9. Variable Interest Entities

A VIE is a partnership, limited liability company, trust, or other legal entity that meets any one of the following criteria:

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The entity does not have sufficient equity to conduct its activities without additional subordinated financial support from another party.

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The entity’s investors lack the power to direct the activities that most significantly impact the entity’s economic performance.

•

The entity’s equity at risk holders do not have the obligation to absorb losses or the right to receive residual returns.

•

The voting rights of some investors are not proportional to their economic interests in the entity, and substantially all of the entity’s activities involve, or are conducted on behalf of, investors with disproportionately few voting rights.

Our VIEs are summarized below. We define a “significant interest” in a VIE as a subordinated interest that exposes us to a significant portion, but not the majority, of the VIE’s expected losses or residual returns, even though we do not have the power to direct the activities that most significantly impact the entity’s economic performance.

On September 30, 2014, we sold the residual interests in all of our outstanding education loan securitization trusts and therefore no longer have a significant interest in those trusts. We deconsolidated the securitization trusts as of September 30, 2014, and removed the trust assets and liabilities from our balance sheet. Further information regarding these education loan securitization trusts is provided in Note 11 (“Acquisitions and Discontinued Operations”) under the heading “Education lending.”


	Consolidated VIEs				Unconsolidated VIEs
	Total		Total		Total		Total		Maximum
in millions	Assets		Liabilities		Assets		Liabilities		Exposure to Loss
March 31, 2015
LIHTC funds	$	1	$	2	$	55		—		—
LIHTC investments		N/A		N/A		1,355	$	4	$	509
December 31, 2014
LIHTC funds	$	1	$	1	$	55		—		—
LIHTC investments		N/A		N/A		1,234	$	4	$	521
March 31, 2014
LIHTC funds	$	15	$	15	$	97		—		—
Education loan securitization trusts		1,912		1,816		N/A		N/A		N/A
LIHTC investments		N/A		N/A		1,595	$	5	$	492

Our involvement with VIEs is described below.

Consolidated VIEs

LIHTC guaranteed funds. KAHC formed limited partnership 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. We also earned syndication fees from the guaranteed funds and continue to earn asset management fees. The guaranteed funds’ assets, primarily investments in LIHTC operating partnerships, totaled less than $1 million at March 31, 2015, $5 million at December 31, 2014, and $12 million at March 31, 2014. These investments are recorded in “accrued income and other assets” on the balance sheet and serve as collateral for the guaranteed funds’ limited obligations.

We have not formed new guaranteed funds or added LIHTC partnerships since October 2003. However, we continue to act as asset manager and to provide occasional funding for existing funds under a guarantee obligation. As a result of this guarantee obligation, we have determined that we are the primary beneficiary of these guaranteed funds. Additional information on return guarantee agreements with LIHTC investors is presented in Note 15 (“Contingent Liabilities and Guarantees”) under the heading “Guarantees.”

In accordance with the applicable accounting guidance for distinguishing liabilities from equity, third-party interests associated with our LIHTC guaranteed funds are considered mandatorily redeemable instruments and are recorded in “accrued expense and other liabilities” on the balance sheet. However, the FASB has indefinitely deferred the measurement and recognition provisions of this accounting guidance for mandatorily redeemable third-party interests associated with finite-lived subsidiaries, such as our LIHTC guaranteed funds. We adjust our financial statements each period for the third-party investors’ share of the guaranteed funds’ profits and losses. At March 31, 2015, we estimated the settlement value of these third-party interests to be between zero and $4 million, while the recorded value, including reserves, totaled $5 million. The partnership agreement for each of our guaranteed funds requires the fund to be dissolved by a certain date.

Unconsolidated VIEs

LIHTC nonguaranteed funds. Although we hold interests in certain nonguaranteed funds that we formed and funded, we have determined that we are not the primary beneficiary because we do not absorb the majority of the funds’ expected losses and do not have the power to direct activities that most significantly influence the economic performance of these entities. Assets of these unconsolidated nonguaranteed funds totaled $55 million at March 31, 2015, and December 31, 2014, and $97 million at March 31, 2014. Our maximum exposure to loss in connection with these funds is minimal, and we do not have any liability recorded related to the funds. We have not formed nonguaranteed funds since October 2003.

LIHTC investments. Through Key Community Bank, we have made investments directly in LIHTC operating partnerships formed by third parties. As a limited partner in these operating partnerships, we are allocated tax credits and deductions associated with the underlying properties. We have determined that we are not the primary beneficiary of these investments because the general partners have the power to direct the activities that most significantly influence the economic performance of their respective partnerships and have the obligation to absorb expected losses and the right to receive benefits. Assets of these unconsolidated LIHTC operating partnerships totaled approximately $885 million at March 31, 2015, $764 million at December 31, 2014, and $826 million at March 31, 2014. At March 31, 2015, our maximum exposure to loss in connection with these partnerships is the unamortized investment balance of $397 million plus $108 million of tax credits claimed but subject to recapture and $4 million of tax credits with a return guarantee agreement with LIHTC investors. We do not have any liability recorded related to these investments because we believe the likelihood of any loss is remote. We have not obtained any significant direct investments (either individually or in the aggregate) in LIHTC operating partnerships since September 2003.

We have additional investments in unconsolidated LIHTC operating partnerships that are held by the consolidated LIHTC guaranteed funds. Total assets of these operating partnerships were approximately $470 million at March 31, 2015, and December 31, 2014, and $769 million at March 31, 2014. The tax credits and deductions associated with these properties are allocated to the funds’ investors based on their ownership percentages. We have determined that we are not the primary beneficiary of these partnerships because the general partners have the power to direct the activities that most significantly impact their economic performance, and the obligation to absorb expected losses and right to receive residual returns. Information regarding our exposure to loss in connection with these guaranteed funds is included in Note 15 under the heading “Return guarantee agreement with LIHTC investors.”

We amortize these investments over the period that we expect to receive the tax benefits. During the first three months of 2015, we recognized $25 million of amortization and $28 million of tax credits associated with these investments within income taxes on our Consolidated Statements of Income. During the first three months of 2014, we recognized $24 million of amortization and $27 million of tax credits associated with these investments within income taxes on our Consolidated Statements of Income. At March 31, 2015, and March 31, 2014, we had $1 billion and $960 million of investments in LIHTC, respectively. These investments are reflected in accrued income and other assets on our Consolidated Balance Sheets.

Commercial and residential real estate investments and principal investments. Our Principal Investing unit and the Real Estate Capital line of business make equity and mezzanine investments, some of which are in VIEs. These investments are held by nonregistered investment companies subject to the provisions of the AICPA Audit and Accounting Guide, “Audits of Investment Companies.” We currently are not applying the accounting or disclosure provisions in the applicable accounting guidance for consolidations to these investments, which remain unconsolidated. The FASB had previously deferred the effective date of this guidance for such nonregistered investment companies. New accounting guidance was issued in February 2015 that removes this deferral. The effective date for this guidance is January 1, 2016 for us. Additional information regarding this new accounting guidance is provided in Note 1 (“Summary of Significant Accounting Policies”).