KeyBank 2009 Annual Report Download

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2009 Annual Report
strong, steady,
recovery ready
Key launches record
38 new branches in 2009

Table of contents

  • Page 1
    2009 Annual Report strong, steady, recovery ready Key launches record 38 new branches in 2009

  • Page 2
    ... Cash dividends paid Book value at year end Tangible book value at year end Market price at year end Weighted-average common shares (000) Weighted-average common shares and potential common shares (000) AT DECEMBER 31, Loans Earning assets Total assets Deposits Key shareholders' equity Common shares...

  • Page 3
    ...to create shareholder value. CEO Henry Meyer discusses Key's strengths and future Team at new branch in Solon, Ohio, sets the pace Breathing new life into urban neighborhoods - Community Reinvestment Programs earn high marks "Green" initiatives touch clients, reduce costs 2 6 7 KeyCorp Management...

  • Page 4
    ...the commercial real estate sector. Annual revenue for 2009 was $4.415 billion, an increase from $4.163 billion for the previous year. Key originated approximately $32 billion in new or renewed lending commitments to consumers and businesses. Average deposits across the Community and National Banking...

  • Page 5
    ... 2009, a ratio that has increased over recent years and should continue to do so. Key's National Banking businesses accounted for approximately 42 percent of revenues, as last year we scaled back lending in higher-risk categories while investing in areas such as our servicing business for commercial...

  • Page 6
    ... and what are the benefits? A strong balance sheet inspires confidence on the part of clients and investors, and gives us needed ï¬,exibility when it comes to making loans and investing in our businesses. During 2009, we increased our loan loss reserve by approximately $900 million to $2.5 billion...

  • Page 7
    ...judgment to address our capital issues. I look forward to the time when our performance justifies an increase in our dividend. Investments in Relationship-Focused Businesses Henry, you mentioned that Key had made investments in a number of its businesses in 2009, including its branch network. What...

  • Page 8
    New Solon Branch Leads the Way Key's multi-year investment in its branch network is adding new locations in higher-growth areas. The new Shoppes at Solon (Ohio) branch set the pace in 2009 among all new branches, acquiring $23 million in new deposits in 18 months. Notably, the mix of those deposits ...

  • Page 9
    ..., savings products, a credit repair service called Loan Assist, money orders, a checkless checking account accessible with an ATM card called Checkless Access, and an array of mortgage products for first-time homebuyers. Key was recognized in 2009 for its creative community reinvestment programs...

  • Page 10
    ... for Key and its clients? Key's strong capital position has enabled us to continue to make loans to new and existing clients, to continue to invest in businesses, and to communicate confidence and strength to clients and our communities. Multiply this impact across the nation's banking system, and...

  • Page 11
    ... chairman, president and CEO of Cliffs Natural Resources, an international mining and natural resources company headquartered in Cleveland. Betsy has a distinguished 30-year career in financial services, retiring as a managing director of Deutsche Bank. Ruth Ann is an executive vice president with...

  • Page 12
    ... states and all Community Banking regions NATIONAL BANKING Loan and deposit figures are average balances, in billions, for the year ended December 31, 2009. KEYCORP HONORS • Ranked 11th on the BusinessWeek/J. D. Power & Associates top 25 U.S. "Customer Service Champs" for 2009, the only bank...

  • Page 13
    ... cash management, equipment leasing, investment and employee benefit programs, succession planning, derivatives, foreign exchange and access to capital markets. NOTEWORTHY • Nation's 15th largest branch network • One of the nation's top providers, by total loan balance, of small business loans...

  • Page 14
    ... and calculus. Saving early for her education can help you both meet the challenges ahead. Call us or stop inside a branch-we'll take the time to get to know your situation and help you find a smart way to save for your child's future. You can count on it. ©2010 KeyCorp. KeyBank is Member FDIC

  • Page 15
    ...54 54 54 55 2009 KeyCorp Annual Report Marketing expense Corporate-wide initiative Income taxes Financial Condition Loans and loans held for sale Commercial loan portfolio Commercial real estate loans Commercial lease financing Consumer loan portfolio Loans held for sale Sales and securitizations...

  • Page 16
    ...Fourth Quarter Results Earnings Net interest income Noninterest income Noninterest expense Provision for loan losses Income taxes 106 107 109 112 117 71 Certifications 72 Management's Annual Report on Internal Control Over Financial Reporting 73 Reports of Independent Registered Public Accounting...

  • Page 17
    ... services of accepting deposits and making loans, our bank and trust company subsidiaries offer personal and corporate trust services, personal financial services, access to mutual funds, cash management services, investment banking and capital markets products, and international banking services...

  • Page 18
    ...; • changes in foreign exchange rates; • limitations on our ability to return capital to shareholders and potential dilution of our common shares as a result of the U.S. Treasury's investment under the terms of the CPP; • adequacy of our risk management program; • increased competitive...

  • Page 19
    ... by federal incentive programs such as the Car Allowance Rebate System, known as "Cash for Clunkers," and the first-time homebuyer tax credits offered as part of the Worker, Homeownership, and Business Assistance Act of 2009. Consumer spending for all of 2009 increased at an average monthly rate of...

  • Page 20
    ...regions in which these business groups operate. The Community Banking group serves consumers and small to midsized businesses by offering a variety of deposit, investment, lending and wealth management products and services. These products and services are provided through a 14-state branch network...

  • Page 21
    ... 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 company's financial condition and results of operations, values of public companies in comparable businesses...

  • Page 22
    ...: Community Banking and National Banking. Fair values are estimated using comparable external market data (market approach) and discounted cash ï¬,ow modeling that incorporates an appropriate risk premium and earnings forecast information (income approach). We perform a sensitivity analysis of...

  • Page 23
    ... through Key Education Resources, the education payment and financing unit of KeyBank. In April 2009, we decided to wind down the operations of Austin, a subsidiary that specialized in managing hedge fund investments for institutional customers. We sold the subprime mortgage loan portfolio held...

  • Page 24
    ... OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES Three primary factors contributed to the decline in our results for 2009: we increased the provision for loan losses, we wrote off certain intangible assets, and we wrote down certain commercial real estate related investments...

  • Page 25
    MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES FIGURE 3. SIGNIFICANT ITEMS AFFECTING THE COMPARABILITY OF EARNINGS 2009 in millions, except per share amounts Credits (charges) related to IRS audits and leveraged lease tax litigation Net ...

  • Page 26
    ... effect of accounting change - assuming dilution Net income (loss) attributable to Key common shareholders - assuming dilution Cash dividends paid Book value at year end Tangible book value at year end Market price at year end Dividend payout ratio Weighted-average common shares outstanding (000...

  • Page 27
    MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES Figure 5 presents certain earnings data and performance ratios, excluding (credits) charges related to intangible assets impairment and the tax treatment of certain leveraged lease financing ...

  • Page 28
    ...)(a) Net interest margin, excluding charges related to leveraged lease tax litigation (TE) (adjusted basis)(a) TANGIBLE COMMON EQUITY TO TANGIBLE ASSETS Key shareholders' equity (GAAP) Less: Intangible assets Preferred Stock, Series B Preferred Stock, Series A Tangible common equity (non-GAAP) Total...

  • Page 29
    ... under the "Corporate Strategy" heading. • During 2009, we opened 38 new branches in eight markets, and we have completed renovations on 160 branches over the past two years. • During 2009, we settled all outstanding federal income tax issues with the IRS for the tax years 1997-2006, including...

  • Page 30
    ... decrease in service charges on deposit accounts, resulting from a change in customer behavior. In addition, market weakness prompted a $19 million reduction in income from trust and investment services, and a $12 million decline in income from investment banking and capital markets activities. The...

  • Page 31
    MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES FIGURE 7. COMMUNITY BANKING Year ended December 31, dollars in millions SUMMARY OF OPERATIONS Net interest income (TE) Noninterest income Total revenue (TE) Provision for loan losses ...

  • Page 32
    ... taxes Net income (loss) Less: Net loss attributable to noncontrolling interests Net income (loss) attributable to Key Loss from continuing operations attributable to Key AVERAGE BALANCES Loans and leases Loans held for sale Total assets Deposits Assets under management at year end (a) Change 2009...

  • Page 33
    .... The Consumer Finance line of business will continue to service existing loans in this portfolio. In April 2009, we made the strategic decision to curtail the operations of Austin, a subsidiary that specialized in managing hedge fund investments for institutional customers. As a result of these...

  • Page 34
    ... securities(b) Trading account assets Short-term investments Other investments(h) Total earning assets Allowance for loan losses Accrued income and other assets Discontinued assets - education lending business Total assets LIABILITIES NOW and money market deposit accounts Savings deposits Certi...

  • Page 35
    MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES 2006 Average Balance Interest(a) Yield/ Rate(a) Average Balance 2005 Interest(a) Yield/ Rate(a) Average Balance 2004 Interest(a) Yield/ Rate(a) Compound Annual Rate of Change (2004-2009) ...

  • Page 36
    ... value of $82 million from held-for-sale status to the held-to-maturity portfolio as a result of current market conditions and our related plans to restructure the terms of these loans. • In late September 2009, we transferred $193 million of loans ($248 million, net of $55 million in net charge...

  • Page 37
    ...Trading account assets Short-term investments Other investments Total interest income (TE) INTEREST EXPENSE NOW and money market deposit accounts Savings deposits Certificates of deposit ($100,000 or more) Other time deposits Deposits in foreign office Total interest-bearing deposits Federal funds...

  • Page 38
    ... Year ended December 31, dollars in millions Trust and investment services income Service charges on deposit accounts Operating lease income Letter of credit and loan fees Corporate-owned life insurance income Net securities gains (losses) Electronic banking fees Gains on leased equipment Insurance...

  • Page 39
    ... markets activities decreased in both 2009 and 2008. The 2009 decline was driven by losses related to certain commercial real estate related investments, primarily due to changes in their fair values. Net losses from investments made by the Real Estate Capital and Corporate Banking Services line...

  • Page 40
    ... a result of market disruption caused by the failure of Lehman Brothers. Losses recorded from other investments were due largely to reductions in the fair values of certain commercial real estate related investments held within the Real Estate Capital and Corporate Banking Services line of business...

  • Page 41
    ...the value of pension plan assets following steep declines in the equity markets in 2008. FIGURE 16. PERSONNEL EXPENSE Year ended December 31, dollars in millions Salaries Incentive compensation Employee benefits Stock-based compensation(a) Severance Total personnel expense (a) Change 2009 vs 2008...

  • Page 42
    ... of $120 million of the after-tax lease financing charges. FINANCIAL CONDITION Loans and loans held for sale Figure 17 shows the composition of our loan portfolio at December 31 for each of the past five years. At December 31, 2009, total loans outstanding were $58.8 billion, compared to $72...

  • Page 43
    MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES FIGURE 17. COMPOSITION OF LOANS December 31, dollars in millions COMMERCIAL Commercial, financial and agricultural Commercial real estate:(a) Commercial mortgage Construction Total commercial...

  • Page 44
    ...was outstanding. Our commercial real estate lending business is conducted through two primary sources: our 14-state banking franchise, and Real Estate Capital and Corporate Banking Services, a national line of business that cultivates relationships both within and beyond the branch system. This line...

  • Page 45
    ... the third quarter of 2009, we ceased conducting business in both the commercial vehicle and office equipment leasing markets. Consumer loan portfolio Consumer loans outstanding decreased by $1.1 billion, or 6%, from one year ago. As shown in Figure 40 in the "Credit risk management" section, $898...

  • Page 46
    ..., payment and cash management solutions. We ceased originating new education loans effective December 5, 2009; however, our Consumer Finance line of business continues to service existing loans in these portfolios. Loans held for sale As shown in Note 7 ("Loans and Loans Held for Sale"), our loans...

  • Page 47
    ... mortgage-backed securities servicing business of ORIX Capital Markets, LLC added more than $27.7 billion to our commercial mortgage servicing portfolio. We adopted new accounting guidance on January 1, 2010, which required us to consolidate our education loan securitization trusts and resulted...

  • Page 48
    ... from the sale were reinvested in CMOs issued by government-sponsored entities and GNMA. Additional CMOs were purchased during the second quarter of 2009 to support our strategies for interest rate risk management, and improving overall balance sheet liquidity and access to secured funding sources...

  • Page 49
    ... basis using the statutory federal income tax rate of 35%. Excludes $113 million of securities at December 31, 2009, that have no stated yield. Included in "discontinued assets" on the balance sheet. Held-to-maturity securities Foreign bonds, capital securities and preferred equity securities...

  • Page 50
    ..., and consumer preferences shifted to higher-yielding certificates of deposit from NOW and money market deposit accounts as a result of the declining interest rate environment. However, during the second half of 2009, we began to benefit from lower funding costs as higher-costing certificates...

  • Page 51
    ... quarterly dividend on common shares to $.01 per share ($.04 annualized) from $.0625 per share ($.25 annualized), commencing in the second quarter of 2009. Common shares outstanding Our common shares are traded on the New York Stock Exchange under the symbol KEY. At December 31, 2009: • Book value...

  • Page 52
    ... CHANGES IN COMMON SHARES OUTSTANDING 2009 Quarters in thousands SHARES OUTSTANDING AT BEGINNING OF PERIOD Common shares exchanged for capital securities Common shares exchanged for Series A Preferred Stock Common shares issued Shares reissued (returned) under employee benefit plans Shares reissued...

  • Page 53
    ... DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES Capital availability and management As a result of market disruptions, the availability of capital (principally to financial services companies) has become severely restricted. While some companies, like...

  • Page 54
    ... on loans and liability for losses on lending-related commitments(d) Net unrealized gains on equity securities available for sale Qualifying long-term debt Total Tier 2 capital Total risk-based capital TIER 1 COMMON EQUITY Tier 1 capital Less: Qualifying capital securities Series B Preferred Stock...

  • Page 55
    ...the Federal Reserve's risk-based and leverage capital rules, and guidelines for bank holding companies. FDIC's standard maximum deposit insurance coverage limit increase. The EESA, as amended by the Helping Families Save Their Homes Act of 2009, provides for a temporary increase in the FDIC standard...

  • Page 56
    ... 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...

  • Page 57
    ... Total Lending-related and other off-balance sheet commitments: Commercial, including real estate Home equity When-issued and to-be-announced securities commitments Commercial letters of credit Principal investing commitments Liabilities of certain limited partnerships and other commitments Total...

  • Page 58
    ... net interest income and the economic value of equity, we manage exposure to interest rate risk in accordance with policy limits established by the Risk Management Committee of the Board of Directors. Interest rate risk positions can be inï¬,uenced by a number of factors other than changes in market...

  • Page 59
    ... about how we use interest rate swaps to manage our balance sheet, see Note 20 ("Derivatives and Hedging Activities"). FIGURE 31. SIMULATED CHANGE IN NET INTEREST INCOME DECEMBER 31, 2009 Basis point change assumption (short-term rates) ALCO policy limits Interest rate risk assessment DECEMBER...

  • Page 60
    ... negatively affect the availability or cost of liquidity will affect the access of all affiliates to money and capital market funding. Oversight of the liquidity risk management process is governed by the Risk Management Committee of the KeyCorp Board of Directors, the KeyBank Board of Directors...

  • Page 61
    ... shares and preferred stock, and the net issuance of long-term debt to fund the growth in portfolio loans. A portion was also deposited in interest-bearing accounts with the Federal Reserve. During 2007, we used short-term borrowings to pay down long-term debt, while the net increase in deposits...

  • Page 62
    ... described in Note 12 ("Short-Term Borrowings"), 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...

  • Page 63
    ... balance sheet at fair value. Related gains or losses, as well as the premium paid or received for credit protection, are included in the trading income component of noninterest income. These swaps reduced our operating results by $37 million during 2009. We also manage the loan portfolio using loan...

  • Page 64
    ... real estate portfolio, and in various components of the commercial and financial portfolio. Deterioration in the home equity loan portfolio, which experienced a higher level of net charge-offs, also contributed to the increase. In addition, our liability for credit losses on lending-related...

  • Page 65
    ... and agricultural Real estate - commercial mortgage Real estate - construction Commercial lease financing Total commercial loans Real estate - residential mortgage Home equity: Community Banking National Banking Total home equity loans Consumer other - Community Banking Consumer other - National...

  • Page 66
    MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES Our provision for loan losses was $3.159 billion for 2009, compared to $1.537 billion for 2008. Credit migration, particularly in the commercial real estate portfolio, resulted in higher ...

  • Page 67
    ...year Loans charged off: Commercial, financial and agricultural Real estate - commercial mortgage Real estate - construction Total commercial real estate loans(a),(b) Commercial lease financing Total commercial loans Real estate - residential mortgage Home equity: Community Banking National Banking...

  • Page 68
    ...ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES During 2009, net charge-offs in the commercial loan portfolio rose by $965 million, due primarily to commercial real estate related credits within the Real Estate Capital and Corporate Banking Services line of business...

  • Page 69
    MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES As shown in Figure 39, nonperforming assets rose during 2009. Almost half of the increase was attributable to the commercial real estate portfolio and was caused in part by the continuation of...

  • Page 70
    ... of the year. FIGURE 42. SUMMARY OF CHANGES IN NONPERFORMING LOANS FROM CONTINUING OPERATIONS 2009 Quarters in millions BALANCE AT BEGINNING OF PERIOD Loans placed on nonaccrual status Charge-offs Loans sold Payments Transfers to OREO Transfers to nonperforming loans held for sale Loans returned to...

  • Page 71
    ..., the 2009 increase attributable to properties acquired was offset in part by sales and valuation adjustments, primarily during the second half of the year. FIGURE 43. SUMMARY OF CHANGES IN OTHER REAL ESTATE OWNED, NET OF ALLOWANCE, FROM CONTINUING OPERATIONS 2009 Quarters in millions BALANCE AT...

  • Page 72
    ... common shares outstanding (000) AT PERIOD END Loans Earning assets Total assets Deposits Long-term debt Key common shareholders' equity Key shareholders' equity PERFORMANCE RATIOS - FROM CONTINUING OPERATIONS Return on average total assets Return on average common equity Net interest margin (TE...

  • Page 73
    ... commercial real estate related investments, primarily due to changes in their fair values. Net losses from investments made by the Real Estate Capital and Corporate Banking Services line of business rose by $34 million from the fourth quarter of 2008. At December 31, 2009, the investments remaining...

  • Page 74
    ... public accounting firm has issued an attestation report, dated March 1, 2010, on our internal control over financial reporting, which is included in this annual report. Henry L. Meyer III Chairman and Chief Executive Officer Jeffrey B. Weeden Senior Executive Vice President and Chief Financial...

  • Page 75
    ... Company Accounting Oversight Board (United States), the consolidated balance sheets of KeyCorp as of December 31, 2009 and 2008, and the related consolidated statements of income, changes in equity, and cash ï¬,ows for each of the three years in the period ended December 31, 2009, and our report...

  • Page 76
    ... ACCOUNTING FIRM Shareholders and Board of Directors KeyCorp We have audited the accompanying consolidated balance sheets of KeyCorp and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of income, changes in equity, and cash ï¬,ows for each of the three years...

  • Page 77
    KEYCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, in millions, except share data ASSETS Cash and due from banks Short-term investments Trading account assets Securities available for sale Held-to-maturity securities (fair value: $24 and $25) Other investments Loans, net of unearned ...

  • Page 78
    ... loan losses NONINTEREST INCOME Trust and investment services income Service charges on deposit accounts Operating lease income Letter of credit and loan fees Corporate-owned life insurance income Net securities gains (losses)(a) Electronic banking fees Gains on leased equipment Insurance income Net...

  • Page 79
    ... Foreign currency translation adjustments Net pension and postretirement benefit costs, net of income taxes Total comprehensive income Deferred compensation Cash dividends declared on common shares ($1.835 per share) Common shares reissued for stock options and other employee benefit plans...

  • Page 80
    ...Investments branch network, net of retention payments Proceeds from sale of MasterCard Incorporated shares Cash used in acquisitions, net of cash acquired Net (increase) decrease in short-term investments Purchases of securities available for sale Proceeds from sales of securities available for sale...

  • Page 81
    ...: Employee Retirement Income Security Act of 1974. ERM: Enterprise risk management. EVE: Economic value of equity. FASB: Financial Accounting Standards Board. FDIC: Federal Deposit Insurance Corporation. Federal Reserve: Board of Governors of the Federal Reserve. FHLMC: Federal Home Loan Mortgage...

  • Page 82
    ...statements. STATEMENTS OF CASH FLOWS Cash and due from banks are considered "cash and cash equivalents" for financial reporting purposes. TRADING ACCOUNT ASSETS These are debt and equity securities, and commercial loans that we purchase and hold but intend to sell in the near term. Trading account...

  • Page 83
    .... 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...

  • Page 84
    ... 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...

  • Page 85
    ... 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...

  • Page 86
    ...Capital and Corporate Banking Services line of business have noncontrolling (minority) 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...

  • Page 87
    ... We estimate the fair value of options granted using the Black-Scholes option-pricing model, as further described in Note 16 ("Stock-Based Compensation"). MARKETING COSTS We expense all marketing-related costs, including advertising costs, as incurred. ACCOUNTING STANDARDS ADOPTED IN 2009 Business...

  • Page 88
    ... in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under the applicable goodwill and other intangibles accounting guidance. This new guidance was effective for fiscal years beginning after December 15, 2008 (effective January 1, 2009...

  • Page 89
    ... related to measuring the fair value of certain alternative investments, such as interests in private equity and venture capital funds. In addition to requiring additional disclosures, this guidance allows companies to use net asset value per share to estimate the fair value of these alternative...

  • Page 90
    ..., the education payment and financing unit of KeyBank. In April 2009, we decided to wind down the operations of Austin, a subsidiary that specialized in managing hedge fund investments for institutional customers. We sold the subprime loan portfolio held by the Champion Mortgage finance business in...

  • Page 91
    ... transfer pricing methodology to the liabilities assumed necessary to support the education lending operations. The discontinued assets and liabilities of our education lending business included on the balance sheet are as follows: December 31, in millions Securities available for sale Loans, net...

  • Page 92
    ... CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES 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 of this decision, we have accounted...

  • Page 93
    ... share) in connection with the sale. We retained McDonald Investments' corporate and institutional businesses, including Institutional Equities and Equity Research, Debt Capital Markets and Investment Banking. In addition, we continue to operate our Wealth Management, Trust and Private Banking...

  • Page 94
    ... deposit, investment and credit products, and business advisory services. Regional Banking also offers financial, estate and retirement planning, and asset management services to assist high-net-worth clients with their banking, trust, portfolio management, insurance, charitable giving and related...

  • Page 95
    ...access to the capital markets. Corporate Banking Services provides cash management, interest rate derivatives, and foreign exchange products and services to clients served by the Community Banking and National Banking groups. Through its Public Sector and Financial Institutions businesses, Corporate...

  • Page 96
    ... TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES SUPPLEMENTARY INFORMATION (COMMUNITY BANKING LINES OF BUSINESS) Year ended December 31, dollars in millions Total revenue (TE) Provision for loan losses Noninterest expense Net income (loss) attributable to Key Average loans and leases...

  • Page 97
    ... capital infusions of $1.2 billion to KeyBank. At December 31, 2009, KeyCorp held $3.5 billion in short-term investments, which can be used to pay dividends, service debt and finance corporate operations. Federal law also restricts loans and advances from bank subsidiaries to their parent companies...

  • Page 98
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES 6. SECURITIES The amortized cost, unrealized gains and losses, and approximate fair value of our securities available for sale and held-to-maturity securities are presented in the following table. Gross unrealized gains and losses ...

  • Page 99
    ... on our debt securities during the fourth quarter of 2009. The cumulative credit impairments of $8 million all relate to residual interests associated with our education loan securitizations. These assets are included in "discontinued assets" on the balance sheet as a result of our decision...

  • Page 100
    ... estate - construction Commercial lease financing Real estate - residential mortgage Automobile Total loans held for sale(a) (a) 2009 $ 14 171 92 27 139 - $443 2008 $102 273 164 7 77 3 $626 Changes in the liability for credit losses on lending-related commitments are summarized as follows: Year...

  • Page 101
    ... the education lending business. In accordance with the relevant accounting guidance, QSPEs, including securitization trusts, established under the accounting guidance related to transfers of financial assets are exempt from consolidation. In June 2009, the FASB issued new guidance which will change...

  • Page 102
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES The table below shows the relationship between the education loans we manage and those held in "discontinued assets" on the balance sheet. Managed loans include those held in discontinued assets, and those securitized and sold, ...

  • Page 103
    ... funds since October 2003. LIHTC investments. Through the Community Banking business group, 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...

  • Page 104
    ... by which the cost of net assets acquired in a business combination exceeds their fair value. Other intangible assets primarily are customer relationships and the net present value of future economic benefits to be derived from the purchase of core deposits. Additional information pertaining to our...

  • Page 105
    ...2009, we identified a $45 million intangible asset related to vendor relationships in the equipment leasing business that was impaired as a result of our actions to cease conducting business in the commercial vehicle and office equipment leasing markets. As a result, we recorded a $45 million charge...

  • Page 106
    ...outstanding under this program. Other short-term credit facilities. We maintain a large balance in our Federal Reserve account, which has reduced our need to obtain funds through various short-term unsecured money market products. This account and the unpledged securities in our investment portfolio...

  • Page 107
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES 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 facilitate short-term liquidity ...

  • Page 108
    ... TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES 14. CAPITAL SECURITIES ISSUED BY UNCONSOLIDATED SUBSIDIARIES We own the outstanding common stock of business trusts formed by us that issued corporation-obligated mandatorily redeemable preferred capital securities. The trusts used the...

  • Page 109
    ...offering, we issued 205,438,975 common shares at an average price of $4.87 per share. Series A Preferred Stock public exchange offer. On June 3, 2009, we launched an offer to exchange common shares for any and all outstanding shares of Series A Preferred Stock. In connection with this exchange offer...

  • Page 110
    ... CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES Institutional capital securities exchange offer. On June 3, 2009, we launched a separate offer to exchange common shares for any and all institutional capital securities issued by the KeyCorp Capital I, KeyCorp Capital II, KeyCorp Capital...

  • Page 111
    ...Federal Deposit Insurance Act Amount Ratio Actual dollars in millions December 31, 2009 TOTAL CAPITAL TO NET RISK-WEIGHTED ASSETS Key KeyBank TIER 1 CAPITAL TO NET RISK-WEIGHTED ASSETS Key KeyBank TIER 1 CAPITAL TO AVERAGE QUARTERLY TANGIBLE ASSETS Key KeyBank December 31, 2008 TOTAL CAPITAL TO NET...

  • Page 112
    ...PROGRAM Our Long-Term Incentive Compensation Program rewards senior executives critical to our long-term financial success. The Program covers three-year performance cycles, with a new cycle beginning each year. Awards are primarily in the form of deferred cash payments, time-lapsed restricted stock...

  • Page 113
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES The compensation cost of time-lapsed and performance-based restricted stock 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-...

  • Page 114
    ...' equity in the fourth quarter of 2008. The components of net pension cost and the amount recognized in other comprehensive income for all funded and unfunded plans are as follows: Year ended December 31, in millions Service cost of benefits earned Interest cost on PBO Expected return on plan assets...

  • Page 115
    ...basis point decrease in the assumed expected return on assets. 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...

  • Page 116
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES asset allocation policy. The following table shows the asset target allocations prescribed by the pension funds' investment policies. Target Allocation 2009 55% 25 5 15 100% Asset Class Equity securities Fixed income securities ...

  • Page 117
    ... annually to reflect certain cost-sharing provisions and benefit limitations. We also sponsor life insurance plans covering certain grandfathered employees. These plans are principally noncontributory. Separate VEBA trusts are used to fund the healthcare plan and one of the life insurance plans...

  • Page 118
    ...-average rates. Year ended December 31, Discount rate Expected return on plan assets 2009 5.75% 5.48 2008 6.00% 5.66 2007 5.50% 5.66 Asset Class Equity securities Fixed income securities Convertible securities Cash equivalents and other assets Investments consist of common trust funds that invest...

  • Page 119
    ... FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES The following table shows the fair values of our postretirement plan assets by asset category. December 31, 2009 in millions ASSET CATEGORY Common trust funds: U.S. equities International equities Convertible securities Short-term investments Total net...

  • Page 120
    ... intangibles Foreign tax adjustments Reduced tax rate on lease financing income Tax-exempt interest income Corporate-owned life insurance income Increase (decrease) in tax reserves State income tax, net of federal tax benefit Tax credits Other Total income tax expense (benefit) At December 31, 2009...

  • Page 121
    ...federal and state income tax liabilities due as a result of the settlement of the leveraged lease issues. Our quarterly review of unrecognized tax benefits also requires us to recalculate our lease income under the applicable accounting guidance for a change or projected change in the timing of cash...

  • Page 122
    ..., an action styled DataTreasury Corporation v. Wells Fargo & Company, et al., was filed against KeyBank and numerous other financial institutions, as owners and users of Small Value Payments Company, LLC software, in the United States District Court for the Eastern District of Texas. The plaintiff...

  • Page 123
    ... business, we "write" interest rate caps for commercial loan clients that have variable rate loans with us and wish to limit their exposure to interest rate increases. At December 31, 2009, outstanding caps had a weightedaverage life of 1.5 years. We are obligated to pay the client if the applicable...

  • Page 124
    ...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. Interest rate risk represents the possibility that economic value of equity or net interest income...

  • Page 125
    ... used "pay fixed/receive variable" interest rate swaps as cash flow hedges to manage the interest rate risk associated with anticipated sales of certain commercial real estate loans. These swaps protected against a possible short-term decline in the value of the loans that could result from changes...

  • Page 126
    ...(45)(b) $411 Year ended December 31, 2009 in millions Interest rate Interest rate Foreign exchange Foreign exchange Total (a) (b) Income Statement Location of Net Gains (Losses) on Derivative Other income Interest expense - Long-term debt Other income Interest expense - Long-term debt Hedged Item...

  • Page 127
    ... rate Foreign exchange Energy and commodity Credit Equity Derivative assets before cash collateral Less: Related cash collateral Total derivative assets Net Gains (Losses) (a) $ 22 48 6 (34) $ 42 Recorded in "investment banking and capital markets income (loss)" on the income statement. 2009...

  • Page 128
    ... application of master netting agreements and cash collateral. Our net exposure to broker-dealers and banks at December 31, 2009, was reduced to $31 million by $219 million of additional collateral held in the form of securities. We enter into transactions with clients to accommodate their business...

  • Page 129
    ...'s capital securities from Baa2 to Baa3 and KeyCorp's Series A Preferred Stock from Baa3 to Ba1. At the time we filed this report on March 1, 2010, no other ratings had changed since December 31, 2009. 21. FAIR VALUE MEASUREMENTS FAIR VALUE DETERMINATION As defined in the applicable accounting...

  • Page 130
    ... us to use 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 investee funds. Private equity and mezzanine investments are classified...

  • Page 131
    ... are exchange-traded, so 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, the LIBOR discount rates and curves, index pricing curves, foreign currency curves...

  • Page 132
    ...Short-term investments Trading account assets: U.S. Treasury, agencies and corporations Other mortgage-backed securities Other securities Total trading account securities Other trading account assets Total trading account assets Securities available for sale: U.S. Treasury, agencies and corporations...

  • Page 133
    ... market price. Cash flow analysis considers internally developed inputs, such as discount rates, default rates, costs of foreclosure and changes in real estate values. The fair value of the collateral, which may take the form of real estate or personal property, is based on internal estimates...

  • Page 134
    ... Cash and short-term investments(a) Trading account assets(e) Securities available for sale(e) Held-to-maturity securities(b) Other investments(e) Loans, net of allowance(c) Loans held for sale(e) Mortgage servicing assets(d) Derivative assets(e) LIABILITIES Deposits with no stated maturity(a) Time...

  • Page 135
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES 22. CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY CONDENSED BALANCE SHEETS December 31, in millions ASSETS Interest-bearing deposits Loans and advances to nonbank subsidiaries Investment in subsidiaries: Banks Nonbank ...

  • Page 136
    ... to Key Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Gain related to exchange of common shares for capital securities Deferred income taxes Equity in net (income) loss less dividends from subsidiaries(a) Net increase in other assets Net increase...

  • Page 137
    ... paper proxy card. Key's Investor Relations website, www.key.com/IR, provides quick access to useful information and shareholder services, including live webcasts of management's quarterly earnings discussions. Home | Sign On | Careers | Bank Locations | Customer Service | About Key Search: Enter...

  • Page 138
    ...THUHNPUN `V\YJHZOÃ...V^VYTPUPTPaPUNYPZRMHJ[VYZ[OH[JV\SKPTWHJ[ your business. There's a lot to consider. Call us or stop inside a branch-we'll take the time to get to know your business and help you develop solutions that stack up. ©2010 KeyCorp. KeyBank is Member FDIC Form# 77-7700KC