-----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, AzSnvmFCktsFYNUXVbfwfveT7in1vgiCEbzJZBXZNGc9sZYK4QjGpMME5PFlTP02 xrfzR9A4hiZL//2H/E2JWg== 0000950152-96-001225.txt : 19981229 0000950152-96-001225.hdr.sgml : 19981229 ACCESSION NUMBER: 0000950152-96-001225 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960328 DATE AS OF CHANGE: 19981228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEYCORP /NEW/ CENTRAL INDEX KEY: 0000091576 STANDARD INDUSTRIAL CLASSIFICATION: 6021 IRS NUMBER: 346542451 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11302 FILM NUMBER: 96540369 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-K 1 KEYCORP 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-850 [LOGO] 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) Securities registered pursuant Securities registered pursuant to Section 12(b) of the Act: to Section 12(g) of the Act: 10% Cumulative Preferred Stock, Class A Depositary Shares representing one-fifth of one share of 10% Cumulative Preferred Stock, Class A Common Shares, $1 par value Rights to Purchase Common Shares None ---------------------------------------- ---------------------------------------- (TITLE OF CLASS) (TITLE OF CLASS) New York Stock Exchange ---------------------------------------- (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
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 the filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by nonaffiliates of the Registrant was approximately $8,772,463,158 at February 29, 1996. (The aggregate market value has been computed using the closing market price of the stock as reported by the New York Stock Exchange on February 29, 1996.) 233,155,167 -------------------------------------------------------------------- (NUMBER OF KEYCORP COMMON SHARES OUTSTANDING AS OF FEBRUARY 29, 1996) Certain specifically designated portions of KeyCorp's 1995 Annual Report to Shareholders are incorporated by reference into Parts I, II and IV of this Form 10-K. Certain specifically designated portions of KeyCorp's definitive Proxy Statement for its 1996 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K. 2 KEYCORP 1995 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
ITEM PAGE NUMBER NUMBER - - - ------ ------ PART I 1 Business................................................... 1 2 Properties................................................. 8 3 Legal Proceedings.......................................... 8 4 Submission of Matters to a Vote of Security Holders........ 8 PART II 5 Market for Registrant's Common Equity and Related Stockholder Matters...................................... 9 6 Selected Financial Data.................................... 9 7 Management's Discussion and Analysis of Financial Condition and Results of Operations................................ 9 8 Financial Statements and Supplementary Data................ 9 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................. 9 PART III 10 Directors and Executive Officers of the Registrant......... 9 11 Executive Compensation..................................... 9 12 Security Ownership of Certain Beneficial Owners and Management............................................... 10 13 Certain Relationships and Related Transactions............. 10 PART IV 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................................. 10 Signatures................................................. 14 Exhibits................................................... 15
3 PART I ITEM 1. BUSINESS OVERVIEW KeyCorp (also referred to herein as the "Corporation") is a legal entity separate and distinct from its banking and other subsidiaries. Accordingly, the right of KeyCorp, its security holders and its creditors to participate in any distribution of the assets or earnings of its banking and other subsidiaries is necessarily subject to the prior claims of the respective creditors of such banking and other subsidiaries, except to the extent that claims of KeyCorp in its capacity as creditor of such banking and other subsidiaries may be recognized. KeyCorp, organized in 1958 under the laws of the state of Ohio and registered under the Bank Holding Company Act of 1956, as amended, is headquartered in Cleveland, Ohio, and is engaged primarily in the business of commercial and retail banking. At December 31, 1995, it was one of the nation's largest bank holding companies with consolidated total assets of approximately $66.3 billion. KeyCorp provides a wide range of banking, fiduciary and other financial services to its corporate, individual and institutional customers through four primary lines of business: Corporate Banking, National Consumer Finance, Community Banking and Key PrivateBank (Personal Financial Services). These services are provided across much of the country through a network of banking subsidiaries operating approximately 1,300 full-service banking offices, a 24-hour telephone banking call center services group and nearly 1,500 ATMs in 14 states as of December 31, 1995. At February 29, 1996, the Corporation and its subsidiaries had approximately 28,905 full-time equivalent employees. In addition to the customary banking services of accepting deposits and making loans, the Corporation's bank and certain nonbank subsidiaries provide specialized services tailored to specific markets, including personal and corporate trust services, customer access to mutual funds, cash management services, investment banking services, international banking services and investment management services. The Corporation also provides other financial services both in and outside of its primary banking markets through its nonbank subsidiaries. These services include providing life, accident and health insurance on loans made by subsidiary banks, venture capital and small business investment financing services, equipment lease financing, community development financing, stock transfer agent services, securities brokerage, automobile financing and other financial services. The Corporation is also an equity participant in a joint venture with a number of other unaffiliated bank holding companies in Electronic Payment Services, Inc. In February 1996, the Corporation received approval from the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") to establish a nonbank subsidiary, Key Capital Markets, Inc., headquartered in Ohio, to engage in various capital markets services and activities, including financial advisory services, certain trading and underwriting activities and services, institutional broker services and foreign exchange and derivatives advisory services for public sector and corporate customers. 1 4 The following financial data is included in the KeyCorp 1995 Annual Report to Shareholders and is incorporated herein by reference as indicated below:
DESCRIPTION OF FINANCIAL DATA PAGE ----------------------------- ---- Selected Financial Data..................................................... 31 Average Balance Sheets, Net Interest Income and Yields/Rates................ 36 Components of Net Interest Income Changes................................... 39 Maturities and Sensitivity of Certain Loans to Changes in Interest Rates.... 44 Composition of Loans........................................................ 48 Securities Available for Sale............................................... 50 Investment Securities....................................................... 50 Allocation of the Allowance for Loan Losses................................. 52 Summary of Loan Loss Experience............................................. 53 Summary of Nonperforming Assets and Past Due Loans.......................... 53 Maturity Distribution of Time Deposits of $100,000 or More.................. 55 Nonperforming Assets........................................................ 74 Short-Term Borrowings....................................................... 76
The executive offices of KeyCorp are located at 127 Public Square, Cleveland, Ohio 44114-1306, and its telephone number is (216) 689-6300. MERGERS, ACQUISITIONS AND DIVESTITURES The information presented in Note 2, "Mergers, Acquisitions and Divestitures", beginning on page 70 of the KeyCorp 1995 Annual Report to Shareholders, is incorporated herein by reference. COMPETITION The market for banking and related financial services is highly competitive. KeyCorp and its subsidiaries compete with other providers of financial services, such as other bank holding companies, commercial banks, savings associations, credit unions, mortgage banking companies, mutual funds, insurance companies, investment management firms, investment banking firms, broker-dealers and a growing list of other local, regional and national institutions which offer financial services. KeyCorp and its subsidiaries compete by offering quality products and innovative services at competitive prices. Recent mergers between financial institutions have added competitive pressure to KeyCorp's core banking services. In addition, competition is expected to intensify further as a consequence of interstate banking laws now in effect in the majority of states which permit banking organizations to expand geographically. Further, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act") removed the restrictions on interstate acquisitions of banks and bank holding companies as of September 29, 1995. The act also authorizes nationwide interstate branching and bank mergers effective June 1, 1997, although states may "opt-in" and permit branching sooner, or "opt-out" and prohibit branching into or out of that state. See "Supervision and Regulation -- Interstate Banking and Other Recent Legislation" herein. SUPERVISION AND REGULATION The following discussion addresses certain of the material elements of the regulatory framework applicable to bank holding companies and their subsidiaries and provides certain specific information relevant to KeyCorp. Regulation of financial institutions, such as KeyCorp and its subsidiaries, is intended primarily for the protection of depositors, the deposit insurance funds of the Federal Deposit Insurance Corporation ("FDIC") and the banking system as a whole, and generally is not intended for the protection of shareholders or other investors. 2 5 In the following discussion, references to statutes and regulations are brief summaries thereof and are qualified in their entirety by reference to such statutes and regulations. In addition, there are other statutes and regulations that apply to the operation of banking institutions. Changes in the applicable laws, and in their application by regulatory agencies, cannot necessarily be predicted, but they may have a material effect on the business and results of KeyCorp. General As a bank holding company, KeyCorp is subject to the regulation, supervision and examination of the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended (the "BHCA"). Under the BHCA, bank holding companies may not, in general, directly or indirectly acquire the ownership or control of more than 5% of the voting shares, or substantially all of the assets, of any company, including a bank, without the prior approval of the Federal Reserve Board. In addition, bank holding companies are generally prohibited under the BHCA from engaging in nonbanking (i.e., commercial or industrial) activities, subject to certain exceptions. As a result of its 1993 acquisition of the institution that is now known as Society First Federal Savings Bank ("Society First Federal") (See Note 2, "Mergers, Acquisitions and Divestitures," starting on page 70 of the KeyCorp 1995 Annual Report to Shareholders which is incorporated herein by reference), the Corporation is also subject to the regulation and supervision of the Office of Thrift Supervision (the "OTS") as a savings and loan holding company registered under the Home Owners' Loan Act, as amended ("HOLA"). The Corporation's banking subsidiaries are also subject to extensive regulation, supervision and examination by applicable Federal and state banking agencies. Society National Bank, KeyBank National Association ("KBNA") and Key Bank USA, National Association ("Key-USA") are national banking associations with full banking powers, subject to regulation, supervision and examination by the Office of the Comptroller of the Currency (the "OCC"). A number of other national banking subsidiaries of the Corporation operate under bank charters that limit their powers to trust-related fiduciary activities. These are Key Trust Company of Ohio, N.A., Key Trust Company of Indiana, N.A. and Key Trust Company of Florida, N.A. These entities are also subject to the regulation, supervision and examination of the OCC, although they are not regulated as banks for purposes of the BHCA. All of the other banking subsidiaries of the Corporation, other than Society First Federal, are state-chartered banks that are subject to regulation, supervision and examination by the applicable state banking authority in the state in which each such institution is chartered. In addition, the Corporation's state-chartered banks are not members of the Federal Reserve System (and are therefore so-called "nonmember banks") and, accordingly, are subject to the regulation, supervision and examination of the FDIC. Because the deposits in all of the Corporation's banking subsidiaries are insured (up to applicable limits) by the FDIC, the FDIC also has certain regulatory and supervisory authority over all such banking subsidiaries, including Society First Federal. The OTS is charged with regulation of Federal savings associations such as Society First Federal, presently the Corporation's only such institution. Depository institutions are also affected by various state and Federal laws, including those relating to consumer protection and similar matters, as well as by the fiscal and monetary policies of the Federal government and its agencies, including the Federal Reserve Board. An important purpose of these policies is to curb inflation and control recessions through control of the supply of money and credit. The Federal Reserve Board uses its powers to establish reserve requirements of depository institutions and to conduct open market operations in United States government securities so as to influence the supply of money and credit. These policies have a direct effect on the availability of bank loans and deposits and on interest rates charged on loans and paid on deposits, with the result that Federal policies have a material effect on the earnings of the banking subsidiaries, and, hence, the Corporation. The Corporation also has other financial services subsidiaries that are subject to regulation, supervision and examination by the Federal Reserve Board, as well as other applicable state and Federal regulatory agencies. For example, the Corporation's brokerage and asset management subsidiaries are subject to supervision and regulation by the Securities and Exchange Commission, the National Association of Securities Dealers, Inc. and state securities regulators; the Corporation's state-chartered trust company subsidiaries are subject to regulation by state banking authorities; and the Corporation's insurance subsidiaries are subject to regulation 3 6 by the insurance regulatory authorities of the various states. Other nonbank subsidiaries of the Corporation are subject to other laws and regulations of both the Federal government and the various states in which they are authorized to do business. Dividend Restrictions The principal source of cash flow to the Corporation, including cash flow to pay dividends on the Corporation's common and preferred shares and debt service on the Corporation's debt, is dividends from its banking and other subsidiaries. Various Federal and state statutory and regulatory provisions limit the amount of dividends that may be paid to the Corporation by its banking subsidiaries without regulatory approval. The approval of the OCC is required for the payment of any dividend by a national bank if the total of all dividends declared by the board of directors of such bank in any calendar year would exceed the total of (i) the bank's net profits (as defined and interpreted by regulation) for the current year plus (ii) the retained net profits (as defined and interpreted by regulation) for the preceding two years, less any required transfer to surplus or a fund for the retirement of any preferred stock. In addition, a national bank can pay dividends only to the extent that retained net profits (including the portion transferred to surplus) exceed bad debts (as defined and interpreted by regulation). Three of the Corporation's banking subsidiaries, Society National Bank, KBNA and Key-USA, and the Corporation's trust company subsidiaries that are national banks, are subject to these restrictions. Key Bank of New York ("Key-NY"), KeyCorp's second-largest banking subsidiary, is subject to dividend restrictions under New York law that are substantially the same as the national bank restrictions described above. In particular, without the prior approval of the Superintendent of Banks, a New York-chartered bank may not declare dividends during any calendar year in excess of (i) the total of the bank's net profits (as defined by statute) for that year combined with (ii) its retained net profits of the preceding two years, less any required transfers to surplus or a fund for the retirement of preferred stock. KeyCorp's third-largest banking subsidiary is Key Bank of Washington ("Key-Washington"), which is chartered by the state of Washington, and is subject to similar restrictions on its ability to pay dividends to KeyCorp. Under Washington law, a bank can pay dividends in an amount not in excess of its retained earnings determined in accordance with generally accepted accounting principles. The Corporation's other banking subsidiaries are subject to various similar restrictions on the payment of dividends under the laws of the states in which they are chartered. In addition, OTS regulations limit the amount of capital distribution (dividends or otherwise) that any savings association may pay without prior OTS approval. These limitations are applicable to Society First Federal. In addition, if, in the opinion of the applicable Federal banking agency, a depository institution under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the institution, could include the payment of dividends) the agency may require, after notice and hearing, that such institution cease and desist from such practice. The OCC and the FDIC have indicated that paying dividends that would deplete a depository institution's capital base to an inadequate level would be an unsafe and unsound practice. Moreover, under the Federal Deposit Insurance Act (the "FDI Act"), an insured depository institution may not pay any dividend if it is undercapitalized or if payment would cause it to become undercapitalized. See "Regulatory Capital Standards and Related Matters -- Prompt Corrective Action." Also, the Federal Reserve Board, the OCC, the FDIC and the OTS have issued policy statements which provide that FDIC-insured depository institutions and their holding companies should generally pay dividends only out of the current operating earnings. Under the laws and regulations applicable to the Corporation's banking subsidiaries, management estimates that, as of December 31, 1995, the Corporation's banking subsidiaries could have declared dividends estimated to be $317.7 million in the aggregate, without obtaining prior regulatory approval, not including dividends that may be payable by the Corporation's trust company subsidiaries, Society First Federal and certain other subsidiaries. 4 7 Holding Company Structure Transactions Involving Banking Subsidiaries. The Corporation's banking subsidiaries are subject to Federal Reserve Act restrictions which limit the transfer of funds or other items of value from such subsidiaries to the Corporation and (with certain exceptions) to the Corporation's nonbanking subsidiaries (together, "affiliates") in so-called "covered transactions." In general, covered transactions include loans and other extensions of credit, investments and asset purchases, as well as other transactions involving the transfer of value from a banking subsidiary to an affiliate or for the benefit of an affiliate. Unless an exemption applies, all covered transactions between a banking subsidiary and any one of its nonbanking affiliates are limited in amount to 10% of that banking subsidiary's capital and surplus and, with respect to all covered transactions with all nonbanking affiliates, in the aggregate, to 20% of that banking subsidiary's capital and surplus. Furthermore, loans and extensions of credit are required to be secured in specified amounts. Source of Strength Doctrine. Under Federal Reserve Board policy, a bank holding company is expected to serve as a source of financial and managerial strength to each of its subsidiary banks and, under appropriate circumstances, to commit resources to support each such subsidiary bank. This support may be required by the Federal Reserve Board at times when the Corporation may not have the resources to provide it, or, for other reasons, would not otherwise be inclined to provide it. Certain loans by a bank holding company to a subsidiary bank are subordinate in right of payment to deposits in, and certain other indebtedness of, the subsidiary bank. In addition, the Crime Control Act of 1990 provides that in the event of a bank holding company's bankruptcy, any commitment by a bank holding company to a Federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. Depositor Preference. The FDI Act provides that, in the event of the "liquidation or other resolution" of an insured depository institution, the claims of depositors of such institution (including claims by the FDIC as subrogee of insured depositors) and certain claims for administrative expenses of the FDIC as a receiver would be afforded a priority over other general unsecured claims against such an institution, including Federal funds and letters of credit. If an insured depository institution fails, insured and uninsured depositors along with the FDIC will be placed ahead of unsecured, nondeposit creditors, including a parent holding company, in order of priority of payment. Liability of Commonly Controlled Institutions. Under the FDI Act, an insured depository institution which is under common control with another insured depository institution is generally liable for any loss incurred, or reasonably anticipated to be incurred, by the FDIC in connection with the default of such commonly controlled institution, or any assistance provided by the FDIC to such commonly controlled institution which is in danger of default. The term "default" is defined generally to mean the appointment of a conservator or receiver and the term "in danger of default" is defined generally as the existence of certain conditions indicating that a "default" is likely to occur in the absence of regulatory assistance. Regulatory Capital Standards and Related Matters Capital Guidelines. The Federal Reserve Board, the FDIC and the OCC have adopted substantially similar risk-based and leverage capital guidelines for United States banking organizations. The guidelines establish a systematic, analytical framework that makes regulatory capital requirements more sensitive to differences in risk profiles among banking organizations, takes off-balance sheet exposure into account in assessing capital adequacy and minimizes disincentives to holding liquid, low-risk assets. The risk-based capital ratio is determined by classifying assets and specified off-balance sheet financial instruments into weighted categories with higher levels of capital being required for categories perceived as representing greater risk. Under these risk-based capital standards, the minimum consolidated ratio of total capital to risk-adjusted assets (including certain off-balance sheet items, such as standby letters of credit) required by the Federal Reserve Board for bank holding companies, such as the Corporation, is currently 8%. At least one-half of the total capital must be comprised of common equity, retained earnings, qualifying noncumulative, perpetual preferred stock, a limited amount of qualifying cumulative, perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less goodwill and certain other intangible assets ("Tier I 5 8 capital"). The remainder may consist of hybrid capital instruments, perpetual debt, mandatory convertible debt securities, a limited amount of subordinated debt, other preferred stock and a limited amount of loan and lease loss reserves ("Tier II capital"). As of December 31, 1995, the Corporation's Tier I and total capital to risk-adjusted assets ratios were 7.53% and 10.85%, respectively. In addition to the risk-based standard, the Corporation is subject to minimum leverage ratio guidelines. The leverage ratio is defined to be the ratio of a banking organization's Tier I capital to its total consolidated quarterly average assets less goodwill and certain other intangible assets. These guidelines provide for a minimum leverage ratio of 3% for bank holding companies that have the highest supervisory rating. All other bank holding companies must maintain a minimum leverage ratio of at least 4% to 5%. Neither the Corporation nor any of its banking subsidiaries has been advised by its primary Federal banking regulator of any specific leverage ratio applicable to it. As of December 31, 1995, the Corporation's Tier I leverage ratio was 6.20%. In addition, Federal Reserve Board policy provides that banking organizations generally, and, in particular, those that are experiencing internal growth or actively making acquisitions are expected to maintain capital positions that are substantially above the minimum supervisory levels, without significant reliance on intangible assets. Furthermore, the guidelines indicate that the Federal Reserve Board will consider a banking organization's "tangible Tier I leverage ratio" in evaluating its proposals for expansion or new activities. The tangible Tier I leverage ratio is the ratio of a banking organization's Tier I capital less all intangible assets to total consolidated quarterly average assets less all intangible assets. As of December 31, 1995, the Corporation's tangible Tier I leverage ratio was 6.16%. Pursuant to Federal Reserve Board rules, net unrealized gains and losses on investments in debt securities classified as "available for sale" are excluded from the computation of Tier I capital for purposes of the risk-based capital and leverage standards. Net unrealized losses on equity securities with readily determinable fair values, which are held in the "available for sale" portfolio, must be deducted from Tier I capital. The Corporation's banking subsidiaries are also subject to capital requirements adopted by their respective primary Federal regulatory agency which are substantially similar to those imposed by the Federal Reserve Board on bank holding companies. The Corporation's national bank subsidiaries are subject to the capital requirements of the OCC and its state-chartered nonmember banks are subject to the capital requirements of the FDIC. As of December 31, 1995, each of the Corporation's banking subsidiaries had capital in excess of all minimum regulatory requirements. On July 14, 1995, the Federal Reserve Board, OCC and FDIC issued a joint notice of proposed rulemaking in which the agencies proposed to amend their respective risk-based capital requirements to incorporate 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. Prompt Corrective Action. The "prompt corrective action" provisions of the FDI Act group FDIC-insured depository institutions into five broad categories based on their capital ratios. The five categories -- "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized' -- are based upon an institution's total, Tier I and leverage capital ratios. Under the regulations, an institution is (i) "well capitalized" if it has a total risk-based capital ratio of 10% or greater, a Tier I risk-based capital ratio of 6% or greater and a leverage ratio of 5% or greater and is not subject to any written agreement, order or capital directive to meet and maintain a specific capital level for any capital measure; (ii) "adequately capitalized" if it has a total risk-based capital ratio of 8% or greater, a Tier I risk-based capital ratio of 4% or greater and a leverage ratio of 4% or greater (3% in certain circumstances) and is not "well capitalized"; (iii) "undercapitalized" if it has a total risk-based capital ratio of less than 8%, a Tier I 6 9 risk-based capital ratio of less than 4% or a leverage ratio of less than 4% (3% in certain circumstances); (iv) "significantly undercapitalized" if it has a total risk-based capital ratio of less than 6%, a Tier I risk-based capital ratio of less than 3% or a leverage ratio of less than 3%; and (v) "critically undercapitalized" if its tangible equity is equal to or less than 2% of average quarterly tangible assets. An institution may be downgraded to, or be deemed to be in, a capital category that is lower than is indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. Each KeyCorp banking subsidiary is considered to be "well capitalized." An institution's capital category, as determined by applying the prompt corrective action provisions of law, may not constitute an accurate representation of the overall financial condition or prospects of the Corporation or its banking subsidiaries, and should be considered in conjunction with other available information regarding the Corporation's financial condition and results of operations. The capital-based prompt corrective action provisions of the FDI Act and their implementing regulations apply to FDIC-insured depository institutions such as the Corporation's banking subsidiaries (other than its trust company subsidiaries), but they are not directly applicable to holding companies, such as the Corporation, which control such institutions. However, both the Federal Reserve Board and the OTS have indicated that, in regulating holding companies, they will take appropriate action at the holding company level based on their assessment of the effectiveness of supervisory actions imposed upon subsidiary depository institutions pursuant to such provisions and regulations. Under the prompt corrective action provisions of the FDI Act, an institution that is not at least "adequately capitalized" may be subject to a number of operating and other restrictions, including restrictions on the payment of dividends to its parent holding company. In addition, under certain circumstances a less than "adequately capitalized" institution's parent holding company must guarantee to restore the institution's capital to certain specified levels. 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 (the "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 insurance 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 previous schedule of 23 to 31 cents per $100 of domestic deposits for institutions whose deposits are subject to assessment by the BIF. 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. For the period commencing June 1 through December 31, 1995, insurance premiums on deposits of all of the Corporation's banking subsidiaries were assessed at the rate of 4 cents per $100 of domestic deposits. The BIF rate has been further reduced to zero as of January 1, 1996. 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. 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 December 31, 1995, the Corporation held $4.4 billion in SAIF deposits which would be subject to the assessment. The Corporation does not know when, or if, this proposal may be adopted nor, if adopted, if it would result in a reduction of the 7 10 SAIF assessment rate of $.23 per $100 of insured deposits. Accordingly, no liability for the special assessment has been recorded. INTERSTATE BANKING AND OTHER RECENT LEGISLATION On September 29, 1994, the Interstate Act was enacted into federal law. Under the Interstate Act, commencing on September 29, 1995, bank holding companies were permitted to acquire banks located in any state regardless of the state law in effect at the time. The Interstate Act also provides for the nationwide interstate branching of banks. Under the Interstate Act, both national and state-chartered banks will be permitted to merge across state lines (and thereby establish interstate branches) commencing on June 1, 1997. States are permitted to "opt-out" of the interstate branching authority by taking action prior to the commencement date. States may also "opt-in" early (i.e., prior to June 1, 1997) to the interstate branching provisions. The Corporation periodically reviews the consolidation opportunities which may become available to it under the terms of the Interstate Act, including under the various states' proposed or enacted "opt-in" and "opt-out" legislative initiatives. The Corporation intends to consolidate the banks within each of its four banking regions to the extent permitted by Federal and state laws and consistent with its business needs, beginning with the Great Lakes and Northwest Regions in 1996. In addition to the matters discussed above, there have been proposed a number of legislative and regulatory proposals designed to strengthen the Federal deposit insurance system and to improve the overall financial stability of the United States banking system, and to provide for other changes in the bank regulatory structure, including proposals to reduce regulatory burdens on banking organizations and to expand the nature of products and services banks and bank holding companies may offer. It is impossible to predict whether or in what form these proposals may be adopted in the future, and, if adopted, what their effect will be on the Corporation. ITEM 2. PROPERTIES The headquarters of KeyCorp and of Society National Bank are located in Society Center at 127 Public Square, Cleveland, Ohio 44114-1306. KeyCorp currently leases approximately 695,000 square feet of the complex, encompassing the first twenty-two floors, the 28th floor and the 54th through 56th floors of the 57-story Society Tower. At December 31, 1995, the banking subsidiaries of KeyCorp owned 775 of their branch banking offices and leased 509 offices. The lease terms for applicable branch banking offices are not individually material, with terms ranging from month-to-month to 99-year leases from inception. Additional information pertaining to KeyCorp's properties is presented in Note 7, "Premises and Equipment," on page 75 of the KeyCorp 1995 Annual Report to Shareholders and is incorporated herein by reference. ITEM 3. 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. Management, based upon the advice of the Corporation's counsel, does not believe that any legal actions, individually or in the aggregate, will have a material adverse effect on KeyCorp's consolidated financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the fiscal year covered by this Report, no matter was submitted to a vote of security holders of KeyCorp. 8 11 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The dividend restrictions discussion on page 4 of this report and the following disclosures included in the KeyCorp 1995 Annual Report to Shareholders are incorporated herein by reference:
PAGE ---- Discussion of Common Shares and shareholder information presented in the Capital and Dividends section............................................... 56 Presentation of quarterly market price and cash dividends per Common Share.... 58 Discussion of dividend restrictions presented in Note 15, Commitments, Contingent Liabilities and Other Disclosures................................ 83
ITEM 6. SELECTED FINANCIAL DATA The Selected Financial Data presented on page 31 of the KeyCorp 1995 Annual Report to Shareholders are incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information included under "Management's Discussion and Analysis of Financial Condition and Results of Operations" presented on pages 27 through 59 of the KeyCorp 1995 Annual Report to Shareholders is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Selected Quarterly Financial Data and the financial statements and the notes thereto, presented on page 58 and on pages 63 through 89, respectively, of the KeyCorp 1995 Annual Report to Shareholders are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is set forth in the sections captioned "ELECTION OF DIRECTORS" and "EXECUTIVE OFFICERS" contained in KeyCorp's definitive Proxy Statement for the 1996 Annual Meeting of Shareholders to be held May 23, 1996, and is incorporated herein by reference. KeyCorp expects to file its proxy statement on or about April 9, 1996. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is set forth in the sections captioned "THE BOARD OF DIRECTORS AND ITS COMMITTEES", "COMPENSATION OF EXECUTIVE OFFICERS" and "EMPLOYMENT, SEVERANCE, AND CHANGE OF CONTROL AGREEMENTS" contained in KeyCorp's definitive Proxy Statement for the 1996 Annual Meeting of Shareholders to be held May 23, 1996, and is incorporated herein by reference. The information set forth in the sections captioned "COMPENSATION AND ORGANIZATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION" and "KEYCORP STOCK PRICE PERFORMANCE" contained in KeyCorp's definitive Proxy Statement for 9 12 the 1996 Annual Meeting of Shareholders to be held May 23, 1996, is not incorporated by reference in this Report on Form 10-K. KeyCorp expects to file its proxy statement on or about April 9, 1996. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is set forth in the section captioned "SHARE OWNERSHIP AND PHANTOM STOCK UNITS" contained in KeyCorp's definitive Proxy Statement for the 1996 Annual Meeting of Shareholders to be held May 23, 1996, and is incorporated herein by reference. KeyCorp expects to file its proxy statement on or about April 9, 1996. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is set forth in the section captioned "ELECTION OF DIRECTORS" contained in KeyCorp's definitive Proxy Statement for the 1996 Annual Meeting of Shareholders to be held May 23, 1996, and is incorporated herein by reference. KeyCorp expects to file its proxy statement on or about April 9, 1996. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) (1) FINANCIAL STATEMENTS The following financial statements of KeyCorp and its subsidiaries, and the auditor's report thereon, are incorporated herein by reference to the pages indicated in the KeyCorp 1995 Annual Report to Shareholders:
PAGE ---- Consolidated Financial Statements: Report of Ernst & Young LLP, Independent Auditors........................... 62 Consolidated Balance Sheets at December 31, 1995 and 1994................... 63 Consolidated Statements of Income for the Years Ended December 31, 1995, 1994 and 1993............................................................ 64 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1995, 1994 and 1993................................... 65 Consolidated Statements of Cash Flow for the Years Ended December 31, 1995, 1994 and 1993............................................................ 66 Notes to Consolidated Financial Statements.................................. 67
(A) (2) FINANCIAL STATEMENT SCHEDULES All financial statement schedules for KeyCorp and its subsidiaries have been included in the consolidated financial statements or the related footnotes, or they are either inapplicable or not required. (A) (3) EXHIBITS* 3.1 Amended and Restated Articles of Incorporation of KeyCorp. Filed as Exhibit 7 to Form 8-A/A filed on February 25, 1994, and incorporated herein by reference. 3.2 Regulations of KeyCorp. Filed as Exhibit 6 to Form 8-A/A filed on February 25, 1994, and incorporated herein by reference. 4.1 Rights Agreement, dated as of August 25, 1989, between Society Corporation and First Chicago Trust Company of New York, as Rights Agent. Filed as Exhibit 1 to Form 8-A filed on August 29, 1989, and incorporated herein by reference.
10 13 4.2 First Amendment to Rights Agreement, dated as of February 21, 1991, between Society Corporation and First Chicago Trust Company of New York, as Rights Agent. Filed as Exhibit 1 to Form 8-A, filed on February 28, 1991, amending Registration Statement on Form 8-A filed August 29, 1989, and incorporated herein by reference. 4.3 Second Amendment to Rights Agreement, dated as of September 12, 1991, between Society Corporation and First Chicago Trust Company of New York, as Rights Agent. Filed as Exhibit 4 to Schedule 13D filed September 23, 1991, and incorporated herein by reference. 4.4 Resignation of First Chicago Trust Company of New York as Rights Agent and appointment of Society National Bank as Rights Agent effective July 1, 1992. Filed as Exhibit 4.4 to Form 10-K for the year ended December 31, 1992, and incorporated herein by reference. 4.5 Third Amendment to Rights Agreement, dated as of October 1, 1993, between Society Corporation and Society National Bank, as Rights Agent. Filed as Exhibit 4 to Schedule 13D filed on October 12, 1993, and incorporated herein by reference. 4.6 Deposit Agreement, dated July 27, 1991, by and between old KeyCorp and Chase Manhattan Bank. Filed as Exhibit 4(c) to old KeyCorp's Registration Statement on Form S-3 (Registration No. 33-40633), and incorporated herein by reference. 10.1 KeyCorp Short Term Incentive Compensation Plan. Filed as Exhibit 10.1 to Form 10-K for the year ended December 31, 1994 and incorporated herein by reference. 10.2 KeyCorp Long Term Cash Incentive Compensation Plan. Filed as Exhibit 10.2 to Form 10-K for the year ended December 31, 1994, and incorporated herein by reference. 10.3 KeyCorp Supplemental Retirement Plan (January 1, 1993 Amendment and Restatement). Filed as Exhibit 10.3 to Form 10-K for the year ended December 31, 1992, and incorporated herein by reference. 10.4 Compensation Continuation Agreements executed between Society Corporation and certain executive officers of Society Corporation as of December 5, 1990. 10.5 Compensation Continuation Agreements executed between Society Corporation and certain executive officers of Society Corporation as of March 31, 1992. Filed as Exhibit 10.5 to Form 10-K for the year ended December 31, 1992, and incorporated herein by reference. 10.6 Compensation Continuation Agreements executed between Society Corporation and certain executive officers of Society Corporation as of June 24, 1993. Filed as Exhibit 10.8 to Form 10-K for the year ended December 31, 1993, and incorporated herein by reference. 10.7 Amended and Restated Employment Agreement between KeyCorp and Victor J. Riley, Jr., dated May 18, 1995. Filed as Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 1995, and incorporated herein by reference. 10.8 Amended and Restated Employment Agreement between KeyCorp and Robert W. Gillespie, dated May 18, 1995. Filed as Exhibit 10.2 to Form 10-Q for the quarter ended June 30, 1995, and incorporated herein by reference. 10.9 Amended and Restated Employment Agreement between KeyCorp and Roger Noall, dated July 19, 1995. Filed as Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 1995, and incorporated herein by reference. 10.10 Employment Agreement between KeyCorp and Gary Allen, dated July 1, 1993. Filed as Exhibit 10.14 to Form 10-K for the year ended December 31,1994, and incorporated herein by reference. 10.11 KeyCorp Director Deferred Compensation Plan (January 1, 1995 Restatement). Filed as Exhibit 10.15 to Form 10-K for the year ended December 31, 1994, and incorporated herein by reference. 10.12 KeyCorp Universal Life Insurance Plan. Filed as Exhibit 10.15 to Form 10-K for the year ended December 31, 1993, and incorporated herein by reference.
11 14 10.13 KeyCorp Supplemental Long Term Disability Plan. Filed as Exhibit 10.16 to Form 10-K for the year ended December 31, 1993, and incorporated herein by reference. 10.14 Society Corporation 1984 Stock Option Plan, as amended. 10.15 Society Corporation 1988 Stock Option Plan, as amended. Filed as Exhibit 10.23 to Form 10-K for the year ended December 31, 1993, and incorporated herein by reference. 10.16 1987 Stock Option Plan of Trustcorp, Inc. 10.17 1981 Incentive Stock Option Plan of Toledo Trustcorp, Inc. 10.18 KeyCorp Amended and Restated 1991 Equity Compensation Plan. Filed as part of KeyCorp's Proxy Statement for its 1994 Annual Meeting of Shareholders, File No.1-11302, and incorporated herein by reference. 10.19 Restatement of the Ameritrust Long-Term Incentive Plan as the Ameritrust Stock Option Plan. 10.20 Trust Agreement (Executive Benefits Rabbi Trust), dated November 3, 1988. 10.21 Ameritrust Corporation Deferred Compensation Plan. **10.22 Old KeyCorp Supplemental Disability Benefit Plan (Specimen Document). 10.23 Form of Employment Agreement for old KeyCorp executives. Filed as Exhibit 10.36 to Form 10-K for the year ended December 31, 1993, and incorporated herein by reference. 10.24 Form of Amendment to Employment Agreement and Severance Agreement for old KeyCorp executives. Filed as Exhibit 10.37 to Form 10-K for the year ended December 31, 1993, and incorporated herein by reference. 10.25 Form of Amendment to Change of Control Agreement for Society executives, dated December 20, 1993. Filed as Exhibit 99(i) to Registration Statement on Form S-4 filed December 28, 1993 (Registration No. 33-51717), and incorporated herein by reference. 10.26 Form of Change of Control Agreement for old KeyCorp executives and Society executives, dated December 20, 1993. Filed as Exhibit 99(j) to Registration Statement on Form S-4 filed December 28, 1993 (Registration No. 33-51717), and incorporated herein by reference. 10.27 Form of Change of Control Agreement for old KeyCorp executives, dated February 25, 1994. Filed as Exhibit 10.36 to Form 10-K for the year ended December 31, 1994, and incorporated herein by reference. 10.28 KeyCorp Directors' Stock Option Plan (November 17, 1994 Restatement). Filed as Exhibit 10.37 to Form 10-K for the year ended December 31, 1994, and incorporated herein by reference. 10.29 KeyCorp 1988 Stock Option Plan, as amended. Filed as Exhibit 10.42 to Form 10-K for the year ended December 31, 1993, and incorporated herein by reference. 10.30 KeyCorp Excess Cash Balance Pension Plan, effective January 1, 1996. 10.31 KeyCorp Excess 401(k) Savings Plan, effective January 1, 1996. **10.32 KeyCorp Executive Deferred Compensation Plan, effective June 1, 1990. **10.33 KeyCorp Survivor Benefit Plan, effective September 1, 1990. **10.34 KeyCorp Directors' Survivor Benefit Plan, effective September 1, 1990.
12 15 **10.35 KeyCorp Supplemental Retirement Benefit Plan for Key Executives, effective July 1, 1990 and restated August 16, 1990. **10.36 KeyCorp Umbrella Trust for Executives, between KeyCorp and National Bank of Detroit dated July 1, 1990. **10.37 KeyCorp Umbrella Trust for Directors, between KeyCorp and National Bank of Detroit dated July 1, 1990. 11 Statement re: Computation of Per Share Earnings. 12 Statement re: Computation of Ratios. 13 KeyCorp 1995 Annual Report to Shareholders. 21 Subsidiaries of the Registrant. 23 Consent of Ernst & Young LLP, Independent Auditors. 24 Powers of Attorney. 27 Financial Data Schedule. The Corporation hereby agrees to furnish the Securities and Exchange Commission upon request, copies of instruments outstanding, including indentures, which define the rights of long-term debt security holders. All documents listed as Exhibits 10.1 through 10.37 constitute management contracts or compensatory plans or arrangements. * Copies of these Exhibits have been filed with the Securities and Exchange Commission. Shareholders may obtain a copy of any exhibit, upon payment of reproduction costs, by writing Mr. Jay S. Gould, Investor Relations, at 127 Public Square (Mailcode OH-01-27-0406), Cleveland, OH 44114-1306. ** These Exhibits are incorporated by reference from old KeyCorp's Current Report on Form 8-K dated March 9, 1992.
(B) REPORTS ON FORM 8-K October 6, 1995 -- Item 5. Other Events and Item 7. Financial Statements, Pro Forma Financial Statements and Exhibits. Reporting that the Registrant had completed the following transactions: (a) the acquisition of AutoFinance Group, Inc., (b) the execution of 3(a)(3) Commercial Paper Agreements and Private Placement Letters of Understanding in connection with the issuance of $500 million of commercial paper, and (c) the obtainment of a $500 million revolving line of credit. October 19, 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 October 17, 1995, announcing its earnings results for the three- and nine-month periods ended September 30, 1995. No other reports on Form 8-K were filed during the fourth quarter of 1995. 13 16 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTIONS 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THE DATE INDICATED. KEYCORP ROGER NOALL Senior Executive Vice President, Chief Administrative Officer, General Counsel, and Secretary March 14, 1996 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE TITLE SIGNATURE TITLE --------- ----- --------- ----- *Robert W. Gillespie President and Chief *Stephen R. Hardis Director Executive Officer (Principal Executive *Henry S. Hemingway Director Officer) *Charles R. Hogan Director *K. Brent Somers Senior Executive Vice President and Chief *Douglas J. McGregor Director Financial Officer (Principal Financial *Steven A. Minter Director Officer) *M. Thomas Moore Director *Lee G. Irving Executive Vice President and Chief *John C. Morley Director Accounting Officer (Principal Accounting *Richard W. Pogue Director Officer) *Victor J. Riley, Jr. Chairman of the Board *Cecil D. Andrus Director *Robert A. Schumacher Director *William G. Bares Director *Ronald B. Stafford Director *Albert C. Bersticker Director *Dennis W. Sullivan Director *Thomas A. Commes Director *Peter G. Ten Eyck, II Director *Kenneth M. Curtis Director *Nancy B. Veeder Director *John C. Dimmer Director *Lucie J. Fjeldstad Director *By Roger Noall, attorney-in-fact March 14, 1996
14 EX-10.04 2 EXHIBIT 10.04 1 EXHIBIT 10.4 EMPLOYMENT CONTINUATION AGREEMENTS ---------------------------------- Attached is a copy of the Employment Continuation Agreement executed between Society Corporation and the following executive officers of Society as of the dates indicated: DECEMBER 5, 1990 ---------------- Patrick V. Auletta James S. Bingay R. Bruce Campbell Lawrence J. Carlini George H. Cress Donald Cruse Frederick A. Deal James A. Fishell Robert W. Gillespie Allen J. Gula, Jr. Michael J. Hammes Douglas L. Hawthorne Robert B. Heisler Anthony Heyworth Michael P. Malone D. Allen McDaniel Henry L. Meyer III A. Jay Meyerson Bruce C. Murray Roger Noall Robert M. Patrick Frank G. Ponchak William J. Simon Martin J. Walker Stephen E. Wall James J. Wert FEBRUARY 1, 1991 ---------------- Daniel J. Gannon Carl C. Heintel, Jr. FEBRUARY 8, 1991 ---------------- Michael D. Hansen 2 AGREEMENT This AGREEMENT ("Agreement"), made as of the __ day of _________, 19__, between SOCIETY CORPORATION, an Ohio corporation ("Society"), and ____________________________ (the "Executive"), W I T N E S S E T H: - - - - - - - - - - WHEREAS, Society has determined that, in light of the importance of the Executive's continued services to the continuity of management of Society and its Subsidiaries (as defined in Section 1 below), it is in Society's best interest to encourage the Executive's continued attention and dedication to the Executive's duties in the potentially disruptive circumstances of a possible Change of Control (as defined in Section 1 below) of Society; NOW, THEREFORE, Society and the Executive agree as follows: 1. Definitions. ----------- (a) ACCOUNTING FIRM. The term "Accounting Firm" means the independent auditors of Society for the fiscal year preceding the year in which the Change of Control occurred 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 -1- 3 Agreement, Society 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 Society or any of its affiliates (as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended). (b) AGGREGATE INCENTIVE COMPENSATION AWARD. The term "Aggregate Incentive Compensation Award" with respect to the Executive for any year shall mean the aggregate incentive compensation awards (whether paid in cash, deferred, or a combination of both) payable to the Executive under both the Society Management Incentive Compensation Plan and the Society Long Term Incentive Compensation Plan for that year. For these purposes, an incentive compensation award payable to the Executive under the Society Long Term Incentive Compensation Plan with respect to any three-year period will be deemed to be "for" the last year of that three-year period. Thus, for example, the incentive compensation award payable to the Executive under the Society Long Term Incentive Compensation Plan with respect to the three year period comprised of 1988, 1989, and 1990 will be deemed to be "for" 1990 (without regard to the time of payment), the entire award under that plan for that period will be part of the Aggregate Incentive Compensation Award for 1990, and no part of the award under -2- 4 that plan for that period will be part of the Aggregate Incentive Compensation Award for any year other than 1990. (c) AVERAGE ANNUAL INCENTIVE COMPENSATION. The term "Average Annual Incentive Compensation" shall mean the greater of: (i) the average of the three highest Aggregate Incentive Compensation Awards payable to the Executive for any of the years during the five-year period ended on the December 31 immediately preceding the Termination Date, or (ii) the average of the three highest Aggregate Incentive Compensation Awards payable to the Executive for any of the years during the five-year period ended on the December 31 immediately preceding the first Change of Control occurring after the execution of this Agreement. (d) CAUSE. The employment of the Executive by Society or any of its Subsidiaries shall have been terminated for "Cause" if, after a Change of Control and prior to the termination of employment, any of the following has occurred: (i) the Executive shall have been convicted of a felony, (ii) the Executive commits an act or series of acts of dishonesty in the course of the Executive's employment which are materially inimical to the best interests of Society or a Subsidiary and which constitutes the commission of a felony, all as determined by the vote of three fourths of all of the members of the Board of Directors of Society (other than the Executive, if the Executive is a Director of Society) which determination is confirmed by a panel of three arbitrators appointed and acting in accordance with the rules of the American Arbitration Association for the purpose of reviewing that determination, or (iii) after being notified in writing by the Board of Directors of Society to cease the Competitive Activity in question, the Executive -3- 5 shall intentionally continue to engage in such Competitive Activity while the Executive remains in the employ of Society or a Subsidiary. (e) CHANGE OF CONTROL. A "Change of Control" shall be deemed to have occurred if at any time or from time to time after the date of this Agreement: (i) 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 Society 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), (ii) during any period of 24 consecutive calendar months, individuals who at the beginning of such period constitute the directors of Society cease for any reason to constitute at least a majority thereof unless the election of each new director of Society was approved or recommended by the vote of at least two-thirds of the directors of Society then still in office who were directors of Society at the beginning of any such period, (iii) Society 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 issued in exchange for voting securities of Society outstanding immediately prior to such merger or consolidation, (iv) 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 Society, or (v) the shareholders of Society shall approve any plan or proposal for the liquidation or dissolution of Society. (f) COMPETITIVE ACTIVITY. The Executive shall be deemed to have engaged in "Competitive Activity" if the Executive: -4- 6 (i) engages in any business or business activity in which Society 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 Society or any of its Subsidiaries), or (ii) serves as a director, officer, or employee of any 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 Society or any of its Subsidiaries (each of the foregoing being hereinafter referred to as a "Financial Services Company"), or renders services of a consultative or advisory nature or otherwise to any such Financial Services Company; provided, however, this clause (ii) shall not prohibit or restrict the Executive from serving in any such capacity with the consent of Society. (g) DAY. A "day" as used in this Agreement means a calendar day unless business day is specifically referred to. (h) 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 salary, hourly rate, partnership interest, or other form of participation, which will result in annual compensation to the Executive of at least 75% of the annual base salary of the Executive with Society and its Subsidiaries at the highest rate in effect at any time from one year prior to the Change of Control to the Termination Date, but does not include employment by (i) a corporation or other firm organized or formed by the Executive as a new business (including, without limitation, a consulting -5- 7 business) after the Termination Date, or (ii) a corporation or other firm the majority of the equity interests of which were acquired by the Executive and/or the Executive's immediate family members after the Termination Date. (i) NON-WINDOW VOLUNTARY RESIGNATION. A "Non-Window Voluntary Resignation" shall have occurred if the Executive, on any day during the two- year period beginning on the date of a Change of Control other than any day that falls within the Window Period, terminates the Executive's employment with Society and all its subsidiaries by voluntarily resigning, unless during that two year period and prior to the Executive's voluntary resignation, there has occurred a Reduction of Base Salary or a Mandatory Relocation; provided further, in the event that there has been more than one Change of Control, there shall not be a Non-Window Voluntary Resignation if the Termination Date occurs during the Window Period with respect to any of the Changes of Control. (j) PERMITTED EMPLOYMENT TERMINATION. A "Permitted Employment Termination" shall have occurred if, after a Change of Control, the employment of the Executive by Society or any of its Subsidiaries is terminated: (i) by Society or its Subsidiary, for Cause, (ii) by Society, its Subsidiary, or the Executive by reason of disability of the Executive, as a result of accidental bodily injury or sickness for a period of 180 consecutive days, but only if the Executive begins to receive payments under the Society Long Term Disability Plan, or (iii) by the death of the Executive. -6- 8 (k) REDUCTION OF BASE SALARY OR A MANDATORY RELOCATION. A "Reduction of Base Salary or a Mandatory Relocation" shall have occurred if either of the following has occurred: (i) after a Change of Control, the base salary of the Executive is at any time reduced, or (ii) after a Change of Control, the Executive is required to relocate the Executive's principal place of employment for Society or its Subsidiary more than 35 miles from where the Executive was located prior to the Change of Control. (l) SOCIETY LONG TERM DISABILITY PLAN. The term "Society Long Term Disability Plan" means and includes the Amended and Restated Society Corporation Long Term Disability Plan as from time to time amended, restated, or otherwise modified, including any long term disability plan hereafter succeeding, replacing, or being substituted for such plan. (m) SOCIETY LONG TERM INCENTIVE COMPENSATION PLAN. The term "Society Long Term Incentive Compensation Plan" means and includes the Society Corporation Long Term Incentive Compensation Plan (January 1, 1990 Restatement) as from time to time amended, restated, or otherwise modified, including any incentive compensation plan hereafter succeeding, replacing, or being substituted for such plan. (n) SOCIETY MANAGEMENT INCENTIVE COMPENSATION PLAN. The term "Society Management Incentive Compensation Plan" means and includes the Society Corporation Management Incentive Compensation Plan (January 1, 1990 Restatement) as from time to time amended, restated, or -7- 9 otherwise modified, including any incentive compensation plan hereafter succeeding, replacing, or being substituted for such plan. (o) SOCIETY RETIREMENT PLANS. The term "Society Retirement Plans" means and includes the Retirement Plan for Employees of Society Corporation and Subsidiaries (January 1, 1986 Restatement), the Society Corporation Excess Benefit Retirement Plan (April 26, 1990 Amendment and Restatement), and the Society Corporation Supplemental Retirement Plan (April 26, 1990 Amendment and Restatement), in all cases, as from time to time amended, restated, or otherwise modified, including any plan hereafter succeeding, replacing, or being substituted for any such plan, and all retirement plans of any nature (including, without limitation, retirement benefits or rights provided under employment contracts or agreements with the Executive or provided in resolutions adopted by the Board of Directors of Society or any of its Subsidiaries) maintained by Society or any of its Subsidiaries in which the Executive was participating prior to the Termination Date. (p) SOCIETY SAVINGS PLANS. The term "Society Savings Plans" means and includes the Society Corporation Employee Stock Purchase and Savings Plan (January 1, 1989 Restatement) and the Amended and Restated Society Corporation Supplemental Stock Purchase and Savings Plan, in both cases, as from time to time amended, restated, or otherwise modified, including any plan hereafter -8- 10 succeeding, replacing, or being 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 Society or any of its Subsidiaries in which the Executive was participating prior to the Termination Date. (q) SOCIETY SUPPLEMENTAL RETIREMENT PLAN. The term "Society Supplemental Retirement Plan" means and includes the Society Corporation Supplemental Retirement Plan (April 26, 1990 Amendment and Restatement) as from time to time amended, restated, or otherwise modified, including any supplemental retirement plan hereafter succeeding, replacing, or being substituted for such plan. (r) SUBSIDIARY. A "Subsidiary" means any corporation, bank, partnership, or other entity a majority of the voting control of which is directly or indirectly owned or controlled at the time in question by Society. (s) TERMINATION DATE. The term "Termination Date" means the date on which the Executive's employment with Society and its Subsidiaries terminates. (t) WINDOW PERIOD. The term "Window Period," with respect to any Change of Control, means the three-month period beginning on the date that falls on same day of the month as the date of the Change of Control in the -9- 11 fifteenth month after the month in which the Change of Control occurs. 2. COMPENSATION CONTINUATION, SEVERANCE, AND OTHER BENEFITS IF EMPLOYMENT IS TERMINATED WITHIN TWO YEARS OF A CHANGE OF CONTROL. If, within two years following the occurrence of a Change of Control, the Executive's employment with Society and its Subsidiaries is terminated for any reason (whether by Society or its Subsidiary or by resignation of the Executive), other than a Non-Window Voluntary Resignation or a Permitted Employment Termination, this Section 2 shall become applicable and Society, either directly or through one or more of its Subsidiaries, shall pay to the Executive the amounts specified in Paragraphs (a) and (b) of this Section 2 on the dates indicated therein and shall provide to the Executive the benefits specified in Paragraphs (c) and (d) of this Section 2 for the period specified therein: (a) Society or a Subsidiary shall pay to the Executive monthly compensation continuation payments for 24 months (commencing on the fifteenth day of the month following the month in which the Termination Date occurs and continuing on the fifteenth day of each of the next succeeding 23 months). The amount of each such monthly payment shall be the sum of (i) one month's base salary of the Executive (at the highest rate in effect at any time from one year prior to the Change of Control to the Termination Date), plus (ii) -10- 12 one-twelfth (1/12) of the Executive's Average Annual Incentive Compensation. (b) Society or a Subsidiary shall pay to the Executive, within 10 business days after the Termination Date, a lump sum severance payment in an amount equal to six times the amount of the monthly payment calculated under Paragraph (a), above. (c) Society or a Subsidiary shall arrange to provide the Executive, for 24 months following the Termination Date, with medical benefits (including, if applicable, dental), long term disability benefits, 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 the Executive was receiving or entitled to receive as an officer of Society or its Subsidiary on the Termination Date. (d) For 24 months following the Termination Date, Society shall cause the Executive to continue to be covered by and to participate in all Society Retirement Plans and Society Savings Plans that the Executive was entitled to be covered by and participating in as an officer of Society or its Subsidiary on the Termination Date, except where such coverage or participation is "impermissible," as defined below. For purposes of determining the benefits, if any, to be provided to the Executive under -11- 13 this Paragraph (d): (i) the 24 month period following the Termination Date that the Executive is entitled to continued coverage by and participation in such plans shall be included in determining the Executive's years of service; (ii) the Executive's base salary during such 24 month period shall be deemed to be the amount the Executive receives under clause (i) of Paragraph (a) of this Section 2 and that portion of the amount payable under clause (ii) of Paragraph (a) of this Section 2 that is attributable to incentive compensation paid under the Society Management Incentive Compensation Plan shall be deemed to be incentive compensation paid under the Society Management Incentive Compensation Plan; and (iii) the Executive, if not already fully vested under the Society Supplemental Retirement Plan will be treated as immediately vested under that plan without regard to age or years of service. For purposes of this Paragraph (d), the Executive's continued coverage by and participation in any of the Society Retirement Plans and Society Savings Plans will be deemed to be "impermissible" if such a continuation would violate the provisions of such plan, would cause such plan to fail to be qualified under Section 401(a) of the Internal Revenue Code, or would be unlawful. If, during the 24 month period referred to in this Paragraph (d), Society determines in good faith that -12- 14 continuing, after the Termination Date, the Executive's coverage by and participation in any of the Society Retirement Plans or any of the Society Savings Plans is impermissible, Society shall not be required to cause the Executive to continue to be covered by and to participate in such affected plan or plans, but in lieu thereof, Society shall, within 45 days after the end of such 24 month period, pay to the Executive a lump-sum amount, with respect to each such plan in which the Executive's coverage or participation ceased for any time during such 24 month period, equal to (x) in the case of any of the Society Savings Plans, the aggregate maximum amount of the employer matching contributions which would have been, but were not, credited to the Executive's account if the Executive had, at all times during such 24 month period, continued to be and participate in that plan to the maximum extent permitted, and (y) in the case of any of the Society Retirement Plans, the difference between the actuarial equivalent of the benefit under that plan which the Executive would have received if the Executive had, at all times during such 24 month period, continued to be covered by and participate in that plan and had thereafter elected to receive a straight life annuity at age 65 under that plan and the actuarial equivalent of the actual benefit paid or payable to the Executive under that plan determined as if the Executive had -13- 15 elected to receive a straight life annuity at age 65 under that plan. For purposes of determining these actuarial equivalents, the discount rate used shall be the lowest "immediate annuity rate" published by the Pension Benefit Guaranty Corporation under PBGC Regulation Section 2619 for plans with valuation dates during the 90-day period ending on the Termination Date and the accrual formulas and actuarial assumptions utilized shall be the most favorable to the Executive of those in effect with respect to that plan during the 90-day period prior to the Termination Date. All determinations and calculations required to be made under sub-clauses (x) and (y) of this Paragraph (d) shall be made by the Accounting Firm, which shall provide detailed supporting calculations both to Society and the Executive within 30 days after the end of such 24 month period. All such determinations and calculations by the Accounting Firm shall be final and binding upon Society and the Executive. The payments under Paragraph (a) of this Section 2 and the benefits required to be provided by Paragraphs (c) and (d) of this Section 2 are subject to reduction or earlier termination, as the case may be, as provided in Section 4 of this Agreement in the event that the Executive accepts Full-time Employment with an Unaffiliated Employer within 24 months following the Termination Date. The payments provided in -14- 16 this Section are also subject to reduction as provided in Section 8 dealing with excess parachute payments. 3. REIMBURSEMENT OF CERTAIN EXPENSES AFTER A CHANGE OF CONTROL. (a) From and after a Change of Control, Society shall pay, as incurred, all expenses, including the reasonable fees of counsel engaged by the Executive, of defending any action brought to have this Agreement declared invalid or unenforceable. (b) From and after a Change of Control, Society shall pay, as incurred, all expenses, including the reasonable fees of counsel engaged by the Executive, of prosecuting any action to compel Society to comply with the terms of this agreement upon receipt from Executive of an undertaking to repay Society for such expenses if, and only if, it is ultimately determined by a court of competent jurisdiction that the Executive had no reasonable grounds for bringing that action (which determination need not be made simply because the Executive fails to succeed in the action). (c) From and after a Change of Control, expenses (including attorney's fees) incurred by the Executive in defending any action, suit, or proceeding commenced or threatened against the Executive for any action or failure to act as an employee, officer, or director of Society or any Subsidiary shall be paid by -15- 17 Society, 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 the Executive in which the Executive agrees to reasonably cooperate with Society or the Subsidiary, as the case may be, concerning the action, suit, or proceeding, and (i) if the action, suit, or proceeding is commenced or threatened against the Executive 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 the Executive's action or failure to act involved an act or omission undertaken with deliberate intent to cause injury to Society or a Subsidiary or (ii) if the action, suit, or proceeding is commenced or threatened against the Executive for any action or failure to act as an officer or employee, to repay the amount if it is ultimately determined that the Executive is not entitled to be indemnified. The provisions of this Paragraph (c) shall not apply if the only liability asserted against the Executive in such action, suit, or proceeding is against the Executive in the Executive's status as a director pursuant to Section 1701.95 of the Ohio Revised Code. 4. NO SET-OFF; NO OBLIGATION TO SEEK OTHER EMPLOYMENT OR TO OTHERWISE MITIGATE DAMAGES. Society's obligation to make the payments provided for in this -16- 18 Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense, or other claim whatsoever which Society or any of its Subsidiaries may have against the Executive; provided, however, if the Executive is indicted or charged by information in criminal proceedings on account of theft from Society or its Subsidiary, Society may thereafter suspend payments under this Agreement pending conclusion (including available appeals) of such criminal proceedings and, if the Executive is convicted at the conclusion of the criminal proceedings of theft from Society or its Subsidiary, Society may set-off amounts owing under this Agreement against the amounts taken by theft by the Executive; otherwise, at the conclusion of the criminal proceedings without the Executive being convicted of theft from Society or its Subsidiary, all suspended payments shall be immediately paid to the Executive. The Executive shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise. Except as provided in the next following sentence, the amount of any payment provided for under this Agreement shall not be reduced by any compensation or benefits earned by the Executive as the result of employment by another employer or otherwise after the termination of the Executive's employment. In the event that the Executive accepts Full-time Employment with an Unaffiliated Employer within 24 months following the Termination Date: -17- 19 (i) the Executive shall, within five business days after accepting such employment, notify Society of such fact, (ii) as long as Society is obligated to continue to make monthly compensation continuation payments under Paragraph (a) of Section 2 of this Agreement, the Executive shall, by the fifth business day of each month occurring after accepting such employment, notify Society of the amount of cash compensation the Executive received during the preceding month from the Executive's new employer, (iii) each remaining monthly compensation continuation payment under Paragraph (a) of Section 2 of this Agreement shall be reduced (but in no event to less than zero) by the amount of cash compensation received by the Executive from the Executive's employment with the Executive's new employer during the month preceding the month in which such payment is made, and (iv) Society's obligation to provide the Executive with benefits under Paragraphs (c) and (d) of Section 2 of this Agreement shall cease on the date that the Executive commences Full-time Employment with an Unaffiliated Employer instead of at the end of the 24 month period specified in Paragraphs (c) and (d) of Section 2 of this Agreement; at each place in such Paragraphs (c) and (d) that there is a reference to a 24 month period, the reference shall be deemed to be to the period from the Termination Date to the commencement date of Full-time Employment with an Unaffiliated Employer; and if Society has an obligation to make a lump-sum payment under clauses (x) or (y) of Paragraph (d) of Section 2, such lump-sum payment shall be made within 45 days after the date that the Executive commences Full-time Employment with an Unaffiliated Employer for the period from the Termination Date to such commencement date. 5. NO EFFECT ON OTHER PLANS OR RIGHTS. The provisions of this Agreement, and any payment provided for hereunder, shall not reduce any amounts otherwise payable, or in any way diminish the Executive's rights, or rights which would accrue solely as a result of the passage of -18- 20 time, under any incentive compensation plan, stock option or stock appreciation rights plan, retirement or supplemental retirement plan, stock purchase and savings plan, disability or insurance plans, or other similar contract, plan or arrangement of Society or any Subsidiary. If the Executive becomes entitled to receive any payments under this Agreement as a result of termination of the Executive's employment following a Change of Control, those payments shall be in lieu of any and all other claims or rights that the Executive may have for severance, separation, and/or salary continuation pay upon that termination of the Executive's employment. 6. INDEMNIFICATION. Society shall indemnify the Executive, to the full extent permitted or authorized by the Ohio General Corporation Law as it may from time to time be amended, if the Executive 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 the Executive is or was a director, officer, or employee of Society or any Subsidiary, or is or was serving at the request of Society 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 6 shall not be deemed exclusive of any other rights to which the Executive may be entitled under the articles of incorporation or the -19- 21 regulations of Society or of any Subsidiary, or any agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in the Executive's official capacity and as to action in another capacity while holding such office, and shall continue as to the Executive after the Executive has ceased to be a director, trustee, officer, or employee and shall inure to the benefit of the heirs, executors, and administrators of the Executive. 7. DISABILITY. If, after a Change of Control and prior to the Termination Date, the Executive is unable to perform services for Society or any Subsidiary for any period by reason of disability of the Executive, as a result of accidental bodily injury or sickness, Society will pay and provide to the Executive all compensation and benefits to which the Executive would have been entitled had the Executive continued to be actively employed by Society through the earliest of the following dates: (a) the first date on which the Executive is no longer so disabled to such an extent that the Executive is unable to perform services for Society, (b) the date on which the Executive becomes eligible for payment of long term disability benefits under the Society Long Term Disability Plan, (c) the date on which Society has paid and provided 24 months of compensation and benefits to the Executive during the Executive's disability, or (d) the date of the Executive's death. 8. EXCESS PARACHUTE PAYMENT REDUCTION. Anything in this Agreement to the contrary notwithstanding, in -20- 22 the event it shall be determined that any payment or distribution by Society or any of its Subsidiaries to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (a "Payment") would be nondeductible by Society 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 the Executive 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 Society because of Section 280G of the Internal Revenue Code and applicable regulations promulgated thereunder. For purposes of this Section 8, 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 8 shall be made by the Accounting Firm which shall provide detailed supporting calculations both to Society and the Executive within 30 days after the Termination Date or such earlier time as is requested by Society. Society and the Executive shall cooperate with each other -21- 23 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 Society and the Executive. The Executive shall determine which of the Agreement Payments (or, at the election of the Executive, other payments) shall be eliminated or reduced consistent with the requirements of this Section 8, provided that, if the Executive does not make such determination within 20 days of the receipt of the calculations made by the Accounting Firm, Society shall elect which of the Agreement Payments shall be eliminated or reduced consistent with the requirements of this Section 8 and shall notify the Executive 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 Society which should not have been made ("Overpayment") or that additional Agreement Payments will not be made by Society 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 -22- 24 treated for all purposes as a loan to the Executive which the Executive shall repay to Society 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 the Executive to Society (or if paid by the Executive to Society, such payment shall be returned to the Executive) 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 lapsed or no appeal is available) determines at any time that an Underpayment has occurred, any such Underpayment shall be promptly paid by Society to or for the benefit of the Executive 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. 9. TAXES; WITHHOLDING OF TAXES. Without limiting the right of Society or its Subsidiary to withhold taxes pursuant to this Section, the Executive shall be responsible for all income, excise, and other taxes (federal, state, city, or other) imposed on or incurred by the Executive as a result of receiving the payments and benefits provided in this Agreement, including, without limitation, the payments and benefits provided under Section 2 of this Agreement. Society or its Subsidiary may withhold from any -23- 25 amounts payable under this Agreement all federal, state, city, or other taxes as Society shall determine to be required pursuant to any law or government regulation or ruling. 10. SUCCESSOR TO SOCIETY. Society will not consolidate with or merge into any other corporation, or transfer all or substantially all of its assets to another corporation or bank, unless such other corporation or bank shall assume this Agreement in a signed writing and deliver a copy thereof to the Executive. Upon such assumption the successor corporation or bank shall become obligated to perform the obligations of Society under this Agreement, and the term "Society" as used in this Agreement shall be deemed to refer to such successor corporation or bank. 11. PAYMENTS TO CONTINUE AFTER EXECUTIVE'S DEATH. If, at the time of the Executive's death, the Executive is entitled to receive payments under this Agreement, all amounts still payable in accordance with the terms of this Agreement shall be paid to the individual or trust designated in a writing delivered to Society by the Executive prior to the Executive's death (with the Executive having the right to change from time to time such designation by delivering to Society prior to the Executive's death a new written designation) or, if there is no such designation, to the Executive's estate. As provided in the preceding sentence, this Agreement will inure to the benefit of and be enforceable by the Executive's personal -24- 26 representatives, executors, administrators, successors, heirs, and designees. 12. TERM OF THIS AGREEMENT. This Agreement shall be effective immediately and shall continue in full force and effect until terminated as provided in this Section 12. (a) This Agreement shall automatically terminate on the first date occurring before a Change of Control on which both: (i) the Executive is neither an elected officer of Society nor an elected officer of any Subsidiary; and (ii) it is not contemplated that the Executive will be elected an officer of Society or any Subsidiary within 60 days thereafter; provided, however, that any termination of employment of the Executive or removal of the Executive as an elected officer done primarily in contemplation of a Change of Control shall be deemed to be a termination or removal of the Executive as of immediately after such Change of Control, if such Change of Control in fact occurs, for purposes of this Agreement. (b) Before a Change of Control, Society may terminate this Agreement by giving the Executive not less than twelve months' prior written notice of its intention to terminate this Agreement; provided, however, that any such notice of intention to terminate shall not be effective if a Change of Control occurs during such twelve month period, and, provided further, -25- 27 that Society shall in no event give a notice under this Paragraph (b) prior to February 22, 1995. After a Change of Control, this Agreement may not be terminated. However, in the event the Executive's employment with Society and its Subsidiaries continues for two years or more following the occurrence of a Change of Control, then, for all purposes of this Agreement, such Change of Control shall thereafter be treated as if it never occurred. 13. NOTICES. For purposes of this Agreement, 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 or mailed by United States registered mail, return receipt requested, postage prepaid, as follows: If to Society or a Subsidiary: Society Corporation 800 Superior Avenue Cleveland, Ohio 44114 Attention: Secretary If to the Executive: ___________________________ ___________________________ ___________________________ ___________________________ 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. 14. EMPLOYMENT RIGHTS. Nothing expressed or implied in this Agreement shall create any right or duty on the part of Society or the Executive to have the Executive -26- 28 continue as an officer of Society or a Subsidiary or to remain in the employment of Society or a Subsidiary. 15. ADMINISTRATION. Society shall be responsible for the general administration of this Agreement and for making payments under this Agreement. All payments under this Agreement shall be made solely from the general assets of Society or one of its Subsidiaries, and the Executive shall have the rights of an unsecured general creditor of Society. All expenses incurred to or costs of the Accounting Firm are the responsibility of Society. 16. CLAIMS REVIEW PROCEDURE. Whenever Society decides for whatever reason to deny, whether in whole or in part, a claim for benefits under this Agreement by the Executive, Society shall transmit a written notice of its decision to the Executive, which notice shall be written in a manner calculated to be understood by the Executive and shall contain a statement of the specific reasons for the denial of the claim and a statement advising the Executive that, within 60 days of the date on which the Executive receives such notice, the Executive may obtain review of the decision of Society in accordance with the procedures hereinafter set forth. Within such 60-day period, the Executive or the Executive's authorized representative may request that the claim denial be reviewed by filing with Society a written request therefor, which request shall contain the following information: (i) the date on which the request was filed with Society, -27- 29 (ii) the specific portions of the denial of the Executive's claim which the Executive requests Society to review, and (iii) any written material which the Executive desires Society to examine. Within 30 days of the date specified in clause (i) of this Section, Society shall conduct a full and fair review of its decision to deny the Executive's claim for benefits and deliver to the Executive its written decision on review, written in a manner calculated to be understood by the Executive, specifying the reasons and the Agreement provisions upon which its decision is based. Nothing in this Section shall be construed as limiting or restricting the Executive's right to institute legal proceedings in a court of competent jurisdiction to enforce this Agreement after complying with the procedures set forth in this Section or as limiting or restricting the scope of the court's review (which review shall be de novo); provided, further, that the failure of the Executive to comply with the procedures set forth in this Section shall not bar or prohibit the subsequent compliance by the Executive with those procedures and thereafter the Executive shall have the right to institute legal proceedings to enforce this Agreement. 17. 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. 18. MISCELLANEOUS. No provision of this Agreement may be modified, waived, or discharged unless such -28- 30 waiver, modification, or discharge is agreed to in a writing signed by the Executive and Society. 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. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. SOCIETY CORPORATION By_____________________ Robert W. Gillespie Chairman of the Board and Chief Executive Officer THE "EXECUTIVE" ________________________ _____________ (type name) -29- EX-10.14 3 EXHIBIT 10.14 1 SOCIETY CORPORATION Exhibit 10.14 1984 STOCK OPTION PLAN 1. Purpose. This 1984 Stock Option Plan (the "Plan") is designed to provide selected officers of Society Corporation (the "Corporation") or any subsidiary incentives by affording them the opportunity to purchase Common Shares of the Corporation and to enable the Corporation and its subsidiaries to attract qualified officers. 2. Types of Options. Options granted under the Plan may be (a) "incentive stock options" within the meaning of Section 422A of the Internal Revenue Code of 1954, as amended, or (b) non-incentive stock options. 3. Administration. The Plan shall be administered by a committee composed of not less than three directors of the Corporation to be appointed by the Board of Directors (the "Committee"). The members of the Committee shall not be officers or employees of the Corporation or any subsidiary. The Board of Directors may also appoint one or more directors as alternate members of the Committee. No option shall be granted to any member or alternate member of the Committee. The Committee shall have authority to grant options under the Plan, to construe and interpret the Plan and to supervise its administration. A majority of the Committee shall constitute a quorum, and the action of the members of the Committee present at any meeting at which a quorum is present, or actions unanimously approved in writing, shall be the actions of the Committee. The construction and interpretation by the Committee of any provision of the Plan or any stock option agreement entered into pursuant to the Plan and any determination by the Committee pursuant to any provision of the Plan or any stock option agreement shall be final and conclusive. No member or alternate member of the Committee shall be liable for any such action or determination made in good faith. 4. Eligibility. Options may be granted to officers of the Corporation or any subsidiary (including officers who are members of the Board of Directors of the Corporation or any subsidiary). An officer of the Corporation or any subsidiary who has been granted an option or options under the Plan may be granted an additional option or options. 5. Stock Available for Options. The stock which may be issued and sold upon the exercise of options granted under the Plan may be authorized and unissued Common Shares of the Corporation or treasury shares as the Board of Directors may from time to time determine. The Corporation may reacquire Common Shares at the time options are exercised, or from time to time in advance, whenever the Board of Directors may deem such purchase advisable. 2 Common Shares may be either Ordinary Shares or Book Value Shares. "Ordinary Shares" are Common Shares of the Corporation for which there is a generally recognized trading market and which are freely transferable. "Book Value Shares" are Common Shares of the Corporation which have the same voting, dividend and liquidation rights as Ordinary Shares, except that they shall not be transferable other than to the Corporation and except that they shall be subject to the repurchase provisions set forth in the stock option agreements pursuant to which they were acquired or purchased. Subject to adjustment as provided in Section 14 of the Plan, the total number of Common Shares of the Corporation which may be issued or sold upon the exercise of all options granted under this 1984 Stock Option Plan shall not exceed the following: (a) 500,000 Ordinary Shares; and (b) a number of Book Value Shares, which as of the respective dates of grant is proportionate to the number of Ordinary Shares described in (a) above, based on the ratio of the then fair market value per share of Ordinary Shares to the then applicable Book Value Per Share (as hereinafter defined in Section 6) of the Book Value Shares; provided, however, that such number of Book Value Shares shall not exceed 750,000, and the number of Book Value Shares so determined shall be rounded to the next lowest whole number of Book Value Shares. The exercise of an option or stock appreciation right relating to Ordinary Shares will reduce proportionately the number of Book Value Shares, if any, subject to the same option or stock appreciation right, and vice versa. Any Book Value Shares or Ordinary Shares ceasing to be subject to the related option because of such reduction shall no longer be available for the future grant of options under the Plan. In the event that any outstanding option under the Plan for any reason expires or is terminated prior to the end of the period during which options may be granted under the Plan, the Common Shares subject to the unexercised portion of such option shall again be available for the future grant of options under the Plan. 6. Option Price. The option price under an option to purchase Ordinary Shares, whether an incentive stock option or a non-incentive stock option, shall be not less than the fair market value of the Ordinary Shares covered by the option, as determined by the Committee, on the date the option is granted. The option price for any Book Value Share shall be not less than the Book Value Per Share on the Fiscal Quarter Date coincident with or immediately preceding the date of the grant of the option. "Book Value Per Share" as of any date means the shareholders' equity allocable to Common Shares of the Corporation, as set forth in the consolidated balance sheet of the Corporation and its subsidiaries as at the Fiscal Quarter Date coincident with or immediately preceding such date, divided by the number of Common Shares of the Corporation outstanding as of such Fiscal Quarter Date; provided, however, 3 that the Book Value Per Share, for the purpose of calculating the repurchase price of Book Value Shares, may be adjusted to such an extent as may be determined by the Committee to preserve the benefit of the arrangement for holders of options on Book Value Shares and the Corporation, if in the opinion of the Committee, after consultation with the Corporation's independent public accountants, changes in the Corporation's accounting policies, acquisitions or other unusual or extraordinary items have materially affected the number of the Corporation's Common Shares outstanding or shareholders' equity allocable to the Corporation's Common Shares. "Fiscal Quarter Date" means March 31, June 30, September 30 or December 31 of any year or such other dates as the Corporation may, from time to time, fix as ending dates of fiscal quarters of the Corporation. 7. Grant of Stock Options; Stock Option Agreements. (a) Incentive Stock Options. The Committee may, from time to time, grant incentive stock options under the Plan. Any grant of an incentive stock option shall be to purchase a specified number of Ordinary Shares. The day on which the Committee authorizes the grant of an incentive stock option shall be the day on which such incentive stock option is granted. No optionee may be granted incentive stock options for Ordinary Shares in any calendar year (under all plans of the Corporation and its subsidiaries) which exceed an aggregate fair market value (determined at the time of grant), of $100,000 plus any unused limit carryover of such optionee to such year from each of the three preceding calendar years. For the purposes of this subsection (a) of this Section 7, the unused limit carryover to any year shall have the meaning attributed to it in Section 422A of the Internal Revenue Code of 1954, as from time to time amended. As of the date of adoption of this 1984 Stock Option Plan, said Section 422A provides that the unused limit carryover means one-half of the amount by which $100,000 exceeds the value (at the time of grant) of the stock for which incentive stock options were granted to the employee in the three preceding calendar years under all plans of the Corporation and its subsidiaries, and further provides that the amount of the unused limit carryover from any calendar year which may be taken into account in any succeeding calendar year shall be the amount of such carryover reduced by the amount of such carryover which was used in prior calendar years. (b) Non-Incentive Stock Options. The Committee may, from time to time, grant nonincentive stock options under the Plan. Any grant of a non-incentive stock option may be to purchase a specified number of Ordinary Shares or Book Value Shares, or both, and may give the optionee the election to purchase either Ordinary Shares or Book Value Shares. The day on which the Committee authorizes the grant of a nonincentive stock option shall be considered to be the day on which such non-incentive stock option is granted, unless the Committee specifies a later day. The 4 exercise of a non-incentive stock option to purchase Ordinary Shares will reduce proportionately the number of Book Value Shares, if any, covered by the same non-incentive stock option, and vice versa. Any grant in respect of Book Value Shares shall provide for the repurchase thereof by the Corporation, and upon such repurchase the repurchase price may be paid in cash, in Ordinary Shares, or a combination of such methods of payment, and may either give to the optionee in the Committee the right to elect the method of payment of the repurchase price. (c) Stock Option Agreements. Each grant of an incentive stock option or a non-incentive stock option under the Plan shall be evidenced by a stock option agreement executed on behalf of the Corporation by an officer designated by the Committee and accepted by the optionee. Such stock option agreement shall contain such terms and provisions, consistent with the Plan, as the Committee may approve. (d) Election. The Committee may, at the time of the grant of a stock option, permit the optionee to irrevocably elect at such time whether such stock option shall be an incentive stock option subject to the terms and conditions set forth in the Plan applicable to incentive stock options, which terms and conditions, if such election is made, shall be set forth in the stock option agreement. 8. Exercise of Options. Options, whether incentive stock options or non-incentive stock options, shall be exercised by delivery of written notice of exercise to the Corporation accompanied by payment of the option price. Except as otherwise provided in Section 9, an option may be exercised only while the optionee is in the employ of the Corporation or of a subsidiary. An optionee to whom an option has been granted must remain in the continuous employ of the Corporation or of a subsidiary for one year from the date on which the option is granted before he or she may exercise any part of the option. There after, and during the life of the option, the option may be exercised at any time as to all of the Common Shares subject to the option, or from time to time, as to any portion of such Common Shares. No fraction of a Common Share may, however, be purchased upon the exercise of an option. An incentive stock option shall not be exercisable while there is outstanding any incentive stock option which was granted before the grant of such incentive stock option to the optionee to purchase Ordinary Shares of the Corporation or a subsidiary (determined at the time of granting of the incentive stock option) or a predecessor of any of such corporations. An incentive stock option shall be treated as outstanding for this purpose until it is exercised in full or expires by reason of lapse of time. Notwithstanding any provision of this Section 8 to the contrary, any option, whether an incentive stock option or a non-incentive stock option, granted pursuant to the Plan (a) may, in the discretion of the Committee, become fully exercisable as to all optioned shares from and after the time the optionee ceases to be an employee of the Corporation or any of its subsidiaries as a result of the sale or other disposition by the Corporation of assets or property (including shares of any subsidiary) in respect of which 5 the optionee had theretofore been employed or as a result of which optionee's continued employment with the Corporation or any subsidiary is no longer required, and (b) shall, in the case of a change in control (as hereinafter defined) of the Corporation, become fully exercisable as to all optioned shares from and after the date of such change in control. For purposes of this paragraph, the term "change in control" shall be deemed to occur upon (i) the approval by the shareholders of the Corporation of (A) any consolidation or merger in which the Corporation is not the continuing or surviving corporation or pursuant to which Common Shares of the Corporation would be converted into cash, securities or other property, other than a merger in which the holders of Common Shares of the Corporation immediately prior to the merger will have the same proportionate ownership of common stock of the surviving corporation immediately after the merger, (B) any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets of the Corporation, or (C) adoption of any plan or proposal for the liquidation or dissolution of the Corporation, or (ii) any "person" (as defined in Section 13(d) of the Securities Exchange Act of 1934 as amended), corporation or other entity, other than the Corporation or any subsidiary or employee benefit plan or trust maintained by the Corporation or any of its subsidiaries, shall become the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of more than 25% of the Common Shares of the Corporation outstanding at the time, without the prior approval of the Board of Directors of the Corporation. 9. Exercise of Options After Termination of Employment or Death. (a) Incentive Stock Options. An incentive stock option may be exercised after termination of employment, whether upon death, disability, retirement or otherwise only to the extent provided in this Section 9(a). (i) Upon any termination of employment for any reason other than the optionee's retirement under any retirement plan, program or policy of the Corporation or of a subsidiary, disability or death, the optionee shall have the right within the period of three months next following the date of such termination of employment, to purchase all or any part of the Common Shares which the optionee would have been entitled to purchase if he or she had exercised his or her option on the date of such termination of employment, except that, if the employment of the optionee is terminated by the Corporation or a subsidiary, the optionee may exercise his or her incentive stock option only with the consent of the Committee. (ii) Upon any termination of employment due to retirement under any retirement plan, program or policy of the Corporation or of a subsidiary, the optionee shall have the right within the period of two years next following the date of termination of 6 employment, to purchase all or any part of the Common Shares which the optionee would have been entitled to purchase if he or she had exercised his or her incentive stock option on the date of such termination of employment. (iii) Upon any termination of employment due to disability, the optionee shall have the right within the period of one year next following the date of termination of employment, to purchase all or any part of the Common Shares which the optionee would have been entitled to purchase if he or she had exercised his or her incentive stock option on the date of such termination of employment. (iv) Upon the death of the optionee while in the active service of the Corporation or of a subsidiary, or within the period referred to in subsection (i), (ii) or (iii) of this Section 9(a), the optionee's executor or administrator or the person or persons to whom the optionee's rights under his or her option are transferred by will or the laws of descent and distribution shall have the right, within the period of two years next following the date of the optionee's death, to purchase all or any part of the Common Shares which the optionee would have been entitled to purchase if he or she had exercised his or her incentive stock option on the date of death. (b) Non-Incentive Stock Options. A non-incentive stock option may be exercised after termination of employment, whether upon death, retirement, or otherwise only to the extent provided in this Section 9(b). (i) Upon any termination of employment (A) due to retirement under any retirement plan, program or policy of the Corporation or of a subsidiary, or (B) due to disability, the optionee shall have the right within the period of two years next following the date of such termination of employment, to purchase all or any part of the Common Shares which the optionee would have been entitled to purchase if he or she had exercised his or her non-incentive stock option on the date of such termination of employment. (ii) Upon any termination of employment for any other reason except the optionee's retirement as specified in (i)(A) or disability as specified in (i)(B) above, or the optionee's death, the optionee shall have the right within the period of six months next following the date of such termination of employment, to purchase all or any part of the Common Shares which the optionee would have been entitled to purchase if he or she had exercised his or her non-incentive stock option on the date of such termination of employment, except that, if the employment of the optionee is terminated by the Corporation or a subsidiary, the optionee may exercise his or her non-incentive stock option only with the consent of the Committee. (iii) Upon the death of the optionee while in the active service of the Corporation or of a subsidiary, or within the period referred to in subsection (i) or (ii) of this Section 9(b), the optionee's executor or administrator or the person or persons to whom the optionee's rights under his or her option are transferred by will or the laws 7 of descent and distribution shall have the right, within the period of two years next following the date of the optionee's death to purchase all or any part of the Common Shares which the optionee would have been entitled to purchase if he or she had exercised his or her option on the date of death. 10. Termination of Options. Notwithstanding any other provision in this Plan, any option, whether an incentive stock option or a non-incentive stock option, granted under the Plan shall terminate, and the right of the optionee or other person to purchase Common Shares shall expire, at the time set forth in the grant, which shall be not later than ten years from the date such option is granted. 11. Payment for Shares. Upon exercise of an option, whether an incentive stock option or a non-incentive stock option, the option price shall be payable either (a) in cash, or (b) by the transfer to the Corporation by the optionee of Ordinary Shares or Book Value Shares having a value (current market value in the case of Ordinary Shares and Book Value Per Share in the case of Book Value Shares) equal to the option price, including, in the discretion of the Committee exercised at the time the option is granted, the right to transfer shares acquired upon the exercise of a part of an option in payment of the option price upon immediate exercise of a further part of the option, or (c) by a combination of the methods described in (a) and (b) of this Section 11. 12. Assignability. Except as otherwise provided in Section 9, an option, whether an incentive stock option or a non-incentive stock option, granted under the Plan shall not be transferred and may be exercised only by the optionee to whom granted. 13. Options in Substitution for Stock Options Granted by Other Companies. Options, whether incentive stock options or non-incentive stock options, may be granted under the Plan in substitution for stock options held by employees of a company who become or are about to become officers of the Corporation or a subsidiary as a result of the merger or consolidation of the employer company with the Corporation or a subsidiary, or the acquisition by the Corporation or a subsidiary of the assets of the employer company, or the acquisition by the Corporation or a subsidiary of stock of the employer company as a result of which it becomes a subsidiary of the Corporation. The terms, provisions and benefits of the substitute options so granted may vary from the terms, provisions and benefits set forth in or authorized by the Plan to such extent as the Committee at the time of grant may deem appropriate to conform, in whole or in part, to the terms, provisions and benefits of the options in substitution for which they are granted. 14. Adjustment Upon Changes in Shares. In the event of any change in the Common Shares subject to the Plan or to any option, whether an incentive stock option or a non-incentive stock option, granted under the Plan, by reason of any stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of the Corporation, or any merger, consolidation, separation, reorganization or partial or complete liquidation, or any other corporate transaction or event having an effect similar 8 to any of the foregoing, the aggregate number of Ordinary Shares and Book Value Shares as to which the options may thereafter be granted under the Plan, the number and class of shares subject to each outstanding option and the option price with respect to such share shall be appropriately adjusted. 15. Purchase For Investment. Each person exercising an option, whether an incentive stock option or a non-incentive stock option, may be required by the Corporation to furnish a representation that he or she is acquiring the shares purchased upon such exercise as an investment and not with a view to distribution thereof if the Corporation shall, in its sole discretion, determine that such representation is required to insure that a re-sale or other disposition of the shares would not involve a violation of the Securities Act of 1933, as amended, or of applicable blue sky laws. Any investment representation so furnished shall no longer be applicable at any time such representation is no longer necessary for such purposes. 16. Duration and Termination of the Plan. The Plan shall remain in effect through February 15, 1994, and shall then terminate, unless terminated at an earlier date by action of the Board of Directors; provided, however, that termination of the Plan shall not affect Options granted prior thereto. 17. Amendment of the Plan. The Board of Directors may alter or amend the Plan from time to time prior to its termination, except that, without shareholder approval, no amendment shall increase the aggregate number of shares with respect to which options may be granted (except in accordance with the provisions of Section 14), reduce the option price at which options may be exercised, extend the time within which options may be granted under the Plan or the time within which an option may be exercised, or change the requirements relating to either eligibility for participation in the Plan or administration of the Plan. Except in accordance with the provisions of Section 14, neither the Board of Directors nor the Committee may, without the consent of the holder of an option granted under the Plan, alter or impair such option. The Committee may, with the agreement of the affected optionee, cancel any stock option agreement entered into pursuant to the Plan. In the event of such cancellation, the Committee may authorize the grant of a new incentive stock option or non-incentive stock option for the same or a different number of Common Shares specified in the cancelled stock option agreement, at such option price and upon terms and provisions which would have been applicable under the Plan had the cancelled stock option agreement not been entered into. 18. Effective Date. The Plan was originally adopted by the Board of Directors of the Corporation on February 16, 1984, and approved by the affirmative vote of the holders of shares of the Corporation entitling them to exercise a majority of the voting power on such proposal on June 21, 1984. EX-10.16 4 EXHIBIT 10.16 1 Exhibit 10.16 1987 STOCK OPTION PLAN OF TRUSTCORP, INC. The terms and conditions of the 1987 Stock Option Plan (hereinafter referred to as the "Plan") of Trustcorp, Inc. (hereinafter referred to as "Company"), a Delaware corporation, are set forth below: 1. PURPOSE OF THE PLAN. The purpose of the Plan is to encourage ownership of shares of the Common Stock, par value $1.00 per share, of the Company (said shares are hereinafter referred to as "Company Common Stock") by an Eligible Employee (as said term is hereinafter defined in paragraph 3 of this Plan) and to encourage each of them to remain in the employ of the Company. It is also intended that any option granted pursuant to the terms of this Plan (an option granted under this Plan is hereinafter referred to as an "Option" and all options granted under this Plan are hereinafter collectively referred to as the "Options") shall be, unless specifically designated otherwise in the written option agreement, an "incentive stock option" within the meaning of Section 422A of the Internal Revenue Code of 1986 (hereinafter as may be hereafter amended referred to as the "Code"). 2. ADMINISTRATION OF PLAN. The Board of Directors of the Company (hereinafter referred to as the "Board") shall appoint a Stock Option Committee (hereinafter referred to as the "Committee") which shall consist of not less than three members of the Board. Subject to the provisions of this Plan, the Committee shall have authority to supervise, administer and interpret this Plan including, but not limited to, the authority to (i) determine the Eligible Employee to whom an Option shall be granted, (ii) determine the number of shares of Company Common Stock to be the subject of each Option, (iii) determine the time or times at which an Option shall be granted and/or exercised, (iv) determine the period of each of the Options, (v) determine in good faith the fair market value of Company Common Stock in accordance with rules and/or regulations adopted by the Internal Revenue Service (hereinafter referred to as the "IRS") under Section 422A of the Code or sections of similar import or, in the absence of such rules or regulations, reasonable valuation methods and, in furtherance of such authority, to seek the opinions of independent and well-qualified experts as to the fair market value of Company Common Stock and (vi) make, amend and rescind rules and regulations relating to the Plan. The determination of the Committee shall be made in accordance with its judgment as to the best interests of the Company and its shareholders and in accordance with the purposes of the Plan. The Committee's determination in all cases arising under the Plan shall be final, conclusive and binding unless otherwise determined by the Board. Notwithstanding anything contained in this Plan to the contrary, no member of the Board shall be eligible to receive an Option under this Plan while a member of the Committee unless the Board approves the granting of such Option. 2 The Board may from time to time appoint members of the Committee in substitution for or in addition to members previously appointed and may fill vacancies, however caused, in the Committee. The Committee shall select one of its members as its chairman and shall hold its meetings at such times and places as it shall deem advisable. A majority of its members shall constitute a quorum. All actions of the Committee shall be taken by a written instrument signed by a majority of the members and action so taken shall be fully as effective as if it had been taken by a vote of a majority of the members at a meeting duly called and held. The Committee may appoint a secretary who shall keep minutes of its meetings. The Committee shall make such rules and regulations for the conduct of its business as it shall deem advisable. 3. ELIGIBLE EMPLOYEE DEFINED. For purposes of this Plan, the term "Eligible Employee" shall be defined to mean an individual who is an employee of either the Company, a Parent of the Company (as that term is defined in Sections 422A(a)(2) and 425 of the Code) or a Subsidiary of the Company (as that term is defined in Sections 422A(a)(2) and 425 of the Code), and who at least either holds the office of Vice President of the Company, a Parent of the Company or a Subsidiary of the Company, or who performs such managerial functions or duties consistent with, in the opinion of the Committee, the level of a Vice President of the Company, a Parent of the Company or a Subsidiary of the Company. Notwithstanding anything contained in this Plan to the contrary, no Option shall be granted to an individual (i) who, at the time such Option is granted, "owns" (as defined in Sections 422A and 425 of the Code) stock possessing more than 10% of the total combined voting power of all classes of stock of the Company, a Parent of the Company or a Subsidiary of the Company unless at the time such Option is granted the option price is at least 110% of the fair market value of the Company Common Stock subject to the Option and such Option by its terms is not exercisable after the expiration of five (5) years from the date such Option is granted and (ii) unless such individual is an employee of the Company, a Parent of the Company or a Subsidiary of the Company at the time of the granting of the Option. 4. COMPANY COMMON STOCK SUBJECT TO THE PLAN. Subject to adjustment as provided in paragraph 12 of this Plan, the aggregate number of shares of Company Common Stock which shall be reserved and which may be issued upon the exercise of all Options to be granted from time to time under this Plan is 400,000, whether or not such shares of Company Common Stock are (i) treasury shares, (ii) authorized but unissued shares, or (iii) both. In the event that an Option expires or terminates without having been exercised as to the full number of shares of Company Common Stock subject thereto, the shares of Company Common Stock as to which such Option was not exercised shall be available for Options which may thereafter be granted under this Plan. 5. GRANT OF OPTION. Each Option shall be granted within ten (10) years from (i) the date this Plan is adopted by the Board, or (ii) the date this Plan is approved by the shareholders of the Company as required by Section 422A(b)(2) of the Code, whichever date is earlier. 3 6. TERM OF OPTION. The term of each Option, other than an Option specifically designated in the written option agreement as being other than an incentive stock option, shall be for a period not to exceed ten (10) years from the date the Option is granted. 7. EXERCISE OF OPTION. Except as otherwise provided in this Plan, an Option shall be exercisable only by the individual to whom it is granted during his lifetime and only if such individual was an employee of either the Company, a Parent of the Company or a Subsidiary of the Company, or a corporation or a parent or subsidiary of such corporation issuing or assuming a stock option in a transaction to which Section 425(a) of the Code applies, at all times during the period beginning on the date of the granting of the Option and ending on the date of such exercise (including the date of such exercise); provided, however, in the case of an employee who is disabled (within the meaning of Section 105(d)(4) of the Code), the ending date of the period shall be one (1) year before the date of such exercise. An Option shall be deemed exercised only if written notice of its exercise is delivered to the Company prior to the expiration of the term of the Option. Notwithstanding anything contained in this Plan to the contrary, no Option may be exercised unless and until this Plan is approved by the shareholders of the Company in the manner and within the time required by Section 422A of the Code. 8. OPTION PRICE. The purchase of Company Common Stock which shall be the subject of an Option shall be not less than the fair market value of Company Common stock at the time such Option is granted. The written option agreement may provide that the option price may be paid in cash or Company Common Stock, or both. 9. NONTRANSFERABILITY OF OPTION. An Option shall not be transferable by the individual to whom it is granted except by (i) will, or (ii) the laws of descent and distribution. 10. TERMINATION OF EMPLOYMENT. In the event that an individual to whom an Option is granted under this Plan (hereinafter referred to as an "Optionee") shall cease to be employed by the Company, a Parent of the Company or a Subsidiary of the Company, whether voluntarily or involuntarily, for any reason other than death or disability (within the meaning of Section 105(d)(4) of the Code) and shall no longer be employed by any of them, such Option and all of the Optionee's rights to further exercise his Option shall expire as of the date the employment of such individual is terminated; provided, however, that no Option other than an Option specifically designated in the written option agreement as being other than an incentive stock option shall be exercisable after the expiration of ten (10) years from the date such Option is granted. Nothing in this Plan shall confer upon any Optionee the right to be continued in the employment of the Company, a Parent of the Company or a Subsidiary of the Company, or interfere in any way with the right of the Company, a Parent of the Company or a Subsidiary of the Company to terminate the employment of an Optionee, whether for cause or otherwise. A leave of absence with the express written consent of the Company shall not be considered termination of employment for purposes of this paragraph. 4 11. DEATH OR DISABILITY OF OPTIONEE. In the event of the death or disability of an Optionee while employed by the Company, a Parent of the Company or a Subsidiary of the Company, his Option may be exercised by him or, in the case of the death of an Optionee, by his personal representative or by any person or persons who shall have acquired the Option directly from the Optionee by will or by the laws of descent and distribution at any time within three (3) months after the date of his death or within one (1) year after the date of his disability; provided, however, that no Option (other than an Option specifically designated in the written option agreement as being other than an incentive stock option) shall be exercisable after the expiration of ten (10) years from the date such Option is granted. 12. ADJUSTMENTS IN COMPANY COMMON STOCK. In the event of any changes in the issued and outstanding shares of Company Common Stock by reason of (i) share dividends, (ii) split-ups, (iii) recapitalizations, (iv) mergers, (v) consolidations, (vi) combinations, (vii) separations, (viii) reorganizations, or (ix) exchange of shares, the aggregate number and class of shares available under this Plan shall be correspondingly adjusted by the Committee; provided, however, that neither this Plan nor any Option (except for any Option specifically designated in the written option agreement as being other than an incentive stock option) shall be adjusted in a manner that causes such Option not to qualify as an incentive stock option within the meaning of Section 422A of the Code. 13. TIME OF GRANTING OPTIONS. Nothing contained in the Plan or in any resolution adopted or to be adopted by the Board or the shareholders of the Company nor any action taken by the Committee shall constitute the granting of an Option. The granting of an Option shall take place only when the written option agreement referred to in paragraph 21 of this Plan shall have been duly executed and delivered by or on behalf of the Company and the Optionee. 14. RIGHTS AS A SHAREHOLDER. Except as otherwise provided by the laws of the State of Delaware, an Optionee shall have no rights as a shareholder of the Company with respect to any shares covered by his Option until the date of the issuance of a share certificate to him for such shares. Except as otherwise provided in paragraph 12 of this Plan and by the laws of the State of Delaware, no adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights on Company Common Stock for which the record date is prior to the date such share certificate is issued. 15. AMENDMENT OF PLAN. To the extent permitted by law, the Board may at any time and from time to time modify or amend the Plan in such respects as it shall deem advisable; provided, however, that such modification or amendment shall not change any rights under any outstanding Option without the written consent of the Optionee; provided further, however, that such modification or amendment shall not, without the approval of the shareholders of the Company, change the Plan so as to cause any of the 5 Options to fail to meet the requirements of an incentive stock option under Section 422A of the Code. 16. TERMINATION OF PLAN. Notwithstanding anything contained in this Plan to the contrary, the Board may at any time terminate or discontinue this Plan or any Option granted hereunder provided that such action shall not, without the written consent of the Optionee affected, impair the rights of such Optionee under any Option previously granted under the plan. 17. GOVERNMENTAL REGULATIONS. This Plan and the granting and exercise of any Option and the obligations of the Company to sell and deliver shares of Company Common Stock under any such Option shall be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies as may be required. 18. COMPLIANCE WITH SECURITIES LAWS. Options granted and shares of Company Common Stock issued by the Company upon the exercise of Options shall be granted and issued only in full compliance with all applicable securities laws including, but not limited to, the Securities Act of 1933, as amended, and the general rules and regulations promulgated thereunder by the Securities and Exchange Commission and applicable state blue sky laws. In connection with such compliance, the Committee may impose such conditions on transfer of the shares of Company Common Stock subject to an Option and other restrictions, conditions and limitations as it may deem necessary and appropriate. 19. PROCEEDS FROM SALE OF COMPANY COMMON. The proceeds to be received by the Company upon the exercise of any Option shall be used for general corporate purposes. 20. OBLIGATIONS OF OPTIONEE. The granting of an Option shall impose no obligation upon the Optionee to exercise such Option. 21. OPTION AGREEMENT. Options granted under this Plan shall be evidenced by written agreements in such form as the Committee shall from time to time approve, which agreements (i) shall comply with and be subject to the terms and conditions of this Plan, (ii) may contain such other provisions not inconsistent with this Plan as the Committee shall deem advisable including, without limitation, restrictions upon exercise of an Option, (iii) may specifically designate the Option it evidences as being other than an incentive stock option, and (iv) shall contain such other limitations and restrictions upon the exercise of an Option as shall be necessary in order that the granting of such Option shall be in compliance with federal and state securities laws. 22. EFFECTIVENESS OF PLAN. This Plan shall become effective on the date this Plan is approved by the Board; provided, however, that the Plan shall be submitted to the shareholders of the Company in the manner and within the time required by Section 422A of the Code. In the event this Plan is not approved by the shareholders of the Company as aforesaid, then this Plan shall be terminated, null and void and all Options granted under this Plan shall terminate. 6 23. DETERMINATION OF DISABILITY. For purposes of this Plan, the determination as to whether an Optionee's employment is terminated because of "disability" shall be vested solely in the Committee and its determination shall be final and conclusive on all parties. 24. PRIORITY. To the extent that any of the provisions of Sections 421 and 422A of the Code are inconsistent with the provisions of this Plan and such inconsistency would cause any Option granted under this Plan (other than any Option specifically designated in the written option agreement as being other than an incentive stock option) not to be treated for federal income tax purposes as an incentive stock option, the provisions of this Plan and of Options granted hereunder shall be deemed to be amended in a manner to comply with the provisions of Section 421 or 422A of the Code, as the case may be. IN WITNESS WHEREOF, the undersigned, being the duly elected and authorized Secretary of the Company, hereby certifies that this Plan was legally and validly approved by the Board at a meeting thereof on November 5, 1987, held in South Bend, Indiana. TRUSTCORP, INC. By /s/ David A. Snavely --------------------- David A. Snavely, Secretary EX-10.17 5 EXHIBIT 10.17 1 Exhibit 10.17 1981 INCENTIVE STOCK OPTION PLAN OF TOLEDO TRUSTCORP, INC. -------------------------------- The terms and conditions of the 1981 Incentive Stock Option Plan (hereinafter referred to as the "Plan") of Toledo Trustcorp, Inc. (hereinafter referred to as Company"), a Delaware corporation, is set forth below: 1. PURPOSE OF THE PLAN. The purpose of the Plan is to encourage ownership of shares of the Common Stock, par value $20.00 per share, of the Company (said shares are hereinafter referred to as "Company Common Stock") by an Eligible Employee (as said term is hereinafter defined in paragraph 3 of this Plan) and to encourage each of them to remain in the employ of the Company. It is also intended that any option granted pursuant to the terms of this Plan (an option granted under this Plan is hereinafter referred to as an "Option" and all options granted under this Plan are hereinafter collectively referred to as the "Options") shall be an "incentive stock option" within the meaning of Section 422A of the Internal Revenue Code of 1954, as amended (hereinafter referred to as the "Code"). 2. ADMINISTRATION OF PLAN. The Board of Directors of the Company (hereinafter referred to as the "Board") shall appoint a Stock Option Committee (hereinafter referred to as the "Committee") which shall consist of not less than three members of the Board. Subject to the provisions of this Plan, the Committee shall have authority to supervise, administer and interpret this Plan including, but not limited, to the authority to (i) determine the Eligible Employee to whom an Option shall be granted, (ii) determine the number of shares of Company Common Stock to be the subject of each Option, (iii) determine the time or times at which an Option shall be granted and/or exercised, (iv) determine the period of each of the Option, (v) determine in good faith the fair market value of Company Common Stock in accordance with rules and/or regulations adopted by the Internal Revenue Service (hereinafter referred to as the "IRS" ) under Section 422A of the Code or sections of similar import or, in the absence of such rules or regulations, reasonable valuation methods and, in furtherance of such authority to seek the opinions of independent and well-qualified experts as to the fair market value of Company Common Stock and (vi) make, amend and rescind rules and regulations relating to the Plan. The determination of the Committee shall be made in accordance with its judgment as to the best interests of the Company and its shareholders and in accordance with the purposes of the Plan. The Committee's determination in all cases arising under the Plan shall be final, conclusive and binding unless otherwise determined by the Board. Notwithstanding anything contained in this Plan to the contrary, no member of the Board shall be eligible to receive an Option under this Plan while a member of the Committee unless the Board approves the granting of such Option. 2 The Board may from time to time appoint members of the Committee in substitution for or in addition to members previously appointed and may fill vacancies, however caused, in the Committee. The Committee shall select one of its members as its chairman and shall hold its meetings at such times and places as it shall deem advisable. A majority of its members shall constitute a quorum. All action of the Committee shall be taken by a written instrument signed by a majority of the members and action so taken shall be fully as effective as if it had been taken by a vote of a majority of the members at a meeting duly called and held. The Committee may appoint a secretary who shall keep minutes of its meetings. The Committee shall make such rules and regulations for the conduct of its business as it shall deem advisable. 3. ELIGIBLE EMPLOYEE DEFINED. For purposes of this Plan, the term "Eligible Employee" shall be defined to mean an indivitual who is an employee of either the Company, a Parent of the Company (as that term is defined in Sections 422A(a)(2) and 425 of the Code) or a Subsidiary of the Company (as that term is defined in Sections 422A(a)(2) and 425 of the Code), and who at least either holds the office of Vice President of the Company, a Parent of the Company or a Subsidiary of the Company, or who performs such managerial functions or duties consistent with, in the opinion of the Committee, the level of a Vice President of the Company, a Parent of the Company or a Subsidiary of the Company. Notwithstanding anything contained in this Plan to the contrary, no Option shall be granted to an individual (i) who, at the time such Option is granted, "owns" (as defined in Sections 422A and 425 of the Code) stock possessing more than 10% of the total combined voting power of all classes of stock of the Company, a Parent of the Company or a Subsidiary of the Company unless at the time such Option is granted the option price is at least 110% of the fair market value of the Company Common Stock subject to the Option and such Option by its terms is not exercisable after the expiration of five (5) years from the date such Option is granted and (ii) unless such individual is an employee of the Company, a Parent of the Company or a Subsidiary of the Company at the time of the granting of the Option. 4. COMPANY COMMON STOCK SUBJECT TO THE PLAN. Subject to adjustment as provided in paragraph 14 of this Plan, the aggregate number of shares of Company Common Stock which shall be reserved and which may be issued upon the exercise of all Options to be granted from time to time under this Plan is l50,000 shares of Company Common Stock, whether or not such shares of Company Common Stock are (i) treasury shares, (ii) authorized but unissued shares or (iii) both. In the event that an Option expires or terminates without having been exercised as to the full number of shares of Company Common Stock subject thereto, the shares of Company Common Stock as to which such Option was not exercised shall be available for Options which may thereafter be granted under this Plan. 5. GRANT OF OPTION. Each Option shall be granted within ten (10) years from (i) the date this Plan is adopted by the Board or (ii) the date this Plan is approved by the shareholders of the Company as required by Section 422A(b)(2) of the Code, whichever date is earlier. 3 6. TERM OF OPTION. The term of each Option shall be for a period not to exceed ten (10) years from the date the Option is granted. 7. EXERCISE OF OPTION. Except as otherwise provided in this Plan, an Option shall be exerciseble only by the individual to whom it is granted during his lifetime and only if such individual was an employee of either the Company, a Parent of the Company or a Subsidiary of the Company, or a corporation or a parent or subsidiary of such corporation issuing or assuming a stock option in a transaction to which Section 425(a) of the Code applies, at all times during the period beginning on the date of the granting of the Option and ending on the date of such exercise (including the date of such exercise); provided, however, in the case of an employee who is disabled (within the meaning of Section 105(d)(4) of the Code), the ending date of the period shall be one (1) year before the date of such exercise. An Option shall be deemed exercised only if written notice of its exercise is delivered to the Company prior to the expiration of the term of the Option. Notwithstanding anything contained in this Plan to the contrary, no Option may be exercised unless and until this Plan is approved by the shareholders of the Company in the manner and within the time required by Section 422A of the Code. 8. OPTION PRICE. The purchase price of Company Common Stock which shall be the subject of an Option shall be not less than the fair market value of Company Common Stock at the time such Option is granted. 9. PRIOR OUTSTANDING OPTIONS. No Option shall be exercisable while there is outstanding (within the meaning of Section 422A(c)(7) of the Code) any incentive stock option (as said term is defined in Section 422A of the Code) which was granted, before the granting of such Option, to the individual to whom the Option was granted to purchase stock in the Company or in a corporation which, at the time the Option is granted, is a Parent of the Company or a Subsidiary of the Company, or in a predecessor corporation of any such corporations. 10. ANNUAL LIMIT ON OPTIONS. Notwithstanding anything contained in this Plan to the contrary, the aggregate fair market value (determined as of the time the Option is granted) of Company Common Stock for which an Eligible Employee may be granted an Option in any calendar year (under all such plans of his employer corporation and its Parent and Subsidiary) shall not exceed $100,000 plus any unused limit carryover to such year as determined in accordance with the provisions of Section 422A(c)(4) of the Code. 11. NONTRANSFERABILITY OF OPTION. An Option shall not be transferable by the individual to whom it is granted except by (i) will or (ii) the laws of descent and distribution. 12. TERMINATION OF EMPLOYMENT. In the event that an individual to whom an Option is granted under this Plan (hereinafter referred to as an "Optionee") shall cease to 4 be employed by the Company, a Parent of the Company or a Subsidiary of the Company, whether voluntarily or involuntarily, for any reason other than death or disability (within the meaning of Section 105(d)(4) of the Code) and shall no longer be employed by any of them, such Option and all of the Optionee's rights to further exercise of his Option shall expire as of the date the employment of such individual is terminated; provided, however, that no Option shall be exercisable after the expiration of ten (10) years from the date such Option is granted. Nothing in this Plan shall confer upon any Optionee the right to be continued in the employment of the Company, a Parent of the Company or a Subsidiary of the Company, or interfere in any way with the right of the Company, a Parent of the Company or a Subsidiary of the Company to terminate the employment of an Optionee, whether for cause or otherwise. A leave of absence with the express written consent of the Company shall not be considered termination of employment for purposes of this paragraph. 13. DEATH OR DISABILITY OF OPTIONEE. In the event of the death or disability of an Optionee while employed by the Company, a Parent of the Company or a Subsidiary of the Company, his Option may be exercised by him or, in the case of the death of Optionee, by his personal representative or by any person or persons who shall have acquired the Option directly from the Optionee by will or by the laws of descent and distribution at an time within three (3) months after the date of his death or within one (1) year after the date of his disability; provided, however, that no Option shall be exercisable after the expiration of ten (10) years from the date such Option is granted. 14. ADJUSTMENTS IN COMPANY COMMON STOCK. In the event of any changes in the issued and outstanding shares of Company Common Stock by reason of (i) share dividends, (ii) split-ups, (iii) recapitalizations, (iv) mergers, (v) consolidations, (vi) combinations, (vii) separations, (viii) reorganizations or (ix) exchange of shares, the aggregate number and class of shares available under this Plan shall be correspondingly adjusted by the Committee; provided, however, that neither this Plan nor an Option shall be adjusted in a manner that causes an Option not to qualify as an incentive stock option within the meaning of Section 422A of the Code. 15. TIME OF GRANTING OPTIONS. Nothing contained in the Plan or in any resolution adopted or to be adopted by the Board or the shareholders of the Company nor any action taken by the Committee shall constitute the granting of an Option. The granting of an Option shall take place only when the written option agreement referred to in paragraph 23 of this Plan shall have been duly executed and delivered by or on behalf of the Company and the Optionee. 16. RIGHTS AS A SHAREHOLDER. Except as otherwise provided by the laws of the State of Delaware, an Optionee shall have no rights as a shareholder of the Company with respect to any shares covered by his Option until the date of the issuance of a share certificate to him for such shares. Except as otherwise provided in paragraph 14 of this Plan and by the laws of the State of Delaware, no adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions 5 or other rights on Company Common Stock for which the record date is prior to the date such share certificate is issued. 17. AMENDMENT OF PLAN. To the extent permitted by law, the Board may at any time and from time to time modify or amend the Plan in such respects as it shall deem advisable; provided, however, that such modification or amendment shall not change any rights under any outstanding Option without the written consent of the Optionee; provided further, however, that such modification or amendment shall not, without the approval of the shareholders of the Company, change the Plan so as to cause any of the Options to fail to meet the requirements of an incentive stock option under Section 422A of the Code. 18. TERMINATION OF PLAN. Notwithstanding anything contained in this Plan to the contrary, the Board may at any time terminate or discontinue this Plan or any Option granted hereunder provided that such action shall not, without the written consent of the Optionee affected, impair the rights of such Optionee under any Option previously grantcd under the Plan. 19. GOVERNMENTAL REGULATIONS. This Plan and the granting and exercise of any Option and the obligations of the Company to sell and deliver shares of Company Common Stock under any such Option shall be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies as may be required. 20. COMPLIANCE WITH SECURITIES LAWS. Options granted and shares of Company Common Stock issued by Company upon the exercise of Options shall be granted and issued only in full compliance with all applicable securities laws including, but not limited to, the Securities Act of 1933, as amended, and the general rules and regulations promulgated thereunder by the Securities and Exchange Commission and applicable state blue sky laws. In connection with such compliance, the Committee may impose such conditions on transfer of the shares of Company Common Stock subject to an Option and other restrictions, conditions and limitations as it may deem necessary and appropriate. 21. PROCEEDS FROM SALE OF COMPANY COMMON. The proceeds to be received by the Company upon the exercise of any Option shall be used for general corporate purposes. 22. OBLIGATIONS OF OPTIONEE. The granting of an Option shall impose no obligation upon the Optionee to exercise such Option. 23. OPTION AGREEMENT. Options granted under this Plan shall be evidenced by written agreements in such form as the Committee shall from time to time approve, which agreements (i) shall comply with and be subject to the terms and conditions of this Plan, (ii) may contain such other provisions not inconsistent with this Plan as the Committee shall deem advisable including, without limitation, restrictions upon exercise of an Option and (iii) shall contain such other limitations and restrictions upon the exercise of an Option as shall be necessary in order that such Option will be an incentive stock 6 option as defined in Section 422A of the Code and that the granting of such Option shall be in compliance with federal and state securities laws. 24. EFFECTIVENESS OF PLAN. This Plan shall become effective on the date this Plan is approved be the Board; provided, however, that the Plan shall be submitted to the shareholders of the Company in the manner and within the time required by Section 422A of the Code. In the event this Plan is not approved by the shareholders of the Company as aforesaid, then this Plan shall be terminated, null and void and all Options granted under this Plan shall terminate. 25. DETERMINATION OF DISABILITY. For purposes of this Plan, the determination as to whether an Optionee's employment is terminated because of "disability" shall be vested solely in the Committee and its determination shall be final and conclusive on all parties. 26. PRIORITY. To the extent that any of the provisions of Sections 421 and 422A of the Code are inconsistent with the provisions of this Plan and such inconsistency would cause this Plan or any Option granted hereunder not to be treated for federal income tax purposes as an incentive stock option plan, the provisions of this Plan and of Options granted hereunder shall be deemed to be amended in a manner to comply with the provisions of Section 421 or 422A of the Code, as the case may be. IN WITNESS WHEREOF, the undersigned, being the duly elected and authorized Secretary of the Company, hereby certifies that this Plan was legally and validly approved by the Board at a meeting thereof on November 25, 1981 in Toledo, Lucas County, Ohio. TOLEDO TRUSTCORP, INC. BY________________________ David A. Snavely Secretary EX-10.19 6 EXHIBIT 10.19 1 RESTATEMENT OF Exhibit 10.19 THE AMERITRUST LONG-TERM INCENTIVE PLAN AS THE AMERITRUST STOCK OPTION PLAN (Effective January 1, 1988) WHEREAS, Ameritrust Corporation (the "Corporation or Ameritrust") adopted The Ameritrust Long-Term Incentive Plan (the "Plan"), effective February 13, 1985; and WHEREAS, the Plan was amended to reflect changes to the rules governing incentive stock options concerning the sequences in which such options must be exercised and the $100,000 limitation on the value of grants and to comply with the requirements of and changes made by the Tax Reform Act of 1986; and WHEREAS, the Corporation has determined to make no further grants of Performance Units under the Plan and desires to restate the Plan to delete all provisions of the Plan relating to Performance Units, to provide for the exercise of options in cases where the funds constituting the exercise price have been borrowed, to provide for options that may become fully exercisable not less than six months after the date they are granted, to change the name of the Plan to the Ameritrust Stock Option Plan and to make such other changes to the Plan as are deemed necessary and desirable. NOW, THEREFORE, in consideration of the premises, the Plan is restated effective January 1, 1988, as follows: 1. Purpose The purpose of the Ameritrust Long-Term Incentive Plan now, by change of name, the Ameritrust Stock Option Plan (the "Plan") is to advance the interests of Ameritrust and its Subsidiaries by providing stock ownership opportunities to certain senior executives and other key employees who contribute significantly to the longer term performance of Ameritrust and its Subsidiaries. In addition the Plan is intended to reinforce corporate strategic goals and enhance the ability of Ameritrust and its Subsidiaries to attract and retain individuals of superior managerial ability and to motivate such key employees to exert their best efforts towards future progress and profitability of Ameritrust and its Subsidiaries. For purposes of the Plan, a Subsidiary shall be any corporation in an unbroken chain of corporations beginning with Ameritrust if each of the corporations other than the last corporation in such chain owns or controls, directly or indirectly, stock possessing not less than 50 percent of the total combined voting power of all classes of stock in one of the other corporations. 2 2. Administration and Interpretation a. ADMINISTRATION. The administration and operation of the Plan shall be supervised by the Compensation and Organization Committee of the Board of Directors of Ameritrust, or such other committee of such Board of Directors which shall succeed to the functions and responsibilities, in whole or in part, of said Compensation and Organization Committee (the "Committee"). The Committee shall consist of not less than three members of the Board of Directors of Ameritrust (the "Board of Directors") who are not officers of Ameritrust or any Subsidiary. No member of the Committee shall be entitled to participate in the Plan. The Committee shall have the authority, consistent with the provisions of the Plan, to determine the provisions of the awards to be granted under the Plan; to determine the form of option agreement; to interpret the Plan and any award granted under the Plan; to adopt, amend and rescind rules and regulations for the administration of the Plan and the awards granted under the Plan; and to make all determinations in connection therewith which may be necessary or advisable. The day-to-day administration of the Plan shall be carried out by such officers and employees of Ameritrust Company National Association as shall be designated from time to time by the Committee. b. INTERPRETATION. The interpretation and construction by the Committee of any provisions of the Plan or of any award granted under the Plan and any determination by the Committee under any provision of the Plan or any such award shall be final and conclusive, unless otherwise determined by the Board of Directors, in which event the determination of the Board of Directors shall be final and conclusive. c. LIMITATION ON LIABILITY. Neither the Board of Directors nor the Committee, nor any member of either, shall be liable for any act, omission, interpretation, construction or determination made in connection with the Plan in good faith, and the members of the Board of Directors and the member of the Committee shall be entitled to indemnification and reimbursement by Ameritrust in respect of any claim, loss, damage or expense (including counsel fees) arising therefrom to the full extent permitted by law and under any directors' and officers' liability insurance coverage which may be in effect from time to time. 3. Shares Subject to Awards Under the Plan a. LIMITATION ON NUMBER OF SHARES. The shares subject to Options (as defined in Section 4 below) ("Option Shares") shall be shares of Ameritrust's authorized but unissued common stock, par value $1.66-2/3 per share ("Common Stock"), and shares, if any, of such Common Stock held as treasury stock by Ameritrust. The aggregate number of Option Shares as to which Options may be granted under and issued pursuant to the Plan, shall not exceed 2,200,000. 3 If any outstanding Option expires or terminates unexercised for any reason prior to April 30, 1990, the shares allocable to the unexercised or terminated portion of such Option may again be made the subject of grants under the Plan. b. ADJUSTMENTS OF AGGREGATE NUMBER OF SHARES. The aggregate number of shares stated in Section 3.a. shall be subject to appropriate adjustment, from time to time, in accordance with the provisions of Sections 4.c.(8) and (9) hereof. In the event of a change in the Common Stock of Ameritrust which is limited to a change in the designation thereof to "Capital Stock" or other similar designation, or to a change in the par value thereof, or from par value to no par value, without increase or decrease in the number of issued shares, the shares resulting from any such change shall be deemed to be Common Stock within the meaning of the Plan. 4. Stock Options a. ELIGIBILITY. The individuals who shall be eligible to receive options under the Plan shall be such key employees (including officers and directors who are employees) of Ameritrust or of any Subsidiary as the Board of Directors and the Committee from time to time shall determine as provided below. b. GRANTS OF OPTIONS. (1) In General. Options granted under the Plan may be either "Incentive Stock Options" or "Non-qualified Stock Options" (both as defined below and collectively referred to as "Options"), or both; provided, however, that no Option Shares under the Plan shall be subject to more than one Option. Options granted under the Plan shall be of such type and for such number of Option Shares (subject to the limitation contained in Section 3), as the Board of Directors and the Committee shall designate. The Committee, at any time and from time to time before May 1, 1990, may authorize the granting of Incentive Stock Options and/or Non-qualified Stock Options to any individual eligible to receive the same; provided, however, that the Incentive Stock Options and/or Non-qualified Stock Options to be granted to a senior executive officer of Ameritrust, as determined by the Board of Directors, and the aggregate of the Incentive Stock Options and/or Non-qualified Stock Options to be granted on a given date to all other eligible employees shall be approved by the Board of Directors. (2) Incentive Stock Options. The term "Incentive Stock Option" shall mean an Option, or portion thereof, which is intended to qualify as an incentive stock option under Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"). For grants made in 1985 and 1986 the aggregate Market Value Per Share (as defined in Section 4.c.(4) below) on the date of grant of the Common Stock for which any eligible individual may be granted Incentive Stock Options under the Plan (and any other incentive stock options which may be issued under any stock option plan which may be 4 maintained by Ameritrust or a Subsidiary) in any calendar year may not exceed the sum of (i) $100,000 and (ii) any "unused limit carryover" applicable to such year. For purposes of this subsection, the "unused limit carryover" applicable to a given year shall be determined in accordance with the rules of Section 422A(c)(4) of the Code prior to its amendment by the Tax Reform Act of 1986. (3) Non-qualified Stock Options. The term "Non-qualified Stock Option" shall mean any Option, or portion thereof, which is not an Incentive Stock Option. Except as specifically provided herein, the provisions of the Plan shall apply in the same manner to Incentive Stock Options and to Non-qualified Stock Options. c. TERMS OF OPTIONS. Options granted pursuant to the Plan shall be evidenced by agreements ("stock option agreements"). Stock option agreements shall comply with and be subject to the following terms and conditions and may contain such other provisions, consistent with the terms of the Plan, as the Committee or the Board of Directors shall deem advisable. (1) Medium of Payment. Upon exercise of an Option, the option price shall be payable to Ameritrust (i) in United States dollars in cash or by certified check, bank draft or money order payable to the order of Ameritrust or (ii) by tendering to Ameritrust shares of Common Stock owned by the optionee having an aggregate Market Value Per Share as of the date of exercise which is not greater than the option price and by paying the remainder of the option price as provided in (i) above. Payment instruments will be received subject to collection. In the event the optionee borrows the funds constituting the option price and requests in writing that the Option Shares be delivered to a specified account or person in connection with such borrowing, then Ameritrust may, in its sole discretion, enter into an appropriate agreement with the person lending such funds (or such person's designated agent) to provide for the delivery of the Option Shares in accordance with the optionee's written request. (2) Number of Shares. Each stock option agreement shall state the total number of Option Shares which are subject to the Option. (3) Option Price. The option price for each Option Share shall be not less than the "Market Value Per Share" on the date of the granting of the Option. (4) Market Value Per Share. The Market Value Per Share as of any particular date shall be the mean between the highest and lowest quoted selling prices for shares of Common Stock as reported by the NASDAQ system on such date (or, if such date shall not be a business day, then the next preceding day which shall be a business day); or, if no sale takes place, then the mean between the bid and asked prices on such date; and if no bid and asked prices are quoted for such date, then such value as shall be determined by such method as the Committee shall deem to reflect fair market value as of such date. 5 (5) Term. The term of each Option shall be determined by the Committee at the date of grant; provided, however, that each Option shall expire not more than ten years from the date the Option is granted. (6) Date of Exercise. Each stock option agreement shall state that the Option granted therein may not be exercised in whole or in part for any period or periods of time specified in such agreement or otherwise as specified by the Committee. Except as may be so specified, any Option may be exercised in whole or in part from time to time during its term; provided, however, that no Option, or portion thereof, may be exercisable until at least six months after the date of grant of such Option. Each stock option agreement for an Incentive Stock Option granted in 1985 or 1986 shall further provide that such Incentive Stock Option shall not be exercisable while there is outstanding with respect to the optionee any incentive stock option (as defined in Section 422A of the Code) to purchase stock of Ameritrust which was granted before the granting of such Incentive Stock Option. For purposes of this subsection (6), an incentive stock option shall be treated as outstanding until such option is exercised in full, or expires by reason of lapse of time. Each stock option agreement for an Incentive Stock Option granted after 1986 may provide that such Incentive Stock Option may be exercised in any order which is consistent with the provisions of this subsection (6) and shall provide that the aggregate Market Value Per Share (determined on the date of grant) of the Common Stock with respect to which Incentive Stock Options are exercisable for the first time by the optionee during any calendar year (under all plans of the optionee's employer and its parent and subsidiary corporations which grant incentive stock options) shall not exceed $100,000. (7) Termination of Employment. In the event that an optionee's employment by Ameritrust or any of its Subsidiaries shall terminate, the optionee's Options shall terminate immediately, except as hereinafter provided in this subsection. In the event of termination of employment for any reason other than death or retirement, the Committee, in its sole discretion, may determine that the optionee's Option to the extent exercisable immediately prior to such termination of employment, may remain exercisable for a designated period of time not to exceed 90 days after such termination of employment. If any termination of employment is due to retirement with the consent of Ameritrust, the Committee shall have discretion to permit any unexercisable, or, with respect to previously granted options, unmatured installments of, Options to be accelerated as of the last to occur of the date of retirement or the elapse of not less than six months after the date of grant and to permit the optionee, subject to the provisions of subsections (5) and (6) above, to exercise his Option at any time within the thirty-six 6 month period after such retirement. Retirement by an optionee on or after the optionee's normal retirement date in accordance with the provisions of the retirement plan of Ameritrust or one of its Subsidiaries under which the optionee is then covered shall be deemed to be retirement with the consent of Ameritrust. Whether any other termination of employment is to be considered a retirement with the consent of Ameritrust and whether an authorized leave of absence or absence on military or government service or for other reasons shall constitute a termination of employment for the purposes of the Plan shall be determined by the Committee. If an optionee shall die while entitled to exercise an Option, any unmatured installments of the Options (relating to Options granted prior to January 1, 1988) shall be accelerated and the optionee's estate, personal representative, or beneficiary, as the case may be, shall have the right, subject to the provisions of subsections (5) and (6) above, to exercise the Option at any time within thirty-six months from the date of the optionee's death (but in no event more than thirty-six months from the date of the optionee's retirement with the consent of Ameritrust). (8) Recapitalization. The aggregate number of shares stated in Section 3.a., the number of Option Shares to which each outstanding Option relates, and the option price in respect of each such Option shall all be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a subdivision or consolidation of shares or other capital adjustments, or the payment of a stock dividend or other increase or decrease in such shares, effected without receipt of consideration by Ameritrust or a Subsidiary; provided, however, that any fractional shares resulting from any such adjustment shall be eliminated. (9) Merger or Consolidation. In the event of any merger, consolidation, separation or reorganization involving Corporation or any partial or complete liquidation of Corporation, or any other corporate transaction or event having an effect similar to any of the foregoing, the Corporation's Board of Directors shall make such adjustments in the specified option price and in the allotted number of shares (or other securities, if any, resulting from any such transaction or event) as the Board in its sole discretion may in good faith determine is equitably required to prevent any dilution or enlargement of Optionee 's rights that might otherwise result, which determination shall be conclusive. No adjustment provided for in this subsection (9) shall require the Corporation to sell any fractional share. (10) Unsupported Tender Offer. In the event of a tender offer for 50 percent or more of the Common Stock which is not supported by the Board of Directors, the Board of Directors may, in its discretion, authorize the payment in cash to each person who is subject to the provisions of Section 16 of the Securities Exchange Act of 1934 of an amount equal to the tender price for a share of Common Stock multiplied by the total number of such person's Option Shares then outstanding and unexercised, and less the total option price for such Option Shares. 7 (11) Optionee's Agreement. If, at the time of the exercise of any Option, in the opinion of counsel for Ameritrust, it is necessary or desirable, in order to comply with any then applicable laws or regulations relating to the sale of securities, that the optionee exercising the Option shall agree to hold any Option Shares issued to the optionee for investment and without any present intention to resell or distribute the same and that the optionee will dispose of such shares only in compliance with such laws and regulations, the optionee will, upon the request of Ameritrust, execute and deliver to Ameritrust a further agreement to such effect. d. EFFECT OF EXERCISE OF OPTIONS. The right of an optionee to exercise an Option shall terminate to the extent that such Option is exercised. e. OPTIONS AND RIGHTS IN SUBSTITUTION FOR STOCK OPTIONS GRANTED BY OTHER CORPORATIONS. Options may be granted under the Plan from time to time in substitution for stock options held by employees of corporations who become key employees of Ameritrust or of any Subsidiary as a result of a merger or consolidation of the employing corporation with Ameritrust or such Subsidiary, or the acquisition by Ameritrust or a Subsidiary of the assets of the employing corporation, or the acquisition by Ameritrust or a Subsidiary of stock of the employing corporation with the result that such employing corporation becomes a Subsidiary. f. APPLICATION OF FUNDS. The proceeds received by Ameritrust from the sale of Option Shares pursuant to Options will be used for general corporate purposes. 5. Withholding for Taxes Any distribution of Common Stock under the Plan shall not be made until appropriate arrangements have been made for the payment of any amounts which may be required to be withheld or paid with respect thereto. 6. Termination of Authority to Grant Awards No awards shall be granted pursuant to this Plan after April 30, 1990. 7. Amendment and Termination. The Board of Directors may from time to time and at any time alter, amend, suspend, discontinue or terminate this Plan; provided, however, that no such action of the Board of Directors may, without the approval of the stockholders of Ameritrust, alter the provision of the Plan so as to (i) increase the maximum number of shares of Common Stock which may be subject to awards and distributed in the payment of awards under the Plan (except as provided in Section 3.b.); (ii) change the class of employees eligible to receive awards under the Plan; (iii) extend beyond ten years the maximum term of Options granted under the Plan or extend the term of the Plan; (iv) decrease, directly or indirectly (by cancellation and substitution of Options or otherwise), the option price 8 applicable to any Option; provided, however, that the provisions of this clause (iv) shall not prevent the granting to any person holding an Option of an additional Option exercisable at a lower option price; (v) withdraw the administration of the Plan from the Committee; or (vi) permit any member of the Committee to be eligible to receive an award pursuant to the terms of the Plan. 8. Preemption by Applicable Laws and Regulations Anything in the Plan or any stock option or other agreement entered into pursuant to the Plan to the contrary notwithstanding, if, at any time specified herein or therein for the making of any determination, the issue or other distribution of shares of Common Stock, any law, regulation or requirement of any governmental authority having jurisdiction in the premises shall require either Ameritrust or the employee (or the employee's beneficiary), as the case may be, to take any action in connection with any such determination or the shares then to be issued or distributed, the issue or distribution of such shares or the making of such determination, as the case may be, shall be deferred until such action shall have been taken. 9. Miscellaneous a. NO EMPLOYMENT CONTRACT. Nothing contained in the Plan shall be construed as conferring upon an employee the right to continue in the employ of Ameritrust or any Subsidiary. b. EMPLOYMENT WITH SUBSIDIARIES. Employment by Ameritrust for the purposes of the Plan shall be deemed to include employment by, and to continue during any period in which an employee is in the employment of, any Subsidiary. c. NO RIGHTS AS A STOCKHOLDER. An employee shall have no rights as a stockholder with respect to Option Shares covered by the employee's Option until the date of the issuance of such shares to the employee and only after such shares are fully paid. No adjustment will be made for dividends or other distributions or rights for which the record date is prior to the date of such issuance. d. NO RIGHT TO CORPORATE ASSETS. Nothing contained in the Plan shall be construed as giving an employee, the employee's beneficiaries or any other person any equity or interest of any kind in any assets of Ameritrust or a Subsidiary or creating a trust of any kind or a fiduciary relationship of any kind between Ameritrust or a Subsidiary and any such person. e. NON-ASSIGNABILITY. Except as contemplated in Section 4.c.(1), neither an employee nor an employee's beneficiary shall have the power or right to sell, exchange, pledge, transfer, assign or otherwise encumber or dispose of such employee's or beneficiary's interest in the Plan or in any award received under the Plan; nor shall such interest be subject to seizure for the payment of an employee's or beneficiary's debts, 9 judgments, alimony, or separate maintenance or be transferable by operation of law in the event of an employee's or beneficiary's bankruptcy or insolvency. Ameritrust's or a Subsidiary's obligations under the Plan are not assignable or transferable except to a corporation which acquires all or substantially all of the assets of Ameritrust or such Subsidiary or to any corporation into which Ameritrust or such Subsidiary may be merged or consolidated. f. OTHER BENEFIT PLANS. No awards under the Plan shall be taken into account in determining any benefits under any retirement, profit-sharing or other plan maintained by Ameritrust or a Subsidiary. g. GOVERNING LAW; CONSTRUCTION. All rights and obligations under the Plan shall be governed by, and the Plan shall be construed in accordance with, the laws of the State of Ohio. Titles and headings to Sections herein are for purposes of reference only, and shall in no way limit, define or otherwise affect the meaning or interpretation of any provisions of the Plan. 10. Name of Plan The name of the Plan is hereby changed to the "Ameritrust Stock Option Plan". EX-10.20 7 EXHIBIT 10.20 1 TRUST AGREEMENT Exhibit 10.20 --------------- This Trust Agreement ("Trust Agreement") made this 3rd day of November, 1988 by and between AMERITRUST CORPORATION, a Delaware corporation ("Ameritrust") and WACHOVIA BANK AND TRUST COMPANY, N.A, a national banking association (the "Trustee"); WITNESSETH: ----------- WHEREAS, in addition to benefits payable under the Ameritrust Retirement Income Plan and the Ameritrust Indiana Retirement Income Plan, as the same have been or may hereafter be supplemented, amended or restated or any successor thereto (the "Retirement Plans"), and under the Ameritrust Corporation Employees' Savings and Investment Plan, and the Ameritrust Indiana Corporation Employees' Profit Sharing and Savings Plan, as the same has been or may hereafter be supplemented, amended or restated or any successor thereto (the "Savings Plans"), to certain employees and former employees listed on Exhibit A-1 hereto or to the beneficiaries of such employees, as the case may be, the employees and their beneficiaries are entitled to certain other benefits under (1) the Ameritrust Corporation Deferred Compensation Plan, which plan became effective on August 1, 1988, as the same has been or may hereafter be supplemented, amended or restated or any successor thereto (the "Deferred Compensation Plan"), (2) the Ameritrust Corporation 2 Excess Benefits Plan, which plan became effective on June 17, 1988, as the same has been or may hereafter be supplemented, amended or restated or any successor thereto (the "Excess Plan"), (3) any unpaid second installment of an Award payment under the Ameritrust Corporation Long-Term Cash Incentive Plan, which plan became effective on September 1, 1988, as the same may hereafter be supplemented, amended or restated or any successor thereto (the "Long Term Plan"), and (4) the post-retirement benefits payable under the Executive Life Insurance Program (the "Life Program") which Deferred Compensation Plan, Excess Plan, Long Term Plan and Life Program are sometimes referred to herein as the "Plans;" WHEREAS, each of certain employees listed on Exhibit A-2 hereto has entered into an employment agreement with Ameritrust or one of its Participating Subsidiaries (as hereinafter defined) (the agreements are referred to herein singularly as an "Agreement" or collectively as the "Agreements"); WHEREAS, the Plans and the Agreements provide for certain employment, severance, retirement income, deferred income, death, disability and survivor and/or other benefits, and Ameritrust and its Participating Subsidiaries wish specifically to assure the payment to the individuals listed on Exhibits A-1 and A-2 (the "Executives") and their beneficiaries (the Executives and their respective beneficiaries are referred to collectively as the "Trust Beneficiaries") of amounts due thereunder (the amounts so payable being collectively referred to herein as the "Benefits"); -2- 3 WHEREAS, subject to Section 9 hereof, the amounts and timing of Benefits to which each Trust Beneficiary is presently or may become entitled are as provided in and determined under the Agreements and the Plans, and, where appropriate, the retirement Plans or the Savings Plans; WHEREAS, Ameritrust wishes to establish a trust (the "Trust") under which Ameritrust and each of its subsidiaries that executes a Participating Subsidiary Deposit Agreement ("Deposit Agreement") as provided in Section 13 hereof (a "Participating Subsidiary"; and "Participating Employer" shall mean Ameritrust or any Participating Subsidiary) may transfer to the Trust assets which shall be held therein subject to the claims of the creditors of each Participating Employer to the extent set forth in Section 3 hereof until paid in full to all Trust Beneficiaries as Benefits in such manner and at such times as specified herein unless the Participating Employer with respect to a Trust Beneficiary is Insolvent (as defined herein) at the time that such Benefits become payable; WHEREAS, each Participating Subsidiary that executes a Deposit Agreement has irrevocably appointed Ameritrust its agent and attorney for purposes of acting on its behalf with respect to this Trust; and WHEREAS, a Participating Employer shall be considered "Insolvent" for purposes of this Trust Agreement at such time as such Participating Employer (i) is subject to a pending voluntary or involuntary proceeding as a debtor under the United States Bankruptcy Code, as heretofore or hereafter amended, or -3- 4 (ii) is unable to pay its debts as they mature or (iii) if a Participating Employer is a bank, whenever a receiver is appointed by the appropriate regulatory authority. NOW, THEREFORE, the parties do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows: 1. TRUST FUND: (a) Subject to the claims of creditors of Participating Employers to the extent set forth in Section 3 hereof, Ameritrust hereby deposits with the Trustee in trust $100.00, which shall become the principal of this Trust, to be held, administered and disposed of by the Trustee as herein provided. (b) The Trust hereby established shall be revocable by Ameritrust at any time prior to the date on which occurs a "Change of Control," as that term is defined in this Section l(b); on or after such date, this Trust shall be irrevocable. In the event that a Change of Control has occurred, Ameritrust shall, and an Executive may, so notify the Trustee promptly. The Trustee may rely on such notice or on any other actual notice, satisfactory to the Trustee, of such a Change of Control which the Trustee may receive. The Trustee shall have no obligation to make an independent determination as to the occurrence of a Change of Control. (i) As used herein, the term "Change of Control" shall mean: (A) the acquisition or ownership of 20% or more of the voting stock of Ameritrust by any person (as the term -4- 5 "person" is used in Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than Ameritrust or its subsidiaries of a tender offer or offer to purchase, market or privately negotiated purchases or any other event or circumstance, as disclosed or required to be disclosed in a report or an amendment to a report on Schedule 13D, Schedule 14D-1 or Form 8-X (or any successor schedule, form or report under the Exchange Act); (B) the merger or consolidation of Ameritrust with another corporation, the sale of all or substantially all of Ameritrust's assets to another entity, or any other fundamental change with respect to Ameritrust (which agreement, sale or change is subject in any event to shareholder approval) to the extent that, as a result of such merger or consolidation, sale, or change, either (A) less than 80% of the outstanding voting securities of the surviving or resulting corporation will be owned in the aggregate by the persons who were the shareholders of Ameritrust immediately prior to such merger or consolidation, sale, or change, or (B) Ameritrust will cease to be required, and any such surviving or resulting corporation will not be required, to file information, documents and reports under Section 13(e) of the Exchange Act; or (C) individuals who, as of the date hereof, constitute the Board of Directors of Ameritrust (the "Board" generally and as of the date hereof the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, -5- 6 provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by Ameritrust's shareholders, was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the Directors of Ameritrust, as such terms are used in Rule 14a-11 of Regulation 15A promulgated under the Exchange Act) shall be, for purposes of this Plan, considered as though such person were a member of the Incumbent Board. (c) The principal of the Trust and any earnings thereon shall be held in trust separate and apart from other funds of each Participating Employer exclusively for the uses and purposes herein set forth. No Trust Beneficiary shall have any preferred claim on, or any beneficial ownership interest in, any assets of the Trust prior to the time that such assets are paid to a Trust Beneficiary as Benefits as provided herein. Each Trust Beneficiary shall have the status of a general unsecured creditor with respect to the assets of the Trust. The obligation of the Trustee to pay Benefits pursuant to the Trust Agreement constitutes merely an unfunded and unsecured promise to pay such Benefits. (d) Ameritrust and any Participating Subsidiary may at any time or from time to time make additional deposits of cash or other property in the Trust to augment the principal to be held, administered and disposed of by the Trustee as herein -6- 7 provided, but no payment of all or any portion of the principal of the Trust or earnings thereon shall be made to any Participating Employer or any other person or entity on behalf of any Participating Employer except as herein expressly provided. (e) Not later than the date on which the Trust has become irrevocable, Ameritrust shall (i) specify the amounts and timing of the Benefits to which each Trust Beneficiary may become entitled, as provided in and subject to Section 9 hereof, in an exhibit ("Exhibit B"), and (ii) provide any corresponding revisions to Exhibits A-1 and A-2 that may be required. (f) The Trust is intended, with respect to each Participating Employer, to be a grantor trust, within the meaning of section 671 of the Internal Revenue Code of 1986, as amended (the "Code"), or any successor provision thereto, and shall be construed accordingly. The Trust is not designed to qualify under section 401(a) of the Code or to be subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). 2. PAYMENTS TO TRUST BENEFICIARIES: (a) Provided that a Trust Beneficiary's Participating Employer is not Insolvent and commencing with the earlier to occur of (i) appropriate notice by Ameritrust to the Trustee, or (ii) the date on which the Trust becomes irrevocable, the Trustee shall make payments of Benefits to the Trust Beneficiaries from the assets of the Trust in accordance with the terms of the Agreements and Plans and subject to Section 9 hereof. The Trustee shall be permitted to -7- 8 withhold from any payment due to a Trust Beneficiary hereunder the amount required by law to be so withheld under federal, state and local withholding requirements or otherwise, and shall pay over to the appropriate government authority the amount so withheld. The Trustee may rely on instructions from Ameritrust as to any required withholding and shall be fully protected under Section 8(f) hereof in relying on such instructions. (b) If the balance of an Executive's separate account maintained pursuant to Section 7(b) hereof is not sufficient to provide for full payment of Benefits to which such Executive's Trust Beneficiaries are entitled as provided herein, the Executive's Participating Employer shall make the balance of each such payment as provided in the applicable provision of the Agreement or the Plans. No payment from the Trust assets to a Trust Beneficiary shall exceed the balance of such separate account. 3. THE TRUSTEE'S RESPONSIBILITY REGARDING PAYMENTS TO A TRUST BENEFICIARY WHEN A PARTICIPATING EMPLOYER IS INSOLVENT: (a) At all times during the continuance of this Trust, the principal and income of the Trust with respect to accounts maintained hereunder on behalf of a Participating Employer shall be subject to claims of creditors of such Participating Employer as set forth in this Section 3(a). The Board of Directors ("Board") of Ameritrust and of each Participating Subsidiary and the Chief Executive Officer of Ameritrust and of each Participating Subsidiary ("CEO") shall have the duty to inform the Trustee if either the Board or the CEO believes that his or -8- 9 their respective Participating Employer is Insolvent. If the Trustee receives a notice from the Board, the CEO, or a creditor of a Participating Employer alleging that such Participating Employer is Insolvent, the Trustee will independently determine within 30 days after receipt of such notice whether the Participating Employer is Insolvent. Pending such determination or if the Trustee has actual knowledge that a Participating Employer is Insolvent, the Trustee shall (i) discontinue payments to any Trust Beneficiary from accounts maintained hereunder on behalf of such Participating Employer (the "Identified Participating Employer"), (ii) determine and allocate all Account Excesses in accordance with Sections 4 and 7(b) hereof for the accounts of Executives then employed by the Identified Participating Employer, or for whom such Identified Participating Employer has obligations and liabilities or has assumed obligations and liabilities pursuant to a Deposit Agreement, treating such accounts solely for this purpose as if they comprised all of the accounts of the Trust, and provided that for this purpose the Threshold Percentage shall be equal to 100%, and (iii) hold the Trust assets attributable to accounts maintained hereunder on behalf of Executives then employed by the Identified Participating Employer, or for whom such Identified Participating Employer has obligations and liabilities or has assumed obligations and liabilities pursuant to a Deposit Agreement, for the benefit of the general creditors of such Identified Participating Employer. The Trustee shall deliver any undistributed principal and income in the Trust to -9- 10 the extent of the balances of the accounts maintained hereunder on behalf of the Identified Participating Employer to the extent necessary to satisfy the claims of the creditors of such Identified Participating Employer as a court of competent jurisdiction may direct. Such payments of principal and income shall be borne by the separate accounts of the Trust Beneficiaries maintained hereunder on behalf of the Identified Participating Employer in proportion to the balances on the date of such court order of their respective accounts maintained hereunder on behalf of such Identified Participating Employer and maintained pursuant to Section 7(b) hereof. If payments to any Trust Beneficiary have been discontinued pursuant to this Section 3(a), the Trustee shall resume payments to such Trust Beneficiary in accordance with this Trust Agreement if the Trustee has determined that the Executive's Participating Employer is not Insolvent, or is no longer Insolvent (if the Trustee initially determined such Participating Employer to be Insolvent), or pursuant to the order of a court of competent jurisdiction. The Trustee shall have no duty to inquire as to whether a Participating Employer is Insolvent and may rely on information concerning the Insolvency of a Participating Employer which has been furnished to the Trustee by any creditor of a Participating Employer or by any person (other than an employee or director of Ameritrust or a Subsidiary) acting with apparent or actual authority with respect to Ameritrust or a Subsidiary. Nothing in this Trust Agreement shall in any way diminish any rights of any Trust Beneficiary to pursue his -10- 11 rights as a general creditor of the Executive's Participating Employer or any other Participating Employer with respect to Benefits or otherwise, and the rights of each Trust Beneficiary under the respective Agreement or Plans shall in no way be affected or diminished by any provision of this Trust Agreement or action taken pursuant to this Trust Agreement except that any payment actually received by any Trust Beneficiary from the Trust shall reduce dollar-per-dollar amounts otherwise due to such Trust Beneficiary pursuant to the respective Agreement or Plans. (b) If the Trustee discontinues payments of Benefits from the Trust pursuant to Section 3(a) hereof, and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments which would have been made to the Trust Beneficiaries in accordance with this Trust Agreement during the period of such discontinuance, less the aggregate amount of payments made to any Trust Beneficiary by the Participating Employer pursuant to the Agreement or the Plans during any such period of discontinuance, together with interest on the net amount delayed determined at a rate equal to the rate actually earned during such period with respect to the assets of the Trust corresponding to such net amount delayed; provided, however, that no such payment shall exceed the balance of the respective Trust Beneficiary's account as provided in Section 7(b) hereof. 4. PAYMENTS TO PARTICIPATING EMPLOYERS: Except to the extent expressly contemplated by Section 1(b) and this Section 4, -11- 12 no Participating Employer shall have any right or power to direct the Trustee to return any of the Trust assets to such Participating Employer before all payments of Benefits have been made to all Trust Beneficiaries of such Participating Employer as herein provided. Upon the written request of a Participating Employer made prior to the date on which the Trust becomes irrevocable, the Trustee shall return to the Participating Employer any Trust assets in accounts for Executives then employed by the Participating Employer, or for whom such Participating Employer has obligations and liabilities or has assumed obligations and liabilities pursuant to a Deposit Agreement, in excess of One Hundred Dollars ($100) as may be specified in such request by such Participating Employer. From time to time, but in no event before the third anniversary of the date on which the Trust has become irrevocable, if and when requested by Ameritrust to do so, the Trustee shall engage the services of The Wyatt Company, or such other independent actuary as may be mutually satisfactory to Ameritrust and to the Trustee, to determine the maximum actuarial present values of the future Benefits that could become payable by each Participating Employer under the Agreements and the Plans with respect to the Trust Beneficiaries. The Trustee shall determine the fair market values of the Trust assets allocated to the account of each Executive pursuant to Section 7(b) hereof. Ameritrust shall pay the fees of such independent actuary and of any appraiser engaged by the Trustee to value any property held in the Trust. The independent actuary shall make its -12- 13 calculations based upon the assumptions set forth in Exhibit C hereto, or such other assumptions as are recommended by such actuary and approved by Ameritrust and, if the Trust is irrevocable, by two-thirds of the Executive Participants, as hereafter defined (subject to the provisions of Sections 10(b)(i) and (b)(ii) hereof). For purposes of this Trust Agreement, (a) "Executive Participants" shall mean the individuals listed on Exhibit A-2 hereto; (b) the "Fully Funded" amount with respect to the account of an Executive maintained pursuant to Section 7(b) hereof shall be equal to the "Threshold Percentage," as defined below, multiplied by the maximum" actuarial present value of the future Benefits that could become payable under the Agreement and the Plans with respect to the Trust Beneficiaries of such Executive, (c) the "Account Excess" with respect to such account shall be equal to the excess, if any, of the fair market value of the assets held in the Trust allocated to an Executive's account over the respective Fully Funded amount, and (d) the "Aggregate Account Excess" with respect to a Participating Employer shall be equal to the excess, if any, of the aggregate account balances of Executives then employed by the Participating Employer, or for whom such Participating Employer has obligations and liabilities or has assumed obligations and liabilities pursuant to a Deposit Agreement, over their aggregate Fully Funded amounts. Unless otherwise provided, the Threshold Percentage shall be equal to 125%. The Trustee shall allocate any Account Excess in accordance with Section 7(b) hereof. Thereafter, upon the -13- 14 request of Ameritrust, the Trustee shall pay to the Participating Employer its Aggregate Account Excess; provided, however, that if such payment would leave the Trustee with insufficient liquid assets to pay all premiums due and to become due on any life insurance policies held in the Trust, the Trustee shall retain sufficient liquid assets to pay such premiums. 5. INVESTMENT OF TRUST FUND: Prior to the date on which the Trust becomes irrevocable, the Trustee shall invest and reinvest the assets of the Trust as Ameritrust or its designee shall prescribe from time to time. Thereafter, or in the absence of such instructions from Ameritrust, the Trustee shall have sole power to invest the assets of the Trust; provided, however, that except as provided in Section 8(j) hereof, the Trustee shall retain any insurance policies in the Trust. The investment objective of the Trustee shall be to preserve the principal of the Trust while obtaining a reasonable total rate of return, measurement of which shall include market appreciation or depreciation plus receipt of interest and dividends. The Trustee shall be mindful, in the course of its management of the Trust, of the liquidity demands on the Trust and any actuarial assumptions that may be communicated to it from time to time in accordance with the provisions of this Trust Agreement. The Trustee shall not be liable for any failure to maximize income on such portion of the Trust assets as may be from time to time invested or reinvested as set forth above, nor for any loss of income due to the liquidation of any -14- 15 investment which the Trustee, in its sole discretion, believes necessary to make payments or to reimburse expenses under the terms of this Trust Agreement. The Trustee shall have the right to invest assets of the Trust as the Trustee may deem proper and suitable in non-interest bearing deposit accounts (including any such accounts offered or maintained by the Trustee or any successor or affiliated corporation). 6. INCOME OF THE TRUST: Except as provided in Section 3 hereof, during the continuance of this Trust all net income (or loss) of the Trust shall be allocated quarterly among the Trust Beneficiaries' separate accounts in accordance with Section 7(b) hereof. Net income (or loss) of the Trust shall be determined by taking into account (i) receipt of interest and dividends, (ii) any increase or decrease in the value of the Trust assets attributable to market appreciation or depreciation and (iii) any increase in the cash surrender value of any life insurance policy held in the Trust other than the portion of such increase attributable to the payment of the premiums due thereon. 7. ACCOUNTING BY TRUSTEE: (a) The Trustee shall maintain such books, records and accounts as may be necessary for the proper administration of the Trust assets, including such specific records as shall be agreed upon in writing by Ameritrust and the Trustee, and shall render to each Participating Employer, within 60 days following the close of each calendar year following the date of this Trust until the termination of this Trust or the removal or resignation of the Trustee (and within 60 days after the date of such termination, removal or resignation), an accounting with respect to the Trust assets as of the end of the then most recent calendar year (and as of the date of such termination, -15- 16 removal or resignation as the case may be). The Trustee shall furnish to each Participating Employer on a monthly basis and in a timely manner such information regarding the Trust as each Participating Employer shall require for purposes of preparing its statements of financial condition. The Trustee shall at all times maintain a separate bookkeeping account for each Participating Employer and for each Executive as prescribed by Section 7(b) hereof. Upon the written request of an Executive or Ameritrust, the Trustee shall deliver to such Executive or Ameritrust, as the case may be, a written report setting forth the amount held in the Trust for such Executive (or each Executive if such request is made by Ameritrust) and a record of the deposits made with respect thereto by each Participating Employer. Unless Ameritrust or any Executive shall have filed with the Trustee written exceptions or objections to any such statement and account within one hundred eighty (180) days after receipt thereof, Ameritrust or the Executive shall be deemed to have approved such statement and account, and in such case the Trustee shall be forever released and discharged with respect to all matters and things reported in such statement and account as though it had been settled by a decree of a court of competent jurisdiction in an action or proceeding to which each Participating Employer and the Executive were parties. -16- 17 (b) The Trustee shall maintain a separate account (i) for each Participating Employer (a "Participating Employer Account") and (ii) within such Participating Employer Account, a separate account for each Executive who performs services for such Participating Employer and from whom such Executive is entitled to Benefits (an "Executive's account"). Each asset of the Trust shall be allocated to the account of a Participating Employer. Executive accounts within a Participating Employer Account shall reflect undivided portions of each asset in such Account. The Trustee shall credit or debit each Executive's account as appropriate to reflect such Executive's allocable portion of the Trust assets allocated to each Participating Employer Account, as such Trust assets may be adjusted from time to time pursuant to the terms of this Trust Agreement. Except as otherwise provided in this Section 7(b), the Trustee shall allocate the income (or loss) of the Trust with respect to each Participating Employer Account, and within such Account, to the separate Executive accounts maintained thereunder in proportion to the balances of the separate accounts of the Executives. All deposits of principal pursuant to Sections 1(a) and 1(d) shall be allocated and reallocated as directed by the Participating Employer making such deposit until such time as the Trust has become irrevocable; thereafter, deposits of principal may be allocated, but not reallocated, by a Participating Employer. The net proceeds of any life insurance policies held in the Trust in excess of the cash surrender values thereof shall be treated and allocated as income for purposes of this Section -17- 18 7(b). Any increase in the cash surrender value of any such policies attributable solely to the payment by a Participating Employer of premiums due thereon pursuant to Section 8(j) hereof shall be treated as a deposit of principal that may be allocated by such Participating Employer for purposes of this Section 7(b). For purposes of this Trust Agreement (a) "Accumulated Benefit" for a Trust Beneficiary shall mean the Benefits to which such Trust Beneficiary may become entitled as of each March 31 with respect to service by an Executive to such date; (b) "Projected Benefit" for a Trust Beneficiary shall mean the Benefits to which such Trust Beneficiary may become entitled projected as of the date three years after the date for determination of the Accumulated Benefit with respect to projected service by an Executive to such date, which Projected Benefit shall include the Accumulated Benefit; (c) the "Projected Benefit Account Excess" with respect to an Executive account maintained pursuant to this Section 7(b) shall be equal to the excess, if any, of the fair market value of the assets held in the Trust allocated to such Executive's account over the respective Projected Benefit; and -18- 19 (d) the "Aggregate Projected Benefit Account Excess" with respect to a Participating Employer shall be equal to the excess, if any, of the aggregate account balances of Executives then employed by the Participating Employer, or for whom such Participating Employer has obligations and liabilities or has assumed obligations and liabilities pursuant to a Deposit Agreement, over their aggregate Projected Benefits. If any deposit of principal is not allocated by the Participating Employer such amount shall be allocated by the Trustee as if it were a Projected Benefit Account Excess with respect to Executives then employed by such Participating Employer, or for whom such Participating Employer has obligations and liabilities or has assumed obligations and liabilities pursuant to a Deposit Agreement, in accordance with this Section 7(b). The Trustee shall determine annually the amount of all Projected Benefit Account Excesses. The Trustee shall allocate the Aggregate Projected Benefit Account Excess of a Participating Employer to any accounts of Executives then employed by such Participating Employer, or for whom such Participating Employer has obligations and liabilities or has assumed obligations and liabilities pursuant to a Deposit Agreement, that do not have a Projected Benefit Account Excess, in proportion to the differences between the respective Projected Benefit amount and account balance, insofar as -19- 20 possible until all accounts are not less than the Projected Benefit for such Executive. Any then remaining Aggregate Projected Benefit Account Excess of a Participating Employer allocated to all the accounts of Executives then employed by such Participating Employer, or for whom such Participating Employer has obligations and liabilities or has assumed obligations and liabilities pursuant to a Deposit Agreement, in proportion to the respective Projected Benefit amounts. (c) Nothing in this Section 7 shall preclude the commingling of Trust assets for investment. 8. RESPONSIBILITY OF TRUSTEE: (a) The duties and responsibilities of the Trustee shall be limited to those expressly set forth in this Trust, and no implied covenants or obligations shall be read into this Trust against Trustee. (b) If all or any part of the Trust assets are at any time attached, garnished, or levied upon by any court order, or in case the payment, assignment, transfer, conveyance or delivery of any such property shall be stayed or enjoined by any court order, or in case any order, judgment or decree shall be made or entered by a court affecting such property or any part thereof, then and in any of such events the Trustee is authorized, in its sole discretion, to rely upon and comply with any such order, judgment or decree, -20- 21 and it shall not be liable to any Participating Employer or any Executive by reason of such compliance even though such order, judgment or decree subsequently may be reversed, modified, annulled, set aside or vacated. (c) The Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; provided, however, that the Trustee shall incur no liability to anyone for any action taken pursuant to a direction, request, or approval given by any Participating Employer, or any Executive, contemplated by and complying with the terms of this Trust Agreement. The Trustee shall discharge its responsibility for the investment, management and control of the Trust assets solely in the interests of the Executives and for the exclusive purpose of assuring that, to the extent of available Trust assets and in accordance with the terms of this Trust Agreement, all payments of Benefits are made when due to the Executives. (d) The Trustee may consult with legal counsel (who may be counsel for any Participating Employer) to be selected by it, and the Trustee shall not be liable for any action taken or suffered by it in accordance with the advice of such counsel. (e) The Trustee shall be reimbursed jointly and severally by Ameritrust and each Participant Subsidiary for its reasonable expenses incurred in connection with the performance of its duties hereunder (including, but not limited to the fees and expenses of counsel incurred pursuant to Section 8(d) or 8(f) hereof) and shall be paid reasonable fees for the -21- 22 performance of such duties in the manner provided by Section 8(f) hereof. (f) Ameritrust and each Participating Subsidiary agrees jointly and severally to indemnify and hold harmless the Trustee from and against any and all damages, losses, claims or expenses as incurred (including expenses of investigation and fees and disbursements of counsel to the Trustee and any taxes imposed on the Trust assets or income of the Trust) arising out of or in connection with the performance by the Trustee of its duties hereunder, other than such damages, losses, claims or expenses arising out of the Trustee's gross negligence or willful misconduct. The Trustee shall not be required to undertake or to defend any litigation arising in connection with this Trust Agreement unless it be first indemnified by Ameritrust or a Participating Subsidiary against its prospective costs, expenses and liabilities (including without limitation attorneys' fees and expenses) relating thereto, and Ameritrust and each Participating Subsidiary hereby jointly and severally to indemnify the Trustee and be primarily liable for such costs, expenses, and liabilities. Any amount payable to the Trustee under Section 8(e) hereof or this Section 8(f) shall be paid by Ameritrust or a Participating Subsidiary promptly upon demand therefor by the Trustee or, in the event that Ameritrust or a Participating Subsidiary fails to make such payment, from the Trust assets, pro rata with respect to account balances. In the event that payment is made hereunder to the Trustee from the Trust assets, the Trustee shall promptly notify Ameritrust in -22- 23 writing of the amount of such payment. Ameritrust agrees that, upon receipt of such notice, it will, jointly and severally, deliver or cause to be delivered to the Trustee to be held in the Trust an amount in cash equal to any payments made from the Trust assets to the Trustee pursuant to Section 8(e) hereof or this Section 8(f). The failure of Ameritrust to transfer any such amount shall not in any way impair the Trustee's right to indemnification, reimbursement and payment pursuant to Section 8(e) hereof or this Section 8(f). (g) The Trustee may vote any stock or other securities and exercise any right appurtenant to any stock, other securities or other property held hereunder, either in person or by general or limited proxy, power of attorney or other instrument. (h) The Trustee may hold securities in bearer form and may register securities and other property held in the trust fund in its own name or in the name of a nominee, combine certificates representing securities with certificates of the same issue held by the Trustee in other fiduciary capacities, and deposit, or arrange for deposit of property with any depository; provided that the books and records of the Trustee shall at all times show that all such securities are part of the trust fund. (i) The Trustee may hire agents, accountants, actuaries, and financial consultants, who may be agent, accountant, actuary, or financial consultant, as the case may be, for Ameritrust or with respect to any Plan. -23- 24 (j) (i) The Trustee is empowered to take all actions necessary or advisable in order to collect any life insurance, annuity, or other benefits or payments of which the Trustee is the designated beneficiary. The Trustee shall maintain in force all life insurance policies held in the Trust (A) by requesting that the Participating Employers pay directly all premiums and other charges due thereon in a timely manner, and (B) by paying all such premiums and charges that are not so paid by the Participating Employers. To the extent the Trustee has cash or its equivalent readily available for such purpose or policy loans and/or dividends are available, the Trustee shall pay premiums due with such cash or its equivalent or policy loans and/or dividends, as the Trustee may deem best. If the Trustee does not have sufficient cash or its equivalent readily available and policy loans and dividends are not available, then the Trustee (C) shall first liquidate other assets held by it in the Trust to generate the necessary cash for the payment of such premiums and charges and for the payment of Benefits, and then (D) shall surrender and liquidate policies in an Executive's account as necessary to pay Benefits to the Trust Beneficiaries with respect to such account. (ii) The Trustee shall be named sole owner and beneficiary of each life insurance policy held in the Trust and shall have full authority and power to exercise all rights of ownership relating to the policy, (x) except that the Trustee shall have no power, other than in accordance with Sections 1(b), 4, and 11 hereof, to name a beneficiary of the policy -24- 25 other than the Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor Trustee, or to loan to any person the proceeds of any borrowing against such policy or, except as provided in the immediately preceding sentence, to surrender any policy or allow any policy to lapse at any time when there are other assets in the Trust that can be disposed of or otherwise used to generate any cash necessary to maintain the policy or for the payment of Benefits, and (y) except to the extent necessary to give effect to the provisions of any split-dollar life insurance arrangement. The Trustee shall have the power, with the consent of Ameritrust, to exchange that portion, if any, of the life insurance coverage on any Executive that is in excess of the amount of such coverage necessary to provide sufficient proceeds to pay the corresponding amount of Benefits, for additional life insurance coverage on other Executives. The Trustee shall also have the power to acquire additional life insurance coverage on Executives through application for new life insurance. (k) The Trustee shall have, without exclusion, all powers conferred on trustees by applicable law unless expressly provided otherwise herein. (l) Notwithstanding any other provision of this Trust Agreement, in the event of the termination of the Trust, or the resignation or discharge of the Trustee, the Trustee shall have the right to a settlement of its accounts, which accounting may be made, at the option of the Trustee, either (i) by a judicial settlement in a court of competent jurisdiction, or (ii) by -25- 26 agreement of settlement, release and indemnity from the Participating Employers to the Trustee. 9. AMENDMENTS, ETC. TO EXHIBITS, AGREEMENT AND PLANS; COOPERATION OF PARTICIPATING EMPLOYERS: (a) Prior to the date on which the Trust becomes irrevocable, the provisions of this Section 9(a) shall apply. (i) Ameritrust shall furnish the Trustee with any amendments, restatements or other changes in the Agreements and the Plans, and Ameritrust shall prescribe or amend, as the case may be, Exhibit B hereto to reflect any such amendment, restatement, or other change, or any changes in the compensation of the Executives, or otherwise. Exhibit B shall prescribe, among other things, the amounts and timing (i) of Benefits to which each Trust Beneficiary may become entitled as of each March 31 for service to such date (the "Accumulated Benefit") and (ii) Benefits to which each Trust Beneficiary may become entitled projected as of the date three years after the date in (i) (the "Projected Benefit"). The Projected Benefit shall be inclusive of the Accumulated Benefit. (ii) At such time as may in the judgment of Ameritrust be appropriate, Ameritrust shall furnish to the Trustee any amendment to Exhibits A-1 or A-2 and any corresponding amendment to Exhibit B required as a result of such amendment to Exhibits A-1 or A-2. (b) On or after the date on which the Trust becomes irrevocable, the provisions of this Section 9(b) shall apply. -26- 27 (i) Not later than forty-five (45) calendar days after the end of each calendar year and at such other time as may in the judgment of Ameritrust be appropriate in view of a change in circumstances, Ameritrust and each Executive (or his personal representative (including his guardian, executor or administrator) (hereafter, his "Successor") shall agree upon and furnish any amendment to Exhibit B hereto as shall be required to reflect: (A) any required change in the amounts of Benefits (including Accumulated Benefits and Projected Benefits) as a result of any change in such Executive's compensation during the prior calendar year, or (B) any amendment, restatement or other change in or to the Plans which agreements to amendments to such Exhibit B shall be furnished to the Trustee by Ameritrust or the Executives (or their Successors) and thereafter be deemed to be a part of, and to amend to the extent thereof, this Trust Agreement; provided, however, that in the event of the failure of Ameritrust and the Executive (or Successor) to reach such agreement, the provisions of Section 9(b)(ii) hereof shall control. (ii) Ameritrust has previously furnished the Trustee complete and correct copies of the Agreements and the Plans, and Ameritrust shall, and any Trust Beneficiary may, promptly furnish the Trustee true and correct copies of any amendment, restatement or successor to any of the Agreements or the Plans. Ameritrust shall, and any Trust Beneficiary -27- 28 may, also furnish the Trustee, upon the Trustee's request, such evidence of changes in compensation of the Executives as the Trustee shall deem necessary for its determination under this Section 9(b)(ii). Upon written notification to the Trustee by Ameritrust or any Executive (or Successor) of the failure of Ameritrust or any Executive (or Successor) to agree as provided in Section 9(b)(i), the Trustee shall, to the extent necessary in the sole judgment of the Trustee, (A) recompute the amount payable hereunder as set forth in Exhibit B hereto to any Trust Beneficiary; and (B) notify Ameritrust and the Executive (or Successor) in writing of its computations. Thereafter, this Trust Agreement and all Exhibits thereto shall be amended to the extent of such Trustee determinations without further action; provided, however, that the failure of Ameritrust to furnish any such amendment, restatement, successor or compensation information shall in no way diminish the rights of any Trust Beneficiary hereunder or thereunder. (iii) Any amendment to Exhibit A-1 must be (A) agreed to by two-thirds of the Executive Participants, subject to the provisions of Sections 10(b)(i) and (b)(ii) hereof, and (B) in the case of an amendment that adds a new Executive as a Trust Beneficiary, accompanied by the deposit into the Trust by a Participating Employer on or before the effective date on which the new Executive would become a Trust Beneficiary, an amount certified by The Wyatt Company, -28- 29 or such other actuary acceptable to Ameritrust and two-thirds of the Executive Participants (as determined prior to the effective date of the amendment and subject to Sections 10(b)(i) and (b)(ii) hereof) as sufficient to pay such new Executive's Benefits hereunder (with such sufficiency determined on the same actuarial basis as that used to determine sufficiency with respect to the Benefits as in effect hereunder immediately prior to the addition of such new Executive). (C) Notwithstanding the foregoing provisions of this Section 9, any amendment, restatement, successor or other change in an Agreement or a Plan that would materially increase the responsibilities or liabilities of the Trustee or materially change its duties shall also require the consent of the Trustee, which consent shall not be unreasonably withheld. 10. REPLACEMENT OF THE TRUSTEE: (a) The Trustee shall continue to serve until its successor accepts the Trust and receives delivery of the Trust assets. The Trustee may resign and be discharged from its duties hereunder after providing not less than ninety (90) days' notice in writing to Ameritrust and the Executive Participants. Prior to the date on which the Trust becomes irrevocable, the Trustee may be removed at any time upon notice in writing by Ameritrust. On or after such date, such removal shall also require the agreement of two thirds of the Executive Participants. Prior to the date on which the Trust becomes irrevocable, a replacement or successor trustee shall be appointed by Ameritrust. On or after such -29- 30 date, such appointment shall also require the agreement of two thirds of the Executive Participants. No such removal or resignation shall be effective until the acceptance of the Trust by a successor trustee designated in accordance with this Section 10. If the Trustee should resign, and within forty-five (45) days of the notice of such resignation Ameritrust and, if required, two thirds of the Executive Participants, shall not have notified the Trustee of an agreement as to a replacement trustee, the Trustee shall apply to a court of competent jurisdiction for the appointment of a successor trustee, which shall be such bank or trust company (A) that the court in its discretion considers an appropriate trustee for the Trust, having due regard for the objectives, magnitude and expected duration of the Trust; (B) (x) whose trust assets under investment would place it among the 100 largest trust companies in the United States, or (y) which is a national banking association or established under the laws of one of the states of the United States, and which has equity in excess of $100 million; and (C) that is independent and not subject to the control of either Ameritrust or the Executives. The court in its discretion may transfer jurisdiction of the Trust to the jurisdiction in which the successor trustee has its principal place of business. The preceding determinations shall be made as of the time of appointment of the successor trustee. Upon the acceptance of the trust by a successor trustee, the Trustee shall release all of the moneys and other property in the Trust to its successor, who shall thereafter for all purposes of this -30- 31 Agreement be considered to be the "Trustee." In the event of its removal or resignation, the Trustee shall duly file with Ameritrust and, after the Trust becomes irrevocable, the Executives, a written statement or statements of accounts and proceedings as provided in Section 7(a) hereof for the period since the last previous annual accounting of the Trust, and if written objection to such account is not filed as provided in Section 7(a) hereof, the Trustee shall to the maximum extent permitted by applicable law be forever released and discharged from all liability and accountability with respect to the propriety of its acts and transactions shown in such account. (b) For purposes of the removal or appointment of a Trustee under this Section 10, (i) if any Executive Participant shall be deceased or adjudged incompetent, such Executive Participant's Successor (or if no Successor, his Trust Beneficiaries) shall participate in such Executive Participant's stead, and (ii) no Successor or Trust Beneficiary shall participate if all payments of Benefits have been made with respect to such Executive Participant (including his Trust Beneficiaries). 11. AMENDMENT OR TERMINATION: (a) This Trust Agreement may be amended at any time and to any extent by a written instrument executed by the Trustee, Ameritrust and, after the Trust has become irrevocable, two thirds of the Executive Participants; provided, however, that no amendment shall have the effect of (i) making the Trust revocable after it has become irrevocable in accordance with Section 1(b) hereof; or (ii) -31- 32 altering Section 8(j) (ii) or 11(b) hereof. Notwithstanding the previous sentence, (x) amendments contemplated by Section 9 hereof shall be made as therein provided, and (y) the approval by Ameritrust or by two thirds of the Executive Participants shall not be required for any amendment necessary in order to obtain a favorable private letter ruling from the Internal Revenue Service regarding the effect of the Trust on the taxation of the Participating Employers or the Trust Beneficiaries. (b) After the Trust has become irrevocable, the Trust shall not terminate until the date on which the Trust no longer contains any assets, or, if earlier, the date on which each Trust Beneficiary is entitled to no further payments hereunder. (i) Notwithstanding any other provision of this Trust Agreement, if the payments under an Agreement or Plan with respect to an Executive subject of litigation, or arbitration, and if the balance of such Executive's separate account maintained pursuant to Section 7(b) is greater than zero, the Trust shall not terminate and the funds held in the Trust with respect to such Executive shall continue to be held by the Trustee until the final resolution of such litigation or arbitration. The Trustee may assume that no Agreement or Plan is the subject of such litigation or arbitration unless the Trustee receives written notice from any Executive or Ameritrust with respect to such litigation or arbitration. The Trustee may rely upon written notice from an Executive as to the final resolution of such -32- 33 litigation or arbitration. Following such final resolution, the Trust shall terminate with respect to each Executive described in this Section 11(b)(i) upon the earlier of either of the following events: (x) the exhaustion of the Trust assets held by the Trustee with respect to such Executive; or (y) the final payment of all amounts payable to the Executive pursuant to the Plans, as certified to the Trustee by such Executive. (c) Upon termination of the Trust as provided in Section 11(b) hereof, any assets remaining in the Trust, less all payments, expenses, taxes and other charges under this Trust Agreement as of such date of termination, shall be returned to Ameritrust or as it directs. 12. SPECIAL DISTRIBUTION: (a) It is intended that (i) the creation of, transfer of assets to, and irrevocability of, the Trust will not cause any of the Agreements or the Plans to be other than "unfunded" for purposes of Title I of ERISA; (ii) transfers of assets to the Trust or the Trust becoming irrevocable will not be transfers of property for purposes of section 83 of the Code, or any successor provision thereto, nor will such transfers or irrevocability cause a currently taxabable benefit to be realized by a Trust Beneficiary pursuant to the "economic benefit" doctrine; and (iii) pursuant to section 451 of the Code, or any successor provision thereto, amounts will be includable as compensation in the gross income of a Trust Beneficiary in the taxable year or years in which such amounts -33- 34 are actually distributable or made available to such Trust Beneficiary by the Trustee. (b) Notwithstanding anything to the contrary contained in this Agreement, if, based upon a change in the federal tax or revenue laws, a published ruling or similar announcement issued by the Internal Revenue Service, a regulation issued by the Secretary of the Treasury, a decision by a court of competent jurisdiction involving a Trust Beneficiary, or a closing agreement made under section 7121 of the Code that is approved by the Internal Revenue Service and involves a Trust Beneficiary, the Trustee determines that amounts are includible as compensation in the gross income of a Trust Beneficiary in a taxable year that is prior to the taxable year or years in which such amounts would, but for this Section 12, otherwise actually be distributed or made available to such Trust Beneficiary by the Trustee, then (i) the assets held in trust shall be allocated in accordance with Section 7(b) hereof, and (ii) subject to the last sentence of Section 2(b) hereof, the Trustee shall promptly make a distribution to each affected Trust Beneficiary which, after taking into account the federal, state and local income tax consequences of the special distribution itself, is equal to the sum of any federal, state and local income taxes, interest due thereon, and penalties assessed with respect thereto which are attributable to amounts that are so includible in the income of such Trust Beneficiary. 13. PARTICIPATING SUBSIDIARY DEPOSIT AGREEMENT: (a) Upon execution of a Deposit Agreement in the form of Exhibit D -34- 35 hereto, a Subsidiary may at any time or from time to time make deposits of cash or other property in the Trust pursuant to Section 1(d) hereof. Such Deposit Agreement shall provide, among other things, for the designation of Ameritrust as agent and attorney for the Participating Subsidiary for all purposes under this Trust Agreement, including consenting to any amendments hereto, consenting to any Trustee accounts and consenting to anything requiring the approval or consent of a Participating Employer hereunder. (b) Ameritrust is the sponsoring grantor for the Trust Agreement. It reserves to itself, and each Subsidiary by execution of a Deposit Agreement delegates to Ameritrust, the power to amend or terminate the Trust Agreement in accordance with its terms. 14. GENERAL PROVISIONS: (a) Ameritrust and each Participating Subsidiary shall, at any time and from time to time, upon the reasonable request of the Trustee, execute and deliver such further instruments and do such further acts as may be necessary or proper to effectuate the purposes of this Trust. (b) Each Exhibit referred to in this Trust Agreement shall become a part hereof and is expressly incorporated herein by reference. (c) This Trust Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof and supersedes any and all prior agreements, arrangements and understandings relating thereto. This Trust Agreement shall -35- 36 be binding upon and inure to the benefit of the parties and their respective successors and legal representatives. (d) This Trust Agreement shall be governed by and construed in accordance with the laws of the State of Ohio, other than and without reference to any provisions of such laws regarding choice of laws or conflict of laws. (e) In the event that any provision of this Trust Agreement or the application thereof to any person or circumstances shall be determined by a court of competent jurisdiction to be invalid or unenforceable to any extent, the remainder of this Trust Agreement, or the application of such provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each provision of this Trust Agreement shall be valid and enforced to the maximum extent permitted by law. (f) The headings contained in this Trust Agreement are solely for the purpose of reference, are not part of the agreement of the parties and shall not in any way affect the meaning or interpretation of this Trust Agreement. (g) No right or interest under this Trust Agreement of a Trust Beneficiary (or any person claiming through or under any of them) other than the surviving spouse of any Executive shall be assignable or transferable in any manner or be subject to alienation, anticipation, sale, pledge, encumbrance or other legal process or in any manner be liable for or subject to the debts or liabilities of any such Trust Beneficiary. If any Trust Beneficiary (other than the surviving spouse of any -36- 37 deceased Executive) shall attempt to or shall transfer, assign, alienate, anticipate, sell, pledge or otherwise encumber his Benefits hereunder or any part thereof, or if by reason of his bankruptcy or other event happening at any time such Benefits would devolve upon anyone else or would not be enjoyed by him, then the Trustee, in its discretion, may terminate his interest in any such Benefit to the extent the Trustee considers necessary or advisable to prevent or limit the effects of such occurrence. Termination shall be effected by filing a written "termination declaration" with the Trust's records and making reasonable efforts to deliver a copy to the Trust Beneficiary (the "Terminated Beneficiary") whose interest is adversely affected. As long as the Terminated Beneficiary is alive, any benefits affected by the termination shall be retained by the Trustee and, in the Trustee's sole and absolute judgment, may be paid to or expended for the benefit of the Terminated Beneficiary, his spouse, his children or any other person or persons in fact dependent upon him in such a manner as the Trustee shall deem proper. Upon the death of the Terminated Beneficiary, all benefits withheld from him and not paid to others in accordance with the preceding sentence shall be disposed of according to the provisions of the Plans that would apply if he died prior to the time that all Benefits to which he was entitled were paid to him; provided, however, that if such provisions provide for distribution to the Terminated Beneficiary's estate or to his creditors and if the Terminated Beneficiary shall have -37- 38 descendants, including adopted children, then living, distribution shall be made to the Terminated Beneficiary's then living descendants, including adopted children, PER STIRPES. (h) Any dispute between the Executives and Ameritrust or the Trustee as to the interpretation or application of the provisions of this Trust and amounts payable hereunder may, at the election of any party to such dispute (or, if more than one Executive is such a party, at the election of two-thirds of such Executives), be determined by binding arbitration within the greater Cleveland metropolitan area in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court of competent jurisdiction. All fees and expenses of such arbitration shall be paid by the Trustee and considered an expense of the Trust under Section 8(f) hereof. (i) Each Executive (and, where applicable, each Successor) is an intended beneficiary under this Trust, and as an intended beneficiary shall be entitled to enforce all terms and provisions hereof with the same force and effect as if such person had been a party hereto. (j) Each action taken by Ameritrust hereunder shall, unless otherwise designated in such action by Ameritrust or unless the context or this Trust Agreement requires otherwise, be deemed to be an action of Ameritrust on behalf of each Participating Subsidiary pursuant to the authority granted to Ameritrust by such Participating Subsidiary in the Deposit Agreement. -38- 39 15. NOTICES; IDENTIFICATION OF CERTAIN TRUST BENEFICIARIES: (a) All notices, reguests, consents and other communications hereunder shall be in writing and shall be deemed to have been duly given when received: If to the Trustee, to: Wachovia Bank and Trust Company, N.A. 301 North Main Street Winston-Salem, N.C. 27150 Attention: Trust Department If to Ameritrust, to: Ameritrust Corporation 900 Euclid Avenue Cleveland, Ohio 44115 Attention: Secretary If to the Trust Beneficiaries, to the addresses listed on Exhibits A-1 and A-2 hereto provided, however, that if any party or any Trust Beneficiary or his, her or its successors shall have designated a different address by written notice to the other parties, then to the last address so designated. (b) Ameritrust shall provide the Trustee with the names of the beneficiary or beneficiaries designated by deceased -39- 40 Executives under the Plans (and who are, therefore, Trust Beneficiaries hereunder). IN WITNESS WHEREOF, each of Ameritrust and the Trustee has caused counterparts of this Trust Agreement to be executed on its behalf on November 3, 1988. AMERITRUST CORPORATION By: /s/ E. William Haffke, Jr. ----------------------------- Its: Executive Vice President ------------------------- WACHOVIA BANK AND TRUST COMPANY, N.A. By /s/ Thomas R. McAllister ----------------------------- /s/ Charles Haskins Its: Senior Vice President ------------------------- ASSISTANT SECRETARY -40- EX-10.21 8 EXHIBIT 10.21 1 EXHIBIT 10.21 AMERITRUST CORPORATION DEFERRED COMPENSATION PLAN ARTICLE I PURPOSE 1.1 PURPOSE. The purpose of this Ameritrust Corporation Deferred Compensation Plan (the "Deferred Compensation Plan") is to provide a means whereby Ameritrust Corporation (the "Corporation"), may afford financial security to a select group of key management and other highly compensated employees of the Corporation and Selected Subsidiaries who have rendered and continue to render valuable services to the Corporation or Selected Subsidiaries which constitute an important contribution towards the Corporation's continued growth and success, by providing for additional future compensation so that such employees may be retained and their productive efforts encouraged. This Deferred Compensation Plan, effective August 1, 1988, supersedes and replaces any prior plan or agreement providing similar benefits to a Participant in this Deferred Compensation Plan. ARTICLE 2 DEFINITIONS AND CERTAIN PROVISIONS 2.1 DEFINITIONS AND REFERENCES. Unless the context indicates otherwise, the following terms shall have the meanings set forth below: (1) "Agreement", the written agreement titled "Ameritrust Corporation Deferred Compensation Plan Agreement" that shall be entered into by the Employer and a Participant with respect to each Benefit Unit to carry out the Plan with respect to such Participant. (2) "Base Salary", the Participant's annual base salary before reduction for deferrals pursuant to this Plan or any plan or agreement of the Employer whereby compensation is deferred, including but not limited to a plan whereby compensation is deferred in accordance with Section 401(k) of the Internal Revenue Code. (3) "Basic Contributions", a Participant's "basic participant contributions" and "basic salary reduction contributions" (as defined in the Savings Plan) which are eligible for Employer matching contributions under the Savings Plan. 2 (4) "Beneficiary", the person or persons designated as such in accordance with Article 6. (5) "Benefit Unit", a unit enrolled in by a Participant covered by a separate Election Form pursuant to which the Participant agrees to defer a specified amount or percent of Earnings for a fixed period of time in accordance with Article 4. Each Benefit Unit provides benefits pursuant to Article 5 in accordance with the Participant's Agreement for that Benefit Unit. The initial Benefit Unit shall be for the period that commences with the Deferred Compensation Plan's effective date and ends December 31, 1992. Subsequent Benefit Units shall be for periods specified by the Committee. (6) "Board", the Board of Directors of Ameritrust Corporation. (7) "Bonus", the Participant's annual bonus under the Ameritrust Corporation Annual Executive Incentive Plan before reduction for deferrals pursuant to this Deferred Compensation Plan or any plan or agreement of the Employer whereby compensation is deferred, including but not limited to a plan whereby compensation is deferred in accordance with Section 401(k) of the Internal Revenue Code. (8) "Change of Control", for the purpose of this Plan, a "Change of Control" shall mean a change of control during the Change of Control period of a nature that would be required to be reported in response to Item 1(a) of the Current Report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); provided that, without limitation, such a "Change of Control" shall be deemed to have occurred if: (i) a third person, including a "group" as such term is used in Section 13(d)(3) of the Exchange Act, becomes the beneficial owner, directly or indirectly, of 20% or more of the combined voting power of the Corporation's outstanding voting securities ordinarily having the right to vote for the election of directors of the Corporation or (ii) individuals who, as of the date hereof, constitute the Board of Directors of the Corporation (the "Board" generally and as of the date hereof the "Incumbent Board") cease for any reason to constitute at least a majority of the board, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Corporation's -2- 3 shareholders, was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the Directors of the Corporation, as such terms are used in Rule 14a-11 of Regulation 15A promulgated under the Exchange Act) shall be, for purposes of this Plan, considered as though such person were a member of the Incumbent Board. (9) "Committee", the Compensation and Organization Committee of the Board, or such other committee of such Board, which is appointed to administer the Deferred Compensation Plan pursuant to Article 3. (10) "Compensation", compensation (as defined in the Savings Plan or the Retirement Plan) which is eligible for Employer matching contributions under the Savings Plan or is used in computing benefits under the Retirement Plan, before reduction for deferrals pursuant to this Deferred Compensation Plan. (11) "Declared Rate", the rate determined from time to time by the Committee as the "Declared Rate". (12) "Deferral Account", the account maintained on the books of account of the Employer for each Participant for each Benefit Unit pursuant to Section 4.3. (13) "Disability" or "Disabled", physical or mental inability of a permanent nature which prevents a Participant from performing the duties such Participant was employed to perform for such Participant's Employer when such Disability commenced. If an Employee makes application for disability benefits under the Social Security Act, as now in effect or as hereafter amended, and qualifies for such benefits, the Employee shall be presumed to suffer from a Disability under this Deferred Compensation Plan. The Committee may require the Employee to submit to an examination by a physician or medical clinic selected by the Committee. On the basis of such medical evidence and in the absence of qualification for disability benefits under the Social Security Act, the determination of the Committee as to whether or not a condition of Disability exists or continues shall be conclusive. To constitute Disability, the same must commence after the Employee has become a Participant in the Deferred Compensation Plan. -3- 4 (14) "Earnings", the Participant's Base Salary, Bonus and Long Term Cash Incentive Award. (15) "Election Form", an Eligible Employee's written election to participate in the Deferred Compensation Plan with respect to each Benefit Unit in accordance with Article 4. (16) "Eligible Employee", an Employee who is authorized to participate in the Deferred Compensation Plan by the Committee. (17) "Employee", any person employed by the Employer on a regular full-time salaried basis, including officers of the Employer. (18) "Employer", with respect to a Participant, the Corporation or the Selected Subsidiary which pays such Participant's Compensation. (19) "Long Term Cash Incentive Award", the Participant's award under the Ameritrust Corporation Long-Term Cash Incentive Plan before reduction for deferrals pursuant to this Deferred Compensation Plan or any plan or agreement of the Employer whereby compensation is deferred, including but not limited to a plan whereby compensation is deferred in accordance with Section 401(k) of the Internal Revenue Code. (20) "Participant", an Eligible Employee who has entered into an Agreement to participate in the Deferred Compensation Plan. (21) "Plan Year", the calendar year, and in 1988, the period from the effective date of the Deferred Compensation Plan through December 31. (22) "Qualified Retirement", the termination of a Participant's employment with the Employer for reasons other than death after the Participant attains age 55 and completes five (5) years of Service. (23) "Retirement Benefit", the payment to a Participant of the Participant's Deferral Account[s] following Qualified Retirement pursuant to Section 5.1. (24) "Retirement Plan", The Ameritrust Retirement Income Plan and the Ameritrust Indiana Retirement Income Plan, as amended from time to time. -4- 5 (25) "Retirement Plan Augmentation Benefit", the benefit paid pursuant to Section 5.7. (26) "Retirement Rate", the rate determined from time to time by the Committee as the "Retirement Rate". (27) "Savings Plan", the Ameritrust Corporation Employees' Savings and Investment Plan and the Ameritrust Indiana Corporation Employees' Savings and Investment Plan, as amended from time to time. (28) "Selected Subsidiaries", any corporation in an unbroken chain of corporations beginning with Ameritrust if each of the corporations other than the last corporation in such chain owns or controls, directly or indirectly, stock possessing not less than 50 percent of the total combined voting power of all class of stock in one of the other corporations, as selected by the Committee. (29) "Service", the period of time during which an employment relationship exists between an Employee and an Employer, including the period of time such relationship existed prior to the time when the Employee became a Participant. (30) "Termination Benefit", the payment to a Participant of the Participant's Deferral Account[s] on account of his termination of employment other than due to Qualified Retirement, Disability or death or termination of a Benefit Unit pursuant to Section 5.4. (31) "Total Unit Deferral Amount", the sum of all amounts which the Participant elects to defer plus the Employer's matching amounts during the Unit Deferral Period with respect to a Benefit Unit. (32) "Unit Deferral Period", the deferrals period for a Benefit Unit, as shown in the Participant's Election Form for that Benefit Unit. (33) "Unit Start Date", the date for commencement of deferrals for a Benefit Unit, as shown in the Participant's Election Form for that Benefit Unit. Except for 1988, the Unit Start Date will be January 1, unless the Committee, in its sole discretion, permits another date. For 1988, the Unit Start Date shall be the Deferred Compensation Plan's effective date. -5- 6 ARTICLE 3 ADMINISTRATION OF THE DEFERRED COMPENSATION PLAN 3.1 POWERS AND DUTIES OF THE COMMITTEE. The Committee shall administer the Deferred Compensation Plan and is hereby authorized to establish, adopt, or revise such rules and regulations as it may deem necessary or advisable for the administration and operation of the Deferred Compensation Plan and to interpret the provisions of the Deferred Compensation Plan, with any such rules, regulations and interpretations to be conclusive. All decisions of the Committee shall be by vote of a majority of its members. Members of the Committee shall be eligible to participate in the Deferred Compensation Plan while serving as members of the Committee, but a member of the Committee shall not vote or act upon any matter which relates solely to such member's interest in the Deferred Compensation Plan as a Participant. ARTICLE 4 PARTICIPATION 4.1 ELECTION TO PARTICIPATE. An Eligible Employee may enroll in a Benefit Unit under the Deferred Compensation Plan by filing a completed and fully executed Election Form with the Committee prior to the Unit Start Date. Pursuant to such Election Form, the Participant shall irrevocably elect the deferral options in which he chooses to participate and designate the amount or percent by which the Earnings of such Participant will be reduced over the Unit Deferral Period. A Participant may further elect to receive an immediate distribution with respect to the Benefit Unit in the event of a reduction in the Declared Rate below six percent (6%). The Committee may permit new Participants to enroll in Benefit Units at such times as it may permit in its sole discretion. Separate Benefit Units may be established for separate deferral options in which the Participant elects to participate, in the Committee's sole discretion. Various deferral options will be made available to Eligible Employees under the Deferred Compensation Plan, subject to such limitations and conditions as the Committee may impose, from time to time, in its complete and sole discretion. The minimum annual deferral for a Benefit Unit will be $2,000. In its sole discretion, the Committee may also permit amounts which Eligible Employees previously elected to defer, or accrued, under other plans or agreements with the employer to be transferred to this Deferred Compensation Plan and credited to Deferral Accounts maintained hereunder; however, no portion of any such amounts rolled into this Deferred Compensation Plan, including the earnings thereon, may be paid to the Participant at a date that -6- 7 is later than the date or dates elected for distribution under such previous plans. Such other plans are: the prior Ameritrust Corporation Participating Subsidiaries Executive Incentive and Deferred Compensation Plan and the Ameritrust Corporation and Participating Subsidiaries Supplemental Retirement Benefit Plan. (a) ACCELERATED REDUCTION. Prior to the beginning of any Plan Year in any Unit Deferral Period as to which there are two or more Plan Years remaining, a Participant may elect in a written notice filed with the Committee to increase the amount of the reduction of Earnings otherwise provided for any of the Plan Years remaining in such Unit Deferral Period; provided, however, that any such increase in the reduction of Earnings for any remaining Plan Years in the Unit Deferral Period shall not increase the Total Unit Deferral Amount for the Unit Deferral Period, but shall act to shorten the length of the Unit Deferral Period unless the Participant elects in such written notice to apply the increased reduction in Earnings for any Plan Year as a credit against the reductions in Earnings that otherwise would have resulted in subsequent Plan Years in the Unit Deferral Period, and provided further, that the apportionment of such increases in reduction of Earnings between Base Salary, Bonus and Long Term Incentive Award shall be made by the Committee, in its sole discretion. (b) ENROLLMENT IN BENEFIT UNIT. For purposes of the Plan, a Benefit Unit shall be deemed to be a Benefit Unit in which a Participant is enrolled only as of and after the first day of the Unit Deferral Period with respect to such Benefit Unit. Notwithstanding the foregoing, the Survivor Benefits which are payable with respect to a Benefit Unit shall only become effective after Earnings are actually deferred with respect to such Benefit Unit. 4.2 EMPLOYER MATCHING AMOUNTS. The Employer shall credit Employer matching amounts to the Deferral Account of each Participant who is eligible to be allocated Employer matching contributions under the Savings Plan. The total Employer matching amounts on behalf of a Participant shall be one hundred percent (100%) of the Participant's elective deferrals under this Deferred Compensation Plan and the Participant's Basic Contributions under the Savings Plan, up to a total of six percent (6%) of the Participant's Compensation, regardless of exceeding the limits on annual additions under tax qualified plans. Employer matching amounts under this Deferred Compensation Plan shall be reduced by employer matching contributions credited to the Participant under the Savings Plan so that the total under both plans does not exceed 6% of Compensation. Employer matching amounts under this Deferred -7- 8 Compensation Plan shall be credited to the Participant's Deferral Accounts at the same time as Employer matching contributions would have been credited under the Savings Plan. 4.3 DEFERRAL ACCOUNTS. The Committee shall establish and maintain a separate Deferral Account for each of a Participant's Benefit Units. The amounts by which a Participant's Earnings are reduced pursuant to Section 4.1 with respect to each Benefit Unit shall be credited by the Employer to the Participant's Deferral Account for such Benefit Unit no later than the later of 15 days or the first day of the month following the month in which such Earnings would otherwise have been paid. The Employer matching amounts provided for by Section 4.2 shall be credited to the Deferral Account for each Benefit Unit in accordance with Section 4.2. The Deferral Account for a Benefit Unit shall be debited by the amount of any payments made by the Employer to the Participant or the Participant's Beneficiary with respect to such Benefit Unit pursuant to this Deferred Compensation Plan . (a) INTEREST ON DEFERRAL ACCOUNTS. Interest will be credited on Deferral Accounts as described below, subject to the limitations set forth in subsection (b) of this Section 4.3. (i) RETIREMENT RATE. Each Deferral Account of a Participant which is distributed on account of Qualified Retirement, Disability, death or an interim distribution after a Participant is eligible for Qualified Retirement shall be deemed to bear interest from the date such Deferral Account was established through the date such Deferral Account is paid out in full at the Retirement Rate for each Plan Year. Interest will be credited at the end of each Plan Year on the balance in a Deferral Account as of the end of that year at the Retirement Rate for the applicable Plan Year. Interest will be compounded annually. (ii) DECLARED RATE. Each Deferral Account of a Participant which is distributed other than on account of Qualified Retirement, Disability, death or an interim distribution after a Participant is eligible for Qualified Retirement shall be deemed to bear interest from the date such Deferral Account was established through the date such Deferral Account is paid out in full at a rate equal to the Declared Rate for each Plan Year. Interest will be credited at the end of the Plan Year on the balance in a Deferral Account as of the end of that year at the Declared Rate for the applicable Plan Year. Interest will be compounded annually. -8- 9 (b) Notwithstanding subsection (a) of this Section 4.3, (i) the Committee reserves the right, in its sole discretion, to decrease retroactively, but not below six percent (6%), the interest rate which is credited to Deferral Accounts of Participants in the event any tax benefit is lost because of any change in law or is disallowed by the Internal Revenue Service to any Employer with respect to any investment made by any Employer with respect to Employee deferrals or Employer matching amounts; provided, nothing in subsection (a) or (b) of this Section 4.3 shall give any Participant or Beneficiary any right or interest in any such investment; and (ii) the Committee reserves the right, in its sole discretion, to increase or decrease the interest rate which is credited to Deferral Accounts of Participants for periods subsequent to such action; provided, however, that no such reduction in the crediting rate may be made below the rate set by the Committee at the time of a Change in Control. (c) VESTING OF DEFERRAL ACCOUNTS. Each Participant shall be vested in the amounts credited to such Participant's Deferral Accounts as follows: (i) ACCOUNTS DEFERRED. A Participant shall be one hundred percent (100%) vested at all times in amounts deferred by the Participant under this Deferred Compensation Plan. (ii) EMPLOYER MATCHING AMOUNTS. A Participant shall be vested in the Employer matching amounts credited to his Deferral Accounts pursuant to Section 4.2, and interest thereon, to the same extent as his Employer matching contributions are vested under the Savings Plan or in accordance with the following schedule: Vested Percentage of Years of Participation Employer Matching Amounts ---------------------- ----------------------------- less than 2 0% 2 25% 3 50% 4 75% 5 or more 100% Any unvested portion of the Employer matching amounts, and interest thereon, shall be forfeited at the same time as the Participant's forfeiture occurs under the Savings Plan. Forfeitures under this Deferred -9- 10 Compensation Plan shall not be reallocated to other Participants but shall be used to reduce employer matching amounts. 4.4 VALUATION OF ACCOUNTS. Each Deferral Account shall have three values. The value of a Deferral Account as of any date shall equal the amounts theretofore credited to such account, plus the interest deemed to be earned on such account in accordance with (1) the Retirement Rate, (2) the Declared Rate and (3) any other rate specified by the Committee pursuant to Section 4.3(b) through the date preceding such date, less the amounts theretofore debited to such account. 4.5 STATEMENT OF ACCOUNTS. The Committee shall submit to each Participant, within one hundred twenty (120) days after the close of each Plan Year, a statement in such form as the Committee deems desirable setting forth the balance standing to the credit of each Participant in each of his Deferral Accounts using both the Retirement Rate, the Declared Rate and any other rate specified by the Committee pursuant to Section 4.3(b). ARTICLE 5 BENEFITS 5.1 RETIREMENT BENEFIT. A Participant is eligible for a Retirement Benefit under this Deferred Compensation Plan when he has satisfied all of the requirements for Qualified Retirement (as defined in Article 2). The Retirement Benefit for a Benefit Unit will be based on the total value of the Deferral Account for the Benefit Unit. Deferral Accounts which are distributed on account of Qualified Retirement will be credited with interest at the Retirement Rate in accordance with Section 4.3(a)(i) but subject to Section 4.3(b) for each Plan Year until such Deferral Accounts are paid out in full. The retirement Benefit for a Benefit Unit will be paid beginning on the date and in the manner which the Participant elects when he enrolls in the Benefit Unit. After the Participant elects the commencement date and the form of payment for a Benefit Unit, he may not change his election for such Benefit Unit. A Participant may elect to receive his Retirement Benefit at Qualified Retirement or on a specified date in either a lump sum or installments over a specified number of years (not to exceed 15 years) or a combination of a lump sum payment and installment payment. All installment payments will be calculated and paid on an annual basis. If a Participant elects to receive all or some portion of his Retirement Benefit in installment payments, the payments will be redetermined annually by dividing the Participant's remaining Deferral Account balance (or portion thereof) at the beginning of each year by the number of remaining years in the payment period for the Retirement Benefit. -10- 11 5.2 INTERIM DISTRIBUTION. A Participant may elect when he enrolls in a Benefit Unit to receive an interim distribution with respect to the Benefit Unit beginning at any time at least five years after the Unit Start Date for the Benefit Unit. The Participant may elect to receive all or any percentage of his Deferral Account balance for a Benefit Unit as an interim distribution in either a lump sum payment or in annual payments over a specified number of years (not to exceed 15 years). For purposes of calculating the amount of an interim distribution the Deferral Account will be credited with interest at the Retirement Rate or the Declared Rate in accordance with Section 4.3(a)(i) or (ii), respectively, but subject to Section 4.3(b), depending on whether interim distributions are made after or before a Participant is eligible for Qualified Retirement. If a Participant elects to receive his Deferral Account balance for a Benefit Unit as an interim distribution before he is eligible for Qualified Retirement and later retires after he is eligible for Qualified Retirement, or dies or becomes Disabled prior to becoming eligible for Qualified Retirement the Deferral Account shall be retroactively credited with interest at the Retirement Rate less the Declared Rate in accordance with Section 4.3(a)(i), but subject to Section 4.3(b), on the amount of such interim distribution through the date or dates of distribution of the Deferred Account. 5.3 DISABILITY. If a Participant suffers a Disability, and prior to such Disability had elected to defer Base Salary, Bonus and any Long Term Cash Incentive Award, the Employer shall credit such deferrals to the Participant's Deferral Accounts during such Disability when they are paid. Any Base Salary deferred under this Section 5.3 shall only be such amounts earned by the Participant before Disability benefits commenced. The Employer shall credit Employer matching amounts attributable to the deferred Base Salary. The Participant's Deferral Accounts which are distributed on account of such Disability will be credited with interest at the Retirement Rate in accordance with Section 4.3(a)(i) for each Plan Year until such Deferral Accounts are paid out in full. In the event of a Disability, the Participant's Deferral Account balances will be paid to the Participant in installments over a period of five (5) years commencing after such Disability has continued for a 36-month period. In the sole discretion of the Committee, the Employer may commence payments on an earlier date. The installment payments will be determined by the Committee and may be determined annually by dividing the Participant's remaining Deferral Account balance at the beginning of each year by the number of remaining years in the -11- 12 payment period. All of the Participant's elections as to the time and manner of payment of his Deferral Accounts will be deemed to be cancelled. If a Participant recovers from a Disability, payment of benefits on account of Disability shall cease. If the Participant returns to employment with the Employer, the Participant shall resume making deferrals for the remaining years of the Unit Deferral Period, but the Unit Deferral Period shall not be extended on account of the Disability. 5.4 TERMINATION BENEFIT. (a) CERTAIN TERMINATIONS OF EMPLOYMENT. If a Participant (i) ceases to be an Employee for any reason other than Qualified Retirement, Disability or death or (ii) fails to return to the status of an Employee within sixty (60) days following recovery from a Disability that lasts less than 36 months prior to Qualified Retirement, the Employer shall pay to the Participant in one lump sum an amount (the "Termination Benefit") equal to the total value of the Participant's Deferral Account[s]. In computing the Termination Benefit the value of the Deferral Account[s] will be determined based on crediting interest at the Declared Rate for each Plan year in accordance with Section 4.3(a)(iii) subject, however, to any decrease in rate pursuant to Section 4.3(b). The Participant shall be entitled to no further benefits under this Deferred Compensation Plan. In such event all of the Participant's elections as to the time and manner of payment of his Deferral Accounts will be deemed to be cancelled. (b) TERMINATION OF A BENEFIT UNIT. With the written consent of the Committee, in its sole discretion, a Participant may terminate enrollment in a Benefit Unit by filing with the Committee a written request to so terminate the Benefit Unit. Upon termination of enrollment in a Benefit Unit, no further reductions in the Participant Earnings or Employer matching amounts shall be made for such Benefit Unit, and the Participant shall immediately cease to be eligible for any benefits with respect to such Benefit Unit other than the Termination Benefit. No other benefit shall be payable to either the Participant or any Beneficiary of such Participant with respect to the terminated Benefit Unit. In its sole discretion, the Committee may pay the Termination Benefit with respect to a terminated Benefit Unit on a date earlier than a Participant's termination of employment with the Employer, with such Termination Benefit to be calculated as if the Participant had terminated employment with the Employer on the date of such payment. -12- 13 5.5 SURVIVOR BENEFITS. Deferral Accounts which are distributed on account of the Participant's death will be credited with interest at the Retirement Rate in accordance with section 4.3(a)(i) but subject to Section 4.3(b) for each Plan Year until such Deferral Accounts are paid in full. Participant deferrals and Employer matching amounts that would otherwise have been credited to the Participant's Deferral Accounts if the Participant had survived through the period covered by deferral elections made prior to the Participant's death shall be made by the Employer effective upon the Participant's death. For the purpose of computing such amounts, it shall be assumed that the Participant's Earnings would have continued for Base Salary at the same rate in effect immediately preceding his death and for Bonus and Long Term Incentive Award at the higher of such amounts paid in the two Plan Years preceding his death. (a) BEFORE QUALIFIED RETIREMENT AGE. If a Participant dies before he is eligible for Qualified Retirement, a Survivor Benefit will be paid to his Beneficiary in a single lump sum. The Survivor Benefit will be equal to the Deferral Account balance[s] for all of the Participant's Benefit Unit[s]. All of the Participant's elections as to the time and manner of payment of his Deferral Accounts will be deemed to be cancelled. (b) AFTER QUALIFIED RETIREMENT AGE. If a Participant dies after he is eligible for Qualified Retirement, his Beneficiary will be entitled to receive the remaining installments of the Retirement Benefit or other benefit which would have been paid to the Participant with respect to each of his Benefit Unit[s] if the Participant had survived, in accordance with the Participant's election as to the manner of payment for each Benefit Unit. However, if such payments have not yet commenced for a Benefit Unit, such payments will commence immediately upon the Participant's death, irrespective of when payments would have commenced if the Participant had survived. 5.6 EMERGENCY BENEFIT. In the event that the Committee, upon written petition of the Participant, determines, in its sole discretion, that the Participant has suffered an unforeseeable financial emergency, the Employer shall pay to the Participant, as soon as practicable following such determination, an amount necessary to meet the emergency not in excess of the Termination Benefit to which the Participant would have been entitled pursuant to Section 5.4 if he had a termination of Service on the date of such determination (the "Emergency Benefit"). For purposes of this Deferred Compensation Plan, an unforeseeable financial emergency is an unexpected need for cash arising from an illness, casualty loss, -13- 14 sudden financial reversal, or other such unforeseeable occurrence. Cash needs arising from foreseeable events such as the purchase of a house or education expenses for children shall not be considered to be the result of an unforeseeable financial emergency. The amount of the benefits otherwise payable under the Deferred Compensation Plan shall thereafter be adjusted to reflect the early payment of the Emergency Benefit. 5.7 RETIREMENT PLAN AUGMENTATION BENEFIT. In addition to the other benefits provided for in this Article 5, the Employer shall pay a Retirement Plan Augmentation Benefit to Participants who have elected to defer a portion of their Earnings in accordance with this Deferred Compensation Plan or its predecessor, the Supplemental Retirement Benefit Plan and who thereby receive a reduced benefit under the Retirement Plan. Said benefit shall be computed as follows: (a) The Participant's lump sum benefit shall be computed in accordance with the Retirement Plan, but without regard to the limitations imposed under Section 415 of the Internal Revenue Code, and for purposes of said computation the Earnings (or that portion of Earnings otherwise taken into account in computing such benefit) deferred in accordance with Article 4 of this Deferred Compensation Plan shall be included in the Participant's Compensation (as defined in the Retirement Plan) and any years of credited service granted through any other arrangement shall be included as Credited Service (as defined in the Retirement Plan). The calculations and the determination of the Retirement Plan Augmentation Benefit (and its actuarial equivalents) to be made hereunder shall be made as of the time of the Participant's initial entitlement to receive a benefit under the Retirement Plan by the actuary appointed by the Plan Administrator of the Retirement Plan, using the actuarial assumptions then in effect for the Retirement Plan. (b) The Participant's actuarial equivalent lump sum benefit under the Retirement Plan shall be computed. (c) The amount determined in subparagraph (b) shall be subtracted from the amount determined in subparagraph (a). The difference, less any portion of this difference which is paid pursuant to any other non-qualified defined benefit retirement plan or arrangement of the Employer, including the Ameritrust Corporation Excess Benefit Plan, plus any amounts granted through any other arrangements not otherwise paid, shall be the Participant's Retirement Plan Augmentation Benefit. It is intended that the Retirement Plan Augmentation Benefit shall include amounts from other arrangements (other than the Excess Benefit Plan), and in no event shall any Participant receive such benefits twice. -14- 15 The Retirement Plan Augmentation Benefit (or its actuarial equivalent) shall be paid in installments over 15 years, or over such other period as the Committee shall determine. A Participant who is not entitled to a benefit under the Retirement Plan shall not be entitled to any Retirement Plan Augmentation Benefit. 5.8 SMALL BENEFIT. In the event the Committee determines that the balance of the Participant's Deferral Accounts and the present value, as determined in Section 5.7(a), of the Retirement Plan Augmentation Benefit are less than $50,000 at the time of commencement of payment of his Retirement Benefit or Termination Benefit, or the portion of the balance of the Participant's Deferral Accounts payable to any Beneficiary is less than $50,000 at the time of commencement of payment of a Survivor Benefit to such Beneficiary, the Employer may pay the benefit in the form of a lump sum payment, notwithstanding any provision of this Article 5 to the contrary. Such lump sum payment shall be equal to the balance of the Participant's Deferral Accounts, or portion thereof payable to a Beneficiary, and the then present value of the unpaid portion of the Retirement Plan Augmentation Benefit. 5.9 WITHHOLDING FOR TAXES. To the extent required by the law in effect at the time payments are made, the Employer shall withhold from payments made hereunder the minimum taxes required to be withheld by the federal or any state or local government. 5.10 INELIGIBLE PARTICIPANT. Notwithstanding any other provisions of this Deferred Compensation Plan to the contrary, if the Committee determines that any Participant may not qualify as a "management or highly compensated employee" within the meaning of the Employee Retirement Income Security Act of 1974, as amended (ERISA) or Regulations thereunder, the Committee may determine, in its sole discretion, that such Participant shall cease to be eligible to participate in this Deferred Compensation Plan and may make an immediate lump sum payment to the Participant equal to the amounts standing credited to his Deferral Accounts. Upon such payment no Survivor Benefit or other benefit shall thereafter be payable under this Deferred Compensation Plan either to the Participant or any Beneficiary of the Participant. All of the Participant's elections as to the time and manner of payment of his Deferral Accounts will be deemed to be cancelled. ARTICLE 6 BENEFICIARY DESIGNATION 6.1 BENEFICIARY DESIGNATION. Each Participant shall have the right, at any time, to designate any person or persons as his Beneficiary or Beneficiaries to whom payment under this -15- 16 Deferred Compensation Plan shall be made in the event of the Participant's death prior to complete distribution of the benefits due under the Deferred Compensation Plan. Each Beneficiary designation shall become effective only when filed in writing with the Committee during the Participant's lifetime on a form prescribed by the Committee. The filing of a new Beneficiary designation form will cancel all Beneficiary designations previously filed. Any finalized divorce or marriage (other then a common law marriage) of a Participant subsequent to the date of filing of a Beneficiary designation form shall revoke such designation, unless in the case of divorce the previous spouse was not designated as Beneficiary and unless in the case of marriage the Participant's new spouse had previously been designated as Beneficiary. The spouse of a married Participant's domiciled in a community property jurisdiction shall join in any designation of a Beneficiary or Beneficiaries other than the spouse. If a Participant fails to designate a Beneficiary as provided above, or if his Beneficiary designation is revoked by marriage, divorce, or otherwise without execution of a new designation, or if all designated Beneficiaries predecease the Participant or die prior to complete distribution of the Participant's benefits, then the Committee shall direct the distribution of such benefits to the Participant's estate. ARTICLE 7 AMENDMENT AND TERMINATION OF PLAN 7.1 AMENDMENT. The Committee may at any time amend the Deferred Compensation Plan in whole or in part for any reason, including but not limited to tax, accounting or other changes, which may result in termination of the Deferred Compensation Plan for future deferrals, provided, however, that no amendment, either before or after a Change of Control, shall be effective to decrease the benefits under the Deferred Compensation Plan payable to any Participant which have accrued prior to the date of such amendment. Written notice of any amendment shall be given to each Participant then participating in the Deferred Compensation Plan. 7.2 TERMINATION. (a) COMPANY'S RIGHT TO TERMINATE. The Board or the Committee may at any time terminate the Deferred Compensation Plan for any reason whatsoever. -16- 17 (b) PAYMENTS UPON TERMINATION. Upon any termination of the Deferred Compensation Plan under this Section 7.2, the Board or Committee shall determine the date or dates of the Deferred Compensation Plan distributions to the Participants, which date or dates shall not be later than the date or dates on which the Participants or their Beneficiaries would otherwise receive benefits hereunder. Earnings shall prospectively cease to be deferred as of the date determined by the Board or Committee. ARTICLE 8 MISCELLANEOUS 8.1 UNSECURED GENERAL CREDITOR. Participants and their Beneficiaries, heirs, successors, and assigns shall have no legal or equitable rights, claims, or interests in any specific property or assets of the Employer, nor shall they be Beneficiaries of, or have any rights, claims, or interests in any life insurance policies, annuity contracts, or the proceeds therefrom owned or which may be acquired by the Employer ("Policies"). Any such Policies or other assets of the Employer shall be, and remain, the general, unpledged, unrestricted assets of the Employer. The Employer's obligation under the Deferred Compensation Plan shall be merely that of an unfunded and unsecured promise of the Employer to pay money in the future. 8.2 TRUST FUND. The Employer shall be responsible for the payment of all benefits provided under the Deferred Compensation Plan. At its discretion, the Employer may establish one or more trusts, with such trustees as the Board or Committee may approve, for the purpose of providing for the payment of such benefits. Such trust or trusts may be irrevocable, but the assets thereof shall be subject to the claims of the Employer's creditors. To the extent any benefits provided under the Deferred Compensation Plan are actually paid from any such trust, the Employer shall have no further obligation with respect thereto, but to the extent not so paid, such benefits shall remain the obligation of, and shall be paid by, the Employer. 8.3 OBLIGATIONS TO EMPLOYER. If a Participant becomes entitled to a distribution of benefits under the Deferred Compensation Plan, and if at such time the Participant has outstanding any debt, obligation, or other liability representing an amount owing to the Employer, then the Employer may offset such amount owed to it against the amount of benefits otherwise distributable. Such determination shall be made by the Committee. -17- 18 8.4 NONASSIGNABILITY BY PARTICIPANT. No right or interest under this Deferred Compensation Plan of a Participant or his designated beneficiary (or any person claiming through or under any of them) other than the surviving spouse of any Participant shall be assignable or transferable in any manner or be subject to alienation, anticipation, sale, pledge, encumbrance or other legal process or in any manner be liable for or subject to the debts or liabilities of any such Participant or designated beneficiary. If any Participant or designated beneficiary (other than the surviving spouse of any deceased Participant) shall attempt to or shall transfer, assign, alienate, anticipate, sell, pledge or otherwise encumber his benefits hereunder or any part thereof, or if by reason of his bankruptcy or other event happening at any time such benefits would devolve upon anyone else or would not be enjoyed by him, then the Employer, in its discretion, may terminate his interest in any such benefit to the extent the Employer considers necessary or advisable to prevent or limit the effects of such occurrence. Termination shall be effected by filing a written "termination declaration" with the Deferred Compensation Plan's records and making reasonable efforts to deliver a copy to the Participant or designated beneficiary (the "Terminated Participant") whose interest is adversely affected. As long as the Terminated Participant is alive, any benefits affected by the termination shall be retained by the Employer and, in the Employer's sole and absolute judgment, may be paid to or expended for the benefit of the Terminated Participant, his spouse, his children or any other person or persons in fact dependent upon him in such a manner as the Employer shall deem proper. Upon the death of the Terminated Participant, all benefits withheld from him and not paid to others in accordance with the preceding sentence shall be disposed of according to the provisions of the Deferred Compensation Plan that would apply if he died prior to the time that all benefits to which he was entitled were paid to him; provided, however, that if such provisions provide for distribution to the Terminated Participant's estate or to his creditors and if the Terminated Participant shall have descendants, including adopted children, then living, distribution shall be made to the Terminated Participant's then living descendants, including adopted children, PER STIRPES. 8.5 EMPLOYMENT NOT GUARANTEED. Nothing contained in this Plan nor any action taken hereunder shall be construed as a contract of employment or as giving any Employee any rights to be retained in employment with the Employer. 8.6 PROTECTIVE PROVISIONS. Each Participant shall cooperate with the Employer by furnishing any and all information requested by the Employer in order to facilitate the -18- 19 payment of benefits hereunder, taking such physical examinations as the Employer may deem necessary and taking such other relevant action as may be requested by the Employer. If a Participant refuses so to cooperate, the Employer shall have no further obligation to the Participant under the Deferred Compensation Plan, other than payment to such Participant of the cumulative reductions in Earnings theretofore made pursuant to this Deferred Compensation Plan. If a Participant commits suicide during the two (2) year period beginning on the later of (a) the first day on which he participates in the Deferred Compensation Plan or (b) the first day of the Participant's Unit Deferral Period for any new Benefit Unit under the Deferred Compensation Plan, or if the Participant makes any material misstatement of information or nondisclosure of medical history, then no benefits with respect to any affected Benefit Unit will be payable hereunder to such Participant or his Beneficiary, other than payment to such Participant of the cumulative reductions in Earnings theretofore made pursuant to this Deferred Compensation Plan, provided, that in the Employer's sole discretion, benefits may be payable in an amount reduced to compensate the Employer for any loss, cost, damage or expense suffered or incurred by the Employer as a result in any way of any such action, misstatement or nondisclosure. 8.7 GENDER, SINGULAR & PLURAL. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, or neuter, as the identity of the person or persons may require. As the context may require, the singular may be read as the plural and the plural as the singular. 8.8 CAPTIONS. The captions of the articles, sections, and paragraphs of this Deferred Compensation Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions. 8.9 VALIDITY. In the event any provision of this Deferred Compensation Plan is held invalid, void, or unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other provision of this Deferred Compensation Plan. 8.10 NOTICE. Any notice or filing required or permitted to be given to the Committee under the Deferred Compensation Plan shall be sufficient if in writing and hand delivered, or sent by registered or certified mail, to the principal office of the Employer, directed to the attention of the Human Resources Division of the Employer. Such notice shall be deemed given as to the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. -19- 20 8.11 APPLICABLE LAW. This Deferred Compensation Plan shall be governed and construed in accordance with the laws of the State of Ohio. 8.12 SUCCESSORS AND ASSIGNS. This Deferred Compensation Plan shall be binding upon the Corporation and its successors and assigns. 8.13 INDEMNITY. It is the intent of the Corporation and each Employer that no Participant be required to incur the expenses associated with the enforcement of his or her rights under this Deferred Compensation Plan by litigation or other legal action because the cost and expense thereof would substantially detract from the benefits intended to be extended to a Participant hereunder. Accordingly, if it should appear to a Participant that the Corporation or any Employer has failed to comply with any of its obligations under this Deferred Compensation Plan or in the event that the Corporation, any Employer or any other person takes any action to declare this Deferred Compensation Plan void or unenforceable, or institutes any litigation designed to deny, or to recover from, the Participant the benefits intended to be provided to such Participant hereunder, the Corporation and any Employer irrevocably authorize such Participant from time to time to retain counsel of his or her choice, at the expense of the Employer as hereafter provided, to represent such Participant in connection with the initiation or defense of any litigation or other legal action, whether by or against the Corporation, any Employer or any director, officer, stockholder or other person affiliated with the Corporation or any Employer in any jurisdiction. Notwithstanding any existing or prior attorney-client relationship between the Corporation or any Employer and such counsel, the Corporation and any Employer irrevocably consent to such Participant's entering into an attorney-client relationship with such counsel, and in that connection the Corporation, any Employer and such Participant agree that a confidential relationship shall exist between such Participant and such counsel. The Employer shall pay and be solely responsible for any and all attorneys and related fees and expenses incurred by such Participant as a result of the failure of the Corporation or any Employer to perform under this Deferred Compensation Plan or any provision thereof; or as a result of the Corporation, the Employer or any person contesting the validity or enforceability of this Deferred Compensation Plan or any provision thereof. Notwithstanding any other provision in this Deferred Compensation Plan, this paragraph cannot be amended so long as any amounts accrued under the Deferred Compensation Plan remain unpaid to the Participants or their designated Beneficiaries. -20- 21 FIRST AMENDMENT TO THE AMERITRUST CORPORATION DEFERRED COMPENSATION PLAN WHEREAS, Ameritrust Corporation established the Ameritrust Corporation Deferred Compensation Plan ("Plan") for purposes of providing financial security to a select group of Key Employees, and WHEREAS, Society Corporation became the legal successor-in-interest by reason of merger with Ameritrust Corporation; and WHEREAS, Society Corporation now deems it necessary to terminate future compensation payments and deferrals to be made to the Plan on and after December 31, 1992; NOW, THEREFORE, the Plan is amended as follows: 1. As of the Effective Date below, the Plan is hereby terminated with regard to any future deferrals or contributions under the Plan, including Base Salary, Basic Contributions, Bonus Earnings, Long Term Cash Awards, Employer Matching Amounts, Compensation, Retirement Benefits, and Retirement Plan Augmentation Benefit. 2. The Effective Date of this Amendment shall be December 30, 1992. IN WITNESS WHEREOF, Society Corporation has caused this First Amendment to the Plan to be executed this 1st day of December, 1992. --- SOCIETY CORPORATION /s/ Michael L. Evans -------------------- Michael L. Evans Senior Vice President EX-10.30 9 EXHIBIT 10.30 1 EXHIBIT 10.30 KEYCORP EXCESS CASH BALANCE PENSION PLAN ARTICLE I --------- THE PLAN -------- The KeyCorp Excess Cash Balance Pension Plan ("Plan") is hereby established effective January 1, 1995, for the purpose of supplementing the pension benefits of certain selected key employees of KeyCorp and its subsidiaries who are covered by the Plan in accordance with the terms hereof. It is the intention of KeyCorp and of the Participants covered under the Plan, that the Plan be unfunded for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended. ARTICLE II ---------- DEFINITIONS ----------- 2.1 MEANINGS OF DEFINITIONS. As used herein, the following words and phrases shall have the meanings hereinafter set forth, unless a different meaning is plainly required by the context: (a) "BENEFICIARY" shall mean the trust, person, or persons determined pursuant to the provisions of Article VII of the Pension Plan entitled to receive the benefits hereunder in the event the Participant dies before his or her Excess Pension Benefit shall have been distributed to him or her in full. (b) "CREDITED SERVICE" shall be calculated by measuring the period of service commencing on the Participant's Employment Commencement Date and Re-Employment Commencement Date, if applicable, and ending on the Participant's Severance from Service Date, and shall be computed based on each full month during which time the Employee is employed by an Employer. (c) "COMPENSATION" of a Participant for any Plan Year or any partial Plan Year in which the Participant incurs a Severance From Service Date shall mean the entire amount of compensation paid to such Participant during such period by reason of his employment as an Employee, as reported for federal income tax purposes, or which would have been paid except for (1) the timing of an Employer's payroll processing operations, (2) the Participant's written election to defer receipt of compensation during the Plan Year, (3) the provisions of the KeyCorp 401(k) Savings Plan, or (4) the provisions of the KeyCorp Flexible Benefits Plan provided, however, that the term shall not include: 1 2 (i) any amount attributable to the Participant's exercise of stock appreciation rights and the amount of any gain to the Participant upon the exercise of stock options; (ii) any amount attributable to the Participant's receipt of non-cash remuneration whether or not it is included in the Participant's income for federal income tax purposes; (iii) any amount attributable to the Participant's receipt of moving expenses and any relocation bonus paid to the Participant during the Plan Year; (iv) any amount attributable to a lump sum severance payment paid by an Employer or the Corporation to the Participant; (v) any amount attributable to fringe benefits (cash and non-cash), (vi) any amount attributable to any bonus or payment made as an inducement for the Participant to accept employment with an Employer, (vii) any amount attributable to salary deferrals paid to the Participant during the Plan Year, which have been previously included as Compensation under the Plan during the Plan Year or any prior Plan Year, (viii) any amount paid to the Participant during the Plan Year which is attributable to interest earned on Compensation deferred under a plan of an Employer or the Corporation; and (ix) any amount paid for any period after the Participant's termination or retirement date. In the case of a Disabled Participant, such Participant's Compensation for each year while Disabled shall equal an amount which shall reflect the Participant's Compensation for the calendar year preceding the date of the Participant's Disability. (b) "CORPORATION" shall mean KeyCorp, an Ohio corporation, its corporate successors, and any corporation or corporations into or with which it may be merged or consolidated. (c) "EMPLOYEE" shall mean a person who is regularly employed by an Employer provided, however, that the term Employee shall specifically exclude those individuals who are participants in a KeyCorp-sponsored Supplemental Retirement Plan. 2 3 (d) "EMPLOYER" shall mean KeyCorp and all of its subsidiaries or affiliates unless specifically excluded as an Employer for Plan purposes by written action by an officer of the Corporation. An Employer's participation shall be subject to any conditions or requirements made by the Corporation as the Plan Administrator, and each Employer shall be deemed to appoint the Plan Administrator as its exclusive agent under the Plan. (e) "EXCESS PENSION BENEFIT" shall mean the pension benefit payable pursuant to the terms of this Plan to a Participant meeting the eligibility requirements of Section 3.1 of the Plan. (f) "INTEREST CREDIT" shall mean the rate at which a Participant's Opening Account Balance as provided for under Section 3.3 of the Plan, is periodically increased with interest. The Interest Credit allocated to a Participant's Opening Account Balance shall be determined based on one-quarter of the effective annual calendar-year interest rate equal to the average (rounded to the nearest one-hundredth of one percent) 5-year United States Treasury Bill rate in effect each month during the twelve (12) month period ending on October 31 or the last business day in October of the preceding calendar year. The procedures to determine such Interest Credit shall be determined by the Pension Trust Oversight Committee, and the Pension Trust Oversight Committee in its sole and exclusive discretion may modify the Interest Credit to be allocated under this Plan. Interest Credits shall cease accruing as of the Participant's retirement or termination date. (g) "PARTICIPANT" shall mean an Employee who is a participant in the Pension Plan and who is selected by the Corporation to become a Participant in the Plan, and whose participation in the Plan has not been terminated by the Corporation. (h) "PENSION PLAN" shall mean the KeyCorp Cash Balance Pension Plan as the same shall be in effect on the date of a Participant's retirement, death, Disability or other termination of employment. (i) "SUPPLEMENTAL RETIREMENT PLAN" shall mean the KeyCorp Supplemental Retirement Plan (formerly known as the Society Corporation Supplemental Retirement Plan), the KeyCorp Supplemental Retirement Benefit Plan, and the Supplemental Retirement Benefit Plan for Key Executives, with all amendments, modifications, and supplements which may be made thereto. All other capitalized and undefined terms used herein shall have the meanings given them in the Pension Plan, unless a different meaning is plainly required by the context. The masculine gender includes the feminine, and singular references include the plural, unless the context clearly requires otherwise. 3 4 ARTICLE III EXCESS PENSION BENEFIT 3.1 ELIGIBILITY. Subject to the provisions of Article VI hereof, a Participant shall be eligible for an Excess Pension Benefit hereunder if the Participant (i) retires on or after age 65 with five or more years of Credited Service, (ii) terminates employment with an Employer on or after age 55 with ten or more years of Credited Service, (iii) terminates his active employment with an Employer upon becoming Disabled and has met the age and service requirements of (i) or (ii) after disability benefits cease under the KeyCorp Long Term Disability Plan, or (iv) dies after completing the age and service requirements of (i) or (ii) and has a Beneficiary who is eligible for a benefit under the Pension Plan. 3.2 AMOUNT OF EXCESS PENSION BENEFIT. The Excess Pension Benefit payable to a Participant shall be in such amount as is required, when added to the Accrued Benefit payable in lump sum form to the Participant under the Pension Plan as of the Participant's retirement or termination date, to produce a lump sum cash aggregate benefit equal to the benefit which would have been payable under the Pension Plan formula in lump sum form to the Participant if the limitations of Section 415 of the Code and Section 401(a)(17) of the Code had not been in effect with regard to the Participant's Compensation, as defined herein. For purposes of this Section 3.2 hereof, the term "Pension Plan formula" means the method of calculating a Participant's pension benefit as reflected in Article IV of the Pension Plan, and shall not include any Predecessor Plan grandfathered benefit formulas. 3.3 OPENING ACCOUNT BALANCE. (1) Effective January 1, 1995, all "Employees" (other than "Grandfathered Employees") as defined in the Society Corporation Supplemental Retirement Plan, as amended and restated as the KeyCorp Supplemental Retirement Plan ("Supplemental Retirement Plan") whose Supplemental Retirement Plan benefit was valued as of January 1, 1995 in the form of a lump sum cash benefit and thereafter the value of which was transferred to this Plan pursuant to the provisions of Article IX of the Supplemental Retirement Plan, shall have the value of such lump sum cash benefit reflected in a bookkeeping opening account balance ("Opening Account Balance") established for such Participant. Such Opening Account Balance shall be credited with Interest Credit as of the last day of each calendar quarter, based on the value of the Participant's Opening Account Balance as of the first day of the applicable quarter, provided, however, that no Interest Credit shall be allocated to the Participant's Opening Account Balance on or after the Participant's benefit distribution date. A Participant's entitlement to such Opening Account Balance shall be governed by the eligibility provisions of Section 3.1 of this Plan, and the value of the opening account balance shall be added to and become a part of such Participant's Excess Pension Benefit, which shall be payable in accordance with the terms of this Plan. 4 5 (2) Effective January 1, 1995, all participants in the Ameritrust Corporation Excess Benefit Plan and all participants in the Ameritrust Corporation Deferred Compensation Plan (hereinafter collectively referred to as "Ameritrust Plan"), whose Ameritrust Plan benefit was valued as of January 1, 1995, in the form of a lump sum cash benefit and thereafter the value of which was transferred to this Plan shall have the value of such lump sum cash benefit reflected in a bookkeeping opening account balance ("Opening Account Balance") established for such Participant. Such Opening Account Balance shall be credited with Interest Credit as of the last day of each calendar quarter, based on the value of the Participant's Opening Account Balance as of the first day of the applicable quarter, provided, however, that no Interest Credit shall be allocated to the Participant's Opening Account Balance on or after the Participant's benefit distribution date. A Participant shall be fully vested in such Opening Account Balance, and the value of the Opening Account Balance shall be added to and become a part of such Participant's Excess Pension Benefit, which shall be payable in accordance with the terms of this Plan. If the Participant fails to meet eligibility requirements of Section 3.1 entitling Participant to an Excess Pension Benefit accruing under this Plan on and after January 1, 1995, the Participant shall nonetheless receive, at his or her termination date, the Participant's vested Opening Account Balance valued as of the Participant's termination date, which shall be paid pursuant to the benefit distribution (payment) options contained in Article IV of this Plan. ARTICLE IV ---------- PAYMENT OF EXCESS PENSION BENEFIT --------------------------------- 4.1 IMMEDIATE PAYMENT UPON TERMINATION OR RETIREMENT OF PARTICIPANT. Subject to the provisions of Section 4.2 hereof, a Participant meeting the age and service eligibility requirements of Section 3.1 shall receive an immediate distribution of his or her Excess Pension Benefit upon the Participant's retirement or termination of employment, in the form of a lump sum cash payment, unless the Participant elects in writing, a minimum of one year prior to his or her retirement or termination date to receive payment of his or her Excess Pension Benefit under a different form of payment. The forms of payment from which a Participant may elect shall be identical to those forms of payment specified in the Pension Plan. The Excess Pension Benefit payable to a Participant in a form other than a lump sum payment shall be the actuarial equivalent to such lump sum cash payment. In making the determination provided for in this Article IV, the Corporation shall rely upon calculations made by the independent actuaries for the Pension Plan, who shall apply the actuarial assumptions and interest rate then in use under the Pension Plan for converting the form of payment elected by the Participant. 5 6 4.2 DEFERRED BENEFIT PAYMENT. A Participant who retires or terminates his or her employment with an Employer after meeting the age and service requirements of Section 3.1, may elect to defer receipt of his or her Excess Pension Benefit until a date specified by the Participant, provided (1) the Participant notifies the Corporation in writing of his or her deferral election a minimum of one year prior to the Participant's retirement or termination of employment, (2) the Participant specifies the future date on which such Excess Pension Benefit is to be distributed, and (3) the Participant commences his or her Excess Pension Benefit no later than the first day of the month immediately following the Participant's sixty-fifth (65th) birthday. The election to defer, once made by the Participant, shall be irrevocable. Notwithstanding the foregoing, in the case of a Participant's "unforeseeable emergency", upon written application by the Participant to the Corporation, the Corporation, in its sole discretion, may accelerate the distribution of the Participant's deferred Excess Pension Benefit. For purposes of this Section 4.2, the term "unforeseeable emergency" shall mean an unanticipated emergency that is caused by an event beyond the control of the Participant that would result in severe financial hardship to the Participant if such premature distribution were not permitted. 4.3 PAYMENT UPON DEATH OF PARTICIPANT. (a) Upon the death of a Participant who has met the age and service requirements of Section 3.1, but who has not yet commenced distribution of his or her Excess Pension Benefit, there shall be paid to the Participant's Beneficiary the Excess Pension Benefit which the Participant would have been entitled to receive had he or she retired on his or her date of death and elected to receive his or her Excess Pension Benefit. Such Excess Pension Benefit shall be paid in the form of a lump sum cash payment. (b) In the event of a Participant's death after the Participant has commenced distribution of his or her Excess Pension Benefit, there shall be paid to the Participant's Beneficiary only those survivor benefits provided under the form of benefit payment elected by the Participant. 4.4 PAYMENT UPON PARTICIPANT'S ATTAINMENT OF AGE 70-1/2. A Participant shall be required to commence distribution of his or her vested Excess Pension Benefit in conjunction with the distribution of the Participant's Pension Plan benefit, no later than April 1 of the calendar year following the year in which the Participant attains age 70-1/2. ARTICLE V --------- ELECTION BETWEEN PLAN BENEFITS ------------------------------ 5.1 PARTICIPANT ELECTION BETWEEN PLAN BENEFITS. A Participant meeting the eligibility requirements for an Excess Pension Benefit, who is also a participant in, and meets the 6 7 eligibility requirements for a plan benefit under the KeyCorp Executive Supplemental Pension Plan, shall be required, prior to the Participant's retirement or termination date, to elect a benefit from either this Plan, or from the KeyCorp Executive Supplemental Pension Plan. A Participant's failure to elect between Plan benefits prior to the Participant's retirement or termination date shall result in an automatic default election by the Participant of an Excess Pension Benefit under the Plan, to be paid to the Participant as of his or her retirement or termination date in the form of a lump sum cash payment. 5.2 BENEFICIARY ELECTION BETWEEN PLAN BENEFITS. If a Participant dies after having met the eligibility requirements for an Excess Pension Benefit, and the Participant at the time of his or her death also is a Participant in the KeyCorp Executive Supplemental Pension Plan and eligible for a benefit under the KeyCorp Executive Supplemental Pension Plan, the Participant's Beneficiary shall be required to elect a death benefit from either this Plan or from the KeyCorp Executive Supplemental Pension Plan, but in no event may the Participant's Beneficiary elect a benefit under both this Plan and the KeyCorp Executive Supplemental Pension Plan. The terms of each respective Plan shall control the form of payment which may be elected by the Participant's Beneficiary. A beneficiary's failure to elect between Plan benefits within 120 days from the date of the Participant's death shall result in an automatic default election by the Beneficiary of an Excess Pension Benefit under this Plan, to be paid to the Beneficiary in a cash lump sum payment. ARTICLE VI ---------- ADMINISTRATION -------------- 6.1 ADMINISTRATION. The Corporation, which shall be the "Administrator" of the Plan for purposes of ERISA and the "Plan Administrator" for purposes of the Code, shall be responsible for the general administration of the Plan, for carrying out the provisions hereof, and for making payments hereunder. The Corporation shall have the sole and absolute discretionary authority and power to carry out the provisions of the Plan, including, but not limited to, the authority and power (a) to determine all questions relating to the eligibility for and the amount of any benefit to be paid under the Plan, (b) to determine all questions pertaining to claims for benefits and procedures for claim review, (c) to resolve all other questions arising under the Plan, including any questions of construction, and (d) to take such further action as the Corporation shall deem advisable in the administration of the Plan. All findings, decisions and determinations of any kind made by the Corporation shall not be disturbed unless the Corporation has acted in an arbitrary and capricious manner. Subject to the requirements of law, the Corporation shall be the sole judge of the standard of proof required in any claim for benefits and in any determination of eligibility for a benefit. All decisions of the Corporation shall be final and binding on all parties. The Corporation may employ such attorneys, investment counsel, agents, and accountants as it may deem necessary 7 8 or advisable to assist it in carrying out its duties hereunder. The actions taken and the decisions made by the Corporation hereunder shall be final and binding upon all interested parties subject, however, to the provisions of Section 6.2. The Plan Year, for purposes of Plan administration, shall be the calendar year. 6.2 CLAIMS REVIEW PROCEDURE. Whenever the Corporation decides for whatever reason to deny, whether in whole or in part, a claim for benefits under the Plan filed by any person (herein referred to as the "Claimant"), the Corporation shall transmit a written notice of its decision to the Claimant, which notice shall be written in a manner calculated to be understood by the Claimant and shall contain a statement of the specific reasons for the denial of the claim and a statement advising the Claimant that, within 60 days of the date on which the Claimant receives such notice, Claimant may obtain review of the decision of the Corporation in accordance with the procedures hereinafter set forth. Within such 60-day period, the Claimant or Claimant's authorized representative may request that the claim denial be reviewed by filing with the Corporation a written request therefore, which request shall contain the following information: (i) the date on which the request was filed with the Corporation; provided, however, that the date on which the request for review was in fact filed with the Corporation shall control in the event that the date of the actual filing is later than the date stated by the Claimant pursuant to this paragraph (i); (ii) the specific portions of the denial of the Claimant's claim which the Claimant requests the Corporation to review; (iii) a statement by the Claimant setting forth the basis upon which Claimant believes the Corporation should reverse its previous denial of the Claimant's claim and accept the Claimant's claim as made; (iv) any written material which the Claimant desires the Corporation to examine in its consideration of the Claimant's position as stated pursuant to paragraph (iii) above. In accordance with this Section, if the Claimant requests a review of the Corporation's decision, such review shall be made by the Corporation, which shall, within sixty (60) days after receipt of the request form, review and render a written decision on the claim containing the specific reasons for the decision including reference to Plan provisions upon which the decision is based. All findings, decisions, and determinations of any kind made by the Corporation shall not be modified unless the Corporation has acted in an arbitrary and capricious manner. Subject to the requirements of law, the Corporation shall be the sole judge of the standard of proof required in any claim for benefits, and any determination of eligibility for a benefit. All decisions of the Corporation shall be binding on the Claimant and upon all other Persons. If the Participant or Beneficiary shall not file written notice with the 8 9 Corporation at the times set forth above, such individual shall have waived all benefits under the Plan other than as already provided, if any, under the Plan. ARTICLE VII ----------- FUNDING ------- All benefits paid under the Plan shall be payable solely out of the general assets of the Corporation. The Corporation shall have no obligation to establish a trust or fund to fund its obligation to pay benefits under the Plan or to insure any benefits under the Plan. Notwithstanding any provision of this Plan, the Corporation may, in its sole discretion, combine the payment due and owing under this Plan with one or more other payments owing to a Participant or the Participant's Beneficiary under any other plan, contract, or otherwise (other than any payment due under the Pension Plan), in one check, direct deposit, wire transfer, or other means of payment. ARTICLE VIII ------------ AMENDMENT AND TERMINATION ------------------------- The Corporation reserves the right to amend or terminate the Plan at any time by action of its Board of Directors, or any duly authorized Committee of such Board of Directors; provided, however, that no such action shall adversely affect any Participant who has met the age and service requirements of Section 3.1, or any Participant or Participant's Beneficiary who is receiving, or who is eligible to receive an Excess Pension Benefit hereunder, unless an equivalent benefit is provided under the Pension Plan or another plan maintained by an Employer. ARTICLE IX ---------- MISCELLANEOUS ------------- 9.1 INTEREST OF PARTICIPANT. The obligation of an Employer under the Plan to provide a Participant or the Participant's Beneficiary with an Excess Pension Benefit merely constitutes the unsecured promise of his Employer to make payments as provided herein, and no person shall have any interest in, or a lien or prior claim on, any property of an Employer. 9.2 BENEFITS. Nothing in the Plan shall be construed to confer any right or claim upon any person, firm, or corporation other than Participants and Participants' Beneficiaries who become entitled to a benefit under the Plan. 9 10 9.3 RESTRICTIONS ON ALIENATION. Except to the extent permitted by law, no benefit under the Plan at any time shall be subject in any manner to anticipation, alienation, assignment (either at law or in equity), encumbrance, garnishment, levy, execution, or other legal or equitable process. No person shall have power in any manner to anticipate, transfer, assign, (either at law or in equity), alienate or subject to attachment, garnishment, levy, execution, or other legal or equitable process, or in any way encumber his benefits under the Plan, or any part thereof, and any attempt to do so shall be void. 9.4 ABSENCE OF LIABILITY. No member of the Board of Directors of the Corporation or a subsidiary, or any officer of the Corporation or a subsidiary shall be liable for any act or action hereunder, whether of commission or omission, taken by any other member, or by any officer, agent, or Employee, except in circumstances involving his or her bad faith or willful misconduct. 9.5 EXPENSES. The expenses of administration of the Plan shall be paid by the Corporation. 9.6 PRECEDENT. Except as otherwise specifically provided, no action taken in accordance with the Plan by the Corporation shall be construed or relied upon as a precedent for similar action under similar circumstances. 9.7 DUTY TO FURNISH INFORMATION. The Corporation shall furnish to each Participant or Participant's Beneficiary any documents, reports, returns statements, or other information that it reasonably deems necessary to perform its duties imposed hereunder or otherwise imposed by law. 9.8 WITHHOLDING. The Corporation shall withhold any tax required by any present or future law to be withheld from any payment hereunder to any Participant or Participant's Beneficiary. 9.9 VALIDITY OF PLAN. The validity of the Plan shall be determined and the Plan shall be construed and interpreted in accordance with the provisions of the Act, the Code, and to the extent applicable, the laws of the State of Ohio. The invalidity or illegality of any provision of the Plan shall not affect the validity or legality of any other part thereof. 9.10 PARTIES BOUND. The Plan shall be binding upon the Employer, all Participants, or Participants' Beneficiaries, and the executors, administrators, successors, and assigns of each of them. 10 11 9.11 HEADINGS. All headings used in the Plan are for convenience of reference only and are not part of the substance of the Plan. Executed at Cleveland, Ohio, to be effective as of the first day of January, 1995. KEYCORP By: -------------------------------- Title: ----------------------------- 11 EX-10.31 10 EXHIBIT 10.31 1 EXHIBIT 10.31 KEYCORP EXCESS 401(k) PLAN The Society Corporation Supplemental Stock Purchase and Savings Plan ("Plan"), originally established effective April 15, 1987, and thereafter amended and restated in its entirety effective January 1, 1989, and December 30, 1992, is hereby amended and restated in its entirety as the KeyCorp Excess 401(k) Plan ("Plan"). The Plan as amended and restated, is intended to provide Participants with a benefit equal to the Employer Contributions that cannot be paid under the KeyCorp 401(k) Savings Plan due to the contribution and compensation limits imposed by Sections 402(g) and 401(a)(17) of the Internal Revenue Code of 1986, as amended from time to time. ARTICLE I --------- DEFINITIONS ----------- 1.1 MEANING OF DEFINITIONS. For the purposes hereof, the following words and phrases shall have the meanings hereinafter set forth, unless a different meaning is plainly required by the context: (a) "401(k) PLAN" shall mean the KeyCorp 401 (k) Savings Plan, with all amendments, modifications, supplements thereto and hereafter made. (b) "BENEFICIARY" shall mean the person or entity (including a trust or the estate of the Participant) designated pursuant to and in accordance with the 401(k) Plan. (c) "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time. Reference to a section of the Code includes such section and any comparable section or sections of any future legislation that amends, supplements, or supersedes such section. (d) "CORPORATE CONTRIBUTIONS" shall mean (i) those Matching Employer Contributions and Profit Sharing Contributions an Employee would have received for the applicable Plan Year as a Participant in the 401(k) Plan, were it not for the contribution limitations imposed by Section 402(g) of the Code, or the compensation limits imposed by Section 401(a)(17) of the Code, and (ii) those Matching Incentive Contributions and Incentive Profit Sharing Contributions that the Corporation has agreed to contribute to the Plan based on a percentage of a Participant's incentive compensation deferred under an Incentive Plan. All Corporate Contributions shall be subject to the vesting requirements of the 401(k) Plan. (e) "CORPORATION" shall mean KeyCorp, an Ohio Corporation, its corporate successors, and any corporation or corporations into or with which it may be merged or consolidated. 2 (f) "EMPLOYEE" shall mean any person who is employed by the Corporation and who meets the definitional requirements of "Employee" as contained in the 401(k) Plan. (g) "EMPLOYER" shall mean the Corporation and any of its subsidiaries unless specifically excluded as an Employer for Plan purposes by written action of the Corporation's Executive Vice President, Human Resources and approved by the Corporation. An Employer's participation shall be subject to any conditions or requirements made by the Corporation, and each Employer shall be deemed to appoint the Plan Administrator as its exclusive agent under the Plan as long as it continues as a subsidiary. (h) "INCENTIVE PLAN" shall mean the KeyCorp Short Term Incentive Compensation Plan, the KeyCorp Long Term Cash Incentive Compensation Plan, and the KeyCorp Management Incentive Compensation Plan, as such Plans may be from time to time amended, and including any replacement plan for such Plans. (i) "MATCHING EMPLOYER CONTRIBUTIONS" shall mean the amount which an Employer would be obligated to contribute to the 401(k) Plan but for the dollar limitation imposed by Section 402(g) of the Code, and the compensation limits imposed by Section 401(a)(17) of the Code, subject to all vesting requirements of the 40l(k) Plan. (j) "MATCHING INCENTIVE CONTRIBUTIONS" shall mean those contributions that the Corporation has agreed to contribute to the Plan, which shall match up to the first six percent of incentive compensation, awarded to the Participant under an Incentive Plan during the applicable Plan Year, for which the Participant elected in writing to defer its receipt in accordance with the provisions of the Incentive Plan. (k) "PARTICIPANT" shall mean an Employee who meets the eligibility requirements set forth in Section 2.1 and becomes a Plan Participant pursuant to Section 2.2. (l) "PLAN" shall mean the KeyCorp Excess 401(k) Plan, effective January 1, 1995, with all amendments, modifications, and supplements hereafter made. (m) "PLAN ACCOUNT" shall mean a ledger bookkeeping account established by the Corporation for each Plan Participant, which shall reflect all Corporate Contributions credited by the Corporation to each Participant, and all dividends and other earnings, if any, which would be attributable thereto, if such credited Plan Account balance had been invested in the Corporation Stock Fund of the 401(k) Plan. Neither the maintenance of, nor the crediting of amounts to such Plan Account shall be treated as (i) the allocation of any Corporation assets to, or a segregation of any Corporation assets in any such Plan Account, or (ii) as otherwise creating a right in any person or Participant to receive specific assets of the Corporation. Benefits under the Plan shall be paid from the general assets of the Corporation, at such time and in such manner as determined by the Corporation in its sole and absolute discretion. 3 (n) "PROFIT SHARING CONTRIBUTIONS" shall mean those discretionary contributions which an Employer may contribute to the 401(k) Plan pursuant to Article VI of the 401(k) Plan. (o) "INCENTIVE PROFIT SHARING CONTRIBUTIONS" shall mean those discretionary contributions which an Employer may contribute to the Plan which shall be based on a percent of the Participant's incentive compensation deferred under an Incentive Plan during the applicable Plan Year. (p) "RETIREMENT" shall mean the termination of employment of a Participant under circumstances making him eligible to receive a benefit under the KeyCorp Cash Balance Pension Plan as the same shall be in effect on the date of a Participant's Retirement. (q) "UNFORSEEABLE EMERGENCY" shall mean an unanticipated emergency that is caused by an event beyond the control of the Participant that would result in severe financial hardship to the individual if such withdrawal were not permitted. 1.2 PRONOUNS: The masculine pronoun wherever used herein includes the feminine in any case so requiring, and the singular may include the plural. 1.3 ADDITIONAL REFERENCE: All other words and phrases used herein shall have the meaning given them in the 401(k) Plan, unless a different meaning is clearly required by the context. ARTICLE II EMPLOYEE PARTICIPATION 2.1 EMPLOYEE ELIGIBILITY. An employee of the Corporation shall be eligible to become a Plan Participant provided that such Employee is a Participant in the 401(k) Plan (as defined by that Plan), and (i)(a) the Employee's elective deferral of Compensation to the 401(k) Plan equals or exceeds the maximum contribution permitted by Sections 402(g) or 401(a)(17) of the Code during the Plan Year, and (b) the Corporation selects such Employee to participate in the Plan; or (ii)(a) such Employee is a participant in an Incentive Plan, (b) such Employee receives an incentive award under an Incentive Plan and elects to defer receipt of all or a portion of the incentive award in accordance with the provisions of the Incentive Plan, and (c) the Corporation selects such Employee to participate in the Plan. 2.2 NOTIFICATION OF NEW PARTICIPANTS. The Corporation shall notify an Employee of his eligibility to participate in the Plan and shall automatically cause such Employee to become a Plan Participant, unless otherwise specifically directed by the Employee. 2.3 EFFECT AND DURATION. Upon becoming a Participant, an Employee shall be entitled to the benefits and shall be bound by all terms and conditions of the Plan. Each Employee who becomes a Participant shall remain a Participant until his or her Termination of Participation, 4 as provided in Article IV hereof, provided such Employee continues to meet the eligibility requirements of Section 2.1 of the Plan, and the Corporation elects to continue the Employee's continued participation in the Plan. ARTICLE III CORPORATE CONTRIBUTIONS 3.1 PLAN ACCOUNT. The Corporation shall establish a separate Plan Account for each Participant to reflect the balance of Corporate Contributions credited by the Corporation to each Participant. Such Plan Account shall also reflect the balance of dividends and other earnings, if any, that would be attributable to each Participant's balance of credited Corporate Contributions had such Corporate Contributions been invested in the 401(k) Plan's Corporation Stock Fund. 3.2 ALLOCATION OF MATCHING EMPLOYER CONTRIBUTIONS AND PROFIT SHARING CONTRIBUTIONS. Matching Employer Contributions shall be credited to a Participant's Plan Account as of the last day of each month immediately following the pay period in which the Participant's elective deferral of Compensation to the 401(k) Plan equals the maximum contribution amount permitted by Sections 402(g) or 401(a)(17) of the Code for Plan Year. Profit Sharing Contributions, if any, shall be allocated to Participants' Plan Accounts, prior to March 31, immediately following the applicable Plan Year. 3.3 ALLOCATION OF MATCHING INCENTIVE CONTRIBUTIONS AND INCENTIVE PROFIT SHARING CONTRIBUTIONS. Matching Incentive Contributions shall be credited to a Participant's Plan Account as of the last day of the month immediately following the date on which an award of incentive compensation is made to the Participant under an Incentive Plan, for which the Participant has elected in writing to defer all or a portion of such award in accordance with the provisions of the Incentive Plan. Incentive Profit Sharing Contributions, if any, shall be allocated to Participant's Plan Accounts, prior to March 31 immediately following the applicable Plan Year. 3.4 CORPORATE ASSETS. All Corporate Contributions, dividends, and any other earnings credited to a Participant's Plan Account remain the assets and property of the Corporation, subject to distribution and withdrawals by the Participant only in accordance with Article IV and Article V of the Plan. All payments hereunder shall be in the form of cash and shall be made from the general assets of the Corporation, and Participants and Beneficiaries shall have the status of general unsecured creditors of the Corporation. The obligations of the Corporation to make distribution in accordance with Article IV or Article V of the Plan constitute a mere promise to make payments in the future. Nothing contained in the Plan shall create, or be construed as creating a trust of any kind or any other fiduciary relationship between a Participant, the Corporation, or any other person. It is the intention of the 5 Corporation and the Participant that the Plan be unfunded for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended. 3.5 NO PRESENT INTEREST. Subject to any federal statue to the contrary, no right or benefit under the Plan and no right or interest in each Participant's Plan Account shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge any right or benefit under the Plan, or Participant's Plan Account shall be void. No right, interest, or benefit under the Plan or Participant's Plan Account shall be liable for or subject to the debts, contracts, liabilities, or torts of the Participant or Beneficiary. If the Participant or Beneficiary becomes bankrupt or attempts to alienate, sell, assign, pledge, encumber, or charge any right under the Plan or Participant's Plan Account, then such right or benefit under the Plan and Participant's Plan Account shall, in the discretion of the Corporation, cease and terminate. 3.6 DETERMINATION OF AMOUNT. The Corporation shall verify the amount of Corporate Contributions, dividends, and earnings, if any, to be credited to each Participant's Plan Account in accordance with the provision of the Plan. This determination shall be final and conclusive upon all Participants and Beneficiaries hereunder. As soon as reasonably practicable after the close of the Plan Year, the Corporation shall send to each Participant an itemized accounting statement which shall reflect the Participant's Plan Account balance. 3.7 EFFECT OF PLAN TERMINATION. Notwithstanding anything to the contrary contained in the Plan, the termination of the Plan or the termination of the 401(k) Plan shall terminate the liability of the Corporation to make further Corporate Contributions to the Plan. ARTICLE IV TERMINATION OF PARTICIPATION AND DISTRIBUTION 4.1 TERMINATION OF PARTICIPATION. Each Participant shall cease to be a Participant hereunder and shall be entitled to distribution under the Plan, on the first to occur of the following dates: (a) On the date of such Participant's Retirement from the employ of his or her Employer; (b) On the date such Participant's employment with his or her Employer is terminated because of the death or permanent disability of such Participant; (c) On the date such Participant's employment with his or her Employer is terminated under any other circumstance; provided, however, that if any such date shall be the last day of any calendar month, the Participant shall for all purposes hereof cease to be a Participant upon the next succeeding day. 6 Written notice of a Participant's termination of participation shall be given promptly by the Participant or his Beneficiary to the Corporation. 4.2 DISTRIBUTION. As of a Participant's Termination of Participation, after notice has been provided to the Corporation, the funds attributable to the Participant's Plan Account, if vested, shall be distributed to him or to his Beneficiary in a lump sum payment. A Participant retiring from the employ of his or her Employer may request, subject to Corporation approval, that distribution be made in a series of quarterly installments over a fixed period of time, which shall not exceed ten years. Distribution under either method shall be made or commenced as soon as reasonably practicable, but in no event later than 60 days after the close of the Plan Year in which the Participant's termination of Participation has occurred. If a Participant or former Participant dies after the distribution of his or her interest under the Plan has commenced, the remaining portion of his or her entire interest under the Plan, if any, shall be distributed to the Participant's Beneficiary under the method of distribution being used as of the Participant's or former Participant's date of death. If a Participant or former Participant dies before the distribution of his or her entire interest has commenced, the Participant's or former Participant's entire interest under the Plan shall be distributed to his or her Beneficiary in a lump-sum payment. 4.3 FORM OF DISTRIBUTION. The distribution of a Participant's or former Participant's interest under the Plan shall be made in the form of cash. 4.4 FACILITY OF PAYMENT. If it is found that any individual to whom an amount is payable hereunder is incapable of attending to his or her financial affairs because of any mental or physical condition, including the infirmities of advanced age, such amount (unless prior claim therefor shall have been made by a duly qualified guardian or other legal representative) may, in the discretion of the Corporation, be paid to another person for the use or benefit of the individual found incapable of attending to his financial affairs or in satisfaction of legal obligations incurred by or on behalf of such individual. Any such payment shall be charged to the Participant's Plan Account from which any such payment would otherwise have been paid to the individual found incapable of attending to his financial affairs, and shall be a complete discharge of any liability therefor under the Plan. 7 ARTICLE V --------- WITHDRAWALS ----------- 5.1 WITHDRAWAL OF CORPORATE CONTRIBUTIONS. Prior to a Participant's Termination of Participation, a Participant may not withdraw from the Plan any amounts attributable to Corporate Contributions credited to his or her Plan Account or any dividends or earnings, if any, attributable thereto, unless the Corporation, in its sole and absolute discretion, determines the existence of an Unforeseeable Emergency of the Participant. Notwithstanding the foregoing, no Participant may receive any such withdrawal at any time during which such Participant is an executive officer of the Corporation for purposes of Section 16(a) of the Securities Exchange Act of 1934. To request a withdrawal pursuant to this Section 5.1, hereof, the Participant must file written notice with the Corporation not less than 15 days prior to the last day of any calendar month on which the requested withdrawal is to be valued, and shall provide the Corporation with satisfactory evidence which substantiates the Participant's Unforeseeable Emergency. The amount of such withdrawal may not exceed the amount determined by the Corporation as necessary to meet the above-described Unforeseeable Emergency. ARTICLE VI ---------- ADMINISTRATION -------------- ADMINISTRATION AND CLAIMS PROCEDURE ----------------------------------- 6.1 ADMINISTRATION. The Corporation, which shall be the "Administrator" of the Plan for purposes of ERISA and the "Plan Administrator" for purposes of the Code, shall be responsible for the general administration of the Plan, for carrying out the provisions hereof, and for making payments hereunder. The Corporation shall have the sole and absolute discretionary authority and power to carry out the provisions of the Plan, including, but not limited to, the authority and power (a) to determine all questions relating to the eligibility for and the amount of any benefit to be paid under the Plan, (b) to determine all questions pertaining to claims for benefits and procedures for claim review, (c) to resolve all other questions arising under the Plan, including any questions of construction and interpretation, and (d) to take such further action as the Corporation shall deem necessary or advisable in the administration of the Plan. All findings, decisions, and determinations of any kind made by the Plan Administrator shall not be disturbed unless the Plan Administrator has acted in an arbitrary and capricious manner. Subject to the requirements of law, the Plan Administrator shall be the sole judge of the standard of proof required in any claim for benefits and in any determination of eligibility for a benefit. All decisions of the Plan Administrator shall 8 be final and binding on all parties. The Corporation may employ such attorneys, investment counsel, agents, and accountants as it may deem necessary or advisable to assist it in carrying out its duties hereunder. The actions taken and the decisions made by the Corporation hereunder shall be final and binding upon all interested parties subject, however, to the provisions of Section 6.2. The Plan Year, for purposes of Plan administration, shall be the calendar year. 6.2 CLAIMS REVIEW PROCEDURE. Whenever the Plan Administrator decides for whatever reason to deny, whether in whole or in part, a claim for benefits under this Plan filed by any person (herein referred to as the "Claimant"), the Plan Administrator shall transmit a written notice of its decision to the Claimant, which notice shall be written in a manner calculated to be understood by the Claimant and shall contain a statement of the specific reasons for the denial of the claim and a statement advising the Claimant that, within 60 days of the date on which he receives such notice, he may obtain review of the decision of the Plan Administrator in accordance with the procedures hereinafter set forth. Within such 60-day period, the Claimant or his authorized representative may request that the claim denial be reviewed by filing with the Plan Administrator a written request therefore, which request shall contain the following information: (i) the date on which the request was filed with the Plan Administrator; provided, however, that the date on which the request for review was in fact filed with the Plan Administrator shall control in the event that the date of the actual filing is later than the date stated by the Claimant pursuant to this paragraph (i); (ii) the specific portions of the denial of his claim which the Claimant requests the Plan Administrator to review; (iii) a statement by the Claimant setting forth the basis upon which he believes the Plan Administrator should reverse its previous denial of his claim and accept his claim as made; and (iv) any written material which the Claimant desires the Plan Administrator to examine in its consideration of his position as stated pursuant to paragraph (ii) above. In accordance with this Section, if the claimant requests a review of the Plan Administrator's decision, such review shall be made by the Plan Administrator, who shall, within sixty (60) days after receipt of the request form, review and render a written decision on the claim containing the specific reasons for the decision including reference to Plan provisions upon which the decision is based. All findings, decisions, and determinations of any kind made by the Plan Administrator shall not be modified unless the Plan Administrator has acted in an arbitrary and capricious manner. Subject to the requirements of a law, the Plan Administrator shall be the sole judge of the standard of proof required in any claim for benefits, and any determination of eligibility for a benefit. All decisions of the Plan 9 Administrator shall be binding on the claimant and upon all other Persons. If the Participant, or Beneficiary shall not file written notice with the Plan Administrator at the times set forth above, such individual shall have waived all benefits under the Plan other than as already provided, if any, under the Plan. ARTICLE VII ----------- AMENDMENT AND TERMINATION ------------------------- 7.1 RESERVATION OF RIGHTS. The Corporation reserves the right to terminate the Plan at any time by action of the Board of Directors of the Corporation, or any duly authorized committee thereof, and to modify or amend the Plan, in whole or in part, at any time and for any reason including, but not limited to, changes in the Federal tax laws. 7.2 EFFECT OF PLAN TERMINATION. If the Corporation terminates the Plan, Participants shall receive distribution of their interests under the Plan as of the Plan's termination date, in a lump-sum payment. Distribution of the Participants' interest under the Plan shall be made as soon as reasonably practicable, but in no event later than sixty (60) days after the close of the Plan Year. ARTICLE VIII ------------ BENEFICIARIES ------------- The Beneficiary designated under the 401(k) Plan shall receive distribution of the Participant's unpaid vested interest under the Plan upon the Participant's death. ARTICLE IX ---------- MISCELLANEOUS PROVISIONS ------------------------ 9.1 NO COMMITMENT AS TO EMPLOYMENT. Nothing herein contained shall be construed as a commitment or agreement upon the part of any Employee hereunder to continue his or her employment with an Employer, and nothing herein contained shall be construed as a commitment on the part of any Employer to continue the employment or rate of compensation of any Employee hereunder for any period. All Participants shall remain subject to discharge to the same extent as if the Plan had never been put into effect. 9.2 BENEFITS. Nothing in the Plan shall be construed to confer any right or claim upon any person, firm, or corporation other than the Participants, former Participants, and Beneficiaries. 9.3 ABSENCE OF LIABILITY. No member of the Board of Directors of the Corporation or a subsidiary or committee authorized by the Board of Directors, or any officer of the 10 Corporation or a subsidiary or officer of a subsidiary shall be liable for any act or action hereunder, whether of commission or omission, taken by any other member, or by any officer, agent, or Employee, except in circumstances involving bad faith or willful misconduct, for anything done or omitted to be done. 9.4 EXPENSES. The expenses of administration of the Plan shall be paid by the Corporation. 9.5 PRECEDENT. Except as otherwise specifically provided, no action taken in accordance with the Plan by the Corporation shall be construed or relied upon as a precedent for similar action under similar circumstances. 9.6 WITHHOLDING. The Corporation shall withhold any tax which the Corporation in discretion deems necessary to be withheld from any payment to any Participant, former Participant, or Beneficiary hereunder, by reason of any present or future law. 9.7 VALIDITY OF PLAN. The validity of the Plan shall be determined and the Plan shall be construed and interpreted in accordance with the provisions of the Act, the Code, and, to the extent applicable, the laws of the State of Ohio. The invalidity or illegality of any provision of the Plan shall not affect the validity or legality of any other part thereof. 9.8 PARTIES BOUND. The Plan shall be binding upon the Employers, Participants, former Participants, and Beneficiaries hereunder, and, as the case may be, the heirs, executors, administrators, successors, and assigns of each of them. 9.9 HEADINGS. All headings used in the Plan are for convenience of reference only and are not part of the substance of the Plan. 9.10 RESTRICTIONS ON ALIENATION. Except to the extent permitted by law, no benefit under the Plan shall be subject to anticipation, alienation, assignment (either at law or in equity), encumbrance, garnishment, levy, execution, or other legal or equitable process. No person shall have power in any manner to anticipate, transfer, assign, (either at law or in equity), alienate or subject to attachment, garnishment, levy, execution, or other legal or equitable process, or in any way encumber his benefits under the Plan, or any part thereof, and any attempt to do so shall be void. Notwithstanding the foregoing, the interest of any Participant, former Participant, or Beneficiary hereunder shall be subject to all the terms and conditions of a Qualified Domestic Relations Order as that term is defined under the Code. 11 9.11. DUTY TO FURNISH INFORMATION. The Corporation shall furnish to each Participant, former Participant, or Beneficiary any documents, reports, returns, statements, or other information that it reasonably deems necessary to perform its duties imposed hereunder or otherwise imposed by law. Executed at Cleveland, Ohio, to be effective as of the 1st day of January, 1995. KEYCORP By: ----------------------------------- Michael L. Evans Senior Vice President Human Resources EX-11 11 EXHIBIT 11 1 EXHIBIT 11 KEYCORP COMPUTATION OF NET INCOME PER COMMON SHARE (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, --------------------------------------- 1995 1994 1993 ----------- ----------- ----------- NET INCOME APPLICABLE TO COMMON SHARES Net income......................................... $ 824,982 $ 853,490 $ 709,926 Less: Preferred dividend requirements.............. 16,000 16,000 18,097 ----------- ----------- ----------- Net income applicable to Common Shares............. $ 808,982 $ 837,490 $ 691,829 =========== =========== =========== NET INCOME PER COMMON SHARE Weighted average Common Shares outstanding......... 234,787,423 243,067,487 239,775,188 =========== =========== =========== Net income applicable to Common Shares............. $ 808,982 $ 837,490 $ 691,829 =========== =========== =========== Net income per Common Share........................ $ 3.45 $ 3.45 $ 2.89 =========== =========== =========== NET INCOME PER COMMON SHARE -- PRIMARY Weighted average Common Shares outstanding......... 234,787,423 243,067,487 239,775,188 Dilutive common stock options (1).................. 2,246,571 2,398,245 1,803,680 ----------- ----------- ----------- Weighted average Common Shares and Common Share equivalents outstanding.......................... 237,033,994 245,465,732 241,578,868 =========== =========== =========== Net income applicable to Common Shares............. $ 808,982 $ 837,490 $ 691,829 =========== =========== =========== Net income per Common Share........................ $ 3.41 $ 3.41 $ 2.86 =========== =========== =========== NET INCOME PER COMMON SHARE -- FULLY DILUTED Weighted average Common Shares outstanding......... 234,787,423 243,067,487 239,775,188 Dilutive common stock options (1).................. 3,519,099 2,400,089 1,944,892 ----------- ----------- ----------- Weighted average Common Shares and Common Share equivalents outstanding.......................... 238,306,522 245,467,576 241,720,080 =========== =========== =========== Net income applicable to Common Shares............. $ 808,982 $ 837,490 $ 691,829 =========== =========== =========== Net income per Common Share........................ $ 3.39 $ 3.41 $ 2.86 =========== =========== ===========
[FN] - - - --------------- (1) Dilutive common stock options are based on the treasury stock method using average market price in computing net income per Common Share -- primary, and the higher of period-end market price or average market price in computing net income per Common Share -- fully diluted. 15 EX-12 12 EXHIBIT 12 1 EXHIBIT 12 KEYCORP COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (UNAUDITED)
YEAR ENDED DECEMBER 31, -------------------------------------------------------------- 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- COMPUTATION OF EARNINGS Net income.................................. $ 824,982 $ 853,490 $ 709,926 $ 592,098 $ 313,696 Add: Provision for income taxes............. 368,465 429,981 373,972 279,632 136,684 Less: Cumulative effect of accounting change................................... -- -- -- 6,613 -- Extraordinary item....................... 35,790 -- -- -- -- ---------- ---------- ---------- ---------- ---------- Income before income taxes and extraordinary item..................... 1,157,657 1,283,471 1,083,898 865,117 450,380 Fixed charges, excluding interest on deposits................................. 818,081 513,225 344,585 324,365 422,189 ---------- ---------- ---------- ---------- ---------- Total earnings for computation, excluding interest on deposits................... 1,975,738 1,796,696 1,428,483 1,189,482 872,569 Interest on deposits........................ 1,704,775 1,324,576 1,233,331 1,468,974 2,135,651 ---------- ---------- ---------- ---------- ---------- Total earnings for computation, including interest on deposits................... $3,680,513 $3,121,272 $2,661,814 $2,658,456 $3,008,220 ========== ========== ========== ========== ========== COMPUTATION OF FIXED CHARGES Net rental expense.......................... $ 116,851 $ 124,168 $ 130,361 $ 130,973 $ 118,855 ========== ========== ========== ========== ========== Portion of net rental expense deemed representative of interest............... $ 38,561 $ 40,975 $ 43,019 $ 43,221 $ 38,450 Interest on short-term borrowed funds....... 518,157 334,456 174,664 174,059 288,220 Interest on long-term debt.................. 261,363 137,794 126,902 107,085 95,519 ---------- ---------- ---------- ---------- ---------- Total fixed charges, excluding interest on deposits............................ 818,081 513,225 344,585 324,365 422,189 Interest on deposits........................ 1,704,775 1,324,576 1,233,331 1,468,974 2,135,651 ---------- ---------- ---------- ---------- ---------- Total fixed charges, including interest on deposits............................ $2,522,856 $1,837,801 $1,577,916 $1,793,339 $2,557,840 ========== ========== ========== ========== ========== COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS Preferred stock dividend requirement on a pre-tax basis............................ $ 23,470 $ 24,061 $ 27,630 $ 35,505 $ 23,292 Total fixed charges, excluding interest on deposits............................ 818,081 513,225 344,585 324,365 422,189 ---------- ---------- ---------- ---------- ---------- Combined fixed charges and preferred stock dividends, excluding interest on deposits............................... 841,551 537,286 372,215 359,870 445,481 Interest on deposits........................ 1,704,775 1,324,576 1,233,331 1,468,974 2,135,651 ---------- ---------- ---------- ---------- ---------- Combined fixed charges and preferred stock dividends, including interest on deposits............................... $2,546,326 $1,861,862 $1,605,546 $1,828,844 $2,581,132 ========== ========== ========== ========== ========== RATIO OF EARNINGS TO FIXED CHARGES Excluding deposit interest............... 2.42X 3.50x 4.15x 3.67x 2.07x Including deposit interest............... 1.46X 1.70x 1.69x 1.48x 1.18x RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS Excluding deposit interest............... 2.35X 3.34x 3.84x 3.31x 1.96x Including deposit interest............... 1.45X 1.68x 1.66x 1.45x 1.17x
16 EX-13 13 EXHIBIT 13 1 EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS [LOGO] FINANCIAL REVIEW Glossary of Terms. . . . . . . . . . . . . . . . . . . . . . 28 Introduction. . . . . . . . . . . . . . . . . . . . . . . . .29 Performance Overview. . . . . . . . . . . . . . . . . . . . .29 Line of Business Results. . . . . . . . . . . . . . . . . . .30 Results of Operations. . . . . . . . . . . . . . . . . . . . 35 Net Interest Income. . . . . . . . . . . . . . . . . . . .35 Asset and Liability Management. . . . . . . . . . . . . . 39 Noninterest Income. . . . . . . . . . . . . . . . . . . . 44 Noninterest Expense. . . . . . . . . . . . . . . . . . . .46 Income Taxes. . . . . . . . . . . . . . . . . . . . . . . 47 Financial Condition. . . . . . . . . . . . . . . . . . . . . 47 Loans. . . . . . . . . . . . . . . . . . . . . . . . . . .47 Securities. . . . . . . . . . . . . . . . . . . . . . . . 49 Asset Quality. . . . . . . . . . . . . . . . . . . . . . .51 Deposits and Other Sources of Funds. . . . . . . . . . . .54 Liquidity. . . . . . . . . . . . . . . . . . . . . . . . .55 Capital and Dividends. . . . . . . . . . . . . . . . . . .56 Fourth Quarter Results. . . . . . . . . . . . . . . . . . . .57 Banking Services Data by Region. . . . . . . . . . . . . . . 59 Six-Year Consolidated Balance Sheets. . . . . . . . . . . . 60 Six-Year Consolidated Statements of Income. . . . . . . . . 61 Report of Management. . . . . . . . . . . . . . . . . . . . 62 Report of Ernst & Young LLP, Independent Auditors. . . . . .62 Consolidated Financial Statements. . . . . . . . . . . . . .63 2 KEYCORP AND SUBSIDIARIES - - - ------------------------------------------------------------------------------ Management's Discussion and Analysis of Financial Condition and Results of Operations - - - ------------------------------------------------------------------------------ GLOSSARY OF TERMS CAPITAL COMPONENTS AND RATIOS: LEVERAGE RATIO: Tier I capital as a percentage of average quarterly total assets, less goodwill and other non-qualifying intangible assets. NET RISK-ADJUSTED ASSETS: The sum of risk-weighted assets plus the risk-weighted credit equivalent amounts of off-balance sheet items, less goodwill, other non-qualifying intangible assets, and the non-qualifying portion of the allowance for loan losses. TIER I CAPITAL: The sum of common shareholders' equity (excluding net unrealized gains or losses on securities, except for net unrealized losses on marketable equity securities) plus noncumulative perpetual preferred stock, less goodwill and other non-qualifying intangible assets. TIER I RISK-ADJUSTED CAPITAL RATIO: The ratio of Tier I capital to net risk-adjusted assets. The Federal regulatory minimum standard for the Tier I risk-adjusted capital ratio is 4.00%. TOTAL CAPITAL: The sum of Tier I capital plus Tier II capital (including the qualifying portions of the allowance for loan losses, subordinated debt instruments, and certain hybrid capital instruments). TOTAL RISK-ADJUSTED CAPITAL RATIO: The ratio of total capital to net risk-adjusted assets. The Federal regulatory minimum standard for the total risk-adjusted capital ratio is 8.00%. DERIVATIVES: Interest rate or currency swaps, futures, forwards, option contracts, or other off-balance sheet financial instruments used for asset and liability management or trading purposes. These instruments derive their values or contractually determined cash flows from the price of an underlying asset or liability, reference rate, index or other security. EARNING ASSETS: The sum of loans, mortgage loans held for sale, investment securities, securities available for sale and short-term investments (interest-bearing deposits with banks, Federal funds sold, securities purchased under agreements to resell and trading account assets). EFFICIENCY RATIO: Noninterest expense (excluding merger and integration charges and certain other nonrecurring charges) divided by taxable-equivalent net interest income plus noninterest income (excluding net securities gains (losses) and gains on certain asset sales). INTEREST-BEARING LIABILITIES: The sum of interest-bearing deposits, Federal funds purchased, securities sold under agreements to repurchase, other short-term borrowings and long-term debt. INTEREST RATE SPREAD: The difference between the taxable-equivalent yield on earning assets and the rate paid on interest-bearing liabilities. INTEREST RATE SWAP: A contract wherein one party pays a fixed rate of interest based on a notional amount to a second party, which pays to the first party a variable rate of interest based on the same notional amount. MERGER AND INTEGRATION CHARGES: Expenses directly related to mergers and consisting of investment banking and other professional fees; severance payments and other employee costs; systems and facilities costs; and other merger-related costs. NET INTEREST MARGIN: Taxable-equivalent net interest income as a percentage of average earning assets. NONPERFORMING ASSETS: The sum of nonperforming loans plus other real estate owned and other nonperforming assets (primarily venture capital investments). NONPERFORMING LOANS: The sum of loans on nonaccrual status (for purposes of interest recognition) plus restructured loans (loans whose repayment criteria have been renegotiated to less-than-market terms due to the inability of the borrowers to repay the loans in accordance with their original terms). OTHER REAL ESTATE OWNED ("OREO"): Real estate acquired in foreclosure or comparable proceedings under which possession of the collateral has been taken. OVERHEAD RATIO: Noninterest expense (excluding merger and integration charges and certain other nonrecurring charges) less noninterest income (excluding net securities gains (losses) and gains on certain asset sales) divided by taxable-equivalent net interest income. RETURN ON AVERAGE TOTAL ASSETS: Net income as a percentage of average total assets. RETURN ON AVERAGE COMMON EQUITY: Net income, less preferred dividends, as a percentage of average common shareholders' equity. SECURITIZATION: A transaction involving the transfer of a pool of assets with similar characteristics to an unaffiliated trust, wherein securities (representing undivided interests in, or obligations of, the trust) are purchased by investors. TAXABLE-EQUIVALENT INCOME: Tax-exempt income which has been adjusted to an amount that would yield the same after-tax income had the income been subject to taxation at the statutory Federal income tax rate. 28 3 KEYCORP AND SUBSIDIARIES - - - ----------------------------------------------------------------------------- - - - ----------------------------------------------------------------------------- INTRODUCTION This section of the report 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 financial statements and notes thereto, presented on pages 63 through 89 of this report. In the third quarter of 1994, the Corporation launched a strategic plan 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. A number of significant actions were taken throughout 1995 in connection with the implementation of this strategic plan. In the first quarter, the Corporation completed the sale of the residential mortgage loan servicing operations of KeyCorp Mortgage Inc., a mortgage banking subsidiary. This transaction was followed by the second quarter acquisition of Spears, Benzak, Salomon & Farrell, Inc., a New York-based investment management firm ("Spears Benzak"). Actions taken during the third quarter included the formation of the Corporation's national consumer finance business through the establishment of Key Bank USA, National Association ("KeyBank USA"), a nationally chartered bank located in Ohio which serves as the national platform for credit card lending, mortgage loan originations and all non-branch consumer finance business; and the acquisition of AutoFinance Group, Inc. ("AFG"), one of the nation's leading subprime automobile finance companies, based in Chicago, Illinois. In the fourth quarter, the Corporation sold its bond services business (a relatively minor portion of the Corporation's overall corporate trust business). During the same quarter, the Corporation entered into a definitive agreement to sell Society First Federal Savings Bank, its Florida savings association subsidiary. This transaction is expected to close during the second quarter of 1996, pending necessary regulatory approvals. In addition to the above actions, the Corporation strengthened its retail franchise with the completion of three bank acquisitions during the first quarter of 1995. 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. Additional information pertaining to these transactions and to those referred to in the preceding paragraph is presented in Note 2, "Mergers, Acquisitions and Divestitures," beginning on page 70. KeyCorp's 1995 consolidated financial results were impacted by actions taken during the first quarter to reconfigure the balance sheet in order to reduce exposure to future changes in interest rates. These actions completed a program begun for that purpose in the fourth quarter of 1994, and included the sales of securities at losses. Other major programs or transactions were undertaken in 1995 in connection with an overall balance sheet re-engineering effort intended to improve returns to shareholders, improve liquidity and enhance capital flexibility. These included the transfer of substantially all debt securities (other than those issued by states and political subdivisions) from the investment securities portfolio to the securities available-for-sale portfolio; the securitization and sale of $1.0 billion of student loans; the securitization and sale of $395 million of indirect auto loans; and the sale of approximately $1.0 billion of residential mortgage loans. The Corporation's policy is to securitize student loans prior to their entering repayment status. The latter two transactions were completed to remove lower spread assets from the balance sheet. The Corporation continued to manage its capital base proactively to optimize returns to shareholders. During 1995, approximately 24 million KeyCorp Common Shares were repurchased, of which 17 million were reissued to acquire AFG, OMNIBANCORP and Spears Benzak and to administer various employee benefit programs of the Corporation. To provide added flexibility, in January 1996 KeyCorp's Board of Directors approved a share repurchase program authorizing the repurchase of up to an additional 12 million shares, representing approximately 5% of the total Common Shares outstanding at December 31, 1995. This new repurchase program authorization expires at the end of 1996. Management continues to evaluate various initiatives to leverage further the capabilities of the franchise through the reallocation of resources and the targeting of selected customer segments. For example, in October 1995 plans were announced to combine the KeyCorp affiliate banks in the Great Lakes Region. The first step in this reorganization was completed in January 1996 with the merger of the Indiana and Michigan affiliate banks. The final stage of the Great Lakes reorganization is expected to be completed in 1996 with the merger of the Indiana/Michigan bank with and into Society National Bank, KeyCorp's principal bank subsidiary located in Ohio. The resulting bank will be renamed KeyBank National Association. The above items are discussed in greater detail in the remainder of this discussion and in the notes to the consolidated financial statements. PERFORMANCE OVERVIEW In 1995, KeyCorp recorded net income of $825.0 million, or $3.45 per Common Share. This compared with $853.5 million, or $3.45 per Common Share, in 1994 and $709.9 million, or $2.89 per Common Share, in 1993. The return on average common equity for 1995 was 17.35%, compared to 18.87% and 17.27% in 1994 and 1993, respectively. The return on average total assets was 1.24% in 1995, 1.36% in 1994 and 1.24% in 1993. Figure 1 presents the primary income and expense components for each of the three years in the period ended December 31, 1995, 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 each of the last six years. 29 4 KEYCORP AND SUBSIDARIES - - - ------------------------------------------------ Figure 1 Components of Earnings Per Common Share - - - ------------------------------------------------
Year ended December 31, Change 1995 vs. 1994 --------------- 1995 1994 1993 Amount Percent - - - --------------------------------------------------------------------- Interest income $21.81 $18.47 $17.57 $3.34 18.1% Interest expense 10.58 7.39 6.40 3.19 43.2 - - - --------------------------------------------------------------------- Net interest income 11.23 11.08 11.17 .15 1.4 Provision for loan losses .43 .51 .88 (.08) (15.7) - - - --------------------------------------------------------------------- Net interest income after provision for loan losses 10.80 10.57 10.29 .23 2.2 Noninterest income 3.97 3.63 4.18 .34 9.4 Noninterest expense 9.84 8.92 9.95 .92 10.3 - - - --------------------------------------------------------------------- Income before income taxes 4.93 5.28 4.52 (.35) (6.6) Income taxes 1.56 1.77 1.56 (.21) (11.9) Extraordinary net gain .15 -- -- .15 N/M Preferred dividends .07 .06 .07 .01 16.7 - - - --------------------------------------------------------------------- Earnings per Common Share $ 3.45 $ 3.45 $ 2.89 -- -- ====== ====== ====== - - - ---------------------------------------------------------------------
N/M = Not Meaningful In many respects, 1995 was a transition year for KeyCorp as management continued to focus its efforts on implementing the strategic plan initiated in 1994 and reconfiguring the Corporation's balance sheet to align with its operating strategies for the future. Significant investments, amounting to more than $41 million, were made in connection with strategic initiatives designed to position the Corporation to take advantage of technological advances within the industry and to strengthen its marketing efforts, in particular those geared toward developing national recognition of the KeyBank brand name. While the costs associated with these efforts contributed to identical per share earnings in comparison with the prior year, these strategic investments are expected to generate higher returns in the Corporation's core businesses in 1996 and beyond. The balance sheet reconfiguration plans are described in greater detail in the Asset and Liability Management section, beginning on page 39. In comparison with the prior year, KeyCorp's 1995 earnings reflected a $24.7 million, or 20%, decrease in the provision for loan losses; a $50.4 million, or 6%, increase in noninterest income; a $61.6 million, or 14%, decrease in income tax expense and an extraordinary net gain of $35.8 million after tax. These positive factors were more than offset by a $58.1 million, or 2%, decrease in taxable-equivalent net interest income; and a $144.4 million, or 7%, increase in noninterest expense. The efficiency ratio, which provides a measure of the extent to which recurring revenues are used to pay operating expenses, was 63.03% in 1995, compared with 59.39% in 1994 and 60.50% in 1993. In addition to the impact of the acquisitions and divestitures described in Note 2, Mergers, Acquisitions and Divestitures, starting on page 70, and the 1995 expenditures for strategic initiatives, comparative results were affected by the special items discussed below. In 1995, results included an extraordinary net gain of $61.1 million ($35.8 million after tax, $.15 per Common Share) 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 Corporation's residential mortgage loan servicing business and a loss of $11.2 million ($5.8 million after tax, $.02 per Common Share) incurred in connection with the sale of Schaenen Wood & Associates, Inc., an asset management subsidiary. In addition, the previously mentioned balance sheet reconfiguration resulted in net losses of $49.3 million ($30.9 million after tax, $.13 per Common Share) from the sales of securities. Other special items in 1995 included a one-time tax benefit of $16.0 million, or $.07 per Common Share, which related to acquisitions completed in prior years; a $25.4 million ($14.8 million after tax, $.06 per Common Share) write-off of obsolete software, and a $12.5 million ($8.1 million after tax, $.03 per Common Share) positive adjustment resulting from better-than-expected performance of student loan securitizations completed in prior periods. In the aggregate, these items increased 1995 earnings by $14.2 million, or $.06 per Common Share. Earnings in 1994 and 1993 were also affected by special items. Steps taken in the fourth quarter of 1994 to reconfigure the balance sheet in order to reduce the Corporation's exposure to further increases in interest rates included the sales of certain securities during the fourth quarter of 1994. These sales resulted in losses of $23.7 million ($14.3 million after tax, $.06 per Common Share). In 1993, net income was adversely impacted by merger and integration charges of $118.7 million ($80.6 million after tax, $.33 per Common Share) recorded in the fourth quarter in connection with the KeyCorp-Society merger. These merger and integration charges are described in greater detail in Note 12, Merger and Integration Charges, on page 80. LINE OF BUSINESS RESULTS The Corporation's strategic plan, initiated in 1994, resulted in the identification of four primary lines of business: Corporate Banking, National Consumer Finance, Community Banking and Key PrivateBank. A summary of the 1995 financial results and key performance measures for each primary line of business is presented in Figure 3. This information was derived from the internal profitability reporting system used by management to monitor and manage the financial performance of the Corporation. The financial results and key performance measures reported are based on internal management accounting policies which have been developed to ensure that results are compiled on a consistent basis and reflect the underlying economics of the businesses. These policies address the methodologies applied in connection with funds transfer pricing as well as the allocation of certain costs and capital. Funds transfer pricing was used in the determination of net interest income by assigning a standard cost for funds used (or a standard credit for funds provided) to 30 5 KEYCORP AND SUBSIDIARIES - - - ------------------------------------------------------------------------------------------------------------------------------------ Figure 2 Selected Finanical Data - - - ------------------------------------------------------------------------------------------------------------------------------------
Compound Annual Rate of Change dollars in millions, except per share amounts 1995 1994 1993 1992 1991 1990 (1990-1995) - - - ------------------------------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, Interest income $5,121.0 $4,490.1 $4,213.9 $4,198.8 $4,652.4 $4,528.8 2.5% Interest expense 2,484.3 1,796.8 1,534.9 1,750.1 2,519.4 2,667.7 (1.4) Net interest income 2,636.7 2,693.3 2,679.0 2,448.7 2,133.0 1,861.1 7.2 Provision for loan losses 100.5 125.2 211.7 338.4 466.2 517.2 (27.9) Noninterest income 933.0 882.6 1,001.7 925.2 849.3 744.2 4.6 Noninterest expense 2,311.6 2,167.2 2,385.1 2,170.4 2,065.7 1,819.5 4.9 Income before income taxes and extraordinary item 1,157.6 1,283.5 1,083.9 865.1 450.4 268.6 33.9 Income before extraordinary item 789.2 853.5 709.9 592.1 313.7 256.1 25.2 Net income 825.0 853.5 709.9 592.1 313.7 256.1 26.4 Net income applicable to Common Shares 809.0 837.5 691.8 568.1 297.5 249.0 26.6 - - - ------------------------------------------------------------------------------------------------------------------------------------ PER COMMON SHARE Income before extraordinary item $ 3.30 $ 3.45 $ 2.89 $ 2.42 $ 1.31 $ 1.13 23.9% Net income 3.45 3.45 2.89 2.42 1.31 1.13 25.0 Cash dividends 1.44 1.28 1.12 .98 .92 .88 10.4 Book value at year-end 21.36 18.88 17.53 15.64 14.10 13.48 9.6 Market price at year-end 36.25 25.00 29.75 32.13 24.75 16.13 17.6 Dividend payout ratio 41.74% 37.10% 38.75% 40.50% 70.23% 77.88% N/A Weighted average Common Shares (000) 234,787.4 243,067.5 239,775.2 235,004.8 227,116.2 220,078.6 1.3 - - - ------------------------------------------------------------------------------------------------------------------------------------ AT DECEMBER 31, Loans $47,691.7 $46,224.7 $40,071.3 $36,021.8 $35,534.3 $34,193.7 6.9% Earning assets 58,762.3 60,046.5 54,352.7 49,380.8 48,207.9 44,668.2 5.6 Total assets 66,339.1 66,801.2 59,634.3 55,068.4 53,600.9 49,953.4 5.8 Deposits 47,281.9 48,564.2 46,499.1 43,433.1 42,835.0 40,935.3 2.9 Long-term debt 4,003.6 3,569.8 1,763.9 1,790.1 1,224.5 1,145.2 28.4 Common shareholders' equity 4,992.5 4,530.4 4,225.5 3,683.3 3,272.4 2,941.7 11.2 Total shareholders' equity 5,152.5 4,690.4 4,385.5 3,927.3 3,516.4 3,025.7 11.2 Full-time equivalent employees 29,563 29,211 29,983 29,117 29,509 28,741 .6 - - - ------------------------------------------------------------------------------------------------------------------------------------ PERFORMANCE RATIOS Return on average total assets 1.24% 1.36% 1.24% 1.13% .60% .54% N/A Return on average common equity 17.35 18.87 17.27 16.33 9.29 8.39 N/A Return on average total equity 17.10 18.56 16.95 15.91 9.31 8.41 N/A Efficiency 63.03 59.39 60.50 60.96 65.27 66.92 N/A Overhead 49.66 46.14 46.85 47.21 52.63 54.58 N/A Net interest margin 4.47 4.83 5.31 5.31 4.71 4.53 N/A - - - ------------------------------------------------------------------------------------------------------------------------------------ CAPITAL RATIOS AT DECEMBER 31, Equity to assets 7.77% 7.03% 7.37% 7.13% 6.56% 6.06% N/A Tangible equity to tangible assets 6.25 6.19 6.51 6.11 5.45 4.79 N/A Tier I risk-adjusted capital 7.53 8.48 8.73 8.56 7.67 6.75 N/A Total risk-adjusted capital 10.85 11.62 12.22 11.73 9.80 9.17 N/A Leverage 6.20 6.63 6.72 6.56 5.97 5.23 N/A - - - ------------------------------------------------------------------------------------------------------------------------------------
The comparability of the information presented above is affected by certain 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 70. N/A = Not Applicable 31 6 KEYCORP AND SUBSIDIARIES - - - ----------------------------------------------------------------------------- - - - ----------------------------------------------------------------------------- assets and liabilities based on their maturity and/or repricing characteristics. Indirect expenses were allocated based on actual volume measurements and other criteria, as appropriate. The allocation of the provision for loan losses was derived by applying the normalized net charge-off ratio for each line of business over a full business cycle (approximately five years) to its average loans for 1995. The negative provision under "Treasury and Other" represents the difference between the consolidated provision and the amounts allocated to the primary lines of business, and reflects the significantly lower level of net charge-offs in 1995 relative to prior years in the business cycle. The level of the consolidated provision for loan losses was based upon the application of methodologies designed by management to assess the adequacy of the consolidated allowance by focusing on a number of specific factors. These factors are more fully discussed in the Asset Quality section beginning on page 51. Income taxes were allocated based on the Corporation's 1995 effective tax rate and capital was assigned to each line of business based on management's assessment of inherent risk. The development and application of these methodologies is a dynamic process. Accordingly, financial results may be revised periodically to reflect management accounting enhancements, changes in risk profile or changes in the organization's structure. Further, unlike financial accounting, there is no authoritative guidance for management accounting similar to generally accepted accounting principles. Consequently, reported results are not necessarily comparable with those presented by other companies. A description of each of the Corporation's primary lines of business is presented below. CORPORATE BANKING As one of the largest providers of corporate financial services in the nation, KeyCorp offers a complete range of financing and advisory services to corporations, governments, institutions and other businesses through its Corporate Banking units. It also operates the fourth largest bank-affiliated equipment leasing company in the United States. Corporate Banking's three primary customer segments are middle market, community middle market and large corporate clients. Its business units include specialty finance activities such as media, healthcare, commercial real estate, structured finance, and agricultural lending. In addition, this line of business provides a number of specialized services, including international banking, corporate finance, capital markets, institutional asset services and corporate wealth transfer, and is among the top cash management providers in the country. - - - ----------------------------------------------------------------------------------------------------------------------------------- Figure 3 Line of Business Results - - - -----------------------------------------------------------------------------------------------------------------------------------
National Treasury Corporate Consumer Community Key and KeyCorp dollars in millions Banking Finance Banking PrivateBank Other Consolidated - - - ------------------------------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, Net interest income (TE) $887.8 $395.9 $1,203.4 $ 74.5 $ 132.4 $2,694.0 Provision for loan losses 110.3 73.1 58.9 3.6 (145.4) 100.5 Noninterest income 240.8 184.3 299.5 117.6 90.8 933.0 Noninterest expense 498.8 232.7 1,190.1 115.5 274.5 2,311.6 - - - ------------------------------------------------------------------------------------------------------------------------------------ Income before income taxes and extraordinary item (TE) 519.5 274.4 253.9 73.0 94.1 1,214.9 Allocated income taxes and TE adjustment 182.1 96.2 89.0 25.6 32.8 425.7 Extraordinary net gain - - - - 35.8 35.8 - - - ---------------------------------------------------------------------------------------------------------------------------------- Net income $337.4 $178.2 $ 164.9 $ 47.4 $ 97.1 $ 825.0 ====== ====== ======= ====== ======= ======== Percent of consolidated net income 41% 22% 20% 6% 11% 100% - - - ---------------------------------------------------------------------------------------------------------------------------------- AVERAGE BALANCES Loans $18,798.2 $10,073.5 $ 9,330.4 $1,929.7 $ 7,628.8 $47,760.6 Earning assets 19,326.3 10,365.8 9,413.5 1,971.5 19,125.9 60,203.0 Deposits 5,336.4 741.1 37,768.0 807.9 2,912.2 47,565.6 Allocated equity1 1,381.0 759.6 1,090.4 155.1 1,437.5 4,823.6 - - - ------------------------------------------------------------------------------------------------------------------------------------ PERFORMANCE RATIOS Return on average allocated equity1 24.43% 23.47% 15.12% 30.60% N/M 17.10% Efficiency ratio 44.20 40.10 79.19 60.10 N/M 63.03 - - - ------------------------------------------------------------------------------------------------------------------------------------
(1)Preferred equity is included in Treasury and Other. TE = Taxable Equivalent N/M = Not Meaningful 32 7 KEYCORP AND SUBSIDIARIES - - - ------------------------------------------------------------------------------ - - - ------------------------------------------------------------------------------ In 1995, Corporate Banking contributed approximately 41% of KeyCorp's consolidated earnings with net income of $337.4 million and a return on average allocated equity of 24.43%. This strong performance was driven by loan growth of approximately 17% since the end of the prior year, combined with the ongoing development of noncredit revenues from cash management services and foreign exchange and derivative activities conducted for the benefit of customers. Other accomplishments in 1995 included the enhancement of advanced client service workstations and the redefining of the Corporate Banking delivery system to differentiate the delivery of products and services among various market segments. The new workstations provide client service representatives with automated, real time access to account information, thereby allowing them to respond to more than 80% of client telephone inquiries while the client is still on the line. With the goal of significantly increasing Corporate Banking's net income growth rate, 1996 efforts will center on refining the relationship management approach to serving customers and expanding product capabilities by implementing the following primary initiatives: - - - - The corporate banking relationship management process will be re-engineered to streamline the credit administration process and to support relationship managers in their advisory roles, - - - - The structured finance business unit will be expanded to provide financing, collateral management and structuring expertise to companies which may not have met the Corporation's traditional credit standards, - - - - The wealth transfer business, established in late 1995, will expand its advisory services to owners of privately held businesses who require assistance in ownership transition, - - - - In response to growth in the real estate market, the commercial real estate capital markets function will be expanded to provide more options to clients seeking permanent capital for real estate projects, - - - - Capital markets capabilities will be enhanced by providing new products and improvements in the areas of foreign exchange, derivatives, merger and acquisition advisory services, private placements, underwriting and distributing qualifying municipal debt issues, and institutional sales and trading, and - - - - The packaging and delivery of PRISM, the Corporation's daily 401(k) valuation product, will be enhanced through improvements made in transaction processing, the addition of a value-added participant education program and by offering a new product designed exclusively to serve the needs of smaller businesses. NATIONAL CONSUMER FINANCE National Consumer Finance is responsible for administering the Corporation's indirect, non-branch based consumer loan and deposit products across the entire franchise, as distinct from direct branch-based consumer business conducted by the Community Banking group. Its specific business units specialize in credit cards, auto loans and leases, marine and recreational vehicle loans, educational loans and branchless deposit generating activities. These activities were formally grouped together in 1995 so as to market and operate the Corporation's indirect consumer loan and credit card businesses under a single management and operating structure. The National Consumer Finance line of business was characterized by the following key volume statistics as of December 31, 1995: - - - - Indirect auto loans and leases of more than $4 billion outstanding with 1995 originations of $2.4 billion generated through a network of approximately 4,000 auto loan dealers, - - - - Student loans of approximately $2.1 billion outstanding with 1995 originations of more than $1 billion, - - - - A $1.6 billion credit card portfolio and more than 1.4 million customer accounts, and - - - - A $1.7 billion indirect marine and recreational vehicle loan portfolio, with 1995 originations exceeding $650 million. In 1995, National Consumer Finance generated net income of $178.2 million, or approximately 22% of KeyCorp's consolidated earnings, and a return on average allocated equity of 23.47%. This was achieved even while the 1995 profitability of the indirect auto loan business was negatively impacted by narrower interest rate spreads on business generated in 1994 during an intensely rate-competitive period. The credit card portfolio was a strong contributor to 1995 earnings, and continued a lower than industry average net loan charge-off ratio of 2.68%. In the first quarter of 1995, National Consumer Finance completed the sale of KeyCorp's residential mortgage loan servicing operation, KeyCorp Mortgage, Inc., and in the third quarter acquired AFG (a Chicago-based automobile finance company operating in 28 states and specializing in the subprime automobile financing market). The sale of the mortgage loan servicing business was the result of a strategic decision by management to focus on other businesses with more promising growth potential. KeyCorp does, however, continue to originate residential mortgage loans for sale through a newly formed mortgage subsidiary. For reporting purposes, the extraordinary net gain resulting from the sale of the mortgage loan servicing business is included under the "Treasury and Other" category in Figure 3. Other significant 1995 transactions in National Consumer Finance were the securitization and sale of $395 million of indirect auto loans (including $96 million of AFG loans) and $1 billion of student loans. 33 8 KEYCORP AND SUBSIDIARIES - - - ----------------------------------------------------------------------------- - - - ----------------------------------------------------------------------------- In 1996, National Consumer Finance will focus on intensifying national marketing efforts, enhancing customer service capabilities and refining the product base by implementing the following primary initiatives: - - - - Further investments will be made in national product and marketing strategies designed to increase the credit card portfolio, - - - - The indirect marine and recreational vehicle loan portfolios will be increased by developing a broader national focus, entering new geographic markets and expanding the manufacturing relationship base. In addition, a standard product set and credit process for these portfolios will be developed and refined to better meet customer needs and improve overall operating efficiency, - - - - The combination of auto loan products offered by KeyBank USA and AFG will be introduced to new markets and dealerships across the KeyCorp franchise, and - - - - The products and technology related to mortgage origination activities will be enhanced to provide better customer service and to maximize origination capability. COMMUNITY BANKING The Community Banking line of business is responsible for delivering a complete line of branch-based retail financial products and services to consumers and small businesses. The delivery of these products and services is accomplished through KeyCorp's banking subsidiaries operating approximately 1,300 full-service banking offices in 14 states, a 24-hour telephone banking call center services group and nearly 1,500 ATMs that access 13 different networks. Community Banking currently serves approximately 3.3 million consumer households and 500,000 small businesses, resulting in a year-end loan portfolio exceeding $9.3 billion and deposits of almost $38 billion. It is the second largest small business lender in the nation. To promote customer convenience and satisfaction, and to ensure that their specific needs are being met, Community Banking has identified four primary customer segments, each of which has unique behavioral and demographic characteristics: Small Business - Served by certified small business relationship managers, this segment is comprised of customers with annual sales and credit needs of less than $3 million and $300,000, respectively. Emerging Affluent - Through the retail private banking program, these customers pay a membership fee which entitles them to a broad array of specialized credit, deposit and investment products. In particular, a combination of proprietary and non-proprietary investment opportunities are emphasized. Mature Market - This segment is comprised of individuals who are typically over 50 years of age, and are generally associated with the occurrence of major life events such as retirement, the start of a second career, the transition to new housing, the death of a spouse and entering the Social Security and Medicare System. Mass Market - Served by branch-based mass market specialists, this is the largest of the four customer segments and is comprised of individuals typically under 50 years of age who generate a modest annual household income. In 1995, net income for Community Banking totaled $164.9 million, or approximately 20% of KeyCorp's consolidated earnings, and the return on average allocated equity was 15.12%. 1995 revenue was driven by brisk consumer and small business loan demand. However, the cost of deposits continued to rise, reflecting pressures to meet funding needs created by that loan demand amid stiff industry competition. Operating results also reflected actions taken in 1995 to generate additional deposit-related fees by revising products and related processes. A team of professionals was assembled within KeyCorp in 1995 to spearhead significant changes in KeyCorp's retail delivery system. The initial efforts of this group were focused on developing and implementing the Community Banking strategy and tailoring products and services to cost-effectively satisfy customer demands for increased value and convenience. One result of these efforts was the introduction of a dual ATM and point-of-sale debit card. In 1996, further efforts will be made by this team to transform the retail delivery network into one that is organized to more profitably and effectively address the four customer segments previously described by implementing the following primary initiatives: - - - - Telephone banking will be heavily promoted to satisfy customer demand for convenience, - - - - Customers will be encouraged to use the call centers for routine service, in an effort to free branch personnel to increase their focus on sales, - - - - ATM functionality will be enhanced to allow customers to more completely access their total KeyCorp relationship. In addition, the capability to pay telephone bills, cash checks to the penny and eliminate the need for deposit envelopes will be introduced, and - - - - Home banking via personal computer will be field tested. Customers will be able to access information on their current accounts and services, obtain value-added financial information, open new accounts, apply for loans and conduct routine transactions. KEY PRIVATEBANK The Key PrivateBank line of business addresses the more complex, diverse needs of the affluent customer segment by offering a full, integrated range of transaction, credit, asset management, estate planning and trust products and services. The delivery system is segmented into two different programs which address customer's needs as they increase in complexity. Each of these programs, which are briefly described, focuses on five key strategic elements: relationship management, client segmentation, technological support, product innovation and service quality. 34 9 KEYCORP AND SUBSIDIARIES - - - ------------------------------------------------------------------------------- - - - ------------------------------------------------------------------------------- Private Banking and Investing - This program focuses on the more complex investment and estate planning needs of individuals having annual income of at least $100,000 or net worth of at least $250,000. Customers participating in this program are served by a team of financial experts including a credit representative, a trust professional, a broker, and often, a certified financial planner. Wealth Management - Wealth Management provides sophisticated financial solutions and an extraordinary level of service for wealthy individuals and families with investable assets of at least $5 million. Primary services provided include asset management, estate planning, business succession planning, tax and financial planning and extensive fiduciary services. Other nontraditional investment capabilities being developed in 1996 include venture capital investment and private placement services, hedge funds, customized derivatives and real estate limited partnerships. In 1995, Key PrivateBank generated net income of $47.4 million, or approximately 6% of KeyCorp's consolidated earnings, and a return on average allocated equity of 30.60%. Operating results reflected an increase in trust and asset management income resulting from the strong performance of both the stock and bond markets in 1995. In addition, 1995 performance was positively affected by an increased array of product offerings. Although 1995 results were moderated by additional costs incurred in conjunction with continued investments in expanding the relationship management infrastructure and improving training programs, these investments are expected to enhance future profitability by improving servicing capabilities. In 1996, a number of initiatives will be undertaken to strengthen this line of business by increasing its penetration of the affluent market segment: - - - - A sales management process with financial planning at its core will be designed and implemented, - - - - The growth of Private Banking and Investing will be emphasized through a national rollout of strategies which focuses on relationship management, targeted sales and innovative product solutions, and - - - - Alternative delivery channels will be designed and implemented. TREASURY AND OTHER The "Treasury and Other" category includes activities that are not directly attributable to one of the four major lines of business. Included in this category are income from the securities and residential mortgage loan portfolios (other than mortgage loans originated for sale); the net effect of transfer pricing; certain nonbanking affiliates involved in, among other things, information technology and asset management; eliminations of intercompany transactions and extraordinary items. Also included in the "Treasury and Other" category are the portions of certain assets, capital and support functions which were not specifically allocated to the four primary lines of business. These support functions include asset and liability management, corporate audit and control, credit policy and administration, corporate development, corporate finance and treasury, human resources, investor relations, in-house legal counsel, marketing and strategic planning. In 1995, the items classified as extraordinary 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, partially offset by a loss of $11.2 million ($5.8 million after tax, $.02 per Common Share) incurred in connection with the sale of Schaenen Wood & Associates, Inc., an asset management subsidiary. 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. 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. Various components of the balance sheet and their respective yields and rates which affect interest income and expense are illustrated in Figure 4. The information presented in Figure 8 provides a summary of the effect on net interest income of changes in the Corporation's yields/rates and average balances in 1995 and 1994. A more in-depth discussion of changes in earning assets and funding sources is presented in the Financial Condition section beginning on page 47. Net interest income was $2.7 billion in 1995, down $58.1 million, or 2%, from the prior year. This followed an increase of $10.0 million in 1994 relative to the comparable 1993 period. In 1995, the decrease in net interest income resulted from a 36 basis point decline in the net interest margin to 4.47%, which more than offset the impact of a $3.3 billion, or 6%, increase in average earning assets. The $10.0 million increase in net interest income in 1994 was attributable to earning asset growth. As shown in Figures 4 and 5, the net interest margin was 4.47% for 1995, down from 4.83% in 1994 and 5.31% in 1993. The reduction in the net interest margin in 1995 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 and the execution of fixed-pay swaps, are more fully described in the following Asset 35 10 KEYCORP AND SUBSIDIARIES - - - ----------------------------------------------------------------------------------------------------------------------------------- Figure 4 Average Balance Sheets, Net Interest Income and Yields/Rates - - - ----------------------------------------------------------------------------------------------------------------------------------- Year ended December 31,
1995 1994 1993 ------------------------- ------------------------- -------------------------- Average Yield/ Average Yield/ Average Yield/ dollars in millions Balance Interest Rate Balance Interest Rate Balance Interest Rate - - - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Loans1,2 Commercial, financial and agricultural $11,180.7 $1,023.0 9.15% $ 9,687.7 $ 851.9 8.79% $ 9,049.3 $ 729.6 8.06% Real estate 22,083.5 1,962.9 8.89 19,932.7 1,619.1 8.12 17,611.7 1,478.3 8.39 Consumer 9,846.8 988.9 10.04 9,567.8 904.7 9.46 8,993.1 926.2 10.30 Student loans held for sale 2,119.8 185.8 8.77 1,553.4 109.1 7.02 1,195.9 77.1 6.45 Lease financing 2,458.2 169.1 6.88 1,930.2 131.5 6.81 1,386.6 109.4 7.89 Foreign 71.6 3.7 5.11 73.7 3.6 4.91 71.0 4.5 6.37 - - - ----------------------------------------------------------------------------------------------------------------------------------- Total loans 47,760.6 4,333.4 9.07 42,745.5 3,619.9 8.47 38,307.6 3,325.1 8.68 Mortgage loans held for sale 251.1 15.4 6.12 717.6 51.1 7.13 1,054.6 74.0 7.02 Taxable investment securities 7,807.3 520.9 6.67 7,664.0 507.0 6.61 7,769.5 556.4 7.16 Tax-exempt investment securities1 1,482.1 125.5 8.47 1,579.2 136.2 8.63 1,786.6 158.5 8.87 - - - ----------------------------------------------------------------------------------------------------------------------------------- Total investment securities 9,289.4 646.4 6.96 9,243.2 643.2 6.96 9,556.1 714.9 7.48 Securities available for sale1,3 2,102.9 135.8 6.40 4,066.1 228.2 5.50 2,070.0 141.5 6.84 Interest-bearing deposits with banks 137.7 8.1 5.86 33.6 1.5 4.47 427.0 14.9 3.49 Federal funds sold and securities purchased under resale agreements 532.8 31.5 5.91 70.8 2.9 4.18 166.4 6.0 3.61 Trading account assets 128.5 7.7 6.00 39.4 2.1 5.23 16.8 .6 3.37 - - - ----------------------------------------------------------------------------------------------------------------------------------- Total short-term investments 799.0 47.3 5.91 143.8 6.5 4.53 610.2 21.5 3.52 - - - ----------------------------------------------------------------------------------------------------------------------------------- Total earning assets 60,203.0 5,178.3 8.60 56,916.2 4,548.9 7.99 51,598.5 4,277.0 8.29 Allowance for loan losses (868.0) (821.2) (803.9) Other assets 7,307.0 6,466.2 6,256.6 - - - ---------------------------------------------------------------------------------------------------------------------------------- $66,642.0 $62,561.2 $57,051.2 ========= ========= ========= LIABILITIES AND SHAREHOLDERS EQUITY Money market deposit accounts $ 7,160.8 260.3 3.64 $ 7,196.6 196.8 2.74 $ 7,306.8 189.6 2.59 Savings deposits 6,505.6 174.0 2.68 7,697.2 204.8 2.66 7,382.9 214.1 2.90 NOW accounts 5,444.4 110.2 2.02 5,558.6 105.9 1.91 5,314.7 109.6 2.06 Certificates of deposit ($100,000 or more) 3,677.3 221.8 6.03 2,992.6 146.2 4.88 3,088.7 138.0 4.47 Other time deposits 14,466.2 783.2 5.41 12,338.3 543.9 4.41 12,443.2 550.5 4.42 Deposits in foreign offices 2,182.1 155.3 7.12 3,014.7 127.0 4.21 1,018.9 31.5 3.09 - - - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 39,436.4 1,704.8 4.32 38,798.0 1,324.6 3.41 36,555.2 1,233.3 3.37 Federal funds purchased and securities sold under repurchase agreements 5,622.5 314.6 5.60 5,850.4 243.5 4.16 4,378.2 130.2 2.97 Other short-term borrowings 3,361.8 203.5 6.05 1,929.6 90.9 4.71 1,196.2 44.5 3.72 Long-term debt4 3,895.5 261.4 6.84 2,233.9 137.8 6.35 1,895.4 126.9 6.96 - - - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 52,316.2 2,484.3 4.75 48,811.9 1,796.8 3.69 44,025.0 1,534.9 3.49 Noninterest-bearing deposits 8,129.2 8,046.2 7,785.9 Other liabilities 1,373.0 1,103.9 1,051.2 Preferred stock 160.0 160.0 183.8 Common shareholders' equity 4,663.6 4,439.2 4,005.3 - - - ----------------------------------------------------------------------------------------------------------------------------------- $66,642.0 $62,561.2 $57,051.2 ========= ========= ========= Interest rate spread 3.85 4.30 4.80 - - - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income (TE) and net interest margin (TE) $2,694.0 4.47% $2,752.1 4.83% $2,742.1 5.31% ======== ==== ======== ==== ======== ==== Taxable-equivalent adjustment1 $57.3 $58.8 $63.1 - - - -----------------------------------------------------------------------------------------------------------------------------------
[FN] (1) Interest income on tax-exempt securities and loans has been adjusted to a taxable-equivalent basis using the statutory Federal income tax rate of 35% for 1995, 1994 and 1993 and 34% for all other years presented. (2) For purposes of these computations, nonaccrual loans are included in the average loan balances. (3) Yield is calculated on the basis of amortized cost. (4) Rate calculation excludes ESOP debt. N/M = Not Meaningful TE = Taxable Equivalent 36 11 - - - ----------------------------------------------------------------------------------------------------------------------------------- KEYCORP AND SUBSIDIARIES - - - -----------------------------------------------------------------------------------------------------------------------------------
Compound Annual Rate of Change 1992 1991 1990 (1990-1995) -------------------------------- ------------------------------- ----------------------------- ------------------------ Average Yield/ Average Yield/ Average Yield/ Average Balance Interest Rate Balance Interest Rate Balance Interest Rate Balance Interest - - - ----------------------------------------------------------------------------------------------------------------------------------- $10,820.8 $ 914.7 8.45% $11,753.3 $1,150.2 9.79% $13,165.0 $1,433.8 10.89% (3.2)% (6.5)% 13,315.3 1,164.7 8.75 12,969.7 1,301.7 10.04 10,248.1 1,098.4 10.72 16.6 12.3 10,059.7 1,100.1 10.94 9,519.5 1,144.6 12.02 8,425.9 1,052.4 12.49 3.2 (1.2) - - - - - - - - - N/M N/M 1,006.3 84.3 8.38 822.9 76.6 9.31 714.1 74.2 10.39 28.0 17.9 105.3 6.2 5.89 84.9 5.9 6.88 79.7 6.9 8.66 (2.1) (11.7) - - - ----------------------------------------------------------------------------------------------------------------------------------- 35,307.4 3,270.0 9.26 35,150.3 3,679.0 10.47 32,632.8 3,665.7 11.23 7.9 3.4 717.1 59.4 8.28 498.8 47.0 9.42 312.7 27.7 8.86 (4.3) (11.1) 7,985.3 676.9 8.48 7,441.3 678.2 9.11 6,433.3 582.6 9.06 3.9 (2.2) 1,881.1 176.1 9.36 1,855.5 185.0 9.97 1,928.7 196.9 10.21 (5.1) (15.9) - - - ----------------------------------------------------------------------------------------------------------------------------------- 9,866.4 853.0 8.65 9,296.8 863.2 9.28 8,362.0 779.5 9.32 2.1 (5.0) 801.0 57.2 7.14 750.5 59.6 7.94 10.4 .9 8.88 189.2 172.5 477.4 20.1 4.21 592.0 41.2 6.96 1,040.0 92.1 8.86 (33.3) (38.5) 268.9 10.3 3.83 726.3 40.6 5.59 589.0 47.4 8.05 (2.0) (7.8) 22.4 1.0 4.46 51.5 3.5 6.91 79.9 5.6 7.06 10.0 6.6 - - - ----------------------------------------------------------------------------------------------------------------------------------- 768.7 31.4 4.08 1,369.8 85.3 6.23 1,708.9 145.1 8.49 (14.1) (20.1) - - - ----------------------------------------------------------------------------------------------------------------------------------- 47,460.6 4,271.0 9.00 47,066.2 4,734.1 10.06 43,026.8 4,618.9 10.73 6.9 2.1 (805.9) (704.4) (550.3) 9.5 5,698.2 5,634.2 4,965.0 8.0 - - - ----------------------------------------------------------------------------------------------------------------------------------- $52,352.9 $51,996.0 $47,441.5 7.0 ========= ========= ========= $ 7,648.2 248.3 3.25 $ 6,733.5 342.1 5.08 $ 5,513.1 324.0 5.88 5.4 (4.3) 5,320.5 181.3 3.41 3,989.4 184.5 4.62 3,682.8 180.3 4.90 12.1 (.7) 4,429.1 120.8 2.73 3,759.6 163.1 4.34 3,368.2 160.2 4.76 10.1 (7.2) 3,573.3 187.7 5.25 4,911.9 337.0 6.86 5,556.9 453.6 8.16 (7.9) (13.3) 13,382.3 717.2 5.36 15,478.5 1,085.2 7.01 13,132.8 1,050.8 8.00 2.0 (5.7) 367.9 13.7 3.72 367.4 23.8 6.48 756.2 61.9 8.19 23.6 20.2 - - - ----------------------------------------------------------------------------------------------------------------------------------- 34,721.3 1,469.0 4.23 35,240.3 2,135.7 6.06 32,010.0 2,230.8 6.97 4.3 (5.2) 4,061.9 142.9 3.52 3,807.4 213.7 5.61 3,505.3 272.3 7.77 9.9 2.9 721.8 31.1 4.31 1,188.2 74.5 6.27 812.9 67.5 8.30 32.8 24.7 1,462.6 107.1 7.70 1,220.0 95.5 8.32 1,164.3 97.1 8.89 27.3 21.9 - - - ----------------------------------------------------------------------------------------------------------------------------------- 40,967.6 1,750.1 4.28 41,455.9 2,519.4 6.09 37,492.5 2,667.7 7.13 6.9 (1.4) 6,661.4 6,228.5 6,059.0 6.1 1,001.4 942.7 845.5 10.2 244.0 166.3 74.6 16.5 3,478.5 3,202.6 2,969.9 9.4 - - - ----------------------------------------------------------------------------------------------------------------------------------- $52,352.9 $51,996.0 $47,441.5 7.0% ========= ========= ========= 4.72 3.97 3.60 - - - ----------------------------------------------------------------------------------------------------------------------------------- $2,520.9 5.31% $2,214.7 4.71% $1,951.2 4.53% 6.3% ======== ==== ======== ==== ======== ==== === $72.2 $81.7 $90.1 (8.7)% - - - -----------------------------------------------------------------------------------------------------------------------------------
37 12 KEYCORP AND SUBSIDIARIES - - - --------------------------------------------- Figure 5 Net Interest Margin - - - --------------------------------------------- Net interest Yield on Cost of margin earning assets funds 1991 4.71% 10.06% 5.35% - - - ------------------------------------------------------- 1992 5.31 9.00 3.69 - - - ------------------------------------------------------- 1993 5.31 8.29 2.98 - - - ------------------------------------------------------- 1994 4.83 7.99 3.16 - - - ------------------------------------------------------- 1995 4.47 8.53 4.06 - - - ------------------------------------------------------- and Liability Management section. After completing these actions, the net interest margin stabilized in the first quarter of 1995 and rose 15 basis points over the remaining three quarters of the year. This improvement reflected the impact of wider loan spreads, the securitization and sale of loans with lower spreads, the sale of lower-yielding investment securities, and the reinvestment of funds from maturing securities into higher-yielding loans. The 48 basis point reduction in the net interest margin in 1994 was attributable to growth in earning assets at reduced spreads, increased reliance on market-priced funding and a liability-sensitive position in a rapidly rising interest rate environment. Average earning assets in 1995 totaled $60.2 billion, which was $3.3 billion, or 6%, higher than the prior year. This increase was primarily due to a higher level of average loans, which rose $5.0 billion, or 12%, reflecting the impact of acquisitions as well as internal loan growth. As illustrated in Figure 4, the largest increases in loans relative to the prior year occurred in the real estate and commercial, financial and agricultural categories. The growth in real estate loans reflected increases in the commercial mortgage and construction portfolios as residential real estate loans declined by $1.4 billion. The increase in the loan portfolio was partially offset, however, by a $1.9 billion, or 14%, decline in securities (including both investment securities and securities available for sale), due in large part to sales associated with the balance sheet reconfiguration. In 1994, the growth in average earning assets resulted from higher levels of both loans and securities, which rose $4.4 billion and $1.7 billion, respectively. The strong growth in loans during 1994 was spread among all major loan categories and reflected the impact of acquisitions as well as internal loan growth. Average earning assets comprised 90% of average total assets during 1995 and 91% during 1994. The Corporation uses portfolio interest rate swaps (as defined in Note 17, Financial Instruments with Off-Balance Sheet Risk, beginning on page 84) in the management of its interest rate sensitivity position. The notional amount of such swaps increased to $11.1 billion at December 31, 1995, from $10.5 billion at year-end 1994. For 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 $29.2 million and 5 basis points, respectively. In 1994, interest rate swaps contributed $98.6 million to net interest income and added 17 basis points to the net interest margin compared with contributions of $140.3 million and 27 basis points, respectively, in 1993. These changes should not be viewed in isolation, however; the swap portfolio is used in the Corporation's overall program of asset and liability management as described in the following Asset and Liability Management section, and changes in the profitability of the swap portfolio are substantially offset by changes in the profitability of the assets or liabilities whose characteristics the swaps are intended to alter. - - - ----------------------------------------- Figure 6 1995 Average Earning Assets Mix - - - ---------------------------------------- Total loans 79.8% Short-term investments 18.9% Securities 1.3% - - - ---------------------------------------- Figure 7 1995 Mix of Funding for Average Earning Assets - - - ---------------------------------------- Long-term debt 6.4% Short-term borrowings 14.9% Noninterest-bearing deposits 13.4% Interest-bearing deposits 65.3% 38 13 KEYCORP AND SUBSIDIARIES - - - ----------------------------------------------------------------------------------------------------------------------------------- Figure 8 Components of Net Interest Income Changes - - - -----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1995 vs. 1994 1994 vs. 1993 -------------------------------------- ----------------------------------------------- Average Yield/ Net Average Yield/ Net in millions Volume Rate Change Volume Rate Change - - - ----------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans $ 443.6 $ 269.9 $713.5 $377.5 $ (82.7) $294.8 Mortgage loans held for sale (29.4) (6.3) (35.7) (24.0) 1.1 (22.9) Taxable investment securities 9.5 4.4 13.9 (7.4) (42.0) (49.4) Tax-exempt investment securities (8.3) (2.4) (10.7) (18.0) (4.3) (22.3) Securities available for sale (122.9) 30.5 (92.4) 115.8 (29.2) 86.6 Short-term investments 38.3 2.5 40.8 (19.9) 5.0 (14.9) - - - ----------------------------------------------------------------------------------------------------------------------------------- Total interest income (TE) 330.8 298.6 629.4 424.0 (152.1) 271.9 INTEREST EXPENSE Money market deposit accounts (1.0) 64.5 63.5 (2.9) 10.1 7.2 Savings deposits (31.9) 1.1 (30.8) 8.9 (18.2) (9.3) NOW accounts (2.2) 6.5 4.3 4.8 (8.5) (3.7) Certificates of deposit ($100,000 or more) 37.3 38.3 75.6 (4.4) 12.6 8.2 Other time deposits 103.1 136.2 239.3 (4.6) (2.0) (6.6) Deposits in foreign offices (42.0) 70.3 28.3 80.6 14.9 95.5 - - - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 63.3 316.9 380.2 82.4 8.9 91.3 Federal funds purchased and securities sold under repurchase agreements (9.8) 80.9 71.1 51.8 61.5 113.3 Other short-term borrowings 81.4 31.2 112.6 32.3 14.1 46.4 Long-term debt 110.5 13.1 123.6 21.4 (10.5) 10.9 - - - ----------------------------------------------------------------------------------------------------------------------------------- Total interest expense 245.4 442.1 687.5 187.9 74.0 261.9 - - - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income (TE) $ 85.4 $(143.5) $ (58.1) $236.1 $(226.1) $ 10.0 ======= ======== ======== ====== ======= ====== - - - -----------------------------------------------------------------------------------------------------------------------------------
[FN] The change in interest not due solely to volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each. TE = Taxable Equivalent 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 Corporatioin'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. SHORT-TERM INTEREST RATE EXPOSURE 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 various pro forma changes in the overall level of interest rates. These estimates are based on a large number of assumptions related to loan and deposit growth, prepayments, interest rates, and other factors. Management believes that both individually and in the aggregate these assumptions are reasonable, but the complexity of the simulation modeling process results in a sophisticated estimate, not a precise calculation of exposure. For example, estimates of future cash flows must be made for instruments without contractual repayment schedules. The ALCO guidelines provide that a gradual 200 basis point increase or decrease in short-term rates over the next twelve-month period should not result in more than a 2% impact on net interest income from what net interest income would have been if interest rates did not change. As discussed in the following Management Actions 39 14 KEYCORP AND SUBSIDIARIES - - - ----------------------------------------------------------------------------- - - - ----------------------------------------------------------------------------- section, the Corporation has maintained a slightly liability-sensitive position, well within these guidelines, largely as a result of actions taken during the fourth quarter of 1994 and the first quarter of 1995. Short-term interest rate exposure analysis is supplemented with an interest rate sensitivity gap ("gap") model. This model measures the difference between assets and liabilities repricing or maturing within specified time periods. An asset-sensitive position indicates that there are more rate-sensitive assets than rate-sensitive liabilities repricing or maturing during specified time horizons, which would generally imply a favorable impact on net interest income in periods of rising interest rates. Conversely, a liability-sensitive position, where rate-sensitive liabilities exceed the amount of rate-sensitive assets repricing or maturing within applicable time frames, would generally imply a favorable impact on net interest income in periods of declining interest rates. The interest rate gap analysis table shown in Figure 9 presents the gap position (including the impact of interest rate swap contracts) of the Corporation at December 31, 1995. Gap analysis has several limitations. For example, it does not take into consideration the varying degrees of interest rate sensitivity pertaining to the assets and liabilities that reprice within very short time frames or the various spreads on different assets and liabilities maturing within a given time frame, whereas such characteristics are considered in the simulation model. Thus, at December 31, 1995, the cumulative adjusted interest rate sensitivity gap within the one-year time frame indicated the Corporation was asset sensitive versus slight liability sensitivity demonstrated by the more sophisticated simulation model. LONG-TERM INTEREST RATE EXPOSURE Short-term interest rate exposure analysis is complemented by a duration/economic value of equity model. This model provides the added benefit of measuring the exposure to interest rate changes outside the one- to two-year time frame not measured by the simulation model. By calculating the net present value of future balance sheet and interest cash flows based on the implied forward yield curve, the effective duration (in years) of assets, liabilities, and off-balance sheet positions are modeled to determine the net duration of the Corporation's equity. A positive equity duration indicates the Corporation is liability sensitive, while a negative duration indicates asset sensitivity. The longer the duration of equity, the more sensitive the Corporation is to longer-term interest rate changes. Duration analysis has several limitations as it involves assumptions about events that span an even longer time frame than that used in the simulation model. Calculated present values of future cash flows often differ from actual market values, and the future structure of the balance sheet derived from ongoing loan and deposit activity by the Corporation's core businesses is not factored into present value calculations. The Corporation is naturally asset-sensitive, generating more fixed rate liabilities than fixed rate assets in response to customer demand. The duration analysis as of December 31, 1995, shown in Figure 10 demonstrates the natural asset sensitivity of the Corporation's core businesses as the duration of liabilities exceeded the duration of assets by .9 years. The assets and liabilities shown under the Risk Management Portfolio heading in Figure 10 are used to manage interest rate exposure, enhance liquidity and improve profitability. Adjusting for this portfolio, the Corporation's duration of equity is slightly liability-sensitive at 1.8 years. MANAGEMENT ACTIONS During the first quarter of 1995, management completed the reconfiguration of the Corporation's balance sheet in accordance with plans initially announced in December 1994. The objective of this reconfiguration was to reduce significantly 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. 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. During the latter half of 1995, a number of additional actions were taken in connection with the execution of asset/liability management strategies designed to improve liquidity, reduce longer-term interest rate exposure and enhance capital management flexibility. In the third quarter of 1995, the Corporation completed its first securitization and sale of indirect auto loans (in the amount of $299.0 million) and sold approximately $500.0 million of residential mortgage loans. In the following quarter, the Corporation sold an additional $510.0 million of residential mortgage loans, entered into a commitment to sell $500.0 million of residential mortgage loans in the first quarter of 1996, reclassified approximately $8.0 billion of securities from the investment securities to the securities available-for-sale portfolio in connection with a one-time opportunity (described in Note 3, Securities Available for Sale, starting on page 71) provided by the Financial Accounting Standards Board ("FASB"), sold $1.3 billion of securities and executed $1.0 billion of indexed amortizing receive fixed swaps and $1.0 billion of pay fixed swaps. 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 40 15 KEYCORP AND SUBSIDIARIES - - - ------------------------------------------------------------------------------------------------------------------------------------ Figure 9 Interest Rate Gap Analysis - - - ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1995 1 to 90 91 to 180 181 to 365 1 to 5 Over 5 dollars in millions Days Days Days Years Years Total - - - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Loans (including mortgage loans held for sale) $22,935.5 $ 3,146.3 $5,895.8 $13,538.7 $2,815.9 $48,332.2 Investment securities 313.1 170.9 317.8 545.8 340.1 1,687.7 Securities available for sale 617.1 489.4 1,106.0 3,916.3 1,931.2 8,060.0 Short-term investments 682.4 - - - - 682.4 Other assets 1,601.7 485.7 589.6 1,799.1 3,100.7 7,576.8 - - - ----------------------------------------------------------------------------------------------------------------------------------- Total assets 26,149.8 4,292.3 7,909.2 19,799.9 8,187.9 66,339.1 - - - ----------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest-bearing deposits 900.3 - - 8,380.7 - 9,281.0 Interest-bearing deposits 11,769.0 4,125.6 3,845.8 18,008.4 252.1 38,000.9 Borrowed funds 8,750.6 974.2 756.3 788.6 1,158.3 12,428.0 Other liabilities 102.9 159.0 137.4 601.7 475.7 1,476.7 Shareholders' equity - - - - 5,152.5 5,152.5 - - - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity 21,522.8 5,258.8 4,739.5 27,779.4 7,038.6 66,339.1 - - - ----------------------------------------------------------------------------------------------------------------------------------- Interest rate swap contracts (4,365.0) (1,036.3) (556.4) 3,701.9 2,255.8 - - - - ----------------------------------------------------------------------------------------------------------------------------------- Rate sensitivity gap $ 262.0 $(2,002.8) $2,613.3 $ (4,277.6) $3,405.1 - Cumulative gap $ 262.0 $(1,740.8) $ 872.5 $ (3,405.1) - - - - - ----------------------------------------------------------------------------------------------------------------------------------- Cumulative gap as a % of earning assets .45% (2.96)% 1.49% (5.80)% - - - - - -----------------------------------------------------------------------------------------------------------------------------------
- - - ------------------------------------------------------------------------------------------------------------------------------------ Figure 10 Duration Analysis - - - ------------------------------------------------------------------------------------------------------------------------------------ December 31, 1995 Risk Management Core Businesses Portfolio Total --------------------- --------------------- ------------------------- Duration Duration Duration dollars in millions Balance (years) Balance (years) Balance (years) - - - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Loans (including mortgage loans held for sale) $48,332.2 1.1 - - $48,332.2 1.1 Investment securities - - $ 1,687.7 2.6 1,687.7 2.6 Securities available for sale - - 8,060.0 3.2 8,060.0 3.2 Short-term investments - - 682.4 - 682.4 - Other assets 7,576.8 2.6 - - 7,576.8 2.6 - - - ----------------------------------------------------------------------------------------------------------------------------------- Total assets 55,909.0 1.3 10,430.1 2.9 66,339.1 1.5 - - - ----------------------------------------------------------------------------------------------------------------------------------- LIABILITIES Noninterest-bearing deposits 9,281.0 3.1 - - 9,281.0 3.1 Interest-bearing deposits 38,000.9 1.9 - - 38,000.9 1.9 Borrowed funds - - 12,428.0 .8 12,428.0 .8 Other liabilities 1,476.7 3.0 - - 1,476.7 3.0 - - - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities 48,758.6 2.2 12,428.0 .8 61,186.6 1.9 - - - ----------------------------------------------------------------------------------------------------------------------------------- Interest rate swap contracts: Receive-fixed - - 8,697.2 2.8 8,697.2 2.8 Pay-fixed - - 2,411.5 .9 2,411.5 .9 - - - ----------------------------------------------------------------------------------------------------------------------------------- Shareholders' equity - - - - 5,152.5 1.8 - - - -----------------------------------------------------------------------------------------------------------------------------------
41 16 KEYCORP AND SUBSIDIARIES - - - ------------------------------------------------------------------------------------------------------------------------------------ Figure 11 Interest Rate Swap Portfolio - - - ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1995 December 31, 1994 ------------------------------------------------------- --------------------- Weighted Average Rate Notional Fair Maturity(1) -------------------- Notional Fair dollars in millions Amount Value (years) Receive Pay Amount Value - - - ----------------------------------------------------------------------------------------------------------------------------------- Receive fixed/pay variable-indexed amortizing $ 6,200.0 $ 70.0 2.3 6.76% 5.79% $ 5,786.6 $(341.7) Receive fixed/pay variable-conventional 2,497.2 104.3 6.7 6.65 5.81 3,010.2 (199.6) Pay fixed/receive variable-conventional 2,411.5 (21.1) 1.0 5.66 6.50 1,456.5 11.5 Basis swaps - - - - - 200.0 .1 - - - ----------------------------------------------------------------------------------------------------------------------------------- Total portfolio swaps 11,108.7 153.2 3.0 6.50 5.95 10,453.3 (529.7) Customer swaps 2,844.0 11.0 4.2 6.50 6.52 1,248.3 2.0 - - - ----------------------------------------------------------------------------------------------------------------------------------- Total interest rate swaps $13,952.7 $164.2 3.3 6.50 6.07 $11,701.6 $(527.7) ========= ====== ========= ======= - - - -----------------------------------------------------------------------------------------------------------------------------------
[FN] (1)Maturity is based upon expected average lives rather than contractual terms. interest-earning assets. Left unaddressed, this tendency results in an asset-sensitive position and would place the Corporation's 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 decision to use portfolio interest rate swaps versus on-balance sheet securities to manage interest rate risk has depended on various factors, including funding costs, liquidity, and capital requirements. As summarized in Figure 11, the Corporation's portfolio swaps totaled $11.1 billion at December 31, 1995, and consisted principally of contracts wherein the Corporation receives a fixed rate of interest while paying a variable rate. 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. 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 mitigates the interest rate risk of customer swaps by entering into offsetting positions with third parties. Adjustments to fair values of customer swaps and offsetting positions are included in other income on the income statement. The $2.8 billion notional amount of customer swaps presented in Figure 11 includes $1.4 billion of interest rate swaps that receive a fixed rate and pay a variable rate and $1.4 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 $14.0 billion and $11.7 billion at December 31, 1995 and 1994, respectively. The weighted average rates presented in Figure 11 are those in effect at December 31, 1995. Portfolio interest rate swaps reduced net interest income and the net interest margin by $29.2 million and 5 basis points, respectively, during 1995. These reductions reflected the amortization of net deferred losses from swap terminations, which more than offset the impact of a positive spread on the 1995 swap portfolio. As of December 31, 1995, the spread on portfolio interest rate swaps, which excludes the - - - ---------------------------------------------------------------------------------------------------------------------------------- Figure 12 Portfolio Swap Activity - - - ----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1995 Receive Fixed ---------------------------- Total Indexed Pay Fixed- Basis Portfolio in millions 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 2,010.0 217.0 2,030.0 - 4,257.0 Maturities - 605.0 1,075.0 200.0 1,880.0 Terminations 1,300.0 125.0 - - 1,425.0 Amortization 296.6 - - - 296.6 - - - ----------------------------------------------------------------------------------------------------------------------------------- Balance at end of year $6,200.0 $2,497.2 $2,411.5 - $11,108.7 ======== ======== ======== ========= - - - -----------------------------------------------------------------------------------------------------------------------------------
42 17 KEYCORP AND SUBSIDIARIES - - - ----------------------------------------------------------------------------------------------------------------------------------- Figure 13 Portfolio Swaps By Interest Rate Management Strategy - - - -----------------------------------------------------------------------------------------------------------------------------------
December 31, 1995 1994 ---------------------------- ---------------------------- Notional Fair Notional Fair in millions Amount Value Amount Value - - - ----------------------------------------------------------------------------------------------------------------------------------- Convert variable rate loans to fixed $ 7,566.7 $113.2 $ 7,146.6 $(470.6) Convert variable rate deposits and short-term borrowings to fixed 2,275.0 (18.2) 1,275.0 11.9 Convert variable rate long-term debt to fixed 136.5 (2.8) 181.5 (.4) Convert fixed rate long-term debt to variable 1,130.5 61.0 1,650.2 (70.7) Other - - 200.0 .1 - - - ----------------------------------------------------------------------------------------------------------------------------------- Total portfolio swaps $11,108.7 $153.2 $10,453.3 $(529.7) ========= ====== ========= ======= - - - -----------------------------------------------------------------------------------------------------------------------------------
amortization of net deferred swap losses, provided a positive impact on net interest income (since the weighted average rate received exceeded the weighted average rate paid by 55 basis points). The portfolio had an aggregate fair value of $153.2 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. As shown in Figure 11, the estimated fair value of the Corporation's total interest rate swap portfolio improved substantially during 1995 from a negative fair value of $(527.7) million at December 31, 1994. The improvement in fair value over the year 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 1994, swaps with an aggregate notional amount of $1.4 billion were terminated prior to their maturities, resulting in net deferred losses of $49.2 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 December 31, 1995, is presented in Note 17, Financial Instruments with Off-Balance Sheet Risk, beginning on page 84. 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 year ended December 31, 1995, are summarized in Figure 12. A summary of the notional and fair values of portfolio swaps by interest rate management strategy at December 31, 1995, is presented in Figure 13. The fair value at any given date represents the estimated income (if positive) or cost (if negative) 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 generated by the asset or liability being managed. 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. - - - ---------------------------------------------------------------------------------------------------------------------------------- Figure 14 Expected Average Maturities Of Portfolio Swaps - - - ----------------------------------------------------------------------------------------------------------------------------------
December 31, 1995 Receive Fixed --------------------------- Total Indexed Pay Fixed- Portfolio in millions Amortizing Conventional Conventional Swaps - - - ---------------------------------------------------------------------------------------------------------------------------------- Due in one year or less $1,247.3 $ 2.4 $1,231.5 $ 2,481.2 Due after one though five years 4,937.7 214.8 1,180.0 6,332.5 Due after five through ten years 15.0 2,280.0 - 2,295.0 - - - ---------------------------------------------------------------------------------------------------------------------------------- Total portfolio swaps $6,200.0 $2,497.2 $2,411.5 $11,108.7 ======== ======== ======== ========= - - - ----------------------------------------------------------------------------------------------------------------------------------
43 18 KEYCORP AND SUBSIDIARIES - - - ---------------------------------------------------------------------------------------------------------------------------------- Figure 15 Maturities and Sensitivity of Certain Changes in Interest Rates - - - ----------------------------------------------------------------------------------------------------------------------------------
December 31, 1995 Within 1-5 Over in millions 1 Year Years 5 Years Total - - - ----------------------------------------------------------------------------------------------------------------------------------- Commercial, financial and agricultural $ 7,355.3 $2,895.7 $ 1,283.6 $11,534.6 Real estate-construction 910.6 506.4 102.9 1,519.9 Real estate-commercial and residential mortgage 2,900.8 6,298.0 10,231.7 19,430.5 Foreign 63.9 6.1 50.8 120.8 - - - ----------------------------------------------------------------------------------------------------------------------------------- $11,230.6 $9,706.2 $11,669.0 $32,605.8 ========= ======== ========= ========= Loans with floating or adjustable rates $4,377.7 $ 6,402.3 Loans with predetermined interest rates 5,328.5 5,266.7 - - - ----------------------------------------------------------------------------------------------------------------------------------- $9,706.2 $11,669.0 ======== ========= - - - -----------------------------------------------------------------------------------------------------------------------------------
At December 31, 1995, the Corporation had 14 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 $159.7 million to 12, with the largest credit exposure to an individual counterparty amounting to $40.9 million. Although the Corporation is exposed to credit-related losses in the event of nonperformance by the counterparties, based on management's assessment, as of December 31, 1995, all counterparties were expected to meet their obligations. The expected average maturities of the portfolio swaps at December 31, 1995, are summarized in Figure 14. The maturities and sensitivity of certain loans to changes in interest rates are summarized in Figure 15. As shown in the figure, at December 31, 1995, approximately one-third of these loans were scheduled to mature within one year and loans with maturities greater than one year were evenly split between those with floating or adjustable rates and those with predetermined rates. NONINTEREST INCOME As shown in Figure 17, noninterest income totaled $933.0 million in 1995, up $50.4 million, or 6%, from the prior year. Excluding, for comparative purposes, noncore items consisting of net securities transactions, special asset management fees and a positive 1995 accounting adjustment of $12.5 million from better-than-expected performance of student loan securitizations completed in prior years, noninterest income for 1995 was $955.1 million, up $75.1 million, or 9%, from the previous year. Core noninterest income in 1994 decreased $18.0 million, or 2%, relative to the prior year, after similarly adjusting for net securities transactions, special asset management fees and a $29.4 million gain on the 1993 sale of Ameritrust Texas Corporation ("ATC"). The net securities losses for both 1995 and 1994 were primarily the result of the balance sheet reconfiguration, previously discussed in the Asset and Liability Management section beginning on page 39. The reduction in special asset management fees reflected an expected decrease in the level of activity associated with loan collection and asset disposition work performed under contracts with the Federal Deposit Insurance Corporation ("FDIC"). As collection and disposition work progressed, the pool of assets on which fees could be earned declined. These contracts expired during the third quarter of 1995. Nine acquisitions completed since the 1993 year end also had a positive impact on 1995 and 1994 noninterest income in comparison with the respective prior year periods. Primary factors contributing to the 1995 improvement in core noninterest income were increases in loan securitization income ($49.6 million), service charges on deposit accounts ($14.8 million), trust and asset management income ($12.6 million) and miscellaneous other income ($37.4 million). These increases were partially offset by a $46.8 million decrease in mortgage banking income. Loan securitization income became a major component of the Corporation's core noninterest income in 1995. Loan sales and securitizations provide increased liquidity and capital flexibility, while contributing to improved profitability through the disposal of lower spread assets. As such, they are important vehicles in implementing the Corporation's balance sheet management strategies. Excluding the $12.5 million adjustment related to prior periods, loan securitization income was $53.1 million in 1995, with the largest contribution - - - --------------------------------------------------------------------- Figure 16 Loan Securitizations - - - ---------------------------------------------------------------------
in millions 1995 1994 1993 - - - --------------------------------------------------------------------- YEAR ENDED DECEMBER 31, Servicing fees $ 3.0 - - Gains on sales of securitized loans 49.2 $ 3.5 $ .5 Miscellaneous income 13.4(1) - - - - - --------------------------------------------------------------------- Total loan securitization income $ 65.6 $ 3.5 $ .5 ====== ===== ==== - - - --------------------------------------------------------------------- AT DECEMBER 31, Student loans securitized $1,604.5 $694.6 $200.4 Auto loans securitized 414.4 - - - - - --------------------------------------------------------------------- Total student and auto loans securitized $2,018.9 $694.6 $200.4 ======== ====== ====== - - - ---------------------------------------------------------------------
[FN] (1) Includes a $12.5 million adjustment for better-than-expected performance of student loan securitizations, with $9.6 million and $2.9 million related to securitizations completed in 1994 and 1993, respectively. 44 19 KEYCORP AND SUBSIDIARIES - - - ------------------------------------------------------------------------------------------------------------------------------------ Figure 17 Noninterest Income - - - ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, Change 1995 vs 1994 --------------------- dollars in millions 1995 1994 1993 Amount Percent - - - ----------------------------------------------------------------------------------------------------------------------------------- Service charges on deposit accounts $278.0 $263.2 $ 252.5 $ 14.8 5.6% Trust and asset management income 232.4 219.8 244.6 12.6 5.7 Loan securitization income 65.6 3.5 .5 62.1 N/M Credit card fees 84.4 76.2 73.5 8.2 10.8 Insurance and brokerage income 60.5 58.6 65.7 1.9 3.2 Mortgage banking income 41.2 88.0 127.9 (46.8) (53.2) Net securities gains (losses) (40.6) (14.7) 28.3 (25.9) (176.2) Gains on certain asset sales - - 29.4 - - Other income: Letter of credit fees 14.6 12.1 11.1 2.5 20.7 Special asset management fees 6.0 17.3 46.0 (11.3) (65.3) Venture capital gains 11.5 16.6 (.8) (5.1) (30.7) Miscellaneous 179.4 142.0 123.0 37.4 26.3 - - - ----------------------------------------------------------------------------------------------------------------------------------- Total other income 211.5 188.0 179.3 23.5 12.5 - - - ----------------------------------------------------------------------------------------------------------------------------------- Total noninterest income $933.0 $882.6 $1,001.7 $ 50.4 5.7% ====== ====== ======== ====== === - - - -----------------------------------------------------------------------------------------------------------------------------------
N/M = Not Meaningful coming from gains totaling $49.2 million on sales of securitized loans. Additional detail pertaining to the composition of loan securitization income and the types of loans securitized is presented in Figure 16. These loans are administered or serviced by the Corporation and are not recorded on its balance sheet. In 1995, the growth in service charges on deposit accounts reflected the repricing of fees by certain affiliate banks, a modestly larger deposit base, increased collection efforts and the introduction of certain services into new markets. The 1994 increase also reflected the repricing of certain fees. Trust and asset management income, including fees associated with investment advisory services, continued to be a major source of noninterest income. In 1995, the increase in trust and asset management income was due, in large part, to the acquisition of Spears Benzak, a New York-based investment management firm. Other factors contributing to the growth of this category were the strong performance of both the stock and bond markets, and an increased array of products. After giving effect to the sale of ATC, which contributed approximately $33.6 million in 1993, trust and asset management income for 1994 was up $8.8 million, or 4%, from the prior year. This sale reduced discretionary trust assets by approximately $4.0 billion. At December 31, 1995, the Corporation, through its bank and trust company subsidiaries and its registered investment advisory subsidiaries, had discretionary assets (excluding corporate trust assets) of more than $47.0 billion, compared with approximately $33.0 billion at the end of 1994. Fees from investment advisory services accounted for approximately 24% and 20% of the Corporation's total trust and asset management income in 1995 and 1994, respectively. Additional detail pertaining to trust income and assets is presented in Figure 18. The increase in miscellaneous other income resulted from a $6.5 million gain from the sale of the Corporation's bond services business, increases of $8.4 million and $7.0 million in income from dealer swap activities and corporate owned life insurance, respectively, $5.0 - - - ---------------------------------------------------------------------- Figure 18 Trust and Asset Management - - - ----------------------------------------------------------------------
Change 1995 vs 1994 ------------------ 1995 1994 1993 Amount Percent - - - ---------------------------------------------------------------------- YEAR ENDED DECEMBER 31, (dollars in millions) Personal asset management and custody fees $136.4 $123.5 $137.1 $12.9 10.4% Institutional asset management and custody fees 68.5 72.8 78.9 (4.3) (5.9) Bond services 8.5 9.1 11.6 (.6) (6.6) All other fees 19.0 14.4 17.0 4.6 31.9 - - - ---------------------------------------------------------------------- Total trust and asset management income $232.4 $219.8 $244.6 $12.6 5.7% ====== ====== ====== ===== ==== - - - ---------------------------------------------------------------------- AT DECEMBER 31, (dollars in billions) Discretionary $47.4 $32.5 NA $14.9 45.8% Non-discretionary 33.9 32.6 NA 1.3 4.0 - - - ---------------------------------------------------------------------- Total trust assets $81.3 $65.1 NA $16.2 24.9% ====== ====== ===== - - - ----------------------------------------------------------------------
NA = Not Available 45 20 KEYCORP AND SUBSIDIARIES - - - ------------------------------------------------------------------------------------------------------------------------------------ Figure 19 Noninterest expense - - - ----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, Change 1995 vs 1994 -------------------- dollars in millions 1995 1994 1993 Amount Percent - - - --------------------------------------------------------------------------------------------------------------------------------- Personnel $1,114.8 $1,059.9 $1,071.4 $ 54.9 5.2% Net occupancy 218.1 216.9 204.2 1.2 .6 Equipment 155.9 158.0 161.3 (2.1) (1.3) FDIC insurance assessments 58.4 98.7 98.7 (40.3) (40.8) Amortization of intangibles 77.4 58.5 58.1 18.9 32.3 Professional fees 73.1 50.0 53.3 23.1 46.2 Marketing 70.9 58.6 60.4 12.3 21.0 Merger and integration charges - - 118.7 - - Other expense: OREO expense (net of income of $5.6, $5.3, $14.4) (1.2) 2.5 43.1 (3.7) N/M Miscellaneous 544.2 464.1 515.9 80.1 17.3 - - - --------------------------------------------------------------------------------------------------------------------------------- Total other expense 543.0 466.6 559.0 76.4 16.4 - - - --------------------------------------------------------------------------------------------------------------------------------- Total noninterest expense $2,311.6 $2,167.2 $2,385.1 $144.4 6.7% ======== ======== ======== ====== Full-time equivalent employees 29,563 29,211 29,983 Efficiency ratio 63.03% 59.39% 60.50% Overhead ratio 49.66 46.14 46.85 - - - ---------------------------------------------------------------------------------------------------------------------------------
N/M = Not Meaningful million of interest recorded in 1995 on Federal income tax refunds and increases in a number of other categories of operating income. The positive impact of the above items was partially offset by a $46.8 million decrease in mortgage banking income, resulting from the March 1995 sale of the Corporation's residential mortgage loan servicing business. This transaction, as well as the Spears Benzak and ATC transactions previously referred to, are more fully disclosed in Note 2, Mergers, Acquisitions and Divestitures, beginning on page 70. NONINTEREST EXPENSE Noninterest expense, as shown in Figure 19, totaled $2.3 billion in 1995, up $144.4 million, or 7%, from the 1994 level. Excluding, for comparative purposes, a $25.4 million write-off of obsolete software in 1995, noninterest expense for 1995 was up $119.0 million, or 5%, from the prior year. Similarly adjusting for the merger and integration charges and certain other nonrecurring charges ($34.4 million) in 1993, core noninterest expense in 1994 was down $64.8 million, or 3%, from 1993. The other nonrecurring charges in 1993 were primarily three items: $21.6 million related to various systems conversion costs, $7.0 million of facilities-related charges and $4.0 million associated with the adoption of Statement of Financial Accounting Standards ("SFAS") No. 112, "Employers' Accounting for Postemployment Benefits." The higher level of core noninterest expense in 1995 was primarily due to increases in personnel expense ($54.9 million), professional fees ($23.1 million), amortization of intangibles ($18.9 million), marketing expense ($12.3 million) and miscellaneous other expense ($54.7 million). These increases were partially offset by a $40.3 million decrease in FDIC insurance assessments discussed in more detail on page 47. In general, the increases previously summarized reflected the impact of nine acquisitions completed since the 1993 year end and approximately $41.3 million of additional expenses recorded during 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 1995 sale of both KeyCorp Mortgage Inc., and Schaenen Wood & Associates, Inc. The acquisitions and sales referred to above are more fully disclosed in Note 2, Mergers, Acquisitions and Divestitures, beginning on page 70. In 1995, the increase in personnel expense, the largest category of noninterest expense, was due, in large part, to normal salary increases, higher employee benefits costs, and the impact of acquisitions, including the resulting increase in the number of full-time equivalent employees. The $11.5 million decrease in 1994 was the result of a 3% decline in the number of full-time equivalent employees, the sale of ATC, the integration of certain old KeyCorp and Society operations and lower costs associated with contracted or temporary personnel. At December 31, 1995, the number of full-time equivalent employees was 29,563, compared with 29,211 and 29,983 at the end of 1994 and 1993, respectively. The increase in professional fees in 1995 included approximately $24.0 million of the $41.3 million of incremental strategic spending noted above. In 1994, the $3.3 million decrease from the prior year reflected lower costs for legal and consulting services. The growth in marketing expense in 1995 was largely due to additional costs related to strategic efforts aimed at strengthening the KeyBank brand name, while the higher level of amortization associated with intangibles in 1995 was a direct result of the amortization 46 21 KEYCORP AND SUBSIDIARIES - - - ------------------------------------------------------------------------------ - - - ------------------------------------------------------------------------------ of goodwill recorded in connection with acquisitions consummated over the past two years. Excluding the noncore items referred to in the first paragraph of this section, the increase in miscellaneous other expense of $54.7 million in 1995 reflected the impact of acquisitions on various expense components and higher loan servicing fees due to the sale of the residential mortgage loan servicing business. The increases in the 1995 noninterest expense categories previously discussed were significantly offset by the effect of a reduction in the Bank Insurance Fund ("BIF") assessment rate for well-capitalized banks from $.23 per $100 of insured deposits to $.04 per $100 for the period June through December 1995. The rate has been further reduced to zero effective January 1, 1996. At December 31, 1995, $41.7 billion, or 88%, of the Corporation's deposits were BIF insured. At the same date, the Corporation had $4.4 billion of deposits insured by the Savings Association Insurance Fund ("SAIF"). The SAIF assessment rate was maintained at $.23 per $100 of insured deposits throughout 1995 and into 1996. Potential reduction of this assessment rate has been linked in a Congressional proposal to a one-time special assessment of institutions whose deposits are SAIF-insured. The special assessment would be for the purpose of replenishing the SAIF, and has been proposed in the range of $.80-$.85 per $100 of SAIF-insured deposits. The Corporation does not know when, or if, this proposal may be adopted, nor, if adopted, if it would result in a reduction of the SAIF assessment rate of $.23 per $100 of insured deposits. Accordingly, no liability for the special assessment has been recorded. Merger and integration charges of $118.7 million ($80.6 million after tax, $.33 per Common Share) were recorded in 1993. These charges established a reserve for expenses, directly related to the KeyCorp-Society merger, primarily consisting of investment banking and other professional fees ($20.5 million); severance payments and other employee costs ($49.6 million); systems and facilities costs ($35.7 million); and other costs incident to the merger ($12.9 million). There was no remaining accrued liability for merger and integration reserves at December 31, 1995, compared with a liability of $33.5 million at December 31, 1994. INCOME TAXES The provision for income taxes (before the extraordinary net gain) for 1995 was $368.5 million, compared with $430.0 million in 1994 and $374.0 million in 1993. The effective tax rate (provision for income taxes as a percentage of income before income taxes) was 31.8% in 1995, 33.5% in 1994 and 34.5% in 1993. The decrease in the 1995 tax provision and the reduction of the 1995 effective tax rate resulted primarily from 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 and an increase in tax-advantaged assets and credits associated with investments in low-income housing projects. The lower 1994 effective tax rate in comparison to 1993 reflected the relatively high level of non-deductible expenses and merger and integration charges incurred in 1993 in relation to the 1994 KeyCorp-Society merger. FINANCIAL CONDITION LOANS As shown in Figure 20, at December 31, 1995, total loans outstanding were $47.7 billion, up from $46.2 billion at December 31, 1994, and $40.1 billion at December 31, 1993. The $1.5 billion, or 3%, increase from the year-end 1994 level reflected increases of $1.3 billion in commercial loans, $711.5 million in commercial real estate (of which $478.8 million pertained to commercial mortgages), $264.7 million in student loans held for sale and $579.8 million in lease financing. These increases resulted from internal loan growth as well as the impact of acquisitions which were completed by the Corporation during 1995. The change in the mix of the loan portfolio reflected the impact of the internal loan growth. Acquisitions included OMNIBANCORP in the Rocky Mountain Region, Casco Northern Bank, National Association and BANKVERMONT Corporation in the Northeast Region and AFG, which is included in Financial Services in Figure 21. Excluding the $1.5 billion impact of the acquisitions, loans decreased by $55.1 million since the prior year end. Internal loan growth of $3.0 billion was offset by the transfer of approximately $1.5 billion of residential mortgage loans to the held for sale portfolio and the securitization and sale of $1.4 billion in student and auto loans. As shown in Figure 21, loan growth, excluding mortgage loans transferred to the held for sale portfolio, was achieved in several of KeyCorp's geographic regions. The large increase in Financial Services resulted from the acquisition of AFG and the transfer of affiliate bank credit card portfolios, aggregating $1.4 billion, to KeyBank USA in 1995. The distribution of loans by geographic region as of December 31, 1995, is evidence of the significant credit risk diversification possible because of the Corporation's unique 14-state, four-region profile. Commercial loans outstanding at December 31, 1995, were $11.5 billion, up 13% from the December 31, 1994, level of $10.2 billion, following an increase of $1.2 billion, or 14%, in 1994. Factors contributing to the growth in 1995 included the general strength of the economy as well as the impact of acquisitions. Loans secured by real estate totaled $21.0 billion at December 31, 1995, compared with $21.6 billion at December 31, 1994, and $18.4 billion at December 31, 1993. These loans consist of construction loans, commercial mortgage loans and one-to-four family residential loans (including home equity loans). The $678.8 million, or 3%, decrease from 1994 was attributable to the transfer of 47 22 KEYCORP AND SUBSIDIARIES - - - -------------------------------------------------------------------------------------------------------------------- Figure 20 Composition of Loans - - - --------------------------------------------------------------------------------------------------------------------
December 31, 1995 1994 1993 ------------------ ------------------- ------------------- dollars in millions Amount % of Total Amount % of Total Amount % of Total - - - -------------------------------------------------------------------------------------------------------------------- Commercial, financial and agricultural $11,534.6 24.2% $10,190.6 22.0% $ 8,965.5 22.4% Real estate-construction 1,519.9 3.2 1,287.2 2.8 1,160.5 2.9 Real estate-commercial mortgage 7,253.7 15.2 6,774.9 14.7 6,228.2 15.5 - - - -------------------------------------------------------------------------------------------------------------------- Total commercial real estate 8,773.6 18.4 8,062.1 17.5 7,388.7 18.4 Real estate-residential mortgage 12,176.8 25.5 13,567.1 29.3 11,026.3 27.5 - - - -------------------------------------------------------------------------------------------------------------------- Total real estate 20,950.4 43.9 21,629.2 46.8 18,415.0 45.9 Credit cards 1,563.9 3.3 1,419.1 3.1 1,429.3 3.6 Other consumer 8,553.8 17.9 8,764.7 19.0 7,847.1 19.5 - - - -------------------------------------------------------------------------------------------------------------------- Total consumer 10,117.7 21.2 10,183.8 22.1 9,276.4 23.1 Student loans held for sale 2,081.2 4.3 1,816.5 3.9 1,648.6 4.1 Lease financing 2,887.0 6.1 2,307.2 5.0 1,702.5 4.3 Foreign 120.8 .3 97.4 .2 63.3 .2 - - - -------------------------------------------------------------------------------------------------------------------- Total $47,691.7 100.0% $46,224.7 100.0% $40,071.3 100.0% ========= ====== ========= ===== ========= ===== - - - --------------------------------------------------------------------------------------------------------------------
1992 1991 ------------------ ----------------- Amount % of Total Amount % of Total - - - ------------------------------------------------------------------------------------------- Commercial, financial and agricultural $ 8,869.0 24.6% $ 9,183.9 25.9% Real estate-construction 1,448.0 4.0 1,577.3 4.4 Real estate-commercial mortgage 5,937.0 16.5 6,258.5 17.6 - - - ------------------------------------------------------------------------------------------- Total commercial real estate 7,385.0 20.5 7,835.8 22.0 Real estate-residential mortgage 8,289.4 23.0 7,240.7 20.4 - - - ------------------------------------------------------------------------------------------- Total real estate 15,674.4 43.5 15,076.5 42.4 Credit cards 1,448.2 4.0 1,459.8 4.1 Other consumer 7,633.5 21.2 8,790.7 24.7 - - - ------------------------------------------------------------------------------------------- Total consumer 9,081.7 25.2 10,250.5 28.8 Student loans held for sale 1,070.1 3.0 - - Lease financing 1,225.2 3.4 946.5 2.7 Foreign 101.4 .3 76.9 .2 - - - ------------------------------------------------------------------------------------------- Total $36,021.8 100.0% $35,534.3 100.0% ========= ======= ========= ====== - - - -------------------------------------------------------------------------------------------
- - - ------------------------------------------------------------------------------------------------------------------------- Figure 21 Period-End Loan Growth By Region - - - -------------------------------------------------------------------------------------------------------------------------
December 31, Other December 31, Percent dollars in millions 1994 Acquired Sold(1) Activity 1995 Change - - - ------------------------------------------------------------------------------------------------------------------------- Northeast Region $12,621.6 $1,162.2 $ 97.2 $ 30.8 $13,717.4 8.7% Great Lakes Region 20,909.0 - 2,178.1 480.4 19,211.3 (8.1) Rocky Mountain Region 3,317.3 215.3 510.7 795.1 3,817.0 15.1 Northwest Region 9,270.2 - 213.4 (49.0) 9,007.8 (2.8) Financial Services 106.6 144.6 96.0 1,783.0 1,938.2 N/M - - - ------------------------------------------------------------------------------------------------------------------------ Total $46,224.7 $1,522.1 $3,095.4 $3,040.3 $47,691.7 3.2% ========= ======== ======== ======== ========= - - - ------------------------------------------------------------------------------------------------------------------------
[FN] (1)Includes mortgage loans transferred to the held for sale portfolio. N/M = Not Meaningful 48 23 KEYCORP AND SUBSIDIARIES - - - -------------------------------------------------------------------------------- - - - -------------------------------------------------------------------------------- approximately $1.5 billion in residential mortgages to the held for sale portfolio. Excluding these transfers, loans secured by real estate were up $821.2 million, or 4%, in 1995. Construction loans increased to $1.5 billion at December 31, 1995, up from $1.3 billion at December 31, 1994, and $1.2 billion at December 31, 1993. At December 31, 1995, 13% of the construction loan portfolio was secured by properties in the Northeast Region, 46% in the Great Lakes Region, 17% in the Rocky Mountain Region, 23% in the Northwest Region and 1% in Financial Services. The commercial mortgage loan portfolio totaled $7.3 billion at December 31, 1995, compared with $6.8 billion at December 31, 1994, and $6.2 billion at December 31, 1993. The Corporation manages risk exposure in the construction and commercial mortgage portfolios through prudent underwriting criteria and by monitoring loan concentrations by geographic region and property type. Figure 22 shows the portions of the construction and commercial mortgage loan portfolios at December 31, 1995, which are collateralized by nonowner-occupied (by industry concentration) and owner-occupied properties. At December 31, 1995, 53% of the construction loan portfolio and 38% of the commercial mortgage loan portfolio were secured by owner-occupied properties. These borrowers are engaged in business activities other than real estate, and the primary source of repayment is not solely dependent on the real estate market. One-to-four family residential mortgages (including home equity loans) were $12.2 billion at December 31, 1995, compared with $13.6 billion at December 31, 1994, and $11.0 billion at December 31, 1993. Home equity loans increased to $2.4 billion at December 31, 1995, up from $2.2 billion and $2.1 billion at December 31, 1994 and 1993, respectively. During 1995, the Corporation adopted a - - - ---------------------------------------------------------------- Figure 22 Construction and Commerical Mortgage Loans - - - ----------------------------------------------------------------
December 31, 1995 Commercial in millions Construction Mortgage Total - - - ------------------------------------------------------------------ Nonowner-occupied: Retail $ 237.9 $ 939.1 $1,177.0 Multi-family properties 187.4 916.7 1,104.1 Office buildings 47.0 1,058.5 1,105.5 Hotels/Motels 1.7 333.9 335.6 Health facilities 5.5 21.1 26.6 Manufacturing facilities 4.4 84.4 88.8 Warehouses 24.8 274.7 299.5 Other 203.4 837.8 1,041.2 - - - ------------------------------------------------------------------ 712.1 4,466.2 5,178.3 Owner-occupied 807.8 2,787.5 3,595.3 - - - ------------------------------------------------------------------ Total $1,519.9 $7,253.7 $8,773.6 ======== ======== ======== - - - ------------------------------------------------------------------
strategy of selling residential mortgage loans with lower spreads. These loans are classified outside of the loan portfolio as mortgage loans held for sale. Furthermore, new residential mortgage loans originated to secondary market standards are sold. During 1995, $1.5 billion of seasoned 15- and 30-year residential mortgages were transferred to the mortgage loans held for sale portfolio. Of the loans transferred, $1.0 billion were sold in the secondary market in 1995 and the remaining $500.0 million were sold in the first quarter of 1996. The net effect of the residential mortgage strategies was a 1995 reduction of $1.6 billion in residential mortgage loans other than home equity loans. Consumer loans (including credit cards) totaled $10.1 billion at December 31, 1995, compared with $10.2 billion at December 31, 1994, and $9.3 billion at December 31, 1993. Credit cards totaled $1.6 billion at December 31, 1995, compared with $1.4 billion at December 31, 1994 and 1993. Other consumer loans, which include approximately $4.0 billion of direct and indirect auto loans and approximately $1.7 billion of indirect marine and recreational vehicle loans, totaled $8.6 billion at December 31, 1995, compared with $8.8 billion at December 31, 1994, and $7.8 billion at December 31, 1993. The decrease in other consumer loans since the 1994 year end primarily reflected the securitization and sale of $395 million of auto loans during 1995. The remainder of the decrease can be attributed to normal portfolio amortization in excess of new originations as the Corporation adhered to a strict pricing discipline in a very competitive market. Student loans held for sale increased to $2.1 billion at December 31, 1995, up from $1.8 billion at December 31, 1994, and $1.6 billion at December 31, 1993. The higher level of outstandings in 1995 reflected the Corporation's role as a primary provider of education loans to law school students. The Corporation continues a policy of securitizing and selling student loans prior to their entering repayment status, with securitizations of this portfolio totaling $1.0 billion and $547.7 million in 1995 and 1994, respectively. The lease financing portfolio totaled $2.9 billion at December 31, 1995, compared with $2.3 billion at December 31, 1994, and $1.7 billion at December 31, 1993. This growth reflected expanded services and market coverage as well as the general strength of the economy. SECURITIES At December 31, 1995, the securities portfolio totaled $9.7 billion, consisting of $8.0 billion of securities available for sale and $1.7 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. Certain information pertaining to the composition, yields and maturities of the securities available for sale and investment securities portfolios is presented in Figure 23 and Figure 24, respectively. The decrease and change in the mix of the overall portfolio were primarily the result of two events. During the first quarter of 49 24 KEYCORP AND SUBSIDIARIES - - - ----------------------------------------------------------------------------------------------------------------------------------- Figure 23 Securities Available for Sale - - - -----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury, States and Mortgage- Weighted Agencies and Political Backed Other Average dollars in millions Corporations Subdivisions Securities(1) Securities Total Yield2 - - - ----------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1995: Maturity: One year or less $ 227.2 $ 2.8 $ 393.9 $120.8 $ 744.7 6.73% Maturity: After one through five years 576.3 11.5 3,792.7 39.7 4,420.2 6.59 Maturity: After five through ten years 198.8 8.2 2,465.4 18.7 2,691.1 7.28 Maturity: After ten years 199.0 3.0 -- 2.0 204.0 6.76 - - - ----------------------------------------------------------------------------------------------------------------------------------- Fair value $1,201.3 $25.5 $6,652.0 $181.2 $8,060.0 - Amortized cost 1,175.8 24.6 6,617.1 176.1 7,993.6 6.86% Weighted average yield 6.71% 8.10% 6.86% 7.51% 6.86% - Weighted average maturity 8.9 years 6.1 years 4.5 years 1.5 years 4.8 years - - - - ----------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1994: Fair value $1,052.5 $25.9 $1,228.3 $214.3 $2,521.0 - Amortized cost 1,067.7 28.9 1,334.1 223.3 2,654.0 6.40% - - - ----------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1993: Fair value $1,497.9 - $273.0 $23.9 $1,794.8 - Amortized cost 1,434.0 - 269.7 23.1 1,726.8 6.80% ===================================================================================================================================
[FN] (1)Maturity is based upon expected average lives rather than contractual terms. (2)Weighted average yields are calculated on the basis of amortized cost. Such yields have been adjusted to a taxable-equivalent basis using a 35% tax rate for all years presented. (3)Includes equity securities with no stated maturity. - - - --------------------------------------------------------------------------------------------------------------------------------- Figure 24 Investment Securities - - - ---------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury, States and Mortgage Weighted Agencies and Political Backed Other Average dollars in millions Corporations Subdivisions Securities 1 Securities Total Yield 2 - - - -------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1995: Maturity: One year or less $1.8 $ 629.0 - $ 79.8 $ 710.6 6.91% Maturity: After one through five years 2.3 508.0 - 138.2 648.5 8.96 Maturity: After five through ten years .6 224.9 - 30.9 256.4 10.23 Maturity: After ten years .2 62.2 - 9.8 72.2 10.06 - - - -------------------------------------------------------------------------------------------------------------------------------- Amortized cost $4.9 $1,424.1 - $258.7 $1,687.7 8.34% Fair value 5.0 1,474.4 - 258.7 1,738.1 - Weighted average yield 10.69% 8.34% - 8.28% 8.34% - Weighted average maturity 1.6 years 2.9 years - 4.9 years 2.9 years - - - - -------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1994: Amortized cost $532.6 $1,508.5 $7,834.2 $400.3 $10,275.6 7.03% Fair value 499.3 1,534.9 7,362.7 360.1 9,757.0 - - - - -------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1993: Amortized cost $796.0 $1,677.8 $7,877.2 $771.1 $11,122.1 6.51% Fair value 807.4 1,779.8 7,967.3 785.7 11,340.2 - ================================================================================================================================
[FN] (1) Maturity is based upon expected average lives rather than contractual terms. (2) Weighted average yields are calculated on the basis of amortized cost. Such yields have been adjusted to a taxable-equivalent basis using a 35% tax rate for all years presented. 50 25 KEYCORP AND SUBSIDIARIES - - - ------------------------------------------------------------------------------ - - - ------------------------------------------------------------------------------ 1995, the Corporation sold $1.2 billion of securities as one of a number of actions taken during 1994 and 1995 to reduce its interest rate sensitivity. These sales resulted in pre-tax losses of $48.6 million. This interest rate sensitivity reduction strategy is more fully discussed in the Asset and Liability Management section beginning on page 39. The second event occurred during the fourth quarter of 1995 when the FASB granted companies a one-time opportunity to reassess and, if appropriate, reclassify their securities from the held-to-maturity category to the available-for-sale category without calling into question the intent to hold other debt securities remaining in the investment securities category to maturity in the future. This FASB development is discussed in more detail in Note 3, Securities Available for Sale, beginning on page 71. In response, the Corporation reclassified substantially all held-to-maturity debt securities, except securities of states and political subdivisions, to the available-for-sale category. The reclassified securities totaled approximately $8.0 billion. At December 31, 1995, the Corporation had $6.7 billion invested in collateralized mortgage obligations ("CMO") and other mortgage-backed securities within the securities available-for-sale portfolio, compared with $9.1 billion within the investment securities and securities available-for-sale portfolios at December 31, 1994. A CMO is a mortgage-backed security that is comprised of classes of bonds created by prioritizing the cash flows from the underlying mortgage pool in order to meet different objectives of investors. Other mortgage-backed securities depend on the underlying pool of mortgage loans to provide a cash flow "pass-through" of principal and interest, without prioritization in classes. The Corporation had $2.8 billion invested in CMO securities at December 31, 1995. The CMO securities held by the Corporation are primarily shorter-maturity class bonds that were structured to have more predictable cash flows by being less sensitive to prepayments during periods of changing interest rates. The Corporation had $3.9 billion invested in other mortgage-backed securities at December 31, 1995. At December 31, 1995, substantially all of the mortgage-backed securities held by the Corporation were issued or backed by Federal agencies. ASSET QUALITY The Corporation's Credit Risk Review Group evaluates and monitors the level of risk in the Corporation's credit-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 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. The allocation of the Corporation's Allowance by loan type at December 31 is shown in Figure 25. Management has developed methodologies designed to assess the adequacy of the Allowance. The Allowance allocation methodologies applied at KeyCorp focus on changes in the size and character of the loan portfolio, changes in the levels of impaired and other nonperforming and past due loans, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing and prospective economic conditions and historical losses on a portfolio basis. In addition, indirect risk in the form of off-balance sheet exposure for unfunded commitments is taken into consideration. Management continues to target and maintain an Allowance equal to the allocated requirement plus an unallocated portion, as appropriate. Management believes this is an appropriate posture in light of current and expected economic conditions and trends, the geographic and industry mix of the portfolio, and similar risk-related matters. As shown in Figure 27, net loan charge-offs in 1995 were $99.2 million, down 9% from $109.2 million in 1994 due to higher recoveries. Net loan charge-offs were $212.8 million in 1993. The 1995 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. Consistent with the decline in the level of net loan charge-offs, the provision for loan losses in 1995 was $100.5 million compared with $125.2 million in 1994 and $211.7 million in 1993. The Allowance at December 31, 1995, was $876.0 million, or 1.84% of loans, compared with $830.3 million, or 1.80% of loans, at December 31, 1994. Included in the 1995 Allowance was $40.2 million specifically allocated for impaired loans. For a further discussion of impaired loans see Note 6, Nonperforming Assets, beginning on page 74. At December 31, 1995, the Allowance was 263.15% of nonperforming loans, compared with 324.27% at December 31, 1994. Although this percentage is not the primary factor used by management in determining the adequacy of the Allowance, it has general short to medium-term relevance. As indicated in Figure 25, the unallocated portion of the Allowance decreased slightly in 1995, primarily as a result of an increase in nonperforming loans from 1994 levels. Approximately 49% of the Allowance remained unallocated to any specific loan category, a conservative position appropriate in light of the difficulty inherent in predicting the level or category of future charge-offs, and the strong loan growth experienced in the Corporate Banking sector in 1995. The composition of nonperforming assets is shown in Figure 28. These assets totaled $378.6 million at December 31, 1995, and represented .79% of loans, OREO and other nonperforming assets compared with $339.8 million, or .73% at December 31, 1994. A $76.9 million increase in nonperforming loans in 1995 reflected the $20.2 million impact of acquisitions and the transfer of $19.9 million from OREO, as a result of the adoption of SFAS No. 114 51 26 - - - ------------------------------------------------------------------------------------------------------------------------------- Figure 25 Allocation of the Allowance for Loan Losses - - - ------------------------------------------------------------------------------------------------------------------------------
December 31, 1995 1994 1993 --------------------- ----------------------- ------------------- Percent of Percent of Percent of Loan Type to Loan Type to Loan Type to dollars in millions Amount Total Loans Amount Total Loans Amount Total Loans - - - ------------------------------------------------------------------------------------------------------------------------------ Commercial, financial and agricultural $205.4 25.3% $119.3 23.0% $177.6 23.4% Real estate-construction 20.5 3.3 17.5 2.9 22.1 3.0 Real estate-commercial and residential mortgage 113.7 42.7 95.7 45.8 90.6 44.9 Consumer 79.9 22.2 95.3 22.9 113.4 24.1 Lease financing 23.2 6.3 24.3 5.2 14.1 4.4 Foreign - .2 - .2 - .2 Unallocated 433.3 - 478.2 - 384.9 - - - - ------------------------------------------------------------------------------------------------------------------------------ Total $876.0 100.0% $830.3 100.0% $802.7 100.0% ====== ====== ====== ====== ====== ====== - - - ------------------------------------------------------------------------------------------------------------------------------
1992 1991 --------------------- -------------------- Percent of Percent of Loan Type to Loan Type to Amount Total Loans Amount Total Loans - - - ----------------------------------------------------------------------------------------------------- Commercial, financial and agricultural $205.1 25.4% $224.4 25.9% Real estate-construction 27.3 4.1 30.1 4.4 Real estate-commercial and residential mortgage 113.3 40.7 126.1 38.0 Consumer 147.2 26.0 149.7 28.8 Lease financing 4.8 3.5 3.4 2.7 Foreign 1.6 .3 20.2 .2 Unallocated 283.3 - 239.6 - - - - ----------------------------------------------------------------------------------------------------- Total $782.6 100.0% $793.5 100.0% ======= ====== ====== ====== - - - -----------------------------------------------------------------------------------------------------
[FN] Amounts in the "Percent of Loan Type to Total Loans" column were computed excluding loans held for sale from the portfolio as no allowances were deemed necessary for such loans. Figure 26 Nonperforming Assets
Other nonperforming Restructured Other real Nonaccrual assets loans estate owned loans 1991 $11.7 $9.9 $330.7 $719.6 - - - ------------------------------------------------------------------------------------------- 1992 14.9 2.4 332.4 550.5 - - - ------------------------------------------------------------------------------------------- 1993 13.4 6.5 150.4 329.8 - - - ------------------------------------------------------------------------------------------- 1994 4.8 1.5 79.0 254.5 - - - ------------------------------------------------------------------------------------------- 1995 3.4 2.5 42.3 330.4 - - - -------------------------------------------------------------------------------------------
(discussed below). OREO (net of the allowance for OREO losses) declined by $36.7 million, with a net $16.8 million of the decline resulting from normal workout activity and the remainder due to the adoption of SFAS No. 114. Additional information pertaining to changes in nonaccrual loans and OREO and the percentage of nonperforming loans to period-end loans by type within the banking regions is presented in Figures 29 and 30, respectively. 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. All loans (other than smaller-balance homogeneous loans) with payments over 90 days past due and on nonaccrual status are considered impaired. 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 74. 52 27 KEYCORP AND SUBSIDIARIES - - - ------------------------------------------------------------------------------------------------------------------------------ Figure 27 Summary of Loan Loss Experience - - - -----------------------------------------------------------------------------------------------------------------------------
Year ended December 31, dollars in millions 1995 1994 1993 1992 1991 - - - ------------------------------------------------------------------------------------------------------------------------------ Average loans outstanding during the year $47,760.6 $42,745.5 $38,307.6 $35,307.4 $35,150.3 - - - ------------------------------------------------------------------------------------------------------------------------------ Allowance for loan losses at beginning of year $830.3 $802.7 $782.6 $793.5 $677.3 Loans charged off: Commercial, financial and agricultural 41.5 60.7 102.6 144.8 173.9 Real estate-construction 1.7 6.6 25.5 25.1 40.9 Real estate-commercial and residential mortgage 35.4 35.0 56.8 100.2 70.4 Consumer 124.5 103.3 115.2 160.3 174.1 Lease financing 4.8 3.2 3.1 10.0 5.7 Foreign - - - - .8 - - - ------------------------------------------------------------------------------------------------------------------------------ 207.9 208.8 303.2 440.4 465.8 Recoveries: Commercial, financial and agricultural 52.6 48.0 33.4 25.7 28.7 Real estate-construction 2.8 1.4 6.0 1.3 1.9 Real estate-commercial and residential mortgage 14.4 11.3 9.8 9.0 3.1 Consumer 37.0 36.8 39.5 39.0 38.9 Lease financing 1.9 2.1 1.6 4.9 1.2 Foreign - - .1 - .2 - - - ------------------------------------------------------------------------------------------------------------------------------ 108.7 99.6 90.4 79.9 74.0 - - - ------------------------------------------------------------------------------------------------------------------------------ Net loans charged off (99.2) (109.2) (212.8) (360.5) (391.8) Provision for loan losses 100.5 125.2 211.7 338.4 466.2 Allowance acquired/sold, net 43.9 11.6 21.2 11.2 41.8 Transfer from OREO allowance .5 - - - - - - - ------------------------------------------------------------------------------------------------------------------------------ Allowance for loan losses at end of year $876.0 $830.3 $802.7 $782.6 $793.5 ====== ====== ====== ====== ====== - - - ------------------------------------------------------------------------------------------------------------------------------ Net loan charge-offs to average loans .21% .26% .56% 1.02% 1.11% Allowance for loan losses to year-end loans 1.84 1.80 2.00 2.17 2.23 Allowance for loan losses to nonperforming loans 263.15 324.27 238.69 141.54 108.79 - - - ------------------------------------------------------------------------------------------------------------------------------
- - - ------------------------------------------------------------------------------------------------------------------------------ Figure 28 Summary of Nonperforming Assets and Past Due Loans - - - ------------------------------------------------------------------------------------------------------------------------------
December 31, dollars in millions 1995 1994 1993 1992 1991 - - - ---------------------------------------------------------------------------------------------------------------------------- Impaired loans 1 $205.0 - - - - Other nonaccrual loans 125.4 $254.5 $329.8 $550.5 $ 719.6 Restructured loans 2.5 1.5 6.5 2.4 9.9 - - - ---------------------------------------------------------------------------------------------------------------------------- Total nonperforming loans 332.9 256.0 336.3 552.9 729.5 Other real estate owned 56.4 100.3 186.1 350.3 349.9 Allowance for OREO losses (14.1) (21.3) (35.7) (17.9) (19.2) - - - ---------------------------------------------------------------------------------------------------------------------------- Other real estate owned, net of allowance 42.3 79.0 150.4 332.4 330.7 Other nonperforming assets 3.4 4.8 13.4 14.9 11.7 - - - ---------------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $378.6 $339.8 $500.1 $900.2 $1,071.9 ====== ====== ====== ====== ======== - - - ---------------------------------------------------------------------------------------------------------------------------- Accruing loans past due 90 days or more $96.7 $50.2 $51.8 $70.3 $94.1 - - - ---------------------------------------------------------------------------------------------------------------------------- Nonperforming loans to year-end loans .70% .55% .84% 1.53% 2.05% Nonperforming assets to year-end loans plus other real estate owned and other nonperforming assets .79 .73 1.24 2.47 2.99 - - - ----------------------------------------------------------------------------------------------------------------------------
[FN] (1)Effective January 1, 1995, the Corporation adopted SFAS No. 114, which requires separate disclosure of impaired loans. Prior to January 1, 1995, impaired loans were included in "Other nonaccrual loans." 53 28 KEYCORP AND SUBSIDIARIES - - - ------------------------------------------------------------------------------------------------------------------------------------ Figure 29 Summary of Changes in Nonaccrual Loans and OREO - - - -----------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF CHANGES IN NONACCRUAL LOANS 1995 Quarters ----------------------------------------------- in millions Full Year Fourth Third Second First - - - ------------------------------------------------------------------------------------------------------------------------------ Balance at beginning of year $254.5 $309.6 $310.3 $302.8 $254.5 Loans placed on nonaccrual 324.7 96.7 66.3 100.9 60.8 Charge-offs 1 (60.9) (11.3) (17.2) (18.5) (13.9) Payments (138.8) (39.8) (28.8) (51.5) (18.7) Transfers to OREO (21.3) (2.8) (7.2) (5.6) (5.7) Loans returned to accrual status (67.9) (22.0) (13.8) (17.8) (14.3) Acquisitions 20.2 - - - 20.2 Transfers from OREO 2 19.9 - - - 19.9 - - - ------------------------------------------------------------------------------------------------------------------------------ Balance at end of year $330.4 $330.4 $309.6 $310.3 $302.8 ====== ====== ====== ====== ====== SUMMARY OF CHANGES IN OREO(3) 1995 Quarters ------------------------------------------------ in millions Full Year Fourth Third Second First - - - ------------------------------------------------------------------------------------------------------------------------------ Balance at beginning of year $ 79.0 $ 49.2 $50.2 $ 54.1 $ 79.0 Additions 41.2 9.1 5.7 18.0 8.4 Sales (49.2) (15.1) (7.6) (12.6) (13.9) Charge-offs and write-downs (13.9) (1.1) (5.4) (3.4) (4.0) Transfers to loans 2 (19.9) - - - (19.9) Acquisitions 1.0 - - - 1.0 Other 4.1 .2 6.3 (5.9) 3.5 - - - ------------------------------------------------------------------------------------------------------------------------------ Balance at end of year $ 42.3 $ 42.3 $49.2 $ 50.2 $ 54.1 ====== ====== ===== ====== ====== - - - ------------------------------------------------------------------------------------------------------------------------------
[FN] (1)Represents the gross charge-offs taken against nonaccrual loans; excluded are charge-offs taken against accruing loans and credit card receivables, and interest reversals. (2)Represents transfers related to the adoption of SFAS No. 114. (3)Net of allowance for OREO losses. - - - ----------------------------------------------------------------------------------------------------------------------------------- Figure 30 Percentage of Nonperforming Loans to Period-End Loans by Loan Type - - - -----------------------------------------------------------------------------------------------------------------------------------
December 31, 1995 Commercial, Real Estate- Real Estate- Financial and Real Estate- Commercial Residential Agricultural Construction Mortgage Mortgage Consumer Total - - - ----------------------------------------------------------------------------------------------------------------------- Northeast Region 1.29% 1.72% 1.75% 1.13% .16% 1.06% Great Lakes Region .81 .44 .90 .36 .14 .57 Rocky Mountain Region 1.38 .34 .49 .18 .38 .69 Northwest Region .41 .68 .89 .43 .22 .48 Financial Services - - - .78 .03 .37 - - - ----------------------------------------------------------------------------------------------------------------------- Total .99% .64% 1.14% .64% .15% .70% - - - -----------------------------------------------------------------------------------------------------------------------
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 1995, these deposits averaged $41.1 billion and represented 68% of the Corporation's funds supporting earning assets compared with $40.8 billion and 72%, respectively, in 1994 and $40.2 billion and 78%, respectively, in 1993. The slight growth in the amount of average core deposits during 1995 and 1994 reflected the impact of acquisitions, offset in part by the pursuit of other alternatives by consumers. As shown in Figure 4, there was a moderate shift in 1995 from highly liquid money market deposit accounts and savings deposits to 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, 54 29 KEYCORP AND SUBSIDIARIES - - - ------------------------------------------------------------------------------ averaged $15.4 billion for 1995, up $1.6 billion, or 12%, from the prior year. These instruments were more heavily relied upon in 1995 as the growth in earning assets exceeded the increase in core deposits previously discussed. As illustrated in Figure 4, the increase was attributable to growth in large certificates of deposit and other short-term borrowings, principally short-term notes. - - - -------------------------------------------------------------------- Figure 31 Maturity Distribution of Time Deposits of $100,000 or More - - - ---------------------------------------------------------------------
December 31, 1995 Domestic Foreign in millions Offices Offices Total - - - ------------------------------------------------------------------- Time remaining to maturity: Three months or less $1,939.7 $1,236.5 $3,176.2 Over three through six months 595.5 .5 596.0 Over six through twelve months 511.5 - 511.5 Over twelve months 729.8 - 729.8 - - - ------------------------------------------------------------------- Total $3,776.5 $1,237.0 $5,013.5 ======== ======== ======== - - - -------------------------------------------------------------------
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, the maturity structure of their loan portfolios and the ability to securitize and package loans for sale. Liquidity is also enhanced by a sizable concentration of core deposits, previously discussed, which are generated by approximately 1,300 banking offices in 14 states. The affiliate banks individually monitor deposit flows and evaluate alternative 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 (such as borrowings from the Federal Reserve system) for short-term liquidity requirements should the need arise. During the third quarter of 1995, KeyCorp established a new Commercial Paper/Note Program which provides for the availability of up to $500.0 million of short-term funding. The proceeds from this program may be used for general corporate purposes, including future acquisitions, and were used in 1995 to fund AFG's lending activities in anticipation of quarterly securitizations of AFG's loans. The parent company also entered into a four-year, $500.0 million revolving credit agreement with several banks under which the banks have agreed to lend collectively up to $500.0 million to KeyCorp. The line of credit will be used primarily as a backup source of liquidity for the Commercial Paper/Note Program. There were no borrowings outstanding under either of these facilities at December 31, 1995. In the first quarter of 1995, the Corporation's $5.0 billion Bank Note Program which involved four affiliate banks was expanded to allow issuances of up to $6.6 billion, covering eleven affiliate banks. The $2.3 billion in notes issued under this program during 1995 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 $200.0 million in long-term 7.25% subordinated notes during 1995. On January 12, 1996, the Bank Note Program was further expanded to allow issuances of up to $12.3 billion, covering twelve affiliate banks. As of that date, the program had an unused capacity of $12.2 billion. In April 1995, KeyCorp updated its universal self registration statement on file with the Securities and Exchange Commission, which provides for the possible issuance of a broad range of debt and equity securities by the parent company. The updated filing registered an additional $845.0 million of securities (up to $750.0 million of which were reserved for future issuance as Medium-Term Notes). Medium-Term notes issued under the registration statement totaled $413.5 million and $395.0 million in 1995 and 1994, respectively, and have original maturities of more than one year. At the end of the year, unused capacity under this shelf registration totaled $611.5 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. As of December 31, 1995, $317.7 million was available in the affiliate banks for the payment of dividends to the parent company without prior regulatory approval. 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 December 31, 1995, were as follows:
Senior Subordinated Commercial Long-Term Long-Term Paper Debt Debt ---------- --------- ------------ Duff & Phelp's D-1 A+ A Standard & Poor's A-2 A- BBB+ Moody's P-1 A1 A2
Further information pertaining to the Corporation's sources and uses of cash for the years ended December 31, 1995, 1994 and 1993 is presented in the Consolidated Statements of Cash Flow on page 66. 55 30 KEYCORP AND SUBSIDIARIES - - - ------------------------------------------------------------------------------ CAPITAL AND DIVIDENDS Total shareholders' equity at December 31, 1995, was $5.2 billion, up $462.1 million, or 10%, from the balance at the end of 1994. This followed an increase of $304.9 million, or 7%, from the balance at the end of 1993. In both years the increase was principally due to the retention of net income after dividends paid to shareholders. Other factors contributing to the change in shareholders' equity during 1995 are shown in the Statement of Changes in Shareholders' Equity presented on page 65. Included in these changes are a $231.0 million increase in Treasury Stock, resulting from the share repurchase programs discussed below, and 1995 net unrealized gains of $163.0 million on securities, resulting in net unrealized gains of $47.7 million as of December 31, 1995. These net unrealized gains were recorded in connection with SFAS No. 115, "Accounting for Investments in Certain Debt and Equity Securities." 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 1995, the Corporation repurchased 23,975,450 shares at a total cost of $723.6 million (an average of $30.18 per share). Additionally, Treasury Shares totaling 15,507,562 were reissued in 1995 in connection with the acquisitions of AFG, OMNIBANCORP and Spears Benzak and 1,808,592 shares were reissued for employee benefit plans. The 12,241,569 Treasury Shares at December 31, 1995, are expected to be issued over time in connection with employee benefit programs, dividend reinvestment plans and other corporate purposes. The repurchase of Common Shares in 1995 reflected the additional capital flexibility achieved, in large part, through the securitizations and sales of loans. As of December 31, 1995, all share repurchase authorizations had been fully utilized. Similar to the 1995 action, in January 1996 the Board of Directors approved a new share repurchase program which authorizes the repurchase of up to an additional 12,000,000 Common Shares in 1996. Under the new program, shares will be repurchased from time to time in the open market or through negotiated transactions and will be available to be reissued in connection with employee stock purchase, 401(k), stock option, and dividend reinvestment plans and for other corporate purposes. 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 7.77% at December 31, 1995, up from 7.03% at December 31, 1994, and 7.37% at December 31, 1993. Banking industry regulators define minimum capital ratios for bank holding companies and their banking and savings association subsidiaries. Based on the risk-adjusted capital rules and definitions prescribed by the banking regulators, KeyCorp's Tier I and total capital to net risk-adjusted assets ratios at December 31, 1995, were 7.53% and 10.85%, respectively. As indicated in Figure 32, 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 December 31, 1995, KeyCorp's leverage ratio was 6.20%, substantially higher than the minimum requirement. Figure 33 presents the details of KeyCorp's regulatory capital position at December 31, 1995 and 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. Failure to meet applicable capital guidelines could result in enforcement remedies available to the banking industry regulators, including a limitation on the ability to pay dividends, the issuance of a directive to increase capital, the termination of deposit insurance by the FDIC, and (in severe cases) the appointment of a conservator or receiver. Management believes that as of December 31, 1995, the parent company and its banking and savings association subsidiaries meet all capital adequacy guidelines to which they are subject. 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," - - - ------------------------------------------------------------------------------ Figure 32 Capital Ratios - - - ------------------------------------------------------------------------------
Leverage Tier 1 risk-adjusted Total risk-adjusted ratio capital ratio capital ratio 1994 6.63% 8.48% 11.62% - - - ------------------------------------------------------------------------------ 1995 6.20 7.53 10.85 - - - ------------------------------------------------------------------------------
56 31 KEYCORP AND SUBSIDIARIES - - - -------------------------------------------------------------------- Figure 33 Capital Components and Risk-Adjusted Assets - - - --------------------------------------------------------------------
December 31, dollars in millions 1995 1994 - - - --------------------------------------------------------------------- TIER I CAPITAL Common shareholders' equity(1) $4,944.9 $4,640.0 Qualifying preferred stock 160.0 160.0 Less: Goodwill (899.3) (418.5) Other intangible assets(2) (143.0) (140.0) - - - --------------------------------------------------------------------- Total Tier I capital 4,062.6 4,241.5 - - - --------------------------------------------------------------------- TIER II CAPITAL Allowance for loan losses 3 676.7 628.7 Qualifying long-term debt 1,114.8 943.2 - - - --------------------------------------------------------------------- Total Tier II capital 1,791.5 1,571.9 - - - --------------------------------------------------------------------- Total capital $5,854.1 $5,813.4 ======== ======== RISK-ADJUSTED ASSETS Risk-adjusted assets on balance sheet $49,555.5 $46,370.0 Risk-adjusted off-balance sheet exposure 5,619.3 4,483.3 Less: Goodwill (899.3) (418.5) Less: Other intangible assets(2) (143.0) (140.0) - - - --------------------------------------------------------------------- Gross risk-adjusted assets 54,132.5 50,294.8 Less: Excess allowance for loan losses(3) (199.3) (201.6) - - - --------------------------------------------------------------------- Net risk-adjusted assets $53,933.2 $50,093.2 ========= ========= AVERAGE QUARTERLY TOTAL ASSETS $66,542.7 $64,613.3 ========= ========= CAPITAL RATIOS Tier I capital to net risk-adjusted assets 7.53% 8.48% Total capital to net risk-adjusted assets 10.85 11.62 Leverage 6.20 6.63 - - - ---------------------------------------------------------------------
[FN] (1)Common shareholders' equity excludes the impact of net unrealized gains or losses on securities, except for net unrealized losses on marketable equity securities. (2)Intangible assets (excluding goodwill and portions of purchased credit card relationships) recorded after February 19, 1992, and deductible portions of purchased mortgage servicing rights. (3)The allowance for loan losses included in Tier II capital is limited to 1.25% of gross risk-adjusted assets. "significantly undercapitalized" and "critically undercapitalized." All of KeyCorp's affiliate banks qualified as "well-capitalized" at December 31, 1995, as they exceeded the well-capitalized thresholds of 10%, 6% and 5% for the total, Tier I and leverage ratios, respectively. 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 December 31, 1995. The FDIC-defined capital categories may not constitute an accurate representation of the overall financial condition or prospects of KeyCorp or its affiliate banks. At December 31, 1995, book value per Common Share was $21.36 based on 233,702,821 shares outstanding, compared with $18.88 based on 240,362,117 shares outstanding at December 31, 1994. KeyCorp's Common Shares are traded on the New York Stock Exchange under the symbol KEY. The sales price ranges of the Common Shares and per Common Share net income and dividends by quarter for each of the last two years are presented in Figure 34. At year-end 1995, the closing sales price on the New York Stock Exchange was $36.25 per share. This price was 170% of year-end book value per share, and reflected a then current dividend yield of 3.97% (based upon the 1995 dividend rate of $1.44). On January 18, 1996, the quarterly dividend on Common Shares was increased by 5.6% to $.38 per Common Share. There were 52,713 holders of record of KeyCorp Common Shares at December 31, 1995. FOURTH QUARTER RESULTS As shown in Figure 34, net income for the fourth quarter of 1995 was $206.7 million, or $.86 per Common Share, compared with $193.8 million, or $.79 per Common Share, for the same period in 1994. The 1995 period included a positive accounting adjustment of $17.9 million ($11.6 million after-tax, $.05 per Common Share) resulting from better-than-expected performance of student loan securitizations completed in prior periods and a write-off of $25.4 million ($14.8 million after-tax, $.06 per Common Share) of obsolete software. The 1994 period was impacted by securities losses of $23.7 million ($14.3 million after-tax, $.06 per Common Share) related to the balance sheet reconfiguration discussed in the Asset and Liability Management section beginning on page 39. The increase in earnings from the prior year resulted from an increase of $98.8 million, or 48%, in noninterest income, partially offset by increases of $66.3 million, or 12%, in noninterest expense, $8.0 million, or 31%, in the provision for loan losses and $6.9 million, or 7%, in tax expense. Taxable-equivalent net interest income was $674.2 million for the fourth quarter of 1995, down less than one percent from the comparable 1994 period. On an annualized basis, the return on average total assets for the fourth quarter of 1995 was 1.23% compared with 1.19% for the fourth quarter of 1994. The annualized return on average common equity for the fourth quarters of 1995 and 1994 were 16.31% and 16.61%, respectively. The increase in noninterest income in the fourth quarter of 1995 as compared with the fourth quarter of 1994, exclusive of the 1995 adjustment for prior student loan securitizations and the 1994 losses on securities, reflected increases of $38.4 million in loan securitization income, $8.7 million in trust and asset management income, $6.9 million in service charges on deposit accounts and a $12.5 million increase in miscellaneous income. The positive impact of these items was partially offset by a $14.4 million decrease in mortgage banking income, resulting from the March 1995 sale of the residential mortgage loan servicing business. The growth in noninterest expense, after excluding the write-off of obsolete software, reflected increases of $18.1 million in personnel expense, $9.9 million in professional fees and $21.7 million in miscellaneous other expense. Contributing to these increases was the impact of acquisitions and additional costs incurred in connection with the implementation of strategic initiatives. These increases were partially offset by a $17.8 million decrease in FDIC insurance assessments resulting from a reduction in the assessment rate which took effect on June 1, 1995. 57 32 KEYCORP AND SUBSIDIARIES
- - - ----------------------------------------------------------------------------------------------------------------------------------- Figure 34 Selected Quarterly Financial Data - - - ----------------------------------------------------------------------------------------------------------------------------------- 1995 1994 ---------------------------------------- ---------------------------------------- dollars in millions, except per share amounts Fourth Third Second First Fourth Third Second First - - - ----------------------------------------------------------------------------------------- ---------------------------------------- FOR THE QUARTER Interest income $1,278.0 $1,298.8 $1,298.8 $1,245.4 $1,191.8 $1,150.7 $1,102.6 $1,045.0 Interest expense 617.4 632.8 632.5 601.6 526.5 471.1 422.3 376.9 Net interest income 660.6 666.0 666.3 643.8 665.3 679.6 680.3 668.1 Provision for loan losses 34.2 27.5 20.3 18.5 26.2 27.2 35.0 36.8 Noninterest income before net securities gains (losses) 302.5 234.8 220.4 215.9 229.0 221.3 226.8 220.2 Net securities gains (losses) 1.6 .2 2.5 (44.9) (23.7) 2.0 .6 6.4 Noninterest expense 621.9 560.3 568.6 560.8 555.6 530.1 538.7 542.8 Income before income taxes and extraordinary item 308.6 313.2 300.3 235.5 288.8 345.6 334.0 315.1 Income before extraordinary item 206.7 209.6 199.0 173.9 193.8 229.3 221.8 208.6 Net income 206.7 209.6 199.0 209.7 193.8 229.3 221.8 208.6 Net income applicable to Common Shares 202.7 205.6 195.0 205.7 189.8 225.3 217.8 204.6 - - - ----------------------------------------------------------------------------------------------------------------------------------- PER COMMON SHARE Income before extraordinary item $ .86 $ .90 $ .83 $ .71 $ .79 $ .92 $ .89 $ .85 Net income .86 .90 .83 .86 .79 .92 .89 .85 Cash dividends .36 .36 .36 .36 .32 .32 .32 .32 Book value at period-end 21.36 20.74 19.71 19.57 18.88 18.65 18.17 17.88 Market price: High 37.25 35.13 32.13 29.50 30.88 33.50 33.75 33.00 Low 33.25 30.38 26.00 24.50 23.63 30.13 29.50 28.88 Close 36.25 34.25 31.38 28.25 25.00 30.50 31.88 30.00 Weighted average Common Shares (millions) 235.8 228.2 235.3 240.0 241.4 244.1 244.8 241.9 - - - ---------------------------------------------------------------------------------------------------------------------------------- AT PERIOD-END Loans $47,691.7 $48,409.7 $48,093.2 $48,020.8 $46,224.7 $44,608.8 $43,157.6 $41,379.8 Earning assets 58,762.3 60,847.4 60,945.7 61,167.1 60,046.5 58,638.1 57,347.0 55,913.5 Total assets 66,339.1 67,967.1 67,481.2 67,709.0 66,801.2 64,503.4 63,359.7 61,479.0 Deposits 47,281.9 47,905.0 48,672.2 48,812.3 48,564.2 47,816.5 47,796.2 46,880.6 Long-term debt 4,003.6 4,047.9 4,019.6 3,725.2 3,569.8 2,177.8 2,123.6 1,744.5 Common shareholders' equity 4,992.5 4,923.4 4,514.4 4,657.5 4,530.4 4,533.9 4,430.7 4,368.3 Total shareholders' equity 5,152.5 5,083.4 4,674.4 4,817.5 4,690.4 4,693.9 4,590.7 4,528.3 - - - ---------------------------------------------------------------------------------------------------------------------------------- PERFORMANCE RATIOS Return on average total assets 1.23% 1.25% 1.19% 1.28% 1.19% 1.43% 1.43% 1.41% Return on average common equity 16.31 18.07 16.86 18.26 16.61 19.95 19.77 19.20 Return on average total equity 16.11 17.79 16.63 17.99 16.38 19.60 19.43 18.88 Efficiency 63.67 61.27 63.05 64.12 61.10 57.90 58.43 60.13 Overhead 47.36 47.89 51.10 52.36 48.01 44.48 44.87 47.27 Net interest margin 4.53 4.50 4.49 4.38 4.60 4.79 4.92 5.03 - - - ----------------------------------------------------------------------------------------------------------------------------------- CAPITAL RATIOS AT PERIOD-END Equity to assets 7.77% 7.48% 6.93% 7.12% 7.03% 7.29% 7.26% 7.38% Tangible equity to tangible assets 6.25 5.98 5.75 6.02 6.19 6.45 6.42 6.55 Tier I risk-adjusted capital 7.53 7.55 7.45 7.96 8.48 8.86 8.77 8.91 Total risk-adjusted capital 10.85 10.84 10.82 11.05 11.62 12.07 12.03 12.34 Leverage 6.20 6.19 5.88 6.24 6.63 6.79 6.76 6.85 - - - -----------------------------------------------------------------------------------------------------------------------------------
[FN] The comparability of the information presented above is affected by certain 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 70. 58 33
KEYCORP AND SUBSIDIARIES - - - ----------------------------------------------------------------------------------------------------------------------------------- Figure 35 Banking Services Data By Region - - - ----------------------------------------------------------------------------------------------------------------------------------- Northeast Region Great Lakes Region --------------------------------- ---------------------------------- dollars in millions 1995 1994 1995 1994 - - - ----------------------------------------------------------------------------------------------------------------------------------- SIGNIFICANT RATIOS Return on average total assets 1.24% 1.35% 1.67% 1.57% Net interest margin 4.52 4.94 4.29 4.54 Nonperforming loans to year-end loans 1.06 .74 .57 .47 Allowance for loan losses to year-end loans 1.42 1.34 2.32 2.32 Net loan charge-offs to average loans .34 .46 .04 .16 Efficiency ratio 55.11 50.68 54.12 55.35 AVERAGE BALANCES Loans $13,943 $12,254 $19,875 $19,163 Earning assets 18,006 16,570 25,498 26,412 Total assets 19,425 17,710 28,189 28,767 Deposits 14,680 13,928 18,682 20,364 - - - -----------------------------------------------------------------------------------------------------------------------------------
Rocky Mountain Region Northwest Region --------------------------------- ---------------------------------- 1995 1994 1995 1994 - - - ----------------------------------------------------------------------------------------------------------------------------------- SIGNIFICANT RATIOS Return on average total assets 1.35% 1.41% 1.15% 1.15% Net interest margin 5.46 5.25 4.88 4.80 Nonperforming loans to year-end loans .69 .58 .48 .47 Allowance for loan losses to year-end loans 1.29 1.38 1.35 1.28 Net loan charge-offs to average loans .32 .28 .15 .13 Efficiency ratio 59.85 56.49 62.58 60.26 AVERAGE BALANCES Loans $3,661 $3,026 $ 8,982 $ 9,214 Earning assets 4,663 3,956 10,398 11,042 Total assets 5,098 4,298 11,387 12,023 Deposits 3,950 3,446 8,865 9,472 - - - -----------------------------------------------------------------------------------------------------------------------------------
59 34 KEYCORP AND SUBSIDIARIES
- - - ----------------------------------------------------------------------------------------------------------------------------------- Figure 36 Six-Year Consolidated Balance Sheets - - - ----------------------------------------------------------------------------------------------------------------------------------- December 31, Compound Annual Rate of Change dollars in millions 1995 1994 1993 1992 1991 1990 (1990-1995) - - - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 3,443.8 $ 3,511.4 $ 2,777.4 $ 3,079.7 $ 3,150.5 $ 3,061.3 2.4% Short-term investments 682.4 670.0 107.2 985.5 1,693.4 1,167.1 (10.2) Mortgage loans held for sale 640.5 355.2 1,325.3 938.5 691.9 389.9 10.4 Securities available for sale 8,060.0 2,521.0 1,726.8 2,458.7 -- 101.8 139.7 Investment securities 1,687.7 10,275.6 11,122.1 8,976.3 10,288.3 8,815.7 (28.2) Loans 47,691.7 46,224.7 40,071.3 36,021.8 35,534.3 34,193.7 6.9 Less: Allowance for loan losses 876.0 830.3 802.7 782.6 793.5 677.3 5.3 - - - ----------------------------------------------------------------------------------------------------------------------------------- Net loans 46,815.7 45,394.4 39,268.6 35,239.2 34,740.8 33,516.4 6.9 Premises and equipment 1,029.8 987.2 912.9 843.3 719.9 676.8 8.8 Other real estate owned, net of allowance 42.3 79.0 150.4 332.4 330.7 211.5 (27.5) Intangible assets 1,070.3 598.9 549.3 601.6 629.5 662.2 10.1 Other assets 2,866.6 2,408.5 1,694.3 1,613.2 1,355.9 1,350.7 16.2 - - - ----------------------------------------------------------------------------------------------------------------------------------- Total assets $66,339.1 $66,801.2 $59,634.3 $55,068.4 $53,600.9 $49,953.4 5.8% ========= ========= ========== =========== ========= ========== LIABILITIES Deposits in domestic offices: Noninterest-bearing $ 9,281.0 $ 9,135.7 $ 8,826.3 $ 8,291.4 $ 7,085.5 $ 6,906.1 6.1% Interest-bearing 36,763.9 36,003.4 35,658.3 34,026.5 35,448.4 33,534.2 1.9 Deposits in foreign offices--interest-bearing 1,237.0 3,425.1 2,014.5 1,115.2 301.1 495.0 20.1 - - - ----------------------------------------------------------------------------------------------------------------------------------- Total deposits 47,281.9 48,564.2 46,499.1 43,433.1 42,835.0 40,935.3 2.9 Federal funds purchased and securities sold under repurchase agreements 5,544.1 5,499.1 4,120.3 4,207.5 4,254.1 3,395.7 10.3 Other short-term borrowings 2,880.3 3,277.6 1,776.2 874.9 833.4 594.2 37.1 Other liabilities 1,476.7 1,200.1 1,089.3 835.5 937.5 857.3 11.5 Long-term debt 4,003.6 3,569.8 1,763.9 1,790.1 1,224.5 1,145.2 28.4 - - - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities 61,186.6 62,110.8 55,248.8 51,141.1 50,084.5 46,927.7 5.4 SHAREHOLDERS' EQUITY Preferred stock 160.0 160.0 160.0 244.0 244.0 84.0 13.8 Common Shares 245.9 245.9 242.8 237.4 179.1 166.3 8.1 Capital surplus 1,500.5 1,454.2 1,433.9 1,336.5 1,487.4 1,270.1 3.4 Retained earnings 3,632.6 3,161.3 2,633.4 2,206.1 1,848.7 1,758.1 15.6 Loans to ESOP trustee (51.4) (63.9) (63.9) (65.5) (65.4) (67.2) (5.2) Net unrealized gains (losses) on securities, net of taxes 47.7 (115.3) -- -- -- -- N/M Treasury stock at cost (382.8) (151.8) (20.7) (31.2) (177.4) (185.6) 15.6 - - - ----------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 5,152.5 4,690.4 4,385.5 3,927.3 3,516.4 3,025.7 11.2 - - - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $66,339.1 $66,801.2 $59,634.3 $55,068.4 $53,600.9 $49,953.4 5.8% ========= ========= ========= ========= ========= ========= - - - -----------------------------------------------------------------------------------------------------------------------------------
[FN] N/M = Not Meaningful 60 35 KEYCORP AND SUBSIDIARIES
KEYCORP AND SUBSIDIARIES - - - ----------------------------------------------------------------------------------------------------------------------------------- Figure 37 Six-Year Consolidated Statements of Income - - - ----------------------------------------------------------------------------------------------------------------------------------- Year ended December 31, Compound Annual Rate of Change dollars in millions, except per share amounts 1995 1994 1993 1992 1991 1990 (1990-1995) - - - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST INCOME Loans $4,319.6 $3,608.5 $3,313.7 $3,254.1 $3,655.9 $3,637.6 3.5% Mortgage loans held for sale 15.4 51.1 74.0 59.4 47.0 27.7 (11.1) Taxable investment securities 520.9 507.0 556.4 676.9 678.2 582.6 (2.2) Tax-exempt investment securities 82.6 89.6 107.4 119.8 126.3 134.9 (9.3) Securities available for sale 135.3 227.4 140.9 57.2 59.6 .9 N/M Short-term investments 47.2 6.5 21.5 31.4 85.4 145.1 (20.1) - - - ------------------------------------------------------------------------------------------------------------------------------------ Total interest income 5,121.0 4,490.1 4,213.9 4,198.8 4,652.4 4,528.8 2.5 INTEREST EXPENSE Deposits 1,704.8 1,324.6 1,233.3 1,469.0 2,135.7 2,230.8 (5.2) Federal funds purchased and securities sold under repurchase agreements 314.6 243.5 130.2 142.9 213.7 272.3 2.9 Other short-term borrowings 203.5 90.9 44.5 31.1 74.5 67.5 24.7 Long-term debt 261.4 137.8 126.9 107.1 95.5 97.1 21.9 - - - ------------------------------------------------------------------------------------------------------------------------------------ Total interest expense 2,484.3 1,796.8 1,534.9 1,750.1 2,519.4 2,667.7 (1.4) - - - ------------------------------------------------------------------------------------------------------------------------------------ NET INTEREST INCOME 2,636.7 2,693.3 2,679.0 2,448.7 2,133.0 1,861.1 7.2 Provision for loan losses 100.5 125.2 211.7 338.4 466.2 517.2 (27.9) - - - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 2,536.2 2,568.1 2,467.3 2,110.3 1,666.8 1,343.9 13.5 NONINTEREST INCOME Service charges on deposit accounts 278.0 263.2 252.5 236.6 217.4 191.9 7.7 Trust and asset management income 232.4 219.8 244.6 250.8 235.8 217.3 1.4 Loan securitization income 65.6 3.5 .5 -- -- -- N/M Credit card fees 84.4 76.2 73.5 80.9 71.4 62.3 6.3 Mortgage banking income 41.2 88.0 127.9 97.6 74.3 31.9 5.3 Net securities gains (losses) (40.6) (14.7) 28.3 14.6 18.9 11.5 N/M Gains on certain asset sales -- -- 29.4 22.9 24.0 4.8 N/M Other income 272.0 246.6 245.0 221.8 207.5 224.5 3.9 - - - ------------------------------------------------------------------------------------------------------------------------------------ Total noninterest income 933.0 882.6 1,001.7 925.2 849.3 744.2 4.6 NONINTEREST EXPENSE Personnel 1,114.8 1,059.9 1,100.7 1,013.6 925.3 853.5 5.5 Net occupancy 218.1 216.9 204.2 189.7 184.8 160.6 6.3 Equipment 155.9 158.0 161.3 151.6 134.1 127.4 4.1 FDIC insurance assessments 58.4 98.7 98.7 96.2 84.7 42.4 6.6 Merger and integration charges -- -- 118.7 92.7 93.8 26.9 N/M Other expense 764.4 633.7 701.5 626.6 643.0 608.7 4.7 - - - ------------------------------------------------------------------------------------------------------------------------------------ Total noninterest expense 2,311.6 2,167.2 2,385.1 2,170.4 2,065.7 1,819.5 4.9 INCOME BEFORE INCOME TAXES, CUMULATIVE EFFECT OF ACCOUNTING CHANGE AND EXTRAORDINARY ITEM 1,157.6 1,283.5 1,083.9 865.1 450.4 268.6 33.9 Income taxes 368.4 430.0 374.0 279.6 136.7 15.2 89.2 - - - ------------------------------------------------------------------------------------------------------------------------------------ INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE AND EXTRAORDINARY ITEM 789.2 853.5 709.9 585.5 313.7 253.4 25.5 Cumulative effect of accounting change -- -- -- 6.6 -- 2.7 N/M Extraordinary net gain 35.8 -- -- -- -- -- N/M - - - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 825.0 $ 853.5 $ 709.9 $ 592.1 $ 313.7 $ 256.1 26.4% ======== ======== ======== ======== ======== ======== Net income applicable to Common Shares $809.0 $837.5 $691.8 $568.1 $297.5 $249.0 26.6% Net income per Common Share: Before cumulative effect of accounting change and extraordinary net gain $3.30 $3.45 $2.89 $2.39 $1.31 $1.13 23.9% After cumulative effect of accounting change and extraordinary net gain 3.45 3.45 2.89 2.42 1.31 1.13 25.0 Weighted average Common Shares outstanding (000) 234,787.4 243,067.5 239,775.2 235,004.8 227,116.2 220,078.6 1.3% Taxable-equivalent adjustment $57.3 $58.8 $63.1 $72.2 $81.7 $90.1 (8.7)% - - - ------------------------------------------------------------------------------------------------------------------------------------
[FN] N/M = Not Meaningful 61 36 KEYCORP AND SUBSIDIARIES - - - ------------------------------------------------------------------------------- Report of Management - - - ------------------------------------------------------------------------------- The management of KeyCorp and its subsidiaries (the "Corporation") is responsible for the preparation, content and integrity of the financial statements and other statistical data and analyses compiled for this report. The financial statements and related notes have been prepared in conformity with generally accepted accounting principles and, in the judgment of management, present fairly the Corporation's financial position, results of operations, and cash flows. Management also believes that financial information presented elsewhere in this report is consistent with that in the financial statements. The amounts contained in the financial statements are based on management's best estimates and judgments. Management is also responsible for establishing and maintaining a system of internal controls designed to provide reasonable assurance as to the protection of assets and the integrity of the financial statements. This corporate-wide system of controls includes self-monitoring mechanisms, written policies and procedures, proper delegation of authority and organizational division of responsibility and the careful selection and training of qualified personnel. Management also maintains a code of ethics that addresses, among other things, conflicts of interest, compliance with laws and regulations, and the prompt reporting of any failure or circumvention of controls. Compliance with the Corporation's code of ethics is certified annually. In addition, an effective internal audit function periodically tests the system of internal controls. Management takes actions to correct control deficiencies as they are identified. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Management believes that the system of internal controls provides reasonable assurances that financial transactions are recorded properly to permit the preparation of reliable financial statements. The Board of Directors discharges its responsibility for KeyCorp's financial statements through its Audit Committee. The Corporation's Audit Committee, composed exclusively of outside directors, also has responsibility for recommending the independent auditors. The Audit Committee meets regularly with the independent auditors and internal auditors to review the scope of their audits and audit reports and to discuss action to be taken. Both the independent auditors and internal auditors have direct access to the Audit Committee. Management has made an assessment of the Corporation's internal control structure and procedures over financial reporting using the criteria described in "Internal Control--Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, management believes that the Corporation maintained an effective system of internal control for financial reporting as of December 31, 1995. /s/ Robert W. Gillespie Robert W. Gillespie President and Chief Executive Officer /s/ Lee Irving Lee Irving Executive Vice President and Chief Accounting Officer - - - ------------------------------------------------------------------------------- Report of Ernst & Young LLP, Independent Auditors - - - -------------------------------------------------------------------------------- Shareholders and Board of Directors KeyCorp We have audited the accompanying consolidated balance sheets of KeyCorp and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in shareholders' equity, and cash flow for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of KeyCorp and subsidiaries at December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Cleveland, Ohio January 16, 1996 62 37
KEYCORP AND SUBSIDIARIES - - - ---------------------------------------------------------------------------------------------------------------- Consolidated Balance Sheets - - - ---------------------------------------------------------------------------------------------------------------- December 31, dollars in thousands 1995 1994 - - - --------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 3,443,820 $ 3,511,368 Short-term investments 682,341 670,010 Mortgage loans held for sale 640,535 355,198 Securities available for sale 8,059,952 2,521,049 Investment securities (fair value: $1,738,095 and $9,757,032) 1,687,752 10,275,638 Loans 47,691,700 46,224,644 Less: Allowance for loan losses 876,036 830,298 - - - --------------------------------------------------------------------------------------------------------------- Net loans 46,815,664 45,394,346 Premises and equipment 1,029,830 987,231 Intangible assets 1,070,326 598,887 Corporate owned life insurance 1,087,979 507,638 Other assets 1,820,886 1,979,874 - - - --------------------------------------------------------------------------------------------------------------- Total assets $66,339,085 $66,801,239 =========== =========== LIABILITIES Deposits in domestic offices: Noninterest-bearing $ 9,281,016 $ 9,135,760 Interest-bearing 36,763,870 36,003,352 Deposits in foreign offices--interest-bearing 1,237,039 3,425,125 - - - --------------------------------------------------------------------------------------------------------------- Total deposits 47,281,925 48,564,237 Federal funds purchased and securities sold under repurchase agreements 5,544,080 5,499,117 Other short-term borrowings 2,880,289 3,277,611 Other liabilities 1,476,682 1,200,052 Long-term debt 4,003,565 3,569,794 - - - --------------------------------------------------------------------------------------------------------------- Total liabilities 61,186,541 62,110,811 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 Common Shares, $1 par value; authorized 900,000,000 shares; issued 245,944,390 shares 245,944 245,944 Capital surplus 1,500,510 1,454,177 Retained earnings 3,632,658 3,161,293 Loans to ESOP trustee (51,409) (63,909) Net unrealized gains (losses) on securities, net of taxes 47,670 (115,280) Treasury stock, at cost (12,241,569 and 5,582,273 shares) (382,829) (151,797) - - - ---------------------------------------------------------------------------------------------------------------- Total shareholders' equity 5,152,544 4,690,428 - - - ---------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $66,339,085 $66,801,239 =========== =========== - - - ----------------------------------------------------------------------------------------------------------------
[FN] See Notes to Consolidated Financial Statements. 63 38 KEYCORP AND SUBSIDIARIES
- - - ------------------------------------------------------------------------------------------------------------------------- Consolidated Statements of Income - - - ------------------------------------------------------------------------------------------------------------------------- Year ended December 31, dollars in thousands, except per share amounts 1995 1994 1993 - - - ------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans $4,319,610 $3,608,488 $3,313,689 Mortgage loans held for sale 15,372 51,133 74,062 Taxable investment securities 520,908 506,971 556,381 Tax-exempt investment securities 82,586 89,548 107,363 Securities available for sale 135,266 227,414 140,895 Short-term investments 47,254 6,516 21,484 - - - ------------------------------------------------------------------------------------------------------------------------- Total interest income 5,120,996 4,490,070 4,213,874 INTEREST EXPENSE Deposits 1,704,775 1,324,576 1,233,331 Federal funds purchased and securities sold under repurchase agreements 314,657 243,532 130,213 Other short-term borrowings 203,500 90,924 44,451 Long-term debt 261,363 137,794 126,902 - - - ------------------------------------------------------------------------------------------------------------------------- Total interest expense 2,484,295 1,796,826 1,534,897 - - - ------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME 2,636,701 2,693,244 2,678,977 Provision for loan losses 100,507 125,157 211,662 - - - ------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 2,536,194 2,568,087 2,467,315 NONINTEREST INCOME Service charges on deposit accounts 278,030 263,192 252,537 Trust and asset management income 232,375 219,804 244,646 Loan securitization income 65,644 3,490 498 Credit card fees 84,422 76,220 73,466 Insurance and brokerage income 60,492 58,619 65,685 Mortgage banking income 41,255 87,971 127,869 Net securities gains (losses) (40,643) (14,673) 28,319 Gains on certain asset sales -- -- 29,410 Other income 211,452 187,999 179,276 - - - ------------------------------------------------------------------------------------------------------------------------- Total noninterest income 933,027 882,622 1,001,706 NONINTEREST EXPENSE Personnel 1,114,822 1,059,859 1,071,444 Net occupancy 218,076 216,946 204,205 Equipment 155,921 158,074 161,281 FDIC insurance assessments 58,418 98,678 98,707 Amortization of intangibles 77,387 58,518 58,050 Professional fees 73,048 50,020 53,274 Marketing 70,859 58,583 60,400 Merger and integration charges -- -- 118,718 Other expense 543,033 466,560 559,044 - - - ------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 2,311,564 2,167,238 2,385,123 INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 1,157,657 1,283,471 1,083,898 Income taxes 368,465 429,981 373,972 - - - ------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE EXTRAORDINARY ITEM 789,192 853,490 709,926 Extraordinary net gain from the sales of subsidiaries, net of income taxes of $25,351 35,790 -- -- - - - ------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 824,982 $ 853,490 $ 709,926 ========== ========== ========== Net income applicable to Common Shares $808,982 $837,490 $691,829 Per Common Share: Income before extraordinary item $3.30 $3.45 $2.89 Net Income 3.45 3.45 2.89 Weighted average Common Shares outstanding 234,787,423 243,067,487 239,775,188 - - - -------------------------------------------------------------------------------------------------------------------------
[FN] See Notes to Consolidated Financial Statements. 64 39
KEYCORP AND SUBSIDIARIES - - - ------------------------------------------------------------------------------------------------------------------------------------ Consolidated Statements of Changes in Shareholder's Equity - - - ------------------------------------------------------------------------------------------------------------------------------------ Loans to Net Unrealized Treasury Preferred Common Capital Retained ESOP Gains (Losses) Stock dollars in thousands, except per share amounts Stock Shares Surplus Earnings Trustee on Securities at Cost - - - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1992 $243,970 $237,364 $1,336,556 $2,206,051 $(65,478) $ (31,175) Adjustment related to change in accounting for contributions (8,022) Net income 709,926 Cash dividends: Common Shares ($1.12 per share) (131,031) Fixed/Adjustable Rate Cumulative Preferred Stock ($1.297 per share) (1,556) Declared by pooled company prior to merger: Common stock (125,992) Preferred stock (17,059) Issuance of Common Shares: Acquisitions--4,494,543 shares 4,495 79,364 Dividend reinvestment, stock option and purchase plans--1,620,479 net shares 969 19,741 10,512 Redemption of 1,200,000 shares of Fixed/ Adjustable Rate Cumulative Preferred Stock (60,000) (1,800) Redemption of 479,394 shares of Series A Preferred Stock (23,970) Tax benefits attributable to ESOP dividends 1,111 Loan payment from ESOP trustee 1,569 - - - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1993 160,000 242,828 1,433,861 2,633,428 (63,909) (20,663) Adjustment of securities available for sale to fair value at January 1, net of deferred tax expense of $26,621 $ 46,153 Adjustments relating to poolings of interests-- 12,990 shares (11) (375) (71) Net income 853,490 Cash dividends: Common Shares ($1.28 per share) (271,074) Cumulative Preferred Stock ($12.50 per share) (12,000) Declared by pooled company prior to merger: Common stock (39,793) Preferred stock (4,000) Issuance of Common Shares: Acquisitions--5,120,205 shares 2,900 18,850 62,474 Conversion of subordinated debentures-- 120,213 shares (701) 2,309 Dividend reinvestment, stock option and purchase plans--1,170,238 net shares 227 2,542 19,752 Repurchase of Common Shares--7,582,700 shares (215,598) Change in net unrealized gains (losses) on secur- ities, net of deferred tax benefit of $(93,109) (161,433) Tax benefits attributable to ESOP dividends 1,242 - - - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1994 160,000 245,944 1,454,177 3,161,293 (63,909) (115,280) (151,797) Net income 824,982 Cash dividends: Common Shares ($1.44 per share) (338,747) Cumulative Preferred Stock ($12.50 per share) (16,000) Issuance of Common Shares: Acquisitions--15,507,562 shares 54,616 441,743 Dividend reinvestment, stock option and purchase plans--1,808,592 net shares (8,283) 50,828 Repurchase of Common Shares--23,975,450 shares (723,603) Change in net unrealized gains (losses) on secur- ities, net of deferred tax expense of $85,453 162,950 Tax benefits attributable to ESOP dividends 1,130 Loan payment from ESOP trustee 12,500 - - - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1995 $160,000 $245,944 $1,500,510 $3,632,658 $(51,409) $ 47,670 $(382,829) ======== ======== ========== ========== ======== ======== ========= - - - ------------------------------------------------------------------------------------------------------------------------------------
[FN] See Notes to Consolidated Financial Statements. 65 40
KEYCORP AND SUBSIDIARIES - - - ----------------------------------------------------------------------------------------------------------------------------- Consolidated Statements of Cash Flow - - - ----------------------------------------------------------------------------------------------------------------------------- Year ended December 31, in thousands 1995 1994 1993 - - - ----------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 824,982 $ 853,490 $ 709,926 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 100,507 125,157 211,662 Depreciation expense 137,990 121,912 110,852 Amortization of intangibles 77,387 58,518 58,050 Amortization of purchased mortgage servicing rights 7,372 37,271 56,566 Net gain from sales of subsidiaries (61,141) -- -- Gains on certain asset sales -- -- (29,410) Net securities (gains) losses 40,643 14,673 (28,319) Gains on sales of mortgage servicing rights -- (3,045) (25,494) (Gains) losses on sales of other real estate owned 11,580 (2,094) 748 Deferred income taxes 168,707 170,334 49,431 Net (increase) decrease in mortgage loans held for sale 225,789 996,682 (386,797) Net (increase) decrease in trading account assets 92,832 (90,099) (32,428) Other operating activities, net 790,721 (415,374) 279,799 - - - ----------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 2,417,369 1,867,425 974,586 INVESTING ACTIVITIES Net increase in loans (3,042,532) (5,869,912) (2,007,283) Loans sold 1,586,563 547,700 200,000 Purchases of investment securities (1,413,016) (4,444,870) (5,441,846) Proceeds from sales of investment securities 14,544 23,043 142,092 Proceeds from prepayments and maturities of investment securities 2,117,899 2,544,315 3,709,134 Purchases of securities available for sale (697,002) (898,848) (280,634) Proceeds from sales of securities available for sale 2,927,309 2,232,569 630,761 Proceeds from prepayments and maturities of securities available for sale 659,605 517,398 445,559 Net (increase) decrease in short-term investments 63,289 (138,278) 1,072,817 Purchases of premises and equipment (178,759) (204,513) (172,157) Proceeds from sales of premises and equipment 13,745 25,333 24,492 Proceeds from sales of other real estate owned 53,646 73,805 189,571 Purchases of mortgage servicing rights -- (43,437) (77,312) Purchases of corporate owned life insurance (544,757) (240,000) (135,000) Proceeds from sales of subsidiaries 357,114 -- 153,254 Net cash provided by (used in) acquisitions, net of cash acquired (193,118) 40,167 (37,427) - - - ----------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,724,530 (5,835,528) (1,583,979) FINANCING ACTIVITIES Net increase (decrease) in deposits (3,001,259) 599,907 (57,506) Net increase (decrease) in short-term borrowings (539,233) 2,858,177 695,185 Net proceeds from issuance of long-term debt 646,135 1,954,060 556,439 Payments on long-term debt (285,526) (154,325) (568,529) Loan payment received from ESOP trustee 12,500 -- 1,569 Redemption of preferred stock -- -- (85,770) Purchases of treasury shares (723,603) (215,598) -- Proceeds from issuance of common stock pursuant to employee stock purchase, stock option and dividend reinvestment plans 36,286 18,623 28,238 Cash dividends (354,747) (358,811) (262,532) - - - ----------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (4,209,447) 4,702,033 307,094 - - - ----------------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (67,548) 733,930 (302,299) CASH AND DUE FROM BANKS AT BEGINNING OF YEAR 3,511,368 2,777,438 3,079,737 - - - ----------------------------------------------------------------------------------------------------------------------------- CASH AND DUE FROM BANKS AT END OF YEAR $ 3,443,820 $ 3,511,368 $ 2,777,438 - - - ----------------------------------------------------------------------------------------------------------------------------- Additional disclosures relative to cash flow: Interest paid $2,467,923 $1,753,894 $1,529,058 Income taxes paid 254,622 263,378 306,489 Net amount (paid) received on portfolio swaps (78,081) 79,314 148,818 Noncash items: Net transfer of loans to other real estate owned $21,216 $52,664 $88,709 Net transfer of securities from investment to available-for-sale portfolio 8,016,324 2,723,143 -- Transfers of loans to mortgage loans held for sale 1,508,874 -- -- - - - -----------------------------------------------------------------------------------------------------------------------------
[FN] See Notes to Consolidated Financial Statements. 66 41 KEYCORP AND SUBSIDIARIES - - - ------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - - ------------------------------------------------------------------------- 1. Summary of Significant Accounting Policies - - - ------------------------------------------------------------------------- ORGANIZATION KeyCorp is an Ohio corporation and a bank holding company headquartered in Cleveland, Ohio, engaged primarily in the business of commercial and retail banking. It provides a wide range of banking, fiduciary and other financial services to its corporate, individual and institutional customers through four primary lines of business: Corporate Banking, National Consumer Finance, Community Banking and Key PrivateBank. These services are provided across much of the country through a network of banking subsidiaries operating approximately 1,300 full-service banking offices, a 24-hour telephone banking call center services group and nearly 1,500 ATMs in 14 states as of December 31, 1995. In addition to the customary banking services of accepting deposits and making loans, KeyCorp's bank and certain nonbank subsidiaries provide specialized services tailored to specific markets, including personal and corporate trust services, customer access to mutual funds, cash management services, investment banking services, international banking services and investment management services. KeyCorp provides other financial services both in and outside of its primary banking markets through its nonbank subsidiaries. These services include accident and health insurance on loans made by subsidiary banks, venture capital and small business investment financing services, equipment lease financing, community development financing, stock transfer agent services, securities brokerage, automobile financing and other financial services. KeyCorp is also an equity participant in a joint venture with a number of other unaffiliated bank holding companies in Electronic Payment Services, Inc. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and judgments in determining the amounts presented in the consolidated financial statements and related notes thereto. Accordingly, future results could be impacted by differences in such estimates. The accounting policies of KeyCorp and its subsidiaries (the "Corporation") conform with generally accepted accounting principles and prevailing practices within the financial services industry. Following is a summary of the Corporation's significant accounting and reporting policies. BASIS OF PRESENTATION The consolidated financial statements include the accounts of KeyCorp and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior year amounts to conform with the current year presentation. 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. BUSINESS COMBINATIONS In business combinations accounted for as poolings of interests (mergers), the assets, liabilities and shareholders' equity of the respective companies are carried forward at their historical amounts. The companies' results of operations are combined and the prior periods' financial statements are restated to give effect to the merger, when material. In business combinations accounted for as purchases, the results of operations of the acquired companies are included from the respective dates of acquisition. Net assets of the companies acquired are recorded at their fair value at the date of acquisition. Related purchase premiums and discounts are amortized over the remaining lives of the respective assets or liabilities. STATEMENT OF CASH FLOWS Cash and due from banks are considered cash and cash equivalents for purposes of complying with the reporting requirements prescribed by SFAS No. 95, statement of cash flows. SECURITIES AND TRADING ACCOUNT ASSETS Effective January 1, 1994, the Corporation adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Under this standard, equity securities with readily determinable fair values and all investments in debt securities are classified and accounted for in one of three categories: securities held to maturity, trading account assets or 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 carried at cost, adjusted for amortization of premiums and accretion of discounts using the level yield method. Securities held to maturity and equity securities that do not have readily determinable fair values are presented as investment securities on the balance sheet. Debt and equity securities that are bought and principally held for the purpose of selling them in the near term are classified as trading account assets, reported at fair value and included in short-term 67 42 KEYCORP AND SUBSIDIARIES - - - ----------------------------------------------------------------------------- Notes to Consolidated Financial Statements - - - ----------------------------------------------------------------------------- investments on the balance sheet. Realized and unrealized gains and losses are reported in other income on the income statement. Debt and equity securities that the Corporation has not classified as investment securities or trading account assets are classified as securities available for sale and, as such, are reported at fair value, with unrealized gains and losses, net of deferred taxes, reported as a component of shareholders' equity. Prior to the adoption of SFAS No. 115, securities available for sale were carried at the lower of aggregate cost or market value. Gains and losses from sales of securities available for sale are computed using the specific identification method and included in net securities gains (losses) on the income statement. MORTGAGE LOANS HELD FOR SALE Mortgage loans held for sale are carried at the lower of aggregate cost or market value. When commitments to sell exist, market value is assumed to be the contracted sales price. LOANS Loans are carried at the principal amount outstanding, net of unearned income, including net deferred loan fees and costs. Certain nonrefundable loan origination and commitment fees and the direct costs associated with originating or acquiring the loans are deferred. The net deferred amount is amortized as an adjustment to the yield over the contractual lives of the related loans. Student loans held for sale are carried at the lower of aggregate cost or market value. IMPAIRED AND OTHER NONACCRUAL LOANS The accrual of interest on loans is generally discontinued when payment is over 90 days past due, unless the loan is well secured and in the process of collection. When accrual of interest is discontinued on a loan, the interest accrued but not collected is charged against the allowance for loan losses. Thereafter, payments received are generally applied to principal. However, based on management's assessment of the ultimate collectibility of a nonaccrual loan, interest income may be recognized on a cash basis. 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." In accordance with SFAS No. 114, the Corporation excludes smaller-balance, homogeneous loans from its impairment evaluation. All other loans with payments over 90 days past due and on nonaccrual status are considered impaired. Impaired loans and other nonaccrual loans (smaller-balance, homogeneous loans) are returned to accrual status when management determines that the circumstances have improved to the extent that there has been a sustained period of repayment performance and both principal and interest are deemed collectible. Impaired loans are evaluated individually. Where collateral exists, the extent of impairment is determined based on the estimated fair value of the underlying collateral. If collateral does not exist, or is insufficient to support the carrying value of the loan, management looks to other means of collection. Where the estimated fair value of the collateral and the present value of the estimated future cash flows from other means of collection do not support the carrying value of the loan, management charges off that portion of the loan balance which it believes will not ultimately be collected. In instances where collateral or other sources of repayment are sufficient, yet uncertainty exists regarding the ultimate repayment, an allowance is specifically allocated for in the allowance for loan losses. For all other nonaccrual loans (smaller-balance, homogeneous loans) management applies historical loss experience rates, adjusted based on management's assessment of emerging credit trends and other factors. The resulting loss estimates are specifically allocated for by loan type in the allowance for loan losses. In general, such loans are charged off when payment is 120-180 days past due. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is the amount which, in the opinion of management, is necessary to absorb potential losses in the loan portfolio. Management's evaluation of the adequacy of the allowance is based on the market area served, local economic conditions, the growth and composition of the loan portfolios and their related risk characteristics, and the continual review by management of the quality of the loan portfolio. DERIVATIVES USED FOR ASSET AND LIABILITY MANAGEMENT PURPOSES The Corporation uses interest rate swaps, forwards and purchased options in the management of its interest rate risk. These instruments are used to modify the repricing or maturity characteristics of specified assets or liabilities, are linked to the related assets or liabilities being managed (at inception and throughout the derivative contract) and are not included in the financial statements. The net interest income or expense associated with such derivatives is accrued and recognized as an adjustment to the interest income or interest expense of the asset or liability being managed. The related interest receivable or payable from such contracts is recorded in other assets or other liabilities on the balance sheet. Realized gains and losses resulting from the early termination of such contracts are deferred as an adjustment to the carrying value of the asset or liability. The deferred gain or loss is amortized using the straight-line method over the shorter of the projected remaining life of the related contract at its termination or that of the underlying asset or liability. DERIVATIVES USED FOR TRADING PURPOSES Derivatives that are not used for asset and liability management purposes are considered to be used for trading purposes. Such derivatives are entered into for the purpose of making a market for customers and for proprietary trading purposes. They typically include financial futures, foreign exchange forward and spot contracts, written and purchased options (including currency options), 68 43 KEYCORP AND SUBSIDIARIES - - - ----------------------------------------------------------------------------- Notes to Consolidated Financial Statements - - - ----------------------------------------------------------------------------- and interest rate caps, floors and swaps. All derivatives used for trading purposes are recorded at fair value and changes in fair value (including applicable payments and receipts) are recorded in other income on the income statement. The determination of fair value considers the remaining cost to service the derivative and the credit risk associated with the counterparty to the derivative. These derivatives are included in other assets on the balance sheet, if the derivative's fair value is positive, or in other liabilities if the fair value is negative. Positions are not netted unless the right of offset exists and certain other criteria are met. PREMISES AND EQUIPMENT Premises and equipment, including leasehold improvements, are stated at cost less accumulated depreciation and amortization. Depreciation of premises and equipment is determined using the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements are amortized using the straight-line method over the terms of the leases. INTANGIBLE ASSETS Goodwill, representing the excess of the cost of acquisitions over the fair value of net assets acquired, is amortized using the straight-line method over the estimated period to be benefited, not exceeding 25 years. Core deposit intangibles represent the net present value of the future economic benefits related to the use of deposits purchased. They are being amortized using an accelerated method over periods ranging from 5 to 15 years. Other intangibles are generally being amortized using the straight-line method over periods ranging from 4 to 15 years. The Corporation periodically reviews its intangible assets for possible impairment. OTHER REAL ESTATE OWNED Other real estate owned includes real estate acquired through foreclosure or a similar conveyance of title. This asset is carried at the lower of its recorded amount (net of allowance) or fair value, less estimated cost of disposal and is included in other assets on the balance sheet. Write-downs of the assets at, or prior to, the dates of acquisition are charged to the allowance for loan losses. Subsequent write-downs, income and expenses incurred in connection with holding such assets and gains and losses resulting from the sales of such assets are included in other expense on the income statement. EMPLOYEE STOCK OPTIONS The terms of employee stock options granted under incentive compensation plans require that the exercise price of the options be equal to or greater than the fair market value of KeyCorp's Common Shares at the date the options are granted. The Corporation accounts for these options in accordance with Accounting Principles Board Opinion ("APBO") No. 25, "Accounting for Stock Issued to Employees," and, accordingly, no compensation expense related to these option grants is recognized. SECURITIZATION INCOME As part of its ongoing business, the Corporation securitizes and sells certain loans. The securitizations involve the transfer of a pool of loans with similar characteristics to a trust (unaffiliated with the Corporation), wherein securities (representing undivided interests in or obligations of the trust) are purchased by investors. The Corporation continues to administer or service the sold loans, and earns loan securitization income by providing these services at rates stipulated in agreements with the various securitization trusts. Loan securitization income also includes gains recorded upon the securitization and sale of loans. Gains are recorded at the net cash proceeds, adjusted for the recognition of an excess servicing asset. The excess servicing asset is estimated as the present value of the loan's future cash flows (net of the securities' obligations), in excess of income realized from the administration or servicing of the loans. The cash flow related to this asset is expected to accrue to the Corporation during the life of the securitization trust. The fair value of the excess servicing asset is recorded in other assets on the balance sheet upon the securitization and sale of loans. MARKETING COSTS The Corporation expenses all marketing related costs, including advertising costs, as incurred. INCOME TAXES Income taxes have been provided using the liability method in accordance with SFASNo. 109, "Accounting for Income Taxes." The Corporation files a consolidated Federal income tax return. EARNINGS PER COMMON SHARE Earnings per Common Share is computed by dividing net income, less preferred stock dividends, by the weighted average number of Common Shares outstanding. These amounts have been adjusted to reflect stock splits. RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board ("FASB") has issued SFASNo. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," SFASNo. 122, "Accounting for Mortgage Servicing Rights -- an Amendment of SFAS No. 65," and SFAS No. 123, "Accounting for Stock-Based Compensation." None of these new accounting standards had been adopted by the Corporation as of December 31, 1995. The standards apply to financial statements for periods beginning after December 15, 1995. These standards, which were adopted as of January 1, 1996, did not have a material effect on the Corporation's financial condition or results of operations. With respect to the adoption of SFAS No. 123, the Corporation will continue to account for stock options issued to employees under APBO No. 25, "Accounting for Stock Issued to Employees." 69 44 KEYCORP AND SUBSIDIARIES - - - ---------------------------------------------------------------------------- Notes to Consolidated Financial Statements - - - ---------------------------------------------------------------------------- 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. In connection with the acquisition of AFG, 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 servicing operations of KeyCorp Mortgage Inc. ("KMI"), an indirect wholly owned subsidiary of KeyCorp. KMI serviced approximately $25 billion of residential mortgage loans. KeyCorp continues to service commercial mortgages, to originate residential mortgage loans through its banking franchise and to sell the rights to service residential mortgages through Key Mortgage Services, Inc., an indirect newly formed subsidiary. A $72.3 million gain was realized on the KMI sale ($41.6 million after tax, $.17 per Common Share) and recorded as an extraordinary item. KEYCORP-SOCIETY MERGER On March 1, 1994, 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
Mergers and acquisitions completed by KeyCorp during the three years ended December 31, 1995, along with the related accounting treatment, are as follows: Common dollars in millions Location Date Assets Shares Issued Cash Paid - - - ---------------------------------------------------------------------------------------------------------------------------------- POOLINGS OF INTERESTS The Bank of Greeley1 Colorado December 1994 $ 60 259,697 -- Commercial Bancorporation of Colorado1 Colorado March 1994 409 2,900,389 -- KeyCorp-Society2 New York/Ohio March 1994 See note 2 124,351,183 -- Jackson County Federal Bank1 Oregon December 1993 338 1,430,813 -- Home Federal Savings Bank1 Colorado June 1993 230 590,485 -- National Savings Bank of Albany1 New York February 1993 671 2,111,638 -- Puget Sound Bancorp2 Washington January 1993 4,700 31,391,544 -- PURCHASES AutoFinance Group, Inc.2 Illinois 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 Northwestern National Bank Washington July 1993 49 361,607 -- First Federal Savings & Loan Association Florida January 1993 1,100 -- 144 - - - ---------------------------------------------------------------------------------------------------------------------------------- 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 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.
70 45 KEYCORP AND SUBSIDIARIES - - - ------------------------------------------------------------------------------ Notes to Consolidated Financial Statements - - - ------------------------------------------------------------------------------ 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 results of both companies. AMERITRUST TEXAS CORPORATION On September 15, 1993, KeyCorp completed the sale of Ameritrust Texas Corporation ("ATC"), a wholly owned subsidiary. ATC was based in Dallas, Texas, and provided a range of investment management and fiduciary services to institutions, businesses and individuals through 11 offices operating in Texas. A $29.4 million gain was realized on the sale ($12.2 million after tax, $.05 per Common Share) and included in gains on certain asset sales on the income statement in 1993. PUGET SOUND BANCORP On January 15, 1993, Puget Sound Bancorp ("PSB"), a bank holding company headquartered in Tacoma, Washington, with approximately $4.7 billion in assets as of December 31, 1992, merged into Key Bancshares of Washington, Inc., a wholly owned subsidiary of KeyCorp. A total of 31,391,544 KeyCorp Common Shares were exchanged for all of the outstanding shares of PSB common stock (based on an exchange ratio of 1.32 shares for each share of PSB). 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 results of both companies. TRANSACTION PENDING AS OF DECEMBER 31, 1995 SOCIETY FIRST FEDERAL SAVINGS BANK On November 20, 1995, KeyCorp entered into a definitive agreement for the sale of Society First Federal Savings Bank, its Florida savings association subsidiary. The transaction is expected to close in the second quarter of 1996, pending necessary regulatory approvals. Following consummation of the sale, and subject to regulatory approval, KeyCorp expects to continue to provide certain banking services in Florida through its trust company subsidiary in Naples, Florida. - - - ------------------------------------------------------------------------------ 3. Securities Available for Sale - - - ------------------------------------------------------------------------------ The amortized cost, unrealized gains and losses and approximate fair values of securities available for sale were as follows:
December 31, 1995 Gross Gross Amortized Unrealized Unrealized Fair in thousands Cost Gains Losses Value - - - ---------------------------------------------------------------------------------------------------------------- U.S. Treasury, agencies and corporations $1,175,841 $ 25,611 $ 125 $1,201,327 States and political subdivisions 24,574 985 95 25,464 Collateralized mortgage obligations 2,766,873 7,713 23,964 2,750,622 Other mortgage-backed securities 3,850,237 72,549 21,409 3,901,377 Other securities 176,144 5,330 312 181,162 - - - ---------------------------------------------------------------------------------------------------------------- Total $7,993,669 $112,188 $45,905 $8,059,952 ========== ======== ======= ========== - - - ---------------------------------------------------------------------------------------------------------------- December 31, 1994 Gross Gross Amortized Unrealized Unrealized Fair in thousands 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 Collateralized mortgage obligations 10,127 -- 131 9,996 Other mortgage-backed securities 1,324,005 211 105,858 1,218,358 Other securities 223,299 47 9,028 214,318 - - - ---------------------------------------------------------------------------------------------------------------- Total $2,654,028 $1,567 $134,546 $2,521,049 ========== ====== ======== ========== - - - ----------------------------------------------------------------------------------------------------------------
71 46 KEYCORP AND SUBSIDIARIES - - - ------------------------------------------------------------------------------ Notes to Consolidated Financial Statements - - - ------------------------------------------------------------------------------ Upon adoption of SFAS No. 115, effective January 1, 1994, the Corporation transferred approximately $4.0 billion of securities from the investment securities portfolio to the securities available-for-sale portfolio. Securities available for sale were adjusted to fair value and shareholders' equity was increased by $46.2 million, representing the net unrealized gain on these securities, net of deferred income taxes. During the fourth quarter of 1995, the FASB granted companies a one-time opportunity to reassess and, if appropriate, reclassify their securities from the held-to-maturity category to the available-for-sale category without calling into question the company's intent to hold other debt securities to maturity in the future. This opportunity appears to have been granted in response to appeals by the banking industry following a clarification of the position of the bank regulatory authorities on related securities accounting matters, a position which if known prior to the effective date of SFAS No. 115 would have caused the Corporation to classify significantly more securities as available for sale upon adoption of SFAS No. 115. As a result, during the fourth quarter the Corporation reclassified substantially all held-to-maturity debt securities, except securities of states and political subdivisions, to the available-for-sale category. The reclassified securities totaled approximately $8.0 billion and had an amortized cost which approximated fair value. At December 31, 1995, approximately $8.1 billion of securities were classified as available for sale and shareholders' equity was increased by $47.7 million, representing the net unrealized gain on these securities, net of deferred income taxes. Securities available for sale by remaining contractual maturity were as follows, with collateralized mortgage obligations and other mortgage-backed securities included in the maturity schedule based on their expected average lives.
December 31, 1995 Amortized Fair in thousands Cost Value - - - --------------------------------------------------------------------------------- Due in one year or less $ 736,915 $ 744,732 Due after one through five years 4,394,705 4,420,219 Due after five through ten years 2,677,319 2,691,040 Due after ten years 184,730 203,961 - - - --------------------------------------------------------------------------------- Total $7,993,669 $8,059,952 ========== ========== - - - ---------------------------------------------------------------------------------
Other securities consist primarily of corporate floating-rate notes and equity securities. Proceeds from the sales of securities available for sale were $2.9 billion, $2.2 billion and $630.8 million during 1995, 1994 and 1993, respectively. Gross realized gains and losses related to those securities were $15.4 million and $56.0 million, respectively, in 1995; $14.9 million and $29.6 million, respectively, in 1994; and $35.3 million and $.02 million, respectively, in 1993. - - - ------------------------------------------------------------------------------------------------- 4. Investment Securities - - - ------------------------------------------------------------------------------------------------- The amortized cost, unrealized gains and losses and approximate fair values of investment securities were as follows:
December 31, 1995 Gross Gross Amortized Unrealized Unrealized Fair in thousands Cost Gains Losses Value - - - ---------------------------------------------------------------------------------------------------------------- U.S. Treasury, agencies and corporations $ 4,911 $ 102 -- $ 5,013 States and political subdivisions 1,424,116 51,059 $763 1,474,412 Other securities 258,725 -- 55 258,670 - - - ---------------------------------------------------------------------------------------------------------------- Total $1,687,752 $51,161 $818 $1,738,095 ========== ======= ==== ========== - - - ----------------------------------------------------------------------------------------------------------------
December 31, 1994 Gross Gross Amortized Unrealized Unrealized Fair in thousands 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 Collateralized mortgage obligations 3,777,520 247 256,397 3,521,370 Other mortgage-backed securities 4,056,649 9,776 225,029 3,841,396 Other securities 400,316 875 41,086 360,105 - - - ---------------------------------------------------------------------------------------------------------------- Total $10,275,638 $44,507 $563,113 $9,757,032 =========== ======= ======== ========== - - - ----------------------------------------------------------------------------------------------------------------
72 47 KEYCORP AND SUBSIDIARIES - - - ------------------------------------------------------------------------------- Notes To Consolidated Financial Statements - - - ------------------------------------------------------------------------------- Investment securities by remaining contractual maturity were as follows: December 31, 1995
Amortized Fair in thousands Cost Value - - - -------------------------------------------------------------------------------- Due in one year or less $ 710,544 $ 711,277 Due after one through five years 648,477 669,363 Due after five through ten years 256,494 280,119 Due after ten years 72,237 77,336 - - - -------------------------------------------------------------------------------- Total $1,687,752 $1,738,095 ========== ========== - - - --------------------------------------------------------------------------------
Other securities in 1995 consisted primarily of those collateralized by Federal Reserve Bank stock, corporate floating-rate notes and venture capital investments. In 1994, other securities included the above securities as well as those secured by credit card and automobile installment loan receivables. Proceeds from the sales of investment securities were $14.5 million, $23.0 million and $142.1 million during 1995, 1994 and 1993, respectively. In 1995 and 1994, the proceeds related to the sales of certain venture capital investments. Gross realized gains and losses related to sales of investment securities were $.8 million and $7.8 million, respectively, in 1993. At December 31, 1995, investment securities and available-for-sale securities with an aggregate amortized cost of approximately $7.4 billion were pledged to secure public and trust deposits, securities sold under repurchase agreements and for other purposes required or permitted by law. - - - -------------------------------------------------------------------------------- 5. Loans - - - -------------------------------------------------------------------------------- Loans are summarized as follows:
December 31, in thousands 1995 1994 - - - ------------------------------------------------------------------- Commercial, financial and agricultural $11,534,650 $10,190,582 Real estate--construction 1,519,881 1,287,195 Real estate--commercial mortgage 7,253,671 6,774,860 Real estate--residential mortgage 12,176,834 13,567,077 Consumer 10,117,649 10,183,798 Student loans held for sale 2,081,185 1,816,524 Lease financing 2,887,040 2,307,212 Foreign 120,790 97,396 - - - ------------------------------------------------------------------- Total $47,691,700 $46,224,644 =========== =========== - - - -------------------------------------------------------------------
Changes in the allowance for loan losses are summarized as follows:
Year ended December 31, in thousands 1995 1994 1993 - - - ---------------------------------------------------------------------------------------------------------------- Balance at beginning of year $ 830,298 $ 802,712 $ 782,649 Charge-offs (207,982) (208,791) (303,160) Recoveries 108,800 99,640 90,385 - - - ---------------------------------------------------------------------------------------------------------------- Net charge-offs (99,182) (109,151) (212,775) Provision for loan losses 100,507 125,157 211,662 Allowance acquired/sold, net 43,865 11,580 21,176 Transfer from OREO allowance 548 -- -- - - - ---------------------------------------------------------------------------------------------------------------- Balance at end of year $ 876,036 $ 830,298 $ 802,712 ========= ========= ========= - - - ----------------------------------------------------------------------------------------------------------------
73 48 KEYCORP AND SUBSIDIARIES - - - ---------------------------------------------------------------------------- Notes To Consolidated Financial Statements - - - ---------------------------------------------------------------------------- In the ordinary course of business, KeyCorp's banking affiliates have made loans at prevailing interest rates and terms to directors and executive officers of KeyCorp and its subsidiaries and their associates (as defined by the Securities and Exchange Commission). Such "related party" loans, in management's opinion, did not present more than the normal risk of collectibility or incorporate other unfavorable features at their origination dates. The aggregate amount of loans outstanding to qualifying related parties at January 1, 1995, was $193.3 million. During 1995, activity with respect to these loans included new loans of $81.7 million, repayments of $81.4 million and a net decrease of $16.1 million due to changes in the status of executive officers and directors. As a result of these activities, the aggregate balance of loans outstanding to related parties at December 31, 1995, was $177.5 million. Portfolio interest rate swaps are used to manage interest rate risk by modifying the repricing and maturity characteristics of certain loans. Additional information pertaining to the notional amount, fair value and weighted average rate of such swaps as of December 31, 1995, is presented in Note 17, Financial Instruments with Off-Balance Sheet Risk, beginning on page 84. - - - ---------------------------------------------------------------------------- 6. Nonperforming Assets - - - ---------------------------------------------------------------------------- Effective January 1, 1995, the Corporation adopted SFASNo. 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 requires loans to be measured for impairment when it is probable that all amounts, including principal and interest, will not be collected in accordance with the contractual terms of the loan agreement. SFAS No. 114 applies to all loans, except for large groups of smaller-balance, homogeneous loans that are collectively evaluated for impairment, loans that are measured at fair value or at the lower of cost or fair value, leases, and debt securities. SFAS No. 118 amends SFASNo. 114 by eliminating certain income recognition provisions and by expanding disclosure requirements. Adoption of these standards did not have a material impact on the Corporation's financial condition or results of operations. The Corporation considers all nonaccrual loans to be impaired loans, except for smaller-balance, homogeneous loans excluded by the requirements of SFAS No. 114. A loan is not deemed impaired during a period of delay in payment of 90 days or less if the Corporation expects to collect all amounts due, including interest accrued at the contractual interest rate, for the period of delay. The Corporation excludes smaller-balance, homogeneous nonaccrual loans from its impairment evaluation. Generally these include loans to finance residential mortgages, automobiles, recreational vehicles, boats and mobile homes. The Corporation applies historical loss experience rates to these loans, adjusted based on management's assessment of emerging credit trends and other factors. The resulting loss estimates are specifically allocated for by loan type in the allowance for loan losses. In general, such loans are charged off when payment is 120-180 days past due. In accordance with SFAS No. 114, loans are to be classified in other real estate owned ("OREO") only when the creditor has 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 December 31, 1995, the recorded investment in impaired loans was $204.9 million. Included in this amount is $126.1 million of impaired loans for which the specifically allocated allowance for loan losses was $40.2 million, and $78.8 million of impaired loans which are carried at their estimated fair value and, therefore, did not have a specifically allocated allowance for loan losses. The average recorded investment in impaired loans for 1995 was $187.1 million. 74 49 KEYCORP AND SUBSIDIARIES - - - ------------------------------------------------------------------------------ Notes To Consolidated Financial Statements - - - ------------------------------------------------------------------------------ Nonperforming assets were as follows:
December 31, in thousands 1995 1994 - - - ------------------------------------------------------------------------------- Impaired loans1 $204,948 -- Other nonaccrual loans 125,410 $254,499 Restructured loans 2,549 1,550 - - - ------------------------------------------------------------------------------- Total nonperforming loans 332,907 256,049 Other real estate owned 56,388 100,265 Allowance for OREO losses (14,112) (21,258) - - - ------------------------------------------------------------------------------- Other real estate owned, net of allowance 42,276 79,007 Other nonperforming assets 3,420 4,777 - - - ------------------------------------------------------------------------------- Total nonperforming assets $378,603 $339,833 ======== ======== - - - -------------------------------------------------------------------------------
[FN] 1 Effective January 1, 1995, the Corporation adopted SFASNo. 114, which requires the separate disclosure of impaired loans. Prior to January 1, 1995, impaired loans were included in "Other nonaccrual loans." The effect on interest income of loans classified as nonperforming at December 31 was as follows:
in thousands 1995 1994 1993 - - - -------------------------------------------------------------------------------- Interest income which would have been recorded if assets had been current under original terms $ 31,384 $ 20,484 $ 30,037 Less: Interest income recorded during the period (11,102) (5,132) (7,900) - - - -------------------------------------------------------------------------------- Net reduction to reported interest income $ 20,282 $ 15,352 $ 22,137 ======== ======== ======== - - - --------------------------------------------------------------------------------
At December 31, 1995, there were no significant commitments to lend additional funds to borrowers with restructured loans or loans on nonaccrual status. Changes in the allowance for OREO losses are summarized as follows:
Year ended December 31, in thousands 1995 1994 1993 - - - ----------------------------------------------------------------------------------------------------------------- Balance at beginning of year $ 21,258 $ 35,690 $ 17,915 Net charge-offs (16,281) (21,808) (21,697) Provision for losses on other real estate owned 12,670 7,162 39,132 Allowance acquired/sold, net (2,987) 214 340 Transfer to allowance for loan losses (548) -- -- - - - ----------------------------------------------------------------------------------------------------------------- Balance at end of year $ 14,112 $ 21,258 $ 35,690 ======== ======== ======== - - - -----------------------------------------------------------------------------------------------------------------
- - - ------------------------------------------------------------------------------- 7. Premises and Equipment - - - ------------------------------------------------------------------------------- Premises and equipment were as follows:
December 31, in thousands 1995 1994 - - - ------------------------------------------------------------------------------- Land $ 127,366 $ 122,034 Buildings and leasehold improvements 840,697 821,003 Furniture and equipment 871,261 762,757 - - - ------------------------------------------------------------------------------- 1,839,324 1,705,794 Accumulated depreciation and amortization (809,494) (718,563) - - - ------------------------------------------------------------------------------- Total $1,029,830 $ 987,231 ========== ========== - - - -------------------------------------------------------------------------------
Depreciation and amortization expense related to premises and equipment totaled $138.0 million, $121.9 million, and $110.9 million in 1995, 1994, and 1993, respectively. At December 31, 1995, KeyCorp's affiliates were obligated under noncancelable leases for land and buildings and for other property, consisting principally of data processing equipment. Rental expense under all operating leases totaled $116.9 million in 1995, $124.2 million in 1994 and $123.7 million in 1993. Minimum future rental payments under noncancelable leases at December 31, 1995, were as follows: 1996 -- $97.4 million; 1997 -- $86.4 million; 1998 -- $76.6 million; 1999 -- $71.6 million; 2000 -- $67.3 million; and subsequent years -- $534.4 million. 75 50 KEYCORP AND SUBSIDIARIES - - - -------------------------------------------------------------------------------- Notes To Consolidated Financial Statements - - - -------------------------------------------------------------------------------- - - - -------------------------------------------------------------------------------- 8. Intangible Assets and Purchased Mortgage Servicing Rights - - - -------------------------------------------------------------------------------- Intangible assets, net of accumulated amortization, were as follows:
December 31, in thousands 1995 1994 - - - --------------------------------------------------------------------------------- Goodwill $ 899,294 $ 418,462 Core deposit intangibles 142,313 154,146 Credit card intangibles 16,252 19,518 Other 12,467 6,761 - - - --------------------------------------------------------------------------------- Total(1) $1,070,326 $ 598,887 ========== ========== - - - --------------------------------------------------------------------------------- Purchased mortgage servicing rights $564 $194,757 - - - --------------------------------------------------------------------------------- (1) Includes accumulated amortization of $220.8 million and $167.7 million at December 31, 1995 and 1994, respectively.
The amortization expense for purchased mortgage servicing rights, which are included in other assets on the balance sheet, totaled $7.4 million, $37.3 million and $56.6 million in 1995, 1994 and 1993, respectively. Substantially all of the purchased mortgage servicing rights were sold in connection with the sale of the residential mortgage loan servicing operations of KMI, previously described in Note 2, Mergers, Acquisitions and Divestitures beginning on page 70. The amortization expense for intangible assets was as follows:
Year ended December 31, in thousands 1995 1994 1993 - - - ------------------------------------------------------- Goodwill $45,435 $25,722 $24,210 Core deposit intangibles 25,674 25,428 22,436 Credit card intangibles 3,266 3,196 4,460 Other 3,012 4,172 6,944 - - - ------------------------------------------------------- Total $77,387 $58,518 $58,050 ======= ======= ======= - - - -------------------------------------------------------
- - - ----------------------------------------------------------------------------------------------------------------------------------- 9. Short-Term Borrowings - - - ----------------------------------------------------------------------------------------------------------------------------------- The details of short-term borrowings were as follows:
dollars in thousands 1995 1994 1993 - - - ----------------------------------------------------------------------------------------------------------------------------------- FEDERAL FUNDS PURCHASED Balance at year-end $2,983,313 $3,055,369 $1,932,211 Average during the year 3,149,272 3,063,429 1,828,606 Maximum month-end balance 4,186,996 3,322,299 3,127,134 Weighted average rate during the year 5.91% 4.37% 3.06% Weighted average rate at December 31 5.80 4.91 3.13 - - - ----------------------------------------------------------------------------------------------------------------------------------- SECURITIES SOLD UNDER REPURCHASE AGREEMENTS Balance at year-end $2,560,767 $2,443,748 $2,188,047 Average during the year 2,473,261 2,786,957 2,549,582 Maximum month-end balance 2,679,014 2,990,963 3,163,603 Weighted average rate during the year 5.19% 3.94% 2.91% Weighted average rate at December 31 4.88 4.43 2.84 - - - ----------------------------------------------------------------------------------------------------------------------------------- OTHER SHORT-TERM BORROWINGS Balance at year-end $2,880,289 $3,277,611 $1,776,192 Average during the year 3,361,704 1,929,631 1,196,188 Maximum month-end balance 4,383,058 3,383,102 1,776,192 Weighted average rate during the year 6.05% 4.71% 3.72% Weighted average rate at December 31 6.11 5.08 3.16 - - - -----------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings consist primarily of Federal funds purchased and securities sold under repurchase agreements, which generally represent overnight borrowing transactions. Other short-term borrowings consist primarily of Medium-Term Bank Notes with original maturities of one year or less, and Treasury, tax and loan demand notes. During the first quarter of 1995, the Corporation expanded its $5.0 billion Bank Note Program, which involved four affiliate banks, to allow the issuance of up to $6.6 billion covering eleven affiliate banks. At December 31, 1995 and 1994, $3.7 billion in debt securities was outstanding under these programs, with $2.3 billion having original maturities of one year or less. On January 12, 1996, the Bank 76 51 KEYCORP AND SUBSIDIARIES - - - -------------------------------------------------------------------------------- Notes To Consolidated Financial Statements - - - -------------------------------------------------------------------------------- Note Program was further expanded to allow the issuance of up to $12.3 billion covering twelve affiliate banks. In the third quarter of 1995, the Corporation's parent company established a new Commercial Paper/Note Program which provides for the availability of up to $500.0 million of additional short-term funding. The parent company also entered into a four-year, $500.0 million revolving credit agreement with several banks under which the banks have agreed to lend collectively up to $500.0 million to KeyCorp. The line of credit will be used 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 December 31, 1995. Portfolio interest rate swaps are used to manage interest rate risk by modifying the repricing and maturity characteristics of certain short-term borrowings. Additional information pertaining to the notional amount, fair value and weighted average rate of such swaps as of December 31, 1995, is presented in Note 17, Financial Instruments with Off-Balance Sheet, Risk beginning on page 84. - - - ---------------------------------------------------------------------------------------------------------------- 10. Long-Term Debt - - - ---------------------------------------------------------------------------------------------------------------- The components of long-term debt, presented net of unamortized discount where applicable, were as follows:
December 31, dollars in thousands 1995 1994 - - - ---------------------------------------------------------------------------------------------------------------- Senior Medium-Term Notes due through 2005 $ 994,950 $ 705,200 Subordinated Medium-Term Notes due through 2005 182,500 165,000 8.125% Subordinated Notes due 2002 198,395 198,148 8.00% Subordinated Notes due 2004 125,000 125,000 8.40% Subordinated Capital Notes due 1999 75,000 75,000 8.875% Notes due 1996 74,950 74,829 11.125% Notes due 1995 -- 49,992 8.404% Notes due 1997 through 2001 48,864 48,864 8.255% Notes due 1996 22,794 22,794 All other long-term debt 364 374 - - - ---------------------------------------------------------------------------------------------------------------- Total parent company 1,722,817 1,465,201 Senior Medium-Term Bank Notes due through 1997 1,399,213 1,398,245 7.25% Subordinated Notes due 2005 200,000 -- 7.85% Subordinated Notes due 2002 199,863 199,843 6.75% Subordinated Notes due 2003 199,011 198,886 Federal Home Loan Bank Advances 267,533 252,328 10.00% Notes due 1995 -- 36,735 Industrial revenue bonds 10,112 10,144 All other long-term debt 5,016 8,412 - - - ---------------------------------------------------------------------------------------------------------------- Total subsidiaries 2,280,748 2,104,593 - - - ---------------------------------------------------------------------------------------------------------------- Total $4,003,565 $3,569,794 ========== ========== - - - ----------------------------------------------------------------------------------------------------------------
Scheduled principal payments on long-term debt are as follows:
in thousands Parent Subsidiaries Total - - - ------------------------------------------------------ 1996 $604,516 $1,146,881 $1,751,397 1997 98,005 428,598 526,603 1998 132,665 29,327 161,992 1999 107,330 51,189 158,519 2000 287,245 756 288,001 - - - ------------------------------------------------------
In April 1995, KeyCorp updated its universal shelf registration statement on file with the Securities and Exchange Commission, which provides for the possible issuance of a broad range of debt and equity securities by the parent company. The updated filing registered an additional $845.0 million of securities (up to $750.0 million of which were reserved for future issuance as Medium-Term Notes). Medium-Term notes issued under the registration statement totaled $413.5 million and $395.0 million in 1995 and 1994, respectively. The proceeds from the issuances of these notes, which have original maturities of more than one year, were used to fund acquisitions and for general corporate purposes. 77 52 KEYCORP AND SUBSIDIARIES - - - -------------------------------------------------------------------------------- Notes To Consolidated Financial Statements - - - -------------------------------------------------------------------------------- At December 31, 1995 and 1994, the parent company's Senior Medium-Term Notes, as presented in the table, had weighted average interest rates of 6.62% and 6.48%, respectively, and the Subordinated Medium-Term Notes had a weighted average interest rate of 6.88%. Both the Senior and Subordinated Notes had varying maturities through 2005. The 8.125% Subordinated Notes, 8.875% Notes and 11.125% Notes are not redeemable prior to maturity. The 8.40% Subordinated Capital Notes due 1999 may, at maturity, be exchanged for common stock, preferred stock or other eligible securities having a market value equal to the principal amount of the notes. In 1989, to fund a leveraged employee stock ownership plan ("ESOP"), the parent company borrowed $71.7 million from several institutional investors through the placement of unsecured notes totaling $22.8 million (the "8.255% Notes") and $48.9 million (the "8.404% Notes"). The interest on these notes totaled $6.0 million in each of the years 1995, 1994 and 1993. The ESOP trustee used the proceeds to purchase 5.8 million KeyCorp Common Shares. These shares are held by the ESOP trustee for matching employee contributions to the Plan. The net difference between the cost of the treasury shares sold to the ESOP trustee and their market value was recorded as a reduction to retained earnings. Except for the repayment schedule, the loans to the ESOP trustee are on substantially similar terms as the borrowings from the institutional investors and, in addition, are secured by the unallocated shares held by the ESOP trustee. The ESOP trustee will repay the loans from KeyCorp using corporate contributions made by the Plan for that purpose and dividends on the Common Shares acquired with the loans. The amount of dividends on the ESOP shares used for debt service by the ESOP trustee totaled $4.8 million in 1995, $4.4 million in 1994 and $3.9 million in 1993. As contributions and dividends are received, a portion of the shares acquired with the loans will be allocated to Plan participants. Interest income recognized on loans to the ESOP trustee is netted against the interest expense incurred on the notes payable to the institutional investors. KeyCorp's receivable from the ESOP trustee, representing deferred compensation to the Corporation's employees, has been recorded as a negative component of shareholders' equity. During 1994, Society National Bank ("SNB") issued $1.4 billion of Senior Medium-Term Bank Notes with original maturities exceeding one year. The proceeds from the sales of these notes were used for general corporate purposes. At December 31, 1995 and 1994, SNB's Senior Medium-Term Bank Notes, as presented in the table, had a weighted average interest rate of 6.71% and 6.72%, respectively, and mature in 1996 and 1997. Long-term advances from the Federal Home Loan Bank ("FHLB") are at adjustable and fixed rates ranging from 4.33% to 12.125% at December 31, 1995, and mature at various dates through 2014. Real estate loans and securities of $353.5 million and $271.3 million at December 31, 1995, and 1994, respectively, collateralize FHLB advances. The 7.25% Subordinated Notes, 7.85% Subordinated Notes and 6.75% Subordinated Notes are obligations of SNB and may not be redeemed prior to their respective maturity dates. Industrial revenue bonds issued by affiliate banks have varying maturities extending to the year 2009 and had weighted average interest rates of 6.96% at December 31, 1995 and 1994. Other long-term debt at December 31, 1995 and 1994, consisted of capital lease obligations and various secured and unsecured obligations of corporate subsidiaries and had weighted average interest rates of 10.36% and 9.64%, respectively. Long-term debt qualifying as supplemental capital for purposes of calculating Tier II capital under Federal Reserve Board Guidelines amounted to $1.1 billion and $943.2 million at December 31, 1995, and 1994, respectively. Portfolio interest rate swaps are used to manage interest rate risk by modifying the repricing and maturity characteristics of certain long-term debt. Additional information pertaining to the notional amount, fair value and weighted average rate of such swaps as of December 31, 1995, is presented in Note 17, Financial Instruments with Off-Balance Sheet Risk, beginning on page 84. - - - -------------------------------------------------------------------------------- 11. Shareholders' Equity - - - -------------------------------------------------------------------------------- COMMON SHARES AND PREFERRED STOCK In connection with the KeyCorp-Society merger, shareholders approved an increase in the number of authorized shares of KeyCorp to 926,400,000 of which 1,400,000 are shares of nonvoting 10% Cumulative Preferred Stock, Class A ("Class A"), par value $5 per share; 25,000,000 are shares of Preferred Stock, par value $1 per share; and 900,000,000 are Common Shares, par value $1 per share. At December 31, 1995, 1,280,000 shares of Class A were outstanding, represented by 6,400,000 Depositary Shares; each Depositary Share represents a one-fifth interest in a share of Class A, $125 liquidation preference per share. Preferred stock is reported on the accompanying consolidated balance sheet at its stated value of $125 per share. The shares of 10% Cumulative Preferred Stock are redeemable at the option of KeyCorp, in whole or in part, on and after June 30, 1996, at $125 per share 78 53 KEYCORP AND SUBSIDIARIES - - - -------------------------------------------------------------------------------- Notes To Consolidated Financial Statements - - - -------------------------------------------------------------------------------- (equivalent to $25 per Depositary Share) plus accrued and unpaid dividends to the redemption date. In January 1995, KeyCorp's Board of Directors approved a 12,000,000 Common Share repurchase program, representing an addition to previously existing programs. The repurchase of approximately 13,200,000 shares was also authorized during the first quarter in connection with the acquisitions of AFG and Spears, Benzak, Salomon & Farrell, Inc. ("Spears Benzak") which are more fully described in Note 2, Mergers, Acquisitions and Divestitures, beginning on page 70. During 1995, the Corporation repurchased 23,975,450 shares at a total cost of $723.6 million (an average of $30.18 per share). Additionally, Treasury Shares totaling 15,507,562 were reissued in 1995 in connection with the acquisitions of AFG, OMNIBANCORP and Spears Benzak and 1,808,592 shares were reissued for employee benefit plans. The 12,241,569 Treasury Shares at December 31, 1995, are expected to be reissued over time in connection with employee benefit programs, dividend reinvestment plans and other corporate purposes. As of December 31, 1995, all share repurchase authorizations had been fully utilized. Similar to the 1995 action, in January 1996 the Board of Directors approved a new share repurchase program which authorizes the repurchase of up to an additional 12,000,000 Common Shares in 1996. Under the new program, shares will be repurchased from time to time in the open market or through negotiated transactions and will be available to be reissued in connection with employee stock purchase, 401(k), stock option, and dividend reinvestment plans and for other corporate purposes. KeyCorp's Board of Directors adopted a Shareholder Rights Plan ("Rights") in 1989 under which each shareholder received one Right for each Common Share of KeyCorp. Each Right represents the right to purchase a Common Share of KeyCorp at a price of $65. The Rights become exercisable 20 days after a person or group acquires 15% or more of the outstanding shares or commences a tender offer that could result in such an ownership interest. Until the Rights become exercisable, they will trade with the Common Shares, and any transfer of the Common Shares will also constitute a transfer of associated Rights. When the Rights become exercisable, they will begin to trade separate and apart from the Common Shares. Twenty days after the occurrence of certain "Flip-In Events," each Right will become the right to purchase a Common Share of KeyCorp for the then par value per share (now $1 per share) and the Rights held by a 15% or more shareholder will become void. KeyCorp may redeem these Rights at its option at $.005 per Right subject to certain limitations. Unless redeemed earlier, the Rights expire on September 12, 1999. In 1993, KeyCorp amended the Rights so as to confirm that the KeyCorp-Society merger would not activate the provisions of the Rights. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS KeyCorp maintains incentive compensation plans which provide for its ability to grant stock options, stock appreciation rights, limited stock appreciation rights, restricted stock and performance shares to selected employees and directors. Generally, the terms of these plans stipulate that the exercise price of options may not be less than the fair market value of KeyCorp's Common Shares at the date the options are granted. Options granted expire not later than ten years from the date of grant. At December 31, 1995 and 1994, options for Common Shares available for future grant totaled 4,674,056 and 4,385,377, respectively. The following table presents a summary of pertinent information with respect to KeyCorp's stock options and stock appreciation rights.
Stock Options 1995 1994 --------------------------- ------------------------- Shares Option Price Shares Option Price - - - ---------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 12,102,036 $ 4.79-- 38.18 9,609,915 $ 4.79-- 38.18 Granted 2,370,690 26.13-- 36.25 3,960,983 25.00-- 35.69 Assumed in acquisition 396,649 .50-- 32.44 327,975 6.46-- 29.15 Exercised 2,134,612 8.41-- 34.65 1,460,899 4.79-- 30.61 Lapsed or cancelled 649,237 10.64-- 38.18 335,938 10.52-- 38.18 - - - ---------------------------------------------------------------------------------------------------------------- Outstanding at end of year 12,085,526 $ .50-- 38.18 12,102,036 $ 4.79-- 38.18 - - - ---------------------------------------------------------------------------------------------------------------- Exercisable at end of year 8,079,108 $ .50-- 38.18 7,833,731 $ 4.79-- 38.18 - - - ----------------------------------------------------------------------------------------------------------------
Stock Appreciation Rights 1995 1994 -------------------------- ------------------------- Shares Option Price Shares Option Price - - - ---------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 42,000 $11.69 44,000 $11.69 Exercised or surrendered 30,000 11.69 -- -- Lapsed or cancelled 12,000 11.69 2,000 11.69 - - - ---------------------------------------------------------------------------------------------------------------- Outstanding at end of year -- -- 42,000 $11.69 - - - ---------------------------------------------------------------------------------------------------------------- Exercisable at end of year -- -- 42,000 $11.69 - - - ----------------------------------------------------------------------------------------------------------------
79 54 KEYCORP AND SUBSIDIARIES - - - -------------------------------------------------------------------------------- Notes To Consolidated Financial Statements - - - -------------------------------------------------------------------------------- - - - -------------------------------------------------------------------------------- 12. Merger and Integration Charges - - - -------------------------------------------------------------------------------- Merger and integration charges of $118.7 million ($80.6 million after tax, $.33 per Common Share) were recorded in 1993 in connection with the March 1, 1994, merger of old KeyCorp into and with Society. The merger and integration charges included accruals for merger expenses, consisting primarily of investment banking and other professional fees directly related to the merger ($20.5 million); severance payments and other employee costs ($49.6 million); systems and facilities costs ($35.7 million); and other costs incidental to the merger ($12.9 million). These charges were recorded by the parent company in the fourth quarter of 1993, at which time management determined that it was probable that a liability for all such charges had been incurred and could be reasonably estimated. There was no remaining accrued liability at December 31, 1995, compared with a liability of $33.5 million at December 31, 1994. The above merger is described in greater detail in Note 2, Mergers, Acquisitions and Divestitures beginning on page 70. - - - -------------------------------------------------------------------------------- 13. Employee Benefits - - - -------------------------------------------------------------------------------- PENSION PLANS Effective January 1, 1995, the noncontributory pension plans sponsored by KeyCorp and its subsidiaries were merged into a single amended and restated plan under the name of the KeyCorp Cash Balance Pension Plan (the "Cash Balance Plan"). The Benefits paid from the predecessor plans, which covered substantially all employees, were based on age, years of service and compensation prior to retirement and were determined in accordance with defined formulas. On the effective date of the adoption of the Cash Balance Plan, a bookkeeping account was established for each participant and each account was credited with an opening balance equal to the actuarial present value of benefits earned under the applicable predecessor plan. The participant's account is then credited based on qualifying compensation and with interest determined at a specified rate. Certain "grandfathering" and enhancement provisions apply to participants meeting specified conditions, including age and service requirements. The actuarially determined amounts presented in the funded status table shown below, as of the applicable measurement dates in 1995 and 1994, reflect the merger of the predecessor plans into the Cash Balance Plan. The adoption of the Cash Balance Plan did not have a material impact on the projected benefit obligations and did not have a material impact on net pension cost. In 1995, the Corporation changed from a December 31 to a September 30 measurement date for the valuation of its pension and other postretirement benefit plans' assets and actuarially determined obligations. The change in measurement date had no effect on 1995 or prior years' net pension and other postretirement benefits costs. The Corporation's funding policy is to contribute an amount to the Cash Balance Plan that meets the minimum funding requirements set forth in the Employee Retirement Income Security Act (ERISA) of 1974, plus such additional amounts as the Corporation determines to be appropriate. The weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of projected benefit obligations of both the funded and unfunded plans were 7.50% and 4.19%, respectively, at September 30, 1995, and 8.50% and 4.24%, respectively, at December 31, 1994. The weighted average expected long-term rate of return on pension assets used in determining net pension cost was 9.50% for both 1995 and 1994, and 9.91% for 1993. The following table reconciles the funded status of the Cash Balance Plan at the applicable measurement dates with the amounts recognized in the consolidated balance sheets at December 31, 1995, and 1994:
in thousands 1995 1994 - - - ---------------------------------------------------------------------------------------------------------------- Accumulated benefit obligation, including vested benefits of $550,295 and $497,653 $570,726 $517,206 - - - ---------------------------------------------------------------------------------------------------------------- Fair value of plan assets, primarily listed stock and fixed income securities1 653,488 573,509 Projected benefit obligation 589,304 527,266 - - - ---------------------------------------------------------------------------------------------------------------- Excess of fair value of plan assets over projected benefit obligation 64,184 46,243 Unrecognized net loss 85,498 116,377 Unrecognized prior service benefit (2,604) (1,890) Unrecognized net transition asset (28,259) (33,369) Fourth quarter contribution 3,447 -- - - - ---------------------------------------------------------------------------------------------------------------- Prepaid pension cost (included in other assets) $122,266 $127,361 ======== ======== - - - ----------------------------------------------------------------------------------------------------------------
[FN] (1)Includes 947,242 KeyCorp Common Shares valued at $32.4 million and $23.7 million at September 30, 1995, and December 31, 1994, respectively. Dividends paid on these shares totaled $1.0 million and $1.2 million for the nine-month period ended September 30, 1995 and the year ended December 31, 1994, respectively. 80 55 KEYCORP AND SUBSIDIARIES - - - -------------------------------------------------------------------------------- Notes To Consolidated Financial Statements - - - -------------------------------------------------------------------------------- The Corporation also maintains several unfunded, non-qualified, supplemental executive retirement programs that provide additional defined pension benefits for certain officers. The following table reconciles the status of the unfunded plans at the applicable measurement dates with the amounts recognized in the consolidated balance sheets at December 31, 1995 and 1994:
in thousands 1995 1994 - - - ---------------------------------------------------------------------------------------------------------------- Accumulated benefit obligation, including vested benefits of $78,747 and $64,440 $ 78,981 $ 68,619 - - - ---------------------------------------------------------------------------------------------------------------- Projected benefit obligation 90,241 77,013 Benefits paid during fourth quarter (1,115) -- Unrecognized prior service cost (9,446) (13,499) Unrecognized transition obligation (2,885) (3,367) Unrecognized net loss (23,642) (14,836) Adjustment to recognize minimum liability 25,109 25,785 - - - ---------------------------------------------------------------------------------------------------------------- Accrued pension cost (included in other liabilities) $ 78,262 $ 71,096 ======== ======== - - - ----------------------------------------------------------------------------------------------------------------
Net pension cost for all funded and unfunded plans included the following components:
Year ended December 31, in thousands 1995 1994 1993 - - - ---------------------------------------------------------------------------------------------------------------- Service cost of benefits earned $ 27,559 $ 23,253 $ 22,506 Interest cost on projected benefit obligation 49,945 42,484 39,098 Actual (return) loss on plan assets (109,588) 3,214 (44,619) Net amortization and deferral 53,194 (60,474) (14,229) - - - ---------------------------------------------------------------------------------------------------------------- Net pension cost $ 21,110 $ 8,477 $ 2,756 ========= ======== ======== - - - -----------------------------------------------------------------------------------------------------------------
OTHER POSTRETIREMENT BENEFIT PLANS The Corporation sponsors postretirement health care and life insurance plans that cover substantially all employees. The postretirement health care plans are nonfunded and contributory, with retirees' contributions adjusted annually to reflect certain cost-sharing provisions and benefit limitations. The postretirement life insurance plans are noncontributory. The Corporation has adopted a funding policy for one of its life insurance plans and annually contributes the service cost of benefits earned plus one-thirtieth of the unfunded accumulated postretirement life insurance benefit obligations. Net postretirement benefits cost included the following components:
Year ended December 31, in thousands 1995 1994 1993 - - - ------------------------------------------------------------------------------ Service cost of benefits earned $ 1,920 $ 2,769 $ 2,873 Interest cost on accumulated postretirement benefit obligation 7,682 9,204 8,713 Actual return on plan assets (25) (26) (22) Amortization of transition obligation over 20 years 5,186 5,350 5,372 Net other amortization and deferral (754) 498 (10) - - - ------------------------------------------------------------------------------ Net postretirement benefits cost $14,009 $17,795 $16,926 ======= ======= ======= - - - ------------------------------------------------------------------------------
The following table reconciles the plans' combined funded status at the applicable measurement dates with the amounts recognized in the consolidated balance sheets at December 31, 1995 and 1994:
in thousands 1995 1994 - - - --------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $ 65,437 $ 97,705 Fully eligible plan participants 11,218 9,199 Other active plan participants 25,617 23,896 - - - --------------------------------------------------------------------------- 102,272 130,800 Fair value of plan assets 313 418 - - - --------------------------------------------------------------------------- Accumulated postretirement benefit obligation in excess of plan assets 101,959 130,382 Amount contributed to life insurance plan during fourth quarter (200) -- Health care benefits paid during fourth quarter (2,289) -- Unrecognized transition obligation (88,165) (95,475) Unrecognized net gain (loss) 14,962 (14,236) - - - --------------------------------------------------------------------------- Accrued postretirement benefits cost (included in other liabilities) $ 26,267 $ 20,671 ======== ======== - - - ---------------------------------------------------------------------------
81 56 KEYCORP AND SUBSIDIARIES - - - -------------------------------------------------------------------------------- Notes To Consolidated Financial Statements - - - -------------------------------------------------------------------------------- The assumed 1996 health care cost trend rate was 9.0% for both Medicare-eligible retirees and non-Medicare-eligible retirees. The rate is assumed to decrease gradually to 5.5% by the year 2003 and remain constant thereafter. In 1995, the assumed rate was 9.5% for both Medicare-eligible retirees and non-Medicare-eligible retirees. Increasing or decreasing the assumed health care cost trend rates by one percentage point in each future year would have an immaterial impact on postretirement benefits cost due to cost-sharing provisions and benefits limitations in the related postretirement plans. The weighted average discount rate used in determining the accumulated postretirement benefit obligations was 7.5% at September 30, 1995, and 8.5% at December 31, 1994. EMPLOYEE 401(k) SAVINGS PLAN Substantially all of the Corporation's employees are covered under a savings plan that is qualified under Section 401(k) of the Internal Revenue Code. Under provisions of this plan, employees may contribute 1% to 10% of eligible compensation, with up to 6% being eligible for matching contributions from the Corporation. At least half of such matching contributions is in the form of KeyCorp Common Shares. The plan also permits a discretionary profit sharing component to be distributed by the Corporation. Total expense associated with the plan was $32.8 million, $28.0 million and $40.4 million in 1995, 1994 and 1993, respectively. - - - -------------------------------------------------------------------------------- 14. Income Taxes - - - -------------------------------------------------------------------------------- Income taxes included in the consolidated statements of income, other than those related to the extraordinary item, are as follows:
Year ended December 31, in thousands 1995 1994 1993 - - - ---------------------------------------------------------------------------------------------------------------- Currently payable: Federal $212,119 $237,229 $289,987 State (12,361) 22,418 34,554 - - - ---------------------------------------------------------------------------------------------------------------- 199,758 259,647 324,541 Deferred: Federal 136,910 152,326 55,043 State 31,797 18,008 (5,612) - - - ---------------------------------------------------------------------------------------------------------------- 168,707 170,334 49,431 - - - ---------------------------------------------------------------------------------------------------------------- Total income tax expense $368,465 $429,981 $373,972 ======== ======== ======== - - - ---------------------------------------------------------------------------------------------------------------- Income tax expense (benefit) on securities transactions totaled $(15.6) million, $(6.3) million and $9.9 million in 1995, 1994 and 1993, respectively.
The differences between income tax expense and the amount computed by applying the statutory Federal tax rate to income before income taxes and extraordinary item are as follows:
Year ended December 31, in thousands 1995 1994 1993 - - - ---------------------------------------------------------------------------------------------------------------- Income before income taxes and extraordinary item times 35% statutory Federal tax rate $405,180 $449,215 $379,364 State income tax, net of Federal tax benefit 12,634 26,277 18,295 Amortization of non-deductible intangibles 12,802 9,589 10,349 Tax-exempt interest income (34,631) (34,777) (40,610) Corporate owned life insurance income (12,012) (7,006) (2,013) Tax credits (7,105) (4,325) (4,184) Other (8,403) (8,992) 12,771 - - - ---------------------------------------------------------------------------------------------------------------- Total income tax expense $368,465 $429,981 $373,972 ======== ======== ======== - - - ----------------------------------------------------------------------------------------------------------------
82 57 KEYCORP AND SUBSIDIARIES - - - -------------------------------------------------------------------------------- Notes To Consolidated Financial Statements - - - -------------------------------------------------------------------------------- Significant components of KeyCorp's deferred tax assets and liabilities are as follows:
December 31, in thousands 1995 1994 - - - ----------------------------------------------------------------------------------------------- Provision for loan losses $301,055 $290,589 Net unrealized securities losses -- 66,488 Merger and integration charges -- 32,414 Write-down of other real estate owned 14,120 20,932 Other 30,623 39,871 - - - ----------------------------------------------------------------------------------------------- Total deferred tax assets 345,798 450,294 Leasing income reported using the operating method for tax purposes 700,478 527,947 Net unrealized securities gains 18,965 -- Depreciation 32,569 34,963 Other 53,470 88,038 - - - ----------------------------------------------------------------------------------------------- Total deferred tax liabilities 805,482 650,948 - - - ----------------------------------------------------------------------------------------------- Net deferred tax liability $459,684 $200,654 ======== ======== - - - -----------------------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------- 15. Commitments, Contingent Liabilities and Other Disclosures - - - -------------------------------------------------------------------------------- LEGAL PROCEEDINGS In the ordinary course of business, KeyCorp and its subsidiaries are subject to legal actions which involve claims for substantial monetary relief. Management, based upon the advice of the Corporation's counsel, does not believe that any currently known legal actions, individually or in the aggregate, will have a material adverse effect on KeyCorp's consolidated financial condition. RESTRICTIONS ON CASH, DUE FROM BANKS, SUBSIDIARY DIVIDENDS AND LENDING ACTIVITIES Under the provisions of the Federal Reserve Act, depository institutions are required to maintain certain average balances in the form of cash or noninterest-bearing balances with the Federal Reserve Bank. Average reserve balances aggregating $1.1 billion in 1995 were maintained in fulfillment of these requirements. The principal source of cash flows for the parent company, including cash flows to pay dividends on shares of its common and preferred stock and to service its debt, is dividends from its banking and other subsidiaries. Various Federal and state statutory and regulatory provisions limit the amount of dividends that may be paid to KeyCorp by its banking subsidiaries without regulatory approval. Under all of the laws, regulations and other restrictions applicable to KeyCorp's banking subsidiaries, at December 31, 1995, such subsidiaries could have declared dividends estimated to be $317.7 million in the aggregate, without obtaining prior regulatory approval. Loans and advances from banking subsidiaries to KeyCorp are also limited by law and are required to be collateralized. - - - -------------------------------------------------------------------------------- 16. Fair Value Disclosures of Financial Instruments - - - -------------------------------------------------------------------------------- The following disclosures are made in accordance with the provisions of SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," which requires the disclosure of fair value information about both on- and off-balance sheet financial instruments where it is practicable to estimate such information. Fair value is defined in SFAS No. 107 as the amount at which an instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The estimated fair values of deposits, credit card loans and residential real estate mortgage loans do not take into account the fair values of long-term relationships, which are integral parts of the related financial instruments. The disclosed estimated fair values of such instruments would increase significantly if the fair values of the long-term relationships were considered. In cases where quoted market prices were not available, fair values were estimated using discounted cash flow or other 83 58 KEYCORP AND SUBSIDIARIES - - - -------------------------------------------------------------------------------- Notes To Consolidated Financial Statements - - - -------------------------------------------------------------------------------- valuation methods, as described below. For financial instruments with a remaining average life to maturity of less than six months, carrying amounts were used as an approximation of fair values. The use of different assumptions (e.g., discount rates and cash flow estimates) and estimation methods could have a significant effect on fair value amounts. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Corporation could realize in a current market exchange. Because SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements, any aggregation of the fair value amounts presented would not represent the underlying value of the Corporation. Interest rate swaps, caps and floors were valued based on discounted cash flow models and had an aggregate fair value of $164.0 million at December 31, 1995. At December 31, 1994, interest rate swaps had an aggregate negative fair value of $528.3 million, and the fair value of caps and floors was not material. Foreign exchange forward contracts, which were valued based on quoted market prices, had a fair value which approximated book value at December 31, 1995 and fair value of $3.7 million at December 31, 1994. Off-balance sheet financial instruments, including their fair values, are discussed in greater detail in Note 17, Financial Instruments with Off-Balance Sheet Risk, below.
December 31, 1995 1994 -------------------------- ------------------------- Carrying Fair Carrying Fair in thousands Amount Value Amount Value - - - ---------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks1 $ 3,443,820 $ 3,443,820 $ 3,511,368 $ 3,511,368 Short-term investments1 682,341 682,341 670,010 670,010 Mortgage loans held for sale1 640,535 640,535 355,198 355,198 Securities available for sale2 8,059,952 8,059,952 2,521,049 2,521,049 Investment securities2 1,687,752 1,738,095 10,275,638 9,757,032 Loans, net of allowance3 46,815,664 47,693,850 45,394,346 44,610,441 LIABILITIES Deposits4 $47,281,925 $47,284,188 $48,564,237 $48,191,660 Federal funds purchased and securities sold under repurchase agreements1 5,544,080 5,544,080 5,499,117 5,499,117 Other short-term borrowings1 2,880,289 2,880,289 3,277,611 3,277,611 Long-term debt5 4,003,565 4,167,201 3,569,794 3,485,803 - - - ---------------------------------------------------------------------------------------------------------------- Valuation Methods and Assumptions - - - --------------------------------- (1) Fair value equals or approximates carrying amount. (2) Fair values of securities available for sale and investment securities generally were based on quoted market prices. Where quoted market prices were not available, fair values were based on quoted market prices of similar instruments. (3) Fair values of certain loans were estimated using a discounted cash flow model. Certain residential real estate loans and student loans held for sale were valued based on quoted market prices of similar loans offered or sold in recent sales or securitization transactions. Lease financing receivables, although excluded from the scope of SFAS No. 107, were included in the estimated fair value of loans at their carrying amounts. (4) Fair values of certificates of deposit were estimated based on discounted cash flows. For all other deposits, carrying amounts were used as a reasonable approximation of their fair values. (5) Fair values of long-term debt were estimated based on discounted cash flows.
- - - -------------------------------------------------------------------------------- 17. 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 in the remainder of this note. In addition to 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. 84 59 KEYCORP AND SUBSIDIARIES - - - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements - - - -------------------------------------------------------------------------------- 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 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. 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.
December 31, in thousands 1995 1994 - - - ---------------------------------------------------------------------------------------------------------------- Loan commitments: Credit card lines $ 6,996,336 $ 5,482,566 Home equity 3,981,472 3,243,618 Commercial real estate and construction 1,554,294 1,503,707 Commercial and other 9,883,270 7,356,564 - - - ---------------------------------------------------------------------------------------------------------------- Total loan commitments 22,415,372 17,586,455 Other commitments: Standby letters of credit 1,108,267 1,003,275 Commercial letters of credit 143,824 205,434 Loans sold with recourse 33,817 231,048 - - - ---------------------------------------------------------------------------------------------------------------- Total loan and other commitments $23,701,280 $19,026,212 =========== =========== - - - ----------------------------------------------------------------------------------------------------------------
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. 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 netting 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 December 31, 1995, all counterparties were expected to meet their obligations. At December 31, 1995, the Corporation had credit exposure of an aggregate $159.7 million to 12 counterparties, with the largest credit exposure to an individual counterparty amounting to $40.9 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 begin to amortize, or the swap will continue in effect until its contractual maturity. Otherwise, the characteristics of these swaps are similar to those of conventional swap contracts. At December 31, 1995, the Corporation was party to $2.5 billion and $3.4 billion of indexed amortizing swaps that used a LIBOR (London Interbank Offered 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. 85 60 KEYCORP AND SUBSIDIARIES
- - - ----------------------------------------------------------------------------------------------------------------------------------- Notes To Consolidated Financial Statements - - - ----------------------------------------------------------------------------------------------------------------------------------- The following table summarizes the notional amount, fair value, maturity and weighted average rate received and paid for the various types of portfolio interest rate swaps used by the Corporation. December 31, 1995 December 31, 1994 -------------------------------------------------------------------- -------------------- Weighted Average Rate Notional Fair Maturity(1) --------------------- Notional Fair dollars in millions Amount Value (years) Receive Pay Amount Value - - - ----------------------------------------------------------------------------------------------------------------------------------- Receive fixed/pay variable--indexed amortizing $6,200,000 $ 69,967 2.3 6.76% 5.79% $ 5,786,597 $(341,654) Receive fixed/pay variable--conventional 2,497,220 104,283 6.7 6.65 5.81 3,010,171 (199,648) Pay fixed/receive variable--conventional 2,411,500 (21,036) 1.0 5.66 6.50 1,456,500 11,541 Basis swaps -- -- -- -- -- 200,000 132 - - - ----------------------------------------------------------------------------------------------------------------------------------- Total portfolio swaps $11,108,720 $153,214 3.0 6.50% 5.95% $10,453,268 $(529,629) =========== ======== =========== ========= - - - -----------------------------------------------------------------------------------------------------------------------------------
[FN] (1) Maturity is based upon expected average lives rather than contractual terms. The following table summarizes the notional amounts, fair values and weighted average rates of portfolio swaps by interest rate management strategy.
December 31, 1995 December 31, 1994 --------------------------------------------------- ---------------------------- Weighted Average Rate Notional Fair --------------------- Notional Fair dollars in thousands Amount Value Receive Pay Amount Value - - - -------------------------------------------------------------------------------------------------------------------------------- Convert variable rate loans to fixed $ 7,566,720 $113,184 6.71% 5.80% $ 7,146,597 $(470,614) Convert variable rate deposits and short-term borrowings to fixed 2,275,000 (18,212) 5.65 6.38 1,275,000 11,938 Convert variable rate long-term debt to fixed 136,500 (2,824) 5.88 8.27 181,500 (397) Convert fixed rate long-term debt to variable 1,130,500 61,066 6.86 5.77 1,650,171 (70,688) Other -- -- -- -- 200,000 132 - - - -------------------------------------------------------------------------------------------------------------------------------- Total portfolio swaps $11,108,720 $153,214 6.50% 5.95% $10,453,268 $(529,629) =========== ======== =========== =========
Based on the weighted average rates in effect at December 31, 1995, the spread on portfolio interest rate swaps, excluding the amortization of net deferred losses on terminated swaps, provided a positive impact on net interest income (since the weighted average rate received exceeded the weighted average rate paid by 55 basis points). The aggregate fair value of $153.2 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 income that would be recognized if the portfolio were to be liquidated at that date. The swaps have an expected average maturity of 3.0 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. 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 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 1995 by $29.2 million, and added $98.6 million to net interest income in 1994. During 1995, swaps with a notional amount of $1.4 billion were terminated, resulting in net deferred losses of $49.2 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 direct costs of disposing the business, were included in the determination of the net gain from the sale. The losses included $15.3 million of the $49.2 million of deferred swap losses referred to above and $22.7 million of deferred swap losses recorded prior to 1995. 86 61 KEYCORP AND SUBSIDIARIES - - - ------------------------------------------------------------------------------- Notes to Consolidated Financial Statements - - - ------------------------------------------------------------------------------- A summary of the Corporation's deferred swap gains and (losses) is as follows:
December 31, 1995 dollars in thousands - - - ------------------------------------------------------- Weighted Average Remaining Deferred Amortization Asset/Liability Managed Gains (Losses) (Years) - - - ------------------------------------------------------ Loans $(10,857) .5 Debt 19,396 7.3 Deposits 779 .1 - - - ------------------------------------------------------- Total $ 9,318 ======== - - - -------------------------------------------------------
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 future dates for specified prices. The Corporation had no futures contracts outstanding at December 31, 1995. FINANCIAL INSTRUMENTS HELD OR ISSUED FOR TRADING PURPOSES The Corporation's affiliate banks also use interest rate contracts for dealer activities, which are generally limited to the banks' current lending customers. Interest rate swap contracts entered into with customers are typically limited to conventional swaps, as previously described. The Corporation mitigates the interest rate risk of customer swaps, interest rate caps and floors by entering into offsetting positions with third parties. The customer swap, cap or floor position and any offsetting position with a third party are recorded at their estimated fair values, and adjustments to fair value are included in other income on the income statement. 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 forward contracts. Adjustments to the fair value of foreign exchange forward contracts are included in other income on the income statement. A summary of the notional amount and the respective fair value of derivative financial instruments held or issued for trading purposes at December 31, 1995, and on average for the year then ended, is presented below. 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 on the balance sheet. At December 31, 1995, credit exposure from financial instruments held or issued for trading purposes is limited to the aggregate fair value of each contract with a positive fair value. The risk of counterparties defaulting on their obligations is monitored on an ongoing basis. The parent company and its affiliate banks contract with counterparties of good 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 $10.4 million and $11.1 million, respectively, in 1995 and $2.3 million and $7.6 million, respectively, in 1994.
December 31, 1995 Year ended December 31, 1995 --------------------------- -------------------------------- Notional Fair Average Average in thousands Amount Value Notional Amount Fair Value - - - ---------------------------------------------------------------------------------------------------------------- Interest rate contracts: Swaps: Assets $1,390,697 $ 32,154 $939,639 $ 20,515 Liabilities 1,453,252 (21,136) 962,855 (16,023) Caps and floors purchased 907,099 1,722 755,195 2,568 Caps and floors written 1,041,188 (1,906) 904,940 (2,786) Foreign exchange forward contracts:1 Assets 400,194 6,477 538,498 29,210 Liabilities 399,660 (6,478) 542,032 (26,586) - - - ----------------------------------------------------------------------------------------------------------------
[FN] (1) Excludes the effect of foreign spot contracts. 87 62 KEYCORP AND SUBSIDIARIES - - - -------------------------------------------------------------------------------- Notes To Consolidated Financial Statements - - - -------------------------------------------------------------------------------- - - - -------------------------------------------------------------------------------- 18. Condensed Financial Information of Parent Company - - - -------------------------------------------------------------------------------- CONDENSED BALANCE SHEETS
December 31, in thousands 1995 1994 - - - ---------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 350 $ 565 Interest-bearing deposits with bank affiliates 329,484 528,793 Securities purchased from bank affiliates under resale agreements 2,848 1,597 Investment securities 24,932 48,218 Securities available for sale 3,389 88,991 Loans and advances to subsidiaries: Banks and bank holding companies 164,242 188,890 Nonbank subsidiaries 204,239 278,636 - - - ---------------------------------------------------------------------------------------------------------------- 368,481 467,526 Investment in subsidiaries: Banks and bank holding companies 5,230,878 4,956,683 Nonbank subsidiaries 662,384 238,311 - - - ---------------------------------------------------------------------------------------------------------------- 5,893,262 5,194,994 Other assets 411,560 363,747 - - - ---------------------------------------------------------------------------------------------------------------- Total assets $7,034,306 $6,694,431 ========== ========== LIABILITIES Short-term borrowings -- $ 175,000 Accrued interest and other liabilities $ 158,945 363,802 Long-term debt 1,722,817 1,465,201 - - - ---------------------------------------------------------------------------------------------------------------- Total liabilities 1,881,762 2,004,003 SHAREHOLDERS' EQUITY1 5,152,544 4,690,428 - - - ---------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $7,034,306 $6,694,431 ========== ========== - - - ---------------------------------------------------------------------------------------------------------------- (1) See page 65 for the parent company's Statement of Changes in Shareholders' Equity.
CONDENSED STATEMENTS OF INCOME
Year ended December 31, in thousands 1995 1994 1993 - - - ---------------------------------------------------------------------------------------------------------------- INCOME Dividends from subsidiaries: Banks and bank holding companies $1,060,854 $402,543 $664,981 Nonbank subsidiaries 55,100 2,218 3,843 Management fees and interest income from subsidiaries 44,680 245,776 113,684 Other income 13,569 10,378 34,549 - - - ---------------------------------------------------------------------------------------------------------------- 1,174,203 660,915 817,057 EXPENSES Interest on borrowed funds 125,338 74,208 97,584 Merger and integration charges -- -- 118,718 Personnel and other expenses 48,944 263,632 198,136 - - - ---------------------------------------------------------------------------------------------------------------- 174,282 337,840 414,438 Income before income tax benefit and equity in net income less dividends from subsidiaries 999,921 323,075 402,619 Income tax benefit 39,350 27,165 81,710 - - - ---------------------------------------------------------------------------------------------------------------- 1,039,271 350,240 484,329 Equity in net income less dividends from subsidiaries (214,289) 503,250 225,597 - - - ---------------------------------------------------------------------------------------------------------------- NET INCOME $ 824,982 $853,490 $709,926 ========== ======== ======== - - - ----------------------------------------------------------------------------------------------------------------
88 63 KEYCORP AND SUBSIDIARIES - - - -------------------------------------------------------------------------------- Notes To Consolidated Financial Statements - - - -------------------------------------------------------------------------------- CONDENSED STATEMENTS OF CASH FLOW
Year ended December 31, in thousands 1995 1994 1993 - - - ------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 824,982 $ 853,490 $ 709,926 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of intangibles 8,371 8,353 8,754 Gain on sale of subsidiary -- -- (29,410) Net securities gains (5,003) (2,653) -- Deferred income taxes 4,217 13,706 (15,315) Equity in net income less dividends from subsidiaries 214,289 (503,250) (225,597) Net (increase) decrease in other assets 88,915 (130,087) (38,037) Net increase (decrease) in other liabilities (172,370) 100,501 72,688 Net increase (decrease) in accrued merger and integration charges (50,185) (76,231) 78,261 Other operating activities, net (137,867) 24,910 4,492 - - - ------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 775,349 288,739 565,762 INVESTING ACTIVITIES Purchases of investment securities (4,506) (134,939) (5,929) Proceeds from prepayments and maturities of investment securities 23,534 130,384 8,523 Purchases of securities available for sale (100,443) (124,208) -- Proceeds from prepayments and maturities of securities available for sale 208,768 32,130 -- Net (increase) decrease in interest-bearing deposits 199,309 (47,793) (137,000) Net (increase) decrease in security resale agreements (1,250) 3,869 (4,863) Net decrease in loans and advances to subsidiaries 92,558 12,736 116,676 Purchases of premises and equipment (226) (3,165) (10,895) Proceeds from sale of subsidiary -- -- 148,054 Net cash used in acquisitions, net of cash acquired (296,268) -- (137,431) (Increase) decrease in investments in subsidiaries 56,089 (71,577) (6,460) - - - ------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 177,565 (202,563) (29,325) FINANCING ACTIVITIES Net increase (decrease) in short-term borrowings (175,750) 147,365 (92,400) Net proceeds from issuance of long-term debt 412,685 394,696 305,100 Payments on long-term debt (160,500) (72,890) (430,465) Loan payment received from ESOP trustee 12,500 -- 1,569 Redemption of preferred stock -- -- (85,770) Purchases of treasury shares (723,603) (215,598) -- Proceeds from issuance of common stock pursuant to employee stock purchase, stock option and dividend reinvestment plans 36,286 18,623 28,238 Cash dividends (354,747) (358,811) (262,532) - - - ------------------------------------------------------------------------------------------------------------------------- NET CASH USED IN FINANCING ACTIVITIES (953,129) (86,615) (536,260) - - - ------------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (215) (439) 177 CASH AND DUE FROM BANKS AT BEGINNING OF YEAR 565 1,004 827 - - - ------------------------------------------------------------------------------------------------------------------------- CASH AND DUE FROM BANKS AT END OF YEAR $ 350 $ 565 $ 1,004 ========= ========= ========= - - - -------------------------------------------------------------------------------------------------------------------------
[FN] For the years ended December 31, 1995, 1994 and 1993, the parent company paid interest on borrowed funds of $134.8 million, $60.1 million and $98.1 million, respectively. 89 EX-21 14 EXHIBIT 21 1 EXHIBIT 21 KEYCORP SUBSIDIARIES OF THE REGISTRANT AT FEBRUARY 29, 1996
JURISDICTION OF INCORPORATION PARENT OR ORGANIZATION COMPANY(1) ---------------- ----------- HOLDING COMPANY SUBSIDIARIES Key Bancshares of Alaska, Inc. (KBsAK) Alaska KeyC Key Bancshares of Maine, Inc. (KBsME) Maine KeyC Key Bancshares of New York Inc. (KBsNY) New York KeyC Key Bancshares of Vermont, Inc. (KBsVT) Vermont KeyC Key Bancshares of Washington, Inc. (KBsWA) Washington KeyC Society Bancorp of Michigan, Inc. (SBMI) Michigan KeyC Key Bank of the Rocky Mountains, Inc. (KBRM) Colorado KeyC BANK SUBSIDIARIES Key Bank of Colorado (KBCO) Colorado KBRM Key Bank of Alaska (KBAK) Alaska KBsAK Key Bank of Idaho (KBID) Idaho KBRM Key Bank of Maine (KBME) Maine KBsME Key Bank of New York (KBNY) New York KBsNY Key Bank of Oregon (KBOR) Oregon KBsAK Key Bank USA, National Association (KBUSA) United States KeyC Key Bank of Utah (KBUT) Utah KBRM Key Bank of Vermont (KBVT) Vermont KBsVT Key Bank of Washington (KBWA) Washington KBsWA Key Bank of Wyoming (KBWY) Wyoming KBRM Key Savings Bank (KSB) Washington KeyC Society First Federal Savings Bank (SFF) United States KeyC KeyBank National Association (KBNA) (2) United States KeyC, SBMI Society National Bank (SNB) United States KeyC OTHER SUBSIDIARIES A.T.-Sentinel, Inc. Delaware SNB American Advisers, Inc. Ohio SAM AutoFinance Group, Inc. (AFG) Ohio KeyC AFG Receivables Corporation California AFG Bar T Bar Fiduciary Holding Company Arizona SNB Beechnut Development Company Washington KeyC Black & Warr Insurance Agency, Inc. Idaho Gem State Boris Development Corp. Maine KBME Boulevard, Inc. Idaho KBID Bozat Development Corp. Maine KBME Commercial Agency, Inc. Colorado KBCO Commercial Building Corporation Utah KBUT Gem State Properties Corporation (Gem State) Idaho KBID Goldome Mortgage Investment Corp. Delaware KBNY INDORE Corp. Indiana KBNA Investco Wyoming KBRM KBID Leasing Corporation Idaho KBID KBNY Leasing, Inc. New York KBNY
17 2 KEYCORP SUBSIDIARIES OF THE REGISTRANT AT FEBRUARY 29, 1996 (CONTINUED)
JURISDICTION OF INCORPORATION PARENT OR ORGANIZATION COMPANY(1) ---------------- ----------- OTHER SUBSIDIARIES (CONTINUED) KBVLIHTC, Corp. Vermont KBVT KBWA Leasing Corporation Washington KBWA KBWA Services, Inc. Washington KBWA Key Agricultural Credit Corporation Wyoming KBWY Key Bank Life Insurance, Ltd. Arizona KeyC Key Capital Corporation Ohio KeyC Key Capital Markets, Inc. Ohio KeyC Key Clearing Corp. Ohio KAMHI Key Community Development Corporation Ohio KeyC Key Equity Capital Corporation Ohio SNB Key Financial Services Inc New York KBNY Key Investments Inc New York SNB Key Lease, Inc. of Ohio Ohio SNB Key Mortgage Services, Inc. Ohio SNB Key Services Corporation New York KBNY Key Trade Services Corporation (KTSC) Ohio SNB Key Trade Services, Ltd. Hong Kong KTSC, SNB Key Trust Company New York KBNY Key Trust Company of the West Wyoming KBRM Key Trust Company of Alaska Alaska KBAK Key Trust Company of Maine Maine KBME Key Trust Company of the Northwest Washington KeyC Key Trust Company of Ohio, National Association United States SNB Key Trust Company of Indiana, National Association United States KBNA Key Trust Company of Florida, National Association United States KeyC KeyCorp Asset Management Holdings, Inc. (KAMHI) Ohio SNB KeyCorp A&L Inc. New York KAMHI KeyCorp Aviation Company Delaware KeyC KeyCorp Finance Inc. Ohio KeyC KeyCorp Insurance Agency (Idaho), Inc. Idaho KBWA KeyCorp Insurance Agency (Maine), Inc. Maine KBWA KeyCorp Insurance Agency (Wyoming), Inc. Wyoming KBWA KeyCorp Insurance Agency, Inc. New York KBWA KeyCorp Insurance Company Ltd. Bermuda KeyC KeyCorp Leasing Ltd. Delaware KBNY KeyCorp Management Company Ohio KeyC KeyCorp Mutual Fund Advisers, Inc. Ohio KAMHI KeyCorp Network Holdings, Inc. Oregon KeyC KeyCorp Real Estate Capital Markets, Inc. Ohio SNB KeyCorp Shareholder Services, Inc. Delaware SNB KLIHTC, Corp. New York KBNY Mansfield Development Corp. Vermont KBVT Michigan Shared Properties Company Ohio SNB Midwest Power Company Ohio KeyC Millennium Asset Holding Corporation New York KBNY M.L.O., Inc. Colorado KBCO
18 3 KEYCORP SUBSIDIARIES OF THE REGISTRANT AT FEBRUARY 29, 1996 (CONTINUED)
JURISDICTION OF INCORPORATION PARENT OR ORGANIZATION COMPANY(1) ---------------- ----------- OTHER SUBSIDIARIES (CONTINUED) Mountain Ash Real Estate, Inc. Vermont KBVT NCB Properties, Inc. New York KBsNY Niagara Asset Corporation New York KBNY Niagara Portfolio Management Corp. New York KBNY OREO Corp. Ohio SNB P.B. Participation Oregon KeyC P.S.M. Financial Management Corp. Washington KBWA PacWest Building Corp. Oregon KeyC Puget Sound Plaza, Inc. (PSP) Washington KBWA Royal Skies Development Co. (RSD) Washington KBWA Second Street Community Urban Redevelopment Corporation Ohio SNB SELCO Service Corporation Ohio SNB Society Asset Management, Inc. (SAM) Ohio KAMHI Society Equipment Leasing Company Ohio KeyC Society Equipment Leasing Corporation Ohio SNB Society Trust Company of New York New York KeyC St. Joseph Insurance Agency, Inc. Indiana KeyC Spears, Benzak, Salomon & Farrell, Inc. New York KAMHI State Financial Services, Inc. Ohio SNB Summit International Sales, Inc. Virgin Islands SNB Swan Island Salmon, Ltd. Maine KBME Trustcorp Financing Services, Inc. Ohio KeyC Vermont Coconut Grove Corp. Vermont KBVT Vermont Realty, Inc. Vermont KBVT Virginia Stone Corporation New York KBNY Washington Mortgage Corporation Washington KBsWA
- - - --------------------------------------------------------------------------- [FN] Note: Listing excludes subsidiaries that are inactive or discontinued operations. (1) Each subsidiary is 100% owned by its parent company or KeyCorp (KeyC) unless otherwise noted. (2) Society Bancorp of Michigan, Inc. owns 23.40% and KeyCorp owns 76.60%. 19 EX-23 15 EXHIBIT 23 1 EXHIBIT 23 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of KeyCorp of our report dated January 16, 1996, included in the 1995 Annual Report to Shareholders of KeyCorp. We also consent to the incorporation by reference in the following Registration Statements of KeyCorp and in the related Prospectuses of our report dated January 16, 1996, with respect to the consolidated financial statements incorporated herein by reference in this Annual Report (Form 10-K) for the year ended December 31, 1995: Form S-3 No. 33-5064 Form S-3 No. 33-10634 Form S-3 No. 33-39733 Form S-3 No. 33-39734 Form S-3 No. 33-51652 Form S-3 No. 33-53643 Form S-3 No. 33-58405 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. 33-56879 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) /s/ ERNST & YOUNG LLP Cleveland, Ohio March 22, 1996 20 EX-24 16 EXHIBIT 24 1 POWER OF ATTORNEY Exhibit 24 ----------------- The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which proposes to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (the "Annual Report"), hereby constitutes and appoints John H. Mancuso, Roger Noall, and K. Brent Somers and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises, hereby ratifying and approving the acts of such attorney or any such substitute. IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as of March 14, 1996. /s/ Cecil D. Andrus ------------------- Typed Name: Cecil D. Andrus ------------------- 2 POWER OF ATTORNEY ----------------- The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which proposes to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (the "Annual Report"), hereby constitutes and appoints John H. Mancuso, Roger Noall, and K. Brent Somers and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises, hereby ratifying and approving the acts of such attorney or any such substitute. IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as of March 14, 1996. /s/ William G. Bares -------------------- Typed Name: William G. Bares -------------------- 3 POWER OF ATTORNEY ----------------- The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which proposes to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (the "Annual Report"), hereby constitutes and appoints John H. Mancuso, Roger Noall, and K. Brent Somers and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises, hereby ratifying and approving the acts of such attorney or any such substitute. IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as of March 14, 1996. /s/ A. C. Bersticker -------------------- Typed Name: A. C. Bersticker -------------------- 4 POWER OF ATTORNEY ----------------- The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which proposes to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (the "Annual Report"), hereby constitutes and appoints John H. Mancuso, Roger Noall, and K. Brent Somers and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises, hereby ratifying and approving the acts of such attorney or any such substitute. IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as of March 14, 1996. /s/ T. A. Commes ---------------- Typed Name: T. A. Commes ---------------- 5 POWER OF ATTORNEY ----------------- The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which proposes to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (the "Annual Report"), hereby constitutes and appoints John H. Mancuso, Roger Noall, and K. Brent Somers and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises, hereby ratifying and approving the acts of such attorney or any such substitute. IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as of March 14, 1996. /s/ Kenneth M. Curtis --------------------- Typed Name: Kenneth M. Curtis --------------------- 6 POWER OF ATTORNEY ----------------- The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which proposes to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (the "Annual Report"), hereby constitutes and appoints John H. Mancuso, Roger Noall, and K. Brent Somers and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises, hereby ratifying and approving the acts of such attorney or any such substitute. IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as of March 14, 1996. /s/ John C. Dimmer ------------------ Typed Name: John C. Dimmer ------------------ 7 POWER OF ATTORNEY ----------------- The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which proposes to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (the "Annual Report"), hereby constitutes and appoints John H. Mancuso, Roger Noall, and K. Brent Somers and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises, hereby ratifying and approving the acts of such attorney or any such substitute. IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as of March 14, 1996. /s/ Peter G. Ten Eyck, II -------------------------- Typed Name: Peter G. Ten Eyck, II -------------------------- 8 POWER OF ATTORNEY ----------------- The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which proposes to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (the "Annual Report"), hereby constitutes and appoints John H. Mancuso, Roger Noall, and K. Brent Somers and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises, hereby ratifying and approving the acts of such attorney or any such substitute. IN WITNESS WHEREOF, the undersigned has hereunto set his and as of March 14, 1996. /s/ Lucie J. Fjeldstad ---------------------- Typed Name: Lucie J. Fjeldstad ---------------------- 9 POWER OF ATTORNEY ----------------- The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which proposes to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (the "Annual Report"), hereby constitutes and appoints John H. Mancuso, Roger Noall, and K. Brent Somers and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises, hereby ratifying and approving the acts of such attorney or any such substitute. IN WITNESS WHEREOF, the undersigned has hereunto set his and as of March 14, 1996. /s/ Stephen R. Hardis --------------------- Typed Name: Stephen R. Hardis --------------------- 10 POWER OF ATTORNEY ----------------- The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which proposes to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (the "Annual Report"), hereby constitutes and appoints John H. Mancuso, Roger Noall, and K. Brent Somers and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises, hereby ratifying and approving the acts of such attorney or any such substitute. IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as of March 14, 1996. /s/ Henry S. Hemingway ---------------------- Typed Name: Henry S. Hemingway ---------------------- 11 POWER OF ATTORNEY ----------------- The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which proposes to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (the "Annual Report"), hereby constitutes and appoints John H. Mancuso, Roger Noall, and K. Brent Somers and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises, hereby ratifying and approving the acts of such attorney or any such substitute. IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as of March 14, 1996. /s/ Charles R. Hogan -------------------- Typed Name: Charles R. Hogan -------------------- 12 POWER OF ATTORNEY ----------------- The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which proposes to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (the "Annual Report"), hereby constitutes and appoints John H. Mancuso, Roger Noall, and K. Brent Somers and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises, hereby ratifying and approving the acts of such attorney or any such substitute. IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as of March 14, 1996. /s/ Douglas J. McGregor ----------------------- Typed Name: Douglas J. McGregor ----------------------- 13 POWER OF ATTORNEY ----------------- The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which proposes to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (the "Annual Report"), hereby constitutes and appoints John H. Mancuso, Roger Noall, and K. Brent Somers and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises, hereby ratifying and approving the acts of such attorney or any such substitute. IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as of March 14, 1996. /s/ Steven A. Minter -------------------- Typed Name: Steven A. Minter -------------------- 14 POWER OF ATTORNEY ----------------- The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which proposes to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (the "Annual Report"), hereby constitutes and appoints John H. Mancuso, Roger Noall, and K. Brent Somers and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises, hereby ratifying and approving the acts of such attorney or any such substitute. IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as of March 14, 1996. /s/ M. Thomas Moore ------------------- Typed Name: M. Thomas Moore ------------------- 15 POWER OF ATTORNEY ----------------- The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which proposes to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (the "Annual Report"), hereby constitutes and appoints John H. Mancuso, Roger Noall, and K. Brent Somers and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises, hereby ratifying and approving the acts of such attorney or any such substitute. IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as of March 14, 1996. /s/ John C. Morley ------------------ Typed Name: John C. Morley ------------------ 16 POWER OF ATTORNEY ----------------- The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which proposes to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (the "Annual Report"), hereby constitutes and appoints John H. Mancuso, Roger Noall, and K. Brent Somers and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises, hereby ratifying and approving the acts of such attorney or any such substitute. IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as of March 14, 1996. /s/ Richard W. Pogue -------------------- Typed Name: Richard W. Pogue -------------------- 17 POWER OF ATTORNEY ----------------- The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which proposes to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (the "Annual Report"), hereby constitutes and appoints John H. Mancuso, Roger Noall, and K. Brent Somers and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises, hereby ratifying and approving the acts of such attorney or any such substitute. IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as of March 14, 1996. /s/ Victor J. Riley, Jr. ------------------------ Typed Name: Victor J. Riley, Jr. ------------------------ 18 POWER OF ATTORNEY ----------------- The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which proposes to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (the "Annual Report"), hereby constitutes and appoints John H. Mancuso, Roger Noall, and K. Brent Somers and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises, hereby ratifying and approving the acts of such attorney or any such substitute. IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as of March 14, 1996. /s/ Robert A. Schumacher ------------------------ Typed Name: Robert A. Schumacher ------------------------ 19 POWER OF ATTORNEY ----------------- The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which proposes to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (the "Annual Report"), hereby constitutes and appoints John H. Mancuso, Roger Noall, and K. Brent Somers and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises, hereby ratifying and approving the acts of such attorney or any such substitute. IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as of March 14, 1996. /s/ Ronald B. Stafford ---------------------- Typed Name: Ronald B. Stafford ---------------------- 20 POWER OF ATTORNEY ----------------- The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which proposes to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (the "Annual Report"), hereby constitutes and appoints John H. Mancuso, Roger Noall, and K. Brent Somers and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises, hereby ratifying and approving the acts of such attorney or any such substitute. IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as of March 14, 1996. /s/ Dennis W. Sullivan ---------------------- Typed Name: Dennis W. Sullivan ---------------------- 21 POWER OF ATTORNEY ----------------- The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which proposes to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (the "Annual Report"), hereby constitutes and appoints John H. Mancuso, Roger Noall, and K. Brent Somers and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises, hereby ratifying and approving the acts of such attorney or any such substitute. IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as of March 14, 1996. /s/ K. Brent Somers ------------------- Typed Name: K. Brent Somers ------------------- 22 POWER OF ATTORNEY ----------------- The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which proposes to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (the "Annual Report"), hereby constitutes and appoints John H. Mancuso, Roger Noall, and K. Brent Somers and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises, hereby ratifying and approving the acts of such attorney or any such substitute. IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as of March 14, 1996. /s/ Lee G. Irving ----------------- Typed Name: Lee G. Irving ----------------- 23 POWER OF ATTORNEY ----------------- The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which proposes to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (the "Annual Report"), hereby constitutes and appoints John H. Mancuso, Roger Noall, and K. Brent Somers and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises, hereby ratifying and approving the acts of such attorney or any such substitute. IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as of March 14, 1996. /s/ Robert W. Gillespie ----------------------- Typed Name: Robert W. Gillespie ----------------------- 24 POWER OF ATTORNEY ----------------- The undersigned, an officer or director, or both an officer and director, of KeyCorp, an Ohio corporation, which proposes to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, its Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (the "Annual Report"), hereby constitutes and appoints John H. Mancuso, Roger Noall, and K. Brent Somers and each of them, as attorney for the undersigned, with full power of substitution and resubstitution, for and in the name, place, and stead of the undersigned, to sign and file the Annual Report and exhibits thereto, and any and all amendments thereto, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises, hereby ratifying and approving the acts of such attorney or any such substitute. IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand as of March 14, 1996. /s/ Nancy B. Veeder ------------------- Typed Name: Nancy B. Veeder ------------------- EX-27 17 EXHIBIT 27
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EXHIBIT 13 - - - - ANNUAL REPORT TO SHAREHOLDERS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 3,443,820 45,085 604,528 32,728 8,059,952 1,687,752 1,738,095 47,691,700 876,036 66,339,085 47,281,925 8,424,369 1,476,682 4,003,565 0 160,000 245,944 4,746,600 66,339,085 4,319,610 738,760 62,626 5,120,996 1,704,775 2,484,295 2,636,701 100,507 (40,643) 2,311,564 1,157,657 789,192 35,790 0 824,982 3.41 3.39 4.47 330,358 96,664 2,549 118,907 830,298 207,982 108,800 876,036 442,736 0 433,300
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