-----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, JMJNPka4oMqVtge6nyX+4zh0NVzmFs40zH4LDlO5GtOl6fjA3lHQT16J45fqJS/X 7EX41QH/IprKAQoEtHJP2w== 0000950152-03-003197.txt : 20030321 0000950152-03-003197.hdr.sgml : 20030321 20030321110309 ACCESSION NUMBER: 0000950152-03-003197 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030321 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: 1934 Act SEC FILE NUMBER: 001-11302 FILM NUMBER: 03611514 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 l97974ae10vk.txt KEYCORP 12-31-2002 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, 2002 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. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] The aggregate market value of voting stock held by nonaffiliates of the Registrant was approximately $10,038,678,546 at February 28, 2003. (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, 2003.) 423,037,444 Shares - -------------------------------------------------------------------------------- (NUMBER OF KEYCORP COMMON SHARES OUTSTANDING AS OF FEBRUARY 28, 2003) Certain specifically designated portions of KeyCorp's 2002 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 2003 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K. KEYCORP 2002 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................................................ 10 13 Certain Relationships and Related Transactions.............. 10 14 Controls and Procedures..................................... 10 PART IV 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................................... 11 Signatures.................................................. 15 Management Certifications................................... 16 Exhibits....................................................
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, 2002, KeyCorp was one of the nation's largest bank-based financial services companies with consolidated total assets of $85.2 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 business groups: Key Consumer Banking, Key Corporate Finance and Key Capital Partners. As of December 31, 2002, these services were provided across much of the country through subsidiaries operating 910 full-service retail banking branches ("KeyCenters"), a telephone banking call center services group and 2,165 ATMs in 17 states. Additional information pertaining to the three business lines referred to above is included in the "Line of Business Results" section beginning on page 24 and in Note 4 ("Line of Business Results"), beginning on page 65 of the Financial Review section of KeyCorp's 2002 Annual Report to Shareholders and is incorporated herein by reference. KeyCorp and its subsidiaries have 20,437 full-time equivalent employees as of December 31, 2002. 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, principal investing, 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. 1 The following financial data is included in the Financial Review section of KeyCorp's 2002 Annual Report to Shareholders and is incorporated herein by reference as indicated below:
DESCRIPTION OF FINANCIAL DATA PAGE - ----------------------------- ---- Selected Financial Data..................................... 23 Average Balance Sheets, Net Interest Income and Yields/Rates.............................................. 28 Components of Net Interest Income Changes................... 31 Composition of Loans........................................ 37 Maturities and Sensitivity of Certain Loans to Changes in Interest Rates............................................ 40 Securities Available for Sale............................... 41 Investment Securities....................................... 41 Allocation of the Allowance for Loan Losses................. 42 Summary of Loan Loss Experience............................. 44 Summary of Nonperforming Assets and Past Due Loans.......... 45 Maturity Distribution of Time Deposits of $100,000 or More...................................................... 46 Impaired Loans and Other Nonperforming Assets............... 72 Short-Term Borrowings....................................... 74
The executive offices of KeyCorp are located at 127 Public Square, Cleveland, Ohio 44114-1306, and its telephone number is (216) 689-6300. ACQUISITIONS AND DIVESTITURES The information presented in Note 3 ("Acquisitions and Divestitures") on page 64 of the Financial Review section of KeyCorp's 2002 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 "Financial Modernization Legislation" on page 7. SUPERVISION AND REGULATION The following discussion addresses certain 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 to protect 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 to protect security holders. Set forth below is a brief discussion of selected laws, regulations and regulatory agency policies applicable to Key. This discussion is not intended to be comprehensive and is qualified in its entirety by reference to the full text of the statutes, regulations and regulatory agency policies to which the discussion refers. Changes in applicable laws, regulations and regulatory agency policies cannot necessarily be predicted by management, yet such changes may have a material effect on Key's business, financial condition or results of operations. 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 bank 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 ("KBNA") and Key Bank USA, National Association ("Key Bank 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 KBNA and Key Bank 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, and 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 bank 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. 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," nor may such an institution pay any dividend while the institution is in default in the payment of any assessment due to the FDIC. See "Regulatory Capital Standards and Related Matters -- Prompt Corrective Action." Also, the Federal Reserve Board, the OCC and the FDIC have issued policy statements that 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 Bank 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 operating 3 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 KBNA and Key Bank USA, including their operating subsidiaries, with or involving KeyCorp and its nonbank subsidiaries that are not operating subsidiaries of KBNA and Key Bank USA was limited at December 31, 2002, to approximately $1.9 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 that 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. Regulatory Capital Standards and Related Matters Risk-Based and Leverage Regulatory Capital. Applicable law and regulation define and prescribe minimum levels of regulatory capital for bank holding companies and their bank 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. 4 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, 2002, Key's Tier 1 and total capital to risk-weighted assets ratios were 8.09% and 12.51%, 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 bank subsidiaries has been advised by its primary federal banking regulator of any specific leverage ratio applicable to it. At December 31, 2002, Key's Tier 1 capital leverage ratio was 8.15%. 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, 2002, each of KeyCorp's national bank subsidiaries had regulatory capital in excess of all minimum risk-based and leverage capital requirements. In addition to establishing regulatory minimum ratios of capital to assets for all bank holding companies and their bank subsidiaries, the risk-based and leverage capital guidelines also identify various organization-specific factors and risks that are not taken into account in the computation of the capital ratios but that 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. Additional information regarding regulatory capital levels is included in the "Capital" section beginning on page 48 of the Financial Review section of KeyCorp's 2002 Annual Report to Shareholders. Recourse Obligations, Direct Credit Substitutes, and Residual Interests. In 2002, a final rule issued by the federal banking agencies became effective that revised the 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 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. Equity Investments in Nonfinancial Companies. On April 1, 2002, the federal banking agencies issued a final rule regarding the regulatory capital treatment of certain equity investments made by banking organizations in companies engaged in nonfinancial activities. It imposes marginal capital charges (applied by making deductions from Tier 1 capital) that 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% to 25% as such aggregate carrying amount increases from 15% to 25% of the banking organization's Tier 1 capital. Implementation of this new rule had no material adverse effect on Key's regulatory capital in 2002. Subprime Lending. The federal banking agencies have heightened their supervisory expectations with respect to regulatory capital of institutions having subprime lending programs. For these purposes, a subprime lending 5 program is one that targets borrowers with weakened credit histories or questionable repayment capacity. In addition to regulatory capital, the supervisory guidance regarding subprime lending addresses supervisory expectations with respect to risk management, the allowance for loan and lease losses, 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 that possess inadequate or weak controls. For an institution having subprime lending portfolio exposure aggregating 25% or more of the institution's Tier 1 capital, the supervisory 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 non-subprime assets of a similar type. 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 Key of any such deficiency. 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, 2002, 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 bank subsidiaries, and should be considered in conjunction with other available information regarding Key's financial condition and results of operations. 6 FDIC DEPOSIT INSURANCE 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 2002 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 2002 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. In May 2002, the U.S. House of Representatives passed H.R. 3717, the Federal Deposit Insurance Reform Act of 2002. Under this legislation: (i) BIF and SAIF would merge into a single Deposit Insurance Fund ("DIF"), (ii) DIF coverage limits would significantly increase with an inflation adjustment index for future increases in coverage, (iii) a designated reserve ratio within a range of 1.15% to 1.40% would apply to DIF replacing the 1.25% designated reserve ratio applicable under current law to BIF and SAIF, with the FDIC determining at least annually the designated reserve ratio within the range that will apply to DIF, (iv) current deposit insurance assessments would be set in an amount the FDIC determines to be appropriate (including a maximum base assessment of $.01 per $100 of assessable deposits for insured depository institutions in the lowest risk category, so long as the DIF reserve ratio does not fall below 1.15%), (v) a one-time credit predicated upon the December 31, 1996, assessment base of eligible insured depository institutions would be available (with the amount of such credit being limited for institutions exhibiting financial, operational, or compliance weakness, including undercapitalization), (vi) the payment of dividends to insured depository institutions would be required whenever the DIF reserve ratio equals or exceeds specified percentages, (vii) an on-going system of credits to be applied against future assessments would be established on the same basis as the payment of dividends, and (viii) restoration plans for DIF would be required to be established and implemented by the FDIC whenever DIF's reserve ratio falls (or is projected to fall) below its then applicable designated reserve ratio. This proposed legislation was not enacted into law before the adjournment of the 107th Congress. Similar legislation has been introduced in the 108th Congress. Enactment into law of legislation similar to H.R. 3717 can be expected to adversely affect the results of operations of all insured depository institutions, including KBNA and Key Bank USA. FINANCIAL MODERNIZATION LEGISLATION The Gramm-Leach-Bliley Act (the "GLBA"), enacted in November of 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 practices, describes under what conditions a financial institution may disclose nonpublic personal information about consumers to non-affiliated third parties, and provides an "opt-out" method for consumers to prevent the 7 financial institution from disclosing that information to non-affiliated 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 for 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, these institutions 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 include a temporary exemption for banks from the definitions of "broker" and "dealer." Since that time, the SEC has extended this temporary extension. The most recent extension provides that banks are exempt from the definition of "broker" until May 2003 and from the definition of "dealer" until February 2003. The SEC has also indicated that it expects to amend the interim final rules, and that it does not expect banks to develop compliance systems to bring their operations into compliance with the interim final rules until they have been amended. In November 2002, the SEC published proposed amendments to the interim final rules principally with respect to the "dealer" exemption. These proposed amendments were adopted in final form in February 2003 and become effective in September 2003. ITEM 2. PROPERTIES The headquarters of KeyCorp, KBNA and Key Bank USA are located in Key Tower at 127 Public Square, Cleveland, Ohio 44114-1306. At December 31, 2002, 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 bank subsidiaries of KeyCorp owned 503 of their branch banking offices and leased 407 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 2002 Annual Report to Shareholders and is incorporated herein by reference. ITEM 3. LEGAL PROCEEDINGS The information presented in the Legal Proceedings section of Note 19 ("Commitments, Contingent Liabilities and Guarantees"), beginning on page 81 of the Financial Review section of KeyCorp's 2002 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 2002 Annual Report to Shareholders are incorporated herein by reference:
PAGE ------ Discussion of common shares and shareholder information presented in the "Capital" section........................ 48 Presentation of quarterly market price and cash dividends per common share.......................................... 51 Discussion of dividend restrictions presented in the "Liquidity" section and in Note 5 ("Restrictions on Cash, Dividends and Lending Activities")........................ 46, 68
8 ITEM 6. SELECTED FINANCIAL DATA The Selected Financial Data presented on page 23 of the Financial Review section of KeyCorp's 2002 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 20 through 51 of the Financial Review section of KeyCorp's 2002 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 30 through 32 of the Financial Review section of KeyCorp's 2002 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 51 and on pages 53 through 88, respectively, of the Financial Review section of KeyCorp's 2002 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 2003 Annual Meeting of Shareholders to be held May 22, 2003, and is incorporated herein by reference. The information set forth in the sections captioned, "AUDIT REVIEW COMMITTEE INDEPENDENCE" and "AUDIT REVIEW COMMITTEE REPORT" contained in KeyCorp's definitive Proxy Statement for the 2003 Annual Meeting of Shareholders to be held May 22, 2003, are not incorporated by reference in this report on Form 10-K. KeyCorp expects to file its final proxy statement on or before April 2, 2003. 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 2003 Annual Meeting of Shareholders to be held May 22, 2003, and is incorporated herein by reference. The information set forth in the sections captioned "COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION" and "KEYCORP STOCK PRICE PERFORMANCE" contained in KeyCorp's definitive Proxy Statement for the 2003 Annual Meeting of Shareholders to be held May 22, 2003, is not incorporated by reference in this report on Form 10-K. KeyCorp expects to file its final proxy statement on or before April 2, 2003. 9 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is set forth in the sections captioned "EQUITY COMPENSATION PLAN INFORMATION" and "SHARE OWNERSHIP AND PHANTOM STOCK UNITS" contained in KeyCorp's definitive Proxy Statement for the 2003 Annual Meeting of Shareholders to be held May 22, 2003, and is incorporated herein by reference. KeyCorp expects to file its final proxy statement on or before April 2, 2003. 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 2003 Annual Meeting of Shareholders to be held May 22, 2003, and is incorporated herein by reference. KeyCorp expects to file its final proxy statement on or before April 2, 2003. ITEM 14. CONTROLS AND PROCEDURES As a bank holding company, KeyCorp is subject to the internal control reporting requirements of the Federal Deposit Insurance Corporation Improvement Act, which became effective in 1993 ("FDICIA"). FDICIA requirements include an annual assessment by our Chief Executive Officer and Chief Financial Officer of the effectiveness of our internal controls over financial reporting, which generally include those controls relating to the preparation of our financial statements in conformity with accounting principles generally accepted in the United States. In addition, under FDICIA our independent auditors have annually examined and attested to, without qualification, management's assertions regarding the effectiveness of our internal controls. Accordingly, we have had an established process of maintaining and evaluating our internal controls over financial reporting. In connection with recent legislation and regulations, our management has also focused its attention on our "disclosure controls and procedures" which, as defined by the SEC, are generally those controls and procedures designed to ensure that financial and nonfinancial information required to be disclosed in KeyCorp's reports filed with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to KeyCorp's management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In light of the new requirements, we have engaged in a process of reviewing our disclosure controls and procedures. As a result of our review, and although we believe that our pre-existing disclosure controls and procedures were effective in enabling us to comply with our disclosure obligations, we have implemented enhancements, which include establishing a disclosure committee and generally formalizing and documenting disclosure controls and procedures that we already have in place. Any future refinements to our controls and procedures will continue to build upon our existing framework. Following the review described above and the establishment of our disclosure committee and within the 90-day period prior to the filing of this report, KeyCorp carried out an evaluation, under the supervision and with the participation of KeyCorp's management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of KeyCorp's disclosure controls and procedures. Based upon that evaluation, KeyCorp's Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective. There have been no significant changes in internal controls that could significantly affect internal controls subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation. 10 PART IV ITEM 15. 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 2002 Annual Report to Shareholders:
PAGE ---- Report of Ernst & Young LLP, Independent Auditors........... 52 Consolidated Financial Statements: Consolidated Balance Sheets at December 31, 2002 and 2001... 53 Consolidated Statements of Income for the Years Ended December 31, 2002, 2001 and 2000.......................... 54 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2002, 2001 and 2000...... 55 Consolidated Statements of Cash Flow for the Years Ended December 31, 2002, 2001 and 2000.......................... 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, 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 23, 2002, filed as Exhibit 3.2 to Form 10-Q for the quarter ended June 30, 2002, 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 January 17, 2002, filed as Exhibit 10.5 to Form 10-Q for the quarter ended June 30, 2002, and incorporated herein by reference. 10.2 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. 10.3 Form of Option Grant between KeyCorp and Henry L. Meyer III, dated November 15, 2000, filed as Exhibit 10.6 to Form 10-K for the year ended December 31, 2000, and incorporated herein by reference. 10.4 Form of Award of Restricted Stock (2002-2003), filed as Exhibit 10.1 to Form 10-Q for the quarter ended March 31, 2002, and incorporated herein by reference. 10.5 Form of Award of Restricted Stock (2002-2004), filed as Exhibit 10.2 to Form 10-Q for the quarter ended March 31, 2002, and incorporated herein by reference. 10.6 Award of Restricted Stock to Henry L. Meyer III (2002-2003), filed as Exhibit 10.3 to Form 10-Q for the quarter ended March 31, 2002, and incorporated herein by reference. 10.7 Award of Restricted Stock to Henry L. Meyer III (2002-2004), filed as Exhibit 10.4 to Form 10-Q for the quarter ended March 31, 2002, and incorporated herein by reference. 10.8 Amended and Restated Employment Agreement between KeyCorp and Henry L. Meyer III, dated July 18, 2002, filed as Exhibit 10.6 to Form 10-Q for the quarter ended June 30, 2002, and incorporated herein by reference.
11 10.9 Amended Employment Agreement among KeyCorp, Robert T. Clutterbuck and McDonald Investments Inc., dated September 16, 2002, filed as Exhibit 10 to Form 10-Q for the quarter ended September 30, 2002, and incorporated herein by reference. 10.10 Letter Agreement between KeyCorp and Thomas W. Bunn, dated February 11, 2002. 10.11 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. 10.12 KeyCorp Amended and Restated 1991 Equity Compensation Plan (amended as of November 21, 2002). 10.13 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. 10.14 KeyCorp 1988 Stock Option Plan, 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. 10.15 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. 10.16 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. 10.17 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. 10.18 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. 10.19 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. 10.20 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. 10.21 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. 10.22 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. 10.23 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. 10.24 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. 10.25 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. 10.26 First Amendment to KeyCorp Deferred Compensation Plan filed as Exhibit 10.28 to Form 10-K for the year ended December 31, 2001, and incorporated herein by reference. 10.27 Second Amendment to KeyCorp Deferred Compensation Plan filed as Exhibit 10.29 to Form 10-K for the year ended December 31, 2001, and incorporated herein by reference. 10.28 Third Amendment to KeyCorp Deferred Compensation Plan.
12 10.29 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. 10.30 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. 10.31 McDonald Financial Group Deferral Plan. 10.32 KeyCorp Signing Bonus Plan (effective January 1, 1999). 10.33 First Amendment to KeyCorp Signing Bonus plan (effective January 1, 2001). 10.34 Key Asset Management Long Term Incentive Plan. 10.35 KeyCorp Commissioned Deferred Compensation Plan as amended and restated as of January 1, 2002. 10.36 KeyCorp Excess 401(k) Savings Plan. 10.37 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. 10.38 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. 10.39 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. 10.40 KeyCorp Supplemental Retirement Plan, amended, restated and effective January 1, 2002. 10.41 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. 10.42 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. 10.43 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. 10.44 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. 10.45 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. 10.46 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. 10.47 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. 10.48 KeyCorp Survivor Benefit Plan, effective September 1, 1990, filed as Exhibit 10.17 to Form 10-K for the year ended December 31, 1996, and incorporated herein by reference. 12 Statement regarding Computation of Ratios. 13 KeyCorp 2002 Annual Report to Shareholders. 21 Subsidiaries of the Registrant. 23 Consent of Independent Auditors. 24 Powers of Attorney.
13 99.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
KeyCorp hereby agrees to furnish the SEC 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 10.48 constitute management contracts or compensatory plans or arrangements. * Copies of these Exhibits have been filed with the SEC. 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 17, 2002 -- Item 5. Other Events, Item 7. Financial Statements and Exhibits and Item 9. Regulation FD Disclosure. Reporting that on October 17, 2002, KeyCorp issued a press release announcing its earnings results for the three-and nine-month periods ended September 30, 2002, and providing a slide presentation reviewed in the related conference call/webcast. No other reports on Form 8-K were filed during the fourth quarter of 2002. INFORMATION AVAILABLE ON WEBSITE KeyCorp makes available free of charge on its website, www.Key.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports as soon as reasonably practicable after KeyCorp electronically files such material with, or furnishes it to, the SEC. 14 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 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 21, 2003 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 * Jeffrey B. Weeden 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
SIGNATURE TITLE --------- ----- * Edward P. Campbell Director * Dr. Carol A. Director Cartwright * Alexander M. Cutler Director * Henry S. Hemingway Director * Charles R. Hogan Director * Dr. Shirley A. Director Jackson * Douglas J. McGregor Director * Eduardo R. Menasce Director * Steven A. Minter 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 21, 2003 15 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Henry L. Meyer III, certify that: 1. I have reviewed this annual report on Form 10-K of KeyCorp; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Henry L. Meyer III ----------------------------------------------------- Henry L. Meyer III Chairman, President and Date: March 12, 2003 Chief Executive Officer
16 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Jeffrey B. Weeden, certify that: 1. I have reviewed this annual report on Form 10-K of KeyCorp; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Jeffrey B. Weeden ----------------------------------------------------- Jeffrey B. Weeden Date: March 12, 2003 Chief Financial Officer
17 EX-10.10 3 l97974aexv10w10.txt EX-10.10 LETTER AGREEMENT-KEYCORP/THOMAS W. BUNN [KEY CORP LOGO] Exhibit 10.10 HENRY L. MEYER III Chairman and Chief Executive Officer KEYCORP 127 Public Square February 11, 2002 Cleveland, OH 44114-1306 Tel: (216) 689-5715 Mr. Thomas W. Bunn 628 Hempstead Place Charlotte, NC 28207 Dear Tom: On behalf of KeyCorp, I am delighted to extend you our offer of employment as the Senior Executive Vice-President for Key Corporate Finance, reporting directly to me. In this role you will also be a member of my Senior Staff as well as the Company's Executive Council. I am pleased to advise you that the Compensation and Organization Committee has approved the following employment terms, effective with your start date: For 2002 - BASE SALARY: $500,000 per annum, payable semi-monthly. Your first salary review will be in April 2004 and will occur annually thereafter. - CASH INCENTIVE: $1,250,000 guaranteed payment, payable when other annual incentives are paid, no later than March 15, 2003. - LONG TERM: You will be a participant in the Company's 2002-2004 Long Term Incentive Compensation (LTIC) plan cycle. Your award for this cycle will be $500,000 and this award will be denominated in restricted stock shares per the terms of the plan. A description of the plan is enclosed for your review. - STOCK OPTIONS: You will be awarded 125,000 stock options effective with your employment date. Of these shares, 75,000 will vest one-third per year (fully vested in three years) from the grant date. The remaining 50,000 options will vest three years from the anniversary of your start date. The exercise price for all shares will be established on your date of employment. To the maximum extent permissible under Internal Revenue Code limitations, the options will be incentive stock options (ISOs), with the balance being non-qualified options (NQOs). A copy of the KeyCorp Amended and Restated 1991 Equity Compensation Plan, which governs these options, is enclosed. - SPECIAL SIGNING GRANT: Effective on your start date you will be granted a signing bonus of $600,000. This award will be denominated in phantom stock shares, effective on your start date, and will be paid to you in KeyCorp Common Stock at the end of the vesting period. One-third of the amount will vest each year for three years, on the anniversary of your start date. Mr. Thomas W. Bunn February 11, 2002 Page 2 For 2003 - BASE SALARY: $500,000, the same as your 2002 salary. - CASH INCENTIVE: $1,250,000 guaranteed payment, payable when other annual awards are paid, but no later than March 15, 2004. - LONG TERM: Similar to 2002, you will be a participant in the Company's Long Term Incentive Compensation Plan. Under the current plan, a new three-year cycle (2003-2005) begins each year. Your grant will be $500,000 and will be denominated in restricted stock, per the terms of the plan. - STOCK OPTIONS: You will receive a stock option grant of 125,000 shares. These options will vest one third per year (fully vested in three years) from the date of grant. The exercise price will be set at the date of grant. Beginning with your initial cash incentive award in the first quarter of 2003, all amounts over $100,000 will be subject to the terms and conditions of KeyCorp's Automatic Deferral Plan then in place. A copy of the KeyCorp Automatic Deferral Plan Executive Compensation Communication, dated August 2000, is enclosed. As we agreed, your initial responsibilities will be to lead our Key Corporate Finance organization. Further, your role will be expanded, no later than September 1, 2002, to include responsibility for investment banking and capital market activities. As we discussed, we will review with you, prior to any release, external and internal communications concerning you joining Key. In addition, you will be eligible for the following: CHANGE OF CONTROL AGREEMENT: You will be provided with a Change of Control Agreement of the type generally given to other KeyCorp senior officers. A draft copy of the current agreement is enclosed for your review. EXECUTIVE PERQUISITES: You will be eligible for the following: - Membership in one luncheon club in Cleveland. The company will pay any initiation fees, if required, and your monthly dues and any assessments. Reimbursement for monthly expenses will automatically be made through payroll and will be grossed-up for tax purposes. - Initiation fees in a personal country club, if you desire. Any subsequent expenses (i.e., monthly dues, assessments, personal expenses, annual fees) will be paid by you. Business related expenses, of course, may be reimbursed through our expense reimbursement process. Mr. Thomas W. Bunn February 11, 2002 Page 3 - Membership in one "Corporate Golf Club." The Company will pay for any initiation fees, if required, and your monthly dues and any assessments. Reimbursement for monthly expenses will automatically be made through payroll and will be grossed up for tax purposes. Following the guaranteed period, beginning in 2004, you will participate in the Short Term Incentive Compensation (STIC) program. Your current annualized target incentive opportunity is $1,250,000. Your actual individual award will be based on the company's performance, the performance of the businesses for which you have responsibility and your individual contributions. Also, in 2004 you will participate in KeyCorp's Stock Option Program. Based on our current program you would have a stock option target of 100,000 shares. Options currently vest one-third per year (fully vested in three years) from the grant date and the exercise price of the options has historically been based on the price of the stock at the time of the grant. All stock option awards are discretionary, subject to the approval of the Compensation and Organization Committee of KeyCorp's Board and are presently granted in accordance with the KeyCorp Amended and Restated 1991 Equity Compensation Plan. You will also continue to be eligible to participate in the KeyCorp Long-Term Incentive Plan (LTIC). Your target award will be $500,000. A copy of your relocation summary is enclosed with this letter for your information. All of the services will be grossed up for Federal, state, local and FICA taxes. If you voluntarily terminate your employment with KeyCorp within one year of your hire date, you will be responsible for repayment of 100% of the total relocation expense incurred by KeyCorp. If you voluntarily terminate after one-year, but within two years of your hire date, you will be responsible for repayment of one-half of the total relocation expense. Our relocation firm will be in touch with you shortly to discuss relocation arrangements with you. We also agree that as part of your relocation we will make the following exceptions. First, we will provide temporary living arrangements for a maximum of six months, if required. Second, you will be permitted two return trips home each month during the period of your temporary living arrangements, to a maximum of six months. Third, for purposes of your relocation, your mountain home will be considered your primary residence. As an employee you are also eligible for the following company benefits: - Participation in the 401(k) and cash balance and the excess 401(k) and cash balance plans in accordance with plan documents. - Enrollment in Medical, Dental, Life Insurance and other insurance coverage according to company policy and coverage limits (coverage begins the first of the month following employment). - In accordance with policy, beginning in 2002, you will be eligible for 25 days of paid time off (PTO). Mr. Thomas W. Bunn February 11, 2002 Page 4 - These and additional benefits are outlined in the New Employee Resources Guide, which I have included. (The company reserves the right to revise benefits at any time to comply with regulatory changes and/or changes in company policies.) This employment offer and the compensation payable to you as set forth above are contingent upon satisfactory completion of the following in KeyCorp's judgment: - Application for employment and related documents. - Review of references, a pre-employment drug screen and a background investigation. - A review for FDIC prohibited offenses which includes fingerprints taken on or about the first day of employment and which can take up to six months to process. - KeyCorp reserves the right to withdraw its offer of employment or to terminate your employment (if you become employed at KeyCorp) if the results of the applicant review are unsatisfactory in KeyCorp's judgment. You will report directly to me, at least through March 15, 2004. Also, in the event that you are terminated by Key, (other than for "Cause," as defined in the Change of Control Agreement), prior to March 15, 2004, you will be entitled to receive the remainder of the guaranteed compensation, including base salary, cash incentive, vesting of all options, signing bonus and restricted stock granted to you under this letter agreement within 30 days of said termination. Tom, we are very excited about the prospect of you joining Key and look forward to a mutually beneficial and rewarding relationship. Sincerely, /s/Henry Henry L. Meyer III AGREED TO: /s/Thomas W. Bunn -------------------------------- Thomas W. Bunn Dated: February 16, 2002 -------------------------------------- EX-10.12 4 l97974aexv10w12.txt EX-10.12 AMENDED EQUITY COMPENSATION PLAN EXHIBIT 10.12 AMENDED AND RESTATED 1991 EQUITY COMPENSATION PLAN (AMENDED AS OF NOVEMBER 21, 2002) 1. PURPOSE. The KeyCorp Amended and Restated 1991 Equity Compensation Plan is intended to promote the interests of the Corporation and its shareholders by providing equity-based incentives for effective service and high levels of performance to Employees selected by the Committee. To achieve these purposes, the Corporation may grant Awards of Options, Stock Appreciation Rights, Limited Stock Appreciation Rights, Restricted Stock, and Performance Shares to selected Employees, all in accordance with the terms and conditions hereinafter set forth. 2. DEFINITIONS. 2.1 1934 ACT. The term "1934 Act" shall mean the Securities Exchange Act of 1934, as amended. 2.2 ACQUISITION PRICE. The term "Acquisition Price" with respect to Restricted Stock shall mean such amount, if any, required by applicable law and as may be specified by the Committee in the Award Instrument with respect to that Restricted Stock as the consideration to be paid by the Employee for that Restricted Stock. 2.3 AWARD. The term "Award" shall mean an award granted under the Plan of an Option, of Stock Appreciation Rights, of Limited Stock Appreciation Rights, of Restricted Stock, or of Performance Shares. 2.4 AWARD INSTRUMENT. The term "Award Instrument" shall mean a written instrument evidencing an Award in such form and with such provisions as the Committee may prescribe, including, without limitation, an agreement to be executed by the Employee and the Corporation, a certificate issued by the Corporation, or a letter executed by the Committee or its designee. Acceptance of the Award Instrument by an Employee constitutes agreement to the terms of the Award evidenced thereby. 2.5 CHANGE OF CONTROL. A "Change of Control" shall be deemed to have occurred if, at any time after the date of the grant of the relevant Award, there is a Change of Control under any of clauses (a), (b), (c), or (d) below. For these purposes, the Corporation will be deemed to have become a subsidiary of another corporation if any other corporation (which term shall include, in addition to a corporation, a limited liability company, partnership, trust, or other organization) owns, directly or indirectly, 50 percent or more of the total combined outstanding voting power of all classes of stock of the Corporation or any successor to the Corporation. (a) A Change of Control will have occurred under this clause (a) if the Corporation is a party to a transaction pursuant to which the Corporation is merged with or into, or is consolidated with, or becomes the subsidiary of another corporation and either (i) immediately after giving effect to that transaction, less than 65% of the then outstanding voting securities of the surviving or resulting corporation or (if the Corporation becomes a subsidiary in the transaction) of the ultimate parent of the Corporation represent or were issued in exchange for voting securities of the Corporation outstanding immediately prior to the transaction, or (ii) immediately after giving effect to that transaction, individuals who were directors of the Corporation on the day before the first public announcement of (A) the pendency of the transaction or (B) the intention of any person or entity to cause the transaction to occur, cease for any reason to constitute at least 51% of the directors of the surviving or resulting corporation or (if the Corporation becomes a subsidiary in the transaction) of the ultimate parent of the Corporation. (b) A Change of Control will have occurred under this clause (b) if a tender or exchange offer shall be made and consummated for 35% or more of the outstanding voting stock of the Corporation or any person (as the term "person" is used in Section 13(d) and Section 14(d)(2) of the 1934 Act) is or becomes the beneficial owner of 35% or more of the outstanding voting stock of the Corporation or there is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as adopted under the 1934 Act, disclosing the acquisition of 35% or more of the outstanding voting stock of the Corporation in a transaction or series of transactions by any person (as defined earlier in this clause (b)). (c) A Change of Control will have occurred under this clause (c) if either (i) without the prior approval, solicitation, invitation, or recommendation of the Corporation's Board of Directors any person or entity makes a public announcement of a bona fide intention (A) to engage in a transaction with the Corporation that, if consummated, would result in a Change Event (as defined below in this clause (c)), or (B) to "solicit" (as defined in Rule 14a-1 under the 1934 Act) proxies in connection with a proposal that is not approved or recommended by the Corporation's Board of Directors, or (ii) any person or entity publicly announces a bona fide intention to engage in an election contest relating to the election of directors of the Corporation (pursuant to Regulation 14A, including Rule 14a-11, under the 1934 Act), and, at any time within the 24 month period immediately following the date of the announcement of that intention, individuals who, on the day before that announcement, constituted the directors of the Corporation (the "Incumbent Directors") cease for any reason to constitute at least a majority thereof unless both (A) the election, or the nomination for election by the Corporation's shareholders, of each new director was approved by a vote of at least two-thirds of the Incumbent Directors in office at the time of the election or nomination for election of such new director, and (B) prior to the time that the Incumbent Directors no longer constitute a majority of the Board of Directors, the Incumbent Directors then in office, by a vote of at least 75% of their number, reasonably determine in good faith that the change in Board membership that has occurred before the date of that determination and that is anticipated to thereafter occur within the balance of the 24 month period to cause the Incumbent Directors to no longer be a majority of the Board of Directors was not caused by or attributable to, in whole or in any significant part, directly or indirectly, proximately or remotely, any event under subclause (i) or (ii) of this clause (c). For purposes of this clause (c), the term "Change Event" shall mean any of the events described in the following subclauses (x), (y), or (z) of this clause (c): (x) A tender or exchange offer shall be made for 25% or more of the outstanding voting stock of the Corporation or any person (as the term "person" is used in Section 13(d) and Section 14(d)(2) of the 1934 Act) is or becomes the beneficial owner of 25% or more of the outstanding voting stock of the Corporation or there is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form, or report), each as adopted under the 1934 Act, disclosing the acquisition of 25% or more of the outstanding voting stock of the Corporation in a transaction or series of transactions by any person (as defined earlier in this subclause (x)). (y) The Corporation is a party to a transaction pursuant to which the Corporation is merged with or into, or is consolidated with, or becomes the subsidiary of another corporation and, after giving effect to such transaction, less than 50% of the then outstanding voting securities of the surviving or resulting corporation or (if the Corporation becomes a subsidiary in the transaction) of the ultimate parent of the Corporation represent or were issued in exchange for voting securities of the Corporation outstanding immediately prior to such transaction or less than 51% of the directors of the surviving or resulting corporation or (if the Corporation becomes a subsidiary in the transaction) of the ultimate parent of the Corporation were directors of the Corporation immediately prior to such transaction. (z) There is a sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets of the Corporation. (d) A Change of Control will have occurred under this clause (d) if there is a sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Corporation. 2.6 COMMITTEE. The term "Committee" shall mean a committee appointed by the Board of Directors of the Corporation to administer the Plan. The Committee shall be composed of not less than three directors of the Corporation. The Board of Directors may also appoint one or more directors as alternate members of the Committee. No officer or Employee of the Corporation or of any Subsidiary shall be a member or alternate member of the Committee. The Committee shall at all times be so comprised (a) as to satisfy the disinterested administration standard contained in Rule 16b-3, if required to qualify for the Rule 16b-3 Exemption and (b) as to satisfy the outside director standard under Section 162(m) of the Internal Revenue Code of 1986, as amended, if required to qualify compensation paid under one or more of the provisions of the Plan as performance-based compensation within the meaning of that section. 2.7 COMMON SHARES. The term "Common Shares" shall mean common shares of the Corporation, with a par value of $1 each. 2.8 CORPORATION. The term "Corporation" shall mean KeyCorp and its successors, including the surviving or resulting corporation of any merger of KeyCorp with or into, or any consolidation of KeyCorp with, any other corporation or corporations. 2.9 DISABILITY. The term "Disability" with respect to an Employee shall mean physical or mental impairment which entitles the Employee to receive disability payments under any long-term disability plan maintained by the Corporation. 2.10 EMPLOYEE. The term "Employee" shall mean any individual employed by the Corporation or by any Subsidiary and shall include officers as well as all other employees of the Corporation or of any Subsidiary (including employees who are members of the Board of Directors of the Corporation or any Subsidiary). 2.11 EMPLOYMENT TERMINATION DATE. The term "Employment Termination Date" with respect to an Employee shall mean the first date on which the Employee is no longer employed by the Corporation or any Subsidiary. 2.12 EXERCISE PRICE. The term "Exercise Price" with respect to an Option shall mean the price specified in the Option at which the Common Shares subject to the Option may be purchased by the holder of the Option. 2.13 FAIR MARKET VALUE. Except as otherwise determined by the Committee at the time of the grant of an Award, the term "Fair Market Value" with respect to Common Shares shall mean: (a) if the Common Shares are traded on a national exchange, the mean between the high and low sales price per Common Share on that national exchange on the date for which the determination of fair market value is made or, if there are no sales of Common Shares on that date, then on the next preceding date on which there were any sales of Common Shares, or (b) if the Common Shares are not traded on a national exchange, the mean between the high and low sales price per Common Share in the over-the-counter market, National Market System, as reported by the National Quotations Bureau, Inc. and NASDAQ on the date for which the determination of fair market value is made or, if there are no sales of Common Shares on that date, then on the next preceding date on which there were any sales of Common Shares. 2.14 INCENTIVE STOCK OPTION. The term "Incentive Stock Option" shall mean an Option intended by the Committee to qualify as an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended. 2.15 LIMITED STOCK APPRECIATION RIGHT. The term "Limited Stock Appreciation Right" or "Limited SAR" shall mean an Award granted to an Employee with respect to all or any part of any Option, that entitles the holder thereof to receive from the Corporation, upon exercise of the Limited SAR and surrender of the related Option, or any portion of the Limited SAR and the related Option, an amount equal to (unless the Committee specifies a lesser amount at the time of the grant of the Award): (a) in the case of a Limited SAR granted with respect to an Incentive Stock Option, 100% of the excess, if any, measured at the time of the exercise of the Limited SAR, of (i) the Fair Market Value of the Common Shares subject to the Incentive Stock Option with respect to which the Limited SAR is exercised over (ii) the Exercise Price of those Common Shares under the Incentive Stock Option, or (b) in the case of a Limited SAR granted with respect to a Nonqualified Option, 100% of the highest of: (i) the excess, measured at the time of the exercise of the Limited SAR, of (A) the Fair Market Value of the Common Shares subject to the Nonqualified Option with respect to which the Limited SAR is exercised over (B) the Exercise Price of those Common Shares under the Nonqualified Option, (ii) the excess of (A) the highest gross price (before brokerage commissions and soliciting dealers' fees) paid or to be paid for a Common Share (whether in cash or in property and whether by way of exchange, conversion, distribution upon liquidation, or otherwise) in connection with any Change of Control multiplied by the number of Common Shares subject to the Nonqualified Option with respect to which the Limited SAR is exercised over (B) the Exercise Price of those Common Shares under the Nonqualified Option, or (iii) the excess of (A) the highest Fair Market Value of the Common Shares subject to the Nonqualified Option with respect to which the Limited SAR is exercised on any one day during the period beginning on the sixtieth day prior to the date on which the Limited SAR is exercised multiplied by the number of Common Shares subject to the Nonqualified Option with respect to which the Limited SAR is exercised over (B) the Exercise Price of those Common Shares under the Nonqualified Option. 2.16 NONQUALIFIED OPTION. The term "Nonqualified Option" shall mean an Option intended by the Committee not to qualify as an "incentive stock option" under Section 422 of the Internal Revenue Code of 1986, as amended. 2.17 OPTION. The term "Option," (a) when used otherwise than in connection with the term Stock Appreciation Right or Limited Stock Appreciation Right, shall mean an Award entitling the holder thereof to purchase a specified number of Common Shares at a specified price during a specified period of time, and (b) when used in connection with the term Stock Appreciation Right or Limited Stock Appreciation Right, shall mean (i) any such Award or (ii) any award under any other plan maintained or assumed by the Corporation entitling the holder thereof to purchase a specified number of Common Shares at a specified price during a specified period of time. 2.18 OPTION EXPIRATION DATE. The term "Option Expiration Date" with respect to any Option shall mean the date selected by the Committee after which, except as provided in Section 10.4 in the case of the death of the Employee to whom the option was granted, the Option may not be exercised. 2.19 PERFORMANCE GOAL. The term "Performance Goal" shall mean a performance goal specified by the Committee in connection with the potential grant of Performance Shares and may include, without limitation, goals based upon cumulative earnings per Common Share, return on investment, return on shareholders' equity, or achievement of any other goals, whether or not readily expressed in financial terms, that are related to the performance by the Corporation, by any Subsidiary, or by any Employee or group of Employees in connection with services performed by that Employee or those Employees for the Corporation, a Subsidiary, or any one or more subunits of the Corporation or of any Subsidiary. 2.20 PERFORMANCE PERIOD. The term "Performance Period" shall mean such one or more periods of time, which may be of varying and overlapping durations, as the Committee may select, over which the attainment of one or more Performance Goals will be relevant in connection with one or more Awards of Performance Shares. 2.21 PERFORMANCE SHARES. The term "Performance Shares" shall mean an Award denominated in Common Shares and contingent upon attainment of one or more Performance Goals by the Corporation or a Subsidiary or any subunit of the Corporation or of any Subsidiary over a Performance Period. 2.22 PLAN. The term "Plan" shall mean this KeyCorp Amended and Restated 1991 Equity Compensation Plan as from time to time hereafter amended in accordance with Section 20. 2.23 RESTRICTED STOCK. The term "Restricted Stock" shall mean Common Shares of the Corporation delivered to an Employee pursuant to an Award subject to such restrictions, conditions and contingencies as the Committee may provide in the relevant Award Instrument, including (a) the restriction that the Employee not sell, transfer, otherwise dispose of, or pledge or otherwise hypothecate the Restricted Stock during the applicable Restriction Period, (b) the requirement that, subject to the provisions of Section 10, if the Employee's employment terminates so that the Employee is no longer employed by the Corporation or any Subsidiary before the end of the applicable Restriction Period, the Employee will offer to sell to the Corporation at the Acquisition Price each Common Share of Restricted Stock held by the Employee at the Employment Termination Date with respect to which, as of that date, any restrictions, conditions, or contingencies have not lapsed, and (c) such other restrictions, conditions, and contingencies, if any, as the Committee may provide in the Award Instrument with respect to that Restricted Stock. 2.24 RESTRICTION PERIOD. The term "Restriction Period" with respect to an Award of Restricted Stock shall mean the period selected by the Committee and specified in the Award Instrument with respect to that Restricted Stock during which the Employee may not sell, transfer, otherwise dispose of, or pledge or otherwise hypothecate that Restricted Stock. 2.25 RULE 16b-3. Term "Rule 16b-3" shall mean Rule 16b-3 or any rule promulgated in replacement thereof or in substitution therefor under the 1934 Act. 2.26 RULE 16b-3 EXEMPTION. The term "Rule 16b-3 Exemption" shall mean the exemption from Section 16(b) of the 1934 Act that is available under Rule 16b-3. 2.27 SECTION 16(b) EMPLOYEE. The term "Section 16(b) Employee" shall mean an individual who is, or at any time within the preceding six months was, a director, officer, or 10% shareholder of the Corporation within the meaning of Section 16(b) of the 1934 Act. 2.28 STOCK APPRECIATION RIGHT. The term "Stock Appreciation Right "or "SAR" shall mean an Award granted to an Employee with respect to all or any part of any Option that entitles the holder thereof to receive from the Corporation, upon exercise of the SAR and surrender of the related Option, or any portion of the SAR and the related Option, an amount equal to 100%, or such lesser percentage as the Committee may determine at the time of the grant of the Award, of the excess, if any, measured at the time of the exercise of the SAR, of (a) the Fair Market Value of the Common Shares subject to the Option with respect to which the SAR is exercised over (b) the Exercise Price of those Common Shares under the Option. 2.29 SUBSIDIARY. The term "Subsidiary" shall mean any corporation, partnership, joint venture, or other business entity in which the Corporation owns, directly or indirectly, 50 percent or more of the total combined voting power of all classes of stock (in the case of a corporation) or other ownership interest (in the case of any entity other than a corporation). 2.30 TANDEM AWARD. The term "Tandem Award" shall mean any two or more Awards that are linked by the terms of any such Awards so that the exercise of one such Award, in whole or in part, requires or will automatically result in the surrender or cancellation, in whole or in proportionate part, of the other such Awards. 2.31 TRANSFEREE. The term "Transferee" shall mean, with respect to Nonqualified Options only, any person or entity to which an Employee is permitted by the Committee to transfer or assign all or part of his or her Options. 3. ADMINISTRATION. The Plan shall be administered by the Committee. No Award may be made under the Plan to any member or alternate member of the Committee. The Committee shall have authority, subject to the terms of the Plan, (a) to determine the Employees who are eligible to participate in the Plan, the type, size, and terms of Awards to be granted to any Employee, the time or times at which Awards shall be exercisable or at which restrictions, conditions, and contingencies shall lapse, and the terms and provisions of the instruments by which Awards shall be evidenced, (b) to establish any other restrictions, conditions, and contingencies on Awards in addition to those prescribed by the Plan, (c) to interpret the Plan, and (d) to make all determinations necessary for the administration of the Plan. The construction and interpretation by the Committee of any provision of the Plan or any Award Instrument delivered pursuant to the Plan and any determination by the Committee pursuant to any provision of the Plan or any Award Instrument shall be final and conclusive. No member or alternate member of the Committee shall be liable for any such action or determination made in good faith. The Committee may act only by a majority of its members. Any determination of the Committee may be made, without a meeting, by a writing or writings signed by all of the members of the Committee. In addition, the Committee may authorize any one or more of their number or any officer of the Corporation to execute and deliver documents on behalf of the Committee and the Committee may delegate to one or more employees, agents, or officers of the Corporation, or to one or more third party consultants, accountants, lawyers, or other advisors, such ministerial duties related to the operation of the Plan as it may deem appropriate. 4. ELIGIBILITY. Awards may be granted to Employees of the Corporation or any Subsidiary selected by the Committee in its sole discretion. The granting of any Award to an Employee shall not entitle that Employee to, nor disqualify the Employee from, participation in any other grant of an Award. The maximum number of Common Shares with respect to which any Employee may receive Awards during any calendar year shall be the lesser of 400,000 Common Shares or ..2% of the outstanding Common Shares of the Corporation on the date such award was made, which maximum number shall be subject to adjustment as provided in Section 13 of the Plan. 5. STOCK SUBJECT TO THE PLAN. The stock that may be issued and distributed to Employees in connection with Awards granted under the Plan shall be Common Shares and may be authorized and unissued Common Shares, treasury Common Shares, or Common Shares acquired on the open market specifically for distribution under the Plan, as the Board of Directors may from time to time determine. Subject to adjustment as provided in Section 13, the number of Common Shares available for grant of Awards under the Plan shall be determined from time to time as follows: (a) on the date of the 1994 Annual Meeting of Shareholders of the Corporation (at which meeting an amendment and restatement of the Plan was submitted for approval of the shareholders of the Corporation), the number of Common Shares available for grant of Awards under the Plan shall equal two percent of the total number of Common Shares outstanding on March 31, 1994, and (b) on January 2, 1995 and on each January 2 occurring thereafter during the life of the Plan, the number of Common Shares available for grant of Awards under the Plan shall be increased by adding to the number of Common Shares then available for grant of Awards under the Plan, the number of Common Shares of the Corporation that, when added to the number of Common Shares that otherwise remain available for grant of additional Awards under the Plan on that January 2, equals two percent of the total number of Common Shares of the Corporation outstanding on December 31st of the next proceeding year. The number of Common Shares remaining available for grants of additional Awards under the Plan at any particular time during a calendar year shall be reduced, upon the granting thereafter of any Award under the Plan, by the full number of Common Shares subject to that Award except that, in the case of any particular Tandem Award, the number of Common Shares counted as being subject to such Tandem Award shall be the maximum number of Common Shares with respect to which the Employee may receive value under such Tandem Award. If any Award for any reason expires or is terminated, in whole or in part, without the receipt by an Employee of Common Shares (or the equivalent thereof in cash or other property), the Common Shares subject to that part of the Award that has so expired or terminated shall again be available for the future grant of Awards under the Plan. Notwithstanding any other provision of the Plan, but subject to adjustment under Section 13, (a) the maximum number of Common Shares that may be issued under the Plan pursuant to Incentive Stock Options shall be 9,600,000 Common Shares, and (b) the maximum number of Common Shares that may be issued under the Plan as Restricted Stock during any calendar year shall be that number of Common Shares that is equal to five percent of the total number of Common Shares available for grant of Awards under the Plan as of January 2 of that calendar year. 6. STOCK OPTIONS. 6.1 TYPE AND DATE OF GRANT OF OPTIONS. (a) The Award Instrument pursuant to which any Incentive Stock Option is granted shall specify that the Option granted thereby shall be treated as an Incentive Stock Option. The Award Instrument pursuant to which any Nonqualified Option is granted shall specify that the Option granted thereby shall not be treated as an Incentive Stock Option. (b) The day on which the Committee authorizes the grant of an Incentive Stock Option shall be the date on which that Option is granted. No Incentive Stock Option may be granted on any date after the tenth anniversary of the date of adoption, on March 17, 1994, by the Board of Directors of the Corporation, of the Plan as amended and restated. (c) The day on which the Committee authorizes the grant of a Nonqualified Option shall be considered the date on which that Option is granted, unless the Committee specifies a later date. 6.2 EXERCISE PRICE. The Exercise Price under any Option shall be not less than the Fair Market Value of the Common Shares subject to the Option on the date the Option is granted. 6.3 OPTION EXPIRATION DATE. The Option Expiration Date under any Incentive Stock Option shall be not later than ten years from the date on which the Option is granted. The Option Expiration Date under any Nonqualified Option shall not be later than ten years and one month from the date on which the Option is granted. 6.4 EXERCISE OF OPTIONS. (a) Except as otherwise provided in Section 10, an Option may be exercised only while the Employee to whom the Option was granted is in the employ of the Corporation or of a Subsidiary. Subject to this requirement, each Option shall become exercisable in one or more installments at the time or times provided in the Award Instrument evidencing the Option. Once any portion of an Option becomes exercisable, that portion shall remain exercisable until expiration or termination of the Option. An Employee to whom an Option is granted or, with respect to Nonqualified Options, the Employee's Transferee may exercise the Option from time to time, in whole or in part, up to the total number of Common Shares with respect to which the Option is then exercisable, except that no fraction of a Common Share may be purchased upon the exercise of any Option. (b) An Employee or, with respect to Nonqualified Options, any Transferee electing to exercise an Option shall deliver to the Corporation (i) the Exercise Price payable in accordance with Section 6.5 and (ii) written notice of the election that states the number of whole Common Shares with respect to which the Employee is exercising the Option. 6.5 PAYMENT FOR COMMON SHARES. Upon exercise of an Option by an Employee or, with respect to Nonqualified Options, any Transferee, the Exercise Price shall be payable by the Employee or Transferee in cash or in such other form of consideration as the Committee determines may be accepted, including without limitation, securities or other property, or any combination of cash, securities or other property, or by delivery by the Employee or Transferee (with the written notice of election to exercise) of irrevocable instructions to a broker registered under the 1934 Act promptly to deliver to the Corporation the amount of sale or loan proceeds to pay the Exercise Price. The Committee, in its sole discretion, may grant to an Employee or, with respect to Nonqualified Options, any Transferee the right to transfer Common Shares acquired upon the exercise of a part of an Option in payment of the Exercise Price payable upon immediate exercise of a further part of the Option. 6.6 CONVERSION OF INCENTIVE STOCK OPTIONS. The Committee may at any time in its sole discretion take such actions as may be necessary to convert any outstanding Incentive Stock Option (or any installments or portions of installments thereof) into a Nonqualified Option with or without the consent of the Employee to whom that Incentive Stock Option was granted and whether or not that Employee is an Employee at the time of the conversion. 7. STOCK APPRECIATION RIGHTS AND LIMITED STOCK APPRECIATION RIGHTS. 7.1 GRANT OF SARS AND LIMITED SARS. An SAR may be granted only in connection with an Option. An SAR granted in connection with an Incentive Stock Option may be granted only when the Incentive Stock Option is granted. An SAR granted in connection with a Nonqualified Option may be granted either when the related Nonqualified Option is granted or at any time thereafter including, in the case of any Nonqualified Option resulting from the conversion of an Incentive Stock Option, simultaneously with or after the conversion. Similarly, a Limited SAR may be granted only in connection with an Option. A Limited SAR granted in connection with an Incentive Stock Option may be granted only when the Incentive Stock Option is granted. A Limited SAR granted in connection with a Nonqualified Option may be granted either when the related Nonqualified Option is granted or at any time thereafter including, in the case of any Nonqualified Option resulting from the conversion of an Incentive Stock Option, simultaneously with or after the conversion. 7.2 EXERCISE OF SARS AND LIMITED SARS. (a) An Employee electing to exercise an SAR or a Limited SAR shall deliver written notice to the Corporation of the election identifying the SAR or Limited SAR and the related Option with respect to which the SAR or Limited SAR was granted to the Employee and specifying the number of whole Common Shares with respect to which the Employee is exercising the SAR or Limited SAR. Upon exercise of the SAR or Limited SAR, the related Option shall be deemed to be surrendered to the extent that the SAR or Limited SAR is exercised. (b) SARs and Limited SARs may be exercised only (i) after the expiration of six months from the date of grant of the SAR or Limited SAR, (ii) on a date when the SAR or Limited SAR is "in the money" (i.e., when there would be positive consideration received upon exercise of the SAR or Limited SAR), (iii) at a time and to the same extent as the related Option is exercisable, (iv) unless otherwise provided in the relevant Award Instrument, by surrender to the Corporation, unexercised, of the related Option or any applicable portion thereof, and (v) in compliance with all restrictions set forth in or specified by the Committee pursuant to Section 7.2(c) (in the case of SARs) or Section 7.2(d) (in the case of Limited SARs). (c) The Committee may specify in the Award Instrument pursuant to which any SAR is granted waiting periods and restrictions on permissible exercise periods in addition to the restrictions on exercise set forth in Section 7.2(b), including, without limitation, any restriction necessary to make applicable the Rule 16b-3 Exemption. 7.3 PAYMENT FOR SARS AND LIMITED SARS. The amount payable upon exercise of an SAR or Limited SAR may be paid by the Corporation in cash, or, if the Committee shall determine in its sole discretion, in whole Common Shares (taken at their Fair Market Value at the time of exercise of the SAR or Limited SAR) or in a combination of cash and whole Common Shares; provided, however, that in no event shall the total number of Common Shares that may be paid to an Employee pursuant to the exercise of an SAR or Limited SAR exceed the total number of Common Shares subject to the related Option. 7.4 TERMINATION, AMENDMENT, OR SUSPENSION OF SARS AND LIMITED SARS. SARs and Limited SARs shall terminate and may no longer be exercised upon the first to occur of (a) exercise or termination of the related Option, (b) any termination date specified by the Committee at the time of grant of the SAR or Limited SAR, or (c) the transfer by the Employee of the related Option. In addition, the Committee may in its sole discretion at any time before the occurrence of a Change of Control amend, suspend, or terminate any SAR or Limited SAR theretofore granted under the Plan without the holder's consent; provided that, in the case of amendment, no provision of the SAR or Limited SAR, as amended, shall be in conflict with any provision of the Plan. 8. RESTRICTED STOCK. 8.1 ADDITIONAL CONDITIONS ON RESTRICTED STOCK. In addition to the restrictions on disposition of Restricted Stock during the Restriction Period and the requirement to offer Restricted Stock to the Corporation if the Employee's employment terminates during the Restriction Period, the Committee may provide in the Award Instrument with respect to any Award of Restricted Stock other restrictions, conditions, and contingencies, which other restrictions, conditions, and contingencies, if any, may relate to, in addition to such other matters as the Committee may deem appropriate, the Employee's personal performance, corporate performance, or the performance of any subunit of the Corporation or any Subsidiary, in each case measured in such manner as may be specified by the Committee. The Committee may impose different restrictions, conditions, and contingencies on separate Awards of Restricted Stock granted to different Employees, whether at the same or different times, and on separate Awards of Restricted Stock granted to the same Employee, whether at the same or different times. The Committee may specify a single Restriction Period for all of the Restricted Stock subject to any particular Award Instrument or may specify multiple Restriction Periods so that the restrictions with respect to the Restricted Stock subject to the Award will expire in stages according to a schedule specified by the Committee and set forth in the Award Instrument; provided, however, that no Restriction Period with respect to any Restricted Stock shall end earlier than one year after the date on which that Restricted Stock is granted. 8.2 PAYMENT FOR RESTRICTED STOCK. Each Employee to whom an Award of Restricted Stock is made shall pay the Acquisition Price with respect to that Restricted Stock to the Corporation not later than 30 days after the delivery to the Employee of the Award Instrument with respect to that Restricted Stock. If any Employee fails to pay the Acquisition Price with respect to any Award of Restricted Stock within that 30 day period, the Employee's right under that Award shall be forfeited. 8.3 RIGHTS AS A SHAREHOLDER. Upon payment by an Employee in full of the Acquisition Price for Restricted Stock under an Award, the Employee shall have all of the rights of a shareholder with respect to the Restricted Stock, including voting and dividend rights, subject only to such restrictions and requirements referred to in Section 8.1 as may be incorporated in the Award Instrument with respect to that Restricted Stock. 9. PERFORMANCE SHARES. 9.1 DISCRETION OF COMMITTEE WITH RESPECT TO PERFORMANCE SHARES. The Committee shall have full discretion to select the Employees to whom Awards of Performance Shares are made, the number of Performance Shares to be granted to any Employee so selected, the kind and level of the Performance Goals and whether those Performance Goals are to apply to the Corporation, a Subsidiary, or any one or more subunits of the Corporation or of any Subsidiary, and the dates on which each Performance Period shall begin and end, and to determine the form and provisions of the Award Instrument to be used in connection with any Award of Performance Shares. 9.2 CONDITIONS TO PAYMENT FOR PERFORMANCE SHARES. (a) Unless otherwise provided in the relevant Award Instrument, an Employee must be employed by the Corporation or a Subsidiary on the last day of a Performance Period to be entitled to payment for any Performance Shares. (b) The Committee may establish, from time to time, one or more formulas to be applied against the Performance Goals to determine whether all, some portion but less than all, or none of the Performance Shares granted with respect to a Performance Period are treated as earned pursuant to any Award. An Employee will be entitled to receive payments with respect to any Performance Shares only to the extent that those Performance Shares are treated as earned under one or more such formulas. 9.3 PAYMENT FOR PERFORMANCE SHARES. The Corporation shall pay each Employee who is entitled to payment for Performance Shares earned with respect to any Performance Period an amount for those Performance Shares (a) in cash (based upon the per share Fair Market Value of Common Shares on the last day of the Performance Period), (b) in Common Shares (one Common Share for each Performance Share earned), (c) in Restricted Stock (one Common Share of Restricted Stock for each Performance Share earned), or (d) any combination of the foregoing, in such proportions as the Committee may determine. Restricted Stock issued by the Corporation in payment of Performance Shares shall be subject to all the provisions of Section 8. 10. TERMINATION OF EMPLOYMENT. After an Employee's Employment Termination Date, the rules set forth in this Section 10 shall apply. All factual determinations with respect to the termination of an Employee's employment that may be relevant under this Section 10 shall be made by the Committee in its sole discretion. 10.1 TERMINATION OTHER THAN UPON DEATH, DISABILITY, OR CERTAIN RETIREMENTS. Upon any termination of an Employee's employment for any reason other than the Employee's retirement (under any retirement plan of the Corporation or of a Subsidiary) as provided in Section 10.2, disability as provided on Section 10.3, or death as provided in Section 10.4: (a) Unless otherwise provided in the relevant Award Instrument, the Employee or, with respect to Nonqualified Options, any Transferee shall have the right (i) during the period ending six months after the Employment Termination Date, but not later than the Option Expiration Date, to exercise any Nonqualified Options and related SARs that were outstanding on the Employment Termination Date, if and to the same extent as those Options and SARs were exercisable by the Employee or Transferee (as the case may be) on the Employment Termination Date, and (ii) during the period ending three months after the Employment Termination Date, but not later than the Option Expiration Date, to exercise any Incentive Stock Options and related SARs that were outstanding on the Employment Termination Date, if and to the same extent as those Options and SARs were exercisable by the Employee on the Employment Termination Date. Notwithstanding the preceding sentence, if within two years after a Change of Control an Employee's Employment Termination Date occurs other than as a result of a Voluntary Resignation, unless otherwise provided in the relevant Award Instrument, the Employee or, with respect to Nonqualified Options, any Transferee shall have the right, during the Extended Period, but not later than the Option Expiration Date, to exercise any Options and related SARs that were outstanding on the Employment Termination Date, if and to the same extent as those Options and SARs were exercisable by the Employee or Transferee (as the case may be) on the Employment Termination Date (even though, in the case of Incentive Stock Options, exercise of those Options more than three months after the Employment Termination Date may cause the Option to fail to qualify for Incentive Stock Option treatment under the Internal Revenue Code of 1986, as amended). As used in the immediately preceding sentence, the term "Extended Period" means the longer of the period that the Option or SAR would otherwise be exercisable in the absence of the immediately preceding sentence or the period ending with the second anniversary date of the Change of Control last occurring before the Employment Termination Date and the term "Voluntary Resignation" means that the Employee shall have terminated his or her employment with the Corporation and its Subsidiaries by voluntarily resigning at his or her own instance without having been requested to so resign by the Corporation or its Subsidiaries except that any resignation by the Employee will not be deemed to be a Voluntary Resignation if, after the Change of Control, the Employee's base salary was reduced or the Employee was required to relocate his or her principal place of employment more than 35 miles, (b) Unless otherwise provided in the relevant Award Instrument, the Employee shall offer for resale at the Acquisition Price to the Corporation each Common Share of Restricted Stock held by the Employee at the Employment Termination Date with respect to which, as of that date, any restrictions, conditions, or contingencies have not lapsed, and (c) Unless otherwise provided in the relevant Award Instrument, the Employee shall forfeit each Performance Share with respect to which, as of that date, any restrictions, conditions, or contingencies have not lapsed. 10.2 TERMINATION DUE TO CERTAIN RETIREMENTS. Upon any termination of an Employee's employment with the Corporation or any Subsidiary under circumstances entitling the Employee to immediate payment of normal retirement or early retirement benefits under any retirement plan of the Corporation or of a Subsidiary (whether the Employee elects to commence or defer receipt of such payment): (a) Unless otherwise provided in the relevant Award Instrument, the Employee or, with respect to Nonqualified Options, any Transferee shall have the right (i) to exercise, from time to time during the period ending three years (two years if the Option was granted prior to January 1, 2002) after the Employment Termination Date, but not later than the Option Expiration Date, any Nonqualified Options and related SARs that were outstanding on the Employment Termination Date, if and to the same extent as those Options and SARs were exercisable by the Employee or Transferee (as the case may be) on the Employment Termination Date, and (ii) to exercise, from time to time during the period ending three years (two years if the Option was granted prior to January 1, 2002) after the Employment Termination Date, but no later than the Option Expiration Date, any Incentive Stock Options and related SARs that were outstanding on the Employment Termination Date, if and to the same extent as those Options and SARs were exercisable by the Employee on the Employment Termination Date (even though exercise of the Incentive Stock Option more than three months after the Employment Termination Date may cause the Option to fail to qualify for Incentive Stock Option treatment under the Internal Revenue Code of 1986, as amended), (b) The relevant Award Instrument may provide that the Employee or, with respect to Nonqualified Options, any Transferee will have the right to exercise, from time to time until not later than the Option Expiration Date, Nonqualified Stock Options and SARs and Incentive Stock Options and SARs to the extent such Options and SARs become exercisable by their terms prior to the Option Expiration Date (or such earlier date as specified in the relevant Award Instrument), notwithstanding the fact that such Options and SARs were not exercisable in whole or in part (whether because a condition to exercise had not yet occurred or a specified time period had not yet elapsed or otherwise) on the Employment Termination Date, (c) Unless otherwise provided in the relevant Award Instrument, the Employee shall offer for resale at the Acquisition Price to the Corporation each Common Share of Restricted Stock held by the Employee at the Employment Termination Date with respect to which, as of that date, any restrictions, conditions, or contingencies have not lapsed, and (d) Unless otherwise provided in the relevant Award Instrument, the Employee shall forfeit each Performance Share with respect to which, as of that date, any restrictions, conditions, or contingencies have not lapsed. 10.3 TERMINATION DUE TO DISABILITY. Upon any termination of an Employee's employment due to disability: (a) Unless otherwise provided in the relevant Award Instrument, the Employee, the Employee's attorney in fact or legal guardian or, with respect to Nonqualified Options, any Transferee shall have the right (i) to exercise, from time to time during the period ending three years (two years if the Option was granted prior to January 1, 2002) after the Employment Termination Date, but not later than the Option Expiration Date, any Nonqualified Options and related SARs that were outstanding on the Employment Termination Date, if and to the same extent those Options and SARs were exercisable by the Employee or Transferee (as the case may be) on the Employment Termination Date, and (ii) to exercise, from time to time during the period ending three years (two years if the Option was granted prior to January 1, 2002) after the Employment Termination Date, but no later than the Option Expiration Date, any Incentive Stock Options and related SARs that were outstanding on the employment Termination Date, if and to the same extent as those Options and SARs were exercisable by the Employee on the Employment Termination Date (even though exercise of the Incentive Stock Option more than one year after the Employment Termination Date may cause the Option to fail to qualify for Incentive Stock Option treatment under the Internal Revenue Code of 1986, as amended), (b) Unless otherwise provided in the relevant Award Instrument, the Employee shall offer for resale at the Acquisition Price to the Corporation each Common Share of Restricted Stock held by the Employee at the Employment Termination Date with respect to which, as of that date, any restrictions, conditions, or contingencies have not lapsed, and (c) Unless otherwise provided in the relevant Award Instrument, the Employee shall forfeit each Performance Share with respect to which, as of that date, any restrictions, conditions, or contingencies have not lapsed. 10.4. DEATH OF AN EMPLOYEE. Upon the death of an Employee while employed by the Corporation or any Subsidiary or within any of the periods referred to in any Section 10.1, 10.2, or 10.3 during which any particular Option or SAR remains potentially exercisable: (a) Unless otherwise provided in the relevant Award Instrument, if the Option Expiration Date of any Nonqualified Option that had not expired before the Employee's death would otherwise expire before the first anniversary of the Employee's death, that Option Expiration Date shall automatically be extended to the first anniversary of the Employee's death or such other date as provided in the relevant Award Instrument, (b) Unless otherwise provided in the relevant Award Instrument, the Employee's executor or administrator, the person or persons to whom the Employee's rights under any Option or SAR are transferred by will or the laws of descent and distribution or, with respect to Nonqualified Options, any Transferee shall have the right to exercise, from time to time during the period ending three years (two years if the Option was granted prior to January 1, 2002) after the date of the Employee's death, but not later than the Option Expiration Date, any Options and related SARs that were outstanding on the date of the Employee's death, if and to the same extent as those Options and SARs were exercisable by the Employee or Transferee (as the case may be) on the date of the Employee's death, (c) Unless otherwise provided in the relevant Award Instrument, the Employee shall offer for resale at the Acquisition Price to the Corporation each Common Share of Restricted Stock held by the Employee at the Employment Termination Date with respect to which, as of that date, any restrictions, conditions, or contingencies have not lapsed, and (d) Unless otherwise provided in the relevant Award Instrument, the Employee shall forfeit each Performance Share with respect to which, as of that date, any restrictions, conditions, or contingencies have not lapsed. 11. ACCELERATION UPON CHANGE OF CONTROL. Unless otherwise specified in the relevant Award Instrument, upon the occurrence of a Change of Control of the Corporation, each Award theretofore granted to any Employee that then remains outstanding shall be automatically treated as follows: (a) any outstanding Option shall become immediately exercisable in full, (b) SARs and Limited SARs related to any such Options shall also become immediately exercisable in full, (c) the Restriction Period with respect to all outstanding Awards of Restricted Stock shall immediately terminate, and (d) the restrictions, conditions, or contingencies on any Performance Shares shall be modified in such manner as the Committee may specify to give the Employee the benefit of those Performance Shares through the date of Change of Control. 12. ASSIGNABILITY. Nonqualified Options may not be assigned or transferred (other than by will or by the laws of descent and distribution) unless the Committee, in its sole discretion, determines to allow such assignment or transfer and, if the Committee determines to allow any such assignment or transfer, the Transferee shall have the power to exercise such Nonqualified Option in accordance with the terms of the Award and the provisions of this Plan. No Incentive Stock Option, SAR, Limited SAR, Restricted Stock during the Restriction Period, or Performance Share may be transferred other than by will or by the laws of descent and distribution. During an Employee's lifetime, only the Employee (or in the case of incapacity of an Employee, the Employee's attorney in fact or legal guardian) may exercise any Incentive Stock Option, SAR, Limited SAR, Restricted Stock during the Restriction Period, or Performance Share requiring or permitting exercise. 13. ADJUSTMENT UPON CHANGES IN COMMON SHARES. Automatically and without Committee action, in the event of any stock dividend, stock split, or share combination of the Common Shares, or by appropriate Committee action in the event of any reclassification, recapitalization, merger, consolidation, other form of business combination, liquidation, or dissolution involving the Corporation or any spin-off or other distribution to shareholders of the Corporation (other than normal cash dividends), appropriate adjustments to (a) the maximum number of Common Shares that may be issued under the Plan pursuant to Section 5, the maximum number of Common Shares that may be issued under the Plan pursuant to Incentive Stock Options as provided in Section 5, and the maximum number of Common Shares with respect to which any Employee may receive Awards during any calendar year as provided in Section 4, and (b) the number and kind of shares subject to, the price per share under, and the terms and conditions of each then outstanding Award shall be made to the extent necessary and in such manner that the benefits of Employees under all then outstanding Awards shall be maintained substantially as before the occurrence of such event. Any such adjustment shall be conclusive and binding for all purposes of the Plan and shall be effective, in the event of any stock dividend, stock split, or share combination, as of the date of such stock dividend, stock split, or share combination, and in all other cases, as of such date as the Committee may determine. 14. PURCHASE FOR INVESTMENT. Each person acquiring Common Shares pursuant to any Award may be required by the Corporation to furnish a representation that he or she is acquiring the Common Shares so acquired as an investment and not with a view to distribution thereof if the Corporation, in its sole discretion, determines that such representation is required to insure that a resale or other disposition of the Common Shares would not involve a violation of the Securities Act of 1933, as amended, or of applicable blue sky laws. Any investment representation so furnished shall no longer be applicable at any time such representation is no longer necessary for such purposes. 15. WITHHOLDING OF TAXES. The Corporation will withhold from any payments of cash made pursuant to the Plan such amount as is necessary to satisfy all applicable federal, state, and local withholding tax obligations. The Committee may, in its discretion and subject to such rules as the Committee may adopt from time to time, permit or require an Employee (or other person exercising an Option with respect to withholding taxes upon exercise of such Option) to satisfy, in whole or in part, any withholding tax obligation that may arise in connection with the grant of an Award, the lapse of any restrictions with respect to an Award, the acquisition of Common Shares pursuant to any Award, or the disposition of any Common Shares received pursuant to any Award by having the Corporation hold back some portion of the Common Shares that would otherwise be delivered pursuant to the Award or by delivering to the Corporation an amount equal to the withholding tax obligation arising with respect to such grant, lapse, acquisition, or disposition in (a) cash, (b) Common Shares, or (c) such combination of cash and Common Shares as the Committee may determine. The Fair Market Value of the Common Shares to be so held back by the Company or delivered by the Employee shall be determined as of the date on which the obligation to withhold first arose. 16. HARMFUL ACTIVITY. If an Employee shall engage in any "harmful activity" prior to or within six months after termination of employment with Key, then any Profits realized upon the exercise of any Covered Option on or after one year prior to the termination of employment with Key shall inure to the Corporation. The aforementioned restriction shall not apply in the event that employment with Key terminates within two years after a Change of Control of the Corporation if any of the following have occurred: a relocation of an Employee's principal place of employment more than 35 miles from an Employee's principal place of employment immediately prior to the Change of Control, a reduction in an Employee's base salary after a Change of Control, or termination of employment under circumstances in which an Employee is entitled to severance benefits or salary continuation or similar benefits under a change of control agreement, employment agreement, or severance or separation pay plan. If any Profits realized upon the exercise of any Covered Option inure to the benefit of the Corporation in accordance with the first sentence of this paragraph, an Employee shall pay all such Profits to the Corporation within 30 days after first engaging in any harmful activity and all unexercised Covered Options shall immediately be forfeited and canceled. Consistent with the provisions of Section 3 of the Plan, the determination by the Committee as to whether an Employee engaged in "harmful activity" prior to or within six months after termination of employment with Key shall be final and conclusive. A "harmful activity" shall have occurred if an Employee shall do any one or more of the following: a. Use, publish, sell, trade or otherwise disclose Non-Public Information of the Key unless such prohibited activity was inadvertent, done in good faith and did not cause significant harm to Key. b. After notice from the Corporation, fail to return to Key any document, data, or thing in an Employee's possession or to which an Employee has access that may involve Non-Public Information of Key. c. After notice from the Corporation, fail to assign to Key all right, title, and interest in and to any confidential or non-confidential Intellectual Property which an Employee created, in whole or in part, during employment with Key, including, without limitation, copyrights, trademarks, service marks, and patents in or to (or associated with) such Intellectual Property. d. After notice from the Corporation, fail to agree to do any acts and sign any document reasonably requested by Key to assign and convey all right, title, and interest in and to any confidential or non-confidential Intellectual Property which an Employee created, in whole or in part, during employment with Key, including, without limitation, the signing of patent applications and assignments thereof. e. Upon an Employee's own behalf or upon behalf of any other person or entity that competes or plans to compete with Key, solicit or entice for employment or hire any Employee of Key. f. Upon an Employee's own behalf or upon behalf of any other person or entity that competes or plans to compete with Key, call upon, solicit, or do business with (other than business which does not compete with any business conducted by Key) any customer of Key an Employee called upon, solicited, interacted with, or became acquainted with, or learned of through access to information (whether or not such information is or was non-public) while employed at Key unless such prohibited activity was inadvertent, done in good faith, and did not involve a customer whom an Employee should have reasonably known was a customer of Key. g. Upon an Employee's own behalf or upon behalf of any other person or entity that competes or plans to compete with Key, engage in any business activity in competition with Key in the same or a closely related activity that an Employee was engaged in for Key during the one year period prior to the termination of employment. For purposes of this Section 16: "Covered Option" means any Option granted on or after January 1, 2001 unless the granting resolution expressly excludes the Option from the provisions of this Section 16. "Intellectual Property" shall mean any invention, idea, product, method of doing business, market or business plan, process, program, software, formula, method, work of authorship, or other information, or thing. "Key" shall mean the Corporation and its Subsidiaries collectively. "Non-Public Information" shall mean, but is not limited to, trade secrets, confidential processes, programs, software, formulas, methods, business information or plans, financial information, and listings of names (e.g., employees, customers, and suppliers) that are developed, owned, utilized, or maintained by an employer such as Key, and that of its customers or suppliers, and that are not generally known by the public. "Profit" shall mean, with respect to any Covered Option, the spread between the Fair Market Value of a Common Share on the date of exercise and the exercise price multiplied by the number of shares exercised under the Covered Option. 17. AWARDS IN SUBSTITUTION FOR AWARDS GRANTED BY OTHER COMPANIES. Awards, whether Incentive Stock Options, Nonqualified Options, SARs, Limited SARs Restricted Stock, or Performance Shares, may be granted under the Plan in substitution for awards held by employees of a company who become Employees of the Corporation or a Subsidiary as a result of the merger or consolidation of the employer company with the Corporation or a Subsidiary, or the acquisition by the Corporation or a Subsidiary of the assets of the employer company, or the acquisition by the Corporation or a Subsidiary of stock of the employer company as a result of which it becomes a Subsidiary. The terms, provisions, and benefits of the substitute Awards so granted may vary from the terms, provisions and benefits set forth in or authorized by the Plan to such extent as the Committee at the time of the grant may deem appropriate to conform, in whole or in part, to the terms, provisions, and benefits of the awards in substitution for which they are granted. 18. LEGAL REQUIREMENTS. No Awards shall be granted and the Corporation shall have no obligation to make any payment under the Plan, whether in Common Shares, cash, or any combination thereof, unless such payment is, without further action by the Committee, in compliance with all applicable Federal and state laws and regulations, including, without limitation, the United States Internal Revenue Code and Federal and state securities laws. 19. DURATION AND TERMINATION OF THE PLAN. The Plan shall become effective and shall be deemed to have been adopted on the date on which it is approved by the shareholders of the Corporation and shall remain in effect thereafter until terminated by action of the Board of Directors. No termination of the Plan shall adversely affect the rights of any Employee with respect to any Award granted before the effective date of the termination. 20. AMENDMENTS. The Board of Directors, or a duly authorized committee thereof, may alter or amend the Plan from time to time prior to its termination in any manner the Board of Directors, or such duly authorized committee, may deem to be in the best interests of the Corporation and its shareholders, except that no amendment may be made without shareholder approval if shareholder approval is required under Rule 16b-3 to qualify for the Rule 16b-3 Exemption, is required by any applicable securities law or tax law, or is required by the rules of any exchange on which the Common Shares of the Corporation are traded or, if the Common Shares are not listed on an exchange, by the rules of the registered national securities association through whose inter-dealer quotation system the Common Shares are quoted. The Committee shall have the authority to amend these terms and conditions applicable to outstanding Awards (a) in any case where expressly permitted by the terms of the Plan or of the relevant Award Instrument or (b) in any other case with the consent of the Employee to whom the Award was granted. Except as expressly provided in the Plan or in the Award Instrument evidencing the Award, the Committee may not, without the consent of the holder of an Award granted under the Plan, amend the terms and conditions applicable to that Award in a manner adverse to the interests of the Employee. 21. PLAN NONCONTRACTUAL. Nothing herein contained shall be construed as a commitment to or agreement with any person employed by the Corporation or a Subsidiary to continue such person's employment with the Corporation or the Subsidiary, and nothing herein contained shall be construed as a commitment or agreement on the part of the Corporation or any Subsidiary to continue the employment or the annual rate of compensation of any such person for any period. All Employees shall remain subject to discharge to the same extent as if the Plan had never been put into effect. 22. INTEREST OF EMPLOYEES. Any obligation of the Corporation under the Plan to make any payment at any future date merely constitutes the unsecured promise of the Corporation to make such payment from its general assets in accordance with the Plan, and no Employee shall have any interest in, or lien or prior claim upon, any property of the Corporation or any Subsidiary by reason of that obligation. 23. 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. 24. ABSENCE OF LIABILITY. No member of the Board of Directors of the Corporation or a Subsidiary, of the Committee, of any other committee of the Board of Directors, or any officer or Employee of the Corporation or a Subsidiary shall be liable for any act or action under the Plan, whether of commission or omission, taken by any other member, or by any officer, agent, or Employee, or except in circumstances involving his bad faith or willful misconduct, for anything done or omitted to be done by himself. 25. SEVERABILITY. The invalidity or unenforceability of any particular provision of the Plan shall not affect any other provision hereof, and the Plan shall be construed in all respects as if such invalid or unenforceable provision were omitted herefrom. 26. GOVERNING LAW. The provisions of the Plan shall be governed and construed in accordance with the laws of the State of Ohio. 27. DURATION AND TERMINATION OF THE PLAN. The Plan shall remain in effect through June 30, 2012, and shall then terminate, unless terminated at an earlier date by action of the Board of Directors or a duly authorized Committee thereof; provided, however, that termination of the Plan shall not affect Awards granted prior thereto. 28. PLAN EFFECTIVE DATE. The Plan, originally named the Society Corporation 1991 Equity Compensation Plan, was approved by the Corporation's shareholders at the Annual Meeting of Shareholders held on April 16, 1991 and became effective on that date. On March 17, 1994, the Corporation's Board of Directors adopted, subject to shareholder approval, certain amendments to the Plan, then renamed the KeyCorp Amended and Restated 1991 Equity Compensation Plan. The shareholders approved these amendments at the Corporation's Annual Meeting of Shareholders held on May 19, 1994. The Plan was further amended by action of the Committee on July 17, 1996 to amend the definition of Change of Control as set forth in Section 2.5 of the Plan, which amendment was effective as of January 1, 1996. If the Corporation hereafter enters into a transaction intended to be accounted for as a pooling of interests and the Committee determines, based on the written advice of the Corporation's independent accountants, that the July 17, 1996 amendment or the operation thereof would conflict with or jeopardize the pooling of interests accounting treatment for such transaction, then the July 17, 1996 amendment shall be inoperative and shall be treated as if it had never been effected so that the definition of Change of Control would be as in effect prior to such amendment. The Plan was further amended and restated as of September 19, 1996, to provide for the transferability of Options granted hereunder. The Plan was further amended by action of the Equity Based Compensation Subcommittee of the Compensation and Organization Committee on May 6, 1998 to amend Section 10.1(a) of the Plan to extend the option exercise period for terminated employees upon a change of control in certain circumstances. The amendment to Section 10.1(a) only applies to Awards and Award Instruments granted or entered into on or after January 1, 1999. If the Corporation enters into a transaction intended to qualify as a pooling of interests for accounting purposes prior to January 1, 1999, the amendment to Section 10.1(a) shall become null and void. The Subcommittee also amended the Plan to delete Section 17 of the Plan and all cross-references thereto. References in the Plan to specific numbers of Common Shares have been adjusted pursuant to Section 13 to reflect the two-for-one split in the Common Shares effective March 6, 1998. With respect to clause (a) of the last paragraph of Section 5, as of May 6, 1998, Incentive Stock Options covering 451,823 Common Shares had been theretofore granted and not expired or terminated unexercised, leaving 9,148,177 Common Shares then available for future grant of Incentive Stock Options (subject to increase in the event that outstanding Incentive Stock Options expire or terminate unexercised). The Plan was further amended by action of the Compensation and Organization Committee on March 15, 2000 to amend Section 1 of the Plan to clarify that Awards under the Plan may be made to any Employee of the Corporation. The Plan was amended on January 17, 2001 to amend Section 6.4(a) to remove the requirement that an Option will not become exercisable unless an Optionee has been continuously employed by the Corporation for at least six months from the date of grant. The Plan was also amended to add a new Section 16 entitled "Harmful Activity" which states that, if an Optionee engages in a "harmful activity" prior to or within six months of termination of employment, profits from the exercise of a Covered Option will inure to the benefit of the Corporation in certain circumstances. Section 16 does not apply to Options granted prior to January 1, 2001. The Plan was amended on March 14, 2001 to amend Sections 10.2, 10.3, and 10.4 to extend the period during which Options are exercisable pursuant to these sections to three years after retirement, disability, or death. The amendment only applies to Options granted on or after January 1, 2002. The Plan was amended on November 14, 2001 to amend Section 2.2 to change the consideration required for Restricted Stock. The Plan was amended on November 21, 2002 to terminate the Plan on June 30, 2012. EX-10.28 5 l97974aexv10w28.txt EX-10.28 3RD AMENDMNT TO KEYCORP DEFERD COMPNSTN P Exhibit 10.28 THIRD AMENDMENT TO THE KEYCORP DEFERRED COMPENSATION PLAN WHEREAS, KeyCorp has established the KeyCorp Deferred Compensation Plan ("Plan") for certain employees of KeyCorp, and WHEREAS, the Board of Directors of KeyCorp has authorized its Compensation and Organization Committee to permit amendments to the Plan, and WHEREAS, the Compensation and Organization Committee of the Board of Directors of KeyCorp has determined it desirable to amend the Plan and has accordingly authorized the execution of this Third Amendment, NOW THEREFORE, pursuant to such action of the Compensation and Organization Committee, the Plan is hereby amended as follows: 1. Section 5.1 shall be amended to delete it in its entirety and to substitute therefore the following: "5.1 CREDITING OF CORPORATION CONTRIBUTIONS. Corporate Contributions shall be credited on a bookkeeping basis to the Participant's Plan Account in proportion to the respective amount of the Participant's Participant Deferrals made to the Plan during the applicable Deferral Period. Corporate Contributions shall be credited to the Participant's Plan Account as of the date that the Participant's Participant Deferrals are credited to the Plan. Notwithstanding the forgoing provisions of this Section 5.1, however, if the Participant is an "Officer" of the Corporation, as that term is defined in accordance with Section 16 of the Securities Act of 1934, such Corporate Contributions shall be credited to the Participant's Plan Account as follows: a. INCENTIVE COMPENSATION DEFERRALS. Corporate Contributions shall be credited on a bookkeeping basis to the Participant's Plan Account as of the date the Incentive Compensation Deferrals would have been payable to the Participant but for the Participant's election to defer such Incentive Compensation to the Plan. b. SALARY DEFERRALS. Corporate Contributions shall be credited to the Participant's Plan Account as of June 30 and December 31 of each Plan year, provided, however, that if a Participant has elected on a bookkeeping basis to invest his or her Salary Deferrals in the Plan's Common Stock Account then such Salary Deferrals shall be credited with Corporate Contributions as of the date such Salary Deferrals would have been paid to the Participant but for the Participant's election to defer such Salary Deferrals to the Plan. Participant Deferrals invested on a bookkeeping basis in the Plan's Interest Bearing Fund and/or Investment Funds shall be credited with Corporate Contributions equal to 6% of such Participant's Participant Deferrals; Participant Deferrals invested on a bookkeeping basis in the Plan's Common Stock Account shall be credited with Corporate Contributions equal to 10% of such Participant's Participant Deferrals. Corporate Contributions (equal to 6% or 10%, as the case may be) shall also be -1- credited on behalf of those Participants whose Participant Deferrals become mandated under the requirements of Section 162(m) of the Code." 2. Except as specifically amended herein, the Plan shall remain in full force and effect. IN WITNESS WHEREOF, KeyCorp has caused this Third Amendment to the Plan to be executed by its duly authorized officer to be effective as of January 1, 2003. KEYCORP BY: /s/ Steven N. Bulloch ------------------------------ TITLE: Assistant Secretary ---------------------------- -2- EX-10.31 6 l97974aexv10w31.txt EX-10.31 MCDONALD FINANCIAL GROUP DEFERRAL PLAN Exhibit 10.31 MCDONALD FINANCIAL GROUP DEFERRAL PLAN ARTICLE I The McDonald Financial Group Deferral Plan ("Plan") is established effective January 1, 2003, to maintain on a bookkeeping basis, those unvested discretionary bonus awards that are granted under the various KeyCorp sponsored Incentive Compensation Plan(s) that mandate the automatic deferral of such unvested awards. The Plan, as structured, is also intended to provide those Employees of KeyCorp with a tax-favorable savings vehicle, while providing KeyCorp with a means of retaining such Employees continued employment. It is the intention of KeyCorp, and it is the understanding of those Participants covered under the Plan, that the Plan is unfunded. ARTICLE II DEFINITIONS ----------- 2.1 MEANING OF DEFINITIONS. For the purposes of this Plan, the following words and phrases shall have the meanings hereinafter set forth, unless a different meaning is clearly required by the context: (a) "BENEFICIARY" shall mean the person, persons or entity entitled under Article VIII to receive any Plan benefits payable after a Participant's death. (b) "BOARD" shall mean the Board of Directors of KeyCorp, the Board's Compensation and Organization Committee, or any other committee designated by the Board or a subcommittee designated by the Board's Compensation and Organization Committee. (c) "CHANGE OF CONTROL" shall be deemed to have occurred if under a rabbi trust arrangement established by KeyCorp ("Trust"), as such Trust may from time to time be amended or substituted, the Corporation is required to fund the Trust because of a "Change of Control." (d) "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time, together with all regulations promulgated thereunder. Reference to a section of the Code shall include such section and any comparable section or sections of any future legislation that amends, supplements, or supersedes such section. (e) "COMMON STOCK ACCOUNT" shall mean the investment account established under the Plan for bookkeeping purposes, in which a Participant may elect to have his or her Discretionary Bonus awards credited. Discretionary Bonus awards invested in the Common Stock Account shall be credited based on a bookkeeping allocation of KeyCorp Common Shares (both whole and fractional rounded to the nearest one-hundredth of a share) that shall be equal to the amount of Discretionary Bonus awards and Corporate Contributions invested by the Participant and by the Corporation in the Common Stock Account. The Common Stock Account shall also reflect on a bookkeeping basis all dividends, gains, and losses attributable to such Common Shares. All Corporate Contributions and all Discretionary Bonus awards credited to the Common Stock Account, shall be based on the ten-day average of the New York Stock Exchange's closing price for such Common Shares immediately preceding, up to, and including the day such Discretionary Bonus awards and Corporate Contributions are credited to the Participants' Plan Account. (f) "CORPORATE CONTRIBUTIONS" shall mean the dollar amount that an Employer has agreed to contribute on a bookkeeping basis to the Participant's Plan Account in accordance with the provisions of Article V of the Plan. (g) "CORPORATION" shall mean KeyCorp, an Ohio corporation, its corporate successors, and any corporation or corporations into or with which it may be merged or consolidated. (h) "DEFERRAL PERIOD" shall mean each applicable calendar year. (i) "DETERMINATION DATE" shall mean the last business day of each calendar quarter. (j) "DISABILITY" shall mean (1) the physical or mental disability of a permanent nature which prevents a Participant from performing the duties such Participant was employed to perform for his or her Employer when such disability commenced, (2) qualifies for disability benefits under the federal Social Security Act within 30 months following the Participant's disability, and (3) qualifies the Participant for disability coverage under the KeyCorp Long Term Disability Plan. (k) "DISCHARGE FOR CAUSE" shall mean the termination (whether by the Participant or the Employer) of a 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 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 2.1(k), provided, however, that for a period of two years following a Change of Control, any determination by the Corporation that an Employee has been Discharged for Cause shall be set forth in writing with the factual basis for such Discharge for Cause clearly specified and documented by the Corporation. (l) "DISCRETIONARY BONUS AWARDS" shall mean those unvested discretionary bonus award(s) granted to an Employee under the terms of an Incentive Compensation Plan during the applicable Deferral Period, which shall be subject to the automatic deferral and vesting provisions of Article III and Article VI of the Plan. For purposes of this Section 2.1(l), the term "Discretionary Bonus Awards" shall not include any compensation paid to the Employee during the applicable Deferral Period which constitutes any form of a hiring bonus, sales commissions, referral awards, recognition awards, and /or corporate long-term incentive compensation plan awards. -2- (m) "EMPLOYEE" shall mean a common law employee who is employed by an Employer. (n) "EMPLOYER" shall mean the Corporation and any of its subsidiaries or affiliates, unless specifically excluded as an Employer for Plan purposes by written action by an officer of the Corporation. An Employer's Plan participation shall be subject to all conditions and requirements made by the Corporation, and each Employer shall be deemed to have appointed the Plan Administrator as its exclusive agent under the Plan as long as it continues as an Employer. (o) "HARMFUL ACTIVITY" shall have occurred if the Participant shall do any one or more of the following: (i) Use, publish, sell, trade or otherwise disclose Non-Public Information of KeyCorp unless such prohibited activity was inadvertent, done in good faith and did not cause significant harm to KeyCorp. (ii) After notice from KeyCorp, fail to return to KeyCorp any document, data, or thing in his or her possession or to which the Participant has access that may involve Non-Public Information of KeyCorp. (iii) After notice from KeyCorp, fail to assign to KeyCorp all right, title, and interest in and to any confidential or non-confidential Intellectual Property which the Participant created, in whole or in part, during employment with KeyCorp, including, without limitation, copyrights, trademarks, service marks, and patents in or to (or associated with) such Intellectual Property. (iv) After notice from KeyCorp, fail to agree to do any acts and sign any document reasonably requested by KeyCorp to assign and convey all right, title, and interest in and to any confidential or non-confidential Intellectual Property which the Participant created, in whole or in part, during employment with KeyCorp, including, without limitation, the signing of patent applications and assignments thereof. (v) Upon the Participant's own behalf or upon behalf of any other person or entity that competes or plans to compete with KeyCorp, solicit or entice for employment or hire any KeyCorp employee. (vi) Upon the Participant's own behalf or upon behalf of any other person or entity that competes or plans to compete with KeyCorp, call upon, solicit, or do business with (other than business which does not compete with any business conducted by KeyCorp) any KeyCorp customer the Participant called upon, solicited, interacted with, or became acquainted with, or learned of through access to information (whether or not such information is or was non-public) while the Participant was employed at KeyCorp unless such prohibited activity was inadvertent, done in good faith, and did not involve a customer whom the Participant should have reasonably known was a customer of KeyCorp. -3- (vii) Upon the Participant's own behalf or upon behalf of any other person or entity that competes or plans to compete with KeyCorp, after notice from KeyCorp, continue to engage in any business activity in competition with KeyCorp in the same or a closely related activity that the Participant was engaged in for KeyCorp during the one year period prior to the termination of the Participant's employment. For purposes of this Section 2.1(o) the term: "INTELLECTUAL PROPERTY" shall mean any invention, idea, product, method of doing business, market or business plan, process, program, software, formula, method, work of authorship, or other information, or thing relating to KeyCorp or any of its businesses. "NON-PUBLIC INFORMATION" shall mean, but is not limited to, trade secrets, confidential processes, programs, software, formulas, methods, business information or plans, financial information, and listings of names (e.g., employees, customers, and suppliers) that are developed, owned, utilized, or maintained by an employer such as KeyCorp, and that of its customers or suppliers, and that are not generally known by the public. "KEYCORP" shall include KeyCorp, its subsidiaries, and its affiliates. (p) "INCENTIVE COMPENSATION PLAN" shall mean a line of business or management incentive compensation plan that is sponsored by KeyCorp or an affiliate of KeyCorp that mandates the deferral of unvested discretionary bonus awards granted under an applicable Incentive Compensation Plan and which the Corporation in its sole discretion has determined constitutes an Incentive Compensation Plan for purposes of the Plan. (q) "INTEREST BEARING ACCOUNT" shall mean the investment account established under the Plan for bookkeeping purposes in which a Participant may elect to have his or her Discretionary Bonus awards credited. Discretionary Bonus awards invested for bookkeeping purposes in the Interest Bearing Account shall be credited with earnings as of each Determination Date which shall be based on the effective annual yield of the average of Moody's Average Corporate Bond Yield Index for the previous calendar month increased by 50 basis points. In the event that Moody's Investor Services, Inc. ceases to publish such Index (or any successor publisher thereto) the Board, in its sole and absolute discretion, shall select a substantially similar index to be used in crediting earnings under the Interest Bearing Account. (r) "INVESTMENT ACCOUNTS" shall collectively mean those investment accounts established under the Plan for bookkeeping purposes in which a Participant may elect to have his or her Discretionary Bonus awards credited. Investment Accounts shall include the Plan's (1) Interest Bearing Account, (2) Common Stock Account, and (3) Investment Funds. (s) "INVESTMENT FUNDS" shall mean those investment accounts established under the Plan for bookkeeping purposes in which a Participant may elect to have his or her Discretionary Bonus awards credited and which mirror the investment funds established under Article VIII of the KeyCorp 401(k) Savings Plan ("Savings Plan") as may be amended from time to time, provided, however, that the Savings Plan's Corporation -4- Stock Fund, for Plan purposes, shall be excluded from the definition of Investment Funds. Discretionary Bonus awards invested for bookkeeping purposes in the Investment Funds shall be credited on a bookkeeping basis with those earnings, gains, and losses experienced by the Savings Plan's investment funds. (t) "INVOLUNTARY TERMINATION" shall mean the termination (by the Employer) of a Participant's employment from his or her Employer and from any other Employer, other than a Discharge for Cause or a Termination Under Limited Circumstances. (u) "PARTICIPANT" shall mean an Employee who meets the eligibility and participation requirements set forth in Section 3.1 of the Plan. (v) "PLAN" shall mean the McDonald Financial Group Deferral Plan with all amendments, modifications and revisions as hereafter made. (w) "PLAN ACCOUNT" shall mean those bookkeeping accounts established by the Corporation for each Plan Participant, which shall reflect all Discretionary Bonus awards and Corporate Contributions invested for bookkeeping purposes in the Plan's Investment Accounts, with all earnings, dividends, gains, and losses thereon. Plan Accounts shall not constitute separate Plan funds or separate Plan assets. Neither the maintenance of, nor the crediting of amounts to such Plan Accounts shall be treated (i) as the allocation of any Corporation assets to, or a segregation of any Corporation assets in any such Plan Accounts, or (ii) as otherwise creating a right in any person or Participant to receive specific assets of the Corporation. (x) "PLAN YEAR" shall mean the calendar year. (y) "RETIREMENT" shall mean the termination of a Participant's employment any time after the Participant's attainment of age 55 and completion of 5 years of Vesting Service but shall not include the Participant's (i) Discharge for Cause, (ii) Involuntary Termination, (iii) Termination Under Limited Circumstances, (iv) Disability, or (v) death. (z) "TERMINATION UNDER LIMITED CIRCUMSTANCES" shall mean the termination (whether by the Participant or the Employer) of a Participant's employment from his or her Employer, and from any other Employer (i) under circumstances in which the Participant is entitled to receive severance benefits or salary continuation benefits under the KeyCorp Separation Pay Plan, (ii) under circumstances in which the Participant is entitled to severance benefits or salary continuation or similar benefits under a change of control agreement or employment agreement within two years after a change of control (as defined by such agreement) has occurred, or (iii) as otherwise expressly approved by the Corporation or the Compensation and Organization Committee, in their sole discretion. (aa) "VESTING SERVICE" for purposes of Section 2.1(aa) shall be calculated by measuring the period of service commencing on the Employee's employment commencement date and ending on the Employee's termination date and shall be computed based on each full calendar month that the Employee is employed by an Employer. -5- (bb) "VOLUNTARY TERMINATION" shall mean a voluntary termination of the 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, Involuntary Termination, Retirement, Termination Under Limited Circumstances, or termination as a result of Disability or death. 2.2 PRONOUNS. The masculine pronoun wherever used herein includes the feminine in any case so requiring, and the singular may include the plural. ARTICLE III ELIGIBILITY AND PARTICIPATION ----------------------------- 3.1 ELIGIBILITY AND PARTICIPATION. An Employee shall participate in the Plan, and shall automatically become a Plan Participant upon (i) the Employee's meeting the applicable Incentive Compensation Plan's annual production criteria established by the Corporation for the applicable Deferral Period, and (ii) the Employee being awarded a unvested, discretionary bonus award under his or her applicable Incentive Compensation Plan. 3.2 AUTOMATIC DEFERRAL REQUIREMENTS. An Employee meeting the eligibility and automatic participation requirements of Section 3.1 hereof, shall automatically have his or her Discretionary bonus awards deferred to the Plan. Such Discretionary Bonus awards shall be maintained in the Plan until vested or forfeited. 3.3 DEFERRAL LIMITED BY TERMINATION UNDER LIMITED CIRCUMSTANCES, INVOLUNTARY TERMINATION, RETIREMENT, DISABILITY, OR DEATH. As of a Participant's Termination Under Limited Circumstances, Involuntary Termination, Retirement, Disability or death, the Participant shall be relieved from and, further, shall not be permitted to have any further bonus awards deferred to the Plan, and any Discretionary Bonus that thereafter would have been subject to the Automatic Deferral Requirements of Section 3.2 hereof, if and to the extent payable, shall be paid directly to the Participant in accordance with the terms of the applicable Incentive Compensation Plan. 3.4 CHANGE IN PARTICIPATION STATUS. During those Deferral Periods in which the Participant does not automatically defer Discretionary Bonus awards to the Plan, Discretionary Bonus awards and Corporate Contributions previously credited to the Participant's Plan Account shall remain in the Plan and shall continue to vest under the terms of Section 6.1 hereof; such Discretionary Bonus awards and Corporate Contributions with all earnings, gains, or losses thereon when vested shall be distributed to the Participant in accordance with the provisions of Article VII of the Plan. -6- ARTICLE IV DISCRETIONARY BONUS AWARDS -------------------------- 4.1 PLAN ACCOUNT/INVESTMENT OF DISCRETIONARY BONUS AWARDS. Discretionary Bonus awards and Corporate Contributions shall be credited on a bookkeeping basis to a Plan Account established in the Participant's name. Each Participant shall direct the manner in which his or her Discretionary Bonus awards are to be invested for bookkeeping purposes under the Plan. All Discretionary Bonus awards may be invested for bookkeeping purposes in any one or more of the Plan's Investment Accounts, in such amounts as the Participant shall select, provided that such election amounts are expressed in five percent increments. Participants may modify their investment elections at such times and in such manner as permitted by the Corporation. 4.2 CREDITING OF DISCRETIONARY BONUS AWARDS. Discretionary Bonus awards shall be credited to the Participant's Plan Account as of the date that the Participant's Discretionary Bonus awards would have been payable to the Participant under an Incentive Compensation Plan but for the Incentive Compensation Plan's mandatory deferral requirements. 4.3 DEFAULT INVESTMENT ELECTION. In the event that a Participant fails to direct the manner in which his or her Discretionary Bonus award(s) shall be invested for bookkeeping purposes under the Plan, then such Discretionary Bonus award(s) when credited to the Participant's Plan Account shall be automatically invested on a bookkeeping basis in the Plan's Interest Bearing Account. ARTICLE V CORPORATE CONTRIBUTIONS ----------------------- 5.1 CREDITING OF CORPORATION CONTRIBUTIONS. Matching Corporate Contributions equal to 15% of the Participant's Discretionary Bonus awards for the applicable Deferral Period shall be credited on a bookkeeping basis to the Participant's Plan Account as of the payroll date on which the Participant's Discretionary Bonus awards are automatically deferred and credited to the Plan. 5.2 INVESTMENT OF CORPORATE CONTRIBUTIONS. All Corporate Contributions credited to the Participant's Plan Account shall be invested for bookkeeping purposes in the Plan's Common Stock Account. Corporate Contributions are not subject to Participant investment direction. 5.3 DETERMINATION OF AMOUNT. The Plan Administrator shall verify the amount of Discretionary Bonus awards, Corporate Contributions, dividends, and earnings, if any, to be credited to each Participant's Plan Account in accordance with the provisions of the Plan. The reasonable and equitable decision of the Plan Administrator as to the value of each Plan Account shall be conclusive and binding upon all Participants and the Beneficiary of each deceased Participant having any interest, direct or indirect in the Participant's Plan Account. As soon as reasonably practicable after the close of the Plan Year, the Corporation shall send to each Participant an itemized accounting statement that shall reflect the Participant's Plan Account balance. 5.4 CORPORATE ASSETS. All Discretionary Bonus awards, Corporate Contributions, dividends, earnings and any other gains and losses credited to a Participant's Plan Account on a bookkeeping basis, remain the assets and property of the Corporation, which shall be subject to distribution to the Participant only in accordance with Article VII of the Plan. Participants and -7- Beneficiaries shall have the status of general unsecured creditors of the Corporation. Nothing contained in the Plan shall create, or be construed as creating a trust of any kind or any other fiduciary relationship between the Participant, the Corporation, or any other person. It is the intention of the Corporation and it is the understanding of the Participant that the Plan be unfunded. 5.5 NO PRESENT INTEREST. Subject to any federal statute to the contrary, no right or benefit under the Plan and no right or interest in each Participant's Plan Account shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge any right or benefit under the Plan, or Participant's Plan Account shall be void. No right, interest, or benefit under the Plan or Participant's Plan Account shall be liable for or subject to the debts, contracts, liabilities, or torts of the Participant or Beneficiary. If the Participant or Beneficiary becomes bankrupt or attempts to alienate, sell, assign, pledge, encumber, or charge any right under the Plan or Participant's Plan Account, such attempt shall be void and unenforceable. ARTICLE VI ---------- VESTING ------- 6.1 VESTING IN DISCRETIONARY BONUS AWARDS AND CORPORATE CONTRIBUTIONS. The calculation of a Participant's vested interest in those Discretionary Bonus awards and Corporate Contributions credited on a bookkeeping basis to the Participant's Plan Account shall be measured from the last day of the applicable calendar quarter in which Discretionary Bonus awards and Corporate Contributions are credited to the Participant's Plan Account ("Quarterly Deferral Date"). A Participant shall become vested in his or her Discretionary Bonus awards and Corporate Contributions with all earnings, gains, and losses thereon under the following three-year graded vesting schedule:
(a) From the date the Participant's Discretionary Bonus awards and Corporate Contributions are credited to the Participant's Plan Account until one full calendar year from the Quarterly Deferral Date.......... 0%. (b) One full calendar year from the Quarterly Deferral Date of the Participant's Discretionary Bonus awards and Corporate Contributions to the Plan but less than two full calendar years from such Quarterly Deferral Date...........................................................33%. (c) Two Full Calendar Years from the Quarterly Deferral Date of the Participant's Discretionary Bonus awards and Corporate Contributions to the Plan But less than three full calendar years from such Quarterly Deferral Date.................................................66%. (d) Three full calendar years from the date of the Quarterly Deferral Date of the Participant's Discretionary Bonus awards and Corporate Contributions to the Plan..............................................100%.
Notwithstanding the foregoing provisions of this Section 6.1, a Participant shall become fully vested in all Discretionary Bonus awards and Corporate Contributions credited on a bookkeeping basis to the Participant's Plan Account upon the Participant's Termination Under Limited Circumstances, Disability or death. -8- 6.2 CONTINUED VESTING UPON RETIREMENT. Subject to the provisions of Section 7.2 of the Plan, upon the Participant's Retirement, the Participant's unvested Discretionary Bonus awards and Corporate Contributions credited to the Participant's Plan Account with all earnings and gains thereon, shall remain in the Plan and shall continue to vest under the vesting provisions of Section 6.1 of the Plan. 6.3 FORFEITURE OF CORPORATE CONTRIBUTIONS. In the event of the Participant's Involuntary Termination, as that term is defined in accordance with Section 2.1(t) of the Plan, the Participant shall become immediately vested in those Discretionary Bonus awards allocated on a bookkeeping basis to the Participant's Plan Account with all earnings and gains thereon. All unvested Corporate Contributions and related earnings credited on a bookkeeping basis to the Participant's Plan Account shall be forfeited as of the Participant's last day of employment. 6.4 FORFEITURE OF DISCRETIONARY BONUS AWARDS AND CORPORATE CONTRIBUTIONS. Notwithstanding any provision of the Plan to the contrary, upon the Participant's Discharge for Cause or the Participant's Voluntary Termination, the Participant shall automatically forfeit all Discretionary Bonus awards and Corporate Contributions allocated on a bookkeeping basis to the Participant's Plan Account with all earnings and gains thereon that have unvested in accordance with the vesting provisions of Section 6.1 of the Plan as of the Participant's last day of employment. ARTICLE VII DISTRIBUTION OF PLAN BENEFITS ----------------------------- 7.1 DISTRIBUTION OF INTEREST BEARING ACCOUNT AND/OR INVESTMENT FUNDS. Subject to the provisions of Section 7.8 and Section 7.9 hereof, a Participant shall receive a distribution of his or her vested Plan Account balance from the Plan's Interest Bearing Account and /or Investment Funds as a single lump sum cash distribution. 7.2 DISTRIBUTION FOR COMMON STOCK ACCOUNT. Subject to the provisions of Section 7.5 and Section 7.6 of the Plan, a Participant shall receive a distribution of his or her vested Plan Account balance from the Plan's Common Stock Account as a single lump sum distribution. Distributions of Discretionary Bonus awards and vested Corporate Contributions from the Plan's Common Stock Account shall be made in KeyCorp Common Shares. 7.3 DISTRIBUTION OF ACCOUNT BALANCE. The Participant's vested Plan Account shall be valued as of the Determination Date immediately preceding his or her Termination, Retirement or Disability (the "valuation date"), and such lump sum distribution shall be made as soon as reasonably practicable following the Participant's Termination, Death or Disability date. 7.4 DISTRIBUTIONS FOLLOWING RETIREMENT. Upon the Participant's Retirement, the Participant's Plan Account balance shall continue to be maintained within the Plan and all Discretionary Bonus awards and Corporate Contributions credited to the Participant's Plan Account with all earnings, gains, and losses thereon, shall continue to vest under the vesting provisions of Section 6.1 of the Plan, and when vested, shall be distributed to the Participant in accordance with the provisions of Section 7.1 and 7.2 hereof. Notwithstanding the foregoing provisions of this Section 7.5, however, in the event of the Participant's Retirement, and within twelve months of such Retirement, the Participant engages in any "Harmful Activity" as that term is defined in accordance with Section 2.1 (o) of the Plan, such -9- Participant's unvested Plan Account balance shall be immediately forfeited and the Participant shall automatically cease Plan participation. 7.5 DISTRIBUTIONS FOLLOWING TERMINATION UNDER LIMITED CIRCUMSTANCES, DISABILITY OR DEATH. Upon the Participant's Termination Under Limited Circumstances, or termination of employment due to Disability or death, all Discretionary Bonus awards and Corporate Contributions credited to the Participant's Plan Account with all earnings, gains, and losses thereon shall become immediately vested and shall be distributed to the Participant in a single lump sum amount of cash and Common Shares. 7.6 DISTRIBUTIONS FOLLOWING INVOLUNTARY TERMINATION. In accordance with the provisions of Section 6.3 of the Plan, upon the Participant's Involuntary Termination, all Discretionary Bonus awards credited to the Participant's Plan Account with all earnings, gains and losses thereon, shall become immediately vested and shall be distributed to the Participant in a single lump sum distribution. All unvested Corporate Contributions credited to the Participant's Plan Account with all related earnings thereon shall be forfeited by the Participant as of his or her last day of employment. 7.7 DISTRIBUTIONS FOLLOWING VOLUNTARY TERMINATION OR DISCHARGE FOR CAUSE. Upon the Participant's Voluntary Termination or Discharge for Cause, all unvested Discretionary Bonus awards and Corporate Contributions credited to the Participant's Plan Account with all earnings, gains, and losses thereon shall be forfeited by the Participant as of his or her last day of employment. 7.8 WITHHOLDING. The withholding of taxes with respect to the Participant's Discretionary Bonus awards, Corporate Contributions, and all earnings and gains thereon shall be made at such time as it becomes required by any state, federal or local law; such taxes shall be withheld from the Participant's Discretionary Bonus awards and Corporate Contributions in accordance with applicable law to the maximum extent possible. 7.9 FACILITY OF PAYMENT. If it is found that any individual to whom an amount is payable hereunder is incapable of attending to his or her financial affairs because of any mental or physical condition, including the infirmities of advanced age, such amount (unless prior claim therefor shall have been made by a duly qualified guardian or other legal representative) may, in the discretion of the Corporation, be paid to another person for the use or benefit of the individual found incapable of attending to his or her financial affairs or in satisfaction of legal obligations incurred by or on behalf of such individual. Any such payment shall be charged to the Participant's Plan Account from which any such payment would otherwise have been paid to the individual found incapable of attending to his or her financial affairs, and shall be a complete discharge of any liability therefor under the Plan. ARTICLE VIII BENEFICIARY DESIGNATION ----------------------- 8.1 BENEFICIARY DESIGNATION. Subject to Section 8.3 hereof, each Participant shall have the right, at any time, to designate one or more persons or an entity as Beneficiary (both primary as well as secondary) to whom benefits under this Plan shall be paid in the event of Participant's death prior to complete distribution of the Participant's vested Plan Account. Each Beneficiary designation shall be in a written form prescribed by the Corporation and shall be effective only when filed with the Corporation during the Participant's lifetime. -10- 8.2 CHANGING BENEFICIARY. A Beneficiary designation may be changed by the Participant without the consent of the previously named Beneficiary by the Participant's filing of a new designation with the Corporation. The filing of a new designation shall cancel all designations previously filed by the Participant. 8.3 NO BENEFICIARY DESIGNATION. If a Participant fails to designate a Beneficiary in the manner provided above, if the designation is void, or if the Beneficiary (including all contingent Beneficiaries) designated by a deceased Participant dies before the Participant, the Participant's Beneficiary shall be the Participant's estate. ARTICLE IX ADMINISTRATION -------------- 9.1 ADMINISTRATION. The Corporation shall be responsible for the general administration of the Plan, for carrying out the provisions hereof, and for making payments hereunder. The Corporation shall have the sole and absolute discretionary authority and power to carry out the provisions of the Plan, including, but not limited to, the authority and power (a) to determine all questions relating to the eligibility for and the amount of any benefit to be paid under the Plan, (b) to determine all questions pertaining to claims for benefits and procedures for claim review, (c) to resolve any and all questions arising under the Plan, including any question of construction and/or interpretation, and (d) to take such further action as the Corporation deems necessary or advisable in the administration of the Plan. All findings, decisions, and determinations of any kind made by the Plan Administrator shall not be disturbed unless the Plan Administrator has acted in an arbitrary and capricious manner. Subject to the requirements of law, the Plan Administrator shall be the sole judge of the standard of proof required in any claim for benefits and in any determination of eligibility for a benefit. All decisions of the Plan Administrator shall be final and binding on all parties. The Corporation may employ such attorneys, investment counsel, agents, and accountants as it may deem necessary or advisable to assist it in carrying out its duties hereunder. The actions taken and the decisions made by the Corporation hereunder shall be final and binding upon all interested parties subject, however, to the provisions of Section 9.2. The Plan Year, for purposes of Plan administration, shall be the calendar year. 9.2 CLAIMS REVIEW PROCEDURE. Whenever the Plan Administrator decides for whatever reason to deny, whether in whole or in part, a claim for benefits under this Plan filed by any person (herein referred to as the "Claimant"), the Plan Administrator shall transmit a written notice of its decision to the Claimant, which notice shall be written in a manner calculated to be understood by the Claimant and shall contain a statement of the specific reasons for the denial of the claim and a statement advising the Claimant that, within 60 days of the date on which he or she receives such notice, he or she may obtain review of the decision of the Plan Administrator in accordance with the procedures hereinafter set forth. Within such 60-day period, the Claimant or his or her authorized representative may request that the claim denial be reviewed by filing with the Plan Administrator a written request therefor, which request shall contain the following information: (a) the date on which the request was filed with the Plan Administrator; provided, however, that the date on which the request for review was in fact filed with the Plan Administrator shall control in the event that the date of the actual filing is later than the date stated by the Claimant pursuant to this paragraph (a); -11- (b) the specific portions of the denial of his or her claim which the Claimant requests the Plan Administrator to review; (c) a statement by the Claimant setting forth the basis upon which he or she believes the Plan Administrator should reverse its previous denial of the claim and accept the claim as made; and (d) any written material which the Claimant desires the Plan Administrator to examine in its consideration of his or her position as stated pursuant to paragraph (b) above. In accordance with this Section, if the Claimant requests a review of the Claim decision, such review shall be made by the Plan Administrator who shall, within sixty (60) days after receipt of the request form, review and render a written decision on the claim containing the specific reasons for the decision including reference to Plan provisions upon which the decision is based. All findings, decisions, and determinations of any kind made by the Plan Administrator shall not be modified unless the Plan Administrator has acted in an arbitrary and capricious manner. Subject to the requirements of law, the Plan Administrator shall be the sole judge of the standard of proof required in any claim for benefits, and any determination of eligibility for a benefit. All decisions of the Plan Administrator shall be binding on the claimant and upon all other Persons. If the Participant or Beneficiary shall not file written notice with the Plan Administrator at the times set forth above, such individual shall have waived all benefits under the Plan other than as already provided, if any, under the Plan. ARTICLE X AMENDMENT AND TERMINATION OF PLAN --------------------------------- 10.1 RESERVATION OF RIGHTS. The Corporation reserves the right to terminate the Plan at any time by action of the Corporation, or any duly authorized committee thereof, and to modify or amend the Plan, in whole or in part, at any time and for any reason, subject to the following: (a) PRESERVATION OF ACCOUNT BALANCE. No termination, amendment, or modification of the Plan shall reduce (i) the amount of Discretionary Bonus awards and Corporate Contributions, and (ii) all earnings and gains on such Discretionary Bonus awards and Corporate Contributions that have accrued up to the effective date of the termination, amendment, or modification. (b) CHANGES IN EARNINGS RATE. No amendment or modification of the Plan shall reduce the rate of earnings to be credited on all Discretionary Bonus awards and Corporate Contribution, and all earnings and gains accrued thereon under the Common Stock Account until the close of the applicable Plan Year in which such amendment or modification is made. 10.2 EFFECT OF PLAN TERMINATION. Notwithstanding anything to the contrary contained in the Plan, the termination of the Plan shall terminate the liability of the Corporation and all Employers to make further Corporate Contributions to the Plan. -12- ARTICLE XI CHANGE OF CONTROL ----------------- 11.1 CHANGE OF CONTROL. Notwithstanding any other provision of the Plan to the contrary, in the event of a Change of Control as defined in accordance with Section 2.1(c) of the Plan, no amendment or modification of the Plan may be made at any time on or after such Change of Control (1) to reduce or modify a Participant's Pre-Change of Control Account Balance, (2) to reduce or modify the Common Stock Accounts' method of calculating earnings, gains, and/or losses on the Participant's Pre-Change of Control Account Balance, or (3) to reduce or modify the Participant's Discretionary Bonus awards and/or Corporate Contributions to be credited to the Participant's Plan Account for the applicable Deferral Period. For purposes of this Section 11.1, the term "Pre-Change of Control Account Balance" shall mean, with regard to any Plan Participant, the aggregate amount of the Participant's Discretionary Bonus awards and Corporate Contributions with all earnings, gains, and losses thereon which are credited to the Participant's Plan Account through the close of the calendar year in which such Change of Control occurs. 11.2 COMMON STOCK CONVERSION. In the event of a transaction or occurrence in which the Common Shares of the Corporation are converted into or exchanged for securities, cash and/or other property as a result of any capital reorganization or reclassification of the capital stock of the Corporation, or consolidation or merger of the Corporation with or into another corporation or entity, or the sale of all or substantially all of its assets to another corporation or entity, the Corporation shall cause the Common Stock Account to reflect on a bookkeeping basis the securities, cash and other property that would have been received in such reorganization, reclassification, consolidation, merger or sale in an equivalent amount of Common Shares equal to the balance in the Common Stock Account and, from and after such reorganization, reclassification, consolidation, merger or sale, the Common Stock Account shall reflect on a bookkeeping basis all dividends, interest, earnings and losses attributable to such securities, cash, and other property. 11.3 AMENDMENT IN THE EVENT OF A CHANGE OF CONTROL. On and after a Change of Control, the provisions of Article II, Article III, Article IV, Article V, Article VI, Article VII, Article VIII, Article IX, Article X, and this Article XI may not be amended or modified as such Sections and Articles apply with regard to the Participants' Pre-Change of Control Account Balances. ARTICLE XII MISCELLANEOUS PROVISIONS ------------------------ 12.1 UNFUNDED PLAN. This Plan is an unfunded plan maintained primarily to provide deferred compensation benefits for a select group of "management or highly-compensated employees." 13.2 NO COMMITMENT AS TO EMPLOYMENT. Nothing herein contained shall be construed as a commitment or agreement upon the part of any Employee hereunder to continue his or her employment with an Employer, and nothing herein contained shall be construed as a commitment on the part of any Employer to continue the employment, rate of compensation, or terms and conditions of employment of any Employee hereunder for any period. All Participants shall remain subject to discharge to the same extent as if the Plan had never been put into effect. -13- 12.3 BENEFITS. Nothing in the Plan shall be construed to confer any right or claim upon any person, firm, or corporation other than the Participants, former Participants, and Beneficiaries. 12.4 ABSENCE OF LIABILITY. No member of the Board of Directors of the Corporation or a subsidiary or committee authorized by the Board of Directors, or any officer of the Corporation or a subsidiary or officer of a subsidiary shall be liable for any act or action hereunder, whether of commission or omission, taken by any other member, or by any officer, agent, or Employee, except in circumstances involving bad faith or willful misconduct, for anything done or omitted to be done. 12.5 EXPENSES. The expenses of administration of the Plan shall be paid by the Corporation. 12.6 PRECEDENT. Except as otherwise specifically agreed to by the Corporation in writing, no action taken in accordance with the Plan by the Corporation shall be construed or relied upon as a precedent for similar action under similar circumstances. 12.7 WITHHOLDING. The Corporation shall withhold any tax which the Corporation in its discretion deems necessary to be withheld from any payment to any Participant, former Participant, or Beneficiary hereunder, by reason of any present or future law. 12.8 VALIDITY OF PLAN. The validity of the Plan shall be determined and the Plan shall be construed and interpreted in accordance with the provisions of the laws of the State of Ohio. The invalidity or illegality of any provision of the Plan shall not affect the validity or legality of any other part thereof. 12.9 PARTIES BOUND. The Plan shall be binding upon the Employers, Participants, former Participants, and Beneficiaries hereunder, and, as the case may be, the heirs, executors, administrators, successors, and assigns of each of them. 12.10 HEADINGS. All headings used in the Plan are for convenience of reference only and are not part of the substance of the Plan. 12.11 DUTY TO FURNISH INFORMATION. The Corporation shall furnish to each Participant, former Participant, or Beneficiary any documents, reports, returns, statements, or other information that it reasonably deems necessary to perform its duties imposed hereunder or otherwise imposed by law. 12.12 VALIDITY. In case any provision of this Plan shall be held illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal and invalid provision had never been inserted herein. 12.13 NOTICE. Any notice required or permitted under the Plan shall be deemed sufficiently provided if such notice is in writing and hand delivered or sent by registered or certified mail. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark or on the receipt for registration or certification. Mailed notice to the Corporation shall be directed to the Corporation's address, attention: KeyCorp Compensation and Benefits Department. Mailed notice to a Participant or Beneficiary shall be directed to the individual's last known address in the Employer's records. 12.14 SUCCESSORS. The provisions of this Plan shall bind and inure to the benefit of each Employer and its successors and assigns. The term successors as used herein shall include any corporate -14- or other business entity, which shall, whether by merger, consolidation, purchase or otherwise, acquire all or substantially all of the business and assets of an Employer. KEYCORP By: ------------------------------------- Title: Exec. VP ---------------------------------- ADDENDUM A The terms of this Addendum A shall apply only to those Employees (i) who have been specifically authorized by the Compensation and Organization Committee of the KeyCorp Board of Directors ("Committee") to participate in the McDonald Financial Group Deferral Plan ("Plan") under an enhanced benefit structure, and (ii) whose average annual gross production averages a minimum of $7,500,000 over the immediately preceding 3-year period under such criteria as is authorized by the Corporation ("Authorized Employees"). In accordance with the authorization granted by the Committee, the Plan is hereby modified with regard to such Authorized Employees as follows: 1. Section 3.1 of the Plan shall be disregarded under the terms of this Addendum, and the following new Section shall become applicable with regard to such Authorized Employees: "CREDITING OF CORPORATION CONTRIBUTIONS. Matching Corporate Contributions equal to 2 times the Authorized Employee's Deferred Bonus award for the applicable Deferral Period shall be credited on a bookkeeping basis to the Authorized Employee's Plan Account as of the payroll date on which the Authorized Employee's Discretionary Bonus award is automatically deferred and credited to the Plan. Notwithstanding the foregoing provisions of this Addendum, however, in the event that the Authorized Employee's Branch Profit Margin (or where applicable, the Branch Profit Margin for such Authorized Employees) fail to equal or exceed (i) 20% for the 2003 Plan year, (ii) 22% for the 2004 Plan year, or (iii) 24% for the 2005 Plan year and for each succeeding Plan years thereafter, then the provisions of this Addendum shall be null and void for purposes of allocating matching Corporate Contributions to such Authorized Employee for the applicable Plan year and the terms of Section 3.1 shall become applicable to such Authorized Employees." For purposes of this Addendum A, the following words and phrases shall have the meanings hereinafter set forth: 1. "BRANCH PROFIT MARGIN" shall mean the branch profit margin per the branch financial statements, calculated as branch revenues less production and direct expenses. For purposes of calculating the branch's direct expenses, the dollar cost of the Authorized Employee's Discretionary Bonus award and matching Corporate Contribution will be included as part of the Branch's direct expenses for the year in which the Discretionary Bonus award is earned rather than paid. Direct expenses, however, shall specifically exclude all allocated expenses such as marketing, operations, and trading costs. EX-10.32 7 l97974aexv10w32.txt EX-10.32 SIGNING BONUS PLAN Exhibit 10.32 KEYCORP SIGNING BONUS PLAN ARTICLE I The KeyCorp Signing Bonus Plan ("Plan") is established effective January 1, 1999 to require certain select Employees of KeyCorp to defer all or a percentage of the total amount of their signing bonus to be provided to the Employee in conjunction with his or her employment with an Employer to the Plan. As structured, the Plan is intended to provide those select Employees of KeyCorp with a tax-favorable savings vehicle, while providing KeyCorp with a means of retaining the Employee's continued employment. It is the intention of KeyCorp, and it is the understanding of those Participants covered under the Plan, that the Plan is unfunded for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended. ARTICLE II DEFINITIONS 2.1 MEANING OF DEFINITIONS. For the purposes of this Plan, the following words and phrases shall have the meanings hereinafter set forth, unless a different meaning is clearly required by the context: (a) "BENEFICIARY" shall mean the person, persons or entity entitled under Article VIII to receive any Plan benefits payable after a Participant's death. (b) "BOARD" shall mean the Board of Directors of KeyCorp, the Board's Compensation and Organization Committee, or any other committee designated by the Board or a subcommittee designated by the Board's Compensation and Organization Committee. (c) "CHANGE OF CONTROL" shall be deemed to have occurred if under a rabbi trust arrangement established by KeyCorp ("Trust"), as such Trust may from time to time be amended or substituted, the Corporation is required to fund the Trust because a "Change of Control", as defined in the Trust, has occurred on and after January 1, 1999. (d) "COMMON STOCK ACCOUNT" shall mean the investment account established under the Plan for bookkeeping purposes in which the Participant shall have his or her Signing Bonus Deferral credited. Signing Bonus Deferrals shall be credited based on a bookkeeping allocation of KeyCorp Common Shares (both whole and fractional rounded to the nearest one-hundredth of a share) ("Common Shares") which, on the date credited, shall be equal in market value (as determined under the last sentence of this Section 2.1(d)) to the amount of the Signing Bonus Deferral deferred. The Common Stock Account shall also reflect on a bookkeeping basis all dividends, gains, and losses attributable to such Common Shares. All Signing Bonus Deferrals credited to the Common Stock Account shall be based on the New York Stock Exchange's closing price for such Common Shares as of the day such Signing Bonus Deferral is credited to the Participant's Plan Account. (e) "CORPORATION" shall mean KeyCorp, an Ohio corporation, its corporate successors, and any corporation or corporations into or with which it may be merged or consolidated. "Date of Hire" shall mean the first day an Employee commences active employment with an Employer. (f) "DETERMINATION DATE" shall mean the last business day of each calendar quarter. (g) "DISABILITY" shall mean (1) the physical or mental disability of a permanent nature which prevents a Participant from performing the duties such Participant was employed to perform for his or her Employer when such disability commenced, (2) qualifies for disability benefits under the federal Social Security Act within 30 months following the Participant's disability, and (3) qualifies the Participant for disability coverage under the KeyCorp Long Term Disability Plan. (h) "DISTRIBUTION AGREEMENT" shall mean the executed agreement submitted by the Participant to the Corporation a minimum of twelve months prior to the Participant's vesting in his or her Signing Bonus Deferral which shall contain, in pertinent part, the Participant's distribution instructions for such Signing Bonus Deferral when vested. In the event the Participant elects or is required to transfer his or her Signing Bonus Deferral to the KeyCorp Deferred Compensation Plan, the Participant, at the time of such transfer, shall be required to execute a new Distribution Agreement which shall control the distribution of such transferred Plan benefits. (i) "EMPLOYEE" shall mean a common law employee who is employed by an Employer. (j) "EMPLOYER" shall mean the Corporation and any of its subsidiaries or affiliates, unless specifically excluded as an Employer for Plan purposes by written action by an officer of the Corporation. An Employer's Plan participation shall be subject to all conditions and requirements made by the Corporation, and each Employer shall be deemed to have appointed the Plan Administrator as its exclusive agent under the Plan as long as it continues as an Employer. (k) "HARMFUL ACTIVITY" shall have occurred if the Participant shall do any one or more of the following: (i) Use, publish, sell, trade or otherwise disclose Non-Public Information of KeyCorp unless such prohibited activity was inadvertent, done in good faith and did not cause significant harm to KeyCorp. (ii) After notice from KeyCorp, fail to return to KeyCorp any document, data, or thing in his or her possession or to which the Participant has access that may involve Non-Public Information of KeyCorp. (iii) After notice from KeyCorp, fail to assign to KeyCorp all right, title, and interest in and to any confidential or non-confidential Intellectual Property which the Participant created, in whole or in part, during employment with KeyCorp, including, without limitation, copyrights, trademarks, service marks, and patents in or to (or associated with) such Intellectual Property. 2 (iv) After notice from KeyCorp, fail to agree to do any acts and sign any document reasonably requested by KeyCorp to assign and convey all right, title, and interest in and to any confidential or non-confidential Intellectual Property which the Participant created, in whole or in part, during employment with KeyCorp, including, without limitation, the signing of patent applications and assignments thereof. (v) Upon the Participant's own behalf or upon behalf of any other person or entity that competes or plans to compete with KeyCorp, solicit or entice for employment or hire any KeyCorp employee. (vi) Upon the Participant's own behalf or upon behalf of any other person or entity that competes or plans to compete with KeyCorp, call upon, solicit, or do business with (other than business which does not compete with any business conducted by KeyCorp) any KeyCorp customer the Participant called upon, solicited, interacted with, or became acquainted with, or learned of through access to information (whether or not such information is or was non-public) while the Participant was employed at KeyCorp unless such prohibited activity was inadvertent, done in good faith, and did not involve a customer whom the Participant should have reasonably known was a customer of KeyCorp. (vii) Upon the Participant's own behalf or upon behalf of any other person or entity that competes or plans to compete with KeyCorp, after notice from KeyCorp, continue to engage in any business activity in competition with KeyCorp in the same or a closely related activity that the Participant was engaged in for KeyCorp during the one year period prior to the termination of the Participant's employment. For purposes of this Section 2.1(k) the term: "INTELLECTUAL PROPERTY" shall mean any invention, idea, product, method of doing business, market or business plan, process, program, software, formula, method, work of authorship, or other information, or thing relating to KeyCorp or any of its businesses. "NON-PUBLIC INFORMATION" shall mean, but is not limited to, trade secrets, confidential processes, programs, software, formulas, methods, business information or plans, financial information, and listings of names (e.g., employees, customers, and suppliers) that are developed, owned, utilized, or maintained by an employer such as KeyCorp, and that of its customers or suppliers, and that are not generally known by the public. "KEYCORP" shall include KeyCorp, its subsidiaries, and its affiliates. (l) "SIGNING BONUS DEFERRAL" shall mean all or any portion of the Employee's employment-signing bonus as negotiated and agreed to by and between the Employee and the Employer as an inducement for the Employee's acceptance of employment with an Employer which has been deferred to the Plan. 3 (m) "PARTICIPANT" shall mean an Employee who meets the eligibility and participation requirements set forth in Section 3.1 of the Plan. (n) "PLAN" shall mean the KeyCorp Signing Bonus Plan with all amendments hereafter made. (o) "PLAN ACCOUNT" shall mean the bookkeeping account established by the Corporation for each Plan Participant, which shall reflect the Participant's Signing Bonus Deferral invested for bookkeeping purposes in the Plan's Common Stock Account, with all earnings, dividends, gains, and losses thereon. Plan Accounts shall not constitute separate Plan funds or separate Plan assets. Neither the maintenance of, nor the crediting of amounts to such Plan Accounts shall be treated (i) as the allocation of any Corporation assets to, or a segregation of any Corporation assets in any such Plan Accounts, or (ii) as otherwise creating a right in any person or Participant to receive specific assets of the Corporation. (p) "PLAN YEAR" shall mean the calendar year. (q) "TERMINATION UNDER LIMITED CIRCUMSTANCES" shall mean the termination (whether by the Participant or the Employer) of a Participant's employment from his or her Employer, and from any other Employer (i) under circumstances in which the Participant is entitled to receive severance benefits or salary continuation benefits under the KeyCorp Separation Pay Plan, (ii) under circumstances in which the Participant is entitled to severance benefits or salary continuation or similar benefits under a change of control agreement or employment agreement within two years after a change of control (as defined by such agreement) has occurred, or (iii) as otherwise expressly approved by the Corporation or the Compensation and Organization Committee, in their sole discretion. (r) "VESTING SERVICE" for purposes of Section 5.1 of the Plan, shall be calculated by measuring the period of service commencing on the Employee's commencement date of active employment with an Employer and ending on the Employee's termination date and shall be computed based on each full calendar month that the Employee is employed by an Employer. (s) "TERMINATION OF EMPLOYMENT" shall mean the voluntary or involuntary termination of the Participant's employment from his or her Employer and from any other Employer, but shall not include the Participant's Termination Under Limited Circumstances or termination as a result of Disability or death. 2.2 PRONOUNS. The masculine pronoun wherever used herein includes the feminine in any case so requiring, and the singular may include the plural. 4 ARTICLE III ELIGIBILITY AND PARTICIPATION 3.1 ELIGIBILITY AND PARTICIPATION. An Employee shall be required to participate in the Plan, and shall automatically become a Plan Participant upon the Employer's grant of an employment-signing bonus to the Employee with such grant being conditioned on the requirement that all or a portion of such bonus be deferred to the Plan. 3.2 AUTOMATIC DEFERRAL REQUIREMENTS. An Employee meeting the eligibility and participation requirements of Section 3.1 hereof, shall in accordance with the negotiated terms of the Employee's employment with his or her Employer, defer such portion (as determined by the Employer) of the Employee's employment-signing bonus to the Plan. ARTICLE IV SIGNING BONUS DEFERRALS 4.1 CREDITING OF SIGNING BONUS DEFERRALS. All Signing Bonus Deferrals shall be credited on a bookkeeping basis to a Plan Account established in the Participant's name as of the payroll date on which the Participant's Signing Bonus would have been payable to the Participant but for the deferral provisions of the Plan and the Employer's deferral requirements mandated in conjunction with the Employee's receipt of his or her signing bonus. 4.2 INVESTMENT OF SIGNING BONUS DEFERRALS. Signing Bonus Deferrals shall be automatically invested on a bookkeeping basis in the Plan's Common Stock Account. 4.3 DETERMINATION OF AMOUNT. The Plan Administrator shall verify the amount of each Participant's Signing Bonus Deferral, with all dividends, and earnings, if any, to be credited to each Participant's Plan Account in accordance with the provisions of the Plan. The reasonable and equitable decision of the Plan Administrator as to the value of each Plan Account shall be conclusive and binding upon all Participants and the Beneficiary of each deceased Participant having any interest, direct or indirect in the Participant's Plan Account. As soon as reasonably practicable after the close of the Plan Year, the Corporation shall send to each Participant an itemized accounting statement that shall reflect the Participant's Plan Account balance. 4.4 CORPORATE ASSETS. All Signing Bonus Deferrals, dividends, earnings and any other gains and losses credited to each Participant's Plan Account on a bookkeeping basis, remain the assets and property of the Corporation, which shall be subject to distribution to the Participant only in accordance with Articles VI, IX and X of the Plan. Distributions made under the Plan shall be in the form of Common Shares or as a plan-to-plan transfer to the KeyCorp Deferred Compensation Plan as provided for in Article VI hereof. Participants and Beneficiaries shall have the status of general unsecured creditors of the Corporation. Nothing contained in the Plan shall create, or be construed as creating a trust of any kind or any other fiduciary relationship between the Participant, the Corporation, or any other person. It is the intention of the Corporation and it is the understanding of the Participant that the Plan be unfunded for tax purposes and for purposes of ERISA. 5 4.5 NO PRESENT INTEREST. Subject to any federal statute to the contrary, no right or benefit under the Plan and no right or interest in each Participant's Plan Account shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge any right or benefit under the Plan, or Participant's Plan Account shall be void. No right, interest, or benefit under the Plan or Participant's Plan Account shall be liable for or subject to the debts, contracts, liabilities, or torts of the Participant or Beneficiary. If the Participant or Beneficiary becomes bankrupt or attempts to alienate, sell, assign, pledge, encumber, or charge any right under the Plan or Participant's Plan Account, such attempt shall be void and unenforceable. ARTICLE V VESTING 5.1 VESTING IN PARTICIPANT SIGNING BONUS DEFERRALS. The calculation of a Participant's vested interest in his or her Signing Bonus Deferral credited on a bookkeeping basis to the Participant's Plan Account shall be measured from the Participant's commencement date of active employment with an Employer. A Participant shall become vested in his or her Signing Bonus Deferral with all earnings, gains, and losses thereon after three full years of Vesting Service. Alternatively, at the Employer's election, with such election having been clearly communicated to the Employee prior to the Employee's date of hire with the Employer, a Participant shall become vested in his or her Signing Bonus Deferral under the following three-year graded vesting schedule (or such other three year vesting schedule as is expressly agreed to in writing by the Employee and Employer prior to the Employee's date of hire): (a) From the date the Participant's Signing Bonus Deferral is credited to the Participant's Plan Account ("Deferral Date") until one full calendar year from the deferral date.............................................................0%. (b) One full calendar year from the Deferral Date of the Participant's Signing Bonus Deferral to the Plan but less than two full calendar years from such Deferral Date............................................................33%. (c) Two full calendar years from the Deferral Date of the Participant's Signing Bonus Deferral to the Plan but less than three full calendar years from such Deferral Date............................................................66%. (d) Three full calendar years from the Deferral Date of the Participant's Signing Bonus Deferral to the Plan...........................................................100%. Notwithstanding the foregoing provisions of this Section 5.1, however, a Participant shall become fully vested in his or her Signing Bonus Deferral as credited on a bookkeeping basis to the Participant's Plan Account upon the Participant's Termination Under Limited Circumstances, Disability or death. 5.2 FORFEITURE OF THE PARTICIPANT'S SIGNING BONUS DEFERRAL. Notwithstanding any provision of the Plan to the contrary, upon the Participant's Termination of Employment, the Participant shall automatically forfeit his or her Signing Bonus Deferral that has been credited on a bookkeeping basis to the Participant's Plan Account with all earnings and gains thereon that have not vested in accordance with the vesting provisions of Section 5.1 of the Plan as of the Participant's last day of employment. 6 ARTICLE VI DISTRIBUTION OF PLAN BENEFITS 6.1 DISTRIBUTION OF DEFERRAL. A Participant's vested Signing Bonus Deferral with all earnings and gains thereon, shall be distributed to the Participant as of the Determination Date concurrently with or immediately following the Participant's vesting in his or her Plan benefit in accordance with the distribution directions provided by the Participant in his or her Distribution Agreement, as follows: (a) as a single lump sum distribution of Common Shares, or (b) as a plan-to-plan transfer of the Participant's vested bookkeeping Plan Account balance to the KeyCorp Deferred Compensation Plan's Common Stock Account. Subject to the withholding provisions of Section 6.4 hereof, lump sum distributions from the Plan shall be made in Common Shares based on the bookkeeping number of whole and fractional Common Shares attributable to the Participant's vested Signing Bonus Deferral maintained in the Plan's Common Stock Account as of the Determination Date concurrently with or immediately preceding the date of such distribution. Participants' Plan Account balances transferred to the KeyCorp Deferred Compensation Plan's Common Stock Account will not be subject to investment diversification and/or reallocation under the KeyCorp Deferred Compensation Plan. Notwithstanding the foregoing provisions of this Section 6.1, however, in the event a Participant who is subject to the Corporation Stock Ownership Guidelines fails to meet his or her Stock Ownership Guidelines requirements at the time of his or her Plan distribution and the Participant has elected to receive a lump sum distribution from the Plan, the Corporation in its discretion may (1) withhold such portion of the Participant's lump sum distribution of Common Shares until the Participant has otherwise met his or her obligations under the Corporation Stock Ownership Guidelines, or (2) issue to the Participant restricted Common Shares whose transferability will be restricted until the Participant otherwise meets his or her obligations under the Stock Ownership Guidelines. 6.2 DISTRIBUTIONS FOLLOWING TERMINATION UNDER LIMITED CIRCUMSTANCES, DISABILITY OR DEATH. Upon the Participant's Termination Under Limited Circumstances, termination of the Participant's employment due to Disability or termination of the Participant's employment due to death, the Participant's Signing Bonus Deferral, as credited to the Participant's Plan Account with all earnings, gains, and losses thereon shall become immediately vested and shall be distributed to the Participant or the Participant's Beneficiary in a single lump sum distribution of Common Shares, net of withholding. 6.3 FORFEITURE FOLLOWING TERMINATION OF EMPLOYMENT. Upon the Participant's Termination of Employment, the Participant's non-vested Signing Bonus Deferral, as credited to the Participant's Plan Account with all earnings, gains, and losses thereon shall be forfeited by the Participant as of his or her last day of employment. 6.4 WITHHOLDING. The withholding of taxes with respect to the Participant's Signing Bonus Deferral with all earnings and gains thereon shall be made at such time as it becomes required by any state, federal or local law; such taxes shall be withheld from the Participant's Signing Bonus Deferral in 7 accordance with applicable law and shall be paid by reducing the number of Common Shares to be distributed to the Participant based on such Common Shares' market value as of the distribution date. 6.5 DISTRIBUTION LIMITATION. If the Corporation determines that a Signing Bonus Deferral with all earnings and gains thereon: 1. would not be deductible by the Corporation if paid in accordance with the distribution instructions specified by the Participant in his or her Distribution Agreement by reason of the disallowance rules of Section 162(m) of the Code, but 2. would be deductible by the Corporation if deferred and paid in a later Plan Year, the Corporation reserves the right to defer the distribution of all or any portion of such Participant's Signing Bonus Deferral with all earnings, gains or loses thereon until such time as the Corporation determines that the distribution of all or any portion of such Participant's Signing Bonus Deferral will be payable without the disallowance of the deduction prescribed by Code Section 162(m) ("Deferrals"). Such unpaid Deferral shall be transferred to the Deferred Compensation Plan and shall be held in the KeyCorp Deferred Compensation Plan's Common Stock Account and the provisions of the KeyCorp Deferred Compensation Plan thereafter shall become applicable with regard to such Deferral. Notwithstanding any other provision of this Section 6.5, however, a Participant's Signing Bonus Deferral transferred to the KeyCorp Deferred Compensation Plan together with all earnings, gains, and losses thereon, shall be distributed to the Participant no later than April 15 of the year following the employment termination date of the Participant, regardless of the deductibility of such distribution. 6.6 FACILITY OF PAYMENT. If it is found that any individual to whom an amount is payable hereunder is incapable of attending to his or her financial affairs because of any mental or physical condition, including the infirmities of advanced age, such amount (unless prior claim therefor shall have been made by a duly qualified guardian or other legal representative) may, in the discretion of the Corporation, be paid to another person for the use or benefit of the individual found incapable of attending to his or her financial affairs or in satisfaction of legal obligations incurred by or on behalf of such individual. Any such payment shall be charged to the Participant's Plan Account from which any such payment would otherwise have been paid to the individual found incapable of attending to his or her financial affairs, and shall be a complete discharge of any liability therefor under the Plan. ARTICLE VII BENEFICIARY DESIGNATION 7.1 BENEFICIARY DESIGNATION. Subject to Section 7.3 hereof, each Participant shall have the right, at any time, to designate one or more persons or an entity as Beneficiary (both primary as well as secondary) to whom benefits under this Plan shall be paid in the event of Participant's death prior to complete distribution of the Participant's vested Plan Account. Each Beneficiary designation shall be in a written form prescribed by the Corporation and shall be effective only when filed with the Corporation during the Participant's lifetime. 7.2 CHANGING BENEFICIARY. Any Beneficiary designation may be changed by the Participant without the consent of the previously named Beneficiary by the Participant's filing of a new designation 8 with the Corporation. The filing of a new designation shall cancel all designations previously filed by the Participant. 7.3 NO BENEFICIARY DESIGNATION. If a Participant fails to designate a Beneficiary in the manner provided above, if the designation is void, or if the Beneficiary (including all contingent Beneficiaries) designated by a deceased Participant dies before the Participant, the Participant's Beneficiary shall be the Participant's estate. ARTICLE VIII ADMINISTRATION 8.1 ADMINISTRATION. The Corporation, as the "Plan Administrator" shall be responsible for the general administration of the Plan, for carrying out the provisions hereof, and for making payments hereunder. The Corporation shall have the sole and absolute discretionary authority and power to carry out the provisions of the Plan, including, but not limited to, the authority and power (a) to determine all questions relating to the eligibility for and the amount of any benefit to be paid under the Plan, (b) to determine all questions pertaining to claims for benefits and procedures for claim review, (c) to resolve all other questions arising under the Plan, including any questions of construction and/or interpretation, and (d) to take such further action as the Corporation shall deem necessary or advisable in the administration of the Plan. All findings, decisions, and determinations of any kind made by the Plan Administrator shall not be disturbed unless the Plan Administrator has acted in an arbitrary and capricious manner. Subject to the requirements of law, the Plan Administrator shall be the sole judge of the standard of proof required in any claim for benefits and in any determination of eligibility for a benefit. All decisions of the Plan Administrator shall be final and binding on all parties. The Corporation may employ such attorneys, investment counsel, agents, and accountants as it may deem necessary or advisable to assist it in carrying out its duties hereunder. The actions taken and the decisions made by the Corporation hereunder shall be final and binding upon all interested parties subject, however, to the provisions of Section 8.2. The Plan Year, for purposes of Plan administration, shall be the calendar year. 8.2 CLAIMS REVIEW PROCEDURE. Whenever the Plan Administrator decides for whatever reason to deny, whether in whole or in part, a claim for benefits under this Plan filed by any person (herein referred to as the "Claimant"), the Plan Administrator shall transmit a written notice of its decision to the Claimant, which notice shall be written in a manner calculated to be understood by the Claimant and shall contain a statement of the specific reasons for the denial of the claim and a statement advising the Claimant that, within 60 days of the date on which he or she receives such notice, he or she may obtain review of the decision of the Plan Administrator in accordance with the procedures hereinafter set forth. Within such 60-day period, the Claimant or his or her authorized representative may request that the claim denial be reviewed by filing with the Plan Administrator a written request therefor, which request shall contain the following information: (a) the date on which the request was filed with the Plan Administrator; provided, however, that the date on which the request for review was in fact filed with the Plan Administrator shall control in the event that the date of the actual filing is later than the date stated by the Claimant pursuant to this paragraph (a); 9 (b) the specific portions of the denial of his or her claim which the Claimant requests the Plan Administrator to review; (c) a statement by the Claimant setting forth the basis upon which he or she believes the Plan Administrator should reverse its previous denial of the claim and accept the claim as made; and (d) any written material which the Claimant desires the Plan Administrator to examine in its consideration of his or her position as stated pursuant to paragraph (b) above. In accordance with this Section 8.2, if the Claimant requests a review of the claim decision, such review shall be made by the Plan Administrator, who shall, within sixty (60) days after receipt of the request form, review and render a written decision on the claim containing the specific reasons for the decision including reference to Plan provisions upon which the decision is based. All findings, decisions, and determinations of any kind made by the Plan Administrator shall not be modified unless the Plan Administrator has acted in an arbitrary and capricious manner. Subject to the requirements of law, the Plan Administrator shall be the sole judge of the standard of proof required in any claim for benefits, and any determination of eligibility for a benefit. All decisions of the Plan Administrator shall be binding on the claimant and upon all other persons or entities. If the Participant or Beneficiary shall not file written notice with the Plan Administrator at the times set forth above, such individual shall have waived all benefits under the Plan other than as already provided, if any, under the Plan. ARTICLE IX AMENDMENT AND TERMINATION OF PLAN 9.1 RESERVATION OF RIGHTS. The Corporation reserves the right to terminate the Plan at any time by action of the Board of Directors of the Corporation, or any duly authorized committee thereof, and to modify or amend the Plan, in whole or in part, at any time and for any reason, subject to the following: (a) PRESERVATION OF ACCOUNT BALANCE. No termination, amendment, or modification of the Plan shall reduce (i) the amount of a Participant's Signing Bonus Deferral, and (ii) all earnings and gains on such Participant's Signing Bonus Deferral that have accrued up to the effective date of the termination, amendment, or modification. (b) CHANGES IN EARNINGS RATE. No amendment or modification of the Plan shall reduce the rate of earnings to be credited on a Participant's Signing Bonus Deferral with all earnings and gains accrued thereon under the Common Stock Account until the close of the applicable Plan Year in which such amendment or modification is made. 9.2 EFFECT OF PLAN TERMINATION. If the Corporation terminates the Plan, either in whole or in part, the following will apply: (a) PARTIAL TERMINATION. The Corporation may partially terminate the Plan by instructing the Plan Administrator to not accept any additional Signing Bonus Deferrals. If such a partial termination occurs, the Plan shall continue to operate and to be effective with 10 regard to those Participant's Signing Bonus Deferrals deferred prior to the effective date of such partial termination. (b) COMPLETE TERMINATION. The Corporation may completely terminate the Plan by instructing the Plan Administrator to not accept any additional Participant Deferrals and to fully vest all Participants' Plan Account balances. If such a complete termination occurs, the Plan shall cease to operate and the Plan Administrator shall distribute each Participant's Plan Account balance. Participants' distributions shall be made in a lump sum distribution of Common Shares, net of withholding, based on the value of each Participant's Plan Account balance as of the Participant's Plan distribution date. Notwithstanding the foregoing provisions of this Section 9.2, however, in the event a Participant who is subject to the Corporation Stock Ownership Guidelines fails to meet his or her Stock Ownership Guidelines requirements at the time of his or her Plan distribution and the Participant has elected to receive a lump sum distribution from the Plan, the Corporation in its discretion may (1) withhold such portion of the Participant's lump sum distribution of Common Shares until the Participant has otherwise met his or her obligations under the Corporation Stock Ownership Guidelines, or (2) issue to the Participant restricted Common Shares whose transferability will be restricted until the Participant otherwise meets his or her obligations under the Stock Ownership Guidelines. ARTICLE X CHANGE OF CONTROL 10.1 CHANGE OF CONTROL. Notwithstanding any other provision of the Plan to the contrary, in the event of a Change of Control as defined in accordance with Section 2.1(c) of the Plan, no amendment or modification of the Plan may be made at any time on or after such Change of Control (1) to reduce or modify a Participant's Pre-Change of Control Account Balance, or (2) to reduce or modify the Common Stock Accounts' method of calculating earnings, gains, and/or losses on the Participant's Pre-Change of Control Account Balance. For purposes of this Section 10.1, the term "Pre-Change of Control Account Balance" shall mean, with regard to any Plan Participant, the aggregate undistributed amount of the Participant's Signing Bonus Deferral with all earnings, gains, and losses thereon which are credited to the Participant's Plan Account through the close of the calendar year in which such Change of Control occurs. 10.2 COMMON STOCK CONVERSION. In the event of a transaction or occurrence in which the Common Shares of the Corporation are converted into or exchanged for securities, cash and/or other property as a result of any capital reorganization or reclassification of the capital stock of the Corporation, or consolidation or merger of the Corporation with or into another corporation or entity, or the sale of all or substantially all of its assets to another corporation or entity, the Corporation shall cause the Common Stock Account to reflect on a bookkeeping basis the securities, cash and other property that would have been received in such reorganization, reclassification, consolidation, merger or sale in an equivalent amount of Common Shares equal to the balance in the Common Stock Account and, from and after such reorganization, reclassification, consolidation, merger or sale, the Common Stock Account shall reflect on a bookkeeping basis all dividends, interest, earnings and losses attributable to such securities, cash, and other property. 11 10.3 AMENDMENT IN THE EVENT OF A CHANGE OF CONTROL. On and after a Change of Control, the provisions of Article II, Article IV, Article V, Article VI, Article VII, Article VIII, Article IX, and this Article X, may not be amended or modified as such Sections and Articles apply with regard to the Participants' Pre-Change of Control Account Balances. ARTICLE XI MISCELLANEOUS PROVISIONS 11.1 UNFUNDED PLAN. This Plan is an unfunded plan maintained primarily to provide deferred compensation benefits for a select group of "management or highly-compensated employees." 11.2 NO COMMITMENT AS TO EMPLOYMENT. Nothing herein contained shall be construed as a commitment or agreement upon the part of any Employee hereunder to continue his or her employment with an Employer, and nothing herein contained shall be construed as a commitment on the part of any Employer to continue the employment, rate of compensation, or terms and conditions of employment of any Employee hereunder for any period. All Participants shall remain subject to discharge to the same extent as if the Plan had never been put into effect. 11.3 BENEFITS. Nothing in the Plan shall be construed to confer any right or claim upon any person, firm, or corporation other than the Participants, former Participants, and Beneficiaries. 11.4 ABSENCE OF LIABILITY. No member of the Board of Directors of the Corporation or a subsidiary or committee authorized by the Board of Directors, or any officer of the Corporation or a subsidiary or officer of a subsidiary shall be liable for any act or action hereunder, whether of commission or omission, taken by any other member, or by any officer, agent, or Employee, except in circumstances involving bad faith or willful misconduct, for anything done or omitted to be done. 11.5 EXPENSES. The expenses of administration of the Plan shall be paid by the Corporation. 11.6 PRECEDENT. Except as otherwise specifically agreed to by the Corporation in writing, no action taken in accordance with the Plan by the Corporation shall be construed or relied upon as a precedent for similar action under similar circumstances. 11.7 WITHHOLDING. The Corporation shall withhold any tax which the Corporation in its discretion deems necessary to be withheld from any payment to any Participant, former Participant, or Beneficiary hereunder, by reason of any present or future law. 11.8 VALIDITY OF PLAN. The validity of the Plan shall be determined and the Plan shall be construed and interpreted in accordance with the laws of the State of Ohio. The invalidity or illegality of any provision of the Plan shall not affect the validity or legality of any other part thereof. 11.9 PARTIES BOUND. The Plan shall be binding upon the Employers, Participants, former Participants, and Beneficiaries hereunder, and, as the case may be, the heirs, executors, administrators, successors, and assigns of each of them. 11.10 HEADINGS. All headings used in the Plan are for convenience of reference only and are not part of the substance of the Plan. 12 11.11 DUTY TO FURNISH INFORMATION. The Corporation shall furnish to each Participant, former Participant, or Beneficiary any documents, reports, returns, statements, or other information that it reasonably deems necessary to perform its duties imposed hereunder or otherwise imposed by law. 11.12 TRUST FUND. At its discretion, the Corporation may establish one or more trusts, with such trustees as the Corporation may approve, for the purpose of providing for the payment of benefits owed under the Plan. Although such a trust may be irrevocable, in the event of insolvency or bankruptcy of the Corporation, such assets will be subject to the claims of the Corporation's general creditors. To the extent any benefits provided under the Plan are paid from any such trust, the Employer shall have no further obligation to pay them. If not paid from the trust, such benefits shall remain the obligation of the Employer. 11.13 VALIDITY. In case any provision of this Plan shall be held illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal and invalid provision had never been inserted herein. 11.14 NOTICE. Any notice required or permitted under the Plan shall be deemed sufficiently provided if such notice is in writing and hand delivered or sent by registered or certified mail. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark or on the receipt for registration or certification. Mailed notice to the Corporation shall be directed to the Corporation's address, attention: KeyCorp Compensation and Benefits Department. Mailed notice to a Participant or Beneficiary shall be directed to the individual's last known address in the Employer's records. 11.15 SUCCESSORS. The provisions of this Plan shall bind and inure to the benefit of each Employer and its successors and assigns. The term successors as used herein shall include any corporate or other business entity, which shall, whether by merger, consolidation, purchase or otherwise, acquire all or substantially all of the business and assets of an Employer. KEYCORP By: /s/ Thomas E. Helfrich ------------------------------------ Title: Executive Vice President --------------------------------- EX-10.33 8 l97974aexv10w33.txt EX-10.33 FIRST AMENDMENT TO SIGNING BONUS PLAN EXHIBIT 10.33 FIRST AMENDMENT TO THE KEYCORP SIGNING BONUS PLAN WHEREAS, KeyCorp has established the KeyCorp Signing Bonus Plan ("Plan") for certain employees of KeyCorp, and WHEREAS, the Board of Directors of KeyCorp has authorized its Compensation and Organization Committee to permit amendments to the Plan, and WHEREAS, the Compensation and Organization Committee of the Board of Directors of KeyCorp has determined it desirable to amend the Plan and has accordingly authorized the execution of the First Amendment, NOW, THEREFORE, pursuant to such action of the Compensation and Organization Committee, the Plan is hereby amended as follows: 1. Section 6.1 of the Plan is amended to delete it in its entirety and to substitute therefore the following: "6.1 DISTRIBUTION OF DEFERRAL. A Participant's vested Signing Bonus Deferral with all earnings and gains thereon, shall be distributed to the Participant as of the Determination Date concurrently with or immediately following the Participant's vesting in his or her Plan benefit in accordance with the distribution directions provided by the Participant in his or her Distribution Agreement, as follows: (a) as a single lump sum distribution of Common Shares, or (b) if the participant is otherwise eligible to participate in the KeyCorp Deferred Compensation Plan based on the Participant's job grade (or job grade equivalent) at the time of his or her Signing Bonus Deferral, then such Participant may make a plan-to-plan transfer of the Participant's vested bookkeeping Plan Account balance to the KeyCorp Deferred Compensation Plan's Common Stock Account. Subject to the withholding provisions of Section 6.4 hereof, distributions from the Plan shall be made in Common Shares based on the bookkeeping number of whole and fractional Common Shares attributable to the Participant's vested Signing Bonus Deferral maintained in the Plan's Common Stock Account as of the Determination Date concurrently with or immediately preceeding the date of such distribution. Participants' Plan Account balances transferred to the KeyCorp Deferred Compensation Plan's Common Stock Account will not be subject to investment diversification and/or reallocation under the KeyCorp Deferred Compensation Plan. Notwithstanding the foregoing provisions of this Section 6.1, however, in the event a Participant who is subject to the Corporation Stock Ownership Guidelines fails to meet his or her Stock Ownership Guidelines requirements at the time of his or her Plan distribution, and the Participant has elected to receive a lump sum distribution from the Plan, the Corporation in its discretion may (1) withhold such portion of the Participant's lump sum distribution of Common Shares until the Participant has otherwise met his or her obligations under the Corporation Stock Ownership Guidelines, or (2) issue to the Participant restricted Common Shares whose transferability will be restricted until the Participant otherwise meets his or her obligations under the Stock Ownership Guidelines." 2. Except as specifically amended herein, the Plan shall remain in full force and effect. IN WITNESS WHEREOF, KeyCorp has caused this First Amendment to the Plan to be executed by its duly authorized officer to be effective as of the first day of January, 2001. KEYCORP By: /s/ Steven N. Bulloch ---------------------------------- Title: Assistant Secretary ------------------------------ EX-10.34 9 l97974aexv10w34.txt EX-10.34 KEY ASSET MGMNT LONG TERM INCENTIVE PLAN EXHIBIT 10.34 KEYCORP 1998 INCENTIVE COMPENSATION KEY ASSET MANAGEMENT LONG TERM INCENTIVE PLAN ("KAM PLAN") - ------------------------------------------------------------------------------ SECTION 1: PLAN SUMMARY OBJECTIVE: To recognize and reward existing key contributors and other selected new hires in the KAM organization for the profitable growth and success of our asset management business over a three year performance period. EFFECTIVE DATE: This plan is effective January 1, 1998 through December 31, 2000, unless otherwise revised or revoked. ELIGIBLE POSITIONS: - --------------------------------------------------------------------------------------- Senior Managing Directors and selected Eligible Positions: Managing Directors. (See Attachment A) - --------------------------------------------------------------------------------------- Number of Employees Eligible: 17 (As of 1998) - ---------------------------------------------------------------------------------------
PLAN FUNDING AND AWARD ALLOCATION MEASURES: Plan funding is based on net operating income inclusive of long-term award costs. Participants will receive target awards for meeting target NOI goals. Awards in excess of target will be distributed to participants on a discretionary basis. The plan provides value to plan participants through two distinct components. The first component is a long-term cash award which provides participants with a chance to share in the growth created directly by the KAM group. This cash award represents two thirds of the total long-term incentive opportunity for plan participants. Phantom stock is the second component and is intended to represent one third of the total incentive opportunity for plan participants. Incentive calculations are detailed in Section 2. PLAN ADMINISTRATOR: The Plan administrator will prepare and present award recommendations to an independent Compensation Committee comprised of H. Meyer, Y. Heisler, P. Jamieson and L. Gilmer, who will review and approve the recommendation list for KAM long term awards and will have final authority to modify/approve such awards.
INDEX: Plan Summary............................................................ Section 1 Plan Funding and award allocation measures.............................. Section 2 Other Terms, Rules and Conditions....................................... Section 3 Definitions............................................................. Section 4 Example................................................................. Attachment C APPROVALS:
/s/ Yank Heisler 10/19/98 /s/ Henry L. Meyer II 10/19/98 - --------------------------------------- ----------------------------------------- Executive Sponsor Date Executive Sponsor Date Yank Heisler Henry Meyer /s/ W. Lawrence Gilmer 10/7/98 /s/ Patty Jamieson 10/5/98 - --------------------------------------- ----------------------------------------- Incentive Compensation Date Finance Date W. Lawrence Gilmer Patty Jamieson
1 SECTION 2: PLAN FUNDING AND AWARD ALLOCATION MEASURES. The KAM Plan is self-funded, meaning, the participants must first meet the net operating income targets and fund the cost of long-term incentive awards before any long-term awards are paid out. See Attachment B for the 1998-2000 plan cycle financials. CALCULATING METHODOLOGY At the beginning of the 3 year cycle, cumulative 3 year net operating income (NOI) growth targets will be set. Performance against these goals will be measured at the end of the cycle and target award will be paid for meeting the growth target. If the growth target has been achieved, participants will share in the excess growth according to the following schedule:
--------------------------------------------------------------------------- PERFORMANCE AGAINST GROWTH TARGET AMOUNT OF AWARD --------------------------------------------------------------------------- --------------------------------------------------------------------------- 100% Target award --------------------------------------------------------------------------- Target award, plus 10% of >100% and <105% excess NOI dollars - --------------------------------------------------------------------------- Target award, plus 20% of excess incremental >105% NOI dollars over 105% ---------------------------------------------------------------------------
Target awards for each participant will be set at the beginning of the cycle and will generally be based on market data for that position. There is no cap on the maximum award amount that can be paid under the plan. DISTRIBUTION OF POOL If the NOI growth target has been achieved, each participant shall receive their target cash award. Any excess pool resulting from performance above targeted NOI will be distributed on a discretionary basis. The award recommendations will be made by KAM senior management and will be presented to the Compensation Committee, as defined on Page 1. Dividends on the deferred shares will be accrued during the deferral period. Cash awards will be paid out as soon as possible after the end of the 3 year cycle. The phantom stock component of this long-term plan will be valued at the time of the award at a price consistent with the average of the high and low of KeyCorp stock as reported on the NYSE. Once awarded, these phantom stock units will vest in two increments, 50% after 1 year from the date of the award and 50% after 2 years from the date of the award. Distributions to participants will be in actual shares of KeyCorp stock. The Committee reserves the right to accelerate vesting of the phantom stock as they see fit. It is intended that the value of the phantom stock to KAM participants plus any long-term cash awards constitute the target total long-term opportunity relative to market. Any upside award above target will be delivered in the discretionary cash award. PARTICIPATION The Committee reserves the right to terminate a Participant's participation in the Plan during the 3 year cycle if the Participant's job responsibilities and/or performance no longer warrants such participation. In this event, the Participant will receive a prorated award at the end of the 3 years cycle, based on the full number of months of participation. 2 SECTION 3: OTHER TERMS, RULES AND CONDITIONS: 3.1 INTENT OF THE PLAN: The KAM Plan was developed to incent and reward eligible Plan Participants for meeting and exceeding the performance objectives of their respective employment positions with KeyCorp while increasing KeyCorp's revenues and business opportunities. ACCORDINGLY, THE EXPRESSED INTENT OF THE PLAN IS TO BENEFIT BOTH KEYCORP AND KAM PLAN PARTICIPANTS. 3.2 ENTITLEMENT OF PLAN BENEFITS: The Participant acknowledges the Participant maintains no present interest or entitlement to Plan benefits other than those determined by KeyCorp and the Compensation Committee to be payable under the terms of the Plan for which payment has been made. 3.3 CHANGE OF EVENTS: In the event of a material change of events such as a merger, a significant increase in allocated operating expense, or a major market change (up or down more than 20%), that the KAM group has no control over, the Committee reserves the right to increase or decrease the NOI targets as necessary to maintain the integrity of the Plan for the remainder of the three year cycle. Any changes to the NOI target would be based on overall KAM performance relative to the external market. 3.4 NEW HIRES, PROMOTED, REACTIVATED, TRANSFERRED-IN EMPLOYEES: Newly hired, promoted, reactivated and transferred-in employees will be eligible to participate in this Plan on an annual basis starting the first full year of employment. Participants would be eligible for a prorated share of any awards made under this plan. 3.5 RESPONSIBILITIES FOR CALCULATIONS AND PLAN PAYMENTS: Responsibilities for Plan administration will reside within KAM. KAM Senior Management will be responsible for calculating and submitting recommendations to the Compensation Committee. The KAM group will be responsible for submitting incentive payment requests. 3.6 PLAN ADMINISTRATION: The Compensation Committee, which shall be the "Administrator" of the Plan, shall be responsible for the general administration of the Plan, for carrying out the provisions hereof, and for making payments hereunder. The Compensation Committee shall have the sole and absolute discretionary authority and power to carry out the provisions of the Plan, including, but not limited to, the authority and power (a) to determine all questions relating to the eligibility for and the amount of any benefit to be paid under the Plan, (b) to determine all questions pertaining to claims for benefits under the Plan, (c) to resolve all other questions arising under the Plan, including any questions of construction and/or interpretations, and (d) to take such further action as the Compensation Committee shall deem necessary or advisable in the administration of the Plan. All finding, decisions and determinations of any kind made by the Plan Administrator shall not be disturbed. Subject to the requirements of law, the Plan Administrator shall be the sole judge of the standard of proof required in any claim for benefit and in any determination of eligibility for a benefit. All decisions of the Plan Administrator shall be final and binding on all parties. 3 SECTION 3: cont'd. OTHER TERMS, RULES AND CONDITIONS: 3.7 AMENDMENT AND TERMINATION: KeyCorp reserves the right to amend or terminate this Plan at any time, for any reason. 3.8 ASSIGNMENT OF INCENTIVE AWARDS: No benefits received under the Plan shall be subject to transfer, assignment, or encumbrance in any manner, either by the Participant or any other person. Any attempt by the Participant to assign his or her benefit thereunder shall result in Participant's forfeiture of such Plan benefits. 3.9. INTEREST IN PLAN AWARDS: With respect to payments of awards under the Plan, Participants shall have rights against KeyCorp only as general, unsecured creditors. 3.10 DEATH, DISABILITY, LEAVE OF ABSENCE, OUT-PLACEMENT, RETIREMENT, AND TRANSFERS: In the event of a Participant's death, disability, medical leave of absence, out-placement, retirement or transfer, the Plan Administrator and the Compensation Committee will determine what incentives, if any, are payable to the Participant under the terms of the Plan. 3.11 TERMINATION: Termination (voluntary or involuntary) of a Participant's employment from KeyCorp for any reason other than death, disability, medical leave of absence, outplacement or retirement during the performance cycle, will result in the forfeiture of any potential awards. 3.12 NO COMMITMENT AS TO EMPLOYMENT: Nothing herein contained shall be construed as a commitment or agreement upon the part of any Participant hereunder to continue his or her employment with KeyCorp, and nothing herein contained shall be construed as a commitment on the part of KeyCorp to continue the employment, rate of compensation or terms and conditions of employment of any Participant hereunder for any period. All Participants shall remain subject to discharge to the same extent as if the Plan had never been put into effect. 3.13 PRECEDENT: Except as otherwise specifically agreed to by KeyCorp in writing, no action taken in accordance with the Plan by KeyCorp shall be construed or relied upon as a precedent for similar action under similar circumstances. 4 SECTION 4: DEFINITIONS: For purposes of this incentive plan, the following words and phrases shall have the meaning indicated. COMPENSATION COMMITTEE: An independent committee comprised of representatives from Executive Management, Finance and Human Resources, who will review and approve the recommendation list for KAM long-term awards and will resolve any issues/disputes regarding such awards and/or modifications to the plan. PERFORMANCE PERIOD: The period during which his plan will be effective: January 1, 1998 through December 31, 2000, unless otherwise revised or revoked. NET OPERATING INCOME: Net operating income is pre-tax income including level 3 expenses (Key Services and management overhead charges). 5 EX-10.35 10 l97974aexv10w35.txt EX-10.35 COMMISSIONED DEFERRED COMPENSATION PLAN EXHIBIT 10.35 KEYCORP COMMISSIONED DEFERRED COMPENSATION PLAN (AMENDED AND RESTATED AS OF JANUARY 1, 2002) ARTICLE I The KeyCorp Commissioned Deferred Compensation Plan ("Plan") is hereby established effective January 1, 2001, and amended and restated as of January 1, 2002, to provide certain selected employees of KeyCorp with the opportunity to defer their immediate receipt of compensation to the Plan and thereby defer the receipt of their taxable income to a later date. The Plan, as structured, is accordingly intended to provide a current tax planning opportunity for such employees. It is the intention of KeyCorp, and it is the understanding of those Participants covered under the Plan, that the Plan constitutes a short-term deferred compensation plan which is unfunded for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). ARTICLE II DEFINITIONS 2.1 MEANING OF DEFINITIONS. For the purposes of this Plan, the following words and phrases shall have the meanings hereinafter set forth, unless a different meaning is clearly required by the context: (a) "BENEFICIARY" shall mean the person, persons or entity entitled under Article VII to receive any Plan benefits payable after a Participant's death. (b) "CHANGE OF CONTROL" shall be deemed to have occurred if under any rabbi trust arrangement maintained by the Corporation, the Corporation is required under the terms of such arrangement to fund such rabbi trust to secure the payment of any Participants' Plan benefits which become payable hereunder because a "Change of Control" as defined in such rabbi trust has occurred on and after January 1, 2001. (c) "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time, together with all regulations promulgated thereunder. Reference to a section of the Code shall include such section and any comparable section or sections of any future legislation that amends, supplements, or supersedes such section. (d) "COMMISSION" shall mean those commissions or incentive payout(s) awarded to the Employee that are tied to the Employee's direct performance in conjunction with a KeyCorp sales event(s) and are generally defined as a percent, share, or dollar amount of the direct sale or profit generated to KeyCorp as a result of such event. (e) "COMMON STOCK ACCOUNT" shall mean the investment account established under the Plan for bookkeeping purposes, in which a Participant may elect to have his or her Participant Deferrals credited. Participant Deferrals to the Common Stock Account shall be credited based on a bookkeeping allocation of KeyCorp Common Shares (both whole and fractional rounded to the nearest one-hundredth of a share) which shall be equal to -1- the amount of Participant Deferrals and Corporate Contributions invested by the Participant and by the Corporation in the Common Stock Account. The Common Stock Account shall also reflect on a bookkeeping basis all Dividends, gains, and losses attributable to such Common Shares. All Corporate Contributions and all Participant Deferrals credited to the Common Stock Account, shall be based on the ten-day average of the New York Stock Exchange's closing price for such Common Shares immediately preceding, up to, and including the day such Participant Deferrals and Corporate Contributions are credited to the Participants' Plan Account. (f) "CORPORATE CONTRIBUTIONS" shall mean the contribution amount which an Employer has agreed to contribute on a bookkeeping basis to the Participant's Plan Account in accordance with the provisions of Article V of the Plan. (g) "CORPORATION" shall mean KeyCorp, an Ohio corporation, its corporate successors, and any corporation or corporations into or with which it may be merged or consolidated. (h) "DEFERRAL PERIOD" shall mean each Plan Year, provided however, that a Participant's initial Deferral Period shall be from his or her first day of participation in the Plan through the last day of the applicable Plan Year. (i) "DETERMINATION DATE" shall mean the last business day of each calendar quarter. (j) "DISABILITY" shall mean (1) the physical or mental disability of a permanent nature which prevents a Participant from performing the duties that such Participant was employed to perform for his or her Employer when such disability commenced, (2) qualifies for disability benefits under the Federal Social Security Act within 30 months following the Participant's disability, and (3) qualifies the Participant for disability coverage under the KeyCorp Long Term Disability Plan. (k) "DISCHARGE FOR CAUSE" shall mean the termination (whether by the Participant or the Employer) of a 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 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 2.1(k), provided, however, that for a period of two years following a Change of Control, any determination by the Corporation that an Employee has been Discharged for Cause shall be set forth in writing with the factual basis for such Discharge for Cause clearly specified and documented by the Corporation. (l) "DIVIDENDS" shall mean those quarterly earnings approved by the KeyCorp Board of Directors and awarded by the Corporation to all shareholders of record as of each applicable ex-dividend date which shall be payable in such form and at such time as the Corporation shall determine. -2- (m) "EARLY RETIREMENT" shall mean the Participant's retirement from his or her employment with an Employer on or after the Participant's attainment of age 55 and completion of a minimum of five years of Vesting Service, but prior to the Participant's Normal Retirement Date. (n) "EMPLOYEE" shall mean a common law employee who is employed by an Employer. (o) "EMPLOYER" shall mean the Corporation and any of its subsidiaries, unless specifically excluded as an Employer for Plan purposes by written action by an Officer of the Corporation. An Employer's participation in the Plan shall be subject to all conditions and requirements made by the Corporation, and each Employer shall be deemed to have appointed the Plan Administrator as its exclusive agent under the Plan as long as it continues as an Employer. (p) "HARMFUL ACTIVITY" shall have occurred if the Participant shall do any one or more of the following: (i) Use, publish, sell, trade or otherwise disclose Non-Public Information of KeyCorp unless such prohibited activity was inadvertent, done in good faith and did not cause significant harm to KeyCorp. (ii) After notice from KeyCorp, fail to return to KeyCorp any document, data, or thing in his or her possession or to which the Participant has access that may involve Non-Public Information of KeyCorp. (iii) After notice from KeyCorp, fail to assign to KeyCorp all right, title, and interest in and to any confidential or non-confidential Intellectual Property which the Participant created, in whole or in part, during employment with KeyCorp, including, without limitation, copyrights, trademarks, service marks, and patents in or to (or associated with) such Intellectual Property. (iv) After notice from KeyCorp, fail to agree to do any acts and sign any document reasonably requested by KeyCorp to assign and convey all right, title, and interest in and to any confidential or non-confidential Intellectual Property which the Participant created, in whole or in part, during employment with KeyCorp, including, without limitation, the signing of patent applications and assignments thereof. (v) Upon the Participant's own behalf or upon behalf of any other person or entity that competes or plans to compete with KeyCorp, solicit or entice for employment or hire any KeyCorp employee. (vi) Upon the Participant's own behalf or upon behalf of any other person or entity that competes or plans to compete with KeyCorp, call upon, solicit, or do business with (other than business which does not compete with any business conducted by KeyCorp) any KeyCorp customer the Participant called upon, solicited, interacted with, or became acquainted with, or learned of through access to information (whether or not such information is or was non-public) while the Participant was employed at KeyCorp unless such prohibited activity was inadvertent, done in -3- good faith, and did not involve a customer whom the Participant should have reasonably known was a customer of KeyCorp. (vii) Upon the Participant's own behalf or upon behalf of any other person or entity that competes or plans to compete with KeyCorp, after notice from KeyCorp, continue to engage in any business activity in competition with KeyCorp in the same or a closely related activity that the Participant was engaged in for KeyCorp during the one year period prior to the termination of the Participant's employment. For purposes of this Section 2.1(p) the term: "INTELLECTUAL PROPERTY" shall mean any invention, idea, product, method of doing business, market or business plan, process, program, software, formula, method, work of authorship, or other information, or thing relating to KeyCorp or any of its businesses. "NON-PUBLIC INFORMATION" shall mean, but is not limited to, trade secrets, confidential processes, programs, software, formulas, methods, business information or plans, financial information, and listings of names (e.g., employees, customers, and suppliers) that are developed, owned, utilized, or maintained by an employer such as KeyCorp, and that of its customers or suppliers, and that are not generally known by the public. "KEYCORP" shall include KeyCorp, its subsidiaries, and its affiliates. (q) "INVOLUNTARY TERMINATION" shall mean the termination (by the Employer) of a Participant's employment from his or her Employer and from any other Employer, other than a Discharge for Cause or a Termination Under Limited Circumstances. (r) "NORMAL RETIREMENT" shall mean the Participant's retirement under the KeyCorp Cash Balance Pension Plan on or after the Participant's Normal Retirement Date. (s) "PARTICIPANT" shall mean an Employee who meets the eligibility requirements set forth in Section 3.1(a) and becomes a Plan Participant pursuant to Section 3.1(b) or Section 3.1(c) of the Plan. (t) "PARTICIPANT DEFERRALS" shall mean the percentage or whole dollar amount of the Participant's Commissions that are earned by the Participant during the applicable Plan Year which the Participant has elected in accordance with his or her Participation Agreement to defer to the Plan. (u) "PARTICIPATION AGREEMENT" shall mean the executed agreement submitted by the Participant to the Corporation prior to the beginning of each applicable Deferral Period, which contains, in pertinent part, the Participant's deferral commitment for such Deferral Period, and the distribution option selected by the Participant for the payment of such Participant Deferrals, Dividends, and Corporate Contributions upon the Participants full vesting in such Dividends and Corporate Contributions. -4- (v) "PLAN" shall mean the KeyCorp Commissioned Deferred Compensation Plan with all amendments hereafter made. (w) "PLAN ACCOUNT" shall mean the bookkeeping account established by the Corporation for each Plan Participant, which shall reflect all Corporate Contributions, Participant Deferrals, and Dividends invested for bookkeeping purposes in the Plan's Common Stock Account with all gains and losses thereon. Plan Accounts shall not constitute separate Plan funds or separate Plan assets. Neither the maintenance of, nor the crediting of amounts to such Plan Accounts shall be treated (i) as the allocation of any Corporation assets to, or a segregation of any Corporation assets in any such Plan Accounts, or (ii) as otherwise creating a right in any person or Participant to receive specific assets of the Corporation. All benefits under the Plan shall be paid from the general assets of the Corporation. (x) "PLAN YEAR" shall mean the calendar year. (y) "RETIREMENT" shall mean the termination of a Participant's employment any time after the Participant's attainment of age 55 and completion of 5 years of Vesting Service under the KeyCorp Cash Balance Pension Plan, but shall not include the Participant's (i) Discharge for Cause, (ii) Involuntary Termination, (iii) Termination under Limited Circumstances, (iv) Disability or Death. (z) "TERMINATION" shall mean the voluntary or involuntary and permanent termination of a Participant's employment from his or her Employer and any other Employer, whether by resignation or otherwise, but shall not include the Participant's Retirement. (aa) "TERMINATION UNDER LIMITED CIRCUMSTANCES" shall mean a Participant's termination (whether by the Participant or the Employer) of the Participant's employment from his or her Employer and from any other Employer (i) within two years after a Change of Control under circumstances in which the Participant is entitled to severance benefits or salary continuation or similar benefits under a Change of Control agreement, employment agreement, or severance or separation pay plan, (ii) under circumstances in which the Participant is entitled to receive severance benefits or salary continuation under the KeyCorp Separation Pay Plan, (iii) due to Disability or death, or (iv) as otherwise expressly approved by the Compensation and Organization Committee, in its sole discretion. (bb) "VOLUNTARY TERMINATION" shall mean a voluntary termination of the 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, Involuntary Termination, Retirement, Termination Under Limited Circumstances, or termination as a result of Disability or death. 2.2 ADDITIONAL REFERENCE. All other words and phrases used herein shall have the meaning given them in the KeyCorp Cash Balance Pension Plan, unless a different meaning is clearly required by the context. 2.3 PRONOUNS. The masculine pronoun wherever used herein includes the feminine in any case so requiring, and the singular may include the plural. -5- ARTICLE III ELIGIBILITY AND PARTICIPATION 3.1 ELIGIBILITY AND PARTICIPATION. (a) ELIGIBILITY. An Employee shall be eligible to participate in the Plan if (1) the Employee earns Commissions during any Plan year in excess of $100,000, and (2) the Corporation selects such Employee to participate in the Plan. (b) PARTICIPATION. An Employee meeting the eligibility criteria of Section 3.1(a) may elect to participate in the Plan with respect to any Deferral Period by submitting a Participation Agreement to the Corporation prior to the beginning of the applicable Deferral Period or such other deadline as established by the Corporation. (c) MID-YEAR PARTICIPATION. When an Employee first becomes eligible to participate in the Plan during a Deferral Period, the Participant shall be required to submit a Participation Agreement to the Corporation within thirty (30) days after the Corporation notifies the Employee of his or her Plan eligibility. Such Participation Agreement will be effective when received by the Corporation. 3.2 DEFERRAL LIMITATIONS. A Participant may defer to the Plan no more than 50% of the Participant's earned Commissions in excess of $100,000 (in 5% increments) that are payable to the Participant during the applicable Deferral Period. 3.3 COMMITMENT LIMITED BY TERMINATION, RETIREMENT, DISABILITY OR DEATH. As of the Participant's Termination date, Retirement date, date of Disability or date of death, all Participant Deferrals under the Plan shall cease. 3.4 MODIFICATION OF DEFERRAL COMMITMENT. A Participant's deferral commitment as evidenced by his or her Participation Agreement for the applicable Deferral Period shall be irrevocable. 3.5 CHANGE IN EMPLOYMENT STATUS. If the Corporation determines that a Participant's performance is no longer at the level that deserves to be rewarded through participation in the Plan, but does not terminate the Participant's employment, the Participant's Participant Deferrals under the Plan shall continue until the end of the applicable Deferral Period. Thereafter, the Corporation shall not permit the Participant to make any further deferrals to the Plan. ARTICLE IV PARTICIPANT DEFERRALS 4.1 PLAN ACCOUNT. All Participant Deferrals and Corporate Contributions shall be credited on a bookkeeping basis to a Plan Account established in the Participant's name. Separate sub-accounts shall be established to reflect all Dividends attributable to such Participant Deferrals and Corporate Contributions. 4.2 INVESTMENT OF PARTICIPANT DEFERRALS. All Participant Deferrals shall be invested for bookkeeping purposes in the Plan's Common Stock Account. -6- 4.3 CREDITING OF PARTICIPANT DEFERRALS; WITHHOLDING. Participant Deferrals shall be credited to the Participant's Plan Account as of the date the Participant's Commission would have been paid to the Participant "but for" the Participant's election to defer such Commission to the Plan. The withholding of taxes with respect to all Participant Deferrals as required by state, federal or local law shall be withheld from the Participant's compensation to the maximum extent possible; thereafter, any taxes remaining due shall be paid by reducing the amount of Participant Deferrals to be credited to the Participant's Plan Account. ARTICLE V CORPORATE CONTRIBUTIONS 5.1 CREDITING OF CORPORATION CONTRIBUTIONS. Corporate Contributions in an amount equal to 15% of the Participant's Participant Deferrals deferred to the Plan for any applicable Deferral Period shall be credited on a bookkeeping basis to the Participant's Plan Account as of the date on which the Participant's Participant Deferrals are deferred and credited to the Plan. 5.2 INVESTMENT OF CORPORATE CONTRIBUTIONS. All Corporate Contributions credited to the Participant's Plan Account shall be invested for bookkeeping purposes in the Plan's Common Stock Account. 5.3 DETERMINATION OF AMOUNT. The Plan Administrator shall verify the amount of Participant Deferrals, Corporate Contributions, Dividends, and earnings, if any, to be credited to each Participant's Plan Account in accordance with the provisions of the Plan. The reasonable and equitable decision of the Plan Administrator as to the value of each Plan Account shall be conclusive and binding upon all Participants and the Beneficiary of each deceased Participant having any interest, direct or indirect in the Participant's Plan Account. As soon as reasonably practicable after the close of the Plan Year, the Corporation shall send to each Participant an itemized accounting statement that shall reflect the Participant's Plan Account balance. 5.4 CORPORATE ASSETS. All Participant Deferrals, Corporate Contributions, Dividends, earnings and any other gains and losses credited to a Participant's Plan Account on a bookkeeping basis, remain the assets and property of the Corporation, which shall become subject to distribution to the Participant only in accordance with the provisions of Articles VII, X and XI of the Plan. Distributions made under the Plan shall be in the form of Common Shares. All Participants and Beneficiaries shall have the status of general unsecured creditors of the Corporation. Nothing contained in the Plan shall create, or shall be construed as creating a trust of any kind or any other fiduciary relationship between the Participant, the Corporation, or any other person. It is the intention of the Corporation and it is the understanding of the Participant that the Plan is not funded for tax purposes as well as for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended. 5.5 NO PRESENT INTEREST. Subject to any federal statute to the contrary, no right or benefit under the Plan and no right or interest in each Participant's Plan Account shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance, or charge. Any attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge any right or benefit under the Plan, or to the Participant's Plan Account shall be void. No right, interest, or benefit under the Plan or Participant's Plan Account shall be liable for or subject to the debts, contracts, liabilities, or torts of the Participant or Beneficiary. If the Participant or Beneficiary becomes bankrupt or attempts to alienate, sell, assign, pledge, encumber, or -7- charge any right under the Plan or Participant's Plan Account such attempt shall be void and unenforceable. ARTICLE VI VESTING 6.1 VESTING IN DIVIDENDS AND CORPORATE CONTRIBUTIONS. The calculation of a Participant's vested interest in his or her Corporate Contributions and all Dividends credited on a bookkeeping basis to the Participant's Plan Account shall be measured from the last day of the applicable calendar quarter in which such Participant Deferrals and matching Corporate Contributions are credited to the Participant's Plan Account ("Quarterly Deferral Date"). A Participant shall become vested in those Corporate Contributions and in those Dividends credited to the Participant's Plan Account with regard to the applicable Participant Deferrals and Corporate Contributions, upon the Participant's completion of three years of vested service. For purposes of this Section 6.1, the term "vested service" shall be determined from the Quarterly Deferral Date and shall be based upon full calendar years. Notwithstanding the foregoing provisions of this Section 6.1, however, a Participant shall become fully vested in all Dividends and Corporate Contributions credited on a bookkeeping basis to the Participant's Plan Account upon the Participant's Termination Under Limited Circumstances. 6.2 CONTINUED VESTING UPON RETIREMENT. Subject to the provisions of Section 7.2 of the Plan, upon the Participant's Retirement, the Participant's not-vested Dividends and not-vested Corporate Contributions credited to the Participant's Plan Account with all gains and losses thereon, shall remain in the Plan and shall continue to vest under the vesting provisions of Section 6.1 hereof. 6.3 FORFEITURE OF CORPORATE CONTRIBUTIONS AND DIVIDENDS. In the event of the Participant's Termination all not-vested Corporate Contributions and all not-vested Dividends that are credited on a bookkeeping basis to the Participant's Plan Account shall be forfeited as of the Participant's last day of employment. ARTICLE VII DISTRIBUTION OF PLAN BENEFITS 7.1 DISTRIBUTIONS PRIOR TO TERMINATION, TERMINATION UNDER LIMITED CIRCUMSTANCES, OR RETIREMENT. A Participant's vested Participant Deferrals, vested Corporate Contributions and vested Dividends shall be distributed to the Participant as of the Determination Date concurrently with or immediately following the Participant's vesting in his or her Plan benefit in accordance with the distribution directions provided by the Participant in his or her Distribution Agreement, as follows: (a) as a single lump sum distribution of Common Shares, or (b) in substantially equal annual installments payments of Common Shares over a five (5) year period. -8- Lump sum distributions from the Plan of Participant Deferrals, vested Corporate Contributions, and vested Dividends shall be made in Common Shares based on the bookkeeping number of whole and fractional Common Shares attributable to those Participant Deferrals, vested Corporate Contributions and vested Dividends maintained in the Plan's Common Stock Account as of the Determination Date concurrently with or immediately following the Participant's vesting date. Distributions shall be made as soon as reasonably practicable following the applicable Determination Date. 7.2 DISTRIBUTIONS FOLLOWING RETIREMENT. Upon the Participant's Retirement, the Participant's Plan Account balance shall continue to be maintained in the Plan and all Corporate Contributions and Dividends credited to the Participant's Plan Account with any and all gains and losses thereon, shall continue to vest under the vesting provisions of Section 6.1 of the Plan, and when vested, shall be distributed to the Participant in accordance with the provisions of Section 7.1 hereof. Notwithstanding the foregoing provisions of this Section 7.2, however, in the event of the Participant's Retirement, and within twelve months of such Retirement the Participant engages in any "Harmful Activity" as that term is defined in accordance with Section 2.1(o) of the Plan, such Participant's not-vested Corporate Contributions and not-vested Dividends shall be immediately forfeited and the Participant shall automatically receive a lump sum distribution of his or her Participant Deferrals under the Plan. 7.3 DISTRIBUTIONS FOLLOWING TERMINATION UNDER LIMITED CIRCUMSTANCES. Upon the Participant's Termination Under Limited Circumstances, all Participant Deferrals, Corporate Contributions, and Dividends credited to the Participant's Plan Account with any and all gains and losses thereon shall become immediately vested and shall be distributed to the Participant in a single lump sum distribution of Common Shares. 7.4 DISTRIBUTIONS FOLLOWING INVOLUNTARY TERMINATION. Upon the Participant's Involuntary Termination, all Participant Deferrals credited to the Participant's Plan Account with all Dividends, gains and losses thereon, shall become immediately vested and shall be distributed to the Participant in a single lump sum distribution. All not-vested Corporate Contributions and all not-vested Dividends credited on such Corporate Contributions with all related earnings and or losses thereon shall be forfeited by the Participant as of his or her last day of employment. 7.5 DISTRIBUTIONS FOLLOWING VOLUNTARY TERMINATION OR DISCHARGE FOR CAUSE. Upon the Participant's Voluntary Termination or Discharge for Cause, all not-vested Corporate Contributions and not-vested Dividends credited to the Participant's Plan Account with all gains and losses thereon shall be forfeited by the Participant as of his or her last day of employment, and the Participant shall receive a lump sum distribution of his or her Participant Deferrals. 7.6 WITHHOLDING. The withholding of taxes with respect to the Participant's Participant Deferrals, Corporate Contributions, and Dividends shall be made at such time as it becomes required by any state, federal or local law. All required taxes shall be withheld from the Participant's Participant Deferrals and Corporate Contributions in accordance with applicable law to the maximum extent possible. 7.7 DISTRIBUTION OF ACCOUNT BALANCE. The Participant's vested Plan Account balance shall be valued as of the Determination Date immediately following his or her date of Termination or Retirement (the "valuation date"): -9- (a) LUMP SUM DISTRIBUTIONS. If a Participant has elected to receive a lump sum distribution of all of his or her vested Plan Account balance, such lump sum distribution of Common Shares shall be made as soon as reasonably practicable following the Participant's valuation date. (b) INSTALLMENT DISTRIBUTIONS. If a Participant has elected to receive an installment distribution of all of his or her vested Plan Account, such installment distribution of Common Shares shall commence as soon as reasonably practicable following the Participant's valuation date. The Participant's vested unpaid Plan Account balance invested for bookkeeping purposes in the Plan's Common Stock Account shall be reflected as a number of whole and fractional Common Shares in a distribution sub-account and shall be credited with Dividends on a bookkeeping basis which shall be reinvested in the Plan's Common Stock Account throughout the installment distribution period; all such reinvested Dividends shall be paid to the Participant in Common Shares in conjunction with the Participant's final installment payment under the Plan. 7.8 DISTRIBUTION OF SMALL ACCOUNTS. Notwithstanding the provisions of Sections 7.1 and 7.2 hereof, if the value of a Participant's vested Account balance as of the Determination Date immediately preceding the Participant's date of Termination or Retirement is under $50,000, such balance shall be distributed to the Participant as a single distribution as soon as reasonably practicable following such date. 7.9 DISTRIBUTION LIMITATION. If the Corporation determines that any amount of a Participant's Participant Deferrals, Dividends, and/or Corporate Contributions with all interest and earnings thereon: (1) would not be deductible by the Corporation if paid in accordance with the distribution instructions specified by the Participant in his or her Participation Agreement by reason of the disallowance rules of Section 162(m) of the Code, but (2) would be deductible by the Corporation if deferred and paid in a later Plan Year, the Corporation reserves the right to defer the distribution of all or any portion of such Participant's Participant Deferrals, Dividends, and/or Corporate Contributions with all interest and earnings thereon until such time as the Corporation determines that the distribution of all or any portion of such Participant's Participant Deferrals, Dividends, and/or Corporate Contributions will be payable without the disallowance of the deduction prescribed by Code Section 162(m) ("Deferrals"). Such Deferrals shall continue to be held in the Participant's Plan Account and shall continue to be credited, on a bookkeeping basis, with all earnings, gains, and losses thereon. If it is thereafter determined by the Corporation that such Deferrals will not be deductible even if paid in a later year, then such Deferrals with all interest and earnings thereon shall become immediately payable to the Participant. Notwithstanding any other provision of this Section 7.9 to the contrary, in the event of the Participant's Termination or Retirement all Deferrals required to be continued under this Section 7.9 contrary to the Participant's distribution elections, shall be paid to the Participant on or immediately following April 15th of the year immediately following the Participant's Termination or Retirement, regardless of the deductibility of such payment. 7.10 FACILITY OF PAYMENT. If it is found that any individual to whom an amount is payable hereunder is incapable of attending to his or her financial affairs because of any mental or physical -10- condition, including the infirmities of advanced age, such amount (unless prior claim therefor shall have been made by a duly qualified guardian or other legal representative) may, in the discretion of the Corporation, be paid to another person for the use or benefit of the individual found incapable of attending to his or her financial affairs or in satisfaction of legal obligations incurred by or on behalf of such individual. Any such payment shall be charged to the Participant's Plan Account from which any such payment would otherwise have been paid to the individual found incapable of attending to his or her financial affairs, and shall be a complete discharge of any liability therefor under the Plan. ARTICLE VIII BENEFICIARY DESIGNATION 8.1 BENEFICIARY DESIGNATION. Subject to Section 8.3 hereof, each Participant shall have the right, at any time, to designate one or more persons or an entity as Beneficiary (both primary as well as secondary) to whom benefits under this Plan shall be paid in the event of Participant's death prior to complete distribution of the Participant's Plan Account. Each Beneficiary designation shall be in a written form prescribed by the Corporation and shall be effective only when filed with the Corporation during the Participant's lifetime. 8.2 CHANGING BENEFICIARY. Subject to Section 8.3, a Participant's Beneficiary designation may be changed by the Participant without the consent of the previously named Beneficiary by the filing of a new designation with the Corporation. The filing of a new designation shall cancel all previously filed designations. 8.3 NO BENEFICIARY DESIGNATION. If a Participant fails to designate a Beneficiary in the manner provided above, if the designation is void, or if the Beneficiary (including all contingent Beneficiaries) designated by a deceased Participant dies before the Participant or before complete distribution of the Participant's benefits, the Participant's Beneficiary shall be the person in the first of the following classes in which there is a survivor: (a) The Participant's spouse; (b) The Participant's children in equal shares, except that if any of the children predeceases the Participant but leaves issue surviving, then such issue shall take, by right of representation the share the parent would have taken if living; (c) The Participant's estate. 8.4 DISTRIBUTION UPON DEATH. If a Participant dies after the distribution of his or her interest under the Plan has commenced, the remaining portion of the Participant's entire interest under the Plan, if any, shall be distributed to the Participant's Beneficiary under the method of distribution being used as of the Participant's date of death. If the Participant dies before the distribution of the Participant's Plan Account has commenced, the Participant's entire interest under the Plan shall be valued as of the Determination Date immediately following the Participant's date of death, and shall be distributed to his or her Beneficiary in a lump sum payment as soon as reasonably practicable following the Participant's date of death. -11- ARTICLE IX ADMINISTRATION 9.1 ADMINISTRATION. The Corporation shall be responsible for the general administration of the Plan, for carrying out the provisions hereof, and for making payments hereunder. The Corporation shall have the sole and absolute discretionary authority and power to carry out the provisions of the Plan, including, but not limited to, the authority and power (a) to determine all questions relating to the eligibility for and the amount of any benefit to be paid under the Plan, (b) to determine all questions pertaining to claims for benefits and procedures for claim review, (c) to resolve any and all questions arising under the Plan, including any question of construction and/or interpretation, and (d) to take such further action as the Corporation deems necessary or advisable in the administration of the Plan. All findings, decisions, and determinations of any kind made by the Plan Administrator shall not be disturbed unless the Plan Administrator has acted in an arbitrary and capricious manner. Subject to the requirements of law, the Plan Administrator shall be the sole judge of the standard of proof required in any claim for benefits and in any determination of eligibility for a benefit. All decisions of the Plan Administrator shall be final and binding on all parties. The Corporation may employ such attorneys, investment counsel, agents, and accountants as it may deem necessary or advisable to assist it in carrying out its duties hereunder. The actions taken and the decisions made by the Corporation hereunder shall be final and binding upon all interested parties subject, however, to the provisions of Section 9.2. The Plan Year, for purposes of Plan administration, shall be the calendar year. 9.2 CLAIMS REVIEW PROCEDURE. Whenever the Plan Administrator decides for whatever reason to deny, whether in whole or in part, a claim for benefits under this Plan filed by any person (herein referred to as the "Claimant"), the Plan Administrator shall transmit a written notice of its decision to the Claimant, which notice shall be written in a manner calculated to be understood by the Claimant and shall contain a statement of the specific reasons for the denial of the claim and a statement advising the Claimant that, within 60 days of the date on which he or she receives such notice, he or she may obtain review of the decision of the Plan Administrator in accordance with the procedures hereinafter set forth. Within such 60-day period, the Claimant or his or her authorized representative may request that the claim denial be reviewed by filing with the Plan Administrator a written request therefor, which request shall contain the following information: (a) the date on which the request was filed with the Plan Administrator; provided, however, that the date on which the request for review was in fact filed with the Plan Administrator shall control in the event that the date of the actual filing is later than the date stated by the Claimant pursuant to this paragraph (a); (b) the specific portions of the denial of his or her claim which the Claimant requests the Plan Administrator to review; (c) a statement by the Claimant setting forth the basis upon which he or she believes the Plan Administrator should reverse its previous denial of the claim and accept the claim as made; and (d) any written material which the Claimant desires the Plan Administrator to examine in its consideration of his or her position as stated pursuant to paragraph (b) above. -12- In accordance with this Section, if the Claimant requests a review of the Plan Administrator's decision, such review shall be made by the Plan Administrator who shall, within sixty (60) days after receipt of the request form, review and render a written decision on the claim containing the specific reasons for the decision including reference to Plan provisions upon which the decision is based. All findings, decisions, and determinations of any kind made by the Plan Administrator shall not be modified unless the Plan Administrator has acted in an arbitrary and capricious manner. Subject to the requirements of law, the Plan Administrator shall be the sole judge of the standard of proof required in any claim for benefits, and any determination of eligibility for a benefit. All decisions of the Plan Administrator shall be binding on the claimant and upon all other Persons. If the Participant or Beneficiary shall not file written notice with the Plan Administrator at the times set forth above, such individual shall have waived all benefits under the Plan other than as already provided, if any, under the Plan. ARTICLE X AMENDMENT AND TERMINATION OF PLAN 10.1 RESERVATION OF RIGHTS. The Corporation reserves the right to terminate the Plan at any time, and to modify or amend the Plan, in whole or in part, at any time and for any reason, subject to the following: (a) PRESERVATION OF ACCOUNT BALANCE. No termination, amendment, or modification of the Plan shall reduce (i) the amount of Participant Deferrals, Corporate Contributions, and Dividends allocated to the Participants' Accounts as of the date of such termination, amendment, or modification, and (ii) all earnings and gains on such Participant Deferrals, Corporate Contributions, and Dividends that have accrued up to the effective date of the termination, amendment, or modification. (b) CHANGES IN EARNINGS RATE. No amendment or modification of the Plan shall reduce the rate of earnings to be credited under the Common Stock Account until the close of the applicable Deferral Period in which such amendment or modification is made. 10.2 EFFECT OF PLAN TERMINATION. If the Corporation terminates the Plan either in whole or in part, the following will apply: (a) PARTIAL TERMINATION. The Corporation may partially terminate the Plan by instructing the Plan Administrator to not accept any additional Participation Agreements. If such a partial termination occurs, the Plan shall continue to operate and be effective with regard to Participation Agreements entered into prior to the effective date of such partial termination. (b) COMPLETE TERMINATION. The Corporation may completely terminate the Plan by instructing the Plan Administrator to not accept any additional Participation Agreements and by terminating all ongoing Participation Agreements. If such a complete termination occurs, the Plan shall cease to operate, and all Plan Participants shall become fully vested in their Plan Account balance. Payment of each Participant's Plan Account balance shall thereafter be made in equal monthly installments over the following period, based on the value of each Participant's Plan Account balance: -13-
Account Balance Payout Period --------------- ------------- Equal to or less than $100,000 Lump Sum More than $100,000 3 Years
Plan distributions shall commence within sixty-five (65) days after the Corporation terminates the Plan. The Participant's unpaid Plan Account balance invested for bookkeeping purposes in the Plan's Common Stock Account shall be reflected as a number of whole and fractional Common Shares in a distribution sub-account and shall be credited with Dividends on a bookkeeping basis which shall be reinvested in the Plan's Common Stock Account throughout the payout period; all such reinvested Dividends shall be paid to the Participant as Common Shares in conjunction with the Participant's final distribution under the Plan. 10.3 EFFECT OF PLAN TERMINATION. Notwithstanding anything to the contrary contained in the Plan, the termination of the Plan shall terminate the liability of the Corporation and all employees to make further Corporate Contributions to the Plan. ARTICLE XI CHANGE OF CONTROL 11.1 CHANGE OF CONTROL. Notwithstanding any other provision of the Plan to the contrary, in the event of a Change of Control as defined in accordance with Section 2.2 of the Plan, no amendment or modification of the Plan may be made at any time on or after such Change of Control (1) to reduce or modify a Participant's Pre-Change of Control Account Balance, (2) to reduce or modify the Common Stock Accounts' method of calculating all earnings, gains, and/or losses on a Participant's Pre-Change of Control Account Balance, or (3) to reduce or modify the Participant's Participant Deferrals and/or Corporate Contributions to be credited to a Participant's Plan Account for the applicable Deferral Period. For purposes of this Section 11.1, the term "Pre-Change of Control Account Balance" shall mean, with regard to any Plan Participant, the aggregate amount of such Participant's Participant Deferrals and Corporate Contributions and Dividends with all earnings, gains, and losses thereon which are credited to the Participant's Plan Account through the close of the calendar year in which such Change of Control occurs. 11.2 COMMON STOCK CONVERSION. In the event of a Change of Control in which the common shares of the Corporation are converted into or exchanged for securities, cash and/or other property as a result of any capital reorganization or reclassification of the capital stock of the Corporation, or consolidation or merger of the Corporation with or into another corporation or entity, or the sale of all or substantially all of its assets to another corporation or entity, the Corporation shall cause the Common Stock Account to reflect on a bookkeeping basis the securities, cash and other property that would have been received in such reorganization, reclassification, consolidation, merger or sale on an equivalent amount of common shares equal to the balance in the Common Stock Account and, from and after such reorganization, reclassification, consolidation, merger or sale, the Common Stock Account shall reflect on a bookkeeping basis all Dividends, interest, earnings and losses attributable to such securities, cash, and other property. 11.3 DISTRIBUTION PROVISIONS. In the event of a Change of Control, the provisions of Section 7.2 of the Plan which limit a Participant's ability to provide services to a financial services organization, business, or company upon the Participant's voluntary Termination, Retirement or Disability shall -14- become null and void, and such Participant's distribution elections as contained within the Participant's Participation Agreement shall control the method and timing of the Participant's distribution of his or her Plan Account balances. 11.4 AMENDMENT IN THE EVENT OF A CHANGE OF CONTROL. On or after a Change of Control, the provisions of Article II, Article IV, Article V, Article VI, Article VII, Article VIII, Article IX, Article X and Article XI may not be amended or modified as such Sections and Articles apply with regard to the Participants' Pre-Change of Control Account Balances. ARTICLE XII MISCELLANEOUS PROVISIONS 12.1 NO COMMITMENT AS TO EMPLOYMENT. Nothing herein contained shall be construed as a commitment or agreement upon the part of any Employee hereunder to continue his or her employment with an Employer, and nothing herein contained shall be construed as a commitment on the part of any Employer to continue the employment, rate of compensation or terms and conditions of employment of any Employee hereunder for any period. All Participants shall remain subject to discharge to the same extent as if the Plan had never been put into effect. 12.2 BENEFITS. Nothing in the Plan shall be construed to confer any right or claim upon any person, firm, or corporation other than the Participants, former Participants, and Beneficiaries. 12.3 ABSENCE OF LIABILITY. No member of the Board of Directors of the Corporation or a subsidiary or committee authorized by the Board of Directors, or any officer of the Corporation or a subsidiary or officer of a subsidiary shall be liable for any act or action hereunder, whether of commission or omission, taken by any other member, or by any officer, agent, or Employee, except in circumstances involving bad faith or willful misconduct, for anything done or omitted to be done. 12.4 EXPENSES. The expenses of administration of the Plan shall be paid by the Corporation. 12.5 PRECEDENT. Except as otherwise specifically agreed to by the Corporation in writing, no action taken in accordance with the Plan by the Corporation shall be construed or relied upon as a precedent for similar action under similar circumstances. 12.6 WITHHOLDING. The Corporation shall withhold any tax that the Corporation in its discretion deems necessary to be withheld from any payment to any Participant, former Participant, or Beneficiary hereunder, by reason of any present or future law. 12.7 VALIDITY OF PLAN. The validity of the Plan shall be determined and the Plan shall be construed and interpreted in accordance with the provisions the laws of the State of Ohio. The invalidity or illegality of any provision of the Plan shall not affect the validity or legality of any other part thereof. 12.8 PARTIES BOUND. The Plan shall be binding upon the Employers, Participants, former Participants, and Beneficiaries hereunder, and, as the case may be, the heirs, executors, administrators, successors, and assigns of each of them. 12.9 HEADINGS. All headings used in the Plan are for convenience of reference only and are not part of the substance of the Plan. -15- 12.10 DUTY TO FURNISH INFORMATION. The Corporation shall furnish to each Participant, former Participant, or Beneficiary any documents, reports, returns, statements, or other information that it reasonably deems necessary to perform its duties imposed hereunder or otherwise imposed by law. 12.11 VALIDITY. In case any provision of this Plan shall be held illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal and invalid provision had never been inserted herein. 12.12 NOTICE. Any notice required or permitted under the Plan shall be deemed sufficiently provided if such notice is in writing and hand delivered or sent by registered or certified mail. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark or on the receipt for registration or certification. Mailed notice to the Corporation shall be directed to the Corporation's address, attention: KeyCorp Compensation and Benefits Department. Mailed notice to a Participant or Beneficiary shall be directed to the individual's last known address in the Employer's records. 12.13 SUCCESSORS. The provisions of this Plan shall bind and inure to the benefit of each Employer and its successors and assigns. The term successors as used herein shall include any corporate or other business entity which shall, whether by merger, consolidation, purchase or otherwise, acquire all or substantially all of the business and assets of an Employer. KEYCORP By: /s/ Steven N. Bulloch ------------------------------------ Title: Assistant Secretary --------------------------------- -16- EX-10.36 11 l97974aexv10w36.txt EX-10.36 KEYCORP EXCESS 401K SAVINGS PLAN EXHIBIT 10.36 KEYCORP EXCESS 401(K) SAVINGS PLAN The KeyCorp Excess 401(k) Savings Plan ("Plan") is hereby amended and restated in its entirety to be effective January 1, 1998. The Plan as amended and restated is intended to provide certain key employees of KeyCorp with a Plan benefit that is generally equal to the benefit that the Participant would have been eligible to receive under the KeyCorp 401(k) Savings Plan but for the contribution limits imposed by Section 402(g) of the Internal Revenue Code of 1986, as amended (Code) and the compensation limits imposed by Section 401(a)(17) of the Code. It is the intention of KeyCorp, and it is the understanding of those Participants covered under the Plan that the Plan is unfunded for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). ARTICLE I DEFINITIONS 1.1 MEANING OF DEFINITIONS. For the purposes hereof, the following words and phrases shall have the meanings hereinafter set forth, unless a different meaning is plainly required by the context: (a) "401(k) SAVINGS PLAN" shall mean the KeyCorp 401(k) Savings Plan, as shall be amended from time to time. (b) "BENEFICIARY" shall mean the same person, persons or entity as designated by the Participant under the 401(k) Savings Plan to receive any Plan benefits payable after a Participant's death. (c) "CHANGE OF CONTROL" shall be deemed to have occurred if under any rabbi trust arrangement maintained by the Corporation, the Corporation is required under the terms of such arrangement to fund such rabbi trust to secure the payment of any Participants' Plan benefits payable hereunder because a "Change of Control" as defined in such rabbi trust has occurred after January 1, 1997. (d) "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time, together with all regulations promulgated thereunder. Reference to a section of the Code includes such section and any comparable section or sections of any future legislation that amends, supplements, or supersedes such section. (e) "COMPENSATION" of a Participant for any Plan Year or any partial Plan Year in which the Participant incurs a Severance From Service Date shall mean the entire amount of compensation paid to such Participant during such period by reason of his or her employment with an Employer, as reported for federal income tax purposes, plus that compensation which would have been paid except for (1) the timing of an Employer's payroll processing operations, (2) the provisions of the 401(k) Savings Plan, or (3) the provisions of the KeyCorp Flexible Benefits Plan, provided, however, that the term shall not include: (i) any amount attributable to the Employee's receipt of stock appreciation rights and the amount of any gain to the Employee upon the exercise of a stock option; (ii) any amount attributable to the Employee's receipt of non-cash remuneration which is included in the Employee's income for federal income tax purposes; (iii) any amount attributable to the Employee's receipt of moving expenses and any relocation bonus paid to the Employee during the Plan Year; (iv) any amount attributable to any severance paid by an Employer or the Corporation to the Employee; (v) any amount attributable to fringe benefits (cash and non-cash), regardless of whether any or all such items are includible in such Participant's gross income for federal tax purposes; (vi) any amount attributable to any bonus or payment made as an inducement for the Employee to accept employment with an Employer; (vii) any amount attributable to compensation of any type including bonus or incentive compensation payments paid on or after the Employee's Severance From Service Date; or (viii) any amount attributable to compensation deferred by the Participant. In determining a Participant's Compensation under the provisions of this Section 1.1(e), for those Plan Participants who participate in a line of business incentive plan, only that Compensation up to a maximum amount of $500,000 minus the amount of the Participant's Compensation utilized in computing his or her 401(k) Savings Plan benefit in accordance with Section 401(a)(17) of the Code shall be utilized in calculating the Participant's Participant Deferrals under this Plan. (f) "CORPORATE CONTRIBUTIONS" shall mean the amount an Employer has agreed to credit on a bookkeeping basis to the Participant's Plan Account in accordance with the provisions of Article IV of the Plan. (g) "CORPORATION STOCK FUND" shall mean the investment account established under the Plan for bookkeeping purposes under which a Participant may elect to have his or her Participant Deferrals credited and which mirrors the Corporation Stock Fund established in accordance with and pursuant to Article VIII of the 401(k) Savings Plan, as shall be amended from time to time. Participant Deferrals to the Corporation Stock Fund shall be credited based on a bookkeeping allocation of KeyCorp Common Shares (both whole and fractional rounded to the nearest one-hundredth of a share) which shall be equal to the amount of Participant Deferrals invested by the Participant in the Corporation Stock Fund. The Corporation Stock Fund shall also reflect on a bookkeeping basis all dividends, gains, and losses attributable to such Common Shares. All Corporate Contributions and all Participant Deferrals credited to the Corporation Stock Fund, shall be based on the New York Stock Exchange's closing price for such Common Shares as of the day such Participant Deferrals are credited to the Participants' Plan Account. (h) "CORPORATION" shall mean KeyCorp, an Ohio Corporation, its corporate successors, and any corporation or corporations into or with which it may be merged or consolidated. (i) "DEFERRAL COMMENCEMENT DATE" shall mean the first pay period coinciding with or immediately following the date on which the Participant reaches his or her maximum contribution limit under Section 402(g) of the Code and/or the Participant's maximum compensation limit under Section 401(a)(17) of the Code which effectively terminates the Participant's deferral of Compensation under the 401(k) Savings Plan. (j) "DEFERRAL ELECTION" shall mean the commitment made by the Participant to defer up to 6% of his or her Compensation on a per pay basis under the Plan, commencing as of the Participant's Deferral Commencement Date; a Participant's Deferral Election shall be made in such manner and at such time as the Corporation shall direct. (k) "DEFERRAL PERIOD" shall mean each Plan year, provided, however, that a Participant's initial Deferral Period shall be from his or her first day of participation in the Plan through the last day of the applicable Plan year. (l) "EMPLOYEE" shall mean a common law employee who is employed by an Employer; provided, however, the term "Employee" shall not include any person who at the time services are performed is not classified as a common law employee by the Employer even though such person may for federal income tax purposes, federal employment tax purposes, or any other purpose be reclassified by the Employer as a common law employee retroactive to when such services were performed by reason of administrative, judicial, regulatory or other governmental action. (m) "EMPLOYER" shall mean the Corporation and any of its subsidiaries, unless specifically excluded as an Employer for Plan purposes by written action of an officer of the Corporation. An Employer's participation shall be subject to all conditions and requirements made by the Corporation, and each Employer shall be deemed to have appointed the Plan Administrator as its exclusive agent under the Plan as long as it continues as a subsidiary. (n) "INVESTMENT FUNDS" shall mean those investment accounts established under the Plan for bookkeeping purposes in which a Participant may elect to have his or her Participant Deferrals credited and which mirror the investment funds established in accordance with and pursuant to Article VIII of the 401(k) Savings Plan as shall be amended from time to time. Participant Deferrals invested for bookkeeping purposes in the Investment Funds shall be credited on a bookkeeping basis with the same earnings, gains, and losses as experienced by the 401(k)Savings Plan's investment funds. (o) "MATCHING EMPLOYER CONTRIBUTIONS" shall mean the amount which an Employer has agreed to contribute to the Plan in accordance with the provisions of Article IV of the Plan. (p) "PARTICIPANT" shall mean an Employee who meets the eligibility requirements set forth in Section 2.1 and becomes a Plan Participant pursuant to Section 2.2 of the Plan. (q) "PARTICIPANT DEFERRALS" shall mean the Participant's elective deferral of Compensation under this Plan. (r) "PLAN" shall mean the KeyCorp Excess 401(k) Savings Plan, with all amendments hereafter made. (s) "PLAN ACCOUNT" shall mean those bookkeeping accounts established by the Corporation for each Plan Participant, which shall reflect all Participant Deferrals and Corporate Contributions with all earnings, gains, and losses attributable thereto, if such Participant Deferrals and Corporate Contributions had been invested pursuant to Article V of the Plan in the various Plan Investment Funds. Plan Accounts shall not constitute separate Plan funds or Plan assets. Neither the maintenance of, nor the crediting of amounts on a bookkeeping basis to such Plan Accounts shall be treated as (i) the allocation of any Corporation assets to, or a segregation of any Corporation assets in any such Plan Accounts, or (ii) as otherwise creating a right in any person or Participant to receive specific assets of the Corporation. Benefits under the Plan shall be paid from the general assets of the Corporation. (t) "PROFIT SHARING CONTRIBUTIONS" shall mean those discretionary contributions which an Employer may contribute to the Plan pursuant to Article IV of the Plan. (u) "VALUATION DATE" shall mean each "business day" or "business days" designated by the Plan Administrator on which Investment Funds will be valued for bookkeeping purposes. (v) "RETIREMENT" shall mean the termination of employment of a Participant under circumstances in which the Participant begins to receive an Early Retirement or Normal Retirement Date benefit under the KeyCorp Cash Balance Pension Plan or, which pursuant to a written employment agreement with the Corporation, the Participant is expressly treated as if he or she had retired for purposes of the Plan or other deferred compensation arrangement of the Corporation. (w) "TERMINATION" shall mean the voluntary or involuntary and permanent termination of a Participant's employment from his or her Employer and any other Employer, whether by resignation or otherwise, but shall not include the Participant's Retirement or termination as a result of Disability. 1.2 PRONOUNS: The masculine pronoun wherever used herein includes the feminine in any case so requiring, and the singular may include the plural. 1.3 ADDITIONAL REFERENCE: All other words and phrases used herein shall have the meaning given them in the 401(k) Savings Plan, unless a different meaning is clearly required by the context. ARTICLE II EMPLOYEE PARTICIPATION 2.1 EMPLOYEE ELIGIBILITY. An Employee shall be eligible to participate in the Plan, provided (1) the Employee is a participant in the 401(k) Savings Plan, (2) the Employee's elective deferrals of compensation under the 401(k) Savings Plan reach the deferral limitations prescribed by Section 402(g) of the Code, and/or the compensation limitations prescribed by Section 401(a)(17) of the Code, and (3) the Corporation selects such Employee to participate in the Plan. 2.2 NOTIFICATION OF NEW PARTICIPANTS. The Corporation shall notify an Employee of his or her eligibility to participate in the Plan; the Employee's election to defer Compensation under the Plan shall be made at such time and in such a manner as the Corporation shall direct. 2.3 EFFECT AND DURATION. Upon becoming a Participant, an Employee shall be entitled to the benefits and shall be bound by all terms and conditions of the Plan. If the Corporation determines that a Participant's performance is no longer at a level that deserves to be rewarded through participation in the Plan, but does not terminate the Participant's employment with an Employer, the Participant's Plan participation shall terminate at the end of the Deferral Period and no new Participant Deferrals thereafter may be made by the Participant. 2.4 AUTHORIZED LEAVE OF ABSENCE. A Participant on an authorized leave of absence who is not receiving Compensation during such leave period shall continue as a Plan Participant during such leave, provided, however, that no Corporate Contributions shall be credited to the Participant's Plan Account on behalf of the Participant during such leave period. Upon the Participant's return to active employment with an Employer, the Participant's Participant Deferrals shall automatically resume in accordance with the Participant's Deferral Election as in effect prior to the Participant's leave period unless otherwise modified by the Participant. ARTICLE III PARTICIPANT DEFERRALS 3.1 PARTICIPANT DEFERRALS. Upon meeting the eligibility criteria contained within Section 2.1 hereof, a Participant may defer not less than one percent nor more than six percent of his or her Compensation under the Plan. Such Participant Deferrals shall commence with the first payment of Compensation to the Participant coinciding with (1) the date on which the Participant's elective deferral of Compensation under the 401(k) Savings Plan reaches the maximum deferral limitations prescribed under Section 402(g) of the Code, or (2) the date on which the Participant's elective deferral of Compensation under the 401(k) Savings Plan reaches the maximum compensation limits prescribed under Section 401(a)(17) of the Code. Participant Deferrals shall be credited on a bookkeeping basis to the Participant's Plan Account as of each applicable pay period in which the Participant makes Participant Deferrals under the Plan. ARTICLE IV CORPORATE CONTRIBUTIONS 4.1 MATCHING EMPLOYER CONTRIBUTIONS. Matching Employer Contributions shall be credited on a bookkeeping basis to the Participant's Plan Account as of each pay period in proportion to the respective amount of the Participant's Participant Deferrals deferred under the Plan for such pay period. Credited Matching Employer Contribution shall equal 100% of those Participant Deferrals deferred under the Plan for such pay period. 4.2 PROFIT SHARING CONTRIBUTIONS. Profit Sharing Contributions, if any, shall be credited to Participant's Plan Account at such time and in such manner as the Corporation directs. ARTICLE V INVESTMENTS 5.1 PLAN ACCOUNT. All Participant Deferrals and Corporate Contributions shall be credited on a bookkeeping basis to a Plan Account established in the Participant's name. Separate sub-accounts may be established to reflect Participant's investment elections on a bookkeeping basis, with all earnings, gains, or losses attributable to such elections. 5.2 INVESTMENT OF PARTICIPANT DEFERRALS. Each Participant shall direct the manner in which his or her Participant Deferrals are to be invested for bookkeeping purposes under the Plan. All Participant Deferrals may be invested for bookkeeping purposes in the Plan's Corporation Stock Fund or any one or more of the Plan Investment Funds in such amount as the Participant shall select provided that such election amounts are expressed in five percent increments. Participants may modify their investment elections at such times and in such manner as permitted by the Corporation. 5.3 INVESTMENT OF CORPORATE CONTRIBUTIONS. All Corporate Contributions credited to the Participant's Plan Account shall be invested for bookkeeping purposes in the Corporation Stock Fund. Corporate Contributions are not subject to Participant investment directives. 5.4 VESTING IN CORPORATE CONTRIBUTIONS. A Participant shall become vested in those Corporate Contributions credited on a bookkeeping basis to the Participant's Plan Account upon the Participant's (1) completion of three years of vested service, (2) Disability, or (3) death. For purposes of this Section 5.4 hereof, the term "vested service" shall be calculated based on the Participant's employment commencement date through the Participant's Termination or Retirement date (which ever shall first occur), and shall be based on consecutive twelve-month periods during which time the Participant is employed by an Employer. 5.5 VALUATION OF PLAN ACCOUNTS. As of each Valuation Date, the Plan Administrator shall verify the amount of Participant Deferrals, Corporate Contributions, dividends, earnings, and losses, if any, to be credited to the Participant's Plan Account in accordance with the provisions of the Plan. The reasonable and equitable decision of the Plan Administrator as to the value of the Participant's Plan Account shall be conclusive and binding upon all Participants and the Beneficiary of each deceased Participant having any interest, direct or indirect in the Participant's Plan Account. The value of the Participant's Plan Account on any day not a Valuation Date, shall be the value on the last preceding Valuation Date. 5.6 CORPORATE ASSETS. All Participant Deferrals, Corporate Contributions, dividends, and all earnings and losses credited to a Participant's Plan Account remain the assets and property of the Corporation, which shall be subject to distribution to the Participant only in accordance with Articles VI and VII of the Plan. All payments hereunder shall be in the form of cash and KeyCorp Common Shares and shall be made from the general assets of the Corporation, and Participants and Beneficiaries shall have the status of general unsecured creditors of the Corporation. Nothing contained in the Plan shall create, or be construed as creating a trust of any kind or any other fiduciary relationship between the Participant, the Corporation, or any other person. It is the intention of the Corporation and the Participant that the Plan be unfunded for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended. 5.7 NO PRESENT INTEREST. Subject to any federal statute to the contrary, no right or benefit under the Plan and no right or interest in each Participant's Plan Account shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge any right or benefit under the Plan, or Participant's Plan Account shall be void. No right, interest, or benefit under the Plan or Participant's Plan Account shall be liable for or subject to the debts, contracts, liabilities, or torts of the Participant or Beneficiary. If the Participant or Beneficiary becomes bankrupt or attempts to alienate, sell, assign, pledge, encumber, or charge any right under the Plan or Participant's Plan Account, such attempt shall be void and unenforceable. 5.8 EFFECT OF PLAN TERMINATION. Notwithstanding anything to the contrary contained in the Plan, the termination of the Plan or the termination of the 401(k) Savings Plan shall terminate the liability of the Corporation to make further Corporate Contributions to the Plan. ARTICLE VI DISTRIBUTION OF PLAN BENEFITS 6.1 DISTRIBUTION OPTIONS. Subject to the provisions of Section 6.3 and Section 6.4 hereof, a Participant shall elect, as reflected in the Participant's Distribution Election Agreement, to receive a distribution of his or her vested Plan Account balance from the Plan's Investment Funds (other than from the Corporation Stock Account) under the following payment options: (a) a single lump sum distribution, or (b) a series of monthly installment distributions over a period of 60, 120, or 180 months. Distributions of Participant Deferrals from the Plan's Investment Funds other than the Corporation Stock Fund shall be made in cash. 6.2 DISTRIBUTION OPTIONS FROM THE CORPORATION STOCK ACCOUNT. Subject to the provisions of Section 6.3 and Section 6.4 of the Plan, a Participant shall elect, as reflected in the Participant's Distribution Election Agreement, to receive a distribution of his or her vested Plan Account balance from the Plan's Corporation Stock Account under the following payment options: (a) a single lump sum distribution, or (b) a series of annual installment distributions over a period of 5, 10, or 15 years. Distributions of Participant Deferrals and vested Corporate Contributions from the Plan's Corporation Stock Fund made or commenced prior to January 1, 1999 shall be made in cash; distributions from the Corporation Stock Fund made or commenced on or after January 1, 1999 shall be made in KeyCorp Common Shares; provided, however, that in the event that the Corporation enters into a transaction intended to qualify as a pooling of interests for accounting purposes prior to January 1, 1999, all distributions from the Corporation Stock Fund shall continue to be made in cash. 6.3 DISTRIBUTIONS FOLLOWING TERMINATION, RETIREMENT OR DISABILITY. (a) Upon a Participant's Termination, the Participant's vested Plan Account balance shall be distributed to the Participant in a single lump sum payment. (b) Upon a Participant's Retirement, or Disability, the Participant's vested Plan Account balance shall be distributed to the Participant in accordance with the distribution elections contained within the Participant's Distribution Election Agreement; provided, however, that if the Participant has failed to complete a Distribution Election Agreement, then the Participant's vested Plan Account balance shall be distributed as a single lump sum payment. Notwithstanding the foregoing provisions of this Section 6.3, however, in the event of the Participant's Retirement and thereafter within twelve months of such Retirement, without the prior written approval of the Corporation, the Participant provides services in any capacity to a financial services organization, or other competitor of the Corporation or any of its subsidiaries, such Participant's distribution election as contained within the Participant's Distribution Election Agreement shall be null and void, and the Participant shall receive an immediate lump sum distribution of his or her vested Plan Account balance. 6.4 TIMING OF DISTRIBUTIONS. The Participant's vested Plan Account shall be valued as of the Valuation Date immediately preceding his or her Termination, Retirement or Disability (the "valuation date"). (a) LUMP SUM DISTRIBUTION. If a Participant has elected to receive a lump sum distribution of his or her vested Plan Account upon his or her Termination, Retirement or Disability date, such lump sum distribution shall be made as soon as reasonably practicable immediately following the Participant's Termination, Retirement or Disability date. (b) INSTALLMENT DISTRIBUTION. If a Participant has elected to receive an installment distribution of his or her Plan Account upon his or her Retirement or Disability, such installment distribution shall commence as soon as reasonably practicable following the Participant's Retirement or Disability date. (i) The Participant's vested unpaid Plan Account balance invested for bookkeeping purposes in the Plan's Investment Funds (other than Corporation Stock Fund) shall be reflected in a distribution sub-account, which shall be credited with all earnings, gains and losses on such Investment Funds during the Participant's installment distribution period. (ii) The Participant's vested unpaid Plan Account balance invested for bookkeeping purposes in the Plan's Corporation Stock Fund shall be reflected as a number of whole and fractional Common Shares in a distribution sub-account and shall be credited with dividends on a bookkeeping basis which shall be reinvested in the Plan's Corporation Stock Fund throughout the installment distribution period; all such reinvested dividends shall be paid to the Participant in Common Shares in conjunction with the Participant's final installment payment under the Plan. 6.5 DISTRIBUTION OF SMALL ACCOUNTS. Notwithstanding the provisions of Sections 6.1, 6.2, 6.3, and 6.4 hereof, if the value of a Participant's vested Account balance as of the Valuation Date immediately preceding the Participant's Retirement or Disability date is under $50,000, such balance shall be distributed to the Participant as a single lump sum distribution as soon as reasonably practicable following such Retirement or Disability date. 6.6 FACILITY OF PAYMENT. If it is found that any individual to whom an amount is payable hereunder is incapable of attending to his or her financial affairs because of any mental or physical condition, including the infirmities of advanced age, such amount (unless prior claim therefor shall have been made by a duly qualified guardian or other legal representative) may, in the discretion of the Corporation, be paid to another person for the use or benefit of the individual found incapable of attending to his or her financial affairs or in satisfaction of legal obligations incurred by or on behalf of such individual. Any such payment shall be charged to the Participant's Plan Account from which any such payment would otherwise have been paid to the individual found incapable of attending to his or her financial affairs, and shall be a complete discharge of any liability therefor under the Plan. ARTICLE VII BENEFICIARY DESIGNATION 7.1 BENEFICIARY DESIGNATION. Subject to Section 7.3 hereof, the Participant shall have the right, at any time, to designate one or more persons or an entity as Beneficiary (both primary as well as secondary) to whom benefits under this Plan shall be paid in the event of Participant's death prior to complete distribution of the Participant's Plan Account. Each Beneficiary designation shall be in a written form prescribed by the Corporation and shall be effective only when filed with the Corporation during the Participant's lifetime. 7.2 CHANGING BENEFICIARY. Subject to Section 7.3, any Beneficiary designation may be changed by a Participant without the consent of the previously named Beneficiary by the filing of a new designation with the Corporation. The filing of a new designation shall cancel all designations previously filed. 7.3 NO BENEFICIARY DESIGNATION. If any Participant fails to designate a Beneficiary in the manner provided above, if the designation is void, or if the Beneficiary (including all contingent Beneficiaries) designated by a deceased Participant dies before the Participant or before complete distribution of the Participant's benefits, the Participant's Beneficiary shall be the person in the first of the following classes in which there is a survivor: (a) The Participant's spouse; (b) The Participant's children in equal shares, except that if any of the children predeceases the Participant but leaves issue surviving, then such issue shall take, by right of representation the share the parent would have taken if living: (c) The Participant's estate. 7.4 DISTRIBUTION UPON DEATH. If a Participant dies after the distribution of his or her vested interest under the Plan has commenced, the remaining portion of the Participant's entire interest under the Plan, if any, shall be distributed to the Participant's Beneficiary under the method of distribution being used as of the Participant's date of death. If the Participant dies before the distribution of the Participant's Plan Account has commenced, the Participant's entire interest under the Plan shall be valued as of the Valuation Date immediately preceding the Participant's date of death, and shall be distributed to his or her Beneficiary in a lump sum payment as soon as reasonably practicable following the Participant's date of death. ARTICLE VIII ADMINISTRATION 8.1 ADMINISTRATION. The Corporation, which shall be the "Administrator" of the Plan for purposes of ERISA and the "Plan Administrator" for purposes of the Code, shall be responsible for the general administration of the Plan, for carrying out the provisions hereof, and for making payments hereunder. The Corporation shall have the sole and absolute discretionary authority and power to carry out the provisions of the Plan, including, but not limited to, the authority and power (a) to determine all questions relating to the eligibility for and the amount of any benefit to be paid under the Plan, (b) to determine all questions pertaining to claims for benefits and procedures for claim review, (c) to resolve all other questions arising under the Plan, including any questions of construction and/or interpretation, and (d) to take such further action as the Corporation shall deem necessary or advisable in the administration of the Plan. All findings, decisions, and determinations of any kind made by the Plan Administrator shall not be disturbed unless the Plan Administrator has acted in an arbitrary and capricious manner. Subject to the requirements of law, the Plan Administrator shall be the sole judge of the standard of proof required in any claim for benefits and in any determination of eligibility for a benefit. All decisions of the Plan Administrator shall be final and binding on all parties. The Plan Administrator may employ such attorneys, investment counsel, agents, and accountants as it may deem necessary or advisable to assist it in carrying out its duties hereunder. The actions taken and the decisions made by the Plan Administrator hereunder shall be final and binding upon all interested parties subject, however, to the provisions of Section 8.2. The Plan Year, for purposes of Plan administration, shall be the calendar year. 8.2 CLAIMS REVIEW PROCEDURE. Whenever the Plan Administrator decides for whatever reason to deny, whether in whole or in part, a claim for benefits under this Plan filed by any person (herein referred to as the "Claimant"), the Plan Administrator shall transmit a written notice of its decision to the Claimant, which notice shall be written in a manner calculated to be understood by the Claimant and shall contain a statement of the specific reasons for the denial of the claim and a statement advising the Claimant that, within 60 days of the date on which he or she receives such notice, he or she may obtain review of the decision of the Plan Administrator in accordance with the procedures hereinafter set forth. Within such 60-day period, the Claimant or his or her authorized representative may request that the claim denial be reviewed by filing with the Plan Administrator a written request therefor, which request shall contain the following information: (a) the date on which the request was filed with the Plan Administrator; provided, however, that the date on which the request for review was in fact filed with the Plan Administrator shall control in the event that the date of the actual filing is later than the date stated by the Claimant pursuant to this paragraph (a); (b) the specific portions of the denial of his or her claim which the Claimant requests the Plan Administrator to review; (c) a statement by the Claimant setting forth the basis upon which he or she believes the Plan Administrator should reverse its previous denial of the claim and accept the claim as made; and (d) any written material which the Claimant desires the Plan Administrator to examine in its consideration of his or her position as stated pursuant to paragraph (b) above. In accordance with this Section, if the claimant requests a review of the Plan Administrator's decision, such review shall be made by the Plan Administrator, who shall, within sixty (60) days after receipt of the request form, review and render a written decision on the claim containing the specific reasons for the decision including reference to Plan provisions upon which the decision is based. All findings, decisions, and determinations of any kind made by the Plan Administrator shall not be modified unless the Plan Administrator has acted in an arbitrary and capricious manner. Subject to the requirements of law, the Plan Administrator shall be the sole judge of the standard of proof required in any claim for benefits, and any determination of eligibility for a benefit. All decisions of the Plan Administrator shall be binding on the claimant and upon all other Persons. If the Participant or Beneficiary shall not file written notice with the Plan Administrator at the times set forth above, such individual shall have waived all benefits under the Plan other than as already provided, if any, under the Plan. ARTICLE IX AMENDMENT AND TERMINATION OF PLAN 9.1 RESERVATION OF RIGHTS. The Corporation reserves the right to terminate the Plan at any time by action of the Board of Directors of the Corporation, or any duly authorized committee thereof, and to modify or amend the Plan, in whole or in part, at any time and for any reason, subject to the following: (a) PRESERVATION OF ACCOUNT BALANCE. No termination, amendment, or modification of the Plan shall reduce (i) the amount of Participant Deferrals and Corporate Contributions, and (ii) all earnings and gains on such Participant Deferrals and Corporate Contributions that have accrued up to the effective date of the termination, amendment, or modification. (b) CHANGES IN EARNINGS RATE. No amendment or modification of the Plan shall reduce or modify the method of accruing earnings, gains, and losses under the Plan's Investment Funds that differ from the method of accruing earnings, gains, and losses under the 401(k) Savings Plan's investment funds until the close of the applicable Deferral Period in which such amendment or modification is made. ARTICLE X CHANGE OF CONTROL 10.1 CHANGE OF CONTROL. Notwithstanding any other provision of the Plan to the contrary, in the event of a Change of Control as defined in accordance with Section 1.1 of the Plan, no amendment or modification of this Plan may be made at any time on or after such Change of Control (1) to reduce or modify a Participant's Pre-Change of Control Account Balance, (2) to reduce or modify the Corporation Stock Fund's method of calculating all earnings, gains, and/or losses on a Participant's Pre-Change of Control Account Balance, (3) to reduce or modify any other Investment Funds' method of calculating all earnings, gains, and/or losses on a Participant's Pre-Change of Control Account Balance, or (4) to reduce or modify the Participant's Participant Deferrals and/or Corporate Contributions to be credited to a Participant's Plan Account for the applicable Deferral Period. For purposes of this Section 10.1, the term "Pre-Change of Control Account Balance" shall mean, with regard to any Plan Participant, the aggregate amount of such Participant's Participant Deferrals and Corporate Contributions with all earnings, gains, and losses thereon which are credited to the Participant's Plan Account through the close of the calendar year in which such Change of Control occurs. 10.2 COMMON STOCK CONVERSION. In the event of a Change of Control in which the common shares of the Corporation are converted into or exchanged for securities, cash and/or other property as a result of any capital reorganization or reclassification of the capital stock of the Corporation, or consolidation or merger of the Corporation with or into another corporation or entity, or the sale of all or substantially all of its assets to another corporation or entity, the Corporation shall cause the Corporation Stock Fund to reflect on a bookkeeping basis the securities, cash and other property that would have been received in such reorganization, reclassification, consolidation, merger or sale on an equivalent amount of common shares equal to the balance in the Corporation Stock Fund and, from and after such reorganization, reclassification, consolidation, merger or sale, the Corporation Stock Fund shall reflect on a bookkeeping basis all dividends, interest, earnings and losses attributable to such securities, cash, and other property. 10.3 DISTRIBUTION PROVISIONS. In the event of a Change of Control, the provisions of Section 6.3 of the Plan which limit a Participant's ability to provide services to a financial services organization, business, or company upon the Participant's Retirement, shall become null and void, and such Participant's distribution elections as contained within the Participant's Agreement shall control the method and timing of the Participant's distribution of his or her Plan Account balances. 10.4 AMENDMENT IN THE EVENT OF A CHANGE OF CONTROL. On or after a Change of Control, the provisions of Article II, Article IV, Article V, Article VI, Article VII, Article VIII, Article IX and Article X may not be amended or modified as such Sections and Articles apply with regard to the Participants' Pre-Change of Control Account Balances. ARTICLE XI SECURITIES LAWS COMPLIANCE 11.1 RESTRICTIONS IMPOSED ON TRANSACTIONS INVOLVING THE CORPORATION STOCK FUND. Notwithstanding any contrary provision in this Plan, the Corporation may, in its discretion, but in a uniform, non-discriminatory manner, delay, suspend or otherwise limit any investment in or withdrawal from the Corporation Stock Fund for such time and to the extent the Corporation, on advice of legal counsel, determines is necessary or desirable to avoid violating any applicable state or federal securities laws, rules or regulations. ARTICLE XII MISCELLANEOUS PROVISIONS 12.1 UNFUNDED PLAN. This Plan is an unfunded plan maintained primarily to provide deferred compensation benefits for a select group of "management or highly-compensated employees" within the meaning of Sections 201, 301, and 401 of ERISA, and therefore is exempt from the provisions of Parts 2, 3, and 4 of Title I of ERISA. 12.2 NO COMMITMENT AS TO EMPLOYMENT. Nothing herein contained shall be construed as a commitment or agreement upon the part of any Employee hereunder to continue his or her employment with an Employer, and nothing herein contained shall be construed as a commitment on the part of any Employer to continue the employment, rate of compensation or terms and conditions of employment of any Employee hereunder for any period. All Participants shall remain subject to discharge to the same extent as if the Plan had never been put into effect. 12.3 BENEFITS. Nothing in the Plan shall be construed to confer any right or claim upon any person, firm, or corporation other than the Participants, former Participants, and Beneficiaries. 12.4 ABSENCE OF LIABILITY. No member of the Board of Directors of the Corporation or a subsidiary or committee authorized by the Board of Directors, or any officer of the Corporation or a subsidiary or officer of a subsidiary shall be liable for any act or action hereunder, whether of commission or omission, taken by any other member, or by any officer, agent, or Employee, except in circumstances involving bad faith or willful misconduct, for anything done or omitted to be done. 12.5 EXPENSES. The expenses of administration of the Plan shall be paid by the Corporation. 12.6 PRECEDENT. Except as otherwise specifically agreed to by the Corporation in writing, no action taken in accordance with the Plan by the Corporation shall be construed or relied upon as a precedent for similar action under similar circumstances. 12.7 WITHHOLDING. The Corporation shall withhold any tax which the Corporation in its discretion deems necessary to be withheld from any payment to any Participant, former Participant, or Beneficiary hereunder, by reason of any present or future law. 12.8 VALIDITY OF PLAN. The validity of the Plan shall be determined and the Plan shall be construed and interpreted in accordance with the provisions of ERISA, the Code, and, to the extent applicable, the laws of the State of Ohio. The invalidity or illegality of any provision of the Plan shall not affect the validity or legality of any other part thereof. 12.9 PARTIES BOUND. The Plan shall be binding upon the Employers, Participants, former Participants, and Beneficiaries hereunder, and, as the case may be, the heirs, executors, administrators, successors, and assigns of each of them. 12.10 HEADINGS. All headings used in the Plan are for convenience of reference only and are not part of the substance of the Plan. 12.11 DUTY TO FURNISH INFORMATION. The Corporation shall furnish to each Participant, former Participant, or Beneficiary any documents, reports, returns, statements, or other information that it reasonably deems necessary to perform its duties imposed hereunder or otherwise imposed by law. 12.12 TRUST FUND. At its discretion, the Corporation may establish one or more trusts, with such trustees as the Corporation may approve, for the purpose of providing for the payment of benefits owed under the Plan. Although such a trust may be irrevocable, in the event of insolvency or bankruptcy of the Corporation, such assets will be subject to the claims of the Corporation's general creditors. To the extent any benefits provided under the Plan are paid from any such trust, the Employer shall have no further obligation to pay them. If not paid from the trust, such benefits shall remain the obligation of the Employer. 12.13 VALIDITY. In case any provision of this Plan shall be held illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal and invalid provision had never been inserted herein. 12.14 NOTICE. Any notice required or permitted under the Plan shall be deemed sufficiently provided if such notice is in writing and hand delivered or sent by registered or certified mail. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark or on the receipt for registration or certification. Mailed notice to the Corporation shall be directed to the Corporation's address, attention: KeyCorp Compensation and Benefits Department. Mailed notice to a Participant or Beneficiary shall be directed to the individual's last known address in the Employer's records. 12.15 SUCCESSORS. The provisions of this Plan shall bind and inure to the benefit of each Employer and its successors and assigns. The term successors as used herein shall include any corporate or other business entity which shall, whether by merger, consolidation, purchase or otherwise, acquire all or substantially all of the business and assets of an Employer. KEYCORP By: /s/ Thomas E. Helfrich ------------------------------------- Title: Executive Vice President ---------------------------------- EX-10.40 12 l97974aexv10w40.txt EX-10.40 KEYCORP SUPPLEMENTAL RETIREMENT PLAN EXHIBIT 10.40 KEYCORP SUPPLEMENTAL RETIREMENT PLAN ARTICLE I THE PLAN The KeyCorp Supplemental Retirement Plan (the "Plan"), as amended and restated as of August 1, 1996, is hereby amended and restated in its entirety to be effective as of January 1, 2002. The Plan, as amended, is designed to provide a supplemental retirement benefit to certain key employees of KeyCorp and its subsidiaries who became covered under the Plan in their capacity as a key employee of Society Corporation, and who in accordance with the terms of the Plan constitute a "Grandfathered Employee" as that term is defined below. It is the intention of KeyCorp and it is the understanding of the Grandfathered Employees covered under the Plan, that the Plan is unfunded for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). ARTICLE II DEFINITIONS 2.1 MEANINGS OF DEFINITIONS. As used herein, the following words and phrases shall have the meanings hereinafter set forth, unless a different meaning is plainly required by the context: (a) "AVERAGE INTEREST CREDIT" shall mean the average of the Interest Credits (as defined in the Retirement Plan) for the three (3) consecutive calendar years ending with the year of the Grandfathered Employee's termination. (b) "AVERAGE TREASURY RATE" shall mean the average of the Treasury Rates (as defined in the Retirement Plan) for the three (3) consecutive calendar years ending with the year of the Grandfathered Employee's termination. (c) "BENEFICIARY" shall mean the Grandfathered Employee's surviving spouse or such other Beneficiary determined pursuant to Article VII of the Retirement Plan in the event the Grandfathered Employee dies before his or her Supplemental Retirement Benefit shall have been distributed to him or her in full. (d) "COMPENSATION" for any Plan year or any partial Plan year in which the Grandfathered Employee incurs a severance from service date shall mean the entire amount of base compensation paid to such Grandfathered Employee during such period by reason of his employment as an Employee as reported for federal income tax purposes, or such base compensation which would have been paid -1- except for (1) the timing of an Employer's payroll processing operations, (2) the Grandfathered Employee's election to participate in the KeyCorp 401(k) Savings Plan, KeyCorp Excess 401(k) Savings Plan, the KeyCorp Flexible Benefits Plan, the KeyCorp Automatic Deferral Plan, and/or (3) the Grandfathered Employee's election to defer such base compensation election of under the KeyCorp Deferred Compensation Plan for the applicable Plan year(s), provided, however, that the term Compensation shall specifically exclude: (i) any amount attributable to the Grandfathered Employee's exercise of stock appreciation rights and the amount of any gain to the Grandfathered Employee upon the exercise of stock options; (ii) any amount attributable to the Grandfathered Employee's receipt of non-cash remuneration whether or not it is included in the Grandfathered Employee's income for federal income tax purposes; (iii) any amount attributable to the Grandfathered Employee's receipt of moving expenses and any relocation bonus paid to the Grandfathered Employee during the Plan year; (iv) any amount attributable to a lump sum severance payment paid by an Employer or the Corporation to the Grandfathered Employee; (v) any amount attributable to fringe benefits (cash and non-cash); (vi) any amount attributable to any bonus or payment made as an inducement for the Grandfathered Employee to accept employment with an Employer; (vii) any amount paid to the Grandfathered Employee during the Plan year which is attributable to interest earned and any KeyCorp matching contributions allocated on compensation deferred under a plan of an Employer or the Corporation. (viii) any amount attributable to salary deferrals paid to the Grandfathered Employee during the Plan year, which have been previously included as compensation under the Plan; and (ix) any amount paid for any period after the Grandfathered Employee's termination or retirement date. -2- (e) "CORPORATION" shall mean KeyCorp, an Ohio corporation, its corporate successors, and any corporation or corporations into or with which it may be merged or consolidated. (f) "EARLY RETIREMENT DATE" shall mean the date of the Grandfathered Employee's retirement from his or her employment with an Employer on or after the Grandfathered Employee's attainment of age 55 and completion of a minimum of ten years of Benefit Service, but prior to the Grandfathered Employee's Normal Retirement Date. (g) "EMPLOYEE" shall mean any person who is employed by an Employer, provided, however, that as of December 31, 1994 all Employees who are Plan Grandfathered Employees (other than Grandfathered Employees) shall cease any further future benefit accrual under the Plan and such Employees' Supplemental Retirement Plan benefit shall be valued in accordance with the provisions of Article IX hereof and transferred to KeyCorp Excess Cash Balance Pension Plan. Thereafter, effective January 1, 1995, the term "Employee" shall include only Grandfathered Employees. (h) "EMPLOYER" shall mean the Corporation and any of its subsidiaries or affiliates unless specifically excluded as an Employer for Plan purposes by written action of an officer of the Corporation. An Employer's participation shall be subject to any conditions or requirements made by the Corporation, and each Employer shall be deemed to appoint the Corporation as its exclusive agent under the Plan as long as it continues as an Employer. (i) "FINAL AVERAGE COMPENSATION" shall mean with respect to any Grandfathered Employee, the annual average of his or her highest aggregate Compensation for any period of five consecutive years within the period of ten consecutive full years immediately prior to his or her retirement or other termination of employment, or any termination of the Plan, whichever first occurs; provided, however, that if a Grandfathered Employee is employed for less than five consecutive years prior to such date, the term shall mean the monthly average of the aggregate amount of his or her Compensation for the entire period of the Grandfathered Employee's employment, multiplied by 12. If a Grandfathered Employee receives no Compensation for any portion of such five consecutive years because of absence from work, there shall be treated as Compensation received during such period of absence an amount equal to the Compensation he or she would have received had the Grandfathered Employee not been absent, such amount to be determined by the Corporation on the basis of such Grandfathered Employee's salary or wage rate in effect immediately prior to such absence; provided, however, that no Compensation shall be credited hereunder for the period during which the Grandfathered Employee is permanently and totally disabled and for which he receives benefits under the long term disability program maintained in effect by his Employer. -3- (j) "GRANDFATHERED EMPLOYEE" shall mean an Employee who is listed on Exhibit A attached hereto. (k) "HARMFUL ACTIVITY" shall have occurred if the Grandfathered Employee shall do any one or more of the following: (i) Use, publish, sell, trade or otherwise disclose Non-Public Information of KeyCorp unless such prohibited activity was inadvertent, done in good faith and did not cause significant harm to KeyCorp. (ii) After notice from KeyCorp, fail to return to KeyCorp any document, data, or thing in his or her possession or to which the Grandfathered Employee has access that may involve Non-Public Information of KeyCorp. (iii) After notice from KeyCorp, fail to assign to KeyCorp all right, title, and interest in and to any confidential or non-confidential Intellectual Property which the Grandfathered Employee created, in whole or in part, during employment with KeyCorp, including, without limitation, copyrights, trademarks, service marks, and patents in or to (or associated with) such Intellectual Property. (iv) After notice from KeyCorp, fail to agree to do any acts and sign any document reasonably requested by KeyCorp to assign and convey all right, title, and interest in and to any confidential or non-confidential Intellectual Property which the Grandfathered Employee created, in whole or in part, during employment with KeyCorp, including, without limitation, the signing of patent applications and assignments thereof. (v) Upon the Grandfathered Employee's own behalf or upon behalf of any other person or entity that competes or plans to compete with KeyCorp, solicit or entice for employment or hire any KeyCorp employee. (vi) Upon the Grandfathered Employee's own behalf or upon behalf of any other person or entity that competes or plans to compete with KeyCorp, call upon, solicit, or do business with (other than business which does not compete with any business conducted by KeyCorp) any KeyCorp customer the Grandfathered Employee called upon, solicited, interacted with, or became acquainted with, or learned of through access to information (whether or not such information is or was non-public) while the Grandfathered Employee was employed at KeyCorp unless such prohibited activity was inadvertent, done in good faith, and did not involve a customer whom the Grandfathered Employee should have reasonably known was a customer of KeyCorp. -4- (vii) Upon the Grandfathered Employee's own behalf or upon behalf of any other person or entity that competes or plans to compete with KeyCorp, after notice from KeyCorp, continue to engage in any business activity in competition with KeyCorp in the same or a closely related activity that the Grandfathered Employee was engaged in for KeyCorp during the one year period prior to the termination of the Grandfathered Employee's employment. For purposes of this Section 2.1(k) the term: "INTELLECTUAL PROPERTY" shall mean any invention, idea, product, method of doing business, market or business plan, process, program, software, formula, method, work of authorship, or other information, or thing relating to KeyCorp or any of its businesses. "NON-PUBLIC INFORMATION" shall mean, but is not limited to, trade secrets, confidential processes, programs, software, formulas, methods, business information or plans, financial information, and listings of names (e.g., employees, customers, and suppliers) that are developed, owned, utilized, or maintained by an employer such as KeyCorp, and that of its customers or suppliers, and that are not generally known by the public. "KEYCORP" shall include KeyCorp, its subsidiaries, and its affiliates. (l) "INCENTIVE COMPENSATION AWARD" for any Plan year shall collectively mean the short term incentive compensation award (whether in cash or common shares of the Corporation, and whether paid or deferred, or a combination of both) and the long term incentive compensation award (whether in cash or common shares of the Corporation, and whether paid or deferred, or a combination of both) (if any) granted to a Grandfathered Employee under an Incentive Compensation Plan, as follows: - An incentive compensation award granted under the KeyCorp Annual Incentive Plan, the KeyCorp Short Term Incentive Compensation Plan, the KeyCorp Management Incentive Compensation Plan, and/or such other Employer-sponsored line of business Incentive Compensation Plan which shall constitute an incentive compensation award for the year in which the award is earned (without regard to the actual time of payment). - An incentive compensation award granted under the KeyCorp Long Term Incentive Compensation Plan ("LTIC Plan") with respect to any multi-year performance period which shall be deemed to be for the last year of the multi-year period without regard to the actual time of payment of the award. Accordingly, an incentive compensation award granted under the LTIC Plan -5- with respect to the three-year performance period of 1993, 1994, and 1995 will be deemed to be for 1995 (without regard to the actual time of payment), and the entire Incentive Compensation award under the LTIC Plan for that performance period will be a LTIC Plan award for the year 1995. - An incentive compensation award granted under the KeyCorp Long Term Incentive Plan ("Long Term Plan") with respect to any multi-year period which shall be deemed to be for the last year of the multi-year performance period and for the year immediately following such year (without regard to the actual time of payment). Accordingly, an award granted under the Long Term Plan with respect to the four-year performance period of 1998, 1999, 2000, and 2001 shall be deemed to be for the years 2001 and 2002, with one-half the award allocated to the year 2001, and one-half the award allocated to the year 2002. - An incentive compensation award granted in the form of restricted stock under the KeyCorp Amended and Restated 1991 Equity Compensation Plan with respect to any multi-year period (but specifically excluding those awards applicable to the 2002-2003 multi-year period), which shall be deemed to be for the year in which the award (grant) is made to the Grandfathered Employee; provided, however, that only those shares of restricted stock that have vested as of the Grandfathered Employee's termination date shall be utilized for purposes of determining the Grandfathered Employee's incentive compensation award. The fair market value of such shares as of the date of the restricted stock grant multiplied by the number of vested shares as of the Grandfathered Employee's termination date shall determine the value of such incentive compensation award for purposes of calculating the Grandfathered Employee's Supplemental Retirement Benefit under the provisions of Article III of the Plan. Notwithstanding the foregoing, however, if at the time of the Grandfathered Employee's termination date, the Grandfathered Employee maintains shares of not forfeited restricted stock and such restricted stock later vests in conjunction with the passage of time or with the Corporation's attainment of certain performance criteria, or otherwise, then as of such vesting date(s), the Grandfathered Employee's Monthly Supplemental Retirement Benefit shall be recalculated to include such newly vested shares for purposes of determining the value of the Grandfathered Employee's incentive compensation award(s) in accordance with Article III of the Plan. - An incentive compensation award granted in the form of either restricted stock and/or phantom shares (hereinafter collectively referred to as "shares") under the KeyCorp Chief Executive Officer Plan with respect to any multi-year period (but specifically excluding those awards applicable to the 2002- -6- 2003 multi-year period), which shall be deemed to be for the year in which the award (grant) is made to the Grandfathered Employee; provided, however, that only those shares that have vested as of the Grandfathered Employee's termination date shall be utilized for purposes of determining the Grandfathered Employee's incentive compensation award. The fair market value of such shares as of the date of the share grant multiplied by the number of vested shares as of the Grandfathered Employee's termination date shall determine the value of such incentive compensation award for purposes of calculating the Grandfathered Employee's Supplemental Retirement Benefit under the provisions of Article III of the Plan. Notwithstanding the foregoing, however, if at the time of the Grandfathered Employee's termination date, the Grandfathered Employee maintains not forfeited shares, and such shares later vest in conjunction with the passage of time or with the Corporation's attainment of certain performance criteria, or otherwise, then as of such vesting date(s), the Grandfathered Employee's Monthly Supplemental Retirement Benefit shall be recalculated to include such newly vested shares for purposes of determining the value of the Grandfathered Employee's incentive compensation award(s) in accordance with Article III of the Plan. (m) "INCENTIVE COMPENSATION PLAN" shall mean the KeyCorp Management Incentive Compensation Plan, the KeyCorp Annual Incentive Plan, the KeyCorp Short Term Incentive Compensation Plan, the KeyCorp Long Term Incentive Compensation Plan, the KeyCorp Long Term Incentive Plan, the KeyCorp Amended and Restated 1991 Equity Compensation Plan, the KeyCorp Chief Executive Officer Plan and/or such other Employer-sponsored line of business incentive compensation plan that KeyCorp in its sole discretion determines constitutes an "Incentive Compensation Plan" for purposes of this Section 2.1(m), as may be amended from time to time. (n) "KEYCORP CHIEF EXECUTIVE OFFICER PLAN" shall mean the KeyCorp Chief Executive Officer Restricted Stock Plan, as may be amended from time to time, including any other successor or replacement plan. (o) "NORMAL RETIREMENT DATE" shall mean the first day of the month coinciding with or immediately following a Grandfathered Employee's 65th birthday, or if later, the fifth anniversary of the Grandfathered Employee's employment commencement date. (p) "RETIREMENT PLAN" shall mean the KeyCorp Cash Balance Pension Plan with all amendments, modifications and supplements which may be made thereto, as in effect on the date of a Grandfathered Employee's retirement, death, or other termination of employment. -7- (q) "SUPPLEMENTAL RETIREMENT BENEFIT" shall mean the benefit paid under this Plan as determined under Article III of the Plan. All other capitalized and undefined terms used herein shall have the meanings given them in the Retirement Plan for Employees of Society Corporation and Subsidiaries (January 1, 1993 Restatement) ("Society Retirement Plan"), unless a different meaning is plainly required by the context. The masculine gender includes the feminine, and singular references include the plural, unless the context clearly requires otherwise. ARTICLE III SUPPLEMENTAL RETIREMENT BENEFIT 3.1 ELIGIBILITY. A Grandfathered Employee shall be eligible for a Supplemental Retirement Benefit hereunder if the Grandfathered Employee (i) retires on or after age 65 with five or more years of Benefit Service, (ii) terminates employment with an Employer on or after age 55 with ten or more years of Benefit Service, (iii) terminates his or her active employment with an Employer upon becoming Disabled after completing five or more years of Benefit Service and disability benefits have ceased under the KeyCorp Long-Term Disability Plan due to the Grandfathered Employee's election for Early or Normal Retirement under the Retirement Plan, or (iv) dies after completing five or more years of Benefit Service, and has a Beneficiary who is eligible for a benefit under the Retirement Plan. 3.2 AMOUNT AND PAYMENT. Subject to the provisions of Section 3.4 hereof, a Grandfathered Employee's Supplemental Retirement Benefit shall be determined as follows: Effective as of December 5, 1989, the monthly Supplemental Retirement Benefit payable to a Grandfathered Employee shall be such amount as is required, when added to the monthly benefit payable (before the reduction applicable to any optional method of payment) under the Retirement Plan, to produce an aggregate monthly benefit equal to the monthly benefit which would have been payable (determined without regard to the annual limitation on Plan benefits imposed pursuant to Section 415 of the Code, the limitation on annual compensation imposed pursuant to Section 401(a)(17) of the Code, or the reduction applicable to any optional method of payment) under either the Society Retirement Plan formula in effect on and after January 1, 1989, or the applicable Society Retirement Plan formula in effect prior to January 1, 1989, whichever results in a larger monthly benefit, if there was added to the Grandfathered Employee's Final Average Monthly Compensation an amount equal to the monthly average of the highest five Incentive Compensation Awards granted to him or her under an Incentive Compensation Plan during the ten-year period preceding the earliest of his retirement, death, disability, or other termination of employment. Notwithstanding the foregoing, if a Grandfathered Employee was granted fewer than five awards, such monthly average is determined by -8- adding the amounts of such awards and dividing by 60. Solely for purposes of reference, the alternative benefit formulas in effect under the Society Retirement Plan prior to January 1, 1989, and the eligibility criteria applicable to each are reproduced in Exhibit B attached hereto. 3.3 EARLY RETIREMENT ELECTION. Subject to the provisions of Section 3.4 hereof, if a Grandfathered Employee elects to receive his or her Supplemental Retirement Benefit on or after the Grandfathered Employee's Early Retirement Date but prior to the Grandfathered Employee's Normal Retirement Date, the Grandfathered Employee's Supplemental Retirement Benefit shall be calculated in accordance with the provisions of Section 3.2 hereof, provided, however, that the benefit payable under the Retirement Plan for purposes of Section 3.2 and this Section 3.3 hereof, shall be the Grandfathered Employee's Normal Retirement Date benefit. In calculating this Normal Retirement Date benefit, if the Grandfathered Employee is not eligible for, or chooses not to elect his or her monthly benefit under the provisions of Section 6.5(b) of the Retirement Plan, then such Grandfathered Employee's Retirement Plan benefit as of his or her termination date shall be increased for purposes of this Plan with an imputed Average Interest Credit to reflect the Grandfathered Employee's benefit at his or her Normal Retirement Date, and shall be converted to the form of a single life annuity option using the Average Treasury Rate and GATT Mortality Table. The amount of the Grandfathered Employee's monthly Supplemental Retirement Benefit otherwise determined under this Section 3.3 hereof shall then be reduced by .3% for each month between ages 55 and 60 and .4% for each month after age 60 in which the commencement of the Grandfathered Employee's Supplemental Retirement Benefit precedes his or her Normal Retirement Date. 3.4 RECALCULATION AS A RESULT OF HARMFUL ACTIVITY. Notwithstanding the foregoing provisions of Section 3.2 and Section 3.3 hereof, the Corporation reserves the right at all times to recalculate a Grandfathered Employee's Supplemental Retirement Benefit, if it is determined that within six months of the Grandfathered Employee's termination date the Grandfathered Employee engaged in any Harmful Activity, as that term is defined in accordance with Section 2.1(k) of the Plan, which resulted in the forfeiture of all or any portion of the Grandfathered Employee's restricted share award(s) under the KeyCorp Amended and Restated 1991 Equity Compensation Plan or the KeyCorp Chief Executive Officer Plan. Such recalculation shall relate back to the Grandfathered Employee's original date of termination, and any Supplemental Retirement Benefit payment paid to the Grandfathered Employee in excess of such recalculated Supplemental Retirement Benefit amount shall be offset against any future Supplemental Retirement Benefit payments to be paid to the Grandfathered Employee. 3.5 ACTUARIAL FACTORS. The Supplemental Retirement Benefit payable to a Grandfathered Employee or Grandfathered Employee's Beneficiary in a form other than a single life annuity shall be actuarially equivalent to such single life annuity payment option. In making the determination provided for in this Article III, the Corporation shall rely upon calculations made by the independent actuaries for the Plan, who shall determine actuarially equivalent benefits under the Plan by applying the UP-1984 Mortality Table (set back two years) and using an interest rate of 6%. -9- ARTICLE IV PAYMENT OF SUPPLEMENTAL RETIREMENT BENEFIT 4.1 IMMEDIATE PAYMENT UPON TERMINATION OR RETIREMENT OF GRANDFATHERED EMPLOYEE. Subject to the provisions of Section 4.2 hereof, a Grandfathered Employee meeting the age and service eligibility requirements of Section 3.1 shall receive an immediate distribution of his or her Supplemental Retirement Benefit upon the Grandfathered Employee's retirement or termination of employment, in the form of a single life annuity, unless the Grandfathered Employee elects in writing a minimum of thirty days prior to his or her retirement or termination date, to receive payment of his or her Supplemental Retirement Benefit under a different form of payment. The forms of payment from which a Grandfathered Employee may elect shall be identical to those forms of payment specified in the Retirement Plan, provided, however, that the lump sum payment option available under the Retirement Plan shall not be available under this Plan. Such method of payment, once elected by the Grandfathered Employee, shall be irrevocable. 4.2 DEFERRED BENEFIT PAYMENT. A Grandfathered Employee who retires or terminates his or her employment with an Employer after meeting the age and service requirements of Section 3.1, may elect to defer receipt of his or her Supplemental Retirement Benefit until a date specified by the Grandfathered Employee, provided, (1) the Grandfathered Employee notifies the Corporation in writing of his or her deferral election a minimum of one year prior to the Grandfathered Employee's retirement or termination of employment, (2) the Grandfathered Employee specifies the future date on which such Supplemental Retirement Benefit shall be distributed, and (3) the Grandfathered Employee commences distribution of his or her Supplemental Retirement Benefit no later than the first day of the month immediately following the Grandfathered Employee's sixty-fifth (65th) birthday. The election to defer, once made by the Grandfathered Employee, shall be irrevocable. Notwithstanding the foregoing, in the case of an "unforeseeable emergency", upon written application by the Grandfathered Employee to the Corporation, the Corporation, in its sole discretion, may accelerate the distribution of the Grandfathered Employee's deferred Supplemental Retirement Benefit. For purposes of this Section 4.2, the term "unforeseeable emergency" shall mean an unanticipated emergency that is caused by an event beyond the control of the Grandfathered Employee that would result in severe financial hardship to the Grandfathered Employee if such premature distribution were not permitted. 4.3 PAYMENT UPON DEATH OF GRANDFATHERED EMPLOYEE. (a) Upon the death of a Grandfathered Employee who has met the service requirement of Section 3.1, but who has not yet commenced distribution of his or her Supplemental Retirement Benefit there shall be paid to the Grandfathered Employee's Beneficiary 50% of the Supplemental Retirement Benefit which the Grandfathered Employee would have been entitled to receive had he or she retired -10- on his or her Normal Retirement Date and elected to receive his or her Supplemental Retirement Benefit. For purposes of this Section 4.3(a) only, the following shall apply: (i) The Grandfathered Employee's Benefit Service shall be calculated as of the Grandfathered Employee's date of death. (ii) The Grandfathered Employee's Retirement Plan benefit shall be calculated under the provisions of Article IV of the Retirement Plan as if the Grandfathered Employee retired on his or her Normal Retirement Date, with such Retirement Plan benefit being increased for purposes of this Section 4.3(a) with an imputed Average Interest Credit to reflect what the Grandfathered Employee's Retirement Plan benefit would have been as of the Grandfathered Employee's Normal Retirement Date; such Retirement Plan benefit shall be converted to a single life annuity option using the Average Treasury Rate and the Gatt Mortality Table. Payment of this death benefit shall be made in the form of a single life annuity, and will be subject to distribution any time after the date the Grandfathered Employee would have attained his or her Early Retirement Date, which shall be calculated in accordance with the actuarial reduction provisions contained within Section 3.3 hereof, if paid prior to the Grandfathered Employee's Normal Retirement Date. (b) In the event of a Grandfathered Employee's death after the Grandfathered Employee has commenced distribution of his or her Supplemental Retirement Benefit, there shall be paid to the Grandfathered Employee's Beneficiary only those survivor benefits provided under the form of benefit payment elected by the Grandfathered Employee. 4.4 PAYMENT UPON GRANDFATHERED EMPLOYEE'S ATTAINMENT OF AGE 70-1/2. A Grandfathered Employee shall be required to commence distribution of his or her Supplemental Retirement Benefit no later than April 1 of the calendar year following the year in which the Grandfathered Employee attains age 70-1/2. ARTICLE V ADMINISTRATION AND CLAIMS PROCEDURE 5.1 ADMINISTRATION. The Corporation, which shall be the "Administrator" of the Plan for purposes of ERISA and the "Plan Administrator" for purposes of the Code, shall be responsible for the general administration of the Plan, for carrying out the provisions hereof, and for making payments hereunder. The Corporation shall have the sole and absolute discretionary -11- authority and power to carry out the provisions of the Plan, including, but not limited to, the authority and power (a) to determine all questions relating to the eligibility for and the amount of any benefit to be paid under the Plan, (b) to determine all questions pertaining to claims for benefits and procedures for claim review, (c) to resolve all other questions arising under the Plan, including any questions of construction, and (d) to take such further action as the Corporation shall deem necessary or advisable in the administration of the Plan. All findings, decisions, and determinations of any kind made by the Corporation shall not be disturbed unless the Corporation has acted in an arbitrary and capricious manner. Subject to the requirements of law, the Corporation shall be the sole judge of the standard of proof required in any claim for benefits and in any determination of eligibility for a benefit. All decisions of the Corporation shall be final and binding on all parties. The Corporation may employ such attorneys, investment counsel, agents, and accountants, as it may deem necessary or advisable to assist it in carrying out its duties hereunder. The actions taken and the decisions made by the Corporation hereunder shall be final and binding upon all interested parties subject, however, to the provisions of Section 5.2. The Plan year, for purposes of Plan administration, shall be the calendar year. 5.2 CLAIMS REVIEW PROCEDURE. Whenever the Corporation decides for whatever reason to deny, whether in whole or in part, a claim for benefits under this Plan filed by any person (herein referred to as the "Claimant"), the Corporation shall transmit a written notice of its decision to the Claimant, which notice shall be written in a manner calculated to be understood by the Claimant and shall contain a statement of the specific reasons for the denial of the claim and a statement advising the Claimant that, within 60 days of the date on which he receives such notice, he may obtain review of the decision of the Corporation in accordance with the procedures hereinafter set forth. Within such 60-day period, the Claimant or his authorized representative may request that the claim denial be reviewed by filing with the Corporation a written request therefore, which request shall contain the following information: (a) the date on which the request was filed with the Corporation; provided, however, that the date on which the request for review was in fact filed with the Corporation shall control in the event that the date of the actual filing is later than the date stated by the Claimant pursuant to this paragraph (a); (b) the specific portions of the denial of his claim which the Claimant requests the Corporation to review; (c) a statement by the Claimant setting forth the basis upon which he believes the Corporation should reverse its previous denial of his or her claim and accept his or her claim as made; and; (d) any written material which the Claimant desires the Corporation to examine in its consideration of the Claimant's position as stated pursuant to paragraph (c) above. In accordance with this Section, if the Claimant requests a review of the Corporation's decision, such review shall be made by the Corporation, who shall, within sixty (60) days after receipt of the request form, review and render a written decision on the claim containing the -12- specific reasons for the decision including reference to Plan provisions upon which the decision is based. All findings, decisions, and determinations of any kind made by the Corporation shall not be modified unless the Corporation has acted in an arbitrary and capricious manner. Subject to the requirements of a law, the Corporation shall be the sole judge of the standard of proof required in any claim for benefits, and any determination of eligibility for a benefit. All decisions of the Corporation shall be binding on the Claimant and upon all other Persons. If the Claimant shall not file written notice with the Corporation at the times set forth above, such individual shall have waived all benefits under the Plan other than as already provided, if any, under the Plan. ARTICLE VI FUNDING All benefits under the Plan shall be payable solely in cash from the general assets of the Corporation or a subsidiary, and Grandfathered Employees, and Grandfathered Employees' Beneficiaries shall have the status of general unsecured creditors of the Corporation. The obligations of the Corporation to make distributions in accordance with the provisions of the Plan constitute a mere promise to make payments in the future. The Corporation shall have no obligation to establish a trust or fund to fund its obligation to pay benefits under the Plan or to insure any benefits under the Plan. Notwithstanding any provision of this Plan, the Corporation may, in its sole discretion, combine the payment due and owing under this Plan with one or more other payments owing to a Grandfathered Employee, or a Grandfathered Employee's Beneficiary under any other plan, contract, or otherwise (other than any payment due under the Retirement Plan), in one check, direct deposit, wire transfer, or other means of payment. Finally, it is the intention of the Corporation and the Grandfathered Employees 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. ARTICLE VII AMENDMENT AND TERMINATION The Corporation reserves the right to amend or terminate the Plan at any time by action of its Board of Directors or a duly authorized committee of such Board of Directors; provided, however, that no such action shall adversely affect the benefit accrued up to the date of the Plan amendment or termination for any Grandfathered Employee who has met the age and service requirements of Section 3.1 of the Plan, or any Grandfathered Employee or Grandfathered Employee's Beneficiary who is receiving a Supplemental Retirement Benefit, unless an equivalent benefit is provided under another plan maintained by an Employer. -13- ARTICLE VIII MISCELLANEOUS 8.1 INTEREST OF GRANDFATHERED EMPLOYEE. The obligation of the Corporation under the Plan to provide a Grandfathered Employee, or Grandfathered Employee's Beneficiary, with a Supplemental Retirement Benefit merely constitutes the unsecured promise of the Corporation to make payments as provided herein, and no person shall have any interest in, or a lien or prior claim on, any property of the Corporation. 8.2 NO COMMITMENT AS TO EMPLOYMENT. Nothing herein contained shall be construed as a commitment or agreement upon the part of any Grandfathered Employee hereunder to continue his employment with an Employer, and nothing herein contained shall be construed as a commitment on the part of any Employer to continue the employment or rate of compensation of any Grandfathered Employee hereunder for any period. All Grandfathered Employees shall remain subject to discharge to the same extent as if the Plan had never been put into effect. 8.3 BENEFITS. Nothing in the Plan shall be construed to confer any right or claim upon any person, firm, or corporation other than Grandfathered Employees, or Grandfathered Employees' Beneficiaries who become entitled to a benefit under the Plan. 8.4 RESTRICTIONS ON ALIENATION. Except to the extent permitted by law, no benefit under the Plan shall be subject to anticipation, alienation, assignment (either at law or in equity), encumbrance, garnishment, levy, execution, or other legal or equitable process. No person shall have power in any manner to anticipate, transfer, assign, (either at law or in equity), alienate or subject to attachment, garnishment, levy, execution, or other legal or equitable process, or in any way encumber his benefits under the Plan, or any part thereof, and any attempt to do so shall be void. 8.5 ABSENCE OF LIABILITY. No member of the Board of Directors of the Corporation or a subsidiary or any officer of the Corporation or a subsidiary shall be liable for any act or action hereunder, whether of commission or omission, taken by any other member, or by any officer, agent, or employee, except in circumstances involving his bad faith or willful misconduct, for anything done or omitted to be done by himself. 8.6 EXPENSES. The expenses of administration of the Plan shall be paid by the Corporation. 8.7 PRECEDENT. Except as otherwise specifically provided, no action taken in accordance with the Plan by the Corporation shall be construed or relied upon as a precedent for similar action under similar circumstances. -14- 8.8 DUTY TO FURNISH INFORMATION. The Corporation shall furnish to each Grandfathered Employee or Grandfathered Employee's Beneficiary any documents, reports, returns statements, or other information that it reasonably deems necessary to perform its duties imposed hereunder or otherwise imposed by law. 8.9 WITHHOLDING. The Corporation shall withhold any tax required by any present or future law to be withheld from any payment hereunder to any Grandfathered Employee or Grandfathered Employee's Beneficiary. 8.10 VALIDITY OF PLAN. The validity of the Plan shall be determined and the Plan shall be construed and interpreted in accordance with the provisions of the Act, the Code, and, to the extent applicable, the laws of the State of Ohio. The invalidity or illegality of any provision of the Plan shall not affect the validity or legality of any other part thereof. 8.11 PARTIES BOUND. The Plan shall be binding upon the Employer, all Grandfathered Employees, and all Grandfathered Employees' Beneficiaries, and the executors, administrators, successors, and assigns of each of them. 8.12 HEADINGS. All headings used in the Plan are for convenience of reference only and are not part of the substance of the Plan. ARTICLE IX TRANSFER OF EMPLOYEES' SUPPLEMENTAL RETIREMENT PLAN BENEFIT INTO THE KEYCORP EXCESS CASH BALANCE PENSION PLAN 9.1 TRANSFER OF EMPLOYEES' SUPPLEMENTAL RETIREMENT PLAN BENEFIT INTO THE KEYCORP EXCESS CASH BALANCE RETIREMENT PLAN. Effective December 31, 1994, all benefit accruals under the Plan for Employees (other than Grandfathered Employees) shall cease, and the Plan benefits for such Employees (other than Grandfathered Employees) shall be calculated and reduced to a lump sum cash benefit by applying the Pension Benefit Guarantee Corporation interest rate for determining lump sum cash benefits as in effect on January l, 1995 and the UP-1984 Mortality Table (no set-back). Effective January l, 1995, the lump sum value of each Employee's (other than Grandfathered Employees') Supplemental Retirement Benefit, as so calculated, shall be transferred to the KeyCorp Excess Cash Balance Pension Plan, and each Employee's Supplemental Retirement Benefit shall become the Employee's opening account balance under the KeyCorp Excess Cash Balance Pension Plan. 9.2 APPLICABILITY OF PLAN PROVISIONS. Notwithstanding anything to the contrary contained in this Plan, the sole provisions of this Plan which continue to have any effect with respect to Employees (other than Grandfathered Employees) on and after January 1, 1995 shall be the provisions of this Article IX, and such Employees shall cease to be Plan Employees as of such date. -15- 9.3 EFFECT OF TRANSFER. The Plan shall not be deemed terminated or discontinued by reason of this Article IX and the transfer of Employees' Supplemental Retirement Benefits into the KeyCorp Excess Cash Balance Retirement Plan; such transfer shall be applicable only to Employees and shall have no effect on Grandfathered Employees' continued Plan participation and accrual of Plan benefits on and after January 1, 1995. No Supplemental Retirement Benefit or any other benefit shall be paid under this Plan to an Employee on or after January 1, 1995. ARTICLE X CHANGE OF CONTROL Notwithstanding any other provision of the Plan to the contrary, in the event of a Change of Control, a Grandfathered Employee's interest in his or her Supplemental Retirement Benefit shall vest, and the Grandfathered Employee shall be entitled to receive an immediate distribution of his or her Supplemental Retirement Benefit, if on and after a Change of Control the Grandfathered Employee has at least five (5) years of Benefit Service, and (i) the Grandfathered Employee's employment is terminated by his or her Employer and any other Employer without cause, or (ii) the Grandfathered Employee resigns within two years following a Change of Control as a result of the Grandfathered Employee's mandatory relocation, reduction in the Grandfathered Employee's base salary, reduction in the Grandfathered Employee's average annual incentive compensation (unless such reduction is attributable to the overall corporate or business unit performance), or the Grandfathered Employee's exclusion from stock option programs as compared to comparably situated Employees. For purposes of this Article X hereof, a "Change of Control" shall be deemed to have occurred if under a rabbi trust arrangement established by the Corporation ("Trust"), as such Trust may from time to time be amended or substituted, the Corporation is required to fund the Trust to secure the payment of any Grandfathered Employees' Plan benefits payable hereunder because a "Change of Control" as defined in the Trust has occurred. KEYCORP By: /s/ Thomas E. Helfrich ----------------------------------- Title: Executive Vice President -------------------------------- -16- EXHIBIT A LIST OF GRANDFATHERED EMPLOYEE NAME OF EMPLOYEE NAME OF EMPLOYEE Andrews, James McGuire, James Auletta, Patrick McDaniel, D.A. Bailey, Raymond McGinty, Kevin Barger, C. Michael Melluzzo, Sebastian Beran, John Meyer, John R. Blake, John T. Meyer III, Henry Brooks, Craig Moody Jr., John Bullard, Janet Murray, Bruce Carlini, Lawrence Neel, Thomas M. Colao Jr., Anthony Newman, Michael Cortelli, John Noall, Roger Cruse Jr., Donald Nucerino, Donald Deal, Frederick O'Donnell, F. Scott Doland, Michael Patrick, Robert Dorland, David Platt, Craig T. Edmonds, David Ponchak, Frank Egan, Richard Purinton II, Arthur Fishell, James Rapacz, Richard Flowers, James Rasmussen, Eric Gill, Michael Roark, Michael Gillespie, Jr., Robert Rusnak, Joseph Greer, Michael Saddler, Thomas Gula, Allen Schaedel, Elroy Haas, Robert Seink, Edward Hancock, John Simon, William Hann, Jr., William Smith, James J. Hartman, Sheldon Swisher, Trace Hawthorne, Douglas Tracy, Robert Hedberg, Douglas Trigg, Michael Heintel, Jr., Carl Uzl, Ralph R. Heisler, Jr., Robert Walker, Martin Herron, David Wall, Stephen Heyworth, Anthony Wert, James W. Hitchcock, Thomas Willet, Richard Holloway, Ruben L. -17- Johannsen, Rolland D. Jones, Robert G. Kamerer, James Kaplan, Stephen Karnatz, William Kleinhenz, Karen R. Klimas, Daniel Knapp, Peter O. Koontz, Cary Kucler, Jack Malone, Michael Mayer, George -18- EXHIBIT B FOR PERIODS OF TIME PRIOR TO JANUARY 1, 1989, THREE ALTERNATIVE BENEFIT FORMULAS WERE IN EFFECT UNDER THE SOCIETY RETIREMENT PLAN. THE MONTHLY AMOUNT OF THE NORMAL RETIREMENT BENEFIT PAYABLE TO AN ELIGIBLE GRANDFATHERED EMPLOYEE WAS EQUAL TO: (a) IF HE BECAME A GRANDFATHERED EMPLOYEE AND THEREFORE BEGAN TO ACCRUE BENEFITS UNDER THE PLAN PRIOR TO JULY 1, 1981, THE GREATER OF: (i) his final average monthly compensation multiplied by the sum of: (A) 3.2% multiplied by his years of benefit service not in excess of 15, plus (B) 1% multiplied by his years of benefit service in excess of 15 but not in excess of 25, plus (C) 0.5% multiplied by his years of benefit service in excess of 25; reduced by: (D) 3.33% of his Social Security Benefit Amount multiplied by his years of benefit service not in excess of 15; or (ii) the amount determined in accordance with the formula set forth in paragraph (b) below which is otherwise applicable to a person who becomes an Employee on or after July 1, 1981; or (b) IF HE BECAME AN EMPLOYEE AND THEREFORE BEGAN TO ACCRUE BENEFITS UNDER THE PLAN ON OR AFTER JULY 1, 1981, HIS FINAL AVERAGE MONTHLY COMPENSATION MULTIPLIED BY THE SUM OF: (i) 2% multiplied by his years of benefit service not in excess of 30, plus (ii) 0.5% multiplied by his years of benefit service in excess of 30; reduced by: (iii) 1.67% of his Social Security Benefit Amount multiplied by his years of benefit service not in excess of 30 to a maximum of 50% of such Amount; or (c) IF HE BECAME AN EMPLOYEE AND THEREFORE BEGAN TO ACCRUE BENEFITS UNDER THE PLAN ON JANUARY 1, 1985, AND IMMEDIATELY PRIOR TO SUCH DATE WAS A GRANDFATHERED EMPLOYEE IN THE THIRD NATIONAL BANK AND TRUST COMPANY OF DAYTON, OHIO RETIREMENT PLAN, THE GREATER OF: (i) the amount determined in accordance with the formula set forth in paragraph (b) above which is otherwise applicable to a person who becomes an Employee on or after July 1, 1981; or -19- (ii) the sum of: (A) 2.2% of his final average monthly compensation, reduced by 2% of his Social Security Benefit Amount; the difference to be multiplied by his years of benefit service at normal retirement date not in excess of 25, plus (B) 1.1% of his final average monthly compensation, reduced by 1% of his Social Security Benefit Amount; the difference to be multiplied by his years of benefit service at normal retirement date in excess of 25, adjusted as necessary to produce the actuarial equivalent value on a straight life annuity basis of a benefit otherwise payable on a ten-year certain and continuous basis; provided, however, that in the case of each Employee who was in the employment of Society National Bank of Cleveland on December 31, 1971, and whose continuous service is not broken after the date and prior to the date of his retirement, the monthly amount of his normal retirement benefit otherwise determined under this Section shall be not less than the monthly amount of his normal retirement benefit determined under the normal retirement benefit formula of the Plan as in effect on December 31, 1971, based on the assumption that he received no increases in the rate of his compensation after December 31, 1971, and using the rules for computing continuous service specified in Article II of the Plan as in effect on June 30, 1976 (hereinafter referred to as his "minimum benefit"); and provided, further, that the monthly amount so determined under the provisions of this Exhibit B shall be reduced to the extent provided in Section 14.10 of the Society Retirement Plan as in effect on December 31, 1988. Notwithstanding anything to the contrary contained in the Society Retirement Plan, in no event shall an Employee receive a benefit commencing at his normal retirement date which is less than the largest early retirement benefit to which he had been entitled under the Society Retirement Plan prior to his normal retirement date. -20- EX-12 13 l97974aexv12.txt EX-12 COMPUTATION OF RATIOS 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, ------------------------------------------ 2002 2001 2000 1999 1998 ------ ------ ------ ------ ------ COMPUTATION OF EARNINGS Net income.................................................. $ 976 $ 132 $1,002 $1,107 $ 996 Add: Provision for income taxes............................. 336 102 515 577 483 Less: Cumulative effect of accounting changes, net of tax... -- (25) -- -- -- ------ ------ ------ ------ ------ Income before income taxes and cumulative effect of accounting changes................................... 1,312 259 1,517 1,684 1,479 Fixed charges, excluding interest on deposits............... 747 1,367 1,820 1,649 1,517 ------ ------ ------ ------ ------ Total earnings for computation, excluding interest on deposits............................................. 2,059 1,626 3,337 3,333 2,996 Interest on deposits........................................ 897 1,478 1,768 1,305 1,359 ------ ------ ------ ------ ------ Total earnings for computation, including interest on deposits............................................. $2,956 $3,104 $5,105 $4,638 $4,355 ====== ====== ====== ====== ====== COMPUTATION OF FIXED CHARGES Net rental expense.......................................... $ 142 $ 145 $ 146 $ 173 $ 139 ====== ====== ====== ====== ====== Portion of net rental expense deemed representative of interest.................................................. $ 27 $ 43 $ 41 $ 46 $ 35 Interest on short-term borrowed funds....................... 169 500 715 646 801 Interest on long-term debt, including capital securities.... 551 824 1,064 957 681 ------ ------ ------ ------ ------ Total fixed charges, excluding interest on deposits..... 747 1,367 1,820 1,649 1,517 Interest on deposits........................................ 897 1,478 1,768 1,305 1,359 ------ ------ ------ ------ ------ Total fixed charges, including interest on deposits..... $1,644 $2,845 $3,588 $2,954 $2,876 ====== ====== ====== ====== ====== COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS Preferred stock dividend requirement on a pre-tax basis..... -- -- -- -- -- Total fixed charges, excluding interest on deposits......... $ 747 $1,367 $1,820 $1,649 $1,517 ------ ------ ------ ------ ------ Combined fixed charges and preferred stock dividends, excluding interest on deposits....................... 747 1,367 1,820 1,649 1,517 Interest on deposits........................................ 897 1,478 1,768 1,305 1,359 ------ ------ ------ ------ ------ Combined fixed charges and preferred stock dividends, including interest on deposits....................... $1,644 $2,845 $3,588 $2,954 $2,876 ====== ====== ====== ====== ====== RATIO OF EARNINGS TO FIXED CHARGES Excluding deposit interest.................................. 2.76X 1.19x 1.83x 2.02x 1.97x Including deposit interest.................................. 1.80X 1.09x 1.42x 1.57x 1.51x RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS Excluding deposit interest.................................. 2.76X 1.19x 1.83x 2.02x 1.97x Including deposit interest.................................. 1.80X 1.09x 1.42x 1.57x 1.51x
EX-13 14 l97974aexv13.txt EX-13 2002 ANNUAL REPORT TO SHAREHOLDERS . . . EXHIBIT 13 FINANCIAL REVIEW MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS Introduction 20 Highlights of Key's 2002 Performance 21 Line of Business Results 24 Results of Operations Net Interest Income 27 Market Risk Management 30 Noninterest Income 32 Noninterest Expense 34 Income Taxes 36 Financial Condition Loans 36 Securities 40 Asset Quality 40 Deposits and Other Sources of Funds 46 Liquidity 46 Capital 48 Fourth Quarter Results 50 REPORT OF MANAGEMENT 52 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS 52 CONSOLIDATED FINANCIAL STATEMENTS 53
19 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES INTRODUCTION This section generally reviews the financial condition and results of operations of KeyCorp and its subsidiaries for each of the past three years. Some tables may cover a longer period to comply with disclosure requirements or to illustrate trends in greater depth. When you read this discussion, you should also refer to the consolidated financial statements and related notes that appear on pages 53 through 88. SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES Key's business is dynamic and complex. Consequently, management must exercise judgment in choosing and applying accounting policies and methodologies in many areas. These choices are important; not only are they necessary to comply with accounting principles generally accepted in the United States, they also reflect management's view of the most appropriate manner in which to record and report Key's overall financial performance. All accounting policies are important, and all policies described in Note 1 ("Summary of Significant Accounting Policies"), which begins on page 57, should be reviewed for a greater understanding of how Key's financial performance is recorded and reported. In management's opinion, some accounting policies are more likely than others to have a significant effect on Key's financial results and to expose those results to potentially greater volatility. These policies apply to areas of relatively greater business importance or require management to make assumptions and estimates that affect amounts reported in the financial statements. Because these assumptions and estimates are based on current circumstances, they may change over time or prove to be inaccurate based on actual experience. For Key, the areas that rely most heavily on the use of assumptions and estimates include accounting for the allowance for loan losses, loan securitizations, contingent obligations arising from litigation and tax exposures, principal investments, goodwill, and pension and other postretirement obligations. A brief discussion of each of these areas appears below. ALLOWANCE FOR LOAN LOSSES. Management determines probable losses inherent in Key's loan portfolio (which represents by far the largest category of assets on Key's balance sheet) and establishes an allowance that is sufficient to absorb those losses by considering factors including historical loss rates, expected cash flows and estimated collateral values. In assessing these factors, management benefits from a lengthy organizational history and experience with credit decisions and related outcomes. Nonetheless, if management's underlying assumptions prove to be inaccurate, the allowance for loan losses would have to be adjusted. Our accounting policy related to the allowance is disclosed in Note 1 under the heading "Allowance for Loan Losses" on page 58. LOAN SECURITIZATIONS. Key securitizes certain types of loans and accounts for such transactions as sales when the criteria set forth in Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" are met. If future events were to preclude accounting for such transactions as sales, the loans would have to be placed back on Key's balance sheet. This could have a potentially adverse effect on Key's capital ratios and other unfavorable financial implications. In addition, determining the gain or loss resulting from securitization transactions and the subsequent carrying amount of retained interests is dependent on underlying assumptions made by management, the most significant of which are described in Note 8 ("Loan Securitizations and Variable Interest Entities"), which begins on page 70. The use of alternative ranges of possible outcomes for these assumptions would change the amount of the initial gain or loss recognized. It could also result in changes in the carrying amount of retained interests, with related effects on results of operations. Our accounting policy related to loan securitizations is disclosed in Note 1 under the heading "Loan Securitizations" on page 59. CONTINGENT OBLIGATIONS. A detailed description of contingent obligations arising from litigation and their potential effects on Key's results of operations is contained in Note 19 ("Commitments, Contingent Liabilities and Guarantees"), which begins on page 81. In the normal course of business, Key is routinely subject to examinations and challenges from tax authorities regarding the amount of taxes due in connection with investments and business activities. Currently, the Internal Revenue Service is challenging Key's tax treatment of certain leveraged lease investments. This and other challenges by tax authorities may result in adjustments to the timing or amount of Key's taxable income or deductions or the allocation of income among tax jurisdictions. Management believes these challenges will be resolved without having any material effect on Key's financial condition or results of operations. VALUATION METHODOLOGIES. Valuation methodologies employed by management often involve a significant degree of judgment, particularly when there are no observable liquid markets for the items being valued. The outcome of valuations performed by management have a direct bearing on the carrying amounts of certain assets and liabilities, such as principal investments, goodwill, and pension and other postretirement benefit obligations. To determine the values of these assets and liabilities, as well as the extent to which related assets may be impaired, management makes assumptions and estimates related to discount rates, asset returns, repayment rates and other factors. The use of different discount rates or other valuation assumptions could produce significantly different results, which could have material positive or negative effects on Key's results of operations. The valuation methodology management uses for principal investments is summarized in Note 21 ("Fair Value Disclosures of Financial Instruments") on page 86 and the methodology used in the testing for goodwill impairment is summarized in Note 1 under the heading "Goodwill and Other Intangible Assets" on page 59. The primary assumptions used in determining Key's pension and other postretirement benefit obligations and related expenses are presented in Note 16 ("Employee Benefits"), which begins on page 78. When a potential asset impairment is identified through testing, observable changes in liquid markets or other means, management must also exercise judgment in determining the nature of the potential impairment (i.e., whether the impairment is temporary or other than temporary) in order to apply the appropriate accounting treatment. For example, unrealized losses on securities available for sale that are deemed temporary are recorded in shareholders' equity, whereas those deemed "other than temporary" are recorded in earnings. REVENUE RECOGNITION In recent months, corporate improprieties related to revenue recognition have received a great deal of attention by regulatory authorities and the news media. Although all companies face the risk of intentional or unintentional misstatements, such misstatements are less likely in the 20 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES financial services industry because most of the revenue (i.e., interest accruals) recorded is driven by nondiscretionary formulas based on written contracts, such as loan agreements. TERMINOLOGY This report contains some shortened names and industry-specific terms. We want to explain some of these terms at the outset so you can better understand the discussion that follows. - - KEYCORP refers solely to the parent holding company. - - KBNA refers to Key's lead bank, KeyBank National Association. - - KEY refers to the consolidated entity consisting of KeyCorp and its subsidiaries. - - A KEYCENTER is one of Key's full-service retail banking facilities or branches. - - Key engages in CAPITAL MARKETS ACTIVITIES. These activities encompass a variety of products and 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), and conduct transactions in foreign currencies (both to accommodate clients' needs and to benefit from fluctuations in exchange rates). - - All earnings per share data included in this discussion are presented on a DILUTED basis, which takes into account all common shares outstanding as well as 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 two classes. Federal regulations prescribe that at least one-half of a bank or bank holding company's TOTAL RISK-BASED CAPITAL must qualify as TIER 1. Both total and Tier 1 capital serve as bases for several measures of capital adequacy, which is an important indicator of financial stability and condition. You will find a more detailed explanation of total and Tier 1 capital and how they are calculated in the section entitled "Capital," which begins on page 48. - - 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. FORWARD-LOOKING STATEMENTS This report may contain "forward-looking statements" about issues like anticipated earnings, anticipated levels of net loan charge-offs and nonperforming assets and anticipated improvement in profitability and competitiveness. These statements usually can be identified by the use of forward-looking language such as "our goal," "our objective," "our plan," "will likely result," "will be," "are expected to," "as planned," "is anticipated," "intends to," "is projected," or similar words. Forward-looking statements by their nature are subject to assumptions, risks and uncertainties. For a variety of reasons, including the following, actual results could differ materially from those contained in or implied by the forward-looking statements. - - Interest rates could change more quickly or more significantly than we expect, which may have an adverse effect on our financial results. - - If the economy or segments of the economy fail to recover or, decline further, the demand for new loans and the ability of borrowers to repay outstanding loans may decline. - - The stock and bond markets could suffer additional declines or disruptions, which may have adverse effects 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; we may be unable to implement certain initiatives; or the initiatives may be unsuccessful. - - Acquisitions and dispositions of assets, business units or affiliates could adversely affect us in ways that management has not anticipated. - - We may become subject to new legal obligations, or the resolution of pending litigation may have an adverse effect on our financial results. - - Terrorist activities or military actions could further disrupt the economy and the general business climate, which may have an adverse effect on our financial results or condition and that of our borrowers. - - We may become subject to new accounting, tax, or regulatory practices or requirements. HIGHLIGHTS OF KEY'S 2002 PERFORMANCE FINANCIAL PERFORMANCE The primary measures of Key's financial performance for 2002, 2001 and 2000 are summarized below. - - Net income for 2002 was $976 million, or $2.27 per common share, compared with $132 million, or $.31 per share for 2001, and $1.0 billion, or $2.30 per share, for 2000. - - Key's return on average equity was 14.96% for 2002. This result compares with a return of 2.01% for 2001 and a return of 15.39% for 2000. - - Key's 2002 return on average total assets was 1.19%. This result compares with a return of .16% for 2001 and a return of 1.19% for 2000. In the second and fourth quarters of 2001, we announced a series of strategic initiatives designed to sharpen our business focus and strengthen Key's financial performance. These included: - - Accelerating Key's revenue growth by delivering our products and services to customers through a seamless, integrated sales process called 1Key. - - Achieving 100% of the savings from our competitiveness initiative discussed on page 22. - - Re-emphasizing our commitment to our relationship-based activities, and committing to re-establish a conservative credit culture while de-emphasizing high-risk, low-return businesses. Specific actions related to these initiatives included exiting the automobile leasing business, de-emphasizing indirect prime automobile lending, discontinuing many credit-only relationships in the leveraged financing and nationally syndicated lending businesses, and increasing the allowance for loan losses. 21 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES As a result of these actions, Key recorded 2001 charges aggregating $1.1 billion ($774 million after tax) that hinder a direct comparison of financial results over the past three years. Specifically, in the second quarter of 2001, we recorded a $150 million write-down of goodwill associated with Key's 1995 acquisition of AutoFinance Group, Inc. This charge reflects our intention to significantly downsize the automobile finance business. We also increased the provision for loan losses by $300 million ($189 million after tax) to facilitate the exiting of credits in the leveraged financing and nationally syndicated lending businesses. Finally, we recorded a $40 million ($25 million after tax) charge to establish a reserve for losses incurred on the residual values of leased vehicles. In the fourth quarter of 2001, we recorded an additional provision for loan losses of $590 million ($372 million after tax) as a result of both the rapid downturn in the economy and further erosion in credit quality experienced after the events of September 11. In the same quarter, we recorded a $45 million ($28 million after tax) write-down of our principal investing portfolio and a $15 million ($9 million after tax) charge to increase our reserve for customer derivative losses. Results for 2001 also were adversely affected by a $39 million ($24 million after tax) charge resulting from a prescribed change in accounting principles generally accepted in the United States applicable to retained interests in securitized assets and a $20 million ($13 million after tax) increase in litigation reserves. The charges summarized above and the primary reasons that Key's specific revenue and expense components changed over the past three years are reviewed in greater detail throughout the remainder of this discussion. Figure 1 summarizes Key's financial performance for each of the past six years. CORPORATE STRATEGY Our goal is to achieve revenue and earnings per share growth that is consistently above the median for stocks that make up the Standard & Poor's 500 Banks Index. Our strategy for achieving this goal comprises the following four primary elements: - - FOCUS ON OUR CORE BUSINESSES. We intend to focus on businesses that enable us to build relationships with our clients. We will focus on our "footprint" businesses that serve individuals, small businesses and middle market companies. In addition, we intend to focus nationwide on our commercial real estate lending, asset management, home equity lending and equipment leasing businesses. These are businesses in which we believe we possess resources of the scale necessary to compete nationally. - - PUT OUR CLIENTS FIRST. We will work to deepen our relationship with our existing clients, and to build relationships with new clients who have the potential to purchase multiple products and services or to generate repeat business. One way in which we are pursuing this goal is by emphasizing deposit growth across all of our lines of business. We also want to ensure that our clients are receiving a distinctive level of service, so we are putting considerable effort into enhancing our service quality. - - ENHANCE OUR BUSINESS. We intend to build on the success of our competitiveness initiative by pursuing a continuous improvement process. We will continue to focus on increasing revenues, controlling expenses and better serving our clients, and we will also continue to leverage technology -- both to reduce costs and to enhance service quality. Over time, we also intend to diversify our revenue mix by emphasizing the growth of fee income while investing in higher-growth and higher-return businesses. - - CULTIVATE A WORKFORCE THAT DEMONSTRATES KEY'S VALUES AND WORKS TOGETHER FOR A COMMON PURPOSE. Key intends to achieve this by: -- paying for performance, but only if achieved in ways that are consistent with Key's values; -- attracting, developing and retaining a quality, high-performing and inclusive workforce; -- developing leadership at all levels in the company; and -- creating a positive, stimulating and entrepreneurial work environment. STATUS OF COMPETITIVENESS INITIATIVE Key launched a major initiative in November 1999, the first phase of which was completed in 2000. This initiative was designed to improve Key's profitability by reducing the costs of doing business, focusing on the most profitable growth businesses and enhancing revenues. During the initial phase, we reduced our annual operating expenses by approximately $100 million by outsourcing certain nonstrategic support functions, consolidating sites in a number of our businesses and reducing management layers. During 2002, we completed the implementation of all projects related to the second and final phase of the initiative, referred to as PEG (Perform, Excel, Grow). In this phase, we reduced our annual operating expenses by an additional $200 million by: - - consolidating 22 business lines into 10 to simplify Key's business structure; - - streamlining and automating business operations and processes; - - standardizing product offerings and internal processes; - - consolidating operating facilities and service centers; and - - outsourcing additional noncore activities. Due primarily to the success of the overall initiative, noninterest expense for 2002 was lower than it has been for any year since 1998. Management expected the competitiveness initiative to reduce Key's workforce by approximately 4,000 positions (comprising both staffed and vacant positions). During 2002, Key completed its workforce reduction bringing the total number of positions eliminated in the initiative to nearly 4,100. Since the inception of the competitiveness initiative, we have recorded related net charges of $270 million. The section entitled "Noninterest expense," which begins on page 34, and Note 18 ("Restructuring Charges") on page 81 provide more information about Key's restructuring charges. 22 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES FIGURE 1 SELECTED FINANCIAL DATA
COMPOUND ANNUAL RATE OF CHANGE dollars in millions, except per share amounts 2002 2001 2000 1999 1998 1997 (1997-2002) - ----------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, Interest income $ 4,366 $ 5,627 $ 6,277 $ 5,695 $ 5,525 $ 5,262 (3.7)% Interest expense 1,617 2,802 3,547 2,908 2,841 2,517 (8.5) Net interest income 2,749 2,825 2,730 2,787 2,684 2,745 -- Provision for loan losses 553 1,350 490 348 297 320 11.6 Noninterest income 1,769 1,725 2,194 2,315 1,600 1,315 6.1 Noninterest expense 2,653 2,941 2,917 3,070 2,508 2,395 2.1 Income before income taxes and cumulative effect of accounting changes 1,312 259 1,517 1,684 1,479 1,345 (.5) Income before cumulative effect of accounting changes 976 157 1,002 1,107 996 919 1.2 Net income 976 132 1,002 1,107 996 919 1.2 - ----------------------------------------------------------------------------------------------------------------------------------- PER COMMON SHARE Income before cumulative effect of accounting changes $ 2.29 $ .37 $ 2.32 $ 2.47 $ 2.25 $ 2.09 1.8% Income before cumulative effect of accounting changes-- assuming dilution 2.27 .37 2.30 2.45 2.23 2.07 1.9 Net income 2.29 .31 2.32 2.47 2.25 2.09 1.8 Net income--assuming dilution 2.27 .31 2.30 2.45 2.23 2.07 1.9 Cash dividends paid 1.20 1.18 1.12 1.04 .94 .84 7.4 Book value at year end 16.12 14.52 15.65 14.41 13.63 11.83 6.4 Market price at year end 25.14 24.34 28.00 22.13 32.00 35.41 (6.6) Dividend payout ratio 52.40% 380.65% 48.28% 42.11% 41.78% 40.19% 5.4 Weighted average common shares (000) 425,451 424,275 432,617 448,168 441,895 439,042 (.6) Weighted average common shares and potential common shares (000) 430,703 429,573 435,573 452,363 447,437 444,544 (.6) - ----------------------------------------------------------------------------------------------------------------------------------- AT DECEMBER 31, Loans $ 62,457 $ 63,309 $ 66,905 $ 64,222 $ 62,012 $ 53,380 3.2% Earning assets 73,635 71,672 77,316 73,733 70,240 64,246 2.8 Total assets 85,202 80,938 87,270 83,395 80,020 73,699 2.9 Deposits 49,346 44,795 48,649 43,233 42,583 45,073 1.8 Long-term debt 15,605 14,554 14,161 15,881 12,967 7,446 15.9 Shareholders' equity 6,835 6,155 6,623 6,389 6,167 5,181 5.7 Full-time equivalent employees 20,437 21,230 22,142 24,568 25,862 24,595 (3.6) KeyCenters 910 911 922 936 968 1,015 (2.2) - ----------------------------------------------------------------------------------------------------------------------------------- PERFORMANCE RATIOS Return on average total assets 1.19% .16% 1.19% 1.37% 1.32% 1.33% N/A Return on average equity 14.96 2.01 15.39 17.68 17.97 18.89 N/A Net interest margin (taxable equivalent) 3.97 3.81 3.69 3.93 4.08 4.54 N/A - ----------------------------------------------------------------------------------------------------------------------------------- CAPITAL RATIOS AT DECEMBER 31, Equity to assets 8.02% 7.60% 7.59% 7.66% 7.71% 7.03% N/A Tangible equity to tangible assets 6.73 6.29 6.12 6.03 5.93 5.52 N/A Tier 1 risk-based capital 8.09 7.43 7.72 7.68 7.21 6.65 N/A Total risk-based capital 12.51 11.41 11.48 11.66 11.69 10.83 N/A Leverage 8.15 7.65 7.71 7.77 6.95 6.40 N/A - -----------------------------------------------------------------------------------------------------------------------------------
Key completed several 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 ("Acquisitions and Divestitures") on page 64 contains specific information about the acquisitions 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. N/A = Not Applicable 23 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES LINE OF BUSINESS RESULTS This section summarizes the financial performance and related strategic developments of each of Key's three major business groups: Key Consumer Banking, Key Corporate Finance and Key Capital Partners. To better understand this discussion, see Note 4 ("Line of Business Results"), which begins on page 65. Note 4 includes a brief description of the products and services offered by each of the three major business groups, more detailed financial information pertaining to the groups and their respective lines of business and brief descriptions of "Other Segments" and "Reconciling Items" included in Figure 2. Figure 2 summarizes the contribution made by each major business group to Key's taxable-equivalent revenue and net income for each of the past three years. FIGURE 2 MAJOR BUSINESS GROUPS--TAXABLE-EQUIVALENT REVENUE AND NET INCOME
YEAR ENDED DECEMBER 31, CHANGE 2002 VS 2001 -------------------- dollars in millions 2002 2001 2000 AMOUNT PERCENT - ------------------------------------------------------------------------------------------------ REVENUE (TAXABLE EQUIVALENT) Key Consumer Banking $ 2,302 $ 2,300 $ 2,232 $ 2 .1% Key Corporate Finance 1,361 1,351 1,264 10 .7 Key Capital Partners 1,109 1,159 1,188 (50) (4.3) Other Segments (76) (73) 57 (3) (4.1) - ------------------------------------------------------------------------------------------------ Total segments 4,696 4,737 4,741 (41) (.9) Reconciling Items (58) (142)(b) 211(b) 84 59.2 - ------------------------------------------------------------------------------------------------ Total $ 4,638 $ 4,595 $ 4,952 $ 43 .9% ======= ======= ======== ======= NET INCOME (LOSS) Key Consumer Banking $ 422 $ 358(a) $ 356 $ 64 17.9% Key Corporate Finance 394 429 396 (35) (8.2) Key Capital Partners 156 129 142 27 20.9 Other Segments (20) (20) 58 -- -- - ------------------------------------------------------------------------------------------------ Total segments 952 896 952 56 6.3 Reconciling Items 24 (764)(b) 50(b) 788 N/M - ------------------------------------------------------------------------------------------------ Total $ 976 $ 132 $ 1,002 $ 844 639.4% ======= ======= ======== ======= - ------------------------------------------------------------------------------------------------
(a) Results for 2001 include a one-time cumulative charge of $39 million ($24 million after tax) resulting from a prescribed change, applicable to all companies, in the accounting for retained interests in securitized assets. (b) Significant items included in Reconciling Items are as follows: Year ended December 31, 2001: - Noninterest income includes a $40 million ($25 million after tax) charge taken to establish a reserve for losses incurred on the residual values of leased vehicles and a $15 million ($9 million after tax) increase in the reserve for customer derivative losses. - The provision for loan losses includes an additional $400 million ($252 million after tax) taken to increase the allowance for loan losses for Key's continuing loan portfolio and an additional $490 million ($309 million after tax) recorded primarily in connection with Key's decision to discontinue certain credit-only commercial relationships. - Noninterest expense includes a goodwill write-down of $150 million associated with the downsizing of the automobile finance business and charges of $20 million ($13 million after tax) taken to establish additional litigation reserves. Year ended December 31, 2000: - Noninterest income includes a gain of $332 million ($207 million after tax) from the sale of Key's credit card portfolio. - The provision for loan losses includes an additional $121 million ($76 million after tax) recorded in connection with the implementation of an enhanced methodology for assessing credit risk, particularly in the commercial loan portfolio. - Noninterest expense includes $127 million ($80 million after tax), primarily restructuring charges, recorded in connection with strategic actions taken to improve Key's operating efficiency and profitability. N/M = Not Meaningful KEY CONSUMER BANKING As shown in Figure 3, net income for Key Consumer Banking was $422 million for 2002, up from $358 million for 2001 and $356 million for 2000. The improvement in 2002 reflects the cumulative effect of the 2001 accounting change presented in the figure, as well as an increase in noninterest income and a reduction in noninterest expense. These positive results were partially offset by a decrease in taxable-equivalent net interest income. The provision for loan losses was essentially unchanged. Taxable-equivalent net interest income decreased by $13 million, or 1%, from 2001 as a more favorable interest rate spread on average earning assets and a 21% increase in average home equity loans were more than offset by the adverse effects of a narrower spread on deposits and a decline in average deposits outstanding. The decrease in deposits reflected declines in time deposits resulting from reduced rates paid for those deposits, as well as consumer preferences for alternative investments that provide higher levels of liquidity. At the same time, savings deposits rose in response to more aggressive pricing implemented in mid-2002, while noninterest-bearing deposits grew significantly as a result of intensified cross-sell efforts and the introduction of new products, including free checking. 24 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES FIGURE 3 KEY CONSUMER BANKING
YEAR ENDED DECEMBER 31, CHANGE 2002 VS 2001 ------------------- dollars in millions 2002 2001 2000 AMOUNT PERCENT - ------------------------------------------------------------------------------------------------------------ SUMMARY OF OPERATIONS Net interest income (TE) $ 1,805 $ 1,818 $ 1,757 $ (13) (.7)% Noninterest income 497 482 475 15 3.1 - ------------------------------------------------------------------------------------------------------------ Total revenue (TE) 2,302 2,300 2,232 2 .1 Provision for loan losses 303 300 281 3 1.0 Noninterest expense 1,324 1,366 1,356 (42) (3.1) - ------------------------------------------------------------------------------------------------------------ Income before income taxes (TE) and cumulative effect of accounting change 675 634 595 41 6.5 Allocated income taxes and TE adjustments 253 252 239 1 .4 - ------------------------------------------------------------------------------------------------------------ Income before cumulative effect of accounting change 422 382 356 40 10.5 Cumulative effect of accounting change -- (24)(a) -- 24 100.0 - ------------------------------------------------------------------------------------------------------------ Net income $ 422 $ 358 $ 356 $ 64 17.9% ======= ======= ======= ======= Percent of consolidated net income 43% 271% 36% N/A N/A AVERAGE BALANCES Loans $27,806 $27,673 $26,690 $ 133 .5% Total assets 29,970 30,398 29,637 (428) (1.4) Deposits 33,942 35,221 35,370 (1,279) (3.6) - ------------------------------------------------------------------------------------------------------------
(a) Results for 2001 include a one-time cumulative charge of $39 million ($24 million after tax) resulting from a prescribed change, applicable to all companies, in the accounting for retained interests in securitized assets. TE = Taxable Equivalent, N/A = Not Applicable ADDITIONAL KEY CONSUMER BANKING DATA
YEAR ENDED DECEMBER 31, CHANGE 2002 VS 2001 ------------------- dollars in millions 2002 2001 2000 AMOUNT PERCENT - ---------------------------------------------------------------------------------------------------------------------- AVERAGE DEPOSITS OUTSTANDING Noninterest-bearing deposits $ 5,136 $ 4,802 $ 4,935 $ 334 7.0% MMDA and other savings deposits 13,054 12,832 13,154 222 1.7 Time deposits 15,752 17,587 17,281 (1,835) (10.4) - ---------------------------------------------------------------------------------------------------------------------- Total deposits $33,942 $35,221 $35,370 $(1,279) (3.6)% ======= ======= ======= ======= - ----------------------------------------------------------------------------------------------------------------------
RETAIL NATIONAL KEY CONSUMER BANKING HOME EQUITY BANKING - ---------------------------------------------------------------------------------------------------------------------------------- HOME EQUITY LOANS (2002) OTHER DATA (2002) Average balance / % change from 2001 $6,619 / 28% $4,906 / 11% On-line clients / % penetration 575,894 / 32% Average loan-to-value ratio 71 80 KeyCenters 910 Percent first lien positions 51 79 Automated teller machines 2,165 - ----------------------------------------------------------------------------------------------------------------------------------
Noninterest income grew by $15 million, or 3%, due primarily to a $15 million decrease in net losses from derivatives in the National Home Equity line of business, an aggregate $7 million increase in service charges on deposit accounts contributed by the Retail Banking and Small Business lines and higher fees from mortgage lending and electronic banking services. The growth in deposit service charges resulted from new pricing implemented in mid-2001 in connection with Key's competitiveness improvement initiative, but was moderated by the introduction of free checking products in the third quarter of 2002. These favorable results more than offset a $19 million increase in losses incurred on the residual values of leased vehicles in the Indirect Lending line of business. Noninterest expense decreased by $42 million, or 3%, from 2001. The improvement reflects an approximate $38 million reduction in goodwill amortization, which resulted from the adoption of new accounting guidance, and lower costs for software amortization. These reductions were partially offset by higher personnel expense and an increase in marketing costs associated with the growth in the National Home Equity line of business. 25 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES In 2001, the increase in net income reflected a $61 million, or 3%, increase in net interest income due to an improved interest rate spread on earning assets and a favorable change in the composition of earning assets resulting from Key's decision to retain (rather than securitize and sell) home equity loans starting in 2000. The growth in net interest income was substantially offset by the effect of the 2001 accounting change mentioned on page 25. KEY CORPORATE FINANCE As shown in Figure 4, net income for Key Corporate Finance was $394 million for 2002, compared with $429 million for 2001 and $396 million for 2000. The decrease from 2001 resulted from a significantly higher provision for loan losses and lower noninterest income. These adverse results were offset in part by moderate growth in net interest income and improvement in noninterest expense. FIGURE 4 KEY CORPORATE FINANCE
YEAR ENDED DECEMBER 31, CHANGE 2002 VS 2001 ------------------- dollars in millions 2002 2001 2000 AMOUNT PERCENT - ---------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS Net interest income (TE) $ 1,123 $ 1,092 $ 1,011 $ 31 2.8% Noninterest income 238 259 253 (21) (8.1) - ---------------------------------------------------------------------------------------------------------- Total revenue (TE) 1,361 1,351 1,264 10 .7 Provision for loan losses 236 140 125 96 68.6 Noninterest expense 495 517 497 (22) (4.3) - ---------------------------------------------------------------------------------------------------------- Income before income taxes (TE) 630 694 642 (64) (9.2) Allocated income taxes and TE adjustments 236 265 246 (29) (10.9) - ---------------------------------------------------------------------------------------------------------- Net income $ 394 $ 429 $ 396 $ (35) (8.2)% ======= ======= ======= ======= Percent of consolidated net income 41% 325% 39% N/A N/A AVERAGE BALANCES Loans $29,278 $31,098 $30,592 $(1,820) (5.9)% Total assets 30,568 32,593 32,086 (2,025) (6.2) Deposits 3,384 3,093 2,815 291 9.4 - ----------------------------------------------------------------------------------------------------------
TE = Taxable Equivalent, N/A = Not Applicable During 2002, taxable-equivalent net interest income increased by $31 million, or 3%. The increase was due primarily to a higher taxable-equivalent adjustment related to portions of the equipment leasing portfolio, which became subject to a lower income tax rate in the latter half of 2001. A more favorable interest rate spread on earning assets and the growth in average deposits also contributed to the improvement. These positive results were partially offset by the adverse effect of a decline in average loans outstanding. During the same time, noninterest income decreased by $21 million, or 8%. The decrease was due principally to losses from residual values of leased equipment in the National Equipment Finance line of business in 2002, compared with gains in the prior year. Lower fees generated by Corporate Banking also contributed to the decline. These adverse results more than offset increases in nonyield-related loan fees and loan sale gains in the National Commercial Real Estate line and growth in service charges on deposit accounts in the Corporate Banking line. Noninterest expense improved by $22 million, or 4%, reflecting a $16 million reduction in goodwill amortization following the adoption of a new accounting standard. The provision for loan losses rose by $96 million, or 69%, due largely to higher levels of net charge-offs in the Corporate Banking and National Equipment Finance lines. In 2001, an $81 million, or 8%, improvement in net interest income drove the increase in net income relative to the prior year. This growth was attributable largely to a more favorable interest rate spread on earning assets, as well as loan growth in both the National Commercial Real Estate and National Equipment Finance lines of business. KEY CAPITAL PARTNERS As shown in Figure 5, Key Capital Partners' net income was $156 million for 2002, compared with $129 million for 2001 and $142 million for 2000. The improvement in 2002 was attributable to a substantial decrease in noninterest expense and growth in taxable-equivalent net interest income. These positive results more than offset a decline in noninterest income, while the provision for loan losses was essentially unchanged. Taxable-equivalent net interest income increased by $19 million, or 9%, from 2001. The growth was due primarily to a more favorable interest rate spread on earning assets. Noninterest income decreased by $69 million, or 7%, as market-sensitive businesses were adversely affected by the weak economy. The reduction was attributable mainly to an aggregate decline of $51 million in trust and investment services income in the High Net Worth and Victory Capital Management lines and lower income from trading activities and derivatives in the Capital Markets line. In addition, revenue for 2001 benefited from a net gain from the sale of residential mortgage loans associated with the private banking business. These factors more than offset an $18 million increase in investment banking income. 26 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES FIGURE 5 KEY CAPITAL PARTNERS
YEAR ENDED DECEMBER 31, CHANGE 2002 VS 2001 ------------------- dollars in millions 2002 2001 2000 AMOUNT PERCENT - ------------------------------------------------------------------------------------------------------ SUMMARY OF OPERATIONS Net interest income (TE) $ 235 $ 216 $ 214 $ 19 8.8% Noninterest income 874 943 974 (69) (7.3) - ----------------------------------------------------------------------------------------------------- Total revenue (TE) 1,109 1,159 1,188 (50) (4.3) Provision for loan losses 14 13 4 1 7.7 Noninterest expense 846 926 944 (80) (8.6) - ----------------------------------------------------------------------------------------------------- Income before income taxes (TE) 249 220 240 29 13.2 Allocated income taxes and TE adjustments 93 91 98 2 2.2 - ----------------------------------------------------------------------------------------------------- Net income $ 156 $ 129 $ 142 $ 27 20.9% ====== ====== ====== ====== Percent of consolidated net income 16% 98% 14% N/A N/A AVERAGE BALANCES Loans $4,904 $5,266 $5,439 $ (362) (6.9)% Total assets 8,382 8,965 8,994 (583) (6.5) Deposits 3,924 3,679 3,480 245 6.7 - -----------------------------------------------------------------------------------------------------
TE = Taxable Equivalent, N/A = Not Applicable ADDITIONAL KEY CAPITAL PARTNERS DATA
DECEMBER 31, 2002 dollars in millions - -------------------------------------------------------------- Assets under management $61,694 Nonmanaged and brokerage assets 64,968 High Net Worth sales personnel 807 - --------------------------------------------------------------
Noninterest expense decreased by $80 million, or 9%, in 2002, due primarily to an approximate $25 million reduction in amortization expense following the prescribed change in accounting for goodwill, lower variable compensation expense associated with revenue generation and reduced software amortization. In 2001, net income decreased primarily as a result of a $31 million, or 3%, reduction in noninterest income. Weak conditions in the capital markets led to a $39 million, or 6%, decline in income from trust and investment services. OTHER SEGMENTS Other Segments, which consists primarily of Treasury, Principal Investing and the net effect of funds transfer pricing, generated net losses of $20 million in both 2002 and 2001. In 2002, net losses from principal investing activities decreased by $64 million ($40 million after tax), or 81%. This improvement was offset by a $55 million ($34 million after tax), or 40%, decline in net interest income, due primarily to the change in the net effect of funds transfer pricing, and a $23 million ($14 million after tax), or 75%, reduction in net securities gains recorded by Treasury. In 2001, Other Segments generated a $20 million net loss, compared with net income of $58 million for the prior year. The decrease in results was due primarily to net losses of $79 million ($50 million after tax) from principal investing in 2001, compared with net gains of $70 million ($44 million after tax) in 2000. In addition, net interest income declined by $54 million ($34 million after tax), or 64%, due largely to the change in the net effect of funds transfer pricing. The adverse effects of these factors were partially offset by net securities gains of $31 million ($19 million after tax) recorded by Treasury in 2001, compared with net securities losses of $40 million ($25 million after tax) in 2000. RESULTS OF OPERATIONS NET INTEREST INCOME Key's principal source of earnings is net interest income, which includes interest paid to Key on earning assets such as loans and securities, as well as loan-related fee income; less interest expense paid on deposits and borrowings. There are several factors that affect net interest income, including: - - the volume, pricing, mix and maturity of earning assets and interest-bearing liabilities; - - the use of derivative instruments to manage interest rate risk; - - market interest rate fluctuations; and - - asset quality. To make it easier to compare results among several periods and 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 yield $100. Figure 6 shows the various components of Key's balance sheet that affect interest income and expense, and their respective yields or rates over the past six years. Net interest income for 2002 was $2.9 billion, essentially unchanged from the prior year as the positive effect of an improved net interest margin was offset by the effect of a decrease in average earning assets. Key's net interest margin rose 16 basis points to 3.97%. The net interest margin is an indicator of the profitability of the earning asset portfolio and is calculated by dividing net interest income by average earning assets. 27 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES FIGURE 6 AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND YIELDS/RATES
2002 2001 2000 YEAR ENDED DECEMBER 31, ---------------------------- ---------------------------- -------------------------- AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ dollars in millions BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Loans(a,b) Commercial, financial and agricultural $ 17,767 $ 907 5.10% $ 19,459 $ 1,362 7.00% $19,369 $ 1,669 8.63% Real estate-- commercial mortgage 6,345 373 5.87 6,821 511 7.50 6,911 628 9.10 Real estate-- construction 5,851 315 5.38 5,654 411 7.27 4,815 464 9.63 Commercial lease financing 7,263 491 6.76 7,049 490 6.95 6,821 493 7.22 - ------------------------------------------------------------------------------------------------------------------------------------ Total commercial loans 37,226 2,086 5.60 38,983 2,774 7.12 37,916 3,254 8.59 Real estate-- residential 2,126 149 7.00 3,607 275 7.64 4,274 325 7.61 Home equity 13,028 889 6.82 10,595 906 8.55 8,857 822 9.29 Credit card -- -- -- -- -- -- -- -- -- Consumer-- direct 2,206 183 8.29 2,427 232 9.55 2,592 265 10.19 Consumer-- indirect lease financing 1,405 126 8.96 2,618 217 8.27 3,089 249 8.03 Consumer-- indirect other 5,155 471 9.15 5,529 530 9.58 6,032 570 9.44 - ------------------------------------------------------------------------------------------------------------------------------------ Total consumer loans 23,920 1,818 7.60 24,776 2,160 8.72 24,844 2,231 8.97 Loans held for sale 2,247 123 5.52 2,217 169 7.64 2,534 230 9.05 - ------------------------------------------------------------------------------------------------------------------------------------ Total loans 63,393 4,027 6.35 65,976 5,103 7.73 65,294 5,715 8.75 Taxable investment securities 1 -- 8.59 2 -- 8.60 2 -- 8.42 Tax-exempt investment securities(a) 180 16 8.67 277 25 8.76 391 34 8.76 - ------------------------------------------------------------------------------------------------------------------------------------ Total investment securities 181 16 8.67 279 25 8.76 393 34 8.75 Securities available for sale(a,c) 6,359 389 6.14 6,625 455 6.89 6,470 448 6.80 Short-term investments 1,496 30 1.99 1,712 65 3.81 1,717 83 4.84 Other investments(c) 871 24 2.57 849 24 2.86 701 25 3.74 - ------------------------------------------------------------------------------------------------------------------------------------ Total earning assets 72,300 4,486 6.20 75,441 5,672 7.52 74,575 6,305 8.45 Allowance for loan losses (1,553) (1,090) (959) Accrued income and other assets 11,034 10,552 10,419 - ------------------------------------------------------------------------------------------------------------------------------------ $ 81,781 $ 84,903 $84,035 ======== ======== ======= LIABILITIES AND SHAREHOLDERS' EQUITY Money market deposit accounts $ 13,197 125 .94 $ 12,323 254 2.06 $12,211 414 3.39 Savings deposits 1,986 13 .67 1,952 21 1.05 2,206 32 1.47 NOW accounts 564 6 1.02 619 9 1.43 612 10 1.59 Certificates of deposit ($100,000 or more)(d) 4,741 218 4.63 5,284 301 5.71 5,511 340 6.15 Other time deposits 12,859 496 3.86 14,208 786 5.53 13,974 805 5.76 Deposits in foreign office 2,336 39 1.67 2,715 107 3.94 2,593 167 6.45 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 35,683 897 2.52 37,101 1,478 3.98 37,107 1,768 4.76 Federal funds purchased and securities sold under repurchase agreements 5,527 90 1.63 5,197 198 3.80 4,931 287 5.82 Bank notes and other short-term borrowings(d) 2,943 79 2.67 6,829 302 4.43 7,121 428 6.01 Long-term debt, including capital securities(d,e) 16,961 551 3.29 15,911 824 5.20 15,707 1,064 6.78 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 61,114 1,617 2.66 65,038 2,802 4.31 64,866 3,547 5.47 Noninterest-bearing deposits 9,098 8,354 8,328 Accrued expense and other liabilities 5,045 4,939 4,329 Shareholders' equity 6,524 6,572 6,512 - ------------------------------------------------------------------------------------------------------------------------------------ $ 81,781 $ 84,903 $84,035 ======== ======== ======= Interest rate spread (TE) 3.54% 3.21% 2.98% - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income (TE) and net interest margin (TE) $2,869 3.97% $ 2,870 3.81% $ 2,758 3.69% ====== ==== ======== ==== ======== ==== Capital securities $ 1,254 $ 78 $ 1,309 $ 89 $ 1,243 $ 95 TE adjustment(a) 120 45 28 - ------------------------------------------------------------------------------------------------------------------------------------
(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 basis adjustments related to fair value hedges. See Note 20 ("Derivatives and Hedging Activities"), which begins on page 84, for an explanation of fair value hedges. (e) Rate calculation excludes ESOP debt. TE = Taxable Equivalent, N/M = Not Meaningful 28 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES
COMPOUND ANNUAL RATE OF CHANGE 1999 1998 1997 (1997-2002) - ------------------------------------ ---------------------------------- ------------------------------ ------------------- AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST - -------------------------------------------------------------------------------------------------------------------------------- $ 17,695 $ 1,350 7.63% $ 15,413 $ 1,251 8.12% $ 12,911 $ 1,126 8.72% 6.6% (4.2)% 6,946 580 8.35 7,080 627 8.86 7,101 663 9.34 (2.2) (10.9) 4,076 343 8.42 2,866 254 8.86 1,945 188 9.67 24.6 10.9 6,092 445 7.30 4,822 359 7.45 3,310 228 6.89 17.0 16.6 - -------------------------------------------------------------------------------------------------------------------------------- 34,809 2,718 7.81 30,181 2,491 8.25 25,267 2,205 8.73 8.1 (1.1) 4,479 338 7.55 5,440 422 7.76 6,192 524 8.46 (19.2) (22.2) 7,548 645 8.55 6,353 557 8.77 5,180 469 9.05 20.3 13.6 997 152 15.25 1,438 212 14.74 1,710 256 14.97 N/M N/M 2,457 238 9.69 2,139 228 10.66 2,238 246 10.99 (.3) (5.7) 2,922 236 8.08 2,024 171 8.45 1,156 99 8.56 4.0 4.9 6,584 608 9.23 6,647 603 9.07 7,023 633 9.01 (6.0) (5.7) - -------------------------------------------------------------------------------------------------------------------------------- 24,987 2,217 8.87 24,041 2,193 9.12 23,499 2,227 9.48 .4 (4.0) 2,605 228 8.75 3,200 262 8.19 2,649 198 7.47 (3.2) (9.1) - -------------------------------------------------------------------------------------------------------------------------------- 62,401 5,163 8.27 57,422 4,946 9.02 51,415 4,630 9.01 4.3 (2.8) 2 -- 12.73 3 -- 7.61 4 -- 7.86 (24.2) N/M 535 46 8.60 801 67 8.36 1,227 97 7.91 (31.9) (30.3) - -------------------------------------------------------------------------------------------------------------------------------- 537 46 8.57 804 67 8.33 1,231 97 7.87 (31.8) (30.3) 6,403 425 6.68 6,610 450 6.84 7,629 527 6.69 (3.6) (5.9) 1,873 78 4.16 1,563 84 5.37 782 40 5.12 13.9 (5.6) 442 15 3.46 279 12 4.36 243 12 4.55 29.1 14.9 - -------------------------------------------------------------------------------------------------------------------------------- 71,656 5,727 7.99 66,678 5,559 8.34 61,300 5,306 8.66 3.4 (3.3) (911) (888) (875) 12.2 10,201 9,491 8,525 5.3 - -------------------------------------------------------------------------------------------------------------------------------- $ 80,946 $75,281 $68,950 3.5 ======== ======= ======= $ 12,950 390 3.01 $11,650 382 3.28 $ 10,897 333 3.06 3.9 (17.8) 2,716 44 1.62 3,225 59 1.83 4,319 94 2.18 (14.4) (32.7) 791 12 1.52 1,215 20 1.65 1,560 32 2.05 (18.4) (28.5) 4,257 223 5.24 3,520 194 5.51 3,376 190 5.63 7.0 2.8 11,969 595 4.97 12,240 654 5.34 13,273 715 5.39 (.6) (7.1) 823 41 4.98 913 50 5.48 1,812 98 5.41 5.2 (16.8) - -------------------------------------------------------------------------------------------------------------------------------- 33,506 1,305 3.89 32,763 1,359 4.15 35,237 1,462 4.15 .3 (9.3) 4,856 220 4.53 6,635 342 5.15 6,942 359 5.17 (4.5) (24.2) 7,912 426 5.38 7,975 459 5.76 4,741 283 5.97 (9.1) (22.5) 16,473 957 6.09 11,175 681 6.30 6,554 413 6.38 20.9 5.9 - -------------------------------------------------------------------------------------------------------------------------------- 62,747 2,908 4.63 58,548 2,841 4.85 53,474 2,517 4.71 2.7 (8.5) 8,474 8,509 8,536 1.3 3,464 2,681 2,074 19.5 6,261 5,543 4,866 6.0 - -------------------------------------------------------------------------------------------------------------------------------- $ 80,946 $ 75,281 $ 68,950 3.5 ======== ======== ========= 3.36% 3.49% 3.95% - -------------------------------------------------------------------------------------------------------------------------------- $ 2,819 3.93% $ 2,718 4.08% $ 2,789 4.54% .6% ====== ==== ======== ==== ======== ==== $ 1,162 $ 85 $ 879 $ 65 $ 648 $ 49 14.1% 9.7% 32 34 44 22.2 - --------------------------------------------------------------------------------------------------------------------------------
29 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES Average earning assets decreased by 4% to $72.3 billion, due primarily to declines in both commercial and consumer loans (other than home equity loans). These declines reflected weak loan demand in a challenging economic environment, as well as the effect of management's decision to exit and/or reduce certain lending activities. This decision is more fully discussed below in the section entitled "Interest earning assets." In 2001, net interest income was $2.9 billion, representing a $112 million, or 4%, increase from 2000. This growth reflected an improved net interest margin, which increased 12 basis points to 3.81%. Average earning assets increased by 1% to $75.4 billion, as growth in the commercial and home equity portfolios more than offset declines in other portfolios (some of which declined due to the strategic decision mentioned above). NET INTEREST MARGIN. Key's net interest margin improved over the past two years, primarily because: - - we benefited from declining short-term interest rates; - - the interest rate spread on our total loan portfolio improved as we continued to focus on those businesses, such as home equity lending, that typically generate higher interest rate spreads; - - we sold loans with interest rate spreads that did not meet Key's internal profitability standards; and - - a greater proportion of Key's earning assets was supported by noninterest-bearing liabilities (such as demand deposits) and shareholders' equity. INTEREST EARNING ASSETS. Average earning assets for 2002 totaled $72.3 billion, which was $3.1 billion, or 4%, lower than the 2001 level. This decrease came principally from the loan portfolio and was attributable to a number of factors, including Key's decision in May 2001 to exit or scale back certain types of lending. Another factor was loan sales, including the September 2001 sale of $1.4 billion of residential mortgage loans. Weak loan demand resulting from the general economic slowdown has also contributed to the net decline in loans. In 2001, average earning assets totaled $75.4 billion, representing an $866 million, or 1%, increase from the prior year. This improvement was driven by the growth of Key's loan portfolio, with the largest increases occurring in the commercial and home equity sectors. However, our decision to scale back or exit certain types of lending, and slower demand for loans in a weak economy, led to declines in Key's commercial and consumer loans during the second half of 2001. The September sale of $1.4 billion of residential mortgage loans also contributed to the decline in consumer loans. Over the past two years, the growth and composition of Key's loan portfolio has been affected by several actions: - - During the third quarter of 2001, we sold $1.4 billion of residential mortgage loans, which were generated by our private banking and community development businesses. These loans are originated as a customer and community accommodation and are sold periodically because they have relatively low interest rate spreads that do not meet Key's internal profitability standards. - - During the second quarter of 2001, management announced that Key would exit the automobile leasing business, de-emphasize indirect prime automobile lending and discontinue certain credit-only commercial relationships. These portfolios, in the aggregate, have declined by approximately $3.3 billion since the date of the announcement through December 31, 2002. - - We sold commercial mortgage loans of $1.4 billion during 2002 and $1.7 billion during 2001. Since some of these loans have been sold with limited recourse, Key established a loss reserve of an amount estimated by management to be appropriate to reflect the recourse risk. More information about the related recourse agreement is provided in Note 19 ("Commitments, Contingent Liabilities and Guarantees") under the section entitled "Recourse agreement with Federal National Mortgage Association" on page 83. Our business of originating and servicing commercial mortgage loans has grown, in part as a result of acquiring Conning Asset Management in the second quarter of 2002 and both Newport Mortgage Company, L.P. and National Realty Funding L.C. in 2000. - - We sold education loans of $1.1 billion ($750 million through securitizations) during 2002 and $1.2 billion ($491 million through securitizations) during 2001. Figure 7 shows how the changes in yields or rates and average balances from the prior year affected net interest income. The section entitled "Financial Condition," which begins on page 36, contains more discussion about changes in earning assets and funding sources. MARKET RISK MANAGEMENT The values of some financial instruments vary not only with changes in market interest rates, but also with changes in foreign exchange rates, factors influencing valuations in the equity securities markets, and other market-driven rates or prices. For example, the value of a fixed-rate bond will decline if market interest rates increase; the bond will become a less attractive investment to the holder. Similarly, the value of the U.S. dollar regularly fluctuates in relation to other currencies. The exposure that instruments tied to such external factors present is called "market risk." Most of Key's market risk is derived from interest rate fluctuations. Interest rate risk management Key's Asset/Liability Management Policy Committee has developed 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 exposure. FACTORS CONTRIBUTING TO INTEREST RATE EXPOSURE. Key uses interest rate exposure models to quantify the potential impact on earnings and economic value of equity arising from a variety of possible future interest rate scenarios. The many interest rate scenarios modeled estimate the level of Key's interest rate exposure arising from option risk, basis risk and gap risk. - - A financial instrument presents "OPTION RISK" when one party to the instrument 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. 30 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES FIGURE 7 COMPONENTS OF NET INTEREST INCOME CHANGES
2002 VS 2001 2001 VS 2000 --------------------------------- --------------------------------- AVERAGE YIELD/ NET AVERAGE YIELD/ NET in millions VOLUME RATE CHANGE VOLUME RATE CHANGE - ------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans $ (193) $ (883) $(1,076) $ 59 $ (671) $ (612) Tax-exempt investment securities (9) -- (9) (10) 1 (9) Securities available for sale (18) (48) (66) 10 (3) 7 Short-term investments (7) (28) (35) -- (18) (18) Other investments 1 (1) -- 5 (6) (1) - ------------------------------------------------------------------------------------------------------------------------- Total interest income (taxable equivalent) (226) (960) (1,186) 64 (697) (633) INTEREST EXPENSE Money market deposit accounts 17 (146) (129) 4 (164) (160) Savings deposits -- (8) (8) (3) (8) (11) NOW accounts (1) (2) (3) -- (1) (1) Certificates of deposit ($100,000 or more) (29) (54) (83) (14) (25) (39) Other time deposits (69) (221) (290) 13 (32) (19) Deposits in foreign office (13) (55) (68) 8 (68) (60) - ------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits (95) (486) (581) 8 (298) (290) Federal funds purchased and securities sold under repurchase agreements 12 (120) (108) 15 (104) (89) Bank notes and other short-term borrowings (132) (91) (223) (17) (109) (126) Long-term debt, including capital securities 51 (324) (273) 14 (254) (240) - ------------------------------------------------------------------------------------------------------------------------- Total interest expense (164) (1,021) (1,185) 20 (765) (745) - ------------------------------------------------------------------------------------------------------------------------- Net interest income (taxable equivalent) $ (62) $ 61 $ (1) $ 44 $ 68 $ 112 ======= ======= ======= ======= ======= ======= - -------------------------------------------------------------------------------------------------------------------------
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. Such a prepayment gives Key a return on its investment (the principal plus some interest), but unless there is a prepayment penalty, that return may not be as high as the return that would have been generated had payments been received for the duration 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 follows to manage interest rate risk is to use floating-rate liabilities (such as borrowings) to fund floating-rate assets (such as loans). That way, as our interest expense increases, so will our interest income. We face "BASIS RISK" when our floating-rate assets and floating-rate liabilities reprice in response to different market factors or indices. Under those circumstances, even if equal amounts of assets and liabilities are repricing at the same time, interest expense and interest income may not change by the same amount. - - We often use an interest-bearing liability to fund 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. MEASUREMENT OF SHORT-TERM INTEREST RATE EXPOSURE. Key uses a net interest income simulation model to measure interest rate risk over a short time frame. 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 and judgments. 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 Key makes are reasonable. Nevertheless, the simulation modeling process produces only a sophisticated estimate, not a precise calculation of exposure. Key's guidelines for risk management call for preventive measures to be taken if the simulation modeling demonstrates that a gradual 200 basis point increase or decrease in short-term rates over the next twelve months would adversely affect net interest income over the same period by more than 2%. Key is operating within these guidelines. Since short-term interest rates were relatively low at December 31, 2002, management modified Key's standard rate scenario of a gradual decrease of 200 basis points over twelve months to a gradual decrease of 50 basis points over three months and no change over the following nine months. As of December 31, 2002, based on the results of our simulation model, and assuming that management does not take action to alter the outcome, Key would expect net interest income to decrease by approximately .43% if short-term interest rates gradually increase by 200 basis points. Conversely, if short-term interest rates gradually decrease by 50 basis points over the next three months, net interest income would be expected to decrease by approximately .51% over the next twelve months. 31 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES The decline in net interest income under both of the preceding scenarios reflects the fact that Key is currently in a liability sensitive position when interest rates increase and an asset sensitive position when rates decrease. Key's asset sensitive position to a decrease in interest rates stems from the fact that short-term rates are at historically low levels. Consequently, the results of the simulation model reflect management's assumption that deposit rates will not decline from current levels, while interest rates on earning assets will continue to do so. To mitigate the risk of a potentially adverse effect on earnings, management is using interest rate contracts while maintaining the flexibility to lower rates on deposits, if necessary. Key has historically been in a liability sensitive position when interest rates are rising. Management actively monitors the risk to higher rates and would endeavor to take preventive actions to ensure that net interest income at risk does not exceed guidelines established by the Asset/Liability Management Policy Committee. Also, Key's lines of business have the ability to mitigate the negative effect on net interest income from rising interest rates by growing loans and deposits with profitable interest rate spreads. 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 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 derivative positions based on the current yield curve. However, economic value does not represent the fair values of asset, liability and derivative positions since it does not consider factors like credit risk and liquidity. Key's guidelines for risk management call for preventive measures to be taken if an immediate 200 basis point increase or decrease in interest rates is estimated to reduce the economic value of equity by more than 15%. Key is operating within these guidelines. Certain short-term interest rates were limited to reductions of less than 200 basis points since interest rates cannot decrease below zero in Key's economic value of equity model. MANAGEMENT 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 manage 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, and interest rate implications. A brief description of interest rate swaps and caps follows. - - INTEREST RATE SWAPS are contracts in which two parties agree to exchange interest payment streams that are calculated based on agreed-upon amounts (known as "notional amounts"). For example, party A will pay interest at a fixed rate to, and receive interest at a variable rate from, party B. Key generally uses interest rate swaps to mitigate its exposure to interest rate risk on certain loans, securities, deposits, short-term borrowings and long-term debt. - - INTEREST RATE CAPS are contracts under which the holder is compensated based on an agreed-upon notional amount when a benchmark interest rate exceeds a specified level (known as the "strike rate"). Caps limit exposure to interest rate increases, but have no effect if interest rates decline. Key has used interest rate caps to manage the risk of adverse movements in interest rates on some of its debt. For more information about how Key uses interest rate swaps and caps to manage its balance sheet, see Note 20 ("Derivatives and Hedging Activities"), which begins on page 84. Trading portfolio risk management Key's trading portfolio includes interest rate swap contracts entered into to accommodate the needs of clients, positions with third parties that are intended to offset or mitigate the interest rate risk of client positions, foreign exchange contracts entered into to accommodate the needs of clients, and proprietary trading positions in financial assets and liabilities. The fair values of these trading portfolio items are included in "accrued income and other assets" or "accrued expense and other liabilities" on the balance sheet. For more information about these items, see Note 20 ("Derivatives and Hedging Activities"), which begins on page 84. Management uses a value at risk ("VAR") model to estimate the potential adverse effect of changes in interest and foreign exchange rates, and equity prices on the fair value of Key's trading portfolio. Using statistical methods, this model estimates the maximum potential one-day loss with 95% probability. At December 31, 2002, Key's aggregate daily VAR was $.9 million, compared with $1.4 million at December 31, 2001. Aggregate daily VAR averaged $1.4 million for 2002, compared with an average of $1.3 million during 2001. 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 2002 was $1.8 billion, representing a $44 million, or 3%, increase from the prior year. In 2001, noninterest income of $1.7 billion was down $469 million, or 21%, from 2000. The 2002 improvement in noninterest income was due primarily to an $84 million increase in income from investment banking and capital markets activities. This increase was attributable to strong growth in investment banking fees, but also reflected two significant charges recorded during the fourth quarter of 2001. These charges included a $45 million write-down of the principal investing portfolio and a $15 million increase to the reserve for customer derivative losses. Also contributing to the 2002 improvement was an $18 million increase in service charges on deposit accounts and a $10 million rise in letter of credit and nonyield-related loan fees. These positive results were offset in part by a $42 million reduction in income from trust and investment services and a $29 million decrease in net securities gains. In 2001, Key's noninterest income decreased principally because noninterest income in 2000 included a $332 million gain from the sale of Key's credit card portfolio in January 2000. For more information on this transaction, see Note 3 ("Acquisitions and Divestitures") on page 64. In addition, 32 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES capital markets-sensitive revenues, particularly those generated by the asset management, principal investing and brokerage businesses, were affected adversely by the recessionary economy. Income from investment banking and capital markets activities decreased by $205 million (including the $60 million of 2001 charges discussed on page 32), while income from trust and investment services declined by $36 million. These reductions were substantially offset by increases in net securities gains (up $63 million), service charges on deposit accounts (up $46 million) and letter of credit and nonyield-related loan fees (up $17 million). Figure 8 shows the major components of Key's noninterest income. The discussion that follows provides additional information, such as the composition of certain components and the factors that caused them to change in 2002 and 2001. FIGURE 8 NONINTEREST INCOME
YEAR ENDED DECEMBER 31, CHANGE 2002 VS 2001 --------------------- dollars in millions 2002 2001 2000 AMOUNT PERCENT - -------------------------------------------------------------------------------------------------------------- Trust and investment services income $ 609 $ 651 $ 687 $ (42) (6.5)% Service charges on deposit accounts 405 387 341 18 4.7 Investment banking and capital markets income 172 88 293 84 95.5 Letter of credit and loan fees 134 124 107 10 8.1 Corporate-owned life insurance income 108 114 109 (6) (5.3) Electronic banking fees 79 74 68 5 6.8 Net securities gains (losses) 6 35 (28) (29) (82.9) Gain from sale of credit card portfolio -- -- 332 -- -- Other income: Insurance income 57 56 62 1 1.8 Net gains from loan securitizations and sales 56 49 31 7 14.3 Loan securitization servicing fees 9 16 24 (7) (43.8) Credit card fees 9 7 11 2 28.6 Miscellaneous income 125 124 157 1 .8 - ------------------------------------------------------------------------------------------------------------ Total other income 256 252 285 4 1.6 - ------------------------------------------------------------------------------------------------------------ Total noninterest income $ 1,769 $ 1,725 $ 2,194 $ 44 2.6% ======= ======= ======= ======= - ------------------------------------------------------------------------------------------------------------
TRUST AND INVESTMENT SERVICES INCOME. Trust and investment services provide Key's largest source of noninterest income. Its primary components are shown in Figure 9. A significant portion of this income is based on the value of assets under management. Thus, over the past two years, the level of revenue derived from these services has been adversely affected by continued declines in the equity and fixed income markets. FIGURE 9 TRUST AND INVESTMENT SERVICES INCOME
YEAR ENDED DECEMBER 31, CHANGE 2002 VS 2001 ----------------------- dollars in millions 2002 2001 2000 AMOUNT PERCENT - ------------------------------------------------------------------------------------------------------------------------------- Personal asset management and custody fees $162 $179 $189 $(17) (9.5)% Institutional asset management and custody fees 77 86 93 (9) (10.5) Bond services 36 41 42 (5) (12.2) Brokerage commission income 198 202 224 (4) (2.0) All other fees 136 143 139 (7) (4.9) - ------------------------------------------------------------------------------------------------------------------------------ Total trust and investment services income $609 $651 $687 $(42) (6.5)% ==== ==== ==== ==== - ------------------------------------------------------------------------------------------------------------------------------
At December 31, 2002, Key's bank, trust and registered investment advisory subsidiaries had assets under management of $61.7 billion, compared with $72.7 billion at the end of 2001. These assets are managed on behalf of both institutions and individuals through a variety of equity, fixed income and money market accounts. The composition of Key's assets under management is shown in Figure 10. In 2002, the value of total assets under management decreased by a net 15%. This decrease reflects a decline in the market value of assets under management, as well as net asset outflows of approximately $4.1 billion during the year. Approximately 60% of the outflows represent funds that have been transferred to an outside vendor in connection with Key's decision in 2002 to sell the 401(k) recordkeeping business. Another 20% of the outflows are attributable to funds which clients have elected to move from money market funds under management to an FDIC insured deposit account with Key. As shown in Figure 10, 56% of the assets Key manages are invested in more stable fixed income or money market funds. The performance of the majority of Key's investment products exceeded the performance of their respective benchmarks. 33 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES FIGURE 10 ASSETS UNDER MANAGEMENT
DECEMBER 31, in millions 2002 2001 2000 - ---------------------------------------------------------------- Assets under management by investment type: Equity $27,224 $35,798 $37,748 Fixed income 16,133 16,919 14,579 Money market 18,337 20,000 21,688 - ---------------------------------------------------------------- Total $61,694 $72,717 $74,015 ======= ======= ======= Proprietary mutual funds included in assets under management: Equity $ 2,878 $ 3,973 $ 4,405 Fixed income 1,215 1,190 1,042 Money market 11,457 13,801 15,307 - ---------------------------------------------------------------- Total $15,550 $18,964 $20,754 ======= ======= ======= - ----------------------------------------------------------------
INVESTMENT BANKING AND CAPITAL MARKETS INCOME. As shown in Figure 11, the 2002 increase in investment banking and capital markets income was driven by improved results from investment banking activities and from principal investing. The improvement in principal investing reflects the $45 million charge taken for write-downs in the fourth quarter of 2001. Key's principal investing income is susceptible to volatility since it is derived from investments in small to medium-sized businesses in various stages of economic development and strategy implementation. While most of Key's principal investments are in their mid to late stages, those that are in their early stages are more vulnerable to changes in general economic conditions. Principal investments consist of direct and indirect investments in predominantly privately-held companies and are carried on the balance sheet at fair value ($677 million at December 31, 2002, and $621 million at December 31, 2001). Thus, the net gains and losses presented in Figure 11 stem from changes in estimated fair values, as well as actual gains and losses on sales of principal investments. If the current weakness in the economy continues, management anticipates there may be a further decline in the fair value of the principal investing portfolio. FIGURE 11 INVESTMENT BANKING AND CAPITAL MARKETS INCOME
YEAR ENDED DECEMBER 31, CHANGE 2002 VS 2001 --------------------- dollars in millions 2002 2001 2000 AMOUNT PERCENT - --------------------------------------------------------------------------------------------------------------------------- Dealer trading and derivatives income $ 32 $ 25 $ 80 $ 7 28.0% Investment banking income 121 102 107 19 18.6 Net gains (losses) from principal investing (14) (79) 71 65 82.3 Foreign exchange income 33 40 35 (7) (17.5) - -------------------------------------------------------------------------------------------------------------------------- Total investment banking and capital markets income $172 $ 88 $293 $84 95.5% ==== ==== ==== === - --------------------------------------------------------------------------------------------------------------------------
SERVICE CHARGES ON DEPOSIT ACCOUNTS. In 2002, service charges on deposit accounts rose for the second consecutive year. These fees increased over the past two years primarily because of strategies implemented in connection with Key's competitiveness initiative and higher levels of noninterest-bearing deposits. The growth in these fees slowed during the second half of 2002 as free checking products were introduced in the third quarter and rolled out to all of Key's markets by the end of the year. CORPORATE-OWNED LIFE INSURANCE INCOME. Income from corporate-owned life insurance, representing a tax-deferred increase in cash surrender values and tax-exempt death benefits, decreased by 5% in 2002, following a 5% increase in the prior year. SECURITIES TRANSACTIONS. During 2002, Key realized net securities gains of $6 million, compared with net gains of $35 million in 2001 and net losses of $28 million in 2000. Since the 2001 sales involved primarily equity securities, the sales did not have a significant adverse affect on Key's net interest income in subsequent periods. In 2000, Key's securities transactions included $50 million of net losses that resulted from the reconfiguration of the fixed income securities portfolio. OTHER INCOME. Other income for 2002 increased by $4 million, or 2%, from 2001. The $33 million decrease in 2001 compared with the prior year was due largely to a $40 million charge (included in miscellaneous income) taken in the second quarter to establish a reserve for losses incurred on the residual values of leased vehicles. This charge was offset in part by an increase in net gains from loan securitizations and sales, and higher fees from electronic banking services. Also, traditional fee income was supplemented in the fourth quarter of 2001 by $10 million of additional revenue, representing the value of shares received as a result of the demutualization of an insurance company in which Key is a policyholder. Key contributed these shares to its charitable foundation, which also increased miscellaneous expense by $10 million. NONINTEREST EXPENSE Noninterest expense for 2002 was $2.7 billion, representing a $288 million, or 10%, decrease from the prior year and Key's lowest level of expense for any year since 1998. In 2001, noninterest expense of $2.9 billion was essentially unchanged from 2000. The 2002 reduction in noninterest expense reflected a $234 million decrease in amortization expense related to intangibles, which resulted from two significant events. In the second quarter of 2001, we recorded a $150 million write-down of goodwill associated with Key's decision to downsize its automobile finance business. In addition, a 2002 prescribed change in accounting for goodwill reduced amortization expense by approximately $79 million. For more information pertaining to the accounting change, see the section entitled "Amortization of intangibles" on page 36. Other factors that contributed to the 2002 improvement in 34 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES noninterest expense were a $60 million reduction in computer processing expense, a $16 million decrease in equipment expense and a $20 million charge (included in miscellaneous expense) taken in the second quarter of 2001 to increase litigation reserves. These positive results were partially offset by a $58 million rise in personnel expense. Noninterest expense for both 2001 and 2000 included significant items that hinder a comparison of results between those years. In 2001, these items included the write-down of goodwill and the additional litigation reserves mentioned above. In 2000, these items included $127 million of restructuring and other special charges recorded in connection with strategic actions implemented to improve operating efficiency and profitability. More information about these charges can be found under the heading "Restructuring and other special charges" on page 36. Excluding these items, noninterest expense for 2001 decreased by $19 million, or 1%, from 2000. The decrease was due primarily to a $67 million improvement in personnel expense and a $21 million decline in equipment expense. These reductions were partially offset by increases in a number of other expense components. Included in miscellaneous expense for 2001 is the $10 million contribution to our charitable foundation discussed under the heading "Other income" on page 34. Figure 12 shows the components of Key's noninterest expense. The discussion that follows explains the composition of certain components and the factors that caused them to change in 2002 and 2001. FIGURE 12 NONINTEREST EXPENSE
YEAR ENDED DECEMBER 31, CHANGE 2002 VS 2001 -------------------- dollars in millions 2002 2001 2000 AMOUNT PERCENT - ------------------------------------------------------------------------------------------------------------- Personnel $ 1,436 $ 1,378 $ 1,445 $ 58 4.2% Net occupancy 226 232 223 (6) (2.6) Computer processing 192 252 240 (60) (23.8) Equipment 136 152 173 (16) (10.5) Marketing 122 112 110 10 8.9 Professional fees 92 88 89 4 4.5 Amortization of intangibles 11 245 101 (234) (95.5) Restructuring charges (credits) -- (4) 102 4 100.0 Other expense: Postage and delivery 59 63 65 (4) (6.3) Telecommunications 35 44 51 (9) (20.5) Equity- and gross receipts-based taxes 26 29 33 (3) (10.3) OREO expense, net 7 6 7 1 16.7 Miscellaneous expense 311 344 278 (33) (9.6) - ------------------------------------------------------------------------------------------------------------ Total other expense 438 486 434 (48) (9.9) - ------------------------------------------------------------------------------------------------------------ Total noninterest expense $ 2,653 $ 2,941 $ 2,917 $ (288) (9.8)% ======== ======== ======== ======== Full-time equivalent employees at year end 20,437 21,230 22,142 (793) (3.7)% - ------------------------------------------------------------------------------------------------------------
PERSONNEL. Personnel expense, the largest category of Key's noninterest expense, rose by $58 million, or 4%, in 2002 following decreases in each of the previous two years. The 2002 increase was due primarily to a rise in the cost of benefits and the effect of annual merit increases, most of which generally take effect during the second quarter. The level of Key's personnel expense continues to reflect the benefits derived from our successful competitiveness initiative. Through this initiative we have improved efficiency and reduced the level of personnel required to conduct our business. At December 31, 2002, the number of full-time equivalent employees was 20,437, compared with 21,230 at the end of 2001 and 22,142 at the end of 2000. Figure 13 shows the major components of Key's personnel expense. FIGURE 13 PERSONNEL EXPENSE
YEAR ENDED DECEMBER 31, CHANGE 2002 VS 2001 ------------------- dollars in millions 2002 2001 2000 AMOUNT PERCENT - -------------------------------------------------------------------------------- Salaries $ 867 $ 842 $ 875 $ 25 3.0% Employee benefits 218 188 192 30 16.0 Incentive compensation 351 348 378 3 .9 - -------------------------------------------------------------------------------- Total personnel expense $1,436 $1,378 $1,445 $ 58 4.2% ====== ====== ====== ====== - --------------------------------------------------------------------------------
35 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES In September 2002, the Board of Directors approved management's recommendation to change Key's method of accounting for stock options granted to eligible employees and directors. Effective January 1, 2003, Key will adopt the fair value method of accounting as outlined in SFAS No. 123, "Accounting for Stock-Based Compensation." Additional information pertaining to this accounting change is included in Note 1 ("Summary of Significant Accounting Policies") under the heading "Accounting Pronouncements Pending Adoption" on page 62. COMPUTER PROCESSING. The decrease in computer processing expense in 2002 was due primarily to a lower level of computer software amortization. This reduction is attributable to a decline in the number of capitalized software projects. Higher software amortization and expenses related to software rental and maintenance accounted for the increase in 2001. EQUIPMENT. The decrease in equipment expense in 2002 and 2001 was driven by reductions in depreciation and rental expense stemming from cost management efforts and our competitiveness initiative. AMORTIZATION OF INTANGIBLES. On January 1, 2002, Key stopped amortizing goodwill, consistent with the industry-wide adoption of new accounting guidance. This change reduced the company's noninterest expense by approximately $79 million for 2002. In accordance with the new guidance, Key completed its transitional goodwill impairment testing during the first quarter of 2002, and determined that no impairment existed as of January 1, 2002. Key performed its annual goodwill impairment testing as of October 1, 2002, and determined that no impairment existed at that date as well. Additional information pertaining to the new accounting guidance is included in Note 1 ("Summary of Significant Accounting Policies") under the heading "Goodwill and Other Intangible Assets" on page 59. RESTRUCTURING AND OTHER SPECIAL CHARGES. Key recorded net charges of $127 million (including net restructuring charges of $104 million) in 2000 in connection with strategic actions related to the competitiveness initiative. For more information related to the actions taken, associated cost savings and reductions to Key's workforce, see the section entitled "Status of competitiveness initiative" on page 22. Additional information related to the restructuring charges can be found in Note 18 ("Restructuring Charges") on page 81. Cash generated by Key's operations is expected to fund the restructuring charge liability; none of the charges had a material impact on Key's liquidity. INCOME TAXES The provision for income taxes was $336 million for 2002, compared with $102 million for 2001 and $515 million for 2000. The effective tax rate, which is the provision for income taxes as a percentage of income before income taxes, was 25.6% for 2002, compared with 39.4% for 2001 and 33.9% for 2000. In 2001, the effective tax rate was significantly distorted by the $150 million nondeductible write-down of goodwill recorded in the second quarter in connection with Key's decision to downsize its automobile finance business. Excluding this charge, the effective tax rate for 2001 was 24.9%. The effective tax rate for 2002 and the effective tax rate for 2001 (excluding the goodwill charge) are substantially below Key's combined statutory federal and state rate of 37% primarily because portions of our equipment leasing portfolio became subject to a lower income tax rate in the latter half of 2001. Responsibility for the management of portions of Key's leasing portfolio was transferred to a subsidiary in a lower tax jurisdiction. Since Key intends to permanently reinvest the earnings of this subsidiary, no deferred income taxes have been recorded on those earnings in accordance with SFAS No. 109, "Accounting for Income Taxes." Other factors that account for the difference between the effective and statutory tax rates in each year include tax deductions associated with dividends paid to Key's 401(k) savings plan, income from investments in tax-advantaged assets (such as tax-exempt securities and corporate-owned life insurance) and credits associated with investments in low-income housing projects. In 2002, Key attained a higher level of pre-tax income, but proportionately less income was derived from tax-advantaged assets. This resulted in an increase from Key's 2001 effective tax rate (excluding the goodwill charge). However, the increase was moderated by the full-year effect of a lower tax rate on our equipment leasing portfolio, as well as legislative changes in 2002 that resulted in a higher tax deduction for dividends paid on Key stock held in Key's 401(k) savings plan. In addition, Key ceased amortizing goodwill effective January 1, 2002, in accordance with new accounting guidance specified by SFAS No. 142, "Goodwill and Other Intangible Assets." In 2001, the effective tax rate (excluding the goodwill charge) decreased significantly because tax-exempt interest income, nontaxable income from corporate-owned life insurance and tax credits accounted for a significantly higher portion of Key's pre-tax income. Pre-tax income was substantially lower in 2001 due to the effects of a weak economy and significant charges recorded in the second and fourth quarters. In addition, the charitable contribution of appreciated stock resulted in a tax benefit. FINANCIAL CONDITION LOANS At December 31, 2002, total loans outstanding were $62.5 billion, compared with $63.3 billion at the end of 2001 and $66.9 billion at the end of 2000. Among the factors that contributed to the decrease in our loans over the past two years are: - - loan sales completed to improve the profitability of the overall portfolio, or to accommodate our funding needs; - - weakening loan demand due to the sluggish economy; and - - our efforts to exit the automobile leasing business, de-emphasize indirect prime automobile lending and discontinue certain credit-only commercial relationships. Over the past several years, we have used alternative funding sources like loan sales and securitizations to allow us to continue to capitalize on our loan origination capabilities. In addition, Key has completed acquisitions that have improved our ability to generate and securitize new loans, especially in the area of commercial real estate. These acquisitions include the purchase of Conning Asset Management in June 2002, and both Newport Mortgage Company, L.P. and National Realty Funding L.C. in 2000. Over the past two years, we have also sold loans and referred new business to an asset-backed commercial paper conduit. These sales and referrals were curtailed in 2002 to keep the loans on Key's balance sheet. For more information about the conduit, 36 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES see Note 19 ("Commitments, Contingent Liabilities and Guarantees") under the heading "Guarantees" on page 83. 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, 2002 2001 2000 -------------------------- ------------------------ ------------------------- dollars in millions AMOUNT % OF TOTAL AMOUNT % OF TOTAL AMOUNT % OF TOTAL - -------------------------------------------------------------------------------------------------------------------------------- COMMERCIAL Commercial, financial and agricultural $ 17,425 27.9% $ 18,159 28.7% $ 20,100 30.0% Commercial real estate (a): Commercial mortgage 6,015 9.6 6,669 10.5 6,876 10.3 Construction 5,659 9.1 5,878 9.3 5,154 7.7 - ---------------------------------------------------------------------------------------------------------------------------- Total commercial real estate loans 11,674 18.7 12,547 19.8 12,030 18.0 Commercial lease financing 7,513 12.0 7,357 11.6 7,164 10.7 - ---------------------------------------------------------------------------------------------------------------------------- Total commercial loans 36,612 58.6 38,063 60.1 39,294 58.7 CONSUMER Real estate -- residential mortgage 1,968 3.1 2,315 3.6 4,212 6.3 Home equity 13,804 22.1 11,184 17.7 9,908 14.8 Credit card -- -- -- -- -- -- Consumer -- direct 2,161 3.5 2,342 3.7 2,539 3.8 Consumer -- indirect: Automobile lease financing 873 1.4 2,036 3.2 3,005 4.5 Automobile loans 2,181 3.5 2,497 4.0 2,809 4.2 Marine 2,088 3.3 1,780 2.8 1,657 2.5 Other 667 1.1 1,036 1.6 1,252 1.9 - ---------------------------------------------------------------------------------------------------------------------------- Total consumer -- indirect loans 5,809 9.3 7,349 11.6 8,723 13.1 - ---------------------------------------------------------------------------------------------------------------------------- Total consumer loans 23,742 38.0 23,190 36.6 25,382 38.0 LOANS HELD FOR SALE 2,103 3.4 2,056 3.3 2,229 3.3 - ---------------------------------------------------------------------------------------------------------------------------- Total $ 62,457 100.0% $ 63,309 100.0% $ 66,905 100.0% ========= ===== ======== ===== ======== ===== - ----------------------------------------------------------------------------------------------------------------------------
1999 1998 -------------------------- ---------------------------- AMOUNT % OF TOTAL AMOUNT % OF TOTAL - ---------------------------------------------------------------------------------------------------- COMMERCIAL Commercial, financial and agricultural $ 18,497 28.8% $ 17,038 27.5% Commercial real estate(a): Commercial mortgage 6,836 10.6 7,309 11.8 Construction 4,528 7.1 3,450 5.6 - --------------------------------------------------------------------------------------------------- Total commercial real estate loans 11,364 17.7 10,759 17.4 Commercial lease financing 6,665 10.4 5,613 9.0 - --------------------------------------------------------------------------------------------------- Total commercial loans 36,526 56.9 33,410 53.9 CONSUMER Real estate-- residential mortgage 3,962 6.1 4,394 7.1 Home equity 7,973 12.4 7,990 12.9 Credit card -- -- 1,425 2.3 Consumer-- direct 2,565 4.0 2,342 3.8 Consumer-- indirect: Automobile lease financing 3,195 5.0 2,580 4.2 Automobile loans 3,082 4.8 See note(b) See note(b) Marine 1,716 2.7 See note(b) See note(b) Other 1,600 2.5 7,009 11.2 - --------------------------------------------------------------------------------------------------- Total consumer-- indirect loans 9,593 15.0 9,589 15.4 - --------------------------------------------------------------------------------------------------- Total consumer loans 24,093 37.5 25,740 41.5 LOANS HELD FOR SALE 3,603 5.6 2,862 4.6 - --------------------------------------------------------------------------------------------------- Total $ 64,222 100.0% $ 62,012 100.0% ========== ===== ========== ===== - ---------------------------------------------------------------------------------------------------
(a) See Figure 15 for a more detailed breakdown of Key's commercial real estate loan portfolio at December 31, 2002. (b) For 1998, indirect automobile and marine loans are included in other indirect loans. 37 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES The level of Key's total loans outstanding (excluding loans held for sale) would have decreased by $402 million, or less than 1%, over the past twelve months if we had not sold $741 million of loans and acquired $244 million of loans during 2002. In the commercial loan portfolio, growth in lease financing receivables was offset by a net decline in all other commercial portfolios, reflecting continued weakness in the economy and our decision to discontinue many credit-only relationships in the leveraged financing and nationally syndicated lending businesses. At December 31, 2002, Key's commercial real estate portfolio included mortgage loans of $6.0 billion and construction loans of $5.7 billion. The average size of a mortgage loan was $.5 million and the largest mortgage loan had a balance of $68 million. The average size of a construction loan was $7 million. The largest construction loan commitment was $57 million; that loan had an outstanding balance of $31 million. Key conducts its commercial real estate lending business through two primary sources: a 12-state banking franchise and National Commercial Real Estate (a national line of business that cultivates relationships both within and beyond the branch system). This line of business deals exclusively with nonowner-occupied properties (i.e., generally properties in which the owner occupies less than 60% of the premises) and accounted for approximately 54% of Key's total average commercial real estate loans during 2002. At December 31, less than 1% of Key's nonowner-occupied portfolio was either nonperforming or delinquent in payments. Our commercial real estate business as a whole focuses on larger real estate developers and, as shown in Figure 15, is diversified by both industry type and geography. FIGURE 15 COMMERCIAL REAL ESTATE LOANS
DECEMBER 31, 2002 GEOGRAPHIC REGION ------------------------------------------- TOTAL PERCENT OF dollars in millions EAST MIDWEST CENTRAL WEST AMOUNT TOTAL - ----------------------------------------------------------------------------------------------------------------------- Nonowner-occupied: Multi-family properties $ 594 $ 561 $ 629 $ 787 $ 2,571 22.0% Retail properties 324 565 150 226 1,265 10.8 Office buildings 171 151 154 213 689 5.9 Residential properties 46 108 135 425 714 6.1 Warehouses 51 217 98 105 471 4.0 Manufacturing facilities 36 28 6 6 76 .7 Hotels/Motels 7 9 -- 10 26 .2 Other 247 404 79 261 991 8.5 - -------------------------------------------------------------------------------------------------------------------- 1,476 2,043 1,251 2,033 6,803 58.2 Owner-occupied 551 2,329 574 1,417 4,871 41.8 - -------------------------------------------------------------------------------------------------------------------- Total $ 2,027 $ 4,372 $ 1,825 $ 3,450 $11,674 100.0% ======= ======= ======= ======= ======= ===== - -------------------------------------------------------------------------------------------------------------------- Nonowner-occupied: Nonperforming loans $ 6 $ 12 $ 2 $ 12 $ 32 N/M Accruing loans past due 90 days or more 6 1 -- -- 7 N/M Accruing loans past due 30 through 89 days 1 9 -- 6 16 N/M - --------------------------------------------------------------------------------------------------------------------
N/M = Not Meaningful Consumer loans would have increased (assuming no loan sales or acquisitions) by $1.1 billion, or 5%, during 2002. Our home equity portfolio grew by $3.0 billion, largely as a result of our focused efforts to grow this business, facilitated by a period of lower interest rates. The growth of the home equity portfolio more than offset declines of $418 million in installment loans, $1.2 billion in automobile lease financing receivables and $347 million in residential real estate mortgage loans. The declines in installment loans and automobile lease financing receivables reflect our decision to de-emphasize indirect prime automobile lending and exit the automobile leasing business. Key's home equity portfolio is derived from both our Retail Banking line of business (64% of the home equity portfolio at December 31, 2002) and our National Home Equity line of business. The National Home Equity line of business has two components: Champion Mortgage Company, a home equity finance company that Key acquired in August 1997, and Key Home Equity Services, which acts as a third-party purchaser of home equity loans. The average loan-to-value ratio at origination for a loan generated by the National Home Equity line of business is 80%. First lien positions comprised 79% of the portfolio for this line of business at December 31, 2002. Key Home Equity Services purchases individual loans from an extensive network of correspondents and agents. Prior to the third quarter of 2002, loans were also purchased through bulk portfolio acquisitions from home equity loan companies. Figure 16 summarizes Key's home equity loan portfolio at December 31 for each of the last six years, as well as certain asset quality statistics and the yields achieved on the portfolio as a whole. SALES, SECURITIZATIONS AND DIVESTITURES. During 2002, Key sold $1.4 billion of commercial real estate loans, $1.1 billion of education loans ($750 million through a securitization) and $835 million of other types of loans. Since 1999, Key has securitized only education loans. Among the factors that Key considers in determining which loans to securitize are: - - whether 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. 38 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES FIGURE 16 HOME EQUITY LOANS
DECEMBER 31, dollars in millions 2002 2001 2000 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------- SOURCES OF LOANS OUTSTANDING AT PERIOD END Retail KeyCenters and other sources $ 8,867 $ 6,431 $ 6,136 $ 5,740 $ 6,036 $ 5,210 Champion Mortgage Company 2,210 1,886 1,082 371 689 242 Key Home Equity Services division 2,727 2,867 2,690 1,862 1,265 211 - ---------------------------------------------------------------------------------------------------------------------- National Home Equity line of business 4,937 4,753 3,772 2,233 1,954 453 - ---------------------------------------------------------------------------------------------------------------------- Total $ 13,804 $ 11,184 $ 9,908 $ 7,973 $ 7,990 $ 5,663 ========== ========== ========== ========== ========== ========== - ---------------------------------------------------------------------------------------------------------------------- Nonperforming loans at year end $ 146 $ 60 $ 80 $ 50 $ 26 $ 15 Net charge-offs for the year 52 98 17 9 5 4 Yield for the year 6.82% 8.55% 9.29% 8.54% 8.77% 9.05% - ----------------------------------------------------------------------------------------------------------------------
Figure 17 summarizes Key's loan sales (including securitizations) for 2002 and 2001. FIGURE 17 LOANS SOLD AND DIVESTED
COMMERCIAL COMMERCIAL RESIDENTIAL HOME CONSUMER in millions COMMERCIAL REAL ESTATE LEASE FINANCING REAL ESTATE EQUITY -- INDIRECT EDUCATION TOTAL - ------------------------------------------------------------------------------------------------------------------------- 2002 - -------------- Fourth quarter $ 93 $ 603 -- $ 65 $ 110 $ 177 $ 100 $ 1,148 Third quarter 18 352 -- 25 242 3 784 1,424 Second quarter 31 159 $ 18 20 24 -- 70 322 First quarter -- 319 -- -- 9 -- 116 444 - ------------------------------------------------------------------------------------------------------------------------- Total $ 142 $ 1,433 $ 18 $ 110 $ 385 $ 180 $ 1,070 $ 3,338 ===== ======== ===== ======== ===== ===== ======== ======== 2001 - -------------- Fourth quarter -- $ 678 -- -- $ 145 -- $ 23 $ 846 Third quarter -- 93 -- $ 1,427 269 -- 597 2,386 Second quarter $ 44 577 -- 20 59 -- 144 844 First quarter -- 327 -- 1 14 -- 449 791 - ------------------------------------------------------------------------------------------------------------------------- Total $ 44 $ 1,675 -- $ 1,448 $ 487 -- $ 1,213 $ 4,867 ===== ======== ===== ======== ===== ===== ======== ======== - -------------------------------------------------------------------------------------------------------------------------
Figure 18 shows loans that are either administered or serviced by Key, but not recorded on the balance sheet. Included are loans that have been both securitized and sold, or simply sold outright. In the event of default, Key is subject to recourse with respect to approximately $227 million of the $24.8 billion of loans administered or serviced at December 31, 2002. Key derives income from two sources when we sell or securitize loans but retain the right to administer or service them. We earn noninterest income (recorded as "other income") from servicing or administering the loans, and we earn interest income from any securitized assets retained. Conning Asset Management and National Realty Funding L.C. service the commercial real estate loans shown in Figure 18, however, other financial institutions originated most of these loans. Approximately $81 million of the assets held in the asset-backed commercial paper conduit, for which Key serves as a referral agent, are also included in Figure 18. For more information regarding the conduit, see Note 19 ("Commitments, Contingent Liabilities and Guarantees") under the heading "Guarantees" on page 83. FIGURE 18 LOANS ADMINISTERED OR SERVICED
DECEMBER 31, in millions 2002 2001 2000 ============================================================== Education loans $ 4,605 $ 4,433 $ 4,113 Automobile loans 54 131 422 Home equity loans 456 768 1,176 Commercial real estate loans 19,508(a) 10,471 7,108 Commercial loans 123 983 973 Commercial lease financing 13 -- -- - -------------------------------------------------------------- Total $ 24,759 $ 16,786 $ 13,792 ========== ========== ========== - --------------------------------------------------------------
(a) Includes $4.1 billion of serviced loans purchased in the June 28, 2002, acquisition of Conning Asset Management. 39 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES Figure 19 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, 2002, approximately 50% of these outstanding loans were scheduled to mature within one year. Loans with maturities greater than one year include $12.2 billion with floating or adjustable rates and $3.2 billion with predetermined rates.
FIGURE 19 MATURITIES AND SENSITIVITY OF CERTAIN LOANS TO CHANGES IN INTEREST RATES DECEMBER 31, 2002 WITHIN 1-5 OVER in millions 1 YEAR YEARS 5 YEARS TOTAL - -------------------------------------------------------------------------------------------------------------------------------- Commercial, financial and agricultural $10,007 $4,982 $2,436 $17,425 Real estate -- construction 3,515 2,025 119 5,659 Real estate -- residential and commercial mortgage 2,131 2,139 3,713 7,983 - -------------------------------------------------------------------------------------------------------------------------------- $15,653 $9,146 $6,268 $31,067 ======= ====== ====== ======= Loans with floating or adjustable interest rates(a) $7,833 $4,348 Loans with predetermined interest rates(b) 1,313 1,920 - -------------------------------------------------------------------------------------------------------------------------------- $9,146 $6,268 ====== ====== - --------------------------------------------------------------------------------------------------------------------------------
(a) "Floating" and "adjustable" rates vary in relation to other interest rates (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, 2002, the securities portfolio totaled $9.5 billion and included $8.5 billion of securities available for sale, $120 million of investment securities and $919 million of other investments (primarily principal investments). In comparison, the total portfolio at December 31, 2001, was $6.5 billion, including $5.4 billion of securities available for sale, $225 million of investment securities and $832 million of other investments. The size and composition of Key's securities portfolio are dependent largely on our needs for liquidity and the extent to which we are required or elect to hold these assets as collateral to secure public and trust deposits. Although debt securities are generally used for this purpose, other assets, such as securities purchased under resale agreements, may be used temporarily when they provide more favorable yields. SECURITIES AVAILABLE FOR SALE. The majority of Key's securities available for sale portfolio consists of collateralized mortgage obligations that provide a source of interest income and serve as collateral in connection with 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, 2002, Key had $8.1 billion invested in collateralized mortgage obligations and other mortgage-backed securities in the available-for-sale portfolio, compared with $4.8 billion at December 31, 2001. Key invested more heavily in these securities during 2002 as opportunities to originate loans (Key's preferred earning assets) have been adversely affected by the weak economy. Substantially all of these securities were issued or backed by federal agencies. Figure 20 shows the composition, yields and remaining maturities of Key's securities available for sale. For more information about retained interests in securitizations, gross unrealized gains and losses by type of security and securities pledged, see Note 6 ("Securities"), which begins on page 68. INVESTMENT SECURITIES. Securities issued by states and political subdivisions account for all of Key's investment securities. Figure 21 shows the composition, yields and remaining maturities of these securities. OTHER INVESTMENTS. Principal investments -- investments in equity and mezzanine instruments made by Key's Principal Investing unit -- are carried at fair value, which aggregated $677 million at December 31, 2002. They represent approximately 75% of other investments and include direct and indirect investments predominately in privately-held companies. Direct investments are those made in a particular company, while indirect investments are made through funds that include other investors. In addition to principal investments, other investments include securities that do not have readily determinable fair values. These securities include certain real estate-related investments. Neither these securities nor principal investments have stated maturities. ASSET QUALITY Key has a multi-faceted program to manage asset quality. Our professionals: - - evaluate and monitor credit quality and risk in credit-related assets; - - develop commercial and consumer credit policies and systems; - - monitor compliance with internal underwriting standards; - - establish credit-related concentration limits; and - - review the adequacy of the allowance for loan losses. ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses at December 31, 2002, was $1.5 billion, or 2.32% of loans. This compares with $1.7 billion, or 2.65% of loans, at December 31, 2001. The allowance includes $179 million that was specifically allocated for impaired loans of $377 million at December 31, 2002, compared with $180 million that was allocated for impaired loans of $417 million a year ago. For more information about impaired loans, see Note 9 ("Impaired Loans and Other Nonperforming Assets") on page 72. At December 31, 2002, the allowance for loan losses was 153.98% of nonperforming loans, compared with 184.29% at December 31, 2001. 40 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES FIGURE 20 SECURITIES AVAILABLE FOR SALE
OTHER U.S. TREASURY, STATES AND COLLATERALIZED MORTGAGE- RETAINED AGENCIES AND POLITICAL MORTGAGE BACKED INTERESTS IN OTHER dollars in millions CORPORATIONS SUBDIVISIONS OBLIGATIONS(a) SECURITIES(a) SECURITIZATIONS(a) SECURITIES - --------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 2002 Remaining maturity: One year or less $ 3 $ 1 $ 852 $ 9 $ 8 $ 1 After one through five years 8 6 6,018 644 201 12 After five through ten years 5 11 185 12 -- 5 After ten years 7 17 152 187 -- 163(c) - --------------------------------------------------------------------------------------------------------------------------------- Fair value $ 23 $ 35 $ 7,207 $ 852 $ 209 $ 181 Amortized cost 22 35 7,143 815 166 208 Weighted average yield 5.29% 6.47% 5.26% 6.78% 22.16% 5.33%(b) Weighted average maturity 8.4 YEARS 10.9 YEARS 2.8 YEARS 2.3 YEARS 3.6 YEARS 9.7 YEARS - --------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 2001 Fair value $ 99 $ 21 $ 3,805 $ 1,032 $ 234 $ 217 Amortized cost 99 21 3,791 1,008 214 232 - --------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 2000 Fair value $ 984 $ 33 $ 4,298 $ 1,355 $ 316 $ 398 Amortized cost 984 33 4,296 1,355 334 362 - ---------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE dollars in millions TOTAL YIELD(b) - ------------------------------------------------------------------ DECEMBER 31, 2002 Remaining maturity: One year or less $ 874 5.65% After one through five years 6,889 5.56 After five through ten years 218 8.53 After ten years 526 9.21 - --------------------------------------------------------------- Fair value $ 8,507 - Amortized cost 8,389 5.76% Weighted average yield 5.76% -- Weighted average maturity 3.0 YEARS -- - --------------------------------------------------------------- DECEMBER 31, 2001 Fair value $ 5,408 -- Amortized cost 5,365 7.26% - --------------------------------------------------------------- DECEMBER 31, 2000 Fair value $ 7,384 -- Amortized cost 7,364 7.16% - ---------------------------------------------------------------
(a) Maturity is based upon expected average lives rather than contractual terms. (b) Weighted average yields are calculated based on amortized cost and exclude equity securities of $188 million that have no stated yield. Such yields have been adjusted to a taxable-equivalent basis using the statutory federal income tax rate of 35%. (c) Includes primarily marketable equity securities (including an internally managed portfolio of bank common stock investments) with no stated maturity. FIGURE 21 INVESTMENT SECURITIES
STATES AND WEIGHTED POLITICAL AVERAGE dollars in millions SUBDIVISIONS YIELD(a) - --------------------------------------------------------------------- DECEMBER 31, 2002 Remaining maturity: One year or less $ 32 9.79% After one through five years 69 9.54 After five through ten years 18 8.32 After ten years 1 11.22 - ------------------------------------------------------------------- Amortized cost $ 120 9.43% Fair value 129 -- Weighted average maturity 2.8 YEARS -- - ------------------------------------------------------------------- DECEMBER 31, 2001 Amortized cost $ 225 8.71% Fair value 234 -- - ------------------------------------------------------------------- DECEMBER 31, 2000 Amortized cost $ 323 9.18% Fair value 333 -- - -------------------------------------------------------------------
(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%. Management estimates the appropriate level of the allowance for loan losses on a quarterly (and at times more frequent) basis. The methodology used is described in Note 1 ("Summary of Significant Accounting Policies") under the heading "Allowance for Loan Losses" on page 58. Briefly, management assigns a specific allowance to an impaired loan when the carrying amount of the loan exceeds the estimated present value of related future cash flows and the fair value of any existing collateral. The allowance for loan losses arising from nonimpaired loans is determined by applying historical loss rates to existing loans with similar risk characteristics and by exercising judgment to assess the impact of factors such as changes in economic conditions, credit policies or underwriting standards, and the level of credit risk associated with specific industries and markets. The aggregate balance of the allowance for loan losses at December 31, 2002, represents management's best estimate of the losses inherent in the loan portfolio at that date. The allowance allocated for Key's impaired loans was essentially unchanged from the prior year, reflecting Key's continued efforts to resolve problem credits, combined with stabilizing credit quality trends in certain portfolios. During the same period, the allowance allocated for nonimpaired loans decreased by $224 million, or 15%, due largely to slow loan growth and stabilizing credit quality trends in certain portfolios. Management has determined that the level of watch credits in several commercial portfolios decreased from year-ago levels. Watch credits are loans with the potential for further deterioration in quality based on the debtor's current financial condition and related ability to perform in accordance with the terms of the loan. The decline in watch credits in specific commercial portfolios was due primarily to more conservative underwriting and slower loan growth in a sluggish economy. The loan portfolios with the most significant decreases in watch credits were large corporate and healthcare. Other portfolios, including middle market, showed signs of stability or modest improvement. At the same time, the media and commercial real estate portfolios experienced higher levels of watch credits. These changes reflect the fluctuations that occur in loan portfolios from quarter to quarter. Management does not believe that such changes require any adjustment to the allowance at this time. 41 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES As shown in Figure 22, most of the 2002 decrease in Key's allowance for loan losses was attributable to developments in the commercial loan portfolio. This decrease reflects net charge-offs recorded in the nonreplenished allowance discussed in the following section, stabilizing credit quality trends in certain portfolios and slow loan growth in a weak economy. FIGURE 22 ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
DECEMBER 31, 2002 2001 2000 ----------------------- ---------------------- ------------------------ PERCENT OF PERCENT OF PERCENT OF 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 $1,092 27.9% $1,289 28.7% $ 742 30.0% Real estate -- commercial mortgage 48 9.6 45 10.5 35 10.3 Real estate -- construction 45 9.1 39 9.3 27 7.7 Commercial lease financing 74 12.0 89 11.6 45 10.7 - --------------------------------------------------------------------------------------------------------------------- Total commercial loans 1,259 58.6 1,462 60.1 849 58.7 Real estate -- residential mortgage 2 3.1 4 3.7 2 6.3 Home equity 65 22.1 59 17.7 20 14.8 Credit card -- -- -- -- -- -- Consumer -- direct 16 3.5 24 3.7 15 3.8 Consumer -- indirect lease financing 5 1.4 8 3.2 9 4.5 Consumer -- indirect other 103 7.9 117 8.4 104 8.6 - --------------------------------------------------------------------------------------------------------------------- Total consumer loans 191 38.0 212 36.7 150 38.0 Loans held for sale 2 3.4 3 3.2 2 3.3 Unallocated -- -- -- -- -- -- - --------------------------------------------------------------------------------------------------------------------- Total $1,452 100.0% $1,677 100.0% $1,001 100.0% ====== ===== ====== ===== ====== ===== - ---------------------------------------------------------------------------------------------------------------------
1999 1998 ----------------------- --------------------- PERCENT OF PERCENT OF LOAN TYPE TO LOAN TYPE TO AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS - --------------------------------------------------------------------------------------------- Commercial, financial and agricultural $509 28.8% $357 27.5% Real estate -- commercial mortgage 34 10.6 32 11.8 Real estate -- construction 16 7.1 15 5.6 Commercial lease financing 39 10.4 49 9.0 - ----------------------------------------------------------------------------------------- Total commercial loans 598 56.9 453 53.9 Real estate -- residential mortgage 1 6.7 7 8.2 Home equity 7 11.8 5 11.8 Credit card -- -- 44 2.3 Consumer -- direct 8 4.0 15 3.8 Consumer -- indirect lease financing 6 5.0 5 4.2 Consumer -- indirect other 55 10.0 77 11.2 - ----------------------------------------------------------------------------------------- Total consumer loans 77 37.5 153 41.5 Loans held for sale 18 5.6 1 4.6 Unallocated 237 -- 293 -- - ----------------------------------------------------------------------------------------- Total $930 100.0% $900 100.0% ==== ===== ==== ===== - -----------------------------------------------------------------------------------------
RUN-OFF LOAN PORTFOLIO. In May 2001, management set apart $300 million of Key's allowance for loan losses as part of its decision to discontinue many credit-only relationships in the leveraged financing and nationally syndicated lending businesses and to facilitate sales of distressed loans in other portfolios. An additional $190 million was added to this allowance in the fourth quarter of 2001. The resulting segregated allowance is being used to exit what initially amounted to approximately $2.7 billion in related commitments (including $1.6 billion of loans outstanding), which were moved to a separate run-off portfolio, and to absorb losses incurred in connection with sales of distressed loans in the continuing portfolio. As losses are charged to this segregated allowance over time, we do not intend to replenish it. Within the run-off portfolio, approximately $940 million of commitments (including $599 million of loans outstanding) remained as of December 31, 2002. Only $85 million of these loans were nonperforming. 42 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES Figure 23 summarizes certain asset quality indicators, segregated between Key's continuing and run-off loan portfolios. Additional information pertaining to the run-off portfolio is presented in Figure 24. FIGURE 23 ASSET QUALITY INDICATORS -- CONTINUING AND RUN-OFF LOAN PORTFOLIOS
DECEMBER 31, RUN-OFF LOAN PORTFOLIO AND CONTINUING LOAN PORTFOLIO NONREPLENISHED ALLOWANCE TOTAL LOAN PORTFOLIO ------------------------- -------------------------- -------------------- in millions 2002 2001 2002 2001 2002 2001 - ---------------------------------------------------------------------------------------------------------------------------- Loans outstanding $61,858 $62,286 $ 599 $ 1,023 $62,457 $63,309 Nonperforming loans 858 679 85 231 943 910 Net loan charge-offs for the year 553 458 227(a) 215(a) 780 673 Allowance for loan losses 1,404 1,402 48 275 1,452 1,677 - ----------------------------------------------------------------------------------------------------------------------------
(a) Includes activity related to the run-off loan portfolio and to sales of distressed loans in the continuing portfolio. FIGURE 24 RUN-OFF LOAN PORTFOLIO SUMMARY OF CHANGES IN COMMITMENTS AND LOANS OUTSTANDING
TOTAL LOANS in millions COMMITMENTS OUTSTANDING - ---------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2001 $1,694 $1,023 Charge-offs (139) (139) Payments, expirations and other changes, net (615) (285) - ---------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2002 $ 940 $ 599 ====== ====== - ----------------------------------------------------------------------------------------------
SUMMARY OF CHANGES IN NONPERFORMING LOANS AND NONREPLENISHED ALLOWANCE FOR LOAN LOSSES(a)
NONPERFORMING NONREPLENISHED in millions LOANS ALLOWANCE - ------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2001 $ 231 $275 Loans placed on nonaccrual status 75 N/A Charge-offs (139) (227) Payments and other changes, net (82) N/A - ------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2002 $ 85 $ 48 ======= ==== - -------------------------------------------------------------------------------------------
(a) Includes activity related to the run-off loan portfolio and to sales of distressed loans in the continuing portfolio. N/A = Not Applicable NET LOAN CHARGE-OFFS. Net loan charge-offs for 2002 were $780 million, or 1.23% of average loans, compared with $673 million, or 1.02% of average loans, for 2001 and $414 million, or .63% of average loans, for 2000. The composition of Key's loan charge-offs and recoveries by type of loan is shown in Figure 25. The increase in net charge-offs for 2002 occurred in the commercial loan portfolio, reflecting continued weakness in the economy and Key's continuing efforts to resolve distressed credits. As shown in Figure 24, we used $227 million of Key's nonreplenished allowance during 2002 to absorb losses arising from the run-off loan portfolio and from sales of distressed loans in the continuing portfolio. Structured finance refers to a type of lending characterized by a high degree of leverage in the borrower's financial condition and a relatively low level of tangible loan collateral. Key has used it in extensions of credit to borrowers in the commercial, financial and agricultural portfolio represented in Figure 25. The structured finance portfolio accounted for 23% of commercial net charge-offs for 2002, but represented only 3% of Key's commercial loans at the end of the year. As shown in Figure 25, the increase in commercial loan net charge-offs was offset in part by a decrease in the level of net charge-offs in the consumer loan portfolio, primarily in the home equity and consumer installment segments. The reduction in net charge-offs on installment loans reflected actions taken by Key since May 2001 to exit the automobile leasing business and to de-emphasize indirect prime automobile lending. 43 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES FIGURE 25 SUMMARY OF LOAN LOSS EXPERIENCE
YEAR ENDED DECEMBER 31, dollars in millions 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------- Average loans outstanding during the year $ 63,393 $ 65,976 $ 65,294 $ 62,401 $ 57,422 - ------------------------------------------------------------------------------------------------------------------------- Allowance for loan losses at beginning of year $ 1,677 $ 1,001 $ 930 $ 900 $ 900 Loans charged off: Commercial, financial and agricultural 407 313 175 112 66 Real estate -- commercial mortgage 78 18 9 2 20 Real estate -- construction 22 8 -- -- 2 - ------------------------------------------------------------------------------------------------------------------------- Total commercial real estate loans(a) 100 26 9 2 22 Commercial lease financing 94 62 14 20 12 - ------------------------------------------------------------------------------------------------------------------------- Total commercial loans 601 401 198 134 100 Real estate -- residential mortgage 6 17 8 8 11 Home equity 56 99 19 10 6 Credit card -- 1 17 89 104 Consumer -- direct 51 47 57 41 44 Consumer -- indirect lease financing 25 27 23 13 8 Consumer -- indirect other 166 192 200 125 111 - ------------------------------------------------------------------------------------------------------------------------- Total consumer loans 304 383 324 286 284 - ------------------------------------------------------------------------------------------------------------------------- 905 784 522 420 384 Recoveries: Commercial, financial and agricultural 44 26 25 28 25 Real estate -- commercial mortgage 6 4 4 4 6 Real estate -- construction 2 -- -- 1 2 - ------------------------------------------------------------------------------------------------------------------------- Total commercial real estate loans(a) 8 4 4 5 8 Commercial lease financing 9 5 2 3 1 - ------------------------------------------------------------------------------------------------------------------------- Total commercial loans 61 35 31 36 34 Real estate -- residential mortgage 1 8 4 4 4 Home equity 4 1 2 1 1 Credit card - 1 5 14 10 Consumer -- direct 8 8 8 8 6 Consumer -- indirect lease financing 8 9 6 3 1 Consumer -- indirect other 43 49 52 36 31 - ------------------------------------------------------------------------------------------------------------------------- Total consumer loans 64 76 77 66 53 - ------------------------------------------------------------------------------------------------------------------------- 125 111 108 102 87 - ------------------------------------------------------------------------------------------------------------------------- Net loans charged off (780) (673) (414) (318) (297) Provision for loan losses 553 1,350 490 348 297 Allowance related to loans acquired (sold), net 2 (1) (5) -- -- - ------------------------------------------------------------------------------------------------------------------------- Allowance for loan losses at end of year $ 1,452 $ 1,677 $ 1,001 $ 930 $ 900 ======== ======== ======== ======== ======== - ------------------------------------------------------------------------------------------------------------------------- Net loan charge-offs to average loans 1.23% 1.02% .63% .51% .52% Allowance for loan losses to year-end loans 2.32 2.65 1.50 1.45 1.45 Allowance for loan losses to nonperforming loans 153.98 184.29 154.00 208.05 234.38 - -------------------------------------------------------------------------------------------------------------------------
(a) See Figure 15 on page 38 and the accompanying discussion for more information related to Key's commercial real estate portfolio. NONPERFORMING ASSETS. Figure 26 shows the composition of Key's nonperforming assets. These assets totaled $993 million at December 31, 2002, and represented 1.59% of loans, other real estate owned (known as "OREO") and other nonperforming assets, compared with $947 million, or 1.49%, at December 31, 2001. The economic slowdown can be expected to continue to impact Key's loan portfolio in general, although the erosion in credit quality that we have experienced is disproportionately concentrated. At December 31, 2002, two segments of the commercial, financial and agricultural portfolio (loans to middle market clients and loans underwritten as structured finance credits) accounted for $219 million and $164 million, respectively, of Key's nonperforming loans. Although these two segments comprised only 16% of Key's total loans, they accounted for 41% of total nonperforming loans. At December 31, 2002, our 20 largest nonperforming loans totaled $258 million, representing 27% of total loans on nonperforming status. At December 31, 2002, the run-off loan portfolio accounted for $85 million, or 9%, of Key's total nonperforming loans presented in Figure 26. 44 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES FIGURE 26 SUMMARY OF NONPERFORMING ASSETS AND PAST DUE LOANS
DECEMBER 31, dollars in millions 2002 2001 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------- Commercial, financial and agricultural $ 448 $ 409 $ 301 $ 175 $ 144 Real estate -- commercial mortgage 157 187 90 102 79 Real estate -- construction 50 83 28 7 6 - -------------------------------------------------------------------------------------------------------------- Total commercial real estate loans(a) 207 270 118 109 85 Commercial lease financing 69 94 48 28 29 - -------------------------------------------------------------------------------------------------------------- Total commercial loans 724 773 467 312 258 Real estate - residential mortgage 36 42 52 44 60 Home equity 146 50 80 50 26 Consumer - direct 13 9 8 6 6 Consumer - indirect lease financing 5 10 7 3 3 Consumer - indirect other 19 26 36 32 31 - -------------------------------------------------------------------------------------------------------------- Total consumer loans 219 137 183 135 126 - -------------------------------------------------------------------------------------------------------------- Total nonperforming loans 943 910 650 447 384 OREO 48 38 23 27 56 Allowance for OREO losses (3) (1) (1) (3) (18) - -------------------------------------------------------------------------------------------------------------- OREO, net of allowance 45 37 22 24 38 Other nonperforming assets 5 -- -- 2 1 - -------------------------------------------------------------------------------------------------------------- Total nonperforming assets $ 993 $ 947 $ 672 $ 473 $ 423 ======= ======= ======= ======= ======= - -------------------------------------------------------------------------------------------------------------- Accruing loans past due 90 days or more $ 198 $ 250 $ 236 $ 219 $ 159 Accruing loans past due 30 through 89 days 790 1,096 963 916 753 - -------------------------------------------------------------------------------------------------------------- Nonperforming loans to year-end loans 1.51% 1.44% .97% .70% .62% Nonperforming assets to year-end loans plus OREO and other nonperforming assets 1.59 1.49 1.00 .74 .68 - --------------------------------------------------------------------------------------------------------------
(a) See Figure 15 on page 38 and the accompanying discussion for more information related to Key's commercial real estate portfolio. Information pertaining to the credit exposure by industry classification inherent in the largest sector of Key's loan portfolio, commercial, financial and agricultural loans, is presented in Figure 27. Within the transportation category, Key had approximately $270 million of exposure to the commercial passenger airline industry at December 31, 2002. The types of activity that caused the change in Key's nonperforming loans during 2002 are summarized in Figure 28. FIGURE 27 COMMERCIAL, FINANCIAL AND AGRICULTURAL LOANS
DECEMBER 31, 2002 NONPERFORMING LOANS ---------------------- TOTAL LOANS % OF LOANS dollars in millions COMMITMENTS OUTSTANDING AMOUNT OUTSTANDING - ---------------------------------------------------------------------------------------------- Industry classification: Manufacturing $10,034 $ 3,931 $ 155 3.9% Services 6,198 2,506 90 3.6 Financial services 4,061 979 5 .5 Retail trade 4,250 2,518 43 1.7 Wholesale trade 2,763 1,313 44 3.4 Property management 2,900 1,098 8 .7 Public utilities 1,728 461 1 .2 Communications 1,178 494 23 4.7 Agriculture/forestry/fishing 1,085 666 17 2.6 Building contractors 1,217 547 26 4.8 Public administration 739 245 - - Transportation 819 440 11 2.5 Insurance 732 216 6 2.8 Mining 379 169 - - Individuals 187 121 1 .8 Other 1,904 1,721 18 1.0 - ---------------------------------------------------------------------------------------------- Total $40,174 $17,425 $ 448 2.6% ======= ======= ======= - ----------------------------------------------------------------------------------------------
45 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES FIGURE 28 SUMMARY OF CHANGES IN NONPERFORMING LOANS
2002 QUARTERS ---------------------------------------------- in millions FULL YEAR FOURTH THIRD SECOND FIRST - --------------------------------------------------------------------------------------------------------- BALANCE AT BEGINNING OF PERIOD $ 910 $ 987 $ 957 $ 973 $ 910 Loans placed on nonaccrual status 1,168 339 281 254 294 Charge-offs (780) (186) (185) (203) (206) Loans sold (79) (36) (25) (18) - Payments (261) (149) (41) (49) (22) Transfers to OREO (3) - - - (3) Loans returned to accrual status (13) (13) - - - Acquisition 1 1 - - - - --------------------------------------------------------------------------------------------------------- BALANCE AT END OF PERIOD $ 943 $ 943 $ 987 $ 957 $ 973 ======= ======= ======= ======= ======= - ---------------------------------------------------------------------------------------------------------
DEPOSITS AND OTHER SOURCES OF FUNDS "Core deposits" -- domestic deposits other than certificates of deposit of $100,000 or more -- are Key's primary source of funding. During 2002, core deposits averaged $37.7 billion, and represented 52% of the funds Key used to support earning assets, compared with $37.5 billion and 50% during 2001, and $37.3 billion and 50% during 2000. The composition of Key's deposits is shown in Figure 6, which spans pages 28 and 29. The increase in the level of Key's core deposits during 2002 was due primarily to higher levels of noninterest-bearing deposits and money market deposit accounts. The growth of these deposits reflected client preferences for investments that provide high levels of liquidity in a low interest rate environment. Also contributing to the significant growth in noninterest-bearing deposits were our intensified cross-sell efforts and the introduction of new products, including free checking. A more aggressive pricing structure implemented in mid-2002 supported the growth in savings deposits. During 2002, time deposits decreased by 9% in part because, like our competitors, Key reduced the rates paid for them as the Federal Reserve reduced interest rates in general. In 2001, the level of Key's core deposits rose from the prior year as moderate growth of time deposits more than offset a decline in the level of savings deposits. Time deposits grew by 2% in 2001, following an increase of 17% in 2000. The growth rate of these deposits declined largely as a result of a lower interest rate environment. Purchased funds, comprising large certificates of deposit, deposits in the foreign branch and short-term borrowings, averaged $15.5 billion during 2002, compared with $20.0 billion during 2001 and $20.2 billion in 2000. As shown in Figure 6, both certificates of deposit and short-term borrowings have declined as funding sources. This is attributable in part to reduced funding needs resulting from loan sales, slow demand for loans and from our decision to scale back or discontinue certain types of lending. In addition, Key continues to consider loan sales and securitizations as a funding alternative when market conditions are favorable. Since late 1995, Key has had a program in place under which deposit balances (above a defined threshold) in certain negotiable order of withdrawal ("NOW") accounts and noninterest-bearing checking accounts are transferred to money market accounts, thereby reducing the level of deposit reserves required to be maintained with the Federal Reserve. Based on certain limitations, funds are periodically transferred back to the checking accounts to cover checks presented for payment or withdrawals. As a result of this program, average deposit balances for 2002 include NOW accounts of $4.4 billion and demand deposits of $4.9 billion that are classified as money market deposit accounts. In Figure 6, the NOW accounts transferred are included in the money market deposit account category, while the demand deposits continue to be reported as noninterest-bearing checking accounts. At December 31, 2002, Key had $8.5 billion in time deposits of $100,000 or more. Figure 29 shows the maturity distribution of these deposits. FIGURE 29 MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE
DECEMBER 31, 2002 DOMESTIC FOREIGN in millions OFFICES OFFICE TOTAL - -------------------------------------------------------------- Remaining maturity: Three months or less $1,732 $3,743 $5,475 After three through twelve months 836 - 836 After twelve months 2,181 - 2,181 - -------------------------------------------------------------- Total $4,749 $3,743 $8,492 ====== ====== ====== - --------------------------------------------------------------
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 its obligations to depositors, borrowers and creditors at a reasonable cost, on a timely basis, and without adverse consequences. KeyCorp has sufficient liquidity when it can pay dividends to shareholders, service its debt, and support customary corporate operations and activities, including acquisitions, at a reasonable cost, in a timely manner and without adverse consequences. LIQUIDITY RISK. There are both direct and indirect circumstances that could adversely affect Key's liquidity or materially affect the cost of funds. For example, events unrelated to Key, such as terrorism or war, natural disasters, political events, or the default or bankruptcy of 46 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES a major corporation, mutual fund or hedge fund, can have market-wide consequences. A direct (but hypothetical) event would be a significant downgrade in Key's public credit rating by a rating agency due to a deterioration in asset quality, a large charge to earnings, a significant merger or acquisition or other events. Similarly, market speculation or rumors about Key or the banking industry in general may cause normal funding sources to withdraw credit until further information becomes available. LIQUIDITY FOR KEY. Key's Funding and Investment Management Group monitors the overall mix of funding sources with the objective of maintaining an appropriate mix in light of the structure of the asset portfolios. We use several tools to maintain sufficient liquidity. - - We maintain portfolios of short-term money market investments and securities available for sale, substantially all of which could be converted to cash quickly at a small expense. - - Key's portfolio of investment securities generates prepayments (often at a premium) and payments at maturity. - - We try to structure the maturities of our loans so we receive a relatively consistent stream of payments from borrowers. - - We have a proven ability to access the securitization markets for a variety of loan types. - - Our 910 full-service KeyCenters in 12 states generate a sizable volume of core deposits. We monitor deposit flows and use alternative 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. Key did not have any borrowings from the Federal Reserve outstanding at December 31, 2002. The Consolidated Statements of Cash Flow on page 56 summarize Key's sources and uses of cash by type of activity for the years ended December 31, 2002, 2001 and 2000. As shown in these statements, Key's largest cash flows relate to both investing and financing activities. Over the past three years, the primary sources of cash from investing activities have been loan securitizations and sales and the sales, prepayments and maturities of securities available for sale. Investing activities that have required the greatest use of cash include lending and the purchases of new securities. Over the past three years, the primary source of cash from financing activities has been the issuance of long-term debt. However, in both 2002 and 2000, deposits were also a significant source of cash. In each of the past three years, cash has been used to repay debt issued in prior periods and to reduce the levels of short-term borrowings. LIQUIDITY FOR KEYCORP. KeyCorp meets its liquidity requirements principally through regular dividends from affiliate banks. In 2002, affiliate banks paid KeyCorp a total of $900 million in dividends. Federal banking law limits the amount of capital distributions that banks can make to their holding companies without obtaining prior regulatory approval. A national bank's dividend paying capacity is affected by several factors, including the amount of its net profits (as defined by statute) for the two previous calendar years, and net profits for the current year up to the date of dividend declaration. Due to this constraint, and the restructuring charges taken by KBNA and Key Bank USA in 2001, as of January 1, 2003, neither bank could pay dividends or make other capital distributions to KeyCorp without prior regulatory approval. In February 2003, KBNA obtained regulatory approval to make capital distributions to KeyCorp of up to $365 million in the aggregate in the first and second quarters. If KBNA were to distribute such amount, it would not have any further dividend paying capacity until it accumulates at least $300 million of additional net profits in 2003. Management expects this will occur during the second quarter. Management also expects Key Bank USA to have restored dividend paying capacity during the first quarter. Assuming KBNA had distributed the $365 million to KeyCorp as of February 15, 2003, as of that date, KeyCorp would have had approximately $1.5 billion of cash or short-term investments available to pay dividends on its common shares, to service its debt and to finance its corporate operations. Management does not expect current constraints on the subsidiary banks to pay dividends to KeyCorp to have any material effect on the ability of KeyCorp to pay dividends to its shareholders, to service its debt or to meet its other obligations. 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. Each of the programs is replaced or extended from time to time as needed. BANK NOTE PROGRAM. During 2002, Key's affiliate banks raised $2.9 billion under Key's bank note program. Of the notes issued during the year, $2.2 billion have original maturities in excess of one year and are included in long-term debt. The remaining notes have original maturities of one year or less and are included in short-term borrowings. Key's current bank note program provides for the issuance of both long- and short-term debt of up to $20.0 billion ($19.0 billion by KBNA and $1.0 billion by Key Bank USA). At December 31, 2002, $18.1 billion was available for future issuance under this program. EURO NOTE PROGRAM. Under Key's euro note program, KeyCorp, KBNA and Key Bank USA may issue both long- and short-term debt of up to $10.0 billion in the aggregate. The notes are offered exclusively to non-U.S. investors and can be denominated in U.S. dollars and many foreign currencies. There were $1.5 billion of borrowings issued under this program during 2002. At the end of the year, $4.2 billion was available for future issuance. KEYCORP MEDIUM-TERM NOTE PROGRAM AND OTHER SECURITIES. KeyCorp has registered with the Securities and Exchange Commission to provide for the issuance of up to $2.2 billion of securities, which could include long- or short-term debt, or equity securities. Of the amount registered, $1.0 billion has been allocated for the issuance of medium-term notes. At December 31, 2002, unused capacity under KeyCorp's universal shelf 47 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES registration statement totaled $1.8 billion, including $575 million allocated for the issuance of medium-term notes. COMMERCIAL PAPER AND REVOLVING CREDIT. KeyCorp has a commercial paper program and a revolving credit agreement with an unaffiliated financial institution that provide funding availability of up to $500 million and $400 million, respectively. As of December 31, 2002, there were no borrowings outstanding under either the commercial paper program or the revolving credit agreement. Key has favorable debt ratings as shown in Figure 30. As long as those debt ratings are maintained, management believes that, under normal conditions in the capital markets, future offerings of securities by KeyCorp or its affiliate banks would be marketable to investors at a competitive cost. FIGURE 30 DEBT RATINGS
SENIOR SUBORDINATED SHORT-TERM LONG-TERM LONG-TERM CAPITAL DECEMBER 31, 2002 BORROWINGS DEBT DEBT SECURITIES - -------------------------------------------------------------------------- KEYCORP Standard & Poor's A-2 A- BBB+ BBB Moody's P-1 A2 A3 "Baal" Fitch F1 A A- A KBNA Standard & Poor's A-1 A A- N/A Moody's P-1 A1 A2 N/A Fitch F1 A A- N/A - --------------------------------------------------------------------------
N/A = Not Applicable Figure 31 summarizes Key's significant cash obligations and contractual amounts of off-balance sheet lending commitments at December 31, 2002, by the specific time periods in which related payments are due or commitments expire. FIGURE 31 CASH OBLIGATIONS AND OFF-BALANCE SHEET COMMITMENTS
DECEMBER 31, 2002 AFTER AFTER WITHIN 1 THROUGH 3 THROUGH AFTER in millions 1 YEAR 3 YEARS 5 YEARS 5 YEARS TOTAL - ---------------------------------------------------------------------------------------------------------------------- Cash obligations: Long-term debt $ 4,430 $ 5,914 $ 2,676 $ 2,585 $15,605 Noncancelable leases 125 212 170 395 902 - ---------------------------------------------------------------------------------------------------------------------- Total $ 4,555 $ 6,126 $ 2,846 $ 2,980 $16,507 ======= ======= ======= ======= ======= Lending-related and other off-balance sheet commitments: Commercial, including real estate $16,350 $ 6,970 $ 2,343 $ 1,384 $27,047 Home equity 54 127 55 5,295 5,531 Federal funds purchased and securities sold under repurchase agreements 3,862 - - - 3,862 Principal investing 1 - 8 213 222 Commercial letters of credit 82 49 4 - 135 - ---------------------------------------------------------------------------------------------------------------------- Total $20,349 $ 7,146 $ 2,410 $ 6,892 $36,797 ======= ======= ======= ======= ======= - ----------------------------------------------------------------------------------------------------------------------
CAPITAL SHAREHOLDERS' EQUITY. Total shareholders' equity at December 31, 2002, was $6.8 billion, up $680 million from the balance at December 31, 2001. Growth in retained earnings, net unrealized gains on securities available for sale and the issuance of common shares out of the treasury stock account in connection with employee stock purchase, 401(k), dividend reinvestment and stock option programs contributed to the increase. Other factors contributing to the change in shareholders' equity during 2002 are shown in the Consolidated Statements of Changes in Shareholders' Equity presented on page 55. SHARE REPURCHASES. In September 2000, the Board of Directors authorized the repurchase of up to 25,000,000 common shares, including 3,647,200 shares remaining at the time from an earlier repurchase program. These shares may be repurchased in the open market or through negotiated transactions. During 2002, Key repurchased a total of 3,000,000 of its common shares at an average price per share of $25.58. At December 31, 2002, a remaining balance of 13,764,400 shares may be repurchased under the September 2000 authorization. At December 31, 2002, Key had 67,945,135 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 2002, Key reissued 2,938,589 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 8.02% at December 31, 2002, and 7.60% at December 31, 2001. 48 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES Banking industry regulators prescribe minimum capital ratios for bank holding companies and their banking subsidiaries. Note 14 ("Shareholders' Equity"), which begins on page 76, explains the implications of failing to meet specific capital requirements imposed by the banking regulators. Risk-based capital guidelines require a minimum level of capital as a percent of "risk-weighted assets," which is total assets plus certain off-balance sheet items, both 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-weighted assets of 4.00%, and total capital as a percent of risk-weighted assets of 8.00%. As of December 31, 2002, Key's Tier 1 capital ratio was 8.09%, and its total capital ratio was 12.51%. Another indicator of capital adequacy, the leverage ratio, is defined as Tier 1 capital as a percentage of average quarterly 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 3.00%. All other bank holding companies must maintain a minimum ratio of 4.00%. As of December 31, 2002, Key had a leverage ratio of 8.15%. Federal bank regulators group FDIC-insured depository institutions into five categories, ranging from "critically undercapitalized" to "well capitalized." Both of Key's affiliate banks qualified as "well capitalized" at December 31, 2002, since each exceeded the prescribed thresholds of 10.00% for total capital, 6.00% for Tier 1 capital and 5.00% for the leverage ratio. If these provisions applied to bank holding companies, Key would also qualify as "well capitalized" at December 31, 2002. The FDIC-defined capital categories serve a limited supervisory function. Investors should not treat them as a representation of the overall financial condition or prospects of Key or its affiliate banks. Figure 32 presents the details of Key's regulatory capital position at December 31, 2002 and 2001. KeyCorp's common shares are traded on the New York Stock Exchange under the symbol KEY. At December 31, 2002: - - Book value per common share was $16.12, based on 423,943,645 shares outstanding, compared with $14.52, based on 424,005,056 shares outstanding, at December 31, 2001. - - The closing sales price of a KeyCorp common share on the New York Stock Exchange was $25.14. This price was 156% of year-end book value per share, and would produce a dividend yield of 4.77%. - - There were 40,166 holders of record of KeyCorp common shares. In 2002, the quarterly dividend was $.30 per common share, up from $.295 per common share in 2001. On January 16, 2003, the quarterly dividend per common share was increased by 1.7% to $.305, effective with the March 2003 dividend payment. Figure 33 on page 51 shows the sales price ranges of the common shares, per common share net income (loss) and dividends paid by quarter for each of the last two years. FIGURE 32 CAPITAL COMPONENTS AND RISK-WEIGHTED ASSETS
DECEMBER 31, dollars in millions 2002 2001 - ----------------------------------------------------------------- TIER 1 CAPITAL Common shareholders' equity(a) $ 6,738 $ 6,117 Qualifying capital securities 1,096 1,243 Less: Goodwill 1,142 1,101 Other assets(b) 60 37 - ----------------------------------------------------------------- Total Tier 1 capital 6,632 6,222 - ----------------------------------------------------------------- TIER 2 CAPITAL Allowance for loan losses(c) 986 1,040 Qualifying long-term debt 2,639 2,286 - ----------------------------------------------------------------- Total Tier 2 capital 3,625 3,326 - ----------------------------------------------------------------- Total risk-based capital $10,257 $ 9,548 ======= ======= RISK-WEIGHTED ASSETS Risk-weighted assets on balance sheet $67,051 $67,783 Risk-weighted off-balance sheet exposure 16,595 17,480 Less: Goodwill 1,142 1,101 Other assets(b) 251 37 Plus: Market risk-equivalent assets 192 217 - ----------------------------------------------------------------- Gross risk-weighted assets 82,445 84,342 Less: Excess allowance for loan losses(c) 466 637 - ----------------------------------------------------------------- Net risk-weighted assets $81,979 $83,705 ======= ======= AVERAGE QUARTERLY TOTAL ASSETS $82,735 $82,467 ======= ======= CAPITAL RATIOS Tier 1 risk-based capital ratio 8.09% 7.43% Total risk-based capital ratio 12.51 11.41 Leverage ratio(d) 8.15 7.65 - -----------------------------------------------------------------
(a) Common shareholders' equity does not include net unrealized gains or losses on securities (except for net unrealized losses on marketable equity securities) nor net gains or losses on cash flow hedges. (b) "Other assets" deducted from Tier 1 capital consists of intangible assets (excluding goodwill) recorded after February 19, 1992, deductible portions of purchased mortgage servicing rights and deductible portions of nonfinancial equity investments. "Other assets" deducted from risk-weighted assets consists of intangible assets (excluding goodwill) recorded after February 19, 1992, deductible portions of purchased mortgage servicing rights and nonfinancial equity investments. (c) The allowance for loan losses included in Tier 2 capital is limited by regulation to 1.25% of gross risk-weighted assets, excluding those with low-level recourse. (d) This ratio is Tier 1 capital divided by average quarterly total assets less goodwill and the nonqualifying intangible assets described in footnote (b). 49 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES FOURTH QUARTER RESULTS Some of the highlights of Key's fourth quarter results are summarized below. Key's financial performance for each of the past eight quarters is summarized in Figure 33. NET INCOME (LOSS). Key had net income of $245 million, or $.57 per common share, for the fourth quarter of 2002, compared with a net loss of $174 million, or $.41 per share, for the same period in 2001. The improvement resulted from growth in both net interest income and noninterest income, along with a decrease in noninterest expense and a substantial reduction in the provision for loan losses. Results for the fourth quarter of 2001 included charges of approximately $410 million (after tax), or $.96 per share, taken to increase Key's allowance for loan losses and to strengthen the balance sheet. The section entitled "Financial performance," which begins on page 21, provides more information about these charges. On an annualized basis, Key's return on average total assets for the fourth quarter of 2002 was 1.17%, compared with a return of (.84)% for the fourth quarter of 2001. The annualized return on average equity was 14.46% for the fourth quarter of 2002, compared with a return of (10.57)% for the year-ago quarter. NET INTEREST INCOME. Net interest income was $712 million for the fourth quarter of 2002, up from $700 million for the fourth quarter of 2001. Key's net interest margin of 3.98% for the fourth quarter of 2002 was unchanged from the fourth quarter of 2001, while average earning assets declined by $152 million or less than one percent. The decrease in earning assets was due primarily to Key's May 2001 decision to exit the automobile leasing business, de-emphasize indirect prime automobile lending and discontinue certain credit-only commercial relationships. Key's sale in September 2001 of $1.4 billion of residential mortgage loans with low interest rate spreads also contributed to the decrease. NONINTEREST INCOME. Key's noninterest income was $446 million for the fourth quarter of 2002 compared with $418 million for the year-ago quarter. The increase was due primarily to a $33 million decrease in losses from principal investing. Noninterest income also benefited from a $6 million increase in net gains from sales of securities. These positive results were offset in part by an $18 million decline in income from trust and investment services and a $7 million reduction in service charges on deposit accounts. NONINTEREST EXPENSE. Noninterest expense for the fourth quarter of 2002 totaled $668 million, compared with $702 million for the fourth quarter of 2001. The largest declines occurred in software amortization and the amortization of goodwill. The January 1, 2002, adoption of new accounting guidance for goodwill resulted in an expense reduction of approximately $20 million for each quarter of 2002. PROVISION FOR LOAN LOSSES. Key's provision for loan losses was $147 million for the fourth quarter of 2002, compared with $723 million for the fourth quarter of 2001. Included in the fourth quarter 2001 amount is $400 million, which was used to increase the allowance for loan losses for Key's continuing loan portfolio. Another $190 million provision was added last year to the portion of the allowance segregated in the second quarter of 2001 in connection with Key's decision to discontinue many credit-only relationships in the leveraged financing and nationally syndicated lending businesses and to facilitate sales of distressed loans in other portfolios as discussed on page 42 under the heading "Run-off loan portfolio." Net loan charge-offs totaled $186 million and were 1.18% of average loans outstanding for the quarter, compared with $220 million and 1.37%, respectively, for the fourth quarter of 2001. For more information about Key's allowance for loan losses, see the section entitled "Allowance for loan losses," which begins on page 40. 50 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES FIGURE 33 SELECTED QUARTERLY FINANCIAL DATA
2002 --------------------------------------------------- dollars in millions, except per share amounts FOURTH THIRD SECOND FIRST - ---------------------------------------------------------------------------------------------------- FOR THE QUARTER Interest income $ 1,077 $ 1,095 $ 1,102 $ 1,092 Interest expense 365 395 419 438 Net interest income 712 700 683 654 Provision for loan losses 147 135 135 136 Noninterest income before net securities gains (losses) 441 432 447 443 Net securities gains (losses) 5 -- 1 -- Noninterest expense 668 659 665 661 Income (loss) before income taxes and cumulative effect of accounting changes 343 338 331 300 Income (loss) before cumulative effect of accounting changes 245 245 246 240 Net income (loss) 245 245 246 240 - ---------------------------------------------------------------------------------------------------- PER COMMON SHARE Income (loss) before cumulative effect of accounting changes $ .58 $ .57 $ .58 $ .56 Income (loss) before cumulative effect of accounting changes-- assuming dilution .57 .57 .57 .56 Net income (loss) .58 .57 .58 .56 Net income (loss)-- assuming dilution .57 .57 .57 .56 Cash dividends paid .30 .30 .30 .30 Book value at period end 16.12 15.66 15.46 15.05 Market price: High 26.75 27.35 29.40 27.26 Low 21.25 20.96 25.95 22.92 Close 25.14 24.97 27.30 26.65 Weighted average common shares (000) 424,578 426,274 426,092 424,855 Weighted average common shares and potential common shares (000) 429,531 431,326 431,935 430,019 - ---------------------------------------------------------------------------------------------------- AT PERIOD END Loans $ 62,457 $ 62,951 $ 63,881 $ 63,956 Earning assets 73,635 72,548 72,820 72,382 Total assets 85,202 83,518 82,778 81,359 Deposits 49,346 44,610 44,805 43,233 Long-term debt 15,605 16,276 16,895 15,256 Shareholders' equity 6,835 6,654 6,592 6,402 Full-time equivalent employees 20,437 20,522 20,929 21,076 Branches 910 903 905 911 - ---------------------------------------------------------------------------------------------------- PERFORMANCE RATIOS Return on average total assets 1.17% 1.19% 1.21% 1.20% Return on average equity 14.46 14.74 15.16 15.53 Net interest margin (taxable equivalent) 3.98 3.99 3.98 3.93 - ---------------------------------------------------------------------------------------------------- CAPITAL RATIOS AT PERIOD END Equity to assets 8.02% 7.97% 7.96% 7.87% Tangible equity to tangible assets 6.73 6.71 6.69 6.57 Tier 1 risk-based capital 8.09 8.34 8.23 7.92 Total risk-based capital 12.51 12.69 12.29 12.02 Leverage 8.15 8.15 8.14 8.13 - ----------------------------------------------------------------------------------------------------
2001 --------------------------------------------------- dollars in millions, except per share amounts FOURTH THIRD SECOND FIRST - ---------------------------------------------------------------------------------------------------- FOR THE QUARTER Interest income $ 1,210 $ 1,380 $ 1,467 $ 1,570 Interest expense 510 656 754 882 Net interest income 700 724 713 688 Provision for loan losses 723 116 401 110 Noninterest income before net securities gains (losses) 419 452 390 429 Net securities gains (losses) (1) 2 8 26 Noninterest expense 702 683 858 698 Income (loss) before income taxes and cumulative effect of accounting changes (307) 379 (148) 335 Income (loss) before cumulative effect of accounting changes (174) 249 (136) 218 Net income (loss) (174) 249 (160) 217 - ---------------------------------------------------------------------------------------------------- PER COMMON SHARE Income (loss) before cumulative effect of accounting changes $ (.41) $ .59 $ (.32) $ .51 Income (loss) before cumulative effect of accounting changes-- assuming dilution (.41) .58 (.32) .51 Net income (loss) (.41) .59 (.38) .51 Net income (loss)-- assuming dilution (.41) .58 (.38) .51 Cash dividends paid .295 .295 .295 .295 Book value at period end 14.52 15.53 15.22 15.79 Market price: High 24.52 28.15 26.43 27.58 Low 20.49 22.20 22.10 22.65 Close 24.34 24.14 26.05 25.80 Weighted average common shares (000) 423,596 424,802 424,675 424,024 Weighted average common shares and potential common shares (000) 428,280 430,346 429,760 429,917 - ---------------------------------------------------------------------------------------------------- AT PERIOD END Loans $ 63,309 $ 64,506 $ 66,693 $ 67,027 Earning assets 71,672 73,943 76,531 77,027 Total assets 80,938 84,419 85,838 86,457 Deposits 44,795 45,372 45,743 45,965 Long-term debt 14,554 15,114 14,675 14,495 Shareholders' equity 6,155 6,575 6,467 6,702 Full-time equivalent employees 21,230 21,297 21,742 21,882 Branches 911 911 926 922 - ---------------------------------------------------------------------------------------------------- PERFORMANCE RATIOS Return on average total assets (.84)% 1.16% (.75)% 1.02% Return on average equity (10.57) 15.20 (9.67) 13.28 Net interest margin (taxable equivalent) 3.98 3.85 3.77 3.63 - ---------------------------------------------------------------------------------------------------- CAPITAL RATIOS AT PERIOD END Equity to assets 7.60% 7.79% 7.53% 7.75% Tangible equity to tangible assets 6.29 6.51 6.25 6.29 Tier 1 risk-based capital 7.43 7.81 7.71 7.99 Total risk-based capital 11.41 11.77 11.81 12.32 Leverage 7.65 7.90 7.68 7.79 - ----------------------------------------------------------------------------------------------------
Note 3 ("Acquisitions and Divestitures") on page 64 contains 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. 51 KEYCORP AND SUBSIDIARIES 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 accounting principles generally accepted in the United States 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 that is intended to protect Key's assets and the integrity of its 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 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 Committee. This committee, which draws its members exclusively from the outside directors, also hires the independent auditors. The Audit 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 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, 2002. /s/Henry L. Meyer III Henry L. Meyer III Chairman and Chief Executive Officer /s/Jeffrey B. Weeden Jeffrey B. Weeden 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, 2002 and 2001, 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, 2002. 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, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. As discussed in Note 1 to the consolidated financial statements, in 2002 Key changed its method of accounting for goodwill. /s/ ERNST & YOUNG LLP Cleveland, Ohio January 13, 2003 52 KEYCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, dollars in millions 2002 2001 - ------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 3,364 $ 2,891 Short-term investments 1,632 1,898 Securities available for sale 8,507 5,408 Investment securities (fair value: $129 and $234) 120 225 Other investments 919 832 Loans, net of unearned income of $1,776 and $1,778 62,457 63,309 Less: Allowance for loan losses 1,452 1,677 - ------------------------------------------------------------------------------------------------------------------------- Net loans 61,005 61,632 Premises and equipment 644 687 Goodwill 1,142 1,103 Other intangible assets 35 31 Corporate-owned life insurance 2,414 2,313 Accrued income and other assets 5,420 3,918 - ------------------------------------------------------------------------------------------------------------------------- Total assets $ 85,202 $ 80,938 ========== ========== LIABILITIES Deposits in domestic offices: NOW and money market deposit accounts $ 16,249 $ 13,461 Savings deposits 2,029 1,918 Certificates of deposit ($100,000 or more) 4,749 4,493 Other time deposits 11,946 13,657 - ------------------------------------------------------------------------------------------------------------------------- Total interest-bearing 34,973 33,529 Noninterest-bearing 10,630 9,667 Deposits in foreign office--interest-bearing 3,743 1,599 - ------------------------------------------------------------------------------------------------------------------------- Total deposits 49,346 44,795 Federal funds purchased and securities sold under repurchase agreements 3,862 3,735 Bank notes and other short-term borrowings 2,823 5,549 Accrued expense and other liabilities 5,471 4,862 Long-term debt 15,605 14,554 Corporation-obligated mandatorily redeemable preferred capital securities of subsidiary trusts holding solely subordinated debentures of KeyCorp (see Note 13) 1,260 1,288 - ------------------------------------------------------------------------------------------------------------------------- Total liabilities 78,367 74,783 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 1,449 1,390 Retained earnings 6,448 5,856 Treasury stock, at cost (67,945,135 and 67,883,724 shares) (1,593) (1,585) Accumulated other comprehensive income 39 2 - ------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 6,835 6,155 - ------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 85,202 $ 80,938 ========== ========== - -------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 53 KEYCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, dollars in millions, except per share amounts 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans $ 3,913 $ 5,067 $ 5,699 Tax-exempt investment securities 10 17 23 Securities available for sale 389 454 447 Short-term investments 30 65 83 Other investments 24 24 25 - ---------------------------------------------------------------------------------------------------------------------------- Total interest income 4,366 5,627 6,277 INTEREST EXPENSE Deposits 897 1,478 1,768 Federal funds purchased and securities sold under repurchase agreements 90 198 287 Bank notes and other short-term borrowings 79 302 428 Long-term debt, including capital securities 551 824 1,064 - ---------------------------------------------------------------------------------------------------------------------------- Total interest expense 1,617 2,802 3,547 - ---------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME 2,749 2,825 2,730 Provision for loan losses 553 1,350 490 - ---------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 2,196 1,475 2,240 NONINTEREST INCOME Trust and investment services income 609 651 687 Service charges on deposit accounts 405 387 341 Investment banking and capital markets income 172 88 293 Letter of credit and loan fees 134 124 107 Corporate-owned life insurance income 108 114 109 Electronic banking fees 79 74 68 Net securities gains (losses) 6 35 (28) Gain from sale of credit card portfolio -- -- 332 Other income 256 252 285 - ---------------------------------------------------------------------------------------------------------------------------- Total noninterest income 1,769 1,725 2,194 NONINTEREST EXPENSE Personnel 1,436 1,378 1,445 Net occupancy 226 232 223 Computer processing 192 252 240 Equipment 136 152 173 Marketing 122 112 110 Professional fees 92 88 89 Amortization of intangibles 11 245 101 Restructuring charges (credits) -- (4) 102 Other expense 438 486 434 - ---------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 2,653 2,941 2,917 INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES 1,312 259 1,517 Income taxes 336 102 515 - ---------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES 976 157 1,002 Cumulative effect of accounting changes, net of tax (see Note 1) -- (25) -- - ---------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 976 $ 132 $ 1,002 ========== ========== ========== Per common share: Income before cumulative effect of accounting changes $ 2.29 $ .37 $ 2.32 Net income 2.29 .31 2.32 Income before cumulative effect of accounting changes--assuming dilution 2.27 .37 2.30 Net income--assuming dilution 2.27 .31 2.30 Weighted average common shares outstanding (000) 425,451 424,275 432,617 Weighted average common shares and potential common shares outstanding (000) 430,703 429,573 435,573 - ----------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 54 KEYCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ACCUMULATED LOANS TO TREASURY OTHER COMMON CAPITAL RETAINED ESOP STOCK, COMPREHENSIVE COMPREHENSIVE dollars in millions, except per share amounts SHARES SURPLUS EARNINGS TRUSTEE AT COST INCOME (LOSS) INCOME - --------------------------------------------------------------------------------------------------------------------- ------------- BALANCE AT DECEMBER 31, 1999 $ 492 $ 1,412 $ 5,833 $ (24) $(1,197) $ (127) Net income 1,002 $ 1,002 Other comprehensive income (losses): Net unrealized gains on securities available for sale, net of income taxes of $80(a) 132 132 Foreign currency translation adjustments (15) (15) ------------ Total comprehensive income $ 1,119 =========== Cash dividends declared on common shares ($1.12 per share) (484) Issuance of common shares: Employee benefit and dividend reinvestment plans-- 2,480,161 net shares (10) 59 Repurchase of common shares-- 22,652,800 shares (462) ESOP transactions 1 11 - --------------------------------------------------------------------------------------------------------------------- ------------- BALANCE AT DECEMBER 31, 2000 492 1,402 6,352 (13) (1,600) (10) Net income 132 $ 132 Other comprehensive income (losses): Net unrealized gains on securities available for sale, net of income taxes of $11(a) 13 13 Cumulative effect of change in accounting for derivative financial instruments, net of income taxes of ($12) (22) (22) Net unrealized gains on derivative financial instruments, net of income taxes of $12 20 20 Foreign currency translation adjustments 1 1 ------------ Total comprehensive income $ 144 =========== Cash dividends declared on common shares ($1.48 per share) (628) Issuance of common shares: Acquisition-- 370,830 shares 9 Employee benefit and dividend reinvestment plans-- 2,415,914 net shares (12) 56 Repurchase of common shares--2,035,600 shares (50) ESOP transactions 13 - --------------------------------------------------------------------------------------------------------------------- ------------- BALANCE AT DECEMBER 31, 2001 492 1,390 5,856 -- (1,585) 2 Net income 976 $ 976 Other comprehensive income (losses): Net unrealized gains on securities available for sale, net of income taxes of $27(a) 47 47 Net unrealized gains on derivative financial instruments, net of income taxes of $5 8 8 Foreign currency translation adjustments 7 7 Minimum pension liability adjustment, net of income taxes of ($14) (25) (25) ------------ Total comprehensive income $ 1,013 =========== Deferred compensation obligation 68 Cash dividends declared on common shares ($.90 per share) (384) Issuance of common shares: Employee benefit and dividend reinvestment plans--2,938,589 net shares (9) 69 Repurchase of common shares-- 3,000,000 shares (77) - --------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2002 $ 492 $ 1,449 $ 6,448 -- $(1,593) $ 39 ====== ======= ======== === ======= ======== - ---------------------------------------------------------------------------------------------------------------------
(a) Net of reclassification adjustments. Reclassification adjustments represent net unrealized gains (losses) as of December 31 of the prior year on securities available for sale that were sold during the current year. The reclassification adjustments were $35 million ($22 million after tax) in 2002, ($5) million [($4) million after tax] in 2001 and ($11) million [($7) million after tax] in 2000. See Notes to Consolidated Financial Statements. 55 KEYCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW
YEAR ENDED DECEMBER 31, in millions 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 976 $ 132 $ 1,002 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 553 1,350 490 Cumulative effect of accounting changes, net of tax -- 25 -- Depreciation expense and software amortization 215 285 281 Amortization of intangibles 11 245 101 Net gain from sale of credit card portfolio -- -- (332) Net securities (gains) losses (6) (35) 28 Net (gains) losses from principal investing 14 79 (71) Net gains from loan securitizations and sales (56) (49) (31) Deferred income taxes 155 (139) 335 Net (increase) decrease in mortgage loans held for sale 118 (10) (164) Net (increase) decrease in trading account assets (204) 146 26 Net increase (decrease) in accrued restructuring charges (35) (64) 31 Other operating activities, net (282) (271) (113) - ---------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,459 1,694 1,583 INVESTING ACTIVITIES Cash used in acquisitions, net of cash acquired (63) (3) (375) Net (increase) decrease in other short-term investments 485 (160) (49) Purchases of securities available for sale (6,744) (4,290) (6,855) Proceeds from sales of securities available for sale 1,552 349 2,450 Proceeds from prepayments and maturities of securities available for sale 2,317 5,859 3,859 Purchases of investment securities (18) (46) (30) Proceeds from prepayments and maturities of investment securities 95 144 155 Purchases of other investments (167) (225) (374) Proceeds from sales of other investments 45 56 129 Proceeds from prepayments and maturities of other investments 57 106 56 Net increase in loans, excluding acquisitions, sales and divestitures (3,184) (1,876) (7,215) Purchases of loans -- (107) -- Proceeds from loan securitizations and sales 3,393 4,916 4,978 Purchases of premises and equipment (90) (121) (103) Proceeds from sales of premises and equipment 9 15 22 Proceeds from sales of other real estate owned 40 27 28 - ---------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (2,273) 4,644 (3,324) FINANCING ACTIVITIES Net increase (decrease) in deposits 4,128 (3,854) 5,416 Net decrease in short-term borrowings (2,611) (2,609) (696) Net proceeds from issuance of long-term debt, including capital securities 4,739 3,864 4,286 Payments on long-term debt, including capital securities (4,418) (3,532) (5,985) Loan payments received from ESOP trustee -- 13 11 Purchases of treasury shares (77) (50) (462) Net proceeds from issuance of common stock 37 33 28 Cash dividends paid (511) (501) (484) - ---------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,287 (6,636) 2,114 - ---------------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 473 (298) 373 CASH AND DUE FROM BANKS AT BEGINNING OF YEAR 2,891 3,189 2,816 - ---------------------------------------------------------------------------------------------------------------------------- CASH AND DUE FROM BANKS AT END OF YEAR $ 3,364 $ 2,891 $ 3,189 ========== ========== ========== - ---------------------------------------------------------------------------------------------------------------------------- Additional disclosures relative to cash flow: Interest paid $ 1,549 $ 2,626 $ 3,572 Income taxes paid 173 115 92 Noncash items: Derivative assets resulting from adoption of new accounting standard -- $ 120 -- Derivative liabilities resulting from adoption of new accounting standard -- 152 -- Cash dividends declared, but not paid -- 127 -- Transfer of investment securities to other investments $ 847 832 $ 820 Transfer of investment securities to securities available for sale 62 62 55 Assets acquired 475 -- -- Liabilities assumed 450 -- -- - ----------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES 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 bank-based financial services companies. KeyCorp's subsidiaries provide 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 business groups: Key Consumer Banking, Key Corporate Finance and Key Capital Partners. As of December 31, 2002, KeyCorp's banking subsidiaries operated 910 full-service branches, a telephone banking call center services group and 2,165 ATMs in 17 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 accounting principles generally accepted in the United States and prevailing practices within the financial services industry. Management must make certain estimates and judgments when determining the amounts presented in Key's consolidated financial statements and the related notes. 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. KeyCorp evaluates whether to consolidate entities in which it has invested based on the nature and amount of equity contributed by third parties, the decision-making power granted to those parties and the extent of their control over the entity's operating and financial policies. Entities that KeyCorp controls, generally through majority ownership, are consolidated and are considered subsidiaries. Unconsolidated investments in entities in which KeyCorp has significant influence over operating and financing decisions (usually defined as a voting or economic interest of 20 to 50%) are accounted for by the equity method. Unconsolidated investments in entities in which KeyCorp has a voting or economic interest of less than 20% are generally carried at cost. Investments held by KeyCorp's broker/dealer and investment company subsidiaries (principal investments) are carried at estimated fair value. KeyCorp uses special purpose entities ("SPEs"), including securitization trusts, in the normal course of business for funding purposes. SPEs established by KeyCorp as qualifying special purpose entities under the provisions of SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"are not consolidated. Nonqualifying SPEs are evaluated for consolidation by KeyCorp based on the nature and amount of equity contributed by third parties, the risks and rewards the parties assume and the control the respective parties exercise over the SPE's activities. Securitization trusts sponsored by KeyCorp are not consolidated since they are qualifying SPEs. KeyCorp also does not consolidate an asset-backed commercial paper conduit for which it is a referral agent. The conduit is owned by a third party and administered by an unaffiliated financial institution. KeyCorp shares the risks and rewards of the conduit's activities with multiple third parties. Additional information on SFAS No. 140 is summarized in this note under the heading "Loan Securitizations" on page 59. Additional information on the conduit is summarized in Note 19 ("Commitments, Contingent Liabilities and Guarantees"),which begins on page 81. The "Accounting Pronouncements Pending Adoption" section of this note, which begins on page 62, and Note 8 ("Loan Securitizations and Variable Interest Entities"), which begins on page 70, summarize guidance issued by the Financial Accounting Standards Board ("FASB") in January 2003 that changes the methods for evaluating when to consolidate entities and may affect Key's decision as to which entities to consolidate in the future. BUSINESS COMBINATIONS Key accounts for its business combinations using the purchase method of accounting. Under this method of accounting, the acquired company's net assets are recorded at fair value at the date of acquisition and the results of operations of the acquired company are combined with Key's results from that date forward. Purchase premiums and discounts, including intangible assets, are amortized over the remaining useful 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. Key's accounting policy for intangible assets is summarized in this note under the heading "Goodwill and Other Intangible Assets"on page 59. In July 2001, the FASB issued SFAS No. 141, "Business Combinations," which eliminated the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. Since that date, Key has not initiated any business combinations that would have qualified for the pooling-of-interests method of accounting under previous accounting standards. The last business combination that Key accounted for using the pooling-of-interests method occurred in December 1994. STATEMENTS OF CASH FLOW Cash and due from banks are considered "cash and cash equivalents" for financial reporting purposes. SECURITIES Key classifies its securities into four categories: trading, available for sale, investment and other investments. TRADING ACCOUNT SECURITIES. These are debt and equity securities that are purchased and held by Key with the intent of selling them in the near term, and certain interests retained in loan securitizations. All of these assets are reported at fair value ($801 million at December 31, 2002, and $597 million at December 31, 2001) and are included in "short-term investments" on the balance sheet. Realized and unrealized gains and 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES losses on trading account securities are reported in "investment banking and capital markets income" on the income statement. SECURITIES AVAILABLE FOR SALE. These include securities that Key intends to hold for an indefinite period of time and that may be sold in response to changes in interest rates, prepayment risk, liquidity needs or other factors. Securities available for sale are reported at fair value and include debt and marketable equity securities with readily determinable fair values. Unrealized gains and losses (net of income taxes) deemed temporary are recorded in shareholders' equity as a component of "accumulated other comprehensive income (loss)." Unrealized gains and losses on specific securities deemed to be "other than temporary" are included in "net securities gains (losses)" on the income statement. Also included in "net securities gains (losses)" are actual gains and losses resulting from sales of specific securities. INVESTMENT SECURITIES. These are debt securities that Key has the intent and ability to hold until maturity. Debt securities are carried at cost, adjusted for amortization of premiums and accretion of discounts using the interest method. This method produces a constant rate of return on the basis of the adjusted carrying amount. OTHER INVESTMENTS. Principal investments -- investments in equity and mezzanine instruments made by Key's Principal Investing unit -- represent the majority of other investments and are carried at fair value. They include direct and indirect investments predominately in privately-held companies. Direct investments are those made in a particular company, while indirect investments are made through funds that include other investors. Changes in estimated fair values and actual gains and losses on sales of Principal Investments are included in "investment banking and capital markets income" on the income statement. In addition to principal investments, other investments include securities that do not have readily determinable fair values. These securities include certain real estate-related investments that are carried at estimated fair value, as well as other types of securities that are generally carried at cost. The carrying amount of the securities carried at cost is adjusted for declines in value that are considered to be "other than temporary." These adjustments are 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, 2002, loans held for sale include commercial, mortgage and education loans. These loans are carried at the lower of aggregate cost or fair value. Fair value is determined based on prevailing market prices for loans with similar characteristics. When a loan is placed in the held for sale category, amortization of the related deferred fees and costs is discontinued. The remaining unamortized fees and costs are recognized as part of the cost basis of the loan at the time it 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. This method amortizes unearned income to produce a constant rate of return on the lease. Net gains or losses 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. Loans are also placed on nonaccrual status when payment is not past due but management has serious doubts as to the ability of the borrower to comply with existing loan repayment terms. Once a loan is designated as nonaccrual, the interest accrued but not collected is generally charged against the allowance for loan losses, and payments subsequently received are generally 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 of timely principal and interest payments. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses represents management's estimate of probable credit losses inherent in the loan portfolio at the balance sheet date. Key determines and maintains an appropriate allowance for loan losses based on an analysis of the quality of the loan portfolio. This analysis is conducted at least quarterly, and more often if deemed necessary. ALLOWANCE FOR IMPAIRED LOANS. When expected cash flows or collateral values do not justify the carrying amount of an impaired loan, the loan is assigned a specific allowance. Management calculates the extent of the impairment, which is the carrying amount of the loan less the estimated present value of future cash flows and the fair value of any existing collateral. The amount that management deems uncollectible (the impaired amount) is charged against the allowance for loan losses. Even when collateral value or other sources of repayment appear sufficient, if 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 historical loss rates to existing loans with similar risk characteristics. The portion of this allowance that was related to legally binding commitments was $72 million at December 31, 2002, compared with $71 million at December 31, 2001. The loss rates used to establish the allowance may be adjusted to reflect management's current assessment of the following factors: - - changes in national and local economic and business conditions; - - changes in experience, ability and depth of lending management and staff, in lending policies or in the mix and volume of the loan portfolio; 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES - - the trend of the volume of past due, nonaccrual and other loans; and - - external forces, such as competition, legal developments and regulatory guidelines. LOAN SECURITIZATIONS Key sells education and certain other types of loans in securitizations. A securitization involves the sale of a pool of loan receivables to investors through either a public or private issuance (generally by a SPE) of asset-backed securities. Securitized loans are removed from the balance sheet and a net gain or loss is recorded when the combined net sales proceeds and, if applicable, residual interests differ from the loans' allocated carrying amount. Net gains and losses resulting from securitizations are recorded in "other income" on the income statement. A servicing asset may also be recorded if Key either purchases or retains the right to service these loans and receives related fees that exceed the going market rate. Income earned under servicing or administration arrangements also is recorded in "other income." Key adopted SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which took effect for all transactions entered into after March 31, 2001. SFAS No. 140 added three significant rules to practices already in effect. These rules: - - prescribe the test that determines whether a SPE is a "qualifying" SPE, and prescribe the amount and type of derivative instruments a qualifying SPE can hold and the activities it may pursue; - - provide more restrictive guidance regarding the circumstances under which a company that transfers assets to a qualifying SPE will be deemed to have relinquished control of such assets and may account for the transaction as a sale; and - - require extensive disclosures about collateral, assets securitized and accounted for as a sale, and retained interests in securitized assets. In some cases, Key retains a residual interest in securitized loans that may take the form of an interest-only strip, a residual asset, a servicing asset and/or a security. The accounting for these retained interests is subject to the rules contained in SFAS No. 140. Under these rules, the previous carrying amount of the assets sold is allocated between the retained interests and the assets sold based on their relative fair values at the date of transfer. Fair value is determined by computing the present value of estimated cash flows, using a discount rate that reflects the risks associated with the cash flows and the dates that Key expects to receive such cash flows. Other assumptions used in the determination of fair value are disclosed in Note 8 ("Loan Securitizations and Variable Interest Entities"), which begins on page 70. In July 2000, the Emerging Issues Task Force ("EITF"), a standard-setting group working under the auspices of the FASB, issued EITF 99-20. This guidance specifies how to record interest income and measure impairment on beneficial interests retained in a securitization transaction accounted for as a sale under SFAS No. 140, and on purchased beneficial interests in securitized financial assets. Assets subject to this accounting guidance are presented on the balance sheet as securities available for sale [see Note 6 ("Securities"), which begins on page 68] or as trading account assets. This guidance became effective for fiscal quarters beginning after March 15, 2001, causing Key to record a cumulative after-tax loss of $24 million in earnings for the second quarter of 2001. This loss is presented on Key's income statement as a "cumulative effect of accounting change." Key conducts a review to determine whether all retained interests are valued appropriately in the financial statements on a quarterly basis. Management reviews the historical performance of each retained interest and the assumptions used to project future cash flows. Assumptions are revised if past performance and future expectations dictate, and the present values of cash flows are recalculated based on the revised assumptions. The present value of these cash flows is referred to as the "retained interest fair value." For retained interests classified as trading account assets, any increase or decrease in the asset's fair value is recognized in "other income" on the income statement. Generally, if the carrying amount of a retained interest classified as securities available for sale exceeds its fair value, impairment is indicated and recognized in earnings. Conversely, if the fair value of the retained interest exceeds its carrying amount, the write-up to fair value is recorded in equity as a component of "accumulated other comprehensive income (loss)," and the yield on the retained interest is adjusted prospectively. SERVICING ASSETS Servicing assets purchased or retained by Key in a sale or securitization of loans are reported at the lower of amortized cost or fair value ($99 million at December 31, 2002, and $73 million at December 31, 2001) and included in "accrued income and other assets" on the balance sheet. Fair value is initially measured by allocating the previous carrying amount of the assets sold or securitized to the retained interests and the assets sold based on their relative fair values at the date of transfer. Fair value is determined by estimating the present value of future cash flows associated with the serviced loans. The estimate is based on a number of assumptions, including the cost of servicing, discount rate, prepayment rate and default rate. The amortization of servicing assets is determined in proportion to, and over the period of, the estimated net servicing income and is recorded in "other income" on the income statement. 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 $1.1 billion at December 31, 2002 and 2001. GOODWILL AND OTHER INTANGIBLE ASSETS "Goodwill" represents the amount by which the cost of net assets acquired in a business combination exceeds their fair value. "Other intangibles" represent primarily 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 7 to 30 years. 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES Effective January 1, 2002, Key adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which replaced Accounting Principles Board Opinion No. 17,"Intangible Assets." Under the new accounting standard, companies are no longer permitted to amortize goodwill and other intangible assets deemed to have indefinite lives. This change reduced Key's noninterest expense and increased net income by approximately $79 million, or $.18 per common share, for 2002. Under SFAS No. 142, goodwill and certain intangible assets are subject to impairment testing, which must be conducted at least annually. Key has determined that its reporting units for purposes of this testing are its major business groups: Key Consumer Banking, Key Corporate Finance and Key Capital Partners. The first step in this testing requires that the fair value of each reporting unit be determined. If the carrying amount of any reporting unit exceeds its fair value, goodwill impairment may be indicated and a second step of impairment testing is required. If such were the case, Key would assume that the purchase price of the reporting unit is equal to its fair value as determined in the first step and then allocate that purchase price to the fair value of the unit's assets (excluding goodwill) and liabilities. Any excess of the assumed purchase price over the fair value of the reporting unit's assets and liabilities represents the implied fair value of goodwill. An impairment loss would be recognized, as a charge to earnings, to the extent the carrying amount of the reporting unit's goodwill exceeds the implied fair value of goodwill. Any impairment losses resulting from the initial application of SFAS No. 142 must be reported as a "cumulative effect of accounting change" on the income statement. Key was required to perform a transitional impairment test of goodwill as of January 1, 2002. In conducting this testing, Key used a discounted cash flow methodology to determine the fair value of its reporting units and a relative valuation methodology to review the fair values for reasonableness. Then, Key compared the fair value of each reporting unit with its carrying amount. Under SFAS No. 142, if the fair value of a particular reporting unit exceeds its carrying amount, no impairment is indicated and further testing is not required. Key completed its transitional goodwill impairment testing during the first quarter of 2002, and determined that no impairment existed as of January 1, 2002. The annual goodwill impairment testing required by SFAS No. 142 will be performed by Key in the fourth quarter of each year beginning in 2002. Any future impairment losses would be charged against income from operations. Key's annual goodwill impairment testing was performed as of October 1, 2002, and it was determined that no impairment existed at that date. Prior to the adoption of SFAS No. 142, goodwill was amortized using the straight-line method over the period (up to 40 years) that management expected the acquired assets to have value. Accumulated amortization on goodwill and other intangible assets was $919 million at December 31, 2002, and $908 million at December 31, 2001. Before January 1, 2002, Key reviewed goodwill and other intangibles for impairment when impairment indicators, such as significant changes in market conditions, changes in product mix or management focus, or a potential sale or disposition, arose. In most instances, Key used the undiscounted cash flow method in testing for impairment. In May 2001, Key recorded a goodwill impairment charge of $150 million as a result of management's decision to downsize the automobile finance business. INTERNALLY DEVELOPED SOFTWARE Key relies on both company personnel and independent contractors to plan, develop, install, customize and enhance computer systems applications that support corporate and administrative operations. Software development costs, such as those related to program coding, testing, configuration and installation, are capitalized and included in "accrued income and other assets" on the balance sheet. The resulting asset ($105 million at December 31, 2002, and $134 million at December 31, 2001) is amortized using the straight-line method over its expected useful life (not to exceed five years). Costs incurred during both the planning and the post-development phases of an internal software project are expensed as incurred. Software that is considered impaired is written down to its fair value. Software that is no longer used is written off to earnings immediately. 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 hedge 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. Key's accounting policies related to such derivatives reflect the accounting guidance in SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which became effective for Key as of January 1, 2001. This standard established the appropriate accounting and reporting for derivative instruments and for hedging activities. SFAS No. 133 requires that all derivatives be recognized as either assets or liabilities on the balance sheet at fair value. The accounting for changes in the fair value (i.e., gains or losses) of derivatives depends on whether they have been designated and qualify as part of a hedging relationship, and further, on the type of hedging relationship. For derivatives that are not designated as hedging instruments, the gain or loss is recognized immediately in earnings. A derivative that is designated and qualifies as a hedging instrument must be designated either a fair value hedge, a cash flow hedge or a hedge of a net investment in a foreign operation. Key does not have any derivatives that hedge net investments in foreign operations. A fair value hedge is used to hedge changes in the fair value of existing assets, liabilities and firm commitments against changes in interest rates or other economic factors. Key recognizes the gain or loss on the derivative, as well as the related gain or loss on the hedged item underlying the hedged risk, in earnings during the period in which the fair value changes. Thus, if a hedge is perfectly effective, the change in the fair value of the hedged item will be offset, resulting in no net effect on earnings. 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES A cash flow hedge is used to hedge the variability of future cash flows against changes in interest rates or other economic factors. The effective portion of a gain or loss on any cash flow hedge is reported as a component of "other comprehensive income (loss)" and reclassified into earnings in the same period or periods that the hedged transaction affects earnings. Any ineffective portion of the derivative gain or loss is recognized in earnings during the current period. As a result of adopting SFAS No. 133, Key recorded cumulative after-tax losses of $1 million in earnings and $22 million in "other comprehensive income (loss)" as of January 1, 2001. The cumulative loss included in earnings represented the fair value at January 1, 2001, of all derivatives that were then designated as fair value hedges and the unrealized gain or loss on the related hedged assets and liabilities. The cumulative loss included in "other comprehensive income (loss)" represented the effective portion of the fair value of all derivatives designated as cash flow hedges. Prior to the effective date of SFAS No. 133, to qualify for hedge accounting treatment, a derivative had to be effective at reducing the risk associated with the exposure being managed and had to be designated as a risk management transaction at the inception of the derivative contract. An instrument effectively reduced risk if there was 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 were several rules that governed the hedge accounting treatment of derivatives prior to SFAS No. 133: - - Changes in fair value of a derivative were not included in the financial statements. - - The net interest income or expense associated with a derivative was 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 was recorded in "other assets" or "other liabilities" on the balance sheet. - - Premiums paid for a derivative were 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 were deferred as an adjustment to the carrying amount of the related asset or liability. Such gains or losses were 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 that 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 "accrued income and other assets" on the balance sheet, and derivatives with a negative fair value are included in "accrued expense and 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 Through December 31, 2002, Key accounted for stock options issued to employees using the intrinsic value method. This method requires that compensation expense be recognized to the extent that the fair value of the stock exceeds the exercise price of the option at the grant date. Key's employee stock options generally have fixed terms and exercise prices that are equal to or greater than the fair value of Key's common shares at the grant date, so Key generally does not recognize compensation expense related to stock options. In September 2002, KeyCorp's Board of Directors approved management's recommendation to change Key's method of accounting for stock options granted to eligible employees and directors. Effective January 1, 2003, Key will adopt the fair value method of accounting as outlined in SFAS No. 123, "Accounting for Stock-Based Compensation." Additional information pertaining to this accounting change is summarized under the heading "Accounting Pronouncements Pending Adoption" on page 62. SFAS No. 123 requires companies like Key that 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. Management estimates 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, but it is commonly used for this purpose. 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 4.1 years in 2002, 3.9 years in 2001 and 4.7 years in 2000; - - a future dividend yield of 4.84% in 2002, 4.22% in 2001 and 5.83% in 2000; - - share price volatility of .264 in 2002, .330 in 2001 and .267 in 2000; and - - a weighted average risk-free interest rate of 3.9% in 2002, 5.0% in 2001 and 6.6% in 2000. The level of accuracy achieved in deriving the estimated fair values is directly related to the accuracy of the underlying assumptions. 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES 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 effect of applying the fair value method of accounting for the years shown in the following table may not be indicative of the effect in future years.
YEAR ENDED DECEMBER 31, in millions, except per share amounts 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------- Net income $ 976 $ 132 $ 1,002 Less: Stock-based employee compensation expense determined under fair value method, net of tax 20 25 17 - ---------------------------------------------------------------------------------------------------------------------------- Net income-- pro forma $ 956 $ 107 $ 985 ========== ========== ========== Per common share: Net income $ 2.29 $ .31 $ 2.32 Net income--pro forma 2.25 .25 2.28 Net income assuming dilution 2.27 .31 2.30 Net income assuming dilution--pro forma 2.23 .25 2.24 - ----------------------------------------------------------------------------------------------------------------------------
MARKETING COSTS Key expenses all marketing-related costs, including advertising costs, as incurred. RESTRUCTURING CHARGES Key may record restructuring charges in connection with certain events or transactions, including business combinations, changes in Key's strategic plan, changes in business conditions that may result in a decrease in or exit from affected businesses, or other factors. Such charges typically result from consolidating or relocating operations, or disposing of or abandoning 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 a 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 are those related to: - - employee severance and termination benefits; - - the consolidation of operations facilities; and - - losses resulting from the impairment or disposal of assets. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." Additional information pertaining to this new accounting guidance is summarized under the heading "Accounting Pronouncements Pending Adoption." ACCOUNTING PRONOUNCEMENTS ADOPTED IN 2002 ACQUISITIONS OF CERTAIN FINANCIAL INSTITUTIONS. Effective October 1, 2002, Key adopted SFAS No. 147, "Acquisitions of Certain Financial Institutions." SFAS No. 147 addresses the financial accounting and reporting for the acquisition of all or part of a financial institution and also provides guidance on the accounting for the impairment or disposal of acquired long-term customer relationship intangible assets. The adoption of this standard did not have any effect on Key's financial condition or results of operations. EXTINGUISHMENT OF DEBT. Effective April 1, 2002, Key adopted SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections." Under this new standard, gains and losses on the extinguishment of debt must be recognized as income or loss from continuing operations rather than extraordinary items. The adoption of this standard did not have any effect on Key's financial condition or results of operations. IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. Effective January 1, 2002, Key adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This new standard maintains the previous accounting for the impairment or disposal of long-lived assets, but imposes more conditions on the classification of such an asset as "held for sale." SFAS No. 144 also increases the range of dispositions that qualify for reporting as discontinued operations and changes the manner in which expected future operating losses from such operations are to be reported. The adoption of this standard did not have any effect on Key's financial condition or results of operations. GOODWILL AND OTHER INTANGIBLE ASSETS. Effective January 1, 2002, Key adopted SFAS No. 142, "Goodwill and Other Intangible Assets." Additional information pertaining to this new accounting guidance is summarized under the heading "Goodwill and Other Intangible Assets" on page 59. ACCOUNTING PRONOUNCEMENTS PENDING ADOPTION CONSOLIDATION OF VARIABLE INTEREST ENTITIES. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities," which significantly changes how Key and other companies determine when to consolidate other entities. Under this guidance, entities are classified as either voting interest entities or variable interest entities ("VIEs"). A voting interest entity is evaluated for consolidation under existing accounting standards, which focus on the equity owner with voting control, while a VIE is consolidated by its primary beneficiary. The primary beneficiary is the party that holds variable interests that expose it to a majority of the entity's expected losses and/or residual returns. Variable interests include equity interests, subordinated debt, derivative 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES contracts, leases, service agreements, guarantees, standby letters of credit, loan commitments and other instruments. Interpretation No. 46 was effective immediately for entities created or obtained after January 31, 2003, and applies to previously existing entities in quarters beginning after June 15, 2003. It requires additional disclosures by primary beneficiaries and other significant variable interest holders. Management is currently evaluating Key's involvement with entities created before February 1, 2003, to identify those that must be consolidated or only disclosed in accordance with this guidance. The most significant impact of this new guidance will be on Key's balance sheet since consolidating additional entities will increase assets and liabilities and change leverage and capital ratios, as well as asset concentrations. Additional information is summarized in Note 8 ("Loan Securitizations and Variable Interest Entities"), which begins on page 70 and in Note 19 ("Commitments, Contingent Liabilities and Guarantees"), which begins on page 81. ACCOUNTING FOR AND DISCLOSURE OF GUARANTEES. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." This Interpretation requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of obligations undertaken. The liability that must be recognized is specifically related to the obligation to stand ready to perform over the term of the guarantee. The initial recognition and measurement provisions of this guidance are effective on a prospective basis for guarantees issued or modified on or after January 1, 2003. This new accounting guidance also expands the disclosures that a guarantor must make about its obligations under certain guarantees. These disclosure requirements are effective for financial statements of interim or annual periods ending after October 15, 2002. The required disclosures for Key are provided in Note 19 ("Commitments, Contingent Liabilities and Guarantees"), which begins on page 81. Management expects that the adoption of Interpretation No. 45 will not have any material effect on Key's financial condition or results of operations. COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This new standard is effective for exit or disposal activities (e.g., activities related to ceasing a line of business, relocating operations, etc.) initiated after December 31, 2002. SFAS No. 146 substantially changes the rules for recognizing costs, such as lease or other contract termination costs and one-time employee termination benefits associated with exit or disposal activities arising from corporate restructurings. Generally, these costs must be recognized when incurred. Previously, those costs could be recognized earlier, for example, when a company committed to an exit or disposal plan. Key will adopt SFAS No. 146 for restructuring activities initiated on or after January 1, 2003. Management expects that the adoption of SFAS No. 146 will not significantly affect Key's financial condition or results of operations. ASSET RETIREMENT OBLIGATIONS. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." The new standard takes effect for fiscal years beginning after June 15, 2002. SFAS No. 143 addresses the accounting for legal obligations associated with the retirement of tangible long-lived assets and requires a liability to be recognized for the fair value of these obligations in the period they are incurred. Related costs are capitalized as part of the carrying amounts of the assets to be retired and are amortized over the assets' useful lives. Key will adopt SFAS No. 143 as of January 1, 2003. Management has determined that the adoption of this accounting guidance will not affect Key's financial condition or results of operations. ACCOUNTING FOR STOCK COMPENSATION. Under SFAS No. 123, "Accounting for Stock-Based Compensation," companies may either recognize the compensation cost associated with stock options as expense over the respective vesting periods or disclose the pro forma impact on earnings in their audited financial statements. Key has historically followed the latter approach, but in September 2002, KeyCorp's Board of Directors approved management's recommendation to recognize the compensation cost for stock options. Effective January 1, 2003, Key will adopt the fair value method of accounting as outlined in SFAS No. 123. Management intends to apply the change in accounting prospectively (prospective method) to all awards as permitted under the transition provisions in SFAS No. 148, "Accounting for Stock-Based Compensation Transition and Disclosure," which was issued in December 2002. SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for an entity that voluntarily changes to the fair value method of accounting for stock compensation. These alternative methods include the: (i) prospective method; (ii) modified prospective method; and, (iii) retroactive restatement method. This accounting guidance also amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock compensation and the effect of the method used on reported financial results. The required disclosures for Key are provided under the heading "Employee Stock Options" on page 61 and in Note 15 ("Stock Options"), which begins on page 77. Based on the valuation and timing of options granted in 2002 and projected to be granted in 2003, management estimates that the accounting change will reduce Key's diluted earnings per common share by up to $.04 in 2003. The effect on Key's earnings per common share in subsequent years will depend on the number and timing of options granted and the assumptions used to estimate their fair value. 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES 2. EARNINGS PER COMMON SHARE Key calculates its basic and diluted earnings per common share as follows:
YEAR ENDED DECEMBER 31, dollars in millions, except per share amounts 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------- EARNINGS Income before cumulative effect of accounting changes $ 976 $ 157 $ 1,002 Net income 976 132 1,002 - ---------------------------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE COMMON SHARES Weighted average common shares outstanding (000) 425,451 424,275 432,617 Effect of dilutive common stock options (000) 5,252 5,298 2,956 - ---------------------------------------------------------------------------------------------------------------------------- Weighted average common shares and potential common shares outstanding (000) 430,703 429,573 435,573 ========== ========== ========== - ---------------------------------------------------------------------------------------------------------------------------- EARNINGS PER COMMON SHARE Income per common share before cumulative effect of accounting changes $ 2.29 $ .37 $ 2.32 Net income per common share 2.29 .31 2.32 Income per common share before cumulative effect of accounting changes-- assuming dilution 2.27 .37 2.30 Net income per common share-- assuming dilution 2.27 .31 2.30 - ----------------------------------------------------------------------------------------------------------------------------
3. ACQUISITIONS AND DIVESTITURES Key completed the following acquisitions and divestitures during the past three years. ACQUISITIONS UNION BANKSHARES, LTD. On December 12, 2002, Key purchased Union Bankshares, Ltd., the holding company for Union Bank & Trust, a seven-branch bank headquartered in Denver, Colorado. Key paid $22.63 per Union Bankshares common share for a total cash consideration of $66 million. Goodwill of approximately $34 million and core deposit intangibles of $13 million were recorded. Union Bankshares, Ltd. had assets of $475 million at the date of acquisition. On January 17, 2003, Union Bank & Trust was merged into KBNA. CONNING ASSET MANAGEMENT On June 28, 2002, Key purchased substantially all of the mortgage loan and real estate business of Conning Asset Management, headquartered in Hartford, Connecticut. Conning's mortgage loan and real estate business originates, securitizes and services multi-family, retail, industrial and office property mortgage loans on behalf of pension fund and life insurance company investors. At the date of acquisition, Conning had net assets of $17 million and serviced approximately $4 billion in commercial mortgage loans. In accordance with a confidentiality clause in the purchase agreement, the terms, which are not material, have not been disclosed. THE WALLACH COMPANY, INC. On January 2, 2001, Key purchased The Wallach Company, Inc., an investment banking firm headquartered in Denver, Colorado. Key paid the purchase price of approximately $11 million using a combination of cash and 370,830 Key common shares. Goodwill of approximately $9 million was recorded and, prior to the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," on January 1, 2002, was being amortized using the straight-line method over a period of 10 years. NEWPORT MORTGAGE COMPANY, L.P. On September 30, 2000, Key purchased certain net assets of Newport Mortgage Company, L.P., a commercial mortgage company headquartered in Dallas, Texas, for $22 million in cash. Goodwill of approximately $10 million was recorded and, prior to the adoption of SFAS No. 142, was being amortized using the straight-line method over a period of 10 years. NATIONAL REALTY FUNDING L.C. On January 31, 2000, Key purchased certain net assets of National Realty Funding L.C., a commercial finance company headquartered in Kansas City, Missouri, for $359 million in cash. Goodwill of approximately $10 million was recorded and, prior to the adoption of SFAS No. 142, was being amortized using the straight-line method over a period of 15 years. DIVESTITURES 401(K) RECORDKEEPING BUSINESS On June 12, 2002, Key sold its 401(k) recordkeeping business. Key recognized a gain of $3 million ($2 million after tax), which is included in "other income" on the income statement. CREDIT CARD PORTFOLIO On January 31, 2000, Key sold its credit card portfolio of $1.3 billion in receivables and nearly 600,000 active VISA and MasterCard accounts to Associates National Bank (Delaware). Key recognized a gain of $332 million ($207 million after tax), which is included in "gain from sale of credit card portfolio" on the income statement. 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES 4. LINE OF BUSINESS RESULTS Key has three major business groups that consist of 10 lines of business: KEY CONSUMER BANKING RETAIL BANKING provides individuals with branch-based deposit and investment products, personal finance services and loans, including residential mortgages, home equity and various types of installment loans. SMALL BUSINESS provides businesses that have annual sales revenues of $10 million or less with deposit, investment and credit products, and business advisory services. INDIRECT LENDING offers automobile, marine and recreational vehicle (RV) loans to consumers through dealers, and finances inventory for automobile, marine and RV dealers. This line of business also provides education loans, insurance and interest-free payment plans for students and their parents. NATIONAL HOME EQUITY provides primarily nonprime mortgage and home equity loan products to individuals. These products originate outside of Key's retail branch system. This line of business also works with mortgage brokers and home improvement contractors to provide home equity and home improvement solutions. KEY CORPORATE FINANCE CORPORATE BANKING provides financing, cash and investment management and business advisory services to middle-market companies and large corporations. NATIONAL COMMERCIAL REAL ESTATE provides construction and interim lending, permanent debt placements and servicing, and equity and investment banking services to developers, brokers and owner-investors. This line of business deals exclusively with nonowner-occupied properties (i.e., generally properties in which the owner occupies less than 60% of the premises). NATIONAL EQUIPMENT FINANCE meets the equipment leasing needs of companies worldwide and provides equipment manufacturers, distributors and resellers with financing options for their clients. Lease financing receivables and related revenues are assigned to Corporate Banking or National Commercial Real Estate if one of those businesses is principally responsible for maintaining the relationship with the client. KEY CAPITAL PARTNERS VICTORY CAPITAL MANAGEMENT manages or gives advice regarding investment portfolios for a national client base, including corporations, labor unions, not-for-profit organizations, governments and individuals. These portfolios may be managed in separate accounts, commingled funds or the Victory family of mutual funds. This line of business also provides administrative services for retirement plans. HIGH NET WORTH offers financial, estate and retirement planning and asset management services to assist high-net-worth clients with their banking, brokerage, trust, portfolio management, insurance, charitable giving and related needs. CAPITAL MARKETS offers investment banking, capital raising, hedging strategies, trading and financial strategies to public and privately-held companies, institutions and government organizations. OTHER SEGMENTS Other segments consists primarily of Treasury, Principal Investing and the net effect of funds transfer pricing. RECONCILING ITEMS Total assets included under "Reconciling Items" represent primarily the unallocated portion of nonearning assets of corporate support functions. Charges related to the funding of these assets are part of net interest income and are allocated to the business segments through noninterest expense. Reconciling Items also include significant items (see note b to the table on pages 66 and 67). These items are not allocated to the business segments because they are not reflective of their normal operations. The table that spans pages 66 and 67 shows selected financial data for each major business group for the years ended December 31, 2002, 2001 and 2000. This table is accompanied by additional supplementary information for each of the lines of business that comprise these groups. The information was derived from the internal financial reporting system that management uses to monitor and manage Key's financial performance. Accounting principles generally accepted in the United States guide financial accounting, but there is no authoritative guidance for "management accounting" -- the way management uses its judgment and experience to make reporting decisions. Consequently, the line of business results Key reports may not be comparable with results presented by other companies. The selected financial data are based on internal accounting policies designed to compile results on a consistent basis and in a manner that reflects the underlying economics of the businesses. As such: - - Net interest income is determined by assigning a standard cost for funds used to assets or a standard credit for funds provided to liabilities based on their maturity, prepayment and/or repricing characteristics. The net effect of this funds transfer pricing is included in the "Other Segments" columns. - - Indirect expenses, such as computer servicing costs and corporate overhead, are allocated based on assumptions of the extent to which each line actually uses the services. - - Key's consolidated provision for loan losses is allocated among the lines of business based primarily on their actual net charge-offs (excluding those in the run-off portfolio discussed on page 43), adjusted for loan growth and changes in risk profile. The level of the consolidated provision is based on the methodology that management uses to estimate Key's 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 are allocated based on the statutory federal income tax rate of 35% (adjusted for tax-exempt interest income, income from corporate-owned life insurance 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%. 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
YEAR ENDED DECEMBER 31, KEY CONSUMER BANKING KEY CORPORATE FINANCE --------------------------------------- -------------------------------------- dollars in millions 2002 2001 2000 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS Net interest income (TE) $ 1,805 $ 1,818 $ 1,757 $ 1,123 $ 1,092 $ 1,011 Noninterest income 497 482 475 238 259 253 - --------------------------------------------------------------------------------------------------------------------------------- Total revenue (TE)(a) 2,302 2,300 2,232 1,361 1,351 1,264 Provision for loan losses 303 300 281 236 140 125 Depreciation and amortization expense 137 216 224 39 64 62 Other noninterest expense 1,187 1,150 1,132 456 453 435 - --------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (TE)and cumulative effect of accounting changes 675 634 595 630 694 642 Allocated income taxes and TE adjustments 253 252 239 236 265 246 - --------------------------------------------------------------------------------------------------------------------------------- Income (loss) before cumulative effect of accounting changes 422 382 356 394 429 396 Cumulative effect of accounting changes -- (24) -- -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 422 $ 358 $ 356 $ 394 $ 429 $ 396 ========== ========== ========== ========== ========== ========== Percent of consolidated net income 43% 271% 36% 41% 325% 39% Percent of total segments net income 44 40 37 41 48 42 - --------------------------------------------------------------------------------------------------------------------------------- AVERAGE BALANCES Loans $ 27,806 $ 27,673 $ 26,690 $ 29,278 $ 31,098 $ 30,592 Total assets(a) 29,970 30,398 29,637 30,568 32,593 32,086 Deposits 33,942 35,221 35,370 3,384 3,093 2,815 - --------------------------------------------------------------------------------------------------------------------------------- OTHER FINANCIAL DATA Expenditures for additions to long-lived assets(a) $ 74 $ 51 $ 48 $ 14 $ 19 $ 24 Net loan charge-offs 303 350 281 462 305 126 Return on average allocated equity 21.14% 16.13% 14.64% 14.12% 15.42% 15.06% Full-time equivalent employees 8,299 8,523 8,769 1,789 1,770 2,034 - ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, KEY CAPITAL PARTNERS -------------------------------------- dollars in millions 2002 2001 2000 - -------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS Net interest income (TE) $ 235 $ 216 $ 214 Noninterest income 874 943 974 - -------------------------------------------------------------------------------------- Total revenue (TE)(a) 1,109 1,159 1,188 Provision for loan losses 14 13 4 Depreciation and amortization expense 53 97 93 Other noninterest expense 793 829 851 - -------------------------------------------------------------------------------------- Income (loss) before income taxes (TE)and cumulative effect of accounting changes 249 220 240 Allocated income taxes and TE adjustments 93 91 98 - -------------------------------------------------------------------------------------- Income (loss) before cumulative effect of accounting changes 156 129 142 Cumulative effect of accounting changes -- -- -- - -------------------------------------------------------------------------------------- Net income (loss) $ 156 $ 129 $ 142 ========== ========== ========== Percent of consolidated net income 16% 98% 14% Percent of total segments net income 16 14 15 - -------------------------------------------------------------------------------------- AVERAGE BALANCES Loans $ 4,904 $ 5,266 $ 5,439 Total assets(a) 8,382 8,965 8,994 Deposits 3,924 3,679 3,480 - -------------------------------------------------------------------------------------- OTHER FINANCIAL DATA Expenditures for additions to long-lived assets(a) $ 11 $ 18 $ 21 Net loan charge-offs 14 13 4 Return on average allocated equity 16.25% 12.33% 12.49% Full-time equivalent employees 3,474 3,749 3,916 - --------------------------------------------------------------------------------------
(a) Substantially all revenue generated by Key's major business groups 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 business groups are located in the United States. (b) Significant items included under Reconciling Items are as follows: Year ended December 31, 2001: - Noninterest income includes a $40 million ($25 million after tax) charge taken to establish a reserve for losses incurred on the residual values of leased vehicles and a $15 million ($9 million after tax) increase in the reserve for customer derivative losses. - The provision for loan losses includes an additional $400 million ($252 million after tax) taken to increase the allowance for loan losses for Key's continuing loan portfolio and an additional $490 million ($309 million after tax) recorded primarily in connection with Key's decision to discontinue certain credit-only commercial relationships. - Depreciation and amortization expense includes a goodwill write-down of $150 million associated with the downsizing of the automobile finance business, and other noninterest expense includes charges of $20 million ($13 million after tax) taken to establish additional litigation reserves. Year ended December 31, 2000: - Noninterest income includes a gain of $332 million ($207 million after tax) from the sale of Key's credit card portfolio. - The provision for loan losses includes an additional $121 million ($76 million after tax) recorded in connection with the implementation of an enhanced methodology for assessing credit risk, particularly in the commercial loan portfolio. - Noninterest expense includes $127 million ($80 million after tax), primarily restructuring charges, recorded in connection with strategic actions taken to improve Key's operating efficiency and profitability. TE = Taxable Equivalent, N/A = Not Applicable, N/M = Not Meaningful - - Capital is assigned based on management's assessment of economic risk factors (primarily credit, operating and market risk). Developing and applying the methodologies that management uses 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 business or changes in Key's organization structure. The financial data reported for all periods presented in the tables reflect a number of changes, which occurred during 2002: - - The Small Business line of business moved from Key Corporate Finance to Key Consumer Banking. - - Methodologies used to allocate certain overhead costs, management fees and funding costs were refined. - - In previous years, noninterest income and expense attributable to Key Capital Partners was assigned to the other business groups if one of those groups was principally responsible for maintaining the relationship with the client that used Key Capital Partners' products and services. That revenue and expense sharing has been discontinued. - - The methodology used to assign a provision for loan losses to each line of business was changed from one based on the credit quality expectations within each line over a normal business cycle to one based primarily upon actual net charge-offs (excluding those in the run-off portfolio), adjusted for loan growth and changes in risk profile. 66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
OTHER SEGMENTS TOTAL SEGMENTS - ----------------------------------------- ----------------------------------------- 2002 2001 2000 2002 2001 2000 - ------------------------------------------------------------------------------------ $ (194) $ (139) $ (85) $ 2,969 $ 2,987 $ 2,897 118 66 142 1,727 1,750 1,844 - ------------------------------------------------------------------------------------ (76) (73) 57 4,696 4,737 4,741 1 5 3 554 458 413 -- 1 1 229 378 380 24 23 30 2,460 2,455 2,448 - ------------------------------------------------------------------------------------ (101) (102) 23 1,453 1,446 1,500 (81) (83) (35) 501 525 548 - ------------------------------------------------------------------------------------ (20) (19) 58 952 921 952 -- (1) -- -- (25) -- - ------------------------------------------------------------------------------------ $ (20) $ (20) $ 58 $ 952 $ 896 $ 952 ========== ========== ========== ========== ========== ========== (2)% (15)% 6% 98% 679% 95% (1) (2) 6 100 100 100 - ------------------------------------------------------------------------------------ $ 1,262 $ 1,833 $ 2,280 $ 63,250 $ 65,870 $ 65,001 11,210 11,585 11,511 80,130 83,541 82,228 3,606 3,492 3,773 44,856 45,485 45,438 - ------------------------------------------------------------------------------------ -- -- -- $ 99 $ 88 $ 93 $ 1 $ 5 $ 3 780 673 414 N/M N/M N/M 15.52% 13.72% 14.44% 35 31 36 13,597 14,073 14,755 - ------------------------------------------------------------------------------------
RECONCILING ITEMS(B) KEY - ----------------------------------------- ----------------------------------------- 2002 2001 2000 2002 2001 2000 - ------------------------------------------------------------------------------------ $ (100) $ (117) $ (139) $ 2,869 $ 2,870 $ 2,758 42 (25) 350 1,769 1,725 2,194 - ------------------------------------------------------------------------------------ (58) (142) 211 4,638 4,595 4,952 (1) 892 77 553 1,350 490 1 152 2 230 530 382 (37) (44) 87 2,423 2,411 2,535 - ------------------------------------------------------------------------------------ (21) (1,142) 45 1,432 304 1,545 (45) (378) (5) 456 147 543 - ------------------------------------------------------------------------------------ 24 (764) 50 976 157 1,002 -- -- -- -- (25) -- - ------------------------------------------------------------------------------------ $ 24 $ (764) $ 50 $ 976 $ 132 $ 1,002 ========== ========== ========== ========== ========== ========== 2% (579)% 5% 100% 100% 100% N/A N/A N/A N/A N/A N/A - ------------------------------------------------------------------------------------ $ 143 $ 106 $ 293 $ 63,393 $ 65,976 $ 65,294 1,651 1,362 1,807 81,781 84,903 84,035 (75) (30) (3) 44,781 45,455 45,435 - ------------------------------------------------------------------------------------ $ 95 $ 111 $ 107 $ 194 $ 199 $ 200 -- -- -- 780 673 414 N/M N/M N/M 14.96% 2.01% 15.39% 6,840 7,157 7,387 20,437 21,230 22,142 - ------------------------------------------------------------------------------------
SUPPLEMENTARY INFORMATION (KEY CONSUMER BANKING LINES OF BUSINESS)
YEAR ENDED DECEMBER 31, RETAIL BANKING SMALL BUSINESS ------------------------------------- -------------------------------------- dollars in millions 2002 2001 2000 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------- Total revenue (taxable equivalent) $ 1,301 $ 1,324 $ 1,304 $ 398 $ 391 $ 367 Provision for loan losses 71 62 124 60 44 33 Noninterest expense 814 855 872 170 179 170 Net income 260 247 185 105 104 101 Average loans 8,784 7,675 7,654 4,272 4,409 4,065 Average deposits 29,890 31,486 31,615 3,723 3,555 3,613 Net loan charge-offs 71 62 124 60 44 33 Return on average allocated equity 46.93% 42.15% 27.13% 32.92% 30.59% 31.08% Full-time equivalent employees 6,053 6,191 6,606 295 258 253 - ---------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, INDIRECT LENDING NATIONAL HOME EQUITY -------------------------------------- --------------------------------------- dollars in millions 2002 2001 2000 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------- Total revenue (taxable equivalent) $ 355 $ 401 $ 425 $ 248 $ 184 $ 136 Provision for loan losses 132 158 115 40 36 9 Noninterest expense 175 187 182 165 145 132 Net income 30 10 76 27 (3) (6) Average loans 9,630 10,949 11,895 5,120 4,640 3,076 Average deposits 317 171 138 12 9 4 Net loan charge-offs 132 158 115 40 86 9 Return on average allocated equity 4.52% 1.17% 7.60% 5.87% (.68)% (1.42)% Full-time equivalent employees 747 776 829 1,204 1,298 1,081 - ---------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTARY INFORMATION (KEY CORPORATE FINANCE LINES OF BUSINESS)
YEAR ENDED DECEMBER 31, CORPORATE BANKING NATIONAL COMMERCIAL REAL ESTATE ------------------------------------- -------------------------------------- dollars in millions 2002 2001 2000 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------------------- Total revenue (taxable equivalent) $ 738 $ 787 $ 773 $ 390 $ 377 $ 316 Provision for loan losses 167 98 112 7 10 2 Noninterest expense 283 313 327 131 118 98 Net income 179 233 207 158 155 135 Average loans 15,687 17,945 18,454 7,782 7,931 7,227 Average deposits 2,776 2,561 2,478 599 525 328 Net loan charge-offs 393 239 113 7 10 2 Return on average allocated equity 10.86% 14.26% 12.71% 21.88% 21.15% 24.19% Full-time equivalent employees 569 650 866 614 499 493 - ---------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, NATIONAL EQUIPMENT FINANCE ------------------------------------- dollars in millions 2002 2001 2000 - --------------------------------------------------------------------------------- Total revenue (taxable equivalent) $ 233 $ 187 $ 175 Provision for loan losses 62 32 11 Noninterest expense 81 86 72 Net income 57 41 54 Average loans 5,809 5,222 4,911 Average deposits 9 7 9 Net loan charge-offs 62 56 11 Return on average allocated equity 13.57% 9.86% 12.22% Full-time equivalent employees 606 621 675 - ---------------------------------------------------------------------------------
67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES SUPPLEMENTARY INFORMATION (KEY CAPITAL PARTNERS LINES OF BUSINESS)
YEAR ENDED DECEMBER 31, VICTORY CAPITAL MANAGEMENT HIGH NET WORTH -------------------------------------- ------------------------------------- dollars in millions 2002 2001 2000 2002 2001 2000 - -------------------------------------------------------------------------------------------------------------------------- Total revenue (taxable equivalent) $ 205 $ 227 $ 235 $ 583 $ 619 $ 652 Provision for loan losses -- -- -- 14 13 4 Noninterest expense 146 164 169 473 521 533 Net income 36 38 40 61 50 69 Average loans 13 26 29 4,204 4,633 4,825 Average deposits 59 75 85 2,246 2,067 1,896 Net loan charge-offs -- -- -- 14 13 4 Return on average allocated equity 30.51% 28.57% 27.03% 13.47% 9.84% 12.34% Full-time equivalent employees 429 579 623 2,347 2,483 2,586 - --------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, CAPITAL MARKETS ------------------------------------- dollars in millions 2002 2001 2000 - -------------------------------------------------------------------------------- Total revenue (taxable equivalent) $ 321 $ 313 $ 301 Provision for loan losses -- -- -- Noninterest expense 227 241 242 Net income 59 41 33 Average loans 687 607 585 Average deposits 1,619 1,537 1,499 Net loan charge-offs -- -- -- Return on average allocated equity 15.17% 10.12% 7.67% Full-time equivalent employees 698 687 707 - --------------------------------------------------------------------------------
5. RESTRICTIONS ON CASH, 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 bank subsidiaries maintained average reserve balances aggregating $336 million in 2002 to fulfill these requirements. KeyCorp's principal source of cash flow to pay dividends on its common shares, to service its debt and to finance its corporate operations is capital distributions from KBNA and its other subsidiaries. Federal banking law limits the amount of capital distributions that national banks can make to their holding companies without obtaining prior regulatory approval. A national bank's dividend paying capacity is affected by several factors, including the amount of its net profits (as defined by statute) for the two previous calendar years, and net profits for the current year up to the date of dividend declaration. Due to this constraint, and the restructuring charges taken by KBNA and Key Bank USA in 2001, as of January 1, 2003, neither bank could pay dividends or make other capital distributions to KeyCorp without prior regulatory approval. In February 2003, KBNA obtained regulatory approval to make capital distributions to KeyCorp of up to $365 million in the aggregate in the first and second quarters. If KBNA were to distribute such amount, it would not have any further dividend paying capacity until it accumulates at least $300 million of additional net profits in 2003. Management expects this will occur during the second quarter. Management also expects Key Bank USA to have restored dividend paying capacity during the first quarter. Assuming KBNA had distributed the $365 million to KeyCorp as of February 15, 2003, as of that date, KeyCorp would have had approximately $1.5 billion of cash or short-term investments available to pay dividends on its common shares, to service its debt and to finance its corporate operations. Management does not expect current constraints on the subsidiary banks to pay dividends to KeyCorp to have any material effect on the ability of KeyCorp to pay dividends to its shareholders, to service its debt or to meet its other obligations. Federal law also restricts loans and advances from bank subsidiaries to their parent companies (and to nonbank subsidiaries of their parent companies), and requires those transactions to be secured. 6. SECURITIES The amortized cost, unrealized gains and losses, and approximate fair value of Key's investment securities, securities available for sale and other investments were as follows:
DECEMBER 31, 2002 ------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR in millions COST GAINS LOSSES VALUE - -------------------------------------------------------------------------------------------- INVESTMENT SECURITIES States and political subdivisions $ 120 $ 9 -- $ 129 - -------------------------------------------------------------------------------------------- SECURITIES AVAILABLE FOR SALE U.S. Treasury, agencies and corporations $ 22 $ 1 -- $ 23 States and political subdivisions 35 -- -- 35 Collateralized mortgage obligations 7,143 129 $ 65 7,207 Other mortgage-backed securities 815 37 -- 852 Retained interests in securitizations 166 43 -- 209 Other securities 208 -- 27 181 - -------------------------------------------------------------------------------------------- Total securities available for sale $ 8,389 $ 210 $ 92 $ 8,507 ========== ========== ========== ========== - -------------------------------------------------------------------------------------------- OTHER INVESTMENTS Principal investments $ 702 $ 36 $ 61 $ 677 Other securities 242 -- -- 242 - -------------------------------------------------------------------------------------------- Total other investments $ 944 $ 36 $ 61 $ 919 ========== ========== ========== ========== - --------------------------------------------------------------------------------------------
DECEMBER 31, 2001 ------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR in millions COST GAINS LOSSES VALUE - -------------------------------------------------------------------------------------------- INVESTMENT SECURITIES States and political subdivisions $ 225 $ 9 -- $ 234 - -------------------------------------------------------------------------------------------- SECURITIES AVAILABLE FOR SALE U.S. Treasury, agencies and corporations $ 99 -- -- $ 99 States and political subdivisions 21 -- -- 21 Collateralized mortgage obligations 3,791 $ 86 $ 72 3,805 Other mortgage-backed securities 1,008 24 -- 1,032 Retained interests in securitizations 214 20 -- 234 Other securities 232 1 16 217 - -------------------------------------------------------------------------------------------- Total securities available for sale $ 5,365 $ 131 $ 88 $ 5,408 ========== ========== ========== ========== - -------------------------------------------------------------------------------------------- OTHER INVESTMENTS Principal investments $ 699 -- $ 78 $ 621 Other securities 211 -- -- 211 - -------------------------------------------------------------------------------------------- Total other investments $ 910 -- $ 78 $ 832 ========== ========== ========== ========== - --------------------------------------------------------------------------------------------
68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES When Key retains an interest in loans it securitizes, it bears risk that the loans will be prepaid (which would reduce expected interest income) or not paid at all. Key accounts for these retained interests (which include both certificated and uncertificated interests) as debt securities, classifying them as available for sale or as trading account assets. "Other securities" held in the available for sale portfolio primarily are marketable equity securities, including an internally managed portfolio of bank common stock investments. "Other securities" held in the other investments portfolio are equity securities that do not have readily determinable fair values. Realized gains and losses related to securities available for sale were as follows:
YEAR ENDED DECEMBER 31, in millions 2002 2001 2000 - ------------------------------------------------------------------ Realized gains $ 34 $ 40 $ 59 Realized losses 28 5 87 - ------------------------------------------------------------------ Net securities gains (losses) $ 6 $ 35 $(28) ==== ==== ==== - ------------------------------------------------------------------
At December 31, 2002, securities available for sale and investment securities with an aggregate amortized cost of approximately $6.0 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 securities by remaining contractual maturity. Included in securities available for sale are collateralized mortgage obligations, other mortgage- backed securities and retained interests in securitizations. All of these securities are presented based on their expected average lives. Other investments do not have stated maturities and are not included in the table.
SECURITIES INVESTMENT AVAILABLE FOR SALE SECURITIES ------------------- ------------------- DECEMBER 31, 2002 AMORTIZED FAIR AMORTIZED FAIR in millions COST VALUE COST VALUE - -------------------------------------------------------------------------------- Due in one year or less $ 861 $ 874 $ 32 $ 32 Due after one through five years 6,718 6,889 69 76 Due after five through ten years 234 218 18 20 Due after ten years 576 526 1 1 - -------------------------------------------------------------------------------- Total $8,389 $8,507 $ 120 $ 129 ====== ====== ====== ====== - -------------------------------------------------------------------------------=
7. LOANS Key's loans by category are summarized as follows:
DECEMBER 31, in millions 2002 2001 - ---------------------------------------------------------------------- Commercial, financial and agricultural $ 17,425 $ 18,159 Commercial real estate: Commercial mortgage 6,015 6,669 Construction 5,659 5,878 - ---------------------------------------------------------------------- Total commercial real estate loans 11,674 12,547 Commercial lease financing 7,513 7,357 - ---------------------------------------------------------------------- Total commercial loans 36,612 38,063 Real estate--residential mortgage 1,968 2,315 Home equity 13,804 11,184 Consumer--direct 2,161 2,342 Consumer--indirect: Automobile lease financing 873 2,036 Automobile loans 2,181 2,497 Marine 2,088 1,780 Other 667 1,036 - ---------------------------------------------------------------------- Total consumer--indirect loans 5,809 7,349 - ---------------------------------------------------------------------- Total consumer loans 23,742 23,190 Loans held for sale: Commercial, financial and agricultural 41 -- Real estate--commercial mortgage 193 252 Real estate--residential mortgage 57 116 Education 1,812 1,688 - ---------------------------------------------------------------------- Total loans held for sale 2,103 2,056 - ---------------------------------------------------------------------- Total loans $ 62,457 $ 63,309 ========= ========= - ----------------------------------------------------------------------
Key uses interest rate swaps to manage interest rate risk; these swaps modify the repricing and maturity characteristics of certain loans. For more information about such swaps at December 31, 2002, see Note 20 ("Derivatives and Hedging Activities"), which begins on page 84. Commercial and consumer lease financing receivables in the preceding table primarily are direct financing leases, but also include leveraged leases and operating leases. The composition of the net investment in direct financing leases is as follows:
DECEMBER 31, in millions 2002 2001 - -------------------------------------------------------------------------- Direct financing lease receivable $ 5,384 $ 6,785 Unearned income (639) (888) Unguaranteed residual value 637 716 Deferred fees and costs 38 38 - -------------------------------------------------------------------------- Net investment in direct financing leases $ 5,420 $ 6,651 ======= ======= - --------------------------------------------------------------------------
Minimum future lease payments to be received at December 31, 2002, are as follows: 2003--$1.0 billion; 2004--$980 million; 2005--$1.1 billion; 2006--$793 million; 2007--$749 million; and all subsequent years--$807 million. Changes in the allowance for loan losses are summarized as follows:
YEAR ENDED DECEMBER 31, in millions 2002 2001 2000 - ------------------------------------------------------------------------------- Balance at beginning of year $ 1,677 $ 1,001 $ 930 Charge-offs (905) (784) (522) Recoveries 125 111 108 - ------------------------------------------------------------------------------- Net charge-offs (780) (673) (414) Provision for loan losses 553 1,350 490 Allowance related to loans acquired (sold), net 2 (1) (5) - ------------------------------------------------------------------------------- Balance at end of year $ 1,452 $ 1,677 $ 1,001 ======= ======= ======= - -------------------------------------------------------------------------------
69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES 8. LOAN SECURITIZATIONS AND VARIABLE INTEREST ENTITIES RETAINED INTERESTS IN LOAN SECURITIZATIONS Key sells certain types of loans in securitizations. A securitization involves the sale of a pool of loan receivables to investors through either a public or private issuance of asset-backed securities. Generally, the assets are transferred to a trust that sells interests in the form of certificates of ownership. In some cases, Key retains an interest in the securitized loans. Certain assumptions and estimates are used to determine the fair value allocated to these retained interests at the date of transfer and at subsequent measurement dates. These assumptions and estimates include loan repayment rates, projected charge-offs and discount rates commensurate with the risks involved. Additional information pertaining to Key's residual interests is disclosed in Note 1 ("Summary of Significant Accounting Policies") under the heading "Loan Securitizations" on page 59. Key securitized and sold $792 million of education loans (including accrued interest) in 2002 and $523 million in 2001. The securitizations resulted in an aggregate gain of $7 million in 2002 (from gross cash proceeds of $799 million) and $11 million in 2001 (from gross cash proceeds of $534 million). In these transactions, Key retained residual interests in the form of servicing assets and interest-only strips. During 2002, Key retained servicing assets of $6 million and interest-only strips of $26 million. During 2001, Key retained servicing assets of $4 million and interest-only strips of $16 million. Primary economic assumptions used to measure the fair value of Key's retained interests and the sensitivity of the current fair value of residual cash flows to immediate adverse changes in those assumptions are as follows:
DECEMBER 31, 2002 EDUCATION HOME EQUITY AUTOMOBILE dollars in millions LOANS LOANS LOANS - ----------------------------------------------------------------------------------------------------------------------------- Carrying amount (fair value) of retained interests $209 $76 $ 8 Weighted-average life (years) 1.1 -- 5.3 1.9 -- 2.8 .5 - ----------------------------------------------------------------------------------------------------------------------------- PREPAYMENT SPEED ASSUMPTIONS (ANNUAL RATE) 7.99% -- 16.32% 23.89% -- 27.10% 1.59% Impact on fair value of 1% CPR (education and home equity) and .10% ABS (automobile) adverse change $ (6) $(1) -- Impact on fair value of 2% CPR (education and home equity) and .20% ABS (automobile) adverse change (11) (2) -- - ----------------------------------------------------------------------------------------------------------------------------- EXPECTED CREDIT LOSSES (STATIC RATE) .01% -- 1.58% 1.27% -- 2.59% 5.51% Impact on fair value of .10% (education) and .25% (home equity and automobile) adverse change $ (7) $(5) $(1) Impact on fair value of .20% (education) and .50% (home equity and automobile) adverse change (14) (9) (2) - ----------------------------------------------------------------------------------------------------------------------------- RESIDUAL CASH FLOWS DISCOUNT RATE (ANNUAL RATE) 8.50% -- 12.00% 7.50% -- 10.75% 9.00% Impact on fair value of 1% adverse change $ (6) $(1) -- Impact on fair value of 2% adverse change (12) (2) -- - ----------------------------------------------------------------------------------------------------------------------------- EXPECTED STATIC DEFAULT (STATIC RATE) 10.46% -- 16.04% N/A N/A Impact on fair value of 1% (education loans) adverse change $ (8) N/A N/A Impact on fair value of 2% (education loans) adverse change (16) N/A N/A - ----------------------------------------------------------------------------------------------------------------------------- VARIABLE RETURNS TO TRANSFEREES (a) (b) (c) - -----------------------------------------------------------------------------------------------------------------------------
These sensitivities are hypothetical and should be relied upon with caution. Sensitivity analysis for each asset type is based on the nature of the asset, the seasoning (i.e., age and payment history) of the portfolio and the results experienced. Changes in fair value based on a 1% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption; in reality, changes in one factor may cause changes in another. For example, increases in market interest rates may result in lower prepayments and increased credit losses, which might magnify or counteract the sensitivities. (a) Forward London Interbank Offered Rate (known as "LIBOR") plus contractual spread over LIBOR ranging from .06% to .75%, or Treasury plus contractual spread over Treasury ranging from .65% to 1.00% or fixed rate yield. (b) Forward LIBOR plus contractual spread over LIBOR ranging from .23% to .40%, or Treasury plus contractual spread over Treasury ranging from 2.40% to 2.95% or fixed rate yield. (c) Fixed rate yield. CPR = Constant Prepayment Rate, ABS = Absolute Prepayment Speed, N/A = Not Applicable 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES Information about the components of Key's managed loans (i.e., loans held in portfolio and securitized loans), as well as related delinquencies and net credit losses is as follows:
DECEMBER 31, -------------------------------------- LOANS PAST DUE NET CREDIT LOSSES LOAN PRINCIPAL 60 DAYS OR MORE DURING THE YEAR ------------------- --------------- ------------------ in millions 2002 2001 2002 2001 2002 2001 - -------------------------------------------------------------------------------------------------------- Education loans $ 6,336 $ 5,964 $166 $161 $ 19 $ 13 Home equity loans 14,242 11,925 237 200 58 104 Automobile loans 2,235 2,628 24 41 84 106 - -------------------------------------------------------------------------------------------------------- Total loans managed 22,813 20,517 427 402 161 223 Less: Loans securitized 5,016 5,148 209 238 16 20 Loans held for sale or securitization 1,812 1,688 -- -- -- -- - -------------------------------------------------------------------------------------------------------- Loans held in portfolio $15,985 $13,681 $218 $164 $ 145 $203 ======= ======= ==== ==== ====== ==== - --------------------------------------------------------------------------------------------------------
VARIABLE INTEREST ENTITIES A variable interest entity ("VIE") is a partnership, limited liability company, trust or other legal entity that is not controlled through a voting equity interest and/or does not have enough equity at risk invested to finance its activities without subordinated financial support from another party. FASB Interpretation No. 46, "Consolidation of Variable Interest Entities," addresses the consolidation of VIEs. This interpretation is summarized in Note 1 ("Summary of Significant Accounting Policies") under the heading "Accounting Pronouncements Pending Adoption" on page 62. Under Interpretation No. 46, VIEs are consolidated by the party (the primary beneficiary) who is exposed to the majority of the VIE's expected losses and/or residual returns. The securitization trusts referred to in the "Retained Interests in Loan Securitizations" section of this note are VIEs; however, as qualifying special purpose entities under SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," they are exempt from consolidation under Interpretation No. 46. As required by Interpretation No. 46, Key is assessing its relationships and arrangements with legal entities formed prior to February 1, 2003, to identify VIEs in which Key holds a significant variable interest and to determine if Key is the primary beneficiary of these entities and should therefore consolidate them. Based on the review performed to date, it is reasonably possible that Key will have to consolidate (if primary beneficiary) or only disclose significant variable interests in the following entities, as currently structured, when Interpretation No. 46 becomes effective on July 1, 2003. COMMERCIAL PAPER CONDUITS. Key, among others, refers third party assets and borrowers and provides liquidity and credit enhancement to an unconsolidated asset-backed commercial paper conduit. The conduit had assets of $423 million at December 31, 2002. In addition, Key holds a subordinated note in and provides referral services and liquidity to one program, also unconsolidated, within another asset-backed commercial paper conduit. This program had assets of $79 million at December 31, 2002. These assets are expected to decrease over time since this conduit program is in the process of being liquidated. At December 31, 2002, Key's maximum exposure to loss from its interests in these conduits totaled $79 million, which represents a $68 million committed credit enhancement facility and an $11 million subordinated note. Additional information pertaining to Key's involvement with conduits is summarized in Note 1 ("Summary of Significant Accounting Policies") under the heading "Basis of Presentation" on page 57 and in Note 19 ("Commitments, Contingent Liabilities and Guarantees") under the heading "Guarantees" on page 83 and the heading "Other Off-Balance Sheet Risk" on page 84. LOW-INCOME HOUSING TAX CREDIT ("LIHTC") GUARANTEED FUNDS. Key Affordable Housing Corporation ("KAHC") forms unconsolidated limited partnerships (funds) which invest in LIHTC projects. Interests in these funds are offered to qualified investors, who pay a fee to KAHC for a guaranteed return. Key also earns syndication and asset management fees from these funds. At December 31, 2002, the guaranteed funds had unamortized equity of $676 million. Additional information on the return guaranty agreement with LIHTC investors is summarized in Note 19 ("Commitments, Contingent Liabilities and Guarantees") under the heading "Guarantees" on page 83. Key's maximum exposure to loss from its relationships with the above entities was $851 million at December 31, 2002, which represents undiscounted future payments due to investors for the return on and of their investments. KAHC has established a reserve in the amount of $35 million at December 31, 2002, which management believes will be sufficient to absorb future estimated losses under the guarantees. LIHTC INVESTMENTS. Key makes investments directly in LIHTC projects through the Retail Banking line of business. As a limited partner in these unconsolidated projects, Key is allocated tax credits and deductions associated with the underlying properties. At December 31, 2002, Key's investments in these projects totaled $298 million. Key has not yet completed its analysis of these entities under Interpretation No. 46. 71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES COMMERCIAL REAL ESTATE INVESTMENTS. Through the National Commercial Real Estate line of business, Key provides real estate financing for new construction, acquisition and rehabilitation projects. In certain of these unconsolidated projects, Key has provided or committed funds through limited partnership interests, mezzanine investments or standby letters of credit. At December 31, 2002, these investments and facilities totaled $131 million. Key has not yet completed its analysis of these investments under Interpretation No. 46. Key is continuing to evaluate its relationships with, and investments in, these entities as well as others to assess whether it is reasonably possible that consolidation or disclosure of significant interests in such entities will be necessary when the guidance provided under Interpretation No. 46 becomes effective for existing VIEs on July 1, 2003. 9. IMPAIRED LOANS AND OTHER NONPERFORMING ASSETS Impaired loans, which account for the largest portion of Key's nonperforming assets, totaled $610 million at December 31, 2002, compared with $661 million at December 31, 2001. Impaired loans averaged $653 million for 2002 and $535 million for 2001. Key's nonperforming assets were as follows:
DECEMBER 31, in millions 2002 2001 - -------------------------------------------------------------- Impaired loans $610 $661 Other nonaccrual loans 333 249 - -------------------------------------------------------------- Total nonperforming loans 943 910 Other real estate owned (OREO) 48 38 Allowance for OREO losses (3) (1) - -------------------------------------------------------------- OREO, net of allowance 45 37 Other nonperforming assets 5 -- - -------------------------------------------------------------- Total nonperforming assets $993 $947 ==== ==== - --------------------------------------------------------------
At December 31, 2002, Key did not have any significant commitments to lend additional funds to borrowers with loans on nonperforming status. Key evaluates most impaired loans individually using the process described in Note 1 ("Summary of Significant Accounting Policies") under the heading "Allowance for Loan Losses" on page 58. At December 31, 2002, Key had $377 million of impaired loans with a specifically allocated allowance for loan losses of $179 million, and $233 million of impaired loans that were carried at their estimated fair value without a specifically allocated allowance. At December 31, 2001, impaired loans included $417 million of loans with a specifically allocated allowance of $180 million, and $244 million that were carried at their estimated fair value. Key does not perform a specific impairment valuation for smaller-balance, homogeneous, nonaccrual loans (shown in the preceding table as "Other nonaccrual loans"). These typically are consumer loans, including residential mortgages, home equity loans and various types of installment loans. Management applies historical loss experience rates to these loans, adjusted to reflect 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 2002 2001 2000 - -------------------------------------------------------------- Interest income receivable under original terms $50 $52 $62 Less: Interest income recorded during the year 20 21 25 - -------------------------------------------------------------- Net reduction to interest income $30 $31 $37 === === === - --------------------------------------------------------------
10. GOODWILL AND OTHER INTANGIBLE ASSETS Effective January 1, 2002, Key adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which eliminates the amortization of goodwill and intangible assets deemed to have indefinite lives. Key's total amortization expense was $11 million for 2002, $245 million for 2001 and $101 million for 2000. Estimated amortization expense for intangible assets subject to amortization for each of the next five years is as follows: 2003 -- $12 million; 2004 -- $8 million; 2005 - -- $3 million; 2006 -- $3 million; and 2007 -- $3 million. 72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES The calculation of Key's net income and earnings per common share, excluding goodwill amortization, is presented below.
YEAR ENDED DECEMBER 31, dollars in millions, except per share amounts 2002 2001 2000 - ------------------------------------------------------------------------------------------------- EARNINGS Net income $ 976 $ 132 $ 1,002 Add: Goodwill amortization -- 82(a) 86 - ------------------------------------------------------------------------------------------------- Adjusted net income $ 976 $ 214 $ 1,088 ======== ======== ======== - ------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE COMMON SHARES Weighted average common shares outstanding (000) 425,451 424,275 432,617 Weighted average common shares and potential common shares outstanding (000) 430,703 429,573 435,573 - ------------------------------------------------------------------------------------------------- EARNINGS PER COMMON SHARE Net income per common share $ 2.29 $ .31 $ 2.32 Add: Goodwill amortization -- .19(a) .20 - ------------------------------------------------------------------------------------------------- Adjusted net income per common share $ 2.29 $ .50 $ 2.52 ======== ======== ======== Adjusted net income per common share--assuming dilution $ 2.27 $ .50 $ 2.50 ======== ======== ======== - -------------------------------------------------------------------------------------------------
(a) Goodwill amortization for 2001 excludes a $150 million write-down (equivalent to $.35 per both basic and diluted common share) associated with Key's decision to downsize the automobile finance business. The following table shows the gross carrying amount and the accumulated amortization of intangible assets that are subject to amortization.
DECEMBER 31, 2002 2001 -------------------------------- ------------------------------- GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED in millions AMOUNT AMORTIZATION AMOUNT AMORTIZATION - ---------------------------------------------------------------------------------------------------------------- Intangible assets subject to amortization: Core deposit intangibles $227 $197 $215 $187 Other intangible assets 11 6 9 6 - ---------------------------------------------------------------------------------------------------------------- Total $238 $203 $224 $193 ==== ==== ==== ==== - ----------------------------------------------------------------------------------------------------------------
During 2002, core deposit intangibles with a fair value of $13 million were acquired in conjunction with the purchase of Union Bankshares and are being amortized using the straight-line method over seven years. Additional information pertaining to this acquisition is discussed in Note 3 ("Acquisitions and Divestitures") on page 64. During 2002, Key performed transitional impairment testing of goodwill at January 1, 2002, that was completed during the first quarter and annual impairment testing of goodwill at October 1, 2002, that was completed during the fourth quarter. Both tests determined that no impairment of Key's goodwill existed at either of those dates. Additional information pertaining to the new accounting guidance is included in Note 1 ("Summary of Significant Accounting Policies") under the heading "Goodwill and Other Intangible Assets" on page 59. Changes in the carrying amount of goodwill by major business group are as follows:
KEY CONSUMER KEY CORPORATE KEY CAPITAL in millions BANKING FINANCE PARTNERS TOTAL - ------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2001 $446 $202 $455 $1,103 Additional goodwill: Union Bankshares acquisition 34 -- -- 34 Conning Asset Management acquisition -- 5 -- 5 - ------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2002 $480 $207 $455 $1,142 ==== ==== ==== ====== - -------------------------------------------------------------------------------------------------
73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES 11. SHORT-TERM BORROWINGS Selected financial information pertaining to the components of Key's short-term borrowings is as follows:
dollars in millions 2002 2001 2000 - ------------------------------------------------------------------------------ FEDERAL FUNDS PURCHASED Balance at year end $2,147 $2,591 $3,267 Average during the year 3,984 3,575 2,991 Maximum month-end balance 5,983 5,034 4,693 Weighted average rate during the year 1.71% 4.00% 6.42% Weighted average rate at December 31 1.19 1.72 6.68 - ------------------------------------------------------------------------------ SECURITIES SOLD UNDER REPURCHASE AGREEMENTS Balance at year end $1,715 $1,144 $1,669 Average during the year 1,543 1,622 1,940 Maximum month-end balance 2,313 1,807 2,447 Weighted average rate during the year 1.49% 3.39% 4.90% Weighted average rate at December 31 1.26 1.80 6.01 - ------------------------------------------------------------------------------ SHORT-TERM BANK NOTES Balance at year end $ 575 $3,748 $4,345 Average during the year 1,700 4,649 5,021 Maximum month-end balance 3,048 6,098 6,834 Weighted average rate during the year 1.94% 5.01% 7.35% Weighted average rate at December 31 2.05 2.16 8.28 - ------------------------------------------------------------------------------ OTHER SHORT-TERM BORROWINGS Balance at year end $2,248 $1,801 $2,612 Average during the year 1,243 2,179 2,100 Maximum month-end balance 2,248 2,841 2,326 Weighted average rate during the year 1.29% 2.39% 3.10% Weighted average rate at December 31 .83 2.18 3.31 - ------------------------------------------------------------------------------
Key uses interest rate swaps and caps, which modify the repricing and maturity characteristics of certain short-term borrowings, to manage interest rate risk. For more information about such financial instruments at December 31, 2002, see Note 20 ("Derivatives and Hedging Activities"),which begins on page 84. 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 ("KBNA") and $1.0 billion by Key Bank USA, National Association ("Key Bank USA")] of bank notes with original maturities ranging from 30 days to 30 years. At December 31, 2002, $18.1 billion was available for future issuance under this program. EURO NOTE PROGRAM. KeyCorp, KBNA and Key Bank USA may issue both long- and short-term debt of up to $10.0 billion to non-U.S. investors. This facility had $4.2 billion available for future issuance as of December 31, 2002. KEYCORP MEDIUM-TERM NOTE PROGRAM AND OTHER SECURITIES. KeyCorp has registered with the Securities and Exchange Commission to provide for the issuance of up to $2.2 billion of securities, which could include long- or short-term debt, or equity securities. Of the amount registered, $1.0 billion has been allocated for the issuance of medium-term notes. At December 31, 2002, unused capacity under KeyCorp's universal shelf registration statement totaled $1.8 billion, including $575 million allocated for the issuance of medium-term notes. COMMERCIAL PAPER AND REVOLVING CREDIT. KeyCorp's commercial paper program and a revolving credit agreement provide funding availability of up to $500 million and $400 million, respectively. There were no borrowings outstanding under the commercial paper program at December 31, 2002. Borrowings outstanding under the commercial paper program totaled $25 million at December 31, 2001. There were no borrowings outstanding under the revolving credit agreement at December 31, 2002 and 2001. The revolving credit agreement serves as a back-up facility for the commercial paper program. LINE OF CREDIT. KBNA has overnight borrowing capacity at the Federal Reserve Bank. At December 31, 2002, this capacity was approximately $17.5 billion and was secured by approximately $22.5 billion of loans, primarily those in the commercial portfolio. There were no borrowings outstanding under this facility at December 31, 2002 or 2001. 74 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES 12. 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 2002 2001 - ----------------------------------------------------------------------- Senior medium-term notes due through 2005(a) $ 1,445 $ 1,286 Subordinated medium-term notes due through 2003(a) 45 85 Senior euro medium-term notes due through 2003(b) 50 50 7.50% Subordinated notes due 2006(c) 250 250 6.75% Subordinated notes due 2006(c) 200 200 8.125% Subordinated notes due 2002(c) -- 200 8.00% Subordinated notes due 2004(c) 125 125 6.625% Subordinated notes due 2017(c) 24 -- All other long-term debt(i) 36 16 - ----------------------------------------------------------------------- Total parent company(j) 2,175 2,212 Senior medium-term bank notes due through 2039(d) 3,854 4,525 Senior euro medium-term bank notes due through 2007(e) 4,792 3,989 6.50% Subordinated remarketable notes due 2027(f) 311 311 6.95% Subordinated notes due 2028(f) 300 300 7.125% Subordinated notes due 2006(f) 250 250 7.25% Subordinated notes due 2005(f) 200 200 6.75% Subordinated notes due 2003(f) 200 200 7.50% Subordinated notes due 2008(f) 165 165 7.00% Subordinated notes due 2011(f) 607 506 7.30% Subordinated notes due 2011(f) 107 107 7.85% Subordinated notes due 2002(f) -- 93 7.55% Subordinated notes due 2006(f) 75 75 7.375% Subordinated notes due 2008(f) 70 70 5.70% Subordinated notes due 2012(f) 300 -- 5.70% Subordinated notes due 2017(f) 200 -- Lease financing debt due through 2006(g) 435 519 Federal Home Loan Bank advances due through 2033(h) 1,018 762 All other long-term debt(i) 546 270 - ----------------------------------------------------------------------- Total subsidiaries 13,430 12,342 - ----------------------------------------------------------------------- Total long-term debt $15,605 $14,554 ======= ======= - -----------------------------------------------------------------------
Key uses interest rate swaps and caps, which modify the repricing and maturity characteristics of certain long-term debt, to manage interest rate risk. For more information about such financial instruments at December 31, 2002, see Note 20 ("Derivatives and Hedging Activities"), which begins on page 84. (a) At December 31, 2002, the senior medium-term notes had a weighted average interest rate of 2.54%, and the subordinated medium-term notes had a weighted average interest rate of 7.30%. At December 31, 2001, the senior medium-term notes had a weighted average interest rate of 2.51%, and the subordinated medium-term notes had a weighted average interest rate of 7.42%. These notes had a combination of fixed and floating interest rates. (b) Senior euro medium-term notes had a weighted average interest rate of 1.62% at December 31, 2002, and 2.33% at December 31, 2001. These notes had a floating interest rate based on the three-month LIBOR. (c) These notes may not be redeemed or prepaid prior to maturity. (d) Senior medium-term bank notes of subsidiaries had weighted average interest rates of 2.59% at December 31, 2002, and 2.45% at December 31, 2001. These notes had a combination of fixed and floating interest rates. (e) Senior euro medium-term notes had weighted average interest rates of 1.79% at December 31, 2002, and 2.58% at December 31, 2001. These notes, which are obligations of KBNA, had a combination of fixed interest rates and floating interest rates based on LIBOR. (f) These notes are all obligations of KBNA, with the exception of the 7.55% notes, which are obligations of Key Bank USA. None of the subordinated notes may be redeemed prior to their maturity dates. (g) Lease financing debt had weighted average interest rates of 7.14% at December 31, 2002, and 7.41% at December 31, 2001. This category of debt consists of primarily nonrecourse debt collateralized by leased equipment under operating, direct financing and sales type leases. (h) Long-term advances from the Federal Home Loan Bank had weighted average interest rates of 1.71% at December 31, 2002, and 2.19% at December 31, 2001. These advances, which had a combination of fixed and floating interest rates, were secured by real estate loans and securities totaling $1.4 billion at December 31, 2002, and $1.1 billion at December 31, 2001. (i) Other long-term debt, consisting of industrial revenue bonds, capital lease obligations, and various secured and unsecured obligations of corporate subsidiaries, had weighted average interest rates of 6.29% at December 31, 2002, and 6.72% at December 31, 2001. (j) At December 31, 2002, unused capacity under KeyCorp's universal shelf registration statement filed with the Securities and Exchange Commission totaled $1.8 billion, including $575 million which was allocated for the issuance of medium-term notes. Scheduled principal payments on long-term debt over the next five years are as follows:
in millions PARENT SUBSIDIARIES TOTAL - ------------------------------------------------- 2003 $773 $3,657 $4,430 2004 490 3,112 3,602 2005 403 1,909 2,312 2006 450 785 1,235 2007 -- 1,441 1,441 - -------------------------------------------------
13. CAPITAL SECURITIES KeyCorp has six fully-consolidated subsidiary business trusts that have issued corporation-obligated mandatorily redeemable preferred capital securities ("capital securities"). These securities are carried as liabilities on Key's balance sheet. They provide an attractive source of funds since they constitute Tier I capital for regulatory reporting purposes, but have the same tax advantages as debt for federal income tax purposes. As guarantor, KeyCorp unconditionally guarantees payment of: - - required distributions on the capital securities; - - the redemption price when a capital security is redeemed; and - - amounts due if a trust is liquidated or terminated. KeyCorp owns the outstanding common stock of each of the trusts. The trusts used the proceeds from the issuance of their capital securities and common stock to buy debentures issued by their respective parent company: KeyCorp in the case of the Key trusts, and Union Bankshares, Ltd. in the case of the Union trust. These debentures are the trusts' only assets; 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 effects on the income statement because they are eliminated in consolidation. 75 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES The capital securities, common stock and related debentures are summarized as follows:
PRINCIPAL INTEREST RATE MATURITY CAPITAL AMOUNT OF OF CAPITAL OF CAPITAL SECURITIES, COMMON DEBENTURES, SECURITIES AND SECURITIES AND dollars in millions NET OF DISCOUNT(a) STOCK NET OF DISCOUNT(b) DEBENTURES(c) DEBENTURES - ----------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 2002 KeyCorp Institutional Capital A $ 413 $11 $ 361 7.826% 2026 KeyCorp Institutional Capital B 177 4 154 8.250 2026 KeyCorp Capital I 230 8 237 2.546 2028 KeyCorp Capital II 182 8 165 6.875 2029 KeyCorp Capital III 248 8 208 7.750 2029 Union Bankshares Capital Trust I(d) 10 1 11 9.000 2028 - ----------------------------------------------------------------------------------------------------------------------------------- Total $1,260 $40 $1,136 6.779% -- ====== === ====== - ----------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 2001 $1,288 $39 $1,282 6.824% -- ====== === ====== - -----------------------------------------------------------------------------------------------------------------------------------
(a) The capital securities must be redeemed 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. Included in certain capital securities at December 31, 2002 and 2001, are basis adjustments of $164 million and $45 million, respectively, related to fair value hedges. See Note 20 ("Derivatives and Hedging Activities"), which begins on page 84, for an explanation of fair value hedges. (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), July 16, 1999 (for debentures owned by Capital III), and December 17, 2003 (for debentures owned by Union Bankshares Capital Trust I); 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 or Union Bankshares Capital Trust 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 be the greater of: (a) the principal amount, plus any accrued but unpaid interest or (b) 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 generally is slightly more favorable to Key. (c) The interest rates for Capital A, Capital B, Capital II, Capital III and Union Bankshares Capital Trust I are fixed. Capital I has a floating interest rate equal to three-month LIBOR plus 74 basis points; it reprices quarterly. The rates shown as the total at December 31, 2002 and 2001, are weighted average rates. (d) On December 12, 2002, KeyCorp acquired Union Bankshares, Ltd., the owner of all the common stock of Union Bankshares Capital Trust I and the guarantor of all the trust's obligations under its capital securities. On January 16, 2003, Union Bankshares, Ltd. merged into KeyCorp. As a result of this merger, KeyCorp became the owner of the common stock of the trust and the guarantor of all the trust's obligations under its capital securities. During 2002, the subsidiary business trusts repurchased an aggregate $159 million of their outstanding capital securities and KeyCorp repurchased a like amount of the related debentures. Management intends to replace the capital securities at some future date with capital securities that will yield a lower cost. 14. 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 apiece, 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 federal banking regulators. Sanctions for failure to meet applicable capital requirements may include regulatory enforcement actions that restrict dividend payments, require the adoption of remedial measures to increase capital, terminate Federal Deposit Insurance Corporation ("FDIC") deposit insurance, and mandate the appointment of a conservator or receiver in severe cases. As of December 31, 2002, KeyCorp and its bank subsidiaries met all capital requirements. Federal bank regulators apply certain capital ratios to assign FDIC- insured depository institutions to one of five categories: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." At December 31, 2002 and 2001, the most recent regulatory notification classified each of KeyCorp's subsidiary banks as "well capitalized." Management does not believe there have been any changes in condition or events since those notifications that would cause the banks' classifications to change. Unlike bank subsidiaries, bank holding companies are not classified by capital adequacy. However, Key satisfied the criteria for a "well capitalized" institution at December 31, 2002 and 2001. The FDIC- defined capital categories serve a limited regulatory function and may not accurately represent the overall financial condition or prospects of Key or its affiliates. 76 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES The following table presents Key's, KBNA's and Key Bank USA'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 FEDERAL DEPOSIT ACTUAL REQUIREMENTS INSURANCE ACT ---------------------- --------------------- ----------------------- dollars in millions AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - ---------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 2002 TOTAL CAPITAL TO NET RISK-WEIGHTED ASSETS Key $10,257 12.51% $6,558 8.00% N/A N/A KBNA 8,248 11.19 5,899 8.00 $7,374 10.00% Key Bank USA 837 12.04 556 8.00 695 10.00 TIER 1 CAPITAL TO NET RISK-WEIGHTED ASSETS Key $ 6,632 8.09% $3,279 4.00% N/A N/A KBNA 5,054 6.85 2,949 4.00 $4,424 6.00% Key Bank USA 713 10.25 278 4.00 417 6.00 TIER 1 CAPITAL TO AVERAGE ASSETS Key $ 6,632 8.15% $2,440 3.00% N/A N/A KBNA 5,054 6.93 2,915 4.00 $3,644 5.00% Key Bank USA 713 8.50 335 4.00 419 5.00 - ---------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 2001 TOTAL CAPITAL TO NET RISK-WEIGHTED ASSETS Key $ 9,548 11.41% $6,696 8.00% N/A N/A KBNA 7,970 10.63 5,993 8.00 $7,492 10.00% Key Bank USA 746 11.48 520 8.00 650 10.00 TIER 1 CAPITAL TO NET RISK-WEIGHTED ASSETS Key $ 6,222 7.43% $3,348 4.00% N/A N/A KBNA 5,170 6.90 2,997 4.00 $4,495 6.00% Key Bank USA 618 9.51 260 4.00 390 6.00 TIER 1 CAPITAL TO AVERAGE ASSETS Key $ 6,222 7.65% $2,440 3.00% N/A N/A KBNA 5,170 7.13 2,897 4.00 $3,622 5.00% Key Bank USA 618 8.53 290 4.00 362 5.00 - ----------------------------------------------------------------------------------------------------------------------------
N/A = Not Applicable DEFERRED COMPENSATION OBLIGATION Key maintains various deferred compensation plans, under which employees and directors can defer a portion of their compensation for future distribution. All or a portion of such deferrals will be distributed in the form of KeyCorp common shares. Effective December 31, 2002, Key reclassified its $68 million obligation relating to the portion of deferred compensation payable in KeyCorp common shares from "other liabilities" to "capital surplus" in accordance with EITF 97-14,"Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested." Among other things, EITF 97-14, which became effective March 19, 1998, for deferrals after that date, requires that the deferred compensation obligation to be settled by the delivery of shares be classified in equity without any subsequent expense recognition for changes in the market value of the underlying shares. Key did not reclassify its obligation in prior years because it was not material. 15. 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 become exercisable at the rate of 33% per year beginning one year from their grant date and expire no later than 10 years from their grant date. At December 31, 2002, KeyCorp had 1,680,959 common shares available for future grant, compared with 3,569,750 at December 31, 2001. 77 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES The following table summarizes activity, pricing and other information about Key's stock options.
2002 2001 -------------------------------- ---------------------------------- WEIGHTED AVERAGE WEIGHTED AVERAGE OPTIONS PRICE PER OPTION OPTIONS PRICE PER OPTION - ------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 34,246,323 $ 24.66 34,291,153 $ 23.72 Granted 7,918,780 24.85 7,377,680 28.02 Exercised 2,346,983 16.08 2,212,746 14.96 Lapsed or canceled 2,142,189 26.54 5,209,764 27.27 - ------------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 37,675,931 $ 25.14 34,246,323 $ 24.66 - ------------------------------------------------------------------------------------------------------------------------- Exercisable at end of year 16,368,542 $ 26.45 19,501,856 $ 24.80 - ------------------------------------------------------------------------------------------------------------------------- Weighted average fair value of options granted during the year $ 3.95 $ 6.26 - -------------------------------------------------------------------------------------------------------------------------
The following table summarizes the range of exercise prices and other related information pertaining to Key's stock options at December 31, 2002.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ----------------------------------------------------------------------------------- -------------------------------- RANGE OF WEIGHTED WEIGHTED AVERAGE WEIGHTED EXERCISE NUMBER OF AVERAGE PRICE REMAINING OPTIONS AVERAGE PRICES OPTIONS PER OPTION LIFE (YEARS) EXERCISABLE PRICE - ------------------------------------------------------------------------------------------------------------------------- $8.94-$14.99 2,350,269 $ 14.14 1.7 2,350,269 $ 14.14 15.00-19.99 5,655,710 17.55 5.5 2,175,367 17.26 20.00-24.99 10,463,784 23.50 8.3 194,475 22.44 25.00-29.99 9,760,542 27.52 7.5 2,202,805 26.15 30.00-34.99 9,128,126 31.37 5.6 9,128,126 31.37 35.00-50.00 317,500 43.48 5.8 317,500 43.48 - ------------------------------------------------------------------------------------------------------------------------- Total 37,675,931 $ 25.14 6.6 16,368,542 $ 26.45 - -------------------------------------------------------------------------------------------------------------------------
Information pertaining to Key's method of accounting for employee stock options, including pro forma disclosures of the net income and earnings per share effect of stock options using the "fair value method," are included in Note 1 ("Summary of Significant Accounting Policies") under the heading "Employee Stock Options" on page 61. 16. EMPLOYEE BENEFITS PENSION PLANS Net periodic and total net pension cost (income) for all funded and unfunded plans include the following components.
YEAR ENDED DECEMBER 31, in millions 2002 2001 2000 - ------------------------------------------------------------------------- Service cost of benefits earned $ 40 $ 37 $ 37 Interest cost on projected benefit obligation 54 53 53 Expected return on plan assets (91) (95) (90) Amortization of unrecognized net transition asset -- (2) (5) Amortization of prior service cost -- 1 2 Amortization of losses 3 1 1 - ------------------------------------------------------------------------- Net periodic pension cost (income) 6 (5) (2) Curtailment gain -- -- (2) - ------------------------------------------------------------------------- Total net pension cost (income) $ 6 $ (5) $ (4) ==== ==== ==== - -------------------------------------------------------------------------
The curtailment gain in the above table resulted from Key's competitiveness initiative and related reduction in workforce. Changes in the projected benefit obligation ("PBO") related to Key's pension plans are summarized as follows:
YEAR ENDED DECEMBER 31, in millions 2002 2001 - ------------------------------------------------- PBO at beginning of year $ 787 $ 715 Service cost 40 37 Interest cost 54 53 Actuarial losses 31 57 Plan amendments 3 -- Benefit payments (69) (75) - ------------------------------------------------- PBO at end of year $ 846 $ 787 ===== ===== - -------------------------------------------------
Changes in the fair value of pension plan assets ("FVA") are summarized as follows:
YEAR ENDED DECEMBER 31, in millions 2002 2001 - ------------------------------------------------------- FVA at beginning of year $ 875 $ 1,062 Actual loss on plan assets (101) (121) Employer contributions 12 9 Benefit payments (69) (75) - ------------------------------------------------------- FVA at end of year $ 717 $ 875 ======= ======= - -------------------------------------------------------
78 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES The funded status of the pension plans at September 30 (the actuarial measurement date), reconciled to the amounts recognized in the consolidated balance sheets at December 31, 2002 and 2001, is as follows:
DECEMBER 31, in millions 2002 2001 - -------------------------------------------------------------------- Funded status(a) $(129) $ 88 Unrecognized net loss 375 156 Unrecognized prior service benefit (1) (4) Benefits paid subsequent to measurement date 3 3 - -------------------------------------------------------------------- Net prepaid pension cost $ 248 $ 243 ===== ===== - -------------------------------------------------------------------- Net prepaid pension cost consists of: Prepaid benefit cost $ 342 $ 332 Accrued benefit liability (136) (89) Deferred tax asset 14 -- Intangible asset 3 -- Accumulated other comprehensive loss 25 -- - -------------------------------------------------------------------- Net prepaid pension cost $ 248 $ 243 ===== ===== - --------------------------------------------------------------------
(a) The excess (shortfall) of the fair value of plan assets over the projected benefit obligation. Included in the above table are the effects of certain nonqualified supplemental executive retirement programs ("SERPs") that are unfunded. At December 31, 2002, the projected benefit obligation for these unfunded plans was $148 million (compared with $132 million at the end of 2001), and the accumulated benefit obligation ("ABO") was $139 million (compared with $128 million at the end of 2001). The amount of accrued benefit liability for these plans was $136 million at December 31, 2002, and $89 million at December 31, 2001. Effective December 31, 2002, Key recorded an additional minimum liability ("AML") of $42 million for its SERPs. SFAS No. 87, "Employers' Accounting for Pensions,"requires the recognition of an AML to the extent of any excess of the unfunded ABO over the liability already recognized as unfunded accrued pension cost. The after-tax effect of recording of the AML was a $25 million reduction to "comprehensive income" in 2002. Key did not record an AML in prior years because it was not material. 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, 2002 2001 2000 - ---------------------------------------------------------------- Discount rate 6.50% 7.25% 7.75% Compensation increase rate 4.00 4.00 4.00 Expected return on plan assets 9.75 9.75 9.75 - ----------------------------------------------------------------
Management estimates that Key's net pension cost will be $38 million for 2003, compared with cost of $6 million for 2002 and income of $5 million for 2001. The substantial increase in cost for 2003 is due primarily to a decline in the fair value of plan assets, reflecting continued weakness in the capital markets. The higher cost also reflects an expected return of 9.00% on plan assets, compared with expected returns of 9.75% in 2002 and 2001. Management determines Key's expected return on plan assets by considering a number of factors. Primary among these are: - - Historical returns on Key's plan assets. - - Historical returns that a portfolio with an investment mix similar to Key's would have earned. - - Management's expectations for returns on plan assets over the long term, weighted for the investment mix of the assets. In accordance with Key's current investment policy, plan assets include equity securities, which comprise 65% to 85% of the portfolio; fixed income securities, which comprise 15% to 30% of the portfolio; and convertible securities, which comprise up to 15% of the portfolio. Management estimates that a 25 basis point decrease (increase) in the expected return on plan assets would increase (decrease) Key's net pension cost for 2003 by approximately $2 million. Additionally, pension cost is affected by an assumed discount rate and an assumed compensation increase rate. Management estimates that a 25 basis point change in either or both of these assumed rates would change net pension cost for 2003 by less than $1 million. Despite the 2002 decline in the fair value of plan assets, at December 31, Key's qualified plan was sufficiently funded under the Employee Retirement Income Security Act of 1974, which outlines pension-funding laws. Consequently, no minimum contributions to the plan were required at that time. OTHER POSTRETIREMENT BENEFIT PLANS Key sponsors a contributory postretirement healthcare plan. 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 periodic and total net postretirement benefit cost includes the following components.
YEAR ENDED DECEMBER 31, in millions 2002 2001 2000 - --------------------------------------------------------------------------------- Service cost of benefits earned $ 3 $ 3 $ 3 Interest cost on accumulated postretirement benefit obligation 8 8 7 Expected return on plan assets (2) (2) (2) Amortization of transition obligation 1 4 5 - --------------------------------------------------------------------------------- Net postretirement benefit cost 10 13 13 Curtailment (gain) loss -- (1) 5 - --------------------------------------------------------------------------------- Total net postretirement benefit cost $ 10 $ 12 $ 18 ==== ==== ==== - ---------------------------------------------------------------------------------
The curtailment activity in the above table resulted from the previously mentioned competitiveness initiative and workforce reduction. Changes in the accumulated postretirement benefit obligation ("APBO") are summarized as follows:
YEAR ENDED DECEMBER 31, in millions 2002 2001 - --------------------------------------------------------------- APBO at beginning of year $ 114 $ 106 Service cost 3 3 Interest cost 8 8 Plan participants' contributions 5 4 Actuarial losses 17 9 Benefit payments (19) (16) - --------------------------------------------------------------- APBO at end of year $ 128 $ 114 ===== ===== - ---------------------------------------------------------------
79 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES Changes in the fair value of postretirement plan assets are summarized as follows:
YEAR ENDED DECEMBER 31, in millions 2002 2001 - ------------------------------------------------------------- FVA at beginning of year $ 39 $ 38 Employer contributions 18 19 Plan participants' contributions 5 4 Benefit payments (19) (16) Actual loss on plan assets (4) (6) - ------------------------------------------------------------- FVA at end of year $ 39 $ 39 ==== ==== - -------------------------------------------------------------
The funded status of the postretirement plans at September 30 (the actuarial measurement date), reconciled to the amounts recognized in the consolidated balance sheets at December 31, 2002 and 2001, is as follows:
YEAR ENDED DECEMBER 31, in millions 2002 2001 - ------------------------------------------------------------------- Funded status(a) $(89) $(76) Unrecognized net loss 35 12 Unrecognized prior service cost 2 3 Unrecognized transition obligation 40 44 Contributions/benefits paid subsequent to measurement date 10 9 - ------------------------------------------------------------------- Accrued postretirement benefit cost $ (2) $ (8) ==== ==== - -------------------------------------------------------------------
(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 2003 is 10.0% for both Medicare-eligible retirees and non-Medicare-eligible retirees. The rate is assumed to decrease gradually to 5.0% by the year 2013 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 benefit 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 benefit cost, management assumed the following weighted average rates:
YEAR ENDED DECEMBER 31, 2002 2001 2000 - ---------------------------------------------------------------- Discount rate 6.50% 7.25% 7.75% Expected return on plan assets 5.73 5.71 5.71 - ----------------------------------------------------------------
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 from 1% to 16% (1% to 10% prior to January 1, 2002) 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 $54 million in 2002, $42 million in 2001 and $51 million in 2000. 17. 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 2002 2001 2000 - ------------------------------------------------------------------------ Currently payable: Federal $ 150 $ 222 $ 147 State 31 19 33 - ------------------------------------------------------------------------ 181 241 180 Deferred: Federal 150 (133) 307 State 5 (6) 28 - ------------------------------------------------------------------------ 155 (139) 335 - ------------------------------------------------------------------------ Total income tax expense(a) $ 336 $ 102 $ 515 ===== ===== ===== - ------------------------------------------------------------------------
(a) Income tax expense (benefit) on securities transactions totaled $2 million in 2002, $14 million in 2001 and ($10) million in 2000. Income tax expense in the above table 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 recorded in noninterest expense on the income statement and totaled $26 million in 2002, $29 million in 2001 and $33 million in 2000. Significant components of Key's deferred tax assets and liabilities are as follows:
DECEMBER 31, in millions 2002 2001 - --------------------------------------------------------------------------- Provision for loan losses $ 477 $ 604 Restructuring charges 10 22 Write-down of OREO 4 5 Other 268 294 - --------------------------------------------------------------------------- Total deferred tax assets 759 925 Leasing income reported using the operating method for tax purposes 2,104 1,853 Net unrealized securities gains 57 18 Depreciation 12 -- Other 388 606 - --------------------------------------------------------------------------- Total deferred tax liabilities 2,561 2,477 - --------------------------------------------------------------------------- Net deferred tax liabilities $1,802 $1,552 ====== ====== - ---------------------------------------------------------------------------
80 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES The following table shows how Key arrived at total income tax expense and the effective tax rate.
YEAR ENDED DECEMBER 31, 2002 2001 2000 -------------- ----------------- ------------------ dollars in millions AMOUNT RATE AMOUNT RATE AMOUNT RATE - ------------------------------------------------------------------------------------------------------------------------------ Income before income taxes times 35% statutory federal tax rate $459 35.0% $ 90 35.0% $ 531 35.0% State income tax, net of federal tax benefit 23 1.8 9 3.4 40 2.6 Amortization of nondeductible intangibles -- -- 78 30.1 27 1.8 Tax-exempt interest income (13) (1.0) (15) (5.9) (18) (1.2) Corporate-owned life insurance income (39) (3.0) (42) (16.3) (40) (2.7) Tax credits (37) (2.8) (42) (16.1) (36) (2.4) Reduced tax rate on lease income (61) (4.7) (13) (5.1) -- -- Other 4 .3 37 14.3 11 .8 - ------------------------------------------------------------------------------------------------------------------------------ Total income tax expense $336 25.6% $ 102 39.4% $ 515 33.9% ==== ==== ===== ==== ===== ==== - ------------------------------------------------------------------------------------------------------------------------------
18. RESTRUCTURING CHARGES In November 1999, KeyCorp instituted a competitiveness initiative to improve Key's operating efficiency and profitability. In the first phase of the initiative, Key outsourced certain technology and corporate support functions, consolidated sites in a number of businesses and reduced the number of management layers. This phase was completed in 2000. During 2002, Key completed the implementation of all projects related to the second and final phase, which started during the second half of 2000. This phase focused on: - - consolidating 22 business lines into 10 to simplify Key's business structure; - - streamlining and automating business operations and processes; - - standardizing product offerings and internal processes; - - consolidating operating facilities and service centers; and - - outsourcing certain noncore activities. Management expected the initiative to reduce Key's workforce by approximately 4,000 positions. Those reductions were to occur at all levels throughout the organization. During 2002, Key completed its workforce reduction, bringing the total number of positions eliminated in the initiative to nearly 4,100. Changes in the components of the restructuring charge liability associated with the actions taken are as follows:
DECEMBER 31, RESTRUCTURING CASH DECEMBER 31, in millions 2001 CHARGES (CREDITS) PAYMENTS 2002 - ----------------------------------------------------------------------------------------- Severance $ 27 $(11) $ 13 $ 3 Site consolidations 33 3 9 27 Equipment and other 1 (1) -- -- - ----------------------------------------------------------------------------------------- Total $ 61 $ (9) $ 22 $ 30 ==== ==== ==== ==== - -----------------------------------------------------------------------------------------
19. COMMITMENTS, CONTINGENT LIABILITIES AND GUARANTEES 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 $132 million in 2002, $132 million in 2001 and $136 million in 2000. Minimum future rental payments under noncancelable leases at December 31, 2002, are as follows: 2003 -- $125 million; 2004 -- $113 million; 2005 -- $99 million; 2006 -- $91 million; 2007 -- $79 million; all subsequent years -- $395 million. COMMITMENTS TO EXTEND CREDIT OR FUNDING Loan commitments generally help Key meet clients' financing needs. However, they also involve credit risk not reflected on Key's balance sheet. Key mitigates its exposure to credit risk with internal controls that guide the way applications for credit are reviewed and approved, credit limits are established and, when necessary, demands for collateral are made. 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 related to commitments to extend credit. Loan commitments provide for financing on predetermined terms as long as the client continues to meet specified criteria. These agreements 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 obtain a loan commitment from Key. Since a commitment may expire without resulting in a loan, the total amount of outstanding commitments may significantly exceed Key's eventual cash outlay. The table on page 82 shows the remaining contractual amount of each class of commitments to extend credit or funding as of the date indicated. 81 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES This amount also represents Key's maximum possible accounting loss. The estimated fair values of these instruments are not material; there are no observable liquid markets for the majority of these instruments.
DECEMBER 31, in millions 2002 2001 - --------------------------------------------------------------------- Loan commitments: Home equity $ 5,531 $ 4,965 Commercial real estate and construction 2,042 2,487 Commercial and other 25,005 24,936 - --------------------------------------------------------------------- Total loan commitments 32,578 32,388 Principal investing commitments 222 191 Commercial letters of credit 135 106 - --------------------------------------------------------------------- Total loan and other commitments $32,935 $32,685 ======= ======= - ---------------------------------------------------------------------
LEGAL PROCEEDINGS RESIDUAL VALUE INSURANCE LITIGATION. Key Bank USA obtained two insurance policies from Reliance Insurance Company ("Reliance") insuring the residual value of certain automobiles leased through Key Bank USA. The two policies ("the Policies"), the "4011 Policy" and the "4019 Policy," together covered leases entered into during the period from January 1, 1997 to January 1, 2001. The 4019 Policy contains an endorsement stating that Swiss Reinsurance America Corporation ("Swiss Re") will assume and reinsure 100% of Reliance's obligations under the 4019 Policy in the event Reliance Group Holdings' ("Reliance's parent") so-called "claims-paying ability" were to fall below investment grade. Key Bank USA also entered into an agreement with Swiss Re and Reliance whereby Swiss Re agreed to issue to Key Bank USA an insurance policy on the same terms and conditions as the 4011 Policy in the event the financial condition of Reliance Group Holdings fell below a certain level. Around May 2000, the conditions under both the 4019 Policy and the Swiss Re agreement were triggered. The 4011 Policy was canceled and replaced as of May 1, 2000, by a policy issued by North American Specialty Insurance Company (a subsidiary or affiliate of Swiss Re) ("the NAS Policy"). Tri-Arc Financial Services, Inc. ("Tri-Arc") acted as agent for Reliance, Swiss Re and NAS. Since February 2000, Key Bank USA has been filing claims under the Policies, but none of these claims has been paid. In July 2000, Key Bank USA filed a claim for arbitration against Reliance, Swiss Re, NAS and Tri-Arc seeking, among other things, a declaration of the scope of coverage under the Policies and for damages. On January 8, 2001, Reliance filed an action (litigation) against Key Bank USA in Federal District Court in Ohio seeking rescission or reformation of the Policies because they allegedly do not reflect the intent of the parties with respect to the scope of coverage and how and when claims were to be paid. Key filed an answer and counterclaim against Reliance, Swiss Re, NAS and Tri-Arc seeking, among other things, declaratory relief as to the scope of coverage under the Policies, damages for breach of contract and failure to act in good faith, and punitive damages. The parties agreed to proceed with this court action and to dismiss the arbitration without prejudice. On May 29, 2001, the Commonwealth Court of Pennsylvania entered an order placing Reliance in a court supervised "rehabilitation" and purporting to stay all litigation against Reliance. On July 23, 2001, the Federal District Court in Ohio stayed the litigation to allow the rehabilitator to complete her task. On October 3, 2001, the Court in Pennsylvania entered an order placing Reliance into liquidation and canceling all Reliance insurance policies as of November 2, 2001. On November 20, 2001, the Federal District Court in Ohio entered an order that, among other things, required Reliance to report to the Court on the progress of the liquidation. On January 15, 2002, Reliance filed a status report requesting the continuance of the stay for an indefinite period. On February 20, 2002, Key Bank USA filed a Motion for Partial Lifting of the July 23, 2001, Stay in which it asked the Court to allow the case to proceed against the parties other than Reliance. The Court granted Key Bank USA's motion on May 17, 2002. Management believes that Key Bank USA has valid insurance coverage or claims for damages relating to the residual value of automobiles leased through Key Bank USA during the four-year period ending January 1, 2001. With respect to each individual lease, however, it is not until the lease expires and the vehicle is sold that Key Bank USA can determine the existence and amount of any actual loss (i.e., the difference between the residual value provided for in the lease agreement and the vehicle's actual market value at lease expiration). Key Bank USA's actual total losses for which it will file claims will depend to a large measure upon the viability of, and pricing within, the market for used cars throughout the lease run- off period, which extends through 2006. The market for used cars varies. Accordingly, the total expected loss on the portfolio for which Key Bank USA will file claims cannot be determined with certainty at this time. Claims filed by Key Bank USA through December 31, 2002, total approximately $259 million, and management currently estimates that approximately $102 million of additional claims may be filed through year-end 2006. As discussed above, a number of factors could affect Key Bank USA's actual loss experience, which may be higher or lower than management's current estimates. Key is filing insurance claims for the entire amount of its losses and is recording as a receivable on its balance sheet a portion of the amount of the insurance claims as and when they are filed. Management believes the amount being recorded as a receivable due from the insurance carriers is appropriate to reflect the collectibility risk associated with the insurance litigation; however, litigation is inherently not without risk, and any actual recovery from the litigation may be more or less than the receivable. While management does not expect an adverse decision, if a court were to make an adverse final determination, such result would cause Key to record a material one-time expense during the period when such determination is made. An adverse determination would not have a material effect on Key's financial condition, but could have a material adverse effect on Key's results of operations in the quarter it occurs. OTHER LITIGATION. In the ordinary course of business, Key is subject to legal actions that involve claims for substantial monetary relief. Based on information presently known to management, management does not believe there is any legal action to which KeyCorp or any of its subsidiaries is a party, or involving any of their properties, that, individually or in the aggregate, could reasonably be expected to have a material adverse effect on Key's financial condition or annual results of operations. 82 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES GUARANTEES Key is a guarantor in various agreements with third parties. In accordance with FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,"certain guarantees issued or modified on or after January 1, 2003, will require the recognition of a liability on Key's balance sheet for the "stand ready" obligation associated with such guarantees. The accounting for guarantees existing at December 31, 2002, was not revised. Thus, the stand ready obligation related to the majority of Key's guarantees was not recorded on the balance sheet at December 31, 2002. Additional information pertaining to Interpretation No. 45 is summarized in Note 1 ("Summary of Significant Accounting Policies") under the heading "Accounting Pronouncements Pending Adoption" on page 62. The following table shows the types of guarantees (as defined by Interpretation No. 45) that Key had outstanding at December 31, 2002.
MAXIMUM POTENTIAL UNDISCOUNTED LIABILITY in millions FUTURE PAYMENTS RECORDED - ---------------------------------------------------------------------------- Financial guarantees: Standby letters of credit $4,325 -- Credit enhancement for asset-backed commercial paper conduit 68 $ 1 Recourse agreement with FNMA 227 4 Return guaranty agreement with LIHTC investors 851 35 Default guarantees 140 2 Written interest rate caps(a) 43 24 - ---------------------------------------------------------------------------- Total $5,654 $ 66 ====== ====== - ----------------------------------------------------------------------------
(a) As of December 31, 2002, the weighted average interest rate of written interest rate caps was 1.5%. Maximum potential undiscounted future payments were calculated assuming a 10% interest rate. STANDBY LETTERS OF CREDIT. These instruments obligate Key to pay a third- party beneficiary when a customer fails to repay an outstanding loan or debt instrument, or fails to perform some contractual nonfinancial obligation. Standby letters of credit are issued by many of Key's lines of business to address clients' financing needs. If amounts are drawn under standby letters of credit, such amounts are treated as loans; they bear interest (generally at variable rates) and pose the same credit risk to Key as a loan would. At December 31, 2002, Key's standby letters of credit had a remaining weighted average life of approximately 2 years, with remaining actual lives ranging from less than 1 to 16 years. CREDIT ENHANCEMENT FOR ASSET-BACKED COMMERCIAL PAPER CONDUIT. Key provides credit enhancement in the form of a committed facility to ensure the continuing operations of an asset-backed commercial paper conduit, which is owned by a third party and administered by an unaffiliated financial institution. The commitment to provide credit enhancement extends until September 26, 2003, and specifies that in the event of default by certain borrowers whose loans are held by the conduit, Key will provide financial relief to the conduit in an amount that is based on defined criteria that consider the level of credit risk involved and other factors. At December 31, 2002, Key's funding requirement under the credit enhancement facility totaled $59 million. However, there were no drawdowns under the facility during or at the end of the year. Key has no recourse or other collateral available to offset any amounts that may be funded under this credit enhancement facility. Key's commitments to provide increased credit enhancement to the conduit are periodically evaluated by management. RECOURSE AGREEMENT WITH FEDERAL NATIONAL MORTGAGE ASSOCIATION. KBNA participates as a lender in the Federal National Mortgage Association ("FNMA") Delegated Underwriting and Servicing ("DUS") program. As a condition to FNMA's delegation of responsibility for originating, underwriting and servicing mortgages, KBNA has agreed to assume a limited portion of the risk of loss during the remaining term on each commercial mortgage loan sold. Accordingly, a reserve for such potential losses has been established and is maintained in an amount estimated by management to approximate the fair value of the liability undertaken by KBNA. The outstanding commercial mortgage loans in this program had a weighted average remaining term of 10 years at December 31, 2002. At December 31, 2002, the unpaid principal balance outstanding of loans sold by KBNA as a participant in this program was approximately $1.1 billion. The maximum potential amount of undiscounted future payments that may be required under this program is equal to 20% of the principal balance of loans outstanding at December 31, 2002. If payment is required under this program, Key would have an interest in the collateral underlying the commercial mortgage loan on which the loss occurred. RETURN GUARANTEE AGREEMENT WITH LOW-INCOME HOUSING TAX CREDIT ("LIHTC") INVESTORS. Key Affordable Housing Corporation ("KAHC"), a subsidiary of KBNA, offers limited partnership interests to qualified investors. Unconsolidated partnerships formed by KAHC invest in low-income residential rental properties that qualify for federal LIHTCs under Section 42 of the Internal Revenue Code. In certain partnerships, investors pay a fee to KAHC for a guaranteed return that is dependent on the financial performance of the property and the property's ability to maintain its LIHTC status throughout the fifteen-year compliance period. If these two conditions are not achieved, Key is obligated to make any necessary payments to investors to provide the guaranteed return. KAHC has the ability to affect changes in the management of the properties to improve performance. However, other than the underlying income stream from the properties, no recourse or collateral would be available to offset the guarantee obligation. These guarantees have expiration dates that extend through 2018. Key meets its obligations pertaining to the guaranteed returns generally through the distribution of tax credits and deductions associated with the specific properties. As shown in the preceding table, KAHC had established a reserve in the amount of $35 million at December 31, 2002, which management believes will be sufficient to cover estimated future obligations under the guarantees. However, in accordance with Interpretation No. 45, for any return guarantee agreements entered into or modified with LIHTC investors on or after January 1, 2003, all fees received in consideration for the guarantee will be established as the fair value liability. 83 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES VARIOUS TYPES OF DEFAULT GUARANTEES. Some lines of business provide or participate in guarantees that obligate Key to perform if the debtor fails to pay all or a portion of the subject indebtedness and/or related interest. These guarantees are generally undertaken when Key is supporting or protecting its underlying investment or where the risk profile of the debtor should provide an investment return. The terms of these default guarantees range from 1 year to as many as 19 years. Although no collateral is held, Key would have recourse against the debtors for any payments made under these default guarantees. WRITTEN INTEREST RATE CAPS. In the ordinary course of business, Key writes interest rate caps for commercial loan clients that have variable rate loans with Key. These caps are purchased by clients to limit their exposure to interest rate increases. Key is obligated to pay the interest rate counterparty if the applicable benchmark interest rate exceeds a specified level (known as the "strike rate") over a weighted average life of approximately 8.3 years. These instruments are accounted for as derivatives with the fair market value liability recorded in "other liabilities" on the balance sheet. Key's potential amount of future payments under these obligations is mitigated by the fact that the company enters into offsetting positions with third parties. OTHER OFF-BALANCE SHEET RISK Other off-balance sheet risk stems from financial instruments that do not meet the definition of a guarantee as specified in Interpretation No. 45 and from other relationships. LIQUIDITY FACILITIES THAT SUPPORT ASSET-BACKED COMMERCIAL PAPER CONDUITS. Key provides liquidity to all or a portion of two separate asset- backed commercial paper conduits that are owned by third parties and administered by unaffiliated financial institutions. These liquidity facilities obligate Key through February 15, 2005, to provide funding if such is required as a result of a disruption in the markets or other factors. Additional information about these asset-backed commercial paper conduits is summarized in Note 1 ("Summary of Significant Accounting Policies") under the heading "Basis of Presentation" on page 57 and in Note 8 ("Loan Securitizations and Variable Interest Entities") under the heading "Variable Interest Entities" on page 71. Key provides liquidity to the conduits in the form of committed facilities of $1.7 billion. The amount available to be drawn on these facilities was $712 million at December 31, 2002. However, there were no drawdowns under either of the committed facilities at that time. Of the $1.7 billion of liquidity facility commitments, $108 million is associated with a conduit program that is in the process of being liquidated. Therefore, Key's commitment will decrease as the assets in this conduit program decrease. Key's commitments to provide liquidity are periodically evaluated by management. INDEMNIFICATIONS PROVIDED IN THE ORDINARY COURSE OF BUSINESS. Key provides certain indemnifications primarily through representations and warranties in contracts that are entered into in the ordinary course of business in connection with purchases and sales of businesses, loan sales and other ongoing activities. Management's past experience with these indemnifications has been that the amounts paid, if any, have not had a significant effect on Key's financial condition or results of operations. INTERCOMPANY GUARANTEES. KeyCorp and primarily KBNA are parties to various guarantees that are undertaken to facilitate the ongoing business activities of other Key affiliates. These business activities encompass debt issuance, certain lease and insurance obligations, investments and securities, and certain leasing transactions involving clients. RELATIONSHIP WITH MASTERCARD INTERNATIONAL INC. AND VISA U.S.A. INC. KBNA and Key Bank USA are members of MasterCard International Inc. and Visa U.S.A. Inc. MasterCard's charter documents and bylaws state that MasterCard may assess members for certain liabilities, including litigation liabilities. Visa's charter documents state that Visa may fix fees payable by members in connection with Visa's operations. Descriptions of pending lawsuits and MasterCard's and Visa's positions regarding the potential impact of those lawsuits on members are set forth on MasterCard's and Visa's respective websites and in MasterCard's public filings with the Securities and Exchange Commission. Key is not a party to any significant litigation by third parties against MasterCard or Visa. 20. DERIVATIVES AND HEDGING ACTIVITIES Key, mainly through its lead bank, KBNA, is party to various derivative instruments. These instruments are used for asset and liability management and trading purposes. Generally, these instruments help Key meet clients' financing needs and manage exposure to "market risk" -- the possibility that economic value or net interest income will be adversely affected by changes in interest rates or other economic factors. However, like other financial instruments, these derivatives 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 derivatives that Key uses are interest rate swaps, caps and futures, and foreign exchange forward contracts. All foreign exchange forward contracts and interest rate swaps and caps held are over-the-counter instruments. ACCOUNTING TREATMENT AND VALUATION Effective January 1, 2001, Key adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivatives and hedging activities. The new standards are summarized in Note 1 ("Summary of Significant Accounting Policies") under the heading "Derivatives Used for Asset and Liability Management Purposes" on page 60. As a result of adopting SFAS No. 133, Key recorded cumulative after- tax losses of $1 million in earnings and $22 million in "other comprehensive income (loss)" as of January 1, 2001. Of the $22 million loss, an estimated $13 million was reclassified as a charge to earnings during 2001. 84 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES At December 31, 2002, Key had $849 million of derivative assets and $151 million of derivative liabilities on its balance sheet that were being used in connection with hedging activities. As of the same date, the fair value of derivative assets and liabilities classified as trading derivatives totaled $1.6 billion and $1.5 billion, respectively. Derivative assets and liabilities are recorded in "accrued income and other assets" and "accrued expense and other liabilities," respectively, on the balance sheet. ASSET AND LIABILITY MANAGEMENT FAIR VALUE HEDGING STRATEGIES. Key uses interest rate swap contracts known as "receive fixed/pay variable" swaps to modify its exposure to interest rate risk. These contracts convert specific fixed-rate deposits, short-term borrowings and long-term debt into variable-rate obligations. As a result, Key receives fixed-rate interest payments in exchange for variable-rate payments over the lives of the contracts without exchanges of the underlying notional amounts. During 2002, Key recognized a net gain of approximately $3 million related to the ineffective portion of its fair value hedging instruments. The ineffective portion recognized is included in "other income" on the income statement. CASH FLOW HEDGING STRATEGIES. Key also enters into "pay fixed/receive variable" interest rate swap contracts that effectively convert a portion of its floating-rate debt into fixed-rate debt to reduce the potential adverse impact of interest rate increases on future interest expense. These contracts allow Key to exchange variable-rate interest payments for fixed-rate payments over the lives of the contracts without exchanges of the underlying notional amounts. Similarly, Key has converted certain floating-rate commercial loans to fixed-rate loans by entering into interest rate swap contracts. Key also uses "pay fixed/receive variable" interest rate swaps to manage the interest rate risk associated with anticipated sales or securitizations of certain commercial real estate loans. These swaps protect against a possible short-term decline in the value of the loans that could result from changes in interest rates between the time they are originated and the time they are securitized or sold. Key's general policy is to sell or securitize these loans within one year of their origination. In May 2001, Key revised its projections of future debt needs. Consequently, during the second quarter of 2001, Key reclassified a $3 million gain from "accumulated other comprehensive income (loss)" to "other income" on the consolidated income statement. This reclassification relates to a cash flow hedge of a previously forecasted debt issuance that Key did not make. During 2002, the net gain recognized by Key in connection with the ineffective portion of its cash flow hedging instruments was not significant. The exclusion of portions of hedging instruments from the assessment of hedge effectiveness had no effect on earnings during 2002. The change in "accumulated other comprehensive income (loss)" resulting from cash flow hedges is as follows:
RECLASSIFICATION DECEMBER 31, 2002 OF LOSSES DECEMBER 31, in millions 2001 HEDGING ACTIVITY TO NET INCOME 2002 - ---------------------------------------------------------------------------------------------------------------------------------- Accumulated other comprehensive income (loss) resulting from cash flow hedges $(2) $(29) $37 $6 - ----------------------------------------------------------------------------------------------------------------------------------
Key expects to reclassify an estimated $47 million of net gains on derivative instruments from "accumulated other comprehensive income (loss)" to earnings during the next twelve months. Reclassifications will coincide with the income statement impact of the hedged item through the payment of variable-rate interest on debt, the receipt of variable-rate interest on commercial loans and the sale or securitization of commercial real estate loans. TRADING PORTFOLIO FUTURES CONTRACTS AND INTEREST RATE SWAPS, CAPS AND FLOORS. Key uses these instruments for dealer activities, which are generally limited to Key's commercial loan clients, and enters into positions with third parties that are intended to offset or mitigate the interest rate risk of the client positions. The transactions entered into with clients are generally limited to conventional interest rate swaps. All futures contracts and interest rate swaps, caps and floors 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 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. OPTIONS AND FUTURES. Key uses these instruments for proprietary trading purposes. Adjustments to the fair value of options and futures are included in "investment banking and capital markets income" on the income statement. The following table shows trading income recognized on interest rate swap, foreign exchange forward, and option and futures contracts.
YEAR ENDED DECEMBER 31, in millions 2002 2001 2000 - ------------------------------------------------------------------- Interest rate contracts $10 $17 $32 Foreign exchange forward contracts 33 40 35 Option and futures contracts -- -- 3 - -------------------------------------------------------------------
85 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES COUNTERPARTY CREDIT RISK Swaps and caps present credit risk because the counterparty may not meet the terms of the contract. This risk is measured as the expected positive replacement value of contracts. 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 related contracts with the same counterparty in the event of default. Second, Credit Administration monitors credit risk exposure to the counterparty on each interest rate swap to determine appropriate limits on Key's total credit exposure and whether it is advisable to demand collateral. At December 31, 2002, Key was party to interest rate swaps and caps with 51 different counterparties. Among these were swaps and caps entered into to offset the risk of client exposure. Key had aggregate credit exposure of $631 million to 31 of these counterparties, with the largest credit exposure to an individual counterparty amounting to approximately $277 million. 21. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS The carrying amount and estimated fair value of Key's financial instruments are shown below in accordance with the requirements of SFAS No. 107, "Disclosures About Fair Value of Financial Instruments."
DECEMBER 31, 2002 2001 ---------------------- ----------------------- CARRYING FAIR CARRYING FAIR in millions AMOUNT VALUE AMOUNT VALUE - --------------------------------------------------------------------------------------------- ASSETS Cash and short-term investments(a) $ 4,996 $ 4,996 $ 4,789 $ 4,789 Securities available for sale(b) 8,507 8,507 5,408 5,408 Investment securities(b) 120 129 225 234 Other investments(c) 919 919 832 832 Loans, net of allowance(d) 61,005 62,703 61,632 62,938 Servicing assets(a) 99 99 73 73 Derivative assets(f) 2,477 2,477 1,107 1,107 LIABILITIES Deposits with no stated maturity(a) $28,908 $28,908 $25,047 $25,047 Time deposits(e) 20,438 21,021 19,748 20,067 Short-term borrowings(a) 6,685 6,685 9,284 9,284 Long-term debt(e) 15,605 15,712 14,554 14,268 Derivative liabilities(f) 1,628 1,628 899 899 CAPITAL SECURITIES(c) 1,260 1,129 1,288 1,157 - ---------------------------------------------------------------------------------------------
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 other investments were estimated based on the issuer's financial condition and results of operations, prospects, values of public companies in comparable businesses, market liquidity, and the nature and duration of resale restrictions. Where fair values were not readily determinable, they were based on fair values of similar instruments, or the investments were included at their carrying amounts. (d) Fair values of most loans were estimated using discounted cash flow models. Lease financing receivables and loans held for sale were included at their carrying amounts in the estimated fair value of loans. (e) Fair values of time deposits, long-term debt and capital securities were estimated based on discounted cash flows. (f) Fair values of interest rate swaps and caps were based on discounted cash flow models. Foreign exchange forward contracts were valued based on quoted market prices and had a fair value that approximated their carrying amount. Residential real estate mortgage loans with carrying amounts of $2.0 billion at December 31, 2002, and $2.3 billion at December 31, 2001, are included in the amount shown for "Loans, net of allowance." The estimated fair values of residential real estate mortgage loans 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. 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 (related to 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 SFAS 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 the underlying value of Key as a whole. 86 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES 22. CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
CONDENSED BALANCE SHEETS DECEMBER 31, in millions 2002 2001 - ------------------------------------------------------------------------ ASSETS Interest-bearing deposits with KBNA $ 1,406 $ 1,054 Loans and advances to subsidiaries: Banks 77 99 Nonbank subsidiaries 693 669 - ------------------------------------------------------------------------ 770 768 Investment in subsidiaries: Banks 5,884 5,744 Nonbank subsidiaries 1,993 2,004 - ------------------------------------------------------------------------ 7,877 7,748 Accrued income and other assets 881 780 - ------------------------------------------------------------------------ Total assets $10,934 $10,350 ======= ======= LIABILITIES Accrued expense and other liabilities $ 595 $ 580 Short-term borrowings 187 121 Long-term debt: Subsidiary trusts 1,142 1,282 Unaffiliated companies 2,175 2,212 - ------------------------------------------------------------------------ 3,317 3,494 - ------------------------------------------------------------------------ Total liabilities 4,099 4,195 SHAREHOLDERS' EQUITY(a) 6,835 6,155 - ------------------------------------------------------------------------ Total liabilities and shareholders' equity $10,934 $10,350 ======= ======= - ------------------------------------------------------------------------
(a) See page 55 for KeyCorp's Consolidated Statements of Changes in Shareholders' Equity.
CONDENSED STATEMENTS OF INCOME YEAR ENDED DECEMBER 31, in millions 2002 2001 2000 - ---------------------------------------------------------------------------------------------------- INCOME Dividends from subsidiaries: Banks $ 900 $ 500 $ 1,440 Nonbank subsidiaries 200 107 57 Interest income from subsidiaries 54 77 62 Other income 3 49 46 - ---------------------------------------------------------------------------------------------------- 1,157 733 1,605 EXPENSES Interest on long-term debt with subsidiary trusts 80 92 98 Interest on other borrowed funds 33 132 133 Restructuring charges (credits) -- (4) 102 Personnel and other expense 58 56 59 - ---------------------------------------------------------------------------------------------------- 171 276 392 Income before income tax benefit and equity in net income less dividends from subsidiaries 986 457 1,213 Income tax benefit 53 28 103 - ---------------------------------------------------------------------------------------------------- 1,039 485 1,316 Equity in net income less dividends from subsidiaries (63) (353) (314) - ---------------------------------------------------------------------------------------------------- NET INCOME $ 976 $ 132 $ 1,002 ======= ======= ======= - ----------------------------------------------------------------------------------------------------
87 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES CONDENSED STATEMENTS OF CASH FLOW
YEAR ENDED DECEMBER 31, in millions 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income $ 976 $ 132 $ 1,002 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of intangibles -- 20 24 Net securities gains (losses) 16 (28) (7) Deferred income taxes (21) (20) 10 Equity in net income less dividends from subsidiaries 63 353 314 Net increase in other assets (113) (69) (213) Net increase in other liabilities 244 125 133 Net increase (decrease) in accrued restructuring charges (32) (68) 33 Other operating activities, net 11 39 (35) - ------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 1,144 484 1,261 INVESTING ACTIVITIES Cash used in acquisition, net of cash acquired (66) -- -- Net (increase) decrease in interest-bearing deposits (352) (507) 136 Purchases of securities available for sale (8) (50) (192) Proceeds from prepayments and maturities of securities available for sale 25 195 10 Net increase in loans and advances to subsidiaries (1,648) (136) (83) (Increase) decrease in investments in subsidiaries 1,604 670 (846) - ------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (445) 172 (975) FINANCING ACTIVITIES Net increase (decrease) in short-term borrowings 66 (1,063) 665 Net proceeds from issuance of long-term debt 423 1,142 290 Payments on long-term debt (637) (230) (334) Loan payment received from ESOP trustee -- 13 11 Purchases of treasury shares (77) (50) (462) Proceeds from issuance of common stock pursuant to employee benefit and dividend reinvestment plans 37 33 28 Cash dividends paid (511) (501) (484) - ------------------------------------------------------------------------------------------------------------------------ NET CASH USED IN FINANCING ACTIVITIES (699) (656) (286) - ------------------------------------------------------------------------------------------------------------------------ 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 $113 million in 2002, $224 million in 2001 and $231 million in 2000. 88 EX-21 15 l97974aexv21.txt EX-21 SUBSIDIARIES OF THE REGISTRANT . . . EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT AT FEBRUARY 28, 2003
JURISDICTION OF INCORPORATION SUBSIDIARIES(A) OR ORGANIZATION PARENT COMPANY - ---------------------------------------------- ---------------- ---------------------------------- KeyBank National Association United States KeyCorp Key Bank USA, National Association United States KeyCorp
(a) Subsidiaries of KeyCorp other than KeyBank National Association and Key Bank USA, National Association are not listed above since, in the aggregate, they would not constitute a significant subsidiary. KeyBank National Association and Key Bank USA, National Association are 100% owned by KeyCorp. EX-23 16 l97974aexv23.txt EX-23 CONSENT OF INDEPENDENT AUDITORS 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 13, 2003, included in the 2002 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 13, 2003, with respect to the consolidated financial statements incorporated herein by reference in this Annual Report (Form 10-K) for the year ended December 31, 2002: Form S-3 No. 33-58405 Form S-3 No. 333-10577 (Post-Effective Amendments No. 1 and No. 2) 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. 333-50802 Form S-3 No. 333-56258 Form S-3 No. 333-63104 Form S-3 No. 333-73380 (Amendment No. 1) Form S-3 No. 333-88934 (Amendment No. 1) 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. 333-45320 Form S-8 No. 333-45322 Form S-8 No. 333-99493 Form S-8 No. 333-99495 Form S-8 No. 33-31569 (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. 33-44657 (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 18, 2003 EX-24 17 l97974aexv24.txt EX-24 POWERS OF ATTORNEY 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, 2002 (the "Annual Report"), hereby constitutes and appoints Paul N. Harris, Thomas C. Stevens, and Daniel R. Stolzer, 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 13, 2003. /s/ Thomas C. Stevens -------------------------------------- Typed Name: Thomas C. Stevens -------------------------------------- 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, 2002 (the "Annual Report"), hereby constitutes and appoints Paul N. Harris, Thomas C. Stevens, and Daniel R. Stolzer, 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 13, 2003. /s/ Henry L. Meyer III -------------------------------------- Typed Name: Henry L. Meyer III -------------------------------------- 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, 2002 (the "Annual Report"), hereby constitutes and appoints Paul N. Harris, Thomas C. Stevens, and Daniel R. Stolzer, 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 13, 2003. /s/ Jeffrey B. Weeden -------------------------------------- Typed Name: Jeffrey B. Weeden -------------------------------------- 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, 2002 (the "Annual Report"), hereby constitutes and appoints Paul N. Harris, Thomas C. Stevens, and Daniel R. Stolzer, 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 13, 2003. /s/ Lee G. Irving -------------------------------------- Typed Name: Lee G. Irving -------------------------------------- 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, 2002 (the "Annual Report"), hereby constitutes and appoints Paul N. Harris, Thomas C. Stevens, and Daniel R. Stolzer, 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 13, 2003. /s/ Cecil D. Andrus -------------------------------------- Typed Name: Cecil D. Andrus -------------------------------------- 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, 2002 (the "Annual Report"), hereby constitutes and appoints Paul N. Harris, Thomas C. Stevens, and Daniel R. Stolzer, 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 13, 2003. /s/ William G. Bares -------------------------------------- Typed Name: William G. Bares -------------------------------------- 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, 2002 (the "Annual Report"), hereby constitutes and appoints Paul N. Harris, Thomas C. Stevens, and Daniel R. Stolzer, 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 13, 2003. /s/ Edward P. Campbell -------------------------------------- Typed Name: Edward P. Campbell -------------------------------------- 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, 2002 (the "Annual Report"), hereby constitutes and appoints Paul N. Harris, Thomas C. Stevens, and Daniel R. Stolzer, 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 13, 2003. /s/ Dr. Carol A. Cartwright -------------------------------------- Typed Name: Dr. Carol A. Cartwright -------------------------------------- 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, 2002 (the "Annual Report"), hereby constitutes and appoints Paul N. Harris, Thomas C. Stevens, and Daniel R. Stolzer, 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 13, 2003. /s/ Alexander M. Cutler -------------------------------------- Typed Name: Alexander M. Cutler -------------------------------------- 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, 2002 (the "Annual Report"), hereby constitutes and appoints Paul N. Harris, Thomas C. Stevens, and Daniel R. Stolzer, 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 13, 2003. /s/ Henry S. Hemingway -------------------------------------- Typed Name: Henry S. Hemingway -------------------------------------- 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, 2002 (the "Annual Report"), hereby constitutes and appoints Paul N. Harris, Thomas C. Stevens, and Daniel R. Stolzer, 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 13, 2003. /s/ Charles R. Hogan -------------------------------------- Typed Name: Charles R. Hogan -------------------------------------- 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, 2002 (the "Annual Report"), hereby constitutes and appoints Paul N. Harris, Thomas C. Stevens, and Daniel R. Stolzer, 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 13, 2003. /s/ Dr. Shirley A. Jackson -------------------------------------- Typed Name: Dr. Shirley A. Jackson -------------------------------------- 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, 2002 (the "Annual Report"), hereby constitutes and appoints Paul N. Harris, Thomas C. Stevens, and Daniel R. Stolzer, 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 13, 2003. /s/ Douglas J. McGregor -------------------------------------- Typed Name: Douglas J. McGregor -------------------------------------- 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, 2002 (the "Annual Report"), hereby constitutes and appoints Paul N. Harris, Thomas C. Stevens, and Daniel R. Stolzer, 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 13, 2003. /s/ Eduardo R. Menasce -------------------------------------- Typed Name: Eduardo R. Menasce -------------------------------------- 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, 2002 (the "Annual Report"), hereby constitutes and appoints Paul N. Harris, Thomas C. Stevens, and Daniel R. Stolzer, 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 13, 2003. /s/ Steven A. Minter -------------------------------------- Typed Name: Steven A. Minter -------------------------------------- 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, 2002 (the "Annual Report"), hereby constitutes and appoints Paul N. Harris, Thomas C. Stevens, and Daniel R. Stolzer, 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 13, 2003. /s/ Dennis W. Sullivan -------------------------------------- Typed Name: Dennis W. Sullivan -------------------------------------- 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, 2002 (the "Annual Report"), hereby constitutes and appoints Paul N. Harris, Thomas C. Stevens, and Daniel R. Stolzer, 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 13, 2003. /s/ Peter G. Ten Eyck, II -------------------------------------- Typed Name: Peter G. Ten Eyck, II -------------------------------------- EX-99.1 18 l97974aexv99w1.txt EX-99.1 CEO SECTION 906 CERT EXHIBIT 99.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to 18 U.S.C. 1350, the undersigned officer of KeyCorp (the "COMPANY"), hereby certifies that the Company's Annual Report on Form 10-K for the year ended December 31, 2002 (the "REPORT") fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. March 12, 2003 /s/ Henry L. Meyer III -------------------------------------- Henry L. Meyer III Chairman, President and Chief Executive Officer EX-99.2 19 l97974aexv99w2.txt EX-99.2 CFO SECTION 906 CERT EXHIBIT 99.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to 18 U.S.C. 1350, the undersigned officer of KeyCorp (the "COMPANY"), hereby certifies that the Company's Annual Report on Form 10-K for the year ended December 31, 2002 (the "REPORT") fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. March 12, 2003 /s/ Jeffrey B. Weeden -------------------------------------- Jeffrey B. Weeden Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----