<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q/A
[] 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)
This First Amendment to the Quarterly Report on Form 10-Q for the period ended
September 30, 1997, is filed for the sole purpose of correcting an error in the
electronic submission of the Registrant's Form 10-Q filed with the Commission
on November 14, 1997, in which certain information was inadvertently omitted.
All Items included that Form 10-Q are included in this First Amendment and are
deemed to be amended.
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> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
This section of the report, including the highlights summarized below, provides
a discussion and analysis of the financial condition and results of operations
of Key for the periods presented. It should be read in conjunction with the
unaudited consolidated interim financial statements and notes thereto, presented
on pages 3 through 18.
This report contains forward-looking statements which are subject to numerous
assumptions, risks and uncertainties. Statements pertaining to future periods
are subject to uncertainty because of the possibility of changes in underlying
factors and assumptions. Actual results could differ materially from those
contained in or implied by such forward-looking statements for a variety of
factors including: sharp and/or rapid changes in interest rates; significant
changes in the economic scenario from the current anticipated scenario which
could materially change anticipated credit quality trends and the ability to
generate loans; significant delay in or inability to execute strategic
initiatives designed to grow revenues and/or control expenses; and significant
changes in accounting, tax, or regulatory practices or requirements.
Key's record earnings results for the third quarter of 1997 reflected growth in
fee revenue businesses, strong loan growth and the impact of strategic actions
taken to complete Key's transformation to a nationwide bank-based financial
services company and to implement expense control initiatives. These planned
actions, which were announced in November 1996, include the consolidation of
Key's bank subsidiaries (other than KeyBank USA) into one nationwide banking
institution (completed June 30, 1997, for all banks with the exception of
KeyBank New Hampshire), the consolidation of nearly 140 branch offices (known as
KeyCenters), and a reduction of approximately 10% of Key's employment base. At
the same time, Key also announced its plans to divest another 140 KeyCenters.
The above actions have been or will be taken with several objectives, including
that of improving the efficiency ratio (exclusive of acquisitions) to the
targeted level of 55% by the end of 1997, with further improvement thereafter.
As of September 30, 1997, Key had merged 119 of the 140 KeyCenters to be
consolidated and sold or reached agreements to sell 104 of the additional 140
KeyCenters targeted for sale. The sale of KeyBank Wyoming, Key's 28 branch
Wyoming bank subsidiary, and the sales of 13 other KeyCenters closed during the
third quarter. In addition, operations have been streamlined through a workforce
reduction of 2,645 full-time equivalent employees, representing substantially
all of the 10% reduction projected at the announcement date. As a result of
these factors and revenue growth, during the third quarter Key's efficiency
ratio improved 91 basis points to 56.75%, almost 400 basis points better than
the 60.71% for the third quarter of 1996. In connection with its efforts to form
one nationwide banking institution and related centralization efforts, Key also
undertook a comprehensive review of its real estate operations and occupancy
cost structure. As a result, during the third quarter Key recorded a $50 million
($33 million after tax) charge in connection with efforts to exit excess real
estate. The elimination of this excess capacity is expected to generate annual
cost savings of approximately $15 million.
During the first nine months of 1997, Key also continued its efforts to
reallocate resources (including those made available or generated by its
above-mentioned divestitures of KeyCenters in areas of low-growth potential) to
businesses with higher earnings potential. Specifically, during the first
quarter Key launched a new subsidiary, Key Corporate Capital Inc., to expand
corporate and specialty finance businesses on a nationwide basis. As part of
Key's Corporate Banking line of business, this new unit targets certain client
segments and geographic markets, including: media and telecommunications,
healthcare, structured finance and lease financing. In addition, Key entered
into an alliance with Standard Chartered Bank of the United Kingdom to provide
expanded international banking services to Key's clients doing business in Asia.
Business developed through the alliance presented no material exposure to loss
from October 1997 developments in Asian economies. During the third quarter, Key
entered into agreements with several preeminent insurance carriers to provide
its small business clients with access to a full array of healthcare,
commercial, and property and casualty insurance.
In the third quarter, Key increased the size and scope of its leasing business
by completing its acquisition of Leasetec, a privately held equipment leasing
company headquartered in Boulder, Colorado, which specializes in the leasing of
information technology and telecommunications equipment to large corporate
clients. Key also completed its acquisition of Champion, headquartered in
Parsippany, New Jersey, and one of the largest home equity finance companies in
the markets served by Champion.
20
<PAGE> 21
In addition to the above actions, during the first nine months of 1997
management continued to actively manage Key's balance sheet and capital.
Specific steps included the securitization and sale of home equity loans and
auto loans totaling $205 million and $671 million, respectively, and the sale of
$365 million of out-of-franchise credit card receivables. Management will
continue to explore opportunities for sales and/or other arrangements with
respect to its credit card and other portfolios throughout the remainder of
1997.
During the fourth quarter of 1996 and the second quarter of 1997, management
augmented its flexibility to continue its management of Key's capital through
the issuance of $500 million and $250 million, respectively, of tax-advantaged
capital securities. The securities issued in 1996 receive Tier I capital
treatment.
During the third quarter of 1997, there were no repurchases of Key Common Shares
under the 12,000,000 Common Shares repurchase program authorized by Key's Board
of Directors in November 1996. As a result, the total number of shares
repurchased under that program remained at 8,263,900. Under a separate
authorization, 2,477,318 Key Common Shares were repurchased during the third
quarter and reissued as part of the total 3,336,118 shares issued in the
Champion transaction. The other 858,800 shares issued in the Champion
transaction had been repurchased in the second quarter of 1997.
The preceding items are discussed in greater detail in the remainder of this
discussion and in the notes to the consolidated interim financial statements
referred to previously.
PERFORMANCE OVERVIEW
The selected financial data set forth in Figure 1 presents certain information
highlighting the financial performance of Key for each of the last five quarters
and the year-to-date periods ended September 30, 1997 and 1996. Each of the
items referred to in this performance overview and in Figure 1 is more fully
described in the following discussion or in the notes to the consolidated
interim financial statements presented on pages 7 through 18.
Net income for the third quarter of 1997 reached a record high of $236 million,
or $1.08 per Common Share, up from $207 million, or $.90 per Common Share, in
the third quarter of 1996. This represents a 20% increase in earnings per Common
Share from the year-ago quarter. In the third quarter of 1996, Key incurred a
one-time charge of $17 million ($11 million after tax) to provide for an
assessment mandated by Congress to recapitalize the Savings Association
Insurance Fund ("SAIF"). Excluding that one-time charge, earnings for the 1996
third quarter were $218 million, or $.95 per Common Share. For the first nine
months of 1997, earnings were $671 million, or $3.06 per Common Share, compared
with $632 million, or $2.70 per Common Share, for the same period last year. On
an annualized basis, the return on average common equity for the third quarter
of 1997 was 19.41%, up from 16.73% for the 1996 third quarter. The annualized
returns on average total assets were 1.34% and 1.28% for the third quarters of
1997 and 1996, respectively.
Contributing to the increase in quarterly earnings were a $19 million increase
in taxable-equivalent net interest income and a $104 million improvement in
noninterest income (including a $65 million increase in net gains from
divestitures). These positive factors were partially offset by a $53 million
rise in the provision for loan losses and a $33 million increase in noninterest
expense. Included in noninterest expense in the 1997 third quarter was a $50
million charge recorded in connection with efforts to exit excess real estate
resulting from Key's nationwide banking and related centralization efforts and
$14 million of distributions on capital securities (which more closely resemble
dividend or interest payments than overhead expense). Excluding these items and
the SAIF assessment recorded last year, noninterest expense was down $14 million
from the comparable period a year ago. The efficiency ratio, which measures the
extent to which recurring revenues are absorbed by operating expenses, improved
to 56.75% for the third quarter of 1997 compared with 57.66% and 60.71% for the
second quarter of 1997 and the third quarter of 1996, respectively. This
reflected continued progress made by Key in its restructuring efforts and
implementation of expense control initiatives.
For the first nine months of 1997, net income totaled $671 million, or $3.06 per
Common Share, up from $632 million, or $2.70 per Common Share, for the same
period last year. On an annualized basis, the return on average common equity
for the first nine months of 1997 was 18.78%, up from 16.76% for the comparable
year-ago period. The annualized returns on average total assets were 1.32% and
1.30% for the first nine months of 1997 and 1996, respectively. Affecting
comparative results were increases of $50 million in taxable-equivalent net
interest income and $138 million in noninterest income (including a $70 million
increase in net gains from divestitures). The positive impact of these factors
was moderated by a $104 million increase in the provision for loan losses and a
$41 million increase in
21
<PAGE> 22
noninterest expense. Excluding the $35 million of distributions on capital
securities recorded during the first nine months of 1997, as well as the real
estate and SAIF charges discussed above, noninterest expense was down $27
million from the first nine months of last year.
FIGURE 1 SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1997 1996 Nine months ended September 30,
--------------------------------- ------------------ -------------------------------
dollars in millions, except per share amounts Third Second First Fourth Third 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE PERIOD
Interest income $ 1,347 $ 1,295 $ 1,255 $ 1,243 $ 1,238 $ 3,897 $ 3,708
Interest expense 643 599 566 560 555 1,808 1,674
Net interest income 704 696 689 683 683 2,089 2,034
Provision for loan losses 102 75 67 57 49 244 140
Noninterest income 393 288 259 285 289 940 802
Noninterest expense 648 582 575 700 615 1,805 1,764
Income before income taxes 347 327 306 211 308 980 932
Net income 236 223 212 151 207 671 632
Net income applicable to Common Shares 236 223 212 151 207 671 624
- -------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Net income $ 1.08 $ 1.02 $ .96 $ .67 $ .90 $ 3.06 $ 2.70
Net income - fully diluted 1.06 1.00 .94 .65 .88 2.99 2.65
Cash dividends .42 .42 .42 .38 .38 1.26 1.14
Book value at period end 23.11 22.04 21.29 21.84 21.91 23.11 21.91
Market price:
High 65.44 58.44 56.38 54.25 44.38 65.44 44.38
Low 55.25 47.88 48.63 43.69 36.25 47.88 33.38
Close 63.63 55.88 48.75 50.50 44.00 63.63 44.00
Weighted average Common Shares (000) 218,107 218,973 221,670 225,562 229,668 219,570 231,363
- -------------------------------------------------------------------------------------------------------------------------------
AT PERIOD END
Loans $ 53,676 $ 51,644 $ 49,724 $ 49,235 $ 48,373 $ 53,676 $ 48,373
Earning assets 63,800 61,508 59,825 59,260 57,640 63,800 57,640
Total assets 72,077 69,672 67,893 67,621 65,356 72,077 65,356
Deposits 43,870 44,626 44,239 45,317 44,523 43,870 44,523
Long-term debt 7,567 5,182 4,774 4,213 4,664 7,567 4,664
Common shareholders' equity 5,076 4,814 4,674 4,881 4,976 5,076 4,976
Total shareholders' equity 5,076 4,814 4,674 4,881 4,976 5,076 4,976
Full-time equivalent employees 25,622 25,882 26,603 27,689 28,337 25,622 28,337
Full-service banking offices 1,088 1,130 1,161 1,205 1,218 1,088 1,218
- -------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on average total assets 1.34% 1.32% 1.30% .92% 1.28% 1.32% 1.30%
Return on average common equity 19.41 18.85 18.07 12.53 16.73 18.78 16.76
Return on average total equity 19.41 18.85 18.07 12.53 16.73 18.78 16.62
Efficiency1 56.75 57.66 58.92 60.92 60.71 57.75 60.81
Overhead2 37.76 41.02 43.71 44.89 44.40 40.81 45.66
Net interest margin (TE) 4.58 4.69 4.75 4.80 4.82 4.67 4.78
- -------------------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS AT PERIOD END
Equity to assets3 7.04% 6.91% 6.88% 7.22% 7.61% 7.04% 7.61%
Tangible equity to tangible assets3 5.46 5.67 5.58 5.88 6.20 5.46 6.20
Tier I risk-adjusted capital 6.73 7.14 7.47 7.98 7.49 6.73 7.49
Total risk-adjusted capital 11.10 11.66 12.31 13.01 12.50 11.10 12.50
Leverage 6.33 6.65 6.68 6.93 6.38 6.33 6.38
- -------------------------------------------------------------------------------------------------------------------------------
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 8.
1 Calculated as noninterest expense (excluding certain nonrecurring charges
and distributions on capital securities) divided by taxable-equivalent net
interest income plus noninterest income (excluding net securities
transactions and gains on branch sales).
2 Calculated as noninterest expense (excluding certain nonrecurring charges
and distributions on capital securities) less noninterest income (excluding
net securities transactions and gains on branch sales) divided by
taxable-equivalent net interest income.
3 Including capital securities receiving Tier I treatment, these ratios at
September 30, 1997 are 7.74% and 6.16%, respectively, at June 30, 1997, are
7.63% and 6.39%, respectively, at March 31, 1997, are 7.62% and 6.32%,
respectively and at December 31, 1996, are 7.96% and 6.63%, respectively.
TE = Taxable Equivalent
</TABLE>
22
<PAGE> 23
CASH BASIS FINANCIAL DATA
The selected financial data presented in Figure 2 presents certain information
highlighting the performance of Key for each of the last five quarters, adjusted
to exclude the amortization of goodwill and nonqualifying intangibles, and
related balances resulting from business combinations recorded by Key under the
purchase method of accounting. Had these business combinations qualified for
accounting under the pooling of interests method, no intangible assets would
have been recorded. Since the amortization of goodwill and other intangibles
does not result in a cash expense, the economic value to shareholders under
either accounting method is essentially the same. Moreover, such amortization
does not impact Key's liquidity and funds management activities. Cash basis
financial data are particularly relevant since they provide an additional basis
for measuring a company's ability to support future growth, pay dividends and
repurchase shares. They also may improve the comparability of financial results
with prior periods by removing the effect of amortization of goodwill and other
intangibles that are considered nonqualifying in regulatory capital
computations. Cash basis financial data, as defined above and presented in
Figure 2, have not been adjusted to exclude the impact of other noncash items
such as depreciation, provision for loan losses, restructuring charges, etc.
This is the only section of this report in which Key's financial results are
discussed on a cash basis.
The amortization of goodwill resulting from the third quarter 1997 acquisitions
of Leasetec and Champion is expected to reduce Key's recorded net income per
Common Share by approximately $.06 on an annual basis.
FIGURE 2. CASH BASIS SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1997 1996
---------------------------------- -----------------------
dollars in millions, except per share amounts THIRD SECOND FIRST Fourth Third
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE PERIOD
Noninterest expense $ 628 $ 563 $ 556 $ 681 $ 597
Income before income taxes 367 346 325 230 326
Net income 253 239 228 167 222
Net income applicable to Common Shares 253 239 228 167 222
- ----------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Net income $ 1.16 $ 1.09 $ 1.03 $ .74 $ .96
Net income - fully diluted 1.14 1.07 1.01 .72 .94
Weighted average Common Shares (000) 218,107 218,973 221,670 225,562 229,668
- ----------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on average total assets 1.45% 1.43% 1.41% 1.04% 1.39%
Return on average common equity 26.82 25.03 24.16 17.29 22.31
Return on average total equity 26.82 25.03 24.16 17.29 22.31
Efficiency1 54.81 55.74 56.93 58.98 58.88
- ----------------------------------------------------------------------------------------------------------------
GOODWILL AND NONQUALIFYING INTANGIBLES
Goodwill average balance $ 977 $ 803 $ 816 $ 830 $ 839
Nonqualifying intangibles average balance 106 111 116 121 126
Goodwill amortization (after tax) 14 13 13 13 12
Nonqualifying intangibles amortization (after tax) 3 3 3 3 3
- ----------------------------------------------------------------------------------------------------------------
</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 8.
1 Calculated as noninterest expense (excluding certain nonrecurring charges,
the amortization of goodwill and nonqualifying intangibles and distributions
on capital securities) divided by taxable-equivalent net interest income
plus noninterest income (excluding net securities transactions and gains on
branch sales).
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 Key. 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 statutory Federal income tax rate.
23
<PAGE> 24
The information presented in Figure 3 provides a summary of the effect on net
interest income of changes in yields/rates and average balances for the
quarterly and year-to-date periods from the same periods in the prior year.
Various components of the balance sheet and their respective yields and rates
which affect interest income and expense are illustrated in Figure 4. A more
in-depth discussion of changes in earning assets and funding sources is
presented in the Financial Condition section beginning on page 33.
For the third quarter of 1997, net interest income was $715 million, up $19
million, or 3% from the same period last year. Growth in average earning assets
(primarily loans) of 9% more than offset a 24 basis point decrease in the net
interest margin, which continued to decline in the third quarter of 1997 and was
11 basis points lower than the prior quarter. The net interest margin is
computed by dividing annualized taxable-equivalent net interest income by
average earning assets.
Average earning assets for the third quarter totaled $62.3 billion, which was
$4.9 billion higher than the third quarter 1996 level and $2.0 billion, or an
annualized 13%, above the second quarter of 1997. The growth from the year-ago
quarter reflected a $4.7 billion, or 12%, increase in targeted loans (such as
commercial, home equity, credit card and consumer installment loans),
accompanied by a stable residential mortgage portfolio. This marked the fourth
consecutive quarter of earning asset growth following a period of planned
decreases in both residential mortgage loans and securities. Key's strategy with
respect to its loan portfolio is discussed in greater detail in the Loan section
beginning on page 33.
The decrease in the net interest margin as compared with the year-ago quarter
was due primarily to the growth of targeted loans at interest rate spreads lower
than the third quarter 1996 net interest margin. This reflected increased
reliance on money market funding of incremental loan growth, in part due to the
reduction in core deposits resulting from branch divestitures. The negative
impact of this factor was partially offset by the issuance of $500 million and
$250 million of capital securities in the fourth quarter of 1996 and second
quarter of 1997, respectively. The distributions related to these tax-advantaged
capital securities are classified as noninterest expense in accordance with
guidelines established by the Securities and Exchange Commission.
Key uses portfolio interest rate swaps and interest rate caps and floors (as
defined in Note 10, Financial Instruments with Off-Balance Sheet Risk, beginning
on page 15) in the management of its interest rate sensitivity position. The
notional amount of portfolio interest rate swaps decreased to $11.3 billion at
September 30, 1997, from $12.3 billion at year-end 1996. Over the same period,
the notional amount of interest rate caps and floors rose to $4.3 billion at
September 30 from $1.4 billion at December 31, 1996. 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 contributed $12 million and
8 basis points to net interest income and the net interest margin, respectively.
For the same period last year, these instruments increased net interest income
by $19 million and the net interest margin by 13 basis points. The manner in
which interest rate swaps and caps and floors are used in Key's overall program
of asset and liability management is described in the following Asset and
Liability Management section.
24
<PAGE> 25
FIGURE 3 COMPONENTS OF NET INTEREST INCOME CHANGES
<TABLE>
<CAPTION>
From Three Months Ended September 30, 1996 From Nine Months Ended September 30, 1996
To Three Months Ended September 30, 1997 To Nine Months Ended September 30, 1997
------------------------------------------ -----------------------------------------
Average Yield/ Net Average Yield/ Net
in millions Volume Rate Change Volume Rate Change
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 104 $ (1) $ 103 $ 175 $ (7) $ 168
Taxable investment securities -- (1) (1) -- (2) (2)
Tax-exempt investment securities (6) (1) (7) (8) (2) (10)
Securities available for sale 4 3 7 10 14 24
Short-term investments 5 -- 5 3 1 4
- ------------------------------------------------------------------------------------------------------------------------------
Total interest income (TE) 107 -- 107 180 4 184
INTEREST EXPENSE
Money market deposit accounts (1) (14) (15) 20 (51) (31)
Savings deposits (9) 13 4 (28) 41 13
NOW accounts (1) -- (1) (17) 4 (13)
Certificates of deposit ($100,000 or more) -- 1 1 2 (7) (5)
Other time deposits 1 7 8 (18) 10 (8)
Deposits in foreign offices 12 1 13 33 1 34
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 2 8 10 (8) (2) (10)
Federal funds purchased and securities sold
under repurchase agreements 16 3 19 40 5 45
Other short-term borrowings 19 (1) 18 55 (5) 50
Long-term debt 40 1 41 55 (6) 49
- ------------------------------------------------------------------------------------------------------------------------------
Total interest expense 77 11 88 142 (8) 134
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income (TE) $ 30 $(11) $ 19 $ 38 $ 12 $ 50
===== ==== ===== ===== ==== =====
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
TE = Taxable Equivalent
25
<PAGE> 26
FIGURE 4 AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND YIELD/RATES
<TABLE>
<CAPTION>
THIRD QUARTER 1997 SECOND QUARTER 1997
-------------------------------------- --------------------------------------------
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 $13,101 $ 286 8.66% $12,844 $ 282 8.81%
Real estate-commercial mortgage 7,088 165 9.24 7,121 165 9.29
Real estate-construction 2,015 49 9.65 1,853 45 9.74
Commercial lease financing 3,820 70 7.27 2,632 42 6.40
- ------------------------------------------------------------------------------------------------------------------------------------
Total commercial loans 26,024 570 8.69 24,450 534 8.76
Real estate-residential 6,161 131 8.44 6,153 127 8.28
Credit card 1,788 68 15.09 1,781 66 14.86
Other consumer 15,926 372 9.27 15,389 356 9.28
- ------------------------------------------------------------------------------------------------------------------------------------
Total consumer loans 23,875 571 9.49 23,323 549 9.44
Loans held for sale 2,809 54 7.63 2,600 50 7.71
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans 52,708 1,195 8.99 50,373 1,133 9.02
Taxable investment securities 270 3 5.88 252 3 5.79
Tax-exempt investment securities 1 1,143 22 7.64 1,349 27 8.03
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 1,413 25 7.02 1,601 30 7.52
Securities available for sale 1, 3 7,399 127 6.86 7,822 136 7.05
Interest-bearing deposits with banks 8 -- 3.94 17 -- 3.66
Federal funds sold and securities
purchased under resale agreements 535 6 4.45 337 5 5.95
Trading account assets 264 5 7.51 143 2 5.61
- ------------------------------------------------------------------------------------------------------------------------------------
Total short-term investments 807 11 5.41 497 7 5.65
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets 62,327 1,358 8.64 60,293 1,306 8.69
Allowance for loan losses (873) (866)
Other assets 8,658 8,351
- ------------------------------------------------------------------------------------------------------------------------------------
$70,112 $67,778
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Money market deposit accounts $10,714 67 2.48 $10,984 66 2.41
Savings deposits 4,161 37 3.53 4,519 42 3.73
NOW accounts 1,547 8 2.05 1,644 9 2.20
Certificates of deposit ($100,000 or more) 3,166 46 5.76 3,341 47 5.64
Other time deposits 13,389 183 5.42 13,584 181 5.34
Deposits in foreign offices 2,065 29 5.57 2,361 33 5.61
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 35,042 370 4.19 36,433 378 4.16
Federal funds purchased and securities
sold under repurchase agreements 6,939 91 5.20 6,461 84 5.21
Bank notes and other short-term borrowings 5,001 73 5.79 4,350 64 5.90
Long-term debt 4 6,879 109 6.33 4,772 73 6.20
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 53,861 643 4.74 52,016 599 4.62
Noninterest-bearing deposits 8,551 8,432
Other liabilities 2,125 1,998
Capital securities 750 588
Preferred stock -- --
Common shareholders' equity 4,825 4,744
- ------------------------------------------------------------------------------------------------------------------------------------
$70,112 $67,778
======== =======
Interest rate spread 3.90 4.07
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income (TE) and net
interest margin (TE) $ 715 4.58% $ 707 4.69%
======= ===== ======= =====
Taxable-equivalent adjustment (1) $11 $11
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
1 Interest income on tax-exempt securities and loans has been adjusted to a
taxable-equivalent basis using the statutory Federal income tax rate of 35%.
2 For purposes of these computations, nonaccrual loans are included in the
average loan balances.
3 Yield is calculated on the basis of amortized cost.
4 Rate calculation excludes ESOP debt.
TE = Taxable Equivalent
</TABLE>
26
<PAGE> 27
<TABLE>
<CAPTION>
FIRST QUARTER 1997 Fourth Quarter 1996 Third Quarter 1996
- ------------------------------------------ ------------------------------------- -----------------------------------------------
AVERAGE YIELD/ Average Yield/ Average Yield/
BALANCE INTEREST RATE Balance Interest Rate Balance Interest Rate
- ------------------------------------------ ------------------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$12,248 $ 268 8.87 % $12,027 $ 270 8.93 % $11,934 $ 270 9.00 %
7,130 163 9.27 6,978 159 9.06 7,056 162 9.13
1,693 40 9.58 1,778 44 9.84 1,671 43 10.24
2,623 39 6.03 2,514 40 6.33 2,413 37 6.10
- -----------------------------------------------------------------------------------------------------------------------------------
23,694 510 8.73 23,297 513 8.76 23,074 512 8.83
6,196 126 8.25 6,312 131 8.26 6,481 136 8.35
1,786 67 15.21 1,712 63 14.64 1,707 62 14.45
15,070 346 9.31 14,884 346 9.25 14,293 331 9.21
- -----------------------------------------------------------------------------------------------------------------------------------
23,052 539 9.48 22,908 540 9.38 22,481 529 9.36
2,469 48 7.88 2,114 41 7.72 2,548 51 7.96
- -----------------------------------------------------------------------------------------------------------------------------------
49,215 1,097 9.04 48,319 1,094 9.01 48,103 1,092 9.03
222 3 5.48 206 3 5.79 251 4 6.34
1,395 27 7.85 1,409 28 7.91 1,458 29 7.91
- -----------------------------------------------------------------------------------------------------------------------------------
1,617 30 7.52 1,615 31 7.64 1,709 33 7.68
7,800 134 6.99 7,271 121 6.62 7,152 120 6.75
17 -- 4.11 18 1 4.49 18 -- 3.57
299 4 5.43 600 8 5.30 385 5 5.17
95 1 5.63 60 -- 6.63 60 1 5.21
- -----------------------------------------------------------------------------------------------------------------------------------
411 5 5.04 678 9 5.28 463 6 5.16
- -----------------------------------------------------------------------------------------------------------------------------------
59,043 1,266 8.70 57,883 1,255 8.63 57,427 1,251 8.67
(868) (866) (870)
8,179 8,046 7,923
- -----------------------------------------------------------------------------------------------------------------------------------
$66,354 $65,063 $64,480
======== ======== =======
$11,008 65 2.39 $10,979 66 2.39 $10,851 82 3.01
4,819 43 3.62 5,110 45 3.50 5,463 33 2.40
1,682 9 2.17 1,702 9 2.10 1,733 9 2.07
3,699 50 5.48 3,448 51 5.88 3,133 45 5.71
13,037 171 5.32 13,497 177 5.22 13,338 175 5.22
1,150 15 5.31 793 10 5.02 1,189 16 5.35
- -----------------------------------------------------------------------------------------------------------------------------------
35,395 353 4.04 35,529 358 4.01 35,707 360 4.01
7,028 88 5.08 6,087 77 5.03 5,694 72 5.03
3,912 57 5.91 3,568 53 5.91 3,669 55 5.96
4,486 68 6.22 4,567 72 6.27 4,359 68 6.28
- -----------------------------------------------------------------------------------------------------------------------------------
50,821 566 4.52 49,751 560 4.48 49,429 555 4.47
8,408 8,615 8,467
1,867 1,793 1,661
500 111 --
-- -- --
4,758 4,793 4,923
- -----------------------------------------------------------------------------------------------------------------------------------
$66,354 $65,063 $64,480
======== ======== =======
4.18 4.15 4.20
- -----------------------------------------------------------------------------------------------------------------------------------
$ 700 4.75 % $ 695 4.80 % $ 696 4.82 %
======= ==== ======= ==== ======= ====
$11 $12 $13
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 28
ASSET AND LIABILITY MANAGEMENT
ASSET/LIABILITY MANAGEMENT COMMITTEES
Key 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 its Asset/Liability Management Policy Committee
("ALCO"). The ALCO has the responsibility for approving the asset/liability
management policies of Key, overseeing the formulation and implementation of
strategies to improve balance sheet positioning and/or earnings, and reviewing
the interest rate sensitivity positions of Key and each of its affiliate banks.
SHORT-TERM INTEREST RATE EXPOSURE
The primary tool utilized by management to measure and manage interest rate
exposure is a net interest income 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 various pro forma 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 rates, balance sheet management strategies
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 a precise calculation
of exposure. The 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 a 2% impact on net interest income from what net interest
income would have been if interest rates did not change. As shown in Figure 5,
Key has been operating well within these guidelines.
FIGURE 5 NET INTEREST INCOME AT RISK TO CHANGES IN INTEREST RATES
[GRAPHIC]
<TABLE>
<CAPTION>
FIGURE 5. NET INTEREST INCOME AT RISK TO CHANGES IN INTEREST RATES
ESTIMATED CHANGE IN NET INTEREST INCOME
<S> <C> <C>
Rise Decline
Dec-95 -0.0124 0.0030
Mar-96 -0.0134 0.0089
Jun-96 -0.0113 0.0092
Sep-96 -0.0123 0.0060
Dec-96 -0.0128 0.0071
Mar-97 -0.0128 0.0090
Jun-97 -0.0113 0.0050
Sep-97 -0.0091 0.0024
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
-3.0%
Dec-95 Mar-96 Jun-96 Sep-96 Dec-96 Mar-97 Jun-97 Sep-97
GRADUAL 200 BASIS POINT DCREASE IN RATES OVER NEXT 12 MONTHS
GRADUAL 200 BASIS POINT INCREASE IN RATES OVER NEXT 12 MONTHS
</TABLE>
LONG-TERM INTEREST RATE EXPOSURE
Short-term interest rate analysis is complemented by an economic value of equity
model. This model provides the added benefit of measuring the exposure to
interest rate changes outside the one- to two-year time frame measured by the
simulation model. The economic value of Key's equity is determined by modeling
the net present value of future cash flows for asset, liability, and off-balance
sheet positions based on the implied forward yield curve. Economic value
analysis has several limitations including: the economic values of asset,
liability, and off-balance sheet positions do not represent the true fair values
of the positions, since they do not consider factors such as credit risk and
liquidity; indeterminate maturity assets and liabilities require that estimated
cash flows be developed; the future structure of the balance sheet derived from
ongoing loan and deposit activity by Key's core businesses is not factored into
present value calculations; and the analysis requires assumptions about events
that span an even longer time frame than that used in the simulation model. The
ALCO guidelines provide that an immediate 200 basis point increase or decrease
in interest rates should not result in more than a 1.75% change in the ratio of
base case economic value of equity to base case economic value of assets. Key
has been operating well within these guidelines.
28
<PAGE> 29
RECENT MANAGEMENT ACTIONS
During 1996, a number of actions were taken in connection with the execution of
asset/liability management strategies designed to improve liquidity and reduce
longer-term interest rate exposure. These actions included the sale of
residential mortgage loans totaling $500 million and the securitization and sale
of non-prime auto loans totaling $212 million. Other actions taken during 1996
included the continued run-off of lower-yielding securities and residential
mortgage loans. During the first nine months of 1997, Key securitized and sold
$205 million of home equity loans and an additional $671 million of auto loans.
In addition, $365 million of out-of-franchise credit card receivables were sold.
Management will continue to evaluate strategies to securitize and/or sell loans,
taking into account the strategies' impacts on liquidity, capital and earnings.
The above actions, along with the issuance of tax-advantaged capital securities
of $500 million during the 1996 fourth quarter and $250 million in the second
quarter of 1997, provided additional capital management flexibility. This was
reflected in the repurchase of 14,620,000 and 8,980,018 Common Shares during
1996 and the first nine months of 1997, respectively.
As was the case throughout 1996, Key continued to utilize both portfolio
interest rate swaps, which are more fully discussed below, and interest rate
caps and floors to manage its interest rate risk. In accordance with the
previously described branch divestitures, during the month of March and in early
April strategies were executed to minimize the interest rate risk associated
with the anticipated loss of fixed rate deposits. These strategies included the
issuance of $250 million of fixed rate bank notes and the execution of $650
million of forward-starting interest rate caps and $100 million of pay fixed
swaps.
PORTFOLIO INTEREST RATE SWAP CONTRACTS
In addition to Key's securities portfolios and debt issuances, 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 decision to use portfolio interest rate swaps versus
on-balance sheet securities or debt to manage interest rate risk depends on
various factors, including the mix and cost of funding sources, liquidity, and
capital requirements. Further details pertaining to Key's swap portfolio are
included in Note 10, Financial Instruments with Off-Balance Sheet Risk,
beginning on page 15.
As shown in Note 10, the estimated fair value of Key's portfolio interest rate
swaps increased $38 million during the first nine months of 1997 from a fair
value of $8 million at December 31, 1996. The increase in fair value over the
past nine months reflected the financial markets' expectations, as measured by
the forward yield curve, for a future decrease in interest rates and the fact
that Key's swap portfolio is primarily in a received fixed position. Swaps with
a notional amount of $220 million were terminated during the first nine months
of 1997, resulting in no deferred gain or loss. A summary of Key's deferred swap
gains and losses at September 30, 1997, is also presented in Note 10. Each swap
termination was made in response to a unique set of circumstances and for
various reasons; however, the decision to terminate a swap contract is
integrated strategically with asset and liability management and other
appropriate processes. Portfolio swap activity for the nine-month period ended
September 30, 1997, is summarized in Figure 6.
FIGURE 6 PORTFOLIO SWAP ACTIVITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Receive Fixed
--------------------------------- Total
Indexed Pay Fixed- Basis Portfolio
in millions Amortizing Conventional Conventional Swaps Swaps
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $5,078 $3,505 $3,312 $400 $12,295
Additions -- 300 1,428 200 1,928
Maturities -- 55 1,280 400 1,735
Terminations 20 -- 200 -- 220
Amortization 993 -- -- -- 993
- ------------------------------------------------------------------------------------------------------------------------
Balance at end of period $4,065 $3,750 $3,260 $200 $11,275
====== ====== ====== ==== =======
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
A summary of the notional and fair values of portfolio swaps by interest rate
management strategy is presented in Figure 7. The fair value at any given date
represents the estimated income (if positive) or cost (if negative) that 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
29
<PAGE> 30
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 from the asset or liability being managed.
FIGURE 7 PORTFOLIO SWAPS BY INTEREST RATE STRATEGY
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 December 31, 1996 September 30, 1996
------------------------ --------------------------- -----------------------
NOTIONAL FAIR Notional Fair Notional Fair
in millions AMOUNT VALUE Amount Value Amount Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Convert variable rate loans to fixed $ 5,430 $ 1 $ 6,443 $(20) $ 6,688 $(80)
Convert fixed rate loans to variable 180 (1) -- -- -- --
Convert variable rate deposits and short-term
borrowings to fixed 2,480 (3) 3,082 (4) 2,033 (2)
Convert variable rate long-term debt to fixed 600 (2) 230 (1) 280 (1)
Convert fixed rate long-term debt to variable 2,385 51 2,140 33 2,149 (2)
Basis swaps 200 -- 400 -- 400 --
- -----------------------------------------------------------------------------------------------------------------------------------
Total portfolio swaps $11,275 $46 $12,295 $ 8 $11,550 $(85)
======== ==== ======== ======= ======== =====
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The expected average maturities of the portfolio swaps at September 30, 1997,
are summarized in Figure 8.
FIGURE 8 EXPECTED AVERAGE MATURITIES OF PORTFOLIO SWAPS AT SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Receive Fixed
---------------------------------- Total
Indexed Pay Fixed- Basis Portfolio
in millions Amortizing Conventional Conventional Swaps Swaps
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Due in one year or less $ 853 $ 512 $1,550 $200 $ 3,115
Due after one through five years 3,123 305 1,710 -- 5,138
Due after five through ten years 89 2,698 -- -- 2,787
Due after ten years -- 235 -- -- 235
- ---------------------------------------------------------------------------------------------------------------------------
Total portfolio swaps $4,065 $3,750 $3,260 $200 $11,275
======= ======= ======= ===== =======
- ---------------------------------------------------------------------------------------------------------------------------
</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. Futures contracts are commitments to either purchase or sell designated
financial instruments at future dates for specific prices. Key had caps and
floors with a notional amount and fair value of $4.3 billion and $17 million,
respectively, at September 30, 1997. There were no futures contracts outstanding
at the same date.
In June 1996, the FASB issued an Exposure Draft of a proposed SFAS, "Accounting
for Derivatives and Similar Financial Instruments and for Hedging Activities."
If adopted in its present form, an effect of this SFAS would be to disqualify
the use of hedge accounting for indexed amortizing swaps currently accounted for
by Key as hedging instruments and, therefore, likely alter Key's use of such
instruments in the future. It is not currently practicable to estimate the
potential effects of any final standard, which may differ from its present form.
CUSTOMER INTEREST RATE SWAP CONTRACTS
While not directly related to asset and liability management, in addition to
portfolio swaps, Key has entered into interest rate swap contracts to
accommodate the needs of its customers, typically commercial loan customers, and
other positions with third parties that are intended to mitigate the interest
rate risk of the customer positions. Adjustments to the fair values of such
swaps are included in other income on the income statement. Further information
pertaining to these contracts, as well as caps and floors, and futures contracts
used for trading purposes is included in Note 10, Financial Instruments with
Off-Balance Sheet Risk, beginning on page 15.
30
<PAGE> 31
NONINTEREST INCOME
As shown in Figure 9, noninterest income for the 1997 third quarter totaled $393
million, up $104 million, or 36%, from the same period last year. Included in
third quarter results were net gains of $76 million ($79 million in branch
divestiture gains and a $3 million loss on the sale of Key's out-of-franchise
credit card portfolio) in 1997 and an $11 million gain on the sale of a credit
card portfolio in 1996. Excluding these items, noninterest income rose $39
million, or 14%, from last year's third quarter. The improvement over the prior
year reflected growth across almost all major categories, including increases in
trust and asset management income and corporate owned life insurance (both up $5
million) and insurance and brokerage income (up $4 million). Additional detail
pertaining to the composition of trust and asset management income is presented
in Figure 10. Excluding the branch divestiture gains and credit card
transactions, other noninterest income was up $24 million, reflecting a $12
million increase in investment banking income and a $6 million increase in ATM
surcharge fees. Investment banking income consists of trading profits derived
from capital markets activities (including derivatives and foreign exchange
fees), corporate finance fees, institutional brokerage commissions and gains
recognized from mezzanine and equity capital investments.
The growth in income contributed by the above categories was partially offset by
a $3 million decrease in loan securitization income, due largely to a reduced
volume of loan securitizations in the 1997 third quarter and the impact of the
accounting change brought about by the January 1, 1997, adoption of SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." This new accounting standard served to reduce
loan securitization income in the third quarter by reclassifying a portion of
such revenue to interest income and by deferring an additional portion which is
expected to be recognized as interest income over the life of the respective
securitizations. SFAS No. 125 is discussed in greater detail in Note 1, Summary
of Significant Accounting Policies, in Key's 1996 Annual Report. Additional
information pertaining to the type and volume of securitized loans which are
either administered or serviced by Key and not recorded on its balance sheet is
included in the Loans section beginning on page 33.
For the first nine months of 1997, noninterest income totaled $940 million, up
$138 million, or 17%, from the comparable 1996 period. Included in 1997 results
were $89 million in branch divestiture gains. For the same period last year,
results included an $11 million gain from the sale of a credit card portfolio
and an $8 million gain from the sale of a Florida savings bank. Excluding these
items, noninterest income was up $68 million, or 9%, from the prior year. As
shown in Figure 9, the growth from the prior year came principally from higher
levels of income from corporate owned life insurance (up $18 million), trust and
asset management income (up $14 million), insurance and brokerage income (up $12
million) and other income (up $42 million). The $26 million decrease in loan
securitization income relative to last year was due primarily to the factors
described in the preceding paragraph.
The $42 million increase in other income included a $23 million increase in
investment banking income and a $15 million increase in ATM surcharge fees. The
positive impact of these items was offset in part by a $16 million decline in
mortgage banking income, reflecting the 1996 transition to a telephone based
method of processing loan originations.
FIGURE 9 NONINTEREST INCOME
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30, Change September 30, Change
----------------- ----------------------- -------------------- ----------------------
dollars in millions 1997 1996 Amount Percent 1997 1996 Amount Percent
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Service charges on deposit accounts $ 77 $ 74 $ 3 4.1 % $222 $218 $ 4 1.8 %
Trust and asset management income 66 61 5 8.2 194 180 14 7.8
Credit card fees 25 24 1 4.2 73 68 5 7.4
Insurance and brokerage income 22 18 4 22.2 64 52 12 23.1
Corporate owned life insurance 20 15 5 33.3 60 42 18 42.9
Loan securitization income 15 18 (3) (16.7) 19 45 (26) (57.8)
Net securities gains -- -- -- -- -- 1 (1) (100.0)
Other income:
Investment banking income 38 26 12 46.2 77 54 23 42.6
Letter of credit fees 8 4 4 100.0 17 11 6 54.5
Mortgage banking income -- 6 (6) (100.0) 4 20 (16) (80.0)
Miscellaneous income 122 43 79 183.7 210 111 99 89.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total other income 168 79 89 112.7 308 196 112 57.1
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest income $393 $289 $ 104 36.0 % $940 $802 $ 138 17.2 %
==== ==== ===== ==== ==== =====
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE> 32
FIGURE 10 TRUST AND ASSET MANAGEMENT INCOME
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, Change September 30, Change
------------------ ----------------- ----------------- --------------------
dollars in millions 1997 1996 Amount Percent 1997 1996 Amount Percent
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Personal asset management and
custody fees $ 37 $36 $ 1 2.8 % $ 106 $107 $ (1) (0.9)%
Institutional asset management and
custody fees 18 17 1 5.9 53 47 6 12.8
Bond services 1 3 (2) (66.7) 5 10 (5) (50.0)
All other fees 10 5 5 (100.0) 30 16 14 87.5
- ----------------------------------------------------------------------------------------------------------------
Total trust and asset
management income $ 66 $61 $ 5 8.2 % $ 194 $180 $ 14 7.8 %
==== === === ===== ==== ====
- ----------------------------------------------------------------------------------------------------------------
AT SEPTEMBER 30,
dollars in billions
- --------------------------------------------------------------------------
Discretionary $ 49 $49 -- --
Non-discretionary 53 44 $ 9 20.5 %
- --------------------------------------------------------------------------
Total trust assets $102 $93 $ 9 9.7 %
==== ==== ===
- --------------------------------------------------------------------------
</TABLE>
NONINTEREST EXPENSE
As shown in Figure 11, noninterest expense for the third quarter of 1997 totaled
$648 million compared with $615 million for the third quarter of 1996. Included
in third quarter 1997 expense was a $50 million charge 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, as well as $14 million of distributions accrued on capital securities
(tax-advantaged preferred securities) issued by Key during the second quarter of
1997 and the fourth quarter of last year. These securities are more fully
described in Note 8, Capital Securities, beginning on page 14. In the prior
year, third quarter results included a one-time charge of $17 million to provide
for an assessment mandated by legislation passed by Congress on September 30,
1996, to recapitalize the SAIF. Excluding the above items, noninterest expense
was $14 million, or 2%, below the year-ago quarter. This improvement was due in
large part to the progress made with respect to the restructuring efforts
announced last November which center around the formation of a single nationwide
community bank (completed June 30, 1997, for all banks with the exception of
KeyBank New Hampshire), as well as the implementation of expense control
initiatives. Further information pertaining to specific actions taken in
connection with the restructuring and expense control initiatives is included in
the Introduction beginning on page 20.
The $14 million reduction in core noninterest expense relative to the third
quarter of last year was attributable primarily to decreases of $8 million in
both marketing expense and professional fees. These improvements were offset in
part by the impact of the Leasetec and Champion acquisitions and incentive
accruals related to various investment banking activities. Also included in
noninterest expense for the third quarter of 1997 was $4 million of expense
incurred in connection with efforts being undertaken by Key to modify computer
information systems to be year 2000 compliant (properly read date-sensitive
information when the calendar year changes to 2000). As of September 30, 1997,
Key had incurred and recognized approximately $10 million of the estimated $40
million of expense that it expects to incur to complete this project by the end
of 1998.
Noninterest expense totaled $1.8 billion for the first nine months of 1997, up
$41 million, or 2%, from the same period last year. Excluding the real estate
disposition charge and $35 million of distributions accrued on capital
securities during 1997, and the one-time SAIF assessment in 1996, noninterest
expense was down $27 million, or 2%, from the comparable year-ago period. This
improvement reflected reductions in personnel expense and professional fees of
$17 million and $13 million, respectively. Reduction in staff was a major reason
for the decrease in personnel costs, as full-time equivalent employees totaled
25,622 at September 30, 1997, down from 28,337 at September 30, 1996. This
reflected the impact of Key's restructuring and expense control initiatives
(including branch mergers). Expenses incurred to become year 2000 compliant
totaled $9 million for the first nine months of 1997.
The efficiency ratio, which provides a measure of the extent to which recurring
revenues are used to pay operating expenses, improved to 56.75% for the third
quarter, from 57.66% in the previous quarter and 60.71% for the third quarter of
1996. The continued improvement during the third quarter of 1997 reflects the
increasing benefits and effectiveness of Key's expense control strategies and
growth in revenues.
32
<PAGE> 33
FIGURE 11 NONINTEREST EXPENSE
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30, Change September 30, Change
------------------ -------------------- ------------------- ------------------
dollars in millions 1997 1996 Amount Percent 1997 1996 Amount Percent
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Personnel $299 $300 $(1) (.3) % $ 872 $ 889 $(17) (1.9) %
Net occupancy 54 55 (1) (1.8) 164 163 1 .6
Equipment 44 41 3 7.3 131 119 12 10.1
Amortization of intangibles 23 21 2 9.5 65 65 -- --
Professional fees 10 18 (8) (44.4) 34 47 (13) (27.7)
Marketing 22 30 (8) (26.7) 65 68 (3) (4.4)
Other expense:
Distributions on capital securities 14 -- 14 N/M 35 -- 35 N/M
Equity and gross receipts based taxes 10 8 2 25.0 28 27 1 3.7
OREO expense, net1 (3) 2 (5) N/M (1) 3 (4) N/M
FDIC insurance assessments 1 20 (19) (95.0) 4 25 (21) (84.0)
Miscellaneous 174 120 54 45.0 408 358 50 14.0
- ---------------------------------------------------------------------------------------------------------------------------------
Total other expense 196 150 46 30.7 474 413 61 14.8
- ---------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense $648 $615 $33 5.4 % $1,805 $1,764 $41 2.3 %
===== ===== ==== ====== ====== ===
Full-time equivalent employees at period end 25,622 28,337 25,622 28,337
Efficiency ratio2 56.75 % 60.71 % 57.75 % 60.71 %
Overhead ratio3 37.76 44.40 40.81 45.66
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
1 OREO expense is net of income of $1 million for both the third quarter of
1997 and 1996, respectively.
2 Calculated as noninterest expense (excluding certain nonrecurring charges
and distributions on capital securities) divided by taxable-equivalent net
interest income plus noninterest income (excluding net securities
transactions and gains on branch sales).
3 Calculated as noninterest expense (excluding certain nonrecurring charges
and distributions on capital securities) less noninterest income (excluding
net securities transactions and gains on branch sales) divided by
taxable-equivalent net interest income.
N/M = Not Meaningful
</TABLE>
INCOME TAXES
The provision for income taxes was $111 million for the three-month period ended
September 30, 1997, up from $101 million for the same period in 1996. The
effective tax rate (provision for income taxes as a percentage of income before
income taxes) for the 1997 third quarter was 32.0% compared with 32.8% for the
third quarter of 1996. For the first nine months of 1997, the provision for
income taxes was $309 million compared with $300 million for the first nine
months of last year. The effective tax rate for these periods was 31.5% and
32.2%, respectively. Compared with the prior year, the lower effective income
tax rate for both the quarterly and year-to-date periods was primarily
attributable to increases in income from corporate owned life insurance and
credits associated with investments in low-income housing projects. The
effective income tax rate remains below the statutory Federal rate of 35% due
primarily to continued investment in tax-advantaged assets (such as tax-exempt
securities and corporate owned life insurance) and the recognition of credits
associated with investments in low-income housing projects.
FINANCIAL CONDITION
LOANS
At September 30, 1997, total loans outstanding were $53.7 billion, up from $49.2
billion at December 31, 1996, and $48.4 billion at September 30, 1996. 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 11.
The $5.3 billion, or 11%, increase in loans outstanding from the September 30,
1996, level was due primarily to internal growth, but also included the net
impact of acquisitions, sales and divestitures. During the third quarter of
1997, Key completed its acquisitions of Leasetec and Champion which added total
loans outstanding of approximately $1.0 billion and $225 million, respectively.
The sales and divestitures which occurred over the past year included the impact
of the planned branch divestitures, as well as Key's continued strategy of
securitizing and/or selling student loans, auto loans and other loans which do
not meet certain return on equity, credit or other internal standards. For
example, Key generally sells or securitizes student loans when a borrower enters
repayment status. A summary of the loans sold and divested during 1997 and 1996
is presented in Figure 12. In addition to the branch divestitures, activity
since September 30, 1996, included the sale of $586 million of student loans (of
which $403 million was associated with securitizations), the sale of auto loans
totaling $742 million and the sale of $205 million of home equity loans. All of
the auto and home equity sales were associated with securitizations. Another
factor moderating the increase in total loans over the past year was the sale of
$365 million of out-of-franchise credit card receivables. Management will
continue to explore opportunities for sales and/or other arrangements with
respect to its credit card and other portfolios over the remainder of 1997.
33
<PAGE> 34
Excluding the net impact of acquisitions, sales and divestitures, loan
portfolios targeted for growth (which exclude one-to-four family mortgages and
loans held for sale) increased $5.5 billion, or 14%, since September 30, 1996,
and were up $1.5 billion, or an annualized 14%, from the prior quarter. Over the
past 12 months, the largest improvement came from commercial loans which
contributed $2.5 billion to the increase, due primarily to higher levels of
commercial, financial and agricultural loans (up $1.8 billion) and real
estate-construction loans (up $341 million). Additionally, consumer loans rose
by $2.9 billion, and included increases of $1.1 billion in home equity loans and
$172 million in credit card receivables.
FIGURE 12 LOANS SOLD AND DIVESTED
<TABLE>
<CAPTION>
Loans Sold
------------------------------------------------------------------------
Home Equity Mortgage
Student Loans Loans Held Loans Held Credit Card Loans
in millions Auto Loans Held for Sale for Sale for Sale Receivables Divested Total
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996
- -------------------
First quarter $ 38 $ 44 -- $500 -- -- $ 582
Second quarter 47 99 -- -- -- $762 1 908
Third quarter 56 464 -- -- $101 -- 621
Fourth quarter 71 403 -- -- -- -- 474
- ----------------------------------------------------------------------------------------------------------------------
Total $212 $1,010 -- $500 $101 $762 $2,585
==== ====== ==== ==== ==== ======
1997
- -------------------
First quarter $456 $31 -- -- $41 -- $ 528
Second quarter 103 52 -- -- -- -- 155
Third quarter 112 100 $205 -- 324 $491 2 1,232
- ----------------------------------------------------------------------------------------------------------------------
Total $671 $183 $205 -- $365 $491 $1,915
==== ==== ==== ==== ==== ======
- ----------------------------------------------------------------------------------------------------------------------
<FN>
1 Residential mortgage loans divested as part of the SFF transaction.
2 Branch divestitures and the sale of KeyBank Wyoming.
</TABLE>
The $4.4 billion increase in loans from the December 31, 1996, level reflected
strong growth in targeted loan portfolios. The aggregate annualized growth rate
of average outstanding balances in these portfolios was 20%, 11% and 7% for the
third, second and first quarters of 1997, respectively. Excluding the net impact
of acquisitions, sales and divestitures, targeted loans rose $4.0 billion due
primarily to higher levels of commercial loans (up $2.1 billion, including $1.6
billion of commercial, financial and agricultural loans) and consumer loans (up
$2.0 billion, including $623 million of home equity loans). At September 30,
1997, targeted loans comprised 83% of total loans and 62% of total assets
compared with 83% of total loans and 60% of total assets at December 31, 1996.
Shown in Figure 13 are loans which have been securitized and sold and are either
administered or serviced by Key, but not recorded on its balance sheet. Income
recognized in connection with such transactions is derived from two sources.
Noninterest income earned from servicing or administering the loans is recorded
as loan securitization income, while income earned on assets subject to
prepayment, recorded in connection with securitizations and accounted for like
investments in interest-only strips, is recorded as interest income on
securities available for sale.
34
<PAGE> 35
The increase from December 31, 1996, to September 30, 1997, in loans shown in
Figure 13 is due primarily to the acquisition of Champion.
FIGURE 13 LOANS SECURITIZED/SOLD AND ADMINISTERED OR SERVICED
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31, September 30,
in millions 1997 1996 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Student loans $1,908 $2,089 $1,778
Auto loans 847 386 375
Home equity loans 869 -- --
- ------------------------------------------------------------------------------------------------
Total $3,624 $2,475 $2,153
====== ====== ======
- ------------------------------------------------------------------------------------------------
</TABLE>
SECURITIES
At September 30, 1997, the securities portfolio totaled $8.9 billion, consisting
of $7.6 billion of securities available for sale and $1.3 billion of investment
securities. This compares with a total portfolio of $9.3 billion, comprised of
$7.7 billion of securities available for sale and $1.6 billion of investment
securities, at December 31, 1996. The composition of the two securities
portfolios by type of security, as of each of these respective dates, is
presented in Note 3, Securities Available for Sale, and Note 4, Investment
Securities, presented on pages 9 and 10, respectively. The increase in
collateralized mortgage obligations since year end 1996 is in part the result of
programs instituted in the fourth quarter of 1996 to better manage securities
used to meet the collateral requirements of the affiliate banks. Previously,
lower-yielding securities with shorter maturities had been relied upon for this
purpose. Certain information pertaining to the composition, yields, and
maturities of the securities available for sale and investment securities
portfolios is presented in Figures 14 and 15, respectively.
FIGURE 14. SECURITIES AVAILABLE FOR SALE AT SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Other
U.S. Treasury States and Collateralized Mortgage- Weighted
Agencies and Political Mortgage- Backed Other Average
dollars in millions Corporations Subdivisions Obligations1 Securities1 Securities1 Total Yield2
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Maturity:
One year or less $436 $ 2 $ 456 $ 6 $ 1 $ 901 5.99 %
After one through five years 100 11 2,872 1,264 205 4,452 6.83
After five through ten years 14 32 54 1,754 140 1,994 6.86
After ten years 24 5 -- 141 46 216 3 6.44
- ------------------------------------------------------------------------------------------------------------------------------------
Fair value $574 $50 $3,382 $3,165 $392 $7,563 --
Amortized cost 572 50 3,376 3,130 423 7,551 6.70 %
Weighted average yield 5.98 % 5.94 % 6.65 % 7.43 % 2.82 % 6.70 % --
Weighted average maturity 1.3 years 7.5 years 2.7 years 6.1 years 4.6 years 4.1 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%.
3 Includes equity securities with no stated maturity.
</TABLE>
35
<PAGE> 36
FIGURE 15 INVESTMENT SECURITIES AT SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
States and Weighted
Political Other Average
dollars in millions Subdivisions Securities Total Yield 1
- -------------------------------------------------------------------------------------------------------
Maturity:
<S> <C> <C> <C> <C>
One year or less $ 414 -- $ 414 7.04 %
After one through five years 469 $ 100 569 10.93
After five through ten years 168 -- 168 10.00
After ten years 54 139 193 2.58
- -------------------------------------------------------------------------------------------------------
Amortized cost $1,105 $239 $1,344 8.42 %
Fair value 1,139 239 1,378 --
Weighted average yield 8.27 % 9.13 % 8.42 % --
Weighted average maturity 3.0 years 2.7 years 2.9 years --
- -------------------------------------------------------------------------------------------------------
<FN>
1 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
Through its Credit Policy, Credit Administration and Loan Review Groups, Key
evaluates and monitors the level of risk in its credit-related assets;
formulates underwriting standards and guidelines for line management; develops
commercial and consumer credit policies and systems; establishes credit-related
concentration limits; reviews loans, leases and other corporate assets to
evaluate credit quality; and reviews the adequacy of the allowance for loan
losses ("Allowance"). Geographic diversity throughout Key is a significant
factor in managing credit risk.
Management has developed methodologies designed to assess the adequacy of the
Allowance. The Allowance allocation methodologies applied at Key focus on
changes in the size and character of the loan portfolio, changes in the levels
of impaired and other nonperforming and past due loans, the risk inherent in
specific loans, concentrations of loans to specific borrowers or industries,
existing and prospective economic conditions and historical losses on a
portfolio basis. In addition, indirect risk in the form of off-balance sheet
exposure for unfunded commitments is 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 16, net loan charge-offs for the third quarter of 1997 were
$85 million, or .64% of average loans, compared with $49 million, or .40% of
average loans, for the same period last year. The higher level of net
charge-offs was concentrated in the consumer-indirect, commercial, financial and
agricultural and credit card portfolios. Key has a relatively small credit card
portfolio which comprises approximately 3% of its total average loans
outstanding. The $19 million increase in consumer-indirect net charge-offs
(primarily indirect auto loans) reflected the impact of a strategy adopted by
Key in 1996 to expand its consumer customer base to include various credit risk
profiles. This strategy also includes risk-adjusted pricing to address the
relative credit risk of various strata of the customer base. In addition, Key's
consumer portfolio was impacted by the continuing nationwide deterioration in
consumer credit quality, as indicated by an increasingly high number of
bankruptcies. Net charge-offs in the commercial portfolio were up $7 million,
primarily due to the resolution of a few large commercial accounts. As a result
of the higher level of net charge-offs, the provision for loan losses was
increased to $102 million for the third quarter of 1997 from $75 million for the
prior quarter and $49 million for the third quarter of last year. This increase
reflected management's intention to continue to maintain the provision for loan
losses at a level equal to or above net charge-offs.
On a year-to-date basis, net charge-offs were $217 million, or .57% of average
loans, for the first nine months of 1997 compared with $138 million, or .38% of
average loans, for the same period last year. The provision for loan losses for
the first nine months of 1997 was $244 million compared with $140 million for
the first nine months of 1996. The $79 million rise in net charge-offs for the
year-to-date period was attributable primarily to increases of $41 million and
$33 million in the consumer-indirect and credit card portfolios, respectively.
36
<PAGE> 37
FIGURE 16 SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
Three months ended September 30 Nine months ended September 30
--------------------------------- -------------------------------------
dollars in millions 1997 1996 1997 1996
- ---------------------------------------------------------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Average loans outstanding during the period $52,708 $48,103 $50,778 $48,182
- ------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses at beginning of period $880 $870 $ 870 $876
Loans charged off:
Commercial, financial and agricultural 17 15 39 54
Real estate-commercial mortgage 8 3 13 10
Real estate-construction -- 2 2 2
Commercial lease financing 2 -- 5 4
- ------------------------------------------------------------------------------------------------------------------------------
Total commercial loans 27 20 59 70
Real estate-residential mortgage 3 3 8 7
Home equity 2 -- 3 1
Credit card 25 21 86 57
Consumer-direct 9 8 27 22
Consumer-indirect 39 20 99 59
- ------------------------------------------------------------------------------------------------------------------------------
Total consumer loans 78 52 223 146
- ------------------------------------------------------------------------------------------------------------------------------
105 72 282 216
Recoveries:
Commercial, financial and agricultural 7 8 23 31
Real estate-commercial mortgage 2 2 7 6
Real estate-construction 2 1 2 1
Commercial lease financing -- -- -- 1
- ------------------------------------------------------------------------------------------------------------------------------
Total commercial loans 11 11 32 39
Real estate-residential mortgage -- -- 2 2
Credit card 2 4 6 10
Consumer-direct 1 2 5 6
Consumer-indirect 6 6 20 21
- ------------------------------------------------------------------------------------------------------------------------------
Total consumer loans 9 12 33 39
- ------------------------------------------------------------------------------------------------------------------------------
20 23 65 78
- ------------------------------------------------------------------------------------------------------------------------------
Net loans charged off (85) (49) (217) (138)
Provision for loan losses 102 49 244 140
Allowance acquired/sold, net 3 -- 3 (8)
- ------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses at end of period $900 $870 $900 $870
==== ==== ==== ====
- ------------------------------------------------------------------------------------------------------------------------------
Net loan charge-offs to average loans .64 % .40 % .57% .38 %
Allowance for loan losses to period end loans 1.68 1.80 1.68 1.80
Allowance for loan losses to nonperforming loans 247.25 252.91 247.25 252.91
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Allowance at September 30, 1997, was $900 million, or 1.68% of loans, up $30
million from $870 million, or 1.77% of loans, at December 31, 1996, and $870
million, or 1.80% of loans, at September 30, 1996. At September 30, 1997, the
Allowance was 247.25% of nonperforming loans, compared with 249.28% at December
31, 1996 and 252.91% at September 30, 1996. 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.
The composition of nonperforming assets is shown in Figure 17. These assets
totaled $411 million at September 30, 1997, and represented .77% of loans, OREO
and other nonperforming assets compared with $400 million, or .81%, at year end
1996 and $396 million, or .82%, at September 30, 1996. The $15 million increase
in nonperforming loans since year end 1996 was geographically broad based and
spread across a number of product types in the commercial (up $35 million) and
consumer (up $5 million) loan portfolios. These increases were partially offset
by a $24 million decline in the level of nonperforming residential real estate
loans. Additional information pertaining to changes in impaired and other
nonaccrual loans and the percentage of nonperforming loans to period end loans
by type within Key's geographically dispersed banking regions is presented in
Figures 18 and 19, respectively. The September 30, 1997, percentage of
nonperforming real estate construction loans to period end loans in the Rocky
Mountain Region included one credit of approximately $17 million which was
placed on nonperforming status during the third quarter.
37
<PAGE> 38
FIGURE 17 SUMMARY OF NONPERFORMING ASSETS AND PAST DUE LOANS
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31, September 30,
dollars in millions 1997 1996 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial, financial and agricultural $ 162 $ 120 $ 131
Real estate--commercial mortgage 77 84 82
Real estate--construction 24 19 14
Commercial lease financing 3 8 16
Real estate--residential mortgage 56 80 75
Consumer 42 37 25
- -------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 364 348 343
Restructured loans -- 1 1
- -------------------------------------------------------------------------------------------------------------
Total nonperforming loans 364 349 344
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
===== ===== =====
- -------------------------------------------------------------------------------------------------------------
Accruing loans past due 90 days or more $ 138 $ 103 $ 105
- -------------------------------------------------------------------------------------------------------------
Nonperforming loans to period end loans .68 % .71 % .71 %
Nonperforming assets to period end loans plus
OREO and other nonperforming assets .77 .81 .82
- -------------------------------------------------------------------------------------------------------------
</TABLE>
FIGURE 18 SUMMARY OF CHANGES IN IMPAIRED AND OTHER NONACCRUAL LOANS
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------------------- ----------------------------------
in millions 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of period $372 $325 $348 $330
Loans placed on nonaccrual 49 75 169 244
Charge-offs1 (26) (15) (52) (59)
Payments (14) (32) (61) (98)
Loans sold (6) -- (6) (38)
Transfers to OREO (3) (6) (19) (19)
Loans returned to accrual (8) (4) (15) (17)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at end of period $364 $343 $364 $343
===== ===== ===== ====
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
1 Represents the gross charge-offs taken against nonaccrual loans; excluded
are charge-offs taken against accruing loans, credit card receivables, and
interest reversals.
</TABLE>
FIGURE 19 PERCENTAGE OF NONPERFORMING LOANS TO PERIOD END LOANS BY TYPE AT
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Commercial, Real Estate- Commercial Real Estate-
Financial and Commercial Real Estate- Lease Residential
Agricultural Mortgage Construction Financing Mortgage2 Consumer1 Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Northeast Region 1.56% 1.87% .41% .03% NA% .20% 1.06%
Great Lakes Region .33 .75 .44 .16 NA .17 .36
Rocky Mountain Region 2.38 1.22 4.82 .02 NA .51 1.69
Northwest Region .55 .94 .42 .06 NA .20 .51
Financial Services - - - .07 NA .22 .15
- ---------------------------------------------------------------------------------------------------------------------------------
Total 1.17% 1.09% 1.15% .08% .91% .26% .68%
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
1 EXCLUDES CREDIT CARD RECEIVABLES.
2 NA = INFORMATION NOT AVAILABLE ON A REGIONAL BASIS.
</TABLE>
38
<PAGE> 39
DEPOSITS AND OTHER SOURCES OF FUNDS
Core deposits, defined as domestic deposits other than certificates of deposit
of $100,000 or more, are Key's primary source of funding. During the third
quarter of 1997, these deposits averaged $38.4 billion and represented 62% of
Key's funds supporting earning assets compared with $39.9 billion and 69%,
respectively, for the third quarter of 1996. As shown in Figure 4 beginning on
page 26, over the past year the decrease in core deposits was due primarily to
steady declines in the levels of both savings deposits and NOW accounts. This
reflected primarily the sale of KeyBank Wyoming in July 1997 and the divestiture
of 21 other branch offices during the second and third quarters of this year.
The divested branches (including KeyBank Wyoming) had deposits of approximately
$1.3 billion.
Purchased funds, which are comprised of large certificates of deposit, deposits
in foreign offices and short-term borrowings, averaged $17.2 billion for the
third quarter of 1997, up $3.5 billion, or 25%, from the comparable prior year
period. As illustrated in Figure 4, the increase was attributable primarily to
higher levels of short-term borrowings and deposits in foreign offices which
rose by $2.6 billion and $876 million, respectively. Purchased funds have been
more heavily relied upon to offset declines in the volume of core deposits and
to fund earning asset growth. This trend is expected to continue through the
remainder of 1997 due in large part to the impact of the planned branch
divestitures.
FIGURE 20 MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE AT
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Domestic Foreign
in millions Offices Offices Total
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Time remaining to maturity:
Three months or less $1,464 $2,172 $3,636
Over three through six months 509 -- 509
Over six through twelve months 430 -- 430
Over twelve months 717 -- 717
- -----------------------------------------------------------------------------------
Total $3,120 $2,172 $5,292
======= ======= ======
- -----------------------------------------------------------------------------------
</TABLE>
LIQUIDITY
Key actively analyzes and manages its liquidity, which 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
affiliate banks maintain liquidity in the form of short-term money market
investments, securities available for sale, anticipated prepayments and
maturities on securities, the maturity structure of their loan portfolios and
the ability to securitize and package loans for sale. Liquidity is also enhanced
by a sizable concentration of core deposits, previously discussed, which are
generated by more than 1,000 full-service Key Centers in 14 states. The
affiliate banks monitor deposit flows and evaluate alternate pricing structures
with respect to their deposit base. This process is supported by a Central
Funding Unit within Key's Funds & Investment Management Group. This group
monitors the overall mix of funding sources in conjunction with the affiliate
banks' deposit pricing and in response to the structure of the earning assets
portfolio. In addition, the affiliate banks have access to various sources of
money market funding (such as Federal funds purchased, securities sold under
repurchase agreements and bank notes) and borrowings from the Federal Reserve
system for short-term liquidity requirements should the need arise. One of the
affiliate banks, KeyBank USA, has a line of credit with the Federal Reserve
which provides for overnight borrowings of up to $1.1 billion and is secured by
$1.4 billion of KeyBank USA's credit card receivables at September 30, 1997.
There were no borrowings outstanding under this line of credit as of September
30, 1997.
During the first nine months of 1997, Key's affiliate banks raised $6.6 billion
under Key's Bank Note Program. Of the notes issued during the first nine months
of 1997, $2.7 billion have original maturities in excess of one year and are
included in long-term debt, while $3.9 billion have original maturities of one
year or less and are included in other short-term borrowings. On October 7,
1997, Key commenced a new Bank Note Program which provides for the issuance of
up to $13 billion ($12 billion by KeyBank National Association and $1 billion by
KeyBank USA).
During the second quarter of 1997, Key diversified its funding sources by
establishing a Euronote Program under which the parent company, KeyBank National
Association and KeyBank USA may issue both long and short-term debt of up to $5
billion in the aggregate. The notes will be offered exclusively to non-U.S.
investors and can be denominated in dollars and most European currencies. There
was $780 million of borrowings outstanding under this facility as of September
30, 1997, all of which were issued during the third quarter of 1997.
39
<PAGE> 40
The parent company's Commercial Paper/Note Program provides for the availability
of up to $500 million of additional short-term funding. The proceeds from this
program may be used for general corporate purposes, and have been used to fund
AutoFinance Group, Inc.'s lending activities in conjunction with securitizations
of its auto loans. The parent company also has a revolving credit agreement with
several unaffiliated banks under which the banks have agreed to lend
collectively up to $500 million to the parent company. This credit agreement is
used primarily as a backup source of liquidity for the Commercial Paper/Note
Program. There were no borrowings outstanding under either of these facilities
as of September 30, 1997.
During the third quarter of 1996, the parent company filed a universal shelf
registration statement with the SEC to provide for the possible issuance of up
to $1.2 billion of debt and equity securities in addition to the unused capacity
under a previous shelf registration. Accordingly, at September 30, 1997, unused
capacity under the 1996 shelf registration totaled $1.3 billion, of which $750
million is reserved for future issuance as medium-term notes. The proceeds from
the issuances under the shelf registration, the Bank Note Program and the
Euronote Program described above may be used for general corporate purposes,
including acquisitions.
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 ready access to the capital
markets as a result of its favorable debt ratings which, at September 30, 1997,
were as follows:
<TABLE>
<CAPTION>
Senior Subordinated
Commercial Long-Term Long-Term
Paper Debt Debt
---------------- ---------------- -----------------
<S> <C> <C> <C>
Duff D-1+ AA- A+
&
Phelps
Standard A-2 A- BBB+
&
Poor's
Moody's P-1 A1 A2
</TABLE>
Further information pertaining to Key's sources and uses of cash for the
nine-month periods ended September 30, 1997 and 1996, is presented in the
Consolidated Statements of Cash Flow on page 6.
CAPITAL AND DIVIDENDS
Total shareholders' equity at September 30, 1997, was $5.1 billion, down $195
million, or 4%, from the December 31, 1996, balance and $100 million, or 2%,
from the end of the third quarter of 1996. The decrease from the end of the
prior year and from the year-ago quarter was due primarily to the share
repurchases discussed below and dividends paid to shareholders from current
period net income. The decrease from the 1996 year end was partially offset by
net unrealized securities gains of $57 million and net income retained for the
current period. As of September 30, 1997, cumulative net unrealized securities
gains totaled $8 million. This amount compares with losses of $6 million and $37
million at December 31, 1996, and September 30, 1996, respectively. Other
factors contributing to the change in shareholders' equity during the first nine
months of 1997 are shown in the Statement of Changes in Shareholders' Equity
presented on page 5.
In November 1996, the Board of Directors approved a share repurchase program
which authorized the repurchase from that date of up to 12,000,000 Common Shares
by the end of 1997. Under the program, shares have been repurchased from time to
time in the open market or through negotiated transactions. During the first
nine months of 1997, Key repurchased 5,643,900 shares at a total cost of $296
million (an average of $52.45 per share) and reissued 1,856,064 Treasury Shares
for employee benefit and dividend reinvestment plans. Coupled with 2,620,000
shares repurchased in the fourth quarter of 1996, this brings the total number
of shares repurchased under the 1997 program to 8,263,900, leaving authority to
repurchase up to 3,736,100 Common Shares by the end of 1997. While Key may
repurchase additional Common Shares by the end of 1997, it does not anticipate
utilizing the full authority under the 12,000,000 Common Shares repurchase
program and may request its Board to extend any remaining authority into 1998.
Under a separate authorization, an additional 3,336,118 Key Common Shares were
repurchased during the current year and reissued in the Champion acquisition.
The 26,278,189 Treasury Shares at September 30, 1997, are expected to be
reissued over time in connection with employee stock purchase, 401(k), stock
option and dividend reinvestment plans and for other corporate purposes.
40
<PAGE> 41
Capital adequacy is an important indicator of financial stability and
performance. Overall, Key's capital position remains strong with a ratio of
total shareholders' equity to total assets of 7.04% at September 30, 1997,
compared with 7.22% at December 31, 1996, and 7.61% at September 30, 1996.
Including the capital securities issued in the fourth quarter of 1996 and the
second quarter of 1997, the ratio of total shareholders' equity to total assets
at September 30, 1997, and December 31, 1996, is 7.74% and 7.96%, respectively.
Banking industry regulators define minimum capital ratios for bank holding
companies and their banking subsidiaries. Based on the risk-adjusted capital
rules and definitions prescribed by the banking regulators, Key's Tier I and
total risk-adjusted capital ratios at September 30, 1997, were 6.73% and 11.10%,
respectively. These compare favorably with the minimum requirements of 4.0% for
Tier I and 8.0% for total capital. The regulatory 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 September 30, 1997, Key's leverage ratio was 6.33%, substantially
higher than the minimum requirement. Figure 21 presents the details of Key's
regulatory capital position at September 30, 1997, December 31, 1996, and
September 30, 1996.
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." All of Key's affiliate banks qualify as "well
capitalized" at September 30, 1997, since they exceeded the well-capitalized
thresholds of 10%, 6% and 5% for the total capital, Tier I capital and leverage
ratios, respectively. Although these provisions are not directly applicable to
Key under existing laws and regulations, based upon its ratios Key would qualify
as "well capitalized" at September 30, 1997. The FDIC-defined capital categories
may not constitute an accurate representation of the overall financial condition
or prospects of Key or its affiliate banks.
41
<PAGE> 42
FIGURE 21 CAPITAL COMPONENTS AND RISK-ADJUSTED ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31, September 30,
dollars in millions 1997 1996 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TIER I CAPITAL
Common shareholders' equity1 $5,068 $4,887 $5,013
Qualifying capital securities 500 500 --
Less: Goodwill (1,095) (824) (838)
Other intangible assets2 (108) (121) (124)
- ------------------------------------------------------------------------------------------------------------------------
Total Tier I capital 4,365 4,442 4,051
- ------------------------------------------------------------------------------------------------------------------------
TIER II CAPITAL
Allowance for loan losses3 812 698 678
Qualifying long-term debt 2,022 2,103 2,026
- ------------------------------------------------------------------------------------------------------------------------
Total Tier II capital 2,834 2,801 2,704
- ------------------------------------------------------------------------------------------------------------------------
Total capital $7,199 $7,243 $6,755
======= ======= ======
RISK-ADJUSTED ASSETS
Risk-adjusted assets on balance sheet $57,181 $52,228 $50,805
Risk-adjusted off-balance sheet exposure 8,990 4,541 4,403
Less: Goodwill (1,095) (824) (838)
Other intangible assets2 (108) (121) (124)
- ------------------------------------------------------------------------------------------------------------------------
Gross risk-adjusted assets 64,968 55,824 54,246
Less: Excess allowance for loan losses3 (88) (172) (192)
- ------------------------------------------------------------------------------------------------------------------------
Net risk-adjusted assets $64,880 $55,652 $54,054
======== ======== =======
AVERAGE QUARTERLY TOTAL ASSETS $70,112 $65,063 $64,480
======== ======== =======
CAPITAL RATIOS5
Tier I risk-adjusted capital ratio 6.73% 7.98% 7.49%
Total risk-adjusted capital ratio 11.10 13.01 12.50
Leverage ratio4 6.33 6.93 6.38
- ------------------------------------------------------------------------------------------------------------------------
<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 portions of purchased
mortgage servicing rights deducted in regulatory capital computations.
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>
42
<PAGE> 43
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
In the ordinary course of business, Key is subject to legal actions
which involve claims for substantial monetary relief. Based on
information presently available to management and Key's counsel,
management does not believe that any legal actions, individually or in
the aggregate, will have a material adverse effect on the consolidated
financial condition of Key.
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 (filed electronically only)
(b) Reports on Form 8-K
July 18, 1997 - Item 5. Other Events and Item 7. Financial Statements,
Pro Forma Financial Statements and Exhibits. Reporting that the
Registrant issued a press release on July 17, 1997, announcing its
earnings results for the three-month period ended June 30, 1997.
No other reports on Form 8-K were filed during the three-month period
ended September 30, 1997.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KEYCORP
--------------------------------------
(Registrant)
Date: November 14, 1997 /s/ Lee Irving
--------------------------------------
By: Lee Irving
Executive Vice President
and Chief Accounting Officer
43
<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/A 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
<FED-FUNDS-SOLD> 626
<TRADING-ASSETS> 567
<INVESTMENTS-HELD-FOR-SALE> 7,563
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<LONG-TERM> 7,567
0
0
<COMMON> 246
<OTHER-SE> 4,830
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<INTEREST-TOTAL> 3,897
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<ALLOWANCE-CLOSE> 900
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<ALLOWANCE-UNALLOCATED> 0
</TABLE>
