KeyBank 2007 Annual Report Download - page 35

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MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES
Operating lease income. The increases in operating lease income in 2007
and 2006 were attributable to higher volumes of activity in the
Equipment Finance line of business. Depreciation expense related to the
leased equipment is presented in Figure 14 as “operating lease expense.”
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 2007, Key recorded $17 million of net losses from loan
sales and write-downs, including $70 million in net losses pertaining to
commercial real estate loans held for sale, primarily due to volatility in
the fixed income markets and the related housing correction. These losses
were offset in part by $54 million in net gains from the sales of
commercial lease financing receivables. This compares to net gains of $76
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. The types of loans sold during 2007 and
2006 are presented in Figure 19 on page 38. Due to unfavorable market
conditions, Key did not proceed with an education loan securitization
during 2007.
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 ($993 million at December 31, 2007, and $830
million at December 31, 2006). The net gains presented in Figure 10
derive from changes in fair values as well as gains resulting from the sales
of principal investments.
Noninterest expense
Noninterest expense for 2007 was $3.2 billion, representing a $99
million, or 3%, increase from 2006. In 2006, noninterest expense rose
by $95 million, or 3%.
Personnel expense for 2007 decreased by $71 million. The sale of the
McDonald Investments branch network resulted in an $83 million
reduction to Key’s personnel expense. As shown in Figure 14, total
nonpersonnel expense rose by $170 million, including a $42 million
charge to litigation (included in “miscellaneous expense”) and a $64
million charge, representing the fair value of Key’s potential liability to
Visa Inc. (“Visa”). In accordance with Visa Bylaws, each Visa member
is obligated to indemnify Visa for a broad range of costs, damages,
liabilities and other expenses incurred by Visa. More information about
Key’s liability to Visa and other related matters is provided in Note 18
(“Commitments, Contingent Liabilities and Guarantees”) under the
heading “Obligation under Visa Inc. By-Laws” on page 99. Also
contributing to the increase in nonpersonnel expense was a $28 million
provision for losses on lending-related commitments, compared to a $6
million credit for 2006, and a $40 million increase in costs associated
with operating leases. The sale of the McDonald Investments branch
network resulted in a reduction of $38 million to Key’s total
nonpersonnel expense.
In 2006, personnel expense grew by $104 million. As shown in Figure
14, 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.
Year ended December 31, Change 2007 vs 2006
dollars in millions 2007 2006 2005 Amount Percent
Personnel $1,621 $1,692 $1,588 $(71) (4.2)%
Net occupancy 246 250 276 (4) (1.6)
Computer processing 201 212 209 (11) (5.2)
Operating lease expense 224 184 158 40 21.7
Professional fees 117 134 126 (17) (12.7)
Equipment 96 102 110 (6) (5.9)
Marketing 76 97 88 (21) (21.6)
Other expense:
Postage and delivery 47 50 50 (3) (6.0)
Franchise and business taxes 32 22 34 10 45.5
Telecommunications 28 28 30 — —
Provision (credit) for losses on
lending-related commitments 28 (6) (7) 34 N/M
Liability to Visa 64 — — 64 N/M
Miscellaneous expense 468 384 392 84 21.9
Total other expense 667 478 499 189 39.5
Total noninterest expense $3,248 $3,149 $3,054 $ 99 3.1%
Average full-time equivalent employees
a
18,934 20,006 19,485 (1,072) (5.4)%
a
The number of average full-time equivalent employees has not been adjusted for discontinued operations.
N/M = Not Meaningful
FIGURE 14. NONINTEREST EXPENSE