KeyBank 2007 Annual Report Download - page 28

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MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES
Year ended December 31, Change 2007 vs 2006
dollars in millions 2007 2006 2005 Amount Percent
SUMMARY OF OPERATIONS
Net interest income (TE) $1,437 $1,406 $1,279 $ 31 2.2%
Noninterest income 905
a
1,014 934 (109) (10.7)
Total revenue (TE) 2,342 2,420 2,213 (78) (3.2)
Provision for loan losses 457 56 35 401 716.1
Noninterest expense 1,356 1,239 1,156 117 9.4
Income from continuing operations
before income taxes (TE) 529 1,125 1,022 (596) (53.0)
Allocated income taxes and TE adjustments 200 420 381 (220) (52.4)
Income from continuing operations 329 705 641 (376) (53.3)
(Loss) income from discontinued operations,
net of taxes (22) (143) 39 121 84.6
Net income $ 307 $ 562 $ 680 $(255) (45.4)%
Percent of consolidated income
from continuing operations 35% 59% 59% N/A N/A
AVERAGE BALANCES
Loans and leases $40,128 $37,778 $34,389 $2,350 6.2%
Loans held for sale 4,427 4,148 3,616 279 6.7
Total assets 50,583 47,959 43,843 2,624 5.5
Deposits 12,165 10,919 7,823 1,246 11.4
a
National Banking results for 2007 include a $26 million ($17 million after tax) gain from the settlement of the residual value insurance litigation during the first quarter.
TE = Taxable Equivalent
N/A = Not Applicable
FIGURE 7. NATIONAL BANKING
Taxable-equivalent net interest income rose by $31 million, or 2%, from
2006 as a result of increases in average earning assets and deposits,
moderated in part by tighter interest rate spreads. Average loans and
leases grew by $2.4 billion, or 6%, while average deposits rose by
$1.2 billion, or 11%.
Noninterest income declined by $109 million, or 11%, as several
capital markets-driven businesses were adversely affected by volatility
in the financial markets. Results for 2007 include $33 million in net losses
from loan sales and write-downs. The bulk of those losses were from
commercial real estate loans held for sale ($70 million) and the write-
down of education loans held for sale ($22 million). These net losses were
offset in part by $54 million in net gains from the sale of commercial
lease financing receivables. This compares to net gains of $60 million for
2006, including $37 million in net gains related to commercial real estate
loans and a $25 million gain from the annual securitization and sale of
education loans. Income from investment banking and capital markets
activities decreased by $118 million for three primary reasons: income
from other investments declined by $77 million, reflecting reductions in
the fair values of certain real estate-related investments held by the
Private Equity unit within the Real Estate Capital line of business and
a $25 million gain recorded during the first quarter of 2006 in connection
with the initial public offering completed by the New York Stock
Exchange, investment banking income decreased, and results from
trading activities conducted in the Debt Capital Markets area were
less favorable. The decline in total noninterest income was offset in part
by a $45 million increase in trust and investment services income and a
$47 million increase in operating lease revenue.
The provision for loan losses rose by $401 million, reflecting deteriorating
market conditions in the residential properties segment of Key’s
commercial real estate construction portfolio. In December 2007, Key
announced a decision to cease conducting business with nonrelationship
homebuilders outside of its 13-state Community Banking footprint.
Because of this change and management’s prior decision to curtail
condominium development lending activities in Florida, Key has
transferred approximately $1.9 billion of homebuilder-related loans
and condominium exposure to a special asset management group. The
majority of these loans were performing at December 31, 2007, and were
expected to continue to perform.
Noninterest expense grew by $117 million, or 9%, from 2006.
Contributing to the growth was a $26 million increase in the provision
for losses on lending-related commitments, a $44 million rise in costs
associated with operating leases and an increase in personnel expense.
In 2006, the $64 million growth in income from continuing operations
resulted from a $127 million, or 10%, increase in taxable-equivalent net
interest income and an $80 million, or 9%, increase in noninterest
income. The positive effects of these improvements were offset in part
by an $83 million, or 7%, increase in noninterest expense, due in part
to additional costs incurred in connection with business expansion, and
a $21 million increase in the provision for loan losses.