-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U3nGZmg1UB4PRBUT8j4iEqnk9zFlhMxGcJpYGsDijPZFaMb21YhU0IxNEjv3cx6E CJqpw/DEme7v3WxLyjQa9g== 0000950152-95-002668.txt : 19951120 0000950152-95-002668.hdr.sgml : 19951120 ACCESSION NUMBER: 0000950152-95-002668 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEYCORP /NEW/ CENTRAL INDEX KEY: 0000091576 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 346542451 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11302 FILM NUMBER: 95593092 BUSINESS ADDRESS: STREET 1: 127 PUBLIC SQ CITY: CLEVELAND STATE: OH ZIP: 44114-1306 BUSINESS PHONE: 2166893000 MAIL ADDRESS: STREET 1: 127 PUBLIC SQ CITY: CLEVELAND STATE: OH ZIP: 44114-1306 FORMER COMPANY: FORMER CONFORMED NAME: SOCIETY CORP DATE OF NAME CHANGE: 19920703 10-Q 1 KEYCORP 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 1995 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From ______ To ______ Commission File Number 0-850 [Logo appears here] KEYCORP ----------------------------------------------------- (Exact name of registrant as specified in its charter) OHIO 34-6542451 ------------------------------------ --------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 127 PUBLIC SQUARE, CLEVELAND, OHIO 44114-1306 ------------------------------------ --------------------- (Address of principal executive offices) (Zip Code) (216) 689-6300 -------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Shares, $1 par value 236,756,685 Shares - --------------------------- ------------------------------- (Title of class) (Outstanding at October 31, 1995) The number of pages of this report is 46 2 KEYCORP TABLE OF CONTENTS PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page Number -------------------- ----------- Consolidated Balance Sheets -- September 30, 1995, December 31, 1994, and September 30, 1994 3 Consolidated Statements of Income -- Three months and nine months ended September 30, 1995 and 1994 4 Consolidated Statements of Changes in Shareholders' Equity -- Nine months ended September 30, 1995 and 1994 5 Consolidated Statements of Cash Flow -- Nine months ended September 30, 1995 and 1994 6 Notes to Consolidated Financial Statements 7 Independent Accountants' Review Report 18 Item 2. Management's Discussion and Analysis of Financial Condition ----------------------------------------------------------- and Results of Operations 19 ------------------------- PART II. OTHER INFORMATION --------------------------- Item 1. Legal Proceedings 42 ----------------- Item 5. Other Information 42 ----------------- Item 6. Exhibits and Reports on Form 8-K 43 -------------------------------- Signature 44
2 3 PART 1. FINANCIAL INFORMATION KEYCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, December 31, September 30, (dollars in thousands, except per share amounts) 1995 1994 1994 - ------------------------------------------------------------------------------------------------------------------------------------ (UNAUDITED) (Unaudited) ASSETS Cash and due from banks $ 3,344,329 $ 3,511,368 $ 3,006,712 Short-term investments 522,049 670,010 126,731 Mortgage loans held for sale 659,148 355,198 418,287 Securities available for sale 1,595,937 2,521,049 2,960,348 Investment securities (fair value: $9,689,488, $9,757,032 and $10,203,998, respectively) 9,660,676 10,275,638 10,523,974 Loans 48,409,616 46,224,644 44,608,770 Less: Allowance for loan losses 879,169 830,298 820,158 - ------------------------------------------------------------------------------------------------------------------------------------ Net loans 47,530,447 45,394,346 43,788,612 Premises and equipment 1,023,074 987,231 947,308 Other real estate owned, net of allowance 49,209 79,007 107,507 Goodwill 907,142 418,462 387,861 Other intangible assets 173,445 180,425 188,582 Other assets 2,501,595 2,408,505 2,047,463 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $67,967,051 $66,801,239 $64,503,385 ==================================================================================================================================== LIABILITIES Deposits in domestic offices: Noninterest-bearing $ 8,610,431 $ 9,135,760 $ 8,531,285 Interest-bearing 37,279,283 36,003,352 35,945,729 Deposits in foreign offices -- interest-bearing 2,015,310 3,425,125 3,339,469 - ------------------------------------------------------------------------------------------------------------------------------------ Total deposits 47,905,024 48,564,237 47,816,483 Federal funds purchased and securities sold under repurchase agreements 5,908,211 5,499,117 5,514,759 Other short-term borrowings 3,632,505 3,277,611 3,172,657 Other liabilities 1,389,969 1,200,052 1,127,821 Long-term debt 4,047,917 3,569,794 2,177,796 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities 62,883,626 62,110,811 59,809,516 SHAREHOLDERS' EQUITY Preferred stock, $1 par value; authorized 25,000,000 shares, none issued -- -- -- 10% Cumulative Preferred Stock Class A, $125 stated value; authorized 1,400,000 shares, issued 1,280,000 shares 160,000 160,000 160,000 Common Shares, $1 par value; authorized 900,000,000 shares; issued 245,944,390, 245,944,390 and 245,944,390 shares 245,944 245,944 245,944 Capital surplus 1,501,579 1,454,177 1,467,803 Retained earnings 3,514,089 3,161,293 3,048,182 Loans to ESOP trustee (63,909) (63,909) (63,909) Net unrealized losses, net of taxes, on securities (25,238) (115,280) (92,956) Treasury stock, at cost (8,554,987, 5,582,273 and 2,402,219 shares) (249,040) (151,797) (71,195) - ------------------------------------------------------------------------------------------------------------------------------------ Total shareholders' equity 5,083,425 4,690,428 4,693,869 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $67,967,051 $66,801,239 $64,503,385 ====================================================================================================================================
See notes to consolidated financial statements (unaudited). 3 4 KEYCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months ended September 30, Nine months ended September 30, -------------------------------- ------------------------------- (dollars in thousands, except per share amounts) 1995 1994 1995 1994 - -------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans $1,102,986 $932,763 $3,228,943 $2,638,611 Mortgage loans held for sale 3,678 9,113 12,048 42,979 Taxable investment securities 138,121 131,729 425,764 360,765 Tax-exempt investment securities 21,383 21,850 65,105 67,865 Securities available for sale 23,040 53,744 71,689 184,354 Short-term investments 9,579 1,518 39,488 3,741 - -------------------------------------------------------------------------------------------------------------------------------- Total interest income 1,298,787 1,150,717 3,843,037 3,298,315 INTEREST EXPENSE Deposits 434,550 345,814 1,287,151 957,349 Federal funds purchased and securities sold under repurchase agreements 79,292 70,238 228,032 169,669 Other short-term borrowings 51,006 23,946 157,396 52,765 Long-term debt 67,877 31,120 194,299 90,501 - -------------------------------------------------------------------------------------------------------------------------------- Total interest expense 632,725 471,118 1,866,878 1,270,284 - -------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME 666,062 679,599 1,976,159 2,028,031 Provision for loan losses 27,506 27,214 66,324 99,033 - -------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 638,556 652,385 1,909,835 1,928,998 NONINTEREST INCOME Service charges on deposit accounts 70,726 67,846 206,497 198,570 Trust and asset management income 58,203 53,899 170,415 166,548 Credit card fees 22,552 20,556 59,879 56,132 Insurance and brokerage income 16,519 14,906 43,814 46,324 Mortgage banking income 9,040 19,300 34,250 66,746 Net securities gains (losses) 172 1,980 (42,237) 8,997 Other income 57,767 44,820 156,268 134,021 - -------------------------------------------------------------------------------------------------------------------------------- Total noninterest income 234,979 223,307 628,886 677,338 NONINTEREST EXPENSE Personnel 278,678 257,622 829,163 792,425 Net occupancy 53,514 53,929 159,573 162,659 Equipment 37,310 39,340 116,400 118,798 FDIC insurance assessments 192 25,250 51,640 74,062 Amortization of intangibles 19,071 14,016 55,118 40,271 Professional fees 17,995 11,201 48,437 35,212 Other expense 153,549 128,665 429,368 388,139 - -------------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 560,309 530,023 1,689,699 1,611,566 - -------------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 313,226 345,669 849,022 994,770 Income taxes 103,580 116,341 266,501 335,040 - -------------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE EXTRAORDINARY ITEM 209,646 229,328 582,521 659,730 Extraordinary net gain from the sales of subsidiaries, net of income taxes of $25,351 -- -- 35,790 -- - -------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 209,646 $ 229,328 $ 618,311 $ 659,730 ================================================================================================================================ Net income applicable to Common Shares $ 205,646 $ 225,328 $ 606,311 $ 647,730 Per Common Share: Income before extraordinary item $.90 $.92 $2.44 $2.66 Net income .90 .92 2.59 2.66 Weighted average Common Shares outstanding 228,187,105 244,132,128 234,461,924 243,635,197 ================================================================================================================================
See notes to consolidated financial statements (unaudited). 4 5 KEYCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
Preferred Common Capital Retained (dollars in thousands, except per share amounts) Stock Shares Surplus Earnings - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1993 $160,000 $242,828 $1,433,861 $2,641,450 Adjustment related to change in accounting for contributions (8,022) Adjustment of securities available for sale to fair value at January 1, net of deferred income taxes of $26,621 Adjustments relating to poolings of interests - 12,990 shares (11) (375) Net income 659,730 Cash dividends: Common Shares ($.96 per share) (194,137) Cumulative Preferred Stock ($6.25 per share) (8,000) Declared by pooled company prior to merger: Common Stock (39,793) Preferred Stock (4,000) Issuance of Common Shares: Acquisitions - 2,900,389 shares 2,900 29,503 Conversion of subordinated debentures - 120,213 shares Dividend reinvestment, stock option and purchase plans - 1,025,233 net shares 227 4,814 Repurchase of Common Shares - 2,040,235 shares Change in net unrealized gains (losses) on securities, net of deferred income tax benefit of $(80,481) Tax benefits attributable to ESOP dividends 954 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT SEPTEMBER 30, 1994 $160,000 $245,944 $1,467,803 $3,048,182 ==================================================================================================================================== BALANCE AT DECEMBER 31, 1994 $160,000 $245,944 $1,454,177 $3,161,293 Net income 618,311 Cash dividends: Common Shares ($1.08 per share) (254,394) Cumulative Preferred Stock ($9.375 per share) (12,000) Issuance of Common Shares: Acquisitions - 15,507,562 shares 54,618 Dividend reinvestment, stock option and purchase plans - 1,375,974 net shares (7,216) Repurchase of Common Shares - 19,856,250 shares Change in net unrealized gains (losses) on securities, net of deferred income taxes of $52,947 Tax benefits attributable to ESOP dividends 879 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT SEPTEMBER 30, 1995 $160,000 $245,944 $1,501,579 $3,514,089 ====================================================================================================================================
Net Unrealized Loans to Securities Treasury ESOP Gains Stock, (dollars in thousands, except per share amounts) Trustee (Losses) at cost - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1993 $(63,909) $(20,663) Adjustment related to change in accounting for contributions Adjustment of securities available for sale to fair value at January 1, net of deferred income taxes of $26,621 $46,153 Adjustments relating to poolings of interests - 12,990 shares Net income Cash dividends: Common Shares ($.96 per share) Cumulative Preferred Stock ($6.25 per share) Declared by pooled company prior to merger: Common Stock Preferred Stock Issuance of Common Shares: Acquisitions - 2,900,389 shares Conversion of subordinated debentures - 120,213 shares 2,309 Dividend reinvestment, stock option and purchase plans - 1,025,233 net shares 12,985 Repurchase of Common Shares - 2,040,235 shares (65,826) Change in net unrealized gains (losses) on securities, net of deferred income tax benefit of $(80,481) (139,109) Tax benefits attributable to ESOP dividends - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT SEPTEMBER 30, 1994 $(63,909) $(92,956) $(71,195) ==================================================================================================================================== BALANCE AT DECEMBER 31, 1994 $(63,909) $(115,280) $(151,797) Net income Cash dividends: Common Shares ($1.08 per share) Cumulative Preferred Stock ($9.375 per share) Issuance of Common Shares: Acquisitions - 15,507,562 shares 441,749 Dividend reinvestment, stock option and purchase plans - 1,375,974 net shares 38,621 Repurchase of Common Shares - 19,856,250 shares (577,613) Change in net unrealized gains (losses) on securities, net of deferred income taxes of $52,947 90,042 Tax benefits attributable to ESOP dividends - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT SEPTEMBER 30, 1995 $(63,909) $(25,238) $(249,040) ====================================================================================================================================
See notes to consolidated financial statements (unaudited). 6 KEYCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
Nine months ended September 30, ---------------------------------- (in thousands) 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income $ 618,311 $ 659,730 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 66,324 99,033 Depreciation expense 101,376 84,199 Amortization of intangibles 55,118 40,271 Amortization of purchased mortgage servicing rights 7,325 31,196 Net gain from sales of subsidiaries (61,141) -- Deferred income taxes 57,577 84,682 Net securities (gains) losses 42,237 (8,997) (Gains) losses from the sales of other real estate owned (7,630) 2,364 Net decrease in mortgage loans held for sale 706,050 933,593 Other operating activities, net (342,505) 48,178 - ------------------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 1,243,042 1,974,249 INVESTING ACTIVITIES Net increase in loans (1,629,835) (3,953,622) Purchases of investment securities (1,017,091) (4,197,324) Proceeds from sales of investment securities 14,080 13,784 Proceeds from prepayments and maturities of investment securities 1,756,650 2,008,492 Purchases of securities available for sale (634,777) (327,380) Proceeds from sales of securities available for sale 1,566,660 1,314,819 Proceeds from prepayments and maturities of securities available for sale 285,053 383,361 Net decrease (increase) in short-term investments 316,361 (19,261) Purchases of premises and equipment (121,147) (134,275) Proceeds from sales of premises and equipment 6,607 19,885 Proceeds from sales of other real estate owned 32,570 48,081 Purchase of mortgage servicing rights -- (40,088) Proceeds from sales of subsidiaries 350,633 -- Net cash (used in) provided by acquisitions (198,340) 22,671 - ------------------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 727,424 (4,860,857) FINANCING ACTIVITIES Net (decrease) increase in deposits (2,377,733) 207,339 Net increase in short-term borrowings 577,114 2,789,593 Net proceeds from issuance of long-term debt 693,725 539,922 Payments on long-term debt (218,009) (127,242) Purchase of treasury shares (577,613) (65,826) Proceeds from issuance of common stock pursuant to employee stock purchase, stock option and dividend reinvestment plans 31,405 18,026 Cash dividends (266,394) (245,930) - ------------------------------------------------------------------------------------------------------------------------------------ NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (2,137,505) 3,115,882 - ------------------------------------------------------------------------------------------------------------------------------------ NET (DECREASE) INCREASE IN CASH AND DUE FROM BANKS (167,039) 229,274 CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 3,511,368 2,777,438 - ------------------------------------------------------------------------------------------------------------------------------------ CASH AND DUE FROM BANKS AT END OF PERIOD $3,344,329 $3,006,712 ==================================================================================================================================== Additional disclosures relative to cash flow: Interest paid $1,794,881 $1,230,941 Income taxes paid 212,526 205,162 Net amount paid (received) on portfolio swaps 81,928 (92,931) Noncash items: Net transfer of loans to other real estate owned 12,129 44,426 Net transfer of securities from investment to available for sale portfolio -- 2,709,617 Transfers of loans to mortgage loans held for sale 1,010,000 -- - ------------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements (unaudited). 6 7 KEYCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The unaudited consolidated interim financial statements include the accounts of KeyCorp and its subsidiaries (the "Corporation"). All significant intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, the unaudited consolidated interim financial statements reflect all adjustments and disclosures which are necessary for a fair presentation of the results for the interim periods presented and should be read in conjunction with the consolidated financial statements and related notes included in the Corporation's 1994 Annual Report to Shareholders. In addition, certain amounts previously reported in the financial statements have been reclassified to conform with the current presentation. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. During the first quarter of 1995, the Corporation adopted Statement of Financial Accounting Standards ("SFAS") No. 116, "Accounting for Contributions Received and Contributions Made." This new accounting standard requires, among other things, that unconditional multi-year commitments to make charitable contributions be recognized as expense in the period in which the commitment is made, as opposed to the period in which the payment takes place. SFAS No. 116 was adopted by restating all periods presented with the cumulative effect of $8.0 million recorded as an adjustment to January 1, 1993, retained earnings. The effect of adopting SFAS No. 116 on subsequent periods was not material, and therefore, the results of operations for those periods were not restated. In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", which is effective for fiscal years beginning after December 15, 1995. SFAS No. 121 requires that long-lived assets, certain identifiable intangibles, and goodwill related to those assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. SFAS No. 121 does not apply to core deposit or credit card intangibles. SFAS No. 121 also provides for disclosures about impairment losses and long-lived assets to be disposed of. The Corporation expects to adopt SFAS No. 121 as of January 1, 1996, and does not expect it to have a material effect on the Corporation's financial condition or results of operations. 2. MERGERS, ACQUISITIONS AND DIVESTITURES COMPLETED TRANSACTIONS AUTOFINANCE GROUP, INC. On September 27, 1995, KeyCorp acquired AutoFinance Group, Inc. ("AFG"), a Chicago-based automobile finance company operating in 28 states, in a tax-free exchange of stock. Under the terms of the merger agreement, 9,554,003 KeyCorp Common Shares, with a value of approximately $325 million, were exchanged for all of the outstanding shares of AFG common stock (based on an exchange ratio of .5 shares for each share of AFG). In addition, immediately prior to the closing, AFG completed a spin-off to its shareholders of 95.01% of its common stock interest in Patlex Corporation, a wholly owned patent exploitation and enforcement subsidiary. Upon consummation of the acquisition, AFG was merged into Key Auto Inc., a wholly owned subsidiary of KeyCorp, which simultaneously changed its name to AutoFinance Group, Inc. In the transaction, which was accounted for as a purchase, KeyCorp recorded goodwill of approximately $270 million, which is being amortized using the straight-line method over a period of 25 years. SCHAENEN WOOD & ASSOCIATES, INC. On April 21, 1995, KeyCorp Asset Management Holdings, Inc., an indirect wholly owned subsidiary of KeyCorp, sold Schaenen Wood & Associates, Inc., an asset management subsidiary. An $11.2 million loss was realized in connection with the sale ($5.8 million after tax, $.02 per Common Share) and recorded as an extraordinary item in the first quarter. KEYCORP MORTGAGE INC. On March 31, 1995, KeyCorp sold the residential mortgage loan servicing operations of KeyCorp Mortgage Inc. ("KMI"), an indirect wholly owned subsidiary of KeyCorp. KMI serviced approximately $25 billion of residential 7 8 mortgage loans. KeyCorp plans to continue to service commercial mortgages, to originate residential mortgage loans through its banking franchise and to sell the rights to service residential mortgage loans originated after the KMI sale through a newly formed subsidiary. A $72.3 million gain was realized on the sale ($41.6 million after tax, $.17 per Common Share) and recorded as an extraordinary item. KEYCORP-SOCIETY MERGER On March 1, 1994, the former KeyCorp, a New York corporation ("old KeyCorp"), merged into and with Society Corporation, an Ohio corporation ("Society"), which was the surviving corporation under the name KeyCorp. Under the terms of the merger agreement, 124,351,183 KeyCorp Common Shares were exchanged for all of the outstanding shares of old KeyCorp common stock (based on an exchange ratio of 1.205 shares for each share of old KeyCorp). The outstanding preferred stock of old KeyCorp was exchanged for 1,280,000 shares of a comparable, new issue of 10% Cumulative Preferred Stock of KeyCorp. The merger was accounted for as a pooling of interests and, accordingly, financial results for prior periods presented have been restated to include the combined financial results of both companies. Mergers and acquisitions completed by KeyCorp during 1994 and the nine-month period ended September 30, 1995, along with the related accounting treatment, are as follows (dollars in millions):
COMMON ACCOUNTING TREATMENT LOCATION DATE ASSETS SHARES ISSUED CASH PAID - --------------------------------------------------------------------------------------------------------------------- POOLINGS OF INTERESTS The Bank of Greeley (1) Colorado December 1994 $ 60 259,697 -- Commercial Bancorporation of Colorado (1) Colorado March 1994 409 2,900,389 -- KeyCorp/Society (2) New York/Ohio March 1994 See Note (2) 124,351,183 -- PURCHASES AutoFinance Group, Inc. (2) Chicago September 1995 181 9,554,003 -- Spears, Benzak, Salomon & Farrell, Inc. New York April 1995 See Note (3) 1,910,000 -- OMNIBANCORP Colorado February 1995 500 4,043,559 -- Casco Northern Bank, National Association Maine February 1995 945 -- $205 BANKVERMONT Corporation Vermont January 1995 661 -- 90 First Citizens Bancorp of Indiana Indiana December 1994 347 1,960,119 -- State Home Savings Bank Ohio September 1994 321 -- 44 - --------------------------------------------------------------------------------------------------------------------- (1) Financial statements for periods prior to the transaction were not restated to include the accounts and results of operations of the pooled company because the transaction was not material to KeyCorp. (2) See preceding text for more information regarding these transactions. (3) Spears, Benzak, Salomon & Farrell, Inc. is an investment management firm that had approximately $3.2 billion in assets under management on the date of acquisition.
8 9 3. SECURITIES AVAILABLE FOR SALE Debt securities that the Corporation has the positive intent and ability to hold to maturity are classified as securities held to maturity and are carried at amortized cost. Securities held to maturity and equity securities that do not have readily determinable fair values are presented as investment securities on the balance sheet. Debt and equity securities that are bought and principally held for the purpose of selling them in the near term are classified as trading account assets, reported at fair value ($169 million as of September 30, 1995) and included in short-term investments with realized and unrealized gains and losses reported in noninterest income. Debt and equity securities not classified as either investment securities or trading account assets are classified as securities available for sale and reported at fair value, with the unrealized gains and losses, net of deferred income taxes, excluded from operating results and reported as a component of shareholders' equity. Generally, the sales or transfers of securities held to maturity are permissible only if made in response to certain changes in circumstances as specified in SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." However, in October 1995, the FASB voted to allow companies a one-time opportunity to reassess and, if appropriate, reclassify their securities between the held-to-maturity and available-for-sale categories specified in SFAS No. 115. The FASB's decision to grant this opportunity considered the number of comments received from companies expressing the desire to re-do their initial SFAS No. 115 allocation in light of their experience since initial implementation of the standard. Companies electing to change classifications must act within a prescribed time period which will extend from approximately mid-November (concurrent with the FASB's publication of a special report on implementation guidance on SFAS No. 115) through December 31, 1995. Management is currently in the process of evaluating this opportunity and has not yet determined the extent and effect of reclassifications which will be made. During the third quarter of 1994, the Corporation transferred approximately $1.3 billion of mortgage-backed securities from the securities available for sale portfolio to the investment securities portfolio. This transfer was made in response to guidance issued by the FASB with regard to the classification of "nonhigh-risk" mortgage securities in accordance with SFAS No. 115. The securities were transferred at their fair value and the unrealized loss (approximately $57.8 million before taxes) is being amortized as a yield adjustment over their remaining lives. At September 30, 1995, approximately $1.6 billion of securities were classified as available for sale and shareholders' equity was reduced by $25.2 million, representing the net unrealized loss on these securities, net of deferred income tax benefit of $13.5 million (including the effect of the third quarter 1994 reclassification described above). The amortized cost, unrealized gains and losses, and approximate fair values of securities available for sale were as follows (in thousands):
SEPTEMBER 30, 1995 ------------------------------------------------------------ GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---------- ------- ------- ---------- U.S. Treasury, agencies and corporations $ 662,886 $ 4,424 $ 80 $ 667,230 States and political subdivisions 25,495 429 38 25,886 Mortgage-backed securities 859,598 7,393 10,101 856,890 Other securities 45,716 237 22 45,931 ---------- ------- ------- ---------- Total $1,593,695 $12,483 $10,241 $1,595,937 ========== ======= ======= ==========
9 10
December 31, 1994 ------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- ----------- ----------- ---------- U.S. Treasury, agencies and corporations $1,067,726 $1,117 $ 16,384 $1,052,459 States and political subdivisions 28,871 192 3,145 25,918 Mortgage-backed securities 1,334,132 211 105,989 1,228,354 Other securities 223,299 47 9,028 214,318 ----------- ----------- ----------- ---------- Total $2,654,028 $1,567 $134,546 $2,521,049 =========== =========== =========== ========== September 30, 1994 ------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- ----------- ----------- ---------- U.S. Treasury, agencies and corporations $1,388,336 $4,831 $ 42,257 $1,350,910 States and political subdivisions 27,405 -- 244 27,161 Mortgage-backed securities 1,488,715 928 81,748 1,407,895 Other securities 202,707 101 28,426 174,382 ----------- ----------- ----------- ---------- Total $3,107,163 $5,860 $152,675 $2,960,348 =========== =========== =========== ==========
4. INVESTMENT SECURITIES The amortized cost, unrealized gains and losses, and approximate fair values of investment securities were as follows (in thousands):
SEPTEMBER 30, 1995 ------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ----------- ----------- ----------- ---------- U.S. Treasury, agencies and corporations $ 538,198 $ 6,195 $ 1,523 $ 542,870 States and political subdivisions 1,446,563 50,517 1,302 1,495,778 Mortgage-backed securities 7,259,415 75,044 99,464 7,234,995 Other securities 416,500 12,202 12,857 415,845 ----------- ----------- ----------- ---------- Total $9,660,676 $143,958 $115,146 $9,689,488 =========== =========== =========== ========== December 31, 1994 ------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- ----------- ----------- ---------- U.S. Treasury, agencies and corporations $ 532,619 $ 280 $ 33,619 $ 499,280 States and political subdivisions 1,508,534 33,329 6,982 1,534,881 Mortgage-backed securities 7,834,169 10,023 481,426 7,362,766 Other securities 400,316 875 41,086 360,105 ----------- ----------- ----------- ---------- Total $10,275,638 $44,507 $563,113 $9,757,032 =========== =========== =========== ==========
10 11
September 30, 1994 ------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- ----------- ----------- ---------- U.S. Treasury, agencies and corporations $ 590,706 $ 1,026 $ 1,652 $ 590,080 States and political subdivisions 1,513,285 44,857 3,968 1,554,174 Mortgage-backed securities 8,004,109 21,037 384,524 7,640,622 Other securities 415,874 3,293 45 419,122 ----------- ----------- ----------- ----------- Total $10,523,974 $70,213 $390,189 $10,203,998 =========== =========== =========== ===========
5. LOANS Loans are summarized as follows (in thousands):
SEPTEMBER 30, December 31, September 30, 1995 1994 1994 ------------- ------------ ------------- Commercial, financial and agricultural $11,558,375 $10,190,582 $10,122,108 Real estate - construction 1,476,779 1,287,195 1,227,380 Real estate - commercial mortgage 7,266,785 6,774,860 6,531,682 Real estate - residential mortgage 12,896,906 13,567,077 13,284,451 Consumer 9,973,170 10,183,798 9,715,523 Student loans held for sale 2,498,374 1,816,524 1,539,218 Lease financing 2,653,010 2,307,212 2,098,872 Foreign 86,217 97,396 89,536 ------------- ------------ ------------- Total $48,409,616 $46,224,644 $44,608,770 ============= ============ =============
Changes in the allowance for loan losses are summarized as follows (in thousands):
Three months ended September 30, Nine months ended September 30, -------------------------------- ------------------------------- 1995 1994 1995 1994 -------------- -------------- -------------- ------------ Balance at beginning of period $867,486 $816,437 $ 830,298 $ 802,712 Charge-offs (57,393) (47,472) (149,070) (155,598) Recoveries 29,743 21,567 84,204 67,196 -------------- -------------- -------------- ------------ Net charge-offs (27,650) (25,905) (64,866) (88,402) Provision for loan losses 27,506 27,214 66,324 99,033 Allowance of acquired companies 11,804 2,412 46,865 6,815 Transfer from OREO allowance 23 -- 548 -- -------------- -------------- -------------- ------------ Balance at end of period $879,169 $820,158 $ 879,169 $ 820,158 ============== ============== ============== ============
11 12 6. NONPERFORMING ASSETS Effective January 1, 1995, the Corporation adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures." SFAS No. 114 prescribes the methodology under which certain loans are to be measured for impairment. Generally, a loan is considered impaired when management believes it is probable that all amounts due will not be collected according to the contractual terms of the loan agreement. SFAS No. 118 amends SFAS No. 114 by eliminating certain income recognition provisions and by expanding the disclosure requirements. Adoption of these standards did not have a material effect on the Corporation's financial condition or results of operations. The Corporation measures impairment on all large balance nonaccrual loans (typically commercial and commercial real estate loans). In most instances, impairment is measured based on the fair value of the underlying collateral. In certain other cases, impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate. Amounts deemed impaired are either specifically allocated for in the allowance for loan losses or reflected as a partial charge-off of the loan balance. Smaller balance homogeneous loans are collectively evaluated for impairment. Cash payments received on nonaccrual loans (including impaired loans) are generally applied to principal. However, based on management's assessment of the ultimate collectibility of the loan, interest income may be recognized on a cash basis. Interest income recognized in the third quarter of 1995 on impaired loans was not significant. In accordance with SFAS No. 114, loans are to be classified in other real estate owned ("OREO") only when the creditor has actually taken possession of the collateral. Accordingly, $19.9 million of loans previously classified as in-substance foreclosures, but for which the Corporation had not taken possession of the collateral, were reclassified to loans during the first quarter of 1995. Similarly, any allowance for OREO losses related to these assets was reclassified to the allowance for loan losses. At September 30, 1995, the recorded investment in impaired loans was $181.5 million. Included in this amount is $72.1 million of impaired loans for which the specifically allocated allowance for loan losses is $24.4 million, and $109.4 million of impaired loans that have been written-down to estimated fair value and, therefore, do not have a specifically allocated allowance for loan losses. The average recorded investment in impaired loans for the third quarter of 1995 was $182.7 million. Nonperforming assets were as follows (in thousands):
SEPTEMBER 30, December 31, September 30, 1995 1994 1994 -------------- ------------- -------------- Impaired loans $181,524 -- -- Other nonaccrual loans 128,124 $254,499 $284,706 Restructured loans 3,744 1,550 1,438 -------------- ------------- -------------- Total nonperforming loans 313,392 256,049 286,144 Other real estate owned 64,334 100,265 134,104 Allowance for OREO losses (15,125) (21,258) (26,597) -------------- ------------- -------------- Other real estate owned, net of allowance 49,209 79,007 107,507 Other nonperforming assets 4,658 4,777 4,829 -------------- ------------- -------------- Total nonperforming assets $367,259 $339,833 $398,480 ============== ============= ==============
12 13 7. LONG-TERM DEBT The components of long-term debt, presented net of unamortized discount where appropriate, were as follows (dollars in thousands):
SEPTEMBER 30, December 31, September 30, 1995 1994 1994 -------------- ------------ ------------- Medium-Term Notes due through 2005 (1) $1,216,848 $870,200 $535,200 8.125% Subordinated Notes due 2002 198,334 198,148 198,085 8.000% Subordinated Notes due 2004 125,000 125,000 125,000 8.400% Subordinated Capital Notes due 1999 75,000 75,000 75,000 8.875% Notes due 1996 74,919 74,829 74,815 11.125% Notes due 1995 -- 49,992 49,988 8.404% Notes due 1997 through 2001 48,864 48,864 48,864 8.255% Notes due 1996 22,794 22,794 22,794 All other long-term debt 366 374 377 -------------- ------------ ------------- Total parent company 1,762,125 1,465,201 1,130,123 Medium-Term Bank Notes due through 1997 (2) 1,398,972 1,398,245 399,042 7.85% Subordinated Notes due 2002 199,858 199,843 199,838 6.75% Subordinated Notes due 2003 198,979 198,886 198,917 7.25% Subordinated Notes due 2005 200,000 -- -- Federal Home Loan Bank Advances 273,220 252,328 194,128 10.00% Notes due 1995 -- 36,735 36,735 Industrial revenue bonds 10,144 10,144 10,399 All other long-term debt 4,619 8,412 8,614 -------------- ------------ ------------- Total subsidiaries 2,285,792 2,104,593 1,047,673 -------------- ------------ ------------- Total $4,047,917 $3,569,794 $2,177,796 ============== ============ ============= (1) The weighted average rate on the Medium-Term Notes due through 2005 was 6.93%. (2) The weighted average rate on the Medium-Term Notes due through 1997 was 6.71%.
8. INCOME TAXES The effective tax rate (provision for income taxes as a percentage of income before income taxes and extraordinary item) for the 1995 third quarter was 33.1% compared to 33.7% for the third quarter of 1994. For the first nine months of 1995, the effective tax rate was 31.4% compared to 33.7% for the same period in 1994. The decrease in the year-to-date effective tax rate was primarily attributable to the recognition during the first quarter of 1995 of one-time tax benefits of $16.0 million related to acquisitions made in years prior to 1992. 9. EXTRAORDINARY ITEM During the first quarter of 1995, the Corporation recorded an extraordinary net gain of $61.1 million ($35.8 million after tax, $.15 per Common Share), representing the net effect of a gain of $72.3 million ($41.6 million after tax, $.17 per Common Share) from the sale of the residential mortgage loan servicing operations of KMI, an indirect wholly owned subsidiary of KeyCorp, and a loss of $11.2 million ($5.8 million after tax, $.02 per Common Share) on the sale of Schaenen Wood & Associates, Inc., an indirect wholly owned asset management subsidiary of KeyCorp. These transactions are described in greater detail in Note 2, Mergers, Acquisitions and Divestitures, beginning on page 7 of this report. 13 14 10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Corporation, mainly through its affiliate banks, is party to various financial instruments with off-balance sheet risk. The banks use these financial instruments in the normal course of business to meet the financing needs of their customers and to effectively manage their exposure to market risk. Market risk is the possibility that the Corporation's net interest income will be adversely affected as a result of changes in interest rates or other economic factors. 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 below. 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 the Corporation 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 excess of amounts recognized in the Corporation's consolidated balance sheet. The Corporation mitigates its exposure to credit risk through internal controls over the extension of credit. These controls include the process of credit approval and review, the establishment of credit limits, and, when deemed necessary, securing collateral. The following is a summary of the contractual amount of each class of lending-related off-balance sheet financial instrument outstanding wherein the Corporation's maximum possible accounting loss equals the contractual amount of the instruments (in thousands):
SEPTEMBER 30, December 31, September 30, 1995 1994 1994 ------------- ------------ ------------- LOAN COMMITMENTS Credit card lines $ 5,873,995 $ 5,482,566 $ 4,458,702 Home equity 3,782,371 3,243,618 3,045,248 Commercial real estate and construction 1,636,404 1,503,707 1,432,980 Other 9,891,636 7,356,564 6,940,470 ------------- ------------ ------------- Total loan commitments 21,184,406 17,586,455 15,877,400 OTHER COMMITMENTS Standby letters of credit 1,108,029 1,003,275 1,129,825 Commercial letters of credit 253,900 205,434 241,965 Loans sold with recourse 34,885 231,048 233,649 ------------- ------------ ------------- Total loan and other commitments $22,581,220 $19,026,212 $17,482,839 ============= ============ =============
The banks' commitments to extend credit are agreements with customers to provide financing at predetermined terms as long as the customer continues to meet specified criteria. Loan commitments serve to meet the financing needs of the banks' customers and generally carry variable rates of interest, have fixed expiration dates or other termination clauses, and may require the payment of fees. Since the commitments may expire without being drawn upon, the total amount of the commitments does not necessarily represent the future cash outlay to be made by the Corporation. The credit worthiness of each customer is evaluated on a case-by-case basis. The estimated fair values of these commitments and the standby letters of credit discussed below are not material. The Corporation does not have any significant concentrations of credit risk. Standby letters of credit enhance the credit worthiness of the banks' customers by assuring the customers' financial performance to third parties in connection with specified transactions. Amounts drawn under standby letters of credit generally carry variable rates of interest and the credit risk involved is essentially the same as that involved in the extension of loan facilities. 14 15 FINANCIAL INSTRUMENTS HELD OR ISSUED FOR ASSET AND LIABILITY MANAGEMENT PURPOSES The Corporation manages its exposure to market risk, in part, by using off-balance sheet instruments to modify the existing interest rate risk characteristics of its assets and liabilities. Primary among the financial instruments used by both KeyCorp and its affiliate banks are interest rate swap contracts used to manage interest rate risk. Interest rate swaps used for this purpose are designated as portfolio swaps. The notional amount of the interest rate swap contracts represents only an agreed-upon amount on which calculations of interest payments to be exchanged are based, and is significantly greater than the amount at risk. Credit risk is measured as the cost of replacing, at current market rates, contracts in an unrealized gain position. The Corporation deals exclusively with counterparties with high credit ratings, enters into bilateral collateral arrangements and arranges master netting agreements. These agreements include legal rights of setoff that provide for the net settlement of the subject contracts with the same counterparty in the event of default. Although the Corporation is exposed to credit-related losses in the event of nonperformance by the counterparties, based on management's assessment, as of September 30, 1995, all counterparties were expected to meet their obligations. At September 30, 1995, the Corporation had credit exposure of an aggregate $28.8 million to nine counterparties, with the largest credit exposure to an individual counterparty amounting to $10.1 million. Under conventional interest rate swap contracts, payments based on fixed or variable rates are received based upon the notional amounts of the swaps in exchange for payments based on variable or fixed rates. Under an indexed amortizing swap contract, the notional amount remains constant for a specified period of time after which, based upon the level of the index at each payment review date, the swap contract will mature, the notional amount will 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, 1995, the Corporation was party to $2.0 billion and $2.3 billion of indexed amortizing swaps that used a LIBOR (London Interbank Offering Rates) index and a CMT (Constant Maturity Treasuries) index, respectively, for the payment review date measurement. Under basis swap contracts, interest payments based on different floating indices are exchanged. The following table summarizes the notional amount and the fair value of portfolio interest rate swaps by type (in millions):
SEPTEMBER 30, 1995 December 31, 1994 September 30, 1994 ----------------------- --------------------- ---------------------- NOTIONAL FAIR Notional Fair Notional Fair AMOUNT VALUE Amount Value Amount Value ----------- ---------- ---------- --------- ----------- --------- Receive fixed/pay variable- indexed amortizing $4,604.0 $(12.0) $5,786.6 $(341.7) $5,159.9 $(245.7) Receive fixed/pay varaible- conventional 2,716.2 20.8 3,010.2 (199.6) 3,035.7 (161.5) Pay fixed/receive variable- conventional 2,486.5 (22.5) 1,456.5 11.5 356.5 6.2 Basic swaps -- -- 200.0 .1 200.0 -- ----------- ---------- ---------- --------- ----------- --------- Total portfolio swaps $9,806.7 $(13.7) $10,453.3 $(529.7) $8,752.1 $(401.0) =========== ========= ========== ======== =========== ========
Based on the weighted average rates in effect at September 30, 1995, the spread on portfolio interest rate swaps, which excludes the amortization of net deferred losses on terminated swaps, provided a slightly positive impact on net interest income (since the weighted average rate received exceeded the weighted average rate paid by 20 basis points). The aggregate negative fair value of $(13.7) million at the same date was derived through the use of discounted cash flow models, which contemplate interest rates using the applicable forward yield curve, and represents an estimate of the cost that would be recognized if the portfolio were to be liquidated at that date. The swaps have an expected average maturity of 3.4 years. Portfolio interest rate swaps are used to manage interest rate risk by modifying the repricing or maturity characteristics of specified on-balance sheet assets and liabilities, principally loans ($5.7 billion), fixed rate liabilities ($1.6 billion) and variable rate liabilities ($2.5 billion). Interest from these swaps is recognized on an accrual basis over the lives of the respective contracts as an adjustment of the interest income or expense of the asset or liability being managed. Gains 15 16 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. Including the impact of both the spread on the swap portfolio and the amortization of the deferred gains and losses resulting from terminated swaps, portfolio interest rate swaps reduced net interest income for the third quarter of 1995 by $7.6 million, and added $20.5 million to net interest income for the same period in 1994. During the first nine months of 1995, swaps with a notional amount of $1.3 billion were terminated, resulting in net deferred losses of $57.8 million. The Corporation recognized $38.0 million of swap losses during the first quarter of 1995 in connection with the sale of the residential mortgage loan servicing business. These recognized losses, which were included in the determination of the net gain from the sale of the business, included $15.3 million of the $57.8 million of deferred swap losses referred to above and $22.7 million of deferred swap losses recorded prior to 1995. The Corporation's deferred swap gains and (losses) at September 30, 1995, are summarized as follows (dollars in thousands):
Weighted Average Deferred Remaining Asset/Liability Managed Gains/(Losses) Amortization (Years) ------------------------- --------------- -------------------- Loans $(22,405) .7 Debt 11,343 6.8 Deposits 1,948 .4 --------------- Total $ (9,114) ===============
The Corporation also uses futures contracts to manage the risk associated with the potential impact of adverse movements in interest rates. These contracts are commitments to either purchase or sell designated financial instruments at a future date for a specified price. At September 30, 1995, the notional amount of these contracts totaled $148 million and their fair value was not material. FINANCIAL INSTRUMENTS HELD OR ISSUED FOR TRADING PURPOSES The Corporation's affiliate banks also use interest rate contracts for dealer activities, which are generally limited to the banks' lending customers. Interest rate swap contracts entered into with customers are typically limited to conventional swaps, as previously described. The Corporation offsets the interest rate risk of customer swaps by entering into offsetting swaps (also included in the customer swap portfolio) with third parties. The swap position and any offsetting swap with a third party are recorded at their estimated fair values. Adjustments to fair value for customer swaps are included in noninterest income. Interest rate cap and floor agreements provide that one party pays the other when interest rates rise above a specified level (caps) or fall below a specified level (floors). The risk from writing interest rate caps and floors is minimized by the banks through the purchase of offsetting caps and floors. The contracts are recorded at fair value, with any changes in fair value recognized in noninterest income. The Corporation also enters into foreign exchange forward contracts to accommodate the business needs of its customers and for proprietary trading purposes. Foreign exchange-based forward contracts provide for the delayed delivery or purchase of foreign currency. The foreign exchange risk associated with these contracts is mitigated by entering into offsetting foreign exchange contracts. Adjustments to the fair value of foreign exchange forward contracts are included in noninterest income. A summary of the notional amount and the respective fair value of derivative financial instruments held or issued for trading purposes at September 30, 1995, and on average for the nine-month period then ended, is as follows (in thousands). The positive fair values represent assets to the Corporation and are recorded in other assets, while the negative fair values represent liabilities and are recorded in other liabilities. 16 17
Nine months ended September 30, 1995 September 30, 1995 --------------------------- ---------------------------- Average Notional Fair Notional Average Amount Value Amount Fair Value ----------- -------- ----------- ---------- INTEREST RATE CONTRACTS Swaps: Assets $1,053,192 $ 20,313 $787,635 $ 16,593 Liabilities 1,067,236 (13,144) 797,594 (14,300) Caps and floors purchased 924,222 2,554 704,004 2,853 Caps and floors written 1,043,039 (2,556) 858,917 (3,083) FOREIGN EXCHANGE FORWARD CONTRACTS(1) Assets $ 510,710 $ 16,886 $582,660 $ 35,519 Liabilities 541,449 (16,991) 589,671 (32,264) (1) Excludes the effect of foreign spot contracts.
At September 30, 1995, credit exposure from financial instruments held or issued for trading purposes is limited to the aggregate fair value of each contract with a positive fair value. The risk of counterparties defaulting on their obligations is monitored on an ongoing basis. The parent company and its affiliate banks contract with counterparties of good credit standing and enter into master netting agreements when possible in an effort to manage credit risk. Trading income recognized on interest rate and foreign exchange forward contracts totaled $5.4 million and $8.9 million, respectively, for the first nine months of 1995 and $1.6 million and $6.0 million, respectively, for the first nine months of 1994. 17 18 INDEPENDENT ACCOUNTANTS' REVIEW REPORT SHAREHOLDERS AND BOARD OF DIRECTORS KEYCORP We have reviewed the unaudited consolidated balance sheets of KeyCorp and subsidiaries ("KeyCorp") as of September 30, 1995 and 1994, 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, 1995 and 1994. These financial statements are the responsibility of KeyCorp's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of KeyCorp as of December 31, 1994, and the related consolidated statements of income, changes in shareholders' equity, and cash flow for the year then ended (not presented herein) and in our report dated January 18, 1995, except for Note 2, as to which the date is February 28, 1995, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1994, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Ernst & Young LLP Cleveland, Ohio October 17, 1995 18 19 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 KeyCorp and its subsidiaries (the "Corporation") for the periods presented. It should be read in conjunction with the consolidated interim financial statements and notes thereto, presented on pages 3 through 17 of this report. The Corporation launched a strategic planning process in 1994, designed to leverage the capabilities of the franchise by reallocating resources to businesses with higher earnings potential and by heightening the focus on certain customer segments. During the first nine months of 1995, a number of actions were taken in connection with the implementation of this strategic planning process. The Corporation completed the sale of the residential mortgage loan servicing operations of KeyCorp Mortgage Inc., a mortgage banking subsidiary, in March. This transaction was followed by the acquisition of Spears, Benzak, Salomon & Farrell, Inc., a New York-based investment management firm ("Spears Benzak"), which was consummated in April. During the third quarter, the Corporation continued to make progress on its strategic initiatives. Specific actions taken included the formation of its national consumer finance business; the establishment of Key Bank USA, National Association, a nationally chartered bank located in Ohio which will serve as the national platform for all non-branch consumer finance businesses; and the September acquisition of AutoFinance Group, Inc. ("AFG"), one of the nation's leading automobile finance companies based in Chicago, Illinois. Additional information pertaining to the sale and the acquisitions referred to above is presented in Note 2, "Mergers, Acquisitions and Divestitures," beginning on page 7. In addition to the above transactions, the Corporation strengthened its retail franchise with the completion of three bank acquisitions during the first quarter. The acquisitions included Casco Northern Bank, National Association located in Portland, Maine; BANKVERMONT Corporation (and its subsidiary, Bank of Vermont) based in Burlington, Vermont; and OMNIBANCORP (and its five subsidiary banks) based in Denver, Colorado. The acquisitions were accounted for as purchases and, accordingly, the results of operations of these companies have been included from the respective dates of acquisition. The Corporation's 1995 financial results were also impacted by further actions taken during the first quarter to reconfigure the balance sheet in order to reduce exposure to future changes in interest rates. These actions included the sales of securities as well as other balance sheet reconfiguration strategies. Other major programs or transactions related to an overall balance sheet re-engineering effort and undertaken in the second and third quarters of 1995 include: the repurchase of 13.4 million shares of KeyCorp common stock, principally in conjunction with the 9.6 million shares reissued to acquire AFG; the Corporation's first securitization and sale of indirect auto loans (in the amount of $299 million), and the sale of approximately $500 million of residential mortgage loans. The latter two transactions involved lower spread assets and had the positive effects of improving the net interest margin, increasing liquidity and enhancing capital flexibility. Management continues to evaluate various initiatives to further leverage the capabilities of the franchise through the reallocation of resources and the targeting of selected customer segments. For example, in October 1995, the Corporation entered into a definitive agreement to sell its bond services business to Mellon Bank Corporation. This transaction, which involves a relatively minor portion of the Corporation's overall corporate trust business, is expected to close by the end of 1995, pending necessary regulatory approvals. The transfer of substantially all of the Corporation's bond services relationships is expected to be completed by the end of 1996. In addition, plans were recently announced to combine the KeyCorp affiliate banks which currently comprise the Great Lakes Region. These plans, as well as others being evaluated to enhance earnings, may result in future charges to the Corporation's results of operations in connection with the consolidation of operations, the optimization and reconfiguration of facilities, and related actions which may be required in conjunction with the reallocation of resources. Management has not yet completed its analysis in order to quantify the potential impact of such charges on the Corporation's financial condition and results of operations. The above items are discussed in greater detail in the remainder of this discussion and in the related notes to the consolidated interim financial statements referred to above. 19 20 PERFORMANCE OVERVIEW Figure 1 presents the primary income and expense components for the first nine months of 1995 and 1994 expressed on a per Common Share basis. The selected financial data set forth in Figure 2 presents certain information highlighting the financial performance of the Corporation for the last five quarters and the year-to-date periods ended September 30, 1995 and 1994. Each of the items referred to in this performance overview and in Figures 1 and 2 is more fully described in the following discussion or in the notes to the consolidated interim financial statements presented on pages 7 through 17 of this report. FIGURE 1. COMPONENTS OF EARNINGS PER COMMON SHARE
Nine Months ended September 30, Change ------------------------------- -------------------- 1995 1994 Amount Percent -------- ------- ------ ------- Interest income $16.39 $13.54 $2.85 21.0 % Interest expense 7.96 5.21 2.75 52.8 -------- ------- ------ Net interest income 8.43 8.33 .10 1.2 Provision for loan losses .28 .41 (.13) (31.7) -------- ------- ------ Net interest income after provision for loan losses 8.15 7.92 .23 2.9 Noninterest income 2.69 2.78 (.09) (3.2) Noninterest expense 7.21 6.62 .59 8.9 -------- ------- ------ Income before income taxes and extraordinary item 3.63 4.08 (.45) (11.0) Income taxes 1.14 1.37 (.23) (16.8) Preferred dividends .05 .05 -- -- -------- ------- ------ Earnings per Common Share before extraordinary item 2.44 2.66 (.22) (8.3) Extraordinary net gain from sales of subsidiaries, net of income taxes .15 -- .15 N/M -------- ------- ------ Earnings per Common Share $2.59 $2.66 $(.07) (2.6)% ======== ======= ======
Net income for the third quarter of 1995 totaled $209.6 million, or $.90 per Common Share. This compared with net income of $229.3 million, or $.92 per Common Share, for the third quarter of 1994. On an annualized basis, the return on average common equity for the third quarter of 1995 was 18.07% compared with 19.95% for the same period last year. The annualized returns on average total assets were 1.25% and 1.43% for the third quarters of 1995 and 1994, respectively. Primary factors affecting the comparative earnings were a $14.3 million decrease in taxable-equivalent net interest income and a $30.2 million increase in noninterest expense. These factors were partially offset by an $11.7 million increase in noninterest income. The efficiency ratio, which measures the extent to which recurring revenues are absorbed by operating expenses, was 61.27% for the third quarter of 1995 compared with 63.05% and 57.90% for the second quarter of 1995 and the third quarter of 1994, respectively. Net income for the nine month period ended September 30, 1995, totaled $618.3 million, or $2.59 per Common Share, down from $659.7 million, or $2.66 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 1995 was 17.72% compared with 19.65% for the first nine months of 1994. The annualized returns on average total assets for the first nine months of 1995 and 1994 were 1.24% and 1.43%, respectively. Included in 1995 year-to-date results was the effect of several significant nonrecurring items recorded during the first quarter. An extraordinary net gain of $61.1 million ($35.8 million after tax, $.15 per Common Share) was recorded in connection with the sales of certain subsidiaries. This net gain included a gain of $72.3 million ($41.6 million after tax, $.17 per Common Share) from the sale of the residential mortgage loan servicing business and a loss of $11.2 million 20 21 ($5.8 million after tax, $.02 per Common Share) incurred in connection with the sale of Schaenen Wood & Associates, Inc., an asset management subsidiary. Continued efforts to reconfigure the balance sheet in order to reduce exposure to changes in interest rates resulted in net losses of $49.3 million ($30.9 million after tax, $.13 per Common Share) from the sales of securities. In addition, the Corporation recorded a one-time tax benefit of $16.0 million, or $.07 per Common Share, which related to acquisitions completed in prior years. In the aggregate, these nonrecurring items increased 1995 year-to-date earnings by $20.9 million, or $.09 per Common Share. Excluding the impact of the above items, operating earnings for the first nine months of 1995 were $597.4 million, or $2.50 per Common Share, down from $659.7 million, or $2.66 per Common Share, for the first nine months of 1994. Affecting the comparative year-to-date results were a $52.0 million decrease in taxable-equivalent net interest income and a $78.1 million increase in noninterest expense. These factors were partially offset by a $32.7 million decrease in the provision for loan losses. The efficiency ratio was 62.79% for the first nine months of 1995 compared with 58.81% for the first nine months of 1994. 21 22 FIGURE 2. - SELECTED FINANCIAL DATA
Nine months ended (dollars in millions, 1995 Quarters 1994 Quarters September 30, except per share amounts) ------------------------------- ------------------------- ----------------------------- THIRD Second First Fourth Third 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------------- FOR THE PERIOD Interest income $ 1,298.8 $ 1,298.8 $ 1,245.4 $ 1,191.8 $ 1,150.7 $ 3,843.0 $ 3,298.3 Interest expense 632.8 632.5 601.6 526.5 471.1 1,866.9 1,270.3 Net interest income 666.0 666.3 643.8 665.3 679.6 1,976.1 2,028.0 Provision for loan losses 27.5 20.3 18.5 26.2 27.2 66.3 99.0 Noninterest income 235.0 222.9 171.0 205.3 223.3 628.9 677.3 Noninterest expense 560.3 568.6 560.8 555.6 530.1 1,689.7 1,611.6 Income before income taxes and extraordinary item 313.2 300.3 235.5 288.8 345.6 849.0 994.7 Income before extraordinary item 209.6 199.0 173.9 193.8 229.3 582.5 659.7 Net income 209.6 199.0 209.7 193.8 229.3 618.3 659.7 Net income applicable to Common Shares 205.6 195.0 205.7 189.8 225.3 606.3 647.7 - ---------------------------------------------------------------------------------------------------------------------------------- PER COMMON SHARE Income before extraordinary item $ .90 $ .83 $ .71 $ .79 $ .92 $ 2.44 $ 2.66 Net income .90 .83 .86 .79 .92 2.59 2.66 Cash dividends declared .36 .36 .36 .32 .32 1.08 .96 Book value at period-end 20.74 19.71 19.57 18.88 18.65 20.74 18.65 Market price: High 35.13 32.13 29.50 30.88 33.50 35.13 33.75 Low 30.38 26.00 24.50 23.63 30.13 24.50 29.50 Close 34.25 31.38 28.25 25.00 30.50 34.25 30.50 Weighted average Common Shares (000) 228,187.1 235,329.3 239,999.2 241,385.2 244,132.1 234,461.9 243,635.2 - ---------------------------------------------------------------------------------------------------------------------------------- AT PERIOD-END Loans $48,409.7 $48,093.2 $48,020.8 $46,224.7 $44,608.8 $48,409.7 $44,608.8 Earning assets 60,847.4 60,945.7 61,167.1 60,046.5 58,638.1 60,847.4 58,638.1 Total assets 67,967.1 67,481.2 67,709.0 66,801.2 64,503.4 67,967.1 64,503.4 Deposits 47,905.0 48,672.2 48,812.3 48,564.2 47,816.5 47,905.0 47,816.5 Long-term debt 4,047.9 4,019.6 3,725.2 3,569.8 2,177.8 4,047.9 2,177.8 Common shareholders' equity 4,923.4 4,514.4 4,657.5 4,530.4 4,533.9 4,923.4 4,533.9 Total shareholders' equity 5,083.4 4,674.4 4,817.5 4,690.4 4,693.9 5,083.4 4,693.9 - ---------------------------------------------------------------------------------------------------------------------------------- PERFORMANCE RATIOS Return on average total assets 1.25 % 1.19 % 1.28 % 1.19 % 1.43 % 1.24 % 1.43 % Return on average common equity 18.07 16.86 18.26 16.61 19.95 17.72 19.65 Return on average total equity 17.79 16.63 17.99 16.38 19.60 17.46 19.31 Efficiency ratio (1) 61.27 63.05 64.12 61.10 57.90 62.79 58.81 Overhead ratio (2) 47.89 51.10 52.36 48.01 44.48 50.43 45.53 Net interest margin 4.50 4.49 4.38 4.60 4.79 4.46 4.91 - ---------------------------------------------------------------------------------------------------------------------------------- CAPITAL RATIOS AT PERIOD-END Equity to assets 7.48 % 6.93 % 7.12 % 7.03 % 7.29 % 7.48 % 7.29 % Tangible equity to tangible assets 5.98 5.75 6.02 6.19 6.45 5.98 6.45 Tier I risk-adjusted capital 7.55 7.45 7.96 8.48 8.86 7.55 8.86 Total risk-adjusted capital 10.84 10.82 11.05 11.62 12.07 10.84 12.07 Leverage 6.19 5.88 6.24 6.63 6.79 6.19 6.79 =================================================================================================================================== The comparability of the information presented above is affected by certain mergers, acquisitions and divestitures completed by KeyCorp in the time periods presented. For further information concerning these transactions, refer to Note 2, Mergers, Acquisitions and Divestitures, beginning on page 7. (1) Calculated as noninterest expense divided by taxable-equivalent net interest income plus noninterest income (excluding net securities transactions). (2) Calculated as noninterest expense less noninterest income (excluding net securities transactions) divided by taxable-equivalent net interest income.
22 23 RESULTS OF OPERATIONS NET INTEREST INCOME Net interest income, which is comprised of interest and loan-related fee income less interest expense, is the principal source of earnings for KeyCorp's banking affiliates. Net interest income is affected by a number of factors including the level, pricing, mix and maturity of earning assets and interest-bearing liabilities (both on and off-balance sheet), interest rate fluctuations and asset quality. To facilitate comparisons in the following discussion, net interest income is presented on a taxable-equivalent basis, which restates tax-exempt income to an amount that would yield the same after-tax income had the income been subject to taxation at the Federal statutory income tax rate. Various components of the balance sheet and their respective yields and rates which affect interest income and expense are illustrated in Figure 3. The information presented in Figure 4 provides a summary of the effect on net interest income of changes in the Corporation's yields/rates and average balances for the quarterly and year-to-date periods from the same periods in the prior year. A more in-depth discussion of changes in earning assets and funding sources is presented in the Financial Condition section beginning on page 32. For the third quarter of 1995 net interest income was $666.0 million, down $13.6 million, or 2%, from the same period last year. This decrease resulted from a net interest margin which declined by 29 basis points to 4.50% and more than offset the impact of a $2.6 billion, or 4%, increase in average earning assets. The net interest margin is computed by dividing taxable-equivalent net interest income on an annualized basis by average earning assets. The reduction in the net interest margin as compared to the year ago quarter was attributable to several factors, including the growth in earning assets (principally new loan originations) at reduced spreads, increased reliance on market-priced funding alternatives with relatively higher interest rates, and actions taken by management during the 1994 fourth quarter and the 1995 first quarter to reduce the Corporation's exposure to changes in interest rates by reconfiguring the balance sheet. These actions, including the sales of certain securities, are more fully described in the following Asset and Liability Management section. After completing these actions, the net interest margin was stable for the remainder of the first quarter and rose 12 basis points during the past six months. This improvement reflected the impact of wider loan spreads, the securitization and sale of loans with lower spreads and the reinvestment of funds from maturing securities into higher-yielding loans. Average earning assets for the third quarter totaled $60.3 billion, which was $2.6 billion, or 4%, higher than the third quarter 1994 level. This increase was primarily due to a higher level of average loan outstandings, which rose $4.6 billion, or 10%, reflecting the impact of acquisitions as well as internal loan growth. The increase in the loan portfolio was partially offset, however, by a $2.2 billion, or 17%, decline in securities (including both investment securities and securities available for sale) due in large part to sales associated with the balance sheet reconfiguration. Average earning assets comprised 91% of average total assets during both the third quarter of 1995 and the third quarter of 1994. The Corporation uses portfolio interest rate swaps (as defined in Note 10, Financial Instruments with Off-Balance Sheet Risk, beginning on page 14) in the management of its interest rate sensitivity position. The notional amount of such swaps decreased to $9.8 billion at September 30, 1995, from $10.5 billion at year-end 1994. For the third quarter of 1995, 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, reduced net interest income and the net interest margin by $7.6 million and 5 basis points, respectively. During the same period in 1994 interest rate swaps contributed $20.5 million to net interest income and added 14 basis points to the net interest margin. The manner in which interest rate swaps are used in the Corporation's overall program of asset and liability management is described in the following Asset and Liability Management section. 23 24 FIGURE 3. AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND YIELDS/RATES
THIRD QUARTER 1995 Second Quarter 1995 -------------------------------------------------------------------------------- AVERAGE YIELD/ Average Yield/ (dollars in millions) BALANCE INTEREST RATE Balance Interest Rate - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS Loans (1) (2): Commercial, financial and agricultural $11,390.9 $ 267.8 9.33 % $11,350.2 $ 269.4 9.52 % Real estate 22,166.1 495.1 8.86 22,518.9 497.1 8.85 Consumer 9,720.1 248.4 10.14 9,886.0 244.2 9.91 Student loans held for sale 2,354.2 50.8 8.56 2,156.4 49.7 9.24 Lease financing 2,490.1 43.3 6.95 2,340.4 39.3 6.71 Foreign 74.3 .9 5.06 53.5 1.0 7.63 - ---------------------------------------------------------------------------------------------------------------------------------- Total loans 48,195.7 1,106.3 9.11 48,305.4 1,100.7 9.14 Mortgage loans held for sale 168.1 3.7 8.75 194.5 3.9 8.02 Taxable investment securities 8,275.5 138.2 6.68 8,578.9 142.9 6.66 Tax-exempt investment securities (1) 1,531.7 31.7 8.29 1,559.2 33.3 8.54 - ---------------------------------------------------------------------------------------------------------------------------------- Total investment securities 9,807.2 169.9 6.93 10,138.1 176.2 6.95 Securities available for sale (1) 1,457.2 23.0 6.15 1,423.5 22.3 6.02 Interest-bearing deposits with banks 41.6 .4 4.06 46.4 .5 4.32 Federal funds sold and securities purchased under resale agreements 480.6 7.1 5.83 526.5 7.9 6.04 Trading account assets 143.7 2.1 5.75 154.7 2.3 6.08 - ---------------------------------------------------------------------------------------------------------------------------------- Total short-term investments 665.9 9.6 5.71 727.6 10.7 5.94 - ---------------------------------------------------------------------------------------------------------------------------------- Total earning assets 60,294.1 1,312.5 8.63 60,789.1 1,313.8 8.66 Allowance for loan losses (870.4) (869.1) Other assets 7,191.9 7,030.2 - ---------------------------------------------------------------------------------------------------------------------------------- $66,615.6 $66,950.2 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Money market deposit accounts $ 7,154.1 66.3 3.67 $ 7,057.7 65.8 3.74 Savings deposits 6,289.4 42.0 2.65 6,594.4 43.7 2.66 NOW accounts 5,407.5 27.3 2.00 5,477.6 28.1 2.06 Certificates of deposit ($100,000 or more) 4,069.8 58.4 5.69 3,508.1 56.9 6.50 Other time deposits 14,495.7 205.7 5.63 14,947.5 195.3 5.24 Deposits in foreign offices 1,867.1 34.9 7.42 2,520.4 49.5 7.88 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 39,283.6 434.6 4.39 40,105.7 439.3 4.39 Federal funds purchased and securities sold under repurchase agreements 5,672.0 79.3 5.55 5,036.8 72.2 5.75 Other short-term borrowings 3,374.7 51.0 6.00 3,686.4 56.6 6.16 Long-term debt (3) 4,046.3 67.9 6.83 3,874.9 64.4 6.77 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 52,376.6 632.8 4.80 52,703.8 632.5 4.82 Noninterest-bearing deposits 8,156.8 8,007.2 Other liabilities 1,406.8 1,441.6 Preferred stock 160.0 160.0 Common shareholders' equity 4,515.4 4,637.6 - ---------------------------------------------------------------------------------------------------------------------------------- $66,615.6 $66,950.2 ========= ========= Interest rate spread 3.83 3.84 - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income (TE) and net interest margin (TE) $ 679.7 4.50 % $ 681.3 4.49 % ======= ======= ======= ======= Taxable-equivalent adjustment(1) $13.7 $15.0 - ---------------------------------------------------------------------------------------------------------------------------------- (1) Interest income on tax-exempt securities and loans has been adjusted to a fully taxable-equivalent basis using the statutory Federal income tax rate. (2) For purposes of these computations, nonaccrual loans are included in the average loan balances outstanding. (3) Rate calculation excludes ESOP debt. TE = Taxable Equivalent
24 25
First Quarter 1995 Fourth Quarter 1994 Third Quarter 1994 - ---------------------------------------------------------------------------------------------------------------------------------- Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate - ---------------------------------------------------------------------------------------------------------------------------------- $10,513.9 $ 232.5 8.97 % $ 9,935.9 $ 219.2 8.75 % $10,171.1 $ 227.9 8.89 % 22,111.9 477.5 8.76 21,316.8 448.2 8.34 20,241.9 417.5 8.18 9,788.5 236.9 9.81 9,894.1 236.6 9.49 9,565.7 225.4 9.35 2,120.8 45.8 8.77 1,595.7 31.7 7.89 1,577.4 30.0 7.53 2,282.3 38.7 6.78 2,148.7 36.6 6.80 1,985.7 33.9 6.83 70.6 .9 5.31 78.9 .4 2.10 74.4 1.1 5.98 - ---------------------------------------------------------------------------------------------------------------------------------- 46,888.0 1,032.3 8.85 44,970.1 972.7 8.58 43,616.2 935.8 8.51 243.0 4.5 7.35 412.3 8.2 7.91 463.5 9.1 7.87 8,665.9 144.7 6.68 8,828.6 146.2 6.62 8,184.0 131.7 6.44 1,565.3 33.2 8.49 1,561.5 33.7 8.63 1,433.0 33.1 9.24 - ---------------------------------------------------------------------------------------------------------------------------------- 10,231.2 177.9 6.96 10,390.1 179.9 6.93 9,617.0 164.8 6.86 1,623.0 26.6 6.06 2,844.0 43.2 5.75 3,890.5 53.9 5.51 414.2 6.5 6.41 33.1 .5 6.49 27.5 .3 3.55 711.9 10.3 5.87 61.7 .8 4.88 92.8 1.0 4.64 146.1 2.3 6.35 97.1 1.5 6.02 15.9 .2 4.66 - ---------------------------------------------------------------------------------------------------------------------------------- 1,272.2 19.1 6.10 191.9 2.8 5.74 136.2 1.5 4.42 - ---------------------------------------------------------------------------------------------------------------------------------- 60,257.4 1,260.4 8.47 58,808.4 1,206.8 8.12 57,723.4 1,165.1 8.01 (853.4) (827.1) (822.2) 7,054.9 6,632.0 6,537.4 - ---------------------------------------------------------------------------------------------------------------------------------- $66,458.9 $64,613.3 $63,438.6 ========= ========= ========= $ 7,144.7 62.4 3.54 $ 7,119.0 56.4 3.15 $ 7,218.3 50.5 2.78 6,948.6 46.9 2.74 7,262.9 49.9 2.73 7,683.9 52.8 2.73 5,505.2 27.7 2.04 5,511.0 27.6 1.99 5,529.6 27.0 1.94 3,387.9 48.7 5.83 3,164.9 42.8 5.37 3,030.5 39.4 5.16 13,789.4 179.2 5.27 12,846.3 152.2 4.70 12,256.3 137.4 4.45 3,321.2 48.3 5.90 2,972.2 38.3 5.11 3,407.3 38.7 4.51 - ---------------------------------------------------------------------------------------------------------------------------------- 40,097.0 413.2 4.18 38,876.3 367.2 3.75 39,125.9 345.8 3.51 5,502.6 76.5 5.64 5,857.9 73.9 5.00 6,295.9 70.2 4.43 3,298.9 49.8 6.12 2,850.6 38.1 5.31 2,052.9 24.0 4.63 3,612.9 62.1 7.01 3,001.6 47.3 6.46 2,144.3 31.1 6.01 - ---------------------------------------------------------------------------------------------------------------------------------- 52,511.4 601.6 4.65 50,586.4 526.5 4.14 49,619.0 471.1 3.77 7,955.9 8,238.9 8,083.0 1,263.8 1,095.2 1,094.9 160.0 160.0 160.0 4,567.8 4,532.8 4,481.7 - ---------------------------------------------------------------------------------------------------------------------------------- $66,458.9 $64,613.3 $63,438.6 ========= ========= ========= 3.82 3.98 4.24 - ---------------------------------------------------------------------------------------------------------------------------------- $ 658.8 4.38 % $ 680.3 4.60 % $ 694.0 4.79 % ======= ====== ======= ====== ======= ====== $15.0 $15.0 $14.4 - ----------------------------------------------------------------------------------------------------------------------------------
25 26 FIGURE 4. COMPONENTS OF NET INTEREST INCOME CHANGES (in millions)
From Three Months Ended Sept. 30, 1994 From Nine Months Ended Sept. 30, 1994 To Three Months Ended Sept. 30, 1995 To Nine Months Ended Sept. 30, 1995 -------------------------------------- ------------------------------------- Average Yield/ Net Average Yield/ Net Volume Rate Change Volume Rate Change -------------------------------------- ------------------------------------- INTEREST INCOME Loans $102.3 $ 68.2 $170.5 $ 383.8 $ 208.3 $ 592.1 Mortgage loans held for sale (6.3) .9 (5.4) (36.1) 5.3 (30.8) Taxable investment securities 1.5 5.0 6.5 61.7 3.3 65.0 Tax-exempt investment securities 2.2 (3.6) (1.4) (2.1) (2.2) (4.3) Securities available for sale (37.6) 6.7 (30.9) (138.6) 25.6 (113.0) Short-term investments 7.5 .6 8.1 32.7 2.9 35.6 ---------- ---------- --------- --------- ---------- --------- Total interest income 69.6 77.8 147.4 301.4 243.2 544.6 INTEREST EXPENSE Money market deposit accounts (.5) 16.3 15.8 (2.0) 56.2 54.2 Savings deposits (9.4) (1.4) (10.8) (24.8) 2.5 (22.3) NOW accounts (.6) .9 .3 (1.6) 6.3 4.7 Certificates of deposit ($100,000 or more) 14.6 4.4 19.0 28.7 31.9 60.6 Other time deposits 27.8 40.5 68.3 80.0 108.6 188.6 Deposits in foreign offices (22.1) 18.3 (3.8) (15.3) 59.3 44.0 ---------- ---------- --------- --------- ---------- --------- Total interest-bearing deposits 9.8 79.0 88.8 65.0 264.8 329.8 Federal funds purchased and securities sold under repurchase agreements (7.4) 16.5 9.1 (13.7) 72.0 58.3 Other short-term borrowings 18.5 8.5 27.0 77.4 27.2 104.6 Long-term debt 31.3 5.5 36.8 93.8 10.1 103.9 ---------- ---------- --------- --------- ---------- --------- Total interest expense 52.2 109.5 161.7 222.5 374.1 596.6 ---------- ---------- --------- --------- ---------- --------- Net interest income $ 17.4 $(31.7) $(14.3) $ 78.9 $(130.9) $ (52.0) ========== ========== ========= ========= ========== =========
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. ASSET AND LIABILITY MANAGEMENT Asset/Liability Management Committee The Corporation manages its exposure to economic loss from fluctuations in interest rates through an active program of asset and liability management pursuant to guidelines established by the Corporation's Asset/Liability Management Committee ("ALCO"). The ALCO has the responsibility for approving the asset/liability management policies of the Corporation, formulating and implementing strategies to improve balance sheet positioning and/or earnings, and reviewing the interest rate sensitivity positions of the Corporation and each of its affiliate banks. The ALCO meets twice monthly to conduct this review and to approve strategies consistent with its policies. The primary tool utilized by management to measure and manage interest rate exposure is a simulation model. Use of the model to perform simulations of changes in interest rates over one- and two-year time horizons has enabled management to develop strategies for managing exposure to interest rate risk. In its simulations, management estimates the impact on net interest income of pro forma 100 and 200 basis point changes in the overall level of interest rates. These estimates are based on a large number of assumptions related to loan and deposit growth, prepayments, interest rates, and other factors. Management believes that both individually and in the aggregate these assumptions are reasonable, but the complexity of the simulation modeling process results in a sophisticated estimate, not an absolutely precise calculation of exposure. ALCO guidelines provide that a gradual 200 basis point increase or decrease in short-term rates over the next twelve-month period should not result in more than an estimated 2% impact on net interest income from what net interest income would have been if interest rates did not change. As discussed in the following Recent Management Actions section, the Corporation is well within these guidelines, largely as a result of actions taken during the fourth quarter of 1994 and the first quarter of 1995. 26 27 Recent Management Actions During the first quarter of 1995, management completed the reconfiguration of the Corporation's balance sheet in accordance with plans initially announced last December. The objective of this reconfiguration was to significantly reduce the Corporation's exposure to changes in interest rates. At the time the plans were announced, the Corporation's liability-sensitive position was moderately in excess of the ALCO guidelines. Implementation of the balance sheet reconfiguration plans began during the fourth quarter of 1994 with the sale of $877.7 million of securities with an aggregate weighted average yield of 5.67%. This was followed by the first quarter 1995 sale of $1.2 billion of securities with an aggregate weighted average yield of 6.24%. In addition, over these two quarters the Corporation executed $2.1 billion of portfolio interest rate swaps that received a variable rate and paid a fixed rate, and terminated $1.6 billion of portfolio interest rate swaps that received a fixed rate and paid a variable rate. During the fourth quarter of 1994 and the first quarter of 1995, the Corporation also issued fixed-rate debt totaling $245.0 million. The actions taken during the fourth quarter of 1994 reduced the Corporation's estimated liability-sensitive position to within the ALCO guidelines, while the additional actions taken during the first quarter of 1995 further reduced the Corporation's liability-sensitive position such that a gradual 200 basis point increase in interest rates over the next twelve-month period would have an approximate 1% negative impact on net interest income, according to the simulation model. While these actions reduced the Corporation's exposure to changes in short-term interest rates, net interest income and the net interest margin were negatively impacted due to increased reliance on fixed-rate market priced funding at higher interest rates. In July 1995, the Corporation completed its first securitization and sale of indirect auto loans in the amount of $299 million and sold approximately $500 million of residential mortgage loans. Since these transactions involved lower spread assets, they had the positive effect of improving the net interest margin. Additionally, these transactions improved liquidity and enhanced capital management flexibility. The Corporation will continue to evaluate strategies to securitize and/or sell loans, taking into account the impact on liquidity, capital and earnings. Interest Rate Swap Contracts The Corporation's core lending and deposit-gathering businesses tend to generate significantly more fixed-rate deposits than fixed-rate interest-earning assets. Left unaddressed, this tendency would place the Corporation' earnings at risk to declining interest rates as interest-earning assets would reprice faster than would interest-bearing liabilities. In addition to the Corporation's securities portfolio, management has utilized interest rate swaps to manage interest rate risk by modifying the repricing or maturity characteristics of specified on-balance sheet assets and liabilities. Interest rate swaps used for this purpose are designated as portfolio swaps. The decisions to use portfolio interest rate swaps versus on-balance sheet securities to manage interest rate risk have depended on various factors, including funding costs, liquidity, and capital requirements. As summarized in Figure 5, the Corporation's portfolio swaps totaled $9.8 billion at September 30, 1995, and consisted principally of contracts wherein the Corporation receives a fixed rate of interest while paying a variable rate. 27 28 FIGURE 5. INTEREST RATE SWAP PORTFOLIO (dollars in millions)
SEPTEMBER 30, 1995 December 31, 1994 ------------------------------------------------------------------ ------------------------ WEIGHTED AVERAGE RATE NOTIONAL FAIR MATURITY(1) ------------------------ Notional Fair AMOUNT VALUE (YEARS) RECEIVE PAY Amount Value ---------- ---------- ---------- ---------- ---------- ---------- ---------- Receive fixed/pay variable - indexed amortizing $ 4,604.0 $(12.0) 2.8 6.83% 5.95% $ 5,786.6 $(341.7) Receive fixed/pay variable - conventional 2,716.2 20.8 6.9 6.64 5.95 3,010.2 (199.6) Pay fixed/receive variable - conventional 2,486.5 (22.5) .7 5.86 7.44 1,456.5 11.5 Basis swaps -- -- -- -- -- 200.0 .1 ---------- ---------- ---------- ---------- Total portfolio swaps 9,806.7 (13.7) 3.4 6.53 6.33 10,453.3 (529.7) Customer swaps 2,116.4 7.2 3.8 6.58 6.67 1,248.3 2.0 ---------- ---------- ---------- ---------- Total interest rate swaps $11,923.1 $ (6.5) 3.5 6.54% 6.39% $11,701.6 $(527.7) ========== ========== ========== ========== (1) Maturity is based on expected average lives rather than contractual terms.
Conventional interest rate swap contracts involve the receipt of amounts based on fixed or variable rates in exchange for payments based on variable or fixed rates, without an exchange of the underlying notional amount. Under an indexed amortizing swap contract, the notional amount remains constant for a specified period of time after which, based upon the level of the index at each payment review date, the swap contract will mature, the notional amount will amortize, or the swap will continue in effect until its contractual maturity. Otherwise, the characteristics of these swaps are similar to those of conventional swap contracts. Under basis swap contracts, interest payments based on different floating indices are exchanged. In addition to portfolio swaps, the Corporation has entered into interest rate swap contracts to accommodate the needs of its customers, typically commercial loan customers. The Corporation offsets the interest rate risk of customer swaps by entering into offsetting swaps with third parties. These offsetting swaps are also included in the customer swap portfolio. Adjustments to fair values of customer swaps are included in noninterest income. The $2.1 billion notional amount of customer swaps presented in Figure 5 includes $956.1 million of interest rate swaps that receive a fixed rate and pay a variable rate and $1.1 billion of interest rate swaps that pay a fixed rate and receive a variable rate. The total notional amount of all interest rate swap contracts outstanding was $11.9 billion at September 30, 1995, $11.7 billion at December 31, 1994, and $10.0 billion at September 30, 1994. The weighted average rates presented in Figure 5 are those in effect at September 30, 1995. Portfolio interest rate swaps reduced net interest income and the net interest margin by $7.6 million and 5 basis points, respectively, during the third quarter of 1995. These reductions reflected the amortization of net deferred losses from prior period swap terminations, which more than offset the impact of a positive spread on the third quarter 1995 swap portfolio. As of September 30, 1995, the spread on portfolio interest rate swaps, which excludes the amortization of net deferred swap losses, provided a slightly positive impact on net interest income (since the weighted average rate received exceeded the weighted average rate paid by 20 basis points). The portfolio had an aggregate negative fair value of $(13.7) million at the same date. The aggregate fair value was estimated through the use of discounted cash flow models which contemplate interest rates using the applicable forward yield curve. The estimated fair value of the Corporation's total interest rate swap portfolio improved substantially during the first nine months of 1995 from a negative fair value of $(527.7) million at December 31, 1994. The improvement in fair value over the past nine months reflected the financial markets' expectations, as measured by the forward yield curve, for a decline in future interest rates. In addition, since the end of last year, swaps with an aggregate notional amount of $1.3 billion were terminated prior to their maturities, resulting in net deferred losses of $57.8 million. Such losses are amortized, generally, over the projected remaining life of the related swap contract at its termination. A summary of the Corporation's deferred swap gains and losses at September 30, 1995, is presented in Note 10, Financial Instruments with Off-Balance Sheet Risk, beginning on page 14 of this report. Each swap was terminated in response to a unique set of circumstances and for various reasons; however, the decision to terminate a swap contract is strategically integrated with asset and liability management and other appropriate processes. These terminations as well as other portfolio swap activity for the nine-month period ended September 30, 1995, are summarized in Figure 6. 28 29 FIGURE 6. PORTFOLIO SWAP ACTIVITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (in millions)
Receive Fixed ----------------------------- Total Indexed Pay Fixed- Basis Portfolio Amortizing Conventional Conventional Swaps Swaps ------------ ------------ ------------ ------------ ------------ Balance at beginning of year $5,786.6 $3,010.2 $1,456.5 $200.0 $10,453.3 Additions 355.0 200.0 1,030.0 -- 1,585.0 Maturities -- 494.0 -- 200.0 694.0 Terminations 1,300.0 -- -- -- 1,300.0 Amortization 237.6 -- -- -- 237.6 ------------ ------------ ------------ ------------ ------------ Balance at end of period $4,604.0 $2,716.2 $2,486.5 -- $ 9,806.7 ============ ============ ============ ============ ============
A summary of the notional and fair values of portfolio swaps by interest rate management strategy at September 30, 1995, is presented in Figure 7. In effect, the fair value at any given date represents the estimated net cost which would be recognized if the portfolio were to be liquidated at that date. However, because the portfolio interest rate swaps are used to alter the repricing or maturity characteristics of specific assets and liabilities, the net unrealized gains and losses related to the swaps are not recognized in earnings. Rather, interest from these swaps is recognized on an accrual basis as an adjustment of the interest income or expense from the asset or liability being managed. FIGURE 7. PORTFOLIO SWAPS BY INTEREST RATE MANAGEMENT STRATEGY (in millions)
September 30, 1995 December 31, 1994 September 30, 1994 -------------------- -------------------- -------------------- Notional Fair Notional Fair Notional Fair Amount Value Amount Value Amount Value -------- -------- -------- -------- -------- -------- Convert variable rate loans to fixed $5,704.0 $(28.1) $ 7,146.6 $(470.6) $6,469.9 $(357.2) Convert fixed rate liabilities to variable 1,616.2 36.9 1,650.2 (70.7) 1,763.0 (38.7) Convert variable rate liabilities to fixed 2,486.5 (22.5) 1,456.5 11.5 319.2 (5.1) Other -- -- 200.0 .1 200.0 -- -------- -------- --------- -------- -------- -------- Total portfolio swaps $9,806.7 $(13.7) $10,453.3 $(529.7) $8,752.1 $(401.0) ======== ======== ========= ======== ======== ========
The notional amount of the interest rate swap contracts represents only an agreed upon amount on which calculations of interest payments to be exchanged are based. It does not represent the potential for gain or loss on such positions. Similarly, the notional amount is not indicative of the market risk or the credit risk of the positions held. Credit risk is the possibility that the counterparty will not meet the terms of the swap contract and is measured as the cost of replacing, at current market rates, contracts in an unrealized gain position. The credit risk exposure to the counterparty on each interest rate swap is monitored by an appropriate credit committee. Based upon detailed credit reviews of the counterparties, limits on the total credit exposure the Corporation may have with each counterparty, and whether collateral is required, are determined. Although the Corporation is exposed to credit-related losses in the event of nonperformance by the counterparties, based on management's assessment, as of September 30, 1995, all counterparties were expected to meet their obligations. At September 30, 1995, the Corporation had 19 different counterparties to portfolio swaps and swaps entered into to offset the risk of customer swaps. Of these counterparties, the Corporation had an aggregate credit exposure of $28.8 million to only nine, with the largest credit exposure to an individual counterparty amounting to $10.1 million. The expected average maturities of the portfolio swaps at September 30, 1995, are summarized in Figure 8. 29 30 FIGURE 8. EXPECTED AVERAGE MATURITIES OF PORTFOLIO SWAPS AT SEPTEMBER 30, 1995 (in millions)
Receive Fixed ----------------------------- Total Indexed Pay Fixed- Portfolio Amortizing Conventional Conventional Swaps ---------- ------------ ------------ --------- Due in one year or less $ 432.0 $ 50.0 $1,725.0 $2,207.0 Due after one through five years 4,172.0 591.2 761.5 5,524.7 Due after five through ten years -- 2,075.0 -- 2,075.0 ---------- ------------ ------------ --------- Total portfolio swaps $4,604.0 $2,716.2 $2,486.5 $9,806.7 ========== ============ ============ =========
NONINTEREST INCOME As shown in Figure 9, noninterest income totaled $235.0 million for the third quarter of 1995, up $11.7 million, or 5%, from the same period last year. This improvement reflected growth in fee-based revenues, with the largest increases coming from services charges on deposit accounts ($2.8 million), trust and asset management income ($4.3 million), and credit card fees ($2.1 million). The increase in trust and asset management income was due, in large part, to the April 1995 acquisition of Spears Benzak, which is more fully disclosed in Note 2, Mergers, Acquisitions and Divestitures, beginning on page 7 of this report. Additional detail pertaining to the composition of the trust revenue component is presented in Figure 10. Also contributing to the growth in noninterest income was a $4.7 million increase in venture capital gains and an $8.7 million increase in miscellaneous income. The increase in miscellaneous income resulted from gains recognized in connection with loan securitizations and sales, higher income from company owned life insurance and increases in various other categories of operating income. The positive effect of the above items was partially offset by a $10.2 million decrease in mortgage banking income, resulting from the March 1995 sale of the residential mortgage loan servicing business. The completion of eight acquisitions, including Spears Benzak, since June 1994 had a positive overall impact on noninterest income relative to the third quarter of last year. For the first nine months of 1995, noninterest income totaled $628.9 million, down $48.4 million, or 7%, from the first nine months of last year. Included in 1995 results were net securities losses of $49.3 million recorded in the first quarter in connection with efforts to reconfigure the balance sheet in order to reduce interest rate risk. As shown in Figure 9, other significant year-to-date declines from the prior year occurred in mortgage banking income and special asset management fees, which decreased by $32.4 million and $6.1 million, respectively. The reduction in mortgage banking income resulted from the sale of the mortgage loan servicing business referred to above, while the reduction in special asset management fees reflected the decrease in the level of activity associated with loan collection and asset disposition work performed under contracts with the Federal Deposit Insurance Corporation. These contracts expired during the third quarter. The above decreases were partially offset by increases in service charges on deposit accounts ($7.9 million), trust and asset management income ($3.9 million), and credit card fees ($3.8 million). The growth in service charges reflected the repricing of fees by certain affiliate banks, improved collections experience and a higher deposit base. In addition, miscellaneous income rose by $25.9 million due to gains from loan securitizations and sales, higher income from dealer swap activities and company owned life insurance, and increases in a number of other categories of operating income. Nine acquisitions completed since the 1993 year end also had a positive impact on 1995 noninterest income in comparison with the 1994 year-to-date period. 30 31 FIGURE 9. NONINTEREST INCOME (dollars in millions)
Three months ended Nine months ended September 30, Change Septermber 30, Change ------------------ ------------------- ------------------ ----------------- 1995 1994 Amount Percent 1995 1994 Amount Percent ------ ------ ------- ------- ------ ------- ------ ------- Service charges on deposit accounts $ 70.7 $ 67.9 $ 2.8 4.1 % $206.5 $198.6 $ 7.9 4.0 % Trust and asset management income 58.2 53.9 4.3 8.0 170.4 166.5 3.9 2.3 Credit card fees 22.6 20.5 2.1 10.2 59.9 56.1 3.8 6.8 Insurance and brokerage income 16.5 14.9 1.6 10.7 43.8 46.3 (2.5) (5.4) Mortgage banking income 9.1 19.3 (10.2) (52.8) 34.3 66.7 (32.4) (48.6) Net securities gains (losses) .2 2.0 (1.8) (90.0) (42.2) 9.0 (51.2) N/M Other income: International fees 5.7 4.5 1.2 26.7 14.7 12.3 2.4 19.5 Special asset management fees 1.4 3.1 (1.7) (54.8) 6.0 12.1 (6.1) (50.4) Venture capital gains 5.3 .6 4.7 783.3 9.9 10.0 (.1) (1.0) Miscellaneous 45.3 36.6 8.7 23.8 125.6 99.7 25.9 26.0 ------ ------ ------ ------ ------ ------ Total other income 57.7 44.8 12.9 28.8 156.2 134.1 22.1 16.5 ------ ------ ------ ------ ------ ------ Total noninterest income $235.0 $223.3 $11.7 5.2 % $628.9 $677.3 $(48.4) (7.1) % ====== ====== ====== ====== ====== ====== N/M = Not Meaningful
FIGURE 10. TRUST AND ASSET MANAGEMENT INCOME (dollars in millions)
Three months ended Nine months ended September 30, Change September 30, Change ----------------- ---------------------- ------------------ ---------------- 1995 1994 Amount Percent 1995 1994 Amount Percent ----- ----- --------- ---------- ------ ------- ------- -------- Personal asset management and custody fees $31.3 $26.2 $ 5.1 19.5 % $ 89.8 $ 83.1 $ 6.7 8.1 % Institutional asset management and custody fees 17.5 18.9 (1.4) (7.4) 51.7 55.5 (3.8) (6.8) Corporate service fees 4.8 5.1 (.3) (5.9) 15.3 17.0 (1.7) (10.0) All other fees 4.6 3.7 .9 24.3 13.6 10.9 2.7 24.8 ----- ----- ------ ------ ------ ------ Total trust and asset management income $58.2 $53.9 $ 4.3 8.0 % $170.4 $166.5 $ 3.9 2.3 % ===== ===== ====== ====== ====== ======
NONINTEREST EXPENSE As shown in Figure 11, noninterest expense for the third quarter of 1995 totaled $560.3 million, up $30.2 million, or 6%, from the third quarter of 1994. This increase reflected the impact of eight acquisitions completed since June 1994 and approximately $11 million of additional expenses recorded during the third quarter of 1995 in connection with the implementation of several strategic initiatives. Partially offsetting these factors was the overall reduction in costs (primarily personnel) resulting from the March 1995 sale of the residential mortgage loan servicing business. Net of this reduction, personnel expense, the largest category of noninterest expense, increased $21.0 million, due in large part to the impact of the acquisitions and the resulting increase in the number of full-time equivalent employees. The $5.0 million increase in the amortization of intangibles was also related to the acquisitions, while the $6.8 million growth in professional fees represented most of the $11 million of incremental costs incurred in connection with the strategic initiatives. Miscellaneous expense rose $21.8 million, reflecting the impact of acquisitions as well as higher loan servicing fees due to the sale of the mortgage loan servicing business. The above increases were substantially offset by the effect of a retroactive reduction in the Bank Insurance Fund assessment rate. This reduction resulted in a September 1995, $25 million return of deposit insurance premiums for the periods June 1 through June 30, 1995, (approximately $7 million) and July 1 through September 30, 1995, (approximately $18 million). At the current level of deposits, the new assessment rate would result in a quarterly expense for deposit insurance premiums for KeyCorp of approximately $7.5 million, down from approximately $25 million in recent quarters. Noninterest expense totaled $1.7 billion for the first nine months of 1995, up $78.1 million, or 5%, from the comparable 1994 period. Increases in personnel expense ($36.8 million), amortization of intangibles ($14.8 million), professional fees ($13.2 million), and miscellaneous expense ($38.5 million) were partially offset by the decrease in deposit insurance premiums. The same factors which contributed to the variance in quarterly results relative to the prior year also accounted for the year-to-date variances summarized above. 31 32 The efficiency ratio, which provides a measure of the extent to which recurring revenues are used to pay operating expenses, was 61.27% for the third quarter compared with 63.05% and 57.90% for the second quarter of 1995 and the third quarter of 1994, respectively. The increase in the efficiency ratio relative to the prior year period reflected the reduction in taxable-equivalent net interest income as well as the increase in noninterest expense. FIGURE 11. NONINTEREST EXPENSE (dollars in millions)
Three months ended Nine months ended September 30, Change September 30, Change -------------------- -------------------- -------------------- -------------------- 1995 1994 Amount Percent 1995 1994 Amount Percent -------- -------- -------- -------- -------- -------- -------- -------- Personnel $278.7 $257.7 $ 21.0 8.1% $ 829.2 $ 792.4 $ 36.8 4.6% Net occupancy 53.5 53.9 (.4) (.7) 159.6 162.6 (3.0) (1.8) Equipment 37.3 39.3 (2.0) (5.1) 116.4 118.8 (2.4) (2.0) FDIC insurance assessments .2 25.3 (25.1) (99.2) 51.6 74.1 (22.5) (30.4) Amortization of intangibles 19.0 14.0 5.0 35.7 55.1 40.3 14.8 36.7 Professional fees 18.0 11.2 6.8 60.7 48.4 35.2 13.2 37.5 Other expense: Marketing 18.4 14.0 4.4 31.4 51.6 44.7 6.9 15.4 OREO expense, net (1) (.5) .8 (1.3) N/M .3 4.5 (4.2) (93.3) Miscellaneous 135.7 113.9 21.8 19.1 377.5 339.0 38.5 11.4 -------- -------- -------- -------- -------- -------- Total other expense 153.6 128.7 24.9 19.3 429.4 388.2 41.2 10.6 -------- -------- -------- -------- -------- -------- Total noninterest expense $560.3 $530.1 $ 30.2 5.7% $1,689.7 $1,611.6 $ 78.1 4.8% ======== ======== ======== ======== ======== ======== Full-time equivalent employees 29,560 29,411 29,560 29,411 Efficiency ratio (2) 61.27% 57.90% 62.79% 58.81% Overhead ratio (3) 47.89 44.48 50.43 45.53 (1) OREO expense is net of income of $1.4 million and $1.6 million for the third quarter of 1995 and 1994 respectively, and $3.8 million and $3.6 million for the 1995 and 1994 year-to-date periods, respectively. (2) Calculated as noninterest expense divided by taxable-equivalent net interest income plus noninterest income (excluding net securities transactions). (3) Calculated as noninterest expense less noninterest income (excluding net securities transactions) divided by taxable-equivalent net interest income.
INCOME TAXES The provision for income taxes was $103.6 million for the three-month period ended September 30, 1995, as compared to $116.3 million for the same period in 1994. The effective tax rate (provision for income taxes as a percentage of income before income taxes and extraordinary item) for the 1995 third quarter was 33.1% compared to 33.7% for the third quarter of 1994. For the first nine months of 1995, the provision for income taxes was $266.5 million compared with $335.0 million for the first nine months of 1994. The effective tax rate in each of these periods was 31.4% and 33.7%, respectively. The decrease in the year-to-date effective tax rate was primarily attributable to the recognition during the first quarter of 1995 of one-time tax benefits totaling $16.0 million related to acquisitions made in years prior to 1992. FINANCIAL CONDITION LOANS At September 30, 1995, total loans outstanding were $48.4 billion, compared to $46.2 billion at December 31, 1994, and $44.6 billion at September 30, 1994. The composition of the loan portfolio by loan type, as of each of these respective dates, is presented in Note 5, Loans, beginning on page 11 of this report. The $2.2 billion growth from the December 31, 1994, level was the result of increases of $1.4 billion in commercial loans, $11.3 million in real estate loans (including a $670.2 million decrease in residential mortgages), $681.9 million in student loans held for sale and $345.8 million in lease financing. The decrease in residential mortgage loans was the result of a transfer of $1.0 billion of seasoned 15- and 30-year residential mortgages to the held for sale portfolio. Of the loans transferred, $500 million were sold during the third quarter. Growth in the above categories was partially offset by a $210.6 million decrease in consumer loans as a result of the $299 million securitization of auto loans. As shown in Figure 12, loan growth, excluding the impact of acquisitions and sales, was achieved principally in the Northeast and Great Lakes regions. The acquired loan growth resulted from the acquisitions of OMNIBANCORP in the Rocky Mountain Region, Casco Northern Bank, National Association and BANKVERMONT Corporation in the Northeast Region and AFG, which is 32 33 included in Financial Services. Additional detail pertaining to these acquisitions is presented in Note 2, Mergers, Acquisitions and Divestitures, beginning on page 7 of this report. FIGURE 12. PERIOD-END LOAN GROWTH BY REGION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (dollars in millions)
December 31, Other September 30, Percent 1994 Acquired Sold(1) Activity 1995 Change ---------- ---------- ---------- ---------- ---------- ---------- Northeast Region $12,621.6 $1,162.2 $ 10.5 $ 538.6 $14,311.9 13.4% Great Lakes Region 20,909.0 - 1,086.5 942.6 20,765.1 (.7) Rocky Mountain Region 3,317.3 215.3 18.9 284.9 3,798.6 14.5 Northwest Region 9,270.2 - 180.2 (78.0) 9,012.0 (2.8) Financial Services 106.6 144.6 -- 270.9 522.1 389.8 ---------- ---------- ---------- ---------- ---------- Total $46,224.7 $1,522.1 $1,296.1 $1,959.0 $48,409.7 4.7% ========== ========== ========== ========== ========== (1) Includes mortgage loans transferred to the held for sale portfolio.
SECURITIES At September 30, 1995, the securities portfolio totaled $11.3 billion, consisting of $1.6 billion of securities available for sale and $9.7 billion of investment securities. This compares to a total portfolio of $12.8 billion, comprised of $2.5 billion of securities available for sale and $10.3 billion of investment securities, at December 31, 1994. The reduction in the overall portfolio since year end 1994 reflects the first quarter 1995 sale of $1.2 billion of securities in conjunction with the balance sheet reconfiguration, which is more fully discussed in the Asset and Liability Management section beginning on page 26 of this report. Certain information pertaining to the composition, yields and maturities of the securities available for sale and investment securities portfolios is presented in Figures 13 and 14, respectively. FIGURE 13. SECURITIES AVAILABLE FOR SALE AT SEPTEMBER 30, 1995 (dollars in millions)
U.S. Treasury, States and Mortgage- Weighted Agencies and Political Backed Other Average Corporations Subdivisions Securities(1) Securities Total Yield (2) ------------ ------------ ------------ ------------ ------------ ------------ Maturity: One year or less $338.1 $ 3.4 $ .2 $ 6.1 $ 347.8 6.76% After one through five years 311.0 10.2 31.4 24.9 377.5 7.09 After five through ten years 10.2 8.5 825.3 10.8 854.8 6.44 After ten years 7.9 3.8 -- 4.1 15.8 7.61 ------------ ------------ ------------ ------------ ------------ Fair value $667.2 $25.9 $856.9 $45.9 $1,595.9 6.56% ============ ============ ============ ============ ============ Amortized cost $662.9 $25.5 $859.6 $45.7 $1,593.7 Weighted average yield 6.99% 8.07% 6.45% 4.58% 6.56% Weighted average maturity 1.6 years 6.1 years 7.4 years 7.8 years 6.2 years (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%.
33 34 FIGURE 14. INVESTMENT SECURITIES AT SEPTEMBER 30, 1995 (dollars in millions)
U.S. Treasury, States and Mortgage- Weighted Agencies and Political Backed Other Average Corporations Subdivisions Securities(1) Securities Total Yield (2) ------------ ------------ ------------- ------------ ------------ ------------ Maturity: One year or less $ 67.1 $ 619.5 $ 275.6 $254.0 $1,216.2 7.05% After one through five years 172.0 523.5 3,772.4 113.8 4,581.7 6.72 After five through ten years 4.3 237.3 1,490.9 46.1 1,778.6 8.03 After ten years 294.8 66.3 1,720.5 2.6 2,084.2 7.11 ------------ ------------ ------------- ------------ ------------ Amortized cost $538.2 $1,446.6 $7,259.4 $416.5 $9,660.7 7.09% ============ ============ ============ ============ ============ Fair value $542.9 $1,495.8 $7,235.0 $415.8 $9,689.5 Weighted average yield 6.92% 8.56% 6.76% 7.90% 7.09% Weighted average maturity 15.2 years 2.9 years 5.6 years 2.2 years 5.5 years (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%.
ASSET QUALITY The Corporation's Credit Risk Review Group evaluates and monitors the level of risk in the Corporation's loan-related assets, and formulates underwriting standards and guidelines for active line management. Geographic diversification throughout the Corporation is a significant factor in managing credit risk. In addition, the Credit Risk Review Group is responsible for reviewing the adequacy of the allowance for loan losses ("Allowance"). The Corporation's Credit Policy/Risk Management Group reviews corporate assets other than loans, leases and other real estate owned ("OREO") to evaluate the credit quality and risk inherent in such assets. This Group is also responsible for commercial and consumer credit policy development, concentration management and credit systems development. Management has developed methodologies designed to assess whether the coverage for possible loan losses by the Allowance is adequate. The methodologies applied at KeyCorp focus on a combination of allowance allocations directly attributable to specific potential problem credits and general allocations based on historical losses on a portfolio basis. In addition, indirect risk in the form of general economic conditions, portfolio diversification and off-balance sheet risk are taken into consideration. Management continues to target and maintain an Allowance equal to the allocated requirement plus an unallocated portion, as appropriate. Management believes this is an appropriate posture in light of current and expected economic conditions and trends, the geographic and industry mix of the loan portfolio and similar risk-related matters. As shown in Figure 15, net loans charged off for the third quarter were slightly higher than those recorded for the same period last year. However, for the year-to-date period net loans charged off were under the prior year level by $23.5 million, or 27%. This improvement came from the commercial, financial and agricultural; real estate-construction; and real estate-mortgage portfolios. These reductions were partially offset by higher net charge-offs in the consumer and lease financing portfolios. The third quarter provision for loan losses was relatively unchanged from that of the year-ago quarter. Consistent with the substantial decline in the level of net loans charged off in the first nine months of 1995, the year-to-date provision was $66.3 million, down $32.7 million, or 33%, from the comparable 1994 period. At September 30, 1995, the Allowance as a percentage of loans outstanding was 1.82%, compared with 1.80% and 1.84% at December 31, 1994, and September 30, 1994, respectively. 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. 34 35 FIGURE 15. SUMMARY OF LOAN LOSS EXPERIENCE (dollars in millions)
Three months ended September 30, Nine months ended September 30, -------------------------------- ------------------------------ 1995 1994 1995 1994 ---------- ---------- ---------- ---------- Average loans outstanding during the period $48,195.7 $43,616.2 $ 47,801.1 $ 41,995.9 Allowance for loan losses at beginning of period 867.5 816.4 830.0 802.7 Loans charged off: Commercial, financial and agricultural 11.4 14.0 31.4 47.4 Real estate-construction .4 -- 1.5 6.5 Real estate-mortgage 12.3 8.1 26.2 25.6 Consumer 32.0 24.7 87.2 73.6 Lease financing 1.3 .7 2.8 2.5 ---------- ---------- ---------- ---------- 57.4 47.5 149.1 155.6 Recoveries: Commercial, financial and agricultural 15.3 8.2 42.3 28.9 Real estate-construction 1.8 .3 2.5 .6 Real estate-mortgage 3.9 3.8 10.7 8.0 Consumer 8.3 9.0 27.3 28.0 Lease financing .4 .3 1.4 1.7 ---------- ---------- ---------- ---------- 29.7 21.6 84.2 67.2 ---------- ---------- ---------- ---------- Net loans charged off (27.7) (25.9) (64.9) (88.4) Provision for loan losses 27.5 27.2 66.3 99.0 Allowance of acquired companies 11.8 2.5 46.9 6.9 Transfer from OREO allowance .1 -- .6 -- ---------- ---------- ---------- ---------- Allowance for loan losses at end of period $ 879.2 $ 820.2 $ 879.2 $ 820.2 ========== ========== ========== ========== Net loan charge-offs to average loans .23% .24% .18% .28% Allowance for loan losses to period-end loans 1.82 1.84 1.82 1.84 Allowance for loan losses to nonperforming loans 280.53 286.62 280.53 286.62
The composition of nonperforming assets ("NPA") is shown in Figure 16. These assets totaled $367.3 million at September 30, 1995, and represented .76% of loans, OREO and other nonperforming assets compared with $339.8 million, or .73%, at year-end 1994 and $398.5 million, or .89%, at September 30, 1994. Effective January 1, 1995, the Corporation adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures". SFAS No. 114 prescribes the methodology under which certain loans are to be measured for impairment and provides that loans are to be classified in OREO only when the creditor has actually taken possession of the collateral. Generally, a loan is considered impaired when management believes it is probable that all amounts due will not be collected according to the contractual terms of the loan agreement. SFAS No. 118 amends SFAS No. 114 by eliminating certain income recognition provisions and by expanding disclosure requirements. Adoption of these standards did not have a material effect on the Corporation's financial condition or results of operations and is more fully discussed in Note 6, Nonperforming Assets, beginning on page 12 of this report. Nonperforming assets increased $27.5 million, or 8%, from the end of the prior year as a result of a $57.4 million, or 22%, increase in nonperforming loans, offset in part by a $36.0 million, or 36%, decrease in OREO. The increase in nonperforming loans resulted from acquisitions ($20.2 million), the addition of one large commercial credit ($28.6 million), and a transfer of $19.9 million from OREO, related to the adoption of SFAS No. 114. The decrease in OREO resulted from the SFAS No. 114 transfer and other activity aggregating $16.1 million. On a regional basis, as illustrated in Figure 18, the ratio of nonperforming assets to total loans plus OREO and other nonperforming assets increased in the Northeast and Rocky Mountain Regions, as a result of acquisitions. The ratio in the Great Lakes Region rose slightly and the ratios for both the Northwest Region and Financial Services improved from the end of the prior year. The higher ratio in the Financial Services sector in the prior year reflected the disproportionately higher level of nonperforming assets in certain nonbank affiliates. Nonperforming assets in these affiliates totaled only $4.6 million at September 30, 1995. 35 36 FIGURE 16. SUMMARY OF NONPERFORMING ASSETS AND PAST DUE LOANS (dollars in millions)
September 30, December 31, September 30, 1995 1994 1994 -------------- ------------- -------------- Commercial, financial and agricultural $120.5 $ 92.3 $114.1 Real estate - construction 12.3 22.0 23.0 Real estate - commercial mortgage 99.4 82.2 88.0 Real estate - residential mortgage 60.3 44.7 43.8 Consumer 14.2 11.8 15.2 Lease financing 2.9 1.5 .6 -------------- ------------- -------------- Total nonaccrual loans 309.6 254.5 284.7 Restructured loans 3.8 1.5 1.4 -------------- ------------- -------------- Total nonperforming loans 313.4 256.0 286.1 Other real estate owned 64.3 100.3 134.1 Allowance for OREO losses (15.1) (21.3) (26.6) -------------- ------------- -------------- Other real estate owned, net of allowance 49.2 79.0 107.5 Other nonperforming assets 4.7 4.8 4.9 -------------- ------------- -------------- Total nonperforming assets $367.3 $339.8 $398.5 ============== ============== ============== Accruing loans past due 90 days or more $79.0 $50.2 $84.6 Nonperforming loans to period-end loans .65% .55% .64% Nonperforming assets to period-end loans plus other real estate owned and other nonperforming assets .76 .73 .89
FIGURE 17. SUMMARY OF CHANGES IN NONACCRUAL LOANS (in millions)
Three months ended September 30, Nine months ended September 30, -------------------------------- ------------------------------- 1995 1994 1995 1994 -------- -------- -------- -------- Balance at beginning of period $310.3 $307.5 $254.5 $329.8 Loans placed on nonaccrual 66.3 49.9 227.9 175.1 Charge-offs (1) (17.2) (21.7) (49.6) (81.6) Payments (28.8) (34.6) (98.9) (89.1) Transfers to OREO (7.2) (6.9) (18.6) (13.7) Loans returned to accrual (13.8) (10.7) (45.8) (38.8) Acquisitions -- 1.2 20.2 3.0 Transfers from OREO (2) -- -- 19.9 - -------- -------- -------- -------- Balance at end of period $309.6 $284.7 $309.6 $284.7 ======== ======== ======== ======== (1) Represents the gross charge-offs taken against nonaccrual loans; excluded are charge-offs taken against accruing loans, credit card receivables, and interest reversals. (2) Represents transfers related to the adoption of SFAS No. 114.
36 37 FIGURE 18. NONPERFORMING LOANS AND ASSETS BY REGION
Nonperforming Assets to Period-end Loans Nonperforming Loans to Period-end Loans Plus OREO and Other NPA ------------------------------------------------- ------------------------------------------------- September 30, December 31, September 30, September 30, December 31, September 30, 1995 1994 1994 1995 1994 1994 ------------- ------------- ------------- ------------- ------------- ------------- Northeast Region .93% .74% .81% 1.15% 1.09% 1.26% Great Lakes Region .52 .47 .59 .58 .57 .77 Rocky Mountain Region .73 .58 .57 .87 .66 .75 Northwest Region .48 .47 .54 .61 .63 .71 Financial Services .24 1.40 1.20 .87 10.19 10.20 ------------- ------------- ------------- ------------- ------------- ------------- Total .65% .55% .64% .76% .73% .89% ============= ============= ============= ============= ============= =============
FIGURE 19. PERCENTAGE OF NONPERFORMING LOANS TO PERIOD-END LOANS BY TYPE
Commercial, Real Estate- Real Estate- Financial and Real Estate- Commercial Residential Agricultural Construction Mortgage Mortgage Consumer Total ------------- ------------- ------------- ------------- ------------- ------------- Northeast Region 1.06% 3.59% 2.20% .60% .13% .93% Great Lakes Region .69 .49 1.09 .36 .11 .52 Rocky Mountain Region 1.36 .11 .86 .25 .31 .73 Northwest Region .31 .21 1.08 .32 .38 .48 Financial Services -- -- -- 1.65 .05 .24 ------------- ------------- ------------- ------------- ------------- ------------- Total .84% .84% 1.44% .44% .16% .65% ============= ============= ============= ============= ============= =============
DEPOSITS AND OTHER SOURCES OF FUNDS Core deposits, defined as domestic deposits other than certificates of deposit of $100,000 or more, are the Corporation's primary source of funding. During the third quarter of 1995, these deposits averaged $41.5 billion and represented 69% of the Corporation's funds supporting earning assets compared with $40.8 billion and 71%, respectively, for the third quarter of 1994. The slight growth in the amount of average core deposits reflected the impact of acquisitions, offset in part by the pursuit of other alternatives by consumers. As shown in Figure 3, beginning on page 24, over the past year balances have also moderately shifted from highly liquid money market deposit accounts and savings deposits to the higher yielding certificates of deposit of $100,000 or more and to the "Other time deposits" category which consists primarily of fixed rate certificates of deposit of less than $100,000. Purchased funds, which are comprised of large certificates of deposit, deposits in foreign offices and short-term borrowings, averaged $15.0 billion for the third quarter of 1995, up $197.0 million, or 1%, from the comparable prior year period. These instruments have been more heavily relied upon in the current year as the growth in earning assets has exceeded the increase in core deposits discussed above. As illustrated in Figure 3, the increase was attributable to growth in large certificates of deposit and other short-term borrowings, principally short-term notes. FIGURE 20. MATURITY DISTRIBUTION OF TIME DEPOSITS (in millions)
Domestic Foreign Offices Offices ---------- ---------- Time remaining to maturity: Three months or less $2,174.1 $2,014.8 Over three through six months 582.1 .5 Over six through twelve months 534.4 -- Over twelve months 688.7 -- ---------- ---------- Total $3,979.3 $2,015.3 ========== ==========
37 38 LIQUIDITY Liquidity represents the availability of funding to meet the needs of depositors, borrowers and creditors at a reasonable cost on a timely basis and without adverse consequences. The Corporation's ALCO actively analyzes and manages the Corporation's liquidity in coordination with similar committees at each affiliate bank. The affiliate banks individually maintain liquidity in the form of short-term money market investments, securities available for sale, anticipated prepayments and maturities on securities and through the maturity structure of their loan portfolios. Liquidity is also enhanced by a sizable concentration of core deposits, previously discussed, which are generated by more than 1,300 banking offices in 14 states. The affiliate banks individually monitor deposit flows and evaluate alternate pricing structures to retain or grow deposits. This process is supported by a Central Funding Unit within the Corporation's Funds Management Group which monitors deposit outflows and assists the banks in converting the pricing of deposits from fixed to floating rates or vice versa as specific needs are determined. In addition, the affiliate banks have access to various sources of non-core market funding for short-term liquidity requirements should the need arise. During the third quarter of 1995, the Corporation established a new Commercial Paper/Note Program which provides for the availability of up to $500 million of additional short-term funding. The proceeds from this program may be used to fund AFG's ongoing lending activities, as well as for general corporate purposes, including future acquisitions. The Corporation also entered into a four-year, $500 million revolving credit agreement with several banks under which the banks have agreed to lend collectively up to $500 million to KeyCorp. The line of credit will be used primarily as a backup source of liquidity for the Corporation's Commercial Paper/Note Program. There were no borrowings outstanding under either of these facilities as of September 30, 1995. In the first quarter of 1995, the Corporation's $5 billion Bank Note Program which involved four affiliate banks was expanded to allow issuances of up to $6.6 billion, covering eleven affiliate banks. During the first nine months of 1995, $2.3 billion was issued under this program leaving an unused capacity of $3 billion at September 30, 1995. All of the notes issued have maturities of one year or less and are included in other short-term borrowings. In addition to these short-term borrowings, Society National Bank, KeyCorp's lead bank, issued $200 million in long-term 7.25% subordinated notes during the same period. Under KeyCorp's universal shelf registration, the parent company issued $396.0 million in Medium-Term Notes during the first nine months of 1995. These notes have original maturities in excess of one year and are included in long-term debt. During April 1995, KeyCorp registered with the SEC a new universal shelf which provides for the possible issuance of a broad range of debt and equity securities by the parent company in an amount not to exceed $845 million. At the end of the third quarter, unused capacity under this shelf registration totaled $629 million. The proceeds from the Bank Note Program discussed above and the shelf registration may be used for general corporate purposes, including future 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, 1995, were as follows: Senior Long-Term Debt Subordinated Debt --------------------- ----------------- Standard & Poor's A- BBB+ Moody's A1 A2 Further information pertaining to the Corporation's sources and uses of cash for the nine-month periods ended September 30, 1995 and 1994, is presented in the Consolidated Statements of Cash Flow on page 6 of this report. CAPITAL AND DIVIDENDS Total shareholders' equity at September 30, 1995, was $5.1 billion, up $393.0 million, or 8%, from the December 31, 1994, balance and $389.6 million, or 8%, from the end of the third quarter of 1994. These increases resulted principally from the retention of net income after dividends paid to shareholders. Other factors contributing to the change in shareholders' equity during the first nine months of 1995 are shown in the Statement of Changes in Shareholders' Equity presented on page 5 of this report. Included in these changes are a $97.2 million increase in Treasury Stock, resulting from the share repurchase programs discussed below, and net unrealized gains of $90.0 million on securities, reducing the net unrealized losses on securities to $25.2 million as of September 30, 1995. These net unrealized losses were recorded in connection with SFAS No. 115, "Accounting for Certain Debt and Equity Securities." 38 39 In January 1995, the Board of Directors approved a 12,000,000 Common Share repurchase program, representing an addition to previously existing programs which had authorized the repurchase of up to 8,000,000 Common Shares. In addition, later during the first quarter of 1995, the Board of Directors authorized the repurchase of approximately 13,200,000 shares in connection with the acquisitions of AFG and Spears Benzak. During the first nine months of 1995, the Corporation repurchased 19,856,250 shares at a total cost of $577.6 million, bringing the total number of shares repurchased under these programs to 27,438,950. Of this total, 19,880,634 shares were reissued in connection with purchase acquisitions and various employee benefit programs. The 8,554,987 Treasury Shares at September 30, 1995, are expected to be reissued over time in connection with employee benefit programs. During the first nine months of 1995, Treasury Shares totaling 15,507,562 were reissued in connection with the acquisitions of AFG, OMNIBANCORP and Spears Benzak and 1,375,974 shares were reissued for employee benefit plans. At September 30, 1995, unused but authorized capacity to repurchase KeyCorp's Common Shares stood at 4,118,731. Capital adequacy is an important indicator of financial stability and performance. Overall, the Corporation's capital position remains strong with a ratio of total shareholders' equity to total assets of 7.48% at September 30, 1995, compared with 7.03% at December 31, 1994, and 7.29% at September 30, 1994. Banking industry regulators define minimum capital ratios for bank holding companies and their banking and savings association subsidiaries. Based on the risk-adjusted capital rules and definitions prescribed by the banking regulators, KeyCorp's Tier I and total capital to net risk-adjusted assets ratios at September 30, 1995, were 7.55% and 10.84%, respectively. These compare favorably with the minimum requirements of 4.0% for Tier I and 8.0% for total capital. The regulatory Tier I leverage ratio standard prescribes a minimum ratio of 3.0%, although most banking organizations are expected to maintain ratios of at least 100 to 200 basis points above the minimum. At September 30, 1995, KeyCorp's leverage ratio was 6.19%, substantially higher than the minimum requirement. Figure 21 presents the details of KeyCorp's regulatory capital position at September 30, 1995, December 31, 1994, and September 30, 1994. The decline in capital ratios from those reported in the prior year reflected the impact of KeyCorp's Common Share repurchase programs and additional goodwill recorded in connection with acquisitions. 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 KeyCorp's affiliate banks qualify as "well-capitalized" at September 30, 1995. Although these provisions are not directly applicable to the Corporation under existing law and regulations, based upon its ratios the Corporation would qualify as "well capitalized" at September 30, 1995. The FDIC-defined capital categories may not constitute an accurate representation of the overall financial condition or prospects of KeyCorp or its affiliate banks. 39 40 FIGURE 21. CAPITAL COMPONENTS AND RISK-ADJUSTED ASSETS (dollars in millions)
SEPTEMBER 30, December 31, September 30, 1995 1994 1994 TIER I CAPITAL ------------- ------------- ------------- Common shareholders' equity (1) $4,948.7 $4,640.0 $4,626.9 Qualifying preferred stock 160.0 160.0 160.0 Less: Goodwill (907.1) (418.5) (387.9) Other intangible assets (2) (142.2) (140.0) (137.0) ------------- ------------- ------------- Total Tier I Capital 4,059.4 4,241.5 4,262.0 ------------- ------------- ------------- TIER II CAPITAL Allowance for loan losses (3) 675.0 628.7 605.0 Qualifying long-term debt 1,097.2 943.2 942.9 ------------- ------------- ------------- Total Tier II Capital 1,772.2 1,571.9 1,547.9 ------------- ------------- ------------- Total Capital $5,831.6 $5,813.4 $5,809.9 ============= ============= ============= RISK-ADJUSTED ASSETS Risk-adjusted assets on balance sheet $49,390.2 $46,370.0 $44,523.6 Risk-adjusted off-balance sheet exposure 5,662.5 4,483.3 4,404.8 Less: Goodwill (907.1) (418.5) (387.9) Other intangible assets (2) (142.2) (140.0) (137.0) ------------- ------------- ------------- Gross risk-adjusted assets 54,003.4 50,294.8 48,403.5 Less: Excess allowance for loan losses (204.1) (201.6) (215.1) ------------- ------------- ------------- Net risk-adjusted assets $53,799.3 $50,093.2 $48,188.4 ============= ============= ============= AVERAGE QUARTERLY TOTAL ASSETS $66,615.6 $64,613.3 $63,438.6 ============= ============= ============= CAPITAL RATIOS Tier I capital to risk-adjusted assets 7.55% 8.48% 8.86% Total capital to risk-adjusted assets 10.84 11.62 12.07 Leverage (4) 6.19 6.63 6.79 (1) Common shareholders' equity excludes the impact of net unrealized gains or losses on securities, except for net unrealized losses on marketable equity securities. (2) Intangible assets (excluding goodwill and portions of purchased credit card relationships) recorded after February 19, 1992, and deductible portions of purchased mortgage servicing rights. (3) The allowance for loan losses included in Tier II capital is limited to 1.25% of gross risk-adjusted assets. (4) Tier I capital as a percentage of average quarterly assets, less goodwill and other non-qualifying intangible assets as defined in (2) above.
40 41 FIGURE 22. BANKING SERVICES DATA BY REGION (dollars in millions)
Northeast Region Great Lakes Region -------------------------------------------- -------------------------------------------- Three months ended Nine months ended Three months ended Nine months ended September 30, September 30, September 30, September 30, -------------------- -------------------- -------------------- -------------------- 1995 1994 1995 1994 1995 1994 1995 1994 -------- -------- -------- -------- -------- -------- -------- -------- SIGNIFICANT RATIOS Return on average total assets 1.29% 1.33% 1.23% 1.37% 1.51% 1.54% 1.51% 1.55% Net interest margin 4.60 4.84 4.63 5.04 4.33 4.52 4.33 4.72 Nonperforming loans to period-end loans .93 .81 .93 .81 .52 .59 .52 .59 Allowance for loan losses to period-end loans 1.39 1.34 1.39 1.34 2.26 2.39 2.26 2.39 Net loan charge-offs to average loans .48 .46 .37 .49 (.05) .13 .04 .24 Efficiency ratio 51.66 51.48 55.26 52.06 53.29 51.85 53.15 52.33 AVERAGE BALANCES Loans $13,901 $12,488 $13,553 $11,715 $20,020 $19,425 $20,095 $17,722 Earning assets 17,761 16,861 17,690 16,028 25,339 26,784 25,898 24,587 Total assets 19,251 17,992 19,050 17,165 27,942 29,161 28,305 26,840 Deposits 14,810 13,935 14,802 13,935 18,331 20,501 19,060 19,141
Rocky Mountain Region Northwest Region -------------------------------------------- -------------------------------------------- Three months ended Nine months ended Three months ended Nine months ended September 30, September 30, September 30, September 30, -------------------- -------------------- -------------------- -------------------- 1995 1994 1995 1994 1995 1994 1995 1994 -------- -------- -------- -------- -------- -------- -------- -------- SIGNIFICANT RATIOS Return on average total assets 1.48% 1.44% 1.35% 1.38% 1.31% 1.19% 1.13% 1.20% Net interest margin 5.55 5.25 5.42 5.25 4.71 4.74 4.59 4.89 Nonperforming loans to period-end loans .73 .57 .73 .57 .48 .54 .48 .54 Allowance for loan losses to period-end loans 1.25 1.36 1.25 1.36 1.34 1.28 1.34 1.28 Net loan charge-offs to average loans .46 .30 .30 .27 .21 .11 .13 .16 Efficiency ratio 56.16 56.11 59.83 57.37 59.43 59.32 62.38 59.95 AVERAGE BALANCES Loans $3,772 $3,186 $3,618 $2,963 $9,135 $9,225 $9,331 $9,145 Earning assets 4,777 4,114 4,624 3,890 10,954 11,235 11,100 10,953 Total assets 5,181 4,463 5,036 4,227 11,886 12,227 12,042 11,924 Deposits 4,027 3,497 3,906 3,401 9,354 9,543 9,306 9,450
41 42 PART II. OTHER INFORMATION Item 1. Legal Proceedings ----------------- In the ordinary course of business, the Corporation and its subsidiaries are subject to legal actions which involve claims for substantial monetary relief. Based on information presently available to management and the Corporation's counsel, management does not believe that any legal actions, individually or in the aggregate, will have a material adverse effect on the consolidated financial condition of the Corporation. Item 5. Other Information ----------------- (a) Capital Guidelines Market Risk - On July 14, 1995, the Board of Governors of the Federal Reserve System (the "FRB"), the Office of the Comptroller of the Currency (the "OCC") and the Federal Deposit Insurance Corporation (the "FDIC") issued a joint notice of proposed rulemaking in which the agencies proposed to amend their respective risk-based capital requirements to incorporate in such requirements a measure for general market risk and for specific risk pertaining to an institution's foreign exchange and commodity activities and trading of debt and equity instruments. Under the proposal, bank holding companies such as KeyCorp, and banks, such as KeyCorp's bank subsidiaries, would be required to hold capital based on the measure of their market risk exposure, in addition to the capital such institutions are presently required to maintain for credit risk exposure. Also under the proposal, institutions with relatively large trading activities would be permitted to calculate their respective capital charge for market risk using either their own internal, so-called "value-at-risk"model or, alternatively, they may adopt the risk measurement techniques developed by banking supervisory authorities (the so-called "standardized approach"). KeyCorp has not yet assessed the impact of this proposal, if any, on its operations, including the effect, if any, on its levels of required capital. Interest Rate Risk - The OCC, FDIC and FRB have issued final regulations, effective September 1, 1995, amending their respective risk-based capital standards which provide for consideration of interest rate risk in the overall determination of a bank's minimum capital requirements. These final rules are intended as the first part of a two-step process to ensure that risk-based capital specifically includes an assessment of a bank's exposure to changes in interest rates in determining capital adequacy. The second step will be to issue a proposed rule to establish an explicit minimum capital charge for interest rate risk based on the level of a bank's interest rate risk exposure measured according to a formula model to be developed by the agencies. Until such a model is adopted, the agencies will collect data on bank exposure to interest rate risk under a proposed supervisory model. Banks will also be permitted to submit information under any internal models used to evaluate interest rate risk. Derivative Financial Instruments - The OCC, FDIC and FRB have issued final regulations, effective October 1, 1995, amending their respective risk-based capital rules to refine the treatment of derivative financial instruments on which a bank has credit exposure for capital computation purposes. Under the final regulations, longer-maturing interest rate and exchange rate contracts are assigned higher conversion factors than were previously in effect. Conversion factors are used to calculate the potential future exposure for derivative contracts. Conversion factors have also been assigned for three new categories of off-balance sheet derivative contracts, i.e., equity contracts, precious metal contracts (except gold), and other commodity contracts. The conversion factors for these categories are higher than the factors for interest rate and foreign exchange rate contracts, reflecting their relatively higher volatility. The final regulations also permit the effects of qualifying bilateral netting arrangements to be recognized in the calculation of potential future exposure with respect to off-balance sheet derivative contracts for risk-based capital purposes. (b) FDIC insurance Under the FDIC's risk-related insurance assessment system, all insured depository institutions are required to pay annual assessments to the Bank Insurance Fund (the "BIF") or the Savings Association Insurance Fund 42 43 ("SAIF") of the FDIC. The assessments are based on the institution's risk classification which, in turn, is based on an assignment of the institution by the FDIC to one of three capital groups and to one of three supervisory subgroups. The capital groups are "well capitalized", "adequately capitalized" and "undercapitalized". The three supervisory subgroups are Group "A" (for financially solid institutions with only a few minor weaknesses), Group "B" (for those institutions with weaknesses which, if uncorrected, could cause substantial deterioration of the institution and increase the risk to the deposit insurance fund) and Group "C" (for those institutions with a substantial probability of loss to the fund absent effective corrective action). On August 8, 1995, the FDIC amended its regulations on insurance assessments to establish a new assessment rate schedule of 4 to 31 cents per $100 of domestic deposits in replacement of the existing schedule of 23 to 31 cents per $100 of domestic deposits for institutions whose deposits are subject to assessment by the BIF. The FDIC has maintained the current assessment rate schedule of 23 to 31 cents per $100 of domestic deposits for institutions whose deposits are subject to assessment by the SAIF. The new BIF schedule became effective on June 1, 1995. Assessments collected in accordance with the previous assessment schedule that exceed the amount due under the new schedule have been refunded, with interest, from the effective date of June 1, 1995. Various legislative proposals regarding the future of the SAIF have been issued recently. One such proposal includes a one-time special assessment for SAIF deposits of 85 cents per $100 of SAIF deposits. As of September 30, 1995, the Corporation held $4.4 billion in SAIF deposits which would be subject to the assessment. The Corporation does not know when this or any other related proposal may be adopted. Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits (10.1) Amended and Restated Employment Agreement between KeyCorp and Roger Noall, dated July 19, 1995. (11) Computation of Net Income Per Common Share (15) Acknowledgment Letter of Independent Auditors (27) Financial Data Schedule (b) Reports on Form 8-K July 20, 1995 - Item 5. Other Events and Item 7. Financial Statements, Pro Forma Financial Statements and Exhibits. Reporting that the Registrant issued a press release on July 20, 1995, announcing its earnings results for the three-month period ended June 30, 1995. No other reports on Form 8-K were filed during the three-month period ended September 30, 1995. 43 44 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 13, 1995 /s/ Lee Irving ---------------------- By: Lee Irving Executive Vice President and Chief Accounting Officer 44 EX-10.1 2 EXHIBIT 10.1 1 EMPLOYMENT AGREEMENT BETWEEN KEYCORP AND ROGER NOALL THIS EMPLOYMENT AGREEMENT (this "Agreement") is made at Cleveland, Ohio, this 19th day of July, 1995, between KEYCORP, an Ohio corporation ("KeyCorp"), and ROGER NOALL, 13705 Shaker Boulevard, Cleveland, Ohio 44120 ("Noall"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, pursuant to an Agreement and Plan of Merger and a related Supplemental Agreement to Agreement and Plan of Merger, both dated as of October 1, 1993, by and between Society Corporation, an Ohio corporation ("Society"), and the former KeyCorp, a New York corporation and a bank holding company ("Old Key"), Society and Old Key agreed to the merger of Old Key into Society in which Society was the surviving corporation and was renamed KeyCorp; WHEREAS, KeyCorp and Noall are parties to an employment agreement, made February 4, 1994 pursuant to which KeyCorp agreed to continue to employ Noall for a period to end on the date of the 1996 Annual Meeting of Shareholders of KeyCorp, unless such period should be extended by mutual agreement; and WHEREAS, KeyCorp and Noall desire to amend and restate the February 4, 1994 agreement and to enter into this Agreement pursuant to which KeyCorp will continue to employ Noall and Noall will continue to serve KeyCorp; NOW, THEREFORE, KeyCorp and Noall, in consideration of the promises and mutual covenants herein contained, agree as follows: 1. Definitions. ----------- 1.1 ACOUNTING FIRM. The term "Accounting Firm" means the independent auditors of KeyCorp for the fiscal year preceding the year in which the earlier of (i) the Termination Date, or (ii) the year, if any, in which occurred the first Change of Control occurring after the Effective Time, and such firm's successor or successors; provided, however, if such firm is unable or unwilling to serve and perform in the capacity contemplated by this Agreement, KeyCorp shall select another national accounting firm of recognized standing to serve and perform in that capacity under this Agreement, except that such other accounting firm shall not be the then independent auditors for KeyCorp or any of its affiliates (as defined in Rule 2 12b-2 promulgated under the Securities Exchange Act of 1934, as amended). 1.2 SHORT TERM INCENTIVE COMPENSATION AWARD. The term "Short Term Incentive Compensation Award" with respect to Noall for any year shall mean the annual incentive compensation award (whether paid in cash, deferred, or a combination of both) payable to Noall under the Combined Short Term Incentive Compensation Plan for that year. 1.3 LONG TERM INCENTIVE COMPENSATION AWARD. The term "Long Term Incentive Compensation Award" with respect to Noall for any year shall mean the incentive compensation award (whether paid in cash, deferred, or a combination of both) payable to Noall under the Combined Long Term Incentive Compensation Plan for that year. For these purposes, an incentive compensation award payable to Noall under the Combined Long Term Incentive Compensation Plan with respect to any multi-year period will be deemed to be "for" the last year of that multi-year period. Thus, for example, any incentive compensation award payable to Noall under the Combined Long Term Incentive Compensation Plan with respect to the three year period comprised of 1990, 1991, and 1992 will be deemed to be "for" 1992 (without regard to the time of payment), the entire award under that plan for that period will be part of the Long Term Incentive Compensation Award for 1992, and no part of the award under that plan for that period will be part of the Long Term Incentive Compensation Award for any year other than 1992. 1.4 AVERAGE ANNUAL INCENTIVE COMPENSATION. The term "Average Annual Incentive Compensation" shall mean the sum of (a) The average of the two highest Short Term Incentive Compensation Awards payable to Noall for any of the years during the five-year period ended on the December 31 immediately preceding the Termination Date; plus (b) The average of the two highest Long Term Incentive Compensatin Awards payable to Noall for any of the years during that five-year period. 1.5 CAUSE. KeyCorp will have "Cause" to terminate Noall at any time during the Scheduled Term only if: (a) Noall commits a felony; (b) Noall commits an act or series of acts of dishonesty in the course of his employment which are materially inimical to the best -2- 3 interests of KeyCorp or a Subsidiary as determined by a vote of a mojority of all of the members of the Borad of Directors of KeyCorp and, if the act or acts are capable of being cured, Noall fails to cure or take all reasonable steps to cure within 30 days of notice from the Board of Directors to Noall; (c) Noall continues to violate his obligation under Section 13.1 not to engage in Competitive Activities after the Board of Directors has advised him in writing to cease those activities; or (d) Other than for disability, Noall totally abandons and completely fails to attempt to perform his duties and responsibilities as specified from time to time by the Board of Directors of KeyCorp for 90 consecutive days after written notice from the Board of Directors. 1.6 CHANGE OF CONTROL. A "Change of Control" shall be deemed to have occurred if at any time or from time to time after the Effective Time: (a) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form, or report), each as adopted under the Securities Exchange Act of 1934, as amended, disclosing the acquisition of 25% or more of the voting stock of KeyCorp in a transaction or series of transactions by any person (as the term "person" is used in Section 13(d) and Section 14(d)(2) of the Securities Exchange Act of 1934, as amended); (b) During (i) any period commencing with the Effective Time and ending not later than the second anniversary of the Effective Time, or (ii) any period of 24 consecutive calendar months commencing on any date after the Effective Time, individuals who at the beginning of such period constitute the directors of KeyCorp cease for any reason to constitute at least a majority thereof unless the election of each new director of KeyCorp was approved or recommended by the vote of at least two-thirds of the entire authorized number of members of the Board of Directors immediately before the time each new director of KeyCorp was elected to the Board; (c) KeyCorp merges with or into or consolidates with another corporation and, after giving effect to such merger or consolidation, less than sixty percent (60%) of the then outstanding voting securities of the surviving or resulting corporation represent or were -3- 4 issued in exchange for voting securities of KeyCorp outstanding immediately prior to such merger or consolidation; (d) There is a sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets of KeyCorp; or (e) The shareholders of KeyCorp shall approve any plan or proposal for the liquidation or dissolution of KeyCorp. 1.7 COMBINED LONG TERM DISABILITY PLAN. The term "Combined Long Term Disability Plan" means and includes the KeyCorp Long Term Disability Plan and the KeyCorp Supplemental Long Term Disability Program, in both cases as from time to time amended, restated, or otherwise modified, including any long term disability plan that, after the Effective Time, succeeds, replaces, or is substituted for either such plan and includes long term disability benefits or rights provided pursuant to or under insurance contracts maintained by KeyCorp applicable to senior executives of KeyCorp. 1.8 COMBINED LONG TERM INCENTIVE COMPENSATION PLAN. The term "Combined Long Term Incentive Compensation Plan" means and includes the Society Corporation Long Term Incentive Compensation Plan as from time to time amended, restated, or otherwise modified, the KeyCorp Long Term Cash Incentive Compensation Plan as from time to time amended, restated, or otherwise modified, and any incentive compensation plan that, after the Effective Time, succeeds, replaces, or is substituted for either such plan and is applicable to senior executives of KeyCorp. 1.9 COMBINED SHORT TERM INCENTIVE COMPENSATION PLAN. The term "Combined Short Term Incentive Compensation Plan" means and includes the Society Corporation Management Incentive Compensation Plan as from time to time amended, restated, or otherwise modified, the KeyCorp Short Term Incentive Compensation Plan as from time to time amended, restated, or otherwise modified, and any incentive compensation plan that, after the Effective Time, succeeds, replaces, or is substituted for either such plan and is applicable to senior executives of KeyCorp. 1.10 COMBINED RETIREMENT PLANS. The term "Combined Retirement Plans" means and includes the KeyCorp Cash Balance Pension Plan, the KeyCorp Excess Cash Balance Pension Plan, and the Amended and Restated Society Corporation Supplemental Retirement Plan, in all cases, as from time to time amended, restated, or otherwise modified, including any plan that, after the Effective Time, succeeds, replaces, or is substituted for any such plan, and all retirement plans of any nature (including, without -4- 5 limitation, retirement benefits or rights provided under employment contracts or agreements with Noall or provided in resolutions adopted by the Board of Directors of KeyCorp or any of its Subsidiaries) maintained by KeyCorp or any of its Subsidiaries in which Noall was participating prior to the end of the Scheduled Term. Reference to a "Combined Retirement Plan," in the singular, shall mean any of the Combined Retirement Plans. 1.11 COMBINED SAVINGS PLANS. The term "Combined Savings Plans" means and includes the KeyCorp 401(k) Savings Plan and the KeyCorp Excess 401(k) Savings Plan, in both cases, as from time to time amended, restated, or otherwise modified, including any plan that, after the Effective Time, succeeds, replaces, or is substituted for either such plan, and all salary reduction, savings, profit-sharing, or stock bonus plans (including, without limitation, all plans involving employer matching contributions, whether or not constituting a qualified cash or deferred arrangement under Section 401(k) of the Internal Revenue Code), maintained by KeyCorp or any of its Subsidiaries in which Noall was participating prior to the end of the Scheduled Term. Reference to a "Combined Savings Plan," in the singular, shall mean any of the Combined Savings Plans. 1.12 COMPETITIVE ACTIVITY (BEFORE TERMINATION DATE). Noall shall be deemed to have engaged in "Competitive Activity" before the Termination Date if, before the Termination Date, he engages, without the consent of KeyCorp, in any business or business activity in which KeyCorp or any of its Subsidiaries engages, including, without limitation, engaging in any business activity in the banking or financial services industry (other than as a director, officer, or employee of KeyCorp or any of its Subsidiaries). 1.13 COMPETITIVE ACTIVITY (AFTER TERMINATION DATE). Noall shall be deemed to have engaged in "Competitive Activity" after the Termination Date if, after the Termination Date and without the consent of KeyCorp, he serves as a director, officer, or employee of any Financial Services Company located in a Restricted State or renders services of a consultative or advisory nature or otherwise to any Financial Services Company located in a Restricted State. 1.14 DAY. A "day" as used in this Agreement means a calendar day unless business day is specifically referred to. 1.15 DEMOTION OR REMOVAL. Noall shall be deemed to have been subjected to "Demotion or Removal" if, during the Schduled Term and other than by Voluntary Resignation, Noall ceases to be Chief Administrative Officer of KeyCorp, unless the reason for Noall ceasing to be Chief Administrative Officer of KeyCorp, is that Noall was promoted to a higher position, in which case, ceasing to hold the higher position at any time -5- 6 during the Scheduled Term other than by Voluntary Resignation would be a Demotion or Removal. 1.16 EFFECTIVE TIME. The term "Effective Time" means the close of business on the date set forth in the first sentence of this Agreement. 1.17 EQUITY COMPENSATION PLAN. The term "Equity Compensation Plan" means the KeyCorp Amended and Restated 1991 Equity Compensation Plan as from time to time amended, restated, or otherwise modified, including any plan that, after the Effective Time, succeeds, replaces, or is substituted for that plan and any predecessor or successor thereto, and any other stock option or equity based plan adopted by Society before the Effective Time or by KeyCorp after the Effective Time. 1.18 FINANCIAL SERVICES COMPANY. "Financial Services Company" means a bank, bank holding company, savings and loan association, building and loan association, savings and loan holding company, insurance company, investment banking, or securities company, or other financial services company, other than KeyCorp or any of its Subsidiaries. 1.19 FULL-TIME EMPLOYMENT WITH AN UNAFFILIATED EMPLOYER. "Full-Time Employment with an Unaffiliated Employer" means full-time (more than 30 hours per week) employment at either a base selary, hourly rate, partnership interest, or other form of participation, which will result in annual compensation to Noall of at least 75% of the annual base salary of Noall with KeyCorp and its Subsidiaries at the highest rate in effect at any time under this Agreement, but does not include employment by (a) a corporation or other firm organized or formed by Noall as a new business (including, without limitation, a consulting business) after the Termination Date, or (b) a corporation or other firm the majority of the equity interests of which were acquired by Noall and/or his immediate family members after the Termination Date. 1.20 GOOD REASON (THROUGHOUT THE SCHEDULED TERM). Noall shall have "Good Reason" to terminate his employment under this Agreement if, at any time during the Scheduled Term, one or more of the events listed in (a) through (d) of this Section 1.20 occurs and, based on that event, Noall gives notice of his intention to terminate his employment effective on a date that is within one year of the occurrence of that event: (a) Noall is subjected to Demotion or Removal; - 6 - 7 (b) Noall's base salary is reduced from the level of his base salary as in effct from time to time (other than in conjunction with an across the board and equal percentage reduction in the base salaries of all KeyCorp senior executives); (c) Noall is excluded from full participation in any benefit plan or arrangement maintained for senior executives of KeyCorp generally; (d) Noall's principal place of employment for KeyCorp is relocated outside of the Cleveland metropolitan area or Noall is otherwise required by KeyCorp to relocate outside the Cleveland metropolitan area. 1.21 IMPERMISSIBLE. The term "Impermissible," when used in the context of Noall's continued coverage by and participation in any of the Combined Retirement Plans or Combined Savings Plans shall mean that such a continuation would violate the provisions of any such Plan, would cause any such Plan to fail to be qualified under Section 401(a) of the Internal Revenue Code, or would be unlawful, and when used in the context of Noall's continued particitpation as an employee in the Equity Compensation Plan shall mean that such a continuation would violate the provisions of the plan, would require shareholder approval, or would be unlawful. 1.22 RESTRICTED STATE. A "Restricted State" means Ohio, New York, and any other state (including the District of Columbia) in which KeyCorp and its Subsidiaries (taken as a whole) have at the time business operations or activities which account for or constitute more than 5% of the totol assets or total deposits of KeyCorp and its Subsidiaries on a consolidated basis or more than 5% of the total income of KeyCorp and its Subsidiaries on a consolidated basis for the then preceding three months. A Financial Services Company shall be deemed to be located in a Restricted State if its headquarters are then located in the Restricted State or if it and its affiliates (taken as a whole) have at the time business operations or activities in the Restricted State with total assets or total deposits exceeding 5% of the total assets or total deposits of KeyCorp and its Subsidiaries on a consolidated basis or which generate gross income during the then preceding three months of more than 5% of the total income of KeyCorp and its Subsidiaries on a consolidated basis for that three month period. The determination of whether a state is a Restricted State shall be made at the time Noall first serves as a director, officer, or employee of the Financial Services Company in question or first renders services of a consultative or advisory nature or otherwise to such Financial Services Company. -7- 8 1.23 SCHEDULED TERM. The term "Scheduled Term" shall mean the period commencing at the Effective Time and ending on February 28, 1997. 1.24 SUBSIDIARY. A "Subsidiary," as of any time, means any corporation, bank, partnership, or other entity a majority of the voting control of which is directly or indirectly owned or controlled at that time by KeyCorp. 1.25 SUPPLEMENTAL TERM. The term "Supplemental Term" shall mean the three-year period commencing on March 1, 1997 and ending on February 29, 2000. 1.26 TERMINATION DATE. The term "Termination Date" means the last day of the Scheduled Term, or, if earlier, the date on which Noall's employment with KeyCorp and its Subsidiaries terminates. 1.27 VOLUNTARY RESIGNATION. A "Voluntary Resignation" shall have occurred if, during the Scheduled Term, Noall terminates his employment with KeyCorp and all its Subsidiaries by voluntarily resigning at his own instance without having been requested to so resign by KeyCorp, except that any resignation by Noall during the Scheduled Term will not be deemed to be a Voluntary Resignation if, at the time of that resignation, Noall had Good Reason to resign. 2. TERM OF FULL-TIME EMPLOYMENT. KeyCorp engages and employs Noall to render such services in the administration and operation of its affairs as, from time to time, may be specified by its Board of Directors, for a period commencing at the Effective Time and ending on February 28, 1997, unless such period is extended by the mutual agreement of KeyCorp and Noall or is sooner terminated pursuant to this Agreement. 3. FULL-TIME SERVICES. Throughout the Scheduled Term, Noall will devote all his time and efforts to the service of KeyCorp, except (a) for usual vacation periods and reasonable periods of illness, (b) for services as an officer and director of any Subsidiary, (c) for service as a director or trustee of other corporations or organizations which are not in competiton with KeyCorp or any Subsidiary, and (d) for other activities agreed to by KeyCorp. 4. EXECUTIVE OFFICER. Throughout the Scheduled Term, Noall will be elected and serve as Chief Administrative Officer of KeyCorp, unless he is promoted to a higher position or positions, in which case he will thereafter during the remainder of the Scheduled Term be elected and serve in such higher position or positions. -8- 9 5. COMPENSATION. For all services to be rendered by Noall to KeyCorp under this Agreement during the Scheduled Term, including services as an officer of KeyCorp or as an officer, director, or member of any committee of any Subsidiary, or any other services specified by the Board of Directors of KeyCorp, KeyCorp shall pay to Noall, in equal monthly or more frequent installments, base salary at a annual rate not lower than the annual rate of base salary being paid to Noall as of the Effective Time. In addition to such base salary, Noall shall participate during the Scheduled Term in any incentive compensation, retirement, savings, stock option, disability, and other employee benefit and welfare plan or arrangement allowed or provided by KeyCorp in which he would otherwise be eligible for participation as an executive officer and employee of KeyCorp, and, to the extent not provided, KeyCorp shall pay or provide for the payment of benefits commensurate with Noall's annual compensation. 6. EFFECT OF FAILURE TO EXTEND PERIOD OF FULL-TIME EMPLOYMENT. If, at the expiration of the Scheduled Term, Noall's employment under this Agreement has not otherwise been terminated and Noall's full-time employment with KeyCorp is not extended upon terms acceptable to Noall (either under this Agreement or under a new agreement), then Noall shall cease to be an officer of KeyCorp and shall cease to be an officer, director, or employee of any Subsidiary on the last day of the Scheduled Term but Noall's status as an employee of KeyCorp shall continue from that date and throughout the Supplemental Term on the terms and subject to the conditions set forth in this Section 6. 6.1 DUTIES, AND RESPONSIBILITIES. During the Supplemental Term, Noall shall have such duties and responsibilities as KeyCorp and Noall may mutually agree upon from time to time. KeyCorp shall make available to Noall an office and secretarial services appropriate to the scope of the duties and responsibilities being assumed and performed by Noall from time to time during the Supplemental Term. Noall shall have complete discretion as to the time or times at which he performs services on behalf of KeyCorp in response to any request for such services by KeyCorp. 6.2 COMPENSATION, BENEFITS, AND PERQUISITES. During the Supplemental Term, Noall shall be entitled to (a) the compensation and benefits specifically provided for in Sections 6.3, 6.4, 6.5, and 6.6 and (b) such perquisites as are generally provided by KeyCorp to its senior executives. Except for the compensation, benefits, and perquisites referred to in the first sentence of this Section 6.2, Noall shall not be entitled to any other compensation, benefits, or perquisites from keyCorp as a result of his continuing employee status during the Supplemental Term. For purposes of determining Noall's rights under the Combined Long Term Incentive Compensation Plan and the Combined Short Term Incentive Compensation Plan during and after the Supplemental Term, Noall's employment with KeyCorp shall be treated as if it had ended on the Termination Date. -9- 10 6.3 CASH COMPENSATION. Throughout the Supplemental Term, KeyCorp shall pay to Noall semimonthly compensation peyments (one such payment to be made on the fifteenth and the last day of each calendar month) throughout the Supplemental Term. The first such semimonthly payment shall be made for the period commencing on the first day of the Supplemental Term and ending on the first day during the Supplemental Term that is either the fifteenth or last day of the calendar month in which the Supplemental Term begins. The last such semimonthly payment shall be made for the period commencing with the last date immediately preceding the end of the Supplemental Term that is either the first or sixteenth day of the calendar month in which the Supplemental Term ends and ending on the last day of the Supplemental Term. The amount of each such semimonthly payment (other than the first and the last such payment) shall be equal to the sum of (a) one half of one month's base salary of Noall (at the highest rate in effect at any time during the Scheduled Term), plus (b) one-twenty-fouth (1/24) of Noall's Average Annual Incentive Compensation, minus (c) the amount of any disability benefits received by Noall with respect to the semimonthly payment period from the Combined Long Term Disability Plan or any other disability plan the entire cost of which was borne by KeyCorp. The amount of each of the first and last such semimonthly payments shall be equal to the amount specified in the immediately preceding sentence multiplied by a fraction, the numerator of which is the number of days in the period for which that payment is payable and the denominator of which is the number of days in the semimonthly period at the end of which that payment is payable. If Noall dies after becoming entitled to payments under this Section 6.3 but before the end of the Supplemental Term, any payments due after his death shall be made to his estate or, if Noall shall so direct to KeyCorp in writing, to his wife or to a trust created by Noall. Noall's right to direct payment of such payments following his death may be exercised by him at any time and from time to time during his life, and any such direction made subsequent to an earlier one shall revoke and supersede such earlier direction. The amounts payable to Noall, his wife, or any trust created by Noall for any month under this Section 6.3 shalll be reduced, but not below zero, by the full amount of the payments, if any, received by any person (including, without limitation, Noall, his wife, and any trust created by Noall) for that month from all Combined Retirement Plans on account of Noall. 6.4 MEDICAL AND LIFE INSURANCE BENEFITS. KeyCorp shall arrange to provide Noall, throughout the period beginning on the first day of the Supplemental Term and ending on the earlier of (a) the last day of the Supplemental Term, or (b) the first date on which Noall accepts Full-Time Employment with an Unaffiliated Employer, with medical benefits (including, if applicable, dental) and group term life insurance benefits, in all cases at substantially the same level of coverage, and subject to the same (by dollar -10- 11 amount) employee contribution requirement (if any), as those which Noall was receiving or entitled to receive as an officer of KeyCorp on the last day of the Scheduled Term. 6.5 RETIREMENT AND SAVINGS PLAN PARTICIPATION. For the period beginning on the first day of the Supplemental Term and ending on the earlier of (a) the last day of the Supplemental Term, or (b) the date of Noall's death (the "Section 6.5 Benefit Period"), KeyCorp shall cause Noall to continue to be covered by and to participate in all Combined Retirement Plans and Combined Savings Plans that he was entitled to be covered by and participating in as an officer of KeyCorp on the last day of the Scheduled Term in the same manner and to the same extent as if Noall continued in the full-time employ of KeyCorp throughout the Section 6.5 Benefit Period, except where such coverage or participation is impermissible. For these purposes: (i) the entire Section 6.5 Benefit Period shall be included in determining Noall's years of service, (ii) amounts received by Noall under clause (a) of Section 6.3 shall be deemed to be base salary received by Noall during the Section 6.5 Benefit Period, and (iii) amounts received by Noall under clause (b) of Section 6.3 shall be deemed to be incentive compensation received by Noall during the Section 6.5 Benefit Period and shall, if relevant, be allocated between the Combined Short Term Incentive Compensation Plan and the Combined Long Term Incentive Compensation Plan based on the degree to which awards under each of those plans were taken into account in determining Average Annual Incentive Compensation. If, at any time during the Section 6.5 Benefit Period, KeyCorp determines in good faith that continuing Noall's coverage by and participation in any of the Combined Retirement Plans or any of the Combined Savings Plans during the Supplemental Term is impermissible, Noall shall not be covered by and participate in such affected Plan or Plans during the Section 6.5 Benefit Period, but KeyCorp shall, from time to time both during and after the Section 6.5 Benefit Period, provide to Noall under this Agreement payments, benefits, and opportunities that, when added to the payments, benefits, and opportunities available and payable to Noall under the Combined Retirement Plans and the Combined Savings Plans put Noall in the same position that he would have been in had he continued to be a full-time employee of KeyCorp and a participant in all of the Combined Retirement Plans and the Combined Savings Plans throughout the Section 6.5 Benefit Period. 6.6 RIGHTS UNDER EQUITY COMPENSATION PLAN AND STOCK OPTIONS. For purposes of determining Noall's rights under the Equity Compensation Plan and under any stock options granted to Noall under the Equity Compensation Plan, Noall shall be treated as remaining in the employ of KeyCorp throughout the Section 6.5 Benefit Period. -11- 12 6.7 RIGHTS NOT AFFECTED BY ANY TERMINATION. If Noall becomes entitled to payments and benefits under this Section 6, his rights to receive payments, benefits, and opportunities shall continue as and to the extent provided in this Section 6 notwithstanding any subsequent termination of Noall's employment relationship with KeyCorp, whether that subsequent termination is with or without cause, voluntary or involuntary, on account of disability, or otherwise. This Section 6.7 shall not override Section 13.2. 7. EFFECT OF GOOD REASON (IN GENERAL). If, at any time before the expiration of the Scheduled Term, Noall has Good Reason to terminate his employment, Noall shall have the right, exercisable at any time during the period beginning on the date the event constituting any particular instance of Good Reason first occurs and ending on the earlier of (a) the first anniversary of that date, or (b) the end of the Scheduled Term, to terminate his employment with KeyCorp by giving written notice of such election to KeyCorp. Any such termination by Noall during that period shall be treated for all purposes of this Agreement as a termination of Noall's employment by KeyCorp without Cause effective as of the date on which Noall delivers notice of his election under this Section 7 to KeyCorp. 8. EFFECT OF TERMINATION WITHOUT CAUSE. If, at any time before the expiration of the Scheduled Term, KeyCorp terminates Noall's employment without Cause, KeyCorp shall pay and provide the following amounts and benefits to Noall: 8.1 COMPENSATION CONTINUATION PAYMENTS. KeyCorp shall pay to Noall semimonthly compensation continuation payments (one such payment to be made on the fifteenth and the last day of each calendar month) throughout the remainder of the Scheduled Term and thereafter throughout the Supplemental Term. The first such semimonthly payment shall be made for the period commencing on the day after the Termination Date and ending on the first day after the Termination Date that is either the fifteenth or last day of the calendar month in which the Termination Date occurs. The last such semimonthly payment shall be made for the period commencing with the last date immediately preceding the end of the Supplemental Term that is either the first or sixteenth day of the calendar month in which the Supplemental Term ends and ending on the last day of the Supplemental Term. The amount of each such semimonthly payment (other than the first and the last such payment) shall be equal to the sum of (a) one half of one month's base salary of Noall (at the highest rate in effect at any time during the two year period ending on the Termination Date), plus (b) one-twenty-fourth (1/24) of Noall's Average Annual Incentive Compensation. The amount of each of the first and last such semimonthly payments shall be equal to the amount specified in the immediately preceding sentence multiplied by a fraction, the numerator of which is the -12- 13 number of days in the period for which that payment is payable and the denominator of which is the number of days in the semimonthly period at the end of which that payment is payable. If Noall dies after becoming entitled to payments under this Section 8.1 but before the end of the Supplemental Term, any payments due after his death shall be made to his estate or, if Noall shall so direct of KeyCorp in writing, to his wife or to a trust created by Noall. Noall's right to direct payment of such payments following his death may be exercised by him at any time and from time to time during his life, and any such direction made subsequent to an earlier one shall revoke and supersede such earlier direction. The amounts payable to Noall, his wife, or any trust created by Noall for any month under this Section 8.1 shall be reduced, but not below zero, by the full amount of the payments, if any, received by any person (including, without limitation, Noall, his wife, and any trust created by Noall) for that month from all Combined Retirement Plans on account of Noall. 8.2 MEDICAL AND LIFE INSURANCE BENEFITS. KeyCorp shall arrange to provide Noall, throughout the period beginning on the Termination Date and ending on the earlier of (a) the last day of the Supplemental Term, or (b) the first date on which Noall accepts Full-Time Employment with an Unaffiliated Employer, with medical benefits (including, if applicable, dental) and group term life insurance benefits, in all cases at substantially the same level of coverage, and subject to the same (by dollar amount) employee contribution requirement (if any), as those which Noall was receiving or entitled to receive as an officer of KeyCorp on the Termination Date. 8.3 CONTRACTUAL SUPPLEMENT TO RETIREMENT AND SAVINGS PLAN BENEFITS. KeyCorp shall, from time to time both during and after the period beginning on the Termination Date and ending on the earlier of (a) the last day of the Supplemental Term, or (b) the date of Noall's death (the "Section 8.3 Benefit Period"), provide to Noall, under this Agreement, paymets, benefits, and opportunities that, when added to the payments, benefits, and opportunities available and payable to Noall under the Combined Retirement Plans and the Combined Savings Plans, put Noall in the same position that he would have been in had he continued to be a full-time employee of KeyCorp and a participant in all of the Combined Retirement Plans and the Combined Savings Plans throughout the Section 8.3 Benefit Period. In determining the position that Noall would have been in had he continued to be a full-time employee of KeyCorp and a participant in all of the Combined Retirement Plans and the Combined Savings Plans throughout the Section 8.3 Benefit Period: (i) the entire Section 8.3 Benefit Period shall be included in determining Noall's years of service, (ii) amount's received by Noall under clause (a) of Section 8.1 shall be deemed to be base salary received by Noall during the Section 8.3 Benefit Period, and (iii) amounts received by Noall under clause (b) of Section 8.1 shall be deemed to be incentive -13- 14 compensation received by Noall during the Section 8.3 Benefit Period and shall, if relevant, be allocated between the Combined Short Term Incentive Compensation Plan and the Combined Long Term Incentive Compensation Plan based on the degree to which awards under each of those plans were taken into account in determining Average Annual Incentive Compensation. 8.4 RIGHTS UNDER EQUITY COMPENSATION PLAN AND STOCK OPTIONS. (a) For purposes of determining Noall's rights under the Equity Compaensation Plan and under any stock options granted to Noall under the Equity Compensation Plan, Noall shall be treated as remaining in the employ of KeyCorp throughout the Section 8.3 Benefit Period, unless that treatment is impermissible. (b) If and to the extent the treatment prescribed in paragraph (a), above, is impermissible, and the treatment prescribed in this paragraph (b) does not conflict with the treatment for accounting purposes of any transaction entered into by KeyCorp as a pooling of interests, KeyCorp shall provide to Noall from time to time, both during and after the Section 8.3 Benefit Period, payments, benefits, and opportunities that, when added to the payments, benefits, and opportunities available and payable to Noall under the Equity Compensation Plan and options granted thereunder put Noall in the same position that he would have been regarding payments, benefits, and opportunities under the Equity Compensation Plan and options granted thereunder, if he had continued to be actively employed by KeyCorp throughout the Section 8.3 Benefit Period. (c) If and to the extent the treatment prescribed in paragraph (a), above, is impermissible, and the treatment prescribed in paragraph (b), above, conflicts with the treatment for accounting purposes of any transaction entered into by KeyCorp as a pooling of interests, Noall's rights under the Equity Compensation Plan and under any stock options granted to Noall under the Equity Compensation Plan shall be as provided in that plan and under those stock options without regard to this Section 8.4. 9. EFFECT OF DEATH WHILE IN EMPLOY OF KEYCORP. If Noall dies during the Scheduled Term while employed by KeyCorp, (a) KeyCorp shall pay to Noall's estate any unpaid base salary due or to become due to Noall with respect to any period ending before his death, (b) if Noall is survived by his wife, KeyCorp shall pay the monthly survivor pension benefit provided for in Section 41, (c) KeyCorp shall have no further obligations to Noall for base salary for any period after Noall's death, and (d) KeyCorp shall pay such incentive compensation as is provided for under the Combined Short Term Incentive Compensation Plan and the -14- 15 Combined Long Term Incentive Compensation Plan to Noall's estate or as otherwise provided for under such plans. 10. EFFECT OF DISABILITY WHILE IN EMPLOY OF KEYCORP. If during the Scheduled Term and while Noall is employed by KeyCorp, he becomes disabled, by reason of physical or mental impairment, to such an extent that he is unable to perform his duties under this agreement: 10.1 KeyCorp may relieve Noall of his duties under this Agreement for as long as Noall is so disabled. 10.2 KeyCorp shall pay to Noall all base salary and incentive compensation to which he would have been entitled under this Agreement and under the Combined Short Term Incentive Compensation Plan and the Combined Long Term Incentive Compensation Plan had he continued to be actively employed by KeyCorp to the earliest of (a) the first date on which he is no longer so disabled to such an extent that he is unable to perform his duties under this Agreement, (b) the date on which he becomes eligible for payment of long term disability benefits under the Combined Long Term Disability Benefit Plan, (c) the date of his death, or (d) the last day of the Scheduled Term. 10.3 If and when Noall becomes eligible for payment of long term disability benefits under the Combined Long Term Disability Benefit Plan, KeyCorp shall pay to Noall semimonthly compensation continuation payments (one such payment to be made on the fifteenth and the last day of each calendar month) throughout the period (the "Section 10.3 Benefit Period") beginning with the date on which Noall becomes so eligible and ending on the earliest of (a) the first date on which he is no longer so disabled to such an extent that he is unable to perform his duties under this Agreement, (b) the date of his death, or (c) the last day of the Scheduled Term. The first such semimonthly payment shall be made for the period commencing on the first day of the Section 10.3 Benefit Period and ending on the first day after that date that is either the fifteenth or last day of the calendar month in which the Section 10.3 Benefit Period begins. The last such semimonthly payment shall be made for the period commencing with the last date within the Section 10.3 Benefit Period that is either the first or sixteenth day of the calendar month in which the Section 10.3 Benefit Period ends and ending on the last day of the Section 10.3 Benefit Period. The amount of each such semimonthly payment (other than the first and the last such payment) shall be equal to the sum of (i) one half of one month's base salary of Noall (at the highest rate in effect at any time during the two year period ending on the last day before the date of the payment on which Noall performed services for KeyCorp), plus (ii) one-twenty-fourth (1/24) of Noall's Average Annual Incentive Compensation (determined as though the -15- 16 last day before the date of the payment on which Noall performed services for KeyCorp was the Termination Date). The amount of each of the first and last such semimonthly payments shall be equal to the amount specified in the immediately preceding sentence multiplied by a fraction, the numerator of which is the number of days in the period for which that payment is payable and the denominator of which is the number of days in the semimonthly period at the end of which that payment is payable. 10.4 The amounts payable to Noall for any month under this Section 10 shall be reduced, but not below zero, by the full amount of the payments, if any, received by Noall for that month (a) from all Combined Retirement Plans, (b) from the Combined Long Term Disability Plan, and (c) from any other disability plan the entire cost of which is borne by KeyCorp. 10.5 For purposes of entitlement to a death benefit under Section 9 or Section 14 of this Agreement, (a) Noall will be treated as being employed by KeyCorp throughout any portion of the Scheduled Term during which he is entitled to receive payments from KeyCorp under either of Sections 10.2 or 10.3 and (b) Noall will not be treated as being employed by KeyCorp at any time during the Supplemental Term. 10.6 For purposes of all retirement, savings, stock option, disability, and other employee benefit and welfare plans or arrangements allowed or provided by KeyCorp to officers, Noall shall be treated in the same manner that KeyCorp treats other officers who become disabled. 10.7 If (a) Noall becomes disabled during the Scheduled Term, (b) survives through the end of the Scheduled Term, and (b) remains disabled on the last day of the Scheduled Term, he shall be entitled to all of the payments, benefits, and perquisites provided for in Section 6 during the Supplemental Term in the same manner and to the same extent as if his full-time employment had continued through the end of the Scheduled Term and KeyCorp and Noall had thereafter failed to extend the period of his full-time employment. 10.8 Except as provided in this Section 10, KeyCorp shall have no further obligations to Noall for base salary or incentive compensation for any period during which Noall is so disabled to such an extent that he is unable to perform his duties under this Agreement. 11. NO SET-OFF OR MITIGATION. The compensation and benefits to be paid and provided by KeyCorp to Noall under this Agreement are not to be subject to any set-off against any claim by KeyCorp against Noall. Noall will not be required to mitigate any amounts payable by KeyCorp to Noall under any of the terms of this Agreement and, except to the limited extent provided herein with -16- 17 respect to welfare benefit plans, no payment or benefit to Noall from any other source will reduce the obligation of KeyCorp to make payment to and provide benefits to Noall during the Supplemental Term or after termination of his employment as provided in this Agreement. 12. PAYMENTS ARE IN LIEU OF SEVERANCE PAYMENTS. If Noall becomes entitled to receive any payments under this Agreement during the Supplemental Term or as a result of termination of his employment, those payments shall be in lieu of any and all other claims or rights that Noall may have for severance, separation, and/or salary continuation pay. 13. LIMITATIONS ON COMPETITION 13.1 Noall shall not engage in any Competitive Activity during the period of his employment with KeyCorp. 13.2 Noall shall not engage in any Competitive Activity at any time while he is receiving payments under either of Sections 6.3 or 8.1. If Noall continues to violate the restriction set forth in this Section 13.2 after the Board of Directors has advised him in writing to cease those activities and that violation is material, KeyCorp shall thereupon be relieved of all further obligations to make payments and provide benefits to Noall under any of the provisions contained in any of Sections 6 through 8. Noall shall not be required to repay to KeyCorp any payment received by him before he began to engage in any such Competitive Activity. If a Financial Services Company has business operations or activities in multiple states some of which are Restricted States and some of which are not Restricted States, KeyCorp will not unreasonably withhold its consent after the Termination Date to Noall serving as an officer, employee, or consultant of such Financial Services Company if (a) Noall's duties and responsibilities for such Financial Services Company are restricted to a specific geographic region which does not include a Restricted State, and (b) none of Noall's services or activities is performed in or relate to a Restricted State. 14. DEATH BENEFIT FOR SURVIVING WIFE. If Noall dies during the Scheduled Term and while employed by KeyCorp leaving his wife surviving him, KeyCorp shall pay to Noall's wife or, if Noall shall so direct to KeyCorp in writing, to a trust in which his wife is one of the beneficiaries or to his estate, a monthly survivor pension equal to the excess, if any, of (a) one-third of the monthly amount Noall or his wife or his estate would receive under Section 8.1 if Noall had been terminated without Cause by KeyCorp on the day before the date of his death (i.e., an amount equal to one-third of the sum of two semimonthly payments calculated as provided in the fourth sentence of Section 8.1), over (b) the aggregate monthly survivor benefits, if any, under all Combined Retirement Plans received by Noall's wife. The monthly survivor payments shall be paid at the rate of one per month -17- 18 commencing with the month following the month in which Noall's death occurs and continuing through the month in which Noall's wife dies. Noall's rights to direct payment of such monthly survivor pension following his death may be exercised by him at any time and from time to time during his life, and any such direction made subsequent to an earlier one shall revoke and supersede such earlier direction. 15. STOCK OPTIONS. If a Change of Control occurs while Noall is employed by KeyCorp under this Agreement, any and all stock options to purchase Common Shares of KeyCorp then held by him that are not then vested or exercisable in full shall automatically and immediately become vested and exercisable in full; provided, however, if the operation of this Section would conflict with or jeopardize, in the judgment of the independent accountants of KeyCorp, the treatment for accounting purposes of any transaction involving KeyCorp as a pooling of interests, this Section shall be inoperative and have no effect. All stock options to purchase Common Shares held by Noall on the date of this Agreement are hereby amended by adding the foregoing sentence and any stock options to purchase Common Shares hereafter granted to Noall shall be deemed to contain the foregoing sentence. This Section shall not apply to any stock options to purchase Common Shares granted to Noall within the six month period ending with the date immediately preceding the date on which occurs the Effective Time. 16. ADDITIONAL RETIREMENT BENEFIT. Following the termination of Noall's employment with KeyCorp under any circumstances other than a termination during the Scheduled Term by KeyCorp for Cause, KeyCorp will pay to Noall an annual pension equal to the aggregate of (a) the amount of the retirement benefit Noall would be entitled to receive under the KeyCorp Cash Balance Pension Plan (the "Pension Plan"), as in effect on the Termination Date, without regard to the limitations of Sections 415 and 401(a)(17) of the Internal Revenue Code, as if Noall had commenced employment with Society on June 20, 1973, and (b) the amount of annual supplemental retirement benefit, if any, which Noall would be entitled to receive under the Ammended and Restated Society Corporation Supplemental Retirement Plan, as in effect on the Termination Date, as if Noall had commenced employment with Society on June 20, 1973, less the aggregate annual benefits received by Noall under all Combined Retirement Plans (including, as an "annual benefit received by Noall" for these purposes, the actuarial equivalent, in annaul terms, of any lump sum benefit received by Noall under any of the Combined Retirement Plans). The provisions of the Pension Plan with respect to optional methods of payment (other than payment of the full benefit in a single lump sum), the commencement and duration of payments, and reemployment shall be applicable to the annual pension payable pursuant to this Section 16. As used in this Section 16, the terms "Pension Plan" and "Amended and Restated Society Corporation Supplemental Retirement Plan" mean and include, in each such case, such plan as currently in effect and as from time to -18- 19 time until the Termination Date amended, restated, or otherwise modified, including any plan hereafter succeeding, replacing, or being substituted for such plan. Following the termination of Noall's employment during the Scheduled Term by KeyCorp for Cause, KeyCorp will pay to Noall and/or to his beneficiary such amounts as Noall and/or his beneficiary is entitled to receive under the Resolution adopted by the Board of Directors of Central National Bank of Cleveland on November 21, 1984, relating to survivor benefits and amount of retirement income and payments, a copy of which is attached to this Agreement (the "Central Board Resolution"). Except as provided in the immediately preceding sentence, no amount will be paid to Noall under the Central Board Resolution. 17. NO REDUCTION IN RETIREMENT BENEFITS FOR EARLY COMMENCEMENT OF BENEFITS IN CERTAIN CIRCUMSTANCES. If Noall becomes entitled to benefits under either of Sections 6.5 or 8.3, and elects to commence receipt of benefits under the Combined Retirement Plans after the end of the Supplemental Term but before he attains age 65, he shall be entitled to receive, in the aggregate, benefits under the Combined Retirement Plans, under Section 6.5 or 8.3 (as the case may be), under Section 16, and under this Section 17 that equal the amounts he would have received, in the aggregate, under the Combined Retirement Plans, under Section 6.5 or 8.3 (as the case may be), and under Section 16 if the benefits under those Plans and Sections had been determined without any reduction on account of commencement of benefits before Noall's attainment of age 65. 18. INDEMNIFICATION. KeyCorp shall indemnify Noall, to the full extent permitted or authorized by the Ohio General Corporation Law as it may from time to time be amended, if Noall is made or threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative, by reason of the fact that Noall is or was a director, officer, or employee of KeyCorp or any Subsidiary, or is or was serving at the request of KeyCorp or any Subsidiary as a director, trustee, officer, or employee of a bank, corporation, partnership, joint venture, trust, or other enterprise. The indemnification provided by this Section 18 shall not be deemed exclusive of any other rights to which Noall may be entitled under the articles of incorporation or the regulations of KeyCorp or of any Subsidiary, or any agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in Noall's official capacity and as to action in another capacity while holding such office, and shall continue as to Noall after Noall has ceased to be a director, trustee, officer, or employee and shall inure to the benefit of the heirs, executors, and administrators of Noall. -19- 20 19. REIMBURSEMENT OF CERTAIN EXPENSES. 19.1 KeyCorp shall pay, as incurred, all expenses, including the reasonable fees of counsel engaged by Noall, of defending any action brought to have this Agreement declared invalid or unenforceable. 19.2 KeyCorp shall pay, as incurred, all expenses, including the reasonable fees of counsel engaged by Noall, of prosecuting any action to compel KeyCorp to comply with the terms of this Agreement upon receipt from Noall of an undertaking to repay KeyCorp for such expenses if, and only if, it is ultimately determined by a court of competent jurisdiction that Noall had no reasonable grounds for bringing that action (which determination need not be made simply because Noall fails to succeed in the action). 19.3 Expenses (including attorney's fees) incurred by Noall in defending any action, suit, or proceeding commenced or threatened against Noall for any action or failure to act as an employee, officer, or director of KeyCorp or any Subsidiary shall be paid by KeyCorp, as they are incurred, in advance of final disposition of the action, suit, or proceeding upon receipt of an undertaking by or on behalf of Noall in which he agrees to reasonably cooperate with KeyCorp or the Subsidiary, as the case may be, concerning the action, suit, or proceeding, and (a) if the action, suit, or proceeding is commenced or threatened against Noall for any action or failure to act as a director, to repay the amount if it is proved by clear and convincing evidence in a court of competent jurisdiction that his action or failure to act involved an act or omission undertaken with deliberate intent to cause injury to KeyCorp or a Subsidiary or (b) if the action, suit, or proceeding is commenced or threatened against Noall for any action or failure to act as an officer or employee, to repay the amount if it is ultimately determined that he is not entitled to be indemnified. The obligation of KeyCorp to advance expenses provided for in this Section 19.3 shall not be deemed exclusive of any other rights to which Noall may be entitled under the articles of incorporation or the regulations of KeyCorp or of any Subsidiary, or any agreement, vote of shareholders or disinterested directors, or otherwise. 20. TERMINATION OF CAUSE. In the event Noall's employment is terminated during the Scheduled Term by KeyCorp for Cause, KeyCorp may, by giving written notice to Noall, terminate this Agreement and all its obligations remaining to be performed or observed by it under this Agreement other than KeyCorp's obligation to satisfy the terms of the Central Board Resolution referred to in the penultimate sentence of Section 16. 21. EXCESS PARACHUTE PAYMENT REDUCTION. Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by KeyCorp or any of its Subsidiaries to or for the -20- 21 benefit of Noall (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (a "Payment") would be nondeductible by KeyCorp for Federal income tax purposes because of Section 280G of the Internal Revenue Code and applicable regulations promulgated thereunder, then the aggregate present value of amounts payable or distributable to or for the benefit of Noall pursuant to this Agreement (such payments or distributions pursuant to this Agreement are hereinafter referred to as "Agreement Payments") shall be reduced (but not below zero) to the Reduced Amount. The "Reduced Amount" shall be an amount expressed in present value which maximizes the aggregate present value of Agreement Payments without causing any Payment to be nondeductible by KeyCorp because of Section 280G of the Internal Revenue Code and applicable regulations promulgated thereunder. For purposes of this Section 21, present value shall be determined in accordance with Section 280G(d)(4) of the Internal Revenue Code and applicable regulations promulgated thereunder. All determinations required to be made under this Section 21 shall be made by the Accounting Firm which shall provide detailed supporting calculations both to KeyCorp and Noall within 30 days after the Termination Date or such earlier time as is requested by KeyCorp. KeyCorp and Noall shall cooperate with each other and the Accounting Firm and will provide necessary information so that the Accounting Firm may make all such determinations. All such determinations by the Accounting Firm shall be final and binding upon KeyCorp and Noall. Noall shall determine which of the Agreement Payments (or, at the election of Noall, other Payments) shall be eliminated or reduced consistent with the requirements of this Section 21, provided that, if Noall does not make such determination within 20 days of the receipt of the calculations made by the Accounting Firm, KeyCorp shall elect which of the Agreement Payments shall be eliminated or reduced consistent with the requirements of this Section 21 and shall notify Noall promptly of such election. As a result of the uncertainty in the application of Section 280G of the Internal Revenue Code and applicable regulations promulgated thereunder at the time of the initial determination by the Accounting Firm hereunder, it is possible that Agreement Payments will be made by KeyCorp which should not have been made ("Overpayment") or that additional Agreement Payments will not be made by KeyCorp which could have been made ("Underpayment"), in each case, consistent with the calculations required to be made hereunder. In the event that the Accounting Firm or a court of competent jurisdiction (in a final judgment as to which the time for appeal has lapsed or no appeal is available) determines at any time that an Overpayment has been made, any such Overpayment shall be treated for all purposes as a loan to Noall which Noall shall repay to KeyCorp together with interest at the applicable short-term Federal rate provided for in Section 1274(d)(1) of the Internal Revenue Code, compounded semi-annually; provided, however, that no amount shall be payable by Noall to KeyCorp (or if paid by Noall to Keycorp, such payment shall be returned to Noall) if and to the extent such payment would not reduce the amount which is subject to taxation under Section 4999 of the Internal Revenue Code. In the event that the Accounting Firm or a court of competent jurisdiction (in a final judgment as to which the time for appeal has -21- 22 lapsed or no appeal is available) determines at any time that an Underpayment has occurred, any such Underpayment shall be promptly paid by KeyCorp to or for the benefit of Noall together with interest at the applicable short-term Federal rate provided for in Section 1274(d)(1) of the Internal Revenue Code, compounded semi-annually. 22. DEFERRAL OF PAYMENT OF COMPENSATION UNDER CERTAIN CIRCUMSTANCES. 22.1 SECTION 162(M). For purposes of this Section 22, the term "Section 162(m)" shall mean Section 162(m) of the Internal Revenue Code (which, as amended by the Revenue Reconciliation Act of 1993, prescribes rules disallowing deductions for certain "applicable employee remuneration" to any of five specified "covered employees" of a publicly held corporation in excess of $1,000,000 per year), as from time to time amended, and the corresponding provisions of any similar law subsequently enacted, and to all regulations issued under that section and any such provisions. 22.2 DEFFERRAL. Except as otherwise porvided in either of Section 22.3 or Section 22.4, below, if KeyCorp determines that, after giving effect to all applicable elective deferrals of compensation, any amount of compensation (including any base salary and any incentive compensation payable under any incentive compensation plan in which Noall is a participant) otherwise payable to Noall under this Agreement at any particular time (the "Scheduled Time"), (a) would not be deductible by KeyCorp if paid at the Scheduled Time by reason of the disallowance rules of Section 162(m), and (b) would be deductible by KeyCorp if defered until and paid during a later year, that amount of compensation shall be deferred until, and paid during, the year that is determined by KeyCorp to be the first year following the year of deferral during which the compensation can be paid without disallowance of the deduction for payment of the compensation by reason of Section162(m). If KeyCorp determines that in any year following the year of deferral a portion of, but not all of, the amounts deferred (together with interest thereon as provided in Section 22.5, below) can be paid without disallowance of the deduction, that portion that can be so paid shall be paid by KeyCorp during that year and the remainder, except as otherwise provided in Section 22.3 or Section 22.4, below, shall continue to be deferred until a later year. -22- 23 22.3 EARLY PAYOUT OF DEFERRED AMOUNT IF DEFERRAL IS DETERMINED TO BE INEFFECTIVE. If any amount of compensation is deferred under Section 22.2 with the expectation that it will be deductible by KeyCorp if paid in a later year and KeyCorp later determines that the compensation will not be deductible by KeyCorp even if payment thereof is deferred until a later year, then, within three months of the date on which that determination is made, the deferral with respect to that compensation shall terminate and KeyCorp shall pay that compensation to Noall. 22.4 PAYOUT FOLLOWING TERMINATION OF EMPLOYMENT IN ALL EVENTS. On April 15 of the year immediately following the year in which Noall ceases to be employed as an officer by KeyCorp, KeyCorp shall pay to Noall, in a single lump sum, all amounts of compensation that have been deferred pursuant to this Section 22 and have not previously been paid out so that, as of the close of business on that date, no amount of compensation will remain deferred under this Section 22 whether or not KeyCorp is entitled to a deduction with respect to the payment of that compensation. 22.5 INTEREST ON DEFERRED AMOUNTS. Upon payment of any amounts of compensation deferred for any period of time pursuant to this Section 22, KeyCorp shall pay to Noall an additional amount equivalent to the interest that would have accrued on that deferred compensation if interest accrued thereon from the date on which that compensation would have been paid but for this Section 22 through the date on which that compensation is paid at a variable rate equal, in each calendar quarter, to the highest annual rate paid by Society National Bank on new IRA certificates of deposit issued in Cuyahoga County, Ohio on the first business day of that calendar quarter, compounded quarterly. 22.6 MISCELLANEOUS. Noall's rights with respect to payment during his lifetime of any compensation deferred under this Section 22 shall not be subject to assignment. If Noall dies before all compensation deferred under this Section 22 has been paid to him, any such unpaid compensation shall be paid, at the same time it would have been paid if Noall had not died but had merely ceased to be an employee of KeyCorp on the date of his death (or, if earlier, on the last date he actually was an employee of KeyCorp), to his estate or, if Noall shall so direct to KeyCorp in writing, to his wife or to a trust created by Noall. The obligation of KeyCorp to make payments of compensation deferred pursuant to this Section 22 constitutes the unsecured promise of KeyCorp to make payments from its general assets as and when due and neither Noall nor any person claiming through him shall have, as of a result of this Section 22, any lien or claim on any assets of KeyCorp that is superior to the claims of the general creditors of KeyCorp. -23- 24 23. MERGER OR TRANSFER OF ASSETS OR STOCK OF KEYCORP. KeyCorp will not enter into any transaction in which it (or any corporation acquiring all or substantially all of KeyCorp's assets in the transaction) will become the direct or indirect subsidiary of any other corporation unless the corporation that is to be the ultimate parent corporation of KeyCorp (or of the corporation acquiring all or substantially all of KeyCorp's assets in the transaction) shall assume this Agreement in a signed writing and deliver a copy thereof to Noall. KeyCorp will not otherwise consolidate with or merge into any other corporation, or transfer all or substantially all of its assets to another corporation, unless the corporation with or into which KeyCorp is merged, or the corporation to which substantially all of KeyCorp's assets are being transferred, shall assume this Agreement in a signed writing and deliver a copy thereof to Noall. Upon any such assumption, the corporation assuming this Agreement (the "Successor Corporation") shall become obligated to perform the obligations of KeyCorp under this Agreement, and the term "KeyCorp" as used in this Agreement (including, without limitation, as used in Section 1.15) shall be deemed to refer to the Successor Corporation. 24. NOTICES. Notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered in person (to the Secretary of KeyCorp in the case of notices to KeyCorp and to Noall in the case of notices to Noall) or mailed by United States registered mail, return receipt requested, postage prepaid, as follows; If to KeyCorp: KeyCorp 127 Public Square Cleveland, Ohio 44114-1306 Attention: Secretary If to Noall: Mr. Roger Noall 13705 Shaker Boulevard Cleveland, Ohio 44120 or such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 25. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement which shall remain in full force and effect. -24- 25 26. MISCELLANEOUS. No provision of this Agreement may be modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in a writing signed by Noall and KeyCorp. No waiver by either party hereto at any time of any breach by the other party of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same time or at any prior or subsequent time. No agreement or representation, oral or otherwise, express or implied, with respect to the subject matter hereof has been made by either party which is not set forth expressly in this Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of Ohio. 27. PRIOR AGREEMENT. This Agreement amends, restates, and extends the employment agreement between Noall and Society Corporation made February 4, 1994, and shall become effective at the Effective Time. At such time, the provisions of this Agreement shall supersede the provisions of the February 4, 1994 agreement and that agreement and all prior agreements on the same subject matter shall hereafter be of no further force or effect. KEYCORP BY /S/ Robert W. Gillespie --------------------------- Robert W. Gillespie, President /S/ ROGER NOALL --------------------------- ROGER NOALL -25- EX-11 3 EXHIBIT 11 1
EXHIBIT 11 KEYCORP COMPUTATION OF NET INCOME PER COMMON SHARE (dollars in thousands, except per share amounts) Three months ended September 30, Nine months ended September 30, -------------------------------- ------------------------------- 1995 1994 1995 1994 ------------- ------------- ------------- ------------- NET INCOME APPLICABLE TO COMMON SHARES Net income $209,646 $229,328 $618,311 $659,730 Less: Preferred dividend requirements 4,000 4,000 12,000 12,000 ------------- ------------- ------------- ------------- Net income applicable to Common Shares $205,646 $225,328 $606,311 $647,730 ============= ============= ============= ============= NET INCOME PER COMMON SHARE Weighted average Common Shares outstanding 228,187,105 244,132,128 234,461,924 243,635,197 ============= ============= ============= ============= Net income applicable to Common Shares $205,646 $225,328 $606,311 $647,730 ============= ============= ============= ============= Net income per Common Share $.90 $.92 $2.59 $2.66 ============= ============= ============= ============= NET INCOME PER COMMON SHARE -- PRIMARY Weighted average Common Shares outstanding 228,187,105 244,132,128 234,461,924 243,635,197 Dilutive common stock options (1) 2,359,502 2,813,300 1,903,072 2,672,647 ------------- ------------- ------------- ------------- Weighted average Common Shares and Common Share equivalents outstanding 230,546,607 246,945,428 236,364,996 246,307,844 ============= ============= ============= ============= Net income applicable to Common Shares $205,646 $225,328 $606,311 $647,730 ============= ============= ============= ============= Net income per Common Share $.89 $.91 $2.57 $2.63 ============= ============= ============= ============= NET INCOME PER COMMON SHARE -- FULLY DILUTED Weighted average Common Shares outstanding 228,187,105 244,132,128 234,461,924 243,635,197 Dilutive common stock options (1) 2,970,326 2,813,804 3,104,555 2,675,110 ------------- ------------- ------------- ------------- Weighted average Common Shares and Common Share equivalents outstanding 231,157,431 246,945,932 237,566,479 246,310,307 ============= ============= ============= ============= Net income applicable to Common Shares $205,646 $225,328 $606,311 $647,730 ============= ============= ============= ============= Net income per Common Share $.89 $.91 $2.55 $2.63 ============= ============= ============= ============= (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.
45 EX-15 4 EXHIBIT 15 1 EXHIBIT 15 ACKNOWLEDGMENT LETTER OF INDEPENDENT AUDITORS Shareholders and Board of Directors KeyCorp We are aware of the incorporation by reference in the following KeyCorp Registration Statements of our review report, dated October 17, 1995, relating to the unaudited consolidated interim financial statements of KeyCorp, included in the Quarterly Report on Form 10-Q for the quarter ended September 30, 1995. Form S-3 No. 33-5064 Form S-3 No. 33-10634 Form S-3 No. 33-39733 Form S-3 No. 33-39734 Form S-3 No. 33-51652 Form S-3 No. 33-53643 Form S-3 No. 33-56879 Form S-3 No. 33-58405 Form S-4 No. 33-31569 Form S-4 No. 33-44657 Form S-4 No. 33-51717 Form S-4 No. 33-55573 Form S-4 No. 33-57329 Form S-4 No. 33-61539 Form S-8 No. 2-97452 Form S-8 No. 33-21643 Form S-8 No. 33-42691 Form S-8 No. 33-45518 Form S-8 No. 33-46278 Form S-8 No. 33-52293 Form S-8 No. 33-54819 Form S-8 No. 33-56745 Form S-8 No. 33-56881 Form S-8 No. 33-31569 (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 13, 1995 46 EX-27 5 EXHIBIT 27
9 1,000 9-MOS DEC-31-1995 JAN-01-1995 SEP-30-1995 3,344,329 61,165 292,159 168,725 1,595,937 9,660,676 9,689,488 48,409,616 (879,169) 67,967,051 47,905,024 9,540,716 1,389,970 4,047,917 245,944 0 160,000 4,677,480 67,967,051 3,240,991 562,558 39,488 3,843,037 1,287,151 1,866,878 1,976,159 66,324 (42,237) 1,689,699 849,022 582,521 35,790 0 618,311 2.57 2.55 4.46 309,648 78,967 3,744 126,059 830,298 149,070 84,204 879,169 879,169 0 447,880
-----END PRIVACY-ENHANCED MESSAGE-----