KeyBank 2014 Annual Report Download - page 136

Additional information regarding acquisitions is provided in Note 13 (“Acquisitions and Discontinued
Operations”).
Goodwill and Other Intangible Assets
Goodwill represents the amount by which the cost of net assets acquired in a business combination exceeds their
fair value. Other intangible assets primarily are the net present value of future economic benefits to be derived
from the purchase of credit card receivable assets and core deposits. Other intangible assets are amortized on
either an accelerated or straight-line basis over periods ranging from 1
1
⁄ 2 to 30 years. Goodwill and other types of
intangible assets deemed to have indefinite lives are not amortized.
Relevant accounting guidance provides that goodwill and certain other intangible assets must be subjected to
impairment testing at least annually. We perform quantitative goodwill impairment testing in the fourth quarter
of each year. Our reporting units for purposes of this testing are our two business segments, Key Community
Bank and Key Corporate Bank. We continue to monitor the impairment indicators for goodwill and other
intangible assets, and to evaluate the carrying amount of these assets quarterly.
The first step in goodwill impairment testing is to determine the fair value of each reporting unit. This amount is
estimated using comparable external market data (market approach) and discounted cash flow modeling that
incorporates an appropriate risk premium and earnings forecast information (income approach). The amount of
capital being allocated to our reporting units as a proxy for the carrying value is based on risk-based regulatory
capital requirements. If the carrying amount of a reporting unit exceeds its fair value, goodwill impairment may
be indicated. In such a case, we would perform the second step of goodwill impairment testing, and we would
estimate a hypothetical purchase price for the reporting unit (representing the unit’s fair value). Then we would
compare that hypothetical purchase price with the fair value of the unit’s net assets (excluding goodwill). Any
excess of the estimated purchase price over the fair value of the reporting unit’s net assets represents the implied
fair value of goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of
goodwill, the impairment loss represented by this difference is charged to earnings.
Additional information pertaining to goodwill and other intangible assets is included in Note 10 (“Goodwill and
Other Intangible Assets”).
Purchased Loans
We evaluate purchased loans for impairment in accordance with the applicable accounting guidance. Purchased
performing loans that do not have evidence of deterioration in credit quality at acquisition are recorded at fair value
at the acquisition date. Any premium or discount associated with purchased performing loans is recognized as an
expense or income based on the effective yield method of amortization. Purchased loans that have evidence of
deterioration in credit quality since origination and for which it is probable, at acquisition, that all contractually
required payments will not be collected, are deemed PCI. These loans are initially recorded at fair value without
recording an allowance for loan losses. Fair value of these loans is determined using market participant assumptions
in estimating the amount and timing of both principal and interest cash flows expected to be collected, as adjusted
for an estimate of future credit losses and prepayments, and then a market-based discount rate is applied to those
cash flows. PCI loans are generally accounted for on a pool basis, with pools formed based on the common
characteristics of the loans, such as loan collateral type or loan product type. Each pool is accounted for as a single
asset with one composite interest rate and an aggregate expectation of cash flows.
Under the accounting model for PCI loans, the excess of cash flows expected to be collected over the carrying
amount of the loans, referred to as the “accretable amount,” is accreted into interest income over the life of the
loans in each pool using the effective yield method. Accordingly, PCI loans are not subject to classification as
nonaccrual (and nonperforming) in the same manner as originated loans. Rather, acquired PCI loans are
considered to be accruing loans because their interest income relates to the accretable yield recognized at the
pool level and not to contractual interest payments at the loan level. The difference between contractually
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