KeyBank 2006 Annual Report Download - page 34

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34
MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES
Service charges on deposit accounts. In 2005, service charges on deposit
accounts decreased, due primarily to reductions in the levels of overdraft
and maintenance fees, and fees charged to commercial clients for cash
management services. The decline in overdraft fees reflects enhanced
capabilities, such as “real time” posting, that allow clients to better
manage their accounts. Maintenance fees decreased because a higher
proportion of Key’s clients have elected to use Key’s free checking
products. In addition, as interest rates increase, commercial clients are
able to cover a larger portion of their service charges with credits
earned on compensating balances.
Investment banking and capital markets income. As shown in Figure
11, the level of investment banking and capital markets income was
essentially unchanged from 2005 as significant growth in investment
banking income was offset by reductions in dealer trading and
derivatives income, and income from other investments. A significant
reason that dealer trading and derivatives income declined was the $11
million of derivative income recorded during the first quarter of 2005
in connection with the sale of Key’s indirect automobile loan portfolio.
Income from other investments for 2006 includes a $25 million gain
from the initial public offering completed by the New York Stock
Exchange in March 2006.
Year ended December 31, Change 2006 vs 2005
dollars in millions 2006 2005 2004 Amount Percent
Investment banking income $112 $ 87 $122 $ 25 28.7%
Dealer trading and derivatives income 33 54 14 (21) (38.9)
Income from other investments 43 48 40 (5) (10.4)
Foreign exchange income 42 40 41 2 5.0
Total investment banking and capital markets income $230 $229 $217 $ 1 .4%
FIGURE 11. INVESTMENT BANKING AND CAPITAL MARKETS INCOME
During 2005, the growth in investment banking and capital markets
income was due to improved results from dealer trading and derivatives,
and higher income from other investments. These positive results were
moderated by a decrease in investment banking income caused by a
slowdown in activity within the client segments served by Key.
Operating lease income. The 2006 increase in operating lease income
reflected a higher volume of activity in the Equipment Finance line
of business. Depreciation expense related to the leased equipment is
presented in Figure 12 as “operating lease expense.”
Letter of credit and loan fees. The significant increase in non-yield-
related loan fees in 2005 was attributable primarily to higher syndication
fees generated by Key’s commercial mortgage lending business. The
improvement reflected a stronger demand for commercial real estate loans.
Net gains from loan securitizations and sales. Key sells or securitizes
loans to achieve desired interest rate and credit risk profiles, to improve
the profitability of the overall loan portfolio or to diversify funding
sources. During the first quarter of 2005, Key completed the sale of the
prime segment of the indirect automobile loan portfolio, resulting in a
gain of $19 million. This gain was partially offset by a $9 million
impairment charge in the education lending business recorded during the
same quarter. The types of loans sold during 2006 and 2005 are
presented in Figure 17 on page 40.
Net gains from principal investing. Principal investments consist of direct
and indirect investments in predominantly privately-held companies.
Key’s principal investing income is susceptible to volatility since most of
it is derived from mezzanine debt and equity investments in small to
medium-sized businesses. These investments are carried on the balance
sheet at fair value ($830 million at December 31, 2006, and $800
million at December 31, 2005). The net gains presented in Figure 8 stem
from changes in estimated fair values as well as actual gains on sales of
principal investments. During the fourth quarter of 2006, Key received
an $8 million distribution in the form of a dividend from principal
investing activities. During the second quarter of 2005, Key received a
similar $15 million distribution in the form of dividends and interest.
Both distributions were recorded in “net interest income.”
Noninterest expense
Noninterest expense for 2006 was $3.1 billion, representing a $95
million, or 3%, increase from 2005. In 2005, noninterest expense rose
by $170 million, or 6%.
Personnel expense for 2006 grew by $104 million. As shown in Figure
12, total nonpersonnel expense was down $9 million, due largely to
decreases of $26 million in net occupancy expense and $12 million in
franchise and business tax expense. These reductions were offset in part
by a $26 million increase in operating lease expense.
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