<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): April 19, 1994
KEYCORP
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(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 5. Other Events
------------
On April 19, 1994, the Registrant issued a press release announcing its
earnings results for the three month period ended March 31, 1994. This
press release is attached as Exhibit 99a to this report and
incorporated herein by reference.
On April 20, 1994, the Registrant mailed its Annual Report to
its shareholders of record as of March 22, 1994. The following portions
of the 1993 Annual Report are attached as Exhibit 99b to this report
and are incorporated herein by reference: Management's Discussion and
Analysis of Financial Condition and Results of Operations; Report of
Ernst & Young, Independent Auditors; Consolidated Financial Statements;
and Notes to Consolidated Financial Statements.
The Registrant is also filing descriptions of its business (including
a discussion of regulatory and supervision matters) and properties
that reflect old KeyCorp and Society on a combined basis giving
effect to the March 1, 1994 merger. The descriptions of business and
properties are attached as Exhibit 99c to this report and are
incorporated herein by reference.
Item 7. Financial Statements, Pro Forma Financial Statements and Exhibits
-----------------------------------------------------------------
(c) Exhibits
--------
23 Consent of Ernst & Young, Independent Auditors
99a. April 19, 1994, press release of the Registrant announcing
its earnings results for the three month period ended
March 31, 1994.
99b. 1993 KeyCorp Annual Report sections: Management's
Discussion and Analysis of Financial Condition and Results
of Operations; Report of Ernst & Young, Independent
Auditors; Consolidated Financial Statements; and Notes to
Consolidated Financial Statements.
99c. Descriptions of KeyCorp's business (including a discussion
of regulatory and supervision matters) and properties that
reflect old KeyCorp and Society on a combined basis giving
effect to the March 1, 1994 merger.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KEYCORP
--------------------
(Registrant)
Date: April 19, 1994 /s/ Lee Irving
---------------------
By: Lee Irving
Executive Vice President,
Treasurer and Chief
Accounting Officer
<PAGE> 1
EXHIBIT 23
CONSENT OF ERNST & YOUNG, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following Registration
Statements of KeyCorp and in the related Prospectuses of our report dated March
1, 1994, with respect to the consolidated financial statements of KeyCorp for
the year ended December 31, 1993, (as restated to give effect to the March 1,
1994 merger of KeyCorp and Society) incorporated by reference in this Current
Report (Form 8-K):
* Form S-3 No. 33-5064
Form S-3 No. 33-10634
Form S-3 No. 33-39733
Form S-3 No. 33-39734
Form S-3 No. 33-51652
* Form S-4 No. 33-31569
Form S-4 No. 33-44657
Form S-4 No. 33-51717
* Form S-8 No. 2-67589
Form S-8 No. 2-96769
Form S-8 No. 2-97452
Form S-8 No. 33-21643
Form S-8 No. 33-42691
Form S-8 No. 33-45518
Form S-8 No. 33-46278
Form S-8 No. 33-52293
Form S-8 No. 33-57408
* Form S-8 No. 33-31569 (Post-Effective Amendment No. 1 to Form S-4)
Form S-8 No. 33-31569 (Post-Effective Amendment No. 2 to Form S-4)
Form S-8 No. 33-31569 (Post-Effective Amendment No. 3 to Form S-4)
Form S-8 No. 33-44657 (Post-Effective Amendment No. 1 to Form S-4)
Form S-8 No. 33-51717 (Post-Effective Amendment No. 1 to Form S-4)
Ernst & Young
Cleveland, Ohio
April 19, 1994
<PAGE> 1
KEYCORP
[logo]
NEWS 127 Public Square, Cleveland, Ohio 44114
==============================================================================
CONTACT: John Fuller (216) 689-8140 (media)
Jay Gould (216) 689-4721 (analysts)
FOR IMMEDIATE RELEASE
KEYCORP REPORTS RECORD QUARTERLY EARNINGS
CLEVELAND, April 19, 1994 -- KeyCorp (NYSE: KEY) today reported record
quarterly earnings of $209 million for the 1994 first quarter, up 10 percent
from the year-ago quarter. Earnings per common share for the first quarter were
$0.85, also up 10 percent from the 1993 first quarter. Prior year results have
been restated for the March 1, 1994, merger with Society Corporation, accounted
for as a pooling of interests.
"The 1994 first quarter included significant milestones in KeyCorp's
history as the previously announced merger with Society Corporation was
approved by shareholders and closed on March 1, 1994," said Victor J. Riley,
Jr., chairman of the board and chief executive officer. "Completing this
merger in only five months makes this one of the fastest and smoothest mergers
in banking history. It also speaks to the merger experience and sense of
teamwork and accomplishment that characterizes our new company. I'm pleased to
report that much of the merger and integration effort is behind us. The
functions of some 40 merger-integration task forces have now shifted to the
new management team. This, in turn, allows us to direct our efforts toward
achieving the previously announced expense savings. We are also encouraged by
early signs related to the revenue enhancement opportunities made possible by
the merger."
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<PAGE> 2
KeyCorp Reports Record Quarterly Earnings
April 19, 1994
Page 2
Commenting on financial performance, James W. Wert, senior executive vice
president and chief financial officer, noted, "KeyCorp's financial performance
continued at a high level in the first quarter, with a return on average total
assets of 1.41 percent and a return on average common equity of 19.2 percent,
placing KeyCorp at or near the top of industry rankings for these important
measures. Our efficiency ratio for the quarter improved to 60.1 percent from
61.4 percent in the 1993 fourth quarter, after excluding nonrecurring items.
This is particularly encouraging since most merger-related expense savings are
only now in the process of beginning to be realized by the new company. We are
also pleased to note that average loans in the first quarter increased at an
annualized rate of 10 percent from the 1993 fourth quarter, continuing the
growth of recent quarters and partially offsetting the impact of a narrowing of
the net interest margin.
"Credit quality measures also continued to improve," said Wert.
"Nonperforming assets declined $36 million, or 7 percent, from the 1993 fourth
quarter and represented 1.12 percent of loans plus other real estate owned and
other nonperforming assets. Net loan charge-offs also declined in the quarter
to a low level, totaling only $31 million, or just 0.31 percent of average
loans, down from $44 million (0.45 percent) in the 1993 fourth quarter."
Reflecting the improvement in credit quality measures, the provision for loan
losses in the 1994 first quarter was $37 million, down from $56 million in the
year-ago quarter and down $10 million from the 1993 fourth quarter. Even so,
the current quarter's provision was $5 million greater than the net
charge-offs, resulting in a slight increase in the allowance for loan losses
and related nonperforming loan and nonperforming asset coverage ratios.
Net interest income in the 1994 first quarter was up $14 million, or 2
percent, from the year-ago quarter. The favorable impact of a $4.3 billion, or
8 percent,
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<PAGE> 3
KeyCorp Reports Record Quarterly Earnings
April 19, 1994
Page 3
increase in the level of average earning assets was partially offset by a
decline in the net interest margin to 5.03 percent from 5.40 percent in the
year-ago quarter. Compared to the 1993 fourth quarter, net interest income
decreased $10 million, or 2 percent, reflecting a decline in the net interest
margin from 5.21 percent to 5.03 percent in the current quarter. This more
than offset the favorable impact of a $1.7 billion, or 3 percent, increase in
average earning assets. Compared to 1993 periods, narrowing spreads are
attributed to earning assets growth, a modest rise in short-term interest
rates, and the repricing of higher-yielding investment securities and
mortgage-related assets.
Excluding the effects of acquisitions and run-off of out-of-market loans
acquired through regulator-assisted transactions in the State of New York,
average loans in the 1994 first quarter were up $1.7 billion, or 4 percent,
from the year-ago quarter. The benefits of regional diversity were apparent as
the growth in bank loans in the Rocky Mountain and Northwest regions of 8
percent and 7 percent, respectively, continued to outpace growth in the Great
Lakes and Northeast regions, 5 percent and 1 percent, respectively.
Noninterest income in the 1994 first quarter was $227 million. When noncore
items such as special asset management fees and net securities transactions are
excluded from all reporting periods for comparison purposes, core noninterest
income in the current quarter was $218 million, up $13 million or 6 percent
from the year-ago quarter, but down slightly ($2 million) from the 1993 fourth
quarter. This latter decrease reflected a $6 million decline in mortgage
banking income, as the 1993 fourth quarter represented an all-time high in
origination activity, as well as a $3 million decline in credit card fees.
These declines were partially offset by a $3 million increase in trust income
and a $4 million increase in all other income.
Special asset management fees are associated with loan collection work
performed for the FDIC. These fees are anticipated to decrease over time as
the FDIC
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<PAGE> 4
KeyCorp Reports Record Quarterly Earnings
April 19, 1994
Page 4
assets under contract are collected and, therefore, decline. In addition,
these fees exhibit quarter-to-quarter volatility depending on the timing
associated with the loan work-outs. For this reason, they are considered
noncore fee income.
Noninterest expense totaled $543 million in the 1994 first quarter. When
noncore items such as net OREO expense and merger and integration charges are
excluded from all reporting periods for comparison purposes, 1994 first quarter
core noninterest expense was up 3 percent from the year-ago quarter, but down
$18 million, or 3 percent, from the 1993 fourth quarter. Contributing to this
decline were decreases in personnel and other expenses of $10 million and $12
million, respectively, which were partially offset by a $6 million increase in
net occupancy costs. First quarter 1994 net OREO expense was down $10 million
compared to the 1993 fourth quarter.
Another event of the 1994 first quarter was the completion of the acquisition
of Commercial Bancorporation of Colorado, with some $400 million in assets and
10 offices. This acquisition increases KeyCorp's presence in Northeast
Colorado, one of the nation's fastest growing markets. With this acquisition,
Key Bank of Colorado had $587 million in total assets as of March 31, 1994.
Effective January 1, 1994, the corporation adopted the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." This new accounting standard
requires, among other things, that management classify its securities into
three portfolios: securities held to maturity, securities available for sale,
and trading securities. Securities available for sale are adjusted to their
fair values through shareholders' equity with no impact on net income. As a
result of this accounting change, approximately $4.5 billion of securities
were classified as available for sale at March 31, 1994, and shareholders'
equity was reduced by $23 million, representing the net unrealized after-tax
loss on these securities.
- more -
<PAGE> 5
KeyCorp Reports Record Quarterly Earnings
April 19, 1994
Page 5
At March 31, 1994, assets totaled $61.5 billion and equity capital totaled
$4.5 billion. The March 31, 1994, Tier 1 capital ratio was estimated at 8.71
percent.
EDITORS NOTE: For a free fax copy of this release, please call
1-800-758-5804, Ext. 804350
# # #
<PAGE> 6
KEYCORP REPORTS RECORD QUARTERLY EARNINGS
APRIL 19, 1994
PAGE 6
<TABLE>
FINANCIAL HIGHLIGHTS
(dollars in millions, except per share amounts)
<CAPTION>
Three months ended
-----------------------------------------
3-31-94 12-31-93 3-31-93
----------- ------------ -----------
<S> <C> <C> <C>
SUMMARY OF OPERATIONS
Net interest income (TE) $682.7 $693.1 $669.9
Provision for loan losses 36.8 46.4 55.9
Noninterest income 226.6 237.1 222.6
Noninterest expense 542.8 689.5 535.0
Net income 208.6 122.3 189.9
PER COMMON SHARE
Net income $ .85 $ .49 $ .77
Cash dividends .32 .28 .28
Book value at period-end 17.88 17.53 16.19
Market price at period-end 30.00 29.75 34.63
AT PERIOD END
Full-time equivalent employees 30,054 29,983 29,170
Full-service banking offices 1,276 1,267 1,292
PERFORMANCE RATIOS
Return on average total assets 1.41 % .83 % 1.38 %
Return on average common equity 19.20 11.09 19.83
Return on average total equity 18.88 11.05 19.27
Efficiency (1) 60.13 61.35 60.04
Overhead (2) 47.27 48.12 46.84
Net interest margin 5.03 5.21 5.40
CAPITAL RATIOS AT PERIOD-END
Equity to assets 7.38 % 7.37 % 6.98 %
Tangible equity to tangible assets 6.55 6.51 5.89
Tier 1 risk-adjusted capital (3) 8.71 8.73 8.05
Total risk-adjusted capital (3) 12.10 12.22 11.24
Leverage 6.82 6.72 6.37
<FN>
(1) Calculated as noninterest expense (excluding merger and integration charges
and other nonrecurring charges) divided by taxable-equivalent net interest income
plus noninterest income (excluding net securities gains and certain gains on
asset sales).
(2) Calculated as noninterest expense (excluding merger and integration charges
and other nonrecurring charges) less noninterest income (excluding net
securities gains and certain gains on asset sales) divided by taxable-equivalent
net interest income.
(3) 3-31-94 ratio is estimated.
TE = Taxable equivalent
</TABLE>
<PAGE> 7
KEYCORP REPORTS RECORD QUARTERLY EARNINGS
APRIL 19, 1994
PAGE 7
<TABLE>
FINANCIAL HIGHLIGHTS
(dollars in millions, except per share amounts)
<CAPTION>
Three months ended
-----------------------------------------
3-31-94 12-31-93 3-31-93
----------- ------------ -----------
<S> <C> <C> <C>
ASSET QUALITY
Net loan charge-offs $31.3 $44.2 $61.6
Net loan charge-offs to average loans .31 % .45 % .66 %
Allowance for loan losses $812.6 $802.7 $793.2
Allowance for loan losses to
period-end loans 1.96 % 2.00 % 2.07 %
Allowance for loan losses to
nonperforming loans 256.53 238.69 159.46
Nonperforming loans at period-end $316.8 $336.3 $497.5
Nonperforming assets at period-end 464.0 500.1 839.6
Nonperforming loans to period-end loans .77 % .84 % 1.30 %
Nonperforming assets to period-end loans plus
OREO and other nonperforming assets 1.12 1.24 2.17
</TABLE>
<PAGE> 8
KEYCORP REPORTS RECORD QUARTERLY EARNINGS
APRIL 19, 1994
PAGE 8
<TABLE>
CONSOLIDATED BALANCE SHEETS
(dollars in millions)
<CAPTION>
ASSETS 3-31-94 12-31-93 3-31-93
----------- ------------ -----------
<S> <C> <C> <C>
Loans $41,379.8 $40,071.3 $38,371.7
Mortgage loans held for sale 901.6 1,325.3 653.9
Investment securities 9,091.2 11,122.1 9,452.4
Securities available for sale 4,474.8 1,726.8 2,189.4
Short-term investments 66.1 107.2 1,679.0
----------- ------------ -----------
Total earning assets 55,913.5 54,352.6 52,346.4
Allowance for loan losses (812.6) (802.7) (793.2)
Cash and due from banks 2,830.7 2,777.4 2,833.0
Premises and equipment 910.9 912.9 891.5
Other real estate owned 134.3 150.4 327.1
Goodwill 381.4 385.4 406.7
Other intangible assets 161.6 163.9 262.1
Purchased mortgage servicing rights 197.9 188.6 176.4
Other assets 1,758.1 1,502.6 1,400.8
----------- ------------ -----------
TOTAL ASSETS $61,475.8 $59,631.2 $57,850.8
=========== ============ ===========
LIABILITIES
Deposits in domestic offices:
Noninterest-bearing $8,213.6 $8,826.3 $7,780.4
Interest-bearing 36,182.0 35,658.3 35,979.5
Deposits in foreign office-interest-bearing 2,485.0 2,014.5 1,204.4
----------- ------------ -----------
Total deposits 46,880.6 46,499.1 44,964.3
Federal funds purchased and securities
sold under agreements to repurchase 5,674.5 4,120.3 5,036.2
Other short-term borrowings 1,560.2 1,776.2 880.7
Other liabilities 1,079.7 1,078.1 1,029.1
Long-term debt 1,744.5 1,763.9 1,904.1
----------- ------------ -----------
TOTAL LIABILITIES 56,939.5 55,237.6 53,814.4
SHAREHOLDERS' EQUITY
Preferred stock 160.0 160.0 184.0
Common equity 4,376.3 4,233.6 3,852.4
----------- ------------ -----------
TOTAL SHAREHOLDERS' EQUITY 4,536.3 4,393.6 4,036.4
TOTAL LIABILITIES AND ----------- ------------ -----------
SHAREHOLDERS' EQUITY $61,475.8 $59,631.2 $57,850.8
=========== ============ ===========
Common Shares outstanding (000) 244,763 241,547 237,936
</TABLE>
<PAGE> 9
KEYCORP REPORTS RECORD QUARTERLY EARNINGS
APRIL 19, 1994
PAGE 9
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
(dollars in millions, except per share amounts)
<CAPTION>
Three months ended
-----------------------------------------
3-31-94 12-31-93 3-31-93
----------- ------------ -----------
<S> <C> <C> <C>
INTEREST INCOME $1,045.0 $1,050.5 $1,047.4
INTEREST EXPENSE 376.9 372.2 393.3
----------- ------------ -----------
NET INTEREST INCOME 668.1 678.3 654.1
Provision for loan losses 36.8 46.4 55.9
----------- ------------ -----------
631.3 631.9 598.2
NONINTEREST INCOME
Trust income 57.0 54.4 62.9
Service charges on deposit accounts 62.3 62.9 60.7
Mortgage banking income 19.4 25.2 14.0
Special asset management fees 2.2 17.7 16.3
Credit card fees 16.7 19.2 16.3
Insurance and brokerage 16.0 16.0 14.1
Net securities gains (losses) 6.4 (0.1) 1.3
Other income 46.6 41.8 37.0
----------- ------------ -----------
Total noninterest income 226.6 237.1 222.6
NONINTEREST EXPENSE
Personnel 275.6 285.6 257.3
Net occupancy 55.5 49.6 50.9
Equipment 39.9 40.5 38.7
FDIC insurance assessments 24.0 24.1 26.3
OREO expense, net of income 1.3 11.7 8.7
Professional fees 12.5 13.7 13.0
Merger and integration charges -- 118.7 --
Other expense 134.0 145.6 140.1
----------- ------------ -----------
Total noninterest expense 542.8 689.5 535.0
----------- ------------ -----------
INCOME BEFORE INCOME TAXES 315.1 179.5 285.8
Income taxes 106.5 57.2 95.9
----------- ------------ -----------
NET INCOME $208.6 $122.3 $189.9
=========== ============ ===========
Net income applicable to Common Shares $204.6 $118.4 $184.4
Net income per Common Share .85 .49 .77
Wtd. avg. Common Shares outstanding (000) 241,926 240,778 237,926
Taxable-equivalent adjustment $14.6 $14.8 $15.8
</TABLE>
<PAGE> 10
KEYCORP REPORTS RECORD QUARTERLY EARNINGS
APRIL 19, 1994
PAGE 10
<TABLE>
CONSOLIDATED QUARTERLY AVERAGE BALANCE SHEETS
(in millions)
<CAPTION>
Three months ended
-----------------------------------------
ASSETS 3-31-94 12-31-93 3-31-93
----------- ------------ -----------
<S> <C> <C> <C>
Loans $40,242.2 $39,257.9 $37,322.9
Mortgage loans held for sale 1,139.2 1,278.1 752.6
Investment securities 7,743.3 10,369.8 9,162.7
Securities available for sale 5,260.9 1,773.3 2,333.0
Short-term investments 154.9 140.3 703.2
----------- ------------ -----------
Total earning assets 54,540.5 52,819.4 50,274.4
Allowance for loan losses (815.8) (807.9) (795.8)
Other assets 6,248.4 6,277.8 6,157.1
----------- ------------ -----------
TOTAL ASSETS $59,973.1 $58,289.3 $55,635.7
=========== ============ ===========
LIABILITIES
Deposits in domestic offices:
Noninterest-bearing $7,802.7 $8,166.4 $7,302.1
Interest-bearing 35,604.3 35,649.1 35,024.3
Deposits in foreign office-interest-bearing 2,678.0 1,282.6 976.1
----------- ------------ -----------
Total deposits 46,085.0 45,098.1 43,302.5
Federal funds purchased and securities
sold under agreements to repurchase 4,993.3 4,472.5 4,631.5
Other short-term borrowings 1,435.2 1,239.8 899.0
Other liabilities 1,220.8 1,200.3 974.6
Long-term debt 1,756.9 1,883.9 1,832.9
----------- ------------ -----------
TOTAL LIABILITIES 55,491.2 53,894.6 51,640.5
SHAREHOLDERS' EQUITY
Preferred stock 160.0 160.0 224.0
Common equity 4,321.9 4,234.7 3,771.2
----------- ------------ -----------
TOTAL SHAREHOLDERS' EQUITY 4,481.9 4,394.7 3,995.2
TOTAL LIABILITIES AND ----------- ------------ -----------
SHAREHOLDERS' EQUITY $59,973.1 $58,289.3 $55,635.7
=========== ============ ===========
</TABLE>
<PAGE> 1
<TABLE>
CONTENTS
- --------
Management's Discussion and Analysis of
Financial Condition and Results of Operations
<S> <C>
Glossary of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Performance Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Net Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Asset and Liability Management . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Noninterest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Noninterest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Asset Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Deposits and Other Sources of Funds . . . . . . . . . . . . . . . . . . . . . . . . 37
Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Capital and Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Fourth Quarter Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Banking Services Data by Region . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Six-Year Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . 42
Six-Year Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . 43
Report of Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . 46
</TABLE>
17
<PAGE> 2
KEYCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GLOSSARY OF TERMS
CAPITAL COMPONENTS AND RATIOS:
TIER I CAPITAL: The sum of common shareholders' equity (including Common
Shares, capital surplus, and retained earnings) plus noncumulative
perpetual preferred stock, less goodwill, other non-qualifying intangible
assets and a valuation adjustment for purchased mortgage servicing rights.
TOTAL CAPITAL: The sum of Tier I capital plus Tier II capital (including
the qualifying portions of the allowance for loan losses, subordinated debt
instruments, and certain hybrid capital instruments).
NET RISK-ADJUSTED ASSETS: The sum of risk-weighted assets plus the
risk-weighted credit equivalent amounts of off-balance sheet items, less
goodwill, other non-qualifying intangible assets, the non-qualifying
portion of the allowance for loan losses, and a valuation adjustment for
purchased mortgage servicing rights.
TIER I RISK-ADJUSTED CAPITAL RATIO: The ratio of Tier I capital to net
risk-adjusted assets. The Federal regulatory minimum standard for the Tier
I risk-adjusted capital ratio is 4.00%.
TOTAL RISK-ADJUSTED CAPITAL RATIO: The ratio of total capital to net
risk-adjusted assets. The Federal regulatory minimum standard for the total
risk-adjusted capital ratio is 8.00%.
LEVERAGE RATIO: Tier I capital as a percentage of average quarterly assets,
less goodwill, other non-qualifying intangible assets, and a valuation
adjustment for purchased mortgage servicing rights.
EARNING ASSETS: The sum of loans, loans held for sale, investment securities,
securities available for sale, interest-bearing deposits with banks, Federal
funds sold, securities purchased under agreements to resell, and trading
account assets.
EFFICIENCY RATIO: Noninterest expense (excluding merger and integration charges
and other nonrecurring charges) divided by taxable-equivalent net interest
income plus noninterest income (excluding net securities gains and certain
gains on asset sales).
INTEREST-BEARING LIABILITIES: The sum of interest-bearing deposits, Federal
funds purchased, securities sold under agreements to repurchase, other
short-term borrowings, and long-term debt.
INTEREST RATE SPREAD: The difference between the taxable-equivalent yield on
earning assets and the rate paid on interest-bearing liabilities.
INTEREST RATE SWAP: A contract wherein one party pays a fixed rate of interest
based on a notional amount to a second party, which pays to the first party a
variable rate of interest based on the same notional amount.
MERGER AND INTEGRATION CHARGES: Expenses directly related
to mergers and consisting of investment banking and
other professional fees; severance payments and other employee costs; systems
and facilities costs; and other merger-related costs.
NET INTEREST MARGIN: Fully taxable-equivalent net interest income as a
percentage of average earning assets.
NONPERFORMING ASSETS: The sum of nonperforming loans plus other real estate
owned and other nonperforming assets (primarily venture capital investments).
NONPERFORMING LOANS: The sum of loans on a nonaccrual basis (for purposes of
interest recognition) plus loans whose repayment criteria have been
renegotiated to less-than-market terms due to the inability of the borrowers to
repay the loans in accordance with their original terms.
OTHER REAL ESTATE OWNED ("OREO"): Real estate acquired in either formal or,
where the borrower's circumstances appear to make actual foreclosure likely,
in-substance foreclosures.
OVERHEAD RATIO: Noninterest expense (excluding merger and integration charges
and other nonrecurring charges) less noninterest income (excluding net
securities gains and certain gains on asset sales) divided by taxable-
equivalent net interest income.
RETURN ON AVERAGE TOTAL ASSETS: Net income as a percentage of average total
assets.
RETURN ON AVERAGE COMMON EQUITY: Net income, less applicable preferred
dividends, as a percentage of average common shareholders' equity.
TAXABLE-EQUIVALENT INCOME: Tax-exempt income which has been adjusted to an
amount that would yield the same after-tax income had the income been subject
to taxation at the statutory Federal income tax rate.
18
<PAGE> 3
KEYCORP AND SUBSIDIARIES
INTRODUCTION
On March 1, 1994, KeyCorp ("old KeyCorp"), a financial services holding company
headquartered in Albany, New York, with approximately $33 billion in assets as
of December 31, 1993, merged into and with Society Corporation ("Society"), a
financial services holding company headquartered in Cleveland, Ohio, with
approximately $27 billion in assets at year-end 1993. Society was the surviving
corporation of the merger under the name "KeyCorp". Other transactions which
were completed over the past two years and have had a significant impact on the
overall growth and geographic diversification of the combined organization are
described in Note 2, Mergers, Acquisitions and Divestitures, on page 51 of this
report.
The merger of old KeyCorp and Society (the "Merger") created one of the
country's largest and strongest financial services holding companies with
nearly $60 billion in total assets, the fifth largest branch network, the
sixteenth largest mortgage banking business and an investment management
business with approximately $34 billion in trust assets under management. The
combined results of these companies established a high level of performance as
KeyCorp's 1993 net income reached a record of $709.9 million. KeyCorp was
positioned eleventh among the country's bank holding companies based on
consolidated asset size as of December 31, 1993.
The Merger was accounted for as a pooling of interests and, accordingly, the
financial information included in the remainder of this discussion and analysis
of the consolidated financial condition and results of operations of KeyCorp
and its subsidiaries (the "Corporation") presents the combined results of old
KeyCorp and Society as if the Merger had been in effect for all periods
presented. This discussion should be read in conjunction with the consolidated
financial statements and notes presented on pages 46 through 72 of this report.
PERFORMANCE OVERVIEW
Figure 1 presents certain income statement components for 1993 and 1992
expressed on a per Common Share basis. A more detailed analysis of the major
factors affecting the comparability between the periods is provided throughout
this report. Net income for 1993 reached a record level of $709.9 million, or
$2.89 per Common Share, up from the previous record of $592.1 million, or $2.42
per Common Share, achieved in 1992 and $313.7 million, or $1.31 per Common
Share, in 1991. The return on average common equity for 1993 rose to 17.27%, up
from 16.33% and 9.29% in 1992 and 1991, respectively. The return on average
total assets was 1.24% in 1993, 1.13% in 1992 and .60% in 1991.
Record-level earnings were attained in 1993 despite fourth-quarter merger and
integration charges of $118.7 million ($80.6 million after tax, $.33 per Common
Share) recorded in connection with the Merger. In 1992, earnings were also
<TABLE>
/FIGURE 1/ COMPONENTS OF EARNINGS PER COMMON SHARE
<CAPTION>
Year ended December 31,
Change
---------------
1993 1992 Amount Percent
=======================================================================
<S> <C> <C> <C> <C>
Interest income $17.57 $17.87 $(.30) (1.7)%
Interest expense 6.40 7.45 (1.05) (14.1)
- -----------------------------------------------------------------------
Net interest income 11.17 10.42 .75 7.2
Provision for loan losses .88 1.44 (.56) (38.9)
- -----------------------------------------------------------------------
Net interest income
after loan loss provision 10.29 8.98 1.31 14.6
Noninterest income 4.18 3.94 .24 6.1
Noninterest expense 9.95 9.24 .71 7.7
- -----------------------------------------------------------------------
Income before income taxes
and cumulative effect
of accounting change 4.52 3.68 .84 22.8
Income taxes 1.56 1.19 .37 31.1
Cumulative effect of
accounting change --- .03 (.03) (100.0)
Preferred dividends .07 .10 (.03) (30.0)
- -----------------------------------------------------------------------
Earnings per Common Share $ 2.89 $ 2.42 $ .47 19.4%
====== ====== =====
=======================================================================
</TABLE>
adversely impacted by similar charges totaling $50.0 million ($34.2
million after tax, $.15 per Common Share) recorded in the first quarter in
connection with the merger with Ameritrust Corporation ("Ameritrust") and $42.7
million ($32.4 million after tax, $.14 per Common Share) recorded in the fourth
quarter in connection with the merger with Puget Sound Bancorp ("PSB"). These
merger and integration charges are described in greater detail in Note 12,
Merger and Integration Charges, on page 63 of this report. Excluding the impact
of these merger and integration charges from noninterest expense, 1993 net
income grew by $131.8 million, or 20%, relative to the previous year. The 1993
improvement reflected a $221.2 million, or 9%, increase in taxable-equivalent
net interest income, a $76.5 million, or 8%, increase in noninterest income,
and a $126.7 million, or 37%, decrease in the provision for loan losses. These
positive factors were offset in part by a $188.7 million, or 9%, increase in
noninterest expense and a $94.3 million, or 34%, increase in tax expense.
Adjusting for the merger and integration charges recorded in both years, the
return on average common equity and the return on average total assets were
19.29% and 1.39%, respectively, in 1993, and 18.25% and 1.26%, respectively, in
1992. The efficiency ratio, which measures the extent to which revenue is
supported by overhead expense, also improved in 1993, decreasing from 60.96% in
1992 to 60.50% on an adjusted basis.
Net income in 1991 was also impacted by merger and integration charges. These
charges totaled $93.8 million ($68.2 million after tax, $.29 per Common Share)
and were recorded during the fourth quarter in connection with the Ameritrust
merger. Excluding the merger and integration
19
<PAGE> 4
<TABLE>
/ FIGURE 2 / SELECTED FINANCIAL DATA
------------------------------------
<CAPTION>
Compound
Annual Rate
of Change
DOLLARS IN MILLIONS, EXCEPT PER
SHARE AMOUNTS 1993 1992 1991 1990 1989 1988 (1988-1993)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
Interest income $ 4,213.9 $ 4,198.8 $ 4,652.4 $ 4,528.8 $ 4,410.2 $ 3,779.4 2.2%
Interest expense 1,534.9 1,750.1 2,519.4 2,667.7 2,615.8 2,148.3 (6.5)
Net interest income 2,679.0 2,448.7 2,133.0 1,861.1 1,794.4 1,631.1 10.4
Provision for loan losses 211.7 338.4 466.2 517.2 306.2 204.4 .7
Noninterest income 1,001.7 925.2 849.3 744.2 635.1 563.7 12.2
Noninterest expense 2,385.1 2,170.4 2,065.7 1,819.5 1,705.8 1,533.8 9.2
Income before income taxes 1,083.9 865.1 450.4 268.6 417.5 456.6 18.9
Net income 709.9 592.1 313.7 256.1 286.7 365.0 14.2
Net income applicable to Common Shares 691.8 568.1 297.5 249.0 281.3 358.2 14.1
- -----------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Net income $ 2.89 $ 2.42 $ 1.31 $ 1.13 $ 1.26 $ 1.61 12.4%
Cash dividends 1.12 .98 .92 .88 .80 .68 10.5
Book value at year-end 17.53 15.64 14.10 13.48 13.29 13.11 6.0
Market price at year-end 29.75 32.13 24.75 16.13 17.07 16.63 12.3
Dividend payout ratio 38.75% 40.50% 70.23% 77.88% 63.49% 42.24% (1.7)
Weighted average Common Shares (000) 239,775.2 235,004.8 227,116.2 220,078.6 223,901.3 222,906.2 1.5
- -----------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31,
Loans $ 40,071.3 $36,021.8 $35,534.3 $34,193.7 $31,570.4 $29,981.0 6.0%
Earning assets 54,352.7 49,380.8 48,207.9 44,668.2 41,871.4 40,302.5 6.2
Total assets 59,631.2 55,068.4 53,600.9 49,953.4 47,205.1 45,287.0 5.7
Deposits 46,499.1 43,433.1 42,835.0 40,935.3 37,375.4 34,838.5 5.9
Long-term debt 1,763.9 1,790.1 1,224.5 1,145.2 1,177.4 1,297.9 6.3
Common shareholders' equity 4,233.6 3,683.3 3,272.4 2,941.7 2,929.1 2,898.3 7.9
Total shareholders' equity 4,393.6 3,927.3 3,516.4 3,025.7 2,979.4 2,980.9 8.1
- -----------------------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on average total assets 1.24% 1.13% .60% .54% .64% .86% N/A
Return on average common equity 17.27 16.33 9.29 8.39 9.56 12.72 N/A
Return on average total equity 16.95 15.91 9.31 8.41 9.53 12.46 N/A
Efficiency1 60.50 60.96 65.27 66.92 67.09 67.52 N/A
Overhead2 46.85 47.21 52.63 54.58 56.50 57.26 N/A
Net interest margin 5.31 5.31 4.71 4.53 4.64 4.53 N/A
- -----------------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS AT DECEMBER 31,
Equity to assets 7.37% 7.13% 6.56% 6.06% 6.31% 6.58% N/A
Tier I risk-adjusted capital 8.73 8.56 7.67 6.75 N/A N/A N/A
Total risk-adjusted capital 12.22 11.73 9.80 9.17 N/A N/A N/A
Leverage 6.72 6.56 5.97 5.23 N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------
<FN>
The comparability of the information presented above is affected by certain acquisitions and divestitures that KeyCorp has
completed in the time periods presented. For further information concerning these acquisitions, refer to Note 2, Mergers,
Acquisitions and Divestitures appearing on page 51.
1 Calculated as noninterest expense (excluding merger and integration charges and other nonrecurring charges) divided by
taxable-equivalent net interest income plus noninterest income (excluding net securities gains and certain gains on asset sales).
2 Calculated as noninterest expense (excluding merger and integration charges and other nonrecurring charges) less noninterest
income (excluding net securities gains and certain gains on asset sales) divided by taxable-equivalent net interest income.
N/A = Not Applicable
</TABLE>
charges in both 1992 and 1991, net income in 1992 grew by $276.8 million, or
72%, relative to the previous year. This 1992 improvement reflected a $306.2
million, or 14%, increase in taxable-equivalent net interest income, a $75.9
million, or 9%, increase in noninterest income and a $127.8 million, or 27%,
decrease in the provision for loan losses. Noninterest expense in 1992
increased $105.8 million, or 5%, after adjusting for the merger and integration
charges in both years.
On an adjusted basis, the 1991 return on average common equity, return on
average total assets and efficiency ratios were 11.42%, .73% and 65.27%,
respectively.
The decreased provision for loan losses in 1993 and 1992 reflected continuing
improvements in asset quality. Total nonperforming assets were $500.1 million
at December 31, 1993, compared with $900.2 million and $1.1 billion at December
31, 1992 and 1991, respectively.
20
<PAGE> 5
KEYCORP AND SUBSIDIARIES
Each of the items referred to in this performance overview is more fully
described in the following discussion or in the notes to the consolidated
financial statements presented on pages 50 through 72 of this report.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income, which is interest and loan-related
fee income less interest expense, is the principal source of earnings for
KeyCorp's banking affiliates. Net interest income is affected by a number of
factors including the level, pricing and maturity of earning assets and
interest-bearing liabilities, interest rate fluctuations, and asset quality. To
facilitate comparisons in the following discussion, net interest income is
presented on a taxable-equivalent basis.
The trends in various components of the balance sheet and their respective
yields and rates which affect interest income and expense are illustrated in
Figure 4. The information presented in Figure 5 provides an analysis of the
effect of changes in yields/rates and average balances on net interest income
in 1993 and 1992. A more in-depth discussion of changes in earning assets and
funding sources is presented in the Financial Condition section beginning on
page 31.
Net interest income was $2.7 billion in 1993, up $221.2 million, or 9%, from
the prior year. This followed an increase of $306.2 million, or 14%, in 1992
relative to the comparable 1991 period. In 1993, the growth in net interest
income resulted from a higher level of average earning assets, as the net
interest margin of 5.31% was unchanged from the prior year.
Average earning assets in 1993 totaled $51.6 billion which represented an
increase of $4.1 billion, or 9%, from the prior year. This followed a slight
increase of $394.4 million, or 1%, in 1992 in comparison with the previous
year. The increase
/FIGURE 3/NET INTEREST MARGIN
<TABLE>
<CAPTION>
Yield on Cost Net
earning of interest
assets funds margin
<S> <C> <C> <C>
1989 11.07 7.43 4.64
1990 10.73 7.13 4.53
1991 10.06 6.09 4.71
1992 9.00 4.28 5.31
1993 8.29 3.49 5.31
</TABLE>
in 1993 reflected the impact of acquisitions completed in 1993 as well as
internal growth generated in the loan and securities available for sale
portfolios. Average loans rose $3.0 billion, or 8%, in 1993, while securities
available for sale were up $1.3 billion, or 158%, relative to the prior year.
These increases were partially offset by lower levels in other categories of
earning assets, primarily investment securities. The increase in loans can be
attributed to growth in real estate loans, student loans held for sale, and
lease financing receivables, offset in part by decreases in the consumer and
commercial loan portfolios. The $394.4 million growth in average earning assets
in 1992 reflected increases in investment securities, mortgage loans held for
sale, and loans of $569.6 million, $218.3 million and $157.1 million,
respectively. These increases were partially offset by a $601.1 million decline
in short-term investments, including $457.4 million of Federal funds sold and
security resale agreements. This latter decrease resulted from reduced
short-term funding requirements for loans and the planned reduction of excess
liquidity. The increase in loans in 1992 was restrained by a decline in demand
due to weak economic conditions; strategic efforts to reduce certain types of
lending; the anticipated run-off of certain Ameritrust credits; and the second
quarter sale of branch offices, including the sale of $331.8 million in loans,
required to meet a condition of the regulatory approvals for the merger with
Ameritrust.
As shown in Figures 3 and 4, the net interest margin was 5.31% for 1993 and
1992 and 4.71% in 1991. The net interest margin was unchanged in 1993 as the
decrease in the value of interest-free funds offset the impact of an improved
interest rate spread and the positive effect of a lower level of nonperforming
assets. In 1993 and 1992, the interest rate spread increased by 8 basis points
and 75 basis points, respectively, as the decrease in the rate paid on
interest-bearing liabilities exceeded the decrease in the yield on earning
assets. Several factors were responsible for the widened spreads, including an
interest rate sensitivity position which has enabled the Corporation to benefit
from the lower interest rate environment. This position was enhanced by the use
of interest rate swaps. The notional amount of such swaps increased to $9.6
billion at December 31, 1993, up from $5.6 billion at December 31, 1992, and
$3.8 billion at December 31, 1991. Included in these totals were $1.2 billion,
$623 million and $703 million, respectively, of swaps entered into to
accommodate the needs of customers rather than as part of the Corporation's
asset and liability management. Interest rate swaps contributed $140.3 million
to net interest income and added 27 basis points to the net interest margin in
1993. In 1992, interest rate swaps contributed $93.8 million to net interest
income and added 20 basis points to the net interest margin. The manner in
which interest rate swaps are used in the Corporation's overall program of
asset and liability management is described in the following Asset and
Liability
21
<PAGE> 6
<TABLE>
/FIGURE 4/ AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND YIELDS/RATES
<CAPTION>
1993 1992 1991
-------------------------- -------------------------- -----------------------------
Average Yield/ Average Yield/ Average Yield/
DOLLARS IN MILLIONS Balance Interest Rate Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Loans1,2
Commercial, financial and
agricultural $ 9,049.3 $ 729.6 8.06% $10,820.8 $ 914.7 8.45% $11,753.3 $1,150.2 9.79%
Real estate 17,611.7 1,478.3 8.39 13,315.3 1,164.7 8.75 12,969.7 1,301.7 10.04
Consumer 8,993.1 926.2 10.30 10,059.7 1,100.1 10.94 9,519.5 1,144.6 12.02
Student loans held for sale 1,195.9 77.1 6.45 -- -- -- -- -- --
Lease financing 1,386.6 109.4 7.89 1,006.3 84.3 8.38 822.9 76.6 9.31
Foreign 71.0 4.5 6.37 105.3 6.2 5.89 84.9 5.9 6.88
- -----------------------------------------------------------------------------------------------------------------------------
Total loans 38,307.6 3,325.1 8.68 35,307.4 3,270.0 9.26 35,150.3 3,679.0 10.47
Mortgage loans held for sale 1,054.6 74.0 7.02 717.1 59.4 8.28 498.8 47.0 9.42
Taxable investment securities 7,769.5 556.4 7.16 7,985.3 676.9 8.48 7,441.3 678.2 9.11
Tax-exempt investment securities1 1,786.6 158.5 8.87 1,881.1 176.1 9.36 1,855.5 185.0 9.97
- -----------------------------------------------------------------------------------------------------------------------------
Total investment securities 9,556.1 714.9 7.48 9,866.4 853.0 8.65 9,296.8 863.2 9.28
Securities available for sale 2,070.0 141.5 6.84 801.0 57.2 7.14 750.5 59.6 7.94
Interest-bearing deposits
with banks 427.0 14.9 3.49 477.4 20.1 4.21 592.0 41.2 6.96
Federal funds sold and security
resale agreements 166.4 6.0 3.61 268.9 10.3 3.83 726.3 40.6 5.59
Trading account assets 16.8 .6 3.37 22.4 1.0 4.46 51.5 3.5 6.91
- -----------------------------------------------------------------------------------------------------------------------------
Total earning assets 51,598.5 4,277.0 8.29 47,460.6 4,271.0 9.00 47,066.2 4,734.1 10.06
Allowance for loan losses (803.9) (805.9) (704.4)
Other assets 6,256.6 5,698.2 5,634.2
- -----------------------------------------------------------------------------------------------------------------------------
$57,051.2 $52,352.9 $51,996.0
========= ======== =========
Liabilities and shareholders'
equity
Money market deposit accounts $ 7,306.8 189.6 2.59 $ 7,648.2 $ 248.3 3.25 $ 6,733.5 342.1 5.08
Savings deposits 7,382.9 214.1 2.90 5,320.5 181.3 3.41 3,989.4 184.5 4.62
NOW accounts 5,314.7 109.6 2.06 4,429.1 120.8 2.73 3,759.6 163.1 4.34
Certificates ($100,000 or more) 3,088.7 138.0 4.47 3,573.3 187.7 5.25 4,911.9 337.0 6.86
Other time deposits 12,443.2 550.5 4.42 13,382.3 717.2 5.36 15,478.5 1,085.2 7.01
Deposits in foreign office 1,018.9 31.5 3.09 367.9 13.7 3.72 367.4 23.8 6.48
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
deposits 36,555.2 1,233.3 3.37 34,721.3 1,469.0 4.23 35,240.3 2,135.7 6.06
Federal funds purchased and
securities sold under
agreements to repurchase 4,378.2 130.2 2.97 4,061.9 142.9 3.52 3,807.4 213.7 5.61
Other short-term borrowings 1,196.2 44.5 3.72 721.8 31.1 4.31 1,188.2 74.5 6.27
Long-term debt3 1,895.4 126.9 6.96 1,462.6 107.1 7.70 1,220.0 95.5 8.32
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 44,025.0 1,534.9 3.49 40,967.6 1,750.1 4.28 41,455.9 2,519.4 6.09
Noninterest-bearing deposits 7,785.9 6,661.4 6,228.5
Other liabilities 1,051.2 1,001.4 942.7
Preferred stock 183.8 244.0 166.3
Common shareholders' equity 4,005.3 3,478.5 3,202.6
- -----------------------------------------------------------------------------------------------------------------------------
$57,051.2 $52,352.9 $51,996.0
========= ========= =========
Interest rate spread 4.80 4.72 3.97
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income and net
interest margin $2,742.1 5.31% $2,520.9 5.31% $2,214.7 4.71%
======== ==== ======== ===== ======== ====
Taxable-equivalent adjustment1 $ 63.1 $ 72.2 $ 81.7
- -----------------------------------------------------------------------------------------------------------------------------
<FN>
1 Interest income on tax-exempt investment securities and loans has been adjusted to a fully taxable-equivalent basis using the
statutory Federal income tax rate of 35% for 1993 and 34% for all other years presented.
2 For purposes of these computations, nonaccrual loans are included in the average loan balances outstanding.
3 Rate calculation excludes ESOP debt.
N/M = Not Meaningful
</TABLE>
22
<PAGE> 7
<TABLE>
<CAPTION>
Compound Annual Rate
1990 1989 1988 of Change (1988-1993)
-------------------------- -------------------------- -------------------------- ---------------------
Average Yield/ Average Yield/ Average Yield/ Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate Balance Interest
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$13,165.0 $1,433.8 10.89% $14,153.1 $1,667.7 11.78% $13,601.5 $1,421.5 10.45% (7.8)% (12.5)%
10,248.1 1,098.4 10.72 8,186.3 887.8 10.84 6,922.3 722.7 10.44 20.5 15.4
8,425.9 1,052.4 12.49 7,702.7 973.9 12.64 7,123.8 836.8 11.75 4.8 2.1
-- -- -- -- -- -- -- -- -- N/M N/M
714.1 74.2 10.39 656.7 64.7 9.85 636.3 61.7 9.70 16.9 12.1
79.7 6.9 8.66 108.0 11.6 10.78 168.7 13.5 8.02 (15.9) (19.7)
- -----------------------------------------------------------------------------------------------------------------------------
32,632.8 3,665.7 11.23 30,806.8 3,605.7 11.70 28,452.6 3,056.2 10.74 6.1 1.7
312.7 27.7 8.86 79.1 9.4 11.88 19.2 2.0 10.51 122.8 105.9
6,433.3 582.6 9.06 6,186.9 535.5 8.66 5,592.0 450.4 8.05 6.8 4.3
1,928.7 196.9 10.21 2,000.2 203.8 10.19 2,212.6 220.8 9.98 (4.2) (6.6)
- -----------------------------------------------------------------------------------------------------------------------------
8,362.0 779.5 9.32 8,187.1 739.3 9.03 7,804.6 671.2 8.60 4.1 1.3
10.4 .9 8.88 28.8 3.0 10.33 -- -- -- N/M N/M
1,040.0 92.1 8.86 1,181.7 111.7 9.45 1,590.7 125.3 7.88 (23.1) (34.7)
589.0 47.4 8.05 364.9 33.2 9.10 258.6 19.8 7.66 (8.4) (21.2)
79.9 5.6 7.06 26.2 2.3 8.89 7.7 .2 2.01 16.9 24.6
- -----------------------------------------------------------------------------------------------------------------------------
43,026.8 4,618.9 10.73 40,674.6 4,504.6 11.07 38,133.4 3,874.7 10.16 6.2 2.0
(550.3) (462.0) (395.7) 15.2
4,965.0 4,689.6 4,597.1 6.4
- -----------------------------------------------------------------------------------------------------------------------------
$47,441.5 $44,902.2 $42,334.8 6.1
========= ========= =========
$ 5,513.1 324.0 5.88 $ 4,655.1 272.2 5.85 $ 5,219.8 278.2 5.33 7.0 (7.4)
3,682.8 180.3 4.90 3,721.5 185.3 4.98 3,918.7 190.1 4.85 13.5 2.4
3,368.2 160.2 4.76 3,179.8 151.4 4.76 3,064.9 142.6 4.65 11.6 (5.1)
5,556.9 453.6 8.16 5,563.7 491.1 8.83 4,193.3 310.7 7.41 (5.9) (15.0)
13,132.8 1,050.8 8.00 11,409.4 920.1 8.06 10,119.9 734.0 7.25 4.2 (5.6)
756.2 61.9 8.19 653.0 58.6 8.97 783.1 58.3 7.44 5.4 (11.6)
- -----------------------------------------------------------------------------------------------------------------------------
32,010.0 2,230.8 6.97 29,182.5 2,078.7 7.12 27,299.7 1,713.9 6.28 6.0 (6.4)
3,505.3 272.3 7.77 3,843.3 337.3 8.78 3,650.9 262.4 7.19 3.7 (13.1)
812.9 67.5 8.30 907.9 81.1 8.93 768.3 58.9 7.67 9.3 (5.5)
1,164.3 97.1 8.89 1,297.4 118.7 9.40 1,260.2 113.1 8.98 8.5 2.3
- -----------------------------------------------------------------------------------------------------------------------------
37,492.5 2,667.7 7.13 35,231.1 2,615.8 7.43 32,979.1 2,148.3 6.52 5.9 (6.5)
6,059.0 5,907.3 5,768.8 6.2
845.5 754.1 656.9 9.9
74.6 68.9 113.2 10.2
2,969.9 2,940.8 2,816.8 7.3
- -----------------------------------------------------------------------------------------------------------------------------
$47,441.5 $44,902.2 $42,334.8 6.1%
========= ========= =========
3.60 3.64 3.64
- -----------------------------------------------------------------------------------------------------------------------------
$1,951.2 4.53% $1,888.8 4.64% $1,726.4 4.53% 9.7
======== ===== ======== ==== ======== ====
$ 90.1 $ 94.4 $ 95.3 (7.6)%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 8
<TABLE>
/ FIGURE 5 / COMPONENTS OF NET INTEREST INCOME CHANGES
------------------------------------------------------
<CAPTION>
Year ended December 31, 1993 VS. 1992 1992 vs. 1991
----------------------------------- ------------------------------------
Average Yield/ Net Average Yield/ Net
IN MILLIONS Volume Rate Change Volume Rate Change
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans $267.8 $(212.7) $ 55.1 $ 16.4 $(425.4) $(409.0)
Mortgage loans held for sale 24.7 (10.1) 14.6 18.6 (6.2) 12.4
Taxable investment securities (17.9) (102.6) (120.5) 47.8 (49.1) (1.3)
Tax-exempt investment securities (8.6) (9.0) (17.6) 2.5 (11.4) (8.9)
Securities available for sale 86.8 (2.5) 84.3 3.8 (6.2) (2.4)
Short-term investments (5.9) (4.0) (9.9) (30.2) (23.7) (53.9)
- -----------------------------------------------------------------------------------------------------------------------------
Total interest income 346.9 (340.9) 6.0 58.9 (522.0) (463.1)
INTEREST EXPENSE
Money market deposit accounts (10.7) (48.0) (58.7) 41.9 (135.7) (93.8)
Savings deposits 62.7 (29.9) 32.8 52.5 (55.7) (3.2)
NOW accounts 21.5 (32.7) (11.2) 25.5 (67.8) (42.3)
Certificates ($100,000 or more) (23.6) (26.1) (49.7) (80.3) (69.0) (149.3)
Other time deposits (47.8) (118.9) (166.7) (134.3) (233.7) (368.0)
Deposits in foreign office 20.5 (2.7) 17.8 -- (10.1) (10.1)
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 22.6 (258.3) (235.7) (94.7) (572.0) (666.7)
Federal funds purchased and securities
sold under agreements to repurchase 10.6 (23.3) (12.7) 13.5 (84.3) (70.8)
Other short-term borrowings 18.1 (4.7) 13.4 (24.2) (19.2) (43.4)
Long-term debt 29.6 (9.8) 19.8 18.1 (6.5) 11.6
- -----------------------------------------------------------------------------------------------------------------------------
Total interest expense 80.9 (296.1) (215.2) (87.3) (682.0) (769.3)
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income $266.0 $ (44.8) $221.2 $146.2 $160.0 $306.2
====== ======= ====== ====== ====== ======
- -----------------------------------------------------------------------------------------------------------------------------
<FN>
The change in interest not due solely to volume or rate has been allocated in proportion to the absolute dollar amounts of the
change in each.
</TABLE>
Management section. Also contributing to the widened spreads was a shift in
deposits from time to lower rate savings deposits with higher liquidity and to
noninterest-bearing deposits.
ASSET AND LIABILITY MANAGEMENT
The Corporation manages its exposure to economic loss from fluctuations in
interest rates through an active program of asset and liability management
within guidelines established by the Corporation's Asset/Liability Management
Committee ("ALCO"). The ALCO has the responsibility for approving the
asset/liability management policies of the Corporation, approving changes in
the balance sheet that would result in deviations from the guidelines in the
policy, approving strategies to improve balance sheet positioning and/or
earnings, and reviewing the interest rate sensitivity positions of the
Corporation and each of the affiliate banks. The ALCO meets twice monthly to
conduct this review and to approve strategies consistent with its policies.
The primary tool utilized by management to measure and manage interest rate
exposure is a simulation model. Use of the model to perform simulations of
changes in interest rates over one- and two-year time horizons has enabled
management to develop strategies for managing exposure to interest rate risk.
In its simulations, management estimates the impact on net interest income from
pro forma 100 and 200 basis point changes in the overall level of interest
rates. ALCO policy guidelines provide that a 200 basis point increase or
decrease over a twelve-month period should not result in more than a 2%
negative impact on net interest income. Simulations as of December 31, 1993,
indicated that the Corporation was positioned within these guidelines and was
slightly liability sensitive.
The simulation model is supplemented with a more traditional tool used in the
banking industry for measuring interest rate risk known as interest rate
sensitivity gap ("gap") analysis. This tool measures the difference between
assets and liabilities repricing or maturing within specified time periods. An
asset-sensitive position indicates that there are more rate-sensitive assets
than rate-sensitive liabilities repricing or maturing within specified time
horizons, which would generally imply a favorable impact on net interest income
in periods of rising interest rates. Conversely, a liability-sensitive position,
where rate-sensitive liabilities exceed the amount of rate-sensitive assets
repricing or maturing within applicable time frames, would generally imply a
favorable impact on net interest income in periods of declining interest rates.
The interest rate gap analysis table shown in Figure 8 presents the gap position
(including
CONTINUED ON PAGE 26
24
<PAGE> 9
<TABLE>
<CAPTION>
/ FIGURE 6 / 1993 AVERAGE EARNING ASSETS MIX / FIGURE 7 / 1993 FUNDING MIX OF AVERAGE EARNING ASSETS
<S> <C> <C> <C>
Graph Total loans 76.3% Graph Interest-bearing deposits 70.5%
Short-term investments 1.2% Long-term debt 3.7%
Securities 22.5% Short-term borrowings 10.8%
Noininterest-bearing deposits 15.0%
</TABLE>
<TABLE>
/ FIGURE 8 / INTEREST RATE GAP ANALYSIS
---------------------------------------
<CAPTION>
December 31, 1993
1 to 90 91 to 180 181 to 365 1 to 5 Over 5
DOLLARS IN MILLIONS Days Days Days Years Years Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans (including mortgage
loans held for sale) $19,019 $2,600 $4,798 $10,897 $ 4,083 $41,397
Investment securities 1,236 681 2,222 5,333 1,650 11,122
Securities available for sale 160 212 184 944 227 1,727
Short-term investments 107 -- -- -- -- 107
Other assets 1,308 -- 11 2,394 1,565 5,278
- -----------------------------------------------------------------------------------------------------------------------------
Total assets 21,830 3,493 7,215 19,568 7,525 59,631
- -----------------------------------------------------------------------------------------------------------------------------
Liabilities and shareholders' equity
Noninterest-bearing deposits 819 -- -- 5,967 2,040 8,826
Interest-bearing deposits 14,231 3,085 3,047 16,550 760 37,673
Borrowed funds 5,031 78 66 1,023 1,462 7,660
Other liabilities 206 2 -- 52 818 1,078
Shareholders' equity -- -- -- -- 4,394 4,394
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity 20,287 3,165 3,113 23,592 9,474 59,631
- -----------------------------------------------------------------------------------------------------------------------------
Off-balance sheet items (4,744) (875) 410 4,810 399
- -----------------------------------------------------------------------------------------------------------------------------
Rate sensitivity gap $(3,201) $ (547) $4,512 $ 786 $(1,550)
Cumulative gap (3,201) (3,748) 764 1,550 --
- -----------------------------------------------------------------------------------------------------------------------------
Cumulative gap as a % of earning assets (5.89)% (6.90)% 1.41% 2.85%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 10
<TABLE>
/ FIGURE 9 / INTEREST RATE SWAP PORTFOLIO
-----------------------------------------
<CAPTION>
Weighted
December 31, 1993 Average Weighted Average Rate
Notional Maturity Fair ---------------------
IN MILLIONS Value (years) Value Receive Pay
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Receive fixed/pay variable $7,559 1.5 $60 5.56% 3.45%
Pay fixed/receive variable 150 1.3 (9) 3.38 8.68
Basis swaps 150 -- -- 3.55 2.81
Forward-starting receive fixed/pay variable 500 1.7 2 5.05 3.48
- -----------------------------------------------------------------------------------------------------------------------------
Total "portfolio" swaps 8,359 1.5 53 5.45 3.53
Customer swaps 1,214 3.7 4 5.22 5.03
- -----------------------------------------------------------------------------------------------------------------------------
Total interest rate swaps $9,573 1.8 $57 5.42% 3.72%
====== ===
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
the impact of off-balance sheet items) of the Corporation at December 31, 1993.
Gap analysis has several limitations. For example, it does not take into
consideration the varying degrees of interest rate sensitivity pertaining to
the assets and liabilities that reprice within one year, whereas such
characteristics are reflected in the simulation model. Thus, at December 31,
1993, the cumulative adjusted interest rate sensitivity gap of 1.41% within the
one-year time frame indicated the Corporation was slightly asset sensitive
whereas the more precise simulation model, previously described, indicated the
Corporation was slightly liability sensitive.
The Corporation's core lending and deposit-gathering businesses tend to
generate significantly more fixed-rate deposits than fixed-rate
interest-earning assets. Left unaddressed, this tendency would place the
Corporation's earnings at risk to declining interest rates as interest-earning
assets would reprice faster than would interest-bearing liabilities. To reduce
this risk, management has utilized its securities portfolio and, for the past
several years, interest rate swaps in the management of interest rate risk. The
decision to use "portfolio" interest rate swaps to manage interest rate risk
versus on-balance sheet securities has depended on various factors, including
funding costs, liquidity and capital requirements. The Corporation's
"portfolio" swaps totaled $8.4 billion at December 31, 1993, and consisted
principally of contracts wherein the Corporation receives a fixed rate of
interest, while paying at a variable rate, as summarized in Figure 9.
In addition to "portfolio" swaps, the Corporation has entered into interest
rate swap agreements to accommodate the needs of its customers, typically
commercial loan customers. The Corporation offsets the interest rate risk of
customer swaps by entering into offsetting swaps, primarily with third parties.
These offsetting swaps are also included in the customer swap portfolio. Where
the Corporation does not have an existing loan with the customer, the swap
position of the customer and any offsetting swap with a third party are carried
at their respective fair values. The $1.2 billion notional value of customer
swaps in Figure 9 includes $645 million of interest rate swaps that receive a
fixed rate and pay a variable rate and $569 million of interest rate swaps that
receive a variable rate and pay a fixed rate.
The total notional value of all interest rate swap contracts outstanding was
$9.6 billion and $5.6 billion as of December 31, 1993 and 1992, respectively.
Of the $4.0 billion increase in the total notional amount of interest rate
swaps, $3.3 billion was attributable to "portfolio" swaps. In 1993, old KeyCorp
began utilizing interest rate swaps as part of its management of interest rate
risk. As a result of this new strategy, $3.0 billion of "portfolio" interest
rate swaps were added in 1993. Figure 10 shows the current year activity for
"portfolio" swaps.
<TABLE>
/ FIGURE 10 / "PORTFOLIO" SWAP ACTIVITY
---------------------------------------
<CAPTION>
Year ended December 31, 1993 Total
Receive Pay Forward- "Portfolio"
IN MILLIONS Fixed Fixed Basis Starting Swaps
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $3,524 $275 $ 45 $1,179 $5,023
Additions 4,750 -- 150 503 5,403
Maturities/amortization (1,445) (137) (45) -- (1,627)
Terminations (380) -- -- (60) (440)
Forward-starting becoming effective 1,110 12 -- (1,122) --
- -----------------------------------------------------------------------------------------------------------------------------
Balance at end of year $7,559 $150 $150 $ 500 $8,359
====== ==== ==== ===== ======
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE> 11
KEYCORP AND SUBSIDIARIES
<TABLE>
/ FIGURE 11 / LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
--------------------------------------------------------------------------
<CAPTION>
December 31, 1993
Within 1-5 Over
IN MILLIONS 1 Year Years 5 Years Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $5,200.1 $2,594.2 $1,171.2 $ 8,965.5
Real estate--construction 709.0 312.5 139.0 1,160.5
- -----------------------------------------------------------------------------------------------------------------------------
$5,909.1 $2,906.7 $1,310.2 $10,126.0
======== ======== ======== =========
Loans with floating or adjustable rates $1,917.6 $ 685.0
Loans with predetermined interest rates 989.1 625.2
- -----------------------------------------------------------------------------------------------------------------------------
$2,906.7 $1,310.2
======== ========
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1993, the aggregate notional values of interest rate swap
contracts, excluding customer swaps, maturing in each of the years 1994 through
1998 were $2.6 billion, $4.0 billion, $550 million, $200 million and $650
million, respectively.
The credit risk exposure to the counterparties for each interest rate swap
contract is monitored by the appropriate credit committees at both the
Corporate and affiliate bank levels. Based upon detailed credit reviews of the
counterparties, these credit committees establish limitations on the total
credit exposure the Corporation may have with each counterparty and indicate
whether collateral is required. At December 31, 1993, excluding customer swaps,
the Corporation had 18 counterparties to interest rate swap contracts, of which
the largest credit exposure to an individual counterparty was $9.4 million on a
notional amount of $300 million. The average total notional amount of swap
contracts with these 18 counterparties was $464 million with an average credit
exposure of $2.9 million.
NONINTEREST INCOME
As shown in Figure 12, noninterest income totaled $1.0 billion in 1993, up
$76.5 million, or 8%, from the prior year. After excluding the $29.4 million
gain on the sale of Ameritrust Texas Corporation ("ATC") and the $28.3 million
in net securities gains, noninterest income in 1993 was $944.0 million. This
represented an increase of $56.3 million, or 6%, from the comparable amount
reported in 1992; that is after excluding $22.9 million in gains on certain
asset sales, primarily from the sale of branch offices and loans, and net
securities gains totaling $14.6 million recorded in 1992. Adjusting for the
1991 net gains on securities transactions and gains on certain asset sales,
noninterest income in 1992 rose $81.3 million, or 10%, relative to the prior
year.
Trust income, including investment management fees, continued to be a major
source of revenue. At December 31, 1993, the Corporation, through Society
Asset Management, Inc. ("SAMI") and the trust departments of its affiliate
banks and trust subsidiaries, managed assets (excluding corporate trust assets)
of approximately $34 billion. SAMI, which is
<TABLE>
/ FIGURE 12 / NONINTEREST INCOME
--------------------------------
<CAPTION>
Year ended December 31, Change 1993 vs 1992
--------------------
DOLLARS IN MILLIONS 1993 1992 1991 Amount Percent
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Trust income $ 244.6 $250.8 $235.8 $ (6.2) (2.5)%
Service charges on deposit accounts 252.5 236.6 217.4 15.9 6.7
Mortgage banking income 93.6 88.7 74.3 4.9 5.5
Credit card fees 73.5 80.9 71.4 (7.4) (9.1)
Gains on certain asset sales 29.4 22.9 24.0 6.5 28.4
Net securities gains 28.3 14.6 18.9 13.7 93.8
Other income:
Insurance and brokerage 65.7 50.1 33.6 15.6 31.1
International fees 21.4 20.5 18.2 .9 4.4
Miscellaneous 192.7 160.1 155.7 32.6 20.4
- -----------------------------------------------------------------------------------------------------------------------------
Total other income 279.8 230.7 207.5 49.1 21.3
- -----------------------------------------------------------------------------------------------------------------------------
Total noninterest income $1,001.7 $925.2 $849.3 $76.5 8.3%
======== ====== ====== =====
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 12
KEYCORP AND SUBSIDIARIES
an indirect wholly-owned subsidiary, is registered with the Securities and
Exchange Commission ("SEC") as an investment advisor and is one of the largest
money managers in the Great Lakes Region. The sale of ATC in September 1993
reduced managed trust assets and trust fees by approximately $4 billion and
$8.0 million, respectively.
Service charges on deposit accounts have long been an important source of
revenue. In 1993, service charges on deposits increased by 7% to $252.5 million
from $236.6 million in 1992, which in turn was $19.2 million, or 9%, higher
than 1991's $217.4 million. Factors contributing to the improvements were a
larger base of business, pricing strategies and other initiatives designed to
offset higher costs associated with the servicing of these accounts.
<TABLE>
/ FIGURE 13 / MORTGAGE BANKING INCOME
<CAPTION>
Year ended December 31,
IN MILLIONS 1993 1992 1991
=====================================================================
<S> <C> <C> <C>
Servicing fees1 $22.0 $54.4 $56.5
Gains on sales of loans 11.1 9.3 3.6
Origination fees 27.2 13.9 6.3
Gains on sales of servicing rights 25.5 --- ---
Late fees and other 7.8 11.1 7.9
- ---------------------------------------------------------------------
Total mortgage banking income $93.6 $88.7 $74.3
===== ===== =====
=====================================================================
<FN>
1Net of mortgage servicing rights amortization.
</TABLE>
The 1993 increase in mortgage banking income as shown in Figure 13 was the
result of $25.5 million of gains realized on sales of servicing rights and
increased fees resulting from a high level of mortgage originations encouraged
by the low interest rate environment. However, the increased fees were more
than offset by an acceleration of the amortization of mortgage servicing rights
(which are netted against servicing fees for reporting purposes) made in
response to continued high levels of mortgage refinancings.
In 1993, credit card fees decreased $7.4 million, or 9%, primarily due to a
decline in annual membership fees relative to the prior year. This compared to
an increase of $9.5 million, or 13%, in 1992.
Total other noninterest income increased by $49.1 million, or 21%, in 1993
compared to 1992. Of this increase, $40.1 million in the "miscellaneous"
category related to fees earned by two affiliate companies, Niagara Asset
Corporation and Niagara Portfolio Management Corp., which operate under asset
management contracts with the Federal Deposit Insurance Corporation ("FDIC").
Fees earned by these companies are expected to be at more modest levels in
1994. Also included in the other category are insurance and brokerage
commissions which increased $15.6 million, or 31%, in 1993 over 1992, largely
as a result of increased levels of business activity and management's
continued emphasis on building its fee-based business. Insurance and brokerage
products, such as mutual funds and annuities, are marketed through the branch
network.
NONINTEREST EXPENSE
Noninterest expense, as shown in Figure 14, totaled $2.4 billion in 1993, up
$214.7 million, or 10%, from the 1992 level. In both 1993 and the prior year,
noninterest expense was adversely impacted by merger and integration charges of
$118.7 million and $92.7 million, respectively. In addition, the current year
included several nonrecurring charges totaling $34.4 million. Significant items
included in the latter charges were $21.6 million related to various systems
conversion costs, $7.0 million of facilities-related charges and $4.0 million
associated with the adoption of Statement of Financial Accounting Standards
("SFAS") No. 112, "Employers' Accounting for Postemployment Benefits."
Excluding the merger and integration charges and the nonrecurring items, 1993
expenses rose $154.3 million, or 7%, principally due to increases in personnel
expense, net occupancy expense, marketing expense and the "miscellaneous"
category; the total of which were offset in part by lower fees for professional
services. The overall increase in recurring noninterest expense was due, in
large part, to the impact of acquisitions completed in 1993. These transactions
are described in greater detail in Note 2, Mergers, Acquisitions and
Divestitures, appearing on page 51. The increased scale of operations as a
result of these acquisitions is not reflected in the 1992 figures. The 1991
period also included merger and integration charges of $93.8 million, as well
as $6.9 million of costs associated with a branch optimization program.
Personnel expense increased by $87.1 million, or 9%, in 1993 over 1992,
following an increase of 10% in 1992 over 1991. In addition to the impact of
the acquisitions completed in 1993, the increase over 1992 reflected the
Corporation's January 1, 1993, adoption of SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions," which added $8.2 million to
1993 employee benefits expense. Excluding the impact of the adoption of SFAS
No. 106 and SFAS No. 112, personnel expense for 1993 increased $74.9 million,
or 7%. SFAS No. 106 and SFAS No. 112 are more fully described on page 29. At
December 31, 1993, the number of full-time equivalent employees was 29,983, up
3% and 2% from 1992 and 1991 levels, respectively, principally due to
acquisitions.
Merger and integration charges of $118.7 million ($80.6 million after tax, $.33
per Common Share), $92.7 million ($66.6 million after tax, $.29 per Common
Share) and $93.8 million ($68.2 million after tax, $.29 per Common Share) were
recorded in 1993, 1992 and 1991, respectively. The merger and integration
charges in 1993 included accruals for expenses, primarily consisting 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).
28
<PAGE> 13
KEYCORP AND SUBSIDIARIES
<TABLE>
/ FIGURE 14 / NONINTEREST EXPENSE
<CAPTION>
Year ended December 31, Change 1993 vs 1992
---------------------
DOLLARS IN MILLIONS 1993 1992 1991 Amount Percent
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Personnel:
Salaries $ 889.7 $ 832.7 $ 757.3 $ 57.0 6.8%
Employee benefits 211.0 180.9 168.0 30.1 16.6
- -----------------------------------------------------------------------------------------------------------------------------
Total personnel 1,100.7 1,013.6 925.3 87.1 8.6
Net occupancy 204.2 189.7 184.8 14.5 7.6
Equipment 161.3 151.6 134.1 9.7 6.4
FDIC insurance assessments 98.7 96.2 84.7 2.5 2.6
Professional fees 53.3 76.0 55.5 (22.7) (29.9)
Merger and integration charges 118.7 92.7 93.8 26.0 28.0
Other expense:
Marketing 60.4 49.9 53.3 10.5 21.0
Amortization of intangibles 58.1 61.7 57.6 (3.6) (5.8)
OREO expense (net of income of $14.4, $11.5, $4.8) 43.1 43.5 36.1 (.4) (.9)
Miscellaneous 486.6 395.5 440.5 91.1 23.0
- -----------------------------------------------------------------------------------------------------------------------------
Total other expense 648.2 550.6 587.5 97.6 17.7
- -----------------------------------------------------------------------------------------------------------------------------
Total noninterest expense $2,385.1 $2,170.4 $2,065.7 $214.7 9.9%
======== ======== ======== ======
Full-time equivalent employees 29,983 29,117 29,509
Efficiency ratio1 60.50% 60.96% 65.27%
Overhead ratio2 46.85 47.21 52.63
- -----------------------------------------------------------------------------------------------------------------------------
<FN>
1 Noninterest expense (excluding merger and integration charges and other nonrecurring charges) divided by taxable-equivalent net
interest income plus noninterest income (excluding net securities gains and certain gains on asset sales).
2 Noninterest expense (excluding merger and integration charges and other nonrecurring charges) less noninterest income (excluding
net securities gains and certain gains on asset sales) divided by taxable-equivalent net interest income.
</TABLE>
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
merger and integration charges recorded in connection with the PSB and
Ameritrust mergers in 1992 and the Ameritrust merger in 1991 were similar in
nature.
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.
One measure used in the banking industry to assess the level of noninterest
expense is the efficiency ratio, which is defined in Figure 14. The efficiency
ratios for 1993, 1992 and 1991 were 60.50%, 60.96% and 65.27%, respectively.
The improvement in the Corporation's efficiency ratios reflected, in large
part, the success achieved in reducing overhead costs through the successful
integration of banking companies, coupled with strong growth in
taxable-equivalent net interest income and noninterest income.
SFAS No. 106, previously referred to on page 28, requires that employers
recognize the cost of providing postretirement benefits over the employees'
active service periods to the date they attain full eligibility for such
benefits. The Corporation elected to recognize the transition obligation,
defined as the unfunded accumulated postretirement benefit obligation at the
date the standard is adopted, of approximately $107 million over a 20-year
period. As of December 31, 1993, the weighted average discount rate used in
determining the actuarial present value of pension and other postretirement
benefits was reduced from 8.1% to 7.4%. In addition, the assumed rate of
increase in future compensation levels (applicable only to the determination of
pension benefits) was reduced from 4.8% to 4.0%. The net effect of these
assumption changes on 1994 expense levels is not expected to be material.
Another assumption used in the determination of the costs of other
postretirement benefits is the health care cost trend rate. Because of certain
benefit limitations in effect, increasing the rates assumed in each future year
by one percentage point would not have a material impact on the costs for other
postretirement benefits.
The Corporation adopted the provisions of SFAS No. 112, "Employers' Accounting
for Postemployment Benefits," during 1993. This standard requires that
employers who provide benefits to former or inactive employees after employment
but before retirement recognize a liability for such benefits if specified
conditions are met. Adoption of this standard increased noninterest expense by
$4.0 million. Postemployment benefits for 1992 and 1991, which were recorded on
a cash basis, were not restated.
29
<PAGE> 14
KEYCORP AND SUBSIDIARIES
<TABLE>
/ FIGURE 15 / COMPOSITION OF LOANS
<CAPTION>
December 31,
1993 1992 1991
------------------- ------------------- -------------------
DOLLARS IN MILLIONS Amount % of Total Amount % of Total Amount % of Total
=============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 8,965.5 22.4% $ 8,869.0 24.6% $ 9,183.9 25.9%
Real estate -- construction 1,160.5 2.9 1,448.0 4.0 1,577.3 4.4
Real estate -- commercial mortgage 6,228.2 15.5 5,937.0 16.5 6,258.5 17.6
- -----------------------------------------------------------------------------------------------------------------------------
Total commercial real estate 7,388.7 18.4 7,385.0 20.5 7,835.8 22.0
Real estate -- residential mortgage 11,026.3 27.5 8,289.4 23.0 7,240.7 20.4
- -----------------------------------------------------------------------------------------------------------------------------
Total real estate 18,415.0 45.9 15,674.4 43.5 15,076.5 42.4
Credit card 1,657.5 4.1 1,684.0 4.7 1,697.4 4.8
Other consumer 7,618.9 19.0 7,397.7 20.5 8,553.1 24.0
- -----------------------------------------------------------------------------------------------------------------------------
Total consumer 9,276.4 23.1 9,081.7 25.2 10,250.5 28.8
Student loans held for sale 1,648.6 4.1 1,070.1 3.0 -- --
Lease financing 1,702.5 4.3 1,225.2 3.4 946.5 2.7
Foreign 63.3 .2 101.4 .3 76.9 .2
- -----------------------------------------------------------------------------------------------------------------------------
Total loans $40,071.3 100.0% $36,021.8 100.0% $35,534.3 100.0%
========= ===== ========= ===== ========= =====
=============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1990 1989
------------------- -------------------
Amount % of Total Amount % of Total
===================================================================================================
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $10,031.7 29.4% $10,881.1 34.4%
Real estate -- construction 2,187.6 6.4 1,884.1 6.0
Real estate -- commercial mortgage 5,611.6 16.4 4,711.2 14.9
- ---------------------------------------------------------------------------------------------------
Total commercial real estate 7,799.2 22.8 6,595.3 20.9
Real estate -- residential mortgage 6,373.5 18.6 5,135.0 16.3
- ---------------------------------------------------------------------------------------------------
Total real estate 14,172.7 41.4 11,730.3 37.2
Credit card 1,582.0 4.6 1,359.5 4.3
Other consumer 7,559.6 22.1 6,836.9 21.7
- ---------------------------------------------------------------------------------------------------
Total consumer 9,141.6 26.7 8,196.4 26.0
Student loans held for sale -- -- -- --
Lease financing 775.2 2.3 686.8 2.2
Foreign 72.5 .2 75.8 .2
- ---------------------------------------------------------------------------------------------------
Total $34,193.7 100.0% $31,570.4 100.0%
========= ===== ========= =====
====================================================================================================
</TABLE>
INCOME TAXES
The provision for income taxes for 1993 was $374.0 million, compared with
$279.6 million in 1992 and $136.7 million in 1991. The increases in both 1993
and the prior year resulted from an overall increase in the level of taxable
earnings. The Omnibus Budget Reconciliation Act of 1993 (the "Act"), which was
signed into law on August 10, 1993, includes a number of items which impacted
the Corporation's Federal income tax provision. Primary among these items was a
retroactive increase in the Federal statutory tax rate from 34% to 35% as of
January 1, 1993. In addition, the Act places certain limitations on deductible
expenses which take effect after 1993. The effective tax rate (provision for
income taxes as a percentage of income before income taxes) was 34.5% in 1993,
32.3% in 1992 and 30.3% in 1991. The effective tax rate was less than the
Federal statutory rate primarily due to tax-exempt income from certain
investment securities and loans. Management expects the Corporation's effective
tax rate to continue to approach the prevailing combined statutory Federal and
state income tax rates. The higher 1993 effective tax rate in comparison to
1992 and 1991 resulted from an increase in the proportion of taxable income to
total pre-tax income, coupled with the previously mentioned increase in the
Federal tax rate from 34% to 35%. Also affecting the 1993 effective tax rate
was a high level of non-deductible expenses included in the merger and
integration charges associated with the Merger.
During the first quarter of 1992, the Corporation adopted the provisions of
SFAS No. 109, "Accounting for Income Taxes." The adoption of this standard did
not have a material effect on the Corporation's financial condition or results
of operations.
30
<PAGE> 15
KEYCORP AND SUBSIDIARIES
<TABLE>
/ FIGURE 16 / 1993 PERIOD-END LOAN GROWTH BY REGION
<CAPTION> Change
Internally From
DOLLARS IN MILLIONS Generated Acquired Total 1992
============================================================================
<S> <C> <C> <C> <C>
Northeast Region $ (56.5) $1,251.2 $1,194.7 11.9%
Great Lakes Region 1,041.6 828.9 1,870.5 11.7
Rocky Mountain Region 201.0 166.9 367.9 15.9
Northwest Region 382.3 247.4 629.7 8.3
Financial Services (13.3) --- (13.3) (12.2)
- ----------------------------------------------------------------------------
Total $1,555.1 $2,494.4 $4,049.5 11.2%
======== ======== ========
============================================================================
</TABLE>
<TABLE>
/ FIGURE 17 / LOANS OUTSTANDING BY REGION
<CAPTION>
December 31, 1993
DOLLARS IN MILLIONS Total Loans Distribution
====================================================================
<S> <C> <C>
Northeast Region $11,255.6 28.1%
Great Lakes Region 17,847.8 44.6
Rocky Mountain Region 2,683.0 6.7
Northwest Region 8,189.0 20.4
Financial Services 95.9 .2
- --------------------------------------------------------------------
Total $40,071.3 100.0%
====================================================================
</TABLE>
FINANCIAL CONDITION
LOANS
At December 31, 1993, total loans outstanding were $40.0 billion, as compared
with $36.0 billion at December 31, 1992, and $35.5 billion at December 31,
1991, as shown in Figure 15. The $4.0 billion, or 11%, increase from the
year-end 1992 level was due, in large part, to the impact of acquisitions which
were completed by the Corporation during 1993. Excluding the $2.5 billion
impact of these acquisitions, loans increased by $1.5 billion since the prior
year end. The internally generated loan growth of $1.5 billion reflected
increases of $1.1 billion in residential real estate loans, $578.5 million in
student loans held for sale and $430.1 million in lease financing receivables.
These increases were partially offset by decreases of $366.2 million in
commercial mortgage and construction loans, $73.0 million in commercial loans,
$98.9 million in consumer loans and $38.1 million in foreign loans. As shown in
Figure 16, the internally generated loan growth was primarily concentrated in
the Great Lakes Region, which has not experienced, to the same degree, the
general economic deterioration and weak loan demand experienced by other
regions of the country.
With respect to geographic concentration, Figure 17 depicts the loan portfolio
at December 31, 1993, by banking region. The Corporation's unique
thirteen-state, four-region profile has provided significant credit risk
diversification. The dangers to banks of regional concentration have been
vividly demonstrated in recent years by the problems of many competitors whose
lending market is confined to one particular area where the economy has
faltered.
Commercial loans outstanding at December 31, 1993, were $9.0 billion, up 1%
from the December 31, 1992, level of $8.9 billion, following a decrease of
$314.9 million, or 3%, from the prior year. The decline in 1992 can be
attributed to weaker loan demand as a consequence of the economic environment
and to strategic efforts to reduce the level of exposure related to
highly-leveraged transactions ("HLT"), principally acquired in the Ameritrust
merger, where there has not been a long-standing relationship with the
borrower. In addition, the decline in 1992 reflected the run-off of certain
other Ameritrust credits which management believed were incompatible with the
Corporation's credit risk profile. At December 31, 1993, the Corporation had
$247.5 million in HLT loans outstanding, down $157.7 million, or 39%, from the
December 31, 1992, level.
Loans secured by real estate totaled $18.4 billion at December 31, 1993,
compared with $15.7 billion at December 31, 1992, and $15.1 billion at December
31, 1991. Loans secured by real estate consist of construction loans,
commercial mortgage loans and one-to-four family residential loans (including
home equity loans). The $2.7 billion, or 17%, increase from 1992 was mainly
attributable to the acquisitions which the Corporation completed during 1993.
Acquisitions accounted for $2.0 billion of the increase in total real estate
loans, including $1.6 billion of the increase in the residential mortgage
portfolio.
Construction loans decreased to $1.2 billion at December 31, 1993, from $1.4
billion at December 31, 1992, and $1.6 billion at December 31, 1991. After
adjusting for the impact of acquisitions, the decrease from year-end 1992 was
$343.0 million. At December 31, 1993, 12% of the portfolio was secured by
<TABLE>
/ FIGURE 18 / CONSTRUCTION AND COMMERCIAL MORTGAGE LOANS
<CAPTION>
December 31, 1993
Commercial
IN MILLIONS Construction Mortgage Total
=============================================================
<S> <C> <C> <C>
Nonowner-occupied:
Retail $ 133.1 $ 891.0 $1,024.1
Multi-family properties 94.0 811.4 905.4
Office buildings 164.9 756.0 920.9
Hotels/Motels 26.5 250.1 276.6
Health facilities 7.9 104.2 112.1
Manufacturing facilities 6.7 102.8 109.5
Warehouses 11.0 261.4 272.4
Other 243.0 340.4 583.4
Owner-occupied 473.4 2,710.9 3,184.3
- -------------------------------------------------------------
Total $1,160.5 $6,228.2 $7,388.7
======== ======== ========
=============================================================
</TABLE>
31
<PAGE> 16
KEYCORP AND SUBSIDIARIES
properties in the Northeast Region, 54% in the Great Lakes Region, 11% in the
Rocky Mountain Region and 23% in the Northwest Region, the principal banking
markets served by the Corporation.
The commercial mortgage loan portfolio totaled $6.2 billion at December 31,
1993, compared with $5.9 billion at December 31, 1992, and $6.3 billion at
December 31, 1991. This loan category, in general, has concerned many followers
of the banking industry in the last few years. This apprehension stems from
overcapacity in the commercial real estate market, made worse by general
economic deterioration and a resultant deflation in real estate values. The
Corporation manages risk exposure in the construction and commercial mortgage
portfolios through prudent underwriting criteria and by monitoring loan
concentrations by geographic region and property type. Figure 18 details the
industry concentrations within the commercial real estate portfolio at December
31, 1993, and shows the portions of the portfolio which are nonowner-occupied
versus owner-occupied. At December 31, 1993, 41% of the construction portfolio
and 44% of the commercial mortgage loan portfolio were comprised of loans
secured by owner-occupied properties. Those borrowers are engaged in business
activities other than real estate, and the primary source of repayment is not
solely dependent on the real estate market.
One-to-four family residential mortgages (including home equity loans) were
$11.0 billion at December 31, 1993, compared with $8.3 billion at December 31,
1992, and $7.2 billion at December 31, 1991. Excluding the impact of
acquisitions, residential mortgages increased $1.1 billion, or 14%, in 1993. A
significant portion of the loan originations during 1993, as well as in 1992,
is attributable to homeowner refinancings, reflecting the lower level of
interest rates. During 1993 the Corporation continued its strategy of
originating and selling most fixed rate loans with 30-year maturities in the
secondary market (and such loans are classified outside of the loan portfolio
as mortgage loans held for sale), whereas other fixed and adjustable rate loans
are originated to secondary market standards and maintained in the portfolio.
At December 31, 1993, the Corporation's mortgage banking operation serviced
approximately $27 billion in loans owned by both affiliate banks and third
parties.
Consumer loans totaled $9.3 billion at December 31, 1993, compared with $9.1
billion at December 31, 1992, and $10.3 billion at December 31, 1991. The
decrease during 1992 reflected the designation of approximately $1.1 billion of
student loans as held for sale in the fourth quarter of 1992. Consumer loans
also declined in 1992 as a result of the sale of $117.6 million in outstandings
as part of branch sales completed in May and June 1992 in connection with the
Ameritrust merger, and the sale of $240.0 million in student loans in August
1992. Excluding the impact of acquisitions in 1993, the portfolio declined
$98.9 million from the 1992 year-end level.
As previously indicated, during the latter part of 1992 the Corporation
designated its student loan portfolio, totaling approximately $1.1 billion, as
held for sale. Since then, this portfolio has grown to $1.6 billion at December
31, 1993, representing an increase of $578.5 million, or 54%, from the year-end
1992 level. The higher level of outstandings in 1993 reflected the
Corporation's role as a primary provider of education loans to law school
students. In June 1993 the Corporation securitized, without recourse, a portion
of this portfolio totaling $200 million. Management anticipates continued
involvement in these programs and plans to sell or securitize such loans at or
near the time that they enter repayment status.
SECURITIES
At December 31, 1993, the book value of the investment securities portfolio
totaled $11.1 billion, an increase of $2.1 billion, or 24%, from December 31,
1992. The growth in 1993 primarily resulted from an increase of $1.8 billion,
or 30%, in mortgage-backed securities. At December 31, 1993 and 1992, the
investment securities portfolio comprised 20% and 18%, respectively, of total
earning assets.
The yield on the investment securities portfolio declined to 6.51% at December
31, 1993, from 7.72% at December 31, 1992. This reduction was attributable to
prepayments on higher-yielding mortgage-backed securities coupled with lower
reinvestment yields resulting from the declining rate environment. The
investment portfolio's market value exceeded its book value by $218.1 million
at December 31, 1993, compared with an excess of $216.8 million at December 31,
1992.
At December 31, 1993, the Corporation had $7.9 billion invested in
mortgage-backed pass-through securities and collateralized mortgage obligations
("CMO") within the investment securities portfolio, compared with $6.1 billion
at December 31, 1992. A mortgage-backed pass-through security depends on the
underlying pool of mortgage loans to provide a cash flow "pass-through" of
principal and interest. The Corporation had $4.3 billion invested in
mortgage-backed pass-through securities at December 31, 1993. A CMO is a
mortgage-backed security that is comprised of classes of bonds created by
prioritizing the cash flows from the underlying mortgage pool in order to meet
different objectives of investors. The Corporation had $3.6 billion invested in
CMO securities at December 31, 1993. The CMO securities held by the Corporation
are primarily shorter-maturity class bonds that were structured to have more
predictable cash flows by being less sensitive to prepayments during periods of
changing interest rates. At December 31, 1993, substantially all of the CMOs
and mortgage-backed pass-through securities held by the Corporation were issued
by Federal agencies or backed by Federal agency pass-through securities.
32
<PAGE> 17
KEYCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
/ FIGURE 19 / INVESTMENT SECURITIES
U.S. Treasury, States and Mortgage- Other Weighted
Agencies and Political Backed Investment Average
DOLLARS IN MILLIONS Corporations Subdivisions Securities1 Securities Total Yield2
============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1993:
Maturity: One year or less $ 87.4 $ 512.5 $1,080.3 $139.6 $ 1,819.8 6.56%
After one through five years 700.4 638.6 3,823.6 427.5 5,590.1 6.56
After five through ten years 6.7 402.9 2,728.5 55.8 3,193.9 6.17
After ten years 1.5 123.8 244.8 148.2 518.3 7.96
- -----------------------------------------------------------------------------------------------------------------------------
Book value $ 796.0 $1,677.8 $7,877.2 $771.1 $11,122.1 6.51%
- -----------------------------------------------------------------------------------------------------------------------------
Market value $ 807.4 $1,779.8 $7,967.3 $785.7 $11,340.2
Weighted average yield 5.50% 8.61% 6.24% 5.63% 6.51%
Average maturity 1.7 YEARS 4.1 YEARS 5.0 YEARS 4.7 YEARS 4.6 YEARS
- -----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1992:
Book value $ 494.2 $1,806.8 $6,062.4 $612.9 $ 8,976.3 7.72%
Market value 506.0 1,886.6 6,171.8 628.7 9,193.1
- -----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1991:
Book value $1,743.3 $1,922.2 $5,879.3 $743.5 $10,288.3 8.70%
Market value 1,812.6 1,996.3 6,087.1 757.9 10,653.9
=============================================================================================================================
<FN>
1Maturity is based upon expected average lives rather than contractual terms.
2Weighted average yields are calculated on the basis of book value. Such yields have been adjusted to a fully taxable-equivalent
basis using a 35% tax rate for 1993 and a 34% tax rate for 1992 and 1991.
</TABLE>
In 1992, the Corporation transferred the majority of its U.S. Treasury
securities and certain other securities from the investment portfolio to the
"available for sale" portfolio. The specific designation of certain securities
as available for sale was made by the Corporation, as well as a significant
number of other major bank holding companies, in response to a general mandate
of the SEC. The designation of securities as available for sale applies to all
securities that may be held for indefinite periods, including securities that
may be sold in response to changes in interest rates, changes in prepayment
risk, increases in loan demand, or for general liquidity and other similar
factors. Securities which the Corporation has the ability and positive intent
to hold to maturity are included in the investment securities portfolio. At
December 31, 1993, the book value of the available for sale portfolio totaled
$1.7 billion, a decrease of $731.8 million, or 30%, from year-end 1992.
ASSET QUALITY
The Corporation's Loan Review Group measures and determines the level of risk
in the Corporation's loan-related assets. This includes the formulation of
underwriting standards and active line management. Geographic diversification
and variation of the dollar amount of loans throughout the Corporation also
provide a method for managing asset quality. In addition, the Loan Review Group
is responsible for reviewing the adequacy of the allowance for loan losses
("Allowance"). The Corporation's Credit Policy/Risk Management Group reviews
corporate assets other than loans, leases and OREO to determine the credit
quality and credit risk inherent in such assets. This Group is also responsible
for commercial and consumer credit policy development, concentration management
and credit systems development.
Allowance methodologies at both old KeyCorp and Society were designed to
provide adequate coverage for both potential and unforeseen loan losses. The
methodology following the Merger will be a hybrid of the methodologies used by
the two organizations. Management will continue to target and maintain a
minimum allowance equal to the allocated requirement plus an unallocated
portion, as appropriate, as shown in Figure 21. Management believes this is an
appropriate posture in light of current and expected economic conditions and
trends, the geographic and industry mix of the portfolio, and similar
risk-related matters. The 1993 provision for loan losses ("Provision") was
$211.7 million compared to $338.4 million in 1992 and $466.2 million in 1991.
The significantly lower Provision in 1993 reflected a corporate-wide
improvement in asset quality, including significant declines in nonperforming
loans.
<TABLE>
/ FIGURE 20 / NONPERFORMING LOANS AND ASSETS BY REGION
<CAPTION>
December 31,
Nonperforming Nonperforming Assets
Loans to Total to Total Loans Plus
Loans OREO and Other NPA
--------------- -------------------
1993 1992 1993 1992
============================================================
<S> <C> <C> <C> <C>
Northeast Region 1.01% 1.18% 1.73% 2.52%
Great Lakes Region .91 2.18 1.25 3.07
Rocky Mountain Region .26 .51 .44 1.01
Northwest Region .63 .96 .91 1.59
Financial Services 1.03 .72 7.76 8.28
- ------------------------------------------------------------
Total .84% 1.53% 1.24% 2.47%
============================================================
</TABLE>
33
<PAGE> 18
KEYCORP AND SUBSIDIARIES
<TABLE>
/ FIGURE 21 / ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<CAPTION>
1993 1992 1991
------------------- ------------------- -------------------
December 31, Percent of Percent of Percent of
Loan Type to Loan Type to Loan Type to
DOLLARS IN MILLIONS Amount Total Loans Amount Total Loans Amount Total Loans
=============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $177.6 23.4% $205.1 25.4% $224.4 25.9%
Real estate--construction 22.1 3.0 27.3 4.1 30.1 4.4
Real estate--mortgage 90.6 44.9 113.3 40.7 126.1 38.0
Consumer 113.4 24.1 147.2 26.0 149.7 28.8
Lease financing 14.1 4.4 4.8 3.5 3.4 2.7
Foreign -- .2 1.6 .3 20.2 .2
Unallocated 384.9 -- 283.3 -- 239.6 --
- -----------------------------------------------------------------------------------------------------------------------------
Total $802.7 100.0% $782.6 100.0% $793.5 100.0%
====== ===== ====== ===== ====== =====
=============================================================================================================================
</TABLE>
<TABLE>
<CAPTION> 1990 1989
------------------- -------------------
Percent of Percent of
Loan Type to Loan Type to
Amount Total Loans Amount Total Loans
===================================================================================================
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $238.7 29.3% $108.9 34.5%
Real estate--construction 23.2 6.4 15.6 6.0
Real estate--mortgage 127.9 35.1 54.0 31.2
Consumer 123.1 26.7 82.3 25.9
Lease financing 5.7 2.3 2.8 2.2
Foreign 19.5 .2 35.2 .2
Unallocated 139.2 -- 153.9 --
- ---------------------------------------------------------------------------------------------------
Total $677.3 100.0% $452.7 100.0%
====== ===== ====== =====
====================================================================================================
<FN>
Amounts in the "Percent of Loan Type to Total Loans" column were computed excluding loans held for sale from the portfolio
as no allowances were deemed necessary for such loans.
</TABLE>
As shown in Figure 23, net loan charge-offs of $212.8 million in 1993 dropped
significantly from $360.5 million in 1992 with asset quality improvement
reflected in the commercial, consumer, lease financing and real estate mortgage
portfolios.
<TABLE>
<CAPTION>
/ FIGURE 22 / NONPERFORMING ASSETS
IN MILLIONS
Other
Other real
nonperforming Restructured estate Nonaccrual
assets loans owned loans
<S> <C> <C> <C> <C>
1989 4.1 63.1 123.6 492.3
1990 2.8 25.2 211.5 773.7
1991 11.7 9.9 330.7 719.6
1992 14.9 2.4 332.4 550.5
1993 13.4 6.5 150.4 329.8
</TABLE>
Most of the charge-offs in 1992 and 1993 were related to problem
credits for which reserves were established in previous periods.
The Allowance at December 31, 1993, was $802.7 million, or 2.00% of loans,
compared with $782.6 million, or 2.17% of loans, at December 31, 1992. As a
percentage of nonperforming loans, the Allowance was 238.69% in 1993 and
141.54% in 1992. Although used as a general indicator, this percentage is not a
primary factor in the determination of the adequacy of the Allowance by
management. As indicated in Figure 21, the unallocated portion of the Allowance
increased in 1993, reflecting continued improvement in overall loan portfolio
quality.
As shown in Figure 24, nonperforming assets totaled $500.1 million at December
31, 1993, down $400.1 million, or 44%, from the December 31, 1992, level. This
followed a decrease of $171.7 million, or 16%, from the previous year. The
significant improvement in 1993 resulted largely from a $216.6 million, or 39%,
decrease in nonperforming loans and a $182.0 million, or 55%, decrease in OREO.
Other nonperforming assets, which are comprised primarily of nonperforming
venture capital investments, decreased $1.5 million, or 10%, in 1993. The
reduction in nonperforming loans was principally
CONTINUED ON PAGE 36
34
<PAGE> 19
KEYCORP AND SUBSIDIARIES
<TABLE>
/ FIGURE 23 / SUMMARY OF LOAN LOSS EXPERIENCE
<CAPTION>
DOLLARS IN MILLIONS 1993 1992 1991 1990 1989
=============================================================================================================================
<S> <C> <C> <C> <C> <C>
Average loans outstanding during the year $38,307.6 $35,307.4 $35,150.3 $32,632.8 $30,806.8
- -----------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses at beginning of year $782.6 $793.5 $677.3 $452.7 $413.1
Loans charged off:
Commercial, financial and agricultural 102.6 144.8 173.9 155.4 105.2
Real estate -- construction 25.5 25.1 40.9 33.7 4.9
Real estate -- mortgage 56.8 100.2 70.4 66.7 79.5
Consumer 115.2 160.3 174.1 136.7 115.7
Lease financing 3.1 10.0 5.7 6.7 8.0
Foreign -- -- .8 2.3 15.1
- -----------------------------------------------------------------------------------------------------------------------------
303.2 440.4 465.8 401.5 328.4
Recoveries:
Commercial, financial and agricultural 33.4 25.7 28.7 28.6 17.2
Real estate -- construction 6.0 1.3 1.9 2.5 .1
Real estate -- mortgage 9.8 9.0 3.1 2.1 2.8
Consumer 39.5 39.0 38.9 34.3 27.0
Lease financing 1.6 4.9 1.2 1.3 1.5
Foreign .1 -- .2 .8 4.3
- -----------------------------------------------------------------------------------------------------------------------------
90.4 79.9 74.0 69.6 52.9
- -----------------------------------------------------------------------------------------------------------------------------
Net loans charged off (212.8) (360.5) (391.8) (331.9) (275.5)
Provision for loan losses 211.7 338.4 466.2 517.2 306.2
Allowance of affiliates purchased 21.2 11.2 41.8 39.3 8.9
- -----------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses at end of year $802.7 $782.6 $793.5 $677.3 $452.7
====== ====== ====== ====== ======
- -----------------------------------------------------------------------------------------------------------------------------
Net loan charge-offs to average loans .56% 1.02% 1.11% 1.02% .89%
Allowance for loan losses to year-end loans 2.00 2.17 2.23 1.98 1.43
Allowance for loan losses to nonperforming loans 238.69 141.54 108.79 84.78 81.51
=============================================================================================================================
</TABLE>
<TABLE>
/ FIGURE 24 / SUMMARY OF NONPERFORMING ASSETS AND PAST DUE LOANS
<CAPTION>
December 31,
DOLLARS IN MILLIONS 1993 1992 1991 1990 1989
=============================================================================================================================
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $329.8 $550.5 $ 719.6 $ 773.7 $492.3
Restructured loans 6.5 2.4 9.9 25.2 63.1
- -----------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 336.3 552.9 729.5 798.9 555.4
Other real estate owned 186.1 350.3 349.9 225.3 131.6
Allowance for OREO losses (35.7) (17.9) (19.2) (13.8) (8.0)
- -----------------------------------------------------------------------------------------------------------------------------
Other real estate owned, net of allowance 150.4 332.4 330.7 211.5 123.6
Other nonperforming assets 13.4 14.9 11.7 2.8 4.1
- -----------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $500.1 $900.2 $1,071.9 $1,013.2 $683.1
====== ====== ======== ======== ======
- -----------------------------------------------------------------------------------------------------------------------------
Accruing loans past due 90 days or more $ 51.8 $ 70.3 $ 94.1 $ 90.5 $ 76.8
- -----------------------------------------------------------------------------------------------------------------------------
Nonperforming loans to year-end loans .84% 1.53% 2.05% 2.34% 1.76%
Nonperforming assets to year-end loans
plus other real estate owned and other
nonperforming assets 1.24 2.47 2.99 2.94 2.16
Nonperforming assets to total assets .84 1.63 2.00 2.03 1.45
=============================================================================================================================
</TABLE>
35
<PAGE> 20
KEYCORP AND SUBSIDIARIES
<TABLE>
/ FIGURE 25 / SUMMARY OF CHANGES IN NONACCRUAL LOANS AND OREO
<CAPTION>
SUMMARY OF CHANGES IN NONACCRUAL LOANS
1993 Quarters
---------------------------------------------------
IN MILLIONS Full Year Fourth Third Second First
=============================================================================================================================
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $550.5 $374.1 $402.3 $495.4 $550.5
Loans placed on nonaccrual 348.7 92.5 75.6 76.7 103.9
Charge-offs1 (217.4) (46.7) (57.5) (57.1) (56.1)
Payments (180.1) (29.0) (24.1) (66.6) (60.4)
Transfers to OREO (57.1) (5.6) (8.1) (29.4) (14.0)
Loans returned to accrual (130.5) (55.5) (16.9) (26.5) (31.6)
Acquisitions 5.2 -- .1 2.0 3.1
Transfers from OREO 10.5 -- 2.7 7.8 --
- -----------------------------------------------------------------------------------------------------------------------------
Balance at end of period $329.8 $329.8 $374.1 $402.3 $495.4
====== ====== ====== ====== ======
=============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
SUMMARY OF CHANGES IN OREO 1993 Quarters
---------------------------------------------------
IN MILLIONS Full Year Fourth Third Second First
=============================================================================================================================
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $332.4 $229.4 $278.0 $327.1 $332.4
Additions 88.7 17.7 13.9 37.5 19.6
Sales (190.3) (70.3) (44.0) (55.2) (20.8)
Charge-offs and writedowns (50.3) (14.0) (11.8) (16.4) (8.1)
Transfers to loans (16.5) (3.6) (2.4) (10.5) --
Acquisitions 8.7 .4 -- .3 8.0
Other (22.3) (9.2) (4.3) (4.8) (4.0)
- -----------------------------------------------------------------------------------------------------------------------------
Balance at end of period $150.4 $150.4 $229.4 $278.0 $327.1
====== ====== ====== ====== ======
=============================================================================================================================
<FN>
1 Represents the gross charge-offs taken against nonaccrual loans; excluded are charge-offs of $32.4 million taken against
accruing loans and interest reversals, and $53.4 million taken against credit card receivables.
</TABLE>
attributable to decreases in nonaccrual commercial (including HLT),
construction and commercial real estate loans. At the end of 1993, nonaccrual
loans in these categories comprised 39%, 12% and 30%, respectively, of total
nonperforming loans and totaled $267.9 million, down $209.1 million, or 44%,
from the previous year-end. This reduction reflected progress made in working
through the credit problems associated with the Ameritrust acquisition. As
indicated in Figure 25, the reduction in OREO was primarily due to the
selective sale of assets.
On a regional basis, all of the Corporation's banks showed improvement in the
ratio of nonperforming assets to total loans plus OREO and other nonperforming
assets. As indicated by Figure 20, the largest basis point improvement was
experienced in the Great Lakes Region.
At December 31, 1993, HLT loans classified as nonperforming amounted to $25.3
million, or 8%, of total nonperforming loans. At December 31, 1992,
nonperforming HLT loans aggregated $4.6 million, or 1%, of total nonperforming
loans. One individual nonperforming HLT loan represented $18.1 million, or 72%,
of the total at December 31, 1993.
In May 1993, the Financial Accounting Standards Board issued SFAS No. 114,
"Accounting by Creditors for Impairment of a
<TABLE>
/ FIGURE 26 / PERCENTAGE OF NONPERFORMING LOANS TO PERIOD-END LOANS BY LOAN TYPE
<CAPTION>
December 31, 1993
Commercial, Real Estate -- Real Estate --
Financial and Real Estate-- Commercial Residential
Agricultural Construction Mortgage Mortgage Consumer Total
=============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Northeast Region 1.82% 6.54% 2.21% .36% .15% 1.01%
Great Lakes Region 1.22 4.46 1.81 .48 .12 .91
Rocky Mountain Region .46 .09 .35 .08 .13 .26
Northwest Region .73 1.26 1.24 .45 .17 .63
Financial Services -- -- -- 2.43 .94 1.03
- -----------------------------------------------------------------------------------------------------------------------------
Total 1.20% 3.49% 1.68% .42% .14% .84%
=============================================================================================================================
</TABLE>
36
<PAGE> 21
KEYCORP AND SUBSIDIARIES
Loan." This standard affects the definition and basis for measuring impaired
loans and is more fully discussed in Note 6, Nonperforming Assets, on page 57.
DEPOSITS AND OTHER SOURCES OF FUNDS
Core deposits, defined as domestic deposits other than certificates of deposit
of $100,000 or more, are the Corporation's primary source of funding. These
deposits averaged $40.2 billion in 1993, $37.4 billion in 1992 and $36.2
billion in 1991. The 1993 increase in average core deposits was primarily a
result of acquisitions. The impact of these acquisitions was substantially
offset, however, by the sale of approximately $1.0 billion in deposits late in
the second quarter of 1992 (as part of the agreement reached with the United
States Department of Justice and in accordance with the Federal Reserve Board
order to divest certain branches in connection with the Ameritrust merger) and
the pursuit of other alternatives by consumers in response to declining
interest rates. In 1993, balances shifted significantly from the "other time
deposits" category, consisting primarily of fixed rate certificates of deposit
of less than $100,000, to noninterest-bearing and savings deposits (including
NOW accounts) with higher liquidity, also in response to declining interest
rates.
Purchased funds, which are comprised of large certificates of deposit, deposits
in the foreign office and short-term borrowings, averaged $9.7 billion for
1993, up $957.1 million, or 11%, from 1992. Average purchased funds were not
materially impacted by the acquisitions completed during 1993. The increase was
largely attributable to increases in foreign office deposits, Federal funds
purchased and securities sold under agreements to repurchase, and other
short-term borrowings. These increases were partially offset by a decline in
large certificates of deposit.
<TABLE>
/ FIGURE 27 / MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE
<CAPTION>
December 31, 1993
Domestic Foriegn
IN MILLIONS Offices Office
- -----------------------------------------------------------------------
<S> <C> <C>
Time remaining to maturity:
Three months or less $1,431.5 $2,014.5
Over three through six months 435.6 --
Over six through twelve months 382.8 --
Over twelve months 571.2 --
- -----------------------------------------------------------------------
Total $2,821.1 $2,014.5
======== ========
=======================================================================
</TABLE>
LIQUIDITY
Liquidity represents the availability of funding to meet the needs of
depositors, borrowers and creditors at a reasonable cost and without adverse
consequences. The Corporation's ALCO actively analyzes and manages the
Corporation's liquidity in coordination with similar committees at each
affiliate bank. The affiliate banks individually maintain liquidity in the form
of short-term money market investments, anticipated prepayments and maturities
on securities and through the maturity structure of their loan portfolios.
Another source of liquidity are those securities classified as available for
sale. In addition, the affiliate banks have access to various sources of
non-core market funding for short-term liquidity requirements should the need
arise. The effective management of balance sheet volumes, mix and maturities
enables the affiliate banks to maintain adequate levels of liquidity while
enhancing profitability.
During 1993, Society National Bank ("SNB"), the Corporation's Ohio bank, issued
$685 million in debt securities under a Medium-Term Bank Note program. These
securities have maturities of less than one year and are included in other
short-term borrowings. The proceeds from the issuance of these securities were
used for general corporate purposes in the ordinary course of business. During
1993 and 1992, KeyCorp issued $305.1 million and $77.0 million, respectively,
in debt securities under separate Medium-Term Note programs. These securities
have maturities in excess of one year and are included in long-term debt.
Subordinated debt totaling $325 million was also issued by KeyCorp in 1992.
During both the second quarter of 1993 and the fourth quarter of 1992, SNB also
issued $200 million in subordinated long-term debt to be used to supplement its
capital base and to provide funds for loans and investments.
During 1993, KeyCorp redeemed $163.4 million in long-term debt securities due
through 2002 at par plus accrued interest. In addition, KeyCorp redeemed
1,200,000 outstanding shares of Fixed/Adjustable Rate Cumulative Preferred
Stock at 103% of its stated value of $60 million plus accumulated but unpaid
dividends, and 479,394 shares of Series A Preferred Stock at its stated value
of $24 million plus accumulated but unpaid dividends.
The liquidity requirements of the parent company, primarily for dividends to
shareholders, retirement of debt and other corporate purposes, are principally
met through regular dividends from affiliate banks. As of December 31, 1993,
$535.4 million was available in the affiliate banks for the payment of
dividends to the parent company without prior regulatory approval. Excess funds
are maintained in short-term investments. The parent company has no lines of
credit with other financial institutions but has ready access to the capital
markets as a result of its favorable debt ratings.
CAPITAL AND DIVIDENDS
Total shareholders' equity at December 31, 1993, was $4.4 billion, up $466.3
million, or 12%, from the balance at the end of 1992. This followed an increase
of $410.9 million, or 12%, from the prior year. In both years the increase was
principally due to the retention of net income after dividends. Other
significant changes in shareholders' equity in 1993 resulted
37
<PAGE> 22
KEYCORP AND SUBSIDIARIES
<TABLE>
/ FIGURE 28 / CAPITAL
COMPONENTS AND RISK-ADJUSTED ASSETS
<CAPTION>
December 31,
dollars in millions 1993 1992
- -------------------------------------------------------------------------
<S> <C> <C>
Tier I capital
Common shareholders' equity $ 4,233.6 $ 3,683.3
Qualifying preferred stock 160.0 244.0
Less: Goodwill (385.4) (361.3)
Other intangible assets1 (104.0) ---
Other2 (18.9) ---
- -------------------------------------------------------------------------
Total Tier I capital 3,885.3 3,566.0
- -------------------------------------------------------------------------
Tier II capital
Allowance for loan losses3 559.7 524.5
Qualifying long-term debt 993.4 799.1
- -------------------------------------------------------------------------
Tier II capital 1,553.1 1,323.6
- -------------------------------------------------------------------------
Total capital $ 5,438.4 $ 4,889.6
========= =========
Risk-adjusted assets
Risk-adjusted assets on balance sheet $40,979.9 $38,621.8
Risk-adjusted off-balance sheet exposure 4,283.3 3,674.8
Less: Goodwill (385.4) (361.3)
Other intangible assets1 (104.0) ---
Other2 (18.9) ---
- -------------------------------------------------------------------------
Gross risk-adjusted assets 44,754.9 41,935.3
Less: Excess allowance for loan losses (243.0) (258.2)
- -------------------------------------------------------------------------
Net risk-adjusted assets $44,511.9 $41,677.1
========= =========
Average quarterly assets $58,289.3 $54,696.0
========= =========
Capital ratios
Tier I capital to net risk-adjusted assets 8.73% 8.56%
Total capital to net risk-adjusted assets 12.22 11.73
Leverage4 6.72 6.56
=========================================================================
<FN>
1Intangible assets (excluding goodwill, purchased mortgage servicing rights
and purchased credit card relationships) recorded after February 19, 1992,
and deductible portions of purchased mortgage servicing rights and
purchased credit card relationships.
2Valuation adjustment for purchased mortgage servicing rights.
3The allowance for loan losses included in Tier II capital is limited to 1.25%
of gross risk-adjusted assets.
4Tier I capital divided by average total assets for the quarter less goodwill
and other intangible assets as defined in (1) above.
</TABLE>
from the previously mentioned preferred stock redemptions which decreased equity
by $84 million in the aggregate.
Capital adequacy is an important indicator of financial stability and
performance. Overall, KeyCorp's capital position remains strong with a ratio of
total shareholders' equity to total assets of 7.37% at December 31, 1993, up
from 7.13% and 6.56% at December 31, 1992 and 1991, respectively.
<TABLE>
/ Figure 29 / Capital Ratios
<CAPTION>
Tier 1 risk- Total risk-
Leverage based capital based capital
ratio ratio ratio
<S> <C> <C> <C>
1992 6.56% 8.56% 11.73%
1993 6.72% 8.73% 12.22%
</TABLE>
Banking industry regulators define minimum capital ratios for bank holding
companies and their banking and savings association subsidiaries. Based on the
risk-based capital rules and definitions prescribed by the banking regulators,
KeyCorp's Tier I and total capital to net risk-adjusted assets ratios at
December 31, 1993, were 8.73% and 12.22%, respectively. These compare favorably
with the minimum requirements of 4.0% for Tier I and 8.0% for total capital.
The regulatory Tier I leverage ratio standard prescribes a minimum ratio of
3.0%, although most banking organizations are expected to maintain ratios of at
least 100 to 200 basis points above the minimum. At December 31, 1993,
KeyCorp's leverage ratio was 6.72%, substantially higher than the minimum
requirement. Figure 28 presents the details of KeyCorp's capital position at
December 31, 1993 and 1992.
Effective December 1992, Federal bank regulators adopted new regulations to
implement the prompt corrective action provisions of the Federal Deposit
Insurance Act which group FDIC-insured depository institutions into five broad
categories based on certain capital ratios. The five categories are
"well-capitalized," "adequately capitalized," "undercapitalized," "significantly
capitalized," and "critically undercapitalized." Although these provisions are
not directly applicable to the Corporation under existing law and regulations,
based upon its ratios the Corporation would qualify, and KeyCorp's affiliate
banks do qualify, as "well-capitalized" at December 31, 1993. The FDIC-defined
capital categories, as determined by applying the prompt corrective action
provisions of the law, may not constitute an accurate representation of the
overall financial condition or prospects of KeyCorp or its affiliate banks.
38
<PAGE> 23
The Office of the Comptroller of the Currency, the Federal
Reserve and the FDIC are proposing amendments to their
respective regulatory capital rules to include in Tier I capital
the net unrealized changes in the value of securities available
for sale for purposes of calculating the risk-based and lever-
age ratios. The proposed amendments are in response to the
provisions outlined in SFAS No. 115,"Accounting for Certain
Investments in Debt and Equity Securities," which takes
effect for fiscal years beginning after December 15, 1993.
See Note 4, Investment Securities, on page 55 for a more
complete description of SFAS No. 115. This new accounting
standard establishes, among other things, net unrealized
holding gains and losses on securities available for sale as
a new component of shareholders' equity. If adopted as pro-
posed, the rules could cause the Tier I capital to be subject
to greater volatility. However, neither SFAS No. 115 nor the
capital proposals would have any direct impact on reported
earnings. Based upon the Corporation's securities portfolio
classified as available for sale as of December 31, 1993, the
estimated impact of the new standard would be an increase
to shareholders' equity of approximately $44 million. The
regulatory agencies are also proposing to add an additional
component to the risk-based capital requirements based upon
the level of an institution's exposure to interest rate risk.
Common Shares outstanding and per Common Share data
have been adjusted for a two-for-one stock split effected
on March 22, 1993 by means of a 100% stock dividend.
At December 31, 1993, book value per Common Share was
$17.53 based on 241,547,151 shares outstanding, compared
with $15.64 based on 235,432,181 shares outstanding at
December 31, 1992. KeyCorp's Common Shares are traded
on the New York Stock Exchange under the symbol KEY. The
sales price ranges of the Common Shares and per Common
Share net income and dividends by quarter for each of the
last two years are presented in Figure 30. At year-end 1993,
the closing sales price on the New York Stock Exchange was
$29.75 per share. This price was 170% of year-end book value
per share and had a dividend yield of 3.76%. On January 20,
1994, the quarterly dividend on Common Shares was
increased by 14% to $.32 per Common Share, up from $.28
per Common Share in 1993. The first-quarter dividend of
$.32 per Common Share was paid on March 15, 1994, to
shareholders of record on February 28, 1994. There were
57,414 holders of record of KeyCorp Common Shares
at March 1, 1994.
FOURTH QUARTER RESULTS
As shown in Figure 30, net income for the fourth quarter of
1993 was $122.3 million, or $.49 per Common Share, com-
pared with $143.7 million, or $.58 per Common Share, for the
same period last year. The 1993 period was impacted by merger
and integration charges of $118.7 million ($80.6 million after-
tax $.33 per Common Share) recorded in connection with the
Merger. In the prior year, fourth-quarter results were reduced
by merger and integration charges totaling $42.7 million
($32.4 million after tax, $.14 per Common Share) incurred
in connection with the acquisition of PSB. Excluding the
impact of the merger and integration charges, net income
was $203.0 million in 1993, up $26.8 million, or 15%, from
the prior year. This reflected a $34.8 million, or 5%, increase
in taxable-equivalent net interest income; a $30.8 million,
or 40%, decrease in the provision for loan losses; and an
$11.1 million, or 5%, increase in noninterest income. These
positive factors were partially offset by an increase of
$40.9 million, or 8%, in noninterest expense. On an annual-
ized basis, the return on average total assets for the fourth
quarter of 1993 was .83% compared with 1.05% for the fourth
quarter of 1992. The annualized returns on average common
equity for the fourth quarters of 1993 and 1992 were 11.09%
and 15.04%, respectively. On an annualized basis, adjusting
for the merger and integration charges, the fourth-quarter
return on average total assets and the return on average
common equity were 1.38% and 18.64%, respectively, in
1993 and 1.28% and 18.53%, respectively, in 1992.
The improvement in taxable-equivalent net interest income
in the fourth quarter of 1993, as compared to the fourth
quarter of 1992, reflected a $3.5 billion, or 7%, increase in
the level of average earning assets, offset in part by an 8
basis point decline in the net interest margin to 5.21%. The
higher level of average earning assets reflected the impact
of acquisitions accounted for as purchases completed in 1993
as well as internal growth achieved in loans, mortgage loans
held for sale and investment securities. The growth in aver-
age earning assets in 1993 was mainly due to an increase of
$3.3 billion in average loans; principally those related to real
estate, student loans held for sale and the lease financing
portfolio; an increase of $453.0 million in investment securi-
ties; and an increase of $467.3 million in mortgage loans held
for sale. These increases were partially offset by decreases of
$623.6 million in interest-bearing deposits with banks and
$233.3 million in Federal funds sold and security resale
agreements. The decline in the net interest margin reflected
the narrowing of spreads available on the replacement of
matured and prepaid loans, securities and interest rate swaps,
and the narrower spread contributed by Society First Federal
Savings Bank. The lower provision for loan losses resulted
from the overall improvement in asset quality, including a
$216.6 million, or 39%, decline in nonperforming loans from
December 31, 1992, to December 31, 1993. The increase
in noninterest expense, excluding merger and integration
charges, was primarily due to higher personnel expense, offset
in part by lower costs associated with professional services.
39
<PAGE> 24
KEYCORP AND SUBSIDIARIES
<TABLE>
/ Figure 30 / SELECTED QUARTERLY FINANCIAL DATA
<CAPTION>
1993 1992
-------------------------------------- -------------------------------------------
dollars in millions,
except per share amounts 4th 3rd 2nd 1st 4th 3rd 2nd 1st
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
For the quarter
Interest income $ 1,050.5 $ 1,051.0 $ 1,065.0 $ 1,047.4 $ 1,044.8 $ 1,024.9 $ 1,045.2 $ 1,083.9
Interest expense 372.2 378.6 390.8 393.3 403.6 411.2 443.8 491.5
Net interest income 678.3 672.4 674.2 654.1 641.2 613.7 601.4 592.4
Provision for loan losses 46.4 49.9 59.5 55.9 77.2 84.7 95.3 81.2
Noninterest income 237.1 288.7 253.3 222.6 226.0 231.3 245.7 222.2
Noninterest expense 689.5 590.8 569.8 535.0 572.6 522.9 511.8 563.1
Income before income taxes 179.5 320.4 298.2 285.8 217.4 237.4 240.0 170.3
Net income 122.3 200.8 196.9 189.9 143.7 160.9 163.5 124.0
Net income applicable to
Common Shares 118.4 196.6 192.4 184.4 137.7 154.9 157.5 118.0
- -------------------------------------------------------------------------------------------------------------------------
Per Common Share
Net income $ .49 $ .82 $ .81 $ .77 $ .58 $ .66 $ .68 $ .50
Cash dividends .28 .28 .28 .28 .245 .245 .245 .245
Book value at period-end 17.53 17.32 16.74 16.19 15.64 15.28 14.86 14.42
Market price:
High 33.50 35.75 37.25 35.75 33.44 29.88 31.63 29.88
Low 27.25 30.88 28.63 30.88 28.13 26.13 25.32 24.25
Close 29.75 32.00 35.13 34.63 32.13 28.25 29.13 27.38
Weighted average Common Shares
(millions) 240.8 240.8 239.5 237.9 236.3 235.5 234.5 233.7
- -------------------------------------------------------------------------------------------------------------------------
At period-end
Loans $40,071.3 $39,070.7 $38,375.9 $38,371.7 $36,021.8 $35,778.3 $34,683.1 $35,038.4
Earning assets 54,352.7 52,935.5 52,699.9 52,346.4 49,380.8 48,968.1 46,318.9 47,035.4
Total assets 59,631.2 58,169.2 57,944.5 57,850.8 55,068.4 54,392.4 51,406.5 52,160.0
Deposits 46,499.1 44,339.9 44,400.8 44,964.3 43,433.1 41,687.4 40,251.1 41,511.2
Long-term debt 1,763.9 1,908.4 1,957.2 1,904.1 1,790.1 1,605.2 1,580.2 1,274.8
Common shareholders' equity 4,233.6 4,150.1 3,999.5 3,852.4 3,683.3 3,582.6 3,476.0 3,353.8
Total shareholders' equity 4,393.6 4,310.1 4,183.5 4,036.4 3,927.3 3,826.6 3,720.0 3,597.7
- -------------------------------------------------------------------------------------------------------------------------
Performance ratios
Return on average total assets .83% 1.40% 1.38% 1.38% 1.05% 1.24% 1.29% .96%
Return on average common equity 11.09 19.10 19.67 19.83 15.04 17.47 18.58 14.24
Return on average total equity 11.05 18.73 19.22 19.27 14.71 16.97 18.00 13.94
Efficiency1 61.35 60.13 60.54 60.04 59.94 60.86 60.78 62.34
Overhead2 48.12 46.50 46.15 46.84 46.20 46.74 46.71 49.30
Net interest margin 5.21 5.30 5.35 5.40 5.29 5.38 5.36 5.20
- -------------------------------------------------------------------------------------------------------------------------
Capital ratios at period-end
Equity to assets 7.37% 7.41% 7.22% 6.98% 7.13% 7.04% 7.24% 6.90%
Tier I risk-adjusted capital 8.73 8.66 8.42 8.05 8.56 8.29 8.40 7.80
Total risk-adjusted capital 12.22 12.18 11.98 11.24 11.73 10.99 11.17 9.91
Leverage 6.72 6.74 6.48 6.37 6.56 6.76 6.60 6.22
- -------------------------------------------------------------------------------------------------------------------------
<FN>
The comparability of the information presented above is affected by certain acquisitions and divestitures that KeyCorp has
completed in the time periods presented. For further information concerning these transactions, refer to Note 2, Mergers,
Acquisitions and Divestitures appearing on page 51.
1Calculated as noninterest expense (excluding merger and integration charges and other nonrecurring charges) divided by
taxable-equivalent net interest income plus noninterest income (excluding net securities gains and certain gains on
2Calculated as noninterest expense (excluding merger and integration charges and other nonrecurring charges) less noninterest income
(excluding net securities gains and certain asset sales) divided by taxable-equivalent net interest income.
</TABLE>
40
<PAGE> 25
KEYCORP AND SUBSIDIARIES
<TABLE>
BANKING SERVICES DATA BY REGION
<CAPTION>
Year ended December 31, Northeast Region Great Lakes Region
------------------------------ ------------------------------
dollars in millions 1993 1992 1993 1992
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Significant ratios
Return on average total assets 1.28% 1.21% 1.54% 1.23%
Net interest margin 5.35 5.24 5.31 5.29
Nonperforming loans to year-end loans 1.01 1.18 .91 2.18
Allowance for loan losses to year-end loans 1.43 1.32 2.69 3.11
Net charge-offs to average loans .80 1.09 .56 1.05
Efficiency 52.27 51.65 55.66 60.20
Average balances
Loans $11,454 $10,782 $17,870 $16,124
Earning assets 15,458 14,384 23,058 21,837
Total assets 16,697 15,593 25,074 23,607
Deposits 13,921 12,985 18,774 18,451
Shareholders' equity 1,280 1,098 2,058 1,736
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Rocky Mountain Region Northwest Region
------------------------------ ------------------------------
1993 1992 1993 1992
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Significant ratios
Return on average total assets 1.31% 1.27% 1.50% .99%
Net interest margin 5.35 5.44 5.79 5.56
Nonperforming loans to year-end loans .26 .51 .63 .96
Allowance for loan losses to year-end loans 1.37 1.27 1.29 1.38
Net charge-offs to average loans .25 .44 .22 .86
Efficiency 59.44 61.19 57.43 67.54
Average balances
Loans $ 2,511 $ 2,165 $ 8,358 $ 6,846
Earning assets 3,394 3,006 9,735 8,423
Total assets 3,687 3,278 10,787 9,210
Deposits 3,030 2,706 8,976 7,459
Shareholders' equity 278 240 886 724
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE> 26
KEYCORP AND SUBSIDIARIES
<TABLE>
SIX-YEAR CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31, Compound
Annual Rate
of Change
dollars in millions 1993 1992 1991 1990 1989 1988 (1988-1993)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Cash and due from banks $ 2,777.4 $ 3,079.7 $ 3,150.5 $13,061.3 $ 3,445.4 $ 3,110.7 (2.2)%
Short-term investments 107.2 985.5 1,693.4 1,167.1 2,080.5 2,263.3 (45.7)
Mortgage loans held for sale 1,325.3 938.5 691.9 389.9 110.4 18.7 134.4
Securities available for sale 1,726.8 2,458.7 -- 101.8 172.6 -- N/M
Investment securities 11,122.1 8,976.3 10,288.3 8,815.7 7,937.5 8,039.5 6.7
Loans 40,071.3 36,021.8 35,534.3 34,193.7 31,570.4 29,981.0 6.0
Less: Allowance for loan losses 802.7 782.6 793.5 677.3 452.7 413.1 14.2
- --------------------------------------------------------------------------------------------------------------------
Net loans 39,268.6 35,239.2 34,740.8 33,516.4 31,117.7 29,567.9 5.8
Premises and equipment 912.9 843.3 719.9 676.8 621.7 670.5 6.4
Other real estate owned 150.4 332.4 330.7 211.5 123.6 89.8 10.9
Intangible assets 549.3 601.6 629.5 662.2 457.9 461.6 3.5
Purchased mortgage servicing rights 188.6 165.4 128.8 8.6 6.6 5.2 105.1
Other assets 1,502.6 1,447.8 1,227.1 1,342.1 1,131.2 1,059.8 7.2
- --------------------------------------------------------------------------------------------------------------------
Total assets $59,631.2 $55,068.4 $53,600.9 $49,953.4 $47,205.1 $45,287.0 5.7
========= ========= ========= ========= ========= =========
Liabilities
Deposits in domestic offices:
Noninterest-bearing $ 8,826.3 $ 8,291.4 $ 7,085.5 $6,906.1 $6,746.9 $ 6,580.3 6.0
Interest-bearing 35,658.3 34,026.5 35,448.4 33,534.2 29,569.8 27,708.2 5.2
Deposits in foreign office-
interest-bearing 2,014.5 1,115.2 301.1 495.0 1,058.7 550.0 29.6
- --------------------------------------------------------------------------------------------------------------------
Total deposits 46,499.1 43,433.1 42,835.0 40,935.3 37,375.4 34,838.5 5.9
Federal funds purchased and securities
sold under agreements to repurchase 4,120.3 4,207.5 4,254.1 3,395.7 3,847.7 4,519.7 (1.8)
Other short-term borrowings 1,776.2 874.9 833.4 594.2 1,010.2 998.6 12.2
Other liabilities 1,078.1 835.5 937.5 857.3 815.0 651.4 10.6
Long-term debt 1,763.9 1,790.1 1,224.5 1,145.2 1,177.4 1,297.9 6.3
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 55,237.6 51,141.1 50,084.5 46,927.7 44,225.7 42,306.1 5.5
Shareholders' equity
Preferred stock 160.0 244.0 244.0 84.0 50.3 82.6 14.1
Common Shares 242.8 237.4 179.1 166.3 166.5 166.1 7.9
Capital surplus 1,433.9 1,336.5 1,487.4 1,270.1 1,293.8 1,301.6 2.0
Retained earnings 2,641.5 2,206.1 1,848.7 1,758.1 1,696.2 1,570.4 11.0
Loans to ESOP trustee (63.9) (65.5) (65.4) (67.2) (71.7) -- N/M
Treasury stock at cost (20.7) (31.2) (177.4) (185.6) (155.7) (139.8) (31.8)
- --------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 4,393.6 3,927.3 3,516.4 3,025.7 2,979.4 2,980.9 8.1
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $59,631.2 $55,068.4 $53,600.9 $49,953.4 $47,205.1 $45,287.0 5.7
========= ========= ========= ========= ========= =========
- --------------------------------------------------------------------------------------------------------------------
<FN>
N/M = Not Meaningful
</TABLE>
42
<PAGE> 27
KEYCORP AND SUBSIDIARIES
<TABLE>
SIX-YEAR CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Year ended December 31, Compound
Annual Rate
dollars in millions, except of Change
per share amounts 1993 1992 1991 1990 1989 1988 (1988-1993)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income
Loans $3,313.7 $3,254.1 $3,655.9 $3,637.6 $3,572.3 $3,027.5 1.8%
Mortgage loans held for sale 74.0 59.4 47.0 27.7 9.4 2.0 105.9
Taxable investment securities 556.4 676.9 678.2 582.6 535.5 450.4 4.3
Tax-exempt investment securities 107.4 119.8 126.3 134.9 142.8 154.2 (7.0)
Securities available for sale 140.9 57.2 59.6 .9 3.0 -- N/M
Short-term investments 21.5 31.4 85.4 145.1 147.2 145.3 (31.8)
- ------------------------------------------------------------------------------------------------------------------------
Total interest income 4,213.9 4,198.8 4,652.4 4,528.8 4,410.2 3,779.4 2.2
Interest expense
Deposits 1,233.3 1,469.0 2,135.7 2,230.8 2,078.7 1,713.9 (6.4)
Federal funds purchased and securities
sold under repurchase agreements 130.2 142.9 213.7 272.3 337.3 262.4 (13.1)
Other short-term borrowings 44.5 31.1 74.5 67.5 81.1 58.9 (5.5)
Long-term debt 126.9 107.1 95.5 97.1 118.7 113.1 2.3
- ------------------------------------------------------------------------------------------------------------------------
Total interest expense 1,534.9 1,750.1 2,519.4 2,667.7 2,615.8 2,148.3 (6.5)
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 2,679.0 2,448.7 2,133.0 1,861.1 1,794.4 1,631.1 10.4
Provision for loan losses 211.7 338.4 466.2 517.2 306.2 204.4 .7
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 2,467.3 2,110.3 1,666.8 1,343.9 1,488.2 1,426.7 11.6
Noninterest income
Trust income 244.6 250.8 235.8 217.3 168.1 155.5 9.5
Service charges on deposit accounts 252.5 236.6 217.4 191.9 171.2 183.2 6.6
Mortgage banking income 93.6 88.7 74.3 31.9 28.4 27.9 27.4
Credit card fees 73.5 80.9 71.4 62.3 50.9 48.2 8.8
Gains on certain asset sales 29.4 22.9 24.0 4.8 20.4 -- N/M
Net securities gains 28.3 14.6 18.9 11.5 6.8 10.0 23.0
Other income 279.8 230.7 207.5 224.5 189.3 138.9 15.0
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest income 1,001.7 925.2 849.3 744.2 635.1 563.7 12.2
Noninterest expense
Personnel 1,100.7 1,013.6 925.3 853.5 809.1 747.4 8.1
Net occupancy 204.2 189.7 184.8 160.6 145.8 132.4 9.1
Equipment 161.3 151.6 134.1 127.4 134.9 118.7 6.3
FDIC insurance assessments 98.7 96.2 84.7 42.4 28.8 24.9 31.7
Merger and integration charges 118.7 92.7 93.8 26.9 -- -- N/M
Other expense 701.5 626.6 643.0 608.7 587.2 510.4 6.6
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 2,385.1 2,170.4 2,065.7 1,819.5 1,705.8 1,533.8 9.2
Income before income taxes and
cumulative effect of accounting change 1,083.9 865.1 450.4 268.6 417.5 456.6 18.9
Income taxes 374.0 279.6 136.7 15.2 130.8 91.6 32.5
- ------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect
of accounting change 709.9 585.5 313.7 253.4 286.7 365.0 14.2
Cumulative effect of accounting change -- 6.6 -- 2.7 -- -- N/M
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 709.9 $ 592.1 $ 313.7 $ 256.1 $ 286.7 $ 365.0 14.2
======== ======== ======== ======== ======== ========
Net income applicable to Common Shares $ 691.8 $ 568.1 $ 297.5 $ 249.0 $ 281.3 $ 358.2 14.1
Net income per Common Share:
Before cumulative effect of
accounting change $2.89 $2.39 $1.31 $1.13 $1.26 $1.61 12.4
After cumulative effect of
accounting change 2.89 2.42 1.31 1.13 1.26 1.61 12.4
Weighted average Common Shares
outstanding (000) 239,775.2 235,004.8 227,116.2 220,078.6 223,901.3 222,906.2 1.5
Full-time equivalent employees 29,983 29,117 29,509 28,741 28,324 28,723 .9
- ------------------------------------------------------------------------------------------------------------------------
<FN>
N/M = Not Meaningful
</TABLE>
43
<PAGE> 28
KEYCORP AND SUBSIDIARIES
REPORT OF ERNST & YOUNG / INDEPENDENT
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, which give effect to the March 1, 1994, merger of KeyCorp and
Society Corporation, 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.
/s/ Ernst & Young
Cleveland, Ohio
March 1, 1994
45
<PAGE> 29
KEYCORP AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31,
dollars in thousands 1993 1992
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 2,777,438 $ 3,079,737
Short-term investments 107,219 985,502
Mortgage loans held for sale 1,325,338 938,541
Securities available for sale (market value: $1,794,845 and $2,518,320) 1,726,828 2,458,641
Investment securities (market value: $11,340,206 and $9,193,081) 11,122,093 8,976,300
Loans 40,071,244 36,021,825
Less: Allowance for loan losses 802,712 782,649
- ------------------------------------------------------------------------------------------------------------------------
Net loans 39,268,532 35,239,176
Premises and equipment 912,870 843,314
Other real estate owned 150,362 332,351
Intangible assets 549,348 601,620
Purchased mortgage servicing rights 188,592 165,433
Other assets 1,502,531 1,447,761
- ------------------------------------------------------------------------------------------------------------------------
Total assets $59,631,151 $55,068,376
=========== ===========
Liabilities
Deposits in domestic offices:
Noninterest-bearing $ 8,826,300 $ 8,291,436
Interest-bearing 35,658,315 34,026,450
Deposits in foreign office--interest-bearing 2,014,533 1,115,179
- ------------------------------------------------------------------------------------------------------------------------
Total deposits 46,499,148 43,433,065
Federal funds purchased and securities sold under agreements to repurchase 4,120,258 4,207,520
Other short-term borrowings 1,776,192 874,887
Other liabilities 1,078,116 835,538
Long-term debt 1,763,870 1,790,078
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 55,237,584 51,141,088
Shareholders' equity
Preferred Stock, without par value; authorized 25,000,000 shares, none issued -- --
Cumulative Preferred Stock; authorized 10,000,000 shares:
Series A, $50 stated value; issued 479,394 shares -- 23,970
Series B, $125 stated value; issued 1,280,000 shares 160,000 160,000
Fixed/Adjustable Rate Cumulative Preferred Stock, $50 stated
value; authorized and issued 1,200,000 shares -- 60,000
Common Shares, $1 par value; authorized 400,000,000 shares;
issued 242,827,755 and 237,364,213 shares 242,828 237,364
Capital surplus 1,433,861 1,336,556
Retained earnings 2,641,450 2,206,051
Loans to ESOP trustee (63,909) (65,478)
Treasury stock at cost(1,280,604 and 1,932,032 shares) (20,663) (31,175)
- ------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 4,393,567 3,927,288
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $59,631,151 $55,068,376
=========== ===========
- ------------------------------------------------------------------------------------------------------------------------
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
46
<PAGE> 30
KEYCORP AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
<CAPTION>
dollars in thousands, except per share amounts 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income
Loans $3,313,689 $3,254,085 $3,655,934
Mortgage loans held for sale 74,062 59,392 46,990
Taxable investment securities 556,381 676,908 678,221
Tax-exempt investment securities 107,363 119,788 126,263
Securities available for sale 140,895 57,167 59,594
Short-term investments 21,484 31,451 85,349
- ------------------------------------------------------------------------------------------------------------------------
Total interest income 4,213,874 4,198,791 4,652,351
Interest expense
Deposits 1,233,331 1,468,974 2,135,651
Federal funds purchased and securities sold under repurchase agreements 130,213 142,894 213,722
Other short-term borrowings 44,451 31,165 74,498
Long-term debt 126,902 107,085 95,519
- ------------------------------------------------------------------------------------------------------------------------
Total interest expense 1,534,897 1,750,118 2,519,390
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 2,678,977 2,448,673 2,132,961
Provision for loan losses 211,662 338,337 466,163
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 2,467,315 2,110,336 1,666,798
Noninterest income
Trust income 244,646 250,788 235,757
Service charges on deposit accounts 252,537 236,573 217,424
Mortgage banking income 93,626 88,700 74,323
Credit card fees 73,466 80,947 71,403
Gains on certain asset sales 29,410 22,906 23,975
Net securities gains 28,319 14,627 18,939
Other income 279,702 230,652 207,440
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest income 1,001,706 925,193 849,261
Noninterest expense
Personnel 1,100,724 1,013,644 925,328
Net occupancy 204,205 189,709 184,761
Equipment 161,281 151,615 134,074
FDIC insurance assessments 98,707 96,179 84,661
Professional fees 53,274 75,983 55,532
Merger and integration charges 118,718 92,716 93,828
Other expense 648,214 550,566 587,495
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 2,385,123 2,170,412 2,065,679
Income before income taxes and cumulative effect of accounting change 1,083,898 865,117 450,380
Income taxes 373,972 279,632 136,684
- ------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 709,926 585,485 313,696
Cumulative effect of accounting change -- 6,613 --
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 709,926 $ 592,098 $ 313,696
======== ======== ========
Net income applicable to Common Shares $ 691,829 $ 568,069 $ 297,473
Net income per Common Share:
Before cumulative effect of accounting change $2.89 $2.39 $1.31
After cumulative effect of accounting change 2.89 2.42 1.31
Weighted average Common Shares outstanding 239,775,188 235,004,821 227,116,237
- ------------------------------------------------------------------------------------------------------------------------
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
47
<PAGE> 31
KEYCORP AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<CAPTION>
Loans to Common
Preferred Common Capital Retained ESOP Shares in
dollars in thousands, except per share amounts Stock Shares Surplus Earnings Trustee Treasury
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1991 $ 83,970 $163,833 $1,272,585 $1,758,110 $(67,226) $(185,596)
Net income 313,696
Cash dividends on Common Shares ($.92 per share) (60,449)
Cash dividends declared by pooled companies prior to mergers:
Common stock (108,837)
Preferred stock (16,257)
Issuance of Common Shares:
Public offerings--11,333,523 shares 11,334 159,151
Dividend reinvestment, stock option, grant and
purchase plans--1,961,946 net shares 1,421 25,351 16,557
Common Shares dividend--2,515,692 shares 2,516 35,641 (38,187)
Issuance of Series B Preferred Stock
Public offering--1,280,000 shares 160,000 (5,344)
Tax benefits attributable to ESOP dividends 622
Loan payments from ESOP trustee 1,877
Purchase of 237,185 treasury shares (8,340)
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1991 243,970 179,104 1,487,384 1,848,698 (65,349) (177,379)
Adjustments relating to pooling of interests (2) (132) (381)
Cancellation of treasury stock of pooled company (3,300) (124,793) 128,093
Net income 592,098
Cash dividends on Common Shares ($.98 per share) (101,547)
Cash dividends on fixed/adjustable rate
Cumulative Preferred Stock ($3.89 per share) (4,670)
Cash dividends declared by pooled companies prior to mergers:
Common Stock (109,667)
Preferred Stock (19,359)
Issuance of Common Shares:
Acquisitions--838,307 shares 838 8,255
Dividend reinvestment, stock option, grant
and purchase plans--1,956,516 net shares 1,395 25,171 18,111
Tax benefits attributable to ESOP dividends 879
Loan payments from ESOP trustee (129)
Two-for-one stock split effected by means of a 100%
Stock dividend paid March 22, 1993 59,329 (59,329)
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1992 243,970 237,364 1,336,556 2,206,051 (65,478) (31,175)
Net income 709,926
Cash dividends on Common Shares ($1.12 per share) (131,031)
Cash dividends on fixed/adjustable rate
Cumulative Preferred Stock ($1.297 per share) (1,556)
Cash dividends declared by pooled company prior to merger:
Common Stock (125,992)
Preferred Stock (17,059)
Issuance of Common Shares:
Acquisitions--4,494,543 shares 4,495 79,364
Dividend reinvestment, stock option, grant
and purchase plans--1,620,479 net shares 969 19,741 10,512
Redemption of 1,200,000 shares of fixed/adjustable
Rate Cumulative Preferred Stock (60,000) (1,800)
Redemption of 479,394 shares of Series A
Preferred Stock (23,970)
Tax benefits attributable to ESOP dividends 1,111
Loan payments from ESOP trustee 1,569
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 $160,000 $242,828 $1,433,861 $2,641,450 $(63,909) $ (20,663)
======== ======== ========== ========== ======== =========
- ----------------------------------------------------------------------------------------------------------------------
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
48
<PAGE> 32
KEYCORP AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOW
<CAPTION>
Year ended December 31,
in thousands 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income $ 709,926 $ 592,098 $ 313,696
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 211,662 338,337 466,163
Depreciation expense 110,852 104,330 84,394
Amortization of intangibles 58,050 61,692 57,574
Amortization of purchased mortgage servicing rights 56,566 29,607 20,410
Gains on certain asset sales (29,410) (22,906) (23,975)
Deferred income taxes 49,431 68,700 19,480
Net securities gains (28,319) (14,627) (18,939)
Net increase in mortgage loans held for sale (386,797) (156,911) (348,238)
Gains on sales of mortgage servicing rights (25,494) -- --
Losses from the sales of other real estate owned 748 3,082 5,135
Other operating activities, net 123,149 (408,475) 287,982
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 850,364 594,927 863,682
Investing activities
Net (increase) decrease in loans (1,807,283) (99,078) 4,535
Purchases of investment securities (5,441,846) (5,266,842) (3,822,950)
Proceeds from sales of investment securities 142,092 662,221 1,102,695
Proceeds from prepayments and maturities of investment securities 3,709,134 3,425,344 2,039,757
Net decrease in securities available for sale 795,686 173,444 101,805
Net (increase) decrease in short-term investments 1,040,389 835,503 (558,454)
Purchases of premises and equipment (172,157) (270,787) (134,620)
Proceeds from sales of premises and equipment 24,492 46,261 14,438
Proceeds from sales of other real estate owned 189,571 162,961 86,899
Purchases of mortgage servicing rights (77,312) (67,359) --
Proceeds from sales of subsidiaries 153,254 4,800 --
Net cash provided by (used in) acquisitions (37,427) 52,381 423,499
- ------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,481,407) (341,151) (742,396)
Financing activities
Net decrease in deposits (57,506) (26,545) (1,381,093)
Net increase (decrease) in short-term borrowings 695,185 (32,795) 1,097,626
Net proceeds from issuance of long-term debt 556,439 700,337 298,911
Payments on long-term debt (568,529) (174,249) (224,888)
Net proceeds from issuance of Common Stock -- -- 172,946
Net proceeds from issuance of Preferred Stock -- -- 154,656
Redemption of Preferred Stock (85,770) -- --
Proceeds from issuance of Common Stock pursuant to employee
stock purchase, stock option and dividend reinvestment plans 28,238 39,442 41,084
Cash dividends (262,532) (233,480) (182,906)
Sales of branch offices and loans:
Deposit liabilities assumed by purchasers -- (1,032,006) --
Loans sold -- 377,578 --
Long-term debt issued to fund branch sale -- 36,154 --
Other, net -- 23,956 --
Other financing activities, net 23,219 (2,984) (8,340)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 328,744 (324,592) (32,004)
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and due from banks (302,299) (70,816) 89,282
Cash and due from banks at beginning of year 3,079,737 3,150,553 3,061,271
- ------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of year $2,777,438 $3,079,737 $3,150,553
========== ========== ==========
- ------------------------------------------------------------------------------------------------------------------------
Additional disclosures relative to cash flows:
Interest paid $1,529,058 $1,803,194 $2,573,578
Income taxes paid 306,489 242,346 109,540
Noncash items:
Transfer of loans to other real estate owned 88,709 193,628 218,697
Transfer of investment securities to securities available for sale -- 2,632,085 --
Transfer of loans to mortgage loans held for sale -- 86,155 --
- ------------------------------------------------------------------------------------------------------------------------
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
49
<PAGE> 33
KEYCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
KeyCorp is a financial services holding company headquartered in Cleveland,
Ohio, and is engaged primarily in the business of commercial and retail
banking. It provides a wide range of banking, fiduciary, mortgage banking,
insurance and other financial services to corporate, institutional and
individual customers.
The accounting policies of KeyCorp and its subsidiaries (the "Corporation")
conform with generally accepted accounting principles and prevailing practices
within the financial services industry. The following is a summary of
significant accounting and reporting policies.
KEYCORP-SOCIETY MERGER
On March 1, 1994, KeyCorp ("old KeyCorp") merged into
and with Society Corporation ("Society"), which was the surviving corporation
under the name KeyCorp. The merger was accounted for as a pooling of interests
and, accordingly, the financial information for all prior periods has been
restated to present the combined financial condition and results of operations
of both companies as if the merger had been in effect for all periods presented.
Further details pertaining to the merger are presented in Note 2, Mergers,
Acquisitions and Divestitures, on page 51 of this report.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
KeyCorp and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain reclassifications,
including adjustments to conform accounting practices, have been made to prior
year amounts to agree to the current year presentation.
BUSINESS COMBINATIONS
In business combinations accounted for as poolings 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 periods' financial statements are restated to give
effect to the merger.
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 and related purchase premiums
and discounts are amortized over the remaining average lives of the respective
assets or liabilities.
STATEMENT OF CASH FLOWS
Cash and due from banks are considered as cash and cash equivalents.
INVESTMENT SECURITIES
Securities which the corporation has the ability and positive intent to hold
to maturity are carried at cost, adjusted for amortization of premiums and
accretion of discounts using the level yield method. Gains or losses from the
sales of investment securities are computed using the specific identification
method and included in net securities gains.
SECURITIES AVAILABLE FOR SALE AND TRADING ACCOUNT ASSETS
Securities available for sale are carried at the lower of 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. Market value adjustments for trading account assets
(included in short-term investments) and changes in net unrealized losses on
securities available for sale are included in noninterest income.
MORTGAGE LOANS HELD FOR SALE
Mortgage 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. certain nonrefundable loan
origination and commitment fees and the direct costs associated with
originating or acquiring the loans are deferred. The net
<PAGE> 34
KEYCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
deferred amount is amortized as an adjustment to the related loan yield over
the contractual lives of the related loans. Student loans held for sale
are carried at the lower of aggregate cost or market value.
Interest income on loans is primarily accrued based on principal amounts
outstanding. 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 has been a sustained period of
repayment performance.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is the amount which, in the opinion of
management, is necessary to absorb potential losses in the loan portfolio.
Management's evaluation of the adequacy of the allowance is based on the
market area served, local economic conditions, the growth and composition of
the loan portfolios and their related risk characteristics, and the continual
review by management of the quality of the loan portfolio.
INTEREST RATE SWAPS, FINANCIAL FUTURES AND OPTIONS
The Corporation uses interest rate swaps, financial futures and
options to manage the interest rate exposure of certain interest-sensitive
assets and liabilities as part of the corporation's overall strategy to manage
interest rate risk. The net interest received or paid on interest rate swaps is
recognized over the lives of the respective contracts as an adjustment to
interest income or expense. Gains and losses resulting from the termination of
interest rate swaps are deferred and amortized over the remaining lives of the
related financial instruments. Gains and losses on futures and option contracts
are recognized when the related hedged financial instruments are sold.
PREMISES AND EQUIPMENT
Premises and equipment, including leasehold improvements, are stated at cost
less accumulated depreciation and amortization. Depreciation of premises and
equipment is determined using the straight-line method over the estimated
useful lives of the respective assets. Leasehold improvements are amortized
using the straight-line method over the terms of the leases. Other real
estate owned other real estate owned includes real estate acquired through
foreclosure or a similar conveyance of title and real estate considered to be
in substance foreclosed when specific criteria are met. Other real estate owned
is carried at the lower of its recorded amount or fair value less estimated
cost of disposal. Writedowns of the assets at, or prior to, the dates of
acquisition are charged to the allowance for loan losses. Subsequent
writedowns, income and expenses incurred in connection with holding such
assets, and gains and losses resulting from the sales of such assets, are
included in other noninterest expense.
INTANGIBLE ASSETS
Goodwill, representing the excess of the cost of acquisitons over the fair
value of net assets acquired, is amortized using the straight-line method over
the estimated period to be benefited, generally not exceeding 25 years. Core
deposit intangibles represent the net present value of the future economic
benefits related to the use of deposits purchase. They are being amortized
using an accelerated method over periods ranging from 7 to 15 years. Other
intangibles are generally being amortized using the straight-line method over
periods ranging from 4 to 15 years.
PURCHASED MORTGAGE SERVICING RIGHTS
Purchased mortgage servicing rights represent the cost of the right to receive
future servicing income. Purchase 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.
INCOME TAXES
Old KeyCorp and Society each filed consolidated Federal Income tax returns for
the periods presented. Effective January 1, 1992, the Corporation prospectively
adopted Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes," which supersedes SFAS No. 96. The cumulative
effect of adopting SFAS No. 109 was not material.
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.
These amounts have been adjusted to reflect stock splits.
2. MERGERS, ACQUISITIONS AND DIVESTITURES
KEYCORP-SOCIETY MERGER
On March 1, 1993, KeyCorp ("old KeyCorp"), a financial services holding company
headquartered in Albany, New York, with approximately $33 billion in assets as
of December 31, 1993, merged into and with Society Corporation ("Society"), a
financial services holding company headquartered in Cleveland, Ohio, with
approximately $27 billion in assets at year-end 1993, which was the surviving
corporation and assumed the name KeyCorp. Under the terms of the merger
agreement, 124,351,183 KeyCorp Common Shares 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 for 1,280,000 shares of a comparable, new issue of
10% Cumulative Preferred Stock of KeyCorp. The merger was accounted for as a
pooling of interest and, accordingly, financial results for prior periods
presented have been restated to include the combined financial results of both
companies.
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.
51
<PAGE> 35
KEYCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. MERGERS, ACQUISITIONS AND DIVESTITURES (CONTINUED)
<TABLE>
<CAPTION>
Year ended December 31,
IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS 1993 1992 1991
- ------------------------------------------------------------------
<S> <C> <C> <C>
Net Interest Income:
Old KeyCorp $1,479,987 $1,318,286 $1,085,801
Society 1,198,990 1,130,387 1,047,160
- ------------------------------------------------------------------
Combined $2,678,977 $2,448,673 $2,132,961
========== ========== ==========
Net Income:
Old KeyCorp $362,767 $290,888 $237,218
Society 347,159 301,210 76,478
- ------------------------------------------------------------------
Combined $709,926 $592,098 $313,696
======== ======== ========
Net Income per Common Share:
Old KeyCorp $3.43 $2.80 $2.45
Society 2.93 2.51 .61
Combined 2.89 2.42 1.31
- -----------------------------------------------------------------
</TABLE>
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.
A total of 1,430,813 KeyCorp Common Shares 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 approximately $338 million at the date of merger.
SCHAENEN WOOD & ASSOCIATES, INC.
On October 5, 1993, Society Asset Management Inc., an indirect wholly-owned
subsidiary of KeyCorp, completed the acquisition of Schaenen Wood & Associates,
Inc. ("SWA"), a New York City-based investment management firm which manages
approximately $1.3 billion in assets. The transaction was accounted for as a
purchase.
AMERITRUST TEXAS CORPORATION
On September 15, 1993, KeyCorp completed the sale of Ameritrust Texas
Corporation ("ATC"), a wholly-owned subsidiary of KeyCorp, to Texas Commerce
Bank, National Association, an affiliate of Chemical Banking Corporation. ATC
was based in Dallas, Texas, and provided a range of investment management and
fiduciary services to institutions, businesses and individuals through 11
offices operating in Texas. For the year-to-date period through the closing
date, ATC had net income of $3.2 million. A $29.4 million gain was realized on
the sale ($12.2 million after tax, $.10 per Common Share) and included in
noninterest income.
NORTHWESTERN NATIONAL BANK
On July 22, 1993, Northwestern National Bank of Port Angeles, Washington
("NNB") merged into Key Bank of Washington, an indirect wholly-owned subsidiary
of KeyCorp. A total of 361,607 KeyCorp Common Shares were issued to the holders
of NNB common stock. The transaction was accounted for as a purchase. NNB had
total assets of approximately $49 million at the date of acquisition.
EMERALD CITY BANK
On July 2, 1993, Key Bank of Washington, an indirect wholly-owned subsidiary of
KeyCorp, assumed $7 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. A total of 590,485
KeyCorp Common Shares 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
approximately $230 million at the date of merger.
FIRST AMERICAN BANK OF NEW YORK
On March 25, 1993, Key Bank of New York, an indirect wholly-owned 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 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 accounted for as a
purchase. Key Bank of New York paid a premium of $41 million on the acquired
deposits. In connection with the transaction, Key Bank of New York recorded a
core deposit intangible of $33 million and goodwill of $8 million.
NATIONAL SAVINGS BANK OF ALBANY
On February 26, 1993, National Savings Bank of Albany, New York
("National") merged into Key Bank of New York, an indirect wholly-owned
subsidiary of KeyCorp. A total of 2,111,638 KeyCorp Common Shares 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
52
<PAGE> 36
KEYCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of National because the transaction was not material to KeyCorp. National had
total assets of approximately $671 million at the date of merger.
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
On January 22, 1993, KeyCorp acquired all of the outstanding shares of First
Federal Savings and Loan Association of Fort Myers ("Society First Federal"), a
Federal stock savings bank, for total cash consideration of $144 million. The
transaction was accounted for as a purchase. Society First Federal had 24
offices in southwest and central Florida and approximately $1.1 billion in
total assets at the date of acquisition.
PUGET SOUND BANCORP
On January 15, 1993, Puget Sound Bancorp ("PSB"), a bank holding company
headquartered in Tacoma, Washington, with approximately $4.7 billion in assets
as of December 31, 1992, merged into Key Bancshares of Washington, Inc., a
wholly-owned subsidiary of KeyCorp. A total of 31,391,544 KeyCorp Common Shares
were exchanged for all of the outstanding shares of PSB common stock (based on
an exchange ratio of 1.32 shares for each share of PSB). The merger was
accounted for as a pooling of interests and, accordingly, financial results
for prior periods presented have been restated to include the combined
financial results of both companies.
ELECTRONIC PAYMENT SERVICES, INC.
On December 4, 1992, KeyCorp and three other bank holding companies formed a
joint venture in a newly-formed company, Electronic Payment Services, Inc.
This company is the largest processor of automated teller machine transactions
in the United States and a national leader in point-of-sale transaction
processing. As part of the agreement, the Corporation contributed its
wholly-owned subsidiary, Green Machine Network Corporation, and its
point-of-sale business in return for an equity interest.
FIRST OF AMERICA BANK-MONROE
On September 30, 1992, KeyCorp acquired all of the outstanding shares of
First of America Bank-Monroe ("FAB-Monroe") from First of America Bank
Corporation in a cash purchase. The transaction was accounted for as a
purchase. FAB-Monroe operated 10 offices in southeastern Michigan and had
approximately $160 million in total assets at the date of acquisition.
SECURITY PACIFIC BANK BRANCHES
On September 3, 1992, Key Bank of Washington ("Key Bank"), an indirect
wholly-owned 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.
OLYMPIC SAVINGS BANK
On July 31, 1992, Key Savings Bank ("Key Savings"), an indirect wholly-owned
subsidiary of KeyCorp, acquired Olympic Savings Bank of Washington ("Olympic").
The transaction was accounted for as a purchase. Olympic had approximately $81
million in assets at the date of acquisition.
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. A
total of 838,308 KeyCorp Common Shares were issued 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
assets of approximately $221 million at the date of merger.
AMERITRUST CORPORATION
On March 16, 1992, Ameritrust Corporation ("Ameritrust"), a financial services
holding company located in Cleveland, Ohio, with approximately $10 billion in
assets as of December 31, 1991, merged with and into the Corporation. Under the
terms of the merger agreement, 49,550,862 KeyCorp Common Shares were exchanged
for all of the outstanding shares of Ameritrust common stock (based on an
exchange ratio of .65 shares of KeyCorp for each share of Ameritrust). The
outstanding preferred stock of Ameritrust was exchanged on a one-for-one basis
for 1,200,000 shares of a comparable, new issue of Fixed/Adjustable Rate
Cumulative Preferred Stock of KeyCorp. The merger was accounted for as a
pooling of interests and, accordingly, financial results for prior periods
presented have been restated to include the financial results of Ameritrust. In
connection with the merger and as part of an agreement with the United States
Department of Justice, the Corporation sold 28 Ameritrust branches located in
Cuyahoga and Lake Counties in Ohio in June 1992. Deposits of $933.3 million and
loans or loan participations totaling $331.8 million were sold along with the
branches at a gain of $20.1 million ($13.2 million after tax, $.11 per Common
Share) which is included in noninterest income. In addition, in May 1992,
deposits and loans totaling $98.7 million and $45.7 million, respectively, were
sold along with four branches in Ashtabula County, Ohio, in accordance with the
Federal Reserve Board order that approved the merger.
53
<PAGE> 37
KEYCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. MERGERS, ACQUISITIONS AND DIVESTITURES (CONTINUED)
PENDING ACQUISITIONS
COMMERCIAL BANCORPORATION OF COLORADO
On March 24, 1994, Commercial Bancorporation of Colorado ("CBC"), a bank
holding company with subsidiary banks operating in the Denver, Colorado
Springs, Sterling and Fort Collins areas of Colorado, merged with Key Bank of
Colorado, a wholly-owned subsidiary of KeyCorp. Holders of CBC common stock
received .899 KeyCorp Common Shares for each outstanding share of CBC common
stock. CBC had total assets of $390 million at December 31, 1993. The
transaction qualified for accounting as a pooling of interests; however,
financial statements will not be restated to include the accounts and results
of operations of CBC because the transaction was not material to KeyCorp.
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
240,000 KeyCorp Common Shares. Greeley Bank had total assets of approximately
$61 million at December 31, 1993.
<TABLE>
3. SECURITIES AVAILABLE FOR SALE
<CAPTION>
The book values, unrealized gains and losses and approximate market values of securities available for sale were as follows:
December 31, 1993 Gross Gross
Book Unrealized Unrealized Market
IN THOUSANDS Value Gains Losses Value
=====================================================================================================================
<S> <C> <C> <C> <C>
U.S. Treasury, agencies and corporations $1,433,980 $64,136 $ (171) $1,497,945
Mortgage-backed securities 269,735 4,165 (861) 273,039
Other securities 23,113 753 (5) 23,861
- ---------------------------------------------------------------------------------------------------------------------
Total $1,726,828 $69,054 $(1,037) $1,794,845
========== ======= ======= ==========
=====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1992 Gross Gross
Book Unrealized Unrealized Market
IN THOUSANDS Value Gains Losses Value
=====================================================================================================================
<S> <C> <C> <C> <C>
U.S. Treasury, agencies and corporations $2,032,526 $61,731 $(4,982) $2,089,275
Mortgage-backed securities 405,812 6,183 (3,794) 408,201
Other securities 20,303 564 (23) 20,844
- ---------------------------------------------------------------------------------------------------------------------
Total $2,458,641 $68,478 $(8,799) $2,518,320
========== ======= ======= ==========
=====================================================================================================================
</TABLE>
The proceeds from sales of securities available for sale during 1993 and 1992
were $630.8 million and $661.9 million, respectively. Gross gains of $35.3
million and $9.6 million were realized on those sales in 1993 and 1992,
respectively, and gross losses of $24 thousand and $7.1 million were realized
on those sales in 1993 and 1992, respectively.
Securities available for sale by remaining maturity were as follows:
<TABLE>
<CAPTION>
December 31, 1993
Book Market
IN THOUSANDS Value Value
========================================================
<S> <C> <C>
Due in one year or less $ 513,674 $ 520,190
Due after one through five years 739,081 771,946
Due after five through ten years 307,384 332,813
Due after ten years 166,689 169,896
- --------------------------------------------------------
Total $1,726,828 $1,794,845
========== ==========
</TABLE>
Mortgage-backed securities are included in the above maturity schedule based on
their expected average lives.
In May 1993, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities.
" SFAS No. 115 requires that equity securities having readily determinable
fair values and all investments in debt securities be classified and
accounted for in three categories. SFAS No. 115 is more fully described in
Note 4, Investment Securities.
54
<PAGE> 38
KEYCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
4. INVESTMENT SECURITIES
The book values, unrealized gains and losses and approximate market values of investment securities were as follows:
<CAPTION>
December 31, 1993
Gross Gross
Book Unrealized Unrealized Market
IN THOUSANDS Value Gains Losses Value
======================================================================================================================
<S> <C> <C> <C> <C>
U.S. Treasury, agencies and corporations $ 795,966 $ 11,601 $ (134) $ 807,433
States and political subdivisions 1,677,823 102,402 (394) 1,779,831
Mortgage-backed securities 7,877,216 108,627 (18,582) 7,967,261
Other securities 771,088 14,900 (307) 785,681
- ----------------------------------------------------------------------------------------------------------------------
Total $11,122,093 $237,530 $(19,417) $11,340,206
=========== ======== ======== ===========
======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1992 Gross Gross
Book Unrealized Unrealized Market
IN THOUSANDS Value Gains Losses Value
======================================================================================================================
<S> <C> <C> <C>
U.S. Treasury, agencies and corporations $ 494,195 $ 11,830 $ (21) $ 506,004
States and political subdivisions 1,806,831 80,627 (863) 1,886,595
Mortgage-backed securities 6,062,422 142,726 (33,393) 6,171,755
Other securities 612,852 16,889 (1,014) 628,727
- ----------------------------------------------------------------------------------------------------------------------
Total $8,976,300 $252,072 $(35,291) $9,193,081
========== ======== ======== ==========
======================================================================================================================
</TABLE>
<TABLE>
Investment securities by remaining maturity were as follows:
<CAPTION>
December 31, 1993
Book Market
IN THOUSANDS Value Value
=============================================================
<S> <C> <C>
Due in one year or less $ 1,819,775 $ 1,841,524
Due after one through five years 5,590,121 5,715,782
Due after five through ten years 3,193,927 3,245,422
Due after ten years 518,270 537,478
- -------------------------------------------------------------
Total $11,122,093 $11,340,206
=========== ===========
=============================================================
</TABLE>
Mortgage-backed securities are included in the above maturity schedule based on
their expected average lives. Other securities consist primarily of those
collateralized by credit card and automobile installment loan receivables,
corporate floating-rate notes and venture capital investments.
The proceeds from sales of investment securities were $142.1 million, $662.2
million and $1.1 billion during 1993, 1992 and 1991, respectively. Gross gains
and losses related to securities were $.8 million and $7.8 million,
respectively, in 1993, $13.0 million and $.9 million, respectively, in 1992, and
$26.2 million and $7.3 million, respectively, in 1991.
At December 31, 1993, investment and available for sale securities with a book
value of approximately $9.6 billion were pledged to secure public and trust
deposits and securities sold under agreements to repurchase, and for certain
other purposes required or permitted by law.
In May 1993, the FASB issued SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." SFAS No. 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 principally held 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 No. 115 is required for fiscal years
beginning after December 15, 1993, with earlier application permitted. The
Corporation will adopt SFAS No. 115 in 1994. Based upon the Corporation's
securities portfolio classified as available for sale as of December 31, 1993,
the estimated impact of the new standard would be an increase to shareholders'
equity of approximately $44 million, with no effect on the results of
operations. With the adoption of SFAS No. 115 in 1994, the Corporation
anticipates that securities with an aggregate book value ranging from $4.5
billion to $5.0 billion will be designated as available for sale. Based upon the
market values of these securities at year-end 1993, the reclassification of
these securities is not expected to have a material effect on shareholders'
equity.
55
<PAGE> 39
KEYCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LOANS
<TABLE>
Loans are summarized as follows:
<CAPTION>
December 31,
IN THOUSANDS 1993 1992
========================================================================================================================
<S> <C> <C>
Commercial, financial and agricultural $ 8,965,528 $ 8,869,032
Real estate-construction 1,160,480 1,448,032
Real estate-commercial mortgage 6,228,188 5,937,022
Real estate-residential mortgage 11,026,319 8,289,386
Consumer 9,276,334 9,081,657
Student loans held for sale 1,648,611 1,070,140
Lease financing 1,702,472 1,225,193
Foreign 63,312 101,363
- ------------------------------------------------------------------------------------------------------------------------
Total $40,071,244 $36,021,825
=========== ===========
========================================================================================================================
</TABLE>
<TABLE>
Changes in the allowance for loan losses are summarized as follows:
<CAPTION>
Year ended December 31,
IN THOUSANDS 1993 1992 1991
========================================================================================================================
<S> <C> <C> <C>
Balance at beginning of year $782,649 $793,519 $677,294
Charge-offs (303,160) (440,396) (465,858)
Recoveries 90,385 79,930 74,042
- ------------------------------------------------------------------------------------------------------------------------
Net charge-offs (212,775) (360,466) (391,816)
Provision for loan losses 211,662 338,337 466,163
Allowance of affiliates purchased 21,176 11,259 41,878
- ------------------------------------------------------------------------------------------------------------------------
Balance at end of year $802,712 $782,649 $793,519
======== ======== ========
========================================================================================================================
</TABLE>
In 1991, Ameritrust recorded an additional $93.9 million provision for loan
losses to conform its approach to determining the level of the allowance to
that used by the Corporation.
In the ordinary course of business, KeyCorp's banking affiliates have made loans
at prevailing interest rates and terms to directors and executive officers of
KeyCorp and its subsidiaries and their associates (as defined by the Securities
and Exchange Commission). Such loans, in management's opinion, did not present
more than the normal risk of collectibility or incorporate other unfavorable
features. The aggregate amount of loans outstanding to qualifying related
parties at January 1, 1993, was $241.3 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 $149.3 million,
$153.9 million and $40.3 million, respectively, resulting in an aggregate
balance of loans outstanding to related parties at December 31, 1993, of $196.4
million.
56
<PAGE> 40
KEYCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. NONPERFORMING ASSETS
<TABLE>
Nonperfoming assets were as follows:
<CAPTION>
December 31,
IN THOUSANDS 1993 1992
- --------------------------------------------------------
<S> <C> <C>
Nonaccrual loans $329,843 $550,522
Restructured loans 6,469 2,380
- --------------------------------------------------------
Total nonperforming loans 336,312 552,902
Other real estate owned 186,052 350,266
Allowance for OREO losses (35,690) (17,915)
- --------------------------------------------------------
Other real estate owned,
net of allowance 150,362 332,351
Other nonperforming assets 13,462 14,903
- --------------------------------------------------------
Total $500,136 $900,156
======== ========
========================================================
</TABLE>
<TABLE>
The effect on interest income of loans classified as nonperforming at December
31 was as follows:
<CAPTION>
IN THOUSANDS 1993 1992 1991
===========================================================
<S> <C> <C> <C>
Interest income which would
have been recorded if assets
had been current under
original terms $30,037 $52,002 $71,235
Less: Interest income recorded
during the period (7,900) (20,536) (28,877)
- -----------------------------------------------------------
Net reduction to reported
interest income $22,137 $31,466 $42,358
======= ======= =======
===========================================================
</TABLE>
At December 31, 1993, there were no significant commitments
to lend additional funds to borrowers with nonaccrual or
restructured loans.
<TABLE>
Changes in the allowance for OREO losses are summarized as follows:
<CAPTION>
Year ended December 31,
IN THOUSANDS 1993 1992 1991
============================================================================================================
<S> <C> <C> <C>
Balance at beginning of year $17,915 $19,191 $13,754
Net charge-offs (21,697) (33,793) (12,661)
Provision for other real estate owned losses 39,132 32,517 15,513
Allowance of affiliates purchased 340 -- 2,585
- ------------------------------------------------------------------------------------------------------------
Balance at end of year $35,690 $17,915 $19,191
======= ======= =======
============================================================================================================
</TABLE>
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," which takes effect for fiscal years beginning after
December 15, 1994. SFAS No. 114 prescribes a valuation methodology for impaired
loans as defined by the standard. Generally, a loan is considered impaired if
management believes that it is probable that all amounts due will not be
collected according to the contractual terms, as scheduled in the loan
agreement. An impaired loan must be valued using the present value of expected
future cash flows discounted at the loan's effective interest rate, the loan's
observable market price or the fair value of the loan's underlying collateral.
The Corporation expects to adopt SFAS No. 114 prospectively in the first
quarter of 1995. It is anticipated that the adoption of SFAS No. 114 will not
have a material effect on the Corporation's financial condition or results of
operations.
57
<PAGE> 41
KEYCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. PREMISES AND EQUIPMENT
<TABLE>
Premises and equipment were as follows:
<CAPTION>
December 31,
IN THOUSANDS 1993 1992
================================================================
<S> <C> <C>
Land $ 116,335 $ 86,196
Buildings and leasehold improvements 741,043 715,762
Furniture and equipment 759,721 681,058
- ----------------------------------------------------------------
1,617,099 1,483,016
Accumulated depreciation and
amortization (704,229) (639,702)
- ----------------------------------------------------------------
Total $ 912,870 $ 843,314
========= =========
================================================================
</TABLE>
Depreciation and amortization expense related to premises and equipment totaled
$110.9 million, $104.3 million, and $84.4 million in 1993, 1992, and 1991,
respectively.
At December 31, 1993, KeyCorp's affiliate banks were obligated
under noncancelable leases for land and buildings and for other property,
consisting principally of data processing equipment. Rental expense under all
operating leases totaled $123.7 million in 1993, $116.5 million in 1992 and
$103.4 million in 1991. Minimum future rental payments under noncancelable
leases at December 31, 1993, were as follows: 1994-$98.9 million; 1995--$89.0
million; 1996--$82.1 million; 1997--$74.2 million; 1998--$59.2 million; and
subsequent years--$547.5 million.
8. INTANGIBLE ASSETS AND PURCHASED MORTGAGE SERVICING RIGHTS
<TABLE>
Intangible assets, net of accumulated amortization, were as follows:
<CAPTION>
December 31,
IN THOUSANDS 1993 1992
===============================================================
<S> <C> <C>
Goodwill $385,359 $361,290
Core deposit intangibles 139,501 132,402
Credit card intangibles 16,648 20,240
Other 7,840 87,688
- ---------------------------------------------------------------
Total $549,348 $601,620
======== ========
- ---------------------------------------------------------------
Purchased mortgage servicing rights $188,592 $165,433
===============================================================
</TABLE>
<TABLE>
The amortization expense for intangible assets was as follows:
<CAPTION>
Year ended December 31,
IN THOUSANDS 1993 1992 1991
===============================================================
<S> <C> <C> <C>
Goodwill $24,210 $21,589 $22,397
Core deposit intangibles 22,436 25,049 22,379
Credit card intangibles 4,460 4,449 4,534
Other 6,944 10,605 8,264
- ---------------------------------------------------------------
Total $58,050 $61,692 $57,574
======= ======= =======
===============================================================
</TABLE>
The amortization expense for purchased mortgage servicing rights
totaled $56.6 million, $29.6 million and $20.4 million in 1993, 1992 and 1991,
respectively. The amount of purchased mortgage servicing rights capitalized
during 1993 was $77.3 million.
58
<PAGE> 42
KEYCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. 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 Medium-Term Notes with original maturities of one year or less, Treasury,
tax and loan demand notes and commercial paper which is issued principally in
amounts of $100,000 or more with maturities of 270 days or less.
On November 30, 1992, Society National Bank ("SNB"), KeyCorp's Ohio banking
affiliate, authorized the issuance of up to $1 billion of Medium-Term Notes to
be offered on a continuous basis. During 1993, $685 million in debt securities
were issued under this program. These securities have original maturities of
less than one year and are included in other short-term borrowings.
<TABLE>
The details of short-term borrowings were as follows:
<CAPTION>
DOLLARS IN THOUSANDS 1993 1992 1991
===========================================================================================================================
<S> <C> <C> <C>
FEDERAL FUNDS PURCHASED
Balance at year-end $1,932,211 $1,826,522 $2,194,057
Average during the year 1,828,606 1,519,406 1,412,714
Maximum month-end balance 3,127,134 2,924,193 2,531,555
Weighted average rate during the year 3.06% 3.74% 5.72%
Weighted average rate at December 31 3.13 3.30 4.02
- --------------------------------------------------------------------------------------------------------------------------
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Balance at year-end $2,188,047 $2,380,998 $2,060,012
Average during the year 2,549,582 2,542,522 2,394,966
Maximum month-end balance 3,163,603 3,036,009 3,228,383
Weighted average rate during the year 2.91% 3.38% 5.42%
Weighted average rate at December 31 2.84 2.97 4.12
- --------------------------------------------------------------------------------------------------------------------------
OTHER SHORT-TERM BORROWINGS
Balance at year-end $1,776,192 $ 874,887 $ 833,465
Average during the year 1,196,188 721,800 1,188,228
Maximum month-end balance 1,776,192 1,144,870 900,611
Weighted average rate during the year 3.72% 4.31% 6.27%
Weighted average rate at December 31 3.16 3.57 3.86
===========================================================================================================================
</TABLE>
At December 31, 1993, the Corporation had available lines of credit for general
corporate purposes aggregating $200 million, all of which were unused at
December 31, 1993. Standard fees were paid for these facilities, which were
cancelled subsequent to the end of the year.
59
<PAGE> 43
KEYCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. LONG-TERM DEBT
<TABLE>
The components of long-term debt, presented net of unamortized discount where appropriate, were as follows:
<CAPTION>
December 31,
DOLLARS IN THOUSANDS 1993 1992
========================================================================================================================
<S> <C> <C>
Medium-Term Notes due through 2003 $ 546,230 $ 303,930
8.125% Subordinated Notes due 2002 197,902 197,655
8.00% Subordinated Notes due 2004 125,000 125,000
8.40% Subordinated Capital Notes due 1999 75,000 75,000
8.875% Notes due 1996 74,772 74,715
11.125% Notes due 1995 49,979 49,967
8.48% Notes due 1997 through 2001 48,864 48,864
8.33% Notes due 1996 22,794 22,794
12.63% Notes due 1994 1,860 1,860
7.875% Notes due 1993 -- 99,952
8.625% Notes due 1996 -- 99,773
9.45% Senior Notes due 1993 -- 75,000
5.25% Floating Rate Subordinated Notes due 1997 -- 50,000
8.25% Notes due 1993 -- 25,000
9.56% Note due 1995 -- 14,922
7.75% Debentures due through 2002 -- 13,533
All other long-term debt 384 4,514
- ------------------------------------------------------------------------------------------------------------------------
Total parent company 1,142,785 1,282,479
7.85% Subordinated Notes due 2002 199,823 198,524
6.75% Subordinated Notes due 2003 198,823 --
Federal Home Loan Bank Advances1 165,100 246,350
10.00% Notes due 1995 36,735 36,735
Industrial revenue bonds 10,938 11,314
All other long-term debt 9,666 14,676
- ------------------------------------------------------------------------------------------------------------------------
Total subsidiaries 621,085 507,599
- ------------------------------------------------------------------------------------------------------------------------
Total $1,763,870 $1,790,078
========== ==========
========================================================================================================================
<FN>
1 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>
<TABLE>
<CAPTION>
Scheduled payments on long-term debt are as follows:
IN THOUSANDS Parent Subsidiaries Total
========================================================
<S> <C> <C> <C>
1994 $ 72,569 $ 37,371 $109,940
1995 160,179 103,386 263,565
1996 214,202 12,170 226,372
1997 47,758 1,623 49,381
1998 82,418 1,101 83,519
========================================================
</TABLE>
During 1993 and 1992, KeyCorp issued $305.1 million and $77.0 million,
respectively, of Medium-Term Notes with original maturities exceeding one year.
In addition to general corporate purposes, the proceeds from the issuance of
these notes were used to redeem and pay principal on notes and debentures; to
fund the purchase of OREO from affiliate banks by NCB Properties, Inc., an OREO
workout subsidiary; and to provide subordinated capital to affiliate banks. At
December 31, 1993, KeyCorp's Medium-Term Notes as presented in the table had a
weighted average interest rate of 6.61% and had varying maturities through
2003.
On June 15, 1992, KeyCorp issued $200 million of 8.125% Subordinated Notes
under a shelf registration. The Notes are not redeemable prior to maturity.
The 8.875% Notes, issued under a separate registration statement, and the
11.125% Notes are not redeemable prior to maturity.
On March 26, 1987, KeyCorp issued $75 million of 8.40% Subordinated Capital
Notes due 1999 under an indenture dated March 1, 1987, between KeyCorp and
Chemical Bank, as trustee. The Notes are unsecured obligations of KeyCorp and
will, at maturity, be exchanged for Capital Securities having a market value
equal to the principal amount of the Notes. Proceeds of this issue were used
primarily to fund the acquisition of Seattle Trust & Savings Bank in July 1987.
60
<PAGE> 44
KEYCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On June 29, 1992, KeyCorp issued $125 million of 8.00% Subordinated Notes.
Proceeds from these twelve-year notes were used to redeem 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.
In 1989, the Ameritrust Corporation Employees' Savings and Investment Plan (the
"Plan") was amended to include a leveraged employee stock ownership plan
("ESOP"). To fund the ESOP, Ameritrust borrowed $71.7 million from several
institutional investors through the placement of unsecured notes totaling
$22.8 million (the "8.33% Notes") and $48.9 million (the "8.48% Notes"). The
interest on those Notes totaled $6.0 million in each of the years 1993, 1992
and 1991. The ESOP trustee used the proceeds to purchase 5.8 million shares of
Ameritrust common stock. These shares, as converted in the merger with Society,
are held by the ESOP trustee for matching employee contributions to the Plan.
The net difference between the cost of the treasury shares sold to the ESOP
trustee and their market value was recorded as a reduction to retained
earnings. Except for the repayment schedule, the loans to the ESOP trustee are
on substantially similar terms as the borrowings from the institutional
investors and, in addition, are secured by the unallocated shares held by the
ESOP trustee. The ESOP trustee will repay the loans from KeyCorp using
corporate contributions made by the Plan for that purpose and dividends on the
Common Shares acquired with the loans. The amount of dividends on the ESOP
shares used for debt service by the ESOP trustee totaled $3.9 million in 1993,
$3.1 million in 1992 and $1.8 million in 1991. As contributions and dividends
are received, a portion of the shares acquired with the loans will be allocated
to plan participants. Interest income recognized on loans to the ESOP trustee
is netted against the interest expense incurred on the Notes payable to the
institutional investors. KeyCorp's receivable from the ESOP trustees,
representing deferred compensation to the Corporation's employees, has been
recorded as a separate reduction of shareholders' equity.
SNB issued $200 million of 7.85% Subordinated Notes on November 3, 1992, and
$200 million of 6.75% Subordinated Notes on June 16, 1993. SNB also issued a
10% Note in connection with the sale of branch offices and loans resulting from
the merger with Ameritrust. None of these Notes may be redeemed prior to
maturity.
The 8.625% Notes due 1996 were redeemed at par plus accrued interest
on June 30, 1993, and the 9.56% Note due 1995 was assumed by the purchaser in
connection with the sale of Ameritrust Texas Corporation on September 15, 1993.
On May 6, 1993, and May 27, 1993, KeyCorp redeemed prior to maturity, and
without penalty, all of its floating rate Subordinated Notes due 1997 and all
of its 7.75% debentures due through 2002, respectively.
Industrial revenue bonds issued by affiliate banks have varying maturities
extending to the year 2009 and had weighted average annual interest rates of
7.14% and 7.19%, respectively, at December 31, 1993 and 1992.
Other long-term debt at December 31, 1993 and 1992, consisted of capital lease
obligations and various secured and unsecured obligations of corporate
subsidiaries and had weighted average annual interest rates of 13.54% and
10.14%, respectively.
Long-term debt qualifying as supplemental capital for purposes of calculating
Tier II capital under Federal Reserve Board Guidelines amounted to $993.4
million and $799.1 million at December 31, 1993, and 1992, respectively.
61
<PAGE> 45
KEYCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. SHAREHOLDERS' EQUITY
COMMON SHARES AND PREFERRED STOCK
In August 1989, KeyCorp's Board of Directors adopted a Shareholder Rights Plan
("Rights") under which each shareholder received one Right for each Common Share
of KeyCorp. Each Right represents the right to purchase a Common Share of
KeyCorp at a price of $65. The Rights become exercisable 20 days after a
person or group acquires 15% or more of the outstanding shares 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. Twenty days after the occurrence of certain
"Flip-In Events," each Right will become the right to purchase a Common Share
of KeyCorp for the then par value per share (now $1 per share) and the Rights
held by a 15% or more shareholder will become void. KeyCorp may redeem these
Rights at its option at $.005 per Right subject to certain limitations. Unless
redeemed earlier, the Rights expire on September 12, 1999. On October 1, 1993,
KeyCorp amended the Rights so that the Merger would not activate the provisions
of the Rights.
At December 31, 1993, KeyCorp had 10.0 million shares of $5 par value,
non-voting preferred stock authorized of which 1,280,000 shares of Series B
were outstanding represented by 6.4 million 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 stated value of
$125 per share. In the Merger, each Series B share was converted into one share
of 10% Cumulative Preferred Stock, Class A.
On August 2, 1993, KeyCorp redeemed the 479,394 outstanding shares of Series
A Preferred Stock at its stated value ($24 million) plus accumulated but
unpaid dividends.
On March 1, 1993, KeyCorp redeemed the 1.2 million outstanding shares of
Fixed/Adjustable Rate Cumulative Preferred Stock at 103% of its stated value
($60 million), plus accumulated but unpaid dividends.
KeyCorp effected a two-for-one stock split on March 22, 1993, by means of a
100% stock dividend. All relevant Common Share amounts, per Common Share
amounts and related data in this report have been adjusted to reflect this
split.
In connection with the Merger, at a special meeting held February 16, 1994,
shareholders increased the authorized number of shares of KeyCorp to 926.4
million, of which 1.4 million are shares of 10% Cumulative Preferred Stock,
Class A, par value $5 per share; 25.0 million are shares of Preferred Stock,
par value $1 per share; and 900.0 million are Common Shares, par value $1 per
share.
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
KeyCorp maintains various incentive compensation plans which provide for its
ability to grant stock options, stock appreciation rights, limited stock
appreciation rights, restricted stock and performance shares to selected
employees and directors. Generally, the terms of these plans stipulate that
the exercise price of options may not be less than the fair market value of
KeyCorp's Common Shares at the date the options are granted. Options granted
expire not later than ten years and one month from the date of grant. Several
option plans have been acquired through mergers. These plans have expired or
were terminated, but unexercised options granted under the plans remain
outstanding. At December 31, 1993 and 1992, options for Common Shares
available for future grant totaled 1,237,965 and 1,233,958, respectively.
The terms of KeyCorp's plans stipulate that stock appreciation rights may only
be granted in tandem with stock options. The appreciation rights have the same
terms as do the options, except that, upon exercise, the holder may receive
either cash or shares for the excess of the current market value of KeyCorp's
Common Shares over the options exercise price. Upon exercise of a stock
appreciation right, the related option is surrendered. During 1993, all stock
appreciation rights for which exercisability was limited to a period following
a change in control of the Corporation were cancelled.
The following table presents a summary of pertinent information with respect
to KeyCorp's stock options and stock appreciation rights.
62
<PAGE> 46
KEYCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
STOCK OPTIONS
1993 1992
-------------------------- --------------------------------
SHARES OPTION PRICE Shares Option Price
==============================================================================================================================
<S> <C> <C> <C> <C>
Outstanding at beginning of year 9,324,776 $ 3.36 - 32.06 8,457,547 $ 2.49 - 25.87
Granted 2,062,544 29.37 - 38.18 3,670,370 24.63 - 32.06
Assumed in acquisition 9,008 4.69 - 7.61 -- --
Exercised or surrendered 1,697,458 3.89 - 28.25 2,508,626 2.49 - 22.92
Lapsed or cancelled 88,955 13.77 - 33.94 294,515 12.30 - 28.25
- ------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year1 9,609,915 $ 3.36 - 38.18 9,324,776 $ 3.36 - 32.06
- ------------------------------------------------------------------------------------------------------------------------------
Exercisable at end of year2 6,529,168 $ 3.36 - 38.18 6,069,912 $ 3.36 - 32.06
==============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
STOCK APPRECIATION RIGHTS
1993 1992
--------------------------- ----------------------------
SHARES OPTION PRICE Shares Option Price
==========================================================================================================================
<S> <C> <C> <C> <C>
Outstanding at beginning of year 2,028,240 $11.69 - 28.25 1,828,708 $ 6.78 - 20.88
Granted 222,000 33.94 920,000 28.25
Exercised or surrendered 36,400 11.69 - 20.88 672,468 6.78 - 20.88
Lapsed or cancelled 2,169,840 11.69 - 33.94 48,000 28.25
- --------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year1 44,000 $11.69 2,028,240 $11.69 - 28.25
- --------------------------------------------------------------------------------------------------------------------------
Exercisable at end of year 44,000 $11.69 49,000 $11.69
==========================================================================================================================
<FN>
1Ordinary options outstanding at December 31, 1992 include 1,979,240 shares granted in tandem with Limited SARs.
2Ordinary options exercisable at December 31, 1992 include 1,107,240 shares granted in tandem with Limited SARs.
</TABLE>
In 1991, KeyCorp's 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.
12. MERGER AND INTEGRATION CHARGES
Merger and integration charges of $118.7 million ($80.6 million after tax, $.33
per Common Share), $92.7 million ($66.6 million after tax, $.29 per Common
Share) and $93.8 million ($68.2 million after tax, $.29 per Common Share) were
recorded in 1993, 1992 and 1991, respectively. The 1993 charges were incurred
in connection with the March 1, 1994, merger of old KeyCorp into and with
Society, while the 1992 charges related to the mergers with PSB and Ameritrust.
The 1991 charges related to the merger with Ameritrust. The merger and
integration charges included 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
parent company in the fourth quarter of 1993 at which time management
determined that it was probable that a liability for all such charges had been
incurred and could be reasonably estimated. The merger and integration charges
recorded in connection with the PSB and Ameritrust mergers in 1992, and the
Ameritrust merger in 1991, were similar in nature. The above mergers are
described in greater detail in note 2, Mergers, Acquisitions and Divestitures,
on page 51 of this report.
63
<PAGE> 47
KEYCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. EMPLOYEE BENEFITS
PENSION PLANS
KeyCorp and its subsidiaries sponsor noncontributory pension plans covering
substantially all employees. Benefits paid from these plans are based on age,
years of service and compensation prior to retirement and are determined in
accordance with defined formulas. The Corporation's funding policy is to
contribute amounts to the plans which meet the minimum funding requirements set
forth in the Employee Retirement Income Security Act (ERISA) of 1974, plus such
additional amounts as the Corporation determines to be appropriate.
<TABLE>
The following table sets forth the status of the funded plans and the amounts recognized in the consolidated balance sheets:
<CAPTION>
December 31,
IN THOUSANDS 1993 1992
========================================================================================================================
<S> <C> <C>
Accumulated benefit obligations, including vested benefits
of $444,018 and $362,626 $454,831 $373,595
- ------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets, primarily listed stock and fixed income securities* 614,139 583,235
Projected benefit obligations 502,614 433,509
- ------------------------------------------------------------------------------------------------------------------------
Excess of fair value of plan assets over projected benefit obligations 111,525 149,726
Unrecognized net loss (gain) 56,834 (132)
Unrecognized prior service benefit (2,850) (3,809)
Unrecognized net asset at January 1, 1986 being recognized over 15 years (38,609) (45,405)
- ------------------------------------------------------------------------------------------------------------------------
Prepaid pension cost (included in other assets) $126,900 $100,380
======== ========
========================================================================================================================
<FN>
*Including KeyCorp Common Shares valued at $27.8 million and $30.4 million at December 31, 1993 and 1992, respectively.
</TABLE>
The weighted average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of projected benefit
obligations were 7.37% and 4.00%, respectively, at December 31, 1993, and 8.08%
and 4.78%, respectively, at December 31, 1992. The weighted average expected
long-term rate of return on pension assets used in determining net pension cost
was 9.91% for 1993, 9.60% for 1992 and 9.69% for 1991.
The Corporation also maintains several unfunded, non-qualified, supplemental
executive retirement programs that provide additional defined pension benefits
for certain officers.
<TABLE>
The following table sets forth the status of the unfunded plans and the amounts recognized in the consolidated balance sheets:
<CAPTION>
December 31,
IN THOUSANDS 1993 1992
========================================================================================================================
<S> <C> <C>
Accumulated benefit obligations, including vested benefits
of $47,288 and $35,300 $50,321 $36,211
- ------------------------------------------------------------------------------------------------------------------------
Projected benefit obligations 62,659 42,414
Unrecognized prior service cost (5,352) (6,524)
Unrecognized transition obligation (3,864) (4,362)
Unrecognized net loss (18,286) (6,868)
Adjustment to recognize minimum liability 11,653 10,897
- ------------------------------------------------------------------------------------------------------------------------
Accrued pension cost (included in other liabilities) $46,810 $35,557
======= =======
========================================================================================================================
64
</TABLE>
<PAGE> 48
KEYCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
Net pension cost (income) for the funded and unfunded plans included the following components:
<CAPTION>
Year ended December 31,
IN THOUSANDS 1993 1992 1991
========================================================================================================================
<S> <C> <C> <C>
Service cost of benefits earned $22,506 $21,424 $ 21,604
Interest cost on projected benefit obligations 39,098 34,687 33,487
Actual return on plan assets (44,619) (51,773) (105,430)
Net amortization and deferral (14,229) (4,360) 55,480
- ------------------------------------------------------------------------------------------------------------------------
Net pension cost (income) $ 2,756 $ (22) $ 5,141
======= ======= ========
========================================================================================================================
</TABLE>
In 1993, the Corporation recognized curtailment and settlement gains of $2.9
million resulting from the divestiture of ATC. Such amounts were included in
the net gain from that divestiture. In 1992, the Corporation recognized
curtailment gains of $7.2 million resulting from merger-related staff
reductions. A portion of the retirement obligations associated with these
reductions was settled by lump-sum cash distributions which resulted in
settlement gains of $1.4 million and $3.0 million in 1993 and 1992,
respectively. Both the curtailment and settlement gains related to the
merger-related staff reductions are included in other noninterest income.
OTHER POSTRETIREMENT BENEFIT PLANS
The Corporation sponsors postretirement health care and life insurance plans
that cover substantially all employees. The postretirement health care plans
are nonfunded and contributory, with retirees' contributions adjusted annually
to reflect certain cost-sharing provisions and benefit limitations. The
postretirement life insurance plans are noncontributory. The Corporation has
adopted a funding policy for one of its life insurance plans and annually
contributes the service cost of benefits earned plus one-thirtieth of the
unfunded accumulated postretirement benefit obligations.
Effective January 1, 1993, the Corporation adopted the provisions of SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
This statement requires that employers recognize the cost of providing
postretirement benefits over the employees' active service periods to
the date they attain full eligibility for such benefits. Postretirement
benefits costs for 1992 and 1991, which were recorded on a cash basis, have not
been restated. Net postretirement benefits cost was $16.9 million in 1993,
including $8.2 million due to adoption of the new standard, $7.7 million in
1992 and $6.6 million in 1991.
<TABLE>
Net postretirement benefits cost included the following components:
<CAPTION>
Year ended December 31, 1993
IN THOUSANDS
===============================================================
<S> <C>
Service cost of benefits attributed to service $ 2,873
Interest cost on accumulated
postretirement benefit obligations 8,713
Actual return on plan assets (22)
Amortization of transition obligation over 20 years 5,372
Net amortization and deferral (10)
- ---------------------------------------------------------------
Net postretirement benefits cost $16,926
=======
===============================================================
</TABLE>
<TABLE>
The following table sets forth the plans' combined funded status reconciled with the amount shown in the consolidated balance sheet:
<CAPTION>
December 31, 1993
IN THOUSANDS
=======================================================
<S> <C>
Accumulated postretirement benefit obligations:
Retirees $ (81,208)
Fully eligible plan participants (10,624)
Other active plan participants (27,396)
- -------------------------------------------------------
(119,228)
Fair value of plan assets 168
- -------------------------------------------------------
Accumulated postretirement benefit obligations
in excess of plan assets (119,060)
Unrecognized transition obligation 101,654
Unrecognized net loss 7,826
- -------------------------------------------------------
Accrued postretirement benefits cost
(included in other liabilities) $ (9,580)
==========
=======================================================
</TABLE>
The assumed 1994 health care cost trend rate for Medicare-eligible retirees
was 11.0% while that for non-Medicare-eligible retirees was 13.0%. Both rates
are assumed to gradually decrease to 5.5% by the year 2009 and remain constant
thereafter. Increasing the assumed health care cost trend rates by one
percentage point in each future year would have an immaterial impact on
postretirement benefits cost due to cost-sharing provisions and benefit
limitations. The weighted average discount rate used in determining the
accumulated postretirement benefit obligations was 7.4% at December 31, 1993.
65
<PAGE> 49
KEYCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. EMPLOYEE BENEFITS (CONTINUED)
EMPLOYEE STOCK PURCHASE AND SAVINGS PLANS
Substantially all of the Corporation's employees are covered under stock
purchase and savings plans that are qualified under Section 401(k) of the
Internal Revenue Code. Under provisions of these plans, employees may
contribute 1% to 15% of eligible compensation, with up to 6% being eligible for
matching contributions from the Corporation in the form of KeyCorp Common
Shares. Under an annual discretionary profit sharing component, employees can
receive additional matching employer contributions from the Corporation based
on a formula established each year by KeyCorp's Board of Directors. Total
expense associated with these plans was $40.4 million, $30.4 million and $29.0
million in 1993, 1992 and 1991, respectively.
POSTEMPLOYMENT BENEFITS
The Corporation adopted the provisions of SFAS No. 112, "Employers' Accounting
for Postemployment Benefits," during 1993. This standard requires that
employers who provide benefits to former or inactive employees after employment
but before retirement recognize a liability for such benefits if specified
conditions are met. Adoption of this standard increased noninterest expense by
$4.0 million. Postemployment benefits for 1992 and 1991, which were recorded on
a cash basis, were not restated.
14. INCOME TAXES
<TABLE>
Income taxes included in the consolidated statements of income are as follows:
<CAPTION>
Year ended December 31,
IN THOUSANDS 1993 1992 1991
========================================================================================================================
<S> <C> <C> <C>
Currently payable:
Federal $289,987 $182,277 $ 99,485
State 34,554 28,655 17,719
- ------------------------------------------------------------------------------------------------------------------------
324,541 210,932 117,204
Deferred:
Federal 55,043 68,297 17,580
State (5,612) 403 1,900
- ------------------------------------------------------------------------------------------------------------------------
49,431 68,700 19,480
- ------------------------------------------------------------------------------------------------------------------------
Total income tax expense $373,972 $279,632 $136,684
======== ======== ========
========================================================================================================================
</TABLE>
<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:
<CAPTION>
Year ended December 31,
IN THOUSANDS 1993 1992 1991
========================================================================================================================
<S> <C> <C> <C>
Income before taxes times statutory tax rate1 $379,364 $294,139 $153,129
State income tax, net of Federal tax benefit 18,295 19,636 13,056
Amortization of non-deductible intangibles 10,349 11,317 10,760
Tax-exempt interest income (40,610) (47,228) (52,073)
Tax credits (4,184) (3,120) (2,825)
Other 10,758 4,888 14,637
- ------------------------------------------------------------------------------------------------------------------------
Total income tax expense $373,972 $279,632 $136,684
======== ======== ========
========================================================================================================================
<FN>
135% for 1993; 34% for 1992 and 1991.
</TABLE>
66
<PAGE> 50
KEYCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
The significant types of temporary differences that gave rise to net deferred
income taxes include the provision for loan losses, lease income, merger and
integration charges and writedown of other real estate owned. Significant
components of deferred income taxes are as follows:
<CAPTION>
Year ended December 31,
IN THOUSANDS 1993 1992 1991
======================================================================================================================
<S> <C> <C> <C>
Provision for loan losses $ (4,536) $ 8,164 $(24,957)
Leasing income reported using the operating method for tax purposes 101,859 66,304 49,699
Writedown of other real estate owned (14,105) (14,243) (6,100)
Merger and integration charges (33,949) 17,050 (27,016)
Other 162 (8,575) 27,854
- ----------------------------------------------------------------------------------------------------------------------
Deferred income tax expense $49,431 $68,700 $19,480
======= ======= =======
======================================================================================================================
</TABLE>
<TABLE>
Significant components of KeyCorp's deferred tax asset (liability) are as follows:
<CAPTION>
December 31,
IN THOUSANDS 1993 1992 1991
======================================================================================================================
<S> <C> <C> <C>
Provision for loan losses $ 259,082 $ 263,531 $ 265,731
Leasing income reported using the operating method for tax purposes (381,393) (282,006) (216,330)
Writedown of other real estate owned 25,289 24,393 9,174
Merger and integration charges 48,677 14,700 26,827
Other (50,523) (61,216) (64,990)
- ----------------------------------------------------------------------------------------------------------------------
Deferred tax asset (liability) $ (98,868) $ (40,598) $ 20,412
======== ========= =========
======================================================================================================================
</TABLE>
15. COMMITMENTS, CONTINGENT LIABILITIES AND OTHER DISCLOSURES
LEGAL PROCEEDINGS
In the ordinary course of business, KeyCorp and its subsidiaries are subject to
legal actions which involve claims for substantial monetary relief. Based on
information presently available to management and the Corporation's counsel,
management does not believe that any legal actions, individually or in the
aggregate, will have a material adverse effect on KeyCorp's consolidated
financial condition.
RESTRICTIONS ON CASH, 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 $1.1 billion in 1993 were maintained in fulfillment of
these requirements.
The principal source of income for the parent company is dividends from its
affiliate 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 $535.4 million were free of such restrictions
and available for the payment of dividends to the parent company. Loans and
advances from banking affiliates to the parent company are also limited by law
and are required to be collateralized.
67
<PAGE> 51
KEYCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. FINANCIAL STATEMENTS
FAIR VALUE DISCLOSURES
The following disclosures are made in accordance with the provisions of SFAS
No. 107, "Disclosures About Fair Value of Financial Instruments," which
requires the disclosure of fair value information about both on- and
off-balance sheet financial instruments where it is practicable to estimate
that value. Fair value is defined in SFAS No. 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.
In accordance with the provisions of SFAS No. 107, the estimated fair values of
deposits, credit card loans and residential real estate mortgage loans do not
take into account the fair values of long-term relationships, which are
integral parts of the related financial instruments. The disclosed estimated
fair values of such instruments would increase significantly if the fair values
of the long-term relationships were considered.
In cases where quoted market prices were not available, fair values were
estimated using present value or other valuation methods, as described below.
The use of different assumptions (e.g., discount rates and cash flow estimates)
and estimation methods could have a significant effect on fair value amounts.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts the Corporation could realize in a current market exchange.
Because SFAS No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements, any aggregation of
the fair value amounts presented would not represent the underlying value of
the Corporation.
<TABLE>
<CAPTION>
December 31, 1993 1992
------------------------- ---------------------------
CARRYING ESTIMATED Carrying Estimated
IN THOUSANDS AMOUNT FAIR VALUE Amount Fair Value
==========================================================================================================================
<S> <C> <C> <C> <C>
Assets
Cash and due from banks $ 2,777,438 $ 2,777,438 $ 3,079,737 $ 3,079,737
Short-term investments 107,219 107,219 985,502 985,502
Mortgage loans held for sale 1,325,338 1,325,338 938,541 938,541
Securities available for sale 1,726,828 1,794,845 2,458,641 2,518,320
Investment securities 11,122,093 11,340,206 8,976,300 9,193,081
Loans, net of allowance 39,268,532 40,023,240 35,239,176 35,813,114
Liabilities
Deposits $46,499,148 $46,717,907 $43,433,065 $43,616,733
Federal funds purchased and securities sold
under agreements to repurchase 4,120,258 4,120,258 4,207,520 4,207,520
Other short-term borrowings 1,776,192 1,776,192 874,887 874,887
Long-term debt 1,763,870 1,908,159 1,790,078 1,830,945
==========================================================================================================================
</TABLE>
The following methods and assumptions were used in estimating the fair values
of financial instruments presented in the preceding table and in the following
paragraphs. For financial instruments with a remaining average life to maturity
of less than six months, carrying amounts were used as an approximation of fair
value. The carrying amounts reported for cash and due from banks, and
short-term investments are their fair values. The carrying value of mortgage
loans held for sale approximates fair value. Securities available for sale and
investment securities were valued based on quoted market prices. Where quoted
market prices were unavailable, fair values were based on quoted market prices
of similar instruments. A discounted cash flow model was used to estimate the
fair values for certain loans. Certain residential real estate loans and
student loans held for sale were valued based on quoted market prices of
similar loans offered or sold in recent securitization transactions. Lease
financing receivables, although excluded from the scope of SFAS No. 107, were
included in the estimated fair value for loans at their carrying amount. In
circumstances in which the fair value of loans was not estimated, the carrying
amount was used as a reasonable approximation of fair value. The fair values of
certificates of deposit and of long-term debt were estimated based on
discounted cash flows. Carrying amounts reported for other deposits and
short-term borrowings were used as a reasonable approximation of their fair
values. Interest rate swaps were valued based on discounted cash flow models
and had a fair value of $57.2 million and $75.8 million at December 31, 1993
and 1992, respectively.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Corporation, mainly through its affiliate banks, is party to various
financial instruments with off-balance sheet risk. The banks use these financial
instruments in the normal course of business to meet the financing needs of
their customers and to manage effectively their exposure to interest rate risk.
The financial instruments used include commitments to extend credit, standby
letters of credit, interest rate
68
<PAGE> 52
KEYCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
swap agreements, forward contracts, futures and options on financial futures,
and interest rate cap and floor agreements.
These instruments involve, to varying degrees, credit and interest rate risks
in excess of amounts recognized in the Corporation's consolidated balance
sheet. Credit risk is the possibility that a counterparty to a financial
instrument will be unable to perform its contractual obligations. Market risk
is the possibility that, due to changes in economic conditions, the
Corporation's net interest income will be adversely affected.
The Corporation mitigates its exposure to credit risk through internal controls
over the extension of credit. These controls include the process of credit
approval and review, the establishment of credit limits, and, when deemed
necessary, securing collateral. The Corporation manages its exposure to market
risk, in part, by using off-balance sheet instruments to offset existing
interest rate risk of its assets and liabilities, and by setting variable rates
of interest on contingent extensions of credit.
The following is a summary of the contractual or notional amount of each
significant class of off-balance sheet financial instruments outstanding. The
Corporation's maximum possible accounting loss from commitments to extend
credit and from standby letters of credit equals the contractual amount of
these instruments. The notional amount represents the total dollar volume of
transactions and is significantly greater than the amount at risk.
<TABLE>
<CAPTION>
December 31,
IN THOUSANDS 1993 1992
========================================================================================================================
<S> <C> <C>
FINANCIAL INSTRUMENTS WHOSE CONTRACTUAL AMOUNTS REPRESENT
CREDIT AND/OR MARKET RISK
Loan commitments:
Credit card lines $ 4,561,794 $ 4,067,628
Home equity 2,690,127 1,940,505
Commercial real estate and construction 1,184,443 866,816
Other 8,382,207 7,655,666
- ------------------------------------------------------------------------------------------------------------------------
Total loan commitments 16,818,571 14,530,615
Other commitments:
Standby letters of credit 1,095,521 978,790
Commercial letters of credit 347,705 58,729
Loans sold with recourse 156,070 203,381
- ------------------------------------------------------------------------------------------------------------------------
Total loan and other commitments $18,417,867 $15,771,515
=========== ===========
========================================================================================================================
FINANCIAL INSTRUMENTS WHOSE NOTIONAL OR CONTRACTUAL AMOUNTS
EXCEED THE AMOUNT OF CREDIT AND/OR MARKET RISK
When issued securities:
Commitments to purchase $ 20,200 $ 1,200
Other 4,152 115,697
Mortgage loan sale commitments 1,124,374 786,473
Mortgage loan options 68,000 63,000
Futures and options on financial futures 688,541 428,742
Interest rate swap agreements 9,573,171 5,649,563
Interest rate cap and floor agreements 102,026 207,630
========================================================================================================================
</TABLE>
KeyCorp's commitments to extend credit are agreements with customers to provide
financing at predetermined terms as long as the customer continues to meet
specified criteria. Loan commitments serve to meet the financing needs of the
banks' customers, have fixed expiration dates or other termination clauses, and
may require the payment of fees. 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.
KeyCorp evaluates each customer's creditworthiness on a case-by-case basis.
Standby 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.
69
<PAGE> 53
KEYCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. FINANCIAL INSTRUMENTS (CONTINUED)
KeyCorp's mortgage banking affiliates originate and service residential
mortgage loans to be sold in the secondary market. In years prior to 1992,
residential mortgages were sold with provisions for recourse by companies
acquired by KeyCorp. At December 31, 1993, the amount of such loans sold with
recourse was $156.1 million. KeyCorp has not and does not sell residential
mortgages with provisions for recourse.
KeyCorp's mortgage banking affiliates enter into forward sale agreements and
option contracts to hedge against adverse movements in interest rates on
mortgage loans held for sale. Forward sale agreements commit the affiliates to
deliver mortgage loans in future periods; option contracts allow the affiliates
to sell or purchase mortgage loans at a specified price, in future periods.
The banks enter into interest rate swap agreements primarily to manage interest
rate risk and to accommodate the business needs of customers. Under a typical
swap agreement, one party pays a fixed rate of interest based on a notional
amount to a second party, which pays to the first party a variable rate of
interest based on the same notional amount. The swaps have an average maturity
of 1.8 years, with selected swaps having fixed maturity dates through 2003. The
following is a summary of the notional amounts of outstanding interest rate
swap agreements:
<TABLE>
<CAPTION>
December 31, 1993
Receive Pay Forward-
IN MILLIONS Fixed Fixed Basis Starting Total
======================================================================================================================
<S> <C> <C> <C> <C> <C>
"Portfolio" $7,559 $150 $150 $500 $8,359
Customer 623 561 -- 30 1,214
- ----------------------------------------------------------------------------------------------------------------------
Total interest rate swaps $8,182 $711 $150 $530 $9,573
====== ==== ==== ==== ======
======================================================================================================================
</TABLE>
The banks enter into interest rate cap and floor agreements in the management
of their interest rate risk and to accommodate the business needs of customers.
These financial instruments transfer interest rate risk at predetermined
levels. The banks receive a fee as compensation for writing interest rate caps
and floors. The interest rate risk from writing interest rate caps and floors
is minimized by the banks through offsetting transactions.
Financial futures contracts and options on financial futures provide for the
delayed delivery or purchase of securities, interest rate instruments or foreign
currency. The banks enter into forward contracts and options to hedge their
interest rate risk and in connection with customer transactions, as well as to
minimize the interest rate risk exposure of mortgage banking activities.
70
<PAGE> 54
KEYCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
17. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
<CAPTION>
CONDENSED BALANCE SHEETS
December 31,
IN THOUSANDS 1993 1992
========================================================================================================================
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,004 $ 827
Interest-bearing deposits with bank affiliates 481,000 344,000
Securities purchased from bank affiliates under resale agreements 5,466 603
Investment securities 46,936 61,410
Loans and advances to subsidiaries:
Banks and bank holding companies 218,507 172,229
Nonbank subsidiaries 227,403 271,980
- ------------------------------------------------------------------------------------------------------------------------
445,910 444,209
Investment in subsidiaries:
Banks and bank holding companies 4,515,267 4,259,452
Nonbank subsidiaries 192,953 194,309
- ------------------------------------------------------------------------------------------------------------------------
4,708,220 4,453,761
Other assets 226,770 168,061
- ------------------------------------------------------------------------------------------------------------------------
Total assets $5,915,306 $5,472,871
========== ==========
LIABILITIES
Short-term borrowings $ 27,600 $ 120,000
Long-term debt 1,142,785 1,282,479
Accrued interest and other liabilities 351,354 143,104
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,521,739 1,545,583
Shareholders' equity 4,393,567 3,927,288
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $5,915,306 $5,472,871
========== ==========
========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
Year ended December 31,
IN THOUSANDS 1993 1992 1991
========================================================================================================================
<S> <C> <C> <C>
INCOME
Dividends from subsidiaries:
Banks and bank holding companies $664,981 $218,764 $408,707
Nonbank subsidiaries 3,843 5,292 12,573
Management fees and interest income from subsidiaries 113,684 95,169 78,051
Other income 34,549 12,323 3,129
- ------------------------------------------------------------------------------------------------------------------------
817,057 331,548 502,460
EXPENSES
Interest on borrowed funds 97,584 84,613 74,859
Merger and integration charges 118,718 77,380 18,139
Personnel and other expenses 198,136 82,743 99,571
- ------------------------------------------------------------------------------------------------------------------------
414,438 244,736 192,569
Income before income tax benefit and equity in
undistributed net income (loss) of subsidiaries 402,619 86,812 309,891
Income tax benefit 81,710 45,403 32,221
- ------------------------------------------------------------------------------------------------------------------------
484,329 132,215 342,112
Equity in undistributed net income (loss) of subsidiaries 225,597 459,883 (28,416)
- ------------------------------------------------------------------------------------------------------------------------
NET INCOME $709,926 $592,098 $313,696
======== ======== ========
========================================================================================================================
</TABLE>
71
<PAGE> 55
KEYCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
17. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY (CONTINUED)
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOW
Year ended December 31,
IN THOUSANDS 1993 1992 1991
========================================================================================================================
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $709,926 $592,098 $313,696
Adjustments to reconcile net income
to net cash provided by operating activities:
Deferred income taxes (15,315) (63) (3,378)
Gain on sale of subsidiary (29,410) -- --
Net increase in other assets (38,037) (53,552) (6,492)
Net increase in other liabilities 72,688 12,570 12,685
Amortization of intangibles 8,754 7,704 7,559
Net increase in accrued merger and integration charges 78,261 18,930 12,114
Equity in undistributed net (income) loss of subsidiaries (225,597) (459,883) 28,416
Other operating activities, net 3,377 7,627 (179)
- ------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 564,647 125,431 364,421
Investing Activities
Proceeds from prepayments and maturities of investment securities 8,523 8,404 30,915
Purchases of investment securities (5,929) (15,834) (46,510)
Net (increase) decrease in security resale agreements (4,863) 237,974 (180,029)
Net (increase) decrease in interest-bearing deposits (137,000) (273,071) 3,251
Net decrease (increase) in loans and advances to subsidiaries 116,676 (259,774) (206,115)
Proceeds from sale of subsidiary 148,054 -- --
Purchase of subsidiary, net of cash acquired (137,431) -- --
Purchases of premises and equipment (10,895) (3,317) (1,367)
Increase in investments in subsidiaries (6,460) (24,893) (2,786)
Other investing activities, net -- (2,442) (88)
- ------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (29,325) (332,953) (402,729)
Financing Activities
Net increase (decrease) in short-term borrowings (92,400) 64,122 (224,528)
Net proceeds from issuance of long-term debt 305,100 451,655 222,630
Payments on long-term debt (430,465) (115,630) (94,310)
Purchase of treasury stock -- -- (8,340)
Net proceeds from issuance of preferred stock -- -- 154,656
Redemption of preferred stock (85,770) -- --
Net proceeds from issuance of common stock -- -- 122,885
Net adjustment related to pooling of interests -- (515) --
Proceeds from issuance of common stock pursuant to employee
stock purchase, stock option and dividend reinvestment plans 28,238 39,442 41,084
Cash dividends (262,528) (233,480) (182,906)
Other financing activities, net 2,680 -- --
- ------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (535,145) 205,594 31,171
- ------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 177 (1,928) (7,137)
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR 827 2,755 9,892
- ------------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF YEAR $ 1,004 $ 827 $ 2,755
======== ======== ========
========================================================================================================================
<FN>
For the years ended December 31, 1993, 1992 and 1991, the parent company paid interest on borrowed funds of $98.1 million, $78.2
million and $70.6 million, respectively.
</TABLE>
72
<PAGE> 1
BUSINESS
OVERVIEW
- --------
On March 1, 1994, KeyCorp ("old KeyCorp"), a financial services
holding company headquartered in Albany, New York, with approximately $33
billion in assets at year end 1993, merged with and into Society Corporation
("Society"), a financial services holding company headquartered in Cleveland,
Ohio, with approximately $27 billion in assets at year end 1993, pursuant to an
Agreement and Plan of Merger, and a related Supplemental Agreement to Agreement
and Plan of Merger, each dated as of October 1, 1993, and each as amended, with
Society as the surviving corporation under the name KeyCorp (also referred to
herein as the "Corporation").
The merger of old KeyCorp with and into Society created a financial
services holding company which traces its roots back to 1825, when the first
predecessor of a subsidiary of old KeyCorp was organized. The first
predecessor of a subsidiary of Society was organized in 1849, and the Ohio
corporation that now holds the name KeyCorp was first organized in 1958. The
merger of old KeyCorp and Society created the "new" KeyCorp, a financial
services company providing banking and other financial services across the
country's northern tier and in Florida through a network of subsidiaries
operating 1267 full-service banking offices in 13 states, making it the
nation's 5th largest branch network (based on management's calculation derived
from data provided as of December 31, 1993, by the SNL Quarterly Bank Digest).
At December 31, 1993, KeyCorp was the 11th largest bank holding company in the
United States based on its consolidated asset size of almost $60 billion
(based on management's calculation derived from data provided as of December
31, 1993 by the SNL Quarterly Bank Digest). In addition to the services
provided through its banking offices, KeyCorp provides mortgage banking,
investment management and trust, and other financial services through
subsidiaries which serve its banking markets and an additional nine states in
which KeyCorp does not have bank branches. At year end 1993, through it
subsidiaries, KeyCorp maintained a $27 billion mortgage servicing portfolio,
managed approximately $34 billion in assets (excluding corporate trust assets)
in its investment management and trust operations, and operated the nation's
13th largest mutual fund business (based on management's calculation derived
from data provided as of December 31, 1993, by Strategic Insight Inc.). See
Exhibit 99b hereto for a more complete description of the Corporation, in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the "Consolidated Financial Statements" and "Notes to
Consolidated Financial Statements" contained therein.
-1-
<PAGE> 2
SUBSIDIARIES
- ------------
KeyCorp provides banking and other financial services across the
country's northern tier and in Florida through a network of subsidiaries
including the following:
- - Society National Bank, a federally chartered bank headquartered in
Cleveland, Ohio, the largest bank in Ohio and one of the nation's
major regional banks with $21.8 billion in total assets and 291
full-service banking offices at December 31, 1993, primarily serves
Ohio;
- - Key Bank of New York, a state chartered bank headquartered in Albany,
New York, with $13.6 billion in total assets and 334 full-service
banking offices at December 31, 1993, primarily serves New York;
- - Key Bank of Washington, a state chartered bank headquartered in
Tacoma, Washington, with $6.8 billion in total assets and 192
full-service banking offices at December 31, 1993, primarily serves
Washington;
_ Society National Bank, Indiana, a federally chartered bank
headquartered in South Bend, Indiana, with $3.0 billion in total
assets and 83 full-service banking offices at December 31, 1993,
primarily serves Indiana;
_ Key Bank of Maine, a state chartered bank headquartered in Portland,
Maine, with $2.6 billion in total assets and 94 full-service banking
offices at December 31, 1993, primarily serves Maine;
_ Key Bank of Oregon, a state chartered bank headquartered in Portland,
Oregon, with $2.3 billion in total assets and 79 full-service banking
offices at December 31, 1993, primarily serves Oregon;
_ Society First Federal Savings Bank, a federally chartered savings bank
headquartered in Fort Myers, Florida, with $1.4 billion in total
assets and 24 full-service banking offices at December 31, 1993,
primarily serves Florida;
_ Key Bank of Wyoming, a state chartered bank headquartered in Cheyenne,
Wyoming, with $1.3 billion in total assets and 27 full-service banking
offices at December 31, 1993, primarily serves Wyoming;
_ Key Bank of Idaho, a state chartered bank headquartered in Boise,
Idaho, with $1.2 billion in total assets and 45 full-service banking
offices at December 31, 1993, primarily serves Idaho;
_ Key Bank of Utah, a state chartered bank headquartered in Salt Lake
City, Utah, with $1.2 billion in total assets and 37 full-service
banking offices at December 31, 1993, primarily serves Utah;
-2-
<PAGE> 3
_ Society Bank, Michigan, a state chartered bank headquartered in Ann
Arbor, Michigan, with $1.1 billion in total assets and 36 full-service
banking offices at December 31, 1993, primarily serves Michigan;
_ Key Bank of Alaska, a state chartered bank headquartered in Anchorage,
Alaska, with $861 million in total assets and 20 full-service banking
offices at December 31, 1993, primarily serves Alaska;
_ Key Bank of Colorado, a state chartered bank headquartered in Fort
Collins, Colorado, with $202 million in total assets and 4 full-service
banking offices at December 31, 1993, primarily serves Colorado;
_ Key Bank USA N.A., a federally-chartered bank headquartered in Albany,
New York, with $626 million in total assets at December 31, 1993,
provides banking services by mail to customers nationwide, primarily
gathering deposits from areas not served by any other Key Bank;
_ Key Savings Bank, a state-chartered savings bank headquartered in
Vancouver, Washington, with $1.6 billion in total assets at December
31, 1993, primarily operates a mortgage banking business and shares
banking offices with Key Bank of Washington. It has no full-service
banking offices that are not so shared.
In addition to the customary banking services of accepting funds for
deposit and making loans, the Corporation's subsidiary banks provide a wide
range of specialized services tailored to specific markets, including mortgage
banking, investment management and investment advisory services, personal and
corporate trust services, personal financial services including the sale of
money market and other mutual funds, cash management services, investment
banking services, and international banking services.
The Corporation's nonbanking subsidiaries provide personal and
corporate trust services, investment management and investment advisory
services, reinsurance of credit life and accident and health insurance on
loans made by
-3-
<PAGE> 4
subsidiary banks, venture capital and small business investment financing
services, equipment lease financing, community development financing, stock
transfer agent services and other financial services.
COMPETITION
- -----------
The market for banking and other financial services is highly
competitive. The Corporation and its subsidiaries compete with other providers
of financial services such as other bank holding companies, commercial banks,
savings banks, savings and loan associations, credit unions, money market and
other mutual funds, insurance companies, and a growing list of other local,
regional and national entities which offer financial services. These other
entities include a number of commercial and industrial companies which are not
traditionally thought of as providers of financial services, many of which
operate in a less extensively regulated, and often less costly, environment by
virtue of their nonbanking status.
In recent years, mergers between financial institutions in a number of
the Corporation's principal market areas have added competitive pressure. In
addition, competition is expected to intensify in many of the Corporation's
banking markets as a consequence of state laws now in effect in a substantial
number of states, permitting some form of either regional or
nationwide interstate banking. Also, Congress is currently considering
legislation that would generally authorize nationwide interstate banking for
both national and state chartered banks, subject to certain limitations,
including the ability of states to opt out of certain aspects of coverage. The
management of KeyCorp is unable to predict whether any such legislation will
ultimately be enacted, and, if it is enacted, what the final provisions will
be.
SUPERVISION AND REGULATION
- --------------------------
GENERAL
-------
As a bank holding company, the Corporation is subject to the
regulation and supervision of the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board") under the Bank Holding Company Act of
1956, as amended (the "BHCA"). Under the BHCA, bank holding companies may not,
in general, directly or indirectly acquire the ownership or control of more
than 5% of the voting shares or
-4-
<PAGE> 5
substantially all of the assets of any company, including a bank, without the
prior approval of the Federal Reserve Board. In addition, bank holding
companies are generally prohibited under the BHCA from engaging in nonbanking
(i.e., commercial or industrial) activities, subject to certain exceptions. As
a result of the 1993 acquisition of the institution that is now known as
Society First Federal Saving Bank ("Society First Federal), the Corporation is
also subject to the regulation and supervision of the Office of Thrift
Supervision (the "OTS") as a savings and loan holding company registered under
the Home Owners' Loan Act of 1933, as amended (the "HOLA").
The banking and savings association subsidiaries (collectively, the
"banking subsidiaries") of the Corporation are subject to extensive
supervision, examination, and regulation by applicable Federal and state
banking agencies. Society National Bank (Ohio), Society National Bank,
Indiana, and Key Bank USA N.A. are national banking associations with full
banking powers, subject to regulation, supervision and examination by the Office
of the Comptroller of the Currency (the "OCC"). Two other national banking
subsidiaries of the Corporation operate under charters that limit their banking
powers to trust-related activities. These entities are also subject to the
regulation, supervision and examination of the OCC, although they are not
regulated as banks for purposes of the BHCA. All of the other banking
subsidiaries of the Corporation, other than Society First Federal, are
state-chartered banks that are subject to supervision, examination, and
regulation by the applicable state banking authority in the state in which each
such institution is chartered. In addition, the company's state-chartered
banks are not members of the Federal Reserve System (and are therefore
so-called "nonmember banks"), and, accordingly, are subject to the regulation,
supervision and examination of the Federal Deposit Insurance Corporation (the
"FDIC"). Also, because each of the Corporation's banking subsidiaries is
insured by the FDIC, the FDIC also has regulatory and supervisory authority
over the banking subsidiaries in that capacity. The OTS is charged with
regulation of Federal savings associations such as Society First Federal, the
Corporation's only such institution. Depository institutions such as the
banking subsidiaries are affected significantly by the actions of the Federal
Reserve Board as it attempts to control the money supply and credit
availability in order to influence the economy. The regulatory framework
applicable to bank holding companies and their subsidiaries generally is not
intended for the protection of investors and is directed toward protecting the
interests of depositors, the FDIC deposit insurance funds, and the U.S. banking
system as a whole.
-5-
<PAGE> 6
A number of the Corporation's banking subsidiaries are
engaged (through subsidiaries) in activities that are subject to supervision
and regulation by other Federal and state authorities. For example, the
Corporation's discount brokerage and investment advisory subsidiaries are
subject to supervision and regulation by the Securities and Exchange
Commission, the National Association of Securities Dealers, Inc., and state
securities regulators.
The Corporation also has nonbanking subsidiaries that are subject to
supervision, regulation and examination by the Federal Reserve Board, as well
as other applicable regulatory agencies. For example, the Corporation's
insurance subsidiaries are subject to regulation by the insurance regulatory
authorities of the various states, and the Corporation's state chartered trust
company subsidiaries (which are nonbanking companies for purposes of the BHCA),
are subject to regulation by state banking authorities. Other nonbanking
subsidiaries are subject to other laws and regulations of both the Federal
government and the various states in which they are authorized to do business.
The following references to certain statutes and regulations are brief
summaries thereof. The references are not intended to be complete and are
qualified in their entirety by reference to the statutes and regulations
themselves. In addition there are numerous other statutes and regulations not
summarized below that apply to and regulate the operation of the Corporation
and its banking and nonbanking subsidiaries. A change in applicable law or
regulation may have a material effect on the business of the Corporation.
DIVIDEND RESTRICTIONS
---------------------
The Corporation is a legal entity separate and distinct from its
banking and nonbanking subsidiaries. The principal source of cash flow of the
Corporation, including cash flow to pay dividends on the Corporation's common
and preferred shares and debt service on the Corporation's debt, is dividends
from its banking subsidiaries. Various Federal and state statutory and
regulatory provisions limit the amount of dividends that may be paid to the
Corporation by its banking subsidiaries without regulatory approval.
The approval of the OCC is required for the payment of any dividend by
a national bank if the total of all dividends declared by the board of
directors of such bank in any calendar year would exceed the total of (i) the
bank's net profits (as defined and interpreted by regulation) for the current
year plus (ii) the retained net profits (as defined and interpreted by
regulation) for the preceding two years, less any required transfers to surplus
or a fund for the retirement of any preferred stock. In addition, a national
bank also can pay dividends only to the extent that retained net profits
(including the portion transferred to surplus) exceed bad debts (as defined and
interpreted by regulation). Three of the Corporation's banking subsidiaries,
Society National Bank (Ohio), Society National Bank, Indiana, and Key Bank USA
N.A., and
-6-
<PAGE> 7
its trust company subsidiaries which are national banks, are subject to
these restrictions.
The Corporation's state nonmember banks are also subject to various
restrictions on the payment of dividends under state laws. A number of the
Corporation's banks, representing approximately 50% of its banking assets
(other than assets under management for customers), are state nonmember banks,
which are restricted as to the payment of dividends by the laws and regulations
of their respective state chartering authority.
In addition, OTS regulations impose limitations upon all capital
distributions by savings associations. These limitations are applicable to
Society First Federal.
In addition, if, in the opinion of the applicable Federal banking
agency, a depository institution under its jurisdiction is engaged in or is
about to engage in an unsafe or unsound practice, which, depending on the
financial condition of the institution, could include the payment of dividends,
the agency may require, after notice and hearing, that such institution cease
and desist from such practice. Also, the Federal Reserve Board, the OCC, the
FDIC and the OTS have issued policy statements which provide that insured
depository institutions and their holding companies should generally pay
dividends only out of current operating earnings.
Under all of the laws, regulations, and other restrictions applicable
to the Corporation's banking subsidiaries, management estimates that, as of
December 31, 1993, the Corporation's banking subsidiaries could have declared
dividends of approximately $535 million in the aggregate, without obtaining
prior regulatory approval.
HOLDING CORPORATION STRUCTURE
-----------------------------
TRANSACTIONS INVOLVING BANKING SUBSIDIARIES. Transactions involving
the Corporation's banking subsidiaries are subject to Federal Reserve Act
restrictions which limit the transfer of funds from such subsidiaries to the
Corporation and (with certain exceptions) to the Corporation's nonbanking
subsidiaries (together, "affiliates") in so called "covered transactions," such
as loans and other extensions of credit, investments, or asset purchases.
Unless an exemption applies, each such transaction by a banking subsidiary with
one of its non-banking affiliates is limited in amount to 10% of that banking
subsidiary's capital and surplus and, with respect to all such transfers to
affiliates, in the aggregate, to 20% of that banking
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subsidiary's capital and surplus. Furthermore, loans and extensions of credit
are required to be secured in specified amounts. "Covered transactions" also
include the acceptance of securities issued by the banking subsidiary as
collateral for a loan and the issuance of a guarantee, acceptance, or letter of
credit for the benefit of the Corporation or any of its affiliates. In
addition, a bank holding company and its banking subsidiaries are prohibited
from engaging in certain tie-in arrangements in connection with any extension
of credit, lease or sale of property, or furnishing of services.
SOURCE OF STRENGTH/COMMONLY CONTROLLED BANKING SUBSIDIARIES. Under
Federal Reserve Board policy, a bank holding company is expected to serve as a
source of financial and managerial strength to each of its subsidiary banks
and, under appropriate circumstances, to commit resources to support each such
subsidiary bank. This support may be required by the Federal Reserve Board at
times when the Corporation may not have the resources to provide it or, for
other reasons, would not otherwise be inclined to provide it. Certain loans by
the Corporation to any of its subsidiary banks are subordinate in right of
payment to deposits in, and certain other indebtedness of, a subsidiary bank.
In addition, the Crime Control Act of 1990 provides that in the event of a bank
holding company's bankruptcy, any commitment by the bank holding company to a
Federal bank regulatory agency to maintain the capital of a subsidiary bank
will be assumed by the bankruptcy trustee and entitled to a priority of
payment.
Under Federal law, a depository institution, the deposits of which are
insured by the FDIC, can be held liable for any loss incurred by, or reasonably
expected to be incurred by, the FDIC in connection with (i) the default of a
commonly controlled FDIC insured depository institution or (ii) any assistance
provided by the FDIC to a commonly controlled FDIC insured depository
institution in danger of default (the so called "cross guaranty" provision).
"Default" is defined under the FDIC's regulations generally as the appointment
of a conservator or receiver and "in danger of default" is defined generally as
the existence of certain conditions indicating that a "default" is likely to
occur in the absence of regulatory assistance.
CAPITAL REQUIREMENTS
--------------------
The Federal Reserve Board, the FDIC, and the OCC have issued
substantially similar minimum risk-based and leverage capital guidelines for
United States banking organizations. The minimum ratio of total capital to
risk
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- -adjusted assets (including certain off balance sheet items, such as standby
letters of credit) required by the Federal Reserve Board for bank holding
companies is currently 8%. At least one half of the total capital must be
comprised of common equity, retained earnings, qualifying non-cumulative,
perpetual preferred stock, a limited amount of qualifying cumulative,
perpetual preferred stock, and minority interests in the equity accounts of
consolidated subsidiaries, less goodwill and certain other intangible assets
("Tier I capital"). The remainder may consist of hybrid capital instruments,
perpetual debt, mandatory convertible debt securities, a limited amount of
subordinated debt, other preferred stock, and a limited amount of loan and
lease loss reserves ("Tier II capital"). As of December 31, 1993, the
Corporation's Tier I and total capital to risk-adjusted assets ratios were
8.73% and 12.22%, respectively.
In addition, the Corporation is subject to minimum leverage ratio
(Tier I capital to total consolidated quarterly average assets) guidelines.
These guidelines provide for a minimum leverage ratio of 3% for bank holding
companies that meet certain specified criteria, such as having the highest
supervisory rating. All other bank holding companies are required to maintain
leverage ratios which are at least 100 to 200 basis points higher (I.E., a
leverage ratio of at least 4% to 5%). Neither the Corporation, nor any of its
banking subsidiaries has been advised by its appropriate Federal regulatory
agency of any specific leverage ratio applicable to it. As of December 31,
1993, the Corporation's Tier I leverage ratio was 6.72%. Federal Reserve Board
Policy provides that banking organizations generally, and, in particular, those
that are experiencing internal growth or actively making acquisitions will be
expected to maintain strong capital positions substantially above the minimum
supervisory levels, without significant reliance on intangible assets.
Furthermore, the guidelines indicate that the Federal Reserve Board will
continue to consider a "tangible Tier I leverage ratio" in evaluating proposals
for expansion or new activities. The tangible Tier I leverage ratio is the
ratio of a banking organization's Tier I capital less all intangible assets, to
total consolidated quarterly average assets less all intangible assets. For
purposes of this calculation, purchase mortgage servicing rights are not
considered to be intangibles. As of December 31, 1993, the Corporation's
tangible Tier I leverage ratio was 6.66%.
Each of the Corporation's banking subsidiaries is also subject to
capital requirements adopted by applicable Federal regulatory agencies which
are substantially similar to those imposed by the Federal Reserve Board on bank
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holding companies. These requirements also include minimum Tier I, total
capital and leverage ratios. As of December 31, 1993, each of the
Corporation's banking subsidiaries had capital in excess of all minimum
regulatory requirements.
All of the Federal banking agencies have proposed regulations that
would add an additional capital requirement based upon the amount of an
institution's exposure to interest rate risk. The OTS recently adopted its
final rule adding an interest rate component to its risk based capital rule.
Under the final OTS rule, a savings association with a greater than "normal"
level of interest rate risk exposure will be subject to a deduction from total
capital for purposes of calculating its risk based capital ratio. The new OTS
rule was effective January 1, 1994, except for limited provisions which are
effective July 1, 1994. The other Federal banking agencies have yet to adopt
their final rules on the interest rate risk component of risk based capital.
The OCC, the Federal Reserve Board, and the FDIC have proposed
amendments to their respective regulatory capital rules to include in Tier I
capital for purposes of calculating the risk based and leverage ratios, the
net unrealized changes in the value of securities available for sale. The
proposed amendments are in response to the provisions outlined in Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which takes effect for fiscal
years beginning after December 15, 1993. This new accounting standard
requires, among other things, that net unrealized holding gains and losses on
securities available for sale be recorded as a new component of shareholders'
equity with no impact on net income. If adopted as proposed, the rule could
cause the amount of an institution's Tier I capital to fluctuate, thereby
causing the institution's Tier I, total capital and leverage ratios to be
subject to greater volatility. Effective January 1, 1994, the Corporation
adopted the provisions of SFAS No. 115. As a result of this accounting change,
approximately $4.5 billion of securities were classified as available for sale
at March 31, 1994, and shareholders' equity was reduced by $23 million,
representing the net unrealized after-tax loss on these securities.
SIGNIFICANT AMENDMENTS TO THE FEDERAL DEPOSIT INSURANCE ACT
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The Federal Deposit Insurance Corporation Improvement Act of 1991,
enacted December 19, 1991, amended several Federal banking statutes, including
the Federal Deposit Insurance Act (the "FDIA"), and among other things,
increased the FDIC's borrowing authority to resolve bank failures, mandated
least cost resolutions and prompt regulatory action with regard to
undercapitalized
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institutions, expanded consumer protection, and mandated increased supervision
of domestic depository institutions and the U.S. operations of foreign
depository institutions. The 1991 amendments to the FDIA required the Federal
banking agencies to promulgate regulations and specify standards in numerous
areas of bank operations, including interest rate exposure, asset growth,
internal controls, credit underwriting, executive officer and director
compensation, real estate construction financing, additional review of capital
standards, interbank liabilities, and other operational and managerial
standards as the agencies determine appropriate. Most of these regulations
have been promulgated in final form by the appropriate Federal bank regulatory
agencies, although several have only been proposed. In general, management
believes that these regulations have increased, and may continue to increase,
the cost of and the regulatory burden associated with the banking business.
PROMPT CORRECTIVE ACTION. Effective in December 1992, the OCC, the
Federal Reserve Board, the FDIC and the OTS adopted new regulations to
implement the so-called "prompt corrective action" provisions of the FDIA. The
regulations group FDIC insured depository institutions into five broad
categories based on their capital ratios. The five categories are "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized," as follows:
An institution is "well capitalized" if it has a total risk based
capital ratio (total capital to risk-adjusted assets) of 10% or greater, a Tier
I risk based capital ratio (Tier I capital to risk-adjusted assets) of 6% or
greater, and a Tier I leverage capital ratio (Tier I capital to average total
assets) of 5% or greater, and it is not subject to a regulatory order,
agreement, or directive to meet and maintain a specific capital level for any
capital measure;
An institution is "adequately capitalized" if it has a total risk
based capital ratio of 8% or greater, a Tier I risk based capital ratio of 4%
or greater and (generally) a Tier I leverage capital ratio of 4% or greater,
and the institution does not meet the definition of a "well capitalized"
institution;
An institution is "undercapitalized" if the relevant capital ratios
are less than those specified in the definition of an "adequately capitalized"
institution;
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An institution is "significantly undercapitalized" if it has a total
risk based capital ratio of less than 6%, a Tier I risk based capital ratio of
less than 3%, or a Tier I leverage capital ratio of less than 3%;
An institution is "critically undercapitalized" if it has a ratio of
tangible equity (as defined in the regulations) to total assets of 2% or less.
Each of the Corporation's subsidiary banks qualifies as
well capitalized as of December 31, 1993.
An institution may be downgraded to, or be deemed to be in a capital
category that is lower than is indicated by its actual capital position if it
is determined to be in an unsafe or unsound condition or if it receives an
unsatisfactory examination rating with respect to certain matters.
The capital based prompt corrective action provisions of the FDIA and
their implementing regulations apply to FDIC-insured depository institutions
such as all of the Corporation's banking subsidiaries, but they are not
applicable to holding companies, such as the Corporation which control such
institutions. However, both the Federal Reserve Board and the OTS have
indicated that, in regulating holding companies, they will take appropriate
action at the holding company level based on their assessment of the
effectiveness of supervisory actions imposed upon subsidiary depository
institutions pursuant to such provisions and regulations. Although the capital
categories defined under the prompt corrective action regulations are not
directly applicable to the Corporation under existing laws and regulations,
based upon its ratios the Corporation would qualify, and its subsidiary banks
do qualify, as well capitalized as of December 31, 1993. However, an
institution's capital category, as determined by applying the prompt corrective
action provisions of the law, may not constitute an accurate representation of
the overall financial condition or prospects of the Corporation or its banking
subsidiaries, and should be considered in conjunction with other available
information regarding the Corporation's financial condition and results of
operations.
The FDIA generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any management
fee to its holding company if the institution would thereafter be
undercapitalized. Undercapitalized depository institutions are also subject to
restrictions on borrowing from the Federal Reserve System, increased monitoring
by the appropriate Federal banking agency and limitations on
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growth, and are required to submit a capital restoration plan to their primary
Federal regulatory agency. The Federal banking agencies may not accept a
capital plan without determining, among other things, that the plan is based on
realistic assumptions and is likely to succeed in restoring the institution's
capital. In addition, for a capital restoration plan to be acceptable, the
depository institution's parent holding company must guarantee that the
institution will comply with such capital restoration plan. The aggregate
liability of the parent holding company with respect to such a guarantee is
limited to the lesser of: (a) an amount equal to 5% of the depository
institution's total assets at the time that it became undercapitalized or (b)
the amount which is necessary (or would have been necessary) to bring the
institution into compliance with all capital standards applicable to it as of
the time it failed to comply with the plan. If a depository institution fails
to submit an acceptable plan, it is treated as if it were significantly
undercapitalized. Significantly undercapitalized depository institutions may
be subject to a number of additional requirements and restrictions, including
orders to sell sufficient voting stock to become adequately capitalized and
requirements to reduce total assets, and are prohibited from receiving deposits
from correspondent banks. "Critically undercapitalized" institutions are
subject to the appointment of a receiver or conservator.
FDIC INSURANCE. Under the risk related insurance assessment
system adopted in final form effective beginning with the January 1, 1994,
assessment period, a bank or savings association is required to pay an annual
assessment ranging from $.23 to $.31 per $100 of deposits based on the
institution's risk classification. The risk classification is based on an
annual assignment of the institution by the FDIC to one of three capital
groups and to one of three supervisory subgroups. The capital groups are
"well capitalized," "adequately capitalized," and "undercapitalized." The
three supervisory subgroups are Group "A" (for financially solid institutions
with only a few minor weaknesses), Group "B" (for those institutions with
weaknesses which, if uncorrected, could cause substantial deterioration of the
institution and increase the risk to the deposit insurance fund), and Group "C"
(for those institutions with a substantial probability of loss to the fund
absent effective corrective action). For the period commencing on January 1,
1994 through June 30, 1994, insurance assessments on deposits of all of the
Corporation's banking subsidiaries owned as of December 31, 1993, were paid at
the rate of $.23 per $100 of deposits.
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DEPOSITOR PREFERENCE STATUTE
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In August 1993, Federal legislation was enacted providing that insured
and uninsured deposits and certain claims for administrative expenses and
employee compensation against an insured depository institution would be
afforded a priority over other general unsecured claims against such an
institution, including Federal funds and letters of credit, in the "liquidation
or other resolution" of such an institution by any receiver. Under this new
legislation, if an insured depository institution fails, insured and uninsured
depositors along with the FDIC will be placed ahead of all unsecured,
nondeposit creditors in order of priority of payment. Due to its recent
enactment, it is too early to determine what impact this legislation will have
on the ability of financial institutions to attract junior creditors in the
future or otherwise.
IMPLICATIONS OF BEING A SAVINGS AND LOAN HOLDING CORPORATION
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By reason of its ownership of Society First Federal, the Corporation
is a savings and loan holding company within the meaning of HOLA. With
certain exceptions, a savings and loan holding company must obtain prior
written approval from the OTS (as well as the Federal Reserve Board, or other
Federal agencies whose approval may be required, depending upon the structure
of the acquisition transaction) before acquiring control of a savings
association or savings and loan holding company through the acquisition
of stock or through a merger or some other business combination. HOLA
prohibits the OTS from approving an acquisition by a savings and loan holding
company which would result in the holding company controlling savings
associations in more than one state unless (a) the holding company is
authorized to do so by the FDIC as an emergency acquisition, (b) the holding
company controls a savings association which operated an office in the
additional state or states on March 5, 1987, or (c) the statutes of the state
in which the savings association to be acquired is located specifically permit
a savings association chartered by such state to be acquired by an out-of-
state savings association or savings and loan holding company.
A Federal savings association, however, including one controlled by a
savings and loan holding company, is permitted, subject to certain restrictions,
to branch on a nationwide basis. Thus, a Federal savings association may
generally also acquire the assets and liabilities or the stock of other
Federal savings associations and operate them as branches, whether or not they
are located in a
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state that would otherwise have permitted the acquiring institution's holding
company to operate a savings association in that state.
CONTROL ACQUISITIONS
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The Change in Bank Control Act (the "CBCA") prohibits a "person" (as
defined in the CBCA, and the regulations thereunder) or group of persons from
acquiring "control" (as defined in the CBCA, and the regulations thereunder) of
a bank holding company unless the Federal Reserve Board has been given 60 days'
prior written notice of the proposed acquisition and within that time period
the Federal Reserve Board has not issued a notice disapproving the proposed
acquisition or extending for up to another 30 days the period during which such
a disapproval may be issued. An acquisition may be made prior to the
expiration of the disapproval period if the Federal Reserve Board issues
written notice of its intention not to disapprove the action. Under a
rebuttable presumption established by the Federal Reserve Board, the
acquisition of 10% or more of a class of voting stock of a bank holding company
with a class of securities registered under Section 12 of the Exchange Act,
such as the Corporation, would, under the circumstances set forth in the
presumption, constitute the acquisition of control.
In addition, any "company" is required to obtain the approval of the
Federal Reserve Board under the BHCA before acquiring 25% (5% in the case of an
acquiror that is a bank holding company) or more of the outstanding Common
Shares of the Corporation, or otherwise obtaining control over the Corporation.
PROPERTIES
The headquarters of the Corporation and of Society National Bank are
located in Society Center at 127 Public Square, Cleveland, Ohio 44114-1306.
The Corporation currently leases approximately 625,000 square feet of the
complex, encompassing the first twenty one floors and the 55th and 56th floors
of the 57 story Society Tower and all ten floors of the adjacent Society for
Savings Building. The Corporation owns a four story office building and the
Summit Center Building, a 16 story office building, both located in downtown
Toledo. In addition, the Corporation has an office center located in a one
story building containing approximately 500,000 square feet on a 55 acre site
in Brooklyn, Ohio which is owned in fee by a subsidiary. At December 31, 1993,
KeyCorp's banking subsidiaries operated 1,267 full-service banking offices of
which 762 were owned and 505 were leased. Certain leases
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expiring at various dates through the year 2017 qualify as capital leases and
contain purchase options for the premises leased thereunder. At December 31,
1993, banking subsidiaries of KeyCorp 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.
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