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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-850
KEYCORP LOGO
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO
---------------------------
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
127 PUBLIC SQUARE, CLEVELAND, OHIO
---------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
34-6542451
----------------
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
44114-1306
----------------
(ZIP CODE)
(216) 689-6300
----------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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<S> <C>
Securities registered pursuant Securities registered pursuant
to Section 12(b) of the Act: to Section 12(g) of the Act:
Common Shares, $1 par value
Rights to Purchase Common Shares None
- ------------------------------------------------ ------------------------------------------------
(TITLE OF EACH CLASS) (TITLE OF CLASS)
New York Stock Exchange
- ------------------------------------------------
(NAME OF EACH EXCHANGE ON WHICH REGISTERED)
</TABLE>
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X]
No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant was approximately $15,369,321,827 at February 28, 1998. (The
aggregate market value has been computed using the closing market price of the
stock as reported by the New York Stock Exchange on February 28, 1998.)
438,731,756
- --------------------------------------------------------------------------------
(NUMBER OF KEYCORP COMMON SHARES OUTSTANDING AS OF FEBRUARY 28, 1998, ADJUSTED
FOR A TWO-FOR-ONE STOCK SPLIT IN THE FORM OF A 100% STOCK DIVIDEND EFFECTIVE AS
OF MARCH 6, 1998)
Certain specifically designated portions of KeyCorp's 1997 Annual Report to
Shareholders are incorporated by reference into Parts I, II and IV of this Form
10-K. Certain specifically designated portions of KeyCorp's definitive Proxy
Statement for its 1998 Annual Meeting of Shareholders are incorporated by
reference into Part III of this Form 10-K.
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KEYCORP
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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ITEM PAGE
NUMBER NUMBER
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PART I
1 Business.................................................... 1
2 Properties.................................................. 7
3 Legal Proceedings........................................... 8
4 Submission of Matters to a Vote of Security Holders......... 8
PART II
5 Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 8
6 Selected Financial Data..................................... 8
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 8
8 Financial Statements and Supplementary Data................. 9
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 9
PART III
10 Directors and Executive Officers of the Registrant.......... 9
11 Executive Compensation...................................... 9
12 Security Ownership of Certain Beneficial Owners and
Management................................................ 9
13 Certain Relationships and Related Transactions.............. 9
PART IV
14 Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 10
Signatures.................................................. 13
Exhibits.................................................... 14
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PART I
ITEM 1. BUSINESS
OVERVIEW
KeyCorp (also referred to herein as the "Corporation") is a legal entity
separate and distinct from its banking and other subsidiaries. Accordingly, the
right of KeyCorp, its security holders and its creditors to participate in any
distribution of the assets or earnings of its banking and other subsidiaries is
necessarily subject to the prior claims of the respective creditors of such
banking and other subsidiaries, except to the extent that claims of the
Corporation in its capacity as creditor of such banking and other subsidiaries
may be recognized.
KeyCorp, organized in 1958 under the laws of the state of Ohio and registered
under the Bank Holding Company Act of 1956, as amended, is headquartered in
Cleveland, Ohio, and is engaged primarily in the business of commercial and
retail banking. At December 31, 1997, it was one of the nation's largest bank
holding companies with consolidated total assets of approximately $73.7 billion.
Its subsidiaries provide a wide range of banking, equipment leasing, fiduciary
and other financial services to its corporate, individual and institutional
customers through four businesses: Key Corporate Capital, Key Consumer Finance,
Key Community Bank and Key Capital Partners. These services are provided across
much of the country through subsidiaries operating more than 1,000 full-service
banking offices in 13 states, a 24-hour telephone banking call center services
group and more than 1,900 automated teller machines ("ATMs") as of December 31,
1997. The Corporation and its subsidiaries had approximately 24,595 full-time
equivalent employees as of December 31, 1997.
In addition to the customary banking services of accepting deposits and making
loans, the bank and trust company subsidiaries provide specialized services,
including personal and corporate trust services, personal financial services,
customer access to mutual funds, cash management services, investment banking
services and international banking services. Through its subsidiary banks, trust
companies and registered investment adviser subsidiaries, KeyCorp provides
investment management services to institutional and individual clients,
including large corporate and public retirement plans, Taft-Hartley plans,
foundations and endowments, and high net worth individuals. In addition,
investment management subsidiaries serve as investment advisers to KeyCorp's
proprietary mutual funds.
KeyCorp provides other financial services both inside and outside of its primary
banking markets through its nonbank subsidiaries. These services include
accident and health insurance on loans made by subsidiary banks, venture
capital, community development financing, securities underwriting and brokerage,
automobile financing and other financial services. KeyCorp is an equity
participant in joint ventures with a number of other unaffiliated companies in
Electronic Payment Services, Inc., which operates ATMs throughout the country,
Integrion Financial Network, L.L.C., which is building a platform for electronic
banking, and Key Merchant Services, L.L.C., which provides merchant services to
businesses.
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The following financial data is included in the Financial Review section of
KeyCorp's 1997 Annual Report to Shareholders and is incorporated herein by
reference as indicated below:
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DESCRIPTION OF FINANCIAL DATA PAGE
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Selected Financial Data..................................... 28
Average Balance Sheets, Net Interest Income and
Yields/Rates.............................................. 34
Components of Net Interest Income Changes................... 37
Composition of Loans........................................ 45
Maturities and Sensitivity of Certain Loans to Changes in
Interest Rates............................................ 46
Securities Available for Sale............................... 47
Investment Securities....................................... 47
Allocation of the Allowance for Loan Losses................. 48
Summary of Loan Loss Experience............................. 49
Summary of Nonperforming Assets and Past Due Loans.......... 50
Maturity Distribution of Time Deposits of $100,000 or
More...................................................... 51
Impaired Loans and Other Nonperforming Assets............... 65
Short-Term Borrowings....................................... 66
</TABLE>
The executive offices of KeyCorp are located at 127 Public Square, Cleveland,
Ohio 44114-1306, and its telephone number is (216) 689-6300.
MERGERS, ACQUISITIONS AND DIVESTITURES
The information presented in Note 3, "Mergers, Acquisitions and Divestitures,"
beginning on page 63 of the Financial Review section of KeyCorp's 1997 Annual
Report to Shareholders is incorporated herein by reference.
COMPETITION
The market for banking and related financial services is highly competitive.
KeyCorp and its subsidiaries ("Key") compete with other providers of financial
services, such as other bank holding companies, commercial banks, savings
associations, credit unions, mortgage banking companies, finance companies,
mutual funds, insurance companies, investment management firms, investment
banking firms, broker-dealers and a growing list of other local, regional and
national institutions which offer financial services. Key competes by offering
quality products and innovative services at competitive prices.
In recent years, mergers between financial institutions have added competitive
pressure to Key's core banking services. In addition, competition is expected to
intensify as a consequence of interstate banking and branching laws now in
effect which permit banking organizations to expand geographically. See
"Supervision and Regulation -- Interstate Banking and Other Recent Legislative
and Regulatory Initiatives" herein.
SUPERVISION AND REGULATION
The following discussion addresses certain of the material elements of the
regulatory framework applicable to bank holding companies and their
subsidiaries, and provides certain specific information regarding Key.
Regulation of financial institutions, such as Key, is intended primarily for the
protection of depositors, the deposit insurance funds of the Federal Deposit
Insurance Corporation ("FDIC") and the banking system as a whole, and generally
is not intended for the protection of shareholders or other investors.
In the following discussion, references to statutes and regulations are brief
summaries thereof and are qualified in their entirety by reference to the full
text of such statutes and regulations. In addition, there are other statutes and
regulations not described below that apply to the operation of banking
institutions. Changes in the applicable laws, and in their application by
regulatory agencies, cannot necessarily be predicted, but they may have a
material effect on the business and results of Key.
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General
As a bank holding company, KeyCorp is subject to the regulation, supervision and
examination of the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") under the Bank Holding Company Act of 1956, as amended
(the "BHCA"). Under the BHCA, bank holding companies may not, in general,
directly or indirectly acquire the ownership or control of more than 5% of the
voting shares, or substantially all of the assets, of any company, including a
bank, without the prior approval of the Federal Reserve Board. In addition, bank
holding companies are generally prohibited under the BHCA from engaging in
commercial or industrial activities.
The Corporation's banking subsidiaries are also subject to extensive regulation,
supervision and examination by applicable Federal banking agencies. In the first
quarter of 1997, KeyCorp converted all of its state-chartered bank subsidiaries
into separate, full-service national bank subsidiaries, and all of its
state-chartered trust company subsidiaries, except Society Trust Company of New
York, into separate, national bank subsidiaries limited to fiduciary activities.
All of these national banks, Key Bank USA, National Association ("KeyBank USA"),
and their subsidiaries are subject to regulation, supervision and examination by
the Office of the Comptroller of the Currency (the "OCC"). The Corporation's
KeyTrust Company, National Associations headquartered in Wyoming and Washington
are also subject to regulation by the Federal Reserve Board. In the second
quarter of 1997, all of the Corporation's full-service national banks, other
than KeyBank National Association in Wyoming (which was sold in the third
quarter of 1997), KeyBank USA, and KeyBank National Association in New Hampshire
merged into KeyBank National Association headquartered in Ohio. Society Trust
Company of New York is a state-chartered trust company subsidiary subject to
regulation by the Federal Reserve Board and banking authorities in the State of
New York. Because the deposits in all of the Corporation's full-service banking
subsidiaries are insured (up to applicable limits) by the FDIC, the FDIC also
has certain regulatory and supervisory authority over all such banking
subsidiaries.
The Corporation also has other financial services subsidiaries that are subject
to regulation, supervision and examination by the Federal Reserve Board, as well
as other applicable state and Federal regulatory agencies. For example, the
Corporation's brokerage and asset management subsidiaries are subject to
supervision and regulation by the Securities and Exchange Commission, the
National Association of Securities Dealers, Inc. and state securities
regulators, and the Corporation's insurance subsidiaries are subject to
regulation by the insurance regulatory authorities of the various states. Other
nonbank subsidiaries of the Corporation are subject to other laws and
regulations of both the Federal government and the various states in which they
are authorized to do business.
Dividend Restrictions
The principal source of cash flow to the Corporation, including cash flow to pay
dividends on the Corporation's common shares and debt service on the
Corporation's debt, is dividends from its banking and other subsidiaries.
Various statutory and regulatory provisions limit the amount of dividends that
may be paid to the Corporation by its banking subsidiaries without regulatory
approval.
The approval of the OCC is required for the payment of any dividend by a
national bank if the total of all dividends declared by the board of directors
of such bank in any calendar year would exceed the total of: (i) the bank's net
income for the current year plus (ii) the retained net income (as defined and
interpreted by regulation) for the preceding two years, less any required
transfer to surplus or a fund for the retirement of any preferred stock. In
addition, a national bank can pay dividends only to the extent of its undivided
profits. All of the Corporation's banking subsidiaries and trust company
subsidiaries, with the exception of Society Trust Company of New York, are
national banks and are subject to these restrictions.
In addition, if, in the opinion of a Federal banking agency, a depository
institution under its jurisdiction is engaged in or is about to engage in an
unsafe or unsound practice (which, depending on the financial condition of the
institution, could include the payment of dividends) the agency may require,
after notice and hearing, that such institution cease and desist from such
practice. The OCC and the FDIC have indicated that paying dividends that would
deplete a depository institution's capital base to an inadequate level would be
an unsafe and unsound practice. Moreover, under the Federal Deposit Insurance
Act (the "FDI Act"), an insured depository institution
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may not pay any dividend if payment would cause it to become less than
"adequately capitalized." See "Regulatory Capital Standards and Related
Matters--Prompt Corrective Action." The FDI Act also prohibits the payment of
any dividend while the institution is in default in the payment of any
assessment due to the FDIC. Also, the Federal Reserve Board, the OCC and the
FDIC have issued policy statements which provide that FDIC-insured depository
institutions and their holding companies should generally pay dividends only out
of their current operating earnings.
Holding Company Structure
Transactions Involving Banking Subsidiaries. The Corporation's banking
subsidiaries are subject to Federal Reserve Act restrictions which limit the
amount of funds or other items of value that can be transferred from such
subsidiaries to either the Corporation and (with certain exceptions) the
Corporation's nonbanking subsidiaries. Any such loans or extensions of credit
are required to be secured in specified amounts.
Source of Strength Doctrine. Under Federal Reserve Board policy, a bank holding
company is expected to serve as a source of financial and managerial strength to
each of its subsidiary banks and, under appropriate circumstances, to commit
resources to support each such subsidiary bank. This support may be required by
the Federal Reserve Board at times when the Corporation may not have the
resources to provide it, or, for other reasons, would not otherwise be inclined
to provide it. Certain loans by a bank holding company to a subsidiary bank are
subordinate in right of payment to deposits in, and certain other indebtedness
of, the subsidiary bank. In addition, the Crime Control Act of 1990 provides
that in the event of a bank holding company's bankruptcy, any commitment by a
bank holding company to a Federal bank regulatory agency to maintain the capital
of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a
priority of payment.
Depositor Preference. The FDI Act provides that, in the event of the
"liquidation or other resolution" of an insured depository institution, the
claims of depositors of such institution (including claims by the FDIC as
subrogee of insured depositors) and certain claims for administrative expenses
of the FDIC as a receiver would be afforded a priority over other general
unsecured claims against such an institution, including Federal funds and
letters of credit. If an insured depository institution fails, insured and
uninsured depositors along with the FDIC will be placed ahead of unsecured,
nondeposit creditors, including a parent holding company, in order of priority
of payment.
Liability of Commonly Controlled Institutions. Under the FDI Act, an insured
depository institution which is under common control with another insured
depository institution is generally liable for any loss incurred, or reasonably
anticipated to be incurred, by the FDIC in connection with the default of such
commonly controlled institution, or any assistance provided by the FDIC to such
commonly controlled institution which is in danger of default. The term
"default" is defined generally to mean the appointment of a conservator or
receiver and the term "in danger of default" is defined generally as the
existence of certain conditions indicating that a "default" is likely to occur
in the absence of regulatory assistance.
Regulatory Capital Standards and Related Matters
Regulatory Capital. Applicable law and regulation define and prescribe certain
minimum quantitative levels of regulatory capital for bank holding companies and
their banking subsidiaries, and identify other factors that can affect the
overall evaluation of the adequacy of such organizations' regulatory capital.
Adequacy of regulatory capital is assessed periodically by the Federal banking
agencies in the examination and supervision process, and in the evaluation of
applications in connection with specific transactions and activities, including
acquisitions, expansion of existing activities and commencement of new
activities.
Bank holding companies are subject to risk-based capital guidelines adopted by
the Federal Reserve Board. These guidelines establish minimum ratios of
qualifying capital to risk-weighted assets. Qualifying capital includes Tier 1
capital and Tier 2 capital. Risk-weighted assets are calculated by assigning
risk-weights of 0, 20, 50, and 100% to broad categories of assets and
off-balance-sheet exposures, based primarily on counterparty credit risk. The
required minimum Tier 1 risk-based capital ratio, calculated by dividing Tier 1
capital by risk-weighted assets, is currently 4%. The required minimum total
risk-based capital ratio is currently 8%. It is calculated by dividing the
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sum of Tier 1 capital and Tier 2 capital not in excess of Tier 1 capital, after
deductions for investments in certain subsidiaries and associated companies and
for reciprocal holdings of capital instruments, by risk-weighted assets.
Tier 1 capital may consist of common stockholders' equity (including common
stock, related surplus and retained earnings), qualifying noncumulative
perpetual preferred stock (including related surplus), a limited amount of
qualifying cumulative perpetual preferred stock (including related surplus), and
minority interests in the equity accounts of consolidated subsidiaries less
certain intangible assets (including goodwill) and certain portions of deferred
tax assets. Tier 2 capital may consist of hybrid capital instruments, perpetual
debt, mandatory convertible debt securities, other qualifying perpetual
preferred stock (including related surplus), and limited amounts of term
subordinated debt, medium-term preferred stock (including related surplus), and
the allowance for loan and lease losses.
In 1997, the Federal Reserve Board adopted amendments to its risk-based capital
guidelines requiring a bank holding company having securities trading activity
above a threshold amount to measure and hold capital against its exposure to
general market risk associated with changes in interest rates, equity prices,
exchange rates and commodity prices, as well as for exposure to specific risk
associated with equity positions and certain debt positions in its trading
portfolio including event and default risk. This capital charge, which may be
supported, in part, by Tier 3 capital, is required to be incorporated into the
computation of the risk-based capital ratios. Tier 3 capital includes certain
types of unsecured subordinated debt. Mandatory compliance with these amendments
begins January 1, 1998. At December 31, 1997, Key's Tier 1 and total capital to
risk-weighted assets ratios were 6.65% and 10.83%, respectively, and would not
have been required to be adjusted for market risk had mandatory compliance with
the market risk amendments been required in 1997.
The risk-based capital guidelines also address factors beyond counterparty
credit risk which can affect the overall evaluation of the adequacy of
regulatory capital. These factors include interest rate risk in non-trading
activities, concentrations of credit risk and risks associated with
nontraditional activities, as well as management's ability to monitor and
control these risks. No standardized explicit risk-based capital charges with
respect to these factors have been adopted by the Federal Reserve Board.
In addition to the risk-based standard, bank holding companies are subject to
the Federal Reserve Board's leverage ratio guidelines. These guidelines
establish minimum ratios of Tier 1 capital to total assets. The minimum Tier 1
capital leverage ratio, calculated by dividing Tier 1 capital by average total
consolidated assets is 3% for bank holding companies that have the highest
supervisory rating. All other bank holding companies must maintain a minimum
leverage ratio of at least 4% to 5%. Neither Key nor any of its banking
affiliates has been advised by its primary Federal banking regulator of any
specific leverage ratio applicable to it. At December 31, 1997, Key's Tier 1
capital leverage ratio was 6.40%.
The Corporation's banking subsidiaries are also subject to risk-based and
leverage capital requirements adopted by the OCC which are substantially similar
to those imposed by the Federal Reserve Board on bank holding companies. At
December 31, 1997, each of the Corporation's banking subsidiaries had regulatory
capital in excess of all minimum risk-based and leverage capital requirements.
During 1997, the Federal banking agencies jointly published a number of proposed
amendments to their risk-based and leverage capital guidelines. One proposal
would amend the Tier 1 capital leverage ratio guidelines so that the most highly
rated insured depository institutions and bank holding companies would be
subject to a minimum 3% Tier 1 capital leverage ratio, with all others being
subject to a minimum 4% Tier 1 capital leverage ratio. Other proposals would
amend the risk-based capital guidelines to: (i) include as Tier 2 capital a
limited amount of unrealized gains on certain available-for-sale equity
securities, (ii) address the treatment of recourse obligations and direct credit
substitutes by using credit ratings to match the risk-based capital assessment
more closely to relative risk of loss in certain asset securitizations, and
(iii) make uniform the risk-based capital treatment regarding construction loans
on presold residential properties, real estate loans secured by junior liens on
1-4 family residential property, and investments in mutual funds. Lastly, the
Federal banking agencies have proposed to amend the risk-based and leverage
capital guidelines to address the treatment of servicing financial assets, both
mortgage and non-mortgage. By December 31, 1997, the Federal banking agencies
had not acted upon any of these proposals.
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Prompt Corrective Action. The "prompt corrective action" provisions of the FDI
Act added by the FDIC Improvement Act of 1991 ("FDICIA") create a statutory
framework that applies a system of both discretionary and mandatory supervisory
actions indexed to the capital level of FDIC-insured depository institutions.
These provisions impose progressively more restrictive constraints on
operations, management and capital distributions of the institution as its
regulatory capital decreases, or in some cases, based on supervisory information
other than the institution's capital level. This framework and the authority it
confers on the Federal banking agencies supplements other existing authority
vested in such agencies to initiate supervisory actions to address capital
deficiencies. Moreover, other provisions of law and regulation employ regulatory
capital level designations the same as or similar to those established by the
prompt corrective action provisions both in imposing certain restrictions and
limitations and in conferring certain economic and other benefits upon
institutions. These include restrictions on brokered deposits, FDIC deposit
insurance limits on pass-through deposits, limits on exposure to interbank
liabilities, risk-based FDIC deposit insurance premium assessments and expedited
action upon regulatory applications.
FDIC-insured depository institutions are grouped into one of five prompt
corrective action capital categories -- "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized"--using the Tier 1 risk-based, total risk-based,
and Tier 1 leverage capital ratios as the relevant capital measures. To be well
capitalized, the institution must have a total risk-based capital ratio of at
least 10%, a Tier 1 risk-based capital ratio of at least 6% and a Tier 1
leverage capital ratio of at least 5% and not be subject to any written
agreement, order or capital directive to meet and maintain a specific capital
level for any capital measure. An adequately capitalized institution must have a
total risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio
of at least 4% or greater and a Tier 1 leverage capital ratio of at least 4% (3%
if the institution has achieved the highest composite rating in its most recent
examination) and not be well capitalized. At December 31, 1997, each KeyCorp
insured depository institution subsidiary met the requirements for the "well
capitalized" capital category. An institution's prompt corrective action capital
category, however, may not constitute an accurate representation of the overall
financial condition or prospects of the Corporation or its banking subsidiaries,
and should be considered in conjunction with other available information
regarding Key's financial condition and results of operations.
FDIC DEPOSIT INSURANCE AND FINANCING CORPORATION BOND ASSESSMENTS
Under the FDIC's risk-related insurance assessment system, all insured
depository institutions are required to pay annual assessments to the Bank
Insurance Fund (the "BIF") or the Savings Association Insurance Fund (the
"SAIF") of the FDIC. The assessments are based on the institution's risk
classification which, in turn, is based on an assignment of the institution by
the FDIC to one of three capital groups and to one of three supervisory
subgroups. The capital groups are "well capitalized," "adequately capitalized"
and "undercapitalized." The three supervisory subgroups are Group "A" (for
financially solid institutions with only a few minor weaknesses), Group "B" (for
those institutions with weaknesses which, if uncorrected, could cause
substantial deterioration of the institution and increase the risk to the
deposit insurance fund) and Group "C" (for those institutions with a substantial
probability of loss to the insurance fund, absent effective corrective action).
Based on their risk classifications, the Corporation's banking subsidiaries paid
no FDIC deposit insurance premiums during 1997.
With the enactment of the Deposit Insurance Funds Act of 1996 ("Funds Act") all
BIF-insured institutions became required to join with SAIF-insured institutions
in servicing the 30 year bonds issued by the Financing Corporation ("FICO") in
the late 1980s to fund losses incurred by the former Federal Savings and Loan
Insurance Corporation. The Funds Act established the FICO assessment as separate
from and in addition to deposit insurance assessments. The statute requires that
the assessment rate for BIF assessable deposits be 1/5 of the assessment rate
for SAIF assessable deposits. For the first half of 1997, the annualized FICO
assessment rates were set at $.0648 per $100 of SAIF-assessable deposits and
$.0130 per $100 of BIF-assessable deposits. Because of growth in the combined
assessment bases, the annualized FICO assessment rates for the second half of
1997 declined slightly, to $.0630 per $100 of SAIF-assessable deposits and
$.0126 per $100 of BIF-assessable deposits. The 1997 FICO assessment expense to
the Corporation's FDIC-insured banking subsidiaries was approximately $6
million.
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INTERSTATE BANKING AND OTHER RECENT LEGISLATIVE AND REGULATORY INITIATIVES
Interstate Banking
On September 29, 1994, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Act") was enacted into Federal law.
Under the Interstate Act, commencing on September 29, 1995, bank holding
companies generally were permitted to acquire banks located in any state
regardless of the state law in effect at the time. The Interstate Act also
provides for the nationwide interstate branching of banks. Under the Interstate
Act, in general, both national and state-chartered banks are permitted to merge
across state lines (and thereby establish interstate branches) commencing on
June 1, 1997. States were permitted to "opt-out" of the interstate branching
authority by taking action prior to the commencement date. States were also
permitted to "opt-in" early (i.e., prior to June 1, 1997) to the interstate
branching provisions. All states in which the Corporation has banking
subsidiaries have "opted in" to the interstate branching provisions. As a
result, the Corporation consolidated all of its bank subsidiaries (other than
KeyBank USA and KeyBank National Association in New Hampshire) into one national
banking institution in mid-1997. The Corporation continues to evaluate its
business opportunities with respect to its trust company subsidiaries, and plans
for consolidating these subsidiaries are not yet final.
Recent Financial Modernization Proposed Legislation
During 1997, both the U.S. House of Representatives ("House") Committee on
Banking and Financial Services and the House Commerce Committee approved and
reported to the House Floor different versions of financial modernization
legislation proposing to establish a comprehensive framework to permit
affiliations among securities firms, insurance companies, commercial banks and,
subject to certain limitations, commercial enterprises. Allowing such
affiliations would enhance customer choice in the financial services
marketplace, eliminate anti-competitive regulatory disparities among financial
services providers and increase competition among providers of financial
services. Both versions, however, address numerous controversial issues for
which no consensus has yet been reached by Congress or within the banking
industry. Among the most important of these issues are: to what extent financial
services activities should be permitted to be conducted by an insured depository
institution versus a bank holding company; what role should state regulators
have regarding insurance activities; and what will be the future of the thrift
charter. It is impossible to predict whether or in what form these or other
similar legislative proposals may be adopted in the future, and, if adopted,
what their effect will be on Key.
Recent Regulatory Initiatives
In late 1996, the OCC adopted a substantially revised regulation dealing with
the corporate activities of national banks. The revised regulation contained a
provision which provided a framework within which the OCC could approve
activities to be conducted within an operating subsidiary of a national bank
which the OCC determines to be part of, or incidental to, the business of
banking but which could not be lawfully conducted by the parent bank itself. In
December of 1997, the OCC approved its first application within this framework
for limited securities activities. It is unclear at this time, however, whether
and to what extent this regulatory initiative may expand the overall mix of
permissible activities within a banking organization.
ITEM 2. PROPERTIES
The headquarters of KeyCorp, KeyBank National Association and KeyBank USA are
located in Key Tower at 127 Public Square, Cleveland, Ohio 44114-1306. At
December 31, 1997, Key leased approximately 695,000 square feet of the complex,
encompassing the first twenty-three floors, the 28th floor and the 54th through
56th floors of the 57-story Key Tower. As of the same date, the banking
subsidiaries of KeyCorp owned 586 of their branch banking offices and leased 429
offices. The lease terms for applicable branch banking offices are not
individually material, with terms ranging from month-to-month to 99-year leases
from inception. Additional information pertaining to KeyCorp's properties is
presented in Note 1, "Summary of Significant Accounting Policies," beginning on
page 60 of the Financial Review section of KeyCorp's 1997 Annual Report to
Shareholders and is incorporated herein by reference.
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ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, Key is subject to legal actions which
involve claims for substantial monetary relief. Based on information presently
available to management and Key's counsel, management does not believe that any
legal actions, individually or in the aggregate, will have a material adverse
effect on the financial condition of Key.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this report, no matter
was submitted to a vote of security holders of KeyCorp.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
On August 29, 1997, the Corporation issued an aggregate of 3,336,118 pre-split
KeyCorp Common Shares pursuant to the exemption from registration under Rule 506
of the Securities Act of 1933, as amended ("the 1933 Act"). The KeyCorp Common
Shares were issued in a tax-free exchange in which KeyCorp acquired 100% of the
outstanding shares of Champion Mortgage Co., Inc. ("Champion"). In privately
issuing the KeyCorp Common Shares in this transaction, KeyCorp relied on the
fact that the KeyCorp Common Shares were acquired by no more than 35 persons who
were not accredited investors and that each non-accredited investor, either
alone or together with his or her purchaser representative(s), was capable of
evaluating the investment. The KeyCorp Common Shares issued to the former
shareholders of Champion were subsequently registered with the Securities and
Exchange Commission pursuant to a registration statement (No. 333-37287) that
was declared effective on October 23, 1997. Further information pertaining to
the Champion acquisition is included in Note 3, "Mergers, Acquisitions, and
Divestitures" beginning on page 63 of the Financial Review section of KeyCorp's
1997 Annual Report to Shareholders and is incorporated herein by reference.
The dividend restrictions discussion beginning on page 3 of this report and the
following disclosures included in the Financial Review section of KeyCorp's 1997
Annual Report to Shareholders are incorporated herein by reference:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Discussion of Common Shares and shareholder information
presented in the Capital and Dividends section............ 52
Presentation of quarterly market price and cash dividends
per Common Share.......................................... 54
Discussion of dividend restrictions presented in Note 15,
Commitments, Contingent Liabilities and Other
Disclosures............................................... 73
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
The Selected Financial Data presented on page 28 of the Financial Review section
of KeyCorp's 1997 Annual Report to Shareholders is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information included under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" presented on pages 25 through 54
of KeyCorp's 1997 Annual Report to Shareholders is incorporated herein by
reference.
8
<PAGE> 11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Selected Quarterly Financial Data and the financial statements and the notes
thereto, presented on page 54 and on pages 56 through 78, respectively, of the
Financial Review section of KeyCorp's 1997 Annual Report to Shareholders are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is set forth in the sections captioned
"Issue One -- ELECTION OF DIRECTORS" and "EXECUTIVE OFFICERS" contained in
KeyCorp's definitive Proxy Statement for the 1998 Annual Meeting of Shareholders
to be held May 7, 1998, and is incorporated herein by reference. KeyCorp expects
to file its final proxy statement on or about March 30, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth in the sections captioned
"THE BOARD OF DIRECTORS AND ITS COMMITTEES," "COMPENSATION OF EXECUTIVE
OFFICERS" and "EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS" contained in
KeyCorp's definitive Proxy Statement for the 1998 Annual Meeting of Shareholders
to be held May 7, 1998, and is incorporated herein by reference. The information
set forth in the sections captioned "COMPENSATION AND ORGANIZATION COMMITTEE
REPORT ON EXECUTIVE COMPENSATION" and "KEYCORP STOCK PRICE PERFORMANCE"
contained in KeyCorp's definitive Proxy Statement for the 1998 Annual Meeting of
Shareholders to be held May 7, 1998, is not incorporated by reference in this
Report on Form 10-K. KeyCorp expects to file its final proxy statement on or
about March 30, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth in the section captioned
"SHARE OWNERSHIP AND PHANTOM STOCK UNITS" contained in KeyCorp's definitive
Proxy Statement for the 1998 Annual Meeting of Shareholders to be held May 7,
1998, and is incorporated herein by reference. KeyCorp expects to file its final
proxy statement on or about March 30, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth in the section captioned
"Issue One -- ELECTION OF DIRECTORS" contained in KeyCorp's definitive Proxy
Statement for the 1998 Annual Meeting of Shareholders to be held May 7, 1998,
and is incorporated herein by reference. KeyCorp expects to file its final proxy
statement on or about March 30, 1998.
9
<PAGE> 12
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following financial statements of KeyCorp and its subsidiaries, and the
auditor's report thereon, included in the Financial Review section of KeyCorp's
1997 Annual Report to Shareholders are incorporated herein by reference:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements:
Report of Ernst & Young LLP, Independent Auditors......... 55
Consolidated Balance Sheets at December 31, 1997 and
1996................................................... 56
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995....................... 57
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995... 58
Consolidated Statements of Cash Flow for the Years Ended
December 31, 1997, 1996 and 1995....................... 59
Notes to Consolidated Financial Statements................ 60
</TABLE>
(a)(2) FINANCIAL STATEMENT SCHEDULES
All financial statement schedules for KeyCorp and its subsidiaries have been
included in the consolidated financial statements or the related footnotes, or
they are either inapplicable or not required.
(a)(3) EXHIBITS*
<TABLE>
<C> <S>
3.1 Amended and Restated Articles of Incorporation of KeyCorp.
Filed as Exhibit 7 to Form 8-A/A filed on February 25, 1994,
and incorporated herein by reference.
3.2 Amended and Restated Regulations of KeyCorp effective May
15, 1997. Filed as Exhibit 2 to Form 8-A/A filed on June 19,
1997, and incorporated herein by reference.
4.1 Restated Rights Agreement, dated as of May 15, 1997, between
KeyCorp and KeyBank National Association, as Rights Agent.
Filed as Exhibit 1 to Form 8-A filed on June 19, 1997, and
incorporated herein by reference.
10.1 KeyCorp Short Term Incentive Compensation Plan (January 1,
1997 Restatement). Filed as Exhibit 10.1 to Form 10-K for
the year ended December 31, 1996, and incorporated herein by
reference.
10.2 KeyCorp Long Term Cash Incentive Compensation Plan (January
1, 1997 Restatement). Filed as Exhibit 10.2 to Form 10-K for
the year ended December 31, 1996, and incorporated herein by
reference.
10.3 KeyCorp Long Term Incentive Plan (January 1, 1998).
10.4 KeyCorp Annual Incentive Plan (January 1, 1998).
10.5 Form of Change of Control Agreements between KeyCorp and
certain executive officers of KeyCorp effective November 20,
1997.
10.6 Form of Stock Performance Option Grants between KeyCorp and
certain executive officers of KeyCorp, dated January 15,
1997. Filed as Exhibit 10.35 to Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference.
10.7 Form of Stock Performance Option Grants between KeyCorp and
Robert W. Gillespie, dated January 2, 1998.
</TABLE>
10
<PAGE> 13
<TABLE>
<C> <S>
10.8 Amended and Restated Employment Agreement between KeyCorp
and Robert W. Gillespie effective November 21, 1996. Filed
as Exhibit 10.33 to Form 10-K for the year ended December
31, 1996, and incorporated herein by reference.
10.9 Employment Agreement between KeyCorp and Henry L. Meyer III,
dated May 5, 1997. Filed As Exhibit 10.1 to Form 10-Q for
the quarter ended June 30, 1997, and incorporated herein by
reference.
10.10 Amendment to Employment Agreement between KeyCorp and Henry
L. Meyer III, dated November 20, 1997.
10.11 Employment Agreement between KeyCorp and Gary Allen, dated
July 1, 1993. Filed as Exhibit 10.14 to Form 10-K for the
year ended December 31, 1994, and incorporated by reference.
10.12 Letter Agreement between KeyCorp and Thomas C. Stevens,
dated May 10, 1996 and amended April 7, 1997.
10.13 Society Corporation 1984 Stock Option Plan, as amended.
Filed as Exhibit 10.14 to Form 10-K for the year ended
December 31, 1995, and incorporated herein by reference.
10.14 Society Corporation 1988 Stock Option Plan, amended as of
September 19, 1996. Filed as Exhibit 10.11 to Form 10-K for
the year ended December 31, 1996, and incorporated herein by
reference.
10.15 KeyCorp Directors' Stock Option Plan (November 17, 1994
Restatement). Filed as Exhibit 10.37 to Form 10-K for the
year ended December 31, 1994, and incorporated herein by
reference.
10.16 KeyCorp 1988 Stock Option Plan as Amended and Restated as of
September 19, 1996. Filed as Exhibit 10.20 to Form 10-K for
the year ended December 31, 1996, and incorporated herein by
reference.
10.17 KeyCorp 1997 Stock Option Plan for Directors effective
January 16, 1997.
10.18 First Amendment to KeyCorp 1997 Stock Option Plan for
Directors dated November 19, 1997.
10.19 Trust Agreement for certain amounts that may become payable
to certain executives and directors of KeyCorp, dated April
1, 1997. Filed as Exhibit 10.2 to Form 10-Q for the quarter
ended June 30, 1997, and incorporated herein by reference.
10.20 Trust Agreement (Executive Benefits Rabbi Trust), dated
November 3, 1988. Filed as Exhibit 10.20 to Form 10-K for
the year ended December 31, 1995, and incorporated herein by
reference.
10.21 KeyCorp Umbrella Trust for Executives, between KeyCorp and
National Bank of Detroit dated July 1, 1990. Filed as
Exhibit 10.27 to Form 10-K for the year ended December 31,
1996, and incorporated herein by reference.
10.22 KeyCorp Umbrella Trust for Directors, between KeyCorp and
National Bank of Detroit dated July 1, 1990. Filed as
Exhibit 10.28 to Form 10-K for the year ended December 31,
1996, and incorporated herein by reference.
10.23 Amended and Restated Director Deferred Compensation Plan
(April 15, 1996 Amendment and Restatement). Filed as Exhibit
10 to form 10-Q for the quarter ended June 30, 1996, and
incorporated herein by reference.
10.24 Ameritrust Corporation Deferred Compensation Plan. Filed as
Exhibit 10.21 to Form 10-K for the year ended December 31,
1995, and incorporated herein by reference (the Plan will be
merged into KeyCorp Deferred Compensation Plan effective
April 1, 1998).
10.25 KeyCorp Directors' Survivor Benefit Plan, effective
September 1, 1990. Filed as Exhibit 10.25 to Form 10-K for
the year ended December 31, 1996, and incorporated herein by
reference.
</TABLE>
11
<PAGE> 14
<TABLE>
<C> <S>
10.26 KeyCorp Executive Supplemental Pension Plan, amended,
restated and effective August 1, 1996. Filed as Exhibit 10.29
to Form 10-K for the year ended December 31, 1996, and
incorporated herein by reference.
10.27 First Amendment to KeyCorp Executive Supplemental Pension
Plan, effective January 1, 1997.
10.28 KeyCorp Amended and Restated 1991 Equity Compensation Plan
(Amended as of September 19, 1996).
10.29 KeyCorp Supplemental Retirement Benefit Plan for Key
Executives, effective July 1, 1990 and restated August 16,
1990. Filed as Exhibit 10.26 to Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference.
10.30 KeyCorp Excess 401(k) Savings Plan as Amended and Restated as
of January 1, 1997. Filed as Exhibit 10.22 to Form 10-K for
the year ended December 31, 1996, and incorporated herein by
reference.
10.31 KeyCorp Survivor Benefit Plan, effective September 1, 1990.
Filed as Exhibit 10.24 to Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference.
10.32 KeyCorp Supplemental Retirement Plan, amended, restated and
effective August 1, 1996.
10.33 KeyCorp Excess Cash Balance Pension Plan, effective August 1,
1996. Filed as Exhibit 10.31 to Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference.
10.34 KeyCorp Universal Life Insurance Plan. Filed as Exhibit 10.15
to Form 10-K for the year ended December 31, 1993, and
incorporated herein by reference.
10.35 KeyCorp Supplemental Long Term Disability Plan. Filed as
Exhibit 10.16 to Form 10-K for the year ended December 31,
1993, and incorporated herein by reference.
10.36 Old KeyCorp Supplemental Disability Plan (Specimen Document).
Filed as Exhibit 10.17 to Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference.
10.37 KeyCorp Deferred Compensation Plan, effective January 1,
1997. Filed as Exhibit 10.36 to Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference.
12 Statement re: Computation of Ratios.
13 KeyCorp 1997 Annual Report to Shareholders.
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP, Independent Auditors.
24 Powers of Attorney.
27 Financial Data Schedule.
</TABLE>
The Corporation hereby agrees to furnish the Securities and Exchange Commission
upon request, copies of instruments outstanding, including indentures, which
define the rights of long-term debt security holders.
All documents listed as Exhibits 10.1 through 10.37 constitute management
contracts or compensatory plans or arrangements.
* Copies of these Exhibits have been filed with the Securities and Exchange
Commission. Shareholders may obtain a copy of any exhibit, upon payment of
reproduction costs, by writing KeyCorp Investor Relations, at 127 Public
Square (Mailcode OH-01-27-1113), Cleveland, OH 44114-1306.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of 1997.
12
<PAGE> 15
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THE DATE INDICATED.
KEYCORP
/S/ THOMAS C. STEVENS
--------------------------------------
THOMAS C. STEVENS
Senior Executive Vice President,
General Counsel and Secretary
March 19, 1998
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND
IN THE CAPACITIES AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Robert W. Gillespie Chairman and Chief
Executive Officer
(Principal Executive
Officer)
* K. Brent Somers Senior Executive Vice
President and Chief
Financial Officer
(Principal Financial
Officer)
* Lee G. Irving Executive Vice
President and Chief
Accounting Officer
(Principal Accounting
Officer)
* Cecil D. Andrus Director
* William G. Bares Director
* Albert C. Bersticker Director
* Dr. Carol A. Cartwright Director
* Thomas A. Commes Director
</TABLE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Kenneth M. Curtis Director
* John C. Dimmer Director
* Stephen R. Hardis Director
* Henry S. Hemingway Director
* Charles R. Hogan Director
* Douglas J. McGregor Director
* Henry L. Meyer III President, Chief
Operating Officer and
Director
* Steven A. Minter Director
* M. Thomas Moore Director
* Richard W. Pogue Director
* Ronald B. Stafford Director
* Dennis W. Sullivan Director
* Peter G. Ten Eyck, II Director
* Nancy B. Veeder Director
</TABLE>
/s/ Thomas C. Stevens
* By Thomas C. Stevens,
attorney-in-fact
March 19, 1998
13
<PAGE> 1
Exhibit 10.3
KEYCORP
LONG TERM INCENTIVE PLAN
(January 1, 1998)
KeyCorp (the "Corporation") hereby establishes this Long Term Incentive
Plan for the purpose of providing an incentive to selected key officers of the
Corporation and its subsidiaries.
ARTICLE I
DEFINITIONS
-----------
For the purposes hereof, the following words and phrases shall have the
meanings indicated:
1. A "Beneficiary" shall mean any person designated by a Participant in
accordance with the Plan to receive payment of all or a portion of any Incentive
Award for which the Participant is eligible at the time of the Participant's
death.
2. A "Change of Control" shall mean a Change of Control under any of
clauses (a), (b), (c), or (d) below. A "Non-Initiated Change of Control" shall
mean (i) a Change of Control under clause (c) below (regardless of whether it
also constitutes a Change of Control under any other clause below), and (ii) a
Change of Control under clause (a), (b), or (d) below if such Change of Control
results in whole or in any significant part, directly or indirectly, proximately
or remotely, from or in response or reaction to an offer or proposal (whether to
the Board of Directors or the shareholders of the Corporation) which was not
solicited or invited by the management of the Corporation to engage in a
transaction with the Corporation that, if consummated, would result in a Change
Event under clause (c) below. An "Initiated Change of Control" shall mean all
Changes of Control other than a Non-Initiated Change of Control. The
determination of the Committee whether a Change of Control constitutes an
Initiated or Non-Initiated Change of Control shall be final and conclusive. For
purposes of this definition, the Corporation will be deemed to have become a
subsidiary of another corporation if any other corporation (which term shall
include, in addition to a corporation, a limited liability company, partnership,
trust, or other organization) owns, directly or indirectly, 50 percent or more
of the total combined outstanding voting power of all classes of stock of the
Corporation or any successor to the Corporation.
<PAGE> 2
(a) A Change of Control will have occurred under this
clause (a) if the Corporation is a party to a transaction
pursuant to which the Corporation is merged with or into, or
is consolidated with, or becomes the subsidiary of another
corporation and either
(i) immediately after giving effect to that
transaction, less than 65% of the then outstanding
voting securities of the surviving or resulting
corporation or (if the Corporation becomes a
subsidiary in the transaction) of the ultimate parent
of the Corporation represent or were issued in
exchange for voting securities of the Corporation
outstanding immediately prior to the transaction, or
(ii) immediately after giving effect to that
transaction, individuals who were directors of the
Corporation on the day before the first public
announcement of (x) the pendency of the transaction
or (y) the intention of any person or entity to cause
the transaction to occur, cease for any reason to
constitute at least 51% of the directors of the
surviving or resulting corporation or (if the
Corporation becomes a subsidiary in the transaction)
of the ultimate parent of the Corporation.
(b) A Change of Control will have occurred under this
clause (b) if a tender or exchange offer shall be made and
consummated for 35% or more of the outstanding voting stock of
the Corporation or any person (as the term "person" is used in
Section 13(d) and Section 14(d)(2) of the 1934 Act) is or
becomes the beneficial owner of 35% or more of the outstanding
voting stock of the Corporation or there is a report filed on
Schedule 13D or Schedule 14D-1 (or any successor schedule,
form or report), each as adopted under the 1934 Act,
disclosing the acquisition of 35% or more of the outstanding
voting stock of the Corporation in a transaction or series of
transactions by any person (as defined earlier in this clause
(b)).
<PAGE> 3
(c) A Change of Control will have occurred under this
clause (c) if either
(i) without the prior approval, solicitation,
invitation, or recommendation of the Corporation
Board of Directors any person or entity makes a
public announcement of a bona fide intention (A) to
engage in a transaction with the Corporation that, if
consummated, would result in a Change Event (as
defined below in this clause (c)), or (B) to
"solicit" (as defined in Rule 14a-1 under the 1934
Act) proxies in connection with a proposal that is
not approved or recommended by the Corporation Board
of Directors, or
(ii) any person or entity publicly announces a bona
fide intention to engage in an election contest
relating to the election of directors of the
Corporation (pursuant to Regulation 14A, including
Rule 14a-11, under the 1934 Act),
and, at any time within the 24 month period immediately
following the date of the announcement of that intention,
individuals who, on the day before that announcement,
constituted the directors of the Corporation (the "Incumbent
Directors") cease for any reason to constitute at least a
majority thereof unless both (A) the election, or the
nomination for election by the Corporation's shareholders, of
each new director was approved by a vote of at least
two-thirds of the Incumbent Directors in office at the time of
the election or nomination for election of such new director,
and (B) prior to the time that the Incumbent Directors no
longer constitute a majority of the Board of Directors, the
Incumbent Directors then in office, by a vote of at least 75%
of their number, reasonably determine in good faith that the
change in Board membership that has occurred before the date
of that determination and that is anticipated to thereafter
occur within the balance of the 24 month period to cause the
Incumbent Directors to no longer be a majority of the Board of
Directors was not caused by or attributable to, in whole or in
any significant part, directly or indirectly, proximately or
remotely, any event under subclause (i) or (ii) of this clause
(c).
<PAGE> 4
For purposes of this clause (c), the term "Change Event" shall
mean any of the events described in the following subclauses
(x), (y), or (z) of this clause (c):
(x) A tender or exchange offer shall be made for 25%
or more of the outstanding voting stock of the
Corporation or any person (as the term "person" is
used in Section 13(d) and Section 14(d)(2) of the
1934 Act) is or becomes the beneficial owner of 25%
or more of the outstanding voting stock of the
Corporation or there is a report filed on Schedule
13D or Schedule 14D-1 (or any successor schedule,
form, or report), each as adopted under the 1934 Act,
disclosing the acquisition of 25% or more of the
outstanding voting stock of the Corporation in a
transaction or series of transactions by any person
(as defined earlier in this subclause (x)).
(y) The Corporation is a party to a transaction
pursuant to which the Corporation is merged with or
into, or is consolidated with, or becomes the
subsidiary of another corporation and, after giving
effect to such transaction, less than 50% of the then
outstanding voting securities of the surviving or
resulting corporation or (if the Corporation becomes
a subsidiary in the transaction) of the ultimate
parent of the Corporation represent or were issued in
exchange for voting securities of the Corporation
outstanding immediately prior to such transaction or
less than 51% of the directors of the surviving or
resulting corporation or (if the Corporation becomes
a subsidiary in the transaction) of the ultimate
parent of the Corporation were directors of the
Corporation immediately prior to such transaction.
(z) There is a sale, lease, exchange, or other
transfer (in one transaction or a series of related
transactions) of all or substantially all the assets
of the Corporation.
(d) A Change of Control will have
occurred under this clause (d) if there is a sale,
lease, exchange, or other transfer (in one transaction or a
series of related transactions) of all or substantially all of
the assets of the Corporation.
<PAGE> 5
3. The "Committee" shall mean the Compensation and Organization
Committee of the Board of Directors of the Corporation, a subcommittee thereof,
or other Committee of the Board of Directors hereafter succeeding to the
responsibilities currently performed by the Compensation and Organization
Committee with respect to the Plan.
4. "Compensation Cycle" shall mean a period consisting of four
consecutive calendar years.
5. "Fair Market Value" shall mean: (a) if the Corporation's Common
Shares are traded on a national exchange, the mean between the high and low
sales price per Common Share on that national exchange on the date for which the
determination of fair market value is made or, if there are no sales of Common
Shares on that date, then on the next preceding date on which there were any
sales of Common Shares, or (b) if the Common Shares are not traded on a national
exchange, the mean between the high and low sales price per Common Share in the
over-the-counter market, National Market System, as reported by the National
Quotations Bureau, Inc. and NASDAQ on the date for which the determination of
fair market value is made or, if there are no sales of Common Shares on that
date, then on the next preceding date on which there were any sales of Common
Shares.
6. An "Incentive Award" shall mean the incentive which may be paid to a
Participant pursuant to the Plan.
7. "Market Point" shall mean for any Participant the average market
point (as determined under the Corporation's salary administration program) of
such Participant's job grade at the end of each of the four years of the
Compensation Cycle; provided, however, that if the Corporation changes such
Participant's job grade during any such year or such Participant is promoted,
transferred, or otherwise moves into a different job grade during such year,
then such Market Point shall be calculated on a pro rata basis for each of the
periods in which such job grades were in effect for such Participant.
8. A "Participant" shall mean a senior officer of the Corporation or
one of its subsidiaries who is selected by the Committee to participate in the
Plan.
9. The "Plan" shall mean this Long Term Incentive Plan, together with
all amendments hereto.
<PAGE> 6
10. "Subsidiary" shall mean a corporation organized and existing under
the laws of the United States or of any state or the District of Columbia of
which 50 percent or more of the issued and outstanding stock is owned by the
Corporation or by a Subsidiary of the Corporation.
11. The "1934 Act" shall mean the Securities Exchange Act of 1934 as
from time to time amended.
ARTICLE II
INCENTIVE AWARDS
----------------
1. PARTICIPATION. Biannually, commencing with 1998, the Committee shall
select the Participants in the Plan for the Compensation Cycle and shall
determine whether such Participants shall be in Incentive Group I, II, or III.
In general, the selection will be made prior to the beginning of each
Compensation Cycle or as soon thereafter as is reasonably practicable.
Participants shall be notified of their selection in writing. In the event that
employees are determined to be Participants by job grade, the Committee or the
Chief Executive Officer, subject to the approval of the Committee or in
accordance with guidelines established by the Committee, may select additional,
or exclude otherwise eligible, employees for Plan participation notwithstanding
their job grade. The Committee, in its sole discretion, may discontinue the
participation of an individual Participant and any such discontinued Participant
shall receive a pro rata Incentive Award after completion of the Compensation
Cycle based on the period of time the Participant was in the Plan. The
Committee, in its sole discretion, may select additional Participants to the
Plan after the inception of a Compensation Cycle and such Participants shall
receive a pro rata Incentive Award based on the period of time the Participant
was in the Plan for the Compensation Cycle.
2. INCENTIVE POOL. The individual target incentives for persons
selected to be in the Plan are set forth in Exhibit A to the Plan, which Exhibit
A may be amended by action of the Committee from time to time for Compensation
Cycles thereafter beginning.
3. FORMULA FOR INCENTIVE AWARDS. Prior to each Compensation Cycle or as
soon as practical thereafter, the Committee shall devise a formula to determine
the percentage to be applied to the target Incentive Awards set forth in Exhibit
A which formula shall be based on one or more financial criteria or other
performance goals.
<PAGE> 7
4. INCENTIVE AWARDS. As soon as practical after the end of the
Compensation Cycle, the Committee shall determine the aggregate amount of the
Incentive Awards payable under the Plan for such Compensation Cycle in
accordance with the percentage determined by the formula set forth in Section 3.
The aggregate amount of the Incentive Awards shall not exceed 250% of the
aggregate amount of the target Incentive Awards payable to all Participants. The
Committee shall determine the amount of the Incentive Award for each Participant
which shall not be less than 70% nor more than 130% of the amount that the
Participant would have received by applying the aggregate percentage based on
the formula set forth in Section 3 to such Participant's target Incentive Award.
In determining the extent to which the formula established in Section 3 has been
achieved and the aggregate percentage to be applied to the target Incentive
Awards, the Committee shall have the discretion to disregard changes in
accounting rules or practices, gains from the sale of subsidiaries or assets
outside the ordinary course of business, or restructuring or other nonrecurring
charges or similar adjustments.
5. ACTIVE EMPLOYMENT REQUIREMENT. Ordinarily, Incentive Awards shall be
made only to Participants who are actively employed at the end of the
Compensation Cycle; however, Participants who retire at age 65 or over or become
disabled during a Compensation Cycle, or the Beneficiary(s) or estate of a
Participant whose death occurs during a Compensation Cycle shall be entitled to,
on a pro rata basis (for the period of time the Participant was in the Plan for
the Compensation Cycle) the lesser of (i) the Participant's target Incentive
Award or (ii) the Participant's target Incentive Award times the percentage
based on the formula set forth in Section 3 if the Committee determines a
percentage of less than 100%. Except as provided in Section 6, no other
Participant who is not actively employed at the end of the Compensation Cycle
shall receive an Incentive Award unless the Committee, in its sole discretion,
so determines that an Incentive Award shall be made.
6. EFFECT OF CHANGE OF CONTROL. Upon the occurrence of a Non-Initiated
Change of Control during the Compensation Cycle, this Plan shall terminate and
each Participant immediately prior to the occurrence of such Non-Initiated
Change of Control shall promptly receive a pro rated amount that would have been
payable at the end of the Compensation Cycle based on the greater of (i) the
Participant's target Incentive Award or (ii) the Participant's target Incentive
Award times the percentage based on the
<PAGE> 8
formula set forth in Section 3. Such payment shall be pro rated based upon the
portion of the Compensation Cycle that occurred prior to such Non-Initiated
Change of Control. Application of the formula shall be based on data and
measurements for each completed year of the Compensation Cycle and, for the year
in which the termination occurs, on the number of full months of such year prior
to the effective date of such Plan termination. The Corporation shall retain the
services of the independent auditors used by the Corporation (prior to the Plan
termination) to determine the required data and measurements for such partial
year. In the event of the occurrence of an Initiated Change of Control during
the Compensation Cycle, the Committee, in its sole discretion, shall determine
whether the Plan should terminate and the manner of calculating, and the time
for payment, of Incentive Awards (if any) to be made under the Plan for the
Compensation Cycle.
7. PAYMENT OF INCENTIVE AWARD. Except as provided in the first sentence
of Section 6, Incentive Awards shall be paid on or prior to March 15 of the year
following the Compensation Cycle. Notwithstanding any other provision of the
Plan, the Committee, in its sole discretion, shall have the authority to
authorize payment of all or a portion of all Incentive Awards prior to the end
of the Compensation Cycle, and if a portion, the Corporation shall pay the
remaining portion of the Award on or prior to March 15 of the year following the
Compensation Cycle.
Notwithstanding any other provision of the Plan, the Committee, in its
sole discretion, shall have the authority to require deferral of payment of all
or a portion of all Incentive Awards due to any Participant if the Committee
determines that the Corporation would be denied a deduction for federal income
tax purposes for such Incentive Award or the portion thereof by reason of
Section 162(m) of the Internal Revenue Code of 1986, as amended, and the
regulations issued thereunder, if the Incentive Award or the portion thereof
were not so deferred. Such deferred Incentive Awards, or the portion thereof,
shall be deferred in accordance with the provisions of the KeyCorp Deferred
Compensation Plan ("Deferred Plan").
8. FORM OF PAYMENT. Participants who are in compliance with the
Corporation's Stock Ownership Guidelines ("Guidelines") may elect (in accordance
with procedures established by the Committee or by the Corporation in
administering the Plan) to receive their Incentive Awards in cash or the
Corporation's Common Shares (at Fair Market Value on the date a cash award would
otherwise be
<PAGE> 9
payable) or any combination thereof. Participants who have not met the
Guidelines shall receive their Incentive Awards in a combination of the
Corporation's Common Shares (at Fair Market Value on the date a cash award would
otherwise be payable) together with an amount of cash necessary to pay all
applicable taxes on the Incentive Award. Common Shares received by a Participant
not in compliance with the Guidelines may not be transferred until the
Participant meets the Guidelines (exclusive of the Common Shares to be
transferred) or terminates employment with the Corporation. Participants may
defer their awards pursuant to the Deferred Plan. Participants who have elected
to defer and have not met the Guidelines must defer awards into the Deferred
Plan's phantom stock account (if such an account is offered) until they have met
the Guidelines.
ARTICLE III
ADMINISTRATION
--------------
The Corporation shall be responsible for the general administration of
the Plan and for carrying out the provisions hereof. The Committee shall have
all such powers as may be necessary to carry out its duties under the Plan,
including the power to determine all questions pertaining to claims for benefits
and procedures for claim review, and the power to resolve all other questions
arising under the Plan, including any questions of construction. The Corporation
and the Committee may take such further action as the Corporation and the
Committee shall deem advisable in the administration of the Plan. The actions
taken and the decisions made by the Corporation and the Committee hereunder
shall be final and binding upon all interested parties. In accordance with the
provisions of Section 503 of the Employee Retirement Income Security Act of
1974, as amended, the Committee shall provide a procedure for handling claims of
Participants or their Beneficiaries under this Plan. Such procedure shall be in
accordance with regulations issued by the Secretary of Labor and shall provide
adequate written notice within a reasonable period of time with respect to the
denial of any such claims as well as a reasonable opportunity for a full and
fair review by the Committee of any such denial. Notwithstanding anything to the
contrary contained herein, the Corporation shall be the "administrator" for the
purpose of the Employee Retirement Income Security Act of 1974, as amended. Any
action authorized under the Plan to be done by the Committee may be
<PAGE> 10
done by a subcommittee of the Compensation and Organization Committee of the
Board of Directors, by the Board of Directors, or by any other Board committee
authorized by the Board of Directors.
ARTICLE IV
AMENDMENT AND TERMINATION
-------------------------
The Corporation reserves the right to amend or terminate the Plan at
any time by action of the Board of Directors or the Committee, but, from and
after the occurrence of a Non-Initiated Change of Control, no such amendment or
termination shall adversely affect the rights of a Participant which have
accrued prior to such amendment or termination except with the written consent
of such Participant.
ARTICLE V
MISCELLANEOUS
-------------
1. NOT AN EMPLOYMENT AGREEMENT. Nothing herein contained shall be
construed as a commitment to or agreement with any person employed by the
Corporation or a Subsidiary to continue such person's employment with the
Corporation or Subsidiary, and nothing herein contained shall be construed as a
commitment or agreement on the part of the Corporation or any Subsidiary to
continue the employment or the annual rate of compensation of any such person
for any period. All Participants shall remain subject to discharge to the same
extent as if the Plan had never been put into effect.
2. UNFUNDED FOR TAX AND ERISA PURPOSES. It is the intention of the
Corporation and the Participants that the Plan be unfunded for tax purposes and
for the purposes of Title I of the Employee Retirement Income Security Act of
1974, as amended.
3. CLAIMS OF OTHER PERSONS. The provisions of the Plan shall in no
event be construed as giving any person, firm, or corporation any legal or
equitable right against the Corporation or any Subsidiary, their officers,
employees, agents, or directors, except any such rights as are specifically
provided for in the Plan or are hereafter created in accordance with the terms
and provisions of the Plan.
4. ABSENCE OF LIABILITY. No member of the Board of Directors of
the Corporation or a Subsidiary or any officer or employee of the Corporation or
a Subsidiary shall be liable for any act or action hereunder, whether of
commission or omission.
<PAGE> 11
5. SEVERABILITY. The invalidity or unenforceability of any particular
provisions of the Plan shall not affect any other provision hereof, and the Plan
shall be construed in all respects as if such invalid or unenforceable provision
were omitted herefrom.
6. GOVERNING LAW. The provisions of the Plan shall be governed and
construed in accordance with the laws of the State of Ohio.
KEYCORP
By:
-------------------------------------------------
Thomas E. Helfrich, Executive Vice President
<PAGE> 12
<TABLE>
<CAPTION>
Exhibit A
---------
Incentive Job Target Incentive As a
Group Grades Percent of Market Point
--------- ------ -----------------------
<S> <C> <C>
I 94-95 60%
II 92-93 50%
III 89-91 40%
</TABLE>
<PAGE> 1
Exhibit 10.4
KEYCORP
ANNUAL INCENTIVE PLAN
(JANUARY 1, 1998)
KeyCorp (the "Corporation") hereby establishes this Annual Incentive
Plan for the purpose of providing an incentive to selected key officers of the
Corporation and its subsidiaries.
ARTICLE I
DEFINITIONS
-----------
For the purposes hereof, the following words and phrases shall have the
meanings indicated:
1. A "Beneficiary" shall mean any person designated by a Participant in
accordance with the Plan to receive payment of all or a portion of any Incentive
Award for which the Participant is eligible at the time of the Participant's
death.
2. A "Change of Control" shall mean a Change of Control under any of
clauses (a), (b), (c), or (d) below. A "Non-Initiated Change of Control" shall
mean (i) a Change of Control under clause (c) below (regardless of whether it
also constitutes a Change of Control under any other clause below), and (ii) a
Change of Control under clause (a), (b), or (d) below if such Change of Control
results in whole or in any significant part, directly or indirectly, proximately
or remotely, from or in response or reaction to an offer or proposal (whether to
the Board of Directors or the shareholders of the Corporation) which was not
solicited or invited by the management of the Corporation to engage in a
transaction with the Corporation that, if consummated, would result in a Change
Event under clause (c) below. An "Initiated Change of Control" shall mean all
Changes of Control other than a Non-Initiated Change of Control. The
determination of the Committee whether a Change of Control constitutes an
Initiated or Non-Initiated Change of Control shall be final and conclusive. For
purposes of this definition, the Corporation will be deemed to have become a
subsidiary of another corporation if any other corporation (which term shall
include, in addition to a corporation, a limited liability company, partnership,
trust, or other organization) owns, directly or indirectly, 50 percent or more
of the total combined outstanding voting power of all classes of stock of the
Corporation or any successor to the Corporation.
<PAGE> 2
(a) A Change of Control will have occurred under this
clause (a) if the Corporation is a party to a transaction
pursuant to which the Corporation is merged with or into, or
is consolidated with, or becomes the subsidiary of another
corporation and either
(i) immediately after giving effect to that
transaction, less than 65% of the then outstanding
voting securities of the surviving or resulting
corporation or (if the Corporation becomes a
subsidiary in the transaction) of the ultimate parent
of the Corporation represent or were issued in
exchange for voting securities of the Corporation
outstanding immediately prior to the transaction, or
(ii) immediately after giving effect to that
transaction, individuals who were directors of the
Corporation on the day before the first public
announcement of (x) the pendency of the transaction
or (y) the intention of any person or entity to cause
the transaction to occur, cease for any reason to
constitute at least 51% of the directors of the
surviving or resulting corporation or (if the
Corporation becomes a subsidiary in the transaction)
of the ultimate parent of the Corporation.
(b) A Change of Control will have occurred under this
clause (b) if a tender or exchange offer shall be made and
consummated for 35% or more of the outstanding voting stock of
the Corporation or any person (as the term "person" is used in
Section 13(d) and Section 14(d)(2) of the 1934 Act) is or
becomes the beneficial owner of 35% or more of the outstanding
voting stock of the Corporation or there is a report filed on
Schedule 13D or Schedule 14D-1 (or any successor schedule,
form or report), each as adopted under the 1934 Act,
disclosing the acquisition of 35% or more of the outstanding
voting stock of the Corporation in a transaction or series of
transactions by any person (as defined earlier in this clause
(b)).
(c) A Change of Control will have occurred under this
clause (c) if either
<PAGE> 3
(i) without the prior approval, solicitation,
invitation, or recommendation of the Corporation
Board of Directors any person or entity makes a
public announcement of a bona fide intention (A) to
engage in a transaction with the Corporation that, if
consummated, would result in a Change Event (as
defined below in this clause (c)), or (B) to
"solicit" (as defined in Rule 14a-1 under the 1934
Act) proxies in connection with a proposal that is
not approved or recommended by the Corporation Board
of Directors, or
(ii) any person or entity publicly announces a bona
fide intention to engage in an election contest
relating to the election of directors of the
Corporation (pursuant to Regulation 14A, including
Rule 14a-11, under the 1934 Act),
and, at any time within the 24 month period immediately
following the date of the announcement of that intention,
individuals who, on the day before that announcement,
constituted the directors of the Corporation (the "Incumbent
Directors") cease for any reason to constitute at least a
majority thereof unless both (A) the election, or the
nomination for election by the Corporation's shareholders, of
each new director was approved by a vote of at least
two-thirds of the Incumbent Directors in office at the time of
the election or nomination for election of such new director,
and (B) prior to the time that the Incumbent Directors no
longer constitute a majority of the Board of Directors, the
Incumbent Directors then in office, by a vote of at least 75%
of their number, reasonably determine in good faith that the
change in Board membership that has occurred before the date
of that determination and that is anticipated to thereafter
occur within the balance of the 24 month period to cause the
Incumbent Directors to no longer be a majority of the Board of
Directors was not caused by or attributable to, in whole or in
any significant part, directly or indirectly, proximately or
remotely, any event under subclause (i) or (ii) of this clause
(c).
For purposes of this clause (c), the term "Change Event" shall
mean any of the events
<PAGE> 4
described in the following subclauses (x), (y), or (z) of this
clause (c):
(x) A tender or exchange offer shall be made for 25%
or more of the outstanding voting stock of the
Corporation or any person (as the term "person" is
used in Section 13(d) and Section 14(d)(2) of the
1934 Act) is or becomes the beneficial owner of 25%
or more of the outstanding voting stock of the
Corporation or there is a report filed on Schedule
13D or Schedule 14D-1 (or any successor schedule,
form, or report), each as adopted under the 1934 Act,
disclosing the acquisition of 25% or more of the
outstanding voting stock of the Corporation in a
transaction or series of transactions by any person
(as defined earlier in this subclause (x)).
(y) the Corporation is a party to a transaction
pursuant to which the Corporation is merged with or
into, or is consolidated with, or becomes the
subsidiary of another corporation and, after giving
effect to such transaction, less than 50% of the then
outstanding voting securities of the surviving or
resulting corporation or (if the Corporation becomes
a subsidiary in the transaction) of the ultimate
parent of the Corporation represent or were issued in
exchange for voting securities of the Corporation
outstanding immediately prior to such transaction or
less than 51% of the directors of the surviving or
resulting corporation or (if the Corporation becomes
a subsidiary in the transaction) of the ultimate
parent of the Corporation were directors of the
Corporation immediately prior to such transaction.
(z) There is a sale, lease, exchange, or other
transfer (in one transaction or a series of related
transactions) of all or substantially all the assets
of the Corporation.
(d) A Change of Control will have occurred under this
clause (d) if there is a sale, lease, exchange, or other
transfer (in one transaction or a series of related
transactions) of all or substantially all of the assets of the
Corporation.
3. The "Committee" shall mean the Compensation and Organization
Committee of the Board of Directors of the Corporation or other Committee of the
Board of Directors hereafter succeeding to the
<PAGE> 5
responsibilities currently performed by the Compensation and Organization
Committee with respect to the Plan.
4. An "Incentive Award" shall mean the incentive which may be paid to a
Participant pursuant to the Plan.
5. "Market Point" shall mean for any Participant for any calendar year
the market point (as determined under the Corporation's salary administration
program) of such Participant's job grade at the end of the calendar year;
provided, however, that if the Corporation changes such Participant's job grade
during any such calendar year or such Participant is promoted, transferred, or
otherwise moves into a different job grade during such calendar year, then such
Market Point shall be calculated on a pro rata basis for each of the periods in
which such job grades were in effect for such Participant.
6. A "Participant" shall mean a senior officer of the Corporation or
one of its subsidiaries who is selected by the Committee to participate in the
Plan.
7. The "Plan" shall mean this Annual Incentive Plan, together with all
amendments hereto.
8. "Plan Year" shall mean each calendar year for which the Plan remains
in existence.
9. "Subsidiary" shall mean a corporation organized and existing under
the laws of the United States or of any state or the District of Columbia of
which 50 percent or more of the issued and outstanding stock is owned by the
Corporation or by a Subsidiary of the Corporation.
10. The "Target Incentive Pool" shall mean the aggregate amount, as
determined in accordance with Article II of the Plan, of the aggregate
individual target Incentive Awards of Participants.
11. "Target Pool Percentage" shall mean the percentage determined
pursuant to Article II, Sections 3 and 4 below that will be used to establish
the aggregate amount available for Incentive Awards.
12. The "1934 Act" shall mean the Securities Exchange Act of 1934
as from time to time amended.
<PAGE> 6
ARTICLE II
INCENTIVE AWARDS
----------------
1. PARTICIPATION. Annually, the Committee shall select the Participants
in the Plan for the Plan Year. In general, the selection will be made prior to
the beginning of each Plan Year or as soon thereafter as is reasonably
practicable; in addition, such selection may be made at any time during a Plan
Year in the case of a newly hired employee or an employee that receives a new
position. Not in limitation of the foregoing, the Committee shall have the
authority to designate at the beginning of a Plan Year, or as soon thereafter as
is reasonably practicable, employees in selected job grades as Participants,
including any employee that may later be hired or promoted into any such job
grade during the Plan Year, without further action on behalf of the Committee.
Participants shall be notified of their selection in writing. In the event that
employees are determined to be Participants by job grade, the Chief Executive
Officer, or his or her designee, may select, subject to the approval of the
Committee or in accordance with guidelines established by the Committee,
additional eligible employees for Plan participation notwithstanding their job
grade. Employees otherwise eligible for participation because of their job grade
may be excluded, by action of the Committee or the Chief Executive Officer (or
his or her designee), if they are participants in business unit or other
incentive compensation plans.
2. INCENTIVE POOL. The individual target incentives for persons
selected to be in the Plan are set forth in Exhibit A to the Plan, which Exhibit
A may be amended by action of the Committee from time to time. Target incentives
for Participants who are eligible for part of the Plan Year or whose incentive
group assignment changed during the Plan Year will be calculated on a pro rata
basis for both the period of each incentive group assignment and the period
during the Plan Year in which the Participant was an eligible employee. In the
event that an individual whose job does not have an assigned salary grade is
approved for participation in the Plan, the Chief Executive Officer, or his or
her designee, is authorized to select a target incentive percentage for such
individual and base the calculation of target incentive and other calculations
under this Plan on such individual's base salary.
3. FORMULA FOR TARGET POOL PERCENTAGE; KNOCK-OUT FACTOR. Prior to each
Plan Year or as soon as practical thereafter, the Committee shall devise a
formula to determine the Target Pool Percentage
<PAGE> 7
which formula shall be based on one or more financial criteria or other
performance goals. The Committee shall have the discretion to set minimal
performance goals which must be met before any Incentive Awards will be made
under the Plan and shall have the further discretion to revise or disregard one
or more of such minimal performance goals if the Committee finds that it or they
have not been met because of unforeseen circumstances.
4. INCENTIVE AWARDS. As soon as practical after the end of the Plan
Year, the Committee shall determine the Target Pool Percentage (not to exceed
200%) to be applied to the Target Incentive Pool to establish the maximum
aggregate amount to be distributed as Incentive Awards. The percentage shall be
based on the formula established in Section 3 hereof but the Committee shall
have the discretion to decrease or increase the Target Pool Percentage by not
more than twenty per cent (20%). In determining whether, and the extent to
which, the formula established in Section 3 hereof has been achieved, the
Committee shall have the discretion to disregard changes in accounting rules or
practices, gains from the sale of subsidiaries or assets outside the ordinary
course of business, or restructuring or other nonrecurring charges or similar
adjustments. It is contemplated that Incentive Awards may, depending upon the
responsibilities of the Participant, be based wholly on corporate performance,
partially on corporate performance and partially on line of business or business
unit performance, or wholly on line of business or business unit performance.
Ordinarily, the Committee will delegate to management responsibility for
determining Target Pool Percentages for each line of business or business unit
provided that the aggregate weighted average Target Pool Percentages for all
lines of business and business units shall be substantially equivalent to the
Target Pool Percentage established by the Committee.
The Committee shall determine or approve the amount of the
Incentive Award for each Participant above such job grade level as the Committee
shall from time to time select and, with respect to all other Participants, the
Committee shall approve the Incentive Awards based on the methodology utilized
by management consistent with the Committee's overall discretion.
It may be determined that a Participant shall receive no
Incentive Award for the Plan Year. In addition, the Plan does not restrict the
maximum amount of an Incentive Award that may be paid to an individual
Participant.
<PAGE> 8
5. ACTIVE EMPLOYMENT REQUIREMENT. Ordinarily, Incentive Awards shall be
made only to Participants who are actively employed at the end of the Plan Year;
however, Participants who retire at age 65 or over or become disabled during a
Plan Year, or the Beneficiary(s) or estate of a Participant whose death occurs
during a Plan Year shall be entitled to, on a pro rata basis (for the period of
time the Participant was in the Plan for the Plan Year) the lesser of (i) the
Participant's target incentive or (ii) the Participant's target incentive times
the Target Pool Percentage if the Committee determines a Target Pool Percentage
of less than 100%. Except as provided in Section 6 hereof, no other Participant
who is not actively employed at the end of the Plan Year shall receive an
Incentive Award unless the Committee, in its sole discretion, so determines that
an Incentive Award shall be made.
6. EFFECT OF CHANGE OF CONTROL. Upon the occurrence of a Non-Initiated
Change of Control during the Plan Year, this Plan shall terminate and each
Participant immediately prior to the occurrence of such Non-Initiated Change of
Control shall promptly receive 200% of such Participant's target incentive
payable under the Plan for the full Plan Year. In the event of the occurrence of
an Initiated Change of Control during the Plan Year, the Committee, in its sole
discretion, shall determine whether the Plan should terminate and the manner of
calculating, and the time for payment, of Incentive Awards (if any) to be made
under the Plan for the Plan Year.
7. PAYMENT OF INCENTIVE AWARD. Except as provided in the first sentence
of Section 6 hereof, Incentive Awards shall be paid on or prior to March 15 of
the year following the Plan Year. Notwithstanding any other provision of the
Plan, the Committee, in its sole discretion, shall have the authority to
authorize payment of all or a portion of all Incentive Awards prior to the end
of the Plan Year, and if a portion, the Corporation shall pay the remaining
portion of the Award on or prior to March 15 of the year following the Plan
Year.
Notwithstanding any other provision of the Plan, the Committee, in its
sole discretion, shall have the authority to require deferral of payment of all
or a portion of all Incentive Awards due to any Plan Participant if the
Committee determines that the Corporation would be denied a deduction for
federal income tax purposes for such Award or the portion thereof by reason of
Section 162(m) of the Internal Revenue Code of 1986, as amended, and the
regulations issued thereunder, if the Award or the portion
<PAGE> 9
thereof were not so deferred. Such deferred Incentive Awards, or the portion
thereof, shall be deferred in accordance with the provisions of the KeyCorp
Deferred Compensation Plan.
ARTICLE III
ADMINISTRATION
--------------
The Corporation shall be responsible for the general administration of
the Plan and for carrying out the provisions hereof. The Committee shall have
all such powers as may be necessary to carry out its duties under the Plan,
including the power to determine all questions pertaining to claims for benefits
and procedures for claim review, and the power to resolve all other questions
arising under the Plan, including any questions of construction. The Corporation
and the Committee may take such further action as the Corporation and the
Committee shall deem advisable in the administration of the Plan. The actions
taken and the decisions made by the Corporation and the Committee hereunder
shall be final and binding upon all interested parties. In accordance with the
provisions of Section 503 of the Employee Retirement Income Security Act of
1974, as amended, the Committee shall provide a procedure for handling claims of
Participants or their Beneficiaries under this Plan. Such procedure shall be in
accordance with regulations issued by the Secretary of Labor and shall provide
adequate written notice within a reasonable period of time with respect to the
denial of any such claims as well as a reasonable opportunity for a full and
fair review by the Committee of any such denial. Notwithstanding anything to the
contrary contained herein, the Corporation shall be the "administrator" for the
purpose of the Employment Retirement Income Security Act of 1974, as amended.
Any action authorized under the Plan to be done by the Committee may be done by
the Board of Directors or any other Board committee authorized by the Board of
Directors.
ARTICLE IV
AMENDMENT AND TERMINATION
-------------------------
The Corporation reserves the right to amend or terminate the Plan at
any time by action of the Board of Directors or the Committee, but, from and
after the occurrence of a Non-Initiated Change of Control, no such amendment or
termination shall adversely affect the rights of a Participant which have
accrued prior to such amendment or termination except with the written consent
of such Participant.
<PAGE> 10
ARTICLE V
MISCELLANEOUS
-------------
1. NOT AN EMPLOYMENT AGREEMENT. Nothing herein contained shall be
construed as a commitment to or agreement with any person employed by the
Corporation or a Subsidiary to continue such person's employment with the
Corporation or Subsidiary, and nothing herein contained shall be construed as a
commitment or agreement on the part of the Corporation or any Subsidiary to
continue the employment or the annual rate of compensation of any such person
for any period. All Participants shall remain subject to discharge to the same
extent as if the Plan had never been put into effect.
2. UNFUNDED FOR TAX AND ERISA PURPOSES. It is the intention of the
Corporation and the Participants that the Plan be unfunded for tax purposes and
for the purposes of Title I of the Employee Retirement Income Security Act of
1974, as amended.
3. CLAIMS OF OTHER PERSONS. The provisions of the Plan shall in no
event be construed as giving any person, firm, or corporation any legal or
equitable right against the Corporation or any Subsidiary, their officers,
employees, agents, or directors, except any such rights as are specifically
provided for in the Plan or are hereafter created in accordance with the terms
and provisions of the Plan.
4. ABSENCE OF LIABILITY. No member of the Board of Directors of the
Corporation or a Subsidiary or any officer or employee of the Corporation or a
Subsidiary shall be liable for any act or action hereunder, whether of
commission or omission.
5. SEVERABILITY. The invalidity or unenforceability of any particular
provisions of the Plan shall not affect any other provision hereof, and the Plan
shall be construed in all respects as if such invalid or unenforceable provision
were omitted herefrom.
6. GOVERNING LAW. The provisions of the Plan shall be governed and
construed in accordance with the laws of the State of Ohio.
KEYCORP
By:
-------------------------------------------------
Thomas E. Helfrich, Executive Vice President
<PAGE> 11
<TABLE>
<CAPTION>
Exhibit A
Incentive Job Target Incentive As a
Group Grades Percent of Market Point
--------- ------ -----------------------
<S> <C> <C>
I 95 100%
II 94 85%
III 92-93 70%
IV 90-91 55%
V 89 45%
VI 88 35%
VII 87 30%
VIII 86 25%
IX 85 20%
X 84 and below 15%
</TABLE>
<PAGE> 1
Exhibit 10.5
EXECUTIVES WITH CHANGE OF CONTROL AGREEMENTS
--------------------------------------------
Gary R. Allen
Patrick V. Auletta
James S. Bingay
Kevin M. Blakely
Michael J. Burns
Michael A. Butler
Stephen A. Cone
Roger E. Dunker
Michael L. Evans
Gerald A. Fallon
Peter H. Fass, M.D.
James A. Fishell
Linda A. Grandstaff
Allen J. Gula, Jr.
Michael J. Hammes
Carl C. Heintel, Jr.
Robert B. Heisler, Jr.
Thomas E. Helfrich
Anthony Heyworth
Leroy G. Irving
Robert G. Jones
Daniel E. Klimas
John E. Kohl
Jack L. Kopnisky
John H. Mancuso
Peter K. Potchen
Kevin P. Riley
John A. Simonson
K. Brent Somers
Thomas C. Stevens
Andrew R. Tyson
<PAGE> 2
AGREEMENT
THIS AGREEMENT ("Agreement") is made as of the 20th day of November,
1997, between KEYCORP, an Ohio corporation ("Key"), and ___________________ (the
"Executive").
Key is entering into this Agreement in recognition of the importance of
the Executive's services to the continuity of management of Key and based upon
its determination that it will be in the best interests of Key and its
Subsidiaries to encourage the Executive's continued attention and dedication to
the Executive's duties in the potentially disruptive circumstances of a possible
Change of Control of Key. (As used in this Agreement, the terms "Subsidiaries"
and "Change of Control" and certain other capitalized terms have the meanings
ascribed to them in Section 7, at the end of this Agreement.)
Key and the Executive agree, effective as of the date first set forth
above, as follows:
1. BASIC SEVERANCE BENEFITS. The benefits described in Sections 1.1,
1.2, and 1.3 below are subject to the limitations set forth in Sections 4.1
(which requires an election among applicable agreements providing severance
benefits if more than one such agreement would apply in the particular
circumstances of the termination of the Executive's employment and stipulates
that any payments received under this Agreement are in lieu of other claims or
rights), 4.2 (regarding withholding), and 4.3 (requiring the execution of a
waiver and release by the Executive).
1.1 IF EMPLOYMENT IS TERMINATED WITHOUT CAUSE, ETC., WITHIN TWO YEARS
OF A CHANGE OF CONTROL. If, within two years following the occurrence of a
Change of Control, the Executive's employment with Key and its Subsidiaries is
terminated by Key or its Subsidiary for any reason other than Cause, Disability,
or death or by the Executive after a Reduction of Base Salary or a Mandatory
Relocation has occurred:
(a) LUMP SUM PAYMENT. Key shall pay to the Executive, within 30
business days after the Termination Date, a lump sum severance
benefit equal to 2 1/2 times the sum of (i) one year's Base
Salary (at the highest rate in effect at any time during the
one year period ending on the date of the Change of Control)
plus (ii) Average Annual Incentive Compensation; and
(b) RETIREMENT AND SAVINGS PLANS. Effective as of the
Termination Date, the Executive's interest in all Relevant
Plans shall become fully vested and nonforfeitable and the
Executive's right to and interest in all subsequent accruals
provided for in the remainder of this Section 1.1(b) under any
of the Relevant Plans shall also be fully vested and
nonforfeitable. For the period beginning on the day after the
Termination Date and ending thirty months, to the day, after
the Termination Date (the "Section 1.1 Benefit Period"), Key
shall cause the Executive to continue to be covered by and to
participate in all of the Relevant Plans in the same manner and
to the same extent as if the Executive continued in the
full-time
<PAGE> 3
employ of Key throughout the Section 1.1 Benefit Period, except
that, if Key determines that such coverage or participation in
any one or more of the Relevant Plans is Impermissible, the
Executive shall continue to be covered by and participate as
aforesaid in all of the Relevant Plans as to which such
coverage or participation is not Impermissible and, with
respect to each Relevant Plan as to which such continued
coverage or participation is Impermissible, Section 1.4(b)
shall apply. With respect to each Discontinued Plan, Section
1.4(c) shall apply.
1.2 IF EMPLOYMENT IS TERMINATED BY EXECUTIVE FOR GOOD REASON DURING A
WINDOW PERIOD. Except as provided in the last sentence of this Section 1.2, if
the Executive's employment with Key and its Subsidiaries is terminated by the
Executive for Good Reason during a Window Period:
(a) LUMP SUM PAYMENT. Key shall pay to the Executive, within 30
business days after the Termination Date, a lump sum severance
benefit equal to one and one half times the sum of (i) one
year's Base Salary (at the highest rate in effect at any time
during the one year period ending on the date of the Change of
Control) plus (ii) Average Annual Incentive Compensation, and
(b) RETIREMENT AND SAVINGS PLANS. Effective as of the
Termination Date, the Executive's interest in all Relevant
Plans shall become fully vested and nonforfeitable and the
Executive's right to and interest in all subsequent accruals
provided for in the remainder of this Section 1.2(b) under any
of the Relevant Plans shall also be fully vested and
nonforfeitable. For the period beginning on the day after the
Termination Date and ending eighteen months, to the day, after
the Termination Date (the "Section 1.2 Benefit Period"), Key
shall cause the Executive to continue to be covered by and to
participate in all of the Relevant Plans in the same manner and
to the same extent as if the Executive continued in the
full-time employ of Key throughout the Section 1.2 Benefit
Period, except that, if Key determines that such coverage or
participation in any one or more of the Relevant Plans is
Impermissible, the Executive shall continue to be covered by
and participate as aforesaid in all of the Relevant Plans as to
which such coverage or participation is not Impermissible and,
with respect to each Relevant Plan as to which such continued
coverage or participation is Impermissible, Section 1.4(b)
shall apply. With respect to each Discontinued Plan, Section
1.4(c) shall apply.
This Section 1.2 shall not apply if, at the Termination Date, (x) there has been
either any Reduction of Base Salary or any Mandatory Relocation (in which event
Section 1.1 would apply to the termination) or (y) Key or any Subsidiary has
Cause to terminate the Executive's employment (in which case no lump sum
severance benefit would be payable under either of Sections 1.1 or 1.2).
1.3 PAYMENT OF COST OF COBRA HEALTH BENEFITS. If the Executive becomes
entitled to payment of a lump sum severance benefit under either of Sections 1.1
or 1.2 of this Agreement and the Executive elects to continue to receive health
benefits pursuant to an election that Key or any Subsidiary is required to
provide to the Executive in order to comply with Section 4980B(f)
<PAGE> 4
of the Internal Revenue Code (commonly referred to as "COBRA continuation
coverage") during the period specified in Section 4980B(f) (the "COBRA
continuation period"), Key will pay the cost of continuing those benefits from
the Termination Date through the first to occur of (a) the end of the COBRA
continuation period or (b) the date on which the Executive becomes employed
(other than on a part-time or temporary basis) by any other person or entity.
1.4 PROVISIONS APPLICABLE TO CONTINUED RETIREMENT AND SAVINGS PLAN
PARTICIPATION.
(a) If the Executive becomes entitled to payment of a lump sum
severance benefit under either of Section 1.1 or Section 1.2,
the rules set forth in the remainder of this Section 1.4(a)
shall be applicable for purposes of all Relevant Plans:
(i) the entire Section 1.1 Benefit Period or Section 1.2
Benefit Period (each, a "Benefit Period"), as the
case may be, shall be included in determining the
Executive's years of service,
(ii) amounts received by the Executive under clause (a)(i)
of either of Section 1.1 or Section 1.2, as the case
may be, shall be deemed to be base salary received by
the Executive ratably during the applicable Benefit
Period, and
(iii) amounts received by the Executive under clause
(a)(ii) of either of Section 1.1 or Section 1.2, as
the case may be, shall be deemed to be incentive
compensation received by the Executive ratably during
the applicable Benefit Period and shall, if relevant,
be allocated between short term incentive
compensation and long term incentive compensation
based on the degree to which awards of each type of
incentive compensation were taken into account in
determining Average Annual Incentive Compensation.
(b) If either Section 1.1(b) or Section 1.2(b) becomes
applicable and at any time during the applicable Benefit
Period, Key determines in good faith that continuing the
Executive's coverage by and participation in any of the
Relevant Plans during the applicable Benefit Period is
Impermissible, the Executive shall not be covered by and
participate in such affected plan or plans during the
applicable Benefit Period, but Key shall provide to the
Executive under this Agreement, as a supplemental retirement
benefit, payments and benefits that put the Executive in the
same position that the Executive would have been in had the
Executive continued to be covered by and to participate in all
such affected plans throughout the applicable Benefit Period
(taking into account the rules set forth in Section 1.4(a)
above) to the same extent as the Executive was a participant
immediately before the Termination Date, with the supplemental
payments and benefits under this sentence being payable to the
Executive (or, if applicable, to the Executive's spouse,
estate, or designated beneficiary) at the same time and with
the same payment options as would be applicable under the
affected plan or plans in question.
<PAGE> 5
(c) If either Section 1.1(b) or Section 1.2(b) becomes
applicable and any of the Relevant Plans are Discontinued
Plans, as to each such Discontinued Plan, Key shall provide to
the Executive under this Agreement, as a supplemental
retirement benefit, payments and benefits that put the
Executive in the same position that the Executive would have
been in had the Discontinued Plan continued through the end of
the applicable Benefit Period without having become a
Discontinued Plan and had the Executive continued to be
covered by and to participate in that Discontinued Plan
throughout the applicable Benefit Period (taking into account
the rules set forth in Section 1.4(a) above) to the same
extent as the Executive was a participant immediately before
the date of the Change of Control, with the supplemental
payments and benefits under this sentence being payable to the
Executive (or, if applicable, to the Executive's spouse,
estate, or designated beneficiary) at the same time and with
the same payment options as would be applicable under the
Discontinued Plan, provided however, that to the extent the
Discontinued Plan has been substituted for by another Relevant
Plan, the amount payable by Key under this Section 1.4(c)
shall be offset by the amounts actually paid under that
substitute plan.
2. OTHER BENEFITS.
2.1 REIMBURSEMENT OF CERTAIN EXPENSES AFTER A CHANGE OF CONTROL.
(a) From and after a Change of Control, Key shall pay, as
incurred, all expenses of the Executive, including the
reasonable fees of counsel engaged by the Executive, of
defending any action brought to have this Agreement declared
invalid or unenforceable.
(b) From and after a Change of Control, Key shall pay, as
incurred, all expenses of the Executive, including the
reasonable fees of counsel engaged by the Executive, of
prosecuting any action to compel Key to comply with the terms
of this Agreement upon receipt from Executive of an
undertaking to repay Key for such expenses if, and only if, it
is ultimately determined by a court of competent jurisdiction
that the Executive had no reasonable grounds for bringing that
action (which determination need not be made simply because
the Executive fails to succeed in the action).
(c) From and after a Change of Control, expenses (including
attorney's fees) incurred by the Executive in defending any
action, suit, or proceeding commenced or threatened (whether
before or after the Change of Control) against the Executive
for any action or failure to act as an employee, officer, or
director of Key or any Subsidiary shall be paid by Key, as
they are incurred, in advance of final disposition of the
action, suit, or proceeding upon receipt of an undertaking by
or on behalf of the Executive in which the Executive agrees to
reasonably cooperate with Key or the Subsidiary, as the case
may be, concerning the action, suit, or proceeding, and (i) if
the action, suit, or proceeding is commenced or threatened
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<PAGE> 6
against the Executive for any action or failure to act as a
director, to repay the amount if it is proved by clear and
convincing evidence in a court of competent jurisdiction that
the Executive's action or failure to act involved an act or
omission undertaken with deliberate intent to cause injury to
Key or a Subsidiary or undertaken with reckless disregard for
the best interests of Key or a Subsidiary, or (ii) if the
action, suit, or proceeding is commenced or threatened against
the Executive for any action or failure to act as an officer or
employee, to repay the amount if it is ultimately determined
that the Executive is not entitled to be indemnified. The
obligation of Key to advance expenses provided for in this
Section 2.1(c) shall not be deemed exclusive of any other
rights to which the Executive may be entitled under the
articles of incorporation or regulations of Key or of any
Subsidiary, any agreement, vote of shareholders or
disinterested directors, or otherwise.
2.2 INDEMNIFICATION. From and after a Change of Control, Key shall
indemnify the Executive, to the full extent permitted or authorized by the Ohio
General Corporation Law as it may from time to time be amended, if the Executive
is (whether before or after the Change of Control) made or threatened to be made
a party to any threatened, pending, or completed action, suit, or proceeding,
whether civil, criminal, administrative, or investigative, by reason of the fact
that the Executive is or was a director, officer, or employee of Key or any
Subsidiary, or is or was serving at the request of Key or any Subsidiary as a
director, trustee, officer, or employee of a bank, corporation, partnership,
joint venture, trust, or other enterprise. The indemnification provided by this
Section 2.2 shall not be deemed exclusive of any other rights to which the
Executive may be entitled under the articles of incorporation or the regulations
of Key or of any Subsidiary, or any agreement, vote of shareholders or
disinterested directors, or otherwise, both as to action in the Executive's
official capacity and as to action in another capacity while holding such
office, and shall continue as to the Executive after the Executive has ceased to
be a director, trustee, officer, or employee and shall inure to the benefit of
the heirs, executors, and administrators of the Executive.
2.3 DISABILITY. If, after a Change of Control and prior to the
Termination Date, the Executive is unable to perform services for Key or any
Subsidiary for any period by reason of disability of the Executive, Key will pay
and provide to the Executive all compensation and benefits to which the
Executive would have been entitled had the Executive continued to be actively
employed by Key or any Subsidiary through the earliest of the following dates:
(a) the first date on which the Executive is no longer so disabled to such an
extent that the Executive is unable to perform services for Key or any
Subsidiary (whereupon the Executive shall be restored to his duties and this
Agreement shall apply in accordance with its terms), (b) the date on which the
Executive becomes eligible for payment of long term disability benefits under a
long term disability plan generally applicable to executives of Key or a
Subsidiary, (c) the date on which Key has paid and provided 24 months of
compensation and benefits to the Executive during the Executive's disability, or
(d) the date of the Executive's death.
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<PAGE> 7
2.4 GROSS-UP OF PAYMENTS DEEMED TO BE EXCESS PARACHUTE PAYMENTS.
(a) Key and the Executive acknowledge that, following a
Change of Control, one or more payments or distributions to be
made by Key to or for the benefit of the Executive (whether
paid or payable or distributed or distributable pursuant to the
terms of this Agreement, under some other plan, agreement, or
arrangement, or otherwise) (a "Payment") may be determined to
be an "excess parachute payment" that is not deductible by Key
for federal income tax purposes and with respect to which the
Executive will be subject to an excise tax because of Sections
280G and 4999, respectively, of the Internal Revenue Code
(hereinafter referred to respectively as "Section 280G" and
"Section 4999"). If the Executive's employment is terminated
after a Change of Control occurs, the Accounting Firm, which,
subject to any inconsistent position asserted by the Internal
Revenue Service, shall make all determinations required to be
made under this Section 2.4, shall determine whether any
Payment would be an excess parachute payment and shall
communicate its determination, together with detailed
supporting calculations, to Key and to the Executive within 30
days after the Termination Date or such earlier time as is
requested by Key. Key and the Executive shall cooperate with
each other and the Accounting Firm and shall provide necessary
information so that the Accounting Firm may make all such
determinations. Key shall pay all of the fees of the Accounting
Firm for services performed by the Accounting Firm as
contemplated in this Section 2.4.
(b) If the Accounting Firm determines that any Payment gives
rise, directly or indirectly, to liability on the part of the
Executive for excise tax under Section 4999 (and/or any
penalties and/or interest with respect to any such excise tax),
Key shall make additional cash payments to the Executive, from
time to time and at the same time as any Payment constituting
an excess parachute payment is paid or provided to the
Executive, in such amounts as are necessary to put the
Executive in the same position, after payment of all federal,
state, and local taxes (whether income taxes, excise taxes
under Section 4999 or otherwise, or other taxes) and any and
all penalties and interest with respect to any such excise tax,
as the Executive would have been in after payment of all
federal, state, and local income taxes if the Payments had not
given rise to an excise tax under Section 4999 and no such
penalties or interest had been imposed.
(c) If the Internal Revenue Service determines that any
Payment gives rise, directly or indirectly, to liability on the
part of the Executive for excise tax under Section 4999 (and/or
any penalties and/or interest with respect to any such excise
tax) in excess of the amount, if any, previously determined by
the Accounting Firm, Key shall make further additional cash
payments to the Executive not later than the due date of any
payment indicated by the Internal Revenue Service with respect
to these matters, in such amounts as are necessary to put the
Executive in the same position, after payment of all federal,
state, and local taxes (whether income taxes, excise taxes
under Section 4999 or otherwise, or other taxes) and any and
all penalties and interest with respect to any such excise tax,
as the Executive would
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<PAGE> 8
have been in after payment of all federal, state, and local
income taxes if the Payments had not given rise to an excise
tax under Section 4999 and no such penalties or interest had
been imposed.
(d) If Key desires to contest any determination by the Internal
Revenue Service with respect to the amount of excise tax under
Section 4999, the Executive shall, upon receipt from Key of an
unconditional written undertaking to indemnify and hold the
Executive harmless (on an after tax basis) from any and all
adverse consequences that might arise from the contesting of
that determination, cooperate with Key in that contest at Key's
sole expense. Nothing in this Paragraph (d) shall require the
Executive to incur any expense other than expenses with respect
to which Key has paid to the Executive sufficient sums so that
after the payment of the expense by the Executive and taking
into account the payment by Key with respect to that expense
and any and all taxes that may be imposed upon the Executive as
a result of the Executive's receipt of that payment, the net
effect is no cost to the Executive. Nothing in this Paragraph
(d) shall require the Executive to extend the statute of
limitations with respect to any item or issue in the
Executive's tax returns other than, exclusively, the excise tax
under Section 4999. If, as the result of the contest of any
assertion by the Internal Revenue Service with respect to
excise tax under Section 4999, the Executive receives a refund
of a Section 4999 excise tax previously paid and/or any
interest with respect thereto, the Executive shall promptly pay
to Key such amount as will leave the Executive, net of the
repayment and all tax effects, in the same position, after all
taxes and interest, that the Executive would have been in if
the refunded excise tax had never been paid.
3. NO SET-OFF; NO OBLIGATION TO SEEK OTHER EMPLOYMENT OR TO OTHERWISE
MITIGATE DAMAGES; NO EFFECT UPON OTHER PLANS. Key's obligation to make the
payments provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any setoff, counterclaim, recoupment,
defense, or other claim whatsoever that Key or any of its Subsidiaries may have
against the Executive. The Executive shall not be required to mitigate damages
or the amount of any payment provided for under this Agreement by seeking other
employment or otherwise. The amount of any payment provided for under this
Agreement shall not be reduced by any compensation or benefits earned by the
Executive as the result of employment by another employer or otherwise after the
termination of the Executive's employment. Neither the provisions of this
Agreement, nor the execution of the waiver and release referred to in Section
4.3 below, nor the making of any payment provided for hereunder shall reduce any
amounts otherwise payable, or in any way diminish the Executive's rights, under
any incentive compensation plan, stock option or stock appreciation rights plan,
retirement or supplemental retirement plan, stock purchase and savings plan,
disability or insurance plan, or other similar contract, plan, or arrangement of
Key or any Subsidiary.
4. CERTAIN LIMITATIONS ON BENEFITS.
4.1 ELECTION OF BENEFITS REQUIRED; PAYMENTS IN LIEU OF OTHER CLAIMS OR
RIGHTS. If (a) the Executive is a party to either or both of an employment
agreement (which includes any
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<PAGE> 9
letter agreement regarding Executive's employment with Key) or severance
agreement with Key (singularly or collectively, the "Prior Agreement"), and (b)
the Executive's employment with Key is terminated under circumstances giving
rise to a right on the part of the Executive to receive continuing compensation,
separation pay, or other severance benefits under the Prior Agreement and under
this Agreement, the Executive shall have the right to elect to have either the
Prior Agreement (if and only to the extent the Prior Agreement is applicable) or
this Agreement (if and only to the extent this Agreement is applicable) , but
not both, apply to the termination. If this Section 4.1 applies: (x) Key shall
not make any payments arising out of the termination of the Executive's
employment, either under the Prior Agreement or under this Agreement, until
after the Executive has delivered to Key a signed notice of election to receive
payments under the Prior Agreement or under this Agreement, and (y) if the
Executive elects to receive payments under the Prior Agreement, the provisions
of Sections 2.1, 2.2, and 2.4 of this Agreement shall nevertheless continue to
be applicable, but without duplication of payments. If the Executive receives
any payments under this Agreement as a result of the termination of the
Executive's employment following a Change of Control, those payments shall be in
lieu of any and all other claims or rights that the Executive may have for
severance, separation, and/or salary continuation pay upon that termination of
the Executive's employment.
4.2 TAXES; WITHHOLDING OF TAXES. Without limiting either the right of
Key or its Subsidiary to withhold taxes pursuant to this Section 4.2 or the
obligation of Key to make gross-up payments pursuant to Section 2.4, the
Executive shall be responsible for all income, excise, and other taxes (federal,
state, city, or other) imposed on or incurred by the Executive as a result of
receiving the payments provided in this Agreement, including, without
limitation, the payments provided under Section 1 of this Agreement. Key or its
Subsidiary may withhold from any amounts payable under this Agreement all
federal, state, city, or other taxes as Key shall determine to be required
pursuant to any law or government regulation or ruling. Without limiting the
generality of the foregoing, Key or its Subsidiary may withhold from any amount
payable under either of Sections 1.1 or 1.2 of this Agreement amounts sufficient
to satisfy any withholding requirements that may arise out of any payment made
to the Executive by Key or any Subsidiary under Section 1.3 of this Agreement.
4.3 WAIVER AND RELEASE. Key may condition the payment of any amounts
otherwise due under Section 1 of this Agreement upon (a) the execution by the
Executive of a waiver and release in the form attached to this Agreement as
Exhibit A, with blanks appropriately filled and, in the case of clause (e)
contained therein, completed with the number of days that Key determines is
required under applicable law, but in no event more than 45 days, and (b) the
observation of such waiting periods, if any, before and after execution of the
waiver and release by the Executive as are required by law, such as, for
example, the waiting periods required for a waiver and release to be effective
with respect to claims under the Age Discrimination in Employment Act, provided
that Key delivers to the Executive such a waiver and release, appropriately
completed, within seven days of the date on which the Executive's employment is
terminated.
5. TERM OF THIS AGREEMENT. This Agreement shall be effective upon the
date first above written and shall thereafter apply to any Change of Control
occurring on or before December 31, 1998. Unless this Agreement is terminated
earlier pursuant to Section 5.1, on
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<PAGE> 10
December 31, 1998 and on December 31 of each succeeding year thereafter (a
"Renewal Date"), the term of this Agreement shall be automatically extended for
an additional year unless either party has given notice to the other, at least
one year in advance of that Renewal Date, that the Agreement shall not apply to
any Change of Control occurring after that Renewal Date.
5.1 TERMINATION OF AGREEMENT UPON TERMINATION OF EMPLOYMENT BEFORE A
CHANGE OF CONTROL. This Agreement shall automatically terminate and cease to be
of any further effect on the first date occurring before a Change of Control on
which the Executive is no longer employed by Key or any Subsidiary, except that,
for purposes of this Agreement, any termination of employment of the Executive
that is effected before and in contemplation of a Change of Control that occurs
after the date of the termination shall be deemed to be a termination of the
Executive's employment as of immediately after that Change of Control and this
Agreement shall be deemed to be in effect immediately after that Change of
Control.
5.2 NO TERMINATION OF AGREEMENT DURING TWO YEAR PERIOD BEGINNING ON
DATE OF A CHANGE OF CONTROL. After a Change of Control, this Agreement may not
be terminated. However, if the Executive's employment with Key and its
Subsidiaries continues for more than two years following the occurrence of a
Change of Control, then, for all purposes of this Agreement other than Sections
2.1 and 2.2, that particular Change of Control shall thereafter be treated as if
it never occurred.
6. MISCELLANEOUS.
6.1 SUCCESSOR TO KEY. Key shall not consolidate with or merge into any
other corporation, or transfer all or substantially all of its assets to another
corporation or bank, unless such other corporation or bank shall assume this
Agreement in a signed writing and deliver a copy thereof to the Executive. Upon
such assumption the successor corporation or bank shall become obligated to
perform the obligations of Key under this Agreement and the term "Key" as used
in this Agreement shall be deemed to refer to such successor corporation or
bank.
6.2 NOTICES. For purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, and addressed, in
the case of notices to Key or a Subsidiary, as follows:
KeyCorp
127 Public Square
Cleveland, Ohio 44114
Attention: Secretary
and, in the case of notices to the Executive, properly addressed to the
Executive at the Executive's most recent home address as shown on the records of
Key or its Subsidiary, or such other address as either party may have furnished
to the other in writing in accordance herewith, except that notices of change of
address shall be effective only upon receipt.
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<PAGE> 11
6.3 EMPLOYMENT RIGHTS. Nothing expressed or implied in this Agreement
shall create any right or duty on the part of Key or the Executive to have the
Executive continue as an officer of Key or a Subsidiary or to remain in the
employment of Key or a Subsidiary.
6.4 ADMINISTRATION. Key shall be responsible for the general
administration of this Agreement and for making payments under this Agreement.
All fees and expenses billed by the Accounting Firm for services contemplated
under this Agreement shall be the responsibility of Key.
6.5 SOURCE OF PAYMENTS. Any payment specified in this Agreement to be
made by Key may be made, at the election of Key, directly by Key or through any
Subsidiary of Key. All payments under this Agreement shall be made solely from
the general assets of Key or one of its Subsidiaries (or from a grantor trust,
if any, established by Key for purposes of making payments under this Agreement
and other similar agreements), and the Executive shall have the rights of an
unsecured general creditor of Key with respect thereto.
6.6 CLAIMS REVIEW PROCEDURE. Whenever Key decides for whatever reason
to deny, whether in whole or in part, a claim for benefits under this Agreement
by the Executive, Key shall transmit a written notice of its decision to the
Executive, which notice shall be written in a manner calculated to be understood
by the Executive and shall contain a statement of the specific reasons for the
denial of the claim and a statement advising the Executive that, within 60 days
of the date on which the Executive receives such notice, the Executive may
obtain review of the decision of Key in accordance with the procedures
hereinafter set forth. Within such 60-day period, the Executive or the
Executive's authorized representative may request that the claim denial be
reviewed by filing with Key a written request therefor, which request shall
contain the following information:
(a) the date on which the request was filed with Key,
(b) the specific portions of the denial of the Executive's claim
that the Executive requests Key to review, and
(c) any written material that the Executive desires Key to
examine.
Within 30 days of the date specified in clause (a) of this Section 6.6, Key
shall conduct a full and fair review of its decision to deny the Executive's
claim for benefits and deliver to the Executive its written decision on review,
written in a manner calculated to be understood by the Executive, specifying the
reasons and the Agreement provisions upon which its decision is based. Nothing
in this Section 6.6 shall be construed as limiting or restricting the
Executive's right to institute legal proceedings in a court of competent
jurisdiction to enforce this Agreement after complying with the procedures set
forth in this Section 6.6 or as limiting or restricting the scope of the court's
review (which review shall be de novo); provided, further, that the failure of
the Executive to comply with the procedures set forth in this Section 6.6 shall
not bar or prohibit the subsequent compliance by the Executive with those
procedures and thereafter the Executive shall have the right to institute legal
proceedings to enforce this Agreement.
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<PAGE> 12
6.7 VALIDITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement which shall remain in full force and effect.
6.8 MODIFICATION, WAIVER, ETC. No provision of this Agreement may be
modified, waived, or discharged unless such waiver, modification, or discharge
is agreed to in a writing signed by the Executive and Key. No waiver by either
party hereto at any time of any breach by the other party of, or compliance
with, any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or conditions
at the same time or at any prior or subsequent time. No agreement or
representation, oral or otherwise, express or implied, with respect to the
subject matter hereof has been made by either party that is not set forth
expressly in this Agreement. This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal representatives, executors,
administrators, successors, heirs, and designees. This Agreement shall be
governed by and construed in accordance with the laws of the State of Ohio.
6.9 SAVINGS CLAUSE. If any payments otherwise payable to the Executive
under this Agreement are prohibited or limited by any statute or regulation in
effect at the time the payments would otherwise be payable, including, without
limitation, any regulation issued by the Federal Deposit Insurance Corporation
(the "FDIC") that limits executive change of control payments that can be made
by an FDIC insured institution or its holding company if the institution is
financially troubled (any such limiting statute or regulation a "Limiting
Rule"):
(a) Key will use its best efforts to obtain the consent of the
appropriate governmental agency (whether the FDIC or any other
agency) to the payment by Key to the Executive of the maximum
amount that is permitted (up to the amounts that would be due
to the Executive absent the Limiting Rule); and
(b) the Executive will be entitled to elect to have apply, and
therefore to receive benefits directly under, either (i) this
Agreement (as limited by the Limiting Rule) or (ii) any
generally applicable Key severance, separation pay, and/or
salary continuation plan that may be in effect at the time of
the Executive's termination.
Following any such election, the Executive will be entitled to receive benefits
under the agreement or plan elected only if and to the extent the agreement or
plan is applicable and subject to its specific terms.
6.10 AGREEMENT SUPERSEDES SIMILAR AGREEMENT PREVIOUSLY ENTERED INTO.
This Agreement supersedes a similar agreement originally entered into between
Key and the Executive as of October 15, 1996, and that agreement (as amended, if
it has been heretofore amended) is no longer of any force or effect.
7. DEFINITIONS.
7.1 ACCOUNTING FIRM. The term "Accounting Firm" means the independent
auditors of Key for the fiscal year preceding the year in which the Change of
Control occurred and such
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firm's successor or successors; provided, however, if such firm is unable or
unwilling to serve and perform in the capacity contemplated by this Agreement,
Key shall select another national accounting firm of recognized standing to
serve and perform in that capacity under this Agreement, except that such other
accounting firm shall not be the then independent auditors for Key or any of its
affiliates (as defined in Rule 12b-2 promulgated under the Securities Exchange
Act of 1934, as amended (the "1934 Act")).
7.2 AVERAGE ANNUAL INCENTIVE COMPENSATION. The term "Average
Annual Incentive Compensation" means the sum of Average Short Term Incentive
Compensation, as defined in clause (a) below, and Average Long Term Incentive
Compensation, as defined in clause (b) below.
(a) The term "Average Short Term Incentive Compensation" means the
higher of:
(i) the average of the short term incentive compensation
payable to the Executive for each of the last two
years immediately preceding the year in which the
Change of Control occurred (the "Change Year") or,
if, for any reason, short term incentive compensation
was payable to the Executive for only one of those
two years, the amount of short term incentive
compensation payable to the Executive for that year,
and
(ii) the Executive's targeted short term incentive
compensation for the Change Year or for the year
immediately preceding the Change Year, whichever is
higher,
except that if the Executive first became a participant in
Key's short term incentive compensation program during the
Change Year, Average Short Term Incentive Compensation means
the Executive's targeted short term incentive compensation for
the Change Year.
(b) The term "Average Long Term Incentive Compensation" means the
higher of:
(i) the average of the "Applicable Amounts" (as defined
in clauses (x) and (y) below) of the long term
incentive compensation awards payable to the
Executive for each of the last two multi-year cycles
that ended before the Change Year or, if, for any
reason, long term incentive compensation was payable
to the Executive for only one of those two multi-year
cycles, the Applicable Amount of the long term
incentive compensation award payable to the Executive
for that multi-year cycle, and
(ii) the Applicable Amount of the Executive's targeted
long term incentive compensation award for the
multi-year cycle that began with the Change Year or,
if higher or if no multi-year cycle began with the
Change Year, the Applicable Amount of the Executive's
targeted long term incentive compensation award for
the most recently commenced multi-year cycle that
began before the Change Year,
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except that if the Executive first became a participant in
Key's long term incentive compensation program during the
Change Year, Average Long Term Incentive Compensation means
the Applicable Amount of the Executive's targeted long term
incentive compensation award for the most recently commenced
multi-year cycle. For these purposes:
(x) if the plan in question provides for a series of
successive multi-year periods, the last year of each
of which follows the last year of the immediately
preceding multi-year period under the plan by a
single year (i.e., a plan that provides for possible
payment of long term incentive compensation each and
every year for as long as the plan continues), the
Applicable Amount of the award for each multi-year
cycle under that plan shall be the full amount (i.e.:
100%) of the award for that multi-year period; and
(y) if the plan in question provides for a series of
successive multi-year periods, the last year of each
of which follows the last year of the immediately
preceding period under the plan by two years (i.e., a
plan that provides for possible payment of long term
incentive compensation every other year for as long
as the plan continues), the Applicable Amount of the
award for each multi-year cycle under that plan shall
be one half of the full amount (i.e.: 50%) of the
award for that multi-year period.
The effect of clauses (x) and (y) is shown in the following
table which assumes that the multi-year long term incentive
compensation plan in question was one described in clause (x)
(contemplating payments every year for successive three-year
cycles) through the three-year cycle ending with the year 1999
and one described in clause (y) (contemplating payments every
other year for successive four-year cycles) starting with a
four-year cycle ending with the year 2001:
<TABLE>
<CAPTION>
------------------ ------------------------------------------------
"Applicable Amount" of Full Award
Multi-Year Cycle Last Year for the Multi-Year Cycle
------------------ ------------------------------------------------
<S> <C> <C> <C>
1995-1997 1997 100%
------------------ ------------------------------------------------
1996-1998 1998 100%
------------------ ------------------------------------------------
1997-1999 1999 100%
------------------ ------------------------------------------------
1998-2001 2001 50%
------------------ ------------------------------------------------
2000-2003 2003 50%
------------------ ------------------------------------------------
2002-2005 2005 50%
------------------ ------------------------------------------------
</TABLE>
As used in this Section 7.2, incentive compensation means any cash based
incentive compensation, including bonuses (but excluding signing bonuses paid to
a newly hired executive) and is calculated before any reduction on account of
deferrals; short term incentive compensation means incentive compensation for
periods of time of one year or less and long term incentive compensation means
incentive compensation for periods of time of more than one year; targeted long
term or short term incentive compensation, as the case may be, means: (i) if
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the incentive compensation plan, program, or arrangement in question designates
a targeted amount or a targeted level of achievement for the Executive, it means
that targeted amount or level, (ii) if the incentive compensation plan, program,
or arrangement in question has only one level of payout for the Executive (other
than zero), it means that level (i.e. the level other than zero), (iii) if the
incentive compensation plan, program, or arrangement in question does not
designate a targeted amount or level of achievement for the Executive but does
have multiple anticipated levels of possible payout or achievement for the
Executive, it means (in each case excluding from consideration any level that
results in zero payout) the middle level of payout or achievement for the
Executive (or if there are an even number of levels, the average of the two
levels if there are only two levels or the average of the middle two levels if
there are four or more levels), and (iv) in all other cases, the amount
anticipated or projected to be paid under the plan, program, or arrangement in
question at the time the performance period in question commenced. For purposes
of calculating Average Annual Incentive Compensation under this Section 7.2, in
determining the amount of incentive compensation (short or long term) payable to
or targeted for the Executive for any past or current incentive compensation
period or cycle, if the incentive compensation was for a partial period or cycle
(such as where an executive becomes a participant in an incentive plan after the
incentive compensation period or cycle has commenced so that the award payable
to or targeted for the executive is prorated), such incentive compensation
payable to or targeted for the Executive shall be determined as if the Executive
had participated throughout the complete incentive compensation period or cycle
in question. For example, if, with respect to a 12-month plan that would have
paid the Executive incentive compensation of $12X if the Executive had been a
participant for the full plan year, the Executive became a participant when only
seven months were left in the plan year and the Executive was therefore paid
incentive compensation of only $7X, the Executive would be treated for purposes
of this Section 7.2 as if the Executive had been a participant for the full plan
year and had been paid incentive compensation of $12X under the plan.
7.3 BASE SALARY. The term "Base Salary" means the salary payable to the
Executive from time to time before any reduction for voluntary contributions to
the KeyCorp 401(k) Plan or any other deferral. Base Salary does not include
imputed income from payment by Key of country club membership fees or other
noncash benefits.
7.4 CAUSE. The employment of the Executive by Key or any of its
Subsidiaries shall have been terminated for "Cause" if, after a Change of
Control and prior to the termination of employment, any of the following has
occurred:
(a) the Executive shall have been convicted of a felony,
(b) the Executive commits an act or series of acts of dishonesty
in the course of the Executive's employment which are
materially inimical to the best interests of Key or a
Subsidiary and which constitutes the commission of a felony,
all as determined by the vote of three fourths of all of the
members of the Board of Directors of Key (other than the
Executive, if the Executive is a Director of Key) which
determination is confirmed by a panel of three arbitrators
appointed and acting in accordance with the rules of the
American Arbitration Association for the purpose of reviewing
that determination,
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<PAGE> 16
(c) Key or any Subsidiary has been ordered or directed by any
federal or state regulatory agency with jurisdiction to
terminate or suspend the Executive's employment and such order
or directive has not been vacated or reversed upon appeal, or
(d) after being notified in writing by the Board of Directors of
Key to cease any particular Competitive Activity, the
Executive shall intentionally continue to engage in such
Competitive Activity while the Executive remains in the employ
of Key or a Subsidiary.
If (x) Key or any Subsidiary terminates the employment of the Executive during
the two year period beginning on the date of a Change of Control and at a time
when it has "Cause" therefor under clause (c), above, (y) the order or directive
is subsequently vacated or reversed on appeal and the vacation or reversal
becomes final and no longer subject to further appeal, and (z) Key or the
Subsidiary fails to offer to reinstate the Executive to employment within ten
days of the date on which the vacation or reversal becomes final and no longer
subject to further appeal, Key or the Subsidiary will be deemed to have
terminated the Executive without Cause during the two year period beginning on
the date of the Change of Control.
7.5 CHANGE OF CONTROL. A "Change of Control" shall be deemed to have
occurred if, at any time while this Agreement is in effect pursuant to Section 5
hereof, there is a Change of Control under any of clauses (a), (b), (c), or (d)
below. For these purposes, Key will be deemed to have become a subsidiary of
another corporation if any other corporation (which term shall, for all purposes
of this Section 7.5, include, in addition to a corporation, a limited liability
company, partnership, trust, or other organization) owns, directly or
indirectly, 50 percent or more of the total combined outstanding voting power of
all classes of stock of Key or any successor to Key.
(a) A Change of Control will have occurred under this clause (a)
if Key is a party to a transaction pursuant to which Key is
merged with or into, or is consolidated with, or becomes the
subsidiary of another corporation and either
(i) immediately after giving effect to that transaction,
less than 65% of the then outstanding voting
securities of the surviving or resulting corporation
or (if Key becomes a subsidiary in the transaction)
of the ultimate parent of Key represent or were
issued in exchange for voting securities of Key
outstanding immediately prior to the transaction, or
(ii) immediately after giving effect to that transaction,
individuals who were directors of Key on the day
before the first public announcement of (x) the
pendency of the transaction or (y) the intention of
any person or entity to cause the transaction to
occur, cease for any reason to constitute at least
51% of the directors of the surviving or resulting
corporation or (if Key becomes a subsidiary in the
transaction) of the ultimate parent of Key.
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<PAGE> 17
(b) A Change of Control will have occurred under this clause (b)
if a tender or exchange offer shall be made and consummated
for 35% or more of the outstanding voting stock of Key or any
person (as the term "person" is used in Section 13(d) and
Section 14(d)(2) of the 1934 Act) is or becomes the beneficial
owner of 35% or more of the outstanding voting stock of Key or
there is a report filed on Schedule 13D or Schedule 14D-1 (or
any successor schedule, form or report), each as adopted under
the 1934 Act, disclosing the acquisition of 35% or more of the
outstanding voting stock of Key in a transaction or series of
transactions by any person (as defined earlier in this clause
(b));
(c) A Change of Control will have occurred under this clause (c) if
either
(i) without the prior approval, solicitation, invitation,
or recommendation of the Key Board of Directors any
person or entity makes a public announcement of a
bona fide intention (A) to engage in a transaction
with Key that, if consummated, would result in a
Change Event (as defined below in this clause (c)),
or (B) to "solicit" (as defined in Rule 14a-1 under
the 1934 Act) proxies in connection with a proposal
that is not approved or recommended by the Key Board
of Directors, or
(ii) any person or entity publicly announces a bona fide
intention to engage in an election contest relating
to the election of directors of Key (pursuant to
Regulation 14A, including Rule 14a-11, under the 1934
Act),
and, at any time within the 24 month period immediately
following the date of the announcement of that intention,
individuals who, on the day before that announcement,
constituted the directors of Key (the "Incumbent Directors")
cease for any reason to constitute at least a majority thereof
unless both (A) the election, or the nomination for election
by Key's shareholders, of each new director was approved by a
vote of at least two-thirds of the Incumbent Directors in
office at the time of the election or nomination for election
of such new director, and (B) prior to the time that the
Incumbent Directors no longer constitute a majority of the
Board of Directors, the Incumbent Directors then in office, by
a vote of at least 75% of their number, reasonably determine
in good faith that the change in Board membership that has
occurred before the date of that determination and that is
anticipated to thereafter occur within the balance of the 24
month period to cause the Incumbent Directors to no longer be
a majority of the Board of Directors was not caused by or
attributable to, in whole or in any significant part, directly
or indirectly, proximately or remotely, any event under
subclause (i) or (ii) of this clause (c).
For purposes of this clause (c), the term "Change Event" shall
mean any of the events described in the following subclauses
(x), (y), or (z) of this clause (c):
(x) A tender or exchange offer shall be made for 25% or
more of the outstanding voting stock of Key or any
person (as the term "person" is
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<PAGE> 18
used in Section 13(d) and Section 14(d)(2) of the
1934 Act) is or becomes the beneficial owner of 25%
or more of the outstanding voting stock of Key or
there is a report filed on Schedule 13D or Schedule
14D-1 (or any successor schedule, form, or report),
each as adopted under the 1934 Act, disclosing the
acquisition of 25% or more of the outstanding voting
stock of Key in a transaction or series of
transactions by any person (as defined earlier in
this subclause (x)).
(y) Key is a party to a transaction pursuant to which Key
is merged with or into, or is consolidated with, or
becomes the subsidiary of another corporation and,
after giving effect to such transaction, less than
50% of the then outstanding voting securities of the
surviving or resulting corporation or (if Key becomes
a subsidiary in the transaction) of the ultimate
parent of Key represent or were issued in exchange
for voting securities of Key outstanding immediately
prior to such transaction or less than 51% of the
directors of the surviving or resulting corporation
or (if Key becomes a subsidiary in the transaction)
of the ultimate parent of Key were directors of Key
immediately prior to such transaction.
(z) There is a sale, lease, exchange, or other transfer
(in one transaction or a series of related
transactions) of all or substantially all the assets
of Key.
(d) A Change of Control will have occurred under this clause (d)
if there is a sale, lease, exchange, or other transfer (in one
transaction or a series of related transactions) of all or
substantially all of the assets of Key.
7.6 COMPETITIVE ACTIVITY. The Executive shall be deemed to have
engaged in "Competitive Activity" if the Executive:
(a) engages in any business or business activity in which Key or
any of its Subsidiaries engages, including, without
limitation, engaging in any business activity in the banking
or financial services industry (other than as a director,
officer, or employee of Key or any of its Subsidiaries), or
(b) serves as a director, officer, or employee of any bank, bank
holding company, savings and loan association, building and
loan association, savings and loan holding company, insurance
company, investment banking or securities company, mutual fund
company, or other financial services company other than Key or
any of its Subsidiaries (each of the foregoing being
hereinafter referred to as a "Financial Services Company"), or
renders services of a consultative or advisory nature or
otherwise to any such Financial Services Company; provided,
however, this clause (b) shall not prohibit or restrict the
Executive from serving in any such capacity with the consent
of Key.
7.7 DISABILITY. For purposes of this Agreement, the Executive's
employment will have been terminated by Key or its Subsidiary by reason of
"Disability" of the Executive only if
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<PAGE> 19
(a) as a result of bodily injury or sickness, the Executive has been unable to
perform the Executive's normal duties for Key or its Subsidiary for a period of
180 consecutive days, and (b) the Executive begins to receive payments under the
KeyCorp Long Term Disability Benefit Plan not later than 30 days after the
Termination Date.
7.8 DISCONTINUED PLAN. The term "Discontinued Plan" means any
Retirement Plan and/or Savings Plan that:
(a) the Executive was covered by and participating in
immediately before the occurrence of a Change of
Control, and
(b) was, between the date of the Change of Control and the
Termination Date, either terminated or altered in such a way
as to substantially reduce the benefits provided to the
Executive thereunder without having been substituted for by a
similar plan providing substantially similar benefits to the
Executive.
7.9 GOOD REASON. The Executive shall be deemed to have "Good Reason" to
terminate the Executive's employment under this Agreement during a Window Period
if, at any time after the occurrence of a Change of Control and before the end
of the Window Period, one or more of the events listed in clauses (a) through
(c) of this Section 7.9 occurs without the written consent of the Executive:
(a) following notice by the Executive to Key and an opportunity by
Key to cure, the Executive determines in good faith that the
Executive's position, responsibilities, duties, or status with
Key are at any time materially less than or reduced from those
in effect before the Change of Control or that the Executive's
reporting relationships with superior executive officers have
been materially changed from those in effect before the Change
of Control;
(b) following notice by the Executive to Key and an opportunity by
Key to cure, the Executive is excluded from full participation
in any incentive compensation plan or stock option, stock
appreciation, or similar equity based plan in which similarly
situated executives of Key and its Subsidiaries generally
participate; or
(c) the headquarters that was the Executive's principal place of
employment before the Change of Control (whether Key's
headquarters or a regional headquarters) is relocated to a
site outside of the greater metropolitan area in which that
headquarters was located before the Change of Control. (If the
Executive's principal place of employment before the Change of
Control was neither at Key's headquarters nor at any regional
headquarters, then this clause (c) shall not be applicable.)
For purposes of clauses (a) and (b), Key will be deemed to have had an
opportunity to cure and to have failed to effect a cure if the circumstance
otherwise constituting Good Reason persists (as determined in good faith by the
Executive) for more than seven calendar days after the Executive has given
notice to Key of the existence of that circumstance.
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7.10 IMPERMISSIBLE. The term "Impermissible," when used in the context
of the Executive's continued coverage by and participation in any of the
Retirement Plans or Savings Plans shall mean that such a continuation would
violate the provisions of any such plan, would cause any such plan that is or is
intended to be qualified under Section 401(a) of the Internal Revenue Code to
fail to be so qualified, would require shareholder approval, or would be
unlawful.
7.11 MANDATORY RELOCATION. A "Mandatory Relocation" shall have occurred
if, at any time after a Change of Control, the Executive is required to relocate
the Executive's principal place of employment for Key or its Subsidiary without
the Executive's written consent more than 35 miles from where the Executive was
located prior to the Change of Control.
7.12 REDUCTION OF BASE SALARY. A "Reduction of Base Salary" shall have
occurred if the Base Salary of the Executive is reduced at any time after a
Change of Control.
7.13 RELEVANT PLANS. The term "Relevant Plans" means:
(a) all Retirement Plans and Savings Plans that the Executive was
covered by and participating in immediately before the
Termination Date, and
(b) all Discontinued Plans.
Reference to a "Relevant Plan," in the singular, means any of the Relevant
Plans.
7.14 RETIREMENT PLANS. The term "Retirement Plans" means the KeyCorp
Cash Balance Pension Plan and the Supplemental Retirement Plan, each as from
time to time amended, restated, or otherwise modified, and any plan that, after
the date of this Agreement, succeeds, replaces, or is substituted for any such
plan, and all retirement plans of any nature maintained by Key or any of its
Subsidiaries in which the Executive was participating prior to the Termination
Date. Reference to a "Retirement Plan," in the singular, means any of the
Retirement Plans.
7.15 SAVINGS PLANS. The term "Savings Plans" means and includes the
KeyCorp 401(k) Savings Plan and the KeyCorp Excess 401(k) Savings Plan, in both
cases, as from time to time amended, restated, or otherwise modified, including
any plan that, after the date of this Agreement, succeeds, replaces, or is
substituted for either such plan, and all salary reduction, savings,
profit-sharing, or stock bonus plans (including, without limitation, all plans
involving employer matching contributions, whether or not constituting a
qualified cash or deferred arrangement under Section 401(k) of the Internal
Revenue Code), maintained by Key or any of its Subsidiaries in which the
Executive was participating prior to the Termination Date. Reference to a
"Savings Plan," in the singular, shall mean any of the Savings Plans.
7.16 SUPPLEMENTAL RETIREMENT PLAN. The term "Supplemental Retirement
Plan" means the KeyCorp Supplemental Retirement Plan, the KeyCorp Excess Cash
Balance Pension Plan, the KeyCorp Supplemental Retirement Plan for Key
Executives, the KeyCorp
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<PAGE> 21
Supplemental Retirement Benefit Plan, and the KeyCorp Executive Supplemental
Pension Plan, each as from time to time amended, restated, or otherwise
modified, and any plan that, after the date of this Agreement, succeeds,
replaces, or is substituted for any of such plans.
7.17 SUBSIDIARY. A "Subsidiary" means any corporation, bank,
partnership, or other entity a majority of the voting control of which is
directly or indirectly owned or controlled at the time in question by Key.
7.18 TERMINATION DATE. The term "Termination Date" means the date on
which the Executive's employment with Key and its Subsidiaries terminates.
7.19 WINDOW PERIOD. The term "Window Period," with respect to any
particular Change of Control, means the three-month period beginning on the date
that falls on the same day of the month as the date of the Change of Control in
the fifteenth month after the month in which the Change of Control occurs. If at
any time there has been more than one Change of Control, there shall be a
separate Window Period with respect to each such Change of Control.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
KEYCORP
By ______________________________
Robert W. Gillespie
Chairman and Chief Executive Officer
THE "EXECUTIVE"
---------------------------------
<PAGE> 22
EXHIBIT A
WAIVER AND RELEASE
DO NOT SIGN WITHOUT READING AND UNDERSTANDING
In consideration of the payments to be made to me following termination of my
employment with KeyCorp pursuant to the agreement between KeyCorp and me dated
as of November 20, 1997 (the "Change of Control Agreement"), which payments I
acknowledge I am not entitled to receive without execution of this Waiver and
Release, and which payments will not commence earlier than eight days after the
execution of this Waiver and Release, I, for myself, my heirs, administrators,
executors, and assigns, release and discharge KeyCorp, its affiliates,
subsidiaries, divisions, successors, and assigns and the employees, officers,
directors, and agents thereof (collectively referred to throughout this Waiver
and Release as "Key") from any and all causes of action, charges of
discrimination, proceedings, or claims of every kind, nature, and character,
arising out of or relating to my employment with Key and the termination of my
employment with Key based upon or related to any contention (i) that my
employment terminated because of any tortious, wrongful, unlawful, or improper
conduct or act or in violation or breach of any express or implied contract or
agreement, or (ii) that Key engaged in any discriminatory act, event, pattern,
or practice involving age, religion, creed, sex, national origin, ancestry,
handicap, disability, veteran status, marital status, race, or color, or the
continuing or future effects thereof (including, without limitation, the federal
Age Discrimination in Employment Act, 29 U.S.C. Section 621 ET SEQ., or any
similar state law).
I warrant that no promise or inducement has been offered to me other than as set
forth in the Change of Control Agreement, that I am relying on no other
statement or representation by Key, and that I have not assigned any of my
rights. I have read this Waiver and Release; I have had a full opportunity to
consider it (including the opportunity to consult with an attorney of my
choice); and I understand that by signing it I am giving up important rights,
including any right to sue under federal, state, or local law. I also verify
that my entering into this Waiver and Release is wholly voluntary.
I further warrant that:
(a) I understand that I am specifically waiving rights or claims under
the federal Age Discrimination in Employment Act, 29 U.S.C. Section 621
ET SEQ.;
(b) I understand that I am not hereby waiving any rights or claims that
may arise after this Waiver and Release is executed by me;
(c) I understand that this Waiver and Release is being given by me in
exchange for consideration that is more valuable to me than what I am
entitled to without the Change of Control Agreement and the execution
of this Waiver and Release;
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<PAGE> 23
EXHIBIT A
(CONT'D)
(d) I have been advised in writing by Key that I should have, at my
expense, an attorney of my choice review this Waiver and Release;
(e) I have been advised by Key that I may take up to _____ days from
receipt of this Waiver and Release to determine whether to execute the
same; and
(f) I have been advised by Key that this Waiver and Release may be
revoked by me within seven (7) days following execution of this Waiver
and Release whereupon this Waiver and Release shall be null and void.
IN WITNESS WHEREOF, I have hereby set my hand this _________ day of
_______________, ____.
Witness:
- ------------------------- -------------------------
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<PAGE> 24
EXHIBIT A
(CONT'D)
ACKNOWLEDGMENT OF RECEIPT OF WAIVER AND RELEASE
I do hereby acknowledge that on _____________________, ____, I received
a copy of the Waiver and Release which is attached hereto, and I understand that
I have _____* days from the date of receipt of the Waiver and Release to
determine whether to execute it.
Witness:______________________ ______________________
*to be completed the same as clause (e) of the Waiver and Release.
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<PAGE> 25
EXHIBIT A
(CONT'D)
Director of Human Resources
KeyCorp
127 Public Square
Cleveland, Ohio 44114
Re: Waiver and Release
Dear Sir or Madam:
On ________ __, ____, I executed a Waiver and Release in favor
of KeyCorp. More than seven (7) days have elapsed since I executed the Waiver
and Release. I have at no time revoked my acceptance or execution of the Waiver
and Release and, accordingly, I hereby request that KeyCorp commence making the
payments due to me under my Change of Control Agreement.
Very truly yours,
Witness:
- ----------------------- -------------------------
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<PAGE> 1
Exhibit 10.7
KEYCORP
NON-QUALIFIED GRANT AGREEMENT
PERFORMANCE OPTION
Robert W. Gillespie
By action of the Equity Based Compensation Subcommittee
("Subcommittee") of the Compensation and Organization Committee of the Board of
Directors of KeyCorp, taken pursuant to the KeyCorp Amended and Restated 1991
Equity Compensation Plan ("Plan") on November 19, 1997, you have been granted a
Non-Qualified Stock Option (the "Option") effective on January 2, 1998 (the
"Option Grant Date") to purchase 106,600 Common Shares at a price of $70.3125
per share (the "Exercise Price"), which may be exercised, subject to the
provisions of the Plan, from time to time, in part or with respect to the full
number of Common Shares then remaining subject to the Option, during the period
commencing on the Vesting Date (as hereinafter defined) and ending January 2,
2008. (Unless otherwise indicated, the capitalized terms used herein shall have
the same meaning as set forth in the Plan).
The Vesting Date shall be the earlier of:
1. The first date on which the conditions in (a) and (b) below have
been satisfied:
(a) The Fair Market Value of a Common Share exceeds
$74.00 for seven consecutive trading days during the
period beginning on the Option Grant Date and ending
December 31, 2000, $82.00 for seven consecutive
trading days during the period beginning on the sixth
trading day before January 1, 2001 and ending on
December 31, 2001, or $90.00 for seven consecutive
trading days during the period beginning on the sixth
trading day before January 1, 2002 and ending on
December 31, 2002, and
(b) KeyCorp's earnings per Common Share equal or exceed
$5.20 per Common Share for the year 1999 or any
calendar year prior thereto or $5.84 per Common Share
for the year 2000, or
<PAGE> 2
2. The first day on which a Change of Control occurs after the
Option Grant Date and on or before December 31, 2002;
provided, however, if no Change of Control has occurred on or
before December 31, 2000 and the earnings per Common Share
condition in 1(b) above has not been satisfied for a year
ending on or before December 31, 2000, the Option shall
terminate on December 31, 2000.
The Option shall terminate on December 31, 2002 unless the Vesting Date
occurs on or before that date or unless the Option has been earlier terminated
in accordance with the proviso contained in 2 above. For purposes of 1(b) above,
earnings per Common Share shall be determined on the same basis as KeyCorp
reports earnings per Common Share in its annual report on Form 10-K (or any
successor form) filed with the Securities and Exchange Commission, adjusted for
the effects of unusual events (such as gains or losses from the sale of
subsidiaries or deposits in excess of 3% of average deposits or other
significant extraordinary items), all as determined by the Subcommittee in its
sole discretion. Reference is hereby made to the Amended and Restated Employment
Agreement, dated as of November 21, 1996, between KeyCorp and you (the
"Employment Agreement"). As used herein, the terms "Cause", "Voluntary
Resignation" and "Scheduled Term" shall have the respective meanings given to
them under the Employment Agreement. Unless your employment is terminated for
Cause or by Voluntary Resignation before the end of the Scheduled Term, you will
be treated, for all purposes under the Option (including vesting and period of
exercisability), as if your employment with KeyCorp continued through January 2,
2008 (irrespective of death, disability, or otherwise). If your employment is
terminated for Cause or by Voluntary Resignation before the end of the Scheduled
Term, the Option will, in all cases, immediately terminate if prior to the
Vesting Date.
The Option shall be governed by the terms, conditions, and provisions
of the Plan.
January 2, 1998
/s/ Thomas E. Helfrich
-------------------------------
Thomas E. Helfrich
Executive Vice President
ACCEPTANCE
----------
The undersigned hereby acknowledges receipt of the Plan, agrees to be
bound by the foregoing Agreement and agrees and consents to the terms,
conditions, and provisions of the Agreement, Plan and the Award evidenced by
this Agreement.
/s/ Robert W. Gillespie
------------------------------
Robert W. Gillespie
<PAGE> 1
Exhibit 10.10
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT (this "Amendment") is made at Cleveland, Ohio, as of the
20th day of November, 1997, between KeyCorp, an Ohio corporation ("Key"), and
HENRY L. MEYER III ("Meyer") and amends the Employment Agreement between Key
and Meyer dated as of May 15, 1997 (the "Employment Agreement").
WHEREAS, Key is in the process of adopting a long term incentive
compensation plan that provides for payouts every other year rather than every
year as has been the practice and the parties deem it appropriate to amend the
Employment Agreement to appropriately take into account this anticipated change,
along with changes made in Key's short term incentive compensation program.
NOW, THEREFORE, Meyer and Key hereby amend the Employment Agreement by
amending Section 21.2 thereof to read, in its entirety, as follows:
21.2 Average Annual Incentive Compensation. The term "Average Annual
Incentive Compensation" means the sum of Average Short Term Incentive
Compensation, as defined in clause (a) below, and Average Long Term Incentive
Compensation, as defined in clause (b) below.
(a) The term "Average Short Term Incentive Compensation" means the higher
of:
(i) the average of the short term incentive compensation payable to
Meyer for each of the last two years immediately preceding the Relevant
Year (as defined below in this clause (a)) or, if for any reason short
term incentive compensation was payable to Meyer for only one of those
two years, the amount of short term incentive compensation payable to
Meyer for that year, and
(ii) Meyer's targeted short term incentive compensation for the
Relevant Year or for the year immediately preceding the Relevant Year,
whichever is higher.
For purposes of this Section 21.2, the term "Relevant Year" means the year in
which the Termination Date occurs unless, during the two year period ending on
the Termination Date, there has occurred one or more Changes of Control, in
which case the term "Relevant Year" means the year in which occurred the first
Change of Control that occurred during that two year period.
(b) The term "Average Long Term Incentive Compensation" means the higher
of:
(i) the average of the "Applicable Amounts" (as defined in clauses (x)
and (y) below) of the long term incentive compensation awards payable
to Meyer for each of the last two multi-year cycles that ended before
the Relevant Year or, if, for any reason, long term incentive
compensation was payable to Meyer for only one of
<PAGE> 2
those two multi-year cycles, the Applicable Amount of the long term
incentive compensation award payable to Meyer for that multi-year
cycle, and
(ii) the Applicable Amount of Meyer's targeted long term incentive
compensation award for the multi-year cycle that began with the
Relevant Year or, if higher or if no multi-year cycle began with the
Relevant Year, the Applicable Amount of Meyer's targeted long term
incentive compensation award for the most recently commenced
multi-year cycle that began before the Relevant Year,
For these purposes:
(x) if the plan in question provides for a series of successive
multi-year periods, the last year of each of which follows the last
year of the immediately preceding multi-year period under the plan by
a single year (i.e., a plan that provides for possible payment of long
term incentive compensation each and every year for as long as the
plan continues), the Applicable Amount of the award for each multiyear
cycle under that plan shall be the full amount (i.e.: 100%) of the
award for that multi-year period; and
(y) if the plan in question provides for a series of successive
multi-year periods, the last year of each of which follows the last
year of the immediately preceding period under the plan by two years
(i.e., a plan that provides for possible payment of long term
incentive compensation every other year for as long as the plan
continues), the Applicable Amount of the award for each multi-year
cycle under that plan shall be one half of the full amount (i.e.: 50%)
of the award for that multi-year period.
The effect of clauses (x) and (y) is shown in the following table which assumes
that the multi-year long term incentive compensation plan in question was one
described in clause (x) (contemplating payments every year for successive
three-year cycles) through the three-year cycle ending with the year 1999 and
one described in clause (y) (contemplating payments every other year for
successive four-year cycles) starting with a four-year cycle ending with the
year 2001:
- -------------------------------------------------------------------------------
Multi-Year Last "Applicable Amount" of Full Award
Cycle Year for the Multi-Year Cycle
- -------------------------------------------------------------------------------
1995-1997 1997 100%
- -------------------------------------------------------------------------------
1996-1998 1998 100%
- -------------------------------------------------------------------------------
1997-1999 1999 100%
- -------------------------------------------------------------------------------
1998-2001 2001 50%
- -------------------------------------------------------------------------------
2000-2003 2003 50%
- -------------------------------------------------------------------------------
2002-2005 2005 50%
- -------------------------------------------------------------------------------
As used in this Section 21.2, incentive compensation means any cash based
incentive compensation, including bonuses and is calculated before any reduction
on account of deferrals; short term incentive compensation means incentive
compensation under all plans for periods of
<PAGE> 3
time of one year or less and long term incentive compensation means incentive
compensation under all plans for periods of time of more than one year; targeted
long term or short term incentive compensation, as the case may be, means: (w)
if the incentive compensation plan, program, or arrangement in question
designates a targeted amount or a targeted level of achievement applicable to
Meyer, it means that targeted amount or level, (x) if the incentive compensation
plan, program, or arrangement in question has only one level of payout
applicable to Meyer (other than zero), it means that level (i.e. the level other
than zero), (y) if the incentive compensation plan, program, or arrangement in
question does not designate a targeted amount or level of achievement applicable
to Meyer but does have multiple anticipated levels of possible payout or
achievement applicable to Meyer, it means (in each case excluding from
consideration any level that results in zero payout) the middle level of payout
or achievement applicable to Meyer (or if there are an even number of levels,
the average of the two levels if there are only two levels or the average of the
middle two levels if there are four or more levels), and (z) in all other cases,
the amount anticipated or projected to be paid under the plan, program, or
arrangement in question at the time the performance period in question
commenced.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first above written.
KEYCORP
By:
-------------------------------------- ---------------------------------
Robert W. Gillespie HENRY L. MEYER III
Chairman and Chief Executive Officer
<PAGE> 1
Exhibit 10.12
Robert W. Gillespie
Chairman, President and
Chief Executive Officer
[LOGO - KEYCORP]
KeyCorp
127 Public Square
Cleveland, OH 44114-1306
Tel: 216-689-8103
Fax: 216 689-0991
April 7, 1997
Mr. Thomas C. Stevens
19800 Shaker Boulevard
Shaker Heights, Ohio 44122
Dear Tom:
In line with the amendment being made to your change of control agreement with
KeyCorp, this letters amends the May 10, 1996 letter agreement that was executed
by you and, on behalf of KeyCorp, by Noall. The original Exhibit B to that
letter agreement, captioned "Excess Parachute Payment Reduction" is hereby
deleted and, in its place, there is hereby inserted the new Exhibit B that is
attached to this letter, captioned "Gross-Up of Payments Deemed to be Excess
Parachute Payments." As used in the new Exhibit B, the term "Accounting Firm"
has the same meaning as in your change of control agreement.
Except as specified above, the May 10, 1996 letter agreement continues in full
force and effect according to its terms.
Sincerely,
/s/ Robert W. Gillespie
- ------------------------
Robert W. Gillespie
Agreed:
/s/ Thomas C. Stevens
- --------------------------
Thomas C. Stevens
<PAGE> 2
EXHIBIT B
GROSS-UP OF PAYMENTS DEEMED TO BE EXCESS PARACHUTE PAYMENTS
(a) KeyCorp and you acknowledge that, following a change of control (as
defined in Exhibit A), one or more payments or distributions to be made by
KeyCorp to you or for your benefit (whether paid or payable or distributed or
distributable pursuant to the terms of this letter agreement, under some other
plan, agreement, or arrangement, or otherwise) (a Payment) may be determined to
be an excess parachute payment that is not deductible by KeyCorp for federal
income tax purposes and with respect to which you will be subject to an excise
tax because of Sections 280G and 4999, respectively, of the Internal Revenue
Code (hereinafter referred to respectively as Section 280G and Section 4999). If
your employment is terminated after a change of control occurs, the Accounting
Firm, which, subject to any inconsistent position asserted by the Internal
Revenue Service, shall make all determinations required to be made under this
Exhibit B, shall determine whether any Payment would be an excess parachute
payment and shall communicate its determination, together with detailed
supporting calculations, to KeyCorp and to you within 30 days after the
termination of your employment or such earlier time as is requested by KeyCorp.
KeyCorp and you shall cooperate with each other and the Accounting Firm and
shall provide necessary information so that the Accounting Firm may make all
such determinations. KeyCorp shall pay all of the fees of the Accounting Firm
for services performed by the Accounting Firm as contemplated in this Exhibit B.
(b) If the Accounting Firm determines that any Payment gives rise, directly
or indirectly, to liability on your part for excise tax under Section 4999
(and/or any penalties and/or interest with respect to any such excise tax),
KeyCorp shall make additional cash payments to you, from time to time and at the
same time as any Payment constituting an excess parachute payment is paid or
provided to you, in such amounts as are necessary to put you in the same
position, after payment of all federal, state, and local taxes (whether income
taxes, excise taxes under Section 4999 or otherwise, or other taxes) and any and
all penalties and interest with respect to any such excise tax, as you would
have been in after payment of all federal, state, and local income taxes if the
Payments had not given rise to an excise tax under Section 4999 and no such
penalties or interest had been imposed.
(C) If the Internal Revenue Service determines that any Payment gives rise,
directly or indirectly, to liability on your part for excise tax under Section
4999 (and/or any penalties and/or interest with respect to any such excise tax)
in excess of the amount, if any, previously determined by the Accounting Firm,
KeyCorp shall make further additional cash payments to you not later than the
due date of any payment indicated by the Internal Revenue Service with respect
to these matters, in such amounts as are necessary to put you in the same
position, after payment of all federal, state, and local taxes (whether income
taxes, excise taxes under Section 4999 or otherwise, or other taxes) and any and
all penalties and interest with respect to any such excise tax, as you would
have been in after payment of all federal, state, and local income taxes if the
<PAGE> 3
Payments had not given rise to an excise tax under Section 4999 and no such
penalties or interest had been imposed.
(d) If KeyCorp desires to contest any determination by the Internal Revenue
Service with respect to the amount of excise tax under Section 4999, you shall,
upon receipt from KeyCorp of an unconditional written undertaking to indemnify
and hold you harmless (on an after tax basis) from any and all adverse
consequences that might arise from the contesting of that determination,
cooperate with KeyCorp in that contest at KeyCorp's sole expense. Nothing in
this Paragraph (d) shall require you to incur any expense other than expenses
with respect to which KeyCorp has paid to you sufficient sums so that after the
payment of the expense by you and taking into account the payment by KeyCorp
with respect to that expense and any and all taxes that may be imposed upon you
as a result of your receipt of that payment, the net effect is no cost to you.
Nothing in this Paragraph (d) shall require you to extend the statute of
limitations with respect to any item or issue in your tax returns other than,
exclusively, the excise tax under Section 4999. If, as the result of the contest
of any assertion by the Internal Revenue Service with respect to excise tax
under Section 4999, you receive a refund of a Section 4999 excise tax previously
paid and/or any interest with respect thereto, you shall promptly pay to KeyCorp
such amount as will leave you, net of the repayment and all tax effects, in the
same position, after all taxes and interest, that you would have been in if the
refunded excise tax had never been paid.
<PAGE> 4
May 10, 1996
Mr. Thomas C. Stevens
19800 Shaker Boulevard
Shaker Heights, Ohio 44122
Dear Tom:
This is to confirm our agreement whereby you will join KeyCorp as Executive Vice
President, General Counsel and Secretary.
The current compensation structure is described in "KeyCorp's Executive
Compensation Program" previously supplied to you. You position is in job grade
92 within this structure.
Your beginning salary will be $375,000. It is contemplated that your first
salary review will be April 1, 1997. You will be a participant in the Short Term
Incentive Compensation Plan (STICP) for 1996 and the Long Term Incentive
Compensation Plan (LTICP) for the 1996-1998 three-year cycle, in both cases as
though you had joined KeyCorp January 1, 1996. Fifty percent of your target
incentive compensation under the STICP for each of the years 1996, 1997, and
1998 will be "prepaid" (i.e., paid prior to the year-end of those years), with
any balance being paid when amounts are normally paid; in the highly unlikely
event that the ultimate amount owed to you for any such years is less than the
fifty percent of target paid to you prior to year-end, such "shortfall", will be
deducted from incentive compensation amounts you would otherwise be paid in
subsequent periods (but in no event will you be called upon to pay back to the
Corporation such "prepaid" amounts).
You will be paid $100,000 upon commencement of your employment.
The Compensation and Organization Committee of the Board of Directors will grant
you an option covering 15,000 shares of KeyCorp common stock at the next meeting
of the Committee (currently scheduled for May 22nd) effective and priced on your
first day of employment and to vest one year thereafter. It is anticipated that
the next annual grant of options will be in January of 1997, at which time it is
anticipated that the Committee, based on past practice and the current
compensation structure, will grant you an option covering another 15,000 shares.
<PAGE> 5
If within the first three years of your employment, your employment with KeyCorp
is terminated (other than (i) voluntarily by you except for good reason as
defined in Exhibit A to this letter or (ii) for cause by the Corporation (cause
is dishonesty or a violation of KeyCorp's Code of Ethics, in each case only if
materially inimical to KeyCorp), or (iii) due to your death or disability),
KeyCorp will pay you, within 30 days of termination of your employment, a
lump-sum severance payment equal to two times the sum of: (a) your highest
annual base salary in the year of your termination (but in no event less than
$375,000) plus (b) your target incentive compensation for the year of your
termination under the STICP or any successor annual incentive compensation plan
applicable to senior executives of KeyCorp (but in no event less than $140,000).
In such instance medical insurance, disability insurance, and group life
insurance (or equivalent benefits) will be continued, at KeyCorp's cost but
subject to the same employee contribution, for two years after employment. In
the unlikely event the first sentence of this paragraph becomes operable, a
condition of the severance payment is a release by you of KeyCorp of any claims
or causes of action you may have relating to your employment with KeyCorp or the
termination of such employment. After the first three years of your employment
you will be covered by KeyCorp's severance plans and practices covering
similarly situated senior executives.
If within two years of any change of control hereafter occurring as defined in
Exhibit A to this letter, your employment with KeyCorp is terminated (other than
(i) voluntarily by you except for good reason as defined in Exhibit A to this
letter or (ii) for cause by the Corporation (cause is dishonesty or a violation
of KeyCorp's Code of Ethics, in each case only if materially inimical to
KeyCorp) or (iii) due to your death or disability), KeyCorp will pay you, within
30 days of termination of your employment, a lump-sum severance payment equal to
2.5 times the sum of: (a) your highest annual base salary in the year of your
termination (but in no event less than $375,000), plus (b) your target incentive
compensation for the year of your termination under the STICP or any successor
annual incentive compensation plan applicable to senior executives of KeyCorp
(but in no event less than $140,000), plus (c) your target incentive
compensation for the latest commencing 3 year (or other multi-year) cycle under
the LTIC or any successor long term incentive compensation plan applicable to
senior executives of KeyCorp (but in no event less than $87,500). In such
instance medical insurance, disability insurance, and group life insurance (or
equivalent benefits) will be continued, at KeyCorp's cost but subject to the
same employee contribution, for two years after employment.
You will also be provided with a change of control agreement of the type given
to other senior executives (the "Standard Agreement"). If your employment is
terminated under circumstances that would entitle you to payments under both the
immediately preceding paragraph and under the second preceding paragraph, you
will be entitled to receive payments under the immediately preceding paragraph,
but not under the second preceding paragraph. In the event you become entitled
to receive payments under both the Standard Agreement and under the immediately
preceding paragraph of this letter, you will be entitled to elect to receive the
payments under the Standard Agreement or the immediately
<PAGE> 6
preceding paragraph, but not both, and until you notify KeyCorp of your
election, KeyCorp may refuse to make any payments to you.
If any payment by KeyCorp to or for your benefit under this letter would be
nondeductible by KeyCorp for Federal income tax purposes because of Section 280G
of the Internal Revenue Code and applicable regulations promulgated thereunder,
then Exhibit B shall apply. KeyCorp agrees to pay all expenses, including
reasonable fees of counsel engaged by you, as provided in Exhibit C.
Your employment is subject to pre-employment processing including drug
screening.
This letter is intended to be a contract legally binding upon KeyCorp and its
successors and assigns and you and all the Exhibits to this letter are a part
hereof as fully as if written herein.
We are all very pleased that you will be joining KeyCorp. As discussed, we will
shoot for sometime in the last half of June for your employment starting date,
but we are flexible on this.
Sincerely,
Agreed:
- -----------------------------
Thomas C. Stevens
<PAGE> 7
EXHIBIT A
GOOD REASON AND CHANGE OF CONTROL DEFINITIONS
"Good reason" means any one or more of the following have occurred:
(a) Stevens' base salary is reduced from the level of his base salary from
time to time in effect (other than in conjunction with an across the
board and equal percentage reduction in the base salaries of all
KeyCorp senior executives);
(b) Stevens' is excluded from participation in any benefit plan or
arrangement maintained by KeyCorp for senior executives (including,
without limitation, short and long term incentive compensation plans
and stock option plans), or his level of participation or award in any
such benefit plan or arrangement is substantially below the average
level of participation and award of other senior executives with the
same or comparable job grades and a good job performance (and, if there
are no other such senior executives in the same or comparable job grade
or if the other senior executives in the same or comparable job grade
had other than a good job performance, then based on extrapolating from
the average level of participation and award of senior executives in
the nearest junior and senior job grades with good job performance);
(c) Stevens principal place of employment for KeyCorp is relocated outside
of the Cleveland metropolitan area or Stevens is otherwise required to
relocate outside the Cleveland metropolitan area in connection with his
employment;
(d) Stevens fails at any time to be a member of the officer committee of
KeyCorp (currently the Management Committee) which is the most senior
in the Corporation in terms of establishing policy and conducting the
management of the Corporation; or
(e) Stevens fails at any time to hold the position of General Counsel
and Secretary of KeyCorp.
As used herein and in the letter to which this Exhibit A is attached, KeyCorp
(sometimes referred to as the "Corporation") means and includes (i) any
successors (by merger, consolidation or otherwise), (ii) the ultimate parent of
KeyCorp if KeyCorp becomes a subsidiary of another corporation, and (iii) the
transferee corporation if KeyCorp sells, leases, exchanges, or otherwise
transfers all or substantially all of its assets. Without limiting the
generality of the foregoing, if there is a successor to KeyCorp or if KeyCorp
becomes a subsidiary of another corporation or sells, leases, exchanges, or
otherwise transfers all or substantially all of its assets, good reason will
exist if any one or more of the events specified in (a) through (e) above has
occurred with respect to KeyCorp or its successors or with respect to the
ultimate parent of KeyCorp or the transferee corporation
<PAGE> 8
(as the case may be) as fully as if the successor's, ultimate parent's or the
transferee corporation's name (as the case may be) was substituted for KeyCorp
(or the Corporation) at each place it appears in (a) through (e) above.
If any event occurs which Stevens believes constitutes good reason, Stevens
shall give KeyCorp, within 90 days of the occurrence of the event, written
notice that he believes that such event constitutes good reason, whereupon
KeyCorp shall have 30 days to cure such event so that good reason will no longer
exist. The failure of Stevens to give written notice that an event constitutes
good reason within 90 days of its occurrence shall not waive his right to assert
such a claim if the same or a similar event occurs at any time thereafter or if
any other event thereafter occurs which he believes constitutes good reason.
A "change of control" means any one or more of the following have occurred:
(a) A "Change of Control" shall have occurred as defined in the Standard
Agreement; or
(b) KeyCorp is a party to a transaction pursuant to which KeyCorp is
merged with or into, or is consolidated with, or becomes a subsidiary
of another corporation and either (i) after giving effect to such
transaction less than 60% of the then outstanding voting securities of
the surviving or resulting corporation or (if KeyCorp becomes a
subsidiary in the transaction) of the ultimate parent of KeyCorp
represent or were issued in exchange for voting securities of KeyCorp
outstanding immediately prior to such transaction, or (ii) at any time
within 3 months after the effective date of that transaction,
individuals who were directors of KeyCorp on the day after the last
annual meeting of shareholders of KeyCorp occurring before the
transaction cease for any reason to constitute at least 51% of the
directors of the surviving or resulting corporation or (if KeyCorp
becomes a subsidiary in the transaction) of the ultimate parent of
KeyCorp. As used in this Exhibit A, KeyCorp will be deemed to have
become a subsidiary of another corporation if any other corporation
owns, directly or indirectly, 50 percent or more of the total combined
voting power of KeyCorp or any successor to KeyCorp by merger,
consolidation, or otherwise; or
(c) There is a report filed on Schedule 13D or Schedule 14D-1 (or any
successor schedule, form, or report), each as adopted under the
Securities Exchange Act of 1934, as amended, disclosing the acquisition
of 40% or more of the voting securities of KeyCorp in a transaction or
series of transactions by any person (as the term "person" is used in
Section 13(d) and Section 14(d)(2) of said Securities Exchange Act); or
(d) During any period of 24 consecutive months individuals who at the
beginning of such period constitute the directors of KeyCorp cease for
any reason to constitute at least 51% of the Board of Directors unless
the election of each new director of KeyCorp was approved and
recommended by the vote of at least a majority of the
<PAGE> 9
Board of Directors immediately before the time each new director of
KeyCorp was nominated to the Board; or
(e) There is a sale, lease, exchange, or other transfer (in one transaction
or a series of related transactions) of all or substantially all the
assets of KeyCorp or the shareholders of KeyCorp approve any plan or
proposal for the liquidation or dissolution of KeyCorp.
<PAGE> 10
EXHIBIT B
EXCESS PARACHUTE REDUCTION
If it is determined that any payment by KeyCorp to or for your benefit (whether
paid or payable pursuant to the terms of the letter to which this Exhibit B is
attached or otherwise) (a "Payment") would be nondeductible by KeyCorp for
Federal income tax purposes because of Section 280G of the Internal Revenue Code
and applicable regulations promulgated thereunder, then the aggregate present
value of amounts payable to or for your benefit pursuant to the letter to which
this Exhibit B is attached (such payments pursuant to such letter are
hereinafter referred to as "Agreement Payments") shall be reduced (but not below
zero) to the Reduced Amount. The "Reduced Amount" shall be an amount expressed
in present value that maximizes the aggregate present value of Agreement
Payments without causing any Payment to be nondeductible by KeyCorp because of
Section 280G(d)(4) of the Internal Revenue Code and applicable regulations
promulgated thereunder. For purposes of this Exhibit B, present value shall be
determined in accordance with Section 280G(d)(4) of the Internal Revenue Code
and applicable regulations promulgated thereunder. All determinations required
to be made under this Exhibit B shall be made by the accounting firm that served
as independent accountants to KeyCorp immediately prior to the change of control
(unless such accounting firm is unwilling to serve, in which case KeyCorp shall
select another national accounting firm of recognized standing other than the
accounting firm then serving as KeyCorp's independent accountants), which shall
provide detailed supporting calculations both to KeyCorp and you within 30 days
after the termination of your employment. KeyCorp and you shall cooperate with
each other and the accounting firm and will provide necessary information so
that the accounting firm may make all such determinations. All such
determinations by the accounting firm shall be final and binding upon KeyCorp
and you. You shall determine which of the Agreement Payments (or, at your
election, other Payments) shall be eliminated or reduced consistent with the
requirements of this Exhibit B, provided that, if you do not make such
determination within 20 days of the receipt of the calculations made by the
accounting firm, KeyCorp shall elect which of the Agreement Payments shall be
eliminated or reduced consistent with the requirements of this Exhibit B and
shall notify you promptly of such election. As a result of the uncertainty in
the application of Section 280G of the Internal Revenue Code and applicable
regulations promulgated thereunder at the time of the initial determination by
the accounting firm hereunder, it is possible that Agreement Payments will be
made by KeyCorp which should not have been made ("Overpayment") or that
additional Agreement Payments will not be made by KeyCorp which could have been
made ("Underpayments"), in each case, consistent with the calculations required
to be made hereunder. In the event that the accounting firm or a court of
competent jurisdiction (in a final judgment as to which the time for appeal has
lapsed or no appeal is available) determines at any time that an Overpayment has
been made, any such Overpayment shall be treated for all purposes as a loan to
you which you shall repay to KeyCorp together with interest at the applicable
short-term Federal rate provided for in Section 1274(d)(1) of the Internal
Revenue Code, compounded semi-annually; provided, however, that no amount shall
be payable by you to KeyCorp (or if
<PAGE> 11
paid by you to KeyCorp, such payment shall be returned to you) if and to the
extent such payment would not reduce the amount which is subject to taxation
under Section 4999 of the Internal Revenue Code. In the event that the
accounting firm or a court of competent jurisdiction (in a final judgment as to
which the time for appeal has lapsed or no appeal is available) determines at
any time that an Underpayment has occurred, any such Underpayment shall be
promptly paid by KeyCorp to or for your benefit together with interest at the
applicable short-term Federal rate provided for in Section 1274(d)(1) of the
Internal Revenue Code, compounded semi-annually.
<PAGE> 12
EXHIBIT C
LEGAL FEES
KeyCorp will pay, as incurred, all expenses, including the reasonable fees of
counsel engaged by you, of defending any action brought to have the letter to
which this Exhibit C is attached declared invalid or unenforceable in whole or
in part. KeyCorp shall pay, as incurred, all expenses, including the reasonable
fees of counsel engaged by you, of prosecuting any action to compel KeyCorp to
comply with the terms of the letter to which this Exhibit C is attached upon
receipt from you of an undertaking to repay KeyCorp for such expenses if, and
only if, it is ultimately determined by a court of competent jurisdiction that
you had no reasonable grounds for bringing the action (which determination need
not be made simply because you failed to succeed in the action).
<PAGE> 1
Exhibit 10.17
Exhibit 1
KEYCORP
1997 STOCK OPTION PLAN
FOR DIRECTORS
(AS OF NOVEMBER 19, 1997)
1. PURPOSE OF THE PLAN. The purpose of the KeyCorp 1997 Stock Option
Plan for Directors is to encourage Directors to acquire a larger stock ownership
in KeyCorp, thus increasing their proprietary interest in KeyCorp and more
closely aligning their interests with those of the shareholders of KeyCorp.
2. DEFINITIONS. Unless the context clearly indicates otherwise, the
following terms have the meanings set forth below.
"Board of Directors" or "Board" means the Board of Directors of
KeyCorp.
"Committee" means the committee appointed by the Board of Directors to
administer the Plan. The Committee shall be composed of not less than
three Directors of KeyCorp. The Board of Directors may also appoint one
or more Directors as alternate members of the Committee. No officer or
employee of KeyCorp or of any subsidiary of KeyCorp shall be a member
or alternate member of the Committee. The Committee shall at all times
be comprised solely of "Non-Employee Directors", as such term is
defined in Rule 16b-3 promulgated under the Securities Exchange Act of
1934.
"Director" means a member of the Board of Directors of KeyCorp.
"Fair Market Value" means, unless otherwise determined by the
Committee, (a) if the Common Shares are traded on a national exchange,
the mean between the high and low sales price per Common Share on that
national exchange on the date for which the determination of Fair
Market Value is made or, if there are no sales of Common Shares on that
date, then on the next preceding date on which there were any sales of
Common Shares, or (b) if the Common Shares are not traded on a national
exchange, the mean between the high and low sales price per Common
Share in the over-the-counter market, National Market System, as
reported by the National Quotations Bureau, Inc. and NASDAQ on the date
for which the determination of Fair Market Value is made or, if there
are no sales of Common Shares on that date, then on the next preceding
date on which there were any sales of Common Shares.
"Plan" means this KeyCorp 1997 Stock Option Plan for Directors as it
may be amended from time to time.
<PAGE> 2
3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the
Committee. The Board may from time to time remove members from or add members to
the Committee. Vacancies on the Committee, however caused, shall be filled by
the Board. The Board shall select one of the Committee's members as Chair.
Members of the Committee shall be eligible to be granted options to purchase
KeyCorp Common Shares under the Plan while serving on the Committee.
The Committee shall be vested with full authority to make such rules
and regulations as it deems necessary or desirable to administer the Plan and to
interpret the provisions of the Plan. Any determination, decision or action of
the Committee in connection with the construction, interpretation,
administration or application of the Plan shall be final, conclusive and binding
upon all optionees and any person claiming under or through an optionee, unless
otherwise determined by the Board.
Any determination, decision or action of the Committee provided for in
the Plan may be made or taken by action of the Board if it so determines, with
the same force and effect as if such determination, decision or action had been
made or taken by the Committee. No member of the Committee or of the Board shall
be liable for any determination, decision or action made in good faith with
respect to the Plan or any option granted under the Plan. The fact that a member
of the Board or the Committee shall at the time be, or shall theretofore have
been or thereafter may be, a person who has received or is eligible to receive
an option shall not disqualify him or her from taking part in and voting at any
time as a member of the Board or of the Committee, as applicable, in favor of or
against any amendment or repeal of the Plan.
4. STOCK SUBJECT TO THE PLAN.
(a) The stock to be issued upon exercise of options granted under the
Plan shall be KeyCorp Common Shares which shall be made available from Common
Shares held in treasury. The aggregate number of Common Shares which may be
issued under or subject to options granted under this Plan shall not exceed
1,000,000 shares.
(b) In the event that any outstanding option or portion thereof under
the Plan for any reason expires or is terminated, the Common Shares allocable to
the unexercised portion of such option may again be made subject to option under
the Plan.
5. GRANT OF OPTIONS. All options granted under this Plan shall be
"nonqualified stock options" for purposes of the Internal Revenue Code of 1986,
as amended.
6. OPTION PRICE. The purchase price per Common Share which is subject
to an option shall be 100 percent of the Fair Market Value of a Common Share on
the date the option is granted.
<PAGE> 3
7. ELIGIBILITY OF OPTIONEES.
(a) Options on KeyCorp Common Shares shall automatically be granted
annually on the third business day following the date of the earnings release of
KeyCorp for the first quarter of each year, commencing in 1998, to those persons
who are then serving as Directors of KeyCorp and who are not then employees or
officers of KeyCorp. The options granted to each Director on an annual basis
shall, as of the option grant date, have a value equal to 2.75 times the annual
cash retainer payable to a Director in the year of the option grant (and the
value of the options shall be determined in accordance with the formula set
forth in Exhibit A to this Plan, which formula is intended to approximate on a
simplified basis the Black-Scholes value of the options).
(b) Subject to the terms of the Plan and subject to review by the
Board, the Committee shall have exclusive jurisdiction (i) to determine the
dates on which, or the time periods during which, the options may be exercised,
(ii) to determine the purchase price of the shares subject to each option in
accordance with Section 6 of the Plan, and (iii) to prescribe the form, which
shall be consistent with the Plan, of the instrument evidencing any options
granted under the Plan.
8. NON-TRANSFERABILITY OF OPTIONS. Unless otherwise determined by the
Committee, no option granted under the Plan shall be assignable or transferable
by the optionee other than by will or the laws of descent and distribution, and
during the lifetime of an optionee the option shall be exercisable only by such
optionee.
9. TERM AND EXERCISE OF OPTIONS.
(a) Unless otherwise determined by the Committee, each option granted
under the Plan shall terminate on the date which is 10 years after the date of
grant. The Committee in its discretion may provide further limitations on the
exercisability of options granted under the Plan. An option may be exercised
only during the continuance of the optionee's service as a Director, except as
provided in Sections 10 and 11 of the Plan.
(b) A person electing to exercise an option shall give written notice
to KeyCorp of such election and of the number of shares he or she has elected to
purchase, in such form or forms as the Committee shall have prescribed or
approved, and shall at the time of exercise tender the full purchase price of
the shares he or she has elected to purchase. Unless otherwise determined by the
Committee, the purchase price shall be paid in full in cash upon the exercise of
the option.
10. TERMINATION OF DIRECTORSHIP. If an optionee's status as a Director
ceases for any reason other than death, any option granted to him or her under
the Plan shall terminate eighteen months after the termination of such optionee
as a Director; provided, however, that no option shall be exercisable after its
expiration date.
11. DEATH OF OPTIONEE. If an optionee dies while serving as a Director,
or after cessation of such service but within the period during which he or she
could have exercised the option under Section 10 of the Plan, then the option
may be exercised by the executors or administrators of the optionee's estate or
by any person or persons who have acquired the option directly from the optionee
by bequest or inheritance, within twenty-four months (or such other period as
prescribed by the Committee) after: (i) the date of the optionee's death in the
case of an optionee who died while still serving as a
<PAGE> 4
director, and (ii) the date the optionee ceased being a director in the case of
an optionee who ceased being a director prior to such optionee's death, except
that in no case shall an option be exercisable after its expiration date.
12. AMENDMENT OR TERMINATION OF THE PLAN. The Committee may at any time
amend, modify suspend or terminate the Plan or modify any outstanding options
granted under the Plan. No amendment, modification, suspension or termination of
the Plan nor modification of any outstanding option shall in any manner affect,
alter or impair any option theretofore granted under the Plan without the
consent of the optionee or any person validly claiming under or through the
optionee.
13. ADJUSTMENT UPON CHANGES IN COMMON SHARES. Automatically and without
Committee action in the event of any stock dividend, stock split or share
combination of the Common Shares, or by appropriate Committee action in the
event of any reclassification, recapitalization, merger, consolidation, other
form of business combination, liquidation or dissolution involving KeyCorp or
any spin-off or other distribution to shareholders of KeyCorp (other than normal
cash dividends), (a) appropriate adjustments to the maximum number of Common
Shares that may be issued under or subject to options granted under the Plan
pursuant to Section 4 shall be made, and (b) appropriate adjustments to the
number and kind of shares subject to, the price per share under, and the terms
and conditions of each then outstanding option shall be made to the extent
necessary and in such manner that the benefits of Directors under all then
outstanding options shall be maintained substantially as before the occurrence
of such event. Any such adjustment shall be conclusive and binding for all
purposes of the Plan, in the event of any stock dividend, stock split or share
combination, as of the date of such stock dividend, stock split or share
combination, and in all other cases, as of such date as the Committee may
determine.
14. AWARDS IN SUBSTITUTION FOR OPTIONS GRANTED BY OTHER COMPANIES.
Options may be granted under the Plan in substitution for awards held by
directors of a company who become Directors of KeyCorp as a result of the merger
or consolidation of such company with KeyCorp, or the acquisition by KeyCorp of
the assets of such company, or the acquisition by KeyCorp of stock of such
company as a result of which it becomes a subsidiary. The terms, provisions and
benefits of the substitute options so granted may vary from the terms,
provisions and benefits set forth in or authorized by the Plan to such extent as
the Committee at the time of the grant may deem appropriate to conform, in whole
or in part, to the terms, provisions and benefits of the awards in substitution
for which they are granted.
15. LEGAL REQUIREMENTS. No options shall be granted and KeyCorp shall
have no obligation to make any payment under the Plan, whether in Common Shares,
cash or any combination thereof, unless such payment is, without further action
by KeyCorp, in compliance with all applicable Federal and state laws and
regulations, including, without limitation, the United States Internal Revenue
Code and Federal and state securities laws.
<PAGE> 5
16. ABSENCE OF LIABILITY. No member of the Board of Directors of
KeyCorp, of the Committee, of any other committee of the Board of Directors or
any officer or Director of KeyCorp or a subsidiary of KeyCorp shall be liable
for any act or action under the Plan, whether of commission or omission, taken
by any other member, or by any officer, agent or employee, or except in
circumstances involving his or her bad faith or willful misconduct, for any
thing done or omitted to be done by himself or herself.
17. SEVERABILITY. The invalidity or unenforceability of any particular
provision of the Plan shall not affect any other provision hereof, and the Plan
shall be construed in all respects as if such invalid or unenforceable provision
were omitted herefrom.
18. GOVERNING LAW. The provisions of the Plan shall be governed and
construed in accordance with the laws of the State of Ohio.
19. PLAN EFFECTIVE DATE. The Plan was approved by the Board of
Directors of KeyCorp at a meeting held on January 16, 1997 and amended on
November 19, 1997.
<PAGE> 1
Exhibit 10.18
FIRST AMENDMENT
TO
KEYCORP 1997 STOCK OPTION PLAN
FOR DIRECTORS
The KeyCorp 1997 Stock Option Plan for Directors is hereby amended by deleting
current Section 7(a) as set forth below and substituting therefor new Section
7(a) as set forth below.
Current Section 7(a) (Deleted)
- ------------------------------
(a) Options on 3,500 KeyCorp Common Shares shall automatically be
granted annually on the third business day following the date of the
earnings release of KeyCorp for the first quarter of each year,
commencing in 1998, to those persons who are then serving as Directors
of KeyCorp and who are not then employees or officers of KeyCorp.
New Section 7(a) (Added)
- ------------------------
(a) Options on KeyCorp Common Shares shall automatically be granted
annually on the third business day following the date of the earnings
release of KeyCorp for the first quarter of each year, commencing in
1998, to those persons who are then serving as Directors of KeyCorp and
who are not then employees or officers of KeyCorp. The options granted
to each Director on an annual basis shall, as of the option grant date,
have a value equal to 2.75 times the annual cash retainer payable to a
Director in the year of the option grant (and the value of the options
shall be determined in accordance with the formula set forth in Exhibit
A to this Plan, which formula is intended to approximate on a
simplified basis the Black-Scholes value of the options).
The KeyCorp 1997 Stock Option Plan for Directors is amended by adding Exhibit A
thereto in the form of Exhibit A to this First Amendment.
The amendment of the KeyCorp 1997 Stock Option Plan for Directors as
contemplated above was approved by the Equity Based Compensation Subcommittee of
the Compensation and Organization Committee of KeyCorp at a meeting held on
November 19, 1997.
KEYCORP
By /s/ Thomas E. Helfrich
-------------------------------
Thomas E. Helfrich
Executive Vice President
<PAGE> 2
EXHIBIT A
Formula Example
- ------- -------
Amount of annual cash retainer $ 27,000
payable to a director in year
of option grant
multiply by 2.75 X 2.75
----------
74,250
multiply by 3 X 3
----------
222,750
divide by Fair Market Value
(mean between high and low
sales price per Common Share) 65
----------
of a Common Share on the date
of the option grant
3,426
round up to nearest whole
number divisible by 100. This
would be the number of common 3,500
Shares covered by the options Common
grant to each Director. Shares
<PAGE> 1
EXHIBIT 10.27
FIRST AMENDMENT TO THE KEYCORP
EXECUTIVE SUPPLEMENTAL PENSION PLAN
WHEREAS, KeyCorp has established the KeyCorp Executive Supplemental
Pension Plan ("Plan") to provide a supplemental pension benefit for certain
selected key employees of KeyCorp, and
WHEREAS, KeyCorp has also established the KeyCorp Deferred Compensation
Plan ("Deferred Compensation Plan") which permits certain selected key employees
of KeyCorp to defer up to 50% of their annual base salary under the Deferred
Compensation Plan, and
WHEREAS, it is presently, and historically has been the intent of
KeyCorp to include such employee's annual base compensation that the employee
has elected to defer under the Deferred Compensation Plan in the Plan's
definition of Compensation for purposes of determining the employee's annual
base compensation for the applicable Plan year.
NOW THEREFORE, the Plan is amended as follows:
1. Section 2.1(e) is amended to delete it in its entirety, and to
substitute the following therefor:
"(e) "COMPENSATION" for any Plan Year or any partial Plan Year
in which the Participant incurs a Severance From Service Date shall
mean the entire amount of base compensation paid to such Participant
during such period by reason of his employment as an Employee, as
reported for federal income tax purposes, or such base compensation
which would have been paid except for (1) the timing of an Employer's
payroll processing operations, (2) the Participant's election to
participate in the KeyCorp 401(k) Savings Plan, the KeyCorp Excess
401(k) Savings Plan, and/or the KeyCorp Flexible Benefits Plan, and/or
(3) the Participant's election to defer such base compensation under
the KeyCorp Deferred Compensation Plan for the applicable Plan Year,
provided, however, that the term Compensation shall specifically
exclude:
(i) any amount attributable to the Participant's
exercise of stock appreciation rights and the amount of any
gain to the Participant upon the exercise of stock options;
(ii) any amount attributable to the Participant's
receipt of non-cash remuneration whether or not it is included
in the Participant's income for federal income tax purposes;
(iii) any amount attributable to the Participant's
receipt of moving expenses and any relocation bonus paid to
the Participant during the Plan Year;
<PAGE> 2
(iv) any amount attributable to a lump sum severance
payment paid by an Employer or the Corporation to the
Participant;
(v) any amount attributable to fringe benefits (cash
and non-cash);
(vi) any amount attributable to any bonus or payment
made as an inducement for the Participant to accept employment
with an Employer;
(vii) any amount paid to the Participant during the
Plan Year which is attributable to interest earned on
compensation which had been deferred under a plan of an
Employer or the Corporation.
(viii) any amount paid to the Participant during the
Plan Year which previously has been included as Compensation
under the Plan; and
(ix) any amount paid for any period after the
Participant's termination or retirement date.
In the case of a Disabled Participant, such Participant's
Compensation for each year while Disabled shall equal an amount which
shall reflect the Participant's Compensation for the calendar year
preceding the date of the Participant's Disability."
2. The amendment set forth in Paragraph 1 hereof shall be effective as
of the first day of January 1997.
3. Except as specifically amended herein, the Plan shall remain in full
force and effect.
IN WITNESS WHEREOF, KeyCorp has caused this First Amendment to the Plan
to be executed by its duly authorized officer, as of this _____ day of December,
1997.
KEYCORP
By:
------------------------------------
Title:
-------------------------------------
<PAGE> 1
Exhibit 10.28
KEYCORP
AMENDED AND RESTATED
1991 EQUITY COMPENSATION PLAN
(Amended as of September 19, 1996)
1. PURPOSE. The KeyCorp Amended and Restated 1991 Equity Compensation
Plan is intended to promote the interests of KeyCorp and its shareholders by
providing equity-based incentives for effective service and high levels of
performance to selected Employees who are in a position to make a substantial
contribution to the continued progress and success of the Corporation and its
Subsidiaries and thereby to enable the Corporation and its Subsidiaries to
attract and retain qualified individuals to serve as Employees in those
positions. To achieve these purposes, the Corporation may grant Awards of
Options, Stock Appreciation Rights, Limited Stock Appreciation Rights,
Restricted Stock, and Performance Shares to selected Employees, all in
accordance with the terms and conditions hereinafter set forth.
2. DEFINITIONS.
2.1 1934 Act. The term "1934 Act" shall mean the Securities
Exchange Act of 1934, as amended.
2.2 ACQUISITION PRICE. The term "Acquisition Price" with respect to
Restricted Stock shall mean such amount, not less than the par value per Common
Share, as may be specified by the Committee in the Award Instrument with respect
to that Restricted Stock as the consideration to be paid by the Employee for
that Restricted Stock.
2.3 AWARD. The term "Award" shall mean an award granted under the Plan
of an Option, of Stock Appreciation Rights, of Limited Stock Appreciation
Rights, of Restricted Stock, or of Performance Shares.
2.4 AWARD INSTRUMENT. The term "Award Instrument" shall mean a written
instrument evidencing an Award in such form and with such provisions as the
Committee may prescribe, including, without limitation, an agreement to be
executed by the Employee and the Corporation, a certificate issued by the
Corporation, or a letter executed by the Committee or its designee. Acceptance
of the Award Instrument by an Employee constitutes agreement to the terms of the
Award evidenced thereby.
2.5 CHANGE OF CONTROL. A "Change of Control" shall be deemed to have
occurred if, at any time after the date of the grant of the relevant Award,
there is a Change of Control under any of clauses (a), (b), (c), or (d) below.
For these purposes, the Corporation will be deemed to have become a subsidiary
of another corporation if any other corporation (which term shall include, in
addition to a corporation, a limited liability company, partnership, trust, or
other organization) owns, directly or indirectly, 50 percent or more of the
total combined
<PAGE> 2
outstanding voting power of all classes of stock of the Corporation or any
successor to the Corporation.
(a) A Change of Control will have occurred under this clause (a)
if the Corporation is a party to a transaction pursuant to
which the Corporation is merged with or into, or is
consolidated with, or becomes the subsidiary of another
corporation and either
(i) immediately after giving effect to that transaction,
less than 65% of the then outstanding voting
securities of the surviving or resulting corporation
or (if the Corporation becomes a subsidiary in the
transaction) of the ultimate parent of the
Corporation represent or were issued in exchange for
voting securities of the Corporation outstanding
immediately prior to the transaction, or
(ii) immediately after giving effect to that transaction,
individuals who were directors of the
Corporation on the day before the first public
announcement of (A) the pendency of the
transaction or (B) the intention of any person
or entity to cause the transaction to occur,
cease for any reason to constitute at least 51%
of the directors of the surviving or resulting
corporation or (if the Corporation becomes a
subsidiary in the transaction) of the ultimate
parent of the Corporation.
(b) A Change of Control will have occurred under this clause (b)
if a tender or exchange offer shall be made and consummated for
35% or more of the outstanding voting stock of the Corporation
or any person (as the term "person" is used in Section 13(d) and
Section 14(d)(2) of the 1934 Act) is or becomes the beneficial
owner of 35% or more of the outstanding voting stock of the
Corporation or there is a report filed on Schedule 13D or
Schedule 14D-1 (or any successor schedule, form or report), each
as adopted under the 1934 Act, disclosing the acquisition of 35%
or more of the outstanding voting stock of the Corporation in a
transaction or series of transactions by any person (as defined
earlier in this clause (b)).
(c) A Change of Control will have occurred under this clause (c) if
either
(i) without the prior approval, solicitation,
invitation, or recommendation of the Corporation's
Board of Directors any person or entity makes a
public announcement of a bona fide intention (A)
to engage in a transaction with the
<PAGE> 3
Corporation that, if consummated, would result in a
Change Event (as defined below in this clause (c)), or
(B) to "solicit" (as defined in Rule 14a-1 under the
1934 Act) proxies in connection with a proposal that
is not approved or recommended by the Corporation's
Board of Directors, or
(ii) any person or entity publicly announces a bona fide
intention to engage in an election contest relating
to the election of directors of the Corporation
(pursuant to Regulation 14A, including Rule 14a-11,
under the 1934 Act),
and, at any time within the 24 month period immediately following the
date of the announcement of that intention, individuals who, on the day
before that announcement, constituted the directors of the Corporation
(the "Incumbent Directors") cease for any reason to constitute at least
a majority thereof unless both (A) the election, or the nomination for
election by the Corporation's shareholders, of each new director was
approved by a vote of at least two-thirds of the Incumbent Directors in
office at the time of the election or nomination for election of such
new director, and (B) prior to the time that the Incumbent Directors no
longer constitute a majority of the Board of Directors, the Incumbent
Directors then in office, by a vote of at least 75% of their number,
reasonably determine in good faith that the change in Board membership
that has occurred before the date of that determination and that is
anticipated to thereafter occur within the balance of the 24 month
period to cause the Incumbent Directors to no longer be a majority of
the Board of Directors was not caused by or attributable to, in whole
or in any significant part, directly or indirectly, proximately or
remotely, any event under subclause (i) or (ii) of this clause (c).
For purposes of this clause (c), the term "Change Event" shall mean any
of the events described in the following subclauses (x), (y), or (z) of
this clause (c):
(x) A tender or exchange offer shall be made for 25% or
more of the outstanding voting stock of the
Corporation or any person (as the term "person" is
used in Section 13(d) and Section 14(d)(2) of the
1934 Act) is or becomes the beneficial owner of 25%
or more of the outstanding voting stock of the
Corporation or there is a report filed on Schedule
13D or Schedule 14D-1 (or any successor schedule,
form, or report), each as adopted under the 1934 Act,
disclosing the acquisition of 25% or more of the
outstanding voting stock of the Corporation in a
3
<PAGE> 4
transaction or series of transactions by any person
(as defined earlier in this subclause (x)).
(y) The Corporation is a party to a transaction pursuant
to which the Corporation is merged with or into, or
is consolidated with, or becomes the subsidiary of
another corporation and, after giving effect to such
transaction, less than 50% of the then outstanding
voting securities of the surviving or resulting
corporation or (if the Corporation becomes a
subsidiary in the transaction) of the ultimate parent
of the Corporation represent or were issued in
exchange for voting securities of the Corporation
outstanding immediately prior to such transaction or
less than 51% of the directors of the surviving or
resulting corporation or (if the Corporation becomes
a subsidiary in the transaction) of the ultimate
parent of the Corporation were directors of the
Corporation immediately prior to such transaction.
(z) There is a sale, lease, exchange, or other transfer
(in one transaction or a series of related
transactions) of all or substantially all the assets
of the Corporation.
(d) A Change of Control will have occurred under this clause (d)
if there is a sale, lease, exchange, or other transfer (in one
transaction or a series of related transactions) of all or
substantially all of the assets of the Corporation.
2.6 Committee. The term "Committee" shall mean a committee appointed by
the Board of Directors of the Corporation to administer the Plan. The Committee
shall be composed of not less than three directors of the Corporation. The Board
of Directors may also appoint one or more directors as alternate members of the
Committee. No officer or Employee of the Corporation or of any Subsidiary shall
be a member or alternate member of the Committee. The Committee shall at all
times be so comprised (a) as to satisfy the disinterested administration
standard contained in Rule 16b-3, if required to qualify for the Rule 16b-3
Exemption and (b) as to satisfy the outside director standard under Section
162(m) of the Internal Revenue Code of 1986, as amended, if required to qualify
compensation paid under one or more of the provisions of the Plan as
performance-based compensation within the meaning of that section.
2.7 Common Shares. The term "Common Shares" shall mean common shares
of the Corporation, with apar value of $1 each.
4
<PAGE> 5
2.8 CORPORATION. The term "Corporation" shall mean KeyCorp and its
successors, including the surviving or resulting corporation of any merger of
KeyCorp with or into, or any consolidation of KeyCorp with, any other
corporation or corporations.
2.9 DISABILITY. The term "Disability" with respect to an Employee shall
mean physical or mental impairment which entitles the Employee to receive
disability payments under any long-term disability plan maintained by the
Corporation.
2.10 EMPLOYEE. The term "Employee" shall mean any individual employed
by the Corporation or by any Subsidiary and shall include officers as well as
all other employees of the Corporation or of any Subsidiary (including employees
who are members of the Board of Directors of the Corporation or any Subsidiary).
2.11 EMPLOYMENT TERMINATION DATE. The term "Employment Termination
Date" with respect to an Employee shall mean the first date on which the
Employee is no longer employed by the Corporation or any Subsidiary.
2.12 EXERCISE PRICE. The term "Exercise Price" with respect to an
Option shall mean the price specified in the Option at which the Common Shares
subject to the Option may be purchased by the holder of the Option.
2.13 FAIR MARKET VALUE. Except as otherwise determined by the Committee
at the time of the grant of an Award, the term "Fair Market Value" with respect
to Common Shares shall mean: (a) if the Common Shares are traded on a national
exchange, the mean between the high and low sales price per Common Share on that
national exchange on the date for which the determination of fair market value
is made or, if there are no sales of Common Shares on that date, then on the
next preceding date on which there were any sales of Common Shares, or (b) if
the Common Shares are not traded on a national exchange, the mean between the
high and low sales price per Common Share in the over-the-counter market,
National Market System, as reported by the National Quotations Bureau, Inc. and
NASDAQ on the date for which the determination of fair market value is made or,
if there are no sales of Common Shares on that date, then on the next preceding
date on which there were any sales of Common Shares.
2.14 INCENTIVE STOCK OPTION. The term "Incentive Stock Option" shall
mean an Option intended by the Committee to qualify as an "incentive stock
option" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended.
2.15 LIMITED STOCK APPRECIATION RIGHT. The term "Limited Stock
Appreciation Right" or "Limited SAR" shall mean an Award granted to an Employee
with respect to all or any part of any Option, that entitles the holder thereof
to receive from the Corporation, upon exercise of the Limited SAR and surrender
of the related Option, or any portion of the Limited SAR and the related Option,
an amount equal to (unless the Committee specifies a lesser amount at the time
of the grant of the Award):
<PAGE> 6
(a) in the case of a Limited SAR granted with respect to
an Incentive Stock Option, 100% of the excess, if
any, measured at the time of the exercise of the
Limited SAR, of (i) the Fair Market Value of the
Common Shares subject to the Incentive Stock Option
with respect to which the Limited SAR is exercised
over (ii) the Exercise Price of those Common Shares
under the Incentive Stock Option, or
(b) in the case of a Limited SAR granted with respect to
a Nonqualified Option, 100% of the highest of:
(i) the excess, measured at the time of the
exercise of the Limited SAR, of (A) the Fair Market
Value of the Common Shares subject to the
Nonqualified Option with respect to which the Limited
SAR is exercised over (B) the Exercise Price of those
Common Shares under the Nonqualified Option,
(ii) the excess of (A) the highest gross
price (before brokerage commissions and soliciting
dealers' fees) paid or to be paid for a Common Share
(whether in cash or in property and whether by way of
exchange, conversion, distribution upon liquidation,
or otherwise) in connection with any Change of
Control multiplied by the number of Common Shares
subject to the Nonqualified Option with respect to
which the Limited SAR is exercised over (B) the
Exercise Price of those Common Shares under the
Nonqualified Option, or
(iii) the excess of (A) the highest Fair
Market Value of the Common Shares subject to the
Nonqualified Option with respect to which the Limited
SAR is exercised on any one day during the period
beginning on the sixtieth day prior to the date on
which the Limited SAR is exercised multiplied by the
number of Common Shares subject to the Nonqualified
Option with respect to which the Limited SAR is
exercised over (B) the Exercise Price of those Common
Shares under the Nonqualified Option.
2.16 NONQUALIFIED OPTION. The term "Nonqualified Option" shall mean an
Option intended by the Committee not to qualify as an "incentive stock option"
under Section 422 of the Internal Revenue Code of 1986, as amended.
2.17 OPTION. The term "Option," (a) when used otherwise than in
connection with the term Stock Appreciation Right or Limited Stock Appreciation
Right, shall mean an Award entitling the holder thereof to purchase a specified
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<PAGE> 7
number of Common Shares at a specified price during a specified period of time,
and (b) when used in connection with the term Stock Appreciation Right or
Limited Stock Appreciation Right, shall mean (i) any such Award or (ii) any
award under any other plan maintained or assumed by the Corporation entitling
the holder thereof to purchase a specified number of Common Shares at a
specified price during a specified period of time.
2.18 OPTION EXPIRATION DATE. The term "Option Expiration Date" with
respect to any Option shall mean the date selected by the Committee after which,
except as provided in Section 10.4 in the case of the death of the Employee to
whom the option was granted, the Option may not be exercised.
2.19 PERFORMANCE GOAL. The term "Performance Goal" shall mean a
performance goal specified by the Committee in connection with the potential
grant of Performance Shares and may include, without limitation, goals based
upon cumulative earnings per Common Share, return on investment, return on
shareholders' equity, or achievement of any other goals, whether or not readily
expressed in financial terms, that are related to the performance by the
Corporation, by any Subsidiary, or by any Employee or group of Employees in
connection with services performed by that Employee or those Employees for the
Corporation, a Subsidiary, or any one or more subunits of the Corporation or of
any Subsidiary.
2.20 PERFORMANCE PERIOD. The term "Performance Period" shall mean such
one or more periods of time, which may be of varying and overlapping durations,
as the Committee may select, over which the attainment of one or more
Performance Goals will be relevant in connection with one or more Awards of
Performance Shares.
2.21 PERFORMANCE SHARES. The term "Performance Shares" shall mean an
Award denominated in Common Shares and contingent upon attainment of one or more
Performance Goals by the Corporation or a Subsidiary or any subunit of the
Corporation or of any Subsidiary over a Performance Period.
2.22 PLAN. The term "Plan" shall mean this KeyCorp Amended and Restated
1991 Equity Compensation Plan as from time to time hereafter amended in
accordance with Section 20.
2.23 RESTRICTED STOCK. The term "Restricted Stock" shall mean Common
Shares of the Corporation delivered to an Employee pursuant to an Award subject
to such restrictions, conditions and contingencies as the Committee may provide
in the relevant Award Instrument, including (a) the restriction that the
Employee not sell, transfer, otherwise dispose of, or pledge or otherwise
hypothecate the Restricted Stock during the applicable Restriction Period, (b)
the requirement that, subject to the provisions of Section 10, if the Employee's
employment terminates so that the Employee is no longer employed by the
Corporation or any Subsidiary before the end of the applicable Restriction
Period, the Employee will offer to sell to the Corporation at the Acquisition
Price each Common Share of Restricted Stock held by the Employee at the
Employment Termination Date with respect to which, as of that date, any
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<PAGE> 8
restrictions, conditions, or contingencies have not lapsed, and (c) such other
restrictions, conditions, and contingencies, if any, as the Committee may
provide in the Award Instrument with respect to that Restricted Stock.
2.24 RESTRICTION PERIOD. The term "Restriction Period" with respect to
an Award of Restricted Stock shall mean the period selected by the Committee and
specified in the Award Instrument with respect to that Restricted Stock during
which the Employee may not sell, transfer, otherwise dispose of, or pledge or
otherwise hypothecate that Restricted Stock.
2.25 RULE 16B-3. Term "Rule 16b-3" shall mean Rule 16b-3 or any rule
promulgated in replacement thereof or in substitution therefor under the 1934
Act.
2.26 RULE 16B-3 EXEMPTION. The term "Rule 16b-3 Exemption" shall mean
the exemption from Section 16(b) of the 1934 Act that is available under Rule
16b-3.
2.27 SECTION 16(B) EMPLOYEE. The term "Section 16(b) Employee" shall
mean an individual who is, or at any time within the preceding six months was, a
director, officer, or 10% shareholder of the Corporation within the meaning of
Section 16(b) of the 1934 Act.
2.28 STOCK APPRECIATION RIGHT. The term "Stock Appreciation Right "or
"SAR" shall mean an Award granted to an Employee with respect to all or any part
of any Option that entitles the holder thereof to receive from the Corporation,
upon exercise of the SAR and surrender of the related Option, or any portion of
the SAR and the related Option, an amount equal to 100%, or such lesser
percentage as the Committee may determine at the time of the grant of the Award,
of the excess, if any, measured at the time of the exercise of the SAR, of (a)
the Fair Market Value of the Common Shares subject to the Option with respect to
which the SAR is exercised over (b) the Exercise Price of those Common Shares
under the Option.
2.29 SUBSIDIARY. The term "Subsidiary" shall mean any corporation,
partnership, joint venture, or other business entity in which the Corporation
owns, directly or indirectly, 50 percent or more of the total combined voting
power of all classes of stock (in the case of a corporation) or other ownership
interest (in the case of any entity other than a corporation).
2.30 TANDEM AWARD. The term "Tandem Award" shall mean any two or more
Awards that are linked by the terms of any such Awards so that the exercise of
one such Award, in whole or in part, requires or will automatically result in
the surrender or cancellation, in whole or in proportionate part, of the other
such Awards.
2.31 TRANSFEREE. The term "Transferee" shall mean, with respect to
Nonqualified Options only, any person or entity to which an Employee is
permitted by the Committee to transfer or assign all or part of his or her
Options.
3. ADMINISTRATION. The Plan shall be administered by the Committee. No
Award may be made under the Plan to any member or alternate member of the
Committee. The
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<PAGE> 9
Committee shall have authority, subject to the terms of the Plan, (a) to
determine the Employees who are eligible to participate in the Plan, the type,
size, and terms of Awards to be granted to any Employee, the time or times at
which Awards shall be exercisable or at which restrictions, conditions, and
contingencies shall lapse, and the terms and provisions of the instruments by
which Awards shall be evidenced, (b) to establish any other restrictions,
conditions, and contingencies on Awards in addition to those prescribed by the
Plan, (c) to interpret the Plan, and (d) to make all determinations necessary
for the administration of the Plan.
The construction and interpretation by the Committee of any provision
of the Plan or any Award Instrument delivered pursuant to the Plan and any
determination by the Committee pursuant to any provision of the Plan or any
Award Instrument shall be final and conclusive. No member or alternate member of
the Committee shall be liable for any such action or determination made in good
faith.
The Committee may act only by a majority of its members. Any
determination of the Committee may be made, without a meeting, by a writing or
writings signed by all of the members of the Committee. In addition, the
Committee may authorize any one or more of their number or any officer of the
Corporation to execute and deliver documents on behalf of the Committee and the
Committee may delegate to one or more employees, agents, or officers of the
Corporation, or to one or more third party consultants, accountants, lawyers, or
other advisors, such ministerial duties related to the operation of the Plan as
it may deem appropriate.
4. ELIGIBILITY. Awards may be granted to Employees of the Corporation
or any Subsidiary selected by the Committee in its sole discretion. The granting
of any Award to an Employee shall not entitle that Employee to, nor disqualify
the Employee from, participation in any other grant of an Award. The maximum
number of Common Shares with respect to which any Employee may receive Awards
during any calendar year shall be the lesser of 200,000 Common Shares or .2% of
the outstanding Common Shares of the Corporation on the date such award was
made, which maximum number shall be subject to adjustment as provided in Section
13 of the Plan.
5. STOCK SUBJECT TO THE PLAN. The stock that may be issued and
distributed to Employees in connection with Awards granted under the Plan shall
be Common Shares and may be authorized and unissued Common Shares, treasury
Common Shares, or Common Shares acquired on the open market specifically for
distribution under the Plan, as the Board of Directors may from time to time
determine.
Subject to adjustment as provided in Section 13, the number of Common
Shares available for grant of Awards under the Plan shall be determined from
time to time as follows: (a) on the date of the 1994 Annual Meeting of
Shareholders of the Corporation (at which meeting an amendment and restatement
of the Plan was submitted for approval of the shareholders of the Corporation),
the number of Common Shares available for grant of
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<PAGE> 10
Awards under the Plan shall equal two percent of the total number of Common
Shares outstanding on March 31, 1994, and (b) on January 2, 1995 and on each
January 2 occurring thereafter during the life of the Plan, the number of Common
Shares available for grant of Awards under the Plan shall be increased by adding
to the number of Common Shares then available for grant of Awards under the
Plan, the number of Common Shares of the Corporation that, when added to the
number of Common Shares that otherwise remain available for grant of additional
Awards under the Plan on that January 2, equals two percent of the total number
of Common Shares of the Corporation outstanding on December 31st of the next
proceeding year.
The number of Common Shares remaining available for grants of
additional Awards under the Plan at any particular time during a calendar year
shall be reduced, upon the granting thereafter of any Award under the Plan, by
the full number of Common Shares subject to that Award except that, in the case
of any particular Tandem Award, the number of Common Shares counted as being
subject to such Tandem Award shall be the maximum number of Common Shares with
respect to which the Employee may receive value under such Tandem Award. If any
Award for any reason expires or is terminated, in whole or in part, without the
receipt by an Employee of Common Shares (or the equivalent thereof in cash or
other property), the Common Shares subject to that part of the Award that has so
expired or terminated shall again be available for the future grant of Awards
under the Plan.
Notwithstanding any other provision of the Plan, but subject to
adjustment under Section 13, (a) the maximum number of Common Shares that may be
issued under the Plan pursuant to Incentive Stock Options shall be 4,800,000
Common Shares, and (b) the maximum number of Common Shares that may be issued
under the Plan as Restricted Stock during any calendar year shall be that number
of Common Shares that is equal to five percent of the total number of Common
Shares available for grant of Awards under the Plan as of January 2 of that
calendar year.
6. STOCK OPTIONS.
6.1 TYPE AND DATE OF GRANT OF OPTIONS.
(a) The Award Instrument pursuant to which any Incentive
Stock Option is granted shall specify that the Option
granted thereby shall be treated as an Incentive
Stock Option. The Award Instrument pursuant to which
any Nonqualified Option is granted shall specify that
the Option granted thereby shall not be treated as an
Incentive Stock Option.
(b) The day on which the Committee authorizes the grant
of an Incentive Stock Option shall be the date on
which that Option is granted. No Incentive Stock
Option may be granted on any date after the tenth
anniversary of the date of adoption, on March 17,
1994, by the Board of Directors of the Corporation,
of the Plan as amended and restated.
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(c) The day on which the Committee authorizes the grant
of a Nonqualified Option shall be considered the date
on which that Option is granted, unless the Committee
specifies a later date.
6.2 Exercise Price. The Exercise Price under any Option shall be not
less than the Fair Market Value of the Common Shares subject to the Option on
the date the Option is granted.
6.3 Option Expiration Date. The Option Expiration Date under any
Incentive Stock Option shall be not later than ten years from the date on which
the Option is granted. The Option Expiration Date under any Nonqualified Option
shall not be later than ten years and one month from the date on which the
Option is granted.
6.4 Exercise of Options.
(a) Except as otherwise provided in Section 10, an Option may be
exercised only (i) while the Employee to whom the Option was
granted is in the employ of the Corporation or of a
Subsidiary, and (ii) subject to Section 11, after the Employee
to whom the Option was granted has been in the continuous
employ of the Corporation or of a Subsidiary for at least six
months from the date on which the Option was granted. Subject
to these requirements, each Option shall become exercisable in
one or more installments at the time or times provided in the
Award Instrument evidencing the Option. Once any portion of an
Option becomes exercisable, that portion shall remain
exercisable until expiration or termination of the Option. An
Employee to whom an Option is granted or, with respect to
Nonqualified Options, the Employee's Transferee may exercise
the Option from time to time, in whole or in part, up to the
total number of Common Shares with respect to which the Option
is then exercisable, except that no fraction of a Common Share
may be purchased upon the exercise of any Option.
(b) An Employee or, with respect to Nonqualified Options, any
Transferee electing to exercise an Option shall deliver to the
Corporation (i) the Exercise Price payable in accordance with
Section 6.5 and (ii) written notice of the election that
states the number of whole Common Shares with respect to which
the Employee is exercising the Option.
6.5 Payment For Common Shares. Upon exercise of an Option by an
Employee or, with respect to Nonqualified Options, any Transferee, the Exercise
Price shall be payable by the Employee or Transferee in cash or in such other
form of consideration as the Committee determines may be accepted, including
without limitation, securities or other property, or any combination of cash,
securities or other property, or by delivery by the Employee or Transferee (with
the written notice of election to exercise) of irrevocable
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instructions to a broker registered under the 1934 Act promptly to deliver to
the Corporation the amount of sale or loan proceeds to pay the Exercise Price.
The Committee, in its sole discretion, may grant to an Employee or, with respect
to Nonqualified Options, any Transferee the right to transfer Common Shares
acquired upon the exercise of a part of an Option in payment of the Exercise
Price payable upon immediate exercise of a further part of the Option.
6.6 CONVERSION OF INCENTIVE STOCK OPTIONS. The Committee may at any
time in its sole discretion take such actions as may be necessary to convert any
outstanding Incentive Stock Option (or any installments or portions of
installments thereof) into a Nonqualified Option with or without the consent of
the Employee to whom that Incentive Stock Option was granted and whether or not
that Employee is an Employee at the time of the conversion.
7. STOCK APPRECIATION RIGHTS AND LIMITED STOCK APPRECIATION RIGHTS.
7.1 GRANT OF SARS AND LIMITED SARS. An SAR may be granted only in
connection with an Option. An SAR granted in connection with an Incentive Stock
Option may be granted only when the Incentive Stock Option is granted. An SAR
granted in connection with a Nonqualified Option may be granted either when the
related Nonqualified Option is granted or at any time thereafter including, in
the case of any Nonqualified Option resulting from the conversion of an
Incentive Stock Option, simultaneously with or after the conversion. Similarly,
a Limited SAR may be granted only in connection with an Option. A Limited SAR
granted in connection with an Incentive Stock Option may be granted only when
the Incentive Stock Option is granted. A Limited SAR granted in connection with
a Nonqualified Option may be granted either when the related Nonqualified Option
is granted or at any time thereafter including, in the case of any Nonqualified
Option resulting from the conversion of an Incentive Stock Option,
simultaneously with or after the conversion.
7.2 EXERCISE OF SARS AND LIMITED SARS.
(a) An Employee electing to exercise an SAR or a Limited SAR shall
deliver written notice to the Corporation of the election
identifying the SAR or Limited SAR and the related Option with
respect to which the SAR or Limited SAR was granted to the
Employee and specifying the number of whole Common Shares with
respect to which the Employee is exercising the SAR or Limited
SAR. Upon exercise of the SAR or Limited SAR, the related
Option shall be deemed to be surrendered to the extent that
the SAR or Limited SAR is exercised.
(b) SARs and Limited SARs may be exercised only (i) after the
expiration of six months from the date of grant of the SAR or
Limited SAR, (ii) on a date when the SAR or Limited SAR is "in
the money" (i.e., when there would be positive consideration
received upon exercise of the SAR or Limited SAR), (iii) at a
time and to the same extent as the related Option is
exercisable, (iv) unless otherwise provided in the relevant
Award
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Instrument, by surrender to the Corporation, unexercised, of
the related Option or any applicable portion thereof, and (v)
in compliance with all restrictions set forth in or specified
by the Committee pursuant to Section 7.2(c) (in the case of
SARs) or Section 7.2(d) (in the case of Limited SARs).
(c) The Committee may specify in the Award Instrument pursuant to
which any SAR is granted waiting periods and restrictions on
permissible exercise periods in addition to the restrictions
on exercise set forth in Section 7.2(b), including, without
limitation, any restriction necessary to make applicable the
Rule 16b-3 Exemption.
7.3 PAYMENT FOR SARS AND LIMITED SARS. The amount payable upon exercise
of an SAR or Limited SAR may be paid by the Corporation in cash, or, if the
Committee shall determine in its sole discretion, in whole Common Shares (taken
at their Fair Market Value at the time of exercise of the SAR or Limited SAR) or
in a combination of cash and whole Common Shares; provided, however, that in no
event shall the total number of Common Shares that may be paid to an Employee
pursuant to the exercise of an SAR or Limited SAR exceed the total number of
Common Shares subject to the related Option.
7.4 TERMINATION, AMENDMENT, OR SUSPENSION OF SARS AND LIMITED SARS.
SARs and Limited SARs shall terminate and may no longer by exercised upon the
first to occur of (a) exercise or termination of the related Option, (b) any
termination date specified by the Committee at the time of grant of the SAR or
Limited SAR, or (c) the transfer by the Employee of the related Option. In
addition, the Committee may in its sole discretion at any time before the
occurrence of a Change of Control amend, suspend, or terminate any SAR or
Limited SAR theretofore granted under the Plan without the holder's consent;
provided that, in the case of amendment, no provision of the SAR or Limited SAR,
as amended, shall be in conflict with any provision of the Plan.
8. RESTRICTED STOCK.
8.1 ADDITIONAL CONDITIONS ON RESTRICTED STOCK. In addition to the
restrictions on disposition of Restricted Stock during the Restriction Period
and the requirement to offer Restricted Stock to the Corporation if the
Employee's employment terminates during the Restriction Period, the Committee
may provide in the Award Instrument with respect to any Award of Restricted
Stock other restrictions, conditions, and contingencies, which other
restrictions, conditions, and contingencies, if any, may relate to, in addition
to such other matters as the Committee may deem appropriate, the Employee's
personal performance, corporate performance, or the performance of any subunit
of the Corporation or any Subsidiary, in each case measured in such manner as
may be specified by the Committee. The Committee may impose different
restrictions, conditions, and contingencies on separate Awards of Restricted
Stock granted to different Employees, whether at the same or different times,
and on separate Awards of Restricted Stock granted to the same Employee, whether
at
<PAGE> 14
the same or different times. The Committee may specify a single Restriction
Period for all of the Restricted Stock subject to any particular Award
Instrument or may specify multiple Restriction Periods so that the restrictions
with respect to the Restricted Stock subject to the Award will expire in stages
according to a schedule specified by the Committee and set forth in the Award
Instrument; provided, however, that no Restriction Period with respect to any
Restricted Stock shall end earlier than one year after the date on which that
Restricted Stock is granted.
8.2 PAYMENT FOR RESTRICTED STOCK. Each Employee to whom an Award of
Restricted Stock is made shall pay the Acquisition Price with respect to that
Restricted Stock to the Corporation not later than 30 days after the delivery to
the Employee of the Award Instrument with respect to that Restricted Stock. If
any Employee fails to pay the Acquisition Price with respect to any Award of
Restricted Stock within that 30 day period, the Employee's right under that
Award shall be forfeited.
8.3 RIGHTS AS A SHAREHOLDER. Upon payment by an Employee in full of the
Acquisition Price for Restricted Stock under an Award, the Employee shall have
all of the rights of a shareholder with respect to the Restricted Stock,
including voting and dividend rights, subject only to such restrictions and
requirements referred to in Section 8.1 as may be incorporated in the Award
Instrument with respect to that Restricted Stock.
9. PERFORMANCE SHARES.
9.1 DISCRETION OF COMMITTEE WITH RESPECT TO PERFORMANCE SHARES. The
Committee shall have full discretion to select the Employees to whom Awards of
Performance Shares are made, the number of Performance Shares to be granted to
any Employee so selected, the kind and level of the Performance Goals and
whether those Performance Goals are to apply to the Corporation, a Subsidiary,
or any one or more subunits of the Corporation or of any Subsidiary, and the
dates on which each Performance Period shall begin and end, and to determine the
form and provisions of the Award Instrument to be used in connection with any
Award of Performance Shares.
9.2 CONDITIONS TO PAYMENT FOR PERFORMANCE SHARES.
(a) Unless otherwise provided in the relevant Award Instrument, an
Employee must be employed by the Corporation or a Subsidiary
on the last day of a Performance Period to be entitled to
payment for any Performance Shares.
(b) The Committee may establish, from time to time, one or more
formulas to be applied against the Performance Goals to
determine whether all, some portion but less than all, or none
of the Performance Shares granted with respect to a
Performance Period are treated as earned pursuant to any
Award. An Employee will be entitled to receive
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payments with respect to any Performance Shares only to the
extent that those Performance Shares are treated as earned
under one or more such formulas.
9.3 PAYMENT FOR PERFORMANCE SHARES. The Corporation shall pay each
Employee who is entitled to payment for Performance Shares earned with respect
to any Performance Period an amount for those Performance Shares (a) in cash
(based upon the per share Fair Market Value of Common Shares on the last day of
the Performance Period), (b) in Common Shares (one Common Share for each
Performance Share earned), (c) in Restricted Stock (one Common Share of
Restricted Stock for each Performance Share earned), or (d) any combination of
the foregoing, in such proportions as the Committee may determine. Restricted
Stock issued by the Corporation in payment of Performance Shares shall be
subject to all the provisions of Section 8.
10. TERMINATION OF EMPLOYMENT. After an Employee's Employment
Termination Date, the rules set forth in this Section 10 shall apply. All
factual determinations with respect to the termination of an Employee's
employment that may be relevant under this Section 10 shall be made by the
Committee in its sole discretion.
10.1 TERMINATION OTHER THAN UPON DEATH, DISABILITY, OR CERTAIN
RETIREMENTS. Upon any termination of an Employee's employment for any reason
other than the Employee's retirement (under any retirement plan of the
Corporation or of a Subsidiary) as provided in Section 10.2, disability as
provided on Section 10.3, or death as provided in Section 10.4:
(a) Unless otherwise provided in the relevant Award Instrument,
the Employee or, with respect to Nonqualified Options, any
Transferee shall have the right (i) during the period ending
six months after the Employment Termination Date, but not
later than the Option Expiration Date, to exercise any
Nonqualified Options and related SARs that were outstanding on
the Employment Termination Date, if and to the same extent as
those Options and SARs were exercisable by the Employee or
Transferee (as the case may be) on the Employment Termination
Date, and (ii) during the period ending three months after the
Employment Termination Date, but not later that the Option
Expiration Date, to exercise any Incentive Stock Options and
related SARs than were outstanding on the Employment
Termination Date, if and to the same extent as those Options
and SARs were exercisable by the Employee on the Employment
Termination Date,
(b) Unless otherwise provided in the relevant Award Instrument,
the Employee shall offer for resale at the Acquisition Price
to the Corporation each Common Share of Restricted Stock held
by the Employee at the Employment Termination Date with
respect to which, as
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of that date, any restrictions, conditions, or contingencies
have not lapsed, and
(c) Unless otherwise provided in the relevant Award Instrument,
the Employee shall forfeit each Performance Share with respect
to which, as of that date, any restrictions, conditions, or
contingencies have not lapsed.
10.2 TERMINATION DUE TO CERTAIN RETIREMENTS. Upon any termination of an
Employee's employment with the Corporation or any Subsidiary under circumstances
entitling the Employee to immediate payment of normal retirement or early
retirement benefits under any retirement plan of the Corporation or of a
Subsidiary (whether the Employee elects to commence or defer receipt of such
payment):
(a) Unless otherwise provided in the relevant Award Instrument,
the Employee or, with respect to Nonqualified Options, any
Transferee shall have the right (i) to exercise, from time to
time during the period ending two years after the Employment
Termination Date, but not later than the Option Expiration
Date, any Nonqualified Options and related SARs that were
outstanding on the Employment Termination Date, if and to the
same extent as those Options and SARs were exercisable by the
Employee or Transferee (as the case may be) on the Employment
Termination Date, and (ii) to exercise, from time to time
during the period ending two years after the Employment
Termination Date, but no later than the Option Expiration
Date, any Incentive Stock Options and related SARs that were
outstanding on the Employment Termination Date, if and to the
same extent as those Options and SARs were exercisable by the
Employee on the Employment Termination Date (even though
exercise of the Incentive Stock Option more than three months
after the Employment Termination Date may cause the Option to
fail to qualify for Incentive Stock Option treatment under the
Internal Revenue Code of 1986, as amended),
(b) The relevant Award Instrument may provide that the Employee
or, with respect to Nonqualified Options, any Transferee will
have the right to exercise, from time to time until not later
than the Option Expiration Date, Nonqualified Stock Options
and SARs and Incentive Stock Options and SARs to the extent
such Options and SARs become exercisable by their terms prior
to the Option Expiration Date (or such earlier date as
specified in the relevant Award Instrument), notwithstanding
the fact that such Options and SARs were not exercisable in
whole or in part (whether because a condition to exercise had
not yet occurred or a specified time period had not yet
elapsed or otherwise) on the Employment Termination Date,
<PAGE> 17
(c) Unless otherwise provided in the relevant Award Instrument,
the Employee shall offer for resale at the Acquisition Price
to the Corporation each Common Share of Restricted Stock held
by the Employee at the Employment Termination Date with
respect to which, as of that date, any restrictions,
conditions, or contingencies have not lapsed, and
(d) Unless otherwise provided in the relevant Award Instrument,
the Employee shall forfeit each Performance Share with respect
to which, as of that date, any restrictions, conditions, or
contingencies have not lapsed.
10.3 TERMINATION DUE TO DISABILITY. Upon any termination of an
Employee's employment due to disability:
(a) Unless otherwise provided in the relevant Award Instrument,
the Employee, the Employee's attorney in fact or legal
guardian or, with respect to Nonqualified Options, any
Transferee shall have the right (i) to exercise, from time to
time during the period ending two years after the Employment
Termination Date, but not later than the Option Expiration
Date, any Nonqualified Options and related SARs that were
outstanding on the Employment Termination Date, if and to the
same extent those Options and SARs were exercisable by the
Employee or Transferee (as the case may be) on the Employment
Termination Date, and (ii) to exercise, from time to time
during the period ending two years after the Employment
Termination Date, but no later than the Option Expiration
Date, any Incentive Stock Options and related SARs that were
outstanding on the employment Termination Date, if and to the
same extent as those Options and SARs were exercisable by the
Employee on the Employment Termination Date (even though
exercise of the Incentive Stock Option more than one year
after the Employment Termination Date may cause the Option to
fail to qualify for Incentive Stock Option treatment under the
Internal Revenue Code of 1986, as amended),
(b) Unless otherwise provided in the relevant Award Instrument,
the Employee shall offer for resale at the Acquisition Price
to the Corporation each Common Share of Restricted Stock held
by the Employee at the Employment Termination Date with
respect to which, as of that date, any restrictions,
conditions, or contingencies have not lapsed, and
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(c) Unless otherwise provided in the relevant Award Instrument,
the Employee shall forfeit each Performance Share with respect
to which, as of that date, any restrictions, conditions, or
contingencies have not lapsed.
10.4. DEATH OF AN EMPLOYEE. Upon the death of an Employee while
employed by the Corporation or any Subsidiary or within any of the periods
referred to in any Section 10.1, 10.2, or 10.3 during which any particular
Option or SAR remains potentially exercisable:
(a) Unless otherwise provided in the relevant Award Instrument, if
the Option Expiration Date of any Nonqualified Option that had
not expired before the Employee's death would otherwise expire
before the first anniversary of the Employee's death, that
Option Expiration Date shall automatically be extended to the
first anniversary of the Employee's death or such other date
as provided in the relevant Award Instrument,
(b) Unless otherwise provided in the relevant Award Instrument,
the Employee's executor or administrator, the person or
persons to whom the Employee's rights under any Option or SAR
are transferred by will or the laws of descent and
distribution or, with respect to Nonqualified Options, any
Transferee shall have the right to exercise, from time to time
during the period ending two years after the date of the
Employee's death, but not later than the Option Expiration
Date, any Options and related SARs that were outstanding on
the date of the Employee's death, if and to the same extent as
those Options and SARs were exercisable by the Employee or
Transferee (as the case may be) on the date of the Employee's
death,
(c) Unless otherwise provided in the relevant Award Instrument,
the Employee shall offer for resale at the Acquisition Price
to the Corporation each Common Share of Restricted Stock held
by the Employee at the Employment Termination Date with
respect to which, as of that date, any restrictions,
conditions, or contingencies have not lapsed, and
(d) Unless otherwise provided in the relevant Award Instrument,
the Employee shall forfeit each Performance Share with respect
to which, as of that date, any restrictions, conditions, or
contingencies have not lapsed.
11. ACCELERATION UPON CHANGE OF CONTROL. Unless otherwise specified in
the relevant Award Instrument, upon the occurrence of a Change of Control of the
Corporation, each Award theretofore granted to any Employee that then remains
outstanding shall, subject to Section 17, be automatically treated as follows:
(a) any outstanding Option shall become
18
<PAGE> 19
immediately exercisable in full, (b) SARs and Limited SARs related to any such
Options shall also become immediately exercisable in full, (c) the Restriction
Period with respect to all outstanding Awards of Restricted Stock shall
immediately terminate, and (d) the restrictions, conditions, or contingencies on
any Performance Shares shall be modified in such manner as the Committee may
specify to give the Employee the benefit of those Performance Shares through the
date of Change of Control.
12. ASSIGNABILITY. Nonqualified Options may not be assigned or
transferred (other than by will or by the laws of descent and distribution)
unless the Committee, in its sole discretion, determines to allow such
assignment or transfer and, if the Committee determines to allow any such
assignment or transfer, the Transferee shall have the power to exercise such
Nonqualified Option in accordance with the terms of the Award and the provisions
of this Plan. No Incentive Stock Option, SAR, Limited SAR, Restricted Stock
during the Restriction Period, or Performance Share may be transferred other
than by will or by the laws of descent and distribution. During an Employee's
lifetime, only the Employee (or in the case of incapacity of an Employee, the
Employee's attorney in fact or legal guardian) may exercise any Incentive Stock
Option, SAR, Limited SAR, Restricted Stock during the Restriction Period, or
Performance Share requiring or permitting exercise
13. ADJUSTMENT UPON CHANGES IN COMMON SHARES. Automatically and without
Committee action, in the event of any stock dividend, stock split, or share
combination of the Common Shares, or by appropriate Committee action in the
event of any reclassification, recapitalization, merger, consolidation, other
form of business combination, liquidation, or dissolution involving the
Corporation or any spin-off or other distribution to shareholders of the
Corporation (other than normal cash dividends), appropriate adjustments to (a)
the maximum number of Common Shares that may be issued under the Plan pursuant
to Section 5, the maximum number of Common Shares that may be issued under the
Plan pursuant to Incentive Stock Options as provided in Section 5, and the
maximum number of Common Shares with respect to which any Employee may receive
Awards during any calendar year as provided in Section 4, and (b) the number and
kind of shares subject to, the price per share under, and the terms and
conditions of each then outstanding Award shall be made to the extent necessary
and in such manner that the benefits of Employees under all then outstanding
Awards shall be maintained substantially as before the occurrence of such event.
Any such adjustment shall be conclusive and binding for all purposes of the Plan
and shall be effective, in the event of any stock dividend, stock split, or
share combination, as of the date of such stock dividend, stock split, or share
combination, and in all other cases, as of such date as the Committee may
determine.
14. PURCHASE FOR INVESTMENT. Each person acquiring Common Shares
pursuant to any Award may be required by the Corporation to furnish a
representation that he or she is acquiring the Common Shares so acquired as an
investment and not with a view to distribution thereof if the Corporation, in
its sole discretion, determines that such representation is required to insure
that a resale or other disposition of the Common Shares would not involve a
violation of the Securities Act of 1993, as amended, or of applicable blue sky
laws. Any
19
<PAGE> 20
investment representation so furnished shall no longer be applicable
at any time such representation is no longer necessary for such purposes.
15. WITHHOLDING OF TAXES. The Corporation will withhold from any
payments of cash made pursuant to the Plan such amount as is necessary to
satisfy all applicable federal, state, and local withholding tax obligations.
The Committee may, in its discretion and subject to such rules as the Committee
may adopt from time to time, permit or require an Employee (or other person
exercising an Option with respect to withholding taxes upon exercise of such
Option) to satisfy, in whole or in part, any withholding tax obligation that may
arise in connection with the grant of an Award, the lapse of any restrictions
with respect to an Award, the acquisition of Common Shares pursuant to any
Award, or the disposition of any Common Shares received pursuant to any Award by
having the Corporation hold back some portion of the Common Shares that would
otherwise be delivered pursuant to the Award or by delivering to the Corporation
an amount equal to the withholding tax obligation arising with respect to such
grant, lapse, acquisition, or disposition in (a) cash, (b) Common Shares, or (c)
such combination of cash and Common Shares as the Committee may determine. The
Fair Market Value of the Common Shares to be so held back by the Company or
delivered by the Employee shall be determined as of the date on which the
obligation to withhold first arose.
16. AWARDS IN SUBSTITUTION FOR AWARDS GRANTED BY OTHER COMPANIES.
Awards, whether Incentive Stock Options, Nonqualified Options, SARs, Limited
SARs Restricted Stock, or Performance Shares, may be granted under the Plan in
substitution for awards held by employees of a company who become Employees of
the Corporation or a Subsidiary as a result of the merger or consolidation of
the employer company with the Corporation or a Subsidiary, or the acquisition by
the Corporation or a Subsidiary of the assets of the employer company, or the
acquisition by the Corporation or a Subsidiary of stock of the employer company
as a result of which it becomes a Subsidiary. The terms, provisions, and
benefits of the substitute Awards so granted may vary from the terms, provisions
and benefits set forth in or authorized by the Plan to such extent as the
Committee at the time of the grant may deem appropriate to conform, in whole or
in part, to the terms, provisions, and benefits of the awards in substitution
for which they are granted.
17. HOLDING PERIODS. No Section 16(b) Employee shall sell or exercise,
as the case may be, any equity security or derivative security (which includes,
without limitation, Options, SARs, and Limited SARs), in each case as defined in
the 1934 Act or the rules and regulations promulgated thereunder, acquired
pursuant to an Award under the Plan, before the earliest date on which the sale
or exercise is eligible for the Rule 16b-3 Exemption. If any provision of this
Section 17 must be modified or becomes unnecessary to comply with the
requirements of Rule 16b-3, the Committee may waive such provision and/or amend
the Plan to add to or modify the provisions hereof accordingly.
18. LEGAL REQUIREMENTS. No Awards shall be granted and the Corporation
shall have no obligation to make any payment under the Plan, whether in Common
Shares, cash, or any combination thereof, unless such payment is, without
further action by the Committee, in
20
<PAGE> 21
compliance with all applicable Federal and state laws and regulations,
including, without limitation, the United States Internal Revenue Code and
Federal and state securities laws.
19. DURATION AND TERMINATION OF THE PLAN. The Plan shall become
effective and shall be deemed to have been adopted on the date on which it is
approved by the shareholders of the Corporation and shall remain in effect
thereafter until terminated by action of the Board of Directors. No termination
of the Plan shall adversely affect the rights of any Employee with respect to
any Award granted before the effective date of the termination.
20. AMENDMENTS. The Board of Directors, or a duly authorized committee
thereof, may alter or amend the Plan from time to time prior to its termination
in any manner the Board of Directors, or such duly authorized committee, may
deem to be in the best interests of the Corporation and its shareholders, except
that no amendment may be made without shareholder approval if shareholder
approval is required under Rule 16b-3 to qualify for the Rule 16b-3 Exemption,
is required by any applicable securities law or tax law, or is required by the
rules of any exchange on which the Common Shares of the Corporation are traded
or, if the Common Shares are not listed on an exchange, by the rules of the
registered national securities association through whose inter-dealer quotation
system the Common Shares are quoted. The Committee shall have the authority to
amend these terms and conditions applicable to outstanding Awards (a) in any
case where expressly permitted by the terms of the Plan or of the relevant Award
Instrument or (b) in any other case with the consent of the Employee to whom the
Award was granted. Except as expressly provided in the Plan or in the Award
Instrument evidencing the Award, the Committee may not, without the consent of
the holder of an Award granted under the Plan, amend the terms and conditions
applicable to that Award in a manner adverse to the interests of the Employee.
21. PLAN NONCONTRACTUAL. Nothing herein contained shall be construed as
a commitment to or agreement with any person employed by the Corporation or a
Subsidiary to continue such person's employment with the Corporation or the
Subsidiary, and nothing herein contained shall be construed as a commitment or
agreement on the part of the Corporation or any Subsidiary to continue the
employment or the annual rate of compensation of any such person for any period.
All Employees shall remain subject to discharge to the same extent as if the
Plan had never been put into effect.
22. INTEREST OF EMPLOYEES. Any obligation of the Corporation under the
Plan to make any payment at any future date merely constitutes the unsecured
promise of the Corporation to make such payment from its general assets in
accordance with the Plan, and no Employee shall have any interest in, or lien or
prior claim upon, any property of the Corporation or any Subsidiary by reason of
that obligation.
23. CLAIMS OF OTHER PERSONS. The provisions of the Plan shall in no
event be construed as giving any person, firm, or corporation any legal or
equitable right against the Corporation or any Subsidiary, their officers,
employees, agents, or directors, except any such
<PAGE> 22
rights as are specifically provided for in the Plan or are hereafter created in
accordance with the terms and provisions of the Plan.
24. ABSENCE OF LIABILITY. No member of the Board of Directors of the
Corporation or a Subsidiary, of the Committee, of any other committee of the
Board of Directors, or any officer or Employee of the Corporation or a
Subsidiary shall be liable for any act or action under the Plan, whether of
commission or omission, taken by any other member, or by any officer, agent, or
Employee, or except in circumstances involving his bad faith or willful
misconduct, for anything done or omitted to be done by himself.
25. SEVERABILITY. The invalidity or unenforceability of any particular
provision of the Plan shall not affect any other provision hereof, and the Plan
shall be construed in all respects as if such invalid or unenforceable provision
were omitted herefrom.
26. GOVERNING LAW. The provisions of the Plan shall be governed and
construed in accordance with the laws of the State of Ohio.
27. PLAN EFFECTIVE DATE. The Plan, originally named the Society
Corporation 1991 Equity Compensation Plan, was approved by the Corporation's
shareholders at the Annual Meeting of Shareholders held on April 16, 1991 and
became effective on that date. On March 17, 1994, the Corporation's Board of
Directors adopted, subject to shareholder approval, certain amendments to the
Plan, then renamed the KeyCorp Amended and Restated 1991 Equity Compensation
Plan. The shareholders approved these amendments at the Corporation's Annual
Meeting of Shareholders held on May 19, 1994. The Plan was further amended by
action of the Committee on July 17, 1996 to amend the definition of Change of
Control as set forth in Section 2.5 of the Plan, which amendment was effective
as of January 1, 1996. If the Corporation hereafter enters into a transaction
intended to be accounted for as a pooling of interests and the Committee
determines, based on the written advice of the Corporation's independent
accountants, that the July 17, 1996 amendment or the operation thereof would
conflict with or jeopardize the pooling of interests accounting treatment for
such transaction, then the July 17, 1996 amendment shall be inoperative and
shall be treated as if it had never been effected so that the definition of
Change of Control would be as in effect prior to such amendment. The Plan was
further amended and restated as of September 19, 1996, to provide for the
transferability of Options granted hereunder.
22
<PAGE> 1
Exhibit 10.32
KEYCORP
SUPPLEMENTAL RETIREMENT PLAN
ARTICLE I
---------
THE PLAN
--------
The KeyCorp Supplemental Retirement Plan (August 1, 1996 Restatement)
("Plan") is hereby amended and restated to reflect certain technical corrections
to the Plan. The effective date of this amendment and restatement shall be
August 1, 1996. The Plan, as herein amended and restated, supplements the
retirement benefits of certain key employees of KeyCorp and its subsidiaries who
are covered by the Plan in accordance with the terms hereof. The provisions of
this Plan are applicable generally to all Grandfathered Employees (as defined
below).
ARTICLE II
----------
DEFINITIONS
-----------
2.1 MEANINGS OF DEFINITIONS. As used herein, the following words
and phrases shall have the meanings hereinafter set forth,
unless a different meaning is plainly required by the context:
(a) "AVERAGE INTEREST CREDIT" shall mean the average of the
Interest Credits (as defined in the Retirement Plan) for the
three (3) consecutive calendar years ending with the year of
the Grandfathered Employee's termination.
(b) "AVERAGE TREASURY RATE" shall mean the average of the Treasury
Rates (as defined in the Retirement Plan) for the three (3)
consecutive calendar years ending with the year of the
Grandfathered Employee's termination.
(c) "BENEFICIARY" shall mean Grandfathered Employee's surviving
spouse in the event the Grandfathered Employee dies before his
or her Supplemental Retirement Benefit shall have been
distributed to him or her.
(d) "COMPENSATION" for any Plan year or any partial Plan year in
which the Grandfathered Employee incurs a severance from
service date shall mean the entire amount of base compensation
paid to such Grandfathered Employee during such period by
reason of his employment as an Employee as reported for
federal income tax purposes, or such base compensation which
would have been paid except for (1) the timing of an
Employer's payroll processing operations, (2) the
Grandfathered Employee's election to participate in the
KeyCorp 401(k) Savings Plan, KeyCorp Excess 401(k) Savings
Plan (January 1, 1997 Restatement), and/or the KeyCorp
Flexible Benefits Plan, and/or (3) the
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<PAGE> 2
Grandfathered Employee's election to defer such base
compensation election of under the KeyCorp Deferred
Compensation Plan (January 1, 1997) for the applicable Plan
year, provided, however, that the term Compensation shall
specifically exclude:
(i) any amount attributable to the Grandfathered
Employee's exercise of stock appreciation rights and
the amount of any gain to the Grandfathered Employee
upon the exercise of stock options;
(ii) any amount attributable to the Grandfathered
Employee's receipt of non-cash remuneration whether
or not it is included in the Grandfathered Employee's
income for federal income tax purposes;
(iii) any amount attributable to the Grandfathered
Employee's receipt of moving expenses and any
relocation bonus paid to the Grandfathered Employee
during the Plan year;
(iv) any amount attributable to a lump sum severance
payment paid by an Employer or the Corporation to the
Grandfathered Employee;
(v) any amount attributable to fringe benefits (cash and
non-cash);
(vi) any amount attributable to any bonus or payment made
as an inducement for the Grandfathered Employee to
accept employment with an Employer;
(vii) any amount paid to the Grandfathered Employee during
the Plan year which is attributable to interest
earned on compensation deferred under a plan of an
Employer or the Corporation.
(viii) any amount attributable to salary deferrals paid to
the Grandfathered Employee during the Plan year,
which have been previously included as compensation
under the Plan; and
(ix) any amount paid for any period after the
Grandfathered Employee's termination or retirement
date.
(e) "CORPORATION" shall mean KeyCorp, an Ohio corporation, its
corporate successors, and any corporation or corporations into
or with which it may be merged or consolidated.
(f) "EARLY RETIREMENT DATE" shall mean the date of the
Grandfathered Employee's retirement from his or her employment
with an Employer on or after the Grandfathered Employee's
attainment of age 55 and completion of a minimum
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<PAGE> 3
of ten years of Benefit Service, but prior to the
Grandfathered Employee's Normal Retirement Date.
(g) "EMPLOYEE" shall mean any person who is employed by an
Employer, provided, however, that as of December 31, 1994 all
Employees who are Plan participants (other than Grandfathered
Employees) shall cease any further future benefit accrual
under the Plan and such Employees' Supplemental Retirement
Plan benefit shall be valued in accordance with the provisions
of Article IX hereof and transferred to KeyCorp Excess Cash
Balance Pension Plan. Thereafter, effective January 1, 1995,
the term "Employee" shall include only Grandfathered
Employees.
(h) "EMPLOYER" shall mean the Corporation and any of its
subsidiaries or affiliates unless specifically excluded as an
Employer for Plan purposes by written action of an officer of
the Corporation. An Employer's participation shall be subject
to any conditions or requirements made by the Corporation, and
each Employer shall be deemed to appoint the Corporation as
its exclusive agent under the Plan as long as it continues as
an Employer.
(i) "FINAL AVERAGE COMPENSATION" shall mean with respect to any
Grandfathered Employee, the annual average of his or her
highest aggregate Compensation for any period of five
consecutive years within the period of ten consecutive full
years immediately prior to his or her retirement or other
termination of employment, or any termination of the Plan,
whichever first occurs; provided, however, that if a
Grandfathered Employee is employed for less than five
consecutive years prior to such date, the term shall mean the
monthly average of the aggregate amount of his or her
Compensation for the entire period of the Grandfathered
Employee's employment, multiplied by 12. If a Grandfathered
Employee receives no Compensation for any portion of such five
consecutive years because of absence from work, there shall be
treated as Compensation received during such period of absence
an amount equal to the Compensation he or she would have
received had the Grandfathered Employee not been absent, such
amount to be determined by the Corporation on the basis of
such Grandfathered Employee's salary or wage rate in effect
immediately prior to such absence; provided, however, that no
Compensation shall be credited hereunder for the period during
which the Grandfathered Employee is permanently and totally
disabled and for which he receives benefits under the long
term disability program maintained in effect by his Employer.
(j) "GRANDFATHERED EMPLOYEE" shall mean an Employee who is listed
on Exhibit A attached hereto.
(k) "INCENTIVE COMPENSATION AWARD" shall mean an incentive
compensation award (whether paid in cash, deferred, or a
combination of both) granted to a
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<PAGE> 4
Grandfathered Employee under an Incentive Compensation Plan,
provided, however, that an incentive compensation award
granted under the KeyCorp Management Incentive Compensation
Plan, and/or the KeyCorp Short Term Incentive Compensation
Plan shall constitute an incentive compensation award for the
year in which the award is earned (without regard to the
actual time of payment), and an incentive compensation award
granted under the KeyCorp Long Term Incentive Compensation
Plan ("LTIC Plan") with respect to any multi-year period shall
be deemed to be "for" the last year of the multi-year period
without regard to the actual time of payment of the award.
Thus, for example, an incentive compensation award granted
under the LTIC Plan with respect to the three-year period
comprised of 1993, 1994, and 1995 will be deemed to be "for"
1995 (without regard to the actual time of payment), and the
entire award under the LTIC Plan for that period will be a
LTIC Plan award for 1995.
(l) "INCENTIVE COMPENSATION PLAN" shall mean the KeyCorp
Management Incentive Compensation Plan, the KeyCorp Short-Term
Incentive Compensation Plan, and the KeyCorp Long-Term
Incentive Compensation Plan, as may be amended from time to
time.
(m) "NORMAL RETIREMENT DATE" shall mean the first day of the month
coinciding with or immediately following a Grandfathered
Employee's 65th birthday, or if later, the fifth anniversary
of the Grandfathered Employee's employment commencement date.
(n) "RETIREMENT PLAN" shall mean the KeyCorp Cash Balance Pension
Plan with all amendments, modifications and supplements which
may be made thereto, as in effect on the date of a
Grandfathered Employee's retirement, death, or other
termination of employment.
(o) "SUPPLEMENTAL RETIREMENT BENEFIT" shall mean the benefit paid
under this Plan as determined under Article III of the Plan.
All other capitalized and undefined terms used herein shall have the
meanings given them in the Retirement Plan for Employees of Society Corporation
and Subsidiaries (January 1, 1993 Restatement) ("Society Retirement Plan"),
unless a different meaning is plainly required by the context.
The masculine gender includes the feminine, and singular references
include the plural, unless the context clearly requires otherwise.
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<PAGE> 5
ARTICLE III
-----------
SUPPLEMENTAL RETIREMENT BENEFIT
-------------------------------
3.1 ELIGIBILITY. A Grandfathered Employee shall be eligible for a
Supplemental Retirement Benefit hereunder if the Grandfathered Employee (i)
retires on or after age 65 with five or more years of Benefit Service, (ii)
terminates employment with an Employer on or after age 55 with ten or more years
of Benefit Service, (iii) terminates his or her active employment with an
Employer upon becoming Disabled after completing five or more years of Benefit
Service and disability benefits have ceased under the KeyCorp Long-Term
Disability Plan due to the Participant's election for Early or Normal Retirement
under the Retirement Plan, or (iv) dies after completing five or more years of
Benefit Service, and has a Beneficiary who is eligible for a benefit under the
Retirement Plan.
3.2 AMOUNT AND PAYMENT. The amount of a Grandfathered Employee's
Supplemental Retirement Benefit hereunder shall be determined as follows:
Effective as of December 5, 1989, the monthly Supplemental Retirement
Benefit payable to a Grandfathered Employee shall be such amount as is
required, when added to the monthly benefit payable (before the
reduction applicable to any optional method of payment) under the
Retirement Plan, to produce an aggregate monthly benefit equal to the
monthly benefit which would have been payable (determined without
regard to the annual limitation on Plan benefits imposed pursuant to
Section 415 of the Code, the limitation on annual compensation imposed
pursuant to Section 401(a)(17) of the Code, or the reduction applicable
to any optional method of payment) under either the Society Retirement
Plan formula in effect on and after January 1, 1989, or the applicable
Society Retirement Plan formula in effect prior to January 1, 1989,
whichever results in a larger monthly benefit, if there was added to
the Grandfathered Employee's Final Average Monthly Compensation an
amount equal to the monthly average of the highest five Incentive
Compensation Awards granted to him or her under the Incentive
Compensation Plan during the ten-year period preceding the earliest of
his retirement, death, disability, or other termination of employment.
Notwithstanding the foregoing, if a Grandfathered Employee was granted
fewer than five awards, such monthly average is determined by adding
the amounts of such awards and dividing by 60. Solely for purposes of
reference, the alternative benefit formulas in effect under the Society
Retirement Plan prior to January 1, 1989, and the eligibility criteria
applicable to each are reproduced in Exhibit B attached hereto.
3.3 EARLY RETIREMENT ELECTION. In the event the Grandfathered Employee
elects to receive his or her Supplemental Retirement Benefit on or after the
Grandfathered Employee's Early Retirement Date but prior to the Grandfathered
Employee's Normal Retirement Date, the Grandfathered Employee's Supplemental
Retirement Benefit shall be calculated in accordance with Section 3.2 hereof,
provided, however, the Grandfathered Employee's benefit payable under the
Retirement Plan for purposes of Section 3.2 and this Section 3.3 hereof,
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<PAGE> 6
shall be the Grandfathered Employee's Normal Retirement Date benefit. In
calculating this Normal Retirement Date benefit, if the Grandfathered Employee
is not eligible for, or chooses not to elect his or her monthly benefit under
the provisions of Section 6.5(b) of the Retirement Plan, then such Grandfathered
Employee's Retirement Plan benefit as of his or her termination date shall be
increased for purposes of this Plan with an imputed Average Interest Credit to
reflect the Grandfathered Employee's benefit at his or her Normal Retirement
Date, and shall be converted to the form of a single life annuity option using
the Average Treasury Rate and GATT Mortality Table. The amount of the
Grandfathered Employee's monthly Supplemental Retirement Benefit otherwise
determined under this Section 3.3 hereof shall then be reduced by .3% for each
month between ages 55 and 60 and .4% for each month after age 60 in which the
commencement of the Grandfathered Employee's Supplemental Retirement Benefit
precedes his or her Normal Retirement Date.
3.4 ACTUARIAL FACTORS. The Supplemental Retirement Benefit payable to
a Grandfathered Employee or Grandfathered Employee's Beneficiary in a form other
than a single life annuity shall be actuarially equivalent to such single life
annuity payment option. In making the determination provided for in this Article
III, the Corporation shall rely upon calculations made by the independent
actuaries for the Plan, who shall determine actuarially equivalent benefits
under the Plan by applying the UP-1984 Mortality Table (set back two years) and
using an interest rate of 6%.
ARTICLE IV
----------
PAYMENT OF SUPPLEMENTAL RETIREMENT BENEFIT
------------------------------------------
4.1 IMMEDIATE PAYMENT UPON TERMINATION OR RETIREMENT OF GRANDFATHERED
EMPLOYEE. Subject to the provisions of Section 4.2 hereof, a Grandfathered
Employee meeting the age and service eligibility requirements of Section 3.1
shall receive an immediate distribution of his or her Supplemental Retirement
Benefit upon the Grandfathered Employee's retirement or termination of
employment, in the form of a single life annuity, unless the Grandfathered
Employee elects in writing a minimum of thirty days prior to his or her
retirement or termination date, to receive payment of his or her Supplemental
Retirement Benefit under a different form of payment. The forms of payment from
which a Grandfathered Employee may elect shall be identical to those forms of
payment specified in the Retirement Plan, provided, however, that the lump sum
payment option available under the Retirement Plan shall not be available under
this Plan. Such method of payment, once elected by the Grandfathered Employee,
shall be irrevocable.
4.2 DEFERRED BENEFIT PAYMENT. A Grandfathered Employee who retires
or terminates his or her employment with an Employer after meeting the age and
service requirements of Section 3.1, may elect to defer receipt of his or her
Supplemental Retirement Benefit until a date specified by the Grandfathered
Employee, provided, (1) the Grandfathered Employee notifies the Corporation in
writing of his or her deferral election a minimum of one
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<PAGE> 7
year prior to the Grandfathered Employee's retirement or termination of
employment, (2) the Grandfathered Employee specifies the future date on which
such Supplemental Retirement Benefit shall be distributed, and (3) the
Grandfathered Employee commences distribution of his or her Supplemental
Retirement Benefit no later than the first day of the month immediately
following the Grandfathered Employee's sixty-fifth (65th) birthday. The election
to defer, once made by the Grandfathered Employee, shall be irrevocable.
Notwithstanding the foregoing, in the case of an "unforeseeable
emergency", upon written application by the Grandfathered Employee to the
Corporation, the Corporation, in its sole discretion, may accelerate the
distribution of the Grandfathered Employee's deferred Supplemental Retirement
Benefit. For purposes of this Section 4.2, the term "unforeseeable emergency"
shall mean an unanticipated emergency that is caused by an event beyond the
control of the Grandfathered Employee that would result in severe financial
hardship to the Grandfathered Employee if such premature distribution were not
permitted.
4.3 PAYMENT UPON DEATH OF GRANDFATHERED EMPLOYEE.
(a) Upon the death of a Grandfathered Employee who has met the service
requirement of Section 3.1, but who has not yet commenced distribution
of his or her Supplemental Retirement Benefit there shall be paid to
the Grandfathered Employee's Beneficiary 50% of the Supplemental
Retirement Benefit which the Grandfathered Employee would have been
entitled to receive had he or she retired on his or her Normal
Retirement Date and elected to receive his or her Supplemental
Retirement Benefit.
For purposes of this Section 4.3(a) only, the following shall apply:
(i) The Grandfathered Employee's Benefit Service shall be
calculated as of the Grandfathered Employee's date of death.
(ii) The Grandfathered Employee's Retirement Plan benefit shall be
calculated under the provisions of Article IV of the
Retirement Plan as if the Grandfathered Employee retired on
his or her Normal Retirement Date, with such Retirement Plan
benefit being increased for purposes of this Section 4.3(a)
with an imputed Average Interest Credit to reflect what the
Grandfathered Employee's Retirement Plan benefit would have
been as of the Grandfathered Employee's Normal Retirement
Date; such Retirement Plan benefit shall be converted to a
single life annuity option using the Average Treasury Rate and
the Gatt Mortality Table.
Payment of this death benefit shall be made in the form of a
single life annuity, and will be subject to distribution any time after
the date the Grandfathered Employee would have attained his or her
Early Retirement Date, which shall be calculated in accordance with the
actuarial reduction provisions contained within Section 3.3 hereof, if
paid prior to the Grandfathered Employee's Normal Retirement Date.
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<PAGE> 8
(b) In the event of a Grandfathered Employee's death after the
Grandfathered Employee has commenced distribution of his or her
Supplemental Retirement Benefit, there shall be paid to the
Grandfathered Employee's Beneficiary only those survivor benefits
provided under the form of benefit payment elected by the Grandfathered
Employee.
4.4 PAYMENT UPON GRANDFATHERED EMPLOYEE'S ATTAINMENT OF AGE 70-1/2. A
Grandfathered Employee shall be required to commence distribution of his or her
Supplemental Retirement Benefit no later than April 1 of the calendar year
following the year in which the Grandfathered Employee attains age 70-1/2.
ARTICLE V
---------
ADMINISTRATION AND CLAIMS PROCEDURE
-----------------------------------
5.1 ADMINISTRATION. The Corporation, which shall be the "Administrator"
of the Plan for purposes of ERISA and the "Plan Administrator" for purposes of
the Code, shall be responsible for the general administration of the Plan, for
carrying out the provisions hereof, and for making payments hereunder. The
Corporation shall have the sole and absolute discretionary authority and power
to carry out the provisions of the Plan, including, but not limited to, the
authority and power (a) to determine all questions relating to the eligibility
for and the amount of any benefit to be paid under the Plan, (b) to determine
all questions pertaining to claims for benefits and procedures for claim review,
(c) to resolve all other questions arising under the Plan, including any
questions of construction, and (d) to take such further action as the
Corporation shall deem necessary or advisable in the administration of the Plan.
All findings, decisions, and determinations of any kind made by the Corporation
shall not be disturbed unless the Corporation has acted in an arbitrary and
capricious manner. Subject to the requirements of law, the Corporation shall be
the sole judge of the standard of proof required in any claim for benefits and
in any determination of eligibility for a benefit. All decisions of the
Corporation shall be final and binding on all parties. The Corporation may
employ such attorneys, investment counsel, agents, and accountants as it may
deem necessary or advisable to assist it in carrying out its duties hereunder.
The actions taken and the decisions made by the Corporation hereunder shall be
final and binding upon all interested parties subject, however, to the
provisions of Section 5.2. The Plan year, for purposes of Plan administration,
shall be the calendar year.
5.2 CLAIMS REVIEW PROCEDURE. Whenever the Corporation decides for
whatever reason to deny, whether in whole or in part, a claim for benefits under
this Plan filed by any person (herein referred to as the "Claimant"), the
Corporation shall transmit a written notice of its decision to the Claimant,
which notice shall be written in a manner calculated to be understood by the
Claimant and shall contain a statement of the specific reasons for the denial of
the claim and a statement advising the Claimant that, within 60 days of the date
on which he receives such notice, he may obtain review of the decision of the
Corporation in accordance
-8-
<PAGE> 9
with the procedures hereinafter set forth. Within such 60-day period, the
Claimant or his authorized representative may request that the claim denial be
reviewed by filing with the Corporation a written request therefore, which
request shall contain the following information:
(a) the date on which the request was filed with the Corporation; provided,
however, that the date on which the request for review was in fact
filed with the Corporation shall control in the event that the date of
the actual filing is later than the date stated by the Claimant
pursuant to this paragraph (a);
(b) the specific portions of the denial of his claim which the Claimant
requests the Corporation to review;
(c) a statement by the Claimant setting forth the basis upon which he
believes the Corporation should reverse its previous denial of his or
her claim and accept his or her claim as made; and;
(d) any written material which the Claimant desires the Corporation to
examine in its consideration of the Claimant's position as stated
pursuant to paragraph (c) above.
In accordance with this Section, if the Claimant requests a review of
the Corporation's decision, such review shall be made by the Corporation, who
shall, within sixty (60) days after receipt of the request form, review and
render a written decision on the claim containing the specific reasons for the
decision including reference to Plan provisions upon which the decision is
based. All findings, decisions, and determinations of any kind made by the
Corporation shall not be modified unless the Corporation has acted in an
arbitrary and capricious manner. Subject to the requirements of a law, the
Corporation shall be the sole judge of the standard of proof required in any
claim for benefits, and any determination of eligibility for a benefit. All
decisions of the Corporation shall be binding on the Claimant and upon all other
Persons. If the Claimant shall not file written notice with the Corporation at
the times set forth above, such individual shall have waived all benefits under
the Plan other than as already provided, if any, under the Plan.
ARTICLE VI
----------
FUNDING
-------
All benefits under the Plan shall be payable solely in cash from the general
assets of the Corporation or a subsidiary, and Grandfathered Employees, and
Grandfathered Employees' Beneficiaries shall have the status of general
unsecured creditors of the Corporation. The obligations of the Corporation to
make distributions in accordance with the provisions of the Plan constitute a
mere promise to make payments in the future. The Corporation shall have no
obligation to establish a trust or fund to fund its obligation to pay benefits
under the Plan or to insure any benefits under the Plan. Notwithstanding any
provision of this Plan, the Corporation may, in its sole discretion, combine the
payment due and owing under this Plan
-9-
<PAGE> 10
with one or more other payments owing to a Grandfathered Employee, or a
Grandfathered Employee's Beneficiary under any other plan, contract, or
otherwise (other than any payment due under the Retirement Plan), in one check,
direct deposit, wire transfer, or other means of payment. Finally, it is the
intention of the Corporation and the Grandfathered Employees that the Plan be
unfunded for tax purposes and for the purposes of Title I of the Employee
Retirement Income Security Act of 1974, as amended.
ARTICLE VII
-----------
AMENDMENT AND TERMINATION
-------------------------
The Corporation reserves the right to amend or terminate the Plan at
any time by action of its Board of Directors or a duly authorized committee of
such Board of Directors; provided, however, that no such action shall adversely
affect the benefit accrued up to the date of the Plan amendment or termination
for any Grandfathered Employee who has met the age and service requirements of
Section 3.1 of the Plan, or any Grandfathered Employee or Grandfathered
Employee's Beneficiary who is receiving a Supplemental Retirement Benefit,
unless an equivalent benefit is provided under another plan maintained by an
Employer.
ARTICLE VIII
------------
MISCELLANEOUS
-------------
8.1 INTEREST OF GRANDFATHERED EMPLOYEE. The obligation of the Corporation under
the Plan to provide a Grandfathered Employee, or Grandfathered Employee's
Beneficiary, with a Supplemental Retirement Benefit merely constitutes the
unsecured promise of the Corporation to make payments as provided herein, and no
person shall have any interest in, or a lien or prior claim on, any property of
the Corporation.
8.2 NO COMMITMENT AS TO EMPLOYMENT. Nothing herein contained shall be construed
as a commitment or agreement upon the part of any Grandfathered Employee
hereunder to continue his employment with an Employer, and nothing herein
contained shall be construed as a commitment on the part of any Employer to
continue the employment or rate of compensation of any Grandfathered Employee
hereunder for any period. All Grandfathered Employees shall remain subject to
discharge to the same extent as if the Plan had never been put into effect.
8.3 BENEFITS. Nothing in the Plan shall be construed to confer any right or
claim upon any person, firm, or corporation other than Grandfathered Employees,
or Grandfathered Employees' Beneficiaries who become entitled to a benefit under
the Plan.
-10-
<PAGE> 11
8.4 RESTRICTIONS ON ALIENATION. Except to the extent permitted by law, no
benefit under the Plan shall be subject to anticipation, alienation, assignment
(either at law or in equity), encumbrance, garnishment, levy, execution, or
other legal or equitable process. No person shall have power in any manner to
anticipate, transfer, assign, (either at law or in equity), alienate or subject
to attachment, garnishment, levy, execution, or other legal or equitable
process, or in any way encumber his benefits under the Plan, or any part
thereof, and any attempt to do so shall be void.
8.5 ABSENCE OF LIABILITY. No member of the Board of Directors of the Corporation
or a subsidiary or any officer of the Corporation or a subsidiary shall be
liable for any act or action hereunder, whether of commission or omission, taken
by any other member, or by any officer, agent, or employee, except in
circumstances involving his bad faith or willful misconduct, for anything done
or omitted to be done by himself.
8.6 EXPENSES. The expenses of administration of the Plan shall be paid by the
Corporation.
8.7 PRECEDENT. Except as otherwise specifically provided, no action taken in
accordance with the Plan by the Corporation shall be construed or relied upon as
a precedent for similar action under similar circumstances.
8.8 DUTY TO FURNISH INFORMATION. The Corporation shall furnish to each
Grandfathered Employee or Grandfathered Employee's Beneficiary any documents,
reports, returns statements, or other information that it reasonably deems
necessary to perform its duties imposed hereunder or otherwise imposed by law.
8.9 WITHHOLDING. The Corporation shall withhold any tax required by any present
or future law to be withheld from any payment hereunder to any Grandfathered
Employee or Grandfathered Employee's Beneficiary.
8.10 VALIDITY OF PLAN. The validity of the Plan shall be determined and the Plan
shall be construed and interpreted in accordance with the provisions of the Act,
the Code, and, to the extent applicable, the laws of the State of Ohio. The
invalidity or illegality of any provision of the Plan shall not affect the
validity or legality of any other part thereof.
8.11 PARTIES BOUND. The Plan shall be binding upon the Employer, all
Grandfathered Employees, and all Grandfathered Employees' Beneficiaries, and the
executors, administrators, successors, and assigns of each of them.
8.12 HEADINGS. All headings used in the Plan are for convenience of reference
only and are not part of the substance of the Plan.
-11-
<PAGE> 12
ARTICLE IX
----------
TRANSFER OF EMPLOYEES' SUPPLEMENTAL
-----------------------------------
RETIREMENT PLAN BENEFIT INTO THE KEYCORP
----------------------------------------
EXCESS CASH BALANCE PENSION PLAN
--------------------------------
9.1 TRANSFER OF EMPLOYEES' SUPPLEMENTAL RETIREMENT PLAN BENEFIT INTO THE KEYCORP
EXCESS CASH BALANCE RETIREMENT PLAN. Effective December 31, 1994, all benefit
accruals under the Plan for Employees (other than Grandfathered Employees) shall
cease, and the Plan benefits for such Employees (other than Grandfathered
Employees) shall be calculated and reduced to a lump sum cash benefit by
applying the Pension Benefit Guarantee Corporation interest rate for determining
lump sum cash benefits as in effect on January l, 1995 and the UP-1984 Mortality
Table (no set-back). Effective January l, 1995, the lump sum value of each
Employee's (other than Grandfathered Employees') Supplemental Retirement
Benefit, as so calculated, shall be transferred to the KeyCorp Excess Cash
Balance Pension Plan, and each Employee's Supplemental Retirement Benefit shall
become the Employee's opening account balance under the KeyCorp Excess Cash
Balance Pension Plan.
9.2 APPLICABILITY OF PLAN PROVISIONS. Notwithstanding anything to the contrary
contained in this Plan, the sole provisions of this Plan which continue to have
any effect with respect to Employees (other than Grandfathered Employees) on and
after January 1, 1995 shall be the provisions of this Article IX, and such
Employees shall cease to be Plan Employees as of such date.
9.3 EFFECT OF TRANSFER. The Plan shall not be deemed terminated or discontinued
by reason of this Article IX and the transfer of Employees' Supplemental
Retirement Benefits into the KeyCorp Excess Cash Balance Retirement Plan; such
transfer shall be applicable only to Employees and shall have no effect on
Grandfathered Employees' continued Plan participation and accrual of Plan
benefits on and after January 1, 1995. No Supplemental Retirement Benefit or any
other benefit shall be paid under this Plan to an Employee on or after January
1, 1995.
Executed at Cleveland, Ohio, as of the 30th day of December, 1997 to be
effective as of the 1st day of August, 1996.
KEYCORP
By:
------------------------------------
Title:
---------------------------------
-12-
<PAGE> 13
EXHIBIT A
---------
LIST OF GRANDFATHERED EMPLOYEE
------------------------------
Name of Employee Name of Employee
- ---------------- ----------------
Andrews, James McGuire, James
Auletta, Patrick McDaniel, D. A.
Bailey, Raymond McGinty, Kevin
Barger, C. Michael Melluzzo, Sebastian
Beran, John Meyer, John R.
Blake, John T. Meyer III, Henry
Brooks, Craig Moody Jr., John
Bullard, Janet Murray, Bruce
Carlini, Lawrence Neel, Thomas M.
Colao Jr., Anthony Newman, Michael
Cortelli, John Noall, Roger
Cruse Jr., Donald Nucerino, Donald
Deal, Frederick O'Donnell, F. Scott
Doland, Michael Patrick, Robert
Dorland, David Platt, Craig, T.
Edmonds, David Ponchak, Frank
Egan, Richard Purinton II, Arthur
Fishell, James Rapacz, Richard
Flowers, James Rasmussen, Eric
Gill, Michael Roark, Michael
Gillespie, Jr., Robert Rusnak, Joseph
Greer, Michael Saddler, Thomas
Gula, Allen Schaedel, Elroy
Haas, Robert Seink, Edward
Hancock, John Simon, William
Hann, Jr., William Smith, James J.
Hartman, Sheldon Swisher, Trace
Hawthorne, Douglas Tracy, Robert
Hedberg, Douglas Trigg, Michael
Heintel, Jr., Carl Uzl, Ralph R.
Heisler, Jr., Robert Walker, Martin
Herron, David Wall, Stephen
Heyworth, Anthony Wert, James W.
Hitchcock, Thomas Willet, Richard
Holloway, Ruben L.
Johannsen, Rolland D.
Jones, Robert G.
Kamerer, James
Kaplan, Stephen
Karnatz, William
Kleinhenz, Karen R.
Klimas, Daniel
Knapp, Peter O.
Koontz, Cary
Kucler, Jack
Malone, Michael
Mayer, George
-13-
<PAGE> 14
EXHIBIT B
---------
FOR PERIODS OF TIME PRIOR TO JANUARY 1, 1989, THREE ALTERNATIVE BENEFIT
FORMULAS WERE IN EFFECT UNDER THE SOCIETY RETIREMENT PLAN. THE MONTHLY AMOUNT OF
THE NORMAL RETIREMENT BENEFIT PAYABLE TO AN ELIGIBLE GRANDFATHERED EMPLOYEE WAS
EQUAL TO:
(A) IF HE BECAME A GRANDFATHERED EMPLOYEE AND THEREFORE BEGAN TO ACCRUE
BENEFITS UNDER THE PLAN PRIOR TO JULY 1, 1981, THE GREATER OF:
(i) his final average monthly compensation multiplied by the sum
of:
(A) 3.2% multiplied by his years of benefit service not
in excess of 15, plus
(B) 1% multiplied by his years of benefit service in
excess of 15 but not in excess of 25, plus
(C) 0.5% multiplied by his years of benefit service in
excess of 25; reduced by:
(D) 3.33% of his Social Security Benefit Amount
multiplied by his years of benefit service not in
excess of 15; or
(ii) the amount determined in accordance with the formula set forth
in paragraph (b) below which is otherwise applicable to a
person who becomes an Employee on or after July 1, 1981; or
(B) IF HE BECAME AN EMPLOYEE AND THEREFORE BEGAN TO ACCRUE BENEFITS
UNDER THE PLAN ON OR AFTER JULY 1, 1981, HIS FINAL AVERAGE MONTHLY COMPENSATION
MULTIPLIED BY THE SUM OF:
(i) 2% multiplied by his years of benefit service not in excess
of 30, plus
(ii) 0.5% multiplied by his years of benefit service in excess of
30; reduced by:
(iii) 1.67% of his Social Security Benefit Amount multiplied by his
years of benefit service not in excess of 30 to a maximum of
50% of such Amount; or
(C) IF HE BECAME AN EMPLOYEE AND THEREFORE BEGAN TO ACCRUE BENEFITS
UNDER THE PLAN ON JANUARY 1, 1985, AND IMMEDIATELY PRIOR TO SUCH DATE WAS A
GRANDFATHERED EMPLOYEE IN THE THIRD NATIONAL BANK AND TRUST COMPANY OF DAYTON,
OHIO RETIREMENT PLAN, THE GREATER OF:
-14-
<PAGE> 15
(i) the amount determined in accordance with the formula set forth
in paragraph (b) above which is otherwise applicable to a
person who becomes an Employee on or after July 1, 1981; or
(ii) the sum of:
(A) 2.2% of his final average monthly compensation,
reduced by 2% of his Social Security Benefit Amount;
the difference to be multiplied by his years of
benefit service at normal retirement date not in
excess of 25, plus
(B) 1.1% of his final average monthly compensation,
reduced by 1% of his Social Security Benefit Amount;
the difference to be multiplied by his years of
benefit service at normal retirement date in excess
of 25, adjusted as necessary to produce the actuarial
equivalent value on a straight life annuity basis of
a benefit otherwise payable on a ten-year certain and
continuous basis; provided, however, that in the case
of each Employee who was in the employment of Society
National Bank of Cleveland on December 31, 1971, and
whose continuous service is not broken after the date
and prior to the date of his retirement, the monthly
amount of his normal retirement benefit otherwise
determined under this Section shall be not less than
the monthly amount of his normal retirement benefit
determined under the normal retirement benefit
formula of the Plan as in effect on December 31,
1971, based on the assumption that he received no
increases in the rate of his compensation after
December 31, 1971, and using the rules for computing
continuous service specified in Article II of the
Plan as in effect on June 30, 1976 (hereinafter
referred to as his "minimum benefit"); and provided,
further, that the monthly amount so determined under
the provisions of this Exhibit B shall be reduced to
the extent provided in Section 14.10 of the Society
Retirement Plan as in effect on December 31, 1988.
Notwithstanding anything to the contrary contained in
the Society Retirement Plan, in no event shall an
Employee receive a benefit commencing at his normal
retirement date which is less than the largest early
retirement benefit to which he had been entitled
under the Society Retirement Plan prior to his normal
retirement date.
<PAGE> 1
EXHIBIT 12
KEYCORP
COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995 1994 1993
------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
COMPUTATION OF EARNINGS
Net income.................................................. $ 919 $ 783 $ 825 $ 853 $ 710
Add: Provision for income taxes............................. 426 360 368 430 374
Less: Extraordinary net gain................................ -- -- 36 -- --
------ ------- ------- ------- -------
Income before income taxes and extraordinary net gain... 1,345 1,143 1,157 1,283 1,084
Fixed charges, excluding interest on deposits............... 1,085 810 819 513 345
------ ------- ------- ------- -------
Total earnings for computation, excluding interest on
deposits............................................. 2,430 1,953 1,976 1,796 1,429
Interest on deposits........................................ 1,462 1,469 1,705 1,325 1,233
------ ------- ------- ------- -------
Total earnings for computation, including interest on
deposits............................................. $3,892 $ 3,422 $ 3,681 $ 3,121 $ 2,662
====== ======= ======= ======= =======
COMPUTATION OF FIXED CHARGES
Net rental expense.......................................... $123 $126 $117 $124 $130
====== ======= ======= ======= =======
Portion of net rental expense deemed representative of
interest.................................................. $ 30 $ 42 $ 39 $ 41 $ 43
Interest on short-term borrowed funds....................... 642 492 519 334 175
Interest on long-term debt.................................. 364 273 261 138 127
Distributions on capital securities......................... 49 3 -- -- --
------ ------- ------- ------- -------
Total fixed charges, excluding interest on deposits..... 1,085 810 819 513 345
Interest on deposits........................................ 1,462 1,469 1,705 1,325 1,233
------ ------- ------- ------- -------
Total fixed charges, including interest on deposits..... $2,547 $ 2,279 $ 2,524 $ 1,838 $ 1,578
====== ======= ======= ======= =======
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
Preferred stock dividend requirement on a pre-tax basis..... -- $ 12 $ 23 $ 24 $ 28
Total fixed charges, excluding interest on deposits......... $1,085 810 819 513 345
------ ------- ------- ------- -------
Combined fixed charges and preferred stock dividends,
excluding interest on deposits....................... 1,085 822 842 537 373
Interest on deposits........................................ 1,462 1,469 1,705 1,325 1,233
------ ------- ------- ------- -------
Combined fixed charges and preferred stock dividends,
including interest on deposits....................... $2,547 $ 2,291 $ 2,547 $ 1,862 $ 1,606
====== ======= ======= ======= =======
RATIO OF EARNINGS TO FIXED CHARGES
Excluding deposit interest.................................. 2.24X 2.41x 2.42x 3.50x 4.15x
Including deposit interest.................................. 1.53X 1.50x 1.46x 1.70x 1.69x
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED
STOCK DIVIDENDS
Excluding deposit interest.................................. 2.24X 2.38x 2.35x 3.34x 3.84x
Including deposit interest.................................. 1.53X 1.49x 1.45x 1.68x 1.66x
</TABLE>
<PAGE> 1
Exhibit 13
Summary Financial Data
<TABLE>
<CAPTION>
dollars in millions, except per share amounts 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C>
PER COMMON SHARE
Net income -- as reported $ 2.09 $ 1.69
Net income, assuming dilution -- as reported 2.07 1.67
Net income -- as adjusted(1) 2.09 1.85
Net income, assuming dilution -- as adjusted(1) 2.07 1.83
Cash dividends .84 .76
Book value at year end 11.83 10.92
Market price at year end 35.41 25.25
Weighted average Common Shares (000) 439,042 459,810
Weighted average Common Shares and
potential Common Shares (000) 444,544 464,282
- ------------------------------------------------------------------------------------
AT DECEMBER 31,
Loans $ 53,380 $ 49,235
Earning assets 64,246 59,260
Total assets 73,699 67,621
Deposits 45,073 45,317
Total shareholders' equity 5,181 4,881
Common Shares outstanding (000) 438,064 446,908
- ------------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on average total assets-- as reported 1.33% 1.21%
Return on average total assets-- as adjusted(1) 1.33 1.33
Return on average total equity-- as reported 18.89 15.64
Return on average total equity-- as adjusted(1) 18.89 17.18
Efficiency 57.50 60.84
- ------------------------------------------------------------------------------------
</TABLE>
1 Excludes the impact of the 1996 restructuring charge and Key's share of a 1996
government-mandated assessment to recapitalize the Savings Association Insurance
Fund.
Return on Average Total Equity
[GRAPHIC]
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
Excluding restructuring charge 16.95% 18.56% 17.10% 17.18% 18.89%
Including restructuring charge 15.64%
</TABLE>
Efficiency Ratio
[GRAPHIC]
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
60.50% 59.39% 63.03% 60.84% 57.50%
</TABLE>
Return on Average Total Assets
[GRAPHIC]
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
Excluding restructuring charge 1.24% 1.36% 1.24% 1.33% 1.33%
Including restructuring charge 1.21%
</TABLE>
Financial Review
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Introduction 26
Performance Overview 27
Cash Basis Financial Data 29
Line of Business Results 29
Results of Operations 33
Net Interest Income 33
Asset and Liability Management 36
Trading Portfolio 40
Noninterest Income 41
Noninterest Expense 42
Income Taxes 44
Financial Condition 44
Loans 44
Securities 46
Asset Quality 48
Deposits and Other Sources of Funds 50
Liquidity 51
Capital and Dividends 52
Fourth Quarter Results 53
Report of Management 55
Report of Ernst & Young LLP,
Independent Auditors 55
Consolidated Financial Statements 56
Corporate Information 79
25
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
This section of the report, including the highlights summarized below, provides
a discussion and analysis of the financial condition and results of operations
of KeyCorp (the "parent company") and its subsidiaries (collectively referred to
as "Key") for the periods presented. It should be read in conjunction with the
consolidated financial statements and notes thereto, presented on pages 56
through 78. All relevant common share amounts and per common share data have
been adjusted for the two-for-one stock split announced on January 15, 1998,
effected by means of a 100% stock dividend payable March 6, 1998, to
shareholders of record on February 18, 1998.
This report contains forward-looking statements which are subject to numerous
assumptions, risks and uncertainties. Statements pertaining to future periods
are subject to uncertainty because of the possibility of changes in underlying
factors and assumptions. Actual results could differ materially from those
contained in or implied by such forward-looking statements for a variety of
factors including: sharp and/or rapid changes in interest rates; significant
changes in the economic scenario from the current anticipated scenario which
could materially change anticipated credit quality trends and the ability to
generate loans; significant delay in or inability to execute on strategic
initiatives designed to grow revenues and/or control expenses; consummation of
significant business combinations or divestitures; and significant changes in
accounting, tax, or regulatory practices or requirements.
Key's record earnings results for 1997 reflected growth in fee revenue
businesses, strong loan growth and the impact of strategic actions taken to
complete Key's transformation to a nationwide bank-based financial services
company and to implement expense control initiatives. These planned actions,
announced in November 1996, include the consolidation of Key's bank subsidiaries
[other than Key Bank USA, National Association ("KeyBank USA")] in 15 states
from Maine to Alaska into one banking institution [completed June 30, 1997, for
all banks with the exception of KeyBank National Association (New Hampshire)
("KeyBank New Hampshire")], the consolidation of nearly 140 KeyCenters, and a
reduction of approximately 10% of Key's employment base of nearly 27,300 at the
time. New Hampshire state banking laws precluded Key's New Hampshire bank from
participating in the bank consolidation. In connection with the above actions,
Key recorded a $100 million restructuring charge in December 1996. At the same
time, Key also announced its plans to divest another 140 KeyCenters located in
areas viewed by management to be of low-growth potential, a strategic action
expected to generate net gains and for which related costs were not included in
the restructuring charge. The above actions were designed to meet several
objectives, including that of improving the efficiency ratio (exclusive of
acquisitions) to a targeted level of 55% by the end of 1997, with further
improvement thereafter. As of December 31, 1997, Key had merged all of the 140
KeyCenters to be consolidated, and sold or reached agreements to sell 117 of the
additional 140 KeyCenters targeted for divestiture. In addition, by year end,
operations were streamlined through a workforce reduction of 3,249 full-time
equivalent employees, representing more than the 10% reduction projected at the
announcement date. As a result of these factors and revenue growth, Key's
efficiency ratio (exclusive of acquisitions) improved to 55.65% for the fourth
quarter of 1997, 527 basis points better than the 60.92% for the fourth quarter
of 1996.
In connection with its efforts to form one banking institution and related
centralization efforts, during 1997 Key also undertook a comprehensive review of
its real estate operations and occupancy cost structure. As a result, during the
third quarter a $50 million ($33 million after tax) charge was recorded in
connection with efforts to vacate and/or dispose of excess real estate. The
elimination of this excess capacity is expected to generate annual cost savings
of approximately $15 million.
During 1997, Key continued its efforts to reallocate resources (including those
made available or generated by its above-mentioned divestitures of KeyCenters)
to businesses with higher earnings potential. Specifically, in the third
quarter, Key increased the size and scope of its leasing business by acquiring a
majority interest in Leasetec Corporation ("Leasetec"), an equipment leasing
company headquartered in Boulder, Colorado, which specializes in the leasing of
information technology and telecommunications equipment to large corporate
clients. In addition, Key completed its acquisition of Champion Mortgage Co.,
Inc. ("Champion"), a home equity finance company headquartered in Parsippany,
New Jersey.
During the fourth quarter, Key undertook actions to enhance and expand its
merchant services business by entering into an agreement to form a joint venture
with NOVA Corporation, an Atlanta-based merchant transaction processor which
provides transaction processing and electronic payment services to merchant
clients nationwide. Key also added California, Nevada and Arizona to its
nationwide retail franchise by entering into an agreement with ARCO Products
Company to install up to 850 automated teller machines ("ATMs") in ARCO
convenience stores in these states as well as in Washington and Oregon, where
Key already had a significant presence.
In addition to the above actions, during 1997 management continued to actively
manage Key's balance sheet, liquidity and capital. Specific steps taken included
the selective securitization and sale of automobile, education and home equity
loans totaling $1.7 billion, $744 million and $205 million, respectively, and
the sale of $365 million of out-of-franchise credit card receivables. Management
continues to explore opportunities for the sale and/or other arrangements with
respect to its credit card and certain other portfolios in efforts to improve
financial returns and manage credit risk.
26
<PAGE> 3
During the fourth quarter of 1996 and the second quarter of 1997, management
augmented its flexibility to continue its management of Key's capital through
the issuance of $500 million and $250 million, respectively, of tax-advantaged
capital securities. The securities issued in 1996 receive Tier 1 capital
treatment.
Throughout 1997, on a pre-split basis Key repurchased 6,709,600 of its Common
Shares under the 12,000,000 Common Shares repurchase program authorized by Key's
Board of Directors in November 1996, bringing the total number of shares
repurchased under that program, which expired at the end of 1997, to 9,329,600.
Under a separate authorization, 3,336,118 pre-split Key Common Shares were
repurchased during the year and issued in August to acquire Champion. In January
1998, the Board approved a program to repurchase up to an additional 5,000,000
Common Shares (10,000,000 shares on a post-split basis).
The preceding items are discussed in greater detail in the remainder of this
discussion and in the notes to the consolidated financial statements.
PERFORMANCE OVERVIEW
The selected financial data set forth in Figure 1 presents certain information
highlighting the financial performance of Key for each of the last six years.
Each of the items referred to in this performance overview and in Figure 1 is
more fully described in the following discussion or in the notes to the
consolidated financial statements presented on pages 60 through 78. Unless
otherwise indicated, all earnings per share data included in this section and
throughout the remainder of this discussion are presented on a diluted basis and
have been restated for the stock split.
In 1997, net income reached a record high of $919 million, or $2.07 per Common
Share. This compared with $783 million, or $1.67 per Common Share, in 1996 and
$825 million, or $1.71 per Common Share, in 1995. The return on average total
equity for 1997 was 18.89%, compared with 15.64% and 17.10% in 1996 and 1995,
respectively. The return on average total assets was 1.33% in 1997, 1.21% in
1996 and 1.24% in 1995. Having notable impact on 1996 earnings was the
restructuring charge of $100 million ($66 million after tax, $.14 per Common
Share) recorded late in the fourth quarter to accelerate the previously
discussed transformation of Key to a nationwide bank-based financial services
company. Excluding the restructuring charge and Key's share of a
government-mandated assessment of $17 million ($11 million after tax, $.02 per
Common Share) to recapitalize the Savings Association Insurance Fund ("SAIF")
recorded in the third quarter, earnings for 1996 were $860 million, or $1.83 per
Common Share. On the same basis, Key's 1996 return on average total equity was
17.18% and its return on average total assets was 1.33%.
Contributing to the increase in 1997 earnings relative to the prior year were a
$71 million increase in taxable-equivalent net interest income, a $219 million
improvement in noninterest income (including a $132 million increase in gains
from divestitures) and a $29 million decrease in noninterest expense. These
positive factors were partially offset by a $123 million rise in the provision
for loan losses. Included in noninterest expense in 1997 was the $50 million
charge recorded in connection with efforts to vacate and/or dispose of excess
real estate resulting from Key's nationwide banking and related centralization
efforts, $49 million of distributions on capital securities (which more closely
resemble dividend or interest payments than overhead expense) and Year 2000
computer system compliance expenses of $17 million. Excluding these 1997 items
and the restructuring charge, SAIF assessment and capital securities
distributions ($3 million) recorded in 1996, noninterest expense decreased $25
million from the prior year. The efficiency ratio, which measures the extent to
which recurring revenues are absorbed by operating expenses, improved to 55.65%
(exclusive of acquisitions) for the fourth quarter of 1997. For the full year,
this ratio (exclusive of acquisitions) was 57.25% compared with 60.84% for 1996
and 63.03% for 1995. This reflected continued progress made by Key in its
restructuring efforts, revenue growth and implementation of expense control
initiatives.
In 1995, results included an extraordinary net gain of $61 million ($36 million
after tax, $.08 per Common Share) recorded in connection with the sales of
certain subsidiaries. This net gain included a gain of $72 million ($42 million
after tax, $.09 per Common Share) from the sale of a residential mortgage loan
servicing business and a loss of $11 million ($6 million after tax, $.01 per
Common Share) incurred in connection with the sale of Schaenen Wood &
Associates, Inc. ("Schaenen Wood"), an asset management subsidiary. In addition,
efforts to reconfigure the balance sheet in order to reduce exposure to changes
in interest rates resulted in net losses of $49 million ($31 million after tax,
$.07 per Common Share) from the sales of securities. Other 1995 items included a
one-time tax benefit of $16 million, or $.03 per Common Share, which related to
acquisitions completed in prior years; $25 million ($15 million after tax, $.03
per Common Share) of write-offs of certain obsolete software previously
developed for internal use, and a $12 million ($8 million after tax, $.02 per
Common Share) positive adjustment resulting from better-than-expected
performance of student loan securitizations completed in prior years. In the
aggregate, these items increased 1995 earnings by $14 million, or $.03 per
Common Share.
27
<PAGE> 4
FIGURE 1 SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Compound
Annual Rate
of Change
dollars in millions, except per share amounts 1997 1996 1995 1994 1993 1992 (1992-1997)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
Interest income $ 5,262 $ 4,951 $ 5,121 $ 4,490 $ 4,214 $ 4,199 4.6%
Interest expense 2,468 2,234 2,485 1,797 1,535 1,750 7.1
Net interest income 2,794 2,717 2,636 2,693 2,679 2,449 2.7
Provision for loan losses 320 197 100 125 212 339 (1.1)
Noninterest income 1,306 1,087 933 883 1,002 925 7.1
Noninterest expense 2,435 2,464 2,312 2,168 2,385 2,170 2.3
Income before income taxes
and extraordinary item 1,345 1,143 1,157 1,283 1,084 865 9.2
Income before extraordinary item 919 783 789 853 710 592 9.2
Net income 919 783 825 853 710 592 9.2
Net income applicable to Common Shares 919 775 809 837 692 568 10.1
- -----------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Income before extraordinary item $ 2.09 $ 1.69 $ 1.65 $ 1.72 $ 1.44 $ 1.21 11.6%
Income before extraordinary item
-- assuming dilution 2.07 1.67 1.63 1.70 1.43 1.20 11.5
Net income 2.09 1.69 1.73 1.72 1.44 1.21 11.6
Net income-- assuming dilution 2.07 1.67 1.71 1.70 1.43 1.20 11.5
Cash dividends .84 .76 .72 .64 .56 .49 11.4
Book value at year end 11.83 10.92 10.68 9.44 8.76 7.82 8.6
Market price at year end 35.41 25.25 18.13 12.50 14.88 16.07 17.1
Dividend payout ratio 40.19% 45.10% 41.74% 37.10% 38.75% 40.50% (.2)
Weighted average Common Shares (000) 439,042 459,810 469,574 486,134 479,550 470,010 (1.4)
Weighted avg. Common Shares and
potential Common Shares (000) 444,544 464,282 472,882 490,932 483,158 473,964 (1.3)
- -----------------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31,
Loans $ 53,380 $ 49,235 $ 48,332 $ 46,579 $ 41,396 $ 36,960 7.6%
Earning assets 64,246 59,260 58,762 60,047 54,353 49,381 5.4
Total assets 73,699 67,621 66,339 66,801 59,634 55,068 6.0
Deposits 45,073 45,317 47,282 48,564 46,499 43,433 .7
Long-term debt 7,446 4,213 4,003 3,570 1,764 1,790 33.0
Common shareholders' equity 5,181 4,881 4,993 4,530 4,225 3,683 7.1
Total shareholders' equity 5,181 4,881 5,153 4,690 4,385 3,927 5.7
Full-time equivalent employees 24,595 27,689 29,563 29,211 29,983 29,117 --
Full-service banking offices 1,015 1,205 1,284 1,272 1,267 1,241 --
- -----------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on average total assets 1.33% 1.21% 1.24% 1.36% 1.24% 1.13% N/A
Return on average common equity 18.89 15.73 17.35 18.87 17.27 16.33 N/A
Return on average total equity 18.89 15.64 17.10 18.56 16.95 15.91 N/A
Efficiency(1) 57.50 60.84 63.03 59.39 60.50 60.96 N/A
Overhead(2) 39.64 45.46 49.66 46.14 46.85 47.21 N/A
Net interest margin (TE) 4.62 4.78 4.47 4.83 5.31 5.31 N/A
- -----------------------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS AT DECEMBER 31,
Equity to assets(3) 7.71% 7.96% 7.77% 7.03% 7.37% 7.13% N/A
Tangible equity to tangible assets(3) 6.21 6.63 6.25 6.19 6.51 6.11 N/A
Tier 1 risk-adjusted capital 6.65 7.98 7.53 8.48 8.73 8.56 N/A
Total risk-adjusted capital 10.83 13.01 10.85 11.62 12.22 11.73 N/A
Leverage 6.40 6.93 6.20 6.63 6.72 6.56 N/A
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The comparability of the information presented above is affected by certain
mergers, acquisitions and divestitures completed by Key in the time periods
presented. For further information concerning these transactions, refer to Note
3, Mergers, Acquisitions and Divestitures beginning on page 63.
1 Calculated as noninterest expense (excluding certain nonrecurring charges and
distributions on capital securities) divided by taxable-equivalent net
interest income plus noninterest income (excluding net securities
transactions and gains on bank and branch divestitures).
2 Calculated as noninterest expense (excluding certain nonrecurring charges and
distributions on capital securities) less noninterest income (excluding net
securities transactions and gains on bank and branch divestitures) divided by
taxable-equivalent net interest income.
3 Excluding capital securities issued in the fourth quarter of 1996 and
receiving Tier 1 treatment, these ratios at December 31, 1997, are 7.03% and
5.52%, respectively, and at December 31, 1996, are 7.22% and 5.88%,
respectively.
N/A = Not Applicable
TE = Taxable Equivalent
28
<PAGE> 5
CASH BASIS FINANCIAL DATA
The selected financial data presented in Figure 2 presents certain information
highlighting the performance of Key for each of the three years in the period
ended December 31, 1997, adjusted to exclude the amortization of goodwill and
other intangibles considered nonqualifying in regulatory capital computations,
and related balances resulting from business combinations recorded by Key under
the purchase method of accounting. Had these business combinations qualified for
accounting under the pooling of interests method, no intangible assets would
have been recorded. Since the amortization of goodwill and other intangibles
does not result in a cash expense, the economic value to shareholders under
either accounting method is essentially the same. Moreover, such amortization
does not impact Key's liquidity and funds management activities. Cash basis
financial data is particularly relevant since they provide an additional basis
for measuring a company's ability to support future growth, pay dividends and
repurchase shares. Cash basis financial data, as defined herein and presented in
Figure 2, have not been adjusted to exclude the impact of other noncash items
such as depreciation, provision for loan losses, restructuring charges, etc.
This is the only section of this report in which Key's financial results are
discussed on a cash basis.
FIGURE 2 CASH BASIS SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
dollars in millions, except per share amounts 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31,
Noninterest expense $ 2,358 $ 2,387 $ 2,247
Income before income taxes and extraordinary item 1,422 1,217 1,222
Income before extraordinary item 989 850 847
Net income 989 850 883
Net income applicable to Common Shares 989 842 867
- -------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Income before extraordinary item $ 2.25 $ 1.85 $ 1.80
Income before extraordinary item-- assuming dilution 2.22 1.81 1.76
Net income 2.25 1.85 1.88
Net income-- assuming dilution 2.22 1.81 1.83
Weighted average Common Shares (000) 439,042 459,810 469,574
Weighted average Common Shares and potential
Common Shares (000) 444,544 464,282 472,882
- -------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on average total assets 1.46% 1.33% 1.34%
Return on average common equity 25.78 21.57 22.99
Return on average total equity 25.78 21.15 22.08
Efficiency(1) 55.59 58.92 61.26
- -------------------------------------------------------------------------------------------------------
GOODWILL AND NONQUALIFYING INTANGIBLES
Goodwill average balance $ 921 $ 855 $ 682
Nonqualifying intangibles average balance 108 132 142
Goodwill amortization (after tax) 58 55 45
Nonqualifying intangibles amortization (after tax) 12 12 13
- -------------------------------------------------------------------------------------------------------
</TABLE>
The comparability of the information presented above is affected by certain
mergers, acquisitions and divestitures completed by Key in the time periods
presented. For further information concerning these transactions, refer to Note
3, Mergers, Acquisitions and Divestitures, beginning on page 63.
1 Calculated as noninterest expense (excluding certain nonrecurring charges,
the amortization of goodwill and nonqualifying intangibles, and distributions
on capital securities) divided by taxable-equivalent net interest income plus
noninterest income (excluding net securities transactions and gains on bank
and branch divestitures).
LINE OF BUSINESS RESULTS
Key's four primary lines of business are Key Corporate Capital, Key Consumer
Finance, Key Community Bank and Key Capital Partners ("KCP"). A summary of 1997
and 1996 financial results and significant performance measures for each primary
line of business is presented in Figure 3.
The financial information discussed in the remainder of this section was derived
from the internal profitability reporting system used by management to monitor
and manage the financial performance of Key. The financial results and
performance measures reported are based on internal management accounting
policies which have been developed such that results are compiled on a
consistent basis and reflect the underlying economics of the businesses. These
policies address the methodologies applied in connection with funds transfer
pricing as well as the allocation of certain costs and capital. Funds transfer
pricing was used in the determination of net interest income by assigning a
standard cost for funds used (or a standard credit for funds provided) to assets
and liabilities based on their maturity, prepayment and/or repricing
characteristics. The net effect of transfer pricing is included in the Key
Community Bank line of business where the securities portfolios are also
maintained. Indirect expenses were allocated based on actual volume measurements
and other criteria, as appropriate. The provision for loan losses was allocated
in an amount based primarily upon the actual net charge-offs of
29
<PAGE> 6
FIGURE 3 LINE OF BUSINESS RESULTS
<TABLE>
<CAPTION>
Year ended December 31, 1997 Key Key Key Key Key
Corporate Consumer Community Capital Support KeyCorp
dollars in millions Capital Finance Bank Partners & Admin. Consolidated
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Net interest income (TE) $414 $526 $1,893 $ 2 $ 3 $2,838
Provision for loan losses 7 207 106 -- -- 320
Noninterest income 54 75 556 470 151 1,306
Revenue sharing-- KCP(1) 96 -- 181 (277) -- --
Noninterest expense 127 230 1,593 313 172 2,435
Expense sharing-- KCP(1) 75 -- 93 (168) -- --
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes (TE) 355 164 838 50 (18) 1,389
Allocated income taxes and TE adjustment 123 62 269 19 (3) 470
- -------------------------------------------------------------------------------------------------------------------------------
Net income $232 $102 $ 569 $ 31 $(15) $ 919
==== ==== ===== ==== ==== =====
Percent of consolidated net income 25% 11% 63% 3% (2)% 100%
- -------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES
Loans $10,193 $13,036 $28,186 -- -- $51,415
Earning assets 10,214 13,311 36,871 $904 -- 61,300
Deposits 441 1,006 42,324 2 -- 43,773
Allocated equity 871 953 2,737 256 $49 4,866
- -------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on average allocated equity 26.64% 10.70% 20.79% 12.11% N/M 18.89%
Efficiency 35.46 35.94 62.25 74.36 N/M 57.50
- -------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1996 Key Key Key Key Key
Corporate Consumer Community Capital Support KeyCorp
dollars in millions Capital Finance Bank Partners & Admin. Consolidated
- -------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Net interest income (TE) $361 $457 $1,938 $ 9 $ 2 $2,767
Provision for loan losses 6 126 65 -- -- 197
Noninterest income 35 158 508 385 1 1,087
Revenue sharing-- KCP(1) 95 -- 146 (241) -- --
Noninterest expense 120 225 1,624 268 227 2,464
Expense sharing-- KCP(1) 78 -- 75 (153) -- --
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes (TE) 287 264 828 38 (224) 1,193
Allocated income taxes and TE adjustment 98 96 280 15 (79) 410
- -------------------------------------------------------------------------------------------------------------------------------
Net income $189 $168 $ 548 $ 23 $(145) $ 783
==== ==== ===== ==== ===== =====
Percent of consolidated net income 24% 21% 71% 3% (19)% 100%
- -------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES
Loans $9,282 $11,546 $27,388 -- -- $48,216
Earning assets 9,287 11,552 36,714 $292 -- 57,845
Deposits 443 787 43,485 8 -- 44,723
Allocated equity 759 884 3,102 197 $64 5,006
- -------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on average allocated equity 24.90% 19.00% 17.67% 11.68% N/M 15.64%
Efficiency 40.33 36.59 65.55 75.16 N/M 60.84
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1 Represents the assignment of KCP revenue and expense to the lines of business
principally responsible for maintaining the customer relationship (See
description of KCP on page 32).
TE = Taxable Equivalent
N/M = Not Meaningful
30
<PAGE> 7
each respective line of business, adjusted for loan growth and changes in risk
profile. The level of the consolidated provision for loan losses was based upon
the application of methodologies designed by management to assess the adequacy
of the consolidated allowance by focusing on a number of specific factors. These
factors are more fully discussed in the Asset Quality section beginning on page
48.
Income taxes were allocated based on the statutory Federal income tax rate of
35% (adjusted for tax-exempt income from corporate owned life insurance,
nondeductible goodwill amortization, and tax credits associated with investments
in low-income housing projects) for the periods presented. Capital was assigned
to each line of business based on regulatory requirements and management's
assessment of economic risk factors (primarily credit, operating and market
risk).
The development and application of these methodologies is a dynamic process.
Accordingly, financial results may be revised periodically to reflect management
accounting enhancements, changes in risk profile or changes in the
organization's structure. Further, unlike financial accounting, there is no
authoritative guidance for management accounting similar to generally accepted
accounting principles. Consequently, reported results are not necessarily
comparable with those presented by other companies. Figure 3 reflects a number
of revisions which have been made to the previously disclosed 1996 financial
results to conform with the current year presentation. Primary among these
revisions was the formation of the KCP line of business by reclassifying asset
management from Other (renamed Key Support & Administration in 1997), investment
banking from Key Corporate Capital, and insurance and brokerage from Key
Community Bank. In addition, the large corporate and wealth transfer businesses
were reclassified from Key Corporate Capital to Key Community Bank, and mortgage
servicing was reclassified from Key Consumer Finance to Key Community Bank to
reflect organizational changes. In 1997, funds transfer pricing was enhanced by
refining the methodology applied to certain balance sheet components with
indeterminate maturities (i.e., certain deposit products, cash, the allowance
for loan losses and equity) and by recognizing the costs of collateral
requirements on certain products. In addition, revenue and expense allocation
agreements between lines of business were modified, and the income tax
calculation was revised to account for the components parenthetically indicated
in the preceding paragraph.
A description of each of Key's primary lines of business is presented below.
KEY CORPORATE CAPITAL
As one of the largest providers of corporate financial services in the nation,
Key offers a complete range of financing, transaction processing and financial
advisory services to corporations throughout the country through its Corporate
Capital unit. It also operates one of the largest bank-affiliated equipment
leasing companies with operations conducted both domestically and throughout
Europe and Asia. Corporate Capital's business units are organized around
specialized industry client segments, inclusive of healthcare,
media/telecommunications, structured finance and commercial real estate. In
serving these targeted segments, Key Corporate Capital provides a number of
specialized services including international banking, corporate finance advisory
services, capital markets products, and 401(k) and trust custody products. Key
is also one of the leading cash management providers in the country.
In 1997, Key Corporate Capital contributed approximately 25% of Key's
consolidated earnings with net income of $232 million, resulting in a return on
average allocated common equity of 26.64%. In 1996, net income was $189 million,
or approximately 24% of Key's consolidated earnings, and the return on average
allocated common equity was 24.90%. The increase in earnings relative to the
prior year reflected higher net interest income resulting from a 10% increase in
total average loans, generated, in large part, from strong growth in both
commercial lending and lease financing. The growth in the commercial loan
portfolio and related fee income benefited from efforts begun late in 1995 to
reengineer the Corporate Capital unit's sales and delivery platform to provide
relationship managers with more time for revenue-generating activities, while
redistributing support and administrative functions to others aided by
technology-based systems functionality. Also contributing to growth in this
portfolio were efforts begun late in 1996 to establish a national focus for
targeted client segments and sales office expansion into high-growth markets.
The 1997 increase in lease financing included the impact of the Leasetec
acquisition completed in July. At December 31, 1997, the Corporate Capital unit
had sales offices in 25 states compared with 16 states at the end of 1996. Also
contributing to the improved earnings performance were the growth in total
noninterest income and the implementation of expense control initiatives which
held the increase in total noninterest expense to a modest level, despite an $11
million impact from the addition of Leasetec. During 1997, Key Corporate
Capital's efficiency ratio improved 487 basis points to 35.46%. The provision
for loan losses was essentially unchanged from the prior year.
KEY CONSUMER FINANCE
Key Consumer Finance is responsible for Key's indirect, non- branch-based
consumer loan and deposit products. This line of business specializes in credit
cards, automobile loans and leases, marine and recreational vehicle loans,
education loans, home equity loans and branchless deposit-generating activities.
As of December 31, 1997, based on the volume of loans generated, Key Consumer
Finance was the third largest education lender in the nation, ranked in the top
ten in retail automobile financing and was one of the leading providers of
financing for consumer purchases of marine and recreational vehicles.
In 1997, Key Consumer Finance generated net income of $102 million, or
approximately 11% of Key's consolidated earnings, and a return on average
allocated common equity of 10.70%. In the prior year, net income was $168
million, or approximately 21% of Key's consolidated earnings, and the return on
average allocated common equity was 19.00%.
31
<PAGE> 8
The decrease in earnings relative to the prior year reflected a significant
increase in the provision for loan losses, a decrease in noninterest income and
a slight increase in noninterest expense, offset in part by growth in net
interest income. The increase in the provision for loan losses resulted from the
continued deterioration in consumer credit quality as evidenced by the record
number of personal bankruptcies in the United States. As was the case in 1996,
most of Key Consumer Finance's net charge-offs occurred in the credit card and
automobile loan portfolios. In response to this, the company sold its
out-of-franchise credit card portfolio ($365 million), which had an historically
high level of delinquencies. The reduction in noninterest income resulted from
loan securitization net losses of $12 million in 1997 compared with loan
securitization income of $62 million in the prior year. Included in 1997 results
was a $36 million loss on the securitization of $949 million of prime credit
automobile loans with low returns on equity. This securitization is consistent
with other actions taken by Key to divest assets which do not support its
achievement of its return on equity objective. The decrease in loan
securitization income in 1997 also reflected the impact of new accounting
standards which took effect on January 1, 1997. These new standards, which are
more fully described in the Securitizations section of Note 1, Summary of
Significant Accounting Policies, beginning on page 60, served to reduce loan
securitization income by reclassifying a portion of such revenue to interest
income and by deferring an additional portion which is expected to be recognized
as interest income over the life of the respective securitizations. The increase
in noninterest expense reflected the $21 million impact of the Champion
acquisition completed in August. Net interest income was up from the prior year
as a result of a 13% increase in total average loans.
KEY COMMUNITY BANK
Key Community Bank is responsible for delivering a complete line of branch-based
retail financial products and services to small businesses and consumers,
addressing the more complex, diverse needs of the affluent client segment and
maximizing relationship management in the commercial banking and public sector
businesses. The delivery of these products and services is accomplished through
KeyBank National Association ("KeyBank N.A.") operating 1,015 KeyCenters, a
24-hour telephone banking call center services group, more than 1,900 ATMs that
access 14 different networks and comprise one of the largest ATM networks in the
United States, relationship management teams of approximately 275 commercial
banking and public sector professionals, over 200 private banking and investing
professionals and approximately 250 small business professionals. In the fourth
quarter of 1997, Key Community Bank expanded its geographic coverage by entering
into an agreement with ARCO Products Company to install up to 850 ATMs in ARCO
convenience stores in California, Nevada, Arizona, Washington and Oregon.
In 1997, net income for Key Community Bank totaled $569 million, or
approximately 63% of Key's consolidated earnings, compared with $548 million, or
71%, respectively, for 1996. Its return on average allocated common equity was
20.79% in 1997 and 17.67% in 1996. Positive factors affecting the Community
Bank's financial performance in comparison with the prior year were a higher
level of total noninterest income and a decrease in total noninterest expense.
The 13% improvement in noninterest income occurred despite branch divestitures
and reflected higher revenues from products offered through KCP as well as
increases in a number of other categories, primary among which were ATM fees,
investment management fees and debit card income. The decrease in total
noninterest expense was due primarily to lower personnel costs and was largely
the result of Key's bank consolidation efforts and expense control initiatives.
During 1997, Key Community Bank's efficiency ratio improved 330 basis points to
62.25%. These positive factors were partially offset by a decline in net
interest income and an increase in the provision for loan losses in response to
both loan portfolio growth and a higher level of net charge-offs. The decrease
in net interest income resulted from a lower net interest margin which was due
largely to greater reliance on higher-cost borrowings, following a decrease in
core deposits stemming from branch sales.
KEY CAPITAL PARTNERS
KCP was formed at the end of 1997 to primarily provide clients served by the
Corporate Capital and Community Bank lines of business with the products and
services offered by Key's asset management, investment banking, insurance and
brokerage businesses. This line of business was created in conjunction with
Key's long-term commitment to providing a full range of corporate and individual
client financial expertise and is expected to play a major role in developing
fee income through its broad range of investment choices and customized
products. Leveraging Key's corporate and community banking distribution channels
and client relationships will be an essential factor in ensuring KCP's future
growth and success.
As indicated in Figure 3, a significant amount of noninterest income and expense
generated by KCP is reported under either Key Corporate Capital or Key Community
Bank. This reflects Key's management accounting practice of assigning such
income and expense to whichever of those two lines of business is principally
responsible for maintaining the relationship with the customers who also avail
themselves of the products and services offered by KCP. On an all-inclusive
basis (i.e., prior to the aforementioned assignments), KCP accounted for
approximately 11% of Key's consolidated earnings, with net income of $102
million in 1997 and $80 million in 1996. The increase in earnings resulted from
higher noninterest income which rose $85 million, or 22%, from the prior year.
The largest contribution to the improvement came from investment banking income
which increased $46 million, or 63%, to $119 million and accounted for
approximately 25% of KCP's total noninterest income in 1997. Despite higher
operating expenses, during 1997 KCP's all-inclusive efficiency ratio improved
171 basis points to 66.31%, reflecting the strong growth in revenues.
32
<PAGE> 9
KEY SUPPORT AND ADMINISTRATION
Key Support and Administration includes activities that are not directly
attributable to one of the four major lines of business. Included in this
category are certain nonbanking affiliates, eliminations of certain intercompany
transactions and certain nonrecurring transactions. Also included are portions
of certain assets, capital and support functions not specifically identifiable
with the four primary lines of business.
In both 1997 and 1996, results included certain nonrecurring items recorded in
connection with Key's transformation to a nationwide bank-based financial
services company and related centralization efforts. In 1997, these items
included $151 million of gains from the divestiture of 104 banking offices and a
$50 million charge incurred in conjunction with efforts to vacate and/or dispose
of excess real estate. In the fourth quarter of 1996, Key recorded a
restructuring charge of approximately $100 million in connection with the
strategic actions subsequently taken in the transformation. These items are more
fully described throughout this management's discussion, and additional
information pertaining to the nature of the restructuring charge is presented in
Note 12, Restructuring Charge, on page 70.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income, which is comprised of interest and loan-related fee income
less interest expense, is the principal source of earnings for Key. Net interest
income is affected by a number of factors including the level, pricing, mix and
maturity of earning assets and interest-bearing liabilities (including
off-balance sheet instruments described in Note 17, Financial Instruments with
Off-Balance Sheet Risk, beginning on page 74), interest rate fluctuations and
asset quality. To facilitate comparisons in the following discussion, net
interest income is presented on a taxable-equivalent basis, which restates
tax-exempt income to an amount that would yield the same after-tax income had
the income been subject to taxation at the statutory Federal income tax rate.
Various components of the balance sheet and their respective yields and rates
which affect interest income and expense are illustrated in Figure 5. The
information presented in Figure 8 provides a summary of the effect on net
interest income of changes in yields/rates and average balances in 1997 and
1996. A more in-depth discussion of changes in earning assets and funding
sources is presented in the Financial Condition section beginning on page 44.
In 1997, net interest income reached a record high of $2.8 billion, up $71
million, or 3%, from the prior year. This followed an increase of $74 million,
or 3%, in 1996 and marked the second consecutive year in which net interest
income reached a record level. In 1997, the growth in average earning assets
(primarily loans), more than offset a 16 basis point decrease in the net
interest margin. The 1996 increase in net interest income resulted from a net
interest margin which rose 31 basis points to 4.78% and more than compensated
for the effect of a managed decrease of $2.4 billion, or 4%, in average earning
assets. The net interest margin is computed by dividing taxable-equivalent net
interest income by average earning assets.
Average earning assets in 1997 totaled $61.3 billion, which was $3.5 billion
higher than the prior year. This growth reflected a $4.0 billion, or 10%,
increase in targeted loans (such as commercial, home equity, credit card and
consumer installment loans), accompanied by a $1.0 billion decline in the
residential mortgage portfolio and an increase in loans held for sale. Earning
assets have grown steadily since the third quarter of 1996 following a period of
approximately two years of planned decreases in both residential mortgage loans
and securities (including both investment securities and securities available
for sale). In 1996, the reduction in average earning assets was due primarily to
a $2.3 billion, or 20%, decline in securities and a $264 million, or 33%,
decline in short-term investments. The planned reduction in securities was part
of Key's overall asset/liability management strategy at the time. The level of
short-term investments was reduced in 1996 as a result of programs instituted to
better manage securities used to meet the collateral requirements of Key's
affiliate banks. Although the level of average loans outstanding during 1996
increased only slightly from the prior year, the composition of the total loan
portfolio changed significantly. Specifically, a $2.5 billion increase in loans
targeted for growth was substantially offset by a $2.3 billion reduction in
residential mortgage loans. The decrease in the mortgage loan portfolio
reflected Key's continued strategy of securitizing and/or selling selected loans
which do not meet certain return on equity, credit and other internal standards.
As a result of the employment of this strategy and the decrease in the
securities portfolio discussed above, during the first three quarters of 1996
Key experienced a gradual reduction in average total earning assets. This trend
was reversed, however, during the fourth quarter of 1996 as the growth in
targeted loans exceeded the decline in lower spread assets. Key's strategy with
respect to its loan portfolio is discussed in greater detail in the Loan section
beginning on page 44.
FIGURE 4 1997 AVERAGE EARNING ASSETS MIX
[PIE GRAPH]
<TABLE>
<S> <C>
Securities 14.9%
Short-term investments 1.3%
Loans 83.8%
</TABLE>
33
<PAGE> 10
FIGURE 5 AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND YIELDS/RATES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
-------------------------- --------------------------- ----------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
dollars in millions BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Loans(3,4)
Commercial, financial and agricultural $12,911 $1,126 8.72% $11,970 $1,070 8.94% $11,252 $1,027 9.13%
Real estate-- commercial mortgage 7,101 663 9.34 7,039 648 9.21 7,115 678 9.53
Real estate-- construction 1,945 188 9.67 1,631 166 10.18 1,416 148 10.45
Commercial lease financing 3,310 228 6.89 2,372 148 6.24 1,876 125 6.66
- ------------------------------------------------------------------------------------------------------------------------------------
Total commercial loans 25,267 2,205 8.73 23,012 2,032 8.83 21,659 1,978 9.13
Real estate-- residential 6,192 524 8.46 7,224 593 8.21 9,554 762 7.98
Credit card 1,710 256 14.97 1,665 243 14.59 1,386 210 15.15
Other consumer 15,597 1,447 9.28 13,887 1,284 9.25 13,042 1,197 9.18
- ------------------------------------------------------------------------------------------------------------------------------------
Total consumer loans 23,499 2,227 9.48 22,776 2,120 9.31 23,982 2,169 9.04
Loans held for sale 2,649 198 7.47 2,428 198 8.15 2,371 201 8.48
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans 51,415 4,630 9.02 48,216 4,350 9.02 48,012 4,348 9.06
Taxable investment securities 247 12 4.83 246 14 5.69 7,807 521 6.67
Tax-exempt investment securities(3) 1,227 97 7.91 1,425 114 8.00 1,482 126 8.47
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 1,474 109 7.39 1,671 128 7.66 9,289 647 6.96
Securities available for sale(3,5) 7,629 527 6.93 7,423 495 6.69 2,103 136 6.40
Interest-bearing deposits with banks 19 1 5.67 24 1 4.17 138 8 5.86
Federal funds sold and securities
purchased under resale agreements 497 24 4.83 463 25 5.40 533 32 5.91
Trading account assets 266 15 5.64 48 2 4.17 128 7 6.00
- ------------------------------------------------------------------------------------------------------------------------------------
Total short-term investments 782 40 5.12 535 28 5.23 799 47 5.91
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets 61,300 5,306 8.66 57,845 5,001 8.65 60,203 5,178 8.60
Allowance for loan losses (875) (872) (868)
Other assets 8,525 7,846 7,307
- ------------------------------------------------------------------------------------------------------------------------------------
$68,950 $64,819 $66,642
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Money market deposit accounts $10,897 333 3.06 $10,211 311 3.05 $7,161 261 3.64
Savings deposits 4,319 94 2.18 5,604 138 2.46 6,506 174 2.68
NOW accounts 1,560 32 2.05 2,438 48 1.97 5,444 110 2.02
Certificates of deposit ($100,000 or more) 3,376 190 5.63 3,377 199 5.89 3,677 222 6.03
Other time deposits 13,273 715 5.39 13,723 720 5.25 14,466 783 5.41
Deposits in foreign offices 1,812 98 5.41 996 53 5.32 2,182 155 7.12
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 35,237 1,462 4.15 36,349 1,469 4.04 39,436 1,705 4.32
Federal funds purchased and securities
sold under repurchase agreements 6,942 359 5.17 5,843 295 5.05 5,623 315 5.60
Bank notes and other short-term borrowings 4,741 283 5.97 3,279 197 6.01 3,362 204 6.05
Long-term debt(6) 5,906 364 6.21 4,296 273 6.43 3,895 261 6.84
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 52,826 2,468 4.67 49,767 2,234 4.49 52,316 2,485 4.75
Noninterest-bearing deposits 8,536 8,374 8,129
Other liabilities 2,074 1,644 1,373
Capital securities 648 28 --
Preferred stock -- 79 160
Common shareholders' equity 4,866 4,927 4,664
- ------------------------------------------------------------------------------------------------------------------------------------
$68,950 $64,819 $66,642
======= ======= =======
Interest rate spread (TE) 3.99 4.16 3.85
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income (TE) and net
interest margin (TE) $2,838 4.62% $2,767 4.78% $2,693 4.47%
====== ==== ====== ==== ====== ====
Taxable-equivalent adjustment(3) $44 $50 $57
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1 For years prior to 1994, all real estate loans are included in real estate --
residential loans.
2 For years prior to 1994, credit card receivables are included in consumer
loans.
3 Interest income on tax-exempt securities and loans has been adjusted to a
taxable-equivalent basis using the statutory Federal income tax rate of 35%
for years subsequent to 1992 and 34% for 1992.
4 For purposes of these computations, nonaccrual loans are included in average
loan balances.
5 Yield is calculated on the basis of amortized cost.
6 Rate calculation excludes ESOP debt.
N/M = Not Meaningful
TE = Taxable Equivalent
34
<PAGE> 11
<TABLE>
<CAPTION>
COMPOUND ANNUAL
RATE OF CHANGE
1994 1993 1992 (1992-1997)
- ---------------------------- --------------------------------- -------------------------------- ------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 9,762 $ 856 8.77% $ 9,120 $ 735 8.06% $10,926 $ 921 8.43% 3.4% 4.1%
6,396 553 8.65 See note(1) See note(1) See note(1) See note(1)See note(1) See note(1) See note(1) See note(1)
1,207 107 8.86 See note(1) See note(1) See note(1) See note(1)See note(1) See note(1) See note(1) See note(1)
1,384 94 6.79 1,387 109 7.86 1,006 84 8.35 26.9 22.1
- ------------------------------------------------------------------------------------------------------------------------------------
18,749 1,610 8.59 10,507 844 8.03 11,932 1,005 8.42 16.2 17.0
8,699 653 7.51 17,612 1,478 8.39 13,315 1,165 8.75 (14.2) (14.8)
1,361 194 14.25 See note(2) See note(2) See note(2) See note(2)See note(2) See note(2) See note(2) See note(2)
12,383 1,054 8.51 8,993 926 10.30 10,061 1,100 10.93 9.2 5.6
- ------------------------------------------------------------------------------------------------------------------------------------
22,443 1,901 8.47 26,605 2,404 9.04 23,376 2,265 9.69 .1 (.3)
2,271 160 7.05 2,251 151 6.71 717 59 8.23 29.9 27.4
- ------------------------------------------------------------------------------------------------------------------------------------
43,463 3,671 8.45 39,363 3,399 8.68 36,025 3,329 9.26 7.4 6.8
7,664 507 6.61 7,769 556 7.16 7,985 677 8.48 (50.1) (55.4)
1,579 136 8.63 1,787 159 8.87 1,881 176 9.36 (8.2) (11.2)
- ------------------------------------------------------------------------------------------------------------------------------------
9,243 643 6.96 9,556 715 7.48 9,866 853 8.65 (31.6) (33.9)
4,066 228 5.50 2,070 141 6.84 801 57 7.14 57.0 56.0
34 2 4.47 427 15 3.49 477 20 4.21 (47.5) (45.1)
71 3 4.18 166 6 3.61 269 11 3.83 13.1 16.9
39 2 5.23 17 1 3.37 23 1 4.46 63.2 71.9
- ------------------------------------------------------------------------------------------------------------------------------------
144 7 4.53 610 22 3.52 769 32 4.08 .3 5.1
- ------------------------------------------------------------------------------------------------------------------------------------
56,916 4,549 7.99 51,599 4,277 8.29 47,461 4,271 9.00 5.3 4.4
(821) (804) (806) 1.7
6,466 6,256 5,698 8.4
- ------------------------------------------------------------------------------------------------------------------------------------
$62,561 $57,051 $52,353 5.7
======= ======= =======
$7,197 197 2.74 $7,307 189 2.59 $7,648 248 3.25 7.3 6.1
7,697 205 2.66 7,383 214 2.90 5,321 181 3.41 (4.1) (12.3)
5,559 106 1.91 5,314 109 2.06 4,429 121 2.73 (18.8) (23.4)
2,992 146 4.88 3,089 138 4.47 3,573 188 5.25 (1.1) .2
12,338 544 4.41 12,443 551 4.42 13,382 717 5.36 (.2) (.1)
3,015 127 4.21 1,019 32 3.09 368 14 3.72 37.6 47.6
- ------------------------------------------------------------------------------------------------------------------------------------
38,798 1,325 3.41 36,555 1,233 3.37 34,721 1,469 4.23 .3 (.1)
5,850 243 4.16 4,378 130 2.97 4,062 143 3.52 11.3 20.2
1,930 91 4.71 1,196 45 3.72 722 31 4.31 45.7 55.6
2,234 138 6.35 1,896 127 6.96 1,463 107 7.70 32.2
- ------------------------------------------------------------------------------------------------------------------------------------
48,812 1,797 3.69 44,025 1,535 3.49 40,968 1,750 4.28 5.2 7.1
8,046 7,786 6,661 5.1
1,104 1,051 1,001 15.7
-- -- -- --
160 184 244 N/M
4,439 4,005 3,479 6.9
- ------------------------------------------------------------------------------------------------------------------------------------
$62,561 $57,051 $52,353 5.7
======= ======= =======
4.30 4.80 4.72
- ------------------------------------------------------------------------------------------------------------------------------------
$2,752 4.83% $2,742 5.31% $2,521 5.31% 2.4%
====== ==== ====== ==== ====== ====
$59 $63 $72 (9.4)%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE> 12
FIGURE 6 1997 MIX OF FUNDING FOR AVERAGE EARNING ASSETS
[PIE GRAPH]
<TABLE>
<S> <C>
Noninterest-bearing deposits 13.9%
Interest-bearing deposits 57.5%
Short-term borrowings 19.0%
Long-term debt 9.6%
</TABLE>
As shown in Figures 5 and 7, the net interest margin was 4.62% for 1997,
compared with 4.78% in 1996 and 4.47% in 1995. The decrease in the net interest
margin in 1997 was due primarily to the growth of targeted loans at interest
rate spreads lower than the 1996 net interest margin. This reflected increased
reliance on money market funding of incremental loan growth, in part due to the
reduction in core deposits resulting from branch divestitures. The negative
impact of this factor was partially offset by the issuance of $500 million and
$250 million of capital securities in the fourth quarter of 1996 and second
quarter of 1997, respectively. The distributions related to these tax-advantaged
capital securities are classified as noninterest expense. The increase in the
net interest margin in 1996 resulted from a number of factors. Primary among
these factors were the origination of new loans with wider interest rate spreads
and the impact of actions taken in both 1996 and 1995 to reduce lower spread
assets by means of their maturity, run-off, securitization and sale.
Key uses portfolio interest rate swaps and interest rate caps and floors (as
defined in Note 17, Financial Instruments with Off-Balance Sheet Risk, beginning
on page 74) in the management of its interest rate sensitivity position. The
notional amount of portfolio interest rate swaps decreased to $11.2 billion at
December 31, 1997, from $12.3 billion at year-end 1996. Over the same period,
the notional amount of interest rate caps and floors rose to $3.4 billion from
$973 million at December 31, 1996. In 1997, interest rate swaps (including the
impact of both the spread on the swap portfolio and the amortization of deferred
gains and losses resulting from terminated swaps) and interest rate caps and
floors contributed $64 million and 10 basis points to net interest income and
the net interest margin, respectively. In 1996, these instruments increased net
interest income by $66 million and the net interest margin by 11 basis points
compared with reductions of $29 million and 5 basis points, respectively, in
1995. The manner in which interest rate swaps and caps and floors are used in
Key's overall program of asset and liability management is described in the
following Asset and Liability Management section.
ASSET AND LIABILITY MANAGEMENT
Market risk is the exposure to economic loss that arises from changes in the
values of certain market risk sensitive instruments. Types of market risk
include interest rate, foreign exchange and equity price risk; foreign exchange
and equity price risk are not material to Key. Key manages its interest rate
risk through an active program of asset and liability management pursuant to
guidelines established by its Asset/Liability Management Policy Committee
("ALCO"). The ALCO has responsibility for approving the asset/liability
management policies of Key, overseeing the formulation and implementation of
strategies to improve balance sheet positioning and/or earnings, and reviewing
the interest rate sensitivity positions of Key and each of its affiliate banks.
FIGURE 7 NET INTEREST MARGIN (TE)
[GRAPHIC]
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
Net interest margin (TE) 5.31 4.83 4.47 4.78 4.62
Yield on earning assets (TE) 8.29 7.99 8.60 8.65 8.66
Cost of funds 2.98 3.16 4.13 3.87 4.04
</TABLE>
TE = Taxable Equivalent
36
<PAGE> 13
FIGURE 8 COMPONENTS OF NET INTEREST INCOME CHANGES
<TABLE>
<CAPTION>
1997 VS 1996 1996 VS 1995
-------------------------------- ---------------------------------
AVERAGE YIELD/ NET AVERAGE YIELD/ NET
in millions VOLUME RATE CHANGE VOLUME RATE CHANGE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans $288 $ (8) $280 $ 18 $ (16) $ 2
Taxable investment securities -- (2) (2) (440) (67) (507)
Tax-exempt investment securities (16) (1) (17) (5) (7) (12)
Securities available for sale 14 18 32 355 4 359
Short-term investments 13 (1) 12 (14) (5) (19)
- --------------------------------------------------------------------------------------------------------------------------------
Total interest income (TE) 299 6 305 (86) (91) (177)
INTEREST EXPENSE
Money market deposit accounts 21 1 22 98 (48) 50
Savings deposits (29) (15) (44) (23) (13) (36)
NOW accounts (18) 2 (16) (59) (3) (62)
Certificates of deposit ($100,000 or more) -- (9) (9) (18) (5) (23)
Other time deposits (24) 19 (5) (39) (24) (63)
Deposits in foreign offices 44 1 45 (70) (32) (102)
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits (6) (1) (7) (111) (125) (236)
Federal funds purchased and securities sold
under repurchase agreements 57 7 64 12 (32) (20)
Bank notes and other short-term borrowings 87 (1) 86 (5) (2) (7)
Long-term debt 99 (8) 91 26 (14) 12
- --------------------------------------------------------------------------------------------------------------------------------
Total interest expense 237 (3) 234 (78) (173) (251)
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income (TE) $ 62 $ 9 $ 71 $ (8) $ 82 $ 74
==== === ==== ==== ==== ====
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The change in interest not due solely to volume or rate has been allocated in
proportion to the absolute dollar amounts of the change in each.
TE = Taxable Equivalent
Short-term Interest Rate Exposure
- ---------------------------------
The primary tool utilized by management to measure and manage interest rate risk
is a net interest income simulation model. Use of the model to perform
simulations of changes in interest rates over one- and two-year time horizons
has enabled management to develop strategies for managing exposure to interest
rate risk. In its simulations, management estimates the impact on net interest
income of various pro forma changes in the overall level of interest rates.
These estimates are based on a large number of assumptions related to loan and
deposit growth, asset and liability prepayments, interest rates, on and
off-balance sheet management strategies and other factors. Management believes
that both individually and in the aggregate these assumptions are reasonable,
but the complexity of the simulation modeling process results in a sophisticated
estimate, not a precise calculation of exposure. The ALCO guidelines provide
that a gradual 200 basis point increase or decrease in short-term rates over the
next twelve-month period should not result in more than a 2% impact on net
interest income over the same period from what net interest income would have
been if such interest rates did not change. Based on the results of the
simulation model using the ALCO guidelines, as of December 31, 1997, Key would
expect its net interest income to increase by approximately $27 million if
short-term interest rates gradually decrease. Conversely, if short-term interest
rates gradually increase, net interest income would be expected to decrease by
approximately $30 million. As shown in Figure 9, Key has been operating well
within the above guidelines.
FIGURE 9 NET INTEREST INCOME AT
RISK TO CHANGES IN INTEREST RATES
[GRAPHIC]
Estimated Change in Net Interest Income
GRADUAL 200 BASIS POINT DECREASE IN RATES OVER NEXT 12 MONTHS
Mar 96 Jun 96 Sep 96 Dec 96 Mar 97 Jun 97 Sep 97 Dec 97
.0089 .0092 .0060 .0071 .0090 .0050 .0024 .0096
GRADUAL 200 BASIS POINT INCREASE IN RATES OVER NEXT 12 MONTHS
- -.0134 -.0113 -.0123 -.0128 -.0128 -.0113 -.0091 -.0107
37
<PAGE> 14
Short-term interest rate risk analysis is supplemented with an interest rate
sensitivity gap ("gap") model. This model measures the difference between assets
and liabilities repricing or maturing within specified time periods. An
asset-sensitive position indicates that there are more rate-sensitive assets
than rate-sensitive liabilities repricing or maturing during specified time
horizons, which would generally imply a favorable impact on net interest income
in periods of rising interest rates. Conversely, a liability-sensitive position,
where rate-sensitive liabilities exceed the amount of rate-sensitive assets
repricing or maturing within applicable time frames, would generally imply a
favorable impact on net interest income in periods of declining interest rates.
The interest rate gap analysis table shown in Figure 10 presents the gap
position (including the impact of portfolio interest rate swaps, caps and
floors) of Key at December 31, 1997. Gap analysis has several limitations. For
example, it does not take into consideration ongoing loan and deposit activity
of Key's core businesses, the varying degrees of interest rate sensitivity
pertaining to the assets and liabilities that reprice within very short time
frames, or the various spreads on different assets and liabilities maturing
within a given time frame. Such characteristics are considered in the simulation
model. The cumulative interest rate sensitivity gap within the one-year time
frame shown in Figure 10 indicated that Key was slightly liability sensitive.
Long-term Interest Rate Exposure
- --------------------------------
Short-term interest rate risk analysis is complemented by an economic value of
equity model. This model provides the added benefit of measuring exposure to
interest rate changes outside the one- to two-year time frame measured by the
simulation model. The economic value of Key's equity is determined by modeling
the net present value of future cash flows for asset, liability and off-balance
sheet positions based on the implied forward yield curve. Economic value
analysis has several limitations including: the economic values of asset,
liability and off-balance sheet positions do not represent the true fair values
of the positions, since they do not consider factors such as credit risk and
liquidity; estimated cash flows are required for assets and liabilities with
indeterminate maturities; the future structure of the balance sheet derived from
ongoing loan and deposit activity by Key's core businesses is not factored into
present value calculations; and the analysis requires assumptions about events
that span an even longer time frame than that used in the simulation model. The
ALCO guidelines provide that an immediate 200 basis point increase or decrease
in interest rates should not result in more than a 1.75% change in the ratio of
base case economic value of equity to base case economic value of assets. Key
has been operating well within these guidelines.
Management of Interest Rate Exposure
- ------------------------------------
Key utilizes the results of its short-term and long-term interest rate exposure
models to formulate strategies to improve balance sheet positioning and/or
earnings within interest rate risk, liquidity and capital guidelines established
by the ALCO. In addition to the interest rate exposure measured using ALCO
guidelines, the risk to earnings and economic value arising from various other
pro forma changes in the overall level of interest rates is periodically
measured. The variety of interest rate scenarios modeled, and their impact on
earnings and economic value, quanti-
FIGURE 10 INTEREST RATE GAP ANALYSIS
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1 TO 90 91 TO 180 181 TO 365 1 TO 5 OVER 5
dollars in millions DAYS DAYS DAYS YEARS YEARS TOTAL
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans $26,964 $3,971 $5,378 $13,607 $3,460 $53,380
Securities 610 626 1,419 4,016 2,267 8,938
Short-term investments 1,928 -- -- -- -- 1,928
Other assets 1,792 1,342 951 1,746 3,622 9,453
- ------------------------------------------------------------------------------------------------------------------------------
Total assets 31,294 5,939 7,748 19,369 9,349 73,699
- ------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 1,105 693 853 4,086 2,631 9,368
Interest-bearing deposits 13,699 4,448 4,975 9,718 2,865 35,705
Borrowed funds 16,212 418 738 1,276 1,748 20,392
Other liabilities 304 534 456 708 301 2,303
Capital securities -- -- -- 250 500 750
Shareholders' equity -- -- -- -- 5,181 5,181
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities, capital securities
and shareholders' equity 31,320 6,093 7,022 16,038 13,226 73,699
- ------------------------------------------------------------------------------------------------------------------------------
Interest rate swaps, caps and floors 294 (1,497) (792) (715) 2,710 --
- ------------------------------------------------------------------------------------------------------------------------------
Rate sensitivity gap $ 268 $(1,651) $ (66) $ 2,616 $(1,167) --
Cumulative gap $ 268 $(1,383) $(1,449) $ 1,167 -- --
- ------------------------------------------------------------------------------------------------------------------------------
Cumulative gap as a % of earning assets .42% (2.15)% (2.26)% 1.82% -- --
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE> 15
fies the level of interest rate exposure arising from several sources, namely
option risk, basis risk and gap risk. Option risk exists in the form of options
(including caps and floors) embedded in certain products. These options permit
the customer (either a loan customer or a depositor) to take advantage of
changes in interest rates without penalty. Examples include floating-rate loans
that contain an interest rate cap, fixed-rate loans that do not contain
prepayment penalties and deposits that are withdrawable on demand. Basis risk
refers to floating-rate assets and floating-rate liabilities that reprice
simultaneously, but are tied to different indices. The risk arises when one
index does not move consistently with another. Gap risk is the risk that assets,
liabilities or related interest rate swaps, caps and floors will mature in
different time frames. For example, floating-rate loans that reprice monthly may
be funded with fixed-rate certificates of deposit that mature in one year.
To manage interest rate risk, management regularly utilizes Key's securities
portfolios, issues debt, and securitizes and sells certain consumer loans. In
addition, management has utilized interest rate swaps, caps and floors to manage
interest rate risk by modifying the repricing or maturity characteristics of
specified on-balance sheet assets and liabilities. Instruments used for this
purpose are designated as portfolio swaps, caps and floors. The decision to use
these instruments versus the on-balance sheet alternatives mentioned above
depends on various factors, including the mix and cost of funding sources,
liquidity and capital requirements. Further details pertaining to portfolio
swaps, caps and floors are included in Note 17, Financial Instruments with
Off-Balance Sheet Risk, beginning on page 74.
Portfolio Swaps, Caps and Floors
- --------------------------------
As shown in Note 17, the estimated fair value of Key's portfolio swaps increased
$94 million during 1997 from a fair value of $8 million at December 31, 1996.
The increase in fair value over the past year reflected the financial markets'
expectations, as measured by the forward yield curve, for a continuation of the
current low-interest rate environment and the fact that Key's swap portfolio is
primarily in a receive fixed position. Swaps with a notional amount of $220
million were terminated during 1997, resulting in no deferred gain or loss.
Further information pertaining to the balance and remaining amortization period
of Key's deferred swap gains and losses at December 31, 1997, is also presented
in Note 17. Each swap termination was made in response to a unique set of
circumstances and for various reasons; however, the decision to terminate any
swap contract is integrated strategically with asset and liability management
and other appropriate processes. During 1997, Key increased its use of portfolio
caps in response to its reduced sensitivity to potential declines in interest
rates and the heavier reliance placed on purchased funds to support earning
asset growth. These instruments were used primarily to protect against the
adverse impact that a future rise in interest rates could have on variable rate
short-term borrowings, while having no impact in the event of a decline in
rates. Portfolio swaps, caps and floors activity for each of the last three
years is summarized in Figure 11.
A summary of the notional and fair values of portfolio swaps, caps and floors by
interest rate management strategy is presented in Figure 12. The fair value at
any given date represents the estimated income (if positive) or cost (if
negative) that would be recognized if the portfolios were to be liquidated at
that date. However, because these instru-
FIGURE 11 PORTFOLIO SWAPS, CAPS AND FLOORS ACTIVITY
<TABLE>
<CAPTION>
Receive Fixed
--------------------------
TOTAL CAPS
INDEXED PAY FIXED- BASIS PORTFOLIO AND
in millions AMORTIZING CONVENTIONAL CONVENTIONAL SWAPS SWAPS FLOORS TOTAL
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 $5,786 $3,010 $1,457 $ 200 $10,453 $ 3 $10,456
Additions 2,010 217 2,030 -- 4,257 100 4,357
Maturities -- 605 1,075 200 1,880 -- 1,880
Terminations 1,300 125 -- -- 1,425 -- 1,425
Amortization 296 -- -- -- 296 -- 296
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 6,200 2,497 2,412 -- 11,109 103 11,212
Additions -- 1,341 2,232 400 3,973 870 4,843
Maturities -- 133 732 -- 865 -- 865
Terminations -- 200 600 -- 800 -- 800
Amortization 1,122 -- -- -- 1,122 -- 1,122
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 5,078 3,505 3,312 400 12,295 973 13,268
Additions -- 376 1,578 1,110 3,064 2,625 5,689
Maturities -- 255 1,700 400 2,355 203 2,558
Terminations 20 -- 200 -- 220 -- 220
Amortization 1,609 -- -- -- 1,609 -- 1,609
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $3,449 $3,626 $2,990 $1,110 $11,175 $3,395 $14,570
====== ====== ====== ====== ======= ====== =======
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 16
ments are used to alter the repricing or maturity characteristics of specific
assets and liabilities, the net unrealized gains and losses are not recognized
in earnings. Rather, interest from these swaps, caps and floors is recognized on
an accrual basis as an adjustment of the interest income or expense from the
asset or liability being managed.
FIGURE 12 PORTFOLIO SWAPS, CAPS AND FLOORS BY INTEREST RATE MANAGEMENT STRATEGY
<TABLE>
<CAPTION>
December 31, 1997 1996
------------------------ -----------------------
NOTIONAL FAIR NOTIONAL FAIR
in millions AMOUNT VALUE AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Convert variable rate loans to fixed $ 4,630 $ 25 $ 6,443 $(20)
Convert fixed rate loans to variable 160 (1) -- --
Convert variable rate deposits and short-term
borrowings to fixed 2,080 (4) 3,082 (4)
Convert variable rate long-term debt to fixed 750 (2) 230 (1)
Convert fixed rate long-term debt to variable 2,445 87 2,140 33
Basis swaps -- foreign currency 280 (3) -- --
Basis swaps -- other 830 -- 400 --
- -------------------------------------------------------------------------------------------------------------------------------
Total portfolio swaps 11,175 102 12,295 8
Modify characteristics of variable rate short-term borrowings 2,580 2 570 5
Modify characteristics of variable rate long-term debt 565 10 403 3
Modify characteristics of capital securities remarketing 250 (15) -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total portfolio caps and floors 3,395 (3) 973 8
- -------------------------------------------------------------------------------------------------------------------------------
Total portfolio swaps, caps and floors $14,570 $ 99 $13,268 $16
======= ==== ======= ===
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The expected average maturities of the portfolio swaps, caps and floors at
December 31, 1997, are summarized in Figure 13.
FIGURE 13 EXPECTED AVERAGE MATURITIES OF PORTFOLIO SWAPS, CAPS AND FLOORS
<TABLE>
<CAPTION>
DECEMBER 31, 1997 RECEIVE FIXED
-------------------------- TOTAL CAPS
INDEXED PAY FIXED- BASIS PORTFOLIO AND
in millions AMORTIZING CONVENTIONAL CONVENTIONAL SWAPS SWAPS FLOORS TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mature in one year or less -- $ 316 $1,630 $ 830 $ 2,776 $ 470 $ 3,246
Mature after one through five years $3,449 872 1,360 280 5,961 2,925 8,886
Mature after five through ten years -- 2,438 -- -- 2,438 -- 2,438
Mature after ten years -- -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total portfolio swaps, caps and floors $3,449 $3,626 $2,990 $1,110 $11,175 $3,395 $14,570
====== ====== ====== ====== ======= ====== =======
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
In June 1996, the Financial Accounting Standards Board ("FASB") issued an
Exposure Draft of a proposed Statement of Financial Accounting Standards
("SFAS"), "Accounting for Derivatives and Similar Financial Instruments and for
Hedging Activities." If adopted in its present form, an effect of this SFAS
would be to disqualify the use of hedge accounting for indexed amortizing swaps
currently accounted for by Key as hedging instruments and, therefore, would
likely alter Key's use of such instruments in the future. It is not currently
practicable to estimate the potential effects of any final standard, which may
differ from its present form.
TRADING PORTFOLIO
Key's trading portfolio includes interest rate swap contracts entered into to
accommodate the needs of its customers and other positions with third parties
that are intended to mitigate the interest rate risk of the customer positions,
foreign exchange contracts entered into to accommodate the needs of its
customers, and financial assets and liabilities (trading positions) included in
short-term investments and other liabilities, respectively, on the balance
sheet. Further information pertaining to the off-balance sheet contracts is
included in Note 17, Financial Instruments with Off-Balance Sheet Risk,
beginning on page 74.
During the second half of 1997, Key began using a value at risk ("VAR") model to
estimate the adverse effect of changes in interest and foreign exchange rates on
the fair value of its trading portfolio. VAR uses statistical methods to
estimate the maximum potential one-day loss with a 95% confidence level. At year
end, Key's aggregate daily VAR was less than $.8 million and averaged less than
$.5 million for the second half of 1997. VAR augments other controls used by Key
to mitigate the market risk exposure of its trading
40
<PAGE> 17
portfolio. These controls are established by Key's Financial Markets Committee
and include, in addition to VAR, loss and position equivalent limits which are
based on the level of activity and volatility of trading products and market
liquidity.
NONINTEREST INCOME
Noninterest income totaled $1.3 billion in 1997, up $219 million, or 20%, from
the prior year. Included in 1997 results were $151 million in bank and branch
divestiture gains and a $36 million loss on the securitization of prime credit
automobile loans with low returns on equity. In 1996, results included an $11
million gain from the sale of an out-of-franchise credit card portfolio and an
$8 million gain from the sale of a Florida savings bank. Excluding these items,
noninterest income for 1997 was up $123 million, or 12%, from the prior year. In
1995, noninterest income included net securities losses of $49 million
recognized in connection with a balance sheet reconfiguration initiated late in
1994 to reduce exposure to changes in interest rates and a positive accounting
adjustment of $12 million for better-than-expected performance of education loan
securitizations completed in prior periods. Excluding, for comparative purposes,
all securities transactions, the accounting adjustment and the 1996 gains
referred to above, noninterest income in 1996 increased $105 million, or 11%,
relative to the prior year.
The improvement in noninterest income in 1997 reflected growth across all major
categories with the exception of loan securitization income. As shown in Figure
14, increases from the prior year came principally from investment banking
income, corporate owned life insurance, trust and asset management income,
insurance and brokerage income and other income.
In 1997, the largest contribution to the increase in Key's core noninterest
income came from the investment banking business, conducted primarily through
KCP whose revenues are derived from various capital markets activities (primary
among which are trading, derivatives and foreign exchange), corporate finance
fees and gains recognized in connection with mezzanine and equity capital
investments. Strong growth in investment banking income was also the primary
contributor to the increase in noninterest income in the prior year.
Factors contributing to the increase in income from corporate owned life
insurance in both 1997 and 1996 included improved investment performance,
expanded coverage and a higher level of death benefits.
Trust and asset management income, including fees associated with investment
advisory services, continued to be a major source of noninterest income. In
1997, the increase in trust and asset management income resulted from continued
strong performance of both the stock and bond markets, new business and a
substantial increase in income from securities lending activities. A strong
market and new business also contributed to the 1996 increase, along with the
introduction of an array of new products. The growth which occurred during 1996
was partially offset by the effect of the December 1995 sale of Key's bond
servicing business. At December 31, 1997, Key, through its bank, trust and
registered investment advisory subsidiaries, had assets under discretionary
management (excluding corporate trust assets) of $60 billion, compared with $50
billion at the end of 1996. Fees from investment advisory services accounted for
approximately 27% and 26% of Key's total trust and asset management income in
1997 and 1996, respectively. Additional detail pertaining to trust income and
assets is presented in Figure 15.
In both 1997 and 1996, the growth in insurance and brokerage income was due
primarily to increases in income from annuity sales and brokerage commissions.
Brokerage income, the largest of the two components, rose by $12 mil-
FIGURE 14 NONINTEREST INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, CHANGE 1997 VS 1996
--------------------------
dollars in millions 1997 1996 1995 AMOUNT PERCENT
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Service charges on deposit accounts $ 299 $ 293 $278 $ 6 2.0%
Trust and asset management income 266 247 232 19 7.7
Investment banking income 119 73 39 46 63.0
Credit card fees 96 93 85 3 3.2
Insurance and brokerage income 88 70 61 18 25.7
Corporate owned life insurance 85 58 30 27 46.6
Loan securitization income (loss) (12) 62 66 (74) N/M
Net securities gains (losses) 1 1 (41) -- --
Gains from sales of branches/subsidiaries 151 8 -- 143 N/M
Other income:
Letter of credit fees 21 16 15 5 31.3
Mortgage banking income 6 22 41 (16) (72.7)
Miscellaneous income 186 144 127 42 29.2
- ---------------------------------------------------------------------------------------------------------------------------------
Total other income 213 182 183 31 17.0
- ---------------------------------------------------------------------------------------------------------------------------------
Total noninterest income $1,306 $1,087 $933 $219 20.1%
====== ====== ==== ==== ====
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
N/M = Not Meaningful
41
<PAGE> 18
FIGURE 15 TRUST AND ASSET MANAGEMENT
<TABLE>
<CAPTION>
CHANGE 1997 VS 1996
-------------------------
dollars in millions 1997 1996 1995 AMOUNT PERCENT
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
Personal asset management and custody fees $145 $147 $136 $(2) (1.4)%
Institutional asset management and custody fees 75 64 57 11 17.2
Bond services 6 13 20 (7) (53.8)
All other fees 40 23 19 17 73.9
- ----------------------------------------------------------------------------------------------------------------------------------
Total trust and asset management income $266 $247 $232 $19 7.7%
==== ==== ==== ===
dollars in billions
- ----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
Discretionary assets $ 60 $50 $47 $10 20.0%
Non-discretionary assets 48 46 34 2 4.3
- ----------------------------------------------------------------------------------------------------------------------------------
Total trust assets $108 $96 $81 $12 12.5%
==== === === ===
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
lion, or 28%, to $54 million in 1997, following an increase of more than 40% in
1996. In each year, the largest contribution to the brokerage category came from
mutual funds.
Excluding the 1996 gain from the credit card sale, other noninterest income in
1997 was up $42 million. This included increases in letter of credit fees, as
well as commissions and fees related to electronic banking and various other
services included in the "Miscellaneous" category. In both 1997 and 1996, the
growth in other noninterest income was moderated by a decline in mortgage
banking income, reflecting Key's reduced focus on the mortgage loan origination
business. The lower level of mortgage banking income in 1996 also reflected the
impact of the March 1995 sale of the residential mortgage loan servicing
business. This transaction, as well as the sale of the Florida savings bank
referred to previously, are more fully disclosed in Note 3, Mergers,
Acquisitions and Divestitures, beginning on page 63.
Key has maintained a strategy of securitizing and/or selling education loans,
automobile loans and other loans which do not meet certain return on equity,
credit or other internal standards. On occasion this strategy results in a loss
recorded in connection with removing such assets from Key's balance sheet. In
1997, the growth in total noninterest income was moderated by securitization
losses of $12 million, following loan securitization income of $62 million
recorded in 1996. The year-to-year change resulted from several factors,
including a $36 million loss recorded in the fourth quarter of 1997 on the
securitization and sale of $949 million of prime credit automobile loans with
low returns on equity. A primary factor contributing to the decrease in the
level of loan securitization income was the impact of the accounting change
brought about by the January 1, 1997, adoption of SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
This new accounting standard served to reduce loan securitization income by
reclassifying a portion of such revenue to interest income and by deferring an
additional portion which is expected to be recognized as interest income over
the life of the respective securitizations. SFAS No. 125 is discussed in greater
detail in Note 1, Summary of Significant Accounting Policies, beginning on page
60. Additional information pertaining to the type and volume of securitized
loans which are either administered or serviced by Key and not recorded on its
balance sheet is included in the Loans section, beginning on page 44.
NONINTEREST EXPENSE
Noninterest expense, as shown in Figure 16, totaled $2.4 billion in 1997, up $29
million, or a slight 1%, from the 1996 level. Included in noninterest expense
for 1997 were a $50 million charge recorded in connection with actions taken to
vacate and/or dispose of certain properties or to alter certain leasing
arrangements in response to Key's nationwide banking and related centralization
efforts and $49 million of distributions accrued on capital securities
(tax-advantaged preferred securities) issued by Key during the second quarter of
1997 and the fourth quarter of the prior year. These securities are more fully
described in Note 9, Capital Securities, beginning on page 67. Also included in
noninterest expense for 1997 was $17 million of expense incurred in connection
with efforts being undertaken by Key to modify computer information systems to
be Year 2000 compliant. As of December 31, 1997, Key had recognized
approximately $18 million of the estimated $40 million of expense that it
expects to incur (primarily for internal and external programmers) to
substantially complete this project by the end of 1998. Further information
pertaining to the Year 2000 issue is included on page 44. In 1996, noninterest
expense included a $100 million restructuring charge recorded in connection with
strategic actions subsequently taken in Key's transformation to a nationwide
bank-based financial services company in 1997, a one-time charge of $17 million
to provide for an assessment mandated by legislation passed by Congress on
September 30, 1996, to recapitalize the SAIF and $3 million of distributions
accrued on capital securities. Excluding the above items, core noninterest
expense for 1997 was $25 million, or 1%, below the prior year. Similarly
adjusting 1995 results for $33 million of write-offs of certain obsolete
software previously devel-
42
<PAGE> 19
oped for internal use and a sublease loss, noninterest expense for 1996 was up
$65 million, or 3%, from 1995.
The decrease in core noninterest expense in 1997 was due in large part to the
progress made with respect to the restructuring efforts announced in November
1996 which center around the formation of a single community bank (completed
June 30, 1997, for all banks with the exception of KeyBank New Hampshire), as
well as the implementation of expense control initiatives. Specifically, the
1997 improvement reflected reductions in professional fees, Federal Deposit
Insurance Corporation ("FDIC") insurance assessments and personnel expense of
$23 million, $19 million and $9 million, respectively. These reductions were
offset in part by the $32 million impact of the Leasetec and Champion
acquisitions, incentive compensation related to various investment banking
activities and higher costs for equipment.
In 1997, the decrease in personnel expense, the largest category of noninterest
expense, was due primarily to reduced staff, as full-time equivalent employees
totaled 24,595 at December 31, 1997, down from 27,689 at December 31, 1996, and
29,563 at December 31, 1995. This reflected the impact of Key's restructuring
and expense control initiatives (including branch mergers). The $75 million
increase in 1996 resulted from the impact of normal annual merit increases
(which take effect in April for the majority of Key's employees), an increase in
employee benefits expense, higher costs associated with various incentive
programs and the overall impact of additional costs associated with the
implementation of strategic initiatives.
Also contributing to the higher level of core noninterest expense in 1996 were
the growth in marketing expense and the amortization of intangibles. The
increase in marketing expense was due largely to incremental costs related to
strategic efforts aimed at strengthening consumer identification of the KeyBank
brand name as well as other marketing activities, while the higher level of
amortization related to intangibles reflected the impact of acquisitions
consummated during 1996 and 1995. These increases were substantially offset,
however, by the effect of the elimination of the Bank Insurance Fund ("BIF")
insurance premium rate for well-capitalized banks (including all of Key's
banks), which took effect January 1, 1996. The SAIF rate was maintained at $.23
per $100 of insured deposits during 1995 and in 1996 through September 30. As a
result of these changes, after excluding the impact of the one-time SAIF
assessment referred to previously, the cost of deposit insurance in 1996
decreased $51 million, or 86%. In accordance with the September 1996
legislation, effective January 1, 1997, the FDIC requires all insured
institutions to service bonds issued in the late 1980s to fund government
assistance payments made necessary by a higher volume of insolvencies in the
thrift industry. The servicing is in the amount of an annual fee equal to $.0130
per $100 of BIF-insured deposits and $.0648 per $100 of SAIF-insured deposits.
These rates were reduced slightly to $.0126 and $.0630, respectively, for the
second half of 1997.
FIGURE 16 NONINTEREST EXPENSE
<TABLE>
<CAPTION>
Year ended December 31, Change 1997 vs 1996
---------------------------
dollars in millions 1997 1996 1995 AMOUNT PERCENT
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Personnel $1,181 $1,190 $1,115 $ (9) (.8)%
Net occupancy 222 219 218 3 1.4
Equipment 177 161 156 16 9.9
Amortization of intangibles 87 88 77 (1) (1.1)
Marketing 86 88 71 (2) (2.3)
Professional fees 47 70 73 (23) (32.9)
Restructuring charge -- 100 -- (100) (100.0)
Other expense:
Distributions on capital securities 49 3 -- 46 N/M
Equity- and gross receipts-based taxes 36 35 42 1 2.9
OREO expense (net of income of $3, $4, $6) (1) 3 (1) (4) N/M
FDIC insurance assessments 6 25 59 (19) (76.0)
Real estate disposition reserve 50 -- -- 50 N/M
Year 2000 expense 17 1 -- 16 N/M
Miscellaneous expense 478 481 502 (3) (.6)
- ----------------------------------------------------------------------------------------------------------------------------------
Total other expense 635 548 602 87 15.9
- ----------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense $2,435 $2,464 $2,312 $ (29) (1.2)%
====== ====== ====== =====
Full-time equivalent employees at year end 24,595 27,689 29,563
Efficiency ratio(1) 57.50% 60.84% 63.03%
Overhead ratio(2) 39.64 45.46 49.66
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1 Calculated as noninterest expense (excluding certain nonrecurring charges and
distributions on capital securities) divided by taxable-equivalent net
interest income plus noninterest income (excluding net securities
transactions and bank and branch divestitures).
2 Calculated as noninterest expense (excluding certain nonrecurring charges and
distributions on capital securities) less noninterest income (excluding net
securities transactions and bank and branch divestitures) divided by
taxable-equivalent net interest income.
N/M = Not meaningful
43
<PAGE> 20
The efficiency ratio, which provides a measure of the extent to which recurring
revenues are used to pay operating expenses, improved to 57.50% for 1997, from
60.84% in 1996 and 63.03% in 1995. The substantial improvement in 1997 reflects
the increasing benefits and effectiveness of Key's expense control strategies
and growth in revenues. Excluding the impact of the Champion and Leasetec
acquisitions, the efficiency ratio for 1997 was 57.25% and improved to 55.65%
for the fourth quarter. Included in other expense are equity- and gross
receipts-based taxes which are assessed in lieu of an income tax in certain
states in which Key operates. These taxes, which are shown in Figure 16,
represented 89, 91 and 115 basis points of Key's efficiency ratio for 1997, 1996
and 1995, respectively. The extent to which such taxes impact the level of
noninterest expense will vary among companies based on the geographic locations
in which they conduct their business.
Year 2000
- ---------
The Year 2000 issue refers to computer systems that were originally programmed
using two digits rather than four digits to identify the applicable year. When
the year 2000 occurs, these systems could interpret the year as 1900 rather than
2000. Unless hardware, system software and applications are corrected to be Year
2000 compliant, computers and the devices they control could generate
miscalculations and create operational problems. Various systems could be
affected ranging from complex computer systems to telephone systems, ATMs and
elevators.
To address this issue, in 1995, Key developed a comprehensive plan, including
the formation of a team consisting of internal resources and third-party
experts. Key prioritized the various systems (including those maintained by its
business partners and suppliers) that could be affected by the Year 2000, and
efforts to ensure compliance of core systems deemed critical to Key have been
accelerated. Key is closely monitoring the efforts of its business partners and
suppliers involved in addressing the potential problem and expects to complete
substantially all of the necessary work by the end of 1998, allowing 1999 as a
year of final testing and refinement. As of December 31, 1997, compliance
efforts had been completed for approximately 25% of the core systems identified.
Key believes the efforts described above will ensure its systems are adequately
prepared for the Year 2000.
The cost of the project and timing of its implementation are based on
management's best estimates, which were derived using numerous assumptions about
future events, including the continued availability of certain resources and
other factors. However, there can be no guarantee that these estimates will be
achieved, and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the efforts of business partners and suppliers, the availability and
cost of trained personnel, the ability to locate and correct all relevant system
codes, and similar uncertainties.
INCOME TAXES
The provision for income taxes for 1997 was $426 million compared with $360
million in 1996 and $368 million [before the extraordinary net gain resulting
from the sales of KeyCorp Mortgage, Inc. ("KMI") and Schaenen Wood] in 1995. The
effective income tax rate (provision for income taxes as a percentage of income
before income taxes) was 31.7% in 1997, 31.5% in 1996 and 31.8% in 1995. The
effective income tax rate remains below the statutory Federal rate of 35% due
primarily to continued investment in tax-advantaged assets (such as tax-exempt
securities and corporate owned life insurance) and the recognition of credits
associated with investments in low-income housing projects.
FINANCIAL CONDITION
LOANS
As shown in Figure 17, at December 31, 1997, total loans outstanding were $53.4
billion, up from $49.2 billion at December 31, 1996, and $48.3 billion at
December 31, 1995.
The $4.2 billion, or 8%, increase in loans outstanding from the December 31,
1996, level was due primarily to internal growth, but also included the net
impact of acquisitions, sales and divestitures. During the third quarter of
1997, Key acquired Leasetec and Champion, which added total loans outstanding of
approximately $1.0 billion and $225 million, respectively. The sales and
divestitures which occurred during 1997 and 1996 are summarized in Figure 18 and
included the impact of planned bank and branch divestitures, as well as Key's
continued strategy of securitizing and/or selling education loans, automobile
loans and other loans which do not meet certain return on equity, credit or
other internal standards. Key generally sells or securitizes education loans
when a borrower enters repayment status. In addition, all non-prime automobile
loans and substantially all home equity loans originated by Champion are
targeted for securitization. In addition to bank and branch divestitures,
activity since December 31, 1996, included the sale of $1.1 billion of education
loans (of which $744 million was associated with securitizations), the sale of
automobile loans totaling $1.7 billion and the sale of $249 million of home
equity loans. All of the automobile loan sales and $205 million of the home
equity loan sales were associated with securitizations. Included in the
automobile loan sales was $949 million of prime credit loans with low returns on
equity. This particular portfolio was sold in keeping with Key's strategy of
divesting assets which do not support its achievement of its return on equity
objective. Also moderating the increase in total loans over the past year was
the sale of $365 million of out-of-franchise credit card receivables which had
an historically high level of delinquency. In 1998, management will continue to
explore opportunities for sales and/or other arrangements with respect to its
credit card and certain other portfolios in efforts to improve financial returns
and manage credit risk.
44
<PAGE> 21
Excluding the net impact of acquisitions, sales and divestitures, loan
portfolios targeted for growth (which exclude one-to-four family mortgages and
loans held for sale) increased $4.9 billion, or 12%, since December 31, 1996.
The largest improvement came from commercial loans which contributed $2.7
billion to the increase, due primarily to higher levels of commercial, financial
and agricultural loans (up $1.9 billion) and real estate-construction loans (up
$573 million). Additionally, consumer loans rose by $2.2 billion, and included
increases of $1.4 billion in installment loans and $675 million in home equity
loans. The strong growth in loans during 1997 reflected the general strength of
the economy, as well as targeted efforts to increase commercial loan volumes as
mentioned in the Key Corporate Capital section of the Line of Business Results
discussion on page 31.
FIGURE 17 COMPOSITION OF LOANS
<TABLE>
<CAPTION>
December 31, 1997 1996 1995
----------------------- ---------------------- ------------------------
dollars in millions AMOUNT % OF TOTAL AMOUNT % OF TOTAL AMOUNT % OF TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMERCIAL
Commercial, financial and agricultural $14,023 26.3% $12,309 25.0% $11,655 24.1%
Real estate-- commercial mortgage 6,952 13.0 7,151 14.5 7,254 15.0
Real estate-- construction 2,231 4.2 1,666 3.4 1,520 3.1
Commercial lease financing 3,990 7.5 2,671 5.4 2,248 4.7
- ---------------------------------------------------------------------------------------------------------------------------------
Total commercial loans 27,196 51.0 23,797 48.3 22,677 46.9
CONSUMER
Real estate-residential mortgage 6,204 11.6 6,229 12.7 8,291 17.2
Home equity 5,421 10.2 4,793 9.7 3,886 8.0
Credit card 1,521 2.8 1,799 3.7 1,564 3.2
Consumer-- direct 2,188 4.1 2,245 4.6 1,934 4.0
Consumer-- indirect 7,989 15.0 8,062 16.4 7,258 15.1
- ---------------------------------------------------------------------------------------------------------------------------------
Total consumer loans 23,323 43.7 23,128 47.1 22,933 47.5
LOANS HELD FOR SALE 2,861 5.3 2,310 4.6 2,722 5.6
- ---------------------------------------------------------------------------------------------------------------------------------
Total $53,380 100.0% $49,235 100.0% $48,332 100.0%
======= ===== ======= ===== ======= =====
- ---------------------------------------------------------------------------------------------------------------------------------
1994 1993
----------------------- ------------------------
AMOUNT % OF TOTAL AMOUNT % OF TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL
Commercial, financial and agricultural $10,288 22.1% $ 9,029 21.8%
Real estate-- commercial mortgage 6,775 14.5 6,228 15.0
Real estate-- construction 1,287 2.8 1,161 2.8
Commercial lease financing 1,742 3.7 1,702 4.1
- ---------------------------------------------------------------------------------------------------------------------------------
Total commercial loans 20,092 43.1 18,120 43.7
CONSUMER
Real estate-residential mortgage 9,872 21.2 11,026 26.6
Home equity 3,695 7.9 See note(1) --
Credit card 1,419 3.0 1,429 3.5
Consumer-- direct 2,447 5.3 See note(1) --
Consumer-- indirect 6,882 14.8 7,847 19.0
- ---------------------------------------------------------------------------------------------------------------------------------
Total consumer loans 24,315 52.2 20,302 49.1
LOANS HELD FOR SALE 2,172 4.7 2,974 7.2
- ---------------------------------------------------------------------------------------------------------------------------------
Total $46,579 100.0% $41,396 100.0%
======= ===== ======= =====
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1 For 1993, home equity loans are included in real estate-residential mortgage
loans and consumer-direct loans are included in consumer-indirect loans.
45
<PAGE> 22
FIGURE 18 LOANS SOLD AND DIVESTED
<TABLE>
<CAPTION>
CREDIT CARD
in millions EDUCATION AUTOMOBILE HOME EQUITY MORTGAGE RECEIVABLES ALL OTHER TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
1997
- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
First quarter $ 31 $ 456 -- -- $ 41 -- $ 528
Second quarter 52 103 -- -- -- -- 155
Third quarter 100 112 $ 205 -- 324 $ 491(1) 1,232
Fourth quarter 879 1,046 44 -- -- 147(1) 2,116
- ---------------------------------------------------------------------------------------------------------------------------------
Total $1,062 $1,717 $ 249 -- $ 365 $ 638 $4,031
====== ====== ====== ====== ====== ======
1996
- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
First quarter $ 44 $ 38 -- $ 500 -- -- $ 582
Second quarter 99 47 -- 762(2) -- -- 908
Third quarter 464 56 -- -- $ 101 -- 621
Fourth quarter 403 71 -- -- -- -- 474
- ---------------------------------------------------------------------------------------------------------------------------------
Total $1,010 $ 212 -- $1,262 $ 101 -- $2,585
====== ====== ====== ====== ======
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
1 Part of branch divestitures, including the sale of KeyBank National Association (Wyoming) in the third quarter.
2 Residential mortgage loans divested as part of the Society First Federal Savings Bank transaction.
</TABLE>
Shown in Figure 19 are loans which have been securitized/sold and are either
administered or serviced by Key, but not recorded on its balance sheet. Income
recognized in connection with such transactions is derived from two sources.
Noninterest income earned from servicing or administering the loans is recorded
as loan securitization income, while income earned on assets subject to
prepayment, recorded in connection with securitizations and accounted for like
investments in interest-only strip securities, is recorded as interest income on
securities available for sale.
The maturities and sensitivity of certain loans to changes in interest rates are
summarized in Figure 20. Floating and adjustable rates are those which vary in
relation to some other interest rate (such as the base lending rate) or some
other variable index which may change during the term of the loan. Predetermined
interest rates are those which are either fixed or will change during the term
of the loan on a pre-established basis. As shown in the figure, at December 31,
1997, approximately 46% of these loans were scheduled to mature within one year,
and loans with maturities greater than one year included $6.7 billion with
floating or adjustable rates and $9.2 billion with predetermined rates.
FIGURE 19 LOANS SECURITIZED/SOLD
AND ADMINISTERED OR SERVICED
<TABLE>
<CAPTION>
DECEMBER 31,
in millions 1997 1996 1995
- --------------------------------------------------------------
<S> <C> <C> <C>
Educational loans $2,611 $2,089 $1,605
Automobile loans 1,601 386 414
Home equity loans 735 -- --
- --------------------------------------------------------------
Total $4,947 $2,475 $2,019
====== ====== ======
- --------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FIGURE 20 MATURITIES AND SENSITIVITY OF CERTAIN LOANS TO CHANGES IN INTEREST RATES
DECEMBER 31, 1997 WITHIN 1-5 OVER
in millions 1 YEAR YEARS 5 YEARS TOTAL
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 8,854 $ 3,280 $ 1,889 $14,023
Real estate -- construction 1,208 846 177 2,231
Real estate -- residential & commercial mortgage 3,426 3,253 6,477 13,156
- ---------------------------------------------------------------------------------------------------------------
$13,488 $ 7,379 $ 8,543 $29,410
======= ======= ======= =======
Loans with floating or adjustable rates $ 3,774 $ 2,974
Loans with predetermined interest rates 3,605 5,569
- ---------------------------------------------------------------------------------------------------------------
$ 7,379 $ 8,543
======= =======
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
SECURITIES
At December 31, 1997, the securities portfolio totaled $8.9 billion, consisting
of $7.7 billion of securities available for sale and $1.2 billion of investment
securities. This compares with a total portfolio of $9.3 billion, comprised of
$7.7 billion of securities available for sale and $1.6 billion of investment
securities, at December 31, 1996. The composition of the two securities
portfolios by type of security, as of each of these respective dates, is
presented in Note 4, Securities, presented on page 64. Certain information
pertaining to the
46
<PAGE> 23
composition, yields, and maturities of the securities available for sale and
investment securities portfolios is presented in Figures 21 and 22,
respectively.
At December 31, 1997, Key had $7.0 billion invested in collateralized mortgage
obligations ("CMO") and other mortgage-backed securities within the
available-for-sale portfolio, compared with $6.7 billion at December 31, 1996. A
CMO is a mortgage-backed security that is comprised of classes of bonds created
by prioritizing the cash flows from the underlying mortgage pool in order to
meet different objectives of investors. Other mortgage-backed securities depend
on the underlying pool of mortgage loans to provide a cash flow "pass-through"
of principal and interest, without prioritization in classes. Key had $4.1
billion invested in CMO securities at December 31, 1997, compared with $3.1
billion at December 31, 1996. The increase in CMO securities in 1997
<TABLE>
<CAPTION>
FIGURE 21 SECURITIES AVAILABLE FOR SALE
OTHER
U.S. TREASURY, STATES AND COLLATERALIZED MORTGAGE-
AGENCIES AND POLITICAL MORTGAGE BACKED
dollars in millions CORPORATIONS SUBDIVISIONS OBLIGATIONS(1) SECURITIES(1)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Maturity:
One year or less $ 63 $ 2 $ 704 $ 22
After one through five years 99 6 3,265 1,326
After five through ten years 16 37 82 1,442
After ten years 26 7 -- 161
- ----------------------------------------------------------------------------------------------------
Fair value $ 204 $ 52 $4,051 $2,951
Amortized cost 202 52 4,045 2,908
Weighted average yield 6.81% 7.76% 6.76% 7.34%
Weighted average maturity 3.5 years 7.5 years 2.8 years 5.9 years
- ----------------------------------------------------------------------------------------------------
DECEMBER 31, 1996
Fair value $ 859 $ 36 $3,149 $3,579
Amortized cost 857 36 3,169 3,570
- ----------------------------------------------------------------------------------------------------
DECEMBER 31, 1995
Fair value $1,201 $ 26 $2,751 $3,901
Amortized cost 1,176 25 2,767 3,850
- ----------------------------------------------------------------------------------------------------
RESIDUAL WEIGHTED
INTERESTS IN OTHER AVERAGE
dollars in millions SECURITIZATIONS SECURITIES TOTAL YIELD(2)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Maturity:
One year or less -- $ 13 $ 804 6.54%
After one through five years $ 165 20 4,881 7.11
After five through ten years 209 17 1,803 7.72
After ten years -- 26(3) 220 7.00
- ----------------------------------------------------------------------------------------------
Fair value $ 374 $ 76 $7,708 --
Amortized cost 418 75 7,700 7.19%
Weighted average yield 10.98% 4.65% 7.19% --
Weighted average maturity 5.5 years 4.6 years 4.2 years --
- ----------------------------------------------------------------------------------------------
DECEMBER 31, 1996
Fair value -- $ 105 $7,728 --
Amortized cost -- 104 7,736 6.83%
- ----------------------------------------------------------------------------------------------
DECEMBER 31, 1995
Fair value -- $ 181 $8,060 --
Amortized cost -- 176 7,994 6.86%
- --------------------------------------------------------------------------------------------
<FN>
1 Maturity is based upon expected average lives rather than contractual terms.
2 Weighted average yields are calculated on the basis of amortized cost. Such yields have been adjusted to a taxable-equivalent
basis using the statutory Federal income tax rate of 35%.
3 Includes equity securities with no stated maturity.
</TABLE>
<TABLE>
<CAPTION>
FIGURE 22 INVESTMENT SECURITIES
U.S. TREASURY, STATES AND WEIGHTED
AGENCIES AND POLITICAL OTHER AVERAGE
dollars in millions CORPORATIONS SUBDIVISIONS SECURITIES TOTAL YIELD(1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1997
Maturity:
One year or less -- $ 336 -- $ 336 7.25%
After one through five years -- 437 $ 102 539 8.16
After five through ten years -- 161 -- 161 9.92
After ten years -- 39 155 194 4.66
- ---------------------------------------------------------------------------------------------------------------------------
Amortized cost -- $ 973 $ 257 $1,230 7.59%
Fair value -- 1,005 257 1,262 --
Weighted average yield -- 8.41% 4.49% 7.59% --
Weighted average maturity -- 3.1 years 2.5 years 3.0 years --
- ---------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996
Amortized cost -- $1,401 $ 200 $1,601 7.76%
Fair value -- 1,437 200 1,637 --
- ---------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1995
Amortized cost $ 5 $1,424 $ 259 $1,688 8.34%
Fair value 5 1,474 259 1,738 --
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
1 Weighted average yields are calculated on the basis of amortized cost. Such yields have been adjusted to a
taxable-equivalent basis using the statutory Federal income tax rate of 35%.
</TABLE>
47
<PAGE> 24
was primarily the result of programs instituted to better manage the collateral
requirements of Key's affiliate banks by utilizing CMOs in lieu of
lower-yielding securities with shorter maturities. The CMO securities held by
Key are primarily shorter-maturity class bonds that were structured to have more
predictable cash flows by being less sensitive to prepayments during periods of
changing interest rates than other longer-term class bonds similarly available.
Key had $2.9 billion invested in other mortgage-backed securities at December
31, 1997. At December 31, 1997, substantially all of the mortgage-backed
securities (including CMOs) held by Key were issued or backed by Federal
agencies.
ASSET QUALITY
Key has established groups dedicated to evaluating and monitoring the level of
risk in its credit-related assets; formulating underwriting standards and
guidelines for line management; developing commercial and consumer credit
policies and systems; establishing credit-related concentration limits;
reviewing loans, leases and other corporate assets to evaluate credit quality;
and reviewing the adequacy of the allowance for loan losses ("Allowance").
Geographic diversity throughout Key is a significant factor in managing credit
risk.
The allocation of Key's Allowance by loan type at December 31 is shown in Figure
23. Management has developed methodologies designed to assess the adequacy of
the Allowance. The Allowance allocation methodologies applied at Key focus on
changes in the size and character of the loan portfolio, changes in the levels
of impaired and other nonperforming and past due loans, the risk inherent in
specific loans, concentrations of loans to specific borrowers or industries,
existing and prospective economic conditions and historical losses on a
portfolio basis. In addition, indirect risk in the form of off-balance sheet
exposure for unfunded
<TABLE>
<CAPTION>
FIGURE 23 ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
DECEMBER 31, 1997 1996 1995
------------------------- ------------------------ -------------------------
PERCENT OF PERCENT OF PERCENT OF
LOAN TYPE TO LOAN TYPE TO LOAN TYPE TO
dollars in millions AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $224 26.3% $177 25.0% $205 24.1%
Real estate-- commercial mortgage 104 13.0 97 14.5 100 15.0
Real estate-- construction 33 4.2 22 3.4 21 3.1
Commercial lease financing 26 7.5 16 5.4 23 4.7
- ---------------------------------------------------------------------------------------------------------------------------------
Total commercial loans 387 51.0 312 48.3 349 46.9
Real estate-- residential mortgage 8 11.6 10 12.7 9 17.2
Home equity 4 10.2 5 9.7 5 8.0
Credit card 45 2.8 44 3.7 25 3.2
Other consumer 81 19.1 93 21.0 52 19.1
- ---------------------------------------------------------------------------------------------------------------------------------
Total consumer loans 138 43.7 152 47.1 91 47.5
Loans held for sale 1 5.3 3 4.6 3 5.6
Unallocated 374 -- 403 -- 433 --
- ---------------------------------------------------------------------------------------------------------------------------------
Total $900 100.0% $870 100.0% $876 100.0%
==== ===== ==== ===== ==== =====
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1994 1993
------------------------- ------------------------
Percent of Percent of
Loan Type to Loan Type to
Amount Total Loans Amount Total Loans
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $119 22.1% $178 21.8%
Real estate-- commercial mortgage 75 14.5 77 15.0
Real estate-- construction 18 2.8 22 2.8
Commercial lease financing 24 3.7 14 4.1
- ---------------------------------------------------------------------------------------------------------------------------
Total commercial loans 236 43.1 291 43.7
Real estate-- residential mortgage 14 21.2 14 26.6
Home equity 6 7.9 See Note(1) See Note(1)
Credit card 44 3.0 See Note(1) 3.5
Other consumer 49 20.1 113 19.0
- ---------------------------------------------------------------------------------------------------------------------------
Total consumer loans 113 52.2 127 49.1
Loans held for sale 3 4.7 -- 7.2
Unallocated 478 -- 385 --
- ---------------------------------------------------------------------------------------------------------------------------
Total $830 100.0% $803 100.0%
==== ===== ==== =====
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
1 For 1993, home equity loans and the respective allocation of allowance are included in the real estate-residential mortgage
category, and the Allowance allocated to credit card receivables is included in the other consumer category.
</FN>
</TABLE>
48
<PAGE> 25
commitments is taken into consideration. Management continues to target and
maintain an Allowance equal to the allocated requirement plus an unallocated
portion, as appropriate. Management believes this is an appropriate posture in
light of current and expected economic conditions and trends, the geographic and
industry mix of the loan portfolio and similar risk-related matters.
As shown in Figure 24, net loan charge-offs in 1997 were $293 million, or .57%
of average loans, compared with $195 million, or .40% of average loans, in 1996
and $99 million, or .21%, in 1995. A primary factor contributing to the increase
in net charge-offs was the continued deterioration in consumer credit quality,
as evidenced by the increased number of personal bankruptcies in the United
States. In 1997, such bankruptcies reached a record high for the second
consecutive year. As a result of the higher level of net charge-offs, the
provision for loan losses was increased to $320 million for 1997 from $197
million in 1996 and $100 million in 1995. This increase reflected management's
current intention to continue to maintain the provision for loan losses at a
level equal to or above net charge-offs.
The higher level of net charge-offs in 1997 was concentrated in the consumer
loan portfolio with the largest increases occurring in the consumer-indirect and
credit card portfolios. Key's credit card portfolio, which is relatively small
(approximately 3% of total average loans outstanding), accounted for $36 million
of the total increase in net charge-offs. The size of the credit card portfolio
was reduced in 1997 through the sale of $365 million of out-of-franchise credit
card receivables which had an historically high level of
<TABLE>
<CAPTION>
FIGURE 24 SUMMARY OF LOAN LOSS EXPERIENCE
YEAR ENDED DECEMBER 31,
dollars in millions 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average loans outstanding during the year $ 51,415 $ 48,216 $ 48,012 $ 43,463 $ 39,363
- -------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses at beginning of year $ 870 $ 876 $ 830 $ 803 $ 783
Loans charged off:
Commercial, financial and agricultural 55 71 42 61 103
Real estate-- commercial mortgage 16 16 22 19 See note(1)
Real estate-- construction 3 2 2 7 25
Commercial lease financing 9 8 5 3 3
- -------------------------------------------------------------------------------------------------------------------------------
Total commercial loans 83 97 71 90 131
Real estate-- residential mortgage 11 9 11 15 57
Home equity 4 2 2 1 See note(1)
Credit card 113 83 50 49 See note(1)
Consumer-- direct 41 29 21 17 See note(1)
Consumer-- indirect 126 83 53 37 115
- -------------------------------------------------------------------------------------------------------------------------------
Total consumer loans 295 206 137 119 172
- -------------------------------------------------------------------------------------------------------------------------------
378 303 208 209 303
Recoveries:
Commercial, financial and agricultural 28 45 53 48 33
Real estate-- commercial mortgage 10 8 5 4 See note(1)
Real estate-- construction 2 1 3 2 6
Commercial lease financing 1 2 2 2 2
- -------------------------------------------------------------------------------------------------------------------------------
Total commercial loans 41 56 63 56 41
Real estate-- residential mortgage 3 3 8 6 10
Home equity -- -- 1 1 See note(1)
Credit card 9 15 11 13 See note(1)
Consumer-- direct 7 7 7 8 See note(1)
Consumer-- indirect 25 27 19 16 39
- -------------------------------------------------------------------------------------------------------------------------------
Total consumer loans 44 52 46 44 49
- -------------------------------------------------------------------------------------------------------------------------------
85 108 109 100 90
- -------------------------------------------------------------------------------------------------------------------------------
Net loans charged off (293) (195) (99) (109) (213)
Provision for loan losses 320 197 100 125 212
Allowance acquired/sold, net 3 (8) 44 11 21
Transfer of OREO allowance -- -- 1 -- --
- -------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses at end of year $ 900 $ 870 $ 876 $ 830 $ 803
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------------------
Net loan charge-offs to average loans .57% .40% .21% .25% .54%
Allowance for loan losses to year end loans 1.69 1.77 1.81 1.78 1.94
Allowance for loan losses to nonperforming loans 236.22 249.28 263.15 324.27 238.69
- -------------------------------------------------------------------------------------------------------------------------------
<FN>
1 For 1993, activity related to real estate-commercial mortgage loans and home equity loans is combined with that of real
estate-residential mortgage loans, and activity related to credit card receivables and consumer-direct loans is combined
with that of consumer-indirect loans.
</FN>
</TABLE>
49
<PAGE> 26
<TABLE>
<CAPTION>
FIGURE 25 SUMMARY OF NONPERFORMING ASSETS AND PAST DUE LOANS
YEAR ENDED DECEMBER 31,
dollars in millions 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Impaired loans(1) $ 196 $ 209 $ 205 -- --
Other nonaccrual loans 185 139 125 $ 254 $ 330
Restructured loans -- 1 3 2 6
- ----------------------------------------------------------------------------------------------------------
Total nonperforming loans 381 349 333 256 336
Other real estate owned ("OREO") 66 56 56 100 186
Allowance for OREO losses (21) (8) (14) (21) (35)
- ----------------------------------------------------------------------------------------------------------
OREO, net of allowance 45 48 42 79 151
Other nonperforming assets 5 3 4 5 13
- ----------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 431 $ 400 $ 379 $ 340 $ 500
===== ===== ===== ===== =====
- ----------------------------------------------------------------------------------------------------------
Accruing loans past due 90 days or more $ 132 $ 103 $ 97 $ 50 $ 52
- ----------------------------------------------------------------------------------------------------------
Nonperforming loans to year end loans .71% .71% .69% .55% .81%
Nonperforming assets to year end loans
plus OREO and other nonperforming assets .81 .81 .78 .73 1.20
- ----------------------------------------------------------------------------------------------------------
<FN>
1 Effective January 1, 1995, Key adopted SFAS No. 114, which requires separate disclosure of impaired
loans. Prior to January 1, 1995, impaired loans were included in "Other nonaccrual loans."
</FN>
</TABLE>
delinquency. The $45 million increase in consumer-indirect net charge-offs
(primarily indirect automobile loans) reflected the impact of a strategy adopted
by Key in 1996 to expand its customer base to include a greater spectrum of
credit risk profiles. This strategy also includes risk-adjusted pricing to
address the relative credit risk of various strata of the customer base.
The Allowance at December 31, 1997, was $900 million, or 1.69% of loans,
compared with $870 million, or 1.77% of loans, at December 31, 1996. The 3%
increase in the Allowance was primarily a precautionary response to commercial
loan growth. Included in both the 1997 and 1996 Allowance was $26 million
specifically allocated for impaired loans. For a further discussion of impaired
loans see Note 6, Impaired Loans and Other Nonperforming Assets, beginning on
page 65. At December 31, 1997, the Allowance was 236.22% of nonperforming loans,
compared with 249.28% at December 31, 1996. As indicated in Figure 23, the
unallocated portion of the Allowance decreased slightly in 1997, primarily as a
result of an increase in the portion of the Allowance allocated to the
commercial loan portfolio. Approximately 42% of the Allowance remained
unallocated to any specific category, a position that management believes
appropriate in light of the economic outlook and such developments as the growth
experienced in the commercial loan portfolio and the risk-based strategies
employed within the Key Consumer Finance line of business.
The composition of nonperforming assets is shown in Figures 25 and 26. These
assets totaled $431 million at December 31, 1997, and represented .81% of loans,
OREO and other nonperforming assets compared with $400 million, or .81%, at
December 31, 1996. The $32 million increase in nonperforming loans since year
end 1996 was geographically broad-based and spread across a number of product
types in the commercial (up $44 million) and consumer (up $10 million) loan
portfolios. These increases were partially offset by a $22 million decline in
the level of nonperforming residential real estate loans.
<TABLE>
<CAPTION>
FIGURE 26 NONPERFORMING ASSETS
(in millions) 1993 1994 1995 1996 1997
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Other nonperforming assets 13 5 4 3 5
Restructured loans 6 2 3 1 0
Other real estated owned 151 79 42 48 45
Impaired and other nonaccrual loans 330 254 125 139 185
</TABLE>
DEPOSITS AND OTHER SOURCES OF FUNDS
Core deposits, defined as domestic deposits other than certificates of deposit
of $100,000 or more, are Key's primary source of funding. During 1997, these
deposits averaged $38.6 billion and represented 63% of Key's funds supporting
earning assets, compared with $40.4 billion and 70%, respectively, in 1996 and
$41.7 billion and 69%, respectively, in 1995. In both 1997 and 1996, the level
of Key's core deposits was adversely affected by investment alternatives pursued
by customers in response to the continued strength of the stock and bond
markets. As shown in Figure 5 beginning on page 34, during 1997 the decrease in
core deposits was due primarily to declines in the levels of both savings
50
<PAGE> 27
deposits and NOW accounts. This resulted primarily from the sale of KeyBank
Wyoming in July 1997 and the divestiture of 76 other branch offices during the
course of the year. The divested branches (including KeyBank Wyoming) had
deposits of approximately $2.3 billion.
The significant change in the mix of core deposits which occurred in 1996
reflected the impact of a new program started during the fourth quarter of 1995
under which deposit balances (above a defined threshold) in certain NOW and
noninterest-bearing checking accounts are transferred to money market deposit
accounts, thereby reducing the level of deposit reserves required to be
maintained with the Federal Reserve. Based on certain limitations, funds are
periodically transferred back to the checking accounts to cover checks presented
for payment or withdrawals. As a result of this program, during 1996, demand
deposits and NOW account balances averaging $1.4 billion and $2.9 billion,
respectively, were transferred to the money market deposit account category, and
a pre-tax cost savings of approximately $17 million was realized. In Figure 5,
the demand deposits transferred continue to be reported as noninterest-bearing
deposits, while the NOW accounts transferred are included in the money market
deposit account category. The implementation of this program was completed in
the second quarter of 1996. Contributing to the decrease in core deposits was
the sale of Key's Florida savings bank in June 1996.
Purchased funds, which are comprised of large certificates of deposit, deposits
in foreign offices, and short-term borrowings, averaged $16.9 billion during
1997, up $3.4 billion, or 25%, from the prior year. As illustrated in Figure 5,
the increase was attributable to higher levels of short-term borrowings and
deposits in foreign offices, which rose by $2.6 billion and $816 million,
respectively. Purchased funds have been more heavily relied upon to offset
declines in the volume of core deposits and to fund earning asset growth. This
trend is expected to continue well into 1998 due in large part to the impact of
the bank and branch divestitures.
<TABLE>
<CAPTION>
FIGURE 27 MATURITY DISTRIBUTION OF TIME DEPOSITS
OF $100,000 OR MORE
DECEMBER 31, 1997 DOMESTIC FOREIGN
in millions OFFICES OFFICES TOTAL
- -------------------------------------------------------------
<S> <C> <C> <C>
Time remaining to maturity:
Three months or less $1,436 $3,700 $5,136
Over three through six months 499 -- 499
Over six through twelve months 430 -- 430
Over twelve months 717 -- 717
- -------------------------------------------------------------
Total $3,082 $3,700 $6,782
====== ====== ======
- -------------------------------------------------------------
</TABLE>
LIQUIDITY
Key actively analyzes and manages its liquidity, which represents the
availability of funding to meet the needs of depositors, borrowers and creditors
at a reasonable cost on a timely basis and without adverse consequences. The
affiliate banks maintain liquidity in the form of short-term money market
investments, securities available for sale, anticipated prepayments and
maturities on securities, the maturity structure of their loan portfolios and
the ability to securitize and package loans for sale. Liquidity is also enhanced
by a sizable concentration of core deposits, previously discussed, which are
generated by more than 1,000 full-service KeyCenters in 13 states. The affiliate
banks monitor deposit flows and evaluate alternate pricing structures with
respect to their deposit base. This process is supported by Key's Funds &
Investment Management Group, which monitors the overall mix of funding sources
in conjunction with the affiliate banks' deposit pricing and in response to the
structure of the earning assets portfolio. In addition, the affiliate banks have
access to various sources of money market funding (such as Federal funds
purchased, securities sold under repurchase agreements and bank notes) and
borrowings from the Federal Reserve system for short-term liquidity requirements
should the need arise. One of the affiliate banks, KeyBank USA, has a line of
credit with the Federal Reserve, which provides for overnight borrowings of up
to $1.1 billion and is secured by $1.5 billion of KeyBank USA's credit card
receivables at December 31, 1997. There were no borrowings outstanding under
this line of credit as of December 31, 1997.
During 1997, Key's affiliate banks raised $7.3 billion under Key's Bank Note
Program. Of the notes issued during 1997, $2.6 billion have original maturities
in excess of one year and are included in long-term debt, while $4.7 billion
have original maturities of one year or less and are included in short-term
borrowings. On October 7, 1997, Key commenced a new Bank Note Program which
provides for the issuance of up to $13 billion ($12 billion by KeyBank N.A. and
$1 billion by KeyBank USA). At December 31, 1997, the program had an unused
capacity of $12.3 billion.
During the second quarter of 1997, Key diversified its funding sources by
establishing a Euronote Program under which the parent company, KeyBank N.A. and
KeyBank USA may issue both long- and short-term debt of up to $5 billion in the
aggregate. The notes will be offered exclusively to non-U.S. investors and can
be denominated in dollars and most European currencies. There was $840 million
of borrowings outstanding under this facility as of December 31, 1997.
The parent company has a commercial paper program and a four-year revolving
credit agreement; both facilities provide funding availability of $500 million.
The proceeds from the commercial paper program may be used for general corporate
purposes and have been used to fund certain non-prime automobile lending
activities in conjunction with securitizations. There were no borrowings
outstanding under either of these facilities as of December 31, 1997.
The parent company also has a universal shelf registration statement on file
with the SEC, which provides for the possible issuance of up to $1.3 billion of
debt and equity securities. At December 31, 1997, unused capacity under the
shelf registration totaled $1.3 billion, including $750 million reserved for
future issuance as medium-term notes. The proceeds from the issuances under the
shelf registration, the Bank Note Program and the Euronote Program described
51
<PAGE> 28
previously may be used for general corporate purposes, including acquisitions.
The liquidity requirements of the parent company, primarily for dividends to
shareholders, servicing of debt and other corporate purposes are principally met
through regular dividends from affiliate banks. In 1997, affiliated companies
paid a total of $208 million in dividends to the parent company. As of December
31, 1997, an additional $538 million was available in the affiliate banks for
the payment of dividends to the parent company without prior regulatory
approval. Excess funds are maintained in short-term investments. The parent
company has ready access to the capital markets as a result of its favorable
debt ratings which, at December 31, 1997, were as follows:
<TABLE>
<CAPTION>
SENIOR SUBORDINATED
COMMERCIAL LONG-TERM LONG-TERM
PAPER DEBT DEBT
- --------------------------------------------------------------
<S> <C> <C> <C>
Duff & Phelps D-1 A+ A
Standard & Poor's A-2 A- BBB+
Moody's P-1 A1 A2
</TABLE>
Further information pertaining to Key's sources and uses of cash for the years
ended December 31, 1997, 1996 and 1995, is presented in the Consolidated
Statements of Cash Flow on page 59.
CAPITAL AND DIVIDENDS
Total shareholders' equity at December 31, 1997, was $5.2 billion, up $300
million, or 6%, from the balance at the end of 1996. This followed a 1996
decrease of $272 million, or 5%, from the balance at December 31, 1995. In 1997,
the increase was due primarily to retained net income, offset in part by a net
increase in treasury stock resulting from the share repurchases discussed below.
In 1996, primary factors contributing to the decrease in shareholders' equity
were share repurchases, dividends paid to shareholders and the redemption of all
$160 million of Key's 10% Cumulative Preferred Stock as of June 30, 1996. Other
factors contributing to the change in shareholders' equity during 1997 are shown
in the Statement of Changes in Shareholders' Equity presented on page 58.
In November 1996, the Board of Directors approved a share repurchase program
which authorized the repurchase from that date of up to 12,000,000 pre-split
Common Shares by the end of 1997, at which time the program expired. Under the
program, shares were repurchased from time to time in the open market or through
negotiated transactions. During 1997, on a pre-split basis Key repurchased
6,709,600 shares at a total cost of $366 million (an average of $54.58 per
share) and reissued 2,287,478 Treasury Shares for employee benefit and dividend
reinvestment plans. Coupled with 2,620,000 pre-split shares repurchased in the
fourth quarter of 1996, this brought the total number of shares repurchased
under the program to 9,329,600. Under a separate authorization, an additional
3,336,118 pre-split Key Common Shares were repurchased during 1997 and reissued
in the Champion acquisition. In January 1998, the Board approved a program to
repurchase up to an additional 5,000,000 shares (10,000,000 shares on a
post-split basis). The 53,824,950 Treasury Shares at December 31, 1997, are
expected to be reissued over time in connection with employee stock purchase,
401(k), stock option and dividend reinvestment plans and for other corporate
purposes.
Capital adequacy is an important indicator of financial stability and
performance. Overall, Key's capital position remains strong with a ratio of
total shareholders' equity to total assets of 7.71% at December 31, 1997,
compared with 7.96% at December 31, 1996. Excluding capital securities issued in
the fourth quarter of 1996 and the second quarter of 1997, the ratio of total
shareholders' equity to total assets at December 31, 1997, and December 31,
1996, is 7.03% and 7.22%, respectively.
Banking industry regulators define minimum capital ratios for bank holding
companies and their banking subsidiaries. Based on risk-adjusted capital rules
and definitions prescribed by the banking regulators, Key's Tier 1 and total
risk-adjusted capital ratios at December 31, 1997, were 6.65% and 10.83%,
respectively. These compare favorably with the minimum requirements of 4.0% for
Tier 1 and 8.0% for total capital. The regulatory leverage ratio standard
prescribes a minimum ratio of 3.0%, although most banking organizations are
expected to maintain ratios of at least 100 to 200 basis points above the
minimum. At December 31, 1997, Key's leverage ratio was 6.40%, substantially
higher than the minimum requirement. Figure 28 presents the details of Key's
regulatory capital position at December 31, 1997 and 1996.
Failure to meet applicable capital guidelines could result in enforcement
remedies available to the banking industry regulators, including a limitation on
the ability to pay dividends, the issuance of a directive to increase capital,
the termination of deposit insurance by the FDIC and (in severe cases) the
appointment of a conservator or receiver. Management believes that as of
December 31, 1997, the parent company and its banking subsidiaries comfortably
meet all capital adequacy guidelines to which they are subject.
Under the Federal Deposit Insurance Act, the Federal bank regulators group
FDIC-insured depository institutions into five broad categories based on certain
capital ratios. The five categories are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." All of Key's affiliate banks qualify as "well
capitalized" at December 31, 1997, since they exceeded the well-capitalized
thresholds of 10%, 6% and 5% for the total capital, Tier 1 capital and leverage
ratios, respectively. Although these provisions are not directly applicable to
Key under existing laws and regulations, based upon its ratios Key would also
qualify as "well capitalized" at December 31, 1997. The FDIC-defined capital
categories may not constitute an accurate representation of the overall
financial condition or prospects of Key or its affiliate banks.
52
<PAGE> 29
<TABLE>
<CAPTION>
FIGURE 28 CAPITAL COMPONENTS AND RISK-ADJUSTED ASSETS
DECEMBER 31,
dollars in millions 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Tier 1 capital
Common shareholders' equity(1) $ 5,170 $ 4,887
Qualifying capital securities 500 500
Less: Goodwill (1,071) (824)
Other intangible assets(2) (95) (121)
- --------------------------------------------------------------------------------
Total Tier 1 capital 4,504 4,442
- --------------------------------------------------------------------------------
Tier 2 capital
Allowance for loan losses(3) 847 698
Qualifying long-term debt 1,982 2,103
- --------------------------------------------------------------------------------
Total Tier 2 capital 2,829 2,801
- --------------------------------------------------------------------------------
Total capital $ 7,333 $ 7,243
======== ========
Risk-adjusted assets
Risk-adjusted assets on balance sheet $58,412 $ 52,228
Risk-adjusted off-balance sheet exposure 10,501 4,541
Less: Goodwill (1,071) (824)
Other intangible assets(2) (95) (121)
- --------------------------------------------------------------------------------
Gross risk-adjusted assets 67,747 55,824
Less: Excess allowance for loan losses(3) (53) (172)
- --------------------------------------------------------------------------------
Net risk-adjusted assets $ 67,694 $ 55,652
======== ========
Average quarterly total assets $ 71,490 $ 65,063
======== ========
Capital ratios
Tier 1 risk-adjusted capital ratio 6.65% 7.98%
Total risk-adjusted capital ratio 10.83 13.01
Leverage ratio(4) 6.40 6.93
- --------------------------------------------------------------------------------
<FN>
1 Common shareholders' equity excludes the impact of net unrealized gains or
losses on securities, except for net unrealized losses on marketable equity
securities.
2 Intangible assets (excluding goodwill and portions of purchased credit card
relationships) recorded after February 19, 1992, and deductible portions of
purchased mortgage servicing rights.
3 The allowance for loan losses included in Tier 2 capital is limited to 1.25%
of gross risk-adjusted assets.
4 Tier 1 capital as a percentage of average quarterly assets, less goodwill and
other non-qualifying intangible assets as defined in 2 above.
</FN>
</TABLE>
Key's relevant Common Share amounts and per Common Share data have been adjusted
for the two-for-one stock split announced on January 15, 1998, effected by means
of a 100% stock dividend payable March 6, 1998, to shareholders of record on
February 18, 1998. On a post-split basis, at December 31, 1997, book value per
Common Share was $11.83 based on 438,063,830 shares outstanding, compared with
$10.92 based on 446,908,074 shares outstanding on the same basis at December 31,
1996. Key's Common Shares are traded on the New York Stock Exchange under the
symbol KEY. The sales price ranges of the Common Shares and per Common Share net
income and dividends by quarter for each of the last two years are presented in
Figure 29. At year end 1997, the closing sales price of a Key Common Share on
the New York Stock Exchange was $35.41. This price was 299% of year end book
value per share and would result in a dividend yield of 2.37% based on the
then-current amount of the dividend. On January 15, 1998, the quarterly dividend
on Common Shares was increased by 12% to $.235 per Common Share, up from $.21
per Common Share in 1997. There were 60,058 holders of record of Key Common
Shares at December 31, 1997.
FOURTH QUARTER RESULTS
As shown in Figure 29, net income for the fourth quarter of 1997 reached a
record high of $248 million, or $.56 per Common Share, up from $151 million, or
$.33 per Common Share, for the same period in 1996. Earnings for the fourth
quarter of 1996 included a restructuring charge of $100 million ($66 million
after tax, $.14 per Common Share) recorded in connection with strategic actions
subsequently taken in Key's transformation to a nationwide bank-based financial
services company. Excluding the restructuring charge, earnings for the fourth
quarter of 1996 were $217 million, or $.48 per Common Share.
The $31 million increase in adjusted earnings resulted from an $81 million, or
28%, increase in noninterest income and a $22 million, or 3%, increase in net
interest income, partially offset by increases of $30 million, or 5%, in
noninterest expense, $23 million, or 24%, in income taxes and $19 million, or
33%, in the provision for loan losses. On an annualized basis, the return on
average total assets for the fourth quarter of 1997 was 1.38% compared with .92%
for the fourth quarter of 1996. The annualized returns on average total equity
for the fourth quarters of 1997 and 1996 were 19.16% and 12.53%, respectively.
Excluding the restructuring charge, Key's fourth quarter 1996 returns on average
total assets and equity were 1.33% and 18.01%, respectively.
Included in noninterest income in the fourth quarter of 1997 were $62 million in
branch divestiture gains and a $36 million loss on the securitization of prime
credit automobile loans with low returns on equity. Excluding these items,
noninterest income exceeded that for the 1996 fourth quarter by $55 million, or
19%, with the largest growth coming from investment banking activities,
corporate owned life insurance, insurance and brokerage income, and trust and
asset management income. The increase in net interest income in the fourth
quarter of 1997 as compared with the fourth quarter of 1996 reflected strong
loan growth as average earning assets increased $5.6 billion, or 10%, and more
than offset the impact of a 30 basis point decline in the net interest margin to
4.50%.
The increase in noninterest expense relative to the fourth quarter of last year
reflected a number of factors, including the impact of the Leastec and Champion
acquisitions, incentive compensation related to various investment banking
activities and increases in both capital securities distributions and Year 2000
compliance costs. During the fourth quarter of 1997, Key realized its objective
of achieving a 55% efficiency ratio (exclusive of acquisitions) by the end of
1997. This ratio for the full fourth quarter improved to 55.65% from nearly 61%
a year ago. The provision for loan losses increased in the current year in
response to the higher level of net charge-offs and reflected management's
current intention to continue to maintain the provision at a level equal to or
above net charge-offs.
53
<PAGE> 30
FIGURE 29 SELECTED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
1997
-------------------------------------------
dollars in millions, except per share amounts Fourth Third Second First
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FOR THE QUARTER
Interest income $ 1,365 $ 1,347 $ 1,295 $ 1,255
Interest expense 660 643 599 566
Net interest income 705 704 696 689
Provision for loan losses 76 102 75 67
Noninterest income before net securities gains 365 393 288 259
Net securities gains 1 -- -- --
Noninterest expense 630 648 582 575
Income before income taxes 365 347 327 306
Net income 248 236 223 212
Net income applicable to Common Shares 248 236 223 212
- ------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Net income $ .56 $ .54 $ .51 $ .48
Net income-- assuming dilution .56 .53 .51 .47
Cash dividends .21 .21 .21 .21
Book value at period end 11.83 11.55 11.02 10.64
Market price:
High 36.59 32.72 29.22 28.19
Low 28.50 27.63 23.94 24.32
Close 35.41 31.82 27.94 24.38
Weighted average Common Shares (000) 438,746 436,214 437,946 443,340
Weighted average Common Shares and
potential Common Shares (000) 445,152 442,050 442,480 448,558
- ------------------------------------------------------------------------------------------------------
AT PERIOD END
Loans $53,380 $53,676 $51,644 $49,724
Earning assets 64,246 63,800 61,508 59,825
Total assets 73,699 72,077 69,672 67,893
Deposits 45,073 43,870 44,626 44,239
Long-term debt 7,446 7,567 5,182 4,774
Common shareholders' equity 5,181 5,076 4,814 4,674
Total shareholders' equity 5,181 5,076 4,814 4,674
Full-time equivalent employees 24,595 25,622 25,882 26,603
Full-service banking offices 1,015 1,088 1,130 1,161
- ------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on average total assets 1.38% 1.34% 1.32% 1.30%
Return on average common equity 19.16 19.41 18.85 18.07
Return on average total equity 19.16 19.41 18.85 18.07
Efficiency(1) 56.81 56.75 57.66 58.92
Overhead(2) 36.17 37.76 41.02 43.71
Net interest margin (TE) 4.50 4.58 4.69 4.75
- ------------------------------------------------------------------------------------------------------
CAPITAL RATIOS AT PERIOD END
Equity to assets(3) 7.71% 7.74% 7.63% 7.62%
Tangible equity to tangible assets(3) 6.21 6.16 6.39 6.32
Tier 1 risk-adjusted capital 6.65 6.73 7.14 7.47
Total risk-adjusted capital 10.83 11.10 11.66 12.31
Leverage 6.40 6.33 6.65 6.68
- ------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------------------
dollars in millions, except per share amounts Fourth Third Second First
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FOR THE QUARTER
Interest income $ 1,243 $ 1,238 $ 1,234 $ 1,236
Interest expense 560 555 552 567
Net interest income 683 683 682 669
Provision for loan losses 57 49 47 44
Noninterest income before net securities gains 285 289 263 249
Net securities gains -- -- 1 --
Noninterest expense 700 615 579 570
Income before income taxes 211 308 320 304
Net income 151 207 217 208
Net income applicable to Common Shares 151 207 213 204
- --------------------------------------------------------------------------------------------------
PER COMMON SHARE
Net income $ .34 $ .45 $ .46 $ .44
Net income-- assuming dilution .33 .45 .46 .43
Cash dividends .19 .19 .19 .19
Book value at period end 10.92 10.96 10.82 10.71
Market price:
High 27.13 22.19 20.13 19.57
Low 21.85 18.13 18.38 16.69
Close 25.25 22.00 19.38 19.32
Weighted average Common Shares (000) 451,124 459,336 462,682 466,200
Weighted average Common Shares and
potential Common Shares (000) 456,252 463,498 466,922 470,554
- --------------------------------------------------------------------------------------------------
AT PERIOD END
Loans $49,235 $48,373 $47,928 $48,273
Earning assets 59,260 57,640 57,404 57,941
Total assets 67,621 65,356 64,764 65,052
Deposits 45,317 44,523 44,417 45,401
Long-term debt 4,213 4,664 4,174 4,266
Common shareholders' equity 4,881 4,976 4,996 4,964
Total shareholders' equity 4,881 4,976 4,996 5,124
Full-time equivalent employees 27,689 28,337 25,622 28,337
Full-service banking offices 1,205 1,218 1,088 1,218
- --------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on average total assets .92% 1.28% 1.35% 1.28%
Return on average common equity 12.53 16.73 17.15 16.42
Return on average total equity 12.53 16.73 16.93 16.22
Efficiency(1) 60.92 60.71 60.50 61.22
Overhead(2) 44.89 44.40 45.53 47.07
Net interest margin (TE) 4.80 4.82 4.80 4.70
- --------------------------------------------------------------------------------------------------
CAPITAL RATIOS AT PERIOD END
Equity to assets(3) 7.96% 7.61% 7.71% 7.88%
Tangible equity to tangible assets(3) 6.63 6.20 6.27 6.38
Tier 1 risk-adjusted capital 7.98 7.49 7.60 7.71
Total risk-adjusted capital 13.01 12.50 11.72 11.45
Leverage 6.93 6.38 6.43 6.43
- --------------------------------------------------------------------------------------------------
<FN>
The comparability of the information presented above is affected by certain mergers, acquisitions and divestitures completed by Key
in the time periods presented. For further information concerning these transactions, refer to Note 3, Mergers, Acquisitions and
Divestitures, beginning on page 63.
1 Calculated as noninterest expense (excluding certain nonrecurring charges and distributions on capital securities) divided by
taxable-equivalent net interest income plus noninterest income (excluding net securities transactions and gains on bank and
branch divestitures).
2 Calculated as noninterest expense (excluding certain nonrecurring charges and distributions on capital securities) less
noninterest income (excluding net securities transactions and gains on bank and branch divestitures) divided by
taxable-equivalent net interest income.
3 Excluding capital securities issued in the fourth quarter of 1996 and receiving Tier 1 treatment, these ratios at December 31,
1997, are 7.03% and 5.52%, respectively; at September 30, 1997, are 7.04% and 5.46%, respectively; at June 30, 1997, are 6.91%
and 5.67%, respectively; at March 31, 1997, are 6.88% and 5.58%, respectively; and at December 31, 1996, are 7.22% and 5.88%,
respectively.
TE = Taxable Equivalent
</FN>
</TABLE>
54
<PAGE> 31
REPORT OF MANAGEMENT
The management of Key is responsible for the preparation, content and integrity
of the financial statements and other statistical data and analyses compiled for
this annual report. The financial statements and related notes have been
prepared in conformity with generally accepted accounting principles and, in the
judgment of management, present fairly Key's financial position, results of
operations and cash flows. Management also believes that financial information
presented elsewhere in this annual report is consistent with that in the
financial statements. The amounts contained in the financial statements are
based on management's best estimates and judgments.
Management is also responsible for establishing and maintaining a system of
internal controls designed to provide assurance as to the protection of assets
and the integrity of the financial statements. This corporate-wide system of
controls includes self-monitoring mechanisms, written policies and procedures,
proper delegation of authority and organizational division of responsibility,
and the careful selection and training of qualified personnel. Management also
maintains a code of ethics that addresses among other things, conflicts of
interest, compliance with laws and regulations, and prompt reporting of any
failure or circumvention of controls. Compliance with Key's code of ethics is
certified annually. In addition, an effective internal audit function
periodically tests the system of internal controls. Management takes action to
correct control deficiencies as they are identified. There are inherent
limitations in the effectiveness of any system of internal control, including
the possibility of human error and the circumvention or overriding of controls.
Management believes that the system of internal controls provides reasonable
assurances that financial transactions are recorded properly to permit the
preparation of reliable financial statements.
The Board of Directors discharges its responsibility for Key's financial
statements through its Audit Committee. Key's Audit Committee, composed
exclusively of outside directors, also has responsibility for recommending the
independent auditors. The Audit Committee meets regularly with the independent
auditors to review the scope of their audits and audit reports and to discuss
action to be taken. Both the independent and internal auditors have direct
access to the Audit Committee.
Management has made an assessment of Key's internal control and procedures over
financial reporting using criteria described in "Internal Control -- Integrated
Framework" issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on that assessment, management believes that Key maintained an
effective system of internal control for financial reporting as of December 31,
1997.
/s/ Robert W. Gillespie
Robert W. Gillespie
Chairman and Chief Executive Officer
/s/ K. Brent Somers
K. Brent Somers
Senior Executive Vice President
and Chief Financial Officer
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Shareholders and Board of Directors
KeyCorp
We have audited the accompanying consolidated balance sheets of KeyCorp and
subsidiaries ("Key") as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flow for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of Key's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Key at December
31, 1997 and 1996, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Cleveland, Ohio
January 13, 1998
55
<PAGE> 32
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
dollars in millions 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $3,651 $3,444
Short-term investments 1,928 696
Securities available for sale 7,708 7,728
Investment securities (fair value: $1,262 and $1,637) 1,230 1,601
Loans, net of unearned income of $1,197 and $854 53,380 49,235
Less: Allowance for loan losses 900 870
- ----------------------------------------------------------------------------------------------------------
Net loans 52,480 48,365
Premises and equipment 985 1,084
Goodwill 1,071 824
Other intangible assets 105 137
Corporate owned life insurance 1,895 1,515
Other assets 2,646 2,227
- ----------------------------------------------------------------------------------------------------------
Total assets $73,699 $67,621
======= =======
LIABILITIES Deposits in domestic offices:
Noninterest-bearing $9,368 $9,524
Interest-bearing 32,005 34,455
Deposits in foreign offices--interest-bearing 3,700 1,338
- ----------------------------------------------------------------------------------------------------------
Total deposits 45,073 45,317
Federal funds purchased and securities sold under repurchase agreements 6,979 6,925
Bank notes and other short-term borrowings 5,967 3,969
Other liabilities 2,303 1,816
Long-term debt 7,446 4,213
- ----------------------------------------------------------------------------------------------------------
Total liabilities 67,768 62,240
Corporation-obligated mandatorily redeemable preferred capital
securities of subsidiary trusts holding solely debentures of
the Corporation (See Note 9) 750 500
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value; authorized 25,000,000 shares, none issued -- --
10% Cumulative Preferred Stock Class A, $125 stated value;
authorized 1,400,000 shares, none issued -- --
Common Shares, $1 par value; authorized 900,000,000 shares;
issued 491,888,780 and 245,944,390 shares 492 246
Capital surplus 1,283 1,484
Retained earnings 4,611 4,060
Loans to ESOP trustee (42) (49)
Net unrealized gains (losses) on securities available for sale, net of income taxes 11 (6)
Treasury stock, at cost (53,824,950 and 22,490,353 shares) (1,174) (854)
- ----------------------------------------------------------------------------------------------------------
Total shareholders' equity 5,181 4,881
- ----------------------------------------------------------------------------------------------------------
Total liabilities, capital securities and shareholders' equity $73,699 $67,621
======= =======
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
56
<PAGE> 33
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
dollars in millions, except per share amounts 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans $4,618 $4,339 $4,335
Taxable investment securities 12 14 521
Tax-exempt investment securities 66 76 83
Securities available for sale 526 494 135
Short-term investments 40 28 47
- ------------------------------------------------------------------------------------------------------------
Total interest income 5,262 4,951 5,121
INTEREST EXPENSE
Deposits 1,462 1,469 1,705
Federal funds purchased and securities sold under repurchase agreements 359 295 315
Bank notes and other short-term borrowings 283 197 204
Long-term debt 364 273 261
- ------------------------------------------------------------------------------------------------------------
Total interest expense 2,468 2,234 2,485
- ------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 2,794 2,717 2,636
Provision for loan losses 320 197 100
- ------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 2,474 2,520 2,536
NONINTEREST INCOME
Service charges on deposit accounts 299 293 278
Trust and asset management income 266 247 232
Investment banking income 119 73 39
Credit card fees 96 93 85
Insurance and brokerage income 88 70 61
Corporate owned life insurance 85 58 30
Loan securitization income (loss) (12) 62 66
Net securities gains (losses) 1 1 (41)
Gains from sales of branches/subsidiaries 151 8 --
Other income 213 182 183
- ------------------------------------------------------------------------------------------------------------
Total noninterest income 1,306 1,087 933
NONINTEREST EXPENSE
Personnel 1,181 1,190 1,115
Net occupancy 222 219 218
Equipment 177 161 156
Amortization of intangibles 87 88 77
Marketing 86 88 71
Professional fees 47 70 73
Restructuring charge -- 100 --
Other expense 635 548 602
- ------------------------------------------------------------------------------------------------------------
Total noninterest expense 2,435 2,464 2,312
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 1,345 1,143 1,157
Income taxes 426 360 368
- ------------------------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM 919 783 789
Extraordinary net gain from the sales of subsidiaries,
net of income taxes of $25 -- -- 36
- ------------------------------------------------------------------------------------------------------------
NET INCOME $919 $783 $825
==== ==== ====
Net income applicable to Common Shares $919 $775 $809
Per Common Share:
Income before extraordinary item $2.09 $1.69 $1.65
Net income 2.09 1.69 1.73
Weighted average Common Shares outstanding (000) 439,042 459,810 469,574
Per Common Share--assuming dilution:
Income before extraordinary item $2.07 $1.67 $1.63
Net Income 2.07 1.67 1.71
Weighted average Common Shares and potential Common
Shares outstanding (000) 444,544 464,282 472,882
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
57
<PAGE> 34
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET UNREALIZED
GAINS (LOSSES)
LOANS TO ON SECURITIES TREASURY
PREFERRED COMMON CAPITAL RETAINED ESOP AVAILABLE STOCK
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS STOCK SHARES SURPLUS EARNINGS TRUSTEE FOR SALE AT COST
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 $160 $246 $1,454 $3,161 $(64) $(115) $(152)
Net income 825
Cash dividends:
Common Shares ($.72 per share) (338)
Cumulative Preferred Stock ($12.50 per share) (16)
Issuance of Common Shares:
Acquisitions-15,507,562 shares 54 442
Employee benefit and dividend reinvestment
plans-1,808,592 net shares (8) 51
Repurchase of Common Shares-23,975,450 shares (724)
Net unrealized gains on securities available for sale,
net of income taxes of $85 163
ESOP transactions 1 13
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 160 246 1,500 3,633 (51) 48 (383)
Net income 783
Cash dividends:
Common Shares ($.76 per share) (349)
Cumulative Preferred Stock ($6.25 per share) (8)
Redemption of 10% Cumulative Preferred Stock (160)
Issuance of Common Shares:
Acquisition-270,263 shares 2 9
Employee benefit and dividend reinvestment
plans-4,100,953 net shares (18) 137
Repurchase of Common Shares-14,620,000 shares (617)
Net unrealized losses on securities available for sale,
net of income taxes of $(21) (54)
ESOP transactions 1 2
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 -- 246 1,484 4,060 (49) (6) (854)
Adjustment related to change in accounting for transfers
of financial assets, net of deferred tax benefit of $(25) (43)
Net income 919
Cash dividends on Common Shares ($.84 per share) (369)
Issuance of Common Shares:
Acquisition-3,336,118 shares 56 143
Employee benefit and dividend reinvestment
plans-2,287,478 net shares (11) 100
Repurchase of Common Shares-10,045,718 shares (563)
Net unrealized gains on securities available for sale,
net of income taxes of $24 60
ESOP transactions 1 7
Two-for-one stock split effected by means of a
100% stock dividend payable March 6, 1998 246 (246)
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 -- $492 $1,283 $4,611 $(42) $ 11 $(1,174)
=== ==== ====== ====== ==== ==== =======
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
58
<PAGE> 35
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
in millions 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 919 $ 783 $ 825
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 320 197 100
Depreciation expense 155 142 138
Amortization of intangibles 87 88 77
Net gains from sales of branches/subsidiaries (151) (8) (61)
Net securities (gains) losses (1) (1) 41
Deferred income taxes 139 112 168
Net (increase) decrease in mortgage loans held for sale (54) 573 226
Net (increase) decrease in trading account assets (498) (4) 93
Increase (decrease) in accrued restructuring charge (75) 100 --
Other operating activities, net (596) (325) 810
- -----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 245 1,657 2,417
INVESTING ACTIVITIES
Net increase in loans, excluding sales, acquisitions and divestitures (6,936) (3,791) (3,043)
Loans sold 3,144 1,351 1,587
Purchases of investment securities (497) (782) (1,413)
Proceeds from sales of investment securities 12 28 15
Proceeds from prepayments and maturities of investment securities 823 809 2,118
Purchases of securities available for sale (3,378) (2,868) (697)
Proceeds from sales of securities available for sale 735 256 2,927
Proceeds from prepayments and maturities of securities available for sale 2,770 2,905 660
Net (increase) decrease in other short-term investments (905) (383) 63
Purchases of premises and equipment (156) (279) (179)
Proceeds from sales of premises and equipment 71 50 14
Proceeds from sales of other real estate owned 28 31 54
Purchases of corporate owned life insurance (300) (345) (545)
Net proceeds from sales of branches/subsidiaries (918) 140 357
Cash used in acquisitions, net of cash acquired (1) (12) (193)
- -----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (5,508) (2,890) 1,725
FINANCING ACTIVITIES
Net increase (decrease) in deposits 2,011 (972) (3,001)
Net increase (decrease) in short-term borrowings 2,031 2,468 (539)
Net proceeds from issuance of long-term debt 3,441 2,093 646
Payments on long-term debt (1,403) (1,822) (286)
Proceeds from issuance of capital securities 250 500 --
Loan payment received from ESOP trustee 7 2 13
Purchases of treasury shares (563) (617) (724)
Redemption of 10% Cumulative Preferred Stock -- (160) --
Proceeds from issuance of common stock pursuant to employee
benefit and dividend reinvestment plans 65 98 36
Cash dividends (369) (357) (354)
- -----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 5,470 1,233 (4,209)
- -----------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 207 -- (67)
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR 3,444 3,444 3,511
- -----------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF YEAR $ 3,651 $ 3,444 $ 3,444
======= ======= =======
- -----------------------------------------------------------------------------------------------------------------
Additional disclosures relative to cash flow:
Interest paid $ 2,427 $ 2,214 $ 2,468
Income taxes paid 253 191 255
Net amount received (paid) on portfolio swaps 61 77 (78)
Noncash items:
Transfer of other assets to securities available for sale 280
Net transfer of securities from investment to available-for-sale portfolio -- -- 8,016
Transfers of loans to mortgage loans held for sale -- -- 1,509
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
59
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
KeyCorp, an Ohio corporation and a bank holding company headquartered in
Cleveland, Ohio, is a bank-based financial services company. Its subsidiaries
provide a wide range of banking, equipment leasing, fiduciary and other
financial services to corporate, individual and institutional customers through
four businesses: Key Corporate Capital, Key Consumer Bank, Key Community Bank
and Key Capital Partners. These services are provided across much of the country
through subsidiaries operating more than 1,000 full-service banking offices, a
24-hour telephone banking call center services group and more than 1,900 ATMs in
13 states as of December 31, 1997. KeyCorp provides other financial services
both in and outside of its primary banking markets through its nonbank
subsidiaries.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
judgments in determining the amounts presented in the consolidated financial
statements and related notes thereto. Accordingly, future results could be
impacted by differences from such estimates.
The accounting policies of Key conform with generally accepted accounting
principles and prevailing practices within the financial services industry.
Presented below is a summary of Key's significant accounting and reporting
policies.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the parent company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation. Certain reclassifications have been made
to prior year amounts to conform with the current year presentation.
BUSINESS COMBINATIONS
In business combinations accounted for as poolings of interests (mergers), the
assets, liabilities and shareholders' equity of the respective companies are
carried forward at their historical amounts. The companies' results of
operations are combined and the prior periods' financial statements are restated
to give effect to the merger, when material.
In business combinations accounted for as purchases, the results of operations
of the acquired companies are included from the respective dates of acquisition.
Net assets of the companies acquired are recorded at their fair value at the
dates of acquisition. Related purchase premiums and discounts are amortized over
the remaining lives of the respective assets or liabilities.
STATEMENT OF CASH FLOWS
Cash and due from banks are considered cash and cash equivalents for financial
reporting purposes.
SECURITIES AND TRADING ACCOUNT ASSETS
Debt securities that Key has the positive intent and ability to hold to maturity
are classified as securities held to maturity and carried at cost, adjusted for
amortization of premiums and accretion of discounts using the level yield
method. Securities held to maturity and equity securities that do not have
readily determinable fair values are presented as investment securities on the
balance sheet.
Debt and equity securities that are bought and held principally for the purpose
of selling them in the near term are classified as trading account assets,
reported at fair value ($535 million and $37 million at December 31, 1997 and
1996, respectively) and included in short-term investments on the balance sheet.
Realized and unrealized gains and losses on such assets are reported in other
income on the income statement.
Debt and equity securities that Key has not classified as investment securities
or trading account assets are classified as securities available for sale and,
as such, are reported at fair value, with unrealized gains and losses, net of
income taxes, reported as a component of shareholders' equity. Gains and losses
from sales of securities available for sale are computed using the specific
identification method and included in net securities gains (losses) on the
income statement.
LOANS
Loans are carried at the principal amount outstanding, net of unearned income,
including net deferred loan fees and costs. Certain nonrefundable loan
origination and commitment fees and the direct costs associated with originating
or acquiring the loans are deferred. The net deferred amount is amortized as an
adjustment to the yield over the estimated lives of the related loans.
Loans held for sale include automobile, mortgage, home equity and education
loans and are carried at the lower of aggregate cost or fair value. Fair value
is determined based on prices observed in the market for loans with similar
characteristics.
Direct financing leases are carried at the aggregate of lease payments
receivable plus estimated residual values less unearned income. Unearned income
on direct financing leases is amortized over the lease terms by methods that
approximate the interest method. Gains on sales of lease residuals are included
in other income on the income statement.
IMPAIRED AND OTHER NONACCRUAL LOANS
The accrual of interest on loans is discontinued generally when payment is 90
days or more past due, unless the loan is well-secured and in the process of
collection. When accrual of interest is discontinued on a loan, the interest
accrued but not collected is charged against the allowance for loan losses.
Thereafter, payments received are generally applied to principal. However, based
on management's assessment of the ultimate collectibility of a nonaccrual loan,
interest income may be recognized on a cash basis.
60
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All loans with payments 90 days or more past due and on nonaccrual status, with
the exception of smaller-balance, homogeneous loans, are considered to be
impaired. Impaired loans and other nonaccrual loans are returned to accrual
status when management determines that the circumstances have improved to the
extent that there has been a sustained period (generally at least six months) of
repayment performance and both principal and interest are deemed to be
collectible.
Impaired loans are evaluated individually. The fair value of collateral, if any,
or estimates of the present value of the estimated future cash flows on the loan
are used to determine the extent of the impairment. When such amounts do not
support the carrying amount of the loan, the amount which management deems
uncollectible is charged to the allowance for loan losses. In instances where
collateral or other sources of repayment are sufficient, yet uncertainty exists
regarding the ultimate repayment, an allowance is specifically allocated for in
the allowance for loan losses.
For all other nonaccrual loans management applies historical loss experience
rates, adjusted based on management's assessment of emerging credit trends and
other factors. The resulting loss estimates are specifically allocated for by
loan type in the allowance for loan losses. In general, such loans are charged
off when payment is 120-180 days past due.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is the amount which, in the opinion of management,
is necessary to absorb potential credit losses in the loan portfolio.
Management's evaluation of the adequacy of the allowance is based on the market
area served, local economic conditions, the growth and composition of the loan
portfolios and their related risk characteristics, and the continual review by
management of the quality of the loan portfolio.
DERIVATIVES USED FOR ASSET AND LIABILITY MANAGEMENT PURPOSES
Key uses interest rate swaps, caps and floors, and futures in the management of
its interest rate risk. Instruments used for this purpose modify the repricing
or maturity characteristics of specified on-balance sheet assets and
liabilities. The instruments must be both effective at reducing the risk
associated with the exposure being managed, and designated as a risk management
transaction at the inception of the derivative contract. In addition, to be
considered effective, a high degree of interest rate correlation must exist
between the derivative and the specified assets or liabilities being managed at
inception and over the life of the derivative contract. The changes in the fair
value of the derivatives are not included in the financial statements. The net
interest income or expense associated with such derivatives is accrued and
recognized as an adjustment to the interest income or interest expense of the
asset or liability being managed. The related interest receivable or payable
from such contracts is recorded in other assets or other liabilities on the
balance sheet. Premiums paid are amortized as an adjustment to the interest
income or expense of the asset or liability being managed. Realized gains and
losses resulting from the early termination of such contracts are deferred as an
adjustment to the carrying amount of the asset or liability. The deferred gain
or loss is amortized using the straight-line method over the shorter of the
projected remaining life of the related contract at its termination or the
underlying asset or liability.
DERIVATIVES USED FOR TRADING PURPOSES
Derivatives that are not used for asset and liability management purposes are
considered to be used for trading purposes. Such derivatives are entered into
for the purpose of making a market for customers and for proprietary trading
purposes. They typically include financial futures, foreign exchange forward and
spot contracts, written and purchased options (including currency options), and
interest rate swaps, caps and floors. All derivatives used for trading purposes
are recorded at fair value, and changes in fair value (including applicable
payments and receipts) are recorded in investment banking income on the income
statement. The determination of fair value considers the remaining cost to
service the derivative and the credit risk associated with the counterparty to
the derivative. These derivatives are included in other assets on the balance
sheet, if the derivative's fair value is positive, or in other liabilities if
the fair value is negative.
PREMISES AND EQUIPMENT
Premises and equipment, including leasehold improvements, are stated at cost
less accumulated depreciation and amortization. Depreciation of premises and
equipment is determined using the straight-line method over the estimated useful
lives of the respective assets. Leasehold improvements are amortized using the
straight-line method over the terms of the leases. Accumulated depreciation and
amortization on premises and equipment totaled $849 million and $852 million at
December 31, 1997 and 1996, respectively.
INTANGIBLE ASSETS
Goodwill, representing the excess of the cost of acquisitions over the fair
value of net assets acquired, is amortized using the straight-line method over
the estimated period to be benefited, not exceeding 25 years. Other intangibles
primarily represent the net present value of the future economic benefits
related to the use of core deposits purchased. They are amortized using an
accelerated method over periods ranging from 5 to 15 years. Accumulated
amortization on intangible assets totaled $356 million and $292 million at
December 31, 1997 and 1996, respectively. Key periodically reviews its
intangible assets for possible impairment.
INTERNALLY DEVELOPED SOFTWARE
Key uses internal resources and contracted assistance to design, develop,
install, customize or enhance existing systems applications for use in its
internal operations. Costs related to the internal development of software are
capitalized and included in other assets on the balance sheet. The resulting
asset ($313 million and $199 million at December 31, 1997 and 1996,
respectively) is amortized using the straight-line method over its expected
useful life (not to exceed five years). Internally developed software that
61
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
is considered impaired is written down to its fair value. Costs incurred during
the initial research and design phase of an internal software project are
expensed as incurred.
EMPLOYEE STOCK OPTIONS
Key accounts for stock options issued to employees in accordance with the
intrinsic value method. The terms of employee stock options generally require
that the exercise price of the options be equal to or greater than the fair
value of Key's Common Shares at the date the options are granted. Except for
certain options with performance features, Key recognizes no compensation
expense related to options granted.
SECURITIZATIONS
On January 1, 1997, Key adopted SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125
requires that certain assets which are subject to prepayment and recorded in
connection with a securitization be accounted for like investments in
interest-only strip securities. Accordingly, Key reclassified approximately $280
million of these assets, which represent uncertificated residual interests in
securitizations, to securities available for sale. At the time of the transfer,
the carrying amount of these assets exceeded their fair value by approximately
$68 million. This difference was recorded as a reduction to the carrying amount
of the transferred assets, and the related after-tax adjustment of $43 million
was made to net unrealized losses on securities available for sale in
shareholders' equity. Gains and income earned from contractual servicing or
administration agreements with the various securitization trusts are included in
loan securitization income. Key reviews quarterly all securitization-related
assets for permanent impairment and records any losses in loan securitization
income (loss) on the income statement.
Prior to adoption of SFAS No. 125, the sale and securitization of loans resulted
in residual assets that were classified as other assets. Included in these
assets were excess servicing assets that were estimated as the present value of
the estimated future cash flows to be received by Key.
The interest related to the excess servicing asset was accrued in loan
securitization income along with gains from the sale and securitization of loans
and income earned from contractual servicing or administration agreements.
MARKETING COSTS
Key expenses all marketing-related costs, including advertising costs, as
incurred.
RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS
In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective Date
of Certain Provisions of FASB Statement No. 125," that deferred implementation
of certain aspects of SFAS No. 125 until January 1, 1998. SFAS No. 127 applies
only to transfers related to securities lending, repurchase agreements, dollar
rolls and other similar secured financings. SFAS No. 125 requires that the
recognition of transfers be based on the financial components approach which
focuses on control. Under this approach the entity that exercises control over
transferred assets recognizes those financial assets it controls and the
liabilities it has incurred. Additional information on the adoption of SFAS No.
125 is included above under the note entitled "Securitizations." On January 1,
1998, Key adopted the provisions of SFAS No. 125 that were deferred by SFAS No.
127. The new requirements did not have a material impact on operations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 130 establishes reporting and display standards for
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is defined as the change in equity of
a business enterprise during a period from transactions and other events and
circumstances arising from nonowner sources. The purpose of the statement is to
provide a basis for reporting a measure of all changes in equity of an
enterprise that will result from recognized transactions and other economic
events of the period other than transactions with owners in their capacity as
owners. SFAS No. 130 is effective for both interim and annual financial
statements issued for periods beginning after December 15, 1997, and also
applies to financial statements presented for prior periods. SFAS No. 131
requires that financial and descriptive information be disclosed for each
reportable operating segment based on the management approach. Key expects that
its reportable operating segments will be comprised of its primary lines of
business. The management approach focuses on financial information that an
enterprise's decision-makers use to assess performance and make decisions about
resource allocation. The statement also prescribes the enterprise-wide
disclosures to be made about products, services, geographic areas and major
customers. SFAS No. 131 is effective for annual financial statements issued for
periods beginning after December 15, 1997, and for interim financial statements
in the second year of application. Comparative information presented for earlier
periods must be restated. Key will adopt the provisions of SFAS No. 130 in its
March 31, 1998, financial statements and will include the disclosures required
by SFAS No. 131 in its December 31, 1998, financial statements.
2. EARNINGS PER COMMON SHARE
On December 31, 1997, Key adopted SFAS No. 128, "Earnings Per Share," which
specifies the computation, presentation and disclosure requirements for earnings
per share for entities with publicly held common stock or common stock
equivalents. SFAS No. 128 replaces the presentation of primary and fully diluted
earnings per share with the presentation of basic and diluted earnings per
share. It also requires dual presentation of basic and diluted earnings per
share on the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic earnings per share computation to the corresponding amounts of the diluted
earnings per share computation.
62
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The computation of Key's basic and diluted earnings per Common Share before
extraordinary item is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
dollars in millions, except per share amounts 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME APPLICABLE TO COMMON SHARES
Income before extraordinary item $919 $783 $789
Less: Preferred dividend requirements -- 8 16
- -------------------------------------------------------------------------------------------
Income applicable to Common Shares $919 $775 $773
======= ======= =======
- -------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES
Weighted average Common Shares outstanding (000) 439,042 459,810 469,574
Potential Common Shares outstanding (000) 5,502 4,472 3,308
- -------------------------------------------------------------------------------------------
Weighted average Common Shares and potential
Common Shares outstanding (000) 444,544 464,282 472,882
======= ======= =======
- -------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE
Income per Common Share $2.09 $1.69 $1.65
Income per Common Share-- assuming dilution 2.07 1.67 1.63
- -------------------------------------------------------------------------------------------
</TABLE>
3. MERGERS, ACQUISITIONS AND DIVESTITURES
COMPLETED MERGERS AND ACQUISITIONS
Business combinations completed by Key during the three years ended December 31,
1997, (all of which were accounted for as purchases) are summarized below on a
pre-split basis.
<TABLE>
<CAPTION>
Common
dollars in millions Location Date Assets Shares Issued
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Champion Mortgage Co., Inc.1 New Jersey August 1997 $ 317 3,336,118
Leasetec Corporation(1) Colorado July 1997 1,080 See note(2)
Carleton, McCreary, Holmes & Co.(3) Ohio August 1996 1 See note(2)
Knight Insurance Agency, Inc.(4) Massachusetts June 1996 8 --
AutoFinance Group, Inc.(1) Illinois September 1995 181 9,554,003
Spears, Benzak, Salomon & Farrell, Inc. New York April 1995 See note(5) 1,910,000
OMNIBANCORP Colorado February 1995 500 4,043,559
Casco Northern Bank, National Association Maine February 1995 945 --
BANKVERMONT Corporation Vermont January 1995 661 --
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
1 See the following text for more information regarding this transaction.
2 In accordance with a confidentiality clause in the purchase agreement, the
terms, which are not material, have not been publicly disclosed.
3 Carleton, McCreary, Holmes & Co. is an investment banking firm specializing
in mergers and acquisitions and other financial advisory services for
mid-sized and large corporations.
4 Knight Insurance Agency, Inc. is an education financing company doing
business under the name "Knight College Resource Group."
5 Spears, Benzak, Salomon & Farrell, Inc. is an investment management firm
that had approximately $3.2 billion in assets under management on the date
of acquisition.
</TABLE>
CHAMPION MORTGAGE CO., INC.
On August 29, 1997, Key acquired Champion, a home equity finance company
headquartered in Parsippany, New Jersey. Under the terms of the agreement,
3,336,118 Common Shares, with a value of approximately $200 million, were
exchanged for all of the outstanding shares of Champion common stock in a
transaction structured as a tax-free exchange and accounted for as a purchase.
The agreement also provides an opportunity for Champion's shareholders to
receive additional consideration in the form of Key Common Shares valued at up
to $100 million in the event that certain performance targets related to
significant increases in profitability and origination volumes established at
the date of closing are achieved over the three-year period following the
closing. In connection with the transaction, Key recorded goodwill of
approximately $195 million, which is being amortized using the straight-line
method over a period of 25 years. At closing, Champion became a wholly owned
subsidiary of KeyBank USA, a wholly owned subsidiary of the parent company.
LEASETEC CORPORATION
On July 1, 1997, Key acquired an 80% interest (with an option to purchase the
remaining 20%) in Leasetec, an equipment leasing company headquartered in
Boulder, Colorado, with operations in the United States and overseas. In
connection with the transaction, which was accounted for as a purchase, Key
recorded goodwill of approximately $126 million, which is being amortized using
the straight-line method over a period of 25 years.
63
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUTOFINANCE GROUP, INC.
On September 27, 1995, Key acquired AutoFinance Group, Inc. ("AFG"), a
Chicago-based automobile finance company operating in 28 states, in a tax-free
exchange of stock. Under the terms of the agreement, 9,554,003 Common Shares,
with a value of approximately $325 million, were exchanged for all of the
outstanding shares of AFG common stock (based on an exchange ratio of .5 shares
for each share of AFG). In addition, immediately prior to the closing, AFG
completed a spin-off to its shareholders of 95.01% of its common stock interest
in Patlex Corporation, a wholly owned patent exploitation and enforcement
subsidiary. In connection with the acquisition of AFG, which was accounted for
as a purchase, Key recorded goodwill of approximately $270 million, which is
being amortized using the straight-line method over a period of 25 years.
COMPLETED DIVESTITURES
KEYBANK NATIONAL ASSOCIATION (WYOMING)
On July 14, 1997, Key sold KeyBank National Association (Wyoming) ("KeyBank
Wyoming"), its 28-branch Wyoming bank subsidiary. KeyBank Wyoming had assets of
approximately $1.1 billion at the time of the transaction. A $53 million ($35
million after tax) gain was realized on the KeyBank Wyoming sale and included in
gains from sales of branches/subsidiaries on the income statement.
BRANCH DIVESTITURES
On November 26, 1996, Key announced its intention to divest approximately 140
branch offices (including the 28 branches associated with the sale of KeyBank
Wyoming). During 1997, excluding the KeyBank Wyoming transaction, 76 such
branches with deposits of approximately $1.3 billion were sold, resulting in
aggregate gains of $98 million ($62 million after tax) which were recorded in
gains from sales of branches/subsidiaries on the income statement. As of
February 28, 1998, contracts have been entered into to sell a total of 46 other
branch offices with deposits of approximately $725 million. The sales of these
remaining branches are expected to close during the first half of 1998.
SOCIETY FIRST FEDERAL SAVINGS BANK
On June 1, 1996, Key sold Society First Federal Savings Bank ("SFF"), its
Florida savings association subsidiary. SFF had assets of approximately $1.2
billion at the time of the transaction. Key continues to provide private banking
services in Florida through KeyBank N. A. An $8 million ($5 million after tax)
gain was realized on the SFF sale and included in gains from sales of
branches/subsidiaries on the income statement.
SCHAENEN WOOD & ASSOCIATES, INC.
On April 21, 1995, Key sold Schaenen Wood, an asset management subsidiary. An
$11 million loss was realized in connection with the sale ($6 million after tax,
$.01 per basic and diluted Common Share) and recorded as an extraordinary item
in the first quarter of 1995.
KEYCORP MORTGAGE INC.
On March 31, 1995, Key sold the residential mortgage loan servicing operations
of KMI, a subsidiary which serviced approximately $25.0 billion of residential
mortgage loans. A $72 million gain was realized on the KMI sale ($42 million
after tax, $.09 per basic and diluted Common Share) and recorded as an
extraordinary item.
TRANSACTION PENDING AS OF DECEMBER 31, 1997
KEY MERCHANT SERVICES, LLC
On January 21, 1998, Key sold a 51% interest in Key Merchant Services, LLC ("Key
Merchant"), a wholly owned subsidiary formed to provide merchant services to
businesses, to NOVA Information Services, Inc. ("NOVA"). A $23 million gain ($14
million after tax) was recognized at the time of closing. Under the terms of the
agreement with NOVA, Key can receive additional consideration at the end of each
of the next three years through the year 2000, provided certain revenue-related
performance targets are met. In accordance with a confidentiality clause in the
agreement, the terms, which are not material, have not been disclosed.
4. SECURITIES
The amortized cost, unrealized gains and losses and approximate fair value of
securities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
------------------------------------------ -------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
IN MILLIONS COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Treasury, agencies and corporations $202 $2 -- $204 $857 $3 $1 $859
States and political subdivisions 52 -- -- 52 36 -- -- 36
Collateralized mortgage obligations 4,045 9 $3 4,051 3,169 3 23 3,149
Other mortgage-backed securities 2,908 53 10 2,951 3,570 44 35 3,579
Residual interests in securitizations 418 -- 44 374 -- -- -- --
Other securities 75 1 -- 76 104 1 -- 105
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $7,700 $65 $57 $7,708 $7,736 $51 $59 $7,728
====== ==== ==== ====== ====== ==== ==== ======
INVESTMENT SECURITIES
States and political subdivisions $973 $32 -- $1,005 $1,401 $37 $1 $1,437
Other securities 257 -- -- 257 200 -- -- 200
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment securities $1,230 $32 -- $1,262 $1,601 $37 $1 $1,637
====== ==== ==== ====== ====== ==== ==== ======
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
64
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Residual interests in securitizations include both certificated and
uncertificated residual interests retained in Key's securitizations.
Uncertificated residual interests in securitizations are subject to prepayment
and are accounted for like investments in interest-only strips.
Gross realized gains and losses related to securities available for sale were
$20 million and $19 million, respectively, in 1997; $5 million and $4 million,
respectively, in 1996; and $15 million and $56 million, respectively, in 1995.
At December 31, 1997, securities available for sale and investment securities
with an aggregate amortized cost of approximately $7.9 billion were pledged to
secure public and trust deposits, securities sold under repurchase agreements
and for other purposes required or permitted by law.
During the fourth quarter of 1995, the FASB granted companies a one-time
opportunity to reassess and, if appropriate, reclassify their securities from
the held-to-maturity category to the available-for-sale category without calling
into question the company's intent to hold other debt securities to maturity in
the future.
As a result, during the fourth quarter of 1995, Key reclassified substantially
all held-to-maturity debt securities, except securities of states and political
subdivisions, to the available-for-sale category. The reclassified securities
totaled approximately $8.0 billion and had an amortized cost which approximated
fair value.
Securities available for sale and investment securities by remaining contractual
maturity were as follows, with collateralized mortgage obligations and other
mortgage-backed securities included in the maturity schedule based on their
expected average lives.
<TABLE>
<CAPTION>
SECURITIES INVESTMENT
AVAILABLE FOR SALE SECURITIES
------------------ ------------------
DECEMBER 31, 1997 AMORTIZED FAIR AMORTIZED FAIR
IN MILLIONS COST VALUE COST VALUE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 804 $ 804 $ 336 $ 337
Due after one through five years 4,848 4,881 539 554
Due after five through ten years 1,830 1,803 161 175
Due after ten years 218 220 194 196
- ----------------------------------------------------------------------------
Total $7,700 $7,708 $1,230 $1,262
====== ====== ====== ======
- --------------------------------------------------------------------------------
</TABLE>
5. LOANS
Loans are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
in millions 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Commercial, financial and agricultural $14,023 $12,309
Real estate -- commercial mortgage 6,952 7,151
Real estate -- construction 2,231 1,666
Commercial lease financing 3,990 2,671
- --------------------------------------------------------------------------------
Total commercial loans 27,196 23,797
Real estate-- residential mortgage 6,204 6,229
Home equity 5,421 4,793
Credit card 1,521 1,799
Consumer--direct 2,188 2,245
Consumer--indirect 7,989 8,062
- --------------------------------------------------------------------------------
Total consumer loans 23,323 23,128
Loans held for sale 2,861 2,310
- --------------------------------------------------------------------------------
Total loans $53,380 $49,235
======= =======
- --------------------------------------------------------------------------------
</TABLE>
Changes in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
in millions 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 870 $ 876 $ 830
Charge-offs (378) (303) (208)
Recoveries 85 108 109
- -------------------------------------------------------------------------------
Net charge-offs (293) (195) (99)
Provision for loan losses 320 197 100
Allowance acquired (sold), net 3 (8) 45
- -------------------------------------------------------------------------------
Balance at end of year $ 900 $ 870 $ 876
===== ===== =====
- -------------------------------------------------------------------------------
</TABLE>
Portfolio interest rate swaps are used to manage interest rate risk by modifying
the repricing and maturity characteristics of certain loans. Additional
information pertaining to the notional amount, fair value and weighted average
rate of such swaps as of December 31, 1997, is presented in Note 17, Financial
Instruments with Off-Balance Sheet Risk, beginning on page 74.
6. IMPAIRED LOANS AND OTHER NONPERFORMING ASSETS
At December 31, 1997, impaired loans totaled $196 million. Included in this
amount are $91 million of impaired loans for which the specifically allocated
allowance for loan losses is $26 million, and $105 million of impaired loans
which are carried at their estimated fair value without a specifically allocated
allowance for loan losses. At the end of the prior year, impaired loans totaled
$209 million, of which $81 million had a specifically allocated allowance of $26
million and $128 million were carried at their estimated fair value. The average
investment in impaired loans for 1997 and 1996 was $190 million and $187
million, respectively.
Nonperforming assets were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
in millions 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans $ 196 $ 209
Other nonaccrual loans 185 139
Restructured loans -- 1
- -------------------------------------------------------------------------------
Total nonperforming loans 381 349
OREO 66 56
Allowance for OREO losses (21) (8)
- -------------------------------------------------------------------------------
OREO, net of allowance 45 48
Other nonperforming assets 5 3
- -------------------------------------------------------------------------------
Total nonperforming assets $ 431 $ 400
==== ====
- -------------------------------------------------------------------------------
</TABLE>
65
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1997, there were no significant commitments to lend additional
funds to borrowers with restructured loans or loans on nonaccrual status.
Key excludes smaller-balance, homogeneous nonaccrual loans (shown in the
preceding table as "Other nonaccrual loans") from impairment evaluation.
Generally, this portfolio includes loans to finance residential mortgages,
automobiles, recreational vehicles, boats and mobile homes. Key applies
historical loss experience rates to these loans, adjusted based on management's
assessment of emerging credit trends and other factors. The resulting loss
estimates are specifically allocated for by loan type in the allowance for loan
losses.
The effect on interest income of loans classified as nonperforming at December
31 was as follows:
<TABLE>
YEAR ENDED DECEMBER 31,
in millions 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income receivable under
original terms $ 36 $ 32 $ 31
Less: Interest income recorded during
the year (13) (12) (11)
- -------------------------------------------------------------------------------
Net reduction to reported interest income $ 23 $ 20 $ 20
==== ==== ====
- -------------------------------------------------------------------------------
</TABLE>
7. SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
dollars in millions 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
FEDERAL FUNDS PURCHASED
Balance at year end $4,058 $4,000 $2,983
Average during the year 4,036 3,214 3,150
Maximum month end balance 5,079 4,027 4,187
Weighted average rate during the year 5.57% 5.41% 5.91%
Weighted average rate at December 31 5.65 5.39 5.80
- -------------------------------------------------------------------------------
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Balance at year end $2,921 $2,925 $2,561
Average during the year 2,906 2,629 2,473
Maximum month end balance 3,191 3,005 2,679
Weighted average rate during the year 4.61% 4.60% 5.19%
Weighted average rate at December 31 4.48 4.62 4.88
- -------------------------------------------------------------------------------
SHORT-TERM BANK NOTES
Balance at year end $4,730 $3,325 $2,325
Average during the year 4,090 2,953 2,309
Maximum month end balance 4,730 3,625 2,450
Weighted average rate during the year 5.50% 5.45% 6.58%
Weighted average rate at December 31 5.85 5.49 6.58
- -------------------------------------------------------------------------------
OTHER SHORT-TERM BORROWINGS
Balance at year end $1,237 $ 644 $ 555
Average during the year 651 326 1,053
Maximum month end balance 1,517 1,484 2,092
Weighted average rate during the year 6.30% 6.44% 4.75%
Weighted average rate at December 31 5.40 4.76 4.14
- -------------------------------------------------------------------------------
<FN>
Portfolio interest rate swaps are used to manage interest rate risk by modifying
the repricing and maturity characteristics of certain short-term borrowings.
Additional information pertaining to the modification of certain short-term
borrowings is presented in Note 17, Financial Instruments with off-Balance Sheet
Risk, beginning on page 74.
</TABLE>
Key has a bank note program, which allows for the issuance of up to $13.0
billion ($12.0 billion by KeyBank N.A. and $1.0 billion by KeyBank USA) of bank
notes with original maturities of 30 days to 30 years. At December 31, 1997, the
amount of bank notes available for issuance under the program was $12.3 billion.
The parent company has both a commercial paper program and a four-year revolving
credit agreement; both facilities provide funding availability of $500 million.
There were no borrowings outstanding under either of these facilities as of
December 31, 1997 and 1996. KeyBank USA has a line of credit with the Federal
Reserve which provides for overnight borrowings of up to $1.1 billion and is
secured by $1.5 billion of KeyBank USA's credit card receivables at December 31,
1997. There were no borrowings outstanding under this line of credit as of
December 31, 1997 and 1996.
66
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. LONG-TERM DEBT
The components of long-term debt, presented net of unamortized discount where
applicable, were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
dollars in millions 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Senior medium-term notes due through 2005(1) $ 493 $ 584
Subordinated medium-term notes due through 2005(1) 183 183
7.50% Subordinated notes due 2006(2) 250 250
6.75% Subordinated notes due 2006(2) 200 200
8.125% Subordinated notes due 2002(2) 199 199
8.00% Subordinated notes due 2004 125 125
8.40% Subordinated capital notes due 1999(3) 75 75
8.404% Notes due through 2001 42 49
All other long-term debt(9) 14 16
- -----------------------------------------------------------------------------
Total parent company(10) 1,581 1,681
Senior medium-term bank notes due through 2002(4) 3,103 1,165
Senior euro medium-term bank notes due through 2007(5) 840 --
7.25% Subordinated notes due 2005(6) 200 200
7.85% Subordinated notes due 2002(6) 200 200
6.75% Subordinated notes due 2003(6) 200 200
7.50% Subordinated notes due 2008(6) 165 165
7.125% Subordinated notes due 2006(6) 250 250
7.55% Subordinated notes due 2006(6) 75 75
7.375% Subordinated notes due 2008(6) 70 70
Lease financing debt due through 2003(7) 549 --
Federal Home Loan Bank Advances due through 2014(8) 163 193
All other long-term debt(9) 50 14
- -----------------------------------------------------------------------------
Total subsidiaries 5,865 2,532
- -----------------------------------------------------------------------------
Total long-term debt $7,446 $4,213
====== ======
- -----------------------------------------------------------------------------
<FN>
Portfolio interest rate swaps are used to manage interest rate risk by modifying
the repricing and maturity characteristics of certain long-term debt. Additional
information pertaining to the notional amount, fair value and weighted average
rate of such swaps as of December 31, 1997, is presented in Note 17, Financial
Instruments with Off-Balance Sheet Risk, beginning on page 74.
1 At December 31, 1997 and 1996, the senior medium-term notes had weighted
average interest rates of 6.64% and 6.57%, respectively, and the
subordinated medium-term notes had weighted average interest rates of 6.90%
and 6.80%, respectively. These notes had a combination of both fixed and
floating interest rates.
2 The 7.50%, 6.75% and 8.125% subordinated notes may not be redeemed or
prepaid prior to maturity.
3 The 8.40% subordinated capital notes may, at maturity, be exchanged for
common stock, preferred stock or other eligible securities having a market
value equal to the principal amount of the notes.
4 At December 31, 1997 and 1996, senior medium-term bank notes of
subsidiaries had weighted average interest rates of 5.51% and 6.17%
respectively. These notes had a combination of both fixed and floating
interest rates.
5 At December 31, 1997, the senior euro medium-term bank notes had a weighted
average interest rate of 5.91%. These notes are obligations of KeyBank N.A.
and had fixed and floating interest rates based on the three-month London
Interbank Offered Rate ("LIBOR"). As of December 31, 1997, the $5.0 billion
Euronote Program had an unused capacity of $4.2 billion.
6 The subordinated notes are all obligations of KeyBank N.A., with the
exception of the 7.55% note which is an obligation of KeyBank USA. These
notes may not be redeemed prior to their respective maturity dates.
7 At December 31, 1997, lease financing debt had a weighted average interest
rate of 7.123% and represented primarily nonrecourse debt collateralized by
lease equipment under operating, direct financing and sales type leases.
8 At December 31, 1997, long-term advances from the Federal Home Loan Bank
("FHLB") had adjustable and fixed interest rates ranging from 5.46% to
12.125%. Real estate loans and securities of $218 million and $257 million
at December 31, 1997, and 1996, respectively, collateralize FHLB advances.
9 Other long-term debt at December 31, 1997 and 1996, consisted of industrial
revenue bonds, capital lease obligations and various secured and unsecured
obligations of corporate subsidiaries and had weighted average interest
rates of 8.06% and 8.94%, respectively.
10 At December 31, 1997, unused capacity under the parent company's shelf
registration totaled $1.3 billion, including $750 million reserved for
future issuance as medium-term notes.
</TABLE>
Scheduled principal payments on long-term debt are as follows:
<TABLE>
<CAPTION>
in millions PARENT SUBSIDIARIES TOTAL
- -------------------------------------------------------------
<S> <C> <C> <C>
1998 $133 $1,051 $1,184
1999 108 1,862 1,970
2000 287 763 1,050
2001 113 16 129
2002 240 1,134 1,374
- -------------------------------------------------------------
</TABLE>
9. CAPITAL SECURITIES
The corporation-obligated mandatorily redeemable preferred capital securities of
subsidiary trusts holding solely debentures of the Corporation ("capital
securities") were issued by three business trusts, KeyCorp Institutional Capital
A ("Capital A"), KeyCorp Institutional Capital B ("Capital B") and KeyCorp
Institutional Capital C ("Capital C"), all of whose common securities are owned
by the parent company. Capital A and Capital B were formed in the fourth quarter
of 1996, and Capital C was formed in the second quarter of 1997. The proceeds
from the issuances of the capital securities and common securities were used to
purchase debentures of the parent company. Capital A and Capital B hold solely
junior subordinated deferrable interest debentures of the parent company.
Capital C holds solely coupon adjusted pass-through security debentures of the
parent company. Both the debentures and related income statement effects are
eliminated in Key's financial statements.
The parent company has entered into contractual arrangements which, taken
collectively, fully and unconditionally guarantee payment of: (i) accrued and
unpaid distributions required to be paid on the capital securities; (ii) the
redemption price with respect to any capital securities called for redemption by
Capital A, Capital B or Capital C; and (iii) payments due upon a voluntary or
involuntary liquidation, winding-up or termination of Capital A, Capital B or
Capital C.
67
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The capital securities, common securities and related debentures are summarized
as follows:
<TABLE>
<CAPTION>
INTEREST RATE MATURITY
PRINCIPAL OF CAPITAL OF CAPITAL
CAPITAL COMMON AMOUNT OF SECURITIES AND SECURITIES AND
DOLLARS IN MILLIONS SECURITIES(1) SECURITIES DEBENTURES(2) DEBENTURES DEBENTURES
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
December 31, 1997
Capital A $350 $11 $361 7.826% 2026
Capital B 150 4 154 8.250 2026
Capital C 250 8 258 6.625 2029
- --------------------------------------------------------------------------------------------------------
Total $750 $23 $773 7.510%(3) --
==== === ====
- --------------------------------------------------------------------------------------------------------
December 31, 1996 $500 $15 $515 7.953%(3) --
==== === ====
- --------------------------------------------------------------------------------------------------------
</TABLE>
1 The capital securities are mandatorily redeemable upon the respective
maturity dates of the debentures or upon earlier redemption as provided in
the indenture. Each issue of capital securities carries an interest rate
identical to that of the respective debenture. The interest rate related to
the capital securities issued by Capital C may be adjusted upon the
remarketing of the capital securities on the coupon adjustment date (June
1, 1999). The capital securities issued by Capital A and Capital B
constitute minority interests in the equity accounts of consolidated
subsidiaries and, therefore, qualify as Tier 1 capital under Federal
Reserve Board Guidelines.
2 The parent company has the right to redeem the debentures purchased by
Capital A, Capital B and Capital C: (i) in whole or in part, on or after
December 1, 2006, December 15, 2006, and June 1, 2009, respectively, (ii)
in whole at any time within 90 days following the occurrence and during the
continuation of a tax event or a capital treatment event (as defined in the
applicable offering circular); and (iii) for Capital C, in whole or in part
on the coupon adjustment date. If the debentures are redeemed prior to
maturity, the redemption price will be expressed as a certain percentage
of, or factor added to, the principal amount, plus any accrued but unpaid
interest.
3 Weighted average rate.
10. SHAREHOLDERS' EQUITY
COMMON SHARES
On January 15, 1998, Key announced a two-for-one stock split effected by means
of a 100% stock dividend payable March 6, 1998, to shareholders of record as of
February 18, 1998. All relevant Common Share amounts and per Common Share data
in this report have been adjusted to reflect the split.
The Board of Directors adopted a Shareholder Rights Plan ("Rights") in 1989 (and
most recently amended in May 1997) under which each shareholder received one
Right for each Common Share of Key. Each Right represents the right to purchase
a Common Share of Key at a price of $82.50. The Rights become exercisable after
a person or group acquires 15% or more of the outstanding shares. Until the
Rights become exercisable, they will trade with the Common Shares, and any
transfer of the Common Shares will also constitute a transfer of associated
Rights. When the Rights become exercisable, they will begin to trade apart from
the Common Shares. After the occurrence of certain "Flip-In Events," each Right
will become the right to purchase a Common Share of Key for $1.00 (the par value
per share), and the Rights held by a 15% or more shareholder will become void.
The parent company may redeem these Rights at its option at $.005 per Right
subject to certain limitations. The Rights expire on May 14, 2007.
CAPITAL ADEQUACY
The parent company and its banking subsidiaries must meet specific quantitative
(i.e., assets, liabilities and certain off-balance sheet items) and qualitative
(i.e., components, risk weightings and other factors) capital requirements
imposed by banking industry regulators under the guidelines and regulatory
framework for prompt corrective action. Failure to meet the applicable capital
requirements could result in enforcement remedies such as limitations on the
ability to pay dividends, issuance of a directive to increase capital,
termination of FDIC deposit insurance and (in severe cases) the appointment of a
conservator or receiver. Management believes that as of December 31, 1997, the
parent company and its banking subsidiaries meet all necessary capital
requirements.
Federal bank regulators group FDIC-insured depository institutions into the
following five categories based on certain capital ratios: "well capitalized,"
"adequately capitalized," "under capitalized," "significantly undercapitalized"
and "critically undercapitalized." As of December 31, 1997 and 1996, the most
recent regulatory notification categorized each of the parent company's
subsidiary banks as "well capitalized," since they exceeded the well-capitalized
thresholds. Management believes no changes in condition or events have occurred
since the last regulatory notification which would result in changes to the
banks' categorizations. Although these provisions are not directly applicable to
Key, under existing laws and regulations Key would qualify as "well capitalized"
at December 31, 1997 and 1996. The FDIC-defined capital categories may not
constitute an accurate representation of the overall financial condition or
prospects of Key or its affiliates.
68
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents Key and KeyBank N.A.'s actual capital amounts and
ratios, minimum capital amounts and ratios prescribed by regulatory guidelines
and capital amounts and ratios required to qualify as well capitalized under the
prompt corrective action provisions of the Federal Deposit Insurance Act.
<TABLE>
<CAPTION>
TO MEET MINIMUM TO QUALIFY AS WELL CAPITALIZED
CAPITAL ADEQUACY UNDER PROMPT CORRECTIVE
ACTUAL REQUIREMENTS ACTION PROVISIONS
---------------------- ---------------------- -----------------------
DOLLARS IN MILLIONS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1997
TOTAL CAPITAL TO NET RISK-ADJUSTED ASSETS
Key $7,333 10.83% $5,416 8.00% N/A N/A
KeyBank N.A.(1) 6,854 10.80 5,083 8.00 $6,353 10.00%
TIER 1 CAPITAL TO NET RISK-ADJUSTED ASSETS
Key $4,504 6.65% $2,708 4.00% N/A N/A
KeyBank N.A.(1) 4,900 7.71 2,541 4.00 $3,812 6.00%
TIER 1 CAPITAL TO AVERAGE ASSETS(2)
Key $4,504 6.40% $2,813 4.00% N/A N/A
KeyBank N.A.(1) 4,900 7.30 2,685 4.00 $3,356 5.00%
- --------------------------------------------------------------------------------------------------------------------------------
December 31, 1996
TOTAL CAPITAL TO NET RISK-ADJUSTED ASSETS
Key $7,243 13.01% $4,452 8.00% N/A N/A
KeyBank N.A.(1) 6,212 11.78 4,218 8.00 $5,272 10.00%
TIER 1 CAPITAL TO NET RISK-ADJUSTED ASSETS
Key $4,442 7.98% $2,226 4.00% N/A N/A
KeyBank N.A.(1) 4,296 8.15 2,109 4.00 $3,163 6.00%
TIER 1 CAPITAL TO AVERAGE ASSETS(2)
Key $4,442 6.93% $2,565 4.00% N/A N/A
KeyBank N.A.(1) 4,296 6.98 2,463 4.00 $3,078 5.00%
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
1 In June 1997, Key completed the merger of its bank subsidiaries (other than
KeyBank USA and KeyBank New Hampshire) into KeyBank N.A. The 1996 financial
information presented in the above table has been restated to include the
combined results of the merged companies.
2 Also referred to as the leverage ratio. The regulatory Tier 1 leverage
ratio standard prescribes a minimum ratio of 3%, although most banking
organizations are expected to maintain ratios of at least 100 to 200 basis
points above the minimum.
N/A = Not applicable
</TABLE>
11. STOCK OPTIONS
Key's incentive compensation plans provide the ability to grant stock options,
stock appreciation rights, limited stock appreciation rights, restricted stock
and performance shares to selected employees and directors. The plans' terms
stipulate that an option's exercise price may not be less than Key's Common
Share fair value at the grant date. Generally, the options expire no later than
ten years from their grant date. At December 31, 1997 and 1996, options for
Common Shares available for future grant totaled 8,761,276 and 8,938,162,
respectively. Approximately 3,664,000 of the options outstanding at December 31,
1997, may vest after certain future performance targets are met. Key granted
approximately 3,658,000 performance options in 1997 and 90,000 in 1996. For
options outstanding at December 31, 1997, the option price per share ranged from
$3.74 to $32.28, and the weighted average remaining contractual life of the
options was 7.1 years.
The following table presents a summary of pertinent information with respect to
Key's stock options.
<TABLE>
<CAPTION>
1997 1996
----------------------------- -----------------------------
WEIGHTED WEIGHTED
AVERAGE PRICE AVERAGE PRICE
OPTIONS PER OPTION OPTIONS PER OPTION
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 19,577,212 $14.44 24,171,052 $13.08
Granted 7,361,536 26.11 4,589,296 17.39
Assumed in acquisition 1,073,404 12.98 -- --
Exercised 4,988,660 13.11 8,273,222 12.16
Lapsed or cancelled 726,924 20.38 909,914 15.26
- ---------------------------------------------------------------------------------------------------------------
Outstanding at end of year 22,296,568 $18.33 19,577,212 $14.44
- ---------------------------------------------------------------------------------------------------------------
Exercisable at end of year 11,821,282 $14.33 11,660,750 $13.30
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
69
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS No. 123, "Accounting for Stock-Based Compensation," requires companies,
such as Key, that use the intrinsic value method to account for employee stock
options to provide pro forma disclosures of the net income and earnings per
share effect of applying the fair value method of accounting for stock options.
The fair value of options granted in 1997 and 1996 was estimated using the
Black-Scholes option pricing model, which was originally developed to estimate
the fair value of exchange-traded equity options which, unlike employee stock
options, have no vesting period or transferability restrictions. Several
assumptions were used in the model, including estimates of expected average
option life, the future dividends to be paid on Key Common Shares, Key Common
Shares' price volatility and the expected risk-free interest rate. These
assumptions were developed based on historical trends and current market
observations. Changes in the assumptions can materially affect the fair value
estimate. In its estimates, Key assumed an average option life of 5.5 years in
1997 and 4.2 years in both 1996 and 1995; a future dividend yield of 3.2%, 4.4%
and 5.4% in 1997, 1996 and 1995, respectively; share price volatility of .240 in
1997, .175 in 1996 and 1995; and a weighted average risk-free interest rate of
6.4%, 5.4% and 6.5% in 1997, 1996 and 1995, respectively.
The following pro forma disclosures present the net income and earnings per
Common Share effect of applying the fair value method of accounting for stock
options estimated using the Black-Scholes option valuation model. The model
assumes that the estimated fair value of the options is amortized over the
options' vesting periods and would be included in personnel expense on the
income statement. Not all options vest within one year; therefore the pro forma
expense for the years shown may not be indicative of amounts reported in future
years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
in millions, except per share amounts 1997 1996 1995
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 919 $ 783 $ 825
Net income-- pro forma 913 780 820
Per Common Share:
Net income $2.09 $1.69 $1.73
Net income-- pro forma 2.08 1.68 1.71
Net income assuming dilution 2.07 1.67 1.71
Net income assuming dilution-- pro forma 2.05 1.66 1.70
- -------------------------------------------------------------------------
</TABLE>
12. RESTRUCTURING CHARGE
During the fourth quarter of 1996, the parent company recorded a $100 million
($66 million after tax, $.14 per basic and diluted Common Share) restructuring
charge in connection with strategic actions to be taken over the next year to
complete Key's transformation to a nationwide bank-based financial services
company. The restructuring charge included accruals for expenses, primarily
consisting of severance payments ($54 million), consolidation costs related to
banking offices identified for closure ($18 million) and costs related to the
write-off of certain obsolete software previously developed for internal use
($28 million).
As of December 31, 1997, Key had completed all of the restructuring actions. As
of that date, Key had: (i) consolidated its banking subsidiaries (with the
exception of KeyBank USA and KeyBank New Hampshire) into one nationwide banking
institution, (ii) consolidated all of the 140 KeyCenters identified for merger
into other KeyCenters, and (iii) reduced its employment base by more than the
projected target of 10% of the pre-restructuring charge employment base. In
1997, cash payments for severance and for consolidation costs totaled $29
million and $3 million, respectively. Remaining restructuring charge accruals at
December 31, 1997, totaled $25 million and were comprised of $17 million for
severance and $8 million for consolidation costs.
13. EMPLOYEE BENEFITS
PENSION PLANS
The Key Cash Balance Pension Plan (the "Cash Balance Plan") is a noncontributory
account balance defined benefit plan covering substantially all employees, in
which the participant has an account to which amounts are credited based on
qualifying compensation and with interest determined at a specified rate. Key's
funding policy is to contribute an amount that meets the minimum funding
requirements set forth in the Employee Retirement Income Security Act ("ERISA")
of 1974, plus such additional amounts as Key determines to be appropriate. Key
also maintains several unfunded, non-qualified, supplemental executive
retirement programs that provide additional defined pension benefits for certain
officers.
Net pension cost for all funded and unfunded plans included the following
components.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
in millions 1997 1996 1995
- -------------------------------------------------------------
<S> <C> <C> <C>
Service cost of benefits earned $ 29 $29 $ 28
Interest cost on projected
benefit obligation 53 49 50
Actual return on plan assets (189) (96) (110)
Net amortization 123 39 53
- -------------------------------------------------------------
Net pension cost $ 16 $21 $ 21
==== === ====
- -------------------------------------------------------------
</TABLE>
70
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The funded status of the Cash Balance Plan and the nonqualified, supplemental
programs at the September 30 measurement date reconciled to the amounts
recognized in the consolidated balance sheets at December 31, 1997 and 1996, is
as follows:
<TABLE>
<CAPTION>
NON-QUALIFIED
CASH BALANCE PLAN SUPPLEMENTAL PROGRAMS
---------------------- ---------------------
in millions 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accumulated benefit obligation $620 $613 $ 89 $79
- ------------------------------------------------------------------------------------------------------------------------------
Vested benefit obligation $602 $594 $ 82 $74
- ------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets(1) $931 $785 -- --
Projected benefit obligation 632 624 $101 $91
- ------------------------------------------------------------------------------------------------------------------------------
Excess (shortfall) of fair value of plan assets over
projected benefit obligation 299 161 (101) (91)
Unrecognized net actuarial loss (gain) (64) 63 25 19
Unrecognized prior service (benefit) cost (4) (3) 6 8
Unrecognized net transition (asset) obligation (18) (23) 2 2
Contribution subsequent to measurement date -- 10 -- --
Adjustment to recognize minimum liability -- -- (21) (19)
Benefits paid subsequent to measurement date -- -- 1 2
- ------------------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) pension cost $213 $208 $ (88) $(79)
==== ==== ===== ====
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
1 Consists primarily of listed stock and fixed income securities.
</TABLE>
Rates assumed in determining the actuarial present value of benefit obligations
and net pension cost for both the funded and unfunded plans were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.25% 7.75% 7.50%
Compensation increase rate 4.20 4.17 4.19
Long-term rate of return 9.50 9.50 9.50
- -------------------------------------------------------------------
</TABLE>
OTHER POSTRETIREMENT BENEFIT PLANS
Key sponsors a postretirement healthcare plan that covers substantially all
employees and life insurance plans covering certain grandfathered employees. The
postretirement healthcare plan is contributory, with retirees' contributions
adjusted annually to reflect certain cost-sharing provisions and benefit
limitations. The life insurance plans are noncontributory. Voluntary Employees'
Beneficiary Associations ("VEBA"s) have been established to provide for
prefunding the healthcare and life insurance plans, and Key makes contributions
to the VEBAs in such amounts as it determines to be appropriate.
Net postretirement benefits cost included the following components.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
in millions 1997 1996 1995
- -------------------------------------------------------------
<S> <C> <C> <C>
Service cost of benefits earned $ 3 $ 3 $ 2
Interest cost on accumulated
postretirement benefit obligation 8 7 8
Amortization of transition
obligation over 20 years 5 5 5
Net deferral -- -- (1)
- -------------------------------------------------------------
Net postretirement benefits cost $16 $15 $14
=== === ===
- -------------------------------------------------------------
</TABLE>
The combined funded status of the plans at the September 30 measurement date
reconciled to the amounts recognized in the consolidated balance sheets at
December 31, 1997 and 1996, is as follows:
<TABLE>
<CAPTION>
in millions 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 70 $ 71
Fully eligible plan participants 6 5
Other active plan participants 32 28
- -------------------------------------------------------------------------------
108 104
Fair value of plan assets 10 --
- -------------------------------------------------------------------------------
Accumulated postretirement benefit obligation
in excess of plan assets 98 104
Contribution to healthcare plans' VEBA subsequent
to measurement date (9) (10)
Healthcare benefits paid subsequent to
measurement date (2) (2)
Unrecognized transition obligation (70) (83)
Unrecognized prior service cost (1) --
Unrecognized net gain 5 13
- -------------------------------------------------------------------------------
Accrued postretirement benefits cost
(included in other liabilities) $ 21 $ 22
==== ====
- -------------------------------------------------------------------------------
</TABLE>
The assumed 1998 weighted average healthcare cost trend rate was 7.25% for both
Medicare-eligible retirees and non-Medicare-eligible retirees. The rate is
assumed to decrease gradually to 5.5% by the year 2003 and remain constant
thereafter. Increasing or decreasing the assumed healthcare cost trend rates by
one percentage point in each future year would have an immaterial impact on the
postretirement benefits cost and obligations due to cost-sharing provisions and
benefits limitations in the related postretirement plan. The weighted average
discount rate used in determining the accumulated postretirement benefit
obligation was 7.25% and 7.75% at September 30, 1997 and 1996, respectively. The
weighted average expected long-term rate of return on
71
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
postretirement assets used in determining net postretirement benefit cost was
9.5% for 1997, 1996 and 1995.
EMPLOYEE 401(K) SAVINGS PLAN
Substantially all of Key's employees are covered under a savings plan that is
qualified under Section 401(k) of the Internal Revenue Code. Under provisions of
this plan, employees may contribute 1% to 10% of eligible compensation, with up
to 6% being eligible for matching contributions from Key. At least half of such
matching contributions is in the form of Key Common Shares. The plan also
permits a discretionary profit sharing component to be distributed by Key. Total
expense associated with the plan was $41 million, $40 million and $33 million in
1997, 1996 and 1995, respectively.
14. INCOME TAXES
Income taxes included in the consolidated statements of income, other than those
related to the 1995 extraordinary item, are presented below. Income taxes have
been provided using the liability method, and Key files a consolidated Federal
income tax return. The extraordinary item pertains to the net gains resulting
from the sales of Schaenen Wood and KMI, previously disclosed in Note 3,
Mergers, Acquisitions and Divestitures, beginning on page 63.
<TABLE>
<CAPTION>
Year ended December 31,
in millions 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Currently payable:
Federal $ 265 $ 239 $ 212
State 22 9 (12)
- -------------------------------------------------------------------------------
287 248 200
Deferred:
Federal 122 89 137
State 17 23 31
- -------------------------------------------------------------------------------
139 112 168
- -------------------------------------------------------------------------------
Total income tax expense(1,2) $ 426 $ 360 $ 368
===== ===== =====
- -------------------------------------------------------------------------------
<FN>
1 Income tax expense (benefit) on securities transactions totaled $.4
million, $.3 million and $(16) million in 1997, 1996 and 1995,
respectively.
2 Income tax expense excludes equity- and gross receipts-based taxes which
are assessed in lieu of an income tax in certain states in which Key
operates. These taxes are included in noninterest expense and totaled $36
million, $35 million and $42 million in 1997, 1996 and 1995, respectively.
</TABLE>
The differences between income tax expense and the amount computed by applying
the statutory Federal tax rate to income before income taxes and extraordinary
item are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
in millions 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before income taxes and
extraordinary item times 35%
statutory Federal tax rate $ 471 $ 400 $ 405
State income tax, net of Federal
tax benefit 25 21 13
Amortization of non-deductible
intangibles 19 16 13
Tax-exempt interest income (27) (30) (35)
Corporate owned life insurance income (30) (22) (12)
Tax credits (26) (17) (7)
Other (6) (8) (9)
- -------------------------------------------------------------------------------
Total income tax expense $ 426 $ 360 $ 368
===== ===== =====
- -------------------------------------------------------------------------------
</TABLE>
Significant components of Key's deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
in millions 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Provision for loan losses $ 327 $ 308
Net unrealized securities losses -- 2
Restructuring charge 21 37
Write-down of OREO 24 10
Other 74 49
- --------------------------------------------------------------------------------
Total deferred tax assets 446 406
Leasing income reported using the operating
method for tax purposes 1,031 840
Net unrealized securities gains 3 --
Depreciation 20 31
Other 63 73
- --------------------------------------------------------------------------------
Total deferred tax liabilities 1,117 944
- --------------------------------------------------------------------------------
Net deferred tax liabilities $ 671 $ 538
====== ======
- --------------------------------------------------------------------------------
</TABLE>
72
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. COMMITMENTS, CONTINGENT LIABILITIES AND OTHER DISCLOSURES
LEGAL PROCEEDINGS
In the ordinary course of business, Key is subject to legal actions which
involve claims for substantial monetary relief. Based on information presently
available to management and Key's counsel, management does not believe that any
legal actions, individually or in the aggregate, will have a material adverse
effect on the financial condition of Key.
RESTRICTIONS ON CASH, DUE FROM BANKS, SUBSIDIARY DIVIDENDS AND LENDING
ACTIVITIES
Under the provisions of the Federal Reserve Act, depository institutions are
required to maintain certain average balances in the form of cash or
noninterest-bearing balances with the Federal Reserve Bank. Average reserve
balances aggregating $655 million in 1997 were maintained in fulfillment of
these requirements.
The principal source of cash flows for the parent company, including cash flows
to pay dividends on its Common Shares and to service its debt, is dividends from
its banking and other subsidiaries. Various Federal and state statutory and
regulatory provisions limit the amount of dividends that may be paid to the
parent company by its banking subsidiaries without regulatory approval.
Under the laws, regulations and other restrictions applicable to the parent
company's banking subsidiaries, at December 31, 1997, such subsidiaries could
have declared dividends estimated to be $538 million in the aggregate, without
obtaining prior regulatory approval. Loans and advances from banking
subsidiaries to the parent company are also limited by law and are required to
be collateralized.
OBLIGATIONS UNDER NONCANCELABLE LEASES
At December 31, 1997, Key's affiliates were obligated under noncancelable leases
for land and buildings and for other property, consisting principally of data
processing equipment. Rental expense under all operating leases totaled $118
million in 1997, $126 million in 1996 and $117 million in 1995. Minimum future
rental payments under noncancelable leases at December 31, 1997, were as
follows: 1998 - $144 million; 1999 - $139 million; 2000 - $120 million; 2001 -
$90 million; 2002 - $84 million; and subsequent years - $532 million.
16. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
The carrying amount and estimated fair value of Key's financial instruments are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
----------------------- -------------------------
Carrying Fair Carrying Fair
in millions Amount Value Amount Value
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and short-term investments(1) $ 5,579 $ 5,579 $ 4,140 $ 4,140
Securities available for sale(2) 7,708 7,708 7,728 7,728
Investment securities(2) 1,230 1,262 1,601 1,637
Loans, net of allowance(3) 52,480 53,322 48,365 48,890
LIABILITIES
Deposits with no stated maturity(1) $25,503 $25,503 $27,374 $27,374
Time deposits(4) 19,570 19,692 17,943 17,953
Short-term borrowings(1) 12,946 12,946 10,894 10,894
Long-term debt(4) 7,446 7,408 4,213 4,124
CAPITAL SECURITIES(4) 750 776 500 500
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
Valuation Methods and Assumptions
- ---------------------------------
1 Fair value equals or approximates carrying amount.
2 Fair values of securities available for sale and investment securities
generally were based on quoted market prices. Where quoted market prices
were not available, fair values were based on quoted market prices of
similar instruments.
3 Fair values of certain loans were estimated using discounted cash flow
models. Certain residential real estate loans and education loans held for
sale were valued based on quoted market prices of similar loans offered or
sold in recent sales or securitization transactions. Lease financing
receivables, although excluded from the scope of SFAS No. 107 "Disclosures
About Fair Value of Financial Instruments," and mortgage loans held for
sale were included in the estimated fair value of loans at their carrying
amounts.
4 Fair values of time deposits, long-term debt and capital securities were
estimated based on discounted cash flows.
</TABLE>
The estimated fair values of credit card receivables, residential real estate
mortgage loans and deposits do not take into account the fair values of
long-term relationships, which are integral parts of the related financial
instruments. The disclosed estimated fair values of such instruments would
increase significantly if the fair values of the long-term relationships were
considered.
For financial instruments with a remaining average life to maturity of less than
six months, carrying amounts were used as an approximation of fair values. The
use of differ-
73
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ent assumptions (e.g., discount rates and cash flow estimates) and estimation
methods could have a significant effect on fair value amounts. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts that
could be realized in a current market exchange. Because SFAS No. 107 excludes
certain financial instruments and all nonfinancial instruments from its
disclosure requirements, any aggregation of the fair value amounts presented
would not represent the underlying value of Key.
Interest rate swaps, caps and floors were valued based on discounted cash flow
models and had an aggregate fair value of $152 million and $50 million at
December 31, 1997 and 1996, respectively. Foreign exchange forward contracts,
which were valued based on quoted market prices, had a fair value which
approximated carrying amount at December 31, 1997 and 1996. Off-balance sheet
financial instruments, including their fair values, are discussed in greater
detail in the following Note 17, Financial Instruments with Off-Balance Sheet
Risk.
17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Key, mainly through its lead bank (KeyBank N. A.), is party to various financial
instruments with off-balance sheet risk. It uses these financial instruments in
the normal course of business to meet the financing needs of its customers and
to manage its exposure to market risk. Market risk includes the possibility that
Key's net interest income will be adversely affected as a result of changes in
interest rates or other economic factors. The primary financial instruments used
include commitments to extend credit, standby and commercial letters of credit,
interest rate swaps, caps and floors, futures and foreign exchange forward
contracts. All of the interest rate swaps, caps and floors, and foreign exchange
forward contracts held are over-the-counter instruments. These financial
instruments may be used for lending-related, asset and liability management and
trading purposes, as discussed in the remainder of this note. In addition to the
market risk inherent in the use of these financial instruments, each contains an
element of credit risk. Credit risk is the possibility that Key will incur a
loss due to a counterparty's failure to meet its contractual obligations.
FINANCIAL INSTRUMENTS HELD OR ISSUED
FOR LENDING-RELATED PURPOSES
These instruments involve, to varying degrees, credit risk in addition to
amounts recognized in Key's balance sheet. Key mitigates its exposure to credit
risk through internal controls over the extension of credit. These controls
include the process of credit approval and review, the establishment of credit
limits and, when deemed necessary, securing collateral.
Key's commitments to extend credit are agreements with customers to provide
financing at predetermined terms as long as the customer continues to meet
specified criteria. Loan commitments serve to meet the financing needs of
customers and generally carry variable rates of interest, have fixed expiration
dates or other termination clauses, and may require the payment of fees. Since
the commitments may expire without being drawn upon, the total amount of the
commitments does not necessarily represent the future cash outlay to be made by
Key. The credit-worthiness of each customer is evaluated on a case-by-case
basis. The estimated fair values of these commitments and the standby letters of
credit discussed below are not material. Key does not have any significant
concentrations of credit risk.
Standby letters of credit enhance the credit-worthiness of Key's customers by
assuring the customers' financial performance to third parties in connection
with specified transactions. Amounts drawn under standby letters of credit
generally carry variable rates of interest, and the credit risk involved is
essentially the same as that involved in the extension of loan facilities.
The following is a summary of the contractual amount of each class of
lending-related off-balance sheet financial instrument outstanding wherein Key's
maximum possible accounting loss equals the contractual amount of the
instruments.
<TABLE>
<CAPTION>
DECEMBER 31,
in millions 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Loan commitments:
Credit card lines $ 8,205 $ 8,078
Home equity 3,977 3,239
Commercial real estate and construction 1,073 1,593
Commercial and other 15,867 10,327
- --------------------------------------------------------------------------------
Total loan commitments 29,122 23,237
Other commitments:
Standby letters of credit 1,431 1,385
Commercial letters of credit 109 202
Loans sold with recourse 27 30
- --------------------------------------------------------------------------------
Total loan and other commitments $30,689 $24,854
======= =======
- --------------------------------------------------------------------------------
</TABLE>
FINANCIAL INSTRUMENTS HELD OR ISSUED FOR ASSET
AND LIABILITY MANAGEMENT PURPOSES
Key manages its exposure to interest rate risk, in part, by using off-balance
sheet financial instruments, commonly referred to as derivatives. Instruments
used for this purpose modify the repricing or maturity characteristics of
specified on-balance sheet assets and liabilities. The instruments must be both
effective at reducing the risk associated with the exposure being managed, and
designated as a risk management transaction at the inception of the derivative
contract. In addition, to be considered effective, a high degree of interest
rate correlation must exist between the derivative and the specified assets or
liabilities being managed at inception and over the life of the derivative
contract. Primary among the financial instruments used by Key to manage exposure
to interest rate risk are interest rate swaps, caps and floors, otherwise
referred to as portfolio swaps, caps and floors.
74
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the notional amount, fair value, maturity,
weighted average rate received and paid, and weighted average strike price for
the various types of portfolio swaps, caps and floors used by Key.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------------------------------------------- ------------------
WEIGHTED AVERAGE RATE
NOTIONAL FAIR MATURITY ----------------------- NOTIONAL FAIR
DOLLARS IN MILLIONS AMOUNT VALUE (YEARS) RECEIVE PAY STRIKE AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest rate swaps:
Receive fixed/pay variable-indexed amortizing(1) $ 3,449 $ 12 1.3 6.83% 5.85% N/A $ 5,078 $ (8)
Receive fixed/pay variable - conventional 3,626 100 6.3 6.68 5.89 N/A 3,505 21
Pay fixed/receive variable - conventional 2,990 (7) 1.3 5.82 6.12 N/A 3,312 (5)
Basis swaps 1,110 (3) 1.7 5.80 5.86 N/A 400 --
- --------------------------------------------------------------------------------------------------------------------------------
Total 11,175 102 -- 6.40% 5.93% -- 12,295 8
Interest rate caps, collars and corridors:
Caps purchased - one to three month LIBOR based(2) 2,845 11 1.6 N/A N/A 5.83% 673 5
Collar - one month LIBOR based 100 -- 9 N/A N/A 5.00 and 5.50 100 1
Collar - thirty year US Treasury based 250 (15) 1.4 N/A N/A 6.06 and 8.25 -- --
1% payout corridor(3) 200 1 1.9 N/A N/A 6.00 to 7.003 200 2
- --------------------------------------------------------------------------------------------------------------------------------
Total 3,395 (3) -- -- -- -- 973 8
- --------------------------------------------------------------------------------------------------------------------------------
Total $14,570 $ 99 -- -- -- -- $13,268 $ 16
======= ===== ======= =====
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
1 Maturity is based upon expected average lives rather than contractual
terms.
2 Includes $1.0 billion of forward starting swaps as of December 31, 1997.
3 Payout is indexed to three-month LIBOR.
N/A = Not Applicable
</TABLE>
Interest rate swap contracts involve the exchange of interest payments
calculated based on an agreed-upon amount (notional amount) and are generally
used to mitigate Key's exposure to interest rate risk on certain loans,
deposits, short-term borrowings and long-term debt. Interest rate caps and
floors involve the payment of a premium by the buyer to the seller for the right
to receive an interest differential equal to the difference between the current
interest rate and an agreed-upon interest rate ("strike rate") applied to a
notional amount. With respect to interest rate caps and floors, Key generally
purchases caps, enters into collars (a combination of simultaneously purchasing
a cap and selling a floor), and enters into corridors (a combination of
simultaneously purchasing a cap at a specified strike price and selling a cap at
a higher strike price); these instruments are used to manage the risk of adverse
movements in interest rates on specified long-term debt and short-term
borrowings. The notional amount associated with the execution of swaps, caps and
floors is significantly greater than the amount at risk.
Credit risk on swaps, caps and floors results from the possibility that the
counterparty will not meet the terms of the contract and is measured as the cost
of replacing, at current market rates, contracts in an unrealized gain position.
Key deals exclusively with counterparties with high credit ratings. With regard
to its swap contracts, Key enters into bilateral collateral arrangements and
generally arranges master netting agreements. These agreements include legal
rights of setoff that provide for the net settlement of the subject contracts
with the same counterparty in the event of default. In addition, the credit risk
exposure to the counterparty on each interest rate swap is monitored by a credit
committee. Based upon credit reviews of the counterparties, limits on the total
credit exposure Key may have with each counterparty and the amount of collateral
required, if any, are determined. Although Key is exposed to credit-related
losses in the event of nonperformance by the counterparties, based on
management's assessment as of December 31, 1997, all counterparties were
expected to meet their obligations. At December 31, 1997, Key had 45 different
counterparties to portfolio swaps and swaps entered into to offset the risk of
customer swaps. Key had aggregate credit exposure of $102 million to 23 of these
counterparties, with the largest credit exposure to an individual counterparty
amounting to $20 million. As of the same date, Key's aggregate credit exposure
on its interest rate caps and floors totaled $13 million. Portfolio swaps
(including the impact of both the spread on the swap portfolio and the
amortization of deferred gains and losses resulting from terminated swaps) and
portfolio caps and floors increased net interest income by $64 million in 1997
and $66 million in 1996.
Conventional interest rate swap contracts involve the receipt of amounts based
on a fixed or variable rate in exchange for payments based on variable or fixed
rates, without an exchange of the underlying notional amount. Under an indexed
amortizing swap contract, the notional amount remains constant for a specified
period of time after which, based upon the level of an index at each review
date, the swap contract will mature, the notional amount will begin to amortize,
or the swap will continue in effect until its contractual maturity. Otherwise,
the characteristics of these swaps are similar to those of conventional swap
contracts. At December 31, 1997, Key was party to $1.1 billion and $2.1 billion
of indexed amortizing swaps that used a LIBOR index and a Constant Maturity
Treasuries ("CMT") index, respectively, for the review date measurement. Under
basis
75
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
swap contracts, interest payments based on different floating indices are
exchanged.
Based on the weighted average rates in effect at December 31, 1997, the spread
on portfolio swaps, excluding the amortization of net deferred gains on
terminated swaps, provided a positive impact on net interest income (since the
weighted average rate received exceeded the weighted average rate paid by 47
basis points). The aggregate fair value of $102 million at the same date was
derived through the use of discounted cash flow models, which contemplate
interest rates using the applicable forward yield curve, and represents an
estimate of the unrealized gain that would be recognized if the portfolio were
to be liquidated at that date.
Interest from portfolio swaps is recognized on an accrual basis over the lives
of the respective contracts as an adjustment of the interest income or expense
of the asset or liability whose risk is being managed. Gains and losses realized
upon the termination of interest rate swaps prior to maturity are deferred as an
adjustment to the carrying amount of the asset or liability. The deferred gain
or loss is amortized using the straight-line method over the shorter of the
projected remaining life of the related contract at its termination or the
underlying asset or liability. During 1997, swaps with a notional amount of $220
million were terminated, resulting in no deferred gain or loss. During 1996,
swaps with a notional amount of $800 million were terminated, resulting in a
deferred gain of $.3 million. At December 31, 1997, Key had a net deferred swap
gain of $14 million with a weighted average life of 5.4 years related to the
management of debt and a net deferred loss of $.3 million with a weighted
average life of .8 years related to the management of loans.
FINANCIAL INSTRUMENTS HELD OR ISSUED FOR TRADING PURPOSES
Key also uses interest rate swaps, caps and floors, and futures contracts for
dealer activities (which are generally limited to the banks' commercial loan
customers) and enters into other positions with third parties that are intended
to mitigate the interest rate risk of the customer positions. Interest rate swap
contracts entered into with customers are typically limited to conventional
swaps, as previously described. The customer swaps, caps and floors, and
futures, as well as the third-party positions, are recorded at their estimated
fair values, and adjustments to fair value are included in investment banking
income on the income statement.
Key also enters into foreign exchange forward contracts to accommodate the
business needs of its customers and for proprietary trading purposes. These
contracts provide for the delayed delivery or purchase of foreign currency. The
foreign exchange risk associated with such contracts is mitigated by entering
into other foreign exchange contracts with third parties. Adjustments to the
fair value of all such foreign exchange forward contracts are included in
investment banking income on the income statement.
Key also enters into treasury options and treasury futures options for
proprietary trading purposes. Adjustments to the fair value of all such options
are included in investment banking income on the income statement.
At December 31, 1997, credit exposure from financial instruments held or issued
for trading purposes was limited to the aggregate fair value of each contract
with a positive fair value, or $160 million. The risk of counterparties
defaulting on their obligations is monitored on an ongoing basis. The affiliate
banks contract with counterparties of good credit standing and enter into master
netting agreements when possible in an effort to manage credit risk.
Trading income recognized on interest rate and foreign exchange forward
contracts totaled $32 million and $16 million, respectively, for 1997 and $20
million and $14 million, respectively, for 1996.
A summary of the notional amount and the respective fair value of derivative
financial instruments held or issued for trading purposes at December 31, 1997,
and on average for the year then ended, is presented below. The positive fair
values represent assets to Key and are recorded in other assets, while the
negative fair values represent liabilities and are recorded in other liabilities
on the balance sheet. The $10.5 billion notional amount of customer swaps
presented in the table includes $4.7 billion of interest rate swaps that receive
a fixed rate and pay a variable rate, $2.8 billion of interest rate swaps that
pay a fixed rate and receive a variable rate and $3.0 billion of basis swaps. As
of December 31, 1997, these swaps had an expected average life of 6.0 years,
carried a weighted average rate received of 6.51% and had a weighted average
rate paid of 6.40%.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1997
-------------------- ------------------------------
NOTIONAL FAIR AVERAGE AVERAGE
in millions AMOUNT VALUE NOTIONAL AMOUNT FAIR VALUE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate contracts:
Swap assets $7,144 $ 122 $5,354 $ 66
Swap liabilities 3,312 (69) 2,184 (32)
Caps and floors purchased 824 1 839 2
Caps and floors sold 1,008 (1) 989 (2)
Futures purchased 785 -- 593 --
Futures sold 7,420 (6) 5,840 (4)
Foreign exchange forward contracts:
Assets 846 24 603 21
Liabilities 821 (25) 569 (20)
Treasury based option contracts:
Options purchased 2,230 13 374 2
Options sold 2,074 (2) 341 --
- -----------------------------------------------------------------------------------------------------
</TABLE>
76
<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
DECEMBER 31,
in millions 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Interest-bearing deposits with KeyBank N.A. $ 279 $ 735
Loans and advances to subsidiaries:
Banks and bank holding companies 98 190
Nonbank subsidiaries 418 316
- ---------------------------------------------------------------------------------------------
516 506
Investment in subsidiaries:
Banks and bank holding companies 6,194 5,247
Nonbank subsidiaries 396 401
- ---------------------------------------------------------------------------------------------
6,590 5,648
Other assets 376 450
- ---------------------------------------------------------------------------------------------
Total assets $7,761 $7,339
====== ======
LIABILITIES
Accrued interest and other liabilities $ 226 $ 262
Long-term debt:
Subsidiary trusts 773 515
Unaffiliated companies 1,581 1,681
- ---------------------------------------------------------------------------------------------
2,354 2,196
- ---------------------------------------------------------------------------------------------
Total liabilities 2,580 2,458
SHAREHOLDERS' EQUITY(1) 5,181 4,881
- ---------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $7,761 $7,339
====== ======
- ---------------------------------------------------------------------------------------------
<FN>
(1) See page 58 for the parent company's Statement of Changes in Shareholders'
Equity.
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
Year ended December 31,
in millions 1997 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME
Dividends from subsidiaries:
Banks and bank holding companies $ 180 $ 1,012 $ 1,061
Nonbank subsidiaries 28 15 55
Management fees and interest income from subsidiaries 51 50 45
Other income 62 16 13
- ------------------------------------------------------------------------------------
321 1,093 1,174
EXPENSES
Interest on long-term debt with subsidiary trusts 50 3 --
Interest on other borrowed funds 100 122 125
Restructuring charge -- 100 --
Personnel and other expenses 68 63 49
- ------------------------------------------------------------------------------------
218 288 174
Income before income tax benefit and equity in
net income less dividends from subsidiaries 103 805 1,000
Income tax benefit 43 84 39
- ------------------------------------------------------------------------------------
146 889 1,039
Equity in net income less dividends from subsidiaries 773 (106) (214)
- ------------------------------------------------------------------------------------
NET INCOME $ 919 $ 783 $ 825
======= ======= =======
- ------------------------------------------------------------------------------------
</TABLE>
77
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOW
Year ended December 31,
in millions 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 919 $ 783 $ 825
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of intangibles 6 9 8
Gain on sale of subsidiary (53) (8) --
Deferred income taxes (2) (31) 4
Equity in net income less dividends from subsidiaries (773) 106 214
Net (increase) decrease in other assets (19) 2 89
Net increase (decrease) in other liabilities 25 (5) (172)
Net decrease in accrued merger and integration charge -- -- (50)
Net increase (decrease) in accrued restructuring charge (75) 100 --
Other financing activities, net 14 72 (144)
- -----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 42 $ 1,028 774
INVESTING ACTIVITIES
Purchases of investment securities -- -- (5)
Proceeds from prepayments and maturities of investment securities 18 8 24
Purchases of securities available for sale (2) (4) (100)
Proceeds from prepayments and maturities of securities available for sale 2 4 209
Net (increase) decrease in interest-bearing deposits 479 (405) 199
Net (increase) decrease in loans and advances to subsidiaries (98) (138) 92
Proceeds from sale of subsidiary 135 164 --
Net cash used in acquisitions, net of cash acquired -- -- (296)
(Increase) decrease in investments in subsidiaries 125 (80) 56
- -----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 659 (451) 179
FINANCING ACTIVITIES
Net decrease in short-term borrowings -- -- (176)
Net proceeds from issuance of long-term debt 258 1,062 413
Payments on long-term debt (99) (605) (161)
Loan payment received from ESOP trustee 7 2 13
Redemption of 10% Cumulative Preferred Stock -- (160) --
Purchases of treasury shares (563) (617) (724)
Proceeds from issuance of common stock pursuant to employee
benefit and dividend reinvestment plans 65 98 36
Cash dividends (369) (357) (354)
- -----------------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (701) (577) (953)
- -----------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS -- -- --
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR -- -- --
- -----------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF YEAR -- -- --
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
For the years ended December 31, 1997, 1996 and 1995, the parent company paid
interest of $147 million, $119 million and $135 million, respectively, on
borrowed funds.
78
<PAGE> 55
CORPORATE INFORMATION
KEYCORP BOARD OF DIRECTORS
ROBERT W. GILLESPIE
Chairman and Chief Executive Officer, KeyCorp
CECIL D. ANDRUS
Chairman, Andrus Center for Public Policy--
Boise State University
WILLIAM G. BARES
Chairman, President and Chief Executive Officer,
The Lubrizol Corporation
ALBERT C. BERSTICKER
Chairman and Chief Executive Officer,
Ferro Corporation
DR. CAROL A. CARTWRIGHT
President, Kent State University
THOMAS A. COMMES
President and Chief Operating Officer,
The Sherwin-Williams Company
KENNETH M. CURTIS
Senior Member,
Curtis, Thaxter, Stevens, Broder & Micoleau LLC
JOHN C. DIMMER
President, Firs Management Corporation
STEPHEN R. HARDIS
Chairman and Chief Executive Officer,
Eaton Corporation
HENRY S. HEMINGWAY
President, Town & Country Life Insurance Company
CHARLES R. HOGAN
Co-owner and Chief Executive Officer,
C.R.H. Investments, Inc.
DOUGLAS J. MCGREGOR
Chairman and Chief Executive Officer,
M.A. Hanna Company
HENRY L. MEYER III
President and Chief Operating Officer, KeyCorp
STEVEN A. MINTER
Executive Director and President,
The Cleveland Foundation
M. THOMAS MOORE
Retired Chairman and Chief Executive Officer,
Cleveland-Cliffs Inc
RICHARD W. POGUE
Senior Advisor, Dix & Eaton
RONALD B. STAFFORD
Partner,
Stafford, Trombley, Purcell, Owens & Curtin, P.C.;
Member, New York State Senate
DENNIS W. SULLIVAN
Executive Vice President,
Parker-Hannifin Corporation
PETER G. TEN EYCK, II
President, Indian Ladder Farms
NANCY B. VEEDER
President, Veeder Realty, Inc.;
Partner, Veedergate Realty, L.P.
KEYCORP MANAGEMENT COMMITTEE
ROBERT W. GILLESPIE
Chairman and Chief Executive Officer
HENRY L. MEYER III
President and Chief Operating Officer
GARY R. ALLEN
Senior Executive Vice President
and Chief Banking Officer
JAMES S. BINGAY
Executive Vice President, Key Corporate Capital
ALLEN J. GULA, JR.
Executive Vice President
Information and Technology
JAMES A. FISHELL
Executive Vice President, Key Consumer Finance
ROBERT B. HEISLER, JR.
Executive Vice President, Key Capital Partners
THOMAS E. HELFRICH
Executive Vice President
Corporate Human Resources
K. BRENT SOMERS
Senior Executive Vice President
and Chief Financial Officer
THOMAS C. STEVENS
Senior Executive Vice President,
General Counsel and Secretary
79
<PAGE> 56
CORPORATE INFORMATION
KEY COMMUNITY BANK
KEYBANK NATIONAL ASSOCIATION
127 Public Square, Cleveland, OH 44114
(800) 523-7247
GARY R. ALLEN
Chairman and Chief Executive Officer
PATRICK V. AULETTA
President
Community Corporate Banking
ROBERT G. JONES
President
Retail Banking
CARL C. HEINTEL, JR.
Vice Chairman
Credit Administration
DANIEL E. KLIMAS
Vice Chairman
Key PrivateBank
SANDY M. MALTBY
Vice Chairman
Consumer Segments
PATRICK J. SWANICK
Vice Chairman
Distribution Management
WILLIAM BARNES
Executive Vice President
Large Corporate Banking
MICHAEL P. BARNUM
Executive Vice President
Retail Banking
JOHN T. BLAKE
Executive Vice President
Commercial Banking
ROBERT M. CURLEY
Executive Vice President
Retail Banking
LEONARD J. HESS
Executive Vice President
Community Corporate Banking
ANTHONY HEYWORTH
Executive Vice President
Community Corporate Banking
KAREN R. KLEINHENZ
Executive Vice President
Public Sector
GARY R. MARTZOLF
Executive Vice President
Key PrivateBank
SCOTT M. PETERS
Executive Vice President
Retail Banking
KERSHAP PUNDOLE
Executive Vice President
Credit Administration
FRANZ PUSSEL JR.
Executive Vice President
Credit Administration
DAVID J. SCHUTTER
Executive Vice President
Credit Administration
KENTON A. THOMPSON
Executive Vice President
Key PrivateBank
AKRON DISTRICT
LINDA L. GENTILE, PRESIDENT
157 South Main Street, Akron, OH 44308
(330) 379-1409
ALASKA DISTRICT
MICHAEL J. BURNS, PRESIDENT
101 West Benson Blvd. Suite 414
Anchorage, AK 99510
(907) 562-6100
ALBANY DISTRICT
ROBERT E. SMYTH, PRESIDENT
66 South Pearl Street, 10th floor,
Albany, NY 12207
(518) 486-8873
BOISE DISTRICT
MICHAEL M. MOONEY, PRESIDENT
702 West Idaho, 12th floor, Boise, ID 83701
(208) 334-7031
BUFFALO DISTRICT
MARSHA S. HENDERSON, PRESIDENT
50 Fountain Plaza, 17th floor, Buffalo, NY 14202
(716) 847-2229
CANTON DISTRICT
MICHAEL P. GILL, PRESIDENT
202 Second Street, NE, Canton, OH 44702
(330) 489-5344
CINCINNATI DISTRICT
MARTIN D. PIAZZA, PRESIDENT
525 Vine Street, 6th floor, Cincinnati, OH 45202
(513) 762-8203
CLEVELAND DISTRICT
RUBEN L. HOLLOWAY, PRESIDENT
800 Superior Avenue, Cleveland, OH 44114
(216) 828-9661
COLUMBUS DISTRICT
TODD F. CLOSSIN, PRESIDENT
88 East Broad Street, Columbus, OH 43215
(614) 460-3493
DAYTON DISTRICT
MERVYN L. ALPHONSO, PRESIDENT
34 North Main Street, Dayton, OH 45402
(937) 586-8667
DENVER DISTRICT
JAMES R. PEOPLES, PRESIDENT
3300 East First Avenue, Denver, CO 80206
(303) 329-7465
HUDSON VALLEY DISTRICT
RICHARD M. KULBIEDA, PRESIDENT
One Washington Center, 5th floor
Newburgh, NY 12550
(914) 563-5190
INDIANAPOLIS DISTRICT
ANTHONY HEYWORTH, PRESIDENT
Ten West Market Street, Indianapolis, IN 46204
(317) 464-8090
LONG ISLAND DISTRICT
MICHAEL R. ORSINO, PRESIDENT
1377 Motor Parkway, Islandia, NY 11788
(516) 233-4046
MAINE DISTRICT
MICHAEL W. MCNAMARA, PRESIDENT
One Canal Plaza, Portland, ME 04101
(207) 874-7275
MICHIGAN DISTRICT
WILLIAM S. HANN, PRESIDENT
100 South Main Street, Ann Arbor, MI 48104
(331) 994-0919
NEW HAMPSHIRE DISTRICT
KENT D. WINTERS, PRESIDENT
One Bedford Farms, Kilton Road
Bedford, NH 03110
(603) 656-1101
NORTH PUGET SOUND DISTRICT
PEGGY A. ZORO, PRESIDENT
101 East Holly, Bellingham, WA 98225
(360) 676-6355
OREGON DISTRICT
JAMES J. ATKINSON, PRESIDENT
1211 S.W. Fifth Avenue, Suite 300
Portland, OR 97204
(503) 790-7506
ROCHESTER DISTRICT
DENNIS S. BUCHAN, PRESIDENT
39 State Street, Rochester, NY 14614
(716) 263-3357
SALT LAKE CITY DISTRICT
CAROL L. DAVENPORT, PRESIDENT
50 South Main Street, Salt Lake City, UT 84130
(801) 535-1105
SEATTLE DISTRICT
JAMES A. WASHAM, PRESIDENT
1325 Fourth Avenue, 12th floor
Seattle, WA 98101
(206) 689-5999
SOUTH BEND DISTRICT
MICHAEL J. HAMMES, PRESIDENT
202 South Michigan Street
South Bend, IN 46601
(219) 237-5344
SYRACUSE DISTRICT
HUGH C. LORDON, PRESIDENT
201 South Warren Street, 3rd floor
Syracuse, NY 13202
(315) 470-5140
TACOMA DISTRICT
RALPH K. HOLLIDAY, PRESIDENT
1119 Pacific Avenue, 3rd floor, Tacoma, WA 98402
(206) 305-7516
TOLEDO DISTRICT
JAMES A. HOFFMAN, PRESIDENT
Three Seagate Tower, Toledo, OH 43604
(419) 259-8587
VERMONT DISTRICT
CHARLES P. SMITH, PRESIDENT
149 Bank Street, P.O. Box 949
Burlington, VT 05402
(802) 660-4213
Key Community
DEVELOPMENT CORPORATION
127 Public Square, Cleveland, OH 44114
(216) 689-8270
JEROME G. MCCLAIN
President
80
<PAGE> 57
CORPORATE INFORMATION
KEY CORPORATE CAPITAL
CORPORATE CAPITAL GROUP
127 Public Square, Cleveland, OH 44114
(216) 689-3690
JAMES S. BINGAY
Group Executive Vice President
KEY CORPORATE CAPITAL, INC.
127 Public Square, Cleveland, OH 44114
(216) 689-3000
LINDA A. GRANDSTAFF
President
AMY K. CARLSON
Vice President, Loan Syndication and Sales
PAUL J. FISSEL
Senior Vice President, Structured Finance
R. ROB HILTON
Senior Vice President,
Global Treasury Management Services
KATHLEEN M. MAYER
Senior Vice President.
Media & Telecommunications Finance
JOSEPH T. RESOR III
Senior Vice President, Healthcare Finance
DONALD C. STONE
Senior Vice President, Institutional Asset Services
KEY GLOBAL FINANCE
30 Federal Street, Boston, MA 02110
(617) 654-2715
CARL R. VERCOLLONE, CFA
President and Senior Managing Director
KEY REAL ESTATE FINANCE
127 Public Square, Cleveland, OH 44114
(216) 689-3574
GEORGE E. EMMONS, JR.
Executive Vice President
KEY EQUIPMENT FINANCE GROUP
1401 Pearl Street, Suite 200, Boulder, CO 80302
(303) 443-8064
PAUL A. LARKINS
President and Chief Executive Officer
KEYCORP LEASING
54 State Street, P.O. Box 1865
Albany, NY 12201-0655
(800) 888-1025
PAUL A. LARKINS
President and Chief Executive Officer
LEASETEC CORPORATION
1401 Pearl St., Suite 200, Boulder, CO 80302
(303) 443-8064
DAVID M. BYRNE
President and Chief Operating Officer
KEY CAPITAL PARTNERS
KEY CAPITAL PARTNERS
127 Public Square, Cleveland, OH 44114
(216) 689-3233
ROBERT B. HEISLER, JR.
Group Executive Vice President
KEY ASSET MANAGEMENT, INC.
127 Public Square, Cleveland, OH 44114
(216) 689-4535
WILLIAM G. SPEARS
Chairman and Chief Executive Officer
RICHARD J. BUONCORE
President and Chief Operating Officer
ANTHONY AVENI
Chief Investment Officer,
Society Asset Management
CHARLES G. CRANE
Chief Market Strategist, Key Asset Management
KATHLEEN A. DENNIS
Senior Managing Director,
Investment Products Group
VINCENT FARRELL, JR.
Chief Investment Officer
Spears, Benzak, Salomon & Farrell
GARY R. MARTZOLF
Senior Managing Director, Key Asset Advisors
RICHARD E. SALOMON
Chief Investment Officer, Wealth Management
Spears, Benzak, Salomon & Farrell
KEYCORP INSURANCE MANAGEMENT GROUP
127 Public Square, Cleveland, OH 44114
(216) 689-8107
ROGER E. DUNKER
President and Chief Executive Officer
KEY INVESTMENTS INC.
127 Public Square, Cleveland, OH 44114
(216) 689-3000
JACK L. KOPNISKY
President and Chief Executive Officer
INVESTMENT BANKING AND
CAPITAL MARKETS GROUP
127 Public Square, Cleveland, OH 44114
(216) 689-3582
JOHN E. KOHL
Group Executive Vice President
GERALD A. FALLON
Executive Vice President and
Director of Capital Markets
KEY CAPITAL MARKETS, INC.
127 Public Square, Cleveland, OH 44114
(216) 689-4889
V. SHIV KRISHNAN
President
CARLETON, MCCREARY,
HOLMES & CO.
600 Superior Avenue, 10th floor
Cleveland, OH 44114
(216) 781-9035
PAUL H. CARLETON
Executive Managing Director
ROBERT G. MCCREARY
Executive Managing Director
DOUGLAS Q. HOLMES
Executive Managing Director
KEY EQUITY CAPITAL CORPORATION
127 Public Square, Cleveland, OH 44114
(216) 689-5776
DAVID P. GIVEN
President and Chief Executive Officer
81
<PAGE> 58
CORPORATE INFORMATION
KEY CONSUMER FINANCE
KEY CONSUMER FINANCE
127 Public Square, Cleveland, OH 44114
(216) 689-5264
JAMES A. FISHELL
Group Executive Vice President
KEYBANK USA
800 Superior Avenue, Cleveland, OH 44114
(800) USA-5553
RANDALL M. BEHM
Senior Vice President, Key Education Resources
(216) 828-9342
LOUIS R. FEAGLES
Chief Executive Officer, Key AutoFinance
(216) 828-9224
KENNETH R. LANDON
Senior Vice President, Key Marine/RV Finance
(216) 828-9113
KEYCORP FINANCE INC.
1259 S. Cedar Crest Blvd.
Allentown, PA 18103-6206
(610) 782-0880
JAMES H. DOWNING
President and Chief Executive Officer
CHAMPION MORTGAGE CO., INC.
20 Waterview Blvd., Parsippany, NJ 07054-9671
(800) 242-6746
JOSEPH P. GORYEB
Chairman and Chief Executive Officer
INFORMATION TECHNOLOGY AND OPERATIONS
KEY SERVICES CORPORATION
22 Corporate Woods, Albany, NY 12211
2025 Ontario Street. Cleveland, OH 44114
(216) 689-8919
ALLEN J. GULA, JR.
Chairman and Chief Executive Officer
MICHAEL L. EVANS
President and Chief Operating Officer
KAREN S. BLUE
Chief Administrative Officer
JO ANN BOYLAN
Senior Vice President, Warehouse Systems
GARY S. DIDIER
Executive Vice President, Continuous Improvement
JOHN R. MEYER
Executive Vice President,
Enterprise Management Services
ANN M. PROCK
Executive Vice President,
Core Accounting and MIS Systems
ROBERT RICKERT
Executive Vice President,
Enterprise & Network Technologies
MICHELE TROLLI
Executive Vice President,
Channel Delivery Systems
OTHER KEY SENIOR EXECUTIVES
KEVIN M. BLAKELY
Risk Management
PETER E. BRERETON
Government Relations
SUSAN P. BROCKETT
Human Resources,
Key Corporate Capital, Key Capital Partners
CRAIG C. BROOKS
Performance Analysis & Planning
MICHAEL A. BUTLER
Loan Portfolio Management
DAVID R. CAMPBELL
Corporate Strategy
DIANE F. COBLE
Human Resources,
Employee Relations, Staffing and Diversity
LISA S. CODISPOTI
Human Resources, Training & Development
PETER H. FASS, M.D.
Human Resources,
Health, Welfare and Employee Services
W. JOHN FULLER
Corporate Communications
W. LAWRENCE GILMER
Human Resources,
Compensation & Executive Benefits
PAMELA D. GORMLEY
Finance,
Key Corporate Capital, Key Capital Partners
KAREN R. HAEFLING
Marketing, Key Community Bank
HENRY HEINEMANN
Finance, Key Services Corporation
JOHN S. HELLING
Corporate Real Estate
LEE IRVING
Chief Accounting Officer, Investor Relations
REGINALD W. JONES
Marketing,
Finance, Planning & Administration
DAVID K. KONEFAL
Marketing, Key Capital Partners
JON E. LIENERT
Corporate Sourcing
JAMES J. MALERBA
Corporate Accounting
JOHN H. MANCUSO
Deputy General Counsel and Secretary
KENNETH T. MAYLAND, Ph.D.
Chief Economist
BRUCE D. MURPHY
Human Resources, Key Community Bank
RONALD J. NICOLAS
Finance, Key Consumer Finance
VERNON L. PATTERSON
Investor Relations
PETER K. POTCHEN
General Auditor
ROBERT A. RESCHKE
Finance,
Financial Operations
KEVIN P. RILEY
Finance, Key Community Bank
LEIF A. ROLL
Marketing, Product Management
JOHN E. THOMAS
Marketing, Key Corporate Capital
TODD L. THOMPSON
Corporate Marketing
ANDREW R. TYSON
Corporate Development
WENDY J. WORTHINGTON
Human Resources, Key Consumer Finance
82
<PAGE> 1
EXHIBIT 21
KEYCORP
SUBSIDIARIES OF THE REGISTRANT AT FEBRUARY 28, 1998
<TABLE>
<CAPTION>
JURISDICTION
OF INCORPORATION
SUBSIDIARIES(1) OR ORGANIZATION PARENT COMPANY
- ---------------------------------------------- ---------------- ----------------------------------
<S> <C> <C>
KeyBank National Association United States KeyCorp
</TABLE>
- ---------------
(1) Subsidiaries of KeyCorp other than KeyBank National Association are not
listed above since, in the aggregate, they would not constitute a
significant subsidiary. KeyBank National Association is 100% owned by
KeyCorp.
<PAGE> 1
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of KeyCorp of our report dated January 13, 1998, included in the 1997 Annual
Report to Shareholders of KeyCorp.
We also consent to the incorporation by reference in the following Registration
Statements of KeyCorp and in the related Prospectuses of our report dated
January 13, 1998, with respect to the consolidated financial statements
incorporated herein by reference in this Annual Report (Form 10-K) for the year
ended December 31, 1997:
Form S-3 No. 33-10634
Form S-3 No. 33-56881
Form S-3 No. 33-58405
Form S-3 No. 333-10577
Form S-3 No. 333-37287
Form S-4 No. 33-31569
Form S-4 No. 33-44657
Form S-4 No. 33-51717
Form S-4 No. 33-55573
Form S-4 No. 33-57329
Form S-4 No. 33-61539
Form S-4 No. 333-19151
Form S-8 No. 2-97452
Form S-8 No. 33-21643
Form S-8 No. 33-42691
Form S-8 No. 33-45518
Form S-8 No. 33-46278
Form S-8 No. 33-52293
Form S-8 No. 33-54819
Form S-8 No. 33-56745
Form S-8 No. 33-56879
Form S-8 No. 33-31569 (Post Effective Amendment No. 1 to Form S-4)
Form S-8 No. 33-44657 (Post-Effective Amendment No. 1 to Form S-4)
Form S-8 No. 33-51717 (Post-Effective Amendment No. 1 to Form S-4)
/s/ Ernst & Young LLP
Cleveland, Ohio
March 23, 1998
<PAGE> 1
Exhibit 24
KEYCORP
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer and
director, of KeyCorp, an Ohio corporation, which proposes to file with the
Securities and Exchange Commission, Washington, D.C., under the provisions of
the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 (the "Annual Report"), hereby
constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C.
Stevens, and each of them, as attorney for the undersigned, with full power of
substitution and resubstitution, for and in the name, place, and stead of the
undersigned, to sign and file the Annual Report and exhibits thereto, and any
and all amendments thereto, with full power and authority to do and perform any
and all acts and things whatsoever requisite and necessary to be done in the
premises, hereby ratifying and approving the acts of such attorney or any such
substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as
of March 19, 1998.
\s\ Cecil D. Andrus
---------------------------
Typed Name: Cecil D. Andrus
---------------------------
<PAGE> 2
Exhibit 24
KEYCORP
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer and
director, of KeyCorp, an Ohio corporation, which proposes to file with the
Securities and Exchange Commission, Washington, D.C., under the provisions of
the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 (the "Annual Report"), hereby
constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C.
Stevens, and each of them, as attorney for the undersigned, with full power of
substitution and resubstitution, for and in the name, place, and stead of the
undersigned, to sign and file the Annual Report and exhibits thereto, and any
and all amendments thereto, with full power and authority to do and perform any
and all acts and things whatsoever requisite and necessary to be done in the
premises, hereby ratifying and approving the acts of such attorney or any such
substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as
of March 19, 1998.
\s\ Lee G. Irving
---------------------------
Typed Name: Lee G. Irving
---------------------------
<PAGE> 3
KEYCORP
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer and
director, of KeyCorp, an Ohio corporation, which proposes to file with the
Securities and Exchange Commission, Washington, D.C., under the provisions of
the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 (the "Annual Report"), hereby
constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C.
Stevens, and each of them, as attorney for the undersigned, with full power of
substitution and resubstitution, for and in the name, place, and stead of the
undersigned, to sign and file the Annual Report and exhibits thereto, and any
and all amendments thereto, with full power and authority to do and perform any
and all acts and things whatsoever requisite and necessary to be done in the
premises, hereby ratifying and approving the acts of such attorney or any such
substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as
of March 19, 1998.
\s\ William G. Bares
---------------------------
Typed Name: William G. Bares
---------------------------
<PAGE> 4
KEYCORP
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer and
director, of KeyCorp, an Ohio corporation, which proposes to file with the
Securities and Exchange Commission, Washington, D.C., under the provisions of
the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 (the "Annual Report"), hereby
constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C.
Stevens, and each of them, as attorney for the undersigned, with full power of
substitution and resubstitution, for and in the name, place, and stead of the
undersigned, to sign and file the Annual Report and exhibits thereto, and any
and all amendments thereto, with full power and authority to do and perform any
and all acts and things whatsoever requisite and necessary to be done in the
premises, hereby ratifying and approving the acts of such attorney or any such
substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as
of March 19, 1998.
\s\ A. C. Bersticker
---------------------------
Typed Name: A. C. Bersticker
---------------------------
<PAGE> 5
KEYCORP
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer and
director, of KeyCorp, an Ohio corporation, which proposes to file with the
Securities and Exchange Commission, Washington, D.C., under the provisions of
the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 (the "Annual Report"), hereby
constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C.
Stevens, and each of them, as attorney for the undersigned, with full power of
substitution and resubstitution, for and in the name, place, and stead of the
undersigned, to sign and file the Annual Report and exhibits thereto, and any
and all amendments thereto, with full power and authority to do and perform any
and all acts and things whatsoever requisite and necessary to be done in the
premises, hereby ratifying and approving the acts of such attorney or any such
substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as
of March 19, 1998.
\s\ Carol Cartwright
---------------------------
Typed Name: Carol Cartwright
---------------------------
<PAGE> 6
KEYCORP
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer and
director, of KeyCorp, an Ohio corporation, which proposes to file with the
Securities and Exchange Commission, Washington, D.C., under the provisions of
the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 (the "Annual Report"), hereby
constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C.
Stevens, and each of them, as attorney for the undersigned, with full power of
substitution and resubstitution, for and in the name, place, and stead of the
undersigned, to sign and file the Annual Report and exhibits thereto, and any
and all amendments thereto, with full power and authority to do and perform any
and all acts and things whatsoever requisite and necessary to be done in the
premises, hereby ratifying and approving the acts of such attorney or any such
substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as
of March 19, 1998.
\s\ Thomas A. Commes
---------------------------
Typed Name: Thomas A. Commes
---------------------------
<PAGE> 7
KEYCORP
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer and
director, of KeyCorp, an Ohio corporation, which proposes to file with the
Securities and Exchange Commission, Washington, D.C., under the provisions of
the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 (the "Annual Report"), hereby
constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C.
Stevens, and each of them, as attorney for the undersigned, with full power of
substitution and resubstitution, for and in the name, place, and stead of the
undersigned, to sign and file the Annual Report and exhibits thereto, and any
and all amendments thereto, with full power and authority to do and perform any
and all acts and things whatsoever requisite and necessary to be done in the
premises, hereby ratifying and approving the acts of such attorney or any such
substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as
of March 19, 1998.
\s\ Kenneth M. Curtis
---------------------------
Typed Name: Kenneth M. Curtis
---------------------------
<PAGE> 8
KEYCORP
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer and
director, of KeyCorp, an Ohio corporation, which proposes to file with the
Securities and Exchange Commission, Washington, D.C., under the provisions of
the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 (the "Annual Report"), hereby
constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C.
Stevens, and each of them, as attorney for the undersigned, with full power of
substitution and resubstitution, for and in the name, place, and stead of the
undersigned, to sign and file the Annual Report and exhibits thereto, and any
and all amendments thereto, with full power and authority to do and perform any
and all acts and things whatsoever requisite and necessary to be done in the
premises, hereby ratifying and approving the acts of such attorney or any such
substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as
of March 19, 1998.
\s\ John C. Dimmer
---------------------------
Typed Name: John C. Dimmer
---------------------------
<PAGE> 9
KEYCORP
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer and
director, of KeyCorp, an Ohio corporation, which proposes to file with the
Securities and Exchange Commission, Washington, D.C., under the provisions of
the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 (the "Annual Report"), hereby
constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C.
Stevens, and each of them, as attorney for the undersigned, with full power of
substitution and resubstitution, for and in the name, place, and stead of the
undersigned, to sign and file the Annual Report and exhibits thereto, and any
and all amendments thereto, with full power and authority to do and perform any
and all acts and things whatsoever requisite and necessary to be done in the
premises, hereby ratifying and approving the acts of such attorney or any such
substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as
of March 19, 1998.
\s\ Robert W. Gillespie
---------------------------
Typed Name: Robert W. Gillespie
---------------------------
<PAGE> 10
KEYCORP
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer and
director, of KeyCorp, an Ohio corporation, which proposes to file with the
Securities and Exchange Commission, Washington, D.C., under the provisions of
the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 (the "Annual Report"), hereby
constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C.
Stevens, and each of them, as attorney for the undersigned, with full power of
substitution and resubstitution, for and in the name, place, and stead of the
undersigned, to sign and file the Annual Report and exhibits thereto, and any
and all amendments thereto, with full power and authority to do and perform any
and all acts and things whatsoever requisite and necessary to be done in the
premises, hereby ratifying and approving the acts of such attorney or any such
substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as
of March 19, 1998.
\s\ Stephen R. Hardis
---------------------------
Typed Name: Stephen R. Hardis
---------------------------
<PAGE> 11
KEYCORP
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer and
director, of KeyCorp, an Ohio corporation, which proposes to file with the
Securities and Exchange Commission, Washington, D.C., under the provisions of
the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 (the "Annual Report"), hereby
constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C.
Stevens, and each of them, as attorney for the undersigned, with full power of
substitution and resubstitution, for and in the name, place, and stead of the
undersigned, to sign and file the Annual Report and exhibits thereto, and any
and all amendments thereto, with full power and authority to do and perform any
and all acts and things whatsoever requisite and necessary to be done in the
premises, hereby ratifying and approving the acts of such attorney or any such
substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as
of March 19, 1998.
\s\ Henry S. Hemingway
---------------------------
Typed Name: Henry S. Hemingway
---------------------------
<PAGE> 12
KEYCORP
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer and
director, of KeyCorp, an Ohio corporation, which proposes to file with the
Securities and Exchange Commission, Washington, D.C., under the provisions of
the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 (the "Annual Report"), hereby
constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C.
Stevens, and each of them, as attorney for the undersigned, with full power of
substitution and resubstitution, for and in the name, place, and stead of the
undersigned, to sign and file the Annual Report and exhibits thereto, and any
and all amendments thereto, with full power and authority to do and perform any
and all acts and things whatsoever requisite and necessary to be done in the
premises, hereby ratifying and approving the acts of such attorney or any such
substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as
of March 19, 1998.
\s\ Charles R. Hogan
---------------------------
Typed Name: Charles R. Hogan
---------------------------
<PAGE> 13
KEYCORP
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer and
director, of KeyCorp, an Ohio corporation, which proposes to file with the
Securities and Exchange Commission, Washington, D.C., under the provisions of
the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 (the "Annual Report"), hereby
constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C.
Stevens, and each of them, as attorney for the undersigned, with full power of
substitution and resubstitution, for and in the name, place, and stead of the
undersigned, to sign and file the Annual Report and exhibits thereto, and any
and all amendments thereto, with full power and authority to do and perform any
and all acts and things whatsoever requisite and necessary to be done in the
premises, hereby ratifying and approving the acts of such attorney or any such
substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as
of March 19, 1998.
\s\ Douglas J. McGregor
---------------------------
Typed Name: Douglas J. McGregor
---------------------------
<PAGE> 14
KEYCORP
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer and
director, of KeyCorp, an Ohio corporation, which proposes to file with the
Securities and Exchange Commission, Washington, D.C., under the provisions of
the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 (the "Annual Report"), hereby
constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C.
Stevens, and each of them, as attorney for the undersigned, with full power of
substitution and resubstitution, for and in the name, place, and stead of the
undersigned, to sign and file the Annual Report and exhibits thereto, and any
and all amendments thereto, with full power and authority to do and perform any
and all acts and things whatsoever requisite and necessary to be done in the
premises, hereby ratifying and approving the acts of such attorney or any such
substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as
of March 19, 1998.
\s\ Henry L. Meyer III
---------------------------
Typed Name: Henry L. Meyer III
---------------------------
<PAGE> 15
KEYCORP
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer and
director, of KeyCorp, an Ohio corporation, which proposes to file with the
Securities and Exchange Commission, Washington, D.C., under the provisions of
the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 (the "Annual Report"), hereby
constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C.
Stevens, and each of them, as attorney for the undersigned, with full power of
substitution and resubstitution, for and in the name, place, and stead of the
undersigned, to sign and file the Annual Report and exhibits thereto, and any
and all amendments thereto, with full power and authority to do and perform any
and all acts and things whatsoever requisite and necessary to be done in the
premises, hereby ratifying and approving the acts of such attorney or any such
substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as
of March 19, 1998.
\s\ Steven A. Minter
---------------------------
Typed Name: Steven A. Minter
---------------------------
<PAGE> 16
KEYCORP
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer and
director, of KeyCorp, an Ohio corporation, which proposes to file with the
Securities and Exchange Commission, Washington, D.C., under the provisions of
the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 (the "Annual Report"), hereby
constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C.
Stevens, and each of them, as attorney for the undersigned, with full power of
substitution and resubstitution, for and in the name, place, and stead of the
undersigned, to sign and file the Annual Report and exhibits thereto, and any
and all amendments thereto, with full power and authority to do and perform any
and all acts and things whatsoever requisite and necessary to be done in the
premises, hereby ratifying and approving the acts of such attorney or any such
substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as
of March 19, 1998.
\s\ M. Thomas Moore
---------------------------
Typed Name: M. Thomas Moore
---------------------------
<PAGE> 17
KEYCORP
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer and
director, of KeyCorp, an Ohio corporation, which proposes to file with the
Securities and Exchange Commission, Washington, D.C., under the provisions of
the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 (the "Annual Report"), hereby
constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C.
Stevens, and each of them, as attorney for the undersigned, with full power of
substitution and resubstitution, for and in the name, place, and stead of the
undersigned, to sign and file the Annual Report and exhibits thereto, and any
and all amendments thereto, with full power and authority to do and perform any
and all acts and things whatsoever requisite and necessary to be done in the
premises, hereby ratifying and approving the acts of such attorney or any such
substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as
of March 19, 1998.
\s\ Richard W. Pogue
---------------------------
Typed Name: Richard W. Pogue
---------------------------
<PAGE> 18
KEYCORP
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer and
director, of KeyCorp, an Ohio corporation, which proposes to file with the
Securities and Exchange Commission, Washington, D.C., under the provisions of
the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 (the "Annual Report"), hereby
constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C.
Stevens, and each of them, as attorney for the undersigned, with full power of
substitution and resubstitution, for and in the name, place, and stead of the
undersigned, to sign and file the Annual Report and exhibits thereto, and any
and all amendments thereto, with full power and authority to do and perform any
and all acts and things whatsoever requisite and necessary to be done in the
premises, hereby ratifying and approving the acts of such attorney or any such
substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as
of March 19, 1998.
\s\ Ronald B. Stafford
---------------------------
Typed Name: Ronald B. Stafford
---------------------------
<PAGE> 19
KEYCORP
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer and
director, of KeyCorp, an Ohio corporation, which proposes to file with the
Securities and Exchange Commission, Washington, D.C., under the provisions of
the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 (the "Annual Report"), hereby
constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C.
Stevens, and each of them, as attorney for the undersigned, with full power of
substitution and resubstitution, for and in the name, place, and stead of the
undersigned, to sign and file the Annual Report and exhibits thereto, and any
and all amendments thereto, with full power and authority to do and perform any
and all acts and things whatsoever requisite and necessary to be done in the
premises, hereby ratifying and approving the acts of such attorney or any such
substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as
of March 19, 1998.
\s\ Dennis W. Sullivan
---------------------------
Typed Name: Dennis W. Sullivan
---------------------------
<PAGE> 20
KEYCORP
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer and
director, of KeyCorp, an Ohio corporation, which proposes to file with the
Securities and Exchange Commission, Washington, D.C., under the provisions of
the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 (the "Annual Report"), hereby
constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C.
Stevens, and each of them, as attorney for the undersigned, with full power of
substitution and resubstitution, for and in the name, place, and stead of the
undersigned, to sign and file the Annual Report and exhibits thereto, and any
and all amendments thereto, with full power and authority to do and perform any
and all acts and things whatsoever requisite and necessary to be done in the
premises, hereby ratifying and approving the acts of such attorney or any such
substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as
of March 19, 1998.
\s\ Peter G. Ten Eyck, II
----------------------------
Typed Name: Peter G. Ten Eyck, II
----------------------------
<PAGE> 21
KEYCORP
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer and
director, of KeyCorp, an Ohio corporation, which proposes to file with the
Securities and Exchange Commission, Washington, D.C., under the provisions of
the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 (the "Annual Report"), hereby
constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C.
Stevens, and each of them, as attorney for the undersigned, with full power of
substitution and resubstitution, for and in the name, place, and stead of the
undersigned, to sign and file the Annual Report and exhibits thereto, and any
and all amendments thereto, with full power and authority to do and perform any
and all acts and things whatsoever requisite and necessary to be done in the
premises, hereby ratifying and approving the acts of such attorney or any such
substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as
of March 19, 1998.
\s\ K. Brent Somers
---------------------------
Typed Name: K. Brent Somers
---------------------------
<PAGE> 22
KEYCORP
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer and
director, of KeyCorp, an Ohio corporation, which proposes to file with the
Securities and Exchange Commission, Washington, D.C., under the provisions of
the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 (the "Annual Report"), hereby
constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C.
Stevens, and each of them, as attorney for the undersigned, with full power of
substitution and resubstitution, for and in the name, place, and stead of the
undersigned, to sign and file the Annual Report and exhibits thereto, and any
and all amendments thereto, with full power and authority to do and perform any
and all acts and things whatsoever requisite and necessary to be done in the
premises, hereby ratifying and approving the acts of such attorney or any such
substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as
of March 19, 1998.
\s\ Nancy B. Veeder
---------------------------
Typed Name: Nancy B. Veeder
---------------------------
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