KeyBank 2006 Annual Report Download - page 83

83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
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 in 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 69.
Key securitized and sold $1.1 billion of education loans (including accrued
interest) in 2006 and $976 million in 2005. The securitizations resulted in
an aggregate gain of $24 million in 2006 (from gross cash proceeds of $1.1
billion) and $19 million in 2005 (from gross cash proceeds of $1.0 billion).
In both years, Key retained residual interests. In the 2006 securitization, Key
retained servicing assets of $10 million and interest-only strips of $29
million, and in the 2005 securitization, Key retained servicing assets of $7
million and interest-only strips of $34 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, 2006, are as follows:
December 31,
Loans Past Due Net Credit Losses
Loan Principal 60 Days or More During the Year
in millions 2006 2005 2006 2005 2006 2005
Education loans managed $8,211 $8,136 $178 $150 $75 $60
Less: Loans securitized 5,475 5,083 151 125 47 36
Loans held for sale or securitization 2,390 2,687 24 22 23 21
Loans held in portfolio $ 346 $ 366 $3 $3 $5 $ 3
Year ended December 31,
in millions 2006 2005
Balance at beginning of year $248 $113
Servicing retained from loan sales 15 15
Purchases 50 150
Amortization (66) (30)
Balance at end of year $247 $248
Fair value at end of year $332 $301
MORTGAGE SERVICING ASSETS
Key originates and periodically sells commercial real estate loans and
continues to service those loans 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 arebased on
current market conditions. Primaryeconomic assumptions used to
measure the fair value of Key’s mortgage servicing assets at December
31, 2006 and 2005, are as follows:
• prepayment speed generally at an annual rate of 0.00% to 25.00%;
• expected credit losses at a static rate of 2.00%; and
• residual cash flows discount rate of 8.50% to 15.00%.
dollars in millions
Fair value of retained interests $243
Weighted-average life (years) .3 — 8.1
PREPAYMENT SPEED ASSUMPTIONS (ANNUAL RATE) 4.00% — 30.00%
Impact on fair value of 1% CPR adverse change $(16)
Impact on fair value of 2% CPR adverse change (20)
EXPECTED CREDIT LOSSES (STATIC RATE) .10% — 20.00%
Impact on fair value of .25% adverse change $ (5)
Impact on fair value of .50% adverse change (11)
RESIDUAL CASH FLOWS DISCOUNT RATE (ANNUAL RATE) 8.50% — 12.00%
Impact on fair value of 1% adverse change $(10)
Impact on fair value of 2% adverse change (20)
EXPECTED STATIC DEFAULT (STATIC RATE) 5.00% — 25.00%
Impact on fair value of 1% adverse change $(32)
Impact on fair value of 2% adverse change (51)
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 .00% to 1.30%, or Treasuryplus contractual spread over
Treasuryranging from .65% to 1.00%, or fixed-rate yield.
CPR = Constant Prepayment Rate
The table below shows the relationship between the education loans Key manages and those held in the loan portfolio. Managed loans include those held
in portfolio and those securitized and sold, but still serviced by Key.Related delinquencies and net credit losses also arepresented.
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