KeyBank 2005 Annual Report Download - page 59

Trading account securities. These are debt and equity securities that are
purchased and held by Key with the intent of selling them in the near
term, and certain interests retained in loan securitizations. All of these
assets are reported at fair value ($850 million at December 31, 2005, and
$863 million at December 31, 2004) and are included in “short-term
investments” on the balance sheet. Realized and unrealized gains and
losses on trading account securities are reported in “investment banking
and capital markets income” on the income statement.
Securities available for sale. These are securities that Key intends to hold
for an indefinite period of time and that may be sold in response to
changes in interest rates, prepayment risk, liquidity needs or other
factors. Securities available for sale, which include debt and marketable
equity securities with readily determinable fair values, are reported at fair
value. Unrealized gains and losses (net of income taxes) deemed
temporary are recorded in shareholders’ equity as a component of
“accumulated other comprehensive loss” on the balance sheet. Unrealized
losses on specific securities deemed to be “other-than-temporary” are
included in “net securities gains (losses)” on the income statement, as are
actual gains and losses resulting from the sales of specific securities.
Additional information regarding unrealized gains and losses on debt and
marketable equity securities with readily determinable fair values is
included in Note 6 (“Securities”), which begins on page 68.
Investment securities. These are debt securities that Key has the intent
and ability to hold until maturity. Debt securities are carried at cost,
adjusted for amortization of premiums and accretion of discounts
using the interest method. This method produces a constant rate of return
on the adjusted carrying amount.
Other investments. Principal investments — investments in equity and
mezzanine instruments made by Key’s Principal Investing unit — represent
the majority of other investments. These securities, which include direct and
indirect investments — predominantly in privately held companies —
are carried at fair value ($800 million at December 31, 2005, and $816
million at December 31, 2004). (Direct investments are those made in a
particular company, while indirect investments are made through funds that
include other investors.) Changes in estimated fair values and actual gains
and losses on sales of principal investments are included in “investment
banking and capital markets income” on the income statement.
In addition to principal investments, “other investments” include other
equity and mezzanine instruments that do not have readily determinable
fair values. These securities include certain real estate-related investments
that are carried at estimated fair value, as well as other types of securities
that generally are carried at cost. The carrying amount of the securities
carried at cost is adjusted for declines in value that are considered to be
other-than-temporary. These adjustments are included in “investment
banking and capital markets income” on the income statement.
LOANS
Loans are carried at the principal amount outstanding, net of unearned
income, including net deferred loan fees and costs. Key defers certain
nonrefundable loan origination and commitment fees, and the direct costs
of originating or acquiring loans. The net deferred amount is amortized
over the estimated lives of the related loans as an adjustment to the yield.
Direct financing leases are carried at the aggregate of lease payments
receivable plus estimated residual values, less unearned income and
deferred initial direct costs. Unearned income on direct financing leases
is amortized over the lease terms using methods that approximate the
interest method. This method amortizes unearned income to produce a
constant rate of return on the lease. Deferred initial direct costs are
amortized over the lease term as an adjustment to the yield.
Leveraged leases are carried net of nonrecourse debt. Revenue on leveraged
leases is recognized on a basis that produces a constant rate of return on
the outstanding investment in the lease, net of related deferred tax
liabilities, in the years in which the net investment is positive.
The residual value component of a lease represents the estimated fair
value of the leased asset at the end of the lease term. Key relies on
industry data, historical experience, independent appraisals and the
experience of its equipment leasing asset management team to establish
residual value estimates. The asset management team is familiar with the
life cycle of the equipment and pending product upgrades, and has insight
into competing products due to their relationships with a number of
equipment vendors. This information is factored into the applicable
residual value estimates.
In accordance with SFAS No. 13, “Accounting for Leases,” residual
values are reviewed at least annually to determine if there has been an
other-than-temporary decline in value. This review is conducted using
the same sources of knowledge and techniques as those described
above. If a decline occurs and is considered to be other-than-temporary,
the residual value is adjusted to its fair value. Impairment charges, as well
as net gains or losses on sales of lease residuals, are included in “other
income” on the income statement.
LOANS HELD FOR SALE
At December 31, 2005, loans held for sale included education, mortgage,
commercial, construction and automobile loans. These loans, which
management has a positive intent to sell, are carried at the lower of
aggregate cost or fair value. Fair value is determined based on prevailing
market prices for loans with similar characteristics. If a loan is transferred
from the loan portfolio to the held for sale category, any writedown in
the carrying amount of the loan at the date of transfer is recorded as a
charge-off. Subsequent declines in fair value are recognized either as a
charge-off or as noninterest expense, depending on the length of time the
loan has been recorded as held for sale. When a loan is placed in the held
for sale category, amortization of the related deferred fees and costs is
discontinued. The remaining unamortized fees and costs are recognized
as part of the cost basis of the loan at the time it is sold.
IMPAIRED AND OTHER NONACCRUAL LOANS
Key generally will stop accruing interest on a loan (i.e., designate the loan
“nonaccrual”) when the borrower’s payment is 90 days or more past
due, unless the loan is well-secured and in the process of collection.
Loans are also placed on nonaccrual status when payment is not past
due but management has serious doubts about the borrower’s ability to
comply with existing loan repayment terms. Once a loan is designated
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
NEXT PAGEPREVIOUS PAGE SEARCH BACK TO CONTENTS