<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 June 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 latest practicable date.
<TABLE>
<S> <C>
Common Shares, $1 par value 244,191,270 Shares
------------------------------- ------------------------------
(Title of class) (Outstanding at July 31, 1994)
</TABLE>
<PAGE> 2
KEYCORP
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
-----------------------------
<TABLE>
<S> <C>
Item 1. Financial Statements Page No.
-------------------- --------
Consolidated Balance Sheets --
June 30, 1994, December 31, 1993, and June 30, 1993 3
Consolidated Statements of Income --
Three months and six months ended June 30, 1994 and 1993 4
Consolidated Statements of Changes in Shareholders' Equity --
Six months ended June 30, 1994 and 1993 5
Consolidated Statements of Cash Flow --
Six months ended June 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>
- 2 -
<PAGE> 3
PART I. FINANCIAL INFORMATION
KEYCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, December 31, June 30,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1994 1993 1993
- ----------------------------------------------------------------------------------------------------------------
(UNAUDITED) (Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $3,132,926 $2,777,438 $2,581,369
Short-term investments 178,534 107,219 1,656,822
Mortgage loans held for sale 529,615 1,325,338 1,178,541
Securities available for sale (at fair value in 1994; fair value
in 1993 of $1,794,845 and $2,247,796, respectively) 4,169,674 1,726,828 2,140,102
Investment securities (fair value: $9,107,675, $11,340,201
and $9,648,950, respectively) 9,311,541 11,122,093 9,348,456
Loans 43,157,659 40,071,244 38,375,940
Less: Allowance for loan losses 816,437 802,712 795,745
- ----------------------------------------------------------------------------------------------------------------
Net loans 42,341,222 39,268,532 37,580,195
Premises and equipment 933,334 912,870 906,460
Other real estate owned, net of allowance 118,006 150,362 278,004
Goodwill 371,966 385,359 402,145
Other intangible assets 194,688 163,989 250,600
Purchased mortgage servicing rights 193,759 188,592 178,768
Other assets 1,881,316 1,502,531 1,442,991
- ----------------------------------------------------------------------------------------------------------------
Total assets $63,356,581 $59,631,151 $57,944,453
================================================================================================================
LIABILITIES
Deposits in domestic offices:
Noninterest-bearing $8,414,213 $8,826,300 $8,121,470
Interest-bearing 35,787,796 35,658,315 35,658,263
Deposits in foreign office -- interest-bearing 3,594,208 2,014,533 621,070
- ----------------------------------------------------------------------------------------------------------------
Total deposits 47,796,217 46,499,148 44,400,803
Federal funds purchased and securities sold
under agreements to repurchase 5,509,707 4,120,258 4,932,721
Other short-term borrowings 2,326,346 1,776,192 1,584,026
Other liabilities 1,001,916 1,078,116 886,229
Long-term debt 2,123,641 1,763,870 1,957,224
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 58,757,827 55,237,584 53,761,003
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value; authorized 25,000,000 shares,
none issued --- --- ---
Cumulative Preferred Stock:
Series A, $50 stated value --- --- 23,970
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 245,898,999, 242,827,755 and 240,617,640 shares 245,899 242,828 240,618
Capital surplus 1,469,021 1,433,861 1,394,920
Retained earnings 2,908,752 2,641,450 2,454,943
Loans to ESOP trustee (63,909) (63,909) (63,909)
Net unrealized gains (losses) on securities available for sale (82,288) --- ---
Treasury stock at cost (1,652,555, 1,280,604 and 1,679,016 shares) (38,721) (20,663) (27,092)
- ----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 4,598,754 4,393,567 4,183,450
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $63,356,581 $59,631,151 $57,944,453
================================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).
- 3 -
<PAGE> 4
KEYCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- ------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1994 1993 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 879,567 $ 836,482 $1,705,848 $1,646,942
Mortgage loans held for sale 15,442 17,937 33,866 32,447
Taxable investment securities 128,482 138,212 229,036 286,302
Tax-exempt investment securities 22,666 27,343 46,015 55,692
Securities available for sale 55,616 37,409 130,610 77,358
Short-term investments 835 7,628 2,223 13,672
- -----------------------------------------------------------------------------------------------------------------------------
Total interest income 1,102,608 1,065,011 2,147,598 2,112,413
INTEREST EXPENSE
Deposits 315,414 314,755 611,535 633,838
Federal funds purchased and securities
sold under agreements to repurchase 60,464 32,020 99,431 66,589
Other short-term borrowings 14,629 10,815 28,819 18,904
Long-term debt 31,781 33,259 59,381 64,795
- -----------------------------------------------------------------------------------------------------------------------------
Total interest expense 422,288 390,849 799,166 784,126
- -----------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 680,320 674,162 1,348,432 1,328,287
Provision for loan losses 35,027 59,576 71,819 115,427
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 645,293 614,586 1,276,613 1,212,860
NONINTEREST INCOME
Service charges on deposit accounts 68,407 64,004 130,724 124,728
Trust income 55,612 63,849 112,649 126,764
Mortgage banking income 19,596 28,039 38,974 42,024
Credit card fees 18,908 18,216 35,576 34,503
Insurance and brokerage income 15,411 17,602 31,418 31,696
Special asset management fees 6,803 7,684 8,959 23,975
Net securities gains 589 1,730 7,017 3,016
Other income 42,149 52,139 88,714 89,114
- -----------------------------------------------------------------------------------------------------------------------------
Total noninterest income 227,475 253,263 454,031 475,820
NONINTEREST EXPENSE
Personnel 267,349 273,841 542,947 531,192
Net occupancy 53,236 51,571 108,730 102,514
Equipment 39,590 41,151 79,458 79,830
FDIC insurance assessments 24,813 24,330 48,812 50,585
Professional fees 11,507 14,575 24,011 27,572
OREO expense, net 2,358 12,665 3,690 21,325
Other expense 139,863 151,698 273,895 291,855
- -----------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 538,716 569,831 1,081,543 1,104,873
- -----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 334,052 298,018 649,101 583,807
Income taxes 112,287 101,130 218,699 197,045
- -----------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 221,765 $ 196,888 $ 430,402 $ 386,762
=============================================================================================================================
Net income applicable to Common Shares $ 217,765 $ 192,438 $ 422,402 $ 376,823
Net income per Common Share .89 .81 1.74 1.58
Weighted average Common Shares outstanding 244,823,153 239,531,988 243,382,552 238,733,270
=============================================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).
- 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) ($31,175)
Net income 386,762
Cash dividends:
Common Shares ($.56 per share) (65,422)
Fixed/Adjustable Rate Cumulative
Preferred Stock ($1.297 per share) (1,556)
Declared by pooled company prior to merger:
Common Stock (62,533)
Preferred Stock (8,901)
Issuance of Common Shares:
Acquisition - 2,702,123 shares 2,702 48,854
Dividend reinvestment, stock option
and purchase plans - 804,319 shares 552 11,310 4,083
Redemption of 1,200,000 shares of
Fixed/Adjustable Rate Cumulative
Preferred Stock (60,000) (1,800)
Tax benefits attributable to ESOP dividends 542
Loan payments from ESOP trustee 1,569
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1993 $183,970 $240,618 $1,394,920 $2,454,943 ($63,909) ($27,092)
- -----------------------------------------------------------------------------------------------------------------------------------
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 1st, net of
deferred income taxes of $26,621 $46,153
Adjustments relating to poolings of interests (11) (375)
Net income 430,402
Cash dividends:
Common Shares ($.64 per share) (115,971)
Cumulative Preferred Stock (4,000)
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
Dividend reinvestment, stock option
and purchase plans - 827,445 shares 182 6,032 11,221
Repurchase of Common Shares - 1,199,396 shares (29,279)
Change in net unrealized gains (losses) on
securities available for sale, net of deferred
income taxes of $(74,978) (128,441)
Tax benefits attributable to ESOP dividends 664
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1994 $160,000 $245,899 $1,469,021 $2,908,752 ($63,909) ($82,288) ($38,721)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).
<PAGE> 6
KEYCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
<TABLE>
<CAPTION>
Six months ended June 30,
--------------------------------
(IN THOUSANDS) 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $430,402 $386,762
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 71,819 115,427
Depreciation expense 59,260 53,546
Amortization of intangibles 26,255 29,022
Amortization of purchased mortgage servicing rights 22,425 24,370
Gains on certain asset sales --- (2,146)
Deferred income taxes 38,061 25,111
Net securities gains (7,017) (3,016)
Net decrease (increase) in mortgage loans held for sale 795,723 (240,000)
Losses (gains) from the sales of other real estate owned 854 (3,766)
Other operating activities, net 100,270 (2,119)
- -------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,538,052 383,191
INVESTING ACTIVITIES
Net increase in loans (2,866,897) (265,041)
Purchases of investment securities (3,607,305) (1,468,650)
Proceeds from sales of investment securities --- 93,627
Proceeds from prepayments and maturities of investment securities 1,495,314 1,472,726
Purchases of securities available for sale (273,636) (215,581)
Proceeds from sales of securities available for sale 1,414,010 349,991
Proceeds from prepayments and maturities of securities available for sale 214,988 229,055
Net increase in short-term investments (71,315) (551,960)
Purchases of premises and equipment (75,246) (91,057)
Proceeds from sales of premises and equipment 7,914 11,583
Proceeds from sales of other real estate owned 30,594 79,791
Purchases of mortgage servicing rights (27,592) (17,799)
Net cash provided by (used in) acquisitions 2,876 (46,961)
- -------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (3,756,295) (420,276)
FINANCING ACTIVITIES
Net increase (decrease) in deposits 481,925 (1,791,426)
Net increase in short-term borrowings 1,938,938 1,315,482
Proceeds from issuance of long-term debt 473,923 554,437
Payments on long-term debt (114,152) (387,712)
Redemption of preferred stock --- (61,800)
Purchase of treasury shares (29,279) ---
Proceeds from issuance of common stock pursuant to employee
stock purchase, stock option and dividend reinvestment plans 17,435 14,732
Cash dividends (195,708) (125,875)
Other financing activities, net 649 20,879
- -------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,573,731 (461,283)
- -------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 355,488 (498,368)
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 2,777,438 3,079,737
- -------------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF PERIOD $3,132,926 $2,581,369
=========================================================================================================================
Additional disclosures relative to cash flow:
Interest paid $779,508 $762,324
Income taxes paid 136,126 135,802
Net payments received on "portfolio" swaps 75,844 68,748
Noncash item:
Transfers of loans to other real estate owned 22,933 57,182
=========================================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).
-6-
<PAGE> 7
KEYCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
On March 1, 1994, KeyCorp merged into and with Society Corporation ("Society"),
which was the surviving corporation under the name KeyCorp. The merger was
accounted for as a pooling of interests and, accordingly, the financial
information for all prior periods has been restated to present the combined
financial condition and results of operations of both companies as if the
merger had been in effect for all periods presented. Further details pertaining
to the merger are presented in Note 2, Mergers 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. 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
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 ("RTC"), 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, KeyCorp ("old KeyCorp"), a financial services company
headquartered in Albany, New York, with approximately $33 billion in assets as
of December 31, 1993, merged into and with Society Corporation ("Society"), a
financial services holding company headquartered in Cleveland, Ohio, with
approximately $27 billion in assets at year-end 1993, which was the surviving
corporation and assumed the name KeyCorp. Under the terms of the merger
agreement, 124,351,183 KeyCorp Common Shares were exchanged for all of the
outstanding shares of old KeyCorp common stock (based on an exchange ratio of
1.205 shares for each share of old KeyCorp). The outstanding preferred stock
of old KeyCorp was exchanged for 1,280,000 shares of a comparable, new issue of
10% Cumulative Preferred Stock of KeyCorp.
- 7 -
<PAGE> 8
PENDING ACQUISITIONS
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, in
a tax-free exchange of stock for a total consideration of $50.8 million.
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 $349 million at March 31, 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 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 a total of $198.5 million in cash. Following the consummation of
the acquisition, Casco Northern, with 34 branches in Maine and with total
assets of $1.1 billion at March 31, 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, had 12 branches and
total assets of $684 million. The acquisitions, which are subject to certain
regulatory approvals, are expected to close during the fourth quarter of 1994
and will be accounted for as purchases.
STATE HOME SAVINGS BANK, FSB
On May 6, 1994, Society National Bank, a wholly-owned subsidiary of KeyCorp,
reached a definitive agreement to acquire State Home Savings Bank, FSB, ("State
Home Savings") based in Bowling Green, Ohio, in a cash purchase. The
transaction, which is subject to certain regulatory approvals, is expected to
close in the third quarter of 1994. The proposed acquisition will be accounted
for as a purchase. State Home Savings is a closely-held Federal savings bank
with total assets of $338 million at March 31, 1994, and 14 branches in five
Northwest Ohio counties.
THE BANK OF GREELEY
On October 5, 1993, KeyCorp agreed to acquire the Bank of Greeley, a single
branch bank headquartered in Greeley, Colorado ("Greeley Bank"). Under terms
of the agreement, 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 in the fourth
quarter of 1994 and will be accounted for as a purchase. Greeley Bank had total
assets of $61 million at June 30, 1994.
- 8 -
<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 "available for sale" and reported at fair value,
with the unrealized gains and losses excluded from operating results and
reported in 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 June 30, 1994, approximately $4.2 billion of securities were classified as
available for sale and shareholders' equity was reduced by $82.3 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.
The amortized cost, unrealized gains and losses, and approximate fair values of
securities available for sale were as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1994
-----------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ------- --------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury, agencies and corporations $1,421,988 $10,204 ($10,769) $1,421,423
States and political subdivisions 27,669 212 (192) 27,689
Mortgage-backed securities 2,829,869 1,413 (113,524) 2,717,758
Other securities 20,793 151 (18,140) 2,804
---------- ------- --------- ----------
Total $4,300,319 $11,980 ($142,625) $4,169,674
========== ======= ========= ==========
</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>
Securities available for sale by remaining contractual maturity were as follows
(in thousands):
<TABLE>
<CAPTION>
June 30, 1994
-------------------------------------
Amortized Fair
Cost Value
---------- ----------
<S> <C> <C>
Due in one year or less $ 509,325 $ 531,188
Due after one through five years 1,980,376 1,952,923
Due after five through ten years 1,371,946 1,326,306
Due after ten years 438,672 359,257
---------- ----------
Total $4,300,319 $4,169,674
========== ==========
</TABLE>
Mortgage-backed securities are included in the above maturity schedule based on
their expected average lives.
During the first six months of 1994, proceeds from the sales of securities
available for sale were $1.4 billion, resulting in gross gains of $10.5 million
and gross losses of $3.5 million.
- 9 -
<PAGE> 10
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):
<TABLE>
<CAPTION>
JUNE 30, 1994
----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- -------- --------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury, agencies and corporations $ 610,008 $ 1,547 $ (24,953) $ 586,602
States and political subdivisions 1,473,641 51,614 (3,633) 1,521,622
Mortgage-backed securities 6,676,460 32,125 (254,395) 6,454,190
Other securities 551,432 4,668 (10,839) 545,261
---------- -------- --------- ----------
Total $9,311,541 $ 89,954 $(293,820) $9,107,675
========== ======== ========= ==========
</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>
Investment securities by remaining contractual maturity were as follows
(in thousands):
<TABLE>
<CAPTION>
June 30, 1994
-------------------------
Amortized Fair
Cost Value
---------- ----------
<S> <C> <C>
Due in one year or less $1,333,665 $1,211,708
Due after one through five years 3,808,987 3,755,685
Due after five through ten years 1,241,696 1,242,730
Due after ten years 2,927,193 2,897,552
---------- ----------
Total $9,311,541 $9,107,675
========== ==========
</TABLE>
Mortgage-backed securities are included in the above maturity schedule based on
their expected average lives.
At June 30, 1994, investment and available for sale securities, with an
aggregate amortized cost of approximately $8.0 billion, were pledged to secure
public and trust deposits and securities sold under repurchase agreements, and
for other purposes required or permitted by law.
-10-
<PAGE> 11
5. LOANS
Loans are summarized as follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1994 1993 1993
---------- ---------- ----------
<S> <C> <C> <C>
Commercial, financial and agricultural $9,776,360 $8,965,528 $9,264,499
Real estate - construction 1,213,977 1,160,480 1,319,291
Real estate - commercial mortgage 6,349,978 6,228,188 6,209,512
Real estate - residential mortgage 12,701,084 11,026,319 10,125,748
Consumer 9,571,957 9,276,334 8,992,369
Student loans held for sale 1,527,390 1,648,611 1,014,812
Lease financing 1,944,515 1,702,472 1,377,144
Foreign 72,398 63,312 72,565
----------- ----------- -----------
Total $43,157,659 $40,071,244 $38,375,940
=========== =========== ===========
</TABLE>
Changes in the allowance for loan losses are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
-------------------------- -------------------------
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance at beginning of period $812,592 $793,247 $802,712 $782,649
Charge-offs (52,673) (84,786) (108,126) (167,176)
Recoveries 21,491 25,148 45,629 45,916
-------- ------- -------- --------
Net charge-offs (31,182) (59,638) (62,497) (121,260)
Provision for loan losses 35,027 59,576 71,819 115,427
Allowance of merged affiliates --- 2,560 4,403 18,929
-------- ------- -------- --------
Balance at end of period $816,437 $795,745 $816,437 $795,745
======== ======== ======== ========
</TABLE>
6. NONPERFORMING ASSETS
Nonperforming assets were as follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1994 1993 1993
-------- -------- --------
<S> <C> <C> <C>
Nonaccrual loans $307,466 $329,843 $402,305
Restructured loans 1,540 6,469 7,491
-------- -------- --------
Total nonperforming loans 309,006 336,312 409,796
Other real estate owned 148,278 186,052 304,226
Allowance for OREO losses (30,272) (35,690) (26,222)
-------- -------- --------
Other real estate owned, net of allowance 118,006 150,362 278,004
Other nonperforming assets 4,841 13,462 13,989
-------- -------- --------
Total nonperforming assets $431,853 $500,136 $701,789
======== ======== ========
</TABLE>
Changes in the allowance for OREO losses are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1994 1993 1994 1993
------- ------- ------- -------
<S> <C> <C> <C> <C>
Balance at beginning of period $33,200 $23,953 $35,690 $17,915
Net charge-offs (3,935) 10,333) (7,519) (12,389)
Provision for other real estate owned losses 1,007 12,602 1,887 20,696
Allowance of merged affiliate --- --- 214 ---
------- ------- ------ --------
Balance at end of period $30,272 $26,222 $30,272 $26,222
======= ======= ======= =======
</TABLE>
-11-
<PAGE> 12
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.
7. LONG-TERM DEBT
The components of long-term debt, presented net of unamortized discount where
appropriate, were as follows (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, December 31, June 30,
1994 1993 1993
---------- ---------- ----------
<S> <C> <C> <C>
Medium-Term Notes due through 2003 $ 490,200 $ 546,230 $ 549,230
8.125% Subordinated Notes due 2002 198,025 197,902 197,778
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 74,800 74,772 74,743
11.125% Notes due 1995 49,985 49,979 49,973
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 -- -- 99,977
8.25 % Notes due 1993 -- -- 25,000
9.56 % Note due 1995 -- -- 14,922
All other long-term debt 2,028 384 390
---------- ---------- ----------
Total parent company 1,086,696 1,142,785 1,285,531
Medium-Term Bank Notes due through 1997 398,923 -- --
7.85 % Subordinated Notes due 2002 199,833 199,823 198,599
6.75 % Subordinated Notes due 2003 198,886 198,823 198,766
Federal Home Loan Bank Advances (1) 182,228 165,100 215,400
10.00 % Note due 1995 36,735 36,735 36,735
Industrial revenue bonds 10,869 10,938 11,257
All other long-term debt 9,471 9,666 10,936
---------- ---------- ----------
Total subsidiaries 1,036,945 621,085 671,693
---------- ---------- ----------
Total $2,123,641 $1,763,870 $1,957,224
========== ========== ==========
<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 June 30, 1994, and mature at various dates through 2005. Real estate loans with a carrying
value of $181.3 million, $174.5 million and $236.1 million at June 30, 1994, December 31, 1993 and June 30, 1993,
respectively, collateralize FHLB advances.
</TABLE>
<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 six months of
1994, there were no material developments or adjustments with respect to merger
and integration charges and management presently believes that the amount
recorded during the fourth quarter of 1993 is adequate. At June 30, 1994, the
remaining liability for merger and integration charges was $74.0 million. 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 June 30, Six months ended June 30,
--------------------------- -------------------------
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Currently payable -- Federal $ 77,332 $ 74,966 $163,236 $152,082
Currently payable -- State 10,282 9,238 17,402 19,852
Deferred -- Federal 23,859 17,076 35,867 26,432
Deferred -- State 814 (150) 2,194 (1,321)
-------- -------- -------- --------
Total income tax expense $112,287 $101,130 $218,699 $197,045
======== ======== ======== ========
</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 or notional amount of each
significant class of off-balance sheet financial instrument outstanding. The
Corporation's maximum possible accounting loss from commitments to extend
credit and from letters of credit equals the contractual amount of these
instruments. 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 transaction.
<TABLE>
<CAPTION>
June 30, 1994
-------------
<S> <C>
LOANS AND OTHER COMMITMENTS WHOSE CONTRACTUAL AMOUNTS REPRESENT CREDIT RISK AND/OR
MARKET RISK (IN THOUSANDS)
Loan commitments:
Credit card lines $ 4,498,569
Home equity 2,935,052
Commercial real estate and construction 1,321,881
Other 7,866,447
-----------
Total loan commitments 16,621,949
Other commitments:
Standby letters of credit 1,125,564
Commercial letters of credit 206,236
Loans sold with recourse 134,280
-----------
Total loan and other commitments $18,088,029
===========
</TABLE>
- 13 -
<PAGE> 14
<TABLE>
<S> <C>
FINANCIAL INSTRUMENTS WHOSE NOTIONAL OR CONTRACTUAL AMOUNTS EXCEED THE AMOUNT OF CREDIT
AND/OR MARKET RISK (IN THOUSANDS)
Mortgage loan sale commitments $ 1,331,654
Mortgage loan options 40,000
Futures and options on financial futures 1,126,731
Interest rate swap agreements 10,301,006
Interest rate cap and floor agreements 186,242
</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 typical 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). The following table
summarizes the notional amount of interest rate swaps by type at June 30, 1994
(in millions):
<TABLE>
<CAPTION>
Receive Fixed Pay Fixed
------------------------ ------------
Indexed
Amortizing Conventional Conventional Basis Total
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
"Portfolio" $5,200 $3,246 $ 356 $200 $ 9,002
Customer --- 608 680 11 1,299
------ ------ ------ ------ -------
Total interest rate swaps $5,200 $3,854 $1,036 $211 $10,301
====== ====== ====== ====== =======
</TABLE>
At June 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 1.49%) even though interest rate swaps, including both "portfolio"
and customer swaps, had an aggregate negative fair value of $336 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.
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 with 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
recognized over the remaining lives of the underlying assets or liabilities.
During the first six 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 June 30, 1994,
is as follows (in thousands):
<TABLE>
<CAPTION>
Ending
Asset/Liability Amortization Deferred
Managed Date Gains/(Losses)
- --------------- ------------- --------------
<S> <C> <C>
Loans February 1996 ($30,022)
Debt June 2002 13,443
Deposits February 1996 7,790
</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 June 30, 1994 and 1993, and the related consolidated
statements of income for the three and six-month periods then ended, and the
consolidated statements of changes in shareholders' equity and cash flow for
the six-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
July 18, 1994
- 15 -
<PAGE> 16
FIGURE 2. - SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS, 1994 Quarters 1993 Quarters Six months ended June 30
---------------------- ------------------------------------ -------------------------
EXCEPT PER SHARE AMOUNTS) SECOND First Fourth Third Second 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the period
Interest income $1,102.6 $1,045.0 $1,050.5 $1,051.0 $1,065.0 $2,147.6 $2,112.4
Interest expense 422.3 376.9 372.2 378.6 390.8 799.2 784.1
Net interest income 680.3 668.1 678.3 672.4 674.2 1,348.4 1,328.3
Provision for loan losses 35.0 36.8 46.4 49.9 59.5 71.8 115.4
Noninterest income 227.4 226.6 237.1 288.7 253.3 454.0 475.9
Noninterest expense 538.7 542.8 689.5 590.8 569.8 1,081.5 1,104.8
Income before income taxes 334.0 315.1 179.5 320.4 298.2 649.1 584.0
Net income 221.8 208.6 122.3 200.8 196.9 430.4 386.8
Net income applicable
to Common Shares 217.8 204.6 118.4 196.6 192.4 422.4 376.8
- ------------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Net income $0.89 $0.85 $0.49 $0.82 $0.81 $1.74 $1.58
Cash dividends declared 0.32 0.32 0.28 0.28 0.28 0.64 0.56
Book value at period-end 18.17 17.88 17.53 17.32 16.74 18.17 17.88
Market price:
High 33.75 33.00 33.50 35.75 37.25 33.75 35.75
Low 29.50 28.88 27.25 30.88 28.63 28.88 28.63
Close 31.88 30.00 29.75 32.00 35.13 31.88 35.13
Weighted average
Common Shares (000) 244,823.2 241,925.8 240,778.3 240,821.9 239,532.0 243,382.6 238,733.3
- ------------------------------------------------------------------------------------------------------------------------------------
AT PERIOD-END
Loans $43,157.6 $41,379.8 $40,071.3 $39,070.7 $38,375.9 $43,157.6 $38,375.9
Earning assets 57,347.0 55,913.5 54,352.7 52,935.5 52,699.9 57,347.0 52,699.9
Total assets 63,356.6 61,475.8 59,631.2 58,169.2 57,944.5 63,356.6 57,944.5
Deposits 47,796.2 46,880.6 46,499.1 44,339.9 44,400.8 47,796.2 44,400.8
Long-term debt 2,123.6 1,744.5 1,763.9 1,908.4 1,957.2 2,123.6 1,957.2
Common shareholders' equity 4,438.8 4,376.3 4,233.6 4,150.1 3,999.5 4,438.8 3,999.5
Total shareholders' equity 4,598.8 4,536.3 4,393.6 4,310.1 4,183.5 4,598.8 4,183.5
- ------------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on average total assets 1.43% 1.41% 0.83% 1.40% 1.38% 1.42% 1.38%
Return on average common equity 19.77 19.20 11.09 19.10 19.67 19.49 19.75
Return on average total equity 19.43 18.88 11.05 18.73 19.22 19.16 19.25
Efficiency(1) 58.43 60.13 61.35 60.13 60.54 59.27 60.30
Overhead(2) 44.87 47.27 48.12 46.50 46.15 46.05 46.49
Net interest margin 4.92 5.03 5.21 5.30 5.35 4.97 5.38
- ------------------------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS AT PERIOD-END
Equity to assets 7.26% 7.38% 7.37% 7.41% 7.22% 7.26% 7.22%
Tangible equity to tangible assets 6.42 6.55 6.51 6.52 6.16 6.42 6.16
Tier I risk-adjusted capital 8.77 8.91 8.73 8.66 8.42 8.77 8.42
Total risk-adjusted capital 12.03 12.34 12.22 12.18 11.98 12.03 11.98
Leverage 6.76 6.85 6.72 6.74 6.48 6.76 6.48
- ------------------------------------------------------------------------------------------------------------------------------------
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 CERTAIN GAINS ON
ASSET SALES).
(2) CALCULATED AS NONINTEREST EXPENSE (EXCLUDING MERGER AND INTEGRATION CHARGES AND OTHER NONRECURRING CHARGES) LESS NONINTEREST
INCOME (EXCLUDING NET SECURITIES TRANSACTIONS AND CERTAIN GAINS ON ASSETS SALES) DIVIDED BY TAXABLE-EQUIVALENT NET INTEREST
INCOME.
</TABLE>
- 17 -
<PAGE> 17
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 six
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 June 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>
Six months ended June 30, Change
------------------------- ---------------
1994 1993 Amount Percent
----- ----- ------ -------
<S> <C> <C> <C> <C>
Interest income $8.82 $8.85 $(.03) (.3)%
Interest expense 3.28 3.29 (.01) (.3)
----- ----- ----
Net interest income 5.54 5.56 (.02) (.4)
Provision for loan losses .30 .48 (.18) (37.5)
----- ----- ----
Net interest income after provision for
loan losses 5.24 5.08 .16 3.1
Noninterest income 1.87 1.99 (.12) (6.0)
Noninterest expense 4.44 4.63 (.19) (4.1)
----- ----- ----
Income before income taxes 2.67 2.44 .23 9.4
Income taxes .90 .82 .08 9.8
Preferred dividends .03 .04 (.01) (25.0)
----- ----- ----
Earnings per Common Share $1.74 $1.58 $ .16 10.1 %
===== ===== ====
</TABLE>
Net income for the second quarter of 1994 reached a record high of
$221.8 million. This represented an increase of $24.9 million, or 13%, from the
$196.9 million recorded in the second quarter of 1993. Earnings per Common
Share rose by 10% over the same period, increasing from $.81 to $.89. On an
annualized basis, the return on average common equity for the second quarter of
1994 was 19.77% compared with 19.67% for the second quarter of 1993. The
annualized returns on average total assets for the second quarters of 1994 and
1993 were 1.43% and 1.38%, respectively. The primary factors which contributed
to the improvement in 1994 earnings were a $5.4 million, or 1%, increase in
taxable-equivalent net interest income, a $31.1 million, or 5%, decrease in
noninterest expense and a $24.5 million, or 41%, decrease in the provision for
loan losses. These positive factors were offset in part by a $25.9 million, or
10%, decrease in noninterest income and a $11.2 million, or 11%, increase in
income taxes. Excluding the impact of net securities gains, the efficiency
ratio, which measures the extent to which revenue is consumed by overhead
expense, was 58.43% for the second quarter of 1994 compared with 60.13% and
60.54% for the first quarter of 1994 and the second quarter of 1993,
respectively. The improvement in this ratio from that reported in the prior
periods was achieved despite the fact that most of the anticipated
merger-related expense savings are yet to be realized by the Corporation.
- 16 -
<PAGE> 18
Net income for the first six months of 1994 was $430.4 million, or $1.74
per Common Share, up from $386.8 million, or $1.58 per Common Share, for the
same period last year. On an annualized basis the return on average common
equity for the first half of 1994 was 19.49% compared with 19.75% for the first
six months of 1993. The annualized returns on average total assets for the
first six months of 1994 and 1993 were 1.42% and 1.38%, 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 an $18.3 million, or 1%, increase in taxable-equivalent net
interest income, a $23.3 million, or 2%, decrease in noninterest expense and a
$43.6 million, or 38%, decrease in the provision for loan losses. Partially
offsetting the impact of these positive factors was a $21.9 million, or 5%,
decrease in noninterest income and a $21.7 million, or 11%, increase in income
taxes. Excluding the impact of net securities gains, the efficiency ratio
improved to 59.27% for the first half of 1994 from 60.30% 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 second quarter of 1994 net interest income was $695.1 million,
up $5.4 million, or 1%, from the same period last year. This growth was
attributed to a $4.9 billion increase in average earning assets, partially
offset by a 43 basis point decline in the net interest margin to 4.92%. 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 second quarter totaled $56.5 billion,
which was $4.9 billion, or 9%, higher than the second 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 $3.8
billion, or 10%, while securities (including both investment securities held to
maturity and securities available for sale) were up $2.0 billion, or 17%, from
the second quarter of 1993. Average earning assets comprised 91% of average
total assets during the second quarter of 1994, up slightly from 90% in the
second quarter of 1993.
The second quarter's net interest margin of 4.92% represented a decrease
of 43 basis points from the 5.35% margin in the same period last year. The
decline was primarily the result of a narrower interest rate spread, which
decreased 42 basis points, as the decrease in the yield on earning assets (46
basis points) exceeded the decrease in the rate paid on interest bearing
liabilities (4 basis points). Primary factors contributing to the decline in
spread were the growth in earning assets at reduced yields, the replacement of
maturing securities and interest rate swaps with lower-yielding portfolios and
the refinancing of higher-yielding fixed-rate mortgage-related assets during the
later half of 1993. In addition, the narrower spread reflected the higher
proportion of lower-yielding securities to earning assets in the current year.
The Corporation uses "portfolio" interest rate swaps in the management of its
interest rate sensitivity position. The notional amount of such swaps increased
to $9.0 billion at June 30, 1994, from $8.4 billion at year-end 1993. Interest
rate swaps contributed $33.6 million to net interest income and 24 basis points
to the net interest margin for the second quarter of 1994. During the same
period in 1993 interest rate swaps contributed $35.6 million to net interest
income and added 28 basis points to the net interest margin.
- 18 -
<PAGE> 19
<TABLE>
FIGURE 3. AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND YIELDS/RATES
<CAPTION>
Second Quarter 1994 First 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 $10,518.2 $231.7 8.84 % $10,109.3 $207.4 8.32 %
Real estate 18,302.0 364.1 7.98 17,305.6 341.6 8.01
Consumer 9,824.2 229.7 9.38 9,513.3 226.4 9.65
Student loans held for sale 1,526.0 25.0 6.55 1,513.3 22.4 5.93
Lease financing 1,851.6 31.1 6.71 1,729.6 29.9 6.92
Foreign 70.2 1.0 5.86 71.1 1.1 6.03
- ----------------------------------------------------------------------------------------------------------------------------
Total loans 42,092.2 882.6 8.41 40,242.2 828.8 8.35
Mortgage loans held for sale 866.1 15.4 7.13 1,139.2 18.4 6.47
Taxable investment securities 7,495.2 128.5 6.86 6,112.6 100.6 6.58
Tax-exempt investment securities (1) 1,693.9 34.2 8.09 1,630.7 35.2 8.63
- ----------------------------------------------------------------------------------------------------------------------------
Total investment securities 9,189.1 162.7 7.08 7,743.3 135.8 7.01
Securities available for sale (1) 4,297.7 55.8 5.14 5,260.9 75.2 5.68
Interest-bearing deposits with banks 41.3 0.3 2.89 32.8 0.4 5.17
Federal funds sold and securities
purchased under agreements to resell 39.5 0.5 4.21 88.8 0.7 3.17
Trading account assets 11.0 0.1 4.48 33.3 0.3 3.38
- ----------------------------------------------------------------------------------------------------------------------------
Total earning assets 56,536.9 1,117.4 7.93 54,540.5 1,059.6 7.88
Allowance for loan losses (819.6) (815.8)
Other assets 6,441.9 6,248.4
- ----------------------------------------------------------------------------------------------------------------------------
$62,159.2 $59,973.1
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Money market deposit accounts $ 7,252.3 46.8 2.59 $ 7,197.6 43.0 2.43
Savings deposits 7,948.6 51.6 2.60 7,900.3 50.5 2.59
NOW accounts 5,622.9 26.0 1.86 5,571.9 25.4 1.85
Certificates ($100,000 or more) 2,914.4 32.7 4.49 2,856.7 31.3 4.44
Other time deposits 12,165.4 129.9 4.28 12,077.8 124.3 4.17
Deposits in foreign office 2,993.7 28.4 3.80 2,678.0 21.6 3.27
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposit 38,897.3 315.4 3.25 38,282.3 296.1 3.14
Federal funds purchased and securities
sold under agreements to repurchase 6,240.0 60.5 3.89 4,993.3 39.0 3.16
Other short-term borrowings 1,363.0 14.6 4.31 1,435.2 14.2 4.01
Long-term debt (3) 2,020.0 31.8 6.52 1,756.9 27.6 6.55
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 48,520.3 422.3 3.50 46,467.7 376.9 3.29
Noninterest-bearing deposits 8,055.1 7,802.7
Other liabilities 1,006.0 1,220.8
Preferred stock 160.0 160.0
Common shareholders' equity 4,417.8 4,321.9
- ----------------------------------------------------------------------------------------------------------------------------
$62,159.2 $59,973.1
========= =========
Interest rate spread 4.43 4.59
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income and net
interest margin $ 695.1 4.92 % $ 682.7 5.03 %
======= ==== ======= ====
Taxable-equivalent adjustment (1) $14.8 $14.6
- ----------------------------------------------------------------------------------------------------------------------------
<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
<TABLE>
<CAPTION>
Fourth Quarter 1993 Third Quarter 1993 Second Quarter 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 8,948.7 $ 180.0 7.98 % $ 8,936.5 $ 183.1 8.13 % $ 9,128.8 $ 192.4 8.45 %
18,127.9 378.8 8.29 17,796.3 372.7 8.31 17,680.0 369.9 8.39
9,166.2 226.4 9.80 9,059.2 229.9 10.07 8,947.9 232.3 10.41
1,379.0 21.2 6.17 1,162.9 18.8 6.46 1,088.3 17.7 6.53
1,570.6 29.8 7.59 1,412.2 29.6 8.39 1,328.5 26.0 7.83
65.5 1.3 7.60 64.2 1.0 6.39 75.3 1.1 5.68
- ------------------------------------------------------------------------------------------------------------------------------------
39,257.9 837.5 8.46 38,431.3 835.1 8.62 38,248.8 839.4 8.80
1,278.1 21.5 6.73 1,155.3 20.1 6.96 972.6 17.9 7.38
8,643.3 137.8 6.37 7,597.0 132.4 6.97 7,497.3 138.2 7.37
1,726.5 37.4 8.67 1,769.8 39.8 8.99 1,816.5 40.0 8.80
- ------------------------------------------------------------------------------------------------------------------------------------
10,369.8 175.2 6.76 9,366.8 172.2 7.35 9,313.8 178.2 7.65
1,773.3 29.7 6.71 1,987.2 34.4 6.93 2,193.5 37.4 6.82
48.4 0.6 5.18 396.5 3.5 3.53 716.8 6.0 3.36
78.1 0.7 3.47 259.3 2.7 4.17 199.0 1.5 3.02
13.8 0.1 3.45 15.5 0.1 3.22 15.7 0.1 3.24
- ------------------------------------------------------------------------------------------------------------------------------------
52,819.4 1,065.3 8.00 51,611.9 1,068.1 8.21 51,660.2 1,080.5 8.39
(807.9) (806.4) (805.4)
6,277.8 6,246.2 6,344.2
- ------------------------------------------------------------------------------------------------------------------------------------
$58,289.3 $57,051.7 $57,199.0
========= ========= =========
$ 7,273.1 44.6 2.43 $ 7,227.1 46.5 2.55 $ 7,194.3 48.6 2.71
7,739.1 52.9 2.71 7,597.9 54.4 2.84 7,583.6 54.6 2.89
5,499.3 26.8 1.94 5,411.7 27.7 2.03 5,276.9 27.7 2.11
2,846.5 32.4 4.51 3,037.3 32.8 4.28 3,297.4 35.8 4.35
12,291.1 129.8 4.19 12,317.2 135.6 4.37 12,521.0 140.1 4.49
1,282.6 10.0 3.08 772.4 6.0 3.08 1,043.7 8.0 3.07
- ------------------------------------------------------------------------------------------------------------------------------------
36,931.7 296.5 3.18 36,363.6 303.0 3.31 36,916.9 314.8 3.42
4,472.5 33.2 2.95 4,058.5 30.4 2.97 4,355.6 32.0 2.95
1,239.8 12.4 3.96 1,462.4 13.2 3.57 1,176.8 10.8 3.69
1,883.9 30.1 6.64 1,931.4 32.0 6.89 1,932.7 33.2 7.15
- ------------------------------------------------------------------------------------------------------------------------------------
44,527.9 372.2 3.32 43,815.9 378.6 3.43 44,382.0 390.8 3.54
8,166.4 7,934.0 7,730.2
1,200.3 1,048.2 978.7
160.0 168.4 184.0
4,234.7 4,085.2 3,924.1
- ------------------------------------------------------------------------------------------------------------------------------------
$58,289.3 $57,051.7 $57,199.0
========= ========= =========
4.68 4.78 4.85
- ------------------------------------------------------------------------------------------------------------------------------------
$ 693.1 5.21 % $ 689.5 5.30 % $ 689.7 5.35 %
======= ====== ======= ====== ======= ======
$14.8 $17.1 $15.5
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 20 -
<PAGE> 21
<TABLE>
FIGURE 4. COMPONENTS OF NET INTEREST INCOME CHANGES
(IN MILLIONS)
<CAPTION>
From Three Months Ended June 30, 1993 From Six Months Ended June 30, 1993
To Three Months Ended June 30, 1994 To Six Months Ended June 30, 1994
---------------------------------------- --------------------------------------
Average Yield/ Net Average Yield/ Net
Volume Rate Change Volume Rate Change
------ ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans $81.7 $(38.5) $43.2 $143.3 $ (84.5) $58.8
Mortgage loans held for sale (1.9) (0.6) (2.5) 4.9 (3.5) 1.4
Taxable investment securities 0.2 (9.9) (9.7) (22.0) (35.3) (57.3)
Tax-exempt investment securities (2.6) (3.2) (5.8) (7.0) (4.8) (11.8)
Securities available for sale 29.0 (10.6) 18.4 71.5 (17.9) 53.6
Short-term investments (7.2) 0.5 (6.7) (12.3) 0.9 (11.4)
------ ------ ------ ------ ------ -----
Total interest income 99.2 (62.3) 36.9 178.4 (145.1) 33.3
INTEREST EXPENSE
Money market deposit accounts 0.4 (2.2) (1.8) (0.5) (8.2) (8.7)
Savings deposits 2.5 (5.5) (3.0) 10.2 (14.9) (4.7)
NOW accounts 1.7 (3.4) (1.7) 4.3 (7.9) (3.6)
Certificates ($100,000 or more) (4.3) 1.2 (3.1) (7.8) (1.2) (9.0)
Other time deposits (3.9) (6.3) (10.2) (10.2) (20.5) (30.7)
Deposits in foreign office 18.1 2.3 20.4 31.9 2.5 34.4
------ ------ ------ ------ ------ -----
Total interest-bearing deposits 14.5 (13.9) 0.6 27.9 (50.2) (22.3)
Federal funds purchased and
securities sold under
agreements to repurchase 16.4 12.1 28.5 18.5 14.3 32.8
Other short-term borrowings 1.8 2.0 3.8 7.2 2.7 9.9
Long-term debt 1.5 (2.9) (1.4) 0.2 (5.6) (5.4)
------ ------ ------ ------ ------ -----
Total interest expense 34.2 (2.7) 31.5 53.8 (38.8) 15.0
------ ------ ------ ------ ------ -----
Net interest income $65.0 $(59.6) $5.4 $124.6 $(106.3) $18.3
====== ====== ====== ====== ====== =====
<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
within guidelines established by the Corporation's Asset/Liability Management
Committee ("ALCO"). The ALCO has the responsibility for approving the asset/
liability management policies of the Corporation, approving changes in the
balance sheet that would result in deviations from the guidelines in the
policies, approving strategies to improve balance sheet positioning and/or
earnings, and reviewing the interest rate sensitivity positions of the
Corporation and each of the affiliate banks. The ALCO meets twice monthly to
conduct this review and to approve strategies consistent with its policies.
The primary tool utilized by management to measure and manage interest rate
exposure is a simulation model. Use of the model to perform simulations of
changes in interest rates over one and two-year time horizons has enabled
management to develop strategies for managing exposure to interest rate risk. In
its simulations, management estimates the impact on net interest income from pro
forma 100 and 200 basis point changes in the overall level of interest rates.
ALCO 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 June 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 $9.0 billion at June 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 JUNE 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 $5,200 3.8 $(220) 6.14 % 4.25 %
Receive fixed/pay variable - conventional 3,246 6.2 (122) 6.45 4.48
Pay fixed/receive variable - conventional 356 1.9 4 4.35 6.63
Basis swaps 200 0.8 --- 4.06 4.64
------- ------
Total "portfolio" swaps 9,002 4.5 (338) 6.14 4.43
Customer swaps 1,299 3.5 2 5.48 5.58
------- ------
Total interest rate swaps $10,301 4.4 $(336) 6.06 % 4.57 %
======= ======
<FN>
(1) MATURITY IS BASED UPON EXPECTED AVERAGE LIVES RATHER THAN CONTRACTUAL TERMS.
</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 for customer swaps are included in
noninterest income. The $1.3 billion notional amount of customer swaps in
Figure 5 includes $608 million of interest rate swaps that receive a fixed rate
and pay a variable rate and $691 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
$10.3 billion at June 30, 1994, $9.6 billion at December 31, 1993 and $5.8
billion at June 30, 1993. At June 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 1.49%) even though interest rate
swaps, including both "portfolio" and customer swaps, had an aggregate negative
fair value of $336 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. The portfolio swap activity for the first
six months of 1994 is summarized in Figure 6 and the expected average
maturities of the portfolio swaps at June 30, 1994, are summarized in Figure 7.
<TABLE>
FIGURE 6. "PORTFOLIO" SWAP ACTIVITY FOR THE SIX MONTHS ENDED JUNE 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 $150 $150 $500 $8,359
Additions 4,913 606 200 50 5,769
Maturities (1,476) --- (150) --- (1,626)
Terminations (2,600) (400) --- (500) (3,500)
Forward-starting becoming effective 50 --- --- (50) ---
------ ---- ---- ----- ------
Balance at end of period $8,446 $356 $200 $ --- $9,002
====== ==== ==== ===== ======
</TABLE>
- 22 -
<PAGE> 23
<TABLE>
FIGURE 7. EXPECTED AVERAGE MATURITIES OF "PORTFOLIO" SWAPS AT JUNE 30, 1994
(IN MILLIONS)
<CAPTION>
Receive fixed/
pay variable - Receive fixed/ Pay fixed/
indexed pay variable - receive variable -
Expected Average Maturity amortizing conventional conventional Basis swaps Total
- -------------------------- ------------- ---------------- ------------------- ----------- -------
<S> <C> <C> <C> <C> <C>
Due in one year or less $ 100 $ 666 $100 $200 $1,066
Due after one through five years 4,700 706 256 --- 5,662
Due after five through ten years 400 1,750 --- --- 2,150
Due after ten years --- 124 --- --- 124
------ ------ ---- ---- ------
Total "portfolio" swaps $5,200 $3,246 $356 $200 $9,002
====== ====== ==== ==== ======
</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 transaction. 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 June 30, 1994, including swap agreements
entered into to offset customer swaps but excluding all other customer swaps,
the Corporation had 23 different counterparties to interest rate swap
agreements, of which the Corporation had credit exposure of $13.9 million on a
notional amount of $622 million to only seven counterparties. The largest
credit exposure to an individual counterparty was $7.9 million on a notional
amount of $200 million. Presented in Figure 8 is a summary of gross unrealized
gains and losses on portfolio swaps at June 30, 1994.
<TABLE>
FIGURE 8. UNREALIZED GAINS AND LOSSES ON "PORTFOLIO" SWAPS BY INTEREST RATE MANAGEMENT STRATEGY AT JUNE 30, 1994
(IN MILLIONS)
<CAPTION>
Unrealized
Notional -------------------
Strategy Amount Gains Losses Total
----------------------------------- -------- ----- ------ -----
<S> <C> <C> <C> <C>
Convert variable rate loans to fixed $6,510 $1 $(311) $(310)
Convert fixed rate debt to variable 1,698 --- (31) (31)
Other 794 11 (8) 3
------ --- ----- -----
Total "portfolio" swaps $9,002 $12 $(350) $(338)
====== === ===== =====
</TABLE>
NONINTEREST INCOME
A summary of noninterest income is presented in Figure 9. Total noninterest
income decreased $25.9 million, or 10%, for the three-month period ended June
30, 1994, compared to the same period in 1993. Excluding for comparative
purposes the noncore items consisting of special asset management fees and net
securities gains, noninterest income was $220.0 million, down $23.9 million or
10% 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 second quarter of 1993
and is anticipated to decrease 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 second quarter
of 1993 by $8.3 million and $8.4 million, respectively. In addition, total
other income was down $10.1 million. These decreases were partially offset by
a $4.4 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 $11.7 million to trust income in
the second quarter of last year. After giving effect to the impact of this
transaction, second quarter trust income was up $3.4 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. The decrease in total other income was primarily the result of the
receipt of a $7.7 million settlement with the FDIC relating to the 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
- 23 -
<PAGE> 24
second quarter of last year. The impact of these prior year transactions was
offset in part by a $6.0 million mark-to-market write-up in the venture capital
portfolio recorded in the second quarter of 1994. 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 six
acquisitions completed during the twelve-month period ended June 30, 1994.
For the first six months of 1994, core noninterest income, which excludes the
special asset management fees and net securities gains, was $438.0 million.
This represented a decrease of $10.9 million, or 2%, from the amount reported
for the first half of last year. As shown in Figure 9, declines from the prior
year occurred primarily in trust income, mortgage banking income and
international fees which decreased by $14.2 million, $3.0 million and $2.5
million, respectively. These decreases were partially offset by a $6.0 million
increase in service charges on deposit accounts. After giving effect to the
sale of Ameritrust Texas Corporation, which contributed $22.6 million to trust
income in the first six months of last year, trust income was up approximately
$8.4 million from the prior year-to-date period.
<TABLE>
FIGURE 9. NONINTEREST INCOME
(DOLLARS IN MILLIONS)
<CAPTION>
Three months ended Six months ended
June 30, Change June 30, Change
---------------------- --------------------- ------------------ ----------------
1994 1993 Amount Percent 1994 1993 Amount Percent
-------- -------- ------- --------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Service charges on deposit accounts $68.4 $64.0 $4.4 6.9 % $130.7 $124.7 $6.0 4.8 %
Trust income 55.6 63.9 (8.3) (13.0) 112.6 126.8 (14.2) (11.2)
Mortgage banking income 19.6 28.0 (8.4) (30.0) 39.0 42.0 (3.0) (7.1)
Credit card fees 18.9 18.2 0.7 3.8 35.6 34.5 1.1 3.2
Insurance and brokerage income 15.4 17.6 (2.2) (12.5) 31.4 31.7 (0.3) (0.9)
Special asset management fees 6.8 7.7 (0.9) (11.7) 9.0 24.0 (15.0) (62.5)
Net securities gains 0.6 1.7 (1.1) (64.7) 7.0 3.0 4.0 133.3
Other income:
International fees 3.5 5.2 (1.7) (32.7) 8.6 11.1 (2.5) (22.5)
Miscellaneous 38.6 47.0 (8.4) (17.9) 80.1 78.1 2.0 2.6
------ ------ ------ ------ ------ -----
Total other income 42.1 52.2 (10.1) (19.3) 88.7 89.2 (0.5) (0.6)
------ ------ ------ ------ ------ -----
Total noninterest income $227.4 $253.3 $(25.9) (10.2)% $454.0 $475.9 $(21.9) (4.6)%
====== ====== ====== ====== ====== =====
</TABLE>
<TABLE>
FIGURE 10. MORTGAGE BANKING INCOME
(DOLLARS IN MILLIONS)
<CAPTION>
Three months ended Six months ended
June 30, Change June 30, Change
---------------------- --------------------- ------------------ ----------------
1994 1993 Amount Percent 1994 1993 Amount Percent
-------- -------- ------- --------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Servicing fees $10.0 $5.4 $4.6 85.2 % $19.1 $15.3 $3.8 24.8 %
Gains on sales of loans 1.7 2.5 (0.8) (32.0) 4.2 1.4 2.8 200.0
Origination fees 3.5 7.9 (4.4) (55.7) 10.1 10.6 (0.5) (4.7)
Gains on sales of servicing rights 3.0 10.2 (7.2) (70.6) 3.0 10.2 (7.2) (70.6)
Late fees and other 1.4 2.0 (0.6) (30.0) 2.6 4.5 (1.9) (42.2)
------ ------ ------ ------ ------ -----
Total mortgage banking income $19.6 $28.0 $(8.4) (30.0) % $39.0 $42.0 $(3.0) (7.1)%
====== ====== ====== ====== ====== =====
</TABLE>
NONINTEREST EXPENSE
Figure 11 provides a summary of noninterest expense. Total noninterest expense
decreased by $31.1 million, or 6%, during the second quarter of 1994 as
compared to the second quarter of 1993. Excluding net OREO expense, core
noninterest expense was $536.3 million, representing a decrease of $20.8
million, or 4%, from the second quarter of last year and down $5.2 million, or
1%, from the prior quarter. In comparison with the second quarter of 1993 the
largest decreases in non-interest expense came from personnel, professional
fees and other noninterest expense which were down by $6.5 million, $3.1
million and $11.8 million, respectively. The decline in personnel expense
reflected a decrease in expenses associated with contracted or temporary
personnel and a 1% decline in the number of full-time equivalent employees,
principally as a result of the divestiture of Ameritrust Texas Corporation
and the integration of certain old KeyCorp and Society operations.
- 24 -
<PAGE> 25
Contributing to the decrease in professional fees were lower costs for legal
and consulting services. The decline in total other expense reflected
decreases in various categories of operating expense, such as marketing,
advertising, computer processing and contributions. The overall decrease in
noninterest expense was moderated by the impact of six acquisitions completed
during the twelve-month period ended June 30, 1994, and the growth in net
occupancy expense, due in part to the opening of a new operations center late
in 1993.
Total core noninterest expense was $1.1 billion for the first six months of
1994, down $5.6 million, or 1%, from the comparable 1993 period. Decreases of
$17.9 million and $3.6 million in total other expense and professional fees,
respectively, were offset in part by an $11.8 million increase in personnel
costs and a $6.2 million increase in net occupancy expense. The decrease in
other expense reflected declines in various categories of operating expense,
while professional fees were down due to lower costs for legal and consulting
services. The year-to-date 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 $8.3 million for the first
six months of 1993. Adjusting for this reclassification, the increase in the
cost of employee benefits was due in part to higher health care costs. The
growth in net occupancy expense reflected the impact of acquisitions as well as
the opening of a new operations center late in 1993.
<TABLE>
FIGURE 11. NONINTEREST EXPENSE
(DOLLARS IN MILLIONS)
<CAPTION>
Three months ended Six months ended
June 30, Change June 30, Change
---------------------- --------------------- ------------------ ----------------
1994 1993 Amount Percent 1994 1993 Amount Percent
-------- -------- ------- --------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Personnel:
Salaries $217.4 $218.7 $ (1.3) (0.6) % $438.5 $427.1 $ 11.4 2.7 %
Employee benefits 49.9 55.1 (5.2) (9.4) 104.4 104.0 0.4 0.4
------ ------ ----- -------- -------- ------
Total personnel 267.3 273.8 (6.5) (2.4) 542.9 531.1 11.8 2.2
Net occupancy 53.2 51.6 1.6 3.1 108.7 102.5 6.2 6.0
Equipment 39.6 41.1 (1.5) (3.6) 79.5 79.8 (.3) (.4)
FDIC insurance assessments 24.8 24.3 0.5 2.1 48.8 50.6 (1.8) (3.6)
Professional fees 11.5 14.6 (3.1) (21.2) 24.0 27.6 (3.6) (13.0)
OREO expense, net (1) 2.4 12.7 (10.3) (81.1) 3.7 21.4 (17.7) (82.7)
Other expense:
Marketing 15.4 17.2 (1.8) (10.5) 30.7 30.7 -- --
Amortization of intangibles 13.8 14.5 (0.7) (4.8) 26.3 29.0 (2.7) (9.3)
Miscellaneous 110.7 120.0 (9.3) (7.8) 216.9 232.1 (15.2) (6.5)
------ ------ ----- -------- -------- ------
Total other expense 139.9 151.7 (11.8) (7.8) 273.9 291.8 (17.9) (6.1)
------ ------ ----- -------- -------- ------
Total noninterest expense $538.7 $569.8 $(31.1) (5.5) % $1,081.5 $1,104.8 $(23.3) (2.1) %
====== ====== ===== ======== ======== ======
Full-time equivalent employees 29,810 30,152 29,810 30,152
Efficiency ratio (2) 58.43 % 60.54 % 59.27 % 60.30 %
Overhead ratio (3) 44.87 46.15 46.05 46.49
<FN>
(1) OREO EXPENSE IS NET OF INCOME OF $1.1 MILLION AND $5.6 MILLION FOR THE 1994
AND 1993 QUARTERS, RESPECTIVELY, AND $2.0 MILLION AND $9.1 MILLION FOR
THE 1994 AND 1993 YEAR-TO-DATE PERIODS, RESPECTIVELY.
(2) CALCULATED AS NONINTEREST EXPENSE DIVIDED BY TAXABLE-EQUIVALENT NET
INTEREST INCOME PLUS NONINTEREST INCOME (EXCLUDING NET SECURITIES GAINS).
(3) CALCULATED AS NONINTEREST EXPENSE LESS NONINTEREST INCOME (EXCLUDING NET
SECURITIES GAINS) DIVIDED BY TAXABLE-EQUIVALENT NET INTEREST INCOME.
</TABLE>
The efficiency ratio, which provides a measure of the extent to which recurring
revenues are used to pay operating expenses, was 58.43% for the second quarter
of 1994 compared with 61.35% and 60.54% for the fourth quarter of 1993 and the
second quarter of 1993, respectively. As previously stated, the improvement in
this ratio from that reported for the
- 25 -
<PAGE> 26
fourth quarter was achieved despite the fact that most of the anticipated
merger-related expense savings are yet to be realized by the Corporation.
INCOME TAXES
The provision for income taxes was $112.3 million for the three-month period
ended June 30, 1994, as compared to $101.1 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 second quarter was 33.6% compared to 33.9%
for the second quarter of 1993. For the first six months of 1994, the provision
for income taxes was $218.7 million compared with $197.0 million for the first
half of 1993. The effective tax rate in each of these periods was 33.7% and
33.8%, respectively. The higher quarterly and year-to-date provisions relative
to the prior year resulted from an overall increase in the levels of taxable
earnings. The effective tax rates in all periods were lower than the statutory
Federal income tax rate primarily due to tax-exempt income from certain
securities and loans.
FINANCIAL CONDITION
LOANS
At June 30, 1994, total loans outstanding were $43.2 billion, compared with
$40.1 billion at December 31, 1993, and $38.4 billion at June 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 $810.8
million in commercial loans, $1.9 billion in real estate loans (of which $1.7
billion pertained to residential mortgages), $295.6 million in consumer loans
and $242.0 million in lease financing. Student loans held for sale declined by
$121.2 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 quarter, $238 million in new loans were recorded under
this program and applications for an additional $278 million were in process as
of June 30. 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 acquisition of CBC, previously described in Note 2,
Mergers and Acquisitions on page 7 of this report.
<TABLE>
FIGURE 12. PERIOD-END LOAN GROWTH BY REGION FOR THE SIX MONTHS ENDED
JUNE 30, 1994
(DOLLARS IN MILLIONS)
<CAPTION>
Internally Percent
Generated Acquired Total Change
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Northeast Region $ 668.2 --- $ 668.2 5.9 %
Great Lakes Region 1,345.4 --- 1,345.4 7.5
Rocky Mountain Region 260.6 $217.9 478.5 17.8
Northwest Region 595.6 --- 595.6 7.3
Financial Services (1.4) --- (1.4) (1.5)
-------- -------- --------
Total $2,868.4 $217.9 $3,086.3 7.7 %
======== ======== ========
</TABLE>
With respect to geographic concentration, Figure 13 depicts the loan portfolio
at June 30, 1994, by region. The Corporation's unique thirteen-state,
four-region profile has provided significant credit risk diversification.
<TABLE>
FIGURE 13. LOANS OUTSTANDING BY REGION AT JUNE 30, 1994
(DOLLARS IN MILLIONS)
<CAPTION>
Total Loans Distribution
--------------- -----------------
<S> <C> <C>
Northeast Region $11,923.8 27.6 %
Great Lakes Region 19,193.2 44.5
Rocky Mountain Region 3,161.5 7.3
Northwest Region 8,784.6 20.4
Financial Services 94.5 0.2
--------- ---------
$43,157.6 100.0 %
========= =========
</TABLE>
- 26 -
<PAGE> 27
Figure 14 summarizes the industry concentrations within the commercial real
estate portfolio at June 30, 1994, and shows the portions of the portfolio
which are nonowner-occupied versus owner-occupied. At June 30, 1994, 46% of
the construction portfolio and 45% of the commercial mortgage loan portfolio
were comprised of loans 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 JUNE 30, 1994
(IN MILLIONS)
<CAPTION>
Commercial
Construction Mortgage Total
------------ ---------- ------
<S> <C> <C> <C>
Nonowner-occupied:
Retail $ 138.7 $ 831.3 $ 970.0
Multi-family properties 93.6 789.4 883.0
Office buildings 139.9 829.4 969.3
Hotels/Motels 26.3 241.6 267.9
Health facilities 9.6 86.9 96.5
Manufacturing facilities 5.4 72.7 78.1
Warehouses 10.6 237.0 247.6
Other 232.6 417.5 650.1
-------- -------- --------
656.7 3,505.8 4,162.5
Owner-occupied 557.3 2,844.2 3,401.5
-------- -------- --------
Total $1,214.0 $6,350.0 $7,564.0
======== ======== ========
</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. 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.
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.
At June 30, 1994, approximately $4.2 billion of securities were classified as
available for sale, and shareholders' equity was reduced by $82.3 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. 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.
- 27 -
<PAGE> 28
<TABLE>
FIGURE 15. SECURITIES AVAILABLE FOR SALE AT JUNE 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 $495.2 $2.6 $33.3 $0.1 $531.2 5.75 %
After one through five years 707.3 10.2 1,234.4 1.1 1,953.0 6.28
After five through ten years 216.2 8.3 1,100.6 1.2 1,326.3 5.42
After ten years 2.7 6.6 349.5 0.4 359.2 5.81
-------- -------- -------- -------- -------- --------
Fair value $1,421.4 $27.7 $2,717.8 $2.8 $4,169.7 5.91 %
======== ======== ======== ======== ======== ========
Amortized cost $1,422.0 $27.6 $2,829.9 $20.8 $4,300.3
Weighted average yield 6.11 % 7.92 % 5.80 % 4.68 % 5.91 %
Weighted average maturity 2.5 years 6.9 years 8.0 years 9.6 years 6.2 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>
<TABLE>
FIGURE 16. INVESTMENT SECURITIES AT JUNE 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 $133.2 $386.9 $508.2 $305.3 $1,333.6 6.62 %
After one through five years 188.8 632.5 2,804.0 183.7 3,809.0 6.86
After five through ten years 29.7 348.4 802.5 61.1 1,241.7 7.75
After ten years 258.3 105.8 2,561.8 1.4 2,927.3 7.25
-------- -------- -------- -------- -------- --------
Amortized cost $610.0 $1,473.6 $6,676.5 $551.5 $9,311.6 7.07 %
======== ======== ======== ======== ======== ========
Fair value $586.6 $1,521.6 $6,454.2 $545.3 $9,107.7
Weighted average yield 6.77 % 8.59 % 6.72 % 7.43 % 7.07 %
Weighted average maturity 11.8 years 3.7 years 7.6 years 3.0 years 7.0 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 USING THE
STATUTORY FEDERAL INCOME TAX RATE OF 35%.
</TABLE>
At June 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 June 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 June 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 June 30, 1994, substantially all of the CMOs and
mortgage-backed pass-through securities held by the Corporation were issued or
backed by Federal agencies.
- 28 -
<PAGE> 29
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 asset quality. In
addition, the Loan Review Group is responsible for reviewing the adequacy of
the allowance for loan losses ("Allowance"). The Corporation's Credit
Policy/Risk Management Group reviews corporate assets other than loans, leases
and OREO to 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 a minimum 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
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 $28.5 million, or 48%, and $58.8
million or 48%, respectively. This improvement came from all major categories
of the loan portfolio. As a result of the overall improvement in asset
quality, including a large reduction in nonperforming loans, the second quarter
provision for loan losses was $35.0 million, down $24.5 million, or 41%, from
the year-ago quarter. The year-to-date provision was $71.8 million, down $43.6
million, or 38%, from the comparable 1993 period. At June 30, 1994, the
Allowance as a percentage of loans outstanding was 1.89%, down from 2.00% at
December 31, 1993, and 2.07% at June 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.
<TABLE>
FIGURE 17. SUMMARY OF LOAN LOSS EXPERIENCE
(DOLLARS IN MILLIONS)
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1994 1993 1994 1993
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Average loans outstanding during the period $42,092.2 $38,248.8 $41,172.3 $37,788.4
Allowance for loan losses at beginning of period $812.6 $793.2 $802.7 $782.6
Loans charged off:
Commercial, financial and agricultural 15.8 29.4 33.4 61.2
Real estate-construction 2.1 7.6 6.5 12.3
Real estate-mortgage 8.1 17.1 17.5 31.5
Consumer 25.1 29.7 48.9 60.8
Lease financing 1.6 1.0 1.8 1.4
---------- ---------- ---------- ----------
52.7 84.8 108.1 167.2
Recoveries:
Commercial, financial and agricultural 8.0 10.1 20.7 17.9
Real estate-construction .1 1.9 .3 2.0
Real estate-mortgage 2.7 3.5 4.2 5.8
Consumer 9.5 9.4 19.0 19.1
Lease financing 1.2 0.2 1.4 1.1
---------- ---------- ---------- ----------
21.5 25.1 45.6 45.9
---------- ---------- ---------- ----------
Net loans charged off (31.2) (59.7) (62.5) (121.3)
Provision for loan losses 35.0 59.5 71.8 115.4
Allowance of merged affiliates --- 2.7 4.4 19.0
---------- ---------- ---------- ----------
Allowance for loan losses at end of period $816.4 $795.7 $816.4 $795.7
========== ========== ========== ==========
Net loan charge-offs to average loans 0.30 % 0.62 % 0.30 % 0.64 %
Allowance for loan losses to period-end loans 1.89 2.07 1.89 2.07
Allowance for loan losses to nonperforming loans 264.21 194.18 264.21 194.18
</TABLE>
- 29 -
<PAGE> 30
The composition of nonperforming assets is shown in Figure 18. These assets
totaled $431.9 million at June 30, 1994, and represented 1.00% of loans, OREO
and other nonperforming assets compared with $500.1 million, or 1.24%, at
year-end 1993 and $701.8 million, or 1.81%, at June 30, 1993.
Nonperforming assets declined $68.2 million, or 14%, from the end of the prior
year as a result of decreases in both nonperforming loans and other real estate
owned of $27.3 million and $32.4 million, respectively. Other nonperforming
assets, which are comprised primarily of nonperforming venture capital
investments, decreased $8.5 million, or 63%, during the first half of 1994. The
reduction in nonperforming loans was principally attributable to decreases in
nonaccrual real estate loans (principally construction loans) and restructured
loans. In the aggregate, nonperforming loans in these categories were down
$23.8 million, or 12%, 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 Northeast and Great Lakes 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 $10.1 million at June 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.
<TABLE>
FIGURE 18. SUMMARY OF NONPERFORMING ASSETS AND PAST DUE LOANS
(DOLLARS IN MILLIONS)
<CAPTION>
June 30, December 31, June 30,
1994 1993 1993
------------ ------------ ------------
<S> <C> <C> <C>
Commercial, financial and agricultural $122.9 $124.0 $118.0
Real estate - construction 26.6 40.4 76.6
Real estate - commercial mortgage 99.5 99.8 139.9
Real estate - residential mortgage 42.0 46.7 48.9
Consumer 15.5 15.3 16.0
Lease financing 1.0 3.6 2.9
--------- --------- ---------
Total nonaccrual loans 307.5 329.8 402.3
Restructured loans 1.5 6.5 7.5
--------- --------- ---------
Total nonperforming loans 309.0 336.3 409.8
Other real estate owned 148.3 186.1 304.2
Allowance for OREO losses (30.3) (35.7) (26.2)
--------- --------- ---------
Other real estate owned, net of allowance 118.0 150.4 278.0
Other nonperforming assets 4.9 13.4 14.0
--------- --------- ---------
Total nonperforming assets $431.9 $500.1 $701.8
========= ========= =========
Accruing loans past due 90 days or more $73.8 $51.8 $58.0
Nonperforming loans to period-end loans 0.72 % 0.84 % 1.07 %
Nonperforming assets to period-end loans plus other
real estate owned and other nonperforming assets 1.00 1.24 1.81
</TABLE>
- 30 -
<PAGE> 31
<TABLE>
FIGURE 19. SUMMARY OF CHANGES IN NONACCRUAL LOANS AND OREO
(IN MILLIONS)
SUMMARY OF CHANGES IN NONACCRUAL LOANS
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- --------------------------
1994 1993 1994 1993
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Balance at beginning of period $315.5 $495.4 $329.8 $550.5
Loans placed on nonaccrual 63.6 76.7 125.2 180.6
Charge-offs (1) (27.3) (57.1) (59.9) (113.2)
Payments (25.1) (66.6) (54.5) (127.0)
Transfers to OREO (1.5) (29.4) (6.8) (43.4)
Loans returned to accrual (17.7) (26.5) (28.1) (58.1)
Acquisitions --- 2.0 1.8 5.1
Transfers from OREO --- 7.8 --- 7.8
---------- ---------- --------- ---------
Balance at end of period $307.5 $402.3 $307.5 $402.3
========== ========== ========= =========
<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>
SUMMARY OF CHANGES IN OREO
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- --------------------------
1994 1993 1994 1993
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Balance at beginning of period $134.3 $327.1 $150.4 $332.4
Additions 6.1 37.5 22.9 57.1
Sales (14.3) (55.2) (31.4) (76.0)
Charge-offs and writedowns (3.2) (16.4) (11.6) (24.5)
Transfers to loans --- (10.5) (5.5) (10.5)
Acquisitions --- 0.3 2.2 8.3
Other (4.9) (4.8) (9.0) (8.8)
---------- ---------- --------- ---------
Balance at end of period $118.0 $278.0 $118.0 $278.0
========== ========== ========= =========
</TABLE>
<TABLE>
FIGURE 20. NONPERFORMING LOANS AND ASSETS BY REGION
<CAPTION>
Nonperforming Assets
Nonperforming Loans to Period-end Loans Plus
to Period-end Loans OREO and Other NPA
------------------------------------- -------------------------------------
June 30, December 31, June 30, June 30, December 31, June 30,
1994 1993 1993 1994 1993 1993
--------- ------------ -------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Northeast Region 0.90 % 1.01 % 0.98 % 1.43 % 1.73 % 2.11 %
Great Lakes Region 0.74 0.91 1.31 0.93 1.25 1.96
Rocky Mountain Region 0.37 0.26 0.54 0.54 0.44 0.79
Northwest Region 0.54 0.63 0.81 0.76 0.91 1.31
Financial Services 0.54 1.03 0.82 9.68 7.76 6.61
--------- ------------ -------- --------- ------------- ---------
Total 0.72 % 0.84 % 1.07 % 1.00 % 1.24 % 1.81 %
========= ============ ======== ========= ============= =========
</TABLE>
<TABLE>
FIGURE 21. PERCENTAGE OF NONPERFORMING LOANS TO PERIOD-END LOANS BY LOAN TYPE
AT JUNE 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 1.48 % 4.54 % 2.21 % 0.29 % 0.18 % 0.90 %
Great Lakes Region 1.02 3.06 1.56 0.37 0.11 0.74
Rocky Mountain Region 0.76 0.06 0.41 0.09 0.08 0.37
Northwest Region 0.73 0.42 1.02 0.42 0.17 0.54
Financial Services --- --- --- 1.58 --- 0.54
------------ ------------ --------- ----------- -------- ------
Total 1.05 % 2.19 % 1.52 % 0.34 % 0.14 % 0.72 %
============ ============ ========= =========== ======== ======
</TABLE>
- 31 -
<PAGE> 32
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 second quarter of 1994, these deposits averaged $41.0 billion and
represented 73% of the Corporation's funds supporting earning assets compared
with $40.3 billion and 78%, respectively, for the second three months of 1993.
The 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 the "Other time deposits"
category, consisting primarily of fixed rate certificates of deposit of less
than $100,000, to noninterest-bearing, money market deposit accounts 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 $13.5 billion for the
second quarter of 1994, up $3.6 billion, or 37%, 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 decline in large certificates of deposit.
<TABLE>
FIGURE 22. MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE AT JUNE
30, 1994
(IN MILLIONS)
<CAPTION>
Domestic Foreign
Offices Office
--------- --------
<S> <C> <C>
Time remaining to maturity:
Three months or less $1,565.7 $3,591.3
Over three through six months 466.1 2.9
Over six through twelve months 391.7 ---
Over twelve months 693.6 ---
--------- --------
Total $3,117.1 $3,594.2
========= ========
</TABLE>
LIQUIDITY
Liquidity represents the availability of funding to meet the needs of
depositors, borrowers and creditors at a reasonable cost and without adverse
consequences. The Corporation's ALCO actively analyzes and manages the
Corporation's liquidity in coordination with similar committees at each
affiliate bank. The affiliate banks individually maintain liquidity in the form
of short-term money market investments, 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 half of 1994, Society National Bank, the Corporation's Ohio
bank, issued $1.5 billion in debt securities under a Medium-Term Bank Note
program. Of these securities, $1.1 billion have maturities of one year or less
and are included in other short-term borrowings and $400 million have
maturities in excess of one year and are included in long-term debt. The
proceeds from this program 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 six-month periods ended June 30, 1994 and 1993, is presented in the
Consolidated Statements of Cash Flow on page 6 of this report.
- 32 -
<PAGE> 33
CAPITAL AND DIVIDENDS
Total shareholders' equity at June 30, 1994, was $4.6 billion, up $205.2
million, or 5%, and $415.3 million, or 10%, from December 31 and June 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 half 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 $128.4 million
on securities available for sale, bringing cumulative net unrealized losses on
these securities to $82.3 million as of June 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.
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 7.26% at June 30, 1994,
compared to 7.37% at December 31, 1993, and 7.22% at June 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 June 30, 1994, were 8.77% and 12.03%, respectively. These compare
favorably with the minimum requirements of 4.0% for Tier I and 8.0% for total
capital. The regulatory Tier I leverage ratio standard prescribes a minimum
ratio of 3.0%, although most banking organizations are expected to maintain
ratios of at least 100 to 200 basis points above the minimum. At June 30, 1994,
KeyCorp's leverage ratio was at 6.76%, substantially higher than the minimum
requirement. In response to SFAS No. 115, 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 June 30, 1994, December 31, 1993, and June 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 June 30, 1994. All of
KeyCorp's affiliate banks qualified as "well-capitalized" at June 30, 1994. The
FDIC-defined capital categories, as determined by applying the prompt
corrective action provisions of the law, may not constitute an accurate
representation of the overall financial condition or prospects of KeyCorp or
its affiliate banks.
- 33 -
<PAGE> 34
FIGURE 23. CAPITAL COMPONENTS AND RISK-ADJUSTED ASSETS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
June 30, December 31, June 30,
TIER I CAPITAL 1994 1993 1993
--------- -------- --------
<S> <C> <C> <C>
Common shareholders' equity (1) $4,521.1 $4,233.6 $3,999.5
Qualifying preferred stock 160.0 160.0 184.0
Less: Goodwill (372.0) (385.4) (402.1)
Other intangible assets (2) (132.9) (104.0) (109.0)
Other (3) (7.2) (18.9) ---
--------- -------- --------
Total Tier I Capital 4,169.0 3,885.3 3,672.4
--------- -------- --------
TIER II CAPITAL
Allowance for loan losses (4) 597.1 559.7 548.3
Qualifying long-term debt 954.2 993.4 1,002.1
--------- -------- --------
Total Tier II Capital 1,551.3 1,553.1 1,550.4
--------- -------- --------
Total Capital $5,720.3 $5,438.4 $5,222.8
========= ======== ========
RISK-ADJUSTED ASSETS
Risk-adjusted assets on balance sheet $43,717.1 $40,979.9 $40,468.8
Risk-adjusted off-balance sheet exposure 4,561.1 4,283.3 3,902.4
Less: Goodwill (372.0) (385.4) (402.1)
Other intangible assets (2) (132.9) (104.0) (91.1)
Other (3) (7.2) (18.9) (17.9)
--------- -------- --------
Gross risk-adjusted assets 47,766.1 44,754.9 43,860.1
Less: Excess allowance for loan losses (219.3) (243.0) (247.5)
--------- -------- --------
Net risk-adjusted assets $47,546.8 $44,511.9 $43,612.6
========= ======== ========
AVERAGE QUARTERLY TOTAL ASSETS $62,159.2 $58,289.3 $57,198.9
========= ======== ========
CAPITAL RATIOS
Tier I capital to risk-adjusted assets 8.77 % 8.73 % 8.42 %
Total capital to risk-adjusted assets 12.03 12.22 11.98
Leverage (5) 6.76 6.72 6.48
<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 CREDIT CARD RELATIONSHIPS.
(3) VALUATION ADJUSTMENT FOR PURCHASED MORTGAGE SERVICING RIGHTS.
(4) THE ALLOWANCE FOR LOAN LOSSES INCLUDED IN TIER II CAPITAL IS LIMITED TO
1.25% OF GROSS RISK-ADJUSTED ASSETS.
(5) 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 June 30, Three months ended June 30,
------------------------------ ---------------------------
1994 1993 1994 1993
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
SIGNIFICANT RATIOS
Return on average total assets 1.38 % 1.25 % 1.54 % 1.73 %
Net interest margin 5.03 5.32 4.63 5.33
Nonperforming loans to period-end loans 0.90 0.98 0.74 1.31
Allowance for loan losses to period-end loans 1.37 1.40 2.53 2.86
Net charge-offs to average loans 0.42 1.00 0.18 0.55
Efficiency 51.74 52.58 51.20 50.49
AVERAGE BALANCES
Loans $12,079 $11,643 $18,858 $17,183
Earning assets 16,439 15,742 26,189 23,170
Total assets 17,621 16,935 28,469 25,295
Deposits 13,878 14,239 20,234 18,738
Shareholder's equity 1,365 1,250 2,077 2,112
</TABLE>
<TABLE>
<CAPTION>
Rocky Mountain Region Northwest Region
---------------------------- ---------------------------
Three months ended June 30, Three months ended June 30,
---------------------------- ---------------------------
1994 1993 1994 1993
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
SIGNIFICANT RATIOS
Return on average total assets 1.40 % 1.30 % 1.14 % 1.31 %
Net interest margin 5.31 5.37 4.77 5.32
Nonperforming loans to period-end loans 0.37 0.54 0.54 0.81
Allowance for loan losses to period-end loans 1.37 1.28 1.26 1.24
Net charge-offs to average loans 0.20 0.30 0.22 0.20
Efficiency 57.60 59.79 60.27 59.65
AVERAGE BALANCES
Loans $3,034 $2,406 $8,378 $8,201
Earning assets 3,991 3,295 11,191 9,655
Total assets 4,348 3,581 12,182 10,734
Deposits 3,497 2,928 9,592 9,121
Shareholder's equity 344 268 877 821
</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
-----------------
Interstate Banking Legislation
On August 8, 1994, the U.S. House of Representatives passed the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Act") as reported by the House and Senate Conferees.
The Interstate Act generally authorizes bank holding companies to
acquire banks located in any state commencing one year after its
enactment. In addition, it generally authorizes national and state
chartered banks to merge across state lines (and to thereby create
interstate branches) commencing June 1, 1997. Under the provisions of
the Interstate Act, states are permitted to opt-out of this latter
interstate branching authority by taking action prior to the
commencement date. States may also "opt-in" early (i.e. prior to June
1, 1997) to the interstate merger provisions. The Senate is scheduled
to vote during the month of August on the Interstate Act. The
Corporation cannot predict whether the bill will become law. The
Corporation does not currently have any plans generally to
consolidate its banking subsidiaries or to take any other actions
that would be contingent on the enactment of this legislation.
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
(b) Reports on Form 8-K
April 12, 1994 - Item 5. Other Events. On March 24, 1994, the
Registrant issued a press release announcing the completion of
acquisition of Commercial Bancorporation of Colorado.
April 20, 1994 - Item 5. Other Events and Item 7.
Financial Statements, Pro Forma Financial Statements and Exhibits.
On April 19, 1994, the Registrant issued a press release announcing
its earnings results for the three-month period ended March 31,
1994. On April 20, 1994, the Registrant filed portions of its
Annual report including Management's Discussion and Analysis of
Financial Condition and Results of Operations; Report of Ernst &
Young, Independent Auditors; Consolidated Financial Statements; and
Notes to Consolidated Financial Statements, and also filed a
description of its business and properties reflecting old KeyCorp
and Society on a combined basis giving effect to the March 1, 1994
merger.
No other reports on Form 8-K were filed during the three-month period
ended June 30, 1994.
-36-
<PAGE> 37
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: August 12, 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 June 30, Six months ended June 30,
--------------------------- ---------------------------
1994 1993 1994 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET INCOME APPLICABLE TO COMMON SHARES
Net income $221,765 $196,888 $430,402 $386,762
Less: Preferred dividend requirements 4,000 4,450 8,000 9,939
----------- ----------- ----------- -----------
Net income applicable to Common Shares $217,765 $192,438 $422,402 $376,823
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE
Weighted average Common Shares outstanding 244,823,153 239,531,988 243,382,552 238,733,270
=========== =========== =========== ===========
Net income applicable to Common Shares $217,765 $192,438 $422,402 $376,823
=========== =========== =========== ===========
Net income per Common Share $0.89 $0.81 $1.74 $1.58
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE -- PRIMARY
Weighted average Common Shares outstanding 244,823,153 239,531,988 243,382,552 238,733,270
Dilutive common stock options 2,843,675 1,735,847 2,601,154 1,907,348
----------- ----------- ----------- -----------
Weighted average Common Shares and Common Share
equivalents outstanding 247,666,828 241,267,835 245,983,706 240,640,618
=========== =========== =========== ===========
Net income applicable to Common Shares $217,765 $192,438 $422,402 $376,823
=========== =========== =========== ===========
Net income per Common Share $0.88 $0.80 $1.72 $1.57
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE -- FULLY DILUTED
Weighted average Common Shares outstanding 244,823,153 239,531,988 243,382,552 238,733,270
Dilutive common stock options 2,848,519 2,191,299 2,758,357 2,260,734
----------- ----------- ----------- -----------
Weighted average Common Shares and Common Share
equivalents outstanding 247,671,672 241,723,287 246,140,909 240,994,004
=========== =========== =========== ===========
Net income applicable to Common Shares $217,765 $192,438 $422,402 $376,823
=========== =========== =========== ===========
Net income per Common Share $0.88 $0.80 $1.72 $1.56
=========== =========== =========== ===========
<FN>
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 July 18, 1994, relating
to the unaudited consolidated interim financial statements of KeyCorp,
included in the Quarterly Report on Form 10-Q for the period ended June 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
August 12, 1994
