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 June 30, 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 APPEARS HERE]
KEYCORP
------------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 34-6542451
---------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
127 PUBLIC SQUARE,
CLEVELAND, OHIO 44114-1306
--------------------- ----------
(Address of principal (Zip Code)
executive offices)
(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 230,395,281 Shares
--------------------------- ------------------------------
(Title of class) (Outstanding at July 31, 1996)
The number of pages of this report is 45.
2
KEYCORP
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page Number
-------------------- -----------
Consolidated Balance Sheets--
June 30, 1996, December 31, 1995,
and June 30, 1995 3
Consolidated Statements of Income--
Three months and six months ended 4
June 30, 1996 and 1995
Consolidated Statements of Changes in
Shareholders' Equity-- Six months ended
June 30, 1996 and 1995 5
Consolidated Statements of Cash Flow--
Six months ended June 30, 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 41
-----------------
Item 4. Submission of Matters to a Vote of
---------------------------------- 41
Security Holders
----------------
Item 6. Exhibits and Reports on Form 8-K 42
--------------------------------
Signature 43
2
3
PART I. FINANCIAL INFORMATION
KEYCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31, June 30,
dollars in millions 1996 1995 1995
- ---------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
ASSETS
Cash and due from banks $ 3,061 $ 3,444 $ 3,197
Short-term investments 511 682 799
Mortgage loans held for sale 102 640 698
Securities available for sale 7,251 8,060 1,437
Investment securities (fair value: $1,748, $1,738
and $9,930, respectively) 1,714 1,688 9,919
Loans 47,826 47,692 48,093
Less: Allowance for loan losses 870 876 867
- ---------------------------------------------------------------------------------------------------------------
Net loans 46,956 46,816 47,226
Premises and equipment 1,032 1,030 1,018
Goodwill 844 899 660
Other intangible assets 154 171 180
Corporate owned life insurance 1,192 1,088 647
Other assets 1,947 1,821 1,700
- ---------------------------------------------------------------------------------------------------------------
Total assets $ 64,764 $ 66,339 $ 67,481
===============================================================================================================
LIABILITIES
Deposits in domestic offices:
Noninterest-bearing $ 8,877 $ 9,281 $ 8,604
Interest-bearing 34,448 36,764 37,738
Deposits in foreign offices -- interest-bearing 1,092 1,237 2,330
- ---------------------------------------------------------------------------------------------------------------
Total deposits 44,417 47,282 48,672
Federal funds purchased and securities sold
under repurchase agreements 6,171 5,544 4,794
Other short-term borrowings 3,408 2,880 4,067
Other liabilities 1,598 1,477 1,254
Long-term debt 4,174 4,003 4,020
- ---------------------------------------------------------------------------------------------------------------
Total liabilities 59,768 61,186 62,807
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 in 1995 -- 160 160
Common Shares, $1 par value; authorized 900,000,000 shares;
issued 245,944,390 shares 246 246 246
Capital surplus 1,490 1,500 1,456
Retained earnings 3,874 3,633 3,390
Loans to ESOP trustee (49) (51) (64)
Net unrealized gains (losses) on securities, net of income taxes (70) 48 (26)
Treasury stock at cost (14,965,373, 12,241,569 and 16,912,650 shares) (495) (383) (488)
- ---------------------------------------------------------------------------------------------------------------
Total shareholders' equity 4,996 5,153 4,674
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 64,764 $ 66,339 $ 67,481
===============================================================================================================
<FN>
See notes to consolidated financial statements (unaudited).
3
4
KEYCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months ended June 30, Six months ended June 30,
(dollars in millions, except per share amounts) 1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $ 1,080 $ 1,097 $ 2,151 $ 2,126
Mortgage loans held for sale 2 4 8 8
Taxable investment securities 3 142 7 287
Tax-exempt investment securities 19 22 38 44
Securities available for sale 124 23 253 49
Short-term investments 6 11 13 30
- ---------------------------------------------------------------------------------------------------------------------
Total interest income 1,234 1,299 2,470 2,544
INTEREST EXPENSE
Deposits 367 440 751 853
Federal funds purchased and securities
sold under repurchase agreements 74 72 146 149
Other short-term borrowings 44 56 89 106
Long-term debt 67 64 133 126
- ---------------------------------------------------------------------------------------------------------------------
Total interest expense 552 632 1,119 1,234
- ---------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 682 667 1,351 1,310
Provision for loan losses 47 21 91 39
- ---------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 635 646 1,260 1,271
NONINTEREST INCOME
Service charges on deposit accounts 72 70 144 136
Trust and asset management income 61 59 119 112
Loan securitization income 14 -- 27 6
Credit card fees 24 20 44 37
Insurance and brokerage income 16 15 34 27
Mortgage banking income 6 7 14 25
Net securities gains (losses) 1 3 1 (42)
Other income 70 49 130 93
- ---------------------------------------------------------------------------------------------------------------------
Total noninterest income 264 223 513 394
NONINTEREST EXPENSE
Personnel 298 271 589 551
Net occupancy 54 52 108 106
Equipment 40 39 78 79
FDIC insurance assessments 3 26 5 51
Amortization of intangibles 22 19 44 36
Professional fees 13 17 29 30
Marketing 17 17 38 33
Other expense 132 127 258 243
- ---------------------------------------------------------------------------------------------------------------------
Total noninterest expense 579 568 1,149 1,129
- ---------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND 320 301 624 536
EXTRAORDINARY ITEM
Income taxes 103 102 199 163
- ---------------------------------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM 217 199 425 373
Extraordinary net gain from the sales of
subsidiaries, net of income taxes of $25 -- -- -- 36
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME $ 217 $ 199 $ 425 $ 409
=====================================================================================================================
Net income applicable to Common Shares $ 213 $ 195 $ 417 $ 401
Per Common Share:
Income before extraordinary item $ .92 $ .83 $ 1.80 $ 1.54
Net income .92 .83 1.80 1.69
Weighted average Common Shares outstanding 231,341 235,329 232,220 237,651
=====================================================================================================================
<FN>
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) $(152)
Net income 409
Cash dividends:
Common Shares ($.72 per share) (173)
Cumulative Preferred Stock ($6.25 per share) (8)
Issuance of Common Shares:
Acquisitions - 5,953,559 shares 7 164
Dividend reinvestment, stock option, and
purchase plans - 878,064 net shares (5) 24
Repurchase of Common Shares - 18,162,000 shares (524)
Change in net unrealized gains (losses) on
securities, net of deferred tax expense of $52 89
Tax benefit attributable to ESOP dividends 1
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1995 $ 160 $246 $1,456 $3,390 $(64) $ (26) $(488)
====================================================================================================================================
BALANCE AT DECEMBER 31, 1995 $ 160 $246 $1,500 $3,633 $(51) $ 48 $(383)
Net income 425
Cash dividends:
Common Shares ($.76 per share) (176)
Cumulative Preferred Stock ($6.25 per share) (8)
Redemption of 10% Cumulative Preferred Stock (160)
Issuance of Common Shares under
dividend reinvestment, stock option, and
purchase plans - 2,322,196 net shares (10) 75
Repurchase of Common Shares - 5,046,000 shares (187)
Change in net unrealized gains (losses) on
securities, net of deferred tax benefit of $(56) (118)
Loan payment from ESOP trustee 2
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1996 - $246 $1,490 $3,874 $(49) $ (70) $(495)
====================================================================================================================================
<FN>
See notes to consolidated financial statements (unaudited).
5
6
KEYCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
Six months ended June 30,
in millions 1996 1995
- -----------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 425 $ 409
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 91 39
Depreciation expense 70 74
Amortization of intangibles 44 36
Net gain from sales of subsidiaries (8) (61)
Net securities (gains) losses (1) 42
Deferred income taxes 33 20
Net (increase) decrease in mortgage loans held for sale 538 (343)
Net increase in trading account assets -- (7)
Other operating activities, net (99) 67
- -----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,093 276
INVESTING ACTIVITIES
Net increase in loans (1,252) (747)
Loans sold 268 311
Purchases of investment securities (439) (776)
Proceeds from sales of investment securities 3 4
Proceeds from prepayments and maturities of investment securities 423 1,276
Purchases of securities available for sale (1,279) (354)
Proceeds from sales of securities available for sale 41 1,506
Proceeds from prepayments and maturities of securities available for sale 1,904 228
Net increase in short-term investments (203) (32)
Purchases of premises and equipment (89) (144)
Proceeds from sales of premises and equipment 14 8
Proceeds from sales of other real estate owned 19 22
Purchases of corporate owned life insurance (65) (125)
Proceeds from sales of subsidiaries 137 351
Net cash used in acquisitions, net of cash acquired (12) (198)
- -----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (530) 1,330
FINANCING ACTIVITIES
Net decrease in deposits (1,868) (1,611)
Net increase (decrease) in short-term borrowings 1,153 (9)
Net proceeds from issuance of long-term debt 932 535
Payments on long-term debt (699) (149)
Loan payment received from ESOP trustee 2 --
Purchases of treasury shares (187) (524)
Redemption of 10% Cumulative Preferred Stock (160) --
Proceeds from issuance of common stock pursuant to employee
stock purchase, stock option and dividend reinvestment plans 65 19
Cash dividends (184) (181)
- -----------------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (946) (1,920)
- -----------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND DUE FROM BANKS (383) (314)
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 3,444 3,511
- -----------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 3,061 $ 3,197
=================================================================================================================
Additional disclosures relative to cash flow:
Interest paid $ 1,122 $ 1,208
Income taxes received 107 149
Net amount received on portfolio swaps 45 56
Noncash items:
Net transfer of loans to other real estate owned $ 17 $ 6
- -----------------------------------------------------------------------------------------------------------------
<FN>
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 audited
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 in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees."
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996. SFAS No. 125 requires that
the recognition of transfers and servicing of financial assets and
extinguishments of liabilities be accounted for based on a financial-
components approach that focuses on control. Under this approach, the entity
that exercises control over transferred assets recognizes those financial and
servicing assets it controls and the liabilities it has incurred. Financial
assets are derecognized when control is surrendered, and liabilities
derecognized when extinguished. KeyCorp expects to adopt SFAS No. 125 as of
January 1, 1997, however, the impact of adoption has not yet been determined.
2. MERGERS, ACQUISITIONS AND DIVESTITURES
COMPLETED MERGERS AND ACQUISITIONS
Mergers and acquisitions completed by KeyCorp during 1996 and 1995 (each of
which was accounted for as a purchase business combination) are summarized
below.
COMMON
dollars in millions LOCATION DATE ASSETS SHARES ISSUED
- --------------------------------------------------------------------------------------------
Knight Insurance Ageny, Inc.(1) Massachusetts June 1996 $ 8 --
AutoFinance Group, Inc.(2) Illinios September 1995 181 9,554,003
Spears, Benzak, Salomon &
Farrell Inc. New York April 1995 See note 3 1,910,000
OMNIBANCORP Colorado February 1995 500 4,043,559
Casco Northern Bancorp,
National Association Maine February 1995 945 --
BANKVERMONT Corporation Vermont January 1995 661 --
- --------------------------------------------------------------------------------------------
<FN>
1 Knight Insurance Agency, Inc. ("Knight") is an education financing company
doing business under the name "Knight College Resource Group."
2 See text for more information regarding this transaction.
3 Spears, Benzak, Salomon & Farrell, Inc. ("Spears Benzak") is an investment
management firm that had approximately $3.2 billion in assets under
management on the date of acquisition.
7
8
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 straightline
method over a period of 25 years.
COMPLETED DIVESTITURES
Society First Federal Savings Bank
On June 1, 1996, KeyCorp sold Society First
Federal Savings Bank ("SFF"), its Florida savings association subsidiary.
SFF had assets of approximately $1.2 billion at the time of the transaction.
KeyCorp continues to provide private banking services in Florida through its
trust company located in Naples, Florida. An $8 million gain was realized on
the SFF sale and included in other income on the income statement.
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, subsequently 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.
ACQUISITION PENDING AS OF JUNE 30, 1996
In May 1996, KeyCorp 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, pending
necessary regulatory approval, is expected to close during the third quarter
and will be accounted for as a purchase.
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 ($33 million as
of June 30, 1996) and included in short-term investments on the balance
sheet. Realized and unrealized gains and losses on such assets are reported
in other income on the income statement. Debt and equity securities that
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.
8
9
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 June 30, 1996, approximately $7.3 billion of securities were classified as
available for sale and shareholders' equity was reduced by $70 million,
representing the net unrealized loss on these securities, net of deferred tax
benefit.
The amortized cost, unrealized gains and losses, and approximate fair values
of securities available for sale were as follows (in millions):
June 30, 1996
---------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------- --------------- -------------- ----------------
U.S. Treasury, agencies and corporations $1,222 $ 3 $ 7 $1,218
States and political subdivisions 20 -- -- 20
Collateralized mortgage obligations 2,419 1 46 2,374
Other mortgage-backed securities 3,542 25 90 3,477
Other securities 160 2 -- 162
----------------- --------------- -------------- ----------------
Total $7,363 $31 $143 $7,251
================= =============== ============== ================
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 -- 3,900
Other securities 176 5 -- 181
----------------- --------------- -------------- ----------------
Total $7,994 $112 $46 $8,060
================= =============== ============== ================
June 30, 1995
---------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------- --------------- -------------- ----------------
U.S. Treasury, agencies and corporations $ 462 $ 5 -- $ 467
States and political subdivisions 29 1 $ 3 27
Other mortgage-backed securities 885 8 9 884
Other securities 59 -- -- 59
----------------- --------------- -------------- ----------------
Total $1,435 $14 $12 $1,437
================= =============== ============== ================
9
10
4. INVESTMENT SECURITIES
The amortized cost, unrealized gains and losses, and approximate fair values
of investment securities were as follows (in millions):
June 30, 1996
---------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------- --------------- -------------- ----------------
States and political subdivisions $1,450 $36 $2 $1,484
Other securities 264 -- -- 264
================= =============== ============== ================
Total $1,714 $36 $2 $1,748
================= =============== ============== ================
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
================= =============== ============== ================
June 30, 1995
---------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------- --------------- -------------- ----------------
U.S. Treasury, agencies and corporations $ 551 $ 6 $ 2 $ 555
States and political subdivisions 1,428 50 2 1,476
Collateralized mortgage obligations 3,613 3 61 3,555
Other mortgage-backed securities 3,892 49 20 3,921
Other securities 435 3 15 423
================= =============== ============== ================
Total $9,919 $111 $100 $9,930
================= =============== ============== ================
5. LOANS
Loans are summarized as follows (in millions):
June 30, December 31, June 30,
1996 1995 1995
---------------- ---------------- -----------------
Commercial, financial and agricultural $11,956 $11,535 $11,340
Real estate-construction 1,561 1,520 1,440
Real estate-commercial mortgage 7,155 7,254 7,228
Real estate-residential mortgage 10,994 12,177 13,522
Credit cards 1,720 1,564 1,381
Other consumer 8,943 8,553 8,508
Student loans held for sale 2,314 2,081 2,175
Lease financing 3,068 2,887 2,430
Foreign 115 121 69
---------------- ---------------- -----------------
Total $47,826 $47,692 $48,093
================ ================ =================
10
11
Changes in the allowance for loan losses are summarized as follows (in
millions):
Three months ended June 30, Six months ended June 30,
---------------------------------------------------------------------------
1996 1995 1996 1995
---------------- ---------------- ----------------- -----------------
Balance at beginning of period $875 $867 $876 $830
Charge-offs (74) (49) (144) (92)
Recoveries 28 28 55 54
---------------- ---------------- ----------------- -----------------
Net charge-offs (46) (21) (89) (38)
Provision for loan losses 47 21 91 39
Allowance acquired/(sold), net (6) -- (8) 35
Transfer from OREO allowance -- -- -- 1
---------------- ---------------- ----------------- -----------------
Balance at end of period $870 $867 $870 $867
================ ================ ================= =================
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.
Nonperforming assets were as follows (in millions):
June 30, December 31, June 30,
1996 1995 1995
----------------- ---------------- ----------------
Impaired loans $175 $205 $192
Other nonaccrual loans 150 125 118
Restructured loans 1 3 1
----------------- ---------------- ----------------
Total nonperforming loans 326 333 311
Other real estate owned 53 56 61
Allowance for OREO losses (11) (14) (11)
----------------- ---------------- ----------------
Other real estate owned, net of allowance 42 42 50
Other nonperforming assets 3 4 5
----------------- ---------------- ----------------
Total nonperforming assets $371 $379 $366
================= ================ ================
11
12
At June 30, 1996, the recorded investment in impaired loans was $175 million.
Included in this amount is $77 million of impaired loans for which the
specifically allocated allowance for loan losses is $23 million, and $98
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 two commercial loans totaling $38 million. The average
recorded investment in impaired loans for the second quarter of 1996 was $177
million, down from $183 million for the second quarter of last year.
7. LONG-TERM DEBT
The components of long-term debt, presented net of unamortized discount where
applicable, were as follows (dollars in millions):
June 30, December 31, June 30,
1996 1995 1995
------------------ ------------------ ------------------
Senior Medium-Term Notes due through 2005 1 $ 990 $ 995 $ 963
Subordinated Medium-Term Notes due through 2005 2 183 183 165
7.50% Subordinated Notes due 2006 250 -- --
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
8.404% Notes due 1997 through 2001 49 49 49
8.875% Notes due 1996 -- 75 75
11.125% Notes due 1995 -- -- 50
8.255% Notes due 1996 -- 23 23
All other long-term debt 16 -- --
------------------ ------------------ ------------------
Total parent company 2,087 1,723 1,723
Senior Medium-Term Bank Notes due through 1998 3 1,380 1,399 1,399
7.25% Subordinated Notes due 2005 200 200 200
7.85% Subordinated Notes due 2002 200 200 200
6.75% Subordinated Notes due 2003 199 199 199
Federal Home Loan Bank Advances 93 267 283
Industrial revenue bonds 10 10 10
All other long-term debt 5 5 6
------------------ ------------------ ------------------
Total subsidiaries 2,087 2,280 2,297
------------------ ------------------ ------------------
Total $4,174 $4,003 $4,020
================== ================== ==================
<FN>
1 The weighted average rate on the Senior Medium-Term Notes due through 2005
was 6.46%, 6.62% and 6.49% at June 30, 1996, December 31,1995, and June 30,
1995, respectively.
2 The weighted average rate on the Subordinated Medium-Term Notes due
through 2005 was 6.82%, 6.88% and 6.81% at June 30, 1996,December 31,
1995, and June 30, 1995, respectively.
3 The weighted average rate on the Senior Medium-Term Notes due through 1998
was 6.60%, 6.71% and 6.80% at June 30, 1996, December 31,1995, and June 30,
1995, respectively.
8. INCOME TAXES
The effective tax rate (provision for income taxes as a percentage of income
before income taxes) for the 1996 second quarter was 32.2% compared to 33.7% for
the second quarter of 1995. For the first six months of 1996, the effective
tax rate was 31.9% compared to 30.4% for the same period in 1995. The lower
1995 year-to-date 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.
12
13
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.
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 or 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
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):
June 30, December 31, June 30,
Loan commitments: 1996 1995 1995
----------------- ------------------ ----------------
Credit card lines $ 7,698 $ 6,996 $ 5,784
Home equity 4,184 3,982 3,663
Commercial real estate and construction 1,643 1,554 1,242
Commercial and other 10,041 9,883 7,450
----------------- ------------------ ----------------
Total loan commitments 23,566 22,415 18,139
Other commitments:
Standby letters of credit 1,236 1,108 1,042
Commercial letters of credit 205 144 236
Loans sold with recourse 32 34 39
----------------- ------------------ ----------------
Total loan and other commitments $25,039 $23,701 $19,456
================= ================== ================
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 creditworthiness of
13
14
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.
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 June 30, 1996, all counterparties were
expected to meet their obligations. At June 30, 1996, KeyCorp had credit
exposure of an aggregate $5 million to 6 counterparties, with the largest
credit exposure to an individual counterparty amounting to $2 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 June 30, 1996, KeyCorp
was party to $2.0 billion and $3.2 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.
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):
June 30, 1996 December 31, 1995
-------------------------------------------------------------------- -------------------------
Maturity(1) Weighted Average Rate
Notional Fair ---------------------------- Notional Fair
Amount Value (years) Receive Pay Amount Value
----------- ----------- ----------- ------------- ------------ ---------- -----------
Receive fixed/pay variable--
indexed amortizing $ 5,486 $ (57) 2.9 6.77% 5.54% $ 6,200 $ 70
Receive fixed/pay variable--
conventional 3,177 (39) 6.4 6.63 5.57 2,497 104
Pay fixed/receive variable--
conventional 1,839 (4) .7 5.48 6.62 2,412 (21)
----------- ----------- ---------- -----------
Total portfolio swaps $10,502 $(100) 3.6 6.50% 5.74% $11,109 $153
=========== =========== ========== ===========
<FN>
1 Maturity is based upon expected average lives rather than contractual terms.
14
15
Based on the weighted average rates in effect at June 30, 1996, the spread on
portfolio interest rate swaps, excluding the amortization of net deferred losses
on terminated swaps, provided a positive impact on net interest income (since
the weighted average rate received exceeded the weighted average rate paid by 76
basis points). The aggregate negative fair value of $(100) 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.
The following table summarizes the notional amounts, fair values and weighted
average rates of portfolio swaps by interest rate management strategy (in
millions):
June 30, 1996 December 31, 1995
------------------------------------------------------ ------------------------
Weighted Average Rate
Notional Fair -------------------------- Notional Fair
Amount Value Receive Pay Amount Value
----------- ------------ ----------- --------- ----------- -----------
Convert variable rate loans
to fixed $ 7,053 $ (91) 6.69% 5.53% $7,567 $113
Convert variable rate deposits
and short-term borrowings
to fixed 1,659 (2) 5.47 6.66 2,275 (18)
Convert variable rate long-
term debt to fixed 180 (2) 5.58 6.29 137 (3)
Convert fixed rate long-term
debt to variable 1,610 (5) 6.85 5.66 1,130 61
----------- ------------ ----------- -----------
Total portfolio swaps $10,502 $(100) 6.50% 5.74% $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 second quarter of 1996 by $19 million, and reduced net
interest income by $3 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 six months
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 June 30, 1996, is
as follows (dollars in millions):
Weighted Average
Deferred Remaining
Asset/Liability Managed Gains/(Losses) Amortization (Years)
- ------------------------------ ------------------- ------------------------
Loans $ (1) 2.3
Debt 18 6.8
-------------------
Total $17
===================
15
16
KeyCorp also uses interest rate caps and floors, and futures contracts to
manage the risk associated with the potential impact of adverse movements in
interest rates. Futures contracts are commitments to either purchase or sell
designated financial instruments at future dates for specified prices.
KeyCorp had caps and floors with a notional amount and fair value of $844
million and $2 million, respectively, at June 30, 1996. There were no
futures contracts outstanding at the same date.
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 June 30, 1996,
and on average for the six-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 June 30, 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 $34 million. The risk of counterparties
defaulting on their obligations is monitored on an ongoing basis.
The affiliate banks contract with counterparties of good credit standing and
enter into master netting agreements when possible in an effort to manage
credit risk.
Trading income recognized on interest rate and foreign exchange forward
contracts totaled $3 million and $6 million, respectively, for both the first
six months of 1996 and 1995.
June 30, 1996 Six months ended June 30, 1996
---------------------------------------------------------------------
Notional Fair Average Average
Interest rate contracts: Amount Value Notional Amount Fair Value
---------- ----------- ----------------------- ----------------
Trading swaps:
Assets $2,150 $23 $1,857 $21
Liabilities 1,974 (7) 1,815 (9)
Caps and floors purchased 1,659 2 1,059 2
Caps and floors written 1,752 (2) 1,100 (2)
Foreign exchange forward contracts:1
Assets 437 10 558 14
Liabilities 431 (10) 562 (14)
<FN>
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 June 30, 1996 and 1995, and the related
consolidated statements of income for the three and six-month periods then
ended, and the consolidated statements of changes in shareholders' equity and
cash flow for the six-month periods ended June 30, 1996 and 1995. 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
July 16, 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 for the periods presented. It should be read in
conjunction with the unaudited consolidated interim financial statements and
notes thereto, presented on pages 3 through 16.
During the first six months 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, during
the first quarter, 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
three times that produced in the first six months 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 first quarter 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 brokerdealer registered with the National
Association of Securities Dealers, Inc., 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 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 midsized
and larger corporate clients. The transaction is expected to close during
the third quarter, pending necessary regulatory approvals. In June 1996,
KeyCorp acquired Knight, a Boston-based company (doing business under the name
"Knight College Resource Group") which specializes in providing education
financing programs, and now operates as a wholly owned subsidiary of KeyBank
USA, National Association. Also in June, KeyCorp completed the sale of SFF,
its Florida savings association subsidiary, but continues to provide private
banking services in Florida through its trust company located in Naples.
In addition to the above actions, during the first six months of 1996
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 residential mortgage loans and student loans totaling
$500 million and $143 million, respectively, the securitization and sale of
$85 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 six months of 1996, 5,046,000 KeyCorp
Common Shares were repurchased as part of the 12,000,000 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 during 1995 and in the first six months of 1996.
In addition, on June 30, 1996, KeyCorp redeemed its 10% Cumulative Preferred
Stock in accordance with approval received earlier in the year from the Board
of Directors.
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 was
completed in June as the Indiana/Michigan bank was merged with and into
Society National Bank, KeyCorp's principal bank subsidiary located in Ohio.
The resulting bank was 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
six 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 and the year-to-date periods ended June 30, 1996 and 1995. 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
unaudited consolidated interim financial statements presented on pages 7
through 16.
FIGURE 1. COMPONENTS OF EARNINGS PER COMMON SHARE
Six Months ended June 30, Change
----------------------------------- -------------------------
1996 1995 Amount Percent
---------------- ---------------- ------------ -----------
Interest income $10.64 $10.70 $(.06) (.6)%
Interest expense 4.82 5.19 (.37) (7.1)
---------------- ---------------- ------------
Net interest income 5.82 5.51 .31 5.6
Provision for loan losses .39 .16 .23 143.8
---------------- ---------------- ------------
Net interest income after provision for
loan losses 5.43 5.35 .08 1.5
Noninterest income 2.21 1.66 .55 33.1
Noninterest expense 4.95 4.75 .20 4.2
---------------- ---------------- ------------
Income before income taxes and
extraordinary item 2.69 2.26 .43 19.0
Income taxes .86 .69 .17 24.6
Preferred dividends .03 .03 -- --
---------------- ---------------- ------------
Earnings per Common Share
before extraordinary item 1.80 1.54 .26 16.9
Extraordinary net gain from sales of
subsidiaries, net of income taxes -- .15 (.15) (100.0)
---------------- ---------------- ------------
Earnings per Common Share $ 1.80 $ 1.69 $ .11 6.5%
================ ================ ============
Net income for the second quarter of 1996 totaled $217 million, or $.92 per
Common Share. This compared with $199 million, or $.83 per Common Share, for
the second quarter of 1995. On an annualized basis, the return on average
common equity for the second quarter of 1996 was 17.15%, up from 16.86% for
the same period last year. The annualized returns on average total assets for
the second quarters of 1996 and 1995 were 1.35% and 1.19%, respectively.
Primary factors affecting the comparative earnings were a $12 million
increase in taxable-equivalent net interest income and a $41 million increase in
noninterest income. These factors were partially offset by a $26 million
increase in the provision for loan losses and a $11 million increase in
noninterest expense. The efficiency ratio, which measures the extent to which
recurring revenues are used to pay operating expenses, improved to 60.50% for
the second quarter of 1996 from 61.22% and 63.05% for the first quarter of
1996 and the second quarter of 1995, respectively.
Net income for the first half of 1996 totaled $425 million, or $1.80 per
Common Share, up from $409 million, or $1.69 per Common Share, for the same
period last year. On an annualized basis, the return on average common
equity for the first six months of 1996 was 16.78% compared with 17.55% for
the first six months of 1995. The annualized returns on average total assets
for the first six months of 1996 and 1995 were 1.32% and 1.24%, respectively.
Included in 1995 year-to-date results was the effect of several significant
nonrecurring items recorded during the first quarter. An extraordinary net
gain of $61 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 year-to-
date earnings by $21 million, or $.09 per Common Share.
19
20
Excluding the impact of the 1995 nonrecurring items, earnings for the first
half of 1996 were up $37 million, or 10%, from the first half of 1995.
Affecting the comparative results were a $36 million increase in taxable-
equivalent net interest income and a $70 million increase in noninterest
income. These positive factors were partially offset by increases in the
provision for loan losses and noninterest expense of $52 million and $20
million, respectively. The efficiency ratio improved to 60.86% for the first
half of 1996 from 63.58% for the first six months of 1995.
20
21
Figure 2. Selected Quarterly Financial Data
1996 1995
---------------------------------- -----------------------------------
dollars in millions, except per share amounts SECOND First Fourth Third Second
- ----------------------------------------------------------------------------------------------------------------------------------
FOR THE PERIOD
Interest income $1,234 $1,236 $1,278 $1,299 $1,299
Interest expense 552 567 618 633 632
Net interest income 682 669 660 666 667
Provision for loan losses 47 44 34 27 21
Noninterest income 264 249 304 235 223
Noninterest expense 579 570 622 561 568
Income before income taxes and extraordinary item 320 304 308 313 301
Income before extraordinary item 217 208 207 209 199
Net income 217 208 207 209 199
Net income applicable to Common Shares 213 204 203 205 195
- -----------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Income before extraordinary item $ .92 $ .88 $ .86 $ .90 $ .83
Net income .92 .88 .86 .90 .83
Cash dividends .38 .38 .36 .36 .36
Book value at period-end 21.63 21.43 21.36 20.74 19.71
Market price:
High 40.25 39.13 37.25 35.13 32.13
Low 36.75 33.38 33.25 30.38 26.00
Close 38.75 38.63 36.25 34.25 31.38
Weighted average Common Shares (000) 231,341 233,100 235,753 228,187 235,329
- -----------------------------------------------------------------------------------------------------------------------------------
AT PERIOD-END
Loans $47,826 $48,161 $47,692 $48,410 $48,093
Earning assets 57,404 57,941 58,762 60,847 60,946
Total assets 64,764 65,052 66,339 67,967 67,481
Deposits 44,417 45,401 47,282 47,905 48,672
Long-term debt 4,174 4,266 4,003 4,048 4,020
Common shareholders' equity 4,996 4,964 4,993 4,923 4,514
Total shareholders' equity 4,996 5,124 5,153 5,083 4,674
- -----------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on average total assets 1.35% 1.28% 1.23% 1.25% 1.19%
Return on average common equity 17.15 16.42 16.31 18.07 16.86
Return on average total equity 16.93 16.22 16.11 17.79 16.63
Efficiency1 60.50 61.22 63.67 61.27 63.05
Overhead2 45.53 47.07 47.36 47.89 51.10
Net interest margin (TE) 4.80 4.70 4.53 4.50 4.49
- -----------------------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS AT PERIOD-END
Equity to assets 7.71% 7.88% 7.77% 7.48% 6.93%
Tangible equity to tangible assets 6.27 6.38 6.25 5.98 5.75
Tier I risk-adjusted capital 7.60 7.71 7.53 7.55 7.45
Total risk-adjusted capital 11.72 11.45 10.85 10.84 10.82
Leverage 6.43 6.43 6.20 6.19 5.88
- -----------------------------------------------------------------------------------------------------------------------------------
Figure 2. Selected Quarterly Financial Data
Six months ended June 30,
---------------------------------
dollars in millions, except per share amounts 1996 1995
- ------------------------------------------------------------------------------------------
FOR THE PERIOD
Interest income $2,470 $2,544
Interest expense 1,119 1,234
Net interest income 1,351 1,310
Provision for loan losses 91 39
Noninterest income 513 394
Noninterest expense 1,149 1,129
Income before income taxes and extraordinary item 624 536
Income before extraordinary item 425 373
Net income 425 409
Net income applicable to Common Shares 417 401
- -------------------------------------------------------------------------------------------
PER COMMON SHARE
Income before extraordinary item $ 1.80 $ 1.54
Net income 1.80 1.69
Cash dividends .76 .72
Book value at period-end 21.63 19.71
Market price:
High 40.25 32.13
Low 33.38 24.50
Close 38.75 31.38
Weighted average Common Shares (000) 232,220 237,651
- -------------------------------------------------------------------------------------------
AT PERIOD-END
Loans $47,826 $48,093
Earning assets 57,404 60,946
Total assets 64,764 67,481
Deposits 44,417 48,672
Long-term debt 4,174 4,020
Common shareholders' equity 4,996 4,514
Total shareholders' equity 4,996 4,674
- -------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on average total assets 1.32% 1.24%
Return on average common equity 16.78 17.55
Return on average total equity 16.58 17.30
Efficiency1 60.86 63.58
Overhead2 46.29 51.72
Net interest margin (TE) 4.75 4.44
- -------------------------------------------------------------------------------------------
CAPITAL RATIOS AT PERIOD-END
Equity to assets 7.71% 6.93%
Tangible equity to tangible assets 6.27 5.75
Tier I risk-adjusted capital 7.60 7.45
Total risk-adjusted capital 11.72 10.82
Leverage 6.43 5.88
- -------------------------------------------------------------------------------------------
<FN>
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.
TE = Taxable Equivalent
21
22
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 interestbearing
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 for the
quarterly and year-to-date periods from the same periods in the prior year.
A more in-depth discussion of changes in earning assets and funding sources
is presented in the Financial Condition section beginning on page 32.
For the second quarter of 1996 net interest income was $694 million, up $12
million, or 2%, from the same period last year. This increase resulted from
a net interest margin which rose by 31 basis points to 4.80% and more than
offset the impact of a planned decrease of $2.9 billion, or 5%, 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 since the second quarter of last year and 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 completion of the amortization of deferred losses
resulting from the 1994/1995 swap terminations related to the balance sheet
reconfiguration, the investment of funds from maturing securities into higher
- -yielding loans and the replacement of maturing bank notes and pay fixed
swaps with similar instruments having lower interest rates during the fourth
quarter of last year. Swap terminations are discussed in greater detail in
Note 10, Financial Instruments with Off Balance Sheet Risk, beginning on page
13. The net interest margin continued to rise in the second quarter of 1996
and was 10 basis points higher than the prior quarter.
Average earning assets for the second quarter totaled $57.9 billion, which
was $2.9 billion, or 5%, lower than the second quarter 1995 level. This
decrease was due primarily to a $2.5 billion, or 21%, decline in securities
(including both investment securities and securities available for sale) and
a $236 million, or 32%, decline in short-term investments. Average earning
assets comprised 90% of average total assets during the second quarter of
1996 and 91% during the second 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 $10.5 billion at June 30, 1996, from $11.1 billion at
year-end 1995. For the second quarter of 1996, interest rate swaps
contributed $19 million and 13 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 $3 million and the net interest margin
by 2 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.
22
23
FIGURE 3. AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND YIELDS/RATES
SECOND QUARTER 1996 First Quarter 1996
------------------------------------- ----------------------------------------
AVERAGE YIELD/ Average Yield/
dollars in millions BALANCE INTEREST RATE Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Loans: 1,2
Commercial, financial and agricultural $12,134 S 271 8.98 % $11,578 $ 256 8.89 %
Real estate 20,155 449 8.96 20,734 459 8.90
Consumer 10,490 264 10.12 10,227 263 10.34
Student loans held for sale 2,343 48 8.24 2,257 46 8.20
Lease financing 2,971 49 6.63 2,895 48 6.67
Foreign 99 2 7.93 109 2 7.38
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans 48,192 1,083 9.04 47,800 1,074 9.04
Mortgage loans held for sale 100 2 8.04 352 6 6.86
Taxable investment securities 259 3 5.64 267 4 6.03
Tax-exempt investment securities1 1,414 28 7.96 1,418 29 8.23
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 1,673 31 7.45 1,685 33 7.88
Securities available for sale 1,3 7,410 124 6.73 7,864 129 6.60
Interest-bearing deposits with banks 28 -- 2.70 32 -- 2.89
Federal funds sold and securities
purchased under resale agreements 418 5 5.08 448 7 5.39
Trading account assets 45 1 5.25 27 -- 5.30
- ------------------------------------------------------------------------------------------------------------------------------------
Total short-term investments 491 6 4.96 507 7 5.35
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets 57,866 1,246 8.66 58,208 1,249 8.63
Allowance for loan losses (877) (875)
Other assets 7,634 7,778
- ------------------------------------------------------------------------------------------------------------------------------------
$64,623 $65,111
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Money market deposit accounts $ 10,273 76 2.98 $ 8,725 71 3.27
Savings deposits 5,832 37 2.55 6,018 39 2.61
NOW accounts 2,348 12 2.06 3,984 18 1.82
Certificates of deposit ($100,000 or more) 3,267 49 6.03 3,661 54 5.93
Other time deposits 13,849 178 5.17 14,215 190 5.38
Deposits in foreign offices 1,154 15 5.23 848 12 5.69
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 36,723 367 4.02 37,451 384 4.12
Federal funds purchased and securities
sold under repurchase agreements 5,899 74 5.05 5,691 72 5.09
Other short-term borrowings 2,922 44 6.06 2,950 45 6.14
Long-term debt 4 4,152 67 6.60 4,102 66 6.59
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 49,696 552 4.47 50,194 567 4.54
Noninterest-bearing deposits 8,202 8,208
Other liabilities 1,571 1,551
Preferred stock 158 160
Common shareholders' equity 4,996 4,998
- ------------------------------------------------------------------------------------------------------------------------------------
$64,623 $65,111
Interest rate spread ========= 4.19 ========= 4.09
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income (TE) and net
interest margin (TE) $ 694 4.80 % $ 682 4.70 %
======== ======= ======== =======
Taxable-equivalent adjustment 1 $12 $13
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
1 Interest income on tax-exempt securities and loans has been adjusted to a taxable-equivalent basis using the statutory Federal
income tax rate of 35%.
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
23
24
Fourth Quarter 1995 Third Quarter 1995 Second Quarter 1995
- ----------------------------------- ---------------------------------------- -----------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------------------------
$11,455 253 8.75 % $11,391 $ 268 9.33 % $11,350 $ 270 9.52 %
21,542 489 9.01 22,166 495 8.86 22,519 497 8.85
9,992 259 10.30 9,720 248 10.14 9,886 244 9.91
1,848 40 8.48 2,355 51 8.56 2,156 50 9.24
2,715 48 6.99 2,490 43 6.95 2,340 39 6.71
88 1 6.40 74 1 5.06 54 1 7.63
- -----------------------------------------------------------------------------------------------------------------------------------
47,640 1,090 9.08 48,196 1,106 9.11 48,305 1,101 9.14
398 7 6.97 168 4 8.75 195 4 8.02
5,736 95 6.58 8,275 139 6.68 8,579 142 6.66
1,275 27 8.49 1,532 32 8.29 1,559 33 8.54
- -----------------------------------------------------------------------------------------------------------------------------------
7,011 122 6.93 9,807 171 6.93 10,138 175 6.95
3,890 64 6.53 1,457 23 6.15 1,424 23 6.02
53 1 4.37 41 -- 4.06 46 1 4.32
417 6 5.89 481 7 5.83 526 8 6.04
70 1 5.60 144 2 5.75 155 2 6.08
- -----------------------------------------------------------------------------------------------------------------------------------
540 8 5.71 666 9 5.71 727 11 5.94
- -----------------------------------------------------------------------------------------------------------------------------------
59,479 1,291 8.62 60,294 1,313 8.63 60,789 1,314 8.66
(879) (870) (869)
7,943 7,192 7,030
- -----------------------------------------------------------------------------------------------------------------------------------
$66,543 $66,616 $66,950
========= ========= =========
$ 7,285 66 3.59 $ 7,154 66 3.67 $ 7,058 66 3.74
6,201 41 2.65 6,289 42 2.65 6,594 44 2.66
5,389 27 2.00 5,408 27 2.00 5,478 28 2.06
3,735 58 6.14 4,070 58 5.69 3,508 57 6.50
14,623 203 5.50 14,496 206 5.63 14,948 195 5.24
1,048 23 8.53 1,867 35 7.42 2,520 50 7.88
- -----------------------------------------------------------------------------------------------------------------------------------
38,281 418 4.33 39,284 434 4.39 40,106 440 4.39
6,269 87 5.48 5,672 79 5.55 5,037 72 5.75
3,089 46 5.92 3,375 52 6.00 3,686 56 6.16
4,042 67 6.58 4,046 68 6.83 3,875 64 6.77
- -----------------------------------------------------------------------------------------------------------------------------------
51,681 618 4.74 52,377 633 4.80 52,704 632 4.82
8,392 8,157 8,007
1,379 1,407 1,441
160 160 160
4,931 4,515 4,638
- -----------------------------------------------------------------------------------------------------------------------------------
$66,543 $66,616 $66,950
========= 3.88 ========= 3.83 ========= 3.84
- -----------------------------------------------------------------------------------------------------------------------------------
$ 673 4.53 % $ 680 4.50 % $ 682 4.49 %
====== ======= ====== ====== ====== ======
$13 $14 $15
- -----------------------------------------------------------------------------------------------------------------------------------
24
25
FIGURE 4. COMPONENTS OF NET INTEREST INCOME CHANGES
in millions
From Three Months Ended June 30, 1995 From Six Months Ended June 30, 1995
To Three Months Ended June 30, 1996 To Six Months Ended June 30, 1996
-------------------------------------- -----------------------------------
Average Yeild/ Net Average Yeild/ Net
Volume Rate Change Volume Rate Change
-------------------------------------- -----------------------------------
INTEREST INCOME
Loans $ 14 $(32) $ (18) $ 18 $ 6 $ 24
Mortgage loans for sale (2) -- (2) -- -- --
Taxable investment securities (106) (33) (139) (232) (48) (280)
Tax-exempt investment securities (3) (2) (5) (6) (3) (9)
Securities available for sale 98 3 101 203 -- 203
Short-term investments (6) 1 (5) (13) (4) (17)
----- ---- ----- ----- ---- -----
Total interest income (TE) (5) (63) (68) (30) (49) (79)
INTEREST EXPENSE
Money market deposit accounts 22 (12) 10 39 (20) 19
Savings deposits (2) (5) (7) (10) (5) (15)
NOW accounts (16) -- (16) (22) (4) (26)
Certificates of deposit ($100,000 or more) (3) (5) (8) (1) (2) (3)
Other time deposits (7) (10) (17) (9) 3 (6)
Deposits in foreign offices (25) (10) (35) (55) (16) (71)
----- ---- ----- ----- ---- -----
Total interenst-bearing deposits (31) (42) (73) (58) (44) (102)
Federal funds purchased and securities
sold under repurchase agreements 8 (6) 2 14 (17) (3)
Other short-term borrowings (9) (3) (12) (17) -- (17)
Long-term debt 7 (4) 3 12 (5) 7
----- ---- ----- ----- ---- -----
Total interest expense (25) (55) (80) (49) (66) (115)
----- ---- ----- ----- ---- -----
Net interest income (TE) $ 20 $ (8) $ 12 $ 19 $ 17 $ 36
===== ==== ===== ===== ==== =====
<FN>
The change in interest not due solely to volume or rate has been allocated in
proportion to the absolute dollar amounts of the change in each.
TE = Taxable Equivalent
ASSET AND LIABILITY MANAGEMENT
Asset/Liability Management 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 and liquidity profiles of KeyCorp 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. The ALCO guidelines provide that a
gradual 200 basis point increase or decrease in short-term rates over the
next 12 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 remains well within these guidelines.
25
26
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 (discussed in
greater detail in Note 3, Securities Available for Sale, beginning on page
8), 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 half of 1996, KeyCorp sold residential mortgage loans and student
loans totaling $500 million and $143 million, respectively, securitized and
sold an additional $85 million of auto loans and repurchased 5,046,000 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 onbalance 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
onbalance 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 $10.5 billion at
June 30, 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
JUNE 30, 1996 December 31, 1995
------------------------------------------------------------------- --------------------------
NOTIONAL FAIR MATURITY1 WEIGHTED AVERAGE RATE
--------------------- Notional Fair
AMOUNT VALUE (YEARS) RECEIVE PAY Amount Value
------------------------------------------------------------------ --------------------------
Receive fixed/pay variable -
indexed amortizing $ 5,486 $ (57) 2.9 6.77% 5.54% $ 6,200 $ 70
Receive fixed/pay variable -
conventional 3,177 (39) 6.4 6.63 5.57 2,497 104
Pay fixed/receive variable -
conventional 1,839 (4) .7 5.48 6.62 2,412 (21)
---------------- ------------ ------------- -------------
Total portfolio swaps 10,502 (100) 3.6 6.50 5.74 11,109 153
Customer swaps 4,124 16 4.6 6.27 6.24 2,844 11
---------------- ------------ ------------- -------------
Total interest rate swaps $ 14,626 $ (84) 3.8 6.44% 5.88% $13,953 $164
================ ============ ============= =============
<FN>
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.
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 $4.1 billion notional amount of customer swaps presented in
Figure 5 includes $2.1 billion of interest rate swaps that receive a fixed
rate and pay a variable rate and $2.0 billion of interest rate swaps that pay
a fixed rate and receive a variable rate.
26
27
The total notional amount of all interest rate swap contracts outstanding was
$14.6 billion at June 30, 1996, $14.0 billion at December 31, 1995, and $11.5
billion at June 30, 1995. The weighted average rates presented in Figure 5
are those in effect at June 30, 1996. Portfolio interest rate swaps
increased net interest income and the net interest margin by $19 million and
by 13 basis points, respectively, during the second quarter of 1996. These
increases reflected the impact of a positive spread on the second quarter
1996 swap portfolio, which more than offset the amortization of deferred
losses from swaps terminated in prior periods. As of June 30, 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 76 basis points). The portfolio had an aggregate negative fair value
of $(100) 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 half of 1996 from a fair value of $164 million at
December 31, 1995. The decline in fair value over the past six 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 June 30, 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 six-month period ended June 30, 1996, are summarized in Figure
6.
FIGURE 6. PORTFOLIO SWAP ACTIVITY FOR THE SIX MONTHS ENDED JUNE 30, 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 -- 781 102 883
Maturities -- (101) (175) (276)
Terminations -- -- (500) (500)
Amortization (714) -- -- (714)
----------- ---------- ------------ ----------
Balance at end of period $ 5,486 $ 3,177 $ 1,839 $ 10,502
=========== ========== ============ ==========
A summary of the notional and fair values of portfolio swaps by interest rate
management strategy at June 30, 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.
27
28
FIGURE 7. PORTFOLIO SWAPS BY INTEREST RATE MANAGEMENT STRATEGY
in millions
JUNE 30, 1996 December 31, 1995 June 30, 1995
-------------------- ------------------- -------------------------
NOTIONAL FAIR Notional Fair Notional Fair
AMOUNT VALUE Amount Value Amount Value
--------- ----- -------- ----- ----------- ---------
Convert variable rate loans
to fixed $ 7,053 $ (91) $ 7,567 $ 113 $5,531 $(30)
Convert variable rate deposits
and short-term borrowings
to fixed 1,659 (2) 2,275 (18) 2,487 (33)
Convert variable rate long-term
debt to fixed 180 (2) 137 (3) -- --
Convert fixed rate long-term
debt to variable 1,610 (5) 1,130 61 1,616 42
------- ----- ------- ----- ------ ----
Total portfolio swaps $10,502 $(100) $11,109 $ 153 $9,634 $(21)
======= ===== ======= ===== ====== ====
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 June 30, 1996, KeyCorp had 17 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 $5 million to 6.0,
with the largest credit exposure to an individual counterparty amounting to
$2 million. Although KeyCorp is exposed to credit-related losses in the
event of nonperformance by the counterparties, based on management's
assessment, as of June 30, 1996, all counterparties were expected to meet
their obligations. The expected average maturities of the portfolio swaps at
June 30, 1996, are summarized in Figure 8.
FIGURE 8. EXPECTED AVERAGE MATURITIES OF PORTFOLIO SWAPS AT JUNE 30, 1996
in millions
Receive Fixed
------------------------ Total
Indexed Pay Fixed- Portfolio
Amortizing Conventional Conventional Swaps
------------ ------------ ------------ ---------
Due in one year or less $ 88 $ 202 $1,737 $ 2,027
Due after one through five years 4,984 345 100 5,429
Due after five through ten years 414 2,630 2 3,046
------ ------ ------- -------
Total portfolio swaps $5,486 $3,177 $1,839 $10,502
====== ====== ====== =======
28
29
NONINTEREST INCOME
As shown in Figure 9, noninterest income totaled $264 million for the second
quarter of 1996, up $41 million, or 18%, from the same period last year. The
improvement in noninterest income reflected growth in all major fee-based
revenues, with the exception of mortgage banking income, and included the
impact of the AFG acquisition completed in September 1995. The largest
increases from the prior year came from loan securitization income ($14
million), credit card fees ($4 million), service charges on deposit accounts
($2 million), trust and asset management income ($2 million) and
miscellaneous other income ($21 million). As shown in Figure 10, loan
securitization income in the second quarter was evenly split between
servicing fees and gains from the securitization and sale of loans. Credit
card fees rose in response to both the establishment of new business
relationships and a higher volume of transactions. 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. The increase in trust and
asset management income resulted from continued strong performance of both
the stock and bond markets, new business and an array of new products. These
positive factors were partially offset, however, by the impact of the
December 1995 sale of KeyCorp's bond servicing business. Additional detail
pertaining to the composition of the trust and asset management income
component is presented in Figure 11. Miscellaneous other income rose from the
prior year due principally to an $8 million increase in income from corporate
owned life insurance and an $8 million gain from the June 1996 sale of SFF.
The SFF transaction as well as the AFG acquisition referred to above are more
fully disclosed in Note 2, Mergers, Acquisitions and Divestitures, beginning
on page 7.
Noninterest income totaled $513 million for the first half of 1996, up $119
million, or 30%, from the comparable 1995 period. Included in first half
1995 results were net securities losses of $49 million recorded in the first
quarter in connection with efforts to reconfigure the balance sheet in order
to reduce interest rate risk. Excluding these and all other securities
transactions for comparative purposes, noninterest income was up $76 million,
or 17%, from the first six months of 1995 and reflected the impact of five
acquisitions completed during 1995. As shown in Figure 9, the growth from
the prior year came principally from higher levels of loan securitization
income ($21 million), service charges on deposit accounts ($8 million), trust
and asset management income ($7 million), credit card fees ($7 million),
insurance and brokerage income ($7 million) and miscellaneous other income
($34 million). Included in the increase in miscellaneous other income was a
$16 million increase in income from corporate owned life insurance and the $8
million gain from the sale of SFF referred to previously. The positive
effect of the above items was partially offset by an $11 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
acquisitions referred to above are more fully disclosed in Note 2, referred
to above.
FIGURE 9. NONINTEREST INCOME
(dollars in millions)
Six Months ended
Three Months ended June 30 Change June 30, Change
-------------------------- ------------------ ----------------- ---------------------
1996 1995 Amount Percent 1996 1995 Amount Percent
--------------- --------- ------- ------- ----- --------- --------- ---------
Service charges on deposit accounts $ 72 $ 70 $ 2 2.9% $144 $ 136 $ 8 5.9%
Trust and asset management income 61 59 2 3.4 119 112 7 6.3
Loan securitization income 14 -- 14 N/M 27 6 21 350.0
Credit card fees 24 20 4 20.0 44 37 7 18.9
Insurance and brokerage income 16 15 1 6.7 34 27 7 25.9
Mortgage banking income 6 7 (1) (14.3) 14 25 (11) (44.0)
Net securities gains (losses) 1 3 (2) (66.7) 1 (42) 43 N/M
Other income:
Letter of credit fees 3 4 (1) (25.0) 7 9 (2) (22.2)
Venture capital gains 2 1 1 100.0 9 4 5 125.0
Miscellaneous 65 44 21 47.7 114 80 34 42.5
---- ---- ---- ---- ----- -----
Total other income 70 49 21 42.9 130 93 37 39.8
---- ---- ---- ---- ----- -----
Total noninterest income $264 $223 $ 41 18.4% $513 $ 394 $ 119 30.2%
==== ==== ==== ==== ===== =====
<FN>
N/M = Not Meaningful
29
30
FIGURE 10. LOAN SECURITIZATIONS
dollars in millions
Three Months ended June 30, Six Months ended June 30,
----------------------------------------------------------------
1996 1995 1996 1995
--------------- --------------- ------------ ------------
Servicing fees $ 7 -- $15 --
Gains on sales of securitized loans 7 -- 11 $6
Miscellaneous income -- -- 1 --
--------------- --------------- ------------ ------------
Total loan securitization income $14 -- $27 $6
=============== =============== ============ ============
- -----------------------------------------------------------------------------------------------------------
AT JUNE 30,
Student loans securitized $1,481 $953
Auto loans securitized 378 --
--------------- --------------
Total securitized loans serviced $1,859 $953
=============== ==============
FIGURE 11. TRUST AND ASSET MANAGEMENT
dollars in millions
Three months ended Six months ended
June 30, Change June 30, Change
------------------------- --------------------- --------------------- ---------------------
1996 1995 Amount Percent 1996 1995 Amount Percent
----------- ---------- ---------- --------- --------- --------- --------- ------------
Personal asset management and
custody fees $36 $35 $ 1 2.9% $ 71 $ 65 $ 6 9.2%
Institutional asset management and
custody fees 16 14 2 14.3 30 28 2 7.1
Bond services 4 5 (1) (20.0) 7 10 (3) (30.0)
All other fees 5 5 -- -- 11 9 2 22.2
----------- ---------- ---------- --------- --------- ---------
Total trust and asset
management income $61 $59 $ 2 3.4% $119 $112 $ 7 6.3%
=========== ========== ========== ========= ========= =========
- ------------------------------------------------------------------------------------------------------------------------------------
AT JUNE 30,
dollars in billions
Discretionary $48 $46 $2 4.3%
Non-discretionary 41 35 6 17.1
----------- ---------- ----------
Total trust assets $89 $81 $8 9.9%
=========== ========== ==========
NONINTEREST EXPENSE
As shown in Figure 12, noninterest expense for the second quarter of 1996
totaled $579 million, up $11 million, or 2%, from the second quarter of 1995.
The higher level of noninterest expense relative to the second quarter of last
year was due primarily to increases in personnel expense ($27 million), the
amortization of intangibles ($3 million) and miscellaneous other expense ($4
million), and included the impact of the AFG acquisition completed in September
1995. Personnel expense, the largest category of noninterest expense, rose
due primarily to the impact of normal annual merit increases (which take
effect in April for the majority of KeyCorp's employees), an increase in
employee benefits expense and higher costs associated with various incentive
programs. The higher level of amortization related to intangibles was a
direct result of the goodwill recorded in connection with the AFG acquisition,
while the growth in miscellaneous other expense reflected increases in a
number of categories of operating expense. Overall, the increase in noninterest
expense relative to the prior year was 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
wellcapitalized banks (including all of KeyCorp's 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 these actions, the cost of insurance assessments
in the second quarter of 1996 decreased $23 million, or 89%, from the second
quarter of 1995.
30
31
Noninterest expense totaled $1.1 billion for the first six months of 1996, up
$20 million, or 2%, from the same period last year. Increases in personnel
expense ($38 million), the amortization of intangibles ($8 million), marketing
expense ($5 million) and miscellaneous other expense ($15 million) were
substantially offset by the $46 million decrease in deposit insurance premiums.
The variances in personnel expense, the amortization of intangibles,
miscellaneous expense and deposit insurance premiums were attributable to the
same factors which accounted for the quarterly variances discussed previously,
while the increase in marketing expense was due largely to additional costs
related to continued strategic efforts aimed at strengthening consumer
identification of the KeyBank brand name. 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 KMI 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 60.50% for the second
quarter, from 63.05% for the second quarter of 1995. The improvement in the
efficiency ratio relative to the second quarter of last year reflected faster
growth in taxable-equivalent net interest income and noninterest income than
in noninterest expense.
FIGURE 12. NONINTEREST EXPENSE
dollars in millions
Three Months Six Months
ended June 30, Change ended June 30, Change
-------------------- ------------------- ------------------------ ---------------------
1996 1995 Amount Percent 1996 1995 Amount Percent
--------- --------- -------- --------- --------- --------- --------- ---------
Personnel $298 $271 $ 27 10.0% $ 589 $ 551 $ 38 6.9%
Net occupancy 54 52 2 3.8 108 106 2 1.9
Equipment 40 39 1 2.6 78 79 (1) (1.3)
FDIC insurance assessments 3 26 (23) (88.5) 5 51 (46) (90.2)
Amortization of intangibles 22 19 3 15.8 44 36 8 22.2
Professional fees 13 17 (4) (23.5) 29 30 (1) (3.3)
Marketing 17 17 -- -- 38 33 5 15.2
Other expense:
OREO expense, net 1 -- (1) 1 100.0 1 1 -- --
Miscellaneous 132 128 4 3.1 257 242 15 6.2
------ ------ ------ ------ --------- --------
Total other expense 132 127 5 3.9 258 243 15 6.2
------- ------ ------ ------- --------- ---------
Total noninterest expense $579 $568 $ 11 1.9% $1,149 $1,129 $ 20 1.8%
======= ====== ====== ======= ========= =========
Full-time equivalent employees 28,319 29,233 28,319 29,233
Efficiency ratio 2 60.50% 63.05% 60.86% 63.58%
Overhead ratio 3 45.53 51.10 46.29 51.72
<FN>
(1) OREO expense is net of income of $1 million for both the second quarter of 1996 and 1995 and $2 million for both the 1996 and
1995 year-to-date periods.
(2) Calculated as noninterest expense divided by taxable-equivalent net interest income plus noninterest income
(excluding net securities transactions).
(3) Calculated as noninterest expense less noninterest income (excluding net securities transactions) divided by
taxable-equivalent net interest income.
INCOME TAXES
The provision for income taxes was $103 million for the three-month period ended
June 30, 1996, as compared to $102 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 second quarter was
32.2% compared to 33.7% for the second quarter of 1995. For the first six
months of 1996, the provision for income taxes was $199 million compared with
$163 million for the first six months of 1995. The effective tax rate in these
periods was 31.9% and 30.4%, respectively. The lower 1995 year-to-date
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.
31
32
FINANCIAL CONDITION
LOANS
At June 30, 1996, total loans outstanding were $47.8 billion, compared with
$47.7 billion at December 31, 1995, and $48.1 billion at June 30, 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 decrease in loans outstanding from June 30, 1995, reflected the impact of
KeyCorp's continued strategy of securitizing and/or selling loans with lower
spreads which do not meet certain return on equity or other internal standards.
This activity included the sale of $1.5 billion of residential mortgage loans
and the securitization and sale of student and auto loans totaling $724 million
and $480 million, respectively. The mortgage loans sold were transferred to the
held for sale portfolio during 1995 with $1.0 billion of the transfer occurring
subsequent to June 30. Also contributing to the decrease was the sale of $763
million of loans (primarily residential real estate) in conjunction with the
June 1996 divestiture of SFF. This latter transaction is described in greater
detail in Note 2, Mergers, Acquisitions and Divestitures, beginning on page 7.
The $134 million growth from the December 31, 1995, level was the result
primarily of increases of $546 million in consumer loans (including a $156
million increase in credit card outstandings), $421 million in commercial loans,
$233 million in student loans held for sale and $181 million in lease financing.
Growth in these targeted categories was substantially offset by a $1.2 billion
decrease in real estate loans, almost all of which was one-to-four family
mortgages, and resulted, in large part, from the SFF divestiture mentioned
above. During the first six months of 1996, KeyCorp also completed the sales
of residential mortgage loans and student loans totaling $500 million and $143
million, respectively, and securitized and sold $85 million of auto loans. The
residential mortgage loans had been previously transferred to the mortgage loans
held for sale portfolio. As shown in Figure 13, new loan volume during the
first half of 1996 was attributable primarily to the National Business sector,
which includes 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, student loans, 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. The majority of
new loan volume generated by the National Business sector is either participated
to the regions where the business was conducted or securitized and sold.
FIGURE 13. PERIOD-END LOAN GROWTH BY REGION FOR THE SIX MONTHS ENDED JUNE 30,
1996
dollars in millions
Net Intercompany
December 31, Originations/ Participations/ Acquired/ June 30, Percent
1995 (Repayments) Sales (Sold) 1996 Change
---------------- ----------------- ----------------- ------------ -------------- -----------
Northeast Region $13,718 $ (383) $ 637 $ (105) $13,867 1.1%
Great Lakes Region 19,211 (361) 1,048 (27) 19,871 3.4
Rocky Mountain Region 3,817 27 15 (8) 3,851 .9
Northwest Region 9,008 (196) 428 (6) 9,234 2.5
National Business 2,108 2,243 (1,921) (121) 2,309 9.5
Eliminations/other1 (170) (166) (207) (763) (1,306) N/M
---------------- ----------------- ----------------- ------------ --------------
Total $47,692 $1,164 -- $(1,030) $47,826 .3%
================ ================= ================= ============ ==============
<FN>
1Eliminations/other includes loans sold in connection with the SFF divestiture.
N/M = Not Meaningful
SECURITIES
At June 30, 1996, the securities portfolio totaled $9.0 billion, consisting of
$7.3 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 25. 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.
32
33
FIGURE 14. SECURITIES AVAILABLE FOR SALE AT JUNE 30, 1996
dollars in millions
Other
U.S. Treasury States and Collateralized Mortgage- Weighted
Agencies and Political Mortgage Backed Other Average
Corporations Subdivisions Obligations1 Securities1 Securities Total Yield 2
--------------- -------------- -------------- -------------- ----------- ---------- --------
Maturity:
One year or less $ 287 $ 3 $ 299 $ 20 $ 91 $ 700 6.51%
After one through five years 577 8 2,073 1,688 44 4,390 7.11
After five through ten years 129 6 2 1,312 20 1,469 7.41
After ten years 225 3 -- 457 7 692 6.75
------ ------ ------ ----- ------ ------
Fair value $1,218 $ 20 $2,374 $3,477 $ 162 $7,251 6.85%
====== ====== ====== ====== ====== ======
Amortized cost $1,222 $ 20 $2,419 $3,542 $ 160 $7,363
Weighted average yield 6.49% 8.23% 6.17% 7.35% 7.44% 6.85%
Weighted average maturity 8.4 years 6.0 years 2.3 years 6.2 years 2.0 years 5.1 years
<FN>
1 Maturity is based upon expected average lives rather than contractual terms.
2 Weighted average yields are calculated on the basis of amortized cost. Such yields have been adjusted to a taxable-
equivalent basis using the statutory Federal income tax rate of 35%.
FIGURE 15. INVESTMENT SECURITIES AT JUNE 30, 1996
dollars in millions
States and Weighted
Political Other Average
Subdivisions Securities Total Yield 1
------------------ ---------------- ------------- -----------
Maturity:
One year or less $ 658 $ 89 $ 747 6.74%
After one through five years 538 137 675 8.86
After five through ten years 198 29 227 10.21
After ten years 56 9 65 9.86
------------------ ---------------- -------------
Amortized cost $1,450 $264 $1,714 8.15%
================== ================ =============
Fair value $1,484 $264 $1,748
Weighted average yield 8.08% 10.08% 8.15%
Weighted average maturity 2.8 years 4.2 years 2.8 years
<FN>
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 Management 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
Management 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.
33
34
As shown in Figure 16, net loan charge-offs for the second quarter of 1996 were
$46 million, or .38% of average loans, compared to $21 million, or .17% of
average loans, for the same period last year. The increase in net charge-offs
was attributable primarily to one large commercial credit ($8 million), as well
as a continued increase from historically low net charge-off levels in the
credit card and indirect auto areas. Credit cards, representing 4% of the total
loan portfolio, experienced an $8 million increase in net chargeoffs, which was
in line with industry experience as well as management's expectations.
Consistent with the higher level of net charge-offs, the provision for loan
losses was increased to $47 million for the second quarter of 1996 from $44
million for the prior quarter and $21 million for the second quarter of last
year.
On a year-to-date-basis, net charge offs were $89 million, or .37% of average
loans, for the first half of 1996 compared with $38 million, or .16% of
average loans for the same period last year. The provision for loan losses for
the first six months of 1996 was $91 million compared to $39 million for the
first six months of last year. Similar to the increase for the quarter, the
increase in net chargeoffs for the year-to-date period was primarily
attributable to two large commercial credits ($17 million) and increased charge-
offs in the credit card and indirect auto areas.
The Allowance at June 30, 1996, was $870 million, or 1.82% of loans, compared
with $876 million, or 1.84% of loans, at December 31, 1995 and $867 million, or
1.80% of loans, at June 30, 1995. At June 30, 1996, the Allowance was 266.87%
of nonperforming loans, compared with 263.15% at December 31, 1995 and 278.88%
at June 30, 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.
FIGURE 16. SUMMARY OF LOAN LOSS EXPERIENCE
dollars in millions
Three months ended June 30, Six months ended June 30,
--------------------------- --------------------------
1996 1995 1996 1995
----------- ----------- --------- ---------
Average loans outstanding during the period $ 48,192 $ 48,305 $ 47,996 $ 47,601
Allowance for loan losses at beginning of period 875 867 876 830
Loans charged off:
Commercial, financial and agricultural 21 12 39 20
Real estate--construction -- -- -- 1
Real estate--commercial and residential mortgage 6 8 12 14
Credit cards 20 12 36 24
Other consumer 24 16 53 31
Lease financing 3 1 4 2
Foreign -- -- -- --
-------- -------- -------- --------
74 49 144 92
Recoveries:
Commercial, financial and agricultural 12 15 23 27
Real estate--construction -- -- -- --
Real estate--commercial and residential mortgage 3 4 6 7
Credit cards 3 3 6 6
Other consumer 10 6 19 13
Lease financing -- -- 1 1
Foreign -- -- -- --
-------- -------- -------- --------
28 28 55 54
-------- -------- -------- --------
Net loans charged off (46) (21) (89) (38)
Provision for loan losses 47 21 91 39
Allowance acquired/(sold), net (6) -- (8) 35
Transfer from OREO allowance -- -- -- 1
-------- -------- -------- --------
Allowance for loan losses at end of period $ 870 $ 867 $ 870 $ 867
======== ======== ======== ========
Net loan charge-offs to average loans .38% .17% .37% .16
Allowance for loan losses to period-end loans 1.82 1.80 1.82 1.80
Allowance for loan losses to nonperforming loans 266.87 278.88 266.87 278.88
34
35
The composition of nonperforming assets is shown in Figure 17. These assets
totaled $371 million at June 30, 1996, and represented .77% of loans, OREO
and other nonperforming assets compared with $379 million, or .79%, at year-end
1995 and $366 million, or .76%, at June 30, 1995. The $7 million decrease in
nonperforming loans since year-end 1995 reflected the placement of an additional
$169 million of loans on nonaccrual status, partially offset by loan chargeoffs
of $44 million, payments received totaling $66 million and the sale of two
nonaccrual commercial loans totaling $38 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 17. SUMMARY OF NONPERFORMING ASSETS AND PAST DUE LOANS
(dollars in millions)
JUNE 30, December 31, June 30,
1996 1995 1995
------------- ---------------- ------------
Commercial, financial and agricultural $128 $145 $124
Real estate--construction 8 10 12
Real estate--commercial mortgage 95 90 99
Real estate--residential mortgage 68 62 56
Consumer 25 20 17
Lease financing 1 3 2
------------- ---------------- ------------
Total nonaccrual loans 325 330 310
Restructured loans 1 3 1
------------- ---------------- ------------
Total nonperforming loans 326 333 311
Other real estate owned 53 56 61
Allowance for OREO losses (11) (14) (11)
------------- ---------------- ------------
Other real estate owned, net of allowance 42 42 50
Other nonperforming assets 3 4 5
------------- ---------------- ------------
Total nonperforming assets $371 $379 $366
============= ================ ============
Accruing loans past due 90 days or more $80 $97 $67
Nonperforming loans to period-end loans .68% .70% .65%
Nonperforming assets to period-end loans plus other
real estate owned and other nonperforming assets .77 .79 .76
FIGURE 18. SUMMARY OF CHANGES IN NONACCRUAL LOANS
in millions
Three months ended June 30, Six months ended June 30,
---------------------------- ---------------------------------
1996 1995 1996 1995
--------- --------------- --------------- ---------------
Balance at beginning of period $338 $303 $330 $255
Loans placed on nonaccrual 88 101 169 162
Charge-offs1 (25) (19) (44) (33)
Payments (45) (51) (66) (70)
Loans sold (18) -- (38) --
Transfers to OREO (5) (6) (13) (12)
Loans returned to accrual status (8) (18) (13) (32)
Acquisitions -- -- -- 20
Transfers from OREO2 -- -- -- 20
--------------- --------------- --------------- ---------------
Balance at end of period $325 $310 $325 $310
=============== =============== =============== ===============
<FN>
1 Represents the gross charge-offs taken against nonaccrual loans; excluded are
charge-offs taken against accruing loans and credit card receivables, and
interest reversals.
2 Represents transfers related to the adoption of SFAS No. 114.
35
36
FIGURE 19. PERCENTAGE OF NONPERFORMING LOANS TO PERIOD-END LOANS BY TYPE AT
JUNE 30, 1996
Commercial, Real Estate-- Real Estate--
Financial and Real Estate-- Commercial Residential
Agricultural Construction Mortgage Mortgage Consumer Total
--------------- --------------- ------------- ------------- ------------ -----------
Northeast Region 1.07% .81% 2.26% .93% .23% 1.03%
Great Lakes Region .52 .39 .86 .47 .18 .47
Rocky Mountain Region 1.57 .05 .83 .45 .44 .87
Northwest Region .73 .93 .93 .41 .21 .58
National Business -- -- -- -- -- --
--------------- --------------- ------------- ------------- ------------ -----------
Total 1.23% .50% 1.35% .65% .18% .68%
=============== =============== ============= ============= ============ ===========
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 second
quarter of 1996, these deposits averaged $40.5 billion and represented 70% of
KeyCorp's funds supporting earning assets compared with $42.1 billion and 69%,
respectively, for the second quarter of 1995. As shown in Figure 3 beginning on
page 23, over the past year the mix of core deposits has changed significantly.
Primary among the factors contributing to this change is a new program started
during the fourth quarter of 1995. 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 six months of 1996, demand deposits and NOW account balances
averaging $1.2 billion and $2.3 billion, respectively, were transferred to the
money market deposit account category and a pre-tax cost savings of
approximately $8 million was realized. In Figure 3, the demand deposits
transferred continue to be reported as noninterest-bearing deposits, while the
NOW accounts transferred are included in the money market deposit account
category. During the second quarter of 1996, the implementation of this program
was completed in the last of KeyCorp's four banking regions. Although the five
acquisitions completed during 1995 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 investment alternatives pursued by customers in response to the
continued strength of the stock and bond markets, and the impact of the SFF
divestiture early in June 1996. These acquisitions and the divestiture are more
fully disclosed in Note 2, Mergers, Acquisitions and Divestitures, beginning on
page 7.
Purchased funds, which are comprised of large certificates of deposit, deposits
in foreign offices and short-term borrowings, averaged $13.2 billion for the
second quarter of 1996, down $1.6 billion, or 10%, from the comparable prior
year period. As illustrated in Figure 3, the decrease was primarily
attributable to the $1.4 billion reduction in deposits in foreign offices as
less expensive sources were used to fund earning assets.
FIGURE 20. MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE AT
JUNE 30, 1996
in millions
Domestic Foreign
Offices Offices Total
--------------- ------------- ------------
Time remaining to maturity:
Three months or less $1,513 $1,090 $2,603
Over three through six months 469 2 471
Over six through twelve months 425 -- 425
Over twelve months 559 -- 559
--------------- ------------- -----------
Total $2,966 $1,092 $4,058
=============== ============= ============
36
37
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 1,239 banking offices in 13 states. The
affiliate banks individually monitor deposit flows and evaluate alternate
pricing structures with respect to their deposit base. 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 June 30, 1996.
During the first half of 1996, KeyCorp's affiliate banks raised $1.9 billion
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 this
period, $282 million have original maturities in excess of one year and are
included in long-term debt, while $1.6 billion have original maturities of one
year or less and are included in other short-term borrowings. As of June 30,
1996, the program had an unused capacity of $9.4 billion.
KeyCorp's universal shelf 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 six months
of 1996 totaled $100 million and have original maturities of more than one year.
During the same period, KeyCorp also issued $450 million of subordinated debt
with an original maturity of more than one year. At the end of the quarter,
unused capacity under the shelf registration totaled $62 million. The proceeds
from issuances under the shelf registration and the Bank Note Program discussed
above may be used for general corporate purposes, including future acquisitions.
In July 1996, KeyCorp's Board of Directors approved the registration of a new
universal shelf which provides for the possible issuance of a broad range of
debt and equity securities by the parent company in an amount not to exceed $1.2
billion.
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 June 30, 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 six
- -month periods ended June 30, 1996 and 1995, is presented in the Consolidated
Statements of Cash Flow on page 6.
37
38
CAPITAL AND DIVIDENDS
Total shareholders' equity at June 30, 1996, was $5.0 billion, down $157
million, or 3%, from the December 31, 1995, balance and up $322 million, or 7%,
from the end of the second 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 six months of 1996 are shown in the Statement of Changes in
Shareholders' Equity presented on page 5. Included in these changes are the
impact of the redemption of all $160 million of KeyCorp's 10% Cumulative
Preferred Stock as of June 30, 1996, and net unrealized losses of $118 million
on securities. These securities losses resulted in cumulative net unrealized
securities losses of $70 million as of June 30, 1996, and 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 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 half of 1996,
KeyCorp repurchased 5,046,000 shares at a total cost of $187 million (an average
of $37.04 per share), leaving 6,954,000 share repurchase capacity under the
Board-approved program. The repurchased shares were placed in Treasury, from
which 2,322,196 Treasury Shares were reissued for employee benefit plans. The
14,965,373 Treasury Shares at June 30, 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.
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 7.71% at June 30, 1996, compared
with 7.77% at December 31, 1995, and 6.93% at June 30, 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 June 30, 1996, were 7.60% and 11.72%, respectively. These compare
favorably with the minimum requirements of 4.0% for Tier I and 8.0% for total
capital. The regulatory Tier I leverage ratio standard prescribes a minimum
ratio of 3.0%, although most banking organizations are expected to maintain
ratios of at least 100 to 200 basis points above the minimum. At June 30, 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 June 30, 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 June 30, 1996, the parent company and
its banking 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 June 30, 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 laws and regulations, based upon its ratios
the parent company would qualify as "well capitalized" at June 30, 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.
38
39
FIGURE 21. CAPITAL COMPONENTS AND RISK-ADJUSTED ASSETS
dollars in millions
JUNE 30, December 31, June 30,
1996 1995 1995
-------- ------------ ---------
TIER I CAPITAL
Common shareholders' equity1 $ 5,066 $ 4,945 $ 4,540
Qualifying preferred stock -- 160 160
Less: Goodwill (844) (899) (660)
Other intangible assets2 (130) (143) (147)
-------- -------- --------
Total Tier I capital 4,092 4,063 3,893
-------- -------- --------
TIER II CAPITAL
Allowance for loan losses3 675 677 655
Qualifying long-term debt 1,542 1,114 1,104
-------- -------- --------
Total Tier II capital 2,217 1,791 1,759
-------- -------- --------
Total capital $ 6,309 $ 5,854 $ 5,652
======== ======== ========
RISK-ADJUSTED ASSETS
Risk-adjusted assets on balance sheet $ 49,940 $ 49,555 $ 48,544
Risk-adjusted off-balance sheet exposure 5,043 5,619 4,722
Less: Goodwill (844) (899) (660)
Other intangible assets2 (130) (143) (147)
-------- -------- --------
Gross risk-adjusted assets 54,009 54,132 52,459
Less: Excess allowance for loan losses3 (195) (199) (212)
-------- -------- --------
Net risk-adjusted assets $ 53,814 $ 53,933 $ 52,247
======== ======== ========
AVERAGE QUARTERLY TOTAL ASSETS $ 64,623 $ 66,543 $ 66,950
======== ======== ========
CAPITAL RATIOS
Tier I capital to net risk-adjusted assets 7.60% 7.53% 7.45%
Total capital to net risk-adjusted assets 11.72 10.85 10.82
Leverage(4) 6.43 6.20 5.88
<FN>
1 Common shareholders' equity excludes the impact of net unrealized gains or
losses on securities, except for net unrealized losses on marketable equity
securities.
2 Intangible assets (excluding goodwill and portions of purchased credit card
relationships) recorded after February 19, 1992, and deductible portions of
purchased mortgage servicing rights.
3 The allowance for loan losses included in Tier II capital is limited to 1.25%
of gross risk-adjusted assets.
4 Tier I capital as a percentage of average quarterly assets, less goodwill and
other non-qualifying intangible assets as defined in 2 above.
39
40
FIGURE 22. BANKING SERVICES DATA BY REGION
dollars in millions
Northeast Region
-----------------------------------------------------
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1996 1995 1996 1995
-------------- ------- ------------ -------
ASSET QUALITY RATIOS
Nonperforming loans to
period-end loans 1.03% .94% 1.03% .94%
Allowance for loan losses to
period-end loans 1.48 1.57 1.48 1.60
Net loan charge-offs to average loans .48 .35 .39 .29
AVERAGE BALANCES
Loans $13,843 $13,956 $13,894 $13,817
Earning assets 17,378 18,101 17,449 18,094
Total assets 18,903 19,430 18,993 19,380
Deposits 13,998 15,063 14,025 14,799
Great Lakes Region
-----------------------------------------------------
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1996 1995 1996 1995
-------------- ------- ------------ -------
ASSET QUALITY RATIOS
Nonperforming loans to
period-end loans .47% .48% .47% .48%
Allowance for loan losses to
period-end loans 2.17 2.30 2.17 2.30
Net loan charge-offs to average loans .09 .05 .12 .08
AVERAGE BALANCES
Loans $19,886 $20,433 $19,628 $20,120
Earning assets 24,139 26,044 23,969 26,216
Total assets 26,634 28,691 26,594 28,816
Deposits 17,104 19,036 17,081 19,436
Rocky Mountain Region
--------------------------------------------------
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1996 1995 1996 1995
----------- ----------- -------- ----------
ASSET QUALITY RATIOS
Nonperforming loans to
period-end loans .87% .80% .87% .80%
Allowance for loan losses to
period-end loans 1.34 1.32 1.34 1.37
Net loan charge-offs to average loans .41 .24 .50 .21
AVERAGE BALANCES
Loans $3,822 $3,659 $3,820 $3,540
Earning assets 4,682 4,718 4,710 4,546
Total assets 5,091 5,172 5,130 4,962
Deposits 3,987 3,996 3,995 3,845
Northwest Region
--------------------------------------------------
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1996 1995 1996 1995
----------- ----------- -------- ----------
ASSET QUALITY RATIOS
Nonperforming loans to
period-end loans .58% .45% .58% .45%
Allowance for loan losses to
period-end loans 1.39 1.37 1.39 1.35
Net loan charge-offs to average loans .16 .13 .16 .09
AVERAGE BALANCES
Loans $ 9,147 $ 9,401 $ 9,074 $ 9,430
Earning assets 10,634 11,117 10,622 11,174
Total assets 11,740 12,037 11,706 12,120
Deposits 8,951 9,247 9,083 9,282
National Business
--------------------------------------------------
Three months ended June 30, Six months ended June 30,
-----------------------------------------------------
1996 1995 1996 1995
----------- ----------- ----------- ----------
ASSET QUALITY RATIOS
Nonperforming loans to
period-end loans -- N/A -- N/A
Allowance for loan losses to
period-end loans 2.01% N/A 2.01% N/A
Net loan charge-offs to average loans 3.17 N/A 2.91 N/A
AVERAGE BALANCES
Loans $2,248 N/A $2,225 N/A
Earning assets 2,278 N/A 2,245 N/A
Total assets 2,731 N/A 2,643 N/A
Deposits 687 N/A 661 N/A
<FN>
N/A=Not Applicable. The National Business unit was formed in September 1995.
40
41
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. Based on information presently available to management and
KeyCorp's counsel, management does not believe that any legal actions,
individually or in the aggregate, will have a material adverse effect on
the consolidated financial condition of KeyCorp.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At the 1996 Annual Meeting of Shareholders of KeyCorp held on May 23,
1996, seven directors were elected for three-year terms expiring in 1999
and the appointment of Ernst & Young LLP by the Board of Directors as
independent auditors for 1996 was ratified. Shareholders also defeated
four shareholder proposals. These proposals were: (a) recommending that
the payment of all directors' fees and compensation be KeyCorp common
shares, (b) requesting that the Board of Directors take steps to restore
annual election of all directors and thereby eliminate the
classification of KeyCorp's Board of Directors, (c) eliminating
management's ability to vote unmarked proxies and (d) recommending that
there be no executive salary increases or stock option grants upon a
reduction in the dividend rate.
The vote on each issue was as follows:
For Against Abstain
----------- ----------- ----------
Director:
Albert C. Bersticker 203,681,496 * 3,233,811
Kenneth M. Curtis 203,222,567 * 3,692,740
John C. Dimmer 203,795,033 * 3,120,274
Charles R. Hogan 203,729,944 * 3,185,363
M. Thomas Moore 203,784,350 * 3,130,957
Richard W. Pogue 203,756,040 * 3,159,267
Dennis W. Sullivan 203,782,579 * 3,132,728
Ratification of independent auditors 202,254,490 3,470,700 1,190,117
Proposal regarding form
of director compensation 25,518,095 158,208,137 23,189,075
Proposal regarding annual election
of directors 64,512,901 119,791,071 22,611,335
Proposal regarding discretionary
voting of proxy cards 29,107,736 151,974,139 25,833,432
Proposal regarding executive
compensation 32,112,327 151,856,289 22,946,691
<FN>
* Proxies provide that shareholders may either cast a vote for, or abstain from
voting for, directors.
41
42
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
(10) Amended and Restated Director Deferred Compensation Plan, dated
April 15, 1996.
(11) Computation of Net Income Per Common Share
(15) Acknowledgment Letter of Independent Auditors
(27) Financial Data Schedule (filed electronically only)
(b) Reports on Form 8-K
April 22, 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 April 18, 1996, announcing its
earnings results for the three-month period ended March 31, 1996.
No other reports on Form 8-K were filed during the three-month period
ended June 30, 1996.
42
43
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: August 12, 1996 /s/ Lee Irving
------------------------------
By: Lee Irving
Executive Vice President
and Chief Accounting Officer
43