NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES 7. LOANS 8. LOAN SECURITIZATIONS AND VARIABLE INTEREST ENTITIES RETAINED INTERESTS IN  LOAN SECURITIZATIONS 63 PREVIOUS PAGE SEARCH BACK TO CONTENTS NEXT PAGE In accordance with Interpretation No. 46, “Consolidation of Variable Interest Entities,” Key’s securitization trusts are exempt from consolidation. Key securitized and sold $1.0 billion of education loans (including accrued interest) in 2003 and $792 million in 2002. The securitizations resulted in an aggregate gain of $12 million in 2003 (from gross cash proceeds of $1.0 billion) and $7 million in 2002 (from gross cash proceeds of $799 million). In these transactions, Key retained residual interests in the form of servicing assets and interest-only strips. During 2003, Key retained servicing assets of $6 million and interest-only strips of $17 million. During 2002, Key retained servicing assets of $6 million and interest-only strips of $26 million. Additionally, in 2003, Key repurchased the remaining loans outstanding in the automobile trust for an immaterial amount.  Key sells certain types of loans in securitizations. A securitization involves the sale of a pool of loan receivables to investors through either a public or private issuance 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 the securitized loans. Certain assumptions and estimates are used to determine the fair value allocated to these retained interests at the date of transfer and at subsequent measurement dates. These assumptions and estimates include loan repayment rates, projected charge-offs and discount rates commensurate with the risks involved. Additional information pertaining to Key’s residual interests is disclosed in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Loan Securitizations” on page 52. For more information on Interpretation No. 46, see the following section entitled “Variable Interest Entities,” which begins on page 64, and Note 1 under the headings “Basis of Presentation” on page 50 and “Accounting Pronouncements Adopted in 2003” on page 55. Key uses interest rate swaps to manage interest rate risk; these swaps modify the repricing and maturity characteristics of certain loans. For more information about such swaps, see Note 19 (GLYPH<210>Derivatives and Hedging ActivitiesGLYPH<211>), which begins on page 80. Changes in the allowance for loan losses are summarized as follows: Minimum future lease payments to be received at December 31, 2003, are as follows:  2004 GLYPH<209> $2.0 billion; 2005 GLYPH<209> $1.3 billion; 2006 GLYPH<209> $850 million; 2007 GLYPH<209> $525 million;  2008 GLYPH<209> $414 million; and all subsequent years GLYPH<209> $274 million. Key’s loans by category are summarized as follows: Commercial and consumer lease financing receivables in the preceding table are primarily direct financing leases, but also include leveraged leases and operating leases. The composition of the net investment in direct financing leases is as follows: Year ended December 31, in millions 2003 2002 2001 Balance at beginning of year $1,452 $1,677 $1,001 Charge-offs (678) (905) (784) Recoveries 130 125 111 Net charge-offs (548) (780) (673) Provision for loan losses 501 553 1,350 Allowance related to loans  acquired (sold), net GLYPH<209> 2 (1) Foreign currency  translation adjustment 1 GLYPH<209> GLYPH<209> Balance at end of year $1,406 $1,452 $1,677 December 31, in millions 2003 2002 Commercial, GLYPH<222>nancial and agricultural $17,012 $17,425 Commercial real estate: Commercial mortgage 5,677 6,015 Construction 4,978 5,659 Total commercial real estate loans 10,655 11,674 Commercial lease GLYPH<222>nancing 8,522 7,513 Total commercial loans 36,189 36,612 Real estate GLYPH<209> residential mortgage 1,613 1,968 Home equity 15,038 13,804 Consumer GLYPH<209> direct 2,119 2,161 Consumer GLYPH<209> indirect: Automobile lease GLYPH<222>nancing 305 873 Automobile loans 2,025 2,181 Marine 2,506 2,088 Other 542 667 Total consumer GLYPH<209> indirect loans 5,378 5,809 Total consumer loans 24,148 23,742 Loans held for sale: Commercial, GLYPH<222>nancial and agricultural GLYPH<209> 41 Real estate GLYPH<209> commercial mortgage 154 193 Real estate GLYPH<209> residential mortgage 18 57 Education 2,202 1,812 Total loans held for sale 2,374 2,103 Total loans $62,711 $62,457 December 31, in millions 2003 2002 Direct GLYPH<222>nancing lease receivable $5,370 $5,384 Unearned income (550) (639) Unguaranteed residual value 513 637 Deferred fees and costs 44 38 Net investment in direct GLYPH<222>nancing leases $5,377 $5,420