Acquisition, Divestiture and Discontinued Operations

12 Months Ended

Dec. 31, 2011

Acquisition, Divestiture and Discontinued Operations [Abstract]

Acquisition, Divestiture and Discontinued Operations

13. Acquisition, Divestiture and Discontinued Operations

Acquisition

HSBC Branches.    On January 11, 2012, Key signed a purchase and assumption agreement to acquire 37 retail banking branches in Buffalo and Rochester, New York. The branches are being sold by First Niagara Bank in connection with their recent acquisition of HSBC’s upstate New York banking franchise. Under the terms of the purchase and assumption agreement, Key will assume deposits consisting primarily of transaction and savings accounts and purchase commercial and residential loans. The deposits associated with these branches total approximately $2.4 billion, while loans total approximately $400 million. The transaction is expected to close late in the second quarter or early third quarter of 2012, subject to customary closing conditions, including regulatory approval.

Divestiture

Tuition Management Systems.    On November 21, 2010, we entered into a definitive agreement to sell substantially all of the net assets of the Tuition Management Systems business (TMS) to a wholly-owned subsidiary of Boston-based First Marblehead Corporation for approximately $47 million in cash. The transaction closed on December 31, 2010. We wrote off $15 million of customer relationship intangible assets in conjunction with this transaction against the purchase price to determine the net gain on sale.

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.

“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 and the loans 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 and the loans at fair value in portfolio. 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 expense. Interest income and expense related to the loans and securities are shown as a component of “Net interest income.”

The components of “income (loss) from discontinued operations, net of taxes” for the education lending business are as follows:

Year ended December 31, in millions	2011		2010		2009
Net interest income	$	138	$	157	$	95
Provision for loan and lease losses		113		79		126
Net interest income (expense) after provision for loan and lease losses		25		78		(31)
Noninterest income		(55)		(66)		23
Noninterest expense		39		48		59
Income (loss) before income taxes		(69)		(36)		(67)
Income taxes		(26)		(14)		(25)
Income (loss) from discontinued operations, net of taxes (a)	$	(43)	$	(22)	$	(42)

(a) Includes after-tax charges of $50 million for 2011, $58 million for 2010, and $59 million for 2009, determined by applying a matched funds transfer pricing methodology to the liabilities assumed necessary to support the discontinued operations.

The discontinued assets and liabilities of our education lending business included on the balance sheet are as follows:

December 31, in millions	2011		2010
Trust loans at fair value	$	2,726	$	3,125
Portfolio loans at fair value		76		—
Loans, net of unearned income of ($2) and $1		3,010		3,326
Less: Allowance for loan and lease losses		104		114
Net loans		5,708		6,337
Loans held for sale		—		15
Trust accrued income and other assets at fair value		121		169
Total assets	$	5,829	$	6,521
Trust accrued expense and other liabilities at fair value	$	28	$	31
Trust securities at fair value		2,522		2,966
Total liabilities	$	2,550	$	2,997

In the past, as part of our education lending business model, we originated and securitized education loans. The process of securitization involves taking a pool of loans from our balance sheet and selling them to a bankruptcy-remote QSPE, or trust. This trust then issues securities to investors in the capital markets to raise funds to pay for the loans. The interest generated on the loans pays holders of the securities issued. As the transferor, we retain a portion of the risk in the form of a residual interest and also retain the right to service the securitized loans and receive servicing fees.

In June 2009, the FASB issued new consolidation accounting guidance that required us to analyze our existing QSPEs for possible consolidation. We determined that we should consolidate our ten outstanding securitization trusts as of January 1, 2010, since we hold 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.

The trust assets can be used only to settle the obligations or securities the trusts issue; we cannot sell the assets or transfer the liabilities. The loans in the consolidated trusts consist of both private and government-guaranteed loans. The security holders or beneficial interest holders do not have recourse to Key. Our economic interest or risk of loss associated with these education loan securitization trusts is approximately $210 million as of December 31, 2011. We record all income and expense (including fair value adjustments) through the “income (loss) from discontinued operations, net of tax” line item in our income statement.

We elected to consolidate these trusts at fair value when we prospectively adopted this new consolidation guidance. Carrying the assets and liabilities of the trusts at fair value better depicts our economic interest. A cumulative effect adjustment of approximately $45 million, which increased our beginning balance of retained earnings at January 1, 2010, was recorded when the trusts were consolidated. The amount of this cumulative effect adjustment was driven primarily by derecognizing the residual interests and servicing assets related to these trusts and consolidating the assets and liabilities at fair value.

During the third quarter of 2011, we corrected an error related to the $45 million cumulative effect adjustment recorded to beginning retained earnings upon consolidation of the education loan securitization trusts on January 1, 2010. Deferred taxes had not been appropriately recognized for the assets and liabilities of the trusts consolidated which were accounted for at fair value for book purposes but not for tax. We assessed the materiality of the error in accordance with the applicable SEC guidance and concluded that the error was not material, individually or in the aggregate, to our financial position for any prior period or the quarter ending September 30, 2011, to trends for those periods affected, or to a fair presentaion of our financial statements for those periods. The error had no impact on our results of operations. Accordingly, results for periods prior to the quarter ending September 30, 2011 were not restated. Instead, accrued income and other assets and retained earnings were reduced by $30 million to correct this error in the third quarter of 2011.

On September 27, 2011, we purchased the government-guaranteed loans from one of the education loan securitization trusts pursuant to the legal terms of the particular trust. The trust used the cash proceeds from the sale of these loans to retire the outstanding securities related to these government-guaranteed loans. This particular trust remains in existence and continues to maintain the private education loan portfolio and has securities related to these loans outstanding. The government-guaranteed loans we purchased are held as portfolio loans and continue to be accounted for at fair value. For the third quarter of 2011, the loans purchased from the trust that are held in portfolio at fair value were valued based on the purchase price of these loans as determined in accordance with the legal terms of this particular trust and are considered to be Level 3 assets.

At December 31, 2011, the primary economic assumptions used to measure the fair value of the assets and liabilities of the trusts are shown in the following table. The fair value of the assets and liabilities of the trusts is determined by calculating the present value of the future expected cash flows. Those cash flows are affected by the following economic assumptions at December 31, 2011. We rely on unobservable inputs (Level 3) when determining the fair value of the assets and liabilities of the trusts because observable market data is not available.

December 31, 2011 dollars in millions
Weighted-average life (years)	1.4 - 5.9
PREPAYMENT SPEED ASSUMPTIONS (ANNUAL RATE)	4.00 - 26.00	%
EXPECTED CREDIT LOSSES	2.00 - 80.00	%
LOAN DISCOUNT RATES (ANNUAL RATE)	2.57 - 10.59	%
SECURITY DISCOUNT RATES (ANNUAL RATE)	2.28 - 9.60	%
EXPECTED DEFAULTS (STATIC RATE)	3.75 - 40.00	%

The following table shows the consolidated trusts’ assets and liabilities at fair value and the portfolio loans at fair value and their related contractual values as of December 31, 2011. At December 31, 2011, loans held by the trusts with unpaid principal balances of $42 million ($39 million on a fair value basis) and portfolio loans at fair value with unpaid principal balances of $2 million ($2 million on a fair value basis) were 90 days or more past due. Loans held by the trusts aggregating $20 million ($19 million on a fair value basis) were in nonaccrual status, while portfolio loans at fair value in nonaccrual status aggregated to less than $1 million on both a contractual amount and fair value basis.

December 31, 2011 in millions	Contractual Amount		Fair Value
ASSETS
Portfolio loans	$	73	$	76
Trust loans		2,908		2,726
Trust other assets		34		34
LIABILITIES
Trust securities	$	2,980	$	2,522
Trust other liabilities		28		28

The following table presents the assets and liabilities of the trusts that were consolidated and are measured at fair value, as well as the portfolio loans that are measured at fair value on a recurring basis.

December 31, 2011 in millions	Level 1		Level 2		Level 3		Total
ASSETS MEASURED ON A RECURRING BASIS
Portfolio loans		—		—	$	76	$	76
Trust loans		—		—		2,726		2,726
Trust other assets		—		—		34		34
Total assets on a recurring basis at fair value		—		—	$	2,836	$	2,836
LIABILITIES MEASURED ON A RECURRING BASIS
Trust securities		—		—	$	2,522	$	2,522
Trust other liabilities		—		—		28		28
Total liabilities on a recurring basis at fair value		—		—	$	2,550	$	2,550

The following table shows the change in the fair values of the Level 3 consolidated education loan securitization trusts for the year ended December 31, 2011.

in millions	Portfolio Student Loans			Trust Student Loans			Trust Other Assets			Trust Securities			Trust Other Liabilities
Balance at January 1, 2011		—		$	3,125		$	45		$	2,966		$	31
Gains (losses) recognized in earnings (a)	$	3			26			—			81			—
Purchases		75			—			—			—			—
Sales		—			(75	)		—			—			—
Issuances		—			—			—			—			—
Settlements		(2	)		(350	)		(11	)		(525	)		(3	)
Balance at December 30, 2011	$	76		$	2,726		$	34		$	2,522		$	28

(a) Gains (losses) on the Trust Student Loans and Trust Securities were driven primarily by fair value adjustments.

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:

Year ended December 31, in millions	2011		2010		2009
Noninterest income	$	1	$	5	$	26
Intangible assets impairment		—		—		27
Other noninterest expense		2		6		8
Income (loss) before income taxes		(1)		(1)		(9)
Income taxes		—		—		(3)
Income (loss) from discontinued operations, net of taxes	$	(1)	$	(1)	$	(6)

The discontinued assets and liabilities of Austin included on the balance sheet are as follows:

December 31, in millions	2011		2010
Cash and due from banks	$	31	$	33
Total assets	$	31	$	33
Accrued expense and other liabilities		—	$	1
Total liabilities		—	$	1

Combined discontinued operations. The combined results of the discontinued operations are as follows:

Year ended December 31, in millions	2011		2010		2009
Net interest income	$	138	$	157	$	95
Provision for loan and lease losses		113		79		126
Net interest income (expense) after provision for loan and lease losses		25		78		(31)
Noninterest income		(54)		(61)		49
Intangible assets impairment		—		—		27
Noninterest expense		41		54		67
Income (loss) before income taxes		(70)		(37)		(76)
Income taxes		(26)		(14)		(28)
Income (loss) from discontinued operations, net of taxes (a)	$	(44)	$	(23)	$	(48)

(a) Includes after-tax charges of $50 million for 2011, $58 million for 2010, and $59 million for 2009, 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:

December 31, in millions	2011		2010
Cash and due from banks	$	31	$	33
Trust loans at fair value		2,726		3,125
Portfolio loans at fair value		76		—
Loans, net of unearned income of ($2) and $1		3,010		3,326
Less: Allowance for loan and lease losses		104		114
Net loans		5,708		6,337
Loans held for sale		—		15
Trust accrued income and other assets at fair value		121		169
Total assets	$	5,860	$	6,554
Trust accrued expense and other liabilities at fair value	$	28	$	31
Accrued expense and other liabilities		—		1
Trust securities at fair value		2,522		2,966
Total liabilities	$	2,550	$	2,998