Divestiture and Discontinued Operations

6 Months Ended

Jun. 30, 2011

Divestiture and Discontinued Operations [Abstract]

Divestiture and Discontinued Operations

11. Divestiture and Discontinued Operations

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 of this decision, we have accounted for this business as a discontinued operation.

The changes in fair value of the assets and liabilities of the education loan securitization trusts (discussed later in this note) and the interest income and expense from the loans and the securities of the trusts are all recorded as a component of “income (loss) from discontinued operations, net of taxes” on the income statement. 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. It is our policy to recognize interest income and expense related to the loans and securities separately from changes in fair value. These amounts 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:

		Three months ended June 30,						Six months ended June 30,
in millions		2011			2010			2011			2010
Net interest income	$	35		$	39		$	71		$	79
Provision for loan and lease losses		30			14			62			38
Net interest income (expense) after provision for loan and lease losses		5			25			9			41
Noninterest income		(11	)		(55	)		(21	)		(56	)
Noninterest expense		9			13			20			25
Income (loss) before income taxes		(15	)		(43	)		(32	)		(40	)
Income taxes		(6	)		(16	)		(12	)		(15	)
Income (loss) from discontinued operations, net of taxes (a)	$	(9	)	$	(27	)	$	(20	)	$	(25	)

(a) Includes after-tax charges of $12 million and $15 million for the three-month periods ended June 30, 2011 and 2010, respectively, and $25 million and $30 million for the six-month periods ended June 30, 2011 and 2010, respectively, 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:

		June 30,		December 31,		June 30,
in millions		2011		2010		2010
Loans at fair value	$	3,100	$	3,125	$	3,223
Loans, net of unearned income of $1, $1 and $1		3,161		3,326		3,371
Less: Allowance for loan and lease losses		109		114		128
Net loans		6,152		6,337		6,466
Loans held for sale		—		15		92
Accrued income and other assets		144		169		223
Total assets	$	6,296	$	6,521	$	6,781
Accrued expense and other liabilities	$	30	$	31	$	46
Securities at fair value		2,919		2,966		3,092
Total liabilities	$	2,949	$	2,997	$	3,138

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 goes to pay 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 impact the economic performance of these 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 are comprised 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 $185 million as of June 30, 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.

At June 30, 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 is determined by calculating the present value of the future expected cash flows; those cash flows are affected by the following assumptions. 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.

June 30, 2011
Weighted-average life (years)	1.4 - 6.0
PREPAYMENT SPEED ASSUMPTIONS (ANNUAL RATE)	4.00 % - 26.00	%
EXPECTED CREDIT LOSSES	2.00 % - 80.00	%
LOAN DISCOUNT RATES (ANNUAL RATE)	2.04 % - 6.79	%
SECURITY DISCOUNT RATES (ANNUAL RATE)	1.68 % - 6.70	%
EXPECTED DEFAULTS (STATIC RATE)	3.75 % - 40.00	%

The following table shows the consolidated trusts’ assets and liabilities at fair value and their related contractual values as of June 30, 2011. At June 30, 2011, loans held by the trusts with unpaid principal balances of $43 million ($42 million on a fair value basis) were 90 days or more past due, and loans aggregating $18 million ($18 million on a fair value basis) were in nonaccrual status.

June 30, 2011	Contractual		Fair
in millions	Amount		Value
ASSETS
Loans	$	3,175	$	3,100
Other assets		34		34
LIABILITIES
Securities	$	3,282	$	2,919
Other liabilities		30		30

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

June 30, 2011
in millions	Level 1		Level 2		Level 3			Total
ASSETS MEASURED ON A RECURRING BASIS
Loans		—		—	$	3,100	$	3,100
Other assets		—		—		34		34
Total assets on a recurring basis at fair value		—		—	$	3,134	$	3,134
LIABILITIES MEASURED ON A RECURRING BASIS
Securities		—		—	$	2,919	$	2,919
Other liabilities		—		—		30		30
Total liabilities on a recurring basis at fair value		—		—	$	2,949	$	2,949

The following table shows the change in the fair values of the Level 3 consolidated education loan securitization trusts for the six-month period ended June 30, 2011.

		Trust
		Student			Other			Trust			Other
in millions		Loans			Assets			Securities			Liabilities
Balance at January 1, 2011	$	3,125		$	45		$	2,966		$	31
Gains (losses) recognized in earnings (a)		159			—			181			—
Purchases		—			—			—			—
Sales		—			—			—			—
Issuances		—			—			—			—
Settlements		(184	)		(11	)		(228	)		(1	)
Balance at June 30, 2011	$	3,100		$	34		$	2,919		$	30

(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 of this decision, 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 June 30,					Six months ended June 30,
in millions	2011		2010			2011		2010
Noninterest income	—	$	1		$	1	$	4
Other noninterest expense	—		2			1		4
Income (loss) before income taxes	—		(1	)		—		—
Income taxes	—		(1	)		—		—
Income (loss) from discontinued operations, net of taxes	—		—			—		—

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

		June 30,		December 31,		June 30,
in millions		2011		2010		2010
Cash and due from banks	$	32	$	33	$	32
Other intangible assets		—		—		1
Total assets	$	32	$	33	$	33
Accrued expense and other liabilities	$	1	$	1	$	1
Total liabilities	$	1	$	1	$	1

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

		Three months ended June 30,						Six months ended June 30,
in millions		2011			2010			2011			2010
Net interest income	$	35		$	39		$	71		$	79
Provision for loan and lease losses		30			14			62			38
Net interest income (expense) after provision for loan and lease losses		5			25			9			41
Noninterest income		(11	)		(54	)		(20	)		(52	)
Noninterest expense		9			15			21			29
Income (loss) before income taxes		(15	)		(44	)		(32	)		(40	)
Income taxes		(6	)		(17	)		(12	)		(15	)
Income (loss) from discontinued operations, net of taxes (a)	$	(9	)	$	(27	)	$	(20	)	$	(25	)

(a) Includes after-tax charges of $12 million and $15 million for the three-month periods ended June 30, 2011 and 2010, respectively, and $25 million and $30 million for the six-month periods ended June 30, 2011 and 2010, 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:

		June 30,		December 31,		June 30,
in millions		2011		2010		2010
Cash and due from banks	$	32	$	33	$	32
Loans at fair value		3,100		3,125		3,223
Loans, net of unearned income of $1, $1 and $1		3,161		3,326		3,371
Less: Allowance for loan and lease losses		109		114		128
Net loans		6,152		6,337		6,466
Loans held for sale		—		15		92
Other intangible assets		—		—		1
Accrued income and other assets		144		169		223
Total assets	$	6,328	$	6,554	$	6,814
Accrued expense and other liabilities	$	31	$	32	$	47
Securities at fair value		2,919		2,966		3,092
Total liabilities	$	2,950	$	2,998	$	3,139