KeyBank 2004 Annual Report Download - page 26

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MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES
Noninterest income for 2003 benefited from a $34 million increase in net
gains from loan securitizations and sales, and a $22 million rise in letter
of credit and non-yield-related loan fees. In addition, income from
investment banking and capital markets activities grew by $18 million, as
Key had net principal investing gains in 2003, compared with net losses
in 2002. As shown in Figure 8, smaller increases were also experienced in
a number of other revenue components. These positive results were
offset by a $60 million decrease in income from trust and investment
services and a $41 million decline in service charges on deposit accounts.
The following discussion explains the composition of certain components
of Key’s noninterest income and the factors that caused those components
to change.
Trust and investment services income. Trust and investment services is
Key’s largest source of noninterest income. The primary sources of
trust and investment services revenue are shown in Figure 9.
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FIGURE 9. TRUST AND INVESTMENT SERVICES INCOME
Year ended December 31, Change 2004 vs 2003
dollars in millions 2004 2003 2002 Amount Percent
Brokerage commissions and fee income $265 $266 $272 $ (1) (.4)%
Personal asset management and custody fees 166 155 156 11 7.1
Institutional asset management and custody fees 37 39 77 (2) (5.1)
All other fees 96 85 100 11 12.9
Total trust and investment services income $564 $545 $605 $19 3.5%
A significant portion of Key’s trust and investment services income
depends on the value of assets under management. At December 31,
2004, Key’s bank, trust and registered investment advisory subsidiaries
had assets under management of $74.6 billion, representing a 9%
increase from $68.7 billion at December 31, 2003. The increase in the
market value of these assets was the primary cause of the growth in this
revenue component during 2004. However, results also benefited from
the full year effect of repricing initiatives implemented in 2003. The
composition of Key’s assets under management is shown in Figure 10.
The 2003 reduction in income from trust and investment services
reflected the effects of the June 2002 sale of Key’s 401(k) plan
recordkeeping business. That sale accounted for approximately $36
million of the decrease in income from institutional asset management
and custody fees — nearly all of the overall decline in this segment. In
addition, trust and investment services income was adversely affected by
weak activity and lower market values in the equity and fixed income
markets during the first half of 2003.
Service charges on deposit accounts. In both 2004 and 2003, the
decrease in service charges on deposit accounts was due primarily to a
reduction in the level of overdraft and maintenance fees charged to
clients. Maintenance fees were lower because a higher proportion of
Key’s clients have elected to use Key’s free checking products or pay for
services with compensating balances.
Investment banking and capital markets income. As shown in Figure 11,
stronger financial markets contributed to increases in all components of
investment banking and capital markets income during 2004, with the
largest growth coming from investment banking activities. In 2003,
investment banking and capital markets income increased because of
improved results from principal investing.
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 businesses generally are in relatively early
stages of economic development and strategy implementation. Principal
investments consist of direct and indirect investments in predominantly
privately held companies and are carried on the balance sheet at fair
value ($816 million at December 31, 2004, and $732 million at
December 31, 2003). Thus, the net gains presented in Figure 11 stem
from changes in estimated fair values as well as actual gains and losses
on sales of principal investments.
December 31,
in millions 2004 2003 2002
Assets under management
by investment type:
Equity $34,788 $31,768 $27,224
Fixed income 20,313 17,355 16,133
Money market 19,456 19,580 18,337
Total $74,557 $68,703 $61,694
Proprietary mutual funds
included in assets
under management:
Equity $ 3,651 $3,165 $ 2,878
Fixed income 827 1,015 1,215
Money market 9,103 10,188 11,457
Total $13,581 $14,368 $15,550
FIGURE 10. ASSETS UNDER MANAGEMENT