-----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, JvT9oCfL8ex80hzwHmh3C+KTQyu4uacYJWAv9IXiNneLE6mKCY9RYR5n7BQfaPsc KyeF3YBnlzMxMGieSmaqww== 0000950152-97-007980.txt : 19971117 0000950152-97-007980.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950152-97-007980 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEYCORP /NEW/ CENTRAL INDEX KEY: 0000091576 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 346542451 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11302 FILM NUMBER: 97717844 BUSINESS ADDRESS: STREET 1: 127 PUBLIC SQ CITY: CLEVELAND STATE: OH ZIP: 44114-1306 BUSINESS PHONE: 2166893000 MAIL ADDRESS: STREET 1: 127 PUBLIC SQ CITY: CLEVELAND STATE: OH ZIP: 44114-1306 FORMER COMPANY: FORMER CONFORMED NAME: SOCIETY CORP DATE OF NAME CHANGE: 19920703 10-Q 1 KEYCORP 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-Q [] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 1997 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From ______ To ______ Commission File Number 0-850 [KEY CORP LOGO] ------------------------------------------------------ (Exact name of registrant as specified in its charter) OHIO 34-6542451 - ------------------------------------------ -------------------------------- (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 127 PUBLIC SQUARE, CLEVELAND, OHIO 44114-1306 - ------------------------------------------ -------------------------------- (Address of principal executive offices) (Zip Code) (216) 689-6300 ------------------------------------------------------ (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Shares with a par value of $1 each 219,682,883 Shares - ----------------------------------------- ---------------------------------- (Title of class) (Outstanding at October 31, 1997) The number of pages of this report is 45. 2 KEYCORP TABLE OF CONTENTS PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page Number -------------------- ----------- Consolidated Balance Sheets -- September 30, 1997, December 31, 1996, and September 30, 1996 3 Consolidated Statements of Income -- Three months and nine months ended September 30, 1997 and 1996 4 Consolidated Statements of Changes in Shareholders' Equity -- Nine months ended September 30, 1997 and 1996 5 Consolidated Statements of Cash Flow -- Nine months ended September 30, 1997 and 1996 6 Notes to Consolidated Financial Statements 7 Independent Accountants' Review Report 19 Item 2. Management's Discussion and Analysis of Financial Condition ----------------------------------------------------------- and Results of Operations 20 ------------------------- PART II. OTHER INFORMATION Item 1. Legal Proceedings 43 ----------------- Item 6. Exhibits and Reports on Form 8-K 43 -------------------------------- Signature 43
2 3 PART I. FINANCIAL INFORMATION KEYCORP AND SUBSIDIARIES Consolidated Balance Sheets
SEPTEMBER 30, December 31, September 30, dollars in millions 1997 1996 1996 - --------------------------------------------------------------------------------------------------------------------------------- (UNAUDITED) (Unaudited) ASSETS Cash and due from banks $ 2,940 $ 3,444 $ 3,110 Short-term investments 1,217 696 501 Securities available for sale 7,563 7,728 7,113 Investment securities (fair value: $1,378, $1,637 and $1,689) 1,344 1,601 1,653 Loans 53,676 49,235 48,373 Less: Allowance for loan losses 900 870 870 - --------------------------------------------------------------------------------------------------------------------------------- Net loans 52,776 48,365 47,503 Premises and equipment 993 1,084 1,052 Goodwill 1,095 824 838 Corporate owned life insurance 1,583 1,515 1,301 Other assets 2,566 2,364 2,285 - --------------------------------------------------------------------------------------------------------------------------------- Total assets $72,077 $67,621 $65,356 ======= ======= ======= LIABILITIES Deposits in domestic offices: Noninterest-bearing $ 8,965 $ 9,524 $ 9,032 Interest-bearing 32,733 34,455 34,608 Deposits in foreign offices -- interest-bearing 2,172 1,338 883 - --------------------------------------------------------------------------------------------------------------------------------- Total deposits 43,870 45,317 44,523 Federal funds purchased and securities sold under repurchase agreements 6,662 6,925 5,592 Bank notes and other short-term borrowings 6,053 3,969 3,861 Other liabilities 2,099 1,816 1,740 Long-term debt 7,567 4,213 4,664 - --------------------------------------------------------------------------------------------------------------------------------- Total liabilities 66,251 62,240 60,380 Corporation-obligated mandatorily redeemable preferred capital securities of subsidiary trusts holding solely debentures of the Corporation (See Note 8) 750 500 -- SHAREHOLDERS' EQUITY Preferred stock, $1 par value; authorized 25,000,000 shares, none issued -- -- -- 10% Cumulative Preferred Stock Class A, $125 stated value; authorized 1,400,000 shares, none issued -- -- -- Common Shares, $1 par value; authorized 900,000,000 shares; issued 245,944,390 shares 246 246 246 Capital surplus 1,531 1,484 1,488 Retained earnings 4,455 4,060 3,994 Loans to ESOP trustee (42) (49) (49) Net unrealized gains (losses) on securities available for sale, net of income taxes 8 (6) (37) Treasury stock, at cost (26,278,189, 22,490,353 and 18,882,718 shares) (1,122) (854) (666) - --------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 5,076 4,881 4,976 - --------------------------------------------------------------------------------------------------------------------------------- Total liabilities, capital securities and shareholders' equity $72,077 $67,621 $65,356 ======= ======= ======= - ---------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements (Unaudited). 3 4 KEYCORP AND SUBSIDIARIES Consolidated Statements of Income (Unaudited)
Three months ended September 30, Nine months ended September 30, -------------------------------- ------------------------------- dollars in millions, except per share amounts 1997 1996 1997 1996 - --------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans $1,191 $1,089 $3,417 $3,248 Taxable investment securities 3 4 9 11 Tax-exempt investment securities 15 20 51 58 Securities available for sale 127 119 397 372 Short-term investments 11 6 23 19 - --------------------------------------------------------------------------------------------------------------------------------- Total interest income 1,347 1,238 3,897 3,708 INTEREST EXPENSE Deposits 370 360 1,101 1,111 Federal funds purchased and securities sold under repurchase agreements 91 72 263 218 Bank notes and other short-term borrowings 73 55 194 144 Long-term debt 109 68 250 201 - --------------------------------------------------------------------------------------------------------------------------------- Total interest expense 643 555 1,808 1,674 - --------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME 704 683 2,089 2,034 Provision for loan losses 102 49 244 140 - --------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 602 634 1,845 1,894 NONINTEREST INCOME Service charges on deposit accounts 77 74 222 218 Trust and asset management income 66 61 194 180 Credit card fees 25 24 73 68 Insurance and brokerage income 22 18 64 52 Corporate owned life insurance income 20 15 60 42 Loan securitization income 15 18 19 45 Net securities gains -- -- -- 1 Other income 168 79 308 196 - --------------------------------------------------------------------------------------------------------------------------------- Total noninterest income 393 289 940 802 NONINTEREST EXPENSE Personnel 299 300 872 889 Net occupancy 54 55 164 163 Equipment 44 41 131 119 Amortization of intangibles 23 21 65 65 Professional fees 10 18 34 47 Marketing 22 30 65 68 Other expense 196 150 474 413 - --------------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 648 615 1,805 1,764 INCOME BEFORE INCOME TAXES 347 308 980 932 Income taxes 111 101 309 300 - --------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 236 $ 207 $ 671 $ 632 ======= ======= ======= ======= Net income applicable to Common Shares $236 $207 $671 $624 Per Common Share: Net income $1.08 $.90 $3.06 $2.70 Net income - fully diluted 1.06 .88 2.99 2.65 Weighted average Common Shares outstanding (000) 218,107 229,668 219,570 231,363 - ---------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements (Unaudited). 4 5 KEYCORP AND SUBSIDIARIES Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
Net Unrealized Loans to Gains (Losses) Treasury Preferred Common Capital Retained ESOP on Securities Stock dollars in millions, except per share amounts Stock Shares Surplus Earnings Trustee Available for Sale at Cost - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1995 $160 $246 $1,500 $3,633 $(51) $ 48 $(383) Net income 632 Cash dividends: Common Shares ($1.14 per share) (263) Cumulative Preferred Stock ($6.25 per share) (8) Redemption of 10% Cumulative Preferred Stock (160) Issuance of Common Shares: Acquisition - 270,263 shares 2 9 Employee benefit and dividend reinvestment plans - 3,193,154 net shares (14) 104 Repurchase of Common Shares - 10,104,566 shares (396) Net unrealized losses on securities available for sale, net of income taxes of $(38) (85) Loan payment from ESOP Trustee 2 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT SEPTEMBER 30, 1996 -- $246 $1,488 $3,994 $(49) $ (37) $(666) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1996 -- $246 $1,484 $4,060 $(49) $ (6) $ (854) Adjustment related to change in accounting for transfers of financial assets, net of deferred tax benefit of $(25) (43) Net income 671 Cash dividends on Common Shares ($1.26 per share) (275) Issuance of Common Shares: Acquisition - 3,336,118 shares 56 143 Employee benefit and dividend reinvestment plans - 1,856,064 net shares (9) 82 Repurchase of Common Shares - 8,980,018 shares (493) Net unrealized gains on securities available for sale, net of income taxes of $32 57 Loan payment from ESOP trustee 7 Foreign currency translation adjustments (1) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT SEPTEMBER 30, 1997 -- $246 $1,531 $4,455 $(42) $ 8 $(1,122) == ==== ====== ====== ==== ====== ======= - ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements (Unaudited). 5 6 KEYCORP AND SUBSIDIARIES Consolidated Statements of Cash Flow (Unaudited)
Nine months ended September 30, ------------------------------- in millions 1997 1996 - ------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income $ 671 $ 632 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 244 140 Depreciation expense 115 105 Amortization of intangibles 65 65 Net gains from sales of subsidiaries/branches (89) (8) Net securities gains -- (1) Deferred income taxes 40 83 Net decrease in mortgage loans held for sale 132 558 Net increase in trading account assets (530) (68) Decrease in accrued restructuring charge 62 -- Other operating activities, net (617) (193) - ------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 93 1,313 INVESTING ACTIVITIES Net increase in loans, excluding sales, acquisitions and divestitures (5,281) (2,326) Loans sold 1,219 876 Purchases of investment securities (387) (627) Proceeds from sales of investment securities 10 9 Proceeds from prepayments and maturities of investment securities 597 620 Purchases of securities available for sale (1,535) (1,608) Proceeds from sales of securities available for sale 180 56 Proceeds from prepayments and maturities of securities available for sale 1,620 2,372 Net increase in other short-term investments (162) (125) Purchases of premises and equipment (169) (184) Proceeds from sales of premises and equipment 125 37 Proceeds from sales of other real estate owned 25 22 Purchases of corporate owned life insurance -- (145) Net proceeds from sales of subsidiaries/branches (241) 140 Cash used in acquisitions, net of cash acquired (1) (12) - ------------------------------------------------------------------------------------------------------------------ NET CASH USED IN INVESTING ACTIVITIES (4,000) (895) FINANCING ACTIVITIES Net decrease in deposits (118) (1,766) Net increase in short-term borrowings 1,800 1,028 Net proceeds from issuance of long-term debt 3,231 1,593 Payments on long-term debt (1,072) (872) Proceeds from the issuance of capital securities 250 -- Loan payment received from ESOP trustee 7 2 Purchases of treasury shares (493) (396) Redemption of 10% Cumulative Preferred Stock -- (160) Proceeds from issuance of common stock pursuant to employee benefit and dividend reinvestment plans 73 90 Cash dividends (275) (271) - ------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,403 (752) - ------------------------------------------------------------------------------------------------------------------ NET DECREASE IN CASH AND DUE FROM BANKS (504) (334) CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 3,444 3,444 - ------------------------------------------------------------------------------------------------------------------ CASH AND DUE FROM BANKS AT END OF PERIOD $ 2,940 $ 3,110 ======= ======= - ------------------------------------------------------------------------------------------------------------------ Additional disclosures relative to cash flow: Interest paid $ 1,754 $ 1,622 Income taxes paid 183 120 Net amount received on portfolio swaps 49 58 Noncash items: Transfer of loans to other real estate owned $ 19 $ 20 Transfer of other assets to securities available for sale 280 -- - ------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements (Unaudited). 6 7 KEYCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The unaudited consolidated interim financial statements include the accounts of KeyCorp and its subsidiaries ("Key"). All significant intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, the unaudited consolidated interim financial statements reflect all adjustments of a normal recurring nature and disclosures which are necessary for a fair presentation of the results for the interim periods presented, and should be read in conjunction with the audited consolidated financial statements and related notes included in Key's 1996 Annual Report to Shareholders. In addition, certain reclassifications have been made to prior year amounts to conform with the current year presentation. In the third quarter of 1997, a $50 million charge was recorded in connection with actions taken to sell certain properties or to alter certain leasing arrangements in response to Key's nationwide banking and related centralization efforts. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. On January 1, 1997, Key adopted Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extingushments of Liabilities." SFAS No. 125 requires that certain assets which are subject to prepayment and recorded in connection with a securitization be accounted for like investments in interest-only strips. Accordingly, Key reclassified approximately $280 million of these assets, which represent uncertificated residual interests in securitizations, to securities available for sale. At the time of the transfer, the carrying amount of these assets exceeded their fair value by approximately $68 million. This difference was recorded as a reduction to the carrying amount of the transferred assets and the related after tax adjustment of $43 million was made to net unrealized losses on securities in shareholders' equity. SFAS No. 125 is more fully discussed in Note 1, Summary of Significant Accounting Policies, of Key's 1996 Annual Report. In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings Per Share," which specifies the computation, presentation and disclosure requirements for earnings per share for entities with publicly held common stock or common stock equivalents. SFAS No. 128 replaces the presentation of primary earnings per share with the presentation of basic earnings per share. It also requires dual presentation of basic and diluted earnings per share on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic earnings per share computation to the corresponding amounts of the diluted earnings per share computation. SFAS No. 128 is effective for both interim and annual financial statements issued for periods ending after December 15, 1997, with earlier adoption prohibited. Key will adopt SFAS No. 128 in its December 31, 1997, financial statements, with no effect on prior period data. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 130 establishes reporting and display standards for comprehensive income and its components in a full set of general-purpose financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances arising from nonowner sources. The purpose of the statement is to provide a basis for reporting a measure of all changes in equity of an enterprise that will result from recognized transactions and other economic events of the period other than transactions with owners in their capacity as owners. SFAS No. 130 is effective for both interim and annual financial statements issued for periods beginning after December 15, 1997, and also applies to financial statements presented for prior periods. SFAS No. 131 requires that financial and descriptive information be disclosed for each reportable operating segment based on the management approach. The management approach focuses on financial information that an enterprise's decision makers use to assess performance and make decisions about resource allocation. The statement also prescribes the enterprise-wide disclosures to be made about products, services, geographic areas and major customers. SFAS No. 131 is effective for annual financial statements issued for periods beginning after December 15, 1997, and for interim financial statements in the second year of application. Comparative information presented for earlier periods must be restated. Key will adopt SFAS No. 130 in its March 31, 1998, financial statements and expects to include the disclosures required by SFAS No. 131 in its December 31, 1998, financial statements. 7 8 2. MERGERS, ACQUISITIONS AND DIVESTITURES COMPLETED MERGERS AND ACQUISITIONS Mergers and acquisitions completed by Key during 1996 and the first nine months of 1997 (all of which were accounted for as purchase business combinations) are summarized below:
dollars in millions COMMON LOCATION DATE ASSETS SHARES ISSUED - --------------------------------------------------------------------------------------------------------------------- Champion Mortgage Co., Inc. 1 New Jersey August 1997 $317 3,336,118 Leasetec Corporation 1 Colorado July 1997 1,080 See note 2 Carleton, McCreary, Holmes & Co. 3 Ohio August 1996 1 See note 2 Knight Insurance Agency, Inc. 4 Massachusetts June 1996 8 -- - --------------------------------------------------------------------------------------------------------------------- 1 See the following text for more information regarding this transaction. 2 In accordance with a confidentiality clause in the purchase agreement, the terms, which are not material, have not been publicly disclosed. 3 Carleton McCreary, Holmes & Company ("Carleton") is an investment banking firm specializing in mergers and acquisitions and other financial advisory services for mid-sized and large corporations. 4 Knight Insurance Agency, Inc. ("Knight") is an education financing company doing business under the name "Knight College Resource Group."
CHAMPION MORTGAGE CO., INC. On August 29, 1997, Key acquired Champion Mortgage Co., Inc. ("Champion"), a home equity finance company headquartered in Parsippany, New Jersey. Under the terms of the merger agreement, 3,336,118 Common Shares, with a value of approximately $200 million, were exchanged for all of the outstanding shares of Champion common stock in a transaction structured as a tax-free exchange and accounted for as a purchase. The merger agreement also provides an opportunity for Champion's shareholders to receive additional consideration in the form of Key Common Shares valued at up to $100 million in the event that certain performance targets related to significant increases in profitability and origination volumes established at the date of closing are achieved over the next three years. In connection with the transaction, Key recorded goodwill of approximately $195 million, which is being amortized using the straight-line method over a period of 25 years. At closing, Champion became a wholly owned subsidiary of Key Bank USA, National Association ("KeyBank USA"), a wholly owned subsidiary of the parent company. LEASETEC CORPORATION On July 1, 1997, Key acquired an 80% interest (with an option to purchase the remaining 20%) in Leasetec Corporation ("Leasetec"), a privately held equipment leasing company headquartered in Boulder, Colorado with operations in the United States and overseas. In connection with the transaction, which was accounted for as a purchase, Key recorded goodwill of approximately $126 million, which is being amortized using the straight-line method over a period of 25 years. COMPLETED DIVESTITURES KEYBANK NATIONAL ASSOCIATION (WYOMING) On July 14, 1997, Key sold KeyBank National Association (Wyoming) ("KeyBank Wyoming"), its 28 branch Wyoming bank subsidiary. KeyBank Wyoming had assets of approximately $1.1 billion at the time of the transaction. A $53 million ($35 million after tax) gain was realized on the KeyBank Wyoming sale and included in other income on the income statement. SOCIETY FIRST FEDERAL SAVINGS BANK On June 1, 1996, Key sold Society First Federal Savings Bank ("SFF"), its Florida savings association subsidiary. SFF had assets of approximately $1.2 billion at the time of the transaction. Key continues to provide private banking services in Florida through KeyBank National Association. An $8 million ($5 million after tax) gain was realized on the SFF sale and included in other income on the income statement. 8 9 TRANSACTIONS PENDING AS OF SEPTEMBER 30, 1997 BRANCH DIVESTITURES On November 26, 1996, Key announced its intention to divest approximately 140 branch offices (including the 28 branches associated with the sale of KeyBank Wyoming). During the first nine months of 1997, including the KeyBank Wyoming transaction, 49 such branches with deposits of approximately $1.3 billion were sold resulting in aggregate gains of $89 million ($58 million after tax) which were recorded in other income on the income statement. As of October 31, 1997, contracts had been entered into to sell a total of 68 other branch offices with deposits of approximately $1.1 billion. The sales of these remaining branches are expected to close in the fourth quarter of 1997 and the first half of 1998. 3. SECURITIES AVAILABLE FOR SALE The amortized cost, unrealized gains and losses, and approximate fair values of securities available for sale were as follows:
SEPTEMBER 30, 1997 --------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR in millions COST GAINS LOSSES VALUE - ----------------------------------------------------------------------------------------------------------------------- U.S. Treasury, agencies and corporations $ 572 $ 2 -- $ 574 States and political subdivisions 50 -- -- 50 Collateralized mortgage obligations 3,376 14 $ 8 3,382 Other mortgage-backed securities 3,130 52 17 3,165 Other securities 423 2 33 392 - ----------------------------------------------------------------------------------------------------------------------- Total $7,551 $70 $58 $7,563 ======= ==== ==== ====== - ----------------------------------------------------------------------------------------------------------------------- December 31, 1996 --------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair in millions Cost Gains Losses Value - ----------------------------------------------------------------------------------------------------------------------- U.S. Treasury, agencies and corporations $ 857 $ 3 $ 1 $ 859 States and political subdivisions 36 -- -- 36 Collateralized mortgage obligations 3,169 3 23 3,149 Other mortgage-backed securities 3,570 44 35 3,579 Other securities 104 1 -- 105 - ----------------------------------------------------------------------------------------------------------------------- Total $7,736 $51 $59 $7,728 ======= ==== ==== ====== - ----------------------------------------------------------------------------------------------------------------------- September 30, 1996 --------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair in millions Cost Gains Losses Value - ----------------------------------------------------------------------------------------------------------------------- U.S. Treasury, agencies and corporations $ 1,135 $ 3 $ 7 $ 1,131 States and political subdivisions 29 -- -- 29 Collateralized mortgage obligations 2,488 1 31 2,458 Other mortgage-backed securities 3,416 34 63 3,387 Other securities 107 1 -- 108 - ----------------------------------------------------------------------------------------------------------------------- Total $7,175 $39 $101 $7,113 ======= ==== ===== ====== - -----------------------------------------------------------------------------------------------------------------------
9 10 Debt securities that Key has the positive intent and ability to hold to maturity are classified as securities held to maturity and are carried at cost, adjusted for amortization of premiums and accretion of discounts using the level yield method. Securities held to maturity and equity securities that do not have readily determinable fair values are presented as investment securities on the balance sheet. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading account assets, reported at fair value ($567 million and $101 million as of September 30, 1997 and 1996, respectively) and included in short-term investments on the balance sheet. Realized and unrealized gains and losses on such assets are reported in other income on the income statement. Debt and equity securities that Key has not classified as investment securities or trading account assets are classified as securities available for sale and, as such, are reported at fair value, with net unrealized gains and losses, net of deferred taxes, reported as a component of shareholders' equity. At September 30, 1997, shareholders' equity was increased by $8 million, representing the net unrealized gain on securities available for sale, net of deferred tax expense. 4. INVESTMENT SECURITIES The amortized cost, unrealized gains and losses and approximate fair values of investment securities were as follows:
SEPTEMBER 30, 1997 --------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR in millions COST GAINS LOSSES VALUE - ----------------------------------------------------------------------------------------------------------------------- States and political subdivisions $1,105 $34 -- $1,139 Other securities 239 -- -- 239 - ----------------------------------------------------------------------------------------------------------------------- Total $1,344 $34 -- $1,378 ======= ==== ==== ====== - ----------------------------------------------------------------------------------------------------------------------- December 31, 1996 --------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair in millions Cost Gains Losses Value - ----------------------------------------------------------------------------------------------------------------------- States and political subdivisions $1,401 $37 $1 $1,437 Other securities 200 -- -- 200 - ----------------------------------------------------------------------------------------------------------------------- Total $1,601 $37 $1 $1,637 ======= ==== === ====== - ----------------------------------------------------------------------------------------------------------------------- September 30, 1996 --------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair in millions Cost Gains Losses Value - ----------------------------------------------------------------------------------------------------------------------- States and political subdivisions $1,434 $37 $1 $1,470 Other securities 219 -- -- 219 - ----------------------------------------------------------------------------------------------------------------------- Total $1,653 $37 $1 $1,689 ======= ==== === ====== - -----------------------------------------------------------------------------------------------------------------------
10 11 5. LOANS Loans are summarized as follows:
SEPTEMBER 30, December 31, September 30, in millions 1997 1996 1996 - ---------------------------------------------------------------------------------------------------------- Commercial, financial and agricultural $13,797 $12,309 $12,115 Real estate-- commercial mortgage 7,109 7,151 7,033 Real estate-- construction 2,055 1,666 1,719 Commercial lease financing 3,645 2,671 2,498 - ---------------------------------------------------------------------------------------------------------- Total commercial loans 26,606 23,797 23,365 Real estate-- residential mortgage 6,154 6,229 6,921 Home equity 5,416 4,793 4,113 Credit card 1,476 1,799 1,669 Consumer-- direct 2,238 2,245 1,993 Consumer-- indirect 8,821 8,062 7,947 - ---------------------------------------------------------------------------------------------------------- Total consumer loans 24,105 23,128 22,643 Loans held for sale 2,965 2,310 2,365 - ---------------------------------------------------------------------------------------------------------- Total $53,676 $49,235 $48,373 ======= ======= ======= - ----------------------------------------------------------------------------------------------------------
Changes in the allowance for loan losses are summarized as follows:
Three months ended September 30, Nine months ended September 30, -------------------------------- ------------------------------- in millions 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------- Balance at beginning of period $880 $870 $ 870 $ 876 Charge-offs (105) (72) (282) (216) Recoveries 20 23 65 78 - ------------------------------------------------------------------------------------------------------------------------------- Net charge-offs (85) (49) (217) (138) Provision for loan losses 102 49 244 140 Allowance acquired (sold), net 3 -- 3 (8) - ------------------------------------------------------------------------------------------------------------------------------- Balance at end of period $900 $870 $ 900 $ 870 ===== ===== ====== ===== - -------------------------------------------------------------------------------------------------------------------------------
11 12 6. IMPAIRED LOANS AND OTHER NONPERFORMING ASSETS At September 30, 1997, the recorded investment in impaired loans was $184 million. Included in this amount is $84 million of impaired loans for which the specifically allocated allowance for loan losses is $21 million, and $100 million of impaired loans which are carried at their estimated fair value without a specifically allocated allowance for loan losses. At the end of 1996, the recorded investment in impaired loans was $209 million, of which $81 million had a specifically allocated allowance of $26 million and $128 million were carried at their estimated fair value. The average recorded investment in impaired loans for the third quarter of 1997 and 1996 was $186 million and $175 million, respectively. Nonperforming assets were as follows:
SEPTEMBER 30, December 31, September 30, in millions 1997 1996 1996 - -------------------------------------------------------------------------------------------------- Impaired loans $184 $209 $185 Other nonaccrual loans 180 139 158 Restructured loans -- 1 1 - -------------------------------------------------------------------------------------------------- Total nonperforming loans 364 349 344 Other real estate owned (OREO) 67 56 59 Allowance for OREO losses (22) (8) (10) - -------------------------------------------------------------------------------------------------- OREO, net of allowance 45 48 49 Other nonperforming assets 2 3 3 - -------------------------------------------------------------------------------------------------- Total nonperforming assets $411 $400 $396 ===== ===== ==== - --------------------------------------------------------------------------------------------------
Key considers all nonaccrual loans to be impaired loans, except for smaller-balance, homogeneous nonaccrual loans (shown in the preceding table as "Other nonaccrual loans") excluded in accordance with the provisions of SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." A loan is not deemed impaired during a period of delay in payment of less than 90 days if Key expects to collect all amounts due, including interest accrued at the contractual interest rate, for the period of delay. Impaired loans are evaluated individually. Where collateral exists, the extent of impairment is determined based on the estimated fair value of the underlying collateral. If collateral does not exist, or is insufficient to support the carrying amount of the loan, management looks to other means of collection. Where the estimated fair value of the collateral and the present value of the estimated future cash flows from other means of collection do not support the carrying amount of the loan, management charges off that portion of the loan balance which it believes will not ultimately be collected. In instances where collateral or other sources of repayment are sufficient, yet uncertainty exists regarding the ultimate repayment, an allowance is specifically allocated for in the allowance for loan losses. Key excludes smaller-balance, homogeneous nonaccrual loans from impairment evaluation. Generally these include loans to finance residential mortgages, automobiles, recreational vehicles, boats and mobile homes. Key applies historical loss experience rates to these loans, adjusted based on management's assessment of emerging credit trends and other factors. The resulting loss estimates are specifically allocated for by loan type in the allowance for loan losses. In general, such loans are charged off when payment is 120-180 days past due. 12 13 7. LONG-TERM DEBT The components of long-term debt, presented net of unamortized discount where applicable, were as follows:
SEPTEMBER 30, December 31, September 30, dollars in millions 1997 1996 1996 - --------------------------------------------------------------------------------------------------------------------- Senior medium-term notes due through 2005 1 $ 493 $ 584 $ 924 Subordinated medium-term notes due through 2005 2 183 183 183 7.50% Subordinated notes due 2006 250 250 250 6.75% Subordinated notes due 2006 200 200 200 8.125% Subordinated notes due 2002 199 199 199 8.00% Subordinated notes due 2004 125 125 125 8.40% Subordinated capital notes due 1999 75 75 75 8.404% Notes due 1997 through 2001 42 49 49 All other long-term debt 15 16 18 - --------------------------------------------------------------------------------------------------------------------- Total parent company 1,582 1,681 2,023 Senior medium-term bank notes due through 2000 3 3,202 1,165 1,275 Senior euro medium-term bank notes due through 2002 4 780 -- -- 7.25% Subordinated notes due 2005 200 200 200 7.85% Subordinated notes due 2002 200 200 200 6.75% Subordinated notes due 2003 200 200 199 7.50% Subordinated notes due 2008 165 165 165 7.125% Subordinated notes due 2006 250 250 250 7.55% Subordinated notes due 2006 75 75 75 7.375% Subordinated notes due 2008 70 70 70 Lease financing debt 5 605 -- -- Federal Home Loan Bank Advances 164 193 193 All other long-term debt 74 14 14 - --------------------------------------------------------------------------------------------------------------------- Total subsidiaries 5,985 2,532 2,641 - --------------------------------------------------------------------------------------------------------------------- Total $7,567 $4,213 $4,664 ======= ======= ====== - --------------------------------------------------------------------------------------------------------------------- 1 The weighted average rate on the senior medium-term notes due through 2005 was 6.56%, 6.57% and 6.50% at September 30, 1997, December 31, 1996 and September 30, 1996, respectively. 2 The weighted average rate on the subordinated medium-term notes due through 2005 was 6.85%, 6.80% and 6.81% at September 30, 1997, December 31, 1996 and September 30, 1996, respectively. 3 The weighted average rate on the senior medium-term notes due through 2000 was 5.75%, 6.17% and 6.68% at September 30, 1997, December 31, 1996 and September 30, 1996, respectively. 4 The weighted average rate on the euro medium-term notes due through 2002 was 5.83% at September 30, 1997. 5 Represents primarily nonrecourse debt collateralized by lease equipment under operating, direct financing and sales type leases.
13 14 8. CAPITAL SECURITIES The corporation-obligated mandatorily redeemable preferred capital securities of subsidiary trusts holding solely debentures of the Corporation ("capital securities") were issued by three business trusts, KeyCorp Institutional Capital A ("Capital A"), KeyCorp Institutional Capital B ("Capital B") and KeyCorp Institutional Capital C ("Capital C"), all of whose common securities are owned by the parent company. Capital A and Capital B were formed in the fourth quarter of 1996 and Capital C was formed in the second quarter of 1997. The proceeds from the issuances of the capital securities and common securities were used to purchase debentures of the parent company. Capital A and Capital B hold solely junior subordinated deferrable interest debentures of the parent company. Capital C holds solely coupon adjusted pass-through security debentures of the parent company. Both the debentures and related income statement effects are eliminated in Key's financial statements. The parent company has entered into contractual arrangements which, taken collectively, fully and unconditionally guarantee payment of: (i) accrued and unpaid distributions required to be paid on the capital securities; (ii) the redemption price with respect to any capital securities called for redemption by Capital A, Capital B or Capital C; and (iii) payments due upon a voluntary or involuntary liquidation, winding-up or termination of Capital A, Capital B or Capital C. The capital securities, common securities and related debentures are summarized as follows:
Interest Rate Maturity Principal of Capital of Capital Capital Common Amount of Securities and Securities and dollars in millions Securities 1 Securities Debentures 2 Debentures Debentures - ------------------------------------------------------------------------------------------------------------------------------- September 30, 1997 Capital A $350 $11 $361 7.826% 2026 Capital B 150 4 154 8.250 2026 Capital C 250 8 258 6.625 2029 - ------------------------------------------------------------------------------------------------------------------------------ Total $750 $23 $773 7.510%3 -- ==== === ===== - ------------------------------------------------------------------------------------------------------------------------------ December 31, 1996 $500 $15 $515 7.953%3 -- ==== === ===== - ------------------------------------------------------------------------------------------------------------------------------ 1 The capital securities are mandatorily redeemable upon the respective maturity dates of the debentures or upon earlier redemption as provided in the indenture. Each issue of capital securities carries an interest rate identical to that of the respective debenture. The interest rate related to the capital securities issued by Capital C may be adjusted upon the remarketing of the capital securites on the coupon adjustment date (June 1, 1999). The capital securities issued by Capital A and Capital B qualify as Tier I capital under Federal Reserve Board Guidelines. 2 The parent company has the right to redeem the debentures purchased by Capital A, Capital B and Capital C: (i) in whole or in part, on or after December 1, 2006, December 15, 2006 and June 1, 2009, respectively, (ii) in whole at any time within 90 days following the occurrence and during the continuation of a tax event or a capital treatment event (as defined in the applicable offering circular); and (iii) for Capital C, in whole or in part on the coupon adjustment date. If the debentures are redeemed prior to maturity, the redemption price will be expressed as a certain percentage of, or factor added to, the principal amount, plus any accrued but unpaid interest. 3 Weighted average rate.
9. RESTRUCTURING CHARGE During the fourth quarter of 1996, the parent company recorded a $100 million ($66 million after tax, $.29 per Common Share) restructuring charge in connection with strategic actions to be taken over the next year to complete its transformation to a nationwide, bank-based financial services company. The primary actions taken or to be taken include: (i) the formation of a nationwide bank from Key's network of banks in 13 states and four regions of the United States (KeyBank USA and KeyBank National Association (New Hampshire) ("KeyBank New Hampshire") did not take part in this consolidation), (ii) the consolidation of nearly 140 of Key's branch offices, known as KeyCenters, into other KeyCenters, and (iii) the reduction of approximately 2,700 positions, or 10% of Key's employment base, distributed throughout the organization at substantially all levels of responsibility. 14 15 Included in the restructuring charge were accruals for expenses, primarily consisting of severance payments ($54 million), consolidation costs related to banking offices identified for closure ($18 million) and costs related to the write-off of certain obsolete software previously developed for internal use ($28 million). As of September 30, 1997, Key had completed the consolidation of 119 of the 140 KeyCenters identified for merger into other KeyCenters and reduced its employment base by the approximate 10% projected at the announcement date. Remaining reserves at September 30, 1997, totaled $38 million. Changes in the restructuring reserve are summarized as follows:
Consolidation Obsolete in millions Severance Costs Software Total - ------------------------------------------------------------------------------------------------------------------------ Balance at January 1, 1997 $ 54 $18 $ 28 $100 Cash payments (25) (2) - (27) Noncash charges -- (7) (28) (35) - ------------------------------------------------------------------------------------------------------------------------ Balance at September 30, 1997 $ 29 $9 -- $ 38 ===== === === ===== - ------------------------------------------------------------------------------------------------------------------------
10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK Key, mainly through its affiliate banks, is party to various financial instruments with off-balance sheet risk. The banks use these financial instruments in the normal course of business to meet the financing needs of their customers and to manage their exposure to market risk. Market risk is the possibility that Key's net interest income will be adversely affected as a result of changes in interest rates or other economic factors. The primary financial instruments used include commitments to extend credit, standby and commercial letters of credit, interest rate swaps, caps and floors, futures and foreign exchange forward contracts. All of the interest rate swaps, caps and floors, and foreign exchange forward contracts held are over-the-counter instruments. These financial instruments may be used for lending-related, asset and liability management and trading purposes, as discussed in the remainder of this note. In addition to the market risks inherent in the use of these financial instruments, each contains an element of credit risk. Credit risk is the possibility that Key will incur a loss due to a counterparty's failure to perform its contractual obligations. FINANCIAL INSTRUMENTS HELD OR ISSUED FOR LENDING-RELATED PURPOSES These instruments involve, to varying degrees, credit risk in addition to amounts recognized in Key's balance sheet. Key mitigates its exposure to credit risk through internal controls over the extension of credit. These controls include the process of credit approval and review, the establishment of credit limits and, when deemed necessary, securing collateral. The banks' commitments to extend credit are agreements with customers to provide financing at predetermined terms as long as the customer continues to meet specified criteria. Loan commitments serve to meet the financing needs of the banks' customers and generally carry variable rates of interest, have fixed expiration dates or other termination clauses, and may require the payment of fees. Since the commitments may expire without being drawn upon, the total amount of the commitments does not necessarily represent the future cash outlay to be made by Key. The credit-worthiness of each customer is evaluated on a case-by-case basis. The estimated fair values of these commitments and the standby letters of credit discussed below are not material. Key does not have any significant concentrations of credit risk. Standby letters of credit enhance the credit-worthiness of the banks' customers by assuring the customers' financial performance to third parties in connection with specified transactions. Amounts drawn under standby letters of credit generally carry variable rates of interest, and the credit risk involved is essentially the same as that involved in the extension of loan facilities. 15 16 The following is a summary of the contractual amount of each class of lending-related off-balance sheet financial instrument outstanding wherein Key's maximum possible accounting loss equals the contractual amount of the instruments:
SEPTEMBER 30, December 31, September 30, in millions 1997 1996 1996 - ----------------------------------------------------------------------------------------------------------------- Loan commitments: Credit card lines $ 7,928 $ 8,078 $ 7,253 Home equity 3,924 3,239 3,081 Commercial real estate and construction 1,104 1,593 1,527 Commercial and other 13,180 10,327 10,233 - ----------------------------------------------------------------------------------------------------------------- Total loan commitments 26,136 23,237 22,094 Other commitments: Standby letters of credit 1,467 1,385 1,285 Commercial letters of credit 120 202 206 Loans sold with recourse 271 30 30 - ----------------------------------------------------------------------------------------------------------------- Total loan and other commitments $27,994 $24,854 $23,615 ======== ======== ======= - -----------------------------------------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS HELD OR ISSUED FOR ASSET AND LIABILITY MANAGEMENT PURPOSES Key manages its exposure to market risk, in part, by using off-balance sheet instruments. Instruments used for this purpose modify the repricing or maturity characteristics of specified on-balance sheet assets and liabilities. The instruments must be both effective at reducing the risk associated with the exposure being managed, and designated as a risk management transaction at the inception of the derivative contract. In addition, to be considered effective, a high degree of interest rate correlation must exist between the derivative and the specified assets or liabilities being managed at inception and over the life of the derivative contract. Primary among the financial instruments used by both the parent company and its subsidiary banks to manage exposure to market risk are interest rate swap contracts. Interest rate swaps used for this purpose are designated as portfolio swaps. The notional amount of the interest rate swap contracts represents only an agreed-upon amount on which calculations of interest payments to be exchanged are based, and is significantly greater than the amount at risk. Credit risk on these instruments is the possibility that the counterparty will not meet the terms of the swap contract and is measured as the cost of replacing, at current market rates, contracts in an unrealized gain position. Key deals exclusively with counterparties with high credit ratings, enters into bilateral collateral arrangements and generally arranges master netting agreements. These agreements include legal rights of setoff that provide for the net settlement of the subject contracts with the same counterparty in the event of default. In addition, the credit risk exposure to the counterparty on each interest rate swap is monitored by a credit committee. Based upon credit reviews of the counterparties, limits on the total credit exposure Key may have with each counterparty and the amount of collateral required, if any, are determined. Although Key is exposed to credit-related losses in the event of nonperformance by the counterparties, based on management's assessment as of September 30, 1997, all counterparties were expected to meet their obligations. At September 30, 1997, Key had 18 different counterparties to portfolio swaps and swaps entered into to offset the risk of customer swaps. Key had aggregate credit exposure of $54 million to twelve of these counterparties, with the largest credit exposure to an individual counterparty amounting to $14 million. Conventional interest rate swap contracts involve the receipt of amounts based on a fixed or variable rate in exchange for payments based on variable or fixed rates, without an exchange of the underlying notional amount. Under an indexed amortizing swap contract, the notional amount remains constant for a specified period of time after which, based upon the level of an index at each review date, the swap contract will mature, the notional amount will begin to amortize, or the swap will continue in effect until its contractual maturity. Otherwise, the characteristics of these swaps are similar to those of conventional swap contracts. At September 30, 1997, Key was party to $1.3 billion and $2.5 billion of indexed amortizing swaps that used a London Interbank Offered Rate ("LIBOR") index and a Constant Maturity Treasuries ("CMT") index, respectively, for the review date measurement. Under basis swap contracts, interest payments based on different floating indices are exchanged. 16 17 The following table summarizes the notional amount, fair value, maturity and weighted average rate received and paid for the various types of portfolio interest rate swaps used by Key:
SEPTEMBER 30, 1997 December 31, 1996 ------------------------------------------------------------------- ------------------------ WEIGHTED AVERAGE RATE NOTIONAL FAIR MATURITY ---------------------------- Notional Fair dollars in millions AMOUNT VALUE (YEARS) RECEIVE PAY Amount Value - --------------------------------------------------------------------------------------------------------------------------------- Receive fixed/pay variable-- indexed amortizing 1 $ 4,065 $ 9 1.6 6.80% 5.73% $ 5,078 $(8) Receive fixed/pay variable-- conventional 3,750 43 6.1 6.69 5.79 3,505 21 Pay fixed/receive variable-- conventional 3,260 (6) 1.1 5.73 6.12 3,312 (5) Basis swaps 200 -- .4 5.76 5.74 400 -- - ------------------------------------------------------------------------------------------------------------------------------- Total portfolio swaps $11,275 $46 2.9 6.44% 5.86% $12,295 $ 8 ======== ==== ======== ==== - ------------------------------------------------------------------------------------------------------------------------------- 1 MATURITY IS BASED UPON EXPECTED AVERAGE LIVES RATHER THAN CONTRACTUAL TERMS.
Based on the weighted average rates in effect at September 30, 1997, the spread on portfolio interest rate swaps, excluding the amortization of net deferred gains on terminated swaps, provided a positive impact on net interest income (since the weighted average rate received exceeded the weighted average rate paid by 58 basis points). The aggregate positive fair value of $46 million at the same date was derived through the use of discounted cash flow models, which contemplate interest rates using the applicable forward yield curve, and represents an estimate of the unrealized gain that would be recognized if the portfolio were to be liquidated at that date. Interest from portfolio swaps is recognized on an accrual basis over the lives of the respective contracts as an adjustment of the interest income or expense of the asset or liability whose risk is being managed. Gains and losses realized upon the termination of interest rate swaps prior to maturity are deferred and amortized, generally using the straight-line method over the projected remaining life of the related swap contract at its termination and recorded as an adjustment of the yield on the respective on-balance sheet instrument that was being managed. During the first nine months of 1997, swaps with a notional amount of $220 million were terminated, resulting in no deferred gain or loss. During the same period last year, swaps with a notional amount of $800 million were terminated, resulting in a deferred gain of $.3 million. A summary of Key's deferred swap gains and (losses) is as follows:
dollars in millions - -------------------------------------------------------------------------------- Weighted Average Deferred Remaining Asset/Liability Managed Gains/(Losses) Amortization (Years) - -------------------------------------------------------------------------------- Loans $ (1) 1.1 Debt 15 5.6 - -------------------------------------------------------------------------------- Total $14 === - --------------------------------------------------------------------------------
Key also uses interest rate caps and floors, and futures contracts to manage the risk associated with the potential impact of adverse movements in interest rates on specified long-term debt and other short-term borrowings. Interest rate caps and floors involve the payment of a premium by the buyer to the seller for the right to receive an interest differential equal to the difference between the current interest rate and an agreed-upon interest rate ("strike rate") applied to a notional amount. Key generally purchases or enters into net purchases (a combination of buying and selling) of caps and floors for asset and liability management purposes. Futures contracts are commitments to either purchase or sell designated financial instruments at future dates for specified prices. Key had caps and floors with a notional amount and fair value of $4.3 billion (of which $1.6 billion are forward-starting) and $17 million, respectively, at September 30, 1997. There were no futures contracts outstanding at the same date. For the third quarter of 1997, interest rate swaps (including the impact of both the spread on the swap portfolio and the amortization of deferred gains and losses resulting from terminated swaps) and interest rate caps and floors increased net interest income by $12 million. For the same period last year, these instruments contributed $19 million to net interest income. 17 18 FINANCIAL INSTRUMENTS HELD OR ISSUED FOR TRADING PURPOSES Key's affiliate banks also use interest rate swap, cap and floor, and future contracts for dealer activities (which are generally limited to the banks' commercial loan customers) and enter into other positions with third parties that are intended to mitigate the interest rate risk of the customer positions. Interest rate swap contracts entered into with customers are typically limited to conventional swaps, as previously described. The customer swaps, caps and floors, and futures, as well as the third party positions, are recorded at their estimated fair values, and adjustments to fair value are included in other income on the income statement. Key had futures contracts with a notional amount and negative fair value of $9.9 billion and $(5) million, respectively, at September 30, 1997. Key also enters into foreign exchange forward contracts to accommodate the business needs of its customers and for proprietary trading purposes. These contracts provide for the delayed delivery or purchase of foreign currency. The foreign exchange risk associated with such contracts is mitigated by entering into other foreign exchange contracts with third parties. Adjustments to the fair value of all such foreign exchange forward contracts are included in other income on the income statement. At September 30, 1997, credit exposure from financial instruments held or issued for trading purposes was limited to the aggregate fair value of each contract with a positive fair value, or $82 million. The risk of counterparties defaulting on their obligations is monitored on an ongoing basis. The affiliate banks contract with counterparties of good credit standing and enter into master netting agreements when possible in an effort to manage credit risk. Trading income recognized on interest rate and foreign exchange forward contracts totaled $23 million and $12 million, respectively, for the first nine months of 1997 and $13 million and $10 million, respectively, for the first nine months of 1996. A summary of the notional amount and the respective fair value of derivative financial instruments held or issued for trading purposes at September 30, 1997, and on average for the nine-month period then ended, is presented below. The positive fair values represent assets to Key and are recorded in other assets, while the negative fair values represent liabilities and are recorded in other liabilities on the balance sheet. The $8.3 billion notional amount of customer swaps presented in the table includes $4.7 billion of interest rate swaps that receive a fixed rate and pay a variable rate and $3.6 billion of interest rate swaps that pay a fixed rate and receive a variable rate. As of September 30, 1997, these swaps had an expected average life of 5.4 years, carried a weighted average rate received of 6.44% and had a weighted average rate paid of 6.25%.
September 30, 1997 Nine months ended September 30, 1997 ----------------------- ----------------------------------------- Notional Fair Average Average in millions Amount Value Notional Amount Fair Value - ------------------------------------------------------------------------------------------------------------------- Interest rate contracts: Customer swaps: Assets $6,178 $ 76 $4,827 $ 52 Liabilities 2,134 (33) 2,046 (24) Caps and floors purchased 2,687 4 2,574 2 Caps and floors written 2,771 (4) 2,647 (3) Foreign exchange forward contracts: Assets 619 18 539 20 Liabilities 572 (16) 494 (19) - ------------------------------------------------------------------------------------------------------------------- 1 Excludes the effect of foreign spot contracts.
18 19 INDEPENDENT ACCOUNTANTS' REVIEW REPORT SHAREHOLDERS AND BOARD OF DIRECTORS KEYCORP We have reviewed the unaudited consolidated balance sheets of KeyCorp and subsidiaries ("Key") as of September 30, 1997 and 1996, and the related consolidated statements of income for the three and nine-month periods then ended, and the consolidated statements of changes in shareholders' equity and cash flow for the nine-month periods ended September 30, 1997 and 1996. These financial statements are the responsibility of Key's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Key as of December 31, 1996, and the related consolidated statements of income, changes in shareholders' equity, and cash flow for the year then ended (not presented herein) and in our report dated January 15, 1997, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1996, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Ernst & Young LLP Cleveland, Ohio October 14, 1997 19 EX-11 2 EXHIBIT 11 1 EXHIBIT 11 KEYCORP COMPUTATION OF NET INCOME PER COMMON SHARE (dollars in millions, except per share amounts)
Three months ended Sept. 30, Nine months ended Sept. 30, ----------------------------------- ----------------------------------- 1997 1996 1997 1996 ---------------- ---------------- ---------------- ---------------- NET INCOME APPLICABLE TO COMMON SHARES Net income $236 $207 $671 $632 Less: Preferred dividend requirements -- -- -- 8 ---------------- ---------------- ---------------- ---------------- Net income applicable to Common Shares $236 $207 $671 $624 ================ ================ ================ ================ NET INCOME PER COMMON SHARE Weighted average Common Shares outstanding (000) 218,107 229,668 219,570 231,363 ================ ================ ================ ================ Net income applicable to Common Shares $236 $207 $671 $624 ================ ================ ================ ================ Net income per Common Share $1.08 $.90 $3.06 $2.70 ================ ================ ================ ================ NET INCOME PER COMMON SHARE -- PRIMARY Weighted average Common Shares outstanding (000) 218,107 229,668 219,570 231,363 Dilutive common stock options (000)1 4,744 3,280 4,204 3,332 ---------------- ---------------- ---------------- ---------------- Weighted average Common Shares and Common Share equivalents outstanding (000) 222,851 232,948 223,774 234,695 ================ ================ ================ ================ Net income applicable to Common Shares $236 $207 $671 $624 ================ ================ ================ ================ Net income per Common Share $1.06 $.89 $3.00 $2.66 ================ ================ ================ ================ NET INCOME PER COMMON SHARE -- FULLY DILUTED Weighted average Common Shares outstanding (000) 218,107 229,668 219,570 231,363 Dilutive common stock options (000)1 5,114 3,940 5,145 4,305 ---------------- ---------------- ---------------- ---------------- Weighted average Common Shares and Common Share equivalents outstanding (000) 223,221 233,608 224,715 235,668 ================ ================ ================ ================ Net income applicable to Common Shares $236 $207 $671 $624 ================ ================ ================ ================ Net income per Common Share $1.06 $.88 $2.99 $2.65 ================ ================ ================ ================ 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.
44 EX-15 3 EXHIBIT 15 1 EXHIBIT 15 ACKNOWLEDGMENT LETTER OF INDEPENDENT AUDITORS Shareholders and Board of Directors KeyCorp We are aware of the incorporation by reference in the following KeyCorp ("Key") Registration Statements of our review report, dated October 14, 1997, relating to the unaudited consolidated interim financial statements of Key, included in the Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. Form S-3 No. 33-5064 Form S-3 No. 33-10634 Form S-3 No. 33-39733 Form S-3 No. 33-51652 Form S-3 No. 33-53643 Form S-3 No. 33-56881 Form S-3 No. 33-58405 Form S-3 No. 333-10577 Form S-3 No. 333-37287 Form S-4 No. 33-31569 Form S-4 No. 33-44657 Form S-4 No. 33-51717 Form S-4 No. 33-55573 Form S-4 No. 33-57329 Form S-4 No. 33-61539 Form S-4 No. 333-19151 Form S-4 No. 333-19153 Form S-8 No. 2-97452 Form S-8 No. 33-21643 Form S-8 No. 33-42691 Form S-8 No. 33-45518 Form S-8 No. 33-46278 Form S-8 No. 33-52293 Form S-8 No. 33-54819 Form S-8 No. 33-56745 Form S-8 No. 33-56879 Form S-8 No. 33-31569 (Post-Effective Amendment No. 1 to Form S-4) Form S-8 No. 33-31569 (Post-Effective Amendment No. 2 to Form S-4) Form S-8 No. 33-31569 (Post-Effective Amendment No. 3 to Form S-4) Form S-8 No. 33-44657 (Post-Effective Amendment No. 1 to Form S-4) Form S-8 No. 33-51717 (Post-Effective Amendment No. 1 to Form S-4) Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not a part of the Registration Statements prepared or certified by accountants within the meaning of Section 7 or 11 of the Securities Act of 1933. /s/ Ernst & Young LLP Cleveland, Ohio November 10, 1997 45 EX-27 4 EXHIBIT 27
9 1,000,000 3-MOS DEC-31-1997 JUL-01-1997 SEP-30-1997 2,940 24 626 567 7,563 1,344 1,378 53,676 900 72,077 43,870 12,715 2,099 7,567 0 0 246 4,830 72,077 3,417 457 23 3,897 1,101 1,808 2,089 244 0 1,805 980 980 0 0 671 3.00 2.99 4.67 364 138 0 0 870 282 65 900 900 0 0
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