<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2000
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
[LOGO]
KEYCORP
------------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 34-6542451
- ---------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
127 PUBLIC SQUARE, CLEVELAND, OHIO 44114-1306
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(Address of principal executive offices) (Zip Code)
(216) 689-6300
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(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Shares with a par value of $1 each 434,780,405 Shares
- ----------------------------------------- -------------------------------
(Title of class) (Outstanding at April 28, 2000)
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KEYCORP
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page Number
-------------------- -----------
<S> <C> <C>
Consolidated Balance Sheets --
March 31, 2000, December 31, 1999 and March 31, 1999 3
Consolidated Statements of Income --
Three months ended March 31, 2000 and 1999 4
Consolidated Statements of Changes in Shareholders' Equity --
Three months ended March 31, 2000 and 1999 5
Consolidated Statements of Cash Flow --
Three months ended March 31, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Independent Accountants' Review Report 23
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 24
Item 3. Quantitative and Qualitative Disclosure of Market Risk 55
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 55
Item 5. Other Information 56
Item 6. Exhibits and Reports on Form 8-K 56
Signature 57
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31,
dollars in millions 2000 1999 1999
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(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 2,757 $ 2,816 $ 2,981
Short-term investments 2,567 1,860 1,630
Securities available for sale 6,269 6,665 6,778
Investment securities (fair value: $1,063, $998 and $1,031) 1,053 986 1,005
Loans, net of unearned income of $1,618, $1,621 and $1,479 64,064 64,222 61,045
Less: Allowance for loan losses 979 930 930
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Net loans 63,085 63,292 60,115
Premises and equipment 761 797 863
Goodwill 1,378 1,389 1,435
Other intangible assets 56 60 72
Corporate owned life insurance 2,132 2,110 2,032
Other assets 3,446 3,420 3,081
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Total assets $83,504 $83,395 $79,992
======= ======= =======
LIABILITIES
Deposits in domestic offices:
Noninterest-bearing $ 8,283 $ 8,607 $ 8,601
Interest-bearing 34,718 33,390 32,555
Deposits in foreign office -- interest-bearing 3,035 1,236 167
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Total deposits 46,036 43,233 41,323
Federal funds purchased and securities sold under repurchase agreements 2,621 4,177 4,336
Bank notes and other short-term borrowings 8,015 8,439 8,242
Other liabilities 4,312 4,033 3,285
Long-term debt 14,784 15,881 15,457
Corporation-obligated mandatorily redeemable preferred capital securities
of subsidiary trusts holding solely subordinated debentures of the Corporation
(See Note 9) 1,243 1,243 1,244
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Total liabilities 77,011 77,006 73,887
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 492 492 492
Capital surplus 1,406 1,412 1,409
Retained earnings 6,077 5,833 5,369
Loans to ESOP trustee (24) (24) (34)
Treasury stock, at cost (54,299,186, 48,462,243 and 44,066,638 shares) (1,301) (1,197) (1,075)
Accumulated other comprehensive loss (157) (127) (56)
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Total shareholders' equity 6,493 6,389 6,105
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Total liabilities and shareholders' equity $83,504 $83,395 $79,992
======= ======= =======
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</TABLE>
See Notes to Consolidated Financial Statements (Unaudited).
3
<PAGE> 4
Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
dollars in millions, except per share amounts 2000 1999
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<S> <C> <C>
INTEREST INCOME
Loans $ 1,347 $ 1,250
Taxable investment securities 4 4
Tax-exempt investment securities 6 9
Securities available for sale 112 97
Short-term investments 20 21
- ------------------------------------------------------------------------------------------------------------
Total interest income 1,489 1,381
INTEREST EXPENSE
Deposits 377 309
Federal funds purchased and securities sold under repurchase agreements 48 54
Bank notes and other short-term borrowings 126 119
Long-term debt, including capital securities 267 214
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Total interest expense 818 696
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NET INTEREST INCOME 671 685
Provision for loan losses 183 111
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Net interest income after provision for loan losses 488 574
NONINTEREST INCOME
Trust and asset management income 115 106
Investment banking and capital markets income 89 66
Service charges on deposit accounts 86 81
Brokerage income 45 42
Corporate owned life insurance income 25 24
Credit card fees 6 10
Net loan securitization gains 2 32
Net securities gains 1 4
Gains from other divestitures 332 148
Other income 105 102
- ------------------------------------------------------------------------------------------------------------
Total noninterest income 806 615
NONINTEREST EXPENSE
Personnel 382 372
Net occupancy 57 59
Computer processing 59 54
Equipment 48 56
Marketing 22 25
Amortization of intangibles 25 28
Professional fees 19 15
Restructuring charges 7 --
Other expense 108 145
- ------------------------------------------------------------------------------------------------------------
Total noninterest expense 727 754
INCOME BEFORE INCOME TAXES 567 435
Income taxes 200 142
- ------------------------------------------------------------------------------------------------------------
NET INCOME $ 367 $ 293
======== ========
Per common share:
Net income $ .83 $ .65
Net Income - assuming dilution .83 .65
Weighted average common shares outstanding (000) 441,834 449,520
Weighted average common shares and potential common
shares outstanding (000) 443,757 454,197
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</TABLE>
See Notes to Consolidated Financial Statements (Unaudited).
4
<PAGE> 5
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
<TABLE>
<CAPTION>
ACCUMULATED
LOANS TO TREASURY OTHER
COMMON CAPITAL RETAINED ESOP STOCK, COMPREHENSIVE COMPREHENSIVE
dollars in millions, except per share amounts SHARES SURPLUS EARNINGS TRUSTEE AT COST (LOSS) INCOME INCOME
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998 $492 $1,412 $5,192 $(34) $ (923) $ 28
Net income 293 $293
Other comprehensive income:
Net unrealized gains on securities
available for sale, net of income
taxes of $(45) (a) (84) (84)
-------------
Total comprehensive income $209
====
Cash dividends on common shares
($.26 per share) (116)
Issuance of common shares:
Employee benefit and dividend
reinvestment plans - 925,769
net shares (3) 22
Repurchase of common shares - 5,555,224 shares (174)
- ------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1999 $492 $1,409 $5,369 $(34) $(1,075) $ (56)
==== ====== ====== ==== ======= =====
- ------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 $492 $1,412 $5,833 $(24) $(1,197) $(127)
Net income 367 $367
Other comprehensive losses:
Net unrealized losses on securities
available for sale, net of income
taxes of $(19) (a) (29) (29)
Foreign currency translation adjustments (1) (1)
-------------
Total comprehensive income $337
====
Cash dividends on common shares
($.28 per share) (123)
Issuance of common shares:
Employee benefit and dividend
reinvestment plans - 528,057
net shares (6) 13
Repurchase of common shares-6,365,000 shares (117)
- ------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2000 $492 $1,406 $6,077 $(24) $(1,301) $(157)
==== ====== ====== ==== ======= =====
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</TABLE>
(a) Net of reclassification adjustments.
See Notes to Consolidated Financial Statements (Unaudited).
5
<PAGE> 6
Consolidated Statements of Cash Flow (Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
in millions 2000 1999
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<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 367 $ 293
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 183 111
Depreciation expense and software amortization 71 71
Amortization of intangibles 25 28
Net gains from divestitures (332) (148)
Net securities gains (1) (4)
Net gains from loan securitizations and sales (9) (42)
Deferred income taxes 57 100
Net (increase) decrease in mortgage loans held for sale (383) 95
Net increase in trading account assets (135) (304)
Net decrease in accrued restructuring charges (20) (1)
Other operating activities, net 209 16
- -----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 32 215
INVESTING ACTIVITIES
Net increase in loans, excluding acquisitions, sales and divestitures (992) (1,678)
Proceeds from loan securitizations and sales 2,087 2,093
Purchases of investment securities (83) (66)
Proceeds from sales of investment securities 5 --
Proceeds from prepayments and maturities of investment securities 33 55
Purchases of securities available for sale (20) (3,287)
Proceeds from sales of securities available for sale 73 51
Proceeds from prepayments and maturities of securities available for sale 225 2,116
Net (increase) decrease in other short-term investments (573) 648
Purchases of premises and equipment (19) (23)
Proceeds from sales of premises and equipment 13 21
Proceeds from sales of other real estate owned 5 7
Cash used in acquisitions, net of cash acquired (357) --
- -----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 397 (63)
FINANCING ACTIVITIES
Net increase (decrease) in deposits 2,803 (1,260)
Net decrease in short-term borrowings (1,980) (1,638)
Net proceeds from issuance of long-term debt, including capital securities 393 3,336
Payments on long-term debt, including capital securities (1,470) (628)
Purchases of treasury shares (117) (174)
Net proceeds from issuance of common stock 6 13
Cash dividends (123) (116)
- -----------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (488) (467)
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NET DECREASE IN CASH AND DUE FROM BANKS (59) (315)
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 2,816 3,296
- -----------------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 2,757 $ 2,981
======= =======
- -----------------------------------------------------------------------------------------------------------------------------
Additional disclosures relative to cash flow:
Interest paid $ 754 $ 701
Income taxes received 49 18
Net amount received on portfolio swaps 5 1
Noncash items:
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
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements (Unaudited).
6
<PAGE> 7
Notes To Consolidated Financial Statements
1. Basis of Presentation
The unaudited condensed consolidated interim financial statements include the
accounts of KeyCorp and its subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation. Management believes that
the unaudited condensed consolidated interim financial statements reflect all
adjustments of a normal recurring nature and disclosures which are necessary for
a fair presentation of the results for the interim periods presented. Some
previously reported results have been reclassified to conform to current
reporting practices. The results of operations for the interim periods are not
necessarily indicative of the results of operations to be expected for the full
year. When you read these financial statements, you should also look at the
audited consolidated financial statements and related notes included in Key's
1999 Annual Report to Shareholders.
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.
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>
THREE MONTHS ENDED MARCH 31,
----------------------------
dollars in millions, except per share amounts 2000 1999
- -------------------------------------------------------------------------------------------
<S> <C> <C>
NET INCOME $ 367 $ 293
======== ========
- -------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES
Weighted average common shares outstanding (000) 441,834 449,520
Effect of dilutive common stock options (000) 1,923 4,677
- -------------------------------------------------------------------------------------------
Weighted average common shares and potential
common shares outstanding (000) 443,757 454,197
======== ========
- -------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE
Net income per common share $ .83 $ .65
Net income per common share - assuming dilution .83 .65
- -------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 8
3. Acquisitions and Divestitures
Business acquisitions and divestitures that Key completed during 1999 and the
first three months of 2000 are summarized below.
ACQUISITION
NATIONAL REALTY FUNDING L.C.
On January 10, 2000, Key purchased certain net assets of National Realty Funding
L.C., a commercial finance company headquartered in Kansas City, Missouri, for
$359 million in cash. Goodwill of approximately $10 million was recorded and is
being amortized using the straight-line method over a period of 15 years.
DIVESTITURES
CREDIT CARD PORTFOLIO
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 ($207 million
after tax), which is included in "gains from other divestitures" on the income
statement.
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 limited liability 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).
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 its Concord
EFS shares and recognized a gain of $15 million ($9 million after tax).
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).
8
<PAGE> 9
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 937 KeyCenters, a 24-hour telephone banking call center
services group, 2,505 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 United States.
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 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.
9
<PAGE> 10
The table that spans pages 10 and 11 shows selected financial data for each
major line of business for the three-month periods ended March 31, 2000 and
1999. 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 of Key's 1999 Annual Report to Shareholders.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, KEY RETAIL BANKING KEY SPECIALTY FINANCE KEY CORPORATE CAPITAL
-------------------- --------------------- ---------------------
dollars in millions 2000 1999 2000 1999 2000 1999
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<S> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Net interest income (taxable equivalent) $ 288 $ 288 $ 127 $ 140 $ 259 $ 238
Noninterest income 82 74 17 44 53 49
Revenue sharing (a) 16 16 -- 1 32 30
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenue (b) 386 378 144 185 344 317
Provision for loan losses 18 16 25 32 27 20
Depreciation and amortization expense 35 38 14 17 15 14
Other noninterest expense 178 187 68 66 121 115
Expense sharing (a) 13 12 -- -- 20 20
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Income before income taxes (taxable equivalent) 142 125 37 70 161 148
Allocated income taxes and taxable equivalent adjustments 51 41 16 28 62 55
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 91 $ 84 $ 21 $ 42 $ 99 $ 93
======= ======= ======= ======= ======= =======
Percent of consolidated net income 25% 29% 6% 14% 27% 31%
Percent of total segments' net income 38 37 9 18 42 41
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AVERAGE BALANCES
Loans $10,472 $ 9,524 $14,660 $14,825 $30,769 $27,859
Total assets (b) 11,976 11,076 15,923 15,923 32,243 29,054
Deposits 31,053 31,383 131 121 2,833 2,746
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OTHER FINANCIAL DATA
Efficiency ratio (g) 58.55% 62.70% 58.22% 44.86% 45.35% 47.00%
- -----------------------------------------------------------------------------------------------------------------------------------
</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 a $332 million ($207 million after tax) gain
from the sale of Key's credit card business in the first quarter of 2000.
In the prior year, results include a $134 million ($85 million after tax)
gain from the sale of Key's 20% interest in Electronic Payment Services,
Inc. and a final $14 million ($9 million after tax) gain from the sale of
Key's 51% interest in Key Merchant Services, LLC.
10
<PAGE> 11
* 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, starting in the first quarter of 2000 the financial
data for both 2000 and 1999 presented in the table reflects a change in the
manner of reporting the results of divested businesses. The impact of these
businesses is now being included under the "Reconciling Items" columns, 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 line of business reporting
decisions--similar to generally accepted accounting principles for financial
accounting. Consequently, the results that Key reports are not necessarily
comparable with those presented by other companies.
<TABLE>
<CAPTION>
KEY CAPITAL PARTNERS TREASURY AND OTHER TOTAL SEGMENTS RECONCILING ITEMS KEYCORP CONSOLIDATED
-------------------- ---------------------- -------------------- -------------------- --------------------
2000 1999 2000 1999 2000 1999 2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 47 $ 49 $ (27) $ (29) $ 694 $ 686 $ (16) $ 7 $ 678 $ 693
270 228 44 33 466 428 340 187 806 615
(48) (47) -- -- -- -- -- -- -- --
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269 230 17 4 1,160 1,114 324 (c) 194 (c) 1,484 1,308
1 -- 1 1 72 69 111 (d) 42 (d) 183 111
24 24 7 5 95 98 1 1 96 99
229 209 26 23 622 600 9 (e) 55 (e) 631 655
(33) (32) -- -- -- -- -- -- -- --
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48 29 (17) (25) 371 347 203 96 574 443
20 13 (16) (18) 133 119 74 31 207 150
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$ 28 $ 16 $ (1) $ (7) $ 238 $ 228 $ 129 $ 65 $ 367 $ 293
====== ====== ======= ======= ======= ======= ======= ======= ======= =======
7% 5% -- (2)% 65% 77% 35% 23% 100% 100%
12 7 (1)% (3) 100 100 N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
$5,018 $4,300 $ 2,448 $ 3,174 $63,367 $59,682 $ 657 $ 2,011 $64,024 $61,693
9,691 8,169 11,211 11,809 81,044 76,031 2,143 (f) 3,827 (f) 83,187 79,858
3,390 3,025 5,659 2,524 43,066 39,799 8 1,314 43,074 41,113
- ------------------------------------------------------------------------------------------------------------------------------------
81.78% 87.39% N/M N/M 61.96% 62.77% N/M N/M 62.27% 61.16%
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</TABLE>
(d) The provision for loan losses in the first quarter of 2000 includes an
additional provision of $121 million ($77 million after tax) that resulted
from the implementation of an enhanced methodology for assessing credit
risk, particularly in the commercial loan portfolio. In the year-ago
quarter, the provision included an additional provision of $30 million ($19
million after tax) related to an enhancement of the allocation methodology
pertaining to the credit card portfolio.
(e) Noninterest expense in the first quarter of 2000 includes $14 million ($9
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 $9 million ($6 million
after tax). Also included is $7 million ($4 million after tax) incurred by
divested businesses. Noninterest expense for the first quarter of 1999
includes special contributions of $20 million ($13 million after tax) made
to the charitable foundation that Key sponsors, $27 million ($17 million
after tax) of various other nonrecurring charges and $22 million ($14
million after tax) incurred by divested businesses.
(f) Total assets represents primarily the unallocated portion of nonearning
assets of corporate support functions.
(g) 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
gains from certain divestitures and certain nonrecurring charges).
N/M = Not Meaningful
N/A = Not Applicable
11
<PAGE> 12
5. Securities
Key classifies its securities into three categories: held to maturity, trading
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 SECURITIES. 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 ($903 million, $768 million and $1.2
billion at March 31, 2000, December 31, 1999 and March 31, 1999, respectively)
and included in "short-term investments" on the balance sheet. Realized and
unrealized gains and losses on trading account securities 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 or trading account securities. Securities available
for sale are reported at fair value with unrealized gains and losses (net of
income taxes) 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" on the income statement.
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 securities.
The amortized cost, unrealized gains and losses and approximate fair value of
Key's securities available for sale and investment securities were as follows:
<TABLE>
<CAPTION>
MARCH 31, 2000
----------------------------------------------------
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 $ 121 -- $ 1 $ 120
States and political subdivisions 53 -- -- 53
Collateralized mortgage obligations 4,295 -- 205 4,090
Other mortgage-backed securities 1,623 $ 3 37 1,589
Retained interests in securitizations 332 -- 19 313
Other securities 111 1 8 104
- -------------------------------------------------------------------------------------------------------
Total securities available for sale $6,535 $ 4 $270 $6,269
====== === ==== ======
INVESTMENT SECURITIES
States and political subdivisions $ 432 $10 -- $ 442
Other securities 621 -- -- 621
- -------------------------------------------------------------------------------------------------------
Total investment securities $1,053 $10 -- $1,063
====== === ======
- -------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
<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
====== === ======
- -------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
March 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 $ 206 $ 1 -- $ 207
States and political subdivisions 62 2 -- 64
Collateralized mortgage obligations 3,946 17 $ 79 3,884
Other mortgage-backed securities 2,006 29 11 2,024
Retained interests in securitizations 380 -- 22 358
Other securities 259 9 27 241
- -------------------------------------------------------------------------------------------------------
Total securities available for sale $6,859 $58 $139 $6,778
====== === ==== ======
INVESTMENT SECURITIES
States and political subdivisions $ 601 $26 -- $ 627
Other securities 404 -- -- 404
- -------------------------------------------------------------------------------------------------------
Total investment securities $1,005 $26 -- $1,031
====== === ======
- -------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
6. Loans
Key's loans by category are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31,
in millions 2000 1999 1999
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial, financial and agricultural $18,895 $18,497 $17,249
Real estate -- commercial mortgage 6,941 6,836 6,994
Real estate -- construction 4,565 4,528 3,865
Commercial lease financing 6,711 6,665 5,799
- -------------------------------------------------------------------------------------------------------------
Total commercial loans 37,112 36,526 33,907
Real estate -- residential mortgage 4,296 4,333 4,738
Home equity 8,338 7,602 7,305
Credit card -- -- 1,331
Consumer -- direct 2,586 2,565 2,388
Consumer -- indirect lease financing 3,143 3,195 2,785
Consumer -- indirect other 6,156 6,398 6,497
- -------------------------------------------------------------------------------------------------------------
Total consumer loans 24,519 24,093 25,044
Real estate -- commercial mortgage 527 146 102
Real estate -- residential mortgage 50 48 --
Home equity -- 371 --
Credit card -- 1,362 --
Education 1,856 1,676 1,992
- -------------------------------------------------------------------------------------------------------------
Total loans held for sale 2,433 3,603 2,094
- -------------------------------------------------------------------------------------------------------------
Total loans $64,064 $64,222 $61,045
======= ======= =======
- -------------------------------------------------------------------------------------------------------------
</TABLE>
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 March 31, 2000, see Note 11 ("Financial Instruments with
Off-Balance Sheet Risk"), which begins on page 18.
Changes in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31,
in millions 2000 1999 1999
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 930 $ 900 $ 900
Charge-offs (164) (420) (107)
Recoveries 30 102 26
- -------------------------------------------------------------------------------------------------------------
Net charge-offs (134) (318) (81)
Provision for loan losses 183 348 111
- -------------------------------------------------------------------------------------------------------------
Balance at end of period $ 979 $ 930 $ 930
===== ===== =====
- -------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
7. Impaired Loans and Other Nonperforming Assets
At March 31, 2000, impaired loans totaled $280 million. This amount includes
$158 million of impaired loans with a specifically allocated allowance for loan
losses of $69 million and $122 million of impaired loans that are carried at
their estimated fair value without a specifically allocated allowance. At the
end of 1999, impaired loans totaled $246 million; $153 million of those loans
had a specifically allocated allowance of $63 million and $93 million were
carried at their estimated fair value. The average investment in impaired loans
for the first quarters of 2000 and 1999 was $263 million and $202 million,
respectively.
Nonperforming assets were as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31,
in millions 2000 1999 1999
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Impaired loans $280 $246 $212
Other nonaccrual loans 143 161 183
- ----------------------------------------------------------------------------------------------------------------
Total nonperforming loans 423 407 395
OREO 28 27 49
Allowance for OREO losses (6) (3) (15)
- ----------------------------------------------------------------------------------------------------------------
OREO, net of allowance 22 24 34
Other nonperforming assets 2 2 1
- ----------------------------------------------------------------------------------------------------------------
Total nonperforming assets $447 $433 $430
==== ==== ====
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
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.
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.
15
<PAGE> 16
8. Long-Term Debt
The components of Key's long-term debt, presented net of unamortized discount
where applicable, were as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31,
dollars in millions 2000 1999 1999
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Senior medium-term notes due through 2005 (a) $ 321 $ 396 $ 401
Subordinated medium-term notes due through 2005 (a) 133 133 133
7.50% Subordinated notes due 2006 (b) 250 250 250
6.75% Subordinated notes due 2006 (b) 200 200 200
8.125% Subordinated notes due 2002 (b) 199 199 199
8.00% Subordinated notes due 2004 (b) 125 125 125
8.404% Notes due through 2001 24 24 34
8.40% Subordinated capital notes -- -- 75
All other long-term debt (h) 2 4 5
- -------------------------------------------------------------------------------------------------------------------------
Total parent company (i) 1,254 1,331 1,422
Senior medium-term bank notes due through 2039 (c) 8,298 9,396 9,499
Senior euro medium-term bank notes due through 2007 (d) 2,491 2,413 1,856
6.50% Subordinated remarketable securities due 2027 (e) 312 312 313
6.95% Subordinated notes due 2028 (e) 300 300 300
7.125% Subordinated notes due 2006 (e) 250 250 250
7.25% Subordinated notes due 2005 (e) 200 200 200
6.75% Subordinated notes due 2003 (e) 200 200 200
7.50% Subordinated notes due 2008 (e) 165 165 165
7.30% Subordinated notes due 2011 (e) 107 107 107
7.85% Subordinated notes due 2002 (e) 93 93 93
7.55% Subordinated notes due 2006 (e) 75 75 75
7.375% Subordinated notes due 2008 (e) 70 70 70
Lease financing debt due through 2006 (f) 629 613 600
Federal Home Loan Bank advances due through 2030 (g) 246 242 237
All other long-term debt (h) 94 114 70
- -------------------------------------------------------------------------------------------------------------------------
Total subsidiaries 13,530 14,550 14,035
- -------------------------------------------------------------------------------------------------------------------------
Total long-term debt $14,784 $15,881 $15,457
======= ======= =======
- -------------------------------------------------------------------------------------------------------------------------
</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 March 31, 2000, see Note
11 ("Financial Instruments with Off-Balance Sheet Risk"), which begins on page
18.
(a) At March 31, 2000, December 31, 1999 and March 31,1999, the senior
medium-term notes had weighted average interest rates of 6.73%, 6.83% and
6.38%, respectively, and the subordinated medium-term notes had a weighted
average interest rate of 7.09% at each respective date. 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) At March 31, 2000, December 31,1999 and March 31, 1999, senior medium-term
bank notes of subsidiaries had weighted average interest rates of 6.13%,
5.98% and 5.11%, respectively. These notes had a combination of fixed and
floating interest rates.
(d) At March 31, 2000, December 31, 1999 and March 31, 1999, senior euro
medium-term notes had weighted average interest rates of 6.20%, 6.26%, and
5.33%, respectively. 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").
16
<PAGE> 17
(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.
(f) At March 31, 2000, December 31, 1999 and March 31, 1999, lease financing
debt had weighted average interest rates of 7.73% , 7.64% and 5.99%,
respectively. This category of debt primarily comprises nonrecourse debt
collateralized by leased equipment under operating, direct financing and
sales type leases.
(g) At March 31, 2000, December 31, 1999 and March 31, 1999, long-term advances
from the Federal Home Loan Bank had weighted average interest rates of
6.05%, 6.27% and 4.97% respectively. These advances, which had a
combination of fixed and floating interest rates, were secured by $369
million, $363 million, and $355 million of real estate loans and securities
at March 31, 2000, December 31, 1999 and March 31, 1999, respectively.
(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 8.24% , 6.76%, and
7.02% at March 31, 2000, December 31, 1999 and March 31, 1999,
respectively.
(i) At March 31, 2000, unused capacity under KeyCorp's shelf registration
totaled $1.0 billion, including $450 million reserved for future issuance
as medium-term notes.
9. 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 INTEREST RATE MATURITY
CAPITAL AMOUNT OF OF CAPITAL OF CAPITAL
SECURITIES, COMMON DEBENTURES, SECURITIES AND SECURITIES AND
dollars in millions NET OF DISCOUNT (a) SECURITIES NET OF DISCOUNT (b) DEBENTURES (c) DEBENTURES
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
March 31, 2000
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 6.744 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 7.458% --
====== === ======
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 1999 $1,243 $39 $1,282 7.473% --
====== === ======
- -----------------------------------------------------------------------------------------------------------------------------------
March 31, 1999 $1,244 $39 $1,283 7.048% --
====== === ======
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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.
17
<PAGE> 18
(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 March 31, 2000, December 31, 1999 and March 31,1999, are
weighted average rates.
10. Restructuring Charges
During 1999 and the first quarter of 2000, KeyCorp recorded restructuring
charges of $98 million ($62 million after tax) and $9 million ($6 million after
tax), respectively, in connection with strategic actions being taken to improve
operating efficiency and profitability.
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, is expected to occur at the
management level. As of March 31, 2000, almost 1,100 positions had been
eliminated.
Changes in the restructuring charge liability associated with the above actions
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, RESTRUCTURING CASH MARCH 31,
in millions 1999 CHARGES PAYMENTS 2000
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Severance $60 $4 $12 $52
Site consolidations 24 1 11 14
Equipment and other 7 4 4 7
- --------------------------------------------------------------------------------------------------------------------
Total $91 $9 $27 $73
=== == === ===
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Key expects to record additional restructuring charges during 2000 in connection
with this productivity initiative. The amount of such charges, if any, may be
higher than originally estimated and will depend on a number of factors. These
factors include the extent of reductions in space requirements (which may result
in excess real estate), the further consolidation of sites, the elimination of
positions in excess of the 3,000 originally estimated and the identification of
additional cost savings and revenue enhancement opportunities.
During the first quarter of 2000, KeyCorp also recorded a $2 million ($1 million
after tax) credit to restructuring charges in connection with separate actions
initiated during the fourth quarter of 1996 to complete Key's transformation to
a nationwide bank-based financial services company. The credit was taken to
reduce the remaining liability associated with branch consolidations, since
favorable market conditions resulted in lower costs to consolidate these
branches than originally expected. At March 31, 2000, the remaining liability
associated with this initiative was approximately $2 million.
11. 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
18
<PAGE> 19
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.
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.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31,
in millions 2000 1999 1999
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loan commitments:
Credit card lines -- $ 7,108 $ 6,349
Home equity $ 4,651 4,560 4,495
Commercial real estate and construction 1,792 1,842 2,009
Commercial and other 22,778 22,023 21,837
- -----------------------------------------------------------------------------------------------
Total loan commitments 29,221 35,533 34,690
Other commitments:
Standby letters of credit 2,350 1,987 1,809
Commercial letters of credit 141 120 136
Loans sold with recourse -- 16 20
- -----------------------------------------------------------------------------------------------
Total loan and other commitments $31,712 $37,656 $36,655
======= ======= =======
- -----------------------------------------------------------------------------------------------
</TABLE>
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
19
<PAGE> 20
"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 $2 million in the
first quarter of 2000 and $1 million in the first quarter of 1999 (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 March 31, 2000, exceeded the weighted average
rate paid by 6 basis points.
The following table summarizes the features of the various types of portfolio
swaps and caps that Key held at March 31, 2000.
<TABLE>
<CAPTION>
MARCH 31, 2000
-------------------------------------------------------------------------------
WEIGHTED AVERAGE RATE
NOTIONAL FAIR MATURITY ---------------------------------------
dollars in millions AMOUNT VALUE (YEARS) RECEIVE PAY STRIKE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate swaps:
Receive fixed/pay variable-indexed amortizing (a) $ 97 -- 1.0 7.14% 6.08% N/A
Receive fixed/pay variable-conventional 5,762 $(145) 5.3 6.27 6.02 N/A
Pay fixed/receive variable-conventional 7,257 121 3.7 6.09 6.38 N/A
Pay fixed/receive variable-forward starting 288 (1) 5.2 6.26 7.24 N/A
Basis swaps - conventional 7,033 (37) 1.5 6.09 5.78 N/A
Basis swaps - forward starting 1,268 (1) 2.6 6.58 6.52 N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Total 21,705 (63) -- 6.17% 6.11% --
Interest rate caps and collars:
Caps purchased - one- to three-month LIBOR-based (b) 830 7 .9 N/A N/A 5.73%
Collar - one- to three-month LIBOR-based 250 -- .8 N/A N/A 4.75 and 6.50
- ------------------------------------------------------------------------------------------------------------------------------------
Total 1,080 7 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total $22,785 $ (56) -- -- -- --
======= =====
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------
NOTIONAL FAIR
dollars in millions AMOUNT VALUE
- ---------------------------------------------------------------------------------
<S> <C> <C>
Interest rate swaps:
Receive fixed/pay variable-indexed amortizing (a) $ 104 $ 1
Receive fixed/pay variable-conventional 5,962 (135)
Pay fixed/receive variable-conventional 5,545 105
Pay fixed/receive variable-forward starting 278 --
Basis swaps - conventional 6,783 (20)
Basis swaps - forward starting -- --
- ---------------------------------------------------------------------------------
Total 18,672 (49)
Interest rate caps and collars:
Caps purchased - one- to three-month LIBOR-based (b) 2,000 7
Collar - one- to three-month LIBOR-based 250 --
- ---------------------------------------------------------------------------------
Total 2,250 7
- ---------------------------------------------------------------------------------
Total $20,922 $ (42)
======= =====
- ---------------------------------------------------------------------------------
</TABLE>
(a) Maturity is based upon expected average lives rather than contractual
terms.
(b) Includes $30 million of forward-starting caps at March 31, 2000.
N/A = Not Applicable
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 March 31, 2000, Key was party to
$59 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.
20
<PAGE> 21
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 current 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 counterparty 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 March 31, 2000, Key had 36 different counterparties to portfolio swaps and
swaps entered into to offset the risk of client swaps. Key had aggregate credit
exposure of $262 million to 25 of these counterparties, with the largest credit
exposure to an individual counterparty amounting to $42 million. As of the same
date, Key's aggregate credit exposure on its interest rate caps totaled $88
million. Based on management's assessment as of March 31, 2000, 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 $63 million at March 31, 2000. Fair
value in this case represents an estimate of the unrealized loss that would be
recognized if the swap portfolio, but not the assets or liabilities being
managed, were to be liquidated at that date. However, because these swaps
qualify for hedge accounting treatment, their estimated negative fair values
should be substantially offset by the unrecognized positive fair values of the
assets and liabilities whose risk characteristics they are being used to modify.
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 the first quarter of 2000, swaps with a notional amount of $902 million
were terminated, resulting in a net deferred gain of $3 million. During the same
period last year, swaps with a notional amount of $551 million were terminated,
resulting in a net deferred gain of $6 million. At March 31, 2000, Key had a
cumulative net deferred swap gain of $22 million with a weighted average life of
5.3 years related to the management of debt, and a cumulative net deferred gain
of $3 million with a weighted average life of 8.2 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
21
<PAGE> 22
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 March 31, 2000, 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 $608 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
in millions 2000 1999
- ----------------------------------------------------------------------------
<S> <C> <C>
Interest rate contracts $15 $8
Foreign exchange forward contracts 8 7
Treasury-based option contracts -- 2
- ----------------------------------------------------------------------------
</TABLE>
The following table summarizes the notional amount and fair value of derivative
financial instruments held or issued for trading purposes at March 31, 2000, and
on average for the first quarter. 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.
<TABLE>
<CAPTION>
MARCH 31, 2000 THREE MONTHS ENDED MARCH 31, 2000
-------------------------- ------------------------------------
NOTIONAL FAIR AVERAGE AVERAGE
in millions AMOUNT VALUE NOTIONAL AMOUNT FAIR VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate contracts - client positions:
Swap assets $11,824 $ 396 $11,500 $ 418
Swap liabilities 13,636 (272) 13,679 (318)
Caps and floors purchased 701 6 635 6
Caps and floors sold 794 (6) 728 (6)
Futures purchased 575 -- 406 --
Futures sold 8,653 10 8,331 13
Interest rate contracts - securitization positions:
Swap assets $ 1,110 $ 37 $ 997 $ 22
Caps purchased 1,177 74 1,033 53
Caps sold 2,151 (74) 1,720 (53)
Foreign exchange forward contracts:
Assets $ 1,892 $ 61 $ 1,860 $ 66
Liabilities 1,708 (55) 1,753 (61)
Treasury-based option contracts:
Options purchased $ 1,684 $ 24 $ 1,405 $ 18
Options sold 2,414 (15) 2,222 (14)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 23
The $25.5 billion notional amount of client interest rate swaps presented in the
table includes $11.8 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 $4.6 billion of basis swaps. As of March 31, 2000, the client
swaps had an average expected life of 5.3 years, carried a weighted average rate
received of 6.31%, and had a weighted average rate paid of 6.32%.
Independent Accountants' Review Report
SHAREHOLDERS AND BOARD OF DIRECTORS
KEYCORP
We have reviewed the unaudited condensed consolidated balance sheets of KeyCorp
and subsidiaries ("Key") as of March 31, 2000 and 1999, and the related
condensed consolidated statements of income, changes in shareholders' equity and
cash flow for the three-month periods then ended. These financial statements are
the responsibility of Key's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with accounting principles generally accepted in the
United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Key as of
December 31, 1999, and the related consolidated statements of income, changes in
shareholders' equity, and cash flow for the year then ended (not presented
herein) and in our report dated January 14, 2000, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1999, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
/s/ Ernst & Young LLP
Cleveland, Ohio
April 14, 2000
23
<PAGE> 24
ITEM 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 the first quarters of
2000 and 1999. Some tables may cover more than these two quarters to comply with
Securities and Exchange Commission disclosure requirements or to illustrate
trends over a period of time. When you read this discussion, you should also
look at the consolidated financial statements and related notes that appear on
pages 3 through 23.
TERMINOLOGY
This report contains some shortened names and 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.
* 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 condition. 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 53.
OUR PROJECTIONS ARE NOT FOOLPROOF
This 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, including the following, 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.
24
<PAGE> 25
* 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 FIRST QUARTER 2000 PERFORMANCE
FINANCIAL PERFORMANCE
Some of the highlights of Key's financial performance for the first quarter of
2000 are discussed below, first on a reported basis and then on a core basis.
* Net income was $367 million, or $.83 per common share, up from $293
million, or $.65 per common share, for the first quarter of 1999. This
improvement represents a 25% increase in net income and a 28% increase in
earnings per common share.
* Key's return on average equity was 22.68%, compared with 19.48% for the
first three months of last year.
* Key's return on average total assets rose to 1.77% from 1.49% for the
year-ago quarter.
Figure 1 summarizes Key's financial performance for each of the last five
quarters.
25
<PAGE> 26
Figure 1. Selected Financial Data
<TABLE>
<CAPTION>
2000 1999
-------- ---------------------------------------------------------------
dollars in millions, except per share amounts FIRST FOURTH THIRD SECOND FIRST
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE PERIOD
Interest income $ 1,489 $ 1,489 $ 1,433 $ 1,392 $ 1,381
Interest expense 818 784 733 695 696
Net interest income 671 705 700 697 685
Provision for loan losses 183 83 78 76 111
Noninterest income 806 672 496 532 615
Noninterest expense 727 885 708 723 754
Income before income taxes 567 409 410 430 435
Net income 367 264 270 280 293
- -----------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Net income $ .83 $ .59 $ .60 $ .63 $ .65
Net income-assuming dilution .83 .59 .60 .62 .65
Cash dividends .28 .26 .26 .26 .26
Book value at period end 14.84 14.41 14.25 13.90 13.63
Market price:
High 22.25 29.75 33.50 38.13 34.19
Low 15.56 21.00 25.19 29.13 29.69
Close 19.00 22.13 25.81 32.13 30.31
Weighted average common shares (000) 441,834 446,402 448,742 448,037 449,520
Weighted average common shares and
potential common shares (000) 443,757 449,678 452,886 452,733 454,197
- -----------------------------------------------------------------------------------------------------------------------------------
AT PERIOD END
Loans $ 64,064 $ 64,222 $ 63,181 $ 61,971 $ 61,045
Earning assets 73,953 73,733 72,831 71,097 70,458
Total assets 83,504 83,395 82,577 80,889 79,992
Deposits 46,036 43,233 43,466 43,016 41,323
Long-term debt 14,784 15,881 15,815 15,168 15,457
Shareholders' equity 6,493 6,389 6,397 6,235 6,105
Full-time equivalent employees 23,474 24,568 25,523 25,758 25,650
Branches 937 936 963 965 969
- -----------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on average total assets 1.77% 1.27% 1.32% 1.40% 1.49%
Return on average equity 22.68 16.18 17.06 18.16 19.48
Efficiency (a) 62.27 59.23 58.91 59.21 61.16
Overhead (b) 35.75 30.39 30.18 29.97 33.19
Net interest margin (taxable equivalent) 3.68 3.88 3.92 3.97 3.95
- -----------------------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS AT PERIOD END
Equity to assets 7.78% 7.66% 7.75% 7.71% 7.63%
Tangible equity to tangible assets 6.16 6.03 6.06 5.95 5.86
Tier 1 risk-adjusted capital 7.98 7.68 7.84 7.48 7.44
Total risk-adjusted capital 12.04 11.66 11.94 11.74 11.92
Leverage 7.89 7.77 7.85 7.41 7.21
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Key has completed several acquisitions and divestitures during the periods 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 period
to the next. Note 3 ("Acquisitions and Divestitures") on page 8 has specific
information about the acquisitions and divestitures that Key completed in the
past five quarters to help you understand how those transactions impacted Key's
financial condition and results of operations.
(a) This ratio measures the extent to which recurring revenues are absorbed by
operating expenses and is calculated as follows: noninterest expense
(excluding certain nonrecurring charges) divided by the sum of
taxable-equivalent net interest income and noninterest income (excluding
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 gains from
certain divestitures and certain nonrecurring charges) divided by
taxable-equivalent net interest income.
26
<PAGE> 27
In both the current and prior 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 2.
Each of these items is discussed in greater detail elsewhere in this report.
Figure 2. Significant Nonrecurring Items
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
dollars in millions, except per share amounts 2000 1999
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Net income as reported $ 367 $ 293
Nonrecurring items (net of tax):
Gain from sale of credit card portfolio (207) --
Enhancement of loan loss provision methodology 77 19
Restructuring and other special charges 7 --
Gain from sale of Electronic Payment Services, Inc. -- (85)
Gains from sale of Key Merchant Services, LLC -- (9)
Other nonrecurring items (1) 30
- ---------------------------------------------------------------------------------------------
Net income - core $ 243 $ 248
====== ======
Net income per diluted common share $ .83 $ .65
Net income per diluted common share - core .55 .55
Return on average total assets 1.77% 1.49%
Return on average total assets - core 1.17 1.26
Return on average equity 22.68 19.48
Return on average equity - core 15.02 16.49
- ---------------------------------------------------------------------------------------------
</TABLE>
On a core basis, which excludes the significant nonrecurring items, Key's
earnings were $243 million, or $.55 per common share for the first quarter of
2000, compared with $248 million, or $.55, for the first three months of 1999.
The decline in Key's core net income from the first quarter of last year is due
in part to the short-term effects of actions that have been taken to promote
Key's development as an integrated financial services company. These actions,
which are intended to support the generation of consistent longer-term growth,
include the October 1999 sale of Key's Long Island district branches and the
January 2000 sale of Key's credit card business. Management estimates that the
difference in net income contributed by the Long Island district branches and
the credit card business in the first quarter of 1999, as compared with the
first quarter of 2000, was $3 million. The decline in core earnings also
reflects the impact of our recently announced intention to de-emphasize the
securitization and sale of home equity loans originated by our home equity
finance affiliate. By retaining these loans on the balance sheet, we intend to
replace over time the earnings capacity lost with the divestiture of Key's
credit card business. Earnings for the first quarter of last year included $32
million of net loan securitization gains that added approximately $20 million to
net income. Management estimates that after excluding pre-divestiture results of
the Long Island and credit card businesses and net gains resulting from the
securitization and sale of home equity loans, Key's core revenue was up 6% from
the first quarter of 1999.
Core earnings for the first quarter of 2000 benefited from the continued
strength of Key's lending activity, particularly in the commercial and home
equity portfolios. Excluding the impact of sales, home equity loans were up an
annualized 21% from the prior quarter, while commercial loans grew by more than
10%, reflecting increases in all major sectors of that portfolio. The impact of
loan growth on net interest income was more than offset, however, by adverse
effects of continued net interest margin compression. Key's net interest margin
declined by 27 basis points from the year-ago quarter, resulting in a $14
million reduction in net interest income. Key anticipated that decreases in net
interest income would result from the Long Island and credit card divestitures;
these transactions accounted for 15 basis points of the reduction in the margin.
For detailed information about net interest income, see the section entitled
"Net interest income," which begins on page 33.
27
<PAGE> 28
Core noninterest income was up $9 million from the same period last year,
despite a $28 million decline in net loan securitization gains. This improvement
reflects increases from several of our fee-generating businesses, primary among
which are various investment banking and capital markets activities, trust and
asset management and service charges on deposit accounts. For the first quarter
of 2000, core noninterest income accounted for 41% of Key's total core revenue
(which is net interest income plus core noninterest income). 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 41.
In the first quarter of 2000, we also enhanced our methodology for assessing
credit risk, particularly in the commercial loan portfolio. This resulted in an
additional provision for loan losses of $121 million. At the same time, the
percentage of Key's nonperforming loans to total loans at March 31, 2000, was
.66%, up only slightly from .65% a year ago. Asset quality has been one of Key's
historical strengths and the change in risk assessment methodology should
strengthen our overall risk profile.
CORPORATE STRATEGY
Key's corporate strategy continues to include 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 annual pre-tax earnings improvement of more
than $370 million by the date of full implementation, when combined with Key's
continued development as an integrated, multiline financial services company,
should enable us to capitalize on additional opportunities.
PRINCIPAL STRATEGIC ACTIONS DURING THE FIRST QUARTER OF 2000
On January 31, Key sold its $1.3 billion credit card portfolio as part of an
overall effort to direct financial resources and free up capital to support
faster growing businesses, such as the home equity business. The small size of
the credit card portfolio in relation to those of competitors did not provide
the scale necessary to allow Key to compete effectively in credit card lending.
The sale of the credit card portfolio is described in Note 3 ("Acquisitions and
Divestitures") on page 8.
In addition, Key continued to invest in high growth businesses. We launched a
retirement services campaign and introduced an e-commerce program for our middle
market clients. We also announced the acquisition of certain net assets of
National Realty Funding L.C., a commercial finance company headquartered in
Kansas City, Missouri. Through this acquisition we expect to significantly
expand our capabilities in originating and servicing conduit loans in the
commercial real estate market. These actions should increase the potential for
additional growth in fee income.
Finally, we continued to make progress on our three-year productivity
improvement initiative that is expected to result in annual pre-tax cost
reductions of more than $170 million by the date of full implementation. As a
result of our efforts to outsource certain nonstrategic support functions,
consolidate sites in a number of our businesses and reduce management layers, we
have reduced Key's employment base by almost 1,100 of the 3,000 positions
initially targeted for elimination by the end of this year. In connection with
these actions, we recorded an additional $14 million of restructuring and other
special charges during the first quarter, bringing the total charges recorded
for this initiative to $166 million.
Key expects to record additional restructuring and other special charges during
2000 in connection with this productivity initiative. The amount of such
charges, if any, may be higher than the $180 million originally estimated and
will depend on a number of factors. These factors include the extent of
reductions in space requirements (which may result in excess real estate), the
further consolidation of sites, the elimination of positions in excess of the
3,000 originally estimated and the identification of additional cost savings and
revenue enhancement opportunities. The section entitled "Noninterest expense,"
which begins on page 43, and Note 10 ("Restructuring Charges"), on page 18,
provide more information about Key's restructuring charges.
28
<PAGE> 29
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 five quarters. 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 1 (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.
Figure 3. Cash Basis Selected Financial Data
<TABLE>
<CAPTION>
2000 1999
-------- ------------------------------------------------------------
dollars in millions, except per share amounts FIRST FOURTH THIRD SECOND FIRST
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE PERIOD
Noninterest expense $ 702 $ 860 $ 684 $ 699 $ 725
Income before income taxes 592 434 434 454 464
Net income 390 287 291 302 319
- ----------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Net income $ .88 $ .64 $ .65 $ .67 $ .71
Net income - assuming dilution .88 .64 .64 .66 .71
Weighted average Common Shares (000) 441,834 446,402 448,742 448,037 449,520
Weighted average Common Shares and potential
Common Shares (000) 443,757 449,678 452,886 452,733 454,197
- ----------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on average total assets 1.92% 1.40% 1.45% 1.54% 1.65%
Return on average equity 30.97 22.64 24.13 25.89 28.14
Efficiency (a) 60.10 57.18 56.89 57.24 58.65
- ----------------------------------------------------------------------------------------------------------------------------------
GOODWILL AND NON-QUALIFYING INTANGIBLES
Goodwill average balance $ 1,386 $ 1,402 $ 1,429 $ 1,437 $ 1,428
Non-qualifying intangibles average balance 58 62 66 69 74
Goodwill amortization (after tax) 20 20 20 20 21
Non-qualifying intangibles amortization (after tax) 3 3 1 2 5
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Key has completed several acquisitions and divestitures during the periods
presented 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 period to the next. Note 3 ("Acquisitions and Divestitures") on page 8 has
specific information about the acquisitions and divestitures that Key completed
in the past five quarters to help you understand how those transactions impacted
Key's financial condition and results of operations.
(a) This ratio measures the extent to which recurring revenues are absorbed by
operating expenses and 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 gains from certain
divestitures and certain nonrecurring charges).
29
<PAGE> 30
LINE OF BUSINESS RESULTS
Key has four primary lines of business:
KEY RETAIL BANKING offers branch-based financial products and services to small
businesses and consumers.
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.
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 9 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 the three-month
periods ended March 31, 2000 and 1999.
Figure 4. Net Income (Loss) by Line of Business
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, CHANGE
---------------------------- ------------------------
dollars in millions 2000 1999 AMOUNT PERCENT
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Key Retail Banking $ 91 $ 84 $ 7 8.3 %
Key Specialty Finance 21 42 (21) (50.0)
Key Corporate Capital 99 93 6 6.5
Key Capital Partners (a) 28 16 12 75.0
Treasury and Other (1) (7) 6 85.7
- --------------------------------------------------------------------------------------
Total segments 238 228 10 4.4
Reconciling items 129 65 64 98.5
- --------------------------------------------------------------------------------------
Total net income $367 $293 $ 74 25.3 %
===== ==== ==== ====
- --------------------------------------------------------------------------------------
</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 $37 million and $26 million for the
first three months of 2000 and 1999, respectively, before it assigned some
of its income and expense.
KEY RETAIL BANKING
Net income for Key Retail Banking was $91 million for the first quarter of 2000,
or approximately 25% of Key's consolidated earnings. In comparison, net income
was $84 million for the first three months of 1999, or approximately 29% of
consolidated earnings. The increase in net income reflects growth in noninterest
income and a decline in noninterest expense. These factors were partially offset
by a slightly higher provision for loan losses.
Noninterest income was up $8 million from the first quarter of last year.
Increases in both service charges on deposit accounts and ATM fees were the
primary factors driving the improvement. The increase in service charges
reflected the repricing of services, while the growth in ATM fees resulted from
a higher volume of activity.
30
<PAGE> 31
Noninterest expense decreased by $11 million from the year-ago quarter,
primarily due to lower personnel expense and a decrease in depreciation and
amortization expenses. The decline in personnel expense reflects a decrease in
the number of employees.
The provision for loan losses increased by $2 million in response to a slightly
higher level of net charge-offs.
Net interest income was virtually unchanged from the prior year. Average loans
outstanding increased 10% due to growth in both the commercial and consumer
portfolios. However, the positive effect of this growth was offset by the impact
of a lower deposit base, lower interest rate spreads used in determining the
credit for deposits generated by Key Retail Banking and an increase in the
deposit rates paid to our clients.
KEY SPECIALTY FINANCE
Net income for Key Specialty Finance was $21 million in the first quarter of
2000, or approximately 6% of Key's consolidated earnings. In comparison, net
income was $42 million for the first three months of 1999, or approximately 14%
of consolidated earnings. The decline in net income had been anticipated by
management as a consequence of strategic changes (discussed in the following two
paragraphs) which led to decreases in both net interest income and noninterest
income. The decline in these revenue components was partially offset by a
reduction in the provision for loan losses.
Net interest income decreased by $13 million from the first quarter of 1999.
This decrease was attributable to a slight decline in average loans outstanding
and higher interest rate spreads used in determining the charge for funds used
to support the home equity loans originated by Champion Mortgage Co., Inc., our
home equity finance affiliate. Starting in 2000, we intend to de-emphasize our
practice of securitizing and selling home equity loans originated by Champion,
although we may continue to securitize these loans without then selling them. By
retaining these assets on the balance sheet, we intend to replace over time the
earnings capacity previously provided by the credit card business, which was
sold in January 2000. The additional funding charge to net interest income
resulted from the fact that since these loans are no longer classified as "held
for sale" and are expected to be retained on the balance sheet until maturity,
their funding costs reflect the higher rates associated with longer holding
periods.
Virtually all of the $28 million decrease in noninterest income from a year ago
is attributable to the absence of securitization gains in the current year, due
in part to the change in practice discussed above. We estimate that the change
in our home equity loan securitization practice will reduce Key's 2000 diluted
earnings per common share by approximately $.08 from what it would have been had
we continued to securitize and sell home equity loans. For more information
about Key's loan securitization activities, see the section entitled "Loans"
which begins on page 46.
The provision for loan losses was reduced by $7 million in response to improved
consumer credit quality, while the level of noninterest expense was essentially
unchanged from the prior year.
KEY CORPORATE CAPITAL
Net income for Key Corporate Capital was $99 million for the first quarter of
2000, or approximately 27% of Key's consolidated earnings. In comparison, net
income was $93 million for the same period last year, or approximately 31% of
consolidated earnings. The increase in net income derived primarily from two
sources. First, total average loans increased by 10%, generating higher net
interest income. This includes strong increases in all major business units,
including real estate construction, lease financing, structured finance,
healthcare, media and the middle market portfolios. Second, noninterest income
increased by $6 million, primarily due to higher income from service charges on
deposit accounts, loan fees and various investment banking and capital markets
activities.
The $27 million increase in total revenue was partially offset by a $7 million
increase in the provision for loan losses. Revenue was also offset by a $7
million increase in noninterest expense, primarily because of higher personnel
expense, fees for professional services, and depreciation and amortization
expense.
31
<PAGE> 32
During the first quarter of 2000, Key announced the acquisition of certain net
assets of National Realty Funding L.C., a commercial finance company
headquartered in Kansas City, Missouri. Through this acquisition we expect to
expand significantly our capabilities in originating and servicing conduit loans
in the commercial real estate market and to enhance our potential for additional
growth in fee income.
KEY CAPITAL PARTNERS
Net income for Key Capital Partners was $28 million for the first quarter of
2000, or approximately 7% of Key's consolidated earnings. In comparison, net
income was $16 million for the first three months of 1999, or approximately 5%
of 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 $37 million in the first three months of 2000
(representing approximately 10% of Key's consolidated earnings) and $26 million
in the same period last year (representing approximately 9% of Key's
consolidated earnings).
Total revenue for Key Capital Partners rose by $39 million from the year-ago
quarter. The main source of this improvement is various investment banking and
capital markets activities, including gains from the sales of equity capital
investments, dealer trading and derivatives income, and investment banking
management fees. 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.
Noninterest expense was up $19 million from the first quarter of last year, due
primarily to higher personnel costs.
TREASURY AND OTHER
Treasury and Other includes the Treasury, Electronic Services and Deposit
Marketing business units, as well as the net effect of funds transfer pricing.
In the first three months of 2000, this segment generated a net loss of $1
million, compared with a net loss of $7 million for the first quarter of 1999.
The $6 million improvement from the prior year is primarily due to growth in the
Electronic Services and Deposit Marketing businesses as well as higher income
from corporate owned life insurance.
RECONCILING ITEMS
The "reconciling items" shown in Figure 4 reflect certain nonrecurring items and
charges related to unallocated corporate support functions. Also included in
both the current and prior year are the results of divested businesses. Prior to
the first quarter of 2000, these results had been included in the individual
lines of business to which they pertained.
The $23 million decrease in net interest income is attributable to the decline
in pre-divestiture earnings contributed by Key's credit card business (divested
in January 2000) and Long Island district branches (divested in October 1999).
Noninterest income for first quarter 2000 includes a $332 million ($207 million
after tax) gain from the sale of Key's credit card business. In the prior year,
first quarter results include a $134 million ($85 million after tax) gain from
the sale of Key's 20% interest in Electronic Payment Services, Inc. and a final
$14 million ($9 million after tax) gain from the sale of Key's 51% interest in
Key Merchant Services, LLC.
32
<PAGE> 33
The $69 million increase in the provision for loan losses resulted from an
additional provision of $121 million ($77 million after tax) recorded in the
first quarter of 2000 in connection with the implementation of a revised
methodology for assessing credit risk, particularly in the commercial loan
portfolio. Another factor contributing to the increase was the impact of the
divested credit card business.
Noninterest expense in the first quarter of 2000 includes restructuring and
other special charges of $14 million ($9 million after tax) related to Key's
profitability enhancement initiative and $7 million ($4 million after tax)
incurred by divested business. In the first quarter of 1999, noninterest expense
includes special contributions of $20 million ($13 million after tax) made to
the charitable foundation that Key sponsors, $27 million ($17 million after tax)
of other nonrecurring charges and $22 million ($14 million after tax) incurred
by divested businesses.
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, including:
* 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 five
quarters. Net interest income for the first quarter 2000 was $678 million,
representing a $15 million, or 2%, decrease from the same period last year. The
decline reflects a 27 basis point reduction in the net interest margin to 3.68%,
which more than offset the impact of a 4% increase in average earning assets
(primarily commercial and consumer loans) to $73.7 billion.
NET INTEREST MARGIN. There are several reasons that the net interest margin
declined over the past year:
* we anticipated that the October 1999 divestiture of Key's Long Island
branches with approximately $1.3 billion in deposits and the January 2000
sale of the $1.3 billion credit card portfolio would result in decreases in
Key's net interest income;
* increased competition has impacted the rates that we can charge for loans
and the rates that we must pay for deposits;
* core deposit growth has not kept pace with loan growth due in part to
branch divestitures and client preferences for other investment
alternatives;
* we are relying more on higher-cost funds to support the increased demand
for loans; and
* we have intensified our efforts to grow deposits such as money market
deposit accounts and time deposits. These deposits are among the more
costly of our core deposit products, but they provide more stable funding
than wholesale sources.
33
<PAGE> 34
Figure 5. Average Balance Sheets, Net Interest Income and Yields/Rates
<TABLE>
<CAPTION>
FIRST QUARTER 2000 FOURTH QUARTER 1999
---------------------------------- --------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
dollars in millions BALANCE INTEREST RATE BALANCE INTEREST RATE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans (a),(b)
Commercial, financial and agricultural $18,677 $ 379 8.17% $18,311 $ 364 7.90%
Real estate-- commercial mortgage 6,891 150 8.74 6,824 147 8.52
Real estate-- construction 4,601 104 9.12 4,438 100 8.88
Commercial lease financing 6,684 122 7.28 6,484 120 7.43
- -----------------------------------------------------------------------------------------------------------------------------------
Total commercial loans 36,853 755 8.23 36,057 731 8.05
Real estate-- residential 4,318 81 7.48 4,338 80 7.56
Home equity 8,129 179 8.85 7,497 168 8.71
Credit card -- -- -- -- -- --
Consumer - direct 2,572 62 9.72 2,560 63 9.85
Consumer - indirect lease financing 3,174 63 7.93 3,159 62 8.01
Consumer - indirect other 6,286 145 9.22 6,452 151 9.34
- -----------------------------------------------------------------------------------------------------------------------------------
Total consumer loans 24,479 530 8.67 24,006 524 8.70
Loans held for sale 2,692 65 9.80 3,423 95 11.09
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans 64,024 1,350 8.47 63,486 1,350 8.46
Taxable investment securities 580 4 2.94 506 4 3.26
Tax-exempt investment securities (a) 436 10 8.74 468 11 8.69
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment securities 1,016 14 5.43 974 15 5.87
Securities available for sale (a),(c) 6,475 112 6.81 6,667 114 6.77
Short-term investments 2,164 20 3.66 1,954 18 3.48
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 73,679 1,496 8.15 73,081 1,497 8.15
Allowance for loan losses (899) (916)
Other assets 10,407 10,409
- -----------------------------------------------------------------------------------------------------------------------------------
$83,187 $82,574
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Money market deposit accounts $12,617 104 3.32 $12,836 100 3.09
Savings deposits 2,357 9 1.61 2,458 9 1.62
NOW accounts 627 3 1.62 610 4 1.76
Certificates of deposit ($100,000 or more) 5,555 80 5.78 5,151 71 5.48
Other time deposits 12,552 164 5.25 12,150 154 5.04
Deposits in foreign office 1,206 17 5.76 906 12 5.45
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 34,914 377 4.34 34,111 350 4.08
Federal funds purchased and securities
sold under repurchase agreements 4,003 48 4.85 4,384 52 4.71
Bank notes and other short-term borrowings 8,680 126 5.83 8,243 116 5.57
Long-term debt, including capital securities (d) 16,577 267 6.49 17,095 266 6.17
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 64,174 818 5.13 63,833 784 4.87
Noninterest-bearing deposits 8,160 8,430
Other liabilities 4,344 3,836
Common shareholders' equity 6,509 6,475
- -----------------------------------------------------------------------------------------------------------------------------------
$83,187 $82,574
======= =======
Interest rate spread (TE) 3.02 3.28
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income (TE) and net
interest margin (TE) $ 678 3.68% $ 713 3.88%
====== ==== ====== ====
Capital securities $ 1,243 $ 23 $ 1,243 $ 23
Taxable-equivalent adjustment (a) 7 8
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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 the
average loan balances.
(c) Yield is calculated on the basis of amortized cost.
(d) Rate calculation excludes ESOP debt.
TE = Taxable Equivalent
34
<PAGE> 35
Figure 5. Average Balance Sheets, Net Interest Income and Yields/Rates
(Continued)
<TABLE>
<CAPTION>
THIRD QUARTER 1999 SECOND QUARTER 1999
------------------------------------ ---------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
dollars in millions BALANCE INTEREST RATE BALANCE INTEREST RATE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans (a),(b)
Commercial, financial and agricultural $17,978 $ 348 7.66% $17,479 $ 324 7.43%
Real estate -- commercial mortgage 6,784 141 8.25 7,007 144 8.27
Real estate -- construction 4,190 89 8.46 4,015 81 8.09
Commercial lease financing 6,261 113 7.16 5,889 109 7.39
- ---------------------------------------------------------------------------------------------------------------------------------
Total commercial loans 35,213 691 7.78 34,390 658 7.67
Real estate -- residential 4,175 80 7.64 4,546 87 7.71
Home equity 7,739 161 8.32 7,556 160 8.47
Credit card 1,302 54 16.45 1,322 49 14.93
Consumer - direct 2,467 60 9.65 2,425 58 9.59
Consumer - indirect lease financing 2,993 61 8.15 2,826 57 8.07
Consumer - indirect other 6,457 148 9.17 6,425 146 9.09
- ---------------------------------------------------------------------------------------------------------------------------------
Total consumer loans 25,133 564 8.92 25,100 557 8.90
Loans held for sale 2,453 50 8.00 2,114 39 7.35
- ---------------------------------------------------------------------------------------------------------------------------------
Total loans 62,799 1,305 8.24 61,604 1,254 8.16
Taxable investment securities 471 4 3.47 424 3 3.25
Tax-exempt investment securities (a) 499 10 8.55 560 12 8.63
- ---------------------------------------------------------------------------------------------------------------------------------
Total investment securities 970 14 6.09 984 15 6.31
Securities available for sale (a),(c) 6,359 106 6.54 6,575 107 6.46
Short-term investments 1,836 17 3.74 1,725 23 5.32
- ---------------------------------------------------------------------------------------------------------------------------------
Total earning assets 71,964 1,442 7.96 70,888 1,399 7.91
Allowance for loan losses (920) (919)
Other assets 10,251 10,056
- ---------------------------------------------------------------------------------------------------------------------------------
$81,295 $80,025
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Money market deposit accounts $13,274 100 2.97 $13,145 96 2.93
Savings deposits 2,699 11 1.63 2,811 12 1.62
NOW accounts 610 1 1.37 743 3 1.45
Certificates of deposit ($100,000 or more) 4,475 59 5.22 3,737 47 5.07
Other time deposits 12,095 150 4.91 11,811 144 4.90
Deposits in foreign office 776 10 4.99 1,096 13 4.75
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 33,929 331 3.87 33,343 315 3.79
Federal funds purchased and securities
sold under repurchase agreements 4,495 51 4.49 5,479 63 4.59
Bank notes and other short-term borrowings 7,428 103 5.50 6,786 88 5.22
Long-term debt, including capital securities (d) 17,069 248 5.79 16,530 229 5.57
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 62,921 733 4.62 62,138 695 4.48
Noninterest-bearing deposits 8,534 8,438
Other liabilities 3,561 3,264
Common shareholders' equity 6,279 6,185
- ---------------------------------------------------------------------------------------------------------------------------------
$81,295 $80,025
======= =======
Interest rate spread (TE) 3.34 3.43
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income (TE) and net
interest margin (TE) $ 709 3.92% $ 704 3.97%
======= ===== ====== ====
Capital securities $ 1,205 $ 22 $ 1,162 $ 21
Taxable-equivalent adjustment (a) 9 7
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FIRST QUARTER 1999
--------------------------------
AVERAGE YIELD/
dollars in millions BALANCE INTEREST RATE
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Loans (a),(b)
Commercial, financial and agricultural $16,994 $ 314 7.49%
Real estate -- commercial mortgage 7,176 148 8.36
Real estate -- construction 3,651 73 8.11
Commercial lease financing 5,723 103 7.30
- ------------------------------------------------------------------------------------
Total commercial loans 33,544 638 7.71
Real estate-- residential 4,868 91 7.58
Home equity 7,399 156 8.43
Credit card 1,377 49 14.43
Consumer - direct 2,374 57 9.74
Consumer - indirect lease financing 2,703 56 8.29
Consumer - indirect other 7,009 163 9.30
- ------------------------------------------------------------------------------------
Total consumer loans 25,730 572 9.02
Loans held for sale 2,419 44 7.38
- ------------------------------------------------------------------------------------
Total loans 61,693 1,254 8.24
Taxable investment securities 375 4 4.33
Tax-exempt investment securities (a) 615 13 8.57
- ------------------------------------------------------------------------------------
Total investment securities 990 17 6.96
Securities available for sale (a),(c) 6,004 97 6.58
Short-term investments 1,975 21 4.31
- ------------------------------------------------------------------------------------
Total earning assets 70,662 1,389 7.97
Allowance for loan losses (888)
Other assets 10,084
- ------------------------------------------------------------------------------------
$79,858
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Money market deposit accounts $12,540 94 3.04
Savings deposits 2,899 12 1.68
NOW accounts 1,210 4 1.34
Certificates of deposit ($100,000 or more) 3,646 46 5.12
Other time deposits 11,814 147 5.05
Deposits in foreign office 509 6 4.78
- ------------------------------------------------------------------------------------
Total interest-bearing deposits 32,618 309 3.84
Federal funds purchased and securities
sold under repurchase agreements 5,077 54 4.31
Bank notes and other short-term borrowings 9,208 119 5.24
Long-term debt, including capital securities (d) 15,172 214 5.73
- ------------------------------------------------------------------------------------
Total interest-bearing liabilities 62,075 696 4.55
Noninterest-bearing deposits 8,495
Other liabilities 3,188
Common shareholders' equity 6,100
- ------------------------------------------------------------------------------------
$79,858
=======
Interest rate spread (TE) 3.42
- ------------------------------------------------------------------------------------
Net interest income (TE) and net
interest margin (TE) $ 693 3.95%
====
Capital securities $ 1,039 $ 19
Taxable-equivalent adjustment (a) 8
- ------------------------------------------------------------------------------------
</TABLE>
35
<PAGE> 36
INTEREST EARNING ASSETS. Average earning assets for the first quarter totaled
$73.7 billion, which was $3.0 billion, or 4%, higher than the first quarter 1999
level. This increase came principally from the loan portfolio, which grew by
$2.3 billion, or 4%, despite the recent sale of Key's credit card business. The
largest growth occurred in the commercial loan portfolio, but the growth of the
home equity portfolio was also strong.
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. Earlier this year, we announced our
intention to de-emphasize the securitization and sale of home equity loans
generated by our home equity finance affiliate. No such transactions occurred
during the first quarter of 2000. In the future, we may continue to securitize
home equity loans without selling them. By retaining the assets generated by
this rapidly growing business on Key's balance sheet, we intend to replace over
time the earnings capacity lost with the divestiture of our credit card
business.
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 to, 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 $21.7
billion at March 31, 2000, from $18.7 billion at the end of 1999. At the same
time, the notional amount of interest rate caps decreased by $1.2 billion to
$1.1 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 $2 million to net
interest income in the first quarter of 2000 and $1 million in the first quarter
of 1999.
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 the first quarters of 2000 and 1999 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 46.
36
<PAGE> 37
Figure 6. Components of Net Interest Income Changes
<TABLE>
<CAPTION>
FROM THREE MONTHS ENDED MARCH 31, 1999,
TO THREE MONTHS ENDED MARCH 31, 2000
---------------------------------------
AVERAGE YIELD/ NET
in millions VOLUME RATE CHANGE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 48 $ 48 $ 96
Taxable investment securities 2 (2) --
Tax-exempt investment securities (4) 1 (3)
Securities available for sale 8 7 15
Short-term investments 2 (3) (1)
- ---------------------------------------------------------------------------------------------
Total interest income (taxable equivalent) 56 51 107
INTEREST EXPENSE
Money market deposit accounts 1 9 10
Savings deposits (2) (1) (3)
NOW accounts (2) 1 (1)
Certificates of deposit ($100,000 or more) 27 7 34
Other time deposits 9 8 17
Deposits in foreign office 10 1 11
- ---------------------------------------------------------------------------------------------
Total interest-bearing deposits 43 25 68
Federal funds purchased and securities sold
under repurchase agreements (12) 6 (6)
Bank notes and other short-term borrowings (7) 14 7
Long-term debt, including capital securities 21 32 53
- ---------------------------------------------------------------------------------------------
Total interest expense 45 77 122
- ---------------------------------------------------------------------------------------------
Net interest income (taxable equivalent) $ 11 $(26) $(15)
==== ==== ====
- ---------------------------------------------------------------------------------------------
</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
37
<PAGE> 38
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 March 31, 2000, based on the results of our simulation model, Key would
expect net interest income to increase by approximately $16 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 $12 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 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 Key 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 equal
38
<PAGE> 39
amounts of assets and liabilities are 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 $56 million during the first three
months of 2000 from a negative fair value of $42 million at December 31, 1999.
Fair value decreased over the past quarter 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 $902 million during the first
three months of 2000, resulting in a deferred gain of $3 million. Each swap
termination was made in response to a unique set of circumstances. Generally,
the decision to terminate any swap contract is integrated strategically with
asset and liability management and takes many factors into account.
During 1999 and the first quarter of 2000, 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 the
three-month period ended March 31, 2000. For more information about these
instruments, including the balance and remaining amortization period of Key's
deferred swap gains and losses, see Note 11 ("Financial Instruments with
Off-Balance Sheet Risk"), which begins on page 18.
Figure 7. Portfolio Swaps and Caps Activity
<TABLE>
<CAPTION>
RECEIVE FIXED PAY FIXED BASIS SWAPS
----------------------------- --------------------------- --------------------------
INDEXED FORWARD- FORWARD-
in millions AMORTIZING CONVENTIONAL CONVENTIONAL STARTING CONVENTIONAL STARTING
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1999 $104 $5,962 $5,545 $ 278 $6,783 --
Additions -- 500 1,939 288 400 $1,268
Maturities -- 200 203 -- 50 --
Terminations -- 500 302 -- 100 --
Forward-starting becoming effective -- -- 278 (278) -- --
Amortization 7 -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2000 $ 97 $5,762 $7,257 $ 288 $7,033 $1,268
==== ====== ====== ===== ====== ======
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TOTAL
PORTFOLIO
in millions SWAPS CAPS TOTAL
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1999 $18,672 $2,250 $20,922
Additions 4,395 30 4,425
Maturities 453 1,200 1,653
Terminations 902 -- 902
Forward-starting becoming effective -- -- --
Amortization 7 -- 7
- -----------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2000 $21,705 $1,080 $22,785
======= ====== =======
- -----------------------------------------------------------------------------------------
</TABLE>
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.
39
<PAGE> 40
Figure 8. Portfolio Swaps and Caps by Interest Rate Management Strategy
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999 MARCH 31, 1999
------------------ ------------------ ------------------
NOTIONAL FAIR NOTIONAL FAIR NOTIONAL FAIR
in millions AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Convert variable rate loans to fixed $ 1,247 $ (34) $ 1,254 $ (24) $ 1,528 $ 31
Convert fixed rate loans to variable 983 11 587 14 822 (1)
Convert fixed rate securities to variable 363 21 316 18 323 (8)
Convert variable rate deposits and short-term borrowings to fixed 1,050 17 1,100 14 1,650 (12)
Convert fixed rate deposits and short-term borrowings to variable 226 (7) 226 (6) 550 --
Convert variable rate long-term debt to fixed 5,149 71 3,820 59 1,395 11
Convert fixed rate long-term debt to variable 4,386 (104) 4,586 (104) 4,173 95
Basis swaps - foreign currency denominated debt 1,089 (37) 321 (23) 304 (7)
Basis swaps - interest rate indices 7,212 (1) 6,462 3 4,752 --
- ----------------------------------------------------------------------------------------------------------------------------------
Total portfolio swaps 21,705 (63) 18,672 (49) 15,497 109
Modify characteristics of variable rate short-term borrowings 950 6 2,050 6 2,825 2
Modify characteristics of variable rate long-term debt 130 1 200 1 400 --
Modify characteristics of capital securities remarketing -- -- -- -- 250 (7)
- ----------------------------------------------------------------------------------------------------------------------------------
Total portfolio caps and collars 1,080 7 2,250 7 3,475 (5)
- ----------------------------------------------------------------------------------------------------------------------------------
Total portfolio swaps, caps and collars $22,785 $ (56) $20,922 $ (42) $18,972 $ 104
======= ===== ======= ===== ======= =====
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Figure 9 summarizes the expected average maturities of Key's portfolio swaps and
caps at March 31, 2000.
Figure 9. Expected Average Maturities of Portfolio Swaps and Caps
<TABLE>
<CAPTION>
MARCH 31, 2000 RECEIVE FIXED PAY FIXED BASIS SWAPS
--------------------------- ---------------------------- ---------------------------
INDEXED FORWARD- FORWARD-
in millions AMORTIZING CONVENTIONAL CONVENTIONAL STARTING CONVENTIONAL STARTING
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Mature in one year or less $38 $1,800 $1,337 -- $3,775 --
Mature after one through five years 59 2,380 4,836 $143 3,258 $1,268
Mature after five through ten years -- 982 721 72 -- --
Mature after ten years -- 600 363 73 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total portfolio swaps, caps
and collars $97 $5,762 $7,257 $288 $7,033 $1,268
=== ====== ====== ==== ====== ======
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 2000
TOTAL
PORTFOLIO
in millions SWAPS CAPS TOTAL
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Mature in one year or less $ 6,950 $ 700 $ 7,650
Mature after one through five years 11,944 380 12,324
Mature after five through ten years 1,775 -- 1,775
Mature after ten years 1,036 -- 1,036
- ----------------------------------------------------------------------------------
Total portfolio swaps, caps
and collars $21,705 $1,080 $22,785
======= ====== =======
- ----------------------------------------------------------------------------------
</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 11 ("Financial
Instruments with Off-Balance Sheet Risk"), which begins on page 18.
Management uses 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 March 31, 2000, Key's aggregate
daily VAR was $.9 million compared with $1 million at March 31, 1999. Aggregate
daily VAR averaged less than $1 million for the first quarter of 2000, compared
with an average of $2 million during the same period last year. 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.
40
<PAGE> 41
NONINTEREST INCOME
Noninterest income for the first three months of 2000 totaled $806 million, up
$191 million, or 31%, from the same period last year. In the first quarters of
both 2000 and 1999, noninterest income has been affected by various nonrecurring
items. The most significant of these items are shown in Figure 10 and include
gains from divestitures and certain nonrecurring charges. For more information
on the divestitures, see Note 3 ("Acquisitions and Divestitures"), which begins
on page 8.
Excluding nonrecurring items, core noninterest income of $476 million was $9
million higher than the $467 million reported a year ago and currently
represents 41% of Key's total core revenue. This growth occurred despite a $28
million decline in net securitization gains due in part to a revised strategy
discussed below. One of management's long-term objectives is to increase core
noninterest income as a percentage of total core revenue to 50%.
The strongest contributions to the growth in noninterest income came from
investment banking and capital markets activities (up $23 million), trust and
asset management (up $9 million) and service charges on deposit accounts (up $5
million). The growth of these revenue components reflected the overall strength
of the securities markets, new business and the repricing of certain services.
Other factors made less substantial contributions to noninterest income,
including increases in brokerage income, letter of credit and loan fees, and
electronic banking fees. Each of these revenue components rose $3 million from
the first three months of last year. The growth in Key's core noninterest income
was moderated by the decline in net loan securitization gains and a $4 million
reduction in credit card fees.
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 from the first three months of 1999. For detailed information about
investment banking and capital markets income, and trust income and assets, see
Figures 11 and 12, respectively.
TRUST AND ASSET MANAGEMENT. Trust and asset management activities provide Key's
largest source of noninterest income. At March 31, 2000, Key's bank, trust, and
registered investment advisory subsidiaries had assets under discretionary
management (excluding corporate trust assets) of $72 billion, compared with $67
billion at March 31, 1999.
CREDIT CARD FEES. Credit card fees declined by $4 million from the first quarter
of 1999 due to the sale of Key's credit card business in January 2000. For more
information about this transaction, see the section entitled "Highlights of
Key's First Quarter 2000 Performance," which begins on page 25, and Note 3
("Acquisitions and Divestitures") on page 8.
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 46.
During the first quarter of 2000, we did not securitize any of our loans due in
part to our plans announced earlier this year to de-emphasize the securitization
and sale of home equity loans originated by our home equity finance affiliate.
By retaining these assets on the balance sheet, we intend to replace over time
the earnings capacity lost with the divestiture of the credit card portfolio.
41
<PAGE> 42
Figure 10. Noninterest Income
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, CHANGE
---------------------------- --------------------------
dollars in millions 2000 1999 AMOUNT PERCENT
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust and asset management income $115 $106 $ 9 8.5 %
Investment banking and capital markets income 89 66 23 34.8
Service charges on deposit accounts 86 81 5 6.2
Brokerage income 45 42 3 7.1
Corporate owned life insurance income 25 24 1 4.2
Credit card fees 6 10 (4) (40.0)
Net loan securitization gains 4 32 (28) (87.5)
Net securities gains 1 4 (3) (75.0)
Other income:
Letter of credit and loan fees 23 20 3 15.0
Electronic banking fees 15 12 3 25.0
Insurance income 17 15 2 13.3
Loan securitization servicing fees 6 7 (1) (14.3)
Gains from sales of loans 7 10 (3) (30.0)
Miscellaneous income 37 38 (1) (2.6)
- -------------------------------------------------------------------------------------------------------------------------
Total other income 105 102 3 2.9
- -------------------------------------------------------------------------------------------------------------------------
Total core noninterest income 476 467 9 1.9
Gain from sale of credit card portfolio 332 -- 332 N/M
Gain from sale of Electronic Payment Services, Inc. -- 134 (134) (100.0)
Gain from sale of Key Merchant Services, LLC -- 14 (14) (100.0)
Nonrecurring charges (2) -- (2) N/M
- -------------------------------------------------------------------------------------------------------------------------
Total significant nonrecurring items 330 148 182 123.0
- -------------------------------------------------------------------------------------------------------------------------
Total noninterest income $806 $615 $ 191 31.1 %
==== ==== =====
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
N/M=Not Meaningful
Figure 11. Investment Banking and Capital Markets Income
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, CHANGE
---------------------------- --------------------------
dollars in millions 2000 1999 AMOUNT PERCENT
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dealer trading and derivatives income $44 $37 $ 7 18.9%
Investment banking income 21 19 2 10.5
Equity capital income 15 3 12 400.0
Foreign exchange income 9 7 2 28.6
- -------------------------------------------------------------------------------------------------------------------------
Total investment banking and capital markets income $89 $66 $23 34.8%
=== === ===
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Figure 12. Trust and Asset Management
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, CHANGE
---------------------------- --------------------------
dollars in millions 2000 1999 AMOUNT PERCENT
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Personal asset management and custody fees $ 47 $ 48 $(1) (2.1)%
Institutional asset management and custody fees 24 25 (1) (4.0)
Bond services 9 5 4 80.0
All other fees 35 28 7 25.0
- -------------------------------------------------------------------------------------------------------------------------
Total trust and asset management income $115 $106 $ 9 8.5 %
==== ==== ===
dollars in billions
- -------------------------------------------------------------------------------------------------------------------------
MARCH 31,
Discretionary assets $ 72 $ 67 $ 5 7.5 %
Non-discretionary assets 50 48 2 4.2
- -------------------------------------------------------------------------------------------------------------------------
Total trust assets $122 $115 $ 7 6.1 %
==== ==== ===
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE> 43
During the first quarter of last year, we securitized and sold $1.8 billion of
consumer loans, resulting in net gains of $32 million. The level of
securitizations was particularly high during that quarter because a
securitization originally planned for the fourth quarter of 1998 was postponed
due to instability in the capital markets and was added to the expected volume
of securitizations for the first quarter of 1999. 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 46.
GAINS FROM OTHER DIVESTITURES. Noninterest income for the first three months of
2000 includes a $332 million gain from the sale of Key's credit card business.
Results for the year-ago quarter include a gain of $134 million from the sale of
Key's interest in Electronic Payment Services, Inc. and a final gain of $14
million that was recorded in connection with the 1998 sale of a 51% interest in
Key Merchant Services, LLC.
NONINTEREST EXPENSE
Noninterest expense for the first three months of 2000 totaled $727 million,
compared with $754 million for the first three months of 1999. Significant
nonrecurring items that affect the comparability of results for the first
quarters of 2000 and 1999 are shown in Figure 13. In the current year, these
items include restructuring and other special charges of $12 million, and a
nonrecurring credit of $3 million. You can find more information about the
nonrecurring charges under the heading "Restructuring and other special charges"
on page 44.
In the first quarter of 1999, results included nonrecurring charges of $47
million. Among these charges are $20 million of charitable contributions made in
light of the gain realized from the sale of Key's interest in Electronic Payment
Services, Inc.
Excluding nonrecurring charges, core noninterest expense of $718 million grew by
less than 2% from $707 million for the year-ago quarter. The increase came
largely from personnel expense (up $14 million), higher costs associated with
computer processing (up $5 million) and fees for professional services (up $4
million). In addition, miscellaneous expense rose by $4 million due to a $7
million charge recorded in the first quarter of 2000 to reduce the carrying
amount of residual values related to leased vehicles. The above increases were
offset in part by lower costs associated with equipment, marketing and the
amortization of intangibles.
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 from the first three months of
1999.
PERSONNEL. Personnel expense, the largest category of Key's noninterest expense,
accounted for most of the total increase in core noninterest expense. The
increase is primarily due to higher costs associated with benefits (including
the impact of a $7 million adjustment recorded in the first quarter of 1999 to
reduce accruals for medical expenses) and the impact of annual merit increases.
At March 31, 2000, the number of full-time equivalent employees was 23,474,
compared with 24,568 at the end of 1999 and 25,650 a year ago. The number of
full-time equivalent employees decreased over the past twelve months, primarily
because of branch divestitures completed in 1999, the sale of the credit card
business, and the elimination of positions in connection with Key's productivity
improvement initiative.
COMPUTER PROCESSING. The increase in computer processing expense is due to
higher levels of computer software amortization as well as increases related to
software rental and maintenance.
PROFESSIONAL FEES. Professional fees comprise expenses incurred for legal,
audit, consulting and certain other business services. The 27% increase in these
fees from the first quarter of 1999 was fairly evenly spread among the above
categories.
43
<PAGE> 44
Figure 13. Noninterest Expense
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, CHANGE
--------------------------- --------------------------
dollars in millions 2000 1999 AMOUNT PERCENT
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Personnel $ 382 $ 368 $ 14 3.8 %
Net occupancy 57 59 (2) (3.4)
Computer processing 59 54 5 9.3
Equipment 48 51 (3) (5.9)
Marketing 22 25 (3) (12.0)
Amortization of intangibles 25 28 (3) (10.7)
Professional fees 19 15 4 26.7
Other expense:
Postage and delivery 17 19 (2) (10.5)
Telecommunications 14 14 -- --
Equity- and gross receipts- based taxes 8 8 -- --
OREO expense, net 2 5 (3) (60.0)
Miscellaneous expense 65 61 4 6.6
- ------------------------------------------------------------------------------------------------------------------
Total other expense 106 107 (1) (.9)
- ------------------------------------------------------------------------------------------------------------------
Total core noninterest expense 718 707 11 1.6
Restructuring and other special charges 12 -- 12 N/M
Other nonrecurring items (3) 47 (50) N/M
- ------------------------------------------------------------------------------------------------------------------
Total significant nonrecurring items 9 47 (38) (80.9)
- ------------------------------------------------------------------------------------------------------------------
Total noninterest expense $ 727 $ 754 $(27) (3.6)%
======= ======= ====
Full-time equivalent employees at period end 23,474 25,650
Efficiency ratio (a) 62.27% 61.16%
Overhead ratio (b) 35.75 33.19
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) This ratio measures the extent to which recurring revenues are absorbed by
operating expenses and is calculated as follows: noninterest expense
(excluding certain nonrecurring charges) divided by the sum of
taxable-equivalent net interest income and noninterest income (excluding
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 gains from certain
divestitures and certain nonrecurring charges) divided by
taxable-equivalent net interest income.
N/M = Not Meaningful
RESTRUCTURING AND OTHER SPECIAL CHARGES. As stated previously, during the first
quarter of 2000 Key recorded nonrecurring charges of $14 million (including
restructuring charges of $9 million) in connection with strategic actions
initiated in the fourth quarter of 1999. Our goal is to achieve more than $170
million of annual expense reductions by the time our three-year productivity
improvement initiative is fully implemented. 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, we anticipate recording
additional charges over the remainder of the year. The amount of such charges,
if any, may be higher than the $180 million originally estimated and will depend
on a number of factors. These factors include the extent of reductions in space
requirements (which may result in excess real estate), the further consolidation
of sites, the elimination of positions in excess of the 3,000 originally
estimated and the identification of additional cost savings and revenue
enhancement opportunities. Cash generated by Key's operations will fund the
restructuring charge liability. None of the charges will have a material impact
on Key's liquidity.
During the first quarter of 2000, Key also recorded a $2 million credit to
restructuring charges in connection with separate actions initiated during the
fourth quarter of 1996 to complete Key's transformation to a nationwide
bank-based financial services company. The credit was taken to reduce the
remaining liability associated with branch consolidations, since favorable
market conditions resulted in lower costs to consolidate these branches than
originally expected.
44
<PAGE> 45
For additional information, including the specific components of the
restructuring charges and the related liability for payment remaining as of
March 31, 2000, see Note 10 ("Restructuring Charges") on page 18.
EFFICIENCY RATIO. The efficiency ratio, which provides a measure of the extent
to which recurring revenues are used to pay operating expenses, was 62.27% for
the first quarter of 2000, compared with 61.16% for the same period last year.
"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 69 basis points of Key's efficiency ratio for the first quarters
of both 2000 and 1999. 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. Failure to address 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 its plan by the end of 1999. At the turn of the
millennium and through the first quarter of 2000 we did not experience any
operational problems. However, we will continue to monitor our systems to ensure
that they continue to operate properly and will make modifications, 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.
INCOME TAXES
The provision for income taxes is $200 million for the three-month period ended
March 31, 2000, up from $142 million for the same period in 1999. The effective
tax rate (which is the provision for income taxes as a percentage of income
before income taxes) for the first quarter of 2000 is 35.3%, compared with 32.6%
for the first quarter of 1999. The effective tax rate increased primarily
because Key had higher state taxes, and lower proportions of tax-exempt income
and tax credits to pretax earnings in the current year. The effective income tax
rate remains below Key's combined statutory Federal and state rate of 37%,
primarily because we continue 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.
45
<PAGE> 46
FINANCIAL CONDITION
LOANS
At March 31, 2000, total loans outstanding were $64.1 billion, compared with
$64.2 billion at the end of 1999 and $61.0 billion a year ago. A summary of the
composition of the loan portfolio at each of these respective dates is presented
in Note 6 ("Loans") on page 14. Key achieved a 5% increase in loans during the
past twelve months, 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 and improving consumer credit conditions.
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 $6.3 billion, or 11%, over the past twelve months, if we had not
securitized and/or sold $4.9 billion of loans during that time period. This
includes the fourth quarter 1999 divestiture of branches with loan portfolios
aggregating $505 million and the first quarter 2000 sale of our $1.3 billion
credit card portfolio.
Excluding the impact of loan sales, commercial loans rose by $4.2 billion, or
13%, since March 31, 1999, due primarily to strong growth in the structured
finance, healthcare, media and middle market portfolios, a $912 million increase
in the lease financing portfolio, a $705 million increase in real
estate-construction loans and a $357 million increase in commercial real-estate
mortgage loans. Consumer loans (excluding loan sales) rose by $2.1 billion, or
8%, including increases of $2.0 billion in the home equity portfolio and $358
million in the lease financing portfolio.
On the same basis, commercial loans grew by $946 million, or an annualized 10%,
from the 1999 year end, reflecting growth in all major sectors of the portfolio.
At the same time, home equity loans were up $389 million, or an annualized 21%.
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 the past twelve months, in addition to selling loans in connection with
branch divestitures and the sale of the credit card portfolio, Key sold $1.2
billion of education loans ($918 million through securitizations), $857 million
of home equity loans ($747 million through securitizations), $354 million of
commercial loans, $292 million of residential real estate loans and $261 million
of commercial real estate loans. The level of securitizations was relatively
high in 1999 (particularly in the first quarter) because we completed a
securitization originally planned for the 1998 fourth quarter that was 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 assets, we
intend to replace over
46
<PAGE> 47
time the revenue generated by our former credit card business. This is one of
the factors contributing to the absence of securitizations in the first quarter
of 2000.
Figure 14 summarizes Key's loan sales (including securitizations) and branch
divestitures for the first quarter of 2000 and all of 1999.
Figure 14. Loans Sold and Divested
<TABLE>
<CAPTION>
COMMERCIAL RESIDENTIAL HOME CREDIT CARD BRANCH
in millions COMMERCIAL REAL ESTATE REAL ESTATE EQUITY RECEIVABLES AUTOMOBILE EDUCATION DIVESTITURES TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2000
- --------------
First quarter $354 $ 6 -- $ 24 $1,339 -- $ 29 -- $1,752
- ----------------------------------------------------------------------------------------------------------------------------------
Total $354 $ 6 -- $ 24 $1,339 -- $ 29 -- $1,752
==== ==== ====== ====== ====== ======
1999
- --------------
Fourth quarter -- $ 92 -- $ 32 -- -- $ 299 $505 $ 928
Third quarter -- 100 -- 359 -- -- 786 -- 1,245
Second quarter -- 63 $292 442 -- -- 132 -- 929
First quarter -- 84 208 428 -- $555 818 -- 2,093
- ----------------------------------------------------------------------------------------------------------------------------------
Total -- $339 $500 $1,261 -- $555 $2,035 $505 $5,195
==== ==== ====== ==== ====== ==== ======
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Figure 15 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.
Figure 15. Loans Securitized/Sold and Administered or Serviced
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31,
in millions 2000 1999 1999
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Education loans $3,386 $3,475 $2,987
Automobile loans 716 855 1,339
Home equity loans 1,457 1,542 1,079
Commercial loans 354 -- --
- -----------------------------------------------------------------------------
Total securitized $5,913 $5,872 $5,405
====== ====== ======
- -----------------------------------------------------------------------------
</TABLE>
SECURITIES
At March 31, 2000, the securities portfolio totaled $7.3 billion and comprised
$6.3 billion of securities available for sale and $1.0 billion of investment
securities. In comparison, the total portfolio at December 31, 1999, was $7.7
billion, including $6.7 billion of securities available for sale and $986
million of investment securities.
Figure 16 shows the composition, yields and remaining maturities of Key's
securities available for sale. Figure 17 provides the same information about
Key's investment securities. For more information about retained interests in
securitizations and gross unrealized gains and losses by type of security,
please see Note 5 ("Securities"), which begins on page 12.
47
<PAGE> 48
Figure 16. Securities Available for Sale
<TABLE>
<CAPTION>
OTHER
U.S. TREASURY, STATES AND COLLATERALIZED MORTGAGE- RETAINED
AGENCIES AND POLITICAL MORTGAGE BACKED INTERESTS IN OTHER
dollars in millions CORPORATIONS SUBDIVISIONS OBLIGATIONS(a) SECURITIES(a) SECURITIZATIONS(a) SECURITIES
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MARCH 31, 2000
Remaining maturity:
One year or less $ 98 $ 1 $ 653 $ 2 -- $ 14
After one through
five years 5 18 3,138 521 $110 18
After five through
ten years 6 32 136 979 203 6
After ten years 11 2 163 87 -- 66(c)
- -------------------------------------------------------------------------------------------------------------------------
Fair value $120 $53 $4,090 $1,589 $313 $104
Amortized cost 121 53 4,295 1,623 332 111
Weighted average yield 5.29% 6.73% 6.52% 7.09% 8.86% 4.59%
Weighted average
maturity 2.4 years 5.6 years 3.4 years 6.6 years 3.6 years 9.8 years
- -------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999
Fair value $127 $53 $4,237 $1,678 $343 $227
Amortized cost 128 53 4,426 1,705 340 223
- -------------------------------------------------------------------------------------------------------------------------
MARCH 31, 1999
Fair value $207 $64 $3,884 $2,024 $358 $241
Amortized cost 206 62 3,946 2,006 380 259
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
TOTAL YIELD(b)
-----------------------
<S> <C> <C>
MARCH 31, 2000
Remaining maturity:
One year or less $ 768 6.54%
After one through
five years 3,810 6.42
After five through
ten years 1,362 7.43
After ten years 329 7.64
-----------------------
Fair value $6,269 --
Amortized cost 6,535 6.82%
Weighted average yield 6.82% --
Weighted average
maturity 4.3 years --
-----------------------
DECEMBER 31, 1999
Fair value $6,665 --
Amortized cost 6,875 6.77%
-----------------------
MARCH 31, 1999
Fair value $6,778 --
Amortized cost 6,859 6.60%
-----------------------
</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.
Figure 17. Investment Securities
<TABLE>
<CAPTION>
STATES AND WEIGHTED
POLITICAL OTHER AVERAGE
dollars in millions SUBDIVISIONS SECURITIES TOTAL YIELD (a)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MARCH 31, 2000
Remaining maturity:
One year or less $126 $ 1 $ 127 8.29%
After one through five years 204 -- 204 9.32
After five through ten years 87 22 109 7.53
After ten years 15 598(b) 613 3.65
- -------------------------------------------------------------------------------------------------------
Amortized cost $432 $621 $1,053 5.71%
Fair value 442 621 1,063 --
Weighted average yield 9.07% 3.37% 5.71% --
Weighted average maturity 3.1 years 9.7 years 7.0 years --
- -------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999
Amortized cost $447 $539 $986 6.15%
Fair value 459 539 998 --
- -------------------------------------------------------------------------------------------------------
MARCH 31, 1999
Amortized cost $601 $404 $1,005 6.86%
Fair value 627 404 1,031 --
- ---------------------------------------------------------------------------------------------------------
</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.
48
<PAGE> 49
ASSET QUALITY
Key manages 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 March 31, 2000, was
$979 million, or 1.53% of loans. This compares with $930 million, or 1.52% of
loans, at March 31, 1999. The allowance includes $69 million (for 2000) and $65
million (for 1999) that is specifically allocated for impaired loans. For more
information about impaired loans, see Note 7 ("Impaired Loans and Other
Nonperforming Assets") on page 15. At March 31, 2000, the allowance for loan
losses was 231.44% of nonperforming loans, compared with 235.44% at March 31,
1999.
Management relies on an iterative methodology to estimate the appropriate 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
of Key's 1999 Annual Report to Shareholders. With the advent of enhanced credit
scoring capabilities, management continues to review and refine Key's
methodology for estimating the appropriate level of the allowance for loan
losses. During the first quarter of 2000, Key enhanced its methodology for
assessing credit risk, particularly within the commercial loan portfolio. As a
result, we recorded an additional provision for loan losses of $121 million. In
the prior year, first quarter results included an additional provision of $30
million related to an enhancement in the allowance allocation methodology
pertaining to the credit card portfolio.
NET LOAN CHARGE-OFFS. As shown in Figure 18, net loan charge-offs for the first
quarter of 2000 were $134 million, or .84% of average loans, compared with $81
million, or .53% of average loans, for the same period last year. Included in
net charge-offs in the current year are $15 million of credit card net
charge-offs, including holdbacks and putbacks related to the January 2000 sale
of the credit card portfolio. Excluding these net charge-offs and the $57
million of one-time charge-offs discussed below, Key's core net charge-offs for
the first quarter of 2000 totaled $62 million, or .39% of average loans.
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. One of the factors that
drove this change is concern that existing guidance is being interpreted
differently within the banking industry, resulting in disparity in how financial
institutions carry out their charge-off practices. Key elected to implement
these new guidelines during the first quarter of 2000, although compliance is
not required until the end of this year. This resulted in the acceleration of
$57 million of consumer loan charge-offs that might otherwise have occurred at
later dates. Key's allowance at December 31, 1999, had already included an
allocation for these potential losses. For more information on the revised
guidelines, see Item 5. ("Other Information") on page 56.
In comparison with the first quarter of 1999, core net charge-offs in the
commercial loan portfolio rose by $12 million. This increase reflected the
growth experienced in the overall portfolio, as well as a modest rise in the
proportion of troubled credits within the portfolio. The increase in commercial
loan net charge-offs was more than offset by a $31 million decline in the level
of core net charge-offs in the consumer loan
49
<PAGE> 50
portfolio. Core net charge-offs of credit card receivables decreased by $23
million due to the sale of the portfolio. At the same time, net charge-offs in
the remainder of the consumer portfolio decreased by $8 million.
Figure 18. Summary of Loan Loss Experience
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
dollars in millions 2000 1999
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Average loans outstanding during the period $64,024 $61,693
- ----------------------------------------------------------------------------------------------------
Allowance for loan losses at beginning of period $ 930 $ 900
Loans charged off:
Commercial, financial and agricultural 34 22
Real estate-commercial mortgage 2 --
Commercial lease financing 4 2
- ----------------------------------------------------------------------------------------------------
Total commercial loans 40 24
Real estate-residential mortgage 1 2
Home equity 8 3
Credit card 16 26
Consumer-direct 20 12
Consumer-indirect lease financing 7 4
Consumer-indirect other 72 36
- ----------------------------------------------------------------------------------------------------
Total consumer loans 124 83
- ----------------------------------------------------------------------------------------------------
164 107
Recoveries:
Commercial, financial and agricultural 10 8
Real estate-commercial mortgage 2 2
Commercial lease financing 2 --
- ----------------------------------------------------------------------------------------------------
Total commercial loans 14 10
Real estate-residential mortgage -- 1
Credit card 1 3
Consumer-direct 1 1
Consumer-indirect lease financing 2 1
Consumer-indirect other 12 10
- ----------------------------------------------------------------------------------------------------
Total consumer loans 16 16
- ----------------------------------------------------------------------------------------------------
30 26
- ----------------------------------------------------------------------------------------------------
Net loans charged off (134) (81)
Provision for loan losses 183 111
- ----------------------------------------------------------------------------------------------------
Allowance for loan losses at end of period $ 979 $ 930
======= =======
Net loan charge-offs to average loans .84% .53%
Allowance for loan losses to period-end loans 1.53 1.52
Allowance for loan losses to nonperforming loans 231.44 235.44
- ----------------------------------------------------------------------------------------------------
</TABLE>
NONPERFORMING ASSETS. Figure 19 shows the composition of Key's nonperforming
assets. These assets totaled $447 million at March 31, 2000, and represented
.70% of loans, other real estate owned (known as "OREO") and other nonperforming
assets, compared with $430 million, or .70%, at March 31, 1999. The $17 million
increase in the level of nonperforming assets over the past twelve months is due
to a $28 million increase in nonperforming loans, offset in part by a $12
million decrease in OREO.
50
<PAGE> 51
Figure 19. Summary of Nonperforming Assets and Past Due Loans
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31,
dollars in millions 2000 1999 1999
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial, financial and agricultural $195 $175 $160
Real estate -- commercial mortgage 98 102 86
Real estate -- construction 18 7 4
Commercial lease financing 39 28 39
- ---------------------------------------------------------------------------------------------------------
Total commercial loans 350 312 289
Real estate -- residential mortgage 46 44 59
Home equity 11 13 12
Consumer -- direct 4 6 7
Consumer -- indirect other 12 32 28
- ---------------------------------------------------------------------------------------------------------
Total consumer loans 73 95 106
- ---------------------------------------------------------------------------------------------------------
Total nonperforming loans 423 407 395
OREO 28 27 49
Allowance for OREO losses (6) (3) (15)
- ---------------------------------------------------------------------------------------------------------
OREO, net of allowance 22 24 34
Other nonperforming assets 2 2 1
- ---------------------------------------------------------------------------------------------------------
Total nonperforming assets $447 $433 $430
==== ==== ====
- ---------------------------------------------------------------------------------------------------------
Accruing loans past due 90 days or more $288 $259 $191
- ---------------------------------------------------------------------------------------------------------
Nonperforming loans to period-end loans .66% .63% .65%
Nonperforming assets to period-end loans
plus OREO and other nonperforming assets .70 .67 .70
- ---------------------------------------------------------------------------------------------------------
</TABLE>
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
the first quarter of 2000, core deposits averaged $36.3 billion, and represented
49% of the funds Key used to support earning assets, compared with $37.0 billion
and 52%, respectively, during the first three months of 1999. As shown in Figure
5 (which spans pages 34 and 35), Key experienced a change in the mix of core
deposits over the past twelve months. The levels of savings deposits and NOW
accounts declined, primarily because we sold 28 branches with deposits of $1.3
billion as part of the October 1999 divestiture of our Long Island franchise. 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 time deposits have grown steadily as a result of client preferences for
investments that offer higher returns.
Purchased funds, comprised of large certificates of deposit, deposits in the
foreign office, and short-term borrowings, averaged $19.4 billion during the
first quarter of 2000, compared with $18.4 billion a year ago. As shown in
Figure 5, Key relied more on each of these sources and long-term debt, including
capital securities, to fund earning assets in the current year. In addition, Key
continues to consider loan securitizations as a funding alternative when market
conditions are favorable. However, no securitizations were completed during the
first quarter of 2000.
51
<PAGE> 52
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 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 with the objective of maintaining an appropriate mix 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 937 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. The bank did not have any borrowings from the
Federal Reserve outstanding as of March 31, 2000.
LIQUIDITY FOR THE PARENT COMPANY. KeyCorp meets its liquidity requirements
principally through regular dividends from affiliate banks. During the first
quarter of 2000, affiliates paid KeyCorp a total of $352 million in dividends.
As of March 31, 2000, the affiliate banks had an additional $326 million
available to pay dividends without prior regulatory approval. These excess funds
are generally maintained in short-term investments.
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 the first three months of 2000, Key's affiliate banks
raised $1.0 billion under Key's bank note program. Of the notes issued during
the first quarter, $250 million have original maturities in excess of one year
and are included in long-term debt; the remaining $770 million 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
aggregate issuance of both long- and short-term debt up to $20.0 billion ($19.0
billion by KeyBank National Association and $1.0 billion by Key Bank USA,
National Association).
Euro note program. Under Key's euro note 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 notes are offered
exclusively to non-U.S. investors and can be denominated in dollars and most
European currencies. There were $2.5 billion of borrowings outstanding under
this facility as of March 31, 2000, $80 million of which were issued during the
first quarter.
52
<PAGE> 53
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 March 31, 2000, $38 million of
borrowings were outstanding under the commercial paper program; no amount was
outstanding under the revolving credit agreement.
Other 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
March 31, 2000, 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 March 31, 2000,
management believes that, under normal conditions in the capital markets, any
eventual offering of securities should be well-received by investors.
<TABLE>
<CAPTION>
Senior Subordinated
Commercial Long-Term Long-Term
Paper Debt Debt
------------ ------------- -----------------
<S> <C> <C> <C>
Duff & Phelps D-1 A+ A
Standard & Poor's A-2 A- BBB+
Moody's P-1 A1 A2
</TABLE>
For more information about Key's sources and uses of cash for the three-month
periods ended March 31, 2000 and 1999, see the Consolidated Statements of Cash
Flow on page 6.
CAPITAL AND DIVIDENDS
SHAREHOLDERS' EQUITY. Total shareholders' equity at March 31, 2000, was $6.5
billion, up $104 million from the balance at December 31, 1999. Retained
earnings increased by $244 million during the quarter, offset to a large extent
by a $104 million net increase in treasury stock due to share repurchases, and a
$29 million increase in net unrealized losses on securities available for sale.
SHARE REPURCHASES. During the first quarter of 2000, Key repurchased 6,365,000
of its common shares at an average price per share of $18.38. These shares were
repurchased under a January 2000 authorization by Key's Board of Directors to
repurchase up to 20,000,000 shares in the open market or through negotiated
transactions.
At March 31, 2000, Key had 54,299,186 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 the first quarter of 2000, Key reissued 528,057 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 7.78% at March 31, 2000,
compared with 7.66% at December 31, 1999, and 7.63% at March 31, 1999.
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
March 31, 2000, Key's Tier 1 capital ratio was 7.98%, and its total capital
ratio was 12.04%.
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
53
<PAGE> 54
KeyCorp has--must maintain a minimum leverage ratio of 3.0%. All other bank
holding companies must maintain a minimum ratio of 4.0%. As of March 31, 2000,
KeyCorp had a leverage ratio of 7.89%, 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 March 31, 2000, 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 March 31, 2000. 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.
Figure 20 presents the details of Key's regulatory capital position at March 31,
2000, December 31, 1999, and March 31, 1999.
Figure 20. Capital Components and Risk-Adjusted Assets
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31,
dollars in millions 2000 1999 1999
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TIER 1 CAPITAL
Common shareholders' equity (a) $ 6,641 $ 6,508 $ 6,156
Qualifying capital securities 1,243 1,243 994
Less: Goodwill (1,378) (1,389) (1,435)
Other intangible assets (b) (53) (56) (67)
- ------------------------------------------------------------------------------------------------
Total Tier 1 capital 6,453 6,306 5,648
- ------------------------------------------------------------------------------------------------
TIER 2 CAPITAL
Allowance for loan losses (c) 979 930 930
Net unrealized holding gains (d) 1 3 1
Qualifying long-term debt 2,311 2,330 2,470
- ------------------------------------------------------------------------------------------------
Total Tier 2 capital 3,291 3,263 3,401
- ------------------------------------------------------------------------------------------------
Total capital $ 9,744 $ 9,569 $ 9,049
======= ======= =======
RISK-ADJUSTED ASSETS
Risk-adjusted assets on balance sheet $68,047 $68,619 $64,017
Risk-adjusted off-balance sheet exposure 14,126 14,513 12,816
Less: Goodwill (1,378) (1,389) (1,435)
Other intangible assets (b) (53) (56) (67)
Plus: Market risk-equivalent assets 162 391 611
Net unrealized holding gains (d) 1 3 1
- ------------------------------------------------------------------------------------------------
Gross risk-adjusted assets 80,905 82,081 75,943
Less: Excess allowance for loan losses (c) -- -- --
- ------------------------------------------------------------------------------------------------
Net risk-adjusted assets $80,905 $82,081 $75,943
======= ======= =======
AVERAGE QUARTERLY TOTAL ASSETS $83,187 $82,574 $79,858
======= ======= =======
CAPITAL RATIOS
Tier 1 risk-adjusted capital ratio 7.98% 7.68% 7.44%
Total risk-adjusted capital ratio 12.04 11.66 11.92
Leverage ratio (e) 7.89 7.77 7.21
- ------------------------------------------------------------------------------------------------
</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).
54
<PAGE> 55
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
The information included in the Market Risk Management section beginning on page
37 of the Management's Discussion and Analysis of Financial Condition and
Results of Operations is incorporated herein by reference.
PART II. OTHER INFORMATION
ITEM 1. 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 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, 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.
55
<PAGE> 56
ITEM 5. OTHER INFORMATION
REGULATORY CAPITAL. In March 2000, the Federal Reserve Board published
for public comment a proposal to amend its regulatory capital
guidelines to increase the amount of consolidated regulatory capital
required to be held by bank holding companies with respect to certain
equity and debt investments made by bank holding companies, or their
subsidiaries, in nonfinancial companies. The financial impact of the
proposal upon Key cannot be determined until a final rule is
published. However, based upon its estimate of the impact of applying
the proposed rule to Key's current investments covered by the proposed
rule, management anticipates that Key's regulatory capital ratios will
remain in excess of the ratios required to be maintained by
FDIC-insured depository institutions, in order to be considered
"well-capitalized" under the prompt corrective action provisions of
the FDIA.
UNIFORM RETAIL CREDIT POLICY. In February 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 uniform delinquency charge-off policies for
closed-end and open-end credit;
* 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 elected to implement these new guidelines during the first quarter
of 2000, although compliance is not required until December 31, 2000.
This resulted in the acceleration of $57 million of consumer loan
charge-offs that might otherwise have occurred at later dates. Key's
allowance at December 31, 1999, had already included an allocation for
these potential losses.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(10) KeyCorp Amended and Restated 1991 Equity Compensation Plan
(March 15, 2000 Amendment).
(15) Acknowledgment Letter of Independent Auditors
(27) Financial Data Schedule (filed electronically only)
(b) Reports on Form 8-K
January 21, 2000 - Item 5. Other Events and Item 7. Financial
Statements and Exhibits. Reporting that on January 20, 2000, the
Registrant issued a press release announcing its earnings results for
the three-month and twelve-month periods ended December 31, 1999.
No other reports on Form 8-K were filed during the three-month period
ended March 31, 2000.
56
<PAGE> 57
SIGNATURE
Pursuant to the requirements 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.
KEYCORP
------------------------------------
(Registrant)
Date: May 10, 2000 /s/ Lee Irving
------------------------------------
By: Lee Irving
Executive Vice President
and Chief Accounting Officer
57
<PAGE> 1
KEYCORP
AMENDED AND RESTATED
1991 EQUITY COMPENSATION PLAN
(AMENDED AS OF MARCH 15, 2000)
1. PURPOSE. The KeyCorp Amended and Restated 1991 Equity Compensation
Plan is intended to promote the interests of the Corporation and its
shareholders by providing equity-based incentives for effective service and high
levels of performance to Employees selected by the Committee. To achieve these
purposes, the Corporation may grant Awards of Options, Stock Appreciation
Rights, Limited Stock Appreciation Rights, Restricted Stock, and Performance
Shares to selected Employees, all in accordance with the terms and conditions
hereinafter set forth.
2. DEFINITIONS.
2.1 1934 ACT. The term "1934 Act" shall mean the Securities Exchange
Act of 1934, as amended.
2.2 ACQUISITION PRICE. The term "Acquisition Price" with respect to
Restricted Stock shall mean such amount, not less than the par value per Common
Share, as may be specified by the Committee in the Award Instrument with respect
to that Restricted Stock as the consideration to be paid by the Employee for
that Restricted Stock.
2.3 AWARD. The term "Award" shall mean an award granted under the Plan
of an Option, of Stock Appreciation Rights, of Limited Stock Appreciation
Rights, of Restricted Stock, or of Performance Shares.
2.4 AWARD INSTRUMENT. The term "Award Instrument" shall mean a written
instrument evidencing an Award in such form and with such provisions as the
Committee may prescribe, including, without limitation, an agreement to be
executed by the Employee and the Corporation, a certificate issued by the
Corporation, or a letter executed by the Committee or its designee. Acceptance
of the Award Instrument by an Employee constitutes agreement to the terms of the
Award evidenced thereby.
2.5 CHANGE OF CONTROL. A "Change of Control" shall be deemed to have
occurred if, at any time after the date of the grant of the relevant Award,
there is a Change of Control under any of clauses (a), (b), (c), or (d) below.
For these purposes, the Corporation will be deemed to have become a subsidiary
of another corporation if any other corporation (which term shall include, in
addition to a corporation, a limited liability company, partnership, trust, or
other organization) owns, directly or indirectly, 50 percent or more of the
total combined outstanding voting power of all classes of stock of the
Corporation or any successor to the Corporation.
(a) A Change of Control will have occurred under this clause (a)
if the Corporation is a party to a transaction pursuant to
which the Corporation is
<PAGE> 2
merged with or into, or is consolidated with, or becomes the
subsidiary of another corporation and either
(i) immediately after giving effect to that transaction,
less than 65% of the then outstanding voting
securities of the surviving or resulting corporation
or (if the Corporation becomes a subsidiary in the
transaction) of the ultimate parent of the
Corporation represent or were issued in exchange for
voting securities of the Corporation outstanding
immediately prior to the transaction, or
(ii) immediately after giving effect to that transaction,
individuals who were directors of the Corporation on
the day before the first public announcement of (A)
the pendency of the transaction or (B) the intention
of any person or entity to cause the transaction to
occur, cease for any reason to constitute at least
51% of the directors of the surviving or resulting
corporation or (if the Corporation becomes a
subsidiary in the transaction) of the ultimate parent
of the Corporation.
(b) A Change of Control will have occurred under this clause (b)
if a tender or exchange offer shall be made and consummated
for 35% or more of the outstanding voting stock of the
Corporation or any person (as the term "person" is used in
Section 13(d) and Section 14(d)(2) of the 1934 Act) is or
becomes the beneficial owner of 35% or more of the outstanding
voting stock of the Corporation or there is a report filed on
Schedule 13D or Schedule 14D-1 (or any successor schedule,
form or report), each as adopted under the 1934 Act,
disclosing the acquisition of 35% or more of the outstanding
voting stock of the Corporation in a transaction or series of
transactions by any person (as defined earlier in this clause
(b)).
(c) A Change of Control will have occurred under this clause (c)
if either
(i) without the prior approval, solicitation, invitation,
or recommendation of the Corporation's Board of
Directors any person or entity makes a public
announcement of a bona fide intention (A) to engage
in a transaction with the Corporation that, if
consummated, would result in a Change Event (as
defined below in this clause (c)), or (B) to
"solicit" (as defined in Rule 14a-1 under the 1934
Act) proxies in connection with a proposal that is
not approved or recommended by the Corporation's
Board of Directors, or
<PAGE> 3
(ii) any person or entity publicly announces a bona fide
intention to engage in an election contest relating
to the election of directors of the Corporation
(pursuant to Regulation 14A, including Rule 14a-11,
under the 1934 Act),
and, at any time within the 24 month period immediately following the
date of the announcement of that intention, individuals who, on the day
before that announcement, constituted the directors of the Corporation
(the "Incumbent Directors") cease for any reason to constitute at least
a majority thereof unless both (A) the election, or the nomination for
election by the Corporation's shareholders, of each new director was
approved by a vote of at least two-thirds of the Incumbent Directors in
office at the time of the election or nomination for election of such
new director, and (B) prior to the time that the Incumbent Directors no
longer constitute a majority of the Board of Directors, the Incumbent
Directors then in office, by a vote of at least 75% of their number,
reasonably determine in good faith that the change in Board membership
that has occurred before the date of that determination and that is
anticipated to thereafter occur within the balance of the 24 month
period to cause the Incumbent Directors to no longer be a majority of
the Board of Directors was not caused by or attributable to, in whole
or in any significant part, directly or indirectly, proximately or
remotely, any event under subclause (i) or (ii) of this clause (c).
For purposes of this clause (c), the term "Change Event" shall mean any
of the events described in the following subclauses (x), (y), or (z) of
this clause (c):
(x) A tender or exchange offer shall be made for 25% or
more of the outstanding voting stock of the
Corporation or any person (as the term "person" is
used in Section 13(d) and Section 14(d)(2) of the
1934 Act) is or becomes the beneficial owner of 25%
or more of the outstanding voting stock of the
Corporation or there is a report filed on Schedule
13D or Schedule 14D-1 (or any successor schedule,
form, or report), each as adopted under the 1934 Act,
disclosing the acquisition of 25% or more of the
outstanding voting stock of the Corporation in a
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
<PAGE> 4
becomes a subsidiary in the transaction) of the
ultimate parent of the Corporation represent or were
issued in exchange for voting securities of the
Corporation outstanding immediately prior to such
transaction or less than 51% of the directors of the
surviving or resulting corporation or (if the
Corporation becomes a subsidiary in the transaction)
of the ultimate parent of the Corporation were
directors of the Corporation immediately prior to
such transaction.
(z) There is a sale, lease, exchange, or other transfer
(in one transaction or a series of related
transactions) of all or substantially all the assets
of the Corporation.
(d) A Change of Control will have occurred under this clause (d)
if there is a sale, lease, exchange, or other transfer (in one
transaction or a series of related transactions) of all or
substantially all of the assets of the Corporation.
2.6 COMMITTEE. The term "Committee" shall mean a committee appointed by
the Board of Directors of the Corporation to administer the Plan. The Committee
shall be composed of not less than three directors of the Corporation. The Board
of Directors may also appoint one or more directors as alternate members of the
Committee. No officer or Employee of the Corporation or of any Subsidiary shall
be a member or alternate member of the Committee. The Committee shall at all
times be so comprised (a) as to satisfy the disinterested administration
standard contained in Rule 16b-3, if required to qualify for the Rule 16b-3
Exemption and (b) as to satisfy the outside director standard under Section
162(m) of the Internal Revenue Code of 1986, as amended, if required to qualify
compensation paid under one or more of the provisions of the Plan as
performance-based compensation within the meaning of that section.
2.7 COMMON SHARES. The term "Common Shares" shall mean common shares of
the Corporation, with a par value of $1 each.
2.8 CORPORATION. The term "Corporation" shall mean KeyCorp and its
successors, including the surviving or resulting corporation of any merger of
KeyCorp with or into, or any consolidation of KeyCorp with, any other
corporation or corporations.
2.9 DISABILITY. The term "Disability" with respect to an Employee shall
mean physical or mental impairment which entitles the Employee to receive
disability payments under any long-term disability plan maintained by the
Corporation.
2.10 EMPLOYEE. The term "Employee" shall mean any individual employed
by the Corporation or by any Subsidiary and shall include officers as well as
all other employees of the Corporation or of any Subsidiary (including employees
who are members of the Board of Directors of the Corporation or any Subsidiary).
<PAGE> 5
2.11 EMPLOYMENT TERMINATION DATE. The term "Employment Termination
Date" with respect to an Employee shall mean the first date on which the
Employee is no longer employed by the Corporation or any Subsidiary.
2.12 EXERCISE PRICE. The term "Exercise Price" with respect to an
Option shall mean the price specified in the Option at which the Common Shares
subject to the Option may be purchased by the holder of the Option.
2.13 FAIR MARKET VALUE. Except as otherwise determined by the Committee
at the time of the grant of an Award, the term "Fair Market Value" with respect
to Common Shares shall mean: (a) if the Common Shares are traded on a national
exchange, the mean between the high and low sales price per Common Share on that
national exchange on the date for which the determination of fair market value
is made or, if there are no sales of Common Shares on that date, then on the
next preceding date on which there were any sales of Common Shares, or (b) if
the Common Shares are not traded on a national exchange, the mean between the
high and low sales price per Common Share in the over-the-counter market,
National Market System, as reported by the National Quotations Bureau, Inc. and
NASDAQ on the date for which the determination of fair market value is made or,
if there are no sales of Common Shares on that date, then on the next preceding
date on which there were any sales of Common Shares.
2.14 INCENTIVE STOCK OPTION. The term "Incentive Stock Option" shall
mean an Option intended by the Committee to qualify as an "incentive stock
option" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended.
2.15 LIMITED STOCK APPRECIATION RIGHT. The term "Limited Stock
Appreciation Right" or "Limited SAR" shall mean an Award granted to an Employee
with respect to all or any part of any Option, that entitles the holder thereof
to receive from the Corporation, upon exercise of the Limited SAR and surrender
of the related Option, or any portion of the Limited SAR and the related Option,
an amount equal to (unless the Committee specifies a lesser amount at the time
of the grant of the Award):
(a) in the case of a Limited SAR granted with respect to an
Incentive Stock Option, 100% of the excess, if any, measured
at the time of the exercise of the Limited SAR, of (i) the
Fair Market Value of the Common Shares subject to the
Incentive Stock Option with respect to which the Limited SAR
is exercised over (ii) the Exercise Price of those Common
Shares under the Incentive Stock Option, or
(b) in the case of a Limited SAR granted with respect to a
Nonqualified Option, 100% of the highest of:
(i) the excess, measured at the time of the exercise of
the Limited SAR, of (A) the Fair Market Value of the
Common Shares subject to the Nonqualified Option with
respect to which the Limited SAR
<PAGE> 6
is exercised over (B) the Exercise Price of those
Common Shares under the Nonqualified Option,
(ii) the excess of (A) the highest gross price (before
brokerage commissions and soliciting dealers' fees)
paid or to be paid for a Common Share (whether in
cash or in property and whether by way of exchange,
conversion, distribution upon liquidation, or
otherwise) in connection with any Change of Control
multiplied by the number of Common Shares subject to
the Nonqualified Option with respect to which the
Limited SAR is exercised over (B) the Exercise Price
of those Common Shares under the Nonqualified Option,
or
(iii) the excess of (A) the highest Fair Market Value of
the Common Shares subject to the Nonqualified Option
with respect to which the Limited SAR is exercised on
any one day during the period beginning on the
sixtieth day prior to the date on which the Limited
SAR is exercised multiplied by the number of Common
Shares subject to the Nonqualified Option with
respect to which the Limited SAR is exercised over
(B) the Exercise Price of those Common Shares under
the Nonqualified Option.
2.16 NONQUALIFIED OPTION. The term "Nonqualified Option" shall mean an
Option intended by the Committee not to qualify as an "incentive stock option"
under Section 422 of the Internal Revenue Code of 1986, as amended.
2.17 OPTION. The term "Option," (a) when used otherwise than in
connection with the term Stock Appreciation Right or Limited Stock Appreciation
Right, shall mean an Award entitling the holder thereof to purchase a specified
number of Common Shares at a specified price during a specified period of time,
and (b) when used in connection with the term Stock Appreciation Right or
Limited Stock Appreciation Right, shall mean (i) any such Award or (ii) any
award under any other plan maintained or assumed by the Corporation entitling
the holder thereof to purchase a specified number of Common Shares at a
specified price during a specified period of time.
2.18 OPTION EXPIRATION DATE. The term "Option Expiration Date" with
respect to any Option shall mean the date selected by the Committee after which,
except as provided in Section 10.4 in the case of the death of the Employee to
whom the option was granted, the Option may not be exercised.
2.19 PERFORMANCE GOAL. The term "Performance Goal" shall mean a
performance goal specified by the Committee in connection with the potential
grant of Performance Shares and may include, without limitation, goals based
upon cumulative earnings per Common Share, return on investment, return on
shareholders' equity, or achievement of any other goals, whether or not readily
expressed in financial terms, that are related to the performance by the
<PAGE> 7
Corporation, by any Subsidiary, or by any Employee or group of Employees in
connection with services performed by that Employee or those Employees for the
Corporation, a Subsidiary, or any one or more subunits of the Corporation or of
any Subsidiary.
2.20 PERFORMANCE PERIOD. The term "Performance Period" shall mean such
one or more periods of time, which may be of varying and overlapping durations,
as the Committee may select, over which the attainment of one or more
Performance Goals will be relevant in connection with one or more Awards of
Performance Shares.
2.21 PERFORMANCE SHARES. The term "Performance Shares" shall mean an
Award denominated in Common Shares and contingent upon attainment of one or more
Performance Goals by the Corporation or a Subsidiary or any subunit of the
Corporation or of any Subsidiary over a Performance Period.
2.22 PLAN. The term "Plan" shall mean this KeyCorp Amended and Restated
1991 Equity Compensation Plan as from time to time hereafter amended in
accordance with Section 19.
2.23 RESTRICTED STOCK. The term "Restricted Stock" shall mean Common
Shares of the Corporation delivered to an Employee pursuant to an Award subject
to such restrictions, conditions and contingencies as the Committee may provide
in the relevant Award Instrument, including (a) the restriction that the
Employee not sell, transfer, otherwise dispose of, or pledge or otherwise
hypothecate the Restricted Stock during the applicable Restriction Period, (b)
the requirement that, subject to the provisions of Section 10, if the Employee's
employment terminates so that the Employee is no longer employed by the
Corporation or any Subsidiary before the end of the applicable Restriction
Period, the Employee will offer to sell to the Corporation at the Acquisition
Price each Common Share of Restricted Stock held by the Employee at the
Employment Termination Date with respect to which, as of that date, any
restrictions, conditions, or contingencies have not lapsed, and (c) such other
restrictions, conditions, and contingencies, if any, as the Committee may
provide in the Award Instrument with respect to that Restricted Stock.
2.24 RESTRICTION PERIOD. The term "Restriction Period" with respect to
an Award of Restricted Stock shall mean the period selected by the Committee and
specified in the Award Instrument with respect to that Restricted Stock during
which the Employee may not sell, transfer, otherwise dispose of, or pledge or
otherwise hypothecate that Restricted Stock.
2.25 RULE 16b-3. Term "Rule 16b-3" shall mean Rule 16b-3 or any rule
promulgated in replacement thereof or in substitution therefor under the 1934
Act.
2.26 RULE 16b-3 EXEMPTION. The term "Rule 16b-3 Exemption" shall mean
the exemption from Section 16(b) of the 1934 Act that is available under Rule
16b-3.
<PAGE> 8
2.27 SECTION 16(b) EMPLOYEE. The term "Section 16(b) Employee" shall
mean an individual who is, or at any time within the preceding six months was, a
director, officer, or 10% shareholder of the Corporation within the meaning of
Section 16(b) of the 1934 Act.
2.28 STOCK APPRECIATION RIGHT. The term "Stock Appreciation Right "or
"SAR" shall mean an Award granted to an Employee with respect to all or any part
of any Option that entitles the holder thereof to receive from the Corporation,
upon exercise of the SAR and surrender of the related Option, or any portion of
the SAR and the related Option, an amount equal to 100%, or such lesser
percentage as the Committee may determine at the time of the grant of the Award,
of the excess, if any, measured at the time of the exercise of the SAR, of (a)
the Fair Market Value of the Common Shares subject to the Option with respect to
which the SAR is exercised over (b) the Exercise Price of those Common Shares
under the Option.
2.29 SUBSIDIARY. The term "Subsidiary" shall mean any corporation,
partnership, joint venture, or other business entity in which the Corporation
owns, directly or indirectly, 50 percent or more of the total combined voting
power of all classes of stock (in the case of a corporation) or other ownership
interest (in the case of any entity other than a corporation).
2.30 TANDEM AWARD. The term "Tandem Award" shall mean any two or more
Awards that are linked by the terms of any such Awards so that the exercise of
one such Award, in whole or in part, requires or will automatically result in
the surrender or cancellation, in whole or in proportionate part, of the other
such Awards.
2.31 TRANSFEREE. The term "Transferee" shall mean, with respect to
Nonqualified Options only, any person or entity to which an Employee is
permitted by the Committee to transfer or assign all or part of his or her
Options.
3. ADMINISTRATION. The Plan shall be administered by the Committee. No
Award may be made under the Plan to any member or alternate member of the
Committee. The Committee shall have authority, subject to the terms of the Plan,
(a) to determine the Employees who are eligible to participate in the Plan, the
type, size, and terms of Awards to be granted to any Employee, the time or times
at which Awards shall be exercisable or at which restrictions, conditions, and
contingencies shall lapse, and the terms and provisions of the instruments by
which Awards shall be evidenced, (b) to establish any other restrictions,
conditions, and contingencies on Awards in addition to those prescribed by the
Plan, (c) to interpret the Plan, and (d) to make all determinations necessary
for the administration of the Plan.
The construction and interpretation by the Committee of any provision
of the Plan or any Award Instrument delivered pursuant to the Plan and any
determination by the Committee pursuant to any provision of the Plan or any
Award Instrument shall be final and conclusive. No member or alternate member of
the Committee shall be liable for any such action or determination made in good
faith.
The Committee may act only by a majority of its members. Any
determination of the Committee may be made, without a meeting, by a writing or
writings signed by all of the
<PAGE> 9
members of the Committee. In addition, the Committee may authorize any one or
more of their number or any officer of the Corporation to execute and deliver
documents on behalf of the Committee and the Committee may delegate to one or
more employees, agents, or officers of the Corporation, or to one or more third
party consultants, accountants, lawyers, or other advisors, such ministerial
duties related to the operation of the Plan as it may deem appropriate.
4. ELIGIBILITY. Awards may be granted to Employees of the Corporation
or any Subsidiary selected by the Committee in its sole discretion. The granting
of any Award to an Employee shall not entitle that Employee to, nor disqualify
the Employee from, participation in any other grant of an Award. The maximum
number of Common Shares with respect to which any Employee may receive Awards
during any calendar year shall be the lesser of 400,000 Common Shares or .2% of
the outstanding Common Shares of the Corporation on the date such award was
made, which maximum number shall be subject to adjustment as provided in Section
13 of the Plan.
5. STOCK SUBJECT TO THE PLAN. The stock that may be issued and
distributed to Employees in connection with Awards granted under the Plan shall
be Common Shares and may be authorized and unissued Common Shares, treasury
Common Shares, or Common Shares acquired on the open market specifically for
distribution under the Plan, as the Board of Directors may from time to time
determine.
Subject to adjustment as provided in Section 13, the number of Common
Shares available for grant of Awards under the Plan shall be determined from
time to time as follows: (a) on the date of the 1994 Annual Meeting of
Shareholders of the Corporation (at which meeting an amendment and restatement
of the Plan was submitted for approval of the shareholders of the Corporation),
the number of Common Shares available for grant of Awards under the Plan shall
equal two percent of the total number of Common Shares outstanding on March 31,
1994, and (b) on January 2, 1995 and on each January 2 occurring thereafter
during the life of the Plan, the number of Common Shares available for grant of
Awards under the Plan shall be increased by adding to the number of Common
Shares then available for grant of Awards under the Plan, the number of Common
Shares of the Corporation that, when added to the number of Common Shares that
otherwise remain available for grant of additional Awards under the Plan on that
January 2, equals two percent of the total number of Common Shares of the
Corporation outstanding on December 31st of the next proceeding year.
The number of Common Shares remaining available for grants of
additional Awards under the Plan at any particular time during a calendar year
shall be reduced, upon the granting thereafter of any Award under the Plan, by
the full number of Common Shares subject to that Award except that, in the case
of any particular Tandem Award, the number of Common Shares counted as being
subject to such Tandem Award shall be the maximum number of Common Shares with
respect to which the Employee may receive value under such Tandem Award. If any
Award for any reason expires or is terminated, in whole or in part, without the
receipt by an Employee of Common Shares (or the equivalent thereof in cash or
other property), the Common Shares subject to that part of the Award that has so
expired or terminated shall again be available for the future grant of Awards
under the Plan.
<PAGE> 10
Notwithstanding any other provision of the Plan, but subject to
adjustment under Section 13, (a) the maximum number of Common Shares that may be
issued under the Plan pursuant to Incentive Stock Options shall be 9,600,000
Common Shares, and (b) the maximum number of Common Shares that may be issued
under the Plan as Restricted Stock during any calendar year shall be that number
of Common Shares that is equal to five percent of the total number of Common
Shares available for grant of Awards under the Plan as of January 2 of that
calendar year.
6. STOCK OPTIONS.
6.1 TYPE AND DATE OF GRANT OF OPTIONS.
(a) The Award Instrument pursuant to which any Incentive Stock
Option is granted shall specify that the Option granted
thereby shall be treated as an Incentive Stock Option. The
Award Instrument pursuant to which any Nonqualified Option is
granted shall specify that the Option granted thereby shall
not be treated as an Incentive Stock Option.
(b) The day on which the Committee authorizes the grant of an
Incentive Stock Option shall be the date on which that Option
is granted. No Incentive Stock Option may be granted on any
date after the tenth anniversary of the date of adoption, on
March 17, 1994, by the Board of Directors of the Corporation,
of the Plan as amended and restated.
(c) The day on which the Committee authorizes the grant of a
Nonqualified Option shall be considered the date on which that
Option is granted, unless the Committee specifies a later
date.
6.2 EXERCISE PRICE. The Exercise Price under any Option shall be not
less than the Fair Market Value of the Common Shares subject to the Option on
the date the Option is granted.
6.3 OPTION EXPIRATION DATE. The Option Expiration Date under any
Incentive Stock Option shall be not later than ten years from the date on which
the Option is granted. The Option Expiration Date under any Nonqualified Option
shall not be later than ten years and one month from the date on which the
Option is granted.
6.4 EXERCISE OF OPTIONS.
(a) Except as otherwise provided in Section 10, an Option may be
exercised only (i) while the Employee to whom the Option was
granted is in the employ of the Corporation or of a
Subsidiary, and (ii) subject to Section 11, after the Employee
to whom the Option was granted has been in the continuous
employ of the Corporation or of a Subsidiary for at least six
months from the date on which the Option was granted. Subject
to these
<PAGE> 11
requirements, each Option shall become exercisable in one or
more installments at the time or times provided in the Award
Instrument evidencing the Option. Once any portion of an
Option becomes exercisable, that portion shall remain
exercisable until expiration or termination of the Option. An
Employee to whom an Option is granted or, with respect to
Nonqualified Options, the Employee's Transferee may exercise
the Option from time to time, in whole or in part, up to the
total number of Common Shares with respect to which the Option
is then exercisable, except that no fraction of a Common Share
may be purchased upon the exercise of any Option.
(b) An Employee or, with respect to Nonqualified Options, any
Transferee electing to exercise an Option shall deliver to the
Corporation (i) the Exercise Price payable in accordance with
Section 6.5 and (ii) written notice of the election that
states the number of whole Common Shares with respect to which
the Employee is exercising the Option.
6.5 PAYMENT FOR COMMON SHARES. Upon exercise of an Option by an
Employee or, with respect to Nonqualified Options, any Transferee, the Exercise
Price shall be payable by the Employee or Transferee in cash or in such other
form of consideration as the Committee determines may be accepted, including
without limitation, securities or other property, or any combination of cash,
securities or other property, or by delivery by the Employee or Transferee (with
the written notice of election to exercise) of irrevocable instructions to a
broker registered under the 1934 Act promptly to deliver to the Corporation the
amount of sale or loan proceeds to pay the Exercise Price. The Committee, in its
sole discretion, may grant to an Employee or, with respect to Nonqualified
Options, any Transferee the right to transfer Common Shares acquired upon the
exercise of a part of an Option in payment of the Exercise Price payable upon
immediate exercise of a further part of the Option.
6.6 CONVERSION OF INCENTIVE STOCK OPTIONS. The Committee may at any
time in its sole discretion take such actions as may be necessary to convert any
outstanding Incentive Stock Option (or any installments or portions of
installments thereof) into a Nonqualified Option with or without the consent of
the Employee to whom that Incentive Stock Option was granted and whether or not
that Employee is an Employee at the time of the conversion.
7. STOCK APPRECIATION RIGHTS AND LIMITED STOCK APPRECIATION RIGHTS.
7.1 GRANT OF SARS AND LIMITED SARS. An SAR may be granted only in
connection with an Option. An SAR granted in connection with an Incentive Stock
Option may be granted only when the Incentive Stock Option is granted. An SAR
granted in connection with a Nonqualified Option may be granted either when the
related Nonqualified Option is granted or at any time thereafter including, in
the case of any Nonqualified Option resulting from the conversion of an
Incentive Stock Option, simultaneously with or after the conversion. Similarly,
a Limited SAR may be granted only in connection with an Option. A Limited SAR
granted in connection with an Incentive Stock Option may be granted only when
the Incentive Stock Option
<PAGE> 12
is granted. A Limited SAR granted in connection with a Nonqualified Option may
be granted either when the related Nonqualified Option is granted or at any time
thereafter including, in the case of any Nonqualified Option resulting from the
conversion of an Incentive Stock Option, simultaneously with or after the
conversion.
7.2 EXERCISE OF SARS AND LIMITED SARS.
(a) An Employee electing to exercise an SAR or a Limited SAR shall
deliver written notice to the Corporation of the election
identifying the SAR or Limited SAR and the related Option with
respect to which the SAR or Limited SAR was granted to the
Employee and specifying the number of whole Common Shares with
respect to which the Employee is exercising the SAR or Limited
SAR. Upon exercise of the SAR or Limited SAR, the related
Option shall be deemed to be surrendered to the extent that
the SAR or Limited SAR is exercised.
(b) SARs and Limited SARs may be exercised only (i) after the
expiration of six months from the date of grant of the SAR or
Limited SAR, (ii) on a date when the SAR or Limited SAR is "in
the money" (i.e., when there would be positive consideration
received upon exercise of the SAR or Limited SAR), (iii) at a
time and to the same extent as the related Option is
exercisable, (iv) unless otherwise provided in the relevant
Award Instrument, by surrender to the Corporation,
unexercised, of the related Option or any applicable portion
thereof, and (v) in compliance with all restrictions set forth
in or specified by the Committee pursuant to Section 7.2(c)
(in the case of SARs) or Section 7.2(d) (in the case of
Limited SARs).
(c) The Committee may specify in the Award Instrument pursuant to
which any SAR is granted waiting periods and restrictions on
permissible exercise periods in addition to the restrictions
on exercise set forth in Section 7.2(b), including, without
limitation, any restriction necessary to make applicable the
Rule 16b-3 Exemption.
7.3 PAYMENT FOR SARS AND LIMITED SARS. The amount payable upon exercise
of an SAR or Limited SAR may be paid by the Corporation in cash, or, if the
Committee shall determine in its sole discretion, in whole Common Shares (taken
at their Fair Market Value at the time of exercise of the SAR or Limited SAR) or
in a combination of cash and whole Common Shares; provided, however, that in no
event shall the total number of Common Shares that may be paid to an Employee
pursuant to the exercise of an SAR or Limited SAR exceed the total number of
Common Shares subject to the related Option.
7.4 TERMINATION, AMENDMENT, OR SUSPENSION OF SARS AND LIMITED SARS.
SARs and Limited SARs shall terminate and may no longer by exercised upon the
first to occur of (a) exercise or termination of the related Option, (b) any
termination date specified by the
<PAGE> 13
Committee at the time of grant of the SAR or Limited SAR, or (c) the transfer by
the Employee of the related Option. In addition, the Committee may in its sole
discretion at any time before the occurrence of a Change of Control amend,
suspend, or terminate any SAR or Limited SAR theretofore granted under the Plan
without the holder's consent; provided that, in the case of amendment, no
provision of the SAR or Limited SAR, as amended, shall be in conflict with any
provision of the Plan.
8. RESTRICTED STOCK.
8.1 ADDITIONAL CONDITIONS ON RESTRICTED STOCK. In addition to the
restrictions on disposition of Restricted Stock during the Restriction Period
and the requirement to offer Restricted Stock to the Corporation if the
Employee's employment terminates during the Restriction Period, the Committee
may provide in the Award Instrument with respect to any Award of Restricted
Stock other restrictions, conditions, and contingencies, which other
restrictions, conditions, and contingencies, if any, may relate to, in addition
to such other matters as the Committee may deem appropriate, the Employee's
personal performance, corporate performance, or the performance of any subunit
of the Corporation or any Subsidiary, in each case measured in such manner as
may be specified by the Committee. The Committee may impose different
restrictions, conditions, and contingencies on separate Awards of Restricted
Stock granted to different Employees, whether at the same or different times,
and on separate Awards of Restricted Stock granted to the same Employee, whether
at the same or different times. The Committee may specify a single Restriction
Period for all of the Restricted Stock subject to any particular Award
Instrument or may specify multiple Restriction Periods so that the restrictions
with respect to the Restricted Stock subject to the Award will expire in stages
according to a schedule specified by the Committee and set forth in the Award
Instrument; provided, however, that no Restriction Period with respect to any
Restricted Stock shall end earlier than one year after the date on which that
Restricted Stock is granted.
8.2 PAYMENT FOR RESTRICTED STOCK. Each Employee to whom an Award of
Restricted Stock is made shall pay the Acquisition Price with respect to that
Restricted Stock to the Corporation not later than 30 days after the delivery to
the Employee of the Award Instrument with respect to that Restricted Stock. If
any Employee fails to pay the Acquisition Price with respect to any Award of
Restricted Stock within that 30 day period, the Employee's right under that
Award shall be forfeited.
8.3 RIGHTS AS A SHAREHOLDER. Upon payment by an Employee in full of the
Acquisition Price for Restricted Stock under an Award, the Employee shall have
all of the rights of a shareholder with respect to the Restricted Stock,
including voting and dividend rights, subject only to such restrictions and
requirements referred to in Section 8.1 as may be incorporated in the Award
Instrument with respect to that Restricted Stock.
<PAGE> 14
9. PERFORMANCE SHARES.
9.1 DISCRETION OF COMMITTEE WITH RESPECT TO PERFORMANCE SHARES. The
Committee shall have full discretion to select the Employees to whom Awards of
Performance Shares are made, the number of Performance Shares to be granted to
any Employee so selected, the kind and level of the Performance Goals and
whether those Performance Goals are to apply to the Corporation, a Subsidiary,
or any one or more subunits of the Corporation or of any Subsidiary, and the
dates on which each Performance Period shall begin and end, and to determine the
form and provisions of the Award Instrument to be used in connection with any
Award of Performance Shares.
9.2 CONDITIONS TO PAYMENT FOR PERFORMANCE SHARES.
(a) Unless otherwise provided in the relevant Award Instrument, an
Employee must be employed by the Corporation or a Subsidiary
on the last day of a Performance Period to be entitled to
payment for any Performance Shares.
(b) The Committee may establish, from time to time, one or more
formulas to be applied against the Performance Goals to
determine whether all, some portion but less than all, or none
of the Performance Shares granted with respect to a
Performance Period are treated as earned pursuant to any
Award. An Employee will be entitled to receive payments with
respect to any Performance Shares only to the extent that
those Performance Shares are treated as earned under one or
more such formulas.
9.3 PAYMENT FOR PERFORMANCE SHARES. The Corporation shall pay each
Employee who is entitled to payment for Performance Shares earned with respect
to any Performance Period an amount for those Performance Shares (a) in cash
(based upon the per share Fair Market Value of Common Shares on the last day of
the Performance Period), (b) in Common Shares (one Common Share for each
Performance Share earned), (c) in Restricted Stock (one Common Share of
Restricted Stock for each Performance Share earned), or (d) any combination of
the foregoing, in such proportions as the Committee may determine. Restricted
Stock issued by the Corporation in payment of Performance Shares shall be
subject to all the provisions of Section 8.
10. TERMINATION OF EMPLOYMENT. After an Employee's Employment
Termination Date, the rules set forth in this Section 10 shall apply. All
factual determinations with respect to the termination of an Employee's
employment that may be relevant under this Section 10 shall be made by the
Committee in its sole discretion.
10.1 TERMINATION OTHER THAN UPON DEATH, DISABILITY, OR CERTAIN
RETIREMENTS. Upon any termination of an Employee's employment for any reason
other than the Employee's retirement (under any retirement plan of the
Corporation or of a Subsidiary) as provided in Section 10.2, disability as
provided on Section 10.3, or death as provided in Section 10.4:
<PAGE> 15
(a) Unless otherwise provided in the relevant Award Instrument,
the Employee or, with respect to Nonqualified Options, any
Transferee shall have the right (i) during the period ending
six months after the Employment Termination Date, but not
later than the Option Expiration Date, to exercise any
Nonqualified Options and related SARs that were outstanding on
the Employment Termination Date, if and to the same extent as
those Options and SARs were exercisable by the Employee or
Transferee (as the case may be) on the Employment Termination
Date, and (ii) during the period ending three months after the
Employment Termination Date, but not later that the Option
Expiration Date, to exercise any Incentive Stock Options and
related SARs that were outstanding on the Employment
Termination Date, if and to the same extent as those Options
and SARs were exercisable by the Employee on the Employment
Termination Date. Notwithstanding the preceding sentence, if
within two years after a Change of Control an Employee's
Employment Termination Date occurs other than as a result of a
Voluntary Resignation, unless otherwise provided in the
relevant Award Instrument, the Employee or, with respect to
Nonqualified Options, any Transferee shall have the right,
during the Extended Period, but not later than the Option
Expiration Date, to exercise any Options and related SARs that
were outstanding on the Employment Termination Date, if and to
the same extent as those Options and SARs were exercisable by
the Employee or Transferee (as the case may be) on the
Employment Termination Date (even though, in the case of
Incentive Stock Options, exercise of those Options more than
three months after the Employment Termination Date may cause
the Option to fail to qualify for Incentive Stock Option
treatment under the Internal Revenue Code of 1986, as
amended). As used in the immediately preceding sentence, the
term "Extended Period" means the longer of the period that the
Option or SAR would otherwise be exercisable in the absence of
the immediately preceding sentence or the period ending with
the second anniversary date of the Change of Control last
occurring before the Employment Termination Date and the term
"Voluntary Resignation" means that the Employee shall have
terminated his or her employment with the Corporation and its
Subsidiaries by voluntarily resigning at his or her own
instance without having been requested to so resign by the
Corporation or its Subsidiaries except that any resignation by
the Employee will not be deemed to be a Voluntary Resignation
if, after the Change of Control, the Employee's base salary
was reduced or the Employee was required to relocate his or
her principal place of employment more than 35 miles,
(b) Unless otherwise provided in the relevant Award Instrument,
the Employee shall offer for resale at the Acquisition Price
to the Corporation each Common Share of Restricted Stock held
by the Employee at the
<PAGE> 16
Employment Termination Date with respect to which, as of that
date, any restrictions, conditions, or contingencies have not
lapsed, and
(c) Unless otherwise provided in the relevant Award Instrument,
the Employee shall forfeit each Performance Share with respect
to which, as of that date, any restrictions, conditions, or
contingencies have not lapsed.
10.2 TERMINATION DUE TO CERTAIN RETIREMENTS. Upon any termination of an
Employee's employment with the Corporation or any Subsidiary under circumstances
entitling the Employee to immediate payment of normal retirement or early
retirement benefits under any retirement plan of the Corporation or of a
Subsidiary (whether the Employee elects to commence or defer receipt of such
payment):
(a) Unless otherwise provided in the relevant Award Instrument,
the Employee or, with respect to Nonqualified Options, any
Transferee shall have the right (i) to exercise, from time to
time during the period ending two years after the Employment
Termination Date, but not later than the Option Expiration
Date, any Nonqualified Options and related SARs that were
outstanding on the Employment Termination Date, if and to the
same extent as those Options and SARs were exercisable by the
Employee or Transferee (as the case may be) on the Employment
Termination Date, and (ii) to exercise, from time to time
during the period ending two years after the Employment
Termination Date, but no later than the Option Expiration
Date, any Incentive Stock Options and related SARs that were
outstanding on the Employment Termination Date, if and to the
same extent as those Options and SARs were exercisable by the
Employee on the Employment Termination Date (even though
exercise of the Incentive Stock Option more than three months
after the Employment Termination Date may cause the Option to
fail to qualify for Incentive Stock Option treatment under the
Internal Revenue Code of 1986, as amended),
(b) The relevant Award Instrument may provide that the Employee
or, with respect to Nonqualified Options, any Transferee will
have the right to exercise, from time to time until not later
than the Option Expiration Date, Nonqualified Stock Options
and SARs and Incentive Stock Options and SARs to the extent
such Options and SARs become exercisable by their terms prior
to the Option Expiration Date (or such earlier date as
specified in the relevant Award Instrument), notwithstanding
the fact that such Options and SARs were not exercisable in
whole or in part (whether because a condition to exercise had
not yet occurred or a specified time period had not yet
elapsed or otherwise) on the Employment Termination Date,
<PAGE> 17
(c) Unless otherwise provided in the relevant Award Instrument,
the Employee shall offer for resale at the Acquisition Price
to the Corporation each Common Share of Restricted Stock held
by the Employee at the Employment Termination Date with
respect to which, as of that date, any restrictions,
conditions, or contingencies have not lapsed, and
(d) Unless otherwise provided in the relevant Award Instrument,
the Employee shall forfeit each Performance Share with respect
to which, as of that date, any restrictions, conditions, or
contingencies have not lapsed.
10.3 TERMINATION DUE TO DISABILITY. Upon any termination of an
Employee's employment due to disability:
(a) Unless otherwise provided in the relevant Award Instrument,
the Employee, the Employee's attorney in fact or legal
guardian or, with respect to Nonqualified Options, any
Transferee shall have the right (i) to exercise, from time to
time during the period ending two years after the Employment
Termination Date, but not later than the Option Expiration
Date, any Nonqualified Options and related SARs that were
outstanding on the Employment Termination Date, if and to the
same extent those Options and SARs were exercisable by the
Employee or Transferee (as the case may be) on the Employment
Termination Date, and (ii) to exercise, from time to time
during the period ending two years after the Employment
Termination Date, but no later than the Option Expiration
Date, any Incentive Stock Options and related SARs that were
outstanding on the employment Termination Date, if and to the
same extent as those Options and SARs were exercisable by the
Employee on the Employment Termination Date (even though
exercise of the Incentive Stock Option more than one year
after the Employment Termination Date may cause the Option to
fail to qualify for Incentive Stock Option treatment under the
Internal Revenue Code of 1986, as amended),
(b) Unless otherwise provided in the relevant Award Instrument,
the Employee shall offer for resale at the Acquisition Price
to the Corporation each Common Share of Restricted Stock held
by the Employee at the Employment Termination Date with
respect to which, as of that date, any restrictions,
conditions, or contingencies have not lapsed, and
(c) Unless otherwise provided in the relevant Award Instrument,
the Employee shall forfeit each Performance Share with respect
to which, as of that date, any restrictions, conditions, or
contingencies have not lapsed.
10.4. DEATH OF AN EMPLOYEE. Upon the death of an Employee while
employed by the Corporation or any Subsidiary or within any of the periods
referred to in any Section 10.1, 10.2, or 10.3 during which any particular
Option or SAR remains potentially exercisable:
<PAGE> 18
(a) Unless otherwise provided in the relevant Award Instrument, if
the Option Expiration Date of any Nonqualified Option that had
not expired before the Employee's death would otherwise expire
before the first anniversary of the Employee's death, that
Option Expiration Date shall automatically be extended to the
first anniversary of the Employee's death or such other date
as provided in the relevant Award Instrument,
(b) Unless otherwise provided in the relevant Award Instrument,
the Employee's executor or administrator, the person or
persons to whom the Employee's rights under any Option or SAR
are transferred by will or the laws of descent and
distribution or, with respect to Nonqualified Options, any
Transferee shall have the right to exercise, from time to time
during the period ending two years after the date of the
Employee's death, but not later than the Option Expiration
Date, any Options and related SARs that were outstanding on
the date of the Employee's death, if and to the same extent as
those Options and SARs were exercisable by the Employee or
Transferee (as the case may be) on the date of the Employee's
death,
(c) Unless otherwise provided in the relevant Award Instrument,
the Employee shall offer for resale at the Acquisition Price
to the Corporation each Common Share of Restricted Stock held
by the Employee at the Employment Termination Date with
respect to which, as of that date, any restrictions,
conditions, or contingencies have not lapsed, and
(d) Unless otherwise provided in the relevant Award Instrument,
the Employee shall forfeit each Performance Share with respect
to which, as of that date, any restrictions, conditions, or
contingencies have not lapsed.
11. ACCELERATION UPON CHANGE OF CONTROL. Unless otherwise specified in
the relevant Award Instrument, upon the occurrence of a Change of Control of the
Corporation, each Award theretofore granted to any Employee that then remains
outstanding shall be automatically treated as follows: (a) any outstanding
Option shall become immediately exercisable in full, (b) SARs and Limited SARs
related to any such Options shall also become immediately exercisable in full,
(c) the Restriction Period with respect to all outstanding Awards of Restricted
Stock shall immediately terminate, and (d) the restrictions, conditions, or
contingencies on any Performance Shares shall be modified in such manner as the
Committee may specify to give the Employee the benefit of those Performance
Shares through the date of Change of Control.
12. ASSIGNABILITY. Nonqualified Options may not be assigned or
transferred (other than by will or by the laws of descent and distribution)
unless the Committee, in its sole discretion, determines to allow such
assignment or transfer and, if the Committee determines to allow any such
assignment or transfer, the Transferee shall have the power to exercise such
Nonqualified Option in accordance with the terms of the Award and the provisions
of this Plan. No Incentive Stock Option, SAR, Limited SAR, Restricted Stock
during the Restriction Period,
<PAGE> 19
or Performance Share may be transferred other than by will or by the laws of
descent and distribution. During an Employee's lifetime, only the Employee (or
in the case of incapacity of an Employee, the Employee's attorney in fact or
legal guardian) may exercise any Incentive Stock Option, SAR, Limited SAR,
Restricted Stock during the Restriction Period, or Performance Share requiring
or permitting exercise
13. ADJUSTMENT UPON CHANGES IN COMMON SHARES. Automatically and without
Committee action, in the event of any stock dividend, stock split, or share
combination of the Common Shares, or by appropriate Committee action in the
event of any reclassification, recapitalization, merger, consolidation, other
form of business combination, liquidation, or dissolution involving the
Corporation or any spin-off or other distribution to shareholders of the
Corporation (other than normal cash dividends), appropriate adjustments to (a)
the maximum number of Common Shares that may be issued under the Plan pursuant
to Section 5, the maximum number of Common Shares that may be issued under the
Plan pursuant to Incentive Stock Options as provided in Section 5, and the
maximum number of Common Shares with respect to which any Employee may receive
Awards during any calendar year as provided in Section 4, and (b) the number and
kind of shares subject to, the price per share under, and the terms and
conditions of each then outstanding Award shall be made to the extent necessary
and in such manner that the benefits of Employees under all then outstanding
Awards shall be maintained substantially as before the occurrence of such event.
Any such adjustment shall be conclusive and binding for all purposes of the Plan
and shall be effective, in the event of any stock dividend, stock split, or
share combination, as of the date of such stock dividend, stock split, or share
combination, and in all other cases, as of such date as the Committee may
determine.
14. PURCHASE FOR INVESTMENT. Each person acquiring Common Shares
pursuant to any Award may be required by the Corporation to furnish a
representation that he or she is acquiring the Common Shares so acquired as an
investment and not with a view to distribution thereof if the Corporation, in
its sole discretion, determines that such representation is required to insure
that a resale or other disposition of the Common Shares would not involve a
violation of the Securities Act of 1933, as amended, or of applicable blue sky
laws. Any investment representation so furnished shall no longer be applicable
at any time such representation is no longer necessary for such purposes.
15. WITHHOLDING OF TAXES. The Corporation will withhold from any
payments of cash made pursuant to the Plan such amount as is necessary to
satisfy all applicable federal, state, and local withholding tax obligations.
The Committee may, in its discretion and subject to such rules as the Committee
may adopt from time to time, permit or require an Employee (or other person
exercising an Option with respect to withholding taxes upon exercise of such
Option) to satisfy, in whole or in part, any withholding tax obligation that may
arise in connection with the grant of an Award, the lapse of any restrictions
with respect to an Award, the acquisition of Common Shares pursuant to any
Award, or the disposition of any Common Shares received pursuant to any Award by
having the Corporation hold back some portion of the Common Shares that would
otherwise be delivered pursuant to the Award or by delivering to the Corporation
an amount equal to the withholding tax obligation arising with respect to such
grant, lapse,
<PAGE> 20
acquisition, or disposition in (a) cash, (b) Common Shares, or (c) such
combination of cash and Common Shares as the Committee may determine. The Fair
Market Value of the Common Shares to be so held back by the Company or delivered
by the Employee shall be determined as of the date on which the obligation to
withhold first arose.
16. AWARDS IN SUBSTITUTION FOR AWARDS GRANTED BY OTHER COMPANIES.
Awards, whether Incentive Stock Options, Nonqualified Options, SARs, Limited
SARs Restricted Stock, or Performance Shares, may be granted under the Plan in
substitution for awards held by employees of a company who become Employees of
the Corporation or a Subsidiary as a result of the merger or consolidation of
the employer company with the Corporation or a Subsidiary, or the acquisition by
the Corporation or a Subsidiary of the assets of the employer company, or the
acquisition by the Corporation or a Subsidiary of stock of the employer company
as a result of which it becomes a Subsidiary. The terms, provisions, and
benefits of the substitute Awards so granted may vary from the terms, provisions
and benefits set forth in or authorized by the Plan to such extent as the
Committee at the time of the grant may deem appropriate to conform, in whole or
in part, to the terms, provisions, and benefits of the awards in substitution
for which they are granted.
17. LEGAL REQUIREMENTS. No Awards shall be granted and the Corporation
shall have no obligation to make any payment under the Plan, whether in Common
Shares, cash, or any combination thereof, unless such payment is, without
further action by the Committee, in compliance with all applicable Federal and
state laws and regulations, including, without limitation, the United States
Internal Revenue Code and Federal and state securities laws.
18. DURATION AND TERMINATION OF THE PLAN. The Plan shall become
effective and shall be deemed to have been adopted on the date on which it is
approved by the shareholders of the Corporation and shall remain in effect
thereafter until terminated by action of the Board of Directors. No termination
of the Plan shall adversely affect the rights of any Employee with respect to
any Award granted before the effective date of the termination.
19. AMENDMENTS. The Board of Directors, or a duly authorized committee
thereof, may alter or amend the Plan from time to time prior to its termination
in any manner the Board of Directors, or such duly authorized committee, may
deem to be in the best interests of the Corporation and its shareholders, except
that no amendment may be made without shareholder approval if shareholder
approval is required under Rule 16b-3 to qualify for the Rule 16b-3 Exemption,
is required by any applicable securities law or tax law, or is required by the
rules of any exchange on which the Common Shares of the Corporation are traded
or, if the Common Shares are not listed on an exchange, by the rules of the
registered national securities association through whose inter-dealer quotation
system the Common Shares are quoted. The Committee shall have the authority to
amend these terms and conditions applicable to outstanding Awards (a) in any
case where expressly permitted by the terms of the Plan or of the relevant Award
Instrument or (b) in any other case with the consent of the Employee to whom the
Award was granted. Except as expressly provided in the Plan or in the Award
Instrument evidencing the Award, the Committee may not, without the consent of
the holder of an Award granted under the
<PAGE> 21
Plan, amend the terms and conditions applicable to that Award in a manner
adverse to the interests of the Employee.
20. PLAN NONCONTRACTUAL. Nothing herein contained shall be construed as
a commitment to or agreement with any person employed by the Corporation or a
Subsidiary to continue such person's employment with the Corporation or the
Subsidiary, and nothing herein contained shall be construed as a commitment or
agreement on the part of the Corporation or any Subsidiary to continue the
employment or the annual rate of compensation of any such person for any period.
All Employees shall remain subject to discharge to the same extent as if the
Plan had never been put into effect.
21. INTEREST OF EMPLOYEES. Any obligation of the Corporation under the
Plan to make any payment at any future date merely constitutes the unsecured
promise of the Corporation to make such payment from its general assets in
accordance with the Plan, and no Employee shall have any interest in, or lien or
prior claim upon, any property of the Corporation or any Subsidiary by reason of
that obligation.
22. 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.
23. ABSENCE OF LIABILITY. No member of the Board of Directors of the
Corporation or a Subsidiary, of the Committee, of any other committee of the
Board of Directors, or any officer or Employee of the Corporation or a
Subsidiary shall be liable for any act or action under the Plan, whether of
commission or omission, taken by any other member, or by any officer, agent, or
Employee, or except in circumstances involving his bad faith or willful
misconduct, for anything done or omitted to be done by himself.
24. SEVERABILITY. The invalidity or unenforceability of any particular
provision of the Plan shall not affect any other provision hereof, and the Plan
shall be construed in all respects as if such invalid or unenforceable provision
were omitted herefrom.
25. GOVERNING LAW. The provisions of the Plan shall be governed and
construed in accordance with the laws of the State of Ohio.
26. PLAN EFFECTIVE DATE. The Plan, originally named the Society
Corporation 1991 Equity Compensation Plan, was approved by the Corporation's
shareholders at the Annual Meeting of Shareholders held on April 16, 1991 and
became effective on that date. On March 17, 1994, the Corporation's Board of
Directors adopted, subject to shareholder approval, certain amendments to the
Plan, then renamed the KeyCorp Amended and Restated 1991 Equity Compensation
Plan. The shareholders approved these amendments at the Corporation's Annual
Meeting of Shareholders held on May 19, 1994. The Plan was further amended by
action of the Committee on July 17, 1996 to amend the definition of Change of
Control as set forth in
<PAGE> 22
Section 2.5 of the Plan, which amendment was effective as of January 1, 1996. If
the Corporation hereafter enters into a transaction intended to be accounted for
as a pooling of interests and the Committee determines, based on the written
advice of the Corporation's independent accountants, that the July 17, 1996
amendment or the operation thereof would conflict with or jeopardize the pooling
of interests accounting treatment for such transaction, then the July 17, 1996
amendment shall be inoperative and shall be treated as if it had never been
effected so that the definition of Change of Control would be as in effect prior
to such amendment. The Plan was further amended and restated as of September 19,
1996, to provide for the transferability of Options granted hereunder. The Plan
was further amended by action of the Equity Based Compensation Subcommittee of
the Compensation and Organization Committee on May 6, 1998 to amend Section
10.1(a) of the Plan to extend the option exercise period for terminated
employees upon a change of control in certain circumstances. The amendment to
Section 10.1(a) only applies to Awards and Award Instruments granted or entered
into on or after January 1, 1999. If the Corporation enters into a transaction
intended to qualify as a pooling of interests for accounting purposes prior to
January 1, 1999, the amendment to Section 10.1(a) shall become null and void.
The Subcommittee also amended the Plan to delete Section 17 of the Plan and all
cross-references thereto. References in the Plan to specific numbers of Common
Shares have been adjusted pursuant to Section 13 to reflect the two-for-one
split in the Common Shares effective March 6, 1998. With respect to clause (a)
of the last paragraph of Section 5, as of May 6, 1998, Incentive Stock Options
covering 451,823 Common Shares had been theretofore granted and not expired or
terminated unexercised, leaving 9,148,177 Common Shares then available for
future grant of Incentive Stock Options (subject to increase in the event that
outstanding Incentive Stock Options expire or terminate unexercised). The Plan
was further amended by action of the Compensation and Organization Committee on
March 15, 2000 to amend Section 1 of the Plan to clarify that Awards under the
Plan may be made to any Employee of the Corporation.
<PAGE> 1
EXHIBIT 15
ACKNOWLEDGMENT LETTER OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
KeyCorp
We are aware of the incorporation by reference in the following KeyCorp ("Key")
Registration Statements of our review report, dated April 14, 2000, relating to
the unaudited condensed consolidated interim financial statements of Key,
included in the Quarterly Report on Form 10-Q for the quarter ended March 31,
2000.
Form S-3 No. 33-58405
Form S-3 No. 333-10577
Form S-3 No. 333-55959
Form S-3 No. 333-59175
Form S-3 No. 333-64601
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)
Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not a part
of the Registration Statements prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
/s/ Ernst & Young LLP
Cleveland, Ohio
May 8, 2000
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