KeyBank 2004 Annual Report Download - page 65

63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
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INVESTMENT MANAGEMENT SERVICES
Investment Management Services includes Victory Capital Management
and McDonald Financial Group.
Victory Capital Management manages or gives advice regarding investment
portfolios for a national client base, including corporations, labor unions,
not-for-profit organizations, governments and individuals. These portfolios
may be managed in separate accounts, common funds or the Victory family
of mutual funds.
McDonald Financial Group offers financial, estate and retirement planning,
and asset management services to assist high-net-worth clients with their
banking, brokerage, trust, portfolio management, insurance, charitable
giving and related needs.
OTHER SEGMENTS
Other segments consist primarily of Corporate Treasury and Key’s
Principal Investing unit.
RECONCILING ITEMS
Total assets included under “Reconciling Items” represent primarily the
unallocated portion of nonearning assets of corporate support functions.
Charges related to the funding of these assets are part of net interest
income and are allocated to the business segments through noninterest
expense. Reconciling Items also includes certain items that are not
allocated to the business segments because they are not reflective of their
normal operations.
The table that spans pages 64 and 65 shows selected financial data for
each major business group for the years ended December 31, 2004, 2003
and 2002. This table is accompanied by supplementary information for
each of the lines of business that comprise these groups. The information
was derived from the internal financial reporting system that management
uses to monitor and manage Key’s financial performance. U.S. generally
accepted accounting principles guide financial accounting, but there is
no authoritative guidance for “management accounting” — the way
management uses its judgment and experience to make reporting
decisions. Consequently, the line of business results Key reports may not
be comparable with line of business results presented by other companies.
The selected financial data are based on internal accounting policies
designed to compile results on a consistent basis and in a manner that reflects
the underlying economics of the businesses. According to our policies:
•Net interest income is determined by assigning a standard cost for funds
used to assets or a standard credit for funds provided to liabilities based
on their assumed maturity, prepayment and/or repricing characteristics.
The net effect of this funds transfer pricing is charged to the lines of
business based on the total loan and deposit balances of each line.
•Indirect expenses, such as computer servicing costs and corporate
overhead, are allocated based on assumptions regarding the extent to
which each line actually uses the services.
•Key’s consolidated provision for loan losses is allocated among the
lines of business based primarily on their actual net charge-offs, adjusted
periodically for loan growth and changes in risk profile. The level of the
consolidated provision is based on the methodology that management
uses to estimate Key’s consolidated allowance for loan losses. This
methodology is described in Note 1 (“Summary of Significant Accounting
Policies”) under the heading “Allowance for Loan Losses” on page 56.
•Income taxes are allocated based on the statutory federal income tax
rate of 35% (adjusted for tax-exempt interest income, income from
corporate-owned life insurance and tax credits associated with
investments in low-income housing projects) and a blended state
income tax rate (net of the federal income tax benefit) of 2.5%.
•Capital is assigned based on management’s assessment of economic
risk factors (primarily credit, operating and market risk) directly
attributable to each line.
Developing and applying the methodologies that management uses to
allocate items among Key’s lines of business is a dynamic process.
Accordingly, financial results may be revised periodically to reflect
accounting enhancements, changes in the risk profile of a particular
business or changes in Key’s organizational structure. The financial
data reported for all periods presented in the tables reflect a number of
changes that occurred during 2004:
•Key implemented a process of revenue sharing based on the type of
transaction involved that allocates revenues between the line of business
servicing the client and the line that made the business referral.
•Key began to charge the net consolidated effect of funds transfer
pricing to the lines of business based on the total loan and deposit
balances of each line. In the past, the net consolidated effect of
funds transfer pricing was included in “Other Segments.”
•Key changed the methodology used to estimate the deferred tax
benefits associated with lease financing.
•The methodology used to assign capital to the lines of business was
revised to reflect only the risk directly attributable to each line.