KeyBank 2014 Annual Report Download - page 30

Our ERM program incorporates risk management throughout our organization to identify, understand, and
manage the risks presented by our business activities. Our ERM program identifies Key’s major risk categories
as: credit risk, compliance risk, operational risk, capital and liquidity risk, market risk, reputation risk, strategic
risk, and model risk. These risk factors, and other risks we may face, are discussed in more detail in other
sections of this report.
I. Credit Risk
Should the fundamentals of the commercial real estate market deteriorate, our financial condition and
results of operations could be adversely affected.
The U.S. economy remains vulnerable, and any reversal in broad macro trends would threaten the recovery in
commercial real estate. The improvement of certain economic factors, such as unemployment and real estate
asset values and rents, has continued to lag behind the overall economy. These economic factors generally affect
certain industries like real estate and financial services more significantly. A significant portion of our clients are
active in these industries. Furthermore, financial services companies with a substantial lending business, like
ours, are dependent upon the ability of their borrowers to make debt service payments on loans.
A portion of our commercial real estate loans are construction loans. Typically these properties are not fully
leased at loan origination; the borrower may require additional leasing through the life of the loan to provide cash
flow to support debt service payments. If we experienced weaknesses similar to those experienced at the height
of the economic downturn, then we would experience a slowing in the execution of new leases, which may also
lead to existing lease turnover.
We are subject to the risk of defaults by our loan counterparties and clients.
Many of our routine transactions expose us to credit risk in the event of default of our counterparty or client. Our
credit risk may be exacerbated when the collateral held cannot be realized upon or is liquidated at prices
insufficient to recover the full amount of the loan or derivative exposure due us. In deciding whether to extend
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 recommend 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 recommend 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.
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