-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LOgRknBl8Nh5/42hTxFUdKQmODdsUHgEDDJVW37nWHTwbBz1zSRdrTmgBwON3hT4 8Rq+nDOi8l4nNvzFXWnbyw== 0000950152-96-002358.txt : 19960515 0000950152-96-002358.hdr.sgml : 19960515 ACCESSION NUMBER: 0000950152-96-002358 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960514 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: 96562205 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 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 1996 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 LOGO] ------------------------------------------------------ (Exact name of registrant as specified in its charter) OHIO 34-6542451 - -------------------------------------------- -------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 127 PUBLIC SQUARE, CLEVELAND, OHIO 44114-1306 - -------------------------------------------- -------------------------------- (Address of principal executive offices) (Zip Code) (216) 689-6300 ------------------------------------------------------ (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Shares, $1 par value 231,833,599 Shares - --------------------------------------- -------------------------------------- (Title of class) (Outstanding at April 30, 1996) The number of pages of this report is 43 2 KEYCORP TABLE OF CONTENTS PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page Number -------------------- ----------- Consolidated Balance Sheets -- March 31, 1996, December 31, 1995, and March 31, 1995 3 Consolidated Statements of Income -- Three months ended March 31, 1996 and 1995 4 Consolidated Statements of Changes in Shareholders' Equity -- Three months ended March 31, 1996 and 1995 5 Consolidated Statements of Cash Flow -- Three months ended March 31, 1996 and 1995 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 40 ----------------- Item 6. Exhibits and Reports on Form 8-K 40 -------------------------------- Signature 41
2 3 PART I. FINANCIAL INFORMATION KEYCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
MARCH 31, December 31, March 31, dollars in millions 1996 1995 1995 - ------------------------------------------------------------------------------------------------------------------------------ (UNAUDITED) (Unaudited) ASSETS Cash and due from banks $ 2,975 $ 3,444 $ 3,303 Short-term investments 507 682 1,052 Mortgage loans held for sale 112 640 165 Securities available for sale 7,482 8,060 1,534 Investment securities (fair value: $1,714, $1,738 and $10,157, respectively) 1,679 1,688 10,395 Loans 48,161 47,692 48,021 Less: Allowance for loan losses 875 876 867 - ------------------------------------------------------------------------------------------------------------------------------ Net loans 47,286 46,816 47,154 Premises and equipment 1,032 1,030 1,016 Goodwill 881 899 598 Other intangible assets 160 171 197 Corporate owned life insurance 1,177 1,088 516 Other assets 1,761 1,821 1,779 - ------------------------------------------------------------------------------------------------------------------------------ Total assets $65,052 $66,339 $67,709 ============================================================================================================================== LIABILITIES Deposits in domestic offices: Noninterest-bearing $ 8,571 $ 9,281 $ 8,300 Interest-bearing 36,451 36,764 37,793 Deposits in foreign offices-- interest-bearing 379 1,237 2,719 - ------------------------------------------------------------------------------------------------------------------------------ Total deposits 45,401 47,282 48,812 Federal funds purchased and securities sold under repurchase agreements 5,820 5,544 4,981 Other short-term borrowings 2,952 2,880 3,927 Other liabilities 1,489 1,477 1,446 Long-term debt 4,266 4,003 3,725 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities 59,928 61,186 62,891 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 160 160 160 Common Shares, $1 par value; authorized 900,000,000 shares; issued 245,944,390 shares 246 246 246 Capital surplus 1,496 1,500 1,458 Retained earnings 3,749 3,633 3,280 Loans to ESOP trustee (49) (51) (64) Net unrealized gains (losses) on securities, net of taxes (15) 48 (44) Treasury stock at cost (14,274,479, 12,241,569 and 7,756,787 shares) (463) (383) (218) - ------------------------------------------------------------------------------------------------------------------------------ Total shareholders' equity 5,124 5,153 4,818 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $65,052 $66,339 $67,709 ==============================================================================================================================
See notes to consolidated financial statements (unaudited). 3 4 KEYCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months ended March 31, ----------------------------------- dollars in millions, except per share amounts 1996 1995 - ----------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans $1,071 $1,029 Mortgage loans held for sale 6 4 Taxable investment securities 4 145 Tax-exempt investment securities 19 22 Securities available for sale 129 26 Short-term investments 7 19 - ----------------------------------------------------------------------------------------------------------- Total interest income 1,236 1,245 INTEREST EXPENSE Deposits 384 413 Federal funds purchased and securities sold under repurchase agreements 72 77 Other short-term borrowings 45 50 Long-term debt 66 62 - ----------------------------------------------------------------------------------------------------------- Total interest expense 567 602 - ----------------------------------------------------------------------------------------------------------- NET INTEREST INCOME 669 643 Provision for loan losses 44 18 - ----------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 625 625 NONINTEREST INCOME Service charges on deposit accounts 72 66 Trust and asset management income 58 53 Loan securitization income 13 6 Credit card fees 20 17 Insurance and brokerage income 18 12 Mortgage banking income 8 18 Net securities losses -- (45) Other income 60 44 - ----------------------------------------------------------------------------------------------------------- Total noninterest income 249 171 NONINTEREST EXPENSE Personnel 291 280 Net occupancy 54 54 Equipment 38 40 FDIC insurance assessments 2 25 Amortization of intangibles 22 17 Professional fees 16 13 Marketing 21 16 Other expense 126 116 - ----------------------------------------------------------------------------------------------------------- Total noninterest expense 570 561 - ----------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 304 235 Income taxes 96 61 - ----------------------------------------------------------------------------------------------------------- INCOME BEFORE EXTRAORDINARY ITEM 208 174 Extraordinary net gain from the sales of subsidiaries, net of income taxes of $25 -- 36 - ----------------------------------------------------------------------------------------------------------- NET INCOME $ 208 $ 210 - ----------------------------------------------------------------------------------------------------------- Net income applicable to Common Shares $ 204 $ 206 Per Common Share: Income before extraordinary item $ .88 $ .71 Net income .88 .86 Weighted average Common Shares (000) 233,100 239,999 - -----------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements (unaudited). 4 5 KEYCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
Net Unrealized Loans to Gains Treasury Preferred Common Capital Retained ESOP (Losses) Stock dollars in millions, except per share amounts Stock Shares Surplus Earnings Trustee on Securities at Cost - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1994 $160 $246 $1,454 $3,161 $(64) $(115) $(152) Net income 210 Cash dividends: Common Shares ($.36 per share) (87) Cumulative Preferred Stock ($3.125 per share) (4) Issuance of Common Shares: Acquisition - 4,043,559 shares 6 110 Dividend reinvestment, stock option, and purchase plans - 255,827 net shares (2) 7 Repurchase of Common Shares - 6,473,900 shares (183) Change in net unrealized gains (losses) on securities, net of deferred tax expense of $41 71 - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT MARCH 31, 1995 $160 $246 $1,458 $3,280 $(64) $ (44) $(218) =================================================================================================================================== BALANCE AT DECEMBER 31, 1995 $160 $246 $1,500 $3,633 $(51) $ 48 $(383) Net income 208 Cash dividends: Common Shares ($.38 per share) (88) Cumulative Preferred Stock ($3.125 per share) (4) Issuance of Common Shares: Dividend reinvestment, stock option, and purchase plans - 1,383,732 net shares (4) 44 Repurchase of Common Shares - 3,416,642 shares (124) Change in net unrealized gains (losses) on securities, net of deferred tax benefit of $(26) (63) Loan payment from ESOP Trustee 2 - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT MARCH 31, 1996 $160 $246 $1,496 $3,749 $(49) $ (15) $(463) ===================================================================================================================================
See notes to consolidated financial statements (unaudited). 5 6 KEYCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
Three months ended March 31, ---------------------------- in millions 1996 1995 - -------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 208 $ 210 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 44 18 Depreciation expense 34 33 Amortization of intangibles 22 17 Net gain from sales of subsidiaries -- (61) Net securities losses -- 45 Deferred income taxes 17 (9) Net decrease in mortgage loans held for sale 528 191 Net increase in trading account assets (9) (33) Other operating activities, net 57 178 - -------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 901 589 INVESTING ACTIVITIES Net increase in loans (616) (671) Loans sold 103 307 Purchases of investment securities (114) (477) Proceeds from sales of investment securities 3 4 Proceeds from prepayments and maturities of investment securities 126 453 Purchases of securities available for sale (457) (66) Proceeds from sales of securities available for sale 8 1,284 Proceeds from prepayments and maturities of securities available for sale 944 55 Net (increase) decrease in short-term investments 184 (181) Purchases of premises and equipment (43) (56) Proceeds from sales of premises and equipment 6 2 Proceeds from sales of other real estate owned 9 13 Purchases of corporate owned life insurance (65) -- Proceeds from sales of subsidiaries -- 351 Net cash used in acquisitions, net of cash acquired -- (198) - ----------------------------------------------------------------------------------------- ------------- NET CASH PROVIDED BY INVESTING ACTIVITIES 88 820 FINANCING ACTIVITIES Net decrease in deposits (1,881) (1,470) Net increase in short-term borrowings 348 37 Net proceeds from issuance of long-term debt 332 152 Payments on long-term debt (83) (67) Loan payment received from ESOP trustee 2 -- Purchases of treasury shares (124) (183) Proceeds from issuance of common stock pursuant to employee stock purchase, stock option and dividend reinvestment plans 40 5 Cash dividends (92) (91) - -------------------------------------------------------------------------------------------------------- NET CASH USED IN FINANCING ACTIVITIES (1,458) (1,617) - -------------------------------------------------------------------------------------------------------- NET DECREASE IN CASH AND DUE FROM BANKS (469) (208) CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 3,444 3,511 - -------------------------------------------------------------------------------------------------------- CASH AND DUE FROM BANKS AT END OF PERIOD $ 2,975 $ 3,303 ======================================================================================================== Additional disclosures relative to cash flow: Interest paid $619 $569 Income taxes received 5 41 Net amount received on portfolio swaps 22 50 Noncash items: Net transfer of loans to (from) other real estate owned $12 $(12) ========================================================================================================
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 ("KeyCorp"). All significant intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, the unaudited consolidated interim financial statements reflect all adjustments, of a normal recurring nature, and disclosures which are necessary for a fair presentation of the results for the interim periods presented and should be read in conjunction with the consolidated financial statements and related notes included in KeyCorp's 1995 Annual Report to Shareholders. In addition, certain reclassifications have been made to prior year amounts to conform with the current year 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. Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of," SFAS No. 122, "Accounting for Mortgage Servicing Rights--an Amendment of SFAS No. 65," and SFAS No. 123, "Accounting for Stock-Based Compensation" were adopted by KeyCorp on January 1, 1996, and did not have a material effect on KeyCorp's financial condition or results of operations. Under an election available in the adoption of SFAS No. 123, KeyCorp continues to account for stock options issued to employees under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." 2. MERGERS, ACQUISITIONS AND DIVESTITURES COMPLETED TRANSACTIONS Mergers and acquisitions completed by KeyCorp during 1995 (each of which was accounted for as a purchase business combination) are summarized below. There were no such transactions during the three-month period ended March 31, 1996.
COMMON dollars in millions LOCATION DATE ASSETS SHARES ISSUED CASH PAID ======================================================================================================================= AutoFinance Group, Inc.(1) Illinois September 1995 $181 9,554,003 -- Spears, Benzak, Salomon & Farrell, Inc. New York April 1995 See note(2) 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 ======================================================================================================================= 1 See text for more information regarding this transaction. 2 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.
AutoFinance Group, Inc. On September 27, 1995, KeyCorp acquired AutoFinance Group, Inc. ("AFG"), a Chicago-based automobile finance company operating in 28 states, in a tax-free exchange of stock. Under the terms of the merger agreement, 9,554,003 KeyCorp Common Shares, with a value of approximately $325 million, were exchanged for all of the outstanding shares of AFG common stock (based on an exchange ratio of .5 shares for each share of AFG). In addition, immediately prior to the closing, AFG completed a spin-off to its shareholders of 95.01% of its common stock interest in Patlex Corporation, a wholly owned patent exploitation and enforcement subsidiary. In connection with the transaction, which was accounted for as a purchase, KeyCorp recorded goodwill of approximately $270 million, which is being amortized using the straight-line method over a period of 25 years. 7 8 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 million loss was realized in connection with the sale ($6 million after tax, $.02 per Common Share) and recorded as an extraordinary item in the first quarter. KeyCorp Mortgage Inc. On March 31, 1995, KeyCorp sold the residential mortgage servicing operations of KeyCorp Mortgage Inc. ("KMI"), an indirect wholly owned subsidiary of KeyCorp. KMI serviced approximately $25 billion of residential mortgage loans. KeyCorp continues to service commercial mortgages, to originate residential mortgage loans through its banking franchise and to sell the rights to service residential mortgages through Key Mortgage Services, Inc., an indirect newly formed subsidiary. A $72 million gain was realized on the KMI sale ($42 million after tax, $.17 per Common Share) and recorded as an extraordinary item. TRANSACTION PENDING AS OF MARCH 31, 1996 Society First Federal Savings Bank On November 20, 1995, KeyCorp entered into a definitive agreement for the sale of Society First Federal Savings Bank, its Florida savings association subsidiary. The transaction is expected to close in the second quarter of 1996, pending necessary regulatory approvals and result in an immaterial gain. Following consummation of the sale, and subject to regulatory approval, KeyCorp expects to continue to provide private banking services in Florida through its trust company located in Naples, Florida. 3. SECURITIES AVAILABLE FOR SALE Debt securities that KeyCorp has the positive intent and ability to hold to maturity are classified as securities held to maturity and are carried at cost, adjusted for amortization of premiums and accretion of discounts using the level yield method. Securities held to maturity and equity securities that do not have readily determinable fair values are presented as investment securities on the balance sheet. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading account assets, reported at fair value ($42 million as of March 31, 1996) and included in short-term investments on the balance sheet. Realized and unrealized gains and losses are reported in other income on the income statement. Debt and equity securities that KeyCorp has not classified as investment securities or trading account assets are classified as securities available for sale and, as such, are reported at fair value, with unrealized gains and losses, net of deferred taxes, reported as a component of shareholders' equity. During the fourth quarter of 1995, the FASB granted companies a one-time opportunity to reassess and, if appropriate, reclassify their securities from the held-to-maturity category to the available-for-sale category without calling into question the company's intent to hold other debt securities to maturity in the future. This opportunity appears to have been granted in response to appeals by the banking industry following a clarification of the position of the bank regulatory authorities on related securities accounting matters, a position which if known prior to the effective date of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," would have caused KeyCorp to classify significantly more securities as available for sale upon adoption of SFAS No. 115. As a result, during the fourth quarter of 1995, KeyCorp reclassified substantially all held-to-maturity debt securities, except securities of states and political subdivisions, to the available-for-sale category. The reclassified securities totaled approximately $8.0 billion and had an amortized cost which approximated fair value. At March 31, 1996, approximately $7.5 billion of securities were classified as available for sale and shareholders' equity was reduced by $15 million, representing the net unrealized loss on these securities, net of deferred income taxes. 8 9 The amortized cost, unrealized gains and losses, and approximate fair values of securities available for sale were as follows (in millions):
MARCH 31, 1996 --------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ----------------- --------------- -------------- ----------------- U.S. Treasury, agencies and corporations $ 995 $ 6 $ 4 $ 997 States and political subdivisions 27 1 -- 28 Collateralized mortgage obligations 2,604 2 33 2,573 Other mortgage-backed securities 3,721 48 49 3,720 Other securities 157 7 -- 164 ================= =============== ============== ================= Total $7,504 $64 $86 $7,482 ================= =============== ============== ================= December 31, 1995 --------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------------- --------------- -------------- ----------------- U.S. Treasury, agencies and corporations $1,176 $ 26 -- $1,202 States and political subdivisions 25 1 -- 26 Collateralized mortgage obligations 2,767 8 $24 2,751 Other mortgage-backed securities 3,850 72 22 3,900 Other securities 176 5 -- 181 ================= =============== ============== ================= Total $7,994 $112 $46 $8,060 ================= =============== ============== ================= March 31, 1995 --------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------------- --------------- -------------- ----------------- U.S. Treasury, agencies and corporations $ 418 $2 $ 1 $ 419 States and political subdivisions 29 -- 3 26 Collateralized mortgage obligations -- -- -- -- Other mortgage-backed securities 902 4 23 883 Other securities 207 -- 1 206 ================= =============== ============== ================= Total $1,556 $6 $28 $1,534 ================= =============== ============== =================
4. INVESTMENT SECURITIES The amortized cost, unrealized gains and losses, and approximate fair values of investment securities were as follows (in millions):
MARCH 31, 1996 --------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------------------------------------------------------------------- U.S. Treasury, agencies and corporations $ 2 -- -- $ 2 States and political subdivisions 1,399 $44 $1 1,442 Other securities 278 -- 8 270 ================ =============== ============== ================= Total $1,679 $44 $9 $1,714 ================ =============== ============== =================
9 10
December 31, 1995 --------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------------------------------------------------------------------- U.S. Treasury, agencies and corporations $ 5 -- -- $ 5 States and political subdivisions 1,424 $51 $1 1,474 Other securities 259 -- -- 259 ================ =============== ============== ================= Total $1,688 $51 $1 $1,738 ================ =============== ============== ================= March 31, 1995 --------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------------------------------------------------------------------- U.S. Treasury, agencies and corporations $ 826 $ 1 $ 21 $ 806 States and political subdivisions 1,485 44 3 1,526 Collateralized mortgage obligations 3,699 1 145 3,555 Other mortgage-backed securities 3,978 20 112 3,886 Other securities 407 3 26 384 ================ =============== ============== ================= Total $10,395 $69 $307 $10,157 ================ =============== ============== =================
5. LOANS Loans are summarized as follows (in millions):
MARCH 31, December 31, March 31, 1996 1995 1995 ----------------- ------------------ ------------------ Commercial, financial and agricultural $11,818 $11,535 $10,974 Real estate--construction 1,516 1,520 1,339 Real estate--commercial mortgage 7,190 7,254 7,292 Real estate--residential mortgage 11,873 12,177 14,082 Credit cards 1,616 1,564 1,352 Other consumer 8,765 8,553 8,470 Student loans held for sale 2,317 2,081 2,126 Lease financing 2,935 2,887 2,314 Foreign 131 121 72 ----------------- ------------------ ------------------ Total $48,161 $47,692 $48,021 ================= ================== ==================
Changes in the allowance for loan losses are summarized as follows (in millions):
Three months ended March 31, ------------------------------------- 1996 1995 ----------------- ------------------ Balance at beginning of year $876 $830 Charge-offs (70) (43) Recoveries 27 26 ----------------- ------------------ Net charge-offs (43) (17) Provision for loan losses 44 18 Allowance acquired/(sold), net (2) 35 Transfer from OREO allowance -- 1 ----------------- ------------------ Balance at end of period $875 $867 ================= ==================
10 11 6. NONPERFORMING ASSETS KeyCorp considers all nonaccrual loans to be impaired loans, except for smaller-balance, homogeneous loans excluded in accordance with the provisions of SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." A loan is not deemed impaired during a period of delay in payment of 90 days or less if KeyCorp expects to collect all amounts due, including interest accrued at the contractual interest rate, for the period of delay. Impaired loans are evaluated individually. Where collateral exists, the extent of impairment is determined based on the estimated fair value of the underlying collateral. If collateral does not exist, or is insufficient to support the carrying value, management looks to other means of collection. Where the estimated fair value of the collateral and the present value of the estimated future cash flows from other means of collection do not support the carrying value of the loan, management charges off that portion of the loan balance which it believes will not ultimately be collected. In instances where collateral or other sources of repayment appear sufficient, yet uncertainty exists regarding the ultimate repayment, an allowance is specifically allocated for in the allowance for loan losses. KeyCorp excludes smaller-balance, homogeneous nonaccrual loans from impairment evaluation. Generally these include loans to finance residential mortgages, automobiles, recreational vehicles, boats and mobile homes. KeyCorp applies historical loss experience rates to these loans, adjusted based on management's assessment of emerging credit trends and other factors. The resulting loss estimates are specifically allocated for by loan type in the allowance for loan losses. In general, such loans are charged off when payment is 120-180 days past due. At March 31, 1996, the recorded investment in impaired loans was $186 million. Included in this amount is $94 million of impaired loans for which the specifically allocated allowance for loan losses is $32 million, and $92 million of impaired loans which are carried at their estimated fair value without a specifically allocated allowance for loan losses. At the end of the prior year, $126 million of impaired loans had a specifically allocated allowance of $40 million and $79 million were carried at their estimated fair value. The decrease in impaired loans since the 1995 year end was due primarily to the sale of one commercial loan of $20 million. The average recorded investment in impaired loans for the first quarter of 1996 was $188 million, down from $190 million for the first quarter of last year. Nonperforming assets were as follows (in millions):
MARCH 31, December 31, March 31, 1996 1995 1995 ------------------ ----------------- -------------- Impaired loans $186 $205 $207 Other nonaccrual loans 152 125 96 Restructured loans 3 3 1 ------------------ ----------------- -------------- Total nonperforming loans 341 333 304 Other real estate owned 56 56 69 Allowance for OREO losses (11) (14) (15) ------------------ ----------------- -------------- Other real estate owned, net of allowance 45 42 54 Other nonperforming assets 3 4 5 ================== ================= ============== Total nonperforming assets $389 $379 $363 ================== ================= ==============
11 12 7. LONG-TERM DEBT The components of long-term debt, presented net of unamortized discount where applicable, were as follows (dollars in millions):
MARCH 31, December 31, March 31, 1996 1995 1995 --------------- ---------------- -------------- Senior Medium-Term Notes due through 2005(1) $ 941 $ 995 $ 820 Subordinated Medium-Term Notes due through 2005(2) 183 183 165 6.75% Subordinated Notes due 2006 200 -- -- 8.125% Subordinated Notes due 2002 199 198 198 8.00 % Subordinated Notes due 2004 125 125 125 8.40% Subordinated Capital Notes due 1999 75 75 75 8.875% Notes due 1996 75 75 75 11.125% Notes due 1995 -- -- 50 8.404% Notes due 1997 through 2001 49 49 49 8.255% Notes due 1996 23 23 23 All other long-term debt 16 -- -- --------------- ---------------- -------------- Total parent company 1,886 1,723 1,580 Senior Medium-Term Bank Notes due through 1997(3) 1,532 1,399 1,398 7.25% Subordinated Notes due 2005 200 200 -- 7.85% Subordinated Notes due 2002 200 200 200 6.75% Subordinated Notes due 2003 199 199 199 Federal Home Loan Bank Advances 234 267 286 10.00% Notes due 1995 -- -- 37 Industrial revenue bonds 10 10 10 All other long-term debt 5 5 15 --------------- ---------------- -------------- Total subsidiaries 2,380 2,280 2,145 --------------- ---------------- -------------- Total $4,266 $4,003 $3,725 =============== ================ ============== 1 The weighted average rate on the Senior Medium-Term Notes due through 2005 was 6.54%, 6.62% and 6.71% at March 31, 1996, December 31, 1995, and March 31, 1995, respectively. 2 The weighted average rate on the Subordinated Medium-Term Notes due through 2005 was 6.78%, 6.88% and 6.77% at March 31, 1996, December 31, 1995, and March 31, 1995, respectively. 3 The weighted average rate on the Senior Medium-Term Notes due through 1997 was 6.61% at March 31, 1996 and 6.71% at December 31, 1995, and March 31, 1995.
8. INCOME TAXES The effective tax rate (provision for income taxes as a percentage of income before income taxes) for the 1996 first quarter was 31.5% compared to 26.2% for the first quarter of 1995. The lower 1995 first quarter effective tax rate as compared to 1996 was primarily attributable to the first quarter 1995 recognition of one-time tax benefits totaling $16 million related to acquisitions made in years prior to 1992. The effective tax rate remains below the statutory Federal rate of 35% due primarily to the impact of continued investment in tax-advantaged assets (such as corporate owned life insurance) and the recognition of credits associated with investments in low-income housing projects. 9. EXTRAORDINARY ITEM During the first quarter of 1995, KeyCorp recorded an extraordinary net gain of $61 million ($36 million after tax, $.15 per Common Share), representing the net effect of a gain of $72 million ($42 million after tax, $.17 per Common Share) from the sale of the residential mortgage servicing operations of KMI, an indirect wholly owned subsidiary of KeyCorp, and a loss of $11 million ($6 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. 12 13 10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK KeyCorp, mainly through its affiliate banks, is party to various financial instruments with off-balance sheet risk. The banks use these financial instruments in the normal course of business to meet the financing needs of their customers and to manage their exposure to market risk effectively. Market risk is the possibility that KeyCorp's net interest income will be adversely affected as a result of changes in interest rates or other economic factors. The primary financial instruments used include commitments to extend credit, standby and commercial letters of credit, interest rate swaps, caps and floors, futures and foreign exchange forward contracts. All of the interest rate swaps, caps and floors, and foreign exchange forward contracts held are over-the-counter instruments. These financial instruments may be used for lending-related, asset and liability management and trading purposes, as discussed in the remainder of this note. In addition to the market risks inherent in the use of these financial instruments, each contains an element of credit risk. Credit risk is the possibility that KeyCorp will incur a loss due to a counterparty's failure to perform its contractual obligations. FINANCIAL INSTRUMENTS HELD OR ISSUED FOR LENDING RELATED PURPOSES These instruments involve, to varying degrees, credit risk in excess of amounts recognized in KeyCorp's consolidated balance sheet. KeyCorp mitigates its exposure to credit risk through internal controls over the extension of credit. These controls include the process of credit approval and review, the establishment of credit limits and, when deemed necessary, securing collateral. The banks' commitments to extend credit are agreements with customers to provide financing at predetermined terms as long as the customer continues to meet specified criteria. Loan commitments serve to meet the financing needs of the banks' customers and generally carry variable rates of interest, have fixed expiration dates or other termination clauses, and may require the payment of fees. Since the commitments may expire without being drawn upon, the total amount of the commitments does not necessarily represent the future cash outlay to be made by KeyCorp. 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. KeyCorp does not have any significant concentrations of credit risk. Standby letters of credit enhance the credit-worthiness of the banks' customers by assuring the customers' financial performance to third parties in connection with specified transactions. Amounts drawn under standby letters of credit generally carry variable rates of interest, and the credit risk involved is essentially the same as that involved in the extension of loan facilities. The following is a summary of the contractual amount of each class of lending-related off-balance sheet financial instrument outstanding wherein KeyCorp's maximum possible accounting loss equals the contractual amount of the instruments (in millions):
MARCH 31, December 31, March 31, 1996 1995 1995 ----------------- ------------------ ---------------- Loan commitments: Credit card lines $ 7,578 $ 6,996 $ 5,649 Home equity 4,108 3,982 3,373 Commercial real estate and construction 1,573 1,554 1,303 Commercial and other 9,989 9,883 7,309 ----------------- ------------------ ---------------- Total loan commitments 23,248 22,415 17,634 Other commitments: Standby letters of credit 1,133 1,108 1,065 Commercial letters of credit 150 144 215 Loans sold with recourse 33 34 41 ----------------- ------------------ ---------------- Total loan and other commitments $24,564 $23,701 $18,955 ================= ================== ================
13 14 FINANCIAL INSTRUMENTS HELD OR ISSUED FOR ASSET AND LIABILITY MANAGEMENT PURPOSES KeyCorp manages its exposure to market risk, in part, by using off-balance sheet instruments to modify the existing interest rate risk characteristics of its assets and liabilities. Primary among the financial instruments used by both KeyCorp and its affiliate banks are interest rate swap contracts. Interest rate swaps used for this purpose are designated as portfolio swaps. The notional amount of the interest rate swap contracts represents 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. KeyCorp deals exclusively with counterparties with high credit ratings, enters into bilateral collateral arrangements and arranges master netting agreements. These agreements include legal rights of setoff that provide for the net settlement of the subject contracts with the same counterparty in the event of default. Although KeyCorp is exposed to credit-related losses in the event of nonperformance by the counterparties, based on management's assessment as of March 31, 1996, all counterparties were expected to meet their obligations. At March 31, 1996, KeyCorp had credit exposure of an aggregate $14 million to 6 counterparties, with the largest credit exposure to an individual counterparty amounting to $9 million. Under conventional interest rate swap contracts, payments based on fixed or variable rates are received based upon the notional amounts of the swaps in exchange for payments based on variable or fixed rates. Under an indexed amortizing swap contract, the notional amount remains constant for a specified period of time after which, based upon the level of the index at each payment review date, the swap contract will mature, the notional amount will begin to amortize, or the swap will continue in effect until its contractual maturity. Otherwise, the characteristics of these swaps are similar to those of conventional swap contracts. At March 31, 1996, KeyCorp was party to $2.1 billion and $3.3 billion of indexed amortizing swaps that used a LIBOR (London Interbank Offered Rates) index and a CMT (Constant Maturity Treasuries) index, respectively, for the payment review date measurement. Under basis swap contracts, interest payments based on different floating indices are exchanged. The following table summarizes the notional amount, fair value, maturity and weighted average rate received and paid for the various types of portfolio interest rate swaps used by KeyCorp (in millions):
MARCH 31, 1996 December 31, 1995 ------------------------------------------------------------ -------------------- WEIGHTED AVERAGE RATE NOTIONAL FAIR MATURITY(1) -------------------------- Notional Fair AMOUNT VALUE (YEARS) RECEIVE PAY Amount Value --------- ------- ----------- ------------ ----------- -------- ------ Receive fixed/pay variable-- indexed amortizing $ 5,651 $(19) 2.8 6.77% 5.48% $ 6,200 $ 70 Receive fixed/pay variable-- conventional 2,649 (4) 7.0 6.63 5.52 2,497 104 Pay fixed/receive variable-- conventional 1,887 (10) .9 5.42 6.65 2,412 (21) --------- ------- -------- ------- Total portfolio swaps $10,187 $(33) 3.5 6.48% 5.71% $11,109 $153 ========= ======= ======== ======= 1 Maturity is based upon expected average lives rather than contractual terms.
Based on the weighted average rates in effect at March 31, 1996, the spread on portfolio interest rate swaps, excluding the amortization of net deferred losses on terminated swaps, provided a slightly positive impact on net interest income (since the weighted average rate received exceeded the weighted average rate paid by 77 basis points). The aggregate negative fair value of $(33) million at the same date was derived through the use of discounted cash flow models, which contemplate interest rates using the applicable forward yield curve, and represents an estimate of the unrealized loss that would be recognized if the portfolio were to be liquidated at that date. 14 15 The following table summarizes the notional amounts, fair values and weighted average rates of portfolio swaps by interest rate management strategy (in millions):
MARCH 31, 1996 December 31, 1995 ----------------------------------------------- ---------------------------- WEIGHTED AVERAGE RATE NOTIONAL FAIR --------------------------- Notional Fair AMOUNT VALUE RECEIVE PAY Amount Value --------- ------- ------------- ----------- -------------- ------------ Convert variable rate loans to fixed $ 7,018 $(35) 6.71% 5.47% $ 7,567 $113 Convert variable rate deposits and short-term borrowings to fixed 1,775 (8) 5.42 6.55 2,275 (18) Convert variable rate long- term debt to fixed 112 (2) 5.43 8.20 137 (3) Convert fixed rate long-term debt to variable 1,282 12 6.81 5.61 1,130 61 --------- ------- -------------- ------------ Total portfolio swaps $10,187 $(33) 6.48% 5.71% $11,109 $153 ========= ======= ============== ============
Portfolio interest rate swaps are used to manage interest rate risk by modifying the repricing or maturity characteristics of specified on-balance sheet assets and liabilities. Interest from these swaps is recognized on an accrual basis over the lives of the respective contracts as an adjustment of the interest income or expense of the asset or liability whose risk is being managed. Gains and losses realized upon the termination of interest rate swaps prior to maturity are deferred and amortized, generally using the straight-line method over the projected remaining life of the related swap contract at its termination. Including the impact of both the spread on the swap portfolio and the amortization of the deferred gains and losses resulting from terminated swaps, portfolio interest rate swaps increased net interest income for the first quarter of 1996 by $9 million, and reduced net interest income by $13 million for the same period in 1995. During 1995, swaps with a notional amount of $1.4 billion were terminated, resulting in net deferred losses of $49 million. KeyCorp recognized $38 million of swap losses during the first quarter of 1995 in connection with the sale of the residential mortgage loan servicing business. These recognized losses, which were direct costs of disposing of the business, were included in the determination of the net gain from the sale. The losses included $15 million of the $49 million of deferred swap losses referred to above and $23 million of deferred swap losses recorded prior to 1995. During the first quarter of 1996, swaps with a notional amount of $500 million were terminated, resulting in a deferred gain of $.3 million. A summary of KeyCorp's deferred swap gains and (losses) at March 31, 1996, is as follows (dollars in millions):
Weighted Average Deferred Remaining Asset/Liability Managed Gains/(Losses) Amortization (Years) - ------------------------------ ------------------- ----------------------- Loans $(1) 2.6 Debt 19 7.0 ------------------- Total $18 ===================
KeyCorp also uses futures contracts to manage the risk associated with the potential impact of adverse movements in interest rates. These contracts are commitments to either purchase or sell designated financial instruments at future dates for specified prices. KeyCorp had no futures contracts outstanding at March 31, 1996. 15 16 FINANCIAL INSTRUMENTS HELD OR ISSUED FOR TRADING PURPOSES KeyCorp's affiliate banks also use interest rate swap, cap and floor contracts for dealer activities (which are generally limited to the banks' commercial loan customers) and enter into other positions with third parties that are intended to mitigate the interest rate risk of the customer positions. Interest rate swap contracts entered into with customers are typically limited to conventional swaps, as previously described. The customer swaps, caps and floors, as well as the third party positions, are recorded at their estimated fair values, and adjustments to fair value are included in other income on the income statement. KeyCorp also enters into foreign exchange forward contracts to accommodate the business needs of its customers and for proprietary trading purposes. These contracts provide for the delayed delivery or purchase of foreign currency. The foreign exchange risk associated with such contracts is mitigated by entering into other foreign exchange contracts with third parties. Adjustments to the fair value of all such foreign exchange forward contracts are included in other income on the income statement. A summary of the notional amount and the respective fair value of derivative financial instruments held or issued for trading purposes at March 31, 1996, and on average for the three-month period then ended, is presented below (in millions). The positive fair values represent assets to KeyCorp and are recorded in other assets, while the negative fair values represent liabilities and are recorded in other liabilities on the balance sheet. At March 31, 1996, 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, or $29 million. 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 $1 million and $3 million, respectively, for both the first three months of 1996 and 1995.
March 31, 1996 Three months ended March 31, 1996 --------------------------- --------------------------------------------- Notional Fair Average Average Interest rate contracts: Amount Value Notional Amount Fair Value ---------- ------------- ----------------------- -------------------- Trading swaps: Assets $1,625 1 $1,598 $17 Liabilities 1,852 11 1,663 (6) Caps and floors purchased 746 2 747 2 Caps and floors written 765 (2) 766 (2) Foreign exchange forward contracts:(1) Assets 632 12 611 14 Liabilities 644 (12) 616 (14) 1 Excludes the effect of foreign spot contracts.
16 17 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 March 31, 1996 and 1995, and the related consolidated statements of income, changes in shareholders' equity, and cash flow for the three-month periods then ended. 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, 1995, 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 16, 1996, 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, 1995, 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 April 17, 1996 17 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION This section of the report, including the highlights summarized below, provides a discussion and analysis of the financial condition and results of operations of KeyCorp and its subsidiaries ("KeyCorp") 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. During the first quarter of 1996, a number of actions were taken in connection with the execution of KeyCorp's strategic plan. These actions reflect continuing efforts to reallocate resources to businesses with higher earnings potential and to focus on certain customer segments, while emphasizing technology to enhance service capability. Specifically, KeyCorp launched its first small-business specialty center in Columbus, Ohio and experienced significant growth in telephone banking, as new loan volume generated by KeyCorp's 24-hour telebanking centers was nearly double that produced in the first quarter of 1995. The opening of the specialty center is part of an overall plan to transform the branch network into customized "KeyCenters" which target the needs of specific customer segments. Other actions included the formation of two new subsidiaries which provide specialized services, primarily to corporate and institutional customers. Key Global Finance, Ltd. provides sophisticated, asset-specific structured financing to large corporate clients, while Key Capital Markets, Inc. ("KCMI"), a broker-dealer registered with the National Association of Broker Dealers, provides foreign exchange, financial risk management and financial advisory services to its institutional clients in the public and private sector. KCMI also engages in certain underwriting and dealing activities authorized by the Federal Reserve Board. In May 1996, KeyCorp also entered into a definitive agreement to acquire Carleton, McCreary, Holmes & Co., a Cleveland-based investment-banking firm specializing in mergers and acquisitions and other financial advisory services for mid-sized and large corporate clients. The transaction is expected to close during the third quarter, pending necessary regulatory approvals. In addition to the above actions, during the first quarter management continued to take certain steps to manage KeyCorp's balance sheet in accordance with strategies developed in mid-1995 to improve returns to shareholders, improve liquidity and enhance capital flexibility. These steps included the sale of $500 million of residential mortgage loans, the securitization and sale of $38 million of auto loans and the continued, planned runoff of lower-yielding securities. KeyCorp continued to manage its capital base proactively to optimize returns to shareholders. During the first quarter, 3.4 million KeyCorp Common Shares were repurchased as part of the 12 million Common Shares repurchase program authorized by the KeyCorp Board of Directors in January 1996. The repurchase of these shares reflected, in large part, the additional capital flexibility achieved through loan sales and securitizations completed in the first quarter and in 1995. In addition, the Board of Directors approved the redemption of the 10% Cumulative Preferred Stock effective June 30, 1996. In January, the merger of KeyCorp's Indiana and Michigan affiliate banks was completed as the first step in the plans to combine the affiliate banks in the Great Lakes Region. The final stage of the Great Lakes reorganization is targeted for completion in June with the merger of the Indiana/Michigan bank with and into Society National Bank, KeyCorp's principal bank subsidiary located in Ohio. The resulting bank will be named KeyBank National Association. The above items are discussed in greater detail in the remainder of this discussion and in the notes to the consolidated interim financial statements referred to above. 18 19 PERFORMANCE OVERVIEW Figure 1 presents the primary income and expense components for the first three months of 1996 and 1995 expressed on a per Common Share basis. The selected financial data set forth in Figure 2 presents certain information highlighting KeyCorp's financial performance for each of the last five quarters. The items referred to in this performance overview and in Figures 1 and 2 are more fully described in the following discussion or in the notes to the consolidated interim financial statements presented on pages 7 through 16. FIGURE 1. COMPONENTS OF EARNINGS PER COMMON SHARE
Three Months ended March 31, Change -------------------------------------- -------------------------- 1996 1995 Amount Percent ----------------- ----------------- ------------ ----------- Interest income $5.30 $5.19 $ .11 2.1 % Interest expense 2.43 2.51 (.08) (3.2) ----------------- ----------------- ----------- Net interest income 2.87 2.68 .19 7.1 Provision for loan losses .19 .07 .12 171.4 ----------------- ----------------- ----------- Net interest income after provision for loan losses 2.68 2.61 .07 2.7 Noninterest income 1.07 .71 .36 50.7 Noninterest expense 2.44 2.34 .10 4.3 ----------------- ----------------- ----------- Income before income taxes and extraordinary item 1.31 .98 .33 33.7 Income taxes .41 .25 .16 64.0 Preferred dividends .02 .02 -- -- ----------------- ----------------- ----------- Earnings per Common Share before extraordinary item .88 .71 .17 23.9 Extraordinary net gain from sales of subsidiaries, net of income taxes -- .15 (.15) (100.0) ----------------- ----------------- ----------- Earnings per Common Share $ .88 $ .86 $ .02 2.3 % ================= ================= ===========
Net income for the first quarter of 1996 totaled $208 million, or $.88 per Common Share. This compared with $210 million, or $.86 per Common Share, for the first quarter of 1995. On an annualized basis, the return on average common equity for the first quarter of 1996 was 16.42% compared with 18.26% for the same period last year. The annualized return on average total assets was 1.28% for the first quarter of 1996, unchanged from the first quarter of 1995. Included in 1995 first quarter results was the effect of several significant nonrecurring items. An extraordinary net gain of $61 million ($36 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 million ($42 million after tax, $.17 per Common Share) from the sale of the residential mortgage loan servicing business and a loss of $11 million ($6 million after tax, $.02 per Common Share) incurred in connection with the sale of Schaenen Wood & Associates, Inc., an asset management subsidiary. Efforts to reconfigure the balance sheet in order to reduce exposure to changes in interest rates resulted in net losses of $49 million ($31 million after tax, $.13 per Common Share) from the sales of securities. In addition, KeyCorp recorded a one-time tax benefit of $16 million, or $.07 per Common Share, which related to acquisitions completed in prior years. In the aggregate, these nonrecurring items increased 1995 first quarter earnings by $21 million, or $.09 per Common Share. Excluding the impact of the above items, operating earnings for the first quarter of 1996 were up $19 million, or 10%, from the comparable prior year period. Contributing to the increase in comparative results were a $24 million increase in taxable-equivalent net interest income and a $29 million increase in noninterest income. These positive factors were partially offset by a $26 million increase in the provision for loan losses and a $9 million increase in noninterest expense. The efficiency ratio improved to 61.22% for the first quarter of 1996 from 64.12% for the first quarter of 1995. 19 20 FIGURE 2. SELECTED QUARTERLY FINANCIAL DATA
1996 1995 ---------- ---------------------------------------------- dollars in millions, except per share amounts FIRST Fourth Third Second First - ----------------------------------------------------------------------------------------------------------------- FOR THE PERIOD Interest income $1,236 $1,278 $1,299 $1,299 $1,245 Interest expense 567 618 633 633 602 Net interest income 669 660 666 666 643 Provision for loan losses 44 34 28 20 18 Noninterest income 249 304 235 223 171 Noninterest expense 570 622 560 569 561 Income before income taxes and extraordinary item 304 308 313 300 235 Income before extraordinary item 208 207 210 199 174 Net income 208 207 210 199 210 Net income applicable to Common Shares 204 203 206 195 206 - ----------------------------------------------------------------------------------------------------------------- PER COMMON SHARE Income before extraordinary item $ .88 $ .86 $ .90 $ .83 $ .71 Net income .88 .86 .90 .83 .86 Cash dividends .38 .36 .36 .36 .36 Book value at period-end 21.43 21.36 20.74 19.71 19.57 Market price: High 39.13 37.25 35.13 32.13 29.50 Low 33.38 33.25 30.38 26.00 24.50 Close 38.63 36.25 34.25 31.38 28.25 Weighted average Common Shares (000) 233,100 235,753 228,187 235,329 239,999 - ----------------------------------------------------------------------------------------------------------------- AT PERIOD-END Loans $48,161 $47,692 $48,410 $48,093 $48,021 Earning assets 57,941 58,762 60,847 60,946 61,167 Total assets 65,052 66,339 67,967 67,481 67,709 Deposits 45,401 47,282 47,905 48,672 48,812 Long-term debt 4,266 4,003 4,048 4,020 3,725 Common shareholders' equity 4,964 4,993 4,923 4,514 4,658 Total shareholders' equity 5,124 5,153 5,083 4,674 4,818 - ----------------------------------------------------------------------------------------------------------------- PERFORMANCE RATIOS Return on average total assets 1.28% 1.23% 1.25% 1.19% 1.28% Return on average common equity 16.42 16.31 18.07 16.86 18.26 Return on average total equity 16.22 16.11 17.79 16.63 17.99 Efficiency(1) 61.22 63.67 61.27 63.05 64.12 Overhead(2) 47.07 47.36 47.89 51.10 52.36 Net interest margin 4.70 4.53 4.50 4.49 4.38 - ----------------------------------------------------------------------------------------------------------------- CAPITAL RATIOS AT PERIOD-END Equity to assets 7.88% 7.77% 7.48% 6.93% 7.12% Tangible equity to tangible assets 6.38 6.25 5.98 5.75 6.02 Tier I risk-adjusted capital 7.71 7.53 7.55 7.45 7.96 Total risk-adjusted capital 11.45 10.85 10.84 10.82 11.05 Leverage 6.43 6.20 6.19 5.88 6.24 - ----------------------------------------------------------------------------------------------------------------- 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. Net interest income is affected by a number of factors including the level, pricing, mix and maturity of earning assets and interest-bearing liabilities (both on and off-balance sheet), interest rate fluctuations and asset quality. To facilitate comparisons in the following discussion, net interest income is presented on a taxable-equivalent basis, which restates tax-exempt income to an amount that would yield the same after-tax income had the income been subject to taxation at the statutory Federal income tax rate. 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 yields/rates and average balances from the first quarter of 1995 to the first quarter of 1996. A more in-depth discussion of changes in earning assets and funding sources is presented in the Financial Condition section beginning on page 31. For the first quarter of 1996 net interest income was $669 million, up $26 million, or 4%, from the same period last year. This increase resulted from a net interest margin which rose by 32 basis points to 4.70% and more than offset the impact of a planned decrease of $2.0 billion, or 3%, in average earning assets. The net interest margin is computed by dividing annualized taxable-equivalent net interest income by average earning assets. The increase in the net interest margin as compared to the year ago quarter reflected the origination of new loans with wider interest rate spreads as well as the impact of continued actions taken to reconfigure the balance sheet. Primary among these actions were loan securitizations and sales which were completed during the past three quarters and the fourth quarter 1995 securities sales. These actions are more fully described in the following Asset and Liability Management section. Other factors which contributed to the improved margin were the reinvestment of funds from maturing securities into higher-yielding loans and the replacement of market-priced funding with similar instruments having lower interest rates during the fourth quarter of last year. The net interest margin continued to rise in the first quarter of 1996 and was 17 basis points higher than the fourth quarter of 1995. Average earning assets for the first quarter totaled $58.2 billion, which was $2.0 billion, or 3%, lower than the first quarter 1995 level. This decrease was due primarily to a $2.3 billion, or 19%, decline in securities (including both investment securities and securities available for sale) and a $765 million, or 60%, decline in short-term investments. Partially offsetting the decreases in securities and short-term investments was a $912 million, or 2%, increase in loans. Average earning assets comprised 89% of average total assets during the first quarter of 1996 and 91% during the first quarter of 1995. KeyCorp 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 $10.2 billion at March 31, 1996, from $11.1 billion at year-end 1995. For the first quarter of 1996, interest rate swaps contributed $9 million and 6 basis points to net interest income and the net interest margin, respectively, including the impact of both the spread on the swap portfolio and the amortization of deferred gains and losses resulting from terminated swaps. During the same period in 1995, interest rate swaps reduced net interest income by $13 million and the net interest margin by 9 basis points. The manner in which interest rate swaps are used in KeyCorp'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
FIRST QUARTER 1996 Fourth Quarter 1995 ----------------------------------- ------------------------------------- AVERAGE YIELD/ Average Yield/ DOLLARS IN MILLIONS BALANCE INTEREST RATE Balance Interest Rate - ------------------------------------------------------------------------------------------------------------------------------ ASSETS Loans: (1), (2) Commercial, financial and agricultural $11,578 $ 256 8.89% $11,455 $ 253 8.75% Real estate 20,734 459 8.90 21,542 489 9.01 Consumer 10,227 263 10.34 9,992 259 10.30 Student loans held for sale 2,257 46 8.20 1,848 40 8.48 Lease financing 2,895 48 6.67 2,715 48 6.99 Foreign 109 2 7.38 88 1 6.40 - ----------------------------------------------------------------------------------------------------------------------------- Total loans 47,800 1,074 9.04 47,640 1,090 9.08 Mortgage loans held for sale 352 6 6.86 398 7 6.97 Taxable investment securities 267 4 6.03 5,736 95 6.58 Tax-exempt investment securities (1) 1,418 29 8.23 1,275 27 8.49 - ----------------------------------------------------------------------------------------------------------------------------- Total investment securities 1,685 33 7.88 7,011 122 6.93 Securities available for sale (1), (3) 7,864 129 6.60 3,890 64 6.53 Interest-bearing deposits with banks 32 -- 2.89 53 1 4.37 Federal funds sold and securities purchased under resale agreements 448 7 5.39 417 6 5.89 Trading account assets 27 -- 5.30 70 1 5.60 - ----------------------------------------------------------------------------------------------------------------------------- Total short-term investments 507 7 5.35 540 8 5.71 - ----------------------------------------------------------------------------------------------------------------------------- Total earning assets 58,208 1,249 8.63 59,479 1,291 8.62 Allowance for loan losses (875) (879) Other assets 7,778 7,943 - ----------------------------------------------------------------------------------------------------------------------------- $65,111 $66,543 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Money market deposit accounts $ 9,278 71 3.08 $ 7,285 66 3.59 Savings deposits 5,465 39 2.87 6,201 41 2.65 NOW accounts 3,984 18 1.82 5,389 27 2.00 Certificates of deposit ($100,000 or more) 3,661 54 5.93 3,735 58 6.14 Other time deposits 14,215 190 5.38 14,623 203 5.50 Deposits in foreign offices 848 12 5.69 1,048 23 8.53 - ----------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 37,451 384 4.12 38,281 418 4.33 Federal funds purchased and securities sold under repurchase agreements 5,691 72 5.09 6,269 87 5.48 Other short-term borrowings 2,950 45 6.14 3,089 46 5.92 Long-term debt (4) 4,102 66 6.59 4,042 67 6.58 - ----------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 50,194 567 4.54 51,681 618 4.74 Noninterest-bearing deposits 8,208 8,392 Other liabilities 1,551 1,379 Preferred stock 160 160 Common shareholders' equity 4,998 4,931 - ----------------------------------------------------------------------------------------------------------------------------- $65,111 $66,543 ======= ======= Interest rate spread 4.09 3.88 - ----------------------------------------------------------------------------------------------------------------------------- Net interest income (TE) and net interest margin (TE) $ 682 4.70% $ 673 4.53% ====== ===== ====== ===== Taxable-equivalent adjustment (1) $13 $13 - ---------------------------------------------------------------------------------------------------------------------------- (1) Interest income on tax-exempt securities and loans has been adjusted to a taxable-equivalent basis using the statutory Federal income tax rate of 35%. (2) For purposes of these computations, nonaccrual loans are included in the average loan balances. (3) Yield is calculated on the basis of amortized cost. (4) Rate calculation excludes ESOP debt. TE = Taxable Equivalent
22 23
Third Quarter 1995 Second Quarter 1995 First Quarter 1995 - ------------------------------------------ ----------------------------------------- ------------------------------------- Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate - ----------------------------------------------------------------------------------------------------------------------------------- $11,391 $ 268 9.33% $11,350 $ 270 9.52% $10,514 $ 232 8.97% 22,166 495 8.86 22,519 497 8.85 22,112 477 8.76 9,720 248 10.14 9,886 244 9.91 9,788 237 9.81 2,355 51 8.56 2,156 50 9.24 2,121 46 8.77 2,490 43 6.95 2,340 39 6.71 2,282 39 6.78 74 1 5.06 54 1 7.63 71 1 5.31 - ----------------------------------------------------------------------------------------------------------------------------------- 48,196 1,106 9.11 48,305 1,101 9.14 46,888 1,032 8.85 168 4 8.75 195 4 8.02 243 4 7.35 8,275 139 6.68 8,579 142 6.66 8,666 145 6.68 1,532 32 8.29 1,559 33 8.54 1,565 33 8.49 - ----------------------------------------------------------------------------------------------------------------------------------- 9,807 171 6.93 10,138 175 6.95 10,231 178 6.96 1,457 23 6.15 1,424 23 6.02 1,623 27 6.06 41 -- 4.06 46 1 4.32 414 7 6.41 481 7 5.83 526 8 6.04 712 10 5.87 144 2 5.75 155 2 6.08 146 2 6.35 - ----------------------------------------------------------------------------------------------------------------------------------- 666 9 5.71 727 11 5.94 1,272 19 6.10 - ----------------------------------------------------------------------------------------------------------------------------------- 60,294 1,313 8.63 60,789 1,314 8.66 60,257 1,260 8.47 (870) (869) (853) 7,192 7,030 7,055 - ----------------------------------------------------------------------------------------------------------------------------------- $66,616 $66,950 $66,459 ======= ======= ======= $ 7,154 66 3.67 $ 7,058 66 3.74 $ 7,145 62 3.54 6,289 42 2.65 6,594 44 2.66 6,949 47 2.74 5,408 27 2.00 5,478 28 2.06 5,505 28 2.04 4,070 58 5.69 3,508 57 6.50 3,388 49 5.83 14,496 206 5.63 14,948 195 5.24 13,789 179 5.27 1,867 35 7.42 2,520 50 7.88 3,321 48 5.90 - ----------------------------------------------------------------------------------------------------------------------------------- 39,284 434 4.39 40,106 440 4.39 40,097 413 4.18 5,672 79 5.55 5,037 72 5.75 5,502 77 5.64 3,375 52 6.00 3,686 56 6.16 3,299 50 6.12 4,046 68 6.83 3,875 64 6.77 3,613 62 7.01 - ----------------------------------------------------------------------------------------------------------------------------------- 52,377 633 4.80 52,704 632 4.82 52,511 602 4.65 8,157 8,007 7,956 1,407 1,441 1,264 160 160 160 4,515 4,638 4,568 - ----------------------------------------------------------------------------------------------------------------------------------- $66,616 $66,950 $66,459 ======= ======= ======= 3.83 3.84 3.82 - ----------------------------------------------------------------------------------------------------------------------------------- $ 680 4.50% $ 682 4.49% $ 658 4.38% ====== ===== ====== ===== ====== ===== $14 $15 $15 - -----------------------------------------------------------------------------------------------------------------------------------
23 24 FIGURE 4. COMPONENTS OF NET INTEREST INCOME CHANGES in millions
From Three Months Ended March 31, 1995 To Three Months Ended March 31, 1996 ------------------------------------------------ Average Yield/ Net Volume Rate Change ------------------------------------------------ INTEREST INCOME Loans $ 20 $ 22 $ 42 Mortgage loans held for sale 2 -- 2 Taxable investment securities (127) (14) (141) Tax-exempt investment securities (3) (1) (4) Securities available for sale 102 -- 102 Short-term investments (11) (1) (12) -------------- --------------- -------------- Total interest income (TE) (17) 6 (11) INTEREST EXPENSE Money market deposit accounts 17 (8) 9 Savings deposits (10) 2 (8) NOW accounts (7) (3) (10) Certificates of deposit ($100,000 or more) 4 1 5 Other time deposits 6 5 11 Deposits in foreign offices (35) (1) (36) -------------- --------------- -------------- Total interest-bearing deposits (25) (4) (29) Federal funds purchased and securities sold under repurchase agreements 3 (8) (5) Other short-term borrowings (5) -- (5) Long-term debt 8 (4) 4 -------------- --------------- -------------- Total interest expense (19) (16) (35) -------------- --------------- -------------- Net interest income (TE) $ 2 $ 22 $ 24 ============== =============== ============== The change in interest not due solely to volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each. TE = Taxable Equivalent
ASSET AND LIABILITY MANAGEMENT Asset/Liability Management Committees KeyCorp manages its exposure to economic loss from fluctuations in interest rates through an active program of asset and liability management pursuant to guidelines established by its Asset/Liability Management Policy Committee, and strategies formulated and implemented by the Asset/Liability Strategy Committee (collectively, "ALCO"). The ALCO has the responsibility for approving the asset/liability management policies of KeyCorp, 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. Both asset/liability management committees meet at least monthly. The primary tool utilized by management to measure and manage interest rate exposure is a simulation model. Use of the model to perform simulations of changes in interest rates over one- and two-year time horizons has enabled management to develop strategies for managing exposure to interest rate risk. In its simulations, management estimates the impact on net interest income of various pro forma changes in the overall level of interest rates. These estimates are based on a large number of assumptions related to loan and deposit growth, prepayments, interest rates, and other factors. Management believes that both individually and in the aggregate these assumptions are reasonable, but the complexity of the simulation modeling process results in a sophisticated estimate, not a precise calculation of exposure. For example, estimates of future cash flows must be made for instruments without contractual repayment schedules. 24 25 The ALCO guidelines provide that a gradual 200 basis point increase or decrease in short-term rates over the next twelve-month period should not result in more than a 2% impact on net interest income from what net interest income would have been if interest rates did not change. KeyCorp is well within these guidelines, largely as a result of actions taken in the fourth quarter of 1994 and the first quarter of 1995 (primarily the sales of securities and the execution and termination of interest rate swaps) to significantly reduce KeyCorp's liability-sensitive position, and the ongoing employment of an effective balance sheet management program. While the above actions reduced 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. Recent Management Actions During the latter half of 1995, a number of actions were taken in connection with the execution of asset/liability management strategies designed to improve liquidity, reduce longer-term interest rate exposure and enhance capital management flexibility. These actions included KeyCorp's first securitization and sale of auto loans (in the amount of $299 million), the sale of approximately $1.0 billion of residential mortgage loans, the reclassification of approximately $8.0 billion of securities from the investment securities to the securities available-for-sale portfolio in connection with a one-time opportunity provided by the FASB, the sale of $1.3 billion of securities and the execution of $1.0 billion of indexed amortizing receive fixed swaps and $1.0 billion of pay fixed swaps. During the same period, KeyCorp repurchased 5.8 million of its Common Shares. In the first quarter of 1996, KeyCorp sold an additional $500 million of residential mortgage loans, securitized and sold an additional $38 million of auto loans and repurchased 3.4 million Common Shares. Management will continue to evaluate strategies to securitize and/or sell loans, taking into account the strategies' impacts on liquidity, capital and earnings. Interest Rate Swap Contracts KeyCorp'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 results in an asset-sensitive position and would place KeyCorp's earnings at risk to declining interest rates as interest-earning assets would reprice faster than would interest-bearing liabilities. In addition to KeyCorp's securities portfolio, management has utilized interest rate swaps to manage interest rate risk by modifying the repricing or maturity characteristics of specified on-balance sheet assets and liabilities. Interest rate swaps used for this purpose are designated as portfolio swaps. The decision to use portfolio interest rate swaps versus on-balance sheet securities to manage interest rate risk has depended on various factors, including funding costs, liquidity, and capital requirements. As summarized in Figure 5, KeyCorp's portfolio swaps totaled $10.2 billion at March 31, 1996, and consisted principally of contracts wherein KeyCorp receives a fixed rate of interest while paying a variable rate. FIGURE 5. INTEREST RATE SWAP PORTFOLIO dollars in millions
MARCH 31, 1996 December 31, 1995 -------------------------------------------------------- --------------------------------- WEIGHTED AVERAGE RATE NOTIONAL FAIR MATURITY(1) --------------------- Notional Fair AMOUNT VALUE (YEARS) RECEIVE PAY Amount Value -------------------------------------------------------- -------------------------------- Receive fixed/pay variable - indexed amortizing $ 5,651 $(19) 2.8 6.77% 5.48% $ 6,200 $ 70 Receive fixed/pay variable - conventional 2,649 (4) 7.0 6.63 5.52 2,497 104 Pay fixed/receive variable - conventional 1,887 (10) .9 5.42 6.65 2,412 (21) --------- -------- --------- --------- Total portfolio swaps 10,187 (33) 3.5 6.48 5.71 11,109 153 Customer swaps 3,477 12 4.3 6.23 6.35 2,844 11 --------- -------- --------- --------- Total interest rate swaps $13,664 $(21) 3.7 6.42% 5.87% $13,953 $164 ========= ======== ========= ========= (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. 25 26 In addition to portfolio swaps, KeyCorp has entered into interest rate swap contracts to accommodate the needs of its customers, typically commercial loan customers, and other positions with third parties that are intended to mitigate the interest rate risk of the customer positions. Adjustments to the fair values of such swaps are included in other income on the income statement. The $3.5 billion notional amount of customer swaps presented in Figure 5 includes $1.6 billion of interest rate swaps that receive a fixed rate and pay a variable rate and $1.9 billion of interest rate swaps that pay a fixed rate and receive a variable rate. The total notional amount of all interest rate swap contracts outstanding was $13.7 billion at March 31, 1996, $14.0 billion at December 31, 1995, and $11.0 billion at March 31, 1995. The weighted average rates presented in Figure 5 are those in effect at March 31, 1996. Portfolio interest rate swaps increased net interest income and the net interest margin by $9 million and by 6 basis points, respectively, during the first quarter of 1996. These increases reflected the impact of a positive spread on the first quarter 1996 swap portfolio, which more than offset the amortization of deferred losses from swaps terminated in prior periods. As of March 31, 1996, the spread on portfolio interest rate swaps, which excludes the amortization of net deferred swap losses, provided a positive impact on net interest income (since the weighted average rate received exceeded the weighted average rate paid by 77 basis points). The portfolio had an aggregate negative fair value of $(33) million at the same date. The aggregate fair value was estimated through the use of discounted cash flow models which contemplate interest rates using the applicable forward yield curve. As shown in Figure 5, the estimated fair value of KeyCorp's total interest rate swap portfolio decreased during the first quarter of 1996 from a fair value of $164 million at December 31, 1995. The decline in fair value over the past three months reflected the financial markets' expectations, as measured by the forward yield curve, for a future increase in interest rates. In addition, during 1995, swaps with an aggregate notional amount of $1.4 billion were terminated prior to their maturities, resulting in net deferred losses of $49 million. Swaps with a notional amount of $500 million were also terminated during the first quarter of 1996, resulting in a deferred gain of $.3 million. Such gains and losses are amortized, generally, over the projected remaining life of the related swap contract at its termination. A summary of KeyCorp's deferred swap gains and losses at March 31, 1996, is presented in Note 10, Financial Instruments with Off-Balance Sheet Risk, beginning on page 13. Each swap termination was in response to a unique set of circumstances and for various reasons; however, the decision to terminate a swap contract is integrated strategically with asset and liability management and other appropriate processes. These terminations as well as other portfolio swap activity for the three-month period ended March 31, 1996, are summarized in Figure 6. FIGURE 6. PORTFOLIO SWAP ACTIVITY FOR THE THREE MONTHS ENDED MARCH 31, 1996 in millions
Receive Fixed --------------------------------- Total Indexed Pay Fixed- Portfolio Amortizing Conventional Conventional Swaps -------------- ---------------- ---------------- ---------------- Balance at beginning of year $6,200 $2,497 $2,412 $11,109 Additions -- 200 100 300 Maturities -- (48) (125) (173) Terminations -- -- (500) (500) Amortization (549) -- -- (549) -------------- ---------------- ---------------- ---------------- Balance at end of period $5,651 $2,649 $1,887 $10,187 ============== ================ ================ ================
A summary of the notional and fair values of portfolio swaps by interest rate management strategy at March 31, 1996, is presented in Figure 7. The fair value at any given date represents the estimated income (if positive) or cost (if negative) that would be recognized if the portfolio were to be liquidated at that date. However, because the portfolio interest rate swaps are used to alter the repricing or maturity characteristics of specific assets and liabilities, the net unrealized gains and losses related to the swaps are not recognized in earnings. Rather, interest from these swaps is recognized on an accrual basis as an adjustment of the interest income or expense from the asset or liability being managed. 26 27 FIGURE 7. PORTFOLIO SWAPS BY INTEREST RATE MANAGEMENT STRATEGY in millions
MARCH 31, 1996 December 31, 1995 March 31, 1995 -------------------------- ------------------------- -------------------------- NOTIONAL FAIR Notional Fair Notional Fair AMOUNT VALUE Amount Value Amount Value --------------- --------- ----------- ----------- ------------ ------------ Convert variable rate loans to fixed $ 7,018 $(35) $ 7,567 $113 $5,574 $(218) Convert variable rate deposits and short-term borrowings to fixed 1,775 (8) 2,275 (18) 2,487 (15) Convert variable rate long-term debt to fixed 112 (2) 137 (3) -- -- Convert fixed rate long-term debt to variable 1,282 12 1,130 61 1,485 (28) Other -- -- -- -- 200 -- --------------- --------- ----------- ----------- ------------ ------------ Total portfolio swaps $10,187 $(33) $11,109 $153 $9,746 $(261) =============== ========= =========== =========== ============ ============
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 KeyCorp may have with each counterparty, and whether collateral is required, are determined. At March 31, 1996, KeyCorp had 18 different counterparties to portfolio swaps and swaps entered into to offset the risk of customer swaps. Of these counterparties, KeyCorp had an aggregate credit exposure of $14 million to 6, with the largest credit exposure to an individual counterparty amounting to $9 million. Although KeyCorp is exposed to credit-related losses in the event of nonperformance by the counterparties, based on management's assessment, as of March 31, 1996, all counterparties were expected to meet their obligations. The expected average maturities of the portfolio swaps at March 31, 1996, are summarized in Figure 8. FIGURE 8. EXPECTED AVERAGE MATURITIES OF PORTFOLIO SWAPS AT MARCH 31, 1996 in millions
Receive Fixed ------------------------------------ Total Indexed Pay Fixed- Portfolio Amortizing Conventional Conventional Swaps -------------- ----------------- ----------------- ------------ Due in one year or less $ 88 $ 2 $1,287 $ 1,377 Due after one through five years 5,372 215 600 6,187 Due after five through ten years 191 2,432 -- 2,623 -------------- ----------------- ----------------- ------------ Total portfolio swaps $5,651 $2,649 $1,887 $10,187 ============== ================= ================= ============
27 28 NONINTEREST INCOME As shown in Figure 9, noninterest income totaled $249 million for the first three months of 1996, up $78 million, or 46%, from the same period last year. Included in first quarter 1995 results were net securities losses of $49 million recorded in connection with efforts to reconfigure the balance sheet in order to reduce interest rate risk. Excluding securities transactions for comparative purposes, core noninterest income was up $33 million, or 15%, from the first three months of 1995. Contributing to this increase was the impact of five acquisitions completed since the 1994 year end. The improvement in core noninterest income reflected growth in all major fee-based revenues, with the exception of mortgage banking income. The largest increases came from loan securitization income ($7 million), service charges on deposit accounts ($6 million), insurance and brokerage income ($6 million), trust and asset management income ($5 million), and miscellaneous other income ($13 million). Detail pertaining to the composition of loan securitization income and the types of securitized loans serviced is presented in Figure 10. Overall, the increase in loan securitization income reflected a higher level of servicing fees. The repricing of fees by certain affiliate banks, the introduction of certain services to new markets in 1995 and enhanced collection efforts were the primary factors contributing to the growth in service charges on deposit accounts. Insurance and brokerage income was up due primarily to higher investment advisory fees and brokerage commissions from the sales of mutual funds which more than doubled. The increase in trust and asset management income resulted from the April 1995 acquisition of Spears Benzak, Salomon & Farrell, Inc. ("Spears Benzak"), a New York-based investment management firm, continued strong performance of both the stock and bond markets and an array of new products. Additional detail pertaining to the composition of the trust and asset management revenue component is presented in Figure 11. Miscellaneous other income rose from the prior year due principally to a $12 million increase in income from corporate owned life insurance. The positive effect of the above items was partially offset by a $10 million decrease in mortgage banking income, resulting from the March 1995 sale of the residential mortgage loan servicing business. This transaction as well as the Spears Benzak acquisition referred to above are more fully disclosed in Note 2, Mergers, Acquisitions and Divestitures, beginning on page 7. FIGURE 9. NONINTEREST INCOME dollars in millions
Three Months ended March 31, Change ---------------------------------- ------------------------- 1996 1995 Amount Percent ---------------- ---------------- ------------ ----------- Service charges on deposit accounts $ 72 $ 66 $ 6 9.1 % Trust and asset management income 58 53 5 9.4 Loan securitization income 13 6 7 116.7 Credit card fees 20 17 3 17.6 Insurance and brokerage income 18 12 6 50.0 Mortgage banking income 8 18 (10) (55.6) Net securities losses -- (45) 45 (100.0) Other income: Letter of credit fees 4 5 (1) (20.0) Venture capital gains 7 3 4 133.3 Miscellaneous 49 36 13 36.1 ---------------- ---------------- ------------ Total other income 60 44 16 36.4 ---------------- ---------------- ------------ Total noninterest income $249 $171 $ 78 45.6 % ================ ================ ============
28 29 FIGURE 10. LOAN SECURITIZATIONS dollars in millions
Three Months ended March 31, ---------------------------------- 1996 1995 ---------------- ---------------- Servicing fees $ 8 -- Gains on sales of securitized loans 4 $6 Miscellaneous income 1 -- ---------------- ---------------- Total loan securitization income $13 $6 ================ ================ - ------------------------------------------------------------------------------- AT MARCH 31, Student loans securitized $1,543 $974 Auto loans securitized 391 -- ---------------- ---------------- Total securitized loans serviced $1,934 $974 ================ ================
FIGURE 11. TRUST AND ASSET MANAGEMENT dollars in millions
Three Months ended March 31, Change ---------------------------------- ------------------------ 1996 1995 Amount Percent ---------------- --------------- ----------- ---------- Personal asset management and custody fees $35 $30 $ 5 16.7 % Institutional asset management and custody fees 14 14 -- -- Bond services 3 5 (2) (40.0) All other fees 6 4 2 50.0 ---------------- ---------------- ----------- Total trust and asset management income $58 $53 $ 5 9.4 % ================ ================ =========== - --------------------------------------------------------------------------------------------------------------- AT MARCH 31, dollars in billions Discretionary $48 $33 $15 45.5% Non-discretionary 39 35 4 11.4 ---------------- ---------------- ----------- Total trust assets $87 $68 $19 27.9% ================ ================ ===========
NONINTEREST EXPENSE As shown in Figure 12, noninterest expense for the first quarter of 1996 totaled $570 million, up $9 million, or 2%, from the first quarter of 1995. The higher level of noninterest expense relative to the first quarter of last year was due primarily to increases in personnel expense ($11 million), amortization of intangibles ($5 million), marketing expense ($5 million) and miscellaneous other expense ($11 million). Personnel expense, the largest category of noninterest expense, rose due primarily to higher costs associated with various incentive programs. The higher level of amortization related to intangibles was a direct result of the amortization of goodwill recorded in connection with acquisitions consummated during 1995, while the growth in marketing expense was due largely to additional costs related to continued strategic efforts aimed at strengthening the KeyBank brand name. The growth in miscellaneous other expense reflected higher loan servicing fees resulting from the sale of the mortgage loan servicing business (wherein KeyCorp had serviced its own mortgage loans), as well as increases in various other categories of operating expense. The above increases were substantially offset by the effect of the elimination of the Bank Insurance Fund assessment rate which took effect as of January 1, 1996. During the latter half of 1995, the assessment rate for well-capitalized banks was reduced from $.23 per $100 of insured deposits to $.04 per $100 for the period June through December 1995. As a result of the above actions, the cost of insurance assessments in the first quarter of 1996 decreased $23 million, or 92%, 29 30 from the first three months of 1995. In general, the increases summarized above reflected the impact of five acquisitions completed during 1995, offset in part by the overall reduction in costs (primarily personnel) resulting from the 1995 sale of both KeyCorp Mortgage Inc., and Schaenen Wood & Associates, Inc. The acquisitions and sales are more fully disclosed in Note 2, Mergers, Acquisitions and Divestitures, beginning on page 7. The efficiency ratio, which provides a measure of the extent to which recurring revenues are used to pay operating expenses, improved to 61.22% for the first quarter, from 64.12% for the first quarter of 1995. The improvement in the efficiency ratio relative to the first quarter of last year reflected the reduction in noninterest expense coupled with the growth in taxable-equivalent net interest income and noninterest income. FIGURE 12. NONINTEREST EXPENSE dollars in millions
Three Months ended March 31, Change ---------------------------------- -------------------------- 1996 1995 Amount Percent --------------- ---------------- ------------ ------------ Personnel $291 $280 $11 3.9 % Net occupancy 54 54 -- -- Equipment 38 40 (2) (5.0) FDIC insurance assessments 2 25 (23) (92.0) Amortization of intangibles 22 17 5 29.4 Professional fees 16 13 3 23.1 Marketing 21 16 5 31.3 Other expense: OREO expense, net (1) 1 2 (1) (50.0) Miscellaneous 125 114 11 9.6 --------------- ---------------- ------------ Total other expense 126 116 10 8.6 --------------- ---------------- ------------ Total noninterest expense $570 $561 $ 9 1.6 % =============== ================ ============ Full-time equivalent employees 28,902 30,370 Efficiency ratio (2) 61.22% 64.12% Overhead ratio (3) 47.07 52.36 (1) OREO expense is net of income of $1 million for both the first quarter of 1996 and 1995. (2) Calculated as noninterest expense divided by taxable-equivalent net interest income plus noninterest income (excluding net securities transactions). (3) Calculated as noninterest expense less noninterest income (excluding net securities transactions) divided by taxable-equivalent net interest income.
INCOME TAXES The provision for income taxes was $96 million for the three-month period ended March 31, 1996, as compared to $61 million (before the extraordinary net gain) for the same period in 1995. The effective tax rate (provision for income taxes as a percentage of income before income taxes) for the 1996 first quarter was 31.5% compared to 26.2% for the first quarter of 1995. The lower 1995 first quarter effective tax rate as compared to 1996 was primarily attributable to the first quarter 1995 recognition of one-time tax benefits totaling $16 million related to acquisitions made in years prior to 1992. The effective tax rate remains below the statutory Federal rate of 35% due to the impact of continued investment in tax-advantaged assets (such as corporate owned life insurance) and the recognition of credits associated with investments in low-income housing projects. 30 31 FINANCIAL CONDITION LOANS At March 31, 1996, total loans outstanding were $48.2 billion, up from $47.7 billion at December 31, 1995, and $48.0 billion at March 31, 1995. 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. The $469 million growth from the December 31, 1995, level was the result primarily of increases of $283 million in commercial loans, $264 million in consumer loans (including a $52 million increase in credit card outstandings) and $236 million in student loans held for sale. Growth in these targeted categories was partially offset by a $372 million decrease in real estate loans (including a $304 million decrease in one-to-four family mortgages). During the first quarter, KeyCorp continued to execute its strategy of securitizing and/or selling loans with lower spreads which do not meet return on equity standards. This strategy resulted in the first quarter sale of $500 million of residential mortgage loans which had been previously transferred to the mortgage loans held for sale portfolio and the securitization of $38 million of auto loans. In addition, KeyCorp sold $45 million of student loans during the quarter. As shown in Figure 13, loan growth was achieved principally in the Great Lakes and National Business sectors. Included in the National Business sector are the activities conducted by Key Bank USA, National Association ("KeyBank USA") and AFG. KeyBank USA, a nationally chartered bank formed during the third quarter of 1995, serves as the national platform for credit card lending, mortgage loan originations and all non-branch consumer finance business, while AFG, acquired during the third quarter of 1995, is one of the nation's leading subprime automobile finance companies. FIGURE 13. PERIOD-END LOAN GROWTH BY REGION FOR THE THREE MONTHS ENDED MARCH 31, 1996 dollars in millions
December 31, Sold or Other MARCH 31, Percent 1995 Acquired Securitized Activity 1996 Change ---------------- ------------- ------------ ------------ ----------------- ---------- Northeast Region $13,718 -- $ (28) 76 $13,766 .3 % Great Lakes Region 19,211 -- (27) 506 19,690 2.5 Rocky Mountain Region 3,817 -- (5) (14) 3,798 (.5) Northwest Region 9,008 -- (1) (9) 8,998 (.1) National Business 2,108 -- (42) 205 2,271 7.7 Eliminations/other (170) -- -- (192) (362) (112.9) ---------------- ------------- ------------ ------------ ----------------- Total $47,692 -- $(103) $ 572 $48,161 1.0 % ================ ============= ============ ============ =================
SECURITIES At March 31, 1996, the securities portfolio totaled $9.2 billion, consisting of $7.5 billion of securities available for sale and $1.7 billion of investment securities. This compares to a total portfolio of $9.7 billion, comprised of $8.0 billion of securities available for sale and $1.7 billion of investment securities, at December 31, 1995. The reduction in the overall portfolio since year-end 1995 reflects the planned runoff of lower-yielding securities pursuant to balance sheet management strategies developed in mid-1995. These strategies are more fully discussed in the Asset and Liability Management section beginning on page 24. Certain information pertaining to the composition, yields and maturities of the securities available for sale and investment securities portfolios is presented in Figures 14 and 15, respectively. 31 32 FIGURE 14. SECURITIES AVAILABLE FOR SALE AT MARCH 31, 1996 dollars in millions
U.S. Treasury, States and Collateralized Mortgage- Agencies and Political Mortgage Backed Other Corporations Subdivisions Obligations(1) Securities1 Securities ------------------ ---------------- ---------------- ---------------- ------------ Maturity: One year or less $198 $ 3 $ 323 $ 18 $115 After one through five years 462 12 2,249 1,236 27 After five through ten years 114 8 1 1,759 17 After ten years 223 5 -- 707 5 ------------------ ---------------- ---------------- ---------------- ------------- Fair value $997 $28 $2,573 $3,720 $164 ================== ================ ================ ================ ============= Amortized cost $995 $27 $2,604 $3,721 $157 Weighted average yield 6.69% 8.18% 6.17% 7.38% 7.55% Weighted average maturity 9.2 years 6.1 years 2.1 years 6.9 years 1.4 years
Weighted Average Total Yield (2) ------------ ------------ Maturity: One year or less $ 657 6.80% After one through five years 3,986 6.78 After five through ten years 1,899 7.07 After ten years 940 6.76 ------------ Fair value $7,482 6.88% ============ Amortized cost $7,504 Weighted average yield 6.88% Weighted average maturity 5.2 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%.
FIGURE 15. INVESTMENT SECURITIES AT MARCH 31, 1996 dollars in millions
U.S. Treasury, States and Weighted Agencies and Political Other Average Corporations Subdivisions Securities Total Yield (1) ------------------ ---------------- ------------- ------------ ------------ Maturity: One year or less $1 $ 609 $ 78 $ 688 6.79% After one through five years 1 509 162 672 8.79 After five through ten years -- 219 30 249 10.25 After ten years -- 62 8 70 9.94 ------------------ ---------------- ------------- ------------ Amortized cost $2 $1,399 $278 $1,679 8.23% ================== ================ ============= ============ Fair value $2 $1,442 $270 $1,714 Weighted average yield 10.73% 8.26% 7.81% 8.23% Weighted average maturity 1.4 years 2.8 years 4.5 years 2.9 years (1) Weighted average yields are calculated on the basis of amortized cost. Such yields have been adjusted to a taxable-equivalent basis using the statutory Federal income tax rate of 35%.
ASSET QUALITY KeyCorp's Credit Risk Review Group evaluates and monitors the level of risk in KeyCorp's credit-related assets, and formulates underwriting standards and guidelines for line management. Geographic diversification throughout KeyCorp 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"). Furthermore, KeyCorp's Credit Policy/Risk Management Group reviews corporate assets other than loans, leases and other real estate owned ("OREO") to evaluate the credit quality and risk inherent in such assets. This group is also responsible for commercial and consumer credit policy development, concentration management and credit systems development. Management has developed methodologies designed to assess the adequacy of the Allowance. The Allowance allocation methodologies applied at KeyCorp focus on changes in the size and character of the loan portfolio, changes in the levels of impaired and other nonperforming and past due loans, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing and prospective economic conditions and historical losses on a portfolio basis. In addition, indirect risk in the form of off-balance sheet exposure for unfunded commitments is taken into consideration. Management continues to target and maintain an Allowance equal to the allocated requirement plus an unallocated portion, as appropriate. Management believes this is an appropriate posture in light of current and expected economic conditions and trends, the geographic and industry mix of the loan portfolio and similar risk-related matters. 32 33 As shown in Figure 16, net loan charge-offs for the first quarter of 1996 were $43 million, up from $17 million recorded for the same period last year. The increase in net charge-offs was attributable primarily to one large commercial credit ($9 million), as well as a continued increase from historically low net charge-off levels in the credit card and indirect auto areas. The $4 million increase in credit card net charge-offs was in line with industry standards as well as management's expectations. Consistent with the higher level of net charge-offs, the provision for loan losses was increased to $44 million for the first quarter of 1996 from $34 million for the prior quarter and $18 million for the first quarter of last year. The Allowance at March 31, 1996, was $875 million , or 1.82% of loans, compared with $876 million, or 1.84% of loans at December 31, 1995 and $867 million, or 1.81% of loans, at March 31, 1995. At March 31, 1996, the Allowance was 256.60% of nonperforming loans, compared with 263.15% at December 31, 1995 and 285.51% at March 31, 1995. Although this percentage is not the primary factor used by management in determining the adequacy of the Allowance, it has general short to medium-term relevance. There have been no significant changes in the allocation of the Allowance since year end. The composition of nonperforming assets is shown in Figure 17. These assets totaled $389 million at March 31, 1996, and represented .81% of loans, OREO and other nonperforming assets compared with $379 million, or .79%, at year-end 1995 and $363 million, or .75%, at March 31, 1995. The $8 million increase in nonperforming loans since year-end 1995 reflected the placement of an additional $81 million of loans on nonaccrual status, partially offset by loan charge-offs of $19 million, payments received totaling $21 million and the sale of one nonaccrual commercial loan of $20 million. Additional information pertaining to changes in nonaccrual loans and the percentage of nonperforming loans to period-end loans by type within KeyCorp's geographically dispersed banking regions is presented in Figures 18 and 19, respectively. FIGURE 16. SUMMARY OF LOAN LOSS EXPERIENCE dollars in millions
Three months ended March 31, ---------------------------------------- 1996 1995 ---------------------- --------------- Average loans outstanding during the period $47,800 $46,888 Allowance for loan losses at beginning of period 876 830 Loans charged off: Commercial, financial and agricultural 18 8 Real estate--construction -- 1 Real estate--commercial and residential mortgage 6 6 Credit cards 16 12 Other consumer 29 15 Lease financing 1 1 Foreign -- -- ---------------------- --------------- 70 43 Recoveries: Commercial, financial and agricultural 11 12 Real estate--construction -- -- Real estate--commercial and residential mortgage 3 3 Credit cards 3 3 Other consumer 9 7 Lease financing 1 1 Foreign -- -- ---------------------- --------------- 27 26 ---------------------- --------------- Net loans charged off (43) (17) Provision for loan losses 44 18 Allowance acquired/(sold), net (2) 35 Transfer from OREO allowance -- 1 ---------------------- --------------- Allowance for loan losses at end of period $875 $867 ====================== =============== Net loan charge-offs to average loans .36% .15% Allowance for loan losses to period-end loans 1.82 1.81 Allowance for loan losses to nonperforming loans 256.60 285.51
33 34 FIGURE 17. SUMMARY OF NONPERFORMING ASSETS AND PAST DUE LOANS (dollars in millions)
MARCH 31, December 31, March 31, 1996 1995 1995 ------------- ----------------- -------------- Commercial, financial and agricultural $132 $145 $111 Real estate--construction 8 10 23 Real estate--commercial mortgage 90 90 106 Real estate--residential mortgage 70 62 48 Consumer 24 20 14 Lease financing 14 3 1 ------------- ----------------- -------------- Total nonaccrual loans 338 330 303 Restructured loans 3 3 1 ------------- ----------------- -------------- Total nonperforming loans 341 333 304 Other real estate owned 56 56 69 Allowance for OREO losses (11) (14) (15) ------------- ----------------- -------------- Other real estate owned, net of allowance 45 42 54 Other nonperforming assets 3 4 5 ------------- ----------------- -------------- Total nonperforming assets $389 $379 $363 ============= ================= ============== Accruing loans past due 90 days or more $89 $97 $60 Nonperforming loans to period-end loans .71% .70% .63% Nonperforming assets to period-end loans plus other real estate owned and other nonperforming assets .81 .79 .75
FIGURE 18. SUMMARY OF CHANGES IN NONACCRUAL LOANS in millions
Three months ended March 31, ----------------------------------- 1996 1995 --------------- ---------------- Balance at beginning of period $330 $255 Loans placed on nonaccrual 81 61 Charge-offs(1) (19) (14) Payments (21) (19) Loans sold (20) -- Transfers to OREO (8) (6) Loans returned to accrual status (5) (14) Acquisitions -- 20 Transfers from OREO(2) -- 20 --------------- ---------------- Balance at end of period $338 $303 =============== ================ (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.
34 35 FIGURE 19. PERCENTAGE OF NONPERFORMING LOANS TO PERIOD-END LOANS BY TYPE AT MARCH 31, 1996
Commercial, Real Estate-- Real Estate-- Financial and Real Estate-- Commercial Residential Agricultural Construction Mortgage Mortgage Consumer Total --------------- --------------- -------------- -------------- ------------ ----------- Northeast Region 1.99% 2.10% 2.15% .86% .21% 1.23% Great Lakes Region .61 .43 .88 .44 .15 .50 Rocky Mountain Region 1.03 .25 .48 .32 .58 .63 Northwest Region .71 .08 .82 .42 .24 .53 National Business -- -- -- -- -- -- --------------- --------------- -------------- -------------- ------------ ----------- Total 1.23% .52% 1.28% .59% .19% .71% =============== =============== ============== ============== ============ ===========
DEPOSITS AND OTHER SOURCES OF FUNDS Core deposits, defined as domestic deposits other than certificates of deposit of $100,000 or more, are KeyCorp's primary source of funding. During the first quarter of 1996, these deposits averaged $41.2 billion and represented 70% of KeyCorp's funds supporting earning assets compared with $41.3 billion and 69%, respectively, for the first quarter of 1995. As shown in Figure 3 beginning on page 22, over the past year the mix of core deposits has changed significantly. Primary among the factors contributing to this change is a new cost reduction program started during the fourth quarter of 1995. In accordance with this program, deposit balances (above a defined threshold) in certain NOW and noninterest-bearing checking accounts are transferred to money market deposit accounts, thereby reducing the level of deposit reserves required to be maintained with the Federal Reserve. Based on certain limitations, funds are periodically transferred back to the checking accounts to cover checks presented for payment or withdrawals. As a result of this program, during the first quarter of 1996, demand deposits and NOW account balances averaging $1.0 billion and $2.1 billion, respectively, were transferred to the money market deposit account category and a pre-tax cost savings of approximately $3 million was realized. In Figure 3, the demand deposits transferred are reported as noninterest-bearing deposits, while the NOW accounts transferred are included in the money market deposit account category. The program is expected to become fully operational during the second quarter of 1996 as its implementation is completed in the last of KeyCorp's four banking regions. The change in deposit mix also reflected a shift from highly liquid savings deposits to higher-yielding certificates of deposit of $100,000 or more and to the "Other time deposits" category which consists primarily of fixed-rate certificates of deposit of less than $100,000. Although the five acquisitions completed since the 1994 year end had a positive effect on the level of average core deposits relative to the year ago quarter, this benefit was offset by the impact of alternatives pursued by customers in response to the continued strength of the stock and bond markets. Purchased funds, which are comprised of large certificates of deposit, deposits in foreign offices and short-term borrowings, averaged $13.2 billion for the first quarter of 1996, down $2.3 billion, or 15%, from the comparable prior year period. As illustrated in Figure 3, the decrease was attributable to the $2.5 billion reduction in deposits in foreign offices as less expensive sources were used to fund earning assets. FIGURE 20. MATURITY DISTRIBUTION OF TIME DEPOSITS AT MARCH 31, 1996 in millions
Domestic Foreign Offices Offices Total --------------- ------------- ------------ Time remaining to maturity: Three months or less $1,996 $378 $2,374 Over three through six months 526 1 527 Over six through twelve months 520 -- 520 Over twelve months 722 -- 722 --------------- ------------- ------------ Total $3,764 $379 $4,143 =============== ============= ============
35 36 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. KeyCorp's ALCO actively analyzes and manages KeyCorp's liquidity in coordination with similar committees at each affiliate bank. The affiliate banks individually maintain liquidity in the form of short-term money market investments, securities available for sale, anticipated prepayments and maturities on securities, the maturity structure of their loan portfolios and the ability to securitize and package loans for sale. Liquidity is also enhanced by a sizable concentration of core deposits, previously discussed, which are generated by 1,270 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 KeyCorp's Funds Management Group which monitors deposit outflows and assists the banks in converting the pricing of deposits from fixed to floating rates or vice versa as specific needs are determined. In addition, the affiliate banks have access to various sources of non-core market funding (such as borrowings from the Federal Reserve system) for short-term liquidity requirements should the need arise. KeyCorp's Commercial Paper/Note Program established in 1995 provides for the availability of up to $500 million of additional short-term funding. The proceeds from this program may be used for general corporate purposes, including future acquisitions, and the funding of AFG's lending activities in conjunction with quarterly securitizations of its auto loans. In 1995, the parent company also entered into a four-year, $500 million revolving credit agreement with several banks under which the banks have agreed to lend collectively up to $500 million to KeyCorp. The line of credit will be used primarily as a backup source of liquidity for the Commercial Paper/Note Program. There were no borrowings outstanding under either of these facilities as of March 31, 1996. During the first quarter of 1996, KeyCorp's affiliate banks, raised $732 million under KeyCorp's Bank Note Program which allows for the issuance of up to $12.3 billion, covering twelve affiliate banks. Of the notes issued during the first quarter, $132 million have original maturities in excess of one year and are included in long-term debt, while $600 million have original maturities of one year or less and are included in other short-term borrowings. As of the end of the quarter, the program had an unused capacity of $10.1 billion. KeyCorp's universal self registration statement on file with the Securities and Exchange Commission provides for the possible issuance of a broad range of debt and equity securities by the parent company. In 1995, KeyCorp updated the filing by registering an additional $845 million of securities (up to $750 million of which are reserved for future issuance as Medium-Term Notes). Medium-Term Notes issued under the registration statement during the first quarter of 1996 totaled $200 million and have original maturities of more than one year. At the end of the quarter, unused capacity under this shelf registration totaled $412 million. The proceeds from the shelf registration and the Bank Note Program discussed above may be used for general corporate purposes, including future acquisitions. The liquidity requirements of the parent company, primarily for dividends to shareholders, servicing of debt and other corporate purposes are principally met through regular dividends from affiliate banks. Excess funds are maintained in short-term investments. The parent company has ready access to the capital markets as a result of its favorable debt ratings which, at March 31, 1996, were as follows:
Senior Subordinated Commercial Long-Term Long-Term Paper Debt Debt --------------- --------------- --------------- Duff & Phelps D-1 A+ A Standard & Poor's A-2 A- BBB+ Moody's P-1 A1 A2
Further information pertaining to KeyCorp's sources and uses of cash for the three-month periods ended March 31, 1996 and 1995, is presented in the Consolidated Statements of Cash Flow on page 6. 36 37 CAPITAL AND DIVIDENDS Total shareholders' equity at March 31, 1996, was $5.1 billion, down $29 million, or 1%, from the December 31, 1995, balance and up $306 million, or 6%, from the end of the first quarter of 1995. The decrease from the end of the prior year was due primarily to the share repurchases discussed below and dividends paid to shareholders. The increase from the year ago quarter 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 three months of 1996 are shown in the Statement of Changes in Shareholders' Equity presented on page 5. Included in these changes are first quarter 1996 net unrealized losses of $63 million on securities, resulting in cumulative net unrealized losses of $15 million as of March 31, 1996. These net unrealized losses were recorded in connection with SFAS No. 115, "Accounting for Investments in Certain Debt and Equity Securities." In January 1996, the Board of Directors approved a new share repurchase program which authorizes the repurchase of up to an additional 12,000,000 Common Shares in 1996. Under the new program, shares will be repurchased from time to time in the open market or through negotiated transactions. During the first quarter of 1996, KeyCorp repurchased 3,416,642 shares at a total cost of $124 million (an average of $36.33 per share) and reissued 1,383,732 Treasury Shares for employee benefit plans. The 14,274,479 Treasury Shares at March 31, 1996, are expected to be reissued over time in connection with employee stock purchase, 401(k), stock option, and dividend reinvestment plans and for other corporate purposes. In addition, the Board of Directors approved the redemption of the 10% Cumulative Preferred Stock effective June 30, 1996. Capital adequacy is an important indicator of financial stability and performance. Overall, KeyCorp's capital position remains strong with a ratio of total shareholders' equity to total assets of 7.88% at March 31, 1996, compared with 7.77% at December 31, 1995, and 7.12% at March 31, 1995. 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 March 31, 1996, were 7.71% and 11.45%, 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 March 31, 1996, KeyCorp's leverage ratio was 6.43%, substantially higher than the minimum requirement. Figure 21 presents the details of KeyCorp's regulatory capital position at March 31, 1996, December 31, 1995, and March 31, 1995. Failure to meet applicable capital guidelines could result in enforcement remedies available to the banking industry regulators, including a limitation on the ability to pay dividends, the issuance of a directive to increase capital, the termination of deposit insurance by the Federal Deposit Insurance Corporation ("FDIC"), and (in severe cases) the appointment of a conservator or receiver. Management believes that as of March 31, 1996, the parent company and its banking and savings association subsidiaries meet all capital adequacy guidelines to which they are subject. Under the Federal Deposit Insurance Act, the Federal bank regulators group FDIC-insured depository institutions into five broad categories based on certain capital ratios. The five categories are "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." All of KeyCorp's affiliate banks qualified as "well-capitalized" at March 31, 1996, as they exceeded the well-capitalized thresholds of 10%, 6% and 5% for the total capital, Tier I capital and leverage ratios, respectively. Although these provisions are not directly applicable to the parent company under existing law and regulations, based upon its ratios the parent company would qualify as "well capitalized" at March 31, 1996. The FDIC-defined capital categories may not constitute an accurate representation of the overall financial condition or prospects of KeyCorp or its affiliate banks. 37 38 FIGURE 21. CAPITAL COMPONENTS AND RISK-ADJUSTED ASSETS dollars in millions
MARCH 31, December 31, March 31, 1996 1995 1995 ------------------ --------------- ---------------- TIER I CAPITAL Common shareholders' equity(1) $4,979 $4,945 $4,700 Qualifying preferred stock 160 160 160 Less: Goodwill (881) (899) (598) Other intangible assets(2) (136) (143) (161) ------------------ --------------- ---------------- Total Tier I capital 4,122 4,063 4,101 ------------------ --------------- ---------------- TIER II CAPITAL Allowance for loan losses(3) 670 677 647 Qualifying long-term debt 1,326 1,114 943 ------------------ --------------- ---------------- Total Tier II capital 1,996 1,791 1,590 ------------------ --------------- ---------------- Total capital $6,118 $5,854 $5,691 ================== =============== ================ RISK-ADJUSTED ASSETS Risk-adjusted assets on balance sheet $49,615 $49,555 $47,923 Risk-adjusted off-balance sheet exposure 5,050 5,619 4,557 Less: Goodwill (881) (899) (598) Other intangible assets(2) (136) (143) (161) ------------------ --------------- ---------------- Gross risk-adjusted assets 53,648 54,132 51,721 Less: Excess allowance for loan losses(3) (205) (199) (220) ------------------ --------------- ---------------- Net risk-adjusted assets $53,443 $53,933 $51,501 ================== =============== ================ AVERAGE QUARTERLY TOTAL ASSETS $65,111 $66,543 $66,459 ================== =============== ================ CAPITAL RATIOS Tier I capital to net risk-adjusted assets 7.71% 7.53% 7.96% Total capital to net risk-adjusted assets 11.45 10.85 11.05 Leverage4 6.43 6.20 6.24 (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.
38 39 FIGURE 22. BANKING SERVICES DATA BY REGION dollars in millions
Northeast Region Great Lakes Region ----------------------------------- ---------------------------------- Three months ended March 31, Three months ended March 31, ----------------------------------- ---------------------------------- 1996 1995 1996 1995 ---------------- --------------- ---------------- --------------- ASSET QUALITY RATIOS Nonperforming loans to period-end loans 1.23% .91% .50% .49% Allowance for loan losses to period-end loans 1.49 1.60 2.24 2.35 Net loan charge-offs to average loans .31 .24 .15 .11 AVERAGE BALANCES Loans $13,946 $13,676 $19,369 $19,805 Earning assets 17,521 18,087 23,798 26,389 Total assets 19,082 19,330 26,554 28,942 Deposits 14,052 14,532 17,058 19,840 Rocky Mountain Region Northwest Region ----------------------------------- ---------------------------------- Three months ended March 31, Three months ended March 31, ----------------------------------- ---------------------------------- 1996 1995 1996 1995 ---------------- --------------- ---------------- ---------------- ASSET QUALITY RATIOS Nonperforming loans to period-end loans .63% .71% .53% .44% Allowance for loan losses to period-end loans 1.36 1.35 1.43 1.35 Net loan charge-offs to average loans .58 .17 .15 .06 AVERAGE BALANCES Loans $3,818 $ 3,420 $ 9,001 $ 9,459 Earning assets 4,737 4,373 10,610 11,231 Total assets 5,168 4,750 11,671 12,205 Deposits 4,004 3,692 9,214 9,317 National Business ----------------------------------- Three months ended March 31, ----------------------------------- 1996 1995 ---------------- --------------- ASSET QUALITY RATIOS Nonperforming loans to period-end loans -- N/A Allowance for loan losses to period-end loans 1.65% N/A Net loan charge-offs to average loans 2.64 N/A AVERAGE BALANCES Loans $2,203 N/A Earning assets 2,211 N/A Total assets 2,526 N/A Deposits 635 N/A N/A=Not Applicable. The National Business unit was formed in September 1995.
39 40 PART II. OTHER INFORMATION Item 1. Legal Proceedings ----------------- In the ordinary course of business, KeyCorp and its subsidiaries are subject to legal actions which involve claims for substantial monetary relief. Management, based upon the advice of KeyCorp's counsel, does not believe that any currently known legal actions, individually or in the aggregate, will have a material adverse effect on KeyCorp's consolidated financial condition. Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits (10) Employment Agreement between KeyCorp and K. Brent Somers, dated February 5, 1996. (11) Computation of Net Income Per Common Share (15) Acknowledgment Letter of Independent Auditors (27) Financial Data Schedule (b) Reports on Form 8-K January 19, 1996 - Item 5. Other Events and Item 7. Financial Statements, Pro Forma Financial Statements and Exhibits. Reporting that the Registrant issued a press release on January 18, 1996, announcing its earnings results for the three-month period ended December 31, 1995. No other reports on Form 8-K were filed during the three-month period ended March 31, 1996. 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) Date: May 10, 1996 /s/ Lee Irving -------------------------------------- By: Lee Irving Executive Vice President and Chief Accounting Officer 41 EX-10 2 EXHIBIT 10 1 EXHIBIT 10 AGREEMENT THIS AGREEMENT ("Agreement") is made as of the 5th day of February, 1996, between KEYCORP, an Ohio corporation ("Key"), and K. BRENT SOMERS (the "Executive"). Key is entering into this Agreement in recognition of the importance of the Executive's services to the continuity of management of Key and based upon its determination that it will be in the best interests of Key and its Subsidiaries to encourage the Executive's continued attention and dedication to the Executive's duties in the potentially disruptive circumstances of a possible Change of Control of Key. (As used in this Agreement, the terms "Subsidiaries" and "Change of Control" and certain other capitalized terms have the meanings ascribed to them in Section 7, at the end of this Agreement.) Key and the Executive agree, effective as of the date first set forth above, as follows: 1. BASIC SEVERANCE BENEFITS. The benefits described in Sections 1.1, 1.2, and 1.3, below, are subject to the limitations set forth in Sections 4.1 (which stipulates that the payments are in lieu of other claims or rights), 4.2 (regarding withholding), 4.3 (regarding excess parachute payments), and 4.4 (regarding potential deferral of certain compensation above $1,000,000). 1.1 LUMP SUM SEVERANCE BENEFIT IF EMPLOYMENT IS TERMINATED IN CERTAIN CIRCUMSTANCES WITHIN TWO YEARS OF A CHANGE OF CONTROL. If, within two years following the occurrence of a Change of Control, the Executive's employment with Key and its Subsidiaries is terminated by Key or its Subsidiary for any reason other than Cause, Disability, or death or by the Executive after a Reduction of Base Salary or a Mandatory Relocation has occurred, Key shall pay to the Executive, within ten business days after the Termination Date, a lump sum severance benefit equal to 2 1/2 times the sum of (a) one year's base salary (at the highest rate in effect at any time from one year prior to the Change of Control to the Termination Date) plus (b) Average Annual Incentive Compensation. 1.2 LUMP SUM SEVERANCE BENEFIT IF EMPLOYMENT IS TERMINATED BY EXECUTIVE DURING A WINDOW PERIOD. Except as provided in the last sentence of this Section 1.2, if the Executive's employment with Key and its Subsidiaries is voluntarily terminated by the Executive during a Window Period, Key shall pay to the Executive, within ten business days after the Termination Date, a lump sum severance benefit equal to the sum of (a) one year's base salary (at the highest rate in effect at any time from one year prior to the Change of Control to the Termination Date) plus (b) Average Annual Incentive Compensation. This Section 1.2 shall not apply if, at the Termination Date, (x) there has been either any Reduction of Base Salary or any Mandatory Relocation (in which event Section 1.1 would apply to the 2 termination) or (y) Key or any Subsidiary has Cause to terminate the Executive's employment (in which case no lump sum severance benefit would be payable under either of Sections 1.1 or 1.2). 1.3 PAYMENT OF COST OF COBRA HEALTH BENEFITS. If the Executive becomes entitled to payment of a lump sum severance benefit under either of Sections 1.1 or 1.2 of this Agreement and the Executive elects to continue to receive health benefits at the Executive's cost pursuant to an election that Key or any Subsidiary is required to provide to the Executive in order to comply with Section 4980B(f) of the Internal Revenue Code (commonly referred to as "COBRA continuation coverage") during the period specified in Section 4980B(f) (the "COBRA continuation period"), Key will pay to the Executive the cost of continuing those benefits from the Termination Date through the first to occur of (a) the end of the COBRA continuation period or (b) the date on which the Executive becomes employed by any other person or entity. 2. OTHER BENEFITS. 2.1 REIMBURSEMENT OF CERTAIN EXPENSES AFTER A CHANGE OF CONTROL. From and after a Change of Control, Key shall pay, as incurred, all expenses, including the reasonable fees of counsel engaged by the Executive, of defending any action brought to have this Agreement declared invalid or unenforceable. 2.2 DISABILITY. If, after a Change of Control and prior to the Termination Date, the Executive is unable to perform services for Key or any Subsidiary for any period by reason of disability of the Executive, as a result of accidental bodily injury or sickness, Key will pay and provide to the Executive all compensation and benefits to which the Executive would have been entitled had the Executive continued to be actively employed by Key or any Subsidiary through the earliest of the following dates: (a) the first date on which the Executive is no longer so disabled to such an extent that the Executive is unable to perform services for Key or any Subsidiary, (b) the date on which the Executive becomes eligible for payment of long term disability benefits under a long term disability plan generally applicable to executives of Key or a Subsidiary, (c) the date on which Key has paid and provided 24 months of compensation and benefits to the Executive during the Executive's disability, or (d) the date of the Executive's death. 3. NO SET-OFF; NO OBLIGATION TO SEEK OTHER EMPLOYMENT OR TO OTHERWISE MITIGATE DAMAGES; NO EFFECT UPON OTHER PLANS. Key's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense, or other claim whatsoever which Key or any of its Subsidiaries may have against the Executive. The Executive shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise. The amount of any payment provided for under this Agreement shall not be reduced by any compensation or benefits earned by the Executive as the result of employment by another employer or otherwise after the termination of the Executive's employment. The provisions of this Agreement, and any payment provided for 3 hereunder, shall not reduce any amounts otherwise payable, or in any way diminish the Executive's rights, or rights which would accrue solely as a result of the passage of time, under any incentive compensation plan, stock option or stock appreciation rights plan, retirement or supplemental retirement plan, stock purchase and savings plan, disability or insurance plan, or other similar contract, plan, or arrangement of Key or any Subsidiary. 4. CERTAIN LIMITATIONS ON BENEFITS. 4.1 PAYMENTS IN LIEU OF OTHER CLAIMS OR RIGHTS. If the Executive receives any payments under this Agreement as a result of termination of the Executive's employment following a Change of Control, those payments shall be in lieu of any and all other claims or rights that the Executive may have for severance, separation, and/or salary continuation pay upon that termination of the Executive's employment. Without limiting the generality of the immediately preceding sentence, if, without regard to this Section 4.1, the Executive becomes entitled both to severance benefits under this Agreement and a severance payment under the January 12, 1996 employment letter from Key to the Executive that was signed on behalf of Key by Roger Noall (the "Employment Letter"), the Executive shall have the right to elect to receive either the severance benefits under this Agreement or the severance payment under the Employment Letter, but not both, and Key shall not make any payments under either this Agreement or the Employment Letter until after the Executive has delivered to Key a signed notice of election to receive payments under this Agreement or under the Employment Letter which notice shall acknowledge that if amounts are paid under this Agreement, none will be paid under the Employment Letter and vice versa. 4.2 TAXES; WITHHOLDING OF TAXES. Without limiting the right of Key or its Subsidiary to withhold taxes pursuant to this Section 4.2, the Executive shall be responsible for all income, excise, and other taxes (federal, state, city, or other) imposed on or incurred by the Executive as a result of receiving the payments provided in this Agreement, including, without limitation, the payments provided under Section 1 of this Agreement. Key or its Subsidiary may withhold from any amounts payable under this Agreement all federal, state, city, or other taxes as Key shall determine to be required pursuant to any law or government regulation or ruling. Without limiting the generality of the foregoing, Key or its Subsidiary may withhold from any amount payable under either of Sections 1.1 or 1.2 of this Agreement amounts sufficient to satisfy any withholding requirements that may arise out of any payment made to the Executive by Key or any Subsidiary under Section 1.3 of this Agreement. 4.3 EXCESS PARACHUTE PAYMENT REDUCTION. If it is determined that any payment or distribution by Key or any of its Subsidiaries to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (a "Payment") would be nondeductible by Key or a Subsidiary for Federal income tax purposes because of Section 280G of the Internal Revenue Code and applicable regulations promulgated thereunder, then the aggregate present value of amounts payable or distributable to or for the benefit of the Executive pursuant to this Agreement (such payments or distributions pursuant to this Agreement are hereinafter referred to as "Agreement Payments") shall be reduced (but not below zero) to the Reduced Amount. The "Reduced Amount" shall 4 be an amount expressed in present value that maximizes the aggregate present value of Agreement Payments without causing any Payment to be nondeductible by Key or a Subsidiary because of Section 280G of the Internal Revenue Code and applicable regulations promulgated thereunder. For purposes of this Section 4.3, present value shall be determined in accordance with Section 280G(d)(4) of the Internal Revenue Code and applicable regulations promulgated thereunder. All determinations required to be made under this Section 4.3 shall be made by the Accounting Firm which shall provide detailed supporting calculations both to Key and the Executive within 30 days after the Termination Date or such earlier time as is requested by Key. Key and the Executive shall cooperate with each other and the Accounting Firm and shall provide necessary information so that the Accounting Firm may make all such determinations. All such determinations by the Accounting Firm shall be final and binding upon Key and the Executive. The Executive shall determine which of the Agreement Payments (or, at the election of the Executive, other payments) shall be eliminated or reduced consistent with the requirements of this Section 4.3, provided that, if the Executive does not make such determination within 20 days of the receipt of the calculations made by the Accounting Firm, Key shall elect which of the Agreement Payments shall be eliminated or reduced consistent with the requirements of this Section 4.3 and shall notify the Executive promptly of such election. As a result of the uncertainty in the application of Section 280G of the Internal Revenue Code and applicable regulations promulgated thereunder at the time of the initial determination by the Accounting Firm hereunder, it is possible that Agreement Payments will be made by Key that should not have been made ("Overpayment") or that additional Agreement Payments will not be made by Key which could have been made ("Underpayment"), in each case, consistent with the calculations required to be made hereunder. If the Accounting Firm or a court of competent jurisdiction (in a final judgment as to which the time for appeal has lapsed or no appeal is available) determines at any time that an Overpayment has been made, any such Overpayment shall be treated for all purposes as a loan to the Executive which the Executive shall repay to Key together with interest at the applicable short-term Federal rate provided for in Section 1274(d)(1) of the Internal Revenue Code, compounded semi-annually; provided, however, that no amount shall be payable by the Executive to Key (or if paid by the Executive to Key, such payment shall be returned to the Executive) if and to the extent such payment would not reduce the amount which is subject to taxation under Section 4999 of the Internal Revenue Code. If the Accounting Firm or a court of competent jurisdiction (in a final judgment as to which the time for appeal has lapsed or no appeal is available) determines at any time that an Underpayment has occurred, any such Underpayment shall be promptly paid by Key to or for the benefit of the Executive together with interest at the applicable short-term Federal rate provided for in Section 1274(d)(1) of the Internal Revenue Code, compounded semi-annually. 4.4 POTENTIAL DEFERRAL OF CERTAIN COMPENSATION IN EXCESS OF $1,000,000 IN ANY CALENDAR YEAR. (a) SECTION 162(M). For purposes of this Section 4.4, the term "Section 162(m)" shall mean Section 162(m) of the Internal Revenue Code (which prescribes rules disallowing deductions for certain "applicable employee remuneration" to any of five specified "covered employees" of a publicly 5 held corporation in excess of $1,000,000 per year), as from time to time amended, and the corresponding provisions of any similar law subsequently enacted, and to all regulations issued under that section and any such provisions. (b) DEFERRAL. Except as otherwise provided in either of Section 4.4(c) or Section 4.4(d), below, if Key determines that, after giving effect to all applicable elective deferrals of compensation, any amount of compensation (including any base salary and any incentive compensation payable under any incentive compensation plan in which the Executive is a participant) otherwise payable to the Executive whether under this Agreement or otherwise at any particular time (the "Scheduled Time"), (i) would not be deductible by Key or any Subsidiary if paid at the Scheduled Time by reason of the disallowance rules of Section 162(m), and (ii) would be deductible by Key or a Subsidiary if deferred until and paid during a later year, that amount of compensation shall be deferred until, and paid during, the year that is determined by Key to be the first year following the year of deferral during which the compensation can be paid without disallowance of the deduction for payment of the compensation by reason of Section 162(m). If Key determines that in any year following the year of deferral a portion of, but not all of, the amounts deferred (together with interest thereon as provided in Section 4.4(e), below) can be paid without disallowance of the deduction, that portion that can be so paid shall be paid by Key during that year and the remainder, except as otherwise provided in Section 4.4(c) or Section 4.4(d), below, shall continue to be deferred until a later year. (c) EARLY PAYOUT OF DEFERRED AMOUNT IF DEFERRAL IS DETERMINED TO BE INEFFECTIVE. If any amount of compensation is deferred under Section 4.4(b) with the expectation that it will be deductible by Key or a Subsidiary if paid in a later year and Key later determines that the compensation will not be deductible by Key or a Subsidiary even if payment thereof is deferred until a later year, then, within three months of the date on which that determination is made, the deferral with respect to that compensation shall terminate and Key shall pay that compensation to the Executive. (d) PAYOUT FOLLOWING TERMINATION OF EMPLOYMENT IN ALL EVENTS. On April 15 of the year immediately following the year in which the Executive ceases to be employed by Key or any Subsidiary, Key shall pay to the Executive, in a single lump sum, all amounts of compensation 6 that have been deferred pursuant to this Section 4.4 and have not previously been paid so that, as of the close of business on that date, no amount of compensation will remain deferred under this Section 4.4 whether or not Key or any Subsidiary is entitled to a deduction with respect to the payment of that compensation. (e) INTEREST ON DEFERRED AMOUNTS. Upon payment of any amounts of compensation deferred for any period of time pursuant to this Section 4.4, Key shall pay to the Executive an additional amount equivalent to the interest that would have accrued on that deferred compensation if interest accrued thereon from the date on which that compensation would have been paid but for this Section 4.4 through the date on which that compensation is paid at a variable rate equal, in each calendar quarter, to 50 basis points higher than the effective annual yield of the average of the Moody's average corporate bond yield index for the calendar month immediately preceding that calendar quarter as published by Moody's Investor Service Inc. (or any successor published thereto) or if such index is no longer published a substantially similar index selected by the Compensation and Organization Committee, compounded quarterly. 5. TERM OF THIS AGREEMENT. This Agreement shall be effective upon the day and date first above written and shall thereafter apply to any Change of Control occurring on or before December 31, 1996. On December 31, 1996 and on December 31 of each succeeding year thereafter (a "Renewal Date"), the term of this Agreement, if not previously terminated, shall be automatically extended for an additional year unless either party has given notice to the other, at least one year in advance of that Renewal Date, that the Agreement shall not apply to any Change of Control occurring after that Renewal Date. 5.1 TERMINATION OF AGREEMENT UPON TERMINATION OF EMPLOYMENT BEFORE A CHANGE OF CONTROL. This Agreement shall automatically terminate on the first date occurring before a Change of Control on which the Executive is no longer employed by Key or any Subsidiary, except that, for purposes of this Agreement, any termination of employment of the Executive that is effected before and primarily in contemplation of a Change of Control that occurs after the date of the termination shall be deemed to be a termination of the Executive's employment as of immediately after that Change of Control. 5.2 NO TERMINATION OF AGREEMENT DURING TWO YEAR PERIOD BEGINNING ON DATE OF A CHANGE OF CONTROL. After a Change of Control, this Agreement may not be terminated. However, if the Executive's employment with Key and its Subsidiaries continues for more than two years following the occurrence of a Change of Control, then, for all purposes of this Agreement other than Section 2.1, that particular Change of Control shall thereafter be treated as if it never occurred. 7 6. MISCELLANEOUS. 6.1 SUCCESSOR TO KEY. Key shall not consolidate with or merge into any other corporation, or transfer all or substantially all of its assets to another corporation or bank, unless such other corporation or bank shall assume this Agreement in a signed writing and deliver a copy thereof to the Executive. Upon such assumption the successor corporation or bank shall become obligated to perform the obligations of Key under this Agreement and the term "Key" as used in this Agreement shall be deemed to refer to such successor corporation or bank. 6.2 NOTICES. For purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, and addressed, in the case of notices to Key or a Subsidiary, as follows: KeyCorp 127 Public Square Cleveland, Ohio 44114 Attention: Secretary and, in the case of notices to the Executive, properly addressed to the Executive at the Executive's most recent home address as shown on the records of Key or its Subsidiary, or such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 6.3 EMPLOYMENT RIGHTS. Nothing expressed or implied in this Agreement shall create any right or duty on the part of Key or the Executive to have the Executive continue as an officer of Key or a Subsidiary or to remain in the employment of Key or a Subsidiary. 6.4 ADMINISTRATION. Key shall be responsible for the general administration of this Agreement and for making payments under this Agreement. All fees and expenses billed by the Accounting Firm for services contemplated under this Agreement shall be the responsibility of Key. 6.5 SOURCE OF PAYMENTS. Any payment specified in this Agreement to be made by Key may be made, at the election of Key, directly by Key or through any Subsidiary of Key. All payments under this Agreement shall be made solely from the general assets of Key or one of its Subsidiaries, and the Executive shall have the rights of an unsecured general creditor of Key with respect thereto. 6.6 CLAIMS REVIEW PROCEDURE. Whenever Key decides for whatever reason to deny, whether in whole or in part, a claim for benefits under this Agreement by the Executive, Key shall transmit a written notice of its decision to the Executive, which notice shall be written in a manner calculated to be understood by the Executive and shall contain a statement of the specific reasons for the denial of the claim and a statement advising the Executive that, within 8 60 days of the date on which the Executive receives such notice, the Executive may obtain review of the decision of Key in accordance with the procedures hereinafter set forth. Within such 60-day period, the Executive or the Executive's authorized representative may request that the claim denial be reviewed by filing with Key a written request therefor, which request shall contain the following information: (a) the date on which the request was filed with Key, (b) the specific portions of the denial of the Executive's claim which the Executive requests Key to review, and (c) any written material which the Executive desires Key to examine. Within 30 days of the date specified in clause (a) of this Section 6.6, Key shall conduct a full and fair review of its decision to deny the Executive's claim for benefits and deliver to the Executive its written decision on review, written in a manner calculated to be understood by the Executive, specifying the reasons and the Agreement provisions upon which its decision is based. Nothing in this Section 6.6 shall be construed as limiting or restricting the Executive's right to institute legal proceedings in a court of competent jurisdiction to enforce this Agreement after complying with the procedures set forth in this Section 6.6 or as limiting or restricting the scope of the court's review (which review shall be de novo); provided, further, that the failure of the Executive to comply with the procedures set forth in this Section 6.6 shall not bar or prohibit the subsequent compliance by the Executive with those procedures and thereafter the Executive shall have the right to institute legal proceedings to enforce this Agreement. 6.7 VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement which shall remain in full force and effect. 6.8 MODIFICATION, WAIVER, ETC. No provision of this Agreement may be modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in a writing signed by the Executive and Key. No waiver by either party hereto at any time of any breach by the other party of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same time or at any prior or subsequent time. No agreement or representation, oral or otherwise, express or implied, with respect to the subject matter hereof has been made by either party which is not set forth expressly in this Agreement. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal representatives, executors, administrators, successors, heirs, and designees. This Agreement shall be governed by and construed in accordance with the laws of the State of Ohio. 9 7. DEFINITIONS. 7.1 ACCOUNTING FIRM. The term "Accounting Firm" means the independent auditors of Key for the fiscal year preceding the year in which the Change of Control occurred and such firm's successor or successors; provided, however, if such firm is unable or unwilling to serve and perform in the capacity contemplated by this Agreement, Key shall select another national accounting firm of recognized standing to serve and perform in that capacity under this Agreement, except that such other accounting firm shall not be the then independent auditors for Key or any of its affiliates (as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended (the "1934 Act")). 7.2 AGGREGATE INCENTIVE COMPENSATION AWARD. The term "Aggregate Incentive Compensation Award" with respect to the Executive for any year shall mean the aggregate incentive compensation awards (whether paid in cash, deferred, or a combination of both) payable to the Executive under any dollar denominated (in contrast to stock based) annual executive incentive compensation plan or multi-year executive incentive compensation plan maintained by Key or any Subsidiary (or any predecessor of Key or a Subsidiary) for that year. For these purposes, an incentive compensation award payable to the Executive under any incentive compensation plan with respect to a period of more than one year will be deemed to be "for" the last year of that multi-year period. If no incentive compensation award is payable to the Executive for any particular year under any incentive compensation plan maintained by Key or any Subsidiary (or any predecessor of Key or a Subsidiary), whether because the Executive was not employed by Key or any Subsidiary (or any predecessor of Key or a Subsidiary) during any part of that year, because incentive compensation targets were not met, or because of any other circumstances, the Aggregate Incentive Compensation Award for that year will be $-0-. 7.3 AVERAGE ANNUAL INCENTIVE COMPENSATION. The term "Average Annual Incentive Compensation" shall mean the average of the three highest Aggregate Incentive Compensation Awards payable to the Executive for any of the years during the five-year period ended on the December 31 immediately preceding the Termination Date. 7.4 CAUSE. The employment of the Executive by Key or any of its Subsidiaries shall have been terminated for "Cause" if, after a Change of Control and prior to the termination of employment, any of the following has occurred: (a) the Executive shall have been convicted of a felony, (b) the Executive commits an act or series of acts of dishonesty in the course of the Executive's employment which are materially inimical to the best interests of Key or a Subsidiary and which constitutes the commission of a felony, all as determined by the vote of three fourths of all of the members of the Board of Directors of Key (other than the Executive, if the Executive is a Director of Key) which determination is confirmed by a panel of three arbitrators appointed and acting in accordance with the 10 rules of the American Arbitration Association for the purpose of reviewing that determination, (c) Key or any Subsidiary has been ordered or directed by any federal or state regulatory agency with jurisdiction to terminate or suspend the Executive's employment and such order or directive has not been vacated or reversed upon appeal, or (d) after being notified in writing by the Board of Directors of Key to cease any particular Competitive Activity, the Executive shall intentionally continue to engage in such Competitive Activity while the Executive remains in the employ of Key or a Subsidiary. If (x) Key or any Subsidiary terminates the employment of the Executive at a time when it has "Cause" therefor under clause (c), above, (y) the order or directive is subsequently vacated or reversed on appeal and the vacation or reversal becomes final and no longer subject to further appeal, and (z) Key or the Subsidiary fails to offer to reinstate the Executive to employment within ten days of the date on which the vacation or reversal becomes final and no longer subject to further appeal, Key or the Subsidiary will be deemed to have terminated the Executive without Cause. 7.5 CHANGE OF CONTROL. A "Change of Control" shall be deemed to have occurred if at any time before the Termination Date there is a Change of Control under any of clauses (a), (b), (c), or (d), below. For these purposes, Key will be deemed to have become a subsidiary of another corporation if any other corporation owns, directly or indirectly, 50 percent or more of the total combined voting power of all classes of stock of Key or any successor to Key. (a) A Change of Control will have occurred under this clause (a) if Key is a party to a transaction pursuant to which Key is merged with or into, or is consolidated with, or becomes the subsidiary of another corporation and, at any time within 24 months after the effective date of that transaction, individuals who were directors of Key on the day after the last annual meeting of shareholders of Key occurring before the transaction cease for any reason to constitute at least 40% of the directors of the surviving or resulting corporation or (if Key becomes a subsidiary in the transaction) of the ultimate parent of Key. (b) A Change of Control will have occurred under this clause (b) if Key is a party to a transaction pursuant to which Key is merged with or into, or is consolidated with, or becomes the subsidiary of another corporation and, (i) after giving effect to such transaction, less than 40% of the then outstanding voting securities of the surviving or resulting 11 corporation or (if Key becomes a subsidiary in the transaction) of the ultimate parent of Key represent or were issued in exchange for voting securities of Key outstanding immediately prior to such transaction, and (ii) at any time within 24 months after the effective date of that transaction, individuals who were directors of Key on the day after the last annual meeting of shareholders of Key occurring before that effective date cease for any reason to constitute at least 51% of the directors of the surviving or resulting corporation or (if Key becomes a subsidiary in the transaction) of the ultimate parent of Key. (c) A Change of Control will have occurred under this clause (c) if any of the events described in (i), (ii), (iii), or (iv) of this clause (c) (a "Change Event") occurs, but only if the condition set out in (x) or the condition set out in (y) of this clause (c) applies. The Change Events described in (i), (ii), (iii), and (iv) of this clause (c) are as follows: (i) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form, or report), each as adopted under the 1934 Act, disclosing the acquisition of 25% or more of the voting stock of Key in a transaction or series of transactions by any person (as the term "person" is used in Section 13(d) and Section 14(d)(2) of the 1934 Act). (ii) Key is a party to a transaction pursuant to which Key is merged with or into, or is consolidated with, or becomes the subsidiary of another corporation and, after giving effect to such transaction, less than 50% of the then outstanding voting securities of the surviving or resulting corporation or (if Key becomes a subsidiary in the transaction) of the ultimate parent of Key represent or were issued in exchange for voting securities of Key outstanding immediately prior to such transaction. (iii) There is a sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets of Key. (iv) The shareholders of Key approve any plan or proposal for the liquidation or dissolution of Key. The conditions set out in (x) and (y) of this clause (c) are as follows: (x) A Change Event occurred in connection with a transaction that was not approved or recommended by the Key Board of Directors. (y) A Change Event occurred in connection with a transaction that was approved or recommended by the Key Board of Directors but only if, within the 24 month period ending on the date of that 12 Change Event, Key had been "put in play" without the prior approval, solicitation, invitation, or recommendation of the Key Board of Directors. For purposes of this condition (y), Key will be deemed to have been "put in play" if any person or entity makes a public announcement of an intention (I) to engage in a transaction with Key that, if consummated, would result in a Change Event, or (II) to "solicit" (as defined in Rule 14a-1 under the 1934 Act) proxies in connection with a proposal that is not approved or recommended by the Key Board of Directors or to engage in an election contest relating to the election of Directors of Key (pursuant to Regulation 14A, including Rule 14a-11, under the 1934 Act). (d) A Change of Control will have occurred under this clause (d) if any person or entity announces an intention to engage in an election contest relating to the election of Directors of Key (pursuant to Regulation 14A, including Rule 14a-11, under the 1934 Act) and, at any time within the 24 month period immediately following the date of the announcement of that intention, individuals who, on the day after the last annual meeting of shareholders of Key occurring before that announcement, constituted the directors of Key cease for any reason to constitute at least a majority thereof. 7.6 COMPETITIVE ACTIVITY. The Executive shall be deemed to have engaged in "Competitive Activity" if the Executive: (a) engages in any business or business activity in which Key or any of its Subsidiaries engages, including, without limitation, engaging in any business activity in the banking or financial services industry (other than as a director, officer, or employee of Key or any of its Subsidiaries), or (b) serves as a director, officer, or employee of any bank, bank holding company, savings and loan association, building and loan association, savings and loan holding company, insurance company, investment banking or securities company, mutual fund company, or other financial services company other than Key or any of its Subsidiaries (each of the foregoing being hereinafter referred to as a "Financial Services Company"), or renders services of a consultative or advisory nature or otherwise to any such Financial Services Company; provided, however, this clause (b) shall not prohibit or restrict the Executive from serving in any such capacity with the consent of Key. 7.7 DISABILITY. For purposes of this Agreement, the Executive's employment will have been terminated by Key or its Subsidiary by reason of "Disability" of the Executive only 13 if (a) as a result of accidental bodily injury or sickness, the Executive has been unable to perform his normal duties for Key or its Subsidiary for a period of 180 consecutive days, and (b) the Executive begins to receive payments under the Key Long Term Disability Plan not later than 30 days after the Termination Date. 7.8 MANDATORY RELOCATION. A "Mandatory Relocation" shall have occurred if, at any time after a Change of Control, the Executive is required to relocate the Executive's principal place of employment for Key or its Subsidiary without the Executive's consent more than 35 miles from where the Executive was located prior to the Change of Control, (b) Key or its Subsidiary has given written notice to the Executive that such a relocation is required, and (c) the Executive, in a written response to that notice, has declined to consent to the required relocation. 7.9 REDUCTION OF BASE SALARY. A "Reduction of Base Salary" shall have occurred if the base salary of the Executive is reduced at any time after a Change of Control. 7.10 SUBSIDIARY. A "Subsidiary" means any corporation, bank, partnership, or other entity a majority of the voting control of which is directly or indirectly owned or controlled at the time in question by Key. 7.11 TERMINATION DATE. The term "Termination Date" means the date on which the Executive's employment with Key and its Subsidiaries terminates. 7.12 WINDOW PERIOD. The term "Window Period," with respect to any particular Change of Control, means the three-month period beginning on the date that falls on same day of the month as the date of the Change of Control in the fifteenth month after the month in which the Change of Control occurs. If at any time there has been more than one Change of Control, there shall be a separate Window Period with respect to each such Change of Control. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. KEYCORP By___________________________ THE "EXECUTIVE" ____________________________ K. BRENT SOMERS EX-11 3 EXHIBIT 11 1 EXHIBIT 11 KEYCORP COMPUTATION OF NET INCOME PER COMMON SHARE (dollars in millions, except per share amounts)
Three months ended March 31, ---------------------------- 1996 1995 -------- -------- NET INCOME APPLICABLE TO COMMON SHARES Net income $208 $210 Less: Preferred dividend requirements 4 4 -------- -------- Net income applicable to Common Shares $204 $206 ======== ======== NET INCOME PER COMMON SHARE Weighted average Common Shares outstanding (000) 233,100 239,999 ======== ======== Net income applicable to Common Shares $204 $206 ======== ======== Net income per Common Share $.88 $.86 ======== ======== NET INCOME PER COMMON SHARE--PRIMARY Weighted average Common Shares outstanding (000) 233,100 239,999 Dilutive common stock options (000)(1) 3,321 1,566 -------- -------- Weighted average Common Shares and Common Share equivalents outstanding (000) 236,421 241,565 ======== ======== Net income applicable to Common Shares $204 $206 ======== ======== Net income per Common Share $.86 $.85 ======== ======== NET INCOME PER COMMON SHARE--FULLY DILUTED Weighted average Common Shares outstanding (000) 233,100 239,999 Dilutive common stock options (000)(1) 3,842 1,661 -------- -------- Weighted average Common Shares and Common Share equivalents outstanding (000) 236,942 241,660 ======== ======== Net income applicable to Common Shares $204 $206 ======== ======== Net income per Common Share $.86 $.85 ======== ======== 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.
42 EX-15 4 EXHIBIT 15 1 EXHIBIT 15 ACKNOWLEDGMENT LETTER OF INDEPENDENT AUDITORS Shareholders and Board of Directors KeyCorp We are aware of the incorporation by reference in the following KeyCorp Registration Statements of our review report, dated April 17, 1996, relating to the unaudited consolidated interim financial statements of KeyCorp, included in the Quarterly Report on Form 10-Q for the quarter ended March 31, 1996. 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 May 9, 1996 43 EX-27 5 EXHIBIT 27
9 1,000,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 2,975 27 438 42 7,482 1,679 1,714 48,161 875 65,052 45,401 8,772 1,489 4,266 246 0 160 4,718 65,052 1,071 152 13 1,236 384 567 669 44 0 570 304 208 0 0 208 .86 .86 4.76 338 89 0 0 876 70 27 875 453 0 422
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