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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, 1999
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
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO
---------------------------
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
127 PUBLIC SQUARE, CLEVELAND, OHIO
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
34-6542451
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(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.
The aggregate market value of voting stock held by nonaffiliates of the
Registrant was approximately $7,476,315,903 at February 29, 2000. (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 29, 2000.)
441,406,105 Shares
- --------------------------------------------------------------------------------
(NUMBER OF KEYCORP COMMON SHARES OUTSTANDING AS OF FEBRUARY 29, 2000)
Certain specifically designated portions of KeyCorp's 1999 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 2000 Annual Meeting of Shareholders are incorporated by
reference into Part III of this Form 10-K.
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KEYCORP
1999 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........................................... 7
4 Submission of Matters to a Vote of Security Holders......... 8
PART II
5 Market for Registrant's Common Stock and Related Stockholder
Matters................................................... 8
6 Selected Financial Data..................................... 8
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 8
7A Quantitative and Qualitative Disclosures about Market
Risk...................................................... 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.................................................. 14
Exhibits.................................................... 15
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PART I
ITEM 1. BUSINESS
OVERVIEW
KeyCorp 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
KeyCorp's banking and other subsidiaries is subject to the prior claims of the
respective creditors of such banking and other subsidiaries, except to the
extent that KeyCorp's claims 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 ("BHCA"), is
headquartered in Cleveland, Ohio. At December 31, 1999, it was one of the
nation's largest integrated multi-line financial services companies with
consolidated total assets of $83 billion. Its subsidiaries provide a wide range
of investment management, retail and commercial banking, consumer finance and
investment banking products and services to corporate, individual and
institutional clients through four lines of business: Key Retail Banking, Key
Specialty Finance, Key Corporate Capital and Key Capital Partners. As of
December 31, 1999, these services are provided across much of the country
through banking subsidiaries operating 936 full-service branches in 13 states, a
24-hour telephone banking call center and 2,516 ATMs in 15 states. Additional
information pertaining to the four business lines referred to above is included
in the "Line of Business Results" section beginning on page 29 and in Note 4
("Line of Business Results"), beginning on page 61 of the Financial Review
section of KeyCorp's 1999 Annual Report to Shareholders and is incorporated
herein by reference. KeyCorp and its subsidiaries have 24,568 full-time
equivalent employees as of December 31, 1999.
In addition to the customary banking services of accepting deposits and making
loans, KeyCorp's 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 and capital markets products, and international banking services.
Through its subsidiary banks, trust companies and registered investment adviser
subsidiaries, KeyCorp provides investment management services to individual and
institutional clients, including large corporate and public retirement plans,
foundations and endowments, high net worth individuals and Taft-Hartley plans
(i.e., multiemployer trust funds established for providing pension, vacation or
other benefits to employees that are established in accordance with applicable
law). In addition, investment management subsidiaries serve as investment
advisers to proprietary mutual funds offered by other KeyCorp affiliates.
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 a joint venture with Key Merchant Services, LLC, which provides
merchant services to businesses.
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The following financial data is included in the Financial Review section of
KeyCorp's 1999 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.......................................... 28
Average Balance Sheets, Net Interest Income and
Yields/Rates.............................................. 32
Components of Net Interest Income Changes................... 35
Composition of Loans........................................ 42
Maturities and Sensitivity of Certain Loans to Changes in
Interest Rates............................................ 44
Securities Available for Sale............................... 44
Investment Securities....................................... 45
Allocation of the Allowance for Loan Losses................. 46
Summary of Loan Loss Experience............................. 47
Summary of Nonperforming Assets and Past Due Loans.......... 48
Maturity Distribution of Time Deposits of $100,000 or
More...................................................... 48
Impaired Loans and Other Nonperforming Assets............... 65
Short-Term Borrowings....................................... 65
</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 60 of the Financial Review section of KeyCorp's 1999 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 led to greater
concentration in the banking industry and placed added competitive pressure on
Key's core banking services. In addition, competition is expected to intensify
as a consequence of the financial modernization laws that were recently enacted
and permit qualifying financial institutions to expand into other activities.
For example, commercial banks are now permitted to have affiliates that
underwrite and deal in securities, underwrite insurance and make merchant
banking investments under certain conditions. See "Interstate Banking and
Branching" and "Financial Modernization Legislation" below.
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. The
regulatory framework is intended primarily for the protection of customers and
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 security holders.
Set forth below is a brief discussion of selected laws, regulations, and
regulatory agency policies applicable to Key. Such discussion is not intended to
be comprehensive, and is qualified in its entirety by reference to the full text
of such statutes, regulations, and regulatory agency policies. Changes in
applicable laws, regulations, and regulatory agency policies cannot necessarily
be predicted, but may have a material effect on Key's business, financial
condition and results of operation.
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General
As a bank holding company, KeyCorp is subject to regulation, supervision and
examination by the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") under 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
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. KeyCorp's banking subsidiaries are also
subject to extensive regulation, supervision and examination by applicable
Federal banking agencies. KeyCorp operates two full-service, FDIC-insured
national bank subsidiaries, KeyBank National Association ("KeyBank") and Key
Bank USA, National Association ("KeyBank USA"), and six national bank
subsidiaries whose activities are limited to those of a fiduciary. All of
KeyCorp's national bank subsidiaries and their subsidiaries are subject to
regulation, supervision and examination by the Office of the Comptroller of the
Currency (the "OCC"). Because the deposits in KeyBank and KeyBank USA are
insured (up to applicable limits) by the FDIC, the FDIC also has certain
regulatory and supervisory authority over both banking subsidiaries.
KeyCorp 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 and self-regulated
organizations. For example, KeyCorp'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. or the
New York Stock Exchange and state securities regulators; KeyCorp's insurance
subsidiaries are subject to regulation by the insurance regulatory authorities
of the various states. Other nonbank subsidiaries of KeyCorp may be 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 KeyCorp, including cash flow to pay
dividends on its common shares and debt service on its indebtedness, is
dividends from its subsidiaries. Various statutory and regulatory provisions
limit the amount of dividends that may be paid by KeyCorp's 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 KeyCorp's national bank subsidiaries 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 "FDIA"), an insured depository institution
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 FDIA 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. KeyCorp's national bank
subsidiaries (and their subsidiaries) are subject to Federal Reserve Act
provisions which impose qualitative standards and quantitative limitations upon
certain transactions with or involving KeyCorp (and its nonbank subsidiaries
which are not subsidiaries of KeyCorp's national banks). Transactions covered by
these provisions, which include loans and other extensions of credit as well as
purchases and sales of assets, must be on arm's length terms, cannot exceed
certain amounts
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which are determined with reference to the bank's regulatory capital, and if a
loan or other extension of credit, must be secured by collateral in an amount
and quality expressly prescribed by statute. For example, the aggregate of all
such outstanding covered transactions by KeyBank and KeyBank USA, including
their subsidiaries, with or involving KeyCorp and its nonbank subsidiaries which
are not subsidiaries of KeyBank and KeyBank USA was limited at December 31,
1999, to approximately $1.8 billion. As a result, these provisions materially
restrict the ability of KeyCorp's national bank subsidiaries and their
subsidiaries to fund KeyCorp and its nonbank subsidiaries which are not
subsidiaries of KeyCorp's national banks.
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 KeyCorp 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 FDIA 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 FDIA, 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.
Uniform Retail Credit Policy. On February 10, 1999, the Federal banking agencies
published their final Uniform Retail Credit Classification and Account
Management Policy (the "Retail Credit Policy"), which revises their 1980 Uniform
Policy for Classification of Consumer Installment Credit Based on Delinquency
Status. The Retail Credit Policy applies to all financial institutions which
file call reports or thrift financial reports with a Federal banking agency. In
general, the Retail Credit Policy establishes a uniform charge-off policy for
closed-end and open-end credit, respectively, provides uniform guidance for
loans affected by bankruptcy, fraud, and death, establishes guidelines for
re-aging, extending, deferring, or rewriting past due accounts, classifies
certain delinquent residential mortgage and home equity loans, and broadens
recognition of partial payments that qualify as full payments. Key anticipates
implementing these new guidelines prior to the required date of December 31,
2000, and perhaps as early as the first quarter of 2000. Based upon current
estimates, management expects that the implementation will accelerate up to $60
million of Key's consumer loan charge-offs which might otherwise have occurred
at later dates. Key's allowance already includes an allocation for these
potential losses.
Regulatory Capital Standards and Related Matters
Regulatory Capital. Applicable law and regulation define and prescribe minimum
levels of regulatory capital for bank holding companies and their banking
subsidiaries. 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.
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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
varying risk-weights 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 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 includes common equity, qualifying perpetual preferred equity,
and minority interests in the equity accounts of consolidated subsidiaries less
certain intangible assets (including goodwill) and certain other assets. Tier 2
capital includes qualifying hybrid capital instruments, perpetual debt,
mandatory convertible debt securities, perpetual preferred equity not includable
in Tier 1 capital, and limited amounts of term subordinated debt, medium-term
preferred equity, certain unrealized holding gains on certain equity securities,
and the allowance for loan and lease losses.
Bank holding companies, such as KeyCorp, whose trading activities exceed
specified levels are required to maintain capital for market risk. Market risk
includes changes in the market value of trading account, foreign exchange, and
commodity positions, whether resulting from broad market movements (such as
changes in the general level of interest rates, equity prices, foreign exchange
rates, or commodity prices) or from position specific factors (such as
idiosyncratic variation, event risk, and default risk). At December 31, 1999,
Key's Tier 1 and total capital to risk-weighted assets ratios were 7.68% and
11.66%, respectively, which include all required adjustments for market risk.
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 leverage
ratio, calculated by dividing Tier 1 capital by average total consolidated
assets, is 3% for bank holding companies that either have the highest
supervisory rating or have implemented the Federal Reserve Board's risk-based
capital measure for market risk. All other bank holding companies must maintain
a minimum leverage ratio of at least 4%. Neither KeyCorp nor any of its banking
subsidiaries has been advised by its primary Federal banking regulator of any
specific leverage ratio applicable to it. At December 31, 1999, Key's Tier 1
capital leverage ratio was 7.77%.
KeyCorp's national bank 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,
1999, each of these banking subsidiaries had regulatory capital in excess of all
minimum risk-based and leverage capital requirements.
Besides establishing regulatory minimum ratios of capital to assets for all bank
holding companies and their banking subsidiaries, the risk-based and leverage
capital guidelines also identify various organization-specific factors and risks
which are not taken into account in the computation of the capital ratios yet
affect the overall supervisory evaluation of a banking organization's regulatory
capital adequacy and can result in the imposition of higher minimum regulatory
capital ratio requirements upon the particular organization. Neither the Federal
Reserve Board nor the OCC has advised KeyCorp or any of its national bank
subsidiaries of any specific minimum risk-based or leverage capital ratio
applicable to KeyCorp or such national bank subsidiary. The Federal Reserve
Board and OCC have published new proposals in 2000 to amend the risk-based
capital treatment of recourse obligations, direct credit substitutes and
securitized transactions, replacing earlier proposals that were not acted upon
in 1999.
Prompt Corrective Action. The "prompt corrective action" provisions of the FDIA
added by the FDIC Improvement Act ("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
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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. An institution is
considered well capitalized if it has 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 is not 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 is not well capitalized. At December 31, 1999, 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 KeyCorp 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
Because substantially all of the deposits of KeyCorp's depository institution
subsidiaries are insured up to applicable limits by the FDIC, these subsidiaries
are subject to deposit insurance premium assessments by the FDIC to maintain the
Bank Insurance Fund (the "BIF") and the Savings Association Insurance Fund (the
"SAIF") of the FDIC. The FDIC has adopted a risk-related deposit insurance
assessment system under which premiums, ranging in 1999 from zero to $.27 for
each $100 of domestic deposits, are imposed based upon the depository
institution's capitalization and Federal supervisory evaluation. Each of
KeyCorp's depository institution subsidiaries in 1999 qualified for a deposit
insurance assessment rate of zero. The FDIC is authorized to increase deposit
insurance premium assessments in certain circumstances. Any such increase would
have an adverse effect on Key's earnings.
Beginning in 1997, all BIF-member institutions were required to join with
SAIF-member institutions in servicing the approximately $793 million of annual
interest on 30-year non-callable bonds issued by the Financing Corporation
("FICO") in the late 1980s to fund losses incurred by the former Federal Savings
and Loan Insurance Corporation. FICO bond assessments are separate from and in
addition to deposit insurance premium assessments and, unlike deposit insurance
premium assessments, do not vary with the depository institution's
capitalization and Federal supervisory evaluation. Federal law required the FICO
assessment rate on BIF assessable deposits to be one-fifth of that imposed on
SAIF assessable deposits through 1999. For 1999, the average annualized FICO
assessment rates were $.05925 per $100 of SAIF-assessable deposits and $.01185
per $100 of BIF-assessable deposits, resulting in approximately $6 million of
FICO assessments paid by Key for 1999. Starting in 2000, BIF and SAIF FICO
assessment rates equalize, with an annualized rate for the first quarter of 2000
of $.02120 per $100 of all FICO assessable deposits. As a result of this
assessment rate equalization, Key's FICO assessment expense for the first
quarter of 2000 increased 51% over such expense for the first quarter of 1999.
INTERSTATE BANKING AND BRANCHING
On September 29, 1994, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Act") was enacted into Federal law. The
Interstate Act generally authorizes bank holding companies to acquire banks
located in any state, and also generally permits FDIC-insured banks located in
different states to merge, allowing the resulting institution to operate
interstate branches. In addition, the Interstate Act allows an FDIC-insured bank
to establish (or acquire) and operate a branch in a state in which such bank
does not maintain
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a branch if that state expressly permits such transactions. Using the authority
conferred by the Interstate Act, the number of FDIC-insured depository
institutions operated by KeyCorp has been reduced to two -- KeyBank and KeyBank
USA.
FINANCIAL MODERNIZATION LEGISLATION
The Gramm-Leach-Bliley Act of 1999 (the "GLBA") was enacted on November 12,
1999, providing for a range of new activities for qualifying financial
institutions. The GLBA repeals significant provisions of the Glass Steagall Act
to permit commercial banks, among other things, to have affiliates that
underwrite and deal in securities and make merchant banking investments provided
certain conditions are met. The GLBA modifies the BHCA to permit bank holding
companies that meet certain specified standards (known as "financial holding
companies") to engage in a broader range of financial activities than previously
permitted under the BHCA, and allows subsidiaries of commercial banks that meet
certain specified standards (known as "financial subsidiaries") to engage in a
wide range of financial activities that are prohibited to such banks themselves
under certain circumstances.
On February 11, 2000, KeyCorp filed with the Federal Reserve Board its
declaration of election to become a financial holding company. It is not
presently known, however, to what extent KeyCorp and its subsidiaries will
utilize the broader range of financial activities available to KeyCorp as a
financial holding company.
ITEM 2. PROPERTIES
The headquarters of KeyCorp, KeyBank and KeyBank USA are located in Key Tower at
127 Public Square, Cleveland, Ohio 44114-1306. At December 31, 1999, 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
520 of their branch banking offices and leased 416 offices. The lease terms for
applicable branch banking offices are not individually material, with terms
ranging from month-to-month to 99-years from inception. Additional information
pertaining to Key's properties is presented in Note 1 ("Summary of Significant
Accounting Policies"), beginning on page 57 of the Financial Review section of
KeyCorp's 1999 Annual Report to Shareholders and is incorporated herein by
reference.
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
known to management and Key's counsel, management does not believe that there
exists any legal action to which KeyCorp or any of its subsidiaries is a party,
or of which their properties are the subject, that, individually or in the
aggregate, will have a material adverse effect on the financial condition of
Key.
In March 1998, McDonald Investments Inc. ("McDonald"), now a subsidiary of
KeyCorp, participated as an initial purchaser in an offering to institutional
investors of certain securities of Nakornthai Strip Mill Public Company Ltd.
("NSM"), a Thailand public company, and certain NSM affiliates, including
approximately $452 million in debt securities and related warrants (the
"Securities"). The offering was part of the financing of an NSM steel mini-mill
located in Chonburi, Thailand. McDonald served as a financial advisor to NSM and
was an initial purchaser of approximately $44 million of the Securities. On
December 24, 1998, holders of Securities gave a Notice of Default alleging a
number of defaults under the terms of the Securities. NSM is currently working
toward a restructuring of its obligations, including obligations to holders of
the Securities and other creditors.
Certain purchasers of Securities have commenced litigation against McDonald and
other parties in California, Connecticut, Illinois, Minnesota, New Jersey and
New York, claiming that McDonald, the other initial purchasers and certain other
third party service providers to NSM have violated certain state and federal
securities and other laws. The lawsuits are based on alleged misstatements and
omissions in the Offering Memorandum for the Securities, and on certain other
information and oral statements allegedly provided to potential investors. In
each
7
<PAGE> 10
lawsuit the plaintiffs allege misrepresentations relating to (among other
things) the physical facilities at the mill, the management of the mill, the
supply of inputs to the mill and the use of the proceeds of the offering.
There are currently pending eight separate lawsuits brought by purchasers of the
Securities against McDonald, as well as other defendants (two suits in Federal
District Court in Minnesota; one suit in Federal District Court in New York; two
suits in California; and one suit in each of Connecticut, Illinois and New
Jersey). The aggregate amount of Securities alleged to have been purchased by
the plaintiffs in these eight lawsuits is at least $257 million. While the
relief claimed in the lawsuits varies, generally speaking, the plaintiffs seek
rescission of the sale of the Securities, compensatory damages, legal fees,
expenses, and in the case of the New Jersey action (which currently covers
approximately $107 million face value of Securities), treble damages consistent
with applicable law, exemplary damages and civil penalties.
McDonald is vigorously defending these actions and has filed, or will file,
responses to each complaint denying liability.
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
The dividend restrictions discussion on page 3 of this report and the following
disclosures included in the Financial Review section of KeyCorp's 1999 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............ 49
Presentation of quarterly market price and cash dividends
per common share.......................................... 51
Discussion of dividend restrictions presented in Note 16
("Commitments, Contingent Liabilities and Other
Disclosures")............................................. 71
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
The Selected Financial Data presented on page 28 of the Financial Review section
of KeyCorp's 1999 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 26 through 51
of the Financial Review section of KeyCorp's 1999 Annual Report to Shareholders
is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information included under the caption "Market risk management" presented on
pages 35 through 37 of the Financial Review section of KeyCorp's 1999 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 51 and on pages 53 through 76, respectively, of the
Financial Review section of KeyCorp's 1999 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 2000 Annual Meeting of Shareholders
to be held May 18, 2000, and is incorporated herein by reference. KeyCorp
expects to file its final proxy statement on or before April 14, 2000.
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 2000 Annual Meeting of Shareholders
to be held May 18, 2000, 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 2000
Annual Meeting of Shareholders to be held May 18, 2000, is not incorporated by
reference in this Report on Form 10-K. KeyCorp expects to file its final proxy
statement on or before April 14, 2000.
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 2000 Annual Meeting of Shareholders to be held May 18,
2000, and is incorporated herein by reference. KeyCorp expects to file its final
proxy statement on or before April 14, 2000.
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 2000 Annual Meeting of Shareholders to be held May 18, 2000,
and is incorporated herein by reference. KeyCorp expects to file its final proxy
statement on or before April 14, 2000.
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, are incorporated herein by reference to the pages
indicated in the Financial Review section of KeyCorp's 1999 Annual Report to
Shareholders:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements:
Report of Ernst & Young LLP, Independent Auditors......... 52
Consolidated Balance Sheets at December 31, 1999 and
1998................................................... 53
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997....................... 54
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 1999, 1998 and 1997... 55
Consolidated Statements of Cash Flow for the Years Ended
December 31, 1999, 1998 and 1997....................... 56
Notes to Consolidated Financial Statements................ 57
</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 on November 13, 1998, as Exhibit 3 to Form 10-Q, and
incorporated herein by reference.
3.2 Amended and Restated Regulations of KeyCorp, effective May
15, 1997, filed on June 19, 1997, as Exhibit 2 to Form
8-A/A, 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 on June 19, 1997, as Exhibit 1 to Form 8-A, and
incorporated herein by reference.
10.1 Form of Change of Control Agreement between KeyCorp and
Certain Executive Officers of KeyCorp, effective November
20, 1997, filed as Exhibit 10.5 to Form 10-K for the year
ended December 31, 1997, and incorporated herein by
reference.
10.2 First Amendment to Form of Change of Control Agreement
between KeyCorp and Certain Executive Officers of KeyCorp,
filed as Exhibit 10.1 to Form 10-Q for the quarter ended
September 30, 1999, and incorporated herein by reference.
10.3 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.
10.4 Form of Stock Performance Option Grants between KeyCorp and
Robert W. Gillespie, dated January 2, 1998, filed as Exhibit
10.7 to Form 10-K for the year ended December 31, 1997, and
incorporated herein by reference.
10.5 Form of Premium Priced Option Grant between KeyCorp and
Robert W. Gillespie dated January 13, 1999, filed as Exhibit
10.2 to Form 10-Q for the quarter ended March 31, 1999, and
incorporated herein by reference.
</TABLE>
10
<PAGE> 13
<TABLE>
<C> <S>
10.6 Form of Premium Priced Option Grant between KeyCorp and
Henry L. Meyer III, dated January 13, 1999, filed as Exhibit
10.3 to Form 10-Q for the quarter ended March 31, 1999, and
incorporated herein by reference.
10.7 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.
10.8 First Amendment to Amended and Restated Employment Agreement
between KeyCorp and Robert W. Gillespie, dated December 7,
1998, filed as Exhibit 10.10 to Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference.
10.9 Second Amendment to Amended and Restated Employment
Agreement between KeyCorp and Robert W. Gillespie, dated
November 23, 1999.
10.10 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.
10.11 Amendment to Employment Agreement between KeyCorp and Henry
L. Meyer III, dated November 20, 1997, filed as Exhibit
10.10 to Form 10-K for the year ended December 31, 1997, and
incorporated herein by reference.
10.12 Second Amendment to Employment Agreement between KeyCorp and
Henry Meyer III, dated July 21, 1999, filed as Exhibit 10.2
to Form 10-Q for the quarter ended September 30, 1999, and
incorporated herein by reference.
10.13 Letter Agreement between KeyCorp and Thomas C. Stevens,
dated May 10, 1996 as amended April 7, 1997, filed as
Exhibit 10.12 to Form 10-K for the year ended December 31,
1997, and incorporated herein by reference.
10.14 Employment Agreement among KeyCorp, William B. Summers, Jr.,
and McDonald & Company Securities, Inc., dated June 14,
1998.
10.15 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.
10.16 KeyCorp Long-Term Incentive Plan (January 1, 1998) filed as
Exhibit 10.3 to Form 10-K for the year ended December 31,
1997, and incorporated herein by reference.
10.17 KeyCorp Annual Incentive Plan (December 21, 1999
Restatement).
10.18 KeyCorp Amended and Restated 1991 Equity Compensation Plan
(Amended as of May 6, 1998). The Amendment filed as Exhibit
10 to Form 10-Q for the quarter ended June 30, 1998, and
incorporated herein by reference.
10.19 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.
10.20 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.
10.21 McDonald & Company Investments, Inc. Stock Option Plan,
filed as Exhibit 10.39 to Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference.
10.22 McDonald & Company Investments, Inc. 1995 Key Employees
Stock Option Plan, filed as Exhibit 10.40 to Form 10-K for
the year ended December 31, 1998, and incorporated herein by
reference.
</TABLE>
11
<PAGE> 14
<TABLE>
<C> <S>
10.23 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.
10.24 KeyCorp 1997 Stock Option Plan for Directors as amended and
restated on April 21, 1999, filed as Exhibit 10 to Form 10-Q
for the quarter ended June 30, 1999, and incorporated herein
by reference.
10.25 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.
10.26 Amended and Restated Director Deferred Compensation Plan
(May 6, 1998 Amendment and Restatement) filed as Exhibit 10
to Form 10-Q for the quarter ended September 30, 1998, and
incorporated herein by reference.
10.27 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.
10.28 KeyCorp Excess 401(k) Savings Plan (Amended and Restated as
of January 1, 1998), filed as Exhibit 10.31 to Form 10-K for
the year ended December 31, 1998, and incorporated herein by
reference.
10.29 KeyCorp Excess Cash Balance Pension Plan (Amended and
Restated as of January 1, 1998), filed as Exhibit 10.34 to
Form 10-K for the year ended December 31, 1998, and
incorporated herein by reference.
10.30 First Amendment to KeyCorp Excess Cash Balance Pension Plan,
effective July 1, 1999, filed as Exhibit 10.4 to Form 10-Q
for the quarter ended September 30, 1999, and incorporated
herein by reference.
10.31 KeyCorp Deferred Compensation Plan (Amended and Restated as
of January 1, 1998), filed as Exhibit 10.38 to Form 10-K for
the year ended December 31, 1998, and incorporated herein by
reference.
10.32 KeyCorp Automatic Deferral Plan, filed as Exhibit 10.3 to
Form 10-Q for the quarter ended September 30, 1999, and
incorporated herein by reference.
10.33 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.
10.34 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.
10.35 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.
10.36 KeyCorp Supplemental Retirement Plan, amended, restated and
effective August 1, 1996, filed as Exhibit 10.32 to Form
10-K for the year ended December 31, 1997, and incorporated
herein by reference.
10.37 First Amendment to KeyCorp Supplemental Retirement Plan,
effective July 1, 1999, filed as Exhibit 10.5 to Form 10-Q
for the quarter ended September 30, 1999, and incorporated
herein by reference.
10.38 KeyCorp Supplemental Retirement Benefit Plan, effective
January 1, 1981, restated August 16, 1990, amended January
1, 1995, and August 1, 1996, filed as Exhibit 10.26 to Form
10-K for the year ended December 31, 1998, and incorporated
herein by reference.
</TABLE>
12
<PAGE> 15
<TABLE>
<C> <S>
10.39 Third Amendment to KeyCorp Supplemental Retirement Benefit
Plan, effective July 1, 1999, filed as Exhibit 10.6 to Form
10-Q for the quarter ended September 30, 1999, and
incorporated herein by reference.
10.40 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.
10.41 First Amendment to KeyCorp Executive Supplemental Pension
Plan, effective January 1, 1997, filed as Exhibit 10.27 to
Form 10-K for the year ended December 31, 1997, and
incorporated herein by reference.
10.42 KeyCorp Supplemental Retirement Benefit Plan for Key
Executives, effective July 1, 1990, restated August 16,
1990, amended as of January 1, 1995, and August 1, 1996,
filed as Exhibit 10.26 to Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference.
10.43 Third Amendment to KeyCorp Supplemental Retirement Benefit
Plan for Key Executives, effective July 1, 1999, filed as
Exhibit 10.7 to Form 10-Q for the quarter ended September
30, 1999, and incorporated herein by reference.
10.44 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.
10.45 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.
10.46 KeyCorp Supplemental Long Term Disability Plan filed as
Exhibit 10.15 to Form 10-K for the year ended December 31,
1993, and incorporated herein by reference.
10.47 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.
12 Statement re: Computation of Ratios.
13 KeyCorp 1999 Annual Report to Shareholders.
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
24 Powers of Attorney.
27 Financial Data Schedule.
</TABLE>
KeyCorp 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 10.47 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 (Mail Code OH-01-27-1113), Cleveland, OH 44114-1306.
(b) REPORTS ON FORM 8-K
October 22, 1999 -- The Registrant's October 21, 1999, press release announcing
its earnings results for the three-month and nine-month periods ended September
30, 1999.
December 15, 1999 -- The Registrant's November 23, 1999, press release
announcing initiatives to improve operating efficiency and enhance earnings
growth.
No other reports on Form 8-K were filed during the fourth quarter of 1999.
13
<PAGE> 16
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 16, 2000
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, Chief
Executive Officer
(Principal Executive
Officer) and
Director
* 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
</TABLE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Edward P. Campbell Director
* Dr. Carol A. Cartwright Director
* Thomas A. Commes Director
* Kenneth M. Curtis Director
* Henry S. Hemingway Director
* Charles R. Hogan Director
* Douglas J. McGregor Director
* Henry L. Meyer III President, Chief
Operating Officer
and Director
* Bill R. Sanford Director
* Ronald B. Stafford Director
* Dennis W. Sullivan Director
* Peter G. Ten Eyck, II Director
</TABLE>
/s/ Thomas C. Stevens
* By Thomas C. Stevens,
attorney-in-fact
March 16, 2000
14
<PAGE> 1
EXHIBIT 10.9
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
BETWEEN KEYCORP AND ROBERT W. GILLESPIE
THIS SECOND AMENDMENT is made this 23rd day of November,
1999, and amends the Amended and Restated Employment Agreement dated as of
November 23, 1996 (the "Agreement"), between KEYCORP ("Key"), and ROBERT W.
GILLESPIE ("Gillespie").
W I T N E S S E T H:
WHEREAS, Key and Gillespie desire to amend the Agreement (a) by
extending by one year the term during which it is anticipated that Gillespie
will provide full time services to Key under the Agreement and (b) by modifying
the definition of "Aggregate Incentive Compensation Award" in view of Key's
transition to a long term incentive compensation plan that pays out every other
year instead of every year as was contemplated when the Agreement was originally
executed;
NOW, THEREFORE, Key and Gillespie, in consideration of the promises
and mutual covenants contained in the Agreement and in this Amendment, hereby
agree as follows (certain terms used in and not otherwise defined in this
Amendment have the meanings assigned to them in the Agreement):
1. Scheduled Term Extended through a Date in May 2001. To extend the
end of the Scheduled Term by one full year, the year "2001" is hereby
substituted for the year "2000" each place it appears in Section 1.22 of the
Agreement, which defines "Scheduled Term." With that substitution, Section 1.22
reads, in its entirety, as follows:
"1.22 Scheduled Term. The term "Scheduled Term" shall mean the period
commencing at the Effective Time and ending May 31, 2001, except that,
if and when proxy materials are mailed to the shareholders of Key
announcing a date in May of 2001 as the date of the annual meeting of
shareholders of Key to be held in the year 2001, the date so announced
shall be substituted for May 31, 2001 as the end of the Scheduled Term.
2. Modification of Definition of "Aggregate Incentive Compensation
Award." As in effect before this amendment, Section 1.2 of Agreement defined
"Aggregate Incentive Compensation Award" for any year by reference, in part, to
the amount of the annual incentive compensation award (whether paid in cash,
deferred, or a combination of both) payable to Gillespie under the Long Term
Incentive Compensation Plan for that year and provided that awards with respect
to any multi-year period under that plan are deemed to be "for" the last year of
that multi-year period. A separate three-year long term incentive compensation
period ends each year through 1999. However, as a result of the transition to
four-year long term incentive compensation periods that begin and end every
other year, there will be no multi-year long term incentive compensation period
that ends with the year 2000. Absent amendment, this leaves a gap in the
definition of "Aggregate Incentive Compensation Award." To fill that gap, the
following language is hereby added at the end of Section 1.2 of the Agreement:
<PAGE> 2
In view of the transition to four-year periods under the Long Term
Incentive Plan and the consequent absence of any actual award under
that plan for the year 2000, the amount of the Aggregate Incentive
Compensation Award for 2000 will be deemed to be equal to the sum of
(a) the incentive compensation payable to Gillespie for 2000 under the
Short Term Incentive Compensation Plan and (b) the average determined
by adding together all of the incentive compensation awards payable to
Gillespie under the Long Term Incentive Compensation Plan for the years
1996, 1997, 1998, and 1999 and dividing the sum so determined by four.
3. This Amendment to Control. This Amendment is intended to alter the
provisions of the Agreement to the extent necessary to give effect to Sections 1
and 2 hereof. If there is any conflict between the provisions of the Agreement
and of any of the provisions of this Amendment, the provisions of this Amendment
shall prevail.
KEYCORP
By /s/ Thomas C. Stevens
---------------------------------------------
Thomas C. Stevens, Senior Executive Vice
President, General Counsel, and Secretary
/s/ Robert W. Gillespie
-----------------------------------------------
ROBERT W. GILLESPIE
<PAGE> 1
EXHIBIT 10.14
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT by and between McDonald & Company Securities, Inc., an Ohio
corporation (the "Company"), KeyCorp, an Ohio Corporation ("KeyCorp") and
William B. Summers, Jr. (the "Executive"), dated as of the 14th day of June,
1998.
1. EMPLOYMENT PERIOD. Subject to the consummation of the transactions
contemplated by the Agreement and Plan of Merger dated as of June 14, 1998 by
and among McDonald & Company Investments, Inc. and KeyCorp (the "Merger
Agreement"), the Company hereby agrees to continue to employ the Executive, and
the Executive hereby agrees to be employed by the Company, subject to the
terms and conditions of this Agreement for the period commencing on the closing
date of the transactions contemplated by the Merger Agreement (the "Commencement
Date") and ending on the fifth anniversary thereof (the "Employment Period"),
unless the Employment Period is renewed or terminated earlier in accordance with
the terms hereof.
2. TERMS OF EMPLOYMENT. (a) POSITION AND DUTIES. (i) During the
Employment Period, the Executive shall serve as Chairman and Chief Executive
Officer of New McDonald (as defined below) and Chairman and Chief Executive
Officer of the Capital Partners Group (as defined below), with such authority,
duties and responsibilities as are commensurate with such positions. During the
Employment Period, the Executive shall report directly to Henry Meyer or the
Chief Executive Officer of KeyCorp. The term "New McDonald" shall include the
following lines of business and the business relationships and management rights
associated with such lines of business: (A) retail and institutional brokerage,
(B) equity and fixed income trading and underwriting, (C) investment banking,
(D) capital markets products, (E) loan syndication, (F) public finance, (G)
venture capital, (H) mezzanine finance and (I) clearing operations, in each
case, as in existence at the Company and KeyCorp and its affiliates as of the
date hereof and, to the extent integrated with such lines of business, as may be
acquired by KeyCorp or its affiliates after the date hereof. The term "Capital
Partners Group" shall include New McDonald and the following lines of business
and the business relationships and management rights associated with such lines
of business: (A) asset management, (B) mutual funds, (C) institutional asset
services, and (D) wealth management, in each case, as in existence at the
Company and KeyCorp and its affiliates as of the date hereof and, to the extent
integrated with such lines of business, as may be acquired by KeyCorp or its
affiliates after the date hereof. In the event KeyCorp hereafter acquires
(either directly or indirectly, through acquisition or merger) other entities
with lines of business included within the Capital Partners Group, KeyCorp's
<PAGE> 2
decision not to integrate such hereafter acquired lines of business into the
Capital Partners Group shall be subject to the Executive's consent, which shall
not be unreasonably denied. As used herein, the terms "affiliates" and
"affiliated companies" shall include any company controlled by, controlling or
under common control with the Company.
(ii) During the Employment Period, the Executive shall serve on
the KeyCorp Management Committee and shall serve as the Chairman of the
management committee responsible for the long-term strategy and day-to-day
management of the Company's Capital Partners Group (the "Capital Partners
Committee"). In addition, during the Employment Period, the Executive shall
serve on the Board of Directors of the Section 20 Subsidiary and as the Chairman
of the Compensation Committee of such Board (the "Compensation Committee"). For
the period required, the Executive shall serve as the Chairman of the
Integration Task Force of the Capital Partners Group.
(iii) During the Employment Period, and excluding any periods
of vacation and sick leave to which the Executive is entitled, the Executive
agrees to devote full attention and time during normal business hours to the
business and affairs of the Company and to use the Executive's reasonable best
efforts to perform such responsibilities in a professional manner. It shall not
be a violation of this Agreement for the Executive to (A) serve on corporate,
civic or charitable boards or committees, (B) deliver lectures, fulfill speaking
engagements or teach at educational institutions and (C) manage personal
investments, so long as such activities do not significantly interfere with the
performance of the Executive's responsibilities as an employee of the Company in
accordance with this Agreement. For purposes hereof, service on corporate boards
pursuant to appointments after the date hereof shall be subject to the prior
approval of KeyCorp, which shall not be unreasonably denied, and to KeyCorp's
Code of Ethics. It is expressly understood and agreed that to the extent that
any such activities have been conducted by the Executive prior to the
Commencement Date, the continued conduct of such activities (or the conduct of
activities similar in nature and scope thereto) subsequent to the Commencement
Date shall not thereafter be deemed to interfere with the performance of the
Executive's responsibilities to the Company.
(b) MANAGEMENT AND OPERATIONS OF NEW MCDONALD AFTER THE MERGER. The
name of the New McDonald business unit shall be McDonald Key Investments, and
the headquarters shall be located in Cleveland, Ohio. During the Employment
Period, the Executive, together with Robert T. Clutterbuck and Yank Heisler as
members of the Compensation Committee of New McDonald, will be responsible for
establishing the aggregate and individual compensation levels for employees of
New McDonald, in accordance with the compensation policies and practices
established by the Compensation Committee,
-2-
<PAGE> 3
which shall be consistent with the historical compensation practices and
policies of the Company and KeyCorp and in conformity with industry practice.
(c) COMPENSATION. (i) BASE SALARY. During the Employment Period, the
Executive shall receive an annual base salary ("Annual Base Salary") in
accordance with the compensation policies and practices established by the
Compensation and Organization Committee of KeyCorp's Board of Directors,
provided that in no event shall the Annual Base Salary be less than the annual
base salary as in effect immediately prior to the Commencement Date.
(ii) ANNUAL BONUS. In addition to the Annual Base Salary, the
Executive shall be awarded an annual cash bonus (the "Annual Bonus"), determined
by the Compensation and Organization Committee of KeyCorp's Board of Directors,
provided that in no event shall the sum of the Annual Base Salary and Annual
Bonus be less than $1.5 million for calendar years 1999, 2000 and 2001. The
Annual Bonus shall be payable no later than March 1 of each calendar year ending
during the Employment Period.
(iii) RETENTION PAYMENTS. (a) In addition to the Annual Base
Salary and Annual Bonus, the Executive shall be entitled to receive payments and
awards from a $68,000,000 retention pool (the "Retention Pool") in an aggregate
amount of $5 million (the "Aggregate Retention Amount"). The Retention Pool and
the Aggregate Retention Amount shall be payable as to 44% of such amounts in
cash and as to 56% of such amounts in non-qualified stock options to acquire
shares of KeyCorp common stock (the "Retention Options"). The aggregate number
of Retention Options to be granted as a percentage of the Retention Pool shall
be determined as of the date hereof based on the Black-Scholes option pricing
model at a .315 valuation (the "Valuation Method"). Retention Options with a
value (based on the Valuation Method) equal to the non-cash portion of the
Aggregate Retention Amount shall be granted to the Executive in two portions
with at least one-half of such Retention Options granted on the Commencement
Date and the remaining portion granted before January 31, 1999. The Retention
Options (i) shall have an exercise price equal to the fair market value of
KeyCorp common stock on the date of grant, (ii) shall have an option expiration
date of ten years from the date of grant (the "Option Term"), (iii) shall vest
as provided in paragraph (b) below and (iv) shall be exercisable after becoming
vested during the periods provided in the KeyCorp Amended and Restated 1991
Equity Compensation Plan as in effect as of the date hereof, provided,
however, that KeyCorp shall use its best efforts to obtain approval from
KeyCorp's Compensation and Organization Committee to provide the Executive with
a two-year post termination of employment exercise period, except upon a
termination for Cause (as defined herein) or without Good Reason (as defined
herein). In no event shall the Retention Options be exercisable beyond the
Option Term.
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(b) The Retention Pool and the Aggregate Retention Amount, including
the Retention Options granted in satisfaction thereof (whether granted on the
Commencement Date or otherwise), shall vest in the percentages, and be payable
or exercisable, as the case may be, on the dates set forth below or if earlier
as provided in the next following sentence:
Vesting &
Payment Date Retention %
------------ -----------
2nd Anniversary of
Commencement Date 40
3rd Anniversary 20
4th Anniversary 20
5th Anniversary 20
If the Company shall terminate the Executive's employment other than for Cause,
including by reason of the Executive's Disability (as defined herein), or the
Executive shall terminate employment for Good Reason or due to his death, or
upon the occurrence of circumstances constituting a breach of Section 2(a) (i)
in a manner that would constitute Good Reason pursuant to Section 3 (c) (A) but
in which the Executive does not terminate his employment, the cash portion of
the Aggregate Retention Amount and the Retention Options shall become fully
vested and immediately payable or exercisable, as the case may be. If after the
Commencement Date and prior to the January 1999 grant of the balance of the
Retention Options, the Executive's employment terminates under any of the
circumstances described in the preceding sentence (other than death), KeyCorp
shall either make a cash payment or grant Retention Options equal to the
balance of the Aggregate Retention Amount. In the event of the Executive's death
after the Commencement Date and prior to the January 1999 grant of the balance
of the Retention Options, the Executive's estate shall be entitled to receive a
cash payment equal to the balance of the Aggregate Retention Amount in lieu of
the Retention Options.
(iv) EMPLOYEE BENEFIT PLANS. During the Employment Period, the
benefit plans, programs, policies and arrangements provided to the Executive
shall be no less favorable, in the aggregate, than the benefit plans, programs,
policies and arrangements in which the Executive was entitled to participate
immediately prior to the Commencement Date.
(v) EXPENSES. During the Employment Period, the Executive shall
be entitled to receive prompt reimbursement for all reasonable business expenses
incurred by the Executive, in accordance with the policies of Capital Partners
Group.
(vi) INDEMNIFICATION/D&O INSURANCE. The Executive shall be
indemnified by KeyCorp against claims arising in connection with the Executive's
status as an employee, officer, director or
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agent of KeyCorp in accordance with KeyCorp's indemnity policies for its senior
executives, subject to applicable law.
(vii) SECTION 162 (m) . In the event that KeyCorp would be
denied a deduction for federal income tax purposes for any amounts payable to
the Executive by reason of the limitations imposed by Section 162(m) of the
Internal Revenue Code of 1986, as amended (the "Code"), the Executive agrees
that, in accordance with the policy of KeyCorp's Compensation and Organization
Committee (and only so long as that policy continues and is applicable to all
executives of KeyCorp who are subject to Section 162 (m)), he will defer the
amount that would not be deductible pursuant to the terms of KeyCorp's Deferred
Compensation Plan as in effect from time to time.
(d) EMPLOYMENT LOCATION. During the Employment Period, the Executive's
principal place of employment shall be located no more than 20 miles from the
Executive's principal place of employment at the date hereof.
3. TERMINATION OF EMPLOYMENT. (a) DEATH OR DISABILITY. The Executive's
employment shall terminate automatically upon the Executive's death during the
Employment Period. If the Company determines in good faith that the Disability
of the Executive has occurred during the Employment Period (pursuant to the
definition of Disability set forth below), it may give to the Executive written
notice in accordance with Section 10(b)) of this Agreement of its intention to
terminate the Executive's employment. In such event, the Executive's employment
with the Company shall terminate effective on the 30th day after receipt of such
notice by the Executive (the "Disability Effective Date"), provided that, within
the 30 days after such receipt, the Executive shall not have returned to
full-time performance of the Executive's duties. For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from the Executive's duties
with New McDonald on a full-time basis for 180 consecutive days as a result of
incapacity due to mental or physical illness or injury.
(b) CAUSE. The Company may terminate the Executive's employment during
the Employment Period for Cause. For purposes of this Agreement, "Cause" shall
mean:
(i) the continued and willful failure of the Executive to
perform substantially the Executive's duties with Capital Partners Group (other
than any such failure resulting from incapacity due to mental or physical
illness or injury), after a written demand for substantial performance is
delivered to the Executive by the Board of Directors of KeyCorp the (the
"Board"), which specifically identifies the manner in which the Board believes
that the Executive has not substantially performed the Executive's duties, or
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(ii) the engaging by the Executive in illegal conduct
constituting a felony, or
(iii) gross misconduct which is materially and demonstrably
injurious to Capital Partners Group, or
(iv) any material breach of Section 7 hereof, provided that to
the extent any such breach is curable, Capital Partners Group shall give the
Executive notice thereof and a reasonable opportunity to cure, or
(v) conduct that results in the permanent loss of the
Executive's professional license to conduct business or in the Executive being
disqualified or barred by banking or security law regulators from serving in the
capacity contemplated by this Agreement for six months or more.
For purposes of this provision, no act or failure to act, on the part of the
Executive, shall be considered "willful" unless it is done, or omitted to be
done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company or
Capital Partners Group. Any act, or failure to act, based upon authority given
pursuant to a resolution duly adopted by the Board or upon the instructions of
the Chief Executive Officer of KeyCorp or a senior officer of KeyCorp or based
upon the advice of counsel for the Company or KeyCorp shall be conclusively
presumed to be done, or omitted to be done, by the Executive in good faith and
in the best interests of the Company or Capital Partners Group. The cessation of
employment of the Executive shall not be deemed to be for Cause unless and until
there shall have been delivered to the Executive a copy of a resolution duly
adopted by the affirmative vote of not less than two-thirds of the entire
membership of the Board at a meeting of the Board called and held for such
purpose (after reasonable notice is provided to the Executive and the Executive
is given an opportunity, together with counsel, to be heard before the Board),
finding that, in the good faith opinion of the Board, the Executive is guilty of
the conduct described in subparagraph (i) through (v) above, and specifying the
particulars thereof in detail.
(c) GOOD REASON. The Executive's employment may be terminated by the
Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean a material breach by the Company of an obligation of the Company under this
Agreement after the Executive has given the Company notice of the breach and a
reasonable opportunity to cure such breach. A breach described in this clause to
include, without limitation, (A) a detrimental alteration or failure to comply
with the terms of the Executive's employment as they relate to the Executive's
position, reporting, responsibilities and duties, or the compensation and
benefit arrangements and opportunities applicable to the Executive, each as
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described in Section 2 hereof, (B) any failure of the Company to abide by the
compensation arrangements described in Section 2(b) hereof or Annex E of the
Merger Agreement, (C) the relocation of the Executive's principal place of
employment to any location more than 20 miles from the Executive's principal
place of employment on the Commencement Date, (D) the failure of the Company to
obtain an agreement reasonably satisfactory to the Executive from any successor
to assume and agree to perform this Agreement, as contemplated in Section 9
hereof or, if the business for which the Executive's services are principally
performed is sold or transferred, the failure of the Company to obtain such an
agreement from the purchaser or transferee of such business, (E) any termination
of the Executive's employment which is not effected pursuant to the terms of
this Agreement.
(d) NOTICE OF TERMINATION. Any termination by the Company for Cause, or
by the Executive for Good Reason, shall be communicated by Notice of Termination
to the other party hereto given in accordance with Section 10(b)) of this
Agreement. For purposes of this Agreement, a "Notice of Termination" means a
written notice which (i) indicates the specific termination provision in this
Agreement relied upon, (ii) sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated and (iii) specifies the termination
date (which date, in the case of a termination for Good Reason, shall be not
more than 30 days after the giving of such notice). The failure by the Executive
or the Company to set forth in the Notice of Termination any fact or
circumstance which contributes to a showing of Good Reason or Cause shall not
waive any right of the Executive or the Company, respectively, hereunder or
preclude the Executive or the Company, respectively, from asserting such fact or
circumstance in enforcing the Executive's or the Company's rights hereunder.
(e) DATE OF TERMINATION. "Date of Termination" means (i) if the
Executive's employment is terminated by the Company for Cause, or by the
Executive for Good Reason, the date that is one day after the last day of the
cure period, (ii) if the Executive's employment is terminated by the Company
other than for Cause or Disability, or the Executive resigns without Good
Reason, the Date of Termination shall be the date on which the Company or the
Executive notifies the Executive or the Company, respectively, of such
termination and (iii) if the Executive's employment is terminated by reason of
death or Disability, the Date of Termination shall be the date of death of the
Executive or the Disability Effective Date, as the case may be.
4. OBLIGATIONS OF THE COMPANY UPON TERMINATION. (a) GOOD REASON; OTHER
THAN FOR CAUSE, DEATH OR DISABILITY. If, during the Employment Period, the
Company shall terminate the Executive's employment other than for Cause or
Disability or the Executive shall terminate employment for Good Reason:
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(i) the Company shall pay to the Executive in a lump sum in
cash within 30 days after the Date of Termination the aggregate of the amounts
set forth in clauses A and B below:
A. the sum of (1) the Executive's Annual Base Salary through the Date of
Termination to the extent not theretofore paid, (2) the product of (x) the
average of the Annual Bonuses paid or payable to the Executive in the three
calendar years prior to the Date of Termination, including any bonus or
portion thereof which has been earned but deferred (and annualized for any
calendar year consisting of less than twelve full months or during which the
Executive was employed for less than twelve full months) (such amount being
referred to as the "Average Annual Bonus") and (y) a fraction, the numerator
of which is the number of days in the current calendar year through the Date
of Termination, and the denominator of which is 365, and (3) any unpaid
Annual Bonus for a prior year and any compensation previously deferred by
the Executive (together with any accrued interest or earnings thereon) to
the extent not theretofore paid (the sum of the amounts described in clauses
(1), (2) and (3) shall be hereinafter referred to as the "Accrued
Obligations"); and
B. the amount equal to the product of (1) the number of years (including
fractions thereof) remaining from the Date of Termination until the end of
the Employment Period (the "Continuation Period") and (2) the sum of (x) the
Executive's Annual Base Salary and (y) the Average Annual Bonus;
(ii) any unpaid cash portion of the Aggregate Retention Amount
shall become fully vested and immediately payable;
(iii) the Retention Options shall become fully vested and
immediately exercisable;
(iv) to the extent not theretofore paid or provided, the
Company shall timely pay or provide to the Executive any other amounts or
benefits required to be paid or provided or which the Executive is entitled to
receive under any plan, program, policy or practice or contract or agreement of
the Company and its affiliated companies (such other amounts and benefits shall
be hereinafter referred to as the "Other Benefits"); and
(v) for the duration of the Continuation Period, the Executive
and the Executive's dependents shall continue to be eligible to participate in
the medical, dental, health and group-term life benefit plans and arrangements
applicable to the Executive immediately prior to the Date of Termination on the
same terms and conditions as in effect for the Executive and the Executive's
dependents immediately prior to the Date of Termination.
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<PAGE> 9
(b) DEATH. If the Executive's employment is terminated by reason of the
Executive's death during the Employment Period, this Agreement shall terminate
without further obligations to the Executive's legal representatives under this
Agreement, other than for payment of Accrued Obligations, the timely payment or
provision of Other Benefits and the payments referred to in Section 4 (a) (ii).
Accrued Obligations and the payments referred to in Section 4(a) (ii) shall be
paid to the Executive's estate or beneficiary, as applicable, in a lump sum in
cash within 30 days of the Date of Termination. In addition, the Retention
Options shall become fully vested and immediately exercisable. With respect to
the provision of Other Benefits, the term Other Benefits as utilized in this
Section 4(b) shall include death benefits as in effect on the date of the
Executive's death, which shall be no less favorable than those in effect
immediately prior to the Commencement Date.
(c) DISABILITY. If the Executive's employment is terminated by reason
of the Executive's Disability during the Employment Period, this Agreement shall
terminate without further obligations to the Executive, other than for payment
of Accrued Obligations, the timely payment or provision of Other Benefits and
the payments referred to in Section 4 (a) (ii). Accrued Obligations and the
payments referred to in Section 4(a) (ii) shall be paid to the Executive in a
lump sum in cash within 30 days of the Date of Termination. In addition, the
Retention Options shall become fully vested and immediately exercisable. With
respect to the provision of Other Benefits, the term Other Benefits as utilized
in this Section 4(c) shall include, and the Executive shall be entitled after
the Disability Effective Date to receive, disability and other benefits as in
effect on the Disability Effective Date, which shall be no less favorable than
those in effect immediately prior to the Commencement Date.
(d) CAUSE; OTHER THAN FOR GOOD REASON. If the Executive's employment
shall be terminated for Cause or the Executive terminates employment without
Good Reason during the Employment Period, this Agreement shall terminate without
further obligations to the Executive other than the obligation to pay to the
Executive (x) Accrued Obligations less the amount determined under Section 4(a)
(i)A(2) hereof, and (y) Other Benefits, in each case to the extent theretofore
unpaid.
5. NON-EXCLUSIVITY OF RIGHTS. Amounts which are vested benefits or
which the Executive is otherwise entitled to receive under any plan, policy,
practice or program of or any contract or agreement with the Company or any of
its affiliated companies at or subsequent to the Date of Termination shall be
payable in accordance with such plan, policy, practice or program or contract or
agreement except as explicitly modified by this Agreement.
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<PAGE> 10
6. FULL SETTLEMENT. The Company's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against the
Executive or others. In no event shall the Executive be obligated to seek
other employment or take any other action by way of mitigation of the amounts
payable to the Executive under any of the provisions of this Agreement and, such
amounts shall not be reduced whether or not the Executive obtains other
employment. The Company agrees to pay as incurred, to the full extent permitted
by law, all legal fees and expenses which the Executive may reasonably incur as
a result of any contest brought in good faith (regardless of the outcome
thereof) by the Company, the Executive or others of the validity or
enforceability of, or liability under, any provision of this Agreement or any
guarantee of performance thereof (including as a result of any contest by the
Executive about the amount of any payment pursuant to this Agreement), plus in
each case interest on any delayed payment at the applicable Federal rate
provided for in Section 7872(f) (2) (A) of the Internal Revenue Code.
7. CONFIDENTIAL INFORMATION/NONCOMPETITION/NONSOLICITATION. (a) The
Executive shall hold in a fiduciary capacity for the benefit of KeyCorp all
secret or confidential information, knowledge or data relating to KeyCorp or any
of its affiliated companies, and their respective businesses, which shall have
been obtained by the Executive during the Executive's employment by KeyCorp or
any of its affiliated companies and which shall not be or become public
knowledge (other than by acts by the Executive or representatives of the
Executive in violation of this Agreement). After termination of the Executive's
employment with KeyCorp, the Executive shall not, without the prior written
consent of KeyCorp or as may otherwise be required by law or legal process,
communicate or divulge any such information, knowledge or data to anyone other
than KeyCorp and those designated by it or to an attorney retained by the
Executive.
(b) While employed by Capital Partners Group or any of its affiliates
and for two years after the Executive's termination of employment by the Company
for Cause or by the Executive without Good Reason (but in no event for more than
two years following the expiration of the Employment Period), the Executive will
not, without the written consent of KeyCorp, directly or indirectly, be
connected as an officer, employee, partner, director or otherwise with any
business which engages within a 50-mile radius of any area in which Capital
Partners Group conducted business during the 12-month period immediately
preceding the Executive's Date of Termination, in any business that competes, at
the time such
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engagement is commenced, with any business actively conducted by Capital
Partners Group in such area and that is of the type of business activity in
which the Executive was directly engaged on behalf of Capital Partners Group
during the 12-month period immediately preceding the Date of Termination or any
other business with respect to which the Executive has confidential information.
Ownership, for personal investment purposes only, of less than 5% of the voting
stock of any publicly held corporation shall not constitute a violation hereof.
(c) While employed by KeyCorp or any of its affiliates and for two
years after the earlier of the Date of Termination and the expiration of the
Employment Period, the Executive will not, directly or indirectly, on behalf of
the Executive or any other person, solicit for employment by other than KeyCorp
any person employed by KeyCorp or its affiliates.
(d) While employed by the Company or any of its affiliates and for two
years after the earlier of (i) the Executive's termination of employment by the
Company for Cause or by the Executive without Good Reason and (ii) the
expiration of the Employment Period, the Executive will not, directly or
indirectly, on behalf of the Executive or any other person, solicit any customer
or client who was a customer or client of Capital Partners Group during the
12-month period immediately preceding the Date of Termination, for the purpose
of providing such customer or client with services that are directly competitive
with the services provided by the Capital Partners Group, provided that under no
circumstances may the Executive solicit any customer or client for the purpose
of providing services relating to business that was under discussion prior to
the Date of Termination.
(e) In the event of a breach or threatened breach of this Section 7,
the Executive agrees that the Company and KeyCorp shall be entitled to
injunctive relief in a court of competent jurisdiction to remedy any such breach
or threatened breach, and the Executive acknowledges that damages would be
inadequate and insufficient.
(f) The provisions of Section 7(b), (c) and (d) shall remain in full
force and effect until the expiration of the period specified herein
notwithstanding the earlier termination of the Executive's employment hereunder.
8. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this
Agreement to the contrary notwithstanding
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and except as set forth below, in the event it shall be determined that any
payment or distribution by the Company to or for the benefit of the Executive
(whether paid or payable or distributed or distributable pursuant to the terms
of this Agreement or otherwise, but determined without regard to any additional
payments required under this Section 8) (a "Payment") would be subject to the
excise tax imposed by Section 4999 of the Code or any interest or penalties are
incurred by the Executive with respect to such excise tax (such excise tax,
together with any such interest and penalties, are hereinafter collectively
referred to as the "Excise Tax"), then the Executive shall be entitled to
receive an additional payment (a "Gross-Up Payment") in an amount such that
after payment by the Executive of all taxes (including any interest or penalties
imposed with respect to such taxes), including, without limitation, any income
taxes (and any interest and penalties imposed with respect thereto) and Excise
Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the
Gross-Up Payment equal to the Excise Tax imposed upon the Payments.
Notwithstanding the foregoing provisions of this Section 8(a), if it shall be
determined that the Executive is entitled to a Gross-Up Payment, but that the
Payments do not exceed 110% of the greatest amount (the "Reduced Amount") that
could be paid to the Executive such that the receipt of Payments would not give
rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive
and the Payments, in the aggregate, shall be reduced to the Reduced Amount.
(b) Subject to the provisions of Section 8(c), all determinations
required to be made under this Section 8, including whether and when a Gross-Up
Payment is required and the amount of such Gross-Up Payment and the assumptions
to be utilized in arriving at such determination, shall be made by Ernst & Young
LLP or such other certified public accounting firm reasonably acceptable to the
Company as may be designated by the Executive (the "Accounting Firm") which
shall provide detailed supporting calculations both to the Company and the
Executive within 15 business days of the receipt of notice from the Executive
that there has been a Payment, or such earlier time as is requested by the
Company. All fees and expenses of the Accounting Firm shall be borne solely by
the Company. Any Gross-Up Payment, as determined pursuant to this Section 8,
shall be paid by the Company to the Executive within five days of (i) the later
of the due date for the payment of any Excise Tax, and (ii) the receipt of the
Accounting Firm's determination. Any determination by the Accounting Firm shall
be binding upon the Company and the Executive. As a result of the uncertainty in
the application of Section 4999 of the Code at the time of the initial
determination by the Accounting Firm hereunder, it is possible that Gross-Up
Payments which will not have been made by the
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Company should have been made ("Underpayment"), consistent with the
calculations required to be made hereunder. In the event that the Company
exhausts its remedies pursuant to Section 8(c) and the Executive thereafter is
required to make a payment of any Excise Tax, the Accounting Firm shall
determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of the
Executive.
(c) The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require the payment by
the Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than ten business days after the Executive is informed
in writing of such claim and shall apprise the Company of the nature of such
claim and the date on which such claim is requested to be paid. The Executive
shall not pay such claim prior to the expiration of the 30-day period following
the date on which it gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim is due).
If the Company notifies the Executive in writing prior to the expiration of such
period that it desires to contest such claim, the Executive shall:
(i) give the Company any information reasonably requested by
the Company relating to such claim,
(ii) take such action in connection with contesting such claim
as the Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim by
an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order
effectively to contest such claim, and
(iv) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions
of this Section 8 (c), the Company shall control all proceedings taken in
connection with such contest and, at its sole option, may pursue or forgo any
and all administrative appeals,
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proceedings, hearings and conferences with the taxing authority in respect of
such claim and may, at its sole option, either direct the Executive to pay the
tax claimed and sue for a refund or contest the claim in any permissible manner,
and the Executive agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as the Company shall determine; provided, however, that if the
Company directs the Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to the Executive, on an
interest-free basis and shall indemnify and hold the Executive harmless, on an
after-tax basis, from any Excise Tax or income tax (including interest or
penalties with respect thereto) imposed with respect to such advance or with
respect to any imputed income with respect to such advance; and further provided
that any extension of the statute of limitations relating to payment of taxes
for the taxable year of the Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested amount.
Furthermore, the Company's control of the contest shall be limited to issues
with respect to which a Gross-Up Payment would be payable hereunder and the
Executive shall be entitled to settle or contest, as the case may be, any other
issue raised by the Internal Revenue Service or any other taxing authority.
(d) If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 8(c), the Executive becomes entitled to receive any
refund with respect to such claim, the Executive shall (subject to the Company's
complying with the requirements of Section 8(c)) promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 8(c), a determination is made that
the Executive shall not be entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing of its intent to contest
such denial of refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid.
9. SUCCESSORS. (a) This Agreement is personal to the Executive and
without the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
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(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(c) The Company and KeyCorp will require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company or KeyCorp, or
any business of the Company or KeyCorp for which the Executive's services are
principally performed, to assume expressly and agree to perform this Agreement
in the same manner and to the same extent that the Company or KeyCorp would be
required to perform it if no such succession had taken place. As used in this
Agreement, "Company" and "KeyCorp" shall mean the Company and KeyCorp as
hereinbefore defined and any successors to their business and/or assets as
aforesaid which assumes and agrees to perform this Agreement by operation of
law, or otherwise.
10. GENERAL PROVISIONS. (a) This Agreement shall be governed by and
construed in accordance with the laws of the State of Ohio, without reference to
principles of conflict of laws. The captions of this Agreement are not part of
the provisions hereof and shall have no force or effect. This Agreement may not
be amended or modified otherwise than by a written agreement executed by the
parties hereto or their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing
and shall be given by hand delivery to the other party or by registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive: William B. Summers, Jr.
------------------- 20749 Beachcliff
Rocky River, Ohio 44116
If to the Company: New McDonald
----------------- 800 Superior Avenue
Cleveland, Ohio 44114
Att: Chief Executive Officer
Copy to: KeyCorp
------- 127 Public Square
Cleveland, Ohio 44114
Att: General Counsel
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
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<PAGE> 16
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(d) The parties agree to treat all amounts paid to the Executive
hereunder as compensation for services. Accordingly, the Company may withhold
from any amounts payable under this Agreement such Federal, state, local or
foreign taxes as shall be required to be withheld pursuant to any applicable law
or regulation.
(e) On and after the Commencement Date, this Agreement shall supersede
any other agreement, written or oral, pertaining to the subject matter of this
Agreement. This Agreement shall immediately terminate and be of no force and
effect if the Executive dies prior to the Commencement Date.
(f) This Agreement may be executed in counterparts, which together
shall constitute one and the same original.
-16-
<PAGE> 17
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from their respective Boards of Directors,
the Company and KeyCorp have caused these presents to be executed in their names
on their behalf, all as of the day and year first above written.
/s/ William B. Summers, Jr.
-----------------------------------
WILLIAM B. SUMMERS, JR.
MCDONALD & COMPANY
SECURITIES, INC.
/s/ Robert T. Clutterbuck
-----------------------------------
By: Robert T. Clutterbuck
Title: President and Chief Operating Officer
KEYCORP
/s/ Thomas C. Stevens
-----------------------------------
By: Thomas C. Stevens
Title: Senior Executive Vice President
<PAGE> 1
EXHIBIT 10.17
KEYCORP
ANNUAL INCENTIVE PLAN
(DECEMBER 21, 1999 RESTATEMENT)
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.
1
<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)).
2
<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).
3
<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.
4
<PAGE> 5
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 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.
5
<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.
6
<PAGE> 7
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 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. In its sole discretion the
Committee may revise or waive one or more of such minimal performance goals as a
result of any change in conditions or the occurrence of any events or other
factors which make such goal or goals unsuitable or undesirable. Notwithstanding
that the Corporation has not met a minimal performance goal, if the Committee
determines that one or more lines of business of the Corporation have had a
level of performance deserving of Incentive Awards, the Committee may establish
a pool for Incentive Awards utilizing a Target Pool Percentage fixed at 25% (or
such higher or lower percentage as the Committee, in its sole discretion, shall
determine).
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.
7
<PAGE> 8
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.
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.
8
<PAGE> 9
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 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 or the KeyCorp Automatic Deferral Plan ("Automatic Deferral Plan"),
whichever is applicable.
ARTICLE III
AUTOMATIC DEFERRAL
------------------
1. ELIGIBILITY AND PARTICIPATION. A Plan Participant who accrues an
Incentive Award under the Plan which exceeds $100,000 for the applicable Plan
year shall automatically and without further action by the Participant defer a
percentage of the Participant's Incentive Award to the Automatic Deferral Plan,
and shall automatically become a participant in the Automatic Deferral Plan.
2. AUTOMATIC DEFERRAL REQUIREMENTS. Commencing as of January 1, 1999
and thereafter, a Participant meeting the eligibility and participation
requirements contained in Section 1 hereof, as a condition of their continued
participation in the Plan, shall automatically defer the following percentages
of the Participant's accrued Incentive Award for the applicable Plan year to the
Automatic Deferral Plan:
(a) THE PORTION OF A PARTICIPANT'S INCENTIVE AWARD
BETWEEN $100,000 UP TO AND INCLUDING $500,000. Twenty percent
(20%) of the Participant's Incentive Award between $100,000 up
to and including $500,000 shall be automatically deferred to
the Automatic Deferral Plan.
9
<PAGE> 10
(b) THE PORTION OF A PARTICIPANT'S INCENTIVE AWARD
BETWEEN $500,000 UP TO AND INCLUDING $1,000,000. Twenty five
(25%) of the Participant's Incentive Award between $500,000 up
to and including $1,000,000 shall be automatically deferred to
the Automatic Deferral Plan.
(c) THE PORTION OF A PARTICIPANT'S INCENTIVE AWARD
GREATER THAN $1,000,000. Thirty percent (30%) of the
Participant's Incentive Award greater than $1,000,000 shall be
automatically deferred to the Automatic Deferral Plan.
3. PLAN VESTING. A Participant shall have no vested interest in that
portion of the Participant's Plan Incentive Award that is automatically deferred
to the Automatic Deferral Plan. Once deferred to the Automatic Deferral Plan,
the Participant's deferred Incentive Award shall be subject to the Automatic
Deferral Plan's vesting, distribution, and forfeiture provisions, and the Plan
Participant shall have no right or entitlement to any such Incentive Award
deferred to the Automatic Deferral Plan except as specifically granted and/or
authorized under the terms of the Automatic Deferral Plan.
4. TIME OF DEFERRAL. A Participant's accrued Plan Incentive Award
deferred to the Automatic Deferral Plan in accordance with the provisions of
Section 2 hereof, shall be credited on a bookkeeping basis to an Automatic
Deferral Plan account established in the Participant's name as of the payroll
date on which such Incentive Awards are generally otherwise paid under the Plan.
5. EFFECT OF DISCHARGE FOR CAUSE OR VOLUNTARY TERMINATION. In the event
of a Participant's Discharge for Cause or Voluntary Termination, the Participant
shall automatically forfeit any and all right to receive payment for any
Incentive Award which otherwise would have become subject to the "Automatic
Deferral Requirements" of Section 2, hereof, but for the Participant's Discharge
for Cause or Voluntary Termination prior to the date on which Incentive Awards
are otherwise paid under the Plan.
6. DEFINITIONS. For purposes of this Article III, the following words
and phrases shall have the meaning hereinafter set forth, unless a different
meaning is clearly required by the context:
(a) "Discharge for Cause" shall mean the permanent
termination of the Participant's employment from his or her
Employer and any other Employer that is the result of (1)
serious misconduct as an Employee, including, but not limited
to, a continued
10
<PAGE> 11
failure after notice to perform a substantial portion of his
or her duties and responsibilities unrelated to illness or
incapacity, unethical behavior such as acts of self-dealing or
self-interest, harassment, violence in the workplace, or
theft; (2) the commission of a crime involving a controlled
substance, moral turpitude, dishonesty, or breach of trust; or
(3) the Employer being directed by a regulatory agency or
self-regulatory agency to terminate or suspend the Participant
or to prohibit the Participant from performing services for
the Employer. The Corporation in its sole and absolute
discretion shall determine whether a Participant has been
Discharged for Cause, as provided for in this Section 6(a).
(b) "Voluntary Termination" shall mean a voluntary
and permanent termination of a Participant's employment from
his or her Employer and from any other Employer, whether by
resignation or otherwise, but shall not include the
Participant's Discharge for Cause, Retirement, Involuntary
Termination, Termination Under Limited Circumstances, or
termination as a result of Disability or death.
All the capitalized and undefined terms used in this Section 6 shall
have the meanings given them in the Automatic Deferral Plan, unless a different
meaning is plainly required by the context.
ARTICLE IV
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
11
<PAGE> 12
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 V
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 VI
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.
12
<PAGE> 13
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: /s/ Thomas E. Helfrich
------------------------------------------------
Thomas E. Helfrich, Executive Vice President
13
<PAGE> 14
Exhibit A
---------
<TABLE>
<CAPTION>
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>
14
<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,
------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
COMPUTATION OF EARNINGS
Net income.................................................. $1,107 $ 996 $ 919 $ 783 $ 825
Add: Provision for income taxes............................. 577 483 426 360 368
Less: Extraordinary net gain................................ -- -- -- -- 36
------ ------ ------ ------ ------
Income before income taxes and extraordinary net gain... 1,684 1,479 1,345 1,143 1,157
Fixed charges, excluding interest on deposits............... 1,649 1,517 1,085 810 819
------ ------ ------ ------ ------
Total earnings for computation, excluding interest on
deposits............................................. 3,333 2,996 2,430 1,953 1,976
Interest on deposits........................................ 1,305 1,359 1,462 1,469 1,705
------ ------ ------ ------ ------
Total earnings for computation, including interest on
deposits............................................. $4,638 $4,355 $3,892 $3,422 $3,681
====== ====== ====== ====== ======
COMPUTATION OF FIXED CHARGES
Net rental expense.......................................... $ 173 $ 139 $ 123 $ 126 $ 117
====== ====== ====== ====== ======
Portion of net rental expense deemed representative of
interest.................................................. $ 46 $ 35 $ 30 $ 42 $ 39
Interest on short-term borrowed funds....................... 646 801 642 492 519
Interest on long-term debt, including cap securities........ 957 681 413 276 261
------ ------ ------ ------ ------
Total fixed charges, excluding interest on deposits..... 1,649 1,517 1,085 810 819
Interest on deposits........................................ 1,305 1,359 1,462 1,469 1,705
------ ------ ------ ------ ------
Total fixed charges, including interest on deposits..... $2,954 $2,876 $2,547 $2,279 $2,524
====== ====== ====== ====== ======
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
Preferred stock dividend requirement on a pre-tax basis..... -- -- -- $ 12 $ 23
Total fixed charges, excluding interest on deposits......... $1,649 $1,517 $1,085 810 819
------ ------ ------ ------ ------
Combined fixed charges and preferred stock dividends,
excluding interest on deposits....................... 1,649 1,517 1,085 822 842
Interest on deposits........................................ 1,305 1,359 1,462 1,469 1,705
------ ------ ------ ------ ------
Combined fixed charges and preferred stock dividends,
including interest on deposits....................... $2,954 $2,876 $2,547 $2,291 $2,547
====== ====== ====== ====== ======
RATIO OF EARNINGS TO FIXED CHARGES
Excluding deposit interest.................................. 2.02X 1.97x 2.24x 2.41x 2.42x
Including deposit interest.................................. 1.57X 1.51x 1.53x 1.50x 1.46x
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
Excluding deposit interest.................................. 2.02X 1.97x 2.24x 2.38x 2.35x
Including deposit interest.................................. 1.57X 1.51x 1.53x 1.49x 1.45x
</TABLE>
15
<PAGE> 1
Exhibit 13
FINANCIAL REVIEW
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction 26
Highlights of Key's 1999 Performance 26
Cash Basis Financial Data 29
Line of Business Results 29
Results of Operations
Net Interest Income 34
Market Risk Management 35
Noninterest Income 37
Noninterest Expense 40
Income Taxes 41
Financial Condition
Loans 42
Securities 44
Asset Quality 45
Deposits and Other Sources of Funds 47
Liquidity 48
Capital and Dividends 49
Fourth Quarter Results 50
REPORT OF MANAGEMENT 52
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS 52
CONSOLIDATED FINANCIAL STATEMENTS 53
CORPORATE INFORMATION 77
25
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
This Management's Discussion and Analysis reviews the financial condition and
results of operations of KeyCorp and its subsidiaries for each of the past three
years. Some tables may cover more than three years to comply with Securities and
Exchange Commission disclosure requirements or to illustrate trends over a
longer period of time. When you read this discussion, you should also look at
the consolidated financial statements and related notes that appear on pages 53
through 76.
TERMINOLOGY
This annual report contains some shortened names and some industry-specific
terms. We want to explain some of these terms at the outset so you can better
understand the discussion that follows.
- - KEYCORP refers solely to the parent company.
- - KEY refers to the consolidated entity consisting of KeyCorp and its
subsidiaries.
- - MCDONALD is McDonald & Company Investments, Inc., a full-service investment
banking and securities brokerage company that Key acquired in October 1998.
- - A KEYCENTER is one of Key's full-service retail banking facilities or
branches.
- - KEY engages in CAPITAL MARKETS ACTIVITIES, primarily through the Key Capital
Partners line of business. These activities encompass a variety of services.
Among other things, we trade securities as a dealer, enter into derivative
contracts (both to accommodate clients' financing needs and for proprietary
trading purposes), invest in new or growing ventures and conduct transactions
in foreign currencies (both to accommodate clients' needs and to benefit from
fluctuations in exchange rates).
- - When we want to draw your attention to a particular item in Key's Notes to
Consolidated Financial Statements, we refer to NOTE ____, giving the
particular number, name, and starting page number.
- - All earnings per share data included in this discussion are presented on a
DILUTED basis, which takes into account all common shares outstanding and
potential common shares that could result from the exercise of outstanding
stock options. Some of the financial information tables also include BASIC
earnings per share, which takes into account only common shares outstanding.
- - For regulatory purposes, capital is divided into several classes. Federal
regulations prescribe that at least half of a bank or bank holding company's
TOTAL RISK-ADJUSTED CAPITAL must qualify as TIER 1. Both total and Tier 1
capital serve as bases for several measures of capital adequacy, which is an
important indicator of financial stability and performance. You will find a
more detailed explanation of total and Tier 1 capital and how they are
calculated in the section entitled "Capital and dividends," which begins on
page 49.
OUR PROJECTIONS ARE NOT FOOLPROOF
This annual report contains "forward-looking statements" about issues like
anticipated improvement in earnings, expected expense reductions and revenue
growth, and related objectives (such as the anticipated reduction in Key's
employment base). Forward-looking statements by their nature are subject to
assumptions, risks and uncertainties. For a variety of reasons, actual results
could differ materially from those contained in or implied by the
forward-looking statements:
- - Interest rates could change more quickly or more significantly than we
expect.
- - If the economy changes significantly in an unexpected way, the demand for new
loans and the ability of borrowers to repay outstanding loans may change in
ways that our models do not anticipate.
- - The stock and bond markets could suffer a significant disruption, which may
have a negative effect on our financial condition and that of our borrowers,
and on our ability to raise money by issuing new securities.
- - It could take us longer than we anticipate to implement strategic initiatives
designed to increase revenues or manage expenses, or we may be unable to
implement those initiatives at all.
- - Acquisitions and dispositions of assets, business units or affiliates could
affect us in ways that management has not anticipated.
- - We may become subject to new legal obligations or the resolution of existing
litigation may have a negative effect on our financial condition.
- - We may become subject to new and unanticipated accounting, tax, or regulatory
practices or requirements.
HIGHLIGHTS OF KEY'S 1999 PERFORMANCE
FINANCIAL PERFORMANCE
Key's financial performance in 1999 was strong. Some of the 1999 highlights are
discussed below.
- - We achieved record earnings for the third consecutive year, breaking the $1.0
billion mark in net income for the first time in our history. Net income was
$1.107 billion, or $2.45 per common share, up 11% from $996 million, or $2.23
per common share, in 1998, and $919 million, or $2.07 per common share, in
1997.
- - Key's return on average total equity was 17.68%, compared with 17.97% in 1998
and 18.89% in 1997.
- - Key's return on average total assets rose to 1.37% from 1.32% in 1998 and
1.33% in 1997.
Figure 2, which appears on page 28, summarizes Key's financial performance for
each of the last six years
In each of the past three years, Key's financial results have been affected by
various nonrecurring items. The most significant of these items and their impact
on both earnings and primary financial ratios are summarized in Figure 1. Each
of these items is discussed in greater detail elsewhere in this report.
26 [LOGO-KEYCORP]
<PAGE> 3
FIGURE 1 SIGNIFICANT NONRECURRING ITEMS
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
dollars in millions, except per share amounts 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income as reported $1,107 $996 $919
Nonrecurring items (net of tax):
Gains from branch divestitures (122) (22) (97)
Gain from sale of Electronic Payment Services, Inc. (85) -- --
Gain from sale of Concord EFS, Inc. common shares (9) -- --
Gains from sale of Key Merchant Services, LLC (9) (31) --
Gain from sale of Compaq Capital Europe LLC and
Compaq Capital Asia Pacific LLC (8) -- --
Restructuring and other special charges 96 -- --
Merger and integration charges -- 5 --
Real estate disposition charge -- -- 33
Other nonrecurring charges 81 -- --
- --------------------------------------------------------------------------------------------------------------------------------
Net income-- core $1,051 $948 $855
====== ===== =====
Net income per diluted common share $2.45 $2.23 $2.07
Net income per diluted common share-- core 2.33 2.12 1.92
Return on average total assets 1.37% 1.32% 1.33%
Return on average total assets-- core 1.30 1.26 1.24
Return on average total equity 17.68 17.97 18.89
Return on average total equity-- core 16.79 17.10 17.57
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Key's earnings for 1999 reflect increases from our fee-generating businesses,
particularly investment banking, dealer trading services, asset management and
brokerage. These businesses have contributed greater amounts to Key's financial
results since Key acquired McDonald in October 1998. We are also seeing the
positive results of recent efforts to increase profitability in the retail
banking unit.
Key's fee income is included in "core noninterest income," which is noninterest
income excluding certain nonrecurring items. Core noninterest income was up 31%
from last year, and accounted for 41% of Key's total core revenue (which is net
interest income plus core noninterest income). In comparison, core noninterest
income accounted for 36% of Key's total core revenue in 1998. One of
management's long-term goals is for Key to derive 50% of its revenue from
activities that generate core noninterest income. For detailed information about
noninterest income, see the section entitled "Noninterest income," which begins
on page 37.
Key's lending activity has also been strong -- particularly in the home equity,
consumer lease financing, equipment leasing and other commercial loan
portfolios. Excluding the impact of loan sales, home equity loans were up 28%
from 1998, while consumer lease financing rose by 24%; commercial loan growth
exceeded 10% for the third consecutive year. Although we are continuously
extending more loans, both nonperforming loans and net charge-offs experienced
only modest increases during 1999.
CORPORATE STRATEGY
Key's corporate strategy for the past several years has focused on an active
program of selling portfolios and business units that have low anticipated
growth rates or do not have a competitive advantage or significant market share,
and acquiring or growing businesses that management believes are capable of
achieving double-digit earnings growth rates.
This long-standing strategy was supplemented in the fourth quarter of 1999 by a
new three-year initiative to improve profitability by reducing the costs of
doing business, sharpening the focus on the most profitable growth businesses
and enhancing revenues. The expected pre-tax earnings improvement of more than
$370 million per year when fully implemented, when combined with Key's
transformation into an integrated, multiline financial services company, should
enable us to capitalize on additional opportunities.
PRINCIPAL STRATEGIC ACTIONS DURING 1999
During the first quarter, Key introduced an initiative designed to strengthen
the profitability of the retail banking unit within the Key Retail Banking line
of business. This initiative and the guiding strategies are discussed in more
detail under the heading "Key Retail Banking" on page 30. Management's long-term
goal is to increase the annual pre-tax earnings growth rate of the retail
banking unit to at least 10%. Our plan to achieve that goal focuses on improving
sales-generating capabilities and reducing operating costs. During 1999, the
retail banking unit achieved a 9% pre-tax earnings growth rate (exceeding the
target for the year of 8%) and contributed to the increase in Key's total
revenue.
Key took three significant actions during the fourth quarter of 1999. First, Key
sold its Long Island, New York business, including 28 KeyCenters with $1.3
billion of deposits and $505 million of loans. The Long Island business was
profitable, but we held a very small share of the market for deposits and loans
in the greater New York City-Long Island area. That region has long been
dominated by major New York City-based financial institutions and our
competitive position was not strong.
The positive effect on capital resulting from the sale of Key's Long Island
business should enable Key to allocate more capital to higher growth
opportunities and geographic markets. For example, Key intends to open
KeyCenters offering a broad range of financial services products in 25
high-growth markets in the western United States. The first two centers opened
during 1999 in Sandy, Utah (a suburb of Salt Lake City) and in Vancouver,
Washington. Since then, plans have been put in place to open 20 to 30 new sites
- -- primarily in the markets of Vancouver and Seattle, Washington and in various
markets in Utah.
Second, Key reached an agreement to sell its credit card portfolio as part of an
overall effort to direct financial resources and free up capital to support
faster growing businesses. The relatively small size of the portfolio ($1.4
billion, or 2% of total loans outstanding at December 31, 1999) did not provide
the scale necessary to allow Key to compete effectively in credit card lending
with other larger credit card issuers. This transaction was completed in January
2000.
[LOGO-KEYCORP] 27
<PAGE> 4
FIGURE 2 SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
COMPOUND
ANNUAL RATE
OF CHANGE
dollars in millions, except per share amounts 1999 1998 1997 1996 1995 1994 (1994-1999)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
Interest income $ 5,695 $ 5,525 $ 5,262 $ 4,951 $ 5,121 $ 4,490 4.9%
Interest expense 2,908 2,841 2,517 2,237 2,485 1,797 10.1
Net interest income 2,787 2,684 2,745 2,714 2,636 2,693 .7
Provision for loan losses 348 297 320 197 100 125 22.7
Noninterest income 2,294 1,575 1,306 1,087 933 883 21.0
Noninterest expense 3,049 2,483 2,386 2,461 2,312 2,168 7.1
Income before income taxes
and extraordinary item 1,684 1,479 1,345 1,143 1,157 1,283 5.6
Income before extraordinary item 1,107 996 919 783 789 853 5.4
Net income 1,107 996 919 783 825 853 5.4
Net income applicable to common shares 1,107 996 919 775 809 837 5.8
- ---------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Income before extraordinary item $ 2.47 $ 2.25 $ 2.09 $ 1.69 $ 1.65 $ 1.72 7.5%
Income before extraordinary item
-- assuming dilution 2.45 2.23 2.07 1.67 1.63 1.70 7.6
Net income 2.47 2.25 2.09 1.69 1.73 1.72 7.5
Net income-- assuming dilution 2.45 2.23 2.07 1.67 1.71 1.70 7.6
Cash dividends 1.04 .94 .84 .76 .72 .64 10.2
Book value at year end 14.41 13.63 11.83 10.92 10.68 9.44 8.8
Market price at year end 22.13 32.00 35.41 25.25 18.13 12.50 12.1
Dividend payout ratio 42.11% 41.78% 40.19% 45.10% 41.74% 37.10% 2.6
Weighted average common shares (000) 448,168 441,895 439,042 459,810 469,574 486,134 (1.6)
Weighted avg. common shares and
potential common shares (000) 452,363 447,437 444,544 464,282 472,882 490,932 (1.6)
- ---------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31,
Loans $ 64,222 $ 62,012 $ 53,380 $ 49,235 $ 48,332 $ 46,579 6.6%
Earning assets 73,733 70,240 64,246 59,260 58,762 60,047 4.2
Total assets 83,395 80,020 73,699 67,621 66,339 66,801 4.5
Deposits 43,233 42,583 45,073 45,317 47,282 48,564 (2.3)
Long-term debt 15,881 12,967 7,446 4,213 4,003 3,570 34.8
Common shareholders' equity 6,389 6,167 5,181 4,881 4,993 4,530 7.1
Total shareholders' equity 6,389 6,167 5,181 4,881 5,153 4,690 6.4
Full-time equivalent employees 24,568 25,862 24,595 27,689 29,563 29,211 (3.4)
Branches 936 968 1,015 1,205 1,284 1,272 (6.0)
- ---------------------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on average total assets 1.37% 1.32% 1.33% 1.21% 1.24% 1.36% N/A
Return on average common equity 17.68 17.97 18.89 15.73 17.35 18.87 N/A
Return on average total equity 17.68 17.97 18.89 15.64 17.10 18.56 N/A
Efficiency(a) 59.43 58.49 58.21 60.88 63.03 59.39 N/A
Overhead(b) 31.52 35.17 40.34 45.51 49.66 46.14 N/A
Net interest margin (taxable equivalent) 3.93 4.08 4.54 4.78 4.47 4.83 N/A
- ---------------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS AT DECEMBER 31,
Equity to assets 7.66% 7.71% 7.03% 7.22% 7.77% 7.03% N/A
Tangible equity to tangible assets 6.03 5.93 5.52 5.88 6.25 6.19 N/A
Tier 1 risk-adjusted capital 7.68 7.21 6.65 7.98 7.53 8.48 N/A
Total risk-adjusted capital 11.66 11.69 10.83 13.01 10.85 11.62 N/A
Leverage 7.77 6.95 6.40 6.93 6.20 6.63 N/A
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Key has completed several mergers, acquisitions and divestitures during the
six-year period shown in this table. One or more of these transactions may have
had a significant effect on Key's results, making it difficult to compare
results from one year to the next. Note 3 ("Mergers, Acquisitions and
Divestitures"), which begins on page 60, has specific information about the
business combinations and divestitures that Key completed in the past three
years to help you understand how those transactions may have impacted Key's
financial condition and results of operations.
(a) This ratio, which measures the extent to which recurring revenues are
absorbed by operating expenses, is calculated as follows: noninterest
expense (excluding certain nonrecurring charges) divided by the sum of
taxable-equivalent net interest income and noninterest income (excluding net
securities transactions, gains from certain divestitures and certain
nonrecurring charges).
(b) This ratio is the difference between noninterest expense (excluding certain
nonrecurring charges) and noninterest income (excluding net securities
transactions, gains from certain divestitures and certain nonrecurring
charges) divided by taxable-equivalent net interest income.
N/A = Not Applicable
28 [LOGO-KEYCORP]
<PAGE> 5
Third, Key announced strategic actions being taken over the next three years
that are expected to result in pre-tax cost reductions. Our goal is to achieve
more than $170 million of expense reductions per year upon completion. These
actions include outsourcing certain nonstrategic support functions (which
resulted in the write-off of selected assets, including certain software), site
consolidations in a number of Key's businesses and reducing the number of
management layers. The actions are expected to reduce Key's employment base by
approximately 3,000 positions, or 11%, by year-end 2000 and to contribute to an
improvement in Key's efficiency ratio. In connection with these actions, we
recorded $145 million of restructuring and other special charges during the
fourth quarter.
The sales of the Long Island business and the credit card portfolio are
described in Note 3 ("Mergers, Acquisitions and Divestitures"), which begins on
page 60. The section entitled "Noninterest expense," which begins on page 40,
and Note 13 ("Restructuring Charges"), on page 69, provide more information
about Key's restructuring charges.
CASH BASIS FINANCIAL DATA
The selected financial data presented in Figure 3 highlight Key's performance on
a cash basis for each of the past three years. We provide cash basis financial
data because we believe it offers a useful tool for evaluating liquidity and
measuring a bank holding company's ability to support future growth, pay
dividends and repurchase shares.
"Cash basis" accounting can mean different things. When we apply "cash basis"
accounting, the only adjustments that we make to get from the information in
Figure 2 (which is presented on an accrual basis) to the comparable line items
in Figure 3 are to exclude goodwill and other intangibles that do not qualify as
Tier 1 capital, and to exclude the amortization of those assets. Figure 3 does
not exclude the impact of other noncash items such as depreciation and deferred
taxes.
Goodwill and other intangibles that do not qualify as Tier 1 capital are the
result of business combinations that Key recorded using the "purchase" method of
accounting. Under the purchase method, assets and liabilities of acquired
companies are recorded at their fair values and any amount paid in excess of the
fair value of the net assets acquired is recorded as goodwill. If the same
transactions had qualified for accounting using the "pooling of interests"
method, the acquired company's financial statements would simply have been
combined with Key's. After a combination using purchase accounting, Key must
amortize goodwill and other intangibles by taking periodic charges against
income, but those charges are only accounting entries, not actual cash expenses.
Thus, from an investor's perspective, the economic effect of a transaction is
the same whether we account for it as a purchase or a pooling. For the same
reason, the amortization of intangibles does not impact Key's liquidity and
funds management activities.
This is the only section of this Financial Review that discusses Key's financial
results on a cash basis.
LINE OF BUSINESS RESULTS
Key has four primary lines of business:
KEY RETAIL BANKING offers branch-based financial products and services, and
services our small business clients.
KEY SPECIALTY FINANCE offers non-branch-based consumer loan products, such as
education loans, home equity loans, automobile loans and leases, and marine and
recreational vehicle loans.
KEY CORPORATE CAPITAL offers financing, transaction processing, financial
advisory services, equipment leasing and a number of other specialized services.
FIGURE 3 CASH BASIS SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
dollars in millions, except per share amounts 1999 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31,
Noninterest expense $ 2,947 $ 2,397 $ 2,309
Income before income taxes 1,786 1,565 1,422
Net income 1,199 1,072 989
- -----------------------------------------------------------------------------------------
PER COMMON SHARE
Net income $ 2.68 $ 2.43 $ 2.25
Net income-- assuming dilution 2.65 2.40 2.22
Weighted average common shares (000) 448,168 441,895 439,042
Weighted average common shares and potential
common shares (000) 452,363 447,437 444,544
- -----------------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on average total assets 1.51% 1.45% 1.46%
Return on average total equity 25.14 24.71 25.78
Efficiency(a) 57.32 56.47 56.28
- -----------------------------------------------------------------------------------------
GOODWILL AND NON-QUALIFYING INTANGIBLES
Goodwill average balance $ 1,424 $ 1,113 $ 921
Non-qualifying intangibles average balance 68 91 108
Goodwill amortization (after tax) 81 65 58
Non-qualifying intangibles amortization (after tax) 11 11 12
- -----------------------------------------------------------------------------------------
</TABLE>
Key has completed several mergers, acquisitions and divestitures during the
three-year period shown in this table. One or more of these transactions may
have had a significant effect on Key's results, making it difficult to compare
results from one year to the next. Note 3 ("Mergers, Acquisitions and
Divestitures"), which begins on page 60, has specific information about the
business combinations and divestitures that Key completed in the past three
years to help you understand how those transactions may have impacted Key's
financial condition and results of operations.
(a) This ratio, which measures the extent to which recurring revenues are
absorbed by operating expenses, is calculated as follows: noninterest
expense (excluding certain nonrecurring charges and the amortization of
goodwill and non-qualifying intangibles) divided by the sum of
taxable-equivalent net interest income and noninterest income (excluding
net securities transactions, gains from certain divestitures and certain
nonrecurring charges).
[LOGO-KEYCORP] 29
<PAGE> 6
KEY CAPITAL PARTNERS offers asset management, wealth management, private
banking, brokerage, investment banking, capital markets, and insurance products
and services.
This section summarizes the financial performance of each line of business and
its most recent strategic developments. To better understand the discussion
below concerning each line of business, see Note 4 ("Line of Business Results"),
which begins on page 61 and describes the activities and financial results of
each line of business in greater detail.
Figure 4 shows Key's net income (loss) by line of business for each of the past
three years.
FIGURE 4 NET INCOME (LOSS) BY LINE OF BUSINESS
<TABLE>
<CAPTION>
Change 1999 vs 1998
-----------------------
YEAR ENDED DECEMBER 31, 1999 1998 1997 AMOUNT PERCENT
dollars in millions
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Key Retail Banking $ 344 $319 $374 $ 25 7.8%
Key Specialty Finance 165 126 84 39 31.0
Key Corporate Capital 434 378 318 56 14.8
Key Capital Partners(a) 107 102 55 5 4.9
Treasury and Other (29) 38 53 (67) N/M
- ----------------------------------------------------------------------------------------------------------------------------------
Total segments 1,021 963 884 58 6.0
Reconciling items 86 33 35 53 160.6
- ----------------------------------------------------------------------------------------------------------------------------------
Total net income $1,107 $996 $919 $111 11.1%
====== ==== ==== ==== ======
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Noninterest income and expense attributable to Key Capital Partners may be
assigned to either Key Corporate Capital or Key Retail Banking if one of
those lines is principally responsible for maintaining the relationship
with the client that used Key Capital Partners' products and services.
Key Capital Partners had net income of $157 million in 1999, $149 million
in 1998, and $88 million in 1997 before it assigned some of its income
and expense.
N/M = Not Meaningful
KEY RETAIL BANKING
Key Retail Banking's primary operating units are retail banking and small
business lending. During 1999, strategic efforts focused on strengthening
sales-generating capabilities and managing costs by making branch-based services
more efficient. In particular, our efforts centered on cross-selling,
streamlining deposit product offerings and improving the deposit pricing
structure.
Management's long-term goal is to achieve annual pre-tax earnings growth of at
least 10% in the retail banking unit. Pre-tax earnings for the unit rose 9% in
1999, exceeding the 8% target set for the year.
Net income for Key Retail Banking as a whole was $344 million in 1999, or
approximately 31% of Key's consolidated earnings. In comparison, net income was
$319 million in 1998, or approximately 32% of consolidated earnings. The
increase in net income reflects growth in net interest income and a decline in
noninterest expense. These factors were partially offset by a decrease in
noninterest income and a slightly higher provision for loan losses. In 1998, net
income increased principally because of higher noninterest income related to
various investment banking and capital markets activities and reduced
noninterest expense.
Net interest income rose by $25 million from 1998, primarily because of a
moderate increase in loans and higher interest rate spreads used in determining
the credit for deposits generated by Key Retail Banking. These factors more than
offset the impact of a lower deposit base. In particular, core deposits (which
are a fairly inexpensive source of funding) have declined, in part because Key
continues to divest branch offices such as the Long Island franchise sold in
1999 and the 46 branch offices sold in 1998. Key has compensated for the growing
disparity between the demand for loans and the availability of deposits to fund
those loans by using funding alternatives such as borrowing in the capital
markets or securitizing and selling loans. However, we initiate securitizations
selectively since they are more expensive than collecting and maintaining
deposits and are dependent on favorable market conditions.
Noninterest expense decreased by $25 million from 1998, primarily due to lower
personnel expense. This reflects a decrease in the number of employees and a
lower level of incentive compensation.
Noninterest income was down $6 million from 1998. Increases in service charges
on deposit accounts, trust and asset management income, and loan fees were more
than offset by the reduced amount of income we derived from various investment
banking and capital markets products and services provided by the Key Capital
Partners line of business in 1999.
The provision for loan losses increased by $1 million in response to a slightly
higher level of net charge-offs in the small business lending unit of Key Retail
Banking.
KEY SPECIALTY FINANCE
Net income for Key Specialty Finance was $165 million in 1999, or approximately
15% of Key's consolidated earnings. In comparison, net income was $126 million
in 1998, or approximately 13% of consolidated earnings. Financial performance
improved primarily because net interest income and noninterest income increased
while the provision for loan losses was slightly reduced. These positive factors
were partially offset by an increase in noninterest expense. Net income in 1998
increased as a result of strong loan growth and higher noninterest income. A
primary source of the 1998 increase in revenue was the acquisition of Champion
Mortgage Co., Inc. in August 1997. Because the acquisition of Champion was
accounted for as a purchase, 1997 results include only four months of Champion's
activity, while 1998 results reflect a full year.
Net interest income increased by $61 million in 1999, primarily because average
loans outstanding rose 7% from 1998. The increase in loans (which occurred
despite the securitizations discussed below) reflects continued strong growth in
the home equity and automobile lease financing portfolios. Another factor
contributing to loan growth was Key's April 1998 acquisition of an $805 million
marine/recreational vehicle installment loan portfolio. Although loans
increased, Key was able to make a slight reduction in the provision for loan
losses because of improvement in consumer credit quality.
Virtually all of the $52 million increase in noninterest income from 1998 to
1999 is attributable to gains resulting from securitizations. During 1999, Key
securitized and sold an aggregate $3.4 billion of education, home equity
30 [LOGO-KEYCORP]
<PAGE> 7
and automobile loans. Starting in 2000, we intend to de-emphasize our practice
of securitizing and selling home equity loans originated by Champion Mortgage
Co., Inc., our home equity finance affiliate. We may continue to securitize
these loans without then selling them. By retaining these loans on the balance
sheet, we intend to replace over time the earnings capacity previously provided
by the credit card portfolio, which was sold in January 2000. In 1999, net
income attributable to the credit card portfolio was approximately $39 million.
For more information about the sale of the credit card portfolio, see Note 3
("Mergers, Acquisitions and Divestitures"), which begins on page 60. We expect
that the change in our home equity loan securitization practice will reduce
Key's 2000 diluted earnings per common share by approximately $.08. For more
information about Key's loan securitization activities, see the section entilted
"Loans," which begins on page 42.
Noninterest expense rose $52 million from 1998, due in large part to increases
in personnel expense, depreciation and amortization expense associated with loan
servicing, and marketing costs incurred to expand the home equity business.
KEY CORPORATE CAPITAL
Net income for Key Corporate Capital was $434 million in 1999, or approximately
39% of Key's consolidated earnings. In comparison, net income was $378 million
in 1998, or approximately 38% of consolidated earnings. The 1999 increase in net
income derived primarily from two sources. First, total average loans increased
by 16%, generating higher net interest income. This includes strong increases in
the real estate construction, lease financing, structured finance, healthcare
and media portfolios. Second, noninterest income increased by $92 million,
primarily due to higher income from loan fees, service charges on deposit
accounts, various investment banking and capital markets activities and a $13
million gain from the sale of Key's interest in a joint venture with Compaq
Capital Corporation. In 1998, net income increased because of a 24% increase in
total average loans and growth in noninterest income, led by various investment
banking and capital markets activities, and trust and asset management.
The $182 million increase in total revenue in 1999 was partially offset by a $37
million increase in the provision for loan losses. Revenue was also offset by a
$54 million increase in noninterest expense, primarily because of higher
personnel expense, depreciation and amortization expense, and costs associated
with investment banking and capital markets activities.
KEY CAPITAL PARTNERS
Net income for Key Capital Partners was $107 million in 1999, compared with $102
million in 1998. In each of these years, Key Capital Partners' net income
represents approximately 10% of Key's consolidated earnings.
If personnel in another line of business are responsible for maintaining a
relationship with a client that uses the products and services offered by Key
Capital Partners, that line of business is assigned the income and expense
arising from our work for the client. As a result, a significant amount of Key
Capital Partners' noninterest income and expense is reported under either Key
Corporate Capital or Key Retail Banking. If Key Capital Partners had not
assigned income and expense items to other lines of business, net income for
this line would have been $157 million in 1999 (representing approximately 14%
of Key's consolidated earnings) and $149 million in 1998 (representing
approximately 15% of Key's consolidated earnings).
Total revenue for Key Capital Partners rose by $342 million ($352 million prior
to revenue sharing) from 1998. The main source of this improvement is the
October 1998 acquisition of McDonald. Because McDonald was accounted for as a
purchase, 1998 results include only two months of McDonald's activity, while
1999 results reflect a full year. Revenue also increased because we expanded our
base of trust and asset management clients, repriced certain services and earned
higher fees from existing accounts that grew while the securities markets were
particularly strong. In 1998, the largest contributions to the increase in net
income came from investment banking and capital markets activities, and trust
and asset management. The growth of these revenue components was bolstered by
the McDonald acquisition.
Noninterest expense was up $332 million from 1998. The principal components of
this increase were increased personnel, depreciation and goodwill amortization
expense resulting from the first full-year impact of the McDonald acquisition.
TREASURY AND OTHER
Treasury and Other includes the Treasury, Electronic Commerce and Deposit
Marketing business units, as well as the net effect of funds transfer pricing.
In 1999, this segment generated a net loss of $29 million, compared with net
income of $38 million in 1998. The $67 million decline is primarily due to a $75
million ($47 million after tax) decrease in the net effect of funds transfer
pricing. During the latter part of 1998 and continuing through 1999, the cost of
maintaining sufficient liquidity was higher than normal. Since this incremental
increase in the cost of funds was not indicative of the normal funding costs for
Key's major lines of business, it was not allocated to those lines, but instead
was retained in the Treasury unit. Net income declined by $15 million from 1997
to 1998 primarily because net interest income fell due to a prolonged period of
flatness in the yield curve and greater reliance placed on higher-cost funds.
RECONCILING ITEMS
The "reconciling items" shown in Figure 4 reflect certain nonrecurring items and
charges related to unallocated nonearning assets of corporate support functions.
These items generally are included in noninterest income or noninterest expense.
In 1999, noninterest income includes a $194 million ($122 million after tax)
gain from branch divestitures, a $134 million ($85 million after tax) gain from
the sale of Key's 20% interest in Electronic Payment Services, Inc., a $15
million ($9 million after tax) gain from the sale of Key's interest in Concord
EFS, Inc. and a final $14 million ($9 million after tax) gain from the sale of
Key's 51% interest in Key Merchant Services, LLC. In 1998, noninterest income
includes a $50 million ($31 million after tax) gain from the sale of Key's 51%
interest in Key Merchant Services and branch divestiture gains of $39 million
($22 million after tax). In 1997, noninterest income includes branch divestiture
gains of $151 million ($97 million after tax).
Noninterest expense in 1999 includes restructuring and other special charges of
$152 million ($96 million after tax) related to Key's profitability enhancement
initiative, special contributions of $23 million ($15 million after tax) made to
the charitable foundation that Key sponsors and $42 million ($26 million after
tax) of various other nonrecurring charges. In 1997, noninterest expense
includes a charge of $50 million ($33 million after tax) related to the disposal
of excess real estate.
[LOGO-KEYCORP] 31
<PAGE> 8
<TABLE>
<CAPTION>
FIGURE 5 AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND YIELDS/RATES
YEAR ENDED DECEMBER 31,
1999 1998
------------------------------ -------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
dollars in millions BALANCE INTEREST RATE BALANCE INTEREST RATE
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Loans(a,b)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 17,695 $ 1,350 7.63% $ 15,413 $ 1,251 8.12%
Real estate - commercial mortgage 6,946 580 8.34 7,080 627 8.86
Real estate - construction 4,076 343 8.41 2,866 254 8.86
Commercial lease financing 6,092 445 7.31 4,822 359 7.45
- -----------------------------------------------------------------------------------------------------------------------------------
Total commercial loans 34,809 2,718 7.81 30,181 2,491 8.25
Real estate - residential 4,479 338 7.54 5,440 422 7.76
Home equity 7,548 645 8.54 6,353 557 8.77
Credit card 997 152 15.28 1,438 212 14.74
Consumer - direct 2,457 238 9.69 2,139 228 10.66
Consumer - indirect lease financing 2,922 236 8.07 2,024 171 8.45
Consumer - indirect other 6,584 608 9.24 6,647 603 9.07
- -----------------------------------------------------------------------------------------------------------------------------------
Total consumer loans 24,987 2,217 8.87 24,041 2,193 9.12
Loans held for sale 2,605 228 8.74 3,200 262 8.19
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans 62,401 5,163 8.27 57,422 4,946 8.61
Taxable investment securities 444 15 3.33 282 12 4.26
Tax-exempt investment securities(a) 535 46 8.60 801 67 8.36
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment securities 979 61 6.21 1,083 79 7.29
Securities available for sale(a,c) 6,403 425 6.58 6,610 450 6.85
Short-term investments 1,873 78 4.19 1,563 84 5.37
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 71,656 5,727 7.99 66,678 5,559 8.34
Allowance for loan losses (911) (888)
Other assets 10,201 9,491
- -----------------------------------------------------------------------------------------------------------------------------------
$ 80,946 $ 75,281
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Money market deposit accounts $ 12,950 390 3.01 $ 11,650 382 3.28
Savings deposits 2,716 44 1.63 3,225 59 1.83
NOW accounts 791 12 1.45 1,215 20 1.65
Certificates of deposit ($100,000 or more) 4,257 223 5.24 3,520 194 5.51
Other time deposits 11,969 595 4.97 12,240 654 5.34
Deposits in foreign office 823 41 5.00 913 50 5.48
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 33,506 1,305 3.90 32,763 1,359 4.15
Federal funds purchased and securities
sold under repurchase agreements 4,856 220 4.53 6,635 342 5.15
Bank notes and other short-term borrowings 7,912 426 5.38 7,975 459 5.76
Long-term debt, including capital securities(d) 16,473 957 5.82 11,175 681 6.09
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 62,747 2,908 4.63 58,548 2,841 4.85
Noninterest-bearing deposits 8,474 8,509
Other liabilities 3,464 2,681
Preferred stock -- --
Common shareholders' equity 6,261 5,543
- -----------------------------------------------------------------------------------------------------------------------------------
$ 80,946 $ 75,281
======== ========
Interest rate spread (TE) 3.36 3.49
Net interest income (TE) and net
interest margin (TE) $ 2,819 3.93% $ 2,718 4.08%
======== ==== ========== ====
Taxable-equivalent adjustment(a) $ 32 $ 34
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31,
1997
-----------------------------------
AVERAGE YIELD/
dollars in millions BALANCE INTEREST RATE
- ----------------------------------------------------------------------------------------------
ASSETS
Loans(a,b)
<S> <C> <C> <C>
Commercial, financial and agricultural $12,911 $1,126 8.72%
Real estate - commercial mortgage 7,101 663 9.34
Real estate - construction 1,945 188 9.67
Commercial lease financing 3,310 228 6.89
- ----------------------------------------------------------------------------------------------
Total commercial loans 25,267 2,205 8.73
Real estate - residential 6,192 524 8.46
Home equity 5,180 469 9.05
Credit card 1,710 256 14.97
Consumer - direct 2,238 246 10.99
Consumer - indirect lease financing 1,156 99 8.56
Consumer - indirect other 7,023 633 9.01
- ----------------------------------------------------------------------------------------------
Total consumer loans 23,499 2,227 9.48
Loans held for sale 2,649 198 7.47
- ----------------------------------------------------------------------------------------------
Total loans 51,415 4,630 9.02
Taxable investment securities 247 12 4.83
Tax-exempt investment securities(a) 1,227 97 7.91
- ----------------------------------------------------------------------------------------------
Total investment securities 1,474 109 7.39
Securities available for sale(a,c) 7,629 527 6.93
Short-term investments 782 40 5.12
- ----------------------------------------------------------------------------------------------
Total earning assets 61,300 5,306 8.66
Allowance for loan losses (875)
Other assets 8,525
- ----------------------------------------------------------------------------------------------
$68,950
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Money market deposit accounts $10,897 333 3.06
Savings deposits 4,319 94 2.18
NOW accounts 1,560 32 2.05
Certificates of deposit ($100,000 or more) 3,376 190 5.63
Other time deposits 13,273 715 5.39
Deposits in foreign office 1,812 98 5.41
- ----------------------------------------------------------------------------------------------
Total interest-bearing deposits 35,237 1,462 4.15
Federal funds purchased and securities
sold under repurchase agreements 6,942 359 5.17
Bank notes and other short-term borrowings 4,741 283 5.97
Long-term debt, including capital securities(d) 6,554 413 6.30
- ----------------------------------------------------------------------------------------------
Total interest-bearing liabilities 53,474 2,517 4.71
Noninterest-bearing deposits 8,536
Other liabilities 2,074
Preferred stock --
Common shareholders' equity 4,866
- ----------------------------------------------------------------------------------------------
$68,950
=======
Interest rate spread (TE) 3.95
Net interest income (TE) and net
interest margin (TE) $2,789 4.54%
====== ====
Taxable-equivalent adjustment(a) $44
- ----------------------------------------------------------------------------------------------
<FN>
(a) 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%.
(b) For purposes of these computations, nonaccrual loans are included in average loan balances.
(c) Yield is calculated on the basis of amortized cost.
(d) Rate calculation excludes ESOP debt.
(e) For 1994, consumer-direct and consumer-indirect lease financing are included in consumer-indirect other.
TE = Taxable Equivalent
N/M = Not Meaningful
</TABLE>
32 KEYCORP AND SUBSIDIARIES
<PAGE> 9
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------ ------------------------------------- ---------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- -----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
$11,970 $1,070 8.94% $11,252 $1,027 9.13% $ 9,762 $ 856 8.77%
7,039 648 9.21 7,115 678 9.53 6,396 553 8.65
1,631 166 10.18 1,416 148 10.45 1,207 107 8.86
2,372 148 6.24 1,876 125 6.66 1,384 94 6.79
- -----------------------------------------------------------------------------------------------------------------------------------
23,012 2,032 8.83 21,659 1,978 9.13 18,749 1,610 8.59
7,224 593 8.21 9,554 762 7.98 8,699 653 7.51
4,214 378 8.97 3,600 333 9.25 2,144 170 7.93
1,665 243 14.59 1,386 210 15.15 1,361 194 14.25
2,183 246 11.27 2,381 253 10.63 See note(e) See note(e) See note(e)
671 56 8.35 582 44 7.56 See note(e) See note(e) See note(e)
6,819 604 8.86 6,479 567 8.75 10,239 884 8.63
- -----------------------------------------------------------------------------------------------------------------------------------
22,776 2,120 9.31 23,982 2,169 9.04 22,443 1,901 8.47
2,428 198 8.15 2,371 201 8.48 2,271 160 7.05
- -----------------------------------------------------------------------------------------------------------------------------------
48,216 4,350 9.02 48,012 4,348 9.06 43,463 3,671 8.45
246 14 5.69 7,807 521 6.67 7,664 507 6.61
1,425 114 8.00 1,482 126 8.47 1,579 136 8.63
- -----------------------------------------------------------------------------------------------------------------------------------
1,671 128 7.66 9,289 647 6.96 9,243 643 6.96
7,423 495 6.69 2,103 136 6.40 4,066 228 5.50
535 28 5.23 799 47 5.91 144 7 4.53
- -----------------------------------------------------------------------------------------------------------------------------------
57,845 5,001 8.65 60,203 5,178 8.60 56,916 4,549 7.99
(872) (868) (821)
7,846 7,307 6,466
- -----------------------------------------------------------------------------------------------------------------------------------
$64,819 $66,642 $62,561
======= ======= =======
$10,211 311 3.05 $ 7,161 261 3.64 $ 7,197 197 2.74
5,604 138 2.46 6,506 174 2.68 7,697 205 2.66
2,438 48 1.97 5,444 110 2.02 5,559 106 1.91
3,377 199 5.89 3,677 222 6.03 2,992 146 4.88
13,723 720 5.25 14,466 783 5.41 12,338 544 4.41
996 53 5.32 2,182 155 7.12 3,015 127 4.21
- -----------------------------------------------------------------------------------------------------------------------------------
36,349 1,469 4.04 39,436 1,705 4.32 38,798 1,325 3.41
5,843 295 5.05 5,623 315 5.60 5,850 243 4.16
3,279 197 6.01 3,362 204 6.05 1,930 91 4.71
4,324 276 6.38 3,895 261 6.84 2,234 138 6.35
- -----------------------------------------------------------------------------------------------------------------------------------
49,795 2,237 4.49 52,316 2,485 4.75 48,812 1,797 3.69
8,374 8,129 8,046
1,644 1,373 1,104
79 160 160
4,927 4,664 4,439
- -----------------------------------------------------------------------------------------------------------------------------------
$64,819 $66,642 $62,561
======= ======= =======
4.16 3.85 4.30
$2,764 4.78% $2,693 4.47% $ 2,752 4.83%
====== ==== ====== ==== ====== ====
$50 $57 $59
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
COMPOUND ANNUAL
RATE OF CHANGE
(1994-1999)
- ---------------------------------
AVERAGE
BALANCE INTEREST
- ---------------------------------
12.6% 9.5%
1.7 1.0
27.6 26.2
34.5 36.5
- ----------------------------------
13.2 11.0
(12.4) (12.3)
28.6 30.6
(6.0) (4.8)
See note(e) See note(e)
See note(e) See note(e)
N/M N/M
- ---------------------------------
2.2 3.1
2.8 7.3
- ---------------------------------
7.5 7.1
(43.4) (50.5)
(19.5) (19.5)
- ---------------------------------
(36.2) (37.6)
9.5 13.3
67.0 62.0
- ---------------------------------
4.7 4.7
2.1
9.5
- ---------------------------------
5.3
12.5 14.6
(18.8) (26.5)
(32.3) (35.3)
7.3 8.8
(.6) 1.8
(22.9) (20.2)
- ---------------------------------
(2.9) (.3)
(3.7) (2.0)
32.6 36.2
49.1 47.3
- ---------------------------------
5.2 10.1
1.0
25.7
N/M
7.1
- ---------------------------------
5.3
.5%
(11.5)%
- ---------------------------------
</TABLE>
KEYCORP AND SUBSIDIARIES 33
<PAGE> 10
RESULTS OF OPERATIONS
NET INTEREST INCOME
Key's principal source of earnings is net interest income, which comprises
interest and loan-related fee income less interest expense. There are several
factors that affect net interest income:
- - the volume, pricing, mix, and maturity of earning assets and interest-bearing
liabilities;
- - the use of off-balance sheet instruments to manage interest rate risk;
- - interest rate fluctuations; and
- - asset quality.
To make it easier to compare results from one period to the next, as well as the
yields on various types of earning assets, we present all net interest income on
a "taxable-equivalent basis." In other words, if we earn $100 of tax-exempt
income, we present those earnings at a higher amount (specifically, $154) that
- -- if taxed at the statutory Federal income tax rate of 35% -- would amount to
$100.
Figure 5 shows various components of the balance sheet that affect interest
income and expense, and their respective yields or rates over the past six
years. In the first quarter of 1999, management reclassified Key's
tax-advantaged preferred securities from "mezzanine equity" to "long-term debt."
The related distributions were also reclassified from "noninterest expense" to
"interest expense." This action was taken in order to allow these instruments to
continue to qualify for hedge accounting in accordance with guidelines issued by
the Securities and Exchange Commission in December 1998. We restated prior years
to conform to that presentation. As a result, the net interest margin (which is
net interest income divided by average earning assets) for 1998 is now 10 basis
points less than the net interest margin previously reported for that year. The
net interest margin for 1997 is 8 basis points less.
Net interest income for 1999 was $2.8 billion, representing a $101 million, or
4% increase, from 1998. This improvement reflected a 7% increase in average
earning assets (primarily commercial loans) to $71.7 billion, which more than
offset a 15 basis point reduction in the net interest margin to 3.93%. In 1998,
net interest income was $2.7 billion, down $71 million, or 3%, from the prior
year. Average earning assets increased by 9% in 1998, but this growth did not
compensate for a decrease of 46 basis points in the net interest margin.
NET INTEREST MARGIN. There are several reasons that the net interest margin has
been declining in recent years:
- - increased competition impacts the rates that we can charge for loans and the
rates that we must pay for deposits;
- - we are relying more on higher-cost funds to support the increased demand for
loans;
- - core deposit growth has not kept pace with loan growth due in part to branch
divestitures and client preferences for other investment alternatives;
- - we have intensified our efforts to grow higher-priced deposits, such as money
market deposit accounts and time deposits, to maintain our competitive
position and to increase our core deposit base; and
- - we have increased our trading portfolio assets with relatively low interest
rate spreads in connection with various capital markets activities.
In 1998, the effects of these factors were pronounced during an unusually (by
historical standards) prolonged period of flatness in the yield curve. In other
words, starting in the third quarter of 1997, a graph plotting the yield on
various fixed-rate securities against their respective terms to maturity would
have generated an almost horizontal line. Typically, the yield curve slopes
upward because investors demand higher yields to entice them to buy long-term
securities. The yields and rates on many of our earning assets and funding
sources are based on the yields on fixed-rate securities with similar terms to
maturity. Since most of our earning assets typically have longer maturities than
the liabilities that support them, a flat yield curve will result in lower
spreads between their respective yields.
INTEREST EARNING ASSETS. Average earning assets for 1999 totaled $71.7 billion,
which was $5.0 billion, or 7%, higher than the 1998 level. This increase came
principally from a $5.0 billion, or 9%, increase in loans. The largest growth
occurred in the commercial loan portfolio. The fourth quarter of 1999 marked the
eleventh consecutive quarter in which the commercial loan portfolio has achieved
annualized growth exceeding 10%.
During 1999, we securitized and sold loans aggregating $3.4 billion as part of
our strategy to diversify Key's funding sources, but that strategy moderated the
growth of the consumer loan portfolio. Starting in 2000, less emphasis will be
placed on the securitization and sale of the home equity loans generated by our
home equity finance affiliate. We may continue to securitize these loans without
selling them. By retaining these loans on Key's balance sheet, we intend to
replace over time the earnings capacity lost with the divestiture of our $1.4
billion credit card portfolio.
Average earning assets in 1998 totaled $66.7 billion, which was $5.4 billion, or
9%, higher than the prior year. This increase came principally from a $6.0
billion, or 12%, increase in loans. More than 80% of that increase came from the
commercial portfolio, but the home equity and indirect consumer loan portfolios
also grew. In particular, Key acquired an $805 million marine/recreational
vehicle installment loan portfolio in April 1998. The increase in loans relative
to the prior year also reflects the fact that, in 1998, we relied less on loan
securitizations as a funding option. Total loans securitized and sold in 1998
amounted to $300 million, compared with $2.7 billion in 1997.
INTEREST RATE SWAPS AND CAPS. As discussed in the following section entitled
"Market risk management," Key uses portfolio interest rate swaps and caps to
help manage its interest rate sensitivity position. Interest rate swaps and caps
are complicated instruments, but briefly:
- - INTEREST RATE SWAPS are contracts under which two parties agree to exchange
interest payment streams that are calculated on agreed-upon amounts (known as
"notional amounts"). For example, party A will pay interest at a fixed rate
and receive interest at a variable rate from party B. Key generally uses
interest rate swaps to mitigate its exposure to interest rate risk on certain
loans, securities, deposits, short-term borrowings and long-term debt.
- - INTEREST RATE CAPS are contracts that provide for the holder to be
compensated based on an agreed-upon notional amount when a benchmark interest
rate exceeds a specified level (known as the "strike rate"). Key uses
interest rate caps to manage the risk of adverse movements in interest rates
on certain of our long-term debt and short-term borrowings. A cap limits
Key's exposure to interest rate increases; caps do not have any impact if
market rates decline.
The notional amount -- or face value -- of interest rate swaps increased to
$18.7 billion at the end of 1999, compared with $12.4 billion at year-end 1998.
At the same time, the notional amount of interest rate caps decreased by $1.6
billion to $2.3 billion. 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 contributed $16 million
to net interest income in 1999 and $23 million in 1998.
34 [LOGO-KEYCORP]
<PAGE> 11
For more information about how Key uses interest rate swaps and caps to manage
its balance sheet, please see the next section, entitled "Market risk
management." Figure 6 shows how changes in yields or rates and average balances
in 1999 and 1998 affected net interest income. You can find more discussion of
the changes in earning assets and funding sources in the section entitled
"Financial Condition," which begins on page 42.
FIGURE 6 COMPONENTS OF NET INTEREST INCOME CHANGES
<TABLE>
<CAPTION>
1999 vs 1998 1998 vs 1997
------------------------------- -----------------------------------
AVERAGE YIELD/ NET AVERAGE YIELD/ NET
IN MILLIONS VOLUME RATE CHANGE VOLUME RATE CHANGE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans $417 $(200) $217 $524 $(208) $316
Taxable investment securities 6 (3) 3 2 (2) --
Tax-exempt investment securities (23) 2 (21) (35) 5 (30)
Securities available for sale (14) (11) (25) (69) (8) (77)
Short-term investments 15 (21) (6) 42 2 44
- --------------------------------------------------------------------------------------------------------------------------------
Total interest income (taxable equivalent) 401 (233) 168 464 (211) 253
INTEREST EXPENSE
Money market deposit accounts 41 (33) 8 24 25 49
Savings deposits (9) (6) (15) (21) (14) (35)
NOW accounts (7) (1) (8) (6) (6) (12)
Certificates of deposit ($100,000 or more) 39 (10) 29 8 (4) 4
Other time deposits (14) (45) (59) (55) (6) (61)
Deposits in foreign office (5) (4) (9) (49) 1 (48)
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 45 (99) (54) (99) (4) (103)
Federal funds purchased and securities sold
under repurchase agreements (84) (38) (122) (16) (1) (17)
Bank notes and other short-term borrowings (4) (29) (33) 186 (10) 176
Long-term debt, including capital securities 309 (33) 276 282 (14) 268
- --------------------------------------------------------------------------------------------------------------------------------
Total interest expense 266 (199) 67 353 (29) 324
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income (taxable equivalent) $135 $ (34) $101 $111 $(182) $ (71)
==== ===== ==== ==== ===== =====
- --------------------------------------------------------------------------------------------------------------------------------
</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.
MARKET RISK MANAGEMENT
"Market risk" is the exposure to economic loss that arises when the
value of a financial instrument adversely changes due to variations in interest
rates, foreign exchange rates, equity prices (the value of equity securities
held as assets), or other market-driven rates or prices. For example, the value
of a fixed-rate bond will decline if market interest rates increase because the
bond will become a less attractive investment. Similarly, the value of the U.S.
dollar regularly fluctuates in relation to other currencies. Key is not affected
in any material way by changes in foreign exchange rates or the prices of
various equity securities held as assets.
ASSET AND LIABILITY MANAGEMENT
Key's Asset/Liability Management Policy Committee has established guidelines for
a program to measure and manage interest rate risk. This committee is also
responsible for approving Key's asset/liability management policies, overseeing
the formulation and implementation of strategies to improve balance sheet
positioning and earnings, and reviewing Key's interest rate sensitivity
position.
MEASUREMENT OF SHORT-TERM INTEREST RATE EXPOSURE. The primary tool that
management uses to measure and manage interest rate risk is a net interest
income simulation model. These simulations estimate the impact that various
changes in the overall level of interest rates over one and two-year time
horizons would have on net interest income. The results help Key develop
strategies for managing exposure to interest rate risk.
Like any forecasting technique, interest rate simulation modeling is based on a
large number of assumptions. In this case, the assumptions relate primarily to
loan and deposit growth, asset and liability prepayments, interest rates and on-
and off-balance sheet management strategies. Management believes that both
individually and in the aggregate the assumptions we make are reasonable.
Nevertheless, the simulation modeling process only produces a sophisticated
estimate, not a precise calculation of exposure.
Key's guidelines for risk management require management to take preventive
measures if a gradual 200 basis point increase or decrease in short-term rates
over the next twelve months would affect net interest income over the same
period by more than 2%. Key has been operating well within these guidelines. As
of December 31, 1999, based on the results of our simulation model, Key would
expect net interest income to increase by approximately $25 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 $22 million.
MEASUREMENT OF LONG-TERM INTEREST RATE EXPOSURE. Key uses an economic value of
equity model to complement short-term interest rate risk analysis. The benefit
of this model is that it measures exposure to interest rate changes over time
frames that are longer than two years. The economic value of Key's equity is
determined by aggregating the present value of projected future cash flows for
asset, liability, and off-balance sheet positions based on the current yield
curve.
Economic value analysis has several limitations. For example, the economic
values of asset, liability, and off-balance sheet positions do not represent the
true fair values of the positions, since economic values do not consider factors
such as credit risk and liquidity. In addition, we must estimate cash flow for
assets and liabilities with indeterminate maturities. Moreover, the future
structure of the balance sheet derived from
[LOGO-KEYCORP] 35
<PAGE> 12
ongoing loan and deposit activity by Key's core businesses is not factored into
present value calculations. Finally, the analysis requires assumptions about
events that span several years. Despite its limitations, the economic value of
equity model does provide management with a relatively sophisticated tool for
evaluating the longer-term effect of possible interest rate movements.
Key's guidelines for risk management require management to take preventive
measures if an immediate 200 basis point increase or decrease in interest rates
would decrease the economic value of equity by more than 20%. Key has been
operating well within these guidelines.
OTHER SOURCES OF INTEREST RATE EXPOSURE. Management uses the results of
short-term and long-term interest rate exposure models to formulate strategies
to improve balance sheet positioning, earnings, or both within the bounds of
Key's interest rate risk, liquidity, and capital guidelines. We also
periodically measure the risk to earnings and economic value arising from
various other pro forma changes in the overall level of interest rates. The
variety of interest rate scenarios modeled, and their potential impact on
earnings and economic value, quantify the level of interest rate exposure
arising from option risk, basis risk and gap risk.
- - A financial instrument presents "OPTION RISK" when one party can take
advantage of changes in interest rates without penalty. For example, when
interest rates decline, borrowers may choose to prepay fixed rate loans by
refinancing at a lower rate. Such a prepayment gives the lender a return on
its investment (the principal plus some interest), but unless there is a
prepayment penalty, that return will not be as much as the loan would have
generated had payments been received as originally scheduled. Floating rate
loans that are capped against potential interest rate increases and deposits
that can be withdrawn on demand also present option risk.
- - One approach that Key uses to manage interest rate risk is to offset floating
rate liabilities (such as deposits) with floating rate assets (such as
loans). That way, as our interest expense increases, so will our interest
income. We face "BASIS RISK" when our floating-rate assets and floating-rate
liabilities reprice in response to different market factors or indices. Under
those circumstances, even if the assets and liabilities are all repricing at
the same time, interest expense and interest income may not change by the
same amount.
- - We often use an interest-bearing liability to provide funding for an
interest-earning asset. For example, Key may sell certificates of deposit and
use the proceeds to make loans. That strategy presents "GAP RISK" if the
related liabilities and assets do not mature or reprice at the same time.
MANAGEMENT OF INTEREST RATE EXPOSURE. Key manages interest rate risk by using
portfolio swaps and caps which modify the repricing or maturity characteristics
of some of our assets and liabilities. The decision to use these instruments
rather than securities, debt, or other on-balance sheet alternatives depends on
many factors, including the mix and cost of funding sources, liquidity and
capital requirements. In addition, management considers interest rate
implications when adding to Key's securities portfolio, issuing new debt and
packaging loans for securitization.
PORTFOLIO SWAPS AND CAPS. The estimated fair value of Key's portfolio swaps and
caps decreased to a negative fair value of $42 million during 1999 from a
positive fair value of $156 million at December 31, 1998. Fair value decreased
over the past year because of the combined impact of a number of factors:
interest rates increased, the implied forward yield curve steepened, and Key's
"receive" fixed interest rate swap portfolio has a slightly longer average
remaining maturity than the "pay" fixed portfolio.
Key terminated swaps with a notional amount of $4.5 billion during 1999,
resulting in a deferred gain of $18 million. Each swap termination was made in
response to a unique set of circumstances. Generally speaking, though, the
decision to terminate any swap contract is integrated strategically with asset
and liability management and takes many factors into account.
During 1999, management also used portfolio rate locks and futures from time to
time since Key relied more heavily on variable rate funding to support earning
asset growth.
Figure 7 summarizes Key's activity in portfolio swaps and caps for each of the
last three years. For more information about these instruments, including the
balance and remaining amortization period of Key's deferred swap gains and
losses, see Note 18 ("Financial Instruments with Off-Balance Sheet Risk"), which
begins on page 72.
FIGURE 7 PORTFOLIO SWAPS AND CAPS ACTIVITY
<TABLE>
<CAPTION>
RECEIVE FIXED PAY FIXED
----------------------- ----------------------
TOTAL
INDEXED FORWARD- BASIS PORTFOLIO
IN MILLIONS AMORTIZING CONVENTIONAL CONVENTIONAL STARTING SWAPS SWAPS CAPS TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Additions -- 1,341 3,226 $ 616 2,592 7,775 1,050 8,825
Maturities -- 342 1,876 -- 830 3,048 570 3,618
Terminations 268 300 68 6 -- 642 -- 642
Forward-starting becoming effective -- -- 600 (600) -- -- -- --
Amortization 2,870 -- -- -- -- 2,870 -- 2,870
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 311 4,325 4,872 10 2,872 12,390 3,875 $16,265
Additions -- 3,821 2,886 1,160 7,337 15,204 115 15,319
Maturities -- 1,289 1,631 24 1,300 4,244 1,725 5,969
Terminations -- 895 814 636 2,126 4,471 15 4,486
Forward-starting becoming effective -- -- 232 (232) -- -- -- --
Amortization 207 -- -- -- -- 207 -- 207
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 $ 104 $ 5,962 $ 5,545 $ 278 $ 6,783 $18,672 $ 2,250 $20,922
======= ======= ======= ======= ======= ======= ======= =======
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
36 [LOGO-KEYCORP]
<PAGE> 13
Figure 8 shows the notional amount and fair values of portfolio swaps and caps
by interest rate management strategy. The fair value of an instrument at any
given date represents the estimated income (if positive) or cost (if negative)
that would be recognized if the instrument was sold at that date. However,
because these instruments are used to alter the repricing or maturity
characteristics of other assets and liabilities, the net unrealized gains and
losses are not recognized separately in earnings. Rather, interest from swaps
and caps is recognized on an accrual basis as an adjustment of the interest
income or expense from the asset or liability being managed.
FIGURE 8 PORTFOLIO SWAPS AND CAPS BY INTEREST RATE MANAGEMENT STRATEGY
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
------------------------ ----------------------------
NOTIONAL FAIR NOTIONAL FAIR
in millions AMOUNT VALUE AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Convert variable-rate loans to fixed $ 1,254 $ (24) $ 1,526 $ 58
Convert fixed-rate loans to variable 587 14 909 (38)
Convert fixed-rate securities to variable 316 18 -- --
Convert variable-rate deposits and short-term borrowings to fixed 1,100 14 2,378 (24)
Convert fixed-rate deposits and short-term borrowings to variable 226 (6) 200 --
Convert variable-rate long-term debt to fixed 3,820 59 1,595 (6)
Convert fixed-rate long-term debt to variable 4,586 (104) 2,910 169
Basis swaps-- foreign currency denominated debt 321 (23) 304 19
Basis swaps-- interest rate indices 6,462 3 2,568 --
- ---------------------------------------------------------------------------------------------------------------------------------
Total portfolio swaps 18,672 (49) 12,390 178
Modify characteristics of variable-rate short-term borrowings 2,050 6 3,060 2
Modify characteristics of variable-rate long-term debt 200 1 565 --
Modify characteristics of capital securities remarketing -- -- 250 (24)
- ---------------------------------------------------------------------------------------------------------------------------------
Total portfolio caps, collars and corridors 2,250 7 3,875 (22)
- ---------------------------------------------------------------------------------------------------------------------------------
Total portfolio swaps, caps, collars and corridors $20,922 $ (42) $16,265 $156
======= ===== ======= ====
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Figure 9 summarizes the expected average maturities of Key's portfolio swaps and
caps at December 31, 1999.
FIGURE 9 EXPECTED AVERAGE MATURITIES OF PORTFOLIO SWAPS AND CAPS
<TABLE>
<CAPTION>
DECEMBER 31, 1999 RECEIVE FIXED PAY FIXED
-------------------------- -------------------------
TOTAL CAPS
INDEXED FORWARD- BASIS PORTFOLIO AND
in millions AMORTIZING CONVENTIONAL CONVENTIONAL STARTING SWAPS SWAPS COLLARS TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mature in one year or less $104 $1,990 $ 729 -- $3,128 $ 5,951 $1,650 $ 7,601
Mature after one through five years -- 2,390 4,110 $240 3,655 10,395 600 10,995
Mature after five through ten years -- 982 350 -- -- 1,332 -- 1,332
Mature after ten years -- 600 356 38 -- 994 -- 994
- ---------------------------------------------------------------------------------------------------------------------------------
Total portfolio swaps, caps and collars $104 $5,962 $5,545 $278 $6,783 $18,672 $2,250 $20,922
==== ====== ====== ==== ====== ======= ====== =======
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
TRADING PORTFOLIO RISK MANAGEMENT
Key's trading portfolio includes interest rate swap contracts entered into to
accommodate the needs of clients, other positions with third parties that are
intended to mitigate the interest rate risk of client positions, foreign
exchange contracts entered into to accommodate the needs of clients and
financial assets and liabilities (trading positions) included in "other assets"
and "other liabilities," respectively, on the balance sheet. For more
information about off-balance sheet contracts, see Note 18 ("Financial
Instruments with Off-Balance Sheet Risk"), which begins on page 72.
Since the second half of 1997, management has been 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 Key's trading portfolio. Using statistical methods,
this model estimates the maximum potential one-day loss with 95% certainty. At
year end, Key's aggregate daily VAR was $1.4 million compared with $1.6 million
at year-end 1998. Aggregate daily VAR averaged less than $1.6 million for 1999,
compared with an average of less than $.7 million during 1998. VAR modeling
augments other controls that Key uses to mitigate the market risk exposure of
the trading portfolio. These controls include loss and portfolio size limits
that are based on market liquidity and the level of activity and volatility of
trading products.
NONINTEREST INCOME
Noninterest income for 1999 totaled $2.3 billion, up $719 million, or 46%, from
1998. In each of the past three years, noninterest income has been affected by
various nonrecurring items. The most significant of these items are shown in
Figure 10 and include gains from branch divestitures, gains from other
divestitures, net securities gains (including $15 million from the sale of
Concord EFS, Inc. securities received in connection with the sale of Electronic
Payment Services, Inc.) and certain nonrecurring charges. For more information
on the divestitures, see Note 3 ("Mergers, Acquisitions and Divestitures"),
which begins on page 60.
[LOGO-KEYCORP] 37
<PAGE> 14
Excluding nonrecurring items, core noninterest income in 1999 increased by $463
million, or 31%, from the prior year. On the same basis, core noninterest income
in 1998 rose by $323 million, or 28%. Core noninterest income represented 41% of
total core revenue in 1999, up from 36% in 1998, and 29% in 1997. One of
management's long-term objectives is to increase core noninterest income as a
percentage of total core revenue to 50%.
The primary reason that core noninterest income improved so significantly in
1999 is that we achieved growth in all major fee-based product categories, with
the exception of credit card fees. The strongest contributions came from
investment banking and capital markets activities (up $115 million), trust and
asset management (up $108 million) and brokerage income (up $85 million). These
three revenue components grew primarily as a result of the October 1998
acquisition of McDonald, but the overall strength of the securities markets, new
business and the repricing of certain services were also instrumental. In
addition, 1999 results benefited from net gains of $83 million recognized when
Key securitized and sold an aggregate $3.4 billion of education, home equity and
automobile loans. Other factors made less substantial contributions to
noninterest income, including a $27 million increase in letter of credit and
loan fees and a $24 million increase in service charges on deposit accounts. In
1998, the increase in Key's core noninterest income was also bolstered by the
McDonald acquisition, as significant contributions came from the same three
product categories that showed the strongest growth in 1999.
Figure 10 shows the major components of Key's noninterest income. For some of
these components, the discussion that follows provides additional information,
such as the composition of the component and the factors that may have caused it
to change in 1999 and 1998. For detailed information about investment banking
and capital markets income, and trust income and assets, see Figures 11 and 12,
respectively.
FIGURE 10 NONINTEREST INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, CHANGE 1999 VS 1998
--------------------------
dollars in millions 1999 1998 1997 AMOUNT PERCENT
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Trust and asset management income $ 443 $ 335 $ 266 $108 32.2%
Investment banking and capital markets income 354 239 119 115 48.1
Service charges on deposit accounts 330 306 299 24 7.8
Brokerage income 156 71 54 85 119.7
Corporate owned life insurance income 107 104 85 3 2.9
Credit card fees 63 68 96 (5) (7.4)
Net loan securitization gains (losses) 83 4 (28) 79 1,975.0
Other income:
Letter of credit and loan fees 98 71 48 27 38.0
Electronic banking fees 58 47 38 11 23.4
Insurance income 52 40 34 12 30.0
Loan securitization servicing fees 28 31 16 (3) (9.7)
Gains from sales of loans 32 50 23 (18) (36.0)
Miscellaneous income 136 111 104 25 22.5
- ----------------------------------------------------------------------------------------------------------------------------------
Total other income 404 350 263 54 15.4
- ----------------------------------------------------------------------------------------------------------------------------------
Total core noninterest income 1,940 1,477 1,154 463 31.3
Gains from branch divestitures 194 39 151 155 397.4
Gain from sale of Electronic Payment Services, Inc. 134 -- -- 134 N/M
Gains from sale of Key Merchant Services, LLC 14 50 -- (36) (72.0)
Gain from sale of Compaq Capital Europe LLC and Compaq
Capital Asia Pacific LLC 13 -- -- 13 N/M
Net securities gains 29 9 1 20 222.2
Nonrecurring charges (30) -- -- (30) N/M
- ----------------------------------------------------------------------------------------------------------------------------------
Total significant nonrecurring items 354 98 152 256 261.2
- ----------------------------------------------------------------------------------------------------------------------------------
Total noninterest income $2,294 $1,575 $1,306 $719 45.7%
====== ====== ====== ====
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
N/M = Not Meaningful
FIGURE 11 INVESTMENT BANKING AND CAPITAL MARKETS INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, CHANGE 1999 VS 1998
--------------------------
dollars in millions 1999 1998 1997 AMOUNT PERCENT
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dealer trading and derivatives income $140 $ 93 $ 40 $ 47 50.5%
Investment banking income 140 79 43 61 77.2
Equity capital income 44 45 19 (1) (2.2)
Foreign exchange income 30 22 17 8 36.4
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment banking and capital markets income $354 $239 $119 $115 48.1%
==== ==== ==== ====
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
38 [LOGO-KEYCORP]
<PAGE> 15
FIGURE 12 TRUST AND ASSET MANAGEMENT
<TABLE>
<CAPTION>
CHANGE 1999 VS 1998
-------------------------
dollars in millions 1999 1998 1997 AMOUNT PERCENT
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
Personal asset management and custody fees $188 $166 $145 $ 22 13.3%
Institutional asset management and custody fees 93 90 75 3 3.3
Bond services 26 2 6 24 1,200.0
All other fees 136 77 40 59 76.6
- ----------------------------------------------------------------------------------------------------------------------------------
Total trust and asset management income $443 $335 $266 $108 32.2%
==== ==== ==== ====
dollars in billions
- ----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
Discretionary assets $ 72 $ 69 $ 60 $3 4.3%
Non-discretionary assets 49 47 48 2 4.3
- ---------------------------------------------------------------------------------------------------------------------------------
Total trust assets $121 $116 $108 $5 4.3%
==== ==== ==== ====
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
TRUST AND ASSET MANAGEMENT. Trust and asset management activities provide Key's
largest source of noninterest income. At December 31, 1999, Key's bank, trust,
and registered investment advisory subsidiaries had assets under discretionary
management (excluding corporate trust assets) of $72 billion, compared with $69
billion at the end of 1998. Fees from investment advisory services accounted for
approximately 41% of Key's total trust and asset management income in 1999, and
34% in 1998.
BROKERAGE. Brokerage income was $156 million in 1999, compared with $71 million
in 1998, and $54 million in 1997. Substantially all of the increase in 1999 came
from commissions related to the trading of stocks and mutual funds.
CORPORATE OWNED LIFE INSURANCE. Income from corporate owned life insurance,
representing a tax-deferred increase in cash surrender values and tax-exempt
death benefits, increased in 1999 primarily due to claims. In 1998, the increase
was principally due to improved investment performance and expanded coverage.
CREDIT CARD FEES. Credit card fees declined by $5 million in 1999, primarily as
a result of Key's decision to de-emphasize this source of revenue. As previously
mentioned, Key sold its credit card portfolio in January 2000. For more
information about this transaction, see the section entitled "Highlights of
Key's 1999 Performance," which begins on page 26, and Note 3 ("Mergers,
Acquisitions and Divestitures"), which begins on page 60.
In 1998, credit card fees declined by $28 million, primarily because Key sold
$365 million of out-of-franchise credit card receivables in 1997. In addition,
merchant credit card processing services revenue declined after Key sold 51% of
Key Merchant Services, LLC (a credit card processing subsidiary) in the first
quarter of 1998.
LOAN SECURITIZATIONS. Key often securitizes and sells loans to generate funds.
The extent to which we use securitizations is dependent upon whether conditions
in the capital markets make them more attractive than other funding
alternatives. Typically we securitize education, home equity, and automobile
loans. We decide which loans to securitize based upon a number of specific
factors as discussed in the section entitled "Loans," which begins on page 42.
During 1999, we securitized and sold $3.4 billion of consumer loans, resulting
in net gains of $83 million. On occasion Key's securitization strategy will
cause us to recognize a loss in connection with removing assets (the package of
securitized loans) from the balance sheet.
The level of securitizations rose in 1999 because management wanted to diversify
Key's funding sources and because we completed a securitization originally
planned for the 1998 fourth quarter and then postponed. We securitized fewer
loans in 1998 than we had in prior years because of instability in the capital
markets in the second half of the year and the fact that other funding
alternatives, such as issuing debt, were more cost-effective. For information
about the type and volume of securitized loans that are either administered or
serviced by Key and not recorded on the balance sheet, see the section entitled
"Loans," which begins on page 42.
GAINS FROM BRANCH DIVESTITURES. These gains were the result of the sale of
branches in geographic areas where Key either did not hold a large enough market
share to be competitive and to grow the business, or determined that growth
opportunities were limited despite our good market share. Included are gains of
$194 million from the sale of 28 offices in 1999, $39 million from the sale of
46 offices in 1998, and $151 million from the sale of 104 offices (including the
Wyoming bank subsidiary) in 1997.
GAINS FROM OTHER DIVESTITURES. In 1999, results include nonrecurring gains of
$134 million from the sale of Key's interest in Electronic Payment Services,
Inc. and $13 million from the sale of Key's interest in a joint venture with
Compaq Capital Corporation. Also included is a final gain of $14 million that
was recorded in connection with the 1998 sale of a 51% interest in Key Merchant
Services, LLC.
Key's 1998 results include $50 million of gains recognized in connection with
the sale of a 51% interest in Key Merchant Services, LLC to NOVA Information
Systems, Inc. The gains were recognized in two stages: $23 million was
recognized in the first quarter at the time of closing, and $27 million was
recognized in the fourth quarter after the transferred business achieved certain
revenue-related performance targets. These gains were accompanied by related
reductions in both merchant credit card processing services revenue and
noninterest expense (primarily personnel).
OTHER INCOME. The increase in other income in both 1999 and 1998 was largely due
to higher loan fees resulting from Key's strong growth in loans in each of those
years. In 1999, this growth was partially offset by an $18 million decline in
gains from loan sales, due in part to the increase in interest rates. Loan sale
gains increased by $27 million in 1998.
[LOGO-KEYCORP] 39
<PAGE> 16
NONINTEREST EXPENSE
Noninterest expense for 1999 totaled $3.0 billion, compared with $2.5 billion
for 1998. Significant nonrecurring items that affect the comparability of
results over the past three years are shown in Figure 13. In 1999, these items
include restructuring and other special charges of $152 million recorded in
connection with strategic actions that Key is taking to improve operating
efficiency and profitability. You can find more information about these charges
under the heading "Restructuring and other special charges" on page 41.
Also included in 1999 expense are other nonrecurring charges of $68 million.
Among these charges are $23 million of charitable contributions made in light of
the gains realized from the sales of Key's interest in Electronic Payment
Services, Inc. and the Concord EFS, Inc. securities obtained in connection with
that transaction. In 1998, Key recorded merger and integration charges of $8
million related to the acquisition of McDonald.
Excluding nonrecurring charges, core noninterest expense for 1999 grew by $354
million, or 14%, from 1998. The increase in core noninterest expense came
largely from personnel expense (up $218 million, due primarily to the October
1998 acquisition of McDonald), higher costs associated with computer processing
(up $60 million), equipment (up $13 million) and intangibles amortization (up
$13 million). The increase in personnel expense was moderated by a $41 million
reduction in stock-based compensation.
In 1997, noninterest expense includes a $50 million charge recorded in
connection with actions taken to vacate, or in some cases dispose of, certain
properties or to alter leasing arrangements in tandem with the national banking
and related centralization efforts Key had in effect at the time.
Excluding nonrecurring charges, core noninterest expense in 1998 rose by $139
million, or 6%, from 1997. The increase in Key's core noninterest expense
reflects higher personnel costs (up $75 million) as well as increases in
computer processing expense (up $45 million), professional fees (up $15 million)
and marketing expense (up $14 million). The higher level of personnel expense
was primarily due to the acquisition of McDonald and the acquisitions of
Leasetec Corporation and Champion Mortgage Co., Inc. during the third quarter of
1997. For more information about these acquisitions, see Note 3 ("Mergers,
Acquisitions and Divestitures") which begins on page 60.
One action that served to reduce noninterest expense for each of the past three
years was the recent reclassification of distributions on Key's tax-advantaged
preferred securities from "noninterest expense" to "interest expense." Key
effected the reclassification in the first quarter of 1999, and restated prior
years to conform to the current presentation. Distributions on Key's
tax-advantaged preferred securities totaled $85 million in 1999, $65 million in
1998 and $49 million in 1997. The securities are described in Note 10 ("Capital
Securities") on page 67. Information pertaining to the basis for the
reclassification can be found in the section entitled "Net interest income,"
which begins on page 34.
Figure 13 shows the components of Key's noninterest expense. The discussion that
follows explains the composition of some of these components and the factors
that may have caused some components to change in 1999 and 1998.
FIGURE 13 NONINTEREST EXPENSE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, CHANGE 1999 VS 1998
--------------------------
dollars in millions 1999 1998 1997 AMOUNT PERCENT
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Personnel $1,474 $1,256 $1,181 $218 17.4%
Net occupancy 231 226 222 5 2.2
Computer processing 236 176 131 60 34.1
Equipment 198 185 177 13 7.0
Marketing 106 100 86 6 6.0
Amortization of intangibles 104 91 87 13 14.3
Professional fees 70 62 47 8 12.9
Other expense:
Postage and delivery 73 73 75 -- --
Telecommunications 56 53 50 3 5.7
Equity- and gross receipts-based taxes 35 39 36 (4) (10.3)
OREO expense, net 13 6 (1) 7 116.7
Miscellaneous expense 233 208 245 25 12.0
- -----------------------------------------------------------------------------------------------------------------------------------
Total other expense 410 379 405 31 8.2
- -----------------------------------------------------------------------------------------------------------------------------------
Total core noninterest expense 2,829 2,475 2,336 354 14.3
Restructuring and other special charges 152 -- -- 152 N/M
Merger and integration charges -- 8 -- (8) (100.0)
Real estate disposition charge -- -- 50 -- --
Other nonrecurring charges 68 -- -- 68 N/M
- -----------------------------------------------------------------------------------------------------------------------------------
Total significant nonrecurring items 220 8 50 212 2,650.0
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense $3,049 $2,483 $2,386 $566 22.8%
====== ====== ====== ====
Full-time equivalent employees at year end 24,568 25,862 24,595
Efficiency ratio(a) 59.43% 58.49% 58.21%
Overhead ratio(b) 31.52 35.17 40.34
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) This ratio, which measures the extent to which recurring revenues are
absorbed by operating expenses, is calculated as follows: noninterest expense
(excluding certain nonrecurring charges) divided by the sum of
taxable-equivalent net interest income and noninterest income (excluding net
securities transactions, gains from certain divestitures and certain
nonrecurring charges).
(b) This ratio is the difference between noninterest expense (excluding certain
nonrecurring charges) and noninterest income (excluding net securities
transactions, gains from certain divestitures and certain nonrecurring
charges) divided by taxable-equivalent net interest income.
N/M = Not Meaningful
40 [LOGO KEYCORP]
<PAGE> 17
PERSONNEL. Personnel expense, the largest category of Key's noninterest expense,
accounted for more than half of the total increase in core noninterest expense
for both 1999 and 1998. The increases are primarily due to higher costs
associated with various incentive programs (including those related to
investment banking and capital markets activities), the impact of annual merit
increases and the impact of acquisitions (which also contributed to the higher
number of full-time equivalent employees in 1998). At December 31, 1999, the
number of full-time equivalent employees was 24,568, compared with 25,862 at the
end of 1998 and 24,595 at the end of 1997. The number of full-time equivalent
employees decreased in 1999, primarily because of branch divestitures.
Personnel expense includes costs incurred for technical staff required in
connection with efforts to modify Key's computer information systems to be Year
2000 compliant. These costs comprise most of Key's Year 2000 expenses, which
totaled $11 million in 1999, $20 million in 1998 and $17 million in 1997. For
more information about the Year 2000 issue and Key's efforts to address it, see
the following section entitled "Year 2000."
COMPUTER PROCESSING. The increase in computer processing expense in both 1999
and 1998 is primarily due to a higher level of computer software amortization,
but also includes increases related to software rental and maintenance.
MARKETING. In 1999, the level of marketing expense rose only slightly from the
prior year, and includes additional advertising costs incurred to promote
businesses like home equity lending that management has targeted for growth. The
increase in marketing expense in 1998 is more substantial due to the impact of
acquisitions, additional costs incurred in connection with Key's efforts to
strengthen brand identity and expenses related to the promotion of selected
product lines.
AMORTIZATION OF INTANGIBLES. The 1999 and 1998 increases in intangibles
amortization are primarily due to additional goodwill amortization recorded as a
result of acquisitions. These acquisitions include the October 1998 acquisition
of McDonald and the acquisitions of Leasetec Corporation and Champion Mortgage
Co., Inc. during the third quarter of 1997.
PROFESSIONAL FEES. Professional fees comprise expenses incurred for legal,
audit, consulting and certain other business services. In 1999, the level of
professional fees was up 13% from the prior year. In comparison, professional
fees increased by 32% in 1998, primarily due to additional costs incurred to
implement strategic initiatives designed to grow Key's fee-generating
businesses.
RESTRUCTURING AND OTHER SPECIAL CHARGES. As stated previously, during 1999 Key
recorded nonrecurring charges of $152 million (including restructuring charges
of $98 million) in connection with strategic actions that are being taken over
the next three years. Our goal is to achieve more than $170 million of expense
reductions per year upon completion. These actions include the outsourcing of
certain nonstrategic support functions (which resulted in the write-off of
selected assets, including certain software), site consolidations in a number of
Key's businesses and a reduction in the number of management layers.
Management expects the planned strategic actions to reduce Key's employment base
by approximately 3,000 positions, or 11%, by year-end 2000 and to improve Key's
efficiency ratio. As these actions are implemented during 2000, we anticipate
that additional charges will be recorded. For additional information, including
the specific components of the restructuring charges and the related liability
for payment remaining as of December 31, 1999, see Note 13 ("Restructuring
Charges") on page 69. The severance portion of the restructuring charge
liability will be funded by cash generated by Key's operations. None of the
charges will have a material impact on Key's liquidity.
EFFICIENCY RATIO. The efficiency ratio, which provides a measure of the extent
to which recurring revenues are used to pay operating expenses, was 59.43%,
compared with 58.49% for 1998, and 58.21% for 1997. The increase in the ratio
over the past year is primarily due to the impact of the McDonald acquisition.
This ratio improved during the year, however, as the growth of Key's core
revenue was complemented by the more effective management of noninterest
expense.
"Other expense" includes equity- and gross receipts-based taxes that are
assessed in lieu of an income tax in certain states in which Key operates. These
taxes represent 74 basis points of Key's efficiency ratio for 1999, compared
with 92 basis points for 1998 and 90 basis points for 1997. The extent to which
such taxes impact noninterest expense will vary among companies based on the
geographic locations in which they conduct their business.
YEAR 2000
During 1999, we continued to modify Key's computer systems to operate properly
in the Year 2000 and beyond. If left unchecked, the so-called Year 2000 problem
could have affected anything from complex computer systems to telephone systems,
ATMs, and elevators. To address this issue, Key developed an extensive plan in
1995 and formed an implementation team comprising internal personnel and
third-party experts.
Key completed all phases of the plan by the end of 1999, and at the turn of the
millennium did not experience any operational problems. However, we will
continue to monitor our systems to ensure they continue to operate properly.
Appropriate modifications will be made, if necessary.
Key has not detected any meaningful credit quality issues arising from client
difficulties with Year 2000 conversions. Nonetheless, it is possible that such
issues may arise over an extended period of time. Key will continue to monitor
its loan portfolio for potential situations in need of special attention.
Further, Key did not experience a significant increase in consumer withdrawals
of deposits in anticipation of the millennium. As a result, there was no
material impact on Key's funding costs.
Management was prepared for the possibility that some of the third parties that
Key deals with (such as foreign banks, governmental agencies, clearing houses,
telephone companies, and other service providers) would suffer from Year 2000
computer problems. We have not been advised that any third party that provides
material products or services to Key has had significant problems with its
systems.
The cumulative cost of implementing Key's Year 2000 plan and mitigating the
adverse effects of potential Year 2000 problems was $50 million as of December
31, 1999; no additional costs are anticipated. The total cost of the project was
funded through operating cash flows and includes expenses of $11 million in
1999, $20 million in 1998 and $17 million in 1997.
INCOME TAXES
The provision for income taxes is $577 million for 1999, up from $483 million
for 1998 and $426 million for 1997. The effective tax rate (which is the
provision for income taxes as a percentage of income before income taxes) for
1999 is 34.3%, compared with 32.7% for 1998 and 31.7% for 1997. The effective
tax rate increased in 1999 primarily because Key had
[LOGO-KEYCORP] 41
<PAGE> 18
higher state taxes, a higher level of non-deductible goodwill amortization and
lower tax-exempt income. In 1998, the increase in the effective tax rate is
principally the result of lower tax-exempt income and lower tax credits. The
effective income tax rate remains below the statutory Federal rate of 35%,
primarily because Key continues to invest in tax-advantaged assets (such as
tax-exempt securities and corporate owned life insurance) and to recognize
credits associated with investments in low-income housing projects.
FINANCIAL CONDITION
LOANS
At December 31, 1999, total loans outstanding were $64.2 billion, compared with
$62.0 billion at the end of 1998 and $53.4 billion at the end of 1997. Key
achieved a 4% increase in loans during 1999, primarily as a result of our
targeted efforts to increase the commercial and home equity portfolios. These
efforts were supported by the overall strength of the economy, improving
consumer credit conditions, and additional leverage provided by Key's
acquisition of Leasetec Corporation in 1997.
Key's success in generating new loan volume has resulted in loan growth that has
outpaced the growth of Key's deposits. As a result, we have used alternative
funding sources such as securitizations to continue to capitalize on our lending
opportunities. Loans outstanding (excluding loans held for sale) would have
grown by $6.4 billion, or 11%, in 1999, if we had not securitized and/or sold
$5.2 billion of loans during the year. This includes the divestiture of branches
with loan portfolios aggregating $505 million.
Excluding the impact of loan sales, commercial loans rose by $3.9 billion, or
12%, due primarily to strong growth in the structured finance, healthcare and
media portfolios, a $1.1 billion increase in real estate-construction loans and
a $1.1 billion increase in the lease financing portfolio. On the same basis,
consumer loans rose by $2.5 billion, or 10%, including increases of $2.0 billion
in the home equity portfolio and $615 million in the lease financing portfolio.
Figure 14 shows the composition of Key's loan portfolio at December 31, for each
of the past five years.
FIGURE 14 COMPOSITION OF LOANS
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998 1997
------------------------ ------------------------ --------------------
dollars in millions AMOUNT % OF TOTAL AMOUNT % OF TOTAL AMOUNT % OF TOTAL
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMERCIAL
Commercial, financial and agricultural $18,497 28.8% $17,038 27.5% $14,023 26.3%
Real estate-- commercial mortgage 6,836 10.6 7,309 11.8 6,952 13.0
Real estate-- construction 4,528 7.1 3,450 5.6 2,231 4.2
Commercial lease financing 6,665 10.4 5,613 9.0 4,439 8.3
- ---------------------------------------------------------------------------------------------------------------------------
Total commercial loans 36,526 56.9 33,410 53.9 27,645 51.8
CONSUMER
Real estate-- residential mortgage 4,333 6.7 5,083 8.2 6,204 11.6
Home equity 7,602 11.8 7,301 11.8 5,421 10.2
Credit card -- -- 1,425 2.3 1,521 2.8
Consumer-- direct 2,565 4.0 2,342 3.8 2,188 4.1
Consumer-- indirect lease financing 3,195 5.0 2,580 4.2 1,576 2.9
Consumer-- indirect other 6,398 10.0 7,009 11.2 5,964 11.2
- --------------------------------------------------------------------------------------------------------------------------
Total consumer loans 24,093 37.5 25,740 41.5 22,874 42.8
LOANS HELD FOR SALE 3,603 5.6 2,862 4.6 2,861 5.4
- --------------------------------------------------------------------------------------------------------------------------
Total $64,222 100.0% $62,012 100.0% $53,380 100.0%
======= ===== ======= ===== ======= =====
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1996 1995
------------------------ ----------------------
AMOUNT % OF TOTAL AMOUNT % OF TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL
Commercial, financial and agricultural $12,309 25.0% $11,655 24.1%
Real estate-- commercial mortgage 7,151 14.5 7,254 15.0
Real estate-- construction 1,666 3.4 1,520 3.1
Commercial lease financing 2,671 5.4 2,248 4.7
- ---------------------------------------------------------------------------------------------------------------------------
Total commercial loans 23,797 48.3 22,677 46.9
CONSUMER
Real estate-- residential mortgage 6,229 12.7 8,291 17.2
Home equity 4,793 9.7 3,886 8.0
Credit card 1,799 3.7 1,564 3.2
Consumer-- direct 2,245 4.6 1,934 4.0
Consumer-- indirect lease financing 839 1.7 639 1.4
Consumer-- indirect other 7,223 14.7 6,619 13.7
- ---------------------------------------------------------------------------------------------------------------------------
Total consumer loans 23,128 47.1 22,933 47.5
LOANS HELD FOR SALE 2,310 4.6 2,722 5.6
- ---------------------------------------------------------------------------------------------------------------------------
Total $49,235 100.0% $48,332 100.0%
======= ===== ======= =====
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
42 [LOGO-KEYCORP]
<PAGE> 19
SALES, SECURITIZATIONS, AND DIVESTITURES. Among the factors that Key considers
in determining which loans to securitize are:
- - the extent to which the characteristics of a specific loan portfolio make it
conducive to securitization;
- - the relative cost of funds;
- - the level of credit risk; and
- - capital requirements.
In addition to balancing the above factors, we may securitize loans when
conditions in the capital markets make that strategy more attractive than
conventional funding sources like debt.
During 1999, in addition to selling loans in connection with branch
divestitures, Key sold $2.0 billion of education loans ($1.7 billion through
securitizations), $1.3 billion of home equity loans ($1.1 billion through
securitizations), $555 million of automobile loans (all through
securitizations), $339 million of commercial real estate loans and $500 million
of residential real estate loans. One of the reasons that securitizations
increased in 1999 was that we completed a securitization originally planned for
the 1998 fourth quarter, but postponed due to market volatility.
Management will continue to explore opportunities to sell certain loan
portfolios, consistent with prudent asset/liability management practices.
However, we intend to securitize and sell fewer of the home equity loans
originated by our home equity finance affiliate. By retaining these loans, we
intend to replace over time the revenue generated by our former credit card
business.
Figure 15 summarizes Key's loan sales (including securitizations) and branch
divestitures for 1999 and 1998.
FIGURE 15 LOANS SOLD AND DIVESTED
<TABLE>
<CAPTION>
COMMERCIAL RESIDENTIAL BRANCH
in millions EDUCATION AUTOMOBILE HOME EQUITY REAL ESTATE REAL ESTATE DIVESTITURES TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
1999
- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fourth quarter $ 299 -- $ 32 $ 92 -- $505 $ 928
Third quarter 786 -- 359 100 -- -- 1,245
Second quarter 132 -- 442 63 $292 -- 929
First quarter 818 $555 428 84 208 -- 2,093
- -----------------------------------------------------------------------------------------------------------------------------------
Total $2,035 $555 $1,261 $339 $500 $505 $5,195
====== ==== ====== ==== ==== ==== ======
1998
- -------------------
Fourth quarter $ 29 -- $ 48 -- -- -- $ 77
Third quarter 201 -- 374 -- -- -- 575
Second quarter 45 -- 53 $167 -- $124 389
First quarter 71 -- -- -- -- 20 91
- -----------------------------------------------------------------------------------------------------------------------------------
Total $346 -- $475 $167 -- $144 $1,132
==== ==== ==== ==== ======
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Figure 16 shows loans that have been either securitized and sold, or simply sold
outright, and are either administered or serviced by Key, but are not recorded
on the balance sheet. Key derives income from two sources as a result of such
transactions. We earn noninterest income (recorded as "other income") from
servicing or administering the loans, and we earn interest income from assets
retained in connection with securitizations and accounted for like debt
securities that are classified as available for sale or trading account assets.
Income from both of these sources increased in 1999 because we completed more
securitizations this year than last year and the amount of loans administered or
serviced has grown substantially.
Figure 17 shows the maturities of certain commercial and real estate loans, and
the sensitivity of those loans to changes in interest rates. As indicated, at
December 31, 1999, approximately 48% of these outstanding loans were scheduled
to mature within one year. Loans with maturities greater than one year include
$9.8 billion with floating or adjustable rates and $8.0 billion with
predetermined rates.
FIGURE 16 LOANS SECURITIZED/SOLD
AND ADMINISTERED OR SERVICED
<TABLE>
<CAPTION>
DECEMBER 31,
in millions 1999 1998 1997
- ---------------------------------------------------------------
<S> <C> <C> <C>
Education loans $3,475 $2,312 $2,611
Automobile loans 855 946 1,601
Home equity loans 1,542 744 735
- ---------------------------------------------------------------
Total $5,872 $4,002 $4,947
====== ====== ======
- ---------------------------------------------------------------
</TABLE>
[LOGO: KEYCORP] 43
<PAGE> 20
FIGURE 17 MATURITIES AND SENSITIVITY OF CERTAIN LOANS TO
CHANGES IN INTEREST RATES
<TABLE>
<CAPTION>
DECEMBER 31, 1999
WITHIN 1-5 OVER
in millions 1 YEAR YEARS 5 YEARS TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $11,063 $4,539 $2,895 $18,497
Real estate-- construction 2,426 1,982 120 4,528
Real estate-- residential and commercial mortgage 2,914 2,451 5,804 11,169
- --------------------------------------------------------------------------------------------------------------------------------
$16,403 $8,972 $8,819 $34,194
======= ====== ====== =======
Loans with floating or adjustable interest rates(a) $5,924 $3,891
Loans with predetermined interest rates(b) 3,048 4,928
- --------------------------------------------------------------------------------------------------------------------------------
$8,972 $8,819
====== ======
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) "Floating" and "adjustable" rates vary in relation to some other interest
rate (such as the base lending rate) or a variable index that may change
during the term of the loan.
(b) "Predetermined" interest rates either are fixed or will change during the
term of the loan according to a specific formula or schedule.
SECURITIES
At December 31, 1999, the securities portfolio totaled $7.7 billion and
comprised $6.7 billion of securities available for sale and $986 million of
investment securities. In comparison, the total portfolio at December 31, 1998,
was $6.3 billion, including $5.3 billion of securities available for sale and
$976 million of investment securities.
Securities available for sale increased during 1999 because management actively
increased Key's investment in collateralized mortgage obligations by reinvesting
funds previously held in lower-yielding securities purchased under resale
agreements, reclassifying approximately $374 million of collateralized mortgage
obligations from the commercial loan portfolio and purchasing additional
securities to be held as collateral in connection with client pledging
requirements. A collateralized mortgage obligation (sometimes called a "CMO") is
a debt security that is secured by a pool of mortgages, mortgage-backed
securities, U.S. government securities, corporate debt obligations or other
bonds. At December 31, 1999, Key had $5.9 billion invested in collateralized
mortgage obligations and other mortgage-backed securities in the
available-for-sale portfolio, compared with $4.4 billion at December 31, 1998.
Substantially all of these securities were issued or backed by Federal agencies.
Figure 18 shows the composition, yields and remaining maturities of Key's
securities available for sale. Figure 19 provides the same information about
Key's investment securities. For more information about retained interests in
securitizations, gross unrealized gains and losses by type of security and
securities pledged, please see Note 5 ("Securities"), which begins on page
63.
FIGURE 18 SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
OTHER
U.S. TREASURY, STATES AND COLLATERALIZED MORTGAGE-
AGENCIES AND POLITICAL MORTGAGE BACKED
dollars in millions CORPORATIONS SUBDIVISIONS OBLIGATIONS(a) SECURITIES(a)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1999
Remaining maturity:
One year or less $ 98 $ 1 $ 659 $ 1
After one through five years 1 19 3,266 998
After five through ten years 6 33 153 624
After ten years 22 -- 159 55
- ----------------------------------------------------------------------------------------
Fair value $ 127 $ 53 $4,237 $1,678
Amortized cost 128 53 4,426 1,705
Weighted average yield 5.28% 6.68% 6.53% 7.06%
Weighted average maturity 4.5 YEARS 5.5 YEARS 3.6 YEARS 5.9 YEARS
- ----------------------------------------------------------------------------------------
DECEMBER 31, 1998
Fair value $ 422 $ 67 $2,211 $2,151
Amortized cost 420 65 2,191 2,123
- ----------------------------------------------------------------------------------------
DECEMBER 31, 1997
Fair value $ 204 $ 52 $4,051 $2,951
Amortized cost 202 52 4,045 2,908
- ----------------------------------------------------------------------------------------
<CAPTION>
RETAINED WEIGHTED
INTERESTS IN OTHER AVERAGE
DOLLARS IN MILLIONS SECURITIZATIONS(a) SECURITIES TOTAL YIELD(b)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1999
Remaining maturity:
One year or less -- $ 10 $ 769 6.56%
After one through five years $ 119 13 4,416 6.46
After five through ten years 224 5 1,045 8.05
After ten years -- 199(c) 435 7.30
- ----------------------------------------------------------------------------------------
Fair value $ 343 $ 227 $6,665 --
Amortized cost 340 223 6,875 6.77%
Weighted average yield 10.06% 5.29% 6.77% --
Weighted average maturity 3.4 YEARS 9.7 YEARS 4.4 YEARS --
- ----------------------------------------------------------------------------------------
DECEMBER 31, 1998
Fair value $ 328 $ 99 $5,278 --
Amortized cost 345 84 5,228 6.69%
- ----------------------------------------------------------------------------------------
DECEMBER 31, 1997
Fair value $ 374 $ 76 $7,708 --
Amortized cost 418 75 7,700 7.19%
- ----------------------------------------------------------------------------------------
</TABLE>
(a) Maturity is based upon expected average lives rather than contractual terms.
(b) Weighted average yields are calculated based on amortized cost. Such yields
have been adjusted to a taxable-equivalent basis using the statutory Federal
income tax rate of 35%.
(c) Includes equity securities with no stated maturity.
44 [LOGO: KEYCORP]
<PAGE> 21
FIGURE 19 INVESTMENT SECURITIES
<TABLE>
<CAPTION>
STATES AND WEIGHTED
POLITICAL OTHER AVERAGE
dollars in millions SUBDIVISIONS SECURITIES TOTAL YIELD(a)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1999
Remaining maturity:
One year or less $126 $ 1 $127 8.24%
After one through five years 213 -- 213 9.29
After five through ten years 93 -- 93 9.46
After ten years 15 538(b) 553 3.90
- ----------------------------------------------------------------------------------------------------------------------------------
Amortized cost $447 $539 $986 6.15%
Fair value 459 539 998 --
Weighted average yield 7.86% 3.73% 6.15% --
Weighted average maturity 3.2 YEARS 10.0 YEARS 6.9 YEARS --
- ----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998
Amortized cost $631 $345 $976 7.13%
Fair value 659 345 1,004 --
- ----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997
Amortized cost $ 973 $257 $1,230 7.59%
Fair value 1,005 257 1,262 --
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Weighted average yields are calculated based on amortized cost. Such yields
have been adjusted to a taxable-equivalent basis using the statutory Federal
income tax rate of 35%.
(b) Includes equity securities with no stated maturity.
ASSET QUALITY
Key maintains asset quality by following procedures that address the issue from
many perspectives. Specifically, Key has groups of professionals that:
- - evaluate and monitor the level of risk in credit-related assets;
- - formulate underwriting standards and guidelines for line management;
- - develop commercial and consumer credit policies and systems;
- - establish credit-related concentration limits;
- - review loans, leases, and other corporate assets to evaluate credit quality;
and
- - review the adequacy of the allowance for loan losses.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses at December 31, 1999,
was $930 million, or 1.45% of loans. This compares with $900 million, or 1.45%
of loans, at December 31, 1998. The allowance includes $63 million (for 1999)
and $42 million (for 1998) that is specifically allocated for impaired loans.
For more information about impaired loans, see Note 7 ("Impaired Loans and Other
Nonperforming Assets") on page 65. At December 31, 1999, the allowance for loan
losses was 228.50% of nonperforming loans, compared with 246.58% at December 31,
1998.
Management relies on an iterative methodology to estimate the level of the
allowance for loan losses on a quarterly (and at times more frequent) basis.
This methodology is described in Note 1 ("Summary of Significant Accounting
Policies") under the heading "Allowance for Loan Losses," on page 58. With the
advent of enhanced credit scoring capabilities, management continues to review
and refine Key's methodology for estimating the allowance for loan losses. As
these methodology enhancements are implemented, they may cause us to alter Key's
provision for loan losses.
In February 1999, the Federal banking agencies published revised guidelines
which, among other things, require that consumer loans be charged off when
payments are past due by a prescribed number of days. Management anticipates
implementing these new guidelines prior to the required date of December 31,
2000, and perhaps as early as the first quarter of 2000. Based upon current
estimates, management expects that the implementation will accelerate up to $60
million of Key's consumer loan charge-offs which might otherwise have occurred
at later dates. Key's allowance already includes an allocation for these
potential losses.
Figure 20 shows the allocation of Key's allowance for loan losses by loan type
at December 31. The amount of allowance allocated to Key's credit card portfolio
at December 31, 1999, is included in the held for sale category. This allocation
is based on the level of net credit card charge-offs that Key expected to record
in the first quarter of 2000. Since the sale of the credit card portfolio closed
in January 2000, Key was able to estimate the amount of net credit card
charge-offs with a relatively high level of precision.
[LOGO: KEYCORP] 45
<PAGE> 22
FIGURE 20 ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- ------------------------- ------------------------
PERCENT OF PERCENT OF PERCENT OF
DECEMBER 31, 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 $509 28.8% $357 27.5% $224 26.3%
Real estate-- commercial mortgage 34 10.6 32 11.8 104 13.0
Real estate-- construction 16 7.1 15 5.6 33 4.2
Commercial lease financing 39 10.4 49 9.0 26 8.3
- --------------------------------------------------------------------------------------------------------------------------------
Total commercial loans 598 56.9 453 53.9 387 51.8
Real estate-- residential mortgage 1 6.7 7 8.2 8 11.6
Home equity 7 11.8 5 11.8 4 10.2
Credit card -- -- 44 2.3 45 2.8
Consumer-- direct 8 4.0 15 3.8 15 4.1
Consumer-- indirect lease financing 6 5.0 5 4.2 3 2.9
Consumer-- indirect other 55 10.0 77 11.2 63 11.2
- --------------------------------------------------------------------------------------------------------------------------------
Total consumer loans 77 37.5 153 41.5 138 42.8
Loans held for sale 18 5.6 1 4.6 1 5.4
Unallocated 237 -- 293 -- 374 --
- --------------------------------------------------------------------------------------------------------------------------------
Total $930 100.0% $900 100.0% $900 100.0%
==== ===== ==== ===== ==== =====
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1996 1995
-------------------------- -------------------------
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 $177 25.0% $205 24.1%
Real estate-- commercial mortgage 97 14.5 100 15.0
Real estate-- construction 22 3.4 21 3.1
Commercial lease financing 16 5.4 23 4.7
- ---------------------------------------------------------------------------------------------------
Total commercial loans 312 48.3 349 46.9
Real estate-- residential mortgage 10 12.7 9 17.2
Home equity 5 9.7 5 8.0
Credit card 44 3.7 25 3.2
Consumer-- direct 15 4.6 5 4.1
Consumer-- indirect lease financing 2 1.7 1 1.3
Consumer-- indirect other 76 14.7 46 13.7
- ---------------------------------------------------------------------------------------------------
Total consumer loans 152 47.1 91 47.5
Loans held for sale 3 4.6 3 5.6
Unallocated 403 -- 433 --
- ---------------------------------------------------------------------------------------------------
Total $870 100.0% $876 100.0%
==== ===== ==== =====
- ---------------------------------------------------------------------------------------------------
</TABLE>
NET LOAN CHARGE-OFFS. As shown in Figure 21, net loan charge-offs for 1999 were
$318 million, or .51% of average loans, compared with $297 million, or .52% of
average loans, for 1998, and $293 million, or .57% of average loans, in 1997. In
1999, net charge-offs in the commercial loan portfolio rose by $32 million,
including increases of $43 million in the commercial, financial and agricultural
sector, and $6 million in the commercial lease financing sector. Charge-offs of
commercial loans increased not only due to a modest increase in the proportion
of troubled credits within the portfolio, but also because this portfolio has
grown significantly. The overall increase in commercial loan net charge-offs was
moderated by improved performance in the commercial real estate sector.
The increase in commercial loan net charge-offs was partially offset by an $11
million decline in the level of net charge-offs in the consumer loan portfolio.
Net charge-offs in the credit card sector decreased by $19 million because of
higher recoveries and a lower volume of credit card receivables. At the same
time, net charge-offs in the installment portfolios increased by $7 million as a
result of the growth in outstanding balances.
46 [LOGO: KEYCORP]
<PAGE> 23
FIGURE 21 SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
dollars in millions 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average loans outstanding during the year $62,401 $57,422 $51,415 $48,216 $48,012
- ----------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses at beginning of year $900 $900 $870 $876 $830
Loans charged off:
Commercial, financial and agricultural 112 66 55 71 42
Real estate-- commercial mortgage 2 20 16 16 22
Real estate-- construction -- 2 3 2 2
Commercial lease financing 20 12 9 8 5
- ----------------------------------------------------------------------------------------------------------------------------------
Total commercial loans 134 100 83 97 71
Real estate-- residential mortgage 8 11 11 9 11
Home equity 10 6 4 2 2
Credit card 89 104 113 83 50
Consumer-- direct 41 44 41 29 21
Consumer-- indirect lease financing 13 8 4 3 2
Consumer-- indirect other 125 111 122 80 51
- ----------------------------------------------------------------------------------------------------------------------------------
Total consumer loans 286 284 295 206 137
- ----------------------------------------------------------------------------------------------------------------------------------
420 384 378 303 208
Recoveries:
Commercial, financial and agricultural 28 25 28 45 53
Real estate-- commercial mortgage 4 6 10 8 5
Real estate-- construction 1 2 2 1 3
Commercial lease financing 3 1 1 2 2
- ----------------------------------------------------------------------------------------------------------------------------------
Total commercial loans 36 34 41 56 63
- ----------------------------------------------------------------------------------------------------------------------------------
Real estate-- residential mortgage 4 4 3 3 8
Home equity 1 1 -- -- 1
Credit card 14 10 9 15 11
Consumer-- direct 8 6 7 7 7
Consumer-- indirect lease financing 3 1 1 1 1
Consumer-- indirect other 36 31 24 26 18
- ----------------------------------------------------------------------------------------------------------------------------------
Total consumer loans 66 53 44 52 46
- ----------------------------------------------------------------------------------------------------------------------------------
102 87 85 108 109
- ----------------------------------------------------------------------------------------------------------------------------------
Net loans charged off (318) (297) (293) (195) (99)
Provision for loan losses 348 297 320 197 100
Allowance acquired (sold), net -- -- 3 (8) 44
Transfer of other real estate owned ("OREO") allowance -- -- -- -- 1
- ----------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses at end of year $930 $900 $900 $870 $876
==== ==== ==== ==== ====
- ----------------------------------------------------------------------------------------------------------------------------------
Net loan charge-offs to average loans .51% .52% .57% .40% .21%
Allowance for loan losses to year-end loans 1.45 1.45 1.69 1.77 1.81
Allowance for loan losses to nonperforming loans 228.50 246.58 236.22 249.28 263.15
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NONPERFORMING ASSETS. Figure 22 shows the composition of Key's nonperforming
assets. These assets totaled $433 million at December 31, 1999, and represented
.67% of loans, other real estate owned (known as "OREO") and other nonperforming
assets, compared with $404 million, or .65%, at December 31, 1998. The $29
million increase in the level of nonperforming assets since the end of 1998 is
due primarily to a $42 million increase in nonperforming loans, offset in part
by a $14 million decrease in OREO. Over the past two years, Key's nonperforming
assets have ranged from a quarterly high of $431 million at December 31, 1997,
to a low of $402 million at September 30, 1998.
DEPOSITS AND OTHER SOURCES OF FUNDS
"Core deposits" are Key's primary source of funding. These deposits consist of
domestic deposits other than certificates of deposit of $100,000 or more. During
1999, core deposits averaged $36.9 billion, and represented 51% of the funds Key
used to support earning assets, compared with $36.8 billion and 55%,
respectively, during 1998, and $38.6 billion and 63%, respectively, in 1997.
Total core deposits did not change much during 1999, following a decrease of
$1.8 billion in 1998. However, as shown in Figure 5 (which spans pages 32 and
33), Key experienced a change in the mix of core deposits in each of the past
two years. The levels of savings deposits, NOW accounts and time deposits
declined, primarily because, since mid-1997, Key has sold 178 branches with
deposits of approximately $4.3 billion. In addition, client preferences for
higher returns and the strength of the securities markets have also caused a
shift from traditional bank products to nonbank financial investments, such as
equity securities. At the same time, Key's money market deposit accounts grew
substantially as a result of client preferences for investments that offer
higher returns.
Purchased funds, which comprise large certificates of deposit, deposits in the
foreign office, and short-term borrowings, averaged $17.8 billion during 1999,
compared with $19.0 billion during 1998, and $16.9 billion in 1997. As shown in
Figure 5, Key relied more on long-term debt, including capital securities, to
fund earning assets in 1999. In addition, Key continues to consider loan
securitizations as a funding alternative when market conditions are favorable.
During 1999, Key securitized and sold $4.3 billion of consumer loans.
[LOGO: KEYCORP] 47
<PAGE> 24
FIGURE 22 SUMMARY OF NONPERFORMING ASSETS AND PAST DUE LOANS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
dollars in millions 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $175 $144 $162 $121 $148
Real estate-- commercial mortgage 102 79 88 84 90
Real estate-- construction 7 6 21 19 10
Commercial lease financing 28 29 5 8 3
- --------------------------------------------------------------------------------------------------------------------------------
Total commercial loans 312 258 276 232 251
Real estate-- residential mortgage 44 60 58 80 62
Home equity 13 10 11 10 5
Consumer-- direct 6 6 8 9 3
Consumer-- indirect other 32 31 28 18 12
- --------------------------------------------------------------------------------------------------------------------------------
Total consumer loans 95 107 105 117 82
- --------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 407 365 381 349 333
OREO 27 56 66 56 56
Allowance for OREO losses (3) (18) (21) (8) (14)
- --------------------------------------------------------------------------------------------------------------------------------
OREO, net of allowance 24 38 45 48 42
Other nonperforming assets 2 1 5 3 4
- --------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $433 $404 $431 $400 $379
==== ==== ==== ==== ====
- --------------------------------------------------------------------------------------------------------------------------------
Accruing loans past due 90 days or more $259 $178 $132 $103 $97
- --------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans to year-end loans .63% .59% .71% .71% .69%
Nonperforming assets to year-end loans
plus OREO and other nonperforming assets .67 .65 .81 .81 .78
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1999, Key had $6.5 billion in time deposits of $100,000 or more.
Figure 23 shows the maturity distribution of these deposits.
FIGURE 23 MATURITY DISTRIBUTION OF
TIME DEPOSITS OF $100,000 OR MORE
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DOMESTIC FOREIGN
in millions OFFICES OFFICE TOTAL
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Remaining maturity:
Three months or less $3,101 $1,236 $4,337
After three through
twelve months 1,119 -- 1,119
After twelve months 1,001 -- 1,001
- -----------------------------------------------------------------------
Total $5,221 $1,236 $6,457
====== ====== ======
- -----------------------------------------------------------------------
</TABLE>
LIQUIDITY
"Liquidity" measures whether an entity has sufficient cash flow to meet its
financial obligations when due. Key has sufficient liquidity when it can meet
the needs of depositors, borrowers, and creditors at a reasonable cost, on a
timely basis, and without adverse consequences. KeyCorp, the parent company, has
sufficient liquidity when it can pay dividends to shareholders, service its
debt, and support customary corporate operations and activities, including
acquisitions.
LIQUIDITY FOR KEY. Management actively analyzes and manages Key's liquidity. In
particular, Key's Funding and Investment Management Group monitors the overall
mix of funding sources to ensure that the mix is appropriate in light of the
structure of the asset portfolios. We use several tools to maintain sufficient
liquidity.
- - We maintain portfolios of short-term money market investments and securities
available for sale, substantially all of which could be converted to cash
quickly at a small expense.
- - Key's portfolio of investment securities generates prepayments (often at a
premium) and payments at maturity.
- - We try to structure the maturities of our loans so we receive a relatively
consistent stream of payments from borrowers. We also selectively securitize
and package loans for sale.
- - Our 936 full-service KeyCenters in 13 states generate a sizable volume of
core deposits. Key's Funding and Investment Management Group monitors deposit
flows and considers alternate pricing structures to attract deposits when
necessary. For more information about core deposits, see the previous section
entitled "Deposits and other sources of funds."
- - Key has access to various sources of money market funding (such as Federal
funds purchased, securities sold under repurchase agreements, and bank notes)
and also can borrow from the Federal Reserve Bank to meet short-term
liquidity requirements. During 1999, KeyBank National Association, one of
KeyCorp's bank affiliates, increased its overnight borrowing capacity at the
Federal Reserve Bank discount window from approximately $975 million at
December 31, 1998, to approximately $17.2 billion at December 31, 1999, by
pledging approximately $23.3 billion of loans (primarily commercial) as
additional collateral. This action, which was purely precautionary, was part
of Key's Year 2000 contingency plan. Another bank affiliate, KeyBank USA
National Association, had overnight borrowing capacity at the Federal Reserve
Bank discount window of up to $1.0 billion at December 31, 1999, which was
secured by approximately $1.3 billion of credit card receivables. Neither
bank had borrowings outstanding under these facilities as of the end of 1999.
LIQUIDITY FOR THE PARENT COMPANY. KeyCorp meets its liquidity requirements
principally through regular dividends from affiliate banks. In 1999, affiliates
paid KeyCorp a total of $946 million in dividends. As of December 31, 1999, the
affiliate banks had an additional $697 million available to pay dividends
without prior regulatory approval. These excess funds are generally maintained
in short-term investments.
48 KEYCORP AND SUBSIDIARES
<PAGE> 25
ADDITIONAL SOURCES OF LIQUIDITY. Management has implemented several programs
that enable Key and KeyCorp to raise money in the public and private markets
when necessary. The proceeds from all of these programs can be used for general
corporate purposes, including acquisitions.
BANK NOTE PROGRAM. During 1999, Key's affiliate banks raised $10.1 billion under
Key's Bank Note Program. Of the notes issued during 1999, $3.7 billion have
original maturities in excess of one year and are included in long-term debt;
the remaining $6.4 billion have original maturities of one year or less and are
included in short-term borrowings. On January 21, 2000, Key commenced a new Bank
Note Program which provides for the issuance of both long- and short-term debt
of up to $20.0 billion ($19.0 billion by KeyBank National Association and $1.0
billion by Key Bank USA, National Association).
EURONOTE PROGRAM. Under Key's Euronote program, KeyCorp, KeyBank National
Association and Key Bank USA, National Association may issue both long- and
short-term debt of up to $7.0 billion in the aggregate. The borrowing capacity
under this program was increased from $5.0 billion during the second quarter of
1999. The notes are offered exclusively to non-U.S. investors and can be
denominated in dollars and most European currencies. There were $2.4 billion of
borrowings outstanding under this facility as of December 31, 1999, $972 million
of which were issued during 1999.
COMMERCIAL PAPER AND REVOLVING CREDIT. KeyCorp has a commercial paper program
and a three-year revolving credit agreement. Each of these facilities provides
funding availability of up to $500 million. As of December 31, 1999, $215
million of borrowings were outstanding under the commercial paper program; no
amount was outstanding under the revolving credit agreement.
PUBLICLY ISSUED SECURITIES. KeyCorp has a universal shelf registration statement
on file with the Securities and Exchange Commission that provides for the
possible issuance of up to $1.3 billion of debt and equity securities. At
December 31, 1999, unused capacity under the shelf registration totaled $1.0
billion, including $450 million reserved for issuance as medium-term notes. If
KeyCorp maintains its favorable debt ratings, shown below as of December 31,
1999, management believes that, under normal conditions in the capital markets,
any eventual offering of securities should be well-received by investors.
SENIOR SUBORDINATED
COMMERCIAL LONG-TERM LONG-TERM
PAPER DEBT DEBT
- ---------------------------------------------------------------------
Duff & Phelps D-1 A+ A
Standard & Poor's A-2 A- BBB+
Moody's P-1 A1 A2
For more information about Key's sources and uses of cash for the years ended
December 31, 1999, 1998, and 1997, see the Consolidated Statements of Cash Flow
on page 56.
CAPITAL AND DIVIDENDS
SHAREHOLDERS' EQUITY. Total shareholders' equity at December 31, 1999, was $6.4
billion, up $222 million from the balance at December 31, 1998. Retained net
income increased during the year, but the increase was largely offset by a net
increase in treasury stock due to share repurchases, and net unrealized losses
on securities available for sale. In contrast, total shareholders' equity
increased by $986 million, or 19%, from the end of 1997 to the end of 1998.
During 1998, retained net income increased, and treasury stock decreased because
KeyCorp issued shares to acquire McDonald. Other factors contributing to the
change in shareholders' equity during 1999 and 1998 are shown in the
Consolidated Statements of Changes in Shareholders' Equity presented on page 55.
SHARE REPURCHASES. During 1999, Key repurchased 11,906,424 of its common shares
at an average price per share of $28.85. Authority to repurchase these shares
came from two sources. First, when Key acquired McDonald, the Board of Directors
authorized the repurchase of up to 60% of the 19,337,159 shares issued to
complete the transaction. With the repurchase of 3,869,761 of these shares in
1999, we have now repurchased all of the shares covered by that authorization.
Second, Key had a program that authorized management to repurchase up to
10,000,000 shares in open market or through negotiated transactions. During
1999, 8,036,663 shares were repurchased under this program, leaving a remaining
balance of 1,963,337 shares that may be repurchased. In January 2000, the Board
authorized the repurchase of up to 20,000,000 shares (including the shares
remaining from the prior authority).
At December 31, 1999, Key had 48,462,243 treasury shares. Management expects to
reissue those shares over time to support the employee stock purchase, 401(k),
stock option, and dividend reinvestment plans, and for other corporate purposes.
During 1999, Key reissued 2,249,181 treasury shares for employee benefit and
dividend reinvestment plans.
CAPITAL ADEQUACY. Capital adequacy is an important indicator of financial
stability and performance. Overall, Key's capital position remains strong: the
ratio of total shareholders' equity to total assets was 7.66% at December 31,
1999, and 7.71% at December 31, 1998.
Banking industry regulators prescribe minimum capital ratios for bank holding
companies and their banking subsidiaries. Risk-based capital guidelines require
a minimum level of capital as a percent of "risk-adjusted assets," which is
total assets plus certain off-balance sheet items that are adjusted for
predefined credit risk factors. Currently, banks and bank holding companies must
maintain, at a minimum, Tier 1 capital as a percent of risk-adjusted assets of
4.0%, and total capital as a percent of risk-adjusted assets of 8.0%. As of
December 31, 1999, Key's Tier 1 capital ratio was 7.68%, and its total capital
ratio was 11.66%.
The leverage ratio is Tier 1 capital as a percentage of tangible assets.
Leverage ratio requirements vary with the condition of the financial
institution. Bank holding companies that either have the highest supervisory
rating or have implemented the Federal Reserve's risk-adjusted measure for
market risk -- as KeyCorp has -- must maintain a minimum leverage ratio of 3.0%.
All other bank holding companies must maintain a minimum ratio of 4%. As of
December 31, 1999, KeyCorp had a leverage ratio of 7.77%, which is substantially
higher than the minimum requirement.
Federal bank regulators group FDIC-insured depository institutions into the
following five categories based on certain capital ratios: "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized,"
and "critically undercapitalized." Both of Key's affiliate banks qualified as
"well capitalized" at December 31, 1999, since each exceeded the prescribed
thresholds of 10% for total capital, 6% for Tier 1 capital, and 5% for the
leverage ratio. If these provisions applied to bank holding companies, KeyCorp
would also qualify as "well capitalized" at December 31, 1999. The FDIC-defined
capital categories serve a limited regulatory function. Investors should not
treat them as a representation of the overall financial condition or prospects
of Key or its affiliates.
[LOGO: KEYCORP] 49
<PAGE> 26
Figure 24 presents the details of Key's regulatory capital position at December
31, 1999 and 1998. Note 11 ("Shareholders' Equity"), which begins on page 67,
explains the implications of failing to meet specific capital requirements
imposed by the banking regulators.
FIGURE 24 CAPITAL COMPONENTS
AND RISK-ADJUSTED ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
dollars in millions 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
TIER 1 CAPITAL
Common shareholders' equity(a) $ 6,508 $ 6,137
Qualifying capital securities 1,243 747
Less: Goodwill (1,389) (1,430)
Other intangible assets(b) (56) (71)
- --------------------------------------------------------------------------------
Total Tier 1 capital 6,306 5,383
- --------------------------------------------------------------------------------
TIER 2 CAPITAL
Allowance for loan losses(c) 930 900
Net unrealized holding gains(d) 3 3
Qualifying long-term debt 2,330 2,445
- --------------------------------------------------------------------------------
Total Tier 2 capital 3,263 3,348
- --------------------------------------------------------------------------------
Total capital $ 9,569 $ 8,731
======== ========
RISK-ADJUSTED ASSETS
Risk-adjusted assets on balance sheet $ 68,619 $ 63,721
Risk-adjusted off-balance sheet exposure 14,513 12,198
Less: Goodwill (1,389) (1,430)
Other intangible assets(b) (56) (71)
Plus: Market risk-equivalent assets 391 242
Net unrealized holding gains(d) 3 3
- --------------------------------------------------------------------------------
Gross risk-adjusted assets 82,081 74,663
Less: Excess allowance for loan losses(c) -- --
- --------------------------------------------------------------------------------
Net risk-adjusted assets $ 82,081 $ 74,663
======== ========
AVERAGE QUARTERLY TOTAL ASSETS $ 82,574 $ 78,968
======== ========
CAPITAL RATIOS
Tier 1 risk-adjusted capital ratio 7.68% 7.21%
Total risk-adjusted capital ratio 11.66 11.69
Leverage ratio(e) 7.77 6.95
- --------------------------------------------------------------------------------
</TABLE>
(a) Common shareholders' equity excludes the impact of net unrealized gains or
losses on securities, except for net unrealized losses on marketable equity
securities.
(b) Intangible assets (excluding goodwill) recorded after February 19, 1992, and
deductible portions of purchased mortgage servicing rights.
(c) The allowance for loan losses included in Tier 2 capital is limited to 1.25%
of gross risk-adjusted assets.
(d) Net unrealized holding gains included in Tier 2 capital are limited to 45%
of net unrealized holding gains on available for sale equity securities with
readily determinable fair values.
(e) Tier 1 capital as a percentage of average quarterly total assets, less
goodwill and other non-qualifying intangible assets as defined in footnote
(b).
KeyCorp's common shares are traded on the New York Stock Exchange under the
symbol KEY. At December 31, 1999:
- - Book value per common share was $14.41, based on 443,426,537 shares
outstanding, compared with $13.63 based on 452,451,597 shares outstanding at
December 31, 1998. o The closing sales price of a KeyCorp common share on the
New York Stock Exchange was $22.13. This price was 154% of year-end book
value per share, and would produce a dividend yield of 4.70% based on the
amount of the dividend at that time.
- - The closing sales price of a KeyCorp common share on the New York Stock
Exchange was $22.13. This price was 154% of year-end book value per share,
and would produce a dividend yield of 4.70% based on the amount of the
dividend at that time.
- - In 1999, the quarterly dividend was $.26 per common share, up from $.235 per
common share in 1998. On January 19, 2000, the quarterly dividend per common
share was increased by 7.7% to $.28.
- - There were 58,600 holders of record of KeyCorp common shares.
Figure 25 shows 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.
FOURTH QUARTER RESULTS
Key completed 1999 with a strong financial performance in the fourth quarter.
Some of the fourth quarter highlights are summarized below. Key's financial
performance for each of the past eight quarters is summarized in Figure 25.
NET INCOME. As shown in Figure 25, net income for the fourth quarter of 1999
totaled $264 million, or $.59 per common share, up from $260 million, or $.57,
for the same period in 1998. This improvement resulted from a $223 million, or
50%, increase in noninterest income and a moderate $18 million increase in net
interest income. The growth of these revenue components more than offset
increases of $216 million, or 32%, in noninterest expense and $6 million, or 8%,
in the provision for loan losses.
On an annualized basis, the return on average total assets for the fourth
quarter of 1999 was 1.27%, compared with 1.31% for the fourth quarter of 1998.
The annualized returns on average equity for the fourth quarters of 1999 and
1998 were 16.18% and 17.12%, respectively.
NET INTEREST INCOME. Net interest income rose to $705 million for the fourth
quarter of 1999 from $687 million for the fourth quarter of 1998. The
improvement resulted from a 5% increase in average earning assets to $73.1
billion, due primarily to continued momentum in commercial and consumer lending.
This growth more than compensated for an 11 basis point reduction in the net
interest margin to 3.88%.
NONINTEREST INCOME. Noninterest income of $670 million for the fourth quarter of
1999 was significantly higher than the $447 of a year ago, and includes a $194
million gain from the sale of Key's Long Island branches and $30 million of
nonrecurring charges. Of the nonrecurring charges, which reduced noninterest
income, the most significant was a $19 million charge that resulted from a more
conservative valuation of assets related to securitizations completed in prior
periods. In 1998, Key's results include a $27 million gain recorded in
connection with the sale of a 51% interest in Key Merchant Services, LLC, a
merchant credit card processing subsidiary. Excluding nonrecurring items, core
noninterest income in the fourth quarter of 1999 increased by $86 million, or
20%, from the prior year.
The strongest contributions to the growth in core noninterest income came from
investment banking and capital markets activities (up $31 million), and trust
and asset management (up $19 million). These revenue components grew primarily
as a result of the October 1998 acquisition of McDonald, but the overall
strength of the securities markets, new business and the repricing of certain
services were also instrumental.
For more information on the sales of the Long Island branches and
the interest in Key Merchant Services, LLC, see Note 3 ("Mergers, Acquisitions
and Divestitures") which begins on page 60.
NONINTEREST EXPENSE. Noninterest expense for the fourth quarter of 1999 totaled
$883 million, compared with $667 million in the fourth quarter of 1998. In 1999,
results include restructuring and other special charges of $145 million recorded
in connection with strategic actions that Key is taking to improve operating
efficiency and profitability. For more information about these charges, see the
section entitled
50 [LOGO: KEYCORP]
<PAGE> 27
"Restructuring and other special charges" on page 41. Also included in 1999
expense are $18 million of other one-time charges, the largest of which was $7
million. Excluding nonrecurring charges in 1999 and $8 million of merger and
integration charges recorded a year ago, core noninterest expense increased by
$61 million, or 9%, from the fourth quarter of 1998.
The rise in core noninterest expense came largely from personnel expense (up $31
million, due primarily to the October 1998 acquisition of McDonald) and higher
costs associated with computer processing (up $14 million). The increase in
personnel expense was moderated by a $12 million reduction in stock-based
compensation.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $83 million for the
fourth quarter of 1999, representing a $6 million increase from the same period
a year ago. Net loan charge-offs totaled $83 million and were .52% of average
loans outstanding for the quarter, compared with $77 million and .50%,
respectively, for the fourth quarter of 1998.
FIGURE 25 SELECTED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
dollars in millions, except per share amounts
1999 1998
---------------------------------------- -------------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE QUARTER
Interest income $ 1,489 $ 1,433 $ 1,392 $ 1,381 $ 1,411 $ 1,415 $ 1,372 $ 1,327
Interest expense 784 733 695 696 724 734 706 677
Net interest income 705 700 697 685 687 681 666 650
Provision for loan losses 83 78 76 111 77 71 72 77
Noninterest income before net
securities gains 667 487 506 605 442 392 378 354
Net securities gains 3 2 20 4 5 -- 2 2
Noninterest expense 883 701 717 748 667 628 602 586
Income before income taxes 409 410 430 435 390 374 372 343
Net income 264 270 280 293 260 252 249 235
- ---------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Net income $ .59 $ .60 $ .63 $ .65 $ .58 $ .57 $ .57 $ .53
Net income-- assuming dilution .59 .60 .62 .65 .57 .57 .56 .53
Cash dividends .26 .26 .26 .26 .235 .235 .235 .235
Book value at period end 14.41 14.25 13.90 13.63 13.63 12.73 12.55 12.15
Market price:
High 29.75 33.50 38.13 34.19 34.06 39.50 44.88 39.25
Low 21.00 25.19 29.13 29.69 23.38 24.75 34.44 31.56
Close 22.13 25.81 32.13 30.31 32.00 28.88 35.63 37.81
Weighted average common shares (000) 446,402 448,742 448,037 449,520 449,949 438,856 440,092 438,589
Weighted average common shares and
potential common shares (000) 449,678 452,886 452,733 454,197 454,527 443,750 446,568 444,836
- ---------------------------------------------------------------------------------------------------------------------------------
AT PERIOD END
Loans $ 64,222 $ 63,181 $ 61,971 $ 61,045 $ 62,012 $ 59,444 $ 57,769 $ 54,900
Earning assets 73,733 72,831 71,097 70,458 70,240 68,568 66,941 64,368
Total assets 83,395 82,577 80,889 79,992 80,020 77,691 75,778 73,198
Deposits 43,233 43,466 43,016 41,323 42,583 42,597 41,794 41,661
Long-term debt 15,881 15,815 15,168 15,457 12,967 11,353 10,196 9,041
Shareholders' equity 6,389 6,397 6,235 6,105 6,167 5,553 5,525 5,338
Full-time equivalent employees 24,568 25,523 25,758 25,650 25,862 24,586 24,711 24,650
Branches 936 963 965 969 968 961 962 1,006
- ---------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on average total assets 1.27% 1.32% 1.40% 1.49% 1.31% 1.32% 1.35% 1.32%
Return on average equity 16.18 17.06 18.16 19.48 17.12 18.14 18.47 18.25
Efficiency(a) 59.16 58.61 59.26 60.22 58.66 58.09 59.02 58.19
Overhead(b) 30.39 30.18 29.97 33.19 32.37 34.25 38.07 36.12
Net interest margin (taxable equivalent) 3.88 3.92 3.97 3.95 3.99 4.08 4.10 4.14
- ---------------------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS AT PERIOD END
Equity to assets 7.66% 7.75% 7.71% 7.63% 7.71% 7.15% 7.29% 7.29%
Tangible equity to tangible assets 6.03 6.06 5.95 5.86 5.93 5.79 5.91 5.81
Tier 1 risk-adjusted capital 7.68 7.84 7.48 7.44 7.21 7.01 7.15 6.81
Total risk-adjusted capital 11.66 11.94 11.74 11.92 11.69 11.61 11.86 11.38
Leverage 7.77 7.85 7.41 7.21 6.95 6.88 7.04 6.61
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Key has completed several mergers, acquisitions and divestitures during the
two-year period shown in this table. One or more of these transactions may have
had a significant effect on Key's results, making it difficult to compare
results from one year to the next. Note 3 ("Mergers, Acquisitions and
Divestitures"), which begins on page 60, has specific information about the
business combinations and divestitures that Key completed in the past three
years to help you understand how those transactions may have impacted Key's
financial condition and results of operations.
(a) This ratio, which measures the extent to which recurring revenues are
absorbed by operating expenses, is calculated as follows: noninterest
expense (excluding certain nonrecurring charges) divided by the sum of
taxable-equivalent net interest income and noninterest income (excluding
net securities transactions, gains from certain divestitures and certain
nonrecurring charges).
(b) This ratio is the difference between noninterest expense (excluding
certain nonrecurring charges) and noninterest income (excluding net
securities transactions, gains from certain divestitures and certain
nonrecurring charges) divided by taxable-equivalent net interest
income.
[LOGO: KEYCORP] 51
<PAGE> 28
REPORT OF MANAGEMENT
Key's management 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 reflect
management's best estimates and judgments. Management believes that the
financial statements and notes present fairly Key's financial position, results
of operations, and cash flows, and that the financial information presented
elsewhere in this annual report is consistent with the financial statements.
Management is responsible for establishing and maintaining a system of internal
control to ensure 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 conflicts of interest, compliance with laws and regulations, and
prompt reporting of any failure or circumvention of controls, among other
things.
We generally certify compliance with Key's code of ethics annually. We have
established an effective risk management function to periodically test the other
internal controls, and we endeavor to correct control deficiencies as they are
identified. Although any system of internal control can be compromised by human
error or intentional circumvention of required procedures, management believes
that Key's system provides reasonable assurances that financial transactions are
recorded properly, providing an adequate basis for reliable financial
statements.
The Board of Directors discharges its responsibility for Key's financial
statements through its Audit and Risk Review Committee. Key's Audit and Risk
Review Committee, which draws its members exclusively from the outside
directors, also recommends the independent auditors. The Audit and Risk Review
Committee meets regularly with the independent auditors to review the scope of
their audits and audit reports and to discuss necessary action. Both the
independent and internal auditors have direct access to and interaction with the
Audit and Risk Review Committee.
Management has assessed 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, 1999.
/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, 1999 and 1998, 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, 1999. 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Cleveland, Ohio
January 14, 2000
52 KEYCORP AND SUBSIDIARIES
<PAGE> 29
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
dollars in millions 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 2,816 $ 3,296
Short-term investments 1,860 1,974
Securities available for sale 6,665 5,278
Investment securities (fair value: $998 and $1,004) 986 976
Loans, net of unearned income of $1,621 and $1,533 64,222 62,012
Less: Allowance for loan losses 930 900
- -----------------------------------------------------------------------------------------------------------------------------------
Net loans 63,292 61,112
Premises and equipment 797 902
Goodwill 1,389 1,430
Other intangible assets 60 79
Corporate owned life insurance 2,110 2,008
Other assets 3,420 2,965
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 83,395 $ 80,020
======== ========
LIABILITIES
Deposits in domestic offices:
Noninterest-bearing $ 8,607 $ 9,540
Interest-bearing 33,390 32,091
Deposits in foreign office - interest-bearing 1,236 952
- -----------------------------------------------------------------------------------------------------------------------------------
Total deposits 43,233 42,583
Federal funds purchased and securities sold under repurchase agreements 4,177 4,468
Bank notes and other short-term borrowings 8,439 9,728
Other liabilities 4,033 3,110
Long-term debt 15,881 12,967
Corporation-obligated mandatorily redeemable preferred capital securities of subsidiary
trusts holding solely subordinated debentures of the Corporation (See Note 10) 1,243 997
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 77,006 73,853
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value; authorized 25,000,000 shares, none issued -- --
Common shares, $1 par value; authorized 1,400,000,000 shares;
issued 491,888,780 shares 492 492
Capital surplus 1,412 1,412
Retained earnings 5,833 5,192
Loans to ESOP trustee (24) (34)
Treasury stock, at cost (48,462,243 and 39,437,183 shares) (1,197) (923)
Accumulated other comprehensive (loss) income (127) 28
- -----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 6,389 6,167
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 83,395 $ 80,020
======== ========
- -----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
</TABLE>
KEYCORP AND SUBSIDIARIES
53
<PAGE> 30
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
dollars in millions, except per share amounts 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
<S> <C> <C> <C>
Loans $ 5,146 $ 4,935 $ 4,618
Taxable investment securities 15 12 12
Tax-exempt investment securities 31 45 66
Securities available for sale 424 449 526
Short-term investments 79 84 40
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest income 5,695 5,525 5,262
INTEREST EXPENSE
Deposits 1,305 1,359 1,462
Federal funds purchased and securities sold under repurchase agreements 220 342 359
Bank notes and other short-term borrowings 426 459 283
Long-term debt, including capital securities 957 681 413
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 2,908 2,841 2,517
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 2,787 2,684 2,745
Provision for loan losses 348 297 320
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 2,439 2,387 2,425
NONINTEREST INCOME
Trust and asset management income 443 335 266
Investment banking and capital markets income 354 239 119
Service charges on deposit accounts 330 306 299
Brokerage income 156 71 54
Corporate owned life insurance income 107 104 85
Credit card fees 63 68 96
Net loan securitization gains (losses) 64 4 (28)
Net securities gains 29 9 1
Gains from branch divestitures 194 39 151
Gains from other divestitures 161 50 --
Other income 393 350 263
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 2,294 1,575 1,306
NONINTEREST EXPENSE
Personnel 1,482 1,256 1,181
Net occupancy 239 226 222
Computer processing 236 176 131
Equipment 203 185 177
Marketing 106 100 86
Amortization of intangibles 104 91 87
Professional fees 70 62 47
Restructuring charges 98 -- --
Other expense 511 387 455
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 3,049 2,483 2,386
INCOME BEFORE INCOME TAXES 1,684 1,479 1,345
Income taxes 577 483 426
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 1,107 $ 996 $ 919
========= ========= =========
Per common share:
Net income $ 2.47 $ 2.25 $ 2.09
Net income -- assuming dilution 2.45 2.23 2.07
Weighted average common shares outstanding (000) 448,168 441,895 439,042
Weighted average common shares and potential common
shares outstanding (000) 452,363 447,437 444,544
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
54 KEYCORP AND SUBSIDIARIES
<PAGE> 31
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY ACCUMULATED
OTHER
COMPRE-
LOANS TO TREASURY HENSIVE COMPRE-
COMMON CAPITAL RETAINED ESOP STOCK, (LOSS) HENSIVE
dollars in millions, except per share amounts SHARES SURPLUS EARNINGS TRUSTEE AT COST INCOME INCOME
- -------------------------------------------------------------------------------------------------------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 $ 246 $ 1,484 $ 4,060 $ (49) $ (854) $ (6)
Net income 919 $ 919
Other comprehensive income:
Adjustment related to change in
accounting for transfers of financial
assets, net of deferred tax benefit of $(25) (43) (43)
Net unrealized gains on securities available
for sale, net of income taxes of $24(a) 60 60
-------
Total comprehensive income $ 936
=======
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)
ESOP transactions 1 7
Two-for-one stock split effected by means
of a 100% stock dividend 246 (246)
- -------------------------------------------------------------------------------------------------------------------- ------------
BALANCE AT DECEMBER 31, 1997 492 1,283 4,611 (42) (1,174) 11
Net income 996 $ 996
Other comprehensive income:
Net unrealized gains on securities available
for sale, net of income taxes of $9(a) 17 17
-------
Total comprehensive income $ 1,013
=======
Cash dividends on common shares
($.94 per share) (416)
Issuance of common shares:
Acquisition - 19,337,159 shares 129 440
Employee benefit and dividend reinvestment
plans - 3,050,008 net shares 67
Repurchase of common shares -
7,999,400 shares (256)
ESOP transactions 1 8
- -------------------------------------------------------------------------------------------------------------------- ------------
BALANCE AT DECEMBER 31, 1998 492 1,412 5,192 (34) (923) 28
Net income 1,107 $ 1,107
Other comprehensive losses:
Net unrealized losses on securities available
for sale, net of income taxes of $(94)(a) (148) (148)
Foreign currency translation adjustments (7) (7)
-------
Total comprehensive income $ 952
=======
Cash dividends on common shares
($1.04 per share) (467)
Issuance of common shares:
Acquisition - 632,183 shares 6 15
Employee benefit and dividend reinvestment
plans - 2,249,181 net shares (6) 55
Repurchase of common shares -
11,906,424 shares (344)
ESOP transactions 1 10
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 $ 492 $ 1,412 $ 5,833 $ (24) $(1,197) $ (127)
======= ======= ======= ======= ======= =======
- --------------------------------------------------------------------------------------------------------------------
<FN>
(a) Net of reclassification adjustments. Reclassification adjustments represent net unrealized gains or losses as of
December 31 of the prior year on securities available for sale that were sold during the current year. In 1999 and
1998, the reclassification adjustments were $3 million ($2 million after tax) and $9 million ($6 million after
tax), respectively.
</TABLE>
See Notes to Consolidated Financial Statements.
KEYCORP AND SUBSIDIARIES 55
<PAGE> 32
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOW
YEAR ENDED DECEMBER 31,
in millions 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,107 $ 996 $ 919
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 348 297 320
Depreciation expense and software amortization 292 237 197
Amortization of intangibles 104 91 87
Net gains from divestitures (355) (89) (151)
Net securities gains (29) (9) (1)
Net (gains) losses from loan securitizations and sales (86) (56) 2
Deferred income taxes 466 325 139
Net (increase) decrease in mortgage loans held for sale 3 156 (54)
Net (increase) decrease in trading account assets 109 (34) (498)
Net increase (decrease) in accrued restructuring charges 88 (22) (75)
Other operating activities, net (193) (89) (640)
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,854 1,803 245
INVESTING ACTIVITIES
Net increase in loans, excluding acquisitions, sales and divestitures (8,110) (9,081) (6,936)
Purchases of loans (7) (859) --
Proceeds from loan securitizations and sales 4,776 987 3,144
Purchases of investment securities (294) (145) (497)
Proceeds from sales of investment securities 17 69 12
Proceeds from prepayments and maturities of investment securities 292 401 823
Purchases of securities available for sale (4,750) (1,837) (3,378)
Proceeds from sales of securities available for sale 419 215 735
Proceeds from prepayments and maturities of securities available for sale 3,176 4,013 2,770
Net (increase) decrease in other short-term investments 5 296 (905)
Purchases of premises and equipment (94) (126) (156)
Proceeds from sales of premises and equipment 27 50 71
Proceeds from sales of other real estate owned 10 11 28
Purchases of corporate owned life insurance -- -- (300)
Net cash paid in connection with divestitures (576) (433) (918)
Cash used in acquisitions, net of cash acquired -- (34) (1)
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (5,109) (6,473) (5,508)
FINANCING ACTIVITIES
Net increase (decrease) in deposits 1,985 (1,832) 2,011
Net increase (decrease) in short-term borrowings (1,560) 984 2,031
Net proceeds from issuance of long-term debt, including capital securities 5,220 6,732 3,691
Payments on long-term debt, including capital securities (2,102) (949) (1,403)
Loan payment received from ESOP trustee 10 8 7
Purchases of treasury shares (344) (256) (563)
Net proceeds from issuance of common stock 33 44 65
Cash dividends (467) (416) (369)
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,775 4,315 5,470
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (480) (355) 207
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR 3,296 3,651 3,444
- -----------------------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF YEAR $ 2,816 $ 3,296 $ 3,651
======= ======= =======
- -----------------------------------------------------------------------------------------------------------------------------------
Additional disclosures relative to cash flow:
Interest paid $ 2,749 $ 2,679 $ 2,427
Income taxes paid 185 148 253
Net amount received on portfolio swaps 18 2 61
Noncash items:
Transfer of credit card receivables to loans held for sale $ 1,299 -- --
Reclassification of financial instruments from loans to securities available for sale 374 -- --
Fair value of Concord EFS, Inc. shares received 170 -- --
Carrying amount of Electronic Payment Services, Inc. shares divested 36 -- --
Assets sold 523 $ 165 $ 1,196
Liabilities sold 1,335 660 2,265
Assets purchased -- 742 1,397
Liabilities assumed -- 593 1,301
Transfer of other assets to securities available for sale -- -- 280
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
56 KEYCORP AND SUBSIDIARIES
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
KeyCorp, an Ohio corporation and bank holding company headquartered in
Cleveland, Ohio, is one of the nation's largest integrated multiline financial
services companies. KeyCorp's subsidiaries provide investment management, retail
and commercial banking, consumer finance, and investment banking products and
services to corporate, individual and institutional clients through four lines
of business: Key Retail Banking, Key Specialty Finance, Key Corporate Capital
and Key Capital Partners. As of December 31, 1999, KeyCorp's banking
subsidiaries operated 936 full-service branches, a 24-hour telephone banking
call center services group and 2,516 ATMs in 15 states.
As used in these Notes, KeyCorp refers solely to the parent company and Key
refers to the consolidated entity consisting of KeyCorp and its subsidiaries.
USE OF ESTIMATES
Key's accounting policies conform to generally accepted accounting principles
and prevailing practices within the financial services industry. In order to
prepare Key's consolidated financial statements and the related notes,
management must make certain estimates and judgments in determining the amounts
presented. If these estimates prove to be inaccurate, actual results could
differ from those reported.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of KeyCorp and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. Some previously reported results have been
reclassified to conform to current reporting practices.
BUSINESS COMBINATIONS
In a business combination accounted for as a pooling of interests, the assets,
liabilities and shareholders' equity of Key and the combined company are carried
forward at historical amounts. The results of operations are combined and
financial statements from prior periods are restated to give effect to the
combination.
When Key accounts for a business combination as a purchase, the results of
operations of the acquired company are combined with Key's results only from the
date of acquisition. The acquired company's net assets are recorded at fair
value at the date of acquisition. Purchase premiums and discounts are amortized
over the remaining lives of the related assets or liabilities. The difference
between the purchase price and the fair value of the net assets acquired is
recorded as goodwill.
STATEMENT OF CASH FLOW
Cash and due from banks are considered "cash and cash equivalents" for financial
reporting purposes.
SECURITIES AND TRADING ACCOUNT ASSETS
Key classifies its securities into three categories: held to maturity, trading
account assets and available for sale.
SECURITIES HELD TO MATURITY. Key has the intent and ability to hold these debt
securities until maturity. These securities are 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.
TRADING ACCOUNT ASSETS. These are debt and equity securities that are purchased
and held by Key with the intent of selling them in the near term. These
securities are reported at fair value ($768 million at December 31, 1999, and
$877 million at December 31, 1998) and included in "short-term investments" on
the balance sheet. Realized and unrealized gains and losses on trading account
assets are reported in "other income" on the income statement.
SECURITIES AVAILABLE FOR SALE. These are debt and equity securities that Key has
not classified as investment securities or trading account assets. Securities
available for sale are reported at fair value; unrealized gains and losses (net
of income taxes) are recorded in shareholders' equity as a component of
"accumulated other comprehensive (loss) income." Actual gains and losses on the
sales of these securities 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. Key defers certain nonrefundable
loan origination and commitment fees and the direct costs of originating or
acquiring loans. The net deferred amount is amortized over the estimated lives
of the related loans as an adjustment to the yield.
At December 31, 1999, loans held for sale include credit card receivables, as
well as mortgage, home equity and education loans. These loans 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. When a
loan is placed in the held for sale category, the amortization of deferred fees
and costs is discontinued. The remaining unamortized fees and costs are
recognized at the time the loan is sold.
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 using methods that
approximate the interest method, which amortizes unearned income to produce a
level yield on the lease. Net gains on sales of lease residuals are included in
"other income" on the income statement.
IMPAIRED AND OTHER NONACCRUAL LOANS
Key will generally stop accruing interest on a loan (i.e., designate the loan
"nonaccrual") when payment is 90 days or more past due, unless the loan is
well-secured and in the process of collection. Once a loan is designated as
nonaccrual, the interest accrued but not collected is charged against the
allowance for loan losses, and payments subsequently received are applied to
principal. However, if management believes that all principal and interest on a
nonaccrual loan ultimately are collectible, interest income may be recognized as
received.
Nonaccrual loans, other than smaller-balance homogeneous loans (i.e., loans to
finance residential mortgages, automobiles, etc.), are designated "impaired."
Impaired loans and other nonaccrual loans are returned to accrual status when
management determines that the borrower's performance has improved and that both
principal and interest are collectible. This generally requires a sustained
period (typically six months or more) of timely repayment performance.
[LOGO-KEYCORP] 57
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LOAN SECURITIZATIONS
On January 1, 1997, Key adopted Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 125"). SFAS 125 provides that certain
assets that are subject to prepayment and retained in connection with a
securitization must be accounted for like debt securities that are classified as
available for sale or as trading account assets, which are carried at fair
value. To satisfy this requirement, Key reclassified approximately $280 million
of retained interests in securitizations from "other assets" 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 a matching reduction of $43 million (after-tax) was made to "accumulated
other comprehensive (loss) income" in shareholders' equity.
Key realizes gains from loan securitizations when loans are sold for more than
their allocated carrying amount. In some cases, Key retains an interest in
securitized loans (also known as an "interest-only strip"). These retained
interests are subject to the rules prescribed by SFAS 125. Therefore, they
initially are recorded at an allocated carrying amount based on fair value. Fair
value is determined by computing the present value of estimated cash flows using
a discount rate considered commensurate with the risks associated with the cash
flows and the dates that Key expects to receive such cash flows. Key records net
gains and losses in "net loan securitization gains (losses)" on the income
statement. Income earned under servicing or administration arrangements is
recorded in "other income" on the income statement.
Key has a valuation committee that meets quarterly to ensure that all retained
interest-only strips are valued appropriately in the financial statements. The
committee reviews the historical performance of each strip and the assumptions
used to project future cash flows. Assumptions are revised if past performance
and future expectations dictate, and cash flows are recalculated based on the
revised assumptions.
The present value of these cash flows is referred to as the "interest-only strip
fair value." For strips classified as trading account assets, any increase or
decrease in the asset's fair value is recognized immediately in "net loan
securitization gains (losses)." For interest-only strips classified as
securities available for sale, impairment is indicated if the carrying amount of
the interest-only strip exceeds its fair value. A determination is made as to
whether this difference represents permanent or temporary impairment. Permanent
impairment is recognized in income. Temporary impairment is recorded in equity
as a component of "accumulated other comprehensive (loss) income." If the
interest-only strip fair value exceeds the carrying amount of the strip, the
write-up to fair value is similarly recorded in equity.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents management's estimate of the amount
that is necessary to absorb potential credit losses in the loan portfolio. Key
determines and maintains an appropriate allowance for loan losses based on a
comprehensive and consistently applied analysis of the loan portfolio, which is
conducted at least quarterly, and more often, if deemed necessary.
ALLOWANCE FOR IMPAIRED LOANS. When appropriate, an impaired loan is assigned a
specific allowance. Management calculates the extent of the impairment, which is
the carrying amount of the loan less the fair value of any existing collateral
(for a secured loan) or the estimated present value of future cash flows (for an
unsecured loan). When collateral value or expected cash flow does not justify
the carrying amount of a loan, the amount that management deems uncollectible
(the impaired amount) is charged against the allowance for loan losses. When
collateral value or other sources of repayment appear sufficient, but management
remains uncertain about whether the loan will be repaid in full, an amount is
specifically allocated in the allowance for loan losses.
ALLOWANCE FOR NONIMPAIRED LOANS AND BINDING COMMITMENTS. Management establishes
an allowance for nonimpaired loans and legally binding commitments by applying
Key's historical loss rates to existing loans with similar risk characteristics.
The results of this analysis are then adjusted based on management's review of
factors that may skew such rates, including:
- - changes in national and local economic and business conditions;
- - changes in experience, ability and depth of lending management and staff or in
lending policies or in the mix and volume of the loan portfolio;
- - the trend of the volume of past due, nonaccrual and other loans; and
- - the effect of external factors, such as competition, legal developments and
regulatory guidelines.
In addition, management generally maintains an unallocated allowance in light of
the subjectivity inherent in estimating potential credit losses.
As of December 31, 1999, Key has not detected any meaningful credit quality
issues arising from client difficulties with Year 2000 conversions that would
result in an adjustment to the allowance for loan losses. Nonetheless, it is
possible that such issues may arise over an extended period of time. Key will
continue to monitor its loan portfolio for situations that might require special
attention.
PREMISES AND EQUIPMENT
Premises and equipment, including leasehold improvements, are stated at cost
less accumulated depreciation and amortization. Management determines
depreciation of premises and equipment using the straight-line method over the
estimated useful lives of the particular 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 $922
million at December 31, 1999, and $905 million at December 31, 1998.
INTANGIBLE ASSETS
"Goodwill" represents the amount by which the cost of net assets acquired
exceeds their fair value. Goodwill is amortized using the straight-line method
over the period (up to 25 years) that management expects the acquired assets to
have value.
"Other intangibles" primarily represent the net present value of the future
economic benefits to be derived from the purchase of core deposits. Other
intangibles are amortized on either an accelerated or straight-line basis over
periods ranging from 5 to 15 years.
Accumulated amortization on goodwill and other intangible assets was $566
million at December 31, 1999, and $467 million at December 31, 1998. Key reviews
goodwill and other intangibles for impairment when impairment indicators, such
as significant changes in market conditions, changes in product mix or
management focus, and a potential sale or disposition, arise. In most instances,
Key will use the undiscounted cash flow method, but the market value method is
used if Key is considering a sale or disposition.
INTERNALLY DEVELOPED SOFTWARE
Key relies on both company personnel and independent contractors to plan,
develop, install, customize and enhance computer systems applications that
58 [LOGO-KEYCORP]
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
support corporate and administrative operations. Software development costs,
such as those related to program coding, testing, configuration and installation
are capitalized and included in "other assets" on the balance sheet. The
resulting asset ($286 million at December 31, 1999, and $368 million at December
31, 1998) is amortized using the straight-line method over its expected useful
life (not to exceed five years). Costs incurred during the planning and
post-development phase of an internal software project are expensed as incurred.
Key's Internally Developed Software Valuation Committee reviews internally
developed software for impairment quarterly, and more often if deemed necessary.
The committee reviews all significant projects to evaluate software performance
and usage relative to expectations. Software that is considered impaired is
written down to its fair value. When management decides to replace unimpaired
software, amortization of such software is accelerated to the expected
replacement date.
DERIVATIVES USED FOR ASSET AND LIABILITY
MANAGEMENT PURPOSES
Key uses derivatives known as interest rate swaps and caps to manage interest
rate risk. These instruments modify the repricing or maturity characteristics of
specified on-balance sheet assets and liabilities. For example, an interest rate
cap tied to variable rate debt would effectively prevent the interest rate on
that debt from rising above a specified point. To qualify for hedge accounting
treatment, a derivative must be effective at reducing the risk associated with
the exposure being managed and must be designated as a risk management
transaction at the inception of the derivative contract. The test for whether an
instrument effectively reduces risk is whether there is a high degree of
interest rate correlation between the derivative and the asset or liability
being managed, both at inception and over the life of the derivative contract.
There are several rules that govern the hedge accounting treatment of
derivatives:
- - Changes in fair value of a derivative are not included in the financial
statements.
- - The net interest income or expense associated with a derivative is accrued
and recognized as an adjustment to the interest income or interest expense of
the asset or liability being managed.
- - The interest receivable or payable from a derivative contract is recorded in
"other assets" or "other liabilities" on the balance sheet.
- - Premiums paid for a derivative 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 a
derivative contract are deferred as an adjustment to the carrying amount of
the related asset or liability.
- - Deferred gains or losses from early terminations are amortized using the
straight-line method over the shorter of the projected remaining life of the
derivative contract on the date of termination or the projected remaining
life of the underlying asset or liability on such date.
DERIVATIVES USED FOR TRADING PURPOSES
Derivatives that are not used for asset and liability management purposes are
used for trading purposes. Key enters into contracts for such derivatives either
to make a market for clients or for proprietary trading purposes. Derivatives
used for trading purposes 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. Fair value
is determined by estimating the present value of future cash flows. Derivatives
with a positive fair value are included in "other assets" on the balance sheet,
and derivatives with a negative fair value are included in "other liabilities."
Changes in fair value (including payments and receipts) are recorded in
"investment banking and capital markets income" on the income statement.
EMPLOYEE STOCK OPTIONS
Key accounts for stock options issued to employees using the intrinsic value
method. This method requires that compensation expense be recognized to the
extent the fair value of the stock exceeds the exercise price of the option at
the grant date. Employee stock options generally have exercise prices that are
equal to or greater than the fair value of Key's common shares at the grant
date. Therefore, Key does not recognize compensation expense when options are
granted. In the case of options with features tied to Key's financial
performance, Key recognizes compensation expense after the grant date when the
fair value of the stock exceeds the exercise price and it is highly probable
that the financial performance measures will be met.
MARKETING COSTS
Key expenses all marketing-related costs, including advertising costs, as
incurred.
RESTRUCTURING CHARGES
Restructuring charges may be recorded by Key in connection with certain events
or transactions including business combinations, changes in Key's strategic
plan, changing business conditions that may result in a decrease or exit from
affected businesses, or other factors. Such charges typically result from the
consolidation or relocation of operations, or the disposition or abandonment of
operations or productive assets. Any of these events could result in a
significant downsizing of the workforce.
To qualify as restructuring charges, costs must be incremental and incurred as a
direct result of the restructuring event or transaction. Restructuring charges
do not include costs that are associated with or incurred to benefit future
periods. Among the costs typically included in restructuring charges and often
associated with the term "restructuring" are those related to:
- - employee severance and termination benefits;
- - the consolidation of operations facilities; and
- - losses resulting from the impairment or disposal of assets.
ACCOUNTING PRONOUNCEMENTS ADOPTED IN 1999
RETAINED INTERESTS FROM SECURITIZATIONS. As of January 1, 1999, Key adopted
Statement of Financial Accounting Standards No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise" ("SFAS 134"). SFAS 134 requires
Key to classify mortgage-backed securities or other retained interests resulting
from mortgage loan securitizations according to Key's ability and intent to sell
or hold those assets. The statement conforms the accounting for securities and
uncertificated interests retained after the securitization of mortgage loans to
the accounting for securities and uncertificated interests retained after the
securitization of other types of assets by non-mortgage banking enterprises.
Key has reclassified retained interests from mortgage loan securitizations as
either "available for sale" or "trading securities." Because Key was
[LOGO-KEYCORP] 59
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
following the procedures prescribed by SFAS 134 before formally adopting the
standard, the accounting change had minimal impact on Key's financial condition
and results of operations.
COSTS OF COMPUTER SOFTWARE. As of January 1, 1999, Key adopted Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"). This statement provides guidance on
matters including the characteristics to be considered in identifying
internal-use software and the circumstances under which related costs should be
expensed or capitalized. The provisions of SOP 98-1 are substantially consistent
with the accounting policy that Key already followed for internally developed
software. As a result, adoption did not have a material impact on Key's
financial condition or results of operations.
ACCOUNTING PRONOUNCEMENTS PENDING ADOPTION
DERIVATIVES AND HEDGING ACTIVITIES. In July 1999, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 137,
"Deferral of the Effective Date of SFAS 133." This new statement delays the
effective date of SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities," until fiscal years beginning after June 15, 2000.
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively called "derivatives") and for hedging activities. SFAS
133 requires that all derivatives be recognized on the balance sheet at fair
value. Depending on the nature of the hedge, and the extent to which it is
effective, the changes in fair value of the derivative will either be offset
against the change in fair value of the hedged item (which also is recognized in
earnings) or recorded in comprehensive income and subsequently recognized in
earnings in the period the hedged item affects earnings. The portion of a hedge
that is deemed ineffective and all changes in the fair value of derivatives not
designated as hedges will be recognized immediately in earnings.
Key will adopt the provisions of SFAS 133 as of January 1, 2001. Management is
currently reviewing SFAS 133 to determine the extent to which the statement will
alter Key's use of certain derivatives in the future and the impact on Key's
financial condition and results of operations.
2. EARNINGS PER COMMON SHARE
The computation of Key's basic and diluted earnings per common share is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
dollars in millions, except per share amounts 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME $1,107 $996 $919
====== ==== ====
- --------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES
Weighted average common shares outstanding (000) 448,168 441,895 439,042
Potential addition to common shares (000)(a) 4,195 5,542 5,502
- --------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares and potential
common shares outstanding (000) 452,363 447,437 444,544
======= ======= =======
- --------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE
Net income per common share $2.47 $2.25 $2.09
Net income per common share-- assuming dilution 2.45 2.23 2.07
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents the effect of dilutive common stock options.
3. MERGERS, ACQUISITIONS AND DIVESTITURES
COMPLETED MERGERS AND ACQUISITIONS
MCDONALD & COMPANY INVESTMENTS, INC.
On October 23, 1998, Key acquired McDonald & Company Investments, Inc., a
full-service investment banking and securities brokerage company headquartered
in Cleveland, Ohio. McDonald had assets of approximately $776 million at the
time of the transaction.
To acquire McDonald, Key issued 19,337,159 common shares, with a value of
approximately $581 million. The transaction was structured as a tax-free merger
and was accounted for as a purchase. Key recorded goodwill of $444 million,
which is being amortized using the straight-line method over a period of 25
years.
Key established a retention program under which certain McDonald employees
received stock options for approximately 3.3 million Key common shares. The
options will vest over a three-year period. In addition, approximately $30
million in cash may be paid to certain McDonald employees over a three-year
period.
CHAMPION MORTGAGE CO., INC.
On August 29, 1997, Key acquired Champion Mortgage Co., Inc., a home equity
finance company headquartered in Parsippany, New Jersey. Champion is now a
wholly owned subsidiary of Key Bank USA, National Association, which is a wholly
owned subsidiary of KeyCorp.
To acquire Champion, Key exchanged 3,336,118 pre-split common shares, with a
value of approximately $200 million, for all of the outstanding shares of
Champion common stock. If Champion achieves certain volume and profitability
performance targets over the three-year period following the acquisition date,
Champion's former shareholders may receive up to an additional $100 million in
Key common shares.
The transaction was structured as a tax-free exchange and was accounted for as a
purchase. Key recorded goodwill of $195 million, which is being amortized using
the straight-line method over a period of 25 years.
LEASETEC CORPORATION
On July 1, 1997, Key acquired an 80% interest (with an option to purchase the
remaining 20%) in Leasetec Corporation, an equipment leasing company
headquartered in Boulder, Colorado. At the time of the transaction,
60 [LOGO-KEYCORP]
<PAGE> 37
NOTES TO CONDOLIDATED FINANCIAL STATEMENTS
Leastec had assets of approximately $1.1 billion and maintained operations in
the United States and overseas. The transaction was accounted for as a purchase.
Key recorded goodwill of $126 million, which is being amortized using the
straight-line method over a period of 25 years.
Key acquired the remaining 20% interest in Leasetec on June 26, 1998. This
transaction created additional goodwill of $26 million, which is being amortized
over the remainder of the 25-year period that began July 1, 1997. Due to a
confidentiality clause in the purchase agreement, the terms, which are not
material, have not been disclosed publicly.
COMPLETED DIVESTITURES
COMPAQ CAPITAL EUROPE LLC AND COMPAQ CAPITAL ASIA PACIFIC LLC
On July 28, 1999, Key sold its 50% interests in Compaq Capital Europe LLC and
Compaq Capital Asia Pacific LLC to Compaq Capital Corporation. Key and Compaq
formed these companies in 1998 to provide customized equipment leasing and
financing programs to Compaq's clients in the United Kingdom, Europe and Asia.
Key recognized a gain of $13 million ($8 million after tax), which is included
in "gains from other divestitures" on the income statement.
ELECTRONIC PAYMENT SERVICES, INC.
On February 28, 1999, Electronic Payment Services, Inc., an electronic funds
transfer processor in which Key held a 20% interest, merged with a wholly owned
subsidiary of Concord EFS, Inc. Key received 5,931,825 shares of Concord EFS in
exchange for its Electronic Payment Services stock, and recognized a gain of
$134 million ($85 million after tax), which is included in "gains from other
divestitures" on the income statement. On June 17, 1999, Key sold the Concord
EFS shares and recognized a gain of $15 million ($9 million after tax), which is
included in "net securities gains" on the income statement.
KEY MERCHANT SERVICES, LLC
On January 21, 1998, Key sold a 51% interest in Key Merchant Services, LLC, a
wholly owned subsidiary formed to provide merchant credit card processing
services, to NOVA Information Systems, Inc. Key recognized a $23 million gain
($14 million after tax) at the time of closing.
Under the terms of the agreement with NOVA, Key was entitled
to receive additional payments if Key Merchant Services achieved certain
revenue-related performance targets. These additional payments created a gain of
$27 million ($17 million after tax) in the fourth quarter of 1998 and a final
gain of $14 million ($9 million after tax) during the first quarter of 1999.
These gains are included in "gains from other divestitures" on the income
statement. Due to a confidentiality clause in the agreement, the terms, which
are not material, have not been disclosed.
BRANCH DIVESTITURES
On October 18, 1999, Key sold its Long Island franchise, which included 28
KeyCenters with $1.3 billion in deposits and $505 million in loans. This
transaction resulted in a gain of $194 million ($122 million after tax). During
1998, Key sold 46 KeyCenters with deposits of $658 million, and recorded
aggregate gains of $39 million ($22 million after tax). During 1997, Key sold 76
KeyCenters (not including those involved in the sale of KeyBank Wyoming) with
deposits of $1.3 billion, and recorded aggregate gains of $98 million ($62
million after tax). All of the above gains are included in "gains from branch
divestitures" on the income statement.
On July 14, 1997, Key sold KeyBank National Association (Wyoming), its Wyoming
bank subsidiary, which had 28 branches (also known as KeyCenters). KeyBank
Wyoming had assets of $1.1 billion and deposits of $931 million at the time of
the transaction. Key recognized a gain of $53 million ($35 million after tax),
which is included in "gains from branch divestitures" on the income statement.
TRANSACTION PENDING AT DECEMBER 31, 1999
(UNAUDITED)
On January 31, 2000, Key sold its credit card portfolio of $1.3 billion in
receivables and nearly 600,000 active VISA and MasterCard accounts to Associates
National Bank (Delaware). Key recognized a gain of $332 million ($209 million
after tax).
4. LINE OF BUSINESS RESULTS
Key's four major lines of business are Key Retail Banking, Key Specialty
Finance, Key Corporate Capital and Key Capital Partners.
KEY RETAIL BANKING
Key Retail Banking delivers a complete line of branch-based financial products
and services to small businesses and consumers. These products and services are
delivered through 936 KeyCenters, a 24-hour telephone banking call center
services group, 2,516 ATMs that access 13 different networks (resulting in one
of the largest ATM networks in the United States) and a core team of
relationship management professionals.
KEY SPECIALTY FINANCE
Key Specialty Finance provides indirect, non-branch-based consumer loan
products, including automobile loans and leases, home equity loans, education
loans, and marine and recreational vehicle loans. As of December 31, 1999, based
on the volume of loans generated, Key Specialty Finance was one of the nation's
leading providers of financing for education loans, automobile loans and leases,
and purchases of marine and recreational vehicles.
KEY CORPORATE CAPITAL
Key Corporate Capital offers a complete range of financing, transaction
processing and financial advisory services to corporations nationwide, and
operates one of the largest bank-affiliated equipment leasing companies in the
world, with operations in the United States, Europe and Asia. Based on total
transaction volume, Key Corporate Capital is also one of the leading cash
management providers in the country.
Key Corporate Capital's business units are organized around six specialized
industry client segments: commercial banking, commercial real estate, lease
financing, structured finance, healthcare and media/telecommunications. These
targeted client segments can receive a number of specialized services, including
international banking, cash management and corporate finance advisory services.
Key Corporate Capital also offers investment banking, capital markets, 401(k)
and trust custody products in cooperation with Key Capital Partners.
KEY CAPITAL PARTNERS
Key Capital Partners provides asset management, wealth management, private
banking, brokerage, investment banking, capital markets and insurance expertise.
This line of business, which generates a substantial
[LOGO-KEYCORP] 61
<PAGE> 38
NOTES TO CONSOLIDATED FINAANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, KEY RETAIL BANKING KEY SPECIALTY FINANCE KEY CORPORATE CAPITAL
------------------------ -------------------------- --------------------------
dollars in millions 1999 1998 1997 1999 1998 1997 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Net interest income
(taxable equivalent) $ 1,227 $ 1,202 $ 1,373 $ 662 $ 601 $ 557 $ 1,027 $ 937 $ 850
Noninterest income 327 313 310 190 139 87 208 145 113
Revenue sharing(a) 64 84 51 4 3 4 143 114 80
- -------------------------------------------------------------------------------------------------------------------------------
Total revenue(b) 1,618 1,599 1,734 856 743 648 1,378 1,196 1,043
Provision for loan losses 61 60 61 182 183 207 112 75 67
Depreciation and amortization expense 140 131 164 62 53 40 64 53 25
Other noninterest expense 825 848 847 338 295 271 426 399 402
Expense sharing(a) 46 57 38 -- -- -- 80 64 46
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes
(taxable equivalent) 546 503 624 274 212 130 696 605 503
Allocated income taxes and taxable
equivalent adjustments 202 184 250 109 86 46 262 227 185
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 344 $ 319 $ 374 $ 165 $ 126 $ 84 $ 434 $ 378 $ 318
======= ======= ======= ======= ======= ======= ======= ======= =======
Percent of consolidated
net income (loss) 31% 32% 41% 15% 13% 9% 39% 38% 35%
- -------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES
Loans $10,006 $ 9,771 $10,012 $15,688 $14,605 $13,170 $29,206 $25,224 $20,390
Total assets(b) 11,310 11,094 11,146 16,774 15,623 13,925 30,576 26,225 21,462
Deposits 32,046 33,357 35,283 130 123 124 2,866 2,765 2,832
- -------------------------------------------------------------------------------------------------------------------------------
OTHER FINANCIAL DATA
Expenditures for additions
to long-lived assets(b) $ 15 $ 71 $ 111 $ 24 $ 18 $ 208 $ 20 $ 51 $ 144
Efficiency ratio(f) 62.48% 64.79% 60.50% 46.73% 46.84% 45.47% 41.76% 43.14% 45.35%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents the assignment of Key Capital Partners' revenue and expense to
the lines of business principally responsible for maintaining the
relationships with the clients that used Key Capital Partners' products and
services.
(b) Substantially all revenue generated by Key's major lines of business is
derived from clients resident in the United States. Substantially all
long-lived assets, including premises and equipment, capitalized software
and goodwill, held by Key's major lines of business are located in the
United States.
(c) "Reconciling items" reflect certain nonrecurring items (which are included
in noninterest income) and charges related to unallocated nonearning assets
of corporate support functions (which are included in net interest income
and allocated to the business segments through noninterest expense).
Noninterest income includes gains of $357 million ($225 million after tax)
in 1999, $89 million ($53 million after tax) in 1998, and $151 million ($97
million after tax) in 1997 from certain divestitures. Noninterest income in
1999 also includes a nonrecurring charge of $11 million ($7 million after
tax).
amount of Key's fee income, comprises three major business groups. One group,
operating under the name McDonald Investments Inc., includes retail and
institutional brokerage, equity and fixed income trading and underwriting,
investment banking, capital markets products, loan syndication and trading,
public finance and clearing operations. The second group, referred to as Key
Asset Management, includes asset management, mutual funds, institutional asset
services, wealth management and insurance. The third group, known as Key
Principal Partners, includes equity capital, mezzanine finance and alliance
funds. The future growth and success of Key Capital Partners depend heavily on
its ability to capitalize on the corporate and retail banking distribution
channels and client relationships that other Key lines of business have already
developed.
The table which spans pages 62 and 63 shows selected financial data
for each major line of business for the years ended December 31, 1999, 1998 and
1997. The financial information was derived from the internal profitability
reporting system that management uses to monitor and manage Key's financial
performance. The selected financial data are based on internal accounting
policies designed to ensure that results are compiled on a consistent basis and
reflect the underlying economics of Key's four major businesses. In accordance
with these policies:
- - 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 funds transfer pricing
is included in the "Treasury and Other" columns of the table.
- - Indirect expenses, such as computer servicing costs and corporate
overhead, were allocated based on the extent to which each line of
business actually used the service.
- - The provision for loan losses was allocated among the lines of business
based primarily upon their actual net charge-offs, adjusted for loan growth
and changes in risk profile. The level of the consolidated provision is
based upon the methodology that Key uses to estimate its consolidated
allowance for loan losses. This methodology is described in Note 1
("Summary of significant accounting policies") under the heading "Allowance
for loan losses" on page 58.
- - 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) and a blended state income tax
rate (net of the Federal income tax benefit) of 2% for the periods
presented.
- - Capital was assigned to each line of business based on management's
assessment of economic risk factors (primarily credit, operating and market
risk).
Developing and applying the methodologies that management follows to allocate
items among Key's lines of business is a dynamic process. Accordingly, financial
results may be revised periodically to reflect accounting enhancements, changes
in the risk profile of a particular segment of Key's business or changes in
Key's structure. In fact, the financial data for all three years presented in
the above table reflects revisions in Key's organizational structure and funds
transfer pricing methodology that occurred during 1999. Primary among the
structural changes were the reclassification of five businesses (public sector,
retail brokerage, wealth management, private banking and franchise trust) from
Key Retail Banking to Key Capital Partners; the reclassification of commercial
banking from Key Retail Banking to Key Corporate Capital; and the
reclassification of institutional asset services from Key Corporate Capital to
Key Capital Partners. Management also enhanced funds transfer
62 [LOGO-KEYCORP]
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
KEY CAPITAL PARTNERS TREASURY AND OTHER TOTAL SEGMENTS
------------------------ ---------------------- ---------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Net interest income
(taxable equivalent) $ 202 $ 159 $ 155 $(123) $(23) $ 26 $2,995 $2,876 $2,961
Noninterest income 1,033 724 493 169 158 161 1,927 1,479 1,164
Revenue sharing(a) (211) (201) (135) -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
Total revenue(b) 1,024 682 513 46 135 187 4,922 4,355 4,125
Provision for loan losses 4 3 2 5 3 8 364 324 345
Depreciation and amortization expense 100 65 32 24 13 10 390 315 271
Other noninterest expense 863 561 477 127 121 132 2,579 2,224 2,129
Expense sharing(a) (126) (121) (84) -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes
(taxable equivalent) 183 174 86 (110) (2) 37 1,589 1,492 1,380
Allocated income taxes and taxable
equivalent adjustments 76 72 31 (81) (40) (16) 568 529 496
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 107 $ 102 $ 55 $ (29) $ 38 $ 53 $1,021 $ 963 $ 884
====== ====== ===== ===== ==== ==== ====== ====== ======
Percent of consolidated
net income (loss) 10% 10% 6% (3)% 4% 6% 92% 97% 97%
- -------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES
Loans $4,449 $3,557 $2,487 $ 2,839 $ 4,010 $ 5,168 $62,188 $57,167 $51,227
Total assets(b) 8,443 6,376 4,277 11,618 13,520 15,595 78,721 72,838 66,405
Deposits 3,222 2,783 2,466 3,748 2,196 2,563 42,012 41,224 43,268
- -------------------------------------------------------------------------------------------------------------------
OTHER FINANCIAL DATA
Expenditures for additions
to long-lived assets(b) $72 $420 $1 $21 $2 -- $152 $562 $464
Efficiency ratio(f) 81.74% 74.05% 82.46% N/M N/M N/M 60.65% 58.42% 57.64%
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
RECONCILING ITEMS KEYCORP CONSOLIDATED
------------------------------- --------------------
1999 1998 1997 1999 1998 1997
---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Net interest income
(taxable equivalent) $(176) $ (158) $(172) $2,819 $ 2,718 $2,789
Noninterest income 367 96 142 2,294 1,575 1,306
Revenue sharing(a) -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------
Total revenue(b) 191(c) (62)(c) (30)(c) 5,113 4,293 4,095
Provision for loan losses (16) (27) (25) 348 297 320
Depreciation and amortization expense 6 13 13 396 328 284
Other noninterest expense 74(d) (69) (27)(d) 2,653 2,155 2,102
Expense sharing(a) -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------
Income before income taxes
(taxable equivalent) 127 21 9 1,716 1,513 1,389
Allocated income taxes and taxable
equivalent adjustments 41 (12) (26) 609 517 470
- ------------------------------------------------------------------------------------------------
Net income (loss) $ 86 $ 33 $ 35 $1,107 $ 996 $ 919
==== ==== ===== ====== ====== ======
Percent of consolidated
net income (loss) 8% 3% 3% 100% 100% 100%
- ---------------------------------------------------------------------------------------------------
AVERAGE BALANCES
Loans $ 213 $ 255 $ 188 $62,401 $57,422 $51,415
Total assets(b) 2,225(e) 2,443(e) 2,545(e) 80,946 75,281 68,950
Deposits (32) 48 505 41,980 41,272 43,773
- --------------------------------------------------------------------------------------------------
OTHER FINANCIAL DATA
Expenditures for additions
to long-lived assets(b) $87 $138 $171 $239 $ 700 $635
Efficiency ratio(f) N/M N/M N/M 59.43% 58.49% 58.21%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(d) Noninterest expense in 1999 includes $152 million ($96 million after tax)
of nonrecurring charges recorded in connection with strategic actions being
taken to improve Key's operating efficiency and profitability, including
restructuring charges of $98 million ($62 million after tax). Noninterest
expense for 1999 also includes special contributions of $23 million ($15
million after tax) made to the charitable foundation that Key sponsors, and
$42 million ($26 million after tax) of various other nonrecurring charges.
Noninterest expense for 1997 includes a charge of $50 million ($33 million
after tax) related to the disposal of excess real estate.
(e) Total assets represents primarily the unallocated portion of nonearning
assets of corporate support functions.
(f) This ratio, which measures the extent to which recurring revenues are
absorbed by operating expenses, is calculated as follows: noninterest
expense (excluding certain nonrecurring charges) divided by the sum of
taxable-equivalent net interest income and noninterest income (excluding
net securities transactions, gains from certain divestitures and certain
nonrecurring charges).
TE = Taxable Equivalent
N/M = Not Meaningful
pricing by refining the methodology applied to residential mortgage loans,
certain fixed rate commercial loans, leases, certain deposit products with
indeterminate maturities and medium-term notes. In addition, charges related to
unallocated nonearning assets of corporate support functions are now allocated
to the business segments through noninterest expense. Also, the financial impact
of the Treasury function is now included under the column entitled, "Treasury
and Other," as opposed to being allocated to the major business lines.
There is no authoritative guidance for "management accounting" -- the way that
management uses its judgment and experience to guide reporting decisions --
similar to generally accepted accounting principles for financial accounting.
Consequently, the results that Key reports cannot necessarily be compared with
those presented by other companies.
5. SECURITIES
The amortized cost, unrealized gains and losses, and approximate fair value of
Key's securities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
in millions Cost Gains Losses Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Treasury, agencies and corporations $ 128 -- $ 1 $ 127
States and political subdivisions 53 -- -- 53
Collateralized mortgage obligations 4,426 -- 189 4,237
Other mortgage-backed securities 1,705 $ 6 33 1,678
Retained interests in securitizations 340 3 -- 343
Other securities 223 4 -- 227
- --------------------------------------------------------------------------------------------
Total securities available for sale $6,875 $ 13 $ 223 $6,665
====== ====== ====== ======
INVESTMENT SECURITIES
States and political subdivisions $ 447 $ 12 -- $ 459
Other securities 539 -- -- 539
- --------------------------------------------------------------------------------------------
Total investment securities $ 986 $ 12 -- $ 998
====== ====== ====== ======
- --------------------------------------------------------------------------------------------
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
IN MILLIONS COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Treasury, agencies and corporations $ 420 $ 2 -- $ 422
States and political subdivisions 65 2 -- 67
Collateralized mortgage obligations 2,191 21 $ 1 2,211
Other mortgage-backed securities 2,123 34 6 2,151
Retained interests in securitizations 345 -- 17 328
Other securities 84 16 1 99
- --------------------------------------------------------------------------------------------
Total securities available for sale $5,228 $ 75 $ 25 $5,278
====== ====== ====== ======
INVESTMENT SECURITIES
States and political subdivisions $ 631 $ 28 -- $ 659
Other securities 345 -- -- 345
- --------------------------------------------------------------------------------------------
Total investment securities $ 976 $ 28 -- $1,004
====== ====== ====== ======
- --------------------------------------------------------------------------------------------
</TABLE>
[LOGO-KEYCORP] 63
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
When Key retains an interest in securitized loans, Key bears the risk that the
loans will be prepaid (which results in less interest income) or not paid at
all. Key's retained interests (which include both certificated and
uncertificated interests) are accounted for like debt securities that are
classified as available for sale or as trading account assets.
Realized gains and losses related to securities available for sale were as
follows:
YEAR ENDED DECEMBER 31,
in millions 1999 1998 1997
- --------------------------------------------------------------------------
Realized gains $42 $18 $20
Realized losses 13 9 19
- --------------------------------------------------------------------------
Net securities gains $29 $ 9 $ 1
=== === ===
- --------------------------------------------------------------------------
At December 31, 1999, securities available for sale and investment securities
with an aggregate amortized cost of approximately $6 billion were pledged to
secure public and trust deposits, securities sold under repurchase agreements,
and for other purposes required or permitted by law.
The following table shows securities available for sale and investment secu-
rities by remaining contractual maturity. Collateralized mortgage obligations,
other mortgage-backed securities and retained interests in securitizations are
presented based on their expected average lives.
SECURITIES INVESTMENT
AVAILABLE FOR SALE SECURITIES
------------------ ------------------
DECEMBER 31,1999 AMORTIZED FAIR AMORTIZED FAIR
in millions COST VALUE COST VALUE
- --------------------------------------------------------------------------------
Due in one year or less $ 777 $ 769 $ 127 $ 126
Due after one through five years 4,522 4,416 213 220
Due after five through ten years 1,096 1,045 93 98
Due after ten years 480 435 553 554
- --------------------------------------------------------------------------------
Total $6,875 $6,665 $ 986 $ 998
====== ====== ====== ======
- --------------------------------------------------------------------------------
6. LOANS
Key's loans by category are summarized as follows:
DECEMBER 31,
in millions 1999 1998
- --------------------------------------------------------------------------------
Commercial, financial and agricultural $18,497 $17,038
Real estate - commercial mortgage 6,836 7,309
Real estate - construction 4,528 3,450
Commercial lease financing 6,665 5,613
- --------------------------------------------------------------------------------
Total commercial loans 36,526 33,410
Real estate - residential mortgage 4,333 5,083
Home equity 7,602 7,301
Credit card -- 1,425
Consumer - direct 2,565 2,342
Consumer - indirect lease financing 3,195 2,580
Consumer - indirect other 6,398 7,009
- --------------------------------------------------------------------------------
Total consumer loans 24,093 25,740
Real estate - commercial mortgage 146 87
Real estate - residential mortgage 48 110
Home equity 371 --
Credit card 1,362 --
Education 1,676 2,665
- --------------------------------------------------------------------------------
Total loans held for sale 3,603 2,862
- --------------------------------------------------------------------------------
Total loans $64,222 $62,012
======= =======
- --------------------------------------------------------------------------------
Key uses portfolio interest rate swaps to manage interest rate risk; these swaps
modify the repricing and maturity characteristics of certain loans. For more
information about the notional amount, fair value, and weighted average rate of
such swaps at December 31, 1999, see Note 18 ("Financial Instruments with
Off-Balance Sheet Risk"), which begins on page 72.
Commercial and consumer lease financing in the preceding table include contracts
that represent more than one type of leasing arrangement. The predominant form
is direct financing leases. The composition of the net investment in direct
financing leases included in loans is as follows:
DECEMBER 31,
in millions 1999 1998
- --------------------------------------------------------------------------------
Direct financing lease receivable $ 8,025 $ 5,293
Unearned income (1,130) (1,020)
Unguaranteed residual value 776 2,085
Deferred fees and costs 83 76
- --------------------------------------------------------------------------------
Net investment in direct financing leases $ 7,754 $ 6,434
======= =======
- --------------------------------------------------------------------------------
Minimum future lease payments to be received are as follows: 2000 - $1,718
million; 2001 - $1,833 million; 2002 - $1,741 million; 2003 - $910 million; 2004
- - $596 million; and all subsequent years - $1,227 million.
Changes in the allowance for loan losses are summarized as follows:
YEAR ENDED DECEMBER 31,
in millions 1999 1998 1997
- --------------------------------------------------------------------------------
Balance at beginning of year $ 900 $ 900 $ 870
Charge-offs (420) (384) (378)
Recoveries 102 87 85
- --------------------------------------------------------------------------------
Net charge-offs (318) (297) (293)
Provision for loan losses 348 297 320
Allowance acquired,net -- -- 3
- --------------------------------------------------------------------------------
Balance at end of year $ 930 $ 900 $ 900
===== ===== =====
- --------------------------------------------------------------------------------
64 KEYCORP AND SUBSIDIARIES
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. IMPAIRED LOANS AND OTHER NONPERFORMING ASSETS
Key's nonperforming assets were as follows:
DECEMBER 31,
in millions 1999 1998
- -------------------------------------------------------------------------------
Impaired loans $ 246 $ 193
Other nonaccrual loans 161 172
- -------------------------------------------------------------------------------
Total nonperforming loans 407 365
OREO 27 56
Allowance for OREO losses (3) (18)
- -------------------------------------------------------------------------------
OREO,net of allowance 24 38
Other nonperforming assets 2 1
- -------------------------------------------------------------------------------
Total nonperforming assets $ 433 $ 404
===== =====
- -------------------------------------------------------------------------------
At December 31, 1999, impaired loans totaled $246 million. This amount includes
$153 million of impaired loans with a specifically allocated allowance for loan
losses of $63 million and $93 million of impaired loans that are carried at
their estimated fair value without a specifically allocated allowance. At the
end of 1998, impaired loans totaled $193 million; $95 million of those loans had
a specifically allocated allowance of $42 million and $98 million were carried
at their estimated fair value. The average investment in impaired loans for
1999 was $216 million, and for 1998 was $194 million.
At December 31, 1999, Key did not have any significant commitments to lend
additional funds to borrowers with restructured loans or loans on nonaccrual
status.
Key evaluates most impaired loans individually using the process described under
the heading "Allowance for Loan Losses," on page 58. However, Key does not
perform a specific impairment valuation for smaller-balance, homogeneous,
nonaccrual loans (shown in the preceding table as "Other nonaccrual loans").
Generally, this portfolio includes loans to finance residential mortgages,
automobiles, recreational vehicles, boats and mobile homes. Management applies
historical loss experience rates to these loans, adjusted based on assessments
of emerging credit trends and other factors, and then allocates a portion of the
allowance for loan losses to each loan type.
The following table shows the amount by which loans classified as nonperforming
at December 31 reduced Key's expected interest income.
YEAR ENDED DECEMBER 31,
in millions 1999 1998 1997
- --------------------------------------------------------------------------------
Interest income receivable under
original terms $ 38 $ 32 $ 36
Less: Interest income recorded during
the year (15) (12) (13)
- --------------------------------------------------------------------------------
Net reduction to interest income $ 23 $ 20 $ 23
==== ==== ====
- --------------------------------------------------------------------------------
8. SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
dollars in millions 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
FEDERAL FUNDS PURCHASED
<S> <C> <C> <C>
Balance at year end $1,883 $1,910 $4,058
Average during the year 2,254 4,022 4,036
Maximum month-end balance 3,712 5,678 5,079
Weighted average rate during the year 5.01% 5.52% 5.57%
Weighted average rate at December 31 5.54 4.99 5.65
- ------------------------------------------------------------------------------------------------------------------------------------
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Balance at year end $2,294 $2,558 $2,921
Average during the year 2,602 2,613 2,906
Maximum month-end balance 2,969 2,813 3,191
Weighted average rate during the year 4.11% 4.59% 4.61%
Weighted average rate at December 31 4.45 3.76 4.48
- ------------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM BANK NOTES
Balance at year end $6,379 $7,290 $4,730
Average during the year 5,633 6,705 4,090
Maximum month-end balance 7,174 7,790 4,730
Weighted average rate during the year 5.54% 5.41% 5.50%
Weighted average rate at December 31 6.46 5.17 5.85
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER SHORT-TERM BORROWINGS
Balance at year end $2,060 $2,438 $1,237
Average during the year 2,279 1,269 651
Maximum month-end balance 3,452 3,105 1,517
Weighted average rate during the year 4.04% 5.99% 6.30%
Weighted average rate at December 31 3.43 5.54 5.40
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
Key uses portfolio interest rate swaps and caps to manage interest rate risk; these instruments modify the repricing and
maturity characteristics of certain short-term borrowings. For more information, see Note 18 ("Financial Instruments
with Off-Balance Sheet Risk"), which begins on page 72.
</TABLE>
KEYCORP AND SUBSIDIARIES 65
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Key has several programs that support short-term financing needs.
BANK NOTE PROGRAM. This program provides for the issuance of up to $20.0 billion
($19.0 billion by KeyBank National Association and $1.0 billion by Key Bank USA,
National Association) of bank notes with original maturities of 30 days to 30
years. At December 31, 1999, the amount of bank notes available for issuance
under the program was $8.4 billion.
EURONOTE PROGRAM. KeyCorp, KeyBank National Association and Key Bank USA,
National Association may issue both long- and short-term debt of up to $7.0
billion to non-U.S. investors. This facility had $2.4 billion of long-term
borrowings outstanding as of December 31, 1999.
COMMERCIAL PAPER AND REVOLVING CREDIT. KeyCorp's commercial paper program and
three-year revolving credit agreement each provide funding availability of up to
$500 million. Borrowings outstanding under the commercial paper program totaled
$215 million at December 31, 1999, and $92 million at December 31, 1998.
LINES OF CREDIT. Key Bank USA, National Association has a line of credit with
the Federal Reserve Bank that provides for overnight borrowings of up to $928
million. This line is secured by $1.3 billion of Key Bank USA, National
Association's credit card receivables at December 31, 1999. KeyBank National
Association has overnight borrowing capacity at the Federal Reserve Bank of
approximately $17.2 billion, which is secured by approximately $23.3 billion of
primarily commercial loans at December 31, 1999. Neither bank had borrowings
outstanding under these facilities at December 31, 1999 and 1998.
9. LONG-TERM DEBT
The components of Key's long-term debt, presented net of unamortized discount
where applicable, were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
dollars in millions 1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Senior medium-term notes due through 2005(a) $ 396 $ 419
Subordinated medium-term notes due through 2005(a) 133 133
7.50% Subordinated notes due 2006(b) 250 250
6.75% Subordinated notes due 2006(b) 200 200
8.125% Subordinated notes due 2002(b) 199 199
8.00% Subordinated notes due 2004(b) 125 125
8.404% Notes due through 2001 24 34
8.40% Subordinated capital notes due 1999 -- 75
All other long-term debt(h) 4 5
- --------------------------------------------------------------------------------------------------------
Total parent company(i) 1,331 1,440
Senior medium-term bank notes due through 2039(c) 9,396 7,426
Senior euro medium-term bank notes due through 2007(d) 2,413 1,441
6.50% Subordinated remarketable securities due 2027(e) 312 313
6.95% Subordinated notes due 2028(e) 300 300
7.125% Subordinated notes due 2006(e) 250 250
7.25% Subordinated notes due 2005(e) 200 200
6.75% Subordinated notes due 2003(e) 200 200
7.50% Subordinated notes due 2008(e) 165 165
7.30% Subordinated notes due 2011(e) 107 --
7.85% Subordinated notes due 2002(e) 93 200
7.55% Subordinated notes due 2006(e) 75 75
7.375% Subordinated notes due 2008(e) 70 70
Lease financing debt due through 2006(f) 613 574
Federal Home Loan Bank advances due through 2029(g) 242 289
All other long-term debt(h) 114 24
- --------------------------------------------------------------------------------------------------------
Total subsidiaries 14,550 11,527
- --------------------------------------------------------------------------------------------------------
Total long-term debt $15,881 $12,967
======= =======
- --------------------------------------------------------------------------------------------------------
</TABLE>
Key uses portfolio interest rate swaps and caps to manage interest rate risk;
these instruments modify the repricing and maturity characteristics of certain
long-term debt. For more information about the notional amount, fair value and
weighted average rate of such financial instruments at December 31, 1999, see
Note 18 ("Financial Instruments with Off-Balance Sheet Risk"), which begins on
page 72.
(a) At December 31, 1999, the senior medium-term notes had a weighted average
interest rate of 6.83%, and the subordinated medium-term notes had a
weighted average interest rate of 7.09%. At December 31, 1998, the senior
medium-term notes had a weighted average interest rate of 6.55%, and the
subordinated medium-term notes had a weighted average interest rate of
7.09%. These notes had a combination of fixed and floating interest rates.
(b) The 7.50%, 6.75%, 8.125%, and 8.00% subordinated notes may not be redeemed
or prepaid prior to maturity.
(c) Subsidiaries' senior medium-term bank notes had weighted average interest
rates of 5.98% at December 31, 1999, and 5.30% at December 31, 1998. These
notes had a combination of fixed and floating interest rates.
(d) The senior euro medium-term notes had weighted average interest rates of
6.26% at December 31, 1999, and 5.52% at December 31, 1998. These notes,
which are obligations of KeyBank National Association, had fixed and
floating interest rates based on the three-month London Interbank Offered
Rate (known as "LIBOR").
(e) The subordinated notes and securities are all obligations of KeyBank
National Association, with the exception of the 7.55% notes, which are
obligations of Key Bank USA, National Association. These notes may not be
redeemed prior to their maturity dates. The 7.30% notes were issued in
exchange for a portion of the 7.85% notes during the first quarter of 1999.
(f) Lease financing debt had weighted average interest rates of 7.64% at
December 31, 1999, and 6.56% at December 31, 1998. This category of debt
primarily comprises nonrecourse debt collateralized by leased equipment
under operating, direct financing and sales type leases.
(g) Long-term advances from the Federal Home Loan Bank had weighted average
interest rates of 6.27% at December 31, 1999, and 5.39% at December 31,
1998. These advances, which had a combination of fixed and floating
interest rates, were secured by $363 million of real estate loans and
securities at December 31, 1999, and $409 million of such loans and
securities at December 31, 1998.
(h) Other long-term debt, comprising industrial revenue bonds, capital lease
obligations, and various secured and unsecured obligations of corporate
subsidiaries, had weighted average interest rates of 6.76% at December 31,
1999, and 7.17% at December 31, 1998.
(i) At December 31, 1999, unused capacity under KeyCorp's shelf registration
totaled $1.0 billion, including $450 million reserved for future issuance
as medium-term notes.
Scheduled principal payments on long-term debt are as follows:
in millions PARENT SUBSIDIARIES TOTAL
- -------------------------------------------------------------------------------
2000 $287 $5,842 $6,129
2001 113 2,755 2,868
2002 240 1,546 1,786
2003 45 1,196 1,241
2004 125 1,600 1,725
- --------------------------------------------------------------------------------
66 KEYCORP AND SUBSIDIARIES
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. CAPITAL SECURITIES
KeyCorp guarantees the corporation-obligated mandatorily redeemable preferred
capital securities of subsidiary trusts holding solely subordinated debentures
of the Corporation ("capital securities"). These securities were issued by five
business trusts: KeyCorp Institutional Capital A, KeyCorp Institutional Capital
B, KeyCorp Capital I, KeyCorp Capital II and KeyCorp Capital III. As guarantor,
KeyCorp unconditionally guarantees payment of:
- - accrued and unpaid distributions required to be paid on the capital
securities;
- - the redemption price when a capital security is called for redemption; and
- - amounts due if a trust is liquidated or terminated.
KeyCorp owns all of the outstanding common stock of each of the five trusts. The
trusts used the proceeds from the issuance of their capital securities and
common stock to buy debentures issued by KeyCorp. These debentures are the
trusts' only assets and the interest payments from the debentures finance the
distributions paid on the capital securities. Key's financial statements do
not reflect the debentures or the related income statement effects because they
are eliminated in consolidation.
The capital securities, common securities and related debentures are summarized
as follows:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF INTEREST RATE MATURITY
CAPITAL DEBENTURES, OF CAPITAL OF CAPITAL
SECURITIES, COMMON NET OF SECURITIES AND SECURITIES AND
dollars in millions NET OF DISCOUNT(a) SECURITIES DISCOUNT(b) DEBENTURES(c) DEBENTURES
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DECEMBER 31,1999
KeyCorp Institutional Capital A $ 350 $ 11 $ 361 7.826% 2026
KeyCorp Institutional Capital B 150 4 154 8.250 2026
KeyCorp Capital I 247 8 255 6.819 2028
KeyCorp Capital II 247 8 255 6.875 2029
KeyCorp Capital III 249 8 257 7.750 2029
- ------------------------------------------------------------------------------------------------------------------------------
Total $1,243 $ 39 $1,282 7.473% --
====== ====== ====== =====
- ------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31,1998 $ 997 $ 31 $1,028 7.149% --
====== ====== ====== =====
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) The capital securities are mandatorily redeemable when the related debentures mature, or earlier if provided in the
governing indenture. Each issue of capital securities carries an interest rate identical to that of the related
debenture. The capital securities constitute minority interests in the equity accounts of KeyCorp's consolidated
subsidiaries and, therefore, qualify as Tier 1 capital under Federal Reserve Board guidelines.
(b) KeyCorp has the right to redeem its debentures: (i) in whole or in part, on or after December 1, 2006 (for
debentures owned by Capital A), December 15, 2006 (for debentures owned by Capital B), July 1, 2008 (for debentures
owned by Capital I), March 18, 1999 (for debentures owned by Capital II), and July 16, 1999 (for debentures owned
by Capital III); and (ii) in whole at any time within 90 days after and during the continuation of a "tax event" or
a "capital treatment event" (as defined in the applicable offering circular). If the debentures purchased by
Capital A or Capital B are redeemed before they mature, the redemption price will be the principal amount, plus a
premium, plus any accrued but unpaid interest. If the debentures purchased by Capital I are redeemed before they
mature, the redemption price will be the principal amount, plus any accrued but unpaid interest. If the debentures
purchased by Capital II or Capital III are redeemed before they mature, the redemption price will the greater of:
(i) the principal amount, plus any accrued but unpaid interest or (ii) the sum of the present values of principal
and interest payments discounted at the Treasury Rate (as defined in the applicable offering circular), plus 20
basis points (25 basis points for Capital III), plus any accrued but unpaid interest. When debentures are redeemed
in response to tax or capital treatment events, the redemption price is generally slightly more favorable to Key.
(c) The interest rates for Capital A, Capital B, Capital II, and Capital III are fixed. Capital I has a floating
interest rate (which reprices quarterly) equal to three-month LIBOR plus 74 basis points. The rates shown as the
total at December 31, 1999 and 1998, are weighted average rates.
</TABLE>
11. SHAREHOLDERS' EQUITY
SHAREHOLDER RIGHTS PLAN
KeyCorp has a shareholder rights plan which was first adopted in 1989 and has
since been amended. Under the plan, each shareholder received one Right -
representing the right to purchase a common share for $82.50 - for each KeyCorp
common share owned. All of the Rights expire on May 14, 2007, but KeyCorp may
redeem Rights earlier for $.005 per Right, subject to certain limitations.
Rights will become exercisable if a person or group acquires 15% or more of
KeyCorp's outstanding shares. Until that time, the Rights will trade with the
common shares; any transfer of a common share will also constitute a transfer of
the associated Right. If the Rights become exercisable, they will begin to trade
apart from the common shares. If one of a number of "flip-in events" occurs,
each Right will entitle the holder to purchase a KeyCorp common share for $1.00
(the par value per share), and the Rights held by a 15% or more shareholder will
become void.
CAPITAL ADEQUACY
KeyCorp and its banking subsidiaries must meet specific capital requirements
imposed by banking industry regulators. Sanctions for failure to meet applicable
capital requirements may include regulatory enforcement actions that restrict
dividend payments, require increased capital, terminate Federal Deposit
Insurance Corporation ("FDIC") deposit insurance, and mandate the appointment of
a conservator or receiver, in severe cases. Management believes that as of
December 31, 1999, KeyCorp and its banking subsidiaries met all necessary
capital requirements.
Federal bank regulators apply certain capital ratios to group FDIC-insured
depository institutions into five categories: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and "crit-
ically undercapitalized." At December 31, 1999 and 1998, the most recent
regulatory notification categorized each of KeyCorp's subsidiary banks as "well
capitalized." Management believes there have not been any changes in condition
or events since those notifications which would cause the banks' categorizations
to change.
Bank holding companies are not categorized by capital adequacy as are their bank
subsidiaries. However, Key satisfied the criteria for a "well capitalized"
institution at December 31, 1999 and 1998. The FDIC-defined capital categories
may not accurately represent the overall financial condition or prospects of Key
or its affiliates.
KEYCORP AND SUBSIDIARIES 67
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents Key and KeyBank National Association'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 Federal Deposit Insurance Act.
<TABLE>
<CAPTION>
TO QUALIFY AS
TO MEET MINIMUM WELL CAPITALIZED
CAPITAL ADEQUACY UNDER PROMPT CORRECTIVE
ACTUAL REQUIREMENTS ACTION PROVISIONS
---------------------- -------------------- -----------------------
dollars in millions AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999
<S> <C> <C> <C> <C> <C> <C>
TOTAL CAPITAL TO NET RISK-ADJUSTED ASSETS
Key $9,569 11.66% $6,567 8.00% N/A N/A
KeyBank National Association 7,907 10.72 5,902 8.00 $7,377 10.00%
TIER 1 CAPITAL TO NET RISK-ADJUSTED ASSETS
Key $6,306 7.68% $3,283 4.00% N/A N/A
KeyBank National Association 5,458 7.40 2,951 4.00 $4,426 6.00%
TIER 1 CAPITAL TO AVERAGE ASSETS
Key $6,306 7.77% $2,434 3.00% N/A N/A
KeyBank National Association 5,458 7.39 2,954 4.00 $3,692 5.00%
- -----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998
TOTAL CAPITAL TO NET RISK-ADJUSTED ASSETS
Key $8,731 11.69% $5,973 8.00% N/A N/A
KeyBank National Association 7,746 11.39 5,439 8.00 $6,799 10.00%
TIER 1 CAPITAL TO NET RISK-ADJUSTED ASSETS
Key $5,383 7.21% $2,987 4.00% N/A N/A
KeyBank National Association 5,291 7.78 2,720 4.00 $4,079 6.00%
TIER 1 CAPITAL TO AVERAGE ASSETS
Key $5,383 6.95% $3,099 4.00% N/A N/A
KeyBank National Association 5,291 7.22 2,932 4.00 $3,665 5.00%
- -----------------------------------------------------------------------------------------------------------------------------------
N/A = Not Applicable
</TABLE>
12. STOCK OPTIONS
Key's compensation plans allow for the granting of stock options, stock
appreciation rights, limited stock appreciation rights, restricted stock and
performance shares to eligible employees and directors. Under all of the option
plans, exercise prices cannot be less than the fair value of Key's common stock
on the grant date. Generally, options expire no later than 10 years from their
grant date.
At December 31, 1999, KeyCorp had 8,868,531 common shares available for future
grant, compared with 9,049,032 at December 31, 1998. Of the options outstanding
at December 31, 1999, 3,211,200 are "performance shares," which will only vest
if certain performance targets are met. Key did not grant performance shares in
1999 and granted 363,200 performance shares in 1998.
The following table summarizes activity, pricing and other information about
Key's stock options.
<TABLE>
<CAPTION>
1999 1998
------------------------------ --------------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
OPTIONS PRICE PER OPTION OPTIONS PRICE PER OPTION
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 27,068,012 $ 22.84 22,296,568 $ 18.33
Granted 6,151,189 30.68 8,512,716 32.31
Assumed in acquisition -- -- 416,652 16.61
Exercised 2,160,786 15.20 3,049,295 14.53
Lapsed or canceled 1,577,118 28.74 1,108,629 25.12
- ------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 29,481,297 $ 24.72 27,068,012 $ 22.84
- ------------------------------------------------------------------------------------------------------------------------------
Exercisable at end of year 13,885,015 $ 19.19 11,993,163 $ 15.89
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes the range of exercise prices for Key's stock
options at December 31, 1999.
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED AVERAGE WEIGHTED
RANGE OF OPTIONS VERAGE PRICE REMAINING OPTIONS AVERAGE PRICE
EXERCISE PRICES OUTSTANDING PER OPTION LIFE (YEARS) EXERCISABLE PER OPTION
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$4.13-$14.99 6,494,147 $ 13.63 3.8 6,199,792 $ 13.64
15.00-19.99 3,834,304 17.15 5.2 3,834,304 17.15
20.00-24.99 286,495 22.31 7.7 234,095 22.52
25.00-29.99 6,017,561 26.16 7.4 1,671,275 26.12
30.00-34.99 12,047,256 31.43 8.6 1,603,437 32.66
35.00-50.00 801,534 39.90 8.4 342,112 43.43
- ------------------------------------------------------------------------------------------------------------------------------
Total 29,481,297 $ 24.72 6.9 13,885,015 $ 19.19
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
68 KEYCORP AND SUBSIDIARIES
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," requires companies such as Key which 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 stock options
using the "fair value method." Under the intrinsic value method, the excess of
the fair value of the stock over the exercise price is recorded as expense on
the date at which both the number of shares the recipient is entitled to receive
and the exercise price are known. Management estimated the fair value of options
granted using the Black-Scholes option pricing model. This model 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. As a result, the Black Scholes model is not a perfect indicator
of the value of an option.
The Black-Scholes model requires several assumptions, which management
developed based on historical trends and current market observations. These
assumptions include:
- - an average option life of 4.3 years in 1999, 4.3 years in 1998 and 5.5
years in 1997;
- - a future dividend yield of 3.4% in 1999, 2.9% in 1998 and 3.2% in 1997;
- - share price volatility of .256 in 1999, .240 in 1998 and .240 in 1997; and
- - a weighted average risk-free interest rate of 4.9% in 1999, 5.1% in 1998
and 6.4% in 1997.
If these assumptions are not accurate, the estimated fair values used to derive
the information shown in the following table also will be incorrect. Moreover,
the model assumes that the estimated fair value of an option is amortized over
the option's vesting period and would be included in personnel expense on the
income statement. The pro forma impact of applying the fair value method of
accounting for the years shown below may not be indicative of the pro forma
impact in future years.
YEAR ENDED DECEMBER 31,
in millions,except per share amounts 1999 1998 1997
- -------------------------------------------------------------------------------
Net income $1,107 $996 $919
Net income - pro forma 1,085 981 913
Per common share:
Net income $2.47 $2.25 $2.09
Net income - pro forma 2.42 2.22 2.08
Net income assuming dilution 2.45 2.23 2.07
Net income assuming dilution - pro forma 2.39 2.19 2.05
- -------------------------------------------------------------------------------
13. RESTRUCTURING CHARGES
During 1999, KeyCorp recorded restructuring charges of $98 million ($62 million
after tax) in connection with strategic actions being taken to improve operating
efficiency and profitability. The largest portion of these charges ($91 million
pre-tax) was recorded in the fourth quarter.
The primary strategic actions being taken include the outsourcing of certain
technology and other corporate support functions, the consolidation of sites in
a number of Key's businesses and a reduction in the number of management layers.
These actions are expected to reduce Key's workforce by approximately 3,000
positions, or 11%, by the end of 2000. Approximately 25% of the reduction, which
will take place throughout the organization, will occur at the management level.
As of December 31, 1999, approximately 438 positions had been eliminated.
The components of the restructuring charge include accruals for severance
payments ($67 million), costs related to site consolidations ($24 million) and
costs related to the acceleration of depreciation/amortization or write-off of
equipment and certain other assets ($7 million). During 1999, cash payments of
$5 million and a non-cash charge of $2 million were taken against the severance
accrual. The liability for restructuring charges remaining at December 31, 1999,
was $91 million. Key expects to record additional restructuring charges
(primarily for severance) during 2000 in connection with this productivity
initiative.
14. EMPLOYEE BENEFITS
PENSION PLANS
Net pension cost (income) for all funded and unfunded plans includes the
following components.
YEAR ENDED DECEMBER 31,
in millions 1999 1998 1997
- -------------------------------------------------------------------------------
Service cost of benefits earned $ 28 $ 29 $ 29
Interest cost on projected
benefit obligation 47 51 53
Expected return on plan assets (82) (80) (69)
Amortization of unrecognized
net transition assets (5) (5) (5)
Amortization of prior service cost 2 2 3
Amortization of losses 3 2 5
- -------------------------------------------------------------------------------
Net pension cost (income) $ (7) $ (1) $ 16
==== ==== ====
- -------------------------------------------------------------------------------
Changes in the projected benefit obligation ("PBO") are summarized as follows:
YEAR ENDED DECEMBER 31,
in millions 1999 1998
- -------------------------------------------------------------------------------
PBO at beginning of year $ 751 $ 733
Service cost 28 29
Interest cost 47 51
Actuarial (gains) losses (28) 25
Benefit payments (73) (87)
- -------------------------------------------------------------------------------
PBO at end of year $ 725 $ 751
===== =====
- -------------------------------------------------------------------------------
Changes in the fair value of plan assets ("FVA") are summarized as follows:
YEAR ENDED DECEMBER 31,
in millions 1999 1998
- -------------------------------------------------------------------------------
FVA at beginning of year(a) $ 933 $ 931
Actual return on plan assets 140 33
Employer contributions 7 56
Benefit payments (73) (87)
- -------------------------------------------------------------------------------
FVA at end of year(a) $ 1,007 $ 933
======= =======
- -------------------------------------------------------------------------------
(a) Consists primarily of listed stocks and fixed income securities.
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The funded status of the plans at September 30 (the actuarial measurement
date), reconciled to the amounts recognized in the consolidated balance sheets
at December 31, 1999 and 1998, is as follows:
DECEMBER 31,
in millions 1999 1998
- --------------------------------------------------------------------------------
Funded status(a) $282 $182
Unrecognized net (gain) loss (58) 32
Unrecognized prior service benefit (2) (1)
Unrecognized net transition asset (7) (12)
Benefits paid subsequent to measurement date 2 2
- --------------------------------------------------------------------------------
Prepaid pension cost $217 $203
==== ====
- --------------------------------------------------------------------------------
(a) The excess of the fair value of plan assets over the pension benefit
obligation.
Key provides certain non-qualified supplemental executive retirement programs
that are unfunded. At December 31, 1999, the projected benefit obligation for
these unfunded plans was $107 million (compared with $116 million at the end of
1998), and the accumulated benefit obligation was $100 million (compared with
$103 million at the end of 1998).
In order to determine the actuarial present value of benefit obligations and net
pension cost (income), management assumed the following weighted average rates.
YEAR ENDED DECEMBER 31, 1999 1998 1997
- --------------------------------------------------------------------------------
Discount rate 7.50% 6.50% 7.25%
Compensation increase rate 4.00 4.22 4.20
Expected return on plan assets 9.75 9.75 9.50
- --------------------------------------------------------------------------------
OTHER POSTRETIREMENT BENEFIT PLANS
Key sponsors a postretirement healthcare plan, which is contributory. Retirees'
contributions are adjusted annually to reflect certain cost-sharing provisions
and benefit limitations. Key also sponsors life insurance plans covering
certain grandfathered employees. These plans are principally noncontributory.
Net postretirement benefits cost includes the following components.
YEAR ENDED DECEMBER 31,
in millions 1999 1998 1997
- --------------------------------------------------------------------------
Service cost of benefits earned $ 3 $ 3 $ 3
Interest cost on accumulated
postretirement benefit obligation 7 7 8
Expected return on plan assets (1) (1) -
Amortization of transition obligation 5 5 5
- --------------------------------------------------------------------------
Net postretirement benefits cost $ 14 $ 14 $ 16
==== ==== ====
- --------------------------------------------------------------------------
Changes in the accumulated postretirement benefit obligation ("APBO") are
summarized as follows:
YEAR ENDED DECEMBER 31,
in millions 1999 1998
- -----------------------------------------------------------------------
APBO at beginning of year $114 $108
Service cost 3 3
Interest cost 7 7
Plan participants' contributions 3 2
Actuarial (gains) losses (8) 6
Benefit payments (13) (12)
- -----------------------------------------------------------------------
APBO at end of year $106 $114
==== ====
- -----------------------------------------------------------------------
Changes in the fair value of plan assets are summarized as follows:
YEAR ENDED DECEMBER 31,
in millions 1999 1998
- -----------------------------------------------------------------------
FVA at beginning of year $20 $10
Employer contributions 14 9
Plan participants' contributions 3 -
Benefit payments (7) -
Actual return on plan assets 1 1
- -----------------------------------------------------------------------
FVA at end of year $31 $20
=== ===
- -----------------------------------------------------------------------
The funded status of the plans at September 30 (the actuarial measurement date),
reconciled to the amounts recognized in the consolidated balance sheets at
December 31, 1999 and 1998, is as follows:
YEAR ENDED DECEMBER 31,
in millions 1999 1998
- --------------------------------------------------------------------------------
Funded status(a) $(75) $(94)
Unrecognized net (gain) loss (7) 1
Unrecognized prior service cost 1 1
Unrecognized transition obligation 61 65
Contributions/benefits paid subsequent
to measurement date 10 13
Impact of curtailment subsequent
to measurement date (2) -
- --------------------------------------------------------------------------------
Net amount recognized $(12) $(14)
==== ====
- --------------------------------------------------------------------------------
(a) The excess of the accumulated postretirement benefit obligation over the
fair value of plan assets.
The assumed weighted average healthcare cost trend rate for 2000 is 6.4% 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 rate by
one percentage point each future year would not have a material impact on net
postretirement benefits cost or obligations since the postretirement plans have
cost-sharing provisions and benefit limitations.
To determine the accumulated postretirement benefit obligation and the net
postretirement benefits cost, management assumed the following weighted average
rates:
YEAR ENDED DECEMBER 31, 1999 1998 1997
- --------------------------------------------------------------------------------
Discount rate 7.50% 6.50% 7.25%
Expected return on plan assets 5.73 9.50 9.50
- --------------------------------------------------------------------------------
EMPLOYEE 401(K) SAVINGS PLAN
A substantial majority of Key's employees are covered under a savings plan that
is qualified under Section 401(k) of the Internal Revenue Code. Key's plan
permits employees to contribute 1% to 10% of eligible compensation, with up to
6% being eligible for matching contributions in the form of Key common shares.
The plan also permits Key to distribute a discretionary profit sharing
component. Total expense associated with the plan was $46 million in 1999, $39
million in 1998 and $41 million in 1997.
70 KEYCORP AND SUBSIDIARIES
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. INCOME TAXES
Income taxes included in the consolidated statements of income are summarized
below. Key files a consolidated Federal income tax return.
YEAR ENDED DECEMBER 31,
in millions 1999 1998 1997
- --------------------------------------------------------------------------------
Currently payable:
Federal $104 $147 $265
State 7 11 22
- --------------------------------------------------------------------------------
111 158 287
Deferred:
Federal 421 296 122
State 45 29 17
- --------------------------------------------------------------------------------
466 325 139
- --------------------------------------------------------------------------------
Total income tax expense(a) $577 $483 $426
==== ==== ====
- --------------------------------------------------------------------------------
(a) Income tax expense on securities transactions totaled $10 million in 1999,
$3 million in 1998, and $.4 million in 1997. 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 $35 million in 1999, $39
million in 1998, and $36 million in 1997.
Significant components of Key's deferred tax assets and liabilities are as
follows:
DECEMBER 31,
in millions 1999 1998
- --------------------------------------------------------------------------------
Provision for loan losses $ 352 $ 332
Net unrealized securities losses 79 --
Restructuring charges 37 5
Write-down of OREO 11 20
Other 194 88
- --------------------------------------------------------------------------------
Total deferred tax assets 673 445
Leasing income reported using the operating
method for tax purposes 1,874 1,375
Net unrealized securities gains -- 19
Depreciation 44 14
Other 84 27
- --------------------------------------------------------------------------------
Total deferred tax liabilities 2,002 1,435
- --------------------------------------------------------------------------------
Net deferred tax liabilities $1,329 $ 990
====== ======
- --------------------------------------------------------------------------------
The following table shows how Key arrives at total income tax expense.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
in millions 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before income taxes times 35% statutory Federal tax rate $ 589 $ 518 $ 471
State income tax,net of Federal tax benefit 34 26 25
Amortization of non-deductible intangibles 27 24 19
Tax-exempt interest income (20) (23) (27)
Corporate owned life insurance income (38) (38) (30)
Tax credits (28) (22) (26)
Other 13 (2) (6)
- -----------------------------------------------------------------------------------------------------------------------
Total income tax expense $ 577 $ 483 $ 426
===== ===== =====
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
16. COMMITMENTS, CONTINGENT LIABILITIES AND OTHER DISCLOSURES
LEGAL PROCEEDINGS
In the ordinary course of business, Key is subject to legal actions involving
claims for substantial monetary relief. Based on information presently known to
management and Key's counsel, management does not believe that there are any
legal actions that, individually or in the aggregate, will have a material
adverse effect on Key's financial condition.
RESTRICTIONS ON CASH, DUE FROM BANKS,
SUBSIDIARY DIVIDENDS AND LENDING ACTIVITIES
Federal law requires depository institutions to maintain a prescribed amount of
cash or noninterest-bearing balances with the Federal Reserve Bank. KeyCorp's
banking subsidiaries maintained average reserve balances aggregating $449
million in 1999 to fulfill these requirements.
KeyCorp's principal source of cash flow, including the cash needed to pay
dividends on its common shares and to service its debt, is dividends from its
banking and other subsidiaries. Various Federal and state statutes and
regulations limit the amount of dividends KeyCorp's banking subsidiaries can pay
without prior regulatory approval. At December 31, 1999, KeyCorp's banking
subsidiaries could have declared dividends of approximately $697 million in
the aggregate without obtaining such approval.
Federal law also restricts loans and advances from banking subsidiaries to their
parent companies (and to nonbank subsidiaries of their parent companies), and
requires those transactions to be secured.
OBLIGATIONS UNDER NONCANCELABLE LEASES
Key is obligated under various noncancelable leases for land, buildings and
other property, consisting principally of data processing equipment. Rental
expense under all operating leases totaled $162 million in 1999, $132 million in
1998, and $118 million in 1997. Minimum future rental payments under
noncancelable leases at December 31, 1999, are as follows: 2000 - $134 million;
2001 - $118 million; 2002 - $102 million; 2003 - $94 million; 2004 - $81
million; and all subsequent years - $464 million.
KEYCORP AND SUBSIDIARIES 71
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. 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, 1999 1998
-------------------- ---------------------
CARRYING FAIR CARRYING FAIR
in millions AMOUNT VALUE AMOUNT VALUE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and short-term investments(a) $ 4,676 $ 4,676 $ 5,270 $ 5,270
Securities available for sale(b) 6,665 6,665 5,278 5,278
Investment securities(b) 986 998 976 1,004
Loans,net of allowance(c) 63,292 63,559 61,112 62,427
LIABILITIES
Deposits with no stated maturity(a) $24,641 $24,641 $26,363 $26,363
Time deposits(d) 18,592 18,593 16,220 16,312
Short-term borrowings(a) 12,616 12,616 14,196 14,196
Long-term debt(d) 15,881 15,533 12,967 13,447
CAPITAL SECURITIES(d) 1,243 1,139 997 1,034
- -------------------------------------------------------------------------------------------
</TABLE>
Valuation Methods and Assumptions
- ---------------------------------
(a) Fair value equals or approximates carrying amount.
(b) 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.
(c) Fair values of most loans were estimated using discounted cash flow models.
Lease financing receivables and loans held for sale were included in the
estimated fair value of loans at their carrying amounts, although lease
financing receivables are excluded from the scope of Statement of Financial
Accounting Standards No. 107, "Disclosures About Fair Value of Financial
Instruments." The fair value of the credit card portfolio is equal to the
contracted price at which the portfolio was sold in January 2000.
(d) Fair values of time deposits, long-term debt, and capital securities were
estimated based on discounted cash flows.
The estimated fair values of residential real estate mortgage loans (included in
the amount shown for "Loans, net of allowance") and deposits do not take into
account the fair values of long-term client relationships, which are integral
parts of the related financial instruments. The estimated fair values of these
instruments would be significantly higher if they included the fair values of
these relationships. Such is the case with Key's credit card receivables which
were valued at an amount equal to the contracted price at which the portfolio
was sold in January 2000.
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.
If management used different assumptions (on matters such as discount rates and
cash flow) and estimation methods, the estimated fair values shown in the table
could change significantly. Accordingly, these estimates do not necessarily
reflect the amounts Key's financial instruments would command in a current
market exchange. Similarly, because Statement of Financial Accounting Standards
No. 107 excludes certain financial instruments and all nonfinancial instruments
from its disclosure requirements, the fair value amounts shown in the table do
not, by themselves, represent Key's underlying value.
Interest rate swaps, caps and floors (which are not included in the preceding
table) were valued based on discounted cash flow models and had an aggregate
fair value of $50 million at December 31, 1999, and $245 million at December 31,
1998. Foreign exchange forward contracts (also excluded from the table) were
valued based on quoted market prices and had a fair value that approximated
their carrying amount at December 31, 1999 and 1998. Off-balance sheet financial
instruments are discussed in greater detail in Note 18 ("Financial Instruments
with Off-Balance Sheet Risk").
18. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Key, mainly through its lead bank (KeyBank National Association), is party to
various financial instruments with off-balance sheet risk. These financial
instruments may be used for lending-related purposes, asset and liability
management or trading purposes. Generally, these instruments help Key meet
clients' financing needs and manage its exposure to "market risk" - the
possibility that net interest income will be adversely affected due to changes
in interest rates or other economic factors. However, like other financial
instruments, these contain an element of "credit risk" - the possibility that
Key will incur a loss because a counterparty fails to meet its contractual
obligations.
The primary financial instruments that Key uses are commitments to extend
credit; standby and commercial letters of credit; interest rate swaps, caps and
futures; and foreign exchange forward contracts. All of the foreign exchange
forward contracts and interest rate swaps and caps held are over-the-counter
instruments.
FINANCIAL INSTRUMENTS HELD OR ISSUED FOR LENDING-RELATED PURPOSES
These instruments - primarily loan commitments and standby letters of credit -
involve credit risk not reflected on Key's balance sheet. Key mitigates its
exposure to credit risk with internal controls that guide the way staff reviews
and approves applications for credit, establishes credit limits and, when
necessary, demands collateral. In particular, Key evaluates the
credit-worthiness of each prospective borrower on a case-by-case basis. Key does
not have any significant concentrations of credit risk.
72 KEYCORP AND SUBSIDIARIES
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMITMENTS TO EXTEND CREDIT are agreements to provide financing at
predetermined terms, as long as the client continues to meet specified criteria.
Loan commitments generally carry variable rates of interest and have fixed
expiration dates or other termination clauses. In many cases, a client must pay
a fee to induce Key to issue a loan commitment. Since a commitment may expire
without resulting in a loan, the total amount of outstanding commitments does
not necessarily represent the future cash outlay that Key will make.
STANDBY LETTERS OF CREDIT enhance the credit-worthiness of Key's clients by
assuring their financial performance to third parties in connection with
particular transactions. Amounts drawn under standby letters of credit are
essentially loans: they bear interest (generally at variable rates) and pose the
same credit risk to Key as a loan would.
The following table shows the contractual amount of each class of
lending-related, off-balance sheet financial instrument outstanding. The table
discloses Key's maximum possible accounting loss, which is equal to the
contractual amount of the various instruments. The estimated fair values of
these commitments and standby letters of credit are not material.
DECEMBER 31,
in millions 1999 1998
- -------------------------------------------------------------------------
Loan commitments:
Credit card lines $ 7,108 $ 6,320
Home equity 4,560 4,347
Commercial real estate and construction 1,842 2,046
Commercial and other 22,023 20,995
- -------------------------------------------------------------------------
Total loan commitments 35,533 33,708
Other commitments:
Standby letters of credit 1,987 1,834
Commercial letters of credit 120 138
Loans sold with recourse 16 21
Total loan and other commitments $37,656 $35,701
======= =======
- -------------------------------------------------------------------------
FINANCIAL INSTRUMENTS HELD OR ISSUED FOR ASSET AND LIABILITY MANAGEMENT PURPOSES
Key manages 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 principal financial instruments
that Key uses to manage exposure to interest rate risk are interest rate swaps
and caps, also referred to as "portfolio" swaps and caps. In addition, Key uses
treasury-based interest rate locks to manage the risk associated with
anticipated loan securitizations.
To qualify for hedge accounting treatment, a derivative must be effective at
reducing the risk associated with the exposure being managed and must be
designated as a risk management transaction at the inception of the derivative
contract. To be considered effective, there must be a high degree of interest
rate correlation between the derivative and the asset or liability being
managed, both at inception and over the life of the derivative contract.
Portfolio swaps and caps increased net interest income by $16 million in 1999,
$23 million in 1998 and $64 million in 1997 (including the impact of both the
spread on the swap portfolio and the amortization of deferred gains and losses
resulting from terminated swaps). The weighted average rate received on
portfolio swaps as of the end of 1999 exceeded the weighted average rate paid by
32 basis points.
The following table summarizes the features of the various types of portfolio
swaps and caps that Key held at the end of 1999.
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------------------------------------------- ------------------
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(a) $ 104 $ 1 1.0 7.20% 6.18% N/A $ 311 $ 4
Receive fixed/pay variable - conventional 5,962 (135) 5.4 6.15 5.83 N/A 4,325 223
Pay fixed/receive variable - conventional 5,545 105 3.8 6.20 6.12 N/A 4,872 (68)
Pay fixed/receive variable - forward starting 278 - 3.1 5.90 6.73 N/A 10 -
Basis swaps 6,783 (20) 1.7 6.15 5.59 N/A 2,872 19
- ------------------------------------------------------------------------------------------------------------------------------------
Total 18,672 (49) - 6.17% 5.85% - 12,390 178
Interest rate caps,collars and corridors:
Caps purchased - one- to three-month
LIBOR-based(b) 2,000 7 .5 N/A N/A 5.87% 3,175 3
Collar - one- to three-month LIBOR-based 250 - 1.1 N/A N/A 4.75 and 6.50 250 (1)
Collar - thirty-year U.S. Treasury-based - - - N/A N/A - 250 (24)
1% payout corridor(c) - - - N/A N/A - 200 -
- ------------------------------------------------------------------------------------------------------------------------------------
Total 2,250 7 - - - - 3,875 (22)
- ------------------------------------------------------------------------------------------------------------------------------------
Total $20,922 $ (42) - - - - $16,265 $ 156
======= ====== ======= =====
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Maturity is based upon expected average lives rather than contractual
terms.
(b) Includes no forward-starting caps at December 31, 1999, and $200 million at
December 31, 1998.
(c) Payout is indexed to three-month LIBOR.
N/A = Not Applicable
KEYCORP AND SUBSIDIARIES 73
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTEREST RATE SWAP CONTRACTS involve the exchange of interest payments
calculated on an agreed-upon amount (known as the "notional amount"). Swaps are
generally used to mitigate Key's exposure to interest rate risk on certain
loans, securities, deposits, short-term borrowings and long-term debt. Key
generally uses three types of interest rate swap contracts.
CONVENTIONAL INTEREST RATE SWAP CONTRACTS involve the receipt of interest
payments 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.
INDEXED AMORTIZING SWAP CONTRACTS differ from conventional swaps because the
notional amount of an indexed amortizing swap contract remains constant for a
specified period of time. Then, based upon the level of an index at agreed-upon
dates, one of three events will occur: the swap contract will mature, the
notional amount will begin to amortize or the swap will continue in effect until
it matures. At December 31, 1999, Key was party to $66 million of indexed
amortizing swaps that used a LIBOR index and $38 million of indexed amortizing
swaps that used a Constant Maturity Treasuries index.
BASIS SWAP CONTRACTS involve the exchange of interest payments based on
different floating indices.
INTEREST RATE CAPS require the buyer to pay a premium to the seller for the
right to receive an amount equal to the difference between the cur- rent
interest rate and an agreed-upon interest rate (known as the "strike rate")
applied to a notional amount. Key generally purchases caps, enters into collars
(which involves simultaneously purchasing a cap and selling a floor) and enters
into corridors (which involves simultaneously purchasing a cap at a specified
strike rate and selling a cap at a higher strike rate) to manage the risk of
adverse movements in interest rates on specified long-term debt and short-term
borrowings.
The notional amount of swaps and caps is significantly greater than the amount
at risk.
CREDIT RISK. Swaps and caps present credit risk because the counter-party may
not meet the terms of the contract. This risk is measured as the cost of
replacing contracts - at current market rates - that have generated unrealized
gains. To mitigate credit risk, Key deals exclusively with counterparties that
have high credit ratings.
Key uses two additional precautions to manage exposure to credit risk on swap
contracts. First, Key generally enters into bilateral collateral and master
netting arrangements. 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. Second, a credit committee monitors credit
risk exposure to the counterparty on each interest rate swap to determine
appropriate limits on Key's total credit exposure and the amount of collateral
required, if any.
At December 31, 1999, Key had 38 different counterparties to portfolio swaps and
swaps entered into to offset the risk of client swaps. Key had aggregate credit
exposure of $237 million to 26 of these counterparties, with the largest credit
exposure to an individual counterparty amounting to $37 million. As of the same
date, Key's aggregate credit exposure on its interest rate caps totaled $76
million. Based on management's assessment as of December 31, 1999, all
counterparties were expected to meet their obligations.
ACCOUNTING TREATMENT AND VALUATION. Management estimated the aggregate fair
value of interest rate swaps at a negative $49 million at December 31, 1999.
Fair value in this case represents an estimate of the unrealized loss that would
be recognized if the portfolio were liquidated at that date. Management arrived
at this estimate by using discounted cash flow models, which predict interest
rates using the applicable forward yield curve.
Interest from a portfolio swap is recognized on an accrual basis over the life
of the contract 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 related asset or liability. The
deferred gain or loss is amortized using the straight-line method over the
projected remaining life of the swap at its termination or the projected
remaining life of the underlying asset or liability, whichever is shorter.
During 1999, swaps with a notional amount of $4.5 billion were terminated,
resulting in a net deferred gain of $18 million. During 1998, swaps with a
notional amount of $642 million were terminated, resulting in a net deferred
loss of $1 million. At December 31, 1999, Key had a net deferred swap gain of
$21 million with a weighted average life of 4.8 years related to the management
of debt, and a net deferred gain of $3 million with a weighted average life of
8.5 years related to the management of loans.
FINANCIAL INSTRUMENTS HELD OR ISSUED FOR TRADING PURPOSES
FUTURES CONTRACTS AND INTEREST RATE SWAPS, CAPS AND FLOORS. Key uses these
instruments for dealer activities (which are generally limited to the banks'
commercial loan clients), and enters into other positions with third parties to
mitigate the interest rate risk of the client positions. The swaps entered into
with clients are generally limited to conventional swaps. All of the above
instruments are recorded at their estimated fair values. Adjustments to fair
value are included in "investment banking and capital markets income" on the
income statement.
FOREIGN EXCHANGE FORWARD CONTRACTS. Key uses these instruments to accommodate
the business needs of clients and for proprietary trading purposes. Foreign
exchange forward contracts provide for the delayed delivery or purchase of
foreign currency. Key mitigates the associated foreign exchange risk by
entering into other foreign exchange contracts with third parties. Adjustments
to the fair value of all foreign exchange forward contracts are included in
"investment banking and capital markets income" on the income statement.
TREASURY OPTIONS AND FUTURES. Key uses these instruments for proprietary
trading purposes. Adjustments to the fair value of all such options are included
in "investment banking and capital markets income" on the income statement.
CREDIT RISK. At December 31, 1999, 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 $525 million. Key manages credit
risk by contracting only with counterparties with high credit ratings,
continuously monitoring counterparties' performance, and entering into master
netting agreements when possible.
The following table shows trading income recognized on interest rate, foreign
exchange forward, and treasury-based option contracts.
DECEMBER 31,
in millions 1999 1998 1997
- --------------------------------------------------------------------------------
Interest rate contracts $40 $65 $32
Foreign exchange forward contracts 30 22 16
Treasury-based option contracts 4 6 -
- --------------------------------------------------------------------------------
74 KEYCORP AND SUBSIDIARIES
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the notional amount and fair value of derivative
financial instruments held or issued for trading purposes at December 31, 1999,
and on average for 1999. The interest rate swaps and caps related to
securitization positions were executed in connection with the residual interests
retained when Key securitized certain home equity and education loans. The
positive fair values represent assets and the negative fair values represent
liabilities.
The $24.6 billion notional amount of interest rate swaps presented in the table
includes $11.6 billion of client swaps that receive a fixed rate and pay a
variable rate, $9.1 billion of client swaps that pay a fixed rate and receive a
variable rate, and $3.9 billion of basis swaps. As of December 31, 1999, the
client swaps had an average expected life of 5.4 years, carried a weighted
average rate received of 6.23%, and had a weighted average rate paid of 6.34%.
<TABLE>
<CAPTION>
DECEMBER 31, 1999 YEAR ENDED DECEMBER 31, 1999
--------------------- ----------------------------
NOTIONAL FAIR AVERAGE AVERAGE
in millions AMOUNT VALUE NOTIONAL AMOUNT FAIR VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate contracts -- client positions:
Swap assets $10,948 $ 360 $13,130 $ 296
Swap liabilities 13,624 (289) 10,351 (221)
Caps and floors purchased 502 5 426 2
Caps and floors sold 605 (5) 540 (2)
Futures purchased 455 (1) 593 (1)
Futures sold 7,392 15 11,373 16
Interest rate contracts -- securitization positions:
Swap assets $ 1,193 $ 21 $ 884 $ 7
Caps purchased 1,225 62 890 32
Caps sold 2,225 (62) 1,290 (32)
Foreign exchange forward contracts:
Assets $ 1,786 $ 54 $ 1,531 $ 50
Liabilities 1,613 (49) 1,341 (45)
Treasury-based option contracts:
Options purchased $ 740 $ 8 $ 3,086 $ 51
Options sold 1,582 (12) 3,884 (38)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
19. CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
DECEMBER 31,
in millions 1999 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Interest-bearing deposits with KeyBank National Association $ 683 $ 314
Loans and advances to subsidiaries:
Banks 99 99
Nonbank subsidiaries 439 324
- ----------------------------------------------------------------------------------------
538 423
Investment in subsidiaries:
Banks 7,024 6,982
Nonbank subsidiaries 1,035 889
- ----------------------------------------------------------------------------------------
8,059 7,871
Other assets 676 437
- ----------------------------------------------------------------------------------------
Total assets $9,956 $9,045
====== ======
LIABILITIES
Accrued interest and other liabilities $ 439 $ 318
Short-term borrowings 515 92
Long-term debt:
Subsidiary trusts 1,282 1,028
Unaffiliated companies 1,331 1,440
- ----------------------------------------------------------------------------------------
2,613 2,468
- ----------------------------------------------------------------------------------------
Total liabilities 3,567 2,878
SHAREHOLDERS' EQUITY(a) 6,389 6,167
- ----------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $9,956 $9,045
====== ======
- ----------------------------------------------------------------------------------------
</TABLE>
(a) See page 55 for the parent company's Statements of Changes in Shareholders'
Equity.
KEYCORP AND SUBSIDIARIES 75
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
in millions 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME
Dividends from subsidiaries:
Banks $ 900 $ 600 $ 180
Nonbank subsidiaries 46 11 28
Interest income from subsidiaries 47 40 51
Gain from sale of Electronic Payment Services,Inc 134 -- --
Other income 17 20 62
- -------------------------------------------------------------------------------------------------------------------------------
1,144 671 321
EXPENSES
Interest on long-term debt with subsidiary trusts 87 67 50
Interest on other borrowed funds 96 94 100
Restructuring charges 98 -- --
Personnel and other expenses 123 87 68
- -------------------------------------------------------------------------------------------------------------------------------
404 248 218
Income before income tax benefit and equity in
net income less dividends from subsidiaries 740 423 103
Income tax benefit 74 83 43
- -------------------------------------------------------------------------------------------------------------------------------
814 506 146
Equity in net income less dividends from subsidiaries 293 490 773
- -------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 1,107 $ 996 $ 919
======= ======= =======
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOW
YEAR ENDED DECEMBER 31,
in millions 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,107 $ 996 $ 919
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of intangibles 18 3 6
Net gains from divestitures (134) -- (53)
Net securities gains (15) -- --
Deferred income taxes (27) (13) (2)
Equity in net income less dividends from subsidiaries (293) (490) (773)
Net increase in other assets (69) (2) (19)
Net increase in other liabilities 4 79 25
Net increase (decrease) in accrued restructuring charges 88 (22) (75)
Other operating activities,net (75) 17 14
- -------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 604 568 42
INVESTING ACTIVITIES
Proceeds from prepayments and maturities of investment securities -- -- 18
Purchases of securities available for sale (30) (13) (2)
Proceeds from prepayments and maturities of securities available for sale 154 5 2
Net (increase) decrease in interest-bearing deposits (370) (35) 479
Net increase in loans and advances to subsidiaries (123) (128) (98)
Proceeds from sale of subsidiary -- -- 135
(Increase) decrease in investments in subsidiaries (23) 14 125
- -------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (392) (157) 659
FINANCING ACTIVITIES
Net increase in short-term borrowings 411 92 --
Net proceeds from issuance of long-term debt 510 255 258
Payments on long-term debt (365) (138) (99)
Loan payment received from ESOP trustee 10 8 7
Purchases of treasury shares (344) (256) (563)
Proceeds from issuance of common stock pursuant to employee
benefit and dividend reinvestment plans 33 44 65
Cash dividends (467) (416) (369)
- -------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (212) (411) (701)
- -------------------------------------------------------------------------------------------------------------------------------
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>
KeyCorp paid interest on borrowed funds amounting to $183 million in 1999, $161
million in 1998 and $147 million in 1997.
76 KEYCORP AND SUBSIDIARIES
<PAGE> 1
EXHIBIT 21
KEYCORP
SUBSIDIARIES OF THE REGISTRANT AT FEBRUARY 29, 2000
<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.
16
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of KeyCorp of our report dated January 14, 2000, included in the 1999 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 14, 2000, with respect to the consolidated financial statements
incorporated herein by reference in this Annual Report (Form 10-K) for the year
ended December 31, 1999:
<TABLE>
<S> <C>
Form S-3 No. 33-58405
Form S-3 No. 333-10577
Form S-3 No. 333-55959
Form S-3 No. 333-64601
Form S-3 No. 333-59175
Form S-3 No. 333-76619 (Post-Effective Amendment No. 1)
Form S-3 No. 333-88063
Form S-3 No. 333-85189
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-4 No. 333-61025
Form S-8 No. 2-97452
Form S-8 No. 33-21643
Form S-8 No. 333-49609
Form S-8 No. 333-49633
Form S-8 No. 333-65391
Form S-8 No. 333-70669
Form S-8 No. 333-70703
Form S-8 No. 333-70775
Form S-8 No. 333-72189
Form S-8 No. 333-92881
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)
Form S-8 No. 333-61025 (Post-Effective Amendment No. 1 to Form S-4)
</TABLE>
/s/ Ernst & Young LLP
Cleveland, Ohio
March 17, 2000
17
<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 anticipates filing with the
United States Securities and Exchange Commission, 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, 1999 (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 requisite and necessary to be done, hereby ratifying and
approving the acts of such attorney or any such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as
of March 16, 2000.
/s/ Cecil D. Andrus
------------------------------
Typed Name: Cecil D. Andrus
------------------------------
<PAGE> 2
KEYCORP
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer and
director, of KeyCorp, an Ohio corporation, which anticipates filing with the
United States Securities and Exchange Commission, 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, 1999 (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 requisite and necessary to be done, hereby ratifying and
approving the acts of such attorney or any such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as
of March 16, 2000.
/s/ William G. Bares
---------------------------
Typed Name: William G. Bares
---------------------------
<PAGE> 3
KEYCORP
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer and
director, of KeyCorp, an Ohio corporation, which anticipates filing with the
United States Securities and Exchange Commission, 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, 1999 (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 requisite and necessary to be done, hereby ratifying and
approving the acts of such attorney or any such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as
of March 16, 2000.
/s/ Albert C. Bersticker
-----------------------------
Typed Name: Albert C. Bersticker
-----------------------------
<PAGE> 4
KEYCORP
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer and
director, of KeyCorp, an Ohio corporation, which anticipates filing with the
United States Securities and Exchange Commission, 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, 1999 (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 requisite and necessary to be done, hereby ratifying and
approving the acts of such attorney or any such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as
of March 16, 2000.
/s/ Edward P. Campbell
---------------------------
Typed Name: Edward P. Campbell
---------------------------
<PAGE> 5
KEYCORP
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer and
director, of KeyCorp, an Ohio corporation, which anticipates filing with the
United States Securities and Exchange Commission, 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, 1999 (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 requisite and necessary to be done, hereby ratifying and
approving the acts of such attorney or any such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as
of March 16, 2000.
/s/ Carol A. Cartwright
---------------------------
Typed Name: Carol A. 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 anticipates filing with the
United States Securities and Exchange Commission, 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, 1999 (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 requisite and necessary to be done, hereby ratifying and
approving the acts of such attorney or any such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as
of March 16, 2000.
/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 anticipates filing with the
United States Securities and Exchange Commission, 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, 1999 (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 requisite and necessary to be done, hereby ratifying and
approving the acts of such attorney or any such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as
of March 16, 2000.
/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 anticipates filing with the
United States Securities and Exchange Commission, 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, 1999 (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 requisite and necessary to be done, hereby ratifying and
approving the acts of such attorney or any such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as
of March 16, 2000.
/s/ Robert W. Gillespie
------------------------------
Typed Name: Robert W. Gillespie
------------------------------
<PAGE> 9
KEYCORP
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer and
director, of KeyCorp, an Ohio corporation, which anticipates filing with the
United States Securities and Exchange Commission, 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, 1999 (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 requisite and necessary to be done, hereby ratifying and
approving the acts of such attorney or any such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as
of March 16, 2000.
/s/ Henry S. Hemingway
----------------------------
Typed Name: Henry S. Hemingway
----------------------------
<PAGE> 10
KEYCORP
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer and
director, of KeyCorp, an Ohio corporation, which anticipates filing with the
United States Securities and Exchange Commission, 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, 1999 (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 requisite and necessary to be done, hereby ratifying and
approving the acts of such attorney or any such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as
of March 16, 2000.
/s/ Charles R. Hogan
--------------------------------
Typed Name: Charles R. Hogan
--------------------------------
<PAGE> 11
KEYCORP
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer and
director, of KeyCorp, an Ohio corporation, which anticipates filing with the
United States Securities and Exchange Commission, 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, 1999 (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 requisite and necessary to be done, hereby ratifying and
approving the acts of such attorney or any such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as
of March 16, 2000.
/s/ Douglas J. McGregor
-------------------------------
Typed Name: Douglas J. McGregor
-------------------------------
<PAGE> 12
KEYCORP
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer and
director, of KeyCorp, an Ohio corporation, which anticipates filing with the
United States Securities and Exchange Commission, 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, 1999 (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 requisite and necessary to be done, hereby ratifying and
approving the acts of such attorney or any such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as
of March 16, 2000.
/s/ Henry L. Meyer III
-------------------------------
Typed Name: Henry L. Meyer III
-------------------------------
<PAGE> 13
KEYCORP
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer and
director, of KeyCorp, an Ohio corporation, which anticipates filing with the
United States Securities and Exchange Commission, 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, 1999 (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 requisite and necessary to be done, hereby ratifying and
approving the acts of such attorney or any such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as
of March 16, 2000.
/s/ Bill R. Sanford
---------------------------------
Typed Name: Bill R. Sanford
---------------------------------
<PAGE> 14
KEYCORP
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer and
director, of KeyCorp, an Ohio corporation, which anticipates filing with the
United States Securities and Exchange Commission, 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, 1999 (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 requisite and necessary to be done, hereby ratifying and
approving the acts of such attorney or any such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as
of March 16, 2000.
/s/ Ronald B. Stafford
-----------------------------
Typed Name: Ronald B. Stafford
-----------------------------
<PAGE> 15
KEYCORP
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer and
director, of KeyCorp, an Ohio corporation, which anticipates filing with the
United States Securities and Exchange Commission, 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, 1999 (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 requisite and necessary to be done, hereby ratifying and
approving the acts of such attorney or any such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as
of March 16, 2000.
/s/ Dennis W. Sullivan
----------------------------------
Typed Name: Dennis W. Sullivan
----------------------------------
<PAGE> 16
KEYCORP
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer and
director, of KeyCorp, an Ohio corporation, which anticipates filing with the
United States Securities and Exchange Commission, 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, 1999 (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 requisite and necessary to be done, hereby ratifying and
approving the acts of such attorney or any such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as
of March 16, 2000.
/s/ Peter G. Ten Eyck, II
----------------------------
Typed Name: Peter G. Ten Eyck, II
----------------------------
<PAGE> 17
KEYCORP
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer and
director, of KeyCorp, an Ohio corporation, which anticipates filing with the
United States Securities and Exchange Commission, 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, 1999 (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 requisite and necessary to be done, hereby ratifying and
approving the acts of such attorney or any such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as
of March 16, 2000.
/s/ Lee G. Irving
------------------------------
Typed Name: Lee G. Irving
------------------------------
<PAGE> 18
KEYCORP
POWER OF ATTORNEY
The undersigned, an officer or director, or both an officer and
director, of KeyCorp, an Ohio corporation, which anticipates filing with the
United States Securities and Exchange Commission, 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, 1999 (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 requisite and necessary to be done, hereby ratifying and
approving the acts of such attorney or any such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as
of March 16, 2000.
/s/ K. Brent Somers
-----------------------------
Typed Name: K. Brent Somers
-----------------------------
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