KeyBank 2006 Annual Report Download - page 57

57
MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES
Operational risk management
Key, like all businesses, is subject to operational risk, which is the risk
of loss resulting from human error, inadequate or failed internal
processes and systems, and external events. Operational risk also
encompasses compliance (legal) risk, which is the risk of loss from
violations of, or noncompliance with, laws, rules, regulations, prescribed
practices or ethical standards. Resulting losses could take the form of
explicit charges, increased operational costs, harm to Key’s reputation
or forgone opportunities. Key seeks to mitigate operational risk through
asystem of internal controls.
Management continuously strives to strengthen Key’s system of internal
controls to ensure compliance with laws, rules and regulations, and to
improve the oversight of Key’s operational risk. For example, a loss-event
database is used to track the amounts and sources of operational losses.
This tracking mechanism serves as another resource to identify weaknesses
and the need to take corrective action. Management also relies upon
sophisticated software programs designed to assist in monitoring Key’s
control processes. This technology has enhanced the reporting of the
effectiveness of Key’s controls to senior management and the Board.
Primary responsibility for managing and monitoring internal control
mechanisms lies with the managers of Key’s various lines of business.
Key’s Risk Review function periodically assesses the overall effectiveness
of Key’s system of internal controls. Risk Review reports the results of
reviews on internal controls and systems to senior management and the
Audit Committee, and independently supports the Audit Committee’s
oversight of these controls. Finally, a senior management committee,
known as the Operational Risk Committee, oversees Key’s level of
operational risk, and directs and supports Key’soperational infrastructure
and related activities.
Regulatory agreements. On October 17, 2005, KeyCorp entered into a
memorandum of understanding with the Federal Reserve Bank of
Cleveland (“FRBC”), and KBNA entered into a consent order with the
Comptroller of the Currency (“OCC”), concerning compliance-related
matters, particularly arising under the Bank Secrecy Act. Management
does not expect these actions to have a material effect on Key’soperating
results; neither the OCC nor the FRBC imposed a fine or civil money
penalty in the matter. As part of the consent order and memorandum of
understanding, Key has agreed to continue to strengthen its anti-money
laundering and other compliance controls. Management believes
significant progress has been made in this regard and continues to
work on making the necessary improvements, including enhanced
training for employees, upgraded client due diligence procedures and
advanced technologies.
FOURTH QUARTER RESULTS
Key’s financial performance for each of the past eight quarters is
summarized in Figure 37. Highlights of Key’s fourth quarter results are
summarized below.
Earnings. Key had income from continuing operations of $311 million,
or $.76 per diluted common share, compared to $284 million, or $.69 per
share, for the fourth quarter of 2005. Earnings per share from continuing
operations increased 10% compared to the fourth quarter of 2005.
In November 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. As a result of these
actions, Key has applied discontinued operations accounting to this
business for all periods presented in this report. For more detailed
information regarding the Champion divestiture, including the gain
resulting from the sale, see Note 3 (“Acquisitions and Divestitures”),
which begins on page 75.
Net income totaled $146 million, or $.36 per diluted common share, for
the fourth quarter of 2006, compared to net income of $296 million, or
$.72 per share, for the fourth quarter of 2005.
The growth in income from continuing operations resulted from
increases in both net interest income and noninterest income, along with
aslight reduction in noninterest expense. These positive changes were
offset in part by a rise in Key’s provision for loan losses.
On an annualized basis, Key’s return on average total assets from
continuing operations for the fourth quarter of 2006 was 1.33%,
compared to 1.26% for the fourth quarter of 2005. The annualized
return on average equity from continuing operations was 15.63% for the
fourth quarter of 2006, compared with 14.96% for the year-ago quarter.
Net interest income. Net interest income increased to $712 million
for the fourth quarter of 2006 from $686 million for the same period
last year.Average earning assets grew by 4%, due primarily to a 5%
increase in commercial loans. The net interest margin was 3.66%,
compared to 3.68% for the same period one year ago. During the
fourth quarter of 2006, Key’snet interest margin benefited from a $16
million lease accounting adjustment resulting from a change in effective
state tax rates, and an $8 million principal investing distribution
received in the formof a dividend. These two items added approximately
12 basis points to the taxable-equivalent net interest margin.
Noninterest income. Key’snoninterest income was $558 million for the
fourth quarter of 2006, compared to $552 million for the year-ago
quarter.Increases in income from trust and investment services,
investment banking and capital markets activities, operating leases and
loan fees drove the improvement. These increases were offset in part by
an $11 million reduction in income from principal investing activities.
However, as discussed above, during the fourth quarter of 2006, the
Principal Investing unit received $8 million in the form of a dividend
included in net interest income.
Noninterest expense. Key’s noninterest expense for the fourth quarter
of 2006 was $809 million, down from $812 million for the same
period last year. Personnel expense rose by $36 million from the year-
ago quarter, due to higher costs associated with business expansion,
employee benefits and variable compensation associated with the
improvement in Key’s fee-based businesses. Nonpersonnel expense
was down $39 million. Key experienced a $9 million decrease in
professional fees, and franchise and business tax expense declined by
$16 million, due to settlements of disputed amounts during the fourth
quarter of 2006. In addition, miscellaneous expense for the fourth
quarter of 2005 included a $15 million contribution to Key’s charitable
trust, Key Foundation.
Previous Page
Search
Next Page
Contents