KeyBank 2008 Annual Report Download - page 104

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
14. SHAREHOLDERS’ EQUITY
PREFERRED STOCK
Series A. During 2008, KeyCorp issued $658 million, or 6,575,000
shares, of noncumulative perpetual convertible preferred stock, Series
A(“Series A Preferred Stock”), with a liquidation preference of $100
per share. This was one of several actions Key took to further
strengthen its capital position in light of charges recorded in connection
with the leasing litigation described in Note 17 (“Income Taxes”),
which begins on page 110, and to position Key to respond to future
business opportunities as they emerge. The Series A Preferred Stock:
(1) is nonvoting, other than class voting rights on matters that could
adversely affect the shares; (2) pays a noncumulative dividend at the
rate of 7.75% per annum at the discretion of Key’s Board of Directors;
and (3) is not redeemable at any time. The Series A Preferred Stock
ranks senior to KeyCorp common shares and is on parity with the
Series B Preferred Stock discussed below in the event of liquidation or
dissolution of Key. Each share of Series A Preferred Stock is convertible
at any time into 7.0922 KeyCorp common shares (equivalent to an
initial conversion price of approximately $14.10 per common share),
plus cash in lieu of fractional shares. The conversion rate may change
upon the occurrence of a consummation of a merger, a change of
control (a “make-whole” acquisition), a reorganization event or to
prevent dilution. On or after June 15, 2013, if the closing price of
KeyCorp common shares exceeds 130% of the conversion price for 20
trading days during any consecutive 30 trading day period, KeyCorp
may automatically convert some or all of the outstanding Series A
Preferred Stock into KeyCorp common shares at the then prevailing
conversion rate.
Series B. During the fourth quarter of 2008, KeyCorp received approval
to participate in the U.S. Treasury’sCapital Purchase Program.
Accordingly, on November 14, 2008, KeyCorp raised $2.5 billion of
capital, including the issuance of $2.414 billion, or 25,000 shares, of
fixed-rate cumulative perpetual preferred stock, Series B (“Series B
Preferred Stock”), with a liquidation preference of $100,000 per share,
which was purchased by the U.S. Treasury.
The Series B Preferred Stock: (1) is nonvoting, other than class voting
rights on matters that could adversely affect the shares; (2) pays a
cumulative mandatory dividend at the rate of 5% per annum for the
first five years, resetting to 9% per annum thereafter; and (3) is
callable at par plus accrued and unpaid dividends at any time. The Series
BPreferred Stock ranks senior to KeyCorp common shares and is on
parity with the Series A Preferred Stock in the event of liquidation or
dissolution of Key.
The terms of the transaction with the U.S. Treasury include limitations
on KeyCorp’s ability to pay dividends and repurchase common shares.
For three years after the issuance or until the U.S. Treasury no longer
holds any Series B Preferred Stock, KeyCorp will not be able to increase
its dividends above the level paid in the third quarter of 2008, nor will
KeyCorp be permitted to repurchase any of its common shares or
preferred stock without the approval of the U.S. Treasury, subject to the
availability of certain limited exceptions (e.g., for purchases in connection
with benefit plans).
Pursuant to an interim final rule issued by the Board of Governors of the
Federal Reserve System on October 16, 2008, bank holding companies
that issue new preferred stock to the U.S. Treasury under the Capital
Purchase Program are permitted to include such capital instruments in
Tier 1 capital for purposes of the Board’s risk-based and leverage
capital rules and guidelines for bank holding companies.
Further information on the Capital Purchase Program is included in the
sections entitled “Capital” under the heading “Emergency Economic
Stabilization Act of 2008” on page 51, and “Liquidity risk management,”
which begins on page 56.
COMMON STOCK WARRANT
On November 14, 2008, in conjunction with KeyCorp’s participation in
the Capital Purchase Program discussed above, KeyCorp granted a
warrant to purchase 35,244,361 common shares to the U.S. Treasury at
afair value of $87 million. The warrant gives the U.S. Treasury the
option to purchase KeyCorp common shares at an exercise price of
$10.64 per share. The warrant has a term of ten years, is immediately
exercisable, in whole or in part, and is transferable. The U.S. Treasury
has agreed not to exercise voting power with respect to any common
shares Key issues upon exercise of the warrant.
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 Federal Deposit Insurance Corporation
(“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 regulatoryapplications for certain
activities, including acquisitions, continuation and expansion of existing
activities, and commencement of new activities are evaluated, and could
make our clients and potential investors less confident. As of December
31, 2008, KeyCorp and KeyBank met all regulatory capital requirements.
Federal bank regulators apply certain capital ratios to assign FDIC-
insured depository institutions to one of five categories: “well
capitalized,” “adequately capitalized,” “undercapitalized,” “significantly
undercapitalized” and “critically undercapitalized.” At December 31,
2008 and 2007, the most recent regulatory notification classified
KeyBank as “well capitalized.” Management believes there has not
been any change in condition or event since the most recent notification
that would cause KeyBank’s capital classification to change.
Bank holding companies are not assigned to any of the five capital
categories applicable to insured depository institutions. However, if those
categories applied to bank holding companies, management believes Key
would satisfy the criteria for a “well capitalized” institution at December
31, 2008 and 2007. The FDIC-defined capital categories serve a limited
regulatory function and may not accurately represent the overall
financial condition or prospects of KeyCorp or its affiliates.