-----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, MD0wskQ5p+59ApE/zDOqC3KRNuUoYwXiOWFelDZuSujRD0QsbM3q0iqYpniEYsPI l8uuEmDXSOGo6affWxYskA== 0000950152-00-001928.txt : 20000323 0000950152-00-001928.hdr.sgml : 20000323 ACCESSION NUMBER: 0000950152-00-001928 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000322 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-K SEC ACT: SEC FILE NUMBER: 001-11302 FILM NUMBER: 575565 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-K 1 KEYCORP 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-850 KEYCORP (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) OHIO --------------------------- (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) 127 PUBLIC SQUARE, CLEVELAND, OHIO --------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) 34-6542451 --------------------------------------- (I.R.S. EMPLOYER IDENTIFICATION NO.) 44114-1306 ---------------- (ZIP CODE) (216) 689-6300 ---------------------------------------------- (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Securities registered pursuant Securities registered pursuant to Section 12(b) of the Act: to Section 12(g) of the Act: Common Shares, $1 par value Rights to Purchase Common Shares None - ------------------------------------------------ ------------------------------------------------ (TITLE OF EACH CLASS) (TITLE OF CLASS) New York Stock Exchange - ------------------------------------------------ (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of voting stock held by nonaffiliates of the Registrant was approximately $7,476,315,903 at February 29, 2000. (The aggregate market value has been computed using the closing market price of the stock as reported by the New York Stock Exchange on February 29, 2000.) 441,406,105 Shares - -------------------------------------------------------------------------------- (NUMBER OF KEYCORP COMMON SHARES OUTSTANDING AS OF FEBRUARY 29, 2000) Certain specifically designated portions of KeyCorp's 1999 Annual Report to Shareholders are incorporated by reference into Parts I, II and IV of this Form 10-K. Certain specifically designated portions of KeyCorp's definitive Proxy Statement for its 2000 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K. 2 KEYCORP 1999 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
ITEM PAGE NUMBER NUMBER - ------ ------ PART I 1 Business.................................................... 1 2 Properties.................................................. 7 3 Legal Proceedings........................................... 7 4 Submission of Matters to a Vote of Security Holders......... 8 PART II 5 Market for Registrant's Common Stock and Related Stockholder Matters................................................... 8 6 Selected Financial Data..................................... 8 7 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 8 7A Quantitative and Qualitative Disclosures about Market Risk...................................................... 8 8 Financial Statements and Supplementary Data................. 9 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 9 PART III 10 Directors and Executive Officers of the Registrant.......... 9 11 Executive Compensation...................................... 9 12 Security Ownership of Certain Beneficial Owners and Management................................................ 9 13 Certain Relationships and Related Transactions.............. 9 PART IV 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................................... 10 Signatures.................................................. 14 Exhibits.................................................... 15
3 PART I ITEM 1. BUSINESS OVERVIEW KeyCorp is a legal entity separate and distinct from its banking and other subsidiaries. Accordingly, the right of KeyCorp, its security holders and its creditors to participate in any distribution of the assets or earnings of KeyCorp's banking and other subsidiaries is subject to the prior claims of the respective creditors of such banking and other subsidiaries, except to the extent that KeyCorp's claims in its capacity as creditor of such banking and other subsidiaries may be recognized. KeyCorp, organized in 1958 under the laws of the state of Ohio and registered under the Bank Holding Company Act of 1956, as amended ("BHCA"), is headquartered in Cleveland, Ohio. At December 31, 1999, it was one of the nation's largest integrated multi-line financial services companies with consolidated total assets of $83 billion. Its subsidiaries provide a wide range of investment management, retail and commercial banking, consumer finance and investment banking products and services to corporate, individual and institutional clients through four lines of business: Key Retail Banking, Key Specialty Finance, Key Corporate Capital and Key Capital Partners. As of December 31, 1999, these services are provided across much of the country through banking subsidiaries operating 936 full-service branches in 13 states, a 24-hour telephone banking call center and 2,516 ATMs in 15 states. Additional information pertaining to the four business lines referred to above is included in the "Line of Business Results" section beginning on page 29 and in Note 4 ("Line of Business Results"), beginning on page 61 of the Financial Review section of KeyCorp's 1999 Annual Report to Shareholders and is incorporated herein by reference. KeyCorp and its subsidiaries have 24,568 full-time equivalent employees as of December 31, 1999. In addition to the customary banking services of accepting deposits and making loans, KeyCorp's bank and trust company subsidiaries provide specialized services, including personal and corporate trust services, personal financial services, customer access to mutual funds, cash management services, investment banking and capital markets products, and international banking services. Through its subsidiary banks, trust companies and registered investment adviser subsidiaries, KeyCorp provides investment management services to individual and institutional clients, including large corporate and public retirement plans, foundations and endowments, high net worth individuals and Taft-Hartley plans (i.e., multiemployer trust funds established for providing pension, vacation or other benefits to employees that are established in accordance with applicable law). In addition, investment management subsidiaries serve as investment advisers to proprietary mutual funds offered by other KeyCorp affiliates. KeyCorp provides other financial services both inside and outside of its primary banking markets through its nonbank subsidiaries. These services include accident and health insurance on loans made by subsidiary banks, venture capital, community development financing, securities underwriting and brokerage, automobile financing and other financial services. KeyCorp is an equity participant in a joint venture with Key Merchant Services, LLC, which provides merchant services to businesses. 1 4 The following financial data is included in the Financial Review section of KeyCorp's 1999 Annual Report to Shareholders and is incorporated herein by reference as indicated below:
DESCRIPTION OF FINANCIAL DATA PAGE ----------------------------- ---- Selected Financial.......................................... 28 Average Balance Sheets, Net Interest Income and Yields/Rates.............................................. 32 Components of Net Interest Income Changes................... 35 Composition of Loans........................................ 42 Maturities and Sensitivity of Certain Loans to Changes in Interest Rates............................................ 44 Securities Available for Sale............................... 44 Investment Securities....................................... 45 Allocation of the Allowance for Loan Losses................. 46 Summary of Loan Loss Experience............................. 47 Summary of Nonperforming Assets and Past Due Loans.......... 48 Maturity Distribution of Time Deposits of $100,000 or More...................................................... 48 Impaired Loans and Other Nonperforming Assets............... 65 Short-Term Borrowings....................................... 65
The executive offices of KeyCorp are located at 127 Public Square, Cleveland, Ohio 44114-1306, and its telephone number is (216) 689-6300. MERGERS, ACQUISITIONS AND DIVESTITURES The information presented in Note 3 ("Mergers, Acquisitions and Divestitures"), beginning on page 60 of the Financial Review section of KeyCorp's 1999 Annual Report to Shareholders is incorporated herein by reference. COMPETITION The market for banking and related financial services is highly competitive. KeyCorp and its subsidiaries ("Key") compete with other providers of financial services, such as other bank holding companies, commercial banks, savings associations, credit unions, mortgage banking companies, finance companies, mutual funds, insurance companies, investment management firms, investment banking firms, broker-dealers and a growing list of other local, regional and national institutions which offer financial services. Key competes by offering quality products and innovative services at competitive prices. In recent years, mergers between financial institutions have led to greater concentration in the banking industry and placed added competitive pressure on Key's core banking services. In addition, competition is expected to intensify as a consequence of the financial modernization laws that were recently enacted and permit qualifying financial institutions to expand into other activities. For example, commercial banks are now permitted to have affiliates that underwrite and deal in securities, underwrite insurance and make merchant banking investments under certain conditions. See "Interstate Banking and Branching" and "Financial Modernization Legislation" below. SUPERVISION AND REGULATION The following discussion addresses certain of the material elements of the regulatory framework applicable to bank holding companies and their subsidiaries, and provides certain specific information regarding Key. The regulatory framework is intended primarily for the protection of customers and depositors, the deposit insurance funds of the Federal Deposit Insurance Corporation ("FDIC") and the banking system as a whole, and generally is not intended for the protection of security holders. Set forth below is a brief discussion of selected laws, regulations, and regulatory agency policies applicable to Key. Such discussion is not intended to be comprehensive, and is qualified in its entirety by reference to the full text of such statutes, regulations, and regulatory agency policies. Changes in applicable laws, regulations, and regulatory agency policies cannot necessarily be predicted, but may have a material effect on Key's business, financial condition and results of operation. 2 5 General As a bank holding company, KeyCorp is subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") under the BHCA. Under the BHCA, bank holding companies may not, in general, directly or indirectly acquire the ownership or control of more than 5% of the voting shares, or substantially all of the assets, of any bank, without the prior approval of the Federal Reserve Board. In addition, bank holding companies are generally prohibited under the BHCA from engaging in commercial or industrial activities. KeyCorp's banking subsidiaries are also subject to extensive regulation, supervision and examination by applicable Federal banking agencies. KeyCorp operates two full-service, FDIC-insured national bank subsidiaries, KeyBank National Association ("KeyBank") and Key Bank USA, National Association ("KeyBank USA"), and six national bank subsidiaries whose activities are limited to those of a fiduciary. All of KeyCorp's national bank subsidiaries and their subsidiaries are subject to regulation, supervision and examination by the Office of the Comptroller of the Currency (the "OCC"). Because the deposits in KeyBank and KeyBank USA are insured (up to applicable limits) by the FDIC, the FDIC also has certain regulatory and supervisory authority over both banking subsidiaries. KeyCorp also has other financial services subsidiaries that are subject to regulation, supervision and examination by the Federal Reserve Board, as well as other applicable state and Federal regulatory agencies and self-regulated organizations. For example, KeyCorp's brokerage and asset management subsidiaries are subject to supervision and regulation by the Securities and Exchange Commission, the National Association of Securities Dealers, Inc. or the New York Stock Exchange and state securities regulators; KeyCorp's insurance subsidiaries are subject to regulation by the insurance regulatory authorities of the various states. Other nonbank subsidiaries of KeyCorp may be subject to other laws and regulations of both the Federal government and the various states in which they are authorized to do business. Dividend Restrictions The principal source of cash flow to KeyCorp, including cash flow to pay dividends on its common shares and debt service on its indebtedness, is dividends from its subsidiaries. Various statutory and regulatory provisions limit the amount of dividends that may be paid by KeyCorp's banking subsidiaries without regulatory approval. The approval of the OCC is required for the payment of any dividend by a national bank if the total of all dividends declared by the board of directors of such bank in any calendar year would exceed the total of: (i) the bank's net income for the current year plus (ii) the retained net income (as defined and interpreted by regulation) for the preceding two years, less any required transfer to surplus or a fund for the retirement of any preferred stock. In addition, a national bank can pay dividends only to the extent of its undivided profits. All of KeyCorp's national bank subsidiaries are subject to these restrictions. In addition, if, in the opinion of a Federal banking agency, a depository institution under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the institution, could include the payment of dividends), the agency may require, after notice and hearing, that such institution cease and desist from such practice. The OCC and the FDIC have indicated that paying dividends that would deplete a depository institution's capital base to an inadequate level would be an unsafe and unsound practice. Moreover, under the Federal Deposit Insurance Act (the "FDIA"), an insured depository institution may not pay any dividend if payment would cause it to become less than "adequately capitalized." See "Regulatory Capital Standards and Related Matters--Prompt Corrective Action." The FDIA also prohibits the payment of any dividend while the institution is in default in the payment of any assessment due to the FDIC. Also, the Federal Reserve Board, the OCC and the FDIC have issued policy statements which provide that FDIC-insured depository institutions and their holding companies should generally pay dividends only out of their current operating earnings. Holding Company Structure Transactions Involving Banking Subsidiaries. KeyCorp's national bank subsidiaries (and their subsidiaries) are subject to Federal Reserve Act provisions which impose qualitative standards and quantitative limitations upon certain transactions with or involving KeyCorp (and its nonbank subsidiaries which are not subsidiaries of KeyCorp's national banks). Transactions covered by these provisions, which include loans and other extensions of credit as well as purchases and sales of assets, must be on arm's length terms, cannot exceed certain amounts 3 6 which are determined with reference to the bank's regulatory capital, and if a loan or other extension of credit, must be secured by collateral in an amount and quality expressly prescribed by statute. For example, the aggregate of all such outstanding covered transactions by KeyBank and KeyBank USA, including their subsidiaries, with or involving KeyCorp and its nonbank subsidiaries which are not subsidiaries of KeyBank and KeyBank USA was limited at December 31, 1999, to approximately $1.8 billion. As a result, these provisions materially restrict the ability of KeyCorp's national bank subsidiaries and their subsidiaries to fund KeyCorp and its nonbank subsidiaries which are not subsidiaries of KeyCorp's national banks. Source of Strength Doctrine. Under Federal Reserve Board policy, a bank holding company is expected to serve as a source of financial and managerial strength to each of its subsidiary banks and, under appropriate circumstances, to commit resources to support each such subsidiary bank. This support may be required by the Federal Reserve Board at times when KeyCorp may not have the resources to provide it, or, for other reasons, would not otherwise be inclined to provide it. Certain loans by a bank holding company to a subsidiary bank are subordinate in right of payment to deposits in, and certain other indebtedness of, the subsidiary bank. In addition, the Crime Control Act of 1990 provides that in the event of a bank holding company's bankruptcy, any commitment by a bank holding company to a Federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. Depositor Preference. The FDIA provides that, in the event of the "liquidation or other resolution" of an insured depository institution, the claims of depositors of such institution (including claims by the FDIC as subrogee of insured depositors) and certain claims for administrative expenses of the FDIC as a receiver would be afforded a priority over other general unsecured claims against such an institution, including Federal funds and letters of credit. If an insured depository institution fails, insured and uninsured depositors along with the FDIC will be placed ahead of unsecured, nondeposit creditors, including a parent holding company, in order of priority of payment. Liability of Commonly Controlled Institutions. Under the FDIA, an insured depository institution which is under common control with another insured depository institution is generally liable for any loss incurred, or reasonably anticipated to be incurred, by the FDIC in connection with the default of such commonly controlled institution, or any assistance provided by the FDIC to such commonly controlled institution which is in danger of default. The term "default" is defined generally to mean the appointment of a conservator or receiver and the term "in danger of default" is defined generally as the existence of certain conditions indicating that a "default" is likely to occur in the absence of regulatory assistance. Uniform Retail Credit Policy. On February 10, 1999, the Federal banking agencies published their final Uniform Retail Credit Classification and Account Management Policy (the "Retail Credit Policy"), which revises their 1980 Uniform Policy for Classification of Consumer Installment Credit Based on Delinquency Status. The Retail Credit Policy applies to all financial institutions which file call reports or thrift financial reports with a Federal banking agency. In general, the Retail Credit Policy establishes a uniform charge-off policy for closed-end and open-end credit, respectively, provides uniform guidance for loans affected by bankruptcy, fraud, and death, establishes guidelines for re-aging, extending, deferring, or rewriting past due accounts, classifies certain delinquent residential mortgage and home equity loans, and broadens recognition of partial payments that qualify as full payments. Key anticipates implementing these new guidelines prior to the required date of December 31, 2000, and perhaps as early as the first quarter of 2000. Based upon current estimates, management expects that the implementation will accelerate up to $60 million of Key's consumer loan charge-offs which might otherwise have occurred at later dates. Key's allowance already includes an allocation for these potential losses. Regulatory Capital Standards and Related Matters Regulatory Capital. Applicable law and regulation define and prescribe minimum levels of regulatory capital for bank holding companies and their banking subsidiaries. Adequacy of regulatory capital is assessed periodically by the Federal banking agencies in the examination and supervision process, and in the evaluation of applications in connection with specific transactions and activities, including acquisitions, expansion of existing activities, and commencement of new activities. 4 7 Bank holding companies are subject to risk-based capital guidelines adopted by the Federal Reserve Board. These guidelines establish minimum ratios of qualifying capital to risk-weighted assets. Qualifying capital includes Tier 1 capital and Tier 2 capital. Risk-weighted assets are calculated by assigning varying risk-weights to broad categories of assets and off-balance-sheet exposures, based primarily on counterparty credit risk. The required minimum Tier 1 risk-based capital ratio, calculated by dividing Tier 1 capital by risk-weighted assets, is currently 4%. The required minimum total risk-based capital ratio is currently 8%. It is calculated by dividing the sum of Tier 1 capital and Tier 2 capital not in excess of Tier 1 capital, after deductions for investments in certain subsidiaries and associated companies and for reciprocal holdings of capital instruments, by risk-weighted assets. Tier 1 capital includes common equity, qualifying perpetual preferred equity, and minority interests in the equity accounts of consolidated subsidiaries less certain intangible assets (including goodwill) and certain other assets. Tier 2 capital includes qualifying hybrid capital instruments, perpetual debt, mandatory convertible debt securities, perpetual preferred equity not includable in Tier 1 capital, and limited amounts of term subordinated debt, medium-term preferred equity, certain unrealized holding gains on certain equity securities, and the allowance for loan and lease losses. Bank holding companies, such as KeyCorp, whose trading activities exceed specified levels are required to maintain capital for market risk. Market risk includes changes in the market value of trading account, foreign exchange, and commodity positions, whether resulting from broad market movements (such as changes in the general level of interest rates, equity prices, foreign exchange rates, or commodity prices) or from position specific factors (such as idiosyncratic variation, event risk, and default risk). At December 31, 1999, Key's Tier 1 and total capital to risk-weighted assets ratios were 7.68% and 11.66%, respectively, which include all required adjustments for market risk. In addition to the risk-based standard, bank holding companies are subject to the Federal Reserve Board's leverage ratio guidelines. These guidelines establish minimum ratios of Tier 1 capital to total assets. The minimum leverage ratio, calculated by dividing Tier 1 capital by average total consolidated assets, is 3% for bank holding companies that either have the highest supervisory rating or have implemented the Federal Reserve Board's risk-based capital measure for market risk. All other bank holding companies must maintain a minimum leverage ratio of at least 4%. Neither KeyCorp nor any of its banking subsidiaries has been advised by its primary Federal banking regulator of any specific leverage ratio applicable to it. At December 31, 1999, Key's Tier 1 capital leverage ratio was 7.77%. KeyCorp's national bank subsidiaries are also subject to risk-based and leverage capital requirements adopted by the OCC which are substantially similar to those imposed by the Federal Reserve Board on bank holding companies. At December 31, 1999, each of these banking subsidiaries had regulatory capital in excess of all minimum risk-based and leverage capital requirements. Besides establishing regulatory minimum ratios of capital to assets for all bank holding companies and their banking subsidiaries, the risk-based and leverage capital guidelines also identify various organization-specific factors and risks which are not taken into account in the computation of the capital ratios yet affect the overall supervisory evaluation of a banking organization's regulatory capital adequacy and can result in the imposition of higher minimum regulatory capital ratio requirements upon the particular organization. Neither the Federal Reserve Board nor the OCC has advised KeyCorp or any of its national bank subsidiaries of any specific minimum risk-based or leverage capital ratio applicable to KeyCorp or such national bank subsidiary. The Federal Reserve Board and OCC have published new proposals in 2000 to amend the risk-based capital treatment of recourse obligations, direct credit substitutes and securitized transactions, replacing earlier proposals that were not acted upon in 1999. Prompt Corrective Action. The "prompt corrective action" provisions of the FDIA added by the FDIC Improvement Act ("FDICIA") create a statutory framework that applies a system of both discretionary and mandatory supervisory actions indexed to the capital level of FDIC-insured depository institutions. These provisions impose progressively more restrictive constraints on operations, management, and capital distributions of the institution as its regulatory capital decreases, or in some cases, based on supervisory information other than the institution's capital level. This framework and the authority it confers on the Federal banking agencies supplements other existing authority vested in such agencies to initiate supervisory actions to address capital 5 8 deficiencies. Moreover, other provisions of law and regulation employ regulatory capital level designations the same as or similar to those established by the prompt corrective action provisions both in imposing certain restrictions and limitations and in conferring certain economic and other benefits upon institutions. These include restrictions on brokered deposits, FDIC deposit insurance limits on pass-through deposits, limits on exposure to interbank liabilities, risk-based FDIC deposit insurance premium assessments, and expedited action upon regulatory applications. FDIC-insured depository institutions are grouped into one of five prompt corrective action capital categories -- well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized -- using the Tier 1 risk-based, total risk-based, and Tier 1 leverage capital ratios as the relevant capital measures. An institution is considered well capitalized if it has a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6% and a Tier 1 leverage capital ratio of at least 5% and is not subject to any written agreement, order or capital directive to meet and maintain a specific capital level for any capital measure. An adequately capitalized institution must have a total risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio of at least 4% or greater and a Tier 1 leverage capital ratio of at least 4% (3% if the institution has achieved the highest composite rating in its most recent examination) and is not well capitalized. At December 31, 1999, each KeyCorp insured depository institution subsidiary met the requirements for the "well capitalized" capital category. An institution's prompt corrective action capital category, however, may not constitute an accurate representation of the overall financial condition or prospects of KeyCorp or its banking subsidiaries, and should be considered in conjunction with other available information regarding Key's financial condition and results of operations. FDIC DEPOSIT INSURANCE AND FINANCING CORPORATION BOND ASSESSMENTS Because substantially all of the deposits of KeyCorp's depository institution subsidiaries are insured up to applicable limits by the FDIC, these subsidiaries are subject to deposit insurance premium assessments by the FDIC to maintain the Bank Insurance Fund (the "BIF") and the Savings Association Insurance Fund (the "SAIF") of the FDIC. The FDIC has adopted a risk-related deposit insurance assessment system under which premiums, ranging in 1999 from zero to $.27 for each $100 of domestic deposits, are imposed based upon the depository institution's capitalization and Federal supervisory evaluation. Each of KeyCorp's depository institution subsidiaries in 1999 qualified for a deposit insurance assessment rate of zero. The FDIC is authorized to increase deposit insurance premium assessments in certain circumstances. Any such increase would have an adverse effect on Key's earnings. Beginning in 1997, all BIF-member institutions were required to join with SAIF-member institutions in servicing the approximately $793 million of annual interest on 30-year non-callable bonds issued by the Financing Corporation ("FICO") in the late 1980s to fund losses incurred by the former Federal Savings and Loan Insurance Corporation. FICO bond assessments are separate from and in addition to deposit insurance premium assessments and, unlike deposit insurance premium assessments, do not vary with the depository institution's capitalization and Federal supervisory evaluation. Federal law required the FICO assessment rate on BIF assessable deposits to be one-fifth of that imposed on SAIF assessable deposits through 1999. For 1999, the average annualized FICO assessment rates were $.05925 per $100 of SAIF-assessable deposits and $.01185 per $100 of BIF-assessable deposits, resulting in approximately $6 million of FICO assessments paid by Key for 1999. Starting in 2000, BIF and SAIF FICO assessment rates equalize, with an annualized rate for the first quarter of 2000 of $.02120 per $100 of all FICO assessable deposits. As a result of this assessment rate equalization, Key's FICO assessment expense for the first quarter of 2000 increased 51% over such expense for the first quarter of 1999. INTERSTATE BANKING AND BRANCHING On September 29, 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act") was enacted into Federal law. The Interstate Act generally authorizes bank holding companies to acquire banks located in any state, and also generally permits FDIC-insured banks located in different states to merge, allowing the resulting institution to operate interstate branches. In addition, the Interstate Act allows an FDIC-insured bank to establish (or acquire) and operate a branch in a state in which such bank does not maintain 6 9 a branch if that state expressly permits such transactions. Using the authority conferred by the Interstate Act, the number of FDIC-insured depository institutions operated by KeyCorp has been reduced to two -- KeyBank and KeyBank USA. FINANCIAL MODERNIZATION LEGISLATION The Gramm-Leach-Bliley Act of 1999 (the "GLBA") was enacted on November 12, 1999, providing for a range of new activities for qualifying financial institutions. The GLBA repeals significant provisions of the Glass Steagall Act to permit commercial banks, among other things, to have affiliates that underwrite and deal in securities and make merchant banking investments provided certain conditions are met. The GLBA modifies the BHCA to permit bank holding companies that meet certain specified standards (known as "financial holding companies") to engage in a broader range of financial activities than previously permitted under the BHCA, and allows subsidiaries of commercial banks that meet certain specified standards (known as "financial subsidiaries") to engage in a wide range of financial activities that are prohibited to such banks themselves under certain circumstances. On February 11, 2000, KeyCorp filed with the Federal Reserve Board its declaration of election to become a financial holding company. It is not presently known, however, to what extent KeyCorp and its subsidiaries will utilize the broader range of financial activities available to KeyCorp as a financial holding company. ITEM 2. PROPERTIES The headquarters of KeyCorp, KeyBank and KeyBank USA are located in Key Tower at 127 Public Square, Cleveland, Ohio 44114-1306. At December 31, 1999, Key leased approximately 695,000 square feet of the complex, encompassing the first twenty-three floors, the 28th floor and the 54th through 56th floors of the 57- story Key Tower. As of the same date, the banking subsidiaries of KeyCorp owned 520 of their branch banking offices and leased 416 offices. The lease terms for applicable branch banking offices are not individually material, with terms ranging from month-to-month to 99-years from inception. Additional information pertaining to Key's properties is presented in Note 1 ("Summary of Significant Accounting Policies"), beginning on page 57 of the Financial Review section of KeyCorp's 1999 Annual Report to Shareholders and is incorporated herein by reference. ITEM 3. LEGAL PROCEEDINGS In the ordinary course of business, Key is subject to legal actions which involve claims for substantial monetary relief. Based on information presently known to management and Key's counsel, management does not believe that there exists any legal action to which KeyCorp or any of its subsidiaries is a party, or of which their properties are the subject, that, individually or in the aggregate, will have a material adverse effect on the financial condition of Key. In March 1998, McDonald Investments Inc. ("McDonald"), now a subsidiary of KeyCorp, participated as an initial purchaser in an offering to institutional investors of certain securities of Nakornthai Strip Mill Public Company Ltd. ("NSM"), a Thailand public company, and certain NSM affiliates, including approximately $452 million in debt securities and related warrants (the "Securities"). The offering was part of the financing of an NSM steel mini-mill located in Chonburi, Thailand. McDonald served as a financial advisor to NSM and was an initial purchaser of approximately $44 million of the Securities. On December 24, 1998, holders of Securities gave a Notice of Default alleging a number of defaults under the terms of the Securities. NSM is currently working toward a restructuring of its obligations, including obligations to holders of the Securities and other creditors. Certain purchasers of Securities have commenced litigation against McDonald and other parties in California, Connecticut, Illinois, Minnesota, New Jersey and New York, claiming that McDonald, the other initial purchasers and certain other third party service providers to NSM have violated certain state and federal securities and other laws. The lawsuits are based on alleged misstatements and omissions in the Offering Memorandum for the Securities, and on certain other information and oral statements allegedly provided to potential investors. In each 7 10 lawsuit the plaintiffs allege misrepresentations relating to (among other things) the physical facilities at the mill, the management of the mill, the supply of inputs to the mill and the use of the proceeds of the offering. There are currently pending eight separate lawsuits brought by purchasers of the Securities against McDonald, as well as other defendants (two suits in Federal District Court in Minnesota; one suit in Federal District Court in New York; two suits in California; and one suit in each of Connecticut, Illinois and New Jersey). The aggregate amount of Securities alleged to have been purchased by the plaintiffs in these eight lawsuits is at least $257 million. While the relief claimed in the lawsuits varies, generally speaking, the plaintiffs seek rescission of the sale of the Securities, compensatory damages, legal fees, expenses, and in the case of the New Jersey action (which currently covers approximately $107 million face value of Securities), treble damages consistent with applicable law, exemplary damages and civil penalties. McDonald is vigorously defending these actions and has filed, or will file, responses to each complaint denying liability. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the fiscal year covered by this report, no matter was submitted to a vote of security holders of KeyCorp. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The dividend restrictions discussion on page 3 of this report and the following disclosures included in the Financial Review section of KeyCorp's 1999 Annual Report to Shareholders are incorporated herein by reference:
PAGE ---- Discussion of common shares and shareholder information presented in the capital and dividends section............ 49 Presentation of quarterly market price and cash dividends per common share.......................................... 51 Discussion of dividend restrictions presented in Note 16 ("Commitments, Contingent Liabilities and Other Disclosures")............................................. 71
ITEM 6. SELECTED FINANCIAL DATA The Selected Financial Data presented on page 28 of the Financial Review section of KeyCorp's 1999 Annual Report to Shareholders is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information included under "Management's Discussion and Analysis of Financial Condition and Results of Operations" presented on pages 26 through 51 of the Financial Review section of KeyCorp's 1999 Annual Report to Shareholders is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information included under the caption "Market risk management" presented on pages 35 through 37 of the Financial Review section of KeyCorp's 1999 Annual Report to Shareholders is incorporated herein by reference. 8 11 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Selected Quarterly Financial Data and the financial statements and the notes thereto, presented on page 51 and on pages 53 through 76, respectively, of the Financial Review section of KeyCorp's 1999 Annual Report to Shareholders are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is set forth in the sections captioned "Issue One -- ELECTION OF DIRECTORS" and "EXECUTIVE OFFICERS" contained in KeyCorp's definitive Proxy Statement for the 2000 Annual Meeting of Shareholders to be held May 18, 2000, and is incorporated herein by reference. KeyCorp expects to file its final proxy statement on or before April 14, 2000. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is set forth in the sections captioned "THE BOARD OF DIRECTORS AND ITS COMMITTEES," "COMPENSATION OF EXECUTIVE OFFICERS" and "EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS" contained in KeyCorp's definitive Proxy Statement for the 2000 Annual Meeting of Shareholders to be held May 18, 2000, and is incorporated herein by reference. The information set forth in the sections captioned "COMPENSATION AND ORGANIZATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION" and "KEYCORP STOCK PRICE PERFORMANCE" contained in KeyCorp's definitive Proxy Statement for the 2000 Annual Meeting of Shareholders to be held May 18, 2000, is not incorporated by reference in this Report on Form 10-K. KeyCorp expects to file its final proxy statement on or before April 14, 2000. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is set forth in the section captioned "SHARE OWNERSHIP AND PHANTOM STOCK UNITS" contained in KeyCorp's definitive Proxy Statement for the 2000 Annual Meeting of Shareholders to be held May 18, 2000, and is incorporated herein by reference. KeyCorp expects to file its final proxy statement on or before April 14, 2000. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is set forth in the section captioned "Issue One -- ELECTION OF DIRECTORS" contained in KeyCorp's definitive Proxy Statement for the 2000 Annual Meeting of Shareholders to be held May 18, 2000, and is incorporated herein by reference. KeyCorp expects to file its final proxy statement on or before April 14, 2000. 9 12 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) FINANCIAL STATEMENTS The following financial statements of KeyCorp and its subsidiaries, and the auditor's report thereon, are incorporated herein by reference to the pages indicated in the Financial Review section of KeyCorp's 1999 Annual Report to Shareholders:
PAGE ---- Consolidated Financial Statements: Report of Ernst & Young LLP, Independent Auditors......... 52 Consolidated Balance Sheets at December 31, 1999 and 1998................................................... 53 Consolidated Statements of Income for the Years Ended December 31, 1999, 1998 and 1997....................... 54 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1999, 1998 and 1997... 55 Consolidated Statements of Cash Flow for the Years Ended December 31, 1999, 1998 and 1997....................... 56 Notes to Consolidated Financial Statements................ 57
(a)(2) FINANCIAL STATEMENT SCHEDULES All financial statement schedules for KeyCorp and its subsidiaries have been included in the consolidated financial statements or the related footnotes, or they are either inapplicable or not required. (a)(3) EXHIBITS* 3.1 Amended and Restated Articles of Incorporation of KeyCorp filed on November 13, 1998, as Exhibit 3 to Form 10-Q, and incorporated herein by reference. 3.2 Amended and Restated Regulations of KeyCorp, effective May 15, 1997, filed on June 19, 1997, as Exhibit 2 to Form 8-A/A, and incorporated herein by reference. 4.1 Restated Rights Agreement, dated as of May 15, 1997, between KeyCorp and KeyBank National Association, as Rights Agent, filed on June 19, 1997, as Exhibit 1 to Form 8-A, and incorporated herein by reference. 10.1 Form of Change of Control Agreement between KeyCorp and Certain Executive Officers of KeyCorp, effective November 20, 1997, filed as Exhibit 10.5 to Form 10-K for the year ended December 31, 1997, and incorporated herein by reference. 10.2 First Amendment to Form of Change of Control Agreement between KeyCorp and Certain Executive Officers of KeyCorp, filed as Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 1999, and incorporated herein by reference. 10.3 Form of Stock Performance Option Grants between KeyCorp and certain executive officers of KeyCorp, dated January 15, 1997, filed as Exhibit 10.35 to Form 10-K for the year ended December 31, 1996, and incorporated herein by reference. 10.4 Form of Stock Performance Option Grants between KeyCorp and Robert W. Gillespie, dated January 2, 1998, filed as Exhibit 10.7 to Form 10-K for the year ended December 31, 1997, and incorporated herein by reference. 10.5 Form of Premium Priced Option Grant between KeyCorp and Robert W. Gillespie dated January 13, 1999, filed as Exhibit 10.2 to Form 10-Q for the quarter ended March 31, 1999, and incorporated herein by reference.
10 13 10.6 Form of Premium Priced Option Grant between KeyCorp and Henry L. Meyer III, dated January 13, 1999, filed as Exhibit 10.3 to Form 10-Q for the quarter ended March 31, 1999, and incorporated herein by reference. 10.7 Amended and Restated Employment Agreement between KeyCorp and Robert W. Gillespie, effective November 21, 1996, filed as Exhibit 10.33 to Form 10-K for the year ended December 31, 1996, and incorporated herein by reference. 10.8 First Amendment to Amended and Restated Employment Agreement between KeyCorp and Robert W. Gillespie, dated December 7, 1998, filed as Exhibit 10.10 to Form 10-K for the year ended December 31, 1998, and incorporated herein by reference. 10.9 Second Amendment to Amended and Restated Employment Agreement between KeyCorp and Robert W. Gillespie, dated November 23, 1999. 10.10 Employment Agreement between KeyCorp and Henry L. Meyer III, dated May 5, 1997, filed as Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 1997, and incorporated herein by reference. 10.11 Amendment to Employment Agreement between KeyCorp and Henry L. Meyer III, dated November 20, 1997, filed as Exhibit 10.10 to Form 10-K for the year ended December 31, 1997, and incorporated herein by reference. 10.12 Second Amendment to Employment Agreement between KeyCorp and Henry Meyer III, dated July 21, 1999, filed as Exhibit 10.2 to Form 10-Q for the quarter ended September 30, 1999, and incorporated herein by reference. 10.13 Letter Agreement between KeyCorp and Thomas C. Stevens, dated May 10, 1996 as amended April 7, 1997, filed as Exhibit 10.12 to Form 10-K for the year ended December 31, 1997, and incorporated herein by reference. 10.14 Employment Agreement among KeyCorp, William B. Summers, Jr., and McDonald & Company Securities, Inc., dated June 14, 1998. 10.15 KeyCorp Long-Term Cash Incentive Compensation Plan (January 1, 1997 Restatement) filed as Exhibit 10.2 to Form 10-K for the year ended December 31, 1996, and incorporated herein by reference. 10.16 KeyCorp Long-Term Incentive Plan (January 1, 1998) filed as Exhibit 10.3 to Form 10-K for the year ended December 31, 1997, and incorporated herein by reference. 10.17 KeyCorp Annual Incentive Plan (December 21, 1999 Restatement). 10.18 KeyCorp Amended and Restated 1991 Equity Compensation Plan (Amended as of May 6, 1998). The Amendment filed as Exhibit 10 to Form 10-Q for the quarter ended June 30, 1998, and incorporated herein by reference. 10.19 Society Corporation 1988 Stock Option Plan, amended as of September 19, 1996, filed as Exhibit 10.11 to Form 10-K for the year ended December 31, 1996, and incorporated herein by reference. 10.20 KeyCorp 1988 Stock Option Plan as Amended and Restated as of September 19, 1996, filed as Exhibit 10.20 to Form 10-K for the year ended December 31, 1996, and incorporated herein by reference. 10.21 McDonald & Company Investments, Inc. Stock Option Plan, filed as Exhibit 10.39 to Form 10-K for the year ended December 31, 1998, and incorporated herein by reference. 10.22 McDonald & Company Investments, Inc. 1995 Key Employees Stock Option Plan, filed as Exhibit 10.40 to Form 10-K for the year ended December 31, 1998, and incorporated herein by reference.
11 14 10.23 KeyCorp Directors' Stock Option Plan (November 17, 1994 Restatement) filed as Exhibit 10.37 to Form 10-K for the year ended December 31, 1994, and incorporated herein by reference. 10.24 KeyCorp 1997 Stock Option Plan for Directors as amended and restated on April 21, 1999, filed as Exhibit 10 to Form 10-Q for the quarter ended June 30, 1999, and incorporated herein by reference. 10.25 KeyCorp Umbrella Trust for Directors, between KeyCorp and National Bank of Detroit, dated July 1, 1990, filed as Exhibit 10.28 to Form 10-K for the year ended December 31, 1996, and incorporated herein by reference. 10.26 Amended and Restated Director Deferred Compensation Plan (May 6, 1998 Amendment and Restatement) filed as Exhibit 10 to Form 10-Q for the quarter ended September 30, 1998, and incorporated herein by reference. 10.27 KeyCorp Directors' Survivor Benefit Plan, effective September 1, 1990, filed as Exhibit 10.25 to Form 10-K for the year ended December 31, 1996, and incorporated herein by reference. 10.28 KeyCorp Excess 401(k) Savings Plan (Amended and Restated as of January 1, 1998), filed as Exhibit 10.31 to Form 10-K for the year ended December 31, 1998, and incorporated herein by reference. 10.29 KeyCorp Excess Cash Balance Pension Plan (Amended and Restated as of January 1, 1998), filed as Exhibit 10.34 to Form 10-K for the year ended December 31, 1998, and incorporated herein by reference. 10.30 First Amendment to KeyCorp Excess Cash Balance Pension Plan, effective July 1, 1999, filed as Exhibit 10.4 to Form 10-Q for the quarter ended September 30, 1999, and incorporated herein by reference. 10.31 KeyCorp Deferred Compensation Plan (Amended and Restated as of January 1, 1998), filed as Exhibit 10.38 to Form 10-K for the year ended December 31, 1998, and incorporated herein by reference. 10.32 KeyCorp Automatic Deferral Plan, filed as Exhibit 10.3 to Form 10-Q for the quarter ended September 30, 1999, and incorporated herein by reference. 10.33 Trust Agreement for certain amounts that may become payable to certain executives and directors of KeyCorp, dated April 1, 1997, filed as Exhibit 10.2 to Form 10-Q for the quarter ended June 30, 1997, and incorporated herein by reference. 10.34 Trust Agreement (Executive Benefits Rabbi Trust), dated November 3, 1988, filed as Exhibit 10.20 to Form 10-K for the year ended December 31, 1995, and incorporated herein by reference. 10.35 KeyCorp Umbrella Trust for Executives, between KeyCorp and National Bank of Detroit, dated July 1, 1990, filed as Exhibit 10.27 to Form 10-K for the year ended December 31, 1996, and incorporated herein by reference. 10.36 KeyCorp Supplemental Retirement Plan, amended, restated and effective August 1, 1996, filed as Exhibit 10.32 to Form 10-K for the year ended December 31, 1997, and incorporated herein by reference. 10.37 First Amendment to KeyCorp Supplemental Retirement Plan, effective July 1, 1999, filed as Exhibit 10.5 to Form 10-Q for the quarter ended September 30, 1999, and incorporated herein by reference. 10.38 KeyCorp Supplemental Retirement Benefit Plan, effective January 1, 1981, restated August 16, 1990, amended January 1, 1995, and August 1, 1996, filed as Exhibit 10.26 to Form 10-K for the year ended December 31, 1998, and incorporated herein by reference.
12 15 10.39 Third Amendment to KeyCorp Supplemental Retirement Benefit Plan, effective July 1, 1999, filed as Exhibit 10.6 to Form 10-Q for the quarter ended September 30, 1999, and incorporated herein by reference. 10.40 KeyCorp Executive Supplemental Pension Plan, amended, restated and effective August 1, 1996, filed as Exhibit 10.29 to Form 10-K for the year ended December 31, 1996, and incorporated herein by reference. 10.41 First Amendment to KeyCorp Executive Supplemental Pension Plan, effective January 1, 1997, filed as Exhibit 10.27 to Form 10-K for the year ended December 31, 1997, and incorporated herein by reference. 10.42 KeyCorp Supplemental Retirement Benefit Plan for Key Executives, effective July 1, 1990, restated August 16, 1990, amended as of January 1, 1995, and August 1, 1996, filed as Exhibit 10.26 to Form 10-K for the year ended December 31, 1996, and incorporated herein by reference. 10.43 Third Amendment to KeyCorp Supplemental Retirement Benefit Plan for Key Executives, effective July 1, 1999, filed as Exhibit 10.7 to Form 10-Q for the quarter ended September 30, 1999, and incorporated herein by reference. 10.44 KeyCorp Survivor Benefit Plan, effective September 1, 1990, filed as Exhibit 10.24 to Form 10-K for the year ended December 31, 1996, and incorporated herein by reference. 10.45 KeyCorp Universal Life Insurance Plan filed as Exhibit 10.15 to Form 10-K for the year ended December 31, 1993, and incorporated herein by reference. 10.46 KeyCorp Supplemental Long Term Disability Plan filed as Exhibit 10.15 to Form 10-K for the year ended December 31, 1993, and incorporated herein by reference. 10.47 Old KeyCorp Supplemental Disability Plan (Specimen Document) filed as Exhibit 10.17 to Form 10-K for the year ended December 31, 1996, and incorporated herein by reference. 12 Statement re: Computation of Ratios. 13 KeyCorp 1999 Annual Report to Shareholders. 21 Subsidiaries of the Registrant. 23 Consent of Independent Auditors. 24 Powers of Attorney. 27 Financial Data Schedule.
KeyCorp hereby agrees to furnish the Securities and Exchange Commission upon request, copies of instruments outstanding, including indentures, which define the rights of long-term debt security holders. All documents listed as Exhibits 10.1 through 10.47 constitute management contracts or compensatory plans or arrangements. * Copies of these Exhibits have been filed with the Securities and Exchange Commission. Shareholders may obtain a copy of any exhibit, upon payment of reproduction costs, by writing KeyCorp Investor Relations, at 127 Public Square (Mail Code OH-01-27-1113), Cleveland, OH 44114-1306. (b) REPORTS ON FORM 8-K October 22, 1999 -- The Registrant's October 21, 1999, press release announcing its earnings results for the three-month and nine-month periods ended September 30, 1999. December 15, 1999 -- The Registrant's November 23, 1999, press release announcing initiatives to improve operating efficiency and enhance earnings growth. No other reports on Form 8-K were filed during the fourth quarter of 1999. 13 16 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THE DATE INDICATED. KEYCORP /s/ THOMAS C. STEVENS -------------------------------------- THOMAS C. STEVENS Senior Executive Vice President, General Counsel and Secretary March 16, 2000 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE TITLE --------- ----- * Robert W. Gillespie Chairman, Chief Executive Officer (Principal Executive Officer) and Director * K. Brent Somers Senior Executive Vice President and Chief Financial Officer (Principal Financial Officer) * Lee G. Irving Executive Vice President and Chief Accounting Officer (Principal Accounting Officer) * Cecil D. Andrus Director * William G. Bares Director * Albert C. Bersticker Director
SIGNATURE TITLE --------- ----- * Edward P. Campbell Director * Dr. Carol A. Cartwright Director * Thomas A. Commes Director * Kenneth M. Curtis Director * Henry S. Hemingway Director * Charles R. Hogan Director * Douglas J. McGregor Director * Henry L. Meyer III President, Chief Operating Officer and Director * Bill R. Sanford Director * Ronald B. Stafford Director * Dennis W. Sullivan Director * Peter G. Ten Eyck, II Director
/s/ Thomas C. Stevens * By Thomas C. Stevens, attorney-in-fact March 16, 2000 14 EX-10.9 2 EXHIBIT 10.9 1 EXHIBIT 10.9 SECOND AMENDMENT TO EMPLOYMENT AGREEMENT BETWEEN KEYCORP AND ROBERT W. GILLESPIE THIS SECOND AMENDMENT is made this 23rd day of November, 1999, and amends the Amended and Restated Employment Agreement dated as of November 23, 1996 (the "Agreement"), between KEYCORP ("Key"), and ROBERT W. GILLESPIE ("Gillespie"). W I T N E S S E T H: WHEREAS, Key and Gillespie desire to amend the Agreement (a) by extending by one year the term during which it is anticipated that Gillespie will provide full time services to Key under the Agreement and (b) by modifying the definition of "Aggregate Incentive Compensation Award" in view of Key's transition to a long term incentive compensation plan that pays out every other year instead of every year as was contemplated when the Agreement was originally executed; NOW, THEREFORE, Key and Gillespie, in consideration of the promises and mutual covenants contained in the Agreement and in this Amendment, hereby agree as follows (certain terms used in and not otherwise defined in this Amendment have the meanings assigned to them in the Agreement): 1. Scheduled Term Extended through a Date in May 2001. To extend the end of the Scheduled Term by one full year, the year "2001" is hereby substituted for the year "2000" each place it appears in Section 1.22 of the Agreement, which defines "Scheduled Term." With that substitution, Section 1.22 reads, in its entirety, as follows: "1.22 Scheduled Term. The term "Scheduled Term" shall mean the period commencing at the Effective Time and ending May 31, 2001, except that, if and when proxy materials are mailed to the shareholders of Key announcing a date in May of 2001 as the date of the annual meeting of shareholders of Key to be held in the year 2001, the date so announced shall be substituted for May 31, 2001 as the end of the Scheduled Term. 2. Modification of Definition of "Aggregate Incentive Compensation Award." As in effect before this amendment, Section 1.2 of Agreement defined "Aggregate Incentive Compensation Award" for any year by reference, in part, to the amount of the annual incentive compensation award (whether paid in cash, deferred, or a combination of both) payable to Gillespie under the Long Term Incentive Compensation Plan for that year and provided that awards with respect to any multi-year period under that plan are deemed to be "for" the last year of that multi-year period. A separate three-year long term incentive compensation period ends each year through 1999. However, as a result of the transition to four-year long term incentive compensation periods that begin and end every other year, there will be no multi-year long term incentive compensation period that ends with the year 2000. Absent amendment, this leaves a gap in the definition of "Aggregate Incentive Compensation Award." To fill that gap, the following language is hereby added at the end of Section 1.2 of the Agreement: 2 In view of the transition to four-year periods under the Long Term Incentive Plan and the consequent absence of any actual award under that plan for the year 2000, the amount of the Aggregate Incentive Compensation Award for 2000 will be deemed to be equal to the sum of (a) the incentive compensation payable to Gillespie for 2000 under the Short Term Incentive Compensation Plan and (b) the average determined by adding together all of the incentive compensation awards payable to Gillespie under the Long Term Incentive Compensation Plan for the years 1996, 1997, 1998, and 1999 and dividing the sum so determined by four. 3. This Amendment to Control. This Amendment is intended to alter the provisions of the Agreement to the extent necessary to give effect to Sections 1 and 2 hereof. If there is any conflict between the provisions of the Agreement and of any of the provisions of this Amendment, the provisions of this Amendment shall prevail. KEYCORP By /s/ Thomas C. Stevens --------------------------------------------- Thomas C. Stevens, Senior Executive Vice President, General Counsel, and Secretary /s/ Robert W. Gillespie ----------------------------------------------- ROBERT W. GILLESPIE EX-10.14 3 EXHIBIT 10.14 1 EXHIBIT 10.14 EMPLOYMENT AGREEMENT -------------------- AGREEMENT by and between McDonald & Company Securities, Inc., an Ohio corporation (the "Company"), KeyCorp, an Ohio Corporation ("KeyCorp") and William B. Summers, Jr. (the "Executive"), dated as of the 14th day of June, 1998. 1. EMPLOYMENT PERIOD. Subject to the consummation of the transactions contemplated by the Agreement and Plan of Merger dated as of June 14, 1998 by and among McDonald & Company Investments, Inc. and KeyCorp (the "Merger Agreement"), the Company hereby agrees to continue to employ the Executive, and the Executive hereby agrees to be employed by the Company, subject to the terms and conditions of this Agreement for the period commencing on the closing date of the transactions contemplated by the Merger Agreement (the "Commencement Date") and ending on the fifth anniversary thereof (the "Employment Period"), unless the Employment Period is renewed or terminated earlier in accordance with the terms hereof. 2. TERMS OF EMPLOYMENT. (a) POSITION AND DUTIES. (i) During the Employment Period, the Executive shall serve as Chairman and Chief Executive Officer of New McDonald (as defined below) and Chairman and Chief Executive Officer of the Capital Partners Group (as defined below), with such authority, duties and responsibilities as are commensurate with such positions. During the Employment Period, the Executive shall report directly to Henry Meyer or the Chief Executive Officer of KeyCorp. The term "New McDonald" shall include the following lines of business and the business relationships and management rights associated with such lines of business: (A) retail and institutional brokerage, (B) equity and fixed income trading and underwriting, (C) investment banking, (D) capital markets products, (E) loan syndication, (F) public finance, (G) venture capital, (H) mezzanine finance and (I) clearing operations, in each case, as in existence at the Company and KeyCorp and its affiliates as of the date hereof and, to the extent integrated with such lines of business, as may be acquired by KeyCorp or its affiliates after the date hereof. The term "Capital Partners Group" shall include New McDonald and the following lines of business and the business relationships and management rights associated with such lines of business: (A) asset management, (B) mutual funds, (C) institutional asset services, and (D) wealth management, in each case, as in existence at the Company and KeyCorp and its affiliates as of the date hereof and, to the extent integrated with such lines of business, as may be acquired by KeyCorp or its affiliates after the date hereof. In the event KeyCorp hereafter acquires (either directly or indirectly, through acquisition or merger) other entities with lines of business included within the Capital Partners Group, KeyCorp's 2 decision not to integrate such hereafter acquired lines of business into the Capital Partners Group shall be subject to the Executive's consent, which shall not be unreasonably denied. As used herein, the terms "affiliates" and "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) During the Employment Period, the Executive shall serve on the KeyCorp Management Committee and shall serve as the Chairman of the management committee responsible for the long-term strategy and day-to-day management of the Company's Capital Partners Group (the "Capital Partners Committee"). In addition, during the Employment Period, the Executive shall serve on the Board of Directors of the Section 20 Subsidiary and as the Chairman of the Compensation Committee of such Board (the "Compensation Committee"). For the period required, the Executive shall serve as the Chairman of the Integration Task Force of the Capital Partners Group. (iii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote full attention and time during normal business hours to the business and affairs of the Company and to use the Executive's reasonable best efforts to perform such responsibilities in a professional manner. It shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. For purposes hereof, service on corporate boards pursuant to appointments after the date hereof shall be subject to the prior approval of KeyCorp, which shall not be unreasonably denied, and to KeyCorp's Code of Ethics. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Commencement Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Commencement Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) MANAGEMENT AND OPERATIONS OF NEW MCDONALD AFTER THE MERGER. The name of the New McDonald business unit shall be McDonald Key Investments, and the headquarters shall be located in Cleveland, Ohio. During the Employment Period, the Executive, together with Robert T. Clutterbuck and Yank Heisler as members of the Compensation Committee of New McDonald, will be responsible for establishing the aggregate and individual compensation levels for employees of New McDonald, in accordance with the compensation policies and practices established by the Compensation Committee, -2- 3 which shall be consistent with the historical compensation practices and policies of the Company and KeyCorp and in conformity with industry practice. (c) COMPENSATION. (i) BASE SALARY. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary") in accordance with the compensation policies and practices established by the Compensation and Organization Committee of KeyCorp's Board of Directors, provided that in no event shall the Annual Base Salary be less than the annual base salary as in effect immediately prior to the Commencement Date. (ii) ANNUAL BONUS. In addition to the Annual Base Salary, the Executive shall be awarded an annual cash bonus (the "Annual Bonus"), determined by the Compensation and Organization Committee of KeyCorp's Board of Directors, provided that in no event shall the sum of the Annual Base Salary and Annual Bonus be less than $1.5 million for calendar years 1999, 2000 and 2001. The Annual Bonus shall be payable no later than March 1 of each calendar year ending during the Employment Period. (iii) RETENTION PAYMENTS. (a) In addition to the Annual Base Salary and Annual Bonus, the Executive shall be entitled to receive payments and awards from a $68,000,000 retention pool (the "Retention Pool") in an aggregate amount of $5 million (the "Aggregate Retention Amount"). The Retention Pool and the Aggregate Retention Amount shall be payable as to 44% of such amounts in cash and as to 56% of such amounts in non-qualified stock options to acquire shares of KeyCorp common stock (the "Retention Options"). The aggregate number of Retention Options to be granted as a percentage of the Retention Pool shall be determined as of the date hereof based on the Black-Scholes option pricing model at a .315 valuation (the "Valuation Method"). Retention Options with a value (based on the Valuation Method) equal to the non-cash portion of the Aggregate Retention Amount shall be granted to the Executive in two portions with at least one-half of such Retention Options granted on the Commencement Date and the remaining portion granted before January 31, 1999. The Retention Options (i) shall have an exercise price equal to the fair market value of KeyCorp common stock on the date of grant, (ii) shall have an option expiration date of ten years from the date of grant (the "Option Term"), (iii) shall vest as provided in paragraph (b) below and (iv) shall be exercisable after becoming vested during the periods provided in the KeyCorp Amended and Restated 1991 Equity Compensation Plan as in effect as of the date hereof, provided, however, that KeyCorp shall use its best efforts to obtain approval from KeyCorp's Compensation and Organization Committee to provide the Executive with a two-year post termination of employment exercise period, except upon a termination for Cause (as defined herein) or without Good Reason (as defined herein). In no event shall the Retention Options be exercisable beyond the Option Term. -3- 4 (b) The Retention Pool and the Aggregate Retention Amount, including the Retention Options granted in satisfaction thereof (whether granted on the Commencement Date or otherwise), shall vest in the percentages, and be payable or exercisable, as the case may be, on the dates set forth below or if earlier as provided in the next following sentence: Vesting & Payment Date Retention % ------------ ----------- 2nd Anniversary of Commencement Date 40 3rd Anniversary 20 4th Anniversary 20 5th Anniversary 20 If the Company shall terminate the Executive's employment other than for Cause, including by reason of the Executive's Disability (as defined herein), or the Executive shall terminate employment for Good Reason or due to his death, or upon the occurrence of circumstances constituting a breach of Section 2(a) (i) in a manner that would constitute Good Reason pursuant to Section 3 (c) (A) but in which the Executive does not terminate his employment, the cash portion of the Aggregate Retention Amount and the Retention Options shall become fully vested and immediately payable or exercisable, as the case may be. If after the Commencement Date and prior to the January 1999 grant of the balance of the Retention Options, the Executive's employment terminates under any of the circumstances described in the preceding sentence (other than death), KeyCorp shall either make a cash payment or grant Retention Options equal to the balance of the Aggregate Retention Amount. In the event of the Executive's death after the Commencement Date and prior to the January 1999 grant of the balance of the Retention Options, the Executive's estate shall be entitled to receive a cash payment equal to the balance of the Aggregate Retention Amount in lieu of the Retention Options. (iv) EMPLOYEE BENEFIT PLANS. During the Employment Period, the benefit plans, programs, policies and arrangements provided to the Executive shall be no less favorable, in the aggregate, than the benefit plans, programs, policies and arrangements in which the Executive was entitled to participate immediately prior to the Commencement Date. (v) EXPENSES. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable business expenses incurred by the Executive, in accordance with the policies of Capital Partners Group. (vi) INDEMNIFICATION/D&O INSURANCE. The Executive shall be indemnified by KeyCorp against claims arising in connection with the Executive's status as an employee, officer, director or -4- 5 agent of KeyCorp in accordance with KeyCorp's indemnity policies for its senior executives, subject to applicable law. (vii) SECTION 162 (m) . In the event that KeyCorp would be denied a deduction for federal income tax purposes for any amounts payable to the Executive by reason of the limitations imposed by Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), the Executive agrees that, in accordance with the policy of KeyCorp's Compensation and Organization Committee (and only so long as that policy continues and is applicable to all executives of KeyCorp who are subject to Section 162 (m)), he will defer the amount that would not be deductible pursuant to the terms of KeyCorp's Deferred Compensation Plan as in effect from time to time. (d) EMPLOYMENT LOCATION. During the Employment Period, the Executive's principal place of employment shall be located no more than 20 miles from the Executive's principal place of employment at the date hereof. 3. TERMINATION OF EMPLOYMENT. (a) DEATH OR DISABILITY. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 10(b)) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with New McDonald on a full-time basis for 180 consecutive days as a result of incapacity due to mental or physical illness or injury. (b) CAUSE. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean: (i) the continued and willful failure of the Executive to perform substantially the Executive's duties with Capital Partners Group (other than any such failure resulting from incapacity due to mental or physical illness or injury), after a written demand for substantial performance is delivered to the Executive by the Board of Directors of KeyCorp the (the "Board"), which specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or -5- 6 (ii) the engaging by the Executive in illegal conduct constituting a felony, or (iii) gross misconduct which is materially and demonstrably injurious to Capital Partners Group, or (iv) any material breach of Section 7 hereof, provided that to the extent any such breach is curable, Capital Partners Group shall give the Executive notice thereof and a reasonable opportunity to cure, or (v) conduct that results in the permanent loss of the Executive's professional license to conduct business or in the Executive being disqualified or barred by banking or security law regulators from serving in the capacity contemplated by this Agreement for six months or more. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company or Capital Partners Group. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer of KeyCorp or a senior officer of KeyCorp or based upon the advice of counsel for the Company or KeyCorp shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company or Capital Partners Group. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) through (v) above, and specifying the particulars thereof in detail. (c) GOOD REASON. The Executive's employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean a material breach by the Company of an obligation of the Company under this Agreement after the Executive has given the Company notice of the breach and a reasonable opportunity to cure such breach. A breach described in this clause to include, without limitation, (A) a detrimental alteration or failure to comply with the terms of the Executive's employment as they relate to the Executive's position, reporting, responsibilities and duties, or the compensation and benefit arrangements and opportunities applicable to the Executive, each as -6- 7 described in Section 2 hereof, (B) any failure of the Company to abide by the compensation arrangements described in Section 2(b) hereof or Annex E of the Merger Agreement, (C) the relocation of the Executive's principal place of employment to any location more than 20 miles from the Executive's principal place of employment on the Commencement Date, (D) the failure of the Company to obtain an agreement reasonably satisfactory to the Executive from any successor to assume and agree to perform this Agreement, as contemplated in Section 9 hereof or, if the business for which the Executive's services are principally performed is sold or transferred, the failure of the Company to obtain such an agreement from the purchaser or transferee of such business, (E) any termination of the Executive's employment which is not effected pursuant to the terms of this Agreement. (d) NOTICE OF TERMINATION. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 10(b)) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) specifies the termination date (which date, in the case of a termination for Good Reason, shall be not more than 30 days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) DATE OF TERMINATION. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date that is one day after the last day of the cure period, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, or the Executive resigns without Good Reason, the Date of Termination shall be the date on which the Company or the Executive notifies the Executive or the Company, respectively, of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 4. OBLIGATIONS OF THE COMPANY UPON TERMINATION. (a) GOOD REASON; OTHER THAN FOR CAUSE, DEATH OR DISABILITY. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason: -7- 8 (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the amounts set forth in clauses A and B below: A. the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the product of (x) the average of the Annual Bonuses paid or payable to the Executive in the three calendar years prior to the Date of Termination, including any bonus or portion thereof which has been earned but deferred (and annualized for any calendar year consisting of less than twelve full months or during which the Executive was employed for less than twelve full months) (such amount being referred to as the "Average Annual Bonus") and (y) a fraction, the numerator of which is the number of days in the current calendar year through the Date of Termination, and the denominator of which is 365, and (3) any unpaid Annual Bonus for a prior year and any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2) and (3) shall be hereinafter referred to as the "Accrued Obligations"); and B. the amount equal to the product of (1) the number of years (including fractions thereof) remaining from the Date of Termination until the end of the Employment Period (the "Continuation Period") and (2) the sum of (x) the Executive's Annual Base Salary and (y) the Average Annual Bonus; (ii) any unpaid cash portion of the Aggregate Retention Amount shall become fully vested and immediately payable; (iii) the Retention Options shall become fully vested and immediately exercisable; (iv) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is entitled to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"); and (v) for the duration of the Continuation Period, the Executive and the Executive's dependents shall continue to be eligible to participate in the medical, dental, health and group-term life benefit plans and arrangements applicable to the Executive immediately prior to the Date of Termination on the same terms and conditions as in effect for the Executive and the Executive's dependents immediately prior to the Date of Termination. -8- 9 (b) DEATH. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations, the timely payment or provision of Other Benefits and the payments referred to in Section 4 (a) (ii). Accrued Obligations and the payments referred to in Section 4(a) (ii) shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. In addition, the Retention Options shall become fully vested and immediately exercisable. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 4(b) shall include death benefits as in effect on the date of the Executive's death, which shall be no less favorable than those in effect immediately prior to the Commencement Date. (c) DISABILITY. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations, the timely payment or provision of Other Benefits and the payments referred to in Section 4 (a) (ii). Accrued Obligations and the payments referred to in Section 4(a) (ii) shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. In addition, the Retention Options shall become fully vested and immediately exercisable. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 4(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits as in effect on the Disability Effective Date, which shall be no less favorable than those in effect immediately prior to the Commencement Date. (d) CAUSE; OTHER THAN FOR GOOD REASON. If the Executive's employment shall be terminated for Cause or the Executive terminates employment without Good Reason during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) Accrued Obligations less the amount determined under Section 4(a) (i)A(2) hereof, and (y) Other Benefits, in each case to the extent theretofore unpaid. 5. NON-EXCLUSIVITY OF RIGHTS. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. -9- 10 6. FULL SETTLEMENT. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest brought in good faith (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f) (2) (A) of the Internal Revenue Code. 7. CONFIDENTIAL INFORMATION/NONCOMPETITION/NONSOLICITATION. (a) The Executive shall hold in a fiduciary capacity for the benefit of KeyCorp all secret or confidential information, knowledge or data relating to KeyCorp or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by KeyCorp or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with KeyCorp, the Executive shall not, without the prior written consent of KeyCorp or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than KeyCorp and those designated by it or to an attorney retained by the Executive. (b) While employed by Capital Partners Group or any of its affiliates and for two years after the Executive's termination of employment by the Company for Cause or by the Executive without Good Reason (but in no event for more than two years following the expiration of the Employment Period), the Executive will not, without the written consent of KeyCorp, directly or indirectly, be connected as an officer, employee, partner, director or otherwise with any business which engages within a 50-mile radius of any area in which Capital Partners Group conducted business during the 12-month period immediately preceding the Executive's Date of Termination, in any business that competes, at the time such -10- 11 engagement is commenced, with any business actively conducted by Capital Partners Group in such area and that is of the type of business activity in which the Executive was directly engaged on behalf of Capital Partners Group during the 12-month period immediately preceding the Date of Termination or any other business with respect to which the Executive has confidential information. Ownership, for personal investment purposes only, of less than 5% of the voting stock of any publicly held corporation shall not constitute a violation hereof. (c) While employed by KeyCorp or any of its affiliates and for two years after the earlier of the Date of Termination and the expiration of the Employment Period, the Executive will not, directly or indirectly, on behalf of the Executive or any other person, solicit for employment by other than KeyCorp any person employed by KeyCorp or its affiliates. (d) While employed by the Company or any of its affiliates and for two years after the earlier of (i) the Executive's termination of employment by the Company for Cause or by the Executive without Good Reason and (ii) the expiration of the Employment Period, the Executive will not, directly or indirectly, on behalf of the Executive or any other person, solicit any customer or client who was a customer or client of Capital Partners Group during the 12-month period immediately preceding the Date of Termination, for the purpose of providing such customer or client with services that are directly competitive with the services provided by the Capital Partners Group, provided that under no circumstances may the Executive solicit any customer or client for the purpose of providing services relating to business that was under discussion prior to the Date of Termination. (e) In the event of a breach or threatened breach of this Section 7, the Executive agrees that the Company and KeyCorp shall be entitled to injunctive relief in a court of competent jurisdiction to remedy any such breach or threatened breach, and the Executive acknowledges that damages would be inadequate and insufficient. (f) The provisions of Section 7(b), (c) and (d) shall remain in full force and effect until the expiration of the period specified herein notwithstanding the earlier termination of the Executive's employment hereunder. 8. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding -11- 12 and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 8) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 8(a), if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that the Payments do not exceed 110% of the greatest amount (the "Reduced Amount") that could be paid to the Executive such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive and the Payments, in the aggregate, shall be reduced to the Reduced Amount. (b) Subject to the provisions of Section 8(c), all determinations required to be made under this Section 8, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Ernst & Young LLP or such other certified public accounting firm reasonably acceptable to the Company as may be designated by the Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 8, shall be paid by the Company to the Executive within five days of (i) the later of the due date for the payment of any Excise Tax, and (ii) the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the -12- 13 Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 8(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 8 (c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, -13- 14 proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 8(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 8(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 8(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 9. SUCCESSORS. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. -14- 15 (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company and KeyCorp will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company or KeyCorp, or any business of the Company or KeyCorp for which the Executive's services are principally performed, to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company or KeyCorp would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" and "KeyCorp" shall mean the Company and KeyCorp as hereinbefore defined and any successors to their business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 10. GENERAL PROVISIONS. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Ohio, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: William B. Summers, Jr. ------------------- 20749 Beachcliff Rocky River, Ohio 44116 If to the Company: New McDonald ----------------- 800 Superior Avenue Cleveland, Ohio 44114 Att: Chief Executive Officer Copy to: KeyCorp ------- 127 Public Square Cleveland, Ohio 44114 Att: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. -15- 16 (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The parties agree to treat all amounts paid to the Executive hereunder as compensation for services. Accordingly, the Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) On and after the Commencement Date, this Agreement shall supersede any other agreement, written or oral, pertaining to the subject matter of this Agreement. This Agreement shall immediately terminate and be of no force and effect if the Executive dies prior to the Commencement Date. (f) This Agreement may be executed in counterparts, which together shall constitute one and the same original. -16- 17 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from their respective Boards of Directors, the Company and KeyCorp have caused these presents to be executed in their names on their behalf, all as of the day and year first above written. /s/ William B. Summers, Jr. ----------------------------------- WILLIAM B. SUMMERS, JR. MCDONALD & COMPANY SECURITIES, INC. /s/ Robert T. Clutterbuck ----------------------------------- By: Robert T. Clutterbuck Title: President and Chief Operating Officer KEYCORP /s/ Thomas C. Stevens ----------------------------------- By: Thomas C. Stevens Title: Senior Executive Vice President EX-10.17 4 EXHIBIT 10.17 1 EXHIBIT 10.17 KEYCORP ANNUAL INCENTIVE PLAN (DECEMBER 21, 1999 RESTATEMENT) KeyCorp (the "Corporation") hereby establishes this Annual Incentive Plan for the purpose of providing an incentive to selected key officers of the Corporation and its subsidiaries. ARTICLE I DEFINITIONS ----------- For the purposes hereof, the following words and phrases shall have the meanings indicated: 1. A "Beneficiary" shall mean any person designated by a Participant in accordance with the Plan to receive payment of all or a portion of any Incentive Award for which the Participant is eligible at the time of the Participant's death. 2. A "Change of Control" shall mean a Change of Control under any of clauses (a), (b), (c), or (d) below. A "Non-Initiated Change of Control" shall mean (i) a Change of Control under clause (c) below (regardless of whether it also constitutes a Change of Control under any other clause below), and (ii) a Change of Control under clause (a), (b), or (d) below if such Change of Control results in whole or in any significant part, directly or indirectly, proximately or remotely, from or in response or reaction to an offer or proposal (whether to the Board of Directors or the shareholders of the Corporation) which was not solicited or invited by the management of the Corporation to engage in a transaction with the Corporation that, if consummated, would result in a Change Event under clause (c) below. An "Initiated Change of Control" shall mean all Changes of Control other than a Non-Initiated Change of Control. The determination of the Committee whether a Change of Control constitutes an Initiated or Non-Initiated Change of Control shall be final and conclusive. For purposes of this definition, the Corporation will be deemed to have become a subsidiary of another corporation if any other corporation (which term shall include, in addition to a corporation, a limited liability company, partnership, trust, or other organization) owns, directly or indirectly, 50 percent or more of the total combined outstanding voting power of all classes of stock of the Corporation or any successor to the Corporation. 1 2 (a) A Change of Control will have occurred under this clause (a) if the Corporation is a party to a transaction pursuant to which the Corporation is merged with or into, or is consolidated with, or becomes the subsidiary of another corporation and either (i) immediately after giving effect to that transaction, less than 65% of the then outstanding voting securities of the surviving or resulting corporation or (if the Corporation becomes a subsidiary in the transaction) of the ultimate parent of the Corporation represent or were issued in exchange for voting securities of the Corporation outstanding immediately prior to the transaction, or (ii) immediately after giving effect to that transaction, individuals who were directors of the Corporation on the day before the first public announcement of (x) the pendency of the transaction or (y) the intention of any person or entity to cause the transaction to occur, cease for any reason to constitute at least 51% of the directors of the surviving or resulting corporation or (if the Corporation becomes a subsidiary in the transaction) of the ultimate parent of the Corporation. (b) A Change of Control will have occurred under this clause (b) if a tender or exchange offer shall be made and consummated for 35% or more of the outstanding voting stock of the Corporation or any person (as the term "person" is used in Section 13(d) and Section 14(d)(2) of the 1934 Act) is or becomes the beneficial owner of 35% or more of the outstanding voting stock of the Corporation or there is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as adopted under the 1934 Act, disclosing the acquisition of 35% or more of the outstanding voting stock of the Corporation in a transaction or series of transactions by any person (as defined earlier in this clause (b)). 2 3 (c) A Change of Control will have occurred under this clause (c) if either (i) without the prior approval, solicitation, invitation, or recommendation of the Corporation Board of Directors any person or entity makes a public announcement of a bona fide intention (A) to engage in a transaction with the Corporation that, if consummated, would result in a Change Event (as defined below in this clause (c)), or (B) to "solicit" (as defined in Rule 14a-1 under the 1934 Act) proxies in connection with a proposal that is not approved or recommended by the Corporation Board of Directors, or (ii) any person or entity publicly announces a bona fide intention to engage in an election contest relating to the election of directors of the Corporation (pursuant to Regulation 14A, including Rule 14a-11, under the 1934 Act), and, at any time within the 24 month period immediately following the date of the announcement of that intention, individuals who, on the day before that announcement, constituted the directors of the Corporation (the "Incumbent Directors") cease for any reason to constitute at least a majority thereof unless both (A) the election, or the nomination for election by the Corporation's shareholders, of each new director was approved by a vote of at least two-thirds of the Incumbent Directors in office at the time of the election or nomination for election of such new director, and (B) prior to the time that the Incumbent Directors no longer constitute a majority of the Board of Directors, the Incumbent Directors then in office, by a vote of at least 75% of their number, reasonably determine in good faith that the change in Board membership that has occurred before the date of that determination and that is anticipated to thereafter occur within the balance of the 24 month period to cause the Incumbent Directors to no longer be a majority of the Board of Directors was not caused by or attributable to, in whole or in any significant part, directly or indirectly, proximately or remotely, any event under subclause (i) or (ii) of this clause (c). 3 4 For purposes of this clause (c), the term "Change Event" shall mean any of the events described in the following subclauses (x), (y), or (z) of this clause (c): (x) A tender or exchange offer shall be made for 25% or more of the outstanding voting stock of the Corporation or any person (as the term "person" is used in Section 13(d) and Section 14(d)(2) of the 1934 Act) is or becomes the beneficial owner of 25% or more of the outstanding voting stock of the Corporation or there is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form, or report), each as adopted under the 1934 Act, disclosing the acquisition of 25% or more of the outstanding voting stock of the Corporation in a transaction or series of transactions by any person (as defined earlier in this subclause (x)). (y) the Corporation is a party to a transaction pursuant to which the Corporation is merged with or into, or is consolidated with, or becomes the subsidiary of another corporation and, after giving effect to such transaction, less than 50% of the then outstanding voting securities of the surviving or resulting corporation or (if the Corporation becomes a subsidiary in the transaction) of the ultimate parent of the Corporation represent or were issued in exchange for voting securities of the Corporation outstanding immediately prior to such transaction or less than 51% of the directors of the surviving or resulting corporation or (if the Corporation becomes a subsidiary in the transaction) of the ultimate parent of the Corporation were directors of the Corporation immediately prior to such transaction. (z) There is a sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets of the Corporation. (d) A Change of Control will have occurred under this clause (d) if there is a sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Corporation. 4 5 3. The "Committee" shall mean the Compensation and Organization Committee of the Board of Directors of the Corporation or other Committee of the Board of Directors hereafter succeeding to the responsibilities currently performed by the Compensation and Organization Committee with respect to the Plan. 4. An "Incentive Award" shall mean the incentive which may be paid to a Participant pursuant to the Plan. 5. "Market Point" shall mean for any Participant for any calendar year the market point (as determined under the Corporation's salary administration program) of such Participant's job grade at the end of the calendar year; provided, however, that if the Corporation changes such Participant's job grade during any such calendar year or such Participant is promoted, transferred, or otherwise moves into a different job grade during such calendar year, then such Market Point shall be calculated on a pro rata basis for each of the periods in which such job grades were in effect for such Participant. 6. A "Participant" shall mean a senior officer of the Corporation or one of its subsidiaries who is selected by the Committee to participate in the Plan. 7. The "Plan" shall mean this Annual Incentive Plan, together with all amendments hereto. 8. "Plan Year" shall mean each calendar year for which the Plan remains in existence. 9. "Subsidiary" shall mean a corporation organized and existing under the laws of the United States or of any state or the District of Columbia of which 50 percent or more of the issued and outstanding stock is owned by the Corporation or by a Subsidiary of the Corporation. 10. The "Target Incentive Pool" shall mean the aggregate amount, as determined in accordance with Article II of the Plan, of the aggregate individual target Incentive Awards of Participants. 11. "Target Pool Percentage" shall mean the percentage determined pursuant to Article II, Sections 3 and 4 below that will be used to establish the aggregate amount available for Incentive Awards. 12. The "1934 Act" shall mean the Securities Exchange Act of 1934 as from time to time amended. 5 6 ARTICLE II INCENTIVE AWARDS ---------------- 1. PARTICIPATION. Annually, the Committee shall select the Participants in the Plan for the Plan Year. In general, the selection will be made prior to the beginning of each Plan Year or as soon thereafter as is reasonably practicable; in addition, such selection may be made at any time during a Plan Year in the case of a newly hired employee or an employee that receives a new position. Not in limitation of the foregoing, the Committee shall have the authority to designate at the beginning of a Plan Year, or as soon thereafter as is reasonably practicable, employees in selected job grades as Participants, including any employee that may later be hired or promoted into any such job grade during the Plan Year, without further action on behalf of the Committee. Participants shall be notified of their selection in writing. In the event that employees are determined to be Participants by job grade, the Chief Executive Officer, or his or her designee, may select, subject to the approval of the Committee or in accordance with guidelines established by the Committee, additional eligible employees for Plan participation notwithstanding their job grade. Employees otherwise eligible for participation because of their job grade may be excluded, by action of the Committee or the Chief Executive Officer (or his or her designee), if they are participants in business unit or other incentive compensation plans. 2. INCENTIVE POOL. The individual target incentives for persons selected to be in the Plan are set forth in Exhibit A to the Plan, which Exhibit A may be amended by action of the Committee from time to time. Target incentives for Participants who are eligible for part of the Plan Year or whose incentive group assignment changed during the Plan Year will be calculated on a pro rata basis for both the period of each incentive group assignment and the period during the Plan Year in which the Participant was an eligible employee. In the event that an individual whose job does not have an assigned salary grade is approved for participation in the Plan, the Chief Executive Officer, or his or her designee, is authorized to select a target incentive percentage for such individual and base the calculation of target incentive and other calculations under this Plan on such individual's base salary. 6 7 3. FORMULA FOR TARGET POOL PERCENTAGE; KNOCK-OUT FACTOR. Prior to each Plan Year or as soon as practical thereafter, the Committee shall devise a formula to determine the Target Pool Percentage which formula shall be based on one or more financial criteria or other performance goals. The Committee shall have the discretion to set minimal performance goals which must be met before any Incentive Awards will be made under the Plan. In its sole discretion the Committee may revise or waive one or more of such minimal performance goals as a result of any change in conditions or the occurrence of any events or other factors which make such goal or goals unsuitable or undesirable. Notwithstanding that the Corporation has not met a minimal performance goal, if the Committee determines that one or more lines of business of the Corporation have had a level of performance deserving of Incentive Awards, the Committee may establish a pool for Incentive Awards utilizing a Target Pool Percentage fixed at 25% (or such higher or lower percentage as the Committee, in its sole discretion, shall determine). 4. INCENTIVE AWARDS. As soon as practical after the end of the Plan Year, the Committee shall determine the Target Pool Percentage (not to exceed 200%) to be applied to the Target Incentive Pool to establish the maximum aggregate amount to be distributed as Incentive Awards. The percentage shall be based on the formula established in Section 3 hereof but the Committee shall have the discretion to decrease or increase the Target Pool Percentage by not more than twenty per cent (20%). In determining whether, and the extent to which, the formula established in Section 3 hereof has been achieved, the Committee shall have the discretion to disregard changes in accounting rules or practices, gains from the sale of subsidiaries or assets outside the ordinary course of business, or restructuring or other nonrecurring charges or similar adjustments. It is contemplated that Incentive Awards may, depending upon the responsibilities of the Participant, be based wholly on corporate performance, partially on corporate performance and partially on line of business or business unit performance, or wholly on line of business or business unit performance. Ordinarily, the Committee will delegate to management responsibility for determining Target Pool Percentages for each line of business or business unit provided that the aggregate weighted average Target Pool Percentages for all lines of business and business units shall be substantially equivalent to the Target Pool Percentage established by the Committee. 7 8 The Committee shall determine or approve the amount of the Incentive Award for each Participant above such job grade level as the Committee shall from time to time select and, with respect to all other Participants, the Committee shall approve the Incentive Awards based on the methodology utilized by management consistent with the Committee's overall discretion. It may be determined that a Participant shall receive no Incentive Award for the Plan Year. In addition, the Plan does not restrict the maximum amount of an Incentive Award that may be paid to an individual Participant. 5. ACTIVE EMPLOYMENT REQUIREMENT. Ordinarily, Incentive Awards shall be made only to Participants who are actively employed at the end of the Plan Year; however, Participants who retire at age 65 or over or become disabled during a Plan Year, or the Beneficiary(s) or estate of a Participant whose death occurs during a Plan Year shall be entitled to, on a pro rata basis (for the period of time the Participant was in the Plan for the Plan Year) the lesser of (i) the Participant's target incentive or (ii) the Participant's target incentive times the Target Pool Percentage if the Committee determines a Target Pool Percentage of less than 100%. Except as provided in Section 6 hereof, no other Participant who is not actively employed at the end of the Plan Year shall receive an Incentive Award unless the Committee, in its sole discretion, so determines that an Incentive Award shall be made. 6. EFFECT OF CHANGE OF CONTROL. Upon the occurrence of a Non-Initiated Change of Control during the Plan Year, this Plan shall terminate and each Participant immediately prior to the occurrence of such Non-Initiated Change of Control shall promptly receive 200% of such Participant's target incentive payable under the Plan for the full Plan Year. In the event of the occurrence of an Initiated Change of Control during the Plan Year, the Committee, in its sole discretion, shall determine whether the Plan should terminate and the manner of calculating, and the time for payment, of Incentive Awards (if any) to be made under the Plan for the Plan Year. 7. PAYMENT OF INCENTIVE AWARD. Except as provided in the first sentence of Section 6 hereof, Incentive Awards shall be paid on or prior to March 15 of the year following the Plan Year. 8 9 Notwithstanding any other provision of the Plan, the Committee, in its sole discretion, shall have the authority to authorize payment of all or a portion of all Incentive Awards prior to the end of the Plan Year, and if a portion, the Corporation shall pay the remaining portion of the Award on or prior to March 15 of the year following the Plan Year. Notwithstanding any other provision of the Plan, the Committee, in its sole discretion, shall have the authority to require deferral of payment of all or a portion of all Incentive Awards due to any Plan Participant if the Committee determines that the Corporation would be denied a deduction for federal income tax purposes for such Award or the portion thereof by reason of Section 162(m) of the Internal Revenue Code of 1986, as amended, and the regulations issued thereunder, if the Award or the portion thereof were not so deferred. Such deferred Incentive Awards, or the portion thereof, shall be deferred in accordance with the provisions of the KeyCorp Deferred Compensation Plan or the KeyCorp Automatic Deferral Plan ("Automatic Deferral Plan"), whichever is applicable. ARTICLE III AUTOMATIC DEFERRAL ------------------ 1. ELIGIBILITY AND PARTICIPATION. A Plan Participant who accrues an Incentive Award under the Plan which exceeds $100,000 for the applicable Plan year shall automatically and without further action by the Participant defer a percentage of the Participant's Incentive Award to the Automatic Deferral Plan, and shall automatically become a participant in the Automatic Deferral Plan. 2. AUTOMATIC DEFERRAL REQUIREMENTS. Commencing as of January 1, 1999 and thereafter, a Participant meeting the eligibility and participation requirements contained in Section 1 hereof, as a condition of their continued participation in the Plan, shall automatically defer the following percentages of the Participant's accrued Incentive Award for the applicable Plan year to the Automatic Deferral Plan: (a) THE PORTION OF A PARTICIPANT'S INCENTIVE AWARD BETWEEN $100,000 UP TO AND INCLUDING $500,000. Twenty percent (20%) of the Participant's Incentive Award between $100,000 up to and including $500,000 shall be automatically deferred to the Automatic Deferral Plan. 9 10 (b) THE PORTION OF A PARTICIPANT'S INCENTIVE AWARD BETWEEN $500,000 UP TO AND INCLUDING $1,000,000. Twenty five (25%) of the Participant's Incentive Award between $500,000 up to and including $1,000,000 shall be automatically deferred to the Automatic Deferral Plan. (c) THE PORTION OF A PARTICIPANT'S INCENTIVE AWARD GREATER THAN $1,000,000. Thirty percent (30%) of the Participant's Incentive Award greater than $1,000,000 shall be automatically deferred to the Automatic Deferral Plan. 3. PLAN VESTING. A Participant shall have no vested interest in that portion of the Participant's Plan Incentive Award that is automatically deferred to the Automatic Deferral Plan. Once deferred to the Automatic Deferral Plan, the Participant's deferred Incentive Award shall be subject to the Automatic Deferral Plan's vesting, distribution, and forfeiture provisions, and the Plan Participant shall have no right or entitlement to any such Incentive Award deferred to the Automatic Deferral Plan except as specifically granted and/or authorized under the terms of the Automatic Deferral Plan. 4. TIME OF DEFERRAL. A Participant's accrued Plan Incentive Award deferred to the Automatic Deferral Plan in accordance with the provisions of Section 2 hereof, shall be credited on a bookkeeping basis to an Automatic Deferral Plan account established in the Participant's name as of the payroll date on which such Incentive Awards are generally otherwise paid under the Plan. 5. EFFECT OF DISCHARGE FOR CAUSE OR VOLUNTARY TERMINATION. In the event of a Participant's Discharge for Cause or Voluntary Termination, the Participant shall automatically forfeit any and all right to receive payment for any Incentive Award which otherwise would have become subject to the "Automatic Deferral Requirements" of Section 2, hereof, but for the Participant's Discharge for Cause or Voluntary Termination prior to the date on which Incentive Awards are otherwise paid under the Plan. 6. DEFINITIONS. For purposes of this Article III, the following words and phrases shall have the meaning hereinafter set forth, unless a different meaning is clearly required by the context: (a) "Discharge for Cause" shall mean the permanent termination of the Participant's employment from his or her Employer and any other Employer that is the result of (1) serious misconduct as an Employee, including, but not limited to, a continued 10 11 failure after notice to perform a substantial portion of his or her duties and responsibilities unrelated to illness or incapacity, unethical behavior such as acts of self-dealing or self-interest, harassment, violence in the workplace, or theft; (2) the commission of a crime involving a controlled substance, moral turpitude, dishonesty, or breach of trust; or (3) the Employer being directed by a regulatory agency or self-regulatory agency to terminate or suspend the Participant or to prohibit the Participant from performing services for the Employer. The Corporation in its sole and absolute discretion shall determine whether a Participant has been Discharged for Cause, as provided for in this Section 6(a). (b) "Voluntary Termination" shall mean a voluntary and permanent termination of a Participant's employment from his or her Employer and from any other Employer, whether by resignation or otherwise, but shall not include the Participant's Discharge for Cause, Retirement, Involuntary Termination, Termination Under Limited Circumstances, or termination as a result of Disability or death. All the capitalized and undefined terms used in this Section 6 shall have the meanings given them in the Automatic Deferral Plan, unless a different meaning is plainly required by the context. ARTICLE IV ADMINISTRATION -------------- The Corporation shall be responsible for the general administration of the Plan and for carrying out the provisions hereof. The Committee shall have all such powers as may be necessary to carry out its duties under the Plan, including the power to determine all questions pertaining to claims for benefits and procedures for claim review, and the power to resolve all other questions arising under the Plan, including any questions of construction. The Corporation and the Committee may take such further action as the Corporation and the Committee shall deem advisable in the administration of the Plan. The actions taken and the decisions made by the Corporation and the Committee hereunder shall be final and binding upon all interested parties. In accordance with the provisions of Section 503 of the Employee Retirement Income Security Act of 1974, as amended, the Committee shall provide a procedure for handling claims of 11 12 Participants or their Beneficiaries under this Plan. Such procedure shall be in accordance with regulations issued by the Secretary of Labor and shall provide adequate written notice within a reasonable period of time with respect to the denial of any such claims as well as a reasonable opportunity for a full and fair review by the Committee of any such denial. Notwithstanding anything to the contrary contained herein, the Corporation shall be the "administrator" for the purpose of the Employment Retirement Income Security Act of 1974, as amended. Any action authorized under the Plan to be done by the Committee may be done by the Board of Directors or any other Board committee authorized by the Board of Directors. ARTICLE V AMENDMENT AND TERMINATION ------------------------- The Corporation reserves the right to amend or terminate the Plan at any time by action of the Board of Directors or the Committee, but, from and after the occurrence of a Non-Initiated Change of Control, no such amendment or termination shall adversely affect the rights of a Participant which have accrued prior to such amendment or termination except with the written consent of such Participant. ARTICLE VI MISCELLANEOUS ------------- 1. NOT AN EMPLOYMENT AGREEMENT. Nothing herein contained shall be construed as a commitment to or agreement with any person employed by the Corporation or a Subsidiary to continue such person's employment with the Corporation or Subsidiary, and nothing herein contained shall be construed as a commitment or agreement on the part of the Corporation or any Subsidiary to continue the employment or the annual rate of compensation of any such person for any period. All Participants shall remain subject to discharge to the same extent as if the Plan had never been put into effect. 2. UNFUNDED FOR TAX AND ERISA PURPOSES. It is the intention of the Corporation and the Participants that the Plan be unfunded for tax purposes and for the purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended. 12 13 3. CLAIMS OF OTHER PERSONS. The provisions of the Plan shall in no event be construed as giving any person, firm, or corporation any legal or equitable right against the Corporation or any Subsidiary, their officers, employees, agents, or directors, except any such rights as are specifically provided for in the Plan or are hereafter created in accordance with the terms and provisions of the Plan. 4. ABSENCE OF LIABILITY. No member of the Board of Directors of the Corporation or a Subsidiary or any officer or employee of the Corporation or a Subsidiary shall be liable for any act or action hereunder, whether of commission or omission. 5. SEVERABILITY. The invalidity or unenforceability of any particular provisions of the Plan shall not affect any other provision hereof, and the Plan shall be construed in all respects as if such invalid or unenforceable provision were omitted herefrom. 6. GOVERNING LAW. The provisions of the Plan shall be governed and construed in accordance with the laws of the State of Ohio. KEYCORP By: /s/ Thomas E. Helfrich ------------------------------------------------ Thomas E. Helfrich, Executive Vice President 13 14 Exhibit A ---------
Incentive Job Target Incentive As a Group Grades Percent of Market Point ----- ------ ----------------------- I 95 100% II 94 85% III 92-93 70% IV 90-91 55% V 89 45% VI 88 35% VII 87 30% VIII 86 25% IX 85 20% X 84 and below 15%
14 EX-12 5 EXHIBIT 12 1 EXHIBIT 12 KEYCORP COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (DOLLARS IN MILLIONS) (UNAUDITED)
YEAR ENDED DECEMBER 31, ------------------------------------------ 1999 1998 1997 1996 1995 ------ ------ ------ ------ ------ COMPUTATION OF EARNINGS Net income.................................................. $1,107 $ 996 $ 919 $ 783 $ 825 Add: Provision for income taxes............................. 577 483 426 360 368 Less: Extraordinary net gain................................ -- -- -- -- 36 ------ ------ ------ ------ ------ Income before income taxes and extraordinary net gain... 1,684 1,479 1,345 1,143 1,157 Fixed charges, excluding interest on deposits............... 1,649 1,517 1,085 810 819 ------ ------ ------ ------ ------ Total earnings for computation, excluding interest on deposits............................................. 3,333 2,996 2,430 1,953 1,976 Interest on deposits........................................ 1,305 1,359 1,462 1,469 1,705 ------ ------ ------ ------ ------ Total earnings for computation, including interest on deposits............................................. $4,638 $4,355 $3,892 $3,422 $3,681 ====== ====== ====== ====== ====== COMPUTATION OF FIXED CHARGES Net rental expense.......................................... $ 173 $ 139 $ 123 $ 126 $ 117 ====== ====== ====== ====== ====== Portion of net rental expense deemed representative of interest.................................................. $ 46 $ 35 $ 30 $ 42 $ 39 Interest on short-term borrowed funds....................... 646 801 642 492 519 Interest on long-term debt, including cap securities........ 957 681 413 276 261 ------ ------ ------ ------ ------ Total fixed charges, excluding interest on deposits..... 1,649 1,517 1,085 810 819 Interest on deposits........................................ 1,305 1,359 1,462 1,469 1,705 ------ ------ ------ ------ ------ Total fixed charges, including interest on deposits..... $2,954 $2,876 $2,547 $2,279 $2,524 ====== ====== ====== ====== ====== COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS Preferred stock dividend requirement on a pre-tax basis..... -- -- -- $ 12 $ 23 Total fixed charges, excluding interest on deposits......... $1,649 $1,517 $1,085 810 819 ------ ------ ------ ------ ------ Combined fixed charges and preferred stock dividends, excluding interest on deposits....................... 1,649 1,517 1,085 822 842 Interest on deposits........................................ 1,305 1,359 1,462 1,469 1,705 ------ ------ ------ ------ ------ Combined fixed charges and preferred stock dividends, including interest on deposits....................... $2,954 $2,876 $2,547 $2,291 $2,547 ====== ====== ====== ====== ====== RATIO OF EARNINGS TO FIXED CHARGES Excluding deposit interest.................................. 2.02X 1.97x 2.24x 2.41x 2.42x Including deposit interest.................................. 1.57X 1.51x 1.53x 1.50x 1.46x RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS Excluding deposit interest.................................. 2.02X 1.97x 2.24x 2.38x 2.35x Including deposit interest.................................. 1.57X 1.51x 1.53x 1.49x 1.45x
15 EX-13 6 EXHIBIT 13 1 Exhibit 13 FINANCIAL REVIEW MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction 26 Highlights of Key's 1999 Performance 26 Cash Basis Financial Data 29 Line of Business Results 29 Results of Operations Net Interest Income 34 Market Risk Management 35 Noninterest Income 37 Noninterest Expense 40 Income Taxes 41 Financial Condition Loans 42 Securities 44 Asset Quality 45 Deposits and Other Sources of Funds 47 Liquidity 48 Capital and Dividends 49 Fourth Quarter Results 50 REPORT OF MANAGEMENT 52 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS 52 CONSOLIDATED FINANCIAL STATEMENTS 53 CORPORATE INFORMATION 77 25 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION This Management's Discussion and Analysis reviews the financial condition and results of operations of KeyCorp and its subsidiaries for each of the past three years. Some tables may cover more than three years to comply with Securities and Exchange Commission disclosure requirements or to illustrate trends over a longer period of time. When you read this discussion, you should also look at the consolidated financial statements and related notes that appear on pages 53 through 76. TERMINOLOGY This annual report contains some shortened names and some industry-specific terms. We want to explain some of these terms at the outset so you can better understand the discussion that follows. - - KEYCORP refers solely to the parent company. - - KEY refers to the consolidated entity consisting of KeyCorp and its subsidiaries. - - MCDONALD is McDonald & Company Investments, Inc., a full-service investment banking and securities brokerage company that Key acquired in October 1998. - - A KEYCENTER is one of Key's full-service retail banking facilities or branches. - - KEY engages in CAPITAL MARKETS ACTIVITIES, primarily through the Key Capital Partners line of business. These activities encompass a variety of services. Among other things, we trade securities as a dealer, enter into derivative contracts (both to accommodate clients' financing needs and for proprietary trading purposes), invest in new or growing ventures and conduct transactions in foreign currencies (both to accommodate clients' needs and to benefit from fluctuations in exchange rates). - - When we want to draw your attention to a particular item in Key's Notes to Consolidated Financial Statements, we refer to NOTE ____, giving the particular number, name, and starting page number. - - All earnings per share data included in this discussion are presented on a DILUTED basis, which takes into account all common shares outstanding and potential common shares that could result from the exercise of outstanding stock options. Some of the financial information tables also include BASIC earnings per share, which takes into account only common shares outstanding. - - For regulatory purposes, capital is divided into several classes. Federal regulations prescribe that at least half of a bank or bank holding company's TOTAL RISK-ADJUSTED CAPITAL must qualify as TIER 1. Both total and Tier 1 capital serve as bases for several measures of capital adequacy, which is an important indicator of financial stability and performance. You will find a more detailed explanation of total and Tier 1 capital and how they are calculated in the section entitled "Capital and dividends," which begins on page 49. OUR PROJECTIONS ARE NOT FOOLPROOF This annual report contains "forward-looking statements" about issues like anticipated improvement in earnings, expected expense reductions and revenue growth, and related objectives (such as the anticipated reduction in Key's employment base). Forward-looking statements by their nature are subject to assumptions, risks and uncertainties. For a variety of reasons, actual results could differ materially from those contained in or implied by the forward-looking statements: - - Interest rates could change more quickly or more significantly than we expect. - - If the economy changes significantly in an unexpected way, the demand for new loans and the ability of borrowers to repay outstanding loans may change in ways that our models do not anticipate. - - The stock and bond markets could suffer a significant disruption, which may have a negative effect on our financial condition and that of our borrowers, and on our ability to raise money by issuing new securities. - - It could take us longer than we anticipate to implement strategic initiatives designed to increase revenues or manage expenses, or we may be unable to implement those initiatives at all. - - Acquisitions and dispositions of assets, business units or affiliates could affect us in ways that management has not anticipated. - - We may become subject to new legal obligations or the resolution of existing litigation may have a negative effect on our financial condition. - - We may become subject to new and unanticipated accounting, tax, or regulatory practices or requirements. HIGHLIGHTS OF KEY'S 1999 PERFORMANCE FINANCIAL PERFORMANCE Key's financial performance in 1999 was strong. Some of the 1999 highlights are discussed below. - - We achieved record earnings for the third consecutive year, breaking the $1.0 billion mark in net income for the first time in our history. Net income was $1.107 billion, or $2.45 per common share, up 11% from $996 million, or $2.23 per common share, in 1998, and $919 million, or $2.07 per common share, in 1997. - - Key's return on average total equity was 17.68%, compared with 17.97% in 1998 and 18.89% in 1997. - - Key's return on average total assets rose to 1.37% from 1.32% in 1998 and 1.33% in 1997. Figure 2, which appears on page 28, summarizes Key's financial performance for each of the last six years In each of the past three years, Key's financial results have been affected by various nonrecurring items. The most significant of these items and their impact on both earnings and primary financial ratios are summarized in Figure 1. Each of these items is discussed in greater detail elsewhere in this report. 26 [LOGO-KEYCORP] 3 FIGURE 1 SIGNIFICANT NONRECURRING ITEMS YEAR ENDED DECEMBER 31,
dollars in millions, except per share amounts 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- Net income as reported $1,107 $996 $919 Nonrecurring items (net of tax): Gains from branch divestitures (122) (22) (97) Gain from sale of Electronic Payment Services, Inc. (85) -- -- Gain from sale of Concord EFS, Inc. common shares (9) -- -- Gains from sale of Key Merchant Services, LLC (9) (31) -- Gain from sale of Compaq Capital Europe LLC and Compaq Capital Asia Pacific LLC (8) -- -- Restructuring and other special charges 96 -- -- Merger and integration charges -- 5 -- Real estate disposition charge -- -- 33 Other nonrecurring charges 81 -- -- - -------------------------------------------------------------------------------------------------------------------------------- Net income-- core $1,051 $948 $855 ====== ===== ===== Net income per diluted common share $2.45 $2.23 $2.07 Net income per diluted common share-- core 2.33 2.12 1.92 Return on average total assets 1.37% 1.32% 1.33% Return on average total assets-- core 1.30 1.26 1.24 Return on average total equity 17.68 17.97 18.89 Return on average total equity-- core 16.79 17.10 17.57 - --------------------------------------------------------------------------------------------------------------------------------
Key's earnings for 1999 reflect increases from our fee-generating businesses, particularly investment banking, dealer trading services, asset management and brokerage. These businesses have contributed greater amounts to Key's financial results since Key acquired McDonald in October 1998. We are also seeing the positive results of recent efforts to increase profitability in the retail banking unit. Key's fee income is included in "core noninterest income," which is noninterest income excluding certain nonrecurring items. Core noninterest income was up 31% from last year, and accounted for 41% of Key's total core revenue (which is net interest income plus core noninterest income). In comparison, core noninterest income accounted for 36% of Key's total core revenue in 1998. One of management's long-term goals is for Key to derive 50% of its revenue from activities that generate core noninterest income. For detailed information about noninterest income, see the section entitled "Noninterest income," which begins on page 37. Key's lending activity has also been strong -- particularly in the home equity, consumer lease financing, equipment leasing and other commercial loan portfolios. Excluding the impact of loan sales, home equity loans were up 28% from 1998, while consumer lease financing rose by 24%; commercial loan growth exceeded 10% for the third consecutive year. Although we are continuously extending more loans, both nonperforming loans and net charge-offs experienced only modest increases during 1999. CORPORATE STRATEGY Key's corporate strategy for the past several years has focused on an active program of selling portfolios and business units that have low anticipated growth rates or do not have a competitive advantage or significant market share, and acquiring or growing businesses that management believes are capable of achieving double-digit earnings growth rates. This long-standing strategy was supplemented in the fourth quarter of 1999 by a new three-year initiative to improve profitability by reducing the costs of doing business, sharpening the focus on the most profitable growth businesses and enhancing revenues. The expected pre-tax earnings improvement of more than $370 million per year when fully implemented, when combined with Key's transformation into an integrated, multiline financial services company, should enable us to capitalize on additional opportunities. PRINCIPAL STRATEGIC ACTIONS DURING 1999 During the first quarter, Key introduced an initiative designed to strengthen the profitability of the retail banking unit within the Key Retail Banking line of business. This initiative and the guiding strategies are discussed in more detail under the heading "Key Retail Banking" on page 30. Management's long-term goal is to increase the annual pre-tax earnings growth rate of the retail banking unit to at least 10%. Our plan to achieve that goal focuses on improving sales-generating capabilities and reducing operating costs. During 1999, the retail banking unit achieved a 9% pre-tax earnings growth rate (exceeding the target for the year of 8%) and contributed to the increase in Key's total revenue. Key took three significant actions during the fourth quarter of 1999. First, Key sold its Long Island, New York business, including 28 KeyCenters with $1.3 billion of deposits and $505 million of loans. The Long Island business was profitable, but we held a very small share of the market for deposits and loans in the greater New York City-Long Island area. That region has long been dominated by major New York City-based financial institutions and our competitive position was not strong. The positive effect on capital resulting from the sale of Key's Long Island business should enable Key to allocate more capital to higher growth opportunities and geographic markets. For example, Key intends to open KeyCenters offering a broad range of financial services products in 25 high-growth markets in the western United States. The first two centers opened during 1999 in Sandy, Utah (a suburb of Salt Lake City) and in Vancouver, Washington. Since then, plans have been put in place to open 20 to 30 new sites - -- primarily in the markets of Vancouver and Seattle, Washington and in various markets in Utah. Second, Key reached an agreement to sell its credit card portfolio as part of an overall effort to direct financial resources and free up capital to support faster growing businesses. The relatively small size of the portfolio ($1.4 billion, or 2% of total loans outstanding at December 31, 1999) did not provide the scale necessary to allow Key to compete effectively in credit card lending with other larger credit card issuers. This transaction was completed in January 2000. [LOGO-KEYCORP] 27 4 FIGURE 2 SELECTED FINANCIAL DATA
COMPOUND ANNUAL RATE OF CHANGE dollars in millions, except per share amounts 1999 1998 1997 1996 1995 1994 (1994-1999) - --------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, Interest income $ 5,695 $ 5,525 $ 5,262 $ 4,951 $ 5,121 $ 4,490 4.9% Interest expense 2,908 2,841 2,517 2,237 2,485 1,797 10.1 Net interest income 2,787 2,684 2,745 2,714 2,636 2,693 .7 Provision for loan losses 348 297 320 197 100 125 22.7 Noninterest income 2,294 1,575 1,306 1,087 933 883 21.0 Noninterest expense 3,049 2,483 2,386 2,461 2,312 2,168 7.1 Income before income taxes and extraordinary item 1,684 1,479 1,345 1,143 1,157 1,283 5.6 Income before extraordinary item 1,107 996 919 783 789 853 5.4 Net income 1,107 996 919 783 825 853 5.4 Net income applicable to common shares 1,107 996 919 775 809 837 5.8 - --------------------------------------------------------------------------------------------------------------------------- PER COMMON SHARE Income before extraordinary item $ 2.47 $ 2.25 $ 2.09 $ 1.69 $ 1.65 $ 1.72 7.5% Income before extraordinary item -- assuming dilution 2.45 2.23 2.07 1.67 1.63 1.70 7.6 Net income 2.47 2.25 2.09 1.69 1.73 1.72 7.5 Net income-- assuming dilution 2.45 2.23 2.07 1.67 1.71 1.70 7.6 Cash dividends 1.04 .94 .84 .76 .72 .64 10.2 Book value at year end 14.41 13.63 11.83 10.92 10.68 9.44 8.8 Market price at year end 22.13 32.00 35.41 25.25 18.13 12.50 12.1 Dividend payout ratio 42.11% 41.78% 40.19% 45.10% 41.74% 37.10% 2.6 Weighted average common shares (000) 448,168 441,895 439,042 459,810 469,574 486,134 (1.6) Weighted avg. common shares and potential common shares (000) 452,363 447,437 444,544 464,282 472,882 490,932 (1.6) - --------------------------------------------------------------------------------------------------------------------------- AT DECEMBER 31, Loans $ 64,222 $ 62,012 $ 53,380 $ 49,235 $ 48,332 $ 46,579 6.6% Earning assets 73,733 70,240 64,246 59,260 58,762 60,047 4.2 Total assets 83,395 80,020 73,699 67,621 66,339 66,801 4.5 Deposits 43,233 42,583 45,073 45,317 47,282 48,564 (2.3) Long-term debt 15,881 12,967 7,446 4,213 4,003 3,570 34.8 Common shareholders' equity 6,389 6,167 5,181 4,881 4,993 4,530 7.1 Total shareholders' equity 6,389 6,167 5,181 4,881 5,153 4,690 6.4 Full-time equivalent employees 24,568 25,862 24,595 27,689 29,563 29,211 (3.4) Branches 936 968 1,015 1,205 1,284 1,272 (6.0) - --------------------------------------------------------------------------------------------------------------------------- PERFORMANCE RATIOS Return on average total assets 1.37% 1.32% 1.33% 1.21% 1.24% 1.36% N/A Return on average common equity 17.68 17.97 18.89 15.73 17.35 18.87 N/A Return on average total equity 17.68 17.97 18.89 15.64 17.10 18.56 N/A Efficiency(a) 59.43 58.49 58.21 60.88 63.03 59.39 N/A Overhead(b) 31.52 35.17 40.34 45.51 49.66 46.14 N/A Net interest margin (taxable equivalent) 3.93 4.08 4.54 4.78 4.47 4.83 N/A - --------------------------------------------------------------------------------------------------------------------------- CAPITAL RATIOS AT DECEMBER 31, Equity to assets 7.66% 7.71% 7.03% 7.22% 7.77% 7.03% N/A Tangible equity to tangible assets 6.03 5.93 5.52 5.88 6.25 6.19 N/A Tier 1 risk-adjusted capital 7.68 7.21 6.65 7.98 7.53 8.48 N/A Total risk-adjusted capital 11.66 11.69 10.83 13.01 10.85 11.62 N/A Leverage 7.77 6.95 6.40 6.93 6.20 6.63 N/A - ---------------------------------------------------------------------------------------------------------------------------
Key has completed several mergers, acquisitions and divestitures during the six-year period shown in this table. One or more of these transactions may have had a significant effect on Key's results, making it difficult to compare results from one year to the next. Note 3 ("Mergers, Acquisitions and Divestitures"), which begins on page 60, has specific information about the business combinations and divestitures that Key completed in the past three years to help you understand how those transactions may have impacted Key's financial condition and results of operations. (a) This ratio, which measures the extent to which recurring revenues are absorbed by operating expenses, is calculated as follows: noninterest expense (excluding certain nonrecurring charges) divided by the sum of taxable-equivalent net interest income and noninterest income (excluding net securities transactions, gains from certain divestitures and certain nonrecurring charges). (b) This ratio is the difference between noninterest expense (excluding certain nonrecurring charges) and noninterest income (excluding net securities transactions, gains from certain divestitures and certain nonrecurring charges) divided by taxable-equivalent net interest income. N/A = Not Applicable 28 [LOGO-KEYCORP] 5 Third, Key announced strategic actions being taken over the next three years that are expected to result in pre-tax cost reductions. Our goal is to achieve more than $170 million of expense reductions per year upon completion. These actions include outsourcing certain nonstrategic support functions (which resulted in the write-off of selected assets, including certain software), site consolidations in a number of Key's businesses and reducing the number of management layers. The actions are expected to reduce Key's employment base by approximately 3,000 positions, or 11%, by year-end 2000 and to contribute to an improvement in Key's efficiency ratio. In connection with these actions, we recorded $145 million of restructuring and other special charges during the fourth quarter. The sales of the Long Island business and the credit card portfolio are described in Note 3 ("Mergers, Acquisitions and Divestitures"), which begins on page 60. The section entitled "Noninterest expense," which begins on page 40, and Note 13 ("Restructuring Charges"), on page 69, provide more information about Key's restructuring charges. CASH BASIS FINANCIAL DATA The selected financial data presented in Figure 3 highlight Key's performance on a cash basis for each of the past three years. We provide cash basis financial data because we believe it offers a useful tool for evaluating liquidity and measuring a bank holding company's ability to support future growth, pay dividends and repurchase shares. "Cash basis" accounting can mean different things. When we apply "cash basis" accounting, the only adjustments that we make to get from the information in Figure 2 (which is presented on an accrual basis) to the comparable line items in Figure 3 are to exclude goodwill and other intangibles that do not qualify as Tier 1 capital, and to exclude the amortization of those assets. Figure 3 does not exclude the impact of other noncash items such as depreciation and deferred taxes. Goodwill and other intangibles that do not qualify as Tier 1 capital are the result of business combinations that Key recorded using the "purchase" method of accounting. Under the purchase method, assets and liabilities of acquired companies are recorded at their fair values and any amount paid in excess of the fair value of the net assets acquired is recorded as goodwill. If the same transactions had qualified for accounting using the "pooling of interests" method, the acquired company's financial statements would simply have been combined with Key's. After a combination using purchase accounting, Key must amortize goodwill and other intangibles by taking periodic charges against income, but those charges are only accounting entries, not actual cash expenses. Thus, from an investor's perspective, the economic effect of a transaction is the same whether we account for it as a purchase or a pooling. For the same reason, the amortization of intangibles does not impact Key's liquidity and funds management activities. This is the only section of this Financial Review that discusses Key's financial results on a cash basis. LINE OF BUSINESS RESULTS Key has four primary lines of business: KEY RETAIL BANKING offers branch-based financial products and services, and services our small business clients. KEY SPECIALTY FINANCE offers non-branch-based consumer loan products, such as education loans, home equity loans, automobile loans and leases, and marine and recreational vehicle loans. KEY CORPORATE CAPITAL offers financing, transaction processing, financial advisory services, equipment leasing and a number of other specialized services. FIGURE 3 CASH BASIS SELECTED FINANCIAL DATA
dollars in millions, except per share amounts 1999 1998 1997 - ----------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, Noninterest expense $ 2,947 $ 2,397 $ 2,309 Income before income taxes 1,786 1,565 1,422 Net income 1,199 1,072 989 - ----------------------------------------------------------------------------------------- PER COMMON SHARE Net income $ 2.68 $ 2.43 $ 2.25 Net income-- assuming dilution 2.65 2.40 2.22 Weighted average common shares (000) 448,168 441,895 439,042 Weighted average common shares and potential common shares (000) 452,363 447,437 444,544 - ----------------------------------------------------------------------------------------- PERFORMANCE RATIOS Return on average total assets 1.51% 1.45% 1.46% Return on average total equity 25.14 24.71 25.78 Efficiency(a) 57.32 56.47 56.28 - ----------------------------------------------------------------------------------------- GOODWILL AND NON-QUALIFYING INTANGIBLES Goodwill average balance $ 1,424 $ 1,113 $ 921 Non-qualifying intangibles average balance 68 91 108 Goodwill amortization (after tax) 81 65 58 Non-qualifying intangibles amortization (after tax) 11 11 12 - -----------------------------------------------------------------------------------------
Key has completed several mergers, acquisitions and divestitures during the three-year period shown in this table. One or more of these transactions may have had a significant effect on Key's results, making it difficult to compare results from one year to the next. Note 3 ("Mergers, Acquisitions and Divestitures"), which begins on page 60, has specific information about the business combinations and divestitures that Key completed in the past three years to help you understand how those transactions may have impacted Key's financial condition and results of operations. (a) This ratio, which measures the extent to which recurring revenues are absorbed by operating expenses, is calculated as follows: noninterest expense (excluding certain nonrecurring charges and the amortization of goodwill and non-qualifying intangibles) divided by the sum of taxable-equivalent net interest income and noninterest income (excluding net securities transactions, gains from certain divestitures and certain nonrecurring charges). [LOGO-KEYCORP] 29 6 KEY CAPITAL PARTNERS offers asset management, wealth management, private banking, brokerage, investment banking, capital markets, and insurance products and services. This section summarizes the financial performance of each line of business and its most recent strategic developments. To better understand the discussion below concerning each line of business, see Note 4 ("Line of Business Results"), which begins on page 61 and describes the activities and financial results of each line of business in greater detail. Figure 4 shows Key's net income (loss) by line of business for each of the past three years. FIGURE 4 NET INCOME (LOSS) BY LINE OF BUSINESS
Change 1999 vs 1998 ----------------------- YEAR ENDED DECEMBER 31, 1999 1998 1997 AMOUNT PERCENT dollars in millions - ---------------------------------------------------------------------------------------------------------------------------------- Key Retail Banking $ 344 $319 $374 $ 25 7.8% Key Specialty Finance 165 126 84 39 31.0 Key Corporate Capital 434 378 318 56 14.8 Key Capital Partners(a) 107 102 55 5 4.9 Treasury and Other (29) 38 53 (67) N/M - ---------------------------------------------------------------------------------------------------------------------------------- Total segments 1,021 963 884 58 6.0 Reconciling items 86 33 35 53 160.6 - ---------------------------------------------------------------------------------------------------------------------------------- Total net income $1,107 $996 $919 $111 11.1% ====== ==== ==== ==== ====== - ----------------------------------------------------------------------------------------------------------------------------------
(a) Noninterest income and expense attributable to Key Capital Partners may be assigned to either Key Corporate Capital or Key Retail Banking if one of those lines is principally responsible for maintaining the relationship with the client that used Key Capital Partners' products and services. Key Capital Partners had net income of $157 million in 1999, $149 million in 1998, and $88 million in 1997 before it assigned some of its income and expense. N/M = Not Meaningful KEY RETAIL BANKING Key Retail Banking's primary operating units are retail banking and small business lending. During 1999, strategic efforts focused on strengthening sales-generating capabilities and managing costs by making branch-based services more efficient. In particular, our efforts centered on cross-selling, streamlining deposit product offerings and improving the deposit pricing structure. Management's long-term goal is to achieve annual pre-tax earnings growth of at least 10% in the retail banking unit. Pre-tax earnings for the unit rose 9% in 1999, exceeding the 8% target set for the year. Net income for Key Retail Banking as a whole was $344 million in 1999, or approximately 31% of Key's consolidated earnings. In comparison, net income was $319 million in 1998, or approximately 32% of consolidated earnings. The increase in net income reflects growth in net interest income and a decline in noninterest expense. These factors were partially offset by a decrease in noninterest income and a slightly higher provision for loan losses. In 1998, net income increased principally because of higher noninterest income related to various investment banking and capital markets activities and reduced noninterest expense. Net interest income rose by $25 million from 1998, primarily because of a moderate increase in loans and higher interest rate spreads used in determining the credit for deposits generated by Key Retail Banking. These factors more than offset the impact of a lower deposit base. In particular, core deposits (which are a fairly inexpensive source of funding) have declined, in part because Key continues to divest branch offices such as the Long Island franchise sold in 1999 and the 46 branch offices sold in 1998. Key has compensated for the growing disparity between the demand for loans and the availability of deposits to fund those loans by using funding alternatives such as borrowing in the capital markets or securitizing and selling loans. However, we initiate securitizations selectively since they are more expensive than collecting and maintaining deposits and are dependent on favorable market conditions. Noninterest expense decreased by $25 million from 1998, primarily due to lower personnel expense. This reflects a decrease in the number of employees and a lower level of incentive compensation. Noninterest income was down $6 million from 1998. Increases in service charges on deposit accounts, trust and asset management income, and loan fees were more than offset by the reduced amount of income we derived from various investment banking and capital markets products and services provided by the Key Capital Partners line of business in 1999. The provision for loan losses increased by $1 million in response to a slightly higher level of net charge-offs in the small business lending unit of Key Retail Banking. KEY SPECIALTY FINANCE Net income for Key Specialty Finance was $165 million in 1999, or approximately 15% of Key's consolidated earnings. In comparison, net income was $126 million in 1998, or approximately 13% of consolidated earnings. Financial performance improved primarily because net interest income and noninterest income increased while the provision for loan losses was slightly reduced. These positive factors were partially offset by an increase in noninterest expense. Net income in 1998 increased as a result of strong loan growth and higher noninterest income. A primary source of the 1998 increase in revenue was the acquisition of Champion Mortgage Co., Inc. in August 1997. Because the acquisition of Champion was accounted for as a purchase, 1997 results include only four months of Champion's activity, while 1998 results reflect a full year. Net interest income increased by $61 million in 1999, primarily because average loans outstanding rose 7% from 1998. The increase in loans (which occurred despite the securitizations discussed below) reflects continued strong growth in the home equity and automobile lease financing portfolios. Another factor contributing to loan growth was Key's April 1998 acquisition of an $805 million marine/recreational vehicle installment loan portfolio. Although loans increased, Key was able to make a slight reduction in the provision for loan losses because of improvement in consumer credit quality. Virtually all of the $52 million increase in noninterest income from 1998 to 1999 is attributable to gains resulting from securitizations. During 1999, Key securitized and sold an aggregate $3.4 billion of education, home equity 30 [LOGO-KEYCORP] 7 and automobile loans. Starting in 2000, we intend to de-emphasize our practice of securitizing and selling home equity loans originated by Champion Mortgage Co., Inc., our home equity finance affiliate. We may continue to securitize these loans without then selling them. By retaining these loans on the balance sheet, we intend to replace over time the earnings capacity previously provided by the credit card portfolio, which was sold in January 2000. In 1999, net income attributable to the credit card portfolio was approximately $39 million. For more information about the sale of the credit card portfolio, see Note 3 ("Mergers, Acquisitions and Divestitures"), which begins on page 60. We expect that the change in our home equity loan securitization practice will reduce Key's 2000 diluted earnings per common share by approximately $.08. For more information about Key's loan securitization activities, see the section entilted "Loans," which begins on page 42. Noninterest expense rose $52 million from 1998, due in large part to increases in personnel expense, depreciation and amortization expense associated with loan servicing, and marketing costs incurred to expand the home equity business. KEY CORPORATE CAPITAL Net income for Key Corporate Capital was $434 million in 1999, or approximately 39% of Key's consolidated earnings. In comparison, net income was $378 million in 1998, or approximately 38% of consolidated earnings. The 1999 increase in net income derived primarily from two sources. First, total average loans increased by 16%, generating higher net interest income. This includes strong increases in the real estate construction, lease financing, structured finance, healthcare and media portfolios. Second, noninterest income increased by $92 million, primarily due to higher income from loan fees, service charges on deposit accounts, various investment banking and capital markets activities and a $13 million gain from the sale of Key's interest in a joint venture with Compaq Capital Corporation. In 1998, net income increased because of a 24% increase in total average loans and growth in noninterest income, led by various investment banking and capital markets activities, and trust and asset management. The $182 million increase in total revenue in 1999 was partially offset by a $37 million increase in the provision for loan losses. Revenue was also offset by a $54 million increase in noninterest expense, primarily because of higher personnel expense, depreciation and amortization expense, and costs associated with investment banking and capital markets activities. KEY CAPITAL PARTNERS Net income for Key Capital Partners was $107 million in 1999, compared with $102 million in 1998. In each of these years, Key Capital Partners' net income represents approximately 10% of Key's consolidated earnings. If personnel in another line of business are responsible for maintaining a relationship with a client that uses the products and services offered by Key Capital Partners, that line of business is assigned the income and expense arising from our work for the client. As a result, a significant amount of Key Capital Partners' noninterest income and expense is reported under either Key Corporate Capital or Key Retail Banking. If Key Capital Partners had not assigned income and expense items to other lines of business, net income for this line would have been $157 million in 1999 (representing approximately 14% of Key's consolidated earnings) and $149 million in 1998 (representing approximately 15% of Key's consolidated earnings). Total revenue for Key Capital Partners rose by $342 million ($352 million prior to revenue sharing) from 1998. The main source of this improvement is the October 1998 acquisition of McDonald. Because McDonald was accounted for as a purchase, 1998 results include only two months of McDonald's activity, while 1999 results reflect a full year. Revenue also increased because we expanded our base of trust and asset management clients, repriced certain services and earned higher fees from existing accounts that grew while the securities markets were particularly strong. In 1998, the largest contributions to the increase in net income came from investment banking and capital markets activities, and trust and asset management. The growth of these revenue components was bolstered by the McDonald acquisition. Noninterest expense was up $332 million from 1998. The principal components of this increase were increased personnel, depreciation and goodwill amortization expense resulting from the first full-year impact of the McDonald acquisition. TREASURY AND OTHER Treasury and Other includes the Treasury, Electronic Commerce and Deposit Marketing business units, as well as the net effect of funds transfer pricing. In 1999, this segment generated a net loss of $29 million, compared with net income of $38 million in 1998. The $67 million decline is primarily due to a $75 million ($47 million after tax) decrease in the net effect of funds transfer pricing. During the latter part of 1998 and continuing through 1999, the cost of maintaining sufficient liquidity was higher than normal. Since this incremental increase in the cost of funds was not indicative of the normal funding costs for Key's major lines of business, it was not allocated to those lines, but instead was retained in the Treasury unit. Net income declined by $15 million from 1997 to 1998 primarily because net interest income fell due to a prolonged period of flatness in the yield curve and greater reliance placed on higher-cost funds. RECONCILING ITEMS The "reconciling items" shown in Figure 4 reflect certain nonrecurring items and charges related to unallocated nonearning assets of corporate support functions. These items generally are included in noninterest income or noninterest expense. In 1999, noninterest income includes a $194 million ($122 million after tax) gain from branch divestitures, a $134 million ($85 million after tax) gain from the sale of Key's 20% interest in Electronic Payment Services, Inc., a $15 million ($9 million after tax) gain from the sale of Key's interest in Concord EFS, Inc. and a final $14 million ($9 million after tax) gain from the sale of Key's 51% interest in Key Merchant Services, LLC. In 1998, noninterest income includes a $50 million ($31 million after tax) gain from the sale of Key's 51% interest in Key Merchant Services and branch divestiture gains of $39 million ($22 million after tax). In 1997, noninterest income includes branch divestiture gains of $151 million ($97 million after tax). Noninterest expense in 1999 includes restructuring and other special charges of $152 million ($96 million after tax) related to Key's profitability enhancement initiative, special contributions of $23 million ($15 million after tax) made to the charitable foundation that Key sponsors and $42 million ($26 million after tax) of various other nonrecurring charges. In 1997, noninterest expense includes a charge of $50 million ($33 million after tax) related to the disposal of excess real estate. [LOGO-KEYCORP] 31 8
FIGURE 5 AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND YIELDS/RATES YEAR ENDED DECEMBER 31, 1999 1998 ------------------------------ ------------------------------------------- AVERAGE YIELD/ AVERAGE YIELD/ dollars in millions BALANCE INTEREST RATE BALANCE INTEREST RATE - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Loans(a,b) Commercial, financial and agricultural $ 17,695 $ 1,350 7.63% $ 15,413 $ 1,251 8.12% Real estate - commercial mortgage 6,946 580 8.34 7,080 627 8.86 Real estate - construction 4,076 343 8.41 2,866 254 8.86 Commercial lease financing 6,092 445 7.31 4,822 359 7.45 - ----------------------------------------------------------------------------------------------------------------------------------- Total commercial loans 34,809 2,718 7.81 30,181 2,491 8.25 Real estate - residential 4,479 338 7.54 5,440 422 7.76 Home equity 7,548 645 8.54 6,353 557 8.77 Credit card 997 152 15.28 1,438 212 14.74 Consumer - direct 2,457 238 9.69 2,139 228 10.66 Consumer - indirect lease financing 2,922 236 8.07 2,024 171 8.45 Consumer - indirect other 6,584 608 9.24 6,647 603 9.07 - ----------------------------------------------------------------------------------------------------------------------------------- Total consumer loans 24,987 2,217 8.87 24,041 2,193 9.12 Loans held for sale 2,605 228 8.74 3,200 262 8.19 - ----------------------------------------------------------------------------------------------------------------------------------- Total loans 62,401 5,163 8.27 57,422 4,946 8.61 Taxable investment securities 444 15 3.33 282 12 4.26 Tax-exempt investment securities(a) 535 46 8.60 801 67 8.36 - ----------------------------------------------------------------------------------------------------------------------------------- Total investment securities 979 61 6.21 1,083 79 7.29 Securities available for sale(a,c) 6,403 425 6.58 6,610 450 6.85 Short-term investments 1,873 78 4.19 1,563 84 5.37 - ----------------------------------------------------------------------------------------------------------------------------------- Total earning assets 71,656 5,727 7.99 66,678 5,559 8.34 Allowance for loan losses (911) (888) Other assets 10,201 9,491 - ----------------------------------------------------------------------------------------------------------------------------------- $ 80,946 $ 75,281 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Money market deposit accounts $ 12,950 390 3.01 $ 11,650 382 3.28 Savings deposits 2,716 44 1.63 3,225 59 1.83 NOW accounts 791 12 1.45 1,215 20 1.65 Certificates of deposit ($100,000 or more) 4,257 223 5.24 3,520 194 5.51 Other time deposits 11,969 595 4.97 12,240 654 5.34 Deposits in foreign office 823 41 5.00 913 50 5.48 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 33,506 1,305 3.90 32,763 1,359 4.15 Federal funds purchased and securities sold under repurchase agreements 4,856 220 4.53 6,635 342 5.15 Bank notes and other short-term borrowings 7,912 426 5.38 7,975 459 5.76 Long-term debt, including capital securities(d) 16,473 957 5.82 11,175 681 6.09 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 62,747 2,908 4.63 58,548 2,841 4.85 Noninterest-bearing deposits 8,474 8,509 Other liabilities 3,464 2,681 Preferred stock -- -- Common shareholders' equity 6,261 5,543 - ----------------------------------------------------------------------------------------------------------------------------------- $ 80,946 $ 75,281 ======== ======== Interest rate spread (TE) 3.36 3.49 Net interest income (TE) and net interest margin (TE) $ 2,819 3.93% $ 2,718 4.08% ======== ==== ========== ==== Taxable-equivalent adjustment(a) $ 32 $ 34 - ----------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1997 ----------------------------------- AVERAGE YIELD/ dollars in millions BALANCE INTEREST RATE - ---------------------------------------------------------------------------------------------- ASSETS Loans(a,b) Commercial, financial and agricultural $12,911 $1,126 8.72% Real estate - commercial mortgage 7,101 663 9.34 Real estate - construction 1,945 188 9.67 Commercial lease financing 3,310 228 6.89 - ---------------------------------------------------------------------------------------------- Total commercial loans 25,267 2,205 8.73 Real estate - residential 6,192 524 8.46 Home equity 5,180 469 9.05 Credit card 1,710 256 14.97 Consumer - direct 2,238 246 10.99 Consumer - indirect lease financing 1,156 99 8.56 Consumer - indirect other 7,023 633 9.01 - ---------------------------------------------------------------------------------------------- Total consumer loans 23,499 2,227 9.48 Loans held for sale 2,649 198 7.47 - ---------------------------------------------------------------------------------------------- Total loans 51,415 4,630 9.02 Taxable investment securities 247 12 4.83 Tax-exempt investment securities(a) 1,227 97 7.91 - ---------------------------------------------------------------------------------------------- Total investment securities 1,474 109 7.39 Securities available for sale(a,c) 7,629 527 6.93 Short-term investments 782 40 5.12 - ---------------------------------------------------------------------------------------------- Total earning assets 61,300 5,306 8.66 Allowance for loan losses (875) Other assets 8,525 - ---------------------------------------------------------------------------------------------- $68,950 ======= LIABILITIES AND SHAREHOLDERS' EQUITY Money market deposit accounts $10,897 333 3.06 Savings deposits 4,319 94 2.18 NOW accounts 1,560 32 2.05 Certificates of deposit ($100,000 or more) 3,376 190 5.63 Other time deposits 13,273 715 5.39 Deposits in foreign office 1,812 98 5.41 - ---------------------------------------------------------------------------------------------- Total interest-bearing deposits 35,237 1,462 4.15 Federal funds purchased and securities sold under repurchase agreements 6,942 359 5.17 Bank notes and other short-term borrowings 4,741 283 5.97 Long-term debt, including capital securities(d) 6,554 413 6.30 - ---------------------------------------------------------------------------------------------- Total interest-bearing liabilities 53,474 2,517 4.71 Noninterest-bearing deposits 8,536 Other liabilities 2,074 Preferred stock -- Common shareholders' equity 4,866 - ---------------------------------------------------------------------------------------------- $68,950 ======= Interest rate spread (TE) 3.95 Net interest income (TE) and net interest margin (TE) $2,789 4.54% ====== ==== Taxable-equivalent adjustment(a) $44 - ---------------------------------------------------------------------------------------------- (a) Interest income on tax-exempt securities and loans has been adjusted to a taxable-equivalent basis using the statutory Federal income tax rate of 35%. (b) For purposes of these computations, nonaccrual loans are included in average loan balances. (c) Yield is calculated on the basis of amortized cost. (d) Rate calculation excludes ESOP debt. (e) For 1994, consumer-direct and consumer-indirect lease financing are included in consumer-indirect other. TE = Taxable Equivalent N/M = Not Meaningful
32 KEYCORP AND SUBSIDIARIES 9
1996 1995 1994 - ------------------------------ ------------------------------------- --------------------------------------------- AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE - ----------------------------------------------------------------------------------------------------------------------------------- $11,970 $1,070 8.94% $11,252 $1,027 9.13% $ 9,762 $ 856 8.77% 7,039 648 9.21 7,115 678 9.53 6,396 553 8.65 1,631 166 10.18 1,416 148 10.45 1,207 107 8.86 2,372 148 6.24 1,876 125 6.66 1,384 94 6.79 - ----------------------------------------------------------------------------------------------------------------------------------- 23,012 2,032 8.83 21,659 1,978 9.13 18,749 1,610 8.59 7,224 593 8.21 9,554 762 7.98 8,699 653 7.51 4,214 378 8.97 3,600 333 9.25 2,144 170 7.93 1,665 243 14.59 1,386 210 15.15 1,361 194 14.25 2,183 246 11.27 2,381 253 10.63 See note(e) See note(e) See note(e) 671 56 8.35 582 44 7.56 See note(e) See note(e) See note(e) 6,819 604 8.86 6,479 567 8.75 10,239 884 8.63 - ----------------------------------------------------------------------------------------------------------------------------------- 22,776 2,120 9.31 23,982 2,169 9.04 22,443 1,901 8.47 2,428 198 8.15 2,371 201 8.48 2,271 160 7.05 - ----------------------------------------------------------------------------------------------------------------------------------- 48,216 4,350 9.02 48,012 4,348 9.06 43,463 3,671 8.45 246 14 5.69 7,807 521 6.67 7,664 507 6.61 1,425 114 8.00 1,482 126 8.47 1,579 136 8.63 - ----------------------------------------------------------------------------------------------------------------------------------- 1,671 128 7.66 9,289 647 6.96 9,243 643 6.96 7,423 495 6.69 2,103 136 6.40 4,066 228 5.50 535 28 5.23 799 47 5.91 144 7 4.53 - ----------------------------------------------------------------------------------------------------------------------------------- 57,845 5,001 8.65 60,203 5,178 8.60 56,916 4,549 7.99 (872) (868) (821) 7,846 7,307 6,466 - ----------------------------------------------------------------------------------------------------------------------------------- $64,819 $66,642 $62,561 ======= ======= ======= $10,211 311 3.05 $ 7,161 261 3.64 $ 7,197 197 2.74 5,604 138 2.46 6,506 174 2.68 7,697 205 2.66 2,438 48 1.97 5,444 110 2.02 5,559 106 1.91 3,377 199 5.89 3,677 222 6.03 2,992 146 4.88 13,723 720 5.25 14,466 783 5.41 12,338 544 4.41 996 53 5.32 2,182 155 7.12 3,015 127 4.21 - ----------------------------------------------------------------------------------------------------------------------------------- 36,349 1,469 4.04 39,436 1,705 4.32 38,798 1,325 3.41 5,843 295 5.05 5,623 315 5.60 5,850 243 4.16 3,279 197 6.01 3,362 204 6.05 1,930 91 4.71 4,324 276 6.38 3,895 261 6.84 2,234 138 6.35 - ----------------------------------------------------------------------------------------------------------------------------------- 49,795 2,237 4.49 52,316 2,485 4.75 48,812 1,797 3.69 8,374 8,129 8,046 1,644 1,373 1,104 79 160 160 4,927 4,664 4,439 - ----------------------------------------------------------------------------------------------------------------------------------- $64,819 $66,642 $62,561 ======= ======= ======= 4.16 3.85 4.30 $2,764 4.78% $2,693 4.47% $ 2,752 4.83% ====== ==== ====== ==== ====== ==== $50 $57 $59 - ----------------------------------------------------------------------------------------------------------------------------------- COMPOUND ANNUAL RATE OF CHANGE (1994-1999) - --------------------------------- AVERAGE BALANCE INTEREST - --------------------------------- 12.6% 9.5% 1.7 1.0 27.6 26.2 34.5 36.5 - ---------------------------------- 13.2 11.0 (12.4) (12.3) 28.6 30.6 (6.0) (4.8) See note(e) See note(e) See note(e) See note(e) N/M N/M - --------------------------------- 2.2 3.1 2.8 7.3 - --------------------------------- 7.5 7.1 (43.4) (50.5) (19.5) (19.5) - --------------------------------- (36.2) (37.6) 9.5 13.3 67.0 62.0 - --------------------------------- 4.7 4.7 2.1 9.5 - --------------------------------- 5.3 12.5 14.6 (18.8) (26.5) (32.3) (35.3) 7.3 8.8 (.6) 1.8 (22.9) (20.2) - --------------------------------- (2.9) (.3) (3.7) (2.0) 32.6 36.2 49.1 47.3 - --------------------------------- 5.2 10.1 1.0 25.7 N/M 7.1 - --------------------------------- 5.3 .5% (11.5)% - ---------------------------------
KEYCORP AND SUBSIDIARIES 33 10 RESULTS OF OPERATIONS NET INTEREST INCOME Key's principal source of earnings is net interest income, which comprises interest and loan-related fee income less interest expense. There are several factors that affect net interest income: - - the volume, pricing, mix, and maturity of earning assets and interest-bearing liabilities; - - the use of off-balance sheet instruments to manage interest rate risk; - - interest rate fluctuations; and - - asset quality. To make it easier to compare results from one period to the next, as well as the yields on various types of earning assets, we present all net interest income on a "taxable-equivalent basis." In other words, if we earn $100 of tax-exempt income, we present those earnings at a higher amount (specifically, $154) that - -- if taxed at the statutory Federal income tax rate of 35% -- would amount to $100. Figure 5 shows various components of the balance sheet that affect interest income and expense, and their respective yields or rates over the past six years. In the first quarter of 1999, management reclassified Key's tax-advantaged preferred securities from "mezzanine equity" to "long-term debt." The related distributions were also reclassified from "noninterest expense" to "interest expense." This action was taken in order to allow these instruments to continue to qualify for hedge accounting in accordance with guidelines issued by the Securities and Exchange Commission in December 1998. We restated prior years to conform to that presentation. As a result, the net interest margin (which is net interest income divided by average earning assets) for 1998 is now 10 basis points less than the net interest margin previously reported for that year. The net interest margin for 1997 is 8 basis points less. Net interest income for 1999 was $2.8 billion, representing a $101 million, or 4% increase, from 1998. This improvement reflected a 7% increase in average earning assets (primarily commercial loans) to $71.7 billion, which more than offset a 15 basis point reduction in the net interest margin to 3.93%. In 1998, net interest income was $2.7 billion, down $71 million, or 3%, from the prior year. Average earning assets increased by 9% in 1998, but this growth did not compensate for a decrease of 46 basis points in the net interest margin. NET INTEREST MARGIN. There are several reasons that the net interest margin has been declining in recent years: - - increased competition impacts the rates that we can charge for loans and the rates that we must pay for deposits; - - we are relying more on higher-cost funds to support the increased demand for loans; - - core deposit growth has not kept pace with loan growth due in part to branch divestitures and client preferences for other investment alternatives; - - we have intensified our efforts to grow higher-priced deposits, such as money market deposit accounts and time deposits, to maintain our competitive position and to increase our core deposit base; and - - we have increased our trading portfolio assets with relatively low interest rate spreads in connection with various capital markets activities. In 1998, the effects of these factors were pronounced during an unusually (by historical standards) prolonged period of flatness in the yield curve. In other words, starting in the third quarter of 1997, a graph plotting the yield on various fixed-rate securities against their respective terms to maturity would have generated an almost horizontal line. Typically, the yield curve slopes upward because investors demand higher yields to entice them to buy long-term securities. The yields and rates on many of our earning assets and funding sources are based on the yields on fixed-rate securities with similar terms to maturity. Since most of our earning assets typically have longer maturities than the liabilities that support them, a flat yield curve will result in lower spreads between their respective yields. INTEREST EARNING ASSETS. Average earning assets for 1999 totaled $71.7 billion, which was $5.0 billion, or 7%, higher than the 1998 level. This increase came principally from a $5.0 billion, or 9%, increase in loans. The largest growth occurred in the commercial loan portfolio. The fourth quarter of 1999 marked the eleventh consecutive quarter in which the commercial loan portfolio has achieved annualized growth exceeding 10%. During 1999, we securitized and sold loans aggregating $3.4 billion as part of our strategy to diversify Key's funding sources, but that strategy moderated the growth of the consumer loan portfolio. Starting in 2000, less emphasis will be placed on the securitization and sale of the home equity loans generated by our home equity finance affiliate. We may continue to securitize these loans without selling them. By retaining these loans on Key's balance sheet, we intend to replace over time the earnings capacity lost with the divestiture of our $1.4 billion credit card portfolio. Average earning assets in 1998 totaled $66.7 billion, which was $5.4 billion, or 9%, higher than the prior year. This increase came principally from a $6.0 billion, or 12%, increase in loans. More than 80% of that increase came from the commercial portfolio, but the home equity and indirect consumer loan portfolios also grew. In particular, Key acquired an $805 million marine/recreational vehicle installment loan portfolio in April 1998. The increase in loans relative to the prior year also reflects the fact that, in 1998, we relied less on loan securitizations as a funding option. Total loans securitized and sold in 1998 amounted to $300 million, compared with $2.7 billion in 1997. INTEREST RATE SWAPS AND CAPS. As discussed in the following section entitled "Market risk management," Key uses portfolio interest rate swaps and caps to help manage its interest rate sensitivity position. Interest rate swaps and caps are complicated instruments, but briefly: - - INTEREST RATE SWAPS are contracts under which two parties agree to exchange interest payment streams that are calculated on agreed-upon amounts (known as "notional amounts"). For example, party A will pay interest at a fixed rate and receive interest at a variable rate from party B. Key generally uses interest rate swaps to mitigate its exposure to interest rate risk on certain loans, securities, deposits, short-term borrowings and long-term debt. - - INTEREST RATE CAPS are contracts that provide for the holder to be compensated based on an agreed-upon notional amount when a benchmark interest rate exceeds a specified level (known as the "strike rate"). Key uses interest rate caps to manage the risk of adverse movements in interest rates on certain of our long-term debt and short-term borrowings. A cap limits Key's exposure to interest rate increases; caps do not have any impact if market rates decline. The notional amount -- or face value -- of interest rate swaps increased to $18.7 billion at the end of 1999, compared with $12.4 billion at year-end 1998. At the same time, the notional amount of interest rate caps decreased by $1.6 billion to $2.3 billion. Interest rate swaps (including the impact of both the spread on the swap portfolio and the amortization of deferred gains and losses resulting from terminated swaps) and interest rate caps contributed $16 million to net interest income in 1999 and $23 million in 1998. 34 [LOGO-KEYCORP] 11 For more information about how Key uses interest rate swaps and caps to manage its balance sheet, please see the next section, entitled "Market risk management." Figure 6 shows how changes in yields or rates and average balances in 1999 and 1998 affected net interest income. You can find more discussion of the changes in earning assets and funding sources in the section entitled "Financial Condition," which begins on page 42. FIGURE 6 COMPONENTS OF NET INTEREST INCOME CHANGES
1999 vs 1998 1998 vs 1997 ------------------------------- ----------------------------------- AVERAGE YIELD/ NET AVERAGE YIELD/ NET IN MILLIONS VOLUME RATE CHANGE VOLUME RATE CHANGE - -------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans $417 $(200) $217 $524 $(208) $316 Taxable investment securities 6 (3) 3 2 (2) -- Tax-exempt investment securities (23) 2 (21) (35) 5 (30) Securities available for sale (14) (11) (25) (69) (8) (77) Short-term investments 15 (21) (6) 42 2 44 - -------------------------------------------------------------------------------------------------------------------------------- Total interest income (taxable equivalent) 401 (233) 168 464 (211) 253 INTEREST EXPENSE Money market deposit accounts 41 (33) 8 24 25 49 Savings deposits (9) (6) (15) (21) (14) (35) NOW accounts (7) (1) (8) (6) (6) (12) Certificates of deposit ($100,000 or more) 39 (10) 29 8 (4) 4 Other time deposits (14) (45) (59) (55) (6) (61) Deposits in foreign office (5) (4) (9) (49) 1 (48) - -------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 45 (99) (54) (99) (4) (103) Federal funds purchased and securities sold under repurchase agreements (84) (38) (122) (16) (1) (17) Bank notes and other short-term borrowings (4) (29) (33) 186 (10) 176 Long-term debt, including capital securities 309 (33) 276 282 (14) 268 - -------------------------------------------------------------------------------------------------------------------------------- Total interest expense 266 (199) 67 353 (29) 324 - -------------------------------------------------------------------------------------------------------------------------------- Net interest income (taxable equivalent) $135 $ (34) $101 $111 $(182) $ (71) ==== ===== ==== ==== ===== ===== - --------------------------------------------------------------------------------------------------------------------------------
The change in interest not due solely to volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each. MARKET RISK MANAGEMENT "Market risk" is the exposure to economic loss that arises when the value of a financial instrument adversely changes due to variations in interest rates, foreign exchange rates, equity prices (the value of equity securities held as assets), or other market-driven rates or prices. For example, the value of a fixed-rate bond will decline if market interest rates increase because the bond will become a less attractive investment. Similarly, the value of the U.S. dollar regularly fluctuates in relation to other currencies. Key is not affected in any material way by changes in foreign exchange rates or the prices of various equity securities held as assets. ASSET AND LIABILITY MANAGEMENT Key's Asset/Liability Management Policy Committee has established guidelines for a program to measure and manage interest rate risk. This committee is also responsible for approving Key's asset/liability management policies, overseeing the formulation and implementation of strategies to improve balance sheet positioning and earnings, and reviewing Key's interest rate sensitivity position. MEASUREMENT OF SHORT-TERM INTEREST RATE EXPOSURE. The primary tool that management uses to measure and manage interest rate risk is a net interest income simulation model. These simulations estimate the impact that various changes in the overall level of interest rates over one and two-year time horizons would have on net interest income. The results help Key develop strategies for managing exposure to interest rate risk. Like any forecasting technique, interest rate simulation modeling is based on a large number of assumptions. In this case, the assumptions relate primarily to loan and deposit growth, asset and liability prepayments, interest rates and on- and off-balance sheet management strategies. Management believes that both individually and in the aggregate the assumptions we make are reasonable. Nevertheless, the simulation modeling process only produces a sophisticated estimate, not a precise calculation of exposure. Key's guidelines for risk management require management to take preventive measures if a gradual 200 basis point increase or decrease in short-term rates over the next twelve months would affect net interest income over the same period by more than 2%. Key has been operating well within these guidelines. As of December 31, 1999, based on the results of our simulation model, Key would expect net interest income to increase by approximately $25 million if short-term interest rates gradually decrease. Conversely, if short-term interest rates gradually increase, net interest income would be expected to decrease by approximately $22 million. MEASUREMENT OF LONG-TERM INTEREST RATE EXPOSURE. Key uses an economic value of equity model to complement short-term interest rate risk analysis. The benefit of this model is that it measures exposure to interest rate changes over time frames that are longer than two years. The economic value of Key's equity is determined by aggregating the present value of projected future cash flows for asset, liability, and off-balance sheet positions based on the current yield curve. Economic value analysis has several limitations. For example, the economic values of asset, liability, and off-balance sheet positions do not represent the true fair values of the positions, since economic values do not consider factors such as credit risk and liquidity. In addition, we must estimate cash flow for assets and liabilities with indeterminate maturities. Moreover, the future structure of the balance sheet derived from [LOGO-KEYCORP] 35 12 ongoing loan and deposit activity by Key's core businesses is not factored into present value calculations. Finally, the analysis requires assumptions about events that span several years. Despite its limitations, the economic value of equity model does provide management with a relatively sophisticated tool for evaluating the longer-term effect of possible interest rate movements. Key's guidelines for risk management require management to take preventive measures if an immediate 200 basis point increase or decrease in interest rates would decrease the economic value of equity by more than 20%. Key has been operating well within these guidelines. OTHER SOURCES OF INTEREST RATE EXPOSURE. Management uses the results of short-term and long-term interest rate exposure models to formulate strategies to improve balance sheet positioning, earnings, or both within the bounds of Key's interest rate risk, liquidity, and capital guidelines. We also periodically measure the risk to earnings and economic value arising from various other pro forma changes in the overall level of interest rates. The variety of interest rate scenarios modeled, and their potential impact on earnings and economic value, quantify the level of interest rate exposure arising from option risk, basis risk and gap risk. - - A financial instrument presents "OPTION RISK" when one party can take advantage of changes in interest rates without penalty. For example, when interest rates decline, borrowers may choose to prepay fixed rate loans by refinancing at a lower rate. Such a prepayment gives the lender a return on its investment (the principal plus some interest), but unless there is a prepayment penalty, that return will not be as much as the loan would have generated had payments been received as originally scheduled. Floating rate loans that are capped against potential interest rate increases and deposits that can be withdrawn on demand also present option risk. - - One approach that Key uses to manage interest rate risk is to offset floating rate liabilities (such as deposits) with floating rate assets (such as loans). That way, as our interest expense increases, so will our interest income. We face "BASIS RISK" when our floating-rate assets and floating-rate liabilities reprice in response to different market factors or indices. Under those circumstances, even if the assets and liabilities are all repricing at the same time, interest expense and interest income may not change by the same amount. - - We often use an interest-bearing liability to provide funding for an interest-earning asset. For example, Key may sell certificates of deposit and use the proceeds to make loans. That strategy presents "GAP RISK" if the related liabilities and assets do not mature or reprice at the same time. MANAGEMENT OF INTEREST RATE EXPOSURE. Key manages interest rate risk by using portfolio swaps and caps which modify the repricing or maturity characteristics of some of our assets and liabilities. The decision to use these instruments rather than securities, debt, or other on-balance sheet alternatives depends on many factors, including the mix and cost of funding sources, liquidity and capital requirements. In addition, management considers interest rate implications when adding to Key's securities portfolio, issuing new debt and packaging loans for securitization. PORTFOLIO SWAPS AND CAPS. The estimated fair value of Key's portfolio swaps and caps decreased to a negative fair value of $42 million during 1999 from a positive fair value of $156 million at December 31, 1998. Fair value decreased over the past year because of the combined impact of a number of factors: interest rates increased, the implied forward yield curve steepened, and Key's "receive" fixed interest rate swap portfolio has a slightly longer average remaining maturity than the "pay" fixed portfolio. Key terminated swaps with a notional amount of $4.5 billion during 1999, resulting in a deferred gain of $18 million. Each swap termination was made in response to a unique set of circumstances. Generally speaking, though, the decision to terminate any swap contract is integrated strategically with asset and liability management and takes many factors into account. During 1999, management also used portfolio rate locks and futures from time to time since Key relied more heavily on variable rate funding to support earning asset growth. Figure 7 summarizes Key's activity in portfolio swaps and caps for each of the last three years. For more information about these instruments, including the balance and remaining amortization period of Key's deferred swap gains and losses, see Note 18 ("Financial Instruments with Off-Balance Sheet Risk"), which begins on page 72. FIGURE 7 PORTFOLIO SWAPS AND CAPS ACTIVITY
RECEIVE FIXED PAY FIXED ----------------------- ---------------------- TOTAL INDEXED FORWARD- BASIS PORTFOLIO IN MILLIONS AMORTIZING CONVENTIONAL CONVENTIONAL STARTING SWAPS SWAPS CAPS TOTAL - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 $ 5,078 $ 3,505 $ 3,312 -- $ 400 $12,295 $ 973 $13,268 Additions -- 376 1,578 -- 1,110 3,064 2,625 5,689 Maturities -- 255 1,700 -- 400 2,355 203 2,558 Terminations 20 -- 200 -- -- 220 -- 220 Amortization 1,609 -- -- -- -- 1,609 -- 1,609 - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 3,449 3,626 2,990 -- 1,110 11,175 3,395 14,570 Additions -- 1,341 3,226 $ 616 2,592 7,775 1,050 8,825 Maturities -- 342 1,876 -- 830 3,048 570 3,618 Terminations 268 300 68 6 -- 642 -- 642 Forward-starting becoming effective -- -- 600 (600) -- -- -- -- Amortization 2,870 -- -- -- -- 2,870 -- 2,870 - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1998 311 4,325 4,872 10 2,872 12,390 3,875 $16,265 Additions -- 3,821 2,886 1,160 7,337 15,204 115 15,319 Maturities -- 1,289 1,631 24 1,300 4,244 1,725 5,969 Terminations -- 895 814 636 2,126 4,471 15 4,486 Forward-starting becoming effective -- -- 232 (232) -- -- -- -- Amortization 207 -- -- -- -- 207 -- 207 - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1999 $ 104 $ 5,962 $ 5,545 $ 278 $ 6,783 $18,672 $ 2,250 $20,922 ======= ======= ======= ======= ======= ======= ======= ======= - -----------------------------------------------------------------------------------------------------------------------------------
36 [LOGO-KEYCORP] 13 Figure 8 shows the notional amount and fair values of portfolio swaps and caps by interest rate management strategy. The fair value of an instrument at any given date represents the estimated income (if positive) or cost (if negative) that would be recognized if the instrument was sold at that date. However, because these instruments are used to alter the repricing or maturity characteristics of other assets and liabilities, the net unrealized gains and losses are not recognized separately in earnings. Rather, interest from swaps and caps is recognized on an accrual basis as an adjustment of the interest income or expense from the asset or liability being managed. FIGURE 8 PORTFOLIO SWAPS AND CAPS BY INTEREST RATE MANAGEMENT STRATEGY
DECEMBER 31, 1999 1998 ------------------------ ---------------------------- NOTIONAL FAIR NOTIONAL FAIR in millions AMOUNT VALUE AMOUNT VALUE - ----------------------------------------------------------------------------------------------------------------------------------- Convert variable-rate loans to fixed $ 1,254 $ (24) $ 1,526 $ 58 Convert fixed-rate loans to variable 587 14 909 (38) Convert fixed-rate securities to variable 316 18 -- -- Convert variable-rate deposits and short-term borrowings to fixed 1,100 14 2,378 (24) Convert fixed-rate deposits and short-term borrowings to variable 226 (6) 200 -- Convert variable-rate long-term debt to fixed 3,820 59 1,595 (6) Convert fixed-rate long-term debt to variable 4,586 (104) 2,910 169 Basis swaps-- foreign currency denominated debt 321 (23) 304 19 Basis swaps-- interest rate indices 6,462 3 2,568 -- - --------------------------------------------------------------------------------------------------------------------------------- Total portfolio swaps 18,672 (49) 12,390 178 Modify characteristics of variable-rate short-term borrowings 2,050 6 3,060 2 Modify characteristics of variable-rate long-term debt 200 1 565 -- Modify characteristics of capital securities remarketing -- -- 250 (24) - --------------------------------------------------------------------------------------------------------------------------------- Total portfolio caps, collars and corridors 2,250 7 3,875 (22) - --------------------------------------------------------------------------------------------------------------------------------- Total portfolio swaps, caps, collars and corridors $20,922 $ (42) $16,265 $156 ======= ===== ======= ==== - ---------------------------------------------------------------------------------------------------------------------------------
Figure 9 summarizes the expected average maturities of Key's portfolio swaps and caps at December 31, 1999. FIGURE 9 EXPECTED AVERAGE MATURITIES OF PORTFOLIO SWAPS AND CAPS
DECEMBER 31, 1999 RECEIVE FIXED PAY FIXED -------------------------- ------------------------- TOTAL CAPS INDEXED FORWARD- BASIS PORTFOLIO AND in millions AMORTIZING CONVENTIONAL CONVENTIONAL STARTING SWAPS SWAPS COLLARS TOTAL - --------------------------------------------------------------------------------------------------------------------------------- Mature in one year or less $104 $1,990 $ 729 -- $3,128 $ 5,951 $1,650 $ 7,601 Mature after one through five years -- 2,390 4,110 $240 3,655 10,395 600 10,995 Mature after five through ten years -- 982 350 -- -- 1,332 -- 1,332 Mature after ten years -- 600 356 38 -- 994 -- 994 - --------------------------------------------------------------------------------------------------------------------------------- Total portfolio swaps, caps and collars $104 $5,962 $5,545 $278 $6,783 $18,672 $2,250 $20,922 ==== ====== ====== ==== ====== ======= ====== ======= - ---------------------------------------------------------------------------------------------------------------------------------
TRADING PORTFOLIO RISK MANAGEMENT Key's trading portfolio includes interest rate swap contracts entered into to accommodate the needs of clients, other positions with third parties that are intended to mitigate the interest rate risk of client positions, foreign exchange contracts entered into to accommodate the needs of clients and financial assets and liabilities (trading positions) included in "other assets" and "other liabilities," respectively, on the balance sheet. For more information about off-balance sheet contracts, see Note 18 ("Financial Instruments with Off-Balance Sheet Risk"), which begins on page 72. Since the second half of 1997, management has been using a value at risk ("VAR") model to estimate the adverse effect of changes in interest and foreign exchange rates on the fair value of Key's trading portfolio. Using statistical methods, this model estimates the maximum potential one-day loss with 95% certainty. At year end, Key's aggregate daily VAR was $1.4 million compared with $1.6 million at year-end 1998. Aggregate daily VAR averaged less than $1.6 million for 1999, compared with an average of less than $.7 million during 1998. VAR modeling augments other controls that Key uses to mitigate the market risk exposure of the trading portfolio. These controls include loss and portfolio size limits that are based on market liquidity and the level of activity and volatility of trading products. NONINTEREST INCOME Noninterest income for 1999 totaled $2.3 billion, up $719 million, or 46%, from 1998. In each of the past three years, noninterest income has been affected by various nonrecurring items. The most significant of these items are shown in Figure 10 and include gains from branch divestitures, gains from other divestitures, net securities gains (including $15 million from the sale of Concord EFS, Inc. securities received in connection with the sale of Electronic Payment Services, Inc.) and certain nonrecurring charges. For more information on the divestitures, see Note 3 ("Mergers, Acquisitions and Divestitures"), which begins on page 60. [LOGO-KEYCORP] 37 14 Excluding nonrecurring items, core noninterest income in 1999 increased by $463 million, or 31%, from the prior year. On the same basis, core noninterest income in 1998 rose by $323 million, or 28%. Core noninterest income represented 41% of total core revenue in 1999, up from 36% in 1998, and 29% in 1997. One of management's long-term objectives is to increase core noninterest income as a percentage of total core revenue to 50%. The primary reason that core noninterest income improved so significantly in 1999 is that we achieved growth in all major fee-based product categories, with the exception of credit card fees. The strongest contributions came from investment banking and capital markets activities (up $115 million), trust and asset management (up $108 million) and brokerage income (up $85 million). These three revenue components grew primarily as a result of the October 1998 acquisition of McDonald, but the overall strength of the securities markets, new business and the repricing of certain services were also instrumental. In addition, 1999 results benefited from net gains of $83 million recognized when Key securitized and sold an aggregate $3.4 billion of education, home equity and automobile loans. Other factors made less substantial contributions to noninterest income, including a $27 million increase in letter of credit and loan fees and a $24 million increase in service charges on deposit accounts. In 1998, the increase in Key's core noninterest income was also bolstered by the McDonald acquisition, as significant contributions came from the same three product categories that showed the strongest growth in 1999. Figure 10 shows the major components of Key's noninterest income. For some of these components, the discussion that follows provides additional information, such as the composition of the component and the factors that may have caused it to change in 1999 and 1998. For detailed information about investment banking and capital markets income, and trust income and assets, see Figures 11 and 12, respectively. FIGURE 10 NONINTEREST INCOME
YEAR ENDED DECEMBER 31, CHANGE 1999 VS 1998 -------------------------- dollars in millions 1999 1998 1997 AMOUNT PERCENT - ---------------------------------------------------------------------------------------------------------------------------------- Trust and asset management income $ 443 $ 335 $ 266 $108 32.2% Investment banking and capital markets income 354 239 119 115 48.1 Service charges on deposit accounts 330 306 299 24 7.8 Brokerage income 156 71 54 85 119.7 Corporate owned life insurance income 107 104 85 3 2.9 Credit card fees 63 68 96 (5) (7.4) Net loan securitization gains (losses) 83 4 (28) 79 1,975.0 Other income: Letter of credit and loan fees 98 71 48 27 38.0 Electronic banking fees 58 47 38 11 23.4 Insurance income 52 40 34 12 30.0 Loan securitization servicing fees 28 31 16 (3) (9.7) Gains from sales of loans 32 50 23 (18) (36.0) Miscellaneous income 136 111 104 25 22.5 - ---------------------------------------------------------------------------------------------------------------------------------- Total other income 404 350 263 54 15.4 - ---------------------------------------------------------------------------------------------------------------------------------- Total core noninterest income 1,940 1,477 1,154 463 31.3 Gains from branch divestitures 194 39 151 155 397.4 Gain from sale of Electronic Payment Services, Inc. 134 -- -- 134 N/M Gains from sale of Key Merchant Services, LLC 14 50 -- (36) (72.0) Gain from sale of Compaq Capital Europe LLC and Compaq Capital Asia Pacific LLC 13 -- -- 13 N/M Net securities gains 29 9 1 20 222.2 Nonrecurring charges (30) -- -- (30) N/M - ---------------------------------------------------------------------------------------------------------------------------------- Total significant nonrecurring items 354 98 152 256 261.2 - ---------------------------------------------------------------------------------------------------------------------------------- Total noninterest income $2,294 $1,575 $1,306 $719 45.7% ====== ====== ====== ==== - ----------------------------------------------------------------------------------------------------------------------------------
N/M = Not Meaningful FIGURE 11 INVESTMENT BANKING AND CAPITAL MARKETS INCOME
YEAR ENDED DECEMBER 31, CHANGE 1999 VS 1998 -------------------------- dollars in millions 1999 1998 1997 AMOUNT PERCENT - ---------------------------------------------------------------------------------------------------------------------------------- Dealer trading and derivatives income $140 $ 93 $ 40 $ 47 50.5% Investment banking income 140 79 43 61 77.2 Equity capital income 44 45 19 (1) (2.2) Foreign exchange income 30 22 17 8 36.4 - ---------------------------------------------------------------------------------------------------------------------------------- Total investment banking and capital markets income $354 $239 $119 $115 48.1% ==== ==== ==== ==== - ----------------------------------------------------------------------------------------------------------------------------------
38 [LOGO-KEYCORP] 15 FIGURE 12 TRUST AND ASSET MANAGEMENT
CHANGE 1999 VS 1998 ------------------------- dollars in millions 1999 1998 1997 AMOUNT PERCENT - ---------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, Personal asset management and custody fees $188 $166 $145 $ 22 13.3% Institutional asset management and custody fees 93 90 75 3 3.3 Bond services 26 2 6 24 1,200.0 All other fees 136 77 40 59 76.6 - ---------------------------------------------------------------------------------------------------------------------------------- Total trust and asset management income $443 $335 $266 $108 32.2% ==== ==== ==== ==== dollars in billions - ---------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, Discretionary assets $ 72 $ 69 $ 60 $3 4.3% Non-discretionary assets 49 47 48 2 4.3 - --------------------------------------------------------------------------------------------------------------------------------- Total trust assets $121 $116 $108 $5 4.3% ==== ==== ==== ==== - ------------------------------------------------------------------------------------------------------------------------------
TRUST AND ASSET MANAGEMENT. Trust and asset management activities provide Key's largest source of noninterest income. At December 31, 1999, Key's bank, trust, and registered investment advisory subsidiaries had assets under discretionary management (excluding corporate trust assets) of $72 billion, compared with $69 billion at the end of 1998. Fees from investment advisory services accounted for approximately 41% of Key's total trust and asset management income in 1999, and 34% in 1998. BROKERAGE. Brokerage income was $156 million in 1999, compared with $71 million in 1998, and $54 million in 1997. Substantially all of the increase in 1999 came from commissions related to the trading of stocks and mutual funds. CORPORATE OWNED LIFE INSURANCE. Income from corporate owned life insurance, representing a tax-deferred increase in cash surrender values and tax-exempt death benefits, increased in 1999 primarily due to claims. In 1998, the increase was principally due to improved investment performance and expanded coverage. CREDIT CARD FEES. Credit card fees declined by $5 million in 1999, primarily as a result of Key's decision to de-emphasize this source of revenue. As previously mentioned, Key sold its credit card portfolio in January 2000. For more information about this transaction, see the section entitled "Highlights of Key's 1999 Performance," which begins on page 26, and Note 3 ("Mergers, Acquisitions and Divestitures"), which begins on page 60. In 1998, credit card fees declined by $28 million, primarily because Key sold $365 million of out-of-franchise credit card receivables in 1997. In addition, merchant credit card processing services revenue declined after Key sold 51% of Key Merchant Services, LLC (a credit card processing subsidiary) in the first quarter of 1998. LOAN SECURITIZATIONS. Key often securitizes and sells loans to generate funds. The extent to which we use securitizations is dependent upon whether conditions in the capital markets make them more attractive than other funding alternatives. Typically we securitize education, home equity, and automobile loans. We decide which loans to securitize based upon a number of specific factors as discussed in the section entitled "Loans," which begins on page 42. During 1999, we securitized and sold $3.4 billion of consumer loans, resulting in net gains of $83 million. On occasion Key's securitization strategy will cause us to recognize a loss in connection with removing assets (the package of securitized loans) from the balance sheet. The level of securitizations rose in 1999 because management wanted to diversify Key's funding sources and because we completed a securitization originally planned for the 1998 fourth quarter and then postponed. We securitized fewer loans in 1998 than we had in prior years because of instability in the capital markets in the second half of the year and the fact that other funding alternatives, such as issuing debt, were more cost-effective. For information about the type and volume of securitized loans that are either administered or serviced by Key and not recorded on the balance sheet, see the section entitled "Loans," which begins on page 42. GAINS FROM BRANCH DIVESTITURES. These gains were the result of the sale of branches in geographic areas where Key either did not hold a large enough market share to be competitive and to grow the business, or determined that growth opportunities were limited despite our good market share. Included are gains of $194 million from the sale of 28 offices in 1999, $39 million from the sale of 46 offices in 1998, and $151 million from the sale of 104 offices (including the Wyoming bank subsidiary) in 1997. GAINS FROM OTHER DIVESTITURES. In 1999, results include nonrecurring gains of $134 million from the sale of Key's interest in Electronic Payment Services, Inc. and $13 million from the sale of Key's interest in a joint venture with Compaq Capital Corporation. Also included is a final gain of $14 million that was recorded in connection with the 1998 sale of a 51% interest in Key Merchant Services, LLC. Key's 1998 results include $50 million of gains recognized in connection with the sale of a 51% interest in Key Merchant Services, LLC to NOVA Information Systems, Inc. The gains were recognized in two stages: $23 million was recognized in the first quarter at the time of closing, and $27 million was recognized in the fourth quarter after the transferred business achieved certain revenue-related performance targets. These gains were accompanied by related reductions in both merchant credit card processing services revenue and noninterest expense (primarily personnel). OTHER INCOME. The increase in other income in both 1999 and 1998 was largely due to higher loan fees resulting from Key's strong growth in loans in each of those years. In 1999, this growth was partially offset by an $18 million decline in gains from loan sales, due in part to the increase in interest rates. Loan sale gains increased by $27 million in 1998. [LOGO-KEYCORP] 39 16 NONINTEREST EXPENSE Noninterest expense for 1999 totaled $3.0 billion, compared with $2.5 billion for 1998. Significant nonrecurring items that affect the comparability of results over the past three years are shown in Figure 13. In 1999, these items include restructuring and other special charges of $152 million recorded in connection with strategic actions that Key is taking to improve operating efficiency and profitability. You can find more information about these charges under the heading "Restructuring and other special charges" on page 41. Also included in 1999 expense are other nonrecurring charges of $68 million. Among these charges are $23 million of charitable contributions made in light of the gains realized from the sales of Key's interest in Electronic Payment Services, Inc. and the Concord EFS, Inc. securities obtained in connection with that transaction. In 1998, Key recorded merger and integration charges of $8 million related to the acquisition of McDonald. Excluding nonrecurring charges, core noninterest expense for 1999 grew by $354 million, or 14%, from 1998. The increase in core noninterest expense came largely from personnel expense (up $218 million, due primarily to the October 1998 acquisition of McDonald), higher costs associated with computer processing (up $60 million), equipment (up $13 million) and intangibles amortization (up $13 million). The increase in personnel expense was moderated by a $41 million reduction in stock-based compensation. In 1997, noninterest expense includes a $50 million charge recorded in connection with actions taken to vacate, or in some cases dispose of, certain properties or to alter leasing arrangements in tandem with the national banking and related centralization efforts Key had in effect at the time. Excluding nonrecurring charges, core noninterest expense in 1998 rose by $139 million, or 6%, from 1997. The increase in Key's core noninterest expense reflects higher personnel costs (up $75 million) as well as increases in computer processing expense (up $45 million), professional fees (up $15 million) and marketing expense (up $14 million). The higher level of personnel expense was primarily due to the acquisition of McDonald and the acquisitions of Leasetec Corporation and Champion Mortgage Co., Inc. during the third quarter of 1997. For more information about these acquisitions, see Note 3 ("Mergers, Acquisitions and Divestitures") which begins on page 60. One action that served to reduce noninterest expense for each of the past three years was the recent reclassification of distributions on Key's tax-advantaged preferred securities from "noninterest expense" to "interest expense." Key effected the reclassification in the first quarter of 1999, and restated prior years to conform to the current presentation. Distributions on Key's tax-advantaged preferred securities totaled $85 million in 1999, $65 million in 1998 and $49 million in 1997. The securities are described in Note 10 ("Capital Securities") on page 67. Information pertaining to the basis for the reclassification can be found in the section entitled "Net interest income," which begins on page 34. Figure 13 shows the components of Key's noninterest expense. The discussion that follows explains the composition of some of these components and the factors that may have caused some components to change in 1999 and 1998. FIGURE 13 NONINTEREST EXPENSE
YEAR ENDED DECEMBER 31, CHANGE 1999 VS 1998 -------------------------- dollars in millions 1999 1998 1997 AMOUNT PERCENT - ---------------------------------------------------------------------------------------------------------------------------------- Personnel $1,474 $1,256 $1,181 $218 17.4% Net occupancy 231 226 222 5 2.2 Computer processing 236 176 131 60 34.1 Equipment 198 185 177 13 7.0 Marketing 106 100 86 6 6.0 Amortization of intangibles 104 91 87 13 14.3 Professional fees 70 62 47 8 12.9 Other expense: Postage and delivery 73 73 75 -- -- Telecommunications 56 53 50 3 5.7 Equity- and gross receipts-based taxes 35 39 36 (4) (10.3) OREO expense, net 13 6 (1) 7 116.7 Miscellaneous expense 233 208 245 25 12.0 - ----------------------------------------------------------------------------------------------------------------------------------- Total other expense 410 379 405 31 8.2 - ----------------------------------------------------------------------------------------------------------------------------------- Total core noninterest expense 2,829 2,475 2,336 354 14.3 Restructuring and other special charges 152 -- -- 152 N/M Merger and integration charges -- 8 -- (8) (100.0) Real estate disposition charge -- -- 50 -- -- Other nonrecurring charges 68 -- -- 68 N/M - ----------------------------------------------------------------------------------------------------------------------------------- Total significant nonrecurring items 220 8 50 212 2,650.0 - ----------------------------------------------------------------------------------------------------------------------------------- Total noninterest expense $3,049 $2,483 $2,386 $566 22.8% ====== ====== ====== ==== Full-time equivalent employees at year end 24,568 25,862 24,595 Efficiency ratio(a) 59.43% 58.49% 58.21% Overhead ratio(b) 31.52 35.17 40.34 - -----------------------------------------------------------------------------------------------------------------------------------
(a) This ratio, which measures the extent to which recurring revenues are absorbed by operating expenses, is calculated as follows: noninterest expense (excluding certain nonrecurring charges) divided by the sum of taxable-equivalent net interest income and noninterest income (excluding net securities transactions, gains from certain divestitures and certain nonrecurring charges). (b) This ratio is the difference between noninterest expense (excluding certain nonrecurring charges) and noninterest income (excluding net securities transactions, gains from certain divestitures and certain nonrecurring charges) divided by taxable-equivalent net interest income. N/M = Not Meaningful 40 [LOGO KEYCORP] 17 PERSONNEL. Personnel expense, the largest category of Key's noninterest expense, accounted for more than half of the total increase in core noninterest expense for both 1999 and 1998. The increases are primarily due to higher costs associated with various incentive programs (including those related to investment banking and capital markets activities), the impact of annual merit increases and the impact of acquisitions (which also contributed to the higher number of full-time equivalent employees in 1998). At December 31, 1999, the number of full-time equivalent employees was 24,568, compared with 25,862 at the end of 1998 and 24,595 at the end of 1997. The number of full-time equivalent employees decreased in 1999, primarily because of branch divestitures. Personnel expense includes costs incurred for technical staff required in connection with efforts to modify Key's computer information systems to be Year 2000 compliant. These costs comprise most of Key's Year 2000 expenses, which totaled $11 million in 1999, $20 million in 1998 and $17 million in 1997. For more information about the Year 2000 issue and Key's efforts to address it, see the following section entitled "Year 2000." COMPUTER PROCESSING. The increase in computer processing expense in both 1999 and 1998 is primarily due to a higher level of computer software amortization, but also includes increases related to software rental and maintenance. MARKETING. In 1999, the level of marketing expense rose only slightly from the prior year, and includes additional advertising costs incurred to promote businesses like home equity lending that management has targeted for growth. The increase in marketing expense in 1998 is more substantial due to the impact of acquisitions, additional costs incurred in connection with Key's efforts to strengthen brand identity and expenses related to the promotion of selected product lines. AMORTIZATION OF INTANGIBLES. The 1999 and 1998 increases in intangibles amortization are primarily due to additional goodwill amortization recorded as a result of acquisitions. These acquisitions include the October 1998 acquisition of McDonald and the acquisitions of Leasetec Corporation and Champion Mortgage Co., Inc. during the third quarter of 1997. PROFESSIONAL FEES. Professional fees comprise expenses incurred for legal, audit, consulting and certain other business services. In 1999, the level of professional fees was up 13% from the prior year. In comparison, professional fees increased by 32% in 1998, primarily due to additional costs incurred to implement strategic initiatives designed to grow Key's fee-generating businesses. RESTRUCTURING AND OTHER SPECIAL CHARGES. As stated previously, during 1999 Key recorded nonrecurring charges of $152 million (including restructuring charges of $98 million) in connection with strategic actions that are being taken over the next three years. Our goal is to achieve more than $170 million of expense reductions per year upon completion. These actions include the outsourcing of certain nonstrategic support functions (which resulted in the write-off of selected assets, including certain software), site consolidations in a number of Key's businesses and a reduction in the number of management layers. Management expects the planned strategic actions to reduce Key's employment base by approximately 3,000 positions, or 11%, by year-end 2000 and to improve Key's efficiency ratio. As these actions are implemented during 2000, we anticipate that additional charges will be recorded. For additional information, including the specific components of the restructuring charges and the related liability for payment remaining as of December 31, 1999, see Note 13 ("Restructuring Charges") on page 69. The severance portion of the restructuring charge liability will be funded by cash generated by Key's operations. None of the charges will have a material impact on Key's liquidity. EFFICIENCY RATIO. The efficiency ratio, which provides a measure of the extent to which recurring revenues are used to pay operating expenses, was 59.43%, compared with 58.49% for 1998, and 58.21% for 1997. The increase in the ratio over the past year is primarily due to the impact of the McDonald acquisition. This ratio improved during the year, however, as the growth of Key's core revenue was complemented by the more effective management of noninterest expense. "Other expense" includes equity- and gross receipts-based taxes that are assessed in lieu of an income tax in certain states in which Key operates. These taxes represent 74 basis points of Key's efficiency ratio for 1999, compared with 92 basis points for 1998 and 90 basis points for 1997. The extent to which such taxes impact noninterest expense will vary among companies based on the geographic locations in which they conduct their business. YEAR 2000 During 1999, we continued to modify Key's computer systems to operate properly in the Year 2000 and beyond. If left unchecked, the so-called Year 2000 problem could have affected anything from complex computer systems to telephone systems, ATMs, and elevators. To address this issue, Key developed an extensive plan in 1995 and formed an implementation team comprising internal personnel and third-party experts. Key completed all phases of the plan by the end of 1999, and at the turn of the millennium did not experience any operational problems. However, we will continue to monitor our systems to ensure they continue to operate properly. Appropriate modifications will be made, if necessary. Key has not detected any meaningful credit quality issues arising from client difficulties with Year 2000 conversions. Nonetheless, it is possible that such issues may arise over an extended period of time. Key will continue to monitor its loan portfolio for potential situations in need of special attention. Further, Key did not experience a significant increase in consumer withdrawals of deposits in anticipation of the millennium. As a result, there was no material impact on Key's funding costs. Management was prepared for the possibility that some of the third parties that Key deals with (such as foreign banks, governmental agencies, clearing houses, telephone companies, and other service providers) would suffer from Year 2000 computer problems. We have not been advised that any third party that provides material products or services to Key has had significant problems with its systems. The cumulative cost of implementing Key's Year 2000 plan and mitigating the adverse effects of potential Year 2000 problems was $50 million as of December 31, 1999; no additional costs are anticipated. The total cost of the project was funded through operating cash flows and includes expenses of $11 million in 1999, $20 million in 1998 and $17 million in 1997. INCOME TAXES The provision for income taxes is $577 million for 1999, up from $483 million for 1998 and $426 million for 1997. The effective tax rate (which is the provision for income taxes as a percentage of income before income taxes) for 1999 is 34.3%, compared with 32.7% for 1998 and 31.7% for 1997. The effective tax rate increased in 1999 primarily because Key had [LOGO-KEYCORP] 41 18 higher state taxes, a higher level of non-deductible goodwill amortization and lower tax-exempt income. In 1998, the increase in the effective tax rate is principally the result of lower tax-exempt income and lower tax credits. The effective income tax rate remains below the statutory Federal rate of 35%, primarily because Key continues to invest in tax-advantaged assets (such as tax-exempt securities and corporate owned life insurance) and to recognize credits associated with investments in low-income housing projects. FINANCIAL CONDITION LOANS At December 31, 1999, total loans outstanding were $64.2 billion, compared with $62.0 billion at the end of 1998 and $53.4 billion at the end of 1997. Key achieved a 4% increase in loans during 1999, primarily as a result of our targeted efforts to increase the commercial and home equity portfolios. These efforts were supported by the overall strength of the economy, improving consumer credit conditions, and additional leverage provided by Key's acquisition of Leasetec Corporation in 1997. Key's success in generating new loan volume has resulted in loan growth that has outpaced the growth of Key's deposits. As a result, we have used alternative funding sources such as securitizations to continue to capitalize on our lending opportunities. Loans outstanding (excluding loans held for sale) would have grown by $6.4 billion, or 11%, in 1999, if we had not securitized and/or sold $5.2 billion of loans during the year. This includes the divestiture of branches with loan portfolios aggregating $505 million. Excluding the impact of loan sales, commercial loans rose by $3.9 billion, or 12%, due primarily to strong growth in the structured finance, healthcare and media portfolios, a $1.1 billion increase in real estate-construction loans and a $1.1 billion increase in the lease financing portfolio. On the same basis, consumer loans rose by $2.5 billion, or 10%, including increases of $2.0 billion in the home equity portfolio and $615 million in the lease financing portfolio. Figure 14 shows the composition of Key's loan portfolio at December 31, for each of the past five years. FIGURE 14 COMPOSITION OF LOANS
DECEMBER 31, 1999 1998 1997 ------------------------ ------------------------ -------------------- dollars in millions AMOUNT % OF TOTAL AMOUNT % OF TOTAL AMOUNT % OF TOTAL - ------------------------------------------------------------------------------------------------------------------------------- COMMERCIAL Commercial, financial and agricultural $18,497 28.8% $17,038 27.5% $14,023 26.3% Real estate-- commercial mortgage 6,836 10.6 7,309 11.8 6,952 13.0 Real estate-- construction 4,528 7.1 3,450 5.6 2,231 4.2 Commercial lease financing 6,665 10.4 5,613 9.0 4,439 8.3 - --------------------------------------------------------------------------------------------------------------------------- Total commercial loans 36,526 56.9 33,410 53.9 27,645 51.8 CONSUMER Real estate-- residential mortgage 4,333 6.7 5,083 8.2 6,204 11.6 Home equity 7,602 11.8 7,301 11.8 5,421 10.2 Credit card -- -- 1,425 2.3 1,521 2.8 Consumer-- direct 2,565 4.0 2,342 3.8 2,188 4.1 Consumer-- indirect lease financing 3,195 5.0 2,580 4.2 1,576 2.9 Consumer-- indirect other 6,398 10.0 7,009 11.2 5,964 11.2 - -------------------------------------------------------------------------------------------------------------------------- Total consumer loans 24,093 37.5 25,740 41.5 22,874 42.8 LOANS HELD FOR SALE 3,603 5.6 2,862 4.6 2,861 5.4 - -------------------------------------------------------------------------------------------------------------------------- Total $64,222 100.0% $62,012 100.0% $53,380 100.0% ======= ===== ======= ===== ======= ===== - ---------------------------------------------------------------------------------------------------------------------------
1996 1995 ------------------------ ---------------------- AMOUNT % OF TOTAL AMOUNT % OF TOTAL - --------------------------------------------------------------------------------------------------------------------------- COMMERCIAL Commercial, financial and agricultural $12,309 25.0% $11,655 24.1% Real estate-- commercial mortgage 7,151 14.5 7,254 15.0 Real estate-- construction 1,666 3.4 1,520 3.1 Commercial lease financing 2,671 5.4 2,248 4.7 - --------------------------------------------------------------------------------------------------------------------------- Total commercial loans 23,797 48.3 22,677 46.9 CONSUMER Real estate-- residential mortgage 6,229 12.7 8,291 17.2 Home equity 4,793 9.7 3,886 8.0 Credit card 1,799 3.7 1,564 3.2 Consumer-- direct 2,245 4.6 1,934 4.0 Consumer-- indirect lease financing 839 1.7 639 1.4 Consumer-- indirect other 7,223 14.7 6,619 13.7 - --------------------------------------------------------------------------------------------------------------------------- Total consumer loans 23,128 47.1 22,933 47.5 LOANS HELD FOR SALE 2,310 4.6 2,722 5.6 - --------------------------------------------------------------------------------------------------------------------------- Total $49,235 100.0% $48,332 100.0% ======= ===== ======= ===== - ---------------------------------------------------------------------------------------------------------------------------
42 [LOGO-KEYCORP] 19 SALES, SECURITIZATIONS, AND DIVESTITURES. Among the factors that Key considers in determining which loans to securitize are: - - the extent to which the characteristics of a specific loan portfolio make it conducive to securitization; - - the relative cost of funds; - - the level of credit risk; and - - capital requirements. In addition to balancing the above factors, we may securitize loans when conditions in the capital markets make that strategy more attractive than conventional funding sources like debt. During 1999, in addition to selling loans in connection with branch divestitures, Key sold $2.0 billion of education loans ($1.7 billion through securitizations), $1.3 billion of home equity loans ($1.1 billion through securitizations), $555 million of automobile loans (all through securitizations), $339 million of commercial real estate loans and $500 million of residential real estate loans. One of the reasons that securitizations increased in 1999 was that we completed a securitization originally planned for the 1998 fourth quarter, but postponed due to market volatility. Management will continue to explore opportunities to sell certain loan portfolios, consistent with prudent asset/liability management practices. However, we intend to securitize and sell fewer of the home equity loans originated by our home equity finance affiliate. By retaining these loans, we intend to replace over time the revenue generated by our former credit card business. Figure 15 summarizes Key's loan sales (including securitizations) and branch divestitures for 1999 and 1998. FIGURE 15 LOANS SOLD AND DIVESTED
COMMERCIAL RESIDENTIAL BRANCH in millions EDUCATION AUTOMOBILE HOME EQUITY REAL ESTATE REAL ESTATE DIVESTITURES TOTAL - ----------------------------------------------------------------------------------------------------------------------------------- 1999 - -------------------- Fourth quarter $ 299 -- $ 32 $ 92 -- $505 $ 928 Third quarter 786 -- 359 100 -- -- 1,245 Second quarter 132 -- 442 63 $292 -- 929 First quarter 818 $555 428 84 208 -- 2,093 - ----------------------------------------------------------------------------------------------------------------------------------- Total $2,035 $555 $1,261 $339 $500 $505 $5,195 ====== ==== ====== ==== ==== ==== ====== 1998 - ------------------- Fourth quarter $ 29 -- $ 48 -- -- -- $ 77 Third quarter 201 -- 374 -- -- -- 575 Second quarter 45 -- 53 $167 -- $124 389 First quarter 71 -- -- -- -- 20 91 - ----------------------------------------------------------------------------------------------------------------------------------- Total $346 -- $475 $167 -- $144 $1,132 ==== ==== ==== ==== ====== - -----------------------------------------------------------------------------------------------------------------------------------
Figure 16 shows loans that have been either securitized and sold, or simply sold outright, and are either administered or serviced by Key, but are not recorded on the balance sheet. Key derives income from two sources as a result of such transactions. We earn noninterest income (recorded as "other income") from servicing or administering the loans, and we earn interest income from assets retained in connection with securitizations and accounted for like debt securities that are classified as available for sale or trading account assets. Income from both of these sources increased in 1999 because we completed more securitizations this year than last year and the amount of loans administered or serviced has grown substantially. Figure 17 shows the maturities of certain commercial and real estate loans, and the sensitivity of those loans to changes in interest rates. As indicated, at December 31, 1999, approximately 48% of these outstanding loans were scheduled to mature within one year. Loans with maturities greater than one year include $9.8 billion with floating or adjustable rates and $8.0 billion with predetermined rates. FIGURE 16 LOANS SECURITIZED/SOLD AND ADMINISTERED OR SERVICED
DECEMBER 31, in millions 1999 1998 1997 - --------------------------------------------------------------- Education loans $3,475 $2,312 $2,611 Automobile loans 855 946 1,601 Home equity loans 1,542 744 735 - --------------------------------------------------------------- Total $5,872 $4,002 $4,947 ====== ====== ====== - ---------------------------------------------------------------
[LOGO: KEYCORP] 43 20 FIGURE 17 MATURITIES AND SENSITIVITY OF CERTAIN LOANS TO CHANGES IN INTEREST RATES
DECEMBER 31, 1999 WITHIN 1-5 OVER in millions 1 YEAR YEARS 5 YEARS TOTAL - -------------------------------------------------------------------------------------------------------------------------------- Commercial, financial and agricultural $11,063 $4,539 $2,895 $18,497 Real estate-- construction 2,426 1,982 120 4,528 Real estate-- residential and commercial mortgage 2,914 2,451 5,804 11,169 - -------------------------------------------------------------------------------------------------------------------------------- $16,403 $8,972 $8,819 $34,194 ======= ====== ====== ======= Loans with floating or adjustable interest rates(a) $5,924 $3,891 Loans with predetermined interest rates(b) 3,048 4,928 - -------------------------------------------------------------------------------------------------------------------------------- $8,972 $8,819 ====== ====== - --------------------------------------------------------------------------------------------------------------------------------
(a) "Floating" and "adjustable" rates vary in relation to some other interest rate (such as the base lending rate) or a variable index that may change during the term of the loan. (b) "Predetermined" interest rates either are fixed or will change during the term of the loan according to a specific formula or schedule. SECURITIES At December 31, 1999, the securities portfolio totaled $7.7 billion and comprised $6.7 billion of securities available for sale and $986 million of investment securities. In comparison, the total portfolio at December 31, 1998, was $6.3 billion, including $5.3 billion of securities available for sale and $976 million of investment securities. Securities available for sale increased during 1999 because management actively increased Key's investment in collateralized mortgage obligations by reinvesting funds previously held in lower-yielding securities purchased under resale agreements, reclassifying approximately $374 million of collateralized mortgage obligations from the commercial loan portfolio and purchasing additional securities to be held as collateral in connection with client pledging requirements. A collateralized mortgage obligation (sometimes called a "CMO") is a debt security that is secured by a pool of mortgages, mortgage-backed securities, U.S. government securities, corporate debt obligations or other bonds. At December 31, 1999, Key had $5.9 billion invested in collateralized mortgage obligations and other mortgage-backed securities in the available-for-sale portfolio, compared with $4.4 billion at December 31, 1998. Substantially all of these securities were issued or backed by Federal agencies. Figure 18 shows the composition, yields and remaining maturities of Key's securities available for sale. Figure 19 provides the same information about Key's investment securities. For more information about retained interests in securitizations, gross unrealized gains and losses by type of security and securities pledged, please see Note 5 ("Securities"), which begins on page 63. FIGURE 18 SECURITIES AVAILABLE FOR SALE
OTHER U.S. TREASURY, STATES AND COLLATERALIZED MORTGAGE- AGENCIES AND POLITICAL MORTGAGE BACKED dollars in millions CORPORATIONS SUBDIVISIONS OBLIGATIONS(a) SECURITIES(a) - ---------------------------------------------------------------------------------------- DECEMBER 31, 1999 Remaining maturity: One year or less $ 98 $ 1 $ 659 $ 1 After one through five years 1 19 3,266 998 After five through ten years 6 33 153 624 After ten years 22 -- 159 55 - ---------------------------------------------------------------------------------------- Fair value $ 127 $ 53 $4,237 $1,678 Amortized cost 128 53 4,426 1,705 Weighted average yield 5.28% 6.68% 6.53% 7.06% Weighted average maturity 4.5 YEARS 5.5 YEARS 3.6 YEARS 5.9 YEARS - ---------------------------------------------------------------------------------------- DECEMBER 31, 1998 Fair value $ 422 $ 67 $2,211 $2,151 Amortized cost 420 65 2,191 2,123 - ---------------------------------------------------------------------------------------- DECEMBER 31, 1997 Fair value $ 204 $ 52 $4,051 $2,951 Amortized cost 202 52 4,045 2,908 - ---------------------------------------------------------------------------------------- RETAINED WEIGHTED INTERESTS IN OTHER AVERAGE DOLLARS IN MILLIONS SECURITIZATIONS(a) SECURITIES TOTAL YIELD(b) - ------------------------------------------------------------------------------------ DECEMBER 31, 1999 Remaining maturity: One year or less -- $ 10 $ 769 6.56% After one through five years $ 119 13 4,416 6.46 After five through ten years 224 5 1,045 8.05 After ten years -- 199(c) 435 7.30 - ---------------------------------------------------------------------------------------- Fair value $ 343 $ 227 $6,665 -- Amortized cost 340 223 6,875 6.77% Weighted average yield 10.06% 5.29% 6.77% -- Weighted average maturity 3.4 YEARS 9.7 YEARS 4.4 YEARS -- - ---------------------------------------------------------------------------------------- DECEMBER 31, 1998 Fair value $ 328 $ 99 $5,278 -- Amortized cost 345 84 5,228 6.69% - ---------------------------------------------------------------------------------------- DECEMBER 31, 1997 Fair value $ 374 $ 76 $7,708 -- Amortized cost 418 75 7,700 7.19% - ----------------------------------------------------------------------------------------
(a) Maturity is based upon expected average lives rather than contractual terms. (b) Weighted average yields are calculated based on amortized cost. Such yields have been adjusted to a taxable-equivalent basis using the statutory Federal income tax rate of 35%. (c) Includes equity securities with no stated maturity. 44 [LOGO: KEYCORP] 21 FIGURE 19 INVESTMENT SECURITIES
STATES AND WEIGHTED POLITICAL OTHER AVERAGE dollars in millions SUBDIVISIONS SECURITIES TOTAL YIELD(a) - ---------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1999 Remaining maturity: One year or less $126 $ 1 $127 8.24% After one through five years 213 -- 213 9.29 After five through ten years 93 -- 93 9.46 After ten years 15 538(b) 553 3.90 - ---------------------------------------------------------------------------------------------------------------------------------- Amortized cost $447 $539 $986 6.15% Fair value 459 539 998 -- Weighted average yield 7.86% 3.73% 6.15% -- Weighted average maturity 3.2 YEARS 10.0 YEARS 6.9 YEARS -- - ---------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1998 Amortized cost $631 $345 $976 7.13% Fair value 659 345 1,004 -- - ---------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1997 Amortized cost $ 973 $257 $1,230 7.59% Fair value 1,005 257 1,262 -- - ----------------------------------------------------------------------------------------------------------------------------------
(a) Weighted average yields are calculated based on amortized cost. Such yields have been adjusted to a taxable-equivalent basis using the statutory Federal income tax rate of 35%. (b) Includes equity securities with no stated maturity. ASSET QUALITY Key maintains asset quality by following procedures that address the issue from many perspectives. Specifically, Key has groups of professionals that: - - evaluate and monitor the level of risk in credit-related assets; - - formulate underwriting standards and guidelines for line management; - - develop commercial and consumer credit policies and systems; - - establish credit-related concentration limits; - - review loans, leases, and other corporate assets to evaluate credit quality; and - - review the adequacy of the allowance for loan losses. ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses at December 31, 1999, was $930 million, or 1.45% of loans. This compares with $900 million, or 1.45% of loans, at December 31, 1998. The allowance includes $63 million (for 1999) and $42 million (for 1998) that is specifically allocated for impaired loans. For more information about impaired loans, see Note 7 ("Impaired Loans and Other Nonperforming Assets") on page 65. At December 31, 1999, the allowance for loan losses was 228.50% of nonperforming loans, compared with 246.58% at December 31, 1998. Management relies on an iterative methodology to estimate the level of the allowance for loan losses on a quarterly (and at times more frequent) basis. This methodology is described in Note 1 ("Summary of Significant Accounting Policies") under the heading "Allowance for Loan Losses," on page 58. With the advent of enhanced credit scoring capabilities, management continues to review and refine Key's methodology for estimating the allowance for loan losses. As these methodology enhancements are implemented, they may cause us to alter Key's provision for loan losses. In February 1999, the Federal banking agencies published revised guidelines which, among other things, require that consumer loans be charged off when payments are past due by a prescribed number of days. Management anticipates implementing these new guidelines prior to the required date of December 31, 2000, and perhaps as early as the first quarter of 2000. Based upon current estimates, management expects that the implementation will accelerate up to $60 million of Key's consumer loan charge-offs which might otherwise have occurred at later dates. Key's allowance already includes an allocation for these potential losses. Figure 20 shows the allocation of Key's allowance for loan losses by loan type at December 31. The amount of allowance allocated to Key's credit card portfolio at December 31, 1999, is included in the held for sale category. This allocation is based on the level of net credit card charge-offs that Key expected to record in the first quarter of 2000. Since the sale of the credit card portfolio closed in January 2000, Key was able to estimate the amount of net credit card charge-offs with a relatively high level of precision. [LOGO: KEYCORP] 45 22 FIGURE 20 ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
1999 1998 1997 ------------------------- ------------------------- ------------------------ PERCENT OF PERCENT OF PERCENT OF DECEMBER 31, LOAN TYPE TO LOAN TYPE TO LOAN TYPE TO dollars in millions AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS - -------------------------------------------------------------------------------------------------------------------------------- Commercial, financial and agricultural $509 28.8% $357 27.5% $224 26.3% Real estate-- commercial mortgage 34 10.6 32 11.8 104 13.0 Real estate-- construction 16 7.1 15 5.6 33 4.2 Commercial lease financing 39 10.4 49 9.0 26 8.3 - -------------------------------------------------------------------------------------------------------------------------------- Total commercial loans 598 56.9 453 53.9 387 51.8 Real estate-- residential mortgage 1 6.7 7 8.2 8 11.6 Home equity 7 11.8 5 11.8 4 10.2 Credit card -- -- 44 2.3 45 2.8 Consumer-- direct 8 4.0 15 3.8 15 4.1 Consumer-- indirect lease financing 6 5.0 5 4.2 3 2.9 Consumer-- indirect other 55 10.0 77 11.2 63 11.2 - -------------------------------------------------------------------------------------------------------------------------------- Total consumer loans 77 37.5 153 41.5 138 42.8 Loans held for sale 18 5.6 1 4.6 1 5.4 Unallocated 237 -- 293 -- 374 -- - -------------------------------------------------------------------------------------------------------------------------------- Total $930 100.0% $900 100.0% $900 100.0% ==== ===== ==== ===== ==== ===== - --------------------------------------------------------------------------------------------------------------------------------
1996 1995 -------------------------- ------------------------- PERCENT OF PERCENT OF LOAN TYPE TO LOAN TYPE TO AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS - ------------------------------------------------------------------------------------------------ Commercial, financial and agricultural $177 25.0% $205 24.1% Real estate-- commercial mortgage 97 14.5 100 15.0 Real estate-- construction 22 3.4 21 3.1 Commercial lease financing 16 5.4 23 4.7 - --------------------------------------------------------------------------------------------------- Total commercial loans 312 48.3 349 46.9 Real estate-- residential mortgage 10 12.7 9 17.2 Home equity 5 9.7 5 8.0 Credit card 44 3.7 25 3.2 Consumer-- direct 15 4.6 5 4.1 Consumer-- indirect lease financing 2 1.7 1 1.3 Consumer-- indirect other 76 14.7 46 13.7 - --------------------------------------------------------------------------------------------------- Total consumer loans 152 47.1 91 47.5 Loans held for sale 3 4.6 3 5.6 Unallocated 403 -- 433 -- - --------------------------------------------------------------------------------------------------- Total $870 100.0% $876 100.0% ==== ===== ==== ===== - ---------------------------------------------------------------------------------------------------
NET LOAN CHARGE-OFFS. As shown in Figure 21, net loan charge-offs for 1999 were $318 million, or .51% of average loans, compared with $297 million, or .52% of average loans, for 1998, and $293 million, or .57% of average loans, in 1997. In 1999, net charge-offs in the commercial loan portfolio rose by $32 million, including increases of $43 million in the commercial, financial and agricultural sector, and $6 million in the commercial lease financing sector. Charge-offs of commercial loans increased not only due to a modest increase in the proportion of troubled credits within the portfolio, but also because this portfolio has grown significantly. The overall increase in commercial loan net charge-offs was moderated by improved performance in the commercial real estate sector. The increase in commercial loan net charge-offs was partially offset by an $11 million decline in the level of net charge-offs in the consumer loan portfolio. Net charge-offs in the credit card sector decreased by $19 million because of higher recoveries and a lower volume of credit card receivables. At the same time, net charge-offs in the installment portfolios increased by $7 million as a result of the growth in outstanding balances. 46 [LOGO: KEYCORP] 23 FIGURE 21 SUMMARY OF LOAN LOSS EXPERIENCE
YEAR ENDED DECEMBER 31, dollars in millions 1999 1998 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- Average loans outstanding during the year $62,401 $57,422 $51,415 $48,216 $48,012 - ---------------------------------------------------------------------------------------------------------------------------------- Allowance for loan losses at beginning of year $900 $900 $870 $876 $830 Loans charged off: Commercial, financial and agricultural 112 66 55 71 42 Real estate-- commercial mortgage 2 20 16 16 22 Real estate-- construction -- 2 3 2 2 Commercial lease financing 20 12 9 8 5 - ---------------------------------------------------------------------------------------------------------------------------------- Total commercial loans 134 100 83 97 71 Real estate-- residential mortgage 8 11 11 9 11 Home equity 10 6 4 2 2 Credit card 89 104 113 83 50 Consumer-- direct 41 44 41 29 21 Consumer-- indirect lease financing 13 8 4 3 2 Consumer-- indirect other 125 111 122 80 51 - ---------------------------------------------------------------------------------------------------------------------------------- Total consumer loans 286 284 295 206 137 - ---------------------------------------------------------------------------------------------------------------------------------- 420 384 378 303 208 Recoveries: Commercial, financial and agricultural 28 25 28 45 53 Real estate-- commercial mortgage 4 6 10 8 5 Real estate-- construction 1 2 2 1 3 Commercial lease financing 3 1 1 2 2 - ---------------------------------------------------------------------------------------------------------------------------------- Total commercial loans 36 34 41 56 63 - ---------------------------------------------------------------------------------------------------------------------------------- Real estate-- residential mortgage 4 4 3 3 8 Home equity 1 1 -- -- 1 Credit card 14 10 9 15 11 Consumer-- direct 8 6 7 7 7 Consumer-- indirect lease financing 3 1 1 1 1 Consumer-- indirect other 36 31 24 26 18 - ---------------------------------------------------------------------------------------------------------------------------------- Total consumer loans 66 53 44 52 46 - ---------------------------------------------------------------------------------------------------------------------------------- 102 87 85 108 109 - ---------------------------------------------------------------------------------------------------------------------------------- Net loans charged off (318) (297) (293) (195) (99) Provision for loan losses 348 297 320 197 100 Allowance acquired (sold), net -- -- 3 (8) 44 Transfer of other real estate owned ("OREO") allowance -- -- -- -- 1 - ---------------------------------------------------------------------------------------------------------------------------------- Allowance for loan losses at end of year $930 $900 $900 $870 $876 ==== ==== ==== ==== ==== - ---------------------------------------------------------------------------------------------------------------------------------- Net loan charge-offs to average loans .51% .52% .57% .40% .21% Allowance for loan losses to year-end loans 1.45 1.45 1.69 1.77 1.81 Allowance for loan losses to nonperforming loans 228.50 246.58 236.22 249.28 263.15 - ----------------------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS. Figure 22 shows the composition of Key's nonperforming assets. These assets totaled $433 million at December 31, 1999, and represented .67% of loans, other real estate owned (known as "OREO") and other nonperforming assets, compared with $404 million, or .65%, at December 31, 1998. The $29 million increase in the level of nonperforming assets since the end of 1998 is due primarily to a $42 million increase in nonperforming loans, offset in part by a $14 million decrease in OREO. Over the past two years, Key's nonperforming assets have ranged from a quarterly high of $431 million at December 31, 1997, to a low of $402 million at September 30, 1998. DEPOSITS AND OTHER SOURCES OF FUNDS "Core deposits" are Key's primary source of funding. These deposits consist of domestic deposits other than certificates of deposit of $100,000 or more. During 1999, core deposits averaged $36.9 billion, and represented 51% of the funds Key used to support earning assets, compared with $36.8 billion and 55%, respectively, during 1998, and $38.6 billion and 63%, respectively, in 1997. Total core deposits did not change much during 1999, following a decrease of $1.8 billion in 1998. However, as shown in Figure 5 (which spans pages 32 and 33), Key experienced a change in the mix of core deposits in each of the past two years. The levels of savings deposits, NOW accounts and time deposits declined, primarily because, since mid-1997, Key has sold 178 branches with deposits of approximately $4.3 billion. In addition, client preferences for higher returns and the strength of the securities markets have also caused a shift from traditional bank products to nonbank financial investments, such as equity securities. At the same time, Key's money market deposit accounts grew substantially as a result of client preferences for investments that offer higher returns. Purchased funds, which comprise large certificates of deposit, deposits in the foreign office, and short-term borrowings, averaged $17.8 billion during 1999, compared with $19.0 billion during 1998, and $16.9 billion in 1997. As shown in Figure 5, Key relied more on long-term debt, including capital securities, to fund earning assets in 1999. In addition, Key continues to consider loan securitizations as a funding alternative when market conditions are favorable. During 1999, Key securitized and sold $4.3 billion of consumer loans. [LOGO: KEYCORP] 47 24 FIGURE 22 SUMMARY OF NONPERFORMING ASSETS AND PAST DUE LOANS
YEAR ENDED DECEMBER 31, dollars in millions 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- Commercial, financial and agricultural $175 $144 $162 $121 $148 Real estate-- commercial mortgage 102 79 88 84 90 Real estate-- construction 7 6 21 19 10 Commercial lease financing 28 29 5 8 3 - -------------------------------------------------------------------------------------------------------------------------------- Total commercial loans 312 258 276 232 251 Real estate-- residential mortgage 44 60 58 80 62 Home equity 13 10 11 10 5 Consumer-- direct 6 6 8 9 3 Consumer-- indirect other 32 31 28 18 12 - -------------------------------------------------------------------------------------------------------------------------------- Total consumer loans 95 107 105 117 82 - -------------------------------------------------------------------------------------------------------------------------------- Total nonperforming loans 407 365 381 349 333 OREO 27 56 66 56 56 Allowance for OREO losses (3) (18) (21) (8) (14) - -------------------------------------------------------------------------------------------------------------------------------- OREO, net of allowance 24 38 45 48 42 Other nonperforming assets 2 1 5 3 4 - -------------------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $433 $404 $431 $400 $379 ==== ==== ==== ==== ==== - -------------------------------------------------------------------------------------------------------------------------------- Accruing loans past due 90 days or more $259 $178 $132 $103 $97 - -------------------------------------------------------------------------------------------------------------------------------- Nonperforming loans to year-end loans .63% .59% .71% .71% .69% Nonperforming assets to year-end loans plus OREO and other nonperforming assets .67 .65 .81 .81 .78 - --------------------------------------------------------------------------------------------------------------------------------
At December 31, 1999, Key had $6.5 billion in time deposits of $100,000 or more. Figure 23 shows the maturity distribution of these deposits. FIGURE 23 MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE
DECEMBER 31, 1999 DOMESTIC FOREIGN in millions OFFICES OFFICE TOTAL - ----------------------------------------------------------------------- Remaining maturity: Three months or less $3,101 $1,236 $4,337 After three through twelve months 1,119 -- 1,119 After twelve months 1,001 -- 1,001 - ----------------------------------------------------------------------- Total $5,221 $1,236 $6,457 ====== ====== ====== - -----------------------------------------------------------------------
LIQUIDITY "Liquidity" measures whether an entity has sufficient cash flow to meet its financial obligations when due. Key has sufficient liquidity when it can meet the needs of depositors, borrowers, and creditors at a reasonable cost, on a timely basis, and without adverse consequences. KeyCorp, the parent company, has sufficient liquidity when it can pay dividends to shareholders, service its debt, and support customary corporate operations and activities, including acquisitions. LIQUIDITY FOR KEY. Management actively analyzes and manages Key's liquidity. In particular, Key's Funding and Investment Management Group monitors the overall mix of funding sources to ensure that the mix is appropriate in light of the structure of the asset portfolios. We use several tools to maintain sufficient liquidity. - - We maintain portfolios of short-term money market investments and securities available for sale, substantially all of which could be converted to cash quickly at a small expense. - - Key's portfolio of investment securities generates prepayments (often at a premium) and payments at maturity. - - We try to structure the maturities of our loans so we receive a relatively consistent stream of payments from borrowers. We also selectively securitize and package loans for sale. - - Our 936 full-service KeyCenters in 13 states generate a sizable volume of core deposits. Key's Funding and Investment Management Group monitors deposit flows and considers alternate pricing structures to attract deposits when necessary. For more information about core deposits, see the previous section entitled "Deposits and other sources of funds." - - Key has access to various sources of money market funding (such as Federal funds purchased, securities sold under repurchase agreements, and bank notes) and also can borrow from the Federal Reserve Bank to meet short-term liquidity requirements. During 1999, KeyBank National Association, one of KeyCorp's bank affiliates, increased its overnight borrowing capacity at the Federal Reserve Bank discount window from approximately $975 million at December 31, 1998, to approximately $17.2 billion at December 31, 1999, by pledging approximately $23.3 billion of loans (primarily commercial) as additional collateral. This action, which was purely precautionary, was part of Key's Year 2000 contingency plan. Another bank affiliate, KeyBank USA National Association, had overnight borrowing capacity at the Federal Reserve Bank discount window of up to $1.0 billion at December 31, 1999, which was secured by approximately $1.3 billion of credit card receivables. Neither bank had borrowings outstanding under these facilities as of the end of 1999. LIQUIDITY FOR THE PARENT COMPANY. KeyCorp meets its liquidity requirements principally through regular dividends from affiliate banks. In 1999, affiliates paid KeyCorp a total of $946 million in dividends. As of December 31, 1999, the affiliate banks had an additional $697 million available to pay dividends without prior regulatory approval. These excess funds are generally maintained in short-term investments. 48 KEYCORP AND SUBSIDIARES 25 ADDITIONAL SOURCES OF LIQUIDITY. Management has implemented several programs that enable Key and KeyCorp to raise money in the public and private markets when necessary. The proceeds from all of these programs can be used for general corporate purposes, including acquisitions. BANK NOTE PROGRAM. During 1999, Key's affiliate banks raised $10.1 billion under Key's Bank Note Program. Of the notes issued during 1999, $3.7 billion have original maturities in excess of one year and are included in long-term debt; the remaining $6.4 billion have original maturities of one year or less and are included in short-term borrowings. On January 21, 2000, Key commenced a new Bank Note Program which provides for the issuance of both long- and short-term debt of up to $20.0 billion ($19.0 billion by KeyBank National Association and $1.0 billion by Key Bank USA, National Association). EURONOTE PROGRAM. Under Key's Euronote program, KeyCorp, KeyBank National Association and Key Bank USA, National Association may issue both long- and short-term debt of up to $7.0 billion in the aggregate. The borrowing capacity under this program was increased from $5.0 billion during the second quarter of 1999. The notes are offered exclusively to non-U.S. investors and can be denominated in dollars and most European currencies. There were $2.4 billion of borrowings outstanding under this facility as of December 31, 1999, $972 million of which were issued during 1999. COMMERCIAL PAPER AND REVOLVING CREDIT. KeyCorp has a commercial paper program and a three-year revolving credit agreement. Each of these facilities provides funding availability of up to $500 million. As of December 31, 1999, $215 million of borrowings were outstanding under the commercial paper program; no amount was outstanding under the revolving credit agreement. PUBLICLY ISSUED SECURITIES. KeyCorp has a universal shelf registration statement on file with the Securities and Exchange Commission that provides for the possible issuance of up to $1.3 billion of debt and equity securities. At December 31, 1999, unused capacity under the shelf registration totaled $1.0 billion, including $450 million reserved for issuance as medium-term notes. If KeyCorp maintains its favorable debt ratings, shown below as of December 31, 1999, management believes that, under normal conditions in the capital markets, any eventual offering of securities should be well-received by investors. SENIOR SUBORDINATED COMMERCIAL LONG-TERM LONG-TERM PAPER DEBT DEBT - --------------------------------------------------------------------- Duff & Phelps D-1 A+ A Standard & Poor's A-2 A- BBB+ Moody's P-1 A1 A2 For more information about Key's sources and uses of cash for the years ended December 31, 1999, 1998, and 1997, see the Consolidated Statements of Cash Flow on page 56. CAPITAL AND DIVIDENDS SHAREHOLDERS' EQUITY. Total shareholders' equity at December 31, 1999, was $6.4 billion, up $222 million from the balance at December 31, 1998. Retained net income increased during the year, but the increase was largely offset by a net increase in treasury stock due to share repurchases, and net unrealized losses on securities available for sale. In contrast, total shareholders' equity increased by $986 million, or 19%, from the end of 1997 to the end of 1998. During 1998, retained net income increased, and treasury stock decreased because KeyCorp issued shares to acquire McDonald. Other factors contributing to the change in shareholders' equity during 1999 and 1998 are shown in the Consolidated Statements of Changes in Shareholders' Equity presented on page 55. SHARE REPURCHASES. During 1999, Key repurchased 11,906,424 of its common shares at an average price per share of $28.85. Authority to repurchase these shares came from two sources. First, when Key acquired McDonald, the Board of Directors authorized the repurchase of up to 60% of the 19,337,159 shares issued to complete the transaction. With the repurchase of 3,869,761 of these shares in 1999, we have now repurchased all of the shares covered by that authorization. Second, Key had a program that authorized management to repurchase up to 10,000,000 shares in open market or through negotiated transactions. During 1999, 8,036,663 shares were repurchased under this program, leaving a remaining balance of 1,963,337 shares that may be repurchased. In January 2000, the Board authorized the repurchase of up to 20,000,000 shares (including the shares remaining from the prior authority). At December 31, 1999, Key had 48,462,243 treasury shares. Management expects to reissue those shares over time to support the employee stock purchase, 401(k), stock option, and dividend reinvestment plans, and for other corporate purposes. During 1999, Key reissued 2,249,181 treasury shares for employee benefit and dividend reinvestment plans. CAPITAL ADEQUACY. Capital adequacy is an important indicator of financial stability and performance. Overall, Key's capital position remains strong: the ratio of total shareholders' equity to total assets was 7.66% at December 31, 1999, and 7.71% at December 31, 1998. Banking industry regulators prescribe minimum capital ratios for bank holding companies and their banking subsidiaries. Risk-based capital guidelines require a minimum level of capital as a percent of "risk-adjusted assets," which is total assets plus certain off-balance sheet items that are adjusted for predefined credit risk factors. Currently, banks and bank holding companies must maintain, at a minimum, Tier 1 capital as a percent of risk-adjusted assets of 4.0%, and total capital as a percent of risk-adjusted assets of 8.0%. As of December 31, 1999, Key's Tier 1 capital ratio was 7.68%, and its total capital ratio was 11.66%. The leverage ratio is Tier 1 capital as a percentage of tangible assets. Leverage ratio requirements vary with the condition of the financial institution. Bank holding companies that either have the highest supervisory rating or have implemented the Federal Reserve's risk-adjusted measure for market risk -- as KeyCorp has -- must maintain a minimum leverage ratio of 3.0%. All other bank holding companies must maintain a minimum ratio of 4%. As of December 31, 1999, KeyCorp had a leverage ratio of 7.77%, which is substantially higher than the minimum requirement. Federal bank regulators group FDIC-insured depository institutions into the following five categories based on certain capital ratios: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized." Both of Key's affiliate banks qualified as "well capitalized" at December 31, 1999, since each exceeded the prescribed thresholds of 10% for total capital, 6% for Tier 1 capital, and 5% for the leverage ratio. If these provisions applied to bank holding companies, KeyCorp would also qualify as "well capitalized" at December 31, 1999. The FDIC-defined capital categories serve a limited regulatory function. Investors should not treat them as a representation of the overall financial condition or prospects of Key or its affiliates. [LOGO: KEYCORP] 49 26 Figure 24 presents the details of Key's regulatory capital position at December 31, 1999 and 1998. Note 11 ("Shareholders' Equity"), which begins on page 67, explains the implications of failing to meet specific capital requirements imposed by the banking regulators. FIGURE 24 CAPITAL COMPONENTS AND RISK-ADJUSTED ASSETS
DECEMBER 31, dollars in millions 1999 1998 - -------------------------------------------------------------------------------- TIER 1 CAPITAL Common shareholders' equity(a) $ 6,508 $ 6,137 Qualifying capital securities 1,243 747 Less: Goodwill (1,389) (1,430) Other intangible assets(b) (56) (71) - -------------------------------------------------------------------------------- Total Tier 1 capital 6,306 5,383 - -------------------------------------------------------------------------------- TIER 2 CAPITAL Allowance for loan losses(c) 930 900 Net unrealized holding gains(d) 3 3 Qualifying long-term debt 2,330 2,445 - -------------------------------------------------------------------------------- Total Tier 2 capital 3,263 3,348 - -------------------------------------------------------------------------------- Total capital $ 9,569 $ 8,731 ======== ======== RISK-ADJUSTED ASSETS Risk-adjusted assets on balance sheet $ 68,619 $ 63,721 Risk-adjusted off-balance sheet exposure 14,513 12,198 Less: Goodwill (1,389) (1,430) Other intangible assets(b) (56) (71) Plus: Market risk-equivalent assets 391 242 Net unrealized holding gains(d) 3 3 - -------------------------------------------------------------------------------- Gross risk-adjusted assets 82,081 74,663 Less: Excess allowance for loan losses(c) -- -- - -------------------------------------------------------------------------------- Net risk-adjusted assets $ 82,081 $ 74,663 ======== ======== AVERAGE QUARTERLY TOTAL ASSETS $ 82,574 $ 78,968 ======== ======== CAPITAL RATIOS Tier 1 risk-adjusted capital ratio 7.68% 7.21% Total risk-adjusted capital ratio 11.66 11.69 Leverage ratio(e) 7.77 6.95 - --------------------------------------------------------------------------------
(a) Common shareholders' equity excludes the impact of net unrealized gains or losses on securities, except for net unrealized losses on marketable equity securities. (b) Intangible assets (excluding goodwill) recorded after February 19, 1992, and deductible portions of purchased mortgage servicing rights. (c) The allowance for loan losses included in Tier 2 capital is limited to 1.25% of gross risk-adjusted assets. (d) Net unrealized holding gains included in Tier 2 capital are limited to 45% of net unrealized holding gains on available for sale equity securities with readily determinable fair values. (e) Tier 1 capital as a percentage of average quarterly total assets, less goodwill and other non-qualifying intangible assets as defined in footnote (b). KeyCorp's common shares are traded on the New York Stock Exchange under the symbol KEY. At December 31, 1999: - - Book value per common share was $14.41, based on 443,426,537 shares outstanding, compared with $13.63 based on 452,451,597 shares outstanding at December 31, 1998. o The closing sales price of a KeyCorp common share on the New York Stock Exchange was $22.13. This price was 154% of year-end book value per share, and would produce a dividend yield of 4.70% based on the amount of the dividend at that time. - - The closing sales price of a KeyCorp common share on the New York Stock Exchange was $22.13. This price was 154% of year-end book value per share, and would produce a dividend yield of 4.70% based on the amount of the dividend at that time. - - In 1999, the quarterly dividend was $.26 per common share, up from $.235 per common share in 1998. On January 19, 2000, the quarterly dividend per common share was increased by 7.7% to $.28. - - There were 58,600 holders of record of KeyCorp common shares. Figure 25 shows the sales price ranges of the common shares and per common share net income and dividends by quarter for each of the last two years. FOURTH QUARTER RESULTS Key completed 1999 with a strong financial performance in the fourth quarter. Some of the fourth quarter highlights are summarized below. Key's financial performance for each of the past eight quarters is summarized in Figure 25. NET INCOME. As shown in Figure 25, net income for the fourth quarter of 1999 totaled $264 million, or $.59 per common share, up from $260 million, or $.57, for the same period in 1998. This improvement resulted from a $223 million, or 50%, increase in noninterest income and a moderate $18 million increase in net interest income. The growth of these revenue components more than offset increases of $216 million, or 32%, in noninterest expense and $6 million, or 8%, in the provision for loan losses. On an annualized basis, the return on average total assets for the fourth quarter of 1999 was 1.27%, compared with 1.31% for the fourth quarter of 1998. The annualized returns on average equity for the fourth quarters of 1999 and 1998 were 16.18% and 17.12%, respectively. NET INTEREST INCOME. Net interest income rose to $705 million for the fourth quarter of 1999 from $687 million for the fourth quarter of 1998. The improvement resulted from a 5% increase in average earning assets to $73.1 billion, due primarily to continued momentum in commercial and consumer lending. This growth more than compensated for an 11 basis point reduction in the net interest margin to 3.88%. NONINTEREST INCOME. Noninterest income of $670 million for the fourth quarter of 1999 was significantly higher than the $447 of a year ago, and includes a $194 million gain from the sale of Key's Long Island branches and $30 million of nonrecurring charges. Of the nonrecurring charges, which reduced noninterest income, the most significant was a $19 million charge that resulted from a more conservative valuation of assets related to securitizations completed in prior periods. In 1998, Key's results include a $27 million gain recorded in connection with the sale of a 51% interest in Key Merchant Services, LLC, a merchant credit card processing subsidiary. Excluding nonrecurring items, core noninterest income in the fourth quarter of 1999 increased by $86 million, or 20%, from the prior year. The strongest contributions to the growth in core noninterest income came from investment banking and capital markets activities (up $31 million), and trust and asset management (up $19 million). These revenue components grew primarily as a result of the October 1998 acquisition of McDonald, but the overall strength of the securities markets, new business and the repricing of certain services were also instrumental. For more information on the sales of the Long Island branches and the interest in Key Merchant Services, LLC, see Note 3 ("Mergers, Acquisitions and Divestitures") which begins on page 60. NONINTEREST EXPENSE. Noninterest expense for the fourth quarter of 1999 totaled $883 million, compared with $667 million in the fourth quarter of 1998. In 1999, results include restructuring and other special charges of $145 million recorded in connection with strategic actions that Key is taking to improve operating efficiency and profitability. For more information about these charges, see the section entitled 50 [LOGO: KEYCORP] 27 "Restructuring and other special charges" on page 41. Also included in 1999 expense are $18 million of other one-time charges, the largest of which was $7 million. Excluding nonrecurring charges in 1999 and $8 million of merger and integration charges recorded a year ago, core noninterest expense increased by $61 million, or 9%, from the fourth quarter of 1998. The rise in core noninterest expense came largely from personnel expense (up $31 million, due primarily to the October 1998 acquisition of McDonald) and higher costs associated with computer processing (up $14 million). The increase in personnel expense was moderated by a $12 million reduction in stock-based compensation. PROVISION FOR LOAN LOSSES. The provision for loan losses was $83 million for the fourth quarter of 1999, representing a $6 million increase from the same period a year ago. Net loan charge-offs totaled $83 million and were .52% of average loans outstanding for the quarter, compared with $77 million and .50%, respectively, for the fourth quarter of 1998. FIGURE 25 SELECTED QUARTERLY FINANCIAL DATA
dollars in millions, except per share amounts 1999 1998 ---------------------------------------- ------------------------------------------- FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST - --------------------------------------------------------------------------------------------------------------------------------- FOR THE QUARTER Interest income $ 1,489 $ 1,433 $ 1,392 $ 1,381 $ 1,411 $ 1,415 $ 1,372 $ 1,327 Interest expense 784 733 695 696 724 734 706 677 Net interest income 705 700 697 685 687 681 666 650 Provision for loan losses 83 78 76 111 77 71 72 77 Noninterest income before net securities gains 667 487 506 605 442 392 378 354 Net securities gains 3 2 20 4 5 -- 2 2 Noninterest expense 883 701 717 748 667 628 602 586 Income before income taxes 409 410 430 435 390 374 372 343 Net income 264 270 280 293 260 252 249 235 - --------------------------------------------------------------------------------------------------------------------------------- PER COMMON SHARE Net income $ .59 $ .60 $ .63 $ .65 $ .58 $ .57 $ .57 $ .53 Net income-- assuming dilution .59 .60 .62 .65 .57 .57 .56 .53 Cash dividends .26 .26 .26 .26 .235 .235 .235 .235 Book value at period end 14.41 14.25 13.90 13.63 13.63 12.73 12.55 12.15 Market price: High 29.75 33.50 38.13 34.19 34.06 39.50 44.88 39.25 Low 21.00 25.19 29.13 29.69 23.38 24.75 34.44 31.56 Close 22.13 25.81 32.13 30.31 32.00 28.88 35.63 37.81 Weighted average common shares (000) 446,402 448,742 448,037 449,520 449,949 438,856 440,092 438,589 Weighted average common shares and potential common shares (000) 449,678 452,886 452,733 454,197 454,527 443,750 446,568 444,836 - --------------------------------------------------------------------------------------------------------------------------------- AT PERIOD END Loans $ 64,222 $ 63,181 $ 61,971 $ 61,045 $ 62,012 $ 59,444 $ 57,769 $ 54,900 Earning assets 73,733 72,831 71,097 70,458 70,240 68,568 66,941 64,368 Total assets 83,395 82,577 80,889 79,992 80,020 77,691 75,778 73,198 Deposits 43,233 43,466 43,016 41,323 42,583 42,597 41,794 41,661 Long-term debt 15,881 15,815 15,168 15,457 12,967 11,353 10,196 9,041 Shareholders' equity 6,389 6,397 6,235 6,105 6,167 5,553 5,525 5,338 Full-time equivalent employees 24,568 25,523 25,758 25,650 25,862 24,586 24,711 24,650 Branches 936 963 965 969 968 961 962 1,006 - --------------------------------------------------------------------------------------------------------------------------------- PERFORMANCE RATIOS Return on average total assets 1.27% 1.32% 1.40% 1.49% 1.31% 1.32% 1.35% 1.32% Return on average equity 16.18 17.06 18.16 19.48 17.12 18.14 18.47 18.25 Efficiency(a) 59.16 58.61 59.26 60.22 58.66 58.09 59.02 58.19 Overhead(b) 30.39 30.18 29.97 33.19 32.37 34.25 38.07 36.12 Net interest margin (taxable equivalent) 3.88 3.92 3.97 3.95 3.99 4.08 4.10 4.14 - --------------------------------------------------------------------------------------------------------------------------------- CAPITAL RATIOS AT PERIOD END Equity to assets 7.66% 7.75% 7.71% 7.63% 7.71% 7.15% 7.29% 7.29% Tangible equity to tangible assets 6.03 6.06 5.95 5.86 5.93 5.79 5.91 5.81 Tier 1 risk-adjusted capital 7.68 7.84 7.48 7.44 7.21 7.01 7.15 6.81 Total risk-adjusted capital 11.66 11.94 11.74 11.92 11.69 11.61 11.86 11.38 Leverage 7.77 7.85 7.41 7.21 6.95 6.88 7.04 6.61 - ---------------------------------------------------------------------------------------------------------------------------------
Key has completed several mergers, acquisitions and divestitures during the two-year period shown in this table. One or more of these transactions may have had a significant effect on Key's results, making it difficult to compare results from one year to the next. Note 3 ("Mergers, Acquisitions and Divestitures"), which begins on page 60, has specific information about the business combinations and divestitures that Key completed in the past three years to help you understand how those transactions may have impacted Key's financial condition and results of operations. (a) This ratio, which measures the extent to which recurring revenues are absorbed by operating expenses, is calculated as follows: noninterest expense (excluding certain nonrecurring charges) divided by the sum of taxable-equivalent net interest income and noninterest income (excluding net securities transactions, gains from certain divestitures and certain nonrecurring charges). (b) This ratio is the difference between noninterest expense (excluding certain nonrecurring charges) and noninterest income (excluding net securities transactions, gains from certain divestitures and certain nonrecurring charges) divided by taxable-equivalent net interest income. [LOGO: KEYCORP] 51 28 REPORT OF MANAGEMENT Key's management is responsible for the preparation, content and integrity of the financial statements and other statistical data and analyses compiled for this annual report. The financial statements and related notes have been prepared in conformity with generally accepted accounting principles and reflect management's best estimates and judgments. Management believes that the financial statements and notes present fairly Key's financial position, results of operations, and cash flows, and that the financial information presented elsewhere in this annual report is consistent with the financial statements. Management is responsible for establishing and maintaining a system of internal control to ensure the protection of assets and the integrity of the financial statements. This corporate-wide system of controls includes self-monitoring mechanisms, written policies and procedures, proper delegation of authority and organizational division of responsibility, and the careful selection and training of qualified personnel. Management also maintains a code of ethics that addresses conflicts of interest, compliance with laws and regulations, and prompt reporting of any failure or circumvention of controls, among other things. We generally certify compliance with Key's code of ethics annually. We have established an effective risk management function to periodically test the other internal controls, and we endeavor to correct control deficiencies as they are identified. Although any system of internal control can be compromised by human error or intentional circumvention of required procedures, management believes that Key's system provides reasonable assurances that financial transactions are recorded properly, providing an adequate basis for reliable financial statements. The Board of Directors discharges its responsibility for Key's financial statements through its Audit and Risk Review Committee. Key's Audit and Risk Review Committee, which draws its members exclusively from the outside directors, also recommends the independent auditors. The Audit and Risk Review Committee meets regularly with the independent auditors to review the scope of their audits and audit reports and to discuss necessary action. Both the independent and internal auditors have direct access to and interaction with the Audit and Risk Review Committee. Management has assessed Key's internal control and procedures over financial reporting using criteria described in "Internal Control-Integrated Framework," issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, management believes that Key maintained an effective system of internal control for financial reporting as of December 31, 1999. /s/ Robert W. Gillespie Robert W. Gillespie Chairman and Chief Executive Officer /s/ K. Brent Somers K. Brent Somers Senior Executive Vice President and Chief Financial Officer REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Shareholders and Board of Directors KeyCorp We have audited the accompanying consolidated balance sheets of KeyCorp and subsidiaries ("Key") as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in shareholders' equity, and cash flow for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of Key's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Key at December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Cleveland, Ohio January 14, 2000 52 KEYCORP AND SUBSIDIARIES 29
CONSOLIDATED BALANCE SHEETS DECEMBER 31, dollars in millions 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 2,816 $ 3,296 Short-term investments 1,860 1,974 Securities available for sale 6,665 5,278 Investment securities (fair value: $998 and $1,004) 986 976 Loans, net of unearned income of $1,621 and $1,533 64,222 62,012 Less: Allowance for loan losses 930 900 - ----------------------------------------------------------------------------------------------------------------------------------- Net loans 63,292 61,112 Premises and equipment 797 902 Goodwill 1,389 1,430 Other intangible assets 60 79 Corporate owned life insurance 2,110 2,008 Other assets 3,420 2,965 - ----------------------------------------------------------------------------------------------------------------------------------- Total assets $ 83,395 $ 80,020 ======== ======== LIABILITIES Deposits in domestic offices: Noninterest-bearing $ 8,607 $ 9,540 Interest-bearing 33,390 32,091 Deposits in foreign office - interest-bearing 1,236 952 - ----------------------------------------------------------------------------------------------------------------------------------- Total deposits 43,233 42,583 Federal funds purchased and securities sold under repurchase agreements 4,177 4,468 Bank notes and other short-term borrowings 8,439 9,728 Other liabilities 4,033 3,110 Long-term debt 15,881 12,967 Corporation-obligated mandatorily redeemable preferred capital securities of subsidiary trusts holding solely subordinated debentures of the Corporation (See Note 10) 1,243 997 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities 77,006 73,853 SHAREHOLDERS' EQUITY Preferred stock, $1 par value; authorized 25,000,000 shares, none issued -- -- Common shares, $1 par value; authorized 1,400,000,000 shares; issued 491,888,780 shares 492 492 Capital surplus 1,412 1,412 Retained earnings 5,833 5,192 Loans to ESOP trustee (24) (34) Treasury stock, at cost (48,462,243 and 39,437,183 shares) (1,197) (923) Accumulated other comprehensive (loss) income (127) 28 - ----------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 6,389 6,167 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 83,395 $ 80,020 ======== ======== - ----------------------------------------------------------------------------------------------------------------------------------- See Notes to Consolidated Financial Statements.
KEYCORP AND SUBSIDIARIES 53 30
CONSOLIDATED STATEMENTS OF INCOME YEAR ENDED DECEMBER 31, dollars in millions, except per share amounts 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans $ 5,146 $ 4,935 $ 4,618 Taxable investment securities 15 12 12 Tax-exempt investment securities 31 45 66 Securities available for sale 424 449 526 Short-term investments 79 84 40 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest income 5,695 5,525 5,262 INTEREST EXPENSE Deposits 1,305 1,359 1,462 Federal funds purchased and securities sold under repurchase agreements 220 342 359 Bank notes and other short-term borrowings 426 459 283 Long-term debt, including capital securities 957 681 413 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest expense 2,908 2,841 2,517 - ----------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME 2,787 2,684 2,745 Provision for loan losses 348 297 320 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 2,439 2,387 2,425 NONINTEREST INCOME Trust and asset management income 443 335 266 Investment banking and capital markets income 354 239 119 Service charges on deposit accounts 330 306 299 Brokerage income 156 71 54 Corporate owned life insurance income 107 104 85 Credit card fees 63 68 96 Net loan securitization gains (losses) 64 4 (28) Net securities gains 29 9 1 Gains from branch divestitures 194 39 151 Gains from other divestitures 161 50 -- Other income 393 350 263 - ----------------------------------------------------------------------------------------------------------------------------------- Total noninterest income 2,294 1,575 1,306 NONINTEREST EXPENSE Personnel 1,482 1,256 1,181 Net occupancy 239 226 222 Computer processing 236 176 131 Equipment 203 185 177 Marketing 106 100 86 Amortization of intangibles 104 91 87 Professional fees 70 62 47 Restructuring charges 98 -- -- Other expense 511 387 455 - ----------------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 3,049 2,483 2,386 INCOME BEFORE INCOME TAXES 1,684 1,479 1,345 Income taxes 577 483 426 - ----------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 1,107 $ 996 $ 919 ========= ========= ========= Per common share: Net income $ 2.47 $ 2.25 $ 2.09 Net income -- assuming dilution 2.45 2.23 2.07 Weighted average common shares outstanding (000) 448,168 441,895 439,042 Weighted average common shares and potential common shares outstanding (000) 452,363 447,437 444,544 - -----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 54 KEYCORP AND SUBSIDIARIES 31
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY ACCUMULATED OTHER COMPRE- LOANS TO TREASURY HENSIVE COMPRE- COMMON CAPITAL RETAINED ESOP STOCK, (LOSS) HENSIVE dollars in millions, except per share amounts SHARES SURPLUS EARNINGS TRUSTEE AT COST INCOME INCOME - -------------------------------------------------------------------------------------------------------------------- ------------ BALANCE AT DECEMBER 31, 1996 $ 246 $ 1,484 $ 4,060 $ (49) $ (854) $ (6) Net income 919 $ 919 Other comprehensive income: Adjustment related to change in accounting for transfers of financial assets, net of deferred tax benefit of $(25) (43) (43) Net unrealized gains on securities available for sale, net of income taxes of $24(a) 60 60 ------- Total comprehensive income $ 936 ======= Cash dividends on common shares ($.84 per share) (369) Issuance of common shares: Acquisition - 3,336,118 shares 56 143 Employee benefit and dividend reinvestment plans - 2,287,478 net shares (11) 100 Repurchase of common shares - 10,045,718 shares (563) ESOP transactions 1 7 Two-for-one stock split effected by means of a 100% stock dividend 246 (246) - -------------------------------------------------------------------------------------------------------------------- ------------ BALANCE AT DECEMBER 31, 1997 492 1,283 4,611 (42) (1,174) 11 Net income 996 $ 996 Other comprehensive income: Net unrealized gains on securities available for sale, net of income taxes of $9(a) 17 17 ------- Total comprehensive income $ 1,013 ======= Cash dividends on common shares ($.94 per share) (416) Issuance of common shares: Acquisition - 19,337,159 shares 129 440 Employee benefit and dividend reinvestment plans - 3,050,008 net shares 67 Repurchase of common shares - 7,999,400 shares (256) ESOP transactions 1 8 - -------------------------------------------------------------------------------------------------------------------- ------------ BALANCE AT DECEMBER 31, 1998 492 1,412 5,192 (34) (923) 28 Net income 1,107 $ 1,107 Other comprehensive losses: Net unrealized losses on securities available for sale, net of income taxes of $(94)(a) (148) (148) Foreign currency translation adjustments (7) (7) ------- Total comprehensive income $ 952 ======= Cash dividends on common shares ($1.04 per share) (467) Issuance of common shares: Acquisition - 632,183 shares 6 15 Employee benefit and dividend reinvestment plans - 2,249,181 net shares (6) 55 Repurchase of common shares - 11,906,424 shares (344) ESOP transactions 1 10 - -------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1999 $ 492 $ 1,412 $ 5,833 $ (24) $(1,197) $ (127) ======= ======= ======= ======= ======= ======= - -------------------------------------------------------------------------------------------------------------------- (a) Net of reclassification adjustments. Reclassification adjustments represent net unrealized gains or losses as of December 31 of the prior year on securities available for sale that were sold during the current year. In 1999 and 1998, the reclassification adjustments were $3 million ($2 million after tax) and $9 million ($6 million after tax), respectively.
See Notes to Consolidated Financial Statements. KEYCORP AND SUBSIDIARIES 55 32
CONSOLIDATED STATEMENTS OF CASH FLOW YEAR ENDED DECEMBER 31, in millions 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 1,107 $ 996 $ 919 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 348 297 320 Depreciation expense and software amortization 292 237 197 Amortization of intangibles 104 91 87 Net gains from divestitures (355) (89) (151) Net securities gains (29) (9) (1) Net (gains) losses from loan securitizations and sales (86) (56) 2 Deferred income taxes 466 325 139 Net (increase) decrease in mortgage loans held for sale 3 156 (54) Net (increase) decrease in trading account assets 109 (34) (498) Net increase (decrease) in accrued restructuring charges 88 (22) (75) Other operating activities, net (193) (89) (640) - ----------------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,854 1,803 245 INVESTING ACTIVITIES Net increase in loans, excluding acquisitions, sales and divestitures (8,110) (9,081) (6,936) Purchases of loans (7) (859) -- Proceeds from loan securitizations and sales 4,776 987 3,144 Purchases of investment securities (294) (145) (497) Proceeds from sales of investment securities 17 69 12 Proceeds from prepayments and maturities of investment securities 292 401 823 Purchases of securities available for sale (4,750) (1,837) (3,378) Proceeds from sales of securities available for sale 419 215 735 Proceeds from prepayments and maturities of securities available for sale 3,176 4,013 2,770 Net (increase) decrease in other short-term investments 5 296 (905) Purchases of premises and equipment (94) (126) (156) Proceeds from sales of premises and equipment 27 50 71 Proceeds from sales of other real estate owned 10 11 28 Purchases of corporate owned life insurance -- -- (300) Net cash paid in connection with divestitures (576) (433) (918) Cash used in acquisitions, net of cash acquired -- (34) (1) - ----------------------------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (5,109) (6,473) (5,508) FINANCING ACTIVITIES Net increase (decrease) in deposits 1,985 (1,832) 2,011 Net increase (decrease) in short-term borrowings (1,560) 984 2,031 Net proceeds from issuance of long-term debt, including capital securities 5,220 6,732 3,691 Payments on long-term debt, including capital securities (2,102) (949) (1,403) Loan payment received from ESOP trustee 10 8 7 Purchases of treasury shares (344) (256) (563) Net proceeds from issuance of common stock 33 44 65 Cash dividends (467) (416) (369) - ----------------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 2,775 4,315 5,470 - ----------------------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (480) (355) 207 CASH AND DUE FROM BANKS AT BEGINNING OF YEAR 3,296 3,651 3,444 - ----------------------------------------------------------------------------------------------------------------------------------- CASH AND DUE FROM BANKS AT END OF YEAR $ 2,816 $ 3,296 $ 3,651 ======= ======= ======= - ----------------------------------------------------------------------------------------------------------------------------------- Additional disclosures relative to cash flow: Interest paid $ 2,749 $ 2,679 $ 2,427 Income taxes paid 185 148 253 Net amount received on portfolio swaps 18 2 61 Noncash items: Transfer of credit card receivables to loans held for sale $ 1,299 -- -- Reclassification of financial instruments from loans to securities available for sale 374 -- -- Fair value of Concord EFS, Inc. shares received 170 -- -- Carrying amount of Electronic Payment Services, Inc. shares divested 36 -- -- Assets sold 523 $ 165 $ 1,196 Liabilities sold 1,335 660 2,265 Assets purchased -- 742 1,397 Liabilities assumed -- 593 1,301 Transfer of other assets to securities available for sale -- -- 280 - -----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 56 KEYCORP AND SUBSIDIARIES 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION KeyCorp, an Ohio corporation and bank holding company headquartered in Cleveland, Ohio, is one of the nation's largest integrated multiline financial services companies. KeyCorp's subsidiaries provide investment management, retail and commercial banking, consumer finance, and investment banking products and services to corporate, individual and institutional clients through four lines of business: Key Retail Banking, Key Specialty Finance, Key Corporate Capital and Key Capital Partners. As of December 31, 1999, KeyCorp's banking subsidiaries operated 936 full-service branches, a 24-hour telephone banking call center services group and 2,516 ATMs in 15 states. As used in these Notes, KeyCorp refers solely to the parent company and Key refers to the consolidated entity consisting of KeyCorp and its subsidiaries. USE OF ESTIMATES Key's accounting policies conform to generally accepted accounting principles and prevailing practices within the financial services industry. In order to prepare Key's consolidated financial statements and the related notes, management must make certain estimates and judgments in determining the amounts presented. If these estimates prove to be inaccurate, actual results could differ from those reported. BASIS OF PRESENTATION The consolidated financial statements include the accounts of KeyCorp and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Some previously reported results have been reclassified to conform to current reporting practices. BUSINESS COMBINATIONS In a business combination accounted for as a pooling of interests, the assets, liabilities and shareholders' equity of Key and the combined company are carried forward at historical amounts. The results of operations are combined and financial statements from prior periods are restated to give effect to the combination. When Key accounts for a business combination as a purchase, the results of operations of the acquired company are combined with Key's results only from the date of acquisition. The acquired company's net assets are recorded at fair value at the date of acquisition. Purchase premiums and discounts are amortized over the remaining lives of the related assets or liabilities. The difference between the purchase price and the fair value of the net assets acquired is recorded as goodwill. STATEMENT OF CASH FLOW Cash and due from banks are considered "cash and cash equivalents" for financial reporting purposes. SECURITIES AND TRADING ACCOUNT ASSETS Key classifies its securities into three categories: held to maturity, trading account assets and available for sale. SECURITIES HELD TO MATURITY. Key has the intent and ability to hold these debt securities until maturity. These securities are carried at cost, adjusted for amortization of premiums and accretion of discounts using the level-yield method. Securities held to maturity and equity securities that do not have readily determinable fair values are presented as "investment securities" on the balance sheet. TRADING ACCOUNT ASSETS. These are debt and equity securities that are purchased and held by Key with the intent of selling them in the near term. These securities are reported at fair value ($768 million at December 31, 1999, and $877 million at December 31, 1998) and included in "short-term investments" on the balance sheet. Realized and unrealized gains and losses on trading account assets are reported in "other income" on the income statement. SECURITIES AVAILABLE FOR SALE. These are debt and equity securities that Key has not classified as investment securities or trading account assets. Securities available for sale are reported at fair value; unrealized gains and losses (net of income taxes) are recorded in shareholders' equity as a component of "accumulated other comprehensive (loss) income." Actual gains and losses on the sales of these securities are computed using the specific identification method and included in "net securities gains (losses)" on the income statement. LOANS Loans are carried at the principal amount outstanding, net of unearned income, including net deferred loan fees and costs. Key defers certain nonrefundable loan origination and commitment fees and the direct costs of originating or acquiring loans. The net deferred amount is amortized over the estimated lives of the related loans as an adjustment to the yield. At December 31, 1999, loans held for sale include credit card receivables, as well as mortgage, home equity and education loans. These loans are carried at the lower of aggregate cost or fair value. Fair value is determined based on prices observed in the market for loans with similar characteristics. When a loan is placed in the held for sale category, the amortization of deferred fees and costs is discontinued. The remaining unamortized fees and costs are recognized at the time the loan is sold. Direct financing leases are carried at the aggregate of lease payments receivable plus estimated residual values, less unearned income. Unearned income on direct financing leases is amortized over the lease terms using methods that approximate the interest method, which amortizes unearned income to produce a level yield on the lease. Net gains on sales of lease residuals are included in "other income" on the income statement. IMPAIRED AND OTHER NONACCRUAL LOANS Key will generally stop accruing interest on a loan (i.e., designate the loan "nonaccrual") when payment is 90 days or more past due, unless the loan is well-secured and in the process of collection. Once a loan is designated as nonaccrual, the interest accrued but not collected is charged against the allowance for loan losses, and payments subsequently received are applied to principal. However, if management believes that all principal and interest on a nonaccrual loan ultimately are collectible, interest income may be recognized as received. Nonaccrual loans, other than smaller-balance homogeneous loans (i.e., loans to finance residential mortgages, automobiles, etc.), are designated "impaired." Impaired loans and other nonaccrual loans are returned to accrual status when management determines that the borrower's performance has improved and that both principal and interest are collectible. This generally requires a sustained period (typically six months or more) of timely repayment performance. [LOGO-KEYCORP] 57 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS LOAN SECURITIZATIONS On January 1, 1997, Key adopted Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"). SFAS 125 provides that certain assets that are subject to prepayment and retained in connection with a securitization must be accounted for like debt securities that are classified as available for sale or as trading account assets, which are carried at fair value. To satisfy this requirement, Key reclassified approximately $280 million of retained interests in securitizations from "other assets" to "securities available for sale." At the time of the transfer, the carrying amount of these assets exceeded their fair value by approximately $68 million. This difference was recorded as a reduction to the carrying amount of the transferred assets, and a matching reduction of $43 million (after-tax) was made to "accumulated other comprehensive (loss) income" in shareholders' equity. Key realizes gains from loan securitizations when loans are sold for more than their allocated carrying amount. In some cases, Key retains an interest in securitized loans (also known as an "interest-only strip"). These retained interests are subject to the rules prescribed by SFAS 125. Therefore, they initially are recorded at an allocated carrying amount based on fair value. Fair value is determined by computing the present value of estimated cash flows using a discount rate considered commensurate with the risks associated with the cash flows and the dates that Key expects to receive such cash flows. Key records net gains and losses in "net loan securitization gains (losses)" on the income statement. Income earned under servicing or administration arrangements is recorded in "other income" on the income statement. Key has a valuation committee that meets quarterly to ensure that all retained interest-only strips are valued appropriately in the financial statements. The committee reviews the historical performance of each strip and the assumptions used to project future cash flows. Assumptions are revised if past performance and future expectations dictate, and cash flows are recalculated based on the revised assumptions. The present value of these cash flows is referred to as the "interest-only strip fair value." For strips classified as trading account assets, any increase or decrease in the asset's fair value is recognized immediately in "net loan securitization gains (losses)." For interest-only strips classified as securities available for sale, impairment is indicated if the carrying amount of the interest-only strip exceeds its fair value. A determination is made as to whether this difference represents permanent or temporary impairment. Permanent impairment is recognized in income. Temporary impairment is recorded in equity as a component of "accumulated other comprehensive (loss) income." If the interest-only strip fair value exceeds the carrying amount of the strip, the write-up to fair value is similarly recorded in equity. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses represents management's estimate of the amount that is necessary to absorb potential credit losses in the loan portfolio. Key determines and maintains an appropriate allowance for loan losses based on a comprehensive and consistently applied analysis of the loan portfolio, which is conducted at least quarterly, and more often, if deemed necessary. ALLOWANCE FOR IMPAIRED LOANS. When appropriate, an impaired loan is assigned a specific allowance. Management calculates the extent of the impairment, which is the carrying amount of the loan less the fair value of any existing collateral (for a secured loan) or the estimated present value of future cash flows (for an unsecured loan). When collateral value or expected cash flow does not justify the carrying amount of a loan, the amount that management deems uncollectible (the impaired amount) is charged against the allowance for loan losses. When collateral value or other sources of repayment appear sufficient, but management remains uncertain about whether the loan will be repaid in full, an amount is specifically allocated in the allowance for loan losses. ALLOWANCE FOR NONIMPAIRED LOANS AND BINDING COMMITMENTS. Management establishes an allowance for nonimpaired loans and legally binding commitments by applying Key's historical loss rates to existing loans with similar risk characteristics. The results of this analysis are then adjusted based on management's review of factors that may skew such rates, including: - - changes in national and local economic and business conditions; - - changes in experience, ability and depth of lending management and staff or in lending policies or in the mix and volume of the loan portfolio; - - the trend of the volume of past due, nonaccrual and other loans; and - - the effect of external factors, such as competition, legal developments and regulatory guidelines. In addition, management generally maintains an unallocated allowance in light of the subjectivity inherent in estimating potential credit losses. As of December 31, 1999, Key has not detected any meaningful credit quality issues arising from client difficulties with Year 2000 conversions that would result in an adjustment to the allowance for loan losses. Nonetheless, it is possible that such issues may arise over an extended period of time. Key will continue to monitor its loan portfolio for situations that might require special attention. PREMISES AND EQUIPMENT Premises and equipment, including leasehold improvements, are stated at cost less accumulated depreciation and amortization. Management determines depreciation of premises and equipment using the straight-line method over the estimated useful lives of the particular assets. Leasehold improvements are amortized using the straight-line method over the terms of the leases. Accumulated depreciation and amortization on premises and equipment totaled $922 million at December 31, 1999, and $905 million at December 31, 1998. INTANGIBLE ASSETS "Goodwill" represents the amount by which the cost of net assets acquired exceeds their fair value. Goodwill is amortized using the straight-line method over the period (up to 25 years) that management expects the acquired assets to have value. "Other intangibles" primarily represent the net present value of the future economic benefits to be derived from the purchase of core deposits. Other intangibles are amortized on either an accelerated or straight-line basis over periods ranging from 5 to 15 years. Accumulated amortization on goodwill and other intangible assets was $566 million at December 31, 1999, and $467 million at December 31, 1998. Key reviews goodwill and other intangibles for impairment when impairment indicators, such as significant changes in market conditions, changes in product mix or management focus, and a potential sale or disposition, arise. In most instances, Key will use the undiscounted cash flow method, but the market value method is used if Key is considering a sale or disposition. INTERNALLY DEVELOPED SOFTWARE Key relies on both company personnel and independent contractors to plan, develop, install, customize and enhance computer systems applications that 58 [LOGO-KEYCORP] 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS support corporate and administrative operations. Software development costs, such as those related to program coding, testing, configuration and installation are capitalized and included in "other assets" on the balance sheet. The resulting asset ($286 million at December 31, 1999, and $368 million at December 31, 1998) is amortized using the straight-line method over its expected useful life (not to exceed five years). Costs incurred during the planning and post-development phase of an internal software project are expensed as incurred. Key's Internally Developed Software Valuation Committee reviews internally developed software for impairment quarterly, and more often if deemed necessary. The committee reviews all significant projects to evaluate software performance and usage relative to expectations. Software that is considered impaired is written down to its fair value. When management decides to replace unimpaired software, amortization of such software is accelerated to the expected replacement date. DERIVATIVES USED FOR ASSET AND LIABILITY MANAGEMENT PURPOSES Key uses derivatives known as interest rate swaps and caps to manage interest rate risk. These instruments modify the repricing or maturity characteristics of specified on-balance sheet assets and liabilities. For example, an interest rate cap tied to variable rate debt would effectively prevent the interest rate on that debt from rising above a specified point. To qualify for hedge accounting treatment, a derivative must be effective at reducing the risk associated with the exposure being managed and must be designated as a risk management transaction at the inception of the derivative contract. The test for whether an instrument effectively reduces risk is whether there is a high degree of interest rate correlation between the derivative and the asset or liability being managed, both at inception and over the life of the derivative contract. There are several rules that govern the hedge accounting treatment of derivatives: - - Changes in fair value of a derivative are not included in the financial statements. - - The net interest income or expense associated with a derivative is accrued and recognized as an adjustment to the interest income or interest expense of the asset or liability being managed. - - The interest receivable or payable from a derivative contract is recorded in "other assets" or "other liabilities" on the balance sheet. - - Premiums paid for a derivative are amortized as an adjustment to the interest income or expense of the asset or liability being managed. - - Realized gains and losses resulting from the early termination of a derivative contract are deferred as an adjustment to the carrying amount of the related asset or liability. - - Deferred gains or losses from early terminations are amortized using the straight-line method over the shorter of the projected remaining life of the derivative contract on the date of termination or the projected remaining life of the underlying asset or liability on such date. DERIVATIVES USED FOR TRADING PURPOSES Derivatives that are not used for asset and liability management purposes are used for trading purposes. Key enters into contracts for such derivatives either to make a market for clients or for proprietary trading purposes. Derivatives used for trading purposes typically include financial futures, foreign exchange forward and spot contracts, written and purchased options (including currency options), and interest rate swaps, caps and floors. All derivatives used for trading purposes are recorded at fair value. Fair value is determined by estimating the present value of future cash flows. Derivatives with a positive fair value are included in "other assets" on the balance sheet, and derivatives with a negative fair value are included in "other liabilities." Changes in fair value (including payments and receipts) are recorded in "investment banking and capital markets income" on the income statement. EMPLOYEE STOCK OPTIONS Key accounts for stock options issued to employees using the intrinsic value method. This method requires that compensation expense be recognized to the extent the fair value of the stock exceeds the exercise price of the option at the grant date. Employee stock options generally have exercise prices that are equal to or greater than the fair value of Key's common shares at the grant date. Therefore, Key does not recognize compensation expense when options are granted. In the case of options with features tied to Key's financial performance, Key recognizes compensation expense after the grant date when the fair value of the stock exceeds the exercise price and it is highly probable that the financial performance measures will be met. MARKETING COSTS Key expenses all marketing-related costs, including advertising costs, as incurred. RESTRUCTURING CHARGES Restructuring charges may be recorded by Key in connection with certain events or transactions including business combinations, changes in Key's strategic plan, changing business conditions that may result in a decrease or exit from affected businesses, or other factors. Such charges typically result from the consolidation or relocation of operations, or the disposition or abandonment of operations or productive assets. Any of these events could result in a significant downsizing of the workforce. To qualify as restructuring charges, costs must be incremental and incurred as a direct result of the restructuring event or transaction. Restructuring charges do not include costs that are associated with or incurred to benefit future periods. Among the costs typically included in restructuring charges and often associated with the term "restructuring" are those related to: - - employee severance and termination benefits; - - the consolidation of operations facilities; and - - losses resulting from the impairment or disposal of assets. ACCOUNTING PRONOUNCEMENTS ADOPTED IN 1999 RETAINED INTERESTS FROM SECURITIZATIONS. As of January 1, 1999, Key adopted Statement of Financial Accounting Standards No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" ("SFAS 134"). SFAS 134 requires Key to classify mortgage-backed securities or other retained interests resulting from mortgage loan securitizations according to Key's ability and intent to sell or hold those assets. The statement conforms the accounting for securities and uncertificated interests retained after the securitization of mortgage loans to the accounting for securities and uncertificated interests retained after the securitization of other types of assets by non-mortgage banking enterprises. Key has reclassified retained interests from mortgage loan securitizations as either "available for sale" or "trading securities." Because Key was [LOGO-KEYCORP] 59 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS following the procedures prescribed by SFAS 134 before formally adopting the standard, the accounting change had minimal impact on Key's financial condition and results of operations. COSTS OF COMPUTER SOFTWARE. As of January 1, 1999, Key adopted Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). This statement provides guidance on matters including the characteristics to be considered in identifying internal-use software and the circumstances under which related costs should be expensed or capitalized. The provisions of SOP 98-1 are substantially consistent with the accounting policy that Key already followed for internally developed software. As a result, adoption did not have a material impact on Key's financial condition or results of operations. ACCOUNTING PRONOUNCEMENTS PENDING ADOPTION DERIVATIVES AND HEDGING ACTIVITIES. In July 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137, "Deferral of the Effective Date of SFAS 133." This new statement delays the effective date of SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," until fiscal years beginning after June 15, 2000. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively called "derivatives") and for hedging activities. SFAS 133 requires that all derivatives be recognized on the balance sheet at fair value. Depending on the nature of the hedge, and the extent to which it is effective, the changes in fair value of the derivative will either be offset against the change in fair value of the hedged item (which also is recognized in earnings) or recorded in comprehensive income and subsequently recognized in earnings in the period the hedged item affects earnings. The portion of a hedge that is deemed ineffective and all changes in the fair value of derivatives not designated as hedges will be recognized immediately in earnings. Key will adopt the provisions of SFAS 133 as of January 1, 2001. Management is currently reviewing SFAS 133 to determine the extent to which the statement will alter Key's use of certain derivatives in the future and the impact on Key's financial condition and results of operations. 2. EARNINGS PER COMMON SHARE The computation of Key's basic and diluted earnings per common share is as follows:
YEAR ENDED DECEMBER 31, dollars in millions, except per share amounts 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- NET INCOME $1,107 $996 $919 ====== ==== ==== - -------------------------------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE COMMON SHARES Weighted average common shares outstanding (000) 448,168 441,895 439,042 Potential addition to common shares (000)(a) 4,195 5,542 5,502 - -------------------------------------------------------------------------------------------------------------------------------- Weighted average common shares and potential common shares outstanding (000) 452,363 447,437 444,544 ======= ======= ======= - -------------------------------------------------------------------------------------------------------------------------------- EARNINGS PER COMMON SHARE Net income per common share $2.47 $2.25 $2.09 Net income per common share-- assuming dilution 2.45 2.23 2.07 - --------------------------------------------------------------------------------------------------------------------------------
(a) Represents the effect of dilutive common stock options. 3. MERGERS, ACQUISITIONS AND DIVESTITURES COMPLETED MERGERS AND ACQUISITIONS MCDONALD & COMPANY INVESTMENTS, INC. On October 23, 1998, Key acquired McDonald & Company Investments, Inc., a full-service investment banking and securities brokerage company headquartered in Cleveland, Ohio. McDonald had assets of approximately $776 million at the time of the transaction. To acquire McDonald, Key issued 19,337,159 common shares, with a value of approximately $581 million. The transaction was structured as a tax-free merger and was accounted for as a purchase. Key recorded goodwill of $444 million, which is being amortized using the straight-line method over a period of 25 years. Key established a retention program under which certain McDonald employees received stock options for approximately 3.3 million Key common shares. The options will vest over a three-year period. In addition, approximately $30 million in cash may be paid to certain McDonald employees over a three-year period. CHAMPION MORTGAGE CO., INC. On August 29, 1997, Key acquired Champion Mortgage Co., Inc., a home equity finance company headquartered in Parsippany, New Jersey. Champion is now a wholly owned subsidiary of Key Bank USA, National Association, which is a wholly owned subsidiary of KeyCorp. To acquire Champion, Key exchanged 3,336,118 pre-split common shares, with a value of approximately $200 million, for all of the outstanding shares of Champion common stock. If Champion achieves certain volume and profitability performance targets over the three-year period following the acquisition date, Champion's former shareholders may receive up to an additional $100 million in Key common shares. The transaction was structured as a tax-free exchange and was accounted for as a purchase. Key recorded goodwill of $195 million, which is being amortized using the straight-line method over a period of 25 years. LEASETEC CORPORATION On July 1, 1997, Key acquired an 80% interest (with an option to purchase the remaining 20%) in Leasetec Corporation, an equipment leasing company headquartered in Boulder, Colorado. At the time of the transaction, 60 [LOGO-KEYCORP] 37 NOTES TO CONDOLIDATED FINANCIAL STATEMENTS Leastec had assets of approximately $1.1 billion and maintained operations in the United States and overseas. The transaction was accounted for as a purchase. Key recorded goodwill of $126 million, which is being amortized using the straight-line method over a period of 25 years. Key acquired the remaining 20% interest in Leasetec on June 26, 1998. This transaction created additional goodwill of $26 million, which is being amortized over the remainder of the 25-year period that began July 1, 1997. Due to a confidentiality clause in the purchase agreement, the terms, which are not material, have not been disclosed publicly. COMPLETED DIVESTITURES COMPAQ CAPITAL EUROPE LLC AND COMPAQ CAPITAL ASIA PACIFIC LLC On July 28, 1999, Key sold its 50% interests in Compaq Capital Europe LLC and Compaq Capital Asia Pacific LLC to Compaq Capital Corporation. Key and Compaq formed these companies in 1998 to provide customized equipment leasing and financing programs to Compaq's clients in the United Kingdom, Europe and Asia. Key recognized a gain of $13 million ($8 million after tax), which is included in "gains from other divestitures" on the income statement. ELECTRONIC PAYMENT SERVICES, INC. On February 28, 1999, Electronic Payment Services, Inc., an electronic funds transfer processor in which Key held a 20% interest, merged with a wholly owned subsidiary of Concord EFS, Inc. Key received 5,931,825 shares of Concord EFS in exchange for its Electronic Payment Services stock, and recognized a gain of $134 million ($85 million after tax), which is included in "gains from other divestitures" on the income statement. On June 17, 1999, Key sold the Concord EFS shares and recognized a gain of $15 million ($9 million after tax), which is included in "net securities gains" on the income statement. KEY MERCHANT SERVICES, LLC On January 21, 1998, Key sold a 51% interest in Key Merchant Services, LLC, a wholly owned subsidiary formed to provide merchant credit card processing services, to NOVA Information Systems, Inc. Key recognized a $23 million gain ($14 million after tax) at the time of closing. Under the terms of the agreement with NOVA, Key was entitled to receive additional payments if Key Merchant Services achieved certain revenue-related performance targets. These additional payments created a gain of $27 million ($17 million after tax) in the fourth quarter of 1998 and a final gain of $14 million ($9 million after tax) during the first quarter of 1999. These gains are included in "gains from other divestitures" on the income statement. Due to a confidentiality clause in the agreement, the terms, which are not material, have not been disclosed. BRANCH DIVESTITURES On October 18, 1999, Key sold its Long Island franchise, which included 28 KeyCenters with $1.3 billion in deposits and $505 million in loans. This transaction resulted in a gain of $194 million ($122 million after tax). During 1998, Key sold 46 KeyCenters with deposits of $658 million, and recorded aggregate gains of $39 million ($22 million after tax). During 1997, Key sold 76 KeyCenters (not including those involved in the sale of KeyBank Wyoming) with deposits of $1.3 billion, and recorded aggregate gains of $98 million ($62 million after tax). All of the above gains are included in "gains from branch divestitures" on the income statement. On July 14, 1997, Key sold KeyBank National Association (Wyoming), its Wyoming bank subsidiary, which had 28 branches (also known as KeyCenters). KeyBank Wyoming had assets of $1.1 billion and deposits of $931 million at the time of the transaction. Key recognized a gain of $53 million ($35 million after tax), which is included in "gains from branch divestitures" on the income statement. TRANSACTION PENDING AT DECEMBER 31, 1999 (UNAUDITED) On January 31, 2000, Key sold its credit card portfolio of $1.3 billion in receivables and nearly 600,000 active VISA and MasterCard accounts to Associates National Bank (Delaware). Key recognized a gain of $332 million ($209 million after tax). 4. LINE OF BUSINESS RESULTS Key's four major lines of business are Key Retail Banking, Key Specialty Finance, Key Corporate Capital and Key Capital Partners. KEY RETAIL BANKING Key Retail Banking delivers a complete line of branch-based financial products and services to small businesses and consumers. These products and services are delivered through 936 KeyCenters, a 24-hour telephone banking call center services group, 2,516 ATMs that access 13 different networks (resulting in one of the largest ATM networks in the United States) and a core team of relationship management professionals. KEY SPECIALTY FINANCE Key Specialty Finance provides indirect, non-branch-based consumer loan products, including automobile loans and leases, home equity loans, education loans, and marine and recreational vehicle loans. As of December 31, 1999, based on the volume of loans generated, Key Specialty Finance was one of the nation's leading providers of financing for education loans, automobile loans and leases, and purchases of marine and recreational vehicles. KEY CORPORATE CAPITAL Key Corporate Capital offers a complete range of financing, transaction processing and financial advisory services to corporations nationwide, and operates one of the largest bank-affiliated equipment leasing companies in the world, with operations in the United States, Europe and Asia. Based on total transaction volume, Key Corporate Capital is also one of the leading cash management providers in the country. Key Corporate Capital's business units are organized around six specialized industry client segments: commercial banking, commercial real estate, lease financing, structured finance, healthcare and media/telecommunications. These targeted client segments can receive a number of specialized services, including international banking, cash management and corporate finance advisory services. Key Corporate Capital also offers investment banking, capital markets, 401(k) and trust custody products in cooperation with Key Capital Partners. KEY CAPITAL PARTNERS Key Capital Partners provides asset management, wealth management, private banking, brokerage, investment banking, capital markets and insurance expertise. This line of business, which generates a substantial [LOGO-KEYCORP] 61 38 NOTES TO CONSOLIDATED FINAANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, KEY RETAIL BANKING KEY SPECIALTY FINANCE KEY CORPORATE CAPITAL ------------------------ -------------------------- -------------------------- dollars in millions 1999 1998 1997 1999 1998 1997 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS Net interest income (taxable equivalent) $ 1,227 $ 1,202 $ 1,373 $ 662 $ 601 $ 557 $ 1,027 $ 937 $ 850 Noninterest income 327 313 310 190 139 87 208 145 113 Revenue sharing(a) 64 84 51 4 3 4 143 114 80 - ------------------------------------------------------------------------------------------------------------------------------- Total revenue(b) 1,618 1,599 1,734 856 743 648 1,378 1,196 1,043 Provision for loan losses 61 60 61 182 183 207 112 75 67 Depreciation and amortization expense 140 131 164 62 53 40 64 53 25 Other noninterest expense 825 848 847 338 295 271 426 399 402 Expense sharing(a) 46 57 38 -- -- -- 80 64 46 - ------------------------------------------------------------------------------------------------------------------------------- Income before income taxes (taxable equivalent) 546 503 624 274 212 130 696 605 503 Allocated income taxes and taxable equivalent adjustments 202 184 250 109 86 46 262 227 185 - ------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 344 $ 319 $ 374 $ 165 $ 126 $ 84 $ 434 $ 378 $ 318 ======= ======= ======= ======= ======= ======= ======= ======= ======= Percent of consolidated net income (loss) 31% 32% 41% 15% 13% 9% 39% 38% 35% - ------------------------------------------------------------------------------------------------------------------------------- AVERAGE BALANCES Loans $10,006 $ 9,771 $10,012 $15,688 $14,605 $13,170 $29,206 $25,224 $20,390 Total assets(b) 11,310 11,094 11,146 16,774 15,623 13,925 30,576 26,225 21,462 Deposits 32,046 33,357 35,283 130 123 124 2,866 2,765 2,832 - ------------------------------------------------------------------------------------------------------------------------------- OTHER FINANCIAL DATA Expenditures for additions to long-lived assets(b) $ 15 $ 71 $ 111 $ 24 $ 18 $ 208 $ 20 $ 51 $ 144 Efficiency ratio(f) 62.48% 64.79% 60.50% 46.73% 46.84% 45.47% 41.76% 43.14% 45.35% - -------------------------------------------------------------------------------------------------------------------------------
(a) Represents the assignment of Key Capital Partners' revenue and expense to the lines of business principally responsible for maintaining the relationships with the clients that used Key Capital Partners' products and services. (b) Substantially all revenue generated by Key's major lines of business is derived from clients resident in the United States. Substantially all long-lived assets, including premises and equipment, capitalized software and goodwill, held by Key's major lines of business are located in the United States. (c) "Reconciling items" reflect certain nonrecurring items (which are included in noninterest income) and charges related to unallocated nonearning assets of corporate support functions (which are included in net interest income and allocated to the business segments through noninterest expense). Noninterest income includes gains of $357 million ($225 million after tax) in 1999, $89 million ($53 million after tax) in 1998, and $151 million ($97 million after tax) in 1997 from certain divestitures. Noninterest income in 1999 also includes a nonrecurring charge of $11 million ($7 million after tax). amount of Key's fee income, comprises three major business groups. One group, operating under the name McDonald Investments Inc., includes retail and institutional brokerage, equity and fixed income trading and underwriting, investment banking, capital markets products, loan syndication and trading, public finance and clearing operations. The second group, referred to as Key Asset Management, includes asset management, mutual funds, institutional asset services, wealth management and insurance. The third group, known as Key Principal Partners, includes equity capital, mezzanine finance and alliance funds. The future growth and success of Key Capital Partners depend heavily on its ability to capitalize on the corporate and retail banking distribution channels and client relationships that other Key lines of business have already developed. The table which spans pages 62 and 63 shows selected financial data for each major line of business for the years ended December 31, 1999, 1998 and 1997. The financial information was derived from the internal profitability reporting system that management uses to monitor and manage Key's financial performance. The selected financial data are based on internal accounting policies designed to ensure that results are compiled on a consistent basis and reflect the underlying economics of Key's four major businesses. In accordance with these policies: - - Funds transfer pricing was used in the determination of net interest income by assigning a standard cost for funds used (or a standard credit for funds provided) to assets and liabilities based on their maturity, prepayment and/or repricing characteristics. The net effect of funds transfer pricing is included in the "Treasury and Other" columns of the table. - - Indirect expenses, such as computer servicing costs and corporate overhead, were allocated based on the extent to which each line of business actually used the service. - - The provision for loan losses was allocated among the lines of business based primarily upon their actual net charge-offs, adjusted for loan growth and changes in risk profile. The level of the consolidated provision is based upon the methodology that Key uses to estimate its consolidated allowance for loan losses. This methodology is described in Note 1 ("Summary of significant accounting policies") under the heading "Allowance for loan losses" on page 58. - - Income taxes were allocated based on the statutory Federal income tax rate of 35% (adjusted for tax-exempt income from corporate owned life insurance, nondeductible goodwill amortization and tax credits associated with investments in low-income housing projects) and a blended state income tax rate (net of the Federal income tax benefit) of 2% for the periods presented. - - Capital was assigned to each line of business based on management's assessment of economic risk factors (primarily credit, operating and market risk). Developing and applying the methodologies that management follows to allocate items among Key's lines of business is a dynamic process. Accordingly, financial results may be revised periodically to reflect accounting enhancements, changes in the risk profile of a particular segment of Key's business or changes in Key's structure. In fact, the financial data for all three years presented in the above table reflects revisions in Key's organizational structure and funds transfer pricing methodology that occurred during 1999. Primary among the structural changes were the reclassification of five businesses (public sector, retail brokerage, wealth management, private banking and franchise trust) from Key Retail Banking to Key Capital Partners; the reclassification of commercial banking from Key Retail Banking to Key Corporate Capital; and the reclassification of institutional asset services from Key Corporate Capital to Key Capital Partners. Management also enhanced funds transfer 62 [LOGO-KEYCORP] 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
KEY CAPITAL PARTNERS TREASURY AND OTHER TOTAL SEGMENTS ------------------------ ---------------------- --------------------- 1999 1998 1997 1999 1998 1997 1999 1998 1997 ----------------------------------------------------------------------------- SUMMARY OF OPERATIONS Net interest income (taxable equivalent) $ 202 $ 159 $ 155 $(123) $(23) $ 26 $2,995 $2,876 $2,961 Noninterest income 1,033 724 493 169 158 161 1,927 1,479 1,164 Revenue sharing(a) (211) (201) (135) -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------- Total revenue(b) 1,024 682 513 46 135 187 4,922 4,355 4,125 Provision for loan losses 4 3 2 5 3 8 364 324 345 Depreciation and amortization expense 100 65 32 24 13 10 390 315 271 Other noninterest expense 863 561 477 127 121 132 2,579 2,224 2,129 Expense sharing(a) (126) (121) (84) -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------- Income before income taxes (taxable equivalent) 183 174 86 (110) (2) 37 1,589 1,492 1,380 Allocated income taxes and taxable equivalent adjustments 76 72 31 (81) (40) (16) 568 529 496 - ------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 107 $ 102 $ 55 $ (29) $ 38 $ 53 $1,021 $ 963 $ 884 ====== ====== ===== ===== ==== ==== ====== ====== ====== Percent of consolidated net income (loss) 10% 10% 6% (3)% 4% 6% 92% 97% 97% - ------------------------------------------------------------------------------------------------------------------- AVERAGE BALANCES Loans $4,449 $3,557 $2,487 $ 2,839 $ 4,010 $ 5,168 $62,188 $57,167 $51,227 Total assets(b) 8,443 6,376 4,277 11,618 13,520 15,595 78,721 72,838 66,405 Deposits 3,222 2,783 2,466 3,748 2,196 2,563 42,012 41,224 43,268 - ------------------------------------------------------------------------------------------------------------------- OTHER FINANCIAL DATA Expenditures for additions to long-lived assets(b) $72 $420 $1 $21 $2 -- $152 $562 $464 Efficiency ratio(f) 81.74% 74.05% 82.46% N/M N/M N/M 60.65% 58.42% 57.64% - ------------------------------------------------------------------------------------------------------------------- RECONCILING ITEMS KEYCORP CONSOLIDATED ------------------------------- -------------------- 1999 1998 1997 1999 1998 1997 --------------------------------------------------------- SUMMARY OF OPERATIONS Net interest income (taxable equivalent) $(176) $ (158) $(172) $2,819 $ 2,718 $2,789 Noninterest income 367 96 142 2,294 1,575 1,306 Revenue sharing(a) -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------- Total revenue(b) 191(c) (62)(c) (30)(c) 5,113 4,293 4,095 Provision for loan losses (16) (27) (25) 348 297 320 Depreciation and amortization expense 6 13 13 396 328 284 Other noninterest expense 74(d) (69) (27)(d) 2,653 2,155 2,102 Expense sharing(a) -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------ Income before income taxes (taxable equivalent) 127 21 9 1,716 1,513 1,389 Allocated income taxes and taxable equivalent adjustments 41 (12) (26) 609 517 470 - ------------------------------------------------------------------------------------------------ Net income (loss) $ 86 $ 33 $ 35 $1,107 $ 996 $ 919 ==== ==== ===== ====== ====== ====== Percent of consolidated net income (loss) 8% 3% 3% 100% 100% 100% - --------------------------------------------------------------------------------------------------- AVERAGE BALANCES Loans $ 213 $ 255 $ 188 $62,401 $57,422 $51,415 Total assets(b) 2,225(e) 2,443(e) 2,545(e) 80,946 75,281 68,950 Deposits (32) 48 505 41,980 41,272 43,773 - -------------------------------------------------------------------------------------------------- OTHER FINANCIAL DATA Expenditures for additions to long-lived assets(b) $87 $138 $171 $239 $ 700 $635 Efficiency ratio(f) N/M N/M N/M 59.43% 58.49% 58.21% - -----------------------------------------------------------------------------------------------------------
(d) Noninterest expense in 1999 includes $152 million ($96 million after tax) of nonrecurring charges recorded in connection with strategic actions being taken to improve Key's operating efficiency and profitability, including restructuring charges of $98 million ($62 million after tax). Noninterest expense for 1999 also includes special contributions of $23 million ($15 million after tax) made to the charitable foundation that Key sponsors, and $42 million ($26 million after tax) of various other nonrecurring charges. Noninterest expense for 1997 includes a charge of $50 million ($33 million after tax) related to the disposal of excess real estate. (e) Total assets represents primarily the unallocated portion of nonearning assets of corporate support functions. (f) This ratio, which measures the extent to which recurring revenues are absorbed by operating expenses, is calculated as follows: noninterest expense (excluding certain nonrecurring charges) divided by the sum of taxable-equivalent net interest income and noninterest income (excluding net securities transactions, gains from certain divestitures and certain nonrecurring charges). TE = Taxable Equivalent N/M = Not Meaningful pricing by refining the methodology applied to residential mortgage loans, certain fixed rate commercial loans, leases, certain deposit products with indeterminate maturities and medium-term notes. In addition, charges related to unallocated nonearning assets of corporate support functions are now allocated to the business segments through noninterest expense. Also, the financial impact of the Treasury function is now included under the column entitled, "Treasury and Other," as opposed to being allocated to the major business lines. There is no authoritative guidance for "management accounting" -- the way that management uses its judgment and experience to guide reporting decisions -- similar to generally accepted accounting principles for financial accounting. Consequently, the results that Key reports cannot necessarily be compared with those presented by other companies. 5. SECURITIES The amortized cost, unrealized gains and losses, and approximate fair value of Key's securities were as follows:
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 ====== ====== ====== ====== - -------------------------------------------------------------------------------------------- DECEMBER 31, 1998 --------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR IN MILLIONS COST GAINS LOSSES VALUE - -------------------------------------------------------------------------------------------- SECURITIES AVAILABLE FOR SALE U.S. Treasury, agencies and corporations $ 420 $ 2 -- $ 422 States and political subdivisions 65 2 -- 67 Collateralized mortgage obligations 2,191 21 $ 1 2,211 Other mortgage-backed securities 2,123 34 6 2,151 Retained interests in securitizations 345 -- 17 328 Other securities 84 16 1 99 - -------------------------------------------------------------------------------------------- Total securities available for sale $5,228 $ 75 $ 25 $5,278 ====== ====== ====== ====== INVESTMENT SECURITIES States and political subdivisions $ 631 $ 28 -- $ 659 Other securities 345 -- -- 345 - -------------------------------------------------------------------------------------------- Total investment securities $ 976 $ 28 -- $1,004 ====== ====== ====== ====== - --------------------------------------------------------------------------------------------
[LOGO-KEYCORP] 63 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS When Key retains an interest in securitized loans, Key bears the risk that the loans will be prepaid (which results in less interest income) or not paid at all. Key's retained interests (which include both certificated and uncertificated interests) are accounted for like debt securities that are classified as available for sale or as trading account assets. Realized gains and losses related to securities available for sale were as follows: YEAR ENDED DECEMBER 31, in millions 1999 1998 1997 - -------------------------------------------------------------------------- Realized gains $42 $18 $20 Realized losses 13 9 19 - -------------------------------------------------------------------------- Net securities gains $29 $ 9 $ 1 === === === - -------------------------------------------------------------------------- At December 31, 1999, securities available for sale and investment securities with an aggregate amortized cost of approximately $6 billion were pledged to secure public and trust deposits, securities sold under repurchase agreements, and for other purposes required or permitted by law. The following table shows securities available for sale and investment secu- rities by remaining contractual maturity. Collateralized mortgage obligations, other mortgage-backed securities and retained interests in securitizations are presented based on their expected average lives. SECURITIES INVESTMENT AVAILABLE FOR SALE SECURITIES ------------------ ------------------ DECEMBER 31,1999 AMORTIZED FAIR AMORTIZED FAIR in millions COST VALUE COST VALUE - -------------------------------------------------------------------------------- Due in one year or less $ 777 $ 769 $ 127 $ 126 Due after one through five years 4,522 4,416 213 220 Due after five through ten years 1,096 1,045 93 98 Due after ten years 480 435 553 554 - -------------------------------------------------------------------------------- Total $6,875 $6,665 $ 986 $ 998 ====== ====== ====== ====== - -------------------------------------------------------------------------------- 6. LOANS Key's loans by category are summarized as follows: DECEMBER 31, in millions 1999 1998 - -------------------------------------------------------------------------------- Commercial, financial and agricultural $18,497 $17,038 Real estate - commercial mortgage 6,836 7,309 Real estate - construction 4,528 3,450 Commercial lease financing 6,665 5,613 - -------------------------------------------------------------------------------- Total commercial loans 36,526 33,410 Real estate - residential mortgage 4,333 5,083 Home equity 7,602 7,301 Credit card -- 1,425 Consumer - direct 2,565 2,342 Consumer - indirect lease financing 3,195 2,580 Consumer - indirect other 6,398 7,009 - -------------------------------------------------------------------------------- Total consumer loans 24,093 25,740 Real estate - commercial mortgage 146 87 Real estate - residential mortgage 48 110 Home equity 371 -- Credit card 1,362 -- Education 1,676 2,665 - -------------------------------------------------------------------------------- Total loans held for sale 3,603 2,862 - -------------------------------------------------------------------------------- Total loans $64,222 $62,012 ======= ======= - -------------------------------------------------------------------------------- Key uses portfolio interest rate swaps to manage interest rate risk; these swaps modify the repricing and maturity characteristics of certain loans. For more information about the notional amount, fair value, and weighted average rate of such swaps at December 31, 1999, see Note 18 ("Financial Instruments with Off-Balance Sheet Risk"), which begins on page 72. Commercial and consumer lease financing in the preceding table include contracts that represent more than one type of leasing arrangement. The predominant form is direct financing leases. The composition of the net investment in direct financing leases included in loans is as follows: DECEMBER 31, in millions 1999 1998 - -------------------------------------------------------------------------------- Direct financing lease receivable $ 8,025 $ 5,293 Unearned income (1,130) (1,020) Unguaranteed residual value 776 2,085 Deferred fees and costs 83 76 - -------------------------------------------------------------------------------- Net investment in direct financing leases $ 7,754 $ 6,434 ======= ======= - -------------------------------------------------------------------------------- Minimum future lease payments to be received are as follows: 2000 - $1,718 million; 2001 - $1,833 million; 2002 - $1,741 million; 2003 - $910 million; 2004 - - $596 million; and all subsequent years - $1,227 million. Changes in the allowance for loan losses are summarized as follows: YEAR ENDED DECEMBER 31, in millions 1999 1998 1997 - -------------------------------------------------------------------------------- Balance at beginning of year $ 900 $ 900 $ 870 Charge-offs (420) (384) (378) Recoveries 102 87 85 - -------------------------------------------------------------------------------- Net charge-offs (318) (297) (293) Provision for loan losses 348 297 320 Allowance acquired,net -- -- 3 - -------------------------------------------------------------------------------- Balance at end of year $ 930 $ 900 $ 900 ===== ===== ===== - -------------------------------------------------------------------------------- 64 KEYCORP AND SUBSIDIARIES 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. IMPAIRED LOANS AND OTHER NONPERFORMING ASSETS Key's nonperforming assets were as follows: DECEMBER 31, in millions 1999 1998 - ------------------------------------------------------------------------------- Impaired loans $ 246 $ 193 Other nonaccrual loans 161 172 - ------------------------------------------------------------------------------- Total nonperforming loans 407 365 OREO 27 56 Allowance for OREO losses (3) (18) - ------------------------------------------------------------------------------- OREO,net of allowance 24 38 Other nonperforming assets 2 1 - ------------------------------------------------------------------------------- Total nonperforming assets $ 433 $ 404 ===== ===== - ------------------------------------------------------------------------------- At December 31, 1999, impaired loans totaled $246 million. This amount includes $153 million of impaired loans with a specifically allocated allowance for loan losses of $63 million and $93 million of impaired loans that are carried at their estimated fair value without a specifically allocated allowance. At the end of 1998, impaired loans totaled $193 million; $95 million of those loans had a specifically allocated allowance of $42 million and $98 million were carried at their estimated fair value. The average investment in impaired loans for 1999 was $216 million, and for 1998 was $194 million. At December 31, 1999, Key did not have any significant commitments to lend additional funds to borrowers with restructured loans or loans on nonaccrual status. Key evaluates most impaired loans individually using the process described under the heading "Allowance for Loan Losses," on page 58. However, Key does not perform a specific impairment valuation for smaller-balance, homogeneous, nonaccrual loans (shown in the preceding table as "Other nonaccrual loans"). Generally, this portfolio includes loans to finance residential mortgages, automobiles, recreational vehicles, boats and mobile homes. Management applies historical loss experience rates to these loans, adjusted based on assessments of emerging credit trends and other factors, and then allocates a portion of the allowance for loan losses to each loan type. The following table shows the amount by which loans classified as nonperforming at December 31 reduced Key's expected interest income. YEAR ENDED DECEMBER 31, in millions 1999 1998 1997 - -------------------------------------------------------------------------------- Interest income receivable under original terms $ 38 $ 32 $ 36 Less: Interest income recorded during the year (15) (12) (13) - -------------------------------------------------------------------------------- Net reduction to interest income $ 23 $ 20 $ 23 ==== ==== ==== - -------------------------------------------------------------------------------- 8. SHORT-TERM BORROWINGS
dollars in millions 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ FEDERAL FUNDS PURCHASED Balance at year end $1,883 $1,910 $4,058 Average during the year 2,254 4,022 4,036 Maximum month-end balance 3,712 5,678 5,079 Weighted average rate during the year 5.01% 5.52% 5.57% Weighted average rate at December 31 5.54 4.99 5.65 - ------------------------------------------------------------------------------------------------------------------------------------ SECURITIES SOLD UNDER REPURCHASE AGREEMENTS Balance at year end $2,294 $2,558 $2,921 Average during the year 2,602 2,613 2,906 Maximum month-end balance 2,969 2,813 3,191 Weighted average rate during the year 4.11% 4.59% 4.61% Weighted average rate at December 31 4.45 3.76 4.48 - ------------------------------------------------------------------------------------------------------------------------------------ SHORT-TERM BANK NOTES Balance at year end $6,379 $7,290 $4,730 Average during the year 5,633 6,705 4,090 Maximum month-end balance 7,174 7,790 4,730 Weighted average rate during the year 5.54% 5.41% 5.50% Weighted average rate at December 31 6.46 5.17 5.85 - ------------------------------------------------------------------------------------------------------------------------------------ OTHER SHORT-TERM BORROWINGS Balance at year end $2,060 $2,438 $1,237 Average during the year 2,279 1,269 651 Maximum month-end balance 3,452 3,105 1,517 Weighted average rate during the year 4.04% 5.99% 6.30% Weighted average rate at December 31 3.43 5.54 5.40 - ------------------------------------------------------------------------------------------------------------------------------------ Key uses portfolio interest rate swaps and caps to manage interest rate risk; these instruments modify the repricing and maturity characteristics of certain short-term borrowings. For more information, see Note 18 ("Financial Instruments with Off-Balance Sheet Risk"), which begins on page 72.
KEYCORP AND SUBSIDIARIES 65 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Key has several programs that support short-term financing needs. BANK NOTE PROGRAM. This program provides for the issuance of up to $20.0 billion ($19.0 billion by KeyBank National Association and $1.0 billion by Key Bank USA, National Association) of bank notes with original maturities of 30 days to 30 years. At December 31, 1999, the amount of bank notes available for issuance under the program was $8.4 billion. EURONOTE PROGRAM. KeyCorp, KeyBank National Association and Key Bank USA, National Association may issue both long- and short-term debt of up to $7.0 billion to non-U.S. investors. This facility had $2.4 billion of long-term borrowings outstanding as of December 31, 1999. COMMERCIAL PAPER AND REVOLVING CREDIT. KeyCorp's commercial paper program and three-year revolving credit agreement each provide funding availability of up to $500 million. Borrowings outstanding under the commercial paper program totaled $215 million at December 31, 1999, and $92 million at December 31, 1998. LINES OF CREDIT. Key Bank USA, National Association has a line of credit with the Federal Reserve Bank that provides for overnight borrowings of up to $928 million. This line is secured by $1.3 billion of Key Bank USA, National Association's credit card receivables at December 31, 1999. KeyBank National Association has overnight borrowing capacity at the Federal Reserve Bank of approximately $17.2 billion, which is secured by approximately $23.3 billion of primarily commercial loans at December 31, 1999. Neither bank had borrowings outstanding under these facilities at December 31, 1999 and 1998. 9. LONG-TERM DEBT The components of Key's long-term debt, presented net of unamortized discount where applicable, were as follows:
DECEMBER 31, dollars in millions 1999 1998 - -------------------------------------------------------------------------------------------------------- Senior medium-term notes due through 2005(a) $ 396 $ 419 Subordinated medium-term notes due through 2005(a) 133 133 7.50% Subordinated notes due 2006(b) 250 250 6.75% Subordinated notes due 2006(b) 200 200 8.125% Subordinated notes due 2002(b) 199 199 8.00% Subordinated notes due 2004(b) 125 125 8.404% Notes due through 2001 24 34 8.40% Subordinated capital notes due 1999 -- 75 All other long-term debt(h) 4 5 - -------------------------------------------------------------------------------------------------------- Total parent company(i) 1,331 1,440 Senior medium-term bank notes due through 2039(c) 9,396 7,426 Senior euro medium-term bank notes due through 2007(d) 2,413 1,441 6.50% Subordinated remarketable securities due 2027(e) 312 313 6.95% Subordinated notes due 2028(e) 300 300 7.125% Subordinated notes due 2006(e) 250 250 7.25% Subordinated notes due 2005(e) 200 200 6.75% Subordinated notes due 2003(e) 200 200 7.50% Subordinated notes due 2008(e) 165 165 7.30% Subordinated notes due 2011(e) 107 -- 7.85% Subordinated notes due 2002(e) 93 200 7.55% Subordinated notes due 2006(e) 75 75 7.375% Subordinated notes due 2008(e) 70 70 Lease financing debt due through 2006(f) 613 574 Federal Home Loan Bank advances due through 2029(g) 242 289 All other long-term debt(h) 114 24 - -------------------------------------------------------------------------------------------------------- Total subsidiaries 14,550 11,527 - -------------------------------------------------------------------------------------------------------- Total long-term debt $15,881 $12,967 ======= ======= - --------------------------------------------------------------------------------------------------------
Key uses portfolio interest rate swaps and caps to manage interest rate risk; these instruments modify the repricing and maturity characteristics of certain long-term debt. For more information about the notional amount, fair value and weighted average rate of such financial instruments at December 31, 1999, see Note 18 ("Financial Instruments with Off-Balance Sheet Risk"), which begins on page 72. (a) At December 31, 1999, the senior medium-term notes had a weighted average interest rate of 6.83%, and the subordinated medium-term notes had a weighted average interest rate of 7.09%. At December 31, 1998, the senior medium-term notes had a weighted average interest rate of 6.55%, and the subordinated medium-term notes had a weighted average interest rate of 7.09%. These notes had a combination of fixed and floating interest rates. (b) The 7.50%, 6.75%, 8.125%, and 8.00% subordinated notes may not be redeemed or prepaid prior to maturity. (c) Subsidiaries' senior medium-term bank notes had weighted average interest rates of 5.98% at December 31, 1999, and 5.30% at December 31, 1998. These notes had a combination of fixed and floating interest rates. (d) The senior euro medium-term notes had weighted average interest rates of 6.26% at December 31, 1999, and 5.52% at December 31, 1998. These notes, which are obligations of KeyBank National Association, had fixed and floating interest rates based on the three-month London Interbank Offered Rate (known as "LIBOR"). (e) The subordinated notes and securities are all obligations of KeyBank National Association, with the exception of the 7.55% notes, which are obligations of Key Bank USA, National Association. These notes may not be redeemed prior to their maturity dates. The 7.30% notes were issued in exchange for a portion of the 7.85% notes during the first quarter of 1999. (f) Lease financing debt had weighted average interest rates of 7.64% at December 31, 1999, and 6.56% at December 31, 1998. This category of debt primarily comprises nonrecourse debt collateralized by leased equipment under operating, direct financing and sales type leases. (g) Long-term advances from the Federal Home Loan Bank had weighted average interest rates of 6.27% at December 31, 1999, and 5.39% at December 31, 1998. These advances, which had a combination of fixed and floating interest rates, were secured by $363 million of real estate loans and securities at December 31, 1999, and $409 million of such loans and securities at December 31, 1998. (h) Other long-term debt, comprising industrial revenue bonds, capital lease obligations, and various secured and unsecured obligations of corporate subsidiaries, had weighted average interest rates of 6.76% at December 31, 1999, and 7.17% at December 31, 1998. (i) At December 31, 1999, unused capacity under KeyCorp's shelf registration totaled $1.0 billion, including $450 million reserved for future issuance as medium-term notes. Scheduled principal payments on long-term debt are as follows: in millions PARENT SUBSIDIARIES TOTAL - ------------------------------------------------------------------------------- 2000 $287 $5,842 $6,129 2001 113 2,755 2,868 2002 240 1,546 1,786 2003 45 1,196 1,241 2004 125 1,600 1,725 - -------------------------------------------------------------------------------- 66 KEYCORP AND SUBSIDIARIES 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. CAPITAL SECURITIES KeyCorp guarantees the corporation-obligated mandatorily redeemable preferred capital securities of subsidiary trusts holding solely subordinated debentures of the Corporation ("capital securities"). These securities were issued by five business trusts: KeyCorp Institutional Capital A, KeyCorp Institutional Capital B, KeyCorp Capital I, KeyCorp Capital II and KeyCorp Capital III. As guarantor, KeyCorp unconditionally guarantees payment of: - - accrued and unpaid distributions required to be paid on the capital securities; - - the redemption price when a capital security is called for redemption; and - - amounts due if a trust is liquidated or terminated. KeyCorp owns all of the outstanding common stock of each of the five trusts. The trusts used the proceeds from the issuance of their capital securities and common stock to buy debentures issued by KeyCorp. These debentures are the trusts' only assets and the interest payments from the debentures finance the distributions paid on the capital securities. Key's financial statements do not reflect the debentures or the related income statement effects because they are eliminated in consolidation. The capital securities, common securities and related debentures are summarized as follows:
PRINCIPAL AMOUNT OF INTEREST RATE MATURITY CAPITAL DEBENTURES, OF CAPITAL OF CAPITAL SECURITIES, COMMON NET OF SECURITIES AND SECURITIES AND dollars in millions NET OF DISCOUNT(a) SECURITIES DISCOUNT(b) DEBENTURES(c) DEBENTURES - ------------------------------------------------------------------------------------------------------------------------------ DECEMBER 31,1999 KeyCorp Institutional Capital A $ 350 $ 11 $ 361 7.826% 2026 KeyCorp Institutional Capital B 150 4 154 8.250 2026 KeyCorp Capital I 247 8 255 6.819 2028 KeyCorp Capital II 247 8 255 6.875 2029 KeyCorp Capital III 249 8 257 7.750 2029 - ------------------------------------------------------------------------------------------------------------------------------ Total $1,243 $ 39 $1,282 7.473% -- ====== ====== ====== ===== - ------------------------------------------------------------------------------------------------------------------------------ DECEMBER 31,1998 $ 997 $ 31 $1,028 7.149% -- ====== ====== ====== ===== - ------------------------------------------------------------------------------------------------------------------------------ (a) The capital securities are mandatorily redeemable when the related debentures mature, or earlier if provided in the governing indenture. Each issue of capital securities carries an interest rate identical to that of the related debenture. The capital securities constitute minority interests in the equity accounts of KeyCorp's consolidated subsidiaries and, therefore, qualify as Tier 1 capital under Federal Reserve Board guidelines. (b) KeyCorp has the right to redeem its debentures: (i) in whole or in part, on or after December 1, 2006 (for debentures owned by Capital A), December 15, 2006 (for debentures owned by Capital B), July 1, 2008 (for debentures owned by Capital I), March 18, 1999 (for debentures owned by Capital II), and July 16, 1999 (for debentures owned by Capital III); and (ii) in whole at any time within 90 days after and during the continuation of a "tax event" or a "capital treatment event" (as defined in the applicable offering circular). If the debentures purchased by Capital A or Capital B are redeemed before they mature, the redemption price will be the principal amount, plus a premium, plus any accrued but unpaid interest. If the debentures purchased by Capital I are redeemed before they mature, the redemption price will be the principal amount, plus any accrued but unpaid interest. If the debentures purchased by Capital II or Capital III are redeemed before they mature, the redemption price will the greater of: (i) the principal amount, plus any accrued but unpaid interest or (ii) the sum of the present values of principal and interest payments discounted at the Treasury Rate (as defined in the applicable offering circular), plus 20 basis points (25 basis points for Capital III), plus any accrued but unpaid interest. When debentures are redeemed in response to tax or capital treatment events, the redemption price is generally slightly more favorable to Key. (c) The interest rates for Capital A, Capital B, Capital II, and Capital III are fixed. Capital I has a floating interest rate (which reprices quarterly) equal to three-month LIBOR plus 74 basis points. The rates shown as the total at December 31, 1999 and 1998, are weighted average rates.
11. SHAREHOLDERS' EQUITY SHAREHOLDER RIGHTS PLAN KeyCorp has a shareholder rights plan which was first adopted in 1989 and has since been amended. Under the plan, each shareholder received one Right - representing the right to purchase a common share for $82.50 - for each KeyCorp common share owned. All of the Rights expire on May 14, 2007, but KeyCorp may redeem Rights earlier for $.005 per Right, subject to certain limitations. Rights will become exercisable if a person or group acquires 15% or more of KeyCorp's outstanding shares. Until that time, the Rights will trade with the common shares; any transfer of a common share will also constitute a transfer of the associated Right. If the Rights become exercisable, they will begin to trade apart from the common shares. If one of a number of "flip-in events" occurs, each Right will entitle the holder to purchase a KeyCorp common share for $1.00 (the par value per share), and the Rights held by a 15% or more shareholder will become void. CAPITAL ADEQUACY KeyCorp and its banking subsidiaries must meet specific capital requirements imposed by banking industry regulators. Sanctions for failure to meet applicable capital requirements may include regulatory enforcement actions that restrict dividend payments, require increased capital, terminate Federal Deposit Insurance Corporation ("FDIC") deposit insurance, and mandate the appointment of a conservator or receiver, in severe cases. Management believes that as of December 31, 1999, KeyCorp and its banking subsidiaries met all necessary capital requirements. Federal bank regulators apply certain capital ratios to group FDIC-insured depository institutions into five categories: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "crit- ically undercapitalized." At December 31, 1999 and 1998, the most recent regulatory notification categorized each of KeyCorp's subsidiary banks as "well capitalized." Management believes there have not been any changes in condition or events since those notifications which would cause the banks' categorizations to change. Bank holding companies are not categorized by capital adequacy as are their bank subsidiaries. However, Key satisfied the criteria for a "well capitalized" institution at December 31, 1999 and 1998. The FDIC-defined capital categories may not accurately represent the overall financial condition or prospects of Key or its affiliates. KEYCORP AND SUBSIDIARIES 67 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table presents Key and KeyBank National Association's actual capital amounts and ratios, minimum capital amounts and ratios prescribed by regulatory guidelines, and capital amounts and ratios required to qualify as "well capitalized" under the Federal Deposit Insurance Act.
TO QUALIFY AS TO MEET MINIMUM WELL CAPITALIZED CAPITAL ADEQUACY UNDER PROMPT CORRECTIVE ACTUAL REQUIREMENTS ACTION PROVISIONS ---------------------- -------------------- ----------------------- dollars in millions AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - ----------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1999 TOTAL CAPITAL TO NET RISK-ADJUSTED ASSETS Key $9,569 11.66% $6,567 8.00% N/A N/A KeyBank National Association 7,907 10.72 5,902 8.00 $7,377 10.00% TIER 1 CAPITAL TO NET RISK-ADJUSTED ASSETS Key $6,306 7.68% $3,283 4.00% N/A N/A KeyBank National Association 5,458 7.40 2,951 4.00 $4,426 6.00% TIER 1 CAPITAL TO AVERAGE ASSETS Key $6,306 7.77% $2,434 3.00% N/A N/A KeyBank National Association 5,458 7.39 2,954 4.00 $3,692 5.00% - ----------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1998 TOTAL CAPITAL TO NET RISK-ADJUSTED ASSETS Key $8,731 11.69% $5,973 8.00% N/A N/A KeyBank National Association 7,746 11.39 5,439 8.00 $6,799 10.00% TIER 1 CAPITAL TO NET RISK-ADJUSTED ASSETS Key $5,383 7.21% $2,987 4.00% N/A N/A KeyBank National Association 5,291 7.78 2,720 4.00 $4,079 6.00% TIER 1 CAPITAL TO AVERAGE ASSETS Key $5,383 6.95% $3,099 4.00% N/A N/A KeyBank National Association 5,291 7.22 2,932 4.00 $3,665 5.00% - ----------------------------------------------------------------------------------------------------------------------------------- N/A = Not Applicable
12. STOCK OPTIONS Key's compensation plans allow for the granting of stock options, stock appreciation rights, limited stock appreciation rights, restricted stock and performance shares to eligible employees and directors. Under all of the option plans, exercise prices cannot be less than the fair value of Key's common stock on the grant date. Generally, options expire no later than 10 years from their grant date. At December 31, 1999, KeyCorp had 8,868,531 common shares available for future grant, compared with 9,049,032 at December 31, 1998. Of the options outstanding at December 31, 1999, 3,211,200 are "performance shares," which will only vest if certain performance targets are met. Key did not grant performance shares in 1999 and granted 363,200 performance shares in 1998. The following table summarizes activity, pricing and other information about Key's stock options.
1999 1998 ------------------------------ -------------------------------------- WEIGHTED AVERAGE WEIGHTED AVERAGE OPTIONS PRICE PER OPTION OPTIONS PRICE PER OPTION - ------------------------------------------------------------------------------------------------------------------------------ Outstanding at beginning of year 27,068,012 $ 22.84 22,296,568 $ 18.33 Granted 6,151,189 30.68 8,512,716 32.31 Assumed in acquisition -- -- 416,652 16.61 Exercised 2,160,786 15.20 3,049,295 14.53 Lapsed or canceled 1,577,118 28.74 1,108,629 25.12 - ------------------------------------------------------------------------------------------------------------------------------ Outstanding at end of year 29,481,297 $ 24.72 27,068,012 $ 22.84 - ------------------------------------------------------------------------------------------------------------------------------ Exercisable at end of year 13,885,015 $ 19.19 11,993,163 $ 15.89 - ------------------------------------------------------------------------------------------------------------------------------
The following table summarizes the range of exercise prices for Key's stock options at December 31, 1999.
WEIGHTED WEIGHTED AVERAGE WEIGHTED RANGE OF OPTIONS VERAGE PRICE REMAINING OPTIONS AVERAGE PRICE EXERCISE PRICES OUTSTANDING PER OPTION LIFE (YEARS) EXERCISABLE PER OPTION - ------------------------------------------------------------------------------------------------------------------------------ $4.13-$14.99 6,494,147 $ 13.63 3.8 6,199,792 $ 13.64 15.00-19.99 3,834,304 17.15 5.2 3,834,304 17.15 20.00-24.99 286,495 22.31 7.7 234,095 22.52 25.00-29.99 6,017,561 26.16 7.4 1,671,275 26.12 30.00-34.99 12,047,256 31.43 8.6 1,603,437 32.66 35.00-50.00 801,534 39.90 8.4 342,112 43.43 - ------------------------------------------------------------------------------------------------------------------------------ Total 29,481,297 $ 24.72 6.9 13,885,015 $ 19.19 - ------------------------------------------------------------------------------------------------------------------------------
68 KEYCORP AND SUBSIDIARIES 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," requires companies such as Key which use the "intrinsic value method" to account for employee stock options, to provide pro forma disclosures of the net income and earnings per share effect of stock options using the "fair value method." Under the intrinsic value method, the excess of the fair value of the stock over the exercise price is recorded as expense on the date at which both the number of shares the recipient is entitled to receive and the exercise price are known. Management estimated the fair value of options granted using the Black-Scholes option pricing model. This model was originally developed to estimate the fair value of exchange-traded equity options, which (unlike employee stock options) have no vesting period or transferability restrictions. As a result, the Black Scholes model is not a perfect indicator of the value of an option. The Black-Scholes model requires several assumptions, which management developed based on historical trends and current market observations. These assumptions include: - - an average option life of 4.3 years in 1999, 4.3 years in 1998 and 5.5 years in 1997; - - a future dividend yield of 3.4% in 1999, 2.9% in 1998 and 3.2% in 1997; - - share price volatility of .256 in 1999, .240 in 1998 and .240 in 1997; and - - a weighted average risk-free interest rate of 4.9% in 1999, 5.1% in 1998 and 6.4% in 1997. If these assumptions are not accurate, the estimated fair values used to derive the information shown in the following table also will be incorrect. Moreover, the model assumes that the estimated fair value of an option is amortized over the option's vesting period and would be included in personnel expense on the income statement. The pro forma impact of applying the fair value method of accounting for the years shown below may not be indicative of the pro forma impact in future years. YEAR ENDED DECEMBER 31, in millions,except per share amounts 1999 1998 1997 - ------------------------------------------------------------------------------- Net income $1,107 $996 $919 Net income - pro forma 1,085 981 913 Per common share: Net income $2.47 $2.25 $2.09 Net income - pro forma 2.42 2.22 2.08 Net income assuming dilution 2.45 2.23 2.07 Net income assuming dilution - pro forma 2.39 2.19 2.05 - ------------------------------------------------------------------------------- 13. RESTRUCTURING CHARGES During 1999, KeyCorp recorded restructuring charges of $98 million ($62 million after tax) in connection with strategic actions being taken to improve operating efficiency and profitability. The largest portion of these charges ($91 million pre-tax) was recorded in the fourth quarter. The primary strategic actions being taken include the outsourcing of certain technology and other corporate support functions, the consolidation of sites in a number of Key's businesses and a reduction in the number of management layers. These actions are expected to reduce Key's workforce by approximately 3,000 positions, or 11%, by the end of 2000. Approximately 25% of the reduction, which will take place throughout the organization, will occur at the management level. As of December 31, 1999, approximately 438 positions had been eliminated. The components of the restructuring charge include accruals for severance payments ($67 million), costs related to site consolidations ($24 million) and costs related to the acceleration of depreciation/amortization or write-off of equipment and certain other assets ($7 million). During 1999, cash payments of $5 million and a non-cash charge of $2 million were taken against the severance accrual. The liability for restructuring charges remaining at December 31, 1999, was $91 million. Key expects to record additional restructuring charges (primarily for severance) during 2000 in connection with this productivity initiative. 14. EMPLOYEE BENEFITS PENSION PLANS Net pension cost (income) for all funded and unfunded plans includes the following components. YEAR ENDED DECEMBER 31, in millions 1999 1998 1997 - ------------------------------------------------------------------------------- Service cost of benefits earned $ 28 $ 29 $ 29 Interest cost on projected benefit obligation 47 51 53 Expected return on plan assets (82) (80) (69) Amortization of unrecognized net transition assets (5) (5) (5) Amortization of prior service cost 2 2 3 Amortization of losses 3 2 5 - ------------------------------------------------------------------------------- Net pension cost (income) $ (7) $ (1) $ 16 ==== ==== ==== - ------------------------------------------------------------------------------- Changes in the projected benefit obligation ("PBO") are summarized as follows: YEAR ENDED DECEMBER 31, in millions 1999 1998 - ------------------------------------------------------------------------------- PBO at beginning of year $ 751 $ 733 Service cost 28 29 Interest cost 47 51 Actuarial (gains) losses (28) 25 Benefit payments (73) (87) - ------------------------------------------------------------------------------- PBO at end of year $ 725 $ 751 ===== ===== - ------------------------------------------------------------------------------- Changes in the fair value of plan assets ("FVA") are summarized as follows: YEAR ENDED DECEMBER 31, in millions 1999 1998 - ------------------------------------------------------------------------------- FVA at beginning of year(a) $ 933 $ 931 Actual return on plan assets 140 33 Employer contributions 7 56 Benefit payments (73) (87) - ------------------------------------------------------------------------------- FVA at end of year(a) $ 1,007 $ 933 ======= ======= - ------------------------------------------------------------------------------- (a) Consists primarily of listed stocks and fixed income securities. 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The funded status of the plans at September 30 (the actuarial measurement date), reconciled to the amounts recognized in the consolidated balance sheets at December 31, 1999 and 1998, is as follows: DECEMBER 31, in millions 1999 1998 - -------------------------------------------------------------------------------- Funded status(a) $282 $182 Unrecognized net (gain) loss (58) 32 Unrecognized prior service benefit (2) (1) Unrecognized net transition asset (7) (12) Benefits paid subsequent to measurement date 2 2 - -------------------------------------------------------------------------------- Prepaid pension cost $217 $203 ==== ==== - -------------------------------------------------------------------------------- (a) The excess of the fair value of plan assets over the pension benefit obligation. Key provides certain non-qualified supplemental executive retirement programs that are unfunded. At December 31, 1999, the projected benefit obligation for these unfunded plans was $107 million (compared with $116 million at the end of 1998), and the accumulated benefit obligation was $100 million (compared with $103 million at the end of 1998). In order to determine the actuarial present value of benefit obligations and net pension cost (income), management assumed the following weighted average rates. YEAR ENDED DECEMBER 31, 1999 1998 1997 - -------------------------------------------------------------------------------- Discount rate 7.50% 6.50% 7.25% Compensation increase rate 4.00 4.22 4.20 Expected return on plan assets 9.75 9.75 9.50 - -------------------------------------------------------------------------------- OTHER POSTRETIREMENT BENEFIT PLANS Key sponsors a postretirement healthcare plan, which is contributory. Retirees' contributions are adjusted annually to reflect certain cost-sharing provisions and benefit limitations. Key also sponsors life insurance plans covering certain grandfathered employees. These plans are principally noncontributory. Net postretirement benefits cost includes the following components. YEAR ENDED DECEMBER 31, in millions 1999 1998 1997 - -------------------------------------------------------------------------- Service cost of benefits earned $ 3 $ 3 $ 3 Interest cost on accumulated postretirement benefit obligation 7 7 8 Expected return on plan assets (1) (1) - Amortization of transition obligation 5 5 5 - -------------------------------------------------------------------------- Net postretirement benefits cost $ 14 $ 14 $ 16 ==== ==== ==== - -------------------------------------------------------------------------- Changes in the accumulated postretirement benefit obligation ("APBO") are summarized as follows: YEAR ENDED DECEMBER 31, in millions 1999 1998 - ----------------------------------------------------------------------- APBO at beginning of year $114 $108 Service cost 3 3 Interest cost 7 7 Plan participants' contributions 3 2 Actuarial (gains) losses (8) 6 Benefit payments (13) (12) - ----------------------------------------------------------------------- APBO at end of year $106 $114 ==== ==== - ----------------------------------------------------------------------- Changes in the fair value of plan assets are summarized as follows: YEAR ENDED DECEMBER 31, in millions 1999 1998 - ----------------------------------------------------------------------- FVA at beginning of year $20 $10 Employer contributions 14 9 Plan participants' contributions 3 - Benefit payments (7) - Actual return on plan assets 1 1 - ----------------------------------------------------------------------- FVA at end of year $31 $20 === === - ----------------------------------------------------------------------- The funded status of the plans at September 30 (the actuarial measurement date), reconciled to the amounts recognized in the consolidated balance sheets at December 31, 1999 and 1998, is as follows: YEAR ENDED DECEMBER 31, in millions 1999 1998 - -------------------------------------------------------------------------------- Funded status(a) $(75) $(94) Unrecognized net (gain) loss (7) 1 Unrecognized prior service cost 1 1 Unrecognized transition obligation 61 65 Contributions/benefits paid subsequent to measurement date 10 13 Impact of curtailment subsequent to measurement date (2) - - -------------------------------------------------------------------------------- Net amount recognized $(12) $(14) ==== ==== - -------------------------------------------------------------------------------- (a) The excess of the accumulated postretirement benefit obligation over the fair value of plan assets. The assumed weighted average healthcare cost trend rate for 2000 is 6.4% for both Medicare-eligible retirees and non-Medicare eligible retirees. The rate is assumed to decrease gradually to 5.5% by the year 2003 and remain constant thereafter. Increasing or decreasing the assumed healthcare cost trend rate by one percentage point each future year would not have a material impact on net postretirement benefits cost or obligations since the postretirement plans have cost-sharing provisions and benefit limitations. To determine the accumulated postretirement benefit obligation and the net postretirement benefits cost, management assumed the following weighted average rates: YEAR ENDED DECEMBER 31, 1999 1998 1997 - -------------------------------------------------------------------------------- Discount rate 7.50% 6.50% 7.25% Expected return on plan assets 5.73 9.50 9.50 - -------------------------------------------------------------------------------- EMPLOYEE 401(K) SAVINGS PLAN A substantial majority of Key's employees are covered under a savings plan that is qualified under Section 401(k) of the Internal Revenue Code. Key's plan permits employees to contribute 1% to 10% of eligible compensation, with up to 6% being eligible for matching contributions in the form of Key common shares. The plan also permits Key to distribute a discretionary profit sharing component. Total expense associated with the plan was $46 million in 1999, $39 million in 1998 and $41 million in 1997. 70 KEYCORP AND SUBSIDIARIES 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. INCOME TAXES Income taxes included in the consolidated statements of income are summarized below. Key files a consolidated Federal income tax return. YEAR ENDED DECEMBER 31, in millions 1999 1998 1997 - -------------------------------------------------------------------------------- Currently payable: Federal $104 $147 $265 State 7 11 22 - -------------------------------------------------------------------------------- 111 158 287 Deferred: Federal 421 296 122 State 45 29 17 - -------------------------------------------------------------------------------- 466 325 139 - -------------------------------------------------------------------------------- Total income tax expense(a) $577 $483 $426 ==== ==== ==== - -------------------------------------------------------------------------------- (a) Income tax expense on securities transactions totaled $10 million in 1999, $3 million in 1998, and $.4 million in 1997. Income tax expense excludes equity- and gross receipts-based taxes, which are assessed in lieu of an income tax in certain states in which Key operates. These taxes are included in noninterest expense and totaled $35 million in 1999, $39 million in 1998, and $36 million in 1997. Significant components of Key's deferred tax assets and liabilities are as follows: DECEMBER 31, in millions 1999 1998 - -------------------------------------------------------------------------------- Provision for loan losses $ 352 $ 332 Net unrealized securities losses 79 -- Restructuring charges 37 5 Write-down of OREO 11 20 Other 194 88 - -------------------------------------------------------------------------------- Total deferred tax assets 673 445 Leasing income reported using the operating method for tax purposes 1,874 1,375 Net unrealized securities gains -- 19 Depreciation 44 14 Other 84 27 - -------------------------------------------------------------------------------- Total deferred tax liabilities 2,002 1,435 - -------------------------------------------------------------------------------- Net deferred tax liabilities $1,329 $ 990 ====== ====== - -------------------------------------------------------------------------------- The following table shows how Key arrives at total income tax expense.
YEAR ENDED DECEMBER 31, in millions 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- Income before income taxes times 35% statutory Federal tax rate $ 589 $ 518 $ 471 State income tax,net of Federal tax benefit 34 26 25 Amortization of non-deductible intangibles 27 24 19 Tax-exempt interest income (20) (23) (27) Corporate owned life insurance income (38) (38) (30) Tax credits (28) (22) (26) Other 13 (2) (6) - ----------------------------------------------------------------------------------------------------------------------- Total income tax expense $ 577 $ 483 $ 426 ===== ===== ===== - -----------------------------------------------------------------------------------------------------------------------
16. COMMITMENTS, CONTINGENT LIABILITIES AND OTHER DISCLOSURES LEGAL PROCEEDINGS In the ordinary course of business, Key is subject to legal actions involving claims for substantial monetary relief. Based on information presently known to management and Key's counsel, management does not believe that there are any legal actions that, individually or in the aggregate, will have a material adverse effect on Key's financial condition. RESTRICTIONS ON CASH, DUE FROM BANKS, SUBSIDIARY DIVIDENDS AND LENDING ACTIVITIES Federal law requires depository institutions to maintain a prescribed amount of cash or noninterest-bearing balances with the Federal Reserve Bank. KeyCorp's banking subsidiaries maintained average reserve balances aggregating $449 million in 1999 to fulfill these requirements. KeyCorp's principal source of cash flow, including the cash needed to pay dividends on its common shares and to service its debt, is dividends from its banking and other subsidiaries. Various Federal and state statutes and regulations limit the amount of dividends KeyCorp's banking subsidiaries can pay without prior regulatory approval. At December 31, 1999, KeyCorp's banking subsidiaries could have declared dividends of approximately $697 million in the aggregate without obtaining such approval. Federal law also restricts loans and advances from banking subsidiaries to their parent companies (and to nonbank subsidiaries of their parent companies), and requires those transactions to be secured. OBLIGATIONS UNDER NONCANCELABLE LEASES Key is obligated under various noncancelable leases for land, buildings and other property, consisting principally of data processing equipment. Rental expense under all operating leases totaled $162 million in 1999, $132 million in 1998, and $118 million in 1997. Minimum future rental payments under noncancelable leases at December 31, 1999, are as follows: 2000 - $134 million; 2001 - $118 million; 2002 - $102 million; 2003 - $94 million; 2004 - $81 million; and all subsequent years - $464 million. KEYCORP AND SUBSIDIARIES 71 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS The carrying amount and estimated fair value of Key's financial instruments are as follows:
December 31, 1999 1998 -------------------- --------------------- CARRYING FAIR CARRYING FAIR in millions AMOUNT VALUE AMOUNT VALUE - ------------------------------------------------------------------------------------------- ASSETS Cash and short-term investments(a) $ 4,676 $ 4,676 $ 5,270 $ 5,270 Securities available for sale(b) 6,665 6,665 5,278 5,278 Investment securities(b) 986 998 976 1,004 Loans,net of allowance(c) 63,292 63,559 61,112 62,427 LIABILITIES Deposits with no stated maturity(a) $24,641 $24,641 $26,363 $26,363 Time deposits(d) 18,592 18,593 16,220 16,312 Short-term borrowings(a) 12,616 12,616 14,196 14,196 Long-term debt(d) 15,881 15,533 12,967 13,447 CAPITAL SECURITIES(d) 1,243 1,139 997 1,034 - -------------------------------------------------------------------------------------------
Valuation Methods and Assumptions - --------------------------------- (a) Fair value equals or approximates carrying amount. (b) Fair values of securities available for sale and investment securities generally were based on quoted market prices. Where quoted market prices were not available, fair values were based on quoted market prices of similar instruments. (c) Fair values of most loans were estimated using discounted cash flow models. Lease financing receivables and loans held for sale were included in the estimated fair value of loans at their carrying amounts, although lease financing receivables are excluded from the scope of Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments." The fair value of the credit card portfolio is equal to the contracted price at which the portfolio was sold in January 2000. (d) Fair values of time deposits, long-term debt, and capital securities were estimated based on discounted cash flows. The estimated fair values of residential real estate mortgage loans (included in the amount shown for "Loans, net of allowance") and deposits do not take into account the fair values of long-term client relationships, which are integral parts of the related financial instruments. The estimated fair values of these instruments would be significantly higher if they included the fair values of these relationships. Such is the case with Key's credit card receivables which were valued at an amount equal to the contracted price at which the portfolio was sold in January 2000. For financial instruments with a remaining average life to maturity of less than six months, carrying amounts were used as an approximation of fair values. If management used different assumptions (on matters such as discount rates and cash flow) and estimation methods, the estimated fair values shown in the table could change significantly. Accordingly, these estimates do not necessarily reflect the amounts Key's financial instruments would command in a current market exchange. Similarly, because Statement of Financial Accounting Standards No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements, the fair value amounts shown in the table do not, by themselves, represent Key's underlying value. Interest rate swaps, caps and floors (which are not included in the preceding table) were valued based on discounted cash flow models and had an aggregate fair value of $50 million at December 31, 1999, and $245 million at December 31, 1998. Foreign exchange forward contracts (also excluded from the table) were valued based on quoted market prices and had a fair value that approximated their carrying amount at December 31, 1999 and 1998. Off-balance sheet financial instruments are discussed in greater detail in Note 18 ("Financial Instruments with Off-Balance Sheet Risk"). 18. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK Key, mainly through its lead bank (KeyBank National Association), is party to various financial instruments with off-balance sheet risk. These financial instruments may be used for lending-related purposes, asset and liability management or trading purposes. Generally, these instruments help Key meet clients' financing needs and manage its exposure to "market risk" - the possibility that net interest income will be adversely affected due to changes in interest rates or other economic factors. However, like other financial instruments, these contain an element of "credit risk" - the possibility that Key will incur a loss because a counterparty fails to meet its contractual obligations. The primary financial instruments that Key uses are commitments to extend credit; standby and commercial letters of credit; interest rate swaps, caps and futures; and foreign exchange forward contracts. All of the foreign exchange forward contracts and interest rate swaps and caps held are over-the-counter instruments. FINANCIAL INSTRUMENTS HELD OR ISSUED FOR LENDING-RELATED PURPOSES These instruments - primarily loan commitments and standby letters of credit - involve credit risk not reflected on Key's balance sheet. Key mitigates its exposure to credit risk with internal controls that guide the way staff reviews and approves applications for credit, establishes credit limits and, when necessary, demands collateral. In particular, Key evaluates the credit-worthiness of each prospective borrower on a case-by-case basis. Key does not have any significant concentrations of credit risk. 72 KEYCORP AND SUBSIDIARIES 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMITMENTS TO EXTEND CREDIT are agreements to provide financing at predetermined terms, as long as the client continues to meet specified criteria. Loan commitments generally carry variable rates of interest and have fixed expiration dates or other termination clauses. In many cases, a client must pay a fee to induce Key to issue a loan commitment. Since a commitment may expire without resulting in a loan, the total amount of outstanding commitments does not necessarily represent the future cash outlay that Key will make. STANDBY LETTERS OF CREDIT enhance the credit-worthiness of Key's clients by assuring their financial performance to third parties in connection with particular transactions. Amounts drawn under standby letters of credit are essentially loans: they bear interest (generally at variable rates) and pose the same credit risk to Key as a loan would. The following table shows the contractual amount of each class of lending-related, off-balance sheet financial instrument outstanding. The table discloses Key's maximum possible accounting loss, which is equal to the contractual amount of the various instruments. The estimated fair values of these commitments and standby letters of credit are not material. DECEMBER 31, in millions 1999 1998 - ------------------------------------------------------------------------- Loan commitments: Credit card lines $ 7,108 $ 6,320 Home equity 4,560 4,347 Commercial real estate and construction 1,842 2,046 Commercial and other 22,023 20,995 - ------------------------------------------------------------------------- Total loan commitments 35,533 33,708 Other commitments: Standby letters of credit 1,987 1,834 Commercial letters of credit 120 138 Loans sold with recourse 16 21 Total loan and other commitments $37,656 $35,701 ======= ======= - ------------------------------------------------------------------------- FINANCIAL INSTRUMENTS HELD OR ISSUED FOR ASSET AND LIABILITY MANAGEMENT PURPOSES Key manages exposure to interest rate risk, in part, by using off-balance sheet financial instruments, commonly referred to as derivatives. Instruments used for this purpose modify the repricing or maturity characteristics of specified on-balance sheet assets and liabilities. The principal financial instruments that Key uses to manage exposure to interest rate risk are interest rate swaps and caps, also referred to as "portfolio" swaps and caps. In addition, Key uses treasury-based interest rate locks to manage the risk associated with anticipated loan securitizations. To qualify for hedge accounting treatment, a derivative must be effective at reducing the risk associated with the exposure being managed and must be designated as a risk management transaction at the inception of the derivative contract. To be considered effective, there must be a high degree of interest rate correlation between the derivative and the asset or liability being managed, both at inception and over the life of the derivative contract. Portfolio swaps and caps increased net interest income by $16 million in 1999, $23 million in 1998 and $64 million in 1997 (including the impact of both the spread on the swap portfolio and the amortization of deferred gains and losses resulting from terminated swaps). The weighted average rate received on portfolio swaps as of the end of 1999 exceeded the weighted average rate paid by 32 basis points. The following table summarizes the features of the various types of portfolio swaps and caps that Key held at the end of 1999.
DECEMBER 31, 1999 DECEMBER 31, 1998 -------------------------------------------------------- ------------------ WEIGHTED AVERAGE RATE NOTIONAL FAIR MATURITY --------------------------- NOTIONAL FAIR dollars in millions AMOUNT VALUE (YEARS) RECEIVE PAY STRIKE AMOUNT VALUE - ------------------------------------------------------------------------------------------------------------------------------------ Interest rate swaps: Receive fixed/pay variable-indexed amortizing(a) $ 104 $ 1 1.0 7.20% 6.18% N/A $ 311 $ 4 Receive fixed/pay variable - conventional 5,962 (135) 5.4 6.15 5.83 N/A 4,325 223 Pay fixed/receive variable - conventional 5,545 105 3.8 6.20 6.12 N/A 4,872 (68) Pay fixed/receive variable - forward starting 278 - 3.1 5.90 6.73 N/A 10 - Basis swaps 6,783 (20) 1.7 6.15 5.59 N/A 2,872 19 - ------------------------------------------------------------------------------------------------------------------------------------ Total 18,672 (49) - 6.17% 5.85% - 12,390 178 Interest rate caps,collars and corridors: Caps purchased - one- to three-month LIBOR-based(b) 2,000 7 .5 N/A N/A 5.87% 3,175 3 Collar - one- to three-month LIBOR-based 250 - 1.1 N/A N/A 4.75 and 6.50 250 (1) Collar - thirty-year U.S. Treasury-based - - - N/A N/A - 250 (24) 1% payout corridor(c) - - - N/A N/A - 200 - - ------------------------------------------------------------------------------------------------------------------------------------ Total 2,250 7 - - - - 3,875 (22) - ------------------------------------------------------------------------------------------------------------------------------------ Total $20,922 $ (42) - - - - $16,265 $ 156 ======= ====== ======= ===== - ------------------------------------------------------------------------------------------------------------------------------------
(a) Maturity is based upon expected average lives rather than contractual terms. (b) Includes no forward-starting caps at December 31, 1999, and $200 million at December 31, 1998. (c) Payout is indexed to three-month LIBOR. N/A = Not Applicable KEYCORP AND SUBSIDIARIES 73 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTEREST RATE SWAP CONTRACTS involve the exchange of interest payments calculated on an agreed-upon amount (known as the "notional amount"). Swaps are generally used to mitigate Key's exposure to interest rate risk on certain loans, securities, deposits, short-term borrowings and long-term debt. Key generally uses three types of interest rate swap contracts. CONVENTIONAL INTEREST RATE SWAP CONTRACTS involve the receipt of interest payments based on a fixed or variable rate in exchange for payments based on variable or fixed rates, without an exchange of the underlying notional amount. INDEXED AMORTIZING SWAP CONTRACTS differ from conventional swaps because the notional amount of an indexed amortizing swap contract remains constant for a specified period of time. Then, based upon the level of an index at agreed-upon dates, one of three events will occur: the swap contract will mature, the notional amount will begin to amortize or the swap will continue in effect until it matures. At December 31, 1999, Key was party to $66 million of indexed amortizing swaps that used a LIBOR index and $38 million of indexed amortizing swaps that used a Constant Maturity Treasuries index. BASIS SWAP CONTRACTS involve the exchange of interest payments based on different floating indices. INTEREST RATE CAPS require the buyer to pay a premium to the seller for the right to receive an amount equal to the difference between the cur- rent interest rate and an agreed-upon interest rate (known as the "strike rate") applied to a notional amount. Key generally purchases caps, enters into collars (which involves simultaneously purchasing a cap and selling a floor) and enters into corridors (which involves simultaneously purchasing a cap at a specified strike rate and selling a cap at a higher strike rate) to manage the risk of adverse movements in interest rates on specified long-term debt and short-term borrowings. The notional amount of swaps and caps is significantly greater than the amount at risk. CREDIT RISK. Swaps and caps present credit risk because the counter-party may not meet the terms of the contract. This risk is measured as the cost of replacing contracts - at current market rates - that have generated unrealized gains. To mitigate credit risk, Key deals exclusively with counterparties that have high credit ratings. Key uses two additional precautions to manage exposure to credit risk on swap contracts. First, Key generally enters into bilateral collateral and master netting arrangements. These agreements include legal rights of setoff that provide for the net settlement of the subject contracts with the same counterparty in the event of default. Second, a credit committee monitors credit risk exposure to the counterparty on each interest rate swap to determine appropriate limits on Key's total credit exposure and the amount of collateral required, if any. At December 31, 1999, Key had 38 different counterparties to portfolio swaps and swaps entered into to offset the risk of client swaps. Key had aggregate credit exposure of $237 million to 26 of these counterparties, with the largest credit exposure to an individual counterparty amounting to $37 million. As of the same date, Key's aggregate credit exposure on its interest rate caps totaled $76 million. Based on management's assessment as of December 31, 1999, all counterparties were expected to meet their obligations. ACCOUNTING TREATMENT AND VALUATION. Management estimated the aggregate fair value of interest rate swaps at a negative $49 million at December 31, 1999. Fair value in this case represents an estimate of the unrealized loss that would be recognized if the portfolio were liquidated at that date. Management arrived at this estimate by using discounted cash flow models, which predict interest rates using the applicable forward yield curve. Interest from a portfolio swap is recognized on an accrual basis over the life of the contract as an adjustment of the interest income or expense of the asset or liability whose risk is being managed. Gains and losses realized upon the termination of interest rate swaps prior to maturity are deferred as an adjustment to the carrying amount of the related asset or liability. The deferred gain or loss is amortized using the straight-line method over the projected remaining life of the swap at its termination or the projected remaining life of the underlying asset or liability, whichever is shorter. During 1999, swaps with a notional amount of $4.5 billion were terminated, resulting in a net deferred gain of $18 million. During 1998, swaps with a notional amount of $642 million were terminated, resulting in a net deferred loss of $1 million. At December 31, 1999, Key had a net deferred swap gain of $21 million with a weighted average life of 4.8 years related to the management of debt, and a net deferred gain of $3 million with a weighted average life of 8.5 years related to the management of loans. FINANCIAL INSTRUMENTS HELD OR ISSUED FOR TRADING PURPOSES FUTURES CONTRACTS AND INTEREST RATE SWAPS, CAPS AND FLOORS. Key uses these instruments for dealer activities (which are generally limited to the banks' commercial loan clients), and enters into other positions with third parties to mitigate the interest rate risk of the client positions. The swaps entered into with clients are generally limited to conventional swaps. All of the above instruments are recorded at their estimated fair values. Adjustments to fair value are included in "investment banking and capital markets income" on the income statement. FOREIGN EXCHANGE FORWARD CONTRACTS. Key uses these instruments to accommodate the business needs of clients and for proprietary trading purposes. Foreign exchange forward contracts provide for the delayed delivery or purchase of foreign currency. Key mitigates the associated foreign exchange risk by entering into other foreign exchange contracts with third parties. Adjustments to the fair value of all foreign exchange forward contracts are included in "investment banking and capital markets income" on the income statement. TREASURY OPTIONS AND FUTURES. Key uses these instruments for proprietary trading purposes. Adjustments to the fair value of all such options are included in "investment banking and capital markets income" on the income statement. CREDIT RISK. At December 31, 1999, credit exposure from financial instruments held or issued for trading purposes was limited to the aggregate fair value of each contract with a positive fair value, or $525 million. Key manages credit risk by contracting only with counterparties with high credit ratings, continuously monitoring counterparties' performance, and entering into master netting agreements when possible. The following table shows trading income recognized on interest rate, foreign exchange forward, and treasury-based option contracts. DECEMBER 31, in millions 1999 1998 1997 - -------------------------------------------------------------------------------- Interest rate contracts $40 $65 $32 Foreign exchange forward contracts 30 22 16 Treasury-based option contracts 4 6 - - -------------------------------------------------------------------------------- 74 KEYCORP AND SUBSIDIARIES 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the notional amount and fair value of derivative financial instruments held or issued for trading purposes at December 31, 1999, and on average for 1999. The interest rate swaps and caps related to securitization positions were executed in connection with the residual interests retained when Key securitized certain home equity and education loans. The positive fair values represent assets and the negative fair values represent liabilities. The $24.6 billion notional amount of interest rate swaps presented in the table includes $11.6 billion of client swaps that receive a fixed rate and pay a variable rate, $9.1 billion of client swaps that pay a fixed rate and receive a variable rate, and $3.9 billion of basis swaps. As of December 31, 1999, the client swaps had an average expected life of 5.4 years, carried a weighted average rate received of 6.23%, and had a weighted average rate paid of 6.34%.
DECEMBER 31, 1999 YEAR ENDED DECEMBER 31, 1999 --------------------- ---------------------------- NOTIONAL FAIR AVERAGE AVERAGE in millions AMOUNT VALUE NOTIONAL AMOUNT FAIR VALUE - ---------------------------------------------------------------------------------------------------------------- Interest rate contracts -- client positions: Swap assets $10,948 $ 360 $13,130 $ 296 Swap liabilities 13,624 (289) 10,351 (221) Caps and floors purchased 502 5 426 2 Caps and floors sold 605 (5) 540 (2) Futures purchased 455 (1) 593 (1) Futures sold 7,392 15 11,373 16 Interest rate contracts -- securitization positions: Swap assets $ 1,193 $ 21 $ 884 $ 7 Caps purchased 1,225 62 890 32 Caps sold 2,225 (62) 1,290 (32) Foreign exchange forward contracts: Assets $ 1,786 $ 54 $ 1,531 $ 50 Liabilities 1,613 (49) 1,341 (45) Treasury-based option contracts: Options purchased $ 740 $ 8 $ 3,086 $ 51 Options sold 1,582 (12) 3,884 (38) - ----------------------------------------------------------------------------------------------------------------
19. CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
CONDENSED BALANCE SHEETS DECEMBER 31, in millions 1999 1998 - ---------------------------------------------------------------------------------------- ASSETS Interest-bearing deposits with KeyBank National Association $ 683 $ 314 Loans and advances to subsidiaries: Banks 99 99 Nonbank subsidiaries 439 324 - ---------------------------------------------------------------------------------------- 538 423 Investment in subsidiaries: Banks 7,024 6,982 Nonbank subsidiaries 1,035 889 - ---------------------------------------------------------------------------------------- 8,059 7,871 Other assets 676 437 - ---------------------------------------------------------------------------------------- Total assets $9,956 $9,045 ====== ====== LIABILITIES Accrued interest and other liabilities $ 439 $ 318 Short-term borrowings 515 92 Long-term debt: Subsidiary trusts 1,282 1,028 Unaffiliated companies 1,331 1,440 - ---------------------------------------------------------------------------------------- 2,613 2,468 - ---------------------------------------------------------------------------------------- Total liabilities 3,567 2,878 SHAREHOLDERS' EQUITY(a) 6,389 6,167 - ---------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $9,956 $9,045 ====== ====== - ----------------------------------------------------------------------------------------
(a) See page 55 for the parent company's Statements of Changes in Shareholders' Equity. KEYCORP AND SUBSIDIARIES 75 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF INCOME YEAR ENDED DECEMBER 31, in millions 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------- INCOME Dividends from subsidiaries: Banks $ 900 $ 600 $ 180 Nonbank subsidiaries 46 11 28 Interest income from subsidiaries 47 40 51 Gain from sale of Electronic Payment Services,Inc 134 -- -- Other income 17 20 62 - ------------------------------------------------------------------------------------------------------------------------------- 1,144 671 321 EXPENSES Interest on long-term debt with subsidiary trusts 87 67 50 Interest on other borrowed funds 96 94 100 Restructuring charges 98 -- -- Personnel and other expenses 123 87 68 - ------------------------------------------------------------------------------------------------------------------------------- 404 248 218 Income before income tax benefit and equity in net income less dividends from subsidiaries 740 423 103 Income tax benefit 74 83 43 - ------------------------------------------------------------------------------------------------------------------------------- 814 506 146 Equity in net income less dividends from subsidiaries 293 490 773 - ------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 1,107 $ 996 $ 919 ======= ======= ======= - -------------------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOW YEAR ENDED DECEMBER 31, in millions 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 1,107 $ 996 $ 919 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of intangibles 18 3 6 Net gains from divestitures (134) -- (53) Net securities gains (15) -- -- Deferred income taxes (27) (13) (2) Equity in net income less dividends from subsidiaries (293) (490) (773) Net increase in other assets (69) (2) (19) Net increase in other liabilities 4 79 25 Net increase (decrease) in accrued restructuring charges 88 (22) (75) Other operating activities,net (75) 17 14 - ------------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 604 568 42 INVESTING ACTIVITIES Proceeds from prepayments and maturities of investment securities -- -- 18 Purchases of securities available for sale (30) (13) (2) Proceeds from prepayments and maturities of securities available for sale 154 5 2 Net (increase) decrease in interest-bearing deposits (370) (35) 479 Net increase in loans and advances to subsidiaries (123) (128) (98) Proceeds from sale of subsidiary -- -- 135 (Increase) decrease in investments in subsidiaries (23) 14 125 - ------------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (392) (157) 659 FINANCING ACTIVITIES Net increase in short-term borrowings 411 92 -- Net proceeds from issuance of long-term debt 510 255 258 Payments on long-term debt (365) (138) (99) Loan payment received from ESOP trustee 10 8 7 Purchases of treasury shares (344) (256) (563) Proceeds from issuance of common stock pursuant to employee benefit and dividend reinvestment plans 33 44 65 Cash dividends (467) (416) (369) - ------------------------------------------------------------------------------------------------------------------------------- NET CASH USED IN FINANCING ACTIVITIES (212) (411) (701) - ------------------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS -- -- -- CASH AND DUE FROM BANKS AT BEGINNING OF YEAR -- -- -- - ------------------------------------------------------------------------------------------------------------------------------- CASH AND DUE FROM BANKS AT END OF YEAR -- -- -- ======= ======= ======= - -------------------------------------------------------------------------------------------------------------------------------
KeyCorp paid interest on borrowed funds amounting to $183 million in 1999, $161 million in 1998 and $147 million in 1997. 76 KEYCORP AND SUBSIDIARIES EX-21 7 EXHIBIT 21 1 EXHIBIT 21 KEYCORP SUBSIDIARIES OF THE REGISTRANT AT FEBRUARY 29, 2000
JURISDICTION OF INCORPORATION SUBSIDIARIES(1) OR ORGANIZATION PARENT COMPANY - ---------------------------------------------- ---------------- ---------------------------------- KeyBank National Association United States KeyCorp
(1) Subsidiaries of KeyCorp other than KeyBank National Association are not listed above since, in the aggregate, they would not constitute a significant subsidiary. KeyBank National Association is 100% owned by KeyCorp. 16 EX-23 8 EXHIBIT 23 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of KeyCorp of our report dated January 14, 2000, included in the 1999 Annual Report to Shareholders of KeyCorp. We also consent to the incorporation by reference in the following Registration Statements of KeyCorp and in the related Prospectuses of our report dated January 14, 2000, with respect to the consolidated financial statements incorporated herein by reference in this Annual Report (Form 10-K) for the year ended December 31, 1999: Form S-3 No. 33-58405 Form S-3 No. 333-10577 Form S-3 No. 333-55959 Form S-3 No. 333-64601 Form S-3 No. 333-59175 Form S-3 No. 333-76619 (Post-Effective Amendment No. 1) Form S-3 No. 333-88063 Form S-3 No. 333-85189 Form S-4 No. 33-31569 Form S-4 No. 33-44657 Form S-4 No. 33-51717 Form S-4 No. 33-55573 Form S-4 No. 33-57329 Form S-4 No. 33-61539 Form S-4 No. 333-19151 Form S-4 No. 333-61025 Form S-8 No. 2-97452 Form S-8 No. 33-21643 Form S-8 No. 333-49609 Form S-8 No. 333-49633 Form S-8 No. 333-65391 Form S-8 No. 333-70669 Form S-8 No. 333-70703 Form S-8 No. 333-70775 Form S-8 No. 333-72189 Form S-8 No. 333-92881 Form S-8 No. 33-31569 (Post-Effective Amendment No. 1 to Form S-4) Form S-8 No. 33-44657 (Post-Effective Amendment No. 1 to Form S-4) Form S-8 No. 33-51717 (Post-Effective Amendment No. 1 to Form S-4) Form S-8 No. 333-61025 (Post-Effective Amendment No. 1 to Form S-4)
/s/ Ernst & Young LLP Cleveland, Ohio March 17, 2000 17 EX-24 9 EXHIBIT 24 1 Exhibit 24 KEYCORP POWER OF ATTORNEY The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which anticipates filing with the United States Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (the "Annual Report"), hereby constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C. Stevens, and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things requisite and necessary to be done, hereby ratifying and approving the acts of such attorney or any such substitute or substitutes. IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as of March 16, 2000. /s/ Cecil D. Andrus ------------------------------ Typed Name: Cecil D. Andrus ------------------------------ 2 KEYCORP POWER OF ATTORNEY The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which anticipates filing with the United States Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (the "Annual Report"), hereby constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C. Stevens, and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things requisite and necessary to be done, hereby ratifying and approving the acts of such attorney or any such substitute or substitutes. IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as of March 16, 2000. /s/ William G. Bares --------------------------- Typed Name: William G. Bares --------------------------- 3 KEYCORP POWER OF ATTORNEY The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which anticipates filing with the United States Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (the "Annual Report"), hereby constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C. Stevens, and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things requisite and necessary to be done, hereby ratifying and approving the acts of such attorney or any such substitute or substitutes. IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as of March 16, 2000. /s/ Albert C. Bersticker ----------------------------- Typed Name: Albert C. Bersticker ----------------------------- 4 KEYCORP POWER OF ATTORNEY The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which anticipates filing with the United States Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (the "Annual Report"), hereby constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C. Stevens, and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things requisite and necessary to be done, hereby ratifying and approving the acts of such attorney or any such substitute or substitutes. IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as of March 16, 2000. /s/ Edward P. Campbell --------------------------- Typed Name: Edward P. Campbell --------------------------- 5 KEYCORP POWER OF ATTORNEY The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which anticipates filing with the United States Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (the "Annual Report"), hereby constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C. Stevens, and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things requisite and necessary to be done, hereby ratifying and approving the acts of such attorney or any such substitute or substitutes. IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as of March 16, 2000. /s/ Carol A. Cartwright --------------------------- Typed Name: Carol A. Cartwright --------------------------- 6 KEYCORP POWER OF ATTORNEY The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which anticipates filing with the United States Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (the "Annual Report"), hereby constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C. Stevens, and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things requisite and necessary to be done, hereby ratifying and approving the acts of such attorney or any such substitute or substitutes. IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as of March 16, 2000. /s/ Thomas A. Commes ------------------------------- Typed Name: Thomas A. Commes ------------------------------- 7 KEYCORP POWER OF ATTORNEY The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which anticipates filing with the United States Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (the "Annual Report"), hereby constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C. Stevens, and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things requisite and necessary to be done, hereby ratifying and approving the acts of such attorney or any such substitute or substitutes. IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as of March 16, 2000. /s/ Kenneth M. Curtis --------------------------- Typed Name: Kenneth M. Curtis --------------------------- 8 KEYCORP POWER OF ATTORNEY The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which anticipates filing with the United States Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (the "Annual Report"), hereby constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C. Stevens, and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things requisite and necessary to be done, hereby ratifying and approving the acts of such attorney or any such substitute or substitutes. IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as of March 16, 2000. /s/ Robert W. Gillespie ------------------------------ Typed Name: Robert W. Gillespie ------------------------------ 9 KEYCORP POWER OF ATTORNEY The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which anticipates filing with the United States Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (the "Annual Report"), hereby constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C. Stevens, and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things requisite and necessary to be done, hereby ratifying and approving the acts of such attorney or any such substitute or substitutes. IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as of March 16, 2000. /s/ Henry S. Hemingway ---------------------------- Typed Name: Henry S. Hemingway ---------------------------- 10 KEYCORP POWER OF ATTORNEY The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which anticipates filing with the United States Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (the "Annual Report"), hereby constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C. Stevens, and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things requisite and necessary to be done, hereby ratifying and approving the acts of such attorney or any such substitute or substitutes. IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as of March 16, 2000. /s/ Charles R. Hogan -------------------------------- Typed Name: Charles R. Hogan -------------------------------- 11 KEYCORP POWER OF ATTORNEY The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which anticipates filing with the United States Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (the "Annual Report"), hereby constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C. Stevens, and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things requisite and necessary to be done, hereby ratifying and approving the acts of such attorney or any such substitute or substitutes. IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as of March 16, 2000. /s/ Douglas J. McGregor ------------------------------- Typed Name: Douglas J. McGregor ------------------------------- 12 KEYCORP POWER OF ATTORNEY The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which anticipates filing with the United States Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (the "Annual Report"), hereby constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C. Stevens, and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things requisite and necessary to be done, hereby ratifying and approving the acts of such attorney or any such substitute or substitutes. IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as of March 16, 2000. /s/ Henry L. Meyer III ------------------------------- Typed Name: Henry L. Meyer III ------------------------------- 13 KEYCORP POWER OF ATTORNEY The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which anticipates filing with the United States Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (the "Annual Report"), hereby constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C. Stevens, and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things requisite and necessary to be done, hereby ratifying and approving the acts of such attorney or any such substitute or substitutes. IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as of March 16, 2000. /s/ Bill R. Sanford --------------------------------- Typed Name: Bill R. Sanford --------------------------------- 14 KEYCORP POWER OF ATTORNEY The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which anticipates filing with the United States Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (the "Annual Report"), hereby constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C. Stevens, and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things requisite and necessary to be done, hereby ratifying and approving the acts of such attorney or any such substitute or substitutes. IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as of March 16, 2000. /s/ Ronald B. Stafford ----------------------------- Typed Name: Ronald B. Stafford ----------------------------- 15 KEYCORP POWER OF ATTORNEY The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which anticipates filing with the United States Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (the "Annual Report"), hereby constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C. Stevens, and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things requisite and necessary to be done, hereby ratifying and approving the acts of such attorney or any such substitute or substitutes. IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as of March 16, 2000. /s/ Dennis W. Sullivan ---------------------------------- Typed Name: Dennis W. Sullivan ---------------------------------- 16 KEYCORP POWER OF ATTORNEY The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which anticipates filing with the United States Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (the "Annual Report"), hereby constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C. Stevens, and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things requisite and necessary to be done, hereby ratifying and approving the acts of such attorney or any such substitute or substitutes. IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as of March 16, 2000. /s/ Peter G. Ten Eyck, II ---------------------------- Typed Name: Peter G. Ten Eyck, II ---------------------------- 17 KEYCORP POWER OF ATTORNEY The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which anticipates filing with the United States Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (the "Annual Report"), hereby constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C. Stevens, and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things requisite and necessary to be done, hereby ratifying and approving the acts of such attorney or any such substitute or substitutes. IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as of March 16, 2000. /s/ Lee G. Irving ------------------------------ Typed Name: Lee G. Irving ------------------------------ 18 KEYCORP POWER OF ATTORNEY The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which anticipates filing with the United States Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (the "Annual Report"), hereby constitutes and appoints Steven N. Bulloch, K. Brent Somers, and Thomas C. Stevens, and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things requisite and necessary to be done, hereby ratifying and approving the acts of such attorney or any such substitute or substitutes. IN WITNESS WHEREOF, the undersigned has hereto set his or her hand as of March 16, 2000. /s/ K. Brent Somers ----------------------------- Typed Name: K. Brent Somers ----------------------------- EX-27 10 EXHIBIT 27
9 1,000,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 2,816 35 1,056 768 6,665 986 998 64,222 930 83,395 43,233 12,616 4,033 17,124 0 0 492 5,897 83,395 5,146 549 0 5,695 1,305 2,908 2,787 348 29 3,049 1,684 1,684 0 0 1,107 2.47 2.45 3.93 407 259 0 0 900 420 102 930 930 0 0
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