KeyBank 2006 Annual Report Download - page 25

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25
MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES
• We continued to manage expenses effectively. Key’s total noninterest
expense grew by 3% during 2006, compared to 6% during 2005. The
growth in 2006 was due primarily to higher costs associated with
business expansion, employee benefits, variable incentive compensation
related to the improvement in Key’s fee-based businesses, and
operating leases.
• Further, we continue to effectively manage our equity capital through
dividends paid to shareholders, share repurchases, and investing in our
businesses. During 2006, Key repurchased 17.5 million of its common
shares. At December 31, 2006, Key’s tangible equity to tangible
assets ratio was 7.01%.
The primary reasons that Key’s revenue and expense components changed
over the past three years are reviewed in greater detail throughout the
remainder of the Management’s Discussion & Analysis section.
Key’s positive 2006 results reflect strategic actions taken over the past
several years to improve the company’s business mix. The decisions in
2006 to sell the Champion Mortgage finance business and the McDonald
Investments branch network as discussed below exemplify management’s
disciplined focus on core relationship-oriented businesses.
Strategic developments
Key’s financial performance continued to improve in 2006, due in part
to a number of specificactions taken during 2006 and 2005 to strengthen
our market share positions and support our corporate strategy as
summarized on page 20.
• On February 9, 2007, McDonald Investments Inc., a wholly-owned
subsidiary of KeyCorp, sold its branch network, which includes
approximately 570 financial advisors and field support staff, and
certain fixed assets, to UBS Financial Services Inc., a subsidiaryof UBS
AG. In the transaction, Key received cash proceeds of approximately
$219 million which may be subject to further adjustment under the
terms of the sales agreement. Key has retained the corporate and
institutional businesses, including Institutional Equities and Equity
Research, Debt Capital Markets and Investment Banking. In addition,
KBNA will continue the Wealth Management, Trust and Private
Banking businesses.
• On November 29, 2006, Key sold the nonprime mortgage loan
portfolio held by the Champion Mortgage finance business and
announced a separate agreement to sell Champion’s origination
platform. The platform sale is expected to close in the first quarter
of 2007.
• On April 1, 2006, Key broadened its asset management product
line by acquiring Austin Capital Management, Ltd., an investment firm
headquartered in Austin, Texas with approximately $900 million in
assets under management at the date of acquisition. Austin specializes
in selecting and managing hedge fund investments for its principally
institutional customer base.
• On December 8, 2005, Key acquired the commercial mortgage-backed
servicing business of ORIX Capital Markets, LLC, headquartered in
Dallas, Texas. The acquisition increased Key’s commercial mortgage
servicing portfolio by approximately $27 billion.
• On July 1, 2005, Key expanded its Federal Housing Administration
(“FHA”) financing and servicing capabilities by acquiring Malone
Mortgage Company, based in Dallas, Texas. Key has made six
commercial real estate acquisitions since January 31, 2000, as part of
an ongoing strategy to expand commercial mortgage finance and
servicing capabilities.
• During the first quarter of 2005, Key completed the sale of $992
million of indirect automobile loans, representing the prime segment
of that portfolio. In April 2005, Key completed the sale of $635
million of automobile loans, representing the nonprime segment.
The decision to sell these loans was driven by management’sstrategies
for improving Key’s returns and achieving desired interest rate and
credit risk profiles.
LINE OF BUSINESS RESULTS
This section summarizes the financial performance and related strategic
developments of Key’stwo major business groups: Community Banking
and National Banking. To better understand this discussion, see Note 4
(“Line of Business Results”), which begins on page 76. Note 4 describes
the products and services offered by each of these business groups,
provides more detailed financial information pertaining to the groups and
their respective lines of business, and explains “Other Segments” and
“Reconciling Items.”
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