01—Abstract
Summary
Summary of the 10-K filed February 27, 2009. Cited figures are marked; the original filing is the authoritative source.
KeyCorp, headquartered in Cleveland, Ohio, reported a 2008 net loss of $1.468 billiona, or $3.36 per common share, compared with net income of $919 million, or $2.32 per diluted common share, in 2007.
Three primary factors drove the decline: a $1.011 billionb after-tax charge in the second quarter from an adverse federal tax court ruling on leveraged lease financing transactions, a $1.306 billion increase in the provision for loan losses, and a $420 million after-tax noncash goodwill impairment charge tied to the National Banking unit. Total assets reached $104.531 billion at year-end, while total shareholders' equity rose to $10.480 billion, supported by $4.242 billion of new capital raised during 2008, including $2.5 billion of Series B Preferred Stock sold to the U.S. Treasury under the Capital Purchase Program. Tier 1 and total risk-based capital ratios were 10.92% and 14.82%, respectively.
Asset quality deteriorated sharply. Net loan charge-offs were $1.260 billionc, or 1.67% of average loans, and nonperforming assets rose to $1.464 billion, or 1.91% of portfolio loans, OREO and other nonperforming assets. Management expects nonperforming loans to keep rising in 2009.
The company's exit loan portfolio, which includes residential homebuilder loans and marine and RV floor-plan lending, accounted for 44%d of net charge-offs in the second half of 2008. The net interest margin fell 130 basis points to 2.16%, largely due to the leveraged lease tax charges. Common dividends were cut twice during 2008, and the CPP terms restrict dividend increases and share repurchases for three years.
Looking ahead, the filing flags several risks: the Treasury's Capital Assistance Program requires stress testing for banks with more than $100 billion in assets, which could force capital raises that dilute common shareholders; the Series B Preferred dividend rises from 5% to 9% after five years; and KeyBank cannot pay dividends to the parent without regulatory approval because of its 2008 net loss of $1.161 billion. The parent held $4.756 billion in short-term investments at year-end, and the company reported that Moody's and Standard & Poor's ratings for KeyCorp were under review, with S&P lowering its senior debt rating to BB on February 24, 2009.
02—Key points
Key Highlights
- Net loss of $1.468 billion, or $3.36 per common share, in 2008, versus net income of $919 million, or $2.32 per diluted share, in 2007.
- Total assets of $104.531 billion and total shareholders' equity of $10.480 billion at December 31, 2008, up $2.734 billion from year-end 2007.
- Raised $4.242 billion of new capital in 2008, including $2.5 billion of Series B Preferred Stock and warrant issued to the U.S. Treasury under the Capital Purchase Program.
- Net loan charge-offs of $1.260 billion (1.67% of average loans) and nonperforming assets of $1.464 billion (1.91% of portfolio loans, OREO and other nonperforming assets), up from 2007.
- Net interest margin declined 130 basis points to 2.16%, driven mainly by $890 million of leveraged lease tax litigation charges to interest income.
- Capital ratios remained above well-capitalized levels: Tier 1 risk-based 10.92% and total risk-based 14.82% at year-end.
- Dividend restrictions under the CPP limit increases and share repurchases for three years, and the Series B preferred dividend rises from 5% to 9% after five years unless redeemed.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2008filed February 27, 2009Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Operating Income | -$1.29B— | — |
| Interest Expense | $2.04B$2.65B | −23.1% |
| Net Income | -$1.47B$919.00M | −259.7% |
| EPS (Basic) | $-3.36$2.35 | −243.0% |
| EPS (Diluted) | $-3.36$2.32 | −244.8% |
| Shares Outstanding (Basic) | 450.04M392.01M | +14.8% |
| Shares Outstanding (Diluted) | 450.04M395.82M | +13.7% |
05—Questions
Frequently Asked Questions
Why did KeyCorp report a loss in 2008?
The 2008 loss of $1.468 billion resulted from three main items: a $1.011 billion after-tax charge in the second quarter tied to an adverse federal court decision on leveraged lease financing transactions, a $1.306 billion increase in the provision for loan losses, and a $420 million after-tax noncash goodwill impairment charge for the National Banking unit recorded in the fourth quarter.
How strong is KeyCorp's capital position after 2008?
At December 31, 2008, KeyCorp reported a Tier 1 risk-based capital ratio of 10.92%, a total risk-based capital ratio of 14.82% and a leverage ratio of 11.05%, all above the minimums and above the well-capitalized thresholds. KeyCorp raised $4.242 billion of capital during 2008, including $2.5 billion from the U.S. Treasury. The filing also states that the Capital Assistance Program stress test could require additional capital.
What risks does the Capital Assistance Program pose to shareholders?
KeyCorp is required to participate in the Treasury's Capital Assistance Program, which includes a stress test. If the Treasury and regulators determine more capital is needed, KeyCorp would have a six-month window to raise it privately or through the program. Any new equity issuance would dilute Common Shares and could limit the company's ability to return capital to shareholders.
How did asset quality change in 2008?
Net loan charge-offs rose to $1.260 billion, or 1.67% of average loans, compared with $275 million, or 0.41%, in 2007. Nonperforming assets increased to $1.464 billion from $764 million. Management expects nonperforming loans to continue rising in 2009, and the allowance for loan losses reached $1.803 billion, or 2.36% of period-end loans.
What limits KeyCorp's ability to pay dividends?
KeyCorp depends mainly on dividends from KeyBank, which paid no dividends to KeyCorp in 2008. KeyBank would need prior regulatory approval to pay dividends because of its 2008 net loss of $1.161 billion. Under the CPP terms, KeyCorp cannot raise its dividend above the third-quarter 2008 level for three years, and it cannot repurchase common or preferred shares without Treasury approval.
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