KeyBank 2015 Annual Report Download - page 77

The B note typically is a structurally subordinate note that may or may not require any debt service until the
primary payment source stabilizes and generates excess cash flow. This excess cash flow customarily is captured
for application to either the A note or B note dependent upon the terms of the restructure. We evaluate the B note
when we consider returning the A note to accrual status. In many cases, the B note is charged off at the same
time the A note is returned to accrual status in accordance with our interpretation of accounting and regulatory
guidance applicable to TDRs. Alternatively, both A and B notes may be simultaneously returned to accrual if
credit metrics are supportive.
Restructured nonaccrual loans may be returned to accrual status based on a current, well-documented evaluation
of the credit, which would include analysis of the borrower’s financial condition, prospects for repayment under
the modified terms, and alternate sources of repayment such as the value of loan collateral. We consider the
borrower’s ability to perform under the modified terms for a reasonable period (generally a minimum of six
months) before returning the loan to accrual status. Sustained historical repayment performance prior to the
restructuring also may be taken into account. The primary consideration for returning a restructured loan to
accrual status is the reasonable assurance that the full contractual principal balance of the loan and the ongoing
contractually required interest payments will be fully repaid. Although our policy is a guideline, considerable
judgment is required to review each borrower’s circumstances.
All loans processed as TDRs, including A notes and any non-charged-off B notes, are reported as TDRs during
the calendar year in which the restructure took place. At December 31, 2015, we had $47 million and $7 million
of A note and B note commercial TDRs, respectively.
Additional information regarding TDRs is provided in Note 5 (“Asset Quality”).
Extensions. Project loans typically are refinanced into the permanent commercial loan market at maturity, but
they are often modified and extended. Extension terms take into account the specific circumstances of the client
relationship, the status of the project, and near-term prospects for the client, the repayment source, and the
collateral. In all cases, pricing and loan structure are reviewed and, where necessary, modified to ensure the loan
has been priced to achieve a market rate of return and loan terms that are appropriate for the risk. Typical
enhancements include one or more of the following: principal pay down, increased amortization, additional
collateral, increased guarantees, and a cash flow sweep. Some maturing loans have automatic extension options
built in; in those cases, pricing and loan terms cannot be altered.
Loan pricing is determined based on the strength of the borrowing entity, the strength of the guarantor, if any,
and the structure and residual risk of the transaction. Therefore, pricing for an extended loan may remain the
same because the loan is already priced at or above current market.
We do not consider loan extensions in the normal course of business (under existing loan terms or at market
rates) as TDRs, particularly when ultimate collection of all principal and interest is not in doubt and no
concession has been made. In the case of loan extensions where either collection of all principal and interest is
uncertain or a concession has been made, we would analyze such credit under the applicable accounting guidance
to determine whether it qualifies as a TDR. Extensions that qualify as TDRs are measured for impairment under
the applicable accounting guidance.
Guarantors. We conduct a detailed guarantor analysis (1) for all new extensions of credit, (2) at the time of any
material modification/extension, and (3) typically annually, as part of our on-going portfolio and loan monitoring
procedures. This analysis requires the guarantor entity to submit all appropriate financial statements, including
balance sheets, income statements, tax returns, and real estate schedules.
While the specific steps of each guarantor analysis may vary, the high-level objectives include determining the
overall financial conditions of the guarantor entities, including size, quality, and nature of asset base; net worth
(adjusted to reflect our opinion of market value); leverage; standing liquidity; recurring cash flow; contingent and
direct debt obligations; and near-term debt maturities.
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