<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
[] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997
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
[KEY CORP LOGO]
------------------------------------------------------
(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)
(216) 689-6300
------------------------------------------------------
(Registrant's telephone number, including area code)
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.
Common Shares with a par value of $1 each 219,682,883 Shares
- ----------------------------------------- ----------------------------------
(Title of class) (Outstanding at October 31, 1997)
The number of pages of this report is 45.
<PAGE> 2
KEYCORP
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements Page Number
-------------------- -----------
<S> <C> <C>
Consolidated Balance Sheets --
September 30, 1997, December 31, 1996, and September 30, 1996 3
Consolidated Statements of Income --
Three months and nine months ended September 30, 1997 and 1996 4
Consolidated Statements of Changes in Shareholders' Equity --
Nine months ended September 30, 1997 and 1996 5
Consolidated Statements of Cash Flow --
Nine months ended September 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Independent Accountants' Review Report 19
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations 20
-------------------------
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 43
-----------------
Item 6. Exhibits and Reports on Form 8-K 43
--------------------------------
Signature 43
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
KEYCORP AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31, September 30,
dollars in millions 1997 1996 1996
- ---------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED) (Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 2,940 $ 3,444 $ 3,110
Short-term investments 1,217 696 501
Securities available for sale 7,563 7,728 7,113
Investment securities (fair value: $1,378, $1,637 and $1,689) 1,344 1,601 1,653
Loans 53,676 49,235 48,373
Less: Allowance for loan losses 900 870 870
- ---------------------------------------------------------------------------------------------------------------------------------
Net loans 52,776 48,365 47,503
Premises and equipment 993 1,084 1,052
Goodwill 1,095 824 838
Corporate owned life insurance 1,583 1,515 1,301
Other assets 2,566 2,364 2,285
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $72,077 $67,621 $65,356
======= ======= =======
LIABILITIES
Deposits in domestic offices:
Noninterest-bearing $ 8,965 $ 9,524 $ 9,032
Interest-bearing 32,733 34,455 34,608
Deposits in foreign offices -- interest-bearing 2,172 1,338 883
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits 43,870 45,317 44,523
Federal funds purchased and securities sold under repurchase agreements 6,662 6,925 5,592
Bank notes and other short-term borrowings 6,053 3,969 3,861
Other liabilities 2,099 1,816 1,740
Long-term debt 7,567 4,213 4,664
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 66,251 62,240 60,380
Corporation-obligated mandatorily redeemable preferred
capital securities of subsidiary trusts holding solely debentures of the
Corporation (See Note 8) 750 500 --
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, none issued -- -- --
Common Shares, $1 par value; authorized 900,000,000 shares;
issued 245,944,390 shares 246 246 246
Capital surplus 1,531 1,484 1,488
Retained earnings 4,455 4,060 3,994
Loans to ESOP trustee (42) (49) (49)
Net unrealized gains (losses) on securities available for sale, net of income taxes 8 (6) (37)
Treasury stock, at cost (26,278,189, 22,490,353 and 18,882,718 shares) (1,122) (854) (666)
- ---------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 5,076 4,881 4,976
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities, capital securities and shareholders' equity $72,077 $67,621 $65,356
======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements (Unaudited).
3
<PAGE> 4
KEYCORP AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
dollars in millions, except per share amounts 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $1,191 $1,089 $3,417 $3,248
Taxable investment securities 3 4 9 11
Tax-exempt investment securities 15 20 51 58
Securities available for sale 127 119 397 372
Short-term investments 11 6 23 19
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest income 1,347 1,238 3,897 3,708
INTEREST EXPENSE
Deposits 370 360 1,101 1,111
Federal funds purchased and securities
sold under repurchase agreements 91 72 263 218
Bank notes and other short-term borrowings 73 55 194 144
Long-term debt 109 68 250 201
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest expense 643 555 1,808 1,674
- ---------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 704 683 2,089 2,034
Provision for loan losses 102 49 244 140
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 602 634 1,845 1,894
NONINTEREST INCOME
Service charges on deposit accounts 77 74 222 218
Trust and asset management income 66 61 194 180
Credit card fees 25 24 73 68
Insurance and brokerage income 22 18 64 52
Corporate owned life insurance income 20 15 60 42
Loan securitization income 15 18 19 45
Net securities gains -- -- -- 1
Other income 168 79 308 196
- ---------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 393 289 940 802
NONINTEREST EXPENSE
Personnel 299 300 872 889
Net occupancy 54 55 164 163
Equipment 44 41 131 119
Amortization of intangibles 23 21 65 65
Professional fees 10 18 34 47
Marketing 22 30 65 68
Other expense 196 150 474 413
- ---------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 648 615 1,805 1,764
INCOME BEFORE INCOME TAXES 347 308 980 932
Income taxes 111 101 309 300
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 236 $ 207 $ 671 $ 632
======= ======= ======= =======
Net income applicable to Common Shares $236 $207 $671 $624
Per Common Share:
Net income $1.08 $.90 $3.06 $2.70
Net income - fully diluted 1.06 .88 2.99 2.65
Weighted average Common Shares outstanding (000) 218,107 229,668 219,570 231,363
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements (Unaudited).
4
<PAGE> 5
KEYCORP AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
<TABLE>
<CAPTION>
Net
Unrealized
Loans to Gains (Losses) Treasury
Preferred Common Capital Retained ESOP on Securities Stock
dollars in millions, except per share amounts Stock Shares Surplus Earnings Trustee Available for Sale at Cost
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 $160 $246 $1,500 $3,633 $(51) $ 48 $(383)
Net income 632
Cash dividends:
Common Shares ($1.14 per share) (263)
Cumulative Preferred Stock ($6.25 per share) (8)
Redemption of 10% Cumulative Preferred Stock (160)
Issuance of Common Shares:
Acquisition - 270,263 shares 2 9
Employee benefit and dividend reinvestment
plans - 3,193,154 net shares (14) 104
Repurchase of Common Shares - 10,104,566 shares (396)
Net unrealized losses on securities available for sale,
net of income taxes of $(38) (85)
Loan payment from ESOP Trustee 2
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1996 -- $246 $1,488 $3,994 $(49) $ (37) $(666)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 -- $246 $1,484 $4,060 $(49) $ (6) $ (854)
Adjustment related to change in accounting for
transfers of financial assets, net of deferred
tax benefit of $(25) (43)
Net income 671
Cash dividends on Common Shares ($1.26 per share) (275)
Issuance of Common Shares:
Acquisition - 3,336,118 shares 56 143
Employee benefit and dividend reinvestment
plans - 1,856,064 net shares (9) 82
Repurchase of Common Shares - 8,980,018 shares (493)
Net unrealized gains on securities available for sale,
net of income taxes of $32 57
Loan payment from ESOP trustee 7
Foreign currency translation adjustments (1)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1997 -- $246 $1,531 $4,455 $(42) $ 8 $(1,122)
== ==== ====== ====== ==== ====== =======
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements (Unaudited).
5
<PAGE> 6
KEYCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flow (Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
in millions 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 671 $ 632
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 244 140
Depreciation expense 115 105
Amortization of intangibles 65 65
Net gains from sales of subsidiaries/branches (89) (8)
Net securities gains -- (1)
Deferred income taxes 40 83
Net decrease in mortgage loans held for sale 132 558
Net increase in trading account assets (530) (68)
Decrease in accrued restructuring charge 62 --
Other operating activities, net (617) (193)
- ------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 93 1,313
INVESTING ACTIVITIES
Net increase in loans, excluding sales, acquisitions and divestitures (5,281) (2,326)
Loans sold 1,219 876
Purchases of investment securities (387) (627)
Proceeds from sales of investment securities 10 9
Proceeds from prepayments and maturities of investment securities 597 620
Purchases of securities available for sale (1,535) (1,608)
Proceeds from sales of securities available for sale 180 56
Proceeds from prepayments and maturities of securities available for sale 1,620 2,372
Net increase in other short-term investments (162) (125)
Purchases of premises and equipment (169) (184)
Proceeds from sales of premises and equipment 125 37
Proceeds from sales of other real estate owned 25 22
Purchases of corporate owned life insurance -- (145)
Net proceeds from sales of subsidiaries/branches (241) 140
Cash used in acquisitions, net of cash acquired (1) (12)
- ------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (4,000) (895)
FINANCING ACTIVITIES
Net decrease in deposits (118) (1,766)
Net increase in short-term borrowings 1,800 1,028
Net proceeds from issuance of long-term debt 3,231 1,593
Payments on long-term debt (1,072) (872)
Proceeds from the issuance of capital securities 250 --
Loan payment received from ESOP trustee 7 2
Purchases of treasury shares (493) (396)
Redemption of 10% Cumulative Preferred Stock -- (160)
Proceeds from issuance of common stock pursuant to employee
benefit and dividend reinvestment plans 73 90
Cash dividends (275) (271)
- ------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,403 (752)
- ------------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND DUE FROM BANKS (504) (334)
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 3,444 3,444
- ------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 2,940 $ 3,110
======= =======
- ------------------------------------------------------------------------------------------------------------------
Additional disclosures relative to cash flow:
Interest paid $ 1,754 $ 1,622
Income taxes paid 183 120
Net amount received on portfolio swaps 49 58
Noncash items:
Transfer of loans to other real estate owned $ 19 $ 20
Transfer of other assets to securities available for sale 280 --
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements (Unaudited).
6
<PAGE> 7
KEYCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited consolidated interim financial statements include the accounts of
KeyCorp and its subsidiaries ("Key"). 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 of a normal recurring nature 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 audited consolidated financial statements and
related notes included in Key's 1996 Annual Report to Shareholders. In addition,
certain reclassifications have been made to prior year amounts to conform with
the current year presentation. In the third quarter of 1997, a $50 million
charge was recorded in connection with actions taken to sell certain properties
or to alter certain leasing arrangements in response to Key's nationwide
banking and related centralization efforts. The results of operations for the
interim periods are not necessarily indicative of the results of operations to
be expected for the full year.
On January 1, 1997, Key adopted Statement of Financial Accounting Standards
("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extingushments of Liabilities." SFAS No. 125 requires that certain assets
which are subject to prepayment and recorded in connection with a securitization
be accounted for like investments in interest-only strips. Accordingly, Key
reclassified approximately $280 million of these assets, which represent
uncertificated residual interests in securitizations, to securities available
for sale. At the time of the transfer, the carrying amount of these assets
exceeded their fair value by approximately $68 million. This difference was
recorded as a reduction to the carrying amount of the transferred assets and the
related after tax adjustment of $43 million was made to net unrealized losses on
securities in shareholders' equity. SFAS No. 125 is more fully discussed in Note
1, Summary of Significant Accounting Policies, of Key's 1996 Annual Report.
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings Per Share," which specifies the computation, presentation and
disclosure requirements for earnings per share for entities with publicly held
common stock or common stock equivalents. SFAS No. 128 replaces the presentation
of primary earnings per share with the presentation of basic earnings per share.
It also requires dual presentation of basic and diluted earnings per share on
the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic earnings per share computation to the corresponding amounts of the diluted
earnings per share computation. SFAS No. 128 is effective for both interim and
annual financial statements issued for periods ending after December 15, 1997,
with earlier adoption prohibited. Key will adopt SFAS No. 128 in its December
31, 1997, financial statements, with no effect on prior period data.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 130 establishes reporting and display standards for
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is defined as the change in equity of
a business enterprise during a period from transactions and other events and
circumstances arising from nonowner sources. The purpose of the statement is to
provide a basis for reporting a measure of all changes in equity of an
enterprise that will result from recognized transactions and other economic
events of the period other than transactions with owners in their capacity as
owners. SFAS No. 130 is effective for both interim and annual financial
statements issued for periods beginning after December 15, 1997, and also
applies to financial statements presented for prior periods. SFAS No. 131
requires that financial and descriptive information be disclosed for each
reportable operating segment based on the management approach. The management
approach focuses on financial information that an enterprise's decision makers
use to assess performance and make decisions about resource allocation. The
statement also prescribes the enterprise-wide disclosures to be made about
products, services, geographic areas and major customers. SFAS No. 131 is
effective for annual financial statements issued for periods beginning after
December 15, 1997, and for interim financial statements in the second year of
application. Comparative information presented for earlier periods must be
restated. Key will adopt SFAS No. 130 in its March 31, 1998, financial
statements and expects to include the disclosures required by SFAS No. 131 in
its December 31, 1998, financial statements.
7
<PAGE> 8
2. MERGERS, ACQUISITIONS AND DIVESTITURES
COMPLETED MERGERS AND ACQUISITIONS
Mergers and acquisitions completed by Key during 1996 and the first nine months
of 1997 (all of which were accounted for as purchase business combinations) are
summarized below:
<TABLE>
<CAPTION>
dollars in millions COMMON
LOCATION DATE ASSETS SHARES ISSUED
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Champion Mortgage Co., Inc. 1 New Jersey August 1997 $317 3,336,118
Leasetec Corporation 1 Colorado July 1997 1,080 See note 2
Carleton, McCreary, Holmes & Co. 3 Ohio August 1996 1 See note 2
Knight Insurance Agency, Inc. 4 Massachusetts June 1996 8 --
- ---------------------------------------------------------------------------------------------------------------------
<FN>
1 See the following text for more information regarding this transaction.
2 In accordance with a confidentiality clause in the purchase agreement, the
terms, which are not material, have not been publicly disclosed.
3 Carleton McCreary, Holmes & Company ("Carleton") is an investment banking
firm specializing in mergers and acquisitions and other financial advisory
services for mid-sized and large corporations.
4 Knight Insurance Agency, Inc. ("Knight") is an education financing company
doing business under the name "Knight College Resource Group."
</TABLE>
CHAMPION MORTGAGE CO., INC.
On August 29, 1997, Key acquired Champion Mortgage Co., Inc. ("Champion"), a
home equity finance company headquartered in Parsippany, New Jersey. Under the
terms of the merger agreement, 3,336,118 Common Shares, with a value of
approximately $200 million, were exchanged for all of the outstanding shares of
Champion common stock in a transaction structured as a tax-free exchange and
accounted for as a purchase. The merger agreement also provides an opportunity
for Champion's shareholders to receive additional consideration in the form of
Key Common Shares valued at up to $100 million in the event that certain
performance targets related to significant increases in profitability and
origination volumes established at the date of closing are achieved over the
next three years. In connection with the transaction, Key recorded goodwill of
approximately $195 million, which is being amortized using the straight-line
method over a period of 25 years. At closing, Champion became a wholly owned
subsidiary of Key Bank USA, National Association ("KeyBank USA"), a wholly owned
subsidiary of the parent company.
LEASETEC CORPORATION
On July 1, 1997, Key acquired an 80% interest (with an option to purchase the
remaining 20%) in Leasetec Corporation ("Leasetec"), a privately held equipment
leasing company headquartered in Boulder, Colorado with operations in the United
States and overseas. In connection with the transaction, which was accounted for
as a purchase, Key recorded goodwill of approximately $126 million, which is
being amortized using the straight-line method over a period of 25 years.
COMPLETED DIVESTITURES
KEYBANK NATIONAL ASSOCIATION (WYOMING)
On July 14, 1997, Key sold KeyBank National Association (Wyoming) ("KeyBank
Wyoming"), its 28 branch Wyoming bank subsidiary. KeyBank Wyoming had assets of
approximately $1.1 billion at the time of the transaction. A $53 million ($35
million after tax) gain was realized on the KeyBank Wyoming sale and included in
other income on the income statement.
SOCIETY FIRST FEDERAL SAVINGS BANK
On June 1, 1996, Key sold Society First Federal Savings Bank ("SFF"), its
Florida savings association subsidiary. SFF had assets of approximately $1.2
billion at the time of the transaction. Key continues to provide private banking
services in Florida through KeyBank National Association. An $8 million ($5
million after tax) gain was realized on the SFF sale and included in other
income on the income statement.
8
<PAGE> 9
TRANSACTIONS PENDING AS OF SEPTEMBER 30, 1997
BRANCH DIVESTITURES
On November 26, 1996, Key announced its intention to divest approximately 140
branch offices (including the 28 branches associated with the sale of KeyBank
Wyoming). During the first nine months of 1997, including the KeyBank Wyoming
transaction, 49 such branches with deposits of approximately $1.3 billion were
sold resulting in aggregate gains of $89 million ($58 million after tax) which
were recorded in other income on the income statement. As of October 31, 1997,
contracts had been entered into to sell a total of 68 other branch offices with
deposits of approximately $1.1 billion. The sales of these remaining branches
are expected to close in the fourth quarter of 1997 and the first half of 1998.
3. SECURITIES AVAILABLE FOR SALE
The amortized cost, unrealized gains and losses, and approximate fair values of
securities available for sale were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
in millions COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury, agencies and corporations $ 572 $ 2 -- $ 574
States and political subdivisions 50 -- -- 50
Collateralized mortgage obligations 3,376 14 $ 8 3,382
Other mortgage-backed securities 3,130 52 17 3,165
Other securities 423 2 33 392
- -----------------------------------------------------------------------------------------------------------------------
Total $7,551 $70 $58 $7,563
======= ==== ==== ======
- -----------------------------------------------------------------------------------------------------------------------
December 31, 1996
---------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
in millions Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------
U.S. Treasury, agencies and corporations $ 857 $ 3 $ 1 $ 859
States and political subdivisions 36 -- -- 36
Collateralized mortgage obligations 3,169 3 23 3,149
Other mortgage-backed securities 3,570 44 35 3,579
Other securities 104 1 -- 105
- -----------------------------------------------------------------------------------------------------------------------
Total $7,736 $51 $59 $7,728
======= ==== ==== ======
- -----------------------------------------------------------------------------------------------------------------------
September 30, 1996
---------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
in millions Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------
U.S. Treasury, agencies and corporations $ 1,135 $ 3 $ 7 $ 1,131
States and political subdivisions 29 -- -- 29
Collateralized mortgage obligations 2,488 1 31 2,458
Other mortgage-backed securities 3,416 34 63 3,387
Other securities 107 1 -- 108
- -----------------------------------------------------------------------------------------------------------------------
Total $7,175 $39 $101 $7,113
======= ==== ===== ======
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
Debt securities that Key has the positive intent and ability to hold to maturity
are classified as securities held to maturity and are carried at cost, adjusted
for amortization of premiums and accretion of discounts using the level yield
method. 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 held principally
for the purpose of selling them in the near term are classified as trading
account assets, reported at fair value ($567 million and $101 million as of
September 30, 1997 and 1996, respectively) and included in short-term
investments on the balance sheet. Realized and unrealized gains and losses on
such assets are reported in other income on the income statement. Debt and
equity securities that Key has not classified as investment securities or
trading account assets are classified as securities available for sale and, as
such, are reported at fair value, with net unrealized gains and losses, net of
deferred taxes, reported as a component of shareholders' equity.
At September 30, 1997, shareholders' equity was increased by $8 million,
representing the net unrealized gain on securities available for sale, net of
deferred tax expense.
4. INVESTMENT SECURITIES
The amortized cost, unrealized gains and losses and approximate fair values of
investment securities were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
in millions COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
States and political subdivisions $1,105 $34 -- $1,139
Other securities 239 -- -- 239
- -----------------------------------------------------------------------------------------------------------------------
Total $1,344 $34 -- $1,378
======= ==== ==== ======
- -----------------------------------------------------------------------------------------------------------------------
December 31, 1996
---------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
in millions Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------
States and political subdivisions $1,401 $37 $1 $1,437
Other securities 200 -- -- 200
- -----------------------------------------------------------------------------------------------------------------------
Total $1,601 $37 $1 $1,637
======= ==== === ======
- -----------------------------------------------------------------------------------------------------------------------
September 30, 1996
---------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
in millions Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------
States and political subdivisions $1,434 $37 $1 $1,470
Other securities 219 -- -- 219
- -----------------------------------------------------------------------------------------------------------------------
Total $1,653 $37 $1 $1,689
======= ==== === ======
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
5. LOANS
Loans are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31, September 30,
in millions 1997 1996 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial, financial and agricultural $13,797 $12,309 $12,115
Real estate-- commercial mortgage 7,109 7,151 7,033
Real estate-- construction 2,055 1,666 1,719
Commercial lease financing 3,645 2,671 2,498
- ----------------------------------------------------------------------------------------------------------
Total commercial loans 26,606 23,797 23,365
Real estate-- residential mortgage 6,154 6,229 6,921
Home equity 5,416 4,793 4,113
Credit card 1,476 1,799 1,669
Consumer-- direct 2,238 2,245 1,993
Consumer-- indirect 8,821 8,062 7,947
- ----------------------------------------------------------------------------------------------------------
Total consumer loans 24,105 23,128 22,643
Loans held for sale 2,965 2,310 2,365
- ----------------------------------------------------------------------------------------------------------
Total $53,676 $49,235 $48,373
======= ======= =======
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Changes in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
in millions 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of period $880 $870 $ 870 $ 876
Charge-offs (105) (72) (282) (216)
Recoveries 20 23 65 78
- -------------------------------------------------------------------------------------------------------------------------------
Net charge-offs (85) (49) (217) (138)
Provision for loan losses 102 49 244 140
Allowance acquired (sold), net 3 -- 3 (8)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at end of period $900 $870 $ 900 $ 870
===== ===== ====== =====
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
6. IMPAIRED LOANS AND OTHER NONPERFORMING ASSETS
At September 30, 1997, the recorded investment in impaired loans was $184
million. Included in this amount is $84 million of impaired loans for which the
specifically allocated allowance for loan losses is $21 million, and $100
million of impaired loans which are carried at their estimated fair value
without a specifically allocated allowance for loan losses. At the end of 1996,
the recorded investment in impaired loans was $209 million, of which $81 million
had a specifically allocated allowance of $26 million and $128 million were
carried at their estimated fair value. The average recorded investment in
impaired loans for the third quarter of 1997 and 1996 was $186 million and $175
million, respectively.
Nonperforming assets were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31, September 30,
in millions 1997 1996 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Impaired loans $184 $209 $185
Other nonaccrual loans 180 139 158
Restructured loans -- 1 1
- --------------------------------------------------------------------------------------------------
Total nonperforming loans 364 349 344
Other real estate owned (OREO) 67 56 59
Allowance for OREO losses (22) (8) (10)
- --------------------------------------------------------------------------------------------------
OREO, net of allowance 45 48 49
Other nonperforming assets 2 3 3
- --------------------------------------------------------------------------------------------------
Total nonperforming assets $411 $400 $396
===== ===== ====
- --------------------------------------------------------------------------------------------------
</TABLE>
Key considers all nonaccrual loans to be impaired loans, except for
smaller-balance, homogeneous nonaccrual loans (shown in the preceding table as
"Other nonaccrual loans") excluded in accordance with the provisions of SFAS No.
114, "Accounting by Creditors for Impairment of a Loan." A loan is not deemed
impaired during a period of delay in payment of less than 90 days if Key expects
to collect all amounts due, including interest accrued at the contractual
interest rate, for the period of delay.
Impaired loans are evaluated individually. Where collateral exists, the extent
of impairment is determined based on the estimated fair value of the underlying
collateral. If collateral does not exist, or is insufficient to support the
carrying amount of the loan, management looks to other means of collection.
Where the estimated fair value of the collateral and the present value of the
estimated future cash flows from other means of collection do not support the
carrying amount of the loan, management charges off that portion of the loan
balance which it believes will not ultimately be collected. In instances where
collateral or other sources of repayment are sufficient, yet uncertainty exists
regarding the ultimate repayment, an allowance is specifically allocated for in
the allowance for loan losses.
Key excludes smaller-balance, homogeneous nonaccrual loans from impairment
evaluation. Generally these include loans to finance residential mortgages,
automobiles, recreational vehicles, boats and mobile homes. Key applies
historical loss experience rates to these loans, adjusted based on management's
assessment of emerging credit trends and other factors. The resulting loss
estimates are specifically allocated for by loan type in the allowance for loan
losses. In general, such loans are charged off when payment is 120-180 days past
due.
12
<PAGE> 13
7. LONG-TERM DEBT
The components of long-term debt, presented net of unamortized discount where
applicable, were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31, September 30,
dollars in millions 1997 1996 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Senior medium-term notes due through 2005 1 $ 493 $ 584 $ 924
Subordinated medium-term notes due through 2005 2 183 183 183
7.50% Subordinated notes due 2006 250 250 250
6.75% Subordinated notes due 2006 200 200 200
8.125% Subordinated notes due 2002 199 199 199
8.00% Subordinated notes due 2004 125 125 125
8.40% Subordinated capital notes due 1999 75 75 75
8.404% Notes due 1997 through 2001 42 49 49
All other long-term debt 15 16 18
- ---------------------------------------------------------------------------------------------------------------------
Total parent company 1,582 1,681 2,023
Senior medium-term bank notes due through 2000 3 3,202 1,165 1,275
Senior euro medium-term bank notes due through 2002 4 780 -- --
7.25% Subordinated notes due 2005 200 200 200
7.85% Subordinated notes due 2002 200 200 200
6.75% Subordinated notes due 2003 200 200 199
7.50% Subordinated notes due 2008 165 165 165
7.125% Subordinated notes due 2006 250 250 250
7.55% Subordinated notes due 2006 75 75 75
7.375% Subordinated notes due 2008 70 70 70
Lease financing debt 5 605 -- --
Federal Home Loan Bank Advances 164 193 193
All other long-term debt 74 14 14
- ---------------------------------------------------------------------------------------------------------------------
Total subsidiaries 5,985 2,532 2,641
- ---------------------------------------------------------------------------------------------------------------------
Total $7,567 $4,213 $4,664
======= ======= ======
- ---------------------------------------------------------------------------------------------------------------------
<FN>
1 The weighted average rate on the senior medium-term notes due through 2005
was 6.56%, 6.57% and 6.50% at September 30, 1997, December 31, 1996 and
September 30, 1996, respectively.
2 The weighted average rate on the subordinated medium-term notes due through
2005 was 6.85%, 6.80% and 6.81% at September 30, 1997, December 31, 1996 and
September 30, 1996, respectively.
3 The weighted average rate on the senior medium-term notes due through 2000
was 5.75%, 6.17% and 6.68% at September 30, 1997, December 31, 1996 and
September 30, 1996, respectively.
4 The weighted average rate on the euro medium-term notes due through 2002 was
5.83% at September 30, 1997.
5 Represents primarily nonrecourse debt collateralized by lease equipment under
operating, direct financing and sales type leases.
</TABLE>
13
<PAGE> 14
8. CAPITAL SECURITIES
The corporation-obligated mandatorily redeemable preferred capital securities of
subsidiary trusts holding solely debentures of the Corporation ("capital
securities") were issued by three business trusts, KeyCorp Institutional Capital
A ("Capital A"), KeyCorp Institutional Capital B ("Capital B") and KeyCorp
Institutional Capital C ("Capital C"), all of whose common securities are owned
by the parent company. Capital A and Capital B were formed in the fourth quarter
of 1996 and Capital C was formed in the second quarter of 1997. The proceeds
from the issuances of the capital securities and common securities were used to
purchase debentures of the parent company. Capital A and Capital B hold solely
junior subordinated deferrable interest debentures of the parent company.
Capital C holds solely coupon adjusted pass-through security debentures of the
parent company. Both the debentures and related income statement effects are
eliminated in Key's financial statements.
The parent company has entered into contractual arrangements which, taken
collectively, fully and unconditionally guarantee payment of: (i) accrued and
unpaid distributions required to be paid on the capital securities; (ii) the
redemption price with respect to any capital securities called for redemption by
Capital A, Capital B or Capital C; and (iii) payments due upon a voluntary or
involuntary liquidation, winding-up or termination of Capital A, Capital B or
Capital C.
The capital securities, common securities and related debentures are summarized
as follows:
<TABLE>
<CAPTION>
Interest Rate Maturity
Principal of Capital of Capital
Capital Common Amount of Securities and Securities and
dollars in millions Securities 1 Securities Debentures 2 Debentures Debentures
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
September 30, 1997
Capital A $350 $11 $361 7.826% 2026
Capital B 150 4 154 8.250 2026
Capital C 250 8 258 6.625 2029
- ------------------------------------------------------------------------------------------------------------------------------
Total $750 $23 $773 7.510%3 --
==== === =====
- ------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 $500 $15 $515 7.953%3 --
==== === =====
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
1 The capital securities are mandatorily redeemable upon the respective
maturity dates of the debentures or upon earlier redemption as provided in
the indenture. Each issue of capital securities carries an interest rate
identical to that of the respective debenture. The interest rate related to
the capital securities issued by Capital C may be adjusted upon the
remarketing of the capital securites on the coupon adjustment date (June 1,
1999). The capital securities issued by Capital A and Capital B qualify as
Tier I capital under Federal Reserve Board Guidelines.
2 The parent company has the right to redeem the debentures purchased by
Capital A, Capital B and Capital C: (i) in whole or in part, on or after
December 1, 2006, December 15, 2006 and June 1, 2009, respectively, (ii) in
whole at any time within 90 days following the occurrence and during the
continuation of a tax event or a capital treatment event (as defined in the
applicable offering circular); and (iii) for Capital C, in whole or in part
on the coupon adjustment date. If the debentures are redeemed prior to
maturity, the redemption price will be expressed as a certain percentage of,
or factor added to, the principal amount, plus any accrued but unpaid
interest.
3 Weighted average rate.
</TABLE>
9. RESTRUCTURING CHARGE
During the fourth quarter of 1996, the parent company recorded a $100 million
($66 million after tax, $.29 per Common Share) restructuring charge in
connection with strategic actions to be taken over the next year to complete its
transformation to a nationwide, bank-based financial services company. The
primary actions taken or to be taken include: (i) the formation of a nationwide
bank from Key's network of banks in 13 states and four regions of the United
States (KeyBank USA and KeyBank National Association (New Hampshire) ("KeyBank
New Hampshire") did not take part in this consolidation), (ii) the consolidation
of nearly 140 of Key's branch offices, known as KeyCenters, into other
KeyCenters, and (iii) the reduction of approximately 2,700 positions, or 10% of
Key's employment base, distributed throughout the organization at substantially
all levels of responsibility.
14
<PAGE> 15
Included in the restructuring charge were accruals for expenses, primarily
consisting of severance payments ($54 million), consolidation costs related to
banking offices identified for closure ($18 million) and costs related to the
write-off of certain obsolete software previously developed for internal use
($28 million).
As of September 30, 1997, Key had completed the consolidation of 119 of the 140
KeyCenters identified for merger into other KeyCenters and reduced its
employment base by the approximate 10% projected at the announcement date.
Remaining reserves at September 30, 1997, totaled $38 million. Changes in the
restructuring reserve are summarized as follows:
<TABLE>
<CAPTION>
Consolidation Obsolete
in millions Severance Costs Software Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $ 54 $18 $ 28 $100
Cash payments (25) (2) - (27)
Noncash charges -- (7) (28) (35)
- ------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 $ 29 $9 -- $ 38
===== === === =====
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Key, mainly through its affiliate banks, is party to various financial
instruments with off-balance sheet risk. The banks use these financial
instruments in the normal course of business to meet the financing needs of
their customers and to manage their exposure to market risk. Market risk is the
possibility that Key's net interest income will be adversely affected as a
result of changes in interest rates or other economic factors. The primary
financial instruments used include commitments to extend credit, standby and
commercial letters of credit, interest rate swaps, caps and floors, futures 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 in the remainder of
this note. In addition to the market risks inherent in the use of these
financial instruments, each contains an element of credit risk. Credit risk is
the possibility that Key will incur a loss due to a counterparty's failure to
perform its contractual obligations.
FINANCIAL INSTRUMENTS HELD OR ISSUED FOR LENDING-RELATED PURPOSES
These instruments involve, to varying degrees, credit risk in addition to
amounts recognized in Key's balance sheet. Key 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 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 Key. 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. Key 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.
15
<PAGE> 16
The following is a summary of the contractual amount of each class of
lending-related off-balance sheet financial instrument outstanding wherein Key's
maximum possible accounting loss equals the contractual amount of the
instruments:
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31, September 30,
in millions 1997 1996 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loan commitments:
Credit card lines $ 7,928 $ 8,078 $ 7,253
Home equity 3,924 3,239 3,081
Commercial real estate and construction 1,104 1,593 1,527
Commercial and other 13,180 10,327 10,233
- -----------------------------------------------------------------------------------------------------------------
Total loan commitments 26,136 23,237 22,094
Other commitments:
Standby letters of credit 1,467 1,385 1,285
Commercial letters of credit 120 202 206
Loans sold with recourse 271 30 30
- -----------------------------------------------------------------------------------------------------------------
Total loan and other commitments $27,994 $24,854 $23,615
======== ======== =======
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
FINANCIAL INSTRUMENTS HELD OR ISSUED FOR ASSET AND LIABILITY MANAGEMENT PURPOSES
Key manages its exposure to market risk, in part, by using off-balance sheet
instruments. Instruments used for this purpose modify the repricing or maturity
characteristics of specified on-balance sheet assets and liabilities. The
instruments must be both effective at reducing the risk associated with the
exposure being managed, and designated as a risk management transaction at the
inception of the derivative contract. In addition, to be considered effective, a
high degree of interest rate correlation must exist between the derivative and
the specified assets or liabilities being managed at inception and over the life
of the derivative contract. Primary among the financial instruments used by both
the parent company and its subsidiary banks to manage exposure to market risk
are interest rate swap contracts. 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. Credit risk on these instruments 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. Key deals exclusively with counterparties with high credit ratings,
enters into bilateral collateral arrangements and generally 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. In addition, the credit risk exposure to the counterparty
on each interest rate swap is monitored by a credit committee. Based upon credit
reviews of the counterparties, limits on the total credit exposure Key may have
with each counterparty and the amount of collateral required, if any, are
determined. Although Key is exposed to credit-related losses in the event of
nonperformance by the counterparties, based on management's assessment as of
September 30, 1997, all counterparties were expected to meet their obligations.
At September 30, 1997, Key had 18 different counterparties to portfolio swaps
and swaps entered into to offset the risk of customer swaps. Key had aggregate
credit exposure of $54 million to twelve of these counterparties, with the
largest credit exposure to an individual counterparty amounting to $14 million.
Conventional interest rate swap contracts involve the receipt of amounts based
on a fixed or variable rate 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 an index at each 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. At September 30, 1997, Key was party to $1.3 billion and $2.5 billion
of indexed amortizing swaps that used a London Interbank Offered Rate ("LIBOR")
index and a Constant Maturity Treasuries ("CMT") index, respectively, for the
review date measurement. Under basis swap contracts, interest payments based on
different floating indices are exchanged.
16
<PAGE> 17
The following table summarizes the notional amount, fair value, maturity and
weighted average rate received and paid for the various types of portfolio
interest rate swaps used by Key:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 December 31, 1996
------------------------------------------------------------------- ------------------------
WEIGHTED AVERAGE RATE
NOTIONAL FAIR MATURITY ---------------------------- Notional Fair
dollars in millions AMOUNT VALUE (YEARS) RECEIVE PAY Amount Value
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Receive fixed/pay variable--
indexed amortizing 1 $ 4,065 $ 9 1.6 6.80% 5.73% $ 5,078 $(8)
Receive fixed/pay variable--
conventional 3,750 43 6.1 6.69 5.79 3,505 21
Pay fixed/receive variable--
conventional 3,260 (6) 1.1 5.73 6.12 3,312 (5)
Basis swaps 200 -- .4 5.76 5.74 400 --
- -------------------------------------------------------------------------------------------------------------------------------
Total portfolio swaps $11,275 $46 2.9 6.44% 5.86% $12,295 $ 8
======== ==== ======== ====
- -------------------------------------------------------------------------------------------------------------------------------
<FN>
1 MATURITY IS BASED UPON EXPECTED AVERAGE LIVES RATHER THAN CONTRACTUAL TERMS.
</TABLE>
Based on the weighted average rates in effect at September 30, 1997, the spread
on portfolio interest rate swaps, excluding the amortization of net deferred
gains on terminated swaps, provided a positive impact on net interest income
(since the weighted average rate received exceeded the weighted average rate
paid by 58 basis points). The aggregate positive fair value of $46 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 unrealized gain that would be recognized if the
portfolio were to be liquidated at that date.
Interest from portfolio 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 whose risk is being managed. Gains and losses realized
upon the termination of interest rate swaps prior to maturity are deferred and
amortized, generally using the straight-line method over the projected remaining
life of the related swap contract at its termination and recorded as an
adjustment of the yield on the respective on-balance sheet instrument that was
being managed. During the first nine months of 1997, swaps with a notional
amount of $220 million were terminated, resulting in no deferred gain or loss.
During the same period last year, swaps with a notional amount of $800 million
were terminated, resulting in a deferred gain of $.3 million.
A summary of Key's deferred swap gains and (losses) is as follows:
<TABLE>
<CAPTION>
dollars in millions
- --------------------------------------------------------------------------------
Weighted Average
Deferred Remaining
Asset/Liability Managed Gains/(Losses) Amortization (Years)
- --------------------------------------------------------------------------------
<S> <C> <C>
Loans $ (1) 1.1
Debt 15 5.6
- --------------------------------------------------------------------------------
Total $14
===
- --------------------------------------------------------------------------------
</TABLE>
Key also uses interest rate caps and floors, and futures contracts to manage the
risk associated with the potential impact of adverse movements in interest rates
on specified long-term debt and other short-term borrowings. Interest rate caps
and floors involve the payment of a premium by the buyer to the seller for the
right to receive an interest differential equal to the difference between the
current interest rate and an agreed-upon interest rate ("strike rate") applied
to a notional amount. Key generally purchases or enters into net purchases (a
combination of buying and selling) of caps and floors for asset and liability
management purposes. Futures contracts are commitments to either purchase or
sell designated financial instruments at future dates for specified prices. Key
had caps and floors with a notional amount and fair value of $4.3 billion (of
which $1.6 billion are forward-starting) and $17 million, respectively, at
September 30, 1997. There were no futures contracts outstanding at the same
date. For the third quarter of 1997, interest rate swaps (including the impact
of both the spread on the swap portfolio and the amortization of deferred gains
and losses resulting from terminated swaps) and interest rate caps and floors
increased net interest income by $12 million. For the same period last year,
these instruments contributed $19 million to net interest income.
17
<PAGE> 18
FINANCIAL INSTRUMENTS HELD OR ISSUED FOR TRADING PURPOSES
Key's affiliate banks also use interest rate swap, cap and floor, and future
contracts for dealer activities (which are generally limited to the banks'
commercial loan customers) and enter into other positions with third parties
that are intended to mitigate the interest rate risk of the customer positions.
Interest rate swap contracts entered into with customers are typically limited
to conventional swaps, as previously described. The customer swaps, caps and
floors, and futures, as well as the third party positions, are recorded at their
estimated fair values, and adjustments to fair value are included in other
income on the income statement. Key had futures contracts with a notional amount
and negative fair value of $9.9 billion and $(5) million, respectively, at
September 30, 1997.
Key also enters into foreign exchange forward contracts to accommodate the
business needs of its customers and for proprietary trading purposes. These
contracts provide for the delayed delivery or purchase of foreign currency. The
foreign exchange risk associated with such contracts is mitigated by entering
into other foreign exchange contracts with third parties. Adjustments to the
fair value of all such foreign exchange forward contracts are included in other
income on the income statement.
At September 30, 1997, credit exposure from financial instruments held or issued
for trading purposes was limited to the aggregate fair value of each contract
with a positive fair value, or $82 million. The risk of counterparties
defaulting on their obligations is monitored on an ongoing basis. The 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 $23 million and $12 million, respectively, for the first nine
months of 1997 and $13 million and $10 million, respectively, for the first nine
months of 1996.
A summary of the notional amount and the respective fair value of derivative
financial instruments held or issued for trading purposes at September 30, 1997,
and on average for the nine-month period then ended, is presented below. The
positive fair values represent assets to Key and are recorded in other assets,
while the negative fair values represent liabilities and are recorded in other
liabilities on the balance sheet. The $8.3 billion notional amount of customer
swaps presented in the table includes $4.7 billion of interest rate swaps that
receive a fixed rate and pay a variable rate and $3.6 billion of interest rate
swaps that pay a fixed rate and receive a variable rate. As of September 30,
1997, these swaps had an expected average life of 5.4 years, carried a weighted
average rate received of 6.44% and had a weighted average rate paid of 6.25%.
<TABLE>
<CAPTION>
September 30, 1997 Nine months ended September 30, 1997
----------------------- -----------------------------------------
Notional Fair Average Average
in millions Amount Value Notional Amount Fair Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate contracts:
Customer swaps:
Assets $6,178 $ 76 $4,827 $ 52
Liabilities 2,134 (33) 2,046 (24)
Caps and floors purchased 2,687 4 2,574 2
Caps and floors written 2,771 (4) 2,647 (3)
Foreign exchange forward contracts:
Assets 619 18 539 20
Liabilities 572 (16) 494 (19)
- -------------------------------------------------------------------------------------------------------------------
<FN>
1 Excludes the effect of foreign spot contracts.
</TABLE>
18
<PAGE> 19
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
SHAREHOLDERS AND BOARD OF DIRECTORS
KEYCORP
We have reviewed the unaudited consolidated balance sheets of KeyCorp and
subsidiaries ("Key") as of September 30, 1997 and 1996, and the related
consolidated statements of income for the three and nine-month periods then
ended, and the consolidated statements of changes in shareholders' equity and
cash flow for the nine-month periods ended September 30, 1997 and 1996. These
financial statements are the responsibility of Key'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 Key as of December 31, 1996, 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 15, 1997, 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, 1996, is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
/s/ Ernst & Young LLP
Cleveland, Ohio
October 14, 1997
19
<PAGE> 1
EXHIBIT 11
KEYCORP
COMPUTATION OF NET INCOME PER COMMON SHARE
(dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Sept. 30, Nine months ended Sept. 30,
----------------------------------- -----------------------------------
1997 1996 1997 1996
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
NET INCOME APPLICABLE TO COMMON SHARES
Net income $236 $207 $671 $632
Less: Preferred dividend requirements -- -- -- 8
---------------- ---------------- ---------------- ----------------
Net income applicable to Common Shares $236 $207 $671 $624
================ ================ ================ ================
NET INCOME PER COMMON SHARE
Weighted average Common Shares outstanding (000) 218,107 229,668 219,570 231,363
================ ================ ================ ================
Net income applicable to Common Shares $236 $207 $671 $624
================ ================ ================ ================
Net income per Common Share $1.08 $.90 $3.06 $2.70
================ ================ ================ ================
NET INCOME PER COMMON SHARE -- PRIMARY
Weighted average Common Shares outstanding (000) 218,107 229,668 219,570 231,363
Dilutive common stock options (000)1 4,744 3,280 4,204 3,332
---------------- ---------------- ---------------- ----------------
Weighted average Common Shares and Common Share
equivalents outstanding (000) 222,851 232,948 223,774 234,695
================ ================ ================ ================
Net income applicable to Common Shares $236 $207 $671 $624
================ ================ ================ ================
Net income per Common Share $1.06 $.89 $3.00 $2.66
================ ================ ================ ================
NET INCOME PER COMMON SHARE -- FULLY DILUTED
Weighted average Common Shares outstanding (000) 218,107 229,668 219,570 231,363
Dilutive common stock options (000)1 5,114 3,940 5,145 4,305
---------------- ---------------- ---------------- ----------------
Weighted average Common Shares and Common Share
equivalents outstanding (000) 223,221 233,608 224,715 235,668
================ ================ ================ ================
Net income applicable to Common Shares $236 $207 $671 $624
================ ================ ================ ================
Net income per Common Share $1.06 $.88 $2.99 $2.65
================ ================ ================ ================
<FN>
1 Dilutive common stock options are based on the treasury stock method using
average market price in computing net income per Common Share--primary, and
the higher of period-end market price or average market price in computing
net income per Common Share--fully diluted.
</TABLE>
44
<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 ("Key")
Registration Statements of our review report, dated October 14, 1997, relating
to the unaudited consolidated interim financial statements of Key, included in
the Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.
Form S-3 No. 33-5064
Form S-3 No. 33-10634
Form S-3 No. 33-39733
Form S-3 No. 33-51652
Form S-3 No. 33-53643
Form S-3 No. 33-56881
Form S-3 No. 33-58405
Form S-3 No. 333-10577
Form S-3 No. 333-37287
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-4 No. 33-61539
Form S-4 No. 333-19151
Form S-4 No. 333-19153
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. 33-56879
Form S-8 No. 33-31569 (Post-Effective Amendment No. 1 to Form S-4)
Form S-8 No. 33-31569 (Post-Effective Amendment No. 2 to Form S-4)
Form S-8 No. 33-31569 (Post-Effective Amendment No. 3 to Form S-4)
Form S-8 No. 33-44657 (Post-Effective Amendment No. 1 to Form S-4)
Form S-8 No. 33-51717 (Post-Effective Amendment No. 1 to Form S-4)
Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not a part
of the Registration Statements prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
/s/ Ernst & Young LLP
Cleveland, Ohio
November 10, 1997
45
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,940
<INT-BEARING-DEPOSITS> 24
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0
0
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</TABLE>
