KeyBank 2007 Annual Report Download - page 22

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20
MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES
As shown in Figure 3, earnings for 2007 were affected by several
significant items, some of which were the result of strategic actions taken
to pursue Key’s long-term goals.
Year ended December 31,
dollars in millions, except per share amounts 2007 2006 2005
SUMMARY OF OPERATIONS
Income from continuing operations before cumulative
effect of accounting change $941 $1,193 $1,090
(Loss) income from discontinued operations, net of taxes
a
(22) (143)
b
39
Cumulative effect of accounting change, net of taxes —5—
Net income $919 $1,055 $1,129
PER COMMON SHARE — ASSUMING DILUTION
c
Income from continuing operations before cumulative
effect of accounting change $2.38 $2.91 $2.63
(Loss) income from discontinued operations
a
(.05) (.35)
b
.09
Cumulative effect of accounting change —.01 —
Net income $2.32 $2.57 $2.73
PERFORMANCE RATIOS
From continuing operations:
Return on average total assets .99% 1.30% 1.24%
Return on average equity 12.19 15.43 14.88
From consolidated operations:
Return on average total assets .97% 1.12% 1.24%
Return on average equity 11.90 13.64 15.42
a
Key sold the subprime mortgage loan portfolio held by the Champion Mortgage finance business in November 2006, and completed the sale of Champion’s origination platform in February 2007.
As a result of these actions, Key has accounted for this business as a discontinued operation.
b
Includes a net after-tax charge of $165 million, or $.40 per share, consisting of: (1) a $170 million, or $.42 per share, write-off of goodwill associated with Key’s 1997 acquisition of Champion
and (2) a net after-tax credit of $5 million, or $.01 per share, from the net gain on sale of the Champion Mortgage loan portfolio and disposal transaction costs.
c
Earnings per share may not foot due to rounding.
FIGURE 2. RESULTS OF OPERATIONS
During the first quarter of 2007, Key completed the previously
announced sales of the McDonald Investments branch network and the
Champion Mortgage loan origination platform. Both transactions are
consistent with Key’s strategy of focusing on core relationship businesses
and exiting those areas in which it does not have either the scale or
opportunity to build profitable client relationships.
During the same period, management repositioned Key’s securities
portfolio to enhance future financial performance, particularly in the
event of a decline in interest rates. For more detailed information
regarding the repositioning and composition of the securities portfolio,
see the section entitled “Securities,” which begins on page 39.
Events leading up to the recognition of other items presented in Figure
3 are discussed in detail throughout this report.
Key’s top four priorities for 2007 were to profitably grow revenue,
institutionalize a culture of compliance and accountability, maintain a
strong credit culture and improve operating leverage so that revenue
growth outpaces expense growth. During 2007:
• Total revenue, which includes both net interest income and noninterest
income, rose by $56 million, or 1%, from the prior year. Net interest
income decreased by $46 million as interest rate spreads on both loans
and deposits remained under pressure due to competitive pricing
and heavier reliance on short-term wholesale borrowings to support
earning asset growth. The tightening of interest rate spreads more than
FIGURE 3. SIGNIFICANT ITEMS
AFFECTING 2007 EARNINGS
in millions, Pre-tax After-tax Impact
except per share amounts Amount Amount on EPS
McDonald Investments
branch network
a
$ 142 $ 89 $ .22
Gains related to MasterCard
Incorporated shares 67 42 .11
Gain from settlement of
automobile residual value
insurance litigation 26 17 .04
Provision for loan losses in
excess of net charge-offs (254) (159) (.40)
Liability to Visa (64) (40) (.10)
Loss from repositioning of
securities portfolio (49) (31) (.08)
Litigation reserve (42) (26) (.07)
Provision for losses on
lending-related commitments (28) (17) (.04)
Separation expense (25) (16) (.04)
a
Represents the financial effect of the McDonald Investments branch network, including a
gain of $171 million ($107 million after tax) from the February 9, 2007, sale of that network.
EPS = Earnings per diluted common share