KeyBank 2007 Annual Report Download - page 70

in proportion to, and over the period of, the estimated net servicing
income and is recorded in “other income” on the income statement.
In accordance with SFAS No. 140, the initial value of servicing assets
purchased or retained prior to January 1, 2007, was determined by
allocating the amount of the assets sold or securitized to the retained
interests and the assets sold based on their relative fair values at the date
of transfer. These servicing assets are reported at the lower of amortized
cost or fair value.
Servicing assets that Key purchases or retains in a sale or securitization
of loans are reported at the lower of amortized cost or fair value ($342
million at December 31, 2007, and $282 million at December 31, 2006)
and included in “accrued income and other assets” on the balance
sheet. Key services primarily mortgage and education loans. Servicing
assets at December 31, 2007, include $313 million related to mortgage
loan servicing and $29 million related to education loan servicing.
Servicing assets are evaluated quarterly for possible impairment. This
process involves classifying the assets based on the types of loans
serviced and their associated interest rates, and determining the fair value
of each class. If the evaluation indicates that the carrying amount of the
servicing assets exceeds their fair value, the carrying amount is reduced
through a charge to income in the amount of such excess. For the
years ended December 31, 2007, 2006 and 2005, no servicing asset
impairment occurred. Additional information pertaining to servicing
assets is included in Note 8 (“Loan Securitizations, Servicing and
Variable Interest Entities”), which begins on page 81.
PREMISES AND EQUIPMENT
Premises and equipment, including leasehold improvements, are stated
at cost less accumulated depreciation and amortization. Management
determines depreciation of premises and equipment using the straight-
line method over the estimated useful lives of the particular assets.
Leasehold improvements are amortized using the straight-line method
over the terms of the leases. Accumulated depreciation and amortization
on premises and equipment totaled $1.1 billion at December 31, 2007,
and $1.2 billion at December 31, 2006.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the amount by which the cost of net assets acquired
in a business combination exceeds their fair value. Other intangible assets
primarily are customer relationships and the net present value of future
economic benefits to be derived from the purchase of core deposits. Other
intangible assets are amortized on either an accelerated or straight-line
basis over periods ranging from five to thirty years. Goodwill and
other intangible assets deemed to have indefinite lives are not amortized.
Under SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill
and certain intangible assets are subject to impairment testing, which
must be conducted at least annually. Key’s reporting units for purposes
of this testing are its major business segments: Community Banking and
National Banking.
The first step in impairment testing is to determine the fair value of each
reporting unit. If the carrying amount of a reporting unit exceeds its fair
value, goodwill impairment may be indicated. In such a case, Key
would estimate a purchase price for the reporting unit (representing the
unit’s fair value) and then compare that hypothetical purchase price to
the fair value of the unit’s net assets (excluding goodwill). Any excess of
the estimated purchase price over the fair value of the reporting unit’s
net assets represents the implied fair value of goodwill. An impairment
loss would be recognized as a charge to earnings to the extent the
carrying amount of the reporting unit’s goodwill exceeds the implied fair
value of goodwill.
Key performs the goodwill impairment testing required by SFAS No. 142
in the fourth quarter of each year. Key’s annual goodwill impairment
testing was performed as of October 1, 2007, and management
determined that no impairment existed at that date. On December 20,
2007, Key announced its decision to cease offering Payroll Online
Services that were not of sufficient size to provide economies of scale to
compete profitably. As a result, $5 million of goodwill was written off
during the fourth quarter of 2007. On December 1, 2006, Key announced
that it sold the subprime mortgage loan portfolio held by the Champion
Mortgage finance business on November 29, 2006, and also announced
that it had entered into a separate agreement to sell Champion’s loan
origination platform. As a result, $170 million of goodwill was written
off during the fourth quarter of 2006. Key sold the Champion Mortgage
loan origination platform on February 28, 2007. Additional information
related to these transactions is included in Note 3 (“Acquisitions and
Divestitures”) under the heading “Divestitures” on page 74.
INTERNALLY DEVELOPED SOFTWARE
Key relies on both company personnel and independent contractors to
plan, develop, install, customize and enhance computer systems
applications that support corporate and administrative operations.
Software development costs, such as those related to program coding,
testing, configuration and installation, are capitalized and included in
“accrued income and other assets” on the balance sheet. The resulting
asset ($118 million at December 31, 2007, and $115 million at December
31, 2006) is amortized using the straight-line method over its expected
useful life (not to exceed five years). Costs incurred during the planning
and post-development phases of an internal software project are
expensed as incurred.
Software that is no longer used is written off to earnings immediately.
When management decides to replace software, amortization of such
software is accelerated to the expected replacement date.
DERIVATIVES USED FOR ASSET AND
LIABILITY MANAGEMENT PURPOSES
Key uses derivatives known as interest rate swaps and caps to hedge
interest rate risk. These instruments modify the repricing characteristics
of specified on-balance sheet assets and liabilities.
Key’s accounting policies related to derivatives reflect the accounting
guidance in SFAS No. 133, “Accounting for Derivative Instruments
and Hedging Activities,” and other related accounting guidance. In
accordance with this accounting guidance, all derivatives are recognized
as either assets or liabilities on the balance sheet at fair value.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES