01—Abstract
Summary
Summary of the 10-K filed February 28, 2008. Cited figures are marked; the original filing is the authoritative source.
KeyCorp (KEY), headquartered in Cleveland, Ohio, is one of the nation's largest bank-based financial services companies, with consolidated total assets of $100.0 billiona at December 31, 2007.
It operates through KeyBank National Association across two business groups, Community Banking and National Banking, with 955 full-service retail branches in thirteen states at year end. KeyCorp reported 2007 income from continuing operations of $941 millionb, or $2.38 per diluted share, and net income of $919 million, or $2.32 per diluted share, compared with $1.193 billion ($2.91 per share) from continuing operations in 2006. Results were affected by a $254 million provision for loan losses in excess of net charge-offs, a $64 million charge for its potential liability to Visa Inc., a $49 million securities repositioning loss, and a $171 million gain from the sale of the McDonald Investments branch network.
Net interest margin declined to 3.46% from 3.67%, and nonperforming assets rose to $764 millionc. The filing highlights growing stress in the commercial real estate portfolio, particularly residential construction lending in Florida and southern California, and volatility in fixed income markets since July 2007. Management expects a 2008 net interest margin of around 3.30%, net loan charge-offs of .60% to .70% of average loans, and an effective tax rate of around 32%.
The company completed the acquisition of U.S.B. Holding Co., Inc. (Union State Bank) on January 1, 2008, and KeyCorp's Tier 1 risk-based capital ratio was 7.44%d at year end, with total risk-based capital at 11.38%.
The quarterly dividend was increased to $.375 per share effective with the March 2008 payment. Investors should note the pending IRS litigation over lease financing transactions, which management says could carry an after-tax interest cost of up to $420 million if resolved adversely.
02—Key points
Key Highlights
- Total assets of $100.0 billion at December 31, 2007, with 955 branches in thirteen states and 1,443 ATMs; average of 18,934 full-time equivalent employees during 2007.
- 2007 income from continuing operations of $941 million, or $2.38 per diluted share, down from $1.193 billion, or $2.91 per share, in 2006.
- Provision for loan losses rose sharply in the fourth quarter of 2007 on deteriorating residential construction loans in Florida and southern California; nonperforming assets reached $764 million, or 1.08% of loans and other real estate and nonperforming assets.
- Net interest margin fell to 3.46% from 3.67%, and management expects around 3.30% in 2008.
- Tier 1 risk-based capital ratio of 7.44% and total risk-based capital ratio of 11.38% at December 31, 2007; KeyBank met the well-capitalized standard.
- Acquired U.S.B. Holding Co., Inc. (Union State Bank) on January 1, 2008, with assets of $2.8 billion and deposits of $1.8 billion, nearly doubling branch penetration in the Lower Hudson Valley.
- Ongoing IRS dispute over lease financing transactions (LILO, QTE and Service Contract Leases); the AWG Leasing Litigation was tried in January 2008, and an adverse outcome could carry after-tax interest costs of up to $420 million.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2007filed February 28, 2008Financial Statements
| Interest Expense | $2.65B |
| Net Income | $919.00M |
| EPS (Basic) | $2.35 |
| EPS (Diluted) | $2.32 |
| Shares Outstanding (Basic) | 392.01M |
| Shares Outstanding (Diluted) | 395.82M |
05—Questions
Frequently Asked Questions
What drove the decline in KeyCorp's 2007 earnings?
Income from continuing operations fell to $941 million ($2.38 per diluted share) from $1.193 billion ($2.91 per share) in 2006. The filing cites a provision for loan losses that exceeded net charge-offs by $254 million, a $64 million Visa-related liability, a $49 million securities repositioning loss, and a $42 million litigation charge. These were partly offset by a $171 million gain on the McDonald Investments branch sale.
How is the commercial real estate portfolio performing?
The filing reports that nonperforming loans in nonowner-occupied properties rose by $403 million during 2007, mainly in the residential properties segment of the construction portfolio in Florida and southern California. Management transferred approximately $1.9 billion of homebuilder-related loans and condominium exposure to a special asset management group, and the majority of these loans were performing at December 31, 2007.
What does management expect for 2008?
Management expects a net interest margin of around 3.30%, a low- to mid-single digit percentage increase in loans excluding acquired balances, net loan charge-offs of .60% to .70% of average loans, a low single digit percentage increase in expenses excluding 2007 Visa and lending commitment charges, and an effective tax rate of around 32% on a taxable-equivalent basis. It also noted about $65 million after-tax in first-quarter market value adjustments if March 2008 conditions resembled mid-February levels.
Is KeyCorp's capital position adequate?
At December 31, 2007, the Tier 1 risk-based capital ratio was 7.44% (minimum 4.00%), the total risk-based capital ratio was 11.38% (minimum 8.00%), and the leverage ratio was 8.39% (minimum 3.00%). Tangible equity to tangible assets was 6.46%, down from 7.01%. Management stated the capital position provides sufficient flexibility for investments, share repurchases and dividends.
What are the main legal and tax risks disclosed?
KeyCorp is contesting IRS disallowances of tax deductions from LILO, QTE and Service Contract Lease transactions for tax years 1995 through 2003. In the AWG Leasing Litigation, the case went to bench trial on January 21, 2008, with a decision anticipated after post-trial briefing. If KeyCorp does not prevail, it would owe interest on taxes and possibly penalties, with after-tax interest cost estimated at up to $420 million, and no reserves have been established for that interest or penalties.
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