<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 March 31, 1995
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)
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
-------------
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>
<CAPTION>
Common Shares, $1 par value 237,587,663 Shares
- --------------------------- -------------------------------
<S> <C>
(Title of class) (Outstanding at April 28, 1995)
</TABLE>
<PAGE> 2
KEYCORP
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements Page No.
--------
<S> <C>
Consolidated Balance Sheets --
March 31, 1995, December 31, 1994, and March 31, 1994 3
Consolidated Statements of Income --
Three months ended March 31, 1995 and 1994 4
Consolidated Statements of Changes in Shareholders' Equity --
Three months ended March 31, 1995 and 1994 5
Consolidated Statements of Cash Flow --
Three months ended March 31, 1995 and 1994 6
Notes to Consolidated Financial Statements 7
Independent Accountants' Review Report 17
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 39
Item 6. Exhibits and Reports on Form 8-K 39
Signature 39
</TABLE>
-2-
<PAGE> 3
PART I. FINANCIAL INFORMATION
KEYCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31, March 31,
(dollars in thousands, except per share amounts) 1995 1994 1994
- ----------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Assets
Cash and due from banks $ 3,303,230 $ 3,511,368 $ 2,830,739
Short-term investments 1,052,025 670,010 66,077
Mortgage loans held for sale 164,608 355,198 901,599
Securities available for sale 1,534,165 2,521,049 4,474,809
Investment securities (fair value: $10,156,809, $9,757,032
and $9,060,585, respectively) 10,395,437 10,275,638 9,091,151
Loans 48,020,823 46,224,644 41,379,815
Less: Allowance for loan losses 867,074 830,298 812,592
- ----------------------------------------------------------------------------------------------------------------------------
Net loans 47,153,749 45,394,346 40,567,223
Premises and equipment 1,016,421 987,231 910,937
Other real estate owned, net of allowance 54,072 79,007 134,301
Goodwill 597,951 418,462 381,440
Other intangible assets 196,743 180,425 161,545
Other assets 2,240,564 2,408,505 1,959,133
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $67,708,965 $66,801,239 $61,478,954
============================================================================================================================
Liabilities
Deposits in domestic offices:
Noninterest-bearing $ 8,300,310 $ 9,135,760 $ 8,213,644
Interest-bearing 37,792,786 36,003,352 36,181,995
Deposits in foreign offices -- interest-bearing 2,719,218 3,425,125 2,484,963
- ----------------------------------------------------------------------------------------------------------------------------
Total deposits 48,812,314 48,564,237 46,880,602
Federal funds purchased and securities sold
under repurchase agreements 4,980,758 5,499,117 5,674,508
Other short-term borrowings 3,927,338 3,277,611 1,560,153
Other liabilities 1,445,882 1,200,052 1,090,825
Long-term debt 3,725,174 3,569,794 1,744,545
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 62,891,466 62,110,811 56,950,633
Shareholders' equity
Preferred stock, $1 par value; authorized 25,000,000 shares,
none issued --- --- ---
10% Cumulative Preferred Stock Class A, $125 stated value;
authorized 1,400,000 shares, issued 1,280,000 shares 160,000 160,000 160,000
Common Shares, $1 par value; authorized 900,000,000 shares;
issued 245,944,390, 245,944,390 and 245,898,999 shares 245,944 245,944 245,899
Capital surplus 1,457,698 1,454,177 1,466,502
Retained earnings 3,279,835 3,161,293 2,761,040
Loans to ESOP trustee (63,909) (63,909) (63,909)
Net unrealized losses, net of taxes, on securities (44,436) (115,280) (22,588)
Treasury stock at cost (7,756,787, 5,582,273 and 1,135,833 shares) (217,633) (151,797) (18,623)
- ----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 4,817,499 4,690,428 4,528,321
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $67,708,965 $66,801,239 $61,478,954
============================================================================================================================
</TABLE>
See notes to consolidated financial statements (unaudited).
-3-
<PAGE> 4
KEYCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
(dollars in thousands, except per share amounts) 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income
Loans $1,029,026 $ 826,281
Mortgage loans held for sale 4,467 18,424
Taxable investment securities 144,718 100,554
Tax-exempt investment securities 21,688 23,349
Securities available for sale 26,343 74,994
Short-term investments 19,135 1,388
- ------------------------------------------------------------------------------------------------------------------------
Total interest income 1,245,377 1,044,990
Interest expense
Deposits 413,274 296,121
Federal funds purchased and securities
sold under repurchase agreements 76,509 38,967
Other short-term borrowings 49,749 14,190
Long-term debt 62,066 27,600
- ------------------------------------------------------------------------------------------------------------------------
Total interest expense 601,598 376,878
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 643,779 668,112
Provision for loan losses 18,446 36,792
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 625,333 631,320
Noninterest income
Service charges on deposit accounts 65,668 62,317
Trust and asset management income 52,750 57,037
Mortgage banking income 17,735 24,795
Credit card fees 16,682 16,668
Insurance and brokerage income 12,667 16,007
Special asset management fees 2,685 2,156
Net securities gains (losses) (44,855) 6,428
Other income 47,703 41,148
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest income 171,035 226,556
Noninterest expense
Personnel 279,882 270,536
Net occupancy 54,219 55,494
Equipment 39,885 39,868
FDIC insurance assessments 25,476 23,999
Professional fees 12,578 12,504
OREO expense, net 2,212 1,332
Other expense 146,595 139,094
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 560,847 542,827
- ------------------------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary item 235,521 315,049
Income taxes 61,610 106,412
- ------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item 173,911 208,637
Extraordinary net gain from the sales of
subsidiaries, net of income taxes of $25,351 35,790 ---
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 209,701 $ 208,637
========================================================================================================================
Net income applicable to Common Shares $ 205,701 $ 204,637
Per Common Share:
Income before extraordinary item .71 .85
Net income .86 .85
Weighted average Common Shares outstanding 239,999,198 241,925,802
========================================================================================================================
</TABLE>
See notes to consolidated financial statements (unaudited).
-4-
<PAGE> 5
KEYCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Loans to
Preferred Common Capital Retained ESOP
(dollars in thousands, except per share amounts) Stock Shares Surplus Earnings Trustee
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $160,000 $242,828 $1,433,861 $2,641,450 $(63,909)
Adjustment related to accounting
for contributions (8,022)
Adjustment of securities available for sale
to fair value at January 1, net of
deferred income taxes of $26,621
Adjustments relating to poolings
of interests - 12,990 shares (11) (375)
Net income 208,637
Cash dividends:
Common Shares ($.32 per share) (37,575)
Declared by pooled company prior to merger:
Common Stock (39,793)
Preferred Stock (4,000)
Issuance of Common Shares:
Acquisitions - 2,900,389 shares 2,900 29,503
Dividend reinvestment, stock option
and purchase plans - 326,206 net shares 182 3,513
Change in net unrealized gains (losses) on
securities, net of deferred income tax
benefit of $(39,124)
Tax benefits attributable to ESOP dividends 343
- -----------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1994 $160,000 $245,899 $1,466,502 $2,761,040 $(63,909)
=======================================================================================================================
Balance at December 31, 1994 $160,000 $245,944 $1,454,177 $3,161,293 $(63,909)
Net income 209,701
Cash dividends:
Common Shares ($.36 per share) (87,469)
Cumulative Preferred Stock ($3.125 per share) (4,000)
Issuance of Common Shares:
Acquisitions - 4,043,559 shares 6,227
Dividend reinvestment, stock option, and
purchase plans - 255,827 net shares (2,458)
Employee stock purchase plan (248)
Repurchase of Common Shares - 6,473,900 shares
Change in net unrealized gains (losses) on
securities, net of deferred income taxes of $41,430
Tax benefits attributable to ESOP dividends 310
- -----------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1995 $160,000 $245,944 $1,457,698 $3,279,835 $(63,909)
=======================================================================================================================
<CAPTION>
Net
Unrealized
Securities Common
Gains Shares in
(dollars in thousands, except per share amounts) (Losses) Treasury
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1993 $ (20,663)
Adjustment related to accounting
for contributions
Adjustment of securities available for sale
to fair value at January 1, net of
deferred income taxes of $26,621 $ 46,153
Adjustments relating to poolings
of interests - 12,990 shares
Net income
Cash dividends:
Common Shares ($.32 per share)
Declared by pooled company prior to merger:
Common Stock
Preferred Stock
Issuance of Common Shares:
Acquisitions - 2,900,389 shares
Dividend reinvestment, stock option
and purchase plans - 326,206 net shares 2,040
Change in net unrealized gains (losses) on
securities, net of deferred income tax
benefit of $(39,124) (68,741)
Tax benefits attributable to ESOP dividends
- -----------------------------------------------------------------------------------------
Balance at March 31, 1994 $ (22,588) $ (18,623)
=========================================================================================
Balance at December 31, 1994 $(115,280) $(151,797)
Net income
Cash dividends:
Common Shares ($.36 per share)
Cumulative Preferred Stock ($3.125 per share)
Issuance of Common Shares:
Acquisitions - 4,043,559 shares 110,025
Dividend reinvestment, stock option, and
purchase plans - 255,827 net shares 6,999
Employee stock purchase plan
Repurchase of Common Shares - 6,473,900 shares (182,860)
Change in net unrealized gains (losses) on
securities, net of deferred income taxes of $41,430 70,844
Tax benefits attributable to ESOP dividends
- ----------------------------------------------------------------------------------------
Balance at March 31, 1995 $ (44,436) $(217,633)
========================================================================================
</TABLE>
See notes to consolidated financial statements (unaudited).
-5-
<PAGE> 6
KEYCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31,
-------------------------------
(in thousands) 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 209,701 $ 208,637
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 18,446 36,792
Depreciation expense 33,430 28,991
Amortization of intangibles 16,455 12,536
Net gain from sales of subsidiaries (61,141) ---
Deferred income taxes (8,845) 13,388
Net securities (gains) losses 44,855 (6,428)
Losses (gains) from the sales of other real estate owned 110 (868)
Net decrease in mortgage loans held for sale 190,590 423,739
Other operating activities, net 179,123 (114,060)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 622,724 602,727
Investing Activities
Net increase in loans (363,738) (1,090,688)
Purchases of investment securities (476,886) (2,708,771)
Proceeds from sales of investment securities 3,818 ---
Proceeds from prepayments and maturities of investment securities 452,670 803,434
Purchases of securities available for sale (65,996) (156,606)
Proceeds from sales of securities available for sale 1,283,808 1,133,866
Proceeds from prepayments and maturities of securities available for sale 55,391 148,975
Net (increase) decrease in short-term investments (213,615) 41,142
Purchases of premises and equipment (56,035) (21,667)
Proceeds from sales of premises and equipment 2,371 2,021
Proceeds from sales of other real estate owned 12,804 17,997
Proceeds from sales of subsidiaries 350,633 ---
Net cash (used in) provided by acquisitions (198,049) 30,690
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 787,176 (1,799,607)
Financing Activities
Net (decrease) increase in deposits (1,470,443) 40,407
Net increase in short-term borrowings 37,375 1,337,546
Net proceeds from issuance of long-term debt 151,658 50,900
Payments on long-term debt (66,909) (71,926)
Purchase of treasury shares (182,860) ---
Proceeds from issuance of common stock pursuant to employee
stock purchase, stock option and dividend reinvestment plans 4,293 6,042
Cash dividends (91,469) (113,311)
Other financing activities, net 317 523
- -------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (1,618,038) 1,250,181
- -------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and due from banks (208,138) 53,301
Cash and due from banks at beginning of period 3,511,368 2,777,438
- -------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of period $3,303,230 $2,830,739
===============================================================================================================================
Additional disclosures relative to cash flow:
Interest paid $568,956 $387,052
Income taxes received 41,157 10,525
Net amounts paid (received) on portfolio swaps 50,331 (5,089)
Noncash items:
Net transfer of loans (from) to other real estate owned (11,584) 16,827
===============================================================================================================================
</TABLE>
See notes to consolidated financial statements (unaudited).
-6-
<PAGE> 7
KEYCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
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 1994 Annual Report to Shareholders. The results of operations for
the interim periods are not necessarily indicative of the results of operations
to be expected for the full year.
During the first quarter of 1995 the Corporation adopted Statement of Financial
Accounting Standards ("SFAS") No. 116, "Accounting for Contributions Received
and Contributions Paid." This new accounting standard requires, among other
things, that unconditional multi-year commitments to make charitable
contributions be recognized as expense in the year the commitment is made, as
opposed to the period in which the payment takes place. SFAS No. 116 was adopted
by restating all periods presented with the cumulative effect of $8.0 million
recorded as an adjustment to January 1, 1993, retained earnings. The effect of
adopting SFAS No. 116 on subsequent periods was not material, and therefore, the
results of operations for those periods were not restated. In addition, certain
amounts previously reported in the financial statements have been reclassified
to conform with the current presentation.
In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" (the "Standard"), which is effective for fiscal
years beginning after December 15, 1995. The Standard requires that impairment
of long-lived assets, certain indentifiable intangibles, and goodwill related to
those assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. The Standard does not apply to core deposit or credit card
intangibles. Under the Standard, a loss is to be recognized to the extent that
the fair value of an impaired asset is less than the asset's carrying amount.
The Standard also provides for disclosures about impairment losses and
long-lived assets to be disposed of. The Corporation expects to adopt the
Standard as of January 1, 1996, and does not expect it to have a material
effect on the Corporation's financial condition or results of operations.
2. MERGERS, ACQUISITIONS AND DIVESTITURES
Completed Transactions
KeyCorp-Society Merger
On March 1, 1994, the former KeyCorp, a New York corporation ("old KeyCorp"),
merged into and with Society Corporation, an Ohio corporation ('Society"), which
was the surviving corporation and assumed the name KeyCorp. Under the terms of
the merger agreement, 124,351,183 KeyCorp Common Shares were exchanged for all
of the outstanding shares of old KeyCorp common stock (based on an exchange
ratio of 1.205 shares for each share of old KeyCorp). The outstanding preferred
stock of old KeyCorp was exchanged for 1,280,000 shares of a comparable, new
issue of 10% Cumulative Preferred Stock of KeyCorp. The merger was accounted for
as a pooling of interests and, accordingly, financial results for prior periods
presented have been restated to include the combined financial results of both
companies.
KeyCorp Mortgage Inc.
On March 31, 1995, KeyCorp sold the residential mortgage loan servicing
operations of KeyCorp Mortgage Inc. ("KMI"), an indirect wholly owned subsidiary
of KeyCorp. KMI serviced approximately $28 billion of residential mortgage
loans. KeyCorp plans to continue to service commercial mortgages, to originate
residential mortgage loans through its banking franchise and to sell the rights
to service residential mortgage loans originated after the KMI sale through a
newly formed subsidiary. A $72.3 million gain was realized on the sale ($41.6
million after tax, $.17 per Common Share) and recorded as an extraordinary item.
-7-
<PAGE> 8
Transactions Pending as of March 31, 1995
Schaenen Wood & Associates, Inc.
On April 21, 1995, KeyCorp Asset Management Holdings, Inc., an indirect wholly
owned subsidiary of KeyCorp, sold Schaenen Wood & Associates, Inc., a wholly
owned asset management subsidiary. An $11.2 million loss was realized in
connection with the sale ($5.8 million after tax, $.02 per Common Share) and
recorded as an extraordinary item in the first quarter.
Spears, Benzak, Salomon & Farrell, Inc.
On April 5, 1995, KeyCorp Asset Management Holdings, Inc. acquired Spears,
Benzak, Salomon & Farrell, Inc., a New York-based investment management firm
("Spears Benzak"). Spears Benzak had aggregate assets under management of
approximately $3.2 billion as of March 31, 1995. A total of 1,910,000 KeyCorp
Common Shares were issued in the transaction which was accounted for as a
purchase.
AutoFinance Group, Inc.
On March 20, 1995, KeyCorp entered into a definitive agreement to acquire
AutoFinance Group, Inc. ("AFG"), a Chicago-based consumer finance company, in a
tax-free exchange of stock. Under the terms of the agreement, AFG shareholders
will receive KeyCorp Common Shares equal to $16.50 per share, subject to a
maximum of .6 and a minimum of .5 KeyCorp Common Shares, for each share of AFG.
Based upon the market price of KeyCorp Common Shares on the date of execution of
the definitive agreement, this would result in the issuance of approximately 11
million KeyCorp Common Shares with a value of approximately $325 million. In
addition, immediately prior to the closing, AFG will complete a spin-off to its
shareholders of 95.01% of its common stock interest in Patlex Corporation, a
wholly owned subsidiary. Upon consummation of the acquisition, AFG will merge
into Key Auto Inc., a wholly owned subsidiary of KeyCorp. The transaction, which
is subject to approval by AFG's shareholders and certain regulatory approvals,
is expected to close on or about September 30, 1995, and will be accounted for
as a purchase. AFG had total assets of $118.7 million as of March 31, 1995.
Mergers and acquisitions completed by KeyCorp during 1994 and the three-month
period ended March 31, 1995, along with the related accounting treatment, are as
follows (dollars in millions):
<TABLE>
<CAPTION>
Common
Accounting Treatment Location Date Assets Shares Issued Cash Paid
==================================================================================================================================
<S> <C> <C> <C> <C> <C>
Poolings of Interests:
The Bank of Greeley (1) Colorado December 1994 $ 60 259,697 ---
Commercial Bancorporation
of Colorado (1) Colorado March 1994 409 2,900,389 ---
KeyCorp/Society (2) New York/Ohio March 1994 See Note (2) 124,351,183 ---
Purchases:
OMNIBANCORP Colorado February 1995 500 4,043,559 ---
Casco Northern Bank, National
Association Maine February 1995 1,000 --- $205
BANKVERMONT Corporation Vermont January 1995 661 --- 90
First Citizens Bancorp
of Indiana Indiana December 1994 347 1,960,119 ---
State Home Savings Bank Ohio September 1994 321 --- 44
===============================================================================================================================
</TABLE>
- ---------------
(1) Financial statements for periods prior to the transaction were not restated
to include the accounts and results of operations of the pooled company
because the transaction was not material to KeyCorp.
(2) See preceding text for more information regarding this transaction.
-8-
<PAGE> 9
3. SECURITIES AVAILABLE FOR SALE
Debt securities that the Corporation has the positive intent and ability to hold
to maturity are classified as securities held to maturity and are carried at
amortized cost. Securities held to maturity and equity securities that do not
have readily determinable fair values are presented as investment securities on
the balance sheet. Debt and equity securities that are bought and principally
held for the purpose of selling them in the near term are classified as trading
account assets and reported at fair value, with realized and unrealized gains
and losses included in noninterest income. Debt and equity securities not
classified as either investment securities or trading account assets are
classified as securities available for sale and reported at fair value, with the
unrealized gains and losses, net of deferred income taxes, excluded from
operating results and reported as a component of shareholders' equity.
During the third quarter of 1994, the Corporation transferred approximately $1.3
billion of mortgage-backed securities from the securities available for sale
portfolio to the investment securities portfolio, This transfer was made in
response to guidance issued by the FASB with regard to the classification of
"nonhigh-risk" mortgage securities in accordance with SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." The securities were
transferred at their fair value and the unrealized loss (approximately $57.8
million before taxes) is being amortized as a yield adjustment over their
remaining lives.
At March 31, 1995, approximately $1.5 billion of securities were classified as
available for sale and shareholders' equity was reduced by $44.4 million,
representing the net unrealized loss on securities, net of deferred income tax
benefit of $25.1 million.
The amortized cost, unrealized gains and losses, and approximate fair values of
securities available for sale were as follows (in thousands):
<TABLE>
<CAPTION>
March 31, 1995
---------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury, agencies and corporations $ 417,473 $1,526 $ 614 $ 418,385
States and political subdivisions 29,195 401 2,689 26,907
Mortgage-backed securities 902,057 3,489 23,182 882,364
Other securities 207,342 119 952 206,509
---------- ------ ------- ----------
Total $1,556,067 $5,535 $27,437 $1,534,165
========== ====== ======= ==========
<CAPTION>
December 31, 1994
---------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury, agencies and corporations $1,067,726 $1,117 $ 16,384 $1,052,459
States and political subdivisions 28,871 192 3,145 25,918
Mortgage-backed securities 1,334,132 211 105,989 1,228,354
Other securities 223,299 47 9,028 214,318
---------- ------ -------- ----------
Total $2,654,028 $1,567 $134,546 $2,521,049
========== ====== ======== ==========
<CAPTION>
March 31, 1994
---------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury, agencies and corporations $1,430,129 $22,849 $ 5,542 $1,447,436
Mortgage-backed securities 2,787,809 22,986 76,053 2,734,742
Other securities 291,962 780 111 292,631
---------- ------- ------- ----------
Total $4,509,900 $46,615 $81,706 $4,474,809
========== ======= ======= ==========
</TABLE>
-9-
<PAGE> 10
4. INVESTMENT SECURITIES
The amortized cost, unrealized gains and losses, and approximate fair values of
investment securities were as follows (in thousands):
<TABLE>
<CAPTION>
March 31, 1995
---------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury, agencies and corporations $ 826,190 $ 714 $ 20,988 $ 805,916
States and political subdivisions 1,485,436 44,358 3,539 1,526,255
Mortgage-backed securities 7,676,808 21,335 256,615 7,441,528
Other securities 407,003 2,409 26,302 383,110
---------- ------ ------- ----------
Total $10,395,437 $68,816 $307,444 $10,156,809
=========== ======= ======== ===========
<CAPTION>
December 31, 1994
---------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury, agencies and corporations $ 532,619 $ 280 $ 33,619 $ 499,280
States and political subdivisions 1,508,534 33,329 6,982 1,534,881
Mortgage-backed securities 7,834,169 10,023 481,426 7,362,766
Other securities 400,316 875 41,086 360,105
---------- ------ ------- ----------
Total $10,275,638 $44,507 $563,113 $9,757,032
=========== ======= ======== ==========
<CAPTION>
March 31, 1994
---------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury, agencies and corporations $ 578,833 $ 8,012 $ 13,450 $ 573,395
States and political subdivisions 1,605,613 61,399 2,661 1,664,351
Mortgage-backed securities 6,472,865 30,227 123,198 6,379,894
Other securities 433,840 9,343 238 442,945
---------- ------ ------- ----------
Total $9,091,151 $108,981 $139,547 $9,060,585
========== ======== ======== ==========
</TABLE>
5. LOANS
Loans are summarized as follows (in thousands):
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1995 1994 1994
----------- ----------- ------------
<S> <C> <C> <C>
Commercial, financial and agricultural $10,973,491 $10,190,582 $ 9,575,237
Real estate - construction 1,338,849 1,287,195 1,164,134
Real estate - commercial mortgage 7,292,295 6,774,860 6,320,673
Real estate - residential mortgage 14,082,040 13,567,077 11,532,894
Consumer 9,821,503 10,183,798 9,400,693
Student loans held for sale 2,126,317 1,816,524 1,538,427
Lease financing 2,314,060 2,307,212 1,763,850
Foreign 72,268 97,396 83,907
----------- ----------- -----------
Total $48,020,823 $46,224,644 $41,379,815
=========== =========== ===========
</TABLE>
-10-
<PAGE> 11
Changes in the allowance for loan losses are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1995 1994
-------- --------
<S> <C> <C>
Balance at beginning of period $830,298 $802,712
Charge-offs (42,966) (55,453)
Recoveries 25,710 24,138
-------- --------
Net charge-offs (17,256) (31,315)
Provision for loan losses 18,446 36,792
Allowance of acquired companies 35,061 4,403
Transfer from OREO allowance 525 ---
-------- --------
Balance at end of period $867,074 $812,592
======== ========
</TABLE>
6. NONPERFORMING ASSETS
Effective January 1, 1995, the Corporation adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan -- Income Recognition and Disclosures." SFAS No. 114
prescribes the methodology under which certain loans are to be measured for
impairment. Generally, a loan is considered impaired when management believes it
is probable that all amounts due will not be collected according to the
contractual terms of the loan agreement. SFAS No. 118 amends SFAS No. 114 by
eliminating certain income recognition provisions and by expanding the
disclosure requirements. Adoption of these standards did not have a material
effect on the Corporation's financial condition or results of operations.
The Corporation measures impairment on all large balance nonaccrual loans
(typically commercial and commercial real estate loans). In most instances,
impairment is measured based on the fair value of the underlying collateral. In
certain other cases, impairment is measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate.
Amounts deemed impaired are either specifically allocated for in the allowance
for loan losses or reflected as a partial charge-off of the loan balance.
Smaller balance homogeneous loans are collectively evaluated for impairment.
Cash payments received on nonaccrual loans (including impaired loans) are
generally applied to principal. However, based on management's assessment of the
ultimate collectibility of the loan, interest income may be recognized on a cash
basis. Interest income recognized in the first quarter of 1995 on impaired loans
was not significant.
In accordance with SFAS No. 114, loans are to be classified in other real estate
owned ("OREO") only when the creditor has actually taken possession of the
collateral. Accordingly, $19.9 million of loans previously classified as
in-substance foreclosures, but for which the Corporation had not taken
possession of the collateral, have been reclassified to loans. Similarly, any
allowance for OREO losses related to these assets has been reclassified to the
allowance for loan losses.
At March 31, 1995, the recorded investment in impaired loans was $206.7 million.
Included in this amount is $57.6 million of impaired loans for which the
specifically allocated allowance for loan losses is $17.3 million, and $149.1
million of impaired loans that have been written-down to estimated fair value
and, therefore, do not have a specifically allocated allowance for loan losses.
The average recorded investment in impaired loans for the first quarter of 1995
was $189.9 million.
-11-
<PAGE> 12
Nonperforming assets were as follows (in thousands):
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1995 1994 1994
--------- ------------ ---------
<S> <C> <C> <C>
Impaired loans $206,738 --- ---
Other nonaccrual loans 96,043 $254,499 $315,438
Restructured loans 894 1,550 1,320
-------- -------- --------
Total nonperforming loans 303,675 256,049 316,758
Other real estate owned 69,045 100,265 167,501
Allowance for OREO losses (14,973) (21,258) (33,200)
-------- -------- --------
Other real estate owned, net of allowance 54,072 79,007 134,301
Other nonperforming assets 4,761 4,777 12,972
-------- -------- --------
Total nonperforming assets $362,508 $339,833 $464,031
======== ======== ========
</TABLE>
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>
March 31, December 31, March 31,
1995 1994 1994
--------- ------------ ---------
<S> <C> <C> <C>
Medium-Term Notes due through 2003 $ 985,200 $ 870,200 $ 505,200
8.125 % Subordinated Notes due 2002 198,210 198,148 197,963
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 74,859 74,829 74,786
11.125 % Notes due 1995 49,995 49,992 49,982
8.404 % Notes due 1997 through 2001 48,864 48,864 48,864
8.255 % Notes due 1996 22,794 22,794 22,794
All other long-term debt 372 374 2,030
---------- ---------- ----------
Total parent company 1,580,294 1,465,201 1,101,619
Medium-Term Bank Notes due through 1997 1,398,487 1,398,245 --
7.85 % Subordinated Notes due 2002 199,848 199,843 199,828
6.75 % Subordinated Notes due 2003 198,917 198,886 198,855
Federal Home Loan Bank Advances 285,697 252,328 187,228
10.00 % Note due 1995 36,735 36,735 36,735
Industrial revenue bonds 10,144 10,144 10,904
All other long-term debt 15,052 8,412 9,376
---------- ---------- ----------
Total subsidiaries 2,144,880 2,104,593 642,926
---------- ---------- ----------
Total $3,725,174 $3,569,794 $1,744,545
========== ========== ==========
</TABLE>
8. INCOME TAXES
The effective tax rate (provision for income taxes as a percentage of income
before income taxes and extraordinary item) for the 1995 first quarter was 26.2%
compared to 33.8% for the first quarter of 1994. The decrease in the effective
tax rate was attributable to the recognition during the first quarter of 1995 of
one-time tax benefits of $16.0 million related to acquisitions made in years
prior to 1992.
-12-
<PAGE> 13
9. EXTRAORDINARY ITEM
During the first quarter of 1995, the Corporation recorded an extraordinary net
gain of $61.1 million ($35.8 million after tax, $.15 per Common Share),
representing a gain of $72.3 million ($41.6 million after tax, $.17 per Common
Share) from the sale of the residential mortgage loan servicing operations of
KeyCorp Mortgage Inc., an indirect wholly owned subsidiary of KeyCorp, and a
loss of $11.2 million ($5.8 million after tax, $.02 per Common Share) recorded
in anticipation of the April 21, 1995, sale of Schaenen Wood & Associates, Inc.,
an indirect wholly owned asset management subsidiary of KeyCorp. These
transactions are described in greater detail in Note 2, Mergers, Acquisitions
and Divestitures, beginning on page 7 of this report.
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 effectively manage their exposure to market risk. Market
risk is the possibility that the Corporation's net interest income will be
adversely affected as a result of changes in interest rates or other economic
factors. Credit risk is the possibility that the Corporation will incur a loss
due to a counterparty's failure to perform its contractual obligations. The
primary financial instruments used include commitments to extend credit, standby
and commercial letters of credit, interest rate swaps, caps and floors, and
foreign exchange forward contracts. All of the interest rate swaps, caps and
floors, and foreign exchange forward contracts held are over-the-counter
instruments. These financial instruments may be used for lending-related, asset
and liability management and trading purposes, as discussed below.
Financial Instruments Held or Issued for Lending Related Purposes
These instruments involve, to varying degrees, credit risk in excess of amounts
recognized in the Corporation's consolidated balance sheet. The Corporation
mitigates its exposure to credit risk through internal controls over the
extension of credit. These controls include the process of credit approval and
review, the establishment of credit limits, and, when deemed necessary,
securing collateral.
The following is a summary of the contractual amount of each class of
lending-related off-balance sheet financial instrument outstanding wherein the
Corporation's maximum possible accounting loss equals the contractual amount of
the instruments (in thousands):
<TABLE>
<CAPTION>
March 31, December 31, March 31,
Loan commitments: 1995 1994 1994
---------- ------------ ----------
<S> <C> <C> <C>
Credit card lines $ 5,648,744 $ 5,482,566 $ 4,659,110
Home equity 3,373,326 3,243,618 2,803,181
Commercial real estate and construction 1,302,882 1,503,707 1,238,391
Other 7,308,607 7,356,564 8,435,058
----------- ----------- -----------
Total loan commitments 17,633,559 17,586,455 17,135,740
Other commitments:
Standby letters of credit 1,065,327 1,003,275 1,153,596
Commercial letters of credit 214,869 205,434 331,759
Loans sold with recourse 41,016 231,048 143,914
----------- ----------- -----------
Total loan and other commitments $18,954,771 $19,026,212 $18,765,009
=========== =========== ===========
</TABLE>
-13-
<PAGE> 14
The banks' commitments to extend credit are agreements with customers to provide
financing at predetermined terms as long as the customer continues to meet
specified criteria. Loan commitments serve to meet the financing needs of the
banks' customers and generally carry variable rates of interest, have fixed
expiration dates or other termination clauses, and may require the payment of
fees. Since the commitments may expire without being drawn upon, the total
amount of the commitments does not necessarily represent the future cash outlay
to be made by the Corporation. The credit-worthiness of each customer is
evaluated on a case-by-case basis. The estimated fair values of these
commitments and the standby letters of credit discussed below are not material.
The Corporation does not have any significant concentrations of credit risk.
Standby letters of credit enhance the credit worthiness of the banks' customers
by assuring the customers' financial performance to third parties in connection
with specified transactions. Amounts drawn under standby letters of credit
generally carry variable rates of interest and the credit risk involved is
essentially the same as that involved in the extension of loan facilities.
Financial Instruments Held or Issued for Asset and Liability Management
Purposes
The Corporation manages its exposure to market risk, in part, by using
off-balance sheet instruments to modify the existing interest rate risk
characteristics of its assets and liabilities. Primary among the financial
instruments used by both the parent company and its affiliate banks are interest
rate swap agreements used to manage market risk. Interest rate swaps used for
this purpose are designated as portfolio swaps. The notional amount of the
interest rate swap contracts represents only an agreed-upon amount on which
calculations of interest payments to be exchanged are based, and is
significantly greater than the amount at risk. The amount at risk is measured as
the cost of replacing, at current market rates, contracts in an unrealized gain
position. Although the Corporation is exposed to credit-related losses in the
event of nonperformance by the counterparties, based on management's assessment,
as of March 31, 1995, all counterparties were expected to meet their
obligations. In addition, the Corporation deals exclusively with counterparties
with high credit ratings, enters into bilateral collateral arrangements and
arranges master netting agreements. These agreements include legal rights of
setoff that provide for the net settlement of the subject contracts with the
same counterparty in the event of default. At March 31, 1995, the Corporation
had credit exposure of an aggregate $11.6 million to six counterparties, with
the largest credit exposure to an individual counterparty amounting to $6.7
million.
Under conventional interest rate swap agreements, payments based on fixed 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 contract, the notional amount remains constant for a specified
period of time after which, based upon the level of the index at each payment
review date, 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. At March 31, 1995, the Corporation was party to $1.9 billion and
$2.3 billion of indexed amortizing swaps that used a LIBOR (London Interbank
Offering Rates) index and a CMT (Constant Maturity Treasuries) index,
respectively, for the payment review date measurement. Otherwise, the
characteristics of these swaps are similar to those of conventional swap
contracts. Under basis swap contracts, interest payments based on different
floating indices are exchanged. Forward-starting swaps are interest rate swaps
with contractual terms that commence at a specified future date.
-14-
<PAGE> 15
The following table summarizes the notional amount and the fair value of
portfolio interest rate swaps by type (in millions):
<TABLE>
<CAPTION>
March 31, 1995 December 31, 1994 March 31, 1994
---------------------- ----------------------- -----------------------
Notional Fair Notional Fair Notional Fair
Amount Value Amount Value Amount Value
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Receive fixed/pay variable -
indexed amortizing $4,474.4 $(144.2) $5,786.6 $(341.7) $5,550.0 $ (60.0)
Receive fixed/pay variable -
conventional 2,585.2 (102.7) 3,010.2 (199.6) 2,658.0 (72.1)
Pay fixed/receive variable -
conventional 2,486.5 (14.6) 1,456.5 11.5 756.0 3.6
Basis swaps 200.0 .1 200.0 .1 --- ---
Forward-starting --- --- --- --- 50.0 ---
-------- ------- --------- ------- -------- -------
Total portfolio swaps $9,746.1 $(261.4) $10,453.3 $(529.7) $9,014.0 $(128.5)
======== ======= ========= ======= ======== =======
</TABLE>
Based on the weighted average rates in effect at March 31, 1995, portfolio
interest rate swaps were providing a slightly negative impact on net interest
income, since the weighted average rate paid exceeded the weighted average rate
received by 19 basis points. The aggregate negative fair value of $(261.4)
million at the same date was derived through the use of discounted cash flow
models, which contemplate interest rates using the applicable forward yield
curve, and represents an estimate of the cost that would be recognized if the
portfolio were to be liquidated at that date. The swaps have an expected average
maturity of 4.1 years.
Portfolio interest rate swaps are used to manage interest rate risk by
modifying the repricing or maturity characteristics of specified on-balance
sheet assets and liabilities, principally loans ($5.6 billion), fixed rate
liabilities ($1.5 billion) and variable rate liabilities ($2.5 billion).
Interest from these swaps is recognized on an accrual basis over the lives of
the respective contracts as an adjustment of the interest income or expense of
the asset or liability being managed. Portfolio interest rate swaps reduced net
interest income for the first quarter of 1995 by $13.4 million, but added $37.8
million to net interest income for the first three months of 1994. The impact
in both periods reflected the spread on the swap portfolio as well as the
amortization of deferred gains and losses from terminated swaps. Gains and
losses realized upon the termination of interest rate swaps are deferred and
amortized using the straight-line method over the projected remaining lives of
the swap agreements. During the first quarter of 1995, swaps with a notional
amount of $1.3 billion were terminated, resulting in net deferred losses of
$57.8 million.
The Corporation recognized $38.0 million of swap losses during the first
quarter of 1995 in connection with the sale of the residential mortgage loan
servicing business. These recognized losses, which were included in the
determination of the net gain from the sale of the business, included $15.3
million of the $57.8 million of deferred swap losses referred to above and
$22.7 million of deferred swap losses recorded prior to 1995.
The Corporation's deferred swap gains and (losses) at March 31, 1995, are
summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
Weighted Average
Remaining
Deferred Amortization
Asset/Liability Managed Gains/(Losses) (Years)
----------------------- -------------- ----------------
<S> <C> <C>
Loans $(45,374) 1.1
Debt 12,183 7.3
Deposits 4,284 .9
--------
Total $(28,907)
========
</TABLE>
The Corporation, prior to the March 31, 1995, sale of KMI (as discussed in Note
2, Mergers, Acquisitions and Divestitures, beginning on page 7), entered into
forward sale agreements and option contracts to manage the risk associated with
the potential impact of adverse movements in interest rates on mortgage loans
held for sale. The sale agreements commit the Corporation's affiliates to
deliver mortgage loans in future periods, while the option contracts allow the
affiliates to sell or purchase mortgage loans at a specified price, at a
specified future date. Commitments to sell mortgage loans totaled $119.4 million
and $365.6 million at March 31, 1995, and December 31, 1994, respectively, while
mortgage loan options at March 31, 1995 and March 31, 1994 were not material.
-15-
<PAGE> 16
Financial Instruments Held or Issued for Trading Purposes
The Corporation's affiliate banks also use interest rate contracts for dealer
activities, which are generally limited to the banks' current lending customers.
Interest rate swap agreements entered into with customers are typically limited
to conventional swaps, as previously described. 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. 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. 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 risk from writing interest rate caps and floors is
minimized by the banks through the purchase of offsetting caps and floors. The
contracts are recorded at fair value, with any changes in fair value recognized
in noninterest income.
The Corporation also enters into foreign exchange forward contracts to
accommodate the business needs of its customers and for proprietary trading
purposes. Foreign exchange-based forward contracts provide for the delayed
delivery or purchase of foreign currency. The foreign exchange risk associated
with these contracts is mitigated by entering into offsetting foreign exchange
contracts. Adjustments to the fair value of foreign exchange forward contracts
are included in noninterest income.
A summary of the notional amount and the respective fair value of derivative
financial instruments held or issued for trading purposes at March 31, 1995, and
on average for the three-month period then ended, is as follows (in thousands).
The positive fair values represent assets to the Corporation, while the negative
fair values represent liabilities.
<TABLE>
<CAPTION>
Three months ended
March 31, 1995 March 31, 1995
---------------------------- -------------------------------
Notional Fair Average Average
Amount Value Notional Amount Fair Value
-------- -------- --------------- ----------
<S> <C> <C> <C> <C>
Interest rate contracts:
Swaps:
Assets $696,485 $ 11,347 $685,328 $ 15,834
Liabilities 550,706 (11,830) 557,067 (15,283)
Caps and floors purchased 605,416 3,265 572,395 3,048
Caps and floors written 756,723 (3,608) 715,446 (3,550)
Foreign exchange forward contracts:
Assets 637,550 55,942 646,393 33,352
Liabilities 702,032 (52,029) 674,965 (29,811)
</TABLE>
At March 31, 1995, credit exposure from financial instruments held or issued for
trading purposes is limited to the aggregate fair value of each contract with a
positive fair value. The risk of counterparties defaulting on their obligations
is monitored on an ongoing basis. The parent company and its affiliate banks
contract with counterparties of good credit standing and enter into master
netting agreements when possible in an effort to manage credit risk.
Trading income recognized on interest rate and foreign exchange forward
contracts totaled $.5 million and $3.3 million, respectively, for the first
three months of 1995 and $.3 million and $2.2 million, respectively, for the
first three months of 1994.
-16-
<PAGE> 17
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Shareholders and Board of Directors
KeyCorp
We have reviewed the unaudited consolidated balance sheets of KeyCorp and
subsidiaries ("KeyCorp") as of March 31, 1995 and 1994, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flow for the three-month periods then ended. These financial statements are the
responsibility of KeyCorp'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 reviews, 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, 1994,
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 January 18, 1995, except for Note 2, as to which the date is
February 28, 1995, 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, 1994, 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
April 20, 1995
-17-
<PAGE> 18
KEYCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
This section of the report, including the 1995 first quarter highlights
summarized below, provides a discussion and analysis of the financial condition
and results of operations of KeyCorp and its subsidiaries (the Corporation) for
the periods presented. It should be read in conjunction with the consolidated
interim financial statements and notes thereto, presented on pages 3 through 16
of this report.
The Corporation's strategic planning process launched in 1994, known as First
Choice 2000, is designed to leverage the capabilities of the franchise by
reallocating resources to businesses with higher earnings potential and by
heightening the focus on certain customer segments. During the first quarter
of 1995, a number of actions were taken in connection with the implementation
of this strategic planning process. Specifically, these actions included the
completion of the sale of the residential mortgage loan servicing operations of
KeyCorp Mortgage Inc., a mortgage banking subsidiary, and entering into an
agreement to acquire AutoFinance Group, Inc., (AFG) one of the nation's leading
automobile finance companies based in Chicago, Illinois. The acquisition of
AFG is expected to close on or about September 30 of this year. On April 5,
the Corporation completed its acquisition of Spears, Benzak, Salomon & Farrell,
Inc., a New York-based investment management firm.
In addition to the above transactions, the Corporation strengthened its retail
franchise with the completion of three bank acquisitions during the first
quarter. The acquisitions included Casco Northern Bank, National Association
located in Portland, Maine; BANKVERMONT Corporation (and its subsidiary, Bank
of Vermont) based in Burlington, Vermont; and OMNIBANCORP (and its five
subsidiary banks) based in Denver, Colorado. The acquisitions were accounted
for as purchases and, accordingly, the results of operations of these companies
have been included from the respective dates of acquisition.
The Corporation's 1995 first quarter financial results were also impacted by
further actions taken to reconfigure the balance sheet in order to reduce
exposure to future changes in interest rates. These actions included the sales
of securities as well as other balance sheet reconfiguration strategies.
The above items are discussed in greater detail in the remainder of this
discussion and in the related notes to the consolidated interim financial
statements referred to above.
PERFORMANCE OVERVIEW
Figure 1 presents the primary income and expense components for the first three
months of 1995 and 1994 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. 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 interim financial statements presented on pages 7 through 16 of
this report.
Net income for the first quarter of 1995 totaled $209.7 million, or $.86 per
Common Share. This compares with net income of $208.6 million, or $.85 per
Common Share, for the first three months of 1994. On an annualized basis, the
return on average common equity for the first quarter of 1995 was 18.26%
compared with 19.20% for the same period last year. The annualized returns on
average total assets were 1.28% and 1.41% for the first quarters of 1995 and
1994, respectively.
-18-
<PAGE> 19
<TABLE>
FIGURE 1. COMPONENTS OF EARNINGS PER COMMON SHARE
<CAPTION>
Three Months ended March 31, Change
---------------------------- ----------------------------
1995 1994 Amount Percent
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income $5.19 $4.32 $.87 20.1 %
Interest expense 2.51 1.56 .95 60.9
---------- ---------- ----------
Net interest income 2.68 2.76 (.08) (2.9)
Provision for loan losses .07 .15 (.08) (53.3)
---------- ---------- ----------
Net interest income after provision for
loan losses 2.61 2.61 --- ---
Noninterest income .71 .94 (.23) (24.5)
Noninterest expense 2.34 2.25 .09 4.0
---------- ---------- ----------
Income before income taxes and
extraordinary item .98 1.30 (.32) (24.6)
Income taxes .25 .44 (.19) (43.2)
Preferred dividends .02 .01 .01 100.0
---------- ---------- ----------
Earnings per Common Share
before extraordinary item .71 .85 (.14) (16.5)
Extraordinary net gain from sales of
subsidiaries, net of income taxes .15 --- .15 N/M
---------- ---------- ----------
Earnings per Common Share $ .86 $ .85 $.01 1.2 %
========== ========== ==========
<FN>
N/M = Not meaningful
</TABLE>
Included in 1995 first quarter results was the effect of several significant
nonrecurring items. An extraordinary net gain of $61.1 million ($35.8 million
after tax, $.15 per Common Share) was recorded in connection with the sales of
certain subsidiaries. This net gain included a gain of $72.3 million ($41.6
million after tax, $.17 per Common Share) from the sale of the residential
mortgage loan servicing business and a loss of $11.2 million ($5.8 million
after tax, $.02 per Common Share) incurred in connection with the sale of an
asset management subsidiary. Continued efforts to reconfigure the balance
sheet in order to reduce exposure to changes in interest rates resulted in net
losses of $49.3 million ($30.9 million after tax, $.13 per Common Share) from
the sales of securities. In addition, the Corporation recorded a one-time tax
benefit of $16.0 million, or $.07 per Common Share, which related to
acquisitions completed in prior years. In the aggregate, these nonrecurring
items increased 1995 first quarter earnings by a net $20.9 million, or $.09 per
Common Share.
Excluding the impact of the above items, operating earnings for the first
quarter were $188.8 million, or $.77 per Common Share, down from $208.6
million, or $.85 per Common Share, for the first quarter of 1994. Primary
factors affecting the comparative operating results were a $23.9 million
decrease in taxable-equivalent net interest income, an $18.0 million increase
in noninterest expense and a $6.3 million decrease in noninterest income.
These factors were partially offset by an $18.3 million decrease in the
provision for loan losses. The efficiency ratio, which measures the extent to
which recurring revenues are used to pay operating expenses, was 64.12% for the
first quarter of 1995 compared with 61.10% and 60.13% for the fourth quarter of
1994 and the first quarter of 1994, respectively.
-19-
<PAGE> 20
Figure 2. - Selected Financial Data
<TABLE>
<CAPTION>
1995 Quarter 1994 Quarters
------------ ---------------------------------------------------------
(dollars in millions, except per share amounts) First Fourth Third Second First
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the period
Interest income $ 1,245.4 $ 1,191.8 $ 1,150.7 $ 1,102.6 $ 1,045.0
Interest expense 601.6 526.5 471.1 422.3 376.9
Net interest income 643.8 665.3 679.6 680.3 668.1
Provision for loan losses 18.5 26.2 27.2 35.0 36.8
Noninterest income 171.0 205.3 223.3 227.4 226.6
Noninterest expense 560.8 555.6 530.1 538.7 542.8
Income before income taxes and extraordinary item 235.5 288.8 345.6 334.0 315.1
Income before extraordinary item 173.9 193.8 229.3 221.8 208.6
Net income 209.7 193.8 229.3 221.8 208.6
Net income applicable to Common Shares 205.7 189.8 225.3 217.8 204.6
- ---------------------------------------------------------------------------------------------------------------------------------
Per Common Share
Income before extraordinary item $ .71 $ .79 $ .92 $ .89 $ .85
Net income .86 .79 .92 .89 .85
Cash dividends declared .36 .32 .32 .32 .32
Book value at period-end 19.57 18.88 18.65 18.17 17.88
Market price:
High 29.50 30.88 33.50 33.75 33.00
Low 24.50 23.63 30.13 29.50 28.88
Close 28.25 25.00 30.50 31.88 30.00
Weighted average Common Shares (000) 239,999.2 241,385.2 244,132.1 244,823.2 241,925.8
- ---------------------------------------------------------------------------------------------------------------------------------
At period-end
Loans $ 48,020.8 $ 46,224.7 $ 44,608.8 $ 43,157.6 $ 41,379.8
Earning assets 61,167.1 60,046.5 58,638.1 57,347.0 55,913.5
Total assets 67,709.0 66,801.2 64,503.4 63,359.7 61,478.9
Deposits 48,812.3 48,564.2 47,816.5 47,796.2 46,880.6
Long-term debt 3,725.2 3,569.8 2,177.8 2,123.6 1,744.5
Common shareholders' equity 4,657.5 4,530.4 4,533.9 4,430.7 4,368.3
Total shareholders' equity 4,817.5 4,690.4 4,693.9 4,590.7 4,528.3
- ---------------------------------------------------------------------------------------------------------------------------------
Performance ratios
Return on average total assets 1.28 % 1.19 % 1.43 % 1.43 % 1.41 %
Return on average common equity 18.26 16.61 19.95 19.77 19.20
Return on average total equity 17.99 16.38 19.60 19.43 18.88
Efficiency(1) 64.12 61.10 57.90 58.43 60.13
Overhead(2) 52.36 48.01 44.48 44.87 47.27
Net interest margin 4.38 4.60 4.79 4.92 5.03
- ---------------------------------------------------------------------------------------------------------------------------------
Capital ratios at period-end
Equity to assets 7.12 % 7.03 % 7.29 % 7.26 % 7.38 %
Tangible equity to tangible assets 6.02 6.19 6.45 6.42 6.55
Tier I risk-adjusted capital 7.96 8.48 8.86 8.77 8.91
Total risk-adjusted capital 11.05 11.62 12.07 12.03 12.34
Leverage 6.24 6.63 6.79 6.76 6.85
=================================================================================================================================
</TABLE>
- ---------------
The comparability of the information presented above is affected by certain
mergers, acquisitions and divestitures completed by KeyCorp in the time periods
presented. For further information concerning these transactions, refer to Note
2, Mergers, Acquisitions and Divestitures, beginning on page 7.
(1) Calculated as noninterest expense divided by taxable-equivalent net
interest income plus noninterest income (excluding net securities
transactions).
(2) Calculated as noninterest expense less noninterest income (excluding net
securities transactions) divided by taxable-equivalent net interest income.
-20-
<PAGE> 21
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 (both on and off-balance sheet), 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 from the first quarter of 1994 to the first quarter of 1995. A more
in-depth discussion of changes in earning assets and funding sources is
presented in the Financial Condition section beginning on page 30.
For the first quarter of 1995 net interest income was $658.8 million, down
$23.9 million, or 4%, from the same period last year. This decrease resulted
from a lower net interest margin which declined by 65 basis points to 4.38% and
more than offset the impact of a $5.7 billion, or 10%, increase in average
earning assets. The net interest margin is computed by dividing
taxable-equivalent net interest income on an annualized basis by average
earning assets.
The reduction in the net interest margin as compared to the year ago quarter
was attributable to several factors, including the impact of rising interest
rates on a moderately liability-sensitive balance sheet, the growth in earning
assets (principally new loan originations) at reduced spreads and actions taken
by management during the 1994 fourth quarter and the 1995 first quarter to
reduce the Corporation's exposure to changes in interest rates by reconfiguring
the balance sheet. These actions, including the sales of certain securities,
are more fully described in the following Asset and Liability Management
section. After completing the balance sheet reconfiguration in the first
quarter of 1995, the net interest margin was stable for the remainder of the
quarter.
Average earning assets for the first quarter totaled $60.3 billion, which was
$5.7 billion, or 10%, higher than the first quarter 1994 level. This increase
was primarily due to a higher level of average loan outstandings, which rose
$6.6 billion, or 17%, reflecting the impact of acquisitions as well as internal
loan growth. The increase in the loan portfolio was partially offset, however,
by a $1.2 billion, or 9%, decline in securities (including both investment
securities and securities available for sale) due in large part to sales
associated with the balance sheet reconfiguration. Average earning assets
comprised 91% of average total assets during both the first quarter of 1995 and
the first quarter of 1994.
The Corporation uses portfolio interest rate swaps (as defined in Note 10,
Financial Instruments with Off-Balance Sheet Risk, beginning on page 13) in the
management of its interest rate sensitivity position. The notional amount of
such swaps decreased to $9.7 billion at March 31, 1995, from $10.5 billion at
year-end 1994. For the first quarter of 1995, interest rate swaps reduced net
interest income and the net interest margin by $13.4 million and 9 basis
points, respectively. During the same period in 1994 interest rate swaps
contributed $37.8 million to net interest income and added 28 basis points to
the net interest margin. The impact in both periods reflected the spread on
the swap portfolio as well as the amortization of deferred gains and losses
from terminated swaps. The manner in which interest rate swaps are used in the
Corporation's overall program of asset and liability management is described in
the following Asset and Liability Management section.
-21-
<PAGE> 22
Figure 3. Average Balance Sheets, Net Interest Income and Yields/Rates
<TABLE>
<CAPTION>
First Quarter 1995 Fourth 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 $11,639.9 $ 257.6 8.98 % $11,060.7 $ 244.6 8.78 %
Real estate 20,619.4 444.6 8.74 19,818.5 417.8 8.36
Consumer 10,155.0 244.7 9.77 10,267.6 241.6 9.33
Student loans held for sale 2,120.8 45.8 8.77 1,595.7 31.7 7.89
Lease financing 2,282.3 38.7 6.78 2,148.7 36.6 6.80
Foreign 70.6 .9 5.31 78.9 .4 2.10
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans 46,888.0 1,032.3 8.85 44,970.1 972.7 8.58
Mortgage loans held for sale 243.0 4.5 7.35 412.3 8.2 7.91
Taxable investment securities 8,665.9 144.7 6.68 8,828.6 146.2 6.62
Tax-exempt investment securities (1) 1,565.3 33.2 8.49 1,561.5 33.7 8.63
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 10,231.2 177.9 7.05 10,390.1 179.9 6.87
Securities available for sale (1) 1,623.0 26.6 6.06 2,844.0 43.2 5.75
Interest-bearing deposits with banks 414.2 6.5 6.41 33.1 .5 6.49
Federal funds sold and securities
purchased under resale agreements 711.9 10.3 5.87 61.7 .8 4.88
Trading account assets 146.1 2.3 6.35 97.1 1.5 6.02
- ------------------------------------------------------------------------------------------------------------------------------------
Total short-term investments 1,272.2 19.1 6.10 191.9 2.8 5.74
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets 60,257.4 1,260.4 8.47 58,808.4 1,206.8 8.12
Allowance for loan losses (853.4) (827.1)
Other assets 7,054.9 6,632.0
- ------------------------------------------------------------------------------------------------------------------------------------
$66,458.9 $64,613.3
========== ==========
Liabilities and shareholders' equity
Money market deposit accounts $ 7,144.7 62.4 3.54 $ 7,119.0 56.4 3.15
Savings deposits 6,948.6 46.9 2.74 7,262.9 49.9 2.73
NOW accounts 5,505.2 27.7 2.04 5,511.0 27.6 1.99
Certificates of deposit ($100,000 or more) 3,387.9 48.7 5.83 3,164.9 42.8 5.37
Other time deposits 13,789.4 179.2 5.27 12,846.3 152.2 4.70
Deposits in foreign offices 3,321.2 48.3 5.90 2,972.2 38.3 5.11
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 40,097.0 413.2 4.18 38,876.3 367.2 3.75
Federal funds purchased and securities
sold under repurchase agreements 5,502.6 76.5 5.64 5,857.9 73.9 5.00
Other short-term borrowings 3,298.9 49.8 6.12 2,850.6 38.1 5.31
Long-term debt (3) 3,612.9 62.1 7.01 3,001.6 47.3 6.46
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 52,511.4 601.6 4.65 50,586.4 526.5 4.14
Noninterest-bearing deposits 7,955.9 8,238.9
Other liabilities 1,263.8 1,095.2
Preferred stock 160.0 160.0
Common shareholders' equity 4,567.8 4,532.8
- ------------------------------------------------------------------------------------------------------------------------------------
$66,458.9 $64,613.3
========== ==========
Interest rate spread 3.82 3.98
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income (TE) and net
interest margin (TE) $ 658.8 4.38 % $ 680.3 4.60 %
========= ======== ======== ========
Taxable-equivalent adjustment (1) $15.0 $15.0
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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.
TE = Taxable Equivalent
-22-
<PAGE> 23
<TABLE>
<CAPTION>
Third Quarter 1994 Second Quarter 1994 First Quarter 1994
- ----------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$10,678.5 $ 240.8 8.95 % $10,518.2 $ 231.7 8.84 % $10,109.3 $ 207.4 8.32 %
19,345.3 396.7 8.14 18,302.0 364.1 7.98 17,305.6 341.6 8.01
9,954.9 233.3 9.30 9,824.2 229.7 9.38 9,513.3 226.4 9.65
1,577.4 30.0 7.53 1,526.0 25.0 6.55 1,513.3 22.4 5.93
1,985.7 33.9 6.83 1,851.6 31.1 6.71 1,729.6 29.9 6.92
74.4 1.1 5.98 70.2 1.0 5.86 71.1 1.1 6.03
- ----------------------------------------------------------------------------------------------------------------------------
43,616.2 935.8 8.51 42,092.2 882.6 8.41 40,242.2 828.8 8.35
463.5 9.1 7.87 866.1 15.4 7.13 1,139.2 18.4 6.47
8,184.0 131.7 6.44 7,495.2 128.5 6.86 6,112.6 100.6 6.58
1,433.0 33.1 9.24 1,693.9 34.2 8.09 1,630.7 35.2 8.63
- ----------------------------------------------------------------------------------------------------------------------------
9,617.0 164.8 6.86 9,189.1 162.7 7.08 7,743.3 135.8 7.01
3,890.5 53.9 5.51 4,297.7 55.8 5.14 5,260.9 75.2 5.68
27.5 .3 3.55 41.3 .3 2.89 32.8 .4 5.17
92.8 1.0 4.64 39.5 .5 4.21 88.8 .7 3.17
15.9 .2 4.66 11.0 .1 4.48 33.3 .3 3.38
- ----------------------------------------------------------------------------------------------------------------------------
136.2 1.5 4.42 91.8 .9 3.65 154.9 1.4 3.64
- ----------------------------------------------------------------------------------------------------------------------------
57,723.4 1,165.1 8.01 56,536.9 1,117.4 7.93 54,540.5 1,059.6 7.88
(822.2) (819.6) (815.8)
6,537.4 6,441.9 6,248.4
- ----------------------------------------------------------------------------------------------------------------------------
$63,438.6 $62,159.2 $59,973.1
========== ========== ==========
$ 7,218.3 50.5 2.78 $ 7,252.3 46.8 2.59 $ 7,197.6 43.0 2.43
7,683.9 52.8 2.73 7,948.6 51.6 2.60 7,900.3 50.5 2.59
5,529.6 27.0 1.94 5,622.9 26.0 1.86 5,571.9 25.4 1.85
3,030.5 39.4 5.16 2,914.4 32.7 4.49 2,856.7 31.3 4.44
12,256.3 137.4 4.45 12,165.4 129.9 4.28 12,077.8 124.3 4.17
3,407.3 38.7 4.51 2,993.7 28.4 3.80 2,678.0 21.6 3.27
- ----------------------------------------------------------------------------------------------------------------------------
39,125.9 345.8 3.51 38,897.3 315.4 3.25 38,282.3 296.1 3.14
6,295.9 70.2 4.43 6,240.0 60.5 3.89 4,993.3 39.0 3.16
2,052.9 24.0 4.63 1,363.0 14.6 4.31 1,435.2 14.2 4.01
2,144.3 31.1 6.01 2,020.0 31.8 6.52 1,756.9 27.6 6.55
- ----------------------------------------------------------------------------------------------------------------------------
49,619.0 471.1 3.77 48,520.3 422.3 3.50 46,467.7 376.9 3.29
8,083.0 8,055.1 7,802.7
1,094.9 1,006.0 1,220.8
160.0 160.0 160.0
4,481.7 4,417.8 4,321.9
- ----------------------------------------------------------------------------------------------------------------------------
$63,438.6 $62,159.2 $59,973.1
========== ========== ==========
4.24 4.43
- ----------------------------------------------------------------------------------------------------------------------------
$ 694.0 4.79 % $ 695.1 4.92 % $ 682.7 5.03 %
======== ======== ======== ======== ======== ========
$14.4 $14.8 $14.6
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
-23-
<PAGE> 24
<TABLE>
FIGURE 4. COMPONENTS OF NET INTEREST INCOME CHANGES
(in millions)
<CAPTION>
From Three Months Ended March 31, 1994
To Three Months Ended March 31, 1995
----------------------------------------
Average Yield/ Net
Volume Rate Change
----------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans $143.5 $ 60.0 $203.5
Mortgage loans held for sale (16.2) 2.3 (13.9)
Taxable investment securities 42.6 1.5 44.1
Tax-exempt investment securities (1.4) (.6) (2.0)
Securities available for sale (58.0) 9.4 (48.6)
Short-term investments 16.2 1.5 17.7
------ ------ ------
Total interest income 126.7 74.1 200.8
INTEREST EXPENSE
Money market deposit accounts (.3) 19.7 19.4
Savings deposits (6.3) 2.7 (3.6)
NOW accounts (.3) 2.6 2.3
Certificates of deposit
($100,000 or more) 6.5 10.9 17.4
Other time deposits 19.2 35.7 54.9
Deposits in foreign offices 6.2 20.5 26.7
------ ------ ------
Total interest-bearing deposits 25.0 92.1 117.1
Federal funds purchased and
securities sold under
repurchase agreements 4.3 33.2 37.5
Other short-term borrowings 25.3 10.3 35.6
Long-term debt 31.7 2.8 34.5
------ ------ ------
Total interest expense 86.3 138.4 224.7
------ ------ ------
Net interest income $ 40.4 $(64.3) $ (23.9)
<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
Asset/Liability Management Committee
The Corporation manages its exposure to economic loss from fluctuations in
interest rates through an active program of asset and liability management
pursuant to guidelines established by the Corporation's Asset/Liability
Management Committee ("ALCO"). The ALCO has the responsibility for approving
the asset/liability management policies of the Corporation, initiating changes
in the balance sheet that could result in deviations from the policies,
formulating and implementing strategies to improve balance sheet positioning
and/or earnings, and reviewing the interest rate sensitivity positions of the
Corporation and each of its affiliate banks. The ALCO meets twice monthly to
conduct this review and to approve strategies consistent with its policies.
The primary tool utilized by management to measure and manage interest rate
exposure is a simulation model. Use of the model to perform simulations of
changes in interest rates over one- and two-year time horizons has enabled
management to develop strategies for managing exposure to interest rate risk.
In its simulations, management estimates the impact on net interest income of
pro forma 100 and 200 basis point changes in the overall level of interest
rates. These estimates are based on a large number of assumptions related to
loan and deposit growth, prepayments, interest
-24-
<PAGE> 25
rates, and other factors. Management believes that both individually and in the
aggregate these assumptions are reasonable, but the complexity of the
simulation modeling process results in a sophisticated estimate, not an
absolutely precise calculation of exposure. ALCO guidelines provide that a
gradual 200 basis point increase or decrease in short-term rates over the next
twelve-month period should not result in more than an estimated 2% impact on
net interest income from what net interest income would have been if interest
rates did not change. As discussed in the following Recent Management Actions
section, the Corporation is well within these guidelines as a result of actions
taken during the fourth quarter of 1994 and early in 1995.
Recent Management Actions
During the first quarter of 1995, management completed the reconfiguration of
the Corporation's balance sheet in accordance with plans initially announced
last December. The objective of this reconfiguration was to significantly
reduce the Corporation's exposure to changes in interest rates. At the time
the plans were announced, the Corporation's liability-sensitive position was
moderately in excess of the ALCO guidelines.
Implementation of the balance sheet reconfiguration plans began during the
fourth quarter of 1994 with the sale of $877.7 million of securities with an
aggregate weighted average yield of 5.67%. This was followed by the first
quarter 1995 sale of $1.2 billion of securities with an aggregate weighted
average yield of 6.24%. In addition, over these two quarters the Corporation
executed $2.1 billion of portfolio interest rate swaps that receive a variable
rate and pay a fixed rate, and terminated $1.6 billion of portfolio interest
rate swaps that received a fixed rate and paid a variable rate. During the
fourth quarter of 1994 and the first quarter of 1995, the Corporation also
issued fixed-rate debt totaling $245.0 million.
The actions taken during the fourth quarter reduced the Corporation's estimated
liability-sensitive position to within the ALCO guidelines, while the
additional actions taken during the first quarter of 1995 further reduced the
Corporation's liability-sensitive position such that a gradual 200 basis point
increase in interest rates over the next twelve -month period would have an
approximate 1% negative impact on net interest income, according to the
simulation model. While these actions reduced the Corporation's exposure to
changes in short-term interest rates, net interest income was negatively
impacted due to increased reliance on fixed-rate market priced funding at
higher interest rates.
Interest Rate Swap Contracts
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' earnings at risk to declining interest rates as interest-earning
assets would reprice faster than would interest-bearing liabilities. In
addition to the Corporation's securities portfolio, management has utilized
interest rate swaps to manage interest rate risk by modifying the repricing or
maturity characteristics of specified on-balance sheet assets and liabilities.
Interest rate swaps used for this purpose are designated as portfolio swaps.
The decisions to use portfolio interest rate swaps versus on-balance sheet
securities to manage interest rate risk have depended on various factors,
including funding costs, liquidity, and capital requirements. As summarized in
Figure 5, the Corporation's portfolio swaps totaled $9.7 billion at March 31,
1995, and consisted principally of contracts wherein the Corporation receives a
fixed rate of interest while paying a variable rate.
-25-
<PAGE> 26
<TABLE>
FIGURE 5. INTEREST RATE SWAP PORTFOLIO
(dollars in millions)
<CAPTION>
MARCH 31, 1995 December 31, 1994
---------------------------------------------------------------------- ----------------------
WEIGHTED AVERAGE RATE
NOTIONAL FAIR MATURITY(1) ----------------------- Notional Fair
AMOUNT VALUE (YEARS) RECEIVE PAY Amount Value
-------------- ---------- ----------- ----------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Receive fixed/pay variable -
indexed amortizing $ 4,474.4 $(144.2) 4.3 6.63 % 6.41 % $ 5,786.6 $(341.7)
Receive fixed/pay variable -
conventional 2,585.2 (102.7) 6.9 6.98 7.07 3,010.2 (199.6)
Pay fixed/receive variable -
conventional 2,486.5 (14.6) 1.2 6.34 7.40 1,456.5 11.5
Basis swaps 200.0 .1 .1 6.19 6.17 200.0 .1
---------- ------- --------- -------
Total portfolio swaps 9,746.1 (261.4) 4.1 6.64 6.83 10,453.3 (529.7)
Customer swaps 1,247.2 (.5) 3.2 6.61 6.67 1,248.3 2.0
---------- ------- --------- -------
Total interest rate swaps $10,993.3 $(261.9) 4.0 6.64 % 6.81 % $11,701.6 $(527.7)
========== ======= ========= =======
<FN>
(1) Maturity is based upon expected average lives rather than contractual terms.
</TABLE>
Conventional interest rate swap contracts involve the receipt of amounts based
on fixed or variable rates in exchange for payments based on variable or fixed
rates, without an exchange of the underlying notional amount. Under an indexed
amortizing swap contract, the notional amount remains constant for a specified
period of time after which, based upon the level of the index at each payment
review date, the swap contract will mature, the notional amount will begin to
amortize, or the swap will continue in effect until its contractual maturity.
Otherwise, the characteristics of these swaps are similar to those of
conventional swap contracts. Under basis swap contracts, interest payments
based on different floating indices are exchanged. At March 31, 1995, the
Corporation was not party to any forward-starting swaps, which are interest
rate swaps with contractual terms that commence at a specified future date.
In addition to portfolio swaps, the Corporation has entered into interest rate
swap contracts 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 also included in the customer swap portfolio. Adjustments to fair
values of customer swaps are included in noninterest income. The $1.2 billion
notional amount of customer swaps presented in Figure 5 includes $550.7
million of interest rate swaps that receive a fixed rate and pay a variable
rate and $690.3 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
$11.0 billion at March 31, 1995, $11.7 billion at December 31, 1994, and $10.1
billion at March 31, 1994. The weighted average rates presented in Figure 5
are those in effect at March 31, 1995. As of that date, portfolio interest
rate swaps were providing a slightly negative impact on net interest income
(since the weighted average rate paid exceeded the weighted average rate
received by 19 basis points) and the portfolio had an aggregate negative fair
value of $(261.4) million at the same date. The aggregate fair value was
estimated through the use of discounted cash flow models which contemplate
interest rates using the applicable forward yield curve. The estimated fair
value of the Corporation's total interest rate swap portfolio improved
substantially during the first quarter of 1995 from a negative fair value of
$(527.7) million at December 31, 1994. The improvement in fair value over the
past quarter reflected the financial markets' expectations for a decline in
future interest rates. In addition, during the first quarter, swaps with an
aggregate notional amount of $1.3 billion were terminated, resulting in net
deferred losses of $57.8 million. Such losses are amortized, generally, over
the projected remaining life of the related swap contract at its termination.
A summary of the Corporation's deferred swap gains and (losses) at March 31,
1995, is presented in Note 10, Financial Instruments with Off-Balance Sheet
Risk, beginning on page 13 of this report. Each swap was terminated in response
to a unique set of circumstances and for various reasons; however, the decision
to terminate a swap contract is strategically integrated with asset and
liability management and other appropriate processes. These terminations as well
as other portfolio swap activity for the first quarter of 1995 are summarized in
Figure 6.
-26-
<PAGE> 27
<TABLE>
FIGURE 6. PORTFOLIO SWAP ACTIVITY FOR THE THREE MONTHS ENDED MARCH 31, 1995
(in millions)
<CAPTION>
Receive Fixed
------------------------------ Total
Indexed Pay Fixed- Basis Portfolio
Amortizing Conventional Conventional Swaps Swaps
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $5,786.6 $3,010.2 $1,456.5 $200.0 $10,453.3
Additions --- --- 1,030.0 --- 1,030.0
Maturities --- (425.0) --- --- (425.0)
Terminations (1,300.0) --- --- --- (1,300.0)
Amortization (12.2) --- --- --- (12.2)
------------ ------------ ------------ ------------ ------------
Balance at end of period $4,474.4 $2,585.2 $2,486.5 $200.0 $ 9,746.1
============ ============ =========== ============ ============
</TABLE>
A summary of the notional and fair values of portfolio swaps by interest rate
management strategy at March 31, 1995, is presented in figure 7. In effect,
the fair value at any given date represents the estimated net cost which would
be recognized if the portfolio were to be liquidated at that date. However,
because the portfolio interest rate swaps are used to alter the repricing or
maturity characteristics of specific assets and liabilities, the net unrealized
gains and losses related to the swaps are not recognized in earnings. Rather,
interest from these swaps is recognized on an accrual basis as an adjustment of
the interest income or expense of the asset or liability being managed.
<TABLE>
FIGURE 7. PORTFOLIO SWAPS BY INTEREST RATE MANAGEMENT STRATEGY
(in millions)
<CAPTION>
MARCH 31, 1995 December 31, 1994 March 31, 1994
--------------------- ---------------------- ---------------------
NOTIONAL FAIR Notional Fair Notional Fair
AMOUNT VALUE Amount Value Amount Value
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Convert variable rate loans to fixed $5,574.4 $(218.5) $ 7,146.6 $(470.6) $7,160.0 $(129.3)
Convert fixed rate liabilities to variable 1,485.2 (28.4) 1,650.2 (70.7) 1,098.0 (2.8)
Convert variable rate liabilities to fixed 2,486.5 (14.6) 1,456.5 11.5 756.0 3.6
Other 200.0 .1 200.0 .1 --- ---
-------- -------- -------- -------- -------- --------
Total portfolio swaps $9,746.1 $(261.4) $10,453.3 $(529.7) $9,014.0 $(128.5)
======== ======== ======== ======== ======== ========
</TABLE>
The notional amount of the interest rate swap contracts represents only an
agreed upon amount on which calculations of interest payments to be exchanged
are based. It does not represent the potential for gain or loss on such
positions. Similarly, the notional amount is not indicative of the market risk
or the credit risk of the positions held. Credit risk is the possibility that
the counterparty will not meet the terms of the swap contract and is measured
as the cost of replacing, at current market rates, contracts in an unrealized
gain position. The credit risk exposure to the counterparty on each interest
rate swap is monitored by an appropriate credit committee. Based upon detailed
credit reviews of the counterparties, limits on the total credit exposure
the Corporation may have with each counterparty, and whether collateral is
required, are determined.
-27-
<PAGE> 28
At March 31, 1995, the Corporation had 20 different counterparties to portfolio
swaps and swaps entered into to offset the risk of customer swaps. Of these
counterparties, the Corporation had an aggregate credit exposure of $11.6
million to only six, with the largest credit exposure to an individual
counterparty amounting to $6.7 million. The expected average maturities of the
portfolio swaps at March 31, 1995, are summarized in Figure 8.
<TABLE>
FIGURE 8. EXPECTED AVERAGE MATURITIES OF PORTFOLIO SWAPS AT MARCH 31, 1995
(in millions)
<CAPTION>
Receive Fixed
------------------------------ Total
Indexed Pay Fixed- Basis Portfolio
Amortizing Conventional Conventional Swaps Swaps
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Due in one year or less $ 26.6 $ 82.4 $1,200.0 $200.0 $1,509.0
Due after one through five years 4,447.8 627.8 1,286.5 --- 6,362.1
Due after five through ten years --- 1,875.0 --- --- 1,875.0
------------- ------------- ------------- ------------- -------------
Total portfolio swaps $4,474.4 $2,585.2 $2,486.5 $200.0 $9,746.1
============= ============= ============= ============= =============
</TABLE>
NONINTEREST INCOME
As shown in Figure 9, noninterest income totaled $171.0 million for the first
three months of 1995, down $55.6 million, or 25%, from the same period last
year. Included in the first quarter 1995 results were net securities losses of
$49.3 million recorded in connection with efforts to reconfigure the balance
sheet in order to reduce interest rate risk. Excluding, for comparative
purposes, noncore items consisting of special asset management fees and total
net securities transactions, noninterest income for the 1995 first quarter was
$213.2 million, representing a decrease of $4.8 million, or 2%, from the first
three months of 1994.
Primary categories contributing to the decline in core noninterest income were
mortgage banking income, trust and asset management income, and insurance and
brokerage income, which decreased by $7.1 million, $4.3 million and $3.3
million, respectively. As shown in Figure 10, the decrease in mortgage banking
income reflected a significant reduction in origination fees. The decline in
trust and asset management income was principally the result of the timing of
certain 1993 annual fees and an accrual adjustment recognized during the first
quarter of 1994. Insurance and brokerage income was down primarily due to lower
brokerage commissions from the sales of mutual funds. These decreases were
partially offset by a $3.4 million increase in service charges on deposit
accounts, reflecting the repricing of fees by certain affiliate banks and a
higher deposit base. In addition, miscellaneous income rose by $8.0 million,
primarily due to higher gains from student loan sales. The overall decline in
most categories of core noninterest income was also moderated by the impact of
seven acquisitions completed since February 1994. Since these acquisitions were
accounted for as purchases, the results of operations of the acquired companies
have been included in consolidated totals only since the respective dates of
acquisition.
During the third quarter of 1994, certain fees generated by the mortgage banking
business were reclassified from other noninterest income to mortgage banking
income. This reclassification was also made to prior period amounts to conform
to the current period presentation. The amount of the fees reclassified for
the first quarter of 1994 totaled $5.4 million. Total noninterest income, as
previously reported, did not change.
Early in October 1994, the Corporation announced that it was exploring the
possibility of offering its residential mortgage loan servicing business for
sale, citing the mortgage banking industry's increasingly large business volume
requirements for the future profitable deployment of capital. The sale of this
business was completed in March 1995, and is disclosed in greater detail in Note
2, Mergers, Acquisitions and Divestitures, beginning on page 7 of this report.
As a result of the sale, the servicing fee component of mortgage banking income
is expected to be significantly lower in the future.
-28-
<PAGE> 29
<TABLE>
FIGURE 9. NONINTEREST INCOME
(dollars in millions)
<CAPTION>
Three months ended
March 31, Change
-------------------------- ----------------------
1995 1994 Amount Percent
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Service charges on deposit accounts $ 65.7 $ 62.3 $ 3.4 5.5 %
Trust and asset management income 52.7 57.0 (4.3) (7.5)
Mortgage banking income 17.7 24.8 (7.1) (28.6)
Credit card fees 16.7 16.7 --- ---
Insurance and brokerage income 12.7 16.0 (3.3) (20.6)
Special asset management fees 2.7 2.2 .5 22.7
Net securities gains (losses) (44.9) 6.4 (51.3) N/M
Other income:
Venture capital gains 3.4 4.4 (1.0) (22.7)
International fees 4.6 5.1 (.5) (9.8)
Miscellaneous 39.7 31.7 8.0 25.2
---------- ---------- ---------
Total other income 47.7 41.2 6.5 15.8
---------- ---------- ---------
Total noninterest income $171.0 $226.6 $(55.6) (24.5)%
========== ========== =========
<FN>
N/M=Not Meaningful
</TABLE>
<TABLE>
FIGURE 10. MORTGAGE BANKING INCOME
(dollars in millions)
<CAPTION>
Three months ended
March 31, Change
-------------------------- ----------------------
1995 1994 Amount Percent
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Servicing fees(1) $ 9.8 $ 5.9 $ 3.9 66.1 %
Net gains (losses) on sales of loans (.2) 3.0 (3.2) N/M
Origination fees 2.1 10.5 (8.4) (80.0)
Gains on sales of servicing rights 2.0 --- 2.0 N/M
Late fees and other 4.0 5.4 (1.4) (25.9)
---------- ---------- ---------
Total mortgage banking income $17.7 $24.8 $(7.1) (28.6) %
========== ========== =========
<FN>
(1) Net of mortgage servicing rights amortization.
N/M=Not Meaningful
</TABLE>
NONINTEREST EXPENSE
As shown in Figure 11, noninterest expense totaled $560.8 million, up 18.0
million, or 3%, as compared to the first quarter of 1994 and up $5.2 million,
or less than 1%, from the prior quarter. These increases reflected the impact
of seven acquisitions completed since February 1994, five of which were
completed during the first quarter of 1995 or late in December of last year.
In comparison with the first quarter of 1994, personnel expense, the largest
category of noninterest expense, increased $9.4 million, or 4%, due in large
part to the impact of acquisitions and the resulting increase in the number of
full-time equivalent employees. Increases of $7.4 million and $1.5 million in
other expense and FDIC insurance assessments, respectively, also contributed to
the overall increase from the prior year. The higher cost of insurance
assessments reflected the growth in deposits while the increase in other
expense was due to higher amortization expense associated with intangibles and
increases in various categories of operating expense.
The efficiency ratio, which provides a measure of the extent to which recurring
revenues are used to pay operating expenses, was 64.12 % for the first quarter
compared with 61.10% and 60.13% for the fourth quarter of 1994 and the first
quarter of 1994, respectively. The increase in the efficiency ratio relative
to the prior year periods reflected the reduction in revenues as well as the
increase in noninterest expense.
-29-
<PAGE> 30
<TABLE>
FIGURE 11. NONINTEREST EXPENSE
(dollars in millions)
<CAPTION>
Three months ended
March 31, Change
----------------------- --------------------------
1995 1994 Amount Percent
------ ------ ------ ---------
<S> <C> <C> <C> <C>
Personnel $279.9 $270.5 $ 9.4 3.5 %
Net occupancy 54.2 55.5 (1.3) (2.3)
Equipment 39.9 39.9 --- ---
FDIC insurance assessments 25.5 24.0 1.5 6.3
Professional fees 12.6 12.5 .1 .8
OREO expense (net of income of $1.2 and $.9) 2.2 1.3 .9 69.2
Other expense:
Marketing 16.0 15.3 .7 4.6
Amortization of intangibles 16.4 12.5 3.9 31.2
Miscellaneous 114.1 111.3 2.8 2.5
-------- --------- -------
Total other expense 146.5 139.1 7.4 5.3
-------- --------- -------
Total noninterest expense $560.8 $542.8 $18.0 3.3 %
======== ========= =======
Full-time equivalent employees 30,370 30,054
Efficiency ratio (1) 64.12 % 60.13 %
Overhead ratio (2) 52.36 47.27
<FN>
(1) Calculated as noninterest expense divided by taxable-equivalent net interest income plus noninterest income (excluding net
securities transactions).
(2) Calculated as noninterest expense less noninterest income (excluding net securities transactions) divided by taxable-equivalent
net interest income.
</TABLE>
INCOME TAXES
The provision for income taxes was $61.6 million for the three-month period
ended March 31, 1995, as compared to $106.5 million for the same period in
1994. The effective tax rate (provision for income taxes as a percentage of
income before income taxes and extraordinary item) for the 1995 first quarter
was 26.2% compared to 33.8% for the first quarter of 1994. The decrease in the
effective tax rate was attributable to the recognition during the first quarter
of 1995 of one-time tax benefits totaling $16.0 million related to
acquisitions made in years prior to 1992. Management anticipates a resumption
of the more normal effective tax rate of approximately 34% in the second
quarter of 1995.
FINANCIAL CONDITION
LOANS
At March 31, 1995, total loans outstanding were $48.0 billion, compared with
$46.2 billion at December 31, 1994, and $41.4 billion at March 31, 1994. The
composition of the loan portfolio by loan type, as of each of these respective
dates, is presented in Note 5, Loans, beginning on page 10 of this report. The
$1.8 billion growth from the December 31, 1994, level was the result of
increases of $782.9 million in commercial loans and $1.1 billion in real estate
loans (of which $515.0 million pertained to residential mortgages). As shown in
Figure 12, internally generated loan growth was achieved throughout all of
KeyCorp's geographic regions. The acquired loan growth resulted from the
acquisitions of OMNIBANCORP in the Rocky Mountain Region and Casco Northern
Bank, National Association and BANKVERMONT Corporation in the Northeast Region.
These acquisitions were previously described in greater detail in Note 2,
Mergers, Acquisitions and Divestitures, beginning on page 7 of this report.
-30-
<PAGE> 31
<TABLE>
FIGURE 12. PERIOD-END LOAN GROWTH BY REGION FOR THE THREE MONTHS ENDED MARCH 31, 1995
<CAPTION>
(dollars in millions)
December 31, Internally MARCH 31, Percent
1994 Generated Acquired 1995 Change
--------------- ------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Northeast Region $12,621.6 $ 69.7 $1,162.2 $13,853.5 9.8 %
Great Lakes Region 20,909.0 186.8 --- 21,095.8 .9
Rocky Mountain Region 3,317.3 67.7 215.3 3,600.3 8.5
Northwest Region 9,270.2 130.2 --- 9,400.4 1.4
Financial Services 106.6 (35.8) --- 70.8 (33.6)
--------------- ------------ ----------- -----------
Total $46,224.7 $418.6 $1,377.5 $48,020.8 3.9 %
=============== ============ =========== ===========
</TABLE>
SECURITIES
At March 31, 1995, the securities portfolio totaled $11.9 billion, consisting of
$1.5 billion of securities available for sale and $10.4 billion of investment
securities. This compares to a total portfolio of $12.8 billion, comprised of
$2.5 billion of securities available for sale and $10.3 billion of
investment securities, at December 31, 1994. The reduction in the overall
portfolio since year end 1994 reflects the first quarter 1995 sale of $1.2
billion of securities with an aggregate weighted-average yield of 6.24%. The
sale was part of the balance sheet reconfiguration which is more fully
discussed in the Asset and Liability Management section beginning on page 24.
At March 31, 1995, shareholders' equity was reduced by $44.4 million,
representing the net unrealized loss on securities, net of deferred income
taxes. Certain information pertaining to the composition, yields and maturities
of the securities available for sale and investment securities portfolios is
presented in Figures 13 and 14, respectively.
<TABLE>
FIGURE 13. SECURITIES AVAILABLE FOR SALE AT MARCH 31, 1995
(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 $256.8 $ 3.2 $ 1.4 $ 74.7 $ 336.1 5.83%
After one through five years 155.1 10.6 21.5 123.8 311.0 7.02
After five through ten years 3.8 9.3 859.0 6.3 878.4 6.45
After ten years 2.7 3.8 .5 1.7 8.7 7.68
------------- ------------- --------------- ----------- --------------
Fair value $418.4 $26.9 $882.4 $206.5 $1,534.2 6.45%
============= ============= =============== =========== ==============
Amortized cost $417.5 $29.2 $902.1 $207.3 $1,556.1
Weighted average yield 6.33% 8.00% 6.45% 6.71% 6.45%
Weighted average maturity 1.2 years 6.3 years 7.9 years 2.2 years 5.6 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 taxable equivalent basis using the statutory
Federal income tax rate of 35%.
</TABLE>
-31-
<PAGE> 32
FIGURE 14. INVESTMENT SECURITIES AT MARCH 31, 1995
(dollars in millions)
<TABLE>
<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 $ 91.2 $ 571.5 $ 283.3 $112.1 $ 1,058.1 6.99%
After one through five years 297.0 554.4 3,921.4 202.9 4,975.7 6.67
After five through ten years 23.0 279.8 1,603.8 89.9 1,996.5 8.09
After ten years 415.0 79.7 1,868.3 2.1 2,365.1 7.17
---------- --------- --------- --------- ---------
Amortized cost $826.2 $1,485.4 $7,676.8 $407.0 $10,395.4 7.09%
========== ========= ========= ========= =========
Fair value $805.9 $1,526.3 $7,441.5 $383.1 $10,156.8
Weighted average yield 6.89% 8.66% 6.76% 7.58% 7.09%
Weighted average maturity 14.4 years 3.2 years 6.0 years 2.4 years 5.8 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 taxable-equivalent
basis using the statutory Federal income tax rate of 35%.
</TABLE>
ASSET QUALITY
The Corporation's Credit Risk 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 is a significant factor in managing
credit risk. In addition, the Credit Risk Review Group is responsible for
reviewing the adequacy of the allowance for loan losses (Allowance). The
Corporation's Credit Policy/Risk Management Group reviews corporate assets
other than loans, leases and other real estate owned (OREO) to evaluate the
credit quality and risk inherent in such assets. This Group is also
responsible for commercial and consumer credit policy development,
concentration management and credit systems development.
Methodologies are designed to provide adequate coverage for possible loan
losses by the Allowance. The methodology applied at KeyCorp focuses on a
combination of allowance allocations directly attributable to specific
potential problem credits and general allocations based on historical losses on
a portfolio basis. In addition, indirect risk in the form of general economic
conditions, portfolio diversification and off-balance sheet risk are taken into
consideration. Management continues to target and maintain an Allowance equal
to the allocated requirement plus an unallocated portion, as appropriate.
Management believes this is an appropriate posture in light of current and
expected economic conditions and trends, the geographic and industry mix of the
loan portfolio and similar risk-related matters.
As shown in Figure 15, net loans charged off for the quarter were under the
prior year level by $14.0 million, or 45%. This improvement came from the
commercial, financial and agricultural, real estate construction and real
estate mortgage portfolios, partially offset by higher net charge-offs in the
consumer and lease financing portfolios. As a result of the substantial decline
in the level of net loans charged off, the first quarter provision for loan
losses was $18.5 million, down $18.3 million, or 50%, from the year-ago
quarter. At March 31, 1995, the Allowance as a percentage of loans outstanding
was 1.81%, slightly up from 1.80% at December 31, 1994, but down from 1.96% at
March 31, 1994. Although this percentage is not a primary factor used by
management in determining the adequacy of the Allowance, it has general short
to medium-term relevance. There have been no significant changes in the
allocation of the Allowance since year end.
-32-
<PAGE> 33
<TABLE>
FIGURE 15. SUMMARY OF LOAN LOSS EXPERIENCE
<CAPTION>
(dollars in millions) Three months ended
March 31,
--------------------------
1995 1994
--------- ---------
<S> <C> <C>
Average loans outstanding during the period $46,888.0 $40,242.2
Allowance for loan losses at beginning of period 830.3 802.7
Loans charged off:
Commercial, financial and agricultural 8.3 17.6
Real estate-construction 1.1 4.4
Real estate-mortgage 6.4 9.4
Consumer 26.5 23.8
Lease financing .7 .2
--------- ---------
43.0 55.4
Recoveries:
Commercial, financial and agricultural 11.8 12.7
Real estate-construction .3 .2
Real estate-mortgage 3.3 1.5
Consumer 9.8 9.5
Lease financing .5 .2
--------- ---------
25.7 24.1
--------- ---------
Net loans charged off (17.3) (31.3)
Provision for loan losses 18.5 36.8
Allowance of acquired companies 35.1 4.4
Transfer from OREO allowance .5 ---
--------- ---------
Allowance for loan losses at end of period $867.1 $812.6
========= =========
Net loan charge-offs to average loans .15 % .31 %
Allowance for loan losses to period-end loans 1.81 1.96
Allowance for loan losses to nonperforming loans 285.51 256.53
</TABLE>
The composition of nonperforming assets is shown in Figure 16. These assets
totaled $362.5 million at March 31, 1995, and represented .75% of loans, OREO
and other nonperforming assets compared with $339.8 million, or .73%, at
year-end 1994 and $464.0 million, or 1.12%, at March 31, 1994.
Effective January 1, 1995, the Corporation adopted SFAS No. 114, Accounting by
Creditors for Impairment of a Loan, and SFAS No. 118, Accounting by Creditors
for Impairment of a Loan -- Income Recognition and Disclosures. SFAS No. 114
prescribes the methodology under which certain loans are to be measured for
impairment and provides that loans are to be classified in OREO only when the
creditor has actually taken possession of the collateral. Generally, a loan is
considered impaired when management believes it is probable that all amounts
due will not be collected according to the contractual terms of the loan
agreement. SFAS No. 118 amends SFAS No. 114 by eliminating certain income
recognition provisions and by expanding the disclosure requirements. Adoption
of these standards did not have a material effect on the Corporation's
financial condition or results of operations and is more fully discussed in
Note 6, Nonperforming Assets, beginning on page 11 of this report.
Nonperforming assets increased $22.7 million, or 7%, from the end of the prior
year as a result of a $47.7 million, or 19%, increase in nonperforming loans,
offset in part by a $31.2 million, or 31%, decrease in OREO. Acquisitions
contributed $20.2 million to the increase in nonperforming loans and a transfer
of $19.9 million from OREO related to the adoption of SFAS No. 114. The
decrease in OREO resulted from the SFAS No. 114 transfer and other activity,
netting to a total decrease of $11.3 million. On a regional basis, as
illustrated in Figure 18, the ratio of nonperforming assets to total loans plus
OREO and other nonperforming assets increased in the Northeast and Rocky
Mountain Regions, as a result of acquisitions. The ratio in the Great Lakes
Region rose as a result of the placement of one large credit on nonaccrual
status. Ratios for both the Northwest Region and Financial Services improved
from the end of the prior year. The higher ratio in the Financial Services
sector reflected the disproportionately higher level of nonperforming assets in
certain nonbank affiliates, although nonperforming assets in these companies
totaled only $2.4 million at March 31, 1995.
-33-
<PAGE> 34
<TABLE>
FIGURE 16. SUMMARY OF NONPERFORMING ASSETS AND PAST DUE LOANS
<CAPTION>
(dollars in millions)
MARCH 31, December 31, March 31,
1995 1994 1994
--------- ------------ ---------
<S> <C> <C> <C>
Commercial, financial and agricultural $110.5 $92.3 $112.2
Real estate - construction 22.7 22.0 31.3
Real estate - commercial mortgage 106.2 82.2 104.1
Real estate - residential mortgage 48.3 44.7 46.2
Consumer 13.9 11.8 19.4
Lease financing 1.2 1.5 2.3
------ ------ ------
Total nonaccrual loans 302.8 254.5 315.5
Restructured loans .9 1.5 1.3
------ ------ ------
Total nonperforming loans 303.7 256.0 316.8
Other real estate owned 69.1 100.3 167.5
Allowance for OREO losses (15.0) (21.3) (33.2)
------ ------ ------
Other real estate owned, net of allowance 54.1 79.0 134.3
Other nonperforming assets 4.7 4.8 12.9
------ ------ ------
Total nonperforming assets $362.5 $339.8 $464.0
====== ====== ======
Accruing loans past due 90 days or more $60.0 $50.2 $53.8
Nonperforming loans to period-end loans .63% .55% .77%
Nonperforming assets to period-end loans plus other
real estate owned and other nonperforming assets .75 .73 1.12
</TABLE>
<TABLE>
FIGURE 17. SUMMARY OF CHANGES IN NONACCRUAL LOANS
<CAPTION>
(in millions)
Three months ended
March 31,
--------------------
1995 1994
-------- --------
<S> <C> <C>
Balance at beginning of period $254.5 $329.8
Loans placed on nonaccrual 60.8 61.6
Charge-offs (1) (13.9) (32.6)
Payments (18.7) (29.4)
Transfers to OREO (5.7) (5.3)
Loans returned to accrual (14.3) (10.4)
Acquisitions 20.2 1.8
Transfers from OREO (2) 19.9 ---
-------- --------
Balance at end of period $302.8 $315.5
======== ========
<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.
(2) Represents transfers related to the adoption of SFAS No.114.
</TABLE>
<TABLE>
FIGURE 18. NONPERFORMING LOANS AND ASSETS BY REGION
<CAPTION>
Nonperforming Assets to Period-end
Nonperforming Loans to Period-end Loans Loans Plus OREO and Other NPA
------------------------------------------------ ----------------------------------------
MARCH 31, December 31, March 31, MARCH 31, December 31, March 31,
1995 1994 1994 1995 1994 1994
--------- ----------- --------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Northeast Region .91% .74% .97% 1.13% 1.09% 1.62%
Great Lakes Region .52 .47 .78 .59 .57 1.03
Rocky Mountain Region .71 .58 .28 .78 .66 .50
Northwest Region .44 .47 .61 .58 .63 .84
Financial Services 3.40 1.40 .61 7.75 10.19 10.78
------ ------ ------ ------ ------ ------
Total .63% .55% .77% .75% .73% 1.12%
====== ====== ====== ====== ====== ======
</TABLE>
-34-
<PAGE> 35
<TABLE>
FIGURE 19. PERCENTAGE OF NONPERFORMING LOANS TO PERIOD-END LOANS BY LOAN TYPE AT MARCH 31, 1995
<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 1.29 % 3.13 % 2.22 % .39 % .12 % .91 %
Great Lakes Region .65 2.53 1.22 .28 .08 .52
Rocky Mountain Region 1.28 .10 1.12 .16 .23 .71
Northwest Region .56 .24 .80 .39 .11 .44
Financial Services --- --- --- 7.75 2.80 3.40
----------- ----------- ----------- ----------- ----------- -----------
Total .85 % 1.70 % 1.46 % .34 % .12 % .63 %
=========== =========== =========== =========== =========== ===========
</TABLE>
DEPOSITS AND OTHER SOURCES OF FUNDS
Core deposits, defined as domestic deposits other than certificates of deposit
of $100,000 or more, are the Corporation's primary source of funding. During
the first quarter of 1995, these deposits averaged $41.3 billion and
represented 69% of the Corporation's funds supporting earning assets compared
with $40.6 billion and 74%, respectively, for the first three months of 1994.
The slight growth in average core deposits reflected the impact of
acquisitions, offset in part by the pursuit of other alternatives by consumers.
As shown in Figure 3 beginning on page 22, over the past year balances have
also moderately shifted from highly liquid money market deposit accounts and
savings deposits to the higher yielding certificates of deposit of $100,000 or
more and to the Other time deposits category which consists of primarily of
fixed rate certificates of deposit of less than $100,000.
Purchased funds, which are comprised of large certificates of deposit, deposits
in foreign offices and short-term borrowings, averaged $15.5 billion for the
first quarter of 1995, up $3.5 billion, or 30%, from the comparable prior year
period. These instruments have been more heavily relied upon in the current
year as the growth in earning assets has exceeded the increase in core deposits
discussed above. As illustrated in Figure 3, the increase was attributable to
growth in large certificates of deposit, deposits in foreign offices, Federal
funds purchased and securities sold under repurchase agreements, and other
short-term borrowings.
<TABLE>
FIGURE 20. MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE AT MARCH 31, 1995
(in millions)
<CAPTION>
Domestic Foreign
Offices Offices
--------- ---------
<S> <C> <C>
Time remaining to maturity:
Three months or less $1,838.6 $2,572.7
Over three through six months 504.3 146.5
Over six through twelve months 619.1 ---
Over twelve months 746.1 ---
--------- ---------
Total $3,708.1 $2,719.2
========= =========
</TABLE>
LIQUIDITY
Liquidity represents the availability of funding to meet the needs of
depositors, borrowers and creditors at a reasonable cost on a timely basis 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
more than 1300 banking offices in 14 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.
-35-
<PAGE> 36
During the first quarter of 1995, the Corporation's $5 billion Bank Note
Program which involved four affiliate banks was expanded to allow issuances of
up to $6.6 billion, covering eleven affiliate banks. During the first three
months of 1995, $325.0 million was issued under this program. All of the notes
issued have maturities of one year or less and are included in other short-term
borrowings. Under KeyCorp's universal shelf registration, the parent company
issued $125.0 million in Medium-Term Notes during the first quarter. These
notes have original maturities in excess of one year and are included in
long-term debt. During April 1995, KeyCorp registered with the SEC an
additional shelf of $845 million. The proceeds from these programs are to be
used to fund acquisitions and for general corporate purposes in the ordinary
course of business.
The liquidity requirements of the parent company, primarily for dividends to
shareholders, servicing of debt and other corporate purposes are principally met
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 ready access to the capital markets as a result
of its favorable debt ratings which, at March 31, 1995, were as follows:
Senior Long-Term Debt Subordinated Debt
--------------------------- ------------------------
Standard & Poor's A- BBB+
Moody's A1 A2
Further information pertaining to the Corporation's sources and uses of cash
for the three-month periods ended March 31, 1995 and 1994, is presented in the
Consolidated Statements of Cash Flow on page 6 of this report.
CAPITAL AND DIVIDENDS
Total shareholders' equity at March 31, 1995, was $4.8 billion, up $127.1
million, or 3%, and $289.2 million, or 6%, from December 31 and March 31, 1994,
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 three months of 1995 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 $70.8
million on securities, bringing the net unrealized losses on securities to $44.4
million as of March 31,1995. These net unrealized losses were recorded in
connection with SFAS No. 115, Accounting for Certain Debt and Equity Securities.
Also having a significant impact on shareholders' equity during the first
quarter of 1995 was a $65.8 million net increase in Treasury Stock resulting
from the share repurchase program discussed below.
In January 1995, the Board of Directors approved a 12,000,000 Common Share
repurchase program, representing an addition to previously existing programs
which had authorized the repurchase of up to 8,000,000 Common Shares. During
the first quarter of 1995, the Corporation repurchased 6,473,900 shares at a
total cost of $182.9 million, bringing the total number of shares repurchased
under these programs to 14,056,600. These shares are expected to be reissued in
connection with acquisitions and various employee benefit programs. During the
first quarter, 4,043,559 treasury shares were issued in connection with the
acquisition of OMNIBANCORP and 255,827 shares were issued for employee benefit
plans.
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 7.12% at March 31, 1995,
compared to 7.03% at December 31, 1994, and 7.38% at March 31, 1994. 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 March 31, 1995, were 7.96% and 11.05%, 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 March 31, 1995,
KeyCorp's leverage ratio was 6.24%, substantially higher than the minimum
requirement. Figure 21 presents the details of KeyCorp's regulatory capital
position at March 31, 1995, December 31, 1994, and March 31, 1994.
-36-
<PAGE> 37
Under the Federal Deposit Insurance 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 March 31, 1995. All of
KeyCorp's affiliate banks do qualify as well-capitalized at March 31, 1995. The
FDIC-defined capital categories may not constitute an accurate representation
of the overall financial condition or prospects of KeyCorp or its affiliate
banks.
<TABLE>
FIGURE 21. CAPITAL COMPONENTS AND RISK-ADJUSTED ASSETS
<CAPTION>
(dollars in millions)
MARCH 31, December 31, March 31,
TIER I CAPITAL 1995 1994 1994
--------- --------- ---------
<S> <C> <C> <C>
Common shareholders' equity (1) $4,700.5 $4,640.0 $4,390.2
Qualifying preferred stock 160.0 160.0 160.0
Less: Goodwill (598.0) (418.5) (381.4)
Other intangible assets (2) (161.0) (140.0) (103.2)
--------- --------- ---------
Total Tier I Capital 4,101.5 4,241.5 4,065.6
--------- --------- ---------
TIER II CAPITAL
Allowance for loan losses (3) 646.6 628.7 574.3
Qualifying long-term debt 943.2 943.2 994.3
--------- --------- ---------
Total Tier II Capital 1,589.8 1,571.9 1,568.6
--------- --------- ---------
Total Capital $5,691.3 $5,813.4 $5,634.2
========= ========= =========
RISK-ADJUSTED ASSETS
Risk-adjusted assets on balance sheet $47,922.9 $46,370.0 $42,021.0
Risk-adjusted off-balance sheet exposure 4,557.7 4,483.3 4,409.6
Less: Goodwill (598.0) (418.5) (381.4)
Other intangible assets (2) (161.0) (140.0) (103.2)
--------- --------- ---------
Gross risk-adjusted assets 51,721.6 50,294.8 45,946.0
Less: Excess allowance for loan losses (220.5) (201.6) (238.3)
--------- --------- ---------
Net risk-adjusted assets $51,501.1 $50,093.2 $45,707.7
========= ========= =========
AVERAGE QUARTERLY TOTAL ASSETS $66,458.9 $64,613.3 $59,973.1
========= ========= =========
CAPITAL RATIOS
Tier I capital to risk-adjusted assets 7.96% 8.48% 8.91%
Total capital to risk-adjusted assets 11.05 11.62 12.34
Leverage (4) 6.24 6.63 6.85
<FN>
(1) Common shareholders' equity excludes the impact of net unrealized gains or losses on securities, except for net
unrealized losses on marketable equity securities.
(2) Intangible assets (excluding goodwill and portions of purchased credit card relationships) recorded
after February 19, 1992, and deductible portions of purchased mortgage servicing rights.
(3) The allowance for loan losses included in Tier II capital is limited to 1.25% of gross risk-adjusted assets.
(4) Tier I capital as a percentage of average quarterly assets, less goodwill and other non-qualifying intangible assets
as defined in (2) above.
</TABLE>
-37-
<PAGE> 38
<TABLE>
FIGURE 22. BANKING SERVICES DATA BY REGION
(dollars in millions)
<CAPTION>
Northeast Region Great Lakes Region
--------------------------- ----------------------------
Three months ended Three months ended
March 31, March 31,
--------------------------- ----------------------------
1995 1994 1995 1994
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
SIGNIFICANT RATIOS
Return on average total assets 1.19 % 1.41 % 1.23 % 1.47 %
Net interest margin 4.52 5.21 4.16 4.71
Nonperforming loans to period-end loans .91 .97 .52 .78
Allowance for loan losses to period-end loans 1.60 1.40 2.24 2.65
Net loan charge-offs to average loans .24 .58 .11 .20
Efficiency 58.20 53.03 53.85 52.55
AVERAGE BALANCES
Loans $ 13,676 $ 11,581 $ 20,799 $ 18,289
Earning assets 18,087 15,766 27,663 25,446
Total assets 19,330 16,864 30,301 27,773
Deposits 14,532 13,994 20,951 20,181
Shareholder's equity 1,533 1,330 2,230 2,022
</TABLE>
<TABLE>
<CAPTION>
Rocky Mountain Region Northwest Region
--------------------------- ----------------------------
Three months ended Three months ended
March 31, March 31,
--------------------------- ----------------------------
1995 1994 1995 1994
---------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
SIGNIFICANT RATIOS
Return on average total assets 1.15 % 1.28 % .88 % 1.29 %
Net interest margin 5.23 5.18 4.41 5.18
Nonperforming loans to period-end loans .71 .28 .44 .61
Allowance for loan losses to period-end loans 1.35 1.43 1.35 1.27
Net loan charge-offs to average loans .17 .32 .06 .17
Efficiency 63.93 58.92 65.80 60.32
AVERAGE BALANCES
Loans $ 3,420 $ 2,663 $ 9,459 $ 8,964
Earning assets 4,373 3,556 11,231 10,418
Total assets 4,750 3,860 12,205 11,347
Deposits 3,692 3,205 9,317 9,212
Shareholder's equity 406 305 990 864
</TABLE>
-38-
<PAGE> 39
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11) Computation of Net Income Per Common Share
(15) Acknowledgment Letter of Independent Auditors
(27) Financial Data Schedule
(b) Reports on Form 8-K
January 21, 1995 - Item 5. Other Events and Item 7. Financial
Statements, Pro Forma Financial Statements and Exhibits.
Reporting that the Registrant issued a press release on January
20, 1995, announcing its earnings results for the three and
twelve-month periods ended December 31, 1994.
No other reports on Form 8-K were filed during the three-month
period ended March 31, 1995.
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: May 15, 1995 By: Lee Irving
Executive Vice President,
Treasurer and Chief
Accounting Officer
- 39 -
<PAGE> 1
EXHIBIT 11
KEYCORP
COMPUTATION OF NET INCOME PER COMMON SHARE
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended March 31,
---------------------------------------
1995 1994
----------- -----------
<S> <C> <C>
Net income applicable to Common Shares
Net income $209,701 $208,637
Less: Preferred dividend requirements 4,000 4,000
----------- -----------
Net income applicable to Common Shares $205,701 $204,637
=========== ===========
Net income per Common Share
Weighted average Common Shares outstanding 239,999,198 241,925,802
=========== ===========
Net income applicable to Common Shares $205,701 $204,637
=========== ===========
Net income per Common Share $.86 $.85
=========== ===========
Net income per Common Share -- primary
Weighted average Common Shares outstanding 239,999,198 241,925,802
Dilutive common stock options(1) 1,565,879 2,355,939
----------- -----------
Weighted average Common Shares and Common Share
equivalents outstanding 241,565,077 244,281,741
=========== ===========
Net income applicable to Common Shares $205,701 $204,637
=========== ===========
Net income per Common Share $.85 $.84
=========== ===========
Net income per Common Share -- fully diluted
Weighted average Common Shares outstanding 239,999,198 241,925,802
Dilutive common stock options(1) 1,660,726 2,357,998
----------- -----------
Weighted average Common Shares and Common Share
equivalents outstanding 241,659,924 244,283,800
=========== ===========
Net income applicable to Common Shares $205,701 $204,637
=========== ===========
Net income per Common Share $.85 $.84
=========== ===========
</TABLE>
- ---------------
(1) Dilutive common stock options are based on the treasury stock method using
average market price in computing net income per Common Share -- primary,
and the higher of period-end market price or average market price in
computing net income per Common Share -- fully diluted.
<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 April 20, 1995, relating to
the unaudited consolidated interim financial statements of KeyCorp, included in
the Quarterly Report on Form 10-Q for the period ended March 31, 1995.
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-3 No. 33-56879
Form S-3 No. 33-58405
Form S-4 No. 33-31569
Form S-4 No. 33-44657
Form S-4 No. 33-51717
Form S-4 No. 33-55573
Form S-4 No. 33-57329
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. 33-56745
Form S-8 No. 33-56881
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
May 15, 1995
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 31,
1995 KEYCORP FORM 10-1 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 3,303,230
<INT-BEARING-DEPOSITS> 132,231
<FED-FUNDS-SOLD> 760,934
<TRADING-ASSETS> 158,860
<INVESTMENTS-HELD-FOR-SALE> 1,534,165
<INVESTMENTS-CARRYING> 10,395,437
<INVESTMENTS-MARKET> 10,156,809
<LOANS> 48,020,823
<ALLOWANCE> 867,074
<TOTAL-ASSETS> 67,708,965
<DEPOSITS> 48,812,314
<SHORT-TERM> 8,908,096
<LIABILITIES-OTHER> 1,445,881
<LONG-TERM> 3,725,174
<COMMON> 245,944
0
160,000
<OTHER-SE> 4,411,555
<TOTAL-LIABILITIES-AND-EQUITY> 67,708,965
<INTEREST-LOAN> 1,033,493
<INTEREST-INVEST> 192,749
<INTEREST-OTHER> 19,135
<INTEREST-TOTAL> 1,245,377
<INTEREST-DEPOSIT> 413,274
<INTEREST-EXPENSE> 601,598
<INTEREST-INCOME-NET> 643,779
<LOAN-LOSSES> 18,446
<SECURITIES-GAINS> (44,855)
<EXPENSE-OTHER> 560,847
<INCOME-PRETAX> 235,521
<INCOME-PRE-EXTRAORDINARY> 173,911
<EXTRAORDINARY> 35,790
<CHANGES> 0
<NET-INCOME> 209,701
<EPS-PRIMARY> 0.85
<EPS-DILUTED> 0.85
<YIELD-ACTUAL> 4.38
<LOANS-NON> 302,781
<LOANS-PAST> 60,043
<LOANS-TROUBLED> 894
<LOANS-PROBLEM> 137,958
<ALLOWANCE-OPEN> 830,298
<CHARGE-OFFS> 42,966
<RECOVERIES> 25,710
<ALLOWANCE-CLOSE> 867,074
<ALLOWANCE-DOMESTIC> 867,074
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 503,170
</TABLE>
