KeyBank 2004 Annual Report Download - page 68

When Key retains an interest in loans it securitizes, it bears risk that the
loans will be prepaid (which would reduce expected interest income) or
not paid at all. Key accounts for these retained interests as debt securities,
classifying them as available for sale or as trading account assets.
“Other securities” held in the available-for-sale portfolio are primarily
marketable equity securities. “Other securities” held in the investment
securities portfolio are foreign bonds.
Realized gains and losses related to securities available for sale were
as follows:
Of the $97 million in total gross unrealized losses, $24 million relates to
commercial mortgage-backed securities (“CMBS”). These CMBS are
beneficial interests in securitizations of commercial mortgages that are held
in the form of bonds and managed by the KeyBank Real Estate Capital
line of business. Principal on these bonds typically is payable at the end
of the bond term and interest is paid monthly at a fixed coupon rate. The
fair value of these investments is sensitive to changes in the market
yield on CMBS. During the time Key has held the bonds, CMBS market
yields have increased, which reduced the bonds’ fair value.
Of the remaining $73 million of gross unrealized losses at December 31,
2004, $71 million relates to fixed-rate agency collateralized mortgage
obligations, which Key invests in as part of its overall asset/liability
management strategy. Since these instruments have fixed interest rates, their
fair value is sensitive to movements in market interest rates. During
2004, there was a general increase in interest rates and as a result, the fair
value of these 93 instruments, which had a weighted-average maturity of
2.26 years at December 31, 2004, decreased below their carrying amount.
Other mortgage-backed securities consist of fixed-rate mortgage-backed
securities issued primarily by the Government National Mortgage
Association (“GNMA”), with gross unrealized losses of $2 million at
December 31, 2004. Similar to the fixed-rate securities discussed above,
these instruments are sensitive to movements in interest rates. During 2004,
there was a general increase in interest rates, which caused the fair value
of these 57 instruments, which had a weighted-average maturity of 4.18
years at December 31, 2004, to decrease below their carrying amount.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
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Duration of Unrealized Loss Position
Less Than 12 Months 12 Months or Longer Total
Gross Gross Gross
December 31, 2004 Fair Unrealized Fair Unrealized Fair Unrealized
in millions Value Losses Value Losses Value Losses
SECURITIES AVAILABLE FOR SALE
Collateralized mortgage obligations:
Commercial mortgage-backed securities $ 4 $ 5 $ 16 $19 $ 20 $24
Agency collateralized mortgage obligations 4,502 48 999 23 5,501 71
Other mortgage-backed securities 63 1 49 1 112 2
Total temporarily impaired securities $4,569 $54 $1,064 $43 $5,633 $97
Year ended December 31,
in millions 2004 2003 2002
Realized gains $43 $48 $34
Realized losses 39 37 28
Net securities gains $4 $11 $ 6
The following table summarizes Key’s securities that were in an unrealized loss position.
The amortized cost, unrealized gains and losses, and approximate fair value of Key’s investment securities and securities available for sale were as follows:
6. SECURITIES
December 31, 2004 2003
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
in millions Cost Gains Losses Value Cost Gains Losses Value
SECURITIES AVAILABLE FOR SALE
U.S. Treasury, agencies and corporations $ 227 — — $ 227 $63 $1 — $64
States and political subdivisions 21 $ 1 — 22 23 — — 23
Collateralized mortgage obligations 6,460 5 $95 6,370 6,696 33 $123 6,606
Other mortgage-backed securities 322 10 2 330 453 18 2 469
Retained interests in securitizations 103 90 — 193 105 70 — 175
Other securities 298 11 — 309 288 13 — 301
Total securities available for sale $7,431 $117 $97 $7,451 $7,628 $135 $125 $7,638
INVESTMENT SECURITIES
States and political subdivisions $58 $3 — $61 $83 $6 — $ 89
Other securities 13 — — 13 15 — — 15
Total investment securities $71 $3 — $74 $98 $6 — $104