KeyBank 2005 Annual Report Download - page 66

65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
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Key Equipment Finance meets the equipment leasing needs of companies
worldwide and provides equipment manufacturers, distributors and
resellers with financing options for their clients. Lease financing
receivables and related revenues are assigned to other lines of business
(primarily Corporate Banking) if those businesses are principally
responsible for maintaining the relationship with the client.
OTHER SEGMENTS
Other Segments consist 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 66 and 67 shows selected financial data for
each major business group for the years ended December 31, 2005, 2004
and 2003. 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 59.
• 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 line of business tables reflect
a number of changes that occurred during 2005:
• Key reorganized and renamed some of its business groups and lines of
business. The Investment Management Services group, which included
McDonald Financial Group and Victory Capital Management, was
disbanded. McDonald Financial Group, along with Retail Banking and
Small Business, is now included as part of the Community Banking line
of business within the Consumer Banking group. Victory Capital
Management is included as part of the Corporate Banking line within
the Corporate and Investment Banking group.
• Key began to charge the net consolidated effect of funds transfer
pricing related to estimated deferred tax benefits associated with
lease financing to the lines of business. In the past, this amount was
included in “Other Segments.”
• Management refined methodologies used to allocate certain overhead
costs and a portion of the provision for loan losses.