KeyBank 2014 Annual Report Download - page 51

The Federal Reserve is currently reviewing of our 2015 capital plan under the CCAR process. Until such time as
it has completed its review and has no objection to our plan, we are not permitted to implement our capital plan
for periods after the first quarter of 2015. Should we receive an objection to our plan, it would likely delay any
actions on capital management until later in the calendar year. For more information about the CCAR process,
see “Capital planning and stress testing” under “Supervision and Regulation” in Item 1 of this report.
Figure 4 presents certain non-GAAP financial measures related to “tangible common equity,” “return on tangible
common equity,” “Tier 1 common equity,” “pre-provision net revenue,” “cash efficiency ratio,” and “Common
Equity Tier 1 under the Regulatory Capital Rules (estimates).”
The tangible common equity ratio and the return on tangible common equity ratio have been a focus for some
investors, and management believes these ratios may assist investors in analyzing Key’s capital position without
regard to the effects of intangible assets and preferred stock. Tier 1 common equity, a non-GAAP financial
measure, is a component of Tier 1 risk-based capital. Tier 1 common equity is neither formally defined by GAAP
nor prescribed in amount by federal banking regulations applicable to us before January 1, 2015. However, since
analysts and banking regulators may assess our capital adequacy using tangible common equity and Tier 1
common equity, we believe it is useful to enable investors to assess our capital adequacy on these same bases.
Figure 4 also reconciles the GAAP performance measures to the corresponding non-GAAP measures.
Traditionally, the banking regulators have assessed bank and BHC capital adequacy based on both the amount
and the composition of capital, the calculation of which is prescribed in federal banking regulations. The Federal
Reserve focuses 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 risk-based capital less preferred stock, qualifying capital securities and noncontrolling interests in subsidiaries)
generally should be the dominant element in Tier 1 risk-based capital, this focus on Tier 1 common equity is
consistent with existing capital adequacy categories. The Regulatory Capital Rules, described in more detail
under the section “Supervision and Regulation” in Item 1 of this report, also make Tier 1 common equity a
priority. The Regulatory Capital Rules change the regulatory capital standards that apply to BHCs by, among
other changes, phasing out the treatment of trust preferred securities and cumulative preferred securities as Tier 1
eligible capital. By 2016, our trust preferred securities will only be included in Tier 2 capital.
Figure 4 also shows the computation for pre-provision net revenue, which is not formally defined by GAAP. We
believe that eliminating the effects of the provision for loan and lease losses makes it easier to analyze our results
by presenting them on a more comparable basis.
The cash efficiency ratio is a ratio of two non-GAAP performance measures. Accordingly, there is no directly
comparable GAAP performance measure. The cash efficiency ratio excludes the impact of our intangible asset
amortization from the calculation. We believe this ratio provides greater consistency and comparability between
our results and those of our peer banks. Additionally, this ratio is used by analysts and investors as they develop
earnings forecasts and peer bank analysis.
Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not
audited. Although these non-GAAP financial measures are frequently used by investors to evaluate a company,
they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses
of results as reported under GAAP.
40