KeyBank 2006 Annual Report Download - page 67

67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
ORGANIZATION
KeyCorp, an Ohio corporation and bank holding company
headquartered in Cleveland, Ohio, is one of the nation’s largest bank-
based financial services companies. KeyCorp’s subsidiaries provide
retail and commercial banking, commercial leasing, investment
management, consumer finance, and investment banking products and
services to individual, corporate and institutional clients through two
major business groups: Community Banking and National Banking. As
of December 31, 2006, KeyCorp’s banking subsidiaries operated 950
KeyCenters, a telephone banking call center services group and 2,050
ATMs in sixteen states.
As used in these Notes, KeyCorp refers solely to the parent company and
Key refers to the consolidated entity consisting of KeyCorp and its
subsidiaries.
USE OF ESTIMATES
Key’s accounting policies conform to U.S. generally accepted accounting
principles and prevailing practices within the financial services industry.
Management must make certain estimates and judgments when
determining the amounts presented in Key’s consolidated financial
statements and the related notes. If these estimates prove to be inaccurate,
actual results could differ from those reported.
BASIS OF PRESENTATION
Consolidation. The consolidated financial statements include the accounts
of KeyCorp and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The consolidated financial statements include any voting rights entity in
which Key has a controlling financial interest. In accordance with
Financial Accounting Standards Board(“FASB”) Revised Interpretation
No. 46, “Consolidation of Variable Interest Entities,” a variable interest
entity (“VIE”) is consolidated if Key has a variable interest in the
entity and is exposed to the majority of its expected losses and/or
residual returns (i.e., Key is considered to be the primary beneficiary).
Variable interests can include equity interests, subordinated debt,
derivative contracts, leases, service agreements, guarantees, standby
letters of credit, loan commitments, and other contracts, agreements and
financial instruments. See Note 8 (“Loan Securitizations, Servicing and
Variable Interest Entities”), which begins on page 83, for information
on Key’s involvement with VIEs.
Management uses the equity method to account for unconsolidated
investments in voting rights entities or VIEs in which Key has significant
influence over operating and financing decisions (usually defined as a
voting or economic interest of 20% to 50%, but not a controlling
interest). Unconsolidated investments in voting rights entities or VIEs in
which Key has a voting or economic interest of less than 20% generally
are carried at cost. Investments held by KeyCorp’s broker/dealer and
investment company subsidiaries (primarily principal investments) are
carried at estimated fair value.
Qualifying special purpose entities (“SPEs”), including securitization
trusts, established by Key under the provisions of Statement of Financial
Accounting Standards (“SFAS”) No. 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities,” are not
consolidated. Information on SFAS No. 140 is included in this note under
the heading “Loan Securitizations” on page 69.
Reclassifications. Some previously reported results have been reclassified
to conform to current reporting practices. The most significant of these
reclassifications affected the composition of the loan portfolio. Specifically,
during the first quarter of 2006, Key reclassified certain loans from the
“commercial lease financing” portfolio to the “commercial, financial and
agricultural” portfolio to more accurately reflect the nature of these
receivables. Prior period balances were not reclassified as the historical
data was not available. The reclassification did not have any effect on
Key’s total loans or net income.
BUSINESS COMBINATIONS
Key accounts for its business combinations using the purchase method
of accounting. Under this method of accounting, the acquired company’s
net assets are recorded at fair value at the date of acquisition and the
results of operations of the acquired company are combined with Key’s
results from that date forward. Purchase premiums and discounts,
including intangible assets with finite lives, are amortized over the
remaining useful lives of the related assets or liabilities. The difference
between the purchase price and the fair value of the net assets acquired
(including intangible assets with finite lives) is recorded as goodwill. Key’s
accounting policy for intangible assets is summarized in this note under
the heading “Goodwill and Other Intangible Assets” on page 70.
STATEMENTS OF CASH FLOW
Cash and due from banks are considered “cash and cash equivalents”
for financial reporting purposes.
SECURITIES
Key classifies each security held into one of four categories: trading,
available for sale, investment or other investments.
Trading account securities. These are debt and equity securities that Key
purchases and holds with the intent of selling them in the near term.
Trading account securities are reported at fair value ($912 million at
December 31, 2006, and $850 million at December 31, 2005) and are
included in “short-term investments” on the balance sheet. Realized and
unrealized gains and losses on trading account securities are reported in
“investment banking and capital markets income” on the income statement.
Securities available for sale. These are securities that Key intends to hold
for an indefinite period of time and that may be sold in response to
changes in interest rates, prepayment risk, liquidity needs or other
factors. Securities available for sale, which include debt and marketable
equity securities with readily determinable fair values, are reported at fair
value. Unrealized gains and losses (net of income taxes) deemed
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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