KeyBank 2015 Annual Report Download - page 144

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. Purchased 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 applicable accounting guidance 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
required principal and interest payments and the cash flows expected to be collected, referred to as the
“nonaccretable amount,” includes estimates of both the impact of prepayments and future credit losses expected
to be incurred over the life of the loans in each pool.
After we acquire loans determined to be PCI loans, actual cash collections are monitored to determine if they
conform to management’s expectations. Revised cash flow expectations are prepared, as necessary. A decrease in
expected cash flows in subsequent periods may indicate that the loan pool is impaired, which would require us to
establish an allowance for loan losses by recording a charge to the provision for loan losses. An increase in
expected cash flows in subsequent periods initially reduces any previously established allowance for loan losses
by the increase in the present value of cash flows expected to be collected, and requires us to recalculate the
amount of accretable yield for the loan pool. The adjustment of accretable yield due to an increase in expected
cash flows is accounted for as a change in estimate. The additional cash flows expected to be collected are
reclassified from the nonaccretable difference to the accretable yield, and the amount of periodic accretion is
adjusted accordingly over the remaining life of the loans in the pool.
A PCI loan may be resolved either through receipt of payment (in full or in part) from the borrower, the sale of
the loan to a third party, or foreclosure of the collateral. If the loan is sold, a gain or loss on sale is recognized
and reported within noninterest income based on the difference between the sales proceeds and the carrying
amount of the loan. In the case of a foreclosure, an individual loan is removed from the pool at an amount
received from its resolution (fair value of the underlying collateral less costs to sell). Any difference between this
amount and the loan carrying value is absorbed by the nonaccretable difference established for the entire pool.
For loans resolved by payment in full, there is no difference between the amount received at resolution and the
outstanding balance of the loan. In these cases, the remaining accretable amount balance is unaffected, and any
material change in remaining effective yield caused by removing the loan from the pool is addressed in
connection with the subsequent cash flow re-assessment for the pool. PCI loans subject to modification are not
removed from the pool even if those loans would otherwise be deemed TDRs since the pool, and not the
individual loan, represents the unit of account.
Premises and Equipment
Premises and equipment, including leasehold improvements, are stated at cost less accumulated depreciation and
amortization. We determine depreciation of premises and equipment using the straight-line method over the
estimated useful lives of the particular assets. Leasehold improvements are amortized using the straight-line
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