KEYCORP /NEW/ - Quarter Report: 2015 September (Form 10-Q)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2015
Commission File Number 001-11302
Exact name of registrant as specified in its charter:
Ohio | 34-6542451 | |
State or other jurisdiction of incorporation or organization |
I.R.S. Employer Identification Number: | |
127 Public Square, Cleveland, Ohio | 44114-1306 | |
Address of principal executive offices: | Zip Code: |
(216) 689-3000
Registrants telephone number, including area code:
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
Common Shares with a par value of $1 each |
835,366,925 Shares | |
Title of class | Outstanding at October 29, 2015 |
Table of Contents
KEYCORP
Page Number | ||||||
Item 1. |
Financial Statements | |||||
Consolidated Balance Sheets |
5 | |||||
Consolidated Statements of Income (Unaudited) |
6 | |||||
Consolidated Statements of Comprehensive Income (Unaudited) |
7 | |||||
Consolidated Statements of Changes in Equity (Unaudited) |
8 | |||||
Consolidated Statements of Cash Flows (Unaudited) |
9 | |||||
10 | ||||||
15 | ||||||
16 | ||||||
18 | ||||||
33 | ||||||
49 | ||||||
53 | ||||||
61 | ||||||
62 | ||||||
64 | ||||||
65 | ||||||
73 | ||||||
75 | ||||||
Note 14. Trust Preferred Securities Issued by Unconsolidated Subsidiaries |
76 | |||||
77 | ||||||
79 | ||||||
82 | ||||||
83 | ||||||
87 | ||||||
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm |
88 |
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Item 2. |
Managements Discussion & Analysis of Financial Condition & Results of Operations | 89 | ||||
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144 | ||||||
Item 3. |
Quantitative and Qualitative Disclosure about Market Risk | 145 | ||||
Item 4. |
Controls and Procedures | 145 |
3
Table of Contents
PART II. OTHER INFORMATION | ||||||
Item 1. |
Legal Proceedings | 145 | ||||
Item 1A. |
Risk Factors | 145 | ||||
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | 146 | ||||
Item 6. |
Exhibits | 146 | ||||
Signature | 147 | |||||
Exhibits | 148 |
Throughout the Notes to Consolidated Financial Statements (Unaudited) and Managements Discussion & Analysis of Financial Condition & Results of Operations, we use certain acronyms and abbreviations as defined in Note 1 (Basis of Presentation and Accounting Policies) that begins on page 10.
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Table of Contents
in millions, except per share data |
September 30, 2015 |
December 31, 2014 |
September 30, 2014 |
|||||||||
(Unaudited) | (Unaudited) | |||||||||||
ASSETS |
||||||||||||
Cash and due from banks |
$ | 470 | $ | 653 | $ | 651 | ||||||
Short-term investments |
1,964 | 4,269 | 2,342 | |||||||||
Trading account assets |
811 | 750 | 965 | |||||||||
Securities available for sale |
14,376 | 13,360 | 12,245 | |||||||||
Held-to-maturity securities (fair value: $4,940, $4,974, and $4,911) |
4,936 | 5,015 | 4,997 | |||||||||
Other investments |
691 | 760 | 822 | |||||||||
Loans, net of unearned income of $645, $682, and $685 |
60,085 | 57,381 | 56,155 | |||||||||
Less: Allowance for loan and lease losses |
790 | 794 | 804 | |||||||||
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Net loans |
59,295 | 56,587 | 55,351 | |||||||||
Loans held for sale |
916 | 734 | 784 | |||||||||
Premises and equipment |
771 | 841 | 832 | |||||||||
Operating lease assets |
315 | 330 | 304 | |||||||||
Goodwill |
1,060 | 1,057 | 1,051 | |||||||||
Other intangible assets |
74 | 101 | 126 | |||||||||
Corporate-owned life insurance |
3,516 | 3,479 | 3,456 | |||||||||
Derivative assets |
793 | 609 | 413 | |||||||||
Accrued income and other assets (including $1, $1, and $1 of consolidated LIHTC guaranteed funds VIEs, see Note 9) (a) |
3,348 | 2,952 | 3,024 | |||||||||
Discontinued assets (including $169 of portfolio loans held for sale at fair value and $191 and $201 of portfolio loans at fair value, see Note 11) |
2,086 | 2,324 | 2,421 | |||||||||
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Total assets |
$ | 95,422 | $ | 93,821 | $ | 89,784 | ||||||
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LIABILITIES |
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Deposits in domestic offices: |
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NOW and money market deposit accounts |
$ | 37,301 | $ | 34,536 | $ | 33,941 | ||||||
Savings deposits |
2,338 | 2,371 | 2,390 | |||||||||
Certificates of deposit ($100,000 or more) |
2,001 | 2,040 | 2,533 | |||||||||
Other time deposits |
3,020 | 3,259 | 3,338 | |||||||||
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Total interest-bearing deposits |
44,660 | 42,206 | 42,202 | |||||||||
Noninterest-bearing deposits |
25,985 | 29,228 | 25,697 | |||||||||
Deposits in foreign office interest-bearing |
428 | 564 | 557 | |||||||||
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Total deposits |
71,073 | 71,998 | 68,456 | |||||||||
Federal funds purchased and securities sold under repurchase agreements |
407 | 575 | 657 | |||||||||
Bank notes and other short-term borrowings |
677 | 423 | 996 | |||||||||
Derivative liabilities |
676 | 784 | 384 | |||||||||
Accrued expense and other liabilities (including $1, $1, and $2 of consolidated LIHTC guaranteed funds VIEs, see Note 9) (a) |
1,562 | 1,621 | 1,613 | |||||||||
Long-term debt |
10,310 | 7,875 | 7,172 | |||||||||
Discontinued liabilities |
| 3 | 3 | |||||||||
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Total liabilities |
84,705 | 83,279 | 79,281 | |||||||||
EQUITY |
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Preferred stock, $1 par value, authorized 25,000,000 shares: |
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7.75% Noncumulative Perpetual Convertible Preferred Stock, Series A, $100 liquidation preference; authorized 7,475,000 shares; issued 2,900,234, 2,904,839, and 2,904,839 shares |
290 | 291 | 291 | |||||||||
Common shares, $1 par value; authorized 1,400,000,000 shares; issued 1,016,969,905, 1,016,969,905, and 1,016,969,905 shares |
1,017 | 1,017 | 1,017 | |||||||||
Capital surplus |
3,914 | 3,986 | 3,984 | |||||||||
Retained earnings |
8,764 | 8,273 | 8,082 | |||||||||
Treasury stock, at cost (181,685,035, 157,566,493, and 148,492,881 shares) |
(3,008 | ) | (2,681 | ) | (2,563 | ) | ||||||
Accumulated other comprehensive income (loss) |
(272 | ) | (356 | ) | (325 | ) | ||||||
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Key shareholders equity |
10,705 | 10,530 | 10,486 | |||||||||
Noncontrolling interests |
12 | 12 | 17 | |||||||||
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Total equity |
10,717 | 10,542 | 10,503 | |||||||||
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Total liabilities and equity |
$ | 95,422 | $ | 93,821 | $ | 89,784 | ||||||
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(a) | The assets of the VIEs can only be used by the particular VIE, and there is no recourse to Key with respect to the liabilities of the consolidated LIHTC VIEs. |
See Notes to Consolidated Financial Statements (Unaudited).
5
Table of Contents
Consolidated Statements of Income (Unaudited)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
dollars in millions, except per share amounts |
2015 | 2014 | 2015 | 2014 | ||||||||||||
INTEREST INCOME |
||||||||||||||||
Loans |
$ | 542 | $ | 531 | $ | 1,597 | $ | 1,576 | ||||||||
Loans held for sale |
10 | 4 | 29 | 13 | ||||||||||||
Securities available for sale |
75 | 67 | 217 | 210 | ||||||||||||
Held-to-maturity securities |
24 | 25 | 72 | 70 | ||||||||||||
Trading account assets |
5 | 6 | 15 | 19 | ||||||||||||
Short-term investments |
1 | 2 | 5 | 4 | ||||||||||||
Other investments |
4 | 4 | 14 | 16 | ||||||||||||
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Total interest income |
661 | 639 | 1,949 | 1,908 | ||||||||||||
INTEREST EXPENSE |
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Deposits |
27 | 28 | 79 | 91 | ||||||||||||
Federal funds purchased and securities sold under repurchase agreements |
| 1 | | 2 | ||||||||||||
Bank notes and other short-term borrowings |
2 | 2 | 6 | 6 | ||||||||||||
Long-term debt |
41 | 33 | 118 | 98 | ||||||||||||
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Total interest expense |
70 | 64 | 203 | 197 | ||||||||||||
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NET INTEREST INCOME |
591 | 575 | 1,746 | 1,711 | ||||||||||||
Provision for credit losses |
45 | 19 | 121 | 35 | ||||||||||||
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Net interest income after provision for credit losses |
546 | 556 | 1,625 | 1,676 | ||||||||||||
NONINTEREST INCOME |
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Trust and investment services income |
108 | 99 | 328 | 291 | ||||||||||||
Investment banking and debt placement fees |
109 | 88 | 318 | 271 | ||||||||||||
Service charges on deposit accounts |
68 | 68 | 192 | 197 | ||||||||||||
Operating lease income and other leasing gains |
15 | 17 | 58 | 81 | ||||||||||||
Corporate services income |
57 | 42 | 143 | 125 | ||||||||||||
Cards and payments income |
47 | 42 | 136 | 123 | ||||||||||||
Corporate-owned life insurance income |
30 | 26 | 91 | 80 | ||||||||||||
Consumer mortgage income |
3 | 3 | 10 | 7 | ||||||||||||
Mortgage servicing fees |
11 | 9 | 33 | 35 | ||||||||||||
Net gains (losses) from principal investing |
11 | 9 | 51 | 60 | ||||||||||||
Other income (a) |
11 | 14 | 35 | 37 | ||||||||||||
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Total noninterest income |
470 | 417 | 1,395 | 1,307 | ||||||||||||
NONINTEREST EXPENSE |
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Personnel |
426 | 405 | 1,223 | 1,182 | ||||||||||||
Net occupancy |
60 | 66 | 191 | 198 | ||||||||||||
Computer processing |
41 | 39 | 121 | 118 | ||||||||||||
Business services and professional fees |
40 | 36 | 115 | 118 | ||||||||||||
Equipment |
22 | 25 | 66 | 73 | ||||||||||||
Operating lease expense |
11 | 11 | 34 | 31 | ||||||||||||
Marketing |
17 | 15 | 40 | 33 | ||||||||||||
FDIC assessment |
8 | 9 | 24 | 21 | ||||||||||||
Intangible asset amortization |
9 | 10 | 27 | 29 | ||||||||||||
OREO expense, net |
2 | 1 | 5 | 3 | ||||||||||||
Other expense |
88 | 89 | 258 | 251 | ||||||||||||
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Total noninterest expense |
724 | 706 | 2,104 | 2,057 | ||||||||||||
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INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |
292 | 267 | 916 | 926 | ||||||||||||
Income taxes |
72 | 64 | 230 | 232 | ||||||||||||
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INCOME (LOSS) FROM CONTINUING OPERATIONS |
220 | 203 | 686 | 694 | ||||||||||||
Income (loss) from discontinued operations, net of taxes of ($2), ($10), $3, and ($24) (see Note 11) |
(3 | ) | (17 | ) | 5 | (41 | ) | |||||||||
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NET INCOME (LOSS) |
217 | 186 | 691 | 653 | ||||||||||||
Less: Net income (loss) attributable to noncontrolling interests |
(2 | ) | | 1 | 6 | |||||||||||
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NET INCOME (LOSS) ATTRIBUTABLE TO KEY |
$ | 219 | $ | 186 | $ | 690 | $ | 647 | ||||||||
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Income (loss) from continuing operations attributable to Key common shareholders |
$ | 216 | $ | 197 | $ | 668 | $ | 671 | ||||||||
Net income (loss) attributable to Key common shareholders |
213 | 180 | 673 | 630 | ||||||||||||
Per common share: |
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Income (loss) from continuing operations attributable to Key common shareholders |
$ | .26 | $ | .23 | $ | .79 | $ | .77 | ||||||||
Income (loss) from discontinued operations, net of taxes |
| (.02 | ) | .01 | (.05 | ) | ||||||||||
Net income (loss) attributable to Key common shareholders (b) |
.26 | .21 | .80 | .72 | ||||||||||||
Per common share assuming dilution: |
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Income (loss) from continuing operations attributable to Key common shareholders |
$ | .26 | $ | .23 | $ | .78 | $ | .76 | ||||||||
Income (loss) from discontinued operations, net of taxes |
| (.02 | ) | .01 | (.05 | ) | ||||||||||
Net income (loss) attributable to Key common shareholders (b) |
.25 | .21 | .79 | .71 | ||||||||||||
Cash dividends declared per common share |
$ | .075 | $ | .065 | $ | .215 | $ | .185 | ||||||||
Weighted-average common shares outstanding (000) |
831,430 | 867,350 | 839,758 | 875,728 | ||||||||||||
Effect of convertible preferred stock |
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Effect of common share options and other stock awards |
7,450 | 6,772 | 7,613 | 6,723 | ||||||||||||
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Weighted-average common shares and potential common shares outstanding (000) (c) |
838,880 | 874,122 | 847,371 | 882,451 | ||||||||||||
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(a) | For each of the three months ended September 30, 2015, and September 30, 2014, net securities gains (losses) totaled less than $1 million. For the three months ended September 30, 2015, and September 30, 2014, we did not have any impairment losses related to securities. |
(b) | EPS may not foot due to rounding. |
(c) | Assumes conversion of common share options and other stock awards and/or convertible preferred stock, as applicable. |
See Notes to Consolidated Financial Statements (Unaudited).
6
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Consolidated Statements of Comprehensive Income (Unaudited)
Three months ended September 30, |
Nine months ended September 30, |
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in millions |
2015 | 2014 | 2015 | 2014 | ||||||||||||
Net income (loss) |
$ | 217 | $ | 186 | $ | 691 | $ | 653 | ||||||||
Other comprehensive income (loss), net of tax: |
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Net unrealized gains (losses) on securities available for sale, net of income taxes of $33, ($20), $35, and $14 |
54 | (33 | ) | 58 | 24 | |||||||||||
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $28, ($6), $37, and ($3) |
48 | (8 | ) | 63 | (4 | ) | ||||||||||
Foreign currency translation adjustments, net of income taxes of ($3), ($3), ($11), and ($3) |
(5 | ) | (9 | ) | (18 | ) | (12 | ) | ||||||||
Net pension and postretirement benefit costs, net of income taxes of ($15), $10, ($12), and $13 |
(24 | ) | 14 | (19 | ) | 19 | ||||||||||
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Total other comprehensive income (loss), net of tax |
73 | (36 | ) | 84 | 27 | |||||||||||
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Comprehensive income (loss) |
290 | 150 | 775 | 680 | ||||||||||||
Less: Comprehensive income attributable to noncontrolling interests |
(2 | ) | | 1 | 6 | |||||||||||
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Comprehensive income (loss) attributable to Key |
$ | 292 | $ | 150 | $ | 774 | $ | 674 | ||||||||
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See Notes to Consolidated Financial Statements (Unaudited).
7
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Consolidated Statements of Changes in Equity (Unaudited)
Key Shareholders Equity | ||||||||||||||||||||||||||||||||||||
dollars in millions, except per |
Preferred Shares Outstanding (000) |
Common Shares Outstanding (000) |
Preferred Stock |
Common Shares |
Capital Surplus |
Retained Earnings |
Treasury Stock, at Cost |
Accumulated Other Comprehensive Income (Loss) |
Noncontrolling Interests |
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BALANCE AT DECEMBER 31, 2013 |
2,905 | 890,724 | $ | 291 | $ | 1,017 | $ | 4,022 | $ | 7,606 | $ | (2,281 | ) | $ | (352 | ) | $ | 17 | ||||||||||||||||||
Net income (loss) |
647 | 6 | ||||||||||||||||||||||||||||||||||
Other comprehensive income (loss): |
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Net unrealized gains (losses) on securities available for sale, net of income taxes of $14 |
24 | |||||||||||||||||||||||||||||||||||
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of ($3) |
(4 | ) | ||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments, net of income taxes of ($3) |
(12 | ) | ||||||||||||||||||||||||||||||||||
Net pension and postretirement benefit costs, net of income taxes of $13 |
19 | |||||||||||||||||||||||||||||||||||
Deferred compensation |
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Cash dividends declared on common shares ($.185 per share) |
(161 | ) | ||||||||||||||||||||||||||||||||||
Cash dividends declared on Noncumulative Series A Preferred Stock ($5.8125 per share) |
(17 | ) | ||||||||||||||||||||||||||||||||||
Common shares repurchased |
(26,499 | ) | (355 | ) | ||||||||||||||||||||||||||||||||
Common shares reissued (returned) for stock options and other employee benefit plans |
4,252 | (38 | ) | 73 | ||||||||||||||||||||||||||||||||
LIHTC guaranteed funds put |
7 | |||||||||||||||||||||||||||||||||||
Net contribution from (distribution to) noncontrolling interests |
(6 | ) | ||||||||||||||||||||||||||||||||||
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BALANCE AT SEPTEMBER 30, 2014 |
2,905 | 868,477 | $ | 291 | $ | 1,017 | $ | 3,984 | $ | 8,082 | $ | (2,563 | ) | $ | (325 | ) | $ | 17 | ||||||||||||||||||
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BALANCE AT DECEMBER 31, 2014 |
2,905 | 859,403 | $ | 291 | $ | 1,017 | $ | 3,986 | $ | 8,273 | $ | (2,681 | ) | $ | (356 | ) | $ | 12 | ||||||||||||||||||
Net income (loss) |
690 | 1 | ||||||||||||||||||||||||||||||||||
Other comprehensive income (loss): |
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Net unrealized gains (losses) on securities available for sale, net of income taxes of $35 |
58 | |||||||||||||||||||||||||||||||||||
Net unrealized gains (losses) on derivative financial instruments, net of income taxes of $37 |
63 | |||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments, net of income taxes of ($11) |
(18 | ) | ||||||||||||||||||||||||||||||||||
Net pension and postretirement benefit costs, net of income taxes of ($12) |
(19 | ) | ||||||||||||||||||||||||||||||||||
Deferred compensation |
13 | |||||||||||||||||||||||||||||||||||
Cash dividends declared on common shares ($.215 per share) |
(182 | ) | ||||||||||||||||||||||||||||||||||
Cash dividends declared on Noncumulative Series A Preferred Stock ($5.8125 per share) |
(17 | ) | ||||||||||||||||||||||||||||||||||
Common shares repurchased |
(31,267 | ) | (448 | ) | ||||||||||||||||||||||||||||||||
Series A Preferred Stock exchanged for common shares |
(5 | ) | 33 | (1 | ) | 1 | ||||||||||||||||||||||||||||||
Common shares reissued (returned) for stock options and other employee benefit plans |
7,116 | (85 | ) | 120 | ||||||||||||||||||||||||||||||||
Net contribution from (distribution to) noncontrolling interests |
(1 | ) | ||||||||||||||||||||||||||||||||||
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BALANCE AT SEPTEMBER 30, 2015 |
2,900 | 835,285 | $ | 290 | $ | 1,017 | $ | 3,914 | $ | 8,764 | $ | (3,008 | ) | $ | (272 | ) | $ | 12 | ||||||||||||||||||
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See Notes to Consolidated Financial Statements (Unaudited).
8
Table of Contents
Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, | ||||||||
in millions |
2015 | 2014 | ||||||
OPERATING ACTIVITIES |
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Net income (loss) |
$ | 691 | $ | 653 | ||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
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Provision for credit losses |
121 | 35 | ||||||
Provision (credit) for losses on LIHTC guaranteed funds |
| (6 | ) | |||||
Depreciation, amortization and accretion expense, net |
176 | 185 | ||||||
Increase in cash surrender value of corporate-owned life insurance |
(75 | ) | (73 | ) | ||||
Stock-based compensation expense |
47 | 31 | ||||||
FDIC reimbursement (payments), net of FDIC expense |
(1 | ) | 1 | |||||
Deferred income taxes (benefit) |
(70 | ) | (29 | ) | ||||
Proceeds from sales of loans held for sale |
5,362 | 2,832 | ||||||
Originations of loans held for sale, net of repayments |
(5,428 | ) | (2,951 | ) | ||||
Net losses (gains) on sales of loans held for sale |
(75 | ) | (59 | ) | ||||
Net losses (gains) from principal investing |
(51 | ) | (60 | ) | ||||
Net losses (gains) and writedown on OREO |
2 | 3 | ||||||
Net losses (gains) on leased equipment |
(8 | ) | (35 | ) | ||||
Net securities losses (gains) |
1 | | ||||||
Net losses (gains) on sales of fixed assets |
6 | 5 | ||||||
Gain on sale of Victory |
| (10 | ) | |||||
Loss on sale of residual interests and deconsolidation of securitization trusts |
| 40 | ||||||
Net decrease (increase) in trading account assets |
(61 | ) | (227 | ) | ||||
Other operating activities, net |
(388 | ) | 130 | |||||
|
|
|
|
|||||
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES |
249 | 465 | ||||||
INVESTING ACTIVITIES |
||||||||
Cash received (used) in acquisitions, net of cash acquired |
| (113 | ) | |||||
Proceeds from sale of residual interests |
| 57 | ||||||
Proceeds from sale of Victory |
| 10 | ||||||
Net decrease (increase) in short-term investments, excluding acquisitions |
2,305 | 3,285 | ||||||
Purchases of securities available for sale |
(3,314 | ) | (1,993 | ) | ||||
Proceeds from sales of securities available for sale |
11 | | ||||||
Proceeds from prepayments and maturities of securities available for sale |
2,357 | 2,123 | ||||||
Proceeds from prepayments and maturities of held-to-maturity securities |
846 | 628 | ||||||
Purchases of held-to-maturity securities |
(770 | ) | (869 | ) | ||||
Purchases of other investments |
(24 | ) | (42 | ) | ||||
Proceeds from sales of other investments |
107 | 266 | ||||||
Proceeds from prepayments and maturities of other investments |
2 | 3 | ||||||
Net decrease (increase) in loans, excluding acquisitions, sales and transfers |
(3,061 | ) | (1,936 | ) | ||||
Proceeds from sales of portfolio loans |
89 | 91 | ||||||
Proceeds from corporate-owned life insurance |
38 | 24 | ||||||
Purchases of premises, equipment, and software |
(40 | ) | (53 | ) | ||||
Proceeds from sales of premises and equipment |
1 | 1 | ||||||
Proceeds from sales of OREO |
16 | 13 | ||||||
|
|
|
|
|||||
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES |
(1,437 | ) | 1,495 | |||||
FINANCING ACTIVITIES |
||||||||
Net increase (decrease) in deposits, excluding acquisitions |
(925 | ) | (806 | ) | ||||
Net increase (decrease) in short-term borrowings |
86 | (224 | ) | |||||
Net proceeds from issuance of long-term debt |
4,054 | 648 | ||||||
Payments on long-term debt |
(1,582 | ) | (1,034 | ) | ||||
Repurchase of common shares |
(448 | ) | (355 | ) | ||||
Net proceeds from reissuance of common shares |
19 | 23 | ||||||
Cash dividends paid |
(199 | ) | (178 | ) | ||||
|
|
|
|
|||||
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES |
1,005 | (1,926 | ) | |||||
|
|
|
|
|||||
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS |
(183 | ) | 34 | |||||
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD |
653 | 617 | ||||||
|
|
|
|
|||||
CASH AND DUE FROM BANKS AT END OF PERIOD |
$ | 470 | $ | 651 | ||||
|
|
|
|
|||||
Additional disclosures relative to cash flows: |
||||||||
Interest paid |
$ | 221 | $ | 250 | ||||
Income taxes paid (refunded) |
173 | 109 | ||||||
Noncash items: |
||||||||
Reduction of secured borrowing and related collateral |
$ | 132 | $ | 78 | ||||
Loans transferred to portfolio from held for sale |
1 | 10 | ||||||
Loans transferred to held for sale from portfolio |
41 | 5 | ||||||
Loans transferred to OREO |
16 | 16 | ||||||
LIHTC guaranteed funds put |
| 7 | ||||||
Assets acquired |
| 35 | ||||||
Liabilities assumed |
| 22 |
See Notes to Consolidated Financial Statements (Unaudited).
9
Table of Contents
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation and Accounting Policies
As used in these Notes, references to Key, we, our, us, and similar terms refer to the consolidated entity consisting of KeyCorp and its subsidiaries. KeyCorp refers solely to the parent holding company, and KeyBank refers to KeyCorps subsidiary, KeyBank National Association.
The acronyms and abbreviations identified below are used in the Notes to Consolidated Financial Statements (Unaudited) as well as in the Managements Discussion & Analysis of Financial Condition & Results of Operations. You may find it helpful to refer back to this page as you read this report.
References to our 2014 Form 10-K refer to our Form 10-K for the year ended December 31, 2014, which was filed with the U.S. Securities and Exchange Commission and is available on its website (www.sec.gov) and on our website (www.key.com/ir).
AICPA: American Institute of Certified Public Accountants. | KREEC: Key Real Estate Equity Capital, Inc. | |
ALCO: Asset/Liability Management Committee. | LCR: Liquidity coverage ratio. | |
ALLL: Allowance for loan and lease losses. | LIBOR: London Interbank Offered Rate. | |
A/LM: Asset/liability management. | LIHTC: Low-income housing tax credit. | |
AOCI: Accumulated other comprehensive income (loss). | Moodys: Moodys Investor Services, Inc. | |
APBO: Accumulated postretirement benefit obligation. | MRM: Market Risk Management group. | |
Austin: Austin Capital Management, Ltd. | N/A: Not applicable. | |
BHCs: Bank holding companies. | NASDAQ: The NASDAQ Stock Market LLC. | |
Board: KeyCorp Board of Directors. | N/M: Not meaningful. | |
CCAR: Comprehensive Capital Analysis and Review. | NOW: Negotiable Order of Withdrawal. | |
CMBS: Commercial mortgage-backed securities. | NYSE: New York Stock Exchange. | |
CMO: Collateralized mortgage obligation. | OCC: Office of the Comptroller of the Currency. | |
Common shares: KeyCorp common shares, $1 par value. | OCI: Other comprehensive income (loss). | |
Dodd-Frank Act: Dodd-Frank Wall Street Reform and | OREO: Other real estate owned. | |
Consumer Protection Act of 2010. | OTTI: Other-than-temporary impairment. | |
EBITDA: Earnings before interest, taxes, depreciation, and | PBO: Projected benefit obligation. | |
amortization. | PCI: Purchased credit impaired. | |
EPS: Earnings per share. | S&P: Standard and Poors Ratings Services, a Division of The | |
ERM: Enterprise risk management. | McGraw-Hill Companies, Inc. | |
EVE: Economic value of equity. | SEC: U.S. Securities and Exchange Commission. | |
FASB: Financial Accounting Standards Board. | Series A Preferred Stock: KeyCorps 7.750% Noncumulative | |
FDIC: Federal Deposit Insurance Corporation. | Perpetual Convertible Preferred Stock, Series A. | |
Federal Reserve: Board of Governors of the Federal Reserve | SIFIs: Systemically important financial institutions, including | |
System. | BHCs with total consolidated assets of at least $50 billion | |
FHLB: Federal Home Loan Bank of Cincinnati. | and nonbank financial companies designated by FSOC for | |
FHLMC: Federal Home Loan Mortgage Corporation. | supervision by the Federal Reserve. | |
FNMA: Federal National Mortgage Association, or Fannie Mae. | TDR: Troubled debt restructuring. | |
FSOC: Financial Stability Oversight Council. | TE: Taxable-equivalent. | |
GAAP: U.S. generally accepted accounting principles. | U.S. Treasury: United States Department of the Treasury. | |
GNMA: Government National Mortgage Association. | VaR: Value at risk. | |
ISDA: International Swaps and Derivatives Association. | VEBA: Voluntary Employee Beneficiary Association. | |
KAHC: Key Affordable Housing Corporation. | Victory: Victory Capital Management and/or | |
KBCM: KeyBanc Capital Markets, Inc. | Victory Capital Advisors. | |
KCDC: Key Community Development Corporation. | VIE: Variable interest entity. | |
KEF: Key Equipment Finance. |
10
Table of Contents
The consolidated financial statements include the accounts of KeyCorp and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Some previously reported amounts have been reclassified to conform to current reporting practices.
The consolidated financial statements include any voting rights entities in which we have a controlling financial interest. In accordance with the applicable accounting guidance for consolidations, we consolidate a VIE if we have: (i) a variable interest in the entity; (ii) the power to direct activities of the VIE that most significantly impact the entitys economic performance; and (iii) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE (i.e., we are considered to be the primary beneficiary). Variable interests can include equity interests, subordinated debt, derivative contracts, leases, service agreements, guarantees, standby letters of credit, loan commitments, and other contracts, agreements, and financial instruments. See Note 9 (Variable Interest Entities) for information on our involvement with VIEs.
We use the equity method to account for unconsolidated investments in voting rights entities or VIEs if we have significant influence over the entitys operating and financing decisions (usually defined as a voting or economic interest of 20% to 50%, but not controlling). Unconsolidated investments in voting rights entities or VIEs in which we have a voting or economic interest of less than 20% generally are carried at cost. Investments held by our registered broker-dealer and investment company subsidiaries (principal investing entities and Real Estate Capital line of business) are carried at fair value.
We believe that the unaudited consolidated interim financial statements reflect all adjustments of a normal recurring nature and disclosures that are necessary for a fair presentation of the results for the interim periods presented. The results of operations for the interim period are not necessarily indicative of the results of operations to be expected for the full year. The interim financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our 2014 Form 10-K.
In preparing these financial statements, subsequent events were evaluated through the time the financial statements were issued. Financial statements are considered issued when they are widely distributed to all shareholders and other financial statement users, or filed with the SEC.
Offsetting Derivative Positions
In accordance with the applicable accounting guidance, we take into account the impact of bilateral collateral and master netting agreements that allow us to settle all derivative contracts held with a single counterparty on a net basis, and to offset the net derivative position with the related cash collateral when recognizing derivative assets and liabilities. Additional information regarding derivative offsetting is provided in Note 7 (Derivatives and Hedging Activities).
Allowance for Loan and Lease Losses
In the third quarter of 2015, we enhanced the approach used to determine the commercial reserve factors used in estimating the commercial ALLL, which had the effect of capturing certain elements in the commercial quantitative reserve component that had formerly been included in the commercial qualitative component. Under the enhanced methodology, we began utilizing more refined commercial estimated loss rates that represent cumulative losses over the estimated average time period from the onset of credit deterioration to the initial loss recorded for an individual loan. In addition, we began utilizing an enhanced framework to quantify commercial ALLL adjustments resulting from qualitative factors that may not be fully captured within the statistical analysis of incurred loss. The impact of these changes was largely neutral to the total ALLL at September 30, 2015. However, because the quantitative reserve is allocated to the business segments at a loan level, while the qualitative portion is allocated at the portfolio level, the impact of the methodology enhancements on the allowance for each business segment and each portfolio caused the business segment and commercial portfolio reserves to increase or decrease accordingly. The impact of the increases and decreases on the business segment and commercial portfolio reserves was not significant.
Accounting Guidance Adopted in 2015
Troubled debt restructurings. In August 2014, the FASB issued new accounting guidance that clarifies how to account for certain government-guaranteed mortgage loans upon foreclosure. This accounting guidance was effective for reporting periods beginning after December 15, 2014 (effective January 1, 2015, for us) and could be implemented using either a modified retrospective method or a prospective method. Early adoption was permitted. We elected to implement the new accounting guidance using a prospective approach. The adoption of this accounting guidance did not have a material effect on our financial condition or results of operations.
11
Table of Contents
Transfers and servicing of financial assets. In June 2014, the FASB issued new accounting guidance that applies secured borrowing accounting to repurchase-to-maturity transactions and linked repurchase financings and expands disclosure requirements. This accounting guidance was effective for interim and annual reporting periods beginning after December 15, 2014 (effective January 1, 2015, for us) and was implemented using a cumulative-effect approach to transactions outstanding as of the effective date with no adjustment to prior periods. The disclosure for secured borrowings will be presented for annual periods beginning after December 15, 2014, and has been presented for interim periods beginning after March 15, 2015 (June 30, 2015, for us). Early adoption was not permitted. The adoption of this accounting guidance did not have a material effect on our financial condition or results of operations.
Discontinued operations. In April 2014, the FASB issued new accounting guidance that revises the criteria for determining when disposals should be reported as discontinued operations and modifies the disclosure requirements. This accounting guidance was effective prospectively for reporting periods beginning after December 15, 2014 (effective January 1, 2015, for us). Early adoption was permitted. The adoption of this accounting guidance did not have a material effect on our financial condition or results of operations.
Investments in qualified affordable housing projects. In January 2014, the FASB issued new accounting guidance that modifies the conditions that must be met to make an election to account for investments in qualified affordable housing projects using the proportional amortization method or the practical expedient method to the proportional amortization method. This accounting guidance was effective retrospectively for reporting periods beginning after December 15, 2014 (effective January 1, 2015, for us). Early adoption was permitted. We elected to amortize our LIHTCs under the practical expedient method to the proportional amortization method. As our LIHTCs were previously accounted for under the effective yield method and related amortization expense was previously classified as income taxes in our Consolidated Statements of Income, the adoption of this accounting guidance did not have a material effect on our financial condition or results of operations. We provide additional information regarding our LIHTCs in Note 9.
Troubled debt restructurings. In January 2014, the FASB issued new accounting guidance that clarifies the definition of when an in substance repossession or foreclosure occurs for purposes of creditor reclassification of residential real estate collateralized consumer mortgage loans by derecognizing the loan and recognizing the collateral asset. This accounting guidance was effective for reporting periods beginning after December 15, 2014 (effective January 1, 2015, for us) and could be implemented using either a modified retrospective method or prospective method. Early adoption was permitted. We elected to implement the new accounting guidance using a prospective approach. The adoption of this accounting guidance did not have a material effect on our financial condition or results of operations. We provide the disclosure related to consumer residential mortgages required by this new accounting guidance in Note 4 (Asset Quality).
Accounting Guidance Pending Adoption at September 30, 2015
Business combinations. In September 2015, the FASB issued new accounting guidance that obligates an acquirer in a business combination to recognize adjustments to provisional amounts in the reporting period that the amounts were determined, eliminating the requirement for retrospective adjustments. The acquirer should record in the current period any income effects that resulted from the change in provisional amounts, calculated as if the accounting were completed at the acquisition date. This accounting guidance will be effective for interim and annual reporting periods beginning after December 15, 2015 (effective January 1, 2016, for us) and should be implemented using the prospective method. Early adoption is permitted. The adoption of this accounting guidance is not expected to have a material effect on our financial condition or results of operations.
Fair value measurement. In May 2015, the FASB issued new disclosure guidance that eliminates the requirement to categorize investments measured using the net asset value practical expedient in the fair value hierarchy table. Entities will be required to disclose the fair value of investments measured using the net asset value practical expedient so that financial statement users can reconcile amounts reported in the fair value hierarchy table to amounts reported on the balance sheet. This disclosure will be presented for interim and annual reporting periods beginning after December 15, 2015 (March 31, 2016, for us) on a retrospective basis. Early adoption is permitted. The adoption of this disclosure guidance will not affect our financial condition or results of operations.
12
Table of Contents
Cloud computing fees. In April 2015, the FASB issued new accounting guidance that clarifies a customers accounting for fees paid in a cloud computing arrangement. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This accounting guidance will be effective for interim and annual reporting periods beginning after December 15, 2015 (effective January 1, 2016, for us) and can be implemented using either a prospective method or a retrospective method. Early adoption is permitted. We have elected to implement this new accounting guidance using a prospective approach. The adoption of this accounting guidance is not expected to have a material effect on our financial condition or results of operations.
Imputation of interest. In April 2015, the FASB issued new accounting guidance that requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This accounting guidance will be effective for interim and annual reporting periods beginning after December 15, 2015 (effective January 1, 2016, for us) and should be implemented using a retrospective method. Early adoption is permitted. The adoption of this accounting guidance is not expected to have a material effect on our financial condition or results of operations.
Consolidation. In February 2015, the FASB issued new accounting guidance that changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The new guidance amends the current accounting guidance to address limited partnerships and similar legal entities, certain investment funds, fees paid to a decision maker or service provider, and the impact of fee arrangements and related parties on the primary beneficiary determination. This accounting guidance will be effective for interim and annual reporting periods beginning after December 15, 2015 (effective January 1, 2016, for us) and should be implemented using a modified retrospective basis. Retrospective application to all relevant prior periods and early adoption is permitted. The adoption of this accounting guidance is not expected to have a material effect on our financial condition or results of operations.
Derivatives and hedging. In November 2014, the FASB issued new accounting guidance that clarifies how current guidance should be interpreted when evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. An entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, when evaluating the nature of a host contract. This accounting guidance will be effective for interim and annual reporting periods beginning after December 15, 2015 (effective January 1, 2016, for us) and should be implemented using a modified retrospective basis. Retrospective application to all relevant prior periods and early adoption is permitted. The adoption of this accounting guidance is not expected to have a material effect on our financial condition or results of operations.
Going concern. In August 2014, the FASB issued new accounting guidance that requires management to perform interim and annual assessments of an entitys ability to continue as a going concern within one year of the date the financial statements are issued. Disclosure is required when conditions or events raise substantial doubt about an entitys ability to continue as a going concern. This accounting guidance will be effective for interim and annual reporting periods beginning after December 15, 2016 (effective January 1, 2017, for us). Early adoption is permitted. The adoption of this accounting guidance is not expected to have a material effect on our financial condition or results of operations.
Consolidation. In August 2014, the FASB issued new accounting guidance that clarifies how to measure the financial assets and the financial liabilities of a consolidated collateralized financing entity. This accounting guidance will be effective for interim and annual reporting periods beginning after December 15, 2015 (effective January 1, 2016, for us) and can be implemented using either a retrospective method or a cumulative-effect approach. Early adoption is permitted. The adoption of this accounting guidance is not expected to have a material effect on our financial condition or results of operations.
Stock-based compensation. In June 2014, the FASB issued new accounting guidance that clarifies how to account for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. This accounting guidance will be effective for interim and annual reporting periods beginning after December 15, 2015 (effective January 1, 2016, for us) and can be implemented using either a retrospective method or a prospective method. Early adoption is permitted. We have elected to implement this new accounting guidance using a prospective approach. The adoption of this accounting guidance is not expected to have a material effect on our financial condition or results of operations.
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Table of Contents
Revenue recognition. In May 2014, the FASB issued new accounting guidance that revises the criteria for determining when to recognize revenue from contracts with customers and expands disclosure requirements. This accounting guidance can be implemented using either a retrospective method or a cumulative-effect approach. In August 2015, the FASB issued an update that defers the effective date of the revenue recognition guidance by one year. This new guidance will be effective for interim and annual reporting periods beginning after December 15, 2017 (effective January 1, 2018, for us). Early adoption is permitted but only for interim and annual reporting periods beginning after December 15, 2016. We have elected to implement this new accounting guidance using a cumulative-effect approach. Our preliminary analysis suggests that the adoption of this accounting guidance is not expected to have a material effect on our financial condition or results of operations. There are many aspects of this new accounting guidance that are still being interpreted, and the FASB has recently issued and proposed updates to certain aspects of the guidance. Therefore, the results of our materiality analysis may change based on the conclusions reached as to the application of the new guidance.
14
Table of Contents
Basic earnings per share is the amount of earnings (adjusted for dividends declared on our preferred stock) available to each common share outstanding during the reporting periods. Diluted earnings per share is the amount of earnings available to each common share outstanding during the reporting periods adjusted to include the effects of potentially dilutive common shares. Potentially dilutive common shares include incremental shares issued for the conversion of our convertible Series A Preferred Stock, stock options, and other stock-based awards. Potentially dilutive common shares are excluded from the computation of diluted earnings per share in the periods where the effect would be antidilutive. For diluted earnings per share, net income available to common shareholders can be affected by the conversion of our convertible Series A Preferred Stock. Where the effect of this conversion would be dilutive, net income available to common shareholders is adjusted by the amount of preferred dividends associated with our Series A Preferred Stock.
Our basic and diluted earnings per common share are calculated as follows:
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
dollars in millions, except per share amounts |
2015 | 2014 | 2015 | 2014 | ||||||||||||
EARNINGS |
||||||||||||||||
Income (loss) from continuing operations |
$ | 220 | $ | 203 | $ | 686 | $ | 694 | ||||||||
Less: Net income (loss) attributable to noncontrolling interests |
(2 | ) | | 1 | 6 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) from continuing operations attributable to Key |
222 | 203 | 685 | 688 | ||||||||||||
Less: Dividends on Series A Preferred Stock |
6 | 6 | 17 | 17 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) from continuing operations attributable to Key common shareholders |
216 | 197 | 668 | 671 | ||||||||||||
Income (loss) from discontinued operations, net of |
(3 | ) | (17 | ) | 5 | (41 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) attributable to Key common shareholders |
$ | 213 | $ | 180 | $ | 673 | $ | 630 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
WEIGHTED-AVERAGE COMMON SHARES |
||||||||||||||||
Weighted-average common shares outstanding (000) |
831,430 | 867,350 | 839,758 | 875,728 | ||||||||||||
Effect of convertible preferred stock |
| | | | ||||||||||||
Effect of common share options and other stock awards |
7,450 | 6,772 | 7,613 | 6,723 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted-average common shares and potential common shares outstanding (000) (b) |
838,880 | 874,122 | 847,371 | 882,451 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
EARNINGS PER COMMON SHARE |
||||||||||||||||
Income (loss) from continuing operations attributable to Key common shareholders |
$ | .26 | $ | .23 | $ | .79 | $ | .77 | ||||||||
Income (loss) from discontinued operations, net of |
| (.02 | ) | .01 | (.05 | ) | ||||||||||
Net income (loss) attributable to Key common shareholders (c) |
.26 | .21 | .80 | .72 | ||||||||||||
Income (loss) from continuing operations attributable to Key common shareholders assuming dilution |
$ | .26 | $ | .23 | $ | .78 | $ | .76 | ||||||||
Income (loss) from discontinued operations, net of |
| (.02 | ) | .01 | (.05 | ) | ||||||||||
Net income (loss) attributable to Key common shareholders assuming dilution (c) |
.25 | .21 | .79 | .71 |
(a) | In April 2009, we decided to wind down the operations of Austin, a subsidiary that specialized in managing hedge fund investments for institutional customers. In September 2009, we decided to discontinue the education lending business conducted through Key Education Resources, the education payment and financing unit of KeyBank. In February 2013, we decided to sell Victory to a private equity fund. As a result of these decisions, we have accounted for these businesses as discontinued operations. For further discussion regarding the income (loss) from discontinued operations, see Note 11 (Acquisitions and Discontinued Operations). |
(b) | Assumes conversion of common share options and other stock awards and/or convertible preferred stock, as applicable. |
(c) | EPS may not foot due to rounding. |
15
Table of Contents
3. Loans and Loans Held for Sale
Our loans by category are summarized as follows:
in millions |
September 30, 2015 |
December 31, 2014 |
September 30, 2014 |
|||||||||
Commercial, financial and agricultural (a) |
$ | 31,095 | $ | 27,982 | $ | 26,683 | ||||||
Commercial real estate: |
||||||||||||
Commercial mortgage |
8,180 | 8,047 | 8,276 | |||||||||
Construction |
1,070 | 1,100 | 1,036 | |||||||||
|
|
|
|
|
|
|||||||
Total commercial real estate loans |
9,250 | 9,147 | 9,312 | |||||||||
Commercial lease financing (b) |
3,929 | 4,252 | 4,135 | |||||||||
|
|
|
|
|
|
|||||||
Total commercial loans |
44,274 | 41,381 | 40,130 | |||||||||
Residential prime loans: |
||||||||||||
Real estate residential mortgage |
2,267 | 2,225 | 2,213 | |||||||||
Home equity: |
||||||||||||
Key Community Bank |
10,282 | 10,366 | 10,380 | |||||||||
Other |
222 | 267 | 283 | |||||||||
|
|
|
|
|
|
|||||||
Total home equity loans |
10,504 | 10,633 | 10,663 | |||||||||
|
|
|
|
|
|
|||||||
Total residential prime loans |
12,771 | 12,858 | 12,876 | |||||||||
Consumer other Key Community Bank |
1,612 | 1,560 | 1,546 | |||||||||
Credit cards |
770 | 754 | 724 | |||||||||
Consumer other: |
||||||||||||
Marine |
620 | 779 | 828 | |||||||||
Other |
38 | 49 | 51 | |||||||||
|
|
|
|
|
|
|||||||
Total consumer other |
658 | 828 | 879 | |||||||||
|
|
|
|
|
|
|||||||
Total consumer loans |
15,811 | 16,000 | 16,025 | |||||||||
|
|
|
|
|
|
|||||||
Total loans (c) (d) |
$ | 60,085 | $ | 57,381 | $ | 56,155 | ||||||
|
|
|
|
|
|
(a) | Loan balances include $88 million, $88 million, and $90 million of commercial credit card balances at September 30, 2015, December 31, 2014, and September 30, 2014, respectively. |
(b) | Commercial lease financing includes receivables held as collateral for a secured borrowing of $162 million, $302 million, and $367 million at September 30, 2015, December 31, 2014, and September 30, 2014, respectively. Principal reductions are based on the cash payments received from these related receivables. Additional information pertaining to this secured borrowing is included in Note 18 (Long-Term Debt) beginning on page 202 of our 2014 Form 10-K. |
(c) | At September 30, 2015, total loans include purchased loans of $119 million, of which $12 million were PCI loans. At December 31, 2014, total loans include purchased loans of $138 million, of which $13 million were PCI loans. At September 30, 2014, total loans include purchased loans of $143 million, of which $14 million were PCI loans. |
(d) | Total loans exclude loans of $1.9 billion at September 30, 2015, $2.3 billion at December 31, 2014, and $2.4 billion at September 30, 2014, related to the discontinued operations of the education lending business. Additional information pertaining to these loans is provided in Note 11 (Acquisitions and Discontinued Operations). |
Our loans held for sale are summarized as follows:
in millions |
September 30, 2015 |
December 31, 2014 |
September 30, 2014 |
|||||||||
Commercial, financial and agricultural |
$ | 74 | $ | 63 | $ | 30 | ||||||
Real estate commercial mortgage |
806 | 638 | 725 | |||||||||
Commercial lease financing |
10 | 15 | 10 | |||||||||
Real estate residential mortgage |
26 | 18 | 19 | |||||||||
|
|
|
|
|
|
|||||||
Total loans held for sale (a) |
$ | 916 | $ | 734 | $ | 784 | ||||||
|
|
|
|
|
|
(a) | Total loans held for sale exclude loans held for sale of $169 million at September 30, 2015, related to the discontinued operations of the education lending business. Additional information pertaining to these loans is provided in Note 11. |
16
Table of Contents
Our quarterly summary of changes in loans held for sale follows:
in millions |
September 30, 2015 |
December 31, 2014 |
September 30, 2014 |
|||||||||
Balance at beginning of the period |
$ | 835 | $ | 784 | $ | 435 | ||||||
New originations |
1,673 | 2,465 | 1,593 | |||||||||
Transfers from (to) held to maturity, net |
24 | 2 | | |||||||||
Loan sales |
(1,616 | ) | (2,516 | ) | (1,243 | ) | ||||||
Loan draws (payments), net |
| (1 | ) | (1 | ) | |||||||
|
|
|
|
|
|
|||||||
Balance at end of period (a) |
$ | 916 | $ | 734 | $ | 784 | ||||||
|
|
|
|
|
|
(a) | Total loans held for sale exclude loans held for sale of $169 million at September 30, 2015, related to the discontinued operations of the education lending business. Additional information pertaining to these loans is provided in Note 11. |
17
Table of Contents
We assess the credit quality of the loan portfolio by monitoring net credit losses, levels of nonperforming assets and delinquencies, and credit quality ratings as defined by management.
Nonperforming loans are loans for which we do not accrue interest income, and include commercial and consumer loans and leases, as well as current year TDRs and nonaccruing TDR loans from prior years. Nonperforming loans do not include loans held for sale or PCI loans. Nonperforming assets include nonperforming loans, nonperforming loans held for sale, OREO, and other nonperforming assets.
Our nonperforming assets and past due loans were as follows:
in millions |
September 30, 2015 |
December 31, 2014 |
September 30, 2014 |
|||||||||
Total nonperforming loans (a), (b) |
$ | 400 | $ | 418 | $ | 401 | ||||||
Nonperforming loans held for sale |
| | | |||||||||
OREO (c) |
17 | 18 | 16 | |||||||||
Other nonperforming assets |
| | 1 | |||||||||
|
|
|
|
|
|
|||||||
Total nonperforming assets |
$ | 417 | $ | 436 | $ | 418 | ||||||
|
|
|
|
|
|
|||||||
Nonperforming assets from discontinued operationseducation lending (d) |
$ | 8 | $ | 11 | $ | 9 | ||||||
|
|
|
|
|
|
|||||||
Restructured loans included in nonperforming loans |
$ | 159 | $ | 157 | $ | 137 | ||||||
Restructured loans with an allocated specific allowance (e) |
71 | 82 | 115 | |||||||||
Specifically allocated allowance for restructured loans (f) |
29 | 34 | 30 | |||||||||
|
|
|
|
|
|
|||||||
Accruing loans past due 90 days or more |
$ | 54 | $ | 96 | $ | 71 | ||||||
Accruing loans past due 30 through 89 days |
271 | 235 | 340 |
(a) | Loan balances exclude $12 million, $13 million, and $14 million of PCI loans at September 30, 2015, December 31, 2014, and September 30, 2014, respectively. |
(b) | Includes carrying value of consumer residential mortgage loans in the process of foreclosure of approximately $114 million at September 30, 2015. |
(c) | Includes carrying value of foreclosed residential real estate of approximately $13 million at September 30, 2015. |
(d) | Restructured loans of approximately $20 million, $17 million, and $16 million are included in discontinued operations at September 30, 2015, December 31, 2014, and September 30, 2014, respectively. See Note 11 (Acquisitions and Discontinued Operations) for further discussion. |
(e) | Included in individually impaired loans allocated a specific allowance. |
(f) | Included in allowance for individually evaluated impaired loans. |
We evaluate purchased loans for impairment in accordance with the applicable accounting guidance. Purchased loans that have evidence of deterioration in credit quality since origination and for which it is probable, at acquisition, that all contractually required payments will not be collected are deemed PCI and initially recorded at fair value without recording an allowance for loan losses. At the 2012 acquisition date, the estimated gross contractual amount receivable of all PCI loans totaled $41 million. The estimated cash flows not expected to be collected (the nonaccretable amount) were $11 million, and the accretable amount was approximately $5 million. The difference between the fair value and the cash flows expected to be collected from the purchased loans is accreted to interest income over the remaining term of the loans.
At September 30, 2015, the outstanding unpaid principal balance and carrying value of all PCI loans was $18 million and $12 million, respectively. Changes in the accretable yield during the first nine months of 2015 included accretion and net reclassifications of less than $1 million, resulting in an ending balance of $5 million at September 30, 2015.
At September 30, 2015, the approximate carrying amount of our commercial nonperforming loans outstanding represented 74% of their original contractual amount owed, total nonperforming loans outstanding represented 79% of their original contractual amount owed, and nonperforming assets in total were carried at 79% of their original contractual amount owed.
At September 30, 2015, our 20 largest nonperforming loans totaled $112 million, representing 28% of total loans on nonperforming status. At September 30, 2014, our 20 largest nonperforming loans totaled $72 million, representing 18% of total loans on nonperforming status.
18
Table of Contents
Nonperforming loans and loans held for sale reduced expected interest income by $12 million for the nine months ended September 30, 2015, and $16 million for the year ended December 31, 2014.
The following tables set forth a further breakdown of individually impaired loans as of September 30, 2015, December 31, 2014, and September 30, 2014:
Unpaid | Average | |||||||||||||||
September 30, 2015 | Recorded | Principal | Specific | Recorded | ||||||||||||
in millions |
Investment (a) | Balance (b) | Allowance | Investment | ||||||||||||
With no related allowance recorded: |
||||||||||||||||
Commercial, financial and agricultural |
$ | 30 | $ | 54 | | $ | 19 | |||||||||
Commercial real estate: |
||||||||||||||||
Commercial mortgage |
9 | 12 | | 10 | ||||||||||||
Construction |
5 | 5 | | 6 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial real estate loans |
14 | 17 | | 16 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial loans |
44 | 71 | | 35 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Real estate residential mortgage |
22 | 22 | | 22 | ||||||||||||
Home equity: |
||||||||||||||||
Key Community Bank |
58 | 58 | | 59 | ||||||||||||
Other |
2 | 2 | | 2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total home equity loans |
60 | 60 | | 61 | ||||||||||||
Consumer other: |
||||||||||||||||
Marine |
1 | 1 | | 1 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total consumer other |
1 | 1 | | 1 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total consumer loans |
83 | 83 | | 84 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total loans with no related allowance recorded |
127 | 154 | | 119 | ||||||||||||
With an allowance recorded: |
||||||||||||||||
Commercial, financial and agricultural |
43 | 56 | $ | 9 | 58 | |||||||||||
Commercial real estate: |
||||||||||||||||
Commercial mortgage |
5 | 6 | 1 | 6 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial real estate loans |
5 | 6 | 1 | 6 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial loans |
48 | 62 | 10 | 64 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Real estate residential mortgage |
33 | 33 | 5 | 33 | ||||||||||||
Home equity: |
||||||||||||||||
Key Community Bank |
54 | 54 | 17 | 53 | ||||||||||||
Other |
10 | 10 | 1 | 10 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total home equity loans |
64 | 64 | 18 | 63 | ||||||||||||
Consumer other Key Community Bank |
3 | 3 | | 3 | ||||||||||||
Credit cards |
3 | 3 | 1 | 3 | ||||||||||||
Consumer other: |
||||||||||||||||
Marine |
38 | 38 | 2 | 39 | ||||||||||||
Other |
2 | 2 | | 2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total consumer other |
40 | 40 | 2 | 41 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total consumer loans |
143 | 143 | 26 | 143 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total loans with an allowance recorded |
191 | 205 | 36 | 207 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 318 | $ | 359 | $ | 36 | $ | 326 | ||||||||
|
|
|
|
|
|
|
|
(a) | The Recorded Investment represents the face amount of the loan increased or decreased by applicable accrued interest, net deferred loan fees and costs, and unamortized premium or discount, and reflects direct charge-offs. This amount is a component of total loans on our consolidated balance sheet. |
(b) | The Unpaid Principal Balance represents the customers legal obligation to us. |
19
Table of Contents
Unpaid | Average | |||||||||||||||
December 31, 2014 | Recorded | Principal | Specific | Recorded | ||||||||||||
in millions |
Investment (a) | Balance (b) | Allowance | Investment | ||||||||||||
With no related allowance recorded: |
||||||||||||||||
Commercial, financial and agricultural |
$ | 6 | $ | 17 | | $ | 8 | |||||||||
Commercial real estate: |
||||||||||||||||
Commercial mortgage |
15 | 20 | | 19 | ||||||||||||
Construction |
5 | 6 | | 7 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial real estate loans |
20 | 26 | | 26 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial loans |
26 | 43 | | 34 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Real estate residential mortgage |
24 | 24 | | 30 | ||||||||||||
Home equity: |
||||||||||||||||
Key Community Bank |
62 | 63 | | 63 | ||||||||||||
Other |
1 | 1 | | 2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total home equity loans |
63 | 64 | | 65 | ||||||||||||
Consumer other: |
||||||||||||||||
Marine |
2 | 2 | | 2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total consumer other |
2 | 2 | | 2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total consumer loans |
89 | 90 | | 97 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total loans with no related allowance recorded |
115 | 133 | | 131 | ||||||||||||
With an allowance recorded: |
||||||||||||||||
Commercial, financial and agricultural |
37 | 37 | $ | 9 | 28 | |||||||||||
Commercial real estate: |
||||||||||||||||
Commercial mortgage |
6 | 6 | 2 | 6 | ||||||||||||
Construction |
3 | 3 | 1 | 2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial real estate loans |
9 | 9 | 3 | 8 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial loans |
46 | 46 | 12 | 36 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Real estate residential mortgage |
31 | 31 | 5 | 25 | ||||||||||||
Home equity: |
||||||||||||||||
Key Community Bank |
46 | 46 | 16 | 43 | ||||||||||||
Other |
11 | 11 | 2 | 11 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total home equity loans |
57 | 57 | 18 | 54 | ||||||||||||
Consumer other Key Community Bank |
4 | 4 | | 3 | ||||||||||||
Credit cards |
4 | 4 | | 4 | ||||||||||||
Consumer other: |
||||||||||||||||
Marine |
43 | 43 | 5 | 45 | ||||||||||||
Other |
2 | 2 | | 2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total consumer other |
45 | 45 | 5 | 47 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total consumer loans |
141 | 141 | 28 | 133 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total loans with an allowance recorded |
187 | 187 | 40 | 169 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 302 | $ | 320 | $ | 40 | $ | 300 | ||||||||
|
|
|
|
|
|
|
|
(a) | The Recorded Investment represents the face amount of the loan increased or decreased by applicable accrued interest, net deferred loan fees and costs, and unamortized premium or discount, and reflects direct charge-offs. This amount is a component of total loans on our consolidated balance sheet. |
(b) | The Unpaid Principal Balance represents the customers legal obligation to us. |
20
Table of Contents
Unpaid | Average | |||||||||||||||
September 30, 2014 | Recorded | Principal | Specific | Recorded | ||||||||||||
in millions |
Investment (a) | Balance (b) | Allowance | Investment | ||||||||||||
With no related allowance recorded: |
||||||||||||||||
Commercial, financial and agricultural |
$ | 11 | $ | 20 | | $ | 12 | |||||||||
Commercial real estate: |
||||||||||||||||
Commercial mortgage |
22 | 27 | | 23 | ||||||||||||
Construction |
9 | 20 | | 7 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial real estate loans |
31 | 47 | | 30 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial loans |
42 | 67 | | 42 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Real estate residential mortgage |
36 | 36 | | 30 | ||||||||||||
Home equity: |
||||||||||||||||
Key Community Bank |
64 | 64 | | 65 | ||||||||||||
Other |
2 | 2 | | 2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total home equity loans |
66 | 66 | | 67 | ||||||||||||
Consumer other: |
||||||||||||||||
Marine |
2 | 2 | | 2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total consumer other |
2 | 2 | | 2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total consumer loans |
104 | 104 | | 99 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total loans with no related allowance recorded |
146 | 171 | | 141 | ||||||||||||
With an allowance recorded: |
||||||||||||||||
Commercial, financial and agricultural |
20 | 21 | $ | 7 | 12 | |||||||||||
Commercial real estate: |
||||||||||||||||
Commercial mortgage |
7 | 7 | 2 | 5 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial real estate loans |
7 | 7 | 2 | 5 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial loans |
27 | 28 | 9 | 17 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Real estate residential mortgage |
19 | 19 | 4 | 24 | ||||||||||||
Home equity: |
||||||||||||||||
Key Community Bank |
41 | 41 | 16 | 39 | ||||||||||||
Other |
11 | 11 | 2 | 11 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total home equity loans |
52 | 52 | 18 | 50 | ||||||||||||
Consumer other Key Community Bank |
3 | 3 | | 3 | ||||||||||||
Credit cards |
3 | 3 | 1 | 3 | ||||||||||||
Consumer other: |
||||||||||||||||
Marine |
46 | 46 | 5 | 47 | ||||||||||||
Other |
2 | 2 | 1 | 2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total consumer other |
48 | 48 | 6 | 49 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total consumer loans |
125 | 125 | 29 | 129 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total loans with an allowance recorded |
152 | 153 | 38 | 146 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 298 | $ | 324 | $ | 38 | $ | 287 | ||||||||
|
|
|
|
|
|
|
|
(a) | The Recorded Investment represents the face amount of the loan increased or decreased by applicable accrued interest, net deferred loan fees and costs, and unamortized premium or discount, and reflects direct charge-offs. This amount is a component of total loans on our consolidated balance sheet. |
(b) | The Unpaid Principal Balance represents the customers legal obligation to us. |
For each of the nine months ended September 30, 2015, and September 30, 2014, interest income recognized on the outstanding balances of accruing impaired loans totaled $5 million.
At September 30, 2015, aggregate restructured loans (accrual and nonaccrual loans) totaled $287 million, compared to $270 million at December 31, 2014, and $264 million at September 30, 2014. We added $87 million in restructured loans during the first nine months of 2015, which were partially offset by $70 million in payments and charge-offs.
21
Table of Contents
A further breakdown of TDRs included in nonperforming loans by loan category as of September 30, 2015, follows:
Pre-modification | Post-modification | |||||||||||
Outstanding | Outstanding | |||||||||||
September 30, 2015 | Number | Recorded | Recorded | |||||||||
dollars in millions |
of Loans | Investment | Investment | |||||||||
LOAN TYPE |
||||||||||||
Nonperforming: |
||||||||||||
Commercial, financial and agricultural |
12 | $ | 56 | $ | 50 | |||||||
Commercial real estate: |
||||||||||||
Real estate commercial mortgage |
11 | 30 | 7 | |||||||||
|
|
|
|
|
|
|||||||
Total commercial real estate loans |
11 | 30 | 7 | |||||||||
|
|
|
|
|
|
|||||||
Total commercial loans |
23 | 86 | 57 | |||||||||
Real estate residential mortgage |
356 | 21 | 21 | |||||||||
Home equity: |
||||||||||||
Key Community Bank |
1,093 | 79 | 70 | |||||||||
Other |
122 | 3 | 3 | |||||||||
|
|
|
|
|
|
|||||||
Total home equity loans |
1,215 | 82 | 73 | |||||||||
Consumer other Key Community Bank |
26 | 1 | 1 | |||||||||
Credit cards |
314 | 2 | 2 | |||||||||
Consumer other: |
||||||||||||
Marine |
92 | 6 | 5 | |||||||||
Other |
16 | | | |||||||||
|
|
|
|
|
|
|||||||
Total consumer other |
108 | 6 | 5 | |||||||||
|
|
|
|
|
|
|||||||
Total consumer loans |
2,019 | 112 | 102 | |||||||||
|
|
|
|
|
|
|||||||
Total nonperforming TDRs |
2,042 | 198 | 159 | |||||||||
Prior-year accruing: (a) |
||||||||||||
Commercial, financial and agricultural |
12 | 6 | 3 | |||||||||
Commercial real estate: |
||||||||||||
Real estate commercial mortgage |
1 | 2 | 1 | |||||||||
|
|
|
|
|
|
|||||||
Total commercial real estate loans |
1 | 2 | 1 | |||||||||
|
|
|
|
|
|
|||||||
Total commercial loans |
13 | 8 | 4 | |||||||||
Real estate residential mortgage |
499 | 36 | 36 | |||||||||
Home equity: |
||||||||||||
Key Community Bank |
794 | 49 | 42 | |||||||||
Other |
327 | 10 | 8 | |||||||||
|
|
|
|
|
|
|||||||
Total home equity loans |
1,121 | 59 | 50 | |||||||||
Consumer other Key Community Bank |
45 | 2 | 1 | |||||||||
Credit cards |
473 | 2 | 2 | |||||||||
Consumer other: |
||||||||||||
Marine |
398 | 59 | 33 | |||||||||
Other |
68 | 2 | 2 | |||||||||
|
|
|
|
|
|
|||||||
Total consumer other |
466 | 61 | 35 | |||||||||
|
|
|
|
|
|
|||||||
Total consumer loans |
2,604 | 160 | 124 | |||||||||
|
|
|
|
|
|
|||||||
Total prior-year accruing TDRs |
2,617 | 168 | 128 | |||||||||
|
|
|
|
|
|
|||||||
Total TDRs |
4,659 | $ | 366 | $ | 287 | |||||||
|
|
|
|
|
|
(a) | All TDRs that were restructured prior to January 1, 2015, and are fully accruing. |
22
Table of Contents
A further breakdown of TDRs included in nonperforming loans by loan category as of December 31, 2014, follows:
Pre-modification | Post-modification | |||||||||||
Outstanding | Outstanding | |||||||||||
December 31, 2014 | Number | Recorded | Recorded | |||||||||
dollars in millions |
of Loans | Investment | Investment | |||||||||
LOAN TYPE |
||||||||||||
Nonperforming: |
||||||||||||
Commercial, financial and agricultural |
14 | $ | 25 | $ | 23 | |||||||
Commercial real estate: |
||||||||||||
Real estate commercial mortgage |
10 | 38 | 13 | |||||||||
Real estate construction |
1 | 5 | | |||||||||
|
|
|
|
|
|
|||||||
Total commercial real estate loans |
11 | 43 | 13 | |||||||||
|
|
|
|
|
|
|||||||
Total commercial loans |
25 | 68 | 36 | |||||||||
Real estate residential mortgage |
453 | 27 | 27 | |||||||||
Home equity: |
||||||||||||
Key Community Bank |
1,184 | 79 | 72 | |||||||||
Other |
158 | 4 | 4 | |||||||||
|
|
|
|
|
|
|||||||
Total home equity loans |
1,342 | 83 | 76 | |||||||||
Consumer other Key Community Bank |
37 | 2 | 1 | |||||||||
Credit cards |
290 | 2 | 2 | |||||||||
Consumer other: |
||||||||||||
Marine |
206 | 17 | 14 | |||||||||
Other |
38 | 1 | 1 | |||||||||
|
|
|
|
|
|
|||||||
Total consumer other |
244 | 18 | 15 | |||||||||
|
|
|
|
|
|
|||||||
Total consumer loans |
2,366 | 132 | 121 | |||||||||
|
|
|
|
|
|
|||||||
Total nonperforming TDRs |
2,391 | 200 | 157 | |||||||||
Prior-year accruing: (a) |
||||||||||||
Commercial, financial and agricultural |
20 | 6 | 3 | |||||||||
Commercial real estate: |
||||||||||||
Real estate commercial mortgage |
1 | 2 | 1 | |||||||||
|
|
|
|
|
|
|||||||
Total commercial real estate loans |
1 | 2 | 1 | |||||||||
|
|
|
|
|
|
|||||||
Total commercial loans |
21 | 8 | 4 | |||||||||
Real estate residential mortgage |
381 | 29 | 29 | |||||||||
Home equity: |
||||||||||||
Key Community Bank |
674 | 41 | 36 | |||||||||
Other |
310 | 9 | 8 | |||||||||
|
|
|
|
|
|
|||||||
Total home equity loans |
984 | 50 | 44 | |||||||||
Consumer other Key Community Bank |
45 | 2 | 2 | |||||||||
Credit cards |
514 | 4 | 2 | |||||||||
Consumer other: |
||||||||||||
Marine |
373 | 54 | 31 | |||||||||
Other |
67 | 2 | 1 | |||||||||
|
|
|
|
|
|
|||||||
Total consumer other |
440 | 56 | 32 | |||||||||
|
|
|
|
|
|
|||||||
Total consumer loans |
2,364 | 141 | 109 | |||||||||
|
|
|
|
|
|
|||||||
Total prior-year accruing TDRs |
2,385 | 149 | 113 | |||||||||
|
|
|
|
|
|
|||||||
Total TDRs |
4,776 | $ | 349 | $ | 270 | |||||||
|
|
|
|
|
|
(a) | All TDRs that were restructured prior to January 1, 2014, and are fully accruing. |
23
Table of Contents
A further breakdown of TDRs included in nonperforming loans by loan category as of September 30, 2014, follows:
Pre-modification | Post-modification | |||||||||||
Outstanding | Outstanding | |||||||||||
September 30, 2014 | Number | Recorded | Recorded | |||||||||
dollars in millions |
of Loans | Investment | Investment | |||||||||
LOAN TYPE |
||||||||||||
Nonperforming: |
||||||||||||
Commercial, financial and agricultural |
20 | $ | 16 | $ | 9 | |||||||
Commercial real estate: |
||||||||||||
Real estate commercial mortgage |
12 | 39 | 14 | |||||||||
Real estate construction |
3 | 15 | 1 | |||||||||
|
|
|
|
|
|
|||||||
Total commercial real estate loans |
15 | 54 | 15 | |||||||||
|
|
|
|
|
|
|||||||
Total commercial loans |
35 | 70 | 24 | |||||||||
Real estate residential mortgage |
464 | 28 | 28 | |||||||||
Home equity: |
||||||||||||
Key Community Bank |
1,125 | 70 | 64 | |||||||||
Other |
133 | 4 | 4 | |||||||||
|
|
|
|
|
|
|||||||
Total home equity loans |
1,258 | 74 | 68 | |||||||||
Consumer other Key Community Bank |
31 | 1 | 1 | |||||||||
Credit cards |
156 | 1 | 1 | |||||||||
Consumer other: |
||||||||||||
Marine |
211 | 16 | 14 | |||||||||
Other |
40 | 1 | 1 | |||||||||
|
|
|
|
|
|
|||||||
Total consumer other |
251 | 17 | 15 | |||||||||
|
|
|
|
|
|
|||||||
Total consumer loans |
2,160 | 121 | 113 | |||||||||
|
|
|
|
|
|
|||||||
Total nonperforming TDRs |
2,195 | 191 | 137 | |||||||||
Prior-year accruing: (a) |
||||||||||||
Commercial, financial and agricultural |
25 | 6 | 3 | |||||||||
Commercial real estate: |
||||||||||||
Real estate commercial mortgage |
4 | 18 | 8 | |||||||||
|
|
|
|
|
|
|||||||
Total commercial real estate loans |
4 | 18 | 8 | |||||||||
|
|
|
|
|
|
|||||||
Total commercial loans |
29 | 24 | 11 | |||||||||
Real estate residential mortgage |
359 | 28 | 28 | |||||||||
Home equity: |
||||||||||||
Key Community Bank |
731 | 45 | 40 | |||||||||
Other |
325 | 10 | 8 | |||||||||
|
|
|
|
|
|
|||||||
Total home equity loans |
1,056 | 55 | 48 | |||||||||
Consumer other Key Community Bank |
53 | 2 | 2 | |||||||||
Credit cards |
564 | 4 | 3 | |||||||||
Consumer other: |
||||||||||||
Marine |
402 | 58 | 34 | |||||||||
Other |
72 | 2 | 1 | |||||||||
|
|
|
|
|
|
|||||||
Total consumer other |
474 | 60 | 35 | |||||||||
|
|
|
|
|
|
|||||||
Total consumer loans |
2,506 | 149 | 116 | |||||||||
|
|
|
|
|
|
|||||||
Total prior-year accruing TDRs |
2,535 | 173 | 127 | |||||||||
|
|
|
|
|
|
|||||||
Total TDRs |
4,730 | $ | 364 | $ | 264 | |||||||
|
|
|
|
|
|
(a) | All TDRs that were restructured prior to January 1, 2014, and are fully accruing. |
We classify loan modifications as TDRs when a borrower is experiencing financial difficulties and we have granted a concession without commensurate financial, structural, or legal consideration. All commercial and consumer loan TDRs, regardless of size, are individually evaluated for impairment to determine the probable loss content and are assigned a specific loan allowance if deemed appropriate. This designation has the effect of moving the loan from the general reserve methodology (i.e., collectively evaluated) to the specific reserve methodology (i.e., individually evaluated) and may impact the ALLL through a charge-off or increased loan loss provision. These components affect the ultimate allowance level. Additional information regarding TDRs for discontinued operations is provided in Note 11.
Commercial loan TDRs are considered defaulted when principal and interest payments are 90 days past due. Consumer loan TDRs are considered defaulted when principal and interest payments are more than 60 days past due. During the three months ended September 30, 2015, there were no significant commercial loan TDRs, and 61 consumer loan TDRs with a combined recorded investment of $3 million that experienced payment defaults from modifications resulting in TDR status during 2014. During the three months ended September 30, 2014, there were no significant commercial loan TDRs, and 93 consumer loan TDRs with a combined recorded investment of $4 million that experienced payment defaults from modifications resulting in TDR status during 2013. As TDRs are individually evaluated for impairment under the specific reserve methodology, subsequent defaults do not generally have a significant additional impact on the ALLL.
24
Table of Contents
Our loan modifications are handled on a case-by-case basis and are negotiated to achieve mutually agreeable terms that maximize loan collectability and meet the borrowers financial needs. Our concession types are primarily interest rate reductions, forgiveness of principal, and other modifications. The commercial TDR other concession category includes modification of loan terms, covenants, or conditions. The consumer TDR other concession category primarily includes those borrowers debts that are discharged through Chapter 7 bankruptcy and have not been formally re-affirmed.
The following table shows the post-modification outstanding recorded investment by concession type for our commercial and consumer accruing and nonaccruing TDRs and other selected financial data.
in millions |
September 30, 2015 |
December 31, 2014 |
September 30, 2014 |
|||||||||
Commercial loans: |
||||||||||||
Interest rate reduction |
$ | 58 | $ | 13 | $ | 24 | ||||||
Forgiveness of principal |
2 | 2 | 5 | |||||||||
Other |
1 | 25 | 6 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 61 | $ | 40 | $ | 35 | ||||||
|
|
|
|
|
|
|||||||
Consumer loans: |
||||||||||||
Interest rate reduction |
$ | 139 | $ | 140 | $ | 140 | ||||||
Forgiveness of principal |
4 | 4 | 4 | |||||||||
Other |
83 | 86 | 85 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 226 | $ | 230 | $ | 229 | ||||||
|
|
|
|
|
|
|||||||
Total commercial and consumer TDRs (a) |
$ | 287 | $ | 270 | $ | 264 | ||||||
Total loans |
60,085 | 57,381 | 56,155 |
(a) | Commitments outstanding to lend additional funds to borrowers whose loan terms have been modified in TDRs are $8 million, $5 million, and $1 million at September 30, 2015, December 31, 2014, and September 30, 2014, respectively. |
Our policies for determining past due loans, placing loans on nonaccrual, applying payments on nonaccrual loans, and resuming accrual of interest for our commercial and consumer loan portfolios are disclosed in Note 1 (Summary of Significant Accounting Policies) under the heading Nonperforming Loans beginning on page 116 of our 2014 Form 10-K.
At September 30, 2015, approximately $59.3 billion, or 98.8%, of our total loans were current, compared to $56.6 billion, or 98.7%, at December 31, 2014, and $55.3 billion, or 98.5%, at September 30, 2014. At September 30, 2015, total past due loans and nonperforming loans of $724 million represented approximately 1.2% of total loans, compared to $749 million, or 1.3%, at December 31, 2014, and $813 million, or 1.5% at September 30, 2014.
25
Table of Contents
The following aging analysis of past due and current loans as of September 30, 2015, December 31, 2014, and September 30, 2014, provides further information regarding Keys credit exposure.
90 and | Total Past | |||||||||||||||||||||||||||||||
30-59 | 60-89 | Greater | Due and | Purchased | ||||||||||||||||||||||||||||
September 30, 2015 | Days Past | Days Past | Days Past | Nonperforming | Nonperforming | Credit | Total | |||||||||||||||||||||||||
in millions |
Current | Due | Due | Due | Loans | Loans | Impaired | Loans | ||||||||||||||||||||||||
LOAN TYPE |
||||||||||||||||||||||||||||||||
Commercial, financial and agricultural |
$ | 30,901 | $ | 58 | $ | 30 | $ | 17 | $ | 89 | $ | 194 | | $ | 31,095 | |||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||||||||||
Commercial mortgage |
8,127 | 18 | 7 | 5 | 23 | 53 | | 8,180 | ||||||||||||||||||||||||
Construction |
1,060 | 1 | | | 9 | 10 | | 1,070 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total commercial real estate loans |
9,187 | 19 | 7 | 5 | 32 | 63 | | 9,250 | ||||||||||||||||||||||||
Commercial lease financing |
3,875 | 29 | 3 | 1 | 21 | 54 | | 3,929 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total commercial loans |
$ | 43,963 | $ | 106 | $ | 40 | $ | 23 | $ | 142 | $ | 311 | | $ | 44,274 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Real estate residential mortgage |
$ | 2,171 | $ | 11 | $ | 4 | $ | 3 | $ | 67 | $ | 85 | $ | 11 | $ | 2,267 | ||||||||||||||||
Home equity: |
||||||||||||||||||||||||||||||||
Key Community Bank |
10,027 | 49 | 20 | 11 | 174 | 254 | 1 | 10,282 | ||||||||||||||||||||||||
Other |
208 | 4 | 2 | 1 | 7 | 14 | | 222 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total home equity loans |
10,235 | 53 | 22 | 12 | 181 | 268 | 1 | 10,504 | ||||||||||||||||||||||||
Consumer other Key Community Bank |
1,595 | 7 | 4 | 5 | 1 | 17 | | 1,612 | ||||||||||||||||||||||||
Credit cards |
750 | 6 | 4 | 8 | 2 | 20 | | 770 | ||||||||||||||||||||||||
Consumer other: |
||||||||||||||||||||||||||||||||
Marine |
601 | 10 | 2 | 1 | 6 | 19 | | 620 | ||||||||||||||||||||||||
Other |
34 | 1 | 1 | 1 | 1 | 4 | | 38 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total consumer other |
635 | 11 | 3 | 2 | 7 | 23 | | 658 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total consumer loans |
$ | 15,386 | $ | 88 | $ | 37 | $ | 30 | $ | 258 | $ | 413 | $ | 12 | $ | 15,811 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total loans |
$ | 59,349 | $ | 194 | $ | 77 | $ | 53 | $ | 400 | $ | 724 | $ | 12 | $ | 60,085 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
90 and | Total Past | |||||||||||||||||||||||||||||||
30-59 | 60-89 | Greater | Due and | Purchased | ||||||||||||||||||||||||||||
December 31, 2014 | Days Past | Days Past | Days Past | Nonperforming | Nonperforming | Credit | Total | |||||||||||||||||||||||||
in millions |
Current | Due | Due | Due | Loans | Loans | Impaired | Loans | ||||||||||||||||||||||||
LOAN TYPE |
||||||||||||||||||||||||||||||||
Commercial, financial and agricultural |
$ | 27,858 | $ | 19 | $ | 14 | $ | 32 | $ | 59 | $ | 124 | | $ | 27,982 | |||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||||||||||
Commercial mortgage |
7,981 | 6 | 10 | 16 | 34 | 66 | | 8,047 | ||||||||||||||||||||||||
Construction |
1,084 | 2 | | 1 | 13 | 16 | | 1,100 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total commercial real estate loans |
9,065 | 8 | 10 | 17 | 47 | 82 | | 9,147 | ||||||||||||||||||||||||
Commercial lease financing |
4,172 | 30 | 21 | 11 | 18 | 80 | | 4,252 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total commercial loans |
$ | 41,095 | $ | 57 | $ | 45 | $ | 60 | $ | 124 | $ | 286 | | $ | 41,381 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Real estate residential mortgage |
$ | 2,111 | $ | 12 | $ | 7 | $ | 4 | $ | 79 | $ | 102 | $ | 12 | $ | 2,225 | ||||||||||||||||
Home equity: |
||||||||||||||||||||||||||||||||
Key Community Bank |
10,098 | 46 | 22 | 14 | 185 | 267 | 1 | 10,366 | ||||||||||||||||||||||||
Other |
249 | 5 | 2 | 1 | 10 | 18 | | 267 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total home equity loans |
10,347 | 51 | 24 | 15 | 195 | 285 | 1 | 10,633 | ||||||||||||||||||||||||
Consumer other Key Community Bank |
1,541 | 9 | 3 | 5 | 2 | 19 | | 1,560 | ||||||||||||||||||||||||
Credit cards |
733 | 6 | 4 | 9 | 2 | 21 | | 754 | ||||||||||||||||||||||||
Consumer other: |
||||||||||||||||||||||||||||||||
Marine |
746 | 11 | 5 | 2 | 15 | 33 | | 779 | ||||||||||||||||||||||||
Other |
46 | 1 | | 1 | 1 | 3 | | 49 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total consumer other |
792 | 12 | 5 | 3 | 16 | 36 | | 828 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total consumer loans |
$ | 15,524 | $ | 90 | $ | 43 | $ | 36 | $ | 294 | $ | 463 | $ | 13 | $ | 16,000 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total loans |
$ | 56,619 | $ | 147 | $ | 88 | $ | 96 | $ | 418 | $ | 749 | $ | 13 | $ | 57,381 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
Table of Contents
90 and | Total Past | |||||||||||||||||||||||||||||||
30-59 | 60-89 | Greater | Due and | Purchased | ||||||||||||||||||||||||||||
September 30, 2014 | Days Past | Days Past | Days Past | Nonperforming | Nonperforming | Credit | Total | |||||||||||||||||||||||||
in millions |
Current | Due | Due | Due | Loans | Loans | Impaired | Loans | ||||||||||||||||||||||||
LOAN TYPE |
||||||||||||||||||||||||||||||||
Commercial, financial and agricultural |
$ | 26,534 | $ | 50 | $ | 34 | $ | 18 | $ | 47 | $ | 149 | | $ | 26,683 | |||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||||||||||
Commercial mortgage |
8,201 | 17 | 7 | 9 | 41 | 74 | $ | 1 | 8,276 | |||||||||||||||||||||||
Construction |
1,017 | 3 | 2 | | 14 | 19 | | 1,036 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total commercial real estate loans |
9,218 | 20 | 9 | 9 | 55 | 93 | 1 | 9,312 | ||||||||||||||||||||||||
Commercial lease financing |
4,017 | 74 | 24 | 6 | 14 | 118 | | 4,135 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total commercial loans |
$ | 39,769 | $ | 144 | $ | 67 | $ | 33 | $ | 116 | $ | 360 | $ | 1 | $ | 40,130 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Real estate residential mortgage |
$ | 2,091 | $ | 17 | $ | 7 | $ | 5 | $ | 81 | $ | 110 | $ | 12 | $ | 2,213 | ||||||||||||||||
Home equity: |
||||||||||||||||||||||||||||||||
Key Community Bank |
10,124 | 46 | 19 | 16 | 174 | 255 | 1 | 10,380 | ||||||||||||||||||||||||
Other |
266 | 4 | 2 | 1 | 10 | 17 | | 283 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total home equity loans |
10,390 | 50 | 21 | 17 | 184 | 272 | 1 | 10,663 | ||||||||||||||||||||||||
Consumer other Key Community Bank |
1,528 | 7 | 3 | 6 | 2 | 18 | | 1,546 | ||||||||||||||||||||||||
Credit cards |
705 | 5 | 4 | 9 | 1 | 19 | | 724 | ||||||||||||||||||||||||
Consumer other: |
||||||||||||||||||||||||||||||||
Marine |
796 | 11 | 4 | 1 | 16 | 32 | | 828 | ||||||||||||||||||||||||
Other |
49 | 1 | | | 1 | 2 | | 51 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total consumer other |
845 | 12 | 4 | 1 | 17 | 34 | | 879 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total consumer loans |
$ | 15,559 | $ | 91 | $ | 39 | $ | 38 | $ | 285 | $ | 453 | $ | 13 | $ | 16,025 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total loans |
$ | 55,328 | $ | 235 | $ | 106 | $ | 71 | $ | 401 | $ | 813 | $ | 14 | $ | 56,155 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The prevalent risk characteristic for both commercial and consumer loans is the risk of loss arising from an obligors inability or failure to meet contractual payment or performance terms. Evaluation of this risk is stratified and monitored by the loan risk rating grades assigned for the commercial loan portfolios and the regulatory risk ratings assigned for the consumer loan portfolios.
Most extensions of credit are subject to loan grading or scoring. Loan grades are assigned at the time of origination, verified by credit risk management, and periodically re-evaluated thereafter. This risk rating methodology blends our judgment with quantitative modeling. Commercial loans generally are assigned two internal risk ratings. The first rating reflects the probability that the borrower will default on an obligation; the second rating reflects expected recovery rates on the credit facility. Default probability is determined based on, among other factors, the financial strength of the borrower, an assessment of the borrowers management, the borrowers competitive position within its industry sector, and our view of industry risk in the context of the general economic outlook. Types of exposure, transaction structure, and collateral, including credit risk mitigants, affect the expected recovery assessment.
Credit quality indicators for loans are updated on an ongoing basis. Bond rating classifications are indicative of the credit quality of our commercial loan portfolios and are determined by converting our internally assigned risk rating grades to bond rating categories. Payment activity and the regulatory classifications of pass and substandard are indicators of the credit quality of our consumer loan portfolios.
Credit quality indicators for our commercial and consumer loan portfolios, excluding $12 million and $14 million of PCI loans at September 30, 2015, and September 30, 2014, respectively, based on bond rating, regulatory classification, and payment activity as of September 30, 2015, and September 30, 2014, are as follows:
27
Table of Contents
Commercial Credit Exposure
Credit Risk Profile by Creditworthiness Category (a)
September 30, | ||||||||||||||||||||||||||||||||||||||||
in millions |
||||||||||||||||||||||||||||||||||||||||
Commercial, financial and agricultural |
RE Commercial | RE Construction | Commercial Lease | Total | ||||||||||||||||||||||||||||||||||||
RATING (b), (c) |
2015 | 2014 | 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | ||||||||||||||||||||||||||||||
AAA AA |
$ | 384 | $ | 342 | $ | 3 | $ | 2 | | $ | 1 | $ | 501 | $ | 528 | $ | 888 | $ | 873 | |||||||||||||||||||||
A |
1,439 | 1,147 | 4 | 2 | | | 478 | 596 | 1,921 | 1,745 | ||||||||||||||||||||||||||||||
BBB BB |
27,438 | 23,822 | 7,690 | 7,736 | $ | 935 | 895 | 2,808 | 2,848 | 38,871 | 35,301 | |||||||||||||||||||||||||||||
B |
639 | 594 | 272 | 298 | 89 | 100 | 88 | 75 | 1,088 | 1,067 | ||||||||||||||||||||||||||||||
CCC C |
1,195 | 778 | 211 | 238 | 46 | 40 | 54 | 88 | 1,506 | 1,144 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total |
$ | 31,095 | $ | 26,683 | $ | 8,180 | $ | 8,276 | $ | 1,070 | $ | 1,036 | $ | 3,929 | $ | 4,135 | $ | 44,274 | $ | 40,130 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) | Credit quality indicators are updated on an ongoing basis and reflect credit quality information as of the dates indicated. |
(b) | Our bond rating to internal loan grade conversion system is as follows: AAA - AA = 1, A = 2, BBB - BB = 3 - 13, B = 14 - 16, and CCC - C = 17 - 20. |
(c) | Our internal loan grade to regulatory-defined classification is as follows: Pass = 1-16, Special Mention = 17, Substandard = 18, Doubtful = 19, and Loss = 20. |
Consumer Credit Exposure
Credit Risk Profile by Regulatory Classifications (a), (b)
September 30, | ||||||||
in millions |
||||||||
Residential Prime | ||||||||
GRADE |
2015 | 2014 | ||||||
Pass |
$ | 12,496 | $ | 12,576 | ||||
Substandard |
263 | 287 | ||||||
|
|
|
|
|||||
Total |
$ | 12,759 | $ | 12,863 | ||||
|
|
|
|
Credit Risk Profile Based on Payment Activity (a)
September 30, | Consumer Key Community Bank |
Credit cards | Consumer Marine | Consumer Other | Total | |||||||||||||||||||||||||||||||||||
in millions |
2015 | 2014 | 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | ||||||||||||||||||||||||||||||
Performing |
$ | 1,611 | $ | 1,544 | $ | 768 | $ | 723 | $ | 614 | $ | 812 | $ | 37 | $ | 50 | $ | 3,030 | $ | 3,129 | ||||||||||||||||||||
Nonperforming |
1 | 2 | 2 | 1 | 6 | 16 | 1 | 1 | 10 | 20 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total |
$ | 1,612 | $ | 1,546 | $ | 770 | $ | 724 | $ | 620 | $ | 828 | $ | 38 | $ | 51 | $ | 3,040 | $ | 3,149 | ||||||||||||||||||||
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) | Credit quality indicators are updated on an ongoing basis and reflect credit quality information as of the dates indicated. |
(b) | Our past due payment activity to regulatory classification conversion is as follows: pass = less than 90 days; and substandard = 90 days and greater plus nonperforming loans. |
We determine the appropriate level of the ALLL on at least a quarterly basis. The methodology is described in Note 1 (Summary of Significant Accounting Policies) under the heading Allowance for Loan and Lease Losses beginning on page 117 of our 2014 Form 10-K. We apply expected loss rates to existing loans with similar risk characteristics as noted in the credit quality indicator table above and exercise judgment to assess the impact of qualitative factors such as changes in economic conditions, changes in credit policies or underwriting standards, and changes in the level of credit risk associated with specific industries and markets.
In the third quarter of 2015, we enhanced the approach used to determine the commercial reserve factors used in estimating the commercial ALLL, which had the effect of capturing certain elements in the commercial quantitative reserve component that had formerly been included in the commercial qualitative component. Under the enhanced methodology, we began utilizing more refined commercial estimated loss rates that represent cumulative losses over the estimated average time period from the onset of credit deterioration to the initial loss recorded for an individual loan. In addition, we began utilizing an enhanced framework to quantify commercial ALLL adjustments resulting from qualitative factors that may not be fully captured within the statistical analysis of incurred loss. The impact of these changes was largely neutral to the total ALLL at September 30, 2015. However, because the quantitative reserve is allocated to the business segments at a loan level, while the qualitative portion is allocated at the portfolio level, the impact of the methodology enhancements on the allowance for each portfolio caused the commercial portfolio ALLL to increase or decrease accordingly. The impact of the increases and decreases on the commercial portfolio ALLL was not significant.
28
Table of Contents
For all commercial and consumer loan TDRs, regardless of size, as well as impaired commercial loans with an outstanding balance of $2.5 million or greater, we conduct further analysis to determine the probable loss content and assign a specific allowance to the loan if deemed appropriate. We estimate the extent of the individual impairment for commercial loans and TDRs by comparing the recorded investment of the loan with the estimated present value of its future cash flows, the fair value of its underlying collateral, or the loans observable market price. Secured consumer loan TDRs that are discharged through Chapter 7 bankruptcy and not formally re-affirmed are adjusted to reflect the fair value of the underlying collateral, less costs to sell. Non-Chapter 7 consumer loan TDRs are combined in homogenous pools and assigned a specific allocation based on the estimated present value of future cash flows using the loans effective interest rate. A specific allowance also may be assigned even when sources of repayment appear sufficient if we remain uncertain about whether the loan will be repaid in full. On at least a quarterly basis, we evaluate the appropriateness of our loss estimation methods to reduce differences between estimated incurred losses and actual losses. The ALLL at September 30, 2015, represents our best estimate of the probable credit losses inherent in the loan portfolio at that date.
Commercial loans generally are charged off in full or charged down to the fair value of the underlying collateral when the borrowers payment is 180 days past due. Consumer loans generally are charged off when payments are 120 days past due. Home equity and residential mortgage loans generally are charged down to net realizable value when payment is 180 days past due. Credit card loans, and similar unsecured products, are charged off when payments are 180 days past due.
At September 30, 2015, the ALLL was $790 million, or 1.31% of loans, compared to $804 million, or 1.43% of loans, at September 30, 2014. At September 30, 2015, the ALLL was 197.5% of nonperforming loans, compared to 200.5% at September 30, 2014.
A summary of the changes in the ALLL for the periods indicated is presented in the table below:
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
in millions |
2015 | 2014 | 2015 | 2014 | ||||||||||||
Balance at beginning of period continuing operations |
$ | 796 | $ | 814 | $ | 794 | $ | 848 | ||||||||
Charge-offs |
(53 | ) | (49 | ) | (152 | ) | (162 | ) | ||||||||
Recoveries |
12 | 18 | 47 | 81 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loans and leases charged off |
(41 | ) | (31 | ) | (105 | ) | (81 | ) | ||||||||
Provision for loan and lease losses from continuing operations |
36 | 21 | 102 | 37 | ||||||||||||
Foreign currency translation adjustment |
(1 | ) | | (1 | ) | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at end of period continuing operations |
$ | 790 | $ | 804 | $ | 790 | $ | 804 | ||||||||
|
|
|
|
|
|
|
|
The changes in the ALLL by loan category for the periods indicated are as follows:
in millions |
December 31, 2014 |
Provision | Charge-offs | Recoveries | September 30, 2015 |
|||||||||||||||
Commercial, financial and agricultural |
$ | 391 | $ | 93 | $ | (59 | ) | $ | 13 | $ | 438 | |||||||||
Real estate commercial mortgage |
148 | (9 | ) | (2 | ) | 2 | 139 | |||||||||||||
Real estate construction |
28 | (3 | ) | (1 | ) | 1 | 25 | |||||||||||||
Commercial lease financing |
56 | (13 | ) | (5 | ) | 7 | 45 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial loans |
623 | 68 | (67 | ) | 23 | 647 | ||||||||||||||
Real estate residential mortgage |
23 | (1 | ) | (4 | ) | 1 | 19 | |||||||||||||
Home equity: |
||||||||||||||||||||
Key Community Bank |
66 | 4 | (21 | ) | 5 | 54 | ||||||||||||||
Other |
5 | (1 | ) | (4 | ) | 4 | 4 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total home equity loans |
71 | 3 | (25 | ) | 9 | 58 | ||||||||||||||
Consumer other Key Community Bank |
22 | 11 | (18 | ) | 5 | 20 | ||||||||||||||
Credit cards |
33 | 20 | (23 | ) | 2 | 32 | ||||||||||||||
Consumer other: |
||||||||||||||||||||
Marine |
21 | | (14 | ) | 6 | 13 | ||||||||||||||
Other |
1 | | (1 | ) | 1 | 1 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total consumer other: |
22 | | (15 | ) | 7 | 14 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total consumer loans |
171 | 33 | (85 | ) | 24 | 143 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total ALLL continuing operations |
794 | 101 | (a) | (152 | ) | 47 | 790 | |||||||||||||
Discontinued operations |
29 | 9 | (25 | ) | 10 | 23 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total ALLL including discontinued operations |
$ | 823 | $ | 110 | $ | (177 | ) | $ | 57 | $ | 813 | |||||||||
|
|
|
|
|
|
|
|
|
|
(a) | Includes a $1 million foreign currency translation adjustment. Excludes a provision for losses on lending-related commitments of $19 million. |
29
Table of Contents
in millions |
December 31, 2013 |
Provision | Charge-offs | Recoveries | September 30, 2014 |
|||||||||||||||
Commercial, financial and agricultural |
$ | 362 | $ | 32 | $ | (35 | ) | $ | 27 | $ | 386 | |||||||||
Real estate commercial mortgage |
165 | (7 | ) | (3 | ) | 4 | 159 | |||||||||||||
Real estate construction |
32 | (16 | ) | (4 | ) | 16 | 28 | |||||||||||||
Commercial lease financing |
62 | (9 | ) | (6 | ) | 8 | 55 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial loans |
621 | | (48 | ) | 55 | 628 | ||||||||||||||
Real estate residential mortgage |
37 | (10 | ) | (7 | ) | 2 | 22 | |||||||||||||
Home equity: |
||||||||||||||||||||
Key Community Bank |
84 | 9 | (29 | ) | 7 | 71 | ||||||||||||||
Other |
11 | (1 | ) | (8 | ) | 4 | 6 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total home equity loans |
95 | 8 | (37 | ) | 11 | 77 | ||||||||||||||
Consumer other Key Community Bank |
29 | 14 | (23 | ) | 4 | 24 | ||||||||||||||
Credit cards |
34 | 24 | (27 | ) | 1 | 32 | ||||||||||||||
Consumer other: |
||||||||||||||||||||
Marine |
29 | 1 | (18 | ) | 7 | 19 | ||||||||||||||
Other |
3 | | (2 | ) | 1 | 2 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total consumer other: |
32 | 1 | (20 | ) | 8 | 21 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total consumer loans |
227 | 37 | (114 | ) | 26 | 176 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total ALLL continuing operations |
848 | 37 | (a) | (162 | ) | 81 | 804 | |||||||||||||
Discontinued operations |
39 | 15 | (34 | ) | 11 | 31 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total ALLL including discontinued operations |
$ | 887 | $ | 52 | $ | (196 | ) | $ | 92 | $ | 835 | |||||||||
|
|
|
|
|
|
|
|
|
|
(a) | Excludes a credit for losses on lending-related commitments of $2 million. |
Our ALLL from continuing operations decreased by $14 million, or 1.7%, from the third quarter of 2014 primarily because of the improvement in the credit quality of our loan portfolios. The quality of new loan originations as well as decreasing levels of classified and nonperforming loans also resulted in a reduction in our general allowance. Our general allowance applies expected loss rates to our existing loans with similar risk characteristics as well as any adjustments to reflect our current assessment of qualitative factors such as changes in economic conditions, underwriting standards, and concentrations of credit. Our delinquency trends declined during 2014 and into 2015 due to continued improved credit quality, relatively stable economic conditions, and continued run-off in our exit loan portfolio, reflecting our effort to maintain a moderate enterprise risk tolerance.
For continuing operations, the loans outstanding individually evaluated for impairment totaled $318 million, with a corresponding allowance of $36 million at September 30, 2015. Loans outstanding collectively evaluated for impairment totaled $59.8 billion, with a corresponding allowance of $753 million at September 30, 2015. At September 30, 2015, PCI loans evaluated for impairment totaled $12 million, with a corresponding allowance of $1 million. There was no provision for loan and lease losses on these PCI loans during the nine months ended September 30, 2015. At September 30, 2014, the loans outstanding individually evaluated for impairment totaled $299 million, with a corresponding allowance of $38 million. Loans outstanding collectively evaluated for impairment totaled $55.8 billion, with a corresponding allowance of $765 million at September 30, 2014. At September 30, 2014, PCI loans evaluated for impairment totaled $14 million, with a corresponding allowance of $1 million. There was no provision for loan and lease losses on these PCI loans during the nine months ended September 30, 2014.
30
Table of Contents
A breakdown of the individual and collective ALLL and the corresponding loan balances as of September 30, 2015, follows:
Allowance | Outstanding | |||||||||||||||||||||||||||
Individually | Collectively | Purchased | Individually | Collectively | Purchased | |||||||||||||||||||||||
September 30, 2015 | Evaluated for | Evaluated for | Credit | Evaluated for | Evaluated for | Credit | ||||||||||||||||||||||
in millions |
Impairment | Impairment | Impaired | Loans | Impairment | Impairment | Impaired | |||||||||||||||||||||
Commercial, financial and agricultural |
$ | 9 | $ | 429 | | $ | 31,095 | $ | 72 | $ | 31,023 | | ||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||||||
Commercial mortgage |
1 | 138 | | 8,180 | 15 | 8,165 | | |||||||||||||||||||||
Construction |
| 25 | | 1,070 | 5 | 1,065 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total commercial real estate loans |
1 | 163 | | 9,250 | 20 | 9,230 | | |||||||||||||||||||||
Commercial lease financing |
| 45 | | 3,929 | | 3,929 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total commercial loans |
10 | 637 | | 44,274 | 92 | 44,182 | | |||||||||||||||||||||
Real estate residential mortgage |
5 | 13 | $ | 1 | 2,267 | 56 | 2,200 | $ | 11 | |||||||||||||||||||
Home equity: |
||||||||||||||||||||||||||||
Key Community Bank |
17 | 37 | | 10,282 | 113 | 10,168 | 1 | |||||||||||||||||||||
Other |
2 | 2 | | 222 | 11 | 211 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total home equity loans |
19 | 39 | | 10,504 | 124 | 10,379 | 1 | |||||||||||||||||||||
Consumer other Key Community Bank |
| 20 | | 1,612 | 3 | 1,609 | | |||||||||||||||||||||
Credit cards |
| 32 | | 770 | 3 | 767 | | |||||||||||||||||||||
Consumer other: |
||||||||||||||||||||||||||||
Marine |
2 | 11 | | 620 | 38 | 582 | | |||||||||||||||||||||
Other |
| 1 | | 38 | 2 | 36 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total consumer other |
2 | 12 | | 658 | 40 | 618 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total consumer loans |
26 | 116 | 1 | 15,811 | 226 | 15,573 | 12 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total ALLL continuing operations |
36 | 753 | 1 | 60,085 | 318 | 59,755 | 12 | |||||||||||||||||||||
Discontinued operations |
2 | 21 | | 1,891 | 20 | 1,871 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total ALLL including discontinued operations |
$ | 38 | $ | 774 | $ | 1 | $ | 61,976 | $ | 338 | $ | 61,626 | $ | 12 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A breakdown of the individual and collective ALLL and the corresponding loan balances as of December 31, 2014, follows:
Allowance | Outstanding | |||||||||||||||||||||||||||
Individually | Collectively | Purchased | Individually | Collectively | Purchased | |||||||||||||||||||||||
December 31, 2014 | Evaluated for | Evaluated for | Credit | Evaluated for | Evaluated for | Credit | ||||||||||||||||||||||
in millions |
Impairment | Impairment | Impaired | Loans | Impairment | Impairment | Impaired | |||||||||||||||||||||
Commercial, financial and agricultural |
$ | 9 | $ | 382 | | $ | 27,982 | $ | 43 | $ | 27,939 | | ||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||||||
Commercial mortgage |
2 | 146 | | 8,047 | 21 | 8,025 | $ | 1 | ||||||||||||||||||||
Construction |
1 | 27 | | 1,100 | 8 | 1,092 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total commercial real estate loans |
3 | 173 | | 9,147 | 29 | 9,117 | 1 | |||||||||||||||||||||
Commercial lease financing |
| 56 | | 4,252 | | 4,252 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total commercial loans |
12 | 611 | | 41,381 | 72 | 41,308 | 1 | |||||||||||||||||||||
Real estate residential mortgage |
5 | 17 | $ | 1 | 2,225 | 55 | 2,159 | 11 | ||||||||||||||||||||
Home equity: |
||||||||||||||||||||||||||||
Key Community Bank |
16 | 50 | | 10,366 | 108 | 10,257 | 1 | |||||||||||||||||||||
Other |
2 | 3 | | 267 | 12 | 255 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total home equity loans |
18 | 53 | | 10,633 | 120 | 10,512 | 1 | |||||||||||||||||||||
Consumer other Key Community Bank |
| 22 | | 1,560 | 4 | 1,556 | | |||||||||||||||||||||
Credit cards |
| 33 | | 754 | 4 | 750 | | |||||||||||||||||||||
Consumer other: |
||||||||||||||||||||||||||||
Marine |
5 | 16 | | 779 | 45 | 734 | | |||||||||||||||||||||
Other |
| 1 | | 49 | 2 | 47 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total consumer other |
5 | 17 | | 828 | 47 | 781 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total consumer loans |
28 | 142 | 1 | 16,000 | 230 | 15,758 | 12 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total ALLL continuing operations |
40 | 753 | 1 | 57,381 | 302 | 57,066 | 13 | |||||||||||||||||||||
Discontinued operations |
1 | 28 | | 2,295 | (a) | 17 | 2,278 | (a) | | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total ALLL including discontinued operations |
$ | 41 | $ | 781 | $ | 1 | $ | 59,676 | $ | 319 | $ | 59,344 | $ | 13 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) | Amount includes $191 million of loans carried at fair value that are excluded from ALLL consideration. |
31
Table of Contents
A breakdown of the individual and collective ALLL and the corresponding loan balances as of September 30, 2014, follows:
Allowance | Outstanding | |||||||||||||||||||||||||||
Individually | Collectively | Purchased | Individually | Collectively | Purchased | |||||||||||||||||||||||
September 30, 2014 | Evaluated for | Evaluated for | Credit | Evaluated for | Evaluated for | Credit | ||||||||||||||||||||||
in millions |
Impairment | Impairment | Impaired | Loans | Impairment | Impairment | Impaired | |||||||||||||||||||||
Commercial, financial and agricultural |
$ | 7 | $ | 379 | | $ | 26,683 | $ | 31 | $ | 26,652 | | ||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||||||
Commercial mortgage |
2 | 157 | | 8,276 | 29 | 8,246 | $ | 1 | ||||||||||||||||||||
Construction |
| 28 | | 1,036 | 10 | 1,026 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total commercial real estate loans |
2 | 185 | | 9,312 | 39 | 9,272 | 1 | |||||||||||||||||||||
Commercial lease financing |
| 55 | | 4,135 | | 4,135 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total commercial loans |
9 | 619 | | 40,130 | 70 | 40,059 | 1 | |||||||||||||||||||||
Real estate residential mortgage |
4 | 17 | $ | 1 | 2,213 | 55 | 2,146 | 12 | ||||||||||||||||||||
Home equity: |
||||||||||||||||||||||||||||
Key Community Bank |
16 | 55 | | 10,380 | 105 | 10,274 | 1 | |||||||||||||||||||||
Other |
2 | 4 | | 283 | 12 | 271 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total home equity loans |
18 | 59 | | 10,663 | 117 | 10,545 | 1 | |||||||||||||||||||||
Consumer other Key Community Bank |
| 24 | | 1,546 | 4 | 1,542 | | |||||||||||||||||||||
Credit cards |
1 | 31 | | 724 | 3 | 721 | | |||||||||||||||||||||
Consumer other: |
||||||||||||||||||||||||||||
Marine |
5 | 14 | | 828 | 48 | 780 | | |||||||||||||||||||||
Other |
1 | 1 | | 51 | 2 | 49 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total consumer other |
6 | 15 | | 879 | 50 | 829 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total consumer loans |
29 | 146 | 1 | 16,025 | 229 | 15,783 | 13 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total ALLL continuing operations |
38 | 765 | 1 | 56,155 | 299 | 55,842 | 14 | |||||||||||||||||||||
Discontinued operations |
1 | 30 | | 2,392 | (a) | 16 | 2,376 | (a) | | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total ALLL including discontinued operations |
$ | 39 | $ | 795 | $ | 1 | $ | 58,547 | $ | 315 | $ | 58,218 | $ | 14 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) | Amount includes $201 million of loans carried at fair value that are excluded from ALLL consideration. |
The liability for credit losses inherent in lending-related unfunded commitments, such as letters of credit and unfunded loan commitments, is included in accrued expense and other liabilities on the balance sheet. We establish the amount of this reserve by considering both historical trends and current market conditions quarterly, or more often if deemed necessary. Our liability for credit losses on lending-related commitments was $54 million at September 30, 2015. When combined with our ALLL, our total allowance for credit losses represented 1.40% of loans at September 30, 2015, compared to 1.49% at September 30, 2014.
Changes in the liability for credit losses on unfunded lending-related commitments are summarized as follows:
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
in millions |
2015 | 2014 | 2015 | 2014 | ||||||||||||
Balance at beginning of period |
$ | 45 | $ | 37 | $ | 35 | $ | 37 | ||||||||
Provision (credit) for losses on lending-related commitments |
9 | (2 | ) | 19 | (2 | ) | ||||||||||
|
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|
|
|
|||||||||
Balance at end of period |
$ | 54 | $ | 35 | $ | 54 | $ | 35 | ||||||||
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Fair Value Determination
As defined in the applicable accounting guidance, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in our principal market. We have established and documented our process for determining the fair values of our assets and liabilities, where applicable. Fair value is based on quoted market prices, when available, for identical or similar assets or liabilities. In the absence of quoted market prices, we determine the fair value of our assets and liabilities using valuation models or third-party pricing services. Both of these approaches rely on market-based parameters, when available, such as interest rate yield curves, option volatilities, and credit spreads, or unobservable inputs. Unobservable inputs may be based on our judgment, assumptions, and estimates related to credit quality, liquidity, interest rates, and other relevant inputs.
Valuation adjustments, such as those pertaining to counterparty and our own credit quality and liquidity, may be necessary to ensure that assets and liabilities are recorded at fair value. Credit valuation adjustments are made when market pricing does not accurately reflect the counterpartys or our own credit quality. We make liquidity valuation adjustments to the fair value of certain assets to reflect the uncertainty in the pricing and trading of the instruments when we are unable to observe recent market transactions for identical or similar instruments. Liquidity valuation adjustments are based on the following factors:
| the amount of time since the last relevant valuation; |
| whether there is an actual trade or relevant external quote available at the measurement date; and |
| volatility associated with the primary pricing components. |
We ensure that our fair value measurements are accurate and appropriate by relying upon various controls, including:
| an independent review and approval of valuation models and assumptions; |
| recurring detailed reviews of profit and loss; and |
| a validation of valuation model components against benchmark data and similar products, where possible. |
We recognize transfers between levels of the fair value hierarchy at the end of the reporting period. Quarterly, we review any changes to our valuation methodologies to ensure they are appropriate and justified, and refine our valuation methodologies if more market-based data becomes available. The Fair Value Committee, which is governed by ALCO, oversees the valuation process for all lines of business and support areas, as applicable. Various Working Groups that report to the Fair Value Committee analyze and approve the underlying assumptions and valuation adjustments. Changes in valuation methodologies for Level 1 and Level 2 instruments are presented to the Accounting Policy group for approval. Changes in valuation methodologies for Level 3 instruments are presented to the Fair Value Committee for approval. The Working Groups are discussed in more detail in the qualitative disclosures within this note and in Note 11 (Acquisitions and Discontinued Operations). Formal documentation of the fair valuation methodologies is prepared by the lines of business and support areas as appropriate. The documentation details the asset or liability class and related general ledger accounts, valuation techniques, fair value hierarchy level, market participants, accounting methods, valuation methodology, group responsible for valuations, and valuation inputs.
Additional information regarding our accounting policies for determining fair value is provided in Note 1 (Summary of Significant Accounting Policies) under the heading Fair Value Measurements beginning on page 118 of our 2014 Form 10-K.
Qualitative Disclosures of Valuation Techniques
Loans. Most loans recorded as trading account assets are valued based on market spreads for similar assets since they are actively traded. Therefore, these loans are classified as Level 2 because the fair value recorded is based on observable market data for similar assets.
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Securities (trading and available for sale). We own several types of securities, requiring a range of valuation methods:
| Securities are classified as Level 1 when quoted market prices are available in an active market for the identical securities. Level 1 instruments include exchange-traded equity securities. |
| Securities are classified as Level 2 if quoted prices for identical securities are not available, and fair value is determined using pricing models (either by a third-party pricing service or internally) or quoted prices of similar securities. These instruments include municipal bonds; bonds backed by the U.S. government; corporate bonds; certain mortgage-backed securities; securities issued by the U.S. Treasury; money markets; and certain agency and corporate CMOs. Inputs to the pricing models include: standard inputs, such as yields, benchmark securities, bids, and offers; actual trade data (i.e., spreads, credit ratings, and interest rates) for comparable assets; spread tables; matrices; high-grade scales; and option-adjusted spreads. |
| Securities are classified as Level 3 when there is limited activity in the market for a particular instrument. To determine fair value in such cases, depending on the complexity of the valuations required, we use internal models based on certain assumptions or a third-party valuation service. At September 30, 2015, our Level 3 instruments consist of two convertible preferred securities. Our Strategy group is responsible for reviewing the valuation model and determining the fair value of these investments on a quarterly basis. The securities are valued using a cash flow analysis of the associated private company issuers. The valuations of the securities are negatively impacted by projected net losses of the associated private companies and positively impacted by projected net gains. |
The fair values of our Level 2 securities available for sale are determined by a third-party pricing service. The valuations provided by the third-party pricing service are based on observable market inputs, which include benchmark yields, reported trades, issuer spreads, benchmark securities, bids, offers, and reference data obtained from market research publications. Inputs used by the third-party pricing service in valuing CMOs and other mortgage-backed securities also include new issue data, monthly payment information, whole loan collateral performance, and To Be Announced prices. In valuations of securities issued by state and political subdivisions, inputs used by the third-party pricing service also include material event notices.
On a monthly basis, we validate the pricing methodologies utilized by our third-party pricing service to ensure the fair value determination is consistent with the applicable accounting guidance and that our assets are properly classified in the fair value hierarchy. To perform this validation, we:
| review documentation received from our third-party pricing service regarding the inputs used in their valuations and determine a level assessment for each category of securities; |
| substantiate actual inputs used for a sample of securities by comparing the actual inputs used by our third-party pricing service to comparable inputs for similar securities; and |
| substantiate the fair values determined for a sample of securities by comparing the fair values provided by our third-party pricing service to prices from other independent sources for the same and similar securities. We analyze variances and conduct additional research with our third-party pricing service and take appropriate steps based on our findings. |
Private equity and mezzanine investments. Private equity and mezzanine investments consist of investments in debt and equity securities through our Real Estate Capital line of business. They include direct investments made in specific properties, as well as indirect investments made in funds that pool assets of many investors to invest in properties. There is no active market for these investments, so we employ other valuation methods. The portion of our Real Estate Capital line of business involved with private equity and mezzanine investments is accounted for as an investment company in accordance with the applicable accounting guidance, whereby all investments are recorded at fair value.
Private equity and mezzanine investments are classified as Level 3 assets since our judgment significantly influences the determination of fair value. Our Fund Management, Asset Management, and Accounting groups are responsible for reviewing the valuation models and determining the fair value of these investments on a quarterly basis. Direct investments in properties are initially valued based upon the transaction price. This amount is then adjusted to fair value based on current market conditions using the discounted cash flow method based on the expected investment exit date. The fair values of the assets are reviewed and adjusted quarterly. There were no significant direct equity and mezzanine investments at September 30, 2015.
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Consistent with accounting guidance, indirect investments are valued using a methodology that allows the use of 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 funds in which we invest. The calculation to determine the investments fair value is based on our percentage ownership in the fund multiplied by the net asset value of the fund, as provided by the fund manager. Under the requirements of the Volcker Rule, we will be required to dispose of some or all of our indirect investments. As of September 30, 2015, management has not committed to a plan to sell these investments. Therefore, these investments continue to be valued using the net asset value per share methodology. For more information about the Volcker Rule, see the discussion under the heading Other Regulatory Developments under the Dodd-Frank Act Volcker Rule in the section entitled Supervision and Regulation beginning on page 16 of our 2014 Form 10-K.
Investments in real estate private equity funds are included within private equity and mezzanine investments. The main purpose of these funds is to acquire a portfolio of real estate investments that provides attractive risk-adjusted returns and current income for investors. Certain of these investments do not have readily determinable fair values and represent our ownership interest in an entity that follows measurement principles under investment company accounting.
The following table presents the fair value of our indirect investments and related unfunded commitments at September 30, 2015. We did not provide any financial support to investees related to our direct and indirect investments for the nine months ended September 30, 2015, and September 30, 2014.
September 30, 2015 | Unfunded | |||||||
in millions |
Fair Value | Commitments | ||||||
INVESTMENT TYPE |
||||||||
Indirect investments |
||||||||
Passive funds (a) |
$ | 9 | $ | 1 | ||||
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Total |
$ | 9 | $ | 1 | ||||
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(a) | We invest in passive funds, which are multi-investor private equity funds. These investments can never be redeemed. Instead, distributions are received through the liquidation of the underlying investments in the funds. Some funds have no restrictions on sale, while others require investors to remain in the fund until maturity. The funds will be liquidated over a period of one to four years. The purpose of KREECs funding is to allow funds to make additional investments and keep a certain market value threshold in the funds. KREEC is obligated to provide financial support, as all investors are required, to fund based on their ownership percentage, as noted in the Limited Partnership Agreements. |
Principal investments. Principal investments consist of investments in equity and debt instruments made by our principal investing entities. They include direct investments (investments made in a particular company) and indirect investments (investments made through funds that include other investors). Our principal investing entities are accounted for as investment companies in accordance with the applicable accounting guidance, whereby each investment is adjusted to fair value with any net realized or unrealized gain/loss recorded in the current periods earnings. This process is a coordinated and documented effort by the Principal Investing Entities Deal Team (individuals from one of the independent investment managers who oversee these instruments), accounting staff, and the Investment Committee (individual employees and a former employee of Key and one of the independent investment managers). This process involves an in-depth review of the condition of each investment depending on the type of investment.
Our direct investments include investments in debt and equity instruments of both private and public companies. When quoted prices are available in an active market for the identical direct investment, we use the quoted prices in the valuation process, and the related investments are classified as Level 1 assets. However, in most cases, quoted market prices are not available for our direct investments, and we must perform valuations using other methods. These direct investment valuations are an in-depth analysis of the condition of each investment and are based on the unique facts and circumstances related to each individual investment. There is a certain amount of subjectivity surrounding the valuation of these investments due to the combination of quantitative and qualitative factors that are used in the valuation models. Therefore, these direct investments are classified as Level 3 assets. The specific inputs used in the valuations of each type of direct investment are described below.
Interest-bearing securities (i.e., loans) are valued on a quarterly basis. Valuation adjustments are determined by the Principal Investing Entities Deal Team and are subject to approval by the Investment Committee. Valuations of debt instruments are based on the Principal Investing Entities Deal Teams knowledge of the current financial status of the subject company, which is regularly monitored throughout the term of the investment. Significant unobservable inputs used in the valuations of these investments include the companys payment history, adequacy of cash flows from operations, and current operating results, including market multiples and historical and forecast EBITDA. Inputs can also include the seniority of the debt, the nature of any pledged collateral, the extent to which the security interest is perfected, and the net liquidation value of collateral.
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Valuations of equity instruments of private companies, which are prepared on a quarterly basis, are based on current market conditions and the current financial status of each company. A valuation analysis is performed to value each investment. The valuation analysis is reviewed by the Principal Investing Entities Deal Team Member, and reviewed and approved by the Chief Administrative Officer of one of the independent investment managers. Significant unobservable inputs used in these valuations include adequacy of the companys cash flows from operations, any significant change in the companys performance since the prior valuation, and any significant equity issuances by the company. Equity instruments of public companies are valued using quoted prices in an active market for the identical security. If the instrument is restricted, the fair value is determined considering the number of shares traded daily, the number of the companys total restricted shares, and price volatility.
Our indirect investments are classified as Level 3 assets since our significant inputs are not observable in the marketplace. Indirect investments include primary and secondary investments in private equity funds engaged mainly in venture- and growth-oriented investing. These investments do not have readily determinable fair values. Indirect investments are valued using a methodology that is consistent with accounting guidance that allows us to estimate fair value based upon net asset value per share (or its equivalent, such as member units or an ownership interest in partners capital to which a proportionate share of net assets is attributed). The significant unobservable input used in estimating fair value is primarily the most recent value of the capital accounts as reported by the general partners of the funds in which we invest. Under the requirements of the Volcker Rule, we will be required to dispose of some or all of our indirect investments. As of September 30, 2015, management has not committed to a plan to sell these investments. Therefore, these investments continue to be valued using the net asset value per share methodology.
For indirect investments, management may make adjustments it deems appropriate to the net asset value if it is determined that the net asset value does not properly reflect fair value. In determining the need for an adjustment to net asset value, management performs an analysis of the private equity funds based on the independent fund managers valuations as well as managements own judgment. Significant unobservable inputs used in these analyses include current fund financial information provided by the fund manager, an estimate of future proceeds expected to be received on the investment, and market multiples. Management also considers whether the independent fund manager adequately marks down an impaired investment, maintains financial statements in accordance with GAAP, or follows a practice of holding all investments at cost.
The following table presents the fair value of our direct and indirect principal investments and related unfunded commitments at September 30, 2015, as well as financial support provided for the three and nine months ended September 30, 2015, and September 30, 2014:
Financial support provided | ||||||||||||||||||||||||||||||||||||||||
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||||||||||||||||||
September 30, 2015 | 2015 | 2014 | 2015 | 2014 | ||||||||||||||||||||||||||||||||||||
Fair | Unfunded | Funded | Funded | Funded | Funded | Funded | Funded | Funded | Funded | |||||||||||||||||||||||||||||||
in millions |
Value | Commitments | Commitments | Other | Commitments | Other | Commitments | Other | Commitments | Other | ||||||||||||||||||||||||||||||
INVESTMENT TYPE |
||||||||||||||||||||||||||||||||||||||||
Direct investments (a) |
$ | 66 | | | $ | | | | | $ | 2 | | $ | 2 | ||||||||||||||||||||||||||
Indirect investments (b) |
271 | $ | 53 | $ | 2 | | $ | 3 | | $ | 7 | | $ | 10 | | |||||||||||||||||||||||||
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|
|
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Total |
$ | 337 | $ | 53 | $ | 2 | $ | | $ | 3 | | $ | 7 | $ | 2 | $ | 10 | $ | 2 | |||||||||||||||||||||
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(a) | Our direct investments consist of equity and debt investments directly in independent business enterprises. Operations of the business enterprises are handled by management of the portfolio company. The purpose of funding these enterprises is to provide financial support for business development and acquisition strategies. We infuse equity capital based on an initial contractual cash contribution and later from additional requests on behalf of the companies management. |
(b) | Our indirect investments consist of buyout funds, venture capital funds, and fund of funds. These investments are generally not redeemable. Instead, distributions are received through the liquidation of the underlying investments of the fund. An investment in any one of these funds typically can be sold only with the approval of the funds general partners. We estimate that the underlying investments of the funds will be liquidated over a period of one to nine years. The purpose of funding our capital commitments to these investments is to allow the funds to make additional follow-on investments and pay fund expenses until the fund dissolves. We, and all other investors in the fund, are obligated to fund the full amount of our respective capital commitments to the fund based on our and their respective ownership percentages, as noted in the applicable Limited Partnership Agreement. |
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Other. We have one indirect equity investment in the form of limited partnership units of less than five percent. The investment is classified as Level 3 asset since our significant inputs are not observable in the marketplace. This investment is valued using a methodology that is consistent with accounting guidance that allows us to estimate fair value based upon net asset value per share (or its equivalent, such an ownership interest in partners capital to which a proportionate share of net asset is attributed). The significant unobservable input used in estimating fair value is primarily the most recent value of the capital account as reported by the general partner of the partnership in which we invest. Under the requirements of the Volcker Rule, we will be required to dispose of this investment. As of September 30, 2015, management has not committed to a plan to sell this investment. Therefore, the investment continues to be valued using the net asset value per share methodology.
Derivatives. Exchange-traded derivatives are valued using quoted prices and, therefore, are classified as Level 1 instruments. However, only a few types of derivatives are exchange-traded. 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, LIBOR and Overnight Index Swap (OIS) discount rates and curves, index pricing curves, foreign currency curves, and volatility surfaces (a three-dimensional graph of implied volatility against strike price and maturity). These derivative contracts, which are classified as Level 2 instruments, include interest rate swaps, certain options, cross currency swaps, and credit default swaps.
In addition, we have several customized derivative instruments and risk participations that are classified as Level 3 instruments. These derivative positions are valued using internally developed models, with inputs consisting of available market data, such as bond spreads and asset values, as well as unobservable internally derived assumptions, such as loss probabilities and internal risk ratings of customers. These derivatives are priced monthly by our MRM group using a credit valuation adjustment methodology. Swap details with the customer and our related participation percentage, if applicable, are obtained from our derivatives accounting system, which is the system of record. Applicable customer rating information is obtained from the particular loan system and represents an unobservable input to this valuation process. Using these various inputs, a valuation of these Level 3 derivatives is performed using a model that was acquired from a third party. In summary, the fair value represents an estimate of the amount that the risk participation counterparty would need to pay/receive as of the measurement date based on the probability of customer default on the swap transaction and the fair value of the underlying customer swap. Therefore, a higher loss probability and a lower credit rating would negatively affect the fair value of the risk participations and a lower loss probability and higher credit rating would positively affect the fair value of the risk participations.
Market convention implies a credit rating of AA equivalent in the pricing of derivative contracts, which assumes all counterparties have the same creditworthiness. To reflect the actual exposure on our derivative contracts related to both counterparty and our own creditworthiness, we record a fair value adjustment in the form of a credit valuation adjustment. The credit component is determined by individual counterparty based on the probability of default and considers master netting and collateral agreements. The credit valuation adjustment is classified as Level 3. Our MRM group is responsible for the valuation policies and procedures related to this credit valuation adjustment. A weekly reconciliation process is performed to ensure that all applicable derivative positions are covered in the calculation, which includes transmitting customer exposures and reserve reports to trading management, derivative traders and marketers, derivatives middle office, and corporate accounting personnel. On a quarterly basis, MRM prepares the credit valuation adjustment calculation, which includes a detailed reserve comparison with the previous quarter, an analysis for change in reserve, and a reserve forecast to ensure that the credit valuation adjustment recorded at period end is sufficient.
Other assets and liabilities. The value of our short positions is driven by the valuation of the underlying securities. If quoted prices for identical securities are not available, fair value is determined by using pricing models or quoted prices of similar securities, resulting in a Level 2 classification. For the interest rate-driven products, such as government bonds, U.S. Treasury bonds and other products backed by the U.S. government, inputs include spreads, credit ratings, and interest rates. For the credit-driven products, such as corporate bonds and mortgage-backed securities, inputs include actual trade data for comparable assets and bids and offers.
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Table of Contents
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Certain assets and liabilities are measured at fair value on a recurring basis in accordance with GAAP. The following tables present these assets and liabilities at September 30, 2015, December 31, 2014, and September 30, 2014.
September 30, 2015 | ||||||||||||||||
in millions |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
ASSETS MEASURED ON A RECURRING BASIS |
||||||||||||||||
Trading account assets: |
||||||||||||||||
U.S. Treasury, agencies and corporations |
| $ | 694 | | $ | 694 | ||||||||||
States and political subdivisions |
| 35 | | 35 | ||||||||||||
Collateralized mortgage obligations |
| | | | ||||||||||||
Other mortgage-backed securities |
| 46 | | 46 | ||||||||||||
Other securities |
$ | 4 | 23 | | 27 | |||||||||||
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|
|
|||||||||
Total trading account securities |
4 | 798 | | 802 | ||||||||||||
Commercial loans |
| 9 | | 9 | ||||||||||||
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|
|
|||||||||
Total trading account assets |
4 | 807 | | 811 | ||||||||||||
Securities available for sale: |
||||||||||||||||
States and political subdivisions |
| 15 | | 15 | ||||||||||||
Collateralized mortgage obligations |
| 12,003 | | 12,003 | ||||||||||||
Other mortgage-backed securities |
| 2,330 | | 2,330 | ||||||||||||
Other securities |
11 | | $ | 17 | 28 | |||||||||||
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|||||||||
Total securities available for sale |
11 | 14,348 | 17 | 14,376 | ||||||||||||
Other investments: |
||||||||||||||||
Principal investments: |
||||||||||||||||
Direct |
| | 66 | 66 | ||||||||||||
Indirect |
| | 271 | 271 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total principal investments |
| | 337 | 337 | ||||||||||||
Equity and mezzanine investments: |
||||||||||||||||
Direct |
| | | | ||||||||||||
Indirect |
| | 9 | 9 | ||||||||||||
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|
|||||||||
Total equity and mezzanine investments |
| | 9 | 9 | ||||||||||||
Other |
| | 4 | 4 | ||||||||||||
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Total other investments |
| | 350 | 350 | ||||||||||||
Derivative assets: |
||||||||||||||||
Interest rate |
| 1,097 | 22 | 1,119 | ||||||||||||
Foreign exchange |
120 | 10 | | 130 | ||||||||||||
Commodity |
| 482 | | 482 | ||||||||||||
Credit |
| 4 | 3 | 7 | ||||||||||||
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|
|
|
|
|||||||||
Derivative assets |
120 | 1,593 | 25 | 1,738 | ||||||||||||
Netting adjustments (a) |
| | | (945 | ) | |||||||||||
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|
|
|
|
|
|
|||||||||
Total derivative assets |
120 | 1,593 | 25 | 793 | ||||||||||||
Accrued income and other assets |
| 2 | | 2 | ||||||||||||
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|
|
|
|
|
|
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Total assets on a recurring basis at fair value |
$ | 135 | $ | 16,750 | $ | 392 | $ | 16,332 | ||||||||
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LIABILITIES MEASURED ON A RECURRING BASIS |
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Bank notes and other short-term borrowings: |
||||||||||||||||
Short positions |
| $ | 677 | | $ | 677 | ||||||||||
Derivative liabilities: |
||||||||||||||||
Interest rate |
| 656 | | 656 | ||||||||||||
Foreign exchange |
$ | 102 | 10 | | 112 | |||||||||||
Commodity |
| 469 | | 469 | ||||||||||||
Credit |
| 5 | | 5 | ||||||||||||
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Derivative liabilities |
102 | 1,140 | | 1,242 | ||||||||||||
Netting adjustments (a) |
| | | (566 | ) | |||||||||||
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|
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Total derivative liabilities |
102 | 1,140 | | 676 | ||||||||||||
Accrued expense and other liabilities |
| 2 | | 2 | ||||||||||||
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Total liabilities on a recurring basis at fair value |
$ | 102 | $ | 1,819 | | $ | 1,355 | |||||||||
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(a) | Netting adjustments represent the amounts recorded to convert our derivative assets and liabilities from a gross basis to a net basis in accordance with applicable accounting guidance. The net basis takes into account the impact of bilateral collateral and master netting agreements that allow us to settle all derivative contracts with a single counterparty on a net basis and to offset the net derivative position with the related cash collateral. Total derivative assets and liabilities include these netting adjustments. |
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December 31, 2014 | ||||||||||||||||
in millions |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
ASSETS MEASURED ON A RECURRING BASIS |
||||||||||||||||
Trading account assets: |
||||||||||||||||
U.S. Treasury, agencies and corporations |
| $ | 555 | | $ | 555 | ||||||||||
States and political subdivisions |
| 38 | | 38 | ||||||||||||
Collateralized mortgage obligations |
| | | | ||||||||||||
Other mortgage-backed securities |
| 124 | | 124 | ||||||||||||
Other securities |
$ | 2 | 29 | | 31 | |||||||||||
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|
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Total trading account securities |
2 | 746 | | 748 | ||||||||||||
Commercial loans |
| 2 | | 2 | ||||||||||||
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Total trading account assets |
2 | 748 | | 750 | ||||||||||||
Securities available for sale: |
||||||||||||||||
States and political subdivisions |
| 23 | | 23 | ||||||||||||
Collateralized mortgage obligations |
| 11,270 | | 11,270 | ||||||||||||
Other mortgage-backed securities |
| 2,035 | | 2,035 | ||||||||||||
Other securities |
22 | | $ | 10 | 32 | |||||||||||
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|
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Total securities available for sale |
22 | 13,328 | 10 | 13,360 | ||||||||||||
Other investments: |
||||||||||||||||
Principal investments: |
||||||||||||||||
Direct |
2 | | 102 | 104 | ||||||||||||
Indirect |
| | 302 | 302 | ||||||||||||
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Total principal investments |
2 | | 404 | 406 | ||||||||||||
Equity and mezzanine investments: |
||||||||||||||||
Direct |
| | | | ||||||||||||
Indirect |
| | 10 | 10 | ||||||||||||
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|
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|
|
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|
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Total equity and mezzanine investments |
| | 10 | 10 | ||||||||||||
Other |
| | 4 | 4 | ||||||||||||
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|
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|
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|
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Total other investments |
2 | | 418 | 420 | ||||||||||||
Derivative assets: |
||||||||||||||||
Interest rate |
| 924 | 13 | 937 | ||||||||||||
Foreign exchange |
91 | 2 | | 93 | ||||||||||||
Commodity |
| 608 | | 608 | ||||||||||||
Credit |
| 2 | 3 | 5 | ||||||||||||
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|
|
|||||||||
Derivative assets |
91 | 1,536 | 16 | 1,643 | ||||||||||||
Netting adjustments (a) |
| | | (1,034 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total derivative assets |
91 | 1,536 | 16 | 609 | ||||||||||||
Accrued income and other assets |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets on a recurring basis at fair value |
$ | 117 | $ | 15,612 | $ | 444 | $ | 15,139 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
LIABILITIES MEASURED ON A RECURRING BASIS |
||||||||||||||||
Bank notes and other short-term borrowings: |
||||||||||||||||
Short positions |
| $ | 423 | | $ | 423 | ||||||||||
Derivative liabilities: |
||||||||||||||||
Interest rate |
| 644 | | 644 | ||||||||||||
Foreign exchange |
$ | 77 | 4 | | 81 | |||||||||||
Commodity |
| 594 | | 594 | ||||||||||||
Credit |
| 6 | $ | 1 | 7 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Derivative liabilities |
77 | 1,248 | 1 | 1,326 | ||||||||||||
Netting adjustments (a) |
| | | (542 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total derivative liabilities |
77 | 1,248 | 1 | 784 | ||||||||||||
Accrued expense and other liabilities |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities on a recurring basis at fair value |
$ | 77 | $ | 1,671 | $ | 1 | $ | 1,207 | ||||||||
|
|
|
|
|
|
|
|
(a) | Netting adjustments represent the amounts recorded to convert our derivative assets and liabilities from a gross basis to a net basis in accordance with applicable accounting guidance. The net basis takes into account the impact of bilateral collateral and master netting agreements that allow us to settle all derivative contracts with a single counterparty on a net basis and to offset the net derivative position with the related cash collateral. Total derivative assets and liabilities include these netting adjustments. |
39
Table of Contents
September 30, 2014 | ||||||||||||||||
in millions |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
ASSETS MEASURED ON A RECURRING BASIS |
||||||||||||||||
Trading account assets: |
||||||||||||||||
U.S. Treasury, agencies and corporations |
| $ | 596 | | $ | 596 | ||||||||||
States and political subdivisions |
| 24 | | 24 | ||||||||||||
Collateralized mortgage obligations |
| | | | ||||||||||||
Other mortgage-backed securities |
| 186 | | 186 | ||||||||||||
Other securities |
$ | 13 | 145 | | 158 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total trading account securities |
13 | 951 | | 964 | ||||||||||||
Commercial loans |
| 1 | | 1 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total trading account assets |
13 | 952 | | 965 | ||||||||||||
Securities available for sale: |
||||||||||||||||
States and political subdivisions |
| 27 | | 27 | ||||||||||||
Collateralized mortgage obligations |
| 10,009 | | 10,009 | ||||||||||||
Other mortgage-backed securities |
| 2,177 | | 2,177 | ||||||||||||
Other securities |
22 | | $ | 10 | 32 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total securities available for sale |
22 | 12,213 | 10 | 12,245 | ||||||||||||
Other investments: |
||||||||||||||||
Principal investments: |
||||||||||||||||
Direct |
| | 115 | 115 | ||||||||||||
Indirect |
| | 353 | 353 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total principal investments |
| | 468 | 468 | ||||||||||||
Equity and mezzanine investments: |
||||||||||||||||
Direct |
| | | | ||||||||||||
Indirect |
| | 13 | 13 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total equity and mezzanine investments |
| | 13 | 13 | ||||||||||||
Other |
| | 4 | 4 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other investments |
| | 485 | 485 | ||||||||||||
Derivative assets: |
||||||||||||||||
Interest rate |
| 827 | 19 | 846 | ||||||||||||
Foreign exchange |
73 | 8 | | 81 | ||||||||||||
Commodity |
| 95 | | 95 | ||||||||||||
Credit |
| 1 | 3 | 4 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Derivative assets |
73 | 931 | 22 | 1,026 | ||||||||||||
Netting adjustments (a) |
| | | (613 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total derivative assets |
73 | 931 | 22 | 413 | ||||||||||||
Accrued income and other assets |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets on a recurring basis at fair value |
$ | 108 | $ | 14,096 | $ | 517 | $ | 14,108 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
LIABILITIES MEASURED ON A RECURRING BASIS |
||||||||||||||||
Bank notes and other short-term borrowings: |
||||||||||||||||
Short positions |
$ | 6 | $ | 490 | | $ | 496 | |||||||||
Derivative liabilities: |
||||||||||||||||
Interest rate |
| 616 | | 616 | ||||||||||||
Foreign exchange |
55 | 9 | | 64 | ||||||||||||
Commodity |
| 89 | $ | 1 | 90 | |||||||||||
Credit |
| 7 | | 7 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Derivative liabilities |
55 | 721 | 1 | 777 | ||||||||||||
Netting adjustments (a) |
| | | (393 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total derivative liabilities |
55 | 721 | 1 | 384 | ||||||||||||
Accrued expense and other liabilities |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities on a recurring basis at fair value |
$ | 61 | $ | 1,211 | $ | 1 | $ | 880 | ||||||||
|
|
|
|
|
|
|
|
(a) | Netting adjustments represent the amounts recorded to convert our derivative assets and liabilities from a gross basis to a net basis in accordance with applicable accounting guidance. The net basis takes into account the impact of bilateral collateral and master netting agreements that allow us to settle all derivative contracts with a single counterparty on a net basis and to offset the net derivative position with the related cash collateral. Total derivative assets and liabilities include these netting adjustments. |
40
Table of Contents
Changes in Level 3 Fair Value Measurements
The following table shows the change in the fair values of our Level 3 financial instruments for the three and nine months ended September 30, 2015, and September 30, 2014. We mitigate the credit risk, interest rate risk, and risk of loss related to many of these Level 3 instruments by using securities and derivative positions classified as Level 1 or Level 2. Level 1 and Level 2 instruments are not included in the following table. Therefore, the gains or losses shown do not include the impact of our risk management activities.
in millions |
Beginning of Period Balance |
Gains (Losses) Included in Earnings |
Purchases | Sales | Settlements | Transfers into Level 3 (d) |
Transfers out of Level 3 (d) |
End of Period Balance (f) |
Unrealized Gains (Losses) Included in Earnings |
|||||||||||||||||||||||||||
Nine months ended September 30, 2015 |
||||||||||||||||||||||||||||||||||||
Securities available for sale |
||||||||||||||||||||||||||||||||||||
Other securities |
$ | 10 | | $ | 7 | | | | | $ | 17 | | ||||||||||||||||||||||||
Other investments |
||||||||||||||||||||||||||||||||||||
Principal investments |
||||||||||||||||||||||||||||||||||||
Direct |
102 | $ | 20 | (b) | 5 | $ | (61 | ) | | | | 66 | | |||||||||||||||||||||||
Indirect |
302 | 33 | (b) | 6 | (70 | ) | | | | 271 | $ | (23 | ) (b) | |||||||||||||||||||||||
Equity and mezzanine investments |
||||||||||||||||||||||||||||||||||||
Direct |
| 2 | (b) | | (2 | ) | | | | | 2 | (b) | ||||||||||||||||||||||||
Indirect |
10 | 6 | (b) | | (7 | ) | | | | 9 | 6 | (b) | ||||||||||||||||||||||||
Other |
4 | | | | | | | 4 | | |||||||||||||||||||||||||||
Derivative instruments (a) |
||||||||||||||||||||||||||||||||||||
Interest rate |
13 | 5 | (c) | 1 | | | $ | 10 | (e) | $ | (7 | ) (e) | 22 | | ||||||||||||||||||||||
Commodity |
| | | | | | | | | |||||||||||||||||||||||||||
Credit |
2 | (7 | ) (c) | | 8 | | | | 3 | | ||||||||||||||||||||||||||
Three months ended September 30, 2015 |
||||||||||||||||||||||||||||||||||||
Securities available for sale |
||||||||||||||||||||||||||||||||||||
Other securities |
$ | 10 | | $ | 7 | | | | | $ | 17 | | ||||||||||||||||||||||||
Other investments |
||||||||||||||||||||||||||||||||||||
Principal investments |
||||||||||||||||||||||||||||||||||||
Direct |
70 | $ | 4 | (b) | 3 | $ | (11 | ) | | | | 66 | $ | 3 | (b) | |||||||||||||||||||||
Indirect |
282 | 8 | (b) | 2 | (21 | ) | | | | 271 | (8 | ) (b) | ||||||||||||||||||||||||
Equity and mezzanine investments |
||||||||||||||||||||||||||||||||||||
Direct |
| | | | | | | | | |||||||||||||||||||||||||||
Indirect |
9 | | | | | | | 9 | | |||||||||||||||||||||||||||
Other |
4 | | | | | | | 4 | | |||||||||||||||||||||||||||
Derivative instruments(a) |
||||||||||||||||||||||||||||||||||||
Interest rate |
16 | 6 | (c) | | | | $ | 2 | (e) | $ | (2 | ) (e) | 22 | | ||||||||||||||||||||||
Commodity |
| | | | | | | | | |||||||||||||||||||||||||||
Credit |
3 | (3 | ) (c) | | 8 | $ | (5 | ) | | | 3 | |
41
Table of Contents
in millions |
Beginning of Period Balance |
Gains (Losses) Included in Earnings |
Purchases | Sales | Settlements | Transfers into Level 3 (d) |
Transfers out of Level 3 (d) |
End of Period Balance (f) |
Unrealized Gains (Losses) Included in Earnings |
|||||||||||||||||||||||||||
Nine months ended September 30, 2014 |
||||||||||||||||||||||||||||||||||||
Securities available for sale |
||||||||||||||||||||||||||||||||||||
Other securities |
| | $ | 10 | | | | | $ | 10 | | |||||||||||||||||||||||||
Other investments |
||||||||||||||||||||||||||||||||||||
Principal investments |
||||||||||||||||||||||||||||||||||||
Direct |
$ | 141 | $ | 9 | (b) | 1 | $ | (36 | ) | | | | 115 | $ | 18 | (b) | ||||||||||||||||||||
Indirect |
413 | 49 | (b) | 8 | (117 | ) | | | | 353 | 8 | (b) | ||||||||||||||||||||||||
Equity and mezzanine investments |
||||||||||||||||||||||||||||||||||||
Direct |
| | | | | | | | | |||||||||||||||||||||||||||
Indirect |
23 | (1 | ) (b) | | (9 | ) | | | | 13 | (1 | ) (b) | ||||||||||||||||||||||||
Other |
4 | | | | | | | 4 | | |||||||||||||||||||||||||||
Derivative instruments (a) |
||||||||||||||||||||||||||||||||||||
Interest rate |
25 | 2 | (c) | 3 | (2 | ) | | $ | 7 | (e) | $ | (16 | ) (e) | 19 | | |||||||||||||||||||||
Commodity |
| | (1 | ) | | | 1 | (e) | (1 | ) (e) | (1 | ) | | |||||||||||||||||||||||
Credit |
3 | (7 | ) (c) | | | $ | 7 | | | 3 | | |||||||||||||||||||||||||
Three months ended September 30, 2014 |
||||||||||||||||||||||||||||||||||||
Securities available for sale |
||||||||||||||||||||||||||||||||||||
Other securities |
| | $ | 10 | | | | | $ | 10 | | |||||||||||||||||||||||||
Other investments |
||||||||||||||||||||||||||||||||||||
Principal investments |
||||||||||||||||||||||||||||||||||||
Direct |
$ | 146 | $ | (2 | ) (b) | | $ | (29 | ) | | | | 115 | $ | (2 | ) (b) | ||||||||||||||||||||
Indirect |
399 | 9 | (b) | 3 | (58 | ) | | | | 353 | (4 | ) (b) | ||||||||||||||||||||||||
Equity and mezzanine investments |
||||||||||||||||||||||||||||||||||||
Direct |
| | | | | | | | | |||||||||||||||||||||||||||
Indirect |
16 | | | (3 | ) | | | | 13 | | ||||||||||||||||||||||||||
Other |
4 | | | | | | | 4 | | |||||||||||||||||||||||||||
Derivative instruments(a) |
||||||||||||||||||||||||||||||||||||
Interest rate |
20 | | | | | $ | 2 | (e) | $ | (3 | ) (e) | 19 | | |||||||||||||||||||||||
Commodity |
1 | | (1 | ) | | | | (1 | ) (e) | (1 | ) | | ||||||||||||||||||||||||
Credit |
3 | (2 | ) (c) | | | $ | 2 | | | 3 | |
(a) | Amounts represent Level 3 derivative assets less Level 3 derivative liabilities. |
(b) | Realized and unrealized gains and losses on principal investments are reported in net gains (losses) from principal investing on the income statement. Realized and unrealized losses on other and private equity and mezzanine investments are reported in other income on the income statement. |
(c) | Realized and unrealized gains and losses on derivative instruments are reported in corporate services income and other income on the income statement. |
(d) | Our policy is to recognize transfers into and transfers out of Level 3 as of the end of the reporting period. |
(e) | Certain derivatives previously classified as Level 2 were transferred to Level 3 because Level 3 unobservable inputs became significant. Certain derivatives previously classified as Level 3 were transferred to Level 2 because Level 3 unobservable inputs became less significant. |
(f) | There were no issuances for the nine-month periods ended September 30, 2015, and September 30, 2014. |
42
Table of Contents
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis in accordance with GAAP. The adjustments to fair value generally result from the application of accounting guidance that requires assets and liabilities to be recorded at the lower of cost or fair value, or assessed for impairment. There were no liabilities measured at fair value on a nonrecurring basis at September 30, 2015, December 31, 2014, and September 30, 2014. The following table presents our assets measured at fair value on a nonrecurring basis at September 30, 2015, December 31, 2014, and September 30, 2014:
September 30, 2015 | ||||||||||||||||
in millions |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
ASSETS MEASURED ON A NONRECURRING BASIS |
||||||||||||||||
Impaired loans |
| | $ | 3 | $ | 3 | ||||||||||
Loans held for sale (a) |
| | | | ||||||||||||
Accrued income and other assets |
| | 6 | 6 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets on a nonrecurring basis at fair value |
| | $ | 9 | $ | 9 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2014 | ||||||||||||||||
in millions |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
ASSETS MEASURED ON A NONRECURRING BASIS |
||||||||||||||||
Impaired loans |
| | $ | 5 | $ | 5 | ||||||||||
Loans held for sale (a) |
| | | | ||||||||||||
Accrued income and other assets |
| | 7 | 7 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets on a nonrecurring basis at fair value |
| | $ | 12 | $ | 12 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
September 30, 2014 | ||||||||||||||||
in millions |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
ASSETS MEASURED ON A NONRECURRING BASIS |
||||||||||||||||
Impaired loans |
| | $ | 6 | $ | 6 | ||||||||||
Loans held for sale (a) |
| | | | ||||||||||||
Accrued income and other assets |
| | 4 | 4 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets on a nonrecurring basis at fair value |
| | $ | 10 | $ | 10 | ||||||||||
|
|
|
|
|
|
|
|
(a) | During the first nine months of 2015, we transferred $24 million of commercial and consumer loans and leases at their current fair value from held-for-sale status to the held-to-maturity portfolio, compared to $11 million during 2014, and $10 million during the first nine months of 2014. |
Impaired loans. We typically adjust the carrying amount of our impaired loans when there is evidence of probable loss and the expected fair value of the loan is less than its contractual amount. The amount of the impairment may be determined based on the estimated present value of future cash flows, the fair value of the underlying collateral, or the loans observable market price. Impaired loans with a specifically allocated allowance based on cash flow analysis or the value of the underlying collateral are classified as Level 3 assets. Impaired loans with a specifically allocated allowance based on an observable market price that reflects recent sale transactions for similar loans and collateral are classified as Level 2 assets.
The evaluations for impairment are prepared by the responsible relationship managers in our Asset Recovery Group and are reviewed and approved by the Asset Recovery Group Executive. The Asset Recovery Group is part of the Risk Management Group and reports to our Chief Credit Officer. These evaluations are performed in conjunction with the quarterly ALLL process.
Loans are evaluated for impairment on a quarterly basis. Loans included in the previous quarters review are re-evaluated, and if their values have changed materially, the underlying information (loan balance and in most cases, collateral value) is compared. Material differences are evaluated for reasonableness, and the relationship managers and their senior managers consider these differences and determine if any adjustment is necessary. The inputs are developed and substantiated on a quarterly basis based on current borrower developments, market conditions, and collateral values.
The following two internal methods are used to value impaired loans:
| Cash flow analysis considers internally developed inputs, such as discount rates, default rates, costs of foreclosure, and changes in collateral values. |
43
Table of Contents
| The fair value of the collateral, which may take the form of real estate or personal property, is based on internal estimates, field observations, and assessments provided by third-party appraisers. We perform or reaffirm appraisals of collateral-dependent impaired loans at least annually. Appraisals may occur more frequently if the most recent appraisal does not accurately reflect the current market, the debtor is seriously delinquent or chronically past due, or there has been a material deterioration in the performance of the project or condition of the property. Adjustments to outdated appraisals that result in an appraisal value less than the carrying amount of a collateral-dependent impaired loan are reflected in the ALLL. |
Impairment valuations are back-tested each quarter, based on a look-back of actual incurred losses on closed deals previously evaluated for impairment. The overall percent variance of actual net loan charge-offs on closed deals compared to the specific allocations on such deals is considered in determining each quarters specific allocations.
Loans held for sale. Through a quarterly analysis of our loan portfolios held for sale, which include both performing and nonperforming loans, we determine any adjustments necessary to record the portfolios at the lower of cost or fair value in accordance with GAAP. Our analysis concluded that there were no loans held for sale adjusted to fair value at September 30, 2015, December 31, 2014, or September 30, 2014.
Market inputs, including updated collateral values, and reviews of each borrowers financial condition influenced the inputs used in our internal models and other valuation methodologies. The valuations are prepared by the responsible relationship managers or analysts in our Asset Recovery Group and are reviewed and approved by the Asset Recovery Group Executive. Actual gains or losses realized on the sale of various loans held for sale provide a back-testing mechanism for determining whether our valuations of these loans held for sale that are adjusted to fair value are appropriate.
Valuations of performing commercial mortgage and construction loans held for sale are conducted using internal models that rely on market data from sales or nonbinding bids on similar assets, including credit spreads, treasury rates, interest rate curves, and risk profiles. These internal models also rely on our own assumptions about the exit market for the loans and details about individual loans within the respective portfolios. Therefore, we classify these loans as Level 3 assets. The inputs related to our assumptions and other internal loan data include changes in real estate values, costs of foreclosure, prepayment rates, default rates, and discount rates.
Valuations of nonperforming commercial mortgage and construction loans held for sale are based on current agreements to sell the loans or approved discounted payoffs. If a negotiated value is not available, we use third-party appraisals, adjusted for current market conditions. Since valuations are based on unobservable data, these loans are classified as Level 3 assets.
Direct financing leases and operating lease assets held for sale. Our KEF Accounting and Capital Markets groups are responsible for the valuation policies and procedures related to these assets. The Managing Director of the KEF Capital Markets group reports to the President of the KEF line of business. A weekly report is distributed to both groups that lists all equipment finance deals booked in the warehouse portfolio. On a quarterly basis, the KEF Accounting group prepares a detailed held-for-sale roll-forward schedule that is reconciled to the general ledger and the above mentioned weekly report. KEF management uses the held-for-sale roll-forward schedule to determine if an impairment adjustment is necessary in accordance with lower of cost or fair value guidelines.
Valuations of direct financing leases and operating lease assets held for sale are performed using an internal model that relies on market data, such as swap rates and bond ratings, as well as our own assumptions about the exit market for the leases and details about the individual leases in the portfolio. The inputs based on our assumptions include changes in the value of leased items and internal credit ratings. These leases have been classified as Level 3 assets. KEF has master sale and assignment agreements with numerous institutional investors. Historically, multiple quotes are obtained, with the most reasonable formal quotes retained. These nonbinding quotes generally lead to a sale to one of the parties who provided the quote. Leases for which we receive a current nonbinding bid, and the sale is considered probable, may be classified as Level 2. The validity of these quotes is supported by historical and continued dealings with these institutions that have fulfilled the nonbinding quote in the past. In a distressed market where market data is not available, an estimate of the fair value of the leased asset may be used to value the lease, resulting in a Level 3 classification. In an inactive market, the market value of the assets held for sale is determined as the present value of the future cash flows discounted at the current buy rate. KEF Accounting calculates an estimated fair value buy rate based on the credit premium inherent in the relevant bond index and the appropriate swap rate on the measurement date. The amount of the adjustment is calculated as book value minus the present value of future cash flows discounted at the calculated buy rate.
44
Table of Contents
Goodwill and other intangible assets. On a quarterly basis, we review impairment indicators to determine whether we need to evaluate the carrying amount of goodwill and other intangible assets assigned to Key Community Bank and Key Corporate Bank. We also perform an annual impairment test for goodwill. Accounting guidance permits an entity to first assess qualitative factors to determine whether additional goodwill impairment testing is required. However, we did not choose to utilize a qualitative assessment in our annual goodwill impairment testing performed during the fourth quarter of 2014. Fair value of our reporting units is determined using both an income approach (discounted cash flow method) and a market approach (using publicly traded company and recent transactions data), which are weighted equally.
Inputs used include market-available data, such as industry, historical, and expected growth rates, and peer valuations, as well as internally driven inputs, such as forecasted earnings and market participant insights. Since this valuation relies on a significant number of unobservable inputs, we have classified goodwill as Level 3. We use a third-party valuation services provider to perform the annual, and if necessary, any interim, Step 1 valuation process, and to perform a Step 2 analysis, if needed, on our reporting units. Annual and any interim valuations prepared by the third-party valuation services provider are reviewed by the appropriate individuals within Key to ensure that the assumptions used in preparing the analysis are appropriate and properly supported. For additional information on the results of recent goodwill impairment testing, see Note 10 (Goodwill and Other Intangible Assets) beginning on page 173 of our 2014 Form 10-K.
The fair value of other intangible assets is calculated using a cash flow approach. While the calculation to test for recoverability uses a number of assumptions that are based on current market conditions, the calculation is based primarily on unobservable assumptions. Accordingly, these assets are classified as Level 3. Our lines of business, with oversight from our Accounting group, are responsible for routinely, at least quarterly, assessing whether impairment indicators are present. All indicators that signal impairment may exist are appropriately considered in this analysis. An impairment loss is only recognized for a held-and-used long-lived asset if the sum of its estimated future undiscounted cash flows used to test for recoverability is less than its carrying value.
Our primary assumptions include attrition rates, alternative costs of funds, and rates paid on deposits. For additional information on the results of other intangible assets impairment testing, see Note 10 beginning on page 173 of our 2014 Form 10-K.
Other assets. OREO and other repossessed properties are valued based on inputs such as appraisals and third-party price opinions, less estimated selling costs. Generally, we classify these assets as Level 3, but OREO and other repossessed properties for which we receive binding purchase agreements are classified as Level 2. Returned lease inventory is valued based on market data for similar assets and is classified as Level 2. Assets that are acquired through, or in lieu of, loan foreclosures are recorded initially as held for sale at fair value less estimated selling costs at the date of foreclosure. After foreclosure, valuations are updated periodically, and current market conditions may require the assets to be marked down further to a new cost basis.
| Commercial Real Estate Valuation Process: When a loan is reclassified from loan status to OREO because we took possession of the collateral, the Asset Recovery Group Loan Officer, in consultation with our OREO group, obtains a broker price opinion or a third-party appraisal, which is used to establish the fair value of the underlying collateral. The determined fair value of the underlying collateral less estimated selling costs becomes the carrying value of the OREO asset. In addition to valuations from independent third-party sources, our OREO group also writes down the carrying balance of OREO assets once a bona fide offer is contractually accepted, where the accepted price is lower than the current balance of the particular OREO asset. The fair value of OREO property is re-evaluated every 90 days, and the OREO asset is adjusted as necessary. |
| Consumer Real Estate Valuation Process: The Asset Management team within our Risk Operations group is responsible for valuation policies and procedures in this area. The current vendor partner provides monthly reporting of all broker price opinion evaluations, appraisals, and the monthly market plans. Market plans are reviewed monthly, and valuations are reviewed and tested monthly to ensure proper pricing has been established and guidelines are being met. Risk Operations Compliance validates and provides periodic testing of the valuation process. The Asset Management team reviews changes in fair value measurements. Third-party broker price opinions are reviewed every 180 days, and the fair value is written down based on changes to the valuation. External factors are documented and monitored as appropriate. |
45
Table of Contents
Quantitative Information about Level 3 Fair Value Measurements
The range and weighted-average of the significant unobservable inputs used to fair value our material Level 3 recurring and nonrecurring assets at September 30, 2015, December 31, 2014, and September 30, 2014, along with the valuation techniques used, are shown in the following table:
September 30, 2015 dollars in millions |
Fair Value of Level 3 Assets |
Valuation Technique |
Significant Unobservable Input |
Range (Weighted-Average) |
||||||||
Recurring |
||||||||||||
Other investments principal investments direct: |
$ | 66 | Individual analysis of the condition of each investment |
|||||||||
Debt instruments |
EBITDA multiple | N/A (5.40 | ) | |||||||||
Equity instruments of private companies |
EBITDA multiple (where applicable) | 5.40 - 6.50 (6.40 | ) | |||||||||
Equity instruments of public companies |
Market approach | Discount | N/A (6.00 | ) | ||||||||
Nonrecurring |
||||||||||||
Impaired loans |
3 | Fair value of underlying collateral | Discount | 00.00 - 50.00% (14.00% | ) | |||||||
Goodwill |
1,060 | Discounted cash flow and market data | Earnings multiple of peers | 11.40 - 15.90 (12.92 | ) | |||||||
Equity multiple of peers | 1.20 - 1.22 (1.21 | ) | ||||||||||
Control premium | 10.00 - 30.00% (19.70% | ) | ||||||||||
Weighted-average cost of capital | 13.00 - 14.00% (13.52% | ) | ||||||||||
December 31, 2014 dollars in millions |
Fair Value of Level 3 Assets |
Valuation Technique |
Significant Unobservable Input |
Range (Weighted-Average) |
||||||||
Recurring |
||||||||||||
Other investments principal investments direct: |
$ | 102 | Individual analysis of the condition of each investment | |||||||||
Debt instruments |
EBITDA multiple | 5.40 - 6.00 (5.50 | ) | |||||||||
Equity instruments of private companies |
EBITDA multiple (where applicable) | 5.50 - 6.20 (5.80 | ) | |||||||||
Revenue multiple (where applicable) | 4.30 - 4.30 (4.30 | ) | ||||||||||
Nonrecurring |
||||||||||||
Impaired loans |
5 | Fair value of underlying collateral | Discount | 10.00 - 64.00% (62.00% | ) | |||||||
Goodwill |
1,057 | Discounted cash flow and market data | Earnings multiple of peers | 11.40 - 15.90 (12.92 | ) | |||||||
Equity multiple of peers | 1.20 - 1.22 (1.21 | ) | ||||||||||
Control premium | 10.00 - 30.00% (19.70% | ) | ||||||||||
Weighted-average cost of capital | 13.00 - 14.00% (13.52% | ) | ||||||||||
September 30, 2014 dollars in millions |
Fair Value of Level 3 Assets |
Valuation Technique |
Significant Unobservable Input |
Range (Weighted-Average) |
||||||||
Recurring |
||||||||||||
Other investments principal investments direct: |
$ | 115 | Individual analysis of the condition of each investment | |||||||||
Debt instruments |
EBITDA multiple | 6.00 - 6.40 (6.30 | ) | |||||||||
Equity instruments of private companies |
EBITDA multiple (where applicable) | 5.50 - 6.00 (5.70 | ) | |||||||||
Revenue multiple (where applicable) | 4.30 - 4.30 (4.30 | ) | ||||||||||
Nonrecurring |
||||||||||||
Impaired loans |
6 | Fair value of underlying collateral | Discount | 10.00 - 90.00% (24.00% | ) | |||||||
Goodwill |
1,051 | Discounted cash flow and market data | Earnings multiple of peers | 10.10 - 14.40 (11.59 | ) | |||||||
Equity multiple of peers | 1.17 - 1.29 (1.24 | ) | ||||||||||
Control premium | N/A (35.00% | ) | ||||||||||
Weighted-average cost of capital | N/A (13.00% | ) |
46
Table of Contents
Fair Value Disclosures of Financial Instruments
The levels in the fair value hierarchy ascribed to our financial instruments and the related carrying amounts at September 30, 2015, December 31, 2014, and September 30, 2014, are shown in the following table.
September 30, 2015 | ||||||||||||||||||||||||
Fair Value | ||||||||||||||||||||||||
in millions |
Carrying Amount |
Level 1 | Level 2 | Level 3 | Netting Adjustment |
Total | ||||||||||||||||||
ASSETS |
||||||||||||||||||||||||
Cash and short-term investments (a) |
$ | 2,434 | $ | 2,434 | | | | $ | 2,434 | |||||||||||||||
Trading account assets (b) |
811 | 4 | $ | 807 | | | 811 | |||||||||||||||||
Securities available for sale (b) |
14,376 | 11 | 14,348 | $ | 17 | | 14,376 | |||||||||||||||||
Held-to-maturity securities (c) |
4,936 | | 4,940 | | | 4,940 | ||||||||||||||||||
Other investments (b) |
691 | | | 691 | | 691 | ||||||||||||||||||
Loans, net of allowance (d) |
59,295 | | | 57,497 | | 57,497 | ||||||||||||||||||
Loans held for sale (b) |
916 | | | 916 | | 916 | ||||||||||||||||||
Derivative assets (b) |
793 | 120 | 1,593 | 25 | $ | (945 | ) (f) | 793 | ||||||||||||||||
LIABILITIES |
||||||||||||||||||||||||
Deposits with no stated maturity (a) |
$ | 65,624 | | $ | 65,624 | | | $ | 65,624 | |||||||||||||||
Time deposits (e) |
5,449 | $ | 427 | 5,075 | | | 5,502 | |||||||||||||||||
Short-term borrowings (a) |
1,084 | | 677 | | | 677 | ||||||||||||||||||
Long-term debt (e) |
10,310 | 10,146 | 463 | | | 10,609 | ||||||||||||||||||
Derivative liabilities (b) |
676 | 102 | 1,140 | | $ | (566 | ) (f) | 676 | ||||||||||||||||
December 31, 2014 | ||||||||||||||||||||||||
Fair Value | ||||||||||||||||||||||||
in millions |
Carrying Amount |
Level 1 | Level 2 | Level 3 | Netting Adjustment |
Total | ||||||||||||||||||
ASSETS |
||||||||||||||||||||||||
Cash and short-term investments (a) |
$ | 4,922 | $ | 4,922 | | | | $ | 4,922 | |||||||||||||||
Trading account assets (b) |
750 | 2 | $ | 748 | | | 750 | |||||||||||||||||
Securities available for sale (b) |
13,360 | 22 | 13,328 | $ | 10 | | 13,360 | |||||||||||||||||
Held-to-maturity securities (c) |
5,015 | | 4,974 | | | 4,974 | ||||||||||||||||||
Other investments (b) |
760 | 2 | | 758 | | 760 | ||||||||||||||||||
Loans, net of allowance (d) |
56,587 | | | 54,993 | | 54,993 | ||||||||||||||||||
Loans held for sale (b) |
734 | | | 734 | | 734 | ||||||||||||||||||
Derivative assets (b) |
609 | 91 | 1,536 | 16 | $ | (1,034 | ) (f) | 609 | ||||||||||||||||
LIABILITIES |
||||||||||||||||||||||||
Deposits with no stated maturity (a) |
$ | 66,135 | | $ | 66,135 | | | $ | 66,135 | |||||||||||||||
Time deposits (e) |
5,863 | $ | 564 | 5,361 | | | 5,925 | |||||||||||||||||
Short-term borrowings (a) |
998 | | 998 | | | 998 | ||||||||||||||||||
Long-term debt (e) |
7,875 | 7,625 | 626 | | | 8,251 | ||||||||||||||||||
Derivative liabilities (b) |
784 | 77 | 1,248 | $ | 1 | $ | (542 | ) (f) | 784 | |||||||||||||||
September 30, 2014 | ||||||||||||||||||||||||
Fair Value | ||||||||||||||||||||||||
in millions |
Carrying Amount |
Level 1 | Level 2 | Level 3 | Netting Adjustment |
Total | ||||||||||||||||||
ASSETS |
||||||||||||||||||||||||
Cash and short-term investments (a) |
$ | 2,993 | $ | 2,993 | | | | $ | 2,993 | |||||||||||||||
Trading account assets (b) |
965 | 13 | $ | 952 | | | 965 | |||||||||||||||||
Securities available for sale (b) |
12,245 | 22 | 12,213 | $ | 10 | | 12,245 | |||||||||||||||||
Held-to-maturity securities (c) |
4,997 | | 4,911 | | | 4,911 | ||||||||||||||||||
Other investments (b) |
822 | | | 822 | | 822 | ||||||||||||||||||
Loans, net of allowance (d) |
55,351 | | | 53,996 | | 53,996 | ||||||||||||||||||
Loans held for sale (b) |
784 | | | 784 | | 784 | ||||||||||||||||||
Mortgage servicing assets (e) |
308 | | | 370 | | 370 | ||||||||||||||||||
Derivative assets (b) |
413 | 73 | 931 | 22 | $ | (613 | ) (f) | 413 | ||||||||||||||||
LIABILITIES |
||||||||||||||||||||||||
Deposits with no stated maturity (a) |
$ | 62,028 | | $ | 62,028 | | | $ | 62,028 | |||||||||||||||
Time deposits (e) |
6,428 | $ | 556 | 5,937 | | | 6,493 | |||||||||||||||||
Short-term borrowings (a) |
1,653 | 6 | 1,647 | | | 1,653 | ||||||||||||||||||
Long-term debt (e) |
7,172 | 6,854 | 1,202 | | | 8,056 | ||||||||||||||||||
Derivative liabilities (b) |
384 | 55 | 721 | $ | 1 | $ | (393 | ) (f) | 384 |
47
Table of Contents
Valuation Methods and Assumptions
(a) | Fair value equals or approximates carrying amount. The fair value of deposits with no stated maturity does not take into consideration the value ascribed to core deposit intangibles. |
(b) | Information pertaining to our methodology for measuring the fair values of these assets and liabilities is included in the sections entitled Qualitative Disclosures of Valuation Techniques and Assets Measured at Fair Value on a Nonrecurring Basis in this note. |
(c) | Fair values of held-to-maturity securities are determined by using models that are based on security-specific details, as well as relevant industry and economic factors. The most significant of these inputs are quoted market prices, interest rate spreads on relevant benchmark securities, and certain prepayment assumptions. We review the valuations derived from the models to ensure they are reasonable and consistent with the values placed on similar securities traded in the secondary markets. |
(d) | The fair value of loans is based on the present value of the expected cash flows. The projected cash flows are based on the contractual terms of the loans, adjusted for prepayments and use of a discount rate based on the relative risk of the cash flows, taking into account the loan type, maturity of the loan, liquidity risk, servicing costs, and a required return on debt and capital. In addition, an incremental liquidity discount is applied to certain loans, using historical sales of loans during periods of similar economic conditions as a benchmark. The fair value of loans includes lease financing receivables at their aggregate carrying amount, which is equivalent to their fair value. |
(e) | Fair values of time deposits and long-term debt are based on discounted cash flows utilizing relevant market inputs. |
(f) | Netting adjustments represent the amounts recorded to convert our derivative assets and liabilities from a gross basis to a net basis in accordance with applicable accounting guidance. The net basis takes into account the impact of bilateral collateral and master netting agreements that allow us to settle all derivative contracts with a single counterparty on a net basis and to offset the net derivative position with the related cash collateral. Total derivative assets and liabilities include these netting adjustments. |
We use valuation methods based on exit market prices in accordance with applicable accounting guidance. We determine fair value based on assumptions pertaining to the factors that a market participant would consider in valuing the asset. A substantial portion of our fair value adjustments are related to liquidity. During 2014 and the first nine months of 2015, the fair values of our loan portfolios have generally remained stable, primarily due to increasing liquidity in the loan markets. If we were to use different assumptions, the fair values shown in the preceding table could change. Also, because the applicable accounting guidance for financial instruments excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements, the fair value amounts shown in the table above do not, by themselves, represent the underlying value of our company as a whole.
Education lending business. The discontinued education lending business consists of loans in portfolio (recorded at carrying value with appropriate valuation reserves) and loans in portfolio held for sale (recorded at fair value). Prior periods included assets and liabilities (recorded at fair value) in the securitization trusts and loans in portfolio (recorded at fair value) that were outside the trusts. All of these loans were excluded from the table above as follows:
| Loans at carrying value, net of allowance, of $1.9 billion ($1.5 billion at fair value) at September 30, 2015, $2.1 billion ($1.8 billion at fair value) at December 31, 2014, and $2.1 billion ($1.9 billion at fair value) at September 30, 2014; |
| Portfolio loans held for sale at fair value of $169 million at September 30, 2015; and |
| Portfolio loans at fair value of $191 million at December 31, 2014, and $201 million at September 30, 2014. |
These loans and securities are classified as Level 3 because we rely on unobservable inputs when determining fair value since observable market data is not available.
On September 30, 2014, we sold the residual interests in all of our outstanding education loan securitization trusts to a third party. With that transaction, in accordance with the applicable accounting guidance, we deconsolidated the securitization trusts and removed the trust assets and liabilities from our balance sheet at September 30, 2014. Additional information regarding the sale of the residual interests and deconsolidation of the securitization trusts is provided in Note 11.
Residential real estate mortgage loans. Residential real estate mortgage loans with carrying amounts of $2.3 billion at September 30, 2015, and $2.2 billion at both December 31, 2014, and September 30, 2014, are included in Loans, net of allowance in the previous table.
Short-term financial instruments. For financial instruments with a remaining average life to maturity of less than six months, carrying amounts were used as an approximation of fair values.
48
Table of Contents
Securities available for sale. These are securities that we intend to hold for an indefinite period of time but that may be sold in response to changes in interest rates, prepayment risk, liquidity needs, or other factors. Securities available for sale are reported at fair value. Unrealized gains and losses (net of income taxes) deemed temporary are recorded in equity as a component of AOCI on the balance sheet. Unrealized losses on equity securities deemed to be other-than-temporary, and realized gains and losses resulting from sales of securities using the specific identification method, are included in other income on the income statement. Unrealized losses on debt securities deemed to be other-than-temporary are included in other income on the income statement or in AOCI on the balance sheet in accordance with the applicable accounting guidance related to the recognition of OTTI of debt securities.
Other securities held in the available-for-sale portfolio consist of marketable equity securities that are traded on a public exchange such as the NYSE or NASDAQ and convertible preferred stock of a privately held company.
Held-to-maturity securities. These are debt securities that we have the intent and ability to hold until maturity. Debt securities are carried at cost and adjusted for amortization of premiums and accretion of discounts using the interest method. This method produces a constant rate of return on the adjusted carrying amount.
Other securities held in the held-to-maturity portfolio consist of foreign bonds and capital securities.
Unrealized losses on equity securities deemed to be other-than-temporary, and realized gains and losses resulting from sales of securities using the specific identification method, are included in other income on the income statement. Unrealized losses on debt securities deemed to be other-than-temporary are included in other income on the income statement or in AOCI on the balance sheet in accordance with the applicable accounting guidance related to the recognition of OTTI of debt 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 tables. Gross unrealized gains and losses represent the difference between the amortized cost and the fair value of securities on the balance sheet as of the dates indicated. Accordingly, the amount of these gains and losses may change in the future as market conditions change.
49
Table of Contents
September 30, 2015 | ||||||||||||||||
in millions |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
SECURITIES AVAILABLE FOR SALE |
||||||||||||||||
States and political subdivisions |
$ | 14 | $ | 1 | | $ | 15 | |||||||||
Collateralized mortgage obligations |
11,938 | 127 | $ | 62 | 12,003 | |||||||||||
Other mortgage-backed securities |
2,309 | 22 | 1 | 2,330 | ||||||||||||
Other securities |
27 | 1 | | 28 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total securities available for sale |
$ | 14,288 | $ | 151 | $ | 63 | $ | 14,376 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
HELD-TO-MATURITY SECURITIES |
||||||||||||||||
Collateralized mortgage obligations |
$ | 4,299 | $ | 24 | 23 | $ | 4,300 | |||||||||
Other mortgage-backed securities |
617 | 3 | | 620 | ||||||||||||
Other securities |
20 | | | 20 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total held-to-maturity securities |
$ | 4,936 | $ | 27 | $ | 23 | $ | 4,940 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2014 | ||||||||||||||||
in millions |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
SECURITIES AVAILABLE FOR SALE |
||||||||||||||||
States and political subdivisions |
$ | 22 | $ | 1 | | $ | 23 | |||||||||
Collateralized mortgage obligations |
11,310 | 96 | $ | 136 | 11,270 | |||||||||||
Other mortgage-backed securities |
2,004 | 32 | 1 | 2,035 | ||||||||||||
Other securities |
29 | 3 | | 32 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total securities available for sale |
$ | 13,365 | $ | 132 | $ | 137 | $ | 13,360 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
HELD-TO-MATURITY SECURITIES |
||||||||||||||||
Collateralized mortgage obligations |
$ | 4,755 | $ | 15 | $ | 57 | $ | 4,713 | ||||||||
Other mortgage-backed securities |
240 | 1 | | 241 | ||||||||||||
Other securities |
20 | | | 20 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total held-to-maturity securities |
$ | 5,015 | $ | 16 | $ | 57 | $ | 4,974 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
September 30, 2014 | ||||||||||||||||
in millions |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
SECURITIES AVAILABLE FOR SALE |
||||||||||||||||
States and political subdivisions |
$ | 26 | $ | 1 | | $ | 27 | |||||||||
Collateralized mortgage obligations |
10,096 | 109 | $ | 196 | 10,009 | |||||||||||
Other mortgage-backed securities |
2,156 | 24 | 3 | 2,177 | ||||||||||||
Other securities |
28 | 4 | | 32 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total securities available for sale |
$ | 12,306 | $ | 138 | $ | 199 | $ | 12,245 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
HELD-TO-MATURITY SECURITIES |
||||||||||||||||
Collateralized mortgage obligations |
$ | 4,977 | $ | 10 | $ | 96 | $ | 4,891 | ||||||||
Other securities |
20 | | | 20 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total held-to-maturity securities |
$ | 4,997 | $ | 10 | $ | 96 | $ | 4,911 | ||||||||
|
|
|
|
|
|
|
|
50
Table of Contents
The following table summarizes our securities that were in an unrealized loss position as of September 30, 2015, December 31, 2014, and September 30, 2014.
Duration of Unrealized Loss Position | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
in millions |
Fair Value | Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
Fair Value | Gross Unrealized Losses |
||||||||||||||||||
September 30, 2015 |
||||||||||||||||||||||||
Securities available for sale: |
||||||||||||||||||||||||
Collateralized mortgage obligations |
$ | 770 | $ | 3 | $ | 3,348 | $ | 59 | $ | 4,118 | $ | 62 | ||||||||||||
Other mortgage-backed securities |
420 | 1 | | | 420 | 1 | ||||||||||||||||||
Other securities (a) |
2 | | 3 | | 5 | | ||||||||||||||||||
Held-to-maturity: |
||||||||||||||||||||||||
Collateralized mortgage obligations |
214 | 1 | 1,355 | 22 | 1,569 | 23 | ||||||||||||||||||
Other mortgage-backed securities |
110 | | | | 110 | | ||||||||||||||||||
Other securities (b) |
4 | | | | 4 | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total temporarily impaired securities |
$ | 1,520 | $ | 5 | $ | 4,706 | $ | 81 | $ | 6,226 | $ | 86 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
December 31, 2014 |
||||||||||||||||||||||||
Securities available for sale: |
||||||||||||||||||||||||
Collateralized mortgage obligations |
$ | 3,019 | $ | 52 | $ | 2,932 | $ | 84 | $ | 5,951 | $ | 136 | ||||||||||||
Other mortgage-backed securities |
| | 78 | 1 | 78 | 1 | ||||||||||||||||||
Other securities (a) |
4 | | 2 | | 6 | | ||||||||||||||||||
Held-to-maturity: |
||||||||||||||||||||||||
Collateralized mortgage obligations |
1,005 | 11 | 1,994 | 46 | 2,999 | 57 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total temporarily impaired securities |
$ | 4,028 | $ | 63 | $ | 5,006 | $ | 131 | $ | 9,034 | $ | 194 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
September 30, 2014 |
||||||||||||||||||||||||
Securities available for sale: |
||||||||||||||||||||||||
Collateralized mortgage obligations |
$ | 605 | $ | 7 | $ | 4,379 | $ | 189 | $ | 4,984 | $ | 196 | ||||||||||||
Other mortgage-backed securities |
811 | 1 | 81 | 2 | 892 | 3 | ||||||||||||||||||
Other securities (a) |
1 | | 2 | | 3 | | ||||||||||||||||||
Held-to-maturity: |
||||||||||||||||||||||||
Collateralized mortgage obligations |
1,288 | 13 | 2,342 | 83 | 3,630 | 96 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total temporarily impaired securities |
$ | 2,705 | $ | 21 | $ | 6,804 | $ | 274 | $ | 9,509 | $ | 295 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(a) | Gross unrealized losses totaled less than $1 million for other securities available for sale as of September 30, 2015, December 31, 2014, and September 30, 2014. |
(b) | Gross unrealized losses totaled less than $1 million for other securities held-to-maturity as of September 30, 2015. |
At September 30, 2015, we had $62 million of gross unrealized losses related to 56 fixed-rate CMOs that we invested in as part of our overall A/LM strategy. These securities had a weighted-average maturity of 4.2 years at September 30, 2015. We also had $1 million of gross unrealized losses related to 17 other mortgage-backed securities positions, which had a weighted-average maturity of 5.2 years at September 30, 2015. Because these securities have a fixed interest rate, their fair value is sensitive to movements in market interest rates. These unrealized losses are considered temporary since we expect to collect all contractually due amounts from these securities. Accordingly, these investments were reduced to their fair value through OCI, not earnings.
We regularly assess our securities portfolio for OTTI. The assessments are based on the nature of the securities, the underlying collateral, the financial condition of the issuer, the extent and duration of the loss, our intent related to the individual securities, and the likelihood that we will have to sell securities prior to expected recovery.
The debt securities identified as other-than-temporarily impaired are written down to their current fair value. For those debt securities that we intend to sell, or more-likely-than-not will be required to sell, prior to the expected recovery of the amortized cost, the entire impairment (i.e., the difference between amortized cost and the fair value) is recognized in earnings. For those debt securities that we do not intend to sell, or more-likely-than-not will not be required to sell, prior to expected recovery, the credit portion of OTTI is recognized in earnings, while the remaining OTTI is recognized in equity as a component of AOCI on the balance sheet. As shown in the following table, we did not have any impairment losses recognized in earnings for the three months ended September 30, 2015.
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Three months ended September 30, 2015 | ||||
in millions |
||||
Balance at June 30, 2015 |
$ | 4 | ||
Impairment recognized in earnings |
| |||
|
|
|||
Balance at September 30, 2015 |
$ | 4 | ||
|
|
Realized gains and losses related to securities available for sale were as follows:
Nine months ended September 30, 2015 | ||||
in millions |
||||
Realized gains |
| |||
Realized losses |
$ | 1 | ||
|
|
|||
Net securities gains (losses) |
$ | (1 | ) | |
|
|
At September 30, 2015, securities available for sale and held-to-maturity securities totaling $6.5 billion were pledged to secure securities sold under repurchase agreements, to secure public and trust deposits, to facilitate access to secured funding, and for other purposes required or permitted by law.
The following table shows securities by remaining maturity. CMOs and other mortgage-backed securities (both of which are included in the securities available-for-sale portfolio) as well as the CMOs in the held-to-maturity portfolio are presented based on their expected average lives. The remaining securities, in both the available-for-sale and held-to-maturity portfolios, are presented based on their remaining contractual maturity. Actual maturities may differ from expected or contractual maturities since borrowers have the right to prepay obligations with or without prepayment penalties.
Securities Available for Sale |
Held-to-Maturity Securities |
|||||||||||||||
September 30, 2015 in millions |
Amortized Cost |
Fair Value |
Amortized Cost |
Fair Value |
||||||||||||
Due in one year or less |
$ | 297 | $ | 302 | $ | 9 | $ | 9 | ||||||||
Due after one through five years |
12,659 | 12,735 | 4,310 | 4,311 | ||||||||||||
Due after five through ten years |
1,329 | 1,336 | 617 | 620 | ||||||||||||
Due after ten years |
3 | 3 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 14,288 | $ | 14,376 | $ | 4,936 | $ | 4,940 | ||||||||
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|
|
|
|
|
|
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7. Derivatives and Hedging Activities
We are a party to various derivative instruments, mainly through our subsidiary, KeyBank. Derivative instruments are contracts between two or more parties that have a notional amount and an underlying variable, require a small or no net investment, and allow for the net settlement of positions. A derivatives notional amount serves as the basis for the payment provision of the contract, and takes the form of units, such as shares or dollars. A derivatives underlying variable is a specified interest rate, security price, commodity price, foreign exchange rate, index, or other variable. The interaction between the notional amount and the underlying variable determines the number of units to be exchanged between the parties and influences the fair value of the derivative contract.
The primary derivatives that we use are interest rate swaps, caps, floors, and futures; foreign exchange contracts; commodity derivatives; and credit derivatives. Generally, these instruments help 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. As further discussed in this note:
| interest rate risk represents the possibility that the EVE or net interest income will be adversely affected by fluctuations in interest rates; |
| credit risk is the risk of loss arising from an obligors inability or failure to meet contractual payment or performance terms; and |
| foreign exchange risk is the risk that an exchange rate will adversely affect the fair value of a financial instrument. |
Derivative assets and liabilities are recorded at fair value on the balance sheet, after taking into account the effects of bilateral collateral and master netting agreements. These agreements allow us to settle all derivative contracts held with a single counterparty on a net basis, and to offset net derivative positions with related cash collateral, where applicable. As a result, we could have derivative contracts with negative fair values included in derivative assets on the balance sheet and contracts with positive fair values included in derivative liabilities.
At September 30, 2015, after taking into account the effects of bilateral collateral and master netting agreements, we had $157 million of derivative assets and a positive $34 million of derivative liabilities that relate to contracts entered into for hedging purposes. Our hedging derivative liabilities are in an asset position largely because we have contracts with positive fair values as a result of master netting agreements. As of the same date, after taking into account the effects of bilateral collateral and master netting agreements and a reserve for potential future losses, we had derivative assets of $636 million and derivative liabilities of $710 million that were not designated as hedging instruments.
Additional information regarding our accounting policies for derivatives is provided in Note 1 (Summary of Significant Accounting Policies) under the heading Derivatives beginning on page 121 of our 2014 Form 10-K.
Derivatives Designated in Hedge Relationships
Net interest income and the EVE change in response to changes in the mix of assets, liabilities, and off-balance sheet instruments; associated interest rates tied to each instrument; differences in the repricing and maturity characteristics of interest-earning assets and interest-bearing liabilities; and changes in interest rates. We utilize derivatives that have been designated as part of a hedge relationship in accordance with the applicable accounting guidance to minimize the exposure and volatility of net interest income and EVE to interest rate fluctuations. The primary derivative instruments used to manage interest rate risk are interest rate swaps, which convert the contractual interest rate index of agreed-upon amounts of assets and liabilities (i.e., notional amounts) to another interest rate index.
We designate certain receive fixed/pay variable interest rate swaps as fair value hedges. These contracts convert certain fixed-rate long-term debt into variable-rate obligations, thereby modifying our exposure to changes in interest rates. As a result, we receive fixed-rate interest payments in exchange for making variable-rate payments over the lives of the contracts without exchanging the notional amounts.
Similarly, we designate certain receive fixed/pay variable interest rate swaps as cash flow hedges. These contracts effectively convert certain floating-rate loans into fixed-rate loans to reduce the potential adverse effect of interest rate decreases on future interest income. Again, we receive fixed-rate interest payments in exchange for making variable-rate payments over the lives of the contracts without exchanging the notional amounts.
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We also designate certain pay fixed/receive variable interest rate swaps as cash flow hedges. These swaps convert certain floating-rate debt into fixed-rate debt. We also use these swaps to manage the interest rate risk associated with anticipated sales of certain commercial real estate loans. The swaps protect against the possible short-term decline in the value of the loans that could result from changes in interest rates between the time they are originated and the time they are sold.
Interest rate swaps are also used to hedge the floating-rate debt that funds fixed-rate leases entered into by our equipment finance line of business. These swaps are designated as cash flow hedges to mitigate the interest rate mismatch between the fixed-rate lease cash flows and the floating-rate payments on the debt. These hedge relationships were terminated during the quarter ended March 31, 2014.
We use foreign currency forward transactions to hedge the foreign currency exposure of our net investment in various foreign equipment finance entities. These entities are denominated in a non-U.S. currency. These swaps are designated as net investment hedges to mitigate the exposure of measuring the net investment at the spot foreign exchange rate.
Derivatives Not Designated in Hedge Relationships
On occasion, we enter into interest rate swap contracts to manage economic risks but do not designate the instruments in hedge relationships. Excluding contracts addressing customer exposures, the amount of derivatives hedging risks on an economic basis at September 30, 2015, was not significant.
Like other financial services institutions, we originate loans and extend credit, both of which expose us to credit risk. We actively manage our overall loan portfolio and the associated credit risk in a manner consistent with asset quality objectives and concentration risk tolerances to mitigate portfolio credit risk. Purchasing credit default swaps enables us to transfer to a third party a portion of the credit risk associated with a particular extension of credit, including situations where there is a forecasted sale of loans. Beginning in the first quarter of 2014, we began purchasing credit default swaps to reduce the credit risk associated with the debt securities held in our trading portfolio. We may also sell credit derivatives to offset our purchased credit default swap position prior to maturity. Although we use credit default swaps for risk management purposes, they are not treated as hedging instruments.
We also enter into derivative contracts for other purposes, including:
| interest rate swap, cap, and floor contracts entered into generally to accommodate the needs of commercial loan clients; |
| energy and base metal swap and options contracts entered into to accommodate the needs of clients; |
| futures contracts and positions with third parties that are intended to offset or mitigate the interest rate or market risk related to client positions discussed above; and |
| foreign exchange forward contracts and options entered into primarily to accommodate the needs of clients. |
These contracts are not designated as part of hedge relationships.
Fair Values, Volume of Activity, and Gain/Loss Information Related to Derivative Instruments
The following table summarizes the fair values of our derivative instruments on a gross and net basis as of September 30, 2015, December 31, 2014, and September 30, 2014. The change in the notional amounts of these derivatives by type from December 31, 2014, to September 30, 2015, indicates the volume of our derivative transaction activity during the first nine months of 2015. The notional amounts are not affected by bilateral collateral and master netting agreements. The derivative asset and liability balances are presented on a gross basis, prior to the application of bilateral collateral and master netting agreements. Total derivative assets and liabilities are adjusted to take into account the impact of legally enforceable master netting agreements that allow us to settle all derivative contracts with a single counterparty on a net basis and to offset the net derivative position with the related cash collateral. Where master netting agreements are not in effect or are not enforceable under bankruptcy laws, we do not adjust those derivative assets and liabilities with counterparties. Securities collateral related to legally enforceable master netting agreements is not offset on the balance sheet. Our derivative instruments are included in derivative assets or derivative liabilities on the balance sheet, as indicated in the following table:
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September 30, 2015 | December 31, 2014 | September 30, 2014 | ||||||||||||||||||||||||||||||||||
Fair Value | Fair Value | Fair Value | ||||||||||||||||||||||||||||||||||
Notional | Derivative | Derivative | Notional | Derivative | Derivative | Notional | Derivative | Derivative | ||||||||||||||||||||||||||||
in millions |
Amount | Assets | Liabilities | Amount | Assets | Liabilities | Amount | Assets | Liabilities | |||||||||||||||||||||||||||
Derivatives designated as hedging instruments: |
||||||||||||||||||||||||||||||||||||
Interest rate |
$ | 17,910 | $ | 394 | $ | 12 | $ | 15,095 | $ | 272 | $ | 26 | $ | 13,946 | $ | 237 | $ | 44 | ||||||||||||||||||
Foreign exchange |
319 | 11 | | 371 | 8 | | 413 | 13 | | |||||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total |
18,229 | 405 | 12 | 15,466 | 280 | 26 | 14,359 | 250 | 44 | |||||||||||||||||||||||||||
Derivatives not designated as hedging instruments: |
||||||||||||||||||||||||||||||||||||
Interest rate |
57,006 | 725 | 644 | 43,771 | 665 | 618 | 42,088 | 608 | 572 | |||||||||||||||||||||||||||
Foreign exchange |
6,161 | 119 | 112 | 4,024 | 85 | 81 | 4,433 | 69 | 64 | |||||||||||||||||||||||||||
Commodity |
1,394 | 482 | 469 | 1,544 | 608 | 594 | 1,780 | 95 | 90 | |||||||||||||||||||||||||||
Credit |
580 | 7 | 5 | 512 | 5 | 7 | 618 | 4 | 7 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total |
65,141 | 1,333 | 1,230 | 49,851 | 1,363 | 1,300 | 48,919 | 776 | 733 | |||||||||||||||||||||||||||
Netting adjustments (a) |
| (945 | ) | (566 | ) | | (1,034 | ) | (542 | ) | | (613 | ) | (393 | ) | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Net derivatives in the balance sheet |
83,370 | 793 | 676 | 65,317 | 609 | 784 | 63,278 | 413 | 384 | |||||||||||||||||||||||||||
Other collateral (b) |
| (113 | ) | (232 | ) | | (155 | ) | (241 | ) | | (71 | ) | (268 | ) | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Net derivative amounts |
$ | 83,370 | $ | 680 | $ | 444 | $ | 65,317 | $ | 454 | $ | 543 | $ | 63,278 | $ | 342 | $ | 116 | ||||||||||||||||||
|
|
|
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|
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|
|
|
|
|
|
(a) | Netting adjustments represent the amounts recorded to convert our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance. |
(b) | Other collateral represents the amount that cannot be used to offset our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance. The other collateral consists of securities and is exchanged under bilateral collateral and master netting agreements that allow us to offset the net derivative position with the related collateral. The application of the other collateral cannot reduce the net derivative position below zero. Therefore, excess other collateral, if any, is not reflected above. |
Fair value hedges. Instruments designated as fair value hedges are recorded at fair value and included in derivative assets or derivative liabilities on the balance sheet. The effective portion of a change in the fair value of an instrument designated as a fair value hedge is recorded in earnings at the same time as a change in fair value of the hedged item, resulting in no effect on net income. The ineffective portion of a change in the fair value of such a hedging instrument is recorded in other income on the income statement with no corresponding offset. During the nine-month period ended September 30, 2015, we did not exclude any portion of these hedging instruments from the assessment of hedge effectiveness. While there is some immaterial ineffectiveness in our hedging relationships, all of our fair value hedges remained highly effective as of September 30, 2015.
The following table summarizes the pre-tax net gains (losses) on our fair value hedges for the nine-month periods ended September 30, 2015, and September 30, 2014, and where they are recorded on the income statement.
Nine months ended September 30, 2015 |
||||||||||||||||
Net Gains | Net Gains | |||||||||||||||
Income Statement Location of | (Losses) on | Income Statement Location of | (Losses) on | |||||||||||||
in millions |
Net Gains (Losses) on Derivative |
Derivative | Hedged Item |
Net Gains (Losses) on Hedged Item |
Hedged Item | |||||||||||
Interest rate |
Other income | $ | 66 | Long-term debt | Other income | $ | (66 | ) (a) | ||||||||
Interest rate |
Interest expense Long-term debt | 91 | ||||||||||||||
|
|
|
|
|||||||||||||
Total |
$ | 157 | $ | (66 | ) | |||||||||||
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|
|
Nine months ended September 30, 2014 |
||||||||||||||||
Net Gains | Net Gains | |||||||||||||||
Income Statement Location of | (Losses) on | Income Statement Location of | (Losses) on | |||||||||||||
in millions |
Net Gains (Losses) on Derivative |
Derivative | Hedged Item |
Net Gains (Losses) on Hedged Item |
Hedged Item | |||||||||||
Interest rate |
Other income | $ | (21 | ) | Long-term debt | Other income | $ | 21 | (a) | |||||||
Interest rate |
Interest expense Long-term debt | 91 | ||||||||||||||
|
|
|
|
|||||||||||||
Total |
$ | 70 | $ | 21 | ||||||||||||
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|
|
(a) | Net gains (losses) on hedged items represent the change in fair value caused by fluctuations in interest rates. |
Cash flow hedges. Instruments designated as cash flow hedges are recorded at fair value and included in derivative assets or derivative liabilities on the balance sheet. Initially, the effective portion of a gain or loss on a cash flow hedge is recorded as a component of AOCI on the balance sheet. This amount is subsequently reclassified into income when the hedged transaction affects earnings (e.g., when we pay variable-rate interest on debt, receive variable-rate interest on commercial loans, or sell commercial real estate loans). The ineffective portion of cash flow hedging transactions is included in other income on the income statement. During the nine-month period ended September 30, 2015, we did not exclude any portion of these hedging instruments from the assessment of hedge effectiveness. While there is some immaterial ineffectiveness in our hedging relationships, all of our cash flow hedges remained highly effective as of September 30, 2015.
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Considering the interest rates, yield curves, and notional amounts as of September 30, 2015, we would expect to reclassify an estimated $37 million of after-tax net losses on derivative instruments from AOCI to income during the next 12 months for our cash flow hedges. In addition, we expect to reclassify approximately $1 million of net losses related to terminated cash flow hedges from AOCI to income during the next 12 months. As of September 30, 2015, the maximum length of time over which we hedge forecasted transactions is 13 years.
Net investment hedges. We enter into foreign currency forward contracts to hedge our exposure to changes in the carrying value of our investments as a result of changes in the related foreign exchange rates. Instruments designated as net investment hedges are recorded at fair value and included in derivative assets or derivative liabilities on the balance sheet. Initially, the effective portion of a gain or loss on a net investment hedge is recorded as a component of AOCI on the balance sheet when the terms of the derivative match the notional and currency risk being hedged. The effective portion is subsequently reclassified into income when the hedged transaction affects earnings (e.g., when we dispose of or liquidate a foreign subsidiary). At September 30, 2015, AOCI reflected unrecognized after-tax gains totaling $35 million related to cumulative changes in the fair value of our net investment hedges, which offset the unrecognized after-tax foreign currency losses on net investment balances. The ineffective portion of net investment hedging transactions is included in other income on the income statement, but there was no net investment hedge ineffectiveness as of September 30, 2015. We did not exclude any portion of our hedging instruments from the assessment of hedge effectiveness during the nine-month period ended September 30, 2015.
The following table summarizes the pre-tax net gains (losses) on our cash flow and net investment hedges for the nine-month periods ended September 30, 2015, and September 30, 2014, and where they are recorded on the income statement. The table includes the effective portion of net gains (losses) recognized in OCI during the period, the effective portion of net gains (losses) reclassified from OCI into income during the current period, and the portion of net gains (losses) recognized directly in income, representing the amount of hedge ineffectiveness.
Nine months ended September 30, 2015 | ||||||||||||||||
in millions |
Net Gains (Losses) Recognized in OCI (Effective Portion) |
Income Statement |
Net Gains (Losses) Reclassified From OCI Into Income (Effective Portion) |
Income Statement (Ineffective Portion) |
Net Gains (Losses) Recognized in Income (Ineffective Portion) |
|||||||||||
Cash Flow Hedges |
||||||||||||||||
Interest rate |
$ | 147 | Interest income Loans | $ | 73 | Other income | | |||||||||
Interest rate |
(3 | ) | Interest expense Long-term debt | (3 | ) | Other income | | |||||||||
Interest rate |
(3 | ) | Investment banking and debt placement fees | | Other income | | ||||||||||
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|
|||||||||||
Net Investment Hedges |
||||||||||||||||
Foreign exchange contracts |
29 | Other Income | | Other income | | |||||||||||
|
|
|
|
|
|
|||||||||||
Total |
$ | 170 | $ | 70 | | |||||||||||
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|
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|
|
|
Nine months ended September 30, 2014 | ||||||||||||||||
in millions |
Net Gains (Losses) Recognized in OCI (Effective Portion) |
Income Statement |
Net Gains (Losses) Reclassified From OCI Into Income (Effective Portion) |
Income Statement Income |
Net Gains (Losses) Recognized in Income (Ineffective Portion) |
|||||||||||
Cash Flow Hedges |
||||||||||||||||
Interest rate |
$ | 27 | Interest income Loans | $ | 49 | Other income | | |||||||||
Interest rate |
(5 | ) | Interest expense Long-term debt | (3 | ) | Other income | | |||||||||
Interest rate |
(1 | ) | Investment banking and debt placement fees | | Other income | | ||||||||||
|
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|
|||||||||||
Net Investment Hedges |
||||||||||||||||
Foreign exchange contracts |
17 | Other Income | | Other income | | |||||||||||
|
|
|
|
|
|
|||||||||||
Total |
$ | 38 | $ | 46 | | |||||||||||
|
|
|
|
|
|
The after-tax change in AOCI resulting from cash flow and net investment hedges is as follows:
in millions |
December 31, 2014 |
2015 Hedging Activity |
Reclassification of Gains to Net Income |
September 30, 2015 |
||||||||||||
AOCI resulting from cash flow and net investment hedges |
$ | (8 | ) | $ | 107 | $ | (44 | ) | $ | 55 |
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Table of Contents
Nonhedging instruments. Our derivatives that are not designated as hedging instruments are recorded at fair value in derivative assets and derivative liabilities on the balance sheet. Adjustments to the fair values of these instruments, as well as any premium paid or received, are included in corporate services income and other income on the income statement.
The following table summarizes the pre-tax net gains (losses) on our derivatives that are not designated as hedging instruments for the nine-month periods ended September 30, 2015, and September 30, 2014, and where they are recorded on the income statement.
Nine months ended September 30, 2015 | Nine months ended September 30, 2014 | |||||||||||||||||||||||
Corporate | Corporate | |||||||||||||||||||||||
Services | Other | Services | Other | |||||||||||||||||||||
in millions |
Income | Income | Total | Income | Income | Total | ||||||||||||||||||
NET GAINS (LOSSES) |
||||||||||||||||||||||||
Interest rate |
$ | 18 | | $ | 18 | $ | 11 | | $ | 11 | ||||||||||||||
Foreign exchange |
27 | | 27 | 25 | | 25 | ||||||||||||||||||
Commodity |
5 | | 5 | 3 | | 3 | ||||||||||||||||||
Credit |
| $ | (10 | ) | (10 | ) | | $ | (16 | ) | (16 | ) | ||||||||||||
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|||||||||||||
Total net gains (losses) |
$ | 50 | $ | (10 | ) | $ | 40 | $ | 39 | $ | (16 | ) | $ | 23 | ||||||||||
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|
Counterparty Credit Risk
Like other financial instruments, derivatives contain an element of credit risk. This risk is measured as the expected positive replacement value of the contracts. We use several means to mitigate and manage exposure to credit risk on derivative contracts. We generally enter into bilateral collateral and master netting agreements that provide for the net settlement of all contracts with a single counterparty in the event of default. Additionally, we monitor counterparty credit risk exposure on each contract to determine appropriate limits on our total credit exposure across all product types. We review our collateral positions on a daily basis and exchange collateral with our counterparties in accordance with standard ISDA documentation, central clearing rules, and other related agreements. We generally hold collateral in the form of cash and highly rated securities issued by the U.S. Treasury, government-sponsored enterprises, or GNMA. The cash collateral netted against derivative assets on the balance sheet totaled $394 million at September 30, 2015, $518 million at December 31, 2014, and $230 million at September 30, 2014. The cash collateral netted against derivative liabilities totaled $14 million at September 30, 2015, $26 million at December 31, 2014, and $10 million at September 30, 2014. The relevant agreements that allow us to access the central clearing organizations to clear derivative transactions are not considered to be qualified master netting agreements. Therefore, we cannot net derivative contracts or offset those contracts with related cash collateral with these counterparties. At September 30, 2015, we posted $112 million of cash collateral with clearing organizations and held $105 million of cash collateral from clearing organizations. At December 31, 2014, we posted $56 million of cash collateral with clearing organizations and did not hold any cash collateral from clearing organizations. At September 30, 2014, we posted $51 million of cash collateral with clearing organizations and did not hold any cash collateral from clearing organizations. This additional cash collateral is included in accrued income and other assets and accrued expense and other liabilities on the balance sheet.
The following table summarizes our largest exposure to an individual counterparty at the dates indicated.
in millions |
September 30, 2015 |
December 31, 2014 |
September 30, 2014 |
|||||||||
Largest gross exposure (derivative asset) to an individual counterparty |
$ | 137 | $ | 133 | $ | 106 | ||||||
Collateral posted by this counterparty |
55 | 100 | 44 | |||||||||
Derivative liability with this counterparty |
78 | 31 | 103 | |||||||||
Collateral pledged to this counterparty |
| | 47 | |||||||||
Net exposure after netting adjustments and collateral |
4 | 2 | 6 |
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Table of Contents
The following table summarizes the fair value of our derivative assets by type at the dates indicated. These assets represent our gross exposure to potential loss after taking into account the effects of bilateral collateral and master netting agreements and other means used to mitigate risk.
in millions |
September 30, 2015 |
December 31, 2014 |
September 30, 2014 |
|||||||||
Interest rate |
$ | 807 | $ | 607 | $ | 556 | ||||||
Foreign exchange |
48 | 41 | 39 | |||||||||
Commodity |
328 | 478 | 47 | |||||||||
Credit |
4 | 1 | 1 | |||||||||
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|
|
|||||||
Derivative assets before collateral |
1,187 | 1,127 | 643 | |||||||||
Less: Related collateral |
394 | 518 | 230 | |||||||||
|
|
|
|
|
|
|||||||
Total derivative assets |
$ | 793 | $ | 609 | $ | 413 | ||||||
|
|
|
|
|
|
We enter into derivative transactions with two primary groups: broker-dealers and banks, and clients. Since these groups have different economic characteristics, we have different methods for managing counterparty credit exposure and credit risk.
We enter into transactions with broker-dealers and banks for various risk management purposes. These types of transactions generally are high dollar volume. We generally enter into bilateral collateral and master netting agreements with these counterparties. We began clearing certain types of derivative transactions with these counterparties in June 2013, whereby the central clearing organizations become our counterparties subsequent to novation of the original derivative contracts. In addition, we began entering into derivative contracts through swap execution facilities during the quarter ended March 31, 2014. The swap clearing and swap trade execution requirements were mandated by the Dodd-Frank Act for the purpose of reducing counterparty credit risk and increasing transparency in the derivative market. At September 30, 2015, we had gross exposure of $952 million to broker-dealers and banks. We had net exposure of $303 million after the application of master netting agreements and cash collateral, where such qualifying agreements exist. We had net exposure of $172 million after considering $131 million of additional collateral held in the form of securities.
We enter into transactions with clients to accommodate their business needs. These types of transactions generally are low dollar volume. We generally enter into master netting agreements with these counterparties. In addition, we mitigate our overall portfolio exposure and market risk by buying and selling U.S. Treasuries and Eurodollar futures, and entering into offsetting positions and other derivative contracts, sometimes with entities other than broker-dealers and banks. Due to the smaller size and magnitude of the individual contracts with clients, we generally do not exchange collateral in connection with these derivative transactions. To address the risk of default associated with the uncollateralized contracts, we have established a credit valuation adjustment (included in derivative assets) in the amount of $8 million at September 30, 2015, which we estimate to be the potential future losses on amounts due from client counterparties in the event of default. At September 30, 2015, we had gross exposure of $525 million to client counterparties and other entities that are not broker-dealers or banks for derivatives that have associated master netting agreements. We had net exposure of $490 million on our derivatives with these counterparties after the application of master netting agreements, collateral, and the related reserve. In addition, the derivatives for one counterparty were guaranteed by a third party with a letter of credit totaling $30 million.
Credit Derivatives
We are both a buyer and seller of credit protection through the credit derivative market. We purchase credit derivatives to manage the credit risk associated with specific commercial lending and swap obligations as well as exposures to debt securities. We may also sell credit derivatives, mainly single-name credit default swaps, to offset our purchased credit default swap position prior to maturity.
The following table summarizes the fair value of our credit derivatives purchased and sold by type as of September 30, 2015, December 31, 2014, and September 30, 2014. The fair value of credit derivatives presented below does not take into account the effects of bilateral collateral or master netting agreements.
September 30, 2015 | December 31, 2014 | September 30, 2014 | ||||||||||||||||||||||||||||||||||
in millions |
Purchased | Sold | Net | Purchased | Sold | Net | Purchased | Sold | Net | |||||||||||||||||||||||||||
Single-name credit default swaps |
$ | (2 | ) | | $ | (2 | ) | $ | (3 | ) | | $ | (3 | ) | $ | (1 | ) | | $ | (1 | ) | |||||||||||||||
Traded credit default swap indices |
4 | | 4 | 1 | | 1 | (2 | ) | | (2 | ) | |||||||||||||||||||||||||
Other (a) |
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$ | 2 | | $ | 2 | $ | (2 | ) | | $ | (2 | ) | $ | (3 | ) | | $ | (3 | ) | |||||||||||||||||
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(a) | As of September 30, 2015, December 31, 2014, and September 30, 2014, the fair value of other credit derivatives sold totaled less than $1 million. |
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Single-name credit default swaps are bilateral contracts whereby the seller agrees, for a premium, to provide protection against the credit risk of a specific entity (the reference entity) in connection with a specific debt obligation. The protected credit risk is related to adverse credit events, such as bankruptcy, failure to make payments, and acceleration or restructuring of obligations, identified in the credit derivative contract. As the seller of a single-name credit derivative, we may settle in one of two ways if the underlying reference entity experiences a predefined credit event. We may be required to pay the purchaser the difference between the par value and the market price of the debt obligation (cash settlement) or receive the specified referenced asset in exchange for payment of the par value (physical settlement). If we effect a physical settlement and receive our portion of the related debt obligation, we will join other creditors in the liquidation process, which may enable us to recover a portion of the amount paid under the credit default swap contract. We also may purchase offsetting credit derivatives for the same reference entity from third parties that will permit us to recover the amount we pay should a credit event occur.
A traded credit default swap index represents a position on a basket or portfolio of reference entities. As a seller of protection on a credit default swap index, we would be required to pay the purchaser if one or more of the entities in the index had a credit event. Upon a credit event, the amount payable is based on the percentage of the notional amount allocated to the specific defaulting entity.
The majority of transactions represented by the other category shown in the above table are risk participation agreements. In these transactions, the lead participant has a swap agreement with a customer. The lead participant (purchaser of protection) then enters into a risk participation agreement with a counterparty (seller of protection), under which the counterparty receives a fee to accept a portion of the lead participants credit risk. If the customer defaults on the swap contract, the counterparty to the risk participation agreement must reimburse the lead participant for the counterpartys percentage of the positive fair value of the customer swap as of the default date. If the customer swap has a negative fair value, the counterparty has no reimbursement requirements. If the customer defaults on the swap contract and the seller fulfills its payment obligations under the risk participation agreement, the seller is entitled to a pro rata share of the lead participants claims against the customer under the terms of the swap agreement.
The following table provides information on the types of credit derivatives sold by us and held on the balance sheet at September 30, 2015, December 31, 2014, and September 30, 2014. The notional amount represents the maximum amount that the seller could be required to pay. The payment/performance risk assessment is based on the default probabilities for the underlying reference entities debt obligations using a Moodys credit ratings matrix known as Moodys Idealized Cumulative Default Rates. The payment/performance risk shown in the table represents a weighted-average of the default probabilities for all reference entities in the respective portfolios. These default probabilities are directly correlated to the probability that we will have to make a payment under the credit derivative contracts.
September 30, 2015 | December 31, 2014 | September 30, 2014 | ||||||||||||||||||||||||||||||||||
Average | Payment / | Average | Payment / | Average | Payment / | |||||||||||||||||||||||||||||||
Notional | Term | Performance | Notional | Term | Performance | Notional | Term | Performance | ||||||||||||||||||||||||||||
dollars in millions |
Amount | (Years) | Risk | Amount | (Years) | Risk | Amount | (Years) | Risk | |||||||||||||||||||||||||||
Single-name credit default swaps |
| | | $ | 5 | .72 | .87 | % | $ | 5 | .97 | .87 | % | |||||||||||||||||||||||
Other |
$ | 9 | 2.95 | 7.45 | % | 6 | 2.89 | 9.58 | 6 | 2.92 | 5.59 | |||||||||||||||||||||||||
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$ | 9 | | | $ | 11 | | | $ | 11 | | | ||||||||||||||||||||||||
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Credit Risk Contingent Features
We have entered into certain derivative contracts that require us to post collateral to the counterparties when these contracts are in a net liability position. The amount of collateral to be posted is based on the amount of the net liability and thresholds generally related to our long-term senior unsecured credit ratings with Moodys and S&P. Collateral requirements also are based on minimum transfer amounts, which are specific to each Credit Support Annex (a component of the ISDA Master Agreement) that we have signed with the counterparties. In a limited number of instances, counterparties have the right to terminate their ISDA Master Agreements with us if our ratings fall below a certain level, usually investment-grade level (i.e., Baa3 for Moodys and BBB- for S&P). At September 30, 2015, KeyBanks rating was A3 with Moodys and A- with S&P, and KeyCorps rating was Baa1 with Moodys and BBB+ with S&P. As of September 30, 2015, the aggregate fair value of all derivative contracts with credit risk contingent features (i.e., those containing collateral posting or termination provisions based on our ratings) held by KeyBank that were in a net liability position totaled $249 million, which includes $216 million in derivative assets and $465 million in derivative liabilities. We had $232 million in cash and securities collateral posted to cover those positions as of September 30, 2015. The aggregate fair value of all derivative contracts with credit risk contingent features held by KeyCorp as of September 30, 2015, that were in a net liability position totaled $8 million, which consists solely of derivative liabilities. We had $8 million in collateral posted to cover those positions as of September 30, 2015.
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The following table summarizes the additional cash and securities collateral that KeyBank would have been required to deliver under the ISDA Master Agreements had the credit risk contingent features been triggered for the derivative contracts in a net liability position as of September 30, 2015, December 31, 2014, and September 30, 2014. The additional collateral amounts were calculated based on scenarios under which KeyBanks ratings are downgraded one, two, or three ratings as of September 30, 2015, December 31, 2014, and September 30, 2014, and take into account all collateral already posted. A similar calculation was performed for KeyCorp, and no additional collateral would have been required as of September 30, 2015, while additional collateral of less than $1 million as of December 31, 2014, and $3 million as of September 30, 2014, would have been required. For more information about the credit ratings for KeyBank and KeyCorp, see the discussion under the heading Factors affecting liquidity in the section entitled Liquidity risk management in Item 2 of this report.
September 30, 2015 | December 31, 2014 | September 30, 2014 | ||||||||||||||||||||||
in millions |
Moodys | S&P | Moodys | S&P | Moodys | S&P | ||||||||||||||||||
KeyBanks long-term senior unsecured credit ratings |
A3 | A- | A3 | A- | A3 | A- | ||||||||||||||||||
One rating downgrade |
$ | 4 | $ | 4 | $ | 1 | $ | 1 | $ | 1 | $ | 1 | ||||||||||||
Two rating downgrades |
5 | 5 | 1 | 1 | 4 | 4 | ||||||||||||||||||
Three rating downgrades |
6 | 6 | 3 | 3 | 6 | 6 |
KeyBanks long-term senior unsecured credit rating is currently four ratings above noninvestment grade at Moodys and S&P. If KeyBanks ratings had been downgraded below investment grade as of September 30, 2015, payments of up to $7 million would have been required to either terminate the contracts or post additional collateral for those contracts in a net liability position, taking into account all collateral already posted. If KeyCorps ratings had been downgraded below investment grade as of September 30, 2015, payments of less than $1 million would have been required to either terminate the contracts or post additional collateral for those contracts in a net liability position, taking into account all collateral already posted.
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We originate and periodically sell commercial mortgage loans but continue to service those loans for the buyers. We also may purchase the right to service commercial mortgage loans for other lenders. We record a servicing asset if we purchase or retain the right to service loans in exchange for servicing fees that exceed the going market servicing rate and are considered more than adequate compensation for servicing. Changes in the carrying amount of mortgage servicing assets are summarized as follows:
Nine months ended September 30, | ||||||||
in millions | 2015 | 2014 | ||||||
Balance at beginning of period |
$ | 323 | $ | 332 | ||||
Servicing retained from loan sales |
39 | 19 | ||||||
Purchases |
29 | 33 | ||||||
Amortization |
(71 | ) | (76 | ) | ||||
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$ | 320 | $ | 308 | ||||
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$ | 427 | $ | 370 | ||||
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The fair value of mortgage servicing assets is determined by calculating the present value of future cash flows associated with servicing the loans. This calculation uses a number of assumptions that are based on current market conditions. The range and weighted-average of the significant unobservable inputs used to fair value our mortgage servicing assets at September 30, 2015, and September 30, 2014, along with the valuation techniques, are shown in the following table:
September 30, 2015 dollars in millions |
Valuation Technique |
Significant Unobservable Input |
Range (Weighted-Average) | |||
Mortgage servicing assets |
Discounted cash flow | Prepayment speed | 1.70 - 16.30% (4.90%) | |||
Expected defaults | 1.00 - 3.00% (1.70%) | |||||
Residual cash flows discount rate | 7.00 - 15.00% (7.80%) | |||||
Escrow earn rate | 0.90 - 3.50% (2.30%) | |||||
Servicing cost | $150 - $2,719 ($1,151) | |||||
Loan assumption rate | 0.00 - 3.00% (1.37%) | |||||
Percentage late | 0.00 - 2.00% (0.33%) |
September 30, 2014 dollars in millions |
Valuation Technique |
Significant Unobservable Input |
Range (Weighted-Average) | |||
Mortgage servicing assets |
Discounted cash flow | Prepayment speed | 1.90 - 12.30% (5.90%) | |||
Expected defaults | 1.00 - 3.00% (1.90%) | |||||
Residual cash flows discount rate | 7.00 - 14.10% (7.80%) | |||||
Escrow earn rate | 0.50 - 3.10% (1.70%) | |||||
Servicing cost | $150 - $2,700 ($1,053) | |||||
Loan assumption rate | 0.20 - 3.00% (1.52%) | |||||
Percentage late | 0.00 - 2.00% (0.32%) |
If these economic assumptions change or prove incorrect, the fair value of mortgage servicing assets may also change. Expected credit losses, escrow earn rates, and discount rates are critical to the valuation of servicing assets. Estimates of these assumptions are based on how a market participant would view the respective rates and reflect historical data associated with the loans, industry trends, and other considerations. Actual rates may differ from those estimated due to changes in a variety of economic factors. A decrease in the value assigned to the escrow earn rates would cause a decrease in the fair value of our mortgage servicing assets. An increase in the assumed default rates of commercial mortgage loans or an increase in the assigned discount rates would cause a decrease in the fair value of our mortgage servicing assets.
Contractual fee income from servicing commercial mortgage loans totaled $33 million for the nine-month period ended September 30, 2015, and $35 million for the nine-month period ended September 30, 2014. We have elected to account for servicing assets using the amortization method. The amortization of servicing assets is determined in proportion to, and over the period of, the estimated net servicing income. The amortization of servicing assets for each period, as shown in the table at the beginning of this note, is recorded as a reduction to fee income. Both the contractual fee income and the amortization are recorded in mortgage servicing fees on the income statement.
Additional information pertaining to the accounting for mortgage and other servicing assets is included in Note 1 (Summary of Significant Accounting Policies) under the heading Servicing Assets on page 122 of our 2014 Form 10-K.
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A 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 entitys investors lack the power to direct the activities that most significantly impact the entitys economic performance. |
| The entitys equity at risk holders do not have the obligation to absorb losses or the right to receive residual returns. |
| The voting rights of some investors are not proportional to their economic interests in the entity, and substantially all of the entitys activities involve, or are conducted on behalf of, investors with disproportionately few voting rights. |
Our significant VIEs are summarized below. We define a significant interest in a VIE as a subordinated interest that exposes us to a significant portion, but not the majority, of the VIEs expected losses or residual returns, even though we do not have the power to direct the activities that most significantly impact the entitys economic performance.
On September 30, 2014, we sold the residual interests in all of our outstanding education loan securitization trusts and therefore no longer have a significant interest in those trusts. We deconsolidated the securitization trusts as of September 30, 2014, and removed the trust assets and liabilities from our balance sheet. Further information regarding these education loan securitization trusts is provided in Note 11 (Acquisitions and Discontinued Operations) under the heading Education lending.
During the third quarter of 2015, we noted that not all liabilities related to our unconsolidated VIEs were captured in the table below. The amounts in the Total Liabilities column for our unconsolidated VIEs were revised to incorporate all liabilities for the periods ended December 31, 2014, and September 30, 2014.
Consolidated VIEs | Unconsolidated VIEs | |||||||||||||||||||
Total | Total | Total | Total | Maximum | ||||||||||||||||
in millions |
Assets | Liabilities | Assets | Liabilities | Exposure to Loss | |||||||||||||||
September 30, 2015 |
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LIHTC funds |
$ | 1 | $ | 1 | $ | 26 | $ | 14 | | |||||||||||
LIHTC investments |
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KCDC |
N/A | N/A | 834 | 271 | $ | 543 | ||||||||||||||
KAHC |
N/A | N/A | 260 | 231 | 14 | |||||||||||||||
December 31, 2014 |
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LIHTC funds |
$ | 1 | $ | 1 | $ | 55 | $ | 36 | | |||||||||||
LIHTC investments |
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KCDC |
N/A | N/A | 764 | 258 | $ | 507 | ||||||||||||||
KAHC |
N/A | N/A | 470 | 462 | 14 | |||||||||||||||
September 30, 2014 |
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LIHTC funds |
$ | 1 | $ | 2 | $ | 55 | $ | 36 | | |||||||||||
LIHTC investments |
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KCDC |
N/A | N/A | 775 | 263 | $ | 498 | ||||||||||||||
KAHC |
N/A | N/A | 470 | 462 | 9 |
Our involvement with VIEs is described below.
Consolidated VIEs
LIHTC guaranteed funds. KAHC formed limited partnership funds that invested in LIHTC operating partnerships. Interests in these funds were offered in syndication to qualified investors who paid a fee to KAHC for a guaranteed return. We also earned syndication fees from the guaranteed funds and continue to earn asset management fees. The guaranteed funds assets, primarily investments in LIHTC operating partnerships, totaled $1 million at September 30, 2015, December 31, 2014, and September 30, 2014. These investments are recorded in accrued income and other assets on the balance sheet and serve as collateral for the guaranteed funds limited obligations, which are recorded in accrued expense and other liabilities on the balance sheet.
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We have not formed new guaranteed funds or added LIHTC partnerships since October 2003. However, we continue to act as asset manager and to provide occasional funding for existing funds under a guarantee obligation. As a result of this guarantee obligation, we have determined that we are the primary beneficiary of these guaranteed funds. Additional information on return guarantee agreements with LIHTC investors is presented in Note 15 (Contingent Liabilities and Guarantees) under the heading Guarantees.
In accordance with the applicable accounting guidance for distinguishing liabilities from equity, third-party interests associated with our LIHTC guaranteed funds are considered mandatorily redeemable instruments and are recorded in accrued expense and other liabilities on the balance sheet. However, the FASB has indefinitely deferred the measurement and recognition provisions of this accounting guidance for mandatorily redeemable third-party interests associated with finite-lived subsidiaries, such as our LIHTC guaranteed funds. We adjust our financial statements each period for the third-party investors share of the guaranteed funds profits and losses. At September 30, 2015, we estimated the settlement value of these third-party interests to be between zero and $4 million, while the recorded value, including reserves, totaled $4 million. Information regarding our exposure to loss in connection with these guaranteed funds is included in Note 15 under the heading Return guarantee agreement with LIHTC investors. The partnership agreement for each of our guaranteed funds requires the fund to be dissolved by a certain date.
Unconsolidated VIEs
LIHTC nonguaranteed funds. Although we hold interests in certain nonguaranteed funds that we formed and funded, we have determined that we are not the primary beneficiary because we do not absorb the majority of the funds expected losses and do not have the power to direct activities that most significantly influence the economic performance of these entities. Our maximum exposure to loss in connection with these funds is minimal and represents the remaining investment balance. We do not have any liability recorded related to the funds. We have not formed nonguaranteed funds since October 2003.
LIHTC investments. Through KCDC, 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 with the underlying properties. We have determined that we are not the primary beneficiary of these investments because the general partners have the power to direct the activities that most significantly influence the economic performance of their respective partnerships and have the obligation to absorb expected losses and the right to receive benefits. Our maximum exposure to loss in connection with these partnerships consists of our unamortized investment balance plus any unfunded equity commitments and tax credits claimed but subject to recapture. These investments are recorded in other investments on the balance sheet. We do not have any liability recorded related to these investments because we believe the likelihood of any loss is remote. We continue to invest in these LIHTC operating partnerships.
Through KAHC, we have additional investments in unconsolidated LIHTC operating partnerships that are held by the consolidated LIHTC guaranteed funds. The tax credits and deductions associated with these properties are allocated to the funds investors based on their ownership percentages. We have determined that we are not the primary beneficiary of these partnerships because the general partners have the power to direct the activities that most significantly impact their economic performance and have the obligation to absorb expected losses and the right to receive residual returns. Our maximum exposure to loss in connection with these partnerships consists of our remaining investment balance. These investments are recorded in other investments on the balance sheet. Information regarding our exposure to loss in connection with these guaranteed funds is described above in the consolidated LIHTC guaranteed funds section and is also included in Note 15 under the heading Return guarantee agreement with LIHTC investors. We have not obtained any significant direct investments (either individually or in the aggregate) in LIHTC operating partnerships since September 2003.
We amortize our LIHTC investments over the period that we expect to receive the tax benefits. During the first nine months of 2015, we recognized $85 million of amortization and $99 million of tax credits associated with these investments within income taxes on our income statement. During the first nine months of 2014, we recognized $72 million of amortization and $84 million of tax credits associated with these investments within income taxes on our income statement. We had $1 billion and $926 million of investments in LIHTC operating partnerships at September 30, 2015, and September 30, 2014, respectively. These investments are recorded in accrued income and other assets on our balance sheet.
Commercial and residential real estate investments and principal investments. Our Principal Investing unit and the Real Estate Capital line of business make equity and mezzanine investments, some of which are in VIEs. These investments are held by nonregistered investment companies subject to the provisions of the AICPA Audit and Accounting Guide, Audits of Investment Companies. We currently are not applying the accounting or disclosure provisions in the applicable accounting guidance for consolidations to these investments, which remain unconsolidated. The FASB had previously deferred the effective date of this guidance for such nonregistered investment companies. New accounting guidance was issued in February 2015 that removes this deferral. The effective date for this guidance is January 1, 2016, for us. Additional information regarding this new accounting guidance is provided in Note 1 (Basis of Presentation and Accounting Policies).
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Income Tax Provision
In accordance with the applicable accounting guidance, the principal method established for computing the provision for income taxes in interim periods requires us to make our best estimate of the effective tax rate expected to be applicable for the full year. This estimated effective tax rate is then applied to interim consolidated pre-tax operating income to determine the interim provision for income taxes.
The effective tax rate, which is the provision for income taxes as a percentage of income from continuing operations before income taxes, was 24.4% for the third quarter of 2015 and 24.1% for the third quarter of 2014. The effective tax rates are below our combined federal and state statutory tax rate of 37.2% primarily due to income from investments in tax-advantaged assets such as corporate-owned life insurance and credits associated with investments in low-income housing projects.
Deferred Tax Asset
At September 30, 2015, from continuing operations, we had a net federal deferred tax asset of $190 million and a net state deferred tax asset of $26 million, compared to a net federal deferred tax asset of $174 million and a net state deferred tax asset of $20 million at December 31, 2014, and a net federal deferred tax asset of $153 million and a net state deferred tax asset of $19 million at September 30, 2014, included in accrued income and other assets on the balance sheet. To determine the amount of deferred tax assets that are more-likely-than-not to be realized, and therefore recorded, we conduct a quarterly assessment of all available evidence. This evidence includes, but is not limited to, taxable income in prior periods, projected future taxable income, and projected future reversals of deferred tax items. These assessments involve a degree of subjectivity and may undergo change. Based on these criteria, we had a valuation allowance of less than $1 million at September 30, 2015, and at December 31, 2014, and $1 million at September 30, 2014, associated with certain state net operating loss carryforwards and state credit carryforwards.
Unrecognized Tax Benefits
As permitted under the applicable accounting guidance for income taxes, it is our policy to recognize interest and penalties related to unrecognized tax benefits in income tax expense.
Deferred tax assets were reduced in the financial statements for unrecognized tax benefits by $2.8 million at September 30, 2015, and by $1 million at both December 31, 2014, and September 30, 2014.
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11. Acquisitions and Discontinued Operations
Acquisitions
Pacific Crest Securities. On September 3, 2014, we acquired Pacific Crest Securities, a leading technology-focused investment bank and capital markets firm based in Portland, Oregon. This acquisition, which was accounted for as a business combination, expanded our corporate and investment banking business unit and added technology to our other industry verticals. During the fourth quarter of 2014, we recorded identifiable intangible assets of $13 million and goodwill of $78 million in Key Corporate Bank for this acquisition. During the third quarter of 2015, goodwill increased $3 million to account for a tax item associated with the business combination. The identifiable intangible assets and the goodwill related to this acquisition are non-deductible for tax purposes. Additional information regarding the identifiable intangible assets and the goodwill related to this acquisition is provided in Note 10 (Goodwill and Other Intangible Assets) beginning on page 173 of our 2014 Form 10-K.
Discontinued operations
Education lending. In September 2009, we decided to exit the government-guaranteed education lending business. As a result, we have accounted for this business as a discontinued operation.
As of January 1, 2010, we consolidated our 10 outstanding education lending securitization trusts since we held the residual interests and are the master servicer with the power to direct the activities that most significantly influence the economic performance of the trusts.
On September 30, 2014, we sold the residual interests in all of our outstanding education lending securitization trusts to a third party for $57 million. In selling the residual interests, we no longer have the obligation to absorb losses or the right to receive benefits related to the securitization trusts. Therefore, in accordance with the applicable accounting guidance, we deconsolidated the securitization trusts and removed trust assets of $1.7 billion and trust liabilities of $1.6 billion from our balance sheet at September 30, 2014. As part of the sale and deconsolidation, we recognized an after-tax loss of $25 million, which was recorded in income (loss) from discontinued operations, net of tax on our income statement. We continue to service the securitized loans in eight of the securitization trusts and receive servicing fees, whereby we are adequately compensated, as well as remain a counterparty to derivative contracts with three of the securitization trusts. We retained interests in the securitization trusts through our ownership of an insignificant percentage of certificates in two of the securitization trusts and two interest-only strips in one of the securitization trusts. These retained interests were remeasured at fair value on September 30, 2014, and their fair value of $1 million was recorded in discontinued assets on our balance sheet. These assets were valued using a similar approach and inputs that have been used to value the education loan securitization trust loans and securities, which are further discussed later in this note.
Income (loss) from discontinued operations, net of taxes on the income statement includes (i) the changes in fair value of the assets and liabilities of the education loan securitization trusts, the loans at fair value in portfolio, and the loans held for sale at fair value in portfolio (discussed later in this note), and (ii) the interest income and expense from the loans and the securities of the trusts, the loans in portfolio, and the loans held for sale in portfolio at both amortized cost and fair value. These amounts are shown separately in the following table. Gains and losses attributable to changes in fair value are recorded as a component of noninterest income or noninterest expense. Interest income and interest expense related to the loans and securities are included as components of net interest income.
The components of income (loss) from discontinued operations, net of taxes for the education lending business are as follows:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
in millions |
2015 | 2014 | 2015 | 2014 | ||||||||||||
Net interest income |
$ | 9 | $ | 21 | $ | 29 | $ | 67 | ||||||||
Provision for credit losses |
7 | 5 | 9 | 15 | ||||||||||||
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Net interest income after provision for credit losses |
2 | 16 | 20 | 52 | ||||||||||||
Noninterest income |
(2 | ) | (41 | ) | 1 | (111 | ) | |||||||||
Noninterest expense |
5 | 7 | 13 | 19 | ||||||||||||
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Income (loss) before income taxes |
(5 | ) | (32 | ) | 8 | (78 | ) | |||||||||
Income taxes |
(2 | ) | (12 | ) | 3 | (29 | ) | |||||||||
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Income (loss) from discontinued operations, net of taxes (a) |
$ | (3 | ) | $ | (20 | ) | $ | 5 | $ | (49 | ) | |||||
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(a) | Includes after-tax charges of $7 million and $9 million for the three-month periods ended September 30, 2015, and September 30, 2014, respectively, and $18 million and $26 million for the nine-month periods ended September 30, 2015, and September 30, 2014, respectively, determined by applying a matched funds transfer pricing methodology to the liabilities assumed necessary to support the discontinued operations. |
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The discontinued assets of our education lending business included on the balance sheet are as follows. There were no discontinued liabilities for the periods presented below.
September 30, | December 31, | September 30, | ||||||||||
in millions |
2015 | 2014 | 2014 | |||||||||
Held-to-maturity securities |
$ | 1 | $ | 1 | $ | 1 | ||||||
Portfolio loans at fair value |
| 191 | 201 | |||||||||
Loans, net of unearned income (a) |
1,891 | 2,104 | 2,174 | |||||||||
Less: Allowance for loan and lease losses |
23 | 29 | 31 | |||||||||
|
|
|
|
|
|
|||||||
Net loans |
1,868 | 2,266 | 2,344 | |||||||||
Portfolio loans held for sale at fair value |
169 | | | |||||||||
Accrued income and other assets |
33 | 38 | 40 | |||||||||
|
|
|
|
|
|
|||||||
Total assets |
$ | 2,071 | $ | 2,305 | $ | 2,385 | ||||||
|
|
|
|
|
|
(a) | At September 30, 2015, December 31, 2014, and September 30, 2014, unearned income was less than $1 million. |
The discontinued education lending business consisted of loans in portfolio (recorded at fair value) and loans in portfolio (recorded at carrying value with appropriate valuation reserves). As of June 30, 2015, we decided to sell the portfolio loans that are recorded at fair value, and these loans were reclassified to portfolio loans held for sale at fair value within discontinued operations. The assets and liabilities in the securitization trusts (recorded at fair value) were removed with the deconsolidation of the securitization trusts on September 30, 2014.
At September 30, 2015, education loans included 1,845 TDRs with a recorded investment of approximately $20 million (pre-modification and post-modification). A specifically allocated allowance of $2 million was assigned to these loans as of September 30, 2015. There have been no significant payment defaults. There are no significant commitments outstanding to lend additional funds to these borrowers. Additional information regarding TDR classification and ALLL methodology is provided in Note 4 (Asset Quality).
In the past, as part of our education lending business model, we originated and securitized education loans. The process of securitization involved taking a pool of loans from our balance sheet and selling them to a bankruptcy-remote qualifying special purpose entity, or trust. This trust then issued securities to investors in the capital markets to raise funds to pay for the loans. The cash flows generated from the loans pays holders of the securities issued. As the transferor, we retained a portion of the risk in the form of a residual interest and also retained the right to service the securitized loans and receive servicing fees.
The trust assets can be used only to settle the obligations or securities the trusts issue; the assets cannot be sold and the liabilities cannot be transferred. The loans in the trusts consist of both private and government-guaranteed loans. The security holders or beneficial interest holders do not have recourse to Key. We no longer had economic interest or risk of loss associated with these education loan securitization trusts as of September 30, 2014, and therefore, the securitization trusts were deconsolidated. During the second quarter of 2014, additional market information became available. Based on this information and our related internal analysis, we adjusted certain assumptions related to valuing the loans in the securitization trusts. As a result, we recognized a net after-tax loss of $22 million during the second quarter of 2014 related to the fair value of the loans and securities in the securitization trusts. These losses resulted in a reduction in the value of our economic interest in these trusts. We record all income and expense (including fair value adjustments) through income (loss) from discontinued operations, net of tax on our income statement.
On June 27, 2014, we purchased the private loans from one of the education loan securitization trusts through the execution of a clean-up call option. The trust used the cash proceeds from the sale of these loans to retire the outstanding securities related to these private loans, and there are no future commitments or obligations to the holders of the securities. The portfolio loans were valued using an internal discounted cash flow method, which was affected by assumptions for defaults, expected credit losses, discount rates, and prepayments. The portfolio loans are considered to be Level 3 assets since we rely on unobservable inputs when determining fair value.
At September 30, 2015, there were loans held for sale with a contractual amount of $173 million that were previously purchased from three of the outstanding securitizations trusts pursuant to the legal terms of these particular trusts. These loans were transferred to held for sale in June 2015 and continue to be accounted for at fair value. As of September 30, 2015, the portfolio loans held for sale were valued based on indicative bids to sell the loans. These portfolio loans were previously
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valued using an internal discounted cash flow model, which was affected by assumptions for defaults, loss severity, discount rates, and prepayments. These loans are considered Level 3 assets since we rely on unobservable inputs when determining fair value. Our valuation process for these loans as well as the trust loans and securities is discussed in more detail below. Portfolio loans held for sale accounted for at fair value had a value of $169 million at September 30, 2015. On October 29, 2015, $117 million of these loans were sold. Portfolio loans accounted for at fair value had a value of $191 million at December 31, 2014, and $201 million at September 30, 2014.
When we first consolidated the education loan securitization trusts, we made an election to record them at fair value. Carrying the assets and liabilities of the trusts at fair value better depicted our economic interest. The fair value of the assets and liabilities of the trusts was determined by calculating the present value of the future expected cash flows. We relied on unobservable inputs (Level 3) when determining the fair value of the assets and liabilities of the trusts because observable market data was not available. Our valuation process is described in more detail below.
Corporate Treasury, within our Finance area, is responsible for the quarterly valuation process that previously determined the fair value of our student loans held in portfolio that were accounted for at fair value and for our loans and securities in our education loan securitization trusts. Corporate Treasury provided these fair values to a Working Group Committee (the Working Group) comprising representatives from the line of business, Credit and Market Risk Management, Accounting, Business Finance (part of our Finance area), and Corporate Treasury. The Working Group is a subcommittee of the Fair Value Committee that is discussed in more detail in Note 5 (Fair Value Measurements). The Working Group reviewed all significant inputs and assumptions and approved the resulting fair values.
The Working Group reviewed actual performance trends of the loans on a quarterly basis and used statistical analysis and qualitative measures to determine assumptions for future performance. Predictive models that incorporate delinquency and charge-off trends along with economic outlooks assisted the Working Group to forecast future defaults. The Working Group used this information to formulate the credit outlook related to the loans. Higher projected defaults, fewer expected recoveries, elevated prepayment speeds, and higher discount rates would be expected to result in a lower fair value of the portfolio loans at fair value. Default expectations and discount rate changes had the most significant impact on the fair values of the loans. Increased cash flow uncertainty, whether through higher defaults and prepayments or fewer recoveries, can result in higher discount rates for use in the fair value process for these loans. This process was previously used in the valuation of the education loan securitization trust loans.
The valuation process for the portfolio loans that were accounted for at fair value was based on a discounted cash flow analysis using a model purchased from a third party and maintained by Corporate Treasury. The valuation process began with loan-level data that was aggregated into pools based on underlying loan structural characteristics (i.e., current unpaid principal balance, contractual term, interest rate). Cash flows for these loan pools were developed using a financial model that reflected certain assumptions for defaults, recoveries, status changes, and prepayments. A net earnings stream, taking into account cost of funding, was calculated and discounted back to the measurement date using an appropriate discount rate. This resulting amount was used to determine the present value of the loans, which represented their fair value to a market participant.
The unobservable inputs set forth in the following table are reviewed and approved by the Working Group on a quarterly basis. The Working Group determines these assumptions based on available data, discussions with appropriate individuals within and outside of Key, and the knowledge and experience of the Working Group members.
A similar discounted cash flow approach to that described above was used on a quarterly basis by Corporate Treasury to determine the fair value of the trust securities. In valuing these securities, the discount rates used were provided by a third-party valuation consultant. These discount rates were based primarily on secondary market spread indices for similar student loans and asset-backed securities and were developed by the consultant using market-based data. On a quarterly basis, the Working Group reviewed the discount rate inputs used in the valuation process for reasonableness.
A quarterly variance analysis reconciled valuation changes in the model used to calculate the fair value of the trust loans and securities and the portfolio loans at fair value. This quarterly analysis considered loan and securities run-off, yields, future default and recovery changes, and the timing of cash releases to us from the trusts. We also performed back-testing to compare expected defaults to actual experience; the impact of future defaults could significantly affect the fair value of these loans and securities over time. In addition, our internal model validation group periodically performed a review to ensure the accuracy and validity of the model for determining the fair value of these loans and securities.
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The following table shows the significant unobservable inputs used to measure the fair value of the portfolio loans held for sale and portfolio loans accounted for at fair value at September 30, 2015, December 31, 2014, and September 30, 2014:
September 30, 2015 dollars in millions |
Fair Value of Level 3 Assets and Liabilities |
Valuation Technique | Significant Unobservable Input |
Range | ||||||||||||
Portfolio loans held for sale accounted for at fair value |
$ | 169 | Market approach | Indicative bids | 84.50 - 104.00% | |||||||||||
December 31, 2014 dollars in millions |
Fair Value of Level 3 Assets and Liabilities |
Valuation Technique | Significant Unobservable Input |
Range (Weighted-Average) |
||||||||||||
Portfolio loans accounted for at fair value |
$ | 191 | Discounted cash flow | Prepayment speed | 5.40 - 5.60% (5.50%) | |||||||||||
Loss severity | 2.00 - 77.00% (25.66%) | |||||||||||||||
Discount rate | 3.90 - 4.00% (3.92%) | |||||||||||||||
Default rate | .86 - 1.70% (1.12%) | |||||||||||||||
September 30, 2014 dollars in millions |
Fair Value of Level 3 Assets and Liabilities |
Valuation Technique | Significant Unobservable Input |
Range (Weighted-Average) |
||||||||||||
Portfolio loans accounted for at fair value |
$ | 201 | Discounted cash flow | Prepayment speed | 5.00 - 5.80% (5.25%) | |||||||||||
Loss severity | 2.00 - 77.00% (25.71%) | |||||||||||||||
Discount rate | 3.60 - 3.90% (3.69%) | |||||||||||||||
Default rate | .93 - 1.91% (1.24%) |
The following table shows the principal and fair value amounts for our portfolio loans held for sale at fair value, portfolio loans at carrying value, and portfolio loans at fair value at September 30, 2015, December 31, 2014, and September 30, 2014. Our policies for determining past due loans, placing loans on nonaccrual, applying payments on nonaccrual loans, and resuming accrual of interest are disclosed in Note 1 (Summary of Significant Accounting Policies) under the heading Nonperforming Loans beginning on page 116 of our 2014 Form 10-K.
September 30, 2015 | December 31, 2014 | September 30, 2014 | ||||||||||||||||||||||
in millions |
Principal | Fair Value | Principal | Fair Value | Principal | Fair Value | ||||||||||||||||||
Portfolio loans held for sale at fair value |
||||||||||||||||||||||||
Accruing loans past due 90 days or more |
$ | 5 | $ | 4 | | | | | ||||||||||||||||
Portfolio loans at carrying value |
||||||||||||||||||||||||
Accruing loans past due 90 days or more |
$ | 26 | N/A | $ | 29 | N/A | $ | 31 | N/A | |||||||||||||||
Loans placed on nonaccrual status |
8 | N/A | 11 | N/A | 9 | N/A | ||||||||||||||||||
Portfolio loans at fair value |
||||||||||||||||||||||||
Accruing loans past due 90 days or more |
| | $ | 5 | $ | 5 | $ | 5 | $ | 5 |
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The following table shows the portfolio loans held for sale at fair value and portfolio loans at fair value and their related contractual amounts at September 30, 2015, December 31, 2014, and September 30, 2014.
September 30, 2015 | December 31, 2014 | September 30, 2014 | ||||||||||||||||||||||
in millions |
Contractual Amount |
Fair Value |
Contractual Amount |
Fair Value |
Contractual Amount |
Fair Value |
||||||||||||||||||
ASSETS |
||||||||||||||||||||||||
Portfolio loans held for sale |
$ | 173 | $ | 169 | | | | | ||||||||||||||||
Portfolio loans |
| | $ | 192 | $ | 191 | $ | 199 | $ | 201 |
The following tables present the assets of the portfolio loans held for sale and portfolio loans measured at fair value on a recurring basis at September 30, 2015, December 31, 2014, and September 30, 2014.
September 30, 2015 in millions |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
ASSETS MEASURED ON A RECURRING BASIS |
||||||||||||||||
Portfolio loans held for sale |
| | $ | 169 | $ | 169 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets on a recurring basis at fair value |
| | $ | 169 | $ | 169 | ||||||||||
|
|
|
|
|
|
|
|
December 31, 2014 in millions |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
ASSETS MEASURED ON A RECURRING BASIS |
||||||||||||||||
Portfolio loans |
| | $ | 191 | $ | 191 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets on a recurring basis at fair value |
| | $ | 191 | $ | 191 | ||||||||||
|
|
|
|
|
|
|
|
September 30, 2014 in millions |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
ASSETS MEASURED ON A RECURRING BASIS |
||||||||||||||||
Portfolio loans |
| | $ | 201 | $ | 201 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets on a recurring basis at fair value |
| | $ | 201 | $ | 201 | ||||||||||
|
|
|
|
|
|
|
|
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The following table shows the change in the fair values of the Level 3 portfolio loans held for sale, portfolio loans, and consolidated education loan securitization trusts for the three- and nine-month periods ended September 30, 2015, and September 30, 2014.
Portfolio | ||||||||||||||||||||||||
Student | Portfolio | Trust | Trust | Trust | ||||||||||||||||||||
Loans Held | Student | Student | Other | Trust | Other | |||||||||||||||||||
in millions |
For Sale | Loans | Loans | Assets | Securities | Liabilities | ||||||||||||||||||
Balance at December 31, 2014 |
| $ | 191 | | | | | |||||||||||||||||
Gains (losses) recognized in earnings (a) |
$ | (4 | ) | 1 | | | | | ||||||||||||||||
Settlements |
(6 | ) | (13 | ) | | | | | ||||||||||||||||
Loans transferred to held for sale |
179 | (179 | ) | | | | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance at September 30, 2015 (b) |
$ | 169 | | | | | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance at June 30, 2015 |
$ | 179 | | | | | | |||||||||||||||||
Gains (losses) recognized in earnings (a) |
(4 | ) | | | | | | |||||||||||||||||
Settlements |
(6 | ) | | | | | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance at September 30, 2015 (b) |
$ | 169 | | | | | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance at December 31, 2013 |
| $ | 147 | $ | 1,960 | $ | 20 | $ | 1,834 | $ | 20 | |||||||||||||
Gains (losses) recognized in earnings (a) |
| (4 | ) | (34 | ) | | 33 | | ||||||||||||||||
Purchases |
| 74 | | | | | ||||||||||||||||||
Sales |
| | (74 | ) | | | | |||||||||||||||||
Settlements |
| (16 | ) | (202 | ) | (1 | ) | (278 | ) | (3 | ) | |||||||||||||
Transfers out due to deconsolidation |
| | (1,650 | ) | (19 | ) | (1,589 | ) | (17 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance at September 30, 2014 (b) |
| $ | 201 | | | | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance at June 30, 2014 |
| $ | 209 | $ | 1,711 | $ | 19 | $ | 1,660 | $ | 17 | |||||||||||||
Gains (losses) recognized in earnings (a) |
| | | | | | ||||||||||||||||||
Purchases |
| | | | | | ||||||||||||||||||
Sales |
| | | | | | ||||||||||||||||||
Settlements |
| (8 | ) | (61 | ) | | (71 | ) | | |||||||||||||||
Transfers out due to deconsolidation |
| | (1,650 | ) | (19 | ) | (1,589 | ) | (17 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance at September 30, 2014 (b) |
| $ | 201 | | | | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(a) | Gains (losses) were driven primarily by fair value adjustments. |
(b) | There were no issuances, transfers into Level 3, or transfers out of Level 3 for the three- and nine-month periods ended September 30, 2015. There were no issuances or transfers into Level 3 for the three- and nine-month periods ended September 30, 2014. |
Victory Capital Management and Victory Capital Advisors. On July 31, 2013, we completed the sale of Victory to a private equity fund. During March 2014, client consents were secured and assets under management were finalized and, as a result, we recorded an additional after-tax cash gain of $6 million as of March 31, 2014. Since February 21, 2013, when we agreed to sell Victory, we have accounted for this business as a discontinued operation.
The results of this discontinued business are included in income (loss) from discontinued operations, net of taxes on the income statement. The components of income (loss) from discontinued operations, net of taxes for Victory, which includes the additional gain recorded as of March 31, 2014, on the sale of this business, are as follows:
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
in millions |
2015 | 2014 | 2015 | 2014 | ||||||||||||
Net interest income |
| $ | 5 | | $ | 7 | ||||||||||
Noninterest income |
| | | 10 | ||||||||||||
Noninterest expense |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before income taxes |
| 5 | | 17 | ||||||||||||
Income taxes |
| 2 | | 7 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) from discontinued operations, net of taxes |
| $ | 3 | | $ | 10 | ||||||||||
|
|
|
|
|
|
|
|
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The discontinued assets of Victory included on the balance sheet are as follows. There were no discontinued liabilities for the periods presented below.
September 30, | December 31, | September 30, | ||||||||||
in millions |
2015 | 2014 | 2014 | |||||||||
Seller note (a) |
| | $ | 17 | ||||||||
|
|
|
|
|
|
|||||||
Total assets |
| | $ | 17 | ||||||||
|
|
|
|
|
|
(a) | At September 30, 2014, the only remaining asset of Victory was the Seller note. The Seller note was paid off during the fourth quarter of 2014. |
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, we have accounted for this business as a discontinued operation.
The results of this discontinued business are included in income (loss) from discontinued operations, net of taxes on the income statement. The components of income (loss) from discontinued operations, net of taxes for Austin are as follows:
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
in millions |
2015 | 2014 | 2015 | 2014 | ||||||||||||
Noninterest expense |
| | | $ | 4 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before income taxes |
| | | (4 | ) | |||||||||||
Income taxes |
| | | (2 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) from discontinued operations, net of taxes |
| | | $ | (2 | ) | ||||||||||
|
|
|
|
|
|
|
|
The discontinued assets and liabilities of Austin included on the balance sheet are as follows:
September 30, | December 31, | September 30, | ||||||||||
in millions |
2015 | 2014 | 2014 | |||||||||
Cash and due from banks |
$ | 15 | $ | 19 | $ | 19 | ||||||
|
|
|
|
|
|
|||||||
Total assets |
$ | 15 | $ | 19 | $ | 19 | ||||||
|
|
|
|
|
|
|||||||
Accrued expense and other liabilities |
| $ | 3 | $ | 3 | |||||||
|
|
|
|
|
|
|||||||
Total liabilities |
| $ | 3 | $ | 3 | |||||||
|
|
|
|
|
|
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Combined discontinued operations. The combined results of the discontinued operations are as follows:
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
in millions |
2015 | 2014 | 2015 | 2014 | ||||||||||||
Net interest income |
$ | 9 | $ | 26 | $ | 29 | $ | 74 | ||||||||
Provision for credit losses |
7 | 5 | 9 | 15 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net interest income after provision for credit losses |
2 | 21 | 20 | 59 | ||||||||||||
Noninterest income |
(2 | ) | (41 | ) | 1 | (101 | ) | |||||||||
Noninterest expense |
5 | 7 | 13 | 23 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before income taxes |
(5 | ) | (27 | ) | 8 | (65 | ) | |||||||||
Income taxes |
(2 | ) | (10 | ) | 3 | (24 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) from discontinued operations, net of taxes (a) |
$ | (3 | ) | $ | (17 | ) | $ | 5 | $ | (41 | ) | |||||
|
|
|
|
|
|
|
|
(a) | Includes after-tax charges of $7 million and $9 million for the three-month periods ended September 30, 2015, and September 30, 2014, respectively, and $18 million and $26 million for the nine-month periods ended September 30, 2015, and September 30, 2014, respectively, determined by applying a matched funds transfer pricing methodology to the liabilities assumed necessary to support the discontinued operations. |
The combined assets and liabilities of the discontinued operations are as follows:
September 30, | December 31, | September 30, | ||||||||||
in millions |
2015 | 2014 | 2014 | |||||||||
Cash and due from banks |
$ | 15 | $ | 19 | $ | 19 | ||||||
Held-to-maturity securities |
1 | 1 | 1 | |||||||||
Seller note |
| | 17 | |||||||||
Portfolio loans at fair value |
| 191 | 201 | |||||||||
Loans, net of unearned income (a) |
1,891 | 2,104 | 2,174 | |||||||||
Less: Allowance for loan and lease losses |
23 | 29 | 31 | |||||||||
|
|
|
|
|
|
|||||||
Net loans |
1,868 | 2,266 | 2,344 | |||||||||
Portfolio loans held for sale at fair value |
169 | | | |||||||||
Accrued income and other assets |
33 | 38 | 40 | |||||||||
|
|
|
|
|
|
|||||||
Total assets |
$ | 2,086 | $ | 2,324 | $ | 2,421 | ||||||
|
|
|
|
|
|
|||||||
Accrued expense and other liabilities |
| $ | 3 | $ | 3 | |||||||
|
|
|
|
|
|
|||||||
Total liabilities |
| $ | 3 | $ | 3 | |||||||
|
|
|
|
|
|
(a) | At September 30, 2015, December 31, 2014, and September 30, 2014, unearned income was less than $1 million. |
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12. Securities Financing Activities
We enter into repurchase and reverse repurchase agreements and securities borrowed transactions (securities financing agreements) primarily to finance our inventory positions, acquire securities to cover short positions, and to settle other securities obligations. We account for these securities financing agreements as collateralized financing transactions. Repurchase and reverse repurchase agreements are recorded on the balance sheet at the amounts that the securities will be subsequently sold or repurchased. Securities borrowed transactions are recorded on the balance sheet at the amounts of cash collateral advanced. While our securities financing agreements incorporate a right of set off, the assets and liabilities are reported on a gross basis. Repurchase agreements and securities borrowed transactions are included in short-term investments on the balance sheet; reverse repurchase agreements are included in federal funds purchased and securities sold under repurchase agreements.
During the third quarter of 2014, our broker-dealer subsidiary, KBCM, moved from a self-clearing organization to using a third-party organization for clearing purposes. In connection with this change, KBCM became an introducing broker-dealer, whereby it no longer needs to fund its business operations by entering into repurchase, reverse repurchase, or securities borrowed agreements. As a result, KBCM did not have any outstanding securities financing agreements at September 30, 2015, December 31, 2014, and September 30, 2014.
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The following table summarizes our securities financing agreements at September 30, 2015, December 31, 2014, and September 30, 2014:
September 30, 2015 | ||||||||||||||||
Gross Amount | ||||||||||||||||
Presented in | Netting | Net | ||||||||||||||
in millions |
Balance Sheet | Adjustments (a) | Collateral (b) | Amounts | ||||||||||||
Offsetting of financial assets: |
||||||||||||||||
Reverse repurchase agreements |
$ | 4 | $ | (4 | ) | | | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 4 | $ | (4 | ) | | | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Offsetting of financial liabilities: |
||||||||||||||||
Repurchase agreements (c) |
$ | 6 | $ | (4 | ) | $ | (2 | ) | | |||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 6 | $ | (4 | ) | $ | (2 | ) | | |||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2014 | ||||||||||||||||
Gross Amount | ||||||||||||||||
Presented in | Netting | Net | ||||||||||||||
in millions |
Balance Sheet | Adjustments (a) | Collateral (b) | Amounts | ||||||||||||
Offsetting of financial assets: |
||||||||||||||||
Reverse repurchase agreements |
$ | 3 | $ | (1 | ) | $ | (2 | ) | | |||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 3 | $ | (1 | ) | $ | (2 | ) | | |||||||
|
|
|
|
|
|
|
|
|||||||||
Offsetting of financial liabilities: |
||||||||||||||||
Repurchase agreements |
$ | 1 | $ | (1 | ) | | | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 1 | $ | (1 | ) | | | |||||||||
|
|
|
|
|
|
|
|
|||||||||
September 30, 2014 | ||||||||||||||||
Gross Amount | ||||||||||||||||
Presented in | Netting | Net | ||||||||||||||
in millions |
Balance Sheet | Adjustments (a) | Collateral (b) | Amounts | ||||||||||||
Offsetting of financial assets: |
||||||||||||||||
Reverse repurchase agreements |
$ | 6 | $ | (4 | ) | $ | (2 | ) | | |||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 6 | $ | (4 | ) | $ | (2 | ) | | |||||||
|
|
|
|
|
|
|
|
|||||||||
Offsetting of financial liabilities: |
||||||||||||||||
Repurchase agreements |
$ | 4 | $ | (4 | ) | | | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 4 | $ | (4 | ) | | | |||||||||
|
|
|
|
|
|
|
|
(a) | Netting adjustments take into account the impact of master netting agreements that allow us to settle with a single counterparty on a net basis. |
(b) | These adjustments take into account the impact of bilateral collateral agreements that allow us to offset the net positions with the related collateral. The application of collateral cannot reduce the net position below zero. Therefore, excess collateral, if any, is not reflected above. |
(c) | Repurchase agreements are collateralized by U.S. Treasury securities and contracted on an overnight basis. |
Like other financing transactions, securities financing agreements contain an element of credit risk. To mitigate and manage credit risk exposure, we generally enter into master netting agreements and other collateral arrangements that give us the right, in the event of default, to liquidate collateral held and to offset receivables and payables with the same counterparty. Additionally, we establish and monitor limits on our counterparty credit risk exposure by product type. For the reverse repurchase agreements, we monitor the value of the underlying securities we received from counterparties and either request additional collateral or return a portion of the collateral based on the value of those securities. We generally hold collateral in the form of highly rated securities issued by the U.S. Treasury and fixed income securities. In addition, we may need to provide collateral to counterparties under our repurchase agreements and securities borrowed transactions. In general, the collateral we pledge and receive can be sold or repledged by the secured parties.
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Pension Plans
Effective December 31, 2009, we amended our cash balance pension plan and other defined benefit plans to freeze all benefit accruals and close the plans to new employees. We will continue to credit participants existing account balances for interest until they receive their plan benefits. We changed certain pension plan assumptions after freezing the plans.
During the third quarters of 2015 and 2014, year-to-date lump sum payments made under certain pension plans triggered settlement accounting. In accordance with the applicable accounting guidance for defined benefit plans, we performed a remeasurement of the affected plans in conjunction with the settlement and recognized the settlement losses reflected in the following table. We will also recognize a settlement loss in the fourth quarter of 2015 related to additional lump sum payments made during the fourth quarter.
The components of net pension cost (benefit) for all funded and unfunded plans are as follows:
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
in millions |
2015 | 2014 | 2015 | 2014 | ||||||||||||
Interest cost on PBO |
$ | 10 | $ | 12 | $ | 30 | $ | 36 | ||||||||
Expected return on plan assets |
(14 | ) | (17 | ) | (42 | ) | (51 | ) | ||||||||
Amortization of losses |
4 | 4 | 13 | 12 | ||||||||||||
Settlement loss |
19 | 20 | 19 | 20 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net pension cost |
$ | 19 | $ | 19 | $ | 20 | $ | 17 | ||||||||
|
|
|
|
|
|
|
|
Other Postretirement Benefit Plans
We sponsor a retiree healthcare plan that all employees age 55 with five years of service (or employees age 50 with 15 years of service who are terminated under conditions that entitle them to a severance benefit) are eligible to participate. Participant contributions are adjusted annually. We may provide a subsidy toward the cost of coverage for certain employees hired before 2001 with a minimum of 15 years of service at the time of termination. We use a separate VEBA trust to fund the retiree healthcare plan.
The components of net postretirement benefit cost for all funded and unfunded plans are as follows:
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
in millions |
2015 | 2014 | 2015 | 2014 | ||||||||||||
Interest cost on APBO |
$ | 1 | $ | 1 | $ | 3 | $ | 3 | ||||||||
Expected return on plan assets |
(1 | ) | (1 | ) | (2 | ) | (3 | ) | ||||||||
Amortization of unrecognized prior service credit |
| | (1 | ) | | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net postretirement benefit cost |
| | | | ||||||||||||
|
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|
|
|
|
|
|
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14. Trust Preferred Securities Issued by Unconsolidated Subsidiaries
We own the outstanding common stock of business trusts formed by us that issued corporation-obligated mandatorily redeemable trust preferred securities. The trusts used the proceeds from the issuance of their trust preferred securities and common stock to buy debentures issued by KeyCorp. These debentures are the trusts only assets; the interest payments from the debentures finance the distributions paid on the mandatorily redeemable trust preferred securities.
We unconditionally guarantee the following payments or distributions on behalf of the trusts:
| required distributions on the trust preferred securities; |
| the redemption price when a capital security is redeemed; and |
| the amounts due if a trust is liquidated or terminated. |
The Regulatory Capital Rules, discussed in Supervision and regulation in Item 2 of this report, implement a phase-out of trust preferred securities as Tier 1 capital, consistent with the requirements of the Dodd-Frank Act. For standardized approach banking organizations such as Key, the phase-out period began on January 1, 2015, and by 2016 will require us to treat our mandatorily redeemable trust preferred securities as Tier 2 capital.
As of September 30, 2015, the trust preferred securities issued by the KeyCorp capital trusts represent $85 million, or .8%, of our total qualifying Tier 1 capital, net of goodwill.
The trust preferred securities, common stock, and related debentures are summarized as follows:
Principal | Interest Rate | Maturity | ||||||||||||||||||
Trust Preferred | Amount of | of Trust Preferred | of Trust Preferred | |||||||||||||||||
Securities, | Common | Debentures, | Securities and | Securities and | ||||||||||||||||
dollars in millions |
Net of Discount (a) | Stock | Net of Discount (b) | Debentures (c) | Debentures | |||||||||||||||
September 30, 2015 |
||||||||||||||||||||
KeyCorp Capital I |
$ | 156 | $ | 6 | $ | 162 | 1.024 | % | 2028 | |||||||||||
KeyCorp Capital II |
111 | 4 | 115 | 6.875 | 2029 | |||||||||||||||
KeyCorp Capital III |
145 | 4 | 149 | 7.750 | 2029 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 412 | $ | 14 | $ | 426 | 4.968 | % | | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
December 31, 2014 |
$ | 408 | $ | 14 | $ | 422 | 4.926 | % | | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
September 30, 2014 |
$ | 397 | $ | 14 | $ | 411 | 4.856 | % | | |||||||||||
|
|
|
|
|
|
|
|
|
|
(a) | The trust preferred securities must be redeemed when the related debentures mature, or earlier if provided in the governing indenture. Each issue of trust preferred securities carries an interest rate identical to that of the related debenture. Certain trust preferred securities include basis adjustments related to fair value hedges totaling $72 million at September 30, 2015, $68 million at December 31, 2014, and $57 million at September 30, 2014. See Note 7 (Derivatives and Hedging Activities) for an explanation of fair value hedges. |
(b) | We have the right to redeem these debentures. If the debentures purchased by KeyCorp Capital I are redeemed before they mature, the redemption price will be the principal amount, plus any accrued but unpaid interest. If the debentures purchased by KeyCorp Capital II or KeyCorp Capital III are redeemed before they mature, the redemption price will be the greater of: (i) the principal amount, plus any accrued but unpaid interest, or (ii) the sum of the present values of principal and interest payments discounted at the Treasury Rate (as defined in the applicable indenture), plus 20 basis points for KeyCorp Capital II or 25 basis points for KeyCorp Capital III or 50 basis points in the case of redemption upon either a tax or a capital treatment event for either KeyCorp Capital II or KeyCorp Capital III, plus any accrued but unpaid interest. The principal amount of certain debentures includes basis adjustments related to fair value hedges totaling $72 million at September 30, 2015, $68 million at December 31, 2014, and $57 million at September 30, 2014. See Note 7 for an explanation of fair value hedges. The principal amount of debentures, net of discounts, is included in long-term debt on the balance sheet. |
(c) | The interest rates for the trust preferred securities issued by KeyCorp Capital II and KeyCorp Capital III are fixed. KeyCorp Capital I has a floating interest rate, equal to three-month LIBOR plus 74 basis points, that reprices quarterly. The total interest rates are weighted-average rates. |
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15. Contingent Liabilities and Guarantees
Legal Proceedings
See Note 20 (Commitments, Contingent Liabilities and Guarantees) under the heading Legal Proceedings on page 206 of our 2014 Form 10-K for a description of a proceeding styled In Re: Checking Account Overdraft Litigation.
Other litigation. From time to time, in the ordinary course of business, we and our subsidiaries are subject to various other litigation, investigations, and administrative proceedings. Private, civil litigations may range from individual actions involving a single plaintiff to putative class action lawsuits with potentially thousands of class members. Investigations may involve both formal and informal proceedings, by both government agencies and self-regulatory bodies. These other matters may involve claims for substantial monetary relief. At times, these matters may present novel claims or legal theories. Due to the complex nature of these various other matters, it may be years before some matters are resolved. While it is impossible to ascertain the ultimate resolution or range of financial liability, based on information presently known to us, we do not believe there is any other matter to which we are a party, or involving any of our properties that, individually or in the aggregate, would reasonably be expected to have a material adverse effect on our financial condition. We continually monitor and reassess the potential materiality of these other litigation matters. We note, however, that in light of the inherent uncertainty in legal proceedings there can be no assurance that the ultimate resolution will not exceed established reserves. As a result, the outcome of a particular matter, or a combination of matters, may be material to our results of operations for a particular period, depending upon the size of the loss or our income for that particular period.
Guarantees
We are a guarantor in various agreements with third parties. The following table shows the types of guarantees that we had outstanding at September 30, 2015. Information pertaining to the basis for determining the liabilities recorded in connection with these guarantees is included in Note 1 (Summary of Significant Accounting Policies) under the heading Guarantees beginning on page 124 of our 2014 Form 10-K.
Maximum Potential | ||||||||
September 30, 2015 | Undiscounted | Liability | ||||||
in millions |
Future Payments | Recorded | ||||||
Financial guarantees: |
||||||||
Standby letters of credit |
$ | 11,498 | $ | 63 | ||||
Recourse agreement with FNMA |
1,747 | 4 | ||||||
Return guarantee agreement with LIHTC investors |
4 | 4 | ||||||
Written put options (a) |
2,131 | 117 | ||||||
|
|
|
|
|||||
Total |
$ | 15,380 | $ | 188 | ||||
|
|
|
|
(a) | The maximum potential undiscounted future payments represent notional amounts of derivatives qualifying as guarantees. |
We determine the payment/performance risk associated with each type of guarantee described below based on the probability that we could be required to make the maximum potential undiscounted future payments shown in the preceding table. We use a scale of low (0% to 30% probability of payment), moderate (greater than 30% to 70% probability of payment), or high (greater than 70% probability of payment) to assess the payment/performance risk, and have determined that the payment/performance risk associated with each type of guarantee outstanding at September 30, 2015, is low.
Standby letters of credit. KeyBank issues standby letters of credit to address clients financing needs. These instruments obligate us to pay a specified third party when a client fails to repay an outstanding loan or debt instrument or fails to perform some contractual nonfinancial obligation. Any amounts drawn under standby letters of credit are treated as loans to the client; they bear interest (generally at variable rates) and pose the same credit risk to us as a loan. At September 30, 2015, our standby letters of credit had a remaining weighted-average life of 3 years, with remaining actual lives ranging from less than one year to as many as 11 years.
Recourse agreement with FNMA. We participate as a lender in the FNMA Delegated Underwriting and Servicing program. FNMA delegates responsibility for originating, underwriting, and servicing mortgages, and we assume a limited portion of the risk of loss during the remaining term on each commercial mortgage loan that we sell to FNMA. We maintain a reserve for such potential losses in an amount that we believe approximates the fair value of our liability. At September 30, 2015, the outstanding commercial mortgage loans in this program had a weighted-average remaining term of 7.85 years, and the unpaid
77
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principal balance outstanding of loans sold by us as a participant was $6.1 billion. As shown in the preceding table, the maximum potential amount of undiscounted future payments that we could be required to make under this program is equal to approximately one-third of the principal balance of loans outstanding at September 30, 2015. If we are required to make a payment, we would have an interest in the collateral underlying the related commercial mortgage loan; any loss we incur could be offset by the amount of any recovery from the collateral.
Return guarantee agreement with LIHTC investors. KAHC, a subsidiary of KeyBank, offered limited partnership interests to qualified investors. Partnerships formed by KAHC invested in low-income residential rental properties that qualify for federal low-income housing tax credits under Section 42 of the Internal Revenue Code. In certain partnerships, investors paid a fee to KAHC for a guaranteed return that is based on the financial performance of the property and the propertys confirmed LIHTC status throughout a 15-year compliance period. Typically, KAHC fulfills these guaranteed returns by distributing tax credits and deductions associated with the specific properties. If KAHC defaults on its obligation to provide the guaranteed return, KeyBank is obligated to make any necessary payments to investors. No recourse or collateral is available to offset our guarantee obligation other than the underlying income streams from the properties and the residual value of the operating partnership interests.
As shown in the previous table, KAHC maintained a reserve in the amount of $4 million at September 30, 2015, which is sufficient to cover estimated future obligations under the guarantees. The maximum exposure to loss reflected in the table represents undiscounted future payments due to investors for the return on and of their investments.
These guarantees have expiration dates that extend through 2018, but KAHC has not formed any new partnerships under this program since October 2003. Additional information regarding these partnerships is included in Note 9 (Variable Interest Entities).
Written put options. In the ordinary course of business, we write put options for clients that wish to mitigate their exposure to changes in interest rates and commodity prices. At September 30, 2015, our written put options had an average life of 2 years. These instruments are considered to be guarantees, as we are required to make payments to the counterparty (the client) based on changes in an underlying variable that is related to an asset, a liability, or an equity security that the client holds. We are obligated to pay the client if the applicable benchmark interest rate or commodity price is above or below a specified level (known as the strike rate). These written put options are accounted for as derivatives at fair value, as further discussed in Note 7 (Derivatives and Hedging Activities). We mitigate our potential future payment obligations by entering into offsetting positions with third parties.
Written put options where the counterparty is a broker-dealer or bank are accounted for as derivatives at fair value but are not considered guarantees since these counterparties typically do not hold the underlying instruments. In addition, we are a purchaser and seller of credit derivatives, which are further discussed in Note 7.
Default guarantees. Some lines of business participate in guarantees that obligate us to perform if the debtor (typically a client) fails to satisfy all of its payment obligations to third parties. We generally undertake these guarantees for one of two possible reasons: (i) either the risk profile of the debtor should provide an investment return, or (ii) we are supporting our underlying investment in the debtor. We do not hold collateral for the default guarantees. If we were required to make a payment under a guarantee, we would receive a pro rata share should the third party collect some or all of the amounts due from the debtor. At September 30, 2015, we did not have any default guarantees.
Other Off-Balance Sheet Risk
Other off-balance sheet risk stems from financial instruments that do not meet the definition of a guarantee as specified in the applicable accounting guidance, and from other relationships.
Indemnifications provided in the ordinary course of business. We provide certain indemnifications, primarily through representations and warranties in contracts that we execute in the ordinary course of business in connection with loan and lease sales and other ongoing activities, as well as in connection with purchases and sales of businesses. We maintain reserves, when appropriate, with respect to liability that reasonably could arise as a result of these indemnities.
Intercompany guarantees. KeyCorp, KeyBank, and certain of our affiliates are parties to various guarantees that facilitate the ongoing business activities of other affiliates. These business activities encompass issuing debt, assuming certain lease and insurance obligations, purchasing or issuing investments and securities, and engaging in certain leasing transactions involving clients.
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16. Accumulated Other Comprehensive Income
Our changes in AOCI for the three and nine months ended September 30, 2015, and September 30, 2014, are as follows:
Unrealized gains | Unrealized gains | Foreign currency | Net pension and | |||||||||||||||||
(losses) on securities | (losses) on derivative | translation | postretirement | |||||||||||||||||
in millions |
available for sale | financial instruments | adjustment | benefit costs | Total | |||||||||||||||
Balance at December 31, 2014 |
$ | (4 | ) | $ | (8 | ) | $ | 22 | $ | (366 | ) | $ | (356 | ) | ||||||
Other comprehensive income before reclassification, net of income taxes |
57 | 107 | (19 | ) | (38 | ) | 107 | |||||||||||||
Amounts reclassified from accumulated other comprehensive income, net of income taxes (a) |
1 | (44 | ) | 1 | 19 | (23 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net current-period other comprehensive income, net of income taxes |
58 | 63 | (18 | ) | (19 | ) | 84 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at September 30, 2015 |
54 | $ | 55 | $ | 4 | $ | (385 | ) | $ | (272 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at June 30, 2015 |
| $ | 7 | $ | 9 | $ | (361 | ) | $ | (345 | ) | |||||||||
Other comprehensive income before reclassification, net of income taxes |
$ | 54 | 65 | (5 | ) | (38 | ) | 76 | ||||||||||||
Amounts reclassified from accumulated other comprehensive income, net of income taxes (a) |
| (17 | ) | | 14 | (3 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net current-period other comprehensive income, net of income taxes |
54 | 48 | (5 | ) | (24 | ) | 73 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at September 30, 2015 |
54 | $ | 55 | $ | 4 | $ | (385 | ) | $ | (272 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at December 31, 2013 |
$ | (63 | ) | $ | (11 | ) | $ | 42 | $ | (320 | ) | $ | (352 | ) | ||||||
Other comprehensive income before reclassification, net of income taxes |
24 | 25 | (9 | ) | | 40 | ||||||||||||||
Amounts reclassified from accumulated other comprehensive income, net of income taxes (a) |
| (29 | ) | (3 | ) | 19 | (13 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net current-period other comprehensive income, net of income taxes |
24 | (4 | ) | (12 | ) | 19 | 27 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at September 30, 2014 |
$ | (39 | ) | $ | (15 | ) | $ | 30 | $ | (301 | ) | $ | (325 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at June 30, 2014 |
$ | (6 | ) | $ | (7 | ) | $ | 39 | $ | (315 | ) | $ | (289 | ) | ||||||
Other comprehensive income before reclassification, net of income taxes |
(33 | ) | 3 | (9 | ) | | (39 | ) | ||||||||||||
Amounts reclassified from accumulated other comprehensive income, net of income |
| (11 | ) | | 14 | 3 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net current-period other comprehensive income, net of income taxes |
(33 | ) | (8 | ) | (9 | ) | 14 | (36 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at September 30, 2014 |
$ | (39 | ) | $ | (15 | ) | $ | 30 | $ | (301 | ) | $ | (325 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
(a) | See table below for details about these reclassifications. |
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Table of Contents
Our reclassifications out of AOCI for the three and nine months ended September 30, 2015, and September 30, 2014, are as follows:
Nine months ended September 30, 2015 in millions |
Amount Reclassified from Accumulated Other Comprehensive Income |
Affected Line Item in the Statement Where Net Income is Presented | ||||
Unrealized gains (losses) on available for sale securities |
||||||
Realized losses |
$ | (1 | ) | Other income | ||
|
|
|||||
(1 | ) | Income (loss) from continuing operations before income taxes | ||||
| Income taxes | |||||
|
|
|||||
$ | (1 | ) | Income (loss) from continuing operations | |||
|
|
|||||
Unrealized gains (losses) on derivative financial instruments |
||||||
Interest rate |
$ | 73 | Interest income Loans | |||
Interest rate |
(3 | ) | Interest expense Long term debt | |||
|
|
|||||
70 | Income (loss) from continuing operations before income taxes | |||||
26 | Income taxes | |||||
|
|
|||||
$ | 44 | Income (loss) from continuing operations | ||||
|
|
|||||
Foreign currency translation adjustment |
||||||
$ | (2 | ) | Corporate services income | |||
|
|
|||||
(2 | ) | Income (loss) from continuing operations before income taxes | ||||
(1 | ) | Income taxes | ||||
|
|
|||||
$ | (1 | ) | Income (loss) from continuing operations | |||
|
|
|||||
Net pension and postretirement benefit costs |
||||||
Amortization of losses |
$ | (13 | ) | Personnel expense | ||
Settlement loss |
(19 | ) | Personnel expense | |||
Amortization of unrecognized prior service cost |
1 | Personnel expense | ||||
|
|
|||||
(31 | ) | Income (loss) from continuing operations before income taxes | ||||
(12 | ) | Income taxes | ||||
|
|
|||||
$ | (19 | ) | Income (loss) from continuing operations | |||
|
|
|||||
Three months ended September 30, 2015 in millions |
Amount Reclassified from Accumulated Other Comprehensive Income |
Affected Line Item in the Statement Where Net Income is Presented | ||||
Unrealized gains (losses) on derivative financial instruments |
||||||
Interest rate |
$ | 28 | Interest income Loans | |||
Interest rate |
(1 | ) | Interest expense Long term debt | |||
|
|
|||||
27 | Income (loss) from continuing operations before income taxes | |||||
10 | Income taxes | |||||
|
|
|||||
$ | 17 | Income (loss) from continuing operations | ||||
|
|
|||||
Foreign currency translation adjustment |
||||||
$ | (1 | ) | Corporate services income | |||
|
|
|||||
(1 | ) | Income (loss) from continuing operations before income taxes | ||||
(1 | ) | Income taxes | ||||
|
|
|||||
| Income (loss) from continuing operations | |||||
|
|
|||||
Net pension and postretirement benefit costs |
||||||
Amortization of losses |
$ | (4 | ) | Personnel expense | ||
Settlement loss |
(19 | ) | Personnel expense | |||
|
|
|||||
(23 | ) | Income (loss) from continuing operations before income taxes | ||||
(9 | ) | Income taxes | ||||
|
|
|||||
$ | (14 | ) | Income (loss) from continuing operations | |||
|
|
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Nine months ended September 30, 2014 in millions |
Amount Reclassified from Accumulated Other Comprehensive Income |
Affected Line Item in the Statement Where Net Income is Presented | ||||
Unrealized gains (losses) on derivative financial instruments |
||||||
Interest rate |
$ | 49 | Interest income Loans | |||
Interest rate |
(3 | ) | Interest expense Long term debt | |||
|
|
|||||
46 | Income (loss) from continuing operations before income taxes | |||||
17 | Income taxes | |||||
|
|
|||||
$ | 29 | Income (loss) from continuing operations | ||||
|
|
|||||
Foreign currency translation adjustment |
||||||
$ | 3 | Corporate services income | ||||
|
|
|||||
3 | Income (loss) from continuing operations before income taxes | |||||
| Income taxes | |||||
|
|
|||||
$ | 3 | Income (loss) from continuing operations | ||||
|
|
|||||
Net pension and postretirement benefit costs |
||||||
Amortization of losses |
$ | (12 | ) | Personnel expense | ||
Settlement loss |
(20 | ) | Personnel expense | |||
|
|
|||||
(32 | ) | Income (loss) from continuing operations before income taxes | ||||
(13 | ) | Income taxes | ||||
|
|
|||||
$ | (19 | ) | Income (loss) from continuing operations | |||
|
|
|||||
Three months ended September 30, 2014 in millions |
Amount Reclassified from Accumulated Other Comprehensive Income |
Affected Line Item in the Statement Where Net Income is Presented | ||||
Unrealized gains (losses) on derivative financial instruments |
||||||
Interest rate |
$ | 18 | Interest income Loans | |||
Interest rate |
(1 | ) | Interest expense Long term debt | |||
Foreign exchange contracts |
1 | Other income | ||||
|
|
|||||
18 | Income (loss) from continuing operations before income taxes | |||||
7 | Income taxes | |||||
|
|
|||||
$ | 11 | Income (loss) from continuing operations | ||||
|
|
|||||
Net pension and postretirement benefit costs |
||||||
Amortization of losses |
$ | (4 | ) | Personnel expense | ||
Settlement loss |
(20 | ) | Personnel expense | |||
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(24 | ) | Income (loss) from continuing operations before income taxes | ||||
(10 | ) | Income taxes | ||||
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$ | (14 | ) | Income (loss) from continuing operations | |||
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Comprehensive Capital Plan
As previously reported and as authorized by the Board and pursuant to our 2015 capital plan submitted to and not objected to by the Federal Reserve, we have authority to repurchase up to $725 million of our common shares, which include repurchases to offset issuances of common shares under our employee compensation plans. During the third quarter of 2015, we completed $123 million of common share repurchases under this authorization.
Consistent with our 2015 capital plan, the Board declared a quarterly dividend of $.075 per common share for the third quarter of 2015. An additional potential increase in our quarterly common share dividend, up to $.085 per share, will be considered by the Board in 2016 for the fifth quarter of the 2015 capital plan.
Preferred Stock
We made a quarterly dividend payment of $1.9375 per share, or $5.6 million, on our Series A Preferred Stock during the third quarter of 2015.
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The specific lines of business that constitute each of the major business segments (operating segments) are described below.
Key Community Bank
Key Community Bank serves individuals and small to mid-sized businesses through its 12-state branch network.
Individuals are provided branch-based deposit and investment products, personal finance services, and loans, including residential mortgages, home equity, credit card, and various types of installment loans. In addition, financial, estate and retirement planning, asset management services, and Delaware Trust capabilities are offered to assist high-net-worth clients with their banking, trust, portfolio management, insurance, charitable giving, and related needs.
Small businesses are provided deposit, investment and credit products, and business advisory services. Mid-sized businesses are provided products and services that include commercial lending, cash management, equipment leasing, investment and employee benefit programs, succession planning, access to capital markets, derivatives, and foreign exchange.
Key Corporate Bank
Key Corporate Bank is a full-service corporate and investment bank focused principally on serving the needs of middle market clients in seven industry sectors: consumer, energy, healthcare, industrial, public sector, real estate, and technology. Key Corporate Bank delivers a broad product suite of banking and capital markets products to its clients, including syndicated finance, debt and equity capital markets, commercial payments, equipment finance, commercial mortgage banking, derivatives, foreign exchange, financial advisory, and public finance. Key Corporate Bank is also a significant servicer of commercial mortgage loans and a significant special servicer of CMBS. Key Corporate Bank also delivers many of its product capabilities to clients of Key Community Bank.
Other Segments
Other Segments consist of Corporate Treasury, Principal Investing, and various exit portfolios.
Reconciling Items
Total assets included under Reconciling Items primarily represent the unallocated portion of nonearning assets of corporate support functions. Charges related to the funding of these assets are part of net interest income and are allocated to the business segments through noninterest expense. Reconciling Items also includes intercompany eliminations and certain items that are not allocated to the business segments because they do not reflect their normal operations.
The table on the following pages shows selected financial data for our major business segments for the three- and nine- month periods ended September 30, 2015, and September 30, 2014.
The information was derived from the internal financial reporting system that we use to monitor and manage our financial performance. GAAP guides financial accounting, but there is no authoritative guidance for management accounting the way we use our judgment and experience to make reporting decisions. Consequently, the line of business results we report may not be comparable to line of business results presented by other companies.
The selected financial data is based on internal accounting policies designed to compile results on a consistent basis and in a manner that reflects the underlying economics of the businesses. In accordance with our policies:
| Net interest income is determined by assigning a standard cost for funds used or a standard credit for funds provided based on their assumed maturity, prepayment, and/or repricing characteristics. |
| Indirect expenses, such as computer servicing costs and corporate overhead, are allocated based on assumptions regarding the extent that each line of business actually uses the services. |
| The consolidated provision for credit losses is allocated among the lines of business primarily based on their actual net loan charge-offs, adjusted periodically for loan growth and changes in risk profile. The amount of the consolidated provision is based on the methodology that we use to estimate our consolidated ALLL. This methodology is described in Note 1 (Summary of Significant Accounting Policies) under the heading Allowance for Loan and Lease Losses beginning on page 117 of our 2014 Form 10-K. |
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In the third quarter of 2015, we enhanced the approach used to determine the commercial reserve factors used in estimating the quantitative component of the commercial ALLL. In addition, we began utilizing an enhanced framework to quantify commercial ALLL adjustments resulting from qualitative factors not fully captured within the statistical analysis of incurred loss. The enhancements of the methodology are described in Note 1 (Basis of Presentation and Accounting Policies) under the heading Allowance for Loan and Lease Losses. As a result of the methodology enhancements, the current period provision for credit losses within each business segment has increased or decreased accordingly. The impact of the increases and decreases on the business segment provision for credit losses was not significant.
| Income taxes are allocated based on the statutory federal income tax rate of 35% and a blended state income tax rate (net of the federal income tax benefit) of 2.2%. |
| Capital is assigned to each line of business based on economic equity. |
Developing and applying the methodologies that we use to allocate items among our lines of business is a dynamic process. Accordingly, financial results may be revised periodically to reflect enhanced alignment of expense base allocation drivers, changes in the risk profile of a particular business, or changes in our organizational structure.
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Three months ended September 30, | Key Community Bank | Key Corporate Bank | ||||||||||||||
dollars in millions |
2015 | 2014 | 2015 | 2014 | ||||||||||||
SUMMARY OF OPERATIONS |
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Net interest income (TE) |
$ | 379 | $ | 359 | $ | 220 | $ | 215 | ||||||||
Noninterest income |
200 | 199 | 234 | 185 | ||||||||||||
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Total revenue (TE) (a) |
579 | 558 | 454 | 400 | ||||||||||||
Provision for credit losses |
18 | 21 | 30 | 2 | ||||||||||||
Depreciation and amortization expense |
14 | 16 | 11 | 8 | ||||||||||||
Other noninterest expense |
434 | 425 | 235 | 205 | ||||||||||||
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Income (loss) from continuing operations before income taxes (TE) |
113 | 96 | 178 | 185 | ||||||||||||
Allocated income taxes and TE adjustments |
42 | 36 | 42 | 51 | ||||||||||||
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Income (loss) from continuing operations |
71 | 60 | 136 | 134 | ||||||||||||
Income (loss) from discontinued operations, net of taxes |
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Net income (loss) |
71 | 60 | 136 | 134 | ||||||||||||
Less: Net income (loss) attributable to noncontrolling interests |
| | (2 | ) | | |||||||||||
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Net income (loss) attributable to Key |
$ | 71 | $ | 60 | $ | 138 | $ | 134 | ||||||||
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AVERAGE BALANCES (b) |
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Loans and leases |
$ | 31,039 | $ | 30,103 | $ | 26,425 | $ | 23,215 | ||||||||
Total assets (a) |
33,090 | 32,173 | 32,163 | 28,268 | ||||||||||||
Deposits |
51,234 | 50,303 | 18,809 | 17,599 | ||||||||||||
OTHER FINANCIAL DATA |
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Net loan charge-offs (b) |
$ | 21 | $ | 28 | $ | 20 | $ | (1 | ) | |||||||
Return on average allocated equity (b) |
10.49 | % | 8.89 | % | 28.65 | % | 31.59 | % | ||||||||
Return on average allocated equity |
10.49 | 8.89 | 28.65 | 31.59 | ||||||||||||
Average full-time equivalent employees (c) |
7,326 | 7,573 | 2,173 | 1,998 | ||||||||||||
Nine months ended September 30, | Key Community Bank | Key Corporate Bank | ||||||||||||||
dollars in millions |
2015 | 2014 | 2015 | 2014 | ||||||||||||
SUMMARY OF OPERATIONS |
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Net interest income (TE) |
$ | 1,098 | $ | 1,084 | $ | 661 | $ | 621 | ||||||||
Noninterest income |
589 | 574 | 671 | 566 | ||||||||||||
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Total revenue (TE) (a) |
1,687 | 1,658 | 1,332 | 1,187 | ||||||||||||
Provision for credit losses |
50 | 48 | 77 | 7 | ||||||||||||
Depreciation and amortization expense |
42 | 49 | 31 | 22 | ||||||||||||
Other noninterest expense |
1,297 | 1,274 | 681 | 599 | ||||||||||||
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Income (loss) from continuing operations before income taxes (TE) |
298 | 287 | 543 | 559 | ||||||||||||
Allocated income taxes and TE adjustments |
111 | 107 | 143 | 158 | ||||||||||||
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Income (loss) from continuing operations |
187 | 180 | 400 | 401 | ||||||||||||
Income (loss) from discontinued operations, net of taxes |
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Net income (loss) |
187 | 180 | 400 | 401 | ||||||||||||
Less: Net income (loss) attributable to noncontrolling interests |
| | (1 | ) | 2 | |||||||||||
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Net income (loss) attributable to Key |
$ | 187 | $ | 180 | $ | 401 | $ | 399 | ||||||||
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AVERAGE BALANCES (b) |
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Loans and leases |
$ | 30,804 | $ | 29,979 | $ | 25,488 | $ | 22,702 | ||||||||
Total assets (a) |
32,853 | 32,063 | 31,236 | 27,829 | ||||||||||||
Deposits |
50,808 | 50,151 | 19,029 | 16,655 | ||||||||||||
OTHER FINANCIAL DATA |
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Net loan charge-offs (b) |
$ | 69 | $ | 89 | $ | 28 | $ | (15 | ) | |||||||
Return on average allocated equity (b) |
9.27 | % | 8.81 | % | 28.82 | % | 33.74 | % | ||||||||
Return on average allocated equity |
9.27 | 8.81 | 28.82 | 33.74 | ||||||||||||
Average full-time equivalent employees (c) |
7,392 | 7,613 | 2,096 | 1,952 |
(a) | Substantially all revenue generated by our major business segments is derived from clients that reside in the United States. Substantially all long-lived assets, including premises and equipment, capitalized software, and goodwill held by our major business segments, are located in the United States. |
(b) | From continuing operations. |
(c) | The number of average full-time equivalent employees was not adjusted for discontinued operations. |
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Other Segments | Total Segments | Reconciling Items | Key | |||||||||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | |||||||||||||||||||||||
$ | (4 | ) | $ | 6 | $ | 595 | $ | 580 | $ | 3 | $ | 1 | $ | 598 | $ | 581 | ||||||||||||||
39 | 38 | 473 | 422 | (3 | ) | (5 | ) | 470 | 417 | |||||||||||||||||||||
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35 | 44 | 1,068 | 1,002 | | (4 | ) | 1,068 | 998 | ||||||||||||||||||||||
(4 | ) | (4 | ) | 44 | 19 | 1 | | 45 | 19 | |||||||||||||||||||||
2 | 3 | 27 | 27 | 35 | 38 | 62 | 65 | |||||||||||||||||||||||
13 | 17 | 682 | 647 | (20 | ) | (6 | ) | 662 | 641 | |||||||||||||||||||||
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24 | 28 | 315 | 309 | (16 | ) | (36 | ) | 299 | 273 | |||||||||||||||||||||
(2 | ) | 1 | 82 | 88 | (3 | ) | (18 | ) | 79 | 70 | ||||||||||||||||||||
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26 | 27 | 233 | 221 | (13 | ) | (18 | ) | 220 | 203 | |||||||||||||||||||||
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26 | 27 | 233 | 221 | (16 | ) | (35 | ) | 217 | 186 | |||||||||||||||||||||
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$ | 26 | $ | 27 | $ | 235 | $ | 221 | $ | (16 | ) | $ | (35 | ) | $ | 219 | $ | 186 | |||||||||||||
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$ | 1,780 | $ | 2,396 | $ | 59,244 | $ | 55,714 | $ | 37 | $ | 82 | $ | 59,281 | $ | 55,796 | |||||||||||||||
26,871 | 26,017 | 92,124 | 86,458 | 527 | 665 | 92,651 | 87,123 | |||||||||||||||||||||||
455 | 564 | 70,498 | 68,466 | (29 | ) | (130 | ) | 70,469 | 68,336 | |||||||||||||||||||||
$ | 1 | $ | 4 | $ | 42 | $ | 31 | $ | (1 | ) | | $ | 41 | $ | 31 | |||||||||||||||
33.27 | % | 24.63 | % | 19.00 | % | 18.28 | % | (.90 | )% | (1.26 | )% | 8.30 | % | 7.69 | % | |||||||||||||||
33.27 | 24.63 | 19.00 | 18.28 | (1.11 | ) | (2.45 | ) | 8.19 | 7.05 | |||||||||||||||||||||
14 | 34 | 9,513 | 9,605 | 4,042 | 4,300 | 13,555 | 13,905 | |||||||||||||||||||||||
Other Segments | Total Segments | Reconciling Items | Key | |||||||||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | |||||||||||||||||||||||
| $ | 21 | $ | 1,759 | $ | 1,726 | $ | 7 | $ | 3 | $ | 1,766 | $ | 1,729 | ||||||||||||||||
$ | 146 | 174 | 1,406 | 1,314 | (11 | ) | (7 | ) | 1,395 | 1,307 | ||||||||||||||||||||
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146 | 195 | 3,165 | 3,040 | (4 | ) | (4 | ) | 3,161 | 3,036 | |||||||||||||||||||||
(7 | ) | (19 | ) | 120 | 36 | 1 | (1 | ) | 121 | 35 | ||||||||||||||||||||
6 | 9 | 79 | 80 | 112 | 115 | 191 | 195 | |||||||||||||||||||||||
38 | 54 | 2,016 | 1,927 | (103 | ) | (65 | ) | 1,913 | 1,862 | |||||||||||||||||||||
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109 | 151 | 950 | 997 | (14 | ) | (53 | ) | 936 | 944 | |||||||||||||||||||||
7 | 27 | 261 | 292 | (11 | ) | (42 | ) | 250 | 250 | |||||||||||||||||||||
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102 | 124 | 689 | 705 | (3 | ) | (11 | ) | 686 | 694 | |||||||||||||||||||||
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102 | 124 | 689 | 705 | 2 | (52 | ) | 691 | 653 | ||||||||||||||||||||||
2 | 4 | 1 | 6 | | | 1 | 6 | |||||||||||||||||||||||
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$ | 100 | $ | 120 | $ | 688 | $ | 699 | $ | 2 | $ | (52 | ) | $ | 690 | $ | 647 | ||||||||||||||
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$ | 1,908 | $ | 2,639 | $ | 58,200 | $ | 55,320 | $ | 63 | $ | 68 | $ | 58,263 | $ | 55,388 | |||||||||||||||
26,617 | 25,944 | 90,706 | 85,836 | 618 | 676 | 91,324 | 86,512 | |||||||||||||||||||||||
454 | 591 | 70,291 | 67,397 | (62 | ) | (138 | ) | 70,229 | 67,259 | |||||||||||||||||||||
$ | 8 | $ | 8 | $ | 105 | $ | 82 | | $ | (1 | ) | $ | 105 | $ | 81 | |||||||||||||||
40.39 | % | 36.38 | % | 18.81 | % | 19.66 | % | (.05 | )% | (.26 | )% | 6.48 | % | 6.59 | % | |||||||||||||||
40.39 | 36.38 | 18.81 | 19.66 | .07 | (1.22 | ) | 6.52 | 6.20 | ||||||||||||||||||||||
15 | 50 | 9,503 | 9,615 | 4,022 | 4,327 | 13,525 | 13,942 |
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Planned Acquisition of First Niagara Financial Group, Inc.
On October 30, 2015, we announced that KeyCorp has entered into a definitive agreement and plan of merger (Agreement) pursuant to which it will acquire all of the outstanding capital stock of First Niagara Financial Group, Inc. (NASDAQ: FNFG) (First Niagara). Under the terms of the Agreement, at the effective time of the merger, each share of First Niagara common stock will be converted into the right to receive (i) 0.680 of a share of KeyCorp common stock and (ii) $2.30 in cash. The exchange ratio of KeyCorp stock for First Niagara stock is fixed and will not adjust based on changes in KeyCorps share trading price. First Niagara equity awards outstanding immediately prior to the effective time of the merger will be converted into equity awards for KeyCorp common stock as provided in the Agreement. Each share of First Niagaras Fixed Rate-to-Floating Rate Perpetual Non-Cumulative Preferred Stock, Series B, will be converted into a share of a newly created series of preferred stock of KeyCorp having substantially the same terms as First Niagaras preferred stock. Based on the closing price of KeyCorp common shares on Thursday, October 29, 2015, of $13.38 and assuming First Niagara has 356.272 million shares outstanding on a fully-diluted basis, the value of the total consideration to be paid by KeyCorp pursuant to the Agreement is approximately $4.1 billion.
The merger is currently expected to be completed during the third quarter of 2016 and is subject to customary closing conditions including the approval of regulators and the shareholders of both KeyCorp and First Niagara.
As of September 30, 2015, First Niagara, headquartered in Buffalo, New York, had 394 branches with approximately $39 billion of total assets and $29 billion of deposits.
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Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of KeyCorp
We have reviewed the consolidated balance sheets of KeyCorp as of September 30, 2015 and 2014, and the related consolidated statements of income and comprehensive income for the three- and nine-month periods ended September 30, 2015 and 2014, and the consolidated statements of changes in equity and cash flows for the nine-month periods ended September 30, 2015 and 2014. These financial statements are the responsibility of KeyCorps management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of KeyCorp as of December 31, 2014, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for the year then ended (not presented herein) and we expressed an unqualified opinion on those consolidated financial statements in our report dated March 2, 2015. In our opinion, the accompanying consolidated balance sheet of KeyCorp as of December 31, 2014, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Cleveland, Ohio |
![]() | |||
November 2, 2015 | Ernst & Young LLP |
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Item 2. Managements Discussion & Analysis of Financial Condition & Results of Operations
This section reviews the financial condition and results of operations of KeyCorp and its subsidiaries for the quarterly and year-to-date periods ended September 30, 2015, and September 30, 2014. Some tables may include additional periods to comply with disclosure requirements or to illustrate trends in greater depth. When you read this discussion, you should also refer to the consolidated financial statements and related notes in this report. The page locations of specific sections and notes that we refer to are presented in the table of contents.
References to our 2014 Form 10-K refer to our Form 10-K for the year ended December 31, 2014, which has been filed with the SEC and is available on its website (www.sec.gov) and on our website (www.key.com/ir).
Throughout this discussion, references to Key, we, our, us, and similar terms refer to the consolidated entity consisting of KeyCorp and its subsidiaries. KeyCorp refers solely to the parent holding company, and KeyBank refers to KeyCorps subsidiary bank, KeyBank National Association.
We want to explain some industry-specific terms at the outset so you can better understand the discussion that follows.
| We use the phrase continuing operations in this document to mean all of our businesses other than the education lending business, Victory, and Austin. The education lending business and Austin have been accounted for as discontinued operations since 2009. Victory was classified as a discontinued operation in our first quarter 2013 financial reporting as a result of the sale of this business as announced on February 21, 2013, and closed on July 31, 2013. |
| Our exit loan portfolios are separate from our discontinued operations. These portfolios, which are in a run-off mode, stem from product lines we decided to cease because they no longer fit with our corporate strategy. These exit loan portfolios are included in Other Segments. |
| We engage in capital markets activities primarily through business conducted by our Key Corporate Bank segment. These activities encompass a variety of products and services. Among other things, we trade securities as a dealer, enter into derivative contracts (both to accommodate clients financing needs and to mitigate certain risks), and conduct transactions in foreign currencies (both to accommodate clients needs and to benefit from fluctuations in exchange rates). |
| For regulatory purposes, capital is divided into two classes. Federal regulations currently prescribe that at least one-half of a bank or BHCs total risk-based capital must qualify as Tier 1 capital. Both total and Tier 1 capital serve as bases for several measures of capital adequacy, which is an important indicator of financial stability and condition. As described under the heading Regulatory capital and liquidity Capital planning and stress testing in the section entitled Supervision and Regulation that begins on page 9 of our 2014 Form 10-K, the regulators are required to conduct a supervisory capital assessment of all BHCs with assets of at least $50 billion, including KeyCorp. As part of this capital adequacy review, banking regulators evaluated a component of Tier 1 capital, known as Tier 1 common equity, using the definitions of Tier 1 capital and total risk-weighted assets that were in effect in 2014, as well as a transition plan for full implementation of the Regulatory Capital Rules. The Capital section of this report under the heading Capital adequacy provides more information on total capital, Tier 1 capital, Tier 1 common equity, and the Regulatory Capital Rules, including Common Equity Tier 1, and describes how these measures are calculated. |
Additionally, a comprehensive list of the acronyms and abbreviations used throughout this discussion is included in Note 1 (Basis of Presentation and Accounting Policies).
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Our financial performance for each of the last five quarters is summarized in Figure 1.
Figure 1. Selected Financial Data
2015 | 2014 | Nine months ended September 30, |
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dollars in millions, except per share amounts |
Third | Second | First | Fourth | Third | 2015 | 2014 | |||||||||||||||||||||
FOR THE PERIOD |
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Interest income |
$ | 661 | $ | 652 | $ | 636 | $ | 646 | $ | 639 | $ | 1,949 | $ | 1,908 | ||||||||||||||
Interest expense |
70 | 68 | 65 | 64 | 64 | 203 | 197 | |||||||||||||||||||||
Net interest income |
591 | 584 | 571 | 582 | 575 | 1,746 | 1,711 | |||||||||||||||||||||
Provision for credit losses |
45 | 41 | 35 | 22 | 19 | 121 | 35 | |||||||||||||||||||||
Noninterest income |
470 | 488 | 437 | 490 | 417 | 1,395 | 1,307 | |||||||||||||||||||||
Noninterest expense |
724 | 711 | 669 | 704 | 706 | 2,104 | 2,057 | |||||||||||||||||||||
Income (loss) from continuing operations before income taxes |
292 | 320 | 304 | 346 | 267 | 916 | 926 | |||||||||||||||||||||
Income (loss) from continuing operations attributable to Key |
222 | 235 | 228 | 251 | 203 | 685 | 688 | |||||||||||||||||||||
Income (loss) from discontinued operations, net of taxes (a) |
(3 | ) | 3 | 5 | 2 | (17 | ) | 5 | (41 | ) | ||||||||||||||||||
Net income (loss) attributable to Key |
219 | 238 | 233 | 253 | 186 | 690 | 647 | |||||||||||||||||||||
Income (loss) from continuing operations attributable to Key common shareholders |
216 | 230 | 222 | 246 | 197 | 668 | 671 | |||||||||||||||||||||
Income (loss) from discontinued operations, net of taxes (a) |
(3 | ) | 3 | 5 | 2 | (17 | ) | 5 | (41 | ) | ||||||||||||||||||
Net income (loss) attributable to Key common shareholders |
213 | 233 | 227 | 248 | 180 | 673 | 630 | |||||||||||||||||||||
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PER COMMON SHARE |
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Income (loss) from continuing operations attributable to Key common shareholders |
$ | .26 | $ | .27 | $ | .26 | $ | .29 | $ | .23 | $ | .79 | $ | .77 | ||||||||||||||
Income (loss) from discontinued operations, net of taxes (a) |
| | .01 | | (.02 | ) | .01 | (.05 | ) | |||||||||||||||||||
Net income (loss) attributable to Key common shareholders (b) |
.26 | .28 | .27 | .29 | .21 | .80 | .72 | |||||||||||||||||||||
Income (loss) from continuing operations attributable to Key common shareholders assuming dilution |
$ | .26 | $ | .27 | $ | .26 | $ | .28 | $ | .23 | $ | .78 | $ | .76 | ||||||||||||||
Income (loss) from discontinued operations, net of taxes assuming dilution (a) |
| | .01 | | (.02 | ) | .01 | (.05 | ) | |||||||||||||||||||
Net income (loss) attributable to Key common shareholders assuming dilution (b) |
.25 | .27 | .26 | .28 | .21 | .79 | .71 | |||||||||||||||||||||
Cash dividends paid |
.075 | .075 | .065 | .065 | .065 | .215 | .185 | |||||||||||||||||||||
Book value at period end |
12.47 | 12.21 | 12.12 | 11.91 | 11.74 | 12.47 | 11.74 | |||||||||||||||||||||
Tangible book value at period end |
11.17 | 10.92 | 10.84 | 10.65 | 10.47 | 11.17 | 10.47 | |||||||||||||||||||||
Market price: |
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High |
15.46 | 15.70 | 14.74 | 14.18 | 14.62 | 15.70 | 14.70 | |||||||||||||||||||||
Low |
12.65 | 13.90 | 12.04 | 11.55 | 12.97 | 12.04 | 12.25 | |||||||||||||||||||||
Close |
13.01 | 15.02 | 14.16 | 13.90 | 13.33 | 13.01 | 13.33 | |||||||||||||||||||||
Weighted-average common shares outstanding (000) |
831,430 | 839,454 | 848,580 | 858,811 | 867,350 | 839,758 | 875,728 | |||||||||||||||||||||
Weighted-average common shares and potential common shares outstanding (000) (c) |
838,880 | 846,312 | 857,122 | 886,186 | 874,122 | 847,371 | 882,451 | |||||||||||||||||||||
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AT PERIOD END |
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Loans |
$ | 60,085 | $ | 58,264 | $ | 57,953 | $ | 57,381 | $ | 56,155 | $ | 60,085 | $ | 56,155 | ||||||||||||||
Earning assets |
83,779 | 82,964 | 82,624 | 82,269 | 78,310 | 83,779 | 78,310 | |||||||||||||||||||||
Total assets |
95,422 | 94,606 | 94,206 | 93,821 | 89,784 | 95,422 | 89,784 | |||||||||||||||||||||
Deposits |
71,073 | 70,669 | 71,622 | 71,998 | 68,456 | 71,073 | 68,456 | |||||||||||||||||||||
Long-term debt |
10,310 | 10,267 | 8,713 | 7,875 | 7,172 | 10,310 | 7,172 | |||||||||||||||||||||
Key common shareholders equity |
10,415 | 10,300 | 10,313 | 10,239 | 10,195 | 10,415 | 10,195 | |||||||||||||||||||||
Key shareholders equity |
10,705 | 10,590 | 10,603 | 10,530 | 10,486 | 10,705 | 10,486 | |||||||||||||||||||||
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PERFORMANCE RATIOS FROM CONTINUING OPERATIONS |
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Return on average total assets |
.95 | % | 1.03 | % | 1.03 | % | 1.12 | % | .92 | % | 1.00 | % | 1.06 | % | ||||||||||||||
Return on average common equity |
8.30 | 8.96 | 8.76 | 9.50 | 7.68 | 8.67 | 8.84 | |||||||||||||||||||||
Return on average tangible common equity (d) |
9.27 | 10.01 | 9.80 | 10.64 | 8.55 | 9.69 | 9.83 | |||||||||||||||||||||
Net interest margin (TE) |
2.87 | 2.88 | 2.91 | 2.94 | 2.96 | 2.88 | 2.98 | |||||||||||||||||||||
Cash efficiency ratio (d) |
66.9 | 65.1 | 65.1 | 64.4 | 69.7 | 65.7 | 66.7 | |||||||||||||||||||||
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PERFORMANCE RATIOS FROM CONSOLIDATED OPERATIONS |
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Return on average total assets |
.92 | % | 1.02 | % | 1.03 | % | 1.10 | % | .81 | % | .99 | % | .95 | % | ||||||||||||||
Return on average common equity |
8.19 | 9.07 | 8.96 | 9.58 | 7.01 | 8.74 | 8.30 | |||||||||||||||||||||
Return on average tangible common equity (d) |
9.14 | 10.14 | 10.02 | 10.72 | 7.81 | 9.76 | 9.23 | |||||||||||||||||||||
Net interest margin (TE) |
2.84 | 2.85 | 2.88 | 2.93 | 2.94 | 2.85 | 2.94 | |||||||||||||||||||||
Loan-to-deposit (e) |
89.3 | 87.3 | 86.9 | 84.6 | 87.4 | 89.3 | 87.4 | |||||||||||||||||||||
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CAPITAL RATIOS AT PERIOD END |
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Key shareholders equity to assets |
11.22 | % | 11.19 | % | 11.26 | % | 11.22 | % | 11.68 | % | 11.22 | % | 11.68 | % | ||||||||||||||
Key common shareholders equity to assets |
10.91 | 10.89 | 10.95 | 10.91 | 11.36 | 10.91 | 11.36 | |||||||||||||||||||||
Tangible common equity to tangible assets (d) |
9.90 | 9.86 | 9.92 | 9.88 | 10.26 | 9.90 | 10.26 | |||||||||||||||||||||
Common Equity Tier 1 (d) |
10.47 | 10.71 | 10.64 | N/A | N/A | 10.47 | N/A | |||||||||||||||||||||
Tier 1 common equity (d) |
N/A | N/A | N/A | 11.17 | 11.26 | N/A | 11.26 | |||||||||||||||||||||
Tier 1 risk-based capital |
10.87 | 11.11 | 11.04 | 11.90 | 12.01 | 10.87 | 12.01 | |||||||||||||||||||||
Total risk-based capital |
12.47 | 12.66 | 12.79 | 13.89 | 14.10 | 12.47 | 14.10 | |||||||||||||||||||||
Leverage |
10.68 | 10.74 | 10.91 | 11.26 | 11.15 | 10.68 | 11.15 | |||||||||||||||||||||
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TRUST AND BROKERAGE ASSETS |
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Assets under management |
$ | 35,158 | $ | 38,399 | $ | 39,281 | $ | 39,157 | $ | 39,283 | $ | 35,158 | $ | 39,283 | ||||||||||||||
Nonmanaged and brokerage assets |
46,796 | 48,789 | 49,508 | 49,147 | 48,273 | 46,796 | 48,273 | |||||||||||||||||||||
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OTHER DATA |
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Average full-time-equivalent employees |
13,555 | 13,455 | 13,591 | 13,590 | 13,905 | 13,525 | 13,942 | |||||||||||||||||||||
Branches |
972 | 989 | 992 | 994 | 997 | 972 | 997 |
(a) | In April 2009, we decided to wind down the operations of Austin, a subsidiary that specialized in managing hedge fund investments for institutional customers. In September 2009, we decided to discontinue the education lending business conducted through Key Education Resources, the education payment and financing unit of KeyBank. In February 2013, we decided to sell Victory to a private equity fund. As a result of these decisions, we have accounted for these businesses as discontinued operations. For further discussion regarding the income (loss) from discontinued operations, see Note 11 (Acquisitions and Discontinued Operations). |
(b) | EPS may not foot due to rounding. |
(c) | Assumes conversion of common share options and other stock awards and/or convertible preferred stock, as applicable. |
(d) | See Figure 7 entitled GAAP to Non-GAAP Reconciliations, which presents the computations of certain financial measures related to tangible common equity, Common Equity Tier 1 (compliance date of January 1, 2015, under the Regulatory Capital Rules), Tier 1 common equity (prior to January 1, 2015), and cash efficiency. The table reconciles the GAAP performance measures to the corresponding non-GAAP measures, which provides a basis for period-to-period comparisons. |
(e) | Represents period-end consolidated total loans and loans held for sale (excluding education loans in the securitizations trusts for periods prior to September 30, 2014) divided by period-end consolidated total deposits (excluding deposits in foreign office). |
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From time to time, we have made or will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements do not relate strictly to historical or current facts. Forward-looking statements usually can be identified by the use of words such as goal, objective, plan, expect, assume, anticipate, intend, project, believe, estimate, or other words of similar meaning. Forward-looking statements provide our current expectations or forecasts of future events, circumstances, results or aspirations. Our disclosures in this report contain forward-looking statements. We may also make forward-looking statements in other documents filed with or furnished to the SEC. In addition, we may make forward-looking statements orally to analysts, investors, representatives of the media, and others.
Forward-looking statements, by their nature, are subject to assumptions, risks, and uncertainties, many of which are outside of our control. Our actual results may differ materially from those set forth in our forward-looking statements. There is no assurance that any list of risks and uncertainties or risk factors is complete. Factors that could cause our actual results to differ from those described in forward-looking statements include, but are not limited to:
| deterioration of commercial real estate market fundamentals; |
| defaults by our loan counterparties or clients; |
| adverse changes in credit quality trends; |
| declining asset prices; |
| our concentrated credit exposure in commercial, financial and agricultural loans; |
| the extensive and increasing regulation of the U.S. financial services industry; |
| changes in accounting policies, standards, and interpretations; |
| breaches of security or failures of our technology systems due to technological or other factors and cybersecurity threats; |
| operational or risk management failures by us or critical third parties; |
| negative outcomes from claims or litigation; |
| the occurrence of natural or man-made disasters or conflicts or terrorist attacks; |
| increasing capital and liquidity standards under applicable regulatory rules; |
| unanticipated changes in our liquidity position, including but not limited to, changes in the cost of liquidity, our ability to enter the financial markets, and to secure alternative funding sources; |
| our ability to receive dividends from our subsidiary, KeyBank; |
| downgrades in our credit ratings or those of KeyBank; |
| a reversal of the U.S. economic recovery due to financial, political, or other shocks; |
| our ability to anticipate interest rate changes and manage interest rate risk; |
| deterioration of economic conditions in the geographic regions where we operate; |
| the soundness of other financial institutions; |
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| our ability to attract and retain talented executives and employees and to manage our reputational risks; |
| our ability to timely and effectively implement our strategic initiatives; |
| increased competitive pressure due to industry consolidation; |
| unanticipated adverse effects of strategic partnerships or acquisitions and dispositions of assets or businesses; and |
| our ability to develop and effectively use the quantitative models we rely upon in our business planning. |
Any forward-looking statements made by us or on our behalf speak only as of the date they are made, and we do not undertake any obligation to update any forward-looking statement to reflect the impact of subsequent events or circumstances. Before making an investment decision, you should carefully consider all risks and uncertainties disclosed in our SEC filings, including this report on Form 10-Q and our subsequent reports on Forms 8-K, 10-Q, and 10-K, and our registration statements under the Securities Act of 1933, as amended, all of which are or will upon filing be accessible on the SECs website at www.sec.gov and on our website at www.key.com/ir.
The economy slowed again in the third quarter of 2015, with real GDP tracking .9% after a second quarter rebound in real GDP of 3.9% on the heels of strong inventory investment. While confidence remains high, job growth has slowed, substantial wage growth has yet to materialize, and consumer spending remains modest. Additionally, housing market data has underwhelmed, with slow growth in single-family construction and only modest gains in existing home sales and home price appreciation in 2015. Concerns regarding the global economy, particularly slowing in emerging markets and the uncertainty around Chinese growth, as well as prospective Federal Reserve actions and mixed economic data in the U.S. have kept markets in check throughout the third quarter of 2015.
In the third quarter of 2015, weak income growth continued to be a constraint on consumption, although fundamentals appear to be strengthening. Real spending was modest, growing slowly at .4% in July and August. Vehicle sales continued their positive momentum, averaging a seasonally adjusted annual rate of 17.8 million units in the third quarter, up from an average seasonally adjusted annual rate of 17.2 million units during the second quarter. Consumer confidence was high, with the Conference Board measure ending the third quarter of 2015 at 103, up from 99.8 at the end of the second quarter and remaining at levels not seen since before the Great Recession. Inflation remains well below the Federal Reserve target, with the core personal consumption expenditure index up just 1.3% year-over-year as of August 2015.
In the labor market, average monthly job gains decreased to 167,000 during the third quarter of 2015, compared to the average of 231,000 in the second quarter of 2015. Gains were broad, with improvement across industry sectors. The unemployment rate declined, finishing the quarter at 5.1%; however, this decrease was driven in part by post-recession low labor force participation as 350,000 workers exited the labor force in September. In addition, wage growth has yet to accelerate, with average hourly earnings ending the quarter flat month-over-month after rising .4% in August and .2% in July.
The housing market was fairly sluggish in the third quarter of 2015, with different results between indicators on a month-to-month basis. Existing home sales increased, ending the third quarter of 2015 at 5.6 million units, or 1.3% quarter-over-quarter, and reversing a 5% month-over-month drop in August sales. New home sales ended the third quarter of 2015 flat from the second quarter as September sales dropped 11.5% from August. Additionally, housing starts were flat over the quarter, totaling a seasonally adjusted annual rate of 1.21 million in September 2015, as multi-family starts contracted 11.1% over the quarter. Permits ended the third quarter 17.5% lower, primarily due to a significant decline in multi-family dwelling permits of 37.1% over the quarter. Home price appreciation modestly increased, up 6.9% year-over-year in August 2015.
The Federal Reserve remained accommodative in the third quarter of 2015, continuing to reinvest principal payments to ease financial conditions. Forward guidance is unclear as to when the Federal Open Market Committee will raise the federal funds target rate, as economic data and inflation measures remain weaker than their established targets, and global growth is slowing, particularly in emerging economies. Weaker economic data, geopolitical tensions, and cautious forward guidance have held rates in check. The yield on the 10-year U.S. Treasury declined 37 basis points during the third quarter of 2015 and finished the quarter at 2.06% as volatility in U.S. and global equity markets put downward pressure on yields.
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Our long-term financial goals are as follows:
| Improve balance sheet efficiency by targeting a loan-to-deposit ratio range of 90% to 100%; |
| Maintain a moderate risk profile by targeting a net loan charge-offs to average loans ratio and provision for credit losses to average loans ratio in the range of .40% to .60%; |
| Grow high quality and diverse revenue streams by targeting a net interest margin in excess of 3.50%, and a ratio of noninterest income to total revenue of greater than 40%; |
| Generate positive operating leverage and target a cash efficiency ratio of less than 60%; and |
| Maintain disciplined capital management and target a return on average assets in the range of 1.00% to 1.25%. |
Figure 2 shows the evaluation of our long-term financial goals for the three and nine months ended September 30, 2015.
Figure 2. Evaluation of Our Long-Term Financial Goals
KEY Business Model |
Key Metrics (a) |
3Q15 | YTD 2015 | Targets | ||||||||||
Balance sheet efficiency | Loan-to-deposit ratio (b) | 89 | % | 89 | % | 90 - 100 | % | |||||||
Moderate risk profile | Net loan charge-offs to average loans | .27 | % | .24 | % | .40 - .60 | % | |||||||
Provision for credit losses to average loans | .30 | % | .28 | % | ||||||||||
High quality, diverse revenue streams | Net interest margin | 2.87 | % | 2.88 | % | > 3.50 | % | |||||||
Noninterest income to total revenue | 44 | % | 44 | % | > 40 | % | ||||||||
Positive operating leverage | Cash efficiency ratio (c) | 66.9 | % | 65.7 | % | < 60 | % | |||||||
Disciplined capital management | Return on average assets | .95 | % | 1.00 | % | 1.00 - 1.25 | % |
(a) | Calculated from continuing operations, unless otherwise noted. |
(b) | Represents period-end consolidated total loans and loans held for sale divided by period-end consolidated total deposits (excluding deposits in foreign office). |
(c) | Excludes intangible asset amortization; non-GAAP measure: see Figure 7 for reconciliation. |
We initiated the following actions during the first nine months of 2015 to support our corporate strategy described in the Introduction section under the Corporate strategy heading on page 36 of our 2014 Form 10-K.
| We continue to focus on growing our businesses and remain committed to improving productivity and efficiency. During the first nine months of 2015, we generated positive operating leverage, with revenue up 4.1% from 2014. Net interest income benefited from solid loan growth, driven by a 12% increase in average commercial, financial and agricultural loans. Noninterest income benefited from increases in several of our core fee-based businesses: investment banking and debt placement fees, which had record high fees in the second quarter of 2015 due to stronger financial advisory fees and loan syndications, trust and investment services income, corporate services income, and cards and payments income. Although noninterest expense increased from prior year, this increase was primarily due to higher performance-based compensation and the third quarter 2014 acquisition of Pacific Crest Securities. |
| Our strong risk management practices and a more favorable credit environment resulted in another quarter of solid credit quality trends. For the nine months ended September 30, 2015, net loan charge-offs were .24% of average loans and the provision for credit losses was .28% of average loans, both well below our targeted range. |
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| Capital management remains a priority for the remainder of 2015. On March 11, 2015, the Federal Reserve announced that it did not object to our 2015 capital plan submitted as part of the annual CCAR process. The 2015 capital plan includes a common share repurchase program of up to $725 million, including repurchases to offset issuances of common shares under our employee compensation plans. Common share repurchases under the 2015 capital plan began in the second quarter of 2015. During the second and third quarters of 2015, we completed $252 million of common share repurchases under this authorization. |
| Our 2015 capital plan also proposed a 15% increase in our quarterly common share dividend to $.075 per share, which was approved by our Board in May 2015. Consistent with our 2015 capital plan, we made a dividend payment of $.075 per common share for each of the second and third quarters of 2015. An additional potential increase in our quarterly common share dividend, up to $.085 per share, will be considered by the Board in 2016 for the fifth quarter of the 2015 capital plan. We anticipate these actions will lead to an estimated payout ratio that is among the highest in our peer group for the third consecutive year. |
We have two major business segments: Key Community Bank and Key Corporate Bank.
Key Community Bank serves individuals and small to mid-sized businesses by offering a variety of deposit, investment, lending, credit card, and personalized wealth management products and business advisory services. These products and services are provided through our relationship managers and specialists working in our 12-state branch network, which is organized into eight internally defined geographic regions: Pacific, Rocky Mountains, Indiana, Western Ohio and Michigan, Eastern Ohio, Western New York, Eastern New York, and New England.
Figure 3 shows the geographic diversity of Key Community Banks average deposits, commercial loans, and home equity loans.
Figure 3. Key Community Bank Geographic Diversity
Geographic Region | ||||||||||||||||||||||||||||||||||||||||
Three months ended September 30, 2015 dollars in millions |
Pacific | Rocky Mountains |
Indiana | West Ohio/ Michigan |
East Ohio |
Western New York |
Eastern New York |
New England |
NonRegion (a) | Total | ||||||||||||||||||||||||||||||
Average deposits |
$ | 12,007 | $ | 5,335 | $ | 2,370 | $ | 4,540 | $ | 9,485 | $ | 4,871 | $ | 7,747 | $ | 2,886 | $ | 1,993 | $ | 51,234 | ||||||||||||||||||||
Percent of total |
23.5 | % | 10.4 | % | 4.6 | % | 8.9 | % | 18.5 | % | 9.5 | % | 15.1 | % | 5.6 | % | 3.9 | % | 100.0 | % | ||||||||||||||||||||
Average commercial loans |
$ | 3,600 | $ | 1,745 | $ | 864 | $ | 1,164 | $ | 2,385 | $ | 615 | $ | 1,853 | $ | 847 | $ | 3,140 | $ | 16,213 | ||||||||||||||||||||
Percent of total |
22.2 | % | 10.8 | % | 5.3 | % | 7.2 | % | 14.7 | % | 3.8 | % | 11.4 | % | 5.2 | % | 19.4 | % | 100.0 | % | ||||||||||||||||||||
Average home equity loans |
$ | 3,265 | $ | 1,562 | $ | 500 | $ | 834 | $ | 1,266 | $ | 837 | $ | 1,277 | $ | 662 | $ | 78 | $ | 10,281 | ||||||||||||||||||||
Percent of total |
31.8 | % | 15.2 | % | 4.9 | % | 8.1 | % | 12.3 | % | 8.1 | % | 12.4 | % | 6.4 | % | .8 | % | 100.0 | % |
(a) | Represents average deposits, commercial loan products, and home equity loan products centrally managed outside of our eight Key Community Bank regions. |
Key Corporate Bank is a full-service corporate and investment bank focused principally on serving the needs of middle market clients in seven industry sectors: consumer, energy, healthcare, industrial, public sector, real estate, and technology. Key Corporate Bank delivers a broad suite of banking and capital markets products to its clients, including syndicated finance, debt and equity capital markets, commercial payments, equipment finance, commercial mortgage banking, derivatives, foreign exchange, financial advisory, and public finance. Key Corporate Bank is also a significant servicer of commercial mortgage loans and a significant special servicer of CMBS. Key Corporate Bank delivers many of its product capabilities to clients of Key Community Bank.
Further information regarding the products and services offered by our Key Community Bank and Key Corporate Bank segments is included in this report in Note 18 (Line of Business Results).
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Regulatory reform developments
On July 21, 2010, the Dodd-Frank Act became law. It was intended to address perceived deficiencies and gaps in the regulatory framework for financial services in the U.S., reduce the risks of bank failures, better equip the nations regulators to guard against or mitigate any future financial crises, and manage systemic risk through increased supervision of bank and nonbank SIFIs, such as KeyCorp and KeyBank. Further discussion concerning the Dodd-Frank Act, related regulatory developments, and the risks that they present to Key is available under the heading Supervision and Regulation in Item 1. Business and under the heading II. Compliance Risks in Item 1A. Risk Factors of our 2014 Form 10-K. Many proposed rules referenced in our prior reports remain pending. The following discussion provides a summary of relevant regulatory developments relating to the Dodd-Frank Act or that relate to our results this quarter.
Regulatory capital rules
In October 2013, federal banking regulators published the final Basel III capital framework for U.S. banking organizations (the Regulatory Capital Rules). The Regulatory Capital Rules generally implement in the U.S. the Basel III capital framework published by the Basel Committee in December 2010 and revised in June 2011 (the Basel III capital framework). The Basel III capital framework and the U.S. implementation of the Basel III capital framework are discussed in more detail in Item 1. Business of our 2014 Form 10-K under the heading Supervision and RegulationBasel III capital and liquidity frameworks.
While the Regulatory Capital Rules became effective on January 1, 2014, the mandatory compliance date for Key as a standardized approach banking organization was January 1, 2015, subject to transitional provisions extending to January 1, 2019.
New minimum capital and leverage ratio requirements
Under the Regulatory Capital Rules, standardized approach banking organizations, like Key, are required to meet the minimum capital and leverage ratios set forth in Figure 4 below. At September 30, 2015, Key had an estimated Common Equity Tier 1 Capital Ratio of 10.37% under the fully phased-in Regulatory Capital Rules. Also at September 30, 2015, based on the fully phased-in Regulatory Capital Rules, Key estimates that its capital and leverage ratios, after adjustment for market risk, would be as set forth in Figure 4.
Figure 4. Estimated Ratios vs. Minimum Capital Ratios Calculated Under the Fully Phased-In Regulatory Capital Rules
Ratios (including Capital conservation buffer) |
Key September 30, 2015 Estimated |
Minimum January 1, 2015 |
Phase-in Period |
Minimum January 1, 2019 |
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Common Equity Tier 1 (a) |
10.4 | % | 4.5 | % | None | 4.5 | % | |||||||
Capital conservation buffer (b) |
| | 1/1/16 - 1/1/19 | 2.5 | ||||||||||
Common Equity Tier 1 + Capital conservation buffer |
| 4.5 | 1/1/16 - 1/1/19 | 7.0 | ||||||||||
Tier 1 Capital |
10.7 | 6.0 | None | 6.0 | ||||||||||
Tier 1 Capital + Capital conservation buffer |
| 6.0 | 1/1/16 - 1/1/19 | 8.5 | ||||||||||
Total Capital |
12.4 | 8.0 | None | 8.0 | ||||||||||
Total Capital + Capital conservation buffer |
| 8.0 | 1/1/16 - 1/1/19 | 10.5 | ||||||||||
Leverage (c) |
10.5 | 4.0 | None | 4.0 |
(a) | See Figure 7 entitled GAAP to Non-GAAP Reconciliations, which presents the computation for estimated Common Equity Tier 1. The table reconciles the GAAP performance measure to the corresponding non-GAAP measure, which provides a basis for period-to-period comparisons. |
(b) | Capital conservation buffer must consist of Common Equity Tier 1 capital. As a standardized approach banking organization, KeyCorp is not subject to the countercyclical capital buffer of up to 2.5% imposed upon an advanced approaches banking organization under the Regulatory Capital Rules. |
(c) | As a standardized approach banking organization, KeyCorp is not subject to the 3% supplemental leverage ratio requirement, which becomes effective January 1, 2018. |
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Revised prompt corrective action capital category ratios
Under the Regulatory Capital Rules, the prompt corrective action capital category threshold ratios applicable to FDIC-insured depository institutions such as KeyBank were revised effective January 1, 2015. Figure 5 identifies the capital category threshold ratios for a well capitalized and an adequately capitalized institution under the Regulatory Capital Rules.
Figure 5. Well Capitalized and Adequately Capitalized Capital Category Ratios under Revised Prompt
Corrective Action Rules
Prompt Corrective Action |
Capital Category | |||||||
Ratio |
Well Capitalized (a) | Adequately Capitalized | ||||||
Common Equity Tier 1 Risk-Based |
6.5 | % | 4.5 | % | ||||
Tier 1 Risk-Based |
8.0 | 6.0 | ||||||
Total Risk-Based |
10.0 | 8.0 | ||||||
Tier 1 Leverage (b) |
5.0 | 4.0 |
(a) | A well capitalized institution also must not be subject to any written agreement, order or directive to meet and maintain a specific capital level for any capital measure. |
(b) | As a standardized approach banking organization, KeyBank is not subject to the 3% supplemental leverage ratio requirement, which becomes effective January 1, 2018. |
As of September 30, 2015, KeyBank meets all well capitalized capital adequacy requirements under the Regulatory Capital Rules.
Liquidity coverage ratio
In October 2014, federal banking agencies published the final Basel III liquidity framework for U.S. banking organizations (the Liquidity Coverage Rules) that create a minimum LCR for certain internationally active bank and nonbank financial companies (excluding KeyCorp) and a modified version of the LCR (Modified LCR) for bank holding companies and other depository institution holding companies with over $50 billion in consolidated assets that are not internationally active (including KeyCorp).
As a Modified LCR bank holding company under the Liquidity Coverage Rules, Key will be required to maintain high-quality liquid assets of at least 100% of its total net cash outflow amount determined by prescribed assumptions in a standardized hypothetical stress scenario over a 30-calendar day period. Implementation for Modified LCR banking organizations, like Key, will begin on January 1, 2016, with a minimum requirement of 90% coverage, reaching 100% coverage by January 1, 2017. For the third quarter of 2015, our estimated Modified LCR was above 100%. In the future, we may change the composition of our investment portfolio, increase the size of the overall investment portfolio, and modify product offerings to enhance or optimize our liquidity position.
KeyBank will not be subject to the LCR or the Modified LCR under the Liquidity Coverage Rules unless the OCC affirmatively determines that application of the LCR or the Modified LCR to KeyBank is appropriate in light of its asset size, level of complexity, risk profile, scope of operations, affiliation with foreign or domestic covered entities, or risk to the financial system.
Net stable funding ratio
As previously disclosed in the Supervision and Regulation section of Item 1. Business of our 2014 Form 10-K under the heading Basel III capital and liquidity frameworks, the Basel Committee finalized the Basel III net stable funding ratio (NSFR) in October 2014. The Basel Committee published final Basel III NSFR disclosure standards in June 2015. The federal banking regulators, however, have yet to issue any proposal to implement either the final Basel III NSFR or the final Basel III NSFR disclosure standards.
Common equity surcharge
In July 2015, the Federal Reserve adopted a final rule to implement the common equity surcharge on U.S. global systemically important banks (G-SIBs). The final rule is effective December 1, 2015, although the surcharge, which will be added to the capital conservation buffer under the Regulatory Capital Rules, will be phased in during the January 1, 2016, through January 1, 2019, period. Notably this final rule applies to advanced approaches banking organizations, not standardized approach banking organizations like Key. In addition, unlike what was proposed under the U.S. G-SIB Notice of Proposed Rulemaking, the final rule does not require KeyCorp to determine annually whether it is a U.S. G-SIB unless it becomes an advanced approaches banking organization.
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For the third quarter of 2015, we announced net income from continuing operations attributable to Key common shareholders of $216 million, or $.26 per common share. Our third quarter of 2015 results compare to net income from continuing operations attributable to Key common shareholders of $197 million, or $.23 per common share, for the third quarter of 2014.
Our taxable-equivalent net interest income was $598 million for the third quarter of 2015, and the net interest margin was 2.87%. These results compare to taxable-equivalent net interest income of $581 million and a net interest margin of 2.96% for the third quarter of 2014. The increase in net interest income reflects higher earning asset balances moderated by lower earning asset yields, which also drove the decline in the net interest margin. For the full year of 2015, without the benefit of higher rates, we expect low-single-digit growth in net interest income compared to the prior year. We expect the net interest margin to be relatively stable with the third quarter of 2015, reflecting continued elevated levels of liquidity.
Our noninterest income was $470 million for the third quarter of 2015, compared to $417 million for the year-ago quarter. The increase from the prior year was primarily attributable to strength in our core fee-based businesses, which included a full-quarter impact of the September 2014 acquisition of Pacific Crest Securities. The third quarter of 2015 included $21 million of higher investment banking and debt placement fees, $15 million of increased corporate services income, and $9 million of higher trust and investment services income. Additionally, cards and payments income increased $5 million due to higher revenue from credit card and merchant fees. For the full year of 2015, we expect mid-single-digit growth in our noninterest income compared to the prior year.
Our noninterest expense was $724 million for the third quarter of 2015, compared to $706 million in the third quarter of last year. Personnel costs increased $21 million year-over-year primarily due to increased performance-based compensation related to a strong capital markets business performance, along with a full-quarter impact of the September 2014 acquisition of Pacific Crest Securities. Nonpersonnel expense remained relatively stable as lower occupancy costs offset an increase in business services and professional fees. For the full year of 2015, we expect noninterest expense to be relatively stable with 2014.
Average loans were $59.3 billion for the third quarter of 2015, an increase of $3.5 billion compared to the third quarter of 2014. The loan growth occurred primarily in the commercial, financial and agricultural portfolio, which increased $3.9 billion and was broad-based across our commercial lines of business. Consumer loans declined $214 million as a result of the run-off in our consumer exit portfolios. Our core consumer loan portfolio remained relatively stable to the year-ago quarter. For the full year of 2015, we anticipate average loan growth in the mid-single-digit range, benefiting from the strength in our commercial business.
Average deposits, excluding deposits in foreign office, totaled $70 billion for the third quarter of 2015, an increase of $2.2 billion compared to the year-ago quarter. NOW and money market deposit accounts increased by $2.3 billion, and noninterest-bearing deposits increased by $966 million, reflecting continued growth in the commercial mortgage servicing business and inflows from commercial and consumer clients. These increases were partially offset by a decline in certificates of deposit.
Our provision for credit losses was $45 million for the third quarter of 2015, compared to $19 million for the year-ago quarter. Our ALLL was $790 million, or 1.31% of total period-end loans at September 30, 2015, compared to 1.43% at September 30, 2014. We expect our provision for credit losses to approximate the level of net loan charge-offs for the remainder of the year.
Net loan charge-offs for the third quarter of 2015 totaled $41 million, or .27% of average total loans, compared to .22% for the same period last year. We expect net loan charge-offs to average total loans to continue to be below our targeted range of .40% to .60% for the remainder of the year.
At September 30, 2015, our nonperforming loans totaled $400 million and represented .67% of period-end portfolio loans, compared to .71% at September 30, 2014. Nonperforming assets at September 30, 2015, totaled $417 million and represented .69% of period-end portfolio loans and OREO and other nonperforming assets, compared to .74% at September 30, 2014.
Our capital ratios remain strong. Our tangible common equity and Tier 1 risk-based capital ratios at September 30, 2015, are 9.90% and 10.87%, respectively, compared to 10.26% and 12.01%, respectively, at September 30, 2014. In addition, our Common Equity Tier 1 ratio is 10.47% at September 30, 2015. We continue to return capital to our shareholders by repurchasing common shares and through our quarterly common share dividend. In the third quarter of 2015, we repurchased $123 million of common shares and paid a cash dividend of $.075 per common share under our 2015 capital plan authorization.
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Figure 6 shows our continuing and discontinued operating results for the current, past, and year-ago quarters and the current and year-ago periods-to-date. Our financial performance for each of the past five quarters is summarized in Figure 1.
Figure 6. Results of Operations
Three months ended | Nine months ended | |||||||||||||||||||
in millions, except per share amounts |
9-30-15 | 6-30-15 | 9-30-14 | 9-30-15 | 9-30-14 | |||||||||||||||
Summary of operations |
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Income (loss) from continuing operations attributable to Key |
$ | 222 | $ | 235 | $ | 203 | $ | 685 | $ | 688 | ||||||||||
Income (loss) from discontinued operations, net of taxes (a) |
(3 | ) | 3 | (17 | ) | 5 | (41 | ) | ||||||||||||
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Net income (loss) attributable to Key |
$ | 219 | $ | 238 | $ | 186 | $ | 690 | $ | 647 | ||||||||||
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Income (loss) from continuing operations attributable to Key |
$ | 222 | $ | 235 | $ | 203 | $ | 685 | $ | 688 | ||||||||||
Less: Dividends on Series A Preferred Stock |
6 | 5 | 6 | 17 | 17 | |||||||||||||||
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Income (loss) from continuing operations attributable to Key common shareholders |
216 | 230 | 197 | 668 | 671 | |||||||||||||||
Income (loss) from discontinued operations, net of taxes (a) |
(3 | ) | 3 | (17 | ) | 5 | (41 | ) | ||||||||||||
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Net income (loss) attributable to Key common shareholders |
$ | 213 | $ | 233 | $ | 180 | $ | 673 | $ | 630 | ||||||||||
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Per common share assuming dilution |
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Income (loss) from continuing operations attributable to Key common shareholders |
$ | .26 | $ | .27 | $ | .23 | $ | .78 | $ | .76 | ||||||||||
Income (loss) from discontinued operations, net of taxes (a) |
| | (.02 | ) | .01 | (.05 | ) | |||||||||||||
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Net income (loss) attributable to Key common shareholders (b) |
$ | .25 | $ | .27 | $ | .21 | $ | .79 | $ | .71 | ||||||||||
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(a) | In April 2009, we decided to wind down the operations of Austin, a subsidiary that specialized in managing hedge fund investments for institutional customers. In September 2009, we decided to discontinue the education lending business conducted through Key Education Resources, the education payment and financing unit of KeyBank. In February 2013, we decided to sell Victory to a private equity fund. As a result of these decisions, we have accounted for these businesses as discontinued operations. For further discussion regarding the income (loss) from discontinued operations, see Note 11 (Acquisitions and Discontinued Operations). |
(b) | EPS may not foot due to rounding. |
Figure 7 presents certain non-GAAP financial measures related to tangible common equity, return on tangible common equity, Common Equity Tier 1, 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 Keys capital position without regard to the effects of intangible assets and preferred stock. 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 Common Equity Tier 1. 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 Common Equity Tier 1 is consistent with existing capital adequacy categories. The Regulatory Capital Rules, described in more detail under the section Supervision and regulation in Item 2 of this report, also make Common Equity Tier 1 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. Since analysts and banking regulators may assess our capital adequacy using tangible common equity and Common Equity Tier 1, we believe it is useful to enable investors to assess our capital adequacy on these same bases. Figure 7 also reconciles the GAAP performance measures to the corresponding non-GAAP measures.
Figure 7 also shows the computation for and reconciliation of pre-provision net revenue, which is not formally defined by GAAP. We believe that eliminating the effects of the provision for credit 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.
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Figure 7. GAAP to Non-GAAP Reconciliations
Three months ended | ||||||||||||||||||||
dollars in millions |
9-30-15 | 6-30-15 | 3-31-15 | 12-31-14 | 9-30-14 | |||||||||||||||
Tangible common equity to tangible assets at period end |
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Key shareholders equity (GAAP) |
$ | 10,705 | $ | 10,590 | $ | 10,603 | $ | 10,530 | $ | 10,486 | ||||||||||
Less: Intangible assets (a) |
1,084 | 1,085 | 1,088 | 1,090 | 1,105 | |||||||||||||||
Series A Preferred Stock (b) |
281 | 281 | 281 | 282 | 282 | |||||||||||||||
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Tangible common equity (non-GAAP) |
$ | 9,340 | $ | 9,224 | $ | 9,234 | $ | 9,158 | $ | 9,099 | ||||||||||
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Total assets (GAAP) |
$ | 95,422 | $ | 94,606 | $ | 94,206 | $ | 93,821 | $ | 89,784 | ||||||||||
Less: Intangible assets (a) |
1,084 | 1,085 | 1,088 | 1,090 | 1,105 | |||||||||||||||
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Tangible assets (non-GAAP) |
$ | 94,338 | $ | 93,521 | $ | 93,118 | $ | 92,731 | $ | 88,679 | ||||||||||
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Tangible common equity to tangible assets ratio (non-GAAP) |
9.90 | % | 9.86 | % | 9.92 | % | 9.88 | % | 10.26 | % | ||||||||||
Common Equity Tier 1 at period end |
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Key shareholders equity (GAAP) |
$ | 10,705 | $ | 10,590 | $ | 10,603 | | | ||||||||||||
Less: Series A Preferred Stock (b) |
281 | 281 | 281 | | | |||||||||||||||
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Common Equity Tier 1 capital before adjustments and deductions |
10,424 | 10,309 | 10,322 | | | |||||||||||||||
Less: Goodwill, net of deferred taxes |
1,036 | 1,034 | 1,036 | | | |||||||||||||||
Intangible assets, net of deferred taxes |
29 | 33 | 36 | | | |||||||||||||||
Deferred tax assets |
1 | 1 | 1 | | | |||||||||||||||
Net unrealized gains (losses) on available-for-sale securities, net of deferred taxes |
54 | | 52 | | | |||||||||||||||
Accumulated gains (losses) on cash flow hedges, net of deferred taxes |
21 | (20 | ) | (8 | ) | | | |||||||||||||
Amounts in AOCI attributed to pension and postretirement benefit costs, net of deferred taxes |
(385 | ) | (361 | ) | (364 | ) | | | ||||||||||||
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Total Common Equity Tier 1 capital |
$ | 9,668 | $ | 9,622 | $ | 9,569 | | | ||||||||||||
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Net risk-weighted assets (regulatory) |
$ | 92,307 | $ | 89,851 | $ | 89,967 | | | ||||||||||||
Common Equity Tier 1 ratio (non-GAAP) |
10.47 | % | 10.71 | % | 10.64 | % | | | ||||||||||||
Tier 1 common equity at period end |
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Key shareholders equity (GAAP) |
| | | $ | 10,530 | $ | 10,486 | |||||||||||||
Qualifying capital securities |
| | | 339 | 340 | |||||||||||||||
Less: Goodwill |
| | | 1,057 | 1,051 | |||||||||||||||
Accumulated other comprehensive income (loss) (c) |
| | | (395 | ) | (366 | ) | |||||||||||||
Other assets (d) |
| | | 83 | 110 | |||||||||||||||
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Total Tier 1 capital (regulatory) |
| | | 10,124 | 10,031 | |||||||||||||||
Less: Qualifying capital securities |
| | | 339 | 340 | |||||||||||||||
Series A Preferred Stock (b) |
| | | 282 | 282 | |||||||||||||||
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Total Tier 1 common equity (non-GAAP) |
| | | $ | 9,503 | $ | 9,409 | |||||||||||||
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Net risk-weighted assets (regulatory) |
| | | $ | 85,100 | $ | 83,547 | |||||||||||||
Tier 1 common equity ratio (non-GAAP) |
| | | 11.17 | % | 11.26 | % | |||||||||||||
Pre-provision net revenue |
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Net interest income (GAAP) |
$ | 591 | $ | 584 | $ | 571 | $ | 582 | $ | 575 | ||||||||||
Plus: Taxable-equivalent adjustment |
7 | 7 | 6 | 6 | 6 | |||||||||||||||
Noninterest income (GAAP) |
470 | 488 | 437 | 490 | 417 | |||||||||||||||
Less: Noninterest expense (GAAP) |
724 | 711 | 669 | 704 | 706 | |||||||||||||||
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Pre-provision net revenue from continuing operations (non-GAAP) |
$ | 344 | $ | 368 | $ | 345 | $ | 374 | $ | 292 | ||||||||||
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Average tangible common equity |
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Average Key shareholders equity (GAAP) |
$ | 10,614 | $ | 10,590 | $ | 10,570 | $ | 10,562 | $ | 10,473 | ||||||||||
Less: Intangible assets (average) (e) |
1,083 | 1,086 | 1,089 | 1,096 | 1,037 | |||||||||||||||
Series A Preferred Stock (average) |
290 | 290 | 290 | 291 | 291 | |||||||||||||||
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Average tangible common equity (non-GAAP) |
$ | 9,241 | $ | 9,214 | $ | 9,191 | $ | 9,175 | $ | 9,145 | ||||||||||
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Return on average tangible common equity from continuing operations |
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Net income (loss) from continuing operations attributable to Key common shareholders (GAAP) |
$ | 216 | $ | 230 | $ | 222 | $ | 246 | $ | 197 | ||||||||||
Average tangible common equity (non-GAAP) |
9,241 | 9,214 | 9,191 | 9,175 | 9,145 | |||||||||||||||
Return on average tangible common equity from continuing operations (non-GAAP) |
9.27 | % | 10.01 | % | 9.80 | % | 10.64 | % | 8.55 | % | ||||||||||
Return on average tangible common equity consolidated |
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Net income (loss) attributable to Key common shareholders (GAAP) |
$ | 213 | $ | 233 | $ | 227 | $ | 248 | $ | 180 | ||||||||||
Average tangible common equity (non-GAAP) |
9,241 | 9,214 | 9,191 | 9,175 | 9,145 | |||||||||||||||
Return on average tangible common equity consolidated (non-GAAP) |
9.14 | % | 10.14 | % | 10.02 | % | 10.72 | % | 7.81 | % | ||||||||||
Cash efficiency ratio |
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Noninterest expense (GAAP) |
$ | 724 | $ | 711 | $ | 669 | $ | 704 | $ | 706 | ||||||||||
Less: Intangible asset amortization (GAAP) |
9 | 9 | 9 | 10 | 10 | |||||||||||||||
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Adjusted noninterest expense (non-GAAP) |
$ | 715 | $ | 702 | $ | 660 | $ | 694 | $ | 696 | ||||||||||
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Net interest income (GAAP) |
$ | 591 | $ | 584 | $ | 571 | $ | 582 | $ | 575 | ||||||||||
Plus: Taxable-equivalent adjustment |
7 | 7 | 6 | 6 | 6 | |||||||||||||||
Noninterest income (GAAP) |
470 | 488 | 437 | 490 | 417 | |||||||||||||||
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Total taxable-equivalent revenue (non-GAAP) |
$ | 1,068 | $ | 1,079 | $ | 1,014 | $ | 1,078 | $ | 998 | ||||||||||
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Cash efficiency ratio (non-GAAP) |
66.9 | % | 65.1 | % | 65.1 | % | 64.4 | % | 69.7 | % |
(a) | For the three months ended September 30, 2015, June 30, 2015, March 31, 2015, December 31, 2014, and September 30, 2014, intangible assets exclude $50 million, $55 million, $61 million, $68 million, and $72 million, respectively, of period-end purchased credit card receivables. |
(b) | Net of capital surplus. |
(c) | Includes 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, and amounts resulting from the application of the applicable accounting guidance for defined benefit and other postretirement plans. |
(d) | Other assets deducted from Tier 1 capital and net risk-weighted assets consist of disallowed intangible assets (excluding goodwill) and deductible portions of nonfinancial equity investments. There were no disallowed deferred tax assets at any quarter-end during 2014. |
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Figure 7. GAAP to Non-GAAP Reconciliations, continued
Three months ended | ||||
dollars in millions |
9-30-15 | |||
Common Equity Tier 1 under the Regulatory Capital Rules (estimates) |
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Common Equity Tier 1 under current Regulatory Capital Rules |
$ | 9,668 | ||
Adjustments from current Regulatory Capital Rules to the fully phased-in Regulatory Capital Rules: |
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Deferred tax assets and other intangible |
(46 | ) | ||
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Common Equity Tier 1 anticipated under the fully phased-in Regulatory Capital Rules (g) |
$ | 9,622 | ||
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Net risk-weighted assets under current Regulatory Capital Rules |
$ | 92,307 | ||
Adjustments from current Regulatory Capital Rules to the fully phased-in Regulatory Capital Rules: |
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Mortgage servicing assets (h) |
479 | |||
All other assets (i) |
1 | |||
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Total risk-weighted assets anticipated under the fully phased-in Regulatory Capital Rules (g) |
$ | 92,787 | ||
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Common Equity Tier 1 ratio under the fully phased-in Regulatory Capital Rules (g) |
10.37 | % |
Nine months ended | ||||||||
dollars in millions |
9-30-15 | 9-30-14 | ||||||
Pre-provision net revenue |
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Net interest income (GAAP) |
$ | 1,746 | $ | 1,711 | ||||
Plus: Taxable-equivalent adjustment |
20 | 18 | ||||||
Noninterest income (GAAP) |
1,395 | 1,307 | ||||||
Less: Noninterest expense (GAAP) |
2,104 | 2,057 | ||||||
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Pre-provision net revenue from continuing operations (non-GAAP) |
$ | 1,057 | $ | 979 | ||||
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Average tangible common equity |
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Average Key shareholders equity (GAAP) |
$ | 10,591 | $ | 10,435 | ||||
Less: Intangible assets (average) (j) |
1,086 | 1,020 | ||||||
Preferred Stock, Series A (average) |
290 | 291 | ||||||
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Average tangible common equity (non-GAAP) |
$ | 9,215 | $ | 9,124 | ||||
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Return on average tangible common equity from continuing operations |
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Net income (loss) from continuing operations attributable to Key common shareholders (GAAP) |
$ | 668 | $ | 671 | ||||
Average tangible common equity (non-GAAP) |
9,215 | 9,124 | ||||||
Return on average tangible common equity from continuing operations (non-GAAP) |
9.69 | % | 9.83 | % | ||||
Return on average tangible common equity consolidated |
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Net income (loss) attributable to Key common shareholders (GAAP) |
$ | 673 | $ | 630 | ||||
Average tangible common equity (non-GAAP) |
9,215 | 9,124 | ||||||
Return on average tangible common equity consolidated (non-GAAP) |
9.76 | % | 9.23 | % | ||||
Cash efficiency ratio |
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Noninterest expense (GAAP) |
$ | 2,104 | $ | 2,057 | ||||
Less: Intangible asset amortization (GAAP) |
27 | 29 | ||||||
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Adjusted noninterest expense (non-GAAP) |
$ | 2,077 | $ | 2,028 | ||||
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Net interest income (GAAP) |
$ | 1,746 | $ | 1,711 | ||||
Plus: Taxable-equivalent adjustment |
20 | 18 | ||||||
Noninterest income (GAAP) |
1,395 | 1,307 | ||||||
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Total taxable-equivalent revenue (non-GAAP) |
$ | 3,161 | $ | 3,036 | ||||
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Cash efficiency ratio (non-GAAP) |
65.7 | % | 66.8 | % |
(e) | For the three months ended September 30, 2015, June 30, 2015, March 31, 2015, December 31, 2014, and September 30, 2014, average intangible assets exclude $52 million, $58 million, $64 million, $69 million, and $76 million, respectively, of average purchased credit card receivables. |
(f) | Includes the deferred tax assets subject to future taxable income for realization, primarily tax credit carryforwards, as well as the deductible portion of purchased credit card receivables. |
(g) | The anticipated amount of regulatory capital and risk-weighted assets is based upon the federal banking agencies Regulatory Capital Rules (as fully phased-in on January 1, 2019); Key is subject to the Regulatory Capital Rules under the standardized approach. |
(h) | Item is included in the 10%/15% exceptions bucket calculation and is risk-weighted at 250%. |
(i) | Includes the phase-in of deferred tax assets arising from temporary differences at 250% risk-weight. Additionally, under the fully implemented rule, certain deferred tax assets and intangible assets subject to the transition provision are no longer required to be risk-weighted because they are deducted directly from capital. |
(j) | For the nine months ended September 30, 2015, and September 30, 2014, average intangible assets exclude $58 million and $82 million, respectively, of average ending purchased credit card receivables. |
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One of our principal sources of revenue is net interest income. Net interest income is the difference between interest income received on earning assets (such as loans and securities) and loan-related fee income, and interest expense paid on deposits and borrowings. There are several factors that affect net interest income, including:
| the volume, pricing, mix, and maturity of earning assets and interest-bearing liabilities; |
| the volume and value of net free funds, such as noninterest-bearing deposits and equity capital; |
| the use of derivative instruments to manage interest rate risk; |
| interest rate fluctuations and competitive conditions within the marketplace; and |
| asset quality. |
To make it easier to compare results among several periods and the yields on various types of earning assets (some taxable, some not), we present net interest income in this discussion on a taxable-equivalent basis (i.e., as if it were all taxable and at the same rate). For example, $100 of tax-exempt income would be presented as $154, an amount that if taxed at the statutory federal income tax rate of 35% would yield $100.
Figure 8 shows the various components of our balance sheet that affect interest income and expense, and their respective yields or rates over the past five quarters. This figure also presents a reconciliation of taxable-equivalent net interest income to net interest income reported in accordance with GAAP for each of those quarters. The net interest margin, which is an indicator of the profitability of the earning assets portfolio less cost of funding, is calculated by dividing annualized taxable-equivalent net interest income by average earning assets.
Taxable-equivalent net interest income was $598 million for the third quarter of 2015, and the net interest margin was 2.87%. These results compare to taxable-equivalent net interest income of $581 million and a net interest margin of 2.96% for the third quarter of 2014. The increase in net interest income reflects higher earning asset balances moderated by lower earning asset yields, which also drove the decline in the net interest margin.
For the nine months ended September 30, 2015, taxable-equivalent net interest income increased $37 million and the net interest margin declined by 10 basis points compared to the same period one year ago. The increase in net interest income was primarily attributable to earning asset growth while the decline in the net interest margin was the result of lower earning asset yields.
Average loans were $59.3 billion for the third quarter of 2015, an increase of $3.5 billion compared to the third quarter of 2014. The loan growth occurred primarily in the commercial, financial and agricultural portfolio, which increased $3.9 billion and was broad-based across our commercial lines of business. Consumer loans declined $214 million as a result of the run-off in our consumer exit portfolios. Our core consumer loan portfolio remained relatively stable to the year-ago quarter.
Our average securities available for sale portfolio increased $2.3 billion from the third quarter of 2014 due to higher levels of liquidity, driven by deposit growth and long-term debt issuances. These actions benefited KeyBanks liquidity coverage ratio and credit ratings profile.
Average deposits, excluding deposits in foreign office, totaled $70 billion for the third quarter of 2015, an increase of $2.2 billion compared to the year-ago quarter. NOW and money market deposit accounts increased by $2.3 billion, and noninterest-bearing deposits increased by $966 million, reflecting continued growth in the commercial mortgage servicing business and inflows from commercial and consumer clients. These increases were partially offset by a decline in certificates of deposit.
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Figure 8. Consolidated Average Balance Sheets, Net Interest Income and Yields/Rates From Continuing Operations
Third Quarter 2015 | Second Quarter 2015 | |||||||||||||||||||||||
Average | Yield/ | Average | Yield/ | |||||||||||||||||||||
dollars in millions |
Balance | Interest (a) | Rate (a) | Balance | Interest (a) | Rate (a) | ||||||||||||||||||
ASSETS |
||||||||||||||||||||||||
Loans (b), (c) |
||||||||||||||||||||||||
Commercial, financial and agricultural (d) |
$ | 30,374 | $ | 244 | 3.19 | % | $ | 29,017 | $ | 233 | 3.23 | % | ||||||||||||
Real estate commercial mortgage |
7,988 | 73 | 3.65 | 7,981 | 74 | 3.70 | ||||||||||||||||||
Real estate construction |
1,164 | 11 | 3.78 | 1,199 | 11 | 3.60 | ||||||||||||||||||
Commercial lease financing |
3,946 | 35 | 3.57 | 3,981 | 36 | 3.58 | ||||||||||||||||||
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Total commercial loans |
43,472 | 363 | 3.32 | 42,178 | 354 | 3.36 | ||||||||||||||||||
Real estate residential mortgage |
2,258 | 24 | 4.19 | 2,237 | 23 | 4.22 | ||||||||||||||||||
Home equity: |
||||||||||||||||||||||||
Key Community Bank |
10,281 | 101 | 3.88 | 10,266 | 99 | 3.89 | ||||||||||||||||||
Other |
229 | 4 | 7.87 | 244 | 5 | 7.86 | ||||||||||||||||||
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Total home equity loans |
10,510 | 105 | 3.96 | 10,510 | 104 | 3.98 | ||||||||||||||||||
Consumer other Key Community Bank |
1,597 | 26 | 6.51 | 1,571 | 26 | 6.52 | ||||||||||||||||||
Credit cards |
759 | 21 | 10.74 | 737 | 19 | 10.57 | ||||||||||||||||||
Consumer other: |
||||||||||||||||||||||||
Marine |
645 | 10 | 6.38 | 702 | 11 | 6.30 | ||||||||||||||||||
Other |
40 | 1 | 8.00 | 43 | 1 | 7.77 | ||||||||||||||||||
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Total consumer other |
685 | 11 | 6.47 | 745 | 12 | 6.38 | ||||||||||||||||||
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Total consumer loans |
15,809 | 187 | 4.69 | 15,800 | 184 | 4.69 | ||||||||||||||||||
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|
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Total loans |
59,281 | 550 | 3.69 | 57,978 | 538 | 3.72 | ||||||||||||||||||
Loans held for sale |
939 | 10 | 3.96 | 1,263 | 12 | 3.91 | ||||||||||||||||||
Securities available for sale (b), (e) |
14,247 | 74 | 2.11 | 13,360 | 73 | 2.17 | ||||||||||||||||||
Held-to-maturity securities (b) |
4,923 | 24 | 1.95 | 4,965 | 24 | 1.91 | ||||||||||||||||||
Trading account assets |
699 | 5 | 2.50 | 805 | 5 | 2.55 | ||||||||||||||||||
Short-term investments |
2,257 | 1 | .26 | 3,228 | 2 | .26 | ||||||||||||||||||
Other investments (e) |
696 | 4 | 2.52 | 713 | 5 | 2.48 | ||||||||||||||||||
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|
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Total earning assets |
83,042 | 668 | 3.21 | 82,312 | 659 | 3.21 | ||||||||||||||||||
Allowance for loan and lease losses |
(790 | ) | (793 | ) | ||||||||||||||||||||
Accrued income and other assets |
10,399 | 10,140 | ||||||||||||||||||||||
Discontinued assets |
2,118 | 2,194 | ||||||||||||||||||||||
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|
|
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Total assets |
$ | 94,769 | $ | 93,853 | ||||||||||||||||||||
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LIABILITIES |
||||||||||||||||||||||||
NOW and money market deposit accounts |
$ | 36,289 | 15 | .16 | $ | 36,122 | 14 | .16 | ||||||||||||||||
Savings deposits |
2,371 | | .02 | 2,393 | | .02 | ||||||||||||||||||
Certificates of deposit ($100,000 or more) (f) |
1,985 | 6 | 1.27 | 2,010 | 6 | 1.25 | ||||||||||||||||||
Other time deposits |
3,064 | 6 | .70 | 3,136 | 5 | .70 | ||||||||||||||||||
Deposits in foreign office |
492 | | .23 | 583 | 1 | .23 | ||||||||||||||||||
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Total interest-bearing deposits |
44,201 | 27 | .24 | 44,244 | 26 | .24 | ||||||||||||||||||
Federal funds purchased and securities sold under repurchase agreements |
859 | | .08 | 557 | | .02 | ||||||||||||||||||
Bank notes and other short-term borrowings |
567 | 2 | 1.51 | 657 | 2 | 1.39 | ||||||||||||||||||
Long-term debt (f), (g) |
7,895 | 41 | 2.19 | 6,968 | 40 | 2.30 | ||||||||||||||||||
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|
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|
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Total interest-bearing liabilities |
53,522 | 70 | .53 | 52,426 | 68 | .52 | ||||||||||||||||||
Noninterest-bearing deposits |
26,268 | 26,594 | ||||||||||||||||||||||
Accrued expense and other liabilities |
2,236 | 2,039 | ||||||||||||||||||||||
Discontinued liabilities(g) |
2,118 | 2,194 | ||||||||||||||||||||||
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|
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Total liabilities |
84,144 | 83,253 | ||||||||||||||||||||||
EQUITY |
||||||||||||||||||||||||
Key shareholders equity |
10,614 | 10,590 | ||||||||||||||||||||||
Noncontrolling interests |
11 | 10 | ||||||||||||||||||||||
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|
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Total equity |
10,625 | 10,600 | ||||||||||||||||||||||
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|
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Total liabilities and equity |
$ | 94,769 | $ | 93,853 | ||||||||||||||||||||
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Interest rate spread (TE) |
2.68 | % | 2.69 | % | ||||||||||||||||||||
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|
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Net interest income (TE) and net interest margin (TE) |
598 | 2.87 | % | 591 | 2.88 | % | ||||||||||||||||||
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TE adjustment (b) |
7 | 7 | ||||||||||||||||||||||
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Net interest income, GAAP basis |
$ | 591 | $ | 584 | ||||||||||||||||||||
|
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|
|
(a) | Results are from continuing operations. Interest excludes the interest associated with the liabilities referred to in (g) below, calculated using a matched funds transfer pricing methodology. |
(b) | Interest income on tax-exempt securities and loans has been adjusted to a taxable-equivalent basis using the statutory federal income tax rate of 35%. |
(c) | For purposes of these computations, nonaccrual loans are included in average loan balances. |
(d) | Commercial, financial and agricultural average balances include $88 million, $88 million, $87 million, $90 million, and $92 million of assets from commercial credit cards for the three months ended September 30, 2015, June 30, 2015, March 31, 2015, December 31, 2014, and September 30, 2014, respectively. |
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Figure 8. Consolidated Average Balance Sheets, Net Interest Income and Yields/Rates From Continuing Operations
First Quarter 2015 | Fourth Quarter 2014 | Third Quarter 2014 | ||||||||||||||||||||||||||||||||
Average |
Interest (a) |
Yield/ |
Average |
Interest (a) |
Yield/ |
Average |
Interest (a) |
Yield/ |
||||||||||||||||||||||||||
$ | 28,321 | $ | 223 | 3.18 | % | $ | 27,188 | $ | 223 | 3.24 | % | $ | 26,456 | $ | 218 | 3.28 | % | |||||||||||||||||
8,095 | 73 | 3.67 | 8,161 | 77 | 3.73 | 8,142 | 78 | 3.79 | ||||||||||||||||||||||||||
1,139 | 11 | 3.90 | 1,077 | 10 | 3.90 | 1,030 | 10 | 3.78 | ||||||||||||||||||||||||||
4,070 | 36 | 3.57 | 4,119 | 38 | 3.67 | 4,145 | 38 | 3.66 | ||||||||||||||||||||||||||
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41,625 | 343 | 3.33 | 40,545 | 348 | 3.40 | 39,773 | 344 | 3.44 | ||||||||||||||||||||||||||
2,229 | 24 | 4.26 | 2,223 | 24 | 4.28 | 2,204 | 24 | 4.35 | ||||||||||||||||||||||||||
10,316 | 99 | 3.89 | 10,365 | 103 | 3.91 | 10,368 | 102 | 3.91 | ||||||||||||||||||||||||||
260 | 5 | 7.82 | 274 | 5 | 7.84 | 290 | 6 | 7.80 | ||||||||||||||||||||||||||
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10,576 | 104 | 3.99 | 10,639 | 108 | 4.01 | 10,658 | 108 | 4.01 | ||||||||||||||||||||||||||
1,546 | 25 | 6.66 | 1,552 | 27 | 6.78 | 1,534 | 26 | 6.87 | ||||||||||||||||||||||||||
732 | 20 | 11.01 | 728 | 20 | 11.02 | 716 | 20 | 11.12 | ||||||||||||||||||||||||||
755 | 12 | 6.35 | 802 | 13 | 6.29 | 856 | 13 | 6.23 | ||||||||||||||||||||||||||
49 | 1 | 7.32 | 52 | | 7.52 | 55 | 2 | 7.63 | ||||||||||||||||||||||||||
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804 | 13 | 6.41 | 854 | 13 | 6.36 | 911 | 15 | 6.32 | ||||||||||||||||||||||||||
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15,887 | 186 | 4.74 | 15,996 | 192 | 4.76 | 16,023 | 193 | 4.78 | ||||||||||||||||||||||||||
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57,512 | 529 | 3.72 | 56,541 | 540 | 3.79 | 55,796 | 537 | 3.82 | ||||||||||||||||||||||||||
795 | 7 | 3.33 | 871 | 8 | 3.72 | 502 | 4 | 3.87 | ||||||||||||||||||||||||||
13,087 | 70 | 2.17 | 12,153 | 67 | 2.20 | 11,939 | 67 | 2.25 | ||||||||||||||||||||||||||
4,947 | 24 | 1.93 | 4,947 | 23 | 1.91 | 5,108 | 25 | 1.90 | ||||||||||||||||||||||||||
717 | 5 | 2.80 | 868 | 6 | 2.84 | 893 | 6 | 2.68 | ||||||||||||||||||||||||||
2,399 | 2 | .27 | 3,520 | 2 | .27 | 3,048 | 2 | .19 | ||||||||||||||||||||||||||
742 | 5 | 2.79 | 792 | 6 | 2.77 | 847 | 4 | 2.12 | ||||||||||||||||||||||||||
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80,199 | 642 | 3.23 | 79,692 | 652 | 3.27 | 78,133 | 645 | 3.30 | ||||||||||||||||||||||||||
(793 | ) | (798 | ) | (809 | ) | |||||||||||||||||||||||||||||
10,223 | 9,868 | 9,799 | ||||||||||||||||||||||||||||||||
2,271 | 2,359 | 4,138 | ||||||||||||||||||||||||||||||||
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$ | 91,900 | $ | 91,121 | $ | 91,261 | |||||||||||||||||||||||||||||
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|
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$ | 34,952 | 13 | .15 | $ | 34,811 | 13 | .14 | $ | 33,969 | 12 | .14 | |||||||||||||||||||||||
2,385 | | .02 | 2,388 | | .02 | 2,428 | 1 | .02 | ||||||||||||||||||||||||||
2,017 | 7 | 1.30 | 2,277 | 7 | 1.25 | 2,629 | 8 | 1.23 | ||||||||||||||||||||||||||
3,217 | 6 | .72 | 3,306 | 6 | .76 | 3,413 | 7 | .83 | ||||||||||||||||||||||||||
529 | | .22 | 543 | | .24 | 595 | | .23 | ||||||||||||||||||||||||||
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43,100 | 26 | .24 | 43,325 | 26 | .24 | 43,034 | 28 | .26 | ||||||||||||||||||||||||||
720 | | .03 | 621 | | .02 | 1,176 | 1 | .19 | ||||||||||||||||||||||||||
506 | 2 | 1.56 | 772 | 3 | 1.17 | 484 | 2 | 1.79 | ||||||||||||||||||||||||||
6,126 | 37 | 2.52 | 5,135 | 35 | 2.80 | 4,868 | 33 | 2.88 | ||||||||||||||||||||||||||
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50,452 | 65 | .52 | 49,853 | 64 | .51 | 49,562 | 64 | .52 | ||||||||||||||||||||||||||
26,269 | 26,342 | 25,302 | ||||||||||||||||||||||||||||||||
2,327 | 1,989 | 1,768 | ||||||||||||||||||||||||||||||||
2,271 | 2,359 | 4,138 | ||||||||||||||||||||||||||||||||
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81,319 | 80,543 | 80,770 | ||||||||||||||||||||||||||||||||
10,570 | 10,562 | 10,473 | ||||||||||||||||||||||||||||||||
11 | 16 | 18 | ||||||||||||||||||||||||||||||||
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10,581 | 10,578 | 10,491 | ||||||||||||||||||||||||||||||||
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$ | 91,900 | $ | 91,121 | $ | 91,261 | |||||||||||||||||||||||||||||
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2.71 | % | 2.76 | % | 2.78 | % | |||||||||||||||||||||||||||||
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|
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577 | 2.91 | % | 588 | 2.94 | % | 581 | 2.96 | % | ||||||||||||||||||||||||||
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6 | 6 | 6 | ||||||||||||||||||||||||||||||||
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$ | 571 | $ | 582 | $ | 575 | |||||||||||||||||||||||||||||
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(e) | Yield is calculated on the basis of amortized cost. |
(f) | Rate calculation excludes basis adjustments related to fair value hedges. |
(g) | A portion of long-term debt and the related interest expense is allocated to discontinued liabilities as a result of applying our matched funds transfer pricing methodology to discontinued operations. |
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Table of Contents
Figure 9 shows how the changes in yields or rates and average balances from the prior year period affected net interest income. The section entitled Financial Condition contains additional discussion about changes in earning assets and funding sources.
Figure 9. Components of Net Interest Income Changes from Continuing Operations
From three months ended September 30, 2014 to three months ended September 30, 2015 |
From nine months ended September 30, 2014 to nine months ended September 30, 2015 |
|||||||||||||||||||||||
in millions |
Average Volume |
Yield/ Rate |
Net Change (a) |
Average Volume |
Yield/ Rate |
Net Change (a) |
||||||||||||||||||
INTEREST INCOME |
||||||||||||||||||||||||
Loans |
$ | 33 | $ | (20 | ) | $ | 13 | $ | 81 | $ | (58 | ) | $ | 23 | ||||||||||
Loans held for sale |
4 | 2 | 6 | 15 | 1 | 16 | ||||||||||||||||||
Securities available for sale |
12 | (5 | ) | 7 | 22 | (15 | ) | 7 | ||||||||||||||||
Held-to-maturity securities |
(1 | ) | | (1 | ) | | 2 | 2 | ||||||||||||||||
Trading account assets |
(1 | ) | | (1 | ) | (4 | ) | | (4 | ) | ||||||||||||||
Short-term investments |
| (1 | ) | (1 | ) | | 1 | 1 | ||||||||||||||||
Other investments |
(1 | ) | 1 | | (3 | ) | 1 | (2 | ) | |||||||||||||||
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Total interest income (TE) |
46 | (23 | ) | 23 | 111 | (68 | ) | 43 | ||||||||||||||||
INTEREST EXPENSE |
||||||||||||||||||||||||
NOW and money market deposit accounts |
1 | 2 | 3 | 2 | 5 | 7 | ||||||||||||||||||
Savings deposits |
| (1 | ) | (1 | ) | | (1 | ) | (1 | ) | ||||||||||||||
Certificates of deposit ($100,000 or more) |
(2 | ) | | (2 | ) | (7 | ) | (2 | ) | (9 | ) | |||||||||||||
Other time deposits |
(1 | ) | | (1 | ) | (3 | ) | (6 | ) | (9 | ) | |||||||||||||
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Total interest-bearing deposits |
(2 | ) | 1 | (1 | ) | (8 | ) | (4 | ) | (12 | ) | |||||||||||||
Federal funds purchased and securities sold under repurchase agreements |
| (1 | ) | (1 | ) | (1 | ) | (1 | ) | (2 | ) | |||||||||||||
Long-term debt |
17 | (9 | ) | 8 | 32 | (12 | ) | 20 | ||||||||||||||||
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Total interest expense |
15 | (9 | ) | 6 | 23 | (17 | ) | 6 | ||||||||||||||||
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Net interest income (TE) |
$ | 31 | $ | (14 | ) | $ | 17 | $ | 88 | $ | (51 | ) | $ | 37 | ||||||||||
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(a) | The change in interest not due solely to volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each. |
As shown in Figure 10, noninterest income was $470 million for the third quarter of 2015, compared to $417 million for the year-ago quarter, an increase of $53 million, or 12.7%. The increase from the prior year was primarily attributable to strength in our core fee-based businesses, which included a full-quarter impact of the September 2014 acquisition of Pacific Crest Securities. The third quarter of 2015 included $21 million of higher investment banking and debt placement fees, $15 million of increased corporate services income, and $9 million of higher trust and investment services income. Additionally, cards and payments income increased $5 million due to higher revenue from credit card and merchant fees.
For the nine months ended September 30, 2015, noninterest income increased $88 million, or 6.7%, from the same period one year ago. The increase was primarily attributable to strength in our core fee-based businesses: higher investment banking and debt placement fees of $47 million, trust and investment services income of $37 million, corporate services income of $18 million, and card and payments income of $13 million. These increases were partially offset by a decrease of $23 million in operating lease income and other leasing gains.
Figure 10. Noninterest Income
Three months ended September 30, |
Change | Nine months ended September 30, |
Change | |||||||||||||||||||||||||||||
dollars in millions |
2015 | 2014 | Amount | Percent | 2015 | 2014 | Amount | Percent | ||||||||||||||||||||||||
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Trust and investment services income |
$ | 108 | $ | 99 | $ | 9 | 9.1 | % | $ | 328 | $ | 291 | $ | 37 | 12.7 | % | ||||||||||||||||
Investment banking and debt placement fees |
109 | 88 | 21 | 23.9 | 318 | 271 | 47 | 17.3 | ||||||||||||||||||||||||
Service charges on deposit accounts |
68 | 68 | | | 192 | 197 | (5 | ) | (2.5 | ) | ||||||||||||||||||||||
Operating lease income and other leasing gains |
15 | 17 | (2 | ) | (11.8 | ) | 58 | 81 | (23 | ) | (28.4 | ) | ||||||||||||||||||||
Corporate services income |
57 | 42 | 15 | 35.7 | 143 | 125 | 18 | 14.4 | ||||||||||||||||||||||||
Cards and payments income |
47 | 42 | 5 | 11.9 | 136 | 123 | 13 | 10.6 | ||||||||||||||||||||||||
Corporate-owned life insurance income |
30 | 26 | 4 | 15.4 | 91 | 80 | 11 | 13.8 | ||||||||||||||||||||||||
Consumer mortgage income |
3 | 3 | | | 10 | 7 | 3 | 42.9 | ||||||||||||||||||||||||
Mortgage servicing fees |
11 | 9 | 2 | 22.2 | 33 | 35 | (2 | ) | (5.7 | ) | ||||||||||||||||||||||
Net gains (losses) from principal investing |
11 | 9 | 2 | 22.2 | 51 | 60 | (9 | ) | (15.0 | ) | ||||||||||||||||||||||
Other income (a) |
11 | 14 | (3 | ) | (21.4 | ) | 35 | 37 | (2 | ) | (5.4 | ) | ||||||||||||||||||||
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Total noninterest income |
$ | 470 | $ | 417 | $ | 53 | 12.7 | % | $ | 1,395 | $ | 1,307 | $ | 88 | 6.7 | % | ||||||||||||||||
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(a) | Included in this line item is our Dealer trading and derivatives income (loss). Additional detail is provided in Figure 11. |
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Figure 11. Dealer Trading and Derivatives Income (Loss)
Three months ended September 30, |
Change | Nine months ended September 30, |
Change | |||||||||||||||||||||||||||||
dollars in millions |
2015 | 2014 | Amount | Percent | 2015 | 2014 | Amount | Percent | ||||||||||||||||||||||||
Dealer trading and derivatives income (loss), proprietary (a), (b) |
$ | (4 | ) | $ | (5 | ) | $ | 1 | N/M | $ | (9 | ) | $ | (13 | ) | $ | 4 | N/M | ||||||||||||||
Dealer trading and derivatives income (loss), nonproprietary (b) |
11 | (3 | ) | 14 | N/M | 16 | 3 | 13 | 433.3 | % | ||||||||||||||||||||||
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Total dealer trading and derivatives income (loss) |
$ | 7 | $ | (8 | ) | $ | 15 | N/M | $ | 7 | $ | (10 | ) | $ | 17 | N/M | ||||||||||||||||
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(a) | For the quarter ended September 30, 2015, income of $1 million related to foreign exchange and commodity derivative trading was offset by losses related to fixed income, equity securities trading, interest rate, and credit portfolio management activities. For the quarter ended September 30, 2014, income of $1 million related to foreign exchange, interest rate and commodity derivative trading was offset by losses related to equity securities trading, fixed income, and credit portfolio management activities. |
(b) | The allocation between proprietary and nonproprietary is made based upon whether the trade is conducted for the benefit of Key or Keys clients rather than based upon rulemaking under the Volcker Rule. Prohibitions and restrictions on proprietary trading activities imposed by the Volcker Rule became effective April 1, 2014. For more information, see the discussion under the heading Other Regulatory Developments under the Dodd-Frank Act Volcker Rule in the section entitled Supervision and Regulation in Item 1 of our 2014 Form 10-K. |
The following discussion explains the composition of certain elements of our noninterest income and the factors that caused those elements to change.
Trust and investment services income
Trust and investment services income is one of our largest sources of noninterest income and consists of brokerage commissions, trust and asset management commissions, and insurance income. The assets under management that primarily generate these revenues are shown in Figure 12. For the three and nine months ended September 30, 2015, trust and investment services income increased $9 million, or 9.1%, and $37 million, or 12.7%, respectively, compared to the same periods one year ago. These increases were primarily attributable to the full-period impact of the September 2014 Pacific Crest Securities acquisition as well as an increase in our brokerage commissions.
A significant portion of our trust and investment services income depends on the value and mix of assets under management. At September 30, 2015, our bank, trust, and registered investment advisory subsidiaries had assets under management of $35.2 billion, compared to $39.3 billion at September 30, 2014. As shown in Figure 12, decreases within all of the investment types were primarily attributable to market declines. Client attrition also contributed to the decrease in the securities lending portfolio.
Figure 12. Assets Under Management
2015 | 2014 | |||||||||||||||||||
in millions |
Third | Second | First | Fourth | Third | |||||||||||||||
Assets under management by investment type: |
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Equity |
$ | 19,728 | $ | 21,226 | $ | 21,681 | $ | 21,393 | $ | 21,035 | ||||||||||
Securities lending |
2,872 | 4,438 | 4,625 | 4,835 | 5,514 | |||||||||||||||
Fixed income |
9,823 | 9,899 | 10,127 | 10,023 | 9,975 | |||||||||||||||
Money market |
2,735 | 2,836 | 2,848 | 2,906 | 2,759 | |||||||||||||||
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Total |
$ | 35,158 | $ | 38,399 | $ | 39,281 | $ | 39,157 | $ | 39,283 | ||||||||||
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Investment banking and debt placement fees
Investment banking and debt placement fees consist of syndication fees, debt and equity financing fees, financial advisor fees, gains on sales of commercial mortgages, and agency origination fees. Investment banking and debt placement fees increased $21 million, or 23.9%, for the third quarter of 2015 and $47 million, or 17.3%, for the nine months ended September 30, 2015, compared to the same periods one year ago. These increases were primarily driven by strength in debt and equity financing fees as well as the full-period impact of the September 2014 acquisition of Pacific Crest Securities.
Service charges on deposit accounts
Service charges on deposit accounts were flat for the third quarter of 2015 compared to one year ago and decreased $5 million, or 2.5%, for the nine months ended September 30, 2015, compared to the year-ago period. This decrease was primarily due to a decline in overdraft fees.
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Operating lease income and other leasing gains
Operating lease income and other leasing gains decreased $2 million, or 11.8%, for the third quarter of 2015 compared to the year-ago quarter due to product run-off, partially offset by increased gains on lease syndications. For the nine months ended September 30, 2015, operating lease income and other leasing gains declined $23 million, or 28.4%, compared to the same period one year ago. The year-to-date decline was due to a $25 million gain on leveraged lease terminations in 2014. The expense related to the rental of leased equipment is presented in Figure 13 as operating lease expense.
Cards and payments income
Cards and payments income, which consists of debit card, consumer and commercial credit card, and merchant services income, increased $5 million, or 11.9%, from the year-ago quarter, and $13 million, or 10.6%, for the nine months ended September 30, 2015, compared to the same period one year ago. The increases were due to higher credit card and merchant fees and increased usage of our corporate purchase and prepaid cards.
Consumer mortgage income
Consumer mortgage income was flat from the year-ago quarter, and increased $3 million, or 42.9%, for the nine months ended September 30, 2015, compared to the same period one year ago. This increase was primarily driven by gains on the sales of consumer mortgage loans.
Mortgage servicing fees
Mortgage servicing fees increased $2 million, or 22.2%, from the year-ago quarter due to higher transactional fees and decreased $2 million, or 5.7%, for the nine months ended September 30, 2015, compared to the same period one year ago due to lower special servicing fees.
Other income
Other income, which consists primarily of gain on sale of certain loans, other service charges, and certain dealer trading income, decreased $3 million, or 21.4%, from the year-ago quarter and decreased $2 million, or 5.4%, for the nine months ended September 30, 2015, compared to the same period one year ago, primarily attributable to changes in various miscellaneous income categories.
As shown in Figure 13, noninterest expense was $724 million for the third quarter of 2015, compared to $706 million for the year-ago quarter, representing an increase of $18 million, or 2.5%. Personnel costs increased $21 million year-over-year, primarily due to higher performance-based compensation related to a strong capital markets business performance, along with a full-quarter impact of the September 2014 acquisition of Pacific Crest Securities. Nonpersonnel expense remained relatively stable as lower occupancy costs offset an increase in business services and professional fees.
For the nine months ended September 30, 2015, noninterest expense increased $47 million, or 2.3%, compared to the same period one year ago. Personnel expense increased $41 million, primarily due to higher performance-based compensation, and nonpersonnel expense increased $6 million from one year ago due to changes in several expense categories. The full-period impact of the September 2014 acquisition of Pacific Crest Securities also contributed to these increases.
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Figure 13. Noninterest Expense
Three months ended September 30, |
Change | Nine months ended September 30, |
Change | |||||||||||||||||||||||||||||
dollars in millions |
2015 | 2014 | Amount | Percent | 2015 | 2014 | Amount | Percent | ||||||||||||||||||||||||
Personnel |
$ | 426 | $ | 405 | $ | 21 | 5.2 | % | $ | 1,223 | $ | 1,182 | $ | 41 | 3.5 | % | ||||||||||||||||
Net occupancy |
60 | 66 | (6 | ) | (9.1 | ) | 191 | 198 | (7 | ) | (3.5 | ) | ||||||||||||||||||||
Computer processing |
41 | 39 | 2 | 5.1 | 121 | 118 | 3 | 2.5 | ||||||||||||||||||||||||
Business services and professional fees |
40 | 36 | 4 | 11.1 | 115 | 118 | (3 | ) | (2.5 | ) | ||||||||||||||||||||||
Equipment |
22 | 25 | (3 | ) | (12.0 | ) | 66 | 73 | (7 | ) | (9.6 | ) | ||||||||||||||||||||
Operating lease expense |
11 | 11 | | | 34 | 31 | 3 | 9.7 | ||||||||||||||||||||||||
Marketing |
17 | 15 | 2 | 13.3 | 40 | 33 | 7 | 21.2 | ||||||||||||||||||||||||
FDIC assessment |
8 | 9 | (1 | ) | (11.1 | ) | 24 | 21 | 3 | 14.3 | ||||||||||||||||||||||
Intangible asset amortization |
9 | 10 | (1 | ) | (10.0 | ) | 27 | 29 | (2 | ) | (6.9 | ) | ||||||||||||||||||||
OREO expense, net |
2 | 1 | 1 | 100.0 | 5 | 3 | 2 | 66.7 | ||||||||||||||||||||||||
Other expense |
88 | 89 | (1 | ) | (1.1 | ) | 258 | 251 | 7 | 2.8 | ||||||||||||||||||||||
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Total noninterest expense |
$ | 724 | $ | 706 | $ | 18 | 2.5 | % | $ | 2,104 | $ | 2,057 | $ | 47 | 2.3 | % | ||||||||||||||||
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Average full-time equivalent employees (a) |
13,555 | 13,905 | (350 | ) | (2.5 | )% | 13,525 | 13,942 | (417 | ) | (3.0 | )% |
(a) | The number of average full-time-equivalent employees was not adjusted for discontinued operations. |
The following discussion explains the composition of certain elements of our noninterest expense and the factors that caused those elements to change.
Personnel
As shown in Figure 14, personnel expense, the largest category of our noninterest expense, increased by $21 million, or 5.2%, for the third quarter of 2015 compared to the year-ago quarter. For the nine months ended September 30, 2015, personnel expense increased $41 million, or 3.5%, from the same period one year ago. Salaries and incentive and stock-based compensation expenses increased from one year ago primarily due to higher performance-based compensation and the full-period impact of the September 2014 acquisition of Pacific Crest Securities. These expenses also increased from one year ago due to our investment in senior bankers and client-facing personnel in Key Community Bank and Key Corporate Bank. Employee benefits also increased from the same periods last year due to higher health care and pension costs. These increases were partially offset by a decrease in severance expense.
Figure 14. Personnel Expense
Three months ended September 30, |
Change | Nine months ended September 30, |
Change | |||||||||||||||||||||||||||||
dollars in millions |
2015 | 2014 | Amount | Percent | 2015 | 2014 | Amount | Percent | ||||||||||||||||||||||||
Salaries |
$ | 234 | $ | 227 | $ | 7 | 3.1 | % | $ | 681 | $ | 667 | $ | 14 | 2.1 | % | ||||||||||||||||
Technology contract labor, net |
13 | 11 | 2 | 18.2 | 33 | 43 | (10 | ) | (23.3 | ) | ||||||||||||||||||||||
Incentive and stock-based compensation |
103 | 89 | 14 | 15.7 | 295 | 263 | 32 | 12.2 | ||||||||||||||||||||||||
Employee benefits |
75 | 71 | 4 | 5.6 | 202 | 187 | 15 | 8.0 | ||||||||||||||||||||||||
Severance |
1 | 7 | (6 | ) | (85.7 | ) | 12 | 22 | (10 | ) | (45.5 | ) | ||||||||||||||||||||
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Total personnel expense |
$ | 426 | $ | 405 | $ | 21 | 5.2 | % | $ | 1,223 | $ | 1,182 | $ | 41 | 3.5 | % | ||||||||||||||||
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Net occupancy
Net occupancy expense decreased $6 million, or 9.1%, for the third quarter of 2015 and $7 million, or 3.5%, for the nine months ended September 30, 2015, compared to the same periods one year ago. These declines were primarily due to lower property reserve charges and rental expenses.
Operating lease expense
Operating lease expense was flat from the year-ago quarter and increased $3 million, or 9.7%, from the nine-month period ended one year ago due to increased depreciation expense on operating lease equipment. Income related to the rental of leased equipment is presented in Figure 10 as operating lease income and other leasing gains.
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Other expense
Other expense comprises various miscellaneous expense items. The $1 million, or 1.1%, decrease in the current quarter and the $7 million, or 2.8%, increase in the first nine months of 2015 compared to the same periods one year ago reflect fluctuations in several of those line items.
We recorded tax expense from continuing operations of $72 million for the third quarter of 2015 and $64 million for the third quarter of 2014. For the first nine months of 2015, we recorded tax expense from continuing operations of $230 million, compared to $232 million for the same period last year.
Our federal tax expense (benefit) differs from the amount that would be calculated using the federal statutory tax rate, primarily because we generate income from investments in tax-advantaged assets, such as corporate-owned life insurance, earn credits associated with investments in low-income housing projects, and make periodic adjustments to our tax reserves. In addition, during the first nine months of 2015, our effective tax rate was reduced by additional federal tax credit refunds filed for prior years.
Additional information pertaining to how our tax expense (benefit) and the resulting effective tax rates were derived is included in Note 12 (Income Taxes) beginning on page 177 of our 2014 Form 10-K.
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This section summarizes the financial performance and related strategic developments of our two major business segments (operating segments): Key Community Bank and Key Corporate Bank. Note 18 (Line of Business Results) describes the products and services offered by each of these business segments, provides more detailed financial information pertaining to the segments, and explains Other Segments and Reconciling Items.
Figure 15 summarizes the contribution made by each major business segment to our taxable-equivalent revenue from continuing operations and income (loss) from continuing operations attributable to Key for the three- and nine-month periods ended September 30, 2015, and September 30, 2014.
In the third quarter of 2015, we enhanced the approach used to determine the commercial reserve factors used in estimating the quantitative component of the commercial ALLL. In addition, we began utilizing an enhanced framework to quantify commercial ALLL adjustments resulting from qualitative factors not fully captured within the statistical analysis of incurred loss. The enhancements of the methodology are described in Note 1 (Basis of Presentation and Accounting Policies) under the heading Allowance for Loan and Lease Losses. As a result of these methodology enhancements, the current period provision for credit losses within each business segment has increased or decreased accordingly. The impact of the increases and decreases on the business segment provision for credit losses was not significant.
Figure 15. Major Business SegmentsTaxable-Equivalent (TE) Revenue from Continuing Operations and Income
(Loss) from Continuing Operations Attributable to Key
Three months ended September 30, |
Change | Nine months ended September 30, |
Change | |||||||||||||||||||||||||||||
dollars in millions |
2015 | 2014 | Amount | Percent | 2015 | 2014 | Amount | Percent | ||||||||||||||||||||||||
REVENUE FROM CONTINUING OPERATIONS (TE) |
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Key Community Bank |
$ | 579 | $ | 558 | $ | 21 | 3.8 | % | $ | 1,687 | $ | 1,658 | $ | 29 | 1.7 | % | ||||||||||||||||
Key Corporate Bank |
454 | 400 | 54 | 13.5 | 1,332 | 1,187 | 145 | 12.2 | ||||||||||||||||||||||||
Other Segments |
35 | 44 | (9 | ) | (20.5 | ) | 146 | 195 | (49 | ) | (25.1 | ) | ||||||||||||||||||||
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Total Segments |
1,068 | 1,002 | 66 | 6.6 | 3,165 | 3,040 | 125 | 4.1 | ||||||||||||||||||||||||
Reconciling Items |
| (4 | ) | 4 | N/M | (4 | ) | (4 | ) | | N/M | |||||||||||||||||||||
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Total |
$ | 1,068 | $ | 998 | $ | 70 | 7.0 | % | $ | 3,161 | $ | 3,036 | $ | 125 | 4.1 | % | ||||||||||||||||
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INCOME (LOSS) FROM CONTINUING OPERATIONS ATTRIBUTABLE TO KEY |
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Key Community Bank |
$ | 71 | $ | 60 | $ | 11 | 18.3 | % | $ | 187 | $ | 180 | $ | 7 | 3.9 | % | ||||||||||||||||
Key Corporate Bank |
138 | 134 | 4 | 3.0 | 401 | 399 | 2 | .5 | ||||||||||||||||||||||||
Other Segments |
26 | 27 | (1 | ) | (3.7 | ) | 100 | 120 | (20 | ) | (16.7 | ) | ||||||||||||||||||||
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Total Segments |
235 | 221 | 14 | 6.3 | 688 | 699 | (11 | ) | (1.6 | ) | ||||||||||||||||||||||
Reconciling Items |
(13 | ) | (18 | ) | 5 | N/M | (3 | ) | (11 | ) | 8 | N/M | ||||||||||||||||||||
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Total |
$ | 222 | $ | 203 | $ | 19 | 9.4 | % | $ | 685 | $ | 688 | $ | (3 | ) | (.4 | )% | |||||||||||||||
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Key Community Bank summary of operations
| Positive operating leverage from prior year |
| Net income increased to $71 million, up 18.3% from prior year |
| Commercial, financial and agricultural loan growth of $1 billion, or 8.7% from prior year |
| Average deposits up $931 million, or 1.9% from the prior year |
As shown in Figure 16, Key Community Bank recorded net income attributable to Key of $71 million for the third quarter of 2015, compared to net income attributable to Key of $60 million for the year-ago quarter.
Taxable-equivalent net interest income increased by $20 million, or 5.6%, from the third quarter of 2014 due to an increase in average loans and leases of 3.1%, including commercial, financial and agricultural loans, which grew by $1 billion, or 8.7%, from the prior year. Average deposits increased 1.9% from one year ago.
Noninterest income remained relatively stable from the year-ago quarter. Core revenue continues to improve, driven by growth in cards and payments income of $4 million, mostly offset by lower service charges on deposit accounts and a decrease in other income.
The provision for credit losses decreased by $3 million, or 14.3%, from the third quarter of 2014, due to the enhancements to the approach utilized to determine the allowance for loan and lease losses discussed above.
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Noninterest expense increased by $7 million, or 1.6%, from the year-ago quarter. Personnel expense increased $1 million while nonpersonnel expense increased by $6 million.
Figure 16. Key Community Bank
Three months ended September 30, |
Change | Nine months ended September 30, |
Change | |||||||||||||||||||||||||||||
dollars in millions |
2015 | 2014 | Amount | Percent | 2015 | 2014 | Amount | Percent | ||||||||||||||||||||||||
SUMMARY OF OPERATIONS |
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Net interest income (TE) |
$ | 379 | $ | 359 | $ | 20 | 5.6 | % | $ | 1,098 | $ | 1,084 | $ | 14 | 1.3 | % | ||||||||||||||||
Noninterest income |
200 | 199 | 1 | .5 | 589 | 574 | 15 | 2.6 | ||||||||||||||||||||||||
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Total revenue (TE) |
579 | 558 | 21 | 3.8 | 1,687 | 1,658 | 29 | 1.7 | ||||||||||||||||||||||||
Provision for credit losses |
18 | 21 | (3 | ) | (14.3 | ) | 50 | 48 | 2 | 4.2 | ||||||||||||||||||||||
Noninterest expense |
448 | 441 | 7 | 1.6 | 1,339 | 1,323 | 16 | 1.2 | ||||||||||||||||||||||||
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Income (loss) before income taxes (TE) |
113 | 96 | 17 | 17.7 | 298 | 287 | 11 | 3.8 | ||||||||||||||||||||||||
Allocated income taxes (benefit) and TE adjustments |
42 | 36 | 6 | 16.7 | 111 | 107 | 4 | 3.7 | ||||||||||||||||||||||||
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Net income (loss) attributable to Key |
$ | 71 | $ | 60 | $ | 11 | 18.3 | % | $ | 187 | $ | 180 | $ | 7 | 3.9 | % | ||||||||||||||||
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AVERAGE BALANCES |
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Loans and leases |
$ | 31,039 | $ | 30,103 | $ | 936 | 3.1 | % | $ | 30,804 | $ | 29,979 | $ | 825 | 2.8 | % | ||||||||||||||||
Total assets |
33,090 | 32,173 | 917 | 2.9 | 32,853 | 32,063 | 790 | 2.5 | ||||||||||||||||||||||||
Deposits |
51,234 | 50,303 | 931 | 1.9 | 50,808 | 50,151 | 657 | 1.3 | ||||||||||||||||||||||||
Assets under management at period end |
$ | 35,158 | $ | 39,249 | $ | (4,091 | ) | (10.4 | )% | $ | 35,158 | $ | 39,249 | $ | (4,091 | ) | (10.4 | )% |
ADDITIONAL KEY COMMUNITY BANK DATA
Three months ended September 30, |
Change | Nine months ended September 30, |
Change | |||||||||||||||||||||||||||||
dollars in millions |
2015 | 2014 | Amount | Percent | 2015 | 2014 | Amount | Percent | ||||||||||||||||||||||||
NONINTEREST INCOME |
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Trust and investment services income |
$ | 73 | $ | 73 | | | $ | 224 | $ | 216 | $ | 8 | 3.7 | % | ||||||||||||||||||
Services charges on deposit accounts |
56 | 57 | $ | (1 | ) | (1.8 | )% | 159 | 164 | (5 | ) | (3.0 | ) | |||||||||||||||||||
Cards and payments income |
43 | 39 | 4 | 10.3 | 124 | 113 | 11 | 9.7 | ||||||||||||||||||||||||
Other noninterest income |
28 | 30 | (2 | ) | (6.7 | ) | 82 | 81 | 1 | 1.2 | ||||||||||||||||||||||
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Total noninterest income |
$ | 200 | $ | 199 | $ | 1 | .5 | % | $ | 589 | $ | 574 | $ | 15 | 2.6 | % | ||||||||||||||||
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AVERAGE DEPOSITS OUTSTANDING |
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NOW and money market deposit accounts |
$ | 28,568 | $ | 27,403 | $ | 1,165 | 4.3 | % | $ | 28,244 | $ | 27,471 | $ | 773 | 2.8 | % | ||||||||||||||||
Savings deposits |
2,362 | 2,419 | (57 | ) | (2.4 | ) | 2,374 | 2,456 | (82 | ) | (3.3 | ) | ||||||||||||||||||||
Certificates of deposits ($100,000 or more) |
1,560 | 2,072 | (512 | ) | (24.7 | ) | 1,555 | 2,134 | (579 | ) | (27.1 | ) | ||||||||||||||||||||
Other time deposits |
3,061 | 3,406 | (345 | ) | (10.1 | ) | 3,134 | 3,552 | (418 | ) | (11.8 | ) | ||||||||||||||||||||
Deposits in foreign office |
271 | 320 | (49 | ) | (15.3 | ) | 301 | 308 | (7 | ) | (2.3 | ) | ||||||||||||||||||||
Noninterest-bearing deposits |
15,412 | 14,683 | 729 | 5.0 | 15,200 | 14,230 | 970 | 6.8 | ||||||||||||||||||||||||
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Total deposits |
$ | 51,234 | $ | 50,303 | $ | 931 | 1.9 | % | $ | 50,808 | $ | 50,151 | $ | 657 | 1.3 | % | ||||||||||||||||
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HOME EQUITY LOANS |
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Average balance |
$ | 10,281 | $ | 10,368 | ||||||||||||||||||||||||||||
Weighted-average loan-to-value ratio (at date of origination) |
71 | % | 71 | % | ||||||||||||||||||||||||||||
Percent first lien positions |
60 | 59 | ||||||||||||||||||||||||||||||
OTHER DATA |
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Branches |
972 | 997 | ||||||||||||||||||||||||||||||
Automated teller machines |
1,259 | 1,290 |
Key Corporate Bank summary of operations
| Investment banking and debt placement fees up 25.6% from the prior year |
| Revenue up 13.5% from the prior year |
| Average loan and lease balances up 13.8% from the prior year |
As shown in Figure 17, Key Corporate Bank recorded net income attributable to Key of $138 million for the third quarter of 2015, an increase of $4 million, or 3%, from the same period one year ago.
Taxable-equivalent net interest income increased by $5 million, or 2.3%, compared to the third quarter of 2014. Average earning assets increased $3 billion, or 12.2%, from the year-ago quarter, primarily driven by growth in commercial, financial and agricultural loans. Average deposit balances increased $1.2 billion, or 6.9%, from the year-ago quarter, driven by commercial mortgage servicing deposits and other commercial client inflows.
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Noninterest income was up $49 million, or 26.5% from the prior year. Investment banking and debt placement fees increased $22 million, or 25.6%, driven by strength in syndications, debt underwriting, and financial advisory fees. Corporate services income increased $16 million, or 53.3%, due to higher derivatives income and loan commitment fees. Trust and investment services income increased $9 million, or 34.6%, primarily due to the full-quarter impact of the September 2014 acquisition of Pacific Crest Securities.
The provision for credit losses increased $28 million from the same period one year ago, primarily due to the enhancements to the approach utilized to determine the allowance for loan and lease losses discussed above, as well as a 13.8% increase in average loan balances.
Noninterest expense increased by $33 million, or 15.5%, from the third quarter of 2014. This increase was driven primarily by higher personnel expense, from increased performance-based compensation related to a strong capital markets business performance, along with a full-quarter impact of the September 2014 acquisition of Pacific Crest Securities.
Figure 17. Key Corporate Bank
Three months ended September 30, |
Change | Nine months ended September 30, |
Change | |||||||||||||||||||||||||||||
dollars in millions |
2015 | 2014 | Amount | Percent | 2015 | 2014 | Amount | Percent | ||||||||||||||||||||||||
SUMMARY OF OPERATIONS |
||||||||||||||||||||||||||||||||
Net interest income (TE) |
$ | 220 | $ | 215 | $ | 5 | 2.3 | % | $ | 661 | $ | 621 | $ | 40 | 6.4 | % | ||||||||||||||||
Noninterest income |
234 | 185 | 49 | 26.5 | 671 | 566 | 105 | 18.6 | ||||||||||||||||||||||||
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Total revenue (TE) |
454 | 400 | 54 | 13.5 | 1,332 | 1,187 | 145 | 12.2 | ||||||||||||||||||||||||
Provision for credit losses |
30 | 2 | 28 | N/M | 77 | 7 | 70 | N/M | ||||||||||||||||||||||||
Noninterest expense |
246 | 213 | 33 | 15.5 | 712 | 621 | 91 | 14.7 | ||||||||||||||||||||||||
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Income (loss) before income taxes (TE) |
178 | 185 | (7 | ) | (3.8 | ) | 543 | 559 | (16 | ) | (2.9 | ) | ||||||||||||||||||||
Allocated income taxes and TE adjustments |
42 | 51 | (9 | ) | (17.6 | ) | 143 | 158 | (15 | ) | (9.5 | ) | ||||||||||||||||||||
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Net income (loss) |
136 | 134 | 2 | 1.5 | 400 | 401 | (1 | ) | (.2 | ) | ||||||||||||||||||||||
Less: Net income (loss) attributable to noncontrolling interests |
(2 | ) | | (2 | ) | N/M | (1 | ) | 2 | (3 | ) | N/M | ||||||||||||||||||||
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Net income (loss) attributable to Key |
$ | 138 | $ | 134 | $ | 4 | 3.0 | % | $ | 401 | $ | 399 | $ | 2 | .5 | % | ||||||||||||||||
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AVERAGE BALANCES |
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Loans and leases |
$ | 26,425 | $ | 23,215 | $ | 3,210 | 13.8 | % | $ | 25,488 | $ | 22,702 | $ | 2,786 | 12.3 | % | ||||||||||||||||
Loans held for sale |
918 | 481 | 437 | 90.9 | 976 | 446 | 530 | 118.8 | ||||||||||||||||||||||||
Total assets |
32,163 | 28,268 | 3,895 | 13.8 | 31,236 | 27,829 | 3,407 | 12.2 | ||||||||||||||||||||||||
Deposits |
18,809 | 17,599 | 1,210 | 6.9 | 19,029 | 16,655 | 2,374 | 14.3 | ||||||||||||||||||||||||
Assets under management at period end |
| $ | 34 | $ | (34 | ) | N/M | | $ | 34 | $ | (34 | ) | N/M |
ADDITIONAL KEY CORPORATE BANK DATA
Three months ended September 30, |
Change | Nine months ended September 30, |
Change | |||||||||||||||||||||||||||||
dollars in millions |
2015 | 2014 | Amount | Percent | 2015 | 2014 | Amount | Percent | ||||||||||||||||||||||||
NONINTEREST INCOME |
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Trust and investment services income |
$ | 35 | $ | 26 | $ | 9 | 34.6 | % | $ | 104 | $ | 75 | $ | 29 | 38.7 | % | ||||||||||||||||
Investment banking and debt placement fees |
108 | 86 | 22 | 25.6 | 314 | 267 | 47 | 17.6 | ||||||||||||||||||||||||
Operating lease income and other leasing gains |
16 | 14 | 2 | 14.3 | 49 | 47 | 2 | 4.3 | ||||||||||||||||||||||||
Corporate services income |
46 | 30 | 16 | 53.3 | 110 | 88 | 22 | 25.0 | ||||||||||||||||||||||||
Service charges on deposit accounts |
11 | 11 | | | 32 | 33 | (1 | ) | (3.0 | ) | ||||||||||||||||||||||
Cards and payments income |
4 | 3 | 1 | 33.3 | 12 | 11 | 1 | 9.1 | ||||||||||||||||||||||||
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Payments and services income |
61 | 44 | 17 | 38.6 | 154 | 132 | 22 | 16.7 | ||||||||||||||||||||||||
Mortgage servicing fees |
11 | 9 | 2 | 22.2 | 34 | 35 | (1 | ) | (2.9 | ) | ||||||||||||||||||||||
Other noninterest income |
3 | 6 | (3 | ) | (50.0 | ) | 16 | 10 | 6 | 60.0 | ||||||||||||||||||||||
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Total noninterest income |
$ | 234 | $ | 185 | $ | 49 | 26.5 | % | $ | 671 | $ | 566 | $ | 105 | 18.6 | % | ||||||||||||||||
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Other Segments consist of Corporate Treasury, Keys Principal Investing unit and various exit portfolios. Other Segments generated net income attributable to Key of $26 million for the third quarter of 2015, essentially unchanged compared to net income attributable to Key of $27 million for the same period last year.
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At September 30, 2015, total loans outstanding from continuing operations were $60.1 billion, compared to $57.4 billion at December 31, 2014, and $56.2 billion at September 30, 2014. The increase in our outstanding loans from continuing operations over the past twelve months results primarily from increased lending activity in our commercial, financial and agricultural portfolio. Loans related to the discontinued operations of the education lending business, which are excluded from total loans at September 30, 2015, December 31, 2014, and September 30, 2014, totaled $1.9 billion, $2.3 billion, and $2.4 billion, respectively. For more information on balance sheet carrying value, see Note 1 (Summary of Significant Accounting Policies) under the headings Loans and Loans Held for Sale on page 116 of our 2014 Form 10-K.
Commercial loan portfolio
Commercial loans outstanding were $44.3 billion at September 30, 2015, an increase of $4.1 billion, or 10.3%, compared to September 30, 2014.
Commercial, financial and agricultural. Our commercial, financial and agricultural loans, also referred to as commercial and industrial, represented 52% of our total loan portfolio at September 30, 2015, 49% at December 31, 2014, and 48% at September 30, 2014, and is the largest component of our total loans. These loans are originated by both Key Corporate Bank and Key Community Bank and consist of fixed and variable rate loans to our large, middle market, and small business clients.
Figure 18 provides our commercial, financial and agricultural loans by industry classification at September 30, 2015, December 31, 2014, and September 30, 2014.
Figure 18. Commercial, Financial and Agricultural Loans
September 30, 2015 | December 31, 2014 | September 30, 2014 | ||||||||||||||||||||||
dollars in millions |
Amount | Percent of Total |
Amount | Percent of Total |
Amount | Percent of Total |
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Industry classification: |
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Services |
$ | 6,509 | 20.9 | % | $ | 6,053 | 21.6 | % | $ | 6,011 | 22.5 | % | ||||||||||||
Manufacturing |
5,035 | 16.2 | 4,621 | 16.5 | 4,538 | 17.0 | ||||||||||||||||||
Public utilities |
2,289 | 7.4 | 1,938 | 6.9 | 1,694 | 6.4 | ||||||||||||||||||
Financial services |
2,980 | 9.6 | 2,844 | 10.2 | 2,752 | 10.3 | ||||||||||||||||||
Wholesale trade |
2,456 | 7.9 | 2,294 | 8.2 | 2,172 | 8.1 | ||||||||||||||||||
Retail trade |
1,274 | 4.1 | 1,089 | 3.9 | 981 | 3.7 | ||||||||||||||||||
Mining |
796 | 2.6 | 946 | 3.4 | 733 | 2.7 | ||||||||||||||||||
Dealer floor plan |
1,289 | 4.1 | 1,439 | 5.2 | 1,188 | 4.5 | ||||||||||||||||||
Property management |
1,125 | 3.6 | 834 | 3.0 | 911 | 3.4 | ||||||||||||||||||
Transportation |
1,805 | 5.8 | 1,407 | 5.0 | 1,183 | 4.4 | ||||||||||||||||||
Building contractors |
665 | 2.1 | 683 | 2.4 | 590 | 2.2 | ||||||||||||||||||
Agriculture/forestry/fishing |
692 | 2.2 | 675 | 2.4 | 550 | 2.1 | ||||||||||||||||||
Insurance |
329 | 1.1 | 257 | .9 | 210 | .8 | ||||||||||||||||||
Public administration |
744 | 2.4 | 501 | 1.8 | 556 | 2.1 | ||||||||||||||||||
Communications |
237 | .8 | 196 | .7 | 168 | .6 | ||||||||||||||||||
Other |
2,870 | 9.2 | 2,205 | 7.9 | 2,446 | 9.2 | ||||||||||||||||||
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Total |
$ | 31,095 | 100.0 | % | $ | 27,982 | 100.0 | % | $ | 26,683 | 100.0 | % | ||||||||||||
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Commercial, financial and agricultural loans increased $4.4 billion, or 16.5% from the same period last year, with Key Corporate Bank increasing $3.8 billion and Key Community Bank up $718 million. We have experienced growth in new high credit quality loan commitments and utilization with clients in our middle market segment and Institutional and Capital Markets business. Our two largest industry classificationsservices and manufacturingincreased by 8.3% and 11%, respectively, when compared to one year ago. The services and manufacturing industries represented approximately 21% and 16%, respectively, of the total commercial, financial and agricultural loan portfolio at September 30, 2015, and approximately 23% and 17%, respectively, at September 30, 2014. At the end of each period provided in Figure 18 above, loans in the services and manufacturing industry classifications accounted for approximately 37%, 38%, and 40% of our total commercial, financial and agricultural loan portfolio.
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Services, manufacturing, and public utilities are focus areas where we maintain dedicated industry verticals that are staffed by relationship managers who possess deep industry experience and knowledge. Our loans in the services classification grew by $498 million, or 8.3%, compared to last year. Loans in the manufacturing classification grew by $497 million, or 11% compared to the same period one year ago. Increases in lending to large corporate, middle market, and business banking clients accounted for the majority of the growth in this classification. Loans in public utilities increased by $595 million, or 35.1%, compared to the same period one year ago due to growth in the wind and solar electric power business.
Our loans in the financial services and transportation classifications increased 8.3% and 52.6%, respectively, compared to the prior year. The increase in financial services loans was primarily attributable to growth in real estate investment trust balances. The increase in transportation loans was primarily attributable to loan growth for rail cars and shipping containers.
Our oil and gas loan portfolio focuses on lending to middle market companies and represents approximately 2% of total loans outstanding at September 30, 2015. We have over 10 years of experience in energy lending with over 20 specialists dedicated to oil and gas. Credit quality on these loans remains solid.
Commercial real estate loans. Our commercial real estate lending business is conducted through two primary sources: our 12-state banking franchise, and KeyBank Real Estate Capital, a national line of business that cultivates relationships with owners of commercial real estate located both within and beyond the branch system. This line of business deals primarily with nonowner-occupied properties (generally properties for which at least 50% of the debt service is provided by rental income from nonaffiliated third parties) and accounted for approximately 67% of our average year-to-date commercial real estate loans, compared to 59% one year ago. KeyBank Real Estate Capital generally focuses on larger owners and operators of commercial real estate.
Commercial real estate loans totaled $9.3 billion at both September 30, 2015, and September 30, 2014, and represented 15% and 17% of our total loan portfolio at September 30, 2015, and September 30, 2014, respectively. These loans, which include both owner- and nonowner-occupied properties, represented 21% and 23% of our commercial loan portfolio at September 30, 2015, and September 30, 2014, respectively. We continue to de-risk the portfolio by changing our focus from developers to owners of completed and stabilized commercial real estate.
Figure 19 includes commercial mortgage and construction loans in both Key Community Bank and Key Corporate Bank. As shown in Figure 19, this loan portfolio is diversified by both property type and geographic location of the underlying collateral.
As presented in Figure 19, at September 30, 2015, our commercial real estate portfolio included mortgage loans of $8.2 billion and construction loans of $1.1 billion, representing 14% and 2%, respectively, of our total loans. At September 30, 2015, nonowner-occupied loans represented 11% of our total loans and owner-occupied loans represented 4% of our total loans. The average size of mortgage loans originated during the third quarter of 2015 was $6.3 million, and our largest mortgage loan at September 30, 2015, had a balance of $75 million. At September 30, 2015, our average construction loan commitment was $8.3 million, our largest construction loan commitment was $48 million, and our largest construction loan amount outstanding was $42.5 million.
Also shown in Figure 19, 73% of our commercial real estate loans at September 30, 2015, were for nonowner-occupied properties compared to 71% at September 30, 2014. Approximately 15% of these loans were construction loans at September 30, 2015, compared to 14% at September 30, 2014. Typically, these properties are not fully leased at the origination of the loan. The borrower relies upon additional leasing through the life of the loan to provide the cash flow necessary to support debt service payments. A significant decline in economic growth, and in turn rental rates and occupancy, would adversely affect our portfolio of construction loans.
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Figure 19. Commercial Real Estate Loans
Geographic Region | Percent of | Commercial | ||||||||||||||||||||||||||||||||||||||||||
dollars in millions |
West | Southwest | Central | Midwest | Southeast | Northeast | National | Total | Total | Construction | Mortgage | |||||||||||||||||||||||||||||||||
September 30, 2015 |
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Nonowner-occupied: |
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Retail properties |
$ | 191 | $ | 102 | $ | 66 | $ | 124 | $ | 239 | $ | 61 | $ | 145 | $ | 928 | 10.0 | % | $ | 143 | $ | 785 | ||||||||||||||||||||||
Multifamily properties |
380 | 183 | 579 | 581 | 856 | 157 | 201 | 2,937 | 31.8 | 539 | 2,398 | |||||||||||||||||||||||||||||||||
Health facilities |
196 | | 155 | 154 | 297 | 285 | 32 | 1,119 | 12.1 | 150 | 969 | |||||||||||||||||||||||||||||||||
Office buildings |
149 | 7 | 179 | 95 | 64 | 68 | | 562 | 6.1 | 53 | 509 | |||||||||||||||||||||||||||||||||
Warehouses |
230 | 2 | 44 | 101 | 31 | 79 | 159 | 646 | 7.0 | 45 | 601 | |||||||||||||||||||||||||||||||||
Manufacturing facilities |
31 | | 2 | 5 | 33 | 2 | 6 | 79 | .9 | 25 | 54 | |||||||||||||||||||||||||||||||||
Hotels/Motels |
37 | | 11 | 6 | | 6 | | 60 | .6 | | 60 | |||||||||||||||||||||||||||||||||
Residential properties |
1 | | 26 | 2 | 2 | 12 | | 43 | .5 | 8 | 35 | |||||||||||||||||||||||||||||||||
Land and development |
14 | | 6 | 11 | 11 | 9 | | 51 | .5 | 40 | 11 | |||||||||||||||||||||||||||||||||
Other |
64 | 12 | 3 | 20 | 32 | 80 | 86 | 297 | 3.2 | 15 | 282 | |||||||||||||||||||||||||||||||||
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Total nonowner-occupied |
1,293 | 306 | 1,071 | 1,099 | 1,565 | 759 | 629 | 6,722 | 72.7 | 1,018 | 5,704 | |||||||||||||||||||||||||||||||||
Owner-occupied |
1,058 | 6 | 279 | 567 | 56 | 562 | | 2,528 | 27.3 | 52 | 2,476 | |||||||||||||||||||||||||||||||||
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Total |
$ | 2,351 | $ | 312 | $ | 1,350 | $ | 1,666 | $ | 1,621 | $ | 1,321 | $ | 629 | $ | 9,250 | 100.0 | % | $ | 1,070 | $ | 8,180 | ||||||||||||||||||||||
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December 31, 2014 |
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Total |
$ | 2,518 | $ | 307 | $ | 1,261 | $ | 1,668 | $ | 1,393 | $ | 1,315 | $ | 685 | $ | 9,147 | $ | 1,100 | $ | 8,047 | ||||||||||||||||||||||||
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September 30, 2014 |
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Total |
$ | 2,426 | $ | 360 | $ | 1,293 | $ | 1,695 | $ | 1,453 | $ | 1,261 | $ | 824 | $ | 9,312 | $ | 1,036 | $ | 8,276 | ||||||||||||||||||||||||
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September 30, 2015 |
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Nonowner-occupied: |
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Nonperforming loans |
| | | $ | 7 | | $ | 9 | | $ | 16 | N/M | $ | 7 | $ | 9 | ||||||||||||||||||||||||||||
Accruing loans past due 90 days or more |
| | | | | 4 | | 4 | N/M | | 4 | |||||||||||||||||||||||||||||||||
Accruing loans past due 30 through 89 days |
| | $ | 3 | 3 | | | | 6 | N/M | | 6 |
West | Alaska, California, Hawaii, Idaho, Montana, Oregon, Washington, and Wyoming |
Southwest | Arizona, Nevada, and New Mexico |
Central | Arkansas, Colorado, Oklahoma, Texas, and Utah |
Midwest | Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, and Wisconsin |
Southeast | Alabama, Delaware, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, South Carolina, Tennessee, Virginia, Washington D.C., and West Virginia |
Northeast | Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, and Vermont |
National | Accounts in three or more regions |
During the first nine months of 2015, nonperforming loans related to nonowner-occupied properties decreased by $5 million from December 31, 2014, to $16 million at September 30, 2015, and decreased by $9 million when compared to September 30, 2014. Our nonowner-occupied commercial real estate portfolio has increased by 2%, or approximately $108 million, since September 30, 2014.
Commercial lease financing. We conduct commercial lease financing arrangements through our KEF line of business and have both the scale and array of products to compete in the equipment lease financing business. Commercial lease financing receivables represented 9% of commercial loans at September 30, 2015, and 10% at September 30, 2014.
Commercial loan modification and restructuring
We modify and extend certain commercial loans in the normal course of business for our clients. Loan modifications vary and are handled on a case-by-case basis with strategies responsive to the specific circumstances of each loan and borrower. In many cases, borrowers have other resources and can reinforce the credit with additional capital, collateral, guarantees, or income sources.
Modifications are negotiated to achieve mutually agreeable terms that maximize loan credit quality while at the same time meeting our clients financing needs. Modifications made to loans of creditworthy borrowers not experiencing financial difficulties and under circumstances where ultimate collection of all principal and interest is not in doubt are not classified as TDRs. In accordance with applicable accounting guidance, a loan is classified as a TDR only when the borrower is experiencing financial difficulties and a creditor concession has been granted.
Our concession types are primarily interest rate reductions, forgiveness of principal, and other modifications. Loan extensions are sometimes coupled with these primary concession types. Because economic conditions have improved modestly and we have restructured loans to provide the optimal opportunity for successful repayment by the borrower, certain of our restructured loans have returned to accrual status and consistently performed under the restructured loan terms over the past year.
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If loan terms are extended at less than normal market rates for similar lending arrangements, our Asset Recovery Group is consulted to help determine if any concession granted would result in designation as a TDR. Transfer to our Asset Recovery Group is considered for any commercial loan determined to be a TDR. During the first nine months of 2015, we had $51 million of new restructured commercial loans compared to $3 million of new restructured commercial loans in the first nine months of 2014.
For more information on concession types for our commercial accruing and nonaccruing TDRs, see Note 4.
Figure 20. Commercial TDRs by Note Type and Accrual Status
in millions |
September 30, 2015 |
June 30, 2015 |
March 31, 2015 |
December 31, 2014 |
September 30, 2014 |
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Commercial TDRs by Note Type |
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Tranche A |
$ | 61 | $ | 70 | $ | 39 | $ | 40 | $ | 35 | ||||||||||
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Total Commercial TDRs |
$ | 61 | $ | 70 | $ | 39 | $ | 40 | $ | 35 | ||||||||||
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Commercial TDRs by Accrual Status |
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Nonaccruing |
$ | 57 | $ | 66 | $ | 35 | $ | 36 | $ | 24 | ||||||||||
Accruing |
4 | 4 | 4 | 4 | 11 | |||||||||||||||
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Total Commercial TDRs |
$ | 61 | $ | 70 | $ | 39 | $ | 40 | $ | 35 | ||||||||||
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We often use an A-B note structure for our TDRs, breaking the existing loan into two tranches. First, we create an A note. Since the objective of this TDR note structure is to achieve a fully performing and well-rated A note, we focus on sizing that note to a level that is supported by cash flow available to service debt at current market terms and consistent with our customary underwriting standards. This note structure typically will include a debt coverage ratio of 1.2 or better of cash flow to monthly payments of market interest, and principal amortization of generally not more than 25 years. These metrics are adjusted from time to time based upon changes in long-term markets and take-out underwriting standards of our various lines of business. Appropriately sized A notes are more likely to return to accrual status, allowing us to resume recognizing interest income. As the borrowers payment performance improves, these restructured notes typically also allow for an upgraded internal quality risk rating classification. Moreover, the borrower retains ownership and control of the underlying collateral (typically, commercial real estate), the borrowers capital structure is strengthened (often to the point that fresh capital is attracted to the transaction), and local markets are spared distressed/fire sales.
The B note typically is an interest-only note with no required amortization until the property stabilizes and generates excess cash flow. This excess cash flow customarily is applied directly to the principal of the A note. We evaluate the B note when we consider returning the A note to accrual status. In many cases, the B note is charged off at the same time the A note is returned to accrual status. Alternatively, both A and B notes may be simultaneously returned to accrual if credit metrics are supportive.
Restructured nonaccrual loans may be returned to accrual status based on a current, well-documented evaluation of the credit, which would include analysis of the borrowers financial condition, prospects for repayment under the modified terms, and alternate sources of repayment such as the value of loan collateral. We wait a reasonable period (generally a minimum of six months) to establish the borrowers ability to sustain historical repayment performance before returning the loan to accrual status. Sustained historical repayment performance prior to the restructuring also may be taken into account. The primary consideration for returning a restructured loan to accrual status is the reasonable assurance that the full contractual principal balance of the loan and the ongoing contractually required interest payments will be fully repaid. Although our policy is a guideline, considerable judgment is required to review each borrowers circumstances.
All loans processed as TDRs, including A notes and any non-charged-off B notes, are reported as TDRs during the calendar year in which the restructure took place.
Additional information regarding TDRs is provided in Note 4 (Asset Quality).
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Extensions. Project loans typically are refinanced into the permanent commercial loan market at maturity, but sometimes they are modified and extended. Extension terms take into account the specific circumstances of the client relationship, the status of the project, and near-term prospects for both the client and the collateral. In all cases, pricing and loan structure are reviewed and, where necessary, modified to ensure the loan has been priced to achieve a market rate of return and loan terms that are appropriate for the risk. Typical enhancements include one or more of the following: principal pay down, increased amortization, additional collateral, increased guarantees, and a cash flow sweep. Some maturing construction loans have automatic extension options built in; in those cases, pricing and loan terms cannot be altered.
Loan pricing is determined based on the strength of the borrowing entity and the strength of the guarantor, if any. Therefore, pricing for an extended loan may remain the same because the loan is already priced at or above current market.
We do not consider loan extensions in the normal course of business (under existing loan terms or at market rates) as TDRs, particularly when ultimate collection of all principal and interest is not in doubt and no concession has been made. In the case of loan extensions where either collection of all principal and interest is uncertain or a concession has been made, we would analyze such credit under the applicable accounting guidance to determine whether it qualifies as a TDR. Extensions that qualify as TDRs are measured for impairment under the applicable accounting guidance.
Guarantors. We conduct a detailed guarantor analysis (1) for all new extensions of credit, (2) at the time of any material modification/extension, and (3) typically annually, as part of our on-going portfolio and loan monitoring procedures. This analysis requires the guarantor entity to submit all appropriate financial statements, including balance sheets, income statements, tax returns, and real estate schedules.
While the specific steps of each guarantor analysis may vary, the high-level objectives include determining the overall financial conditions of the guarantor entities, including size, quality, and nature of asset base; net worth (adjusted to reflect our opinion of market value); leverage; standing liquidity; recurring cash flow; contingent and direct debt obligations; and near-term debt maturities.
Borrower and guarantor financial statements are required at least annually within 90-120 days of the calendar/fiscal year end. Income statements and rent rolls for project collateral are required quarterly. We may require certain information, such as liquidity, certifications, status of asset sales or debt resolutions, and real estate schedules, to be provided more frequently.
We routinely seek performance from guarantors of impaired debt if the guarantor is solvent. We may not seek to enforce the guaranty if we are precluded by bankruptcy or we determine the cost to pursue a guarantor exceeds the value to be returned given the guarantors verified financial condition. We often are successful in obtaining either monetary payment or the cooperation of our solvent guarantors to help mitigate loss, cost, and the expense of collections.
Mortgage and construction loans with a loan-to-value ratio greater than 1.0 are accounted for as performing loans. These loans were not considered impaired due to one or more of the following factors: (i) underlying cash flow adequate to service the debt at a market rate of return with adequate amortization; (ii) a satisfactory borrower payment history; and (iii) acceptable guarantor support. As of September 30, 2015, we did not have any mortgage and construction loans that had a loan-to-value ratio greater than 1.0.
Consumer loan portfolio
Consumer loans outstanding decreased by $214 million, or 1.3%, from one year ago. The home equity portfolio is the largest segment of our consumer loan portfolio. Approximately 98% of this portfolio at September 30, 2015, was originated from our Key Community Bank within our 12-state footprint. The remainder of the portfolio, which has been in an exit mode since the fourth quarter of 2007, was originated from the Consumer Finance line of business and is now included in Other Segments. Home equity loans in Key Community Bank decreased by $98 million, or .9%, over the past twelve months.
As shown in Figure 16, we held the first lien position for approximately 60% of the Key Community Bank home equity portfolio at September 30, 2015, and 59% at September 30, 2014. For consumer loans with real estate collateral, we track borrower performance monthly. Regardless of the lien position, credit metrics are refreshed quarterly, including recent Fair Isaac Corporation scores as well as original and updated loan-to-value ratios. This information is used in establishing the ALLL. Our methodology is described in Note 1 (Summary of Significant Accounting Policies) under the heading Allowance for Loan and Lease Losses beginning on page 117 of our 2014 Form 10-K.
Regulatory guidance issued in January 2012 addressed specific risks and required actions within home equity portfolios associated with second lien loans. At September 30, 2015, 40% of our home equity portfolio was secured by second lien mortgages. On at least a quarterly basis, we continue to monitor the risk characteristics of these loans when determining whether our loss estimation methods are appropriate.
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Figure 21 summarizes our home equity loan portfolio by source at the end of each of the last five quarters, as well as certain asset quality statistics and yields on the portfolio as a whole.
Figure 21. Home Equity Loans
2015 | 2014 | |||||||||||||||||||
dollars in millions |
Third | Second | First | Fourth | Third | |||||||||||||||
SOURCES OF PERIOD-END LOANS |
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Key Community Bank |
$ | 10,282 | $ | 10,296 | $ | 10,270 | $ | 10,366 | $ | 10,380 | ||||||||||
Other |
222 | 236 | 253 | 267 | 283 | |||||||||||||||
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Total |
$ | 10,504 | $ | 10,532 | $ | 10,523 | $ | 10,633 | $ | 10,663 | ||||||||||
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Nonperforming loans at period end |
$ | 181 | $ | 184 | $ | 191 | $ | 195 | $ | 184 | ||||||||||
Net loan charge-offs for the period |
3 | 8 | 5 | 6 | 7 | |||||||||||||||
Yield for the period |
3.96 | % | 3.98 | % | 3.99 | % | 4.01 | % | 4.01 | % |
Loans held for sale
As shown in Note 3 (Loans and Loans Held for Sale), our loans held for sale increased to $916 million at September 30, 2015, from $734 million at December 31, 2014, and $784 million at September 30, 2014.
At September 30, 2015, loans held for sale included $74 million of commercial, financial and agricultural loans, which increased $44 million from September 30, 2014, $806 million of commercial mortgage loans, which increased $81 million from September 30, 2014, and $26 million of residential mortgage loans, which increased $7 million from September 30, 2014.
Loan sales
As shown in Figure 22, during the first nine months of 2015, we sold $4.5 billion of commercial real estate loans, $450 million of residential real estate loans, $249 million of commercial loans, and $211 million of commercial lease financing loans. Most of these sales came from the held-for-sale portfolio; however, $89 million of these loan sales related to the held-to-maturity portfolio.
Loan sales classified as held for sale generated net gains of $75 million in the first nine months of 2015 and are included in investment banking and debt placement fees and other income on the income statement.
Among the factors that we consider in determining which loans to sell are:
| our business strategy for particular lending areas; |
| whether particular lending businesses meet established performance standards or fit with our relationship banking strategy; |
| our A/LM needs; |
| the cost of alternative funding sources; |
| the level of credit risk; |
| capital requirements; and |
| market conditions and pricing. |
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Figure 22 summarizes our loan sales for the first nine months of 2015 and all of 2014.
Figure 22. Loans Sold (Including Loans Held for Sale)
in millions |
Commercial | Commercial Real Estate |
Commercial Lease Financing |
Residential Real Estate |
Total | |||||||||||||||
2015 |
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Third quarter |
$ | 150 | $ | 1,246 | $ | 100 | $ | 142 | $ | 1,638 | ||||||||||
Second quarter |
41 | 2,210 | 48 | 188 | 2,487 | |||||||||||||||
First quarter |
58 | 1,010 | 63 | 120 | 1,251 | |||||||||||||||
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Total |
$ | 249 | $ | 4,466 | $ | 211 | $ | 450 | $ | 5,376 | ||||||||||
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2014 |
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Fourth quarter |
$ | 29 | $ | 2,333 | $ | 80 | $ | 103 | $ | 2,545 | ||||||||||
Third quarter |
179 | 913 | 48 | 127 | 1,267 | |||||||||||||||
Second quarter |
152 | 679 | 45 | 104 | 980 | |||||||||||||||
First quarter |
16 | 489 | 39 | 73 | 617 | |||||||||||||||
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Total |
$ | 376 | $ | 4,414 | $ | 212 | $ | 407 | $ | 5,409 | ||||||||||
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Figure 23 shows loans that are either administered or serviced by us, but not recorded on the balance sheet, and includes loans that were sold.
Figure 23. Loans Administered or Serviced
September 30, | June 30, | March 31, | December 31, | September 30, | ||||||||||||||||
in millions |
2015 | 2015 | 2015 | 2014 | 2014 | |||||||||||||||
Commercial real estate loans |
$ | 206,893 | $ | 203,315 | $ | 201,397 | $ | 191,407 | $ | 179,293 | ||||||||||
Education loans (a) |
1,398 | 1,459 | 1,521 | 1,589 | 1,655 | |||||||||||||||
Commercial lease financing |
779 | 709 | 701 | 722 | 709 | |||||||||||||||
Commercial loans |
340 | 337 | 347 | 344 | 340 | |||||||||||||||
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Total |
$ | 209,410 | $ | 205,820 | $ | 203,966 | $ | 194,062 | $ | 181,997 | ||||||||||
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(a) | During the third quarter of 2014, we sold the residual interests in all of our outstanding education loan securitization trusts to a third party. At September 30, 2014, we deconsolidated the securitization trusts and removed the trust assets from our balance sheet. We retained the servicing for the loans associated with these securitization trusts. See Note 11 (Acquisitions and Discontinued Operations) for more information about this transaction. |
In the event of default by a borrower, we are subject to recourse with respect to approximately $1.7 billion of the $209 billion of loans administered or serviced at September 30, 2015. Additional information about this recourse arrangement is included in Note 15 (Contingent Liabilities and Guarantees) under the heading Recourse agreement with FNMA.
We derive income from several sources when retaining the right to administer or service loans that are sold. We earn noninterest income (recorded as mortgage servicing fees) from fees for servicing or administering loans. This fee income is reduced by the amortization of related servicing assets. In addition, we earn interest income from investing funds generated by escrow deposits collected in connection with the servicing of commercial real estate loans.
Our securities portfolio totaled $19.3 billion at September 30, 2015, compared to $18.4 billion at December 31, 2014, and $17.2 billion at September 30, 2014. Available-for-sale securities were $14.4 billion at September 30, 2015, compared to $13.4 billion at December 31, 2014, and $12.2 billion at September 30, 2014. Held-to-maturity securities were $4.9 billion at September 30, 2015, compared to $5 billion at December 31, 2014, and $5 billion at September 30, 2014.
As shown in Figure 24, all of our mortgage-backed securities, which include both securities available for sale and held-to-maturity securities, are issued by government-sponsored enterprises or GNMA, and are traded in liquid secondary markets. These securities are recorded on the balance sheet at fair value for the available-for-sale portfolio and at cost for the held-to-maturity portfolio. For more information about these securities, see Note 5 (Fair Value Measurements) under the heading Qualitative Disclosures of Valuation Techniques, and Note 6 (Securities).
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Figure 24. Mortgage-Backed Securities by Issuer
September 30, | December 31, | September 30, | ||||||||||
in millions |
2015 | 2014 | 2014 | |||||||||
FHLMC |
$ | 4,694 | $ | 5,666 | $ | 5,988 | ||||||
FNMA |
4,810 | 4,998 | 5,253 | |||||||||
GNMA |
9,749 | 7,636 | 5,922 | |||||||||
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Total (a) |
$ | 19,253 | $ | 18,300 | $ | 17,163 | ||||||
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(a) | Includes securities held in the available-for-sale and held-to-maturity portfolios. |
Securities available for sale
The majority of our securities available-for-sale portfolio consists of Federal Agency CMOs and mortgage-backed securities. CMOs are debt securities secured by a pool of mortgages or mortgage-backed securities. These mortgage securities generate interest income, serve as collateral to support certain pledging agreements, and provide liquidity value under upcoming regulatory requirements. At September 30, 2015, we had $14.3 billion invested in CMOs and other mortgage-backed securities in the available-for-sale portfolio, compared to $13.3 billion at December 31, 2014, and $12.2 billion at September 30, 2014.
We periodically evaluate our securities available-for-sale portfolio in light of established A/LM objectives, changing market conditions that could affect the profitability of the portfolio, the regulatory environment, and the level of interest rate risk to which we are exposed. These evaluations may cause us to take steps to adjust our overall balance sheet positioning.
In addition, the size and composition of our securities available-for-sale portfolio could vary with our needs for liquidity and the extent to which we are required (or elect) to hold these assets as collateral to secure public funds and trust deposits. Although we generally use debt securities for this purpose, other assets, such as securities purchased under resale agreements or letters of credit, are used occasionally when they provide a lower cost of collateral or more favorable risk profiles.
Throughout 2014 and the first nine months of 2015, our investing activities continued to complement other balance sheet developments and provide for our ongoing liquidity management needs. Our actions to not reinvest the monthly security cash flows at various times during this time period served to provide the liquidity necessary to address our funding requirements. These funding requirements included ongoing loan growth and occasional debt maturities. At other times, we may make additional investments that go beyond the replacement of maturities or mortgage security cash flows as our liquidity position and/or interest rate risk management strategies may require. Lastly, our focus on investing in GNMA-related securities is also related to liquidity management strategies as we continue to prepare for future regulatory requirements.
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Figure 25 shows the composition, yields, and remaining maturities of our securities available for sale. For more information about these securities, including gross unrealized gains and losses by type of security and securities pledged, see Note 6.
Figure 25. Securities Available for Sale
dollars in millions |
States and Political Subdivisions |
Collateralized Mortgage Obligations (a) |
Other Mortgage- Backed Securities (a) |
Other Securities (b) |
Total | Weighted- Average Yield (c) |
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September 30, 2015 |
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Remaining maturity: |
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One year or less |
$ | 2 | $ | 299 | $ | 1 | | $ | 302 | 3.14 | % | |||||||||||||
After one through five years |
9 | 11,074 | 1,631 | $ | 21 | 12,735 | 2.11 | |||||||||||||||||
After five through ten years |
4 | 630 | 695 | 7 | 1,336 | 2.13 | ||||||||||||||||||
After ten years |
| | 3 | | 3 | 5.42 | ||||||||||||||||||
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Fair value |
$ | 15 | $ | 12,003 | $ | 2,330 | $ | 28 | $ | 14,376 | | |||||||||||||
Amortized cost |
14 | 11,938 | 2,309 | 27 | 14,288 | 2.13 | % | |||||||||||||||||
Weighted-average yield (c) |
6.22 | % | 2.12 | % | 2.13 | % | | 2.13 | % (d) | | ||||||||||||||
Weighted-average maturity |
3.3 years | 3.8 years | 3.9 years | 4.1 years | 3.8 years | | ||||||||||||||||||
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December 31, 2014 |
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Fair value |
$ | 23 | $ | 11,270 | $ | 2,035 | $ | 32 | $ | 13,360 | | |||||||||||||
Amortized cost |
22 | 11,310 | 2,004 | 29 | 13,365 | 2.24 | % | |||||||||||||||||
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September 30, 2014 |
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Fair value |
$ | 27 | $ | 10,009 | $ | 2,177 | $ | 32 | $ | 12,245 | | |||||||||||||
Amortized cost |
26 | 10,096 | 2,156 | 28 | 12,306 | 2.28 | % | |||||||||||||||||
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(a) | Maturity is based upon expected average lives rather than contractual terms. |
(b) | Includes primarily marketable equity securities. |
(c) | Weighted-average yields are calculated based on amortized cost. Such yields have been adjusted to a taxable-equivalent basis using the statutory federal income tax rate of 35%. |
(d) | Excludes $28 million of securities at September 30, 2015, that have no stated yield. |
Held-to-maturity securities
Federal Agency CMOs and mortgage-backed securities constitute essentially all of our held-to-maturity securities. The remaining balance comprises foreign bonds and capital securities. Figure 26 shows the composition, yields and remaining maturities of these securities.
Figure 26. Held-to-Maturity Securities
Collateralized | Other | Weighted- | ||||||||||||||||||
dollars in millions |
Mortgage Obligations |
Mortgage-backed Securities |
Other Securities |
Total | Average Yield (a) |
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September 30, 2015 |
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Remaining maturity: |
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One year or less |
| | $ | 9 | $ | 9 | 2.34 | % | ||||||||||||
After one through five years |
$ | 4,299 | | 11 | 4,310 | 1.89 | ||||||||||||||
After five through ten years |
| $ | 617 | | 617 | 2.71 | ||||||||||||||
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Amortized cost |
$ | 4,299 | $ | 617 | $ | 20 | $ | 4,936 | 1.99 | % | ||||||||||
Fair value |
4,300 | 620 | 20 | 4,940 | | |||||||||||||||
Weighted-average yield |
1.89 | % | 2.71 | % | 2.64 | %(b) | 1.99 | %(b) | | |||||||||||
Weighted-average maturity |
3.3 years | 6.2 years | 1.9 years | 3.7 years | | |||||||||||||||
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December 31, 2014 |
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Amortized cost |
$ | 4,755 | $ | 240 | $ | 20 | $ | 5,015 | 1.95 | % | ||||||||||
Fair value |
4,713 | 241 | 20 | 4,974 | | |||||||||||||||
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September 30, 2014 |
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Amortized cost |
$ | 4,977 | | $ | 20 | $ | 4,997 | 1.92 | % | |||||||||||
Fair value |
4,891 | | 20 | 4,911 | |
(a) | Weighted-average yields are calculated based on amortized cost. Such yields have been adjusted to a taxable-equivalent basis using the statutory federal income tax rate of 35%. |
(b) | Excludes $5 million of securities at September 30, 2015, that have no stated yield. |
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Principal investments investments in equity and debt instruments made by our Principal Investing unit represented 49% of other investments at September 30, 2015. They include direct investments (investments made in a particular company) as well as indirect investments (investments made through funds that include other investors). Principal investments are predominantly made in privately held companies and are carried at fair value. The fair value of the direct investments was $66 million at September 30, 2015, $104 million at December 31, 2014, and $115 million at September 30, 2014, while the fair value of the indirect investments was $271 million at September 30, 2015, $302 million at December 31, 2014, and $353 million at September 30, 2014. Under the requirements of the Volcker Rule, we will be required to dispose of some or all of our indirect principal investments. The Federal Reserve extended the conformance period to July 21, 2016, for all banking entities with respect to covered funds. The Federal Reserve also indicated its intent to exercise the authority granted by Section 13 of the Bank Holding Company Act to grant the final one-year extension until July 21, 2017. If this authority is not exercised by the Federal Reserve, Key is permitted to file for an additional extension of up to five years for illiquid funds, to retain the indirect investments for a longer period of time. We plan to apply for the extension, if not granted automatically, and hold the investments. As of September 30, 2015, we have not committed to a plan to sell these investments. For more information about the Volcker Rule, see the discussion under the heading Other Regulatory Developments under the Dodd-Frank Act Volcker Rule in the section entitled Supervision and Regulation beginning on page 16 of our 2014 Form 10-K.
In addition to principal investments, other investments include other equity and mezzanine instruments, such as certain real-estate-related investments and an indirect ownership interest in a partnership, that are carried at fair value, as well as other types of investments that generally are carried at cost. The real-estate-related investments were valued at $9 million at September 30, 2015, $10 million at December 31, 2014, and $13 million at September 30, 2014. The indirect investment in a partnership was valued at $4 million at September 30, 2015, December 31, 2014, and September 30, 2014. These investments may be subject to the disposal requirements under the Volcker Rule, as described in the previous paragraph.
Most of our other investments are not traded on an active market. We determine the fair value at which these investments should be recorded based on the nature of the specific investment and all available relevant information. This review may encompass such factors as the issuers past financial performance and future potential, the values of public companies in comparable businesses, the risks associated with the particular business or investment type, current market conditions, the nature and duration of resale restrictions, the issuers payment history, our knowledge of the industry, third-party data, and other relevant factors. During the first nine months of 2015, net gains from our principal investing activities (including results attributable to noncontrolling interests) totaled $51 million, which includes $39 million of net unrealized losses. These net gains are recorded as net gains (losses) from principal investing on the income statement. Additional information regarding these investments is provided in Note 5 (Fair Value Measurements).
Deposits and other sources of funds
Domestic deposits are our primary source of funding. The composition of our average deposits is shown in Figure 8 in the section entitled Net interest income. During the third quarter of 2015, average domestic deposits were $70 billion and represented 84% of the funds we used to support loans and other earning assets, compared to $67.7 billion and 87% during the third quarter of 2014. NOW and money market deposit accounts increased $2.3 billion, and noninterest-bearing deposits increased $966 million, reflecting continued growth in the commercial mortgage servicing business and inflows from commercial and consumer clients. These increases were partially offset by a decline in certificates of deposit.
Wholesale funds, consisting of deposits in our foreign office and short-term borrowings, averaged $1.9 billion during the third quarter of 2015, compared to $2.3 billion during the third quarter of 2014. The change from the third quarter of 2014 was caused by a decrease of $317 million in federal funds purchased and securities sold under agreements to repurchase and a decline of $103 million in foreign office deposits, partially offset by an $83 million increase in bank notes and other short-term borrowings.
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At September 30, 2015, our shareholders equity was $10.7 billion, up $175 million from December 31, 2014. The following sections discuss certain factors that contributed to this change. For other factors that contributed to the change, see the Consolidated Statements of Changes in Equity (Unaudited).
CCAR and capital actions
As part of its ongoing supervisory process, the Federal Reserve requires BHCs like KeyCorp to submit an annual comprehensive capital plan and to update that plan to reflect material changes in the BHCs risk profile, business strategies, or corporate structure, including but not limited to changes in planned capital actions. In January 2015, we submitted to the Federal Reserve and provided to the OCC our 2015 capital plan under the annual CCAR process. On March 11, 2015, the Federal Reserve announced that it did not object to our 2015 capital plan. The 2015 capital plan includes a common share repurchase program of up to $725 million. Share repurchases under the 2015 capital plan began in the second quarter of 2015 and include repurchases to offset issuances of common shares under our employee compensation plans.
During the third quarter of 2015, we repurchased $123 million of common shares under our 2015 capital plan authorization.
Dividends
As previously reported, our 2015 capital plan proposed an increase in our quarterly common share dividend from $.065 to $.075 per share, which was approved by our Board in May 2015. An additional potential increase in our quarterly common share dividend, up to $.085 per share, will be considered by the Board in 2016 for the fifth quarter of the 2015 capital plan. Other changes to future dividends may be evaluated by the Board based upon our earnings, financial condition, and other factors, including regulatory review. Further information regarding the capital planning process and CCAR is included under the heading Regulatory capital and liquidity in the Supervision and Regulation section beginning on page 10 of our 2014 Form 10-K.
Consistent with the 2015 capital plan, we made a dividend payment of $.075 per share, or $63 million, on our common shares during the third quarter of 2015.
We also made a quarterly dividend payment of $1.9375 per share, or $5.6 million, on our Series A Preferred Stock during the third quarter of 2015.
Common shares outstanding
Our common shares are traded on the NYSE under the symbol KEY with 27,385 holders of record at September 30, 2015. Our book value per common share was $12.47 based on 835.3 million shares outstanding at September 30, 2015, compared to $11.91 per common share based on 859.4 million shares outstanding at December 31, 2014, and $11.74 per common share based on 868.5 million shares outstanding at September 30, 2014. At September 30, 2015, our tangible book value per common share was $11.17, compared to $10.65 per common share at December 31, 2014, and $10.47 per common share at September 30, 2014.
Figure 27 shows activities that caused the change in outstanding common shares over the past five quarters.
Figure 27. Changes in Common Shares Outstanding
2015 | 2014 | |||||||||||||||||||
in thousands |
Third | Second | First | Fourth | Third | |||||||||||||||
Shares outstanding at beginning of period |
843,608 | 850,920 | 859,403 | 868,477 | 876,823 | |||||||||||||||
Common shares repurchased |
(8,386 | ) | (8,794 | ) | (14,087 | ) | (9,786 | ) | (8,830 | ) | ||||||||||
Shares reissued (returned) under employee benefit plans |
63 | 1,482 | 5,571 | 712 | 484 | |||||||||||||||
Series A Preferred Stock exchanged for common shares |
| | 33 | | | |||||||||||||||
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|
|
|
|||||||||||
Shares outstanding at end of period |
835,285 | 843,608 | 850,920 | 859,403 | 868,477 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
As shown above, common shares outstanding decreased by 8.3 million shares during the third quarter of 2015 due to share repurchases under our 2015 capital plan, partially offset by the net activity in our employee benefit plans.
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At September 30, 2015, we had 181.7 million treasury shares, compared to 157.6 million treasury shares at December 31, 2014, and 148.5 million treasury shares at September 30, 2014. Going forward we expect to reissue treasury shares as needed in connection with stock-based compensation awards and for other corporate purposes.
Information on repurchases of common shares by KeyCorp is included in Part II, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds of this report.
Capital adequacy
Capital adequacy is an important indicator of financial stability and performance. All of our capital ratios remained in excess of regulatory requirements at September 30, 2015. Our capital and liquidity levels are intended to position us to weather an adverse credit cycle while continuing to serve our clients needs, as well as to meet the Regulatory Capital Rules described in the Supervision and regulation section of Item 2 of this report. Our shareholders equity to assets ratio was 11.22% at September 30, 2015, compared to 11.22% at December 31, 2014, and 11.68% at September 30, 2014. Our tangible common equity to tangible assets ratio was 9.90% at September 30, 2015, compared to 9.88% at December 31, 2014, and 10.26% at September 30, 2014.
Federal banking regulators have promulgated minimum risk-based capital and leverage ratio requirements for BHCs like KeyCorp and their banking subsidiaries like KeyBank. As of January 1, 2015, Key and KeyBank (consolidated) were each required to maintain a minimum Tier 1 risk-based capital ratio of 6.00%, a total risk-based capital ratio of 8.00%, and a Tier 1 leverage ratio of 4.00%. At September 30, 2015, our Tier 1 risk-based capital ratio, total risk-based capital ratio, and Tier 1 leverage ratio were 10.87%, 12.47%, and 10.68%, respectively, compared to 11.90%, 13.89%, and 11.26%, respectively, at December 31, 2014, and 12.01%, 14.10%, and 11.15%, respectively, at September 30, 2014. In addition, as of January 1, 2015, Key and KeyBank (consolidated) were each required to maintain a minimum Common Equity Tier 1 capital ratio of 4.5%. At September 30, 2015, our Common Equity Tier 1 capital ratio was 10.47%.
The adoption of the Regulatory Capital Rules changes the regulatory capital standards that apply to BHCs by phasing out the treatment of capital securities and cumulative preferred securities as eligible Tier 1 capital. The phase-out period, which began January 1, 2015, for standardized approach banking organizations such as KeyCorp, will result in our trust preferred securities issued by the KeyCorp capital trusts being treated only as Tier 2 capital by 2016. The trust preferred securities issued by the KeyCorp capital trusts contribute $85 million, or 9 basis points, to our Tier 1 risk-based capital ratio of 10.87% and Tier 1 leverage ratio of 10.68% at September 30, 2015. The trust preferred securities contribute $340 million, or 37 basis points, to our total risk-based capital ratio of 12.47% at September 30, 2015. The new minimum capital and leverage ratios under the Regulatory Capital Rules together with the estimated ratios of Key at September 30, 2015, calculated on a fully phased-in basis, are set forth under the heading New minimum capital and leverage ratio requirements in the Supervision and regulation section in Item 2 of this report.
As previously indicated in the Supervision and Regulation section of Item 1 of our 2014 Form 10-K under the heading Revised prompt corrective action capital category ratios, the prompt corrective action capital category regulations do not apply to BHCs. If, however, these regulations did apply to BHCs, we believe KeyCorp would qualify for the well capitalized capital category at September 30, 2015. Moreover, after accounting for the phase-out of our trust preferred securities as Tier 1 eligible (and as Tier 2 instead) as of September 30, 2015, we estimate KeyCorp would still qualify for the well capitalized capital category under the Regulatory Capital Rules, with an estimated Tier 1 risk-based capital ratio, estimated Tier 1 leverage ratio, estimated Common Equity Tier 1 capital ratio, and estimated total risk-based capital ratio of 10.78%, 10.59%, 10.47%, and 12.47%, respectively. The new threshold ratios for a well capitalized and an adequately capitalized institution under the Regulatory Capital Rules are described in the Supervision and regulation section of Item 2 of this report under the heading Revised prompt corrective action capital category ratios. Since the regulatory capital categories under these regulations serve a limited supervisory function, investors should not use them as a representation of the overall financial condition or prospects of KeyCorp. A discussion of the regulatory capital standards and other related capital adequacy regulatory standards is included in the section Regulatory capital and liquidity in Supervision and Regulation under Item 1 of our 2014 Form 10-K.
Traditionally, the banking regulators have assessed bank and BHC capital adequacy based on both the amount and composition of capital, the calculation of which is prescribed in federal banking regulations. The Federal Reserves assessment of capital adequacy previously focused on a component of Tier 1 risk-based capital, known as Tier 1 common equity, and its review of the consolidated capitalization of SIFIs, including KeyCorp. The capital modifications mandated by the Regulatory Capital Rules, which became effective on January 1, 2015, for Key, require higher and better-quality capital and introduced a new capital measure, Common Equity Tier 1. Common Equity Tier 1 is not formally defined by GAAP
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and is considered to be a non-GAAP financial measure. Figure 7 in the Highlights of Our Performance section reconciles Key shareholders equity, the GAAP performance measure, to Common Equity Tier 1, the corresponding non-GAAP measure. Our Common Equity Tier 1 ratio was 10.47% at September 30, 2015.
At September 30, 2015, for Keys consolidated operations, we had a federal net deferred tax asset of $211 million and a state deferred tax asset of $28 million, compared to a federal net deferred tax asset of $195 million and a state deferred tax asset of $22 million at December 31, 2014, and a federal net deferred tax asset of $176 million and a state deferred tax asset of $21 million at September 30, 2014. We had a valuation allowance against the gross deferred tax assets associated with certain state net operating loss carryforwards and state credit carryforwards of less than $1 million at September 30, 2015, and at December 31, 2014, and $1 million at September 30, 2014. Starting with the implementation of the Regulatory Capital Rules on January 1, 2015, deferred tax assets that arise from net operating loss and tax credit carryforwards are deductible from Common Equity Tier 1 on a phase-in basis. As of September 30, 2015, this balance was approximately $1 million.
Figure 28 represents the details of our regulatory capital position at September 30, 2015, under the Regulatory Capital Rules. Figure 29 represents the details of our regulatory capital position at December 31, 2014, and September 30, 2014.
Figure 28. Capital Components and Risk-Weighted Assets (Regulatory Capital Rules)
dollars in millions |
September 30, 2015 |
|||
COMMON EQUITY TIER 1 |
||||
Key shareholders equity (GAAP) |
$ | 10,705 | ||
Less: Series A Preferred Stock (a) |
281 | |||
|
|
|||
Common Equity Tier 1 capital before adjustments and deductions |
10,424 | |||
|
|
|||
Less: Goodwill, net of deferred taxes |
1,036 | |||
Intangible assets, net of deferred taxes |
29 | |||
Deferred tax assets |
1 | |||
Net unrealized gains (losses) on available-for-sale securities, net of deferred taxes |
54 | |||
Accumulated gains (losses) on cash flow hedges, net of deferred taxes |
21 | |||
Amounts in AOCI attributed to pension and postretirement benefit costs, net of deferred taxes |
(385 | ) | ||
|
|
|||
Total Common Equity Tier 1 capital |
$ | 9,668 | ||
|
|
|||
TIER 1 CAPITAL |
||||
Common Equity Tier 1 |
$ | 9,668 | ||
Additional Tier 1 capital instruments and related surplus |
281 | |||
Non-qualifying capital instruments subject to phase out |
85 | |||
Less: Deductions |
1 | |||
|
|
|||
Total Tier 1 capital |
10,033 | |||
|
|
|||
TIER 2 CAPITAL |
||||
Tier 2 capital instruments and related surplus |
614 | |||
Allowance for losses on loans and liability for losses on lending-related commitments (b) |
868 | |||
Net unrealized gains on available-for-sale preferred stock classified as an equity security |
| |||
Less: Deductions |
| |||
|
|
|||
Total Tier 2 capital |
1,482 | |||
|
|
|||
Total risk-based capital |
$ | 11,515 | ||
|
|
|||
RISK-WEIGHTED ASSETS |
||||
Risk-weighted assets on balance sheet |
$ | 69,101 | ||
Risk-weighted off-balance sheet exposure |
22,625 | |||
Market risk-equivalent assets |
581 | |||
|
|
|||
Gross risk-weighted assets |
92,307 | |||
Less: Excess allowance for loan and lease losses |
| |||
|
|
|||
Net risk-weighted assets |
$ | 92,307 | ||
|
|
|||
AVERAGE QUARTERLY TOTAL ASSETS |
$ | 93,982 | ||
|
|
|||
CAPITAL RATIOS |
||||
Tier 1 risk-based capital |
10.87 | % | ||
Total risk-based capital |
12.47 | |||
Leverage (c) |
10.68 | |||
Common Equity Tier 1 |
10.47 |
(a) | Net of capital surplus. |
(b) | The ALLL included in Tier 2 capital is limited by regulation to 1.25% of the institutions standardized total risk-weighted assets (excluding its standardized market risk-weighted assets). The ALLL includes $23 million of allowance classified as discontinued assets on the balance sheet at September 30, 2015. |
(c) | This ratio is Tier 1 capital divided by average quarterly total assets as defined by the Federal Reserve less: (i) goodwill, (ii) the disallowed intangible and deferred tax assets, and (iii) other deductions from assets for leverage capital purposes. |
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Figure 29. Capital Components and Risk-Weighted Assets
dollars in millions |
December 31, 2014 |
September 30, 2014 |
||||||
TIER 1 CAPITAL |
||||||||
Key shareholders equity |
$ | 10,530 | $ | 10,486 | ||||
Qualifying capital securities |
339 | 340 | ||||||
Less: Goodwill |
1,057 | 1,051 | ||||||
Accumulated other comprehensive income (a) |
(395 | ) | (366 | ) | ||||
Other assets (b) |
83 | 110 | ||||||
|
|
|
|
|||||
Total Tier 1 capital |
10,124 | 10,031 | ||||||
|
|
|
|
|||||
TIER 2 CAPITAL |
||||||||
Allowance for losses on loans and liability for losses on lending-related commitments (c) |
859 | 870 | ||||||
Net unrealized gains on equity securities available for sale |
1 | 2 | ||||||
Qualifying long-term debt |
840 | 880 | ||||||
|
|
|
|
|||||
Total Tier 2 capital |
1,700 | 1,752 | ||||||
|
|
|
|
|||||
Total risk-based capital |
$ | 11,824 | $ | 11,783 | ||||
|
|
|
|
|||||
TIER 1 COMMON EQUITY |
||||||||
Tier 1 capital |
$ | 10,124 | $ | 10,031 | ||||
Less: Qualifying capital securities |
339 | 340 | ||||||
Series A Preferred Stock (d) |
282 | 282 | ||||||
|
|
|
|
|||||
Total Tier 1 common equity |
$ | 9,503 | $ | 9,409 | ||||
|
|
|
|
|||||
RISK-WEIGHTED ASSETS |
||||||||
Risk-weighted assets on balance sheet |
$ | 66,054 | $ | 65,245 | ||||
Risk-weighted off-balance sheet exposure |
19,360 | 18,721 | ||||||
Less: Goodwill |
1,057 | 1,051 | ||||||
Other assets (b) |
120 | 295 | ||||||
Plus: Market risk-equivalent assets |
863 | 927 | ||||||
|
|
|
|
|||||
Gross risk-weighted assets |
85,100 | 83,547 | ||||||
Less: Excess allowance for loan and lease losses |
| | ||||||
|
|
|
|
|||||
Net risk-weighted assets |
$ | 85,100 | $ | 83,547 | ||||
|
|
|
|
|||||
AVERAGE QUARTERLY TOTAL ASSETS |
$ | 91,116 | $ | 91,283 | ||||
|
|
|
|
|||||
CAPITAL RATIOS |
||||||||
Tier 1 risk-based capital |
11.90 | % | 12.01 | % | ||||
Total risk-based capital |
13.89 | 14.10 | ||||||
Leverage (e) |
11.26 | 11.15 | ||||||
Tier 1 common equity |
11.17 | 11.26 |
(a) | Includes 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, and amounts resulting from the application of the applicable accounting guidance for defined benefit and other postretirement plans. |
(b) | Other assets deducted from Tier 1 capital and risk-weighted assets consist of disallowed intangible assets (excluding goodwill) and deductible portions of nonfinancial equity investments. There were no disallowed deferred tax assets at December 31, 2014, and September 30, 2014. |
(c) | The ALLL included in Tier 2 capital is limited by regulation to 1.25% of the sum of gross risk-weighted assets plus low level exposures and residual interests calculated under the direct reduction method, as defined by the Federal Reserve. The ALLL includes $29 million and $31 million of allowance classified as discontinued assets on the balance sheet at December 31, 2014, and September 30, 2014, respectively. |
(d) | Net of capital surplus. |
(e) | This ratio is Tier 1 capital divided by average quarterly total assets as defined by the Federal Reserve less: (i) goodwill, (ii) the disallowed intangible assets described in footnote (b), and (iii) deductible portions of nonfinancial equity investments; plus assets derecognized as an offset to AOCI resulting from the adoption and subsequent application of the applicable accounting guidance for defined benefit and other postretirement plans. |
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Like all financial services companies, we engage in business activities and assume the related risks. The most significant risks we face are credit, compliance, operational, capital and liquidity, market, reputation, strategic, and model risks. Our risk management activities are focused on ensuring we properly identify, measure, and manage such risks across the entire enterprise to maintain safety and soundness and maximize profitability. Certain of these risks are defined and discussed in greater detail in the remainder of this section.
The Board serves in an oversight capacity ensuring that Keys risks are managed in a manner that is effective and balanced and adds value for the shareholders. The Board understands Keys risk philosophy, approves the risk appetite, inquires about risk practices, reviews the portfolio of risks, compares the actual risks to the risk appetite, and is apprised of significant risks, both actual and emerging, and determines whether management is responding appropriately. The Board challenges management and ensures accountability.
The Boards Audit Committee assists the Board in oversight of financial statement integrity, regulatory and legal requirements, independent auditors qualifications and independence, and the performance of the internal audit function and independent auditors. The Audit Committee meets with management and approves significant policies relating to the risk areas overseen by the Audit Committee. The Audit Committee has responsibility over all risk review functions, including internal audit, as well as financial reporting, legal matters, and fraud risk. The Audit Committee also receives reports on enterprise risk. In addition to regularly scheduled bi-monthly meetings, the Audit Committee convenes to discuss the content of our financial disclosures and quarterly earnings releases.
The Boards Risk Committee assists the Board in oversight of strategies, policies, procedures, and practices relating to the assessment and management of enterprise-wide risk, including credit, market, liquidity, model, operational, compliance, reputation, and strategic risks. The Risk Committee also assists the Board in overseeing risks related to capital adequacy, capital planning, and capital actions. The Risk Committee reviews and provides oversight of managements activities related to the enterprise-wide risk management framework, which includes review of the ERM Policy, including the Risk Appetite Statement, and management and ERM reports. The Risk Committee also approves any material changes to the charter of the ERM Committee and significant policies relating to risk management.
The Audit and Risk Committees meet jointly, as appropriate, to discuss matters that relate to each committees responsibilities. Committee chairpersons routinely meet with management during interim months to plan agendas for upcoming meetings and to discuss emerging trends and events that have transpired since the preceding meeting. All members of the Board receive formal reports designed to keep them abreast of significant developments during the interim months.
Our ERM Committee, chaired by the Chief Executive Officer and comprising other senior level executives, is responsible for managing risk and ensuring that the corporate risk profile is managed in a manner consistent with our risk appetite. The ERM Program encompasses our risk philosophy, policy, framework, and governance structure for the management of risks across the entire company. The ERM Committee reports to the Boards Risk Committee. Annually, the Board reviews and approves the ERM Policy, as well as the risk appetite, including corporate risk tolerances for major risk categories. We use a risk-adjusted capital framework to manage risks. This framework is approved and managed by the ERM Committee.
Tier 2 Risk Governance Committees support the ERM Committee by identifying early warning events and trends, escalating emerging risks, and discussing forward-looking assessments. Risk Governance Committees include attendees from each of the Three Lines of Defense. The First Line of Defense is the Line of Business primarily responsible to accept, own, proactively identify, monitor, and manage risk. The Second Line of Defense comprises Risk Management representatives who provide independent, centralized oversight over all risk categories by aggregating, analyzing, and reporting risk information. Risk Review provides the Third Line of Defense in their role to provide independent assessment and testing of the effectiveness, appropriateness, and adherence to KeyCorps risk management policies, practices, and controls.
The Chief Risk Officer ensures that relevant risk information is properly integrated into strategic and business decisions, ensures appropriate ownership of risks, provides input into performance and compensation decisions, assesses aggregate enterprise risk, monitors capabilities to manage critical risks, and executes appropriate Board and stakeholder reporting.
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Federal banking regulators continue to emphasize with financial institutions the importance of relating capital management strategy to the level of risk at each institution. We believe our internal risk management processes help us achieve and maintain capital levels that are commensurate with our business activities and risks, and conform to regulatory expectations.
Market risk is the risk that movements in market risk factors, including interest rates, foreign exchange rates, equity prices, commodity prices, credit spreads, and volatilities will reduce Keys income and the value of its portfolios. These factors influence prospective yields, values, or prices associated with the instrument. For example, the value of a fixed-rate bond will decline when market interest rates increase, while the cash flows associated with a variable rate loan will increase when interest rates increase. The holder of a financial instrument is exposed to market risk when either the cash flows or the value of the instrument is tied to such external factors.
We are exposed to market risk both in our trading and nontrading activities, which include asset and liability management activities. Our trading positions are carried at fair value with changes recorded in the income statement. These positions are subject to various market-based risk factors that impact the fair value of the financial instruments in the trading category. Our traditional banking loan and deposit products as well as long-term debt and certain short-term borrowings are nontrading positions. These positions are generally carried at the principal amount outstanding for assets and the amount owed for liabilities. The nontrading positions are subject to changes in economic value due to varying market conditions, primarily changes in interest rates.
Trading market risk
Key incurs market risk as a result of trading, investing, and client facilitation activities, principally within our investment banking and capital markets businesses. Key has exposures to a wide range of interest rates, equity prices, foreign exchange rates, credit spreads, and commodity prices, as well as the associated implied volatilities and spreads. Our primary market risk exposures are a result of trading activities in the derivative and fixed income markets and maintaining positions in these instruments. We maintain modest trading inventories to facilitate customer flow, make markets in securities, and hedge certain risks. The majority of our positions are traded in active markets.
Management of trading market risks. Market risk management is an integral part of Keys risk culture. The Risk Committee of our Board provides oversight of trading market risks. The ERM Committee and the Market Risk Committee regularly review and discuss market risk reports prepared by our MRM that contain our market risk exposures and results of monitoring activities. Market risk policies and procedures have been defined and approved by the Market Risk Committee, a Tier 2 Risk Governance Committee, and take into account our tolerance for risk and consideration for the business environment.
The MRM is an independent risk management function that partners with the lines of business to identify, measure, and monitor market risks throughout our company. The MRM is responsible for ensuring transparency of significant market risks, monitoring compliance with established limits, and escalating limit exceptions to appropriate senior management. The various business units and trading desks are responsible for ensuring that market risk exposures are well-managed and prudent. Market risk is monitored through various measures, such as VaR, and through routine stress testing, sensitivity, and scenario analyses. The MRM conducts stress tests for each covered position using historical worst case and standard shock scenarios. VaR, stressed VaR, and other analyses are prepared daily and distributed to appropriate management.
Covered positions. We monitor the market risk of our covered positions, which includes all of our trading positions as well as all foreign exchange and commodity positions, regardless of whether the position is in a trading account. All positions in the trading account are recorded at fair value, and changes in fair value are reflected in our consolidated statements of income. Information regarding our fair value policies, procedures, and methodologies is provided in Note 1 (Summary of Significant Accounting Policies) under the heading Fair Value Measurements beginning on page 118 of our 2014 Form 10-K and Note 5 (Fair Value Measurements) in this report. Instruments that are used to hedge nontrading activities, such as bank-issued debt and loan portfolios, equity positions that are not actively traded, and securities financing activities, do not meet the definition of a covered position. The MRM is responsible for identifying our portfolios as either covered or non-covered. The Covered Position Working Group develops the final list of covered positions, and a summary is provided to the Market Risk Committee.
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Our significant portfolios of covered positions are detailed below. We analyze market risk by portfolios of covered positions, and do not separately measure and monitor our portfolios by risk type. The descriptions below incorporate the respective risk types associated with each of these portfolios.
| Fixed income includes those instruments associated with our capital markets business and the trading of securities as a dealer. These instruments may include positions in municipal bonds, bonds backed by the U.S. government, agency and corporate bonds, certain mortgage-backed securities, securities issued by the U.S. Treasury, money markets, and certain CMOs. The activities and instruments within the fixed income portfolio create exposures to interest rate and credit spread risks. |
| Interest rate derivatives include interest rate swaps, caps, and floors, which are transacted primarily to accommodate the needs of commercial loan clients. In addition, we enter into interest rate derivatives to offset or mitigate the interest rate risk related to the client positions. The activities within this portfolio create exposures to interest rate risk. |
| Credit derivatives generally include credit default swap indexes, which are used to manage the credit risk exposure associated with anticipated sales of certain commercial real estate loans. The transactions within the credit derivatives portfolio result in exposure to counterparty credit risk and market risk. |
VaR and stressed VaR. VaR is the estimate of the maximum amount of loss on an instrument or portfolio due to adverse market conditions during a given time interval within a stated confidence level. Stressed VaR is used to assess extreme conditions on market risk within our trading portfolios. MRM calculates VaR and stressed VaR on a daily basis, and the results are distributed to appropriate management. VaR and stressed VaR results are also provided to our regulators and utilized in regulatory capital calculations.
We use a historical VaR model to measure the potential adverse effect of changes in interest rates, foreign exchange rates, equity prices, and credit spreads on the fair value of our covered positions. Historical scenarios are customized for specific covered positions, and numerous risk factors are incorporated in the calculation. Additional consideration is given to the risk factors to estimate the exposures that contain optionality features, such as options and cancelable provisions. VaR is calculated using daily observations over a one-year time horizon, and approximates a 95% confidence level. Statistically, this means that we would expect to incur losses greater than VaR, on average, five out of 100 trading days, or three to four times each quarter. We also calculate VaR and stressed VaR at a 99% confidence level.
The VaR model is an effective tool in estimating ranges of possible gains and losses on our covered positions. However, there are limitations inherent in the VaR model since it uses historical results over a given time interval to estimate future performance. Historical results may not be indicative of future results, and changes in the market or composition of our portfolios could have a significant impact on the accuracy of the VaR model. We regularly review and enhance the modeling techniques, inputs and assumptions used. Our market risk policy includes the independent validation of our VaR model by Keys Risk Management Group on an annual basis. The Model Risk Management Committee oversees the Model Validation Program, and results of validations are discussed with the ERM Committee.
Actual losses for the total covered positions did not exceed aggregate daily VaR on any day during the quarters ended September 30, 2015, and September 30, 2014. The MRM backtests our VaR model on a daily basis to evaluate its predictive power. The test compares VaR model results at the 99% confidence level to daily held profit and loss. Results of backtesting are provided to the Market Risk Committee. Backtesting exceptions occur when trading losses exceed VaR.
We do not engage in correlation trading, or utilize the internal model approach for measuring default and credit migration risk. Our net VaR approach incorporates diversification, but our VaR calculation does not include the impact of counterparty risk and our own credit spreads on derivatives.
The aggregate VaR at the 99% confidence level for all covered positions was $1.3 million at September 30, 2015, and $1.1 million at September 30, 2014. The increase in aggregate VaR was primarily due to the increased exposure in our credit derivative portfolio and the composition of our fixed income portfolio. Figure 30 summarizes our VaR at the 99% confidence level for significant portfolios of covered positions for the three months ended September 30, 2015, and September 30, 2014. During this period, none of our significant portfolios daily trading VaR numbers exceeded their VaR limits or stress VaR limits.
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Figure 30. VaR for Significant Portfolios of Covered Positions
2015 | 2014 | |||||||||||||||||||||||||||||||
Three months ended September 30, | Three months ended September 30, | |||||||||||||||||||||||||||||||
in millions |
High | Low | Mean | September 30, | High | Low | Mean | September 30, | ||||||||||||||||||||||||
Trading account assets: |
||||||||||||||||||||||||||||||||
Fixed income |
$ | .9 | $ | .3 | $ | .5 | $ | .6 | $ | .7 | $ | .3 | $ | .5 | $ | .4 | ||||||||||||||||
Derivatives: |
||||||||||||||||||||||||||||||||
Interest rate |
$ | .1 | | $ | .1 | $ | .1 | $ | .2 | $ | .1 | $ | .1 | $ | .1 | |||||||||||||||||
Credit |
.4 | $ | .1 | .3 | .4 | .3 | .1 | .2 | .3 |
Stressed VaR is calculated using our general VaR results at the 99% confidence level and applying certain assumptions. The aggregate stressed VaR for all covered positions was $3.8 million at September 30, 2015, and $3.4 million at September 30, 2014. Figure 31 summarizes our stressed VaR for significant portfolios of covered positions for the three months ended September 30, 2015, and September 30, 2014, as used for market risk capital charge calculation purposes.
Figure 31. Stressed VaR for Significant Portfolios of Covered Positions
2015 | 2014 | |||||||||||||||||||||||||||||||
Three months ended September 30, | Three months ended September 30, | |||||||||||||||||||||||||||||||
in millions |
High | Low | Mean | September 30, | High | Low | Mean | September 30, | ||||||||||||||||||||||||
Trading account assets: |
||||||||||||||||||||||||||||||||
Fixed income |
$ | 2.6 | $ | 1.0 | $ | 1.6 | $ | 1.9 | $ | 2.1 | $ | 1.0 | $ | 1.5 | $ | 1.2 | ||||||||||||||||
Derivatives: |
||||||||||||||||||||||||||||||||
Interest rate |
$ | .4 | $ | .1 | $ | .2 | $ | .2 | $ | .7 | $ | .2 | $ | .4 | $ | .2 | ||||||||||||||||
Credit |
1.3 | .4 | .8 | 1.3 | 1.0 | .4 | .6 | 1.0 |
Internal capital adequacy assessment. Market risk is a component of our internal capital adequacy assessment. Our risk-weighted assets include a market risk-equivalent asset position, which consists of a VaR component, stressed VaR component, a de minimis exposure amount, and a specific risk add-on, which are added together to arrive at total market risk equivalent assets. Specific risk is the price risk of individual financial instruments, which is not accounted for by changes in broad market risk factors and is measured through a standardized approach. Specific risk calculations are run quarterly by the MRM, and approved by the Chief Market Risk Officer.
Nontrading market risk
Most of our nontrading market risk is derived from interest rate fluctuations and its impacts on our traditional loan and deposit products, as well as investments, hedging relationships, long-term debt, and certain short-term borrowings. Interest rate risk, which is inherent in the banking industry, is measured by the potential for fluctuations in net interest income and the EVE. Such fluctuations may result from changes in interest rates and differences in the repricing and maturity characteristics of interest-earning assets and interest-bearing liabilities. We manage the exposure to changes in net interest income and the EVE in accordance with our risk appetite and within Board-approved policy limits.
Interest rate risk positions are influenced by a number of factors including the balance sheet positioning that arises out of consumer preferences for loan and deposit products, economic conditions, the competitive environment within our markets, changes in market interest rates that affect client activity, and our hedging, investing, funding, and capital positions. The primary components of interest rate risk exposure consist of reprice risk, basis risk, yield curve risk, and option risk.
The management of nontrading market risk is centralized within Corporate Treasury. The Risk Committee of our Board provides oversight of nontrading market risk. The ERM Committee and the ALCO review reports on the components of interest rate risk described above as well as sensitivity analyses of these exposures. These committees have various responsibilities related to managing nontrading market risk, including recommending, approving, and monitoring strategies that maintain risk positions within approved tolerance ranges. The Asset Liability Management policy provides the framework for the oversight and management of interest rate risk and is administered by the ALCO. Internal and external emerging issues are monitored on a daily basis. The MRM, as the second line of defense, provides additional oversight.
| Reprice risk is the exposure to changes in interest rates and occurs when the volume of interest-bearing liabilities and the volume of interest-earning assets they fund (e.g., deposits used to fund loans) do not mature or reprice at the same time. |
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| Basis risk is the exposure to asymmetrical changes in interest rate indexes and occurs when floating-rate assets and floating-rate liabilities reprice at the same time, but in response to different market factors or indexes. |
| Yield curve risk is the exposure to non-parallel changes in the slope of the yield curve (where the yield curve depicts the relationship between the yield on a particular type of security and its term to maturity) and occurs when interest-bearing liabilities and the interest-earning assets that they fund do not price or reprice to the same term point on the yield curve. |
| Option risk is the exposure to a customer or counterpartys ability to take advantage of the interest rate environment and terminate or reprice one of our assets, liabilities, or off-balance sheet instruments prior to contractual maturity without a penalty. Option risk occurs when exposures to customer and counterparty early withdrawals or prepayments are not mitigated with an offsetting position or appropriate compensation. |
Net interest income simulation analysis. The primary tool we use to measure our interest rate risk is simulation analysis. For purposes of this analysis, we estimate our net interest income based on the current and projected composition of our on- and off-balance sheet positions, accounting for recent and anticipated trends in customer activity. The analysis also incorporates assumptions for the current and projected interest rate environments, including a most likely macro-economic scenario. Simulation modeling assumes that residual risk exposures will be managed to within the risk appetite and Board-approved policy limits.
We measure the amount of net interest income at risk by simulating the change in net interest income that would occur if the federal funds target rate were to gradually increase or decrease over the next 12 months, and term rates were to move in a similar direction, although at a slower pace. Our standard rate scenarios encompass a gradual increase or decrease of 200 basis points, but due to the low interest rate environment, we have modified the standard to a gradual decrease of 25 basis points over two months with no change over the following ten months. After calculating the amount of net interest income at risk to interest rate changes, we compare that amount with the base case of an unchanged interest rate environment. We also perform regular stress tests and sensitivities on the model inputs that could materially change the resulting risk assessments. One set of stress tests and sensitivities assesses the effect of interest rate inputs on simulated exposures. Assessments are performed using different shapes of the yield curve, including steepening or flattening of the yield curve, changes in credit spreads, an immediate parallel change in market interest rates, and changes in the relationship of money market interest rates. Another set of stress tests and sensitivities assesses the effect of loan and deposit assumptions and assumed discretionary strategies on simulated exposures. Assessments are performed on changes to the following assumptions: the pricing of deposits without contractual maturities; changes in lending spreads; prepayments on loans and securities; other loan and deposit balance shifts; investment, funding and hedging activities; and liquidity and capital management strategies.
Simulation analysis produces only a sophisticated estimate of interest rate exposure based on judgments related to assumption inputs into the simulation model. We tailor assumptions to the specific interest rate environment and yield curve shape being modeled, and validate those assumptions on a regular basis. Our simulations are performed with the assumption that interest rate risk positions will be actively managed through the use of on- and off-balance sheet financial instruments to achieve the desired residual risk profile. However, actual results may differ from those derived in simulation analysis due to unanticipated changes to the balance sheet composition, customer behavior, product pricing, market interest rates, investment, funding and hedging activities, and repercussions from unanticipated or unknown events.
Figure 32 presents the results of the simulation analysis at September 30, 2015, and September 30, 2014. At September 30, 2015, our simulated exposure to changes in interest rates was moderately asset sensitive, and net interest income would benefit over time from either an increase in short-term or intermediate-term interest rates. Tolerance levels for risk management require the development of remediation plans to maintain residual risk within tolerance if simulation modeling demonstrates that a gradual increase or decrease in short-term interest rates over the next 12 months would adversely affect net interest income over the same period by more than 4%. As shown in Figure 32, we are operating within these levels as of September 30, 2015.
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Figure 32. Simulated Change in Net Interest Income
September 30, 2015 |
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Basis point change assumption (short-term rates) |
-25 | +200 | ||||||
Tolerance level |
-4.00 | % | -4.00 | % | ||||
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Interest rate risk assessment |
-.54 | % | 2.39 | % | ||||
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September 30, 2014 |
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Basis point change assumption (short-term rates) |
-25 | +200 | ||||||
Tolerance level |
-4.00 | % | -4.00 | % | ||||
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Interest rate risk assessment |
-1.04 | % | 3.34 | % | ||||
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The results of additional sensitivity analysis of alternate interest rate paths and loan and deposit behavior assumptions indicates that net interest income could increase or decrease from the base simulation results presented in Figure 32. Net interest income is highly dependent on the timing, magnitude, frequency, and path of interest rate increases and the associated assumptions for deposit repricing relationships, lending spreads, and the balance behavior of transaction accounts. The unprecedented low level of interest rates increases the uncertainty of assumptions for deposit balance behavior and deposit repricing relationships to market interest rates. Recent balance growth in deposits has caused the uncertainty in assumptions to increase further. Our historical deposit repricing betas in the last rising rate cycle ranged between 50% and 60% for interest-bearing deposits, and we continue to make similar assumptions in our modeling. The sensitivity testing of these assumptions supports our confidence that actual results are likely to be within a 100 basis point range of modeled results.
Key will continue to monitor balance sheet flows and expects the benefit from rising rates to increase modestly prior to any increase in the federal funds rate. Our current interest rate risk position could fluctuate to higher or lower levels of risk depending on the competitive environment and client behavior that may affect the actual volume, mix, maturity, and repricing characteristics of loan and deposit flows. As changes occur to both the configuration of the balance sheet and the outlook for the economy, management proactively evaluates hedging opportunities that may change our interest rate risk profile.
We also conduct simulations that measure the effect of changes in market interest rates in the second and third years of a three-year horizon. These simulations are conducted in a manner similar to those based on a 12-month horizon. To capture longer-term exposures, we calculate exposures to changes of the EVE as discussed in the following section.
Economic value of equity modeling. EVE complements net interest income simulation analysis as it estimates risk exposure beyond 12-, 24-, and 36-month horizons. EVE modeling measures the extent to which the economic values of assets, liabilities and off-balance sheet instruments may change in response to fluctuations in interest rates. EVE is calculated by subjecting the balance sheet to an immediate 200 basis point increase or decrease in interest rates, measuring the resulting change in the values of assets, liabilities and off-balance sheet instruments, and comparing those amounts with the base case of an unchanged interest rate environment. Because the calculation of EVE under an immediate 200 basis point decrease in interest rates in the current low rate environment results in certain interest rates declining to zero and a less than 200 basis point decrease in certain yield curve term points, we have modified the standard declining rate scenario to an immediate 100 basis point decrease. This analysis is highly dependent upon assumptions applied to assets and liabilities with non-contractual maturities. Those assumptions are based on historical behaviors, as well as our expectations. We develop remediation plans that would maintain residual risk within tolerance if this analysis indicates that our EVE will decrease by more than 15% in response to an immediate increase or decrease in interest rates. We are operating within these guidelines as of September 30, 2015.
Management of interest rate exposure. We use the results of our various interest rate risk analyses to formulate A/LM strategies to achieve the desired risk profile while managing to our objectives for capital adequacy and liquidity risk exposures. Specifically, we manage interest rate risk positions by purchasing securities, issuing term debt with floating or fixed interest rates, and using derivatives predominantly in the form of interest rate swaps, which modify the interest rate characteristics of certain assets and liabilities.
Figure 33 shows all swap positions that we hold for A/LM purposes. These positions are used to convert the contractual interest rate index of agreed-upon amounts of assets and liabilities (i.e., notional amounts) to another interest rate index. For example, fixed-rate debt is converted to a floating rate through a receive fixed/pay variable interest rate swap. The volume, maturity and mix of portfolio swaps change frequently as we adjust our broader A/LM objectives and the balance sheet positions to be hedged. For more information about how we use interest rate swaps to manage our risk profile, see Note 7 (Derivatives and Hedging Activities).
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Figure 33. Portfolio Swaps by Interest Rate Risk Management Strategy
September 30, 2015 | ||||||||||||||||||||||||||||
Weighted-Average | September 30, 2014 | |||||||||||||||||||||||||||
dollars in millions |
Notional Amount |
Fair Value |
Maturity (Years) |
Receive Rate |
Pay Rate |
Notional Amount |
Fair Value |
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Receive fixed/pay variable conventional A/LM (a) |
$ | 10,705 | $ | 74 | 2.5 | 1.0 | % | .2 | % | $ | 9,300 | $ | (10 | ) | ||||||||||||||
Receive fixed/pay variable conventional debt |
7,004 | 275 | 3.8 | 2.0 | .2 | 4,434 | 180 | |||||||||||||||||||||
Pay fixed/receive variable conventional debt |
50 | (8 | ) | 12.8 | .3 | 3.6 | 50 | (4 | ) | |||||||||||||||||||
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Total portfolio swaps |
$ | 17,759 | $ | 341 | (b) | 3.0 | 1.4 | % | .2 | % | $ | 13,784 | $ | 166 | (b) | |||||||||||||
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(a) | Portfolio swaps designated as A/LM are used to manage interest rate risk tied to both assets and liabilities. |
(b) | Excludes accrued interest of $45 million and $28 million for September 30, 2015, and September 30, 2014, respectively. |
Liquidity risk, which is inherent in the banking industry, is measured by our ability to accommodate liability maturities and deposit withdrawals, meet contractual obligations, and fund new business opportunities at a reasonable cost, in a timely manner, and without adverse consequences. Liquidity management involves maintaining sufficient and diverse sources of funding to accommodate planned, as well as unanticipated, changes in assets and liabilities under both normal and adverse conditions.
Governance structure
We manage liquidity for all of our affiliates on an integrated basis. This approach considers the unique funding sources available to each entity, as well as each entitys capacity to manage through adverse conditions. The approach also recognizes that adverse market conditions or other events that could negatively affect the availability or cost of liquidity will affect the access of all affiliates to sufficient wholesale funding.
The management of consolidated liquidity risk is centralized within Corporate Treasury. Oversight and governance is provided by the Board, the ERM Committee, the ALCO, and the Chief Risk Officer. The Asset Liability Management Policy provides the framework for the oversight and management of liquidity risk and is administered by the ALCO. The MRM, as the second line of defense, provides additional oversight. Our current liquidity risk management practices are in compliance with the Federal Reserve Boards Enhanced Prudential Standards.
These committees regularly review liquidity and funding summaries, liquidity trends, peer comparisons, variance analyses, liquidity projections, hypothetical funding erosion stress tests, and goal tracking reports. The reviews generate a discussion of positions, trends, and directives on liquidity risk and shape a number of our decisions. When liquidity pressure is elevated, positions are monitored more closely and reporting is more intensive. To ensure that emerging issues are identified, we also communicate with individuals inside and outside of the company on a daily basis.
Factors affecting liquidity
Our liquidity could be adversely affected by both direct and indirect events. An example of a direct event would be a downgrade in our public credit ratings by a rating agency. Examples of indirect events (events unrelated to us) that could impair our access to liquidity would be an act of terrorism or war, natural disasters, political events, or the default or bankruptcy of a major corporation, mutual fund or hedge fund. Similarly, market speculation, or rumors about us or the banking industry in general, may adversely affect the cost and availability of normal funding sources.
Our credit ratings at September 30, 2015, are shown in Figure 34. We believe these credit ratings, under normal conditions in the capital markets, will enable KeyCorp or KeyBank to issue fixed income securities to investors.
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Figure 34. Credit Ratings
September 30, 2015 |
Short-Term Borrowings |
Long-Term Deposits |
Senior Long-Term Debt |
Subordinated Long-Term Debt |
Capital Securities |
Series A Preferred Stock |
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KEYCORP (THE PARENT COMPANY) |
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Standard & Poors |
A-2 | N/A | BBB+ | BBB | BB+ | BB+ | ||||||||||||||||||
Moodys |
P-2 | N/A | Baa1 | Baa1 | Baa2 | Baa3 | ||||||||||||||||||
Fitch |
F1 | N/A | A- | BBB+ | BB+ | BB | ||||||||||||||||||
DBRS |
R-2(high) | N/A | BBB(high) | BBB | BBB | N/A | ||||||||||||||||||
KEYBANK |
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Standard & Poors |
A-2 | N/A | A- | BBB+ | N/A | N/A | ||||||||||||||||||
Moodys |
P-1 | Aa3 | A3 | Baa1 | N/A | N/A | ||||||||||||||||||
Fitch |
F1 | A | A- | BBB+ | N/A | N/A | ||||||||||||||||||
DBRS |
R-1(low) | A(low) | A(low) | BBB(high) | N/A | N/A |
Managing liquidity risk
Most of our liquidity risk is derived from our lending activities, which inherently places funds into illiquid assets. Liquidity risk is also derived from our deposit gathering activities and the ability of our customers to withdraw funds that do not have a stated maturity or to withdraw funds before their contractual maturity. The assessments of liquidity risk are measured under the assumption of normal operating conditions as well as under a stressed environment. We manage these exposures in accordance with our risk appetite, and within Board-approved policy limits.
We regularly monitor our liquidity position and funding sources and measure our capacity to obtain funds in a variety of hypothetical scenarios in an effort to maintain an appropriate mix of available and affordable funding. In the normal course of business, we perform a monthly hypothetical funding erosion stress test for both KeyCorp and KeyBank. In a heightened monitoring mode, we may conduct the hypothetical funding erosion stress tests more frequently, and use assumptions to reflect the changed market environment. Our testing incorporates estimates for loan and deposit lives based on our historical studies. Erosion stress tests analyze potential liquidity scenarios under various funding constraints and time periods. Ultimately, they determine the periodic effects that major direct and indirect events would have on our access to funding markets and our ability to fund our normal operations. To compensate for the effect of these assumed liquidity pressures, we consider alternative sources of liquidity and maturities over different time periods to project how funding needs would be managed.
We maintain a Contingency Funding Plan that outlines the process for addressing a liquidity crisis. The plan provides for an evaluation of funding sources under various market conditions. It also assigns specific roles and responsibilities for managing liquidity through a problem period. As part of the plan, we maintain on-balance sheet liquid reserves referred to as our liquid asset portfolio, which consists of high quality liquid assets. During a problem period, that reserve could be used as a source of funding to provide time to develop and execute a longer-term strategy. The liquid asset portfolio at September 30, 2015, totaled $14.7 billion, consisting of $12.8 billion of unpledged securities, $640 million of securities available for secured funding at the FHLB, and $1.3 billion of net balances of federal funds sold and balances in our Federal Reserve account. The liquid asset portfolio can fluctuate due to excess liquidity, heightened risk, or prefunding of expected outflows, such as debt maturities. Additionally, as of September 30, 2015, our unused borrowing capacity secured by loan collateral was $19.5 billion at the Federal Reserve Bank of Cleveland and $2.9 billion at the FHLB. During the third quarter of 2015, Keys outstanding FHLB advances were reduced by $12 million due to repayments.
Final U.S. liquidity coverage ratio
Under the Liquidity Coverage Rules, we will be required to calculate the Modified LCR. Implementation for Modified LCR banking organizations, like Key, will begin on January 1, 2016, with a minimum requirement of 90% coverage, reaching 100% coverage by January 1, 2017. For the third quarter of 2015, our estimated Modified LCR was above 100%. In the future, we may change the composition of our investment portfolio, increase the size of the overall investment portfolio, and modify product offerings to enhance or optimize our liquidity position.
Additional information about the Liquidity Coverage Ratio is included in the Supervision and Regulation section under the heading U.S. implementation of the Basel III liquidity framework beginning on page 12 of our 2014 Form 10-K.
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Long-term liquidity strategy
Our long-term liquidity strategy is to be predominantly funded by core deposits. However, we may use wholesale funds to sustain an adequate liquid asset portfolio, meet daily cash demands, and allow management flexibility to execute business initiatives. Keys client-based relationship strategy provides for a strong core deposit base that, in conjunction with intermediate and long-term wholesale funds managed to a diversified maturity structure and investor base, supports our liquidity risk management strategy. We use the loan-to-deposit ratio as a metric to monitor these strategies. Our target loan-to-deposit ratio is 90-100% (at September 30, 2015, our loan-to-deposit ratio was 89%), which we calculate as total loans, loans held for sale, and nonsecuritized discontinued loans divided by domestic deposits.
Sources of liquidity
Our primary sources of liquidity include customer deposits, wholesale funding, and liquid assets. If the cash flows needed to support operating and investing activities are not satisfied by deposit balances, we rely on wholesale funding or on-balance sheet liquid reserves. Conversely, excess cash generated by operating, investing, and deposit-gathering activities may be used to repay outstanding debt or invest in liquid assets.
Liquidity programs
We have several liquidity programs, which are described in Note 18 (Long-Term Debt) beginning on page 202 of our 2014 Form 10-K, that are designed to enable the parent company and KeyBank to raise funds in the public and private debt markets. The proceeds from most of these programs can be used for general corporate purposes, including acquisitions. These liquidity programs are reviewed from time to time by the Board and are renewed and replaced as necessary. There are no restrictive financial covenants in any of these programs.
On September 15, 2015, under its Medium-Term Note Program, KeyCorp issued $1 billion of 2.90% Senior Medium-Term Notes due September 15, 2020.
On September 29, 2015, we updated the KeyBank Global Note Program. This program has $20 billion authorized for issuance, separate from the $20 billion authorized for the 2012 program. There will be no additional notes issued under the 2012 program.
Liquidity for KeyCorp
The primary source of liquidity for KeyCorp is from subsidiary dividends, primarily from KeyBank. KeyCorp has sufficient liquidity when it can service its debt; support customary corporate operations and activities (including acquisitions); support occasional guarantees of subsidiaries obligations in transactions with third parties at a reasonable cost, in a timely manner, and without adverse consequences; and pay dividends to shareholders.
We use a parent cash coverage months metric as the primary measure to assess parent company liquidity. The parent cash coverage months metric measures the months into the future where projected obligations can be met with the current amount of liquidity. We generally issue term debt to supplement dividends from KeyBank to manage our liquidity position at or above our targeted levels. The parent company generally maintains cash and short-term investments in an amount sufficient to meet projected debt maturities over at least the next 24 months. At September 30, 2015, KeyCorp held $2.7 billion in short-term investments, which we projected to be sufficient to meet our projected obligations, including the repayment of our maturing debt obligations for the periods prescribed by our risk tolerance.
Typically, KeyCorp meets its liquidity requirements through regular dividends from KeyBank, supplemented with term debt. Federal banking law limits the amount of capital distributions that a bank can make to its holding company without prior regulatory approval. A national banks dividend-paying capacity is affected by several factors, including net profits (as defined by statute) for the two previous calendar years and for the current year, up to the date of dividend declaration. During the third quarter of 2015, KeyBank paid KeyCorp $250 million in dividends; nonbank subsidiaries did not pay any cash dividends or noncash dividends to KeyCorp. KeyCorp did not make any capital infusions to KeyBank during the third quarter of 2015. As of September 30, 2015, KeyBank had $903 million of capacity to pay dividends to KeyCorp without prior regulatory approval.
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Our liquidity position and recent activity
Over the past quarter, our liquid asset portfolio, which includes overnight and short-term investments, as well as unencumbered, high quality liquid securities held as protection against a range of potential liquidity stress scenarios, has decreased as a result of net customer loan and deposit flows and offset by an increase in unpledged securities. The liquid asset portfolio continues to exceed the amount that we estimate would be necessary to manage through an adverse liquidity event by providing sufficient time to develop and execute a longer-term solution.
From time to time, KeyCorp or KeyBank may seek to retire, repurchase, or exchange outstanding debt, capital securities, preferred shares, or common shares through cash purchase, privately negotiated transactions or other means. Additional information on repurchases of common shares by KeyCorp is included in Part II, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds of this report and in Part II, Item 5. Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities on page 30 of our 2014 Form 10-K. Such transactions depend on prevailing market conditions, our liquidity and capital requirements, contractual restrictions, regulatory requirements, and other factors. The amounts involved may be material, individually or collectively.
We generate cash flows from operations and from investing and financing activities. We have approximately $204 million of cash and cash equivalents and short-term investments in international tax jurisdictions as of September 30, 2015. As we consider alternative long-term strategic and liquidity plans, opportunities to repatriate these amounts would result in approximately $3 million in taxes to be paid. We have included the appropriate amount as a deferred tax liability at September 30, 2015.
The Consolidated Statements of Cash Flows (Unaudited) summarize our sources and uses of cash by type of activity for the nine-month periods ended September 30, 2015, and September 30, 2014.
Credit risk is the risk of loss to us arising from an obligors inability or failure to meet contractual payment or performance terms. Like other financial services institutions, we make loans, extend credit, purchase securities, and enter into financial derivative contracts, all of which have related credit risk.
Credit policy, approval, and evaluation
We manage credit risk exposure through a multifaceted program. The Credit Risk Committee approves both retail and commercial credit policies. These policies are communicated throughout the organization to foster a consistent approach to granting credit.
Our credit risk management team is responsible for credit approval, is independent of our lines of business, and consists of senior officers who have extensive experience in structuring and approving loans. Only credit risk management members are authorized to grant significant exceptions to credit policies. It is not unusual to make exceptions to established policies when mitigating circumstances dictate, but most major lending units have been assigned specific thresholds to keep exceptions at an acceptable level based upon portfolio and economic considerations.
Loan grades are assigned at the time of origination, verified by the credit risk management team and periodically reevaluated thereafter. Most extensions of credit are subject to loan grading or scoring. This risk rating methodology blends our judgment with quantitative modeling. Commercial loans generally are assigned two internal risk ratings. The first rating reflects the probability that the borrower will default on an obligation; the second rating reflects expected recovery rates on the credit facility. Default probability is determined based on, among other factors, the financial strength of the borrower, an assessment of the borrowers management, the borrowers competitive position within its industry sector, and our view of industry risk within the context of the general economic outlook. Types of exposure, transaction structure and collateral, including credit risk mitigants, affect the expected recovery assessment.
Our credit risk management team uses risk models to evaluate consumer loans. These models, known as scorecards, forecast the probability of serious delinquency and default for an applicant. The scorecards are embedded in the application processing system, which allows for real-time scoring and automated decisions for many of our products. We periodically validate the loan grading and scoring processes.
We maintain an active concentration management program to mitigate concentration risk in our credit portfolios. For individual obligors, we employ a sliding scale of exposure, known as hold limits, which is dictated by the type of loan and strength of the borrower. Our legal lending limit is approximately $1.6 billion for any individual borrower. However, internal hold limits generally restrict the largest exposures to less than 20% of that amount. As of September 30, 2015, we had eight client relationships with loan commitments net of credit default swaps of more than $200 million. The average amount outstanding on these eight individual net obligor commitments was $45 million at September 30, 2015. In general, our philosophy is to maintain a diverse portfolio with regard to credit exposures.
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We actively manage the overall loan portfolio in a manner consistent with asset quality objectives and concentration risk tolerances to mitigate portfolio credit risk. We utilize credit default swaps on a limited basis to transfer a portion of the credit risk associated with a particular extension of credit to a third party. At September 30, 2015, we used credit default swaps with a notional amount of $357 million to manage the credit risk associated with specific commercial lending obligations. We may also sell credit derivatives primarily single name credit default swaps to offset our purchased credit default swap position prior to maturity. At September 30, 2015, we did not have any sold credit default swaps outstanding.
Credit default swaps are recorded on the balance sheet at fair value. Related gains or losses, as well as the premium paid or received for credit protection, are included in the corporate services income and other income components of noninterest income.
Allowance for loan and lease losses
At September 30, 2015, the ALLL was $790 million, or 1.31% of period-end loans, compared to $794 million, or 1.38%, at December 31, 2014, and $804 million, or 1.43%, at September 30, 2014. The allowance includes $36 million that was specifically allocated for impaired loans of $318 million at September 30, 2015, compared to $40 million that was specifically allocated for impaired loans of $302 million at December 31, 2014, and $38 million that was specifically allocated for impaired loans of $299 million at September 30, 2014. For more information about impaired loans, see Note 4 (Asset Quality). At September 30, 2015, the ALLL was 197.5% of nonperforming loans, compared to 190.0% at December 31, 2014, and 200.5% at September 30, 2014.
Selected asset quality statistics for each of the past five quarters are presented in Figure 35. The factors that drive these statistics are discussed in the remainder of this section.
Figure 35. Selected Asset Quality Statistics from Continuing Operations
2015 | 2014 | |||||||||||||||||||
dollars in millions |
Third | Second | First | Fourth | Third | |||||||||||||||
Net loan charge-offs |
$ | 41 | $ | 36 | $ | 28 | $ | 32 | $ | 31 | ||||||||||
Net loan charge-offs to average total loans |
.27 | % | .25 | % | .20 | % | .22 | % | .22 | % | ||||||||||
Allowance for loan and lease losses |
$ | 790 | $ | 796 | $ | 794 | $ | 794 | $ | 804 | ||||||||||
Allowance for credit losses (a) |
844 | 841 | 835 | 829 | 839 | |||||||||||||||
Allowance for loan and lease losses to period-end loans |
1.31 | % | 1.37 | % | 1.37 | % | 1.38 | % | 1.43 | % | ||||||||||
Allowance for credit losses to period-end loans |
1.40 | 1.44 | 1.44 | 1.44 | 1.49 | |||||||||||||||
Allowance for loan and lease losses to nonperforming loans |
197.5 | 190.0 | 181.7 | 190.0 | 200.5 | |||||||||||||||
Allowance for credit losses to nonperforming loans |
211.0 | 200.7 | 191.1 | 198.3 | 209.2 | |||||||||||||||
Nonperforming loans at period end (b) |
$ | 400 | $ | 419 | $ | 437 | $ | 418 | $ | 401 | ||||||||||
Nonperforming assets at period end |
417 | 440 | 457 | 436 | 418 | |||||||||||||||
Nonperforming loans to period-end portfolio loans |
.67 | % | .72 | % | .75 | % | .73 | % | .71 | % | ||||||||||
Nonperforming assets to period-end portfolio loans plus |
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OREO and other nonperforming assets |
.69 | .75 | .79 | .76 | .74 |
(a) | Includes the ALLL plus the liability for credit losses on lending-related unfunded commitments. |
(b) | Loan balances exclude $12 million, $12 million, $12 million, $13 million, and $14 million of PCI loans at September 30, 2015, June 30, 2015, March 31, 2015, December 31, 2014, and September 30, 2014, respectively. |
We estimate the appropriate level of the ALLL on at least a quarterly basis. The methodology used is described in Note 1 (Summary of Significant Accounting Policies) under the heading Allowance for Loan and Lease Losses beginning on page 117 of our 2014 Form 10-K. Briefly, our general allowance applies expected loss rates to existing loans with similar risk characteristics. We exercise judgment to assess any adjustment to the expected loss rates for the impact of factors such as changes in economic conditions, lending policies including underwriting standards, and the level of credit risk associated with specific industries and markets.
In the third quarter of 2015, we enhanced the approach used to determine the commercial reserve factors used in estimating the quantitative component of the commercial ALLL. In addition, we began utilizing an enhanced framework to quantify commercial ALLL adjustments resulting from qualitative factors not fully captured within the statistical analysis of incurred loss. The enhancements of the methodology are described in Note 1 (Basis of Presentation and Accounting Policies) under the heading Allowance for Loan and Lease Losses. As a result of the methodology enhancements, the current quarter ALLL within each commercial portfolio and the current quarter provision for credit losses within each business segment has increased or decreased accordingly. The impact of the increases and decreases in the commercial portfolio ALLL and the business segment provision for credit losses was not significant.
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For all commercial and consumer loan TDRs, regardless of size, as well as impaired commercial loans with an outstanding balance of $2.5 million or greater, we conduct further analysis to determine the probable loss content and assign a specific allowance to the loan if deemed appropriate. We estimate the extent of the individual impairment for commercial loans and TDRs by comparing the recorded investment of the loan with the estimated present value of its future cash flows, the fair value of its underlying collateral, or the loans observable market price. Secured consumer loan TDRs that are discharged through Chapter 7 bankruptcy and not formally re-affirmed are adjusted to reflect the fair value of the underlying collateral, less costs to sell. Other consumer loan TDRs are combined in homogenous pools and assigned a specific allocation based on the estimated present value of future cash flows using the effective interest rate. A specific allowance also may be assigned even when sources of repayment appear sufficient if we remain uncertain about whether the loan will be repaid in full. On at least a quarterly basis, we evaluate the appropriateness of our loss estimation methods to reduce differences between estimated incurred losses and actual losses. The ALLL at September 30, 2015, represents our best estimate of the probable credit losses inherent in the loan portfolio at that date.
As shown in Figure 36, our ALLL decreased by $14 million, or 1.7%, during the past 12 months, primarily because of the improvement in the credit quality of our loan portfolios. Our delinquency trends have declined during the past 12 months due to a modest level of loan growth, relatively stable economic conditions, and continued run-off in our exit loan portfolio reflecting our effort to maintain a moderate enterprise risk tolerance. Our liability for credit losses on lending-related commitments increased by $19 million to $54 million at September 30, 2015. When combined with our ALLL, our total allowance for credit losses represented 1.40% of period-end loans at September 30, 2015, compared to 1.44% at December 31, 2014, and 1.49% at September 30, 2014.
Figure 36. Allocation of the Allowance for Loan and Lease Losses
September 30, 2015 | December 31, 2014 | September 30, 2014 | ||||||||||||||||||||||||||||||||||
dollars in millions |
Amount | Percent of Allowance to Total Allowance |
Percent of Loan Type to Total Loans |
Amount | Percent of Allowance to Total Allowance |
Percent of Loan Type to Total Loans |
Amount | Percent of Allowance to Total Allowance |
Percent of Loan Type to Total Loans |
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Commercial, financial and agricultural |
$ | 438 | 55.4 | % | 51.8 | % | $ | 391 | 49.2 | % | 48.8 | % | $ | 386 | 48.0 | % | 47.5 | % | ||||||||||||||||||
Commercial real estate: |
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Commercial mortgage |
139 | 17.6 | 13.6 | 148 | 18.7 | 14.0 | 159 | 19.8 | 14.7 | |||||||||||||||||||||||||||
Construction |
25 | 3.2 | 1.8 | 28 | 3.5 | 1.9 | 28 | 3.5 | 1.9 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total commercial real estate loans |
164 | 20.8 | 15.4 | 176 | 22.2 | 15.9 | 187 | 23.3 | 16.6 | |||||||||||||||||||||||||||
Commercial lease financing |
45 | 5.7 | 6.5 | 56 | 7.1 | 7.4 | 55 | 6.8 | 7.4 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total commercial loans |
647 | 81.9 | 73.7 | 623 | 78.5 | 72.1 | 628 | 78.1 | 71.5 | |||||||||||||||||||||||||||
Real estate residential mortgage |
19 | 2.4 | 3.7 | 23 | 2.9 | 3.9 | 22 | 2.7 | 3.9 | |||||||||||||||||||||||||||
Home equity: |
||||||||||||||||||||||||||||||||||||
Community Banking |
54 | 6.8 | 17.1 | 66 | 8.3 | 18.1 | 71 | 8.8 | 18.5 | |||||||||||||||||||||||||||
Other |
4 | .5 | .4 | 5 | .6 | .5 | 6 | .8 | .5 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total home equity loans |
58 | 7.3 | 17.5 | 71 | 8.9 | 18.6 | 77 | 9.6 | 19.0 | |||||||||||||||||||||||||||
Consumer other Community Banking |
20 | 2.5 | 2.7 | 22 | 2.8 | 2.7 | 24 | 3.0 | 2.7 | |||||||||||||||||||||||||||
Credit cards |
32 | 4.1 | 1.3 | 33 | 4.1 | 1.3 | 32 | 4.0 | 1.3 | |||||||||||||||||||||||||||
Consumer other: |
||||||||||||||||||||||||||||||||||||
Marine |
13 | 1.7 | 1.0 | 21 | 2.7 | 1.3 | 19 | 2.4 | 1.5 | |||||||||||||||||||||||||||
Other |
1 | .1 | .1 | 1 | .1 | .1 | 2 | .2 | .1 | |||||||||||||||||||||||||||
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|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|||||||||||||||||||
Total consumer other |
14 | 1.8 | 1.1 | 22 | 2.8 | 1.4 | 21 | 2.6 | 1.6 | |||||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total consumer loans |
143 | 18.1 | 26.3 | 171 | 21.5 | 27.9 | 176 | 21.9 | 28.5 | |||||||||||||||||||||||||||
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|
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|
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|
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|
|
|
|
|||||||||||||||||||
Total loans (a) |
$ | 790 | 100.0 | % | 100.0 | % | $ | 794 | 100.0 | % | 100.0 | % | $ | 804 | 100.0 | % | 100.0 | % | ||||||||||||||||||
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|
|
(a) | Excludes allocations of the ALLL related to the discontinued operations of the education lending business in the amount of $23 million, $29 million, and $31 million at September 30, 2015, December 31, 2014, and September 30, 2014, respectively. |
Our provision for credit losses was $45 million for the third quarter of 2015, compared to $19 million for the third quarter of 2014. The increase in our provision is due to the growth in our loan portfolio over the past twelve months as well as lower recoveries in the third quarter of 2015 compared to the same period one year ago. We continue to reduce our exposure in our higher-risk businesses, including the residential properties portion of our construction loan portfolio, Marine/RV financing, and other selected leasing portfolios through the sale of certain loans, payments from borrowers, or net loan charge-offs.
Credit quality on our oil and gas loan portfolio, which represents approximately 2% of total loans at September 30, 2015, remains solid, with net loan charge-offs lower than those on our overall portfolio. Our ALLL reflects the estimated impact of current oil prices at September 30, 2015.
The provision for credit losses and allowance for credit losses reflect the most recent review under the Shared National Credit Program, which did not have a material impact on our overall allowance for credit losses at September 30, 2015.
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Table of Contents
Net loan charge-offs
Net loan charge-offs for the third quarter of 2015 totaled $41 million, or .27% of average loans, compared to net loan charge-offs of $31 million, or .22%, for the same period last year. Figure 37 shows the trend in our net loan charge-offs by loan type, while the composition of loan charge-offs and recoveries by type of loan is presented in Figure 38.
Over the past 12 months, net loan charge-offs increased $10 million. This increase is attributable to the growth in our loan portfolio over the same period. As shown in Figure 40, our exit loan portfolio did not contribute any net loan charge-offs for the third quarter of 2015, compared to $4 million in net loan charge-offs for the third quarter of 2014. The decrease in net loan charge-offs in our exit loan portfolio for the third quarter of 2015 was primarily driven by net recoveries in our commercial exit loan portfolio and lower levels of net loan charge-offs in our consumer exit loan portfolios.
Figure 37. Net Loan Charge-offs from Continuing Operations (a)
2015 | 2014 | |||||||||||||||||||
dollars in millions |
Third | Second | First | Fourth | Third | |||||||||||||||
Commercial, financial and agricultural |
$ | 24 | $ | 15 | $ | 7 | $ | 4 | $ | 6 | ||||||||||
Real estate Commercial mortgage |
| | | 3 | (2 | ) | ||||||||||||||
Real estate Construction |
| (1 | ) | 1 | | 1 | ||||||||||||||
Commercial lease financing |
| | (2 | ) | 2 | (1 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial loans |
24 | 14 | 6 | 9 | 4 | |||||||||||||||
Home equity Key Community Bank |
4 | 7 | 5 | 6 | 6 | |||||||||||||||
Home equity Other |
(1 | ) | 1 | | | 1 | ||||||||||||||
Credit cards |
6 | 7 | 8 | 7 | 9 | |||||||||||||||
Marine |
3 | 3 | 2 | 3 | 2 | |||||||||||||||
Other |
5 | 4 | 7 | 7 | 9 | |||||||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||
Total consumer loans |
17 | 22 | 22 | 23 | 27 | |||||||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||
Total net loan charge-offs |
$ | 41 | $ | 36 | $ | 28 | $ | 32 | $ | 31 | ||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||
Net loan charge-offs to average loans |
.27 | % | .25 | % | .20 | % | .22 | % | .22 | % | ||||||||||
Net loan charge-offs from discontinued operations education lending business |
$ | 7 | $ | 2 | $ | 6 | $ | 8 | $ | 7 |
(a) | Credit amounts indicate that recoveries exceeded charge-offs. |
138
Table of Contents
Figure 38. Summary of Loan and Lease Loss Experience from Continuing Operations
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
dollars in millions |
2015 | 2014 | 2015 | 2014 | ||||||||||||
Average loans outstanding |
$ | 59,281 | $ | 55,796 | $ | 58,263 | $ | 55,388 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Allowance for loan and lease losses at beginning of period |
$ | 796 | $ | 814 | $ | 794 | $ | 848 | ||||||||
Loans charged off: |
||||||||||||||||
Commercial, financial and agricultural (a) |
26 | 12 | 59 | 35 | ||||||||||||
Real estate commercial mortgage |
| | 2 | 3 | ||||||||||||
Real estate construction |
| 2 | 1 | 4 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial real estate loans (b) |
| 2 | 3 | 7 | ||||||||||||
Commercial lease financing |
2 | 1 | 5 | 6 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial loans |
28 | 15 | 67 | 48 | ||||||||||||
Real estate residential mortgage |
1 | 2 | 4 | 7 | ||||||||||||
Home equity: |
||||||||||||||||
Key Community Bank |
6 | 9 | 21 | 29 | ||||||||||||
Other |
1 | 2 | 4 | 8 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total home equity loans |
7 | 11 | 25 | 37 | ||||||||||||
Consumer other Key Community Bank |
6 | 7 | 18 | 23 | ||||||||||||
Credit cards |
7 | 9 | 23 | 27 | ||||||||||||
Consumer other: |
||||||||||||||||
Marine |
4 | 4 | 14 | 18 | ||||||||||||
Other |
| 1 | 1 | 2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total consumer other |
4 | 5 | 15 | 20 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total consumer loans |
25 | 34 | 85 | 114 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total loans charged off |
53 | 49 | 152 | 162 | ||||||||||||
Recoveries: |
||||||||||||||||
Commercial, financial and agricultural (a) |
2 | 6 | 13 | 27 | ||||||||||||
Real estate commercial mortgage |
| 2 | 2 | 4 | ||||||||||||
Real estate construction |
| 1 | 1 | 16 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial real estate loans (b) |
| 3 | 3 | 20 | ||||||||||||
Commercial lease financing |
2 | 2 | 7 | 8 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial loans |
4 | 11 | 23 | 55 | ||||||||||||
Real estate residential mortgage |
| | 1 | 2 | ||||||||||||
Home equity: |
||||||||||||||||
Key Community Bank |
2 | 3 | 5 | 7 | ||||||||||||
Other |
2 | 1 | 4 | 4 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total home equity loans |
4 | 4 | 9 | 11 | ||||||||||||
Consumer other Key Community Bank |
1 | 1 | 5 | 4 | ||||||||||||
Credit cards |
1 | | 2 | 1 | ||||||||||||
Consumer other: |
||||||||||||||||
Marine |
1 | 2 | 6 | 7 | ||||||||||||
Other |
1 | | 1 | 1 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total consumer other |
2 | 2 | 7 | 8 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total consumer loans |
8 | 7 | 24 | 26 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total recoveries |
12 | 18 | 47 | 81 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loan charge-offs |
(41 | ) | (31 | ) | (105 | ) | (81 | ) | ||||||||
Provision (credit) for loan and lease losses |
36 | 21 | 102 | 37 | ||||||||||||
Foreign currency translation adjustment |
(1 | ) | | (1 | ) | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Allowance for loan and lease losses at end of period |
$ | 790 | $ | 804 | $ | 790 | $ | 804 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liability for credit losses on lending-related commitments at beginning of period |
$ | 45 | $ | 37 | $ | 35 | $ | 37 | ||||||||
Provision (credit) for losses on lending-related commitments |
9 | (2 | ) | 19 | (2 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Liability for credit losses on lending-related commitments at end of period (c) |
$ | 54 | $ | 35 | $ | 54 | $ | 35 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total allowance for credit losses at end of period |
$ | 844 | $ | 839 | $ | 844 | $ | 839 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loan charge-offs to average total loans |
.27 | % | .22 | % | .24 | % | .20 | % | ||||||||
Allowance for loan and lease losses to period-end loans |
1.31 | 1.43 | 1.31 | 1.43 | ||||||||||||
Allowance for credit losses to period-end loans |
1.40 | 1.49 | 1.40 | 1.49 | ||||||||||||
Allowance for loan and lease losses to nonperforming loans |
197.5 | 200.5 | 197.5 | 200.5 | ||||||||||||
Allowance for credit losses to nonperforming loans |
211.0 | 209.2 | 211.0 | 209.2 | ||||||||||||
Discontinued operations education lending business: |
||||||||||||||||
Loans charged off |
$ | 9 | $ | 10 | $ | 25 | $ | 34 | ||||||||
Recoveries |
2 | 3 | 10 | 11 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loan charge-offs |
$ | (7 | ) | $ | (7 | ) | $ | (15 | ) | $ | (23 | ) | ||||
|
|
|
|
|
|
|
|
(a) | See Figure 18 and the accompanying discussion in the Loans and loans held for sale section for more information related to our commercial, financial and agricultural loan portfolio. |
(b) | See Figure 19 and the accompanying discussion in the Loans and loans held for sale section for more information related to our commercial real estate loan portfolio. |
(c) | Included in accrued expense and other liabilities on the balance sheet. |
139
Table of Contents
Nonperforming assets
Figure 39 shows the composition of our nonperforming assets. These assets totaled $417 million at September 30, 2015, and represented .69% of period-end portfolio loans, OREO and other nonperforming assets, compared to $436 million, or .76%, at December 31, 2014, and $418 million, or .74%, at September 30, 2014. See Note 1 (Summary of Significant Accounting Policies) under the headings Nonperforming Loans, Impaired Loans, and Allowance for Loan and Lease Losses beginning on page 116 of our 2014 Form 10-K for a summary of our nonaccrual and charge-off policies.
Figure 39. Summary of Nonperforming Assets and Past Due Loans from Continuing Operations
September 30, | June 30, | March 31, | December 31, | September 30, | ||||||||||||||||
dollars in millions |
2015 | 2015 | 2015 | 2014 | 2014 | |||||||||||||||
Commercial, financial and agricultural (a) |
$ | 89 | $ | 100 | $ | 98 | $ | 59 | $ | 47 | ||||||||||
Real estate commercial mortgage |
23 | 26 | 30 | 34 | 41 | |||||||||||||||
Real estate construction |
9 | 12 | 12 | 13 | 14 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial real estate loans (b) |
32 | 38 | 42 | 47 | 55 | |||||||||||||||
Commercial lease financing |
21 | 18 | 20 | 18 | 14 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial loans |
142 | 156 | 160 | 124 | 116 | |||||||||||||||
Real estate residential mortgage |
67 | 67 | 72 | 79 | 81 | |||||||||||||||
Home equity: |
||||||||||||||||||||
Key Community Bank |
174 | 176 | 182 | 185 | 174 | |||||||||||||||
Other |
7 | 8 | 9 | 10 | 10 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total home equity loans |
181 | 184 | 191 | 195 | 184 | |||||||||||||||
Consumer other Key Community Bank |
1 | 1 | 2 | 2 | 2 | |||||||||||||||
Credit cards |
2 | 2 | 2 | 2 | 1 | |||||||||||||||
Consumer other: |
||||||||||||||||||||
Marine |
6 | 8 | 9 | 15 | 16 | |||||||||||||||
Other |
1 | 1 | 1 | 1 | 1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total consumer other |
7 | 9 | 10 | 16 | 17 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total consumer loans |
258 | 263 | 277 | 294 | 285 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total nonperforming loans (c) |
400 | 419 | 437 | 418 | 401 | |||||||||||||||
Nonperforming loans held for sale |
| | | | | |||||||||||||||
OREO |
17 | 20 | 20 | 18 | 16 | |||||||||||||||
Other nonperforming assets |
| 1 | | | 1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total nonperforming assets |
$ | 417 | $ | 440 | $ | 457 | $ | 436 | $ | 418 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Accruing loans past due 90 days or more |
$ | 54 | $ | 66 | $ | 111 | $ | 96 | $ | 71 | ||||||||||
Accruing loans past due 30 through 89 days |
271 | 181 | 216 | 235 | 340 | |||||||||||||||
Restructured loans accruing and nonaccruing (d) |
287 | 300 | 268 | 270 | 264 | |||||||||||||||
Restructured loans included in nonperforming loans (d) |
160 | 170 | 141 | 157 | 137 | |||||||||||||||
Nonperforming assets from discontinued operations education lending business |
8 | 6 | 8 | 11 | 9 | |||||||||||||||
Nonperforming loans to period-end portfolio loans |
.67 | % | .72 | % | .75 | % | .73 | % | .71 | % | ||||||||||
Nonperforming assets to period-end portfolio loans plus OREO and other nonperforming assets |
.69 | .75 | .79 | .76 | .74 |
(a) | See Figure 18 and the accompanying discussion in the Loans and loans held for sale section for more information related to our commercial, financial and agricultural loan portfolio. |
(b) | See Figure 19 and the accompanying discussion in the Loans and loans held for sale section for more information related to our commercial real estate loan portfolio. |
(c) | Loan balances exclude $12 million, $12 million, $12 million, $13 million, and $14 million of PCI loans at September 30, 2015, June 30, 2015, March 31, 2015, December 31, 2014, and September 30, 2014, respectively. |
(d) | Restructured loans (i.e., TDRs) are those for which Key, for reasons related to a borrowers financial difficulties, grants a concession to the borrower that it would not otherwise consider. These concessions are made to improve the collectability of the loan and generally take the form of a reduction of the interest rate, extension of the maturity date or reduction in the principal balance. |
As shown in Figure 39, nonperforming assets at September 30, 2015, decreased $1 million from one year ago. Increases in the commercial, financial and agricultural and commercial lease financing portfolios were offset by declines in the commercial real estate and consumer loan portfolios. As shown in Figure 40, our exit loan portfolio accounted for $19 million, or 5%, of our total nonperforming assets at September 30, 2015, compared to $43 million, or 10%, at September 30, 2014.
At September 30, 2015, the approximate carrying amount of our commercial nonperforming loans outstanding represented 74% of their contractual amount owed, total nonperforming loans outstanding represented 79% of their contractual amount owed, and nonperforming assets in total were carried at 79% of their original contractual amount owed.
At September 30, 2015, our 20 largest nonperforming loans totaled $112 million, representing 28% of total nonperforming loans. At September 30, 2014, our 20 largest nonperforming loans totaled $72 million, representing 18% of total nonperforming loans.
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Table of Contents
Figure 40 shows the composition of our exit loan portfolio at September 30, 2015, and September 30, 2014, the net loan charge-offs recorded on this portfolio for the third quarters of 2015 and 2014, and the nonperforming status of these loans at September 30, 2015, and September 30, 2014. The exit loan portfolio represented 3% of total loans at September 30, 2015, and 4% of total loans at September 30, 2014.
Figure 40. Exit Loan Portfolio from Continuing Operations
Balance Outstanding |
Change 9-30-15 vs. |
Net Loan Charge-offs |
Balance on Nonperforming Status |
|||||||||||||||||||||||||
in millions |
9-30-15 | 9-30-14 | 9-30-14 | 9-30-15 | 9-30-14 (c) | 9-30-15 | 9-30-14 | |||||||||||||||||||||
Residential properties homebuilder |
$ | 6 | $ | 11 | $ | (5 | ) | | $ | 1 | $ | 5 | $ | 10 | ||||||||||||||
Marine and RV floor plan |
1 | 7 | (6 | ) | | | | 5 | ||||||||||||||||||||
Commercial lease financing (a) |
798 | 1,046 | (248 | ) | $ | (1 | ) | (1 | ) | | 1 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total commercial loans |
805 | 1,064 | (259 | ) | (1 | ) | | 5 | 16 | |||||||||||||||||||
Home equity Other |
222 | 283 | (61 | ) | (1 | ) | 1 | 7 | 10 | |||||||||||||||||||
Marine |
620 | 828 | (208 | ) | 3 | 2 | 6 | 16 | ||||||||||||||||||||
RV and other consumer |
44 | 57 | (13 | ) | (1 | ) | 1 | 1 | 1 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total consumer loans |
886 | 1,168 | (282 | ) | 1 | 4 | 14 | 27 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total exit loans in loan portfolio |
$ | 1,691 | $ | 2,232 | $ | (541 | ) | | $ | 4 | $ | 19 | $ | 43 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Discontinued operations education lending business (not included in exit loans above) (b) |
$ | 1,891 | $ | 2,375 | $ | (484 | ) | $ | 7 | $ | 7 | $ | 8 | $ | 9 |
(a) | Includes (1) the business aviation, commercial vehicle, office products, construction, and industrial leases; (2) Canadian lease financing portfolios; (3) European lease financing portfolios; and (4) all remaining balances related to lease in, lease out; sale in, lease out; service contract leases; and qualified technological equipment leases. |
(b) | Excludes loans held for sale of $169 million at September 30, 2015. |
(c) | Credit amounts indicate recoveries exceeded charge-offs. |
Figure 41 shows the types of activity that caused the change in our nonperforming loans during each of the last five quarters.
Figure 41. Summary of Changes in Nonperforming Loans from Continuing Operations
2015 | 2014 | |||||||||||||||||||
in millions |
Third | Second | First | Fourth | Third | |||||||||||||||
Balance at beginning of period |
$ | 419 | $ | 437 | $ | 418 | $ | 401 | $ | 396 | ||||||||||
Loans placed on nonaccrual status |
81 | 92 | 123 | 103 | 109 | |||||||||||||||
Charge-offs |
(53 | ) | (52 | ) | (47 | ) | (49 | ) | (49 | ) | ||||||||||
Loans sold |
(2 | ) | | | (2 | ) | | |||||||||||||
Payments |
(16 | ) | (25 | ) | (9 | ) | (17 | ) | (13 | ) | ||||||||||
Transfers to OREO |
(4 | ) | (5 | ) | (7 | ) | (6 | ) | (7 | ) | ||||||||||
Loans returned to accrual status |
(25 | ) | (28 | ) | (41 | ) | (12 | ) | (35 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at end of period (a) |
$ | 400 | $ | 419 | $ | 437 | $ | 418 | $ | 401 | ||||||||||
|
|
|
|
|
|
|
|
|
|
(a) | Loan balances exclude $12 million, $12 million, $12 million, $13 million, and $14 million of PCI loans at September 30, 2015, June 30, 2015, March 31, 2015, December 31, 2014, and September 30, 2014, respectively. |
Figure 42 shows the factors that contributed to the change in our OREO during each of the last five quarters.
Figure 42. Summary of Changes in Other Real Estate Owned, Net of Allowance, from Continuing Operations
2015 | 2014 | |||||||||||||||||||
in millions |
Third | Second | First | Fourth | Third | |||||||||||||||
Balance at beginning of period |
$ | 20 | $ | 20 | $ | 18 | $ | 16 | $ | 12 | ||||||||||
Properties acquired nonperforming loans |
4 | 5 | 7 | 6 | 7 | |||||||||||||||
Valuation adjustments |
(2 | ) | (1 | ) | (1 | ) | (2 | ) | (1 | ) | ||||||||||
Properties sold |
(5 | ) | (4 | ) | (4 | ) | (2 | ) | (2 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at end of period |
$ | 17 | $ | 20 | $ | 20 | $ | 18 | $ | 16 | ||||||||||
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Operational and compliance risk management
Like all businesses, we are subject to operational risk, which is the risk of loss resulting from human error or malfeasance, inadequate or failed internal processes and systems, and external events. These events include, among other things, threats to our cybersecurity, as we are reliant upon information systems and the Internet to conduct our business activities.
Operational risk also encompasses compliance risk, which is the risk of loss from violations of, or noncompliance with, laws, rules and regulations, prescribed practices, and ethical standards. Under the Dodd-Frank Act, large financial companies like Key are subject to heightened prudential standards and regulation. This heightened level of regulation has increased our operational risk. We have created work teams to respond to and analyze the regulatory requirements that have been or will be promulgated as a result of the enactment of the Dodd-Frank Act. Resulting operational risk losses and/or additional regulatory compliance costs could take the form of explicit charges, increased operational costs, harm to our reputation, or foregone opportunities.
We seek to mitigate operational risk through identification and measurement of risk, alignment of business strategies with risk appetite and tolerance, and a system of internal controls and reporting. We continuously strive to strengthen our system of internal controls to improve the oversight of our operational risk and to ensure compliance with laws, rules, and regulations. For example, an operational event database tracks the amounts and sources of operational risk and losses. This tracking mechanism helps to identify weaknesses and to highlight the need to take corrective action. We also rely upon software programs designed to assist in assessing operational risk and monitoring our control processes. This technology has enhanced the reporting of the effectiveness of our controls to senior management and the Board.
The Operational Risk Management Program provides the framework for the structure, governance, roles, and responsibilities, as well as the content, to manage operational risk for Key. The Compliance Risk Committee serves the same function in managing compliance risk for Key. Primary responsibility for managing and monitoring internal control mechanisms lies with the managers of our various lines of business. The Operational Risk Committee and Compliance Risk Committee are senior management committees that oversee our level of operational and compliance risk and direct and support our operational and compliance infrastructure and related activities. These committees and the Operational Risk Management and Compliance functions are an integral part of our ERM Program. Our Risk Review function regularly assesses the overall effectiveness of our Operational Risk Management and Compliance Programs and our system of internal controls. Risk Review reports the results of reviews on internal controls and systems to senior management and the Audit Committee and independently supports the Audit Committees oversight of these controls.
Cybersecurity
We devote significant time and resources to maintaining and regularly updating our technology systems and processes to protect the security of our computer systems, software, networks, and other technology assets against attempts by third parties to obtain unauthorized access to confidential information, destroy data, disrupt or degrade service, sabotage systems, or cause other damage. We and many other U.S. financial institutions have experienced distributed denial-of-service attacks from technologically sophisticated third parties. These attacks are intended to disrupt or disable consumer online banking services and prevent banking transactions. We also periodically experience other attempts to breach the security of our systems and data. These cyberattacks have not, to date, resulted in any material disruption of our operations, material harm to our customers, and have not had a material adverse effect on our results of operations.
Cyberattack risks may also occur with our third-party technology service providers, and may interfere with their ability to fulfill their contractual obligations to us, with attendant potential for financial loss or liability that could adversely affect our financial condition or results of operations. Recent high-profile cyberattacks have targeted retailers and other businesses for the purpose of acquiring the confidential information (including personal, financial, and credit card information) of customers, some of whom are customers of ours. We may incur expenses related to the investigation of such attacks or related to the protection of our customers from identity theft as a result of such attacks. Risks and exposures related to cyberattacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking, and other technology-based products and services by us and our clients.
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Critical Accounting Policies and Estimates
Our business is dynamic and complex. Consequently, we must exercise judgment in choosing and applying accounting policies and methodologies. These choices are critical not only are they necessary to comply with GAAP, they also reflect our view of the appropriate way to record and report our overall financial performance. All accounting policies are important, and all policies described in Note 1 (Summary of Significant Accounting Policies) beginning on page 114 of our 2014 Form 10-K should be reviewed for a greater understanding of how we record and report our financial performance.
In our opinion, some accounting policies are more likely than others to have a critical effect on our financial results and to expose those results to potentially greater volatility. These policies apply to areas of relatively greater business importance, or require us to exercise judgment and to make assumptions and estimates that affect amounts reported in the financial statements. Because these assumptions and estimates are based on current circumstances, they may prove to be inaccurate, or we may find it necessary to change them.
We rely heavily on the use of judgment, assumptions, and estimates to make a number of core decisions, including accounting for the ALLL; contingent liabilities, guarantees and income taxes; derivatives and related hedging activities; and assets and liabilities that involve valuation methodologies. In addition, we may employ outside valuation experts to assist us in determining fair values of certain assets and liabilities. A brief discussion of each of these areas appears on pages 99 through 102 of our 2014 Form 10-K.
At September 30, 2015, $16 billion, or 17%, of our total assets were measured at fair value on a recurring basis. Approximately 98% of these assets, before netting adjustments, were classified as Level 1 or Level 2 within the fair value hierarchy. At September 30, 2015, $1 billion, or 2%, of our total liabilities were measured at fair value on a recurring basis. All of these liabilities were classified as Level 1 or Level 2.
During the third quarter of 2015, $9 million of our total assets were measured at fair value on a nonrecurring basis. All of these assets were classified as Level 3. At September 30, 2015, there were no liabilities measured at fair value on a nonrecurring basis.
During the first nine months of 2015, we did not significantly alter the manner in which we applied our critical accounting policies or developed related assumptions and estimates, except as discussed below.
Allowance for Loan and Lease Losses
In the third quarter of 2015, we enhanced the approach used to determine the commercial reserve factors used in estimating the commercial ALLL, which had the effect of capturing certain elements in the commercial quantitative reserve component that had formerly been included in the commercial qualitative component. Under the enhanced methodology, we began utilizing more refined commercial estimated loss rates that represent cumulative losses over the estimated average time period from the onset of credit deterioration loss to the initial loss recorded for an individual loan. In addition, we began utilizing an enhanced framework to quantify commercial ALLL adjustments resulting from qualitative factors that may not be fully captured within the statistical analysis of incurred loss. The enhanced framework utilizes the nine qualitative factors recommended within the OCCs Interagency Policy Statement on the Allowance for Loan and Lease Losses (issued 12/13/2006) to quantify the commercial qualitative component. The impact of these changes was largely neutral to the total ALLL at September 30, 2015. However, because the quantitative reserve is allocated to the business segments at a loan level, while the qualitative portion is allocated at the portfolio level, the impact of the methodology enhancements on the allowance for each business segment and each portfolio caused the business segment and commercial portfolio reserves to increase or decrease accordingly. The impact of the increases and decreases on the business segment and commercial portfolio reserves was not significant.
For further discussion of the methodology used in the determination of the ALLL for areas not changed as part of the methodology enhancement, refer to Note 1 (Summary of Significant Accounting Policies) under the heading Allowance for Loan and Lease Losses beginning on page 117 of our 2014 Form 10-K.
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European Sovereign and Non-Sovereign Debt Exposures
Our total European sovereign and non-sovereign debt exposure is presented in Figure 43.
Figure 43. European Sovereign and Non-Sovereign Debt Exposures
Short-and Long- | Foreign Exchange | |||||||||||
September 30, 2015 in millions |
Term Commercial Total (a) |
and Derivatives with Collateral (b) |
Net Exposure |
|||||||||
France: |
||||||||||||
Sovereigns |
| | | |||||||||
Non-sovereign financial institutions |
| $ | (1 | ) | $ | (1 | ) | |||||
Non-sovereign non-financial institutions |
$ | 20 | | 20 | ||||||||
|
|
|
|
|
|
|||||||
Total |
20 | (1 | ) | 19 | ||||||||
Germany: |
||||||||||||
Sovereigns |
| | | |||||||||
Non-sovereign financial institutions |
| (2 | ) | (2 | ) | |||||||
Non-sovereign non-financial institutions |
193 | | 193 | |||||||||
|
|
|
|
|
|
|||||||
Total |
193 | (2 | ) | 191 | ||||||||
Greece: |
||||||||||||
Sovereigns |
| | | |||||||||
Non-sovereign financial institutions |
| | | |||||||||
Non-sovereign non-financial institutions |
| | | |||||||||
|
|
|
|
|
|
|||||||
Total |
| | | |||||||||
Iceland: |
||||||||||||
Sovereigns |
| | | |||||||||
Non-sovereign financial institutions |
| | | |||||||||
Non-sovereign non-financial institutions |
| | | |||||||||
|
|
|
|
|
|
|||||||
Total |
| | | |||||||||
Ireland: |
||||||||||||
Sovereigns |
| | | |||||||||
Non-sovereign financial institutions |
| | | |||||||||
Non-sovereign non-financial institutions |
1 | | 1 | |||||||||
|
|
|
|
|
|
|||||||
Total |
1 | | 1 | |||||||||
Italy: |
||||||||||||
Sovereigns |
| | | |||||||||
Non-sovereign financial institutions |
| | | |||||||||
Non-sovereign non-financial institutions |
39 | | 39 | |||||||||
|
|
|
|
|
|
|||||||
Total |
39 | | 39 | |||||||||
Netherlands: |
||||||||||||
Sovereigns |
| | | |||||||||
Non-sovereign financial institutions |
| | | |||||||||
Non-sovereign non-financial institutions |
15 | | 15 | |||||||||
|
|
|
|
|
|
|||||||
Total |
15 | | 15 | |||||||||
Portugal: |
||||||||||||
Sovereigns |
| | | |||||||||
Non-sovereign financial institutions |
| | | |||||||||
Non-sovereign non-financial institutions |
| | | |||||||||
|
|
|
|
|
|
|||||||
Total |
| | | |||||||||
Spain: |
||||||||||||
Sovereigns |
| | | |||||||||
Non-sovereign financial institutions |
| | | |||||||||
Non-sovereign non-financial institutions |
24 | | 24 | |||||||||
|
|
|
|
|
|
|||||||
Total |
24 | | 24 | |||||||||
Switzerland: |
||||||||||||
Sovereigns |
| | | |||||||||
Non-sovereign financial institutions |
| (3 | ) | (3 | ) | |||||||
Non-sovereign non-financial institutions |
65 | | 65 | |||||||||
|
|
|
|
|
|
|||||||
Total |
65 | (3 | ) | 62 | ||||||||
United Kingdom: |
||||||||||||
Sovereigns |
| | | |||||||||
Non-sovereign financial institutions |
| 17 | 17 | |||||||||
Non-sovereign non-financial institutions |
90 | | 90 | |||||||||
|
|
|
|
|
|
|||||||
Total |
90 | 17 | 107 | |||||||||
Other Europe: (c) |
||||||||||||
Sovereigns |
| | | |||||||||
Non-sovereign financial institutions |
| | | |||||||||
Non-sovereign non-financial institutions |
73 | | 73 | |||||||||
|
|
|
|
|
|
|||||||
Total |
73 | | 73 | |||||||||
Total Europe: |
||||||||||||
Sovereigns |
| | | |||||||||
Non-sovereign financial institutions |
| 11 | 11 | |||||||||
Non-sovereign non-financial institutions |
520 | | 520 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 520 | $ | 11 | $ | 531 | ||||||
|
|
|
|
|
|
(a) | Represents our outstanding leases. |
(b) | Represents contracts to hedge our balance sheet asset and liability needs, and to accommodate our clients trading and/or hedging needs. Our derivative mark-to-market exposures are calculated and reported on a daily basis. These exposures are largely covered by cash or highly marketable securities collateral with daily collateral calls. |
(c) | Other Europe consists of the following countries: Austria, Belarus, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Finland, Hungary, Lithuania, Luxembourg, Malta, Norway, Poland, Romania, Russia, Slovakia, Slovenia, Sweden, and Ukraine. 100% of our exposure in Other Europe is in Belgium, Finland, and Sweden. |
Our credit risk exposure is largely concentrated in developed countries with emerging market exposure essentially limited to commercial facilities; these exposures are actively monitored by management. We do not have at-risk exposures in the rest of the world.
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Item 3. Quantitative and Qualitative Disclosure about Market Risk
The information presented in the Market risk management section of the Managements Discussion & Analysis of Financial Condition & Results of Operations is incorporated herein by reference.
Item 4. Controls and Procedures
As of the end of the period covered by this report, KeyCorp carried out an evaluation, under the supervision and with the participation of KeyCorps management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of KeyCorps disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)), to ensure that information required to be disclosed by KeyCorp in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to KeyCorps management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon that evaluation, KeyCorps Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective, in all material respects, as of the end of the period covered by this report. No changes were made to KeyCorps internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, KeyCorps internal control over financial reporting.
The information presented in the Legal Proceedings section of Note 15 (Contingent Liabilities and Guarantees) of the Notes to Consolidated Financial Statements (Unaudited) is incorporated herein by reference.
On at least a quarterly basis, we assess our liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. Where it is probable that we will incur a loss and the amount of the loss can be reasonably estimated, we record a liability in our consolidated financial statements. These legal reserves may be increased or decreased to reflect any relevant developments on a quarterly basis. Where a loss is not probable or the amount of the loss is not estimable, we have not accrued legal reserves, consistent with applicable accounting guidance. Based on information currently available to us, advice of counsel, and available insurance coverage, we believe that our established reserves are adequate and the liabilities arising from the legal proceedings will not have a material adverse effect on our consolidated financial condition. We note, however, that in light of the inherent uncertainty in legal proceedings there can be no assurance that the ultimate resolution will not exceed established reserves. As a result, the outcome of a particular matter or a combination of matters may be material to our results of operations for a particular period, depending upon the size of the loss or our income for that particular period.
For a discussion of certain risk factors affecting us, see the section titled Supervision and Regulation in Part I, Item 1. Business, on pages 9-18 of our 2014 Form 10-K; Part I, Item 1A. Risk Factors, on pages 18-28 of our 2014 Form 10-K; the section titled Supervision and regulation in this Form 10-Q; and our disclosure regarding forward-looking statements in this Form 10-Q.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
From time to time, KeyCorp or its principal subsidiary, KeyBank, may seek to retire, repurchase, or exchange outstanding debt of KeyCorp or KeyBank, and capital securities or preferred stock of KeyCorp, through cash purchase, privately negotiated transactions, or otherwise. Such transactions, if any, depend on prevailing market conditions, our liquidity and capital requirements, contractual restrictions, and other factors. The amounts involved may be material.
In January 2015, we submitted to the Federal Reserve and provided to the OCC our 2015 capital plan under the annual CCAR process. On March 11, 2015, the Federal Reserve announced that it did not object to our 2015 capital plan. The 2015 capital plan includes a common share repurchase program of up to $725 million. Share repurchases under the capital plan were authorized by our Board and include repurchases to offset issuances of common shares under our employee compensation plans. Common share repurchases under the 2015 capital plan began in the second quarter of 2015.
We completed $123 million of common share repurchases during the third quarter of 2015 under this authorization.
The following table summarizes our repurchases of our common shares for the three months ended September 30, 2015.
Calendar month |
Total number of shares repurchased (a) |
Average price paid per share |
Total number of shares purchased as part of publicly announced plans or programs |
Maximum number of shares that may yet be purchased as part of publicly announced plans or programs (b) |
||||||||||||
July 131 |
3,192,620 | $ | 15.06 | 3,188,129 | 36,921,280 | |||||||||||
August 131 |
4,816,802 | 14.58 | 4,812,650 | 34,767,143 | ||||||||||||
September 130 |
390,374 | 12.96 | 384,800 | 36,329,045 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total |
8,399,796 | $ | 14.68 | 8,385,579 | ||||||||||||
|
|
|
|
|
|
(a) | Includes common shares repurchased in the open market and common shares deemed surrendered by employees in connection with our stock compensation and benefit plans to satisfy tax obligations. |
(b) | Calculated using the remaining general repurchase amount divided by the closing price of KeyCorp common shares as follows: on July 31, 2015, at $14.84; on August 31, 2015, at $13.74; and on September 30, 2015, at $13.01. |
15 | Acknowledgment of Independent Registered Public Accounting Firm. |
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2 | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101 | The following materials from KeyCorps Form 10-Q Report for the quarterly period ended September 30, 2015, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income and Consolidated Statements of Comprehensive Income, (iii) the Consolidated Statements of Changes in Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements. |
Information Available on Website
KeyCorp makes available free of charge on its website, www.key.com, its 2014 Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports as soon as reasonably practicable after KeyCorp electronically files such material with, or furnishes it to, the SEC. We also make available a summary of filings made with the SEC of statements of beneficial ownership of our equity securities filed by our directors and officers under Section 16 of the Exchange Act. The Regulatory Disclosures and Filings tab of the investor relations section of our website includes public disclosures concerning our annual and mid-year stress-testing activities under the Dodd-Frank Act. Information contained on or accessible through our website or any other website referenced in this report is not part of this report.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the date indicated.
KEYCORP |
(Registrant) |
Date: November 2, 2015
/s/ Douglas M. Schosser |
By: Douglas M. Schosser |
Chief Accounting Officer (Principal Accounting Officer) |
147