KeyBank 2007 Annual Report Download - page 68

specific securities deemed to be “other-than-temporary” are included in
“net securities (losses) gains” on the income statement, as are actual gains
and losses resulting from the sales of securities. Additional information
regarding unrealized gains and losses on securities available for sale is
included in Note 6 (“Securities”), which begins on page 79.
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
and classifies them as available for sale.
“Other securities” held in the available-for-sale portfolio are primarily
marketable equity securities.
Held-to-maturity 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 securities” held in the held-to-
maturity portfolio are primarily foreign bonds.
OTHER INVESTMENTS
Principal investments — investments in equity and mezzanine instruments
made by Key’s Principal Investing unit — represent 65% of other
investments at December 31, 2007. They include direct investments
(investments made in a particular company), as well as indirect investments
(investments made through funds that include other investors). Principal
investments are predominantly made in privately held companies and are
carried at fair value ($993 million at December 31, 2007, and $830
million at December 31, 2006). Changes in fair values, and actual gains
and losses on sales of principal investments are reported as “net gains from
principal investments” on the income statement.
In addition to principal investments, “other investments” include other
equity and mezzanine instruments, such as certain real estate-related
investments that are carried at fair value, as well as other types of
investments that generally are carried at cost. The carrying amount of the
investments 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.
Neither these securities nor principal investments have stated maturities.
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 a method that approximates 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, during the years in which the net investment is positive.
The residual value component of a lease represents the 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 value lease residuals. The asset
management team is familiar with the life cycle of the leased equipment and
pending product upgrades and has insight into competing products due to
the team’s relationships with a number of equipment vendors.
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 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
Key’s loans held for sale at December 31, 2007, and 2006, are disclosed
in Note 7 (“Loans and Loans Held for Sale”), which begins on page 80.
These loans, which Key originated and intends 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
write-down 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
as a charge to noninterest income. When a loan is placed in the held-for-
sale category, Key ceases to amortize the related deferred fees and costs.
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. Also, loans
are 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
nonaccrual, the interest accrued but not collected generally is charged
against the allowance for loan losses, and payments subsequently
received generally are applied to principal. However, if management
believes that all principal and interest on a nonaccrual loan ultimately
are collectible, interest income may be recognized as received.
Nonaccrual loans, other than smaller-balance homogeneous loans (i.e.,
home equity loans, loans to finance automobiles, etc.), are designated
“impaired.” Impaired loans and other nonaccrual loans are returned to
accrual status if management determines that both principal and interest
are collectible. This generally requires a sustained period of timely
principal and interest payments.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES