KeyBank 2008 Annual Report Download - page 38

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36
MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES
Noninterest income
Noninterest income for 2008 was $1.870 billion, down $359 million,
or 16%, from 2007. In 2007, noninterest income rose by $102 million,
or 5%.
Several significant items affected noninterest income in 2008 and 2007.
Key’s noninterest income for 2008 includes a $165 million gain from the
partial redemption of Visa Inc. shares. Results for 2007 include a $171
million gain associated with the sale of the McDonald Investments
branch network, $67 million in gains related to the sale of MasterCard
Incorporated shares, a $26 million gain from the settlement of the
automobile residual value insurance litigation and a $49 million loss from
the repositioning of the securities portfolio.
Excluding the above items, noninterest income for 2008 decreased by
$309 million, or 15%, due to three primary factors. As shown in
Figure 11, Key recorded net losses of $62 million from principal
investing in 2008, compared to net gains of $134 million in 2007. In
addition, net losses from loan sales rose by $78 million, and income from
investment banking and capital markets activities declined by $54
million. The reduction in noninterest income attributable to these
factors was offset in part by increases of $48 million in income from trust
and investment services, and $28 million in deposit service charges.
Results for 2007 include $16 million of brokerage commissions and fees
generated by the McDonald Investments branch network. Adjusting for
this revenue, trust and investment services income rose by $64 million,
or 14%, in 2008.
In 2007, the sale of the McDonald Investments branch network
accounted for $25 million of the increase in noninterest income, as the
$171 million gain from the sale was substantially offset by a reduction
in the level of trust and investment services income generated by the
McDonald Investments branch network operation. Excluding the net
increase attributable to the sale of the McDonald Investments branch
network, Key’s noninterest income rose by $77 million, or 4%, from the
2006 level. As shown in Figure 11, the improvement reflected growth in
net gains from principal investing, income from deposit service charges,
and operating lease revenue. Trust and investment services income was
up $57 million, excluding the impact of the McDonald Investments sale.
Gains derived from the sale of MasterCard Incorporated shares and the
settlement of the automobile residual value insurance litigation also
contributed to the 2007 increase. These positive results were partially
offset by the adverse effects of market volatility on several of Key’s capital
markets-driven businesses, and the loss recorded in 2007 in connection
with the repositioning of the securities portfolio.
Figure 10 shows how the changes in yields or rates and average balances
from the prior year affected net interest income. The section entitled
“Financial Condition,” which begins on page 41, contains more
discussion about changes in earning assets and funding sources.
FIGURE 10. COMPONENTS OF NET INTEREST INCOME CHANGES
2008 vs 2007 2007 vs 2006
Average Yield/ Net Average Yield/ Net
in millions Volume Rate Change Volume Rate Change
INTEREST INCOME
Loans $ 540 $(1,945) $(1,405) $170 $ 17 $187
Loans held for sale (136) (55) (191) 22 (10) 12
Securities available for sale 30 (15) 15 23 57 80
Held-to-maturity securities (1) 3 2 (1) — (1)
Trading account assets 16 2 18 268
Short-term investments 22 (28) (6) 224
Other investments 1 (2) (1) 9 (39) (30)
Total interest income (TE) 472 (2,040) (1,568) 227 33 260
INTEREST EXPENSE
NOW and money market deposit accounts 69 (404) (335) (28) 80 52
Savings deposits —33 — (1) (1)
Certificates of deposit ($100,000 or more) 133 (56) 77 40 20 60
Other time deposits 67 (61) 6 7 62 69
Deposits in foreign office (33) (95) (128) 97 (8) 89
Total interest-bearing deposits 236 (613) (377) 116 153 269
Federal funds purchased and securities sold
under repurchase agreements (56) (95) (151) 102 (1) 101
Bank notes and other short-term borrowings 96 (69) 27 6410
Long-term debt 95 (249) (154) (83) 13 (70)
Total interest expense 371 (1,026) (655) 141 169 310
Net interest income (TE) $ 101 $(1,014) $ (913) $ 86 $(136) $ (50)
The change in interest not due solely to volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each.
TE = Taxable Equivalent