KeyBank 2009 Annual Report Download - page 73

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MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES
Noninterest income
Our noninterest income was $469 million for the fourth quarter of
2009, compared to $383 million for the fourth quarter of 2008. The
increase reflects net gains of $80 million from principal investing
(which include results attributable to noncontrolling interests) in the
fourth quarter of 2009, compared to net losses of $37 million for the
same period last year, and a $22 million increase in investment banking
income. Additionally, during the fourth quarter of 2008, we recorded
net losses of $39 million related to the volatility associated with the
hedge accounting applied to debt instruments. These factors were
offset in part by losses related to certain commercial real estate related
investments, primarily due to changes in their fair values. Net losses
from investments made by the Real Estate Capital and Corporate
Banking Services line of business rose by $34 million from the fourth
quarter of 2008. At December 31, 2009, the investments remaining in
this portfolio had a carrying amount of approximately $63 million,
representing 51% of our original investment. We also experienced a $31
million reduction in income from dealer trading and derivatives
activities, including a $16 million loss recorded during the current
quarter as a result of changes in the fair values of certain commercial
mortgage-backed securities. At December 31, 2009, these securities had
acarrying amount of approximately $29 million, representing 33% of
their face value. The improvement in noninterest income was also
moderated by lower income from trust and investment services, service
charges on deposit accounts and operating leases.
Noninterest expense
Our noninterest expense was $871 million for the fourth quarter of
2009, compared to $1.264 billion for the same period last year.
Noninterest expense for the fourth quarter of 2008 was adversely
affected by a goodwill impairment charge of $465 million. Excluding this
charge, noninterest expense for the current quarter was up $72 million,
or 9%, from the year-ago quarter.
Personnel expense decreased by $5 million and nonpersonnel expense
rose by $77 million. The growth in nonpersonnel expense was
attributable to increases of $34 million in the FDIC deposit insurance
assessment, $32 million in the provision for losses on lending-related
commitments and $19 million in costs associated with OREO, including
write-downs and losses on sales.
Provision for loan losses
Our provision for loan losses was $756 million for the fourth quarter
of 2009, compared to $551 million for the year-ago quarter. During the
fourth quarter of 2009, the provision exceeded net loan charge-offs by
$48 million. As a result, our allowance for loan losses was $2.5 billion,
or 4.31% of total loans, at December 31, 2009, compared to 2.24% at
December 31, 2008.
Compared to the fourth quarter of 2008, net loan charge-offs in the
commercial loan portfolio increased by $371 million. The increase was
attributable to the continuation of elevated net charge-offs on our
commercial real estate loans within the Real Estate Capital and Corporate
Banking Services line of business. Net loan charge-offs in this line of
business rose by $353 million, including $131 million of net charge-offs
recorded on two specific customer relationships during the fourth quarter
of 2009. The level of net charge-offs in the consumer loan portfolio rose
by $28 million with the largest increases coming from the home equity and
marine components. Our exit loan portfolio accounted for $141 million,
or 20%, of total net loan charge-offs for the fourth quarter of 2009.
Income taxes
For the fourth quarter of 2009, we recorded a tax benefit of $347 million,
compared to a benefit of $318 for the fourth quarter of 2008. In both years,
the tax benefit was primarily a result of a pre-tax loss from continuing
operations and credits recorded in connection with the IRS global tax
settlement pertaining to certain leveraged lease financing transactions.
During the fourth quarter of 2009, we recorded a $106 million credit to
income taxes, due primarily to the settlement of IRS audits for the tax
years 1997-2006. This credit includes a final adjustment of $80 million
related to the resolution of certain lease financing tax issues. During the
fourth quarter of 2008, we reached an agreement with the IRS on all
material aspects related to the IRS global tax settlement, which resulted
in a $120 million reduction to income taxes for the recovery of previously
accrued interest on disputed tax balances. The positive impact of the
recovered interest was partially offset by $68 million of additional U.S.
taxes recorded on accumulated earnings of the Canadian leasing
operation. During the fourth quarter of 2008, we decided that, due
to changes in the Canadian leasing operations, we would no longer
permanently reinvest the earnings of the Canadian leasing subsidiaries
overseas. For a discussion of the factors that cause the difference between
our effective tax rate and the federal statutory tax rate, and the agreement
entered into with the IRS, see the section entitled “Income taxes.”
CERTIFICATIONS
We have filed, as exhibits to our Annual Report on Form 10-K for the
year ended December 31, 2009, the certifications of our Chief Executive
Officer and Chief Financial Officer required pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
On June 8, 2009, we submitted to the New York Stock Exchange the
Annual CEO Certification required pursuant to Section 303A.12(a) of
the New York Stock Exchange Listed Company Manual.