KeyBank 2013 Annual Report Download - page 194

The trust assets can be used only to settle the obligations or securities the trusts issue; we cannot sell the assets or
transfer the liabilities. The loans in the consolidated trusts consist of both private and government-guaranteed
loans. The security holders or beneficial interest holders do not have recourse to Key. Our economic interest or
risk of loss associated with these education loan securitization trusts is approximately $126 million as of
December 31, 2013. During the third quarter of 2013, additional market participant information about projected
trends for default and recovery rates became available. Based on this information and our related internal
analysis, we adjusted certain assumptions related to valuing the loans and securities in the securitization trusts.
As a result, a $48 million after-tax loss was recognized during the third quarter of 2013 related to the fair value of
the loans and securities in the education loan securitization trusts. This loss resulted in a reduction in the value of
our economic interest in these trusts. We record all income and expense (including fair value adjustments)
through the “income (loss) from discontinued operations, net of tax” line item in our income statement.
On October 27, 2013, we purchased the government-guaranteed education loans from one of the education loan
securitization trusts pursuant to the legal terms of the particular trust. The trust used the cash proceeds from the
sale of these loans to retire the outstanding securities related to the government-guaranteed education loans. This
particular trust remains in existence and continues to maintain the private education loan portfolio and has
securities related to these loans outstanding. On December, 20, 2013, we sold substantially all of the loans we
purchased for $147 million and recognized a gain on the sale of $3 million.
At December 31, 2013, there are $140 million of loans that were purchased from three of the outstanding
securitizations trusts pursuant to the legal terms of these particular trusts. These loans are held as portfolio loans
and continue to be accounted for at fair value. These portfolio loans were valued using an internal discounted
cash flow model, which was affected by assumptions for defaults, loss severity, discount rates and prepayments.
These portfolio loans are considered to be Level 3 assets since we rely on unobservable inputs when determining
fair value. Our valuation process for these loans as well as the trust loans and securities is discussed in more
detail below. Portfolio loans accounted for at fair value had a value of $147 million at December 31, 2013, and
$157 million at December 31, 2012.
We elected to consolidate these trusts at fair value. Carrying the assets and liabilities of the trusts at fair value
better depicts our economic interest. The fair value of the assets and liabilities of the trusts is determined by
calculating the present value of the future expected cash flows. We rely on unobservable inputs (Level 3) when
determining the fair value of the assets and liabilities of the trusts because observable market data is not
available. Our valuation process is described in more detail below.
Corporate Treasury, within our Finance area, is responsible for the quarterly valuation process that determines
the fair value of the loans and securities in our education loan securitization trusts as well as our student loans
held in portfolio that are accounted for at fair value. Corporate Treasury provides these fair values to a Working
Group Committee (“the Working Group”) comprising representatives from the line of business, Credit and
Market Risk Management, Accounting, Business Finance (part of our Finance area), and Corporate Treasury.
The Working Group is a subcommittee of the Fair Value Committee that is discussed in more detail in Note 6
(“Fair Value Measurements”). The Working Group reviews all significant inputs and assumptions and approves
the resulting fair values.
The Working Group reviews actual performance trends of the loans and securities on a quarterly basis and uses
statistical analysis and qualitative measures to determine assumptions for future performance. Predictive models
that incorporate delinquency and charge-off trends along with economic outlooks assist the Working Group to
forecast future defaults. The Working Group uses this information to formulate the credit outlook for each of the
securitization trusts. Higher projected defaults, fewer expected recoveries, elevated prepayment speeds and
higher discount rates would be expected to result in a lower fair value of the loans and securities in these
securitization trusts as well as the portfolio loans at fair value. Default expectations and discount rate changes
have the most significant impact on the fair values of the loans and securities. Increased cash flow uncertainty,
whether through higher defaults and prepayments or fewer recoveries, can result in higher discount rates for use
in the fair value process for these loans and securities.
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