KeyBank 2007 Annual Report Download - page 85

83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
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 primary beneficiary of
those funds. At December 31, 2007, assets of these unconsolidated
nonguaranteed funds totaled $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, 2007, assets of these
unconsolidated LIHTC operating partnerships totaled approximately
$756 million. Key’s maximum exposure to loss in connection with these
partnerships is the unamortized investment balance of $221 million at
December 31, 2007, plus $77 million of tax credits claimed but subject
to recapture. In 2007, 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 that are held by the consolidated LIHTC guaranteed funds
discussed on page 82. Total assets of these operating partnerships were
approximately $1.7 billion at December 31, 2007. 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.
Commercial and residential real estate investments and principal
investments. Key’s Principal Investing unit and the KeyBank Real Estate
Capital line of business make equity and mezzanine investments in
entities, some of which are VIEs. These investments are held by
nonregistered investment companies subject to the provisions of the
American Institute of Certified Public Accountants (“AICPA”) Audit
and Accounting Guide, “Audits of Investment Companies.” The FASB
deferred the effective date of Revised Interpretation No. 46 for such
nonregistered investment companies until the AICPA clarifies the scope of
the Audit Guide. As a result, Key is not currently applying the accounting
or disclosure provisions of Revised Interpretation No. 46 to its principal
and real estate mezzanine and equity investments, which remain
unconsolidated. As discussed in Note 1 under the heading “Accounting
Pronouncements Pending Adoption at December 31, 2007” on page 71,
in May 2007, the FASB issued Staff Position FIN 46(R)-7, which provides
an exception to the scope of Revised Interpretation No. 46 for investment
companies covered by SOP No. 07-1. Staff Position FIN 46(R)-7 will be
effective for Key upon the adoption of SOP 07-1. Additional information
regarding the status of SOP 07-1 is included in Note 1 under the heading
“Accounting Pronouncements Pending Adoption at December 31, 2007.”
9. NONPERFORMING ASSETS AND PAST DUE LOANS
Impaired loans totaled $519 million at December 31, 2007, compared
to $95 million at December 31, 2006. Impaired loans had a weighted-
average balance of $241 million for 2007, $113 million for 2006 and
$95 million for 2005.
Key’s nonperforming assets and past due loans were as follows:
At December 31, 2007, Key did not have any significant commitments to
lend additional funds to borrowers with loans on nonperforming status.
Management evaluates the collectibility of Key’s loans by applying
historical loss experience rates to loans with similar risk characteristics.
These loss rates are adjusted to reflect emerging credit trends and other
factors to determine the appropriate level of allowance for loan losses
to be allocated to each loan type. As described in Note 1 (“Summary of
Significant Accounting Policies”) under the heading “Allowance for Loan
Losses” on page 67, management conducts further analysis to determine
the probable loss content of impaired loans with larger balances.
Management does not perform a loan-specific impairment valuation for
smaller-balance, homogeneous, nonaccrual loans (shown in the preceding
table as “Other nonaccrual loans”). These typically are smaller-balance
commercial loans and consumer loans, including residential mortgages,
home equity loans and various types of installment loans.
The following table shows the amount by which loans and loans held for
sale classified as nonperforming at December 31 reduced Key’s expected
interest income.
December 31,
in millions 2007 2006
Impaired loans $519 $95
Other nonaccrual loans 168 120
Total nonperforming loans 687 215
Nonperforming loans held for sale 25 3
Other real estate owned (“OREO”)21 57
Allowance for OREO losses (2) (3)
OREO, net of allowance 19 54
Other nonperforming assets 33
a
1
Total nonperforming assets $764 $273
Impaired loans with a specifically
allocated allowance $426 $34
Specifically allocated allowance
for impaired loans 126 14
Accruing loans past due 90 days or more $231 $120
Accruing loans past due 30 through 89 days 843 644
a
Primarily investments held by the Private Equity unit within Key’s Real Estate Capital line
of business.
Year ended December 31,
in millions 2007 2006 2005
Interest income receivable under
original terms $57 $20 $20
Less: Interest income recorded
during the year 42 88
Net reduction to interest income $15 $12 $12