<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Period Ended September 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _____________ To ____________
Commission File Number 0-850
KeyCorp
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Ohio 34-6542451
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
127 Public Square, Cleveland, Ohio 44114-1306
(Address of principal executive offices) (Zip Code
Registrant's telephone number, including area code (216) 689-6300
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the lates practicable date.
<TABLE>
<S> <C>
Common Shares, $1 par value 241,446,964 Shares
(Title of class) (Outstanding at October 31, 1994)
</TABLE>
<PAGE> 2
KEYCORP
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C>
Item 1. Financial Statements Page No.
Consolidated Balance Sheets --
September 30, 1994, December 31, 1993, and September 30, 1993 3
Consolidated Statements of Income --
Three months and nine months ended September 30, 1994 and 1993 4
Consolidated Statements of Changes in Shareholders' Equity --
Nine months ended September 30, 1994 and 1993 5
Consolidated Statements of Cash Flow --
Nine months ended September 30, 1994 and 1993 6
Notes to Consolidated Financial Statements 7
Independent Accountants' Review Report 15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 36
Item 5. Other Information 36
Item 6. Exhibits and Reports on Form 8-K 36
Signature 37
</TABLE>
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<PAGE> 3
<TABLE>
PART I. FINANCIAL INFORMATION
KEYCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
<S> <C> <C> <C>
SEPTEMBER 30, December 31, September 30,
(dollars in thousands, except per share amounts) 1994 1993 1993
- -----------------------------------------------------------------------------------------------------------------------
(UNAUDITED) (Unaudited)
ASSETS
Cash and due from banks $3,006,712 $2,777,438 $2,656,067
Short-term investments 126,731 107,219 879,630
Mortgage loans held for sale 418,287 1,325,338 1,121,695
Securities available for sale (at fair value in 1994; fair value
in 1993 of $1,794,845 and $1,894,791, respectively) 2,960,348 1,726,828 1,805,776
Investment securities (fair value: $10,203,998, $11,340,201
and $10,354,040, respectively) 10,523,974 11,122,093 10,057,744
Loans 44,608,770 40,071,244 39,070,651
Less: Allowance for loan losses 820,158 802,712 799,394
- -----------------------------------------------------------------------------------------------------------------------
Net loans 43,788,612 39,268,532 38,271,257
Premises and equipment 947,308 912,870 903,735
Other real estate owned, net of allowance 107,507 150,362 229,374
Goodwill 387,861 385,359 378,617
Other intangible assets 188,582 163,989 172,009
Purchased mortgage servicing rights 197,483 188,592 187,163
Other assets 1,846,845 1,502,531 1,506,159
- -----------------------------------------------------------------------------------------------------------------------
Total assets $64,500,250 $59,631,151 $58,169,226
- -----------------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits in domestic offices:
Noninterest-bearing $8,531,285 $8,826,300 $8,060,640
Interest-bearing 35,945,729 35,658,315 35,706,259
Deposits in foreign office -- interest-bearing 3,339,469 2,014,533 572,972
- -----------------------------------------------------------------------------------------------------------------------
Total deposits 47,816,483 46,499,148 44,339,871
Federal funds purchased and securities sold
under agreements to repurchase 5,514,759 4,120,258 4,936,292
Other short-term borrowings 3,172,657 1,776,192 1,633,913
Other liabilities 1,116,664 1,078,116 1,040,624
Long-term debt 2,177,796 1,763,870 1,908,419
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 59,798,359 55,237,584 53,859,119
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value; authorized 25,000,000 shares,
none issued --- --- ---
Cumulative Preferred Stock:
Class A (Series B in 1993), $125 stated value; authorized 1,400,000
shares, issued 1,280,000 shares 160,000 160,000 160,000
Common Shares, $1 par value; authorized 900,000,000 shares;
issued 245,944,390, 242,827,755 and 241,153,278 shares 245,944 242,828 241,153
Capital surplus 1,467,803 1,433,861 1,410,635
Retained earnings 3,056,204 2,641,450 2,587,599
Loans to ESOP trustee (63,909) (63,909) (63,909)
Net unrealized gains (losses) on securities available for sale (92,956) --- ---
Treasury stock at cost (2,402,219, 1,280,604 and 1,572,340 shares) (71,195) (20,663) (25,371)
- -----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 4,701,891 4,393,567 4,310,107
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $64,500,250 $59,631,151 $58,169,226
- -----------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements (unaudited).
</TABLE>
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<PAGE> 4
KEYCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
------------------------------- ------------------------------
(dollars in thousands, except per share amounts) 1994 1993 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $932,763 $831,991 $2,638,611 $2,478,933
Mortgage loans held for sale 9,113 20,111 42,979 52,558
Taxable investment securities 131,729 132,337 360,765 418,639
Tax-exempt investment securities 21,850 26,174 67,865 81,866
Securities available for sale 53,744 33,969 184,354 111,327
Short-term investments 1,518 6,377 3,741 20,049
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income 1,150,717 1,050,959 3,298,315 3,163,372
INTEREST EXPENSE
Deposits 345,814 303,027 957,349 936,865
Federal funds purchased and securities
sold under agreements to repurchase 70,238 30,382 169,669 96,971
Other short-term borrowings 23,946 13,160 52,765 32,064
Long-term debt 31,120 32,023 90,501 96,818
- ---------------------------------------------------------------------------------------------------------------------------
Total interest expense 471,118 378,592 1,270,284 1,162,718
- ---------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 679,599 672,367 2,028,031 2,000,654
Provision for loan losses 27,214 49,879 99,033 165,306
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 652,385 622,488 1,928,998 1,835,348
NONINTEREST INCOME
Service charges on deposit accounts 67,846 64,941 198,570 189,669
Trust income 53,899 63,466 166,548 190,230
Mortgage banking income 19,300 35,781 66,746 94,491
Credit card fees 20,556 19,779 56,132 54,282
Insurance and brokerage income 14,906 17,955 46,324 49,651
Special asset management fees 3,150 4,317 12,109 28,292
Net securities gains 1,980 25,403 8,997 28,419
Gain on sale of subsidiary -- 29,410 -- 29,410
Other income 41,670 27,690 121,912 100,118
- ---------------------------------------------------------------------------------------------------------------------------
Total noninterest income 223,307 288,742 677,338 764,562
NONINTEREST EXPENSE
Personnel 264,871 283,984 807,818 815,176
Net occupancy 53,929 52,070 162,659 154,584
Equipment 39,340 40,943 118,798 120,773
FDIC insurance assessments 25,250 24,053 74,062 74,638
Professional fees 11,201 12,009 35,212 39,581
OREO expense, net 767 10,050 4,457 31,375
Other expense 134,665 167,689 408,560 459,544
- ---------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 530,023 590,798 1,611,566 1,695,671
- ---------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 345,669 320,432 994,770 904,239
Income taxes 116,341 119,630 335,040 316,675
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME 229,328 200,802 659,730 587,564
- ---------------------------------------------------------------------------------------------------------------------------
Net income applicable to Common Shares $225,328 $196,644 $647,730 $573,467
Net income per Common Share 0.92 0.82 2.66 2.40
Weighted average Common Shares outstanding 244,132,128 240,821,930 243,635,197 239,437,141
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
See notes to consolidated financial statements (unaudited).
</TABLE>
-4-
<PAGE> 5
KEYCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Net
Unrealized
Loans to Securities Common
Preferred Common Capital Retained ESOP Gains Shares in
(dollars in thousands, except per share amounts) Stock Shares Surplus Earnings Trustee (Losses) Treasury
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992 $243,970 $237,364 $1,336,556 $2,206,051 $(65,478) $(31,175)
Net income 587,564
Cash dividends:
Common Shares $(.84 per share) (98,205)
Fixed/Adjustable Rate Cumulative
Preferred Stock $(1.297 per share) (1,556)
Declared by pooled company prior to merger:
Common Stock (94,033)
Preferred Stock (13,059)
Issuance of Common Shares:
Acquisitions - 3,063,730 shares 3,064 60,758
Dividend reinvestment, stock option
and purchase plans - 1,085,026 shares 725 15,121 5,804
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 837
Loan payments from ESOP trustee 1,569
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1993 $160,000 $241,153 $1,410,635 $2,587,599 $(63,909) $(25,371)
====================================================================================================================================
BALANCE AT DECEMBER 31, 1993 $160,000 $242,828 $1,433,861 $2,641,450 $(63,909) $(20,663)
Adjustment of securities available for sale
to fair value at January 1, net of
deferred income taxes of $26,621 $46,153
Adjustments relating to poolings of interests (11) (375)
Net income 659,730
Cash dividends:
Common Shares $(.96 per share) (194,137)
Cumulative Preferred Stock (8,000)
Declared by pooled company prior to merger:
Common Stock (39,793)
Preferred Stock (4,000)
Issuance of Common Shares:
Acquisition - 2,900,389 shares 2,900 29,503
Conversion of subordinated debentures -
120,213 shares 2,309
Dividend reinvestment, stock option
and purchase plans - 1,025,233 shares 227 4,814 12,985
Repurchase of Common Shares - 2,040,235 shares (65,826)
Change in net unrealized gains (losses) on
securities available for sale, net of deferred
income taxes of $(80,481) (139,109)
Tax benefits attributable to ESOP dividends 954
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1994 $160,000 $245,944 $1,467,803 $3,056,204 $(63,909) $(92,956) $(71,195)
====================================================================================================================================
<FN>
See notes to consolidated financial statements (unaudited).
</TABLE>
-5-
<PAGE> 6
KEYCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
<TABLE>
Nine months ended September 30,
-------------------------------
(in thousands) 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $659,730 $587,564
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 99,033 165,306
Depreciation expense 84,199 81,999
Amortization of intangibles 40,271 43,835
Amortization of purchased mortgage servicing rights 31,196 36,201
Gain on sale of subsidiary --- (29,410)
Deferred income taxes 84,682 31,442
Net securities gains (8,997) (28,419)
Gains on sales of mortgage servicing rights 3,058 15,485
Losses (gains) from the sales of other real estate owned 2,364 (4,696)
Net decrease (increase) in mortgage loans held for sale 933,593 (183,154)
Other operating activities, net 44,166 39,321
- ----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,973,295 755,474
INVESTING ACTIVITIES
Net increase in loans (3,953,622) (975,678)
Purchases of investment securities (4,197,324) (3,070,891)
Proceeds from sales of investment securities 13,784 117,013
Proceeds from prepayments and maturities of investment securities 2,008,492 2,292,118
Purchases of securities available for sale (327,380) (228,234)
Proceeds from sales of securities available for sale 1,314,819 696,649
Proceeds from prepayments and maturities of securities available for sale 383,361 287,737
Net (increase) decrease in short-term investments (19,261) 237,935
Purchases of premises and equipment (134,275) (130,338)
Proceeds from sales of premises and equipment 19,885 21,501
Proceeds from sales of other real estate owned 48,081 124,706
Purchases of mortgage servicing rights (40,088) (17,273)
Proceeds from sale of subsidiary --- 148,054
Net cash provided by (used in) acquisitions 22,671 (43,758)
- ----------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (4,860,857) (540,459)
FINANCING ACTIVITIES
Net increase (decrease) in deposits 207,339 (1,901,925)
Net increase in short-term borrowings 2,789,593 1,368,940
Proceeds from issuance of long-term debt 539,922 555,698
Payments on long-term debt (127,242) (423,050)
Redemption of preferred stock --- (85,770)
Purchase of treasury shares (65,826) ---
Proceeds from issuance of common stock pursuant to employee
stock purchase, stock option and dividend reinvestment plans 18,026 19,897
Cash dividends (245,930) (194,189)
Other financing activities, net 954 21,714
- ----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,116,836 (638,685)
- ----------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 229,274 (423,670)
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 2,777,438 3,079,737
- ----------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF PERIOD $3,006,712 $2,656,067
======================================================================================================================
Additional disclosures relative to cash flow:
Interest paid $1,230,941 $1,148,135
Income taxes paid 205,162 198,731
Net payments received on portfolio swaps 92,931 128,123
Noncash items:
Transfers of loans to other real estate owned 44,426 57,182
Net transfer of securities from investment to available for sale portfolio 2,709,617 ---
======================================================================================================================
<FN>
See notes to consolidated financial statements (unaudited).
</TABLE>
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<PAGE> 7
KEYCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
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 periods prior to the merger
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 and Acquisitions.
The unaudited consolidated interim financial statements include the
accounts of KeyCorp and its subsidiaries (the "Corporation"). All
significant intercompany accounts and transactions have been eliminated in
consolidation. In the opinion of management, the unaudited consolidated
interim financial statements reflect all adjustments and disclosures which
are necessary for a fair presentation of the results for the interim
periods presented and should be read in conjunction with the consolidated
financial statements and related notes included in the Corporation's 1993
Annual Report to Shareholders filed on Form 8-K on April 20, 1994.
Certain amounts previously reported in the financial statements have been
reclassified to conform with the current presentation. The results of
operations for the interim periods are not necessarily indicative of the
results of operations to be expected for the full year.
2. MERGERS AND ACQUISITIONS
STATE HOME SAVINGS BANK, FSB
On September 16, 1994, Society National Bank ("SNB"), a wholly owned
subsidiary of KeyCorp, acquired State Home Savings Bank, FSB ("State Home
Savings"), a closely held Federal stock savings bank based in Bowling
Green, Ohio, for cash consideration of $44.2 million. The transaction was
accounted for as a purchase. State Home Savings had 14 branches in five
Northwest Ohio counties and total assets of $335 million at June 30, 1994.
FAR WEST FEDERAL SAVINGS BANK BRANCHES
On April 15, 1994, Key Bank of Oregon ("Key Bank"), an indirect wholly
owned subsidiary of KeyCorp, assumed approximately $418 million in deposits
of 21 branches from the Resolution Trust Corporation, as receiver for the
failed Far West Federal Savings Bank of Portland, Oregon. Key Bank paid a
premium of $27.5 million in the transaction.
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 was acquired
and its subsidiary banks merged into Key Bank of Colorado, a wholly owned
subsidiary of KeyCorp. Under the terms of the merger agreement, 2,900,389
KeyCorp Common Shares were exchanged for all of the outstanding shares of
CBC common stock (based on an exchange ratio of .899 common shares for each
share of CBC). CBC had total assets of $390 million at December 31, 1993.
The merger 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 CBC because the
transaction was not material to KeyCorp.
KEYCORP-SOCIETY MERGER
On March 1, 1994, 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, 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 interests and, accordingly, financial results for prior
periods presented have been restated to include the combined financial
results of both companies.
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<PAGE> 8
2. MERGERS AND ACQUISITIONS (CONTINUED)
PENDING ACQUISITIONS
OMNIBANCORP
On September 1, 1994, KeyCorp reached a definitive agreement to acquire
OMNIBANCORP, based in Denver , Colorado, in a tax-free exchange of stock.
Under the terms of the merger agreement, KeyCorp Common Shares will be
exchanged for all of the outstanding shares of OMNIBANCORP common stock
(based on an exchange ratio of .2452 common shares for each share of
OMNIBANCORP). Based on KeyCorp's closing stock price on September 30,
1994, the value of the KeyCorp Common Shares to be issued would be
approximately $123 million. OMNIBANCORP is a privately-held bank holding
company for six Colorado-chartered banks ("Omnibanks"), and had 18 branches
and total assets of $506 million at September 30, 1994. The transaction,
which is subject to regulatory and OMNIBANCORP shareholder approvals, is
expected to close in the first quarter of 1995, and will be accounted for
as a purchase. Subsequent to the consummation of the acquisition, the
Omnibanks will be merged with and into Key Bank of Colorado, a wholly owned
subsidiary of KeyCorp.
FIRST CITIZENS BANCORP OF INDIANA
On June 30, 1994, KeyCorp reached a definitive agreement to acquire
First Citizens Bancorp of Indiana ("First Citizens"), based in Anderson,
Indiana, for total consideration of $50.8 million in a tax-free exchange of
stock. Following the consummation of the merger, First Citizens'
subsidiary, Citizens Banking Company, an Indiana-chartered commercial bank
with nine branches in central Indiana, and with total assets of $351
million at September 30, 1994, will be merged with and into Society
National Bank, Indiana, a wholly owned subsidiary of KeyCorp. The
acquisition, which is subject to certain regulatory and First Citizens'
shareholder approvals, is expected to close during the fourth quarter of
1994 and will be accounted for as a purchase.
CASCO NORTHERN BANK, NATIONAL ASSOCIATION
BANKVERMONT CORPORATION
On June 23, 1994, KeyCorp reached definitive agreements to acquire
Casco Northern Bank, National Association ("Casco Northern"), headquartered
in Portland, Maine, and BANKVERMONT Corporation, headquartered in
Burlington, Vermont, for cash consideration of $198.5 million. The
aggregate purchase price is to be adjusted by the amount by which adjusted
Tier I capital for each of these companies, as defined in the agreements,
exceeds (resulting in an upward adjustment) or falls below (resulting in a
downward adjustment) a specified level for each company as of a specified
date prior to the closing of each transaction. Following the consummation
of the acquisition, Casco Northern, with 34 branches in Maine and with
total assets of $1.2 billion at September 30, 1994, will merge with and
into Key Bank of Maine, an indirect wholly owned subsidiary of KeyCorp. As
of the same date, BANKVERMONT Corporation's subsidiary, Bank of Vermont,
with 12 branches and total assets of $688 million will become an indirect
wholly owned subsidiary of KeyCorp. The acquisitions, which are subject to
certain regulatory approvals, are expected to close during the first
quarter of 1995 and will be accounted for as purchases.
THE BANK OF GREELEY
On October 5, 1993, KeyCorp reached a definitive agreement to acquire
the Bank of Greeley, a single branch bank headquartered in Greeley,
Colorado ("Greeley Bank"). Under terms of the merger agreement, KeyCorp
Common Shares will be exchanged for all of the outstanding shares of
Greeley Bank stock (based on an exchange ratio of 1.026 common shares for
each share of Greeley Bank). The transaction, which is subject to certain
regulatory approvals, is expected to close during the fourth quarter of
1994 and will be accounted for as a pooling of interests. Greeley Bank had
total assets of $61 million at September 30, 1994.
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<PAGE> 9
3. SECURITIES AVAILABLE FOR SALE
Effective January 1, 1994, the Corporation adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Under this new
accounting standard, equity securities having readily determinable fair
values and all investments in debt securities are classified and accounted
for in three categories. Debt securities that management has the positive
intent and ability to hold to maturity are classified as investment
securities ("held-to-maturity securities") and are carried at amortized
cost. Debt and equity securities that are bought and principally held for
the purpose of selling them in the near term are 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 classified
as "securities available for sale" and reported at fair value, with the
unrealized gains and losses excluded from operating results and reported
as a separate component of shareholders' equity. Gains or losses from the
sale of securities available for sale are computed using the specific
identification method and included in net securities gains.
At September 30, 1994, approximately $3.0 billion of securities were
classified as available for sale and shareholders' equity was reduced by
$93.0 million, representing the net unrealized loss on these securities,
net of deferred income taxes. The change in the classification of
securities under the new accounting standard had no impact on net income.
During the third quarter of 1994, KeyCorp transferred approximately
$1.3 billion in mortgage-backed securities from the securities available
for sale portfolio to the investment securities portfolio. This transfer
was made in response to additional guidance issued by the Financial
Accounting Standards Board during the third quarter, which provides that
the possibility that "nonhigh-risk" mortgage securities may at some time in
the future become "high risk", should not preclude an institution from
concluding it has the intent and ability to hold to maturity those
securities that were nonhigh-risk when acquired. The securities were
transferred at their fair value and the unrealized loss component
(approximately $57.8 million before taxes) of the carrying value of the
transferred securities is being amortized as a yield adjustment over their
remaining lives, as is the corresponding unrealized loss component of
shareholders' equity.
The amortized cost, unrealized gains and losses, and approximate fair
values of securities available for sale were as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994
-----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ------- --------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury, agencies and corporations $1,388,336 $ 4,831 $( 42,257) $1,350,910
States and political subdivisions 27,405 -- (244) 27,161
Mortgage-backed securities 1,488,715 928 (81,748) 1,407,895
Other securities 202,707 101 (28,426) 174,382
---------- ------- --------- ----------
Total $3,107,163 $ 5,860 $(152,675) $2,960,348
========== ======= ========= ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1993
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost 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>
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<PAGE> 10
3. SECURITIES AVAILABLE FOR SALE (CONTINUED)
Securities available for sale by remaining contractual maturity were as
follows (in thousands):
<TABLE>
<CAPTION>
September 30, 1994
----------------------------------------
Amortized Fair
Cost Value
---------- ----------
<S> <C> <C>
Due in one year or less $ 567,653 $ 545,605
Due after one through five years 1,099,282 1,063,923
Due after five through ten years 1,398,766 1,302,319
Due after ten years 41,462 48,501
---------- ----------
Total $3,107,163 $2,960,348
========== ==========
</TABLE>
Mortgage-backed securities are included in the above maturity schedule
based on their expected average lives.
During the first nine months of 1994, proceeds from the sales of
securities available for sale were $1.3 billion, resulting in gross gains
of $12.9 million and gross losses of $4.9 million.
<TABLE>
4. INVESTMENT SECURITIES
The amortized cost, unrealized gains and losses, and approximate fair
values of investment securities ("held-to-maturity securities") were as
follows (in thousands):
<CAPTION>
SEPTEMBER 30, 1994
------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- -------- --------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury, agencies and corporations $ 590,706 $ 1,026 $ (1,652) $ 590,080
States and political subdivisions 1,513,285 44,857 (3,968) 1,554,174
Mortgage-backed securities 8,004,109 21,037 (384,524) 7,640,622
Other securities 415,874 3,293 (45) 419,122
----------- -------- ---------- ----------
Total $10,523,974 $ 70,213 $ (390,189) $10,203,998
=========== ======== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1993
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost 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 (18,889) 7,966,954
Other securities 771,088 14,900 (5) 785,983
----------- -------- ---------- ----------
Total $11,122,093 $237,530 $ (19,422) $11,340,201
=========== ======== ========== ===========
</TABLE>
<TABLE>
Investment securities by remaining contractual maturity were as follows (in thousands):
<CAPTION>
September 30, 1994
----------------------------------------
Amortized Fair
Cost Value
----------- -----------
<S> <C> <C>
Due in one year or less $ 1,387,075 $ 1,410,123
Due after one through five years 5,369,699 5,222,298
Due after five through ten years 1,583,171 1,560,415
Due after ten years 2,184,029 2,011,162
----------- -----------
Total $10,523,974 $10,203,998
=========== ===========
</TABLE>
Mortgage-backed securities are included in the above maturity schedule
based on their expected average lives.
-10-
<PAGE> 11
4. INVESTMENT SECURITIES (CONTINUED)
Gains or losses from the sale of investment securities are computed
using the specific identification method and included in net securities
gains. During the first nine months of 1994, proceeds from the sales of
investment securities were $13.8 million, resulting in gross gains of $1.0
million.
At September 30, 1994, investment and available for sale securities,
with an aggregate amortized cost of approximately $8.8 billion, were pledged
to secure public and trust deposits and securities sold under repurchase
agreements, and for other purposes required or permitted by law.
<TABLE>
5. LOANS
Loans are summarized as follows (in thousands):
<CAPTION>
SEPTEMBER 30, December 31, September 30,
1994 1993 1993
------------- ----------- ------------
<S> <C> <C> <C>
Commercial, financial and agricultural $10,122,108 $8,965,528 $8,946,360
Real estate - construction 1,227,380 1,160,480 1,273,769
Real estate - commercial mortgage 6,531,682 6,228,188 6,155,998
Real estate - residential mortgage 13,284,451 11,026,319 10,647,902
Consumer 9,715,523 9,276,334 9,132,122
Student loans held for sale 1,539,218 1,648,611 1,336,616
Lease financing 2,098,872 1,702,472 1,514,182
Foreign 89,536 63,312 63,702
------------- ----------- ------------
Total $44,608,770 $40,071,244 $39,070,651
============= =========== ============
</TABLE>
<TABLE>
Changes in the allowance for loan losses are summarized as follows (in
thousands):
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance at beginning of period $816,437 $795,745 $802,712 $782,649
Charge-offs (47,472) (68,732) (155,598) (235,908)
Recoveries 21,567 21,463 67,196 67,379
-------- -------- -------- --------
Net charge-offs (25,905) (47,269) (88,402) (168,529)
Provision for loan losses 27,214 49,879 99,033 165,306
Allowance of acquired companies 2,412 1,039 6,815 19,968
-------- -------- -------- --------
Balance at end of period $820,158 $799,394 $820,158 $799,394
======== ======== ======== ========
</TABLE>
<TABLE>
6. NONPERFORMING ASSETS
Nonperforming assets were as follows (in thousands):
<CAPTION>
SEPTEMBER 30, December 31, September 30,
1994 1993 1993
------------ ----------- -------------
<S> <C> <C> <C>
Nonacccrual loans $284,706 $329,843 $374,062
Restructured loans 1,438 6,469 5,642
------------ ----------- -------------
Total nonperforming loans 286,144 336,312 379,704
Other real estate owned 134,104 186,052 259,637
Allowance for OREO losses (26,597) (35,690) (30,263)
------------ ----------- -------------
Other real estate owned, net of allowance 107,507 150,362 229,374
Other nonperforming assets 4,829 13,462 13,633
------------ ----------- -------------
Total nonperforming assets $398,480 $500,136 $622,711
============ =========== =============
</TABLE>
- 11 -
<PAGE> 12
<TABLE>
6. NONPERFORMING ASSETS (CONTINUED)
Changes in the allowance for OREO losses are summarized as follows (in
thousands):
<CAPTION>
Three months ended September 30, Nine months ended September 30,
1994 1993 1994 1993
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance at beginning of period $30,272 $26,222 $35,690 $17,915
Net charge-offs (5,129) (4,834) (12,648) (17,223)
Provision for losses on other real estate owned 1,454 8,875 3,341 29,571
Allowance of acquired company --- --- 214 ---
--------- --------- --------- ---------
Balance at end of period $26,597 $30,263 $26,597 $30,263
========= ========= ========= =========
</TABLE>
In May 1993, the Financial Accounting Standards Board ("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 either 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.
<TABLE>
7. LONG-TERM DEBT
The components of long-term debt, presented net of unamortized discount
where appropriate, were as follows (dollars in thousands):
<CAPTION>
SEPTEMBER 30, December 31, September 30,
1994 1993 1993
---------- ---------- ----------
<S> <C> <C> <C>
Medium-Term Notes due through 2003 $535,200 $546,230 $546,230
8.125 % Subordinated Notes due 2002 198,085 197,902 197,840
8.00 % Subordinated Notes due 2004 125,000 125,000 125,000
8.40 % Subordinated Capital Notes due 1999 75,000 75,000 75,000
8.875 % Notes due 1996 74,815 74,772 74,757
11.125 % Notes due 1995 49,988 49,979 49,976
8.404 % Notes due 1997 through 2001 48,864 48,864 48,864
8.255 % Notes due 1996 22,794 22,794 22,794
12.63 % Notes due 1994 -- 1,860 1,860
7.875 % Notes due 1993 -- -- 99,990
8.25 % Notes due 1993 -- -- 25,000
All other long-term debt 377 384 387
---------- ---------- ----------
Total parent company 1,130,123 1,142,785 1,267,698
Medium-Term Bank Notes due through 1997 399,042 -- --
7.85 % Subordinated Notes due 2002 199,838 199,823 199,818
6.75 % Subordinated Notes due 2003 198,917 198,823 198,792
Federal Home Loan Bank Advances (1) 194,128 165,100 185,100
10.00 % Note due 1995 36,735 36,735 36,735
Industrial revenue bonds 10,399 10,938 10,637
All other long-term debt 8,614 9,666 9,639
---------- ---------- ----------
Total subsidiaries 1,047,673 621,085 640,721
---------- ---------- ----------
Total $2,177,796 $1,763,870 $1,908,419
========== ========== ==========
<FN>
(1) Long-term advances from the Federal Home Loan Bank (FHLB) are at
adjustable and fixed rates ranging from 3.80% to 12.13% at September
30, 1994, and mature at various dates through 2012. Real estate loans
with a carrying value of $192.6 million, $174.5 million and $199.0
million at September 30, 1994, December 31, 1993 and September 30,
1993, respectively, collateralize FHLB advances.
</TABLE>
- 12 -
<PAGE> 13
8. MERGER AND INTEGRATION CHARGES
During the fourth quarter of 1993, merger and integration charges of $118.7
million ($80.6 million after tax, $.33 per Common Share) were recorded in
connection with the March 1, 1994, merger of old KeyCorp into and with Society
(the "Merger"). These 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 incidental 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. During the first nine months of
1994, there were no material developments or adjustments with respect to merger
and integration charges and management presently considers the remaining
liability of $55.6 million at September 30, 1994, to be adequate. The Merger
is described in greater detail in Note 2, Mergers and Acquisitions, on page
7 of this report.
9. INCOME TAXES
Income taxes included in the consolidated statements of income are as follows
(in thousands):
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
------------------------------- ------------------------------
1994 1993 1994 1993
-------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Currently payable -- Federal $64,391 $104,479 $227,627 $256,561
Currently payable -- State 5,329 8,820 22,731 28,672
Deferred -- Federal 41,474 6,093 77,341 32,525
Deferred -- State 5,147 238 7,341 (1,083)
-------------- ----------- ------------ ------------
Total income tax expense $116,341 $119,630 $335,040 $316,675
============== =========== ============ ============
</TABLE>
10. 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 their exposure to interest rate risk.
The following is a summary of the contractual amount of each significant class
of off-balance sheet financial instrument outstanding wherein the Corporation's
maximum possible accounting loss from commitments to extend credit and from
letters of credit equals the contractual amount of these instruments.
LOANS AND OTHER COMMITMENTS WHOSE CONTRACTUAL AMOUNTS REPRESENT CREDIT RISK
AND/OR MARKET RISK
(IN THOUSANDS)
Loan commitments: September 30, 1994
------------------
Credit card lines $4,458,702
Home equity 3,045,248
Commercial real estate and construction 1,432,980
Other 6,940,470
-------------
Total loan commitments 15,877,400
Other commitments:
Standby letters of credit 1,129,825
Commercial letters of credit 241,965
Loans sold with recourse 233,649
-------------
Total loan and other commitments $17,482,839
=============
-13-
<PAGE> 14
10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
The following is a summary of the notional or contractual amount of each
significant class of off-balance sheet financial instrument outstanding wherein
the notional amount (an agreed upon amount on which calculations of interest
payments to be exchanged are based) is significantly greater than the amount
at risk, which is estimated as the cost to replace the instrument.
<TABLE>
FINANCIAL INSTRUMENTS WHOSE NOTIONAL OR CONTRACTUAL AMOUNTS EXCEED THE AMOUNT
OF CREDIT AND/OR MARKET RISK
(IN THOUSANDS)
<S> <C>
Commitments to purchase when-issued securities $10,000
Mortgage loan sale commitments 604,963
Mortgage loan options 40,000
Futures and options on financial futures 1,602,680
Interest rate swap agreements 10,028,834
Interest rate cap and floor agreements 469,650
</TABLE>
Both the parent company and its affiliate banks enter into interest rate swap
agreements to manage interest rate risk. The affiliate banks also use interest
rate swaps, caps and floors to accommodate the business needs of their
customers. Under conventional interest rate swap agreements, payments based on
fixed rates or variable rates are received based upon the notional amounts of
the swaps in exchange for payments based on variable or fixed rates. Under an
indexed amortizing swap agreement, the notional amount remains constant for a
specified period of time after which, based upon the level of the index, the
swap contract will mature, the notional amount will begin to amortize, or the
swap will continue in effect until the contractual maturity of the agreement.
Otherwise, the characteristics of these swaps are similar to conventional swap
agreements. Interest rate swaps used for interest rate risk management purposes
are designated as portfolio swaps. Interest rate cap and floor agreements
provide that one party pays the other when interest rates rise above a specified
level (caps) or fall below a specified level (floors). All of the interest rate
swaps and substantially all of the foreign exchange contracts held by the
Corporation are over-the-counter instruments. The following table summarizes
the notional amount of interest rate swaps by type at September 30, 1994 (in
millions):
<TABLE>
<CAPTION>
Receive Fixed Pay Fixed
---------------------------------------- ------------
Indexed Amortizing Conventional Conventional Basis Total
------------------ ------------ ------------ -------- ----------
<S> <C> <C> <C> <C> <C>
Portfolio $5,159.9 $3,035.7 $356.5 $200.0 $8,752.1
Customer --- 593.0 679.5 4.2 1,276.7
------------------ ------------ ------------ -------- ----------
Total interest rate swaps $5,159.9 $3,628.7 $1,036.0 $204.2 $10,028.8
------------------ ------------ ------------ -------- ----------
</TABLE>
At September 30, 1994, the interest rate swap portfolio was providing a positive
cash flow (since the weighted average rate received exceeded the weighted
average rate paid by .84%) even though it had an aggregate negative fair value
of $397.9 million at the same date. The aggregate fair value was derived through
the use of discounted cash flow models which contemplate future interest rates
using the yield curve.
Portfolio interest rate swaps are used to manage interest rate risk by modifying
the repricing or maturity characteristics of specified on-balance sheet assets
and liabilities. Income from these swaps is recognized on an accrual basis as
an adjustment of the interest income or expense pertaining to the related asset
or liability whose interest rate risk characteristics are being adjusted. Gains
and losses realized upon the termination of these interest rate swaps are
deferred and amortized over the projected remaining lives of the swap
agreements. During the first nine months of 1994, swaps with a notional amount
of $3.5 billion were terminated resulting in net deferred losses of $26 million.
A summary of the Corporation's deferred swap gains and (losses) at September 30,
1994, is as follows (in thousands):
<TABLE>
<CAPTION>
Ending
Asset/Liability Amortization Deferred
Managed Date Gains/(Losses)
--------------- ------------ -------------
<S> <C> <C>
Loans February 1996 $(26,817.6)
Debt June 2002 13,023.0
Deposits February 1996 6,221.4
</TABLE>
The Corporation offsets the interest rate risk of customer swaps by entering
into offsetting swaps (also included in the customer swap portfolio) with third
parties. Where the Corporation does not have an existing loan with the
customer, the swap position and any offsetting swap with a third party are
recorded at their estimated fair values. Adjustments to fair value for customer
swaps are included in noninterest income.
- 14 -
<PAGE> 15
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Shareholders and Board of Directors
KeyCorp
We have reviewed the unaudited consolidated balance sheets of KeyCorp
and subsidiaries as of September 30, 1994 and 1993, and the related
consolidated statements of income for the three and nine-month periods then
ended, and the consolidated statements of changes in shareholders' equity
and cash flow for the nine-month periods then ended. 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.
We conducted our reviews in accordance with standards established by
the American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data, and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, which will be performed for the full year with the objective of
expressing an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the consolidated financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of KeyCorp as of
December 31, 1993, and the related consolidated statements of income,
changes in shareholders' equity, and cash flow for the year then ended (not
presented herein) and in our report dated March 1, 1994, we expressed an
unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying consolidated balance
sheet as of December 31, 1993, is fairly stated, in all material respects,
in relation to the consolidated balance sheet from which it has been
derived.
/s/ Ernst & Young LLP
Cleveland, Ohio
October 17, 1994
- 15 -
<PAGE> 16
KEYCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
On March 1, 1994, KeyCorp ("old KeyCorp"), a financial services holding
company headquartered in Albany, New York, merged into and with Society
Corporation ("Society"), a financial services holding company headquartered
in Cleveland, Ohio. Society was the surviving corporation of the merger
under the name "KeyCorp". 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 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 3 through 14 of this report.
PERFORMANCE OVERVIEW
Figure 1 presents certain income statement components for the first
nine months of 1994 and 1993 expressed on a per Common Share basis. The
selected financial data set forth in Figure 2 presents certain information
highlighting the financial performance of the Corporation for the last five
quarters and the year-to-date periods ended September 30, 1994 and 1993.
Each of the items referred to in this performance overview and in Figures 1
and 2 is more fully described in the following discussion or in the notes
to the consolidated financial statements presented on pages 7 through 14 of
this report.
<TABLE>
FIGURE 1. COMPONENTS OF EARNINGS PER COMMON SHARE
<CAPTION>
Nine Months ended
September 30, Change
--------------------- ------------------------
1994 1993 Amount Percent
------- ------ ------ -------
<S> <C> <C> <C> <C>
Interest income $13.54 $13.21 $0.33 2.5 %
Interest expense 5.21 4.85 0.36 7.4
------- ------ ------
Net interest income 8.33 8.36 (0.03) (0.4)
Provision for loan losses 0.41 0.69 (0.28) (40.6)
------- ------ ------
Net interest income after provision for
loan losses 7.92 7.67 0.25 3.3
Noninterest income 2.78 3.19 (0.41) (12.9)
Noninterest expense 6.62 7.08 (0.46) (6.5)
------- ------ ------
Income before income taxes 4.08 3.78 0.30 7.9
Income taxes 1.37 1.32 0.05 3.8
Preferred dividends 0.05 0.06 (0.01) (16.7)
------- ------ ------
Earnings per Common Share $2.66 $2.40 $0.26 10.8 %
======= ====== ======
</TABLE>
Net income for the third quarter of 1994 reached a record high of
$229.3 million. This represented an increase of $28.5 million, or 14%,
from the $200.8 million recorded in the third quarter of 1993. Earnings
per Common Share rose by 12% over the same period, increasing from $.82 to
$.92. On an annualized basis, the return on average common equity for the
third quarter of 1994 was 19.95% compared with 19.10% for the third quarter
of 1993. The annualized returns on average total assets for the third
quarters of 1994 and 1993 were 1.43% and 1.40%, respectively. The primary
factors which contributed to the improvement in 1994 earnings were a $4.5
million, or 1%, increase in taxable-equivalent net interest income, a $60.7
million, or 10%, decrease in noninterest expense and a $22.7 million, or
45%, decrease in the provision for loan losses. These positive factors
were offset in part by a $65.4 million, or 23%, decrease in noninterest
income. Excluding the impact of net securities gains and certain
nonrecurring charges and credits, the efficiency ratio, which measures the
extent to which revenue is consumed by overhead expense, was 57.90% for the
third quarter of 1994 compared with 58.43% and 60.13% for the second
quarter of 1994 and the third quarter of 1993, respectively.
- 16 -
<PAGE> 17
<TABLE>
FIGURE 2. - SELECTED FINANCIAL DATA
<CAPTION>
Nine months ended
1994 Quarters 1993 Quarters September 30,
(dollars in millions, ------------------------------------- ----------------------- ------------------------
except per share amounts) THIRD Second First Fourth Third 1994 1993
....................................................................................................................................
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE PERIOD
Interest income $1,150.7 $1,102.6 $1,045.0 $1,050.5 $1,051.0 $3,298.3 $3,163.4
Interest expense 471.1 422.3 376.9 372.2 378.6 1,270.3 1,162.7
Net interest income 679.6 680.3 668.1 678.3 672.4 2,028.0 2,000.7
Provision for loan losses 27.2 35.0 36.8 46.4 49.9 99.0 165.3
Noninterest income 223.3 227.4 226.6 237.1 288.7 677.3 764.6
Noninterest expense 530.1 538.7 542.8 689.5 590.8 1,611.6 1,695.6
Income before income taxes 345.6 334.0 315.1 179.5 320.4 994.7 904.4
Net income 229.3 221.8 208.6 122.3 200.8 659.7 587.6
Net income applicable
to Common Shares 225.3 217.8 204.6 118.4 196.6 647.7 573.4
....................................................................................................................................
PER COMMON SHARE
Net income $0.92 $0.89 $0.85 $0.49 $0.82 $2.66 $2.40
Cash dividends declared 0.32 0.32 0.32 0.28 0.28 0.96 0.84
Book value at period-end 18.65 18.17 17.88 17.53 17.32 18.65 17.32
Market price:
High 33.50 33.75 33.00 33.50 35.75 33.75 37.25
Low 30.13 29.50 28.88 27.25 30.88 29.50 28.63
Close 30.50 31.88 30.00 29.75 32.00 30.50 32.00
Weighted average
Common Shares (000) 244,132.1 244,823.2 241,925.8 240,778.3 240,821.9 243,635.2 239,437.1
....................................................................................................................................
AT PERIOD-END
Loans $44,608.8 $43,157.6 $41,379.8 $40,071.3 $39,070.7 $44,608.8 $39,070.7
Earning assets 58,638.1 57,347.0 55,913.5 54,352.7 52,935.5 58,638.1 52,935.5
Total assets 64,500.3 63,356.6 61,475.8 59,631.2 58,169.2 64,500.3 58,169.2
Deposits 47,816.5 47,796.2 46,880.6 46,499.1 44,339.9 47,816.5 44,339.9
Long-term debt 2,177.8 2,123.6 1,744.5 1,763.9 1,908.4 2,177.8 1,908.4
Common shareholders' equity 4,541.9 4,438.8 4,376.3 4,233.6 4,150.1 4,541.9 4,150.1
Total shareholders' equity 4,701.9 4,598.8 4,536.3 4,393.6 4,310.1 4,701.9 4,310.1
....................................................................................................................................
PERFORMANCE RATIOS
Return on average total assets 1.43% 1.43% 1.41% 0.83% 1.40% 1.43% 1.39%
Return on average common equity 19.95 19.77 19.20 11.09 19.10 19.65 19.52
Return on average total equity 19.60 19.43 18.88 11.05 18.73 19.31 19.07
Efficiency(1) 57.90 58.43 60.13 61.35 60.13 58.81 60.21
Overhead(2) 44.48 44.87 47.27 48.12 46.50 45.53 46.42
Net interest margin 4.79 4.92 5.03 5.21 5.30 4.91 5.35
....................................................................................................................................
CAPITAL RATIOS AT PERIOD-END
Equity to assets 7.29% 7.26% 7.38% 7.37% 7.41% 7.29% 7.41%
Tangible equity to tangible asset 6.45 6.42 6.55 6.51 6.52 6.45 6.52
Tier I risk-adjusted capital 8.86 8.77 8.91 8.73 8.66 8.86 8.66
Total risk-adjusted capital 12.07 12.03 12.34 12.22 12.18 12.07 12.18
Leverage 6.79 6.76 6.85 6.72 6.74 6.79 6.74
===================================================================================================================================
<FN>
On March 1, 1994, KeyCorp merged into and with Society Corporation which was the surviving corporation and assumed the name
KeyCorp. The merger was accounted for as a pooling of interests and, accordingly, the financial results (except for cash
dividends and market price per Common Share) for prior periods presented within this report have been restated to include the
combined financial results of both companies. Cash dividends and market price per Common Share are the historical amounts
originally reported by Society Corporation.
(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 transactions and gains on certain
asset sales).
(2) Calculated as noninterest expense (excluding merger and integration charges and other nonrecurring charges) less noninterest
income (excluding net securities transactions and gains on certain assets sales) divided by taxable-equivalent net interest
income.
</TABLE>
- 17 -
<PAGE> 18
Net income for the first nine months of 1994 was $659.7 million, or $2.66 per
Common Share, up from $587.6 million, or $2.40 per Common Share, for the same
period last year. On an annualized basis the return on average common equity
for the first nine months of 1994 was 19.65% compared with 19.52% for the first
nine months of 1993. The annualized returns on average total assets for the
first nine months of 1994 and 1993 were 1.43% and 1.39%, respectively. The
same factors which contributed to the increase in quarterly earnings relative
to the prior year also accounted for the improvement in year-to-date earnings.
These factors included a $22.7 million, or 1%, increase in taxable-equivalent
net interest income, an $84.1 million, or 5%, decrease in noninterest expense
and a $66.3 million, or 40%, decrease in the provision for loan losses.
Partially offsetting the impact of these positive factors was an $87.3 million,
or 11%, decrease in noninterest income and an $18.2 million, or 6%, increase in
income taxes. Excluding the impact of net securities gains and certain
nonrecurring charges and credits, the efficiency ratio improved to 58.81% for
the first nine months of 1994 from 60.21% for the same period last year.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income, which is comprised of 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, mix 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, which restates tax-exempt income to an
amount that would yield the same after-tax income had the income been subject
to taxation at the Federal statutory income tax rate.
Various components of the balance sheet and their respective yields and rates
which affect interest income and expense are illustrated in Figure 3. The
information presented in Figure 4 provides a summary of the effect on net
interest income of changes in the Corporation's yields/rates and average
balances for the quarterly and year-to-date periods from the same periods in
the prior year. A more in-depth discussion of changes in earning assets and
funding sources is presented in the Financial Condition section beginning on
page 26.
For the third quarter of 1994 net interest income was $694.0 million, up $4.5
million, or 1%, from the same period last year. This growth was attributed to a
$6.1 billion increase in average earning assets, partially offset by a 51 basis
point decline in the net interest margin to 4.79%. The net interest margin is
computed by dividing taxable-equivalent net interest income on an annualized
basis by average earning assets.
Average earning assets for the third quarter totaled $57.7 billion, which was
$6.1 billion, or 12%, higher than the third quarter 1993 level. This increase
reflected the impact of acquisitions as well as internal growth generated in
the loan and securities portfolios. Average loans rose $5.2 billion, or 13%,
while securities (including both investment securities held to maturity and
securities available for sale) were up $2.2 billion, or 19%, from the third
quarter of 1993. Average earning assets comprised 91% of average total assets
during both the third quarter of 1994 and the third quarter of 1993.
The third quarter's net interest margin of 4.79% represented a decrease of 51
basis points from the 5.30% margin in the same period last year. Approximately
70% of the decline was attributable to the growth in earning assets
(principally new loan originations) at reduced spreads, and the replacement of
maturing securities and interest rate swaps with lower-yielding portfolios and
the refinancing of higher-yielding fixed-rate mortgage-related assets. The
replacement of securities and the refinancing of mortgage-related assets
occurred primarily during the fourth quarter of 1993 and the first quarter of
this year. Also contributing to the decline was the impact of the rise in
interest rates over the past nine months on the Corporation's moderately
liability-sensitive balance sheet. If short-term interest rates continue to
rise, some further decline in the net interest margin is anticipated, but at a
slower pace than that experienced over the past three quarters.
The Corporation uses portfolio (as defined in Note 10, Financial Instruments
with Off-Balance Sheet Risk, on page 14) interest rate swaps in the management
of its interest rate sensitivity position. The notional amount of such swaps
increased to $8.8 billion at September 30, 1994, from $8.4 billion at year-end
1993. Interest rate swaps contributed $20.5 million to net interest income and
14 basis points to the net interest margin for the third quarter of 1994.
During the same period in 1993 interest rate swaps contributed $36.0 million to
net interest income and added 28 basis points to the net interest margin. A
more in-depth discussion of the Corporation's use of interest rate swaps is
presented in the Asset and Liability Management section beginning on page 21.
<PAGE> 19
<TABLE>
FIGURE 3. AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND YIELDS/RATES
<CAPTION>
THIRD QUARTER 1994 Second Quarter 1994
-------------------------------- --------------------------------
AVERAGE YIELD/ Average Yield/
(dollars in millions) BALANCE INTEREST RATE Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans (1)(2):
Commercial, financial and agricultural $10,678.5 $240.8 8.95 % $10,518.2 $231.7 8.84%
Real estate 19,345.3 396.7 8.14 18,302.0 364.1 7.98
Consumer 9,954.9 233.3 9.30 9,824.2 229.7 9.38
Student loans held for sale 1,577.4 30.0 7.53 1,526.0 25.0 6.55
Lease financing 1,985.7 33.9 6.83 1,851.6 31.1 6.71
Foreign 74.4 1.1 5.98 70.2 1.0 5.86
- ----------------------------------------------------------------------------------------------------------------------
Total loans 43,616.2 935.8 8.51 42,092.2 882.6 8.41
Mortgage loans held for sale 463.5 9.1 7.87 866.1 15.4 7.13
Taxable investment securities 8,184.0 131.7 6.44 7,495.2 128.5 6.86
Tax-exempt investment securities (1) 1,433.0 33.1 9.24 1,693.9 34.2 8.09
- ----------------------------------------------------------------------------------------------------------------------
Total investment securities 9,617.0 164.8 6.86 9,189.1 162.7 7.08
Securities available for sale (1) 3,890.5 53.9 5.51 4,297.7 55.8 5.14
Interest-bearing deposits with banks 27.5 0.3 3.55 41.3 0.3 2.89
Federal funds sold and securities
purchased under agreements to resell 92.8 1.0 4.64 39.5 0.5 4.21
Trading account assets 15.9 0.2 4.66 11.0 0.1 4.48
- ----------------------------------------------------------------------------------------------------------------------
Total short-term investments 136.2 1.5 4.42 91.8 0.9 3.65
- ----------------------------------------------------------------------------------------------------------------------
Total earning assets 57,723.4 1,165.1 8.01 56,536.9 1,117.4 7.93
Allowance for loan losses (822.2) (819.6)
Other assets 6,537.4 6,441.9
- ----------------------------------------------------------------------------------------------------------------------
$63,438.6 $62,159.2
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Money market deposit accounts $7,218.3 50.5 2.78 $7,252.3 46.8 2.59
Savings deposits 7,683.9 52.8 2.73 7,948.6 51.6 2.60
NOW accounts 5,529.6 27.0 1.94 5,622.9 26.0 1.86
Certificates of deposit ($100,000 or more) 3,030.5 39.4 5.16 2,914.4 32.7 4.49
Other time deposits 12,256.3 137.4 4.45 12,165.4 129.9 4.28
Deposits in foreign office 3,407.3 38.7 4.51 2,993.7 28.4 3.80
- ----------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 39,125.9 345.8 3.51 38,897.3 315.4 3.25
Federal funds purchased and securities
sold under agreements to repurchase 6,295.9 70.2 4.43 6,240.0 60.5 3.89
Other short-term borrowings 2,052.9 24.0 4.63 1,363.0 14.6 4.31
Long-term debt (3) 2,144.3 31.1 6.01 2,020.0 31.8 6.52
- ----------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 49,619.0 471.1 3.77 48,520.3 422.3 3.50
Noninterest-bearing deposits 8,083.0 8,055.1
Other liabilities 1,094.9 1,006.0
Preferred stock 160.0 160.0
Common shareholders' equity 4,481.7 4,417.8
- ----------------------------------------------------------------------------------------------------------------------
$63,438.6 $62,159.2
========= =========
Interest rate spread 4.24 4.43
- ----------------------------------------------------------------------------------------------------------------------
Net interest income and net
interest margin $694.0 4.79 % $695.1 4.92%
====== ==== ====== ====
Taxable-equivalent adjustment (1) $14.4 $14.8
- ----------------------------------------------------------------------------------------------------------------------
<FN>
(1) Interest income on tax-exempt securities and loans has been adjusted to a fully taxable-equivalent basis using the
statutory Federal income tax rate.
(2) For purposes of these computations, nonaccrual loans are included in the average loan balances outstanding.
(3) Rate calculation excludes ESOP debt.
</TABLE>
-19-
<PAGE> 20
FIGURE 3. AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND YIELDS/RATES
<TABLE>
<CAPTION>
First Quarter 1994 Fourth Quarter 1993 Third Quarter 1993
------------------------------- --------------------------- ----------------------------
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
Loans (1)(2):
Commercial, financial and
agricultural $10,109.3 $207.4 8.32% $ 8,948.7 $180.0 7.98% $8,936.5 $183.1 8.13%
Real estate 17,305.6 341.6 8.01 18,127.9 378.8 8.29 17,796.3 372.7 8.31
Consumer 9,513.3 226.4 9.65 9,166.2 226.4 9.80 9,059.2 229.9 10.07
Student loans held for sale 1,513.3 22.4 5.93 1,379.0 21.2 6.17 1,162.9 18.8 6.46
Lease financing 1,729.6 29.9 6.92 1,570.6 29.8 7.59 1,412.2 29.6 8.39
Foreign 71.1 1.1 6.03 65.5 1.3 7.60 64.2 1.0 6.39
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans 40,242.2 828.8 8.35 39,257.9 837.5 8.46 38,431.3 835.1 8.62
Mortgage loans held for sale 1,139.2 18.4 6.47 1,278.1 21.5 6.73 1,155.3 20.1 6.96
Taxable investment securities 6,112.6 100.6 6.58 8,643.3 137.8 6.37 7,597.0 132.4 6.97
Tax-exempt investment securities (1) 1,630.7 35.2 8.63 1,726.5 37.4 8.67 1,769.8 39.8 8.99
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment securities 7,743.3 135.8 7.01 10,369.8 175.2 6.76 9,366.8 172.2 7.35
Securities available for sale (1) 5,260.9 75.2 5.68 1,773.3 29.7 6.71 1,987.2 34.4 6.93
Interest-bearing deposits with banks 32.8 0.4 5.17 48.4 0.6 5.18 396.5 3.5 3.53
Federal funds sold and securities
purchased under agreements to resell 88.8 0.7 3.17 78.1 0.7 3.47 259.3 2.7 4.17
Trading account assets 33.3 0.3 3.38 13.8 0.1 3.45 15.5 0.1 3.22
- -----------------------------------------------------------------------------------------------------------------------------------
Total short-term investments 154.9 1.4 3.64 140.4 1.4 4.06 671.3 6.4 3.77
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 54,540.5 1,059.6 7.88 52,819.4 ,065.3 8.00 51,611.9 1,068.1 8.21
Allowance for loan losses (815.8) (807.9 (806.4)
Other assets 6,248.4 6,277.8 6,246.2
- -----------------------------------------------------------------------------------------------------------------------------------
$59,973.1 $58,289.3 $57,051.7
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Money market deposit accounts $7,197.6 43.0 2.43 $7,273.1 44.6 2.43 $7,227.1 46.5 2.55
Savings deposits 7,900.3 50.5 2.59 7,739.1 52.9 2.71 7,597.9 54.4 2.84
NOW accounts 5,571.9 25.4 1.85 5,499.3 26.8 1.94 5,411.7 27.7 2.03
Certificates of deposit
($100,000 or more) 2,856.7 31.3 4.44 2,846.5 32.4 4.51 3,037.3 32.8 4.28
Other time deposits 12,077.8 124.3 4.17 12,291.1 129.8 4.19 12,317.2 135.6 4.37
Deposits in foreign office 2,678.0 21.6 3.27 1,282.6 10.0 3.08 772.4 6.0 3.08
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 38,282.3 296.1 3.14 36,931.7 296.5 3.18 36,363.6 303.0 3.31
Federal funds purchased and securities
sold under agreements to repurchase 4,993.3 39.0 3.16 4,472.5 33.2 2.95 4,058.5 30.4 2.97
Other short-term borrowings 1,435.2 14.2 4.01 1,239.8 12.4 3.96 1,462.4 13.2 3.57
Long-term debt (3) 1,756.9 27.6 6.55 1,883.9 30.1 6.64 1,931.4 32.0 6.89
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 46,467.7 376.9 3.29 44,527.9 372.2 3.32 43,815.9 378.6 3.43
Noninterest-bearing deposits 7,802.7 8,166.4 7,934.0
Other liabilities 1,220.8 1,200.3 1,048.2
Preferred stock 160.0 160.0 168.4
Common shareholders' equity 4,321.9 4,234.7 4,085.2
- ------------------------------------------------------------------------------------------------------------------------------------
$59,973.1 $58,289.3 $57,051.7
========= ========= =========
Interest rate spread 4.59 4.68 4.78
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income and net
interest margin $682.7 5.03% $693.1 5.21% $689.5 5.30%
====== ===== ====== ===== ====== ====
Taxable-equivalent adjustment (1) $14.6 $14.8 $17.1
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Interest income on tax-exempt securities and loans has been adjusted to a fully taxable-equivalent basis using the
statutory Federal income tax rate.
(2) For purposes of these computations, nonaccrual loans are included in the average loan balances outstanding.
(3) Rate calculation excludes ESOP debt.
</TABLE>
-20-
<PAGE> 21
<TABLE>
FIGURE 4. COMPONENTS OF NET INTEREST INCOME CHANGES
(in millions)
<CAPTION>
From Three Months Ended September 30, 1993 From Nine Months Ended September 30, 1993
To Three Months Ended September 30, 1994 To Nine Months Ended September 30, 1994
---------------------------------------- ------------------------------------------
Average Yield/ Net Average Yield/ Net
Volume Rate Change Volume Rate Change
---------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans $111.3 ($10.6) $100.7 $254.1 ($94.5) $159.6
Mortgage loans held for sale (13.3) 2.3 (11.0) (7.5) (2.1) (9.6)
Taxable investment securities 9.8 (10.5) (0.7) (11.1) (46.7) (57.8)
Tax-exempt investment securities (7.8) 1.1 (6.7) (14.5) (4.0) (18.5)
Securities available for sale 27.5 (8.0) 19.5 99.0 (25.9) 73.1
Short-term investments (5.8) 1.0 (4.8) (18.5) 2.2 (16.3)
-------- -------- -------- ------- ------- -------
Total interest income 121.7 (24.7) 97.0 301.5 (171.0) 130.5
INTEREST EXPENSE
Money market deposit accounts (0.1) 4.1 4.0 (0.6) (4.1) (4.7)
Savings deposits 0.6 (2.2) (1.6) 10.8 (17.2) (6.4)
NOW accounts 0.6 (1.3) (0.7) 4.9 (9.2) (4.3)
Certificates of deposit
($100,000 or more) (0.1) 6.7 6.6 (8.1) 5.8 (2.3)
Other time deposits (0.7) 2.5 1.8 (10.9) (18.1) (29.0)
Deposits in foreign office 28.8 3.9 32.7 60.1 7.0 67.1
-------- -------- -------- ------- ------- -------
Total interest-bearing deposits 29.1 13.7 42.8 56.2 (35.8) 20.4
Federal funds purchased and
securities sold under
agreements to repurchase 21.1 18.7 39.8 38.9 33.8 72.7
Other short-term borrowings 6.2 4.6 10.8 13.4 7.3 20.7
Long-term debt 3.3 (4.2) (0.9) 3.8 (10.1) (6.3)
-------- -------- -------- ------- ------- -------
Total interest expense 59.7 32.8 92.5 112.3 (4.8) 107.5
-------- -------- -------- ------- ------- -------
Net interest income $62.0 ($57.5) $4.5 $189.2 ($166.2) $23.0
======== ======== ======== ======= ======= =======
<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>
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 pursuant to 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 policies, approving strategies to
improve balance sheet positioning and/or earnings, and reviewing the
interest rate sensitivity positions of the Corporation and each of its
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 of pro forma 100 and 200 basis point changes in the
overall level of interest rates. ALCO guidelines provide that a gradual 200
basis point increase or decrease in short-term rates over a twelve-month
period should not result in more than a 2% negative impact on net interest
income. Simulations as of September 30, 1994, indicated that the
Corporation's liability sensitive position was moderately in excess of those
guidelines. Management believes its current rate sensitivity level to be
appropriate, considering its view of the economic outlook, coupled with a
degree of conservatism inherent in its simulation assumptions and
guidelines.
- 21 -
<PAGE> 22
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.
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 versus on-balance sheet
securities to manage interest rate risk has depended on various factors,
including funding costs, liquidity, and capital requirements. The
Corporation's portfolio swaps totaled $8.8 billion at September 30, 1994, and
consisted principally of contracts wherein the Corporation receives a fixed
rate of interest while paying at a variable rate, as summarized in Figure 5.
<TABLE>
FIGURE 5. INTEREST RATE SWAP PORTFOLIO AT SEPTEMBER 30, 1994
(dollars in millions)
<CAPTION>
Weighted Average Rate
Notional Maturity (1) Fair ---------------------
Amount (years) Value Receive Pay
-------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Receive fixed/pay variable - indexed amortizing $5,159.9 3.0 $(245.7) 6.14% 5.24%
Receive fixed/pay variable - conventional 3,035.7 6.3 (161.5) 6.50 5.00
Pay fixed/receive variable - conventional 356.5 1.7 6.2 4.91 6.63
Basis swaps 200.0 0.5 --- 4.06 4.64
--------- -------
Total portfolio swaps 8,752.1 4.0 (401.0) 6.16 5.20
Customer swaps 1,276.7 3.4 3.1 5.66 5.72
--------- -------
Total interest rate swaps $10,028.8 3.9 $(397.9) 6.10% 5.26%
========= =======
<FN>
(1) Maturity is based upon expected average lives rather than contractual terms. For indexed amortizing swaps, the maturity
assumes no change in interest rates.
</TABLE>
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 with third parties. These offsetting
swaps are included in the customer swap portfolio. Where the Corporation does
not have an existing loan with the customer, the swap position and any
offsetting swap with a third party are recorded at their estimated fair values.
Adjustments to fair value of customer swaps are included in noninterest income.
The $1.3 billion notional amount of customer swaps in Figure 5 includes $593.0
million of interest rate swaps that receive a fixed rate and pay a variable
rate and $683.7 million of interest rate swaps that pay a fixed rate and
receive a variable rate.
The total notional amount of all interest rate swap contracts outstanding was
$10.0 billion at September 30, 1994, $9.6 billion at December 31, 1993 and $5.9
billion at September 30, 1993. At September 30, 1994, the interest rate swap
portfolio was providing a positive cash flow (since the weighted average rate
received exceeded the weighted average rate paid by .84%) even though it had an
aggregate negative fair value of $397.9 million at the same date. The aggregate
fair value was estimated through the use of discounted cash flow models which
contemplate future interest rates using the yield curve. The portfolio swap
activity for the first nine months of 1994 is summarized in Figure 6 and the
expected average maturities of the portfolio swaps at September 30, 1994, are
summarized in Figure 7.
<TABLE>
FIGURE 6. PORTFOLIO SWAP ACTIVITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994
(in millions)
<CAPTION>
Total
Receive Pay Forward- Portfolio
Fixed Fixed Basis Starting Swaps
--------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $7,559.0 $150.0 $150.0 $500.0 $8,359.0
Additions 4,913.0 606.5 200.0 50.0 5,769.5
Maturities (1,686.3) --- (150.0) --- (1,836.3)
Terminations (2,600.0) (400.0) --- (500.0) (3,500.0)
Forward-starting becoming effective 50.0 --- --- (50.0) ---
Amortization (40.1) --- --- (40.1)
-------- ------- ------ ------ --------
Balance at end of period $8,195.6 $356.5 $200.0 $ --- $8,752.1
======== ====== ====== ====== ========
</TABLE>
-22-
<PAGE> 23
<TABLE>
FIGURE 7. EXPECTED AVERAGE MATURITIES OF PORTFOLIO SWAPS AT SEPTEMBER 30, 1994
(in millions)
<CAPTION>
Receive Fixed
----------------------------
Indexed Pay Fixed-
Expected Average Maturity amortizing Conventional Conventional Basis swaps Total
- ----------------------------- --------- ------------ ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Due in one year or less $100.0 $455.5 $100.0 $200.0 $855.5
Due after one through five years 4,659.9 705.2 256.5 --- 5,621.6
Due after five through ten years 400.0 1,875.0 --- --- 2,275.0
-------- -------- ------ ------ --------
Total portfolio swaps $5,159.9 $3,035.7 $356.5 $200.0 $8,752.1
======== ======== ====== ====== ========
</TABLE>
The notional amount of the interest rate swap contracts represents an agreed
upon amount on which calculations of interest payments to be exchanged are
based and is not representative of the potential for gain or loss on such
positions. Similarly, the notional amount is not indicative of the credit or
market risk of the positions held, which is estimated as the cost which would
be incurred to replace the instrument. The credit risk exposure to the
counterparties on each interest rate swap is monitored by the appropriate
Corporate Banking credit committees. 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 determine
whether collateral is required. At September 30, 1994, including swap
agreements entered into to offset customer swaps, but excluding all other
customer swaps, the Corporation had 22 different counterparties to interest
rate swap agreements, of which the Corporation had credit exposure of $15.8
million on a notional amount of $678.0 million to only seven counterparties.
The largest credit exposure to an individual counterparty was $9.2 million on a
notional amount of $250.0 million. Presented in Figure 8 is a summary of gross
unrealized gains and losses on portfolio swaps at September 30, 1994.
<TABLE>
FIGURE 8. UNREALIZED GAINS AND LOSSES ON PORTFOLIO SWAPS BY INTEREST RATE
MANAGEMENT STRATEGY AT SEPTEMBER 30, 1994
(in millions)
<CAPTION>
Unrealized
Notional -------------------------
Strategy Amount Gains Losses Total
- ----------------------------------- -------- ------ --------- --------
<S> <C> <C> <C> <C>
Convert variable rate loans to fixed $6,469.9 $0.6 $(357.8) $(357.2)
Convert fixed rate debt to variable 1,763.0 8.3 (47.0) (38.7)
Other 519.2 1.6 (6.7) (5.1)
-------- ----- ------- -------
Total portfolio swaps $8,752.1 $10.5 $(411.5) $(401.0)
======== ===== ======= =======
</TABLE>
NONINTEREST INCOME
A summary of noninterest income is presented in Figure 9. Total noninterest
income decreased $65.4 million, or 23%, for the three-month period ended
September 30, 1994, compared to the same period in 1993. Excluding, for
comparative purposes, noncore items consisting of special asset management
fees, net securities gains and the $29.4 million gain on the September 1993,
sale of Ameritrust Texas Corporation, noninterest income for the 1994 third
quarter was $218.2 million, down $11.4 million or 5% from the same period last
year. Special asset management fees are earned in connection with loan
collection and asset disposition work performed for the Federal Deposit
Insurance Corporation ("FDIC") under asset management contracts. The level of
these fees decreased from the third quarter of 1993 and is anticipated to
decrease further over time as the FDIC assets under contract are collected and
therefore decline. These fees may vary from quarter-to-quarter as a result of
the timing associated with the loan work-outs or asset dispositions.
Primary factors contributing to the decrease in core noninterest income were
trust income and mortgage banking income which declined from the third quarter
of 1993 by $9.5 million and $16.5 million, respectively. These decreases were
partially offset by a $14.1 million increase in other income and a $2.9 million
increase in service charges on deposit accounts. The decrease in trust income
reflected the September 1993, sale of Ameritrust Texas Corporation which
contributed approximately $11.0 million to trust income in the third quarter of
last year. After giving effect to the impact of this transaction, third
quarter trust income was up $1.5 million. As shown in Figure 10, the decrease
in mortgage banking income was primarily due to a decline in origination fees,
reflecting an industry-wide, exceptionally high level of activity last year,
and lower gains from the sales of servicing rights and loans. The increase in
other income reflected a higher level of recoveries of fees, expenses and
foregone interest in excess of related recoveries of principal on loans
previously charged-off, increased gains on loans held for sale and growth in
various other categories of miscellaneous income. The reclassification referred
to above is discussed in greater detail on page 24. The growth in service
charges on deposit accounts reflected the impact of acquisitions and the
repricing of fees by certain affiliate banks over the past twelve months. The
overall decrease in core noninterest income was moderated by the impact of four
acquisitions completed during the twelve-month period ended September 30, 1994.
-23-
<PAGE> 24
For the first nine months of 1994, core noninterest income, which excludes the
special asset management fees and net securities gains, was $656.2 million.
This represented a decrease of $22.3 million, or 3%, from the amount reported
for the first nine months of last year after excluding the September 1993, gain
on the sale of Ameritrust Texas Corporation and the other noncore items
referred to above. As shown in Figure 9, declines from the prior year occurred
primarily in trust income and mortgage banking income which decreased by $23.7
million and $27.8 million, respectively. These decreases were partially offset
by an $8.9 million increase in service charges on deposit accounts and a $21.9
million increase in other income. After giving effect to the sale of Ameritrust
Texas Corporation, which contributed $33.6 million to trust income in the first
nine months of last year, trust income was up approximately $9.9 million from
the prior year-to-date period. The increase in other income reflected the same
factors which impacted the comparative quarterly results as well as a $5.2
million increase in venture capital gains. In 1993, other income was affected
by the receipt of a $7.7 million settlement with the FDIC relating to the prior
acquisition of certain assets and liabilities of Goldome Savings Bank, and a
$3.2 million gain on the sale of a credit investigation company, both recorded
during the second quarter.
During the third quarter of 1994, certain fees generated by the mortgage
banking business were reclassified from other noninterest income to mortgage
banking income. This reclassification was also made to prior period amounts to
conform to the current period presentation. The amount of the fees
reclassified totaled $9.4 million for the third quarter of 1993 and $26.1
million for the nine-month period ended September 30, 1993. Equivalent fee
amounts for the 1994 quarterly and year-to-date periods totaled $3.8 million
and $12.5 million, respectively. Total noninterest income, as previously
reported, did not change.
Early in October 1994, the Corporation announced that it is exploring the
possibility of offering its mortgage banking subsidiary for sale, citing the
mortgage banking industry's increasingly large business volume requirements for
future profitable deployment of capital. A decision regarding a possible sale
will be made, pending a thorough review of alternative capital development
opportunities.
<TABLE>
FIGURE 9. NONINTEREST INCOME
<CAPTION>
(dollars in millions)
Three months ended Nine months ended
September 30, Change September 30, Change
----------------- ------------------- ------------------ --------------------
1994 1993 Amount Percent 1994 1993 Amount Percent
------ ------ -------- --------- ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Service charges on deposit accounts $ 67.9 $ 65.0 $ 2.9 4.5% $198.6 $189.7 $ 8.9 4.7%
Trust income 53.9 63.4 (9.5) (15.0) 166.5 190.2 (23.7) (12.5)
Mortgage bankin income 19.3 35.8 (16.5) (46.1) 66.7 94.5 (27.8) (29.4)
Credit card fees 20.5 19.8 .7 3.5 56.1 54.3 1.8 3.3
Insurance and brokerage income 14.9 18.0 (3.1) (17.2) 46.3 49.7 (3.4) (6.8)
Special asset management fees 3.1 4.3 (1.2) (27.9) 12.1 28.3 (16.2) (57.2)
Net securities gains 2.0 25.4 (23.4) (92.1) 9.0 28.4 (19.4) (68.3)
Gain on sale of subsidiary -- 29.4 (29.4) (100.0) -- 29.4 (29.4) (100.0)
Other income:
International fees 3.7 4.2 (.5) (11.9) 12.3 15.3 (3.0) (19.6)
Miscellaneous 38.0 23.4 14.6 62.4 109.7 84.8 24.9 29.4
------ ------ ------ ------ ------ ------
Total other income 41.7 27.6 14.1 51.1 122.0 100.1 21.9 21.9
------ ------ ------ ------ ------ ------
Total noninterest income $223.3 $288.7 $(65.4) 22.7% $677.3 $764.6 $(87.3) (11.4)%
====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
FIGURE 10. MORTGAGE BANKING INCOME
<CAPTION>
(dollars in millions)
Three months ended Nine months ended
September 30, Change September 30, Change
----------------- ------------------- ------------------ --------------------
1994 1993 Amount Percent 1994 1993 Amount Percent
------ ------ -------- --------- ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Service Fees $ 9.1 $4.6 $4.5 97.8% $21.6 $15.1 $6.5 43.0%
Gain on sale of loans .7 4.3 (3.6) (83.7) 5.1 6.4 (1.3) (20.3)
Origination fees 4.6 16.0 (11.4) (71.3) 22.7 41.7 (19.0) (45.6)
Gains on sales of servicing rights .1 5.1 (5.0) (98.0) 3.1 15.5 (12.4) (80.0)
Late fees and other 4.8 5.8 (1.0) (17.2) 14.2 15.8 (1.6) (10.1)
------ ------ ------ ------ ------ ------
Total mortgage banking income $ 19.3 $ 35.8 $(16.5) (46.1)% $ 66.7 $ 94.5 $(27.8) (29.4)%
====== ====== ====== ====== ====== ======
</TABLE>
-24-
<PAGE> 25
NONINTEREST EXPENSE
Figure 11 provides a summary of noninterest expense. Total noninterest
expense decreased by $60.7 million, or 10%, during the third quarter of
1994 as compared with the third quarter of 1993. Excluding, for
comparative purposes, net OREO expense and certain third quarter 1993
nonrecurring charges totaling $34.4 million, core noninterest expense was
$529.3 million, representing a decrease of $17.1 million, or 3%, from the
third quarter of last year and down $7.0 million, or 1%, from the prior
quarter. Significant items included in the nonrecurring charges were $21.4
million related to the write-off of various systems conversion costs, $7.0
million of facilities-related charges and $4.0 million associated with the
adoption of SFAS No. 112, "Employers' Accounting for Post Employment
Benefits." In comparison with the third quarter of 1993 the largest
decrease in core noninterest expense came from personnel expense which was
down by $19.2 million. The decline in personnel expense reflected a number
of factors including a 4% decline in the number of full-time equivalent
employees, the impact of the divestiture of Ameritrust Texas Corporation
and the integration of certain old KeyCorp and Society operations. The
overall decrease in noninterest expense was moderated by the impact of four
acquisitions completed during the twelve-month period ended September 30,
1994, and the growth in net occupancy expense, due in part to the opening
of a new operations center late in 1993.
<TABLE>
FIGURE 11. NONINTEREST EXPENSE
(dollars in millions)
<CAPTION>
Three months ended Nine months ended
September 30, Change September 30, Change
---------------- ----------------- -------------------- -----------------
1994 1993 Amount Percent 1994 1993 Amount Percent
------ ------ ------ ------- -------- -------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Personnel:
Salaries $220.2 $225.8 $ (5.6) (2.5)% $ 658.7 $ 652.9 $ 5.8 .9 %
Employee benefits 44.7 58.3 (13.6) (23.3) 149.1 162.3 (13.2) (8.1)
------ ------ ------ -------- -------- ------
Total personnel 264.9 284.1 (19.2) (6.8) 807.8 815.2 (7.4) (.9)
Net occupancy 53.9 52.1 1.8 3.5 162.6 154.6 8.0 5.2
Equipment 39.3 40.9 (1.6) (3.9) 118.8 120.7 (1.9) (1.6)
FDIC insurance assessments 25.3 24.0 1.3 5.4 74.1 74.6 (.5) (.7)
Professional fees 11.2 12.0 (.8) (6.7) 35.2 39.6 (4.4) (11.1)
OREO expense, net (1) .8 10.0 (9.2) (92.0) 4.5 31.4 (26.9) (85.7)
Other expense:
Marketing 14.0 14.5 (.5) (3.4) 44.7 45.2 (.5) (1.1)
Amortization of intangibles 14.0 14.8 (.8) (5.4) 40.3 43.8 (3.5) (8.0)
Miscellaneous 106.7 138.4 (31.7) (22.9) 323.6 370.5 (46.9) (12.7)
------ ------ ------ -------- -------- ------
Total other expense 134.7 167.7 (33.0) (19.7) 408.6 459.5 (50.9) (11.1)
------ ------ ------ -------- -------- ------
Total noninterest expense $530.1 $590.8 $(60.7) (10.3)% $1,611.6 $1,695.6 $(84.0) (5.0)%
====== ====== ====== ======== ======== ======
Full-time equivalent employees 29,411 30,482 29,411 30,482
Efficiency ratio (2) 57.90% 60.13% 58.81% 60.21%
Overhead ratio (3) 44.48 46.50 45.53 46.42
<FN>
(1) OREO expense is presented net of income of $1.6 million and $4.2 million for the 1994 and 1993 quarters, respectively, and
$3.6 million and $13.3 million for the 1994 and 1993 year-to-date periods, respectively.
(2) Calculated as noninterest expense (excluding nonrecurring charges) divided by taxable-equivalent net interest income plus
noninterest income (excluding net securities gains and gains on certain asset sales).
(3) Calculated as noninterest expense (excluding nonrecurring charges) less noninterest income (excluding net securities
gains and gains on certain asset sales) divided by taxable-equivalent net interest income.
</TABLE>
- 25 -
<PAGE> 26
Total core noninterest expense, which excludes net OREO expense and the
nonrecurring charges previously discussed, was $1.6 billion for the first
nine months of 1994, down $22.8 million, or 1%, from the comparable 1993
period. Decreases of $12.5 million (excluding nonrecurring charges), $7.4
million and $4.4 million in other expense, personnel expense and
professional fees, respectively, were partially offset by an $8.0 million
increase in net occupancy expense. The decrease in other expense reflected
declines in various categories of operating expense. In addition to the
factors impacting the comparability of the quarterly results, the
year-to-date decrease in personnel expense also reflected lower costs
associated with contracted and temporary personnel. Professional fees were
down due to lower costs for legal and consulting services. The variance
from the prior year in both salaries and employee benefits reflected the
prospective reclassification of certain expenses previously recorded as
employee benefits by old KeyCorp to salaries. These expenses for old
KeyCorp totaled approximately $12.2 million for the first nine months of
1993. The growth in net occupancy expense reflected the impact of
acquisitions as well as the opening of a new operations center late in
1993.
The efficiency ratio, which provides a measure of the extent to which
recurring revenues are used to pay operating expenses, was 57.90% for the
third quarter of 1994 compared with 58.43% and 60.13% for the second
quarter of 1994 and the third quarter of 1993, respectively.
INCOME TAXES
The provision for income taxes was $116.3 million for the three-month
period ended September 30, 1994, as compared to $119.6 million for the same
period in 1993. The effective tax rate (provision for income taxes as a
percentage of income before income taxes) for the 1994 third quarter was
33.7% compared to 37.3% for the third quarter of 1993. For the first nine
months of 1994, the provision for income taxes was $335.0 million compared
with $316.7 million for the first nine months of 1993. The effective tax
rate in each of these periods was 33.7% and 35.0%, respectively.
FINANCIAL CONDITION
LOANS
At September 30, 1994, total loans outstanding were $44.6 billion,
compared with $40.1 billion at December 31, 1993, and $39.1 billion at
September 30, 1993. The composition of the loan portfolio by loan type as
of each of these respective dates is presented in Note 5, Loans, on page 11
of this report. The growth from the December 31, 1993 level was primarily
due to increases of $1.2 billion in commercial loans, $2.6 billion in real
estate loans (of which $2.3 billion pertained to residential mortgages),
$439.2 million in consumer loans and $396.4 million in lease financing.
Student loans held for sale declined by $109.4 million from year-end 1993.
The growth in the commercial loan portfolio was due in part to the success
of a program launched in mid-April which was originally expected to
generate approximately $200 million in small business loans. During the
second and third quarters, $387 million in new loans were recorded under
this program. As shown in Figure 12, the internally generated loan growth
was achieved throughout all of KeyCorp's geographic regions. The acquired
loan growth resulted from the acquisitions of CBC in the Rocky Mountain
Region and State Home Savings in the Great Lakes Region. These acquisitions
were previously described in greater detail in Note 2, Mergers and
Acquisitions, on page 7 of this report.
<TABLE>
FIGURE 12. PERIOD-END LOAN GROWTH BY REGION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994
(dollars in millions)
<CAPTION>
Internally Percent
Generated Acquired Total Change
---------- -------- -------- -------
<S> <C> <C> <C> <C>
Northeast Region $1,049.5 --- $1,049.5 9.3%
Great Lakes Region 1,927.6 $256.0 2,183.6 12.2
Rocky Mountain Region 303.5 217.9 521.4 19.4
Northwest Region 775.7 --- 775.7 9.5
Financial Services 7.3 --- 7.3 7.6
-------- ------ --------
Total $4,063.6 $473.9 $4,537.5 11.3%
======== ====== ========
</TABLE>
-26-
<PAGE> 27
With respect to geographic concentration, Figure 13 depicts the loan
portfolio at September 30, 1994, by region. The Corporation's unique
thirteen-state, four-region profile has provided significant geographic
credit risk diversification.
<TABLE>
FIGURE 13. LOANS OUTSTANDING BY REGION AT SEPTEMBER 30, 1994
(dollars in millions)
<CAPTION>
Total Loans Distribution
----------- ------------
<S> <C> <C>
Northeast Region $12,305.0 27.6 %
Great Lakes Region 20,031.4 44.9
Rocky Mountain Region 3,204.4 7.2
Northwest Region 8,964.7 20.1
Financial Services 103.2 0.2
----------- ------------
$44,608.8 100.0 %
========== ============
</TABLE>
Figure 14 shows the portions of the construction and commercial mortgage
loan portfolios at September 30, 1994, which are collateralized by
nonowner-occupied (by industry concentration) and owner-occupied properties.
At September 30, 1994, 47% of the construction loan portfolio and 45% of the
commercial mortgage loan portfolio were secured by owner-occupied
properties. These 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.
<TABLE>
FIGURE 14. CONSTRUCTION AND COMMERCIAL MORTGAGE LOANS AT SEPTEMBER 30, 1994
(in millions)
<CAPTION>
Commercial
Construction Mortgage Total
----------- ---------- ----------
<S> <C> <C> <C>
Nonowner-occupied:
Retail $132.3 $842.7 $975.0
Multi-family properties 108.3 809.8 918.1
Office buildings 106.6 857.8 964.4
Hotels/Motels 25.7 240.2 265.9
Health facilities 10.6 85.6 96.2
Manufacturing facilities 7.5 69.9 77.4
Warehouses 12.5 244.6 257.1
Other 249.2 467.1 716.3
----------- ---------- ----------
652.7 3,617.7 4,270.4
Owner-occupied 574.7 2,914.0 3,488.7
----------- ---------- ----------
Total $1,227.4 $6,531.7 $7,759.1
=========== ========== ==========
</TABLE>
SECURITIES
Effective January 1, 1994, the Corporation adopted the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." This new accounting standard requires, among other things,
that equity securities having readily determinable fair values and all
investments in debt securities be classified in three portfolios: securities
held to maturity, securities available for sale, and trading securities.
Securities that management has the positive intent and ability to hold to
maturity are included in the investment securities portfolio and are carried
at amortized cost. 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. These securities are carried at their
fair values with unrealized gains and losses excluded from operating results
and reported in a separate component of shareholders' equity.
At September 30, 1994, approximately $3.0 billion of securities were
classified as available for sale, and shareholders' equity was reduced by
$93.0 million, representing the net unrealized loss on these securities, net
of deferred income taxes. The change in the classification of securities
under the new accounting standard had no impact on net income.
- 27 -
<PAGE> 28
During the third quarter of 1994, KeyCorp transferred approximately
$1.3 billion in mortgage-backed securities from the securities available
for sale portfolio to the investment securities portfolio. This transfer
was made in response to additional guidance issued by the Financial
Accounting Standards Board during the third quarter, which provides that
the possibility that "nonhigh-risk" mortgage securities may at some time in
the future become "high risk" should not preclude an institution from
concluding it has the intent and ability to hold to maturity those
securities that were nonhigh-risk when acquired. The securities were
transferred at their fair value and the unrealized loss component
(approximately $57.8 million before taxes) of the carrying value of the
transferred securities is being amortized as a yield adjustment over their
remaining lives, as is the corresponding unrealized loss component of
shareholders' equity. SFAS No. 115 is more fully described in Note 3,
Securities Available for Sale, on page 9 of this report.
Additional information pertaining to securities available for sale and
investment securities is presented in Figure 15 and Figure 16,
respectively.
<TABLE>
FIGURE 15. SECURITIES AVAILABLE FOR SALE AT SEPTEMBER 30, 1994
(dollars in millions)
<CAPTION>
U.S. Treasury, States and Mortgage- Weighted
Agencies and Political Backed Other Average
Corporations Subdivisions Securities (1) Securities Total Yield (2)
------------ ------------ ------------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Maturity:
One year or less $451.5 $3.2 $ --- $ 90.9 $545.6 5.58 %
After one through five years 691.5 11.2 324.3 36.9 1,063.9 5.88
After five through ten years 205.3 7.4 1,053.4 36.2 1,302.3 5.81
After ten years 2.6 5.3 30.2 10.4 48.5 5.98
---------- ---------- ---------- ---------- ---------- --------
Fair value $1,350.9 $27.1 $1,407.9 $174.4 $2,960.3 5.80 %
========== ========== ========== ========== ========== =======
Amortized cost $1,388.4 $27.4 $1,488.7 $202.7 $3,107.2
Weighted average yield 6.06 % 7.91 % 5.54 % 4.89 % 5.80 %
Weighted average maturity 2.3 years 6.7 years 7.4 years 9.5 years 5.0 years
<FN>
(1) Maturity is based upon expected average lives rather than
contractual terms.
(2) Weighted average yields are calculated on the basis of amortized
cost. Such yields have been adjusted to a fully taxable-equivalent
basis the statutory Federal income tax rate of 35%.
</TABLE>
<TABLE>
FIGURE 16. INVESTMENT SECURITIES AT SEPTEMBER 30, 1994
(dollars in millions)
<CAPTION>
U.S. Treasury, States and Mortgage- Weighted
Agencies and Political Backed Other Average
Corporations Subdivisions Securities (1) Securities Total Yield (2)
------------ ------------ ------------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Maturity:
One year or less $129.2 $547.1 $650.6 $60.2 $1,387.1 6.48 %
After one through five years 196.5 576.0 4,343.1 254.1 5,369.7 6.85
After five through ten years 13.0 298.0 1,173.8 98.4 1,583.2 7.81
After ten years 252.0 92.2 1,836.6 3.2 2,184.0 7.24
---------- ---------- ---------- ---------- ---------- --------
Amortized cost $590.7 $1,513.3 $8,004.1 $415.9 $10,524.0 7.03 %
========== ========== ========== ========== ========== =======
Fair value $590.1 $1,554.2 $7,640.6 $419.1 $10,204.0
Weighted average yield 6.79 % 8.48 % 6.74 % 7.38 % 7.03 %
Weighted average maturity 12.6 years 3.4 years 5.4 years 2.7 years 5.4 years
<FN>
(1) Maturity is based upon expected average lives rather than
contractual terms.
(2) Weighted average yields are calculated on the basis of amortized cost.
Such yields have been adjusted to a fully taxable-equivalent basis
using the statutory Federal income tax rate of 35%.
</TABLE>
-28 -
<PAGE> 29
At September 30, 1994, the Corporation had $9.4 billion invested in
mortgage-backed pass-through securities and collateralized mortgage
obligations ("CMO") within the investment securities and securities
available for sale portfolios, compared with $8.1 billion at December 31,
1993. 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 $5.5 billion invested in mortgage-backed
pass-through securities at September 30, 1994. 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 $3.9 billion invested in CMO
securities at September 30, 1994. 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 September 30, 1994,
substantially all of the CMOs and mortgage-backed pass-through securities
held by the Corporation were issued or backed by Federal agencies.
ASSET QUALITY
The Corporation's Loan Review Group evaluates and monitors the level of
risk in the Corporation's loan-related assets, and formulates underwriting
standards and guidelines for active line management. Geographic
diversification throughout the Corporation also assists in managing credit
risk. 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 other real estate owned ("OREO") to evaluate the credit
quality and 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 are designed to provide adequate coverage for
both potential and unforeseen loan losses. The methodology applied at
KeyCorp focuses on a combination of allocations directly attributable to
specific potential problem credits and general allocations based on
historical losses on a portfolio basis. In addition, indirect risk in the
form of general economic conditions, portfolio diversification and
off-balance sheet risk are taken into consideration. Management continues
to target and maintain an allowance equal to the allocated requirement plus
an unallocated portion, as appropriate. Management believes this is an
appropriate posture in light of current and expected economic conditions
and trends, the geographic and industry mix of the loan portfolio and
similar risk-related matters.
As shown in Figure 17, net loans charged off for the quarterly and
year-to-date periods were under the prior year levels by $21.4 million, or
45%, and $80.1 million or 48%, respectively. This improvement came from all
categories of the loan portfolio. As a result of the overall improvement
in asset quality, including a large reduction in nonperforming loans, the
third quarter provision for loan losses was $27.2 million, down $22.7
million, or 45%, from the year-ago quarter. The year-to-date provision was
$99.0 million, down $66.3 million, or 40%, from the comparable 1993 period.
At September 30, 1994, the Allowance as a percentage of loans outstanding
was 1.84%, down from 2.00% at December 31, 1993, and 2.05% at September 30,
1993. Although used as a general indicator, this percentage is not a
primary factor used by management in determining the adequacy of the
Allowance. There have been no significant changes in the allocation of the
Allowance since year end.
- 29 -
<PAGE> 30
<TABLE>
FIGURE 17. SUMMARY OF LOAN LOSS EXPERIENCE
(dollars in millions)
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------ -------------------------
1994 1993 1994 1993
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Average loans outstanding during the period $43,616.2 $38,431.3 $41,995.9 $38,005.1
Allowance for loan losses at beginning of period $816.4 $795.7 $802.7 $782.6
Loans charged off:
Commercial, financial and agricultural 14.0 21.5 47.4 82.7
Real estate-construction --- 7.6 6.5 19.9
Real estate-mortgage 8.1 12.9 25.6 44.4
Consumer 24.7 25.9 73.6 86.7
Lease financing 0.7 0.8 2.5 2.2
--------- --------- --------- ---------
47.5 68.7 155.6 235.9
Recoveries:
Commercial, financial and agricultural 8.2 8.6 28.9 26.5
Real estate-construction 0.3 1.4 0.6 3.4
Real estate-mortgage 3.8 0.8 8.0 6.6
Consumer 9.0 10.2 28.0 29.3
Lease financing 0.3 0.5 1.7 1.6
--------- --------- --------- ---------
21.6 21.5 67.2 67.4
--------- --------- --------- ---------
Net loans charged off (25.9) (47.2) (88.4) (168.5)
Provision for loan losses 27.2 49.9 99.0 165.3
Allowance of acquired companies 2.5 1.0 6.9 20.0
--------- --------- --------- ---------
Allowance for loan losses at end of period $820.2 $799.4 $820.2 $799.4
========= ========= ========= =========
Net loan charge-offs to average loans 0.24 % 0.49 % 0.28 % 0.59 %
Allowance for loan losses to period-end loans 1.84 2.05 1.84 2.05
Allowance for loan losses to nonperforming loans 286.62 210.53 286.62 210.53
</TABLE>
The composition of nonperforming assets is shown in Figure 18. These
assets totaled $398.5 million at September 30, 1994, and represented
.89% of loans, OREO and other nonperforming assets compared with $500.1
million, or 1.24%, at year-end 1993 and $622.7 million, or 1.58%, at
September 30, 1993.
Nonperforming assets declined $101.6 million, or 20%, from the end of
the prior year, principally as a result of decreases in both nonperforming
loans and other real estate owned of $50.2 million and $42.8 million,
respectively. Other nonperforming assets, which are comprised primarily
of nonperforming venture capital investments, decreased $8.5 million, or
63%, during the first nine months of 1994. The reduction in nonperforming
loans was principally attributable to decreases in nonaccrual real estate
loans (principally construction loans) and commercial loans. In the
aggregate, nonperforming loans in these categories were down $42.0 million,
or 14%, from the previous year end. As indicated in Figure 19, the
reduction in OREO was largely due to the selective sale of assets. On a
regional basis, the largest basis point improvements in the ratio of
nonperforming assets to total loans plus OREO and other nonperforming assets
were experienced in the Great Lakes and Northeast regions as illustrated in
Figure 20. The higher ratio in the Financial Services sector reflected the
disproportionately higher level of nonperforming assets in certain mortgage
and investment companies, although nonperforming assets in these companies
totaled only $16.5 million at September 30, 1994.
In May 1993, the Financial Accounting Standards Board issued SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan." This standard affects
the definition and basis for measuring impaired loans and is more fully
discussed in Note 6, Nonperforming Assets on page 11 of this report.
- 30 -
<PAGE> 31
<TABLE>
FIGURE 18. SUMMARY OF NONPERFORMING ASSETS AND PAST DUE LOANS
(dollars in millions)
<CAPTION>
SEPTEMBER 30, December 31, September 30,
1994 1993 1993
------------ ------------ ------------
<S> <C> <C> <C>
Commercial, financial and agricultural $114.1 $124.0 $111.5
Real estate - construction 23.0 40.4 75.3
Real estate - commercial mortgage 88.0 99.8 120.9
Real estate - residential mortgage 43.8 46.7 50.5
Consumer 15.2 15.3 13.2
Lease financing 0.6 3.6 2.7
------------ ------------ ------------
Total nonaccrual loans 284.7 329.8 374.1
Restructured loans 1.4 6.5 5.6
------------ ------------ ------------
Total nonperforming loans 286.1 336.3 379.7
Other real estate owned 134.1 186.1 259.6
Allowance for OREO losses (26.6) (35.7) (30.2)
------------ ------------ ------------
Other real estate owned, net of allowance 107.5 150.4 229.4
Other nonperforming assets 4.9 13.4 13.6
------------ ------------ ------------
Total nonperforming assets $398.5 $500.1 $622.7
============ ============ ============
Accruing loans past due 90 days or more $84.6 $51.8 $71.6
Nonperforming loans to period-end loans 0.64 % 0.84 % 0.97 %
Nonperforming assets to period-end loans plus other
real estate owned and other nonperforming assets 0.89 1.24 1.58
</TABLE>
<TABLE>
FIGURE 19. SUMMARY OF CHANGES IN NONACCRUAL LOANS AND OREO
(in millions)
<CAPTION>
SUMMARY OF CHANGES IN NONACCRUAL LOANS Three months ended Nine months ended
September 30, September 30,
------------------------ --------------------------
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance at beginning of period $307.5 $402.3 $329.8 $550.5
Loans placed on nonaccrual 49.9 75.6 175.1 256.2
Charge-offs (1) (21.7) (57.5) (81.6) (170.7)
Payments (34.6) (24.1) (89.1) (151.1)
Transfers to OREO (6.9) (8.1) (13.7) (51.5)
Loans returned to accrual (10.7) (16.9) (38.8) (75.0)
Acquisitions 1.2 0.1 3.0 5.2
Transfers from OREO --- 2.7 --- 10.5
-------- -------- -------- --------
Balance at end of period $284.7 $374.1 $284.7 $374.1
======== ======== ======== ========
<FN>
(1) Represents the gross charge-offs taken against nonaccrual loans;
excluded are charge-offs taken against accruing loans
and credit card receivables, and interest reversals.
</TABLE>
<TABLE>
<CAPTION>
SUMMARY OF CHANGES IN OREO Three months ended Nine months ended
September 30, September 30,
------------------------ --------------------------
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance at beginning of period $118.0 $278.0 $150.4 $332.4
Additions 21.5 13.9 44.4 71.0
Sales (19.0) (44.0) (50.4) (120.0)
Charge-offs and writedowns (7.6) (11.8) (19.2) (36.3)
Transfers to loans (0.8) (2.4) (6.3) (12.9)
Acquisitions 0.2 --- 2.4 8.3
Other (4.7) (4.3) (13.7) (13.1)
------ ------ ------ ------
Balance at end of period $107.6 $229.4 $107.6 $229.4
====== ====== ====== ======
</TABLE>
- 31 -
<PAGE> 32
<TABLE>
FIGURE 20. NONPERFORMING LOANS AND ASSETS BY REGION
<CAPTION>
Nonperforming Assets to Period-end
Nonperforming Loans to Period-end Loans Loans Plus OREO and Other NPA
---------------------------------------------- ----------------------------------------------
SEPTEMBER 30, December 31, September 30, SEPTEMBER 30, December 31, September 30,
1994 1993 1993 1994 1993 1993
------------- ------------ ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Northeast Region 0.81% 1.01% 0.96% 1.26% 1.73% 1.91%
Great Lakes Region 0.59 0.91 1.18 0.77 1.25 1.74
Rocky Mountain Region 0.57 0.26 0.49 0.75 0.44 0.69
Northwest Region 0.54 0.63 0.70 0.71 0.91 1.03
Financial Services 1.20 1.03 1.22 10.20 7.76 12.58
---- ---- ---- ----- ---- -----
Total 0.64% 0.84% 0.97% 0.89% 1.24% 1.58%
==== ==== ==== ==== ==== =====
</TABLE>
<TABLE>
FIGURE 21. PERCENTAGE OF NONPERFORMING LOANS TO PERIOD-END LOANS BY LOAN TYPE AT SEPTEMBER 30, 1994
<CAPTION>
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 1.59% 3.55% 1.61% 0.27% 0.20% 0.81%
Great Lakes Region 0.72 2.58 1.41 0.34 0.11 0.59
Rocky Mountain Region 1.01 0.06 0.93 0.10 0.14 0.57
Northwest Region 0.71 0.44 1.13 0.43 0.10 0.54
Financial Services --- --- --- 3.45 --- 1.20
---- ---- ---- ---- ---- ----
Total 0.93% 1.88% 1.35% 0.34% 0.14% 0.64%
==== ==== ==== ==== ==== ====
</TABLE>
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. During the third quarter of 1994, these deposits averaged $40.8
billion and represented 71% of the Corporation's funds supporting earning
assets compared with $40.5 billion and 78%, respectively, for the third
quarter of 1993. The slight growth in average core deposits reflected the
impact of acquisitions, offset in part by the pursuit of other alternatives
by consumers in response to the interest rate environment. As shown in
Figure 3 on page 19, over the past year balances have also moderately
shifted from money market deposit accounts and 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 the
interest rate environment.
Purchased funds, which are comprised of large certificates of deposit,
deposits in the foreign office and short-term borrowings, averaged $14.8
billion for the third quarter of 1994, up $5.5 billion, or 58%, from the
comparable prior year period. These instruments were more heavily relied
upon in the current year as the growth in earning assets exceeded the
increase in core deposits discussed above. As illustrated in Figure 3, the
increase was attributable to growth 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
slight decline in large certificates of deposit.
<TABLE>
FIGURE 22. MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE AT SEPTEMBER 30, 1994
(in millions)
<CAPTION>
Domestic Foreign
Offices Office
-------- --------
<S> <C> <C>
Time remaining to maturity:
Three months or less $1,903.1 $3,333.7
Over three through six months 408.0 5.8
Over six through twelve months 671.3 ---
Over twelve months 919.8 ---
-------- --------
Total $3,902.2 $3,339.5
======== ========
</TABLE>
- 32 -
<PAGE> 33
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, securities available for sale,
anticipated prepayments and maturities on securities and through the
maturity structure of their loan portfolios. Liquidity is also enhanced by
a sizable concentration of core deposits, previously discussed, which are
generated by nearly 1300 banking offices in 13 states. The affiliate banks
individually monitor deposit flows and evaluate alternate pricing
structures to retain or grow deposits. This process is supported by a
Central Funding Unit within the Corporation's Funds Management Group which
monitors deposit outflows and assists the banks in converting the pricing
of deposits from fixed to floating rates or vice versa as specific needs
are determined. In addition, the affiliate banks have access to various
sources of non-core market funding for short-term liquidity requirements
should the need arise.
During the first nine months of 1994, Society National Bank, the
Corporation's Ohio bank, raised $1.5 billion in funding under a Medium-Term
Bank Note program. Of the notes issued, $1.1 billion have maturities of
one year or less and are included in other short-term borrowings and $400
million have original maturities in excess of one year and are included in
long-term debt. Under a separate Bank Note program, during the third
quarter of 1994, four KeyCorp banks issued short-term notes totaling $895
million with Key Bank of New York's $400 million constituting the largest
issuance. The proceeds from these programs are to be used for general
corporate purposes in the ordinary course of business.
The liquidity requirements of the parent company, primarily for
dividends to shareholders, retirement of debt and other corporate purposes
are met principally through regular dividends from affiliate banks. Excess
funds are maintained in short-term investments. The parent company has no
lines of credit with other financial institutions, but has access to the
capital markets as a result of its debt ratings.
Further information pertaining to the Corporation's sources and uses of
cash for the nine-month periods ended September 30, 1994 and 1993, is
presented in the Consolidated Statements of Cash Flow on page 6 of this
report.
CAPITAL AND DIVIDENDS
Total shareholders' equity at September 30, 1994, was $4.7 billion, up
$308.3 million, or 7%, and $391.8 million, or 9%, from December 31 and
September 30, 1993, balances, respectively. The increases resulted
principally from the retention of net income after dividends paid to
shareholders. Other factors contributing to the change in shareholders'
equity during the first nine months of 1994 are shown in the Statement of
Changes in Shareholders' Equity presented on page 5 of this report.
Included in these changes are net unrealized losses of $139.1 million on
securities available for sale, bringing cumulative net unrealized losses on
these securities to $93.0 million as of September 30, 1994. These net
unrealized losses were recorded in connection with SFAS No. 115,
"Accounting for Certain Debt and Equity Securities," which was adopted by
the Corporation as of January 1, 1994. 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
and is more fully described in Note 3, Securities Available for Sale, on
page 9 of this report.
During the first nine months of 1994, the Corporation repurchased
2,040,235 million shares of its common stock at a total cost of $65.8
million. These shares are expected to be issued in connection with
acquisitions and various employee benefit programs.
Capital adequacy is an important indicator of financial stability and
performance. Overall, the Corporation's capital position remains strong
with a ratio of total shareholders' equity to total assets of 7.29% at
September 30, 1994, compared to 7.37% at December 31, 1993, and 7.41% at
September 30, 1993.
Banking industry regulators define minimum capital ratios for bank
holding companies and their banking and savings association subsidiaries.
Based on the risk-adjusted capital rules and definitions prescribed by the
banking regulators, KeyCorp's Tier I and total capital to net risk-adjusted
assets ratios at September 30, 1994, were 8.86% and 12.07%, 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 by regulators to maintain ratios of at least 100 to 200 basis
points above the minimum. At September 30, 1994, KeyCorp's leverage ratio
was at 6.79%, substantially higher than the minimum requirement. In
response to SFAS No. 115,
- 33 -
<PAGE> 34
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 gains or losses on securities
available for sale for purposes of calculating the risk-based and leverage
ratios. If adopted as proposed, the rules could cause the Tier I capital to be
subject to greater volatility. The regulatory agencies are also proposing to
add a new component to the risk-based capital requirements based upon the level
of an institution's exposure to interest rate risk. Figure 23 presents the
details of KeyCorp's capital position at September 30, 1994, December 31, 1993,
and September 30, 1993.
Under the FDIC Improvement Act, the Federal bank regulators group FDIC-insured
depository institutions into five broad categories based on certain capital
ratios. The five categories are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" 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 as "well capitalized" at September 30, 1994. All of
KeyCorp's affiliate banks qualified as "well-capitalized" at September 30,
1994. The FDIC-defined capital categories, as determined by applying the prompt
corrective action provisions of the law, do not necessarily constitute an
accurate representation of the overall financial condition or prospects of
KeyCorp or its affiliate banks.
<TABLE>
FIGURE 23. CAPITAL COMPONENTS AND RISK-ADJUSTED ASSETS
(dollars in millions)
<CAPTION>
SEPTEMBER 30, December 31, September 30,
TIER I CAPITAL 1994 1993 1993
------------ ----------- ------------
<S> <C> <C> <C>
Common shareholders' equity (1) $4,634.9 $4,233.6 $4,150.1
Qualifying preferred stock 160.0 160.0 160.0
Less: Goodwill (387.9) (385.4) (378.6)
Other intangible assets (2) (137.0) (122.9) (117.0)
------------ ----------- ------------
Total Tier I Capital 4,270.0 3,885.3 3,814.5
------------ ----------- ------------
TIER II CAPITAL
Allowance for loan losses (3) 605.0 559.7 553.5
Qualifying long-term debt 942.9 993.4 993.3
------------ ----------- ------------
Total Tier II Capital 1,547.9 1,553.1 1,546.8
------------ ----------- ------------
Total Capital $5,817.9 $5,438.4 $5,361.3
============ =========== ============
RISK-ADJUSTED ASSETS
Risk-adjusted assets on balance sheet $44,523.6 $40,979.9 $40,588.1
Risk-adjusted off-balance sheet exposure 4,404.8 4,283.3 4,187.4
Less: Goodwill (387.9) (385.4) (378.6)
Other intangible assets (2) (137.0) (122.9) (117.0)
------------ ----------- ------------
Gross risk-adjusted assets 48,403.5 44,754.9 44,279.9
Less: Excess allowance for loan losses (215.1) (243.0) (245.9)
------------ ----------- ------------
Net risk-adjusted assets $48,188.4 $44,511.9 $44,034.0
============ =========== ============
AVERAGE QUARTERLY TOTAL ASSETS $63,438.6 $58,289.3 $57,051.7
============ =========== ============
CAPITAL RATIOS
Tier I capital to risk-adjusted assets 8.86 % 8.73 % 8.66 %
Total capital to risk-adjusted assets 12.07 12.22 12.18
Leverage (4) 6.79 6.72 6.74
<FN>
(1) Common shareholders' equity excludes the impact of net unrealized gains or losses on securities classified as available
for sale.
(2) Intangible 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.
(3) The allowance for loan losses included in Tier II capital is limited to 1.25% of gross risk-adjusted assets.
(4) Tier I capital divided by average total assets for the quarter less goodwill and other intangible assets as defined in (2)
above.
</TABLE>
- 34 -
<PAGE> 35
<TABLE>
FIGURE 24. BANKING SERVICES DATA BY REGION
(dollars in millions)
<CAPTION>
Northeast Region Great Lakes Region
------------------------- -----------------------------
Three months ended Three months ended
September 30, September 30,
------------------------- -----------------------------
1994 1993 1994 1993
------- ------- ------- -------
<S> <C> <C> <C> <C>
SIGNIFICANT RATIOS
Return on average total assets 1.33% 1.31% 1.54% 1.75%
Net interest margin 4.84 5.34 4.52 5.19
Nonperforming loans to period-end loans 0.84 0.89 0.62 1.15
Allowance for loan losses to period-end loans 1.34 1.40 2.39 2.79
Net charge-offs to average loans 0.46 0.66 0.13 0.49
Efficiency 51.48 52.09 51.85 51.65
AVERAGE BALANCES
Loans $12,488 $11,485 $19,425 $17,062
Earning assets 16,861 15,579 26,784 22,772
Total assets 17,992 16,714 29,161 24,906
Deposits 13,935 13,966 20,501 18,466
Shareholder's equity 1,385 1,276 2,058 2,008
</TABLE>
<TABLE>
(dollars in millions)
<CAPTION>
Rocky Mountain Region Northwest Region
------------------------- -----------------------------
Three months ended Three months ended
September 30, September 30,
------------------------- -----------------------------
1994 1993 1994 1993
------- ------- ------- -------
<S> <C> <C> <C> <C>
SIGNIFICANT RATIOS
Return on average total assets 1.44% 1.35% 1.19% 1.37%
Net interest margin 5.25 5.32 4.74 5.38
Nonperforming loans to period-end loans 0.32 0.33 0.33 0.39
Allowance for loan losses to period-end loans 1.36 1.35 1.28 1.24
Net charge-offs to average loans 0.30 0.22 0.11 0.26
Efficiency 56.11 57.71 59.32 56.44
AVERAGE BALANCES
Loans $3,186 $2,651 $9,225 $8,607
Earning assets 4,114 3,499 11,235 9,901
Total assets 4,463 3,797 1,227 10,906
Deposits 3,497 3,131 9,543 9,190
Shareholder's equity 351 287 939 840
</TABLE>
-35-
<PAGE> 36
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In the ordinary course of business, the Corporation 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.
Item 5. OTHER INFORMATION
(a) Interstate Banking Legislation
On September 29, 1994, the Riegle-Neal Interstate Banking and Branching
companies will be permitted to acquire banks located in any state
regardless of the state law in effect at the time. The Interstate Act
also provides for the nationwide interstate branching of banks. Under
the Interstate Act, both national and state chartered banks will be
permitted to merge across state lines (and thereby create interstate
branches) commencing June 1, 1997. Under the provisions of the
Interstate Act, states are permitted to "opt-out" of the interstate
branching authority by taking appropriate legislative action prior to
the commencement date. States may also "opt-in" early (i.e. prior to
June 1, 1997) to the interstate branching provisions. KeyCorp will
make a thorough review of consolidation opportunities which may become
available to it under the terms of the Interstate Act.
(b) Key Mortgage Inc.
On October 6, 1994, as an outgrowth of its strategic planning process,
KeyCorp announced it was exploring the possibility of offering its
mortgage banking subsidiary, Key Mortgage Inc., for sale.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(11) Computation of Net Income Per Common Share
(15) Acknowledgment Letter of Independent Auditors
(21) Subsidiaries of the Registrant
(27) Financial Data Schedule
(b) Reports on Form 8-K
August 10, 1994 - Item 5. Other Events and Item 7. Financial
Statements, Pro Forma Financial Statements and Exhibits. Reporting
that the Registrant and CS First Boston Corporation, Goldman, Sachs &
Co., Kidder, Peabody & Co. Incorporated, J.P. Morgan Securities Inc.
and Salomon Brothers Inc. have executed a Distribution Agreement dated
as of August 10, 1994, in connection with the Registrant's Medium-Term
Note Program and its Universal Shelf Registration Statement, as amended.
-36-
<PAGE> 37
August 10, 1994 - Item 5. Other Events and Item 7. Financial
Statements, Pro Forma Financial Statements and Exhibits. Reporting
Amendment No. 1, on Form 8-K/A, to the July 25, 1994 Form 8-K, filing
Section 801(3) of the Senior Indenture and Section 1303 of both the
Senior Indenture and Subordinated Indenture.
July 25, 1994 - Item 5. Other Events and Item 7. Financial
Statements, Pro Forma Financial Statements and Exhibits. Reporting
that the Registrant and Bankers Trust Company, as Trustee, have
executed a Senior Indenture and a Subordinated Indenture in connection
with the Registrant's Universal Shelf Registration Statement, as
amended.
July 19, 1994 - Item 5. Other Events and Item 7. Financial
Statements, Pro Forma Financial Statements and Exhibits. Reporting
that the Registrant issued a press release on July 18, 1994, announcing
its earnings results for the three and six-month periods ended June 30,
1994.
No other reports on Form 8-K were filed during the three-month period
ended September 30, 1994.
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)
/s/ Lee Irving
Dated: November 14, 1994 -----------------
By: Lee Irving
Executive Vice President,
Treasurer and Chief
Accounting Officer
- 37 -
<PAGE> 1
EXHIBIT 11
KEYCORP
COMPUTATION OF NET INCOME PER COMMON SHARE
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
------------------------------- ------------------------------
1994 1993 1994 1993
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
NET INCOME APPLICABLE TO COMMON SHARES
Net income $229,328 $200,802 $659,730 $587,564
Less: Preferred dividend requirements 4,000 4,158 12,000 14,097
-------------- -------------- ------------- ---------------
Net income applicable to Common Shares $225,328 $196,644 $647,730 $573,467
============== ============== ============= ===============
NET INCOME PER COMMON SHARE
Weighted average Common Shares outstanding 244,132,128 240,821,930 243,635,197 239,437,141
============== ============== ============= ===============
Net income applicable to Common Shares $225,328 $196,644 $647,730 $573,467
============== ============== ============= ===============
Net income per Common Share $0.92 $0.82 $2.66 $2.40
============== ============== ============= ===============
NET INCOME PER COMMON SHARE -- PRIMARY
Weighted average Common Shares outstanding 244,132,128 240,821,930 243,635,197 239,437,141
Dilutive common stock options (1) 2,813,300 1,571,119 2,672,647 1,892,081
-------------- -------------- ------------- ---------------
Weighted average Common Shares and Common Share
equivalents outstanding 246,945,428 242,393,049 246,307,844 241,329,22
============== ============== ============= ===============
Net income applicable to Common Shares $225,328 $196,644 $647,730 $573,467
============== ============== ============= ===============
Net income per Common Share $0.91 $0.81 $2.63 $2.38
============== ============== ============= ===============
NET INCOME PER COMMON SHARE -- FULLY DILUTED
Weighted average Common Shares outstanding 244,132,128 240,821,930 243,635,197 239,437,141
Dilutive common stock options (1) 2,813,804 3,009,280 2,675,110 2,063,647
-------------- -------------- ------------- ---------------
Weighted average Common Shares and Common Share
equivalents outstanding 246,945,932 243,831,210 246,310,307 241,500,788
============== ============== ============= ===============
Net income applicable to Common Shares $225,328 $196,644 $647,730 $573,467
============== ============== ============= ===============
Net income per Common Share $0.91 $0.81 $2.63 $2.37
============== ============== ============= ===============
<FN>
(1) Dilutive common stock options are based on the treasury stock method using
average market price in computing net income per Common Share -- primary,
and the higher of period-end market price or average market price in
computing net income per Common Share -- fully diluted.
</TABLE>
<PAGE> 1
EXHIBIT 15
ACKNOWLEDGMENT LETTER OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
KeyCorp
We are aware of the incorporation by reference in the following KeyCorp
Registration Statements of our review report, dated October 17, 1994,
relating to the unaudited consolidated interim financial statements of
KeyCorp, included in the Quarterly Report on Form 10-Q for the period ended
September 30, 1994.
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-3 No. 33-53643
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. 33-54819
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)
Pursuant to Rule 436(c) of the Securities Act of 1933, our report is
not a part of the Registration Statements prepared or certified by
accountants within the meaning of Section 7 or 11 of the Securities Act of
1933.
/s/ Ernst & Young LLP
Cleveland, Ohio
November 14, 1994
<PAGE> 1
<TABLE>
EXHIBIT 21
KEYCORP
SUBSIDIARIES OF THE REGISTRANT AT OCTOBER 31, 1994
<CAPTION>
Jurisdiction Percent
of Incorporation of
or Organization Ownership (1)
---------------- -------------
<S> <C> <C>
NAME OF HOLDING COMPANY SUBSIDIARY
Key Bancshares of Alaska, Inc. (KBsAK) Alaska 100%
Key Bancshares of Idaho, Inc. (KBsID) Idaho 100%
Key Bancshares of Maine, Inc. (KBsME) Maine 100%
Key Bancshares of New York, Inc. (KBsNY) New York 100%
Key Bancshares of Utah, Inc. (KBsUT) Utah 100%
Key Bancshares of Washington, Inc. (KBsWA) Washington 100%
Key Bancshares of Wyoming, Inc. (KBsWY) Wyoming 100%
Society Bancorp of Michigan, Inc. (SBMI) Michigan 100%
NAME OF BANKING SUBSIDIARY
Key Bank of Colorado (KBCO) Colorado 100%
Key Bank of Alaska (KBAK) Alaska 100% by KBsAK
Key Bank of Idaho (KBID) Idaho 100% by KBsID
Key Bank of Maine (KBME) Maine 100% by KBsME
Key Bank of New York (KBNY) New York 100% by KBsNY
Key Bank of Oregon (KBOR) Oregon 100% by KBsAK
Key Bank U.S.A. N.A. (KBUSA) United States 100% by KBsNY
Key Bank of Utah (KBUT) Utah 100% by KBsUT
Key Bank of Washington (KBWA) Washington 100% by KBsWA
Key Bank of Wyoming (KBWY) Wyoming 100% by KBsWY
Key Savings Bank (KSB) Washington 100% by KBsWA
Society First Federal Savings Bank (SFF) United States 100%
Society Bank, Michigan Michigan 100% by SBMI
Society National Bank (SNB) United States 100%
Society National Bank, Indiana (SBIN) United States 100%
Society National Trust Company United States 100%
NAME OF NONBANKING SUBSIDIARY
A.T. -Sentinel. Inc. Delaware 100% by SNB
A.T. Acceptance Corporation (2) Ohio 100%
American Advisers, Inc. Ohio 100% by SAM
Ameritrust Company (2) Ohio 100%
AT Financial Corporation (2) Ohio 100%
AT Management Company (2) Delaware 100%
Bar T Bar Fiduciary Holding Company Arizona 100% by SNB
Beechnut Development Company Washington 100%
Black & Warr Insurance Agency, Inc. Idaho 100% by Gem State
Boulevard, Inc. Idaho 100% by KBID
CFS One, Inc. (2) Alabama 100%
Commercial Agency, Inc. Colorado 100% by KBCO
Commercial Building Corporation Utah 100% by KBUT
Electronic Payment Services, Inc. Delaware 7%
Emgee Coal Company (2) Ohio 100% by SNB
First Appraisal Services Corporation Florida 100% by SFF
</TABLE>
<PAGE> 2
<TABLE>
KEYCORP
SUBSIDIARIES OF THE REGISTRANT AT OCTOBER 31, 1994 (CONTINUED)
<CAPTION>
Jurisdiction Percent
of Incorporation of
or Organization Ownership (1)
---------------- -------------
<S> <C> <C>
NAME OF NONBANKING SUBSIDIARY (CONTINUED)
Gem State Properties Corporation (Gem State) Idaho 100% by KBID
Goldome Mortgage Investment Corp. New York 100% by KMI
GRCC Mid-Hudson Motel Corporation (2) New York 100% by KMI
INDORE Corp. Indiana 100% by SBIN
Interstate Financial Corporation (2) Ohio 100%
Investco Wyoming 100% by KBsWY
KBID Leasing Corporation Idaho 100% by KBID
KBNY Leasing, Inc. New York 100% by KBNY
KBWA Leasing Corporation Washington 100% by KBWA
KBWA Services, Inc. (2) Washington 100% by KBWA
Key Agricultural Credit Corporation Utah 100% by KBWY
Key Bank Life Insurance, Ltd. Arizona 100%
Key Brokerage Company, Inc. New York 100% by KBUSA
Key Capital Corporation Ohio 100%
Key Clearing Corp. Ohio 100% by KAMHI
Key Community Development Corporation Ohio 100%
Key Equity Capital Corporation Ohio 100% by SNB
Key Financial Services, Inc. New York 100% by KBNY
Key Services Corporation Ohio 100% by KBsNY
Key Trust Company New York 100% by KBsNY
Key Trust Company of the West Wyoming 100% by KBsWY
Key Trust Company of Alaska Alaska 100% by KBAK
Key Trust Company of Maine Maine 100% by KBsME
Key Trust of the Northwest Washington 100%
KeyCorp (New York) New York 100% by KBsNY
KeyCorp Asset Management Holdings, Inc. (KAMHI) Ohio 100% by SNB
KeyCorp Financial Services, Inc. (2) New York 100%
KeyCorp Insurance Agency (Idaho), Inc. Idaho 100% by KBUSA
KeyCorp Insurance Agency (Maine), Inc. Maine 100% by KBUSA
KeyCorp Insurance Agency (Wyoming), Inc. Wyoming 100% by KBUSA
KeyCorp Insurance Agency, Inc. New York 100% by KBUSA
KeyCorp Insurance Co. Ltd. Bermuda 100%
KeyCorp Leasing Ltd. Delaware 100% by KBUSA
KeyCorp Management Company Ohio 100%
KeyCorp Mortgage, Inc. (KMI) Maryland 100% by KBNY
KeyCorp Network Holdings, Inc. Oregon 100%
KeyCorp Shareholder Services, Inc. Delaware 100% by SNB
KeyLease, Inc. of Ohio Ohio 100% by SNB
KLIHTC, Corp. New York 100% by KBNY
Michigan Shared Properties Company Ohio 100% by SNB
Midwest Power Company Ohio 100%
Millennium Asset Holding Corporation New York 100% by KBNY
Money Station, Inc. Ohio 14%
National Financial Services Corporation (2) Ohio 100%
NCB Properties, Inc. New York 100% by KBNY
Niagara Asset Corporation New York 100% by KBNY
</TABLE>
<PAGE> 3
<TABLE>
KEYCORP
SUBSIDIARIES OF THE REGISTRANT AT OCTOBER 31, 1994 (CONTINUED)
<CAPTION>
Jurisdiction Percent
of Incorporation of
or Organization Ownership (1)
---------------- -------------
<S> <C> <C>
NAME OF NONBANKING SUBSIDIARY (CONTINUED)
Niagara Portfolio Management Corp. Texas 100% by KBNY
OREO Corp. Ohio 100% by SNB
P.B. Participation Oregon 100%
P.S.M. Financial Management Corp. Washington 100% by KSB
PacWest Building Corporation Oregon 100%
Platinum Spring Corporation Maryland 100% by KBNY
Puget Sound Mortgage Servicing Corporation Washington 100% by KSB
Puget Sound Plaza, Inc. (PSP) Washington 100% by KBWA
Puget Sound Securities, Inc. Washington 100% by KSB
Royal Skies Development Co. (RSD) Washington 100% by KBWA
Schaenen Wood & Associates, Inc. New York 100% by KAMHI
Second Street Community Urban Redevelopment Corporation Ohio 100% by SNB
Security Capital Leasing, Inc. (2) Kentucky 100%
SELCO Service Corporation Ohio 100% by SNB
Society Asset Management, Inc. (SAM) Ohio 100% by KAMHI
Society Aviation Company Delaware 100%
Society Corporation (2) Ohio 100%
Society Equipment Leasing Company Ohio 100%
Society Equipment Leasing Corporation (SEL) Ohio 100% by SNB
Society Funding Corporation (2) Ohio 100% by SEL
Society Investments, Inc. Ohio 100% by SNB
Society Life Insurance Company Arizona 100%
Society Trust Company of New York New York 100%
St. Joseph Insurance Agency, Inc. Indiana 100%
State Financial Services, Inc. Ohio 100% by SNB
Summit International Sales, Inc. Virgin Islands 100% by SNB
Summit Street Properties, Inc. (2) Ohio 100% by SNB
Swan Island Salmon, Ltd. Maine 100% by KBME
TCIS, Inc. Ohio 100%
Trustcorp Financing Services, Inc. Ohio 100%
Virginia Stone Corporation New York 100% by KBNY
Washington Mortgage Corporation (WMC) Washington 100% by KBsWA
<FN>
- ----------------------------------------
(1) Subsidiaries are directly owned by KeyCorp unless otherwise noted.
(2) Subsidiaries are inactive or are discontinued operations.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1994
<PERIOD-START> Jan-1-1994
<PERIOD-END> SEP-30-1994
<CASH> 3,006,712
<INT-BEARING-DEPOSITS> 35,945,729
<FED-FUNDS-SOLD> 86,129
<TRADING-ASSETS> 13,543
<INVESTMENTS-HELD-FOR-SALE> 2,960,348
<INVESTMENTS-CARRYING> 10,523,974
<INVESTMENTS-MARKET> 10,203,998
<LOANS> 44,608,770
<ALLOWANCE> 820,158
<TOTAL-ASSETS> 64,500,250
<DEPOSITS> 47,816,483
<SHORT-TERM> 3,172,657
<LIABILITIES-OTHER> 1,116,664
<LONG-TERM> 2,177,796
<COMMON> 245,944
0
160,000
<OTHER-SE> 4,295,947
<TOTAL-LIABILITIES-AND-EQUITY> 64,500,250
<INTEREST-LOAN> 2,681,590
<INTEREST-INVEST> 612,984
<INTEREST-OTHER> 3,741
<INTEREST-TOTAL> 3,298,315
<INTEREST-DEPOSIT> 957,349
<INTEREST-EXPENSE> 1,270,284
<INTEREST-INCOME-NET> 2,028,031
<LOAN-LOSSES> 99,033
<SECURITIES-GAINS> 8,997
<EXPENSE-OTHER> 1,611,566
<INCOME-PRETAX> 994,770
<INCOME-PRE-EXTRAORDINARY> 994,770
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 659,730
<EPS-PRIMARY> 2.66
<EPS-DILUTED> 2.63
<YIELD-ACTUAL> 4.91
<LOANS-NON> 284,706
<LOANS-PAST> 84,586
<LOANS-TROUBLED> 1,438
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 802,712
<CHARGE-OFFS> 155,598
<RECOVERIES> 67,196
<ALLOWANCE-CLOSE> 820,158
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
