KeyBank 2015 Annual Report Download - page 228

a weighted-average remaining term of 7.8 years, and the unpaid principal balance outstanding of loans sold by us
as a participant was $6.3 billion. The maximum potential amount of undiscounted future payments that we could
be required to make under this program, as shown in the preceding table, is equal to approximately 30% of the
principal balance of loans outstanding at December 31, 2015. If we are required to make a payment, we would
have an interest in the collateral underlying the related commercial mortgage loan; any loss we incur could be
offset by the amount of any recovery from the collateral.
Return guarantee agreement with LIHTC investors. KAHC, a subsidiary of KeyBank, offered limited
partnership interests to qualified investors. Partnerships formed by KAHC invested in low-income residential
rental properties that qualify for federal low-income housing tax credits under Section 42 of the Internal Revenue
Code. In certain partnerships, investors paid a fee to KAHC for a guaranteed return that is based on the financial
performance of the property and the property’s confirmed LIHTC status throughout a 15-year compliance period.
Typically, KAHC fulfills these guaranteed returns by distributing tax credits and deductions associated with the
specific properties. If KAHC defaults on its obligation to provide the guaranteed return, KeyBank is obligated to
make any necessary payments to investors. No recourse or collateral is available to offset our guarantee
obligation other than the underlying income streams from the properties and the residual value of the operating
partnership interests.
As shown in the previous table, KAHC maintained a reserve in the amount of $4 million at December 31, 2015,
which is sufficient to cover estimated future obligations under the guarantees. The maximum exposure to loss
reflected in the table represents undiscounted future payments due to investors for the return on and of their
investments.
These guarantees have expiration dates that extend through 2018, but KAHC has not formed any new
partnerships under this program since October 2003. Additional information regarding these partnerships is
included in Note 11 (“Variable Interest Entities”).
Written put options. In the ordinary course of business, we “write” put options for clients that wish to mitigate
their exposure to changes in interest rates and commodity prices. At December 31, 2015, our written put options
had an average life of 2.6 years. These instruments are considered to be guarantees, as we are required to make
payments to the counterparty (the client) based on changes in an underlying variable that is related to an asset, a
liability, or an equity security that the client holds. We are obligated to pay the client if the applicable benchmark
interest rate or commodity price is above or below a specified level (known as the “strike rate”). These written
put options are accounted for as derivatives at fair value, as further discussed in Note 8 (“Derivatives and
Hedging Activities”). We mitigate our potential future payment obligations by entering into offsetting positions
with third parties.
Written put options where the counterparty is a broker-dealer or bank are accounted for as derivatives at fair value
but are not considered guarantees since these counterparties typically do not hold the underlying instruments. In
addition, we are a purchaser and seller of credit derivatives, which are further discussed in Note 8.
Default guarantees. Some lines of business participate in guarantees that obligate us to perform if the debtor
(typically a client) fails to satisfy all of its payment obligations to third parties. We generally undertake these
guarantees for one of two possible reasons: (i) either the risk profile of the debtor should provide an investment
return, or (ii) we are supporting our underlying investment in the debtor. We do not hold collateral for the default
guarantees. If we were required to make a payment under a guarantee, we would receive a pro rata share should
the third party collect some or all of the amounts due from the debtor. At December 31, 2015, we had $7 million
default guarantees.
Other Off-Balance Sheet Risk
Other off-balance sheet risk stems from financial instruments that do not meet the definition of a guarantee as
specified in the applicable accounting guidance, and from other relationships.
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