KeyBank 2009 Annual Report Download - page 53

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MANAGEMENT’S 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 ours, have been successful in raising additional
capital, lower market prices per share have increased the dilution of our
per common share results. We cannot predict when or if the markets will
return to more favorable conditions.
We determine how capital is to be strategically allocated among our
businesses to maximize returns and strengthen core relationship
businesses. In that regard, we will continue to emphasize our
relationship strategy.
Capital adequacy
Capital adequacy is an important indicator of financial stability and
performance. All of our capital ratios remain strong at December 31,
2009. This, along with our improved liquidity, positions us well to
weather the current credit cycle and to continue to serve our clients’
needs. Our Key shareholders’ equity to assets ratio was 11.43% at
December 31, 2009, compared to 10.03% at December 31, 2008. Our
tangible common equity to tangible assets ratio was 7.56% at December
31, 2009, compared to 5.95% at December 31, 2008.
Banking industry regulators prescribe minimum capital ratios for
bank holding companies and their banking subsidiaries. Federal
bank regulators group FDIC-insured depository institutions into five
categories, ranging from “critically undercapitalized” to “well
capitalized.” KeyCorp’s affiliate bank, KeyBank, qualified as “well
capitalized” at December 31, 2009, 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, we would qualify as “well capitalized” at December
31, 2009. 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.
See Note 15 for a summary of the implications of failing to meet the
minimum 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, 2009, our Tier 1 risk-
based capital ratio was 12.75%, and our total risk-based capital ratio
was 16.95%.
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 we have — 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, 2009,
we had a leverage ratio of 11.72%.
Traditionally, the banking regulators have assessed bank and bank
holding company capital adequacy based on both the amount and
composition of capital, the calculation of which is prescribed in federal
banking regulations. As a result of the SCAP, the Federal Reserve has
intensified its assessment of capital adequacy on a component of Tier 1
capital, known as Tier 1 common equity. Because the Federal Reserve
has long indicated that voting common shareholders’ equity (essentially
Tier 1 capital less preferred stock, qualifying capital securities and
noncontrolling interests in subsidiaries) generally should be the dominant
element in Tier 1 capital, such a focus is consistent with existing capital
adequacy guidelines and does not imply a new or ongoing capital
standard. Because Tier 1 common equity is neither formally defined by
GAAP nor prescribed in amount by federal banking regulations, this
measure is considered to be a non-GAAP financial measure. Figure 5 in
the “Highlights of Our 2009 Performance” section reconciles Key
shareholders’ equity, the GAAP performance measure, to Tier 1 common
equity,the corresponding non-GAAP measure. Our Tier 1 common
equity ratio was 7.50% at December 31, 2009, compared to 5.62% at
December 31, 2008.
As discussed in Note 1 (“Summaryof Significant Accounting Policies”),
we adopted new accounting guidance on January1, 2010, that will
requireus to consolidate our education loan securitization trusts
(which will be classified as discontinued operations), thereby adding
approximately $2.8 billion in assets and liabilities to our balance
sheet. In accordance with federal banking regulations, the consolidation
will add approximately $890 million to our net risk-weighted assets.
Had the consolidation taken effect on December 31, 2009, this would
have reduced our Tier 1 risk-based capital ratio at that date by 13 basis
points to 12.62% and our Tier 1 common equity ratio by 8 basis
points to 7.42%.
At December 31, 2009, we had a net deferred tax asset of $577
million; in recent years, we had been in a net deferred tax liability
position. Generally, for risk-based capital purposes, deferred tax assets
that are dependent upon future taxable income are limited to the
lesser of: (i) the amount of deferred tax assets that a financial institution
expects to realize within one year of the calendar quarter-end date,
based on its projected future taxable income for the year, or (ii) 10% of
the amount of an institution’s Tier 1 capital. Based on these restrictions,
at December 31, 2009, $514 million of our net deferred tax asset was
deducted from Tier 1 capital and risk-weighted assets. We anticipate
that the amount of our net deferred tax asset disallowed for risk-based
capital purposes will increase in coming quarters until we begin to
generate taxable income and, as a result, will continue to adversely
impact our risk-based capital ratios.