<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15d of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 1, 1994
KeyCorp
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 0-850 34-6542451
------------------------------- ------------ -------------------
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation) File Number) Identification No.)
127 Public Square, Cleveland, Ohio 44114-1306
-------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 689-3000
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
- ---------------------------------------------
On March 1, 1994, KeyCorp, a financial services holding company headquartered
in Albany, New York, ("Old KeyCorp") and Society Corporation ("Society"), a
financial services holding company headquartered in Cleveland, Ohio, completed
the merger of Old KeyCorp into and with Society, which assumed the name
KeyCorp. The merger was completed under the terms of the Agreement and Plan of
Merger dated as of October 1, 1993, as amended. The terms of the merger are
more fully described in the Society and Old KeyCorp Prospectus/Joint Proxy
Statement for the Special Meetings of Shareholders held February 16, 1994,
included in Society's Form S-4 Registration Statement No. 33-51717 filed
December 28, 1993. Shareholders of Society and Old KeyCorp approved the merger
in separate meetings on February 16, 1994. Federal Reserve Board approvals
were granted and other necessary regulatory approvals were received prior to
March 1, 1994.
Under the terms of the merger agreement, 124,351,183 shares of KeyCorp common
stock were exchanged for all of the outstanding shares of Old KeyCorp common
stock (based on an exchange ratio of 1.205 shares for each share of Old
KeyCorp). The outstanding preferred stock of Old KeyCorp was exchanged on a
one-for-one basis for 1,280,000 shares of a comparable, new issue of 10%
Cumulative Preferred Stock of KeyCorp.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION, AND EXHIBITS
- ----------------------------------------------------------------------------
(a) Financial Statements of Old KeyCorp and subsidiaries.
The following are filed as exhibits to this Form 8-K Current Report:
Report of Independent Auditors
Consolidated Balance Sheets at December 31, 1993 and 1992
Consolidated Statements of Income for the three years in the
period ended December 31, 1993
Consolidated Statements of Changes in Stockholders' Equity for
the three years in the period ended December 31, 1993
Consolidated Statements of Cash Flows for the three years in the
period ended December 31, 1993
Notes to Consolidated Financial Statements
(b) Pro Forma Financial Information
The following unaudited pro forma condensed combined balance sheet as of
December 31, 1993, and the unaudited pro forma condensed combined statements
of income for the years ended December 31, 1993, 1992, and 1991, give effect
to the merger based on the historical consolidated financial statements of
Society and Old KeyCorp under the assumptions and adjustments set forth in the
accompanying notes to the pro forma condensed combined financial statements.
The pro forma condensed combined financial statements have been prepared by the
managements of Society and Old KeyCorp based upon their respective consolidated
financial statements, which include results of operations as if the merger had
been consummated on January 1, 1991. The pro forma condensed combined
financial statements may not be indicative of the results that actually would
have occurred if the merger had been in effect during the period presented or
which may be obtained in the future. As a part of the ongoing merger
integration process, management is evaluating the accounting policies and
practices of the combined organization. This evaluation may result in certain
conforming accounting adjustments, the effects of which are not expected to be
material to the financial condition or results of operations of the combined
organization. The pro forma condensed combined financial statements should be
read in conjunction with the historical consolidated financial statements and
the related accompanying notes thereto of Old KeyCorp, included herein, and
those of Society.
<PAGE> 3
<TABLE>
<CAPTION>
OLD KEYCORP AND SUBSIDIARIES AND
SOCIETY CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 1993
(in thousands)
OLD PRO FORMA PRO FORMA
KEYCORP SOCIETY ADJUSTMENTS COMBINED
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks $1,401,793 $1,375,645 $2,777,438
Short-term investments 39,288 67,931 107,219
Mortgage loans held for sale 1,003,635 321,703 1,325,338
Securities available for sale 988,750 738,078 1,726,828
Investment securities 5,468,866 5,653,227 11,122,093
Loans 22,197,605 17,897,647 40,095,252
Less: Allowance for loan losses 322,078 480,634 802,712
------------ ----------- ----------- -----------
Net loans 21,875,527 17,417,013 39,292,540
Premises and equipment 491,105 421,765 912,870
Other assets 1,378,868 1,011,965 2,390,833
------------ ----------- ----------- -----------
TOTAL ASSETS $32,647,832 $27,007,327 $59,655,159
============ =========== =========== ===========
LIABILITIES
Deposits:
Noninterest-bearing $5,022,623 $3,803,677 8,826,300
Interest-bearing 21,595,821 16,077,027 37,672,848
------------ ----------- ----------- -----------
Total deposits 26,618,444 19,880,704 46,499,148
Federal funds purchased and securities
sold under agreements to repurchase 1,766,518 2,353,740 4,120,258
Other short-term borrowings 600,440 1,175,752 1,776,192
Other liabilities 480,631 605,888 1,086,519
Long-term debt 811,213 952,657 1,763,870
------------ ----------- ----------- -----------
TOTAL LIABILITIES 30,277,246 24,968,741 55,245,987
SHAREHOLDERS' EQUITY
Preferred stock 160,000 (1) 160,000
Common Shares 515,227 118,658 $(391,057) (1) 242,828
Capital surplus 407,296 635,508 391,057 (1) 1,433,861
Retained earnings 1,288,063 1,368,992 2,657,055
Loans to ESOP trustee (63,909) (63,909)
Treasury Stock at cost (20,663) (20,663)
------------ ----------- ----------- -----------
TOTAL SHAREHOLDERS' EQUITY 2,370,586 2,038,586 4,409,172
------------ ----------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $32,647,832 $27,007,327 $59,655,159
============ =========== =========== ===========
See accompanying notes to unaudited pro forma condensed combined financial statements.
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
OLD KEYCORP AND SUBSIDIARIES AND
SOCIETY CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1993
(in thousands, except per share amounts)
OLD PRO FORMA
KEYCORP SOCIETY COMBINED
------------ ------------ ------------
<S> <C> <C> <C>
Interest income $2,342,578 $1,871,296 $4,213,874
Interest expense 862,591 672,306 1,534,897
------------ ------------ ------------
Net interest income 1,479,987 $1,198,990 2,678,977
Provision for loan losses 139,422 72,240 211,662
------------ ------------ ------------
Net interest income after
provision for loan losses 1,340,565 1,126,750 2,467,315
Noninterest income 491,922 509,784 1,001,706
Noninterest expense 1,283,221 1,101,902 2,385,123
------------ ------------ ------------
Income before income taxes 549,266 534,632 1,083,898
Income taxes 186,499 187,473 373,972
------------ ------------ ------------
Net income $362,767 $347,159 $709,926
============ ============ ============
Net income applicable to
Common Shares $345,708 $346,121 $691,829
============ ============ ============
Weighted average Common Shares
outstanding 100,789,822 118,323,452 239,775,188
Net income per Common Share $3.43 $2.93 $2.89
See accompanying notes to unaudited pro forma combined financial statements.
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
OLD KEYCORP AND SUBSIDIARIES AND
SOCIETY CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1992
(in thousands, except per share amounts)
OLD PRO FORMA
KEYCORP SOCIETY COMBINED
------------- ------------ ------------
<S> <C> <C> <C>
Interest income $2,295,357 $1,903,434 $4,198,791
Interest expense 977,071 773,047 1,750,118
------------- ------------ ------------
Net interest income 1,318,286 1,130,387 2,448,673
Provision for loan losses 190,971 147,366 338,337
------------- ------------ ------------
Net interest income after
provision for loan losses 1,127,315 983,021 2,110,336
Noninterest income 423,659 501,534 925,193
Noninterest expense 1,124,461 1,045,951 2,170,412
------------- ------------ ------------
Income before income taxes and
cumulative effect of accounting change 426,513 438,604 865,117
Income taxes 142,238 137,394 279,632
------------- ------------ ------------
Income before cumulative effect of
accounting change 284,275 301,210 585,485
============= ============ ============
Net income applicable to
Common Shares $273,085 $294,984 $568,069
============= ============ ============
Weighted average Common Shares
outstanding 97,639,971 117,348,656 235,004,821
Net income per Common Share $2.73 $2.51 $2.39
See accompanying notes to unaudited pro forma combined financial statements.
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
OLD KEYCORP AND SUBSIDIARIES AND
SOCIETY CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1991
(in thousands, except per share amounts)
OLD PRO FORMA
KEYCORP SOCIETY COMBINED
------------ --------------- -------------
<S> <C> <C> <C>
Interest income $2,388,478 $2,263,873 $4,652,351
Interest expense 1,302,677 1,216,713 2,519,390
------------ --------------- -------------
Net interest income 1,085,801 1,047,160 2,132,961
Provision for loan losses 186,116 280,047 466,163
------------ --------------- -------------
Net interest income after
provision for loan losses 899,685 767,113 1,666,798
Noninterest income 394,197 455,064 849,261
Noninterest expense 953,186 1,112,493 2,065,679
------------ --------------- -------------
Income before income taxes 340,696 109,684 450,380
Income taxes 103,478 33,206 136,684
------------ --------------- -------------
Net income $237,218 $76,478 $313,696
============ =============== =============
Net income applicable to
Common Shares $227,244 $70,229 $297,473
============ =============== =============
Weighted average Common Shares
outstanding 92,821,073 115,266,844 227,116,237
Net income per Common Share $2.45 $.61 $1.31
See accompanying notes to unaudited pro forma combined financial statements.
</TABLE>
<PAGE> 7
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(1) Pro forma adjustments to common shares and capital surplus, at December 31,
1993, reflect the combination of Old KeyCorp and Society, accounted for as a
pooling of interests, through: (a) the exchange of 124,351,183 shares of
KeyCorp Common Shares for all outstanding shares of Old KeyCorp common stock at
an Exchange Ratio of 1.205 shares of KeyCorp Common Shares for each share of
Old KeyCorp common stock, and (b) the exchange of 1,280,000 shares of KeyCorp
Preferred Stock for all outstanding shares of Old KeyCorp Preferred Stock on a
share-for-share basis. Under generally accepted accounting principles ("GAAP"),
the assets and liabilities of Society have been combined with those of Old
KeyCorp at book values. In addition, the statements of income of Society have
been combined with the statements of income of Old KeyCorp on a retroactive
basis.
(2) Pro forma weighted average Common Shares for the years ended December 31,
1993, 1992, and 1991, reflect the issuance of 1.205 KeyCorp Common Shares for
each share of Old KeyCorp Common Stock.
(3) During 1993, Society and Old KeyCorp recorded combined restructuring
charges of $118.7 million ($80.6 million after tax, $.33 per Common Share) in
connection with the merger Old KeyCorp with and into Society. These
restructuring charges include accruals for merger expenses, consisting primarily
of investment banking and other professional fees directly related to the
merger ($20.5 million); severance payments and other employee costs ($49.6
million); systems and facilities costs ($35.7 million); and other costs
incident to the merger ($12.9 million). These charges were recorded by the
respective parent companies in the fourth quarter of 1993 at which time
management determined that it was probable that a liability for such charges
had been incurred and could be reasonably estimated.
Although no assurance can be given, it is also expected that, as a result of
the merger, cost savings will be achieved by the combined institution at an
annual rate of approximately $100 million by the end of the first quarter of
1995. These cost savings are anticipated to result from the integration of
operations and from efficiencies in certain combined lines of business.
Management presently expects that approximately 50% of the annual cost savings
will be achieved in 1994. The pro forma condensed combined financial
statements do not give effect to the anticipated cost savings in connection
with the merger from the consolidation of operations and improved efficiencies
of Society and KeyCorp.
<PAGE> 8
(c) Exhibits
2.1 Agreement and Plan of Merger, dated as of October 1, 1993, as amended,
by and between Society and Old KeyCorp (composite form). Filed as Exhibit
(2)(a) to Form S-4 Registration Statement No. 33-51717 filed December 28,
1993 and incorporated herein by reference.
2.2 Supplemental Agreement to Agreement and Plan of Merger, dated as of
October 1, 1993, as amended, by and between Society and Old KeyCorp
(composite form). Filed as Exhibit (2)(b) to Form S-4 Registration
Statement No. 33-51717 filed December 28, 1993 and incorporated herein
by reference.
99.1 Report of Ernst & Young, Independent Auditors
99.2 Financial statements of Old KeyCorp and subsidiaries.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
KeyCorp
----------------------
Registrant
Date: March 16, 1994 /s/ Lee G. Irving
----------------------
Lee G. Irving
Executive Vice President
Treasurer and Chief Accounting Officer
(Principal Accounting Officer)
<PAGE> 1
KEYCORP AND SUBSIDIARIES
AUDITED FINANCIAL STATEMENTS
Report of Ernst & Young, Independent Auditors
Audited Financial Statements
Consolidated balance sheets as of December 31, 1993 and 1992
Consolidated statements of income for each of the three years
in the period ended December 31, 1993
Consolidated statements of changes in shareholders' equity for
each of the three years in the period ended December 31, 1993
Consolidated statements of cash flow for each of the three
years in the period ended December 31, 1993
Notes to consolidated financial statements
REPORT OF ERNST & YOUNG / INDEPENDENT AUDITORS
Shareholders and Board of Directors
KeyCorp
We have audited the accompanying consolidated balance sheets of KeyCorp and
subsidiaries as of December 31, 1993 and 1992, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1993. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 KeyCorp and
subsidiaries at December 31, 1993 and 1992, and the consolidated results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1993, in conformity with generally accepted
accounting principles.
ERNST & YOUNG
/s/ Ernst & Young
Albany, New York
January 20, 1994
except for Note 2 Subsequent Event,
as to which the date is March 1, 1994
<PAGE> 1
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31,
dollars in thousands, except per share amounts 1993 1992
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 1,401,793 $ 1,734,652
Short-term investments 39,288 206,627
Mortgage loans held for sale 1,003,635 768,241
Securities available for sale (market value: 1993-$1,013,181;1992-$1,368,743) 988,750 1,336,417
Investment securities (market value: 1993-$5,604,966;1992-$4,624,348) 5,468,866 4,491,919
Loans 22,197,605 20,014,345
Less: allowance for loan losses (322,078) (279,905)
- ----------------------------------------------------------------------------------------------------------
Net loans 21,875,527 19,734,440
Premises and equipment 491,105 436,754
Other real estate owned 102,267 199,010
Intangible assets 336,647 322,005
Purchased mortgage servicing rights 187,155 164,359
Other assets 752,799 719,658
- ----------------------------------------------------------------------------------------------------------
Total assets $32,647,832 $30,114,082
=========== ===========
Liabilities
Deposits:
Noninterest-bearing $ 5,022,623 $ 4,632,558
Interest-bearing 21,595,821 20,142,507
- ----------------------------------------------------------------------------------------------------------
Total deposits 26,618,444 24,775,065
Federal funds purchased and securities sold under agreements to repurchase 1,766,518 1,373,415
Other short-term borrowings 600,440 598,530
Other liabilities 480,631 388,256
Long-term debt 811,213 904,026
- ----------------------------------------------------------------------------------------------------------
Total liabilities 30,277,246 28,039,292
Shareholders' equity
Preferred stock, liquidation value 160,000 183,970
Common stock, par value $5 per share 515,227 492,557
Capital surplus 407,296 329,916
Retained earnings 1,288,063 1,068,347
- ----------------------------------------------------------------------------------------------------------
Total shareholders' equity 2,370,586 2,074,790
- ----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $32,647,832 $30,114,082
=========== ===========
- ----------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE> 2
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Year ended December 31,
dollars in thousands, except per share amount 1993 1992 1991
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income
Loans $1,898,690 $1,823,191 $1,895,657
Mortgage loans held for sale 56,276 46,553 40,143
Taxable investment securities 226,336 279,281 299,132
Tax-preference investment securities 79,132 82,994 82,086
Securities available for sale 77,122 57,167 59,594
Short-term investments 5,022 6,171 11,866
- --------------------------------------------------------------------------------------------------------
Total interest income 2,342,578 2,295,357 2,388,478
Interest expense
Deposits 729,092 826,030 1,094,256
Federal funds purchased and
securities sold under repurchase agreements 48,990 65,322 89,215
Other short-term borrowings 20,449 19,233 57,038
Long-term debt 64,060 66,486 62,168
- --------------------------------------------------------------------------------------------------------
Total interest expense 862,591 977,071 1,302,677
- --------------------------------------------------------------------------------------------------------
Net interest income 1,479,987 1,318,286 1,085,801
Provision for loan losses 139,422 190,971 186,116
- --------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 1,340,565 1,127,315 899,685
Noninterest income
Trust income 39,794 40,836 36,610
Service charges on deposit accounts 154,567 136,963 121,539
Mortgage banking income 88,564 78,681 63,863
Credit card fees 25,434 26,176 19,067
Gains on miscellaneous asset sales -- 2,832 23,975
Net securities gains 2,241 4,852 11,508
Other income 181,322 133,319 117,635
- --------------------------------------------------------------------------------------------------------
Total noninterest income 491,922 423,659 394,197
Noninterest expense
Salaries and employee benefits 594,008 521,926 438,178
Net occupancy 111,570 100,600 94,405
Equipment 82,331 74,657 61,186
FDIC insurance 58,016 52,376 42,567
Professional fees 32,903 44,613 25,773
Merger and restructuring charges 64,812 42,700 --
Other expense 339,581 287,589 291,077
- --------------------------------------------------------------------------------------------------------
Total noninterest expense 1,283,221 1,124,461 953,186
Income before income taxes and cumulative
effect of accounting change 549,266 426,513 340,696
Income taxes 186,499 142,238 103,478
- --------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 362,767 284,275 237,218
Cumulative effect of accounting change -- 6,613 --
- --------------------------------------------------------------------------------------------------------
Net income $ 362,767 $ 290,888 $ 237,218
========== ========== ==========
Net income applicable to common shares $ 345,708 $ 273,085 $ 227,244
Net income per common share:
Before cumulative effect of accounting change $3.43 $2.73 $2.45
After cumulative effect of accounting change $3.43 $2.80 $2.45
Weighted average common shares outstanding 100,789,822 97,639,971 92,821,073
- --------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE> 3
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<CAPTION>
Preferred Common Capital Retained Treasury
dollars in thousands, except per share amounts Stock Stock Surplus Earnings Stock
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1991 $ 23,970 $421,935 $155,260 $ 794,629 $(532)
Net income 237,218
Issuance of Common Stock:
Public offerings - 9,405,414 shares 47,027 123,458
Dividend reinvestment, stock option, grant
and purchase plans - 838,930 shares 4,195 9,517
Stock option, grant and purchase plans - 36,274
shares which were satisfied through shares
issued from Treasury (163) 532
Issuance of Series B Preferred Stock
public offering - 1,280,000 shares 160,000 (5,344)
Common stock dividend - 2,087,712 shares 10,440 27,717 (38,187)
Cash dividends declared - Preferred (Series A and B) (9,974)
Cash dividends declared - Common ($.95 per share) (84,855)
- ------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1991 183,970 483,597 310,445 898,831 --
Net income 290,888
Issuance of Common Stock:
Acquisitions - 695,691 shares 3,478 5,615
Dividend reinvestment, stock option, grant
and purchase plans - 1,096,428 shares 5,482 13,856
Cash dividends declared - Preferred (Series A and B) (17,803)
Cash dividends declared - Common ($1.04 per share) (103,569)
- ------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1992 183,970 492,557 329,916 1,068,347 --
Net income 362,767
Issuance of Common Stock:
Acquisitions - 3,729,912 shares 18,649 65,210
Dividend reinvestment, stock option, grant
and purchase plans - 804,192 shares 4,021 12,170
Redemption of Series A Preferred Stock (23,970)
Cash dividends declared - Preferred (Series A and B) (17,059)
Cash dividends declared - Common ($1.24 per share) (125,992)
- ------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 $160,000 $515,227 $407,296 $1,288,063 $ --
======== ======== ======== ========== =====
- ------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE> 4
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOW
<CAPTION>
Year ended December 31,
dollars in thousands 1993 1992 1991
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 362,767 $ 290,888 $ 237,218
Noncash items included in determination of net income:
Provision for loan losses 139,422 190,971 186,116
Depreciation 52,989 42,482 35,435
Amortization of intangibles 32,022 29,558 28,520
Amortization of purchased mortgage servicing rights 56,135 29,212 20,397
Accretion of discount on investment securities (4,418) (2,466) (3,187)
Deferred income taxes (7,380) 428 6,483
Realized security gains (2,241) (5,352) (12,998)
Net change in mortgage loans held for sale (235,394) (91,240) (287,419)
Gain on sale of mortgage servicing rights (25,494) -- --
Realized losses from the sale of other real estate owned 6,121 2,601 5,039
Net other changes 93,355 (109,128) 228,201
- ---------------------------------------------------------------------------------------------------
Net cash provided by operating activities 467,884 377,954 443,805
Investing Activities
Net increase in loans (635,361) (462,266) (864,117)
Purchases of investment securities (2,231,504) (2,075,621) (2,250,472)
Proceeds from sales of investment securities 767 51,222 666,896
Proceeds from maturities of investment securities 1,672,351 1,610,065 1,163,963
Net change in securities available for sale 374,486 173,444 101,805
Net (increase) decrease in short-term investments 193,392 73,946 (37,942)
Purchases of premises and equipment (93,755) (84,978) (94,865)
Proceeds from sales of premises and equipment 19,067 11,686 8,533
Proceeds from sales of other real estate owned 94,801 95,681 68,612
Purchases of mortgage servicing rights (77,312) (67,359) --
Net cash provided by acquisitions 80,431 54,667 423,499
- ---------------------------------------------------------------------------------------------------
Net cash used by investing activities (602,637) (619,513) (814,088)
Financing Activities
Net increase (decrease) in deposits (243,724) 442,557 (4,806)
Net increase (decrease) in short-term borrowings 276,155 (185,972) 330,397
Proceeds from issuance of long-term debt 245,940 304,158 298,911
Principal reductions in long-term debt (338,753) (160,894) (212,403)
Net proceeds from issuance of Common Stock -- -- 172,946
Net proceeds from issuance of Preferred Stock -- -- 154,656
Cost of redeeming Series A Preferred Stock (23,970) -- --
Proceeds from employee stock purchase, stock option
and dividend reinvestment plans 16,191 19,338 11,088
Purchase of treasury stock -- -- 532
Cash dividends paid on Preferred Stock (17,059) (17,803) (9,985)
Cash dividends paid on Common Stock (112,886) (101,806) (82,207)
- ---------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (198,106) 299,578 659,129
Net increase (decrease) in cash and due from banks (332,859) 58,019 288,846
Cash and due from banks at beginning of year 1,734,652 1,676,633 1,387,787
- ---------------------------------------------------------------------------------------------------
Cash and due from banks at end of year $1,401,793 $1,734,652 $1,676,633
========== ========== ==========
- ---------------------------------------------------------------------------------------------------
Additional disclosures relative to cash flows:
Interest paid $ 857,918 $1,000,705 $1,323,156
Income taxes paid 184,706 147,190 95,666
Noncash items:
Transfer of loans to other real estate owned 63,063 126,102 143,962
Transfer of investment securities to securities
available for sale -- 1,509,861 --
Transfer of loans to mortgage loans held for sale -- 57,275 --
- ---------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE> 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of KeyCorp and its subsidiaries
(the "Corporation") are prepared in conformity with generally accepted
accounting principles and prevailing practices within the financial services
industry. The following is a summary of significant accounting and reporting
policies.
Basis of Presentation
The consolidated financial statements include the accounts of KeyCorp
(the "Parent") and all subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain prior year amounts
have been reclassified to conform to current year classifications. Assets held
in an agency or fiduciary capacity are not included in the consolidated
financial statements.
As discussed in Note 3, Mergers and Acquisitions, the financial statements give
retroactive effect to the merger of Puget Sound Bancorp with and into the
Corporation, accounted for as a pooling of interests. Accordingly, all
financial data are presented as if both companies had been merged for all
periods presented.
Business Combinations
In business combinations accounted for as pooling of interests, the assets,
liabilities and shareholders' equity of the respective companies are carried
forward at their historical amounts, the companies' results of operations are
combined and the prior period financial statements are restated to give effect
to the merger, unless the effect of the business combination is not material to
the financial statements of the Corporation.
In business combinations accounted for as purchases, the results of operations
of the acquired businesses are included from the respective dates of
acquisition. Net assets of the companies acquired are recorded at their cost to
the Corporation at the date of acquisition.
Statement of Cash Flows
Cash and due from banks are the only items considered as cash and cash
equivalents.
Investment Securities
Investment securities are those securities which the Corporation has the
positive intent and ability to hold to maturity. Investment securities are
carried at cost, adjusted for amortization of premiums and accretion of
discounts on a level yield basis. Gains or losses from the sale of investment
securities are recognized upon realization and are computed on the specific
identification method.
Securities Available for Sale
Securities available for sale are carried at the lower of their aggregate cost
or market value. Gains or losses from the sale of securities available for sale
are computed using the specific identification method and are included in net
securities gains.
In May 1993, the Financial Accounting Standards Board issued Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115).
SFAS 115 requires that equity securities having readily determinable fair
values and all investments in debt securities be classified and accounted for
in three categories. Debt securities that management has the positive intent
and ability to hold to maturity are to be classified as "held-to-maturity
securities" and reported at amortized cost. Debt and equity securities that
are bought and held principally for the purpose of selling them in the near
term are to be classified as "trading securities" and reported at fair value,
with unrealized gains and losses included in operating results. Debt and equity
securities not classified as either held-to-maturity securities or trading
securities are to be classified as "available for sale securities" and
reported at fair value, with the unrealized gains and losses excluded from
operating results and reported as a separate component of shareholders' equity.
Adoption of SFAS 115 is required for fiscal years beginning after December 15,
1993, with earlier application permitted. The Corporation will adopt SFAS 115
in 1994. Based upon the Corporation's securities portfolio at December 31,
1993, the estimated impact of adopting SFAS 115 would be an increase to
shareholders' equity of $15.9 million, with no effect on the results of
operations.
Mortgage Loans Held for Sale
Loans held for sale are carried at the lower of aggregate cost, market value,
or contracted sales value when fixed price commitments to sell exist.
Loans
Loans are carried at the principal amount outstanding, net of unearned income,
including deferred loan fees and costs. Interest on loans and amortization of
unearned income is credited to income, on a level yield basis.
The accrual of interest is discontinued when circumstances indicate that
collection is questionable, or generally when payment is over 90 days past
due. In such cases, interest accrued but not collected is charged against the
Allowance for Loan Losses. Thereafter, payments received are first applied to
the principal. Depending on management's assessment of the ultimate
collectibility of the loan, interest income may be recognized on a cash basis.
Loans are returned to accrual status when management determines that the
circumstances have improved to the extent that both principal and interest are
deemed collectible and there is a sustained period of repayment performance.
<PAGE> 6
Nonrefundable loan origination and commitment fees and the direct costs
associated with originating or acquiring loans are deferred. The net deferred
amount is amortized as an adjustment to the related loan yield over the
contractual life of the related loans.
Allowance for Loan Losses
The Allowance for Loan Losses (the "Allowance") is intended to absorb future
probable losses in the loan portfolio. Additions to the Allowance are made by
charges to the Provision for Loan Losses. These additions are based upon
several factors, including management's continual review of the overall quality
of the loan portfolio (with special attention to those loans which are not
current as to principal and/or interest), and the growth and composition of the
loan portfolio (including the collateral).
In May 1993, the Financial Accounting Standards Board issued Statement No. 114,
"Accounting by Creditors for Impairment of a Loan" (SFAS 114), effective for
fiscal years beginning after December 15, 1994. SFAS 114 prescribes valuation
methodology for impaired loans. Such loans must be valued using the present
value of expected future cash flows discounted at the loans effective interest
rate, the loans observable market price or the fair value of the loans
underlying collateral. The Corporation expects to adopt SFAS 114 prospectively
starting in the first quarter of 1995. It is anticipated that the adoption of
SFAS 114 will not have a material effect on the Corporation's financial
condition or results of operations.
Premises and Equipment
Premises and equipment, including leasehold improvements, are stated at cost
less accumulated depreciation. Capital leases are included in premises and
equipment at the capitalized amount less accumulated amortization. Depreciation
and amortization included in operating expenses are computed principally on the
straight-line method throughout the estimated useful lives of the assets.
Additions to premises and equipment and major replacements or improvements are
capitalized.
Other Assets
Included in other assets are real estate and repossessed personal property held
for sale which have been acquired principally through foreclosure or a similar
conveyance of title. Real estate may be considered to be in-substance
foreclosed and included in other assets prior to the conveyance of title when
specific criteria are met. Both foreclosed and in-substance foreclosed real
estate, as well as repossessed personal property, are carried at the lower of
their recorded amounts or fair value less estimated costs of disposal. Any
write-downs at, or prior to, the dates of acquisition are charged to the
Allowance for Loan Losses. Subsequent write-downs are recorded in noninterest
expense. Expenses incurred in connection with holding such assets, and gains
and losses upon sale, are included in other noninterest expense.
Intangible assets are principally comprised of core deposit intangibles and the
excess of cost over net assets of acquired subsidiaries (goodwill). Core
deposit intangibles represent the present value of the difference in costs
between the acquired core deposits and the market alternative funding sources
and are amortized on an accelerated basis over lives ranging from 7 to 14
years.
The excess of cost over net assets of acquired subsidiaries is amortized on a
straight-line basis over periods generally not exceeding 25 years. In
acquisitions of financially-troubled institutions the excess cost, if any, is
amortized over the average weighted life of the acquired long-term interest-
bearing assets, which has ranged from 5 to 10 years.
Purchased mortgage servicing rights represent the cost of the right to receive
future servicing income. Purchased mortgage servicing rights are amortized
(as a reduction to service fee income) over the estimated life of the related
loans in proportion to the recognition of estimated net servicing income. An
evaluation of the carrying amount of the purchased mortgage servicing rights
is performed on a disaggregated basis by discounting the expected future cash
flows, taking into consideration the estimated level of prepayments based upon
current industry expectations.
Other Postemployment Benefits
In November 1992, the Financial Accounting Standards Board issued Statement No.
112, "Employers' Accounting for Postretirement Benefits" (SFAS 112), generally
effective for fiscal years that begin after December 15, 1993. SFAS 112
establishes standards for accounting and reporting the cost of benefits
provided by an employer to its former or inactive employees after employment
but before retirement. The Corporation provides certain benefits to former and
inactive employees. The current accounting by the Corporation with respect to
these benefits does not materially differ from the requirements of SFAS 112.
The Corporation adopted SFAS 112 on a prospective basis on January 1, 1994.
Income Taxes
The Corporation accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
(SFAS 109).
<PAGE> 7
The Corporation, with the exception of Key Bank Life Insurance Ltd., files a
consolidated federal income tax return.
Interest Rate Swaps
As part of its interest rate risk management strategy, KeyCorp enters into
interest rate swap agreements. Revenue and expense associated with interest
rate swaps entered into as part of KeyCorp's asset and liability management
activities is recognized as an adjustment to interest income and expense.
Earnings Per Share
Earnings per common share is computed by dividing net income, less preferred
stock dividends, by the weighted average number of common shares outstanding.
NOTE 2. SUBSEQUENT EVENT - MERGER WITH SOCIETY CORPORATION
On March 1, 1994, KeyCorp merged with and into Society Corporation ("Society")
of Cleveland, Ohio, and the combined corporation changed its name to KeyCorp.
Under the terms of the merger agreement, 124,351,183 shares of new KeyCorp
Common Stock were exchanged for all of the outstanding shares of KeyCorp Common
Stock based upon an exchange ratio of 1.205 shares of new KeyCorp Common Stock
for each share of KeyCorp Common Stock. The outstanding preferred stock of
KeyCorp was exchanged for 1,280,000 shares of comparable, newly-created issue
of 10% Cumulative Preferred Stock of the new KeyCorp. The merger was accounted
for as a pooling of interests and as a tax-free exchange for KeyCorp
stockholders.
Society is a bank holding company which provides traditional banking and
associated financial services to consumer, business, and commercial markets
through 434 full service banking offices in Ohio, Florida, Indiana, and
Michigan. Society also has one of the largest investment management and trust
businesses in the United States, and provides a full range of investment and
fiduciary services to institutions and individuals. At December 31, 1993,
Society and its consolidated subsidiaries had total assets of $27.0 billion,
total deposits of $19.9 billion, and shareholders' equity of $2.0 billion.
In connection with the merger, KeyCorp recognized in the fourth quarter of 1993
merger and restructuring charges amounting to $64.8 million ($41.1 million
after tax, $.41 per common share). These charges, which are directly
attributable to the merger, included accruals for severance, relocation and
other employee costs ($32.0 million), systems and facilities costs ($19.0
million), merger transaction costs consisting primarily of investment banking,
legal and accounting fees ($7.9 million) and other charges incident to the
merger ($5.9 million). These charges were recorded by the parent company in the
fourth quarter of 1993 at which time management determined that it was
probable that a liability for such charges had been incurred and could be
reasonably estimated.
The following table presents net interest income, net income and net income
per Common Share reported by each of the companies and on a combined basis.
<TABLE>
<CAPTION>
in thousands, except per share amounts 1993 1992
- ---------------------------------------------------------------------
<S> <C> <C>
Net Interest Income:
KeyCorp $1,479,987 $1,318,286
Society 1,198,990 1,130,387
- ---------------------------------------------------------------------
Combined $2,678,977 $2,448,673
========== ==========
Net Income:
KeyCorp $362,767 $290,888
Society 347,159 301,210
- ---------------------------------------------------------------------
Combined $709,926 $592,098
======== ========
Net Income per Common Share:
KeyCorp $3.43 $2.80
Society 2.93 2.51
- ---------------------------------------------------------------------
Combined $2.89 $2.42
===== =====
- ---------------------------------------------------------------------
</TABLE>
<PAGE> 8
NOTE 3. MERGERS AND ACQUISITIONS
Jackson County Federal Bank
On December 31, 1993, Jackson County Federal Bank of Medford, Oregon ("JCF")
merged into Key Bank of Oregon, an indirect wholly-owned subsidiary of KeyCorp.
Approximately 1.2 million shares of KeyCorp common stock were issued to the
holders of JCF common and preferred stock. The transaction qualified for
accounting as a pooling of interests; however, financial statements for periods
prior to the merger have not been restated to include the accounts and results
of operations of JCF because the transaction was not material to KeyCorp. JCF
had total assets of $338 million at the date of the merger.
Northwestern National Bank
On July 22, 1993, Northwestern National Bank of Port Angeles, Washington
("NNB") merged into Key Bank of Washington, a wholly-owned indirect subsidiary
of KeyCorp. Approximately 0.3 million shares of KeyCorp common stock were
issued to the holders of NNB common stock. The transaction was treated as a
purchase for accounting purposes. NNB had total assets of $49 million at the
date of the acquisition.
Emerald City Bank
On July 2, 1993, Key Bank of Washington, a wholly-owned indirect subsidiary of
KeyCorp, assumed $7.2 million of deposits of the failed Emerald City Bank of
Seattle, Washington in an FDIC-assisted transaction.
Home Federal Savings Bank
On June 30, 1993, Home Federal Savings Bank of Fort Collins, Colorado ("Home
Federal") merged into Key Bank of Colorado, a wholly-owned subsidiary of KeyCorp
formed for the purposes of consummating the merger. Approximately 0.5 million
shares of KeyCorp common stock were issued to the holders of Home Federal
common stock. The transaction qualified for accounting as a pooling of
interests; however, financial statements for periods prior to the merger have
not been restated to include the accounts and results of operations of Home
Federal because the transaction was not material to KeyCorp. Home Federal had
total assets of $230 million at the date of the merger.
First American Bank of New York
On March 25, 1993, Key Bank of New York, a wholly-owned indirect subsidiary of
KeyCorp, acquired all of the deposits and the majority of the assets of First
American Bank of New York ("First American"). Key Bank of New York acquired 40
branches (thirty-nine branches in upstate New York and one branch in New York
City) and other business operations with approximately $1.0 billion in deposits
and approximately $600 million in loans, in addition to branch real estate and
other physical assets. The transaction was treated as a purchase for accounting
purposes. Key Bank paid a premium of $40.6 million on the acquired deposits. In
connection with the transaction, Key Bank of New York recorded a preliminary
core deposit intangible of $33.0 million and goodwill of $8.0 million.
Separately, Key Bank of New York sold the branch in New York City on July 8,
1993.
National Savings Bank of Albany
On February 26, 1993, National Savings Bank ("National") of Albany, New York
merged into Key Bank of New York, a wholly-owned indirect subsidiary of
KeyCorp. Approximately 1.75 million shares of KeyCorp common stock were
issued to the holders of National common stock. The transaction qualified for
accounting as a pooling of interests; however, financial statements for periods
prior to the merger have not been restated to include the accounts and results
of operations of National because the transaction was not material to KeyCorp.
National had total assets of $671 million at the date of the merger.
Puget Sound Bancorp
On January 15, 1993, Puget Sound Bancorp ("PSB"), a bank holding company
headquartered in Tacoma, Washington, merged into Key Bancshares of Washington,
Inc., a wholly-owned subsidiary of KeyCorp. KeyCorp issued 26.4 million
shares of common stock to the shareholders of PSB common stock. PSB
shareholders received 1.32 shares of KeyCorp's common stock for each share of
PSB common stock.
The merger was accounted for as a pooling of interests and, accordingly, pre-
merger historical financial information has been restated to include the
accounts of PSB.
In the fourth quarter of 1992, KeyCorp and PSB recorded one-time pretax
restructuring charges of $7.7 million and $35.0 million, respectively, related
to the merger. The restructuring charges resulted primarily from employee
severance and retention expenses, investment banking fees and branch closing
expenses. PSB also increased allowances related to the planned sale of out-of-
market loans and disposition of other real estate.
Security Pacific Bank Branches
On September 3, 1992, Key Bank of Washington ("Key Bank"), a wholly-owned
indirect subsidiary of KeyCorp, acquired 48 branches and other business and
private banking operations with approximately $1.3 billion in deposits and
$709 million in loans in addition to branch real estate and other physical
assets in the state of Washington from BankAmerica Corporation. The transaction
was accounted for as a purchase. Key Bank paid a premium of $53.6 million on
the acquired deposits.
<PAGE> 9
Olympic Savings Bank
On July 31, 1992, Key Savings Bank ("Key Savings"), a wholly-owned indirect
subsidiary of KeyCorp, acquired Olympic Savings Bank of Washington
("Olympic"). The transaction was accounted for as a purchase. Olympic had
$81.0 million in assets at the date of acquisition. $2.8 million in cash was
paid to the shareholders of Olympic.
Valley Bancorporation
On June 4, 1992, Valley Bancorporation (Valley) of Idaho Falls, Idaho was
merged with Key Bancshares of Idaho, a wholly-owned subsidiary of KeyCorp.
KeyCorp issued 0.7 million shares of KeyCorp common stock for all of the
outstanding shares of Valley common stock. The transaction qualified for
accounting as a pooling of interests; however, financial statements for periods
prior to the merger have not been restated to include the accounts and results
of operations of Valley because the transaction was not material to KeyCorp.
Valley had total assets of $221 million at the date of merger.
Intangible Assets
In connection with the purchase transactions presented above, goodwill totaling
$16.3 million in 1993 and $2.0 million in 1992 was initially recorded and is
being amortized on a straight-line basis over periods ranging from 5 to 25
years (See Note 10, Intangible Assets and Purchased Mortgage Servicing Rights).
Pending Acquisitions
Commercial Bancorporation of Colorado
On September 11, 1993, KeyCorp agreed to acquire Commercial Bancorporation of
Colorado ("CBC"), headquartered in Denver. Holders of CBC common stock will
receive KeyCorp common stock based on an exchange ratio of .746 shares of
KeyCorp common stock (.899 shares of new KeyCorp common stock, see Note 2)
for each outstanding share of CBC common stock. Shareholders of CBC approved
the Agreement at a Special Meeting held on February 22, 1994. The Agreement
is subject to the approval of the appropriate regulatory authorities. It is
anticipated that the transaction will be accounted for as a pooling of
interests and that it will close in March of 1994. CBC, a bank holding company
with subsidiary banks operating ten branch offices in the Denver, Colorado
Springs, Sterling and Fort Collins areas of Colorado, had total assets of $390
million at December 31, 1993.
The Bank of Greeley
On October 5, 1993, KeyCorp agreed to acquire the Bank of Greeley, a single
branch bank headquartered in Greeley, Colorado ("Greeley Bank"). Under terms
of the agreement, all shares of Greeley Bank will be exchanged for
approximately 0.2 million shares of KeyCorp common stock. Greeley Bank had
total assets of $61 million at December 31, 1993.
<PAGE> 10
NOTE 4. SECURITIES AVAILABLE FOR SALE
The book values, gross unrealized gains, gross unrealized losses and
approximate market values of securities available for sale at December 31, 1993
and 1992 were as follows:
<TABLE>
<CAPTION>
December 31, 1993
Gross Gross
Book Unrealized Unrealized Market
dollars in thousands Value Gains Losses Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury, agencies and corporations $695,902 $20,541 $ (162) $ 716,281
Mortgage-backed securities 269,735 4,165 (861) 273,039
Other debt securities 23,113 753 (5) 23,861
- -----------------------------------------------------------------------------------------------
Total debt securities $988,750 $25,459 $(1,028) $1,013,181
======== ======= ======= ==========
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1992 Gross Gross
Book Unrealized Unrealized Market
dollars in thousands Value Gains Losses Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury, agencies and corporations $ 910,302 $29,689 $ (293) $ 939,698
Mortgage-backed securities 405,812 6,183 (3,794) 408,201
Other debt securities 20,303 564 (23) 20,844
- -----------------------------------------------------------------------------------------------
Total debt securities $1,336,417 $36,436 $(4,110) $1,368,743
========== ======= ======= ==========
- -----------------------------------------------------------------------------------------------
</TABLE>
Proceeds from sales of securities available for sale during 1993 and 1992 were
$47.5 million and $661.9 million, respectively. Gross gains of $1.5 million
and $10.0 million were realized on those sales in 1993 and 1992, respectively.
Gross losses of $24 thousand and $7.0 million were realized on those sales in
1993 and 1992, respectively.
Securities available for sale at December 31, 1993, by expected maturity, were
as follows. Expected maturities may differ from contractual maturities if the
issuers have the right to call or prepay the obligations.
<TABLE>
<CAPTION>
December 31, 1993
Book Market
dollars in thousands Value Value
- ------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $306,733 $ 311,686
Due after one through five years 411,708 427,818
Due after five through ten years 106,093 106,707
Due after ten years 164,216 166,970
- ------------------------------------------------------------------------
Total debt securities $988,750 $1,013,181
======== ==========
- ------------------------------------------------------------------------
</TABLE>
<PAGE> 11
NOTE 5. INVESTMENT SECURITIES
The book value, gross unrealized gains, gross unrealized losses and approximate
market values of investment securities at December 31, 1993 and 1992 were as
follows:
<TABLE>
<CAPTION>
December 31, 1993
Gross Gross
Book Unrealized Unrealized Market
dollars in thousands Value Gains Losses Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury, agencies and corporations $ 785,381 $ 10,511 $ (134) $ 795,758
States and political subdivisions 1,303,152 86,801 (349) 1,389,604
Mortgage-backed securities 3,333,038 49,676 (10,293) 3,372,421
Other 9,181 82 (176) 9,087
- ----------------------------------------------------------------------------------------------------------
Total debt securities 5,430,752 147,070 (10,952) 5,566,870
Equity securities 38,114 92 (110) 38,096
- ----------------------------------------------------------------------------------------------------------
Total investment securities $5,468,866 $147,162 $(11,062) $5,604,966
========== ======== ======== ==========
December 31, 1992
Gross Gross
Book Unrealized Unrealized Market
dollars in thousands Value Gains Losses Value
- ----------------------------------------------------------------------------------------------------------
U.S. Treasury, agencies and corporations $ 487,326 $ 11,329 $ (21) $ 498,634
States and political subdivisions 1,282,006 62,310 (565) 1,343,751
Mortgage-backed securities 2,688,058 68,609 (9,149) 2,747,518
Other 21,871 454 (24) 22,301
- ----------------------------------------------------------------------------------------------------------
Total debt securities 4,479,261 142,702 (9,759) 4,612,204
Equity securities 12,658 277 (791) 12,144
- ----------------------------------------------------------------------------------------------------------
Total investment securities $4,491,919 $142,979 $(10,550) $4,624,348
========== ======== ======== ==========
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Investment securities at December 31, 1993, by anticipated maturity, are shown
below. Expected maturities may differ from contractual maturities if the
issuers have the right to call or prepay the obligations.
<TABLE>
<CAPTION>
December 31, 1993
Book Market
dollars in thousands Value Value
- ---------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $1,347,843 $1,361,603
Due after one year through five years 3,004,751 3,060,959
Due after five through ten years 877,464 925,980
Due after ten years 238,808 256,424
- ---------------------------------------------------------------------------------
Total debt securities $5,468,866 $5,604,966
========== ==========
- ---------------------------------------------------------------------------------
</TABLE>
The proceeds from sales of investment securities were $0.8 million, $51.2
million and $666.9 million during 1993, 1992 and 1991, respectively. During
1993, no gains were realized on the sales of investment securities, while
gross losses of $0.5 million were realized on such sales. Gross gains and
losses related to sales of investment securities were $2.2 million and $19
thousand, respectively, in 1992, and $16.7 million and $5.8 million,
respectively, in 1991.
There were no investments in obligations of state and political subdivisions
that were payable from and secured by the same source of revenue or taxing
authority and that exceeded 10 percent of consolidated shareholders' equity
on December 31, 1993 or 1992.
At December 31, 1993 investment and available for sale securities with a
carrying amount of approximately $5.2 billion were pledged to secure public
deposits and for certain other purposes as required by law.
<PAGE> 12
NOTE 6. LOANS
Loans at December 31 were as follows:
<TABLE>
<CAPTION>
dollars in thousands 1993 1992 1991
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial, financial and agricultural $ 4,589,000 $ 4,450,662 $ 4,017,891
Real estate-construction 537,235 710,449 737,829
Real estate-residential mortgage 4,108,331 3,616,235 3,627,322
Real estate-commercial mortgage 6,462,977 5,096,198 4,303,153
Consumer 6,008,032 5,836,744 5,815,923
Lease financing 492,030 304,057 224,465
- ------------------------------------------------------------------------------------
Total $22,197,605 $20,014,345 $18,726,583
=========== =========== ===========
- ------------------------------------------------------------------------------------
</TABLE>
Changes in the Allowance for Loan Losses for the years ended December 31 are
summarized as follows:
<TABLE>
<CAPTION>
dollars in thousands 1993 1992 1991
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $279,905 $267,603 $216,255
Loans charged off (155,344) (216,685) (198,234)
Recoveries 37,768 27,785 21,457
- ----------------------------------------------------------------------------
Net loans charged off (117,576) (188,900) (176,777)
Provision for loan losses 139,422 190,971 186,116
Allowances of subsidiaries purchased 20,327 10,231 42,009
- ----------------------------------------------------------------------------
Balance at end of year $322,078 $279,905 $267,603
======== ======== ========
- ----------------------------------------------------------------------------
</TABLE>
There were no significant credit concentrations in KeyCorp's loan portfolio at
December 31, 1993. At December 31, 1993, KeyCorp had no foreign loans or loans
related to highly leveraged transactions.
NOTE 7. NONPERFORMING ASSETS
The effect on interest income of loans classified as nonperforming at December
31 of each respective year was as follows:
<TABLE>
<CAPTION>
dollars in thousands 1993 1992
- -----------------------------------------------------------
<S> <C> <C>
Interest income which would have
been recorded if assets had been
current under original terms $12,555 $17,271
Less: Interest income recorded
during the period (4,450) (6,162)
- -----------------------------------------------------------
Net reduction to reported
interest income $ 8,105 $11,109
======= =======
- -----------------------------------------------------------
</TABLE>
Nonperforming assets at December 31 were as follows:
<TABLE>
<CAPTION>
dollars in thousands 1993 1992
- ------------------------------------------------------------
<S> <C> <C>
Nonaccrual loans $167,395 $202,743
Restructured loans 6,099 1,446
- ------------------------------------------------------------
Total nonperforming loans 173,494 204,189
Other real estate owned 124,946 213,548
Allowance for loss on disposal (22,679) (14,538)
- ------------------------------------------------------------
Other real estate owned,
net of allowance 102,267 199,010
- -----------------------------------------------------------
Total nonperforming assets $275,761 $403,199
======== ========
- ------------------------------------------------------------
</TABLE>
<PAGE> 13
Changes in the Allowance for Losses on other real estate owned for the years
ended December 31 are summarized as follows:
<TABLE>
<CAPTION>
dollars in thousands 1993 1992 1991
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $14,538 $11,944 $ 6,162
Net charge-offs (17,470) (29,173) (10,778)
Provision for other real estate owned losses 25,271 31,767 13,975
Allowances of subsidiaries purchased 340 -- 2,585
- ----------------------------------------------------------------------------------
Balance at end of year $22,679 $14,538 $11,944
======= ======= =======
- ----------------------------------------------------------------------------------
</TABLE>
NOTE 8. RELATED PARTY TRANSACTIONS
Certain executive officers, directors and their associates (as defined by the
Securities and Exchange Commission) have loans and other transactions with the
subsidiary banks. Such transactions are made on substantially the same terms,
including interest rates and collateral required, as those prevailing for
similar transactions with others. The aggregate amount of loans outstanding to
qualifying related parties at January 1, 1993, was $106.3 million. During 1993,
activity with respect to these loans included new loans, repayments and a net
decrease (due to changes in the status of executive officers and directors) of
$118.5 million, $77.4 million and $18.7 million, respectively, resulting in an
aggregate balance of loans outstanding to related parties at December 31, 1993,
of $128.7 million.
<PAGE> 14
NOTE 9. PREMISES AND EQUIPMENT
The Corporation's executive offices are in Albany, New York. At December 31,
1993, KeyCorp's banking subsidiaries operated 833 offices, of which 515 were
owned and 318 were leased. Certain leases, expiring at various dates through
the year 2010, qualify as capital leases and contain purchase options for the
premises leased thereunder. At December 31, 1993, banking subsidiaries of the
Corporation were obligated under noncancellable operating leases for land and
buildings and for other property consisting principally of data processing
equipment. Many of the realty lease agreements contain renewal options for
varying periods. In many cases, renewal terms, including annual rentals to be
paid, must be negotiated at the renewal date. The leases generally require
payment of maintenance costs and real estate taxes in excess of specified
minimums. There are no significant encumbrances on properties owned.
Rental expense under all operating leases totaled $70.3 million in 1993,
$60.1 million in 1992 and $53.9 million in 1991. Minimum future rental
payments under noncancellable leases at December 31, 1993, are as follows:
1994-$61.6 million; 1995-$58.3 million; 1996-$53.2 million; 1997-$50.4 million;
1998-$37.6 million; and subsequent years-$286.2 million.
Depreciation and amortization expense related to premises and equipment totaled
$53.0 million, $42.5 million, and $35.4 million in 1993, 1992, and 1991
respectively.
Premises and equipment at December 31 were as follows:
<TABLE>
<CAPTION>
dollars in thousands 1993 1992
- -------------------------------------------------------------------
<S> <C> <C>
Land $ 73,310 $ 57,454
Buildings and leasehold improvements 392,926 359,686
Furniture and equipment 345,058 299,477
- -------------------------------------------------------------------
811,294 716,617
Accumulated depreciation and
amortization (320,189) (279,863)
- -------------------------------------------------------------------
Total $491,105 $436,754
======== ========
- -------------------------------------------------------------------
</TABLE>
NOTE 10. INTANGIBLE ASSETS AND PURCHASED MORTGAGE SERVICING RIGHTS
Intangible assets, net of accumulated amortization, at December 31 were as
follows:
<TABLE>
<CAPTION>
dollars in thousands 1993 1992
- -------------------------------------------------------------------
<S> <C> <C>
Goodwill $204,367 $199,743
Core deposit intangibles 128,160 115,453
Other 4,120 6,809
- -------------------------------------------------------------------
Intangibles, net of
accumulated amortization $336,647 $322,005
======== ========
- -------------------------------------------------------------------
Purchased mortgage servicing rights $187,155 $164,359
- -------------------------------------------------------------------
</TABLE>
Goodwill is amortized by the straight-line method over periods generally not
exceeding twenty-five years. Core deposit intangibles represent the net
present value of the future economic benefits related to the use of deposits
purchased. They are being amortized on an accelerated basis over periods
ranging from 7 to 14 years. Other intangibles are generally being amortized
using the straight-line method over periods ranging from five to ten years.
The 1993 amortization expense for goodwill, core deposit intangibles, and other
intangibles was $12.3 million, $16.9 million, and $2.9 million, respectively.
The 1993 amortization expense for purchased mortgage servicing rights was $56.1
million. The amount of purchased mortgage servicing rights capitalized during
1993 was $77.3 million.
<PAGE> 15
NOTE 11. CERTIFICATES OF DEPOSIT OVER $100,000
The Corporation had certificates of deposit over $100,000 of $1,888.1 million,
$1,866.5 million and $2,315.7 million at December 31, 1993, 1992 and 1991,
respectively. Interest expense on certificates of deposit over $100,000 was
$86.2 million, $101.1 million and $176.4 million for the years ended December
31, 1993, 1992 and 1991, respectively.
NOTE 12. SHORT-TERM BORROWINGS
Short-Term Borrowings
Short-term borrowings consist primarily of federal funds purchased and
securities sold under repurchase agreements, which generally represent
overnight borrowing transactions. Other short-term borrowings consist
primarily of Treasury tax and loan demand notes and commercial paper of the
Corporation which is issued primarily in amounts of $100,000 or more with
maturities of one year or less.
The details of short-term borrowings are as follows:
<TABLE>
<CAPTION>
dollars in thousands 1993 1992 1991
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased
Balance at year-end $ 918,411 $ 509,955 $ 822,419
Average during the year 765,076 711,752 444,214
Maximum month-end balance 967,490 1,181,338 890,333
Weighted average rate during the year 3.06% 3.51% 5.72%
Weighted average rate at December 31 3.08 3.15 4.28
- --------------------------------------------------------------------------------------
Securities sold under repurchase agreements
Balance at year-end $ 848,107 $ 863,460 $ 929,226
Average during the year 883,938 1,037,960 1,122,684
Maximum month-end balance 1,060,974 1,108,102 1,501,663
Weighted average rate during the year 2.89% 3.42% 5.40%
Weighted average rate at December 31 2.77 3.00 4.12
- --------------------------------------------------------------------------------------
Other short-term borrowings
Balance at year-end $ 600,440 $ 598,530 $ 380,236
Average during the year 378,235 361,225 871,933
Maximum month-end balance 600,440 598,530 380,236
Weighted average rate during the year 5.41% 5.32% 6.54%
Weighted average rate at December 31 3.11 4.04 3.28
- --------------------------------------------------------------------------------------
</TABLE>
At December 31, 1993 the Corporation had available lines of credit for general
corporate purposes aggregating $200.0 million, all of which was unused at
December 31, 1993. Standard fees are paid for these facilities.
<PAGE> 16
NOTE 13. LONG-TERM DEBT
The components of long-term debt at December 31 are as follows:
<TABLE>
<CAPTION>
dollars in thousands 1993 1992
- ---------------------------------------------------------------------------------
<S> <C> <C>
Parent
6.97% Medium Term Notes due to 2003 <F1> $435,630 $303,930
9.45% Senior Notes due 1993 -- 75,000
12.63% Promissory Notes due 1994 1,860 1,860
5.25% Floating Rate Subordinated Notes due 1997 -- 50,000
8.40% Subordinated Capital Notes due 1999 75,000 75,000
7.75% Debentures due to 2002 -- 13,533
8.00% Subordinated Note due 2004 125,000 125,000
- ---------------------------------------------------------------------------------
637,490 644,323
Subsidiaries
Federal Home Loan Bank Advances <F2> 165,100 246,350
All Other 8,623 13,353
- ---------------------------------------------------------------------------------
$811,213 $904,026
======== ========
- ---------------------------------------------------------------------------------
<FN>
<F1> Represents a weighted average rate at December 31, 1993.
<F2> Long-term advances from the Federal Home Loan Bank of Seattle (FHLB)
are at adjustable and fixed rates ranging from 3.125% to 12.125% at
December 31, 1993, and mature at various dates through 2005. Real
estate loans with a recorded value of $472.6 million and $375.4
million at December 31, 1993 and 1992, respectively, collateralize
FHLB advances.
</TABLE>
All subordinated notes of the Corporation qualify as Tier II capital in
calculating capital adequacy ratios.
Scheduled payments on long-term debt are as follows:
in thousands Parent Subsidiaries Total
- -------------------------------------------------------
1994 $72,890 $36,536 $109,426
1995 49,000 66,048 115,048
1996 67,600 11,583 79,183
1997 41,000 1,135 42,135
1998 74,500 735 75,235
- -------------------------------------------------------
On June 29, 1992, KeyCorp issued $125 million of subordinated debt. Proceeds
from these twelve-year notes were used to retire without penalty all of its
11.25% Senior Notes prior to maturity. Proceeds were also employed to provide
capital for Key Bank of Washington. This capital infusion was made in
anticipation of Key Bank of Washington's purchase of 48 former Security Pacific
Bank branches from BankAmerica on September 3, 1992.
Additionally, KeyCorp issued $77 million of medium-term notes during 1992.
KeyCorp used the proceeds from the issuance of medium-term notes principally
to provide subordinated capital to subsidiary banks and to fund the purchase
of OREO from subsidiary banks by NCB Properties Inc., KeyCorp's OREO workout
subsidiary.
On July 27, 1992, the Securities and Exchange Commission declared effective a
shelf registration of KeyCorp debt securities. The shelf registration may be
used to offer up to $400 million aggregate principal amount of debt securities.
As of December 31, 1992, $40 million of subordinated medium-term notes had been
issued under the shelf registration.
On May 6, 1993 and May 27, 1993, KeyCorp retired prior to maturity, and without
penalty, all of its floating rate subordinated notes due 1997 and all of its
7.75% Debentures due to 2002, respectively. On June 1, 1993, KeyCorp's 9.45%
Senior Notes matured.
A total of $194.5 million of medium-term notes were issued during 1993. KeyCorp
used the proceeds from the issuance of $125.0 million of subordinated medium-
term notes to retire and pay the principal on the above referenced notes and
debentures and to fund the purchase of OREO from subsidiary banks by NCB
Properties Inc.
<PAGE> 17
NOTE 14. SHAREHOLDERS' EQUITY
On March 1, 1994, KeyCorp merged with and into Society and the combined
corporation changed its name to KeyCorp. Under the terms of the merger
agreement, shares of new KeyCorp were exchanged for all of the outstanding
shares of KeyCorp. See Note 2 Subsequent Event - Merger with Society
Corporation, for further discussion.
At the Annual Meeting of Shareholders of KeyCorp held on April 22, 1993, the
shareholders approved an Amendment to the Certificate of Incorporation to
increase the number of shares of common stock which KeyCorp shall have
authority to issue from 175,000,000 to 350,000,000.
Preferred Stock
At December 31, 1993, KeyCorp had 10,000,000 shares of $5 par value, non-voting
preferred stock authorized of which 1,280,000 shares of Series B were
outstanding represented by 6,400,000 Depositary Shares. Each Depositary Share
represents a one-fifth interest in a share of 10% Cumulative Preferred Stock,
Series B, $125 liquidation preference per share. Preferred Stock is reported
on the accompanying consolidated balance sheet at its per share liquidation
value of $125.
Dividends on the Series B Preferred Stock are cumulative from the date of
original issue and are payable quarterly, at the rate of 10 percent per annum.
The Series B Preferred Stock is not redeemable prior to June 30, 1996 and is
redeemable at the option of KeyCorp (subject to Federal Reserve Board approval)
at $125 per share ($25 per Depositary Share) plus unpaid dividends accrued to
the redemption date.
Except for a limited right to elect two Directors if full cumulative dividends
have not been paid for six quarterly dividend periods, and a right to vote as a
class on amendments to the KeyCorp Certificate of Incorporation which could
adversely affect the rights of the Preferred Shareholders, the shareholders of
Series B Preferred Stock are not entitled to vote.
KeyCorp redeemed all outstanding shares of its Series A Preferred Stock in
August 1993 without premium at a redemption price of $50 per share. The total
cost of redeeming the Series A Preferred Stock was $24.0 million.
Common Stock
Concurrent with the KeyCorp/Society Merger Agreement (see Note 2), KeyCorp
entered into a Shareholder Rights Protection Agreement dated October 1, 1993,
pursuant to which holders of record on October 15, 1993 of KeyCorp common
stock received one Right for each share of the Corporation. Each Right
represents the right to purchase one one-hundredth of a share of participating
preferred stock, par value $5 per share, for $115 subject to adjustment. The
rights become exercisable 10 days after a person or group acquires 20% or more
of the outstanding shares of KeyCorp Common Stock or commences a tender offer
that could result in such an ownership interest. Until the Rights become
exercisable, they will trade with the common shares, and any transfer of the
common shares will also constitute a transfer of associated Rights. When the
Rights become exercisable, they will begin to trade separate and apart from
the common shares. The Corporation may redeem these Rights at its option at
$.01 per Right subject to certain limitations. The KeyCorp Rights will not
prevent a takeover of KeyCorp. However, the KeyCorp Rights may cause
substantial dilution to a person or group that acquires 20% or more of the
KeyCorp Common Stock unless the KeyCorp Rights are first redeemed by the Board
of Directors of KeyCorp. The merger with Society Corporation did not activate
the provisions of the Rights.
At December 31, 1993, approximately 4,898,404 shares of common stock were
reserved for issuance under KeyCorp's Dividend Reinvestment, Employee Stock
Purchase, and Stock Option Plans.
Stock Options
The Corporation has various stock option plans which allow for the granting of
stock options to key employees and directors of KeyCorp. In accordance with the
plans, options may be granted from time to time at a purchase price per share
of 100% of the fair market value on the grant date. Once granted, the options
can be exercised over a period of ten years from the date of the grant.
In addition, the plans allow for the granting of stock appreciation rights
(SARs) in tandem with options. During 1991 all outstanding SARs were exercised.
There are no SARs outstanding at December 31, 1993.
A summary of activity under the plans follows:
<PAGE> 18
<TABLE>
<CAPTION>
Stock Options
1993 1992
-----------------------------------------------------
options in thousands Shares Option Price Shares Option Price
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 3,454 $ 4.04-$38.63 3,760 $ 4.04-$27.42
Granted 701 35.38- 46.00 843 29.67- 38.63
Exercised or surrendered (864) 8.45- 32.38 (1,012) 4.04- 26.67
Lapsed or cancelled (24) 16.59- 36.88 (137) 16.59- 32.38
- ----------------------------------------------------------------------------------------
Outstanding at end of year 3,267 $4.04-$46.00 3,454 $ 4.04-$38.63
- ----------------------------------------------------------------------------------------
Exercisable at end of year 2,769 $4.04-$46.00 2,886 $ 4.04-$38.63
- ----------------------------------------------------------------------------------------
</TABLE>
In 1991, the Board of Directors approved grants to certain officers of KeyCorp
and its subsidiaries under the Career Equity Program ("Program"). The Program
is designed to increase equity ownership by the participants, who make an
initial investment and elect to have options automatically exercised at regular
intervals when share value appreciation is present. At exercise, replacement
option grants are made at the current market value. Shares received under the
Program are restricted as to resale during the five-year period of the Program.
NOTE 15. EMPLOYEE BENEFITS
The Corporation sponsors a non-contributory defined benefit pension plan
covering substantially all of its employees. Benefits are principally based on
an employee's years of service and the highest five consecutive years of base
salary during the last ten years of service. The Corporation's funding policy
is to contribute amounts to the plan which meet the minimum funding
requirements set forth in the Employee Retirement Income Security Act of 1974,
plus such additional amounts as the Corporation determines to be appropriate.
Contributions are intended to provide both for benefits attributed to service
to date and for those that are expected to be earned in the future.
The following table sets forth the status of the funded plan and the amounts
recognized in the Corporation's consolidated balance sheets at December 31:
<TABLE>
<CAPTION>
dollars in thousands 1993 1992
- ----------------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation
Vested benefits $221,261 $184,452
Non-vested benefits 3,271 5,522
- ----------------------------------------------------------------------------
Accumulated benefit obligation 224,532 189,974
Effect of projected future
compensation levels 28,628 45,981
- ----------------------------------------------------------------------------
Projected benefit obligation 253,160 235,955
Plan assets at fair value,
(principally listed stock and
fixed income securities) <F1> 253,144 234,802
- ----------------------------------------------------------------------------
Plan assets in excess of
(less than) projected benefit obligation (16) (1,153)
Unrecognized net loss 20,813 12,010
Unrecognized prior service cost 12,271 14,711
Unrecognized net asset (being amortized
principally over 15 years) (10,645) (11,793)
- ----------------------------------------------------------------------------
Prepaid pension cost included
in other assets $ 22,423 $ 13,775
======== ========
- ----------------------------------------------------------------------------
<FN>
<F1> Including KeyCorp common stock valued at $27.8 million in 1993 and
$30.4 million in 1992.
</TABLE>
<PAGE> 19
The weighted average discount rate used in determining the projected benefit
obligation as of December 31, 1993 and 1992 was 7.25% and 7.75%, respectively.
The assumed rate of increase in future compensation was 4% and 5% as of
December 31, 1993, and 1992, respectively. The expected long-term rate of
return on plan assets was 10.5% in 1991 through 1993.
The Corporation also maintains an unfunded, non-qualified supplemental
executive retirement program that provides certain officers defined pension
benefits in excess of limits imposed by Federal law. The following table sets
forth the status of the unfunded plan and amounts recognized in the
Corporation's consolidated balance sheets at December 31:
<TABLE>
<CAPTION>
dollars in thousands 1993 1992
- ----------------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation
Vested benefits $35,995 $25,804
Non-vested benefits 127 73
- ----------------------------------------------------------------------------
Accumulated benefit obligation 36,122 25,877
Effect of projected future compensation levels 7,570 3,302
- ----------------------------------------------------------------------------
Projected benefit obligation 43,692 29,179
Unrecognized prior service cost (4,583) (5,705)
Unrecognized transition obligation (2,724) (3,064)
Unrecognized net loss (11,915) (5,430)
Adjustment to recognize minimum liability 11,653 10,897
- ----------------------------------------------------------------------------
Accrued pension cost included in
accrued taxes and expenses $36,123 $25,877
======= =======
- ----------------------------------------------------------------------------
</TABLE>
Net periodic pension expense for the funded and unfunded plans for the years
ended December 31, included the following components:
<TABLE>
<CAPTION>
dollars in thousands 1993 1992 1991
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost of benefits earned
during the period $13,852 $11,463 $ 8,933
Interest cost on projected
benefit obligation 20,920 18,171 16,180
Actual return on plan assets (14,762) (17,346) (38,481)
Net amortization and deferral (7,523) (2,588) 21,158
- ----------------------------------------------------------------------------
Net periodic pension cost $12,487 $ 9,700 $ 7,790
======= ======= =======
- ----------------------------------------------------------------------------
</TABLE>
The Corporation sponsors the KeyCorp Profit Sharing Plus Plan (the 401(k)
Plan), a defined contribution profit sharing plan with cash or deferral
arrangements permitted by Internal Revenue Code subsection 401(k).
Substantially all employees are eligible to participate after satisfaction of
the one year service requirement under the plan. Under the savings aspect of
the plan, employees may contribute 1% to 10% of base compensation with up to
6% being eligible for matching contributions from the Corporation. In addition
to a mandatory match, the Corporation, after determining its net income, may
make an additional match, or contribute additional amounts to the 401(k) Plan,
which are then allocated to each plan participant in proportion to their
eligible salary. Contributions to the 401(k) Plan were $16.4 million, $12.3
million and $9.3 million for 1993, 1992 and 1991, respectively.
The Corporation sponsors defined benefit postretirement plans that cover
substantially all employees. The plans provide medical and death benefits.
The postretirement medical plan is contributory, with contributions adjusted
annually; the death benefit is noncontributory. Employee contributions are
based on years of service and are adjusted annually. The accounting for the
medical plan anticipates future cost-sharing changes to the written plan that
are consistent with the Corporation's expressed intent to increase retiree
contributions each year. The Corporation elected to adopt prospectively
Statement of Financial Accounting Standards No. 106, Employers' Accounting for
Postretirement Benefits Other than Pensions (FAS 106) on January 1, 1993.
<PAGE> 20
FAS 106 requires that the projected future cost of retiree health and life
insurance be accrued over the employees' working careers. Prior to the change,
cost were charged to expense as incurred. Postretirement benefit expense was
$5.0 million in 1993 (including $3.5 million due to the application of the new
standard), $2.5 million in 1992 and $1.8 million in 1991.
Net periodic postretirement benefit cost for 1993 included the following
components:
<TABLE>
<CAPTION>
dollars in thousands
- -----------------------------------------------------------
<S> <C>
Service cost benefits attributed to
service during the period $1,246
Interest cost on accumulated
postretirement benefit obligation 2,298
Actual return on plan assets (22)
Amortization of transition obligation
over 20 years 1,524
Net amortization and deferred (10)
- -----------------------------------------------------------
Net periodic postretirement benefit cost $5,036
======
- -----------------------------------------------------------
</TABLE>
Because the Corporation fixed its contribution for postretirement medical
benefits at 1993 levels, a health care cost trend assumption was not used in
the determination of obligation and net periodic postretirement benefit cost
for medical benefits.
The weighted average discount rates used in determining the accumulated
postretirement benefit obligation are 7.75% and 7.25% as of January 1, 1993 and
December 31, 1993, respectively. The expected long-term rate of return on plan
assets was 10.5% as of January 1,1993 and will be 9.5% for 1994.
The Corporation's postretirement medical plan is unfunded; the accumulated
postretirement benefit obligation and plan assets as of January 1, 1993 were
$25.9 million and $0, respectively. The Corporation has adopted a funding
policy for its postretirement death benefit plan and annually contributes the
service cost for active employees not fully eligible for benefits plus an
amount to amortize the unfunded accumulated postretirement benefit obligation
over a 30-year period; as of January 1, 1993, the accumulated postretirement
benefit obligation and plan assets were $4.7 million and $.3 million,
respectively.
The following table sets forth the plans' combined funded status reconciled
with the amount shown in the Corporation's balance sheet at December 31, 1993:
<TABLE>
<CAPTION>
dollars in thousands
- -----------------------------------------------------------
<S> <C>
Accumulated postretirement benefit obligation:
Retirees $(17,255)
Fully eligible plan participants (3,626)
Other active plan participants (12,674)
- -----------------------------------------------------------
(33,555)
Plan assets at fair value 168
- -----------------------------------------------------------
Accumulated postretirement benefit
obligation in excess of plan assets (33,387)
Unrecognized net loss from past experience
different from that assumed and
from changes in assumptions 1,660
Unrecognized transition obligation 28,955
- -----------------------------------------------------------
Accrued postretirement benefit cost $ (2,772)
========
- -----------------------------------------------------------
</TABLE>
<PAGE> 21
NOTE 16. INCOME TAXES
Income taxes included in the consolidated statements of income are as
follows:
<TABLE>
<CAPTION>
Year ended December 31,
in thousands 1993 1992 1991
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Currently payable:
Federal $163,386 $114,645 $ 80,683
State 30,493 27,165 16,312
- ----------------------------------------------------------------------------
193,879 141,810 96,995
Deferred:
Federal (664) 25 4,583
State (6,716) 403 1,900
- ----------------------------------------------------------------------------
(7,380) 428 6,483
- ----------------------------------------------------------------------------
Total income tax expense $186,499 $142,238 $103,478
======== ======== ========
- ----------------------------------------------------------------------------
</TABLE>
The reasons for the differences between income tax expense and the amount
computed by applying the statutory federal tax rate to income before taxes
are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
in thousands 1993 1992 1991
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Income before taxes times statutory
tax rate <F1> $192,243 $145,014 $115,836
State income tax, net of federal
tax benefit 14,938 18,194 12,020
Amortization of intangibles 4,113 3,878 3,719
Tax-preference interest income (26,758) (28,893) (27,949)
Tax credits (2,170) (688) (581)
Other 4,133 4,733 433
- ----------------------------------------------------------------------------
$186,499 $142,238 $103,478
======== ======== ========
- ----------------------------------------------------------------------------
<FN>
<F1> 35% for 1993; 34% for 1992 and 1991.
</TABLE>
Income taxes on securities transactions were $.8 million in 1993, $1.7 million
in 1992 and $3.9 million in 1991.
The significant types of temporary differences that gave rise to net deferred
income taxes include the provision for loan losses, lease income, restructuring
charges, and writedown of other real estate owned.
The significant components of deferred income taxes (benefits) are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
in thousands 1993 1992 1991
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for loan losses $(12,980) $ (82) $(1,919)
Leasing income reported using the
operating method for tax purposes 48,405 25,954 9,606
Writedown of other real estate owned (11,436) (14,243) (6,100)
Restructuring charges (25,016) 296 (1,241)
Other (6,353) (11,497) 6,137
- ----------------------------------------------------------------------------
Deferred income tax expense (benefit) $ (7,380) $ 428 $ 6,483
======== ======= =======
- ----------------------------------------------------------------------------
</TABLE>
Significant components of KeyCorp's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
in thousands 1993 1992 1991
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for loan losses $ 89,019 $ 90,575 $ 84,529
Leasing income reported using the
operating method for tax purposes (85,487) (40,231) (14,277)
Writedown of other real estate owned 19,065 20,940 6,697
Restructuring charges 25,989 945 1,241
Other (9,885) (41,033) (53,179)
- ----------------------------------------------------------------------------
Net deferred tax assets $ 38,701 $ 31,196 $ 25,011
======== ======== ========
- ----------------------------------------------------------------------------
</TABLE>
<PAGE> 22
NOTE 17. COMMITMENTS, CONTINGENT LIABILITIES AND OTHER DISCLOSURES
Restrictions on Cash and Due from Banks, Subsidiary Dividends and Lending
Activities
Under the provisions of the Federal Reserve Act, depository institutions are
required to maintain certain average balances in the form of cash or
noninterest-bearing balances with the Federal Reserve Bank. Average reserve
balances aggregating $630.9 million in 1993 were maintained in fulfillment of
these requirements.
The principal source of income for the parent company is dividends from its
subsidiary banks. Such dividends are subject to certain restrictions as set
forth in the national and state banking laws and regulations. At December 31,
1993, undistributed earnings of $459.4 million were free of such restrictions
and available for the payment of dividends to the parent company.
Loans and advances from banking subsidiaries to the parent company are also
limited by law and are required to be collateralized.
Legal Proceedings
Although KeyCorp and its subsidiaries are defendants in various legal
proceedings arising in the course of business, there are no legal proceedings
pending which, in the opinion of management and counsel, may result in a
material loss to the Corporation.
<PAGE> 23
NOTE 18. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Corporation, in the normal course of its business to meet the financing
needs of its customers and to reduce its own exposure to fluctuations in
interest rates, is a party to financial instruments with off-balance sheet
risk. These instruments expose the Corporation to credit risk in addition to
amounts recognized on the consolidated balance sheets.
The Corporation uses the same credit policies in making commitments and
conditional obligations as it does for making loans. In the opinion of
management, the Corporation's outstanding commitments do not represent unusual
risks for KeyCorp. The exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for these commitments is
represented by the contractual amount.
A summary of credit exposure related to these items at December 31, 1993 is
shown below:
<TABLE>
<CAPTION>
in thousands
- -------------------------------------------------------------------
<S> <C>
Financial instruments whose contract
amounts represent credit and/or
market risk:
Loan commitments:
Credit card lines $1,466,336
Home equity 1,061,854
Commercial real estate,
construction and land development 530,218
Other <F1> 3,254,507
- -------------------------------------------------------------------
Total loan commitments 6,312,915
Other commitments:
Financial standby letters of credit 143,550
Performance standby letters of credit 52,432
Commercial letters of credit 110,873
Loans sold with recourse 140,365
- -------------------------------------------------------------------
Total loan and other commitments $6,760,135
==========
Financial instruments whose notional
or contract amounts exceed the
amount of credit and/or market risk:
When-issued securities
Commitments to purchase when-issued securities $ 20,200
Other 4,152
Mortgage loan sale commitments 958,262
Loan purchase options 45,000
Interest rate swap agreements 3,119,171
- -------------------------------------------------------------------
<FN>
<F1> Includes commitments to extend credit through overdraft facilities
or commercial lines of credit, retail check credit and related plans,
and mortgage loans.
</TABLE>
Commitments to extend credit are agreements to lend to a customer at a future
date, subject to the meeting of the contractual terms. Commitments generally
have fixed expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
actual future cash requirements of the Corporation. The Corporation evaluates
each customer's creditworthiness on a case-by-case basis.
Financial standby, performance standby and commercial letters of credit are
conditional commitments issued by the Corporation to guarantee the performance
of a customer to a third party. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to
customers.
A KeyCorp mortgage banking affiliate originates and services residential
mortgage loans to be sold in the secondary market. Prior to 1992
residential mortgages were sold with provisions for recourse by a mortgage
banking company acquired by KeyCorp. At December 31, 1993, the amount of such
loans sold with recourse to the acquired mortgage banking company was $140.4
million. KeyCorp has not and does not sell residential mortgages with
provisions for recourse.
Sales commitments and option contracts may be used by KeyCorp's mortgage
subsidiary to hedge against adverse movements in interest rates on mortgage
loans held for sale. At December 31, 1993, KeyCorp's mortgage subsidiary was
committed to deliver, at dates throughout 1994, $958.3 million of mortgage
loans under forward sale agreements. In addition, at December 31, 1993,
KeyCorp's mortgage subsidiary had entered into options to purchase $45.0
million of loans at a specified price. KeyCorp enters into interest rate swap
agreements to alter the interest rate characteristics of existing assets or
liabilities arising in the normal course of business.
The Corporation has limited the extension of loan commitments to customers
within the states served by its banking subsidiaries. The following table
presents the geographic distribution of unused loan commitments by state at
December 31, 1993:
Unused Loan
in thousands Commitments
- ----------------------------------------------
New York $2,986,289
Maine 598,394
Oregon 516,934
Washington 1,410,722
Utah 270,193
Idaho 244,719
Colorado 27,293
Wyoming 178,686
Alaska 79,685
- ----------------------------------------------
Total loan commitments $6,312,915
==========
- ----------------------------------------------
<PAGE> 24
NOTE 19. FAIR VALUE DISCLOSURES
In December 1991, the Financial Accounting Standards Board issued Statement
107, "Disclosures about Fair Value of Financial Instruments" (SFAS 107). SFAS
107 requires disclosure of fair value information about financial instruments,
whether or not recognized on the balance sheet, for which it is practicable to
estimate that value. "Fair value" is defined in SFAS 107 as the amount at which
an instrument could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. It is not the
Corporation's intent to enter into such exchanges.
"Financial instruments" is defined in SFAS 107 to include categories listed
below but does not include the value of separate intangible assets such as
customer relationships, purchased mortgage servicing rights and core deposit
intangibles which, if considered an integral part of the related financial
instruments, would increase their fair values.
The estimated fair value amounts have been determined by the Corporation using
relevant market information, where available. No considerations or allowances
are made in the estimation of fair value for differences that may result due
to volume and size of market. Certain of the Corporation's financial
instruments are not represented in an active market as characterized by a
willing buyer and willing seller engaging in an arms-length exchange
transaction. It is also the Corporation's general practice and intent to hold
these financial instruments to maturity. For such financial instruments,
discounted cash flow methodologies were employed to estimate fair value.
Generally, the discount rates utilized are derived from the risk-free Treasury
rates, adjusted for credit risk, operating expense factors and service charges.
These estimates are subjective in nature, involve uncertainties and matters of
significant judgment and cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
All estimates are based upon pertinent information available to management as
of December 31, 1993 and 1992. Although management is not aware of additional
factors that would significantly affect the estimated fair value amounts, such
amounts have not been subsequently revalued for purposes of these financial
statements since these dates and, therefore, current estimates of fair value
may differ significantly from the amounts presented herein.
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments:
Cash and Due from Banks and Short-Term Investments
The carrying amounts for cash and due from banks and short-term investments
approximate those assets' fair values.
Loans Held for Sale
The carrying value of loans held for sale approximates their fair values.
Securities Available for Sale and Investment Securities
As included in Notes 4 and 5 to the consolidated financial statements, fair
values for securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments.
Loans
The fair value of loans receivable is estimated by discounting their expected
future cash flows.
in millions 1993 1992
- -----------------------------------------------
Net carrying amount $21,388 $19,432
Fair value 21,517 19,408
- -----------------------------------------------
The Corporation has no plan to dispose of these loans either in part or in
their entirety. Furthermore, the Corporation believes that considerable
customer franchise value exists in the accounts represented above; a high
percentage of these customers have had previous relationships with the
Corporation and are expected to continue their business with the Corporation
following satisfaction of current obligations. However, franchise value
estimates have not been incorporated into the fair value identified herein as
these amounts are not included in SFAS 107's definition of "financial
instruments."
Deposits
SFAS 107 defines the fair values of certain deposits (for example, interest and
noninterest checking, passbook savings, and certain types of money market
accounts) to equal the amount payable on demand at the reporting date (that is,
their carrying amounts). Similarly, the carrying amounts for variable rate,
fixed-term money market accounts and certificates of deposit approximate their
fair values at the reporting date. Fair values for fixed-rate certificates of
deposit are estimated by discounting their expected future cash flows.
in millions 1993 1992
- -----------------------------------------------
Carrying amount $26,618 $24,775
Fair value 26,749 24,870
- -----------------------------------------------
<PAGE> 25
Short-Term Borrowings
The carrying amounts of federal funds purchased, borrowings under repurchase
agreements, and other short-term borrowings approximate their fair values.
Long-Term Debt
The fair values of the Corporation's long-term debt are estimated by
discounting expected future cash flows.
in millions 1993 1992
- --------------------------------------------
Carrying Amount $811 $904
Fair Value 871 894
- --------------------------------------------
Financial Instruments with Off-Balance Sheet Risk
As described in Note 18 to the consolidated financial statements, the
Corporation was a party to financial instruments with off-balance sheet risk
at December 31, 1993 and 1992. Such financial instruments consist of
commitments to extend permanent financing and letters of credit. If the options
are exercised by the prospective borrowers, these financial instruments will
become interest-earning assets of the Corporation. If the options expire,
the Corporation retains fees paid by the counterparty in order to enter into
the commitment or guarantee.
The fair value of guarantees and letters of credit is based on fees currently
charged for similar agreements. The fair value of these off-balance sheet
items at December 31, 1993 and 1992 approximates the recorded amounts of the
related fees.
Interest Rate Swap and Cap Agreements
As described in Note 18 to the consolidated financial statements, the
Corporation is a party to interest rate swap and cap agreements at December 31,
1993 and 1992 and interest rate cap agreements at December 31, 1992. The fair
value of interest rate swap agreements is based upon a discounted cash flow
analysis utilizing current assumptions. The fair value of interest rate cap
agreements is based upon the current fees charged to enter into such contracts.
At December 31, 1992, the balance of the unamortized fees incurred to enter
into such interest rate cap agreements approximates their fair value.
Interest Rate Swap Agreements
-----------------------------
in millions 1993 1992
- ---------------------------------------------------------
Notional/Contract Value $3,119 $192
Fair Value (10) 1
- ---------------------------------------------------------
Interest Rate Cap Agreements
----------------------------
in millions 1993 1992
- ---------------------------------------------------------
Notional/Contract Value $-- $30
Fair Value -- .3
- ---------------------------------------------------------
Considerations
The fair value estimates presented are based on existing on- and off-balance
sheet financial instruments, as defined by SFAS 107. No attempt has been made
to estimate the value of anticipated future business and the fair value of
assets and liabilities that are not considered financial instruments by SFAS
107. In fact, significant income is generated from operations of the
Corporation which are not related to the generation, retention and settlement
of financial instruments. For example, the trust operation and the mortgage
banking operation contribute considerable service fee income. Other significant
assets and liabilities that are not considered financial instruments include
the brokerage network, insurance operations, leasing operation, property,
plant, equipment and goodwill. In addition, the tax ramifications related to
the realization of the unrealized gains and losses can have significant effect
on fair value estimates and have not been considered in the estimates.
<PAGE> 26
NOTE 20. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
<TABLE>
<CAPTION>
Condensed Balance Sheets at December 31,
dollars in thousands 1993 1992
- -------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 948 $ 781
Investment securities 45,434 47,624
Due from subsidiaries <F1>
Banks and bank holding companies 218,507 172,229
Other subsidiaries 170,637 192,147
- -------------------------------------------------------------------------
389,144 364,376
Investment in subsidiaries <F1>
Banks and bank holding companies 2,552,430 2,245,253
Other subsidiaries 13,073 57,403
- -------------------------------------------------------------------------
2,565,503 2,302,656
Excess of cost over net
assets of acquired subsidiaries 124,587 114,047
Other assets 81,408 62,971
- -------------------------------------------------------------------------
Total Assets $3,207,024 $2,892,455
========== ==========
Liabilities
Short-term borrowings $ 27,600 $ 120,000
Long-term debt 637,490 644,323
Accrued taxes, expenses and
other liabilities 171,348 53,342
- -------------------------------------------------------------------------
Total Liabilities 836,438 817,665
Shareholders' Equity 2,370,586 2,074,790
- -------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $3,207,024 $2,892,455
========== ==========
- -------------------------------------------------------------------------
<FN>
<F1> Eliminated in consolidation
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Income For the Three Years Ended December 31,
dollars in thousands 1993 1992 1991
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Dividends from subsidiaries <F1>
Banks and bank holding companies $155,372 $152,416 $ 81,506
Other subsidiaries 1,865 2,878 2,219
Management fees and interest
income from subsidiaries <F1> 101,065 80,944 63,711
Other 3,531 3,531 2,277
- -------------------------------------------------------------------------
261,833 239,769 149,713
Expenses
Interest on borrowed funds 53,053 49,462 40,956
Restructuring charges 64,812 42,700 --
Salaries, employee benefits, and other 90,574 33,447 55,015
- -------------------------------------------------------------------------
208,439 125,609 95,971
Income before income tax benefit
and equity in undistributed net
income of subsidiaries 53,394 114,160 53,742
Income tax benefit 35,730 12,717 9,766
- -------------------------------------------------------------------------
89,124 126,877 63,508
Equity in undistributed net income
(loss) of subsidiaries <F1>
Banks and bank holding companies 290,842 182,710 182,114
Other subsidiaries (17,199) (18,699) (8,404)
- -------------------------------------------------------------------------
Net Income $362,767 $290,888 $237,218
======== ======== ========
- -------------------------------------------------------------------------
<FN>
<F1> Eliminated in consolidation
</TABLE>
<PAGE> 27
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows For the Three Years Ended December 31,
dollars in thousands 1993 1992 1991
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net Income $362,767 $290,888 $237,218
Adjustments to reconcile net
income to net cash provided by
operating activities:
Equity in undistributed net
income (loss) of subsidiaries (273,643) (164,011) (173,710)
Accrued restructuring charges, net 41,085 6,791 --
Amortization of intangibles 7,208 5,853 5,868
Other changes, net 4,242 (7,470) (2,240)
- -----------------------------------------------------------------------------
Net cash provided by Operating Activities 141,659 132,051 67,136
Investing Activities
Investment in and advances to
subsidiaries (38,125) (270,081) (183,584)
Redemption of stock investment
in subsidiaries 113,122 -- --
Repayment of advances to subsidiaries 27,897 -- --
Purchases of investment securities (5,458) (8,500) (45,136)
Proceeds from sales, prepayments
or maturities of investment securities 8,104 8,404 28,679
Purchases of premises and equipment (10,079) (3,317) (1,367)
- -----------------------------------------------------------------------------
Net cash provided (used) by
Investing Activities 95,461 (273,494) (201,408)
Financing Activities
Proceeds from issuance of
long-term debt 194,500 254,000 222,630
Payments on long-term debt (201,333) (103,970) (85,280)
Net increase (decrease) in
short-term borrowings (92,400) 98,000 (204,850)
Proceeds from issuance of
preferred stock -- -- 154,656
Cost of redeeming preferred stock (23,970) -- --
Net proceeds from issuance
of common stock -- -- 122,885
Proceeds from employee stock
purchase, stock option and
dividend reinvestment plans 16,191 11,098 11,620
Cash dividends (129,941) (119,609) (92,192)
- -----------------------------------------------------------------------------
Net cash provided (used) by
Financing Activities (236,953) 139,519 129,469
- -----------------------------------------------------------------------------
Net Decrease in Cash and Due From Banks 167 (1,924) (4,803)
Cash and Due From Banks at
Beginning of Year 781 2,705 7,508
- -----------------------------------------------------------------------------
Cash and Due From Banks at End of Year $ 948 $ 781 $ 2,705
======== ======== ========
- -----------------------------------------------------------------------------
For the years ended December 31, 1993, 1992 and 1991 the Parent Company paid
interest on borrowed funds of $52.4 million, $42.9 million and $36.3 million,
respectively.
</TABLE>
