KeyBank 2006 Annual Report Download - page 51

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51
MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES
During the first quarter of 2004, Key reclassified $70 million of its
allowance for loan losses to a separate allowance for probable credit losses
inherent in lending-related commitments. Earnings for 2004 and prior
period balances were not affected by this reclassification. The separate
allowance is included in “accrued expense and other liabilities” on the
balance sheet and totaled $53 million at December 31, 2006, compared
to $59 million at December 31, 2005. Management establishes the
amount of this allowance by considering both historical trends and
current market conditions quarterly, or more often if deemed necessary.
Management estimates the appropriate level of the allowance for
loan losses on a quarterly (and at times more frequent) basis. The
methodology used is described in Note 1 (“Summary of Significant
Accounting Policies”) under the heading “Allowance for Loan Losses”
on page 69. Briefly, management estimates the appropriate level of
Key’s allowance for loan losses by applying historical loss rates to
existing loans with similar risk characteristics and by exercising judgment
to assess the impact of factors such as changes in economic conditions,
changes in credit policies or underwriting standards, and changes in the
level of credit risk associated with specific industries and markets. For
an impaired loan, special treatment exists if the outstanding balance is
greater than $2.5 million and the resulting allocation is deemed
insufficient to cover the extent of the impairment. In such cases, a
specific allowance is assigned to the loan. A specific allowance may
be assigned even when sources of repayment appear sufficient if
management remains uncertain about whether the loan will be repaid
in full. The aggregate balance of the allowance for loan losses at
December 31, 2006, represents management’s best estimate of the
losses inherent in the loan portfolio at that date.
As shown in Figure 31, Key’s allowance for loan losses decreased by
$22 million, or 2%, during 2006. This reduction was attributable to
improving credit quality trends, as well as the third quarter 2006
transfer of $2.5 billion of home equity loans from the loan portfolio
to loans held for sale in connection with Key’s expected sale of the
Champion Mortgage finance business.
December 31, 2006 2005 2004
Percent of Percent of Percent of Percent of Percent of Percent of
Allowance Loan Type Allowance Loan Type Allowance Loan Type
to Total to Total to Total to Total to Total to Total
dollars in millions Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans
Commercial, financial and agricultural $341 36.1% 32.5% $338 35.0% 31.0% $ 385 33.8% 29.6%
Real estate — commercial mortgage 170 18.0 12.8 168 17.4 12.6 178 15.6 12.8
Real estate — construction 132 14.0 12.5 94 9.7 10.7 99 8.7 8.7
Commercial lease financing 139 14.7 15.6 183 19.0 15.5 258 22.7 16.0
Total commercial loans 782 82.8 73.4 783 81.1 69.8 920 80.8 67.1
Real estate — residential mortgage 12 1.3 2.2 13 1.3 2.2 15 1.3 2.3
Home equity 74 7.8 16.4 95 9.8 20.3 101 8.9 22.2
Consumer — direct 29 3.1 2.3 31 3.2 2.7 39 3.4 3.1
Consumer — indirect 47 5.0 5.7 44 4.6 5.0 63 5.6 5.3
Total consumer loans 162 17.2 26.6 183 18.9 30.2 218 19.2 32.9
Total $944 100.0% 100.0% $966 100.0% 100.0% $1,138 100.0% 100.0%
2003 2002
Percent of Percent of Percent of Percent of
Allowance Loan Type Allowance Loan Type
to Total to Total to Total to Total
dollars in millions Amount Allowance Loans Amount Allowance Loans
Commercial, financial and agricultural $ 515 36.6% 27.3% $ 577 39.7% 28.0%
Real estate — commercial mortgage 237 16.9 10.6 272 18.7 11.1
Real estate — construction 132 9.4 8.3 152 10.5 9.5
Commercial lease financing 286 20.3 13.3 255 17.6 11.7
Total commercial loans 1,170 83.2 59.5 1,256 86.5 60.3
Real estate — residential mortgage 17 1.2 2.8 15 1.0 3.3
Home equity 110 7.8 25.2 89 6.1 23.1
Consumer — direct 41 2.9 3.5 32 2.3 3.6
Consumer — indirect 68 4.9 9.0 60 4.1 9.7
Total consumer loans 236 16.8 40.5 196 13.5 39.7
Total $1,406 100.0% 100.0% $1,452 100.0% 100.0%
FIGURE 31. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
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