFF-BALANCE SHEET ARRANGEMENTS AND
AGGREGATE CONTRACTUAL OBLIGATIONS
Off-balance sheet arrangements
Key is party to various types of off-balance sheet arrangements, which
could expose it to contingent liabilities or risks of loss that are not
reflected on the balance sheet.
Variable interest entities. Avariable interest entity (“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 entity’s investors lack the authority to make decisions about the
activities of the entity through voting rights or similar rights, as
well as the obligation to absorb the entity’s expected losses and the
right to receive the entity’s expected residual returns.
• The voting rights of some investors are not proportional to their
economic interest in the entity, and substantially all of the entity’s
activities involve or are conducted on behalf of investors with
disproportionately few voting rights.
Revised Interpretation No. 46, “Consolidation of Variable Interest
Entities,” requires VIEs to be consolidated by the party that is exposed
to a majority of the VIE’s expected losses and/or residual returns (i.e.,
the primary beneficiary). This interpretation is summarized in Note 1
(“Summary of Significant Accounting Policies”) under the heading
“Basis of Presentation” on page 67 and Note 8.
Key holds a significant interest in several VIEs for which it is not the
primary beneficiary. In accordance with Revised Interpretation No.
46, these entities are not consolidated. Key defines a “significant
interest” in a VIE as a subordinated interest that exposes Key to a
significant portion, but not the majority, of the VIE’s expected losses or
residual returns. Key’sinvolvement with these VIEs is described in
Note 8 under the heading “Unconsolidated VIEs” on page 84.
Loan securitizations. Key originates, securitizes and sells education
loans. A securitization involves the sale of a pool of loan receivables to
investors through either a public or private issuance (generally by a
qualifying special purpose entity (“SPE”)) of asset-backed securities.
Generally, the assets are transferred to a trust that sells interests in the
form of certificates of ownership. In accordance with Revised
Interpretation No. 46, qualifying SPEs, including securitization trusts
established by Key under SFAS No. 140, are exempt from consolidation.
In some cases, Key retains a residual interest in self-originated, securitized
loans that may take the form of an interest-only strip, residual asset,
servicing asset or security. Key reports servicing assets in “accrued income
and other assets” on the balance sheet. Key accounts for all other retained
interests as debt securities and classifies them as either available-for-sale
securities or trading account assets. By retaining an interest in securitized
loans, Key bears risk that the loans will be prepaid (which would reduce
expected interest income) or not paid at all. In the event that cash flows
generated by the securitized loans become inadequate to service the
obligations of the trusts, the investors in the asset-backed securities
would have no further recourse against Key. Additional information
pertaining to Key’s retained interests in loan securitizations is summarized
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