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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ______ To ______
Commission File Number 0-850
[KEYCORP LOGO]
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(Exact name of registrant as specified in its charter)
OHIO 34-6542451
- --------------------------------------------- ------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
127 PUBLIC SQUARE, CLEVELAND, OHIO 44114-1306
- --------------------------------------------- ------------------------------------------
(Address of principal executive offices) (Zip Code)
(216) 689-6300
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No | |
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Shares with a par value of $1 each 424,518,284 Shares
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(Title of class) (Outstanding at April 30, 2001)
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KEYCORP
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS Page Number
-----------
Consolidated Balance Sheets --
March 31, 2001, December 31, 2000 and March 31, 2000 3
Consolidated Statements of Income --
Three months ended March 31, 2001 and 2000 4
Consolidated Statements of Changes in Shareholders' Equity --
Three months ended March 31, 2001 and 2000 5
Consolidated Statements of Cash Flow --
Three months ended March 31, 2001 and 2000 6
Notes to Consolidated Financial Statements 7
Independent Accountants' Review Report 24
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 25
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK 53
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 54
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 54
Signature 54
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, MARCH 31,
dollars in millions 2001 2000 2000
- --------------------------------------------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
ASSETS
Cash and due from banks $ 2,484 $ 3,189 $ 2,757
Short-term investments 1,892 1,884 2,567
Securities available for sale 6,900 7,329 6,269
Investment securities (fair value: $1,220, $1,208 and $1,063) 1,208 1,198 1,053
Loans, net of unearned income of $1,783, $1,789 and $1,618 67,027 66,905 64,064
Less: Allowance for loan losses 1,001 1,001 979
- --------------------------------------------------------------------------------------------------------------------------
Net loans 66,026 65,904 63,085
Premises and equipment 703 717 761
Goodwill 1,311 1,324 1,378
Other intangible assets 40 44 56
Corporate-owned life insurance 2,241 2,215 2,132
Accrued income and other assets 3,652 3,466 3,446
- --------------------------------------------------------------------------------------------------------------------------
Total assets $ 86,457 $ 87,270 $ 83,504
======== ======== ========
LIABILITIES
Deposits in domestic offices:
Noninterest-bearing $ 8,329 $ 9,076 $ 8,283
Interest-bearing 36,152 35,519 34,718
Deposits in foreign office--interest-bearing 1,484 4,054 3,035
- --------------------------------------------------------------------------------------------------------------------------
Total deposits 45,965 48,649 46,036
Federal funds purchased and securities sold under repurchase agreements 4,463 4,936 2,621
Bank notes and other short-term borrowings 8,721 6,957 8,015
Accrued expense and other liabilities 4,803 4,701 4,312
Long-term debt 14,495 14,161 14,784
Corporation-obligated mandatorily redeemable preferred capital securities
of subsidiary trusts holding solely subordinated debentures of KeyCorp (See Note 9) 1,308 1,243 1,243
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities 79,755 80,647 77,011
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value; authorized 25,000,000 shares, none issued -- -- --
Common shares, $1 par value; authorized 1,400,000,000 shares; issued 491,888,780 shares 492 492 492
Capital surplus 1,399 1,402 1,406
Retained earnings 6,444 6,352 6,077
Loans to ESOP trustee (13) (13) (24)
Treasury stock, at cost (67,474,937 and 54,299,186 shares) (1,573) (1,600) (1,301)
Accumulated other comprehensive loss (47) (10) (157)
- --------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 6,702 6,623 6,493
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 86,457 $ 87,270 $ 83,504
======== ======== ========
- --------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements (Unaudited).
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CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
dollars in millions, except per share amounts 2001 2000
- ------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $ 1,418 $ 1,347
Taxable investment securities 7 4
Tax-exempt investment securities 5 6
Securities available for sale 120 112
Short-term investments 20 20
- ------------------------------------------------------------------------------------------------------
Total interest income 1,570 1,489
INTEREST EXPENSE
Deposits 460 377
Federal funds purchased and securities sold under repurchase agreements 70 48
Bank notes and other short-term borrowings 105 126
Long-term debt, including capital securities 247 267
- ------------------------------------------------------------------------------------------------------
Total interest expense 882 818
- ------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 688 671
Provision for loan losses 110 183
- ------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 578 488
NONINTEREST INCOME
Trust and investment services income 141 160
Investment banking and capital markets income 65 89
Service charges on deposit accounts 84 86
Corporate-owned life insurance income 27 25
Letter of credit and loan fees 29 23
Net securities gains 26 1
Gain from divestiture -- 332
Other income 83 90
- ------------------------------------------------------------------------------------------------------
Total noninterest income 455 806
NONINTEREST EXPENSE
Personnel 364 382
Net occupancy 57 57
Computer processing 62 59
Equipment 38 48
Marketing 27 22
Amortization of intangibles 26 25
Professional fees 18 19
Restructuring charges (4) 7
Other expense 110 108
- ------------------------------------------------------------------------------------------------------
Total noninterest expense 698 727
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 335 567
Income taxes 117 200
- ------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 218 367
Cumulative effect of accounting change, net of tax (see Note 1) (1) --
- ------------------------------------------------------------------------------------------------------
NET INCOME $ 217 $ 367
========= =========
Per common share:
Income before cumulative effect of account change $.51 $.83
Net income .51 .83
Income before cumulative effect of accounting change - assuming dilution .51 .83
Net income - assuming dilution .51 .83
Weighted average common shares outstanding (000) 424,024 441,834
Weighted average common shares and potential common shares outstanding (000) 429,917 443,757
- ------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements (Unaudited).
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
ACCUMULATED
LOANS TO TREASURY OTHER
Dollars in millions, COMMON CAPITAL RETAINED ESOP STOCK, COMPREHENSIVE COMPREHENSIVE
except per share amounts SHARES SURPLUS EARNINGS TRUSTEE AT COST INCOME (LOSS) INCOME (LOSS)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 $492 $1,412 $5,833 $(24) $(1,197) $(127)
Net income 367 $367
Other comprehensive losses:
Net unrealized losses on securities
available for sale, net of income
taxes of ($19)(a) (29) (29)
Foreign currency translation adjustments (1) (1)
----
Total comprehensive income $337
====
Cash dividends on common shares
($.28 per share) (123)
Issuance of common shares:
Employee benefit and dividend
reinvestment plans - 528,057
net shares (6) 13
Repurchase of common shares -
6,365,000 shares (117)
- ------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2000 $492 $1,406 $6,077 $(24) $(1,301) $(157)
==== ====== ====== ==== ======= =====
- ------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 $492 $1,402 $6,352 $(13) $(1,600) $ (10)
Net income 217 $217
Other comprehensive income (losses):
Net unrealized losses on securities
available for sale, net of income
taxes of ($1)(a) (9) (9)
Cumulative effect of change in
accounting for derivative financial
instruments, net of income taxes
of ($12) (22) (22)
Net losses on derivative financial
instruments, net of income
taxes of ($7) (11) (11)
Foreign currency translation adjustments 5 5
----
Total comprehensive income $180
====
Cash dividends on common shares
($.295 per share) (125)
Issuance of common shares:
Employee benefit and dividend
reinvestment plans - 1,159,943
net shares (3) 27
- ------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2001 $492 $1,399 $6,444 $(13) $(1,573) $(47)
==== ====== ====== ===== ======== =====
- ------------------------------------------------------------------------------------------------------------------
(a) Net of reclassification adjustments.
See Notes to Consolidated Financial Statements (Unaudited).
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CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
in millions 2001 2000
==============================================================================================================
OPERATING ACTIVITIES
Net income $ 217 $ 367
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 110 183
cumulative effect of accounting change, net of tax 1 --
Depreciation expense and software amortization 71 71
Amortization of intangibles 26 25
Net gain from divesture -- (332)
Net securities gains (26) (1)
Net (gains) losses from venture capital investments 16 (15)
Net gains from loan securitizations and sales (5) (9)
Deferred income taxes 43 57
Net increase in mortgage loans held for sale (190) (383)
Net increase in trading account assets (132) (135)
Net decrease in accrued restructuring charges (22) (20)
Other operating activities, net (66) 224
- ---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 43 32
INVESTING ACTIVITIES
Net increase in loans, excluding acquisitions, sales and divestitures (744) (992)
Purchase of loans (107) --
Proceeds from loan securitizations and sales 796 2,087
Purchase of investment securities (55) (83)
Proceeds from sales of investment securities 26 5
Proceeds from prepayments and maturities of investment securities 26 33
Purchases of securities available for sale (1,751) (20)
Proceeds from sales of securities available for sale 110 73
Proceeds from prepayments and maturities of securities
available for sale 2,082 225
Net(increase) decrease in other short-term investments 124 (573)
Purchases of premises and equipment (20) (19)
Proceeds from sales of premises and equipment -- 13
Proceeds from sales of other real estate owned 10 5
Cash used in acquisitions, net of cash acquired (3) (357)
- ---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 494 397
FINANCING ACTIVITIES
Net increase (decrease) in deposits (2,700) 2,803
Net increase (decrease) in short-term borrowings 1,278 (1,980)
Net proceeds from issuance of long-term debt, including capital
securities 1,256 393
Payments on long-term debt, including capital securities (962) (1,470)
Purchase of treasury shares -- (117)
Net proceeds from issuance of common stock 11 6
Cash dividends (125) (123)
- ---------------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (1,242) (488)
- ---------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND DUE FROM BANKS (705) (59)
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 3,189 2,816
- ---------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 2,484 $ 2,757
======= =======
- ---------------------------------------------------------------------------------------------------------------
Additional disclosures relative to cash flow:
Interest paid $953 $754
Income taxes paid (8) 49
Noncash items:
Derivative assets resulting from adoption of
net accounting standard $120 --
Derivative liabilities resulting from adoption
of new accounting standard 152 --
================================================================================================================
See Notes to Consolidated Financial Statements (Unaudited).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited condensed consolidated interim financial statements include the
accounts of KeyCorp and its subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation. Management believes that
the unaudited condensed consolidated interim financial statements reflect all
adjustments of a normal recurring nature and disclosures which are necessary for
a fair presentation of the results for the interim periods presented. Some
previously reported results have been reclassified to conform to current
reporting practices. The results of operations for the interim periods are not
necessarily indicative of the results of operations to be expected for the full
year. When you read these financial statements, you should also look at the
audited consolidated financial statements and related notes included in Key's
2000 Annual Report to Shareholders.
As used in these Notes, KeyCorp refers solely to the parent company and Key
refers to the consolidated entity consisting of KeyCorp and its subsidiaries.
ACCOUNTING PRONOUNCEMENTS ADOPTED IN 2001
DERIVATIVES AND HEDGING ACTIVITIES. Effective January 1, 2001, Key adopted
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133), which establishes accounting and
reporting standards for derivative instruments ("derivatives") and for hedging
activities. SFAS 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. Derivatives that are
designated and qualify as hedging instruments must be designated as 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.
Derivatives that are used to hedge changes in the fair value of existing assets,
liabilities, and firm commitments against changes in interest rates or other
economic factors are designated as fair value hedges. The gain or loss on the
derivative as well as the related loss or gain on the hedged item attributable
to the hedged risk are recognized in earnings during the period of the change in
fair values. Derivatives that are used to hedge the variability of future cash
flows against changes in interest rates or other economic factors are designated
as cash flow hedges. The effective portion of a gain or loss on a derivative
designated as a cash flow hedge is reported as a component of other
comprehensive income or loss and reclassified into earnings in the same period
or periods that the hedged transaction affects earnings. The ineffective portion
of the derivative gain or loss, if any, is recognized in earnings during the
current period. For derivatives not designated as hedging instruments, the gain
or loss is recognized immediately in earnings.
As a result of adopting SFAS 133, Key recorded a cumulative loss of $1 million
in net income and a cumulative loss of $22 million in other comprehensive income
(loss) during the first quarter of 2001.
ACCOUNTING PRONOUNCEMENTS PENDING ADOPTION
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES.
In September 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" (SFAS 140), which
replaces SFAS 125. SFAS 140 retains most of the SFAS 125 provisions related to
controlling interests and adds three significant new rules. These new rules:
- - prescribe the test that determines whether a special purpose entity ("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;
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- - 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.
SFAS 140 is effective for transactions entered into after March 31, 2001.
However, the statement was effective for recognition and reclassification of
collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. Key included the
disclosures required by SFAS 140 in its December 31, 2000, financial statements.
RECOGNITION OF INTEREST INCOME AND IMPAIRMENT ON CERTAIN INVESTMENTS. In July
2000, the Emerging Issues Task Force ("EITF"), a standard-setting group under
the auspices of the Financial Accounting Standards Board, reached a consensus in
EITF 99-20 that provides guidance on how to record interest income and measure
impairment on beneficial interests retained in a securitization transaction
accounted for as a sale under SFAS 140, and purchased beneficial interests in
securitized financial assets. Assets subject to this accounting guidance are
carried on the balance sheet as securities available for sale [see Note 5
("Securities") starting on page 13] or as trading account assets. This
accounting guidance is effective for fiscal quarters beginning after March 15,
2001. Key adopted this guidance on April 1, 2001. As a result, during the second
quarter, Key recorded a cumulative loss of $23 million in net income. This loss
will be presented as a "cumulative effect of accounting change" on Key's second
quarter income statement.
ACCOUNTING GUIDANCE ISSUED DURING 2001
ACCOUNTING AND REPORTING FOR CERTAIN LOANS HELD FOR SALE. The Office of the
Comptroller of the Currency, the Federal Deposit Insurance Corporation, the
Federal Reserve Board, the Office of Thrift Supervision, and the National Credit
Union Administration issued Interagency Guidance in March 2001, instructing
institutions and examiners about the appropriate accounting and reporting
treatment for certain loans that are sold directly from the loan portfolio or
transferred to a held for sale account. This guidance, which is directed toward
loans that have declined in credit quality, did not have a significant impact on
Key in the first quarter, nor would it have had a significant impact on prior
periods had it been issued earlier.
2. EARNINGS PER COMMON SHARE
The computation of Key's basic and diluted earnings per common share is as
follows:
THREE MONTHS ENDED MARCH 31,
---------------------------------------
dollars in millions, except per share amounts 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------
EARNINGS
Income before cumulative effect of accounting change $218 $367
Net income 217 367
- ---------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES
Weighted average common shares outstanding (000) 424,024 441,834
Effect of dilutive common stock options (000) 5,893 1,923
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average common shares and potential
common shares outstanding (000) 429,917 443,757
======= =======
- ---------------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE
Income per common share before cumulative effect of accounting change $.51 $.83
Net income per common share .51 .83
Income per common share before cumulative effect of accounting change
- assuming dilution .51 .83
Net income per common share - assuming dilution .51 .83
- ---------------------------------------------------------------------------------------------------------------------------
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3. ACQUISITIONS AND DIVESTITURE
Business acquisitions and the divestiture that Key completed during 2000 and the
first three months of 2001 are summarized below.
ACQUISITIONS
- ------------
THE WALLACH COMPANY INC.
On January 2, 2001, Key purchased The Wallach Company, Inc., an investment
banking firm headquartered in Denver, Colorado. The purchase price of
approximately $11 million was paid partly in cash and partly in the form of
370,830 Key common shares. Goodwill of approximately $9 million was recorded and
is 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.
Goodwill of approximately $10 million was recorded and is 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.
Goodwill of approximately $10 million was recorded and is being amortized using
the straight-line method over a period of 15 years.
DIVESTITURE
- -----------
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 divestiture" on the income
statement.
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4. LINE OF BUSINESS RESULTS
Key's three major lines of business are Key Consumer Banking, Key Corporate
Finance and Key Capital Partners.
KEY CONSUMER BANKING
RETAIL BANKING (A DIVISION OF KEY CONSUMER BANKING)
Retail Banking delivers a complete line of branch-based financial products and
services to consumers through 922 KeyCenters (retail banking branches). These
KeyCenters are operated by relationship managers supported by a 24-hour
telephone banking call center services group, 2,424 ATMs that access 15
different networks (resulting in one of the largest ATM networks in the United
States) and a leading-edge Internet banking service, Key.com.
HOME EQUITY AND CONSUMER FINANCE (A DIVISION OF KEY CONSUMER BANKING)
Home Equity and Consumer Finance provides indirect, non-branch-based consumer
loan products, including automobile loans and leases, home equity loans,
education loans, and marine and recreational vehicle loans. As of December 31,
2000, based on the volume of loans generated, Home Equity and Consumer Finance
was one of the foremost lenders for education, for automobile purchases and
leases, and for purchases of marine and recreational vehicles in the United
States.
KEY CORPORATE FINANCE
Key Corporate Finance offers a complete range of financing, transaction
processing, electronic commerce and financial advisory services to corporations
nationwide, and operates one of the largest bank-affiliated equipment leasing
companies in the world, with operations in the United States, Europe and Asia.
Based on total transaction volume, Key Corporate Finance is one of the leading
cash management providers in the United States. This line of business also
serves the needs of Key's small business clients.
Key Corporate Finance's business units are organized around six specialized
industry client segments: commercial banking, commercial real estate, lease
financing, healthcare, media/telecommunications and technology. These targeted
client segments can receive a number of specialized services, including
international banking, cash management and corporate finance advisory services.
Key Corporate Finance also offers investment banking, capital markets, 401(k)
and trust custody products in cooperation with Key Capital Partners.
KEY CAPITAL PARTNERS
Key Capital Partners provides asset management, employee benefits services,
brokerage services, investment banking, capital markets and insurance expertise,
and conducts equity capital investing. It also offers specialized services to
high-net-worth clients through the wealth management and private banking
businesses. Key Capital Partners employs a range of distribution outlets,
including those of Key's other lines of business.
The table that spans pages 11 and 12 shows selected financial data for each
major line of business for the three-month periods ended March 31, 2001 and
2000. The financial information was derived from the internal profitability
reporting system that management uses to monitor and manage Key's financial
performance. The selected financial data are based on internal accounting
policies designed to ensure that results are compiled on a consistent basis and
reflect the underlying economics of Key's three major businesses. In accordance
with these policies:
- - Net interest income for each line of business was determined by assigning a
standard cost for funds used (or a standard credit for funds provided) to
assets and liabilities based on their maturity, prepayment and/or repricing
characteristics. The net effect of this funds transfer pricing is included
in the "Treasury" columns of the table.
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- - Indirect expenses, such as computer servicing costs and corporate overhead,
were allocated based on the extent to which each line of business actually
used the service.
- - The provision for loan losses assigned to each line of business reflects
credit quality expectations within each line over a normal business cycle.
This "normalized provision for loan losses" does not necessarily coincide
with actual net loan charge-offs at any given point in the cycle. The level
of the consolidated provision is based upon the methodology that Key uses
to estimate its consolidated allowance for loan losses. This methodology is
described in Note 1 ("Summary of significant accounting policies") under
the heading "Allowance for loan losses" on page 66 of Key's 2000 Annual
Report to Shareholders.
- - Income taxes were allocated based on the statutory Federal income tax rate
of 35% (adjusted for tax-exempt income from corporate-owned life insurance,
nondeductible goodwill amortization and tax credits associated with
investments in low-income housing projects) and a blended state income tax
rate (net of the Federal income tax benefit) of 2% for the periods
presented.
- - Capital was assigned to each line of business based on management's
assessment of economic risk factors (primarily credit, operating and market
risk).
KEY CONSUMER BANKING
---------------------------------------------------------------
HOME EQUITY AND
THREE MONTHS ENDED MARCH 31, RETAIL BANKING CONSUMER FINANCE
------------------------------ ------------------------------
dollars in millions 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Net interest income (taxable equivalent) $228 $226 $142 $128
Noninterest income 98 87 5 17
Revenue sharing(a) 13 16 1 1
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenue(b) 339 329 148 146
Provision for loan losses 12 12 33 33
Depreciation and amortization expense 39 40 12 13
Noninterest expense 158 165 68 69
Expense sharing(a) 10 13 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (taxable equivalent) and
cumulative effect of accounting change 120 99 35 31
Allocated income taxes and taxable equivalent adjustments 47 39 15 13
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of accounting change 73 60 20 18
Cumulative effect of accounting change -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 73 $60 $20 $18
==== === === ===
Percent of consolidated net income 34% 16% 9% 5%
Percent of total segments' net income 32 27 9 8
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES
Loans $7,843 $7,631 $15,868 $14,662
Total assets(b) 9,211 9,131 16,960 15,915
Deposits 32,570 30,427 144 130
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER FINANCIAL DATA
Efficiency ratio(g) 60.88% 66.28% N/M N/M
- -----------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, KEY CORPORATE FINANCE
---------------------------------
dollars in millions 2001 2000
- -------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Net interest income (taxable equivalent) $340 $319
Noninterest income 70 71
Revenue sharing(a) 36 29
- ------------------------------------------------------------------------------------------------------
Total revenue(b) 446 419
Provision for loan losses 52 48
Depreciation and amortization expense 20 19
Noninterest expense 172 156
Expense sharing(a) 21 18
- ------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (taxable equivalent) and
cumulative effect of accounting change 181 178
Allocated income taxes and taxable equivalent adjustments 69 68
- ------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of accounting change 112 110
Cumulative effect of accounting change -- --
- ------------------------------------------------------------------------------------------------------
Net income (loss) $112 $110
==== ====
Percent of consolidated net income 52% 30%
Percent of total segments' net income 50 50
- ------------------------------------------------------------------------------------------------------
AVERAGE BALANCES
Loans $35,629 $33,691
Total assets(b) 37,222 35,437
Deposits 6,484 6,144
- ------------------------------------------------------------------------------------------------------
OTHER FINANCIAL DATA
Efficiency ratio(g) N/M N/M
- ------------------------------------------------------------------------------------------------------
(a) Represents the assignment of Key Capital Partners' revenue and expense to
the lines of business principally responsible for maintaining the
relationships with the clients that used Key Capital Partners' products and
services.
(b) Substantially all revenue generated by Key's major lines of business is
derived from clients resident in the United States. Substantially all
long-lived assets, including premises and equipment, capitalized software
and goodwill, held by Key's major lines of business are located in the
United States.
(c) "Reconciling items" reflect certain nonrecurring items, the results of
divested businesses and charges related to unallocated nonearning assets of
corporate support functions. These latter charges are part of net interest
income and are allocated to the business segments through noninterest
expense. Noninterest income in the first quarter of 2000 includes a gain of
$332 million ($207 million after tax) from the sale of Key's credit card
business and $5 million ($3 million after tax) earned by the divested
credit card business. This business also added $13 million ($8 million
after tax) in the first quarter of 2000 to net interest income.
(d) The provision for loan losses includes an additional provision of $121
million ($76 million after tax) recorded in the first quarter of 2000. This
provision resulted from the implementation of an enhanced methodology for
assessing credit risk, particularly in the commercial loan portfolio.
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Developing and applying the methodologies that management follows to allocate
items among Key's lines of business is a dynamic process. Accordingly, financial
results may be revised periodically to reflect accounting enhancements, changes
in the risk profile of a particular segment of Key's business or changes in
Key's structure. The financial data for both 2001 and 2000 presented in the
accompanying table reflects the following changes that occurred during the first
quarter of 2001:
- - A number of businesses have been reclassified. The Key Electronic Services
unit moved from Treasury to Retail Banking, the Small Business unit moved
from Retail Banking to Key Corporate Finance, and the Community Development
unit moved from Key Corporate Finance to Retail Banking.
- - The methodology used to assign a provision for loan losses to each line of
business was changed from one based primarily upon actual net charge-offs
to a methodology based on the credit quality expectations within each line
over a normal business cycle.
Generally accepted accounting principles guide financial accounting, but there
is no authoritative guidance for "management accounting"--the way management
uses its judgment and experience to guide reporting decisions. Consequently, the
line of business results Key reports cannot necessarily be compared with results
presented by other companies.
KEY CAPITAL PARTNERS TREASURY TOTAL SEGMENTS RECONCILING ITEMS
- ------------------------------ ---------------------------- ---------------------------- ---------------------------
2001 2000 2001 2000 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
$ 50 $ 45 $ (33) $ (15) $ 727 $ 703 $ (32) $ (25)
228 265 51 25 452 465 3 341
(50) (46) -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
228 264 18 10 1,179 1,168 (29) (c) 316 (c)
3 2 1 2 101 97 9 86 (d)
25 24 -- -- 96 96 1 --
224 231 3 4 625 625 (24) 6 (e)
(31) (31) -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
7 38 14 4 357 350 (15) 224
5 16 (6) (8) 130 128 (6) 79
- ----------------------------------------------------------------------------------------------------------------------------
2 22 20 12 227 222 (9) 145
-- -- (1) -- (1) -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
$ 2 $ 22 $ 19 $ 12 $ 226 $ 222 $ (9) $ 145
====== ====== ======= ======= ======= ======= ======= ======
1% 6% 8% 3% 104% 60% (4)% 40%
1 10 8 5 100 100 N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------
$5,567 $5,051 $ 2,031 $ 2,440 $66,938 $63,475 $ 95 $ 611
9,848 9,595 11,344 10,980 84,585 81,058 1,739 (f) 2,129 (f)
3,916 3,374 3,647 2,973 46,761 43,048 (37) 27
- ----------------------------------------------------------------------------------------------------------------------------
N/M N/M N/M N/M N/M N/M N/M N/M
- ----------------------------------------------------------------------------------------------------------------------------
KEYCORP CONSOLIDATED
- ------------------------------
2001 2000
- ------------------------------
$ 695 $ 678
455 806
-- --
- ------------------------------
1,150 1,484
110 183
97 96
601 631
-- --
- ------------------------------
342 574
124 207
- ------------------------------
218 367
(1) --
- ------------------------------
$ 217 $ 367
======= =======
100% 100%
N/A N/A
- ------------------------------
$67,033 $64,086
86,324 83,187
46,724 43,075
- ------------------------------
N/M N/M
- ------------------------------
(e) Noninterest expense in the first quarter of 2000 includes $14 million ($9
million after tax) of nonrecurring charges recorded in connection with
strategic actions taken to improve Key's operating efficiency and
profitability, including restructuring charges of $9 million ($6 million
after tax) and $7 million ($4 million after tax) incurred by the divested
credit card business.
(f) Total assets represent primarily the unallocated portion of nonearning
assets of corporate support functions.
(g) This ratio, which measures the extent to which recurring revenues are
absorbed by operating expenses, is calculated as follows: noninterest
expense (excluding significant nonrecurring items) divided by the sum of
taxable-equivalent net interest income and noninterest income (excluding
significant nonrecurring items).
N/A = Not Applicable
N/M = Not Meaningful
12
13
5. SECURITIES
Key classifies its securities into three categories: trading, investment and
available for sale.
TRADING ACCOUNT SECURITIES. These are debt and equity securities that are
purchased and held by Key with the intent of selling them in the near term.
These securities are reported at fair value ($875 million, $743 million and $903
million at March 31, 2001, December 31, 2000 and March 31, 2000, respectively)
and included in "short-term investments" on the balance sheet. Realized and
unrealized gains and losses on trading account securities are reported in
"investment banking and capital markets income" on the income statement.
INVESTMENT SECURITIES. These include debt securities that Key has the intent and
ability to hold until maturity and equity securities that do not have readily
determinable fair values. The 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.
SECURITIES AVAILABLE FOR SALE. These are debt and equity securities that Key has
not classified as trading account securities or investment securities.
Securities available for sale are reported at fair value with unrealized gains
and losses (net of income taxes) recorded in shareholders' equity as a component
of "accumulated other comprehensive loss." Actual gains and losses on the sales
of these securities are computed for each specific security sold and included in
"net securities gains " on the income statement.
When Key retains an interest in securitized loans, Key bears the risk that the
loans will be prepaid (which results in less interest income) or not paid at
all. Key's retained interests (which include both certificated and
uncertificated interests) are accounted for like debt securities that are
classified as securities available for sale or as trading account assets.
The amortized cost, unrealized gains and losses, and approximate fair value of
Key's investment securities and securities available for sale were as follows:
MARCH 31, 2001
-----------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
in millions COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------------------
INVESTMENT SECURITIES
States and political subdivisions $ 316 $ 12 -- $ 328
Other securities 892 -- -- 892
- -------------------------------------------------------------------------------------------------------------------
Total investment securities $1,208 $ 12 -- $1,220
====== ==== === ======
SECURITIES AVAILABLE FOR SALE
U.S. Treasury, agencies and corporations $ 220 -- -- $ 220
States and political subdivisions 31 -- -- 31
Collateralized mortgage obligations 4,680 $ 85 $57 4,708
Other mortgage-backed securities 1,289 20 3 1,306
Retained interests in securitizations 320 -- 33 287
Other securities 350 4 6 348
- -------------------------------------------------------------------------------------------------------------------
Total securities available for sale $6,890 $109 $99 $6,900
====== ==== === ======
- -------------------------------------------------------------------------------------------------------------------
13
14
DECEMBER 31, 2000
-----------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
in millions COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------------------
INVESTMENT SECURITIES
States and political subdivisions $ 323 $ 10 -- $ 333
Other securities 875 -- -- 875
- -------------------------------------------------------------------------------------------------------------------
Total investment securities $1,198 $ 10 -- $1,208
====== ==== === ======
SECURITIES AVAILABLE FOR SALE
U.S. Treasury, agencies and corporations $ 984 -- -- $ 984
States and political subdivisions 33 -- -- 33
Collateralized mortgage obligations 4,296 $ 63 $61 4,298
Other mortgage-backed securities 1,355 12 12 1,355
Retained interests in securitizations 334 -- 18 316
Other securities 307 42 6 343
- -------------------------------------------------------------------------------------------------------------------
Total securities available for sale $7,309 $117 $97 $7,329
====== ==== === ======
- -------------------------------------------------------------------------------------------------------------------
MARCH 31, 2000
-----------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
in millions COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------------------
INVESTMENT SECURITIES
States and political subdivisions $ 432 $10 -- $ 442
Other securities 621 -- -- 621
- -------------------------------------------------------------------------------------------------------------------
Total investment securities $1,053 $10 -- $1,063
====== === === ======
SECURITIES AVAILABLE FOR SALE
U.S. Treasury, agencies and corporations $ 121 -- $ 1 $ 120
States and political subdivisions 53 -- -- 53
Collateralized mortgage obligations 4,295 -- 205 4,090
Other mortgage-backed securities 1,623 $ 3 37 1,589
Retained interests in securitizations 332 -- 19 313
Other securities 111 1 8 104
- -------------------------------------------------------------------------------------------------------------------
Total securities available for sale $6,535 $ 4 $270 $6,269
====== === === ======
- -------------------------------------------------------------------------------------------------------------------
14
15
6. LOANS
Key's loans by category are summarized as follows:
March 31, December 31, March 31,
in millions 2001 2000 2000
- -------------------------------------------------------------------------------------
Commercial, financial and agricultural $20,214 $20,100 $18,895
Real estate - commercial mortgage 6,873 6,876 6,941
Real estate - construction 5,351 5,154 4,565
Commercial lease financing 7,091 7,164 6,711
- -------------------------------------------------------------------------------------
Total commercial loans 39,529 39,294 37,112
Real estate - residential mortgage 4,125 4,212 4,296
Home equity 10,288 9,908 8,338
Consumer - direct 2,425 2,539 2,586
Consumer - indirect lease financing 2,855 3,005 3,143
Consumer - indirect other 5,623 5,718 6,156
- -------------------------------------------------------------------------------------
Total consumer loans 25,316 25,382 24,519
Real estate - commercial mortgage 491 316 527
Real estate - residential mortgage 57 42 50
Education 1,634 1,871 1,856
- -------------------------------------------------------------------------------------
Total loans held for sale 2,182 2,229 2,433
- -------------------------------------------------------------------------------------
Total loans $67,027 $66,905 $64,064
======= ======= =======
- -------------------------------------------------------------------------------------
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 March 31, 2001, see Note 12 ("Derivatives and
Hedging Activities"), which begins on page 21.
Changes in the allowance for loan losses are summarized as follows:
March 31, March 31,
in millions 2001 2000
- -------------------------------------------------------------------------
Balance at beginning of period $ 1,001 $ 930
Charge-offs (135) (164)
Recoveries 26 30
- -------------------------------------------------------------------------
Net charge-offs (109) (134)
Allowance related to loans sold (1) --
Provision for loan losses 110 183
- -------------------------------------------------------------------------
Balance at end of period $ 1,001 $ 979
======= =======
- -------------------------------------------------------------------------
15
16
7. IMPAIRED LOANS AND OTHER NONPERFORMING ASSETS
At March 31, 2001, impaired loans totaled $385 million. This amount includes
$256 million of impaired loans with a specifically allocated allowance for loan
losses of $111 million, and $129 million of impaired loans that are carried at
their estimated fair value without a specifically allocated allowance. At the
end of 2000, impaired loans totaled $364 million, including $213 million of
loans with a specifically allocated allowance of $102 million, and $151 million
that were carried at their estimated fair value. The average investment in
impaired loans for the first quarters of 2001 and 2000 was $375 million and $263
million, respectively.
Key's Nonperforming assets were as follows:
MARCH 31, DECEMBER 31, MARCH 31,
in millions 2001 2000 2000
- ----------------------------------------------------------------------------------------
Impaired loans $ 385 $ 364 $ 280
Other nonaccrual loans 328 283 193
- ----------------------------------------------------------------------------------------
Total nonaccrual loans 713 647 473
Restructured loans(a) -- 3 --
- ----------------------------------------------------------------------------------------
Total nonperforming loans 713 650 473
OREO 28 23 28
Allowance for OREO losses (1) (1) (6)
- ----------------------------------------------------------------------------------------
OREO, net of allowance 27 22 22
Other nonperforming assets -- -- 2
- ----------------------------------------------------------------------------------------
Total nonperforming assets $ 740 $ 672 $ 497
===== ===== =====
- ----------------------------------------------------------------------------------------
(a) Excludes restructured loans on nonaccrual status.
When appropriate, an impaired loan is assigned a specific allowance. Management
calculates the extent of the impairment, which is the carrying amount of the
loan less the estimated present value of future cash flows and the fair value of
any existing collateral. When expected cash flow and/or collateral value does
not justify the carrying amount of a loan, the amount that management deems
uncollectible (the impaired amount) is charged against the allowance for loan
losses. When collateral value or other sources of repayment appear sufficient,
but management remains uncertain about whether the loan will be repaid in full,
an amount is specifically allocated in the allowance for loan losses.
Key does not perform a specific impairment valuation for smaller-balance,
homogeneous, nonaccrual loans (shown in the preceding table as "Other nonaccrual
loans"). Generally, this portfolio includes loans to finance residential
mortgages, automobiles, recreational vehicles, boats and mobile homes.
Management applies historical loss experience rates to these loans, adjusted
based on assessments of emerging credit trends and other factors, and then
allocates a portion of the allowance for loan losses to each loan type.
16
17
8. LONG-TERM DEBT
The components of Key's long-term debt, presented net of unamortized discount
where applicable, were as follows:
MARCH 31, DECEMBER 31, MARCH 31,
dollars in millions 2001 2000 2000
- -------------------------------------------------------------------------------------------------------------------------
Senior medium-term notes due through 2005(a) $ 546 $ 393 $ 321
Subordinated medium-term notes due through 2005(a) 103 103 133
7.50% Subordinated notes due 2006(b) 250 250 250
6.75% Subordinated notes due 2006(b) 200 200 200
8.125% Subordinated notes due 2002(b) 200 199 199
8.00% Subordinated notes due 2004(b) 125 125 125
8.404% Notes due through 2001 13 13 24
All other long-term debt(h) 15 -- 2
- -------------------------------------------------------------------------------------------------------------------------
Total parent company(i) 1,452 1,283 1,254
Senior medium-term bank notes due through 2039(c) 5,725 5,979 8,298
Senior euro medium-term bank notes due through 2007(d) 3,814 3,955 2,491
6.50 % Subordinated remarketable securities due 2027(e) 312 312 312
6.95% Subordinated notes due 2028(e) 300 300 300
7.125% Subordinated notes due 2006(e) 250 250 250
7.25% Subordinated notes due 2005(e) 200 200 200
6.75% Subordinated notes due 2003(e) 200 200 200
7.50% Subordinated notes due 2008(e) 165 165 165
7.00% Subordinated notes due 2011(e) 506 -- --
7.30% Subordinated notes due 2011(e) 107 107 107
7.85% Subordinated notes due 2002(e) 93 93 93
7.55% Subordinated notes due 2006(e) 75 75 75
7.375% Subordinated notes due 2008(e) 70 70 70
Lease financing debt due through 2006(f) 569 581 629
Federal Home Loan Bank advances due through 2030(g) 453 452 246
All other long-term debt(h) 204 139 94
- -------------------------------------------------------------------------------------------------------------------------
Total subsidiaries 13,043 12,878 13,530
- -------------------------------------------------------------------------------------------------------------------------
Total long-term debt $14,495 $14,161 $14,784
======= ======= =======
- -------------------------------------------------------------------------------------------------------------------------
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 March 31, 2001, see Note 12
("Derivatives and Hedging Activities"),which begins on page 21.
(a) At March 31, 2001, December 31, 2000 and March 31,2000, the senior
medium-term notes had weighted average interest rates of 5.58%, 6.81% and
6.73%, respectively, and the subordinated medium-term notes had a weighted
average interest rate of 7.32%, 7.32% and 7.09% at each respective date.
These notes had a combination of fixed and floating interest rates.
(b) The notes may not be redeemed or prepaid prior to maturity.
(c) Senior medium-term bank notes of subsidiaries had weighted average interest
rates of 5.47%, 6.72% and 6.13%, at March 31, 2001, December 31, 2000 and
March 31, 2000, respectively. These notes had a combination of fixed and
floating interest rates.
(d) Senior euro medium-term notes had weighted average interest rates of 6.15%,
6.89%, and 6.20%, at March 31, 2001, December 31, 2000 and March 31, 2000,
respectively. These notes, which are obligations of KeyBank National
Association, had fixed and floating interest rates based on the three-month
London Interbank Offered Rate (known as "LIBOR").
17
18
(e) These notes and securities are all obligations of KeyBank National
Association, with the exception of the 7.55% notes, which are obligations
of Key Bank USA, National Association. None of the subordinated notes may
be redeemed prior to their maturity dates.
(f) Lease financing debt had weighted average interest rates of 7.79% at March
31, 2001, 7.80% at December 31, 2000 and 7.73% at March 31, 2000. This
category of debt primarily comprises nonrecourse debt collateralized by
leased equipment under operating, direct financing and sales type.
(g) Long-term advances from the Federal Home Loan Bank had weighted average
interest rates of 5.23% at March 31, 2001, 6.66% at December 31, 2000 and
6.05% at March 31, 2000. These advances, which had a combination of fixed
and floating interest rates, were secured by $679 million, $678 million,
and $369 million of real estate loans and securities at March 31, 2001,
December 31, 2000 and March 31, 2000, respectively.
(h) Other long-term debt, comprising industrial revenue bonds, capital lease
obligations, and various secured and unsecured obligations of corporate
subsidiaries, had weighted average interest rates of 7.88%, 7.91%, and
8.24% at March 31, 2001, December 31, 2000 and March 31, 2000,
respectively.
(i) At March 31, 2001, unused capacity under KeyCorp's shelf registration
totaled $500 million.
9. CAPITAL SECURITIES
Five subsidiary business trusts of KeyCorp (KeyCorp Institutional Capital A,
KeyCorp Institutional Capital B, KeyCorp Capital I, KeyCorp Capital II and
KeyCorp Capital III) have issued corporation-obligated mandatorily redeemable
preferred capital securities ("capital securities"). As guarantor, KeyCorp
unconditionally guarantees payment of:
- - accrued and unpaid distributions required to be paid on the capital
securities;
- - the redemption price when a capital security is called for redemption; and
- - amounts due if a trust is liquidated or terminated.
KeyCorp owns all of the outstanding common stock of each of the five trusts. The
trusts used the proceeds from the issuance of their capital securities and
common stock to buy debentures issued by KeyCorp. These debentures are the
trusts' only assets and the interest payments from the debentures finance the
distributions paid on the capital securities. Key's financial statements do not
reflect the debentures or the related income statement effects because they are
eliminated in consolidation.
The capital securities, common securities and related debentures are summarized
as follows:
PRINCIPAL
CAPITAL AMOUNT OF
SECURITIES, COMMON DEBENTURES,
dollars in millions NET OF DISCOUNT(a) SECURITIES NET OF DISCOUNT(b)
- ----------------------------------------------------------------------------------------------------------------------
March 31, 2001
KeyCorp Institutional Capital A $ 388 $11 $ 361
KeyCorp Institutional Capital B 166 4 154
KeyCorp Capital I 247 8 255
KeyCorp Capital II 244 8 255
KeyCorp Capital III 263 8 257
- ----------------------------------------------------------------------------------------------------------------------
Total $1,308 $39 $1,282
====== === ======
- ----------------------------------------------------------------------------------------------------------------------
December 31, 2000 $1,243 $39 $1,282
====== === ======
- ----------------------------------------------------------------------------------------------------------------------
March 31, 2000 $1,243 $39 $1,282
====== === ======
- ----------------------------------------------------------------------------------------------------------------------
INTEREST RATE MATURITY
OF CAPITAL OF CAPITAL
SECURITIES AND SECURITIES AND
dollars in millions DEBENTURES(c) DEBENTURES
- ------------------------------------------------------------------------------------------------
March 31, 2001
KeyCorp Institutional Capital A 7.826% 2026
KeyCorp Institutional Capital B 8.250 2026
KeyCorp Capital I 7.141 2028
KeyCorp Capital II 6.875 2029
KeyCorp Capital III 7.750 2029
- -----------------------------------------------------------------------------------------------
Total 7.558% --
- -----------------------------------------------------------------------------------------------
December 31, 2000 7.619% --
- -----------------------------------------------------------------------------------------------
March 31, 2000 7.458% --
- -----------------------------------------------------------------------------------------------
(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.
(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
19
18, 1999 (for debentures owned by Capital II), and July 16, 1999 (for
debentures owned by Capital III); and (ii) in whole at any time within 90
days after and during the continuation of a "tax event" or a "capital
treatment event" (as defined in the applicable offering circular). If the
debentures purchased by Capital A or Capital B are redeemed before they
mature, the redemption price will be the principal amount, plus a premium,
plus any accrued but unpaid interest. If the debentures purchased by
Capital I are redeemed before they mature, the redemption price will be the
principal amount, plus any accrued but unpaid interest. If the debentures
purchased by Capital II or Capital III are redeemed before they mature, the
redemption price will the greater of: (i) the principal amount, plus any
accrued but unpaid interest or (ii) the sum of the present values of
principal and interest payments discounted at the Treasury Rate (as defined
in the applicable offering circular), plus 20 basis points (25 basis points
for Capital III), plus any accrued but unpaid interest. When debentures are
redeemed in response to tax or capital treatment events, the redemption
price is generally slightly more favorable to Key.
(c) The interest rates for Capital A, Capital B, Capital II and Capital III are
fixed. Capital I has a floating interest rate (which reprices quarterly)
equal to three-month LIBOR plus 74 basis points. The rates shown as the
total at March 31, 2001, December 31, 2000, and March 31, 2000, are
weighted average rates.
10. RESTRUCTURING CHARGES
During the first quarter of 2001, KeyCorp recorded a restructuring charge credit
of $4 million ($2 million after tax) in connection with a three-year
"competitiveness initiative" instituted in November 1999 to improve Key's
operating efficiency and profitability. Restructuring charges previously accrued
under this initiative totaled $104 million ($66 million after tax) in 2000 and
$98 million ($62 million after tax) in 1999.
In the first phase of the initiative, Key's primary strategic actions were
outsourcing certain technology and other corporate support functions,
consolidating sites in a number of Key's businesses and reducing the number of
management layers. This phase was completed last year. The final phase, which
started during the second half of 2000, is focusing on:
- - simplifying Key's business structure by consolidating 22 business lines
into 12;
- - streamlining and automating business operations and processes;
- - standardizing product offerings and internal processes;
- - consolidating operating facilities and service centers; and
- - outsourcing certain noncore activities.
As a result of the competitiveness initiative, Key's workforce will be reduced
by approximately 4,000 positions. Those reductions will occur at all levels
throughout the organization. At March 31, 2001, more than 3,100 positions had
been eliminated. Key's management expects the remaining reductions to occur by
the end of 2001.
Changes in the restructuring charge liability associated with the above actions
are as follows:
DECEMBER 31, RESTRUCTURING CASH MARCH 31,
in millions 2000 CHARGES PAYMENTS 2001
- ---------------------------------------------------------------------------------------------------
Severance $ 62 $ (7) $ 11 $ 44
Site consolidations 60 3 7 56
Equipment and other 2 -- -- 2
- ---------------------------------------------------------------------------------------------------
Total $124 $ (4) $ 18 $102
==== ==== ==== ====
- ---------------------------------------------------------------------------------------------------
19
20
11. LEGAL PROCEEDINGS
In March 1998, McDonald Investments Inc. ("McDonald"), now a subsidiary of
KeyCorp, participated in an offering to institutional investors of certain
securities of Nakornthai Strip Mill Public Company Ltd. ("NSM"), a Thailand
public company, and certain NSM affiliates. The offering was part of the
financing of an NSM steel mini-mill located in Chonburi, Thailand. McDonald
served as a financial advisor to NSM and was an initial purchaser in connection
with the offering (under Rule 144A of the Securities and Exchange Commission) of
the approximately $452 million in NSM debt securities and related warrants. On
December 24, 1998, holders of NSM securities gave a Notice of Default alleging a
number of defaults under the terms of the securities. NSM is currently working
to restructure its obligations, including obligations to holders of the
securities and other creditors.
Certain purchasers of the NSM securities have commenced litigation against
McDonald and several other parties, claiming that McDonald, the other initial
purchasers and certain other of NSM's third party service providers violated
certain state and Federal securities and other laws. The lawsuits are based on
alleged misstatements and omissions in the Offering Memorandum for the
securities, and on certain other information allegedly provided and oral
statements allegedly made to potential investors. In each lawsuit the plaintiffs
allege misrepresentations relating to (among other things) the physical
facilities at the mill, the management of the mill, the supply of inputs to the
mill and the use of the proceeds of the offering.
McDonald and others are currently defending nine separate lawsuits brought by
purchasers of the NSM securities: two in Federal District Court in Minnesota;
two in Federal District Court in New York; two in California; and one in each of
Connecticut, Illinois and New Jersey. The aggregate amount of securities alleged
to have been purchased by the plaintiffs in these nine lawsuits is at least $260
million. While the relief claimed in the lawsuits varies, generally the
plaintiffs seek rescission of the sale of the securities, compensatory damages,
punitive damages, pre- and post judgment interest, legal fees and expenses, and
in the New Jersey action (in which plaintiffs allege damages of approximately
$54 million), treble damages consistent with applicable law.
McDonald is vigorously defending these actions and has filed, or will file,
responses to each complaint denying liability.
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 and Key's counsel, management does not believe there is any legal
action (including the actions against McDonald) to which KeyCorp or any of its
subsidiaries is a party, or involving any of their properties, that,
individually or in the aggregate, will have a material adverse effect on Key's
financial condition.
20
21
12. DERIVATIVES AND HEDGING ACTIVITIES
Key, mainly through its lead bank (KeyBank National Association), is party to
various derivative instruments. These derivatives 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 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 of the 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 133, which establishes accounting
and reporting standards for derivatives and hedging activities. The new
standards are summarized in Note 1 ("Basis of Presentation") under the heading
"Derivatives and hedging activities," on page 7.
As a result of adopting SFAS 133, Key recorded a cumulative loss of $1 million
in net income and a cumulative loss of $22 million in other comprehensive income
(loss) during the first quarter of 2001. Of the $22 million loss, approximately
$13 million will be reclassified to earnings during 2001.
At March 31, 2001, Key had $191 million of derivative assets recorded in
"accrued income and other assets" and $231 million of derivative liabilities
recorded in "accrued expense and other liabilities," on the balance sheet.
ASSET AND LIABILITY MANAGEMENT
FAIR VALUE HEDGING STRATEGIES. Key enters into primarily receive fixed/pay
variable interest rate swap contracts to modify its exposure to interest rate
risk by converting specified fixed-rate deposits, short-term borrowings and
long-term debt to variable rate obligations. These contracts involve the receipt
of fixed-rate interest payments in exchange for variable rate payments over the
life of the contracts without an exchange of the underlying notional amount.
During the first quarter of 2001, Key recognized a net gain of less than $1
million related to the ineffective portion of its fair value hedging
instruments. The ineffective portion of the hedge relationship was recorded in
"other income" on the income statement.
CASH FLOW HEDGING STRATEGIES. Key also enters into primarily pay fixed/receive
variable interest rate swap contracts that effectively convert a portion of its
floating-rate debt to fixed-rate, thereby reducing the potential adverse impact
of interest rate increases on future interest expense. With these contracts,
variable-rate interest payments are exchanged for fixed-rate payments over the
life of the contracts without an exchange of the underlying notional amount.
Similarly, Key has converted certain floating-rate commercial loans to
fixed-rate by entering into receive fixed/pay variable interest rate swap
contracts. With these contracts, Key receives fixed-rate interest payments in
exchange for variable-rate payments over the life of the contracts.
Key also uses pay fixed/receive variable interest rate swaps to manage the
interest rate risk associated with anticipated sales/securitizations of certain
commercial real estate loans. These swaps protect against a possible short-term
decline in the value of the loans between the time they are originated and the
time of the anticipated sale/securitization. Key's policy is to generally sell
or securitize these loans within one year
21
22
of their origination and to hedge the related interest rate risk over the period
during which the loans are held.
During the first quarter of 2001, the net gain recognized by Key in connection
with the ineffective portion of its cash flow hedging instruments was not
significant. There was no impact on earnings during the first quarter of 2001
related to the exclusion of portions of hedging instruments from the assessment
of hedge effectiveness. Any hedge ineffectiveness was recorded in "other income"
on the income statement.
The change in accumulated other comprehensive income (loss) resulting from cash
flow hedges is as follows:
CUMULATIVE
EFFECT
DECEMBER 31, OF ADOPTING 2001 RECLASSIFICATION MARCH 31,
in millions 2000 SFAS 133 HEDGING ACTIVITY TO EARNINGS 2001
- ---------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive
income (loss) resulting from
cash flow hedges -- $(22) $(14) $3 $(33)
- ---------------------------------------------------------------------------------------------------------------------------
At March 31, 2001, Key expects to reclassify approximately $27 million of net
losses on derivative instruments from accumulated other comprehensive income
(loss) to earnings during the next twelve months, coinciding 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/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 the banks'
commercial loan clients), and enters into other positions with third parties to
mitigate the interest rate risk of the client positions. The swaps entered into
with clients are generally limited to conventional swaps. All of the 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 foreign exchange risk by entering
into other foreign exchange contracts with third parties. Adjustments to the
fair value of all foreign exchange forward contracts are included in "investment
banking and capital markets income" on the income statement.
OPTIONS AND FUTURES. Key uses these instruments for proprietary trading
purposes. Adjustments to the fair value of options 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.
THREE MONTHS ENDED MARCH 31,
-----------------------------
in millions 2001 2000
- -------------------------------------------------------------------------
Interest rate swap contracts $ 3 $15
Foreign exchange forward contracts 11 8
Option and futures contracts (1) --
- -------------------------------------------------------------------------
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CREDIT RISK
Swaps and caps present credit risk because the counterparty may not meet the
terms of the contract. This risk is measured as the cost of replacing
contracts--at current market rates-- that have generated unrealized gains. To
mitigate credit risk, Key deals exclusively with counterparties that have high
credit ratings.
Key uses two additional precautions to manage exposure to credit risk on swap
contracts. First, Key generally enters into bilateral collateral and master
netting arrangements. These agreements include legal rights of setoff that
provide for the net settlement of the subject contracts with the same
counterparty in the event of default. Second, a credit committee monitors credit
risk exposure to the counterparty on each interest rate swap to determine
appropriate limits on Key's total credit exposure and the amount of collateral
required, if any.
At March 31, 2001, Key had 35 different counterparties to hedging swaps and
swaps entered into to offset the risk of client swaps. Key had aggregate credit
exposure of $70 million to 16 of these counterparties, with the largest credit
exposure to an individual counterparty amounting to $22 million. As of the same
date, Key's aggregate credit exposure on its interest rate caps totaled $34
million. Based on management's assessment, as of March 31, 2001, all
counterparties were expected to meet their obligations.
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INDEPENDENT ACCOUNTANTS' REVIEW REPORT
SHAREHOLDERS AND BOARD OF DIRECTORS
KEYCORP
We have reviewed the unaudited condensed consolidated balance sheets of KeyCorp
and subsidiaries ("Key") as of March 31, 2001 and 2000, and the related
condensed consolidated statements of income, changes in shareholders' equity and
cash flow for the three-month periods then ended. These financial statements are
the responsibility of Key's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with accounting principles generally accepted in the
United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Key as of
December 31, 2000, and the related consolidated statements of income, changes in
shareholders' equity, and cash flow for the year then ended (not presented
herein) and in our report dated January 12, 2001, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 2000, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
/s/ Ernst & Young LLP
Cleveland, Ohio
April 13, 2001
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
- ------------
This Management's Discussion and Analysis reviews the financial condition and
results of operations of KeyCorp and its subsidiaries for the first quarters of
2001 and 2000. Some tables may cover more than these two quarters to comply with
Securities and Exchange Commission disclosure requirements or to illustrate
trends over a longer period of time. When you read this discussion, you should
also look at the consolidated financial statements and related notes that appear
on pages 3 through 23.
TERMINOLOGY
This report contains some shortened names and industry-specific terms. We want
to explain some of these terms at the outset so you can better understand the
discussion that follows.
- - KEYCORP refers solely to the parent company.
- - KEY refers to the consolidated entity consisting of KeyCorp and its
subsidiaries.
- - A KEYCENTER is one of Key's full-service retail banking facilities or
branches.
- - Key engages in CAPITAL MARKETS ACTIVITIES, primarily through the Key
Capital Partners line of business. These activities encompass a variety of
services. Among other things, we trade securities as a dealer, enter into
derivative contracts (both to accommodate clients' financing needs and for
proprietary trading purposes), invest in privately held companies (also
referred to as principal investing) and conduct transactions in foreign
currencies (both to accommodate clients' needs and to benefit from
fluctuations in exchange rates).
- - CORE FINANCIAL RESULTS exclude the effects of significant nonrecurring
items such as gains from divestitures and restructuring charges.
- - When we want to draw your attention to a particular item in Key's Notes to
Consolidated Financial Statements, we refer to NOTE ___, giving the
particular number, name and starting page number.
- - All earnings per share data included in this discussion are presented on a
DILUTED basis, which takes into account all common shares outstanding and
potential common shares that could result from the exercise of outstanding
stock options. Some of the financial information tables also include BASIC
earnings per share, which takes into account only common shares
outstanding.
- - For regulatory purposes, capital is divided into several classes. Federal
regulations prescribe that at least half of a bank or bank holding
company's TOTAL RISK-ADJUSTED CAPITAL must qualify as TIER 1. Both total
and Tier 1 capital serve as bases for several measures of capital adequacy,
which is an important indicator of financial stability and condition. You
will find a more detailed explanation of total and Tier 1 capital and how
they are calculated in the section entitled "Capital and dividends," which
begins on page 52.
OUR PROJECTIONS ARE NOT FOOLPROOF
This report contains "forward-looking statements" about issues like anticipated
cost savings and revenue growth, and the anticipated reduction in Key's
employment base. Forward-looking statements by their nature are subject to
assumptions, risks and uncertainties. For a variety of reasons, including the
following, actual results could differ materially from those contained in or
implied by the forward-looking statements.
- - Interest rates could change more quickly or more significantly than we
expect.
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- - If the economy or segments of the economy continue to slow, the demand for
new loans and the ability of borrowers to repay outstanding loans may
decline.
- - The stock and bond markets could suffer a disruption, which may have a
negative effect on our financial condition and that of our borrowers, and
on our ability to raise money by issuing new securities.
- - It could take us longer than we anticipate to implement strategic
initiatives designed to increase revenues or manage expenses, or we may be
unable to implement those initiatives at all.
- - Acquisitions and dispositions of assets, business units or affiliates could
affect us in ways that management has not anticipated.
- - We may become subject to new legal obligations, or the resolution of
pending litigation may have a negative effect on our financial condition.
- - We may become subject to new and unanticipated accounting, tax, or
regulatory practices or requirements.
HIGHLIGHTS OF KEY'S FIRST QUARTER 2001 PERFORMANCE
- --------------------------------------------------
FINANCIAL PERFORMANCE
Some of the highlights of Key's core financial performance for the first
quarters of 2001 and 2000 are discussed below.
Net income was $217 million, or $.51 per diluted common share, compared with
adjusted core earnings of $234 million or $.53 per share for the first quarter
of 2000. Last year's adjusted core earnings exclude $.28 per share of
significant nonrecurring items and $.02 per share from the divested credit card
business. On a reported basis, Key's net income for the first quarter of 2000
was $367 million or $.83 per diluted common share.
Key's return on average equity for the first quarter of 2001 was 13.28%,
compared with a core return on average equity of 15.02% for the first three
months of last year.
Key's first quarter return on average total assets was 1.02%, compared with a
core return of 1.17% for the first quarter of 2000.
Although there were no significant nonrecurring items affecting Key's first
quarter 2001 results, Key's financial results for the year-ago quarter were
affected by a number of such items. The most significant of these items and
their impact on both earnings and primary financial ratios are summarized in
Figure 1. Each of these items is discussed in greater detail elsewhere in this
report.
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FIGURE 1. SIGNIFICANT NONRECURRING ITEMS
THREE MONTHS ENDED MARCH 31,
----------------------------
dollars in millions, except per share amounts 2001 2000
- -------------------------------------------------------------------------------------
Net income as reported $ 217 $ 367
Nonrecurring items (net of tax):
Gain from sale of credit card portfolio -- (207)
Additional provision for loan losses -- 77
Restructuring and other special charges -- 7
Other nonrecurring items -- (1)
- -------------------------------------------------------------------------------------
Net income - core $ 217 $ 243
======= =======
Net income per diluted common share $ .51 $ .83
Net income per diluted common share - core .51 .55
Return on average total assets 1.02% 1.77%
Return on average total assets - core 1.02 1.17
Return on average equity 13.28 22.68
Return on average equity - core 13.28 15.02
- -------------------------------------------------------------------------------------
The decline in Key's net income from adjusted core earnings reported a year-ago
was due largely to the significant, adverse effects of a weakening economy. The
impact was particularly noticeable in our more capital markets-sensitive
businesses, such as equity capital investing and brokerage, both within the Key
Capital Partners line of business. While the economic slowdown also impacted our
loan portfolio generally, the erosion in credit quality that we are experiencing
is disproportionately concentrated in two distinct portfolios of limited size in
our Specialty Lending area. More specific information on Key's credit quality is
provided in the section entitled "Asset quality," which begins on page 47.
Despite the unfavorable operating conditions, we were encouraged by continued
strong growth in our home equity lending business and Retail Banking deposits.
We also were pleased with the continued reduction in our noninterest expense,
reflecting the immediate and lasting benefits of Key's comprehensive,
corporate-wide competitiveness initiative, which we began implementing last
fall. We remain confident that we will capture 100 percent of the initiative's
cost savings potential; more than half of our projects have been implemented,
and have begun to favorably impact Key's expenses. In addition, we remain on
schedule to complete the remaining projects. The accumulating benefits of this
initiative provide Key with a distinct advantage; the ability to reduce costs
substantially is critical in an economic environment in which revenue growth is
difficult.
Figure 2 summarizes Key's financial performance on a reported basis for each of
the past five quarters.
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FIGURE 2. SELECTED FINANCIAL DATA
2001 2000
----------------- -------------------------------------------------
dollars in millions, except per share amounts FIRST FOURTH THIRD SECOND FIRST
- ---------------------------------------------------------------------------------------------------------------------------
FOR THE PERIOD
Interest income $ 1,570 $ 1,652 $ 1,596 $ 1,540 $ 1,489
Interest expense 882 950 912 867 818
Net interest income 688 702 684 673 671
Provision for loan losses 110 108 131 68 183
Noninterest income 455 508 405 475 806
Noninterest expense 698 705 787 698 727
Income before income taxes 335 397 171 382 567
Net income 217 266 121 248 367
- ---------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Net income $ .51 $ .63 $ .28 $ .57 $ .83
Net income-assuming dilution .51 .62 .28 .57 .83
Cash dividends .295 .28 .28 .28 .28
Book value at period end 15.79 15.65 15.26 15.09 14.84
Market price:
High 27.58 28.50 27.06 23.00 22.25
Low 22.65 21.50 17.50 17.00 15.56
Close 25.80 28.00 25.31 17.63 19.00
Weighted average common shares (000) 424,024 425,054 429,584 434,112 441,834
Weighted average common shares and
potential common shares (000) 429,917 430,634 431,972 436,022 443,757
- ---------------------------------------------------------------------------------------------------------------------------
AT PERIOD END
Loans $ 67,027 $ 66,905 $ 66,299 $ 65,612 $ 64,064
Earning assets 77,027 77,316 75,786 74,748 73,953
Total assets 86,457 87,270 85,500 84,719 83,504
Deposits 45,965 48,649 47,809 49,076 46,036
Long-term debt 14,495 14,161 13,800 14,097 14,784
Shareholders' equity 6,702 6,623 6,520 6,507 6,493
Full-time equivalent employees 21,882 22,142 22,457 23,005 23,474
Branches 922 922 932 938 937
- ---------------------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on average total assets 1.02% 1.24% .57% 1.20% 1.77%
Return on average equity 13.28 16.16 7.39 15.40 22.68
Net interest margin (taxable equivalent) 3.63 3.71 3.68 3.68 3.68
- ---------------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS AT PERIOD END
Equity to assets 7.75% 7.59% 7.63% 7.68% 7.78%
Tangible equity to tangible assets 6.29 6.12 6.10 6.12 6.16
Tier 1 risk-adjusted capital 7.99 7.72 7.59 7.88 7.98
Total risk-adjusted capital 12.32 11.48 11.34 11.74 12.04
Leverage 7.79 7.71 7.76 7.90 7.89
- ---------------------------------------------------------------------------------------------------------------------------
Key completed several acquisitions and a divestiture during the five quarters
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 quarter to the next. Note 3 ("Acquisitions and Divestiture") on page 9 has
specific information about the acquisitions and divestiture that Key completed
in the periods presented above to help you understand how those transactions
impacted Key's financial condition and results of operations.
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CORPORATE STRATEGY
Key's management reviews Key's business lines on an ongoing basis to identify
opportunities to improve earnings by shifting capital from low-growth to
high-growth businesses. We continue to focus on acquiring or developing
businesses that we believe are capable of achieving double-digit earnings growth
rates, and selling portfolios and business units that have low anticipated
growth rates or do not have a competitive advantage or significant market share.
Key's corporate strategy also reflects the growing importance of the Internet
and related information technologies to all daily activities. In particular, the
strategy calls for the continual and thoughtful application of such technologies
to enhance Key's product and service offerings and to streamline our internal
business practices.
This long-standing strategy was supplemented in the fourth quarter of 1999 by a
new three-year competitiveness initiative to improve profitability by reducing
the costs of doing business, sharpening the focus on the most profitable growth
businesses and enhancing revenues. More specific information on the status of
this initiative is provided in the section below entitled "Status of three-year
competitiveness initiative." Importantly, it is Key's plan to convert this
competitiveness initiative into a continuous process in order to improve client
service levels and to control expenses.
In light of the economic downturn, we may accelerate in the second quarter of
2001 our ongoing process of exiting or de-emphasizing low growth or low profit
businesses in order to be better positioned to expand higher growth and higher
profit businesses when the economy improves. Strategic decisions such as these
may necessitate accounting charges.
PRINCIPAL STRATEGIC ACTIONS DURING THE FIRST QUARTER OF 2001
Early in the first quarter, we acquired The Wallach Company, Inc., an
investment-banking firm based in Denver, Colorado. We expect this acquisition to
enhance our position in this fast-growth region and to provide additional
expertise in the information technology and financial institutions sectors.
STATUS OF THREE-YEAR COMPETITIVENESS INITIATIVE
During the third quarter of 2000, we entered the second and final phase of our
three-year competitiveness initiative. Management expects that Key will achieve
an annual savings rate of approximately $360 million from the overall initiative
when actions are fully implemented by the end of 2002. In the initial phase,
which began in November 1999, Key reduced its operating expenses by
approximately $100 million by outsourcing certain nonstrategic support
functions, consolidating sites in a number of our businesses and reducing
management layers. The final phase is focusing on:
- - simplifying Key's business structure by consolidating 22 business lines
into 12;
- - streamlining and automating business operations and processes;
- - standardizing product offerings and internal processes;
- - consolidating operating facilities and service centers; and
- - outsourcing additional noncore activities.
As of March 31, 2001, more than half of the projects related to the final phase
have been completed, although many of the expected benefits from these projects
have just begun to be realized. Management expects that the actions taken in the
final phase will reduce Key's workforce by approximately 2,300 positions by the
end of 2001. This will bring workforce reductions to approximately 4,000
positions for the entire three-year initiative. In the first quarter of 2001, we
reduced restructuring and other special charges in connection with the
competitiveness initiative by $4 million, bringing the cumulative charges
recorded for this initiative to a net $277 million. The section entitled
"Noninterest expense," which begins on page 42, and Note 10 ("Restructuring
Charges"), on page 19, provide more information about Key's restructuring
charges.
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CASH BASIS FINANCIAL DATA
- -------------------------
The selected financial data presented in Figure 3 highlight Key's performance on
a cash basis for each of the past five quarters. We provide cash basis financial
data because we believe it offers a useful tool for measuring Key's ability to
support future growth, evaluating liquidity and assessing Key's ability to pay
dividends and repurchase shares.
"Cash basis" accounting can mean different things. When we apply "cash basis"
accounting, the only adjustments that we make to get from the information in
Figure 2 (which is presented on an accrual basis) to the comparable line items
in Figure 3 are to exclude goodwill and other intangibles that do not qualify as
Tier 1 capital, and to exclude the amortization of those assets. Figure 3 does
not exclude the impact of other noncash items (such as depreciation and deferred
taxes) and significant nonrecurring items.
Key's goodwill and other intangibles that do not qualify as Tier 1 capital are
the result of business combinations that Key recorded using the "purchase"
method of accounting. Under the purchase method, assets and liabilities of
acquired companies are recorded at their fair values and any amount paid in
excess of the fair value of the net assets acquired is recorded as goodwill. (If
the same transactions had qualified for accounting using the "pooling of
interests" method, the acquired company's financial statements would simply have
been combined with Key's.) After a combination using purchase accounting, Key
must amortize goodwill and other intangibles by taking periodic charges against
income, but those charges are only accounting entries, not actual cash expenses.
Thus, from an investor's perspective, the economic effect of a transaction is
the same whether we account for it as a purchase or a pooling. For the same
reason, the amortization of intangibles does not impact Key's liquidity and
funds management activities.
This is the only section of this Financial Review that discusses Key's financial
results on a cash basis.
FIGURE 3. CASH BASIS SELECTED FINANCIAL DATA
2001 2000
--------- ------------------------------------------------
dollars in millions, except per share amounts FIRST FOURTH THIRD SECOND FIRST
- -----------------------------------------------------------------------------------------------------------------------
FOR THE PERIOD
Noninterest expense $ 672 $ 679 $ 763 $ 672 $ 702
Income before income taxes 361 423 195 408 592
Net income 241 290 143 271 390
- -----------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Net income $ .57 $ .68 $ .33 $ .62 $ .88
Net income - assuming dilution .56 .67 .33 .62 .88
Weighted average common shares (000) 424,024 425,054 429,584 434,112 441,834
Weighted average common shares and potential
common shares (000) 429,917 430,634 431,972 436,022 443,757
- -----------------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on average total assets 1.15% 1.37% .69% 1.33% 1.92%
Return on average equity 18.57 22.33 11.12 21.56 30.97
- -----------------------------------------------------------------------------------------------------------------------
GOODWILL AND NONQUALIFYING INTANGIBLES
Goodwill average balance $ 1,323 $ 1,335 $ 1,346 $ 1,370 $ 1,386
Nonqualifying intangibles average balance 42 46 50 54 58
Goodwill amortization (after tax) 21 21 20 21 20
Nonqualifying intangibles amortization (after tax) 3 3 2 2 3
- -----------------------------------------------------------------------------------------------------------------------
Key completed several acquisitions and a divestiture during the five quarters
presented in this table. One or more of these transactions may have had a
significant effect on Key's results, making it difficult to compare results from
one quarter to the next. Note 3 ("Acquisitions and Divestiture") on page 9 has
specific information about the acquisitions and divestiture that Key completed
in the quarters presented above to help you understand how those transactions
impacted Key's financial condition and results of operations.
30
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LINE OF BUSINESS RESULTS
- ------------------------
Key has three major lines of business:
KEY CONSUMER BANKING comprises two of Key's primary divisions: RETAIL BANKING,
AND HOME EQUITY AND CONSUMER FINANCE.
- - RETAIL BANKING offers branch-based deposit, investment and credit products
and personal financial services to consumers.
- - HOME EQUITY AND CONSUMER FINANCE offers non-branch-based consumer loan
products, such as education loans, home equity loans, automobile loans and
leases, and marine and recreational vehicle loans.
KEY CORPORATE FINANCE offers financing and specialized services related to,
among other things, transaction processing, corporate electronic commerce,
financial advice and equipment leasing. It also serves the needs of Key's small
business clients.
KEY CAPITAL PARTNERS offers asset management, employee benefits services,
brokerage services, investment banking, capital markets and insurance expertise,
and conducts equity capital investing. It also provides specialized services to
high-net-worth clients through the wealth management and private banking
businesses.
This section summarizes the financial performance of each line of business and
related strategic developments. To better understand this discussion, see Note 4
("Line of Business Results"), which begins on page 10 and discloses the
activities and financial results of each line of business in greater detail.
Figure 4 shows the net income (loss) contributed by each of Key's major lines of
business in the first quarters of 2001 and 2000.
FIGURE 4. NET INCOME (LOSS) BY LINE OF BUSINESS(a)
THREE MONTHS ENDED MARCH 31, CHANGE
----------------------------- -------------------------
dollars in millions 2001 2000 AMOUNT PERCENT
- -----------------------------------------------------------------------------------------------------
Key Consumer Banking:
Retail Banking $ 73 $ 60 $ 13 21.7%
Home Equity and Consumer Finance 20 18 2 11.1
Key Corporate Finance 112 110 2 1.8
Key Capital Partners(b) 2 22 (20) (90.9)
Treasury 19 12 7 (58.3)
- -----------------------------------------------------------------------------------------------------
Total segments 226 222 4 1.8
Reconciling items(c) (9) 145 (154) (106.2)
- -----------------------------------------------------------------------------------------------------
Total net income $ 217 $ 367 $(150) (40.9)%
===== ===== =====
- -----------------------------------------------------------------------------------------------------
(a) Key's management accounting system utilizes a methodology for loan loss
provisioning by line of business that reflects credit quality expectations
within each line of business over a normal business cycle. The "normalized
provision for loan losses" assigned to each line as a result of this
methodology does not necessarily coincide with the level of net loan
charge-offs at any given point in the cycle.
(b) Noninterest income and expense attributable to Key Capital Partners is
assigned to Retail Banking, Home Equity and Consumer Finance or Key
Corporate Finance if one of those businesses is principally responsible for
maintaining the relationship with the client that used Key Capital
Partners' products and services. Key Capital Partners had net income of $15
million in the first quarter of 2001 and $31 million in the first quarter
of 2000 before its income and expense were reassigned.
(c) Reconciling items include certain nonrecurring items such as the first
quarter 2000 gain from the sale of Key's credit card business, charges
related to unallocated nonearning assets of corporate support functions and
the results of the divested credit card business.
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KEY CONSUMER BANKING
RETAIL BANKING (A DIVISION OF KEY CONSUMER BANKING)
Net income for Retail Banking was $73 million for the first quarter of 2001, up
from $60 million for the same period in 2000. The increase in net income is
attributable to growth in total revenue and a reduction in noninterest expense.
Net interest income improved slightly from the first quarter of 2000, reflecting
the positive effects of a 3% increase in average loans outstanding and a 7%
increase in deposits. The positive effects of this growth were substantially
offset by the effect of narrower interest rate spreads used in determining the
profit contribution from deposits generated by Retail Banking. Noninterest
income rose 8% from the year-ago quarter, while noninterest expense decreased
5%, largely due to lower costs associated with personnel, depreciation and
amortization expense, and various indirect charges.
HOME EQUITY AND CONSUMER FINANCE (A DIVISION OF KEY CONSUMER BANKING)
Net income for Home Equity and Consumer Finance was $20 million in the first
quarter of 2001, compared with $18 million for the same period last year. Total
revenue rose slightly from the year-ago quarter, reflecting growth in net
interest income that was largely offset by a decrease in noninterest income. At
the same time, the level of noninterest expense declined.
Although total revenue grew only slightly from the first quarter of 2000, its
composition changed due to our decision to cease securitizing and selling our
home equity loans. These assets have an attractive risk/reward profile and
retaining them was a significant factor in contributing to an 8% increase in
average loans outstanding and a $14 million, or 11%, increase in net interest
income. This decision also contributed to a decline in noninterest income due to
lower fee income from the servicing of securitized assets. Also adding to the
decline in noninterest income was an increase in losses on leased vehicle
residual values. The slight decrease in noninterest expense was primarily due to
lower personnel costs.
KEY CORPORATE FINANCE
Net income for Key Corporate Finance was $112 million for the first three months
of 2001, compared with $110 million for the same period last year and $142
million for the fourth quarter of 2000. The improvement from the year-ago
quarter was driven by revenue growth, but was substantially offset by a rise in
noninterest expense and a higher normalized provision for loan losses.
In comparison with the first quarter of 2000, total average loans grew by 6%,
resulting in a $21 million, or 7%, improvement in net interest income. The
growth in loans was distributed among most major business units. At the same
time, noninterest income rose 6% primarily due to higher income from loan fees
and various investment banking and capital markets activities. These increases
in revenue were largely offset by higher costs associated with investment
banking and capital markets activities, credit extensions and collections, and
personnel.
The decline in earnings from the preceding quarter was due to a decrease in
total revenue (primarily noninterest income) and an increase in noninterest
expense. The decrease in noninterest income was largely attributable to declines
in loan fees and investment banking fees, an area in which the volume of
business is typically higher in the fourth quarter of the year.
KEY CAPITAL PARTNERS
Net income for Key Capital Partners was $2 million in the first quarter of 2001,
compared with $22 million for the same period last year. Prior to assigning
revenue and expense to other business lines whose clients utilize products and
services offered by Key Capital Partners, net income was $15 million in the
first quarter of 2001, compared with $31 million in the first quarter of 2000.
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33
Total revenue for Key Capital Partners decreased by $36 million, or 14%, ($32
million, or 10%, prior to revenue sharing) from the year-ago quarter. The
primary factors contributing to the decrease were declines in net gains from
equity capital investments and revenue derived from brokerage services
(principally in our Private Client Group). The reduction in each of these
revenue components reflects the effect of a slower economy and related weakness
in the securities markets. These declines were partially offset by a $6 million,
or 3% decrease in noninterest expense, due primarily to lower personnel costs.
TREASURY
Treasury includes the Treasury business unit, as well as the net effect of funds
transfer pricing. In the first three months of 2001, this segment generated net
income of $19 million, up from $12 million in the same period last year. The
improvement was attributable to a $25 million increase in gains from the sales
of securities, offset in part by a reduction in net interest income.
RECONCILING ITEMS
The "reconciling items" shown in Figure 4 reflect certain nonrecurring items,
charges related to unallocated nonearning assets of corporate support functions
and the results of the divested credit card business. For more specific
information regarding the above items, see notes c, d and e to the table
included in Note 4 ("Line of Business Results"), which begins on page 10.
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RESULTS OF OPERATIONS
- ---------------------
NET INTEREST INCOME
Key's principal source of earnings is net interest income, which comprises
interest and loan-related fee income less interest expense. There are several
factors that affect net interest income, including:
- - the volume, pricing, mix and maturity of earning assets and
interest-bearing liabilities;
- - the use of off-balance sheet instruments to manage interest rate risk;
- - interest rate fluctuations; and
- - asset quality.
To make it easier to compare results 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 5 shows the various components of Key's balance sheet that affect
interest income and expense, and their respective yields or rates over the past
five quarters. Net interest income for the first quarter of 2001 was $695
million, representing a $17 million, or 3%, increase from the same period last
year. Average earning assets (primarily commercial and home equity loans)
increased by 4% to $76.9 billion, but that improvement was partially offset by a
decline in the net interest margin from 3.68% in the first quarter of 2000 to
3.63% in the first quarter of 2001.
NET INTEREST MARGIN. The decline in the net interest margin from the year-ago
quarter was largely attributable to the divestiture of Key's credit card
business in January 2000. The net interest margin also decreased from the fourth
quarter of 2000, following three consecutive quarters in which the margin was
either unchanged or slightly higher than the previous quarter. There are several
reasons that the net interest margin declined from the fourth quarter:
- - as a result of competitive factors, we did not lower the rates paid for
deposits at the same time that the Federal Reserve reduced interest rates
in the first quarter of 2001; Key made this adjustment later in the first
quarter;
- - our commercial demand deposits and loan fees are typically higher in the
fourth quarter of each year; and
- - core deposit growth did not keep pace with loan growth.
INTEREST EARNING ASSETS. Average earning assets for the first quarter totaled
$76.9 billion, which was $3.2 billion, or 4%, higher than the first quarter 2000
level. This increase came principally from the loan portfolio, despite the sale
of Key's credit card business in January 2000 and the effect of other loan sales
discussed below. The largest growth from the year-ago quarter occurred in the
commercial and home equity portfolios.
Key's loan growth has been affected by several strategic developments. During
2000, we sold $805 million of low interest spread commercial loans to a loan
conduit. This arrangement allows us to continue to meet our customers' funding
needs and to generate servicing revenue without having to retain these low
interest spread assets on the balance sheet. In addition, during 2000 and the
first three months of 2001, Key sold without recourse $1.0 billion of its
commercial mortgage loans. Our business of originating and servicing commercial
mortgage loans is expected to grow as a result of Key's acquisitions of Newport
Mortgage Company, L.P. and National Realty Funding L.C. last year.
34
35
FIGURE 5. AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND YIELDS/RATES
FIRST QUARTER 2001 FOURTH QUARTER 2000
---------------------------------------- -----------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
dollars in millions BALANCE INTEREST RATE BALANCE INTEREST RATE
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Loans(a),(b)
Commercial, financial and agricultural $20,025 $ 406 8.22 % $20,093 $ 451 8.92 %
Real estate-- commercial mortgage 6,897 147 8.63 6,855 162 9.42
Real estate-- construction 5,273 117 9.03 5,164 129 9.97
Commercial lease financing 7,102 125 7.07 6,965 125 7.20
- -----------------------------------------------------------------------------------------------------------------------------------
Total commercial loans 39,297 795 8.19 39,077 867 8.84
Real estate-- residential 4,172 81 7.74 4,232 81 7.68
Home equity 10,086 233 9.38 9,591 228 9.45
Consumer - direct 2,480 64 10.43 2,582 69 10.57
Consumer - indirect lease financing 2,936 59 8.02 3,023 62 8.16
Consumer - indirect other 5,673 136 9.58 5,813 141 9.72
- -----------------------------------------------------------------------------------------------------------------------------------
Total consumer loans 25,347 573 9.10 25,241 581 9.18
Loans held for sale 2,389 54 9.09 2,220 51 9.13
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans 67,033 1,422 8.57 66,538 1,499 8.98
Taxable investment securities 892 7 3.24 898 8 3.73
Tax-exempt investment securities(a) 317 8 8.83 344 8 8.73
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment securities 1,209 15 4.70 1,242 16 5.12
Securities available for sale(a),(c) 7,026 120 6.87 6,807 121 7.02
Short-term investments 1,604 20 5.00 1,449 23 6.20
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 76,872 1,577 8.28 76,036 1,659 8.69
Allowance for loan losses (1,006) (989)
Accrued income and other assets 10,458 10,380
- -----------------------------------------------------------------------------------------------------------------------------------
$86,324 $85,427
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Money market deposit accounts $12,070 95 3.17 $11,873 103 3.44
Savings deposits 1,993 7 1.34 2,045 7 1.32
NOW accounts 602 2 1.54 600 2 1.55
Certificates of deposit ($100,000 or more)(d) 5,994 92 6.25 5,789 94 6.44
Other time deposits 15,011 224 6.06 15,037 232 6.15
Deposits in foreign office 2,869 40 5.64 3,265 54 6.60
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 38,539 460 4.84 38,609 492 5.07
Federal funds purchased and securities
sold under repurchase agreements 5,263 70 5.39 5,859 93 6.33
Bank notes and other short-term borrowings(d) 7,532 105 5.67 6,446 101 6.22
Long-term debt, including capital
securities(d),(e) 15,412 247 6.58 15,235 264 6.91
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 66,746 882 5.38 66,149 950 5.72
Noninterest-bearing deposits 8,185 8,363
Accrued expense and other liabilities 4,766 4,368
Common shareholders' equity 6,627 6,547
- -----------------------------------------------------------------------------------------------------------------------------------
$86,324 $85,427
======= =======
Interest rate spread (TE) 2.90 2.97
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income (TE) and net
interest margin (TE) $695 3.63% $709 3.71%
===== ==== ==== ====
Capital securities $1,307 $24 $1,243 $24
Taxable-equivalent adjustment(a) 7 7
- -----------------------------------------------------------------------------------------------------------------------------------
(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.
(e) Rate calculation excludes ESOP debt.
TE = Taxable Equivalent
N/M = Not Meaningful
35
36
FIGURE 5. AVERAGE BALANCE SHEETS, NET INTEREST INCOME
AND YIELDS/RATES (CONTINUED)
THIRD QUARTER 2000 SECOND QUARTER 2000
------------------------------------- -----------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
dollars in millions BALANCE INTEREST RATE BALANCE INTEREST RATE
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS
Loans(a),(b)
Commercial, financial and agricultural $19,647 $ 434 8.87% $19,046 $ 405 8.56%
Real estate-- commercial mortgage 6,932 160 9.29 6,967 156 9.03
Real estate-- construction 4,866 121 9.98 4,625 110 9.51
Commercial lease financing 6,861 122 7.14 6,773 124 7.30
- ---------------------------------------------------------------------------------------------------------------------------------
Total commercial loans 38,306 837 8.78 37,411 795 8.53
Real estate-- residential 4,273 80 7.51 4,276 83 7.80
Home equity 9,095 219 9.68 8,600 196 9.16
Consumer - direct 2,595 68 10.50 2,620 66 10.09
Consumer - indirect lease financing 3,052 62 8.08 3,107 62 7.97
Consumer - indirect other 5,952 142 9.55 6,078 142 9.33
- ---------------------------------------------------------------------------------------------------------------------------------
Total consumer loans 24,967 571 9.17 24,681 549 8.92
Loans held for sale 2,504 56 8.96 2,725 58 8.52
- ---------------------------------------------------------------------------------------------------------------------------------
Total loans 65,777 1,464 8.93 64,817 1,402 8.68
Taxable investment securities 787 8 3.63 671 6 3.63
Tax-exempt investment securities(a) 369 7 8.12 415 9 8.77
- ---------------------------------------------------------------------------------------------------------------------------------
Total investment securities 1,156 15 5.06 1,086 15 5.60
Securities available for sale(a),(c) 6,275 107 6.67 6,198 107 6.73
Short-term investments 1,501 17 4.76 1,757 23 5.29
- ---------------------------------------------------------------------------------------------------------------------------------
Total earning assets 74,709 1,603 8.61 73,858 1,547 8.40
Allowance for loan losses (969) (976)
Accrued income and other assets 10,365 10,523
- ---------------------------------------------------------------------------------------------------------------------------------
$84,105 $83,405
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Money market deposit accounts $11,956 102 3.43 $12,403 105 3.41
Savings deposits 2,151 8 1.49 2,275 8 1.44
NOW accounts 592 2 1.59 628 3 1.61
Certificates of deposit ($100,000 or more)(d) 5,269 84 6.40 5,430 82 6.06
Other time deposits 14,634 218 6.01 13,656 190 5.61
Deposits in foreign office 2,860 48 6.70 3,029 48 6.39
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 37,462 462 4.96 37,421 436 4.69
Federal funds purchased and securities
sold under repurchase agreements 5,746 88 6.17 4,096 58 5.64
Bank notes and other short-term borrowings(d) 6,403 99 6.19 6,972 103 5.96
Long-term debt, including capital
securities(d),(e) 15,356 263 6.91 15,668 270 6.92
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 64,967 912 5.65 64,157 867 5.43
Noninterest-bearing deposits 8,377 8,412
Accrued expense and other liabilities 4,248 4,357
Common shareholders' equity 6,513 6,479
- ---------------------------------------------------------------------------------------------------------------------------------
$84,105 $83,405
======= =======
Interest rate spread (TE) 2.96 2.97
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income (TE) and net
interest margin (TE) $ 691 3.68% $680 3.68%
===== ==== ==== ====
Capital securities $1,243 $24 $1,243 $24
Taxable-equivalent adjustment(a) 7 7
- ---------------------------------------------------------------------------------------------------------------------------------
FIRST QUARTER 2000
--------------------------------------------
AVERAGE YIELD/
dollars in millions BALANCE INTEREST RATE
- -----------------------------------------------------------------------------------------------
ASSETS
Loans(a),(b)
Commercial, financial and agricultural $18,677 $ 379 8.17%
Real estate-- commercial mortgage 6,891 150 8.74
Real estate-- construction 4,601 104 9.12
Commercial lease financing 6,684 122 7.28
- -----------------------------------------------------------------------------------------------
Total commercial loans 36,853 755 8.23
Real estate-- residential 4,318 81 7.48
Home equity 8,129 179 8.85
Consumer - direct 2,572 62 9.72
Consumer - indirect lease financing 3,174 63 7.93
Consumer - indirect other 6,286 145 9.22
- -----------------------------------------------------------------------------------------------
Total consumer loans 24,479 530 8.67
Loans held for sale 2,692 65 9.80
- -----------------------------------------------------------------------------------------------
Total loans 64,024 1,350 8.47
Taxable investment securities 580 4 2.94
Tax-exempt investment securities(a) 436 10 8.74
- -----------------------------------------------------------------------------------------------
Total investment securities 1,016 14 5.43
Securities available for sale(a),(c) 6,475 112 6.81
Short-term investments 2,164 20 3.66
- -----------------------------------------------------------------------------------------------
Total earning assets 73,679 1,496 8.15
Allowance for loan losses (899)
Accrued income and other assets 10,407
- -----------------------------------------------------------------------------------------------
$83,187
======
LIABILITIES AND SHAREHOLDERS' EQUITY
Money market deposit accounts $12,617 104 3.32
Savings deposits 2,357 9 1.61
NOW accounts 627 3 1.62
Certificates of deposit ($100,000 or more)(d) 5,555 80 5.78
Other time deposits 12,552 164 5.25
Deposits in foreign office 1,206 17 5.76
- -----------------------------------------------------------------------------------------------
Total interest-bearing deposits 34,914 377 4.34
Federal funds purchased and securities
sold under repurchase agreements 4,003 48 4.85
Bank notes and other short-term borrowings(d) 8,680 126 5.83
Long-term debt, including capital securities(d),(e) 16,577 267 6.49
- -----------------------------------------------------------------------------------------------
Total interest-bearing liabilities 64,174 818 5.13
Noninterest-bearing deposits 8,160
Accrued expense and other liabilities 4,344
Common shareholders' equity 6,509
- -----------------------------------------------------------------------------------------------
$83,187
=======
Interest rate spread (TE) 3.02
- -----------------------------------------------------------------------------------------------
Net interest income (TE) and net
interest margin (TE) $678 3.68%
==== ====
Capital securities $1,243 $23
Taxable-equivalent adjustment(a) 7
- -----------------------------------------------------------------------------------------------
36
37
Early in 2000, management announced that Key would de-emphasize the
securitization and sale of home equity loans generated by our home equity
finance affiliate. We have not effected any such transactions since the 1999
year end. By retaining the assets attributable to this growing business on Key's
balance sheet, we intend to replace over time the earnings formerly generated by
the divested credit card business. We will continue, however, to consider
securitizations of other portfolios as a source of alternative funding when
conditions in the capital markets are favorable. Key did not securitize any of
its loans during the first quarter of 2001.
INTEREST RATE SWAPS AND CAPS. Key uses interest rate swaps and caps to help
manage its interest rate sensitivity position. Interest rate swaps and caps are
complicated instruments, but briefly:
- - INTEREST RATE SWAPS are contracts under which two parties agree to exchange
interest payment streams that are calculated on agreed-upon amounts (known
as "notional amounts"). For example, party A will pay interest at a fixed
rate to, and receive interest at a variable rate from, party B. Key
generally uses interest rate swaps to mitigate its exposure to interest
rate risk on certain loans, securities, deposits, short-term borrowings and
long-term debt.
- - INTEREST RATE CAPS are contracts that provide for the holder to be
compensated based on an agreed-upon notional amount when a benchmark
interest rate exceeds a specified level (known as the "strike rate"). Key
uses interest rate caps to manage the risk of adverse movements in interest
rates on certain of our long-term debt and short-term borrowings. A cap
limits Key's exposure to interest rate increases; caps do not have any
impact if interest rates decline.
For more information about how Key uses interest rate swaps and caps to manage
its balance sheet, see the next section, entitled "Market risk management" and
Note 12 ("Derivatives and Hedging Activities"), starting on page 21. Figure 6
shows how 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 44, contains more discussion about changes in earning assets and
funding sources.
FIGURE 6. COMPONENTS OF NET INTEREST INCOME CHANGES
FROM THREE MONTHS ENDED MARCH 31, 2000
TO THREE MONTHS ENDED MARCH 31, 2001
---------------------------------------------------------
AVERAGE YIELD/ NET
in millions VOLUME RATE CHANGE
- ------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $ 64 $ 8 $ 72
Taxable investment securities 2 1 3
Tax-exempt investment securities (3) 1 (2)
Securities available for sale 9 (1) 8
Short-term investments (6) 6 --
- ------------------------------------------------------------------------------------------------------------
Total interest income (taxable equivalent) 66 15 81
INTEREST EXPENSE
Money market deposit accounts (4) (5) (9)
Savings deposits (1) (1) (2)
NOW accounts -- (1) (1)
Certificates of deposit ($100,000 or more) 7 5 12
Other time deposits 35 25 60
Deposits in foreign office 23 -- 23
- ------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 60 23 83
Federal funds purchased and securities sold
under repurchase agreements 16 6 22
Bank notes and other short-term borrowings (16) (5) (21)
Long-term debt, including capital securities (19) (1) (20)
- ------------------------------------------------------------------------------------------------------------
Total interest expense 41 23 64
- ------------------------------------------------------------------------------------------------------------
Net interest income (taxable equivalent) $ 25 $ (8) $ 17
==== ==== ====
- ------------------------------------------------------------------------------------------------------------
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.
37
38
MARKET RISK MANAGEMENT
The values of some financial instruments vary with changes in external interest
rates, foreign exchange rates, equity prices (the value of equity securities
held as assets), or other market-driven rates or prices. For example, the value
of a fixed-rate bond will decline if market interest rates increase because the
bond will become a less attractive investment. Similarly, the value of the U.S.
dollar regularly fluctuates in relation to other currencies. (Key is not
affected in any material way by changes in foreign exchange rates or the prices
of various equity securities held as assets.) The exposure that instruments tied
to such external factors presents is called "market risk."
ASSET AND LIABILITY 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 position.
MEASUREMENT OF SHORT-TERM INTEREST RATE EXPOSURE. The primary tool that
management uses to measure interest rate risk is a net interest income
simulation model. These simulations estimate the impact that various changes in
the overall level of interest rates over one- and two-year time horizons would
have on net interest income. The results help Key develop strategies for
managing exposure to interest rate risk.
Like any forecasting technique, interest rate simulation modeling is based on a
large number of assumptions. In this case, the assumptions relate primarily to
loan and deposit growth, asset and liability prepayments, interest rates, and
on- and off-balance sheet management strategies. Management believes that both
individually and in the aggregate the assumptions we make are reasonable.
Nevertheless, the simulation modeling process produces only a sophisticated
estimate, not a precise calculation of exposure.
Key's guidelines for risk management call for preventive measures if a gradual
200 basis point increase or decrease in short-term rates over the next twelve
months would affect net interest income over the same period by more than 2%.
Key has been operating well within these guidelines. As of March 31, 2001, based
on the results of our simulation model, Key would expect net interest income to
increase by approximately .75% if short-term interest rates gradually decrease
by 200 basis points. Conversely, if short-term interest rates gradually increase
by 200 basis points, net interest income would be expected to decrease by
approximately .46%.
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.
Economic value analysis has several limitations. For example, the economic
values of asset, liability and off-balance sheet positions do not represent the
true fair values of the positions, since economic values do not consider factors
like credit risk and liquidity. In addition, we must estimate cash flow for
assets and liabilities with indeterminate maturities. Moreover, our present
value calculations do not take into consideration future changes in the balance
sheet that will likely result from ongoing loan and deposit activities conducted
by Key's core businesses. Finally, the analysis requires assumptions about
events that span several years. Despite its limitations, the economic value of
equity model is a relatively sophisticated tool for evaluating the longer-term
effect of possible interest rate movements.
38
39
Key's guidelines for risk management call for preventive measures if an
immediate 200 basis point increase or decrease in interest rates would reduce
the economic value of equity by more than 15%. Key has been operating well
within these guidelines.
OTHER SOURCES OF INTEREST RATE EXPOSURE. Management uses the results of
short-term and long-term interest rate exposure models to formulate strategies
to improve balance sheet positioning, earnings, or both, within the bounds of
Key's interest rate risk, liquidity and capital guidelines. We also periodically
measure the risk to earnings and economic value arising from various other pro
forma changes in the overall level of interest rates. The many interest rate
scenarios modeled, and their potential impact on earnings and economic value,
quantify 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 can take
advantage of changes in interest rates without penalty. For example, when
interest rates decline, borrowers may choose to prepay fixed-rate loans by
refinancing at a lower rate. Such a prepayment gives Key a return on its
investment (the principal plus some interest), but unless there is a
prepayment penalty, that return will not be as much as the loan would have
generated had payments been received as originally scheduled. Floating rate
loans that are capped against potential interest rate increases and
deposits that can be withdrawn on demand also present option risk.
- - One approach that Key uses to manage interest rate risk is to offset
floating-rate liabilities (such as borrowings) with floating-rate assets
(such as loans). That way, as our interest expense increases, so will our
interest income. We face "BASIS RISK" when our floating-rate assets and
floating-rate liabilities reprice in response to different market factors
or indices. Under those circumstances, even if equal amounts of assets and
liabilities are repricing at the same time, interest expense and interest
income may not change by the same amount.
- - We often use an interest-bearing liability to provide funding for an
interest-earning asset. For example, Key may sell certificates of deposit
and use the proceeds to make loans. That strategy presents "GAP RISK" if
the related liabilities and assets do not mature or reprice at the same
time.
MANAGEMENT OF INTEREST RATE EXPOSURE. Key manages interest rate risk by using
portfolio swaps and caps, which modify the repricing or maturity characteristics
of some of our assets and liabilities. The decision to use these instruments
rather than securities, debt or other on-balance sheet alternatives depends on
many factors, including the mix and cost of funding sources, liquidity and
capital requirements. In addition, management considers interest rate
implications when adding to Key's securities portfolio, issuing new debt and
packaging loans for securitization.
TRADING PORTFOLIO RISK MANAGEMENT
Key's trading portfolio includes interest rate swap contracts entered into to
accommodate the needs of clients, other positions with third parties that are
intended to mitigate the interest rate risk of client positions, foreign
exchange contracts entered into to accommodate the needs of clients, and
financial assets and liabilities (trading positions) included in "accrued income
and other assets" and "accrued expense and other liabilities," respectively, on
the balance sheet. For more information about these contracts, see Note 12
("Derivatives and Hedging Activities"), which begins on page 21.
Management uses a value at risk ("VAR") model to estimate the potential adverse
effect of changes in interest and foreign exchange rates on the fair value of
Key's trading portfolio. Using statistical methods, this model estimates the
maximum potential one-day loss with 95% certainty. At March 31, 2001, Key's
aggregate daily VAR was $1.6 million compared with $.9 million at March 31,
2000. Aggregate daily VAR averaged $1.4 million for the first three months of
2001, compared with an average of less than $1 million during the same period
last year. VAR modeling augments other controls that Key uses to mitigate the
market risk exposure of the trading portfolio. These controls include loss and
portfolio size limits that are based on market liquidity and the level of
activity and volatility of trading products.
39
40
NONINTEREST INCOME
Noninterest income for the first quarter of 2001 totaled $455 million, down $351
million, or 44%, from the same period last year. In the prior year, noninterest
income was affected by nonrecurring items. The most significant of these items,
which are shown in Figure 7, is the gain from the January 2000 sale of Key's
credit card business. For more information on this transaction, see Note 3
("Acquisitions and Divestiture"), on page 9.
Core noninterest income, which excludes significant nonrecurring items, was $455
million (40% of total core revenue) in the first quarter of 2001, compared with
$476 million (41% of total core revenue) for the first three months of 2000. One
of management's long-term objectives is to increase core noninterest income as a
percentage of total core revenue to 50%.
The absence of income generated by the divested credit card business accounted
for $5 million of the $21 million decrease in core noninterest income. The
remainder of the decrease was attributable primarily to the effects of weaker
conditions in the securities markets. These adverse conditions led to declines
in revenue derived from various capital markets activities; the impact was
particularly noticeable in our equity capital investing and brokerage
businesses.
Figure 7 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 from the first three
months of 2000. For detailed information about investment banking and capital
markets income, and trust and investment services, see Figures 8 and 9,
respectively.
FIGURE 7. NONINTEREST INCOME
THREE MONTHS ENDED MARCH 31, CHANGE
----------------------------------- -------------------------
dollars in millions 2001 2000 AMOUNT PERCENT
- -----------------------------------------------------------------------------------------------------------------------------------
Trust and investment services income $141 $160 $ (19) (11.9)%
Investment banking and capital markets income 65 89 (24) (27.0)
Service charges on deposit accounts 84 86 (2) (2.3)
Corporate-owned life insurance income 27 25 2 8.0
Letter of credit and loan fees 29 23 6 26.1
Net securities gains 26 1 25 N/M
Other income:
Electronic banking fees 17 15 2 13.3
Insurance income 14 17 (3) (17.6)
Loan securitization servicing fees 4 6 (2) (33.3)
Net gains from loan securitizations and sales 5 9 (4) (44.4)
Miscellaneous income 43 45 (2) (4.4)
- -----------------------------------------------------------------------------------------------------------------------------------
Total other income 83 92 (9) (9.8)
- -----------------------------------------------------------------------------------------------------------------------------------
Total core noninterest income 455 476 (21) (4.4)
Gain from sale of credit card portfolio -- 332 (332) (100.0)
Other nonrecurring items -- (2) 2 (100.0)
- -----------------------------------------------------------------------------------------------------------------------------------
Total significant nonrecurring items -- 330 (330) (100.0)
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest income $455 $806 $(351) (43.5)%
==== ==== =====
- -----------------------------------------------------------------------------------------------------------------------------------
N/M = Not Meaningful
40
41
FIGURE 8. INVESTMENT BANKING AND CAPITAL MARKETS INCOME
THREE MONTHS ENDED MARCH 31, CHANGE
------------------------------- ------------------------
dollars in millions 2001 2000 AMOUNT PERCENT
- -----------------------------------------------------------------------------------------------------------------------------
Dealer trading and derivatives income $50 $44 $ 6 13.6%
Investment banking income 20 21 (1) (4.8)
Equity capital gains (losses) (16) 15 (31) N/M
Foreign exchange income 11 9 2 22.2
- -----------------------------------------------------------------------------------------------------------------------------
Total investment banking and capital markets income $65 $89 $(24) (27.0)%
==== ==== ====
- -----------------------------------------------------------------------------------------------------------------------------
N/M = Not Meaningful
FIGURE 9. TRUST AND INVESTMENT SERVICES
THREE MONTHS ENDED MARCH 31, CHANGE
---------------------------- --------------------
dollars in millions 2001 2000 AMOUNT PERCENT
- --------------------------------------------------------------------------------------------------------
Personal asset management and custody fees $ 46 $ 47 $ (1) (2.1)%
Institutional asset management and custody fees 22 24 (2) (8.3)
Bond services 10 9 1 11.1
Brokerage commission income 26 45 (19) (42.2)
All other fees 37 35 2 5.7
- --------------------------------------------------------------------------------------------------------
Total trust and investment services income $141 $160 $(19) (11.9)%
==== ==== ====
dollars in billions
- --------------------------------------------------------------------------------------------------------
MARCH 31,
Discretionary trust assets $ 66 $ 72 $ (6) (8.3)%
Nondiscretionary trust assets 51 50 1 2.0
- --------------------------------------------------------------------------------------------------------
Total trust assets $117 $122 $ (5) (4.1)%
==== ==== ====
- --------------------------------------------------------------------------------------------------------
TRUST AND INVESTMENT SERVICES. Trust and investment services provide Key's
largest source of noninterest income. As shown in Figure 9, the decrease in
revenue derived from these services was largely due to a decline in brokerage
commission income, reflecting the impact of a weakening economy. The softer
economic environment also resulted in a decrease in fee income that is based on
the value of assets managed by Key for its clients. At March 31, 2001, Key's
bank, trust and registered investment advisory subsidiaries had assets under
discretionary management (excluding corporate trust assets) of $66 billion,
compared with $72 billion at March 31, 2000.
INVESTMENT BANKING AND CAPITAL MARKETS INCOME. The decrease in this revenue
component also reflects the effects of a weakening economy. As shown in Figure
8, results for the first quarter of 2001 include net equity capital losses of
$16 million (including $21 million of unrealized mark-to-market adjustments),
compared with net equity capital gains of $15 million in the year-ago quarter.
This negative $31 million swing was substantially offset by an increase in net
realized gains from the sales of certain securities held in Key's available for
sale portfolio discussed below.
SECURITIES TRANSACTIONS. During the first quarter of 2001, Key realized $26
million of core net securities gains from the sales of securities held in the
available for sale portfolio, compared with net gains of $1 million a year ago.
Since the sales involved primarily equity securities issued by financial service
companies, management does not expect the sales of these assets to have an
adverse affect on Key's future net interest income.
SIGNIFICANT NONRECURRING ITEMS. Noninterest income for the first three months of
2000 includes a $332 million gain from the sale of Key's credit card business.
41
42
NONINTEREST EXPENSE
Noninterest expense for the first quarter of 2001 totaled $698 million, down
from $727 million for the first quarter of 2000. Items that hinder a direct
comparison of results between quarters are shown in Figure 10. These items
include restructuring and other special charges recorded during the first
quarter of 2000 in connection with strategic actions that Key is taking to
improve operating efficiency and profitability. You can find more information
about these charges under the heading "Restructuring and other special charges,"
on page 43.
Core noninterest expense, which excludes significant nonrecurring items,
decreased by $20 million, or 3%, from the year-ago quarter. Marketing expense
rose by $5 million, but this was more than offset by an $18 million decrease in
personnel expense and a $10 million decrease in equipment expense.
Figure 10 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 from the first three months of 2000.
FIGURE 10. NONINTEREST EXPENSE
THREE MONTHS ENDED MARCH 31, CHANGE
------------------------------ -----------------------------
dollars in millions 2001 2000 AMOUNT PERCENT
- ---------------------------------------------------------------------------------------------------------------------
Personnel $ 364 $ 382 $ (18) (4.7)%
Net occupancy 57 57 -- --
Computer processing 62 59 3 5.1
Equipment 38 48 (10) (20.8)
Marketing 27 22 5 22.7
Amortization of intangibles 26 25 1 4.0
Professional fees 18 19 (1) (5.3)
Other expense:
Postage and delivery 17 17 -- --
Telecommunications 11 14 (3) (21.4)
Equity- and gross receipts- based taxes 8 8 -- --
OREO expense, net 2 2 -- --
Miscellaneous expense 68 65 3 4.6
- -----------------------------------------------------------------------------------------------------------------------
Total other expense 106 106 -- --
- -----------------------------------------------------------------------------------------------------------------------
Total core noninterest expense 698 718 (20) (2.8)
Restructuring and other special charges -- 12 (12) (100.0)
Other nonrecurring items -- (3) 3 (100.0)
- -----------------------------------------------------------------------------------------------------------------------
Total significant nonrecurring items -- 9 (9) (100.0)
- -----------------------------------------------------------------------------------------------------------------------
Total noninterest expense $ 698 $ 727 $ (29) (4.0)%
======== ======== =======
Full-time equivalent employees at period end 21,882 23,474
- -----------------------------------------------------------------------------------------------------------------------
PERSONNEL. Personnel expense, the largest category of Key's noninterest expense,
declined by $18 million from the same period last year. This improvement is
attributable to our competitiveness initiative and to the divestiture of Key's
credit card business in January 2000. Through the competitiveness initiative we
have improved efficiency, reduced the level of personnel required to conduct our
business, and instilled a greater sense of awareness among all employees of the
need to manage costs. Figure 11 shows the major components of Key's core
personnel expense.
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43
FIGURE 11. CORE PERSONNEL EXPENSE
THREE MONTHS ENDED MARCH 31, CHANGE
------------------------------------ --------------------------
dollars in millions 2001 2000 AMOUNT PERCENT
- -------------------------------------------------------------------------------------------------------------
Salaries $211 $225 $(14) (6.2)%
Employee benefits 57 61 (4) (6.6)
Incentive compensation 96 96 -- --
- -------------------------------------------------------------------------------------------------------------
Total core personnel expense $364 $382 $(18) (4.7)%
==== ==== ====
- -------------------------------------------------------------------------------------------------------------
At March 31, 2001, the number of full-time equivalent employees was 21,882,
compared with 22,142 at the end of 2000 and 23,474 a year ago. The decrease in
the number of employees is primarily a result of Key's competitiveness
initiative.
EQUIPMENT. The decrease in equipment expense was driven by reductions in
depreciation, maintenance expense and rental expense stemming from cost
management efforts and our competitiveness initiative.
MARKETING. The increase in marketing expense was due in part to the launch of
Key's "Achieve anything" brand line early in the first quarter of 2001.
RESTRUCTURING AND OTHER SPECIAL CHARGES. During the first quarter of last year,
Key recorded nonrecurring charges of $14 million (including restructuring
charges of $9 million) in connection with strategic actions related to the
competitiveness initiative. For more information related to the actions taken or
to be taken, anticipated cost savings and expected reductions to Key's
workforce, see the section entitled "Status of three-year competitiveness
initiative," on page 29. Additional information related to the restructuring
charges can be found in Note 10 ("Restructuring Charges"), on page 19. Cash
generated by Key's operations will fund the restructuring charge liability; none
of the charges will have a material impact on Key's liquidity.
INCOME TAXES
The provision for income taxes was $117 million for the three-month period ended
March 31, 2001, compared with $200 million for the comparable period in 2000.
The decrease in income taxes reflects a lower level of taxable income relative
to the year-ago quarter, as well as a decrease in Key's effective tax rate. The
effective tax rate (which is the provision for income taxes as a percentage of
income before income taxes) for the first quarter of 2001 was 34.9%, compared
with 35.3% for the same period last year. The effective tax rate decreased
primarily because Key had larger tax credits, and tax-exempt income from
corporate-owned life insurance and securities accounted for a larger portion of
pretax income. The effect of these items was offset in part by proportionately
higher levels of state income taxes and amortization related to nondeductible
intangible assets. The effective income tax rate remains below Key's combined
statutory Federal and state rate of 37%, primarily because we continue to invest
in tax-advantaged assets (such as tax-exempt securities and corporate-owned life
insurance) and to recognize credits associated with investments in low-income
housing projects.
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44
FINANCIAL CONDITION
- -------------------
LOANS
At March 31, 2001, total loans outstanding were $67.0 billion, compared with
$66.9 billion at the end of 2000 and $64.1 billion a year ago. The composition
of the loan portfolio at each of these respective dates is summarized in Note 6
("Loans") on page 15. Despite the effects of a weakening economy, Key achieved a
5% increase in loans over the past twelve months, primarily as a result of
strong growth in the home equity portfolio.
Because of Key's success in generating new loan volume, loan growth has outpaced
deposit growth over the past several years. To mitigate this imbalance, we have
used alternative funding sources like loan sales and securitizations so we can
continue to capitalize on our lending opportunities. Management expects Newport
Mortgage Company, L.P. and National Realty Funding L.C., which were acquired
last year, to improve Key's ability to generate and securitize new loans,
especially in the area of commercial real estate. In addition, early in 2000, we
began selling loans to a loan conduit. This arrangement allows us to continue to
meet our corporate customers' funding needs and to generate servicing revenue
without having to retain certain low interest spread assets on the balance
sheet.
Loans outstanding (excluding loans held for sale) would have grown by $5.3
billion, or 9%, over the past twelve months, if we had not sold $3.7 billion of
loans ($1.0 billion through securitizations) during that time period. Excluding
the impact of loan sales, commercial loans rose by $4.4 billion, or 12% since
March 31, 2000. Four factors contributed to this increase: strong growth in the
middle market and business banking portfolios; a $1.4 billion increase in
commercial real estate mortgage loans; a $786 million increase in real estate
construction loans and a $380 million increase in the equipment lease financing
portfolio. Consumer loans rose (excluding loan sales) by $929 million, or 4%.
This growth reflects a $2.1 billion increase in the home equity portfolio,
partially because we opted to not securitize these loans starting in 2000. By
retaining these assets, we intend to replace over time the revenue generated by
our former credit card business. The growth of the home equity portfolio was
moderated by declines of $694 million in installment loans and $288 million in
automobile lease financing receivables.
SALES, SECURITIZATIONS AND DIVESTITURES. During the past twelve months, Key sold
$1.6 billion of education loans ($1.0 billion through securitizations), $1.4
billion of commercial real estate loans, $478 million of commercial loans, and
$131 million of home equity loans. A small amount of residential real estate
loans were sold in the first quarter of this year.
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.
Figure 12 summarizes Key's loan sales (including securitizations) for the first
three months of 2001 and all of 2000.
44
45
FIGURE 12. LOANS SOLD AND DIVESTED
Commercial Residential Home Credit Card
in millions Commercial Real Estate Real Estate Equity Receivables Education Total
- -----------------------------------------------------------------------------------------------------------------------------------
2001
- -------------------------
First quarter -- $ 327 $ 1 $ 14 -- $ 449 $ 791
- -----------------------------------------------------------------------------------------------------------------------------------
Total -- $ 327 $ 1 $ 14 -- $ 449 $ 791
====== ====== ====== ====== ====== ====== ======
2000
- -------------------------
Fourth quarter -- $ 560 -- $ 22 -- $ 13 $ 595
Third quarter $ 27 70 -- 72 -- 618 787
Second quarter 451 499 -- 23 -- 518 1,491
First quarter 354 6 -- 24 $1,339 29 1,752
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 832 $1,135 -- $ 141 $1,339 $1,178 $4,625
====== ====== ====== ====== ====== ====== ======
- -----------------------------------------------------------------------------------------------------------------------------------
Figure 13 shows loans that are either administered or serviced by Key, but are
not recorded on the balance sheet. This includes loans that have been both
securitized and sold, or simply sold outright. 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 when we retain
a portion of the securitized assets because those assets are accounted for like
debt securities that are classified as available for sale or trading account
assets.
FIGURE 13. LOANS ADMINISTERED OR SERVICED
MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
in millions 2001 2000 2000 2000 2000
- --------------------------------------------------------------------------------------------------
Education loans $ 4,428 $ 4,113 $ 3,946 $ 3,783 $ 3,386
Automobile loans 340 422 505 602 716
Home equity loans 1,085 1,176 1,266 1,361 1,457
Commercial real estate loans 6,549 5,322 4,071 3,700 3,100
Commercial loans 1,023 973 916 805 354
- --------------------------------------------------------------------------------------------------
Total $13,425 $12,006 $10,704 $10,251 $ 9,013
======= ======= ======= ======= =======
- --------------------------------------------------------------------------------------------------
SECURITIES
At March 31, 2001, the securities portfolio totaled $8.1 billion and included
$6.9 billion of securities available for sale and $1.2 billion of investment
securities. In comparison, the total portfolio at December 31, 2000, was $8.5
billion, including $7.3 billion of securities available for sale and $1.2
billion of investment securities.
Figure 14 shows the composition, yields and remaining maturities of Key's
securities available for sale. Figure 15 provides the same information about
Key's investment securities. For more information about retained interests in
securitizations and gross unrealized gains and losses by type of security, see
Note 5 ("Securities"), which begins on page 13.
45
46
FIGURE 14. SECURITIES AVAILABLE FOR SALE
OTHER
U.S. TREASURY, STATES AND COLLATERALIZED MORTGAGE-
AGENCIES AND POLITICAL MORTGAGE BACKED
dollars in millions CORPORATIONS SUBDIVISIONS OBLIGATIONS(a) SECURITIES(a)
- ---------------------------------------------------------------------------------------------------------------------------------
MARCH 31, 2001
Remaining maturity:
One year or less $201 $1 $ 105 $ 1
After one through five years 6 12 4,026 724
After five through ten years 6 18 398 532
After ten years 7 -- 179 49
- ---------------------------------------------------------------------------------------------------------------------------------
Fair value $220 $31 $4,708 $1,306
Amortized cost 220 31 4,680 1,289
Weighted average yield (b) 5.10 % 4.63 % 7.07 % 7.17 %
Weighted average maturity .7 years 5.4 years 3.7 years 5.0 years
- ---------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2000
Fair value $984 $33 $4,298 $1,355
Amortized cost 984 33 4,296 1,355
- ---------------------------------------------------------------------------------------------------------------------------------
MARCH 31, 2000
Fair value $120 $53 $4,090 $1,589
Amortized cost 121 53 4,295 1,623
- ---------------------------------------------------------------------------------------------------------------------------------
RETAINED WEIGHTED
INTERESTS IN OTHER AVERAGE
dollars in millions SECURITIZATIONS(a) SECURITIES TOTAL YIELD (b)
- -------------------------------------------------------------------------------------------------------------------
MARCH 31, 2001
Remaining maturity:
One year or less $ 49 $ 9 $ 366 6.13 %
After one through five years 238 10 5,016 7.01
After five through ten years -- 6 960 7.38
After ten years -- 323(c) 558 8.46
- -------------------------------------------------------------------------------------------------------------------
Fair value $287 $348 $6,900 --
Amortized cost 320 350 6,890 7.08 %
Weighted average yield (b) 8.39 % 6.90 % 7.08 % --
Weighted average maturity 3.6 years 10.9 years 4.2 years --
- -------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2000
Fair value $316 $343 $7,329 --
Amortized cost 334 307 7,309 7.16 %
- -------------------------------------------------------------------------------------------------------------------
MARCH 31, 2000
Fair value $313 $104 $6,269 --
Amortized cost 332 111 6,535 6.82 %
- -------------------------------------------------------------------------------------------------------------------
(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 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 equity securities with no stated maturity.
FIGURE 15. INVESTMENT SECURITIES
STATES AND WEIGHTED
POLITICAL OTHER AVERAGE
dollars in millions SUBDIVISIONS SECURITIES TOTAL YIELD(a)
- ----------------------------------------------------------------------------------------------------------
MARCH 31, 2001
Remaining maturity:
One year or less $124 $ 5 $ 129 8.34 %
After one through five years 135 -- 135 9.74
After five through ten years 52 25 77 8.26
After ten years 5 862(b) 867 5.40
- ----------------------------------------------------------------------------------------------------------
Amortized cost $316 $892 $1,208 8.01 %
Fair value 328 892 1,220 --
Weighted average yield(a) 9.12 % 5.46 % 8.01 % --
Weighted average maturity 2.5 years 9.9 years 8.0 years --
- ----------------------------------------------------------------------------------------------------------
DECEMBER 31, 2000
Amortized cost $323 $875 $1,198 8.16 %
Fair value 333 875 1,208 --
- ----------------------------------------------------------------------------------------------------------
MARCH 31, 2000
Amortized cost $432 $621 $1,053 5.71 %
Fair value 442 621 1,063 --
- ----------------------------------------------------------------------------------------------------------
(a) Weighted average yields are calculated based on amortized cost and exclude
equity securities that have no stated yield. Such yields have been adjusted
to a taxable-equivalent basis using the statutory Federal income tax rate
of 35%.
(b) Includes equity securities with no stated maturity.
46
47
ASSET QUALITY
Key manages asset quality by following procedures that address the issue from
many perspectives. Specifically, Key has professionals that:
- - evaluate and monitor the level of risk in credit-related assets;
- - formulate underwriting standards and guidelines for line management;
- - develop commercial and consumer credit policies and systems;
- - establish credit-related concentration limits;
- - review loans, leases and other corporate assets to evaluate credit quality;
and
- - review the adequacy of the allowance for loan losses.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses at March 31, 2001, was
$1.0 billion, or 1.49% of loans. This compares with $979 million, or 1.53%, at
March 31, 2000. The allowance includes $111 million (for 2001) and $69 million
(for 2000) that is specifically allocated for impaired loans. For more
information about impaired loans, see Note 7 ("Impaired Loans and Other
Nonperforming Assets") on page 16. At March 31, 2001, the allowance for loan
losses was 140.39% of nonperforming loans, compared with 206.98% at March 31,
2000.
Management estimates the appropriate level of the allowance for loan losses on a
quarterly (and at times more frequent) basis using an iterative methodology. The
methodology is described in Note 1 ("Summary of Significant Accounting
Policies") under the heading "Allowance for Loan Losses," on page 66 of Key's
2000 Annual Report to Shareholders. Since the allowance is established through
the provision for loan losses, this methodology also has a direct impact on the
level of the provision that Key records. In the first quarter of 2001, Key's
provision for loan losses totaled $110 million, compared with a core provision
of $62 million for the first quarter of last year. The core provision in the
year-ago quarter excludes $121 million, which represents an additional amount
added to the provision for an enhancement in Key's methodology for assessing
credit risk.
NET LOAN CHARGE-OFFS. As shown in Figure 16, net loan charge-offs for the first
quarter of 2001 were $109 million, or .66% of average loans, compared with net
charge-offs of $134 million, or .84%, for the same period last year. Net
charge-offs a year ago include $15 million of credit card net charge-offs,
including holdbacks and putbacks related to the January 2000 sale of Key's
credit card portfolio. Also included are $57 million of accelerated consumer
loan charge-offs resulting from the implementation of new Federal charge-off
guidelines applicable to all banking companies.
In comparison with the first quarter of 2000, net charge-offs in the commercial
loan portfolio rose by $25 million, including two specific charge-offs that
accounted for more than half of the increase. The rise in commercial net
charge-offs reflects the growth of the overall portfolio as well as the impact
of a weaker economy. The level of net charge-offs in the consumer portfolio
decreased by $50 million from the year-ago quarter. Net charge-offs of credit
card receivables decreased by $15 million because Key sold the credit card
portfolio, while net charge-offs in the remainder of the consumer portfolio
decreased by $35 million due primarily to the implementation of the new
charge-off guidelines last year. These reductions were partially offset by a $14
million increase in net charge-offs of indirect automobile loans. Management
anticipates that the level of Key's net charge-offs will continue to increase in
the second quarter of 2001.
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48
FIGURE 16. SUMMARY OF LOAN LOSS EXPERIENCE
THREE MONTHS ENDED MARCH 31,
-----------------------------
dollars in millions 2001 2000
- -------------------------------------------------------------------------------------
Average loans outstanding during the period $67,033 $64,024
- -------------------------------------------------------------------------------------
Allowance for loan losses at beginning of period $ 1,001 $ 930
Loans charged off:
Commercial, financial and agricultural 53 34
Real estate-commercial mortgage 3 2
Commercial lease financing 3 4
- -------------------------------------------------------------------------------------
Total commercial loans 59 40
Real estate-residential mortgage 2 1
Home equity 6 8
Credit card -- 16
Consumer-direct 12 20
Consumer-indirect lease financing 6 7
Consumer-indirect other 50 72
- -------------------------------------------------------------------------------------
Total consumer loans 76 124
- -------------------------------------------------------------------------------------
135 164
Recoveries:
Commercial, financial and agricultural 7 10
Real estate-commercial mortgage -- 2
Commercial lease financing 1 2
- -------------------------------------------------------------------------------------
Total commercial loans 8 14
Real estate-residential mortgage 2 --
Credit card -- 1
Consumer-direct 2 1
Consumer-indirect lease financing 2 2
Consumer-indirect other 12 12
- -------------------------------------------------------------------------------------
Total consumer loans 18 16
- -------------------------------------------------------------------------------------
26 30
- -------------------------------------------------------------------------------------
Net loans charged off (109) (134)
Provision for loan losses 110 183
Allowance related to loans sold, net (1) --
- -------------------------------------------------------------------------------------
Allowance for loan losses at end of period $ 1,001 $ 979
======= =======
- -------------------------------------------------------------------------------------
Net loan charge-offs to average loans .66 % .84 %
Allowance for loan losses to period-end loans 1.49 1.53
Allowance for loan losses to nonperforming loans 140.39 206.98
- -------------------------------------------------------------------------------------
NONPERFORMING ASSETS. Figure 17 shows the composition of Key's nonperforming
assets. These assets totaled $740 million at March 31, 2001, and represented
1.10% of loans, other real estate owned (known as "OREO") and other
nonperforming assets, compared with $672 million, or 1.00%, at December 31,
2000, and $497 million, or .78%, at March 31, 2000. The increase in the level of
nonperforming assets in general is attributable to a number of factors,
including continued economic weakness, the significant growth of the loan
portfolio as a whole and the aging of certain segments of the portfolio. While
the economic slowdown is expected to continue to impact Key's loan portfolio
generally, the erosion in credit quality that we are experiencing is
disproportionately concentrated in two distinct commercial portfolios of limited
size: healthcare and the leveraged lending sector of structured finance.
Although aggregate loans outstanding in these two portfolios account for only 3%
of Key's total loans, these portfolios account for approximately 23% of the
commercial loans on nonperforming status at March 31, 2001. These portfolios are
expected to experience some continued deterioration in credit quality in the
near term.
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49
FIGURE 17. SUMMARY OF NONPERFORMING ASSETS AND PAST DUE LOANS
MARCH 31, DECEMBER 31, MARCH 31,
dollars in millions 2001 2000 2000
- --------------------------------------------------------------------------------------------
Commercial, financial and agricultural $ 348 $ 301 $ 195
Real estate -- commercial mortgage 84 90 98
Real estate -- construction 29 28 18
Commercial lease financing 50 48 39
- --------------------------------------------------------------------------------------------
Total commercial loans 511 467 350
Real estate -- residential mortgage 56 52 46
Home equity 102 80 59
Consumer -- direct 8 8 4
Consumer -- indirect lease financing 9 7 2
Consumer -- indirect other 27 36 12
- --------------------------------------------------------------------------------------------
Total consumer loans 202 183 123
- --------------------------------------------------------------------------------------------
Total nonperforming loans 713 650 473
OREO 28 23 28
Allowance for OREO losses (1) (1) (6)
- --------------------------------------------------------------------------------------------
OREO, net of allowance 27 22 22
Other nonperforming assets -- -- 2
- --------------------------------------------------------------------------------------------
Total nonperforming assets $ 740 $ 672 $ 497
======= ======= =======
- --------------------------------------------------------------------------------------------
Accruing loans past due 90 days or more $ 299 $ 236 $ 238
Accruing loans past due 30 through 89 days 962 963 1,078
- --------------------------------------------------------------------------------------------
Nonperforming loans to period-end loans 1.06 % .97 % .74 %
Nonperforming assets to period-end loans
plus OREO and other nonperforming assets 1.10 1.00 .78
- --------------------------------------------------------------------------------------------
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 the first
quarter of 2001, core deposits averaged $37.9 billion, and represented 49% of
the funds Key used to support earning assets, compared with $36.3 billion and
49%, respectively, during the same period last year. As shown in Figure 5 (which
spans pages 35 and 36), the mix of Key's deposits has changed over the past
twelve months. The levels of money market deposits, savings deposits and NOW
accounts declined, while Key's time deposits have grown as a result of our
marketing efforts and client preferences for investments that offer higher
returns. Weaker conditions in the securities markets have also contributed to
the growth of time deposits, which offer a more stable rate of return than
equity investing alternatives. Average deposits in Key's Retail Banking division
grew by 7% from the year-ago quarter and allowed us to moderate our dependence
on higher-cost funds.
Purchased funds, comprising large certificates of deposit, deposits in the
foreign branch and short-term borrowings, averaged $21.7 billion during the
first quarter of 2001, compared with $19.4 billion a year ago. As shown in
Figure 5, Key has relied more heavily on purchased funds over the past several
quarters to fund earning assets. In addition, Key continues to consider loan
securitizations as a funding alternative when market conditions are favorable.
No securitizations were completed during the first three months of 2001.
49
50
LIQUIDITY
"Liquidity" measures whether an entity has sufficient cash flow to meet its
financial obligations when due. Key has sufficient liquidity when it can meet
the needs of depositors, borrowers and creditors at a reasonable cost, on a
timely basis, and without adverse consequences. KeyCorp, the parent company, has
sufficient liquidity when it can pay dividends to shareholders, service its
debt, and support customary corporate operations and activities, including
acquisitions.
LIQUIDITY FOR KEY. Management actively analyzes and manages Key's liquidity. In
particular, Key's Funding and Investment Management Group monitors the overall
mix of funding sources with the objective of maintaining an appropriate mix in
light of the structure of the asset portfolios. We use several tools to maintain
sufficient liquidity.
- - We maintain portfolios of short-term money market investments and
securities available for sale, substantially all of which could be
converted to cash quickly at a small expense.
- - Key's portfolio of investment securities generates prepayments (often at a
premium) and payments at maturity.
- - We try to structure the maturities of our loans so we receive a relatively
consistent stream of payments from borrowers. We also selectively
securitize and package loans for sale.
- - Our 922 full-service KeyCenters in 13 states generate a sizable volume of
core deposits. Key's Funding and Investment Management Group monitors
deposit flows and considers alternate pricing structures to attract
deposits when necessary. (For more information about core deposits, see the
previous section entitled "Deposits and other sources of funds.")
- - Key has access to various sources of money market funding (such as Federal
funds purchased, securities sold under repurchase agreements, and bank
notes) and also can borrow from the Federal Reserve Bank to meet short-term
liquidity requirements. Key did not have any borrowings from the Federal
Reserve outstanding as of March 31, 2001.
LIQUIDITY FOR THE PARENT COMPANY. KeyCorp meets its liquidity requirements
principally through regular dividends from affiliate banks. During the first
three months of 2001, affiliate banks paid KeyCorp a total of $1 million in
dividends. As of March 31, 2001, the affiliate banks had an additional $943
million available to pay dividends without prior regulatory approval. These
excess funds are generally maintained in short-term investments. During the
first quarter, KeyCorp also received a $450 million distribution of surplus in
the form of cash from KeyBank National Association.
ADDITIONAL SOURCES OF LIQUIDITY. Management has implemented several programs
that enable Key and KeyCorp to raise money in the public and private markets
when necessary. The proceeds from all of these programs can be used for general
corporate purposes, including acquisitions.
BANK NOTE PROGRAM. During the first three months of 2001, Key's affiliate banks
raised $3.0 billion under Key's bank note program. Of the notes issued during
this period of time, $539 million 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 up
to $20.0 billion ($19.0 billion by KeyBank National Association and $1.0 billion
by Key Bank USA, National Association).
EURO NOTE PROGRAM. Under Key's euro note program, KeyCorp, KeyBank National
Association and Key Bank USA, National Association may issue both long- and
short-term debt of up to $7.0 billion in the aggregate. The notes are offered
exclusively to non-U.S. investors and can be denominated in U.S. dollars and
many foreign currencies. There were $3.8 billion of borrowings outstanding under
this facility as of March 31, 2001, none of which were issued during the first
quarter.
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51
COMMERCIAL PAPER AND REVOLVING CREDIT. KeyCorp has a commercial paper program
and a two-year revolving credit agreement that provide funding availability of
up to $500 million and $400 million, respectively. As of March 31, 2001, $111
million of borrowings were outstanding under the commercial paper program; no
amount was outstanding under the revolving credit agreement.
OTHER PUBLICLY ISSUED SECURITIES. KeyCorp has a universal shelf registration
statement on file with the Securities and Exchange Commission that provides for
the possible issuance of up to $1.5 billion of debt and equity securities in
addition to the unused capacity under a previous shelf registration. At March
31, 2001, unused capacity under the new shelf registration totaled $500 million.
If Key maintains its favorable debt ratings, shown in Figure 18 below,
management believes that, under normal conditions in the capital markets, any
eventual offering of securities would be well-received by investors at a
competitive cost.
FIGURE 18. DEBT RATINGS
SENIOR SUBORDINATED
SHORT-TERM LONG-TERM LONG-TERM CAPITAL
MARCH 31, 2001 BORROWINGS DEBT DEBT SECURITIES
- -------------------------------------------------------------------------------------------------------------------
KeyCorp
- ----------------------------
Standard & Poor's A-2 A- BBB+ BBB
Moody's P-1 A1 A2 "al"
KeyBank National Association
- ----------------------------
Standard & Poor's A-1 A A- N/A
Moody's P-1 Aa3 A1 N/A
- -------------------------------------------------------------------------------------------------------------------
N/A=Not Applicable
For more information about Key's sources and uses of cash for the three month
periods ended March 31, 2001 and 2000, see the Consolidated Statements of Cash
Flow on page 6.
51
52
CAPITAL AND DIVIDENDS
SHAREHOLDERS' EQUITY. Total shareholders' equity at March 31, 2001, was $6.7
billion, up $79 million from the balance at December 31, 2000. Growth in
retained earnings more than offset the effects of net unrealized losses on
securities available for sale, a reduction in capital resulting from the
cumulative effect of a change in accounting for derivative financial
instruments, and net losses incurred on derivative financial instruments during
the first quarter of 2001.
SHARE REPURCHASES. In light of Key's earnings outlook and strong capital
position, in September 2000 the Board of Directors authorized the repurchase of
25,000,000 common shares, including the 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 the first three months of
2001, Key did not repurchase any of its common shares. At March 31, 2001, a
remaining balance of 18,800,000 shares may be repurchased under the September
2000 authorization.
At March 31, 2001, Key had 67,474,937 treasury shares. Management expects to
reissue those shares over time to support the employee stock purchase, 401(k),
stock option, and dividend reinvestment plans, and for other corporate purposes.
During the first three months of 2001, Key reissued 1,159,943 treasury shares
for employee benefit and dividend reinvestment plans.
CAPITAL ADEQUACY. Capital adequacy is an important indicator of financial
stability and performance. Overall, Key's capital position remains strong: the
ratio of total shareholders' equity to total assets was 7.75% at March 31, 2001,
compared with 7.59% at December 31, 2000, and 7.78% at March 31, 2000.
Banking industry regulators prescribe minimum capital ratios for bank holding
companies and their banking subsidiaries. Risk-based capital guidelines require
a minimum level of capital as a percent of "risk-adjusted assets," which is
total assets plus certain off-balance sheet items that are adjusted for
predefined credit risk factors. Currently, banks and bank holding companies must
maintain, at a minimum, Tier 1 capital as a percent of risk-adjusted assets of
4.0%, and total capital as a percent of risk-adjusted assets of 8.0%. As of
March 31, 2001, Key's Tier 1 capital ratio was 7.99%, and its total capital
ratio was 12.32%.
The leverage ratio is 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 3.0%. All other bank holding companies must maintain a minimum ratio of 4%.
As of March 31, 2001, KeyCorp had a leverage ratio of 7.79%, which is
substantially higher than the minimum requirement.
Federal bank regulators group FDIC-insured depository institutions into the
following five categories based on certain capital ratios: "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
and "critically undercapitalized." Both of Key's affiliate banks qualified as
"well capitalized" at March 31, 2001, since each exceeded the prescribed
thresholds of 10% for total capital, 6% for Tier 1 capital and 5% for the
leverage ratio. If these provisions applied to bank holding companies, KeyCorp
would also qualify as "well capitalized" at March 31, 2001. The FDIC-defined
capital categories serve a limited regulatory function. Investors should not
treat them as a representation of the overall financial condition or prospects
of Key or its affiliates.
Figure 19 presents the details of Key's regulatory capital position at March 31,
2001, December 31, 2000 and March 31, 2000.
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FIGURE 19. CAPITAL COMPONENTS AND RISK-ADJUSTED ASSETS
MARCH 31, DECEMBER 31, MARCH 31,
dollars in millions 2001 2000 2000
- --------------------------------------------------------------------------------------------
TIER 1 CAPITAL
Common shareholders' equity(a) $ 6,730 $ 6,609 $ 6,641
Qualifying capital securities 1,243 1,243 1,243
Less: Goodwill 1,311 1,324 1,378
Other intangible assets(b) 45 44 53
- --------------------------------------------------------------------------------------------
Total Tier 1 capital 6,617 6,484 6,453
- --------------------------------------------------------------------------------------------
TIER 2 CAPITAL
Allowance for loan losses(c) 1,001 1,001 979
Net unrealized holding gains(d) 1 16 1
Qualifying long-term debt 2,587 2,136 2,311
- --------------------------------------------------------------------------------------------
Total Tier 2 capital 3,589 3,153 3,291
- --------------------------------------------------------------------------------------------
Total capital $10,206 $ 9,637 $ 9,744
======= ======= =======
RISK-ADJUSTED ASSETS
Risk-adjusted assets on balance sheet $71,251 $71,326 $68,047
Risk-adjusted off-balance sheet exposure 12,747 13,776 14,126
Less: Goodwill 1,311 1,324 1,378
Other intangible assets(b) 45 44 53
Plus: Market risk-equivalent assets 226 225 162
Net unrealized holding gains(d) 1 16 1
- --------------------------------------------------------------------------------------------
Gross risk-adjusted assets 82,869 83,975 80,905
Less: Excess allowance for loan losses(c) -- -- --
- --------------------------------------------------------------------------------------------
Net risk-adjusted assets $82,869 $83,975 $80,905
======= ======= =======
AVERAGE QUARTERLY TOTAL ASSETS $86,324 $85,427 $83,187
======= ======= =======
CAPITAL RATIOS
Tier 1 risk-adjusted capital ratio 7.99 % 7.72 % 7.98 %
Total risk-adjusted capital ratio 12.32 11.48 12.04
Leverage ratio(e) 7.79 7.71 7.89
- --------------------------------------------------------------------------------------------
(a) Common shareholders' equity does not include net unrealized gains or losses
on securities, except for net unrealized losses on marketable equity
securities.
(b) Intangible assets (excluding goodwill) recorded after February 19, 1992,
and deductible portions of purchased mortgage servicing rights.
(c) The allowance for loan losses included in Tier 2 capital is limited by
regulation to 1.25% of gross risk-adjusted assets.
(d) Net unrealized holding gains included in Tier 2 capital are limited by
regulation to 45% of net unrealized holding gains on available for sale
equity securities with readily determinable fair values.
(e) Tier 1 capital divided by average quarterly total assets less goodwill and
other nonqualifying intangible assets as defined in footnote (b).
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
The information presented in the Market Risk Management section beginning on
page 38 of the Management's Discussion and Analysis of Financial Condition and
Results of Operations is incorporated herein by reference.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information presented in Note 11 ("Legal Proceedings"), on page 20, of the
Notes to Consolidated Financial Statements is incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(10.1) Amended Stock Option Plan for Directors
(10.2) Amended and Restated 1991 Equity Compensation Plan
(10.3) Amended Annual Incentive Plan
(15) Acknowledgment Letter of Independent Auditors
(b) REPORTS ON FORM 8-K
January 17, 2001 - Item 5. Other Events, Item 7. Financial Statements
and Exhibits and Item 9. Regulation FD Disclosure. Reporting that on
January 16, 2001, the Registrant issued a press release announcing its
earnings results for the three- and twelve-month periods ended December
31, 2000, and providing a slide presentation reviewed in the related
conference call/webcast.
February 14, 2001- Item 7. Financial Statements and Exhibits and Item
9. Regulation FD Disclosure. Providing a slide presentation to be used
by the Registrant in meetings with investors and analysts.
No other reports on Form 8-K were filed during the three-month period
ended March 31, 2001.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KEYCORP
------------------------------------
(Registrant)
Date: May 11, 2001 /s/ Lee Irving
------------------------------------
By: Lee Irving
Executive Vice President
and Chief Accounting Officer
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