MANAGEMENTGLYPH<213>S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES FIGURE 25. NET INTEREST INCOME VOLATILITY Per $100 Million of New Business Net Interest Income Volatility Interest Rate Risk ProGLYPH<222>le Floating-rate commercial loans  Increases annual net interest income  No change.  at 3.0% funded short-term. $2.0 million. Two-year GLYPH<222>xed-rate CDs at 2.0% Rates unchanged: Decreases annual net  Reduces the GLYPH<210>standardGLYPH<211> simulated  that reduce short-term funding. interest income $1.0 million. net interest income at risk to rising  rates by .04%. Rates up 200 basis points over 12 months:  No change to net interest income. Five-year GLYPH<222>xed-rate home equity Rates unchanged: Increases annual net  Increases the GLYPH<210>standardGLYPH<211> simulated  loans at 6.0% funded short-term. interest income $4.3 million. net interest income at risk to rising  rates by .03%. Rates up 200 basis points over 12 months:  Increases annual net interest income $3.5 million. Premium money market deposits at Rates unchanged: No change to net  Reduces the GLYPH<210>standardGLYPH<211> simulated  1.0% that reduce short-term funding. interest income. net interest income at risk to rising  rates by .02%. Rates up 200 basis points over 12 months:  Increases annual net interest income $.5 million. Information presented in the above GLYPH<222>gure assumes a short-term funding rate of 1.0%. It is important to note that the results of the simulation model can be different for different changes in market interest rates and over different time frames, even if the various business flow assumptions remain static. Figure 26 demonstrates Key’s net interest income exposure to various changes in the overall level of interest rates over various time frames. For purposes of demonstrating Key’s net interest income exposure, it is assumed that semi-annual base net interest income is $1.5 billion for the next two years assuming that interest rates will not change. Key’s assumed base net interest income benefits from a current liability-sensitive position, depending on the assumed slope of the yield curve and how fast and how far interest rates are assumed to move up. Accordingly, the modeled changes to net interest income in the table depict our risk to a current liability-sensitive position. FIGURE 26. NET INTEREST INCOME EXPOSURE OVER A TWO-YEAR TIME FRAME First Year Second Year in millions First Six Months Twelve Months First Six Months Twelve Months Assumed Base Net Interest Income $1,500 $3,000 $1,500 $3,000 POTENTIAL RATE CHANGES SIMULATED NET INTEREST INCOME CHANGE FROM BASE Short-term rates  increasing .5 % per quarter — $14 — $29 + $17 + $81 in the GLYPH<222>rst year, then no change afterwards. (liability sensitive) (liability sensitive) (asset sensitive) (asset sensitive) Short-term rates  decreasing .3 % in the GLYPH<222>rst + $5 +$2 — $10 — $29 quarter, then no change afterwards. (liability sensitive) (liability sensitive) (asset sensitive) (asset sensitive) Short-term rates unchanged in the GLYPH<222>rst year, GLYPH<209> GLYPH<209> — $2 + $25 then  increasing .5% per quarter afterwards. (liability sensitive) (asset sensitive) Short-term rates  increasing .5% per quarter — $14 — $30 + $8 + $87 in the GLYPH<222>rst and second year. (liability sensitive) (liability sensitive) (asset sensitive) (asset sensitive) Key’s guidelines for risk management call for preventive measures to be taken if an immediate 200 basis point increase or decrease in interest rates is estimated to reduce the economic value of equity by more than 15%. Key is operating within these guidelines. Certain short-term interest rates were limited to reductions of less than 200 basis points because they were already unusually low. Measurement of long-term interest rate exposure. Key uses an economic value of equity model to complement short-term interest rate risk analysis. The benefit of this model is that it measures exposure to interest rate changes over time frames longer than two years. The economic value of Key’s equity is determined by aggregating the present value of projected future cash flows for asset, liability and derivative positions based on the current yield curve. However, economic value does not represent the fair values of asset, liability and derivative positions since it does not consider factors like credit risk and liquidity. Management of interest rate exposure. Management uses the results of short-term and long-term interest rate exposure models to formulate strategies to improve balance sheet positioning, earnings, or both, within the bounds of Key’s interest rate risk, liquidity and capital guidelines. 35 NEXT PAGE BACK TO CONTENTS SEARCH PREVIOUS PAGE