KeyBank 2009 Annual Report Download - page 30

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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 7, Community Banking recorded a net loss
attributable to Key of $62 million for 2009, compared to net income of
$361 million for 2008 and $573 million for 2007. The decrease in 2009
was the result of reductions in net interest income and noninterest
income, coupled with increases in the provision for loan losses and
noninterest expense.
Taxable-equivalent net interest income declined by $41 million, or
2%, from 2008 as a result of a decrease in average earning assets,
tighter earning asset spreads and a change in deposit mix, moderated in
part by growth in deposits. Average loans and leases declined by $844
million, or 3%, due to reductions in the commercial loan portfolios,
while average deposits grew by $2.1 billion, or 4%. The increase in
average deposits reflects strong growth in certificates of deposit and
noninterest-bearing deposits, which more than offset a decline in money
market deposit accounts. During the second half of 2009, higher-
costing certificates of deposit originated in the prior year began to
mature and repriced to current market rates.
Noninterest income declined by $53 million, or 6%, from 2008, due in
partto a $33 million decrease in service charges on deposit accounts,
resulting from a change in customer behavior. In addition, market
weakness prompted a $19 million reduction in income from trust and
investment services, and a $12 million decline in income from investment
banking and capital markets activities. The adverse effect of these factors
was offset in part by a $15 million increase in mortgage loan sale gains.
The provision for loan losses rose by $418 million from 2008, reflecting
a$167 million increase in net loan charge-offs, primarily from the
commercial, financial and agricultural, and home equity loan portfolios.
Community Banking’s provision for loan losses exceeded net loan
charge-offs by $269 million as we continued to increase reserves in light
of the challenging credit conditions brought on by a weak economy.
Year ended December 31, Change 2009 vs 2008
dollars in millions 2009 2008 2007 Amount Percent
REVENUE FROM CONTINUING
OPERATIONS (TE)
Community Banking
(a)
$2,482 $2,576 $2,725 $ (94) (3.6)%
National Banking
(b)
1,878 1,219 2,239 659 54.1
Other Segments
(c)
123 (96) 141 219 N/M
Total Segments 4,483 3,699 5,105 784 21.2
Reconciling Items
(d)
(42) 10 (79) (52) N/M
Total $4,441 $3,709 $5,026 $732 19.7%
INCOME (LOSS) FROM CONTINUING
OPERATIONS ATTRIBUTABLE TO KEY
Community Banking
(a)
$ (62) $ 361 $573 $(423) N/M
National Banking
(b)
(1,489) (1,313) 305 (176) (13.4)%
Other Segments
(c)
66 (26) 82 92 N/M
Total Segments (1,485) (978) 960 (507) (51.8)
Reconciling Items
(d)
198 (317) (25) 515 N/M
Total $(1,287) $(1,295) $935 $ 8 .6%
(a)
Community Banking’s results for 2007 include a $171 million ($107 million after tax) gain from the sale of the McDonald Investments branch network. See Note 3 (“Acquisitions and Divestitures”)
for moreinformation about this sale.
(b)
National Banking’s results for 2009 include a $45 million ($28 million after tax) write-off of intangible assets, other than goodwill, resulting from actions taken to cease lending in certain
equipment leasing markets, and a $196 million ($164 million after tax) noncash charge for goodwill and other intangible assets impairment. National Banking’s results for 2008 include a $465
million ($420 million after tax) noncash charge for intangible assets impairment. National Banking’s results for 2008 also include $54 million ($33 million after tax) of derivative-related charges
as a result of market disruption caused by the failure of Lehman Brothers, and $31 million ($19 million after tax) of realized and unrealized losses from the residential properties segment of
the construction loan portfolio. Also, during 2008, National Banking’s taxable-equivalent revenue and loss from continuing operations attributable to Key were reduced by $890 million and
$557 million, respectively,as a result of that business group’sinvolvement with certain leveraged lease financing transactions that werechallenged by the IRS. National Banking’sresults for
2007 include a $26 million ($17 million after tax) gain from the settlement of the residual value insurance litigation.
(c)
Other Segments’ results for 2009 include a $17 million ($11 million after tax) loss during the thirdquarter and a $95 million ($59 million after tax) gain during the second quarter related to the
exchange of common shares for capital securities. Also, during 2009, Other Segments’ results include net gains of $125 million ($78 million after tax) in connection with the repositioning of
the securities portfolio. Other Segments’ results for 2008 include a $23 million ($14 million after tax) credit recorded when we reversed the remaining reserve associated with the Honsador
litigation, which was settled in September 2008. Other Segments’ results for 2007 include a $26 million ($16 million after tax) charge for the Honsador litigation and a $49 million ($31 million
after tax) loss in connection with the repositioning of the securities portfolio.
(d)
Reconciling Items for 2009 include a $106 million credit to income taxes, due primarily to the settlement of IRS audits for the tax years 1997-2006. Results for 2009 also include a $32 million
($20 million after tax) gain from the sale of our claim associated with the Lehman Brothers’ bankruptcy and a $105 million ($65 million after tax) gain from the sale of our remaining equity
interest in Visa Inc. Reconciling Items for 2008 include $120 million of previously accrued interest recovered in connection with our opt-in to the IRS global tax settlement and total charges
of $505 million to income taxes for the interest cost associated with the leveraged lease tax litigation. Also, during 2008, Reconciling Items include a $165 million ($103 million after tax) gain
from the partial redemption of our equity interest in Visa Inc. and a $17 million charge to income taxes for the interest cost associated with the increase to our tax reserves for certain LILO
transactions. Reconciling Items for 2007 include gains of $27 million ($17 million after tax) during the third quarter and $40 million ($25 million after tax) during the second quarter related
to MasterCard Incorporated shares. Results for 2007 also include a $64 million ($40 million after tax) charge representing the fair value of our potential liability to Visa Inc. and a $16 million
($10 million after tax) charge for the Honsador litigation.
FIGURE 6. MAJOR BUSINESS GROUPS — TAXABLE-EQUIVALENT REVENUE FROM CONTINUING
OPERATIONS AND INCOME (LOSS) FROM CONTINUING OPERATIONS ATTRIBUTABLE TO KEY