KeyBank 2006 Annual Report Download - page 98

98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
Loan commitments involve credit risk not reflected on Key’s balance
sheet. Key mitigates exposure to credit risk with internal controls that
guide how applications for credit are reviewed and approved, how
credit limits are established and, when necessary, how demands for
collateral are made. In particular, Key evaluates the credit-worthiness of
each prospective borrower on a case-by-case basis and, when
appropriate, adjusts the allowance for probable credit losses inherent in
all commitments. Additional information pertaining to this allowance
is included in Note 1 (“Summary of Significant Accounting Policies”)
under the heading “Allowance for Credit Losses on Lending-Related
Commitments” on page 69.
The following table shows the remaining contractual amount of each
class of commitments related to extensions of credit or the funding of
principal investments as of the date indicated. For loan commitments and
commercial letters of credit, this amount represents Key’s maximum
possible accounting loss if the borrower were to draw upon the full
amount of the commitment and then subsequently default on payment
for the total amount of the then outstanding loan.
LEGAL PROCEEDINGS
Residual value insurance litigation. Key has previously reported on its
on-going litigation with Swiss Reinsurance America Corporation (“Swiss
Re”) in the United States Federal District Court in Ohio relating to
insurance coverage of the residual value of certain automobile leases
through Key Bank USA (the “Residual Value Litigation”).
As previously reported, on February 13, 2007, Key and Swiss Re
entered into an agreement to settle the Residual Value Litigation,
subject to certain conditions. On February 16, 2007, the conditions to
settlement were satisfied. Under the settlement agreement, Swiss Re will
pay Key $279 million in two installments: $50 million on March 15,
2007, and $229 million on June 29, 2007. As a result of the settlement,
Key will record a one-time gain of approximately $26 million ($17
million after tax, or $.04 per diluted common share), representing the
difference between the proceeds received and the receivable recorded on
Key’s balance sheet.
Other litigation.In the ordinary course of business, Key is subject to legal
actions that involve claims for substantial monetary relief. Based on
information presently known to management, management does not
believe there is any legal action to which KeyCorp or any of its subsidiaries
is a party, or involving any of their properties, that, individually or in the
aggregate, could reasonably be expected to have a material adverse effect
on Key’s financial condition.
TAX CONTINGENCY
In the ordinary course of business, Key enters into certain transactions
that have tax consequences. On occasion, the IRS may challenge a
particular tax position taken by Key. The IRS has completed its review
of Key’s tax returns for the 1995 through 2000 tax years and has
disallowed all LILO deductions taken in the 1995 through 1997 tax years
and all deductions taken in the 1998 through 2000 tax years that
relate to certain lease financing transactions. In addition, the IRS is
currently conducting audits of the 2001 through 2003 tax years. Key
expects that the IRS will disallow all similar deductions taken in those
years. Further information on Key’s position on these matters and on the
potential implications to Key is included in Note 17 (“Income Taxes”)
under the heading “Lease Financing Transactions” on page 96.
GUARANTEES
Key is a guarantor in various agreements with third parties. The
following table shows the types of guarantees that Key had outstanding
at December 31, 2006. Information pertaining to the basis for
determining the liabilities recorded in connection with these guarantees
is included in Note 1 (“Summary of Significant Accounting Policies”)
under the heading “Guarantees” on page 71.
Standby letters of credit. These instruments, issued on behalf of clients,
obligate Key to pay a specified third party when a client fails to repay
an outstanding loan or debt instrument, or fails to perform some
contractual nonfinancial obligation. Many of Key’s lines of business issue
standby letters of credit to address clients’ financing needs. Any amounts
drawn under standby letters of credit are treated as loans; they bear
interest (generally at variable rates) and pose the same credit risk to Key
as a loan. At December 31, 2006, Key’s standby letters of credit had a
remaining weighted-average life of approximately 2.6 years, with
remaining actual lives ranging from less than one year to as many as
twelve years.
December 31,
in millions 2006 2005
Loan commitments:
Commercial and other $24,747 $25,104
Home equity 7,688 7,331
Commercial real estate
and construction 7,524 6,456
Total loan commitments 39,959 38,891
When-issued and to be announced
securities commitments 671 2,222
Commercial letters of credit 246 336
Principal investing commitments 244 214
Liabilities of certain limited partnerships
and other commitments 140 58
Total loan and other commitments $41,260 $41,721
Maximum Potential
Undiscounted Liability
in millions Future Payments Recorded
Financial guarantees:
Standby letters of credit $13,294 $34
Credit enhancement for asset-backed
commercial paper conduit 28 —
Recourse agreement with FNMA 619 8
Return guarantee agreement
with LIHTC investors 421 43
Default guarantees 12 1
Written interest rate caps
a
80 5
Total $14,454 $91
a
As of December 31, 2006, the weighted-average interest rate of written interest rate
caps was 5.1% and the weighted-average strike rate was 5.5%. Maximum potential
undiscounted future payments were calculated assuming a 10% interest rate.
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