KeyBank 2004 Annual Report Download - page 71

69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
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MORTGAGE SERVICING ASSETS
Key originates and periodically sells commercial real estate loans that it
continues to service for the buyers. Changes in the carrying amount of
mortgage servicing assets are summarized as follows:
The fair value of mortgage servicing assets is estimated by calculating the
present value of future cash flows associated with servicing the loans.
This calculation uses a number of assumptions that are based on
current market conditions. Primary economic assumptions used to
measure the fair value of Key’s mortgage servicing assets at December 31,
2004 and 2003, are as follows:
Prepayment speed at an annual rate of 0.00% to 100.00%
Expected credit losses at a static rate of 1.00% to 2.00%
Residual cash flows discount rate of 8.50% to 15.00%
Additional information pertaining to the accounting for mortgage
servicing assets is included in Note 1 (“Summary of Significant
Accounting Policies”) under the heading “Servicing Assets” on page 57.
VARIABLE INTEREST ENTITIES
A VIE 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 ability to make decisions about the
activities of the entity through voting rights or similar rights, the
obligation to absorb the entity’s expected losses, or 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 VIEs to be consolidated by the
party who is exposed to a majority of the VIE’s expected losses and/or
residual returns (i.e., the primary beneficiary). This interpretation is
summarized in Note 1 under the headings “Basis of Presentation” on page
55 and “Accounting Pronouncements Adopted in 2004” on page 60.
Those who transfer assets to qualifying special purpose entities meeting the
requirements of SFAS No. 140, “Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities,” are exempt 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 are insignificant.
Key adopted Revised Interpretation No. 46 effective March 31, 2004.
The adoption had no material effect on Key’s balance sheet or results
of operations.
Key’s involvement with VIEs, including those consolidated and de-
consolidated and those in which Key holds a significant interest, is
described below. Key defines a “significant interest” in a VIE as a
subordinated interest that exposes Key to a significant portion, but not
the majority, of the VIE’s expected losses or residual returns.
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, 2004, the conduit
had assets of $571 million, of which $550 million are recorded in
“loans” and $20 million 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 $73 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 83 and under the
heading “Other Off-Balance Sheet Risk” on page 84.
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 are
primarily investments in LIHTC operating partnerships, which totaled
$419 million at December 31, 2004. 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, management
elected to discontinue this program. No new funds or LIHTC investments
have been added since that date; however, Key continues to act as asset
manager and provides occasional funding for existing funds. 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. Therefore, 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 mandatorily redeemable instruments and are
recorded in “accrued expense and other liabilities” on the balance sheet.
In November 2003, the FASB 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 noncontrolling interests as minority interests
and adjusts the financial statements each period for the investors’ share
of fund profits and losses. At December 31, 2004, the settlement value
of these noncontrolling interests was estimated to be between $525
million and $640 million, while the recorded value, including reserves,
totaled $415 million.
Year Ended December 31,
in millions 2004 2003
Balance at beginning of year $99 $83
Servicing retained from loan sales 13 14
Purchases 21 19
Amortization (20) (17)
Balance at end of year $113 $99
Fair value at end of year $157 $141