KeyBank 2007 Annual Report Download - page 57

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MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES
Operational risk management
Key, like all businesses, is subject to operational risk, which is the risk
of loss resulting from human error, inadequate or failed internal
processes and systems, and external events. Operational risk also
encompasses compliance (legal) risk, which is the risk of loss from
violations of, or noncompliance with, laws, rules, regulations, prescribed
practices or ethical standards. Resulting losses could take the form of
explicit charges, increased operational costs, harm to Key’s reputation
or forgone opportunities. Key seeks to mitigate operational risk through
a system of internal controls.
Management continuously strives to strengthen Key’s system of internal
controls to ensure compliance with laws, rules and regulations, and to
improve the oversight of Key’s operational risk. For example, a loss-event
database is used to track the amounts and sources of operational losses.
This tracking mechanism helps to identify weaknesses and to highlight
the need to take corrective action. Management also relies upon
sophisticated software programs designed to assist in monitoring Key’s
control processes. This technology has enhanced the reporting of the
effectiveness of Key’s controls to senior management and the Board.
Primary responsibility for managing and monitoring internal control
mechanisms lies with the managers of Key’s various lines of business. Key’s
Risk Review function periodically assesses the overall effectiveness of Key’s
system of internal controls. Risk Review reports the results of reviews on
internal controls and systems to senior management and the Audit
Committee, and independently supports the Audit Committee’s oversight
of these controls. A senior management committee, known as the
Operational Risk Committee, oversees Key’s level of operational risk, and
directs and supports Key’s operational infrastructure and related activities.
Nonperforming Loans
December 31, 2007 Total Loans % of Loans
dollars in millions Commitments
a
Outstanding Amount Outstanding
Industry classification:
Services $10,918 $ 3,793 $ 8 .2%
Manufacturing 10,305 3,875 20 .5
Retail trade 6,698 3,918 3 .1
Public utilities 4,643 919 — —
Financial services 4,104 1,502 7 .5
Wholesale trade 3,738 1,629 2 .1
Property management 3,301 1,558 3 .2
Insurance 2,653 275 4 1.5
Building contractors 2,439 1,028 8 .8
Transportation 2,159 1,609 19 1.2
Public administration 1,029 503 — —
Mining 985 526 — —
Agriculture/forestry/fishing 977 587 1 .2
Communications 714 326 — —
Individuals 23 14 — —
Other 3,325 2,735 9 .3
Total $58,011 $24,797 $84 .3%
a
Total commitments include unfunded loan commitments, unfunded letters of credit (net of amounts conveyed to others) and loans outstanding.
FIGURE 36. COMMERCIAL, FINANCIAL AND AGRICULTURAL LOANS
2007 Quarters
in millions 2007 Fourth Third Second First 2006
BALANCE AT BEGINNING OF PERIOD $ 215 $ 498 $276 $254 $215 $ 277
Loans placed on nonaccrual status 974 378 337 130 129 447
Charge-offs (361) (147) (81) (72) (61) (268)
Loans sold (26) (13) (6) (7) — (35)
Payments (58) (17) (13) (21) (7) (126)
Transfer to held-for-sale portfolio
a
—————(55)
Transfers to OREO (26) (5) (12) — (9) (16)
Loans returned to accrual status (31) (7) (3) (8) (13) (9)
BALANCE AT END OF PERIOD $ 687 $ 687 $498 $276 $254 $ 215
a
On August 1, 2006, Key transferred approximately $55 million of subprime mortgage loans from nonperforming loans to nonperforming loans held for sale in connection with its intention
to pursue the sale of the Champion Mortgage finance business.
FIGURE 37. SUMMARY OF CHANGES IN NONPERFORMING LOANS