0000950152-95-001814.txt : 19950816
0000950152-95-001814.hdr.sgml : 19950816
ACCESSION NUMBER: 0000950152-95-001814
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 6
CONFORMED PERIOD OF REPORT: 19950630
FILED AS OF DATE: 19950814
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: KEYCORP /NEW/
CENTRAL INDEX KEY: 0000091576
STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021]
IRS NUMBER: 346542451
STATE OF INCORPORATION: OH
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-11302
FILM NUMBER: 95563867
BUSINESS ADDRESS:
STREET 1: 127 PUBLIC SQ
CITY: CLEVELAND
STATE: OH
ZIP: 44114-1306
BUSINESS PHONE: 2166893000
MAIL ADDRESS:
STREET 1: 127 PUBLIC SQ
CITY: CLEVELAND
STATE: OH
ZIP: 44114-1306
FORMER COMPANY:
FORMER CONFORMED NAME: SOCIETY CORP
DATE OF NAME CHANGE: 19920703
10-Q
1
KEYCORP 10-Q
1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Period Ended June 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From _____________ To ____________
Commission File Number 0-850
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)
Registrant's telephone number, including area code (216) 689-6300
-----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Shares, $1 par value 227,536,767 Shares
----------------------------------------- ------------------------------
(Title of class) (Outstanding at July 31, 1995)
2
KEYCORP
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. FINANCIAL STATEMENTS PAGE NO.
Consolidated Balance Sheets --
June 30, 1995, December 31, 1994, and June 30, 1994 3
Consolidated Statements of Income --
Three months and six months ended June 30, 1995 and 1994 4
Consolidated Statements of Changes in Shareholders' Equity --
Six months ended June 30, 1995 and 1994 5
Consolidated Statements of Cash Flow --
Six months ended June 30, 1995 and 1994 6
Notes to Consolidated Financial Statements 7
Independent Accountants' Review Report 17
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 18
PART II. OTHER INFORMATION
--------------------------
Item 1. LEGAL PROCEEDINGS 39
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 39
Item 5. OTHER INFORMATION 39
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 40
Signature 41
-2-
3
PART I. FINANCIAL INFORMATION
KEYCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, December 31, June 30,
(dollars in thousands, except per share amounts) 1995 1994 1994
------------------------------------------------------------------------------------------------------------
(UNAUDITED) (Unaudited)
ASSETS
Cash and due from banks $ 3,196,990 $3,511,368 $3,132,926
Short-term investments 799,339 670,010 178,534
Mortgage loans held for sale 698,296 355,198 529,615
Securities available for sale 1,436,468 2,521,049 4,169,674
Investment securities (fair value: $9,929,558, $9,757,032
and $9,107,675, respectively) 9,918,415 10,275,638 9,311,541
Loans 48,093,211 46,224,644 43,157,659
Less: Allowance for loan losses 867,486 830,298 816,437
-------------------------------------------------------------------------------------------------------------
Net loans 47,225,725 45,394,346 42,341,222
Premises and equipment 1,017,793 987,231 933,334
Other real estate owned, net of allowance 50,188 79,007 118,006
Goodwill 660,471 418,462 371,966
Other intangible assets 180,494 180,425 194,688
Other assets 2,297,013 2,408,505 2,078,210
-------------------------------------------------------------------------------------------------------------
Total assets $67,481,192 $66,801,239 $63,359,716
=============================================================================================================
LIABILITIES
Deposits in domestic offices:
Noninterest-bearing $ 8,603,870 $ 9,135,760 $ 8,414,213
Interest-bearing 37,737,977 36,003,352 35,787,796
Deposits in foreign offices -- interest-bearing 2,330,325 3,425,125 3,594,208
-------------------------------------------------------------------------------------------------------------
Total deposits 48,672,172 48,564,237 47,796,217
Federal funds purchased and securities sold
under repurchase agreements 4,793,894 5,499,117 5,509,707
Other short-term borrowings 4,067,444 3,277,611 2,326,346
Other liabilities 1,253,646 1,200,052 1,013,073
Long-term debt 4,019,599 3,569,794 2,123,641
-------------------------------------------------------------------------------------------------------------
Total liabilities 62,806,755 62,110,811 58,768,984
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value; authorized 25,000,000 shares,
none issued --- --- --
10% Cumulative Preferred Stock Class A, $125 stated value;
authorized 1,400,000 shares, issued 1,280,000 shares 160,000 160,000 160,000
Common Shares, $1 par value; authorized 900,000,000 shares;
issued 245,944,390, 245,944,390 and 245,898,999 shares 245,944 245,944 245,899
Capital surplus 1,455,966 1,454,177 1,469,021
Retained earnings 3,390,050 3,161,293 2,900,730
Loans to ESOP trustee (63,909) (63,909) (63,909)
Net unrealized losses, net of taxes, on securities (25,338) (115,280) (82,288)
Treasury stock at cost (16,912,650, 5,582,273 and 1,652,555 shares) (488,276) (151,797) (38,721)
-------------------------------------------------------------------------------------------------------------
Total shareholders' equity 4,674,437 4,690,428 4,590,732
-------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $67,481,192 $66,801,239 $63,359,716
=============================================================================================================
See notes to consolidated financial statements (unaudited).
-3-
4
KEYCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months ended June 30, Six months ended June 30,
----------------------------- -------------------------
(dollars in thousands, except per share amounts) 1995 1994 1995 1994
----------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $1,096,931 $ 879,567 $2,125,957 $1,705,848
Mortgage loans held for sale 3,903 15,442 8,370 33,866
Taxable investment securities 142,925 128,482 287,643 229,036
Tax-exempt investment securities 22,034 22,666 43,722 46,015
Securities available for sale 22,306 55,616 48,649 130,610
Short-term investments 10,774 835 29,909 2,223
----------------------------------------------------------------------------------------------------------------------------
Total interest income 1,298,873 1,102,608 2,544,250 2,147,598
INTEREST EXPENSE
Deposits 439,327 315,414 852,601 611,535
Federal funds purchased and securities
sold under repurchase agreements 72,231 60,464 148,740 99,431
Other short-term borrowings 56,641 14,629 106,390 28,819
Long-term debt 64,356 31,781 126,422 59,381
----------------------------------------------------------------------------------------------------------------------------
Total interest expense 632,555 422,288 1,234,153 799,166
----------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 666,318 680,320 1,310,097 1,348,432
Provision for loan losses 20,372 35,027 38,818 71,819
----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 645,946 645,293 1,271,279 1,276,613
NONINTEREST INCOME
Service charges on deposit accounts 70,103 68,407 135,771 130,724
Trust and asset management income 59,462 55,612 112,212 112,649
Credit card fees 20,645 18,908 37,327 35,576
Insurance and brokerage income 14,628 15,411 27,295 31,418
Mortgage banking income 7,475 22,651 25,210 47,446
Net securities gains (losses) 2,456 589 (42,409) 7,017
Other income 48,103 45,897 98,501 89,201
----------------------------------------------------------------------------------------------------------------------------
Total noninterest income 222,872 227,475 393,907 454,031
NONINTEREST EXPENSE
Personnel 270,603 264,267 550,485 534,803
Net occupancy 51,840 53,236 106,059 108,730
Equipment 39,205 39,590 79,090 79,458
FDIC insurance assessments 25,972 24,813 51,448 48,812
Amortization of intangibles 19,592 13,719 36,047 26,255
Professional fees 17,864 11,507 30,442 24,011
Other expense 143,467 131,584 275,819 259,474
----------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 568,543 538,716 1,129,390 1,081,543
----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 300,275 334,052 535,796 649,101
Income taxes 101,311 112,287 162,921 218,699
----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM 198,964 221,765 372,875 430,402
Extraordinary net gain from the sales of
subsidiaries, net of income taxes of $25,351 --- --- 35,790 ---
----------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 198,964 $ 221,765 $ 408,665 $ 430,402
============================================================================================================================
Net income applicable to Common Shares $ 194,964 $ 217,765 $ 400,665 $ 422,402
Per Common Share:
Income before extraordinary item $ .83 $ .89 $1.54 $1.74
Net income .83 .89 1.69 1.74
Weighted average Common Shares outstanding 235,329,270 244,823,153 237,651,334 243,382,552
============================================================================================================================
See notes to consolidated financial statements (unaudited).
-4-
5
KEYCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
Net
Unrealized
Loans to Securities Common
Preferred Common Capital Retained ESOP Gains Shares in
(dollars in thousands, except per share amounts) Stock Shares Surplus Earnings Trustee (Losses) Treasury
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1993 $160,000 $242,828 $1,433,861 $2,641,450 $(63,909) $ (20,663)
Adjustment related to change in accounting
for contributions (8,022)
Adjustment of securities available for sale
to fair value at January 1, net of
deferred income taxes of $26,621 $46,153
Adjustments relating to poolings of
interests - 12,990 shares (11) (375)
Net income 430,402
Cash dividends:
Common Shares ($.64 per share) (115,971)
Cumulative Preferred Stock ($3.125 per share) (4,000)
Declared by pooled company prior to merger:
Common Stock (39,793)
Preferred Stock (4,000)
Issuance of Common Shares:
Acquisitions - 2,900,389 shares 2,900 29,503
Dividend reinvestment, stock option
and purchase plans - 827,445 net shares 182 6,032 11,221
Repurchase of Common Shares - 1,199,396 shares (29,279)
Change in net unrealized gains (losses) on
securities, net of deferred income tax
benefit of $(74,978) (128,441)
Tax benefits attributable to ESOP dividends 664
----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1994 $160,000 $245,899 $1,469,021 $2,900,730 $(63,909) $ (82,288) $ (38,721)
==================================================================================================================================
BALANCE AT DECEMBER 31, 1994 $160,000 $245,944 $1,454,177 $3,161,293 $(63,909) $(115,280) $(151,797)
Net income 408,665
Cash dividends:
Common Shares ($.72 per share) (172,517)
Cumulative Preferred Stock ($6.25 per share) (8,000)
Issuance of Common Shares:
Acquisitions - 5,953,559 shares 7,312 163,614
Dividend reinvestment, stock option
and purchase plans - 878,064 net shares (5,523) 24,129
Repurchase of Common Shares - 18,162,000 shares (524,222)
Change in net unrealized gains (losses) on
securities, net of deferred income taxes of $51,533 89,942
Tax benefits attributable to ESOP dividends 609
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1995 $160,000 $245,944 $1,455,966 $3,390,050 $(63,909) $(25,338) $(488,276)
===================================================================================================================================
See notes to consolidated financial statements (unaudited).
-5-
6
KEYCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
Six months ended June 30,
---------------------------
(in thousands) 1995 1994
------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 408,665 $ 430,402
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 38,818 71,819
Depreciation expense 73,971 59,260
Amortization of intangibles 36,047 26,255
Amortization of purchased mortgage servicing rights 7,279 22,425
Net gain from sales of subsidiaries (61,141) ---
Deferred income taxes 19,624 38,061
Net securities (gains) losses 42,409 (7,017)
(Gains) losses from the sales of other real estate owned (335) 854
Net (increase) decrease in mortgage loans held for sale (343,098) 795,723
Other operating activities, net (64,715) 100,270
------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 157,524 1,538,052
INVESTING ACTIVITIES
Net increase in loans (436,126) (2,866,897)
Purchases of investment securities (776,270) (3,607,305)
Proceeds from sales of investment securities 4,164 ---
Proceeds from prepayments and maturities of investment securities 1,275,777 1,495,314
Purchases of securities available for sale (354,380) (273,636)
Proceeds from sales of securities available for sale 1,505,939 1,414,010
Proceeds from prepayments and maturities of securities available for sale 228,129 214,988
Net increase in short-term investments (39,071) (71,315)
Purchases of premises and equipment (143,662) (75,246)
Proceeds from sales of premises and equipment 8,300 7,914
Proceeds from sales of other real estate owned 22,342 30,594
Purchase of mortgage servicing rights --- (27,592)
Proceeds from sales of subsidiaries 350,633 ---
Net cash (used in) provided by acquisitions (198,049) 2,876
------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,447,726 (3,756,295)
FINANCING ACTIVITIES
Net (decrease) increase in deposits (1,610,585) 481,925
Net (decrease) increase in short-term borrowings (9,383) 1,938,938
Net proceeds from issuance of long-term debt 534,627 473,923
Payments on long-term debt (148,770) (114,152)
Purchase of treasury shares (524,222) (29,279)
Proceeds from issuance of common stock pursuant to employee
stock purchase, stock option and dividend reinvestment plans 18,607 17,435
Cash dividends (180,517) (195,708)
Other financing activities, net 615 649
------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (1,919,628) 2,573,731
------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND DUE FROM BANKS (314,378) 355,488
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 3,511,368 2,777,438
------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF PERIOD $3,196,990 $3,132,926
==================================================================================================================
Additional disclosures relative to cash flow:
Interest paid $1,207,525 $ 779,508
Income taxes paid 149,013 136,126
Net amount paid (received) on portfolio swaps 55,838 (75,844)
Noncash items:
Net transfer of loans to other real estate owned 6,433 22,933
==================================================================================================================
See notes to consolidated financial statements (unaudited).
-6-
7
KEYCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited consolidated interim financial statements include the accounts of
KeyCorp and its subsidiaries (the "Corporation"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
In the opinion of management, the unaudited consolidated interim financial
statements reflect all adjustments and disclosures which are necessary for a
fair presentation of the results for the interim periods presented and should
be read in conjunction with the consolidated financial statements and related
notes included in the Corporation's 1994 Annual Report to Shareholders. In
addition, certain amounts previously reported in the financial statements have
been reclassified to conform with the current presentation. The results of
operations for the interim periods are not necessarily indicative of the
results of operations to be expected for the full year.
During the first quarter of 1995, the Corporation adopted Statement of
Financial Accounting Standards ("SFAS") No. 116, "Accounting for Contributions
Received and Contributions Made." This new accounting standard requires, among
other things, that unconditional multi-year commitments to make charitable
contributions be recognized as expense in the year the commitment is made, as
opposed to the period in which the payment takes place. SFAS No. 116 was
adopted by restating all periods presented with the cumulative effect of $8.0
million recorded as an adjustment to January 1, 1993, retained earnings. The
effect of adopting SFAS No. 116 on subsequent periods was not material, and
therefore, the results of operations for those periods were not restated.
In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" (the "Standard"), which is effective for
fiscal years beginning after December 15, 1995. The Standard requires that
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. The Standard does not apply to core deposit or credit card
intangibles. The Standard also provides for disclosures about impairment
losses and long-lived assets to be disposed of. The Corporation expects to
adopt the Standard as of January 1, 1996, and does not expect it to have a
material effect on the Corporation's financial condition or results of
operations.
2. MERGERS, ACQUISITIONS AND DIVESTITURES
COMPLETED TRANSACTIONS
KEYCORP-SOCIETY MERGER
On March 1, 1994, the former KeyCorp, a New York corporation ("old KeyCorp"),
merged into and with Society Corporation, an Ohio corporation ("Society"),
which was the surviving corporation under the name KeyCorp. Under the terms of
the merger agreement, 124,351,183 KeyCorp Common Shares were exchanged for all
of the outstanding shares of old KeyCorp common stock (based on an exchange
ratio of 1.205 shares for each share of old KeyCorp). The outstanding
preferred stock of old KeyCorp was exchanged for 1,280,000 shares of a
comparable, new issue of 10% Cumulative Preferred Stock of KeyCorp. The
merger was accounted for as a pooling of interests and, accordingly, financial
results for prior periods presented have been restated to include the combined
financial results of both companies.
-7-
8
Mergers and acquisitions completed by KeyCorp during 1994 and the six-month
period ended June 30, 1995, along with the related accounting treatment, are as
follows (dollars in millions):
COMMON
ACCOUNTING TREATMENT LOCATION DATE ASSETS SHARES ISSUED CASH PAID
----------------------------------------------------------------------------------------------------------------------------
POOLINGS OF INTERESTS:
The Bank of Greeley (1) Colorado December 1994 $ 60 259,697 ---
Commercial Bancorporation
of Colorado (1) Colorado March 1994 409 2,900,389 ---
KeyCorp/Society (2) New York/Ohio March 1994 See Note (2) 124,351,183 ---
PURCHASES:
Spears, Benzak, Salomon &
Farrell, Inc. New York April 1995 See Note (3) 1,910,000 ---
OMNIBANCORP Colorado February 1995 500 4,043,559 ---
Casco Northern Bank, National
Association Maine February 1995 945 --- $205
BANKVERMONT Corporation Vermont January 1995 661 --- 90
First Citizens Bancorp
of Indiana Indiana December 1994 347 1,960,119 ---
State Home Savings Bank Ohio September 1994 321 --- 44
============================================================================================================================
(1) Financial statements for periods prior to the transaction were not restated
to include the accounts and results of operations of the pooled company
because the transaction was not material to KeyCorp.
(2) See preceding text for more information regarding this transaction.
(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.
KEYCORP MORTGAGE INC.
On March 31, 1995, KeyCorp sold the residential mortgage loan servicing
operations of KeyCorp Mortgage Inc. ("KMI"), an indirect wholly owned
subsidiary of KeyCorp. KMI serviced approximately $28 billion of mortgage
loans. KeyCorp plans to continue to service commercial mortgages, to originate
residential mortgage loans through its banking franchise and to sell the rights
to service residential mortgage loans originated after the KMI sale through a
newly formed subsidiary. A $72.3 million gain was realized on the sale ($41.6
million after tax, $.17 per Common Share) and recorded as an extraordinary
item.
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.
TRANSACTIONS PENDING AS OF JUNE 30, 1995
AUTOFINANCE GROUP, INC.
On March 20, 1995, KeyCorp entered into a definitive agreement to acquire
AutoFinance Group, Inc. ("AFG"), a Chicago-based automobile finance company, in
a tax-free exchange of stock. Under the terms of the agreement, AFG
shareholders will receive KeyCorp Common Shares equal to $16.50 per share,
subject to a maximum of .6 and a minimum of .5 KeyCorp Common Shares, for each
share of AFG. Based upon the market price of KeyCorp Common Shares on June 30,
1995, this would result in the issuance of approximately 10.4 million KeyCorp
Common Shares with a value of approximately $327 million. In addition,
immediately prior to the closing, AFG will complete a spin-off to its
shareholders of 95.01% of its common stock interest in Patlex Corporation, a
wholly owned patent exploitation and enforcement subsidiary. Upon consummation
of the acquisition, AFG will merge into Key Auto Inc., a wholly owned
subsidiary of KeyCorp. The transaction, which is subject to approval by AFG's
shareholders on September 7, and certain regulatory approvals, is expected to
close by late September or early October of this year and will be accounted for
as a purchase. AFG had total assets of $118.7 million as of March 31, 1995.
-8-
9
3. SECURITIES AVAILABLE FOR SALE
Debt securities that the Corporation has the positive intent and ability to
hold to maturity are classified as securities held to maturity and are carried
at amortized cost. Securities held to maturity and equity securities that do
not have readily determinable fair values are presented as investment
securities on the balance sheet. Debt and equity securities that are bought
and principally held for the purpose of selling them in the near term are
classified as trading account assets and reported at fair value, with realized
and unrealized gains and losses included in noninterest income. Debt and equity
securities not classified as either investment securities or trading account
assets are classified as securities available for sale and reported at fair
value, with the unrealized gains and losses, net of deferred income taxes,
excluded from operating results and reported as a component of shareholders'
equity.
During the third quarter of 1994, the Corporation transferred approximately
$1.3 billion of mortgage-backed securities from the securities available for
sale portfolio to the investment securities portfolio, This transfer was made
in response to guidance issued by the FASB with regard to the classification of
"nonhigh-risk" mortgage securities in accordance with SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." The securities were
transferred at their fair value and the unrealized loss (approximately $57.8
million before taxes) is being amortized as a yield adjustment over their
remaining lives.
At June 30, 1995, approximately $1.4 billion of securities were classified as
available for sale and shareholders' equity was reduced by $25.3 million,
representing the net unrealized loss on securities, net of deferred income tax
benefit of $15.0 million.
The amortized cost, unrealized gains and losses, and approximate fair values of
securities available for sale were as follows (in thousands):
JUNE 30, 1995
---------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ------- -------- ----------
U.S. Treasury, agencies and corporations $ 462,276 $ 4,816 $ 119 $ 466,973
States and political subdivisions 28,316 483 2,509 26,290
Mortgage-backed securities 885,272 8,216 9,767 883,721
Other securities 59,204 296 16 59,484
---------- ------- -------- ----------
Total $1,435,068 $13,811 $ 12,411 $1,436,468
========== ======= ======== ==========
December 31, 1994
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ------- -------- ----------
U.S. Treasury, agencies and corporations $1,067,726 $ 1,117 $ 16,384 $1,052,459
States and political subdivisions 28,871 192 3,145 25,918
Mortgage-backed securities 1,334,132 211 105,989 1,228,354
Other securities 223,299 47 9,028 214,318
---------- ------- -------- ----------
Total $2,654,028 $ 1,567 $134,546 $2,521,049
========== ======= ======== ==========
June 30, 1994
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ------- -------- ----------
U.S. Treasury, agencies and corporations $1,421,988 $10,204 $ 10,769 $1,421,423
States and political subdivisions 27,669 212 192 27,689
Mortgage-backed securities 2,829,869 1,413 113,524 2,717,758
Other securities 20,793 151 18,140 2,804
---------- ------- -------- ----------
Total $4,300,319 $11,980 $142,625 $4,169,674
========== ======= ======== ==========
-9-
10
4. INVESTMENT SECURITIES
The amortized cost, unrealized gains and losses, and approximate fair values of
investment securities were as follows (in thousands):
JUNE 30, 1995
------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ----------- ----------- ----------
U.S. Treasury, agencies and corporations $ 551,313 $ 5,892 $ 2,225 $ 554,980
States and political subdivisions 1,427,678 50,093 1,669 1,476,102
Mortgage-backed securities 7,505,203 51,994 81,008 7,476,189
Other securities 434,221 3,483 15,417 422,287
----------- ----------- ----------- ----------
Total $ 9,918,415 $ 111,462 $100,319 $9,929,558
=========== =========== =========== ==========
December 31, 1994
------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- ----------
U.S. Treasury, agencies and corporations $ 532,619 $ 280 $ 33,619 $ 499,280
States and political subdivisions 1,508,534 33,329 6,982 1,534,881
Mortgage-backed securities 7,834,169 10,023 481,426 7,362,766
Other securities 400,316 875 41,086 360,105
----------- ----------- ----------- ----------
Total $10,275,638 $44,507 $563,113 $9,757,032
=========== =========== =========== ==========
June 30, 1994
------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- ----------
U.S. Treasury, agencies and corporations $ 610,008 $ 1,547 $ 24,953 $ 586,602
States and political subdivisions 1,473,641 51,614 3,633 1,521,622
Mortgage-backed securities 6,676,460 32,125 254,395 6,454,190
Other securities 551,432 4,668 10,839 545,261
----------- ----------- ----------- ----------
Total $9,311,541 $89,954 $293,820 $9,107,675
=========== =========== =========== ==========
5. LOANS
Loans are summarized as follows (in thousands):
JUNE 30, December 31, June 30,
1995 1994 1994
----------- ----------- -----------
Commercial, financial and agricultural $11,340,368 $10,190,582 $ 9,776,360
Real estate - construction 1,439,856 1,287,195 1,213,977
Real estate - commercial mortgage 7,228,204 6,774,860 6,349,978
Real estate - residential mortgage 13,522,504 13,567,077 12,701,084
Consumer 9,889,101 10,183,798 9,571,957
Student loans held for sale 2,174,549 1,816,524 1,527,390
Lease financing 2,429,632 2,307,212 1,944,515
Foreign 68,997 97,396 72,398
----------- ----------- -----------
Total $48,093,211 $46,224,644 $43,157,659
=========== =========== ===========
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Changes in the allowance for loan losses are summarized as follows (in
thousands):
Three months ended June 30, Six months ended June 30,
----------------------------- -----------------------------
1995 1994 1995 1994
-------- -------- -------- --------
Balance at beginning of period $867,074 $812,592 $830,298 $802,712
Charge-offs (48,711) (52,673) (91,677) (108,126)
Recoveries 28,751 21,491 54,461 45,629
-------- -------- -------- --------
Net charge-offs (19,960) (31,182) (37,216) (62,497)
Provision for loan losses 20,372 35,027 38,818 71,819
Allowance of acquired companies --- --- 35,061 4,403
Transfer from OREO allowance --- --- 525 ---
-------- -------- -------- --------
Balance at end of period $867,486 $816,437 $867,486 $816,437
======== ======== ======== ========
6. NONPERFORMING ASSETS
Effective January 1, 1995, the Corporation adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan -- Income Recognition and Disclosures." SFAS No. 114
prescribes the methodology under which certain loans are to be measured for
impairment. Generally, a loan is considered impaired when management believes it
is probable that all amounts due will not be collected according to the
contractual terms of the loan agreement. SFAS No. 118 amends SFAS No. 114 by
eliminating certain income recognition provisions and by expanding the
disclosure requirements. Adoption of these standards did not have a material
effect on the Corporation's financial condition or results of operations.
The Corporation measures impairment on all large balance nonaccrual loans
(typically commercial and commercial real estate loans). In most instances,
impairment is measured based on the fair value of the underlying collateral. In
certain other cases, impairment is measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate.
Amounts deemed impaired are either specifically allocated for in the allowance
for loan losses or reflected as a partial charge-off of the loan balance.
Smaller balance homogeneous loans are collectively evaluated for impairment.
Cash payments received on nonaccrual loans (including impaired loans) are
generally applied to principal. However, based on management's assessment of
the ultimate collectibility of the loan, interest income may be recognized on a
cash basis. Interest income recognized in the second quarter of 1995 on
impaired loans was not significant.
In accordance with SFAS No. 114, loans are to be classified in other real estate
owned ("OREO") only when the creditor has actually taken possession of the
collateral. Accordingly, $19.9 million of loans previously classified as
in-substance foreclosures, but for which the Corporation had not taken
possession of the collateral, were reclassified to loans during the first
quarter of 1995. Similarly, any allowance for OREO losses related to these
assets was reclassified to the allowance for loan losses.
At June 30, 1995, the recorded investment in impaired loans was $192.4 million.
Included in this amount is $68.5 million of impaired loans for which the
specifically allocated allowance for loan losses is $26.0 million, and $123.9
million of impaired loans that have been written-down to estimated fair value
and, therefore, do not have a specifically allocated allowance for loan losses.
The average recorded investment in impaired loans for the second quarter of 1995
was $182.9 million.
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Nonperforming assets were as follows (in thousands):
JUNE 30, December 31, June 30,
1995 1994 1994
-------- -------- --------
Impaired loans $192,363 --- ---
Other nonaccrual loans 117,902 $254,499 $307,466
Restructured loans 795 1,550 1,540
-------- -------- --------
Total nonperforming loans 311,060 256,049 309,006
Other real estate owned 61,182 100,265 148,278
Allowance for OREO losses (10,994) (21,258) (30,272)
-------- -------- --------
Other real estate owned, net of allowance 50,188 79,007 118,006
Other nonperforming assets 5,051 4,777 4,841
-------- -------- --------
Total nonperforming assets $366,299 $339,833 $431,853
======== ======== ========
7. LONG-TERM DEBT
The components of long-term debt, presented net of unamortized discount where
appropriate, were as follows (dollars in thousands):
JUNE 30, December 31, June 30,
1995 1994 1994
--------- ---------- ----------
Medium-Term Notes due through 2005 (1) $1,127,896 $ 870,200 $ 490,200
8.125% Subordinated Notes due 2002 198,272 198,148 198,025
8.00 % Subordinated Notes due 2004 125,000 125,000 125,000
8.40 % Subordinated Capital Notes due 1999 75,000 75,000 75,000
8.875% Notes due 1996 74,889 74,829 74,800
11.125% Notes due 1995 49,998 49,992 49,985
8.404% Notes due 1997 through 2001 48,864 48,864 48,864
8.255% Notes due 1996 22,794 22,794 22,794
All other long-term debt 370 374 2,028
---------- ---------- ----------
Total parent company 1,723,083 1,465,201 1,086,696
Medium-Term Bank Notes due through 1997 (2) 1,398,729 1,398,245 398,923
7.85 % Subordinated Notes due 2002 199,853 199,843 199,833
6.75 % Subordinated Notes due 2003 198,948 198,886 198,886
7.25 % Subordinated Notes due 2005 200,000 --- ---
Federal Home Loan Bank Advances 282,691 252,328 182,228
10.00 % Note due 1995 --- 36,735 36,735
Industrial revenue bonds 10,144 10,144 10,869
All other long-term debt 6,151 8,412 9,471
---------- ---------- ----------
Total subsidiaries 2,296,516 2,104,593 1,036,945
---------- ---------- ----------
Total $4,019,599 $3,569,794 $2,123,641
========== ========== ==========
(1) The weighted average rate on the Medium-Term Notes due through 2005 was
7.12%.
(2) The weighted average rate on the Medium-Term Notes due through 1997 was
6.71%.
8. INCOME TAXES
The effective tax rate (provision for income taxes as a percentage of income
before income taxes and extraordinary item) for the 1995 second quarter was
33.7% compared to 33.6% for the second quarter of 1994. For the first six
months of 1995, the effective tax rate was 30.4% compared to 33.7% for the same
period in 1994. The decrease in the year-to-date effective tax rate was
attributable to the recognition during the first quarter of 1995 of one-time tax
benefits of $16.0 million related to acquisitions made in years prior to 1992.
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9. EXTRAORDINARY ITEM
During the first quarter of 1995, the Corporation recorded an extraordinary net
gain of $61.1 million ($35.8 million after tax, $.15 per Common Share),
representing the net effect of a gain of $72.3 million ($41.6 million after
tax, $.17 per Common Share) from the sale of the residential mortgage loan
servicing operations of KMI, an indirect wholly owned subsidiary of KeyCorp,
and a loss of $11.2 million ($5.8 million after tax, $.02 per Common Share) on
the sale of Schaenen Wood & Associates, Inc., an indirect wholly owned asset
management subsidiary of KeyCorp. These transactions are described in greater
detail in Note 2, Mergers, Acquisitions and Divestitures, beginning on page 7
of this report.
10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Corporation, mainly through its affiliate banks, is party to various
financial instruments with off-balance sheet risk. The banks use these
financial instruments in the normal course of business to meet the financing
needs of their customers and to effectively manage their exposure to market
risk. Market risk is the possibility that the Corporation's net interest
income will be adversely affected as a result of changes in interest rates or
other economic factors. Credit risk is the possibility that the Corporation
will incur a loss due to a counterparty's failure to perform its contractual
obligations. The primary financial instruments used include commitments to
extend credit, standby and commercial letters of credit, interest rate swaps,
caps and floors, futures and foreign exchange forward contracts. All of the
interest rate swaps, caps and floors, and foreign exchange forward contracts
held are over-the-counter instruments. These financial instruments may be used
for lending-related, asset and liability management and trading purposes, as
discussed below.
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 cvredit limits, and, when deemed necessary,
securing collateral.
The following is a summary of the contractual amount of each class of
lending-related off-balance sheet financial instrument outstanding wherein the
Corporation's maximum possible accounting loss equals the contractual amount of
the instruments (in thousands):
JUNE 30, December 31, June 30,
1995 1994 1994
---------- ------------ ----------
Loan commitments:
Credit card lines $ 5,783,794 $ 5,482,566 $ 4,498,569
Home equity 3,662,700 3,243,618 2,935,052
Commercial real estate and construction 1,242,008 1,503,707 1,321,881
Other 7,450,091 7,356,564 7,866,447
----------- ----------- -----------
Total loan commitments 18,138,593 17,586,455 16,621,949
Other commitments:
Standby letters of credit 1,042,026 1,003,275 1,125,564
Commercial letters of credit 235,896 205,434 206,236
Loans sold with recourse 39,671 231,048 134,280
----------- ----------- -----------
Total loan and other commitments $19,456,186 $19,026,212 $18,088,029
=========== ============ ===========
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.
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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.
FINANCIAL INSTRUMENTS HELD OR ISSUED FOR ASSET AND LIABILITY MANAGEMENT PURPOSES
The Corporation manages its exposure to market risk, in part, by using
off-balance sheet instruments to modify the existing interest rate risk
characteristics of its assets and liabilities. Primary among the financial
instruments used by both KeyCorp and its affiliate banks are interest rate swap
contracts used to manage interest rate risk. Interest rate swaps used for this
purpose are designated as portfolio swaps. The notional amount of the interest
rate swap contracts represents only an agreed-upon amount on which calculations
of interest payments to be exchanged are based, and is significantly greater
than the amount at risk. Credit risk is measured as the cost of replacing, at
current market rates, contracts in an unrealized gain position. Although the
Corporation is exposed to credit-related losses in the event of nonperformance
by the counterparties, based on management's assessment, as of June 30, 1995,
all counterparties were expected to meet their obligations. In addition, the
Corporation deals exclusively with counterparties with high credit ratings,
enters into bilateral collateral arrangements and arranges master netting
agreements. These agreements include legal rights of setoff that provide for
the net settlement of the subject contracts with the same counterparty in the
event of default. At June 30, 1995, the Corporation had credit exposure of an
aggregate $39.0 million to nine counterparties, with the largest credit
exposure to an individual counterparty amounting to $19.9 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 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 June 30, 1995, the Corporation was party to $1.9 billion and
$2.3 billion of indexed amortizing swaps that used a LIBOR (London Interbank
Offering Rates) index and a CMT (Constant Maturity Treasuries) index,
respectively, for the payment review date measurement. Under basis swap
contracts, interest payments based on different floating indices are exchanged.
Forward-starting swaps are interest rate swaps with contractual terms that
commence at a specified future date.
The following table summarizes the notional amount and the fair value of
portfolio interest rate swaps by type (in millions):
June 30, 1995 December 31, 1994 June 30, 1994
------------------------ -------------------- ---------------------
NOTIONAL FAIR Notional Fair Notional Fair
AMOUNT VALUE Amount Value Amount Value
-------- ------- -------- ------- -------- --------
Receive fixed/pay variable -
indexed amortizing $4,430.8 $(24.7) $5,786.6 $(341.7) $5,200.0 $(220.2)
Receive fixed/pay variable -
conventional 2,716.2 37.0 3,010.2 (199.6) 3,245.7 (122.0)
Pay fixed/receive variable -
conventional 2,486.5 (33.2) 1,456.5 11.5 356.5 4.1
Basis swaps --- --- 200.0 .1 200.0 ---
-------- ----- --------- ------ -------- ------
Total portfolio swaps $9,633.5 $(20.9) $10,453.3 $(529.7) $9,002.2 $(338.1)
======== ===== ========= ===== ======= ======
Based on the weighted average rates in effect at June 30, 1995, the spread on portfolio interest rate swaps, which excludes
the amortization of net deferred swap losses, provided a slightly positive impact on net interest income (since the weighted average
rate received exceeded the weighted average rate paid by 13 basis points).
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The aggregate negative fair value of $(20.9) million at the same date was
derived through the use of discounted cash flow models, which contemplate
interest rates using the applicable forward yield curve, and represents an
estimate of the cost that would be recognized if the portfolio were to be
liquidated at that date. The swaps have an expected average maturity of 4.0
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, principally loans ($5.5 billion), fixed rate
liabilities ($1.6 billion) and variable rate liabilities ($2.5 billion).
Interest from these swaps is recognized on an accrual basis over the lives of
the respective contracts as an adjustment of the interest income or expense of
the asset or liability being managed. Portfolio interest rate swaps reduced
net interest income for the second quarter of 1995 by $3.0 million, and added
$33.6 million to net interest income for the same period in 1994. The impact
in both periods reflected the spread on the swap portfolio as well as the
amortization of deferred gains and losses from terminated swaps. Gains and
losses realized upon the termination of interest rate swaps are deferred and
amortized, generally, using the straight-line method over the projected
remaining life of the related swap contract at its termination. During the
first six months of 1995, swaps with a notional amount of $1.3 billion were
terminated, resulting in net deferred losses of $57.8 million.
The Corporation recognized $38.0 million of swap losses during the first
quarter of 1995 in connection with the sale of the residential mortgage loan
servicing business. These recognized losses, which were included in the
determination of the net gain from the sale of the business, included $15.3
million of the $57.8 million of deferred swap losses referred to above and
$22.7 million of deferred swap losses recorded prior to 1995.
The Corporation's deferred swap gains and (losses) at June 30, 1995, are
summarized as follows (dollars in thousands):
Weighted Average
Remaining
Deferred Amortization
Asset/Liability Managed Gains/(Losses) (Years)
----------------------- -------------- -----------------
Loans $(33,952) .8
Debt 11,763 7.0
Deposits 3,116 .6
-------
Total $(19,073)
=======
The Corporation also uses futures contracts to manage the risk associated with
the potential impact of adverse movements in interest rates. These contracts
are commitments to either purchase or sell designated financial instruments at
a future date for a specified price. At June 30, 1995, the notional amount of
these contracts totaled $853 million and their fair value was not material.
FINANCIAL INSTRUMENTS HELD OR ISSUED FOR TRADING PURPOSES
The Corporation's affiliate banks also use interest rate contracts for dealer
activities, which are generally limited to the banks' current lending
customers. Interest rate swap contracts entered into with customers are
typically limited to conventional swaps, as previously described. The
Corporation offsets the interest rate risk of customer swaps by entering into
offsetting swaps (also included in the customer swap portfolio) with third
parties. The swap position and any offsetting swap with a third party are
recorded at their estimated fair values. Adjustments to fair value for customer
swaps are included in noninterest income. Interest rate cap and floor
agreements provide that one party pays the other when interest rates rise above
a specified level (caps) or fall below a specified level (floors). The risk
from writing interest rate caps and floors is minimized by the banks through
the purchase of offsetting caps and floors. The contracts are recorded at fair
value, with any changes in fair value recognized in noninterest income.
The Corporation also enters into foreign exchange forward contracts to
accommodate the business needs of its customers and for proprietary trading
purposes. Foreign exchange-based forward contracts provide for the delayed
delivery or purchase of foreign currency. The foreign exchange risk associated
with these contracts is mitigated by entering into offsetting foreign exchange
contracts. Adjustments to the fair value of foreign exchange forward contracts
are included in noninterest income.
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16
A summary of the notional amount and the respective fair value of
derivative financial instruments held or issued for trading purposes at June
30, 1995, and on average for the six-month period then ended, is as follows (in
thousands). The positive fair values represent assets to the Corporation and
are recorded in other assets, while the negative fair values represent
liabilities and are recorded in other liabilities.
Six months ended
June 30, 1995 June 30, 1995
---------------------------- ----------------------------------
Notional Fair Average Average
Amount Value Notional Amount Fair Value
-------- ------- --------------- ----------
Interest rate contracts:
Swaps:
Assets $870,269 $17,059 $707,755 $15,747
Liabilities 953,913 (13,502) 662,040 (14,401)
Caps and floors purchased 624,345 2,020 612,358 2,779
Caps and floors written 782,528 (2,173) 766,270 (3,039)
Foreign exchange forward contracts:
Assets 538,240 34,697 601,999 41,940
Liabilities 507,263 (32,316) 612,773 (37,731)
At June 30, 1995, credit exposure from financial instruments held or
issued for trading purposes is limited to the aggregate fair value of each
contract with a positive fair value. The risk of counterparties defaulting on
their obligations is monitored on an ongoing basis. The parent company and its
affiliate banks contract with counterparties of good credit standing and enter
into master netting agreements when possible in an effort to manage credit
risk.
Trading income recognized on interest rate and foreign exchange forward
contracts totaled $3.2 million and $5.8 million, respectively, for the first
six months of 1995 and $1.0 million and $4.4 million, respectively, for the
first six months of 1994.
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INDEPENDENT ACCOUNTANTS' REVIEW REPORT
SHAREHOLDERS AND BOARD OF DIRECTORS
KEYCORP
We have reviewed the unaudited consolidated balance sheets of KeyCorp and
subsidiaries ("KeyCorp") as of June 30, 1995 and 1994, and the related
consolidated statements of income for the three and six-month periods then
ended, and the consolidated statements of changes in shareholders' equity and
cash flow for the six-month periods ended June 30, 1995 and 1994. These
financial statements are the responsibility of KeyCorp's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, which will be
performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of KeyCorp as of December 31, 1994,
and the related consolidated statements of income, changes in shareholders'
equity, and cash flow for the year then ended (not presented herein) and in our
report dated January 18, 1995, except for Note 2, as to which the date is
February 28, 1995, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of December 31, 1994, is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
/s/ Ernst & Young LLP
Cleveland, Ohio
July 20, 1995
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18
KEYCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
This section of the report, including the 1995 first half highlights summarized
below, provides a discussion and analysis of the financial condition and
results of operations of KeyCorp and its subsidiaries (the "Corporation") for
the periods presented. It should be read in conjunction with the consolidated
interim financial statements and notes thereto, presented on pages 3 through 16
of this report.
The Corporation's current strategic planning process was launched in 1994 and
is designed to leverage the capabilities of the franchise by reallocating
resources to businesses with higher earnings potential and by heightening the
focus on certain customer segments. During the first half of 1995, a number of
actions were taken in connection with the implementation of this strategic
planning process. During the first quarter, the Corporation completed the sale
of the residential mortgage loan servicing operations of KeyCorp Mortgage Inc.,
a mortgage banking subsidiary, and entered into an agreement to acquire
AutoFinance Group, Inc., ("AFG") one of the nation's leading automobile finance
companies based in Chicago, Illinois. The acquisition of AFG is expected to
close by late September or early October of this year. On April 5, the
Corporation completed its acquisition of Spears, Benzak, Salomon & Farrell,
Inc., a New York-based investment management firm ("Spears Benzak").
In addition to the above transactions, the Corporation strengthened its retail
franchise with the completion of three bank acquisitions during the first
quarter. The acquisitions included Casco Northern Bank, National Association
located in Portland, Maine; BANKVERMONT Corporation (and its subsidiary, Bank
of Vermont) based in Burlington, Vermont; and OMNIBANCORP (and its five
subsidiary banks) based in Denver, Colorado. The acquisitions were accounted
for as purchases and, accordingly, the results of operations of these companies
have been included from the respective dates of acquisition.
The Corporation's 1995 financial results were also impacted by further actions
taken during the first quarter to reconfigure the balance sheet in order to
reduce exposure to future changes in interest rates. These actions included
the sales of securities as well as other balance sheet reconfiguration
strategies. During the second quarter, a number of additional actions were
taken to enhance shareholder value. KeyCorp repurchased 11.7 million shares
of its common stock, principally in conjunction with the pending acquisition of
AFG. This brings the total number of shares repurchased in 1995 to 18.2
million. The Corporation also initiated its first securitization of indirect
auto loans in the amount of $299 million and arranged to sell approximately
$500 million of residential mortgage loans. These transactions, which involved
lower spread assets, closed in July. Although they did not impact
second quarter earnings, they will contribute to improving loan spreads and
increasing capital flexibility in future periods.
The above items are discussed in greater detail in the remainder of this
discussion and in the related notes to the consolidated interim financial
statements referred to above.
PERFORMANCE OVERVIEW
Figure I presents the primary income and expense components for the first six
months of 1995 and 1994 expressed on a per Common Share basis. The selected
financial data set forth in Figure 2 presents certain information highlighting
the financial performance of the Corporation for the last five quarters and the
year-to-date periods ended June 30, 1995 and 1994. Each of the items referred
to in this performance overview and in Figures 1 and 2 is more fully described
in the following discussion or in the notes to the consolidated interim
financial statements presented on pages 7 through 16 of this report.
Net income for the second quarter of 1995 totaled $199.0 million, or $.83 per
Common Share. This compared with net income of $221.8 million, or $.89 per
Common Share, for the second quarter of 1994. On an annualized basis, the
return on average common equity for the second quarter of 1995 was 16.86%
compared with 19.77% for the same period last
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19
year. The annualized returns on average total assets were 1.19% and 1.43% for
the second quarters of 1995 and 1994, respectively. Primary factors affecting
the comparative earnings were a $13.8 million decrease in taxable-equivalent
net interest income, a $4.5 million decrease in noninterest income and a $29.9
million increase in noninterest expense. These factors were partially offset
by a $14.7 million decrease in the provision for loan losses. The efficiency
ratio, which measures the extent to which recurring revenues are used to pay
operating expenses, was 63.05% for the second quarter of 1995 compared with
64.12% and 58.43% for the first quarter of 1995 and the second quarter of 1994,
respectively.
Net income for the first half of 1995 totaled $408.7 million, or $1.69 per
Common Share, down from $430.4 million, or $1.74 per Common Share, for the same
period last year. On an annualized basis, the return on average common equity
for the first six months of 1995 was 17.55% compared with 19.49% for the first
six months of 1994. The annualized returns on average total assets for the
first six months of 1995 and 1994 were 1.24% and 1.42%, respectively.
Included in 1995 year-to-date results was the effect of several significant
nonrecurring items recorded during the first quarter. An extraordinary net
gain of $61.1 million ($35.8 million after tax, $.15 per Common Share) was
recorded in connection with the sales of certain subsidiaries. This net gain
included a gain of $72.3 million ($41.6 million after tax, $.17 per Common
Share) from the sale of the residential mortgage loan servicing business and a
loss of $11.2 million ($5.8 million after tax, $.02 per Common Share) incurred
in connection with the sale of an asset management subsidiary. Continued
efforts to reconfigure the balance sheet in order to reduce exposure to changes
in interest rates resulted in net losses of $49.3 million ($30.9 million after
tax, $.13 per Common Share) from the sales of securities. In addition, the
Corporation recorded a one-time tax benefit of $16.0 million, or $.07 per
Common Share, which related to acquisitions completed in prior years. In the
aggregate, these nonrecurring items increased 1995 year-to-date earnings by a
net $20.9 million, or $.09 per Common Share.
Excluding the impact of the above items, operating earnings for the first half
of 1995 were $387.8 million, or $1.60 per Common Share, down from $430.4
million, or $1.74 per Common Share, for the first half of 1994. The same
factors which accounted for the change in quarterly earnings relative to the
prior year also contributed to the variance in year-to-date operating earnings.
Affecting the comparative results were a $37.7 million decrease in
taxable-equivalent net interest income, a $10.8 million decrease in noninterest
income and a $47.9 million increase in noninterest expense. These factors were
partially offset by a $33.0 million decrease in the provision for loan losses.
The efficiency ratio was 63.58% for the first half of 1995 compared with 59.27%
for the first six months of 1994.
FIGURE 1. COMPONENTS OF EARNINGS PER COMMON SHARE
Six Months ended June 30, Change
--------------------------- -------------------------
1995 1994 Amount Percent
----------- ----------- ----------- -----------
Interest income $10.70 $8.82 $1.88 21.3 %
Interest expense 5.19 3.28 1.91 58.2
----------- ----------- -----------
Net interest income 5.51 5.54 (.03) (.5)
Provision for loan losses .16 .30 (.14) (46.7)
----------- ----------- -----------
Net interest income after provision for
loan losses 5.35 5.24 .11 2.1
Noninterest income 1.66 1.87 (.21) (11.2)
Noninterest expense 4.75 4.44 .31 7.0
Income before income taxes and ----------- ----------- -----------
extraordinary item 2.26 2.67 (.41) (15.4)
Income taxes .69 .90 (.21) (23.3)
Preferred dividends .03 .03 --- ---
Earnings per Common Share ----------- ----------- -----------
before extraordinary item 1.54 1.74 (.20) (11.5)
Extraordinary net gain from sales of
subsidiaries, net of income taxes .15 --- .15 N/M
----------- ----------- -----------
Earnings per Common Share $1.69 $1.74 $(.05) (2.9)%
=========== =========== ===========
N/M=Not Meaningful
-19-
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FIGURE 2. - SELECTED FINANCIAL DATA
1995 Quarters 1994 Quarters
(dollars in millions, ----------------------------- ------------------------------------
except per share amounts) SECOND First Fourth Third Second
_________________________________________________________________________________________________________________________
FOR THE PERIOD
Interest income $ 1,298.8 $ 1,245.4 $ 1,191.8 $ 1,150.7 $ 1,102.6
Interest expense 632.5 601.6 526.5 471.1 422.3
Net interest income 666.3 643.8 665.3 679.6 680.3
Provision for loan losses 20.3 18.5 26.2 27.2 35.0
Noninterest income 222.9 171.0 205.3 223.3 227.4
Noninterest expense 568.6 560.8 555.6 530.1 538.7
Income before income taxes
and extraordinary item 300.3 235.5 288.8 345.6 334.0
Income before extraordinary item 199.0 173.9 193.8 229.3 221.8
Net income 199.0 209.7 193.8 229.3 221.8
Net income applicable
to Common Shares 195.0 205.7 189.8 225.3 217.8
_________________________________________________________________________________________________________________________
PER COMMON SHARE
Income before extraordinary item $ .83 $ .71 $ .79 $ .92 $ .89
Net income .83 .86 .79 .92 .89
Cash dividends declared .36 .36 .32 .32 .32
Book value at period-end 19.71 19.57 18.88 18.65 18.17
Market price:
High 32.13 29.50 30.88 33.50 33.75
Low 26.00 24.50 23.63 30.13 29.50
Close 31.38 28.25 25.00 30.50 31.88
Weighted average
Common Shares (000) 235,329.3 239,999.2 241,385.2 244,132.1 244,823.2
_________________________________________________________________________________________________________________________
AT PERIOD-END
Loans $ 48,093.2 $ 48,020.8 $ 46,224.7 $ 44,608.8 $ 43,157.6
Earning assets 60,945.7 61,167.1 60,046.5 58,638.1 57,347.0
Total assets 67,481.2 67,709.0 66,801.2 64,503.4 63,359.7
Deposits 48,672.2 48,812.3 48,564.2 47,816.5 47,796.2
Long-term debt 4,019.6 3,725.2 3,569.8 2,177.8 2,123.6
Common shareholders' equity 4,514.4 4,657.5 4,530.4 4,533.9 4,430.7
Total shareholders' equity 4,674.4 4,817.5 4,690.4 4,693.9 4,590.7
_________________________________________________________________________________________________________________________
PERFORMANCE RATIOS
Return on average total assets 1.19% 1.28% 1.19% 1.43% 1.43%
Return on average common equity 16.86 18.26 16.61 19.95 19.77
Return on average total equity 16.63 17.99 16.38 19.60 19.43
Efficiency ratio (1) 63.05 64.12 61.10 57.90 58.43
Overhead ratio (2) 51.10 52.36 48.01 44.48 44.87
Net interest margin 4.49 4.38 4.60 4.79 4.92
_________________________________________________________________________________________________________________________
CAPITAL RATIOS AT PERIOD-END
Equity to assets 6.93% 7.12% 7.03% 7.29% 7.26%
Tangible equity to tangible assets 5.75 6.02 6.19 6.45 6.42
Tier I risk-adjusted capital 7.45 7.96 8.48 8.86 8.77
Total risk-adjusted capital 10.82 11.05 11.62 12.07 12.03
Leverage 5.88 6.24 6.63 6.79 6.76
=========================================================================================================================
Six months ended June 30,
(dollars in millions, ----------------------------
except per share amounts) 1995 1994
_____________________________________________________________________
FOR THE PERIOD
Interest income $ 2,544.2 $ 2,147.6
Interest expense 1,234.1 799.2
Net interest income 1,310.1 1,348.4
Provision for loan losses 38.8 71.8
Noninterest income 393.9 454.0
Noninterest expense 1,129.4 1,081.5
Income before income taxes
and extraordinary item 535.8 649.1
Income before extraordinary item 372.9 430.4
Net income 408.7 430.4
Net income applicable
to Common Shares 400.7 422.4
______________________________________________________________________
PER COMMON SHARE
Income before extraordinary item $ 1.54 $ 1.74
Net income 1.69 1.74
Cash dividends declared .72 .64
Book value at period-end 19.71 18.17
Market price:
High 32.13 33.75
Low 24.50 28.88
Close 31.38 31.88
Weighted average
Common Shares (000) 237,651.3 243,382.6
______________________________________________________________________
AT PERIOD-END
Loans $ 48,093.2 $ 43,157.6
Earning assets 60,945.7 57,347.0
Total assets 67,481.2 63,359.7
Deposits 48,672.2 47,796.2
Long-term debt 4,019.6 2,123.6
Common shareholders' equity 4,514.4 4,430.7
Total shareholders' equity 4,674.4 4,590.7
______________________________________________________________________
PERFORMANCE RATIOS
Return on average total assets 1.24% 1.42%
Return on average common equity 17.55 19.49
Return on average total equity 17.30 19.16
Efficiency ratio (1) 63.58 59.27
Overhead ratio (2) 51.72 46.05
Net interest margin 4.44 4.97
______________________________________________________________________
CAPITAL RATIOS AT PERIOD-END
Equity to assets 6.93% 7.26%
Tangible equity to tangible assets 5.75 6.42
Tier I risk-adjusted capital 7.45 8.77
Total risk-adjusted capital 10.82 12.03
Leverage 5.88 6.76
======================================================================
The comparability of the information presented above is affected by certain mergers, acquisitions and divestitures completed
by KeyCorp in the time periods presented. For further information concerning these transactions, refer to Note 2, Mergers,
Acquisitions and Divestitures, beginning on page 7.
(1) Calculated as noninterest expense divided by taxable-equivalent net interest income plus noninterest income (excluding net
securities transactions).
(2) Calculated as noninterest expense less noninterest income (excluding net securities transactions) divided by
taxable-equivalent net interest income.
-20-
21
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income, which is comprised of interest and loan-related fee income
less interest expense, is the principal source of earnings for KeyCorp's
banking affiliates. Net interest income is affected by a number of factors
including the level, pricing, mix and maturity of earning assets and
interest-bearing liabilities (both on and off-balance sheet), interest rate
fluctuations and asset quality. To facilitate comparisons in the following
discussion, net interest income is presented on a taxable-equivalent basis,
which restates tax-exempt income to an amount that would yield the same
after-tax income had the income been subject to taxation at the Federal
statutory income tax rate.
Various components of the balance sheet and their respective yields and rates
which affect interest income and expense are illustrated in Figure 3. The
information presented in Figure 4 provides a summary of the effect on net
interest income of changes in the Corporation's yields/rates and average
balances for for the quarterly and year-to-date periods from the same periods
in the prior year. A more in-depth discussion of changes in earning assets and
funding sources is presented in the Financial Condition section beginning on
page 30.
For the second quarter of 1995 net interest income was $681.3 million, down
$13.8 million, or 2%, from the same period last year. This decrease resulted
from a lower net interest margin which declined by 43 points to 4.49% and more
than offset the impact of a $4.3 billion, or 8%, increase in average earning
assets. The net interest margin is computed by dividing taxable-equivalent net
interest income on an annualized basis by average earning assets.
The reduction in the net interest margin as compared to the year ago quarter
was attributable to several factors, including the growth in earning assets
(principally new loan originations) at reduced spreads, increased reliance on
market-priced funding alternatives with relatively higher interest rates, and
actions taken by management during the 1994 fourth quarter and the 1995 first
quarter to reduce the Corporation's exposure to changes in interest rates by
reconfiguring the balance sheet. These actions, including the sales of certain
securities, are more fully described in the following Asset and Liability
Management section. After completing the balance sheet reconfiguration, the
net interest margin was stable for the remainder of the first quarter and rose
11 basis points during the second quarter of 1995. The second quarter 1995
improvement over the prior quarter reflected the impact of wider loan speads as
well as some benefits from certain adjustments, such as interest recovered on
nonaccrual loans, recorded during the second quarter.
Average earning assets for the second quarter totaled $60.8 billion, which was
$4.3 billion, or 8%, higher than the second quarter 1994 level. This increase
was primarily due to a higher level of average loan outstandings, which rose
$6.2 billion, or 15%, reflecting the impact of acquisitions as well as
internal loan growth. 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. Average earning assets
comprised 91% of average total assets during both the second quarter of 1995
and the second quarter of 1994.
The Corporation uses portfolio interest rate swaps (as defined in Note 10,
Financial Instruments with Off-Balance Sheet Risk, beginning on page 13) in the
management of its interest rate sensitivity position. The notional amount of
such swaps decreased to $9.6 billion at June 30, 1995, from $10.5 billion at
year-end 1994. For the second quarter of 1995, interest rate swaps reduced
net interest income and the net interest margin by $3.0 million and 2 basis
points, respectively. During the same period in 1994 interest rate swaps
contributed $33.6 million to net interest income and added 24 basis points to
the net interest margin. The impact in both periods reflected the spread on
the swap portfolio as well as the amortization of deferred gains and losses
from terminated swaps. The manner in which interest rate swaps are used in the
Corporation's overall program of asset and liability management is described in
the following Asset and Liability Management section.
-21-
22
FIGURE 3. AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND YIELDS/RATES
SECOND QUARTER 1995 First Quarter 1995
_____________________________________________________________________
AVERAGE YIELD/ Average Yield/
(dollars in millions) BALANCE INTEREST RATE Balance Interest Rate
____________________________________________________________________________________________________________________
ASSETS
Loans (1)(2):
Commercial, financial and agricultural $11,350.2 $ 269.4 9.52% $10,513.9 $ 232.5 8.97%
Real estate 22,518.9 497.1 8.85 22,111.9 477.5 8.76
Consumer 9,886.0 244.2 9.91 9,788.5 236.9 9.81
Student loans held for sale 2,156.4 49.7 9.24 2,120.8 45.8 8.77
Lease financing 2,340.4 39.3 6.71 2,282.3 38.7 6.78
Foreign 53.5 1.0 7.63 70.6 .9 5.31
____________________________________________________________________________________________________________________
Total loans 48,305.4 1,100.7 9.14 46,888.0 1,032.3 8.85
Mortgage loans held for sale 194.5 3.9 8.02 243.0 4.5 7.35
Taxable investment securities 8,578.9 142.9 6.66 8,665.9 144.7 6.68
Tax-exempt investment securities (1) 1,559.2 33.3 8.54 1,565.3 33.2 8.49
____________________________________________________________________________________________________________________
Total investment securities 10,138.1 176.2 6.95 10,231.2 177.9 7.05
Securities available for sale (1) 1,423.5 22.3 6.02 1,623.0 26.6 6.06
Interest-bearing deposits with banks 46.4 .5 4.32 414.2 6.5 6.41
Federal funds sold and securities
purchased under resale agreements 526.5 7.9 6.04 711.9 10.3 5.87
Trading account assets 154.7 2.3 6.08 146.1 2.3 6.35
____________________________________________________________________________________________________________________
Total short-term investments 727.6 10.7 5.94 1,272.2 19.1 6.10
____________________________________________________________________________________________________________________
Total earning assets 60,789.1 1,313.8 8.66 60,257.4 1,260.4 8.47
Allowance for loan losses (869.1) (853.4)
Other assets 7,030.2 7,054.9
____________________________________________________________________________________________________________________
$66,950.2 $66,458.9
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Money market deposit accounts $ 7,057.7 65.8 3.74 $7,144.7 62.4 3.54
Savings deposits 6,594.4 43.7 2.66 6,948.6 46.9 2.74
NOW accounts 5,477.6 28.1 2.06 5,505.2 27.7 2.04
Certificates of deposit ($I00,000 or more) 3,508.1 56.9 6.50 3,387.9 48.7 5.83
Other time deposits 14,947.5 195.3 5.24 13,789.4 179.2 5.27
Deposits in foreign offices 2,520.4 49.5 7.88 3,321.2 48.3 5.90
____________________________________________________________________________________________________________________
Total interest-bearing deposits 40,105.7 439.3 4.39 40,097.0 413.2 4.18
Federal funds purchased and securities
sold under repurchase agreements 5,036.8 72.2 5.75 5,502.6 76.5 5.64
Other short-term borrowings 3,686.4 56.6 6.16 3,298.9 49.8 6.12
Long-term debt (3) 3,874.9 64.4 6.77 3,612.9 62.1 7.01
____________________________________________________________________________________________________________________
Total interest-bearing liabilities 52,703.8 632.5 4.82 52,511.4 601.6 4.65
Noninterest-bearing deposits 8,007.2 7,955.9
Other liabilities 1,441.6 1,263.8
Preferred stock 160.0 160.0
Common shareholders' equity 4,637.6 4,567.8
____________________________________________________________________________________________________________________
$66,950.2 $66,458.9
========= =========
Interest rate spread 3.84 3.82
____________________________________________________________________________________________________________________
Net interest income (TE) and net
interest margin (TE) $ 681.3 4.49% $ 658.8 4.38%
======== ==== ======== ====
Taxable-equivalent adjustment (1) $15.0 $15.0
____________________________________________________________________________________________________________________
(1) Interest income on tax-exempt securities and loans has been adjusted to a fully taxable-equivalent basis using
the statutory Federal income tax rate.
(2) For purposes of these computations, nonaccrual loans are included in the average loan balances outstanding.
(3) Rate calculation excludes ESOP debt.
TE = Taxable Equivalent
-22-
23
Fourth Quarter 1994 Third Quarter 1994 Second Quarter 1994
_______________________________________________________________________________________________________________________________
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance lnterest Rate
_______________________________________________________________________________________________________________________________
$ 9,935.9 $ 219.2 8.75% $10,171.1 $227.9 8.89% $ 9,453.5 $ 213.5 9.06%
21,316.8 448.2 8.34 20,241.9 417.5 8.18 19,657.5 389.1 7.94
9,894.1 236.6 9.49 9,565.7 225.4 9.35 9,533.4 222.9 9.38
1,595.7 31.7 7.89 1,577.4 30.0 7.53 1,526.0 25.0 6.55
2,148.7 36.6 6.80 1,985.7 33.9 6.83 1,851.6 31.1 6.71
78.9 .4 2.10 74.4 1.1 5.98 70.2 1.0 5.86
_______________________________________________________________________________________________________________________________
44,970.1 972.7 8.58 43,616.2 935.8 8.51 42,092.2 882.6 8.41
412.3 8.2 7.91 463.5 9.1 7.87 866.1 15.4 7.13
8,828.6 146.2 6.62 8,184.0 131.7 6.44 7,495.2 128.5 6.86
1,561.5 33.7 8.63 1,433.0 33.1 9.24 1,693.9 34.2 8.09
_______________________________________________________________________________________________________________________________
10,390.1 179.9 6.87 9,617.0 164.8 6.86 9,189.1 162.7 7.08
2,844.0 43.2 5.75 3,890.5 53.9 5.51 4,297.7 55.8 5.14
33.1 .5 6.49 27.5 .3 3.55 41.3 .3 2.89
61.7 .8 4.88 92.8 1.0 4.64 39.5 .5 4.21
97.1 1.5 6.02 15.9 .2 4.66 11.0 .1 4.48
_______________________________________________________________________________________________________________________________
191.9 2.8 5.74 136.2 1.5 4.42 91.8 .9 3.65
_______________________________________________________________________________________________________________________________
58,808.4 1,206.8 8.12 57,723.4 1,165.1 8.01 56,536.9 1,117.4 7.93
(827.1) (822.2) (819.6)
6,632.0 6,537.4 6,441.9
_______________________________________________________________________________________________________________________________
$64,613.3 $63,438.6 $62,159.2
========= ========= =========
$ 7,119.0 56.4 3.15 $ 7,218.3 50.5 2.78 $7,252.3 46.8 2.59
7,262.9 49.9 2.73 7,683.9 52.8 2.73 7,948.6 51.6 2.60
5,511.0 27.6 1.99 5,529.6 27.0 1.94 5,622.9 26.0 1.86
3,164.9 42.8 5.37 3,030.5 39.4 5.16 2,914.4 32.7 4.49
12,846.3 152.2 4.70 12,256.3 137.4 4.45 12,165.4 129.9 4.28
2,972.2 38.3 5.11 3,407.3 38.7 4.51 2,993.7 28.4 3.80
_______________________________________________________________________________________________________________________________
38,876.3 367.2 3.75 39,125.9 345.8 3.51 38,897.3 315.4 3.25
5,857.9 73.9 5.00 6,295.9 70.2 4.43 6,240.0 60.5 3.89
2,850.6 38.1 5.31 2,052.9 24.0 4.63 1,363.0 14.6 4.31
3,001.6 47.3 6.46 2,144.3 31.1 6.01 2,020.0 31.8 6.52
_______________________________________________________________________________________________________________________________
50,586.4 526.5 4.14 49,619.0 471.1 3.77 48,520.3 422.3 3.50
8,238.9 8,083.0 8,055.1
1,095.2 1,094.9 1,006.0
160.0 160.0 160.0
4,532.8 4,481.7 4,417.8
_______________________________________________________________________________________________________________________________
$64,613.3 $63,438.6 $62,159.2
========= ========= =========
3.98 4.24 4.43
_______________________________________________________________________________________________________________________________
$ 680.3 4.60% $ 694.0 4.79% $ 695.1 4.92%
======== ==== ======== ==== ======== ====
$15.0 $14.4 $14.8
_______________________________________________________________________________________________________________________________
-23-
24
FIGURE 4. COMPONENTS OF NET INTEREST INCOME CHANGES
(in millions)
From Three Months Ended June 30, 1994 From Six Months Ended June 30, 1994
To Three Months Ended June 30, 1995 To Six Months Ended June 30, 1995
------------------------------------- --------------------------------------
Average Yield/ Net Average Yield/ Net
Volume Rate Change Volume Rate Change
------ ------ ------ ------- ------- -------
INTEREST INCOME
Loans $137.4 $ 80.7 $218.1 $ 281.1 $140.5 $421.6
Mortgage loans held for sale (13.2) 1.7 (11.5) (29.4) 4.0 (25.4)
Taxable investment securities 18.1 (3.7) 14.4 60.4 (1.9) 58.5
Tax-exempt investment securities (2.7) 1.8 (0.9) (4.2) 1.3 (2.9)
Securities available for sale (43.2) 9.7 (33.5) (101.1) 19.0 (82.1)
Short-term investments 9.0 0.8 9.8 25.2 2.3 27.5
------ ------ ------ ------- ------- -------
Total interest income 105.4 91.0 196.4 232.0 165.2 397.2
INTEREST EXPENSE
Money market deposit accounts (1.3) 20.3 19.0 (1.6) 40.0 38.4
Savings deposits (9.0) 1.1 (7.9) (15.4) 3.9 (11.5)
NOW accounts (0.7) 2.8 2.1 (1.1) 5.5 4.4
Certificates of deposit
($100,000 or more) 7.6 16.6 24.2 14.1 27.5 41.6
Other time deposits 33.1 32.3 65.4 52.2 68.1 120.3
Deposits in foreign offices (5.1) 26.2 21.1 1.5 46.3 47.8
------ ------ ------ ------- ------- -------
Total interest-bearing deposits 24.6 99.3 123.9 49.7 191.3 241.0
Federal funds purchased and
securities sold under
repurchase agreements (13.3) 25.0 11.7 (6.6) 55.8 49.2
Other short-term borrowings 33.5 8.5 42.0 58.8 18.8 77.6
Long-term debt 30.7 1.9 32.6 62.4 4.7 67.1
------ ------ ------ ------- ------- -------
Total interest expense 75.5 134.7 210.2 164.3 270.6 434.9
------ ------ ------ ------- ------- -------
Net interest income $ 29.9 $(43.7) $(13.8) $ 67.7 $(105.4) $ (37.7)
====== ====== ====== ======= ======= =======
The change in interest not due solely to volume or rate has been allocated in proportion to the absolute dollar amounts of the
change in each.
ASSET AND LIABILITY MANAGEMENT
Asset/Liability Management Committee
The Corporation manages its exposure to economic loss from fluctuations in
interest rates through an active program of asset and liability management
pursuant to guidelines established by the Corporation's Asset/Liability
Management Committee ("ALCO"). The ALCO has the responsibility for approving
the asset/liability management policies of the Corporation, initiating changes
in the balance sheet that could result in deviations from the policies,
formulating and implementing strategies to improve balance sheet positioning
and/or earnings, and reviewing the interest rate sensitivity positions of the
Corporation and each of its affiliate banks. The ALCO meets twice monthly to
conduct this review and to approve strategies consistent with its policies.
The primary tool utilized by management to measure and manage interest rate
exposure is a simulation model. Use of the model to perform simulations of
changes in interest rates over one- and two-year time horizons has enabled
management to develop strategies for managing exposure to interest rate risk.
In its simulations, management estimates the impact on net interest income of
pro forma 100 and 200 basis point changes in the overall level of interest
rates. These estimates are based on a large number of assumptions related to
loan and deposit growth, prepayments, interest
-24-
25
rates, and other factors. Management believes that both individually
and in the aggregate these assumptions are reasonable, but the complexity of
the simulation modeling process results in a sophisticated estimate, not an
absolutely precise calculation of exposure. ALCO guidelines provide that a
gradual 200 basis point increase or decrease in short-term rates over the next
twelve-month period should not result in more than an estimated 2% impact on
net interest income from what net interest income would have been if interest
rates did not change. As discussed in the following Recent Management Actions
section, the Corporation is well within these guidelines, largely as a result
of actions taken during the fourth quarter of 1994 and the first quarter of
1995.
Recent Management Actions
During the first quarter of 1995, management completed the
reconfiguration of the Corporation's balance sheet in accordance with plans
initially announced last December. The objective of this reconfiguration was
to significantly reduce the Corporation's exposure to changes in interest
rates. At the time the plans were announced, the Corporation's
liability-sensitive position was moderately in excess of the ALCO guidelines.
Implementation of the balance sheet reconfiguration plans began during
the fourth quarter of 1994 with the sale of $877.7 million of securities with
an aggregate weighted average yield of 5.67%. This was followed by the first
quarter 1995 sale of $1.2 billion of securities with an aggregate weighted
average yield of 6.24%. In addition, over these two quarters the Corporation
executed $2.1 billion of portfolio interest rate swaps that received a variable
rate and paid a fixed rate, and terminated $1.6 billion of portfolio interest
rate swaps that received a fixed rate and paid a variable rate. During the
fourth quarter of 1994 and the first quarter of 1995, the Corporation also
issued fixed-rate debt totaling $245.0 million.
The actions taken during the fourth quarter reduced the Corporation's
estimated liability-sensitive position to within the ALCO guidelines, while the
additional actions taken during the first quarter of 1995 further reduced the
Corporation's liability-sensitive position such that a gradual 200 basis point
increased in interest rates over the next twelve-month period would have an
approximate 1% negative impact on net interest income, according to the
simulation model. While these actions reduced the Corporation's exposure to
changes in short-term interest rates, net interest income and the net interest
margin were negatively impacted due to increased reliance on fixed-rate market
priced funding at higher interest rates.
At the end of the second quarter of 1995 the Corporation initiated its
first securitization of indirect auto loans in the amount of $299 million and
arranged to sell approximately $500 million of residential mortgage loans.
These transactions, which involve lower spread assets, closed in July.
Although they did not impact second quarter earnings, they will
contribute to improving loan spreads and increasing capital flexibility in
future periods.
Interest Rate Swap Contracts
The Corporation's core lending and deposit-gathering businesses tend to
generate significantly more fixed-rate deposits than fixed-rate
interest-earning assets. Left unaddressed, this tendency would place the
Corporation' earnings at risk to declining interest rates as interest-earning
assets would reprice faster than would interest-bearing liabilities. In
addition to the Corporation's securities portfolio, management has utilized
interest rate risk by modifying the repricing or maturity characteristics of
specified on-blance sheet assets and liabilities. Interest rate swaps used for
this purpose are designated as portfolio swaps. The decisions to use portfolio
interest rate swaps versus on-balance sheet securities to manage interest rate
risk have depended on various factors, including funding costs, liquidity, and
capital requirements. As summarized in Figure 5, the Corporation's portfolio
swaps totaled $9.6 billion at June 30, 1995, and consisted principally of
contracts wherein the Corporation receives a fixed rate of interest while
paying a variable rate.
-25-
26
FIGURE 5. INTEREST RATE SWAP PORTFOLIO
(dollars in millions)
JUNE 30, 1995 December 31, 1994
-------------------------------- WEIGHTED AVERAGE ---------------------
NOTIONAL FAIR MATURITY(1) --------------- Notional Fair
AMOUNT VALUE (YEARS) RECEIVE PAY Amount Value
--------- ------- ------- ------- ---- -------- --------
Receive fixed/pay variable -
indexed amortizing $ 4,430.8 $(24.7) 3.8 6.81% 6.12% $5,786.6 $(341.7)
Receive fixed/pay variable -
conventional 2.716.2 37.0 7.0 6.64 6.18 3,010.2 (199.6)
Pay fixed/receive variable -
conventional 2,486.5 (33.2) 1.0 6.22 7.44 1,456.5 11.5
Basis swaps -- -- -- -- - 200.0 0.1
--------- ----- --------- -------
Total portfolio swaps 9,633.5 (20.9) 4.0 6.61 6.48 10,453.3 (529.7)
Customer swaps 1,824.2 3.6 3.6 6.65 6.69 1,248.3 2.0
--------- ----- --------- -------
Total interest rate swaps $11,457.7 $(17.3) 3.9 6.62% 6.51% $11,701.6 $(527.7)
========= ===== ========= =======
(1) Maturity is based upon expected average lives rather than contractual terms.
Conventional interest rate swap contracts involve the receipt of
amounts based on fixed or variable rates in exchange for payments based on
variable or fixed rates, without an exchange of the underlying notional amount.
Under an indexed amortizing swap contract, the notional amount remains constant
for a specified period of time after which, based upon the level of the index at
each payment review date, the swap contract will mature, the notional amount
will amortize, or the swap will continue in effect until its contractual
maturity. Otherwise, the characteristics of these swaps are similar to those of
conventional swap contracts. Under basis swap contracts, interest payments
based on different floating indices are exchanged. At June 30, 1995, the
Corporation was not party to any forward-starting swaps, which are interest rate
swaps with contractual terms that commence at a specified future date.
In addition to portfolio swaps, the Corporation has entered into
interest rate swap contracts to accommodate the needs of its customers,
typically commercial loan customers. The Corporation offsets the interest rate
risk of customer swaps by entering into offsetting swaps with third parties.
These offsetting swaps are also included in the customer swap portfolio.
Adjustments to fair values of customer swaps are included in noninterest
income. The $1.8 billion notional amount of customer swaps presented in Figure
5 includes $829.6 million of interest rate swaps that receive a fixed rate and
pay a variable rate and $988.4 million of interest rate swaps that pay a fixed
rate and receive a variable rate.
The total notional amount of all interest rate swap contracts
outstanding was $11.5 billion at June 30, 1995, $11.7 billion at December 31,
1994, and $10.3 billion at June 30, 1994. The weighted average rates presented
in Figure 5 are those in effect at June 30, 1995. Portfolio interest rate swaps
reduced net interest income and the net interest margin by $3.0 million and 2
basis points, respectively, during the second quarter of 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 swap portfolio. As of
June 30, the spread on portfolio interest rate swaps, which excludes the
amortization of net deferred swap losses, provided a slightly positive impact on
net interest income (since the weighted average rate received exceeded the
weighted average rate paid by 13 basis points). The portfolio had an aggregate
negative fair value of $(20.9) million at the same date. The aggregate fair
value was estimated through the use of discounted cash flow models which
contemplate interest rates using the applicable forward yield curve. The
estimated fair value of the Corporation's total interest rate swap portfolio
improved substantially during the first half of 1995 from a negative fair value
of $(527.7) million at December 31, 1994. The improvement in fair value over the
past six months reflected the financial markets' expectations for a decline in
future interest rates. In addition, since the end of last year, swaps with an
aggregate notional amount of $1.3 billion were terminated, resulting in net
deferred losses of $57.8 million. Such losses are amortized, generally, over
the projected remaining life of the related swap contract at its termination.
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A summary of the Corporation's deferred swap gains and losses at June 30, 1995,
is presented in Note 10, Financial Instruments with Off-Balance Sheet Risk,
beginning on page 13 of this report. Each swap was terminated in response to a
unique set of circumstances and for various reasons; however, the decision to
terminate a swap contract is strategically integrated with asset and liability
management and other appropriate processes. These terminations as well as other
portfolio swap activity for the first half of 1995 are summarized in Figure 6.
FIGURE 6. PORTFOLIO SWAP ACTIVITY FOR THE SIX MONTHS ENDED JUNE 30, 1995
(in millions)
Receive Fixed
----------------------------- Total
Indexed Pay Fixed- Basis Portfolio
Amortizing Conventional Conventional Swaps Swaps
---------- ------------ ------------ ------ ---------
Balance at beginning of year $5,786.6 $3,010.2 $1,456.5 $200.0 $10,453.3
Additions --- 200.0 1,030.0 --- 1,230.0
Maturities --- 494.0 --- 200.0 694.0
Terminations 1,300.0 --- --- --- 1,300.0
Amortization 55.8 --- --- --- 55.8
-------- -------- -------- ------ --------
Balance at end of period $4,430.8 $2,716.2 $2,486.5 --- $9,633.5
======== ======== ======== ====== ========
A summary of the notional and fair values of portfolio swaps by interest rate
management strategy at June 30, 1995, is presented in Figure 7. In effect, the
fair value at any given date represents the estimated net cost which would be
recognized if the portfolio were to be liquidated at that date. However,
because the portfolio interest rate swaps are used to alter the repricing or
maturity characteristics of specific assets and liabilities, the net unrealized
gains and losses related to the swaps are not recognized in earnings. Rather,
interest from these swaps is recognized on an accrual basis as an adjustment of
the interest income or expense of the asset or liability being managed.
FIGURE 7. PORTFOLIO SWAPS BY INTEREST RATE MANAGEMENT STRATEGY
(in millions)
JUNE 30, 1995 December 31, 1994 June 30, 1994
-------------------- ---------------------- ---------------------
NOTIONAL FAIR Notional Fair Notional Fair
AMOUNT VALUE Amount Value Amount Value
-------- ------ --------- ------- -------- -------
Convert variable rate loans to fixed $5,530.8 $(29.9) $ 7,146.6 $(470.6) $6,510.0 $(309.6)
Convert fixed rate liabilities to variable 1,616.2 42.2 1,650.2 (70.7) 1,560.7 (28.7)
Convert variable rate liabilities to fixed 2,486.5 (33.2) 1,456.5 11.5 356.5 4.1
Other --- --- 200.0 0.1 575.0 (3.9)
-------- ------ --------- ------- -------- -------
Total portfolio swaps $9,633.5 $(20.9) $10,453.3 $(529.7) $9,002.2 $(338.1)
======== ====== ========= ======= ======== =======
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.
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At June 30, 1995, the Corporation had 19 different counterparties to portfolio
swaps and swaps entered into to offset the risk of customer swaps. Of these
counterparties, the Corporation had an aggregate credit exposure of $39.0
million to only nine, with the largest credit exposure to an individual
counterparty amounting to $19.9 million. The expected average maturities of
the portfolio swaps at June 30, 1995, are summarized in Figure 8.
FIGURE 8. EXPECTED AVERAGE MATURITIES OF PORTFOLIO SWAPS AT JUNE 30, 1995
(in millions)
Receive Fixed
---------------------------------- Total
Indexed Pay Fixed- Portfolio
Amortizing Conventional Conventional Swaps
---------- ------------ ------------ ---------
Due in one year or less $ 314.1 $ 50.0 $1,250.0 $1,614.1
Due after one through five years 3,918.6 591.2 1,236.5 5,746.3
Due after five through ten years 198.1 2,075.0 --- 2,273.1
-------- -------- -------- --------
Total portfolio swaps $4,430.8 $2,716.2 $2,486.5 $9,633.5
======== ======== ======== ========
NONINTEREST INCOME
As shown in Figure 9, noninterest income totaled $222.9 million for the second
quarter of 1995, down $4.5 million, or 2%, from the same period last year.
Primary categories contributing to the decline in noninterest income were
mortgage banking income and special asset management fees, which decreased by
$15.1 million and $4.9 million, respectively. The decrease in mortgage banking
income resulted from the March 1995, sale of the residential mortgage loan
servicing business, while the reduction in special asset management fees
reflected the decrease in the level of activity associated with loan collection
and asset disposition work performed under contracts with the Federal Deposit
Insurance Corporation. All of these contracts will have expired by the end of
the third quarter of this year. The decreases referred to above were partially
offset by a $3.9 million increase in trust and asset management income and a
$1.7 million increase in service charges on deposit accounts. The increase in
trust and asset management income was due, in large part, to the April 5,
acquisition of Spears Benzak, which is more fully disclosed in Note 2, Mergers,
Acquisitions and Divestitures, beginning on page 7 of this report. In addition,
miscellaneous income rose by $10.2 million, as a result of increases in various
categories of operating income. The completion of seven acquisitions, including
Spears Benzak, since March 1994, had a positive overall impact on noninterest
income relative to the second quarter of last year.
For the first six months of 1995, noninterest income totaled $393.9 million,
down $60.1 million, or 13%, from the first half of last year. Included in 1995
results were net securities losses of $49.3 million recorded in the first
quarter in connection with efforts to reconfigure the balance sheet in order to
reduce interest rate risk. As shown in Figure 9, other significant
year-to-date declines from the prior year occurred in mortgage banking income,
and insurance and brokerage income, which decreased by $22.2 million and $4.1
million, respectively. The reduction in mortgage banking income resulted from
the sale of the mortgage loan servicing business referred to above. Insurance
and brokerage income was down primarily due to lower commissions from the sales
of various types of insurance and lower brokerage commissions from the sales of
mutual funds. These decreases were partially offset by a $5.1 million increase
in service charges on deposit accounts, reflecting the repricing of fees by
certain affiliate banks, improved collections experience and a higher deposit
base. In addition, miscellaneous income rose by $18.1 million due to higher
gains from student loan sales and increases in a number of other categories of
operating income. Eight acquisitions completed since February 1994, also had a
positive impact on noninterest income in comparison with the 1994 year-to-date
period.
During the third quarter of 1994, certain fees generated by the mortgage
banking business were reclassified from other noninterest income to mortgage
banking income. This reclassification was also made to prior period amounts to
conform to the current period presentation. The amount of the fees
reclassified totaled $3.1 million for the second quarter of 1994 and $8.4
million for the six-month period ended June 30, 1994. Total noninterest
income, as previously reported, did not change.
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FIGURE 9. NONINTEREST INCOME
(dollars in millions)
Three months ended June 30, Change Six months ended June 30, Change
--------------------------- ------------------ ------------------------- ------------------
1995 1994 Amount Percent 1995 1994 Amount Percent
------ ------ ------ ------- ------ ------ ------ -------
Service charges on deposit accounts $70.1 $68.4 $1.7 2.5 % $135.8 $130.7 $5.1 3.9 %
Trust and asset management income 59.5 55.6 3.9 7.0 112.2 112.6 (.4) (.4)
Credit card fees 20.6 18.9 1.7 9.0 37.3 35.6 1.7 4.8
Insurance and brokerage income 14.6 15.4 (.8) (5.2) 27.3 31.4 (4.1) (13.1)
Mortgage banking income 7.5 22.6 (15.1) (66.8) 25.2 47.4 (22.2) (46.8)
Net securities gains (losses) 2.5 .6 1.9 N/M (42.4) 7.0 (49.4) N/M
Other income:
International fees 4.3 3.5 .7 19.4 8.9 8.6 .3 3.5
Special asset management fees 1.9 6.8 (4.9) (72.1) 4.6 9.0 (4.4) (48.9)
Venture capital gains 1.2 5.0 (3.8) (76.0) 4.6 9.4 (4.8) (51.1)
Miscellaneous 40.7 30.6 10.2 33.4 80.4 62.3 18.1 29.1
------ ----- ---- ----- ------ ------
Total other income 48.1 45.9 2.2 4.8 98.5 89.3 9.2 10.3
------ ----- ---- ----- ------ ------
Total noninterest income $222.9 $227.4 $(4.5) (2.0)% $393.9 $454.0 $(60.1) (13.2)%
====== ====== ==== ====== ====== ======
N/M = Not Meaningful
NONINTEREST EXPENSE
As shown in Figure 10, noninterest expense for the second quarter of 1995
totaled $568.6 million, up $29.9 million, or 6%, from the second quarter of
1994. This increase reflected the impact of eight acquisitions completed since
February 1994, and approximately $7 million of additional expenses recorded
during the second quarter of 1995 in connection with the implementation of
several strategic initiatives. Partially offsetting these factors was the
overall reduction in costs (primarily personnel) resulting from the March 1995,
sale of the mortgage loan servicing business. Personnel expense, the largest
category of noninterest expense, increased $6.3 million, due in large part to
the impact of the acquisitions and the resulting increase in the number of
full-time equivalent employees. The $5.8 million increase in the amortization
of intangibles was also related to the acquisitions, while the $6.3 million
growth in professional fees included most of the $7 million of incremental
costs incurred in connection with the strategic initiatives. Miscellaneous
expense rose $14.1 million, reflecting the impact of acquisitions as well as
higher loan servicing fees due to the sale of the mortgage loan servicing
business. The above increases were partially offset by decreases in OREO
expense and net occupancy expense of $3.8 million and $1.3 million,
respectively. The decline in net occupancy expense was primarily due to the
sale of the mortgage loan servicing business.
Noninterest expense totaled $1.1 billion for the first six months of 1995, up
$47.9 million, or 4%, from the comparable 1994 period. Increases in personnel
expense ($15.7 million), amortization of intangibles ($9.8 million),
professional fees ($6.4 million), and miscellaneous expense ($16.8 million)
were partially offset by decreases in OREO expense and net occupancy expense of
$2.9 million and $2.6 million, respectively. The same factors which
contributed to the variance in quarterly results relative to the prior year
also accounted for the year-to-date variances summarized above.
The efficiency ratio, which provides a measure of the extent to which recurring
revenues are used to pay operating expenses, was 63.05% for the second quarter
compared with 64.12% and 58.43% for the first quarter of 1995 and the second
quarter of 1994, respectively. The increase in the efficiency ratio relative
to the prior year period reflected the reduction in revenues as well as the
increase in noninterest expense.
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FIGURE 10. NONINTEREST EXPENSE
(dollars in millions)
Three months ended June 30, Change Six months ended June 30, Change
--------------------------- ------------------ ------------------------- -----------------
1995 1994 Amount Percent 1995 1994 Amount Percent
------ ------ ------ ------- ------ -------- ------ -------
C>
Personnel $270.6 $264.3 $ 6.3 2.4% $ 550.5 $ 534.8 $15.7 2.9%
Net occupancy 51.9 53.2 (1.3) (2.4) 106.1 108.7 (2.6) (2.4)
Equipment 39.2 39.6 (.4) (1.0) 79.1 79.5 (.4) (.5)
FDIC insurance assessments 25.9 24.8 1.1 4.4 51.4 48.8 2.6 5.3
Amortization of intangibles 19.6 13.8 5.8 42.0 36.1 26.3 9.8 37.3
Professional fees 17.8 11.5 6.3 54.8 30.4 24.0 6.4 26.7
Other expense:
Marketing 17.2 15.4 1.8 11.7 33.2 30.7 2.5 8.1
OREO expense, net (1) (1.4) 2.4 (3.8) N/M .8 3.7 (2.9) (78.4)
Miscellaneous 127.8 113.7 14.1 12.4 241.8 225.0 16.8 7.5
------ ------ ----- --------- -------- -----
Total other expense 143.6 131.5 12.1 9.2 275.8 259.4 16.4 6.3
------ ------ ----- --------- -------- -----
Total noninterest expense $568.6 $538.7 $29.9 5.6% $1,129.4 $1,081.5 $47.9 4.4%
====== ====== ===== ========= ======== =====
Full-time equivalent employees 29,233 29,810 29,233 29,810
Efficiency ratio (2) 63.05% 58.43% 63.58% 59.27%
Overhead ratio (3) 51.10 44.87 51.72 46.05
(1) OREO expense is net of income of $1.2 million and $1.1 million for the second quarter of 1995 and 1994 respectively, and
$2.4 million and $2.0 million for the 1995 and 1994 year-to-date periods, respectively.
(2) Calculated as noninterest expense divided by taxable-equivalent net interest income plus noninterest income (excluding net
securities transactions).
(3) Calculated as noninterest expense less noninterest income (excluding net securities transactions) divided by
taxable-equivalent net interest income.
N/M = Not Meaningful
INCOME TAXES
The provision for income taxes was $101.3 million for the three-month period
ended June 30, 1995, as compared to $112.3 million for the same period in 1994.
The effective tax rate (provision for income taxes as a percentage of income
before income taxes and extraordinary item) for the 1995 second quarter was
33.7% compared to 33.6% for the second quarter of 1994. For the first six
months of 1995, the provision for income taxes was $162.9 million compared with
$218.7 million for the first half of 1994. The effective tax rate in each of
these periods was 30.4% and 33.7%, respectively. This decrease in the
year-to-date effective tax rate was attributable to the recognition during the
first quarter of 1995 of one-time tax benefits totaling $16.0 million related
to acquisitions made in years prior to 1992.
FINANCIAL CONDITION
LOANS
At June 30, 1995, total loans outstanding were $48.1 billion, compared to $46.2
billion at December 31, 1994, and $43.2 billion at June 30, 1994. The
composition of the loan portfolio by loan type, as of each of these respective
dates, is presented in Note 5, Loans, beginning on page 10 of this report. The
$1.9 billion growth from the December 31, 1994, level was the result of
increases of $1.1 billion in commercial loans, $561.4 million in real estate
loans (moderated by a $44.6 million decrease in residential mortgages), $358.0
million in student loans held for sale and $122.4 million in lease financing.
The decrease in residential mortgage loans was the result of a transfer of $500
million of seasoned 15 and 30 year residential mortgages to the held for sale
portfolio. Growth in the above categories was partially offset by a $294.7
million decrease in consumer loans. As shown in Figure 11, loan growth,
excluding the impact of acquisitions and sales, was achieved principally in the
Northeast and Great Lakes regions. The acquired loan growth resulted from the
acquisitions of OMNIBANCORP in the Rocky Mountain Region and Casco Northern
Bank, National Association and BANKVERMONT Corporation in the Northeast Region.
Additional detail pertaining to these acquisitions is presented in Note 2,
Mergers, Acquisitions and Divestitures, beginning on page 7 of this report.
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FIGURE 11. PERIOD-END LOAN GROWTH BY REGION FOR THE SIX MONTHS ENDED JUNE 30, 1995
(dollars in millions)
December 31, Other June 30, Percent
1994 Acquired Sold (1) Activity 1995 Change
--------- -------- ------- -------- --------- ------
Northeast Region $12,621.6 $1,162.2 $ 10.5 $ 343.0 $14,116.3 11.8 %
Great Lakes Region 20,909.0 --- 771.5 750.3 20,887.8 (.1)
Rocky Mountain Region 3,317.3 215.3 3.9 197.1 3,725.8 12.3
Northwest Region 9,270.2 --- .2 19.9 9,289.9 .2
Financial Services 106.6 --- --- (33.2) 73.4 (31.1)
--------- -------- ------ -------- --------- ------
Total $46,224.7 $1,377.5 $786.1 $1,277.1 $48,093.2 4.0 %
========= ======== ====== ======== ========= ======
(1) Includes mortgage loans transferred to the held for sale portfolio.
SECURITIES
At June 30, 1995, the securities portfolio totaled $11.3 billion, consisting of
$1.4 billion of securities available for sale and $9.9 billion of investment
securities. This compares to a total portfolio of $12.8 billion, comprised of
$2.5 billion of securities available for sale and $10.3 billion of investment
securities, at December 31, 1994. The reduction in the overall portfolio since
year end 1994 reflects the first quarter 1995 sale of $1.2 billion of securities
with an aggregate weighted-average yield of 6.24%. The sale was part of the
balance sheet reconfiguration which is more fully discussed in the Asset and
Liability Management section beginning on page 24. At June 30, 1995,
shareholders' equity was reduced by $25.3 million, representing the net
unrealized loss on securities, net of deferred income taxes. Certain information
pertaining to the composition, yields and maturities of the securities available
for sale and investment securities portfolios is presented in Figures 12 and 13,
respectively.
FIGURE 12. SECURITIES AVAILABLE FOR SALE AT JUNE 30, 1995
(dollars in millions)
U.S. Treasury, States and Mortgage- Weighted
Agencies and Political Backed Other Average
Corporations Subdivisions Securities(1) Securities Total Yield(2)
-------------- ------------ ------------- ---------- ---------- ----------
Maturity:
One year or less $245.7 $ 3.2 $ .5 $ 9.3 $ 258.7 6.38%
After one through five years 211.0 9.9 32.8 28.6 282.3 7.09
After five through ten years 5.8 9.4 849.9 16.6 881.7 6.44
After ten years 4.5 3.8 .5 5.0 13.8 7.68
-------- -------- -------- -------- --------
Fair value $467.0 $26.3 $883.7 $59.5 $1,436.5 6.53%
======== ======== ======== ======== ========
Amortized cost $462.3 $28.3 $885.3 $59.2 $1,435.1
Weighted average yield 6.76% 8.02% 6.46% 4.64% 6.53%
Weighted average maturity 1.5 years 6.2 years 7.6 years 8.1 years 6.2 years
(1) Maturity is based upon expected average lives rather than contractual terms.
(2) Weighted average yields are calculated on the basis of amortized cost. Such yields have been adjusted to a taxable-
equivalent basis using the statutory Federal income tax rate of 35%.
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32
FIGURE 13. INVESTMENT SECURITIES AT JUNE 30, 1995
(dollars in millions)
U.S. Treasury, States and Mortgage- Weighted
Agencies and Political Backed Other Average
Corporations Subdivisions Securities (1) Securities Total Yield (2)
------------- ------------ -------------- ---------- --------- ----------
Maturity:
One year or less $ 50.1 $ 570.1 $ 326.8 $142.5 $1,089.5 6.98%
After one through five years 203.3 540.9 3,891.3 245.5 4,881.0 6.74
After five through ten years 4.1 247.0 1,442.1 43.9 1,737.1 8.12
After ten years 293.8 69.7 1,845.0 2.3 2,210.8 7.15
---------- ----------- ------------ ---------- ---------
Amortized cost $551.3 $1,427.7 $7,505.2 $434.2 $9,918.4 7.11%
========== =========== ============ ========== =========
Fair value $555.0 $1,476.1 $7,476.2 $422.3 $9,929.6
Weighted average yield 6.86% 8.66% 6.77% 7.58% 7.10%
Weighted average maturity 15.0 years 3.1 years 5.8 years 2.3 years 5.7 years
(1) Maturity is based upon expected average lives rather than contractual
terms.
(2) Weighted average yields are calculated on the basis of amortized cost. Such
yields have been adjusted to a taxable-equivalent basis using the
statutory Federal income tax rate of 35%.
ASSET QUALITY
The Corporation's Credit Risk Review Group evaluates and monitors the level of
risk in the Corporation's loan-related assets, and formulates underwriting
standards and guidelines for active line management. Geographic
diversification throughout the Corporation is a significant factor in managing
credit risk. In addition, the Credit Risk Review Group is responsible for
reviewing the adequacy of the allowance for loan losses ("Allowance"). The
Corporation's Credit Policy/Risk Management Group reviews corporate assets
other than loans, leases and other real estate owned ("OREO") to evaluate the
credit quality and risk inherent in such assets. This Group is also
responsible for commercial and consumer credit policy development,
concentration management and credit systems development.
Methodologies are designed to provide adequate coverage for possible loan
losses by the Allowance. The methodology applied at KeyCorp focuses on a
combination of allowance allocations directly attributable to specific
potential problem credits and general allocations based on historical losses on
a portfolio basis. In addition, indirect risk in the form of general economic
conditions, portfolio diversification and off-balance sheet risk are taken into
consideration. Management continues to target and maintain an Allowance equal
to the allocated requirement plus an unallocated portion, as appropriate.
Management believes this is an appropriate posture in light of current and
expected economic conditions and trends, the geographic and industry mix of the
loan portfolio and similar risk-related matters.
As shown in Figure 14, net loans charged off for the quarterly and year-to-date
periods were under the prior year level by $11.3 million, or 36%, and $25.3
million, or 40%, respectively. This improvement came from the commercial,
financial and agricultural, real estate construction, real estate mortgage and
lease financing portfolios, partially offset by higher net charge-offs in the
consumer loan portfolio. As a result of the substantial decline in the level of
net loans charged off, the second quarter provision for loan losses was $20.3
million, down $14.7 million, or 42%, from the year-ago quarter. The
year-to-date provision was $38.8 million, down $33.0 million, or 46%, from the
comparable 1994 period. At June 30, 1995, the Allowance as a percentage of
loans outstanding was 1.80%, equal to that at December 31, 1994, but down from
1.89% at June 30, 1994. Although this percentage is not a primary factor used
by management in determining the adequacy of the Allowance, it has general
short to medium-term relevance. There have been no significant changes in the
allocation of the Allowance since year end.
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FIGURE 14. SUMMARY OF LOAN LOSS EXPERIENCE
(dollars in millions)
Three months ended June 30, Six months ended June 30,
--------------------------- --------------------------
1995 1994 1995 1994
--------- --------- --------- ---------
Average loans outstanding during the period $48,305.4 $42,092.2 $47,600.0 $41,172.3
Allowance for loan losses at beginning of period 867.1 812.6 830.3 802.7
Loans charged off:
Commercial, financial and agricultural 11.7 15.8 20.0 33.4
Real estate-construction --- 2.1 1.1 6.5
Real estate-mortgage 7.5 8.1 13.9 17.5
Consumer 28.7 25.1 55.2 48.9
Lease financing .8 1.6 1.5 1.8
--------- --------- --------- ---------
48.7 52.7 91.7 108.1
Recoveries:
Commercial, financial and agricultural 15.2 8.0 27.0 20.7
Real estate-construction .4 .1 .7 .3
Real estate-mortgage 3.5 2.7 6.8 4.2
Consumer 9.2 9.5 19.0 19.0
Lease financing .5 1.2 1.0 1.4
--------- --------- --------- ---------
28.8 21.5 54.5 45.6
--------- --------- --------- ---------
Net loans charged off (19.9) (31.2) (37.2) (62.5)
Provision for loan losses 20.3 35.0 38.8 71.8
Allowance of acquired companies --- --- 35.1 4.4
Transfer from OREO allowance --- --- .5 ---
--------- --------- --------- ---------
Allowance for loan losses at end of period $867.5 $816.4 $867.5 $816.4
========= ========= ========= =========
Net loan charge-offs to average loans .17% .30% .16% .30%
Allowance for loan losses to period-end loans 1.80 1.89 1.80 1.89
Allowance for loan losses to nonperforming loans 278.88 264.21 278.88 264.21
The composition of nonperforming assets is shown in Figure 15. These assets
totaled $366.3 million at June 30, 1995, and represented .76% of loans, OREO and
other nonperforming assets compared with $339.8 million, or .73%, atyear-end
1994 and $431.9 million, or 1.00%, at June 30, 1994.
Effective January 1, 1995, the Corporation adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan -- Income Recognition and Disclosures." SFAS No. 114
prescribes the methodology under which certain loans are to be measured for
impairment and provides that loans are to be classified in OREO only when the
creditor has actually taken possession of the collateral. Generally, a loan is
considered impaired when management believes it is probable that all amounts due
will not be collected according to the contractual terms of the loan agreement.
SFAS No. 118 amends SFAS No. 114 by eliminating certain income recognition
provisions and by expanding the 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 11 of this report.
Nonperforming assets increased $26.5 million, or 8%, from the end of the prior
year as a result of a $55.1 million, or 22%, increase in nonperforming loans,
offset in part by a $39.2 million, or 39%, decrease in OREO. The increase in
nonperforming loans resulted from acquisitions ($20.2 million), the addition of
one large commercial credit ($29.1 million), and a transfer of $19.9 million
from OREO, related to the adoption of SFAS No. 114. The decrease in OREO
resulted from the SFAS No. 114 transfer and other activity aggregating $19.3
million. On a regional basis, as illustrated in Figure 17, the ratio of
nonperforming assets to total loans plus OREO and other nonperforming assets
increased in the Northeast and Rocky Mountain Regions, as a result of
acquisitions. The ratio in the Great Lakes Region did not change and the ratios
for both the Northwest Region and Financial Services improved from the end of
the prior year. The higher ratio in the Financial Services sector reflected the
disproportionately higher level of nonperforming assets in certain nonbank
affiliates, although nonperforming assets in these companies totaled only
$4.3 million at June 30, 1995.
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FIGURE 15. SUMMARY OF NONPERFORMING ASSETS AND PAST DUE LOANS
(dollars in millions)
JUNE 30, December 31, June 30,
1995 1994 1994
----------- ------------ -----------
Commercial, financial and agricultural $123.8 $92.3 $122.9
Real estate - construction 12.3 22.0 26.6
Real estate - commercial mortgage 99.1 82.2 99.5
Real estate - residential mortgage 55.7 44.7 42.0
Consumer 17.1 11.8 15.5
Lease financing 2.3 1.5 1.0
----------- ------------ -----------
Total nonaccrual loans 310.3 254.5 307.5
Restructured loans .8 1.5 1.5
----------- ------------ -----------
Total nonperforming loans 311.1 256.0 309.0
Other real estate owned 61.1 100.3 148.3
Allowance for OREO losses (11.0) (21.3) (30.3)
----------- ------------ -----------
Other real estate owned, net of allowance 50.1 79.0 118.0
Other nonperforming assets 5.1 4.8 4.9
----------- ------------ -----------
Total nonperforming assets $366.3 $339.8 $431.9
=========== ============ ===========
Accruing loans past due 90 days or more $66.5 $50.2 $73.8
Nonperforming loans to period-end loans .65% .55% .72%
Nonperforming assets to period-end loans plus other
real estate owned and other nonperforming assets .76 .73 1.00
FIGURE 16. SUMMARY OF CHANGES IN NONACCRUAL LOANS
(in millions)
Three months ended June 30, Six months ended June 30,
-------------------------- ----------------------------
1995 1994 1995 1994
------ ------- ------- -------
Balance at beginning of period $302.8 $315.5 $254.5 $329.8
Loans placed on nonaccrual 100.9 63.6 161.6 125.2
Charge-offs (1) (18.5) (27.3) (32.4) (59.9)
Payments (51.5) (25.1) (70.1) (54.5)
Transfers to OREO (5.6) (1.5) (11.4) (6.8)
Loans returned to accrual (17.8) (17.7) (32.0) (28.1)
Acquisitions --- --- 20.2 1.8
Transfers from OREO (2) --- --- 19.9 ---
------ ------- ------- -------
Balance at end of period $310.3 $307.5 $310.3 $307.5
====== ======= ======= =======
(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.
FIGURE 17. NONPERFORMING LOANS AND ASSETS BY REGION
Nonperforming Assets to Period-end Loans Plus
Nonperforming Loans to Period-end Loans OREO and Other NPA
--------------------------------------------- -----------------------------------------------
JUNE 30, December 31, June 30, JUNE 30, December 31, June 30,
1995 1994 1994 1995 1994 1994
------------ ------------ ------------ ------------ ------------ ------------
Northeast Region .94% .74% .90% 1.14% 1.09% 1.43%
Great Lakes Region .51 .47 .74 .57 .57 .93
Rocky Mountain Region .80 .58 .37 .92 .66 .54
Northwest Region .45 .47 .54 .57 .63 .76
Financial Services 1.42 1.40 .54 5.66 10.19 9.68
------------ ------------ ------------ ------------ ------------ ------------
Total .65% .55% .72% .76% .73% 1.00%
============ ============ ============ ============ ============ ============
-34-
35
FIGURE 18. PERCENTAGE OF NONPERFORMING LOANS TO PERIOD-END LOANS BY LOAN TYPE
AT JUNE 30, 1995
Commercial, Real Estate- Real Estate-
Financial and Real Estate- Commercial Residential
Agricultural Construction Mortgage Mortgage Consumer Total
------------- -------------- ------------- ------------- ---------- --------
Northeast Region 1.32% 2.55% 2.06% .57% .19% .94%
Great Lakes Region .75 .88 1.16 .30 .08 .51
Rocky Mountain Region 1.65 .08 .93 .15 .24 .80
Northwest Region .46 .21 .86 .42 .16 .45
Financial Services --- --- --- 5.38 .45 1.42
------------- -------------- ------------- ------------- ---------- --------
Total .91% .86% 1.37% .41% .14% .65%
============= ============== ============= ============= ========== ========
DEPOSITS AND OTHER SOURCES OF FUNDS
Core deposits, defined as domestic deposits other than certificates of deposit
of $100,000 or more, are the Corporation's primary source of funding. During
the second quarter of 1995, these deposits averaged $42.1 billion and
represented 69% of the Corporation's funds supporting earning assets compared
with $41.0 billion and 73%, respectively, for the second quarter of 1994. The
slight growth in average core deposit dollars reflected the impact of
acquisitions, offset in part by the pursuit of other alternatives by consumers.
As shown in Figure 3, beginning on page 22, over the past year balances have
also moderately shifted from highly liquid money market deposit accounts and
savings deposits to the higher yielding certificates of deposit of $100,000 or
more and to the "Other time deposits" category which consists primarily of fixed
rate certificates of deposit of less than $100,000.
Purchased funds, which are comprised of large certificates of deposit, deposits
in foreign offices and short-term borrowings, averaged $14.8 billion for the
second quarter of 1995, up $1.3 billion, or 9%, from the comparable prior year
period. These instruments have been more heavily relied upon in the current
year as the growth in earning assets has exceeded the increase in core deposits
discussed above. As illustrated in Figure 3, the increase was attributable to
growth in large certificates of deposit and other short-term borrowings,
principally short-term notes.
FIGURE 19. MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE AT JUNE
30, 1995
(in millions)
Domestic Foreign
Offices Offices
---------- ----------
Time remaining to maturity:
Three months or less $2,064.3 $2,330.3
Over three through six months 675.0 ---
Over six through twelve months 611.7 ---
Over twelve months 699.7 ---
---------- ----------
Total $4,050.7 $2,330.3
========== ==========
LIQUIDITY
Liquidity represents the availability of funding to meet the needs of
depositors, borrowers and creditors at a reasonable cost on a timely basis and
without adverse consequences. The Corporation's ALCO actively analyzes and
manages the Corporation's liquidity in coordination with similar committees at
each affiliate bank. The affiliate banks individually maintain liquidity in the
form of short-term money market investments, securities available for sale,
anticipated prepayments and maturities on securities and through the maturity
structure of their loan portfolios. Liquidity is also enhanced by a sizable
concentration of core deposits, previously discussed, which are generated by
more than 1300 banking offices in 14 states. The affiliate banks individually
monitor deposit flows and evaluate alternate pricing structures to retain or
grow deposits. This process is supported by a Central Funding Unit within the
Corporation's Funds Management Group which monitors deposit outflows and assists
the banks in converting the pricing of deposits from fixed to floating rates or
vice versa as specific needs are determined. In addition, the affiliate banks
have access to various sources of non-core market funding for short-term
liquidity requirements should the need arise.
-35-
36
In the first quarter of 1995, the Corporation's $5 billion Bank Note Program
which involved four affiliate banks was expanded to allow issuances of up to
$6.6 billion, covering eleven affiliate banks. During the first six months of
1995, $825.0 million was issued under this program. All of the notes issued
have maturities of one year or less and are included in other short-term
borrowings. In addition to these short-term borrowings, Society National Bank,
KeyCorp's lead bank, issued $200 million in long-term 7.25% subordinated notes.
Under KeyCorp's universal shelf registration, the parent company issued $308.0
million in Medium-Term Notes during the first six months of 1995. These notes
have original maturities in excess of one year and are included in long-term
debt. During April 1995, KeyCorp registered with the SEC an additional shelf of
$845 million. The proceeds from these programs are to be used to fund
acquisitions and for general corporate purposes in the ordinary course of
business.
The liquidity requirements of the parent company, primarily for dividends to
shareholders, servicing of debt and other corporate purposes are principally
met through regular dividends from affiliate banks. Excess funds are
maintained in short-term investments. The parent company has no lines of credit
with other financial institutions, but has ready access to the capital markets
as a result of its favorable debt ratings which, at June 30, 1995, were as
follows:
Senior Long-Term Debt Subordinated Debt
--------------------- -----------------
Standard & Poor's A- BBB+
Moody's A1 A2
Further information pertaining to the Corporation's sources and uses of cash
for the six-month periods ended June 30, 1995 and 1994, is presented in the
Consolidated Statements of Cash Flow on page 6 of this report.
CAPITAL AND DIVIDENDS
Total shareholders' equity at June 30, 1995, was $4.7 billion, down $16.0
million, or less than 1%, from the December 31, 1994, balance, but up $83.7
million, or 2%, from the end of the second quarter of 1994. The decrease from
year end 1994 is due to a $336.5 million increase in Treasury Shares, resulting
from the share repurchase programs discussed below. The increase from June
1994, resulted principally from the retention of net income after dividends
paid to shareholders. Other factors contributing to the change in shareholders'
equity during the first six months of 1995 are shown in the Statement of
Changes in Shareholders' Equity presented on page 5 of this report. Included in
these changes are net unrealized gains of $89.9 million on securities, reducing
the net unrealized losses on securities to $25.3 million as of June 30,1995.
These net unrealized losses were recorded in connection with SFAS No. 115,
"Accounting for 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 the first six months of 1995,
the Corporation repurchased 18,162,000 shares at a total cost of $524.2
million, bringing the total number of shares repurchased under these programs
to 25,744,700. These shares were reissued in connection with purchase
acquisitions and various employee benefit programs, or are expected to be
reissued in connection with the acquisition of AFG and employee benefit
programs. During the first half of 1995, treasury shares totaling 5,953,559
were issued in connection with the acquisitions of OMNIBANCORP and Spears
Benzak and 878,064 shares were issued for employee benefit plans.
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 6.93% at June 30, 1995,
compared to 7.03% at December 31, 1994, and 7.26% at June 30, 1994. Banking
industry regulators define minimum capital ratios for bank holding companies
and their banking and savings association subsidiaries. Based on the
risk-adjusted capital rules and definitions prescribed by the banking
regulators, KeyCorp's Tier I and total capital to net risk-adjusted assets
ratios at June 30, 1995, were 7.45% and 10.82%, respectively. These compare
favorably with the minimum requirements of 4.0% for Tier I and 8.0% for total
capital. The regulatory Tier I leverage ratio standard prescribes a minimum
ratio of 3.0%, although most banking organizations are expected to maintain
ratios of at least 100 to 200 basis points above the minimum. At June 30, 1995,
KeyCorp's leverage ratio was 5.88%, substantially higher than the minimum
requirement. Figure 20 presents the details of KeyCorp's regulatory capital
position at June 30, 1995, December 31, 1994, and June 30, 1994.
- 36 -
37
Under the Federal Deposit Insurance Act, the Federal bank regulators group
FDIC-insured depository institutions into five broad categories based on certain
capital ratios. The five categories are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." 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 June 30, 1995.
All of KeyCorp's affiliate banks qualify as "well-capitalized" at June 30, 1995.
The FDIC-defined capital categories may not constitute an accurate
representation of the overall financial condition or prospects of KeyCorp or its
affiliate banks.
FIGURE 20. CAPITAL COMPONENTS AND RISK-ADJUSTED ASSETS
(dollars in millions)
JUNE 30, December 31, June 30,
TIER I CAPITAL 1995 1994 1994
--------- --------- ---------
Common shareholders' equity (1) $4,539.8 $4,640.0 $4513.1
Qualifying preferred stock 160.0 160.0 160.0
Less: Goodwill (660.5) (418.5) (372.0)
Other intangible assets (2) (146.8) (140.0) (140.1)
--------- --------- ---------
Total Tier I Capital 3,892.5 4,241.5 4,161.0
--------- --------- ---------
TIER II CAPITAL
Allowance for loan losses (3) 655.7 628.7 597.1
Qualifying long-term debt 1,103.3 943.2 954.2
--------- --------- ---------
Total Tier II Capital 1,759.0 1,571.9 1,551.3
--------- --------- ---------
Total Capital $5,651.5 $5,813.4 $5,712.3
========= ========= =========
RISK-ADJUSTED ASSETS
Risk-adjusted assets on balance sheet $48,544.1 $46,370.0 $43,717.1
Risk-adjusted off-balance sheet exposure 4,722.3 4,483.3 4,561.1
Less: Goodwill (660.5) (418.5) (372.0)
Other intangible assets (2) (146.8) (140.0) (140.1)
--------- --------- ---------
Gross risk-adjusted assets 52,459.1 50,294.8 47,766.1
Less: Excess allowance for loan losses (211.8) (201.6) (219.3)
--------- --------- ---------
Net risk-adjusted assets $52,247.3 $50,093.2 $47,546.8
========= ========= =========
AVERAGE QUARTERLY TOTAL ASSETS $66,950.2 $64,613.3 $62,159.2
========= ========= =========
CAPITAL RATIOS
Tier I capital to risk-adjusted assets 7.45% 8.48% 8.75%
Total capital to risk-adjusted assets 10.82 11.62 12.01
Leverage (4) 5.88 6.63 6.75
(1) Common shareholders' equity excludes the impact of net unrealized gains or
losses on securities, except for net unrealized losses on marketable equity
securities.
(2) Intangible assets (excluding goodwill and portions of purchased credit card
relationships) recorded after February 19, 1992, and deductible portions of
purchased mortgage servicing rights.
(3) The allowance for loan losses included in Tier II capital is limited to
1.25% of gross risk-adjusted assets.
(4) Tier I capital as a percentage of average quarterly assets, less goodwill
and other non-qualifying intangible assets as defined in (2) above.
- 37 -
38
FIGURE 21. BANKING SERVICES DATA BY REGION
(dollars in millions)
Northeast Region Great Lakes Region
--------------------------------------- ---------------------------------------
Three months Six months Three months Six months
ended June 30, ended June 30, ended June 30, ended June 30,
------------------ ----------------- ------------------ -----------------
1995 1994 1995 1994 1995 1994 1995 1994
------- ------- ------- ------- ------- ------- ------- -------
SIGNIFICANT RATIOS
Return on average total assets 1.25% 1.38% 1.20% 1.39% 1.48% 1.54% 1.39% 1.42%
Net interest margin 4.68 5.03 4.60 5.12 4.36 4.63 4.26 4.62
Nonperforming loans to
period-end loans .94 .90 .94 .90 .47 .74 .48 .80
Allowance for loan losses to
period-end loans 1.57 1.37 1.60 1.37 2.20 2.53 2.24 2.56
Net loan charge-offs to average loans .35 .42 .29 .49 .05 .18 .08 .23
Efficiency ratio 55.67 51.74 56.90 51.71 53.31 51.20 53.48 52.51
AVERAGE BALANCES
Loans $13,956 $12,079 $13,817 $11,831 $21,449 $18,858 $21,125 $18,568
Earning assets 18,101 16,439 18,094 16,112 27,343 26,189 27,504 25,870
Total assets 19,430 17,621 19,380 17,246 30,044 28,469 30,043 28,111
Deposits 15,063 13,878 14,799 13,936 20,143 20,234 20,545 20,176
Rocky Mountain Region Northwest Region
--------------------------------------- ---------------------------------------
Three months Six months Three months Six months
ended June 30, ended June 30, ended June 30, ended June 30,
------------------ ----------------- ------------------ -----------------
1995 1994 1995 1994 1995 1994 1995 1994
------- ------- ------- ------- ------- ------- ------- -------
SIGNIFICANT RATIOS
Return on average total assets 1.35% 1.40% 1.29% 1.34% 1.15% 1.14% 1.04% 1.21%
Net interest margin 5.45 5.31 5.35 5.25 4.65 4.77 4.53 4.97
Nonperforming loans to
period-end loans .80 .37 .80 .37 .45 .54 .45 .54
Allowance for loan losses to
period-end loans 1.32 1.37 1.37 1.41 1.37 1.26 1.35 1.26
Net loan charge-offs to average loans .24 .20 .21 .26 .13 .22 .09 .19
Efficiency ratio 59.98 57.60 61.83 58.07 62.08 60.27 63.89 60.27
AVERAGE BALANCES
Loans $3,659 $3,034 $3,540 $2,850 $9,401 $8,378 $9,430 $9,105
Earning assets 4,718 3,991 4,546 3,776 11,117 11,191 11,174 10,809
Total assets 5,172 4,348 4,962 4,107 12,037 12,182 12,120 11,770
Deposits 3,996 3,497 3,845 3,352 9,247 9,592 9,282 9,403
-38-
39
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
In the ordinary course of business, the Corporation and its
subsidiaries are subject to legal actions which involve claims for
substantial monetary relief. Based on information presently available
to management and the Corporation's counsel, management does not
believe that any legal actions, individually or in the aggregate, will
have a material adverse effect on KeyCorp's consolidated financial
condition.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At the 1995 Annual Meeting of Shareholders of KeyCorp held on
May 18, 1995, seven directors were elected for three-year terms
expiring in 1998. Shareholders also defeated a shareholder proposal to
eliminate management's ability to vote unmarked proxies.
The vote for each director elected at the meeting was as follows:
Director For Abstain
--------------------- ----------- ----------
H. Douglas Barclay 209,468,566 2,215,863
Thomas A. Commes 209,562,042 2,122,387
Stephen R. Hardis 209,590,570 2,093,859
Douglas J. McGregor 209,510,035 2,174,394
John C. Morley 209,527,059 2,157,370
Peter G. Ten Eyck, II 209,556,790 2,127,639
Nancy B. Veeder 209,453,686 2,230,743
The vote defeating the shareholder proposal regarding
discretionary voting of unmarked proxies was as follows:
For Against Abstain
------------- ------------- -----------
35,411,838 147,422,682 7,689,339
Item 5. Other Information
-----------------
(a) CAPITAL GUIDELINES
On July 14, 1995, the Board of Governors of the Federal Reserve
System, the Office of the Comptroller of the Currency and the Federal
Deposit Insurance Corporation issued a joint notice of proposed
rulemaking in which the agencies proposed to amend their respective
risk-based capital requirements to incorporate in such requirements a
measure for general market risk and for specific risk pertaining to an
institution's foreign exchange and commodity activities and trading of
debt and equity instruments. Under the proposal, bank holding companies
such as KeyCorp, and banks, such as KeyCorp's bank subsidiaries, would
be required to hold capital based on the measure of their market risk
exposure, in addition to the capital such institutions are presently
required to maintain for credit risk exposure. Also under the
proposal, institutions with relatively large trading activities would
be permitted to calculate their respective capital charge for market
risk using either their own internal, so-called "value-at-risk" model
or, alternatively, they may adopt the risk measurement techniques
developed by banking supervisory authorities (the so-called
"standardized approach"). KeyCorp has not yet assessed the impact of
this proposal, if any, on its operations, including the effect, if any,
on its levels of required capital.
- 39 -
40
(b) FDIC INSURANCE
Under the FDIC's risk-related insurance assessment system, all
insured depository institutions are required to pay annual assessments
to the Bank Insurance Fund (the "BIF") or the Savings Association
Insurance Fund ("SAIF") of the FDIC. The assessments are based on the
institution's risk classification which, in turn, is based on an
assignment of the institution by the FDIC to one of three capital
groups and to one of three supervisory subgroups. The capital groups
are "well capitalized", "adequately capitalized" and
"undercapitalized". The three supervisory subgroups are Group "A"
(for financially solid institutions with only a few minor weaknesses),
Group "B" (for those institutions with weaknesses which, if
uncorrected, could cause substantial deterioration of the institution
and increase the risk to the deposit insurance fund) and Group "C"
(for those institutions with a substantial probability of loss to the
fund absent effective corrective action).
On August 8, 1995, the Federal Deposit Insurance Corporation ("FDIC")
amended its regulations on insurance assessments to establish a new
assessment rate schedule of 4 to 31 cents per $100 of domestic
deposits in replacement of the existing schedule of 23 to 31 cents per
$100 of domestic deposits for institutions whose deposits are subject
to assessment by the BIF. The FDIC has maintained the current
assessment rate schedule of 23 to 31 cents per $100 of domestic
deposits for institutions whose deposits are subject to assessment by
the SAIF. The new BIF schedule will become effective on the first day
of the month after the month in which the BIF reaches its required
level of funding of $1.25 per $100 of domestic deposits, which the
FDIC has estimated occurred sometime in the second quarter of 1995.
Assessments collected in accordance with the previous assessment
schedule that exceed the amount due under the new schedule will be
refunded, with interest, from the effective date of the new schedule.
Various legislative proposals regarding the future of the BIF and the
SAIF have been issued recently. Several of these proposals include a
one-time special assessment for SAIF deposits and a subsequent
comparable and reduced level of annual premiums for SAIF and BIF
deposits. The Corporation does not know when and if any such proposal
or any other related proposal may be adopted.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
(10.1) Amended and Restated Employment and Consulting Agreement
between KeyCorp and Victor J. Riley, Jr., dated May 18, 1995.
(10.2) Amended and Restated Employment Agreement between KeyCorp and
Robert W. Gillespie, dated May 18, 1995.
(11) Computation of Net Income Per Common Share
(15) Acknowledgment Letter of Independent Auditors
(27) Financial Data Schedule
(b) Reports on Form 8-K
April 20, 1995 - Item 5. Other Events and Item 7. Financial
Statements, Pro Forma Financial Statements and Exhibits. Reporting
that the Registrant issued a press release on April 20, 1995,
announcing its earnings results for the three-month period ended March
31, 1995.
April 25, 1995 - Item 5. Other Events and Item 7. Financial
Statements, Pro Forma Financial Statements and Exhibits. Reporting
that a Distribution Agreement, dated April 21, 1995, has been executed
in connection with a new series of medium-term notes to be issued
under KeyCorp's Medium-Term Note Program.
No other reports on Form 8-K were filed during the three-month period
ended June 30, 1995.
- 40 -
41
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KEYCORP
-----------------------------
(Registrant)
/s/ Lee Irving
-----------------------------
Dated: August 14, 1995 By: Lee Irving
Executive Vice President
and Chief Accounting Officer
-41-
EX-10.1
2
EXHIBIT 10.1
1
Exhibit 10.1
AMENDMENT TO EMPLOYMENT AND CONSULTING AGREEMENT
------------------------------------------------
THIS AMENDMENT (this "Amendment") is made at Cleveland, Ohio, this 18th
day of May, 1995, between KeyCorp, an Ohio corporation ("KeyCorp"), and VICTOR
J. RILEY, JR. ("Riley") and amends the Employment and Consulting Agreement
between KeyCorp and Riley dated as of February 15, 1995 (the "Employment and
Consulting Agreement").
WHEREAS, in accordance with the management plan approved on May 18,
1995 by the Board of Directors of KeyCorp, Riley intends to voluntarily resign
as Chief Executive Officer of KeyCorp effective September 1, 1995, but continue
as an employee of KeyCorp through December 31, 1995.
NOW, THEREFORE, Riley hereby resigns as Chief Executive Officer of
KeyCorp, effective September 1, 1995, and Riley and KeyCorp hereby amend the
Employment and Consulting Agreement as set forth below in this Amendment.
1. Section 1.1 of the Employment and Consulting Agreement is hereby
amended to read, in its entirety, as follows:
1.1 EMPLOYMENT. KeyCorp hereby agrees to continue to employ Riley,
and Riley agrees to continue to serve as an employee of KeyCorp, during
the period from the date hereof through December 31, 1995 (the "Employment
Period"). Riley shall serve until September 1, 1995 in the capacity of Chief
Executive Officer of KeyCorp with the duties and responsibilities that are
specified in the Regulations of KeyCorp, and, thereafter, during the
remainder of the Employment Period, as an employee of KeyCorp. At all times
during the Employment Period, Riley also shall serve as Chairman of the Board
of Directors of KeyCorp (the "Board") and Chairman of the Executive Committee
of the Board (the "Executive Committee").
2. KeyCorp hereby waives, with respect to any period on or after
September 1, 1995, the requirements in Section 1.2 of the Employment and
Consulting Agreement that Riley shall devote his full business time, attention,
and best efforts to the affairs of KeyCorp and its subsidiaries during the
Employment Period.
3. Riley hereby waives, with respect to any period on or after
September 1, 1995, his right to terminate his employment for "Good Reason"
based upon his ceasing to have and to hold the position of Chief Executive
Officer (and to have the attendant power, authority, duties, or
responsibilities) on and after that date.
4. Unless otherwise terminated pursuant to Section 4 of the
Employment and Consulting Agreement, Riley's employment with KeyCorp shall
continue through December 31, 1995, and, accordingly, he shall continue to be
treated, through that date, as an
2
active employee and as a senior executive officer (notwithstanding that he will
not hold any officer position on and after September 1, 1995) of KeyCorp for
purposes of any compensation or benefit plan or program in which he is a
participant including, without limitation, the Agreement attached as Exhibit B
to the Employment and Consulting Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment on
the date first above written.
KEYCORP
By: /s/ Roger Noall /s/ Victor J. Riley, Jr.
------------------------------- ------------------------------
Roger Noall Victor J. Riley, Jr.
Senior Executive Vice President
and Chief Administrative Officer
EX-10.2
3
EXHIBIT 10.2
1
Exhibit 10.2
AMENDMENT TO EMPLOYMENT AGREEMENT
---------------------------------
THIS AMENDMENT (this "Amendment") is made at Cleveland, Ohio, this 18th
day of May, 1995, between KeyCorp, an Ohio corporation ("KeyCorp"), and ROBERT
W. GILLESPIE ("Gillespie") and amends the Amended and Restated Employment
Agreement between KeyCorp (then known as "Society Corporation") and Gillespie
dated as of December 20, 1993 (the "Employment Agreement").
WHEREAS, in accordance with the management plan approved on May 18,
1995 by the Board of Directors of KeyCorp, Gillespie intends to voluntarily
resign as Chief Operating Officer of KeyCorp effective June 1, 1995, but
continue as President of KeyCorp through December 31, 1998 and become Chief
Executive Officer of KeyCorp on September 1, 1995.
NOW, THEREFORE, Gillespie hereby resigns as Chief Operating Officer of
KeyCorp, effective June 1, 1995, and Gillespie and KeyCorp hereby amend the
Employment Agreement, effective June 1, 1995, as set forth below in this
Amendment.
1. Clause (iii) of Section 1.15(a) of the Employment Agreement
(pursuant to which Gillespie's ceasing to be Chief Operating Officer of KeyCorp
would constitute a "Demotion or Removal") is hereby deleted from the Employment
Agreement and Section 1.20(c) of the Employment Agreement (specifying
circumstances under which Gillespie would have "Good Reason" to terminate
employment after a Change of Control) is hereby amended by deleting therefrom
the words "and Chief Operating Officer."
2. Section 4(a) of the Employment Agreement is hereby amended to
read, in its entirety, as follows:
(a) During the Post-Merger Period, Gillespie shall hold the
title of President of KeyCorp and, in that capacity, shall have the duties,
responsibilities, and authority that are allocated to the President of
KeyCorp in the Job Description.
3. In accordance with Section 2 of Article IV of KeyCorp's
Regulations and Sections 1.23 and 4 of the Employment Agreement, Gillespie
shall become Chief Executive Officer of KeyCorp at such time as Victor J.
Riley, Jr. ("Riley") no longer holds that office, which was originally to be in
no event later than December 31, 1995, but which, pursuant to the management
plan approved on May 18, 1995 by the Board of Directors of KeyCorp, is now to
be September 1, 1995, the date Riley is to resign as Chief Executive Officer of
KeyCorp pursuant to that plan.
2
IN WITNESS WHEREOF, the parties hereto have executed this Amendment on
the date first above written.
KEYCORP
By: /s/ Roger Noall /s/ Robert W. Gillespie
---------------------------------- -----------------------------
Roger Noall Robert W. Gillespie
Senior Executive Vice President
and Chief Administrative Officer
EX-11
4
EXHIBIT 11
1
EXHIBIT 11
KEYCORP
COMPUTATION OF NET INCOME PER COMMON SHARE
(dollars in thousands, except per share amounts)
Three months ended June 30, Six months ended June 30,
------------------------------ -----------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
NET INCOME APPLICABLE TO COMMON SHARES
Net income $198,964 $221,765 $408,665 $430,402
Less: Preferred dividend requirements 4,000 4,000 8,000 8,000
----------- ----------- ----------- -----------
Net income applicable to Common Shares $194,964 $217,765 $400,665 $422,402
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE
Weighted average Common Shares outstanding 235,329,270 244,823,153 237,651,334 243,382,552
=========== =========== =========== ===========
Net income applicable to Common Shares $194,964 $217,765 $400,665 $422,402
=========== =========== =========== ===========
Net income per Common Share $0.83 $0.89 $1.69 $1.74
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE -- PRIMARY
Weighted average Common Shares outstanding 235,329,270 244,823,153 237,651,334 243,382,552
Dilutive common stock options (1) 1,775,113 2,843,675 1,671,074 2,601,154
----------- ----------- ----------- -----------
Weighted average Common Shares and Common Share
equivalents outstanding 237,104,383 247,666,828 239,322,408 245,983,706
=========== =========== =========== ===========
Net income applicable to Common Shares $194,964 $217,765 $400,665 $422,402
=========== =========== =========== ===========
Net income per Common Share $0.82 $0.88 $1.67 $1.72
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE -- FULLY DILUTED
Weighted average Common Shares outstanding 235,329,270 244,823,153 237,651,334 243,382,552
Dilutive common stock options (1) 2,428,250 2,848,519 2,456,249 2,758,357
----------- ----------- ----------- -----------
Weighted average Common Shares and Common Share
equivalents outstanding 237,757,520 247,671,672 240,107,583 246,140,909
=========== =========== =========== ===========
Net income applicable to Common Shares $194,964 $217,765 $400,665 $422,402
=========== =========== =========== ===========
Net income per Common Share $.82 $.88 $1.67 $1.72
=========== =========== =========== ===========
(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.
EX-15
5
EXHIBIT 15
1
EXHIBIT 15
ACKNOWLEDGMENT LETTER OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
KeyCorp
We are aware of the incorporation by reference in the following KeyCorp
Registration Statements of our review report, dated July 20, 1995, relating to
the unaudited consolidated interim financial statements of KeyCorp, included in
the Quarterly Report on Form 10-Q for the period ended June 30, 1995.
Form S-3 No. 33-5064
Form S-3 No. 33-10634
Form S-3 No. 33-39733
Form S-3 No. 33-39734
Form S-3 No. 33-51652
Form S-3 No. 33-53643
Form S-3 No. 33-56879
Form S-3 No. 33-58405
Form S-4 No. 33-31569
Form S-4 No. 33-44657
Form S-4 No. 33-51717
Form S-4 No. 33-55573
Form S-4 No. 33-57329
Form S-4 No. 33-61539
Form S-8 No. 2-97452
Form S-8 No. 33-21643
Form S-8 No. 33-42691
Form S-8 No. 33-45518
Form S-8 No. 33-46278
Form S-8 No. 33-52293
Form S-8 No. 33-54819
Form S-8 No. 33-56745
Form S-8 No. 33-56881
Form S-8 No. 33-31569 (Post-Effective Amendment No. 1 to Form S-4)
Form S-8 No. 33-31569 (Post-Effective Amendment No. 2 to Form S-4)
Form S-8 No. 33-31569 (Post-Effective Amendment No. 3 to Form S-4)
Form S-8 No. 33-44657 (Post-Effective Amendment No. 1 to Form S-4)
Form S-8 No. 33-51717 (Post-Effective Amendment No. 1 to Form S-4)
Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not a part
of the Registration Statements prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
/s/ Ernst & Young LLP
Cleveland, Ohio
August 11, 1995
EX-27
6
EXHIBIT 27
9
1,000
6-MOS
DEC-31-1995
JAN-01-1995
JUN-30-1995
3,196,990
33,612
633,326
132,401
1,436,468
9,918,415
9,929,558
48,093,211
867,486
67,481,192
48,672,172
8,861,338
1,253,647
4,019,599
245,944
0
160,000
4,268,493
67,481,192
2,134,327
380,014
29,909
2,544,250
852,601
1,234,153
1,310,097
38,818
(42,409)
1,129,390
535,796
372,875
35,790
0
408,665
1.67
1.67
4.44
310,265
66,460
795
125,767
830,298
91,677
54,461
867,486
867,486
0
0