KeyBank 2005 Annual Report Download - page 58

57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
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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: Consumer
Banking, and Corporate and Investment Banking. As of December 31,
2005, KeyCorp’s banking subsidiaries operated 947 KeyCenters, a telephone
banking call center services group and 2,180 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.
Key consolidates any voting rights entity in which it 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 is exposed to the majority of the VIE’s expected losses and/or
residual returns (i.e., Key is considered to be the primary beneficiary).
Variable interests 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 70, for information on Key’s
involvement with VIEs.
Key uses the equity method to account for unconsolidated investments
in voting rights entities or VIEs in which it 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 59.
Reclassifications. Some previously reported results have been reclassified
to conform to current reporting practices. The most significant of these
reclassifications affected the loan portfolio.
During the second quarter of 2005, Key reclassified its operating leases
from “loans” to “accrued income and other assets” for all periods
presented to reflect changes in industry reporting practice. The rental
income and depreciation expense associated with these leases were
similarly reclassified from “net interest income” to “other income”
and “other expense,” respectively. The reclassification of these leases,
which historically have represented less than 1% of Key’s total earning
assets, had no effect on net income in any of the periods for which the
reclassification was made.
As a result of a detailed review of the classification of loans on the
commercial loan accounting subsystem, Key reclassified certain loans
from the “commercial, financial and agricultural” loan portfolio to the
“real estate — commercial mortgage” portfolio during the third quarter
of 2005. These loans, which represented less than 1% of Key’s total loan
portfolio, were reclassified because each is secured wholly or substantially
by a lien on real property that is central to the extension of the credit (i.e.,
the borrower would not have been extended credit in the same amount
or on terms as favorable without the lien).
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 60.
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.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES