KeyBank 2006 Annual Report Download - page 84

84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
Additional information pertaining to the accounting for mortgage and
other servicing assets is included in Note 1 under the heading “Servicing
Assets” on page 69.
VARIABLE INTEREST ENTITIES
AVIE is a partnership, limited liability company, trust or other legal
entity that meets any one of the following criteria:
• The entity does not have sufficient equity to conduct its activities
without additional subordinated financial support from another party.
• The entity’s investors lack the authority to make decisions about the
activities of the entity through voting rights or similar rights, as
well as the obligation to absorb the entity’s expected losses and the
right to receive the entity’s expected residual returns.
• The voting rights of some investors are not proportional to their
economic interest in the entity, and substantially all of the entity’s
activities involve or are conducted on behalf of investors with
disproportionately few voting rights.
Revised Interpretation No. 46 requires a VIE to be consolidated by the
party that is exposed to a majority of the VIE’s expected losses and/or
residual returns (i.e., the primary beneficiary). However, parties that
transfer assets to qualifying special purpose entities meeting the
requirements of SFAS No. 140 areexempt from Revised Interpretation
No. 46. As a result, substantially all of Key’s securitization trusts are
exempt from consolidation. Interests in securitization trusts formed by
Key that do not qualify for this exception areinsignificant. Information
related to Key’s consolidation of VIEs is included in Note 1 under the
heading “Basis of Presentation” on page 67.
Key adopted Revised Interpretation No. 46 effective March 31, 2004. The
Interpretation did not have a material effect on Key’s financial condition
or results of operations.
Key’s involvement with VIEs is described below.
Consolidated VIEs
Commercial paper conduit. Key, among others, refers third-party assets
and borrowers and provides liquidity and credit enhancement to an
asset-backed commercial paper conduit. At December 31, 2006, the
conduit had assets of $195 million, of which $188 million arerecorded
in “loans;” nearly all the rest are recorded in “securities available for sale”
on the balance sheet. These assets serve as collateral for the conduit’s
obligations to commercial paper holders. The commercial paper holders
have no recourse to Key’s general credit other than through Key’s
committed credit enhancement facility of $28 million.
Additional information pertaining to Key’s involvement with the conduit
is included in Note 18 (“Commitments, Contingent Liabilities and
Guarantees”) under the heading “Guarantees” on page 98 and the
heading “Other Off-Balance Sheet Risk” on page 99.
Low-Income Housing Tax Credit (“LIHTC”) guaranteed funds. Key
Affordable Housing Corporation (“KAHC”) formed limited partnerships
(funds) that invested in LIHTC operating partnerships. Interests in these
funds were offered in syndication to qualified investors who paid a fee to
KAHC for a guaranteed return. Key also earned syndication fees from these
funds and continues to earn asset management fees. The funds’ assets
primarily are investments in LIHTC operating partnerships, which totaled
$330 million at December 31, 2006. These investments are recorded in
“accrued income and other assets” on the balance sheet and serve as
collateral for the funds’ limited obligations. In October 2003, Key ceased
to form new funds or add LIHTC partnerships. However, Key continues
to act as asset manager and provides occasional funding for existing
funds under a guarantee obligation. Additional information on return
guarantee agreements with LIHTC investors is summarized in Note 18
under the heading “Guarantees.”
The partnership agreement for each guaranteed fund requires the fund to
be dissolved by a certain date. In accordance with SFAS No. 150,
“Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity,” the noncontrolling interests associated with these
funds are considered mandatorily redeemable instruments and are
recorded in “accrued expense and other liabilities” on the balance sheet.
The FASB has indefinitely deferred the measurement and recognition
provisions of SFAS No. 150 for mandatorily redeemable noncontrolling
interests associated with finite-lived subsidiaries. Key currently accounts
for these interests as minority interests and adjusts the financial statements
each period for the investors’ share of the funds’ profits and losses. At
December 31, 2006, the settlement value of these noncontrolling interests
was estimated to be between $355 million and $421 million, while the
recorded value, including reserves, totaled $345 million.
Unconsolidated VIEs
LIHTC nonguaranteed funds. Although Key holds significant interests in
certain nonguaranteed funds that Key formed and funded, management
has determined that Key is not the primarybeneficiaryof those funds. At
December 31, 2006, assets of these unconsolidated nonguaranteed funds
wereestimated to be $186 million. Key’s maximum exposure to loss in
connection with these funds is minimal. In October 2003, management
elected to cease forming these funds.
LIHTC investments.Through the Community Banking line of business,
Key has made investments directly in LIHTC operating partnerships
formed by third parties. As a limited partner in these operating
partnerships, Key is allocated tax credits and deductions associated with
the underlying properties. At December 31, 2006, assets of these
unconsolidated LIHTC operating partnerships totaled approximately
$748 million. Key’s maximum exposure to loss in connection with these
partnerships is the unamortized investment balance of $163 million at
December 31, 2006, plus $63 million of tax credits claimed, but subject
to recapture. In 2006, Key did not obtain significant direct investments
(either individually or in the aggregate) in LIHTC operating partnerships.
Key has additional investments in unconsolidated LIHTC operating
partnerships as a result of consolidating the LIHTC guaranteed funds
discussed above. Total assets of these operating partnerships are
approximately $1.8 billion at December 31, 2006. The tax credits and
deductions associated with these properties are allocated to the funds’
investors based on their ownership percentages. Information regarding
Key’s exposure to loss in connection with these guaranteed funds is
included in Note 18 under the heading “Return guarantee agreement
with LIHTC investors” on page 99.
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