-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Pq7I50j7Tt9afVXGG5y+PhwlZvrFXvLAMgG8S+aNBwZGKiexemq974X+umDyOalT z/JnPjk3XTZ0WJKzGBiIMQ== 0000950152-00-004005.txt : 20000515 0000950152-00-004005.hdr.sgml : 20000515 ACCESSION NUMBER: 0000950152-00-004005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEYCORP /NEW/ CENTRAL INDEX KEY: 0000091576 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 346542451 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11302 FILM NUMBER: 628963 BUSINESS ADDRESS: STREET 1: 127 PUBLIC SQ CITY: CLEVELAND STATE: OH ZIP: 44114-1306 BUSINESS PHONE: 2166896300 MAIL ADDRESS: STREET 1: 127 PUBLIC SQ CITY: CLEVELAND STATE: OH ZIP: 44114-1306 FORMER COMPANY: FORMER CONFORMED NAME: SOCIETY CORP DATE OF NAME CHANGE: 19920703 10-Q 1 KEYCORP 10-Q 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 - ---------------------------------------- ------------------- (Address of principal executive offices) (Zip Code) (216) 689-6300 ------------------------------------------------------ (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) 2 KEYCORP TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Item 1. Financial Statements Page Number -------------------- ----------- 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
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets
MARCH 31, DECEMBER 31, MARCH 31, dollars in millions 2000 1999 1999 - ------------------------------------------------------------------------------------------------------------------------------------ (UNAUDITED) (UNAUDITED) 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 - ------------------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------------------ 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) - ------------------------------------------------------------------------------------------------------------------------------------ Total shareholders' equity 6,493 6,389 6,105 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $83,504 $83,395 $79,992 ======= ======= ======= - ---------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements (Unaudited). 3 4 Consolidated Statements of Income (Unaudited)
THREE MONTHS ENDED MARCH 31, ---------------------------- dollars in millions, except per share amounts 2000 1999 - ------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------ Total interest expense 818 696 - ------------------------------------------------------------------------------------------------------------ NET INTEREST INCOME 671 685 Provision for loan losses 183 111 - ------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements (Unaudited). 4 5 Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
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 - ---------------------------------------------------------------------------------------------------------------------------------- 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) ==== ====== ====== ==== ======= ===== - ------------------------------------------------------------------------------------------------------------------
(a) Net of reclassification adjustments. See Notes to Consolidated Financial Statements (Unaudited). 5 6 Consolidated Statements of Cash Flow (Unaudited)
THREE MONTHS ENDED MARCH 31, ---------------------------- in millions 2000 1999 - ----------------------------------------------------------------------------------------------------------------------------- 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) - ----------------------------------------------------------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements (Unaudited). 6 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:
THREE MONTHS ENDED MARCH 31, ---------------------------- dollars in millions, except per share amounts 2000 1999 - ------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------
7 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 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 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.
THREE MONTHS ENDED MARCH 31, KEY RETAIL BANKING KEY SPECIALTY FINANCE KEY CORPORATE CAPITAL -------------------- --------------------- --------------------- dollars in millions 2000 1999 2000 1999 2000 1999 - ----------------------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------------------- OTHER FINANCIAL DATA Efficiency ratio (g) 58.55% 62.70% 58.22% 44.86% 45.35% 47.00% - -----------------------------------------------------------------------------------------------------------------------------------
(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 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.
KEY CAPITAL PARTNERS TREASURY AND OTHER TOTAL SEGMENTS RECONCILING ITEMS KEYCORP CONSOLIDATED -------------------- ---------------------- -------------------- -------------------- -------------------- 2000 1999 2000 1999 2000 1999 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ $ 47 $ 49 $ (27) $ (29) $ 694 $ 686 $ (16) $ 7 $ 678 $ 693 270 228 44 33 466 428 340 187 806 615 (48) (47) -- -- -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ 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) -- -- -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ 48 29 (17) (25) 371 347 203 96 574 443 20 13 (16) (18) 133 119 74 31 207 150 - ------------------------------------------------------------------------------------------------------------------------------------ $ 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% - ------------------------------------------------------------------------------------------------------------------------------------
(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 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:
MARCH 31, 2000 ---------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR in millions COST GAINS LOSSES VALUE - ------------------------------------------------------------------------------------------------------- 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 ====== === ====== - -------------------------------------------------------------------------------------------------------
12 13
December 31, 1999 ---------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR in millions COST GAINS LOSSES VALUE - ------------------------------------------------------------------------------------------------------- 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 ====== === ====== - -------------------------------------------------------------------------------------------------------
March 31, 1999 ---------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR in millions COST GAINS LOSSES VALUE - ------------------------------------------------------------------------------------------------------- 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 ====== === ====== - -------------------------------------------------------------------------------------------------------
13 14 6. Loans Key's loans by category are summarized as follows:
MARCH 31, DECEMBER 31, MARCH 31, in millions 2000 1999 1999 - ------------------------------------------------------------------------------------------------------------- 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 ======= ======= ======= - -------------------------------------------------------------------------------------------------------------
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:
MARCH 31, DECEMBER 31, MARCH 31, in millions 2000 1999 1999 - ------------------------------------------------------------------------------------------------------------- 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 ===== ===== ===== - -------------------------------------------------------------------------------------------------------------
14 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:
MARCH 31, DECEMBER 31, MARCH 31, in millions 2000 1999 1999 - ---------------------------------------------------------------------------------------------------------------- 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 ==== ==== ==== - ----------------------------------------------------------------------------------------------------------------
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 16 8. Long-Term Debt The components of Key's long-term debt, presented net of unamortized discount where applicable, were as follows:
MARCH 31, DECEMBER 31, MARCH 31, dollars in millions 2000 1999 1999 - ------------------------------------------------------------------------------------------------------------------------- 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 ======= ======= ======= - -------------------------------------------------------------------------------------------------------------------------
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 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:
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 - ----------------------------------------------------------------------------------------------------------------------------------- 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% -- ====== === ====== - -----------------------------------------------------------------------------------------------------------------------------------
(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 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:
DECEMBER 31, RESTRUCTURING CASH MARCH 31, in millions 1999 CHARGES PAYMENTS 2000 - -------------------------------------------------------------------------------------------------------------------- Severance $60 $4 $12 $52 Site consolidations 24 1 11 14 Equipment and other 7 4 4 7 - -------------------------------------------------------------------------------------------------------------------- Total $91 $9 $27 $73 === == === === - --------------------------------------------------------------------------------------------------------------------
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 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.
MARCH 31, DECEMBER 31, MARCH 31, in millions 2000 1999 1999 - ----------------------------------------------------------------------------------------------- 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 ======= ======= ======= - -----------------------------------------------------------------------------------------------
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 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.
MARCH 31, 2000 ------------------------------------------------------------------------------- WEIGHTED AVERAGE RATE NOTIONAL FAIR MATURITY --------------------------------------- dollars in millions AMOUNT VALUE (YEARS) RECEIVE PAY STRIKE - ------------------------------------------------------------------------------------------------------------------------------------ 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) -- -- -- -- ======= ===== - ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999 ----------------------- NOTIONAL FAIR dollars in millions AMOUNT VALUE - --------------------------------------------------------------------------------- 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) ======= ===== - ---------------------------------------------------------------------------------
(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 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 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.
THREE MONTHS ENDED MARCH 31, ---------------------------- in millions 2000 1999 - ---------------------------------------------------------------------------- Interest rate contracts $15 $8 Foreign exchange forward contracts 8 7 Treasury-based option contracts -- 2 - ----------------------------------------------------------------------------
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.
MARCH 31, 2000 THREE MONTHS ENDED MARCH 31, 2000 -------------------------- ------------------------------------ NOTIONAL FAIR AVERAGE AVERAGE in millions AMOUNT VALUE NOTIONAL AMOUNT FAIR VALUE - ------------------------------------------------------------------------------------------------------------------------------- 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) - -------------------------------------------------------------------------------------------------------------------------------
22 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 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 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 26 Figure 1. Selected Financial Data
2000 1999 -------- --------------------------------------------------------------- dollars in millions, except per share amounts FIRST FOURTH THIRD SECOND FIRST - ----------------------------------------------------------------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------------------------------------------------------------
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 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
THREE MONTHS ENDED MARCH 31, ---------------------------- dollars in millions, except per share amounts 2000 1999 - --------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------
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 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 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
2000 1999 -------- ------------------------------------------------------------ dollars in millions, except per share amounts FIRST FOURTH THIRD SECOND FIRST - ---------------------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------------------
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 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
THREE MONTHS ENDED MARCH 31, CHANGE ---------------------------- ------------------------ dollars in millions 2000 1999 AMOUNT PERCENT - -------------------------------------------------------------------------------------- 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 % ===== ==== ==== ==== - --------------------------------------------------------------------------------------
(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 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 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 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 34 Figure 5. Average Balance Sheets, Net Interest Income and Yields/Rates
FIRST QUARTER 2000 FOURTH QUARTER 1999 ---------------------------------- -------------------------------- AVERAGE YIELD/ AVERAGE YIELD/ dollars in millions BALANCE INTEREST RATE BALANCE INTEREST RATE - ----------------------------------------------------------------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------------------------------------------------------------
(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 35 Figure 5. Average Balance Sheets, Net Interest Income and Yields/Rates (Continued)
THIRD QUARTER 1999 SECOND QUARTER 1999 ------------------------------------ --------------------------------- AVERAGE YIELD/ AVERAGE YIELD/ dollars in millions BALANCE INTEREST RATE BALANCE INTEREST RATE - --------------------------------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------------------------------
FIRST QUARTER 1999 -------------------------------- AVERAGE YIELD/ dollars in millions BALANCE INTEREST RATE - ------------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------------
35 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 37 Figure 6. Components of Net Interest Income Changes
FROM THREE MONTHS ENDED MARCH 31, 1999, TO THREE MONTHS ENDED MARCH 31, 2000 --------------------------------------- AVERAGE YIELD/ NET in millions VOLUME RATE CHANGE - --------------------------------------------------------------------------------------------- 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) ==== ==== ==== - ---------------------------------------------------------------------------------------------
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 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 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
RECEIVE FIXED PAY FIXED BASIS SWAPS ----------------------------- --------------------------- -------------------------- INDEXED FORWARD- FORWARD- in millions AMORTIZING CONVENTIONAL CONVENTIONAL STARTING CONVENTIONAL STARTING - ------------------------------------------------------------------------------------------------------------------------------------ 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 ==== ====== ====== ===== ====== ====== - ------------------------------------------------------------------------------------------------------------------------------------
TOTAL PORTFOLIO in millions SWAPS CAPS TOTAL - ----------------------------------------------------------------------------------------- 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 ======= ====== ======= - -----------------------------------------------------------------------------------------
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 40 Figure 8. Portfolio Swaps and Caps by Interest Rate Management Strategy
MARCH 31, 2000 DECEMBER 31, 1999 MARCH 31, 1999 ------------------ ------------------ ------------------ NOTIONAL FAIR NOTIONAL FAIR NOTIONAL FAIR in millions AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE - ---------------------------------------------------------------------------------------------------------------------------------- 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 ======= ===== ======= ===== ======= ===== - ----------------------------------------------------------------------------------------------------------------------------------
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
MARCH 31, 2000 RECEIVE FIXED PAY FIXED BASIS SWAPS --------------------------- ---------------------------- --------------------------- INDEXED FORWARD- FORWARD- in millions AMORTIZING CONVENTIONAL CONVENTIONAL STARTING CONVENTIONAL STARTING - ----------------------------------------------------------------------------------------------------------------------------------- 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 === ====== ====== ==== ====== ====== - -----------------------------------------------------------------------------------------------------------------------------------
MARCH 31, 2000 TOTAL PORTFOLIO in millions SWAPS CAPS TOTAL - ---------------------------------------------------------------------------------- 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 ======= ====== ======= - ----------------------------------------------------------------------------------
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 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 42 Figure 10. Noninterest Income
THREE MONTHS ENDED MARCH 31, CHANGE ---------------------------- -------------------------- dollars in millions 2000 1999 AMOUNT PERCENT - ------------------------------------------------------------------------------------------------------------------------- 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 % ==== ==== ===== - -------------------------------------------------------------------------------------------------------------------------
N/M=Not Meaningful Figure 11. Investment Banking and Capital Markets Income
THREE MONTHS ENDED MARCH 31, CHANGE ---------------------------- -------------------------- dollars in millions 2000 1999 AMOUNT PERCENT - ------------------------------------------------------------------------------------------------------------------------- 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% === === === - -------------------------------------------------------------------------------------------------------------------------
Figure 12. Trust and Asset Management
THREE MONTHS ENDED MARCH 31, CHANGE ---------------------------- -------------------------- dollars in millions 2000 1999 AMOUNT PERCENT - ------------------------------------------------------------------------------------------------------------------------- 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 % ==== ==== === - -------------------------------------------------------------------------------------------------------------------------
42 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 44 Figure 13. Noninterest Expense
THREE MONTHS ENDED MARCH 31, CHANGE --------------------------- -------------------------- dollars in millions 2000 1999 AMOUNT PERCENT - ------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------
(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 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 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 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
COMMERCIAL RESIDENTIAL HOME CREDIT CARD BRANCH in millions COMMERCIAL REAL ESTATE REAL ESTATE EQUITY RECEIVABLES AUTOMOBILE EDUCATION DIVESTITURES TOTAL - ---------------------------------------------------------------------------------------------------------------------------------- 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 ==== ==== ====== ==== ====== ==== ====== - ----------------------------------------------------------------------------------------------------------------------------------
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
MARCH 31, DECEMBER 31, MARCH 31, in millions 2000 1999 1999 - ----------------------------------------------------------------------------- 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 ====== ====== ====== - -----------------------------------------------------------------------------
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 48 Figure 16. Securities Available for Sale
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 - ------------------------------------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE TOTAL YIELD(b) ----------------------- 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% -----------------------
(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
STATES AND WEIGHTED POLITICAL OTHER AVERAGE dollars in millions SUBDIVISIONS SECURITIES TOTAL YIELD (a) - ------------------------------------------------------------------------------------------------------- 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 -- - ---------------------------------------------------------------------------------------------------------
(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 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 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
THREE MONTHS ENDED MARCH 31, ---------------------------- dollars in millions 2000 1999 - ---------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------
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 51 Figure 19. Summary of Nonperforming Assets and Past Due Loans
MARCH 31, DECEMBER 31, MARCH 31, dollars in millions 2000 1999 1999 - --------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------
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 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 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.
Senior Subordinated Commercial Long-Term Long-Term Paper Debt Debt ------------ ------------- ----------------- Duff & Phelps D-1 A+ A Standard & Poor's A-2 A- BBB+ Moody's P-1 A1 A2
For more information about Key's sources and uses of cash for the 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 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
MARCH 31, DECEMBER 31, MARCH 31, dollars in millions 2000 1999 1999 - ------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------
(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 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 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 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 EX-10 2 EXHIBIT 10 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 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 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 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). 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 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 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. 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 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. 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 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 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 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. 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: 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 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, 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: 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, 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, 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 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 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. EX-15 3 EXHIBIT 15 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 EX-27 4 EXHIBIT 27
9 1,000,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 2,757 53 1,611 903 6,269 1,053 1,063 64,064 979 83,504 46,036 10,636 4,312 14,784 1,243 0 492 6,001 83,504 1,347 142 0 1,489 377 441 671 183 1 727 567 567 0 0 367 0.83 0.83 3.68 423 288 0 0 979 164 30 979 979 0 0
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