KeyBank 2006 Annual Report Download - page 26

Community Banking summaryof operations
As shown in Figure 4, net income for Community Banking was $427
million for 2006, up from $420 million for 2005 and $412 million for
2004. The increase in 2006 was the result of growth in net interest
income, a modest increase in noninterest income and a lower provision
for loan losses, offset in part by an increase in noninterest expense.
Taxable-equivalent net interest income grew by $49 million, or 3%, from
2005. Net interest income benefited from a 5% increase in average
deposits, which also experienced a morefavorable interest rate spread.
Increased deposits were in the form of money market deposit accounts
and certificates of deposit. The increase in money market deposits was
attributable to the introduction of new products, while the growth in
certificates of deposit reflected client preferences for these products in a
rising interest rate environment.
Noninterest income rose by $4 million, or less than 1%. Increases of
$12 million in annuity fee income, $9 million in electronic banking fees and
$3 million in service charges on deposit accounts were substantially offset
by decreases of $12 million in trust and investment services income and $8
million in income from investment banking and capital markets activities.
The provision for loan losses decreased by $13 million, or 12%, as a
result of a $15 million reduction in net charge-offs, primarily within the
Small Business lending unit.
Noninterest expense grew by $55 million, or 3%, from 2005, due primarily
to higher personnel, marketing and occupancy expenses. A portion of these
additional costs was incurred in connection with the anticipated sale of the
McDonald Investments branch network discussed below.
In 2005, the $8 million increase in net income was attributable to a $121
million, or 8%, increase in taxable-equivalent net interest income and
a$17 million, or 14%, reduction in the provision for loan losses. The
positive effects of these changes were partially offset by a $40 million, or
4%, reduction in noninterest income, due primarily to a decrease in service
charges on deposit accounts. In addition, noninterest expense rose by $84
million, or 5%, as a result of higher costs associated with marketing and
occupancy, as well as increases in various indirect charges.
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 subsidiary of 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.
During the second half of 2004, Key improved market share position
by acquiring EverTrust Financial Group, Inc., which is headquartered
in Everett, Washington. At the date of acquisition, EverTrust had
assets of approximately $780 million and deposits of approximately
$570 million. Key also acquired ten branch offices and approximately
$380 million of deposits of Sterling Bank & Trust FSB in suburban
Detroit, Michigan.
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MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES
Year ended December 31, Change 2006 vs 2005
dollars in millions 2006 2005 2004 Amount Percent
REVENUE FROM CONTINUING
OPERATIONS (TE)
Community Banking $2,642 $2,589 $2,508 $ 53 2.0%
National Banking 2,485 2,274 2,017 211 9.3
Other Segments 28 69 26 (41) (59.4)
Total Segments 5,155 4,932 4,551 223 4.5
Reconciling Items (110) (88) (76) (22) (25.0)
Total $5,045 $4,844 $4,475 $201 4.1%
INCOME (LOSS) FROM
CONTINUING OPERATIONS
Community Banking $ 427 $ 420 $412 $ 7 1.7%
National Banking 701 633 479 68 10.7
Other Segments 41 67 43 (26) (38.8)
Total Segments 1,169 1,120 934 49 4.4
Reconciling Items 24 (30) (27) 54 N/M
Total $1,193 $1,090 $907 $103 9.4%
TE = Taxable Equivalent, N/M = Not Meaningful
FIGURE 3. MAJOR BUSINESS GROUPS — TAXABLE-EQUIVALENT REVENUE
AND INCOME (LOSS) FROM CONTINUING OPERATIONS
Figure 3 summarizes the contribution made by each major business group to Key’s taxable-equivalent revenue and income (loss) from continuing
operations for each of the past three years.
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