10-K 1 l92910ae10-k.txt KEYCORP 10-K/YEAR ENDING 12-31-2001 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, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-850 [KEYCORP LOGO] (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) OHIO --------------------------- (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) 127 PUBLIC SQUARE, CLEVELAND, OHIO --------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) 34-6542451 --------------------------------------- (I.R.S. EMPLOYER IDENTIFICATION NO.) 44114-1306 ---------------- (ZIP CODE) (216) 689-6300 ---------------------------------------------- (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) 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 $10,658,486,487 at February 28, 2002. (The aggregate market value has been computed using the closing market price of the stock as reported by the New York Stock Exchange on February 28, 2002.) 424,979,525 Shares -------------------------------------------------------------------------------- (NUMBER OF KEYCORP COMMON SHARES OUTSTANDING AS OF FEBRUARY 28, 2002) Certain specifically designated portions of KeyCorp's 2001 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 2002 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K. KEYCORP 2001 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
ITEM PAGE NUMBER NUMBER ------ ------ PART I 1 Business.................................................... 1 2 Properties.................................................. 8 3 Legal Proceedings........................................... 8 4 Submission of Matters to a Vote of Security Holders......... 8 PART II 5 Market for Registrant's Common Equity and Related Stockholder Matters....................................... 8 6 Selected Financial Data..................................... 9 7 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 9 7A Quantitative and Qualitative Disclosures about Market Risk...................................................... 9 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.............. 10 PART IV 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................................... 10 Signatures.................................................. 14 Exhibits.................................................... 15
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, is headquartered in Cleveland, Ohio. It has elected to be a bank holding company and a financial holding company under the Bank Holding Company Act of 1956, as amended ("BHCA"). At December 31, 2001, KeyCorp was one of the nation's largest bank-based financial services companies with consolidated total assets of $80.9 billion. Its subsidiaries provide a wide range of retail and commercial banking, commercial leasing, investment management, consumer finance and investment banking products and services to individual, corporate and institutional clients through three major lines of business: Key Consumer Banking, Key Corporate Finance and Key Capital Partners. As of December 31, 2001, these services were provided across much of the country through subsidiaries operating 911 full-service retail banking branches ("KeyCenters") in 12 states, a telephone banking call center services group and 2,333 ATMs. Additional information pertaining to the three business lines referred to above is included in the "Line of Business Results" section beginning on page 26 and in Note 4 ("Line of Business Results"), beginning on page 64 of the Financial Review section of KeyCorp's 2001 Annual Report to Shareholders and is incorporated herein by reference. KeyCorp and its subsidiaries had 21,230 full-time equivalent employees as of December 31, 2001. 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 company 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). 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 and other financial services. KeyCorp is an equity participant in a joint venture with Key Merchant Services, LLC, which provides merchant services to businesses. The executive offices of KeyCorp are located at 127 Public Square, Cleveland, Ohio 44114-1306, and its telephone number is (216) 689-6300. 1 The following financial data is included in the Financial Review section of KeyCorp's 2001 Annual Report to Shareholders and is incorporated herein by reference:
DESCRIPTION OF FINANCIAL DATA PAGE ----------------------------- ---- Selected Financial Data..................................... 25 Average Balance Sheets, Net Interest Income and Yields/Rates.............................................. 30 Components of Net Interest Income Changes................... 32 Composition of Loans........................................ 39 Maturities and Sensitivity of Certain Loans to Changes in Interest Rates............................................ 42 Securities Available for Sale............................... 42 Investment Securities....................................... 43 Allocation of the Allowance for Loan Losses................. 44 Summary of Loan Loss Experience............................. 46 Summary of Nonperforming Assets and Past Due Loans.......... 47 Maturity Distribution of Time Deposits of $100,000 or More...................................................... 48 Impaired Loans and Other Nonperforming Assets............... 69 Short-Term Borrowings....................................... 69
ACQUISITIONS AND DIVESTITURES The information presented in Note 3 ("Acquisitions and Divestitures"), beginning on page 63 of the Financial Review section of KeyCorp's 2001 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 has intensified as a consequence of the financial modernization laws that were enacted in November 1999 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" on page 7. 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. The following 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 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 one national bank subsidiary 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-regulatory organizations. For example, KeyCorp's brokerage and asset management subsidiaries are subject to supervision and regulation by the Securities and Exchange Commission (the "SEC"), 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 are subject to other laws and regulations of both the Federal government and the various states in which they are authorized to do business. Dividend Restrictions The principal source of cash flow to 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. Since June 30, 2001, KeyBank USA has had a deficit in its undivided profits account. Accordingly, its payment of dividends to KeyCorp requires prior OCC consent. 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 operating 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 3 operating 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 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 operating subsidiaries, with or involving KeyCorp and its nonbank subsidiaries which are not operating subsidiaries of KeyBank and KeyBank USA was limited at December 31, 2001, to approximately $1.8 billion. As a result, these provisions materially restrict the ability of KeyCorp's national bank subsidiaries and their operating subsidiaries to fund KeyCorp and its nonbank subsidiaries, which are not operating 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. Subprime Lending. In 2001, the Federal banking agencies published expanded guidance to examiners in connection with their examination of subprime lending programs. For these purposes, a subprime lending program is one that targets borrowers with weakened credit histories or having questionable repayment capacity. The guidance addresses supervisory expectations with respect to risk management, the allowance for loan and lease losses, regulatory capital, portfolio and transaction level examination review, analysis, and classification, cure program documentation, and predatory or abusive lending practices. While this guidance principally applies to institutions with subprime lending programs having an aggregate credit exposure of at least 25% of Tier 1 capital, Federal banking examiners may apply it to other subprime portfolios, such as those that are experiencing rapid growth or adverse performance trends, those that are administered by inexperienced management, and those which possess inadequate or weak controls. The Federal banking agencies have indicated, however, that the guidance is neither intended nor considered by the agencies to be a capital regulation and does not represent a change in policy by the agencies. Moreover, the agencies have also indicated that examiners would not unilaterally require additional reserves or capital based upon the guidance, and that any determination made by an examiner that an institution's reserves or capital is deficient would be discussed with the institution's management and each agency's appropriate supervisory office before a final decision is made. Neither the Federal Reserve Board nor the OCC has advised KeyCorp or any of its national bank subsidiaries of any such deficiency. 4 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. 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 4.00%. The required minimum total risk-based capital ratio is currently 8.00%. 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, 2001, Key's Tier 1 and total capital to risk-weighted assets ratios were 7.43% and 11.41%, respectively, which include 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 3.00% 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 4.00%. 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, 2001, Key's Tier 1 capital leverage ratio was 7.65%. 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, 2001, 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. In late November 2001, the Federal banking agencies published their final rule on the revised regulatory capital treatment of on-balance sheet assets and off-balance sheet exposures consisting of recourse obligations, direct credit substitutes, and residual interests that expose banking organizations primarily to credit risk. The final rule 5 treats recourse obligations and direct credit substitutes more consistently and adds new standards for the treatment of residual interests, including a concentration limit for credit-enhancing interest-only strip receivables. In addition, the agencies use credit rating and certain alternative approaches to match regulatory capital requirements more closely to a banking organization's relative risk of loss for certain positions in asset securitizations. The final rule became effective on January 1, 2002, for any transactions that settle on or after such date. Transactions which settle before January 1, 2002, and result in increased regulatory capital requirements are not required to conform to the final rule until December 31, 2002. Management is in the process of completing its evaluation of the effect on Key of the final rule. In late January 2002, the Federal banking agencies published their final rule on the regulatory capital treatment of certain equity investments made by banking organizations in companies engaged in nonfinancial activities. The final rule becomes effective on April 1, 2002. The final rule imposes marginal capital charges (applied by making deductions from banking organization's Tier 1 capital) which increase as the banking organization's aggregate carrying amount of its covered equity investments increase in relation to its Tier 1 capital. Such capital charges range from 8% - 25% as such aggregate carrying amount increases from 15% to 25% of the banking organization's Tier 1 capital. Management is in the process of completing its evaluation of the effect on Key of the final rule. As noted on page 4 in "Subprime Lending," the subprime lending examination guidance addresses, among other matters, Federal banking agency supervisory expectations with respect to regulatory capital of institutions with subprime lending portfolios. For an institution having subprime lending portfolio exposure aggregating 25% or more of the institution's Tier 1 capital, the guidance indicates examiners will likely expect, as a minimum, that the institution would hold capital against such portfolio in an amount that is 1.5 to 3.0 times greater than what is appropriate for nonsubprime assets of a similar type. Federal banking agencies may also apply this additional capital requirement to other subprime portfolios such as those that are experiencing rapid growth or adverse performance trends, that are administered by inexperienced management, or which possess inadequate or weak controls. 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 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 10.00%, a Tier 1 risk-based capital ratio of at least 6.00% and a Tier 1 leverage capital ratio of at least 5.00% 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 8.00%, a Tier 1 risk-based capital ratio of at least 4.00% and a Tier 1 leverage capital ratio of at least 4.00% (3.00% if the institution has achieved the highest composite rating in its most recent examination) and is not well capitalized. At December 31, 2001, 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 6 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 2001 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 2001 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. Starting in 2000, BIF and SAIF FICO assessment rates equalized. Throughout 2001, Key paid FICO bond assessments at an annualized rate of less than $.02 per $100 of its FICO-assessable deposits. INTERSTATE BANKING AND BRANCHING The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (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 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 (the "GLBA"), enacted in November 1999, authorizes 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. In 2000, KeyCorp elected to become a financial holding company. Under the authority conferred by the GLBA, Key has been able to expand the nature and scope of its equity investments in nonfinancial companies, operate its McDonald Investments Inc. subsidiary with fewer operating restrictions, and acquire financial subsidiaries to engage in real estate leasing activities and insurance agency activities without geographic restriction. GLBA also established new requirements for financial institutions to provide new privacy protections to consumers. The Federal banking agencies jointly adopted a final regulation providing for the implementation of these protections. It requires a financial institution to provide notice to customers about its privacy policies and 7 practices, describes under what conditions a financial institution may disclose nonpublic personal information about consumers to nonaffiliated third parties, and provides an "opt-out" method for consumers to prevent the financial institution from disclosing that information to nonaffiliated third parties. Financial institutions were required to be in compliance with the final regulation by July 1, 2001. Effective in May 2001, GLBA repealed the blanket exception of banks (and savings associations) from the definitions of "broker" and "dealer" under the Securities Exchange Act of 1934, and replaced this full exception with functional exceptions. Under the statute, banks that engage in securities activities either must conduct those activities through a broker-dealer or conform their securities activities to those which qualify for functional exceptions. The SEC issued interim final rules in May 2001 which included a temporary exemption for banks from the definitions of "broker" and "dealer" until October 2001. In July 2001, the SEC further extended this temporary exemption until May 2002. The SEC has also given notice that it expects to amend its interim final rules and further extend the temporary exemption so that banks will have a sufficient transition period to bring their operations into compliance with the amended rules. 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, 2001, 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 502 of their branch banking offices and leased 409 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 58 of the Financial Review section of KeyCorp's 2001 Annual Report to Shareholders and is incorporated herein by reference. ITEM 3. LEGAL PROCEEDINGS The information presented in the Legal Proceedings section of Note 17 ("Commitments, Contingent Liabilities and Other Disclosures"), beginning on page 76 of the Financial Review section of KeyCorp's 2001 Annual Report to Shareholders is incorporated herein by reference. 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 2001 Annual Report to Shareholders are incorporated herein by reference:
PAGE ---- Discussion of common shares and shareholder information presented in the capital and dividends section............ 50 Presentation of quarterly market price and cash dividends per common share.......................................... 52 Discussion of dividend restrictions presented in Note 17 ("Commitments, Contingent Liabilities and Other Disclosures")............................................. 77
8 ITEM 6. SELECTED FINANCIAL DATA The Selected Financial Data presented on page 25 of the Financial Review section of KeyCorp's 2001 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 22 through 52 of the Financial Review section of KeyCorp's 2001 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 29, 32 and 33 of the Financial Review section of KeyCorp's 2001 Annual Report to Shareholders is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Selected Quarterly Financial Data and the financial statements and the notes thereto, presented on page 52 and on pages 54 through 83, respectively, of the Financial Review section of KeyCorp's 2001 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 2002 Annual Meeting of Shareholders to be held May 23, 2002, and is incorporated herein by reference. KeyCorp expects to file its final proxy statement on or before April 12, 2002. The information set forth in the sections captioned, "AUDIT AND RISK REVIEW COMMITTEE INDEPENDENCE" and "AUDIT AND RISK REVIEW COMMITTEE REPORT" contained in KeyCorp's definitive Proxy Statement for the 2002 Annual Meeting of Shareholders to be held May 23, 2002, are not incorporated by reference in this Report on Form 10-K. 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 2002 Annual Meeting of Shareholders to be held May 23, 2002, 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 2002 Annual Meeting of Shareholders to be held May 23, 2002, is not incorporated by reference in this Report on Form 10-K. KeyCorp expects to file its final proxy statement on or before April 12, 2002. 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 2002 Annual Meeting 9 of Shareholders to be held May 23, 2002, and is incorporated herein by reference. KeyCorp expects to file its final proxy statement on or before April 12, 2002. 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 2002 Annual Meeting of Shareholders to be held May 23, 2002, and is incorporated herein by reference. KeyCorp expects to file its final proxy statement on or before April 12, 2002. 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 2001 Annual Report to Shareholders:
PAGE ---- Report of Ernst & Young LLP, Independent Auditors........... 53 Consolidated Financial Statements: Consolidated Balance Sheets at December 31, 2001 and 2000... 54 Consolidated Statements of Income for the Years Ended December 31, 2001, 2000 and 1999.......................... 55 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2001, 2000 and 1999...... 56 Consolidated Statements of Cash Flow for the Years Ended December 31, 2001, 2000 and 1999.......................... 57 Notes to Consolidated Financial Statements.................. 58
(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, as Exhibit 3 to Form 10-Q for the quarter ended September 30, 1998, 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 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 10.4 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 herin by reference. 10.5 Form of Option Grant between KeyCorp and Robert W. Gillespie, dated November 15, 2000, filed as Exhibit 10.5 to Form 10-K for the year ended December 31, 2000, and incorporated herein by reference. 10.6 Form of Option Grant between KeyCorp and Henry L. Meyer III, dated November 15, 2000, filed as Exhibit 10.6 to Form10-K for the year ended December 31, 2000, 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, filed as Exhibit 10.9 to Form 10-K for the year ended December 31, 1999, and incorporated herein by reference. 10.10 Amended Employment Agreement between KeyCorp and Henry L. Meyer III, dated February 1, 2001, filed as Exhibit 10.10 to Form 10-K for the year ended December 31, 2000, and incorporated herein by reference. 10.11 Employment Agreement among KeyCorp, Robert T. Clutterbuck and McDonald Investments Inc., dated October 4, 2000, filed as Exhibit 10.13 to Form 10-K for the year ended December 31, 2000, and incorporated herein by reference. 10.12 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. 10.13 KeyCorp Annual Incentive Plan as amended and restated on January 17, 2001, filed as Exhibit 10.3 to Form 10-Q for the quarter ended March 31, 2001, and incorporated herein by reference. 10.14 KeyCorp Amended and Restated 1991 Equity Compensation Plan (Amended as of November 14, 2001). 10.15 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. 10.16 KeyCorp 1988 Stock Option Plan as Amended and Restated as of September 19, 1996, filed as Exhibit 10.20 to Form 10-K for the year ended December 31, 1996, and incorporated herein by reference. 10.17 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. 10.18 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. 10.19 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. 10.20 KeyCorp 1997 Stock Option Plan for Directors as amended and restated on March 14, 2001, filed as Exhibit 10.1 to Form 10-Q for the quarter ended March 31, 2001, and incorporated herein by reference.
11 10.21 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. 10.22 Amended and Restated Director Deferred Compensation Plan (May 18, 2000 Amendment and Restatement) filed as Exhibit 10 to Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by reference. 10.23 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. 10.24 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. 10.25 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. 10.26 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. 10.27 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. 10.28 First Amendment to KeyCorp Deferred Compensation Plan. 10.29 Second Amendment to KeyCorp Deferred Compensation Plan. 10.30 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. 10.31 First Amendment to KeyCorp Automatic Deferral Plan, filed as Exhibit 10.31 to Form 10-K for the year ended December 31, 2000, and incorporated herein by reference. 10.32 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. 10.33 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. 10.34 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. 10.35 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. 10.36 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. 10.37 Second Amendment to KeyCorp Supplemental Retirement Plan, filed as Exhibit 10.37 to form 10-K for the year ended December 31, 2000, 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 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 Third Amendment to KeyCorp Executive Supplemental Pension Plan, filed as Exhibit 10.42 to Form 10-K for the year ended December 31, 2000, and incorporated herein by reference. 10.43 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. 10.44 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. 10.45 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. 10.46 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 2001 Annual Report to Shareholders. 21 Subsidiaries of the Registrant. 23 Consent of Independent Auditors. 24 Powers of Attorney.
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 10.46 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 December 20, 2001 -- The Registrant's December 20, 2001, press release announcing: (a) actions taken to increase the loan loss reserve and strengthen the balance sheet and (b) that the Registrant's Board of Directors increased the cash dividend on the Registrant's common stock. No other reports on Form 8-K were filed during the fourth quarter of 2001. 13 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 Vice Chairman, Chief Administrative Officer and Secretary March 14, 2002 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 --------- ----- * Henry L. Meyer III Chairman, Chief Executive Officer, and President (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 * Kenneth M. Curtis Director * Alexander M. Cutler Director * Henry S. Hemingway Director * Charles R. Hogan Director * Douglas J. McGregor Director * Steven A. Minter Director * Bill R. Sanford Director * Ronald B. Stafford Director * Thomas C. Stevens Director * Dennis W. Sullivan Director * Peter G. Ten Eyck, II Director
/s/ Thomas C. Stevens ------------------------------------ * By Thomas C. Stevens, attorney-in-fact March 14, 2002 14