KeyBank 2004 Annual Report Download - page 72

70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
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Unconsolidated VIEs
LIHTC nonguaranteed funds. Key has determined that it is not the
primary beneficiary of certain nonguaranteed funds it has formed and in
which it has invested, although it continues to hold significant interests
in those funds. At December 31, 2004, assets of these unconsolidated
nonguaranteed funds were estimated to be $343 million. Key’s maximum
exposure to loss from its involvement with these funds is minimal. In
October 2003, management elected to discontinue this program.
Business trusts issuing mandatorily redeemable preferred capital
securities. Key owns the common stock of business trusts that have issued
corporation-obligated mandatorily redeemable preferred capital securities
to third-party investors. The trusts’ only assets, which totaled $1.3
billion at December 31, 2004, are debentures issued by Key that the
trusts acquired using proceeds from the issuance of preferred securities
and common stock. The debentures are recorded in “long-term debt” and
Key’s equity interest in the business trusts is recorded in “accrued
income and other assets” on the balance sheet. Additional information
on the trusts is included in Note 13 (“Capital Securities Issued by
Unconsolidated Subsidiaries”), which begins on page 73.
LIHTC investments.Through the Retail 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, 2004, assets of these unconsolidated
LIHTC operating partnerships totaled approximately $828 million.
Key’s maximum exposure to loss from its involvement with these
partnerships is the unamortized investment balance of $164 million at
December 31, 2004, plus $54 million of tax credits claimed, but subject
to recapture. Direct interests in LIHTC operating partnerships obtained
by Key during 2004 were not significant individually or in the aggregate.
Key has additional investments in 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, 2004. The tax credits and deductions associated
with these properties are allocated to the funds’ investors based on their
ownership percentages. Key’s exposure to loss from its involvement with
these funds is discussed above. In October 2003, management elected to
discontinue this program.
Commercial and residential real estate investments and principal
investments. Through the KeyBank Real Estate Capital line of business,
Key makes mezzanine investments in construction, acquisition and
rehabilitation projects that Key has determined to be VIEs. Key receives
underwriting and other fees from these VIEs and, for certain projects, also
may provide the senior financing.
Key’s principal investing unit makes direct investments in equity and
mezzanine instruments offered by individual companies, some of which Key
has determined to be VIEs. These investments are held by nonregistered
investment companies subject to the provisions of the 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 real estate mezzanine and
principal investments, which remain unconsolidated.
Impaired loans totaled $91 million at December 31, 2004, compared
with $340 million at December 31, 2003. Impaired loans averaged
$189 million for 2004 and $492 million for 2003.
Key’s nonperforming assets were as follows:
At December 31, 2004, Key did not have any significant commitments to
lend additional funds to borrowers with loans on nonperforming status.
Key evaluates most impaired loans individually as described in Note 1
(“Summary of Significant Accounting Policies”) under the heading
“Allowance for Loan Losses” on page 56. At December 31, 2004, Key
had $38 million of impaired loans with a specifically allocated allowance
for loan losses of $12 million, and $53 million of impaired loans that
were carried at their estimated fair value without a specifically allocated
allowance. At December 31, 2003, impaired loans included $183
million of loans with a specifically allocated allowance of $73 million,
and $157 million that were carried at their estimated fair value without
a specifically allocated allowance.
9. IMPAIRED LOANS AND OTHER NONPERFORMING ASSETS
December 31,
in millions 2004 2003
Impaired loans $91 $340
Other nonaccrual loans 225 354
Total nonperforming loans 316 694
Other real estate owned (OREO) 53 61
Allowance for OREO losses (4) (4)
OREO, net of allowance 49 57
Other nonperforming assets 14 2
Total nonperforming assets $379 $753