KeyBank 2007 Annual Report Download - page 26

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MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES
Community Banking summary of operations
As shown in Figure 6, Community Banking recorded net income of $538
million for 2007, up from $422 million for 2006 and $410 million for
2005. The improvement in 2007 was the result of significant growth in
noninterest income, lower noninterest expense and a reduced provision
for loan losses. These positive results were offset in part by a decrease
in net interest income.
Taxable-equivalent net interest income decreased by $73 million, or 4%,
from 2006, as interest rate spreads on both average earning assets and
deposits have remained under pressure due to competitive pricing. The
decrease also reflected the effect of the February 2007 sale of the
McDonald Investments branch network discussed below, in which
Key transferred approximately $1.3 billion of Negotiable Order of
Withdrawal (“NOW”) and money market deposit accounts to the
buyer. McDonald Investments’ NOW and money market deposit
accounts averaged $1.5 billion for 2006.
Excluding the $171 million gain associated with the sale of the
McDonald Investments branch network, noninterest income decreased
by $87 million, or 9%. A reduction in brokerage commissions caused
by the McDonald Investments sale was offset in part by a $36 million
increase in deposit service charge income.
The provision for loan losses decreased by $22 million, or 23%, as a
result of an improved credit risk profile, primarily within the Middle
Market lending unit.
Noninterest expense declined by $153 million, or 8%, from 2006. The
sale of the McDonald Investments branch network reduced Key’s costs
by $121 million, including an $83 million decrease in personnel expense.
The remainder of the decline in total noninterest expense reflected
decreases in various charges, due in part to a reduction in the number
of average full-time equivalent employees.
In 2006, the $12 million increase in net income was attributable to a $47
million, or 3%, increase in taxable-equivalent net interest income, an $8
million, or 1%, increase in noninterest income, and a $14 million, or 13%,
reduction in the provision for loan losses. The positive effects of these
changes were offset in part by a $50 million, or 3%, rise in noninterest
expense, reflecting increases in personnel, marketing and various other
expenses. Some of these additional costs were incurred in connection with
the anticipated sale of the McDonald Investments branch network.
On January 1, 2008, Key acquired U.S.B. Holding Co., Inc., the holding
company for Union State Bank, a 31-branch state-chartered commercial
bank headquartered in Orangeburg, New York. U.S.B. Holding
Company had assets of $2.8 billion and deposits of $1.8 billion at the
date of acquisition. The acquisition nearly doubled Key’s branch
penetration in the attractive Lower Hudson Valley area.
Year ended December 31, Change 2007 vs 2006
dollars in millions 2007 2006 2005 Amount Percent
REVENUE FROM CONTINUING
OPERATIONS (TE)
Community Banking
a
$2,709 $2,698 $2,643 $ 11 .4%
National Banking
b
2,342 2,420 2,213 (78) (3.2)
Other Segments
c
112 28 70 84 300.0
Total Segments 5,163 5,146 4,926 17 .3
Reconciling Items
d
(66) (101) (82) 35 34.7
Total $5,097 $5,045 $4,844 $ 52 1.0%
INCOME (LOSS) FROM
CONTINUING OPERATIONS
Community Banking
a
$538 $ 422 $ 410 $ 116 27.5%
National Banking
b
329 705 641 (376) (53.3)
Other Segments
c
83 42 68 41 97.6
Total Segments 950 1,169 1,119 (219) (18.7)
Reconciling Items
d
(9) 24 (29) (33) N/M
Total $941 $1,193 $1,090 $(252) (21.1)%
a
Community Banking results for 2007 include a $171 million ($107 million after tax) gain from the February 9, 2007, sale of the McDonald Investments branch network. See Note 3 (“Acquisitions
and Divestitures”), which begins on page 74, for more information pertaining to this transaction.
b
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.
c
Other Segments’ results for 2007 include a $26 million ($16 million after tax) charge for litigation recorded during the second quarter. This charge and the litigation charge referred to in note (d)
below comprise the $42 million charge recorded in connection with the Honsador litigation disclosed in Note 18 (“Commitments, Contingent Liabilities and Guarantees”), which begins on
page 97. Results for 2007 also include a $49 million ($31 million after tax) loss recorded during the first quarter in connection with the repositioning of the securities portfolio.
d
Reconciling Items include gains of $27 million ($17 million after tax) recorded during the third quarter of 2007, $40 million ($25 million after tax) recorded during the second quarter of 2007
and $9 million ($6 million after tax) recorded during the second quarter of 2006, all related to MasterCard Incorporated shares. Results for 2007 also include a $64 million ($40 million after tax)
charge, representing the fair value of Key’s potential liability to Visa Inc. recorded during the fourth quarter, and a $16 million ($10 million after tax) charge for litigation recorded during the
second quarter.
TE = Taxable Equivalent
N/M = Not Meaningful
FIGURE 5. MAJOR BUSINESS GROUPS — TAXABLE-EQUIVALENT REVENUE
AND INCOME (LOSS) FROM CONTINUING OPERATIONS