KeyBank 2005 Annual Report Download - page 71

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70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
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Education
dollars in millions Loans
Fair value of retained interests $214
Weighted-average life (years) 1.1 — 9.0
PREPAYMENT SPEED
ASSUMPTIONS (ANNUAL RATE) 4.00% — 30.00%
Impact on fair value of 1% CPR adverse change $ (8)
Impact on fair value of 2% CPR adverse change (14)
EXPECTED CREDIT
LOSSES (STATIC RATE) .10% — 20.00%
Impact on fair value of .25% adverse change $(4)
Impact on fair value of .50% adverse change (8)
RESIDUAL CASH FLOWS
DISCOUNT RATE (ANNUAL RATE) 8.50% — 12.00%
Impact on fair value of 1% adverse change $ (7)
Impact on fair value of 2% adverse change (16)
EXPECTED STATIC
DEFAULT (STATIC RATE) 5.00% — 25.00%
Impact on fair value of 1% adverse change $(20)
Impact on fair value of 2% adverse change (40)
VARIABLE RETURNS TO TRANSFEREES
(a)
These sensitivities are hypothetical and should be relied upon with caution. Sensitivity
analysis is based on the nature of the asset, the seasoning (i.e., age and payment history)
of the portfolio and the results experienced. Changes in fair value based on a 1% variation
in assumptions generally cannot be extrapolated because the relationship of the change
in assumption to the change in fair value may not be linear. Also, the effect of a variation
in a particular assumption on the fair value of the retained interest is calculated without
changing any other assumption; in reality, changes in one factor may cause changes in
another. For example, increases in market interest rates may result in lower prepayments
and increased credit losses, which might magnify or counteract the sensitivities.
a
Forward London Interbank Offered Rate (known as “LIBOR”) plus contractual spread over
LIBOR ranging from .01% to 1.30%, or Treasury plus contractual spread over Treasury
ranging from .65% to 1.00%, or fixed-rate yield.
CPR = Constant Prepayment Rate
8. LOAN SECURITIZATIONS, SERVICING AND VARIABLE INTEREST ENTITIES
RETAINED INTERESTS IN
LOAN SECURITIZATIONS
Key sells education loans in securitizations. A securitization involves the
sale of a pool of loan receivables to investors through either a public or
private issuance (generally by a qualifying SPE) of asset-backed securities.
Generally, the assets are transferred to a trust that sells interests in the
form of certificates of ownership.
In some cases, Key retains an interest in securitized loans that may take
the form of an interest-only strip, residual asset, servicing asset or
security. Additional information pertaining to Key’s retained interests is
disclosed in Note 1 (“Summary of Significant Accounting Policies”) under
the heading “Loan Securitizations” on page 59.
Key securitized and sold $976 million of education loans (including
accrued interest) in 2005 and $1.1 billion in 2004. The securitizations
resulted in an aggregate gain of $19 million in 2005 (from gross cash
proceeds of $1.0 billion) and $17 million in 2004 (from gross cash
proceeds of $1.1 billion). In these transactions, Key retained residual
interests in the form of servicing assets and interest-only strips. In the 2005
securitization, Key retained servicing assets of $7 million and interest-only
strips of $34 million. In the 2004 securitization, Key retained servicing
assets of $8 million and interest-only strips of $19 million.
Management uses certain assumptions and estimates to determine the
fair value to be allocated to retained interests at the date of transfer and
at subsequent measurement dates. Primary economic assumptions used
to measure the fair value of Key’s retained interests in education loans
and the sensitivity of the current fair value of residual cash flows to
immediate adverse changes in those assumptions at December 31,
2005, are as follows:
Changes in the allowance for loan losses are summarized as follows:
Year ended December 31,
in millions 2005 2004 2003
Balance at beginning of year $1,138 $1,406 $1,452
Charge-offs (409) (583) (678)
Recoveries 94 152 130
Net loans charged off (315) (431) (548)
Provision for loan losses 143 185 501
Reclassification of allowance
for credit losses on lending-
related commitments
a
—(70) —
Allowance related to loans
acquired, net —48 —
Foreign currency
translation adjustment ——1
Balance at end of year $ 966 $1,138 $1,406
a
Included in “accrued expense and other liabilities” on the consolidated balance sheet.
Changes in the allowance for credit losses on lending-related commitments
are summarized as follows:
Year ended December 31,
in millions 2005 2004
Balance at beginning of year $66 —
Reclassification of allowance
for credit losses —$70
Credit for losses on lending-
related commitments (7) (4)
Balance at end of year
a
$59 $66
a
Included in “accrued expense and other liabilities” on the consolidated balance sheet.