KeyBank 2013 Annual Report Download - page 32

credit or enter into other transactions, we may rely on information furnished by or on behalf of counterparties and
clients, including financial statements, credit reports and other information. We may also rely on representations
of those counterparties, clients, or other third parties as to the accuracy and completeness of that information. The
inaccuracy of that information or those representations affects our ability to accurately evaluate the default risk of
a counterparty or client.
Various factors may cause our allowance for loan and lease losses to increase.
We maintain an ALLL (a reserve established through a provision for loan and lease losses charged to expense)
that represents our estimate of losses based on our evaluation of risks within our existing portfolio of loans. The
level of the allowance reflects our ongoing evaluation of industry concentrations, specific credit risks, loan and
lease loss experience, current loan portfolio quality, present economic, political and regulatory conditions, and
incurred losses inherent in the current loan portfolio. The determination of the appropriate level of the ALLL
inherently involves a degree of subjectivity and requires that we make significant estimates of current credit risks
and future trends, all of which may undergo material changes. Changes in economic conditions affecting
borrowers, the stagnation of certain economic indicators that we are more susceptible to, such as unemployment
and real estate values, new information regarding existing loans, identification of additional problem loans and
other factors, both within and outside of our control, may require an increase in the ALLL. Bank regulatory
agencies periodically review our ALLL and, based on judgments that can differ somewhat from those of our own
management, may require an increase in the provision for loan and lease losses or the recognition of further loan
charge-offs. In addition, if charge-offs in future periods exceed the ALLL (i.e., if the loan and lease allowance is
inadequate), we will need additional loan and lease loss provisions to increase the ALLL, which would decrease
our net income and capital.
Declining asset prices could adversely affect us.
During the recession from December 2007 to June 2009, the volatility and disruption that the capital and credit
markets experienced reached extreme levels. The severe market disruption in 2008 led to the failure of several
substantial financial institutions, causing the widespread liquidation of assets and constraining the credit markets.
These asset sales, along with asset sales by other leveraged investors, including some hedge funds, rapidly drove
down prices and valuations across a wide variety of traded asset classes. Asset price deterioration has a negative
effect on the valuation of many of the asset categories represented on our balance sheet, and reduces our ability
to sell assets at prices we deem acceptable. A further recession would likely reverse recent positive trends in
asset prices.
We have heightened credit exposure in high-balance loans and loans in environmentally sensitive
industries.
As of December 31, 2013, approximately 70% of our loan portfolio consisted of commercial, financial and
agricultural loans, commercial real estate loans, including commercial mortgage and construction loans, and
commercial leases. These types of loans are typically larger than residential real estate loans and consumer loans.
We also do business with environmentally sensitive industries and in connection with the development of
Brownfield sites that provide appropriate business opportunities. We monitor and evaluate our borrowers for
compliance with environmental-related covenants, which include covenants requiring compliance with
applicable law. Should political or other changes make it difficult for certain of our customers to maintain
compliance with applicable covenants, our credit quality could be adversely affected. The deterioration of a
larger loan or a group of our loans could cause a significant increase in nonperforming loans, which could result
in net loss of earnings from these loans, an increase in the provision for loan and lease losses, and an increase in
loan charge-offs.
19