KeyBank 2013 Annual Report Download - page 116

respects, and the risk profile of certain segments of the loan portfolio may be improving while the risk profile of
others is deteriorating, we may decide to change the level of the allowance for one segment of the portfolio
without changing it for any other segment.
In addition to adjusting the ALLL to reflect market conditions, we also may adjust the allowance because of
unique events that are likely to cause actual losses to vary abruptly and significantly from expected losses. For
example, class action lawsuits brought against an industry segment (e.g., one that used asbestos in its product)
can cause a precipitous deterioration in the risk profile of borrowers doing business in that segment. Conversely,
the dismissal of such lawsuits can improve the risk profile. In either case, historical loss rates for that industry
segment would not have provided a precise basis for determining the appropriate level of allowance.
Even minor changes in the level of estimated losses can significantly affect management’s determination of the
appropriate allowance because those changes must be applied across a large portfolio. To illustrate, an increase in
estimated losses equal to one-tenth of one percent of our consumer loan portfolio as of December 31, 2013,
would indicate the need for a $16 million increase in the allowance. The same increase in estimated losses for the
commercial loan portfolio would result in a $38 million increase in the allowance. Such adjustments to the ALLL
can materially affect financial results. Following the above examples, a $16 million increase in the consumer
loan portfolio allowance would have reduced our earnings on an after-tax basis by approximately $10 million, or
$.01 per common share; a $38 million increase in the commercial loan portfolio allowance would have reduced
earnings on an after-tax basis by approximately $24 million, or $.03 per common share.
As we make decisions regarding the allowance, we benefit from a lengthy organizational history and experience
with credit evaluations and related outcomes. Nonetheless, if our underlying assumptions later prove to be
inaccurate, the ALLL would likely need to be adjusted, possibly having an adverse effect on our results of
operations.
Our accounting policy related to the allowance is disclosed in Note 1 under the heading “Allowance for Loan and
Lease Losses.”
Valuation methodologies
We follow the applicable accounting guidance for fair value measurements and disclosures, which defines fair
value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.
In the absence of quoted market prices, we determine the fair value of our assets and liabilities using internally
developed models, which are based on third-party data as well as our judgment, assumptions and estimates
regarding credit quality, liquidity, interest rates and other relevant market available inputs. We describe our
application of this accounting guidance, the process used to determine fair values, and the fair value hierarchy in
Note 1 under the heading “Fair Value Measurements,” and in Note 6 (“Fair Value Measurements”).
Valuation methodologies often involve significant judgment, particularly when there are no observable active
markets for the items being valued. To determine the values of assets and liabilities, as well as the extent to
which related assets may be impaired, we make assumptions and estimates related to discount rates, asset returns,
prepayment rates and other factors. The use of different discount rates or other valuation assumptions could
produce significantly different results. The outcomes of valuations that we perform have a direct bearing on the
recorded amounts of assets and liabilities, including loans held for sale, principal investments, goodwill, and
pension and other postretirement benefit obligations.
At December 31, 2013, $14.5 billion, or 15.6%, of our total assets were measured at fair value on a recurring
basis. Substantially all of these assets were classified as Level 1 or Level 2 within the fair value hierarchy. At
December 31, 2013, $1.3 billion, or 1.5%, of our total liabilities were measured at fair value on a recurring basis.
Substantially all of these liabilities were classified as Level 1 or Level 2.
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