Exhibit 13
FINANCIAL REVIEW
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS
Introduction 22
Highlights of Key's 2001 Performance 23
Cash Basis Financial Data 26
Line of Business Results 26
Results of Operations
Net Interest Income 28
Market Risk Management 29
Noninterest Income 33
Noninterest Expense 36
Income Taxes 38
Financial Condition
Loans 38
Securities 42
Asset Quality 43
Deposits and Other Sources of Funds 48
Liquidity 48
Capital and Dividends 50
Fourth Quarter Results 51
REPORT OF MANAGEMENT 53
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS 53
CONSOLIDATED FINANCIAL STATEMENTS 54
21
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS KEYCORP AND SUBSIDIARIES
INTRODUCTION
This Management's Discussion and Analysis generally reviews the financial
condition and results of operations of KeyCorp and its subsidiaries for each of
the past three years, although some tables may cover more than three years to
comply with Securities and Exchange Commission disclosure requirements or to
illustrate trends over a longer period of time. When you read this discussion,
you should also look at the consolidated financial statements and related notes
that appear on pages 54 through 83.
ACCOUNTING POLICIES
Key's business is dynamic and complex. Consequently, management must exercise
judgment in choosing and applying the most appropriate accounting policies and
methodologies in many areas. These choices are important; not only are they
necessary to ensure compliance with generally accepted accounting principles,
they also reflect the exercise of management's judgment in determining the most
appropriate manner in which to record and report Key's financial performance. In
management's opinion, some of these areas have a more significant impact than
others on the financial performance of Key. This is because they apply to areas
of relatively greater business importance, and/or require a more subjective
decision-making process on the part of management. For Key, these areas include
accounting for the allowance for loan losses, loan securitizations, and
contingent obligations arising from litigation. Our accounting policies related
to the first two of these three areas are disclosed in Note 1 ("Summary of
Significant Accounting Policies"), which begins on page 58. A detailed
description of contingent obligations arising from litigation is contained in
Note 17 ("Commitments, Contingent Liabilities and Other Disclosures"), which
begins on page 76. All accounting policies are important, and all policies
contained in Note 1 should be reviewed for a greater understanding of how Key's
financial performance is recorded and reported.
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), 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 accounting changes, write-downs of certain assets in connection with
the implementation of strategic actions, gains from divestitures and
restructuring charges. All of these items can distort results, particularly
in period-to-period comparisons. Reported results include these items as
required under accounting principles generally accepted in the United States.
- - All earnings per share data included in this discussion are presented on a
DILUTED basis, which takes into account all common shares outstanding as well
as potential common shares that could result from the exercise of outstanding
stock options. Some of the financial information tables also include BASIC
earnings per share, which takes into account only common shares outstanding.
- - For regulatory purposes, capital is divided into two classes. Federal
regulations prescribe that at least one-half of a bank or bank holding
company's TOTAL RISK-BASED CAPITAL must qualify as Tier 1. Both total and
Tier 1 capital serve as bases for several measures of capital adequacy, which
is an important indicator of financial stability and condition. You will find
a more detailed explanation of total and Tier 1 capital and how they are
calculated in the section entitled "Capital and dividends," which begins on
page 50.
- - 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.
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,
which may have an adverse effect on our financial results.
- - If the economy or segments of the economy fail to rebound or decline further,
the demand for new loans and the ability of borrowers to repay outstanding
loans may decline.
- - The stock and bond markets could suffer additional disruption, which may have
an adverse 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; we may be unable to
implement certain initiatives; or the initiatives may be unsuccessful.
- - Acquisitions and dispositions of assets, business units or affiliates could
adversely affect us in ways that management has not anticipated.
- - We may become subject to new legal obligations, or the resolution of pending
litigation may have an adverse effect on our financial condition.
- - Terrorist activities or military actions could further disrupt the economy and
the general business climate, which may have an adverse effect on our
financial results or condition and that of our borrowers.
- - We may become subject to new accounting, tax, or regulatory practices or
requirements.
22
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS KEYCORP AND SUBSIDIARIES
HIGHLIGHTS OF KEY'S 2001 PERFORMANCE
FINANCIAL PERFORMANCE
In May and December, we announced actions designed to improve Key's business
performance and to better position the company to take advantage of an eventual
economic recovery. However, these actions had the effect of reducing Key's
financial results for 2001.
MAY 2001 ANNOUNCEMENT
- ---------------------
On May 17, concurrent with the election of Chief Executive Officer Henry L.
Meyer III as Chairman of the Board of Directors, we announced a series of
strategic initiatives designed to sharpen our business focus and strengthen our
financial performance by returning to our core relationship businesses. Specific
actions include exiting the automobile leasing business, de-emphasizing indirect
prime automobile lending, and discontinuing nonrelationship lending in the
leveraged financing and nationally syndicated lending businesses. These actions
are part of a broader business plan discussed under the heading "Corporate
strategy," on page 24.
As a result of the above actions, we recorded several significant charges that
had an adverse effect on Key's 2001 financial performance. These charges include
a noncore $150 million write-down of goodwill, as well as two large charges
included in Key's core financial results. The core charges include an additional
provision for loan losses of $300 million ($189 million after tax) and $40
million ($25 million after tax) for losses incurred on the residual values of
leased vehicles.
DECEMBER 2001 ANNOUNCEMENT
- --------------------------
On December 20, we announced several significant core charges recorded in
connection with our commitment to restore Key's conservative risk management
culture and strengthen the balance sheet. Specifically, we recorded an
additional provision for loan losses of $590 million ($372 million after tax), a
$45 million ($28 million after tax) write-down of our principal investing
portfolio and a $15 million ($10 million after tax) charge to increase our
reserve for customer derivative losses. We believe that these actions are
critically important in the wake of the events of September 11 and the continued
uncertainty surrounding the timing of an economic recovery; they position us to
take full advantage of the economic recovery when it occurs. These charges, as
well as those recorded in May, are reviewed in greater detail in the remainder
of this discussion.
Key's net income for 2001 was $132 million, or $.31 per common share, compared
with $1.002 billion or $2.30 per share, in 2000. The primary measures of Key's
core financial performance for 2001 are summarized below and reflect the effects
of the core charges recorded in both May and December.
- - Core net income was $320 million, or $.74 per common share, compared with
$1.009 billion, or $2.32 per share in 2000, and $1.051 billion, or $2.33 per
share, in 1999.
- - Key's core return on average equity was 4.87%, compared with 15.49% in 2000
and 16.79% in 1999.
- - Key's core return on average total assets was .38%, compared with 1.20% in
2000 and 1.30% in 1999.
In each of the past three years, Key's financial results have been affected by
significant items, including those related to the implementation of strategic
actions. Those items that are considered to be nonrecurring (or noncore) and
their impact on both earnings and primary financial ratios are summarized in
Figure 1.
FIGURE 1 SIGNIFICANT NONRECURRING ITEMS
YEAR ENDED DECEMBER 31,
dollars in millions, except per share amounts 2001 2000 1999
- -------------------------------------------------------------------------------------------------
Net income as reported $132 $1,002 $1,107
Nonrecurring items (net of tax):
Goodwill write-down (automobile finance business) 150 -- --
Cumulative effect of accounting change -- EITF 99-20 24 -- --
Additional litigation reserves 13 -- --
Restructuring and other special charges 1 78 96
Gain from sale of credit card portfolio -- (207) --
Additional provisions for loan losses -- 101 19
Net losses from reconfiguration of securities portfolio -- 32 --
Gains from branch divestitures -- -- (122)
Gain from sale of Electronic Payment Services, Inc. -- -- (85)
Gains from sale of Key Merchant Services, LLC -- -- (9)
Other nonrecurring items -- 3 45
- -------------------------------------------------------------------------------------------------
Net income -- core $320 $1,009 $1,051
==== ====== ======
Net income per diluted common share $.31 $2.30 $2.45
Net income per diluted common share -- core .74 2.32 2.33
Return on average total assets .16% 1.19% 1.37%
Return on average total assets -- core .38 1.20 1.30
Return on average equity 2.01 15.39 17.68
Return on average equity -- core 4.87 15.49 16.79
- -------------------------------------------------------------------------------------------------
23
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS KEYCORP AND SUBSIDIARIES
Key's core net income declined from 2000 to 2001 due primarily to the adverse
effects of a sluggish economy, which weakened further after the events of
September 11. We witnessed erosion in credit quality among our borrowers over
the past year, particularly during the fourth quarter. The core charges
(primarily provisions for loan losses) recorded in connection with the actions
announced in May and December contributed significantly to the decline in core
net income. The effects of poor economic conditions were also particularly
noticeable in our more capital markets-sensitive businesses, such as principal
investing (investing in privately held companies) and brokerage.
The decrease in Key's core net income from 1999 to 2000 was due in part to the
October 1999 sale of Key's Long Island district branches and the January 2000
sale of Key's credit card business. The decline in core earnings also reflects
the impact of a decision made early in 2000 to discontinue securitizing and
selling home equity loans originated by our home equity finance affiliate. By
retaining these loans on the balance sheet, we intend to replace over time the
earnings formerly generated by the credit card business.
The primary reasons that Key's specific revenue and expense components changed
over the past two years are reviewed in detail in the remainder of this
discussion.
Figure 2 summarizes Key's financial performance on a reported basis for each of
the past six years.
CORPORATE STRATEGY
Our objective is to achieve revenue and earnings per share growth that is
consistently above the median for stocks that make up the Standard & Poors 500
Banks Index. In order to achieve this, our strategy is comprised of the
following four primary elements:
- - STAY FOCUSED ON OUR CORE BUSINESSES. To further this objective, we intend to
focus on businesses where we can build relationships with our clients. We
will primarily focus on a business mix that comprises our "footprint"
businesses that serve individuals, particularly the affluent, small
businesses and middle market companies. Additionally, we will focus on
national businesses such as commercial real estate lending, asset management,
home equity lending and equipment leasing.
Over time, we also intend to diversify our revenue mix by emphasizing the
growth of fee income and to invest in higher-growth and higher-return
businesses.
- - PUT OUR CLIENTS FIRST. To accomplish this, we are focusing on how we can
deepen our relationship with each of our clients. We want to build
relationships with those clients who have the potential to purchase multiple
products and services or repeat business. One way in which we are pursuing
this is to emphasize deposit growth across all of our lines of business.
We also want to ensure that our clients are receiving a distinctive level of
service. We are putting considerable effort into enhancing our service
quality.
- - ENHANCE OUR BUSINESS. To accomplish this objective, we will build on the
success of our competitiveness initiative via a continuous improvement
process, which will continue to focus on increasing revenues, controlling
expenses and better serving our clients. Additionally, we will continue to
leverage technology both to reduce costs and enhance the service quality
provided to our clients.
- - CULTIVATE A WORKFORCE THAT DEMONSTRATES KEY'S VALUES AND WORKS TOGETHER FOR A
COMMON PURPOSE. Key intends to achieve this by:
- paying for performance, but only if achieved in ways that are consistent
with Key's values and keep the company's overall performance in mind;
- attracting, developing and retaining a quality, high-performing and
inclusive workforce;
- developing leadership at all levels in the company; and
- creating a positive, stimulating and entrepreneurial work environment.
STATUS OF COMPETITIVENESS INITIATIVE
Key launched a major initiative in November 1999, the first phase of which was
completed in 2000. This initiative is designed to improve Key's profitability by
reducing the costs of doing business, focusing on the most profitable growth
businesses and enhancing revenues. During the initial phase, we reduced our
operating expenses by approximately $100 million by outsourcing certain
nonstrategic support functions, consolidating sites in a number of our
businesses and reducing management layers.
In the second and final phase of the initiative, referred to as PEG (Perform,
Excel, Grow), we are working to:
- - simplify Key's business structure by consolidating 22 business lines into 10;
- - streamline and automate business operations and processes;
- - standardize product offerings and internal processes;
- - consolidate operating facilities and service centers; and
- - outsource additional noncore activities.
By year end, more than 90% of the PEG projects had been completed and we had
reduced costs by more than two-thirds of the expected net annual savings rate of
$200 million.
Management expects that Key will achieve an annual savings rate of approximately
$360 million from the overall initiative when all planned actions are fully
implemented before the end of 2002. Approximately $60 million of these savings
will be reinvested to fund activities that are designed to enhance Key's
strategic competitive position, fuel higher growth and improve customer service.
Management anticipates that the actions taken in the competitiveness initiative
will reduce Key's workforce by approximately 4,000 positions (comprising both
staffed and vacant positions) by the end of the first quarter of 2002. At
December 31, 2001, nearly 3,900 of these positions had been eliminated.
Since the inception of the competitiveness initiative, we have recorded related
net charges of $279 million. The section entitled "Noninterest expense," which
begins on page 36, and Note 14 ("Restructuring Charges"), which begins on page
73, provide more information about Key's restructuring charges.
24
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES
FIGURE 2 SELECTED FINANCIAL DATA
COMPOUND
ANNUAL RATE
OF CHANGE
dollars in millions, except per share amounts 2001 2000 1999 1998 1997 1996 (1996-2001)
- -------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
Interest income $ 5,627 $ 6,277 $ 5,695 $ 5,525 $ 5,262 $ 4,951 2.6%
Interest expense 2,802 3,547 2,908 2,841 2,517 2,237 4.6
Net interest income 2,825 2,730 2,787 2,684 2,745 2,714 .8
Provision for loan losses 1,350 490 348 297 320 197 47.0
Noninterest income 1,725 2,194 2,315 1,600 1,315 1,090 9.6
Noninterest expense 2,941 2,917 3,070 2,508 2,395 2,464 3.6
Income before income taxes and cumulative
effect of accounting changes 259 1,517 1,684 1,479 1,345 1,143 (25.7)
Income before cumulative effect
of accounting changes 157 1,002 1,107 996 919 783 (27.5)
Net income 132 1,002 1,107 996 919 783 (30.0)
- -------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Income before cumulative effect
of accounting changes $ .37 $ 2.32 $ 2.47 $ 2.25 $ 2.09 $ 1.69 (26.2)%
Income before cumulative effect
of accounting changes --
assuming dilution .37 2.30 2.45 2.23 2.07 1.67 (26.0)
Net income .31 2.32 2.47 2.25 2.09 1.69 (28.8)
Net income -- assuming dilution .31 2.30 2.45 2.23 2.07 1.67 (28.6)
Cash dividends paid 1.18 1.12 1.04 .94 .84 .76 9.2
Book value at year end 14.52 15.65 14.41 13.63 11.83 10.92 5.9
Market price at year end 24.34 28.00 22.13 32.00 35.41 25.25 (.7)
Dividend payout ratio 380.65% 48.28% 42.11% 41.78% 40.19% 45.10% 53.2
Weighted average common shares (000) 424,275 432,617 448,168 441,895 439,042 459,810 (1.6)
Weighted average common shares and
potential common shares (000) 429,573 435,573 452,363 447,437 444,544 464,282 (1.5)
- -------------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31,
Loans $ 63,309 $ 66,905 $ 64,222 $ 62,012 $ 53,380 $ 49,235 5.2%
Earning assets 71,672 77,316 73,733 70,240 64,246 59,260 3.9
Total assets 80,938 87,270 83,395 80,020 73,699 67,621 3.7
Deposits 44,795 48,649 43,233 42,583 45,073 45,317 (.2)
Long-term debt 14,554 14,161 15,881 12,967 7,446 4,213 28.1
Common shareholders' equity 6,155 6,623 6,389 6,167 5,181 4,881 4.7
Total shareholders' equity 6,155 6,623 6,389 6,167 5,181 4,881 4.7
Full-time equivalent employees 21,230 22,142 24,568 25,862 24,595 27,689 (5.2)
Branches 911 922 936 968 1,015 1,205 (5.4)
- -------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on average total assets .16% 1.19% 1.37% 1.32% 1.33% 1.21% N/A
Return on average common equity 2.01 15.39 17.68 17.97 18.89 15.73 N/A
Return on average total equity 2.01 15.39 17.68 17.97 18.89 15.64 N/A
Net interest margin (taxable equivalent) 3.81 3.69 3.93 4.08 4.54 4.78 N/A
- -------------------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS AT DECEMBER 31,
Equity to assets 7.60% 7.59% 7.66% 7.71% 7.03% 7.22% N/A
Tangible equity to tangible assets 6.29 6.12 6.03 5.93 5.52 5.88 N/A
Tier 1 risk-based capital 7.43 7.72 7.68 7.21 6.65 7.98 N/A
Total risk-based capital 11.41 11.48 11.66 11.69 10.83 13.01 N/A
Leverage 7.65 7.71 7.77 6.95 6.40 6.93 N/A
- -------------------------------------------------------------------------------------------------------------------------------
Key completed several acquisitions and divestitures during the six-year period
shown in this table. One or more of these transactions may have had a
significant effect on Key's results, making it difficult to compare results from
one year to the next. Note 3 ("Acquisitions and Divestitures"), which begins on
page 63, has specific information about the acquisitions and divestitures that
Key completed in the past three years to help you understand how those
transactions may have impacted Key's financial condition and results of
operations.
N/A = Not Applicable
25
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS KEYCORP AND SUBSIDIARIES
CASH BASIS FINANCIAL DATA
The selected financial data presented in Figure 3 summarize Key's performance on
a "cash basis" for each of the past three years. We provide cash basis financial
data because we believe it is 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.
When we apply cash basis accounting, we make certain adjustments to get from the
information in Figure 2 (which is presented on an accrual basis) to the
comparable items in Figure 3. Specifically, we exclude goodwill and other
intangibles that do not qualify as Tier 1 capital and exclude the amortization
of those assets. The data provided in Figure 3 do not exclude the impact of any
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.
After combinations using purchase accounting, Key amortized goodwill and other
intangibles by taking periodic charges against income, but those charges were
only accounting entries, not actual cash expenses. Thus, the amortization of
intangibles did not adversely affect Key's cash position or its liquidity. As
shown in Figure 3, Key's 2001 goodwill amortization was relatively high since it
includes an impairment charge of $150 million that resulted from management's
decision to downsize the automobile finance business.
Effective January 1, 2002, a new accounting standard eliminates the amortization
of goodwill and other intangible assets deemed to have indefinite lives. The
absence of this noncash amortization will essentially eliminate the difference
between Key's reported results and those presented on a cash basis. For more
information pertaining to the new accounting standard, see the section entitled
"Accounting Pronouncements Pending Adoption," included in Note 1 ("Summary of
Significant Accounting Policies"), on page 62.
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
dollars in millions, except per share amounts 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
Noninterest expense $ 2,696 $ 2,817 $ 2,968
Income before income taxes and cumulative effect of accounting changes 504 1,617 1,786
Income before cumulative effect of accounting changes 393 1,617 1,786
Net income 368 1,093 1,199
- ------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Income before cumulative effect of accounting changes $ .93 $ 2.53 $ 2.68
Income before cumulative effect of accounting changes-- assuming dilution .91 2.51 2.65
Net income .87 2.53 2.68
Net income-- assuming dilution .86 2.51 2.65
Weighted average common shares (000) 424,275 432,617 448,168
Weighted average common shares and potential common shares (000) 429,573 435,573 452,363
- ------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on average total assets .44% 1.32% 1.51%
Return on average equity 6.89 21.43 25.14
- ------------------------------------------------------------------------------------------------------------
GOODWILL AND NONQUALIFYING INTANGIBLES
Goodwill average balance $ 1,196 $ 1,359 $ 1,424
Nonqualifying intangibles average balance 37 52 68
Goodwill amortization (after tax) 228 82 81
Nonqualifying intangibles amortization (after tax) 8 9 11
- ------------------------------------------------------------------------------------------------------------
Key completed several acquisitions and divestitures during the three-year period 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 them from one year to the next. Note 3 ("Acquisitions and Divestitures"), which begins on page 63,
has specific information about the acquisitions and divestitures that Key completed during the past three
years to help you understand how those transactions impacted Key's financial condition and results of
operations.
LINE OF BUSINESS RESULTS
Key has three major lines of business:
KEY CONSUMER BANKING consists of 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
marine loans.
KEY CORPORATE FINANCE offers financing, as well as financial advisory services
and specialized services related to, among other things, transaction processing,
corporate electronic commerce and equipment leasing. It also serves the needs of
Key's small business clients.
26
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS KEYCORP AND SUBSIDIARIES
KEY CAPITAL PARTNERS offers specialized services to high-net-worth clients
through the wealth management and private banking businesses. It also provides
asset management, investment banking and capital markets expertise, and various
other services, including brokerage, employee benefits and insurance.
This section summarizes the financial performance and related strategic
developments of each line of business. To better understand this discussion, see
Note 4 ("Line of Business Results"), which begins on page 64 and presents the
activities and financial results of each line of business in greater detail.
Figure 4 summarizes the contribution made by each major line of business to
Key's net income for each of the past three years.
FIGURE 4 NET INCOME BY LINE OF BUSINESS(a)
YEAR ENDED DECEMBER 31, CHANGE 2001 VS 2000
-------------------
dollars in millions 2001 2000 1999 AMOUNT PERCENT
- ----------------------------------------------------------------------------------------
Key Consumer Banking:
Retail Banking $ 315 $ 281 $ 214 $ 34 12.1%
Home Equity and Consumer Finance(b) 68 69 112 (1) (1.4)
Key Corporate Finance 515 477 429 38 8.0
Key Capital Partners(c) 65 82 68 (17) (20.7)
Other Segments (28) 45 66 (73) N/M
- ----------------------------------------------------------------------------------------
Total segments 935 954 889 (19) (2.0)
Reconciling items(d) (803) 48 218 (851) N/M
- ----------------------------------------------------------------------------------------
Total net income $ 132 $1,002 $1,107 $ (870) (86.8)%
====== ====== ====== ======
- ----------------------------------------------------------------------------------------
(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) Results for 2001 exclude a second quarter cumulative charge of $39 million
($24 million after tax) resulting from a prescribed change, applicable to
all companies, in the accounting for retained interests in securitized
assets.
(c) 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 $112 million
in 2001, $127 million in 2000 and $105 million in 1999 before its income and
expense were reassigned.
(d) Reconciling items include certain strategic and nonrecurring items
summarized in notes (c), (d) and (e) to the table included in Note 4 ("Line
of Business Results"), beginning on page 64. Also included are charges
related to unallocated nonearning assets of corporate support functions and
the effect of the accounting change described in note (b) above.
N/M= Not Meaningful
KEY CONSUMER BANKING
RETAIL BANKING (A DIVISION OF KEY CONSUMER BANKING)
- ---------------------------------------------------
Retail Banking's net income was $315 million for 2001, up from $281 million for
2000 and $214 million for 1999. The 2001 increase in net income is attributable
primarily to a decrease in noninterest expense, but also reflects an increase in
total revenue. In 2000, net income increased principally because of growth in
total revenue and a decline in noninterest expense.
Noninterest expense decreased by $45 million, or 5%, from 2000, due largely to
lower costs associated with personnel, capital markets activities and a number
of other direct expense components, including occupancy and marketing. The
decline in costs related to capital markets activities is primarily a result of
the income and expense sharing relationship, described under the heading "Key
Capital Partners," on page 28. The improvement in noninterest expense is also
reflected in the efficiency ratio, which is calculated by dividing operating
revenues by operating expenses. That ratio measures the extent to which revenues
are used to pay expenses and improved to 59.28% for 2001 from 62.91% for 2000.
Noninterest income rose by $18 million, or 4%, from 2000. This growth was
largely the result of higher income from service charges on deposit accounts,
which resulted from the implementation of strategies developed under Key's
competitiveness initiative. At the same time, net interest income decreased by
$11 million, or 1%, primarily because interest rate spreads on deposits were
narrower and average deposits decreased slightly.
HOME EQUITY AND CONSUMER FINANCE (A DIVISION OF KEY CONSUMER BANKING)
- ---------------------------------------------------------------------
The Home Equity and Consumer Finance division had net income of $68 million for
2001. This compares with net income of $69 million for 2000 and $112 million for
1999. Total revenue increased in 2001, as strong growth in net interest income
more than offset a significant decrease in noninterest income. The improvement
in total revenue was offset, however, by a rise in noninterest expense. In 2000,
net income decreased primarily as a result of lower noninterest income stemming
from management's decision to discontinue securitizing and selling Key's home
equity loans.
Net interest income increased by $68 million, or 13%, from 2000, largely because
interest rate spreads on loans improved. The growth in net interest income also
reflects a favorable change in the composition of earning assets resulting from
Key's decision to retain (rather than securitize and sell) home equity loans
starting in 2000. Management believes that these assets have an attractive
risk/reward profile. They helped to generate a 4% increase in total average
loans outstanding despite a very challenging economic environment. Noninterest
income
27
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS KEYCORP AND SUBSIDIARIES
declined by $50 million, or 96%, from 2000 due to unfavorable results related to
capital markets activities and losses incurred from reduced residual values of
leased vehicles. Noninterest expense rose by $24 million, or 8%, reflecting
higher costs associated with collections, professional fees and computer
processing.
KEY CORPORATE FINANCE
Key Corporate Finance's net income rose to $515 million for 2001, from $477
million for 2000 and $429 million for 1999. The improvement from 2000 was driven
by revenue growth, offset in part by a moderate increase in noninterest expense.
In 2000, the increase in net income was due primarily to higher net interest
income.
During 2001, net interest income increased by $75 million, or 6%. More favorable
interest rate spreads and modest growth in both total average loans and deposits
were the primary factors contributing to this improvement. The strongest growth
in loans occurred in the commercial real estate, equipment leasing and business
banking units. At the same time, noninterest income rose by $27 million, or 6%,
due largely to increases in income from service charges on deposit accounts and
from letter of credit and non-yield-related loan fees. The increase in service
charges on deposit accounts resulted from strategies implemented under Key's
competitiveness initiative. The $35 million, or 4%, increase in noninterest
expense reflects higher costs associated with computer processing and extensions
of credit, offset in part by lower personnel expense.
KEY CAPITAL PARTNERS
Key Capital Partners' net income was $65 million for 2001, compared with $82
million for 2000 and $68 million for 1999. Prior to assigning revenue and
expense to other business lines whose clients use products and services offered
by Key Capital Partners, net income was $112 million for 2001, $127 million for
2000 and $105 million for 1999.
Total revenue for Key Capital Partners decreased by $7 million, or 1% (a
decrease of $25 million, or 2%, prior to revenue sharing), from 2000. Higher
revenues were generated by fixed income products, derivatives and foreign
exchange, all of which benefited from unstable market interest rates and
favorable conditions in the fixed income securities markets. In addition, Key
Capital Partners' revenue for 2001 benefited from a net gain from the sale of
residential mortgage loans associated with the private banking business.
However, weak conditions in the capital markets adversely affected Key Capital
Partners' overall financial performance in 2001. As a result, income derived
from trust and investment services and from investment banking declined by
approximately $64 million, or 9%, from the prior year.
Noninterest expense increased by $20 million, or 2% (a decrease of $2 million,
or less than 1%, prior to expense sharing). The rise in noninterest expense was
moderated by lower personnel costs and other expense reductions related to a
lower volume of business activity.
In 2000, the increase in net income was mainly the result of an increase in
total revenue stemming from increases in dealer trading and derivatives income
and in trust and investment advisory fees.
OTHER SEGMENTS
Other Segments includes the Treasury unit, the Principal Investing unit and the
net effect of funds transfer pricing among certain Key affiliates and business
units. Financial results for years prior to 2001 have been restated to reflect
the reclassification of two businesses. During 2001, the Principal Investing
unit moved from Key Capital Partners to Other Segments and the Key Electronic
Services unit moved from Other Segments to the Retail Banking division of Key
Consumer Banking.
In 2001, Other Segments generated a net loss of $28 million, compared with net
income of $45 million in the prior year. The decrease in results was primarily
due to net losses of $79 million ($50 million after tax) recorded by the
Principal Investing unit in 2001, compared with net gains of $70 million ($44
million after tax) in 2000. In addition, net interest income declined by $50
million ($32 million after tax), or 50%, due primarily to the net effect of
funds transfer pricing. The adverse effects of these factors were partially
offset by net securities gains of $31 million ($19 million after tax) recorded
by the Treasury unit in 2001, compared with net securities losses of $40 million
($25 million after tax) in 2000.
In 2000, Other Segments generated net income of $45 million, down from $66
million in 1999. The Treasury unit recorded the net securities losses discussed
above, compared with net gains of less than $1 million in 1999. The adverse
effect of securities transactions was partially offset by a $26 million ($17
million after tax) increase in net gains generated by the Principal Investing
unit.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Key's principal source of earnings is net interest income, which is 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 derivative 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
six years. Net interest income for 2001 was $2.9 billion, representing a $112
million, or 4%, increase from 2000. This growth reflected an improved net
interest margin, which increased 12 basis points to 3.81%. The net interest
margin is an indicator of the profitability of the earning asset portfolio and
is calculated by dividing net interest income by average earning assets. Average
earning assets increased by 1% to $75.4 billion, as growth in the commercial and
home equity portfolios more than offset declines in other portfolios, some of
which were due to strategic decisions to exit and/or reduce certain lending
activities. These decisions are more fully discussed in the section entitled
"Interest earning assets," on page 29.
28
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS KEYCORP AND SUBSIDIARIES
In 2000, net interest income was $2.8 billion, down $61 million, or 2%, from the
previous year. Average earning assets, primarily commercial and home equity
loans, increased by 4% to $74.6 billion. That improvement was more than offset,
however, by a decline in the net interest margin from 3.93% in 1999 to 3.69% in
2000. The sales of Key's Long Island branches in the fourth quarter of 1999 and
its credit card business in the first quarter of 2000 slowed the growth in
earning assets and contributed to the reduction in the net interest margin.
NET INTEREST MARGIN. The net interest margin improved over the past year,
primarily because:
- - we benefited from declining short-term interest rates;
- - the interest rate spread on our total loan portfolio improved as we continued
to focus on those businesses, such as home equity lending, that typically
generate higher interest rate spreads;
- - we sold loans with interest rate spreads that did not meet Key's internal
profitability standards; and
- - a greater proportion of Key's earning assets was supported by
noninterest-bearing liabilities (such as demand deposits) and shareholders'
equity.
INTEREST EARNING ASSETS. Average earning assets for 2001 totaled $75.4 billion,
which was $866 million, or 1%, higher than the 2000 level. This increase came
principally from the loan portfolio, with the largest growth occurring in the
commercial and home equity sectors. However, our decision in May to scale back
or exit certain types of lending, and slower demand for loans in a recessionary
economy, led to declines in Key's commercial and consumer loans during the
second half of the year. The September sale of $1.4 billion of residential
mortgage loans also contributed to the decline in consumer loans.
In 2000, average earning assets totaled $74.6 billion, representing a $2.9
billion, or 4%, increase from the prior year. This improvement was driven by the
growth of Key's loan portfolio, despite the January 2000 sale of the credit card
business. Most of the increase was attributable to the commercial loan
portfolio, but the growth of the home equity portfolio was also strong.
Over the past two years, the growth and composition of Key's loan portfolio has
been affected by several actions:
- - During the third quarter of 2001, we sold approximately $1.4 billion of
residential mortgage loans generated by our private banking and community
development businesses. These loans are originated as a customer and
community accommodation and are sold periodically because they have
relatively low interest rate spreads that do not meet Key's internal
profitability standards.
- - During the second quarter of 2001, management announced that Key would exit
the automobile leasing business, de-emphasize indirect prime automobile
lending and discontinue certain nonrelationship credit-only commercial
lending.
- - During 2001 and 2000, Key sold commercial mortgage loans aggregating $2.8
billion. Since a portion of these loans was sold with limited recourse, Key
established a loss reserve of an amount estimated by management to be
appropriate to reflect the recourse risk. More information about the related
recourse agreement is provided in Note 19 ("Other Financial Instruments with
Off-Balance Sheet Risk") under the section entitled "Recourse agreement with
Federal National Mortgage Association," on page 79. Our business of
originating and servicing commercial mortgage loans has grown, in part, as a
result of acquiring Newport Mortgage Company, L.P. and National Realty
Funding L.C. in 2000.
- - During 2000, we became a referral agent to an asset-backed commercial paper
conduit. This arrangement allows us to generate referral revenue without
having to add certain low interest rate spread assets to the balance sheet.
During 2001, Key sold $434 million of federally guaranteed education loans to
a qualified special purpose entity, which issued beneficial interests that
were acquired by the conduit. This followed the sale of $805 million of
commercial loans to the conduit in 2000. In each year, the loans sold were
performing in accordance with their contractual terms. Note 19 ("Other
Financial Instruments with Off-Balance Sheet Risk") on page 79, provides more
information about the asset-backed commercial paper conduit.
- - Early in 2000, we began to retain, rather than securitize and sell, home
equity loans generated by our home equity finance affiliate. Over time, we
expect earnings from this growing business to replace the earnings formerly
generated by the divested credit card business. We will continue, however, to
consider securitizations of other portfolios as a source of funding when
conditions in the capital markets are favorable. We securitized and sold
education loans of $491 million in 2001 and $1.0 billion in 2000.
Figure 6 shows how the changes in yields or rates and average balances from the
prior year affected net interest income. The section entitled "Financial
Condition," which begins on page 38, contains more discussion about changes in
earning assets and funding sources.
MARKET RISK MANAGEMENT
The values of some financial instruments vary not only with changes in external
interest rates, but also with changes in foreign exchange rates, the fair value
of equity securities held as assets, and other market-driven rates or prices.
For example, the value of a fixed-rate bond will decline if market interest
rates increase; the bond will become a less attractive investment. Similarly,
the value of the U.S. dollar regularly fluctuates in relation to other
currencies. The exposure that instruments tied to such external factors presents
is called "market risk." Most of Key's market risk is derived from interest rate
fluctuations.
INTEREST RATE RISK MANAGEMENT
- -----------------------------
Key's Asset/Liability Management Policy Committee has developed a program to
measure and manage interest rate risk. This committee is also responsible for
approving Key's asset/liability management policies, overseeing the formulation
and implementation of strategies to improve balance sheet positioning and
earnings, and reviewing Key's interest rate sensitivity 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.
29
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES
FIGURE 5 AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND YIELDS/RATES
YEAR ENDED DECEMBER 31,
2001 2000
----------------------------- --------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
dollars in millions BALANCE INTEREST RATE BALANCE INTEREST RATE
- ----------------------------------------------------------------------------------------------------------------
ASSETS
Loans(a,b)
Commercial, financial and agricultural $ 19,459 $ 1,362 7.00% $ 19,369 $ 1,669 8.63%
Real estate-- commercial mortgage 6,821 511 7.50 6,911 628 9.10
Real estate-- construction 5,654 411 7.27 4,815 464 9.63
Commercial lease financing 7,049 490 6.95 6,821 493 7.22
- ----------------------------------------------------------------------------------------------------------------
Total commercial loans 38,983 2,774 7.12 37,916 3,254 8.59
Real estate-- residential 3,607 275 7.64 4,274 325 7.61
Home equity 10,595 906 8.55 8,857 822 9.29
Credit card -- -- -- -- -- --
Consumer-- direct 2,427 232 9.55 2,592 265 10.19
Consumer-- indirect lease financing 2,618 217 8.27 3,089 249 8.03
Consumer-- indirect other 5,529 530 9.58 6,032 570 9.44
- ----------------------------------------------------------------------------------------------------------------
Total consumer loans 24,776 2,160 8.72 24,844 2,231 8.97
Loans held for sale 2,217 169 7.64 2,534 230 9.05
- ----------------------------------------------------------------------------------------------------------------
Total loans 65,976 5,103 7.73 65,294 5,715 8.75
Taxable investment securities 908 27 2.99 734 26 3.52
Tax-exempt investment securities(a) 277 25 8.76 391 34 8.76
- ----------------------------------------------------------------------------------------------------------------
Total investment securities 1,185 52 4.34 1,125 60 5.34
Securities available for sale(a,c) 6,568 452 6.91 6,439 447 6.81
Short-term investments 1,712 65 3.81 1,717 83 4.84
- ----------------------------------------------------------------------------------------------------------------
Total earning assets 75,441 5,672 7.52 74,575 6,305 8.45
Allowance for loan losses (1,090) (959)
Accrued income and other assets 10,552 10,419
- ----------------------------------------------------------------------------------------------------------------
$ 84,903 $ 84,035
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Money market deposit accounts $ 12,323 254 2.06 $ 12,211 414 3.39
Savings deposits 1,952 21 1.05 2,206 32 1.47
NOW accounts 619 9 1.43 612 10 1.59
Certificates of deposit ($100,000 or more)(d) 5,284 301 5.71 5,511 340 6.15
Other time deposits 14,208 786 5.53 13,974 805 5.76
Deposits in foreign office 2,715 107 3.94 2,593 167 6.45
- ----------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 37,101 1,478 3.98 37,107 1,768 4.76
Federal funds purchased and securities
sold under repurchase agreements 5,197 198 3.80 4,931 287 5.82
Bank notes and other short-term borrowings(d) 6,829 302 4.43 7,121 428 6.01
Long-term debt, including capital securities(d,e) 15,911 824 5.20 15,707 1,064 6.78
- ----------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 65,038 2,802 4.31 64,866 3,547 5.47
Noninterest-bearing deposits 8,354 8,328
Accrued expense and other liabilities 4,939 4,329
Preferred stock -- --
Common shareholders' equity 6,572 6,512
- ----------------------------------------------------------------------------------------------------------------
$ 84,903 $ 84,035
======== ========
Interest rate spread (TE) 3.21 2.98
- ----------------------------------------------------------------------------------------------------------------
Net interest income (TE) and net
interest margin (TE) $ 2,870 3.81% $ 2,758 3.69%
======== ==== ======== ====
Capital securities $ 1,309 $ 89 $ 1,243 $ 95
Taxable-equivalent adjustment(a) 45 28
- ----------------------------------------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES
FIGURE 5 AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND YIELDS/RATES
YEAR ENDED DECEMBER 31,
1999
----------------------------
AVERAGE YIELD/
dollars in millions BALANCE INTEREST RATE
- ---------------------------------------------------------------------------------
ASSETS
Loans(a,b)
Commercial, financial and agricultural $ 17,695 $ 1,350 7.63%
Real estate-- commercial mortgage 6,946 580 8.35
Real estate-- construction 4,076 343 8.42
Commercial lease financing 6,092 445 7.30
- ---------------------------------------------------------------------------------
Total commercial loans 34,809 2,718 7.81
Real estate-- residential 4,479 338 7.55
Home equity 7,548 645 8.55
Credit card 997 152 15.25
Consumer-- direct 2,457 238 9.69
Consumer-- indirect lease financing 2,922 236 8.08
Consumer-- indirect other 6,584 608 9.23
- ---------------------------------------------------------------------------------
Total consumer loans 24,987 2,217 8.87
Loans held for sale 2,605 228 8.75
- ---------------------------------------------------------------------------------
Total loans 62,401 5,163 8.27
Taxable investment securities 444 15 3.38
Tax-exempt investment securities(a) 535 46 8.60
- ---------------------------------------------------------------------------------
Total investment securities 979 61 6.23
Securities available for sale(a,c) 6,403 425 6.68
Short-term investments 1,873 78 4.16
- ---------------------------------------------------------------------------------
Total earning assets 71,656 5,727 7.99
Allowance for loan losses (911)
Accrued income and other assets 10,201
- ---------------------------------------------------------------------------------
$ 80,946
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
Money market deposit accounts $ 12,950 390 3.01
Savings deposits 2,716 44 1.62
NOW accounts 791 12 1.52
Certificates of deposit ($100,000 or more)(d) 4,257 223 5.24
Other time deposits 11,969 595 4.97
Deposits in foreign office 823 41 4.98
- ---------------------------------------------------------------------------------
Total interest-bearing deposits 33,506 1,305 3.89
Federal funds purchased and securities
sold under repurchase agreements 4,856 220 4.53
Bank notes and other short-term borrowings(d) 7,912 426 5.38
Long-term debt, including capital securities(d,e) 16,473 957 6.09
- ---------------------------------------------------------------------------------
Total interest-bearing liabilities 62,747 2,908 4.63
Noninterest-bearing deposits 8,474
Accrued expense and other liabilities 3,464
Preferred stock --
Common shareholders' equity 6,261
- ---------------------------------------------------------------------------------
$ 80,946
=========
Interest rate spread (TE) 3.36
- ---------------------------------------------------------------------------------
Net interest income (TE) and net
interest margin (TE) $ 2,819 3.93%
======== ====
Capital securities $ 1,162 $ 85
Taxable-equivalent adjustment(a) 32
- ---------------------------------------------------------------------------------
(a) Interest income on tax-exempt securities and loans has been adjusted to a
taxable-equivalent basis using the statutory Federal income tax rate of 35%
(b) For purposes of these computations, nonaccrual loans are included in average
loan balances.
(c) Yield is calculated on the basis of amortized cost.
(d) Rate calculation excludes basis adjustments related to fair value hedges.
See Note 20 ("Derivatives and Hedging Activities"), which begins on page 80,
for an explanation of fair value hedges.
(e) Rate calculation excludes ESOP debt.
TE = Taxable Equivalent
N/M = Not Meaningful
30
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES
COMPOUND ANNUAL
RATE OF CHANGE
1998 1997 1996 (1996-2001)
- ---------------------------- ---------------------------------- ---------------------------------- ------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST
- -----------------------------------------------------------------------------------------------------------------------------------
$15,413 $1,251 8.12% $12,911 $1,126 8.72% $11,970 $1,070 8.94% 10.2% 4.9%
7,080 627 8.86 7,101 663 9.34 7,039 648 9.21 (.6) (4.6)
2,866 254 8.86 1,945 188 9.67 1,631 166 10.18 28.2 19.9
4,822 359 7.45 3,310 228 6.89 2,372 148 6.24 24.3 27.1
- -----------------------------------------------------------------------------------------------------------------------------------
30,181 2,491 8.25 25,267 2,205 8.73 23,012 2,032 8.83 11.1 6.4
5,440 422 7.76 6,192 524 8.46 7,224 593 8.21 (13.0) (14.2)
6,353 557 8.77 5,180 469 9.05 4,214 378 8.97 20.2 19.1
1,438 212 14.74 1,710 256 14.97 1,665 243 14.59 N/M N/M
2,139 228 10.66 2,238 246 10.99 2,183 246 11.27 2.1 (1.2)
2,024 171 8.45 1,156 99 8.56 671 56 8.35 31.3 31.1
6,647 603 9.07 7,023 633 9.01 6,819 604 8.86 (4.1) (2.6)
- -----------------------------------------------------------------------------------------------------------------------------------
24,041 2,193 9.12 23,499 2,227 9.48 22,776 2,120 9.31 1.7 .4
3,200 262 8.19 2,649 198 7.47 2,428 198 8.15 (1.8) (3.1)
- -----------------------------------------------------------------------------------------------------------------------------------
57,422 4,946 9.02 51,415 4,630 9.01 48,216 4,350 9.02 6.5 3.2
282 12 4.83 247 12 4.86 246 14 5.69 29.8 14.0
801 67 8.36 1,227 97 7.91 1,425 114 8.00 (27.9) (26.2)
- -----------------------------------------------------------------------------------------------------------------------------------
1,083 79 7.29 1,474 109 7.39 1,671 128 7.66 (6.6) (16.5)
6,610 450 6.84 7,629 527 6.69 7,423 495 6.69 (2.4) (1.8)
1,563 84 5.37 782 40 5.12 535 28 5.23 26.2 18.3
- -----------------------------------------------------------------------------------------------------------------------------------
66,678 5,559 8.34 61,300 5,306 8.66 57,845 5,001 8.65 5.5 2.6
(888) (875) (872) 4.6
9,491 8,525 7,846 6.1
- -----------------------------------------------------------------------------------------------------------------------------------
$75,281 $68,950 $64,819 5.5
====== ======= =======
$11,650 382 3.28 $10,897 333 3.06 $10,211 311 3.05 3.8 (4.0)
3,225 59 1.83 4,319 94 2.18 5,604 138 2.46 (19.0) (31.4)
1,215 20 1.65 1,560 32 2.05 2,438 48 1.97 (24.0) (28.5)
3,520 194 5.51 3,376 190 5.63 3,377 199 5.89 9.4 8.6
12,240 654 5.34 13,273 715 5.39 13,723 720 5.25 .7 1.8
913 50 5.48 1,812 98 5.41 996 53 5.32 22.2 15.1
- -----------------------------------------------------------------------------------------------------------------------------------
32,763 1,359 4.15 35,237 1,462 4.15 36,349 1,469 4.04 .4 .1
6,635 342 5.15 6,942 359 5.17 5,843 295 5.05 (2.3) (7.7)
7,975 459 5.76 4,741 283 5.97 3,279 197 6.01 15.8 8.9
11,175 681 6.30 6,554 413 6.38 4,324 276 6.38 29.8 24.5
- -----------------------------------------------------------------------------------------------------------------------------------
58,548 2,841 4.85 53,474 2,517 4.71 49,795 2,237 4.49 5.5 4.6
8,509 8,536 8,374 --
2,681 2,074 1,644 24.6
-- -- 79 N/M
5,543 4,866 4,927 5.9
- -----------------------------------------------------------------------------------------------------------------------------------
$75,281 $68,950 $64,819 5.5
======= ======= =======
3.49 3.95 4.16
- -----------------------------------------------------------------------------------------------------------------------------------
$2,718 4.08% $2,789 4.54% $2,764 4.78% .8%
====== ==== ====== ==== ====== ====
$879 $65 $648 $49 $28 $3 N/M
34 44 50 (2.1)%
- -----------------------------------------------------------------------------------------------------------------------------------
31
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES
FIGURE 6 COMPONENTS OF NET INTEREST INCOME CHANGES
2001 VS 2000 2000 VS 1999
------------------------- -------------------------
AVERAGE YIELD/ NET AVERAGE YIELD/ NET
in millions VOLUME RATE CHANGE VOLUME RATE CHANGE
- ----------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $ 59 $(671) $(612) $ 246 $ 306 $ 552
Taxable investment securities 6 (5) 1 10 1 11
Tax-exempt investment securities (10) 1 (9) (13) 1 (12)
Securities available for sale 9 (4) 5 2 20 22
Short-term investments -- (18) (18) (7) 12 5
- ----------------------------------------------------------------------------------------------------
Total interest income (taxable equivalent) 64 (697) (633) 238 340 578
INTEREST EXPENSE
Money market deposit accounts 4 (164) (160) (23) 47 24
Savings deposits (3) (8) (11) (8) (4) (12)
NOW accounts -- (1) (1) (3) 1 (2)
Certificates of deposit ($100,000 or more) (14) (25) (39) 73 44 117
Other time deposits 13 (32) (19) 108 102 210
Deposits in foreign office 8 (68) (60) 111 15 126
- ----------------------------------------------------------------------------------------------------
Total interest-bearing deposits 8 (298) (290) 258 205 463
Federal funds purchased and securities sold
under repurchase agreements 15 (104) (89) 3 64 67
Bank notes and other short-term borrowings (17) (109) (126) (45) 47 2
Long-term debt, including capital securities 14 (254) (240) (46) 153 107
- ----------------------------------------------------------------------------------------------------
Total interest expense 20 (765) (745) 170 469 639
- ----------------------------------------------------------------------------------------------------
Net interest income (taxable equivalent) $ 44 $ 68 $ 112 $ 68 $(129) $ (61)
===== ===== ===== ===== ===== =======
- ----------------------------------------------------------------------------------------------------
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.
Like any forecasting technique, interest rate simulation modeling is based on a
large number of assumptions and judgments. In this case, the assumptions relate
primarily to loan and deposit growth, asset and liability prepayments, interest
rates, and on- and off-balance sheet management strategies. Management believes
that, both individually and in the aggregate, the assumptions Key makes are
reasonable. Nevertheless, the simulation modeling process produces only a
sophisticated estimate, not a precise calculation of exposure.
Key's guidelines for risk management call for preventive measures to be taken if
the simulation modeling demonstrates that a gradual 2% increase or decrease in
short-term rates over the next twelve months would adversely affect net interest
income over the same period by more than 2%. Key is operating within these
guidelines. The low level of short-term interest rates at December 31, 2001,
necessitated a modification of Key's standard rate scenario of a gradual
decrease of 2% over twelve months to a gradual decrease of 1% over six months.
As of December 31, 2001, based on the results of our simulation model, and
assuming that management does not take action to alter the outcome, Key would
expect net interest income to decrease by approximately .86% if short-term
interest rates gradually increase by 2%. Conversely, if short-term interest
rates gradually decrease by 1% over the next six months, net interest income
would be expected to increase by approximately .21%.
MEASUREMENT OF LONG-TERM INTEREST RATE EXPOSURE. Key uses an economic value of
equity model to complement short-term interest rate risk analysis. The benefit
of this model is that it measures exposure to interest rate changes over time
frames longer than two years. The economic value of Key's equity is determined
by aggregating the present value of projected future cash flows for asset,
liability and derivative positions based on the current yield curve. However,
economic value does not represent the true fair values of asset, liability and
derivative positions, since it does not consider factors like credit risk and
liquidity.
Key's guidelines for risk management call for preventive measures to be taken if
an immediate 2% increase or decrease in interest rates is estimated to reduce
the economic value of equity by more than 15%. Key is operating within these
guidelines.
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
hypothetical 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 high as the
32
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS KEYCORP AND SUBSIDIARIES
return that would have been generated had payments been received for the
duration originally scheduled. Floating-rate loans that are capped against
potential interest rate increases and deposits that can be withdrawn on
demand also present option risk.
- - One approach that Key follows to manage interest rate risk is to use
floating-rate liabilities (such as borrowings) to fund floating-rate assets
(such as loans). That way, as our interest expense increases, so will our
interest income. We face "basis risk" when our floating-rate assets and
floating-rate liabilities reprice in response to different market factors or
indices. Under those circumstances, even if equal amounts of assets and
liabilities are repricing at the same time, interest expense and interest
income may not change by the same amount.
- - We often use an interest-bearing liability to fund an interest-earning asset.
For example, Key may sell certificates of deposit and use the proceeds to
make loans. That strategy presents "GAP RISK" if the related liabilities and
assets do not mature or reprice at the same time.
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, and interest rate implications.
A brief description of interest rate swaps and caps is as follows:
- - INTEREST RATE SWAPS are contracts in 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"). Caps limit
exposure to interest rate increases, but have no effect if interest rates
decline. Key has used interest rate caps to manage the risk of adverse
movements in interest rates on some of its debt.
For more information about how Key uses interest rate swaps and caps to manage
its balance sheet, see Note 20 ("Derivatives and Hedging Activities"), starting
on page 80.
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 20
("Derivatives and Hedging Activities"), which begins on page 80.
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% probability. At December 31, 2001, Key's
aggregate daily VAR was $1.4 million, compared with $1.1 million at December 31,
2000. Aggregate daily VAR averaged $1.3 million for 2001, compared with an
average of $1.0 million during 2000. VAR modeling augments other controls that
Key uses to mitigate the market risk exposure of the trading portfolio. These
controls include loss and portfolio size limits that are based on market
liquidity and the level of activity and volatility of trading products.
NONINTEREST INCOME
Noninterest income was $1.7 billion for 2001, compared with $2.2 billion for
2000 and $2.3 billion for 1999. In both 2000 and 1999, noninterest income was
affected by various nonrecurring items. The most significant of these items,
including gains from divestitures and net losses resulting from the
reconfiguration of Key's securities portfolio, are shown in Figure 7. For more
information on the divestitures, see Note 3 ("Acquisitions and Divestitures"),
which begins on page 63.
Core noninterest income, which excludes significant nonrecurring items, was $1.7
billion (38% of total core revenue) in 2001, compared with $1.9 billion (41% of
total core revenue) in 2000 and $2.0 billion (41% of total core revenue) in
1999.
Key's core noninterest income for 2001 was reduced by several significant core
charges. In the second quarter, Key recorded a $40 million charge (included in
miscellaneous income) for losses incurred on the residual values of leased
vehicles. This was followed by a $60 million fourth quarter charge (included in
investment banking and capital markets income) for principal investing
write-downs ($45 million) and to increase our reserve for customer derivative
losses ($15 million). The 2001 decrease in core noninterest income was also
attributable to the decline in Key's capital markets-sensitive revenues,
particularly those generated by the asset management, principal investing and
brokerage businesses, which were affected adversely by the recessionary economy.
Income from investment banking and capital markets activities decreased by $123
million (excluding the $60 million charge discussed above), while income from
trust and investment services declined by $58 million. These reductions were
substantially offset by growth in service charges on deposit accounts (up $46
million), letter of credit and non-yield-related loan fees (up $17 million) and
net securities gains (up $13 million).
Excluding revenue from divested businesses and gains from home equity loan
securitizations, core noninterest income in 2000 was up $92 million, or 5%, from
the prior year and reflected nearly across-the-board growth in traditional
sources of fee income. In 2000, the absence of revenue from the divested Long
Island branches and the credit card business accounted for a $69 million
decrease in core noninterest income, while the absence of gains from the
securitization and sale of home equity loans (a substantial source of income in
1999) accounted for a $64 million decrease.
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 in 2001 and 2000.
33
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES
FIGURE 7 NONINTEREST INCOME
YEAR ENDED DECEMBER 31, CHANGE 2001 VS 2000
---------------------
dollars in millions 2001 2000 1999 AMOUNT PERCENT
- --------------------------------------------------------------------------------------------------------------
Trust and investment services income $ 550 $ 608 $ 599 $ (58) (9.5)%
Investment banking and capital markets income 189 372 354 (183) (49.2)
Service charges on deposit accounts 387 341 330 46 13.5
Corporate-owned life insurance income 114 109 107 5 4.6
Letter of credit and loan fees 124 107 98 17 15.9
Net securities gains 35 22 -- 13 59.1
Other income:
Electronic banking fees 74 68 58 6 8.8
Insurance income 56 62 52 (6) (9.7)
Loan securitization servicing fees 16 24 28 (8) (33.3)
Net gains from loan securitizations and sales 49 38 115 11 28.9
Credit card fees 7 11 63 (4) (36.4)
Miscellaneous income 124 157 157 (33) (21.0)
- --------------------------------------------------------------------------------------------------------------
Total other income 326 360 473 (34) (9.4)
- --------------------------------------------------------------------------------------------------------------
Total core noninterest income 1,725 1,919 1,961 (194) (10.1)
Gain from sale of credit card portfolio -- 332 -- (332) (100.0)
Net losses from reconfiguration of securities portfolio -- (50) -- 50 (100.0)
Gains from branch divestitures -- -- 194 -- --
Gain from sale of Electronic Payment Services, Inc. -- -- 134 -- --
Gain from sale of Concord EFS, Inc. common shares -- -- 15 -- --
Gains from sale of Key Merchant Services, LLC -- -- 14 -- --
Gain from sale of Compaq Capital Europe LLC and
Compaq Capital Asia Pacific LLC -- -- 13 -- --
Other securities gains -- -- 14 -- --
Other nonrecurring items -- (7) (30) 7 (100.0)
- --------------------------------------------------------------------------------------------------------------
Total significant nonrecurring items -- 275 354 (275) (100.0)
- --------------------------------------------------------------------------------------------------------------
Total noninterest income $ 1,725 $ 2,194 $ 2,315 $ (469) (21.4)%
======= ======= ======= =======
- --------------------------------------------------------------------------------------------------------------
TRUST AND INVESTMENT SERVICES INCOME. Trust and investment services provide
Key's largest source of noninterest income. As shown in Figure 8, the 2001
decrease in revenue derived from these services was due largely to the effects
of a weakened economy, leading to declines in brokerage commission income and
fee income that is based on the value of assets.
FIGURE 8 TRUST AND INVESTMENT SERVICES INCOME
YEAR ENDED DECEMBER 31, CHANGE 2001 VS 2000
-------------------
dollars in millions 2001 2000 1999 AMOUNT PERCENT
- ----------------------------------------------------------------------------------------
Personal asset management and custody fees $179 $189 $188 $(10) (5.3)%
Institutional asset management and custody fees 86 93 93 (7) (7.5)
Bond services 41 42 26 (1) (2.4)
Brokerage commission income 101 145 156 (44) (30.3)
All other fees 143 139 136 4 2.9
- ----------------------------------------------------------------------------------------
Total trust and investment services income $550 $608 $599 $(58) (9.5)%
==== ==== ==== ====
- ----------------------------------------------------------------------------------------
At December 31, 2001, Key's bank, trust and registered investment advisory
subsidiaries had assets under management of $73 billion, compared with $74
billion at the end of 2000. These assets are managed on behalf of both
institutions and individuals through a variety of equity, fixed income and money
market accounts. The composition of Key's assets under management is shown in
Figure 9. The value of total assets under management declined by a net 2% in
2001. This modest decline reflects the positive effect of net new asset inflows
of approximately $2.7 billion, representing a 145% increase from net new asset
inflows in 2000, and an approximate 5% decline in the market value of assets
under management at December 31, 2000. This market performance compares
favorably with that of the equity markets in general. The Standard & Poors 500
Banks Index decreased by 12%, while the NASDAQ index was down 21% for the year.
Key's relatively favorable market results are due primarily to two factors:
approximately one-half of
34
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS KEYCORP AND SUBSIDIARIES
the assets Key manages are invested in more stable fixed income or money market
funds and the performance of the majority of our equity and fixed income
products exceeded the performance of their respective benchmarks.
FIGURE 9 ASSETS UNDER MANAGEMENT
DECEMBER 31,
in millions 2001 2000 1999
- --------------------------------------------------------------
Assets under management
by investment type:
Equity $35,798 $37,748 $39,257
Fixed income 16,919 14,579 14,360
Money market 20,000 21,688 19,675
- --------------------------------------------------------------
Total $72,717 $74,015 $73,292
======= ======= =======
Proprietary mutual funds
included in assets
under management:
Equity $ 3,973 $ 4,405 $ 4,601
Fixed income 1,190 1,042 1,124
Money market 13,801 15,307 13,735
- --------------------------------------------------------------
Total $18,964 $20,754 $19,460
======= ======= =======
- --------------------------------------------------------------
INVESTMENT BANKING AND CAPITAL MARKETS INCOME. The 2001 decrease in this revenue
component reflects the $60 million charge taken for principal investing
write-downs and to increase our reserve for customer derivative losses, as well
as the overall effects of a recessionary economy. As shown in Figure 10, results
for 2001 include net losses from principal investing, compared with net gains in
2000. The $150 million decrease in principal investing results is attributable
to unrealized mark-to-market adjustments of $114 million recorded in 2001,
including the $45 million charge taken in the fourth quarter. Principal
investing income is by nature susceptible to volatility since it is derived from
investments in small to medium-sized businesses, some of which are in their
early stages of economic development and strategy implementation, and thus more
susceptible to changes in general economic conditions. Principal investing
assets are carried on the balance sheet at fair value. The cost basis,
unrealized losses and fair value of direct and indirect investments contained in
Key's principal investing portfolio at December 31, 2001, are summarized in
Figure 11. Investments in technology-rich companies, which have been
particularly hard hit by the effects of the weak economy, accounted for only $38
million, or 6%, of the fair value of Key's portfolio at year end.
FIGURE 10 INVESTMENT BANKING AND CAPITAL MARKETS INCOME
YEAR ENDED DECEMBER 31, CHANGE 2001 VS 2000
-------------------
dollars in millions 2001 2000 1999 AMOUNT PERCENT
- ----------------------------------------------------------------------------------------------------
Dealer trading and derivatives income $ 126 $ 159 $ 140 $ (33) (20.8)%
Investment banking income 102 107 140 (5) (4.7)
Net gains (losses) from principal investing (79) 71 44 (150) N/M
Foreign exchange income 40 35 30 5 14.3
- ----------------------------------------------------------------------------------------------------
Total investment banking and capital markets income $ 189 $ 372 $ 354 $(183) (49.2)%
===== ===== ===== =====
- ----------------------------------------------------------------------------------------------------
N/M = Not Meaningful
FIGURE 11 PRINCIPAL INVESTING PORTFOLIO
DECEMBER 31, 2001 COST UNREALIZED FAIR
in millions BASIS LOSSES VALUE
- ----------------------------------------------------------------
Direct investments $451 $59 $392
Indirect investments 248 20 228
- ----------------------------------------------------------------
Total $699 $79 $620
==== === ====
- ----------------------------------------------------------------
SERVICE CHARGES ON DEPOSIT ACCOUNTS. Service charges on deposit accounts reached
a record high in 2001 and account for the largest increase in fee income. The
growth of these fees over the past two years is attributable primarily to
strategies implemented in connection with Key's competitiveness initiative.
CORPORATE-OWNED LIFE INSURANCE INCOME. Income from corporate-owned life
insurance, representing a tax-deferred increase in cash surrender values and
tax-exempt death benefits, increased by 5% in 2001, following a 2% increase in
the prior year.
SECURITIES TRANSACTIONS. During 2001, Key realized $35 million of net securities
gains from the sales of securities held in the available-for-sale portfolio,
compared with core net gains of $22 million a year ago. Since the sales involved
primarily equity securities issued by financial service companies, the sales
will not have a significant adverse affect on Key's future net interest income.
OTHER INCOME. The decrease in other income in 2001 was due largely to the $40
million charge for losses incurred on the residual values of leased vehicles.
This charge was offset in part by an increase in net gains from loan
securitizations and sales, and higher fees from electronic banking services.
Also, traditional fee income was supplemented in the fourth quarter of 2001 by
$10 million of additional revenue, representing the value of shares received as
a result of a demutualization of an insurance company in which Key is a
policyholder. Key contributed these shares to its charitable foundation, which
also increased miscellaneous expense by $10 million.
35
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS KEYCORP AND SUBSIDIARIES
In 2000, the decrease in other income was attributable to lower net gains from
loan securitizations and sales, and a substantial reduction in credit card fees,
partially offset by higher income from electronic banking services and insurance
activities. The decrease in net gains from loan securitizations and sales was
attributable primarily to the fact that in 2000 we ceased securitizing Champion
Mortgage's home equity loans. For information about the type and volume of
securitized loans that are either administered or serviced by Key, but not
recorded on the balance sheet, see the section entitled "Loans," which begins on
page 38. The decline in credit card fees reflects the sale of Key's credit card
business in January 2000. For more information about this transaction, see Note
3 ("Acquisitions and Divestitures"), which begins on page 63.
SIGNIFICANT NONRECURRING ITEMS. Noninterest income for 2000 includes a $332
million gain from the sale of Key's credit card business and $50 million of net
losses that resulted from the reconfiguration of Key's securities portfolio.
Results for 1999 include gains of $194 million from the sale of Key's Long
Island franchise, which included 28 branches. These branches are located in a
geographic area where Key held a very small share of the market for deposits and
loans, and where management viewed Key's growth potential to be very limited.
Also included in 1999 results are a $134 million gain from the sale of Key's
interest in Electronic Payment Services, Inc.; a $14 million gain recorded in
connection with the 1998 sale of a 51% interest in Key Merchant Services, LLC; a
$15 million gain from the sale of Concord EFS, Inc. shares obtained in the sale
of Electronic Payment Services, Inc.; and a $13 million gain from the sale of
Key's interest in a joint venture with Compaq Capital Corporation.
NONINTEREST EXPENSE
Noninterest expense for 2001 was $2.9 billion, relatively unchanged from 2000
and slightly down from $3.1 billion for 1999. Significant nonrecurring items
that hinder a direct comparison of results over the past three years are shown
in Figure 12. In the current year, these items include a $150 million write-down
of goodwill associated with Key's decision to downsize the automobile finance
business and a second quarter increase of $20 million in litigation reserves. In
2000 and 1999, significant nonrecurring items include restructuring and other
special charges recorded in connection with strategic actions implemented to
improve operating efficiency and profitability. More information about these
charges can be found under the heading "Restructuring and other special
charges."
Noninterest expense in 1999 also includes other nonrecurring charges of $68
million. These charges include $23 million of charitable contributions made in
light of the gains realized from the sales of Key's interests in Electronic
Payment Services, Inc. and Concord EFS, Inc. For more information on these
divestitures, see Note 3 ("Acquisitions and Divestitures"), which begins on page
63.
Core noninterest expense, which excludes significant nonrecurring items,
decreased by $25 million, or 1%, from 2000. The decrease was due primarily to a
$67 million improvement in personnel expense and a $21 million decline in
equipment expense. These reductions were partially offset by increases in a
number of other expense components. Included in miscellaneous expense for 2001
is the $10 million contribution to our charitable foundation discussed
previously under the heading "Other income," on page 35.
In 2000, core noninterest expense decreased by $56 million, or 2%. The decrease
came largely from personnel expense (down $29 million), equipment expense (down
$25 million) and net occupancy expense (down $8 million). These improvements
were partially offset by higher costs associated with professional fees (up $7
million) and computer processing expense (up $4 million). In addition,
miscellaneous expense for 2000 includes a $7 million charge to reduce the
carrying amount of residual values related to leased vehicles.
Figure 12 shows the components of Key's noninterest expense. The discussion that
follows explains the composition of certain components and the factors that
caused them to change in 2001 and 2000.
PERSONNEL. Personnel expense, the largest category of Key's noninterest expense,
decreased in both 2001 and 2000, largely because of our successful
competitiveness initiative. Through this initiative we have improved efficiency
and reduced the level of personnel required to conduct our business. At December
31, 2001, the number of full-time equivalent employees was 21,230, compared with
22,142 at the end of 2000 and 24,568 at the end of 1999. Moreover, in 2001,
weaker economic conditions reduced revenues on which certain incentive
compensation programs, including those related to investment banking and capital
markets activities, are based. In 2000, the decline in personnel expense was
also attributable to the effect of divestitures and the fact that 1999 costs for
technical staff were unusually high due to Year 2000 compliance issues. Figure
13 shows the major components of Key's core personnel expense.
COMPUTER PROCESSING. The increases in computer processing expense in 2001 and
2000 were due primarily to a higher level of computer software amortization, but
also include increases related to software rental and maintenance. In each year,
the increase in these costs was substantially offset by the reduced need for
outside services.
EQUIPMENT. The decrease in equipment expense in 2001 and 2000 was driven by
reductions in depreciation and rental expense stemming from cost management
efforts and our competitiveness initiative. The improvement in 2000 was also
attributable to lower maintenance costs. Rental expense for 1999 includes a $5
million charge for the early termination of a lease.
PROFESSIONAL FEES. Professional fees comprise expenses incurred for legal,
audit, consulting and certain other business services. The level of professional
fees rose by 14% in 2001 and 10% in 2000. In 2001, the increase was due
primarily to higher legal expenses associated with litigation. The increase in
fees for 2000 reflects additional costs incurred in connection with Key's
competitiveness initiative.
RESTRUCTURING AND OTHER SPECIAL CHARGES. Key recorded net nonrecurring charges
of $127 million (including net restructuring charges of $104 million) in 2000
and $152 million (including net restructuring charges of $98 million) in 1999 in
connection with strategic actions related to the competitiveness initiative. For
more information related to the actions taken, anticipated cost savings and
reductions to Key's workforce, see the section entitled "Status of
competitiveness initiative," on page 24. Additional information related to the
restructuring charges can be found in Note 14 ("Restructuring Charges"), which
begins on page 73. Cash generated by Key's operations is expected to fund the
restructuring charge liability; none of the charges had a material impact on
Key's liquidity.
36
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS KEYCORP AND SUBSIDIARIES
FIGURE 12 NONINTEREST EXPENSE
YEAR ENDED DECEMBER 31, CHANGE 2001 VS 2000
----------------------------
dollars in millions 2001 2000 1999 AMOUNT PERCENT
- ------------------------------------------------------------------------------------------------------------------------------------
Personnel $1,378 $1,445 $1,474 $ (67) (4.6)%
Net occupancy 232 223 231 9 4.0
Computer processing 252 240 236 12 5.0
Equipment 152 173 198 (21) (12.1)
Marketing 112 110 106 2 1.8
Amortization of intangibles 95 101 104 (6) (5.9)
Professional fees 88 77 70 11 14.3
Other expense:
Postage and delivery 63 65 73 (2) (3.1)
Telecommunications 44 51 56 (7) (13.7)
Equity- and gross receipts-based taxes 29 33 35 (4) (12.1)
OREO expense, net 6 7 13 (1) (14.3)
Miscellaneous expense 318 269 254 49 18.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total other expense 460 425 431 35 8.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total core noninterest expense 2,769 2,794 2,850 (25) (.9)
Goodwill write-down (automobile finance business) 150 -- -- 150 N/M
Additional litigation reserves 20 -- -- 20 N/M
Restructuring and other special charges 2 125 152 (123) (98.4)
Other nonrecurring items -- (2) 68 2 (100.0)
- ------------------------------------------------------------------------------------------------------------------------------------
Total significant nonrecurring items 172 123 220 49 39.8
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense $2,941 $2,917 $3,070 $ 24 .8%
====== ====== ====== =====
Full-time equivalent employees at year end 21,230 22,142 24,568 (912) (4.1)
- ------------------------------------------------------------------------------------------------------------------------------------
N/M = Not Meaningful
FIGURE 13 CORE PERSONNEL EXPENSE
YEAR ENDED DECEMBER 31, CHANGE 2001 VS 2000
----------------------------
dollars in millions 2001 2000 1999 AMOUNT PERCENT
- ------------------------------------------------------------------------------------------------------------------------------------
Salaries $ 842 $ 875 $ 907 $(33) (3.8)%
Employee benefits 188 192 187 (4) (2.1)
Incentive compensation 348 378 380 (30) (7.9)
- ------------------------------------------------------------------------------------------------------------------------------------
Total core personnel expense $1,378 $1,445 $1,474 $(67) (4.6)%
====== ====== ====== ====
- ------------------------------------------------------------------------------------------------------------------------------------
During the first quarter of 2000, Key also recorded a $2 million credit to
restructuring charges in connection with actions initiated during the fourth
quarter of 1996 to complete Key's transformation to a nationwide bank-based
financial services company. The credit was taken to reduce the remaining
liability associated with branch consolidations since favorable market
conditions enabled Key to consolidate these branches at a lower cost than
originally expected.
Key continues to benefit from the expense management disciplines instituted as
part of the competitiveness initiative implemented in November 1999. As
illustrated in Figure 14, Key's core noninterest expense, adjusted for the
divestiture of the Long Island branches (October 1999) and the sale of the
credit card business (January 2000), has been stable over the past three years.
One of management's goals is to keep noninterest expense relatively flat from
2001 to 2002, unless the growth can be attributed to incentive compensation
related to even greater increases in revenue. This figure also shows that Key's
noninterest expense for 2000 and 2001 was significantly lower than it would have
been had it simply grown at the rate of inflation as measured by the annual
change in the consumer price index. If we are successful in hitting our targeted
expense level in 2002, management estimates that the difference between Key's
actual expense and that adjusted for inflation (based on an assumed 2% increase
in the consumer price index for 2002) will grow to approximately $240 million.
The dollar amounts shown for all years in Figure 14 are presented on a
consistent basis, including the accounting for goodwill amortization.
Information on the change in accounting for goodwill and other intangible assets
that became effective as of January 1, 2002, can be found in Note 1 ("Summary of
Significant Accounting Policies") under the heading "Accounting Pronouncements
Pending Adoption," on page 62.
37
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS KEYCORP AND SUBSIDIARIES
FIGURE 14 COMPETITIVENESS INITIATIVE - COST SAVINGS
[LINE/BAR GRAPH]
Noninterest
Expense
Noninterest Adjusted for
In millions Expense(a) Inflation
- --------------------------------------------------
1999 $2,776 $2,776(b)
2000 2,789 2,869(c)
2001 2,769 2,949(d)
2002T 2,770 3,010(e)
- --------------------------------------------------
(a) Noninterest expense less significant nonrecurring items, adjusted for
divested operations
(b) CPI base
(c) CPI + 3.4% (Bureau of Labor Statistics Jan-Dec 2000)
(d) CPI + 2.8% (Bureau of Labor Statistics Jan-Nov 2001)
(e) CPI + 2.0% (Estimate of 2% for 2002)
T = Targeted noninterest expense, assuming a 2% increase in the consumer
price index for 2002
INCOME TAXES
The provision for income taxes was $102 million for 2001, compared with $515
million for 2000 and $577 million for 1999. The effective tax rate (which is the
provision for income taxes as a percentage of income before income taxes) was
39.4% for 2001, compared with 33.9% for 2000 and 34.3% for 1999. In 2001, the
effective tax rate was significantly affected by the $150 million nondeductible
write-down of goodwill recorded in connection with Key's decision to downsize
the automobile finance business. Excluding this charge, the effective tax rate
for 2001 was approximately 25%. This adjusted effective tax rate declined from
2000 because tax-exempt interest income, nontaxable income from corporate-owned
life insurance and tax credits accounted for a significantly higher proportion
of Key's lower pre-tax income in 2001. A nonrecurring tax benefit resulting from
the charitable contribution of appreciated stock also contributed to the lower
effective tax rate. In 2001, pre-tax income was substantially lower than
previous years due to the effects of a weak economy and significant charges
recorded in the second and fourth quarters.
In 2000, the effective tax rate decreased primarily because Key had larger tax
credits and more tax-exempt income from corporate-owned life insurance. The
effect of these items was offset, in part, by higher state income taxes and a
higher level of amortization related to nondeductible intangible assets. In
addition, in 1999 Key recorded a nonrecurring tax benefit associated with a
charitable contribution of appreciated stock.
We have invested in tax-advantaged assets (such as tax-exempt securities and
corporate-owned life insurance) and we continue to recognize credits associated
with investments in low-income housing projects in order to reduce Key's
effective income tax rate.
FINANCIAL CONDITION
LOANS
At December 31, 2001, total loans outstanding were $63.3 billion, compared with
$66.9 billion at the end of 2000 and $64.2 billion at the end of 1999. Among the
factors that contributed to the 5% decrease in our loans over the past year are:
- - weaker loan demand stemming from the sluggish economy;
- - our decision to exit the automobile leasing business, de-emphasize indirect
prime automobile lending and discontinue certain nonrelationship,
credit-only commercial lending; and
- - loan sales completed to improve the profitability of Key's overall
portfolio, or to accommodate our funding needs.
Over the past several years, we have used alternative funding sources like loan
sales and securitizations to allow us to continue to capitalize on our lending
opportunities. Management expects Newport Mortgage Company, L.P. and National
Realty Funding L.C., both of which were acquired in 2000, to improve Key's
ability to generate and securitize new loans, especially in the area of
commercial real estate. In addition, over the past two years, we have sold loans
and referred new business to an asset-backed commercial paper conduit. This
arrangement allows us to generate referral revenue without having to add certain
low interest rate spread assets to the balance sheet. For more information about
the conduit, see Note 19 ("Other Financial Instruments with Off-Balance Sheet
Risk"), on page 79.
Figure 15 shows the composition of Key's loan portfolio at December 31 for each
of the past five years.
The level of Key's loans outstanding (excluding loans held for sale) would have
been unchanged from a year ago if we had not securitized and/or sold $3.7
billion of loans during 2001. Assuming no loan sales, commercial loans grew by
$488 million, or 1%, during the year. Growth in our commercial real estate and
lease financing portfolios was substantially offset by declines in other
commercial portfolios, reflecting continued weakness in the economy and our
decision to eliminate nonrelationship lending in the leveraged financing and
nationally syndicated lending businesses.
At December 31, 2001, Key's commercial real estate portfolio included mortgage
loans of $6.7 billion and construction loans of $5.9 billion. The average size
of a mortgage loan was $.5 million and the largest mortgage loan had a balance
of $32 million. The average size of a construction loan was $8 million for
commercial projects and $1 million for residential projects. The largest
construction loan was $84 million. Key conducts its commercial real estate
lending business through two primary sources: a 12-state banking franchise,
which includes 911 retail banking branches, and a national line of business that
cultivates relationships both within and beyond the branch system. At December
31, our national line of business accounted for approximately 50% of Key's total
commercial real estate loans outstanding. Our commercial real estate business as
a whole focuses on larger real estate developers and, as shown in Figure 16, is
diversified by both industry type and geography.
38
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS KEYCORP AND SUBSIDIARIES
FIGURE 15 COMPOSITION OF LOANS
DECEMBER 31, 2001 2000 1999
----------------------- ------------------------ -----------------------
dollars in millions AMOUNT % OF TOTAL AMOUNT % OF TOTAL AMOUNT % OF TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL
Commercial, financial and agricultural $18,159 28.7% $20,100 30.0% $18,497 28.8%
Commercial real estate(a):
Commercial mortgage 6,669 10.5 6,876 10.3 6,836 10.6
Construction 5,878 9.3 5,154 7.7 4,528 7.1
- ------------------------------------------------------------------------------------------------------------------------------------
Total commercial real estate loans 12,547 19.8 12,030 18.0 11,364 17.7
Commercial lease financing 7,357 11.6 7,164 10.7 6,665 10.4
- ------------------------------------------------------------------------------------------------------------------------------------
Total commercial loans 38,063 60.1 39,294 58.7 36,526 56.9
CONSUMER
Real estate -- residential mortgage 2,315 3.6 4,212 6.3 3,962 6.1
Home equity 11,184 17.7 9,908 14.8 7,973 12.4
Credit card -- -- -- -- -- --
Consumer -- direct 2,342 3.7 2,539 3.8 2,565 4.0
Consumer -- indirect:
Lease financing 2,036 3.2 3,005 4.5 3,195 5.0
Automobile 2,497 4.0 2,809 4.2 3,082 4.8
Marine 1,780 2.8 1,657 2.5 1,716 2.7
Other 1,036 1.6 1,252 1.9 1,600 2.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total consumer -- indirect loans 7,349 11.6 8,723 13.1 9,593 15.0
- ------------------------------------------------------------------------------------------------------------------------------------
Total consumer loans 23,190 36.6 25,382 38.0 24,093 37.5
LOANS HELD FOR SALE 2,056 3.3 2,229 3.3 3,603 5.6
- ------------------------------------------------------------------------------------------------------------------------------------
Total $63,309 100.0% $66,905 100.0% $64,222 100.0%
======= ===== ======= ===== ======= =====
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997
-------------------- --------------------
AMOUNT % OF TOTAL AMOUNT % OF TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL
Commercial, financial and agricultural $17,038 27.5% $14,023 26.3%
Commercial real estate(a):
Commercial mortgage 7,309 11.8 6,952 13.0
Construction 3,450 5.6 2,231 4.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total commercial real estate loans 10,759 17.4 9,183 17.2
Commercial lease financing 5,613 9.0 4,439 8.3
- ------------------------------------------------------------------------------------------------------------------------------------
Total commercial loans 33,410 53.9 27,645 51.8
CONSUMER
Real estate -- residential mortgage 4,394 7.1 5,962 11.2
Home equity 7,990 12.9 5,663 10.6
Credit card 1,425 2.3 1,521 2.8
Consumer -- direct 2,342 3.8 2,188 4.1
Consumer -- indirect:
Lease financing 2,580 4.2 1,576 2.9
Automobile See note(b) See note(b) See note(b) See note(b)
Marine See note(b) See note(b) See note(b) See note(b)
Other 7,009 11.2 5,964 11.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total consumer -- indirect loans 9,589 15.4 7,540 14.1
- ------------------------------------------------------------------------------------------------------------------------------------
Total consumer loans 25,740 41.5 22,874 42.8
LOANS HELD FOR SALE 2,862 4.6 2,861 5.4
- ------------------------------------------------------------------------------------------------------------------------------------
Total $62,012 100.0% $53,380 100.0%
======= ===== ======= =====
- ------------------------------------------------------------------------------------------------------------------------------------
(a) See Figure 16 for a more detailed breakdown of Key's commercial real estate
loan portfolio at December 31, 2001.
(b) For 1998 and 1997, indirect automobile and marine loans are included in
other indirect loans.
39
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
& RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES
FIGURE 16 COMMERCIAL REAL ESTATE LOANS
DECEMBER 31, 2001 GEOGRAPHIC REGION
---------------------------------------------------- TOTAL PERCENT OF
dollars in millions EAST MIDWEST CENTRAL WEST AMOUNT TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
Nonowner-occupied:
Multi-family properties $ 359 $ 582 $ 637 $ 599 $ 2,177 17.4%
Retail properties 248 915 133 285 1,581 12.6
Office buildings 129 323 149 270 871 6.9
Residential properties 59 100 97 338 594 4.7
Warehouses 37 104 18 27 186 1.5
Manufacturing facilities 28 32 2 10 72 .6
Hotels/Motels 24 4 2 14 44 .3
Other 388 684 224 383 1,679 13.4
- ------------------------------------------------------------------------------------------------------------------------------------
1,272 2,744 1,262 1,926 7,204 57.4
Owner-occupied 668 2,477 605 1,593 5,343 42.6
- ------------------------------------------------------------------------------------------------------------------------------------
Total $1,940 $5,221 $1,867 $3,519 $12,547 100.0%
====== ====== ====== ====== ======= =====
- ------------------------------------------------------------------------------------------------------------------------------------
As illustrated in Figure 17, our commercial lease financing portfolio has grown
in each of the past five years. In the third quarter of 1997, Key increased the
size and scope of its leasing business by acquiring Leasetec Corporation, which
specializes in the leasing of information technology and telecommunications
equipment to large corporate clients. The Leasetec acquisition has been a major
reason for the 22% compound annual growth rate in lease financing receivables
since 1996. During the same period, Key has consistently achieved net residual
gains in connection with the commercial lease financing business. Residual value
pricing and management are important elements of lease financing profitability.
FIGURE 17 COMMERCIAL LEASE FINANCING
DECEMBER 31,
in millions 2001 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Lease financing receivables $7,357 $7,164 $6,665 $5,613 $4,439 $2,671
Net residual gains for the year 19 22 20 25 5 7
Net charge-offs for the year 57 12 17 11 8 6
Nonperforming leases 94 48 28 29 5 8
- ------------------------------------------------------------------------------------------------------------------------------------
Consumer loans decreased (assuming no loan sales) by $257 million, or 1%. The
growth of the home equity portfolio in 2001 was offset by declines of $602
million in installment loans, $969 million in automobile lease financing
receivables and $449 million in residential real estate mortgage loans. The
declines in installment loans and lease financing receivables reflect our
decision to de-emphasize indirect prime automobile lending and exit the
automobile leasing business. Our home equity portfolio grew by $1.8 billion,
largely as a result of lower interest rates and our decision to stop
securitizing and selling these loans starting in 2000. By retaining these
assets, we intend to replace over time the revenue generated by our former
credit card business, which was sold in January 2000.
Key's home equity portfolio is derived from both our Retail Banking line of
business (58% of the home equity portfolio at December 31, 2001), and our
National Home Equity line of business.
The National Home Equity line of business has two components: Champion Mortgage
Company, a home equity finance company that Key acquired in August 1997; and Key
Home Equity Services, which acts as a third-party purchaser of home equity
loans. The average loan-to-value ratio at origination for a loan generated by
the National Home Equity line of business is 77%. First lien positions comprised
83% of the portfolio for this line of business at December 31, 2001.
Key Home Equity Services purchases loans in two primary ways: on a loan-by-loan
basis from an extensive network of correspondents and agents, and in bulk
portfolio acquisitions from home equity loan companies. Key intends to
discontinue the latter approach in 2002.
Figure 18 summarizes Key's home equity loan portfolio at December 31 for each of
the last six years, as well as certain asset quality statistics and the yields
achieved on the portfolio as a whole. The portfolio grew by 13% in 2001, and had
a 5-year compound annual growth rate of 18%.
SALES, SECURITIZATIONS AND DIVESTITURES. During 2001, Key sold $1.7 billion of
commercial real estate loans, $1.4 billion of residential mortgage loans, $1.2
billion of education loans ($491 million through securitizations) and $531
million of other types of loans.
Among the factors that Key considers in determining which loans to securitize
are:
- - whether the characteristics of a specific loan portfolio make it conducive
to securitization;
- - the relative cost of funds;
- - the level of credit risk; and
- - capital requirements.
40
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS KEYCORP AND SUBSIDIARIES
FIGURE 18 HOME EQUITY LOANS
DECEMBER 31,
dollars in millions 2001 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Retail banking branches and other $ 6,431 $6,136 $5,740 $6,036 $5,210 $4,793
Champion Mortgage Company 1,886 1,082 371 689 242 --
Key Home Equity Services division 2,867 2,690 1,862 1,265 211 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total $11,184 $9,908 $7,973 $7,990 $5,663 $4,793
======= ====== ====== ====== ====== ======
- ------------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans $50 $80 $50 $26 $15 $10
Net charge-offs for the year 98 17 9 5 4 2
Yield for the year 8.55% 9.29% 8.54% 8.77% 9.05% 8.97%
- ------------------------------------------------------------------------------------------------------------------------------------
Figure 19 summarizes Key's loan sales (including securitizations) for 2001 and
2000.
FIGURE 19 LOANS SOLD AND DIVESTED
COMMERCIAL RESIDENTIAL HOME CREDIT CARD
IN MILLIONS COMMERCIAL REAL ESTATE REAL ESTATE EQUITY RECEIVABLES EDUCATION TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
2001
- -------------
Fourth quarter -- $ 678 -- $145 -- $ 23 $ 846
Third quarter -- 93 $1,427 269 -- 597 2,386
Second quarter $44 577 20 59 -- 144 844
First quarter -- 327 1 14 -- 449 791
- ------------------------------------------------------------------------------------------------------------------------------------
Total $44 $1,675 $1,448 $487 -- $1,213 $4,867
==== ====== ====== ==== ====== ====== ======
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 20 shows loans that are either administered or serviced by Key, but not
recorded on the balance sheet. This includes loans that have been both
securitized and sold, or simply sold outright. In the event of default, Key is
subject to recourse with respect to approximately $976 million of the $16.7
billion of loans administered or serviced at December 31, 2001. Key derives
income from two sources when we sell or securitize loans but retain the right to
administer or service them. We earn noninterest income (recorded as "other
income") from servicing or administering the loans, and we earn interest income
from the securitized assets retained. The commercial real estate loans shown in
Figure 20 are serviced by National Realty Funding L.C., which was acquired by
Key in January 2000. Most of these loans were originated by other financial
institutions. The $970 million of loans held in the asset-backed commercial
paper conduit, for which Key serves as a referral agent, are also included in
Figure 20. For more information regarding the conduit, see Note 19 ("Other
Financial Instruments with Off-Balance Sheet Risk"), on page 79.
FIGURE 20 LOANS ADMINISTERED OR SERVICED
DECEMBER 31,
in millions 2001 2000 1999
- ------------------------------------------------------------------
Education loans $ 4,433 $ 4,113 $3,475
Automobile loans 131 422 855
Home equity loans 768 1,176 1,542
Commercial real estate loans 10,471 7,108 1,905
Commercial loans 913 973 --
- ------------------------------------------------------------------
Total $16,716 $13,792 $7,777
======= ======= ======
- ------------------------------------------------------------------
Figure 21 shows the maturities of certain commercial and real estate loans, and
the sensitivity of those loans to changes in interest rates. As indicated, at
December 31, 2001, approximately 50% of these outstanding loans were scheduled
to mature within one year. Loans with maturities greater than one year include
$11.3 billion with floating or adjustable rates and $5.2 billion with
predetermined rates.
41
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS KEYCORP AND SUBSIDIARIES
FIGURE 21 MATURITIES AND SENSITIVITY OF
CERTAIN LOANS TO CHANGES IN INTEREST RATES
DECEMBER 31, 2001 WITHIN 1-5 OVER
in millions 1 YEAR YEARS 5 YEARS TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial, financial and agricultural $10,625 $4,706 $2,828 $18,159
Real estate -- construction 3,734 1,993 151 5,878
Real estate -- residential and commercial mortgage 2,173 2,544 4,267 8,984
- ------------------------------------------------------------------------------------------------------------------------------------
$16,532 $9,243 $7,246 $33,021
======= ====== ====== =======
Loans with floating or adjustable interest rates(a) $6,737 $4,557
Loans with predetermined interest rates(b) 2,506 2,689
- ------------------------------------------------------------------------------------------------------------------------------------
$9,243 $7,246
====== ======
- ------------------------------------------------------------------------------------------------------------------------------------
(a) "Floating" and "adjustable" rates vary in relation to other interest rates
(such as the base lending rate) or a variable index that may change during
the term of the loan.
(b) "Predetermined" interest rates either are fixed or will change during the
term of the loan according to a specific formula or schedule.
SECURITIES
At December 31, 2001, the securities portfolio totaled $6.5 billion and included
$5.4 billion of securities available for sale and $1.1 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.
The size and composition of Key's securities portfolio are dependent largely on
our needs for liquidity and the extent to which we are required or elect to hold
these assets as collateral to secure public and trust deposits. Although debt
securities are generally used for this purpose, other assets, such as securities
purchased under resale agreements, may be used temporarily when they provide
more favorable yields.
The majority of Key's securities portfolio consists of collateralized mortgage
obligations that provide a source of interest income and serve as collateral in
connection with pledging requirements. A collateralized mortgage obligation
(sometimes called a "CMO") is a debt security that is secured by a pool of
mortgages, mortgage-backed securities, U.S. government securities, corporate
debt obligations or other bonds. At December 31, 2001, Key had $4.8 billion
invested in collateralized mortgage obligations and other mortgage-backed
securities in the available-for-sale portfolio, compared with $5.7 billion at
December 31, 2000. Substantially all of these securities were issued or backed
by Federal agencies.
Figure 22 shows the composition, yields and remaining maturities of Key's
securities available for sale. Figure 23 provides the same information about
Key's investment securities. For more information about retained interests in
securitizations, gross unrealized gains and losses by type of security and
securities pledged, see Note 5 ("Securities"), which begins on page 66.
FIGURE 22 SECURITIES AVAILABLE FOR SALE
OTHER
U.S. TREASURY, STATES AND COLLATERALIZED MORTGAGE- RETAINED WEIGHTED
AGENCIES AND POLITICAL MORTGAGE BACKED INTERESTS IN OTHER AVERAGE
dollars in millions CORPORATIONS SUBDIVISIONS OBLIGATIONS(a) SECURITIES(a) SECURITIZATIONS(a) SECURITIES TOTAL YIELD(b)
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2001
Remaining maturity:
One year or less $ 3 -- $1,610 $ 1 $ 10 $ 6 $1,630 7.13%
After one through five years 80 $10 1,833 965 224 7 3,119 7.14
After five through ten years 6 11 191 39 -- 4 251 8.23
After ten years 10 -- 171 27 -- 138(c) 346 8.49
- ------------------------------------------------------------------------------------------------------------------------------------
Fair value $99 $21 $3,805 $1,032 $234 $155 $5,346 --
Amortized cost 99 21 3,791 1,008 214 170 5,303 7.26%
Weighted average yield(b) 3.85% 4.74% 6.94% 7.30% 14.77% 5.75% 7.26% --
Weighted average maturity 3.8 years 4.9 years 2.8 years 3.0 years 3.7 years 10.4 years 3.1 years --
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2000
Fair value $984 $33 $4,298 $1,355 $316 $343 $7,329 --
Amortized cost 984 33 4,296 1,355 334 307 7,309 7.16%
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999
Fair value $127 $53 $4,237 $1,678 $343 $227 $6,665 --
Amortized cost 128 53 4,426 1,705 340 223 6,875 6.77%
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Maturity is based upon expected average lives rather than contractual
terms.
(b) Weighted average yields are calculated based on amortized cost and exclude
equity securities of $145 million that have no stated yield. Such yields
have been adjusted to a taxable-equivalent basis using the statutory
Federal income tax rate of 35%.
(c) Includes primarily marketable equity securities (including an internally
managed portfolio of bank common stock investments) with no stated
maturity.
42
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS KEYCORP AND SUBSIDIARIES
FIGURE 23 INVESTMENT SECURITIES
STATES AND WEIGHTED
POLITICAL OTHER AVERAGE
dollars in millions SUBDIVISIONS SECURITIES TOTAL YIELD(a)
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2001
Remaining maturity:
One year or less $ 89 $ 5 $ 94 7.22%
After one through five years 96 -- 96 9.74
After five through ten years 39 40 79 7.03
After ten years 1 849(b) 850 4.78
- ------------------------------------------------------------------------------------------------------------------------------------
Amortized cost $225 $894 $1,119 7.24%
Fair value 234 894 1,128 --
Weighted average yield(a) 8.71% 4.79% 7.24% --
Weighted average maturity 2.6 years 9.9 years 8.4 years --
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2000
Amortized cost $323 $875 $1,198 8.16%
Fair value 333 875 1,208 --
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999
Amortized cost $447 $539 $986 6.15%
Fair value 459 539 998 --
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Weighted average yields are calculated based on amortized cost and exclude
equity securities of $759 million that have no stated yield. Such yields
have been adjusted to a taxable-equivalent basis using the statutory
Federal income tax rate of 35%.
(b) Includes equity securities (primarily principal investing assets) with no
stated maturity.
ASSET QUALITY
Key has a multi-faceted program to manage asset quality. Our professionals:
- - evaluate and monitor credit quality and risk in credit-related assets;
- - develop commercial and consumer credit policies and systems;
- - monitor compliance with internal underwriting standards;
- - establish credit-related concentration limits; and
- - review the adequacy of the allowance for loan losses.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses at December 31, 2001,
was $1.7 billion, or 2.65% of loans. This compares with $1.0 billion, or 1.50%
of loans, at December 31, 2000. The allowance includes $180 million (for 2001)
and $107 million (for 2000) that is specifically allocated for impaired loans.
For more information about impaired loans, see Note 8 ("Impaired Loans and Other
Nonperforming Assets") on page 69. At December 31, 2001, the allowance for loan
losses was 184.29% of nonperforming loans, compared with 154.00% at December 31,
2000.
Management estimates the appropriate level of the allowance for loan losses on a
quarterly (and at times more frequent) basis. The methodology used is described
in Note 1 ("Summary of Significant Accounting Policies") under the heading
"Allowance for Loan Losses," on page 59. The allowance was increased in 2001
because of continued weakness in the economy and the related adverse effects on
specific loan portfolios. As discussed in the following section entitled
"Run-off Loan Portfolio," the higher allowance was also necessary to implement
Key's decision to eliminate certain types of commercial lending.
At the time loans are made, all of them appear collectible. Nonetheless,
experience has shown that at any given time there is some risk of loss inherent
in the loan portfolio. Management estimates the level of probable losses and
adjusts the amount of the allowance for loan losses accordingly.
Estimating the amount and timing of probable loan losses is an imperfect
science. Management establishes an allowance for losses arising from nonimpaired
loans by using statistical measurement tools and by exercising judgment to
assess the impact of factors such as changes in economic conditions, credit
policies or underwriting standards, and the level of credit risk associated with
specific industries and markets.
Management establishes an allowance for impaired loan losses based on loss
characteristics specific to those impaired loans. As shown in Figure 24, these
efforts, in combination with the use of continually enhanced modeling
techniques, enabled management to allocate the entire allowance to various
segments of Key's loan portfolio in each of the past two years rather than leave
a portion "unallocated" as we did in previous years. The 2001 increase in
allocations among the specific portfolios reflects a number of factors,
including the effects of a weak economy, continued loan growth (primarily in the
commercial and home equity portfolios) and loan aging. The aggregate balance of
the allowance for loan losses at December 31, 2001, represents management's best
estimate of the losses inherent in the loan portfolio at that date.
The amount of allowance allocated to Key's credit card portfolio at December 31,
1999, is included in the held-for-sale category. This allocation was based on
the level of net credit card charge-offs that Key expected to record in the
first quarter of 2000. Since the sale of the credit card portfolio closed in
January 2000, Key was able to estimate the amount of net credit card charge-offs
with a high level of precision.
43
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS KEYCORP AND SUBSIDIARIES
Figure 24 ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
December 31, 2001 2000 1999
------------------------- ------------------------- ----------------------
Percent of Percent of Percent of
Loan Type to Loan Type to Loan Type to
dollars in millions Amount Total Loans Amount Total Loans Amount Total Loans
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial, financial and agricultural $1,289 28.7% $ 742 30.0% $509 28.8%
Real estate-- commercial mortgage 45 10.5 35 10.3 34 10.6
Real estate-- construction 39 9.3 27 7.7 16 7.1
Commercial lease financing 89 11.6 45 10.7 39 10.4
- ------------------------------------------------------------------------------------------------------------------------------------
Total commercial loans 1,462 60.1 849 58.7 598 56.9
Real estate-- residential mortgage 4 3.7 2 6.3 1 6.7
Home equity 59 17.7 20 14.8 7 11.8
Credit card -- -- -- -- -- --
Consumer-- direct 24 3.7 15 3.8 8 4.0
Consumer-- indirect lease financing 8 3.2 9 4.5 6 5.0
Consumer-- indirect other 117 8.4 104 8.6 55 10.0
- ------------------------------------------------------------------------------------------------------------------------------------
Total consumer loans 212 36.7 150 38.0 77 37.5
Loans held for sale 3 3.2 2 3.3 18 5.6
Unallocated -- -- -- -- 237 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total $1,677 100.0% $1,001 100.0% $930 100.0%
====== ===== ====== ===== ==== =====
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997
------------------------- -------------------------
Percent of Percent of
Loan Type to Loan Type to
Amount Total Loans Amount Total Loans
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial, financial and agricultural $357 27.5% $224 26.3%
Real estate-- commercial mortgage 32 11.8 104 13.0
Real estate-- construction 15 5.6 33 4.2
Commercial lease financing 49 9.0 26 8.3
- ------------------------------------------------------------------------------------------------------------------------------------
Total commercial loans 453 53.9 387 51.8
Real estate-- residential mortgage 7 8.2 8 11.6
Home equity 5 11.8 4 10.2
Credit card 44 2.3 45 2.8
Consumer-- direct 15 3.8 15 4.1
Consumer-- indirect lease financing 5 4.2 3 2.9
Consumer-- indirect other 77 11.2 63 11.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total consumer loans 153 41.5 138 42.8
Loans held for sale 1 4.6 1 5.4
Unallocated 293 -- 374 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total $900 100.0% $900 100.0%
==== ===== ==== =====
- ------------------------------------------------------------------------------------------------------------------------------------
RUN-OFF LOAN PORTFOLIO. In May 2001, management segregated $300 million of Key's
allowance for loan losses in connection with the decision to eliminate
nonrelationship lending in the leveraged financing and nationally syndicated
lending businesses. An additional $190 million was added to this allowance in
the fourth quarter. The segregated allowance is being used to exit approximately
$2.7 billion in related commitments (which were moved to a separate run-off
portfolio) and for losses incurred in connection with loan sales. Approximately
$1.7 billion of these commitments (including $1.023 billion of loans
outstanding) were remaining as of December 31. The majority of the loans are
performing in accordance with their contractual terms. As write-downs on the
run-off portfolio occur over time, we do not expect to replenish the related
allowance.
44
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS KEYCORP AND SUBSIDIARIES
Figure 25 summarizes certain asset quality indicators, segregated between Key's
continuing and run-off loan portfolios. Additional information pertaining to the
run-off portfolio is presented in Figure 26.
FIGURE 25 ASSET QUALITY INDICATORS - CONTINUING AND RUN-OFF LOAN PORTFOLIOS
Year Ended
December 31, 2001 December 31, 2001
----------------------------------------------------------- ----------------------
Allowance for Loan Losses Net Loan Charge-offs
Loans ------------------------- Nonperforming --------------------
dollars in millions Outstanding Amount % of Loans Loans Amount % of Loans
- -----------------------------------------------------------------------------------------------------------------------------------
Continuing loan portfolio $62,286 $1,402 2.25% $679 $458 .71%
Run-off loan portfolio 1,023 275 26.88 231 215 N/M
- ------------------------------------------------------------------------------------------------------------------------------------
Total loan portfolio $63,309 $1,677 2.65% $910 $673 1.02%
======= ====== ==== ====
- ------------------------------------------------------------------------------------------------------------------------------------
N/M = Not Meaningful
FIGURE 26 RUN-OFF LOAN PORTFOLIO
SUMMARY OF CHANGES IN COMMITMENTS AND LOANS OUTSTANDING
Total Loans
in millions Commitments Outstanding
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at May 17, 2001 $2,648 $1,611
Charge-offs (215) (215)
Loans sold (115) (115)
Payments/expirations (624) (258)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $1,694 $1,023
====== ======
- ------------------------------------------------------------------------------------------------------------------------------------
Summary of Changes in Nonperforming Loans
and Nonreplenishing Allowance for Loan Losses(a)
Nonperforming Nonreplenishing
in millions Loans Allowance
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at May 17, 2001 $ 257 $ 300
Provision for loan losses N/A 190
Loans placed on nonaccrual status 278 N/A
Charge-offs (214) (215)
Loans sold (90) N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $ 231 $ 275
====== ======
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Includes activity related to the run-off loan portfolio and loans sold.
N/A = Not Applicable
NET LOAN CHARGE-OFFS. Net loan charge-offs for 2001 were $673 million, or 1.02%
of average loans, compared with $414 million, or .63% of average loans, for 2000
and $318 million, or .51% of average loans, for 1999. The composition of Key's
loan charge-offs and recoveries by type of loan is shown in Figure 27. Net
charge-offs increased in 2001 because of continued weakness in the economy and
Key's aggressive efforts to resolve credits within the commercial loan run-off
portfolio. As shown in Figure 26, this portfolio accounted for $215 million of
total net charge-offs recorded during 2001. In addition, net charge-offs within
the home equity portfolio rose by $81 million, reflecting the growth of this
portfolio, the accelerated disposition of certain nonperforming loans and the
impact of continued economic weakness.
45
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS KEYCORP AND SUBSIDIARIES
FIGURE 27 SUMMARY OF LOAN LOSS EXPERIENCE
Year ended December 31,
dollars in millions 2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Average loans outstanding during the year $65,976 $65,294 $62,401 $57,422 $51,415
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses at beginning of year $1,001 $ 930 $ 900 $ 900 $ 870
Loans charged off:
Commercial, financial and agricultural 296 152 108 59 55
Real estate-- commercial mortgage 35 31 6 27 16
Real estate-- construction 8 1 -- 2 3
- ------------------------------------------------------------------------------------------------------------------------------------
Total commercial real estate loans 43 32 6 29 19
Commercial lease financing 62 14 20 12 9
- ------------------------------------------------------------------------------------------------------------------------------------
Total commercial loans 401 198 134 100 83
Real estate-- residential mortgage 17 8 8 11 11
Home equity 99 19 10 6 4
Credit card 1 17 89 104 113
Consumer-- direct 47 57 41 44 41
Consumer-- indirect lease financing 27 23 13 8 4
Consumer-- indirect other 192 200 125 111 122
- ------------------------------------------------------------------------------------------------------------------------------------
Total consumer loans 383 324 286 284 295
- ------------------------------------------------------------------------------------------------------------------------------------
784 522 420 384 378
Recoveries:
Commercial, financial and agricultural 26 25 28 25 28
Real estate-- commercial mortgage 4 4 4 6 10
Real estate-- construction -- -- 1 2 2
- ------------------------------------------------------------------------------------------------------------------------------------
Total commercial real estate loans 4 4 5 8 12
Commercial lease financing 5 2 3 1 1
- ------------------------------------------------------------------------------------------------------------------------------------
Total commercial loans 35 31 36 34 41
Real estate-- residential mortgage 8 4 4 4 3
Home equity 1 2 1 1 --
Credit card 1 5 14 10 9
Consumer-- direct 8 8 8 6 7
Consumer-- indirect lease financing 9 6 3 1 1
Consumer-- indirect other 49 52 36 31 24
- ------------------------------------------------------------------------------------------------------------------------------------
Total consumer loans 76 77 66 53 44
- ------------------------------------------------------------------------------------------------------------------------------------
111 108 102 87 85
- ------------------------------------------------------------------------------------------------------------------------------------
Net loans charged off (673) (414) (318) (297) (293)
Provision for loan losses 1,350 490 348 297 320
Allowance related to loans acquired (sold), net (1) (5) -- -- 3
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses at end of year $1,677 $1,001 $ 930 $ 900 $ 900
====== ====== ===== ===== =====
- ------------------------------------------------------------------------------------------------------------------------------------
Net loan charge-offs to average loans 1.02% .63% .51% .52% .57%
Allowance for loan losses to year-end loans 2.65 1.50 1.45 1.45 1.69
Allowance for loan losses to nonperforming loans 184.29 154.00 208.05 234.38 233.77
- ------------------------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS. Figure 28 shows the composition of Key's nonperforming
assets. These assets totaled $910 million at December 31, 2001, and represented
1.49% of loans, other real estate owned (known as "OREO") and other
nonperforming assets, compared with $672 million, or 1.00%, at December 31,
2000.
The economic slowdown can be expected to continue to impact Key's loan portfolio
in general, although the erosion in credit quality that we have experienced is
concentrated in several distinct commercial portfolios of limited size. At
December 31, 2001, two lines of business, Structured Finance and Healthcare,
accounted for $164 million and $160 million, respectively, of Key's
nonperforming loans. Although these two lines comprised less than 5% of the
total loan portfolio, they accounted for 36% of total nonperforming loans. Key's
exposure to the three industries most affected by the events of September 11
(commercial airlines, property and casualty insurance carriers, and hotel/motel)
is nominal. At December 31, 2001, our 20 largest nonperforming loans totaled
$283 million, representing 31% of total loans on nonperforming status. As shown
in Figure 26, the run-off loan portfolio (whose nonperforming loans are also
included in Figure 28) accounted for $231 million, or 25%, of Key's total
nonperforming loans at the end of the year.
46
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES
FIGURE 28 SUMMARY OF NONPERFORMING ASSETS AND PAST DUE LOANS
DECEMBER 31,
dollars in millions 2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Commercial, financial and agricultural $ 409 $ 301 $ 175 $ 144 $ 162
Real estate -- commercial mortgage 187 90 102 79 88
Real estate -- construction 83 28 7 6 21
- ---------------------------------------------------------------------------------------------------------------------------------
Total commercial real estate loans(a) 270 118 109 85 109
Commercial lease financing 94 48 28 29 5
- ---------------------------------------------------------------------------------------------------------------------------------
Total commercial loans 773 467 312 258 276
Real estate-- residential mortgage 42 52 44 60 58
Home equity 50 80 50 26 15
Consumer -- direct 9 8 6 6 8
Consumer -- indirect lease financing 10 7 3 3 --
Consumer -- indirect other 26 36 32 31 28
- ---------------------------------------------------------------------------------------------------------------------------------
Total consumer loans 137 183 135 126 109
- ---------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 910 650 447 384 385
OREO 38 23 27 56 66
Allowance for OREO losses (1) (1) (3) (18) (21)
- ---------------------------------------------------------------------------------------------------------------------------------
OREO, net of allowance 37 22 24 38 45
Other nonperforming assets -- -- 2 1 5
- ---------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 947 $ 672 $ 473 $ 423 $ 435
======= ======= ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------------------
Accruing loans past due 90 days or more $ 250 $ 236 $ 219 $ 159 $ 128
Accruing loans past due 30 through 89 days 1,096 963 916 753 749
- ---------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans to year-end loans 1.44% .97% .70% .62% .72%
Nonperforming assets to year-end loans
plus OREO and other nonperforming assets 1.49 1.00 .74 .68 .81
- ---------------------------------------------------------------------------------------------------------------------------------
(a) See Figure 16 on page 40 and the accompanying discussion on page 38 for more
information related to Key's commercial real estate portfolio.
Further information pertaining to the credit exposure inherent in the largest
sector of Key's loan portfolio, commercial, financial and agricultural loans, is
presented in Figure 29. The types of activity that caused the change in Key's
nonperforming loans during 2001 are summarized in Figure 30.
FIGURE 29 COMMERCIAL, FINANCIAL AND AGRICULTURAL LOANS
DECEMBER 31, 2001 NONPERFORMING LOANS
--------------------------------
TOTAL LOANS % OF LOANS
dollars in millions COMMITMENTS OUTSTANDING AMOUNT OUTSTANDING
- ----------------------------------------------------------------------------------------------------------------------
Industry classification:
Manufacturing $10,455 $ 4,478 $ 148 3.3%
Services 5,787 2,670 95 3.6
Financial services 5,595 1,007 3 .3
Retail trade 4,014 2,190 40 1.8
Wholesale trade 3,014 1,416 26 1.8
Property management 2,567 1,149 9 .8
Public utilities 1,307 262 12 4.6
Communications 1,288 572 2 .3
Agriculture/forestry/fishing 1,280 829 26 3.1
Building contractors 1,274 558 22 3.9
Public administration 710 326 -- --
Transportation 700 464 5 1.1
Insurance 576 131 -- --
Mining 374 217 1 .5
Individuals 217 131 1 .8
Other 2,078 1,759 19 1.1
- ----------------------------------------------------------------------------------------------------------------------
Total $41,236 $18,159 $ 409 2.3%
======= ======= =======
- ----------------------------------------------------------------------------------------------------------------------
47
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS KEYCORP AND SUBSIDIARIES
FIGURE 30 SUMMARY OF CHANGES IN NONPERFORMING LOANS
2001 QUARTERS
----------------------------------------------------
in millions FULL YEAR FOURTH THIRD SECOND FIRST
- ------------------------------------------------------------------------------------------------------------------------
BALANCE AT BEGINNING OF PERIOD $ 650 $ 885 $ 797 $ 713 $ 650
Loans placed on nonaccrual status 1,441 407 324 455 255
Charge-offs (672) (220) (173) (170) (109)
Loans sold (260) (83) (35) (137) (5)
Payments (208) (65) (20) (61) (62)
Transfers to OREO (29) (12) (8) (2) (7)
Loans returned to accrual status (12) (2) -- (1) (9)
- ------------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF PERIOD $ 910 $ 910 $ 885 $ 797 $ 713
======= ======= ======= ======= =======
- ------------------------------------------------------------------------------------------------------------------------
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 2001, core
deposits averaged $37.5 billion, and represented 50% of the funds Key used to
support earning assets, compared with $37.3 billion and 50% during 2000, and
$36.9 billion and 51% during 1999. The composition of Key's deposits is shown in
Figure 5, which spans pages 30 and 31.
During 2001, the level of Key's core deposits was relatively unchanged from the
prior year as the growth of time deposits, which slowed considerably, was offset
by a decline in the level of savings deposits. Time deposits grew by 2% in 2001,
following an increase of 17% in 2000. The growth rate of these deposits declined
because, like our competitors, Key reduced the rates paid for them as the
Federal Reserve reduced interest rates in general. At the same time, Key's money
market deposit accounts increased slightly, since clients view these investments
as relatively liquid and stable in a weak economy.
In 2000, money market deposit accounts, savings deposits and NOW accounts
declined, primarily because we sold 28 branches with deposits of $1.3 billion as
part of the October 1999 divestiture of the Long Island franchise. At the same
time, Key's time deposits grew significantly as a result of our marketing
efforts and client preferences for investments that offer higher returns. In
2000, the deposits in Key's Retail Banking division grew by 7% from the prior
year 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 $20.0 billion during 2001,
compared with $20.2 billion during 2000 and $17.8 billion in 1999. As shown in
Figure 5, Key has relied more heavily on certificates of deposit and foreign
branch deposits to fund earning assets over the past two years. In addition, Key
continues to consider loan securitizations as a funding alternative when market
conditions are favorable. Key securitized and sold education loans totaling $491
million in 2001 and $1.0 billion in 2000.
At December 31, 2001, Key had $6.9 billion in time deposits of $100,000 or more.
Figure 31 shows the maturity distribution of these deposits.
FIGURE 31 MATURITY DISTRIBUTION OF
TIME DEPOSITS OF $100,000 OR MORE
DECEMBER 31, 2001 DOMESTIC FOREIGN
in millions OFFICES OFFICE TOTAL
- -------------------------------------------------------------------------------
Remaining maturity:
Three months or less $2,136 $1,599 $3,735
After three through twelve months 1,580 -- 1,580
After twelve months 1,571 -- 1,571
- -------------------------------------------------------------------------------
Total $5,287 $1,599 $6,886
====== ====== ======
- -------------------------------------------------------------------------------
LIQUIDITY
"Liquidity" measures whether an entity has sufficient cash flow to meet its
financial obligations when due. Key has sufficient liquidity when it can meet
the needs of depositors, borrowers and creditors at a reasonable cost, on a
timely basis, and without adverse consequences. KeyCorp has sufficient liquidity
when it can pay dividends to shareholders, service its debt, and support
customary corporate operations and activities, including acquisitions.
LIQUIDITY RISK. Management recognizes that there are circumstances that could
adversely affect Key's liquidity or materially affect the cost of funds. One
such circumstance involves the occurrence of events that are systemic in nature,
such as terrorism or war, natural disasters, political events, or the default or
bankruptcy of a major corporation, mutual fund or hedge fund. Examples of these
events are the September 11 attacks on the World Trade Center and Pentagon, and
the Fall, 1998 Russian and Long-term Capital Management defaults. Another
circumstance is a significant downgrade in the public credit rating of Key by a
rating agency due to a deterioration in asset quality, a large charge to
earnings, a significant merger or acquisition or other events. In addition,
market speculation or rumors about Key may cause normal funding sources to
withdraw credit until further information becomes available.
LIQUIDITY FOR KEY. Key's Funding and Investment Management Group monitors the
overall mix of funding sources with the objective of maintaining an appropriate
mix in light of the structure of the asset portfolios. We use several tools to
maintain sufficient liquidity.
- - We maintain portfolios of short-term money market investments and securities
available for sale, substantially all of which could be converted to cash
quickly at a small expense.
48
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS KEYCORP AND SUBSIDIARIES
- - 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 that we receive a
relatively consistent stream of payments from borrowers. We also selectively
securitize and package loans for sale.
- - Our 911 full-service KeyCenters in 12 states generate a sizable volume of
core deposits. We monitor deposit flows and use alternative pricing
structures to attract deposits when necessary. For more information about
core deposits, see the previous section entitled "Deposits and other sources
of funds."
- - Key has access to various sources of money market funding (such as Federal
funds purchased, securities sold under repurchase agreements, and bank
notes) and also can borrow from the Federal Reserve Bank to meet short-term
liquidity requirements. Key did not have any borrowings from the Federal
Reserve outstanding as of December 31, 2001.
LIQUIDITY FOR THE PARENT COMPANY. KeyCorp meets its liquidity requirements
principally through regular dividends from affiliate banks. In 2001, affiliate
banks paid KeyCorp a total of $500 million in dividends; KeyCorp also received a
$700 million distribution of surplus in the form of cash from KeyBank National
Association. As of January 1, 2002, the affiliate banks had an additional $449
million available to pay dividends to KeyCorp without prior regulatory approval.
KeyCorp generally maintains excess funds in short-term investments.
ADDITIONAL SOURCES OF LIQUIDITY. Management has implemented several programs
that enable Key and KeyCorp to raise money in the public and private markets
when necessary. The proceeds from all of these programs can be used for general
corporate purposes, including acquisitions.
BANK NOTE PROGRAM. During 2001, Key's affiliate banks raised $5.6 billion under
Key's bank note program. Of the notes issued during the year, $1.9 billion have
original maturities in excess of one year and are included in long-term debt.
The remaining notes have original maturities of one year or less and are
included in short-term borrowings. Key's current bank note program provides for
the issuance of both long- and short-term debt of up to $20.0 billion ($19.0
billion by KeyBank National Association and $1.0 billion by Key Bank USA,
National Association). At December 31, 2001, KeyBank National Association had
$11.8 billion of debt outstanding and $8.2 billion available for future issuance
under this program.
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 $10.0 billion in the aggregate. The notes are offered
exclusively to non-U.S. investors and can be denominated in U.S. dollars and
many foreign currencies. There were $4.0 billion of borrowings outstanding under
this facility as of December 31, 2001, $340 million of which were issued during
2001. At the end of the year, $5.7 billion was available for future issuance
under this program.
COMMERCIAL PAPER AND REVOLVING CREDIT. KeyCorp has a commercial paper program
and a revolving credit agreement with an unaffiliated financial institution that
provide funding availability of up to $500 million and $400 million,
respectively. As of December 31, 2001, $25 million of borrowings were
outstanding under the commercial paper program; no amount was outstanding under
the revolving credit agreement.
PARENT COMPANY NOTE PROGRAM AND OTHER SECURITIES. KeyCorp has registered with
the Securities and Exchange Commission to provide for the issuance of up to $2.2
billion of securities which could include long- or short-term debt, or equity
securities. At December 31, 2001, $2.2 billion of this capacity remained unused,
including $1.0 billion which is reserved for issuance as medium-term notes. Key
has favorable debt ratings as shown in Figure 32 below. As long as those debt
ratings are maintained, management believes that, under normal conditions in the
capital markets, any eventual offering of securities would be marketable to
investors at a competitive cost.
FIGURE 32 DEBT RATINGS
SENIOR SUBORDINATED
SHORT-TERM LONG-TERM LONG-TERM CAPITAL
DECEMBER 31, 2001 BORROWINGS DEBT DEBT SECURITIES
- ------------------------------------------------------------------------------
KEYCORP
- ------------------
Standard & Poor's A-2 A- BBB+ BBB
Moody's P-1 A2 A3 "Baal"
KEYBANK NATIONAL
ASSOCIATION
- ------------------
Standard & Poor's A-1 A A- N/A
Moody's P-1 A1 A2 N/A
- ------------------------------------------------------------------------------
N/A = Not Applicable
Figure 33 summarizes Key's significant cash obligations and contractual amounts
of off-balance sheet lending commitments at December 31, 2001, by the specific
time periods in which related payments are due or commitments expire.
FIGURE 33 CASH OBLIGATIONS AND OFF-BALANCE SHEET COMMITMENTS
DECEMBER 31, 2001 AFTER AFTER
WITHIN 1 THROUGH 3 THROUGH AFTER
in millions 1 YEAR 3 YEARS 5 YEARS 5 YEARS TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
Long-term debt $ 4,361 $ 6,665 $ 1,951 $ 1,577 $14,554
Noncancelable leases 124 217 167 455 963
- --------------------------------------------------------------------------------------------------------------------------------
Total cash obligations $ 4,485 $ 6,882 $ 2,118 $ 2,032 $15,517
======= ======= ======= ======= =======
Commercial, including real estate $18,334 $ 5,663 $ 2,786 $ 640 $27,423
Home equity 90 131 147 4,597 4,965
Letters of credit 1,720 1,004 683 202 3,609
- --------------------------------------------------------------------------------------------------------------------------------
Total lending-related off-balance sheet commitments $20,144 $ 6,798 $ 3,616 $ 5,439 $35,997
======= ======= ======= ======= =======
- --------------------------------------------------------------------------------------------------------------------------------
49
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS KEYCORP AND SUBSIDIARIES
For more information about Key's sources and uses of cash for the years ended
December 31, 2001, 2000 and 1999, see the Consolidated Statements of Cash Flow
on page 57.
CAPITAL AND DIVIDENDS
SHAREHOLDERS' EQUITY. Total shareholders' equity at December 31, 2001, was $6.2
billion, down $468 million from the balance at December 31, 2000. The decrease
was due primarily to a lower level of retained earnings stemming from
significant charges recorded in the second and fourth quarters of 2001. These
charges were taken in connection with actions designed to improve Key's business
performance and to better position the company to take advantage of an eventual
economic rebound. The section entitled "Financial Performance," which begins on
page 23, provides more information about these charges. Other factors
contributing to the change in shareholders' equity during 2001 are shown in the
Statement of Changes in Shareholders' Equity, presented on page 56.
SHARE REPURCHASES. In September 2000, the Board of Directors authorized the
repurchase of up to 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 2001,
Key repurchased a total of 2,035,600 of its common shares at an average price
per share of $24.56. At December 31, 2001, a remaining balance of 16,764,400
shares may be repurchased under the September 2000 authorization.
At December 31, 2001, Key had 67,883,724 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 2001, Key reissued 2,415,914 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 7.60% at December 31,
2001, and 7.59% at December 31, 2000.
Banking industry regulators prescribe minimum capital ratios for bank holding
companies and their banking subsidiaries. Note 12 ("Shareholders' Equity"),
which begins on page 71, explains the implications of failing to meet specific
capital requirements imposed by the banking regulators. Risk-based capital
guidelines require a minimum level of capital as a percent of "risk-weighted
assets," which is total assets plus certain off-balance sheet items 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-weighted assets of 4.00%, and total capital as a percent of risk-weighted
assets of 8.00%. As of December 31, 2001, Key's Tier 1 capital ratio was 7.43%,
and its total capital ratio was 11.41%.
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 3.00%. All other bank holding companies must maintain a minimum ratio
of 4.00%. As of December 31, 2001, KeyCorp had a leverage ratio of 7.65%.
Federal bank regulators group FDIC-insured depository institutions into five
categories, ranging from "critically undercapitalized" to "well capitalized."
Both of Key's affiliate banks qualified as "well capitalized" at December 31,
2001, since each exceeded the prescribed thresholds of 10.00% for total capital,
6.00% for Tier 1 capital and 5.00% for the leverage ratio. If these provisions
applied to bank holding companies, KeyCorp would also qualify as "well
capitalized" at December 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 34 presents the details of Key's regulatory capital position at December
31, 2001 and 2000.
FIGURE 34 CAPITAL COMPONENTS
AND RISK-WEIGHTED ASSETS
DECEMBER 31,
dollars in millions 2001 2000
- -------------------------------------------------------------------------
TIER 1 CAPITAL
Common shareholders' equity(a) $ 6,117 $ 6,609
Qualifying capital securities 1,243 1,243
Less: Goodwill 1,101 1,324
Other assets(b) 37 44
- -------------------------------------------------------------------------
Total Tier 1 capital 6,222 6,484
- -------------------------------------------------------------------------
TIER 2 CAPITAL
Allowance for loan losses(c) 1,040 1,001
Net unrealized holding gains(d) -- 16
Qualifying long-term debt 2,286 2,136
- -------------------------------------------------------------------------
Total Tier 2 capital 3,326 3,153
- -------------------------------------------------------------------------
Total risk-based capital $ 9,548 $ 9,637
======= =======
RISK-WEIGHTED ASSETS
Risk-weighted assets on balance sheet $67,783 $71,326
Risk-weighted off-balance sheet exposure 17,480 13,776
Less: Goodwill 1,101 1,324
Other assets(b) 37 44
Plus: Market risk-equivalent assets 217 225
Net unrealized holding gains(d) -- 16
- -------------------------------------------------------------------------
Gross risk-weighted assets 84,342 83,975
Less: Excess allowance for loan losses(c) 637 --
- -------------------------------------------------------------------------
Net risk-weighted assets $83,705 $83,975
======= =======
AVERAGE QUARTERLY TOTAL ASSETS $81,329 $85,427
======= =======
CAPITAL RATIOS
Tier 1 risk-based capital ratio 7.43% 7.72%
Total risk-based capital ratio 11.41 11.48
Leverage ratio(e) 7.65 7.71
- -------------------------------------------------------------------------
(a) Common shareholders' equity does not include net unrealized gains or losses
on securities (except for net unrealized losses on marketable equity
securities) and net gains or losses on cash flow hedges.
(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-weighted assets, excluding those with
low-level recourse.
(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) This ratio is Tier 1 capital divided by average quarterly total assets less
goodwill and the nonqualifying intangible assets described in footnote (b).
50
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS KEYCORP AND SUBSIDIARIES
KeyCorp's common shares are traded on the New York Stock Exchange under the
symbol KEY. At December 31, 2001:
- - Book value per common share was $14.52, based on 424,005,056 shares
outstanding, compared with $15.65, based on 423,253,899 shares outstanding
at December 31, 2000.
- - In 2001, the quarterly dividend was $.295 per common share, up from $.28 per
common share in 2000. On December 19, 2001, the quarterly dividend per
common share was increased by 1.7% to $.30, effective with the March 2002
dividend payment.
- - The closing sales price of a KeyCorp common share on the New York Stock
Exchange was $24.34. This price was 168% of year-end book value per share,
and would produce a dividend yield of 4.93% based on the quarterly dividend
of $.30 per common share.
- - There were 45,340 holders of record of KeyCorp common shares.
Figure 35 shows the sales price ranges of the common shares, per common share
net income (loss) and dividends paid by quarter for each of the last two years.
FOURTH QUARTER RESULTS
Some of the highlights of Key's fourth quarter results are summarized below.
Key's financial performance for each of the past eight quarters is summarized in
Figure 35.
NET INCOME (LOSS). Key had a net loss of $174 million, or $.41 per common share,
for the fourth quarter of 2001, compared with net income of $266 million, or
$.62 per share, for the same period in 2000. The decline in Key's results
reflects the adverse effects of a sluggish economy on Key's credit quality and
capital markets-sensitive businesses, such as principal investing. Results for
the fourth quarter of 2001 include core charges of approximately $410 million
(after tax), or $.96 per share, taken to increase Key's allowance for loan
losses and to strengthen the balance sheet. The section entitled "Financial
performance," which begins on page 23, provides more information about these
charges.
On an annualized basis, Key's return on average total assets for the fourth
quarter of 2001 was (.84)%, compared with a return of 1.24% for the fourth
quarter of 2000. The annualized return on average equity was (10.57)% for the
fourth quarter of 2001, compared with a return of 16.16% for the year-ago
quarter.
NET INTEREST INCOME. Net interest income was $700 million for the fourth quarter
of 2001, down slightly from $702 million for the fourth quarter of 2000. A 27
basis point rise in Key's net interest margin to 3.98%, the highest level since
the fourth quarter of 1998, was more than offset by a 4% decrease in average
earning assets to $72.7 billion. The decrease in earning assets was due
primarily to Key's May 2001 decision to exit the automobile leasing business,
de-emphasize indirect prime automobile lending and discontinue certain
nonrelationship commercial lending. Key's sale in September of $1.4 billion of
residential mortgage loans with low interest rate spreads also contributed to
the decrease.
The net interest margin rose by 13 basis points from the third quarter of 2001
and accounted for nearly one-half of the 27 basis point improvement from the
fourth quarter of 2000. Almost one-half of the fourth quarter increase, or 6
basis points, is attributable to an increase in the taxable-equivalent
adjustment related to income derived from portions of our equipment leasing
portfolio. This income is now subject to a lower income tax rate than the one
previously used to calculate our tax expense accrual. Although a portion of the
fourth quarter increase represents a cumulative catch-up adjustment, the
application of the lower tax rate will provide continued future benefits.
NONINTEREST INCOME. Key's noninterest income was $418 million for the fourth
quarter of 2001 and includes $60 million of core charges for principal investing
write-downs and an increase in our reserve for customer derivative losses. This
compares with net income of $508 million a year ago. Lower income from
investment banking and capital markets activities (down $28 million), net gains
from sales of securities (down $20 million) and trust and investment services
(down $13 million) accounted for the decrease. These unfavorable results were
offset partially by a $21 million increase in service charges on deposit
accounts. Also, traditional fee income in the fourth quarter of 2001 was
supplemented by $10 million of additional revenue, representing the value of
shares received as a result of the demutualization of an insurance company in
which Key is a policyholder. Key contributed these shares to its charitable
foundation.
NONINTEREST EXPENSE. Noninterest expense for the fourth quarter of 2001 totaled
$702 million, including the $10 million contribution discussed above. This
compares with $705 million in the fourth quarter of 2000. Personnel expense
decreased by $25 million, primarily because incentive compensation tied to
revenue production declined, as did the total number of employees. The decline
in personnel expense was partially offset by moderate increases in a number of
other expense categories.
PROVISION FOR LOAN LOSSES. Key's provision for loan losses was $723 million for
the fourth quarter of 2001, compared with $108 million for the fourth quarter of
2000. Included in the fourth quarter 2001 amount is a provision of $590 million,
of which $400 million was used to increase the allowance for loan losses for
Key's continuing loan portfolio. The remaining $190 million was added to the
portion of the allowance segregated in the second quarter in connection with
Key's decision to eliminate certain nonrelationship lending, as discussed on
page 44, under the heading "Run-off loan portfolio." The fourth quarter increase
in the overall allowance is a result of continued weakness in the economy and
the related adverse effects on Key's specific portfolios. Net loan charge-offs
totaled $220 million and were 1.37% of average loans outstanding for the
quarter, compared with $108 million and .64%, respectively, for the fourth
quarter of 2000. For more information about Key's allowance for loan losses, see
the section entitled "Allowance for loan losses," which begins on page 43.
51
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS KEYCORP AND SUBSIDIARIES
FIGURE 35 SELECTED QUARTERLY FINANCIAL DATA
2001 2000
------------------------------------ ------------------------------------
dollars in millions, except per share amounts FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
- -----------------------------------------------------------------------------------------------------------------------------------
FOR THE QUARTER
Interest income $1,210 $1,380 $1,467 $1,570 $1,652 $1,596 $1,540 $1,489
Interest expense 510 656 754 882 950 912 867 818
Net interest income 700 724 713 688 702 684 673 671
Provision for loan losses 723 116 401 110 108 131 68 183
Noninterest income before net
securities gains (losses) 419 452 390 429 489 455 473 805
Net securities gains (losses) (1) 2 8 26 19 (50) 2 1
Noninterest expense 702 683 858 698 705 787 698 727
Income (loss) before income taxes and
cumulative effect of accounting changes (307) 379 (148) 335 397 171 382 567
Income (loss) before cumulative effect
of accounting changes (174) 249 (136) 218 266 121 248 367
Net income (loss) (174) 249 (160) 217 266 121 248 367
Net income (loss) -- core (174) 249 28 217 272 245 249 243
- -----------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Income (loss) before cumulative
effect of accounting changes $(.41) $.59 $(.32) $.51 $.63 $.28 $.57 $.83
Income (loss) before cumulative
effect of accounting changes
-- assuming dilution (.41) .58 (.32) .51 .62 .28 .57 .83
Net income (loss) (.41) .59 (.38) .51 .63 .28 .57 .83
Net income (loss) -- core (.41) .59 .07 .51 .64 .57 .57 .55
Net income (loss) -- assuming dilution (.41) .58 (.38) .51 .62 .28 .57 .83
Net income (loss) -- assuming dilution -- core (.41) .58 .07 .51 .63 .57 .57 .55
Cash dividends paid .295 .295 .295 .295 .28 .28 .28 .28
Book value at period end 14.52 15.53 15.22 15.79 15.65 15.26 15.09 14.84
Market price:
High 24.52 28.15 26.43 27.58 28.50 27.06 23.00 22.25
Low 20.49 22.20 22.10 22.65 21.50 17.50 17.00 15.56
Close 24.34 24.14 26.05 25.80 28.00 25.31 17.63 19.00
Weighted average common shares (000) 423,596 424,802 424,675 424,024 425,054 429,584 434,112 441,834
Weighted average common shares and
potential common shares (000) 423,596 430,346 424,675 429,917 430,634 431,972 436,022 443,757
- -----------------------------------------------------------------------------------------------------------------------------------
AT PERIOD END
Loans $63,309 $64,506 $66,693 $67,027 $66,905 $66,299 $65,612 $64,064
Earning assets 71,672 73,943 76,531 77,027 77,316 75,786 74,748 73,953
Total assets 80,938 84,419 85,838 86,457 87,270 85,500 84,719 83,504
Deposits 44,795 45,372 45,743 45,965 48,649 47,809 49,076 46,036
Long-term debt 14,554 15,114 14,675 14,495 14,161 13,800 14,097 14,784
Shareholders' equity 6,155 6,575 6,467 6,702 6,623 6,520 6,507 6,493
Full-time equivalent employees 21,230 21,297 21,742 21,882 22,142 22,457 23,005 23,474
Branches 911 911 926 922 922 932 938 937
- -----------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on average total assets (.84)% 1.16% (.75)% 1.02% 1.24% .57% 1.20% 1.77%
Return on average total assets -- core (.84) 1.16 .13 1.02 1.27 1.16 1.20 1.17
Return on average equity (10.57) 15.20 (9.67) 13.28 16.16 7.39 15.40 22.68
Return on average equity -- core (10.57) 15.20 1.69 13.28 16.53 14.97 15.46 15.02
Net interest margin (taxable equivalent) 3.98 3.85 3.77 3.63 3.71 3.68 3.68 3.68
- -----------------------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS AT PERIOD END
Equity to assets 7.60% 7.79% 7.53% 7.75% 7.59% 7.63% 7.68% 7.78%
Tangible equity to tangible assets 6.29 6.51 6.25 6.29 6.12 6.10 6.12 6.16
Tier 1 risk-based capital 7.43 7.81 7.71 7.99 7.72 7.59 7.88 7.98
Total risk-based capital 11.41 11.77 11.81 12.32 11.48 11.34 11.74 12.04
Leverage 7.65 7.90 7.68 7.79 7.71 7.76 7.90 7.89
- -----------------------------------------------------------------------------------------------------------------------------------
Key completed several acquisitions and divestitures during the two-year period
shown in this table. One or more of these transactions may have had a
significant effect on Key's results, making it difficult to compare results from
one year to the next. Note 3 ("Acquisitions and Divestitures"), which begins on
page 63, has specific information about the business combinations and
divestitures that Key completed in the past three years to help you understand
how those transactions may have impacted Key's financial condition and results
of operations.
52
KEYCORP AND SUBSIDIARIES
REPORT OF MANAGEMENT
Key's management is responsible for the preparation, content and integrity of
the financial statements and other statistical data and analyses compiled for
this annual report. The financial statements and related notes have been
prepared in conformity with accounting principles generally accepted in the
United States and reflect management's best estimates and judgments. Management
believes that the financial statements and notes present fairly Key's financial
position, results of operations and cash flows, and that the financial
information presented elsewhere in this annual report is consistent with the
financial statements.
Management is responsible for establishing and maintaining a system of internal
control to ensure the protection of assets and the integrity of the financial
statements. This corporate-wide system of controls includes self- monitoring
mechanisms, written policies and procedures, proper delegation of authority and
organizational division of responsibility, and the careful selection and
training of qualified personnel. Management also maintains a code of ethics that
addresses conflicts of interest, compliance with laws and regulations, and
prompt reporting of any failure or circumvention of controls, among other
things.
We generally certify compliance with Key's code of ethics annually. We have
established an effective risk management function to periodically test the other
internal controls, and we endeavor to correct control deficiencies as they are
identified. Although any system of internal control can be compromised by human
error or intentional circumvention of required procedures, management believes
Key's system provides reasonable assurances that financial transactions are
recorded properly, providing an adequate basis for reliable financial
statements.
The Board of Directors discharges its responsibility for Key's financial
statements through its Audit and Risk Review Committee. This committee, which
draws its members exclusively from the outside directors, also recommends the
independent auditors. The Audit and Risk Review Committee meets regularly with
the independent auditors to review the scope of their audits and audit reports
and to discuss necessary action. Both the independent and internal auditors have
direct access to and interaction with the Audit and Risk Review Committee.
Management has assessed Key's internal control and procedures over financial
reporting using criteria described in "Internal Control -- Integrated
Framework," issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on that assessment, management believes that Key maintained an
effective system of internal control for financial reporting as of December 31,
2001.
/s/ Henry L. Meyer III
Henry L. Meyer III
Chairman and Chief Executive Officer
/s/ K. Brent Somers
K. Brent Somers
Senior Executive Vice President and Chief Financial Officer
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Shareholders and Board of Directors
KeyCorp
We have audited the accompanying consolidated balance sheets of KeyCorp and
subsidiaries ("Key") as of December 31, 2001 and 2000, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flow for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of Key's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Key at December
31, 2001 and 2000, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Cleveland, Ohio
January 14, 2002
53
KEYCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
dollars in millions 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 2,891 $ 3,189
Short-term investments 1,898 1,884
Securities available for sale 5,346 7,329
Investment securities (fair value: $1,128 and $1,208) 1,119 1,198
Loans, net of unearned income of $1,778 and $1,789 63,309 66,905
Less: Allowance for loan losses 1,677 1,001
- ------------------------------------------------------------------------------------------------------------------------------
Net loans 61,632 65,904
Premises and equipment 687 717
Goodwill 1,101 1,324
Other intangible assets 31 44
Corporate-owned life insurance 2,313 2,215
Accrued income and other assets 3,920 3,466
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $80,938 $87,270
======= =======
LIABILITIES
Deposits in domestic offices:
Money market deposit accounts $12,845 $12,066
Savings deposits 1,918 2,032
NOW Accounts 616 506
Certificates of deposit ($100,000 or more) 4,493 5,797
Other time deposits 13,657 15,118
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing 33,529 35,519
Noninterest-bearing 9,667 9,076
Deposits in foreign office-- interest-bearing 1,599 4,054
- ------------------------------------------------------------------------------------------------------------------------------
Total deposits 44,795 48,649
Federal funds purchased and securities sold under repurchase agreements 3,735 4,936
Bank notes and other short-term borrowings 5,549 6,957
Accrued expense and other liabilities 4,862 4,701
Long-term debt 14,554 14,161
Corporation-obligated mandatorily redeemable preferred capital securities of subsidiary
trusts holding solely subordinated debentures of KeyCorp (see Note 11) 1,288 1,243
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 74,783 80,647
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value; authorized 25,000,000 shares, none issued -- --
Common shares, $1 par value; authorized 1,400,000,000 shares;
issued 491,888,780 shares 492 492
Capital surplus 1,390 1,402
Retained earnings 5,856 6,352
Loans to ESOP trustee -- (13)
Treasury stock, at cost (67,883,724 and 68,634,881 shares) (1,585) (1,600)
Accumulated other comprehensive income (loss) 2 (10)
- ------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 6,155 6,623
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $80,938 $87,270
======= =======
==============================================================================================================================
See Notes to Consolidated Financial Statements.
54
KEYCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
dollars in millions, except per share amounts 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $ 5,067 $ 5,699 $ 5,146
Taxable investment securities 27 26 15
Tax-exempt investment securities 17 23 31
Securities available for sale 451 446 424
Short-term investments 65 83 79
- -----------------------------------------------------------------------------------------------------------------------------
Total interest income 5,627 6,277 5,695
INTEREST EXPENSE
Deposits 1,478 1,768 1,305
Federal funds purchased and securities sold under repurchase agreements 198 287 220
Bank notes and other short-term borrowings 302 428 426
Long-term debt, including capital securities 824 1,064 957
- -----------------------------------------------------------------------------------------------------------------------------
Total interest expense 2,802 3,547 2,908
- -----------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 2,825 2,730 2,787
Provision for loan losses 1,350 490 348
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 1,475 2,240 2,439
NONINTEREST INCOME
Trust and investment services income 550 608 599
Investment banking and capital markets income 189 372 354
Service charges on deposit accounts 387 341 330
Corporate-owned life insurance income 114 109 107
Letter of credit and loan fees 124 107 98
Net securities gains (losses) 35 (28) 29
Gains from branch divestitures -- -- 194
Gains from other divestitures -- 332 161
Other income 326 353 443
- -----------------------------------------------------------------------------------------------------------------------------
Total noninterest income 1,725 2,194 2,315
NONINTEREST EXPENSE
Personnel 1,378 1,445 1,482
Net occupancy 232 223 239
Computer processing 252 240 236
Equipment 152 173 203
Marketing 112 110 106
Amortization of intangibles 245 101 104
Professional fees 88 89 70
Restructuring charges (4) 102 98
Other expense 486 434 532
- -----------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 2,941 2,917 3,070
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT
OF ACCOUNTING CHANGES 259 1,517 1,684
Income taxes 102 515 577
- -----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES 157 1,002 1,107
Cumulative effect of accounting changes, net of tax (see Note 1) (25) -- --
- -----------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 132 $ 1,002 $ 1,107
======= ======= =======
Per common share:
Income before cumulative effect of accounting changes $ .37 $ 2.32 $ 2.47
Net income .31 2.32 2.47
Income before cumulative effect of accounting changes--
assuming dilution .37 2.30 2.45
Net income-- assuming dilution .31 2.30 2.45
Weighted average common shares outstanding (000) 424,275 432,617 448,168
Weighted average common shares and potential common
shares outstanding (000) 429,573 435,573 452,363
- -----------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
55
KEYCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
LOANS TO TREASURY
COMMON CAPITAL RETAINED ESOP STOCK,
dollars in millions, except per share amounts SHARES SURPLUS EARNINGS TRUSTEE AT COST
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 $ 492 $ 1,412 $ 5,192 $ (34) $ (923)
Net income 1,107
Other comprehensive losses:
Net unrealized losses on securities available
for sale, net of income taxes of ($94)(a)
Foreign currency translation adjustments
Total comprehensive income
Cash dividends declared on common shares
($1.04 per share) (467)
Issuance of common shares:
Acquisition-- 632,183 shares 6 15
Employee benefit and dividend reinvestment
plans-- 2,249,181 net shares (6) 55
Repurchase of common shares-- 11,906,424 shares (344)
ESOP transactions 1 10
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 492 1,412 5,833 (24) (1,197)
Net income 1,002
Other comprehensive income (losses):
Net unrealized gains on securities available
for sale, net of income taxes of $80(a)
Foreign currency translation adjustments
Total comprehensive income
Cash dividends declared on common shares
($1.12 per share) (484)
Issuance of common shares:
Employee benefit and dividend reinvestment
plans-- 2,480,161 net shares (10) 59
Repurchase of common shares-- 22,652,800 shares (462)
ESOP transactions 1 11
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 492 1,402 6,352 (13) (1,600)
Net income 132
Other comprehensive income (losses):
Net unrealized gains on securities available
for sale, net of income taxes of $11(a)
Cumulative effect of change in accounting for
derivative financial instruments, net of income
taxes of ($12)
Net unrealized gains on derivative financial instruments,
net of income taxes of $12
Foreign currency translation adjustments
Total comprehensive income
Cash dividends declared on common shares
($1.48 per share) (628)
Issuance of common shares:
Acquisition-- 370,830 shares 9
Employee benefit and dividend reinvestment
plans-- 2,415,914 net shares (12) 56
Repurchase of common shares-- 2,035,600 shares (50)
ESOP transactions 13
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001 $ 492 $ 1,390 $ 5,856 -- $(1,585)
======= ======= ======= ======= ========
===================================================================================================================================
Accumulated
Other
Comprehensive Comprehensive
dollars in millions, except per share amounts Income (Loss) Income
- ---------------------------------------------------------------------- -------------
BALANCE AT DECEMBER 31, 1998 $ 28
Net income $ 1,107
Other comprehensive losses:
Net unrealized losses on securities available
for sale, net of income taxes of ($94)(a) (148) (148)
Foreign currency translation adjustments (7) (7)
-------
Total comprehensive income $ 952
=======
Cash dividends declared on common shares
($1.04 per share)
Issuance of common shares:
Acquisition-- 632,183 shares
Employee benefit and dividend reinvestment
plans-- 2,249,181 net shares
Repurchase of common shares-- 11,906,424 shares
ESOP transactions
- --------------------------------------------------------------------- -------------
BALANCE AT DECEMBER 31, 1999 (127)
Net income $ 1,002
Other comprehensive income (losses):
Net unrealized gains on securities available
for sale, net of income taxes of $80(a) 132 132
Foreign currency translation adjustments (15) (15)
-------
Total comprehensive income $ 1,119
=======
Cash dividends declared on common shares
($1.12 per share)
Issuance of common shares:
Employee benefit and dividend reinvestment
plans-- 2,480,161 net shares
Repurchase of common shares-- 22,652,800 shares
ESOP transactions
- --------------------------------------------------------------------- -------------
BALANCE AT DECEMBER 31, 2000 (10)
Net income $ 132
Other comprehensive income (losses):
Net unrealized gains on securities available
for sale, net of income taxes of $11(a) 13 13
Cumulative effect of change in accounting for
derivative financial instruments, net of income
taxes of ($12) (22) (22)
Net unrealized gains on derivative financial instruments,
net of income taxes of $12 20 20
Foreign currency translation adjustments 1 1
-------
Total comprehensive income $ 144
=======
Cash dividends declared on common shares
($1.48 per share)
Issuance of common shares:
Acquisition-- 370,830 shares
Employee benefit and dividend reinvestment
plans-- 2,415,914 net shares
Repurchase of common shares-- 2,035,600 shares
ESOP transactions
- ---------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001 $ 2
=======
=====================================================================
(a) Net of reclassification adjustments. Reclassification adjustments represent
net unrealized gains or losses as of December 31, of the prior year on
securities available for sale that were sold during the current year. The
reclassification adjustments were ($5) million [($4) million after tax] in
2001, ($11) million [($7) million after tax] in 2000 and $3 million ($2
million after tax) in 1999.
See Notes to Consolidated Financial Statements.
56
KEYCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
YEAR ENDED DECEMBER 31,
in millions 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 132 $ 1,002 $ 1,107
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 1,350 490 348
Cumulative effect of accounting changes, net of tax 25 -- --
Depreciation expense and software amortization 285 281 292
Amortization of intangibles 245 101 104
Net gains from divestitures -- (332) (355)
Net securities (gains) losses (35) 28 (29)
Net (gains) losses from venture capital investments 79 (70) (38)
Net gains from loan securitizations and sales (49) (31) (86)
Deferred income taxes (139) 335 466
Net (increase) decrease in mortgage loans held for sale (10) (164) 3
Net decrease in trading account assets 146 26 109
Net increase (decrease) in accrued restructuring charges (64) 31 88
Other operating activities, net (271) (114) (155)
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,694 1,583 1,854
INVESTING ACTIVITIES
Net increase in loans, excluding acquisitions, sales and divestitures (1,876) (7,215) (8,110)
Purchases of loans (107) -- (7)
Proceeds from loan securitizations and sales 4,916 4,978 4,776
Purchases of investment securities (271) (404) (294)
Proceeds from sales of investment securities 56 129 17
Proceeds from prepayments and maturities of investment securities 250 211 292
Purchases of securities available for sale (4,290) (6,855) (4,750)
Proceeds from sales of securities available for sale 349 2,450 419
Proceeds from prepayments and maturities of securities available for sale 5,859 3,859 3,176
Net (increase) decrease in other short-term investments (160) (49) 5
Purchases of premises and equipment (121) (103) (94)
Proceeds from sales of premises and equipment 15 22 27
Proceeds from sales of other real estate owned 27 28 10
Net cash paid in connection with divestitures -- -- (576)
Cash used in acquisitions, net of cash acquired (3) (375) --
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 4,644 (3,324) (5,109)
FINANCING ACTIVITIES
Net increase (decrease) in deposits (3,854) 5,416 1,985
Net decrease in short-term borrowings (2,609) (696) (1,560)
Net proceeds from issuance of long-term debt, including capital securities 3,864 4,286 5,220
Payments on long-term debt, including capital securities (3,532) (5,985) (2,102)
Loan payments received from ESOP trustee 13 11 10
Purchases of treasury shares (50) (462) (344)
Net proceeds from issuance of common stock 33 28 33
Cash dividends paid (501) (484) (467)
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (6,636) 2,114 2,775
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (298) 373 (480)
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR 3,189 2,816 3,296
- -----------------------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF YEAR $ 2,891 $ 3,189 $ 2,816
======= ======= =======
- -----------------------------------------------------------------------------------------------------------------------------------
Additional disclosures relative to cash flow:
Interest paid $ 2,626 $ 3,572 $ 2,749
Income taxes paid 115 92 185
Noncash items:
Derivative assets resulting from adoption of new accounting standard $ 120 -- --
Derivative liabilities resulting from adoption of new accounting standard 152 -- --
Cash dividends declared, but not paid 127 -- --
Transfer of credit card receivables to loans held for sale -- -- $ 1,299
Reclassification of financial instruments from loans to securities available for sale -- -- 374
Fair value of Concord EFS, Inc. shares received -- -- 170
Carrying amount of Electronic Payment Services, Inc. shares divested -- -- 36
Assets sold -- -- 523
Liabilities sold -- -- 1,335
===================================================================================================================================
See Notes to Consolidated Financial Statements.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
KeyCorp, an Ohio corporation and bank holding company headquartered in
Cleveland, Ohio, is one of the nation's largest bank- based financial services
companies. KeyCorp's subsidiaries provide retail and commercial banking,
commercial leasing, investment management, consumer finance and investment
banking products and services to individual, corporate and institutional clients
through three major lines of business: Key Consumer Banking, Key Corporate
Finance and Key Capital Partners. As of December 31, 2001, KeyCorp's banking
subsidiaries operated 911 full-service branches, a telephone banking call center
services group and 2,333 ATMs in 20 states.
As used in these Notes, KEYCORP refers solely to the parent company and KEY
refers to the consolidated entity consisting of KeyCorp and its subsidiaries.
USE OF ESTIMATES
Key's accounting policies conform to accounting principles generally accepted in
the United States and prevailing practices within the financial services
industry. Management must make certain estimates and judgments when determining
the amounts presented in Key's consolidated financial statements and the related
notes. If these estimates prove to be inaccurate, actual results could differ
from those reported.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of KeyCorp and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. Some previously reported results have been
reclassified to conform to current reporting practices.
BUSINESS COMBINATIONS
In a business combination accounted for as a pooling-of-interests, the assets,
liabilities and shareholders' equity of Key and the combined company are carried
forward at historical amounts. The results of operations are combined and
financial statements from prior periods are restated to give effect to the
combination.
When Key accounts for a business combination as a purchase, the acquired
company's net assets are recorded at fair value at the date of acquisition and
the results of operations of the acquired company are combined with Key's
results from that date forward. Purchase premiums and discounts, including
intangible assets, are amortized over the remaining useful lives of the related
assets or liabilities. The difference between the purchase price and the fair
value of the net assets acquired is recorded as goodwill.
The provisions of Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations," became effective as of July 1, 2001, superseding the
previous accounting for business combinations. Additional information pertaining
to this new accounting standard is summarized under the heading "Accounting
Pronouncements Adopted in 2001," which begins on page 61.
STATEMENT OF CASH FLOW
Cash and due from banks are considered "cash and cash equivalents" for financial
reporting purposes.
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 ($597 million at December 31, 2001,
and $743 million at December 31, 2000) and included in "short-term investments"
on the balance sheet. Realized and unrealized gains and losses on trading
account securities are reported in "other income" on the income statement.
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. The equity securities consist mainly of investments held in
Key's Principal Investing unit. Principal investments include direct and
indirect investments predominantly in privately held companies. These
investments are carried at estimated fair value as determined by management.
Changes in estimated fair values and actual gains and losses on sales of these
investments are included in "investment banking and capital markets income" on
the income statement.
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. Unrealized gains and
losses (net of income taxes) deemed temporary are recorded in shareholders'
equity as a component of "accumulated other comprehensive income (loss)." Actual
gains and losses on sales of these securities are computed for each specific
security sold and included in "net securities gains (losses)" on the income
statement.
LOANS
Loans are carried at the principal amount outstanding, net of unearned income,
including net deferred loan fees and costs. Key defers certain nonrefundable
loan origination and commitment fees and the direct costs of originating or
acquiring loans. The net deferred amount is amortized over the estimated lives
of the related loans as an adjustment to the yield.
At December 31, 2001, loans held for sale include mortgage and education loans.
These loans are carried at the lower of aggregate cost or fair value. Fair value
is determined based on prevailing market prices for loans with similar
characteristics. When a loan is placed in the held for sale category,
amortization of the related deferred fees and costs is discontinued. The
remaining unamortized fees and costs are recognized as part of the cost basis of
the related loan at the time it is sold.
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
Direct financing leases are carried at the aggregate of lease payments
receivable plus estimated residual values, less unearned income. Unearned income
on direct financing leases is amortized over the lease terms using methods that
approximate the interest method. This method amortizes unearned income to
produce a constant rate of return on the lease. Net gains on sales of lease
residuals are included in "other income" on the income statement.
IMPAIRED AND OTHER NONACCRUAL LOANS
Key will generally stop accruing interest on a loan (i.e., designate the loan
"nonaccrual") when payment is 90 days or more past due, unless the loan is
well-secured and in the process of collection. Once a loan is designated as
nonaccrual, the interest accrued but not collected is generally charged against
the allowance for loan losses, and payments subsequently received are generally
applied to principal. However, if management believes that all principal and
interest on a nonaccrual loan ultimately are collectible, interest income may be
recognized as received.
Nonaccrual loans, other than smaller-balance homogeneous loans (i.e., loans to
finance residential mortgages, automobiles, etc.), are designated "impaired."
Impaired loans and other nonaccrual loans are returned to accrual status when
management determines that the borrower's performance has improved and that both
principal and interest are collectible. This generally requires a sustained
period of timely principal and interest payments.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents management's estimate of probable
credit losses inherent in the loan portfolio at the balance sheet date. Key
determines and maintains an appropriate allowance for loan losses based on an
analysis of the quality of the loan portfolio. This analysis is conducted at
least quarterly and more often if deemed necessary.
ALLOWANCE FOR IMPAIRED LOANS. When 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 flows or
collateral values do not justify the carrying amount of the loan, the amount
that management deems uncollectible (the impaired amount) is charged against the
allowance for loan losses. Even when collateral value or other sources of
repayment appear sufficient, if management remains uncertain about whether the
loan will be repaid in full, an amount is specifically allocated in the
allowance for loan losses.
ALLOWANCE FOR NONIMPAIRED LOANS AND BINDING COMMITMENTS. Management establishes
an allowance for nonimpaired loans and legally binding commitments by applying
historical loss rates to existing loans with similar risk characteristics. The
loss rates used to establish the allowance may be adjusted to reflect
management's current assessment of the following factors:
- - changes in national and local economic and business conditions;
- - changes in experience, ability and depth of lending management and staff, in
lending policies or in the mix and volume of the loan portfolio;
- - the trend of the volume of past due, nonaccrual and other loans; and
- - external forces, such as competition, legal developments and regulatory
guidelines.
LOAN SECURITIZATIONS
Key sells education and other types of loans through securitizations.
Securitized loans are removed from the balance sheet and a net gain or loss is
recorded when the combined net sales proceeds and, if applicable, residual
interests differ from the loans' allocated carrying amount. Net gains and losses
resulting from securitizations are recorded in "other income" on the income
statement. A servicing asset may also be recorded if Key either purchases or
retains the right to service these loans and receives related fees that exceed
the going market rate. Income earned under servicing or administration
arrangements also is recorded in "other income."
In some cases, Key retains a residual interest in securitized loans that may
take the form of an interest-only strip, a residual asset, a servicing asset
and/or a security. These retained interests are subject to the rules contained
in SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." Under these rules, the previous carrying amount
of the assets sold is allocated between the retained interests and the assets
sold based on their relative fair values at the date of transfer. Fair value is
determined by computing the present value of estimated cash flows, using a
discount rate considered commensurate with the risks associated with the cash
flows and the dates that Key expects to receive such cash flows. Other
assumptions used in the determination of fair value are disclosed in Note 7
("Retained Interests in Loan Securitizations") on page 68. The retained
interests are accounted for like debt securities classified as available for
sale or as trading account assets.
On a quarterly basis, Key ensures that all retained interests are valued
appropriately in the financial statements. Management reviews the historical
performance of each retained interest and the assumptions used to project future
cash flows. Assumptions are revised if past performance and future expectations
dictate and the present value of cash flows is recalculated based on the revised
assumptions.
The present value of these cash flows is referred to as the retained interest
fair value. For retained interests classified as trading account assets, any
increase or decrease in the asset's fair value is recognized in "other income."
Generally, if the carrying amount of a retained interest classified as
securities available for sale exceeds its fair value, impairment is indicated
and recognized in earnings. Conversely, if the fair value of the retained
interest exceeds its carrying amount, the write-up to fair value is recorded in
equity as a component of "accumulated other comprehensive income (loss)," and
the yield on the retained interest is adjusted prospectively. See the section
entitled "Recognition of interest income and impairment on certain investments,"
on page 62 for more information regarding the accounting guidance that governs
the determination of impairment on Key's retained interests.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
SERVICING ASSETS
Servicing assets purchased or retained by Key in a sale or securitization of
loans are reported at the lower of amortized cost or fair value ($73 million at
December 31, 2001, and $49 million at December 31, 2000) and included in
"accrued income and other assets" on the balance sheet. Fair value is initially
measured by allocating the previous carrying amount of the assets sold or
securitized to the retained interests and the assets sold based on their
relative fair values at the date of transfer. Fair value is determined by
estimating the present value of future cash flows associated with the serviced
loans. The estimate is based on a number of assumptions, including the cost of
servicing, discount rate, prepayment rate and default rate. The amortization of
servicing assets is determined in proportion to, and over the period of, the
estimated net servicing income and is recorded in "other income" on the income
statement.
PREMISES AND EQUIPMENT
Premises and equipment, including leasehold improvements, are stated at cost
less accumulated depreciation and amortization. Management determines
depreciation of premises and equipment using the straight-line method over the
estimated useful lives of the particular assets. Leasehold improvements are
amortized using the straight-line method over the terms of the leases.
Accumulated depreciation and amortization on premises and equipment totaled $1.1
billion at December 31, 2001, and $980 million at December 31, 2000.
INTANGIBLE ASSETS
"Goodwill" represents the amount by which the cost of net assets acquired
exceeds their fair value. Goodwill is amortized using the straight-line method
over the period (up to 25 years) that management expects the acquired assets to
have value.
"Other intangibles" represent primarily the net present value of the future
economic benefits to be derived from the purchase of core deposits. Other
intangibles are amortized on either an accelerated or straight-line basis over
periods ranging from 5 to 15 years.
Accumulated amortization on goodwill and other intangible assets was $908
million at December 31, 2001, and $666 million at December 31, 2000. Key reviews
goodwill and other intangibles for impairment when impairment indicators, such
as significant changes in market conditions, changes in product mix or
management focus, or a potential sale or disposition, arise. In most instances,
Key has used the undiscounted cash flow method in testing for impairment. In May
2001, Key recorded a goodwill impairment charge of $150 million as a result of
management's decision to downsize the automobile finance business.
The current accounting guidance for goodwill and other intangible assets has
been superseded by the provisions of SFAS No. 142, "Goodwill and Other
Intangible Assets," which became effective for Key as of January 1, 2002. In
accordance with this new guidance, Key will cease goodwill amortization and will
test goodwill for impairment at least annually using various valuation
techniques recommended by the new standard. Additional information pertaining to
SFAS No. 142 is summarized under the heading "Accounting Pronouncements Pending
Adoption," on page 62.
INTERNALLY DEVELOPED SOFTWARE
Key relies on both company personnel and independent contractors to plan,
develop, install, customize and enhance computer systems applications that
support corporate and administrative operations. Software development costs,
such as those related to program coding, testing, configuration and
installation, are capitalized and included in "accrued income and other assets"
on the balance sheet. The resulting asset ($134 million at December 31, 2001,
and $208 million at December 31, 2000) is amortized using the straight-line
method over its expected useful life (not to exceed five years). Costs incurred
during the planning and post-development phase of an internal software project
are expensed as incurred.
Software that is considered impaired is written down to its fair value. Software
that is no longer used is written off to earnings immediately. When management
decides to replace unimpaired software, amortization of such software is
accelerated to the expected replacement date.
DERIVATIVES USED FOR ASSET AND
LIABILITY MANAGEMENT PURPOSES
Key uses derivatives known as interest rate swaps and caps to manage interest
rate risk. These instruments modify the repricing or maturity characteristics of
specified on-balance sheet assets and liabilities. For example, an interest rate
cap tied to variable rate debt would effectively prevent the interest rate on
that debt from rising above a specified point.
Key's accounting policies related to such derivatives reflect the accounting
guidance in SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (as amended and interpreted), which became effective for Key as of
January 1, 2001. Additional information pertaining to this new accounting
standard is summarized under the heading "Accounting Pronouncements Adopted in
2001," on page 61.
Prior to the effective date of the new accounting standard, to qualify for hedge
accounting treatment, a derivative had to be effective at reducing the risk
associated with the exposure being managed and had to be designated as a risk
management transaction at the inception of the derivative contract. An
instrument effectively reduced risk if there was a high degree of interest rate
correlation between the derivative and the asset or liability being managed,
both at inception and over the life of the derivative contract.
There were several rules that governed the hedge accounting treatment of
derivatives:
- - Changes in fair value of a derivative were not included in the financial
statements.
- - The net interest income or expense associated with a derivative was accrued
and recognized as an adjustment to the interest income or interest expense
of the asset or liability being managed.
- - The interest receivable or payable from a derivative contract was recorded
in "other assets" or "other liabilities" on the balance sheet.
- - Premiums paid for a derivative were amortized as an adjustment to the
interest income or expense of the asset or liability being managed.
- - Realized gains and losses resulting from the early termination of a
derivative contract were deferred as an adjustment to the carrying amount of
the related asset or liability. Such gains or losses were
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
amortized using the straight-line method over the shorter of the projected
remaining life of the derivative contract on the date of termination or the
projected remaining life of the underlying asset or liability on that date.
DERIVATIVES USED FOR TRADING PURPOSES
Derivatives that are not used for asset and liability management purposes are
used for trading purposes. Key enters into contracts for such derivatives either
to make a market for clients or for proprietary trading purposes. Derivatives
used for trading purposes typically include financial futures, foreign exchange
forward and spot contracts, written and purchased options (including currency
options), and interest rate swaps, caps and floors.
All derivatives used for trading purposes are recorded at fair value. Fair value
is determined by estimating the present value of future cash flows. Derivatives
with a positive fair value are included in "accrued income and other assets" on
the balance sheet, and derivatives with a negative fair value are included in
"accrued expense and other liabilities." Changes in fair value (including
payments and receipts) are recorded in "investment banking and capital markets
income" on the income statement.
EMPLOYEE STOCK OPTIONS
Key accounts for stock options issued to employees using the intrinsic value
method. This method requires that compensation expense be recognized to the
extent that the fair value of the stock exceeds the exercise price of the option
at the grant date. Key's employee stock options generally have fixed terms and
exercise prices that are equal to or greater than the fair value of Key's common
shares at the grant date, so Key generally does not recognize compensation
expense related to stock options.
MARKETING COSTS
Key expenses all marketing-related costs, including advertising costs, as
incurred.
RESTRUCTURING CHARGES
Key may record restructuring charges in connection with certain events or
transactions, including business combinations, changes in Key's strategic plan,
changes in business conditions that may result in a decrease in or exit from
affected businesses, or other factors. Such charges typically result from
consolidating or relocating operations, or disposing of or abandoning operations
or productive assets. Any of these events could result in a significant
downsizing of the workforce.
To qualify as restructuring charges, costs must be incremental and incurred as a
direct result of a restructuring event or transaction. Restructuring charges do
not include costs that are associated with or incurred to benefit future
periods. Among the costs typically included in restructuring charges are those
related to:
- - employee severance and termination benefits;
- - the consolidation of operations facilities; and
- - losses resulting from the impairment or disposal of assets.
ACCOUNTING PRONOUNCEMENTS
ADOPTED IN 2001
DERIVATIVES AND HEDGING ACTIVITIES. Effective January 1, 2001, Key adopted SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
new standard establishes the appropriate accounting and reporting for derivative
instruments ("derivatives") and for hedging activities. SFAS No. 133 requires
that all derivatives be recognized as either assets or liabilities on the
balance sheet at fair value. The accounting for changes in the fair value (i.e.,
gains or losses) of derivatives depends on whether they have been designated and
qualify as part of a hedging relationship, and further, on the type of hedging
relationship. For derivatives that are not designated as hedging instruments,
the gain or loss is recognized immediately in earnings.
A derivative that is designated and qualifies as a hedging instrument must be
designated 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.
A fair value hedge is used to hedge changes in the fair value of existing
assets, liabilities and firm commitments against changes in interest rates or
other economic factors. Key recognizes the gain or loss on the derivative, as
well as the related loss or gain on the hedged item attributable to the hedged
risk, in earnings during the period in which the fair value changed. Thus, to
the extent that the hedge is perfectly effective, the change in the fair value
of the hedged item will be offset, resulting in no net effect on earnings.
A cash flow hedge is used to hedge the variability of future cash flows against
changes in interest rates or other economic factors. The effective portion of a
gain or loss on any cash flow hedge is reported as a component of "other
comprehensive income (loss)" and reclassified into earnings in the same period
or periods that the hedged transaction affects earnings. Any ineffective portion
of the derivative gain or loss is recognized in earnings during the current
period.
As a result of adopting SFAS No. 133, Key recorded cumulative after-tax losses
of $1 million in earnings and $22 million in "other comprehensive income (loss)"
as of January 1, 2001. The cumulative loss included in earnings represents the
fair value at January 1, 2001, of all derivatives that were then designated as
fair value hedges and the unrealized gain or loss on the related hedged assets
and liabilities. The cumulative loss included in "other comprehensive income
(loss)" represented the effective portion of the fair value of all derivatives
designated as cash flow hedges.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES.
Key adopted SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," which took effect for all
transactions entered into after March 31, 2001. SFAS No. 140 added three
significant new rules to practices already in effect. 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;
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
- - 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.
RECOGNITION OF INTEREST INCOME AND IMPAIRMENT ON CERTAIN INVESTMENTS. In July
2000, the Emerging Issues Task Force ("EITF"), a standard- setting group working
under the auspices of the Financial Accounting Standards Board ("FASB"), 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 No. 140 and on
purchased beneficial interests in securitized financial assets. Assets subject
to this accounting guidance are presented on the balance sheet as securities
available for sale [see Note 5 ("Securities") starting on page 66] or as trading
account assets. This guidance became effective for fiscal quarters beginning
after March 15, 2001, causing Key to incur a cumulative after-tax loss of $24
million in earnings for the second quarter of 2001. This loss is presented on
Key's income statement as a "cumulative effect of accounting change."
BUSINESS COMBINATIONS. In July 2001, the FASB issued SFAS No. 141, "Business
Combinations," which eliminates the pooling-of-interests method of accounting
for business combinations initiated after June 30, 2001. Since June 30, 2001,
Key has not initiated any business combinations that would have qualified for
the pooling-of-interests method of accounting under previous accounting
standards. The last business combination accounted for by Key as a
pooling-of-interests occurred in December 1994.
ACCOUNTING PRONOUNCEMENTS
PENDING ADOPTION
GOODWILL AND OTHER INTANGIBLE ASSETS. In July 2001, the FASB issued SFAS No.
142, "Goodwill and Other Intangible Assets," which takes effect for fiscal years
beginning after December 15, 2001. Under SFAS No. 142, companies are no longer
permitted to amortize goodwill and intangible assets deemed to have indefinite
lives. Management anticipates that implementing this change will reduce
noninterest expense and increase net income by approximately $80 million, or
$.19 per common share, for 2002.
Under the new accounting standard, goodwill and certain intangible assets are
subject to impairment testing, which must be conducted at least annually. The
first step in this testing requires Key to determine the fair value of its
reporting units by using various valuation techniques recommended by the
standard. The fair value of each reporting unit is compared with its carrying
amount. If the fair value of a particular reporting unit exceeds its carrying
amount, no impairment is indicated and further testing is not required. If the
carrying amount of any reporting unit exceeds its fair value, goodwill
impairment may be indicated and the second step of this testing is required. Key
would assume that the purchase price of the reporting unit is the fair value as
determined in the first step and then allocate that purchase price to the fair
value of the assets (excluding goodwill) and liabilities of the reporting unit.
Any excess purchase price over the fair value of the reporting unit's assets and
liabilities represents the implied fair value of goodwill. An impairment loss
would be recognized, as a charge to earnings, to the extent that the carrying
amount of the reporting unit's recorded goodwill exceeds the implied fair value
of goodwill. All goodwill balances are subject to future annual impairment
testing.
Any impairment losses that result from the initial application of SFAS No. 142
would be accounted for as a "cumulative effect of accounting change" on Key's
income statement. Transitional impairment tests to determine the amount of any
such losses must be completed no later than December 31, 2002, but Key expects
to complete this testing before March 31, 2002. Based on preliminary test
results, management anticipates that a "transition impairment charge" will not
be necessary since the fair values of Key's reporting units are believed to
exceed their carrying amounts. Any subsequent impairment losses would be
recorded as part of income from operations.
ASSET RETIREMENT OBLIGATIONS. In August 2001, the FASB issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." The new standard takes effect for
fiscal years beginning after June 15, 2002. SFAS No. 143 addresses the
accounting for obligations associated with the retirement of tangible long-lived
assets and requires a liability to be recognized for the fair value of these
obligations in the period they are incurred. Related costs are capitalized as
part of the carrying amounts of the assets to be retired and amortized over the
assets' useful lives. Key will adopt SFAS No. 143 as of January 1, 2003.
Management is evaluating the extent to which it may affect Key's financial
condition and results of operations.
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. In October 2001, the FASB issued
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
The new standard maintains the previous accounting for the impairment or
disposal of long-lived assets, but also establishes more restrictive criteria
that have to be met to classify such an asset as "held for sale." SFAS No. 144
also increases the range of dispositions that qualify for reporting as
discontinued operations, and changes the manner in which expected future
operating losses from such operations are to be reported. Key adopted SFAS No.
144 as of January 1, 2002.
ACCOUNTING GUIDANCE ISSUED DURING 2001
ACCOUNTING AND REPORTING FOR CERTAIN LOANS HELD FOR SALE. The primary Federal
banking regulators issued Interagency Guidance in March 2001 that instructs
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. The Securities and Exchange Commission
has expressed views that support this guidance. Specifically, once a decision
has been made to sell a nonperforming loan, normal credit evaluation procedures
should continue until the loan is sold or transferred to a held for sale
account.
If the proceeds from the sale of a nonperforming loan held in the portfolio are
less than its net carrying amount, the shortfall must be recorded as a loan
charge-off unless it can be demonstrated that part or all of the shortfall was
attributable to market-driven factors, such as changes in interest rates or
foreign exchange rates. Market-driven losses must be reported in earnings, while
credit risk related losses
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
must be reported as charge-offs. Nonperforming loans transferred to a held for
sale account must be revalued at each subsequent reporting date until sold, and
reported at the lower of their amortized cost or fair value. Changes in the
carrying amounts of these loans must be reported as a charge to earnings.
This guidance did not have a significant impact on Key during 2001, nor would it
have had a significant impact on prior periods had it been issued earlier. Key
has applied this guidance in sales of certain nonperforming consumer (primarily
home equity) loans.
2. EARNINGS PER COMMON SHARE
Key calculates its basic and diluted earnings per common share as follows:
YEAR ENDED DECEMBER 31,
dollars in millions, except per share amounts 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
EARNINGS
Income before cumulative effect of accounting changes $ 157 $ 1,002 $ 1,107
Net income 132 1,002 1,107
- -----------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES
Weighted average common shares outstanding (000) 424,275 432,617 448,168
Effect of dilutive common stock options (000) 5,298 2,956 4,195
- -----------------------------------------------------------------------------------------------------------------------------
Weighted average common shares and potential
common shares outstanding (000) 429,573 435,573 452,363
========= ========= =========
- -----------------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE
Income per common share before cumulative effect of accounting changes $ .37 $ 2.32 $ 2.47
Net income per common share .31 2.32 2.47
Income per common share before cumulative effect of accounting changes
-- assuming dilution .37 2.30 2.45
Net income per common share-- assuming dilution .31 2.30 2.45
=============================================================================================================================
3. ACQUISITIONS AND DIVESTITURES
Key completed the following acquisitions and divestitures during the past three
years.
ACQUISITIONS
THE WALLACH COMPANY, INC.
On January 2, 2001, Key purchased The Wallach Company, Inc., an investment
banking firm headquartered in Denver, Colorado. Key paid the purchase price of
approximately $11 million using a combination of cash and 370,830 Key common
shares. Goodwill of approximately $9 million was recorded and, through December
31, 2001, was being amortized using the straight-line method over a period of 10
years.
NEWPORT MORTGAGE COMPANY, L.P.
On September 30, 2000, Key purchased certain net assets of Newport Mortgage
Company, L.P., a commercial mortgage company headquartered in Dallas, Texas, for
$22 million in cash. Goodwill of approximately $10 million was recorded and,
through December 31, 2001, was being amortized using the straight-line method
over a period of 10 years.
NATIONAL REALTY FUNDING L.C.
On January 31, 2000, Key purchased certain net assets of National Realty Funding
L.C., a commercial finance company headquartered in Kansas City, Missouri, for
$359 million in cash. Goodwill of approximately $10 million was recorded and,
through December 31, 2001, was being amortized using the straight-line method
over a period of 15 years.
Effective January 1, 2002, Key ceased amortizing goodwill in accordance with new
accounting rules prescribed by SFAS No. 142, "Goodwill and Other Intangible
Assets." More information related to this new accounting standard is presented
in Note 1 ("Summary of Significant Accounting Policies") under the heading
"Accounting Pronouncements Pending Adoption," on page 62.
DIVESTITURES
CREDIT CARD PORTFOLIO
On January 31, 2000, Key sold its credit card portfolio of $1.3 billion in
receivables and nearly 600,000 active VISA and MasterCard accounts to Associates
National Bank (Delaware). Key recognized a gain of $332 million ($207 million
after tax), which is included in "gains from other divestitures" on the income
statement.
BRANCH DIVESTITURES
On October 18, 1999, Key sold its Long Island franchise, which included 28
KeyCenters with $1.3 billion in deposits and $505 million in loans. This
transaction resulted in a gain of $194 million ($122 million after tax), which
is included in "gains from branch divestitures" on the income statement.
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
COMPAQ CAPITAL EUROPE LLC AND
COMPAQ CAPITAL ASIA PACIFIC LLC
On July 28, 1999, Key sold its 50% interests in Compaq Capital Europe LLC and
Compaq Capital Asia Pacific LLC to Compaq Capital Corporation. Key and Compaq
formed these limited liability companies in 1998 to provide customized equipment
leasing and financing programs to Compaq's clients in the United Kingdom, Europe
and Asia. Key recognized a gain of $13 million ($8 million after tax), which is
included in "gains from other divestitures" on the income statement.
ELECTRONIC PAYMENT SERVICES, INC.
On February 28, 1999, Electronic Payment Services, Inc., an electronic funds
transfer processor in which Key held a 20% interest (accounted for using the
equity method), merged with a wholly owned subsidiary of Concord EFS, Inc. Key
received 5,931,825 shares of Concord EFS in exchange for its Electronic Payment
Services stock, and recognized a gain of $134 million ($85 million after tax).
The gain is included in "gains from other divestitures" on the income statement.
On June 17, 1999, Key sold the Concord EFS shares, accounted for as securities
available for sale, and recognized an additional gain of $15 million ($9 million
after tax), which is included in "net securities gains (losses)" on the income
statement.
KEY MERCHANT SERVICES, LLC
On January 21, 1998, Key sold a 51% interest in Key Merchant Services, LLC, a
wholly owned subsidiary formed to provide merchant credit card processing
services, to NOVA Information Systems, Inc. Key recognized a $23 million gain
($14 million after tax) at the time of closing.
Under the terms of the agreement with NOVA, Key was entitled to receive
additional payments if Key Merchant Services achieved certain revenue-related
performance targets. These additional payments created a gain of $27 million
($17 million after tax) in the fourth quarter of 1998 and a final gain of $14
million ($9 million after tax) during the first quarter of 1999. These gains are
included in "gains from other divestitures" on the income statement. The
agreement between Key and NOVA contains a confidentiality clause that prevents
Key from disclosing the specific terms of this transaction, but those terms are
not material.
4. LINE OF BUSINESS RESULTS
YEAR ENDED DECEMBER 31, KEY CONSUMER BANKING
-------------------------------------------------------------------
HOME EQUITY AND
RETAIL BANKING CONSUMER FINANCE
-------------------------------- -------------------------------
dollars in millions 2001 2000 1999 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Net interest income (taxable equivalent) $ 926 $ 937 $ 931 $ 589 $ 521 $ 521
Noninterest income 406 369 333 -- 50 132
Revenue sharing(a) 51 70 66 2 2 2
- -------------------------------------------------------------------------------------------------------------------------
Total revenue(b) 1,383 1,376 1,330 591 573 655
Provision for loan losses 48 50 47 130 131 129
Depreciation and amortization expense 154 159 166 44 48 54
Noninterest expense 630 652 708 299 272 282
Expense sharing(a) 36 54 57 1 -- --
- -------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes
(taxable equivalent) and cumulative
effect of accounting changes 515 461 352 117 122 190
Allocated income taxes and taxable-equivalent
adjustments 200 180 138 49 53 78
- -------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of
accounting changes 315 281 214 68 69 112
Cumulative effect of accounting changes -- -- -- (24) -- --
- -------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 315 $ 281 $ 214 $ 44 $ 69 $ 112
======== ======== ======== ======== ======== ========
Percent of consolidated net income 239% 28% 19% 33% 7% 10%
Percent of total segments' net income 35 29 24 5 7 13
- -------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES
Loans $ 7,673 $ 7,653 $ 7,299 $ 15,594 $ 14,974 $ 14,364
Total assets(b) 9,025 9,130 8,844 16,609 16,129 15,535
Deposits 31,538 31,620 29,908 181 142 129
- -------------------------------------------------------------------------------------------------------------------------
OTHER FINANCIAL DATA
Expenditures for additions to long-lived
assets(b) $ 36 $ 33 $ 15 $ 8 $ 8 $ 24
- -------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
KEY CORPORATE FINANCE
------------------------------------
dollars in millions 2001 2000 1999
- ------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Net interest income (taxable equivalent) $ 1,404 $ 1,329 $ 1,222
Noninterest income 336 310 325
Revenue sharing(a) 133 132 113
- ------------------------------------------------------------------------------------
Total revenue(b) 1,873 1,771 1,660
Provision for loan losses 206 199 179
Depreciation and amortization expense 81 80 76
Noninterest expense 675 636 643
Expense sharing(a) 77 82 71
- -----------------------------------------------------------------------------------
Income (loss) before income taxes
(taxable equivalent) and cumulative
effect of accounting changes 834 774 691
Allocated income taxes and taxable-equivalent
adjustments 319 297 262
- -----------------------------------------------------------------------------------
Income (loss) before cumulative effect of
accounting changes 515 477 429
Cumulative effect of accounting changes -- -- --
- -----------------------------------------------------------------------------------
Net income (loss) $ 515 $ 477 $ 429
======== ======== ========
Percent of consolidated net income 390% 48% 39%
Percent of total segments' net income 56 50 48
- -----------------------------------------------------------------------------------
AVERAGE BALANCES
Loans $ 35,504 $ 34,654 $ 31,546
Total assets(b) 37,312 36,524 33,294
Deposits 6,640 6,421 6,077
- -----------------------------------------------------------------------------------
OTHER FINANCIAL DATA
Expenditures for additions to long-lived
assets(b) $ 19 $ 24 $ 20
- -----------------------------------------------------------------------------------
(a) Represents revenue and expense generated by Key Capital Partners that gets
assigned 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 for 2001 includes a $40 million ($25 million after tax)
loss recorded in connection with declines in leased vehicle residual values
and a $15 million ($9 million after tax) increase in the reserve for
customer derivative losses. Noninterest income also includes a gain of $332
million ($207 million after tax) in 2000 from the sale of Key's credit card
business and $357 million ($225 million after tax) in 1999 from
divestitures.
In addition, noninterest income includes $5 million ($3 million after tax)
in 2000 and $74 million ($47 million after tax) in 1999 earned by
since-divested businesses. These businesses also added $13 million ($8
million after tax) in 2000 and $175 million ($110 million after tax) in
1999 to net interest income.
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
Key's 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 911 KeyCenters (retail banking branches). These
KeyCenters are operated by relationship managers and supported by a telephone
banking call center, 2,333 ATMs that access 12 different networks (comprising
one of the largest ATM networks in the United States) and a leading-edge
Internet banking service, Key.com.(R)
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 home equity loans, education loans, automobile loans
and marine loans. As of December 31, 2001, based on the volume of loans
generated, Home Equity and Consumer Finance was one of the foremost lenders for
education, automobile purchases and purchases of marine 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. It operates one of the largest bank-affiliated equipment leasing
companies in the world, with operations in the United States, Canada, Europe,
Asia and the Pacific Rim. Key Corporate Finance also offers investment banking,
capital markets, 401(k) and trust custody products in cooperation with Key
Capital Partners.
Key Corporate Finance is organized around four primary lines of business:
National Commercial Real Estate, National Equipment Finance, Corporate Banking
and Small Business. Across Key's 12-state franchise, the Corporate Banking and
Small Business lines have a significant market share with clients ranging from
small businesses to large corporations. Nationally, Key Corporate Finance
provides financial services to the commercial real estate and equipment leasing
industries. It also serves the unique needs of firms operating in the media and
telecommunications, healthcare and technology industries. Based on total
transaction volume, it is one of the nation's leading providers of cash
management services.
KEY CAPITAL PARTNERS OTHER SEGMENTS TOTAL SEGMENTS
- ----------------------------------- ----------------------------------- ---------------------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------
$ 213 $ 206 $ 198 $ (151) $ (101) $ (66) $ 2,981 $ 2,892 $ 2,806
941 973 932 66 142 156 1,749 1,844 1,878
(186) (204) (181) -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------
968 975 949 (85) 41 90 4,730 4,736 4,684
10 10 8 4 5 7 398 395 370
98 92 95 1 1 1 378 380 392
856 864 849 26 32 42 2,486 2,456 2,524
(114) (136) (128) -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------
118 145 125 (116) 3 40 1,468 1,505 1,398
53 63 57 (89) (42) (26) 532 551 509
- -----------------------------------------------------------------------------------------------------------------
65 82 68 (27) 45 66 936 954 889
-- -- -- (1) -- -- (25) -- --
- -----------------------------------------------------------------------------------------------------------------
$ 65 $ 82 $ 68 $ (28) $ 45 $ 66 $ 911 $ 954 $ 889
======== ======== ======== ======== ======== ======== ======== ======== ========
49% 8% 6% (21)% 4% 6% 690% 95% 80%
7 9 8 (3) 5 7 100 100 100
- -----------------------------------------------------------------------------------------------------------------
$ 5,268 $ 5,440 $ 4,514 $ 1,833 $ 2,280 $ 2,834 $ 65,872 $ 65,001 $ 60,557
9,012 9,048 8,016 11,585 11,511 11,697 83,543 82,342 77,386
3,706 3,492 3,181 3,446 3,773 1,670 45,511 45,448 40,965
- -----------------------------------------------------------------------------------------------------------------
$ 17 $ 21 $ 72 $ 8 $ 17 $ 21 $ 88 $ 103 $ 152
- -----------------------------------------------------------------------------------------------------------------
RECONCILING ITEMS KEY
-------------------------------------- ------------------------------------
2001 2000 1999 2001 2000 1999
- ---------------------------------------------------------------------------------
$ (111) $ (134) $ 13 $ 2,870 $ 2,758 $ 2,819
(24) 350 437 1,725 2,194 2,315
-- -- -- -- -- --
- ---------------------------------------------------------------------------------
(135)(c) 216(c) 450(c) 4,595 4,952 5,134
952(d) 95(d) (22)(d) 1,350 490 348
152(e) 2 4 530 382 396
(75)(e) 79(e) 150(e) 2,411 2,535 2,674
-- -- -- -- -- --
- ---------------------------------------------------------------------------------
(1,164) 40 318 304 1,545 1,716
(385) (8) 100 147 543 609
- ---------------------------------------------------------------------------------
(779) 48 218 157 1,002 1,107
-- -- -- (25) -- --
- ---------------------------------------------------------------------------------
$ (779) $ 48 $ 218 $ 132 $ 1,002 $ 1,107
=========== ======== ======== ======== ======== =========
(590)% 5% 20% 100% 100% 100%
N/A N/A N/A N/A N/A N/A
- ---------------------------------------------------------------------------------
$ 104 $ 293 $ 1,844 $ 65,976 $ 65,294 $ 62,401
1,360(f) 1,693(f) 3,560(f) 84,903 84,035 80,946
(56) (13) 1,015 45,455 45,435 41,980
- ---------------------------------------------------------------------------------
$ 101 $ 97 $ 87 $ 189 $ 200 $ 239
- ---------------------------------------------------------------------------------
(d) The provision for loan losses for 2001 includes an additional $400 million
($252 million after tax) taken to increase the allowance for loan losses
for Key's continuing loan portfolio and an additional $490 million ($309
million after tax) recorded primarily in connection with Key's decision to
discontinue certain nonrelationship credit-only commercial lending. In
2000, the provision for loan losses includes an additional $121 million
($76 million after tax) that resulted from the implementation of an
enhanced methodology for assessing credit risk, particularly in the
commercial loan portfolio. In 1999, the provision includes an additional
$30 million ($19 million after tax) related to an enhancement of the
allowance methodology pertaining to the credit card portfolio.
(e) Noninterest expense for 2001 includes a goodwill write-down of $150 million
associated with Key's decision to downsize its automobile finance business,
a $20 million ($13 million after tax) increase in litigation reserves and
nonrecurring charges of $2 million ($1 million after tax) recorded in
connection with strategic actions being taken to improve Key's operating
efficiency and profitability.
Noninterest expense for 2000 includes $127 million (80 million after tax)
of nonrecurring charges recorded in connection with strategic actions being
taken to improve Key's operating efficiency and profitability and $5
million ($3 million after tax) incurred by the since-divested credit card
business.
Noninterest expense in 1999 includes $152 million ($96 million after tax)
of nonrecurring charges recorded in connection with strategic actions being
taken to improve Key's operating efficiency and profitability. Noninterest
expense for 1999 also includes special contributions of $23 million ($15
million after tax) made to the charitable foundation that Key sponsors, $42
million ($26 million after tax) of various other nonrecurring charges and
$74 million ($46 million after tax) incurred by since-divested businesses.
(f) Total assets represent primarily the unallocated portion of nonearning
assets of corporate support functions.
N/A = Not Applicable
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
KEY CAPITAL PARTNERS
Key Capital Partners offers specialized services to high-net-worth clients
through the wealth management and private banking businesses. It also provides
asset management, investment banking and capital markets expertise, and various
other services, including brokerage, employee benefits and insurance.
Key Capital Partners employs a range of distribution outlets, including Key's
existing retail banking branches and commercial offices.
The table that spans pages 64 and 65 shows selected financial data for each
major line of business for the years ended December 31, 2001, 2000 and 1999. The
financial information was derived from the internal profitability reporting
system that management uses to monitor and manage Key's financial performance.
The selected financial data are based on internal accounting policies designed
to ensure that results are compiled on a consistent basis and reflect the
underlying economics of the businesses. As such:
- - Net interest income is 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 "Other
Segments" columns.
- - Indirect expenses, such as computer servicing costs and corporate overhead,
are allocated based on the extent to which each line actually uses the
service.
- - The provision for loan losses reflects credit quality expectations 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 management uses to estimate Key's consolidated allowance
for loan losses. This methodology is described in Note 1 ("Summary of
Significant Accounting Policies") under the heading "Allowance for Loan
Losses," on page 59.
- - Income taxes are 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%.
- - Capital is assigned based on management's assessment of economic risk
factors (primarily credit, operating and market risk).
Developing and applying the methodologies that management uses to allocate items
among Key's lines of business is a dynamic process. Accordingly, financial
results may be revised periodically to reflect accounting enhancements, changes
in the risk profile of a particular business or changes in Key's structure. The
financial data presented in the accompanying table reflects the following
changes that occurred during 2001:
- - A number of businesses have been reclassified. The Key Electronic Services
unit moved from Other Segments to Retail Banking; the Small Business unit
moved from Retail Banking to Key Corporate Finance; the Community
Development unit moved from Key Corporate Finance to Retail Banking; and
the Principal Investing unit moved from Key Capital Partners to Other
Segments.
- - 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.
- - The methodologies used to apply funds transfer pricing and to allocate
certain balance sheet items and overhead costs were refined.
Accounting principles generally accepted in the United States guide financial
accounting, but there is no authoritative guidance for "management accounting"
- -- the way management uses its judgment and experience to make reporting
decisions. Consequently, the line of business results Key reports may not be
comparable with results presented by other companies.
5. SECURITIES
The amortized cost, unrealized gains and losses, and approximate fair value of
Key's securities were as follows:
DECEMBER 31, 2001 2000
-------------------------------------------- ------------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
in millions COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT SECURITIES
States and political
subdivisions $ 225 $ 9 -- $ 234 $ 323 $ 10 -- $ 333
Other securities 894 -- -- 894 875 -- -- 875
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment securities $1,119 $ 9 -- $1,128 $1,198 $ 10 -- $1,208
====== ====== ==== ====== ====== ====== ====== ======
- -----------------------------------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE
U.S. Treasury, agencies and
corporations $ 99 -- -- $ 99 $ 984 -- -- $ 984
States and political subdivisions 21 -- -- 21 33 -- -- 33
Collateralized mortgage obligations 3,791 $ 86 $ 72 3,805 4,296 $ 63 $ 61 4,298
Other mortgage-backed securities 1,008 24 -- 1,032 1,355 12 12 1,355
Retained interests in
securitizations 214 20 -- 234 334 -- 18 316
Other securities 170 1 16 155 307 42 6 343
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities available
for sale $5,303 $ 131 $ 88 $5,346 $7,309 $ 117 $ 97 $7,329
====== ====== ====== ====== ====== ====== ====== ======
- -----------------------------------------------------------------------------------------------------------------------------------
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
"Other securities" held in the investment securities portfolio are primarily
principal investing assets, which are carried on the balance sheet at fair
value.
When Key retains an interest in loans it securitizes, it bears risk that the
loans will be prepaid (which would reduce interest income) or not paid at all.
Key accounts for these retained interests (which include both certificated and
uncertificated interests) as debt securities, classifying them as available for
sale or as trading account assets.
"Other securities" held in the available for sale portfolio are primarily
marketable equity securities, including an internally managed portfolio of bank
common stock investments.
Realized gains and losses related to securities available for sale were as
follows:
YEAR ENDED DECEMBER 31,
in millions 2001 2000 1999
- --------------------------------------------------------------------------------
Realized gains $40 $ 59 $42
Realized losses 5 87 13
- --------------------------------------------------------------------------------
Net securities gains (losses) $35 $(28) $29
=== === ===
- --------------------------------------------------------------------------------
At December 31, 2001, securities available for sale and investment securities
with an aggregate amortized cost of approximately $4.7 billion were pledged to
secure public and trust deposits, securities sold under repurchase agreements,
and for other purposes required or permitted by law.
The following table shows securities available for sale and investment
securities by remaining contractual maturity. Included in securities available
for sale are collateralized mortgage obligations, other mortgage-backed
securities and retained interests in securitizations. All of these securities
are presented based on their expected average lives.
SECURITIES INVESTMENT
AVAILABLE FOR SALE SECURITIES
---------------------- ------------------
DECEMBER 31, 2001 AMORTIZED FAIR AMORTIZED FAIR
in millions COST VALUE COST VALUE
- --------------------------------------------------------------------------------
Due in one year or less $1,584 $1,630 $ 94 $ 95
Due after one through five years 3,044 3,119 96 103
Due after five through ten years 269 251 79 81
Due after ten years 406 346 850 849
- --------------------------------------------------------------------------------
Total $5,303 $5,346 $1,119 $1,128
====== ====== ====== ======
- --------------------------------------------------------------------------------
6. LOANS
Key's loans by category are summarized as follows:
DECEMBER 31,
in millions 2001 2000
- --------------------------------------------------------------------------------
Commercial, financial and agricultural $18,159 $20,100
Commercial real estate:
Commercial mortgage 6,669 6,876
Construction 5,878 5,154
- --------------------------------------------------------------------------------
Total commercial real estate loans 12,547 12,030
Commercial lease financing 7,357 7,164
- --------------------------------------------------------------------------------
Total commercial loans 38,063 39,294
Real estate-- residential mortgage 2,315 4,212
Home equity 11,184 9,908
Consumer-- direct 2,342 2,539
Consumer-- indirect:
Lease financing 2,036 3,005
Automobile 2,497 2,809
Marine 1,780 1,657
Other 1,036 1,252
- --------------------------------------------------------------------------------
Total consumer--indirect loans 7,349 8,723
- --------------------------------------------------------------------------------
Total consumer loans 23,190 25,382
Loans held for sale:
Real estate-- commercial mortgage 252 316
Real estate-- residential mortgage 116 42
Education 1,688 1,871
- --------------------------------------------------------------------------------
Total loans held for sale 2,056 2,229
- --------------------------------------------------------------------------------
Total loans $63,309 $66,905
======= =======
- --------------------------------------------------------------------------------
Key uses interest rate swaps to manage interest rate risk; these swaps modify
the repricing and maturity characteristics of certain loans. For more
information about such swaps at December 31, 2001, see Note 20 ("Derivatives and
Hedging Activities"), which begins on page 80.
Commercial and consumer lease financing receivables in the preceding table
include contracts that represent direct financing leases, leveraged leases and
operating leases. The composition of the net investment in the predominant form,
direct financing leases, is as follows:
DECEMBER 31,
in millions 2001 2000
- --------------------------------------------------------------------------------
Direct financing lease receivable $ 6,899 $ 8,027
Unearned income (897) (1,097)
Unguaranteed residual value 597 648
Deferred fees and costs 120 100
- --------------------------------------------------------------------------------
Net investment in direct financing leases $ 6,719 $ 7,678
======= ========
- --------------------------------------------------------------------------------
Minimum future lease payments to be received at December 31, 2001, are as
follows: 2002-- $1,496 million; 2003-- $1,413 million; 2004 -- $1,115 million;
2005 -- $873 million; 2006 -- $771 million; and all subsequent years -- $1,231
million.
Changes in the allowance for loan losses are summarized as follows:
YEAR ENDED DECEMBER 31,
in millions 2001 2000 1999
- --------------------------------------------------------------------------------
Balance at beginning of year $ 1,001 $ 930 $ 900
Charge-offs (784) (522) (420)
Recoveries 111 108 102
- --------------------------------------------------------------------------------
Net charge-offs (673) (414) (318)
Allowance related to loans sold (1) (5) --
Provision for loan losses 1,350 490 348
- --------------------------------------------------------------------------------
Balance at end of year $ 1,677 $ 1,001 $ 930
======= ======= =======
- --------------------------------------------------------------------------------
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
7. RETAINED INTERESTS IN LOAN SECURITIZATIONS
Key sells certain types of loans through securitizations. A securitization
involves the sale of a pool of loan receivables to investors through either a
public or private issuance of asset-backed securities. Generally, the assets are
transferred to a trust that sells interests in the form of certificates of
ownership. In some cases, Key retains an interest in the securitized loans.
Certain assumptions and estimates are used to determine the fair value allocated
to these retained interests at the date of transfer and at subsequent
measurement dates. These assumptions and estimates include loan repayment rates,
projected charge-offs and discount rates commensurate with the risks involved.
Additional information pertaining to Key's residual interests is disclosed in
Note 1 ("Summary of Significant Accounting Policies") under the heading "Loan
Securitizations" on page 59.
During 2001 and 2000, Key securitized and sold $523 million and $1.1 billion,
respectively, of education loans (including accrued interest).
The securitizations resulted in an aggregate gain of $11 million in 2001 and $18
million in 2000. In these transactions, Key retained residual interests in the
form of servicing assets and interest-only strips. During 2001, Key retained a
servicing asset of $4 million and an interest-only strip of $16 million. During
2000, Key retained servicing assets of $7 million and interest-only strips of
$48 million. The primary assumptions and rates used to measure the fair value of
these retained interests are essentially the same as those disclosed in the
following table. In 2001 and 2000, Key received gross cash proceeds of $534
million and $1.1 billion, respectively, from new securitizations from the
education lending securitization trusts.
Primary economic assumptions used to measure the fair value of Key's retained
interests and the sensitivity of the current fair value of residual cash flows
to immediate adverse changes in those assumptions are as follows:
DECEMBER 31, 2001 EDUCATION HOME EQUITY AUTOMOBILE
dollars in millions LOANS LOANS LOANS
- ---------------------------------------------------------------------------------------------------
Carrying amount (fair value) of
retained interests $223 $106 $10
Weighted-average life (years) 1.6-5.1 2.3-2.9 .8
- ---------------------------------------------------------------------------------------------------
PREPAYMENT SPEED ASSUMPTIONS (ANNUAL RATE) 7.99%-- 16.32% 23.83%-- 27.69% 1.59%
Impact on fair value of 1% CPR
(education and home equity)
and .10% ABS (automobile)
adverse change $(4) $(1) --
Impact on fair value of 2% CPR
(education and home equity)
and .20% ABS (automobile)
adverse change (9) (3) --
- ---------------------------------------------------------------------------------------------------
EXPECTED CREDIT LOSSES (STATIC RATE) .01%-- 1.58% 1.26%-- 2.27% 5.51%
Impact on fair value of .10% (education)
and .25% (home equity and automobile)
adverse change $(5) $(5) $(1)
Impact on fair value of .20% (education)
and .50% (home equity and automobile)
adverse change (11) (9) (2)
- ---------------------------------------------------------------------------------------------------
RESIDUAL CASH FLOWS DISCOUNT RATE
(ANNUAL RATE) 8.50%-- 12.00% 7.50%-- 12.00% 9.00%
Impact on fair value of 1%
adverse change $(5) $(2) --
Impact on fair value of 2%
adverse change (10) (4) --
- ---------------------------------------------------------------------------------------------------
EXPECTED STATIC DEFAULT (STATIC RATE) 10.46%-- 16.04% N/A N/A
Impact on fair value of 1% (education
loans) adverse change $(5) N/A N/A
Impact on fair value of 2% (education
loans) adverse change (9) N/A N/A
- ---------------------------------------------------------------------------------------------------
VARIABLE RETURNS TO TRANSFEREES (a) (b) (c)
- ---------------------------------------------------------------------------------------------------
These sensitivities are hypothetical and should be relied upon with caution.
Sensitivity analysis for each asset type is based on the nature of the asset,
the seasoning of the portfolio and the results experienced. Changes in fair
value based on a 1% variation in assumptions generally cannot be extrapolated
because the relationship of the change in assumption to the change in fair value
may not be linear. Also, the effect of a variation in a particular assumption on
the fair value of the retained interest is calculated without changing any other
assumption; in reality, changes in one factor may cause changes in another. For
example, increases in market interest rates may result in lower prepayments and
increased credit losses, which might magnify or counteract the sensitivities.
(a) Forward Libor plus contractual spread over Libor ranging from .07% to .75%,
or Treasury plus contractual spread over Treasury ranging from .65% to
1.00% or fixed rate yield.
(b) Forward Libor plus contractual spread over Libor ranging from .23% to .40%,
or Treasury plus contractual spread over Treasury ranging from 2.40% to
2.95% or fixed rate yield.
(c) Fixed rate yield.
CPR = Constant Prepayment Rate
ABS = Absolute Prepayment Speed
N/A = Not Applicable
Information about Key's managed loans, delinquencies and net credit losses is as
follows:
DECEMBER 31, 2001
--------------------------------
LOAN LOANS PAST DUE NET CREDIT LOSSES
in millions PRINCIPAL 60 DAYS OR MORE DURING 2001
- ------------------------------------------------------------------------------------------------------------
Education loans $ 6,121 $ 163 $ 13
Home equity loans 11,952 200 104
Automobile loans 2,628 41 106
- ------------------------------------------------------------------------------------------------------------
Total loans managed and securitized 20,701 404 223
Less:
Loans securitized 5,332 238 20
Loans held for sale or securitization 1,688 -- --
- ------------------------------------------------------------------------------------------------------------
Loans held in portfolio $13,681 $ 166 $ 203
======= ======= =======
- ------------------------------------------------------------------------------------------------------------
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
8. IMPAIRED LOANS AND OTHER NONPERFORMING ASSETS
At December 31, 2001, impaired loans totaled $661 million. This amount includes
$417 million of impaired loans with a specifically allocated allowance for loan
losses of $180 million, and $244 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 $396 million, including $236 million of
loans with a specifically allocated allowance of $107 million, and $160 million
that were carried at their estimated fair value. Impaired loans averaged $535
million for 2001, and $337 million for 2000.
Key's nonperforming assets were as follows:
DECEMBER 31,
in millions 2001 2000
- ----------------------------------------------------------------
Impaired loans $661 $396
Other nonaccrual loans 249 251
- ----------------------------------------------------------------
Total nonaccrual loans 910 647
Restructured loans(a) -- 3
- ----------------------------------------------------------------
Total nonperforming loans 910 650
OREO 38 23
Allowance for OREO losses (1) (1)
- ----------------------------------------------------------------
OREO, net of allowance 37 22
Other nonperforming assets -- --
- ----------------------------------------------------------------
Total nonperforming assets $947 $672
==== ====
- ----------------------------------------------------------------
(a) Excludes restructured loans on nonaccrual status.
At December 31, 2001, Key did not have any significant commitments to lend
additional funds to borrowers with restructured loans or loans on nonaccrual
status.
Key evaluates most impaired loans individually using the process described under
the heading "Allowance for Loan Losses," on page 59. However, Key does not
perform a specific impairment valuation for smaller-balance, homogeneous,
nonaccrual loans (shown in the preceding table as "Other nonaccrual loans").
Generally, these include residential mortgages and automobile and marine loans.
Instead, management applies historical loss experience rates to these loans,
adjusted to reflect emerging credit trends and other factors, and then allocates
a portion of the allowance for loan losses to each loan type.
The following table shows the amount by which loans classified as nonperforming
at December 31 reduced Key's expected interest income.
Year ended December 31,
in millions 2001 2000 1999
- -----------------------------------------------------------------
Interest income receivable under
original terms $52 $62 $38
Less: Interest income recorded
during the year 21 25 15
- -----------------------------------------------------------------
Net reduction to interest income $31 $37 $23
=== === ===
- -----------------------------------------------------------------
9. SHORT-TERM BORROWINGS
Selected financial information pertaining to the components of Key's short-term
borrowings is as follows:
dollars in millions 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
FEDERAL FUNDS PURCHASED
Balance at year end $2,591 $3,267 $1,883
Average during the year 3,575 2,991 2,254
Maximum month-end balance 5,034 4,693 3,712
Weighted average rate during the year 4.00% 6.42% 5.01%
Weighted average rate at December 31 1.72 6.68 5.54
- -----------------------------------------------------------------------------------------------------------------------------------
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Balance at year end $1,144 $1,669 $2,294
Average during the year 1,622 1,940 2,602
Maximum month-end balance 1,807 2,447 2,969
Weighted average rate during the year 3.39% 4.90% 4.11%
Weighted average rate at December 31 1.80 6.01 4.45
- -----------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM BANK NOTES
Balance at year end $3,748 $4,345 $6,379
Average during the year 4,649 5,021 5,633
Maximum month-end balance 6,098 6,834 7,174
Weighted average rate during the year 5.01% 7.35% 5.54%
Weighted average rate at December 31 2.16 8.28 6.46
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER SHORT-TERM BORROWINGS
Balance at year end $1,801 $2,612 $2,060
Average during the year 2,179 2,100 2,279
Maximum month-end balance 2,841 2,326 3,452
Weighted average rate during the year 2.39% 3.10% 4.04%
Weighted average rate at December 31 2.18 3.31 3.43
- -----------------------------------------------------------------------------------------------------------------------------------
Key uses interest rate swaps and caps, which modify the repricing and maturity
characteristics of certain short-term borrowings, to manage interest rate risk.
For more information about such financial instruments at December 31, 2001, see
Note 20 ("Derivatives and Hedging Activities"),which begins on page 80.
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
Key has several programs that support short-term financing needs.
BANK NOTE PROGRAM. This program provides for the issuance of up to $20.0 billion
($19.0 billion by KeyBank National Association and $1.0 billion by Key Bank USA,
National Association) of bank notes with original maturities of 30 days to 30
years. At December 31, 2001, the amount of bank notes available for issuance by
KeyBank National Association under the program was $8.2 billion.
EURO NOTE PROGRAM. KeyCorp, KeyBank National Association and Key Bank USA,
National Association may issue both long- and short-term debt of up to $10.0
billion to non-U.S. investors. This facility had $4.0 billion of long-term
borrowings outstanding and $5.7 billion available for future issuance as of
December 31, 2001.
COMMERCIAL PAPER AND REVOLVING CREDIT. KeyCorp's commercial paper program and
revolving credit agreement provide funding availability of up to $500 million
and $400 million, respectively. Borrowings outstanding under the commercial
paper program totaled $25 million at December 31, 2001, and $315 million at
December 31, 2000. There were no borrowings outstanding under the revolving
credit agreement at December 31, 2001 and 2000. This agreement serves as a
back-up facility for the commercial paper program.
LINE OF CREDIT. KeyBank National Association has overnight borrowing capacity at
the Federal Reserve Bank. At December 31, 2001, this capacity was approximately
$16.5 billion and was secured by approximately $25.0 billion of primarily
commercial loans. There were no borrowings outstanding under this facility at
December 31, 2001 and 2000.
PARENT COMPANY NOTE PROGRAM. This program provides for the issuance of up to
$1.0 billion of notes with original maturities of 30 days to 30 years. At
December 31, 2001, the amount of notes available for issuance under the program
was $1.0 billion.
10. LONG-TERM DEBT
The components of Key's long-term debt, presented net of unamortized discount
where applicable, were as follows:
DECEMBER 31,
dollars in millions 2001 2000
- -----------------------------------------------------------------
Senior medium-term notes due through 2005(a) $ 1,286 $ 393
Subordinated medium-term notes
due through 2005(a) 85 103
Senior euro medium-term notes
due through 2003(b) 50 --
7.50% Subordinated notes due 2006(c) 250 250
6.75% Subordinated notes due 2006(c) 200 200
8.125% Subordinated notes due 2002(c) 200 199
8.00% Subordinated notes due 2004(c) 125 125
8.404% Notes due through 2001 -- 13
All other long-term debt(i) 16 --
- -----------------------------------------------------------------
Total parent company(j) 2,212 1,283
Senior medium-term bank notes
due through 2039(d) 4,525 5,979
Senior euro medium-term bank notes
due through 2007(e) 3,989 3,955
6.50% Subordinated remarketable securities
due 2027(f) 311 312
6.95% Subordinated notes due 2028(f) 300 300
7.125% Subordinated notes due 2006(f) 250 250
7.25% Subordinated notes due 2005(f) 200 200
6.75% Subordinated notes due 2003(f) 200 200
7.50% Subordinated notes due 2008(f) 165 165
7.00% Subordinated notes due 2011(f) 506 --
7.30% Subordinated notes due 2011(f) 107 107
7.85% Subordinated notes due 2002(f) 93 93
7.55% Subordinated notes due 2006(f) 75 75
7.375% Subordinated notes due 2008(f) 70 70
Lease financing debt due through 2006(g) 519 581
Federal Home Loan Bank advances
due through 2030(h) 762 452
All other long-term debt(i) 270 139
- -----------------------------------------------------------------
Total subsidiaries 12,342 12,878
- -----------------------------------------------------------------
Total long-term debt $14,554 $14,161
======= =======
- -----------------------------------------------------------------
Key uses interest rate swaps and caps, which modify the repricing and maturity
characteristics of certain long-term debt, to manage interest rate risk. For
more information about such financial instruments at December 31, 2001, see Note
20 ("Derivatives and Hedging Activities"), which begins on page 80.
(a) At December 31, 2001, the senior medium-term notes had a weighted average
interest rate of 2.51%, and the subordinated medium-term notes had a
weighted average interest rate of 7.42%. At December 31, 2000, the senior
medium-term notes had a weighted average interest rate of 6.81%, and the
subordinated medium-term notes had a weighted average interest rate of
7.32%. These notes had a combination of fixed and floating interest rates.
(b) Senior euro medium-term notes had a weighted average interest rate of 2.33%
at December 31, 2001. These notes had a floating interest rate based on the
three-month London Interbank Offered Rate (known as "LIBOR").
(c) The notes may not be redeemed or prepaid prior to maturity.
(d) Senior medium-term bank notes of subsidiaries had weighted average interest
rates of 2.45% at December 31, 2001, and 6.72% at December 31, 2000. These
notes had a combination of fixed and floating interest rates.
(e) The senior euro medium-term notes had weighted average interest rates of
2.58% at December 31, 2001, and 6.89% at December 31, 2000. These notes,
which are obligations of KeyBank National Association, had fixed and
floating interest rates based on LIBOR.
(f) These notes and securities are 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.
(g) Lease financing debt had weighted average interest rates of 7.41% at
December 31, 2001, and 7.80% at December 31, 2000. This category comprises
primarily nonrecourse debt for which equipment held under operating, direct
financing or sales type leases serves as collateral.
(h) Long-term advances from the Federal Home Loan Bank had weighted average
interest rates of 2.19% at December 31, 2001, and 6.66% at December 31,
2000. These advances, which had a combination of fixed and floating
interest rates, were secured by real estate loans and securities totaling
$1.1 billion at December 31, 2001, and $678 million at December 31, 2000.
(i) Other long-term debt, consisting of industrial revenue bonds, capital lease
obligations, and various secured and unsecured obligations of corporate
subsidiaries, had weighted average interest rates of 6.72% at December 31,
2001, and 7.91% at December 31, 2000.
(j) At December 31, 2001, unused capacity under KeyCorp's shelf registration
totaled $2.2 billion, including $1.0 billion reserved for issuance as
medium-term notes.
Scheduled principal payments on long-term debt over the next five years are
as follows:
in millions PARENT SUBSIDIARIES TOTAL
- ------------------------------------------------------------
2002 $500 $3,861 $4,361
2003 773 3,381 4,154
2004 490 2,021 2,511
2005 3 836 839
2006 450 662 1,112
- ------------------------------------------------------------
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
11. CAPITAL SECURITIES
KeyCorp has five subsidiary business trusts that have issued
corporation-obligated mandatorily redeemable preferred capital securities
("capital securities"), which are carried as liabilities on Key's balance sheet.
These securities provide an attractive source of funds since they are given Tier
I capital treatment for financial reporting purposes, but have the same tax
advantages as debt for Federal income tax purposes. As guarantor, KeyCorp
unconditionally guarantees payment of:
- - required distributions -- both accrued and unpaid -- on the capital
securities;
- - the redemption price when a capital security is redeemed; and
- - amounts due if a trust is liquidated or terminated.
KeyCorp owns the outstanding common stock of each of the trusts. The trusts used
the proceeds from the issuance of their capital securities and common stock to
buy debentures issued by 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 effects on the income statement because they are eliminated in
consolidation.
The capital securities, common stock and related debentures are summarized as
follows:
Principal Interest Rate Maturity
Capital Amount of of Capital of Capital
Securities, Common Debentures, Securities and Securities and
dollars in millions Net of Discount(a) Stock Net of Discount(b) Debentures(c) Debentures
- ---------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2001
KeyCorp Institutional Capital A $ 372 $11 $ 361 7.826% 2026
KeyCorp Institutional Capital B 160 4 154 8.250 2026
KeyCorp Capital I 247 8 255 3.340 2028
KeyCorp Capital II 242 8 255 6.875 2029
KeyCorp Capital III 267 8 257 7.750 2029
- ---------------------------------------------------------------------------------------------------------------------------------
Total $1,288 $39 $1,282 6.824% --
====== === ======
- ---------------------------------------------------------------------------------------------------------------------------------
December 31, 2000 $1,243 $39 $1,282 7.619% --
====== === ======
- ---------------------------------------------------------------------------------------------------------------------------------
(a) The capital securities must be redeemed when the related debentures mature,
or earlier if provided in the governing indenture. Each issue of capital
securities carries an interest rate identical to that of the related
debenture. The capital securities constitute minority interests in the
equity accounts of KeyCorp's consolidated subsidiaries and, therefore,
qualify as Tier 1 capital under Federal Reserve Board guidelines. Included
in certain capital securities at December 31, 2001, are basis adjustments
of $45 million related to fair value hedges.
(b) KeyCorp has the right to redeem its debentures: (i) in whole or in part, on
or after December 1, 2006 (for debentures owned by Capital A), December 15,
2006 (for debentures owned by Capital B), July 1, 2008 (for debentures
owned by Capital I), March 18, 1999 (for debentures owned by Capital II),
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 be the greater of:
(a) the principal amount, plus any accrued but unpaid interest or (b) the
sum of the present values of principal and interest payments discounted at
the Treasury Rate (as defined in the applicable offering circular), plus 20
basis points (25 basis points for Capital III), plus any accrued but unpaid
interest. When debentures are redeemed in response to tax or capital
treatment events, the redemption price 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 equal to three-month LIBOR
plus 74 basis points; it reprices quarterly. The rates shown as the total
at December 31, 2001 and 2000, are weighted average rates.
12. SHAREHOLDERS' EQUITY
SHAREHOLDER RIGHTS PLAN
KeyCorp has a shareholder rights plan, which was first adopted in 1989 and has
since been amended. Under the plan, each shareholder received one Right --
representing the right to purchase a common share for $82.50 -- for each KeyCorp
common share owned. All of the Rights expire on May 14, 2007, but KeyCorp may
redeem Rights earlier for $.005 apiece, subject to certain limitations.
Rights will become exercisable if a person or group acquires 15% or more of
KeyCorp's outstanding shares. Until that time, the Rights will trade with the
common shares; any transfer of a common share will also constitute a transfer of
the associated Right. If the Rights become exercisable, they will begin to trade
apart from the common shares. If one of a number of "flip-in events" occurs,
each Right will entitle the holder to purchase a KeyCorp common share for $1.00
(the par value per share), and the Rights held by a 15% or more shareholder will
become void.
CAPITAL ADEQUACY
KeyCorp and its banking subsidiaries must meet specific capital requirements
imposed by banking industry regulators. Sanctions for failure to meet applicable
capital requirements may include regulatory enforcement actions that restrict
dividend payments, require increased capital, terminate Federal Deposit
Insurance Corporation ("FDIC") deposit insurance, and mandate the appointment of
a conservator or receiver in severe cases. As of December 31, 2001, KeyCorp and
its banking subsidiaries met all necessary capital requirements.
Federal bank regulators apply certain capital ratios to assign FDIC-insured
depository institutions to one of five categories: "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
and "critically undercapitalized." At December 31, 2001 and 2000, the most
recent regulatory notification categorized each of KeyCorp's subsidiary banks as
"well capitalized." Management
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
believes that there have not been any changes in condition or events since those
notifications that would cause the banks' categorizations to change.
Unlike bank subsidiaries, bank holding companies are not categorized by capital
adequacy. However, Key satisfied the criteria for a "well capitalized"
institution at December 31, 2001 and 2000. The FDIC-defined capital categories
serve a limited regulatory function and may not accurately represent the overall
financial condition or prospects of Key or its affiliates.
The following table presents Key and KeyBank National Association's actual
capital amounts and ratios, minimum capital amounts and ratios prescribed by
regulatory guidelines, and capital amounts and ratios required to qualify as
"well capitalized" under the Federal Deposit Insurance Act.
To Qualify as Well
To Meet Minimum Capitalized
Capital Adequacy Under Federal Deposit
Actual Requirements Insurance Act
------------------------ ------------------------ -------------------------
dollars in millions Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------------------
December 31, 2001
TOTAL CAPITAL TO NET RISK-WEIGHTED ASSETS
Key $9,548 11.41% $6,696 8.00% N/A N/A
KeyBank National Association 7,970 10.63 5,993 8.00 $7,492 10.00%
TIER 1 CAPITAL TO NET RISK-WEIGHTED ASSETS
Key $6,222 7.43% $3,348 4.00% N/A N/A
KeyBank National Association 5,170 6.90 2,997 4.00 $4,495 6.00%
TIER 1 CAPITAL TO AVERAGE ASSETS
Key $6,222 7.65% $2,440 3.00% N/A N/A
KeyBank National Association 5,170 7.13 2,897 4.00 $3,622 5.00%
- ---------------------------------------------------------------------------------------------------------------------------------
December 31, 2000
TOTAL CAPITAL TO NET RISK-WEIGHTED ASSETS
Key $9,637 11.48% $6,718 8.00% N/A N/A
KeyBank National Association 8,491 11.03 6,158 8.00 $7,697 10.00%
TIER 1 CAPITAL TO NET RISK-WEIGHTED ASSETS
Key $6,484 7.72% $3,359 4.00% N/A N/A
KeyBank National Association 6,030 7.83 3,079 4.00 $4,618 6.00%
TIER 1 CAPITAL TO AVERAGE ASSETS
Key $6,484 7.71% $2,522 3.00% N/A N/A
KeyBank National Association 6,030 7.98 3,022 4.00 $3,778 5.00%
- ---------------------------------------------------------------------------------------------------------------------------------
N/A = Not Applicable
13. STOCK OPTIONS
Key's compensation plans allow for the granting of stock options, stock
appreciation rights, limited stock appreciation rights, restricted stock and
performance shares to eligible employees and directors. Under all of the option
plans, exercise prices cannot be less than the fair value of Key's common stock
on the grant date. Generally, options become exercisable at the rate of 33% per
year beginning one year from their grant date and expire no later than 10 years
from their grant date.
At December 31, 2001, KeyCorp had 8,480,101 common shares available for future
grant, compared with 8,465,078 at December 31, 2000.
The following table summarizes activity, pricing and other information about
Key's stock options.
2001 2000
------------------------------ --------------------------------
Weighted Average Weighted Average
Options Price Per Option Options Price Per Option
- --------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 34,291,153 $23.72 29,481,297 $24.72
Granted 7,377,680 28.02 9,345,858 19.53
Exercised 2,212,746 14.96 1,931,652 14.50
Lapsed or canceled 5,209,764 27.27 2,604,350 26.82
- --------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 34,246,323 $24.66 34,291,153 $23.72
- --------------------------------------------------------------------------------------------------------------------------------
Exercisable at end of year 19,501,856 $24.80 20,662,121 $19.74
- --------------------------------------------------------------------------------------------------------------------------------
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
The following table summarizes the range of exercise prices and other related
information pertaining to Key's stock options at December 31, 2001.
Weighted Weighted Average Weighted
Range of Options Average Price Remaining Options Average Price
Exercise Prices Outstanding Per Option Life (Years) Exercisable Per Option
- ---------------------------------------------------------------------------------------------------------------------------------
$4.13-$14.99 3,892,959 $14.15 2.1 3,832,037 $14.16
15.00-19.99 6,480,166 17.50 6.3 2,777,670 17.31
20.00-24.99 4,410,234 21.70 8.1 1,802,625 21.74
25.00-29.99 9,257,245 27.68 8.2 2,166,690 26.51
30.00-34.99 9,882,719 31.38 6.6 8,599,834 31.48
35.00-50.00 323,000 43.44 6.8 323,000 43.44
- ---------------------------------------------------------------------------------------------------------------------------------
Total 34,246,323 $24.66 6.7 19,501,856 $24.80
=================================================================================================================================
SFAS No. 123, "Accounting for Stock-Based Compensation," requires companies like
Key that use the "intrinsic value method" to account for employee stock options
to provide pro forma disclosures of the net income and earnings per share effect
of stock options using the "fair value method." Under the intrinsic value
method, the excess of the fair value of the stock over the exercise price is
recorded as expense on the date at which both the number of shares the recipient
is entitled to receive and the exercise price are known.
Management estimated the fair value of options granted using the Black-Scholes
option-pricing model. This model was originally developed to estimate the fair
value of exchange-traded equity options, which (unlike employee stock options)
have no vesting period or transferability restrictions. As a result, the
Black-Scholes model is not a perfect indicator of the value of an option, but it
is commonly used for this purpose.
The Black-Scholes model requires several assumptions, which management developed
based on historical trends and current market observations. These assumptions
include:
- - an average option life of 3.9 years in 2001, 4.7 years in 2000 and 4.3 years
in 1999;
- - a future dividend yield of 4.22% in 2001, 5.83% in 2000 and 3.4% in 1999;
- - share price volatility of .330 in 2001, .267 in 2000 and .256 in 1999; and
- - a weighted average risk-free interest rate of 5.0% in 2001, 6.6% in 2000 and
4.9% in 1999.
If these assumptions are not accurate, the estimated fair values used to derive
the information presented in the following table also will be inaccurate.
Moreover, the model assumes that the estimated fair value of an option is
amortized over the option's vesting period and would be included in personnel
expense on the income statement. The pro forma impact of applying the fair value
method of accounting for the years shown below may not be indicative of the pro
forma impact in future years.
YEAR ENDED DECEMBER 31,
in millions, except per share amounts 2001 2000 1999
- -----------------------------------------------------------------------
Net income $132 $1,002 $1,107
Net income -- pro forma 107 985 1,085
Per common share:
Net income $.31 $2.32 $2.47
Net income -- pro forma .25 2.28 2.42
Net income assuming dilution .31 2.30 2.45
Net income assuming dilution --
pro forma .25 2.24 2.39
- -----------------------------------------------------------------------
14. RESTRUCTURING CHARGES
During 2001, KeyCorp recorded a restructuring charge credit of $4 million ($2
million after tax) in connection with a competitiveness initiative instituted in
November 1999 to improve Key's operating efficiency and profitability.
Restructuring charges previously recorded 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 outsourced certain technology and
corporate support functions, consolidated sites in a number of Key's businesses
and reduced the number of management layers. This phase was completed last year.
The second and final phase, which started during the second half of 2000, is
focusing on:
- - simplifying Key's business structure by consolidating 22 business lines into
10;
- - 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 initiative, Key estimated that it would reduce its workforce
by approximately 4,000 positions. Those reductions were to occur at all levels
throughout the organization. At December 31, 2001, nearly 3,900 positions had
been eliminated. Management expects to eliminate the remaining positions -- both
staffed and vacant -- by the end of the first quarter of 2002.
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
Changes in the components of the restructuring charge liability associated with
the actions discussed on page 73 are as follows:
December 31, Restructuring Cash December 31,
in millions 2000 Charges (Credits) Payments 2001
- --------------------------------------------------------------------------------------------------------------------
Severance $ 62 $(7) $28 $27
Site consolidations 60 4 31 33
Equipment and other 2 (1) -- 1
- --------------------------------------------------------------------------------------------------------------------
Total $124 $(4) $59 $61
==== === === ===
====================================================================================================================
15. EMPLOYEE BENEFITS
PENSION PLANS
Net periodic and total pension income for all funded and unfunded plans includes
the following components.
YEAR ENDED DECEMBER 31,
in millions 2001 2000 1999
- --------------------------------------------------------------------------------
Service cost of benefits earned $ 37 $ 37 $ 28
Interest cost on projected
benefit obligation 53 53 47
Expected return on plan assets (95) (90) (82)
Amortization of unrecognized
net transition asset (2) (5) (5)
Amortization of prior service cost 1 2 2
Amortization of losses 1 1 3
- --------------------------------------------------------------------------------
Net periodic pension income (5) (2) (7)
Curtailment gain -- (2) --
- --------------------------------------------------------------------------------
Total pension income $ (5) $ (4) $ (7)
==== ==== ====
===============================================================================
The curtailment gain in the above table resulted from Key's competitiveness
initiative and related reduction in workforce.
Changes in the projected benefit obligation ("PBO") related to Key's pension
plans are summarized as follows:
YEAR ENDED DECEMBER 31,
in millions 2001 2000
- -------------------------------------------------------------------------------
PBO at beginning of year $715 $725
Service cost 37 37
Interest cost 53 53
Actuarial (gains) losses 57 (21)
Curtailments -- (1)
Benefit payments (75) (78)
- --------------------------------------------------------------------------------
PBO at end of year $787 $715
==== ====
- --------------------------------------------------------------------------------
Changes in the fair value of pension plan assets ("FVA") are summarized as
follows:
YEAR ENDED DECEMBER 31,
in millions 2001 2000
- --------------------------------------------------------------------------------
FVA at beginning of year $ 1,062 $ 1,007
Actual return (loss) on plan assets (121) 125
Employer contributions 9 8
Benefit payments (75) (78)
- --------------------------------------------------------------------------------
FVA at end of year $ 875 $ 1,062
======= =======
- --------------------------------------------------------------------------------
The funded status of the pension plans at September 30 (the actuarial
measurement date), reconciled to the amounts recognized in the consolidated
balance sheets at December 31, 2001 and 2000, is as follows:
DECEMBER 31,
in millions 2001 2000
- --------------------------------------------------------------------------------
Funded status(a) $ 88 $ 346
Unrecognized net (gain) loss 156 (114)
Unrecognized prior service benefit (4) (3)
Unrecognized net transition asset -- (3)
Benefits paid subsequent to measurement date 3 2
- --------------------------------------------------------------------------------
Net prepaid pension cost $ 243 $ 228
======= =======
- --------------------------------------------------------------------------------
(a) The excess of the fair value of plan assets over the projected benefit
obligation.
Key provides certain nonqualified supplemental executive retirement programs
that are unfunded and reflected in the above table. At December 31, 2001, the
projected benefit obligation for these unfunded plans was $132 million (compared
with $109 million at the end of 2000), and the accumulated benefit obligation
was $128 million (compared with $103 million at the end of 2000). The amount of
accrued pension cost for these plans was $89 million at December 31, 2001, and
$85 million at December 31, 2000.
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
In order to determine the actuarial present value of benefit obligations and net
pension income, management assumed the following weighted average rates.
YEAR ENDED DECEMBER 31, 2001 2000 1999
- -----------------------------------------------------------------
Discount rate 7.25% 7.75% 7.50%
Compensation increase rate 4.00 4.00 4.00
Expected return on plan assets 9.75 9.75 9.75
- -----------------------------------------------------------------
OTHER POSTRETIREMENT BENEFIT PLANS
Key sponsors a contributory postretirement healthcare plan. Retirees'
contributions are adjusted annually to reflect certain cost-sharing provisions
and benefit limitations. Key also sponsors life insurance plans covering certain
grandfathered employees. These plans are principally noncontributory.
Net periodic and total postretirement benefits cost includes the following
components.
YEAR ENDED DECEMBER 31,
in millions 2001 2000 1999
- ------------------------------------------------------------------------
Service cost of benefits earned $ 3 $ 3 $ 3
Interest cost on accumulated
postretirement benefit obligation 8 7 7
Expected return on plan assets (2) (2) (1)
Amortization of transition obligation 4 5 5
- -----------------------------------------------------------------------
Net postretirement benefits cost 13 13 14
Curtailment (gain) loss (1) 5 2
- -----------------------------------------------------------------------
Total postretirement benefits cost $ 12 $ 18 $ 16
==== ==== ====
- -----------------------------------------------------------------------
The curtailment activity in the above table resulted from the previously
mentioned competitiveness initiative and workforce reduction.
Changes in the accumulated postretirement benefit obligation ("APBO") are
summarized as follows:
YEAR ENDED DECEMBER 31,
in millions 2001 2000
- --------------------------------------------------------------------------------
APBO at beginning of year $ 106 $ 106
Service cost 3 3
Interest cost 8 7
Plan participants' contributions 4 4
Actuarial losses 9 1
Plan amendments -- 2
Curtailments -- (3)
Benefit payments (16) (14)
- --------------------------------------------------------------------------------
APBO at end of year $ 114 $ 106
======= =======
- --------------------------------------------------------------------------------
Changes in the fair value of postretirement plan assets are summarized as
follows:
YEAR ENDED DECEMBER 31,
in millions 2001 2000
- --------------------------------------------------------------------------------
FVA at beginning of year $ 38 $ 31
Employer contributions 19 15
Plan participants' contributions 4 3
Benefit payments (16) (12)
Actual return (loss) on plan assets (6) 1
- --------------------------------------------------------------------------------
FVA at end of year $ 39 $ 38
======= =======
- --------------------------------------------------------------------------------
The funded status of the postretirement plans at September 30 (the actuarial
measurement date), reconciled to the amounts recognized in the consolidated
balance sheets at December 31, 2001 and 2000, is as follows:
YEAR ENDED DECEMBER 31,
in millions 2001 2000
- -------------------------------------------------------------------------------
Funded status(a) $ (76) $ (69)
Unrecognized net (gain) loss 12 (5)
Unrecognized prior service cost 3 3
Unrecognized transition obligation 44 46
Contributions/benefits paid subsequent
to measurement date 9 10
- -------------------------------------------------------------------------------
Accrued postretirement benefit cost $ (8) $ (15)
======= =======
- -------------------------------------------------------------------------------
(a) The excess of the accumulated postretirement benefit obligation over the
fair value of plan assets.
The assumed weighted average healthcare cost trend rate for 2002 is 5.9% for
both Medicare-eligible retirees and non-Medicare-eligible retirees. The rate is
assumed to decrease gradually to 5.5% by the year 2003 and remain constant
thereafter. Increasing or decreasing the assumed healthcare cost trend rate by
one percentage point each future year would not have a material impact on net
postretirement benefits cost or obligations since the postretirement plans have
cost-sharing provisions and benefit limitations.
To determine the accumulated postretirement benefit obligation and the net
postretirement benefits cost, management assumed the following weighted average
rates:
YEAR ENDED DECEMBER 31, 2001 2000 1999
- --------------------------------------------------------------------------------
Discount rate 7.25% 7.75% 7.50%
Expected return on plan assets 5.71 5.71 5.73
- --------------------------------------------------------------------------------
EMPLOYEE 401(K) SAVINGS PLAN
A substantial majority of Key's employees are covered under a savings plan that
is qualified under Section 401(k) of the Internal Revenue Code. Key's plan
permits employees to contribute from 1% to 10% of eligible compensation, with up
to 6% being eligible for matching contributions in the form of Key common
shares. The plan also permits Key to distribute a discretionary profit-sharing
component. Total expense associated with the plan was $42 million in 2001, $51
million in 2000 and $46 million in 1999.
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
16. INCOME TAXES
Income taxes included in the consolidated statements of income are summarized
below. Key files a consolidated Federal income tax return.
YEAR ENDED DECEMBER 31,
in millions 2001 2000 1999
- --------------------------------------------------------------------------------
Currently payable:
Federal $222 $147 $104
State 19 33 7
- --------------------------------------------------------------------------------
241 180 111
Deferred:
Federal (133) 307 421
State (6) 28 45
- --------------------------------------------------------------------------------
(139) 335 466
- --------------------------------------------------------------------------------
Total income tax expense(a) $102 $515 $577
==== ==== ====
- --------------------------------------------------------------------------------
(a) Income tax expense (benefit) on securities transactions totaled $14 million
in 2001, ($10) million in 2000 and $10 million in 1999. Income tax expense
in the above table excludes equity- and gross receipts-based taxes, which
are assessed in lieu of an income tax in certain states in which Key
operates. These taxes are recorded in noninterest expense on the income
statement and totaled $29 million in 2001, $33 million in 2000 and $35
million in 1999.
Significant components of Key's deferred tax assets and liabilities are as
follows:
DECEMBER 31,
in millions 2001 2000
- --------------------------------------------------------------------------------
Provision for loan losses $ 604 $ 372
Restructuring charges 22 48
Write-down of OREO 5 3
Other 294 212
- --------------------------------------------------------------------------------
Total deferred tax assets 925 635
Leasing income reported using the operating
method for tax purposes 1,853 2,245
Net unrealized securities gains 18 8
Depreciation -- 6
Other 606 73
- --------------------------------------------------------------------------------
Total deferred tax liabilities 2,477 2,332
- --------------------------------------------------------------------------------
Net deferred tax liabilities $ 1,552 $ 1,697
======= =======
- --------------------------------------------------------------------------------
The following table shows how Key arrived at total income tax expense and the
effective tax rate.
YEAR ENDED DECEMBER 31, 2001 2000 1999
----------------- ------------------ -----------------
dollars in millions Amount Rate Amount Rate Amount Rate
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes times 35% statutory Federal tax rate $ 90 35.0% $ 531 35.0% $ 589 35.0%
State income tax, net of Federal tax benefit 9 3.4 40 2.6 34 2.0
Amortization of nondeductible intangibles 78 30.1 27 1.8 27 1.6
Tax-exempt interest income (15) (5.9) (18) (1.2) (20) (1.2)
Corporate-owned life insurance income (42) (16.3) (40) (2.7) (38) (2.3)
Tax credits (42) (16.1) (36) (2.4) (28) (1.6)
Other 24 9.2 11 .8 13 .8
- -----------------------------------------------------------------------------------------------------------------------------
Total income tax expense $ 102 39.4% $ 515 33.9% $ 577 34.3%
===== ===== ===== ===== ===== =====
- -----------------------------------------------------------------------------------------------------------------------------
17. COMMITMENTS, CONTINGENT LIABILITIES AND OTHER DISCLOSURES
LEGAL PROCEEDINGS
RESIDUAL VALUE INSURANCE LITIGATION. Key Bank USA, National Association
("KeyBank") obtained two insurance policies from Reliance Insurance Company
("Reliance") insuring the residual value of certain automobiles leased through
KeyBank. The two policies ("the Policies"), the "4011 Policy" and the "4019
Policy," together covered leases entered into during the period January 1, 1997
to January 1, 2001.
The 4019 Policy contains an endorsement stating that Swiss Reinsurance America
Corporation ("Swiss Re") will assume and reinsure 100% of Reliance's obligations
under the 4019 Policy in the event that Reliance Group Holdings' ("Reliance's
parent") so-called "claims-paying ability" were to fall below investment grade.
KeyBank also entered into an agreement with Swiss Re and Reliance whereby Swiss
Re agreed to issue to KeyBank an insurance policy on the same terms and
conditions as the 4011 Policy in the event that the financial condition of
Reliance Group Holdings fell below a certain level. Around May 2000, the
conditions under both the 4019 Policy and the Swiss Re agreement were triggered.
The 4011 Policy was canceled and replaced as of May 1, 2000, by a policy issued
by North American Specialty Insurance Company (a subsidiary or affiliate of
Swiss Re) ("the NAS Policy"). Tri-Arc Financial Services, Inc. ("Tri-Arc") acted
as agent for Reliance, Swiss Re and NAS. Since February 2000, KeyBank has been
filing claims under the Policies, but none of these claims have been paid.
In July 2000, KeyBank filed a claim for arbitration against Reliance, Swiss Re,
NAS and Tri-Arc seeking, among other things, a declaration of the scope of
coverage under the Policies and for damages. On January 8, 2001, Reliance filed
an action (litigation) against KeyBank in Federal District Court in Ohio seeking
rescission or reformation of the Policies claiming that they do not reflect the
intent of the parties with respect to the scope of coverage and how and when
claims were to be paid. Key filed an answer and counterclaim against Reliance,
Swiss Re, NAS and Tri-Arc seeking, among other things, declaratory relief as to
the scope of coverage under the Policies, damages for breach of contract,
failure to act in good faith, and punitive damages. The parties have agreed to
proceed with this court action and to dismiss the arbitration without prejudice.
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
On May 29, 2001, the Commonwealth Court of Pennsylvania entered an order placing
Reliance in a court supervised "rehabilitation" and purporting to stay all
litigation against Reliance. On July 23, 2001, the Federal District Court in
Ohio stayed the litigation to allow the Rehabilitator to complete her task. On
October 3, 2001, the Court in Pennsylvania entered an order placing Reliance
into liquidation and canceling all Reliance insurance policies as of November 2,
2001. On November 20, 2001, the Federal District Court in Ohio entered an order
which, among other things, required Reliance to report to the Court on the
progress of the liquidation. On January 15, 2002, Reliance filed a status report
requesting the continuance of the stay for an indefinite period.
Management believes that KeyBank has valid insurance coverage or claims for
damages relating to the residual value of automobiles leased through KeyBank
during the four-year period ending January 1, 2001. With respect to each
individual lease, however, it is not until the lease expires and the vehicle is
sold that KeyBank can determine the existence and amount of any actual loss on
the lease -- i.e., the difference between the residual value provided for in the
lease agreement and the vehicle's actual market value at lease expiration.
KeyBank's actual total losses for which it will file claims will depend to a
large measure upon the viability of, and pricing within, the market for used
cars throughout the lease runoff period, which extends through 2006.
Accordingly, the total expected loss on the portfolio cannot be determined with
certainty at this time. Claims filed by KeyBank through December 31, 2001, total
approximately $89 million, and management currently estimates that approximately
$225 million of additional claims may be filed through year-end 2006. During
this time frame, a number of factors will affect KeyBank's actual loss
experience, which may be higher or lower than management's current estimates.
Key is recording as a receivable the amount of the claims as and when filed,
less an amount Key has estimated to be an appropriate reserve to reflect the
collectibility risk associated with the insurance litigation.
NSM LITIGATION. In March 1998, McDonald Investments Inc. ("McDonald"), now a
subsidiary of KeyCorp, participated in an offering to institutional investors of
approximately $452 million of debt securities and related warrants of Nakornthai
Strip Mill Public Company Ltd. ("NSM"), a Thailand public company, and certain
NSM affiliates. The offering was part of the financing of NSM's steel mini-mill
located in Chonburi, Thailand. McDonald served as a financial advisor to NSM and
was an initial purchaser in the offering. On December 24, 1998, holders of NSM
securities gave a Notice of Default alleging a number of defaults under the
terms of the securities.
In 1999, certain purchasers of the NSM securities 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 complaints in those
lawsuits were 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.
Nine separate lawsuits were brought against McDonald and others by purchasers of
the NSM securities: two in Federal court in Minnesota; two in Federal 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 was approximately $260 million. While the
relief claimed in the lawsuits has varied, generally the plaintiffs have sought
rescission of the sale of the securities, compensatory damages, punitive
damages, pre- and post-judgment interest, legal fees and expenses.
McDonald filed responses to each complaint denying liability and has been
vigorously defending these actions. McDonald has entered into settlement
agreements with the plaintiffs in seven of the nine lawsuits, pursuant to which
those plaintiffs' claims against McDonald were dismissed. The terms of those
settlement agreements, including the consideration paid by McDonald, are
confidential.
Key sought coverage from its insurance carriers for certain liabilities and
expenses related to the settled claims (above certain self-insurance layers that
were exhausted and expensed), which coverage was subsequently denied by the
carriers. As a result, Key and the insurance carriers filed declaratory judgment
actions against each other. In January 2002, the insurance carriers and Key
agreed to a monetary settlement of their dispute, which would have (when
aggregated with litigation reserves previously established for these lawsuits)
provided coverage for amounts paid by Key in settlement of the seven settled NSM
lawsuits. However, in the course of finalizing the settlement documentation, the
insurance carriers informed Key that in their view a settlement of all material
terms was not reached and, accordingly, the settlement agreement is not valid.
Management believes that the settlement agreement is valid.
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 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.
RESTRICTIONS ON CASH, DUE FROM BANKS,
SUBSIDIARY DIVIDENDS AND LENDING ACTIVITIES
Federal law requires depository institutions to maintain a prescribed amount of
cash or noninterest-bearing balances with the Federal Reserve Bank. KeyCorp's
banking subsidiaries maintained average reserve balances aggregating $330
million in 2001 to fulfill these requirements.
KeyCorp's principal source of cash flow, including the cash needed to pay
dividends on its common shares and to service its debt, is dividends from its
banking and other subsidiaries. Various Federal and state statutes and
regulations limit the amount of dividends KeyCorp's banking subsidiaries can pay
without prior regulatory approval. At January 1, 2002, KeyCorp's banking
subsidiaries could have declared dividends of approximately $449 million in the
aggregate without obtaining such approval.
Federal law also restricts loans and advances from banking subsidiaries to their
parent companies (and to nonbank subsidiaries of their parent companies), and
requires those transactions to be secured. At December 31, 2001, KeyCorp and its
subsidiaries were in compliance with these legal restrictions.
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
OBLIGATIONS UNDER NONCANCELABLE LEASES
Key is obligated under various noncancelable leases for land, buildings and
other property, consisting principally of data processing equipment. Rental
expense under all operating leases totaled $132 million in 2001, $136 million in
2000 and $162 million in 1999. Minimum future rental payments under
noncancelable leases at December 31, 2001, are as follows: 2002 -- $124 million;
2003 -- $116 million; 2004 -- $101 million; 2005 -- $87 million; 2006 -- $80
million; all subsequent years -- $455 million.
18. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
The carrying amount and estimated fair value of Key's financial instruments are
shown below in accordance with the requirements of SFAS No. 107, "Disclosures
About Fair Value of Financial Instruments."
DECEMBER 31, 2001 2000
-------------------------- ----------------------------
Carrying Fair Carrying Fair
in millions Amount Value Amount Value
- --------------------------------------------------------------------------------------------------------------
ASSETS
Cash and short-term investments(a) $ 4,789 $ 4,789 $ 5,073 $ 5,073
Securities available for sale(b) 5,346 5,346 7,329 7,329
Investment securities(b) 1,119 1,128 1,198 1,208
Loans, net of allowance(c) 61,632 62,938 65,904 67,495
Servicing assets(a) 73 73 49 49
LIABILITIES
Deposits with no stated maturity(a) $25,047 $25,047 $23,680 $23,680
Time deposits(d) 19,748 20,067 24,969 25,317
Short-term borrowings(a) 9,284 9,284 11,893 11,893
Long-term debt(d) 14,554 14,268 14,161 14,342
CAPITAL SECURITIES(d) 1,288 1,157 1,243 1,056
- ---------------------------------------------------------------------------------------------------------------
Valuation Methods and Assumptions
- ---------------------------------
(a) Fair value equals or approximates carrying amount.
(b) Fair values of securities available for sale and investment securities
generally were based on quoted market prices. Where quoted market prices
were not available, fair values were based on quoted market prices of
similar instruments.
(c) Fair values of most loans were estimated using discounted cash flow models.
Lease financing receivables and loans held for sale were included in the
estimated fair value of loans at their carrying amounts.
(d) Fair values of time deposits, long-term debt and capital securities were
estimated based on discounted cash flows.
The estimated fair values of residential real estate mortgage loans (carrying
amount of $2.3 billion at December 31, 2001, and $4.2 billion at December 31,
2000, and included in the amount shown for "Loans, net of allowance") and
deposits do not take into account the fair values of long-term client
relationships, which are integral parts of the related financial instruments.
The estimated fair values of these instruments would be significantly higher if
they included the fair values of these relationships.
For financial instruments with a remaining average life to maturity of less than
six months, carrying amounts were used as an approximation of fair values.
If management used different assumptions (on matters such as discount rates and
cash flow) and estimation methods, the estimated fair values shown in the table
could change significantly. Accordingly, these estimates do not necessarily
reflect the amounts Key's financial instruments would command in a current
market exchange. Similarly, because SFAS No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements,
the fair value amounts shown in the table do not, by themselves, represent the
underlying value of Key itself.
Interest rate swaps and caps were valued based on discounted cash flow models.
The aggregate fair values of assets and liabilities at December 31, 2001, were
$1.1 billion and $899 million, respectively, compared with $473 million and $314
million, respectively, as of December 31, 2000. Foreign exchange forward
contracts were valued based on quoted market prices and had a fair value that
approximated their carrying amount at December 31, 2001 and 2000. These
instruments are discussed in greater detail in Note 20 ("Derivatives and Hedging
Activities"), beginning on page 80.
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
19. OTHER FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Key, mainly through its lead bank, KeyBank National Association, is party to
various financial instruments with off-balance sheet risk. Many financial
instruments with such risk to which Key is a party are discussed in other notes
to these financial statements. Notes 7, 17 and 20 address such matters. The
other major types of financial instruments with off-balance sheet risk are
primarily loan commitments and standby letters of credit. These financial
instruments generally help Key meet clients' financing needs. However, they also
involve credit risk not reflected on Key's balance sheet. Key mitigates its
exposure to credit risk with internal controls that guide the way staff reviews
and approves applications for credit, establishes credit limits and, when
necessary, demands collateral. In particular, Key evaluates the
credit-worthiness of each prospective borrower on a case-by-case basis. Key does
not have any significant concentrations of credit risk.
COMMITMENTS TO EXTEND CREDIT. These are agreements to provide financing on
predetermined terms, as long as the client continues to meet specified criteria.
Loan commitments generally carry variable rates of interest and have fixed
expiration dates or other termination clauses. In many cases, a client must pay
a fee to induce Key to issue a loan commitment. Since a commitment may expire
without resulting in a loan, the total amount of outstanding commitments may
exceed Key's eventual cash outlay.
STANDBY LETTERS OF CREDIT. These instruments obligate Key to pay a third-party
beneficiary when a customer fails to repay an outstanding loan or debt
instrument, or fails to perform some contractual nonfinancial obligation.
Amounts drawn under standby letters of credit are essentially loans: they bear
interest (generally at variable rates) and pose the same credit risk to Key as a
loan would.
ASSET-BACKED COMMERCIAL PAPER CONDUIT. Key serves as a referral agent to an
asset-backed commercial paper conduit ("conduit"), which is owned by a third
party and administered by an unaffiliated financial institution. In connection
with this arrangement, Key receives fees for the referral of high-grade loans
and structured assets, and for making commitments to provide liquidity and
credit enhancement. Key provides liquidity and credit enhancement to the conduit
in the form of a committed liquidity facility and credit agreement. The
commitment to provide credit enhancement specifies that in the event of default,
Key will provide financial relief to the conduit in an amount that is based on
defined criteria that consider the level of credit risk involved and other
factors. During 2001, Key sold $434 million of federally guaranteed education
loans to a qualified special purpose entity, which issued beneficial interests
that were acquired by the conduit.
At December 31, 2001, Key's commitments to provide liquidity and credit
enhancement totaled $994 million and $456 million, respectively. There were no
balances outstanding under either of the commitment facilities at the end of the
year. Management periodically evaluates Key's potential exposure related to
these commitments.
The balance of assets outstanding in the conduit was $1.1 billion at December
31, 2001. Of this amount, $157 million represents the balance of the beneficial
interests in the federally guaranteed education loans acquired by the conduit in
2001. All of the assets in the conduit were performing in accordance with their
contractual terms at December 31, 2001.
RECOURSE AGREEMENT WITH FEDERAL NATIONAL MORTGAGE ASSOCIATION. KeyBank National
Association ("KeyBank") participates as a lender in the Federal National
Mortgage Association ("FNMA") Delegated Underwriting and Servicing ("DUS")
program. As a condition to FNMA's delegation of responsibility for originating,
underwriting and servicing mortgages, KeyBank has agreed to assume a limited
portion of the risk of loss on each mortgage loan sold. Accordingly, a reserve
for such potential losses has been established and is maintained in an amount
estimated by management to be appropriate in light of the recourse risk. As of
December 31, 2001, KeyBank had sold approximately $1.1 billion of loans as a
participant in this program.
RETURN GUARANTY AGREEMENT WITH LOW-INCOME HOUSING TAX CREDIT ("LIHTC")
INVESTORS. Key Affordable Housing Corporation ("KAHC"), a subsidiary of KeyBank,
offers limited partnership interests to qualified investors. Partnerships formed
by KAHC invest in low-income residential rental properties that qualify for
Federal LIHTCs under Section 42 of the Internal Revenue Code. In certain
partnerships, investors pay a fee to KAHC for a guaranteed return. The
guaranteed return is incumbent on the financial performance of the property and
the property's ability to maintain its LIHTC status throughout the fifteen-year
compliance period. Key meets its obligations pertaining to the guaranteed
returns generally through the distribution of tax credits and deductions
associated with the specific properties. At December 31, 2001, Key guaranteed
equity of $696 million plus a specified return on that equity. KAHC has
established a reserve in an amount estimated by management to be sufficient to
cover its obligations under the guarantees in the event that the properties do
not perform as expected.
The following table shows the contractual amount of each class of
lending-related, off-balance sheet financial instrument outstanding. The table
discloses Key's maximum possible accounting loss, which is equal to the
contractual amount of the various instruments. The estimated fair values of
these instruments are not material; observable liquid markets do not exist for
the majority of these instruments.
DECEMBER 31,
in millions 2001 2000
- -------------------------------------------------------------------------------
Loan commitments:
Home equity $ 4,965 $ 4,727
Commercial real estate and construction 2,487 2,211
Commercial and other 24,936 25,376
- -------------------------------------------------------------------------------
Total loan commitments 32,388 32,314
Other commitments:
Standby letters of credit 3,503 3,555
Commercial letters of credit 106 116
- -------------------------------------------------------------------------------
Total loan and other commitments $35,997 $35,985
======= =======
- -------------------------------------------------------------------------------
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
20. DERIVATIVES AND HEDGING ACTIVITIES
Key, mainly through its lead bank, KeyBank National Association, is party to
various derivative instruments. These instruments are used for asset and
liability management and trading purposes. Generally, these instruments help Key
meet clients' financing needs and manage exposure to "market risk" -- the
possibility that economic value or net interest income will be adversely
affected by changes in interest rates or other economic factors. However, like
other financial instruments, these derivatives contain an element of "credit
risk" -- the possibility that Key will incur a loss because a counterparty fails
to meet its contractual obligations.
The primary derivatives that Key uses are interest rate swaps, caps and futures,
and foreign exchange forward contracts. All foreign exchange forward contracts
and interest rate swaps and caps held are over-the-counter instruments.
ACCOUNTING TREATMENT AND VALUATION
Effective January 1, 2001, Key adopted SFAS No. 133, which establishes
accounting and reporting standards for derivatives and hedging activities. The
new standards are summarized in Note 1 ("Summary of Significant Accounting
Policies") under the heading "Accounting Pronouncements Adopted in 2001," on
page 61.
As a result of adopting SFAS No. 133, Key recorded cumulative after-tax losses
of $1 million in earnings and $22 million in "other comprehensive income (loss)"
as of January 1, 2001. Of the $22 million loss, an estimated $13 million was
reclassified to earnings during 2001.
At December 31, 2001, Key had $233 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. These
balances compare with $120 million and $152 million, respectively, recorded upon
adoption of SFAS No. 133.
The following section includes information pertaining to derivatives and hedging
activities for 2001 (subsequent to adopting SFAS No. 133) and 2000 (prior to
adopting SFAS No. 133).
ASSET AND LIABILITY MANAGEMENT
FAIR VALUE HEDGING STRATEGIES. Key uses interest rate swap contracts known as
"receive fixed/pay variable" swaps to modify its exposure to interest rate risk.
These contracts convert specific fixed-rate deposits, short-term borrowings and
long-term debt to variable rate obligations. As a result, Key receives
fixed-rate interest payments in exchange for variable rate payments over the
lives of the contracts without exchanges of the underlying notional amounts.
During 2001, Key recognized a net loss of approximately $1 million related to
the ineffective portion of its fair value hedging instruments. The ineffective
portion recognized is included in "other income" on the income statement.
CASH FLOW HEDGING STRATEGIES. Key also enters into "pay fixed/receive variable"
interest rate swap contracts that effectively convert a portion of its
floating-rate debt to fixed-rate to reduce the potential adverse impact of
interest rate increases on future interest expense. These contracts allow Key to
exchange variable-rate interest payments for fixed-rate payments over the lives
of the contracts without exchanges of the underlying notional amounts.
Similarly, Key has converted certain floating-rate commercial loans to
fixed-rate loans by entering into interest rate swap contracts.
Key also uses "pay fixed/receive variable" interest rate swaps to manage the
interest rate risk associated with anticipated sales or securitizations of
certain commercial real estate loans. These swaps protect against a possible
short-term decline in the value of the loans between the time they are
originated and the time they are securitized or sold. Key's general policy is to
sell or securitize these loans within one year of their origination.
As a result of actions announced in May, Key revised its projections of future
debt needs. Consequently, during the second quarter of 2001, Key reclassified a
$3 million gain from "accumulated other comprehensive income (loss)" to "other
income" on the income statement. This reclassification relates to a cash flow
hedge of a previously forecasted debt issuance that Key will not make.
During 2001, Key did not recognize any significant net loss in connection with
the ineffective portion of its cash flow hedging instruments. There was no
impact on earnings during 2001 related to the exclusion of portions of hedging
instruments from the assessment of hedge effectiveness. Any loss resulting from
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 DECEMBER 31,
in millions 2000 SFAS 133 HEDGING ACTIVITY TO EARNINGS 2001
- ---------------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income
(loss) resulting from cash flow hedges -- $(22) $(13) $33 $(2)
- ---------------------------------------------------------------------------------------------------------------------------------
Key expects to reclassify approximately $22 million of net gains on derivative
instruments from "accumulated other comprehensive income (loss)" to earnings
during the next twelve months. Reclassifications will coincide with the income
statement impact of the hedged item through the payment of variable-rate
interest on debt, the receipt of variable-rate interest on commercial loans and
the sale or securitization of commercial real estate loans.
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
The following table summarizes the features of the various types of portfolio
swaps and caps that Key held at the end of 2000 prior to the adoption of SFAS
No. 133.
DECEMBER 31, 2000
------------------------------------------------------------------
WEIGHTED AVERAGE RATE
--------------------------------
NOTIONAL FAIR MATURITY
dollars in millions AMOUNT VALUE (YEARS) RECEIVE PAY STRIKE
- -----------------------------------------------------------------------------------------------------------------------------
Interest rate swaps:
Receive fixed/pay variable-- indexed amortizing(a) $ 45 $ 1 .8 7.98% 6.76% N/A
Receive fixed/pay variable-- conventional 4,330 75 6.6 6.68 6.76 N/A
Receive fixed/pay variable-- forward starting 88 3 10.1 5.62 5.41 N/A
Pay fixed/receive variable-- conventional 4,636 (46) 3.7 6.75 6.31 N/A
Pay fixed/receive variable-- forward starting 116 (5) 10.0 6.18 6.48 N/A
Basis swaps 6,625 (75) 1.6 6.67 6.78 N/A
- -----------------------------------------------------------------------------------------------------------------------------
Total 15,840 (47) -- 6.69% 6.63% --
Interest rate caps and collars:
Caps purchased-- one- to three-month
LIBOR-based -- -- -- N/A N/A --
Collar-- one- to three-month LIBOR-based 250 -- .1 N/A N/A 4.75 and 6.50
- -----------------------------------------------------------------------------------------------------------------------------
Total 250 -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total $16,090 $ (47) -- -- -- --
======= ========
- -----------------------------------------------------------------------------------------------------------------------------
(a) Maturity is based upon expected average lives rather than contractual terms.
N/A = Not Applicable
During 2000, Key terminated swaps with a notional amount of $4.5 billion,
resulting in a net deferred loss of $12 million. At December 31, 2000, Key had a
cumulative net deferred swap gain of $9 million with a weighted average life of
4.9 years related to the management of debt, and a cumulative net deferred loss
of $2 million with a weighted average life of 4.5 years related to the
management of available-for-sale securities.
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 futures contracts
and interest rate swaps, caps and floors are recorded at their estimated fair
values. Adjustments to fair value are included in "investment banking and
capital markets income" on the income statement.
FOREIGN EXCHANGE FORWARD CONTRACTS. Key uses these instruments to accommodate
the business needs of clients and for proprietary trading purposes. Foreign
exchange forward contracts provide for the delayed delivery or purchase of
foreign currency. Key mitigates the associated risk by entering into other
foreign exchange contracts with third parties. Adjustments to the fair value of
all foreign exchange forward contracts are included in "investment banking and
capital markets income" on the income statement.
OPTIONS AND FUTURES. Key uses these instruments for proprietary trading
purposes. Adjustments to the fair value of options are included in "investment
banking and capital markets income" on the income statement.
The following table shows trading income recognized on interest rate swap,
foreign exchange forward, and option and futures contracts.
YEAR ENDED DECEMBER 31,
in millions 2001 2000 1999
- ------------------------------------------------------------------------------
Interest rate contracts $17 $32 $40
Foreign exchange forward contracts 40 35 30
Option and futures contracts -- 3 4
- --------------------------------------------------------------------------------
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 related 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 whether any collateral may
be required.
At December 31, 2001, Key was party to swaps with 38 different counterparties.
Among these were swaps entered into to offset the risk of client swaps. Key had
aggregate credit exposure of $542 million to 27 of these counterparties, with
the largest credit exposure to an individual counterparty amounting to $150
million. As of the same date, Key's aggregate credit exposure on its interest
rate caps totaled $31 million. Based on management's assessment, as of December
31, 2001, all counterparties were expected to meet their obligations.
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
21. CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
CONDENSED BALANCE SHEETS
DECEMBER 31,
in millions 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-bearing deposits with KeyBank National Association $ 1,054 $ 547
Loans and advances to subsidiaries:
Banks 99 99
Nonbank subsidiaries 669 575
- --------------------------------------------------------------------------------------------------------------------------
768 674
Investment in subsidiaries:
Banks 5,744 6,733
Nonbank subsidiaries 2,004 2,010
- --------------------------------------------------------------------------------------------------------------------------
7,748 8,743
Accrued income and other assets 780 883
- --------------------------------------------------------------------------------------------------------------------------
Total assets $10,350 $10,847
======= =======
LIABILITIES
Accrued expense and other liabilities $ 580 $ 453
Short-term borrowings 121 1,206
Long-term debt:
Subsidiary trusts 1,282 1,282
Unaffiliated companies 2,212 1,283
- --------------------------------------------------------------------------------------------------------------------------
3,494 2,565
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities 4,195 4,224
SHAREHOLDERS' EQUITY(a) 6,155 6,623
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $10,350 $10,847
======= =======
- --------------------------------------------------------------------------------------------------------------------------
(a) See page 56 for KeyCorp's Statements of Changes in Shareholders' Equity.
CONDENSED STATEMENTS OF INCOME
Year ended December 31,
in millions 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
INCOME
Dividends from subsidiaries:
Banks $ 500 $ 1,440 $ 900
Nonbank subsidiaries 107 57 46
Interest income from subsidiaries 77 62 47
Gain from sale of Electronic Payment Services, Inc. -- -- 134
Other income 49 46 17
- --------------------------------------------------------------------------------------------------------------------------
733 1,605 1,144
EXPENSES
Interest on long-term debt with subsidiary trusts 92 98 87
Interest on other borrowed funds 132 133 96
Restructuring charges (4) 102 98
Personnel and other expense 56 59 123
- --------------------------------------------------------------------------------------------------------------------------
276 392 404
Income before income tax benefit and equity in
net income less dividends from subsidiaries 457 1,213 740
Income tax benefit 28 103 74
- --------------------------------------------------------------------------------------------------------------------------
485 1,316 814
Equity in net income less dividends from subsidiaries (353) (314) 293
- --------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 132 $ 1,002 $ 1,107
======= ======= =======
- --------------------------------------------------------------------------------------------------------------------------
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KEYCORP AND SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOW
YEAR ENDED DECEMBER 31,
in millions 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 132 $ 1,002 $ 1,107
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of intangibles 20 24 18
Net gains from divestitures -- -- (134)
Net securities gains (28) (7) (15)
Deferred income taxes (20) 10 (27)
Equity in net income less dividends from subsidiaries 353 314 (293)
Net increase in other assets (69) (213) (69)
Net increase in other liabilities 125 133 4
Net increase (decrease) in accrued restructuring charges (68) 33 88
Other operating activities, net 39 (35) (75)
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 484 1,261 604
INVESTING ACTIVITIES
Purchases of securities available for sale (50) (192) (30)
Proceeds from prepayments and maturities of securities available for sale 195 10 154
Net (increase) decrease in interest-bearing deposits (507) 136 (370)
Net increase in loans and advances to subsidiaries (136) (83) (123)
(Increase) decrease in investments in subsidiaries 670 (846) (23)
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 172 (975) (392)
FINANCING ACTIVITIES
Net increase (decrease) in short-term borrowings (1,063) 665 411
Net proceeds from issuance of long-term debt 1,142 290 510
Payments on long-term debt (230) (334) (365)
Loan payment received from ESOP trustee 13 11 10
Purchases of treasury shares (50) (462) (344)
Proceeds from issuance of common stock pursuant to employee
benefit and dividend reinvestment plans 33 28 33
Cash dividends paid (501) (484) (467)
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (656) (286) (212)
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS -- -- --
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF YEAR -- -- --
====== ====== ======
- -----------------------------------------------------------------------------------------------------------------------------------
KeyCorp paid interest on borrowed funds amounting to $224 million in 2001,
$231 million in 2000 and $183 million in 1999.
83