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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
OR
[ ] TRANSLATION 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
(FORMERLY KNOWN AS SOCIETY CORPORATION)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 34-6542451
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
127 PUBLIC SQUARE, CLEVELAND, OHIO 44114-1306
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (216) 689-3000
Securities registered pursuant New York Stock Exchange
to Section 12(b) of the Act:(1) -----------------------------
(NAME OF EACH EXCHANGE
10% Cumulative Preferred Stock, Class A ON WHICH REGISTERED)
Depositary Shares representing one-fifth
of one share of 10% Cumulative Securities registered pursuant
Preferred Stock, Class A to Section 12(g) of the Act:
Common Shares, $1 par value
Rights to Purchase Common Shares None
- ---------------------------------------- -----------------------------
(TITLE OF CLASS) (TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to the
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Yes X No
--- ---
The aggregate market value of voting stock held by nonaffiliates of the
Registrant was approximately $7,300,303,000 at March 1, 1994. (The aggregate
market value has been computed using the closing market price of the stock as
reported by the New York Stock Exchange on March 1, 1994.)
There were 241,764,577 KeyCorp Common Shares outstanding, exclusive of
treasury shares, on March 1, 1994.
- ---------------
(1) The securities listed include those securities of KeyCorp registered
pursuant to Section 12(b) of the Act. Prior to the merger of old KeyCorp
with and into Society Corporation, Society Corporation securities
registered pursuant to Section 12(b) of the Act included Common Shares,
$1 par value, and Rights to purchase Common Shares.
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KEYCORP
1993 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
ITEM PAGE
NUMBER NUMBER
- ------ ---------------------
PART I
1 Business................................................... 1
2 Properties................................................. 8
3 Legal Proceedings.......................................... 8
4 Submission of Matters to a Vote of Security Holders........ 9
PART II
5 Market for Registrant's Common Stock and Related
Stockholder Matters...................................... 9
6 Selected Financial Data.................................... 9
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 9
8 Financial Statements and Supplementary Data................ 37
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... 62
PART III
10 Directors and Executive Officers of the Registrant......... 62
11 Executive Compensation..................................... 62
12 Security Ownership of Certain Beneficial Owners and
Management............................................... 62
13 Certain Relationships and Related Transactions............. 62
PART IV
14 Exhibits, Financial Statement Schedules, and Reports on
Form 8-K................................................. 63
Signatures................................................. 99
Exhibits................................................... 100
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PART I
ITEM 1. BUSINESS
OVERVIEW
On March 1, 1994, KeyCorp ("old KeyCorp"), a financial services holding company
headquartered in Albany, New York, with approximately $33 billion in assets at
December 31, 1993, merged into and with Society Corporation, an Ohio corporation
("Society"), which was the surviving corporation of the merger under the name
KeyCorp (See Mergers, Acquisitions and Divestitures on page 2 for a more
complete description of the merger).
Because the merger, which was accounted for as a pooling of interests, occurred
subsequent to December 31, 1993, the information presented in this Annual Report
on Form 10-K does not give effect to the impact of the merger. Consequently,
unless otherwise expressly stated, the information presented relates to Society
prior to its merger with old KeyCorp. However, supplemental financial statements
included on pages 65 through 94 present the combined financial condition and
results of operations of Society and old KeyCorp as if the merger had been in
effect for all periods presented.
Society, a financial services holding company organized in 1958, is
headquartered in Cleveland, Ohio, is incorporated in Ohio, and is registered
under the Bank Holding Company Act ("BHCA") and the Home Owners' Loan Act
("HOLA"). It is principally a regional banking organization and provides a wide
range of banking, fiduciary, and other financial services to corporate,
institutional, and individual customers. Based on total consolidated assets of
approximately $27 billion at December 31, 1993, Society ranked as the third
largest bank holding company in Ohio. The first predecessor of a subsidiary of
Society was organized in 1849. At December 31, 1993, Society's subsidiary banks
operated 434 full-service banking offices in the States of Ohio, Indiana,
Michigan, and Florida. At December 31, 1993, Society had 12,038 full-time
equivalent employees.
SUBSIDIARIES
Banking operations in Ohio are conducted through Society National Bank, a
Federally-chartered bank headquartered in Cleveland, Ohio, which is the largest
bank in Ohio and one of the nation's major regional banks. At December 31, 1993,
Society National Bank had total assets of $21.8 billion and operated 291 full-
service banking offices.
Banking operations in Indiana are conducted through Society National Bank,
Indiana, a Federally-chartered bank headquartered in South Bend, Indiana. At
December 31, 1993, Society National Bank, Indiana had total assets of $3.0
billion and operated 83 full-service banking offices.
Banking operations in Michigan are conducted through Society Bank, Michigan, a
state-chartered bank headquartered in Ann Arbor, Michigan. At December 31, 1993,
Society Bank, Michigan had assets of $1.1 billion and operated 36 full-service
banking offices.
Banking operations in Florida are conducted through Society First Federal
Savings Bank, a Federally-chartered savings bank headquartered in Fort Myers,
Florida. At December 31, 1993, Society First Federal Savings Bank had assets of
$1.4 billion and operated 24 full-service banking offices.
In addition to the customary banking services of accepting funds for deposit and
making loans, Society's subsidiary banks provide a wide range of specialized
services tailored to specific markets, including investment management, personal
and corporate trust services, personal financial services, cash management
services, investment banking services, and international banking services. At
December 31, 1993, Society had one of the nation's largest trust departments
with managed assets (excluding corporate trust assets) of approximately $29.4
billion.
Society's nonbanking subsidiaries provide investment advisory services,
securities brokerage services, institutional and personal trust services,
mortgage banking services, reinsurance of credit life and accident and health
insurance on loans made by subsidiary banks, venture capital and small business
investment financing services,
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equipment lease financing, community development financing, stock transfer agent
services and other financial services.
Society is a legal entity separate and distinct from its subsidiaries. The
principal source of Society's income is the earnings of subsidiary banks, and
the principal source of its cash flow is dividends from its subsidiary banks.
Applicable state and Federal laws impose limitations on the ability of Society's
banking subsidiaries to pay dividends. In addition, the subsidiary banks are
subject to the limitations contained in the Federal Reserve Act regarding
extensions of credit to, investments in, and certain other transactions with
Society and its other subsidiaries. See "Supervision and Regulation" on page 3
for a more complete description of the regulatory restrictions to which Society
and its subsidiaries are subject.
The following financial data concerning Society and its subsidiaries is
incorporated herein by reference as indicated below:
DESCRIPTION OF FINANCIAL DATA PAGE
---------------------------------------------------------------------------- ----
Average Balance Sheets, Net Interest Income, and Yields/Rates............... 14
Components of Net Interest Income Changes................................... 16
Securities.................................................................. 26
Composition of Loans........................................................ 24
Loan Maturities and Sensitivity to Changes in Interest Rates................ 19
Summary of Nonperforming Assets and Past Due Loans.......................... 29
Nonperforming Assets........................................................ 48
Summary of Loan Loss Experience............................................. 28
Allocation of the Allowance for Loan Losses................................. 28
Maturity Distribution of Time Deposits of $100,000 or More.................. 30
Selected Financial Data..................................................... 11
Short-Term Borrowings....................................................... 49
MERGERS, ACQUISITIONS AND DIVESTITURES
On March 1, 1994, old KeyCorp, a financial services holding company
headquartered in Albany, New York, with approximately $33 billion in assets as
of December 31, 1993, merged into and with Society, which was the surviving
corporation and assumed the name KeyCorp. Under the terms of the merger
agreement, 124,351,183 KeyCorp Common Shares were exchanged for all of the
outstanding shares of old KeyCorp common stock (based on an exchange ratio of
1.205 KeyCorp Common Shares for each share of old KeyCorp). The outstanding
preferred stock of old KeyCorp was exchanged on a one-for-one basis for
1,280,000 shares of a comparable, new issue of 10% Cumulative Preferred Stock of
KeyCorp. The merger was accounted for as a pooling of interests and,
accordingly, financial results for all prior periods presented will be restated
to include the financial results of old KeyCorp. The supplemental financial
statements presented on pages 65 through 94 of this report present the financial
condition and results of operations of Society and old KeyCorp as if the merger
had been in effect for all periods presented.
On October 5, 1993, Society completed the acquisition of Schaenen Wood &
Associates, Inc. ("SWA"), a New York City-based investment management firm which
manages approximately $1.3 billion in assets. The transaction was accounted for
as a purchase. Accordingly, the results of operations of SWA have been included
in the consolidated financial statements from the date of acquisition.
On September 15, 1993, Society completed the sale of Ameritrust Texas
Corporation ("ATC") to Texas Commerce Bank, National Association, an affiliate
of Chemical Banking Corporation. ATC was based in Dallas, Texas, and provided a
range of investment management and fiduciary services to institutions,
businesses and individuals through 11 offices operating in Texas. For the
year-to-date period through the closing date, ATC had net income of $3.2
million. The $29.4 million gain on the sale ($12.2 million after tax, $.10 per
Common Share) is included in noninterest income.
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On January 22, 1993, Society acquired all of the outstanding shares of First
Federal Savings and Loan Association of Fort Myers ("Society First Federal"), a
Federal stock savings bank, for total cash consideration of $144 million. The
transaction was accounted for as a purchase. Accordingly, the results of
operations of Society First Federal have been included in the consolidated
financial statements from the date of acquisition. Society First Federal had 24
offices in southwest and central Florida and approximately $1.1 billion in total
assets at the date of acquisition.
On December 4, 1992, Society and three other bank holding companies formed a
joint venture in a newly-formed company, Electronic Payment Services, Inc. This
company is the largest processor of automated teller machine transactions in the
United States and a national leader in point-of-sale transaction processing. As
part of the agreement, Society contributed its wholly-owned subsidiary, Green
Machine Network Corporation, and its point-of-sale business in return for an
equity interest.
On September 30, 1992, Society acquired all the outstanding shares of First of
America Bank-Monroe ("FAB-Monroe") from First of America Bank Corporation in a
cash purchase. The transaction was accounted for as a purchase, and accordingly,
the results of operations of FAB-Monroe have been included in the consolidated
financial statements from the date of acquisition. FAB-Monroe operated 10
offices in southeastern Michigan and had approximately $160 million in total
assets at the date of acquisition.
On March 16, 1992, Ameritrust Corporation ("Ameritrust"), a financial services
holding company located in Cleveland, Ohio, with approximately $10 billion in
assets as of December 31, 1991, merged with and into Society. Under the terms of
the merger agreement, 49,550,862 Society Common Shares were exchanged for all of
the outstanding shares of Ameritrust common stock (based on an exchange ratio of
.65 shares of Society for each share of Ameritrust). The outstanding preferred
stock of Ameritrust was exchanged on a one-for-one basis for 1,200,000 shares of
a comparable, new issue of Fixed/Adjustable Rate Cumulative Preferred Stock of
Society. The merger was accounted for as a pooling of interests and,
accordingly, financial results for all prior periods presented have been
restated to include the financial results of Ameritrust. In connection with the
merger and as part of an agreement with the United States Department of Justice,
Society sold 28 Ameritrust branches located in Cuyahoga and Lake Counties in
Ohio in June 1992. Deposits of $933.3 million and loans or loan participations
totaling $331.8 million were sold along with the branches at a gain of $20.1
million ($13.2 million after tax, $.11 per Common Share) which is included in
noninterest income. In addition, in May 1992, deposits and loans totaling $98.7
million and $45.7 million, respectively, were sold along with four branches in
Ashtabula County, Ohio, in accordance with the Federal Reserve Board order that
approved the merger.
COMPETITION
The market for banking and bank-related services is highly competitive. Society
and its subsidiaries compete with other providers of financial services such as
other bank holding companies, commercial banks, savings and loan associations,
credit unions, mutual funds, including money market mutual funds, insurance
companies, and a growing list of other local, regional and national institutions
which offer financial services. Mergers between financial institutions have
added competitive pressure. Competition is expected to intensify as a
consequence of reciprocal interstate banking laws now in effect in a substantial
number of states, and the prospect of possible Federal legislation authorizing
nationwide interstate banking. Society and its subsidiaries compete by offering
quality products and innovative services at competitive prices.
SUPERVISION AND REGULATION
GENERAL
As a bank holding company, Society is subject to supervision by the Board of
Governors of the Federal Reserve System ("Federal Reserve Board"). As a result
of the 1993 acquisition of Society First Federal, Society is also subject to
supervision by the Office of Thrift Supervision (the "OTS") as a savings and
loan holding company registered under HOLA. The banking and savings association
subsidiaries (collectively, "banking subsidiaries") of Society are subject to
extensive supervision, examination, and regulation by applicable Federal and
state banking agencies, including the Office of the Comptroller of the Currency
(the "OCC") in the case of national bank subsidiaries, the Michigan Financial
Institutions Bureau in the case of Society Bank, Michigan, and the OTS in the
case of Society First Federal. Each of the banking subsidiaries is
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insured by, and therefore also subject to the regulations of, the Federal
Deposit Insurance Corporation (the "FDIC"). Depository institutions such as the
banking subsidiaries are affected significantly by the actions of the Federal
Reserve Board as it attempts to control the money supply and credit availability
in order to influence the economy. The regulatory regime applicable to bank
holding companies and their subsidiaries generally is not intended for the
protection of investors and is directed toward protecting the interests of
depositors, the FDIC deposit insurance funds, and the U.S. banking system as a
whole.
Society's nonbanking subsidiaries are also subject to supervision and
examination by the Federal Reserve Board, as well as other applicable regulatory
agencies. For example, Society's discount brokerage and investment advisory
subsidiaries are subject to supervision and regulation by the SEC, the National
Association of Securities Dealers, Inc., and state securities regulators.
Society's insurance subsidiary is subject to regulation by the insurance
regulatory authorities of the various states. Other nonbanking subsidiaries are
subject to other laws and regulations of both the Federal government and the
various states in which they are authorized to do business.
The following references to certain statutes and regulations are brief summaries
thereof. The references are not intended to be complete and are qualified in
their entirety by reference to the statutes and regulations. In addition there
are other statutes and regulations that apply to and regulate the operation of
banking institutions. A change in applicable law or regulation may have a
material effect on the business of Society.
DIVIDEND RESTRICTIONS
Various Federal and state statutory provisions limit the amount of dividends
that may be paid to Society by its banking subsidiaries without regulatory
approval. The approval of the OCC is required for the payment of any dividend by
a national bank if the total of all dividends declared by the bank in any
calendar year would exceed the total of its net profits (as defined by the OCC)
for that year combined with its retained net profits for the preceding two
years, less any required transfers to surplus or a fund for the retirement of
any preferred stock. In addition, a national bank is not permitted to pay a
dividend in an amount greater than its net profits then on hand (as defined by
the OCC) after deducting its losses and bad debts. For this purpose, bad debts
are defined to include, generally, loans which have matured as to which interest
is overdue by six months or more, other than such loans which are well secured
and in the process of collection. Society's principal banking
subsidiaries -- Society National Bank and Society National Bank, Indiana are
national banks.
In addition, OTS regulations impose limitations upon all capital distributions
by savings associations. These limitations are applicable to Society First
Federal, Society's only savings association subsidiary.
State banks that are not members of the Federal Reserve System ("nonmember
banks") are also subject to varying restrictions on the payment of dividends
under state laws. Society Bank, Michigan is Society's only state nonmember bank.
Under these restrictions, as of December 31, 1993, Society's banking
subsidiaries could have declared dividends of approximately $76.0 million in the
aggregate, without obtaining prior regulatory approval.
In addition, if, in the opinion of the applicable Federal banking agency, a
depository institution under its jurisdiction is engaged in or is about to
engage in an unsafe or unsound practice (which, depending on the financial
condition of the institution, could include the payment of dividends), the
agency may require, after notice and hearing, that such institution cease and
desist from such practice. In addition, the Federal Reserve Board, the OCC, the
FDIC and the OTS have issued policy statements which provide that insured
depository institutions and their holding companies should generally pay
dividends only out of current operating earnings.
HOLDING COMPANY STRUCTURE
Transactions Involving Banking Subsidiaries. Transactions involving Society's
banking subsidiaries are subject to Federal Reserve Act restrictions which limit
the transfer of funds from such subsidiaries to Society and (with certain
exceptions) to Society's nonbanking subsidiaries (together, "affiliates") in
so-called "covered transactions," such as loans, extensions of credit,
investments, or asset purchases. Unless an exemption applies, each such transfer
by a banking subsidiary to one of its affiliates is limited in amount to 10% of
that banking subsidiary's capital and surplus and, with respect to all such
transfers to affiliates, in the aggregate, to 20% of that banking subsidiary's
capital and surplus. Furthermore, loans and extensions of credit are required
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to be secured in specified amounts. "Covered transactions" also include the
acceptance of securities issued by the banking subsidiary as collateral for a
loan and the issuance of a guarantee, acceptance, or letter of credit for the
benefit of Society or any of its affiliates. In addition, a bank holding company
and its banking subsidiaries are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit, lease or sale of
property, or furnishing of services.
Bank Holding Company Support of Banking Subsidiaries. Under Federal Reserve
Board policy, a bank holding company is expected to act as a source of financial
and managerial strength to each of its subsidiary banks and to commit resources
to support each such subsidiary bank. This support may be required by the
Federal Reserve Board at times when Society may not have the resources to
provide it or, for other reasons, would not otherwise be inclined to provide it.
Any capital loans by Society to any of its subsidiary banks are subordinate in
right of payment to deposits and to certain other indebtedness of a subsidiary
bank. In addition, the Crime Control Act of 1990 provides that in the event of a
bank holding company's bankruptcy, any commitment by the bank holding company to
a Federal bank regulatory agency to maintain the capital of a subsidiary bank
will be assumed by the bankruptcy trustee and entitled to a priority of payment.
A depository institution, the deposits of which are insured by the FDIC, can be
held liable for any loss incurred by, or reasonably expected to be incurred by
the FDIC in connection with (i) the default of a commonly controlled
FDIC-insured depository institution or (ii) any assistance provided by the FDIC
to a commonly controlled FDIC-insured depository institution in danger of
default (the so-called "cross guaranty" provision). "Default" is defined under
the FDIC's regulations generally as the appointment of a conservator or receiver
and "in danger of default" is defined generally as the existence of certain
conditions indicating that a "default" is likely to occur in the absence of
regulatory assistance.
CAPITAL REQUIREMENTS
The minimum ratio of total capital to risk-adjusted assets (including certain
off-balance sheet items, such as standby letters of credit) required by the
Federal Reserve Board for bank holding companies is 8%. At least one-half of the
total capital must be comprised of common equity, retained earnings, qualifying
noncumulative perpetual preferred stock, a limited amount of qualifying
cumulative perpetual preferred stock, and minority interests in the equity
accounts of consolidated subsidiaries, less goodwill and certain other
intangible assets ("Tier I capital"). The remainder may consist of hybrid
capital instruments, perpetual debt, mandatory convertible debt securities, a
limited amount of subordinated debt, other preferred stock, and a limited amount
of loan and lease loss reserves ("Tier II capital"). The Federal Reserve Board
has stated that banking organizations generally, and, in particular, those that
actively make acquisitions, are expected to operate well above the minimum
risk-based capital ratios. As of December 31, 1993, Society's Tier I and total
capital to risk-adjusted assets ratios were 8.65% and 12.88%, respectively.
In addition, Society is subject to minimum leverage ratio (Tier I capital to
average total assets for the relevant period) guidelines. These guidelines
provide for a minimum leverage ratio of 3% for bank holding companies that meet
certain specified criteria, such as having the highest supervisory rating. All
other bank holding companies are required to maintain a leverage ratio which is
at least 100 to 200 basis points higher (i.e., a leverage ratio of at least 4%
to 5%). Neither Society, nor any of its banking subsidiaries have been advised
by its appropriate Federal regulatory agency of any specific leverage ratio
applicable to it. At December 31, 1993, Society's Tier I leverage ratio was
7.18%. The guidelines also provide that banking organizations experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets. Furthermore, the guidelines indicate
that the Federal Reserve Board will continue to consider a "tangible Tier I
leverage ratio" in evaluating proposals for expansion or new activities. The
tangible Tier I leverage ratio is the ratio of a banking organization's Tier I
capital less all intangibles, to total assets less all intangibles.
Each of Society's banking subsidiaries is also subject to capital requirements
adopted by applicable Federal regulatory agencies which are substantially
similar to those imposed by the Federal Reserve Board on bank holding companies.
As of December 31, 1993, each of Society's banking subsidiaries had capital in
excess of all minimum regulatory requirements.
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All the Federal banking agencies have proposed regulations that would add an
additional capital requirement based upon the amount of an institution's
exposure to interest rate risk. The OTS recently adopted its final rule adding
an interest rate component to its risk-based capital rule. Under the final OTS
rule, savings associations with a greater than "normal" level of interest rate
risk exposure will be subject to a deduction from total capital for purposes of
calculating the risk-based capital ratio. The new OTS rule was effective January
1, 1994, except for limited provisions which are effective July 1, 1994. The
other Federal banking agencies have yet to adopt their final rules on the
interest rate risk component of risk-based capital.
The OCC, the Federal Reserve, and the FDIC have proposed amendments to their
respective regulatory capital rules to include in Tier I capital the net
unrealized changes in the value of securities available for sale for purposes of
calculating the risk-based and leverage ratios. The proposed amendments are in
response to the provisions outlined in Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," which takes effect for fiscal years beginning after December
15, 1993. See Note 3, Securities, on page 46 for a more complete description of
SFAS No. 115. This new accounting standard establishes, among other things, net
unrealized holding gains and losses on securities available for sale as a new
component of stockholders' equity. If adopted as proposed, the rules could cause
the Tier I capital to be subject to greater volatility. However, neither SFAS
No. 115 nor the capital proposals would have any direct impact on reported
earnings.
SIGNIFICANT AMENDMENTS TO THE FEDERAL DEPOSIT INSURANCE ACT
In 1991, Congress enacted the Federal Deposit Insurance Corporation Improvement
Act of 1991, which, among other things, amended the Federal Deposit Insurance
Act (the "FDIA"), and increased the FDIC's borrowing authority to resolve bank
failures, mandated least-cost resolutions and prompt regulatory action with
regard to undercapitalized institutions, expanded consumer protection, and
mandated increased supervision of domestic depository institutions and the U.S.
operations of foreign depository institutions. The amendments to the FDIA
resulting from enactment of the Federal Deposit Insurance Corporation
Improvement Act of 1991 require Federal banking agencies to promulgate
regulations and specify standards in numerous areas of bank operations,
including interest rate exposure, asset growth, internal controls, credit
underwriting, executive officer and director compensation, real estate
construction financing, additional review of capital standards, interbank
liabilities, and other operational and managerial standards as the agencies
determine appropriate. Most of these regulations have been promulgated in final
form by the appropriate Federal bank regulatory agencies, although some have
only been proposed. These regulations have increased and may continue to
increase the cost of and the regulatory burden associated with the banking
business.
Prompt Corrective Action. Effective in December 1992, the FDIC, the Federal
Reserve Board, the OCC and the OTS adopted new regulations to implement the
prompt corrective action provisions of the FDIA. The regulations group
FDIC-insured depository institutions into five broad categories based on their
capital ratios. The five categories are "well capitalized," "adequately
capitalized", "undercapitalized", "significantly undercapitalized," and
"critically undercapitalized." An institution is "well capitalized" if it has a
total risk-based capital ratio (total capital to risk-adjusted assets) of 10% or
greater, a Tier I risk-based capital ratio (Tier I capital to risk-adjusted
assets) of 6% or greater and a Tier I leverage capital ratio (Tier I capital to
average total assets) of 5% or greater, and it is not subject to a regulatory
order, agreement or directive to meet and maintain a specific capital level for
any capital measure. An institution is "adequately capitalized" if it has a
total risk-based capital ratio of 8% or greater, a Tier I risk-based capital
ratio of 4% or greater and (generally) a Tier I leverage capital ratio of 4% or
greater, and the institution does not meet the definition of a "well
capitalized" institution. An institution is "undercapitalized" if the relevant
capital ratios are less than those specified in the definition of an "adequately
capitalized" institution. An institution is "significantly undercapitalized" if
it has a total risk-based capital ratio of less than 6%, a Tier I risk-based
capital ratio of less than 3%, or a Tier I leverage capital ratio of less than
3%. An institution is "critically undercapitalized" if it has a ratio of
tangible equity (as defined in the regulations) to total assets of 2% or less.
An institution may be downgraded to, or be deemed to be in a capital category
that is lower than is indicated by its actual capital position if it is
determined to be in an unsafe or unsound condition or if it receives an
unsatisfactory examination rating with respect to certain matters.
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The capital-based prompt corrective action provisions of the FDIA and their
implementing regulations apply to FDIC insured depository institutions and are
not applicable to holding companies which control such institutions. However,
both the Federal Reserve Board and the OTS have indicated that, in regulating
holding companies, they will take appropriate action at the holding company
level based on their assessment of the effectiveness of supervisory actions
imposed upon subsidiary depository institutions pursuant to such provisions and
regulations. Although the capital categories defined under the prompt corrective
action regulations are not directly applicable to Society under existing law and
regulations, based upon its ratios Society would qualify, and its subsidiary
banks do qualify, as well-capitalized as of December 31, 1993. The capital
category, as determined by applying the prompt corrective action provisions of
the law, may not constitute an accurate representation of the overall financial
condition or prospects of Society or its banking subsidiaries.
The FDIA generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the institution would thereafter be undercapitalized.
Undercapitalized depository institutions are also subject to restrictions on
borrowing from the Federal Reserve System (effective December 19, 1993).
Undercapitalized depository institutions are subject to increased monitoring by
the appropriate Federal banking agency and limitations on growth, and are
required to submit a capital restoration plan. The Federal banking agencies may
not accept a capital plan without determining, among other things, that the plan
is based on realistic assumptions and is likely to succeed in restoring the
institution's capital. In addition, for a capital restoration plan to be
acceptable, the depository institution's parent holding company must guarantee
that the institution will comply with such capital restoration plan. The
aggregate liability of the parent holding company with respect to such a
guarantee is limited to the lesser of: (a) an amount equal to 5% of the
depository institution's total assets at the time it became undercapitalized or
(b) the amount which is necessary (or would have been necessary) to bring the
institution into compliance with all capital standards applicable with respect
to such institution as of the time it fails to comply with the plan. If a
depository institution fails to submit an acceptable plan, it is treated as if
it were significantly undercapitalized. Significantly undercapitalized
depository institutions may be subject to a number of requirements and
restrictions, including orders to sell sufficient voting stock to become
adequately capitalized and requirements to reduce total assets, and are
prohibited from receiving deposits from correspondent banks. "Critically
undercapitalized" institutions are subject to the appointment of a receiver or
conservator.
FDIC Insurance. Under the risk-related insurance assessment system, adopted in
final form effective beginning with the January 1, 1994 assessment period, a
bank or savings association is required to pay an assessment ranging from $.23
to $.31 per $100 of deposits based on the institution's risk classification. The
risk classification is based on an assignment of the institution by the FDIC to
one of three capital groups and to one of three supervisory subgroups. The
capital groups are "well capitalized," "adequately capitalized," and
"undercapitalized." The three supervisory subgroups are Group "A" (for
financially solid institutions with only a few minor weaknesses), Group "B" (for
those institutions with weaknesses which, if uncorrected, could cause
substantial deterioration of the institution and increase the risk to the
deposit insurance fund), and Group "C" (for those institutions with a
substantial probability of loss to the fund absent effective corrective action).
For the period commencing on July 1, 1993 through December 31, 1993, insurance
assessments on all deposits of Society's banking subsidiaries were paid at the
$.23 per $100 of deposits rate.
DEPOSITOR PREFERENCE STATUTE
In August 1993, Federal legislation was enacted which provides that insured and
uninsured deposits of, and certain claims for administrative expenses and
employee compensation against, an insured depository institution would be
afforded a priority over other general unsecured claims against such an
institution, including federal funds and letters of credit, in the "liquidation
or other resolution" of such an institution by any receiver. Under this new
legislation, if an insured depository institution fails, insured and uninsured
depositors along with the FDIC will be placed ahead of all unsecured, nondeposit
creditors in order of priority of payment. Due to its recent enactment, it is
too early to determine what impact this legislation will have on the ability of
financial institutions to attract junior creditors in the future or otherwise.
7
10
IMPLICATIONS OF BEING A SAVINGS AND LOAN HOLDING COMPANY
Society is a savings and loan holding company within the meaning of HOLA. With
certain exceptions, a savings and loan holding company must obtain prior written
approval from the OTS (as well as the Federal Reserve Board, or other Federal
agencies whose approval may be required, depending upon the structure of the
acquisition transaction) before acquiring control of a savings association or
savings and loan holding company through the acquisition of stock or through a
merger or some other business combination. HOLA prohibits the OTS from approving
an acquisition by a savings and loan holding company which would result in the
holding company's controlling savings associations in more than one state unless
(a) the holding company is authorized to do so by the FDIC as an emergency
acquisition, (b) the holding company controls a savings association which
operated an office in the additional state or states on March 5, 1987, or (c)
the statutes of the state in which the savings association to be acquired is
located specifically permit a savings association chartered by such state to be
acquired by an out-of-state savings association or savings and loan holding
company.
CONTROL ACQUISITIONS
The Change in Bank Control prohibits a person or group of persons from acquiring
"control" of a bank holding company unless the Federal Reserve Board has been
given 60 days' prior written notice of proposed acquisition and within that time
period the Federal Reserve Board has not issued a notice disapproving the
proposed acquisition or extending for up to another 30 days the period during
which such a disapproval may be issued. An acquisition may be made prior to the
expiration of the disapproval period if the Federal Reserve Board issues written
notice of its intention not to disapprove the action. Under a rebuttable
presumption established by the Federal Reserve Board, the acquisition of 10% or
more of a class of voting stock of a bank holding company with a class of
securities registered under Section 12 of the Exchange Act, such as Society
would, under the circumstances set forth in the presumption, constitute the
acquisition of control.
In addition, any "company" would be required to obtain the approval of the
Federal Reserve Board under the BHCA before acquiring 25% (5% in the case of an
acquiror that is a bank holding company) or more of the outstanding Society
Common Shares, or otherwise obtaining control over Society.
ITEM 2. PROPERTIES
The headquarters of Society and of Society National Bank are located in Society
Center at 127 Public Square, Cleveland, Ohio 44114-1306. Society currently
leases approximately 625,000 square feet of the complex, encompassing the first
twenty-one floors and the 55th and 56th floors of the 57-story Society Tower and
all ten floors of the adjacent Society for Savings Building. Society owns a
four-story office building and the Summit Center Building, a 16-story office
building, both located in downtown Toledo. In addition, Society has an office
center located in a one-story building containing approximately 500,000 square
feet on a 55 acre site in Brooklyn, Ohio which is owned in fee by a subsidiary.
Society National Bank is still under lease on the former Ameritrust offices at
2017 East Ninth Street in Cleveland in accordance with obligations assumed as
part of the merger. These offices under lease consist of a portion of a 29-story
office building, an attached 13-story office building and an 8-story parking
garage.
Society Bank, Michigan owns its seven-story main office building in Ann Arbor,
Michigan, which is also the headquarters of Society Bancorp of Michigan, Inc.
Society National Bank, Indiana leases its 14-story headquarters building in
South Bend, Indiana.
At December 31, 1993, the banking subsidiaries of Society owned 247 of their
branch banking offices and leased 187 offices. The lease terms for applicable
branch banking offices are not individually material, with terms ranging from
month-to-month to 99-year leases from inception.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, Society and its subsidiaries are subject to
legal actions which involve claims for substantial monetary relief. Based on
information presently available to management and Society'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
Society.
8
11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this Report, no matter
was submitted to a vote of security holders of Society.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The discussion with respect to Common Shares and Shareholder Information
appearing on page 32 and the dividend restrictions discussions included on page
4 and in Note 13, Commitments, Contingent Liabilities, and Other Disclosures, on
page 56 are incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The Selected Financial Data included on page 11 is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section provides a narrative discussion and analysis of the consolidated
financial condition and results of operations of Society Corporation and its
subsidiaries (the "Corporation"). The financial data included throughout the
remainder of this discussion should be read in conjunction with the consolidated
financial statements and notes presented on pages 39 through 61 of this report.
On March 1, 1994, KeyCorp ("old KeyCorp"), a financial services holding company
headquartered in Albany, New York, with approximately $33 billion in assets as
of December 31, 1993, merged into and with Society Corporation ("Society"), an
Ohio corporation, which was the surviving corporation of the merger under the
name "KeyCorp".
Because the merger, which was accounted for as a pooling of interests, occurred
subsequent to December 31, 1993, the financial information and narrative
discussion presented herein covers Society's financial performance prior to the
merger and does not give effect to the restatement to include old KeyCorp's
financial results. However, the supplemental financial statements included on
pages 65 through 94 of this report present the combined financial condition and
results of operations of Society and old KeyCorp as if the merger had been in
effect for all periods presented.
In addition to the merger of Society and old KeyCorp, the following
transactions, which were completed over the past two years and have had a
significant impact on the Corporation's overall growth and geographic
diversification, are described in greater detail in Note 2, Mergers,
Acquisitions and Divestitures, on page 45 of this report: (i) the March 16,
1992, merger of Ameritrust Corporation ("Ameritrust") with and into Society,
(ii) the September 30, 1992, acquisition by Society of all the outstanding
shares of First of America Bank - Monroe ("FAB-Monroe"), (iii) the December 4,
1992, formation by Society and three other bank holding companies of a joint
venture in a new corporation named Electronic Payment Services, Inc., (iv) the
January 22, 1993, acquisition by Society of all the outstanding shares of First
Federal Savings and Loan Association of Fort Myers ("Society First Federal"),
(v) the September 15, 1993, sale by Society of Ameritrust Texas Corporation
("ATC"), and (vi) the October 5, 1993, acquisition by Society of Schaenen Wood &
Associates, Inc. ("SWA").
9
12
PERFORMANCE OVERVIEW
Net income for 1993 reached a record level of $347.2 million, or $2.93 per
Common Share, up from the previous record of $301.2 million, or $2.51 per Common
Share, achieved in 1992 and $76.5 million, or $.61 per Common Share, in 1991.
The return on average common equity for the current year rose to 17.87%, up from
17.52% and 4.24% in 1992 and 1991, respectively. The return on average total
assets was 1.36% in 1993, 1.26% in 1992 and .30% in 1991.
Record-level earnings were attained in 1993 despite fourth-quarter merger and
integration charges of $53.9 million ($39.6 million after tax, $.33 per Common
Share) recorded in connection with the merger with old KeyCorp. In 1992,
earnings were also adversely impacted by similar charges of $50.0 million ($34.2
million after tax, $.29 per Common Share) recorded in the first quarter in
connection with the merger with Ameritrust. In addition, 1992 earnings reflected
a $20.1 million ($13.2 million after tax, $.11 per Common Share) gain on the
sale of certain branch offices and loans. Excluding the impact of the above
items, 1993 net income grew by $64.6 million, or 20%, relative to the previous
year. On a pre-tax basis, this improvement reflected a $62.1 million, or 5%,
increase in taxable-equivalent net interest income, a $28.3 million, or 6%,
increase in noninterest income and a $75.1 million, or 51%, decrease in the
provision for loan losses. These positive factors were offset in part by a $52.1
million, or 5%, increase in noninterest expense. Adjusting for the merger and
integration charges in both years and the 1992 gain, the returns on average
common equity and the returns on average total assets were 19.92% and 1.51%,
respectively, in 1993, and 18.77% and 1.35%, respectively, in 1992.
In 1991, net income was also impacted by merger and integration charges totaling
$93.8 million ($68.2 million after tax, $.59 per Common Share) recorded during
the fourth quarter in connection with the Ameritrust merger. Excluding the
merger and integration charges in both 1992 and 1991 and the gain referred to
above, net income in 1992 grew by $177.5 million, or 123%, relative to the
previous year. On a pre-tax basis, this improvement reflected a $72.3 million,
or 7%, increase in taxable-equivalent net interest income, a $26.4 million, or
6%, increase in noninterest income and a $132.7 million, or 47%, decrease in the
provision for loan losses. Noninterest expense also decreased $22.7 million,
after adjusting for the merger and integration charges in both years. On an
adjusted basis, the 1991 return on average common equity and the return on
average total assets were 8.36% and .57%, respectively.
(FIG. 1) - COMPONENTS OF EARNINGS PER COMMON SHARE
YEAR ENDED DECEMBER 31,
---------------------------------------
CHANGE
-----------------
1993 1992 AMOUNT PERCENT
------ ------ ------ ------
Interest income...................... $15.81 $16.22 $ (.41) (2.5)%
Interest expense..................... 5.68 6.59 (.91) (13.8)
------ ------ ------
Net interest income................ 10.13 9.63 .50 5.2
Provision for loan losses............ .61 1.25 (.64) (51.2)
------ ------ ------
Net interest income after
provision....................... 9.52 8.38 1.14 13.6
Noninterest income................... 4.31 4.27 .04 .9
Noninterest expense.................. 9.31 8.91 .40 4.5
------ ------ ------
Income before income taxes......... 4.52 3.74 .78 20.9
Income taxes......................... 1.58 1.17 .41 35.0
Preferred dividends.................. .01 .06 (.05) (83.3)
------ ------ ------
Earnings per common share.......... $ 2.93 $ 2.51 $ .42 16.7
------ ------ ------
------ ------ ------
10
13
(FIG. 2) - SELECTED FINANCIAL DATA (1)
(dollars in millions,
except per share amounts) 1993 1992 1991 1990 1989 1988
- ------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
YEAR ENDED DECEMBER 31,
Interest income................ $ 1,871.3 $ 1,903.4 $ 2,263.9 $ 2,521.4 $ 2,564.1 $ 2,222.3
Interest expense............... 672.3 773.0 1,216.7 1,498.9 1,538.0 1,292.7
Net interest income............ 1,199.0 1,130.4 1,047.2 1,022.5 1,026.1 929.6
Provision for loan losses...... 72.2 147.4 280.0 419.9 212.1 147.3
Noninterest income............. 509.8 501.5 455.0 460.6 361.1 332.1
Noninterest expense............ 1,101.9 1,045.9 1,112.5 1,065.1 979.3 866.4
Income (loss) before income
taxes........................ 534.7 438.6 109.7 (1.9) 195.8 248.0
Net income..................... 347.2 301.2 76.5 61.5 121.8 204.8
Net income applicable to Common
Shares....................... 346.1 295.0 70.2 56.3 119.9 202.7
PER COMMON SHARE(2)
Net income..................... $ 2.93 $ 2.51 $ .61 $ .49 $ 1.00 $ 1.65
Originally reported........ 2.93 2.51 2.45 2.35 2.32 2.09
Cash dividends................. 1.12 .98 .92 .88 .80 .68
Book value at year-end......... 17.37 15.49 13.82 13.90 14.46 14.87
Originally reported........ 17.37 15.49 16.90 15.34 16.58 14.98
Market price at year-end....... 29.75 32.13 24.75 16.13 17.07 16.63
Dividend payout ratio.......... 38.23% 39.04% 150.82% 179.59% 80.00% 41.21%
Weighted average Common Shares
(000)........................ 118,323.5 117,348.7 115,266.8 115,465.1 119,729.8 122,858.9
AT DECEMBER 31,
Loans.......................... $ 17,897.6 $ 16,031.5 $ 16,831.7 $ 18,076.8 $ 18,372.5 $ 17,627.3
Earning assets................. 24,678.5 22,587.2 23,265.3 23,565.1 24,530.5 23,832.4
Total assets................... 27,007.3 24,978.3 25,585.6 26,121.4 27,450.1 26,694.5
Deposits....................... 19,880.7 18,658.0 20,014.8 21,395.0 21,763.4 20,506.8
Long-term debt................. 952.7 886.0 463.8 471.1 468.9 463.1
Common shareholders' equity.... 2,038.6 1,808.1 1,595.2 1,586.0 1,677.9 1,744.8
Total shareholders' equity..... 2,038.6 1,868.1 1,655.2 1,646.0 1,702.9 1,769.8
PERFORMANCE RATIOS
Return on average total
assets....................... 1.36% 1.26% .30% .23% .47% .81%
Originally reported........ 1.36 1.26 1.09 1.03 1.11 1.07
Return on average common
equity....................... 17.87 17.52 4.24 3.39 6.89 11.53
Originally reported........ 17.87 17.52 15.36 16.17 15.49 15.56
Return on average total
equity....................... 17.84 17.28 4.46 3.59 6.91 11.30
Originally reported........ 17.84 17.28 15.36 16.14 15.23 15.28
Efficiency(3).................. 60.41 61.11 66.44 68.09 68.70 65.96
Overhead(4).................... 45.57 45.27 52.60 54.65 56.95 54.51
Net interest margin............ 5.26 5.33 4.65 4.44 4.54 4.30
CAPITAL RATIOS AT DECEMBER 31,
Equity to assets............... 7.55% 7.48% 6.47% 6.30% 6.20% 6.63%
Tier I risk-adjusted capital... 8.65 8.53 7.43 6.15 6.78 N/A
Total risk-adjusted capital.... 12.88 12.39 9.71 9.42 9.27 N/A
Leverage....................... 7.18 6.98 5.92 5.57 5.78 N/A
COMPOUND
ANNUAL RATE
(dollars in millions, OF CHANGE
except per share amounts) (1988-1993)
- ------------------------------- -----------
YEAR ENDED DECEMBER 31,
Interest income................ (3.4)%
Interest expense............... (12.3)
Net interest income............ 5.2
Provision for loan losses...... (13.3)
Noninterest income............. 9.0
Noninterest expense............ 4.9
Income (loss) before income
taxes........................ 16.6
Net income..................... 11.1
Net income applicable to Common
Shares....................... 11.3
PER COMMON SHARE(2)
Net income..................... 12.2
Originally reported........ 7.0
Cash dividends................. 10.5
Book value at year-end......... 3.2
Originally reported........ 3.0
Market price at year-end....... 12.3
Dividend payout ratio.......... (1.5)
Weighted average Common Shares
(000)........................ (.8)
AT DECEMBER 31,
Loans.......................... .3
Earning assets................. .7
Total assets................... .2
Deposits....................... (.6)
Long-term debt................. 15.5
Common shareholders' equity.... 3.2
Total shareholders' equity..... 2.9
PERFORMANCE RATIOS
Return on average total
assets....................... N/A
Originally reported........ N/A
Return on average common
equity....................... N/A
Originally reported........ N/A
Return on average total
equity....................... N/A
Originally reported........ N/A
Efficiency(3).................. N/A
Overhead(4).................... N/A
Net interest margin............ N/A
CAPITAL RATIOS AT DECEMBER 31,
Equity to assets............... N/A
Tier I risk-adjusted capital... N/A
Total risk-adjusted capital.... N/A
Leverage....................... N/A
- --------------------------------------------------------------------------------
(1) Amounts have been restated to reflect the March 16, 1992, merger with
Ameritrust Corporation and the January 5, 1990, merger with Trustcorp, Inc.,
each accounted for as a pooling of interests.
(2) Common Share and per Common Share amounts have been restated to reflect a
two-for-one stock split effected by means of a 100% stock dividend paid on
March 22, 1993.
(3) Calculated as noninterest expense (excluding merger and integration charges
and other non-recurring charges) divided by taxable-equivalent net interest
income plus noninterest income (excluding net securities transactions, gain
on sale of subsidiary and gain on sale of branch offices and loans).
(4) Calculated as noninterest expense (excluding merger and integration charges
and other non-recurring charges) less noninterest income (excluding net
securities transactions, gain on sale of subsidiary and gain on sale of
branch offices and loans) divided by taxable-equivalent net interest income.
N/A = Not Applicable.
11
14
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 Society's banking
affiliates. Net interest income is affected by a number of factors including the
level, pricing and maturity of earning assets and interest-bearing liabilities,
interest rate fluctuations and asset quality. To facilitate comparisons in the
following discussion, net interest income is presented on a taxable-equivalent
basis, which increases reported interest income on tax-exempt loans and
securities by an amount equivalent to the taxes which would be paid if the
income were taxable at the statutory Federal income tax rate.
The trends in various components of the balance sheet and their respective
yields and rates which affect interest income and expense are illustrated in
Figure 3. The table presented in Figure 4 provides an analysis of the effect of
changes in yields/rates and average balances on net interest income in 1993 and
1992. A more in-depth discussion of changes in earning assets and funding
sources is presented in the Financial Condition section beginning on page 23.
Net interest income was $1.2 billion in 1993, up $62.1 million, or 5%, from the
prior year. This followed an increase of $72.3 million, or 7%, in 1992 relative
to the comparable 1991 period. In 1993, the growth in net interest income
resulted from a higher level of average earning assets, which more than offset a
slight decline in the net interest margin. The net interest margin is computed
by dividing taxable equivalent net interest income by average earning assets.
Average earning assets in 1993 totaled $23.2 billion which represented an
increase of $1.5 billion, or 7%, from the prior year. This followed a decrease
of $1.6 billion, or 7%, in 1992 relative to the previous year. Excluding the
impact of the January 1993, acquisition of Society First Federal, average
earning assets increased by $325.2 million in 1993 due to increases of $461.8
million in total securities and $69.2 million in loans and mortgage loans held
for sale. These increases were partially offset by a $205.7 million decline in
aggregate short-term investments. The increase in loans can be primarily
attributed to growth in student loans held for sale, residential mortgage loans
and lease financing, offset in part by lower levels of outstanding loans in the
consumer and commercial portfolios. The $1.6 billion decrease in average earning
assets in 1992 resulted primarily from a $1.3 billion decline in average loans,
principally in the commercial and real estate construction portfolios. The
decline also reflected a decrease of $375.4 million in Federal funds sold and
security resale agreements. This latter decrease resulted from reduced
short-term funding requirements for loans and the planned reduction of excess
liquidity. The decrease in loans in 1992 can be attributed to a decline in
demand due to weak economic conditions, strategic efforts to reduce certain
types of lending, the anticipated run-off of certain Ameritrust credits and the
second quarter sale of branch offices, including $331.8 million in loans,
required in connection with the merger with Ameritrust.
As shown in Figure 3, the net interest margin for the current year was 5.26%
compared with 5.33% in 1992 and 4.65% in 1991. The slight decline in the 1993
net interest margin reflected the narrower interest rate spread contributed by
Society First Federal and the lower proportion of interest free funds supporting
earning assets in comparison with the prior year. The interest rate spread is
computed as the difference between the taxable-equivalent yield on earning
assets and the rate paid on interest-bearing liabilities. Excluding the impact
of Society First Federal, the net interest margin increased to 5.35%. On an
adjusted basis, the improvement in the margin over the past two years was
principally the result of a wider spread. In 1993 and 1992 the spread increased
by 16 basis points and 85 basis points, respectively, as the decrease in the
rate paid on interest-bearing liabilities exceeded the decrease in the yield on
earning assets. Several factors were responsible for the widened spreads,
including an interest rate sensitivity position which has enabled the
Corporation to benefit from the lower interest rate environment. This position
was enhanced through the increased use of "portfolio" interest rate swaps and
securities. The notional amount of such swaps increased to $5.2 billion at
December 31, 1993, up from $4.8 billion at December 31, 1992, and $2.9 billion
at December 31, 1991. Interest rate swaps contributed $131.1 million to net
interest income and 56 basis points to the net interest margin in 1993. In 1992
interest rate swaps increased net interest income by $93.8 million and added 44
basis points to the net interest margin. The manner in which interest rate swaps
are used in the Corporation's overall program of asset and liability management
is described in the Asset and Liability Management section on page 16 of this
report. Also contributing to the widened spread was a shift in deposits from
time to lower rate savings deposits with higher liquidity and to
noninterest-bearing deposits. The improved margin also reflected the effects of
a lower level of nonperforming assets and the 1992 reduction in short-term
investments (made by Ameritrust prior to the merger) which had narrower spreads.
12
15
[PAGE INTENTIONALLY LEFT BLANK]
13
16
(FIG. 3) - AVERAGE BALANCE SHEETS, NET INTEREST INCOME, AND YIELDS/RATES (4)
1993 1992
--------------------------------- ---------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
(dollars in millions) BALANCE INTEREST RATE BALANCE INTEREST RATE
- ------------------------------------- --------- -------- ------ --------- -------- ------
ASSETS
Loans(1)(2):
Commercial, financial and
agricultural..................... $ 4,430.4 $ 359.0 8.10% $ 4,843.0 $ 405.0 8.36%
Real estate........................ 7,078.7 574.3 8.11 6,267.8 517.9 8.26
Consumer........................... 3,165.3 332.1 10.49 4,173.5 452.6 10.84
Student loans held for sale........ 1,195.9 77.0 6.44
Lease financing.................... 1,010.8 75.4 7.46 758.9 59.3 7.81
Foreign............................ 71.0 4.5 6.37 105.3 6.2 5.88
--------- -------- --------- --------
Total loans...................... 16,952.1 1,422.3 8.39 16,148.5 1,441.0 8.92
Mortgage loans held for sale......... 243.4 17.8 7.31 149.0 12.8 8.59
Investment Securities:
Taxable investment securities...... 4,161.0 330.1 7.93 4,250.6 397.1 9.34
Tax-exempt investment
securities(1).................... 461.4 41.9 9.10 584.0 54.8 9.38
--------- -------- --------- --------
Total investment securities...... 4,622.4 372.0 8.05 4,834.6 451.9 9.35
Securities available for sale........ 911.1 63.8 7.00
Interest-bearing deposits with
banks.............................. 409.9 14.5 3.53 409.6 17.9 4.36
Federal funds sold and security
resale agreements.................. 45.4 1.4 3.18 168.9 6.5 3.85
Trading account assets............... 16.8 .6 3.37 20.5 .9 4.34
--------- -------- --------- --------
Total earning assets............. 23,201.1 1,892.4 8.16 21,731.1 1,931.0 8.89
Allowance for loan losses............ (496.3) (522.2)
Other assets......................... 2,888.2 2,657.6
--------- ---------
$25,593.0 $23,866.5
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Money market deposit accounts...... $ 2,509.4 $ 62.9 2.51% $ 2,816.0 $ 91.8 3.26%
Savings deposits................... 2,702.6 70.9 2.62 2,301.0 74.1 3.22
NOW accounts....................... 2,383.8 52.9 2.22 2,008.8 56.4 2.81
Certificates ($100,000 or more).... 1,046.7 51.8 4.95 1,441.7 87.2 6.05
Other time deposits................ 5,624.7 234.2 4.17 6,255.2 319.7 5.11
Deposits in foreign office......... 1,018.8 31.5 3.09 367.9 13.7 3.72
--------- -------- --------- --------
Total interest-bearing
deposits....................... 15,286.0 504.2 3.30 15,190.6 642.9 4.23
Federal funds purchased and
securities sold under agreements to
repurchase......................... 2,729.1 81.2 2.98 2,312.2 77.6 3.35
Other short-term borrowings.......... 818.0 24.0 2.93 360.6 11.9 3.31
Long-term debt(3).................... 1,028.7 62.9 6.57 609.3 40.6 7.55
--------- -------- --------- --------
Total interest-bearing
liabilities.................... 19,861.8 672.3 3.40 18,472.7 773.0 4.20
-------- ------ -------- ------
Noninterest-bearing deposits......... 3,152.8 3,062.9
Other liabilities.................... 632.0 587.6
Preferred stock...................... 9.9 60.0
Common shareholders' equity.......... 1,936.5 1,683.3
--------- ---------
$25,593.0 $23,866.5
========= =========
Interest rate spread................. 4.76% 4.69%
==== ====
Net interest income and net interest
margin............................. $1,220.1 5.26% $1,158.0 5.33%
======== ==== ======== ====
Taxable-equivalent adjustment(1)..... $ 21.1 $ 27.6
- ----------------------------------------------------------------------------
(1) Interest income on tax-exempt investment securities and loans has been
adjusted to a fully taxable-equivalent basis using the statutory Federal
income tax rate of 35% for 1993 and 34% for all other years presented.
(2) For purposes of these computations, nonaccrual loans are included in average
loan balances outstanding.
(3) Rate calculation excludes ESOP debt.
(4) Certain amounts previously reported have been reclassified to conform with
the current reporting presentation.
N/M = Not Meaningful.
1991 1990
-------------------------------- -----------------------------
AVERAGE YIELD/ AVERAGE YIELD/
(dollars in millions) BALANCE INTEREST RATE BALANCE INTEREST RATE
- ------------------------------------- --------- -------- ------ --------- -------- ------
ASSETS
Loans(1)(2):
Commercial, financial and
agricultural..................... $ 5,757.1 $ 548.2 9.51% $ 6,584.3 $ 723.6 10.99%
Real estate........................ 6,568.4 633.8 9.65 6,809.3 698.3 10.25
Consumer........................... 4,341.1 529.4 12.19 4,259.1 548.7 12.88
Student loans held for sale........
Lease financing.................... 675.1 60.3 8.94 621.3 63.5 10.22
Foreign............................ 84.9 5.8 6.83 79.6 6.9 8.67
--------- -------- --------
Total loans...................... 17,426.6 1,777.5 10.19 18,353.6 2,041.0 11.12
Mortgage loans held for sale......... 73.2 6.8 9.29 105.9 9.7 9.15
Investment Securities:
Taxable investment securities...... 3,963.8 378.3 9.54 3,297.2 308.0 9.34
Tax-exempt investment
securities(1).................... 688.6 66.3 9.63 824.0 79.8 9.68
--------- -------- --------- --------
Total investment securities...... 4,652.4 444.6 9.57 4,121.2 387.8 9.41
Securities available for sale........ 10.4 .9 8.88
Interest-bearing deposits with
banks.............................. 579.8 39.5 6.80 1,030.0 91.3 8.87
Federal funds sold and security
resale agreements.................. 544.3 30.7 5.64 447.4 36.1 8.07
Trading account assets............... 49.3 3.3 6.75 65.1 4.8 7.36
--------- -------- --------- --------
Total earning assets............. 23,325.6 2,302.4 9.87 24,133.6 2,571.6 10.66
Allowance for loan losses............ (463.8) (366.2)
Other assets......................... 2,539.5 2,644.4
--------- ---------
$25,401.3 $26,411.8
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Money market deposit accounts...... $ 2,972.0 $ 147.3 4.96% $2,753.2 $ 169.2 6.15%
Savings deposits................... 2,101.7 94.5 4.50 2,205.0 105.7 4.79
NOW accounts....................... 1,759.2 77.7 4.42 1,694.9 84.4 4.98
Certificates ($100,000 or more).... 2,238.7 162.4 7.26 2,777.3 233.8 8.42
Other time deposits................ 7,777.8 535.7 6.89 7,884.8 616.4 7.82
Deposits in foreign office......... 367.4 23.8 6.48 756.2 61.9 8.19
--------- -------- --------- --------
Total interest-bearing
deposits....................... 17,216.8 1,041.4 6.05 18,071.4 1,271.4 7.04
Federal funds purchased and
securities sold under agreements to
repurchase......................... 2,240.8 124.5 5.56 2,191.8 171.2 7.81
Other short-term borrowings.......... 316.3 17.5 5.52 278.3 21.1 7.57
Long-term debt(3).................... 468.1 33.3 8.41 477.5 35.2 8.69
--------- -------- --------- --------
Total interest-bearing
liabilities.................... 20,242.0 1,216.7 6.03 21,019.0 1,498.9 7.16
-------- ------ --------
Noninterest-bearing deposits......... 2,920.6 3,115.2
Other liabilities.................... 523.2 565.3
Preferred stock...................... 60.0 50.0
Common shareholders' equity.......... 1,655.5 1,662.3
--------- ---------
$25,401.3 $26,411.8
--------- ---------
--------- ---------
Interest rate spread................. 3.84% 3.50%
------ -----
------ -----
Net interest income and net interest
margin............................. $1,085.7 4.65% $1,072.7 4.44%
-------- ------ -------- -----
-------- ------ -------- -----
Taxable-equivalent adjustment(1)..... $ 38.5 $ 50.2
14
17
COMPOUND ANNUAL
RATE OF CHANGE
1989 1988 (1988-1993)
--------------------------------- --------------------------------- --------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST
--------- -------- ------ --------- -------- ------ -------- --------
$ 7,323.8 $ 863.0 11.78% $ 7,433.5 $ 768.0 10.33% (9.8)% (14.1)%
6,045.4 649.2 10.74 5,155.3 530.7 10.29 6.5 1.6
4,025.8 525.8 13.06 3,827.4 450.4 11.77
N/M N/M
548.7 53.5 9.74 453.5 41.9 9.24 17.3 12.4
108.0 11.6 10.78 168.7 13.5 8.02 (15.8) (19.7)
--------- -------- --------- --------
18,051.7 2,103.1 11.65 17,038.4 1,804.5 10.59 (.1) (4.6)
79.1 9.4 11.87 19.2 2.0 10.51 66.2 54.8
3,215.2 277.0 8.61 2,950.7 229.4 7.77 7.1 7.6
935.8 87.8 9.39 1,147.2 107.6 9.38 (16.7) (17.1)
--------- -------- --------- --------
4,151.0 364.8 8.79 4,097.9 337.0 8.22 2.4 1.9
28.8 2.9 10.33 N/M N/M
1,163.1 110.3 9.48 1,562.8 123.1 7.88 (23.5) (34.8)
279.5 26.0 9.30 112.4 9.0 8.03 (16.6) (31.1)
22.2 1.9 8.78 7.7 .2 2.01 16.9 24.6
--------- -------- --------- --------
23,775.4 2,618.4 11.01 22,838.4 2,275.8 9.97 3 (3.6)
(305.0) (250.3) 14.7
2,592.7 2,668.3 1.6
--------- ---------
$26,063.1 $25,256.4 .3
--------- ---------
--------- ---------
$ 2,471.6 $ 147.4 5.96% $ 2,820.1 $ 153.0 5.42% (2.3)% (16.3)%
2,329.5 115.8 4.97 2,516.0 120.5 4.79 1.4 (10.1)
1,673.8 82.9 4.95 1,676.2 78.1 4.66 7.3 (7.5)
2,940.7 260.4 8.86 2,116.4 156.1 7.38 (13.1) (19.8)
7,229.1 580.9 8.04 6,546.5 474.3 7.25 (3.0) (13.2)
653.0 58.6 8.97 783.2 58.3 7.45 5.4 (11.6)
--------- -------- --------- --------
17,297.7 1,246.0 7.20 16,458.4 1,040.3 6.32 (1.5) (13.4)
2,569.5 226.3 8.80 2,589.3 185.2 7.15 1.1 (15.2)
284.1 24.1 8.50 332.2 24.7 7.45 19.7 (.6)
485.2 41.6 9.24 466.6 42.5 9.10 17.1 8.2
--------- -------- --------- --------
20,636.5 1,538.0 7.47 19,846.5 1,292.7 6.51 (12.3)
-------- ------ -------- ------
3,163.2 3,185.5 (.2)
499.6 412.1 8.9
25.0 53.7 (28.7)
1,738.8 1,758.6 1.9
--------- ---------
$26,063.1 $25,256.4 .3
--------- ---------
--------- ---------
3.54% 3.46%
------ ------
------ ------
$1,080.4 4.54% $ 983.1 4.30% 4.4
-------- ------ -------- ------
-------- ------ -------- ------
$ 54.3 $ 53.5 (17.0)
18
(FIG. 4) - COMPONENTS OF NET INTEREST INCOME CHANGES
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1993 VS. 1992 1992 VS. 1991
-------------------------------- ----------------------------------
AVERAGE YIELD/ NET AVERAGE YIELD/ NET
(dollars in millions) VOLUME RATE CHANGE VOLUME RATE CHANGE
- --------------------------------------- ------ -------- -------- -------- -------- --------
INTEREST INCOME
Loans.................................. $69.8 $ (88.5) $ (18.7) $ (124.3) $ (212.1) $ (336.4)
Mortgage loans held for sale........... 7.1 (2.1) 5.0 6.5 (.5) 6.0
Taxable investment securities.......... (8.2 ) (58.8) (67.0) 26.9 (8.1) 18.8
Tax-exempt investment securities....... (11.2 ) (1.7) (12.9) (9.8) (1.7) (11.5)
Securities available for sale.......... 63.8 63.8
Short-term investments................. (4.9 ) (3.9) (8.8) (28.8) (19.4) (48.2)
------ -------- -------- -------- -------- --------
Total interest income................ 116.4 (155.0) (38.6) (129.5) (241.8) (371.3)
INTEREST EXPENSE
Money market deposit accounts.......... (9.3 ) (19.6) (28.9) (7.4) (48.1) (55.5)
Savings deposits....................... 11.8 (15.0) (3.2) 8.3 (28.7) (20.4)
NOW accounts........................... 9.5 (13.0) (3.5) 9.9 (31.2) (21.3)
Certificates ($100,000 or more)........ (21.3 ) (14.1) (35.4) (51.2) (24.0) (75.2)
Other time deposits.................... (30.1 ) (55.4) (85.5) (93.2) (122.7) (215.9)
Deposits in foreign office............. 20.5 (2.7) 17.8 (10.1) (10.1)
------ -------- -------- -------- -------- --------
Total interest-bearing deposits...... (18.9 ) (119.8) (138.7) (133.6) (264.8) (398.4)
Federal funds purchased and securities
sold under agreements to
repurchase........................... 13.0 (9.4) 3.6 3.8 (50.7) (46.9)
Other short-term borrowings............ 13.6 (1.5) 12.1 2.2 (7.7) (5.5)
Long-term debt......................... 25.9 (3.6) 22.3 9.2 (2.0) 7.2
------ -------- -------- -------- -------- --------
Total interest expense............... 33.6 (134.3) (100.7) (118.4) (325.2) (443.6)
------ -------- -------- -------- -------- --------
NET INTEREST INCOME.................. $82.8 $ (20.7) $ 62.1 $ (11.1) $ 83.4 $ 72.3
------ -------- -------- -------- -------- --------
------ -------- -------- -------- -------- --------
The change in interest not due solely to volume or rate has been allocated in
proportion to the absolute dollar amount of the change in each.
ASSET AND LIABILITY MANAGEMENT
The Corporation manages its exposure to economic loss from fluctuations in
interest rates through an active program of asset and liability management
within guidelines established by the Corporation's Asset/Liability Management
Committee ("ALCO"). The ALCO has the responsibility for approving the
asset/liability management policies of the Corporation, approving changes in the
balance sheet that would result in deviations from guidelines in the policy,
approving strategies to improve balance sheet positioning and/or earnings, and
reviewing the interest rate sensitivity positions of the Corporation and each of
the affiliate banks. The ALCO meets twice monthly to conduct this review and to
approve strategies consistent with its policies.
The primary tool utilized by management to measure and manage interest rate
exposure is a simulation model. Use of the model to perform simulations of
changes in interest rates over one-and two-year time horizons has enabled
management to develop strategies for managing exposure to interest rate risk.
In performing its simulations, management projects the impact on net interest
income from pro forma 100 and 200 basis point changes in the overall level of
interest rates. ALCO policy guidelines provide that a 200 basis point increase
or decrease over a 12-month period should not result in more than a 2% negative
impact on net interest income. Simulations as of December 31, 1993, indicated
that a 200 basis point increase in interest rates over the next twelve months
would have reduced net interest income by 2.2%. Conversely, a 200 basis point
decrease in interest rates over the same time period would have increased net
interest income by 1.4%. Accordingly, as of December 31, 1993, the simulation
model indicated that the Corporation's liability-sensitivity position was
outside of policy guidelines. ALCO determined that this interest rate
sensitivity position was appropriate considering the pending merger with old
KeyCorp. Simulations on a pro forma combined basis with old KeyCorp as of
December 31, 1993, indicated that the combined corporation was positioned within
the guidelines and was slightly liability sensitive.
The simulation model is supplemented with a more traditional tool used in the
banking industry for measuring interest rate risk known as interest rate
sensitivity gap analysis. This tool measures the difference between
16
19
assets and liabilities repricing or maturing within specified time periods. An
asset-sensitive position indicates that there are more rate-sensitive assets
than rate-sensitive liabilities repricing or maturing within specified time
horizons, which would generally imply a favorable impact on net interest income
in periods of rising interest rates. Conversely, a liability sensitive position,
where rate-sensitive liabilities exceed the amount of rate-sensitive assets
repricing or maturing within applicable time frames, would generally imply a
favorable impact on net interest income in periods of declining interest rates.
The interest rate gap analysis table shown in Figure 5 presents the gap position
(including the impact of off-balance sheet items) of the Corporation at December
31, 1993. Gap analysis has several limitations. For example, it does not take
into consideration the varying degrees of interest rate sensitivity pertaining
to the assets and liabilities that reprice within one year. Thus at December 31,
1993, the cumulative adjusted interest rate sensitivity gap of 4.78% within the
one-year time frame indicated that the Corporation was asset-sensitive, whereas
the more precise simulation model, previously described, indicated the
Corporation was slightly liability-sensitive.
The Corporation's core lending and deposit-gathering businesses tend to generate
significantly more fixed-rate deposits than fixed-rate interest-earning assets.
Left unaddressed, this tendency would place the Corporation's earnings at risk
to declining interest rates as interest-earning assets would reprice faster than
would interest-bearing liabilities. To reduce this risk, management has utilized
its securities portfolio and, for the past several years, interest rate swaps in
the management of interest rate risk. The decision to use "portfolio" interest
rate swaps to manage interest rate risk versus on-balance sheet securities has
depended on various factors, including funding costs, liquidity, and capital
requirements. The Corporation's "portfolio" swaps totaled $5.2 billion at
December 31, 1993, and consisted principally of contracts wherein the
Corporation receives a fixed rate of interest, while paying at a variable rate,
as summarized in Figure 6.
In addition to "portfolio" swaps, the Corporation has entered into interest rate
swap agreements to accommodate the needs of its customers, typically commercial
loan customers. The Corporation offsets the interest rate risk of customer swaps
by entering into offsetting swaps, primarily with third parties. These
offsetting swaps are also included in the customer swap portfolio. Where the
Corporation does not have an existing loan with the customer, the swap position
of the customer and any offsetting swap with a third party are carried at their
respective fair values. The $1.2 billion notional value of customer swaps in
Figure 6 includes $645 million of interest rate swaps that receive a fixed rate
and pay a variable rate and $569 million of interest rate swaps that receive a
variable rate and pay a fixed rate.
The total notional value of all interest rate swap contracts outstanding was
$6.5 billion and $5.5 billion as of December 31, 1993 and 1992, respectively.
Figure 7 shows the current year activity for such swaps.
At December 31, 1993, the aggregate notional values of interest rate swap
contracts, excluding customer swaps, maturing in each of the years 1994 through
1998 were $2.5 billion, $1.0 billion, $500 million, $200 million and $650
million, respectively.
The credit risk exposure to the counterparties for each interest rate swap
contract is monitored by the appropriate credit committees at both the Corporate
and affiliate bank levels. Based upon detailed credit reviews of the
counterparties, these credit committees establish limitations on the total
credit exposure the Corporation may have with each counterparty and indicate
whether collateral is required. At December 31, 1993, excluding customer swaps,
the Corporation had 16 counterparties to interest rate swap contracts, of which
the largest credit exposure to an individual counterparty was $16.4 million on a
notional amount of $900 million. The average total notional amount of swap
contracts with these 16 counterparties was $328 million with an average credit
exposure of $4.1 million.
17
20
(FIG. 5) - INTEREST RATE GAP ANALYSIS
DECEMBER 31, 1993
-----------------------------------------------------------------------
1 TO 90 91 TO 180 181 TO 365 1 TO 5 OVER 5
(dollars in millions) DAYS DAYS DAYS YEARS YEARS TOTAL
- ----------------------------------- ------- --------- ---------- ------- ------ -------
ASSETS
Loans............................ $9,477 $ 925 $1,949 $ 3,951 $1,596 $17,898
Mortgage loans held for sale..... 322 322
Investment securities............ 433 312 1,633 2,593 682 5,653
Securities available for sale.... 104 100 4 327 203 738
Short-term investments........... 68 68
Other assets..................... 2,315 13 2,328
------- --------- ---------- ------- ------ -------
Total assets.................. 10,404 1,337 3,586 9,186 2,494 27,007
------- --------- ---------- ------- ------ -------
LIABILITIES AND SHAREHOLDERS'
EQUITY
Noninterest-bearing deposits..... 601 3,203 3,804
Interest-bearing deposits........ 4,911 1,482 1,414 8,209 61 16,077
Short-term borrowings............ 3,529 3,529
Long-term debt................... 312 641 953
Other liabilities................ 606 606
Shareholders' equity............. 2,038 2,038
------- --------- ---------- ------- ------ -------
Total liabilities and
shareholders' equity........ 9,041 1,482 1,414 11,724 3,346 27,007
------- --------- ---------- ------- ------ -------
Off balance sheet items............ (1,745 ) (875) 410 1,810 400
------- --------- ---------- ------- ------
Rate sensitivity gap............... $ 382 $(1,020) $2,582 $ (728) $(452 )
Cumulative gap..................... $ 382 $(1,402) $1,180 $ 452
------- --------- ---------- -------
------- --------- ---------- -------
Cumulative gap as a % of earning
assets........................... (1.55)% (5.68)% 4.78% 1.83%
------- --------- ---------- -------
------- --------- ---------- -------
(FIG. 6) - INTEREST RATE SWAP PORTFOLIO
DECEMBER 31, 1993
----------------------------------------------------
WEIGHTED WEIGHTED AVERAGE
AVERAGE RATE
NOTIONAL MATURITY FAIR ----------------
(in millions) VALUE (YEARS) VALUE RECEIVE PAY
- --------------------------------------------- -------- -------- ----- ------- ----
Receive fixed/pay variable................... $4,490 2.2 $66 6.32% 3.45%
Pay fixed/receive variable................... 100 .8 (4) 3.38 8.78
Basis swaps.................................. 150 3.54 2.81
Forward-starting receive fixed/pay
variable................................... 500 1.7 2 6.06 3.48
-------- -----
Total "portfolio" swaps................. 5,240 2.1 64 5.45 3.53
Customer swaps............................... 1,214 3.7 4 5.22 5.03
-------- -----
Total interest rate swaps............... $6,454 2.4 $68 5.90 3.82
-------- -----
-------- -----
18
21
(FIG. 7) - "PORTFOLIO" SWAP ACTIVITY
YEAR ENDED DECEMBER 31, 1993
---------------------------------------------
TOTAL
RECEIVE PAY FORWARD- "PORTFOLIO"
(in millions) FIXED FIXED BASIS STARTING SWAPS
- ----------------------------------------------------- ------ ----- ----- -------- ---------
Balance at beginning of year......................... $3,455 $200 $1,180 $ 4,835
Additions....................................... 1,750 $150 502 2,402
Maturities/amortization......................... (1,445) (112 ) (1,557)
Terminations.................................... (380) (60) (440)
Forward-starting becoming effective............. 1,110 12 (1,122)
------ ----- ----- -------- ---------
Balance at end of year............................... $4,490 $100 $150 $ 500 $ 5,240
------ ----- ----- -------- ---------
------ ----- ----- -------- ---------
(FIG. 8) - LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
DECEMBER 31, 1993
-------------------------------------------
WITHIN 1 - 5 OVER
(in millions) 1 YEAR YEARS 5 YEARS TOTAL
- ----------------------------------------------------- -------- -------- ------- --------
Commercial, financial and agricultural............... $2,801.3 $1,143.8 $443.1 $4,388.2
Real estate -- construction.......................... 333.7 201.5 88.0 623.2
-------- -------- ------- --------
$3,135.0 $1,345.3 $531.1 $5,011.4
-------- -------- ------- --------
-------- -------- ------- --------
Loans at floating or adjustable rates................ $ 901.0 $237.0
Loans at predetermined interest rates................ 444.3 294.1
-------- -------
$1,345.3 $531.1
-------- -------
-------- -------
NONINTEREST INCOME
As shown in Figure 9, noninterest income totaled $509.8 million in 1993, up $8.3
million, or 2%, from the prior year. After excluding the $29.4 million gain on
the sale of ATC, the $26.1 million in net securities gains and certain other
nonrecurring items, noninterest income in 1993 was $457.6 million. This
represented an increase of $14.1 million, or 3%, from the amount reported in
1992, after excluding last year's $20.1 million gain on the sale of branch
offices and loans, and net securities gains totaling $9.8 million. Adjusting for
the 1992 gains and the securities transactions recorded in 1991, noninterest
income in 1992 rose $23.9 million, or 5%, relative to the prior year.
Trust fees continued to be a major source of revenue. After excluding the gains
referred to above, these fees accounted for 45% of noninterest income in both
1993 and 1992, compared to 44% in 1991. The growth during the 1992 period
reflected the development of new business, expanded geographic coverage and
enhanced service capability. At December 31, 1993, the Corporation, through
Society Asset Management, Inc. ("SAMI") and the trust departments of its
affiliate banks and trust subsidiaries, managed assets (excluding corporate
trust assets) of approximately $29.4 billion. SAMI, which is a wholly-owned
subsidiary of Society National Bank, is registered with the Securities and
Exchange Commission ("SEC") as an investment advisor and is one of the largest
money managers in the Great Lakes region. The sale of ATC in September 1993
reduced managed trust assets and trust fees by approximately $4 billion and $8.0
million, respectively.
Service charges on deposit accounts decreased $1.6 million, or 2%, in 1993
following an increase of $3.7 million, or 4%, in 1992. The decrease in 1993 was
due, in part, to the change in the mix of the deposit base and related pricing
structure resulting from acquisitions and divestitures. Factors contributing to
the improvement in 1992 were pricing strategies and other corporate-wide
initiatives designed to offset higher costs associated with servicing deposit
accounts.
In 1993, credit card fees decreased $6.8 million, or 12%, primarily due to a
decline in annual membership fees relative to the prior year. This compared to
an increase of $2.5 million, or 5%, in 1992.
19
22
Growth in the insurance and brokerage component of other income over the past
three years was due to increased broker dealer commissions at Society
Investments, Inc. (SII). SII, which is a wholly-owned subsidiary of Society
National Bank, is a registered broker dealer with the SEC and the National
Association of Securities Dealers. The increase in commissions at SII resulted
from aggressive and strategic sales initiatives, including an expanded sales
force and product line. "Miscellaneous" other income in 1993 decreased $8.0
million, or 12%, from the comparable 1992 amount. Primary factors contributing
to this decrease were an $8.2 million decline in ATM fees resulting from
Society's contribution of the Green Machine subsidiary to the newly formed
Electronic Payment Systems joint venture which Society entered into in the
fourth quarter of 1992, and $10.2 million in gains resulting from the
curtailment and settlement of retirement obligations recorded in 1992 in
connection with merger-related staff reductions. The impact of these factors was
partially offset by a $4.5 million interest rate swap trading gain recorded in
1993.
(FIG. 9) - NONINTEREST INCOME
YEAR ENDED DECEMBER 31,
--------------------------------------------------
CHANGE 1993 VS
1992
-----------------
(dollars in millions) 1993 1992 1991 AMOUNT PERCENT
- --------------------------------------------- ------ ------ ------ ------ ------
Trust income................................. $204.9 $210.0 $199.1 $ (5.1) (2.4)%
Service charges on deposit accounts.......... 98.0 99.6 95.9 (1.6) (1.6)
Credit card fees............................. 48.0 54.8 52.3 (6.8) (12.4)
Gain on sale of subsidiary................... 29.4 29.4 N/M
Gain on sale of branch offices and loans..... 20.1 (20.1) (100.0)
Net securities gains......................... 26.1 9.8 7.4 16.3 166.3
Other income:
Insurance and brokerage.................... 21.4 18.1 13.7 3.3 18.2
International fees......................... 21.4 20.5 18.2 .9 4.4
Miscellaneous.............................. 60.6 68.6 68.5 (8.0) (11.7)
------ ------ ------ ------
Total other income...................... 103.4 107.2 100.4 (3.8) (3.5)
------ ------ ------ ------
Total noninterest income.............. $509.8 $501.5 $455.1 $ 8.3 1.7
------ ------ ------ ------
------ ------ ------ ------
N/M = Not Meaningful
NONINTEREST EXPENSE
Noninterest expense, as shown in Figure 10, totaled $1.1 billion in 1993, up
$55.9 million, or 5%, from the 1992 level. In both 1993 and the prior year,
noninterest expense was adversely impacted by merger and integration charges of
$53.9 million and $50.0 million, respectively. In addition, the current year
included several nonrecurring charges totaling $34.4 million. Significant items
included in these charges were $21.6 million related to various systems
conversion costs, $7.0 million of facilities-related charges and $4.0 million
associated with the adoption of SFAS No. 112, "Employers' Accounting for
Postemployment Benefits." Excluding the merger and integration charges and the
nonrecurring items, 1993 expenses rose $17.6 million, or 2%, principally due to
increases in personnel expense, marketing expense and the "Miscellaneous"
category, offset in part by lower fees for professional services. The overall
increase in recurring noninterest expense was due, in large part, to the
acquisition of Society First Federal in January 1993. The 1991 period also
included merger and integration charges of $93.8 million, as well as $6.9
million of costs associated with a branch optimization program. After adjusting
for these items, 1992 noninterest expense decreased $15.8 million, or 2%,
relative to the prior year, reflecting the effectiveness of cost management
initiatives.
Personnel expense for 1993 increased $15.0 million, or 3%, over 1992. In
addition to the $9.3 million impact of the Society First Federal acquisition,
this increase reflected the Corporation's January 1, 1993, adoption of SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions,"
which added $4.7 million to 1993 employee benefits expense, as well as
additional costs associated with a new employee incentive program. Excluding the
impact of the adoption of SFAS No. 106 and SFAS No. 112, personnel expense for
1993 increased $6.3 million or 1%. SFAS No. 106 and SFAS No. 112 are more fully
described
20
23
below. Personnel expense for 1992 increased $4.5 million, or less than 1%, from
the prior year. The 1992 increase in the salaries component was mainly due to
higher costs related to temporary contracted personnel, but was substantially
offset by the decrease in benefits resulting from reduced staff levels. At
December 31, 1993, the number of full-time equivalent employees was 12,038, down
3% and 11% from 1992 and 1991 levels, respectively.
Merger and integration charges of $53.9 million, $50.0 million and $93.8 million
were recorded in 1993, 1992, and 1991, respectively. The 1993 charges were
incurred in connection with the merger with old KeyCorp, while the 1992 and 1991
amounts related to the merger with Ameritrust. The merger and integration
charges directly attributable to the old KeyCorp merger included accruals for
merger expenses, consisting primarily of investment banking and other
professional fees directly related to the merger ($12.6 million); severance
payments and other employee costs ($17.6 million); systems and facilities costs
($16.7 million); and other costs incident to the merger ($7.0 million). These
charges were recorded by the parent company in the fourth quarter of 1993 at
which time management determined that it was probable that a liability for such
charges had been incurred and could be reasonably estimated. The merger and
integration charges recorded in connection with the Ameritrust merger in 1992
and 1991 were similar in nature.
Although no assurance can be given, it is also expected that as a result of the
old KeyCorp merger, cost savings will be achieved by the combined institution at
an annual rate of approximately $100 million by the end of the first quarter of
1995. These cost savings are anticipated to result from the integration of
operations and from efficiencies in certain combined lines of business.
Management presently expects that approximately 50% of the annual cost savings
will be achieved in 1994.
One measure used in the banking industry to assess the level of noninterest
expense is the efficiency ratio, which is defined in Figure 10. The efficiency
ratios for 1993, 1992, and 1991 were 60.41%, 61.11%, and 66.44%, respectively.
The improvement in the Corporation's efficiency ratios reflects, in large part,
the success achieved in reducing overhead costs through the successful
integration of banking companies, coupled with the strong growth in
taxable-equivalent net interest income.
SFAS No. 106, previously referred to on page 20, requires that employers
recognize the cost of providing postretirement benefits over the employees'
active service periods to the date they attain full eligibility for such
benefits. A transition obligation, defined as the unfunded accumulated
postretirement benefit obligation at the date the standard is adopted, may be
recognized immediately (through a charge to earnings in the year of adoption),
or on a delayed basis, generally over a transition period not to exceed 20
years. The Corporation elected to recognize the transition obligation of
approximately $77 million over a 20-year transition period. As previously
stated, adoption of the new standard added $4.7 million to noninterest expense
in the current year. As of December 31, 1993, the discount rate used in
determining the actuarial present value of both pension and other postretirement
benefits was reduced from 8.5% to 7.5%. In addition, the assumed rate of
increase in future compensation levels (applicable only to the determination of
pension benefits) was reduced from 4.5% to 4.0%. The net effect of these
assumption changes on 1994 expense levels is not expected to be material.
Another assumption used in the determination of the costs of other
postretirement benefits is the health care cost trend rate. Because of certain
cost-sharing provisions and benefit limitations in effect, increasing the rates
assumed in each future year by one percentage point would not be expected to
have a material impact on the costs for other postretirement benefits.
The Corporation adopted the provisions of SFAS No. 112, "Employers' Accounting
for Postemployment Benefits" during 1993. This standard requires that employers
who provide benefits to former and inactive employees after employment but
before retirement recognize a liability for such benefits if specified
conditions are met. Adoption of the standard increased third quarter and full
year 1993 noninterest expense by $4.0 million. Postemployment benefits for 1992
and 1991, which were recorded on a cash basis, were not restated.
21
24
(FIG. 10) - NONINTEREST EXPENSE
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
CHANGE
1993 VS 1992
---------------------
(dollars in millions) 1993 1992 1991 AMOUNT PERCENT
- ----------------------------------------------- -------- -------- -------- -------- --------
Personnel:
Salaries..................................... $ 433.3 $ 429.7 $ 409.9 $ 3.6 .8%
Employee benefits............................ 73.4 62.0 77.3 11.4 18.4
-------- -------- -------- --------
Total personnel........................... 506.7 491.7 487.2 15.0 3.1
Net occupancy.................................. 92.6 89.1 90.4 3.5 3.9
Equipment...................................... 79.0 77.0 72.9 2.0 2.6
FDIC insurance assessments..................... 40.7 43.8 42.1 (3.1) (7.1)
Professional fees.............................. 20.4 31.4 29.8 (11.0) (35.0)
Merger and integration charges................. 53.9 50.0 93.8 3.9 7.8
Other expense:
Marketing.................................... 28.6 23.3 28.2 5.3 22.7
Amortization of intangibles.................. 26.5 30.1 27.5 (3.6) (12.0)
OREO (net of income of $14.4, $11.5 and
$4.8)..................................... 5.6 6.1 9.7 (.5) (8.2)
Miscellaneous................................ 247.9 203.5 230.9 44.4 21.8
-------- -------- -------- --------
Total other expense....................... 308.6 263.0 296.3 45.6 17.3
-------- -------- -------- --------
Total noninterest expense............... $1,101.9 $1,046.0 $1,112.5 $ 55.9 5.3
-------- -------- -------- --------
-------- -------- -------- --------
Full-time equivalent employees................. 12,038 12,451 13,507
Efficiency ratio (1)........................... 60.41% 61.11% 66.44%
Overhead ratio (2)............................. 45.57 45.27 52.60
(1) Calculated as noninterest expense (excluding merger and integration charges
and other non-recurring charges) divided by taxable-equivalent net interest
income plus noninterest income (excluding net securities transactions, gain
on sale of subsidiary and gain on sale of branch offices and loans).
(2) Calculated as noninterest expense (excluding merger and integration charges
and other non-recurring charges) less noninterest income (excluding net
securities transactions, gain on sale of subsidiary and gain on sale of
branch offices and loans) divided by taxable-equivalent net interest income.
INCOME TAXES
The provision for income taxes for 1993 was $187.5 million, compared with $137.4
million in 1992 and $33.2 million in 1991. The increases in both 1993 and the
prior year resulted from an overall increase in the level of taxable earnings.
The Omnibus Budget Reconciliation Act of 1993, which was signed into law on
August 10, 1993, includes a number of significant items which impacted the
Corporation's Federal income tax provision. Primary among these items is a
retroactive increase in the Federal statutory tax rate from 34% to 35% as of
January 31, 1993. In addition, the Act places certain limitations on deductible
expenses which take effect after 1993. The effective tax rate (provision for
income taxes as a percentage of income before income taxes) was 35.1% in 1993,
31.3% in 1992 and 30.3% in 1991. The effective tax rate in 1993 exceeded the
current Federal statutory tax rate of 35% as a higher tax-basis gain on the sale
of ATC and non tax-deductible expenses, including the amortization of certain
intangible assets and certain merger expenses, exceeded tax-exempt income in the
current year. The non tax-deductible merger expenses incurred in 1993 were
primarily due to additional costs associated with the merger with old KeyCorp.
The effective tax rate in 1992 and 1991 was less than the Federal statutory tax
rate of 34.0%, in effect at the time, due primarily to tax-exempt income from
certain investment securities and loans.
During the first quarter of 1992, the Corporation adopted the provisions of SFAS
No. 109, "Accounting for Income Taxes." The adoption of this standard did not
have a material effect on the Corporation's financial condition or results of
operations.
22
25
FINANCIAL CONDITION
The financial condition of Society and its subsidiaries as of December 31 is
presented in the comparative balance sheet on page 39. The following discussions
address significant elements of financial condition including loans, securities,
credit quality and experience, sources of funds, liquidity and capital adequacy.
Unless otherwise indicated, amounts presented in the discussions are as of the
appropriate period-end.
LOANS
At December 31, 1993, total loans outstanding were $17.9 billion, as compared
with $16.0 billion at December 31, 1992, and $16.8 billion at December 31, 1991,
as shown in Figure 11. The increase from the year-end 1992 level was due, in
part, to the acquisition of Society First Federal in January 1993. Excluding the
$836.6 million impact of this acquisition and adjusting for $200.0 million of
student loans securitized or sold in 1993, loans increased by $1.3 billion since
the prior year end. This reflected increases of $603.0 million in residential
real estate loans, $578.5 million in student loans held for sale and $289.3
million in lease financing receivables. These increases were partially offset by
decreases of $360.0 million in commercial mortgage and construction loans, $43.6
million in commercial loans, $41.5 million in credit card outstandings and $38.1
million in foreign loans.
Commercial loans outstanding at December 31, 1993, were $4.4 billion, down
slightly from the December 31, 1992 level, following a decrease of $747.6
million, or 14%, in the prior year. The declines in both years can be attributed
to weaker loan demand as a consequence of the economic environment and to
strategic efforts to reduce the level of exposure related to highly-leveraged
transactions ("HLT"s), principally acquired in the Ameritrust Merger, where
there has not been a long-standing relationship with the borrower. These
transactions are defined and monitored based upon the criteria previously used
by the banking regulators. In addition, the decline in 1992 reflected the
run-off of certain other Ameritrust credits which management believed were
incompatible with the Corporation's credit risk profile. At December 31, 1993,
the Corporation had $247.5 million in HLT loans outstanding, down $157.7
million, or 39%, from the December 31, 1992, level. This followed a decline of
$145.3 million, or 26%, in 1992.
Loans secured by real estate totaled $7.3 billion at December 31, 1993, compared
with $6.3 billion at December 31, 1992, and $6.4 billion at December 31, 1991.
Loans secured by real estate consist of construction loans, one-to-four family
residential loans (including home equity loans) and commercial mortgage loans.
The increase from 1992 was mainly attributable to the acquisition of Society
First Federal. The acquisition accounted for $811.9 million of the increase in
total real estate loans and $767.2 million of the increase in the residential
mortgage portfolio.
Construction loans decreased to $623.2 million at December 31, 1993, from $737.6
million at December 31, 1992, and $839.4 million at December 31, 1991. After
adjusting for the impact of the acquisition of Society First Federal, the
decrease from year-end 1992 was $132.6 million. As portrayed in Figure 12, loans
in the construction portfolio are concentrated in the Midwest, which has not
experienced, to the same degree, the level of overbuilding and declines in real
estate values as have certain other regions of the country. At December 31,
1993, 70% of the portfolio was secured by properties in Ohio, and 17% were in
Indiana and Michigan, Society's principal banking markets.
The commercial mortgage loan portfolio totaled $2.1 billion at December 31,
1993, compared with $2.3 billion at December 31, 1992, and $2.6 billion at
December 31, 1991. In addition to efforts to downsize the portfolio, the slower
economy also contributed to this decrease. As depicted in Figure 12, commercial
mortgages are also geographically concentrated in the Midwest, with 64% of
outstandings secured by properties in Ohio, and 21% in Indiana and Michigan. At
December 31, 1993, 49% of the commercial mortgage loan portfolio was comprised
of loans secured by owner-occupied properties. Those borrowers are engaged in
business activities other than real estate, and the primary source of repayment
is not solely dependent on the real estate market. The Corporation manages risk
exposure in the construction and commercial mortgage portfolios through prudent
underwriting criteria and by monitoring loan concentrations by geographic region
and property type.
One-to-four family residential mortgages (including home equity loans) were $4.6
billion at December 31, 1993, compared with $3.2 billion at December 31, 1992,
and $2.9 billion at December 31, 1991. Excluding the
23
26
impact of the acquisition of Society First Federal, residential mortgages increased $603.0 million, or 19%, in 1993. This followed
an increase of $515.6 million, or 19%, in 1992, after adjusting for the sale of $260.0 million of mortgage loans in connection with
the branch sales previously discussed. Excluding the impact of the acquisition of Society First Federal, loan originations increased
$428.5 million, or 25%, in 1993, following an increase of $806.6 million, or 88%, in 1992. A significant portion of the loan
originations during the past two years is attributable to homeowner refinancings, reflecting the lower level of interest rates.
During 1993 the Corporation continued its strategy of originating and selling most fixed rate loans with 30-year maturities in the
secondary market (and such loans are classified outside of the loan portfolio as mortgage loans held for sale), whereas adjustable
rate loans and fixed rate loans with 15-year maturities are originated to secondary market standards and maintained in the
portfolio. At December 31, 1993, 22% of the residential loan portfolio was adjustable rate. The Corporation's mortgage banking
operation services $5.1 billion in loans, of which $2.4 billion is held by third parties.
Consumer loans totaled $3.3 billion at December 31, 1993, compared with $3.2 billion at December 31, 1992, and $4.4 billion at
December 31, 1991. The decrease during 1992 reflected the designation of approximately $1.1 billion of student loans as held for
sale in the fourth quarter of 1992. Consumer loans also declined as a result of the sale of $117.6 million in outstandings as part
of the branch sales in May and June 1992 in connection with the Ameritrust merger, and the sale of $240.0 million in student loans
in August 1992. Excluding the impact of these 1992 items, consumer loans increased $446.0 million, or 9%, from the December 31,
1991, level.
As indicated above, during the latter part of 1992 the Corporation initially designated its student loan portfolio, totaling
approximately $1.1 billion at the time, as held for sale. Since then, this portfolio has grown to $1.6 billion at December 31, 1993,
representing an increase of $578.5 million, or 54%, from the year-end 1992 level. The higher level of outstandings in 1993 reflected
the Corporation's increased involvement in the Law Access Loan Program as a primary provider of education loans to law school
students. In June 1993, the Corporation securitized, without recourse, a portion of this portfolio totaling $200.0 million.
(FIG. 11) - COMPOSITION OF LOANS
DECEMBER 31,
-------------------------------------------------------------------
1993 1992 1991
------------------- ------------------- -------------------
% OF % OF % OF
(dollars in millions) AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
- ---------------------------------------- --------- ----- --------- ----- --------- -----
Commercial, financial, and
agricultural.......................... $ 4,388.2 24.5 % $ 4,430.0 27.6% $ 5,177.7 30.8%
Real estate -- construction............. 623.2 3.5 737.6 4.6 839.4 5.0
Real estate -- commercial mortgage...... 2,119.8 11.8 2,320.8 14.5 2,631.2 15.6
--------- ----- --------- ----- --------- -----
Total commercial real estate.......... 2,743.0 15.3 3,058.4 19.1 3,470.6 20.6
Real estate -- residential mortgage..... 4,574.5 25.6 3,204.4 20.0 2,948.8 17.5
--------- ----- --------- ----- --------- -----
Total real estate................... 7,317.5 40.9 6,262.8 39.1 6,419.4 38.1
Credit card............................. 1,036.1 5.8 1,076.5 6.7 1,108.6 6.6
Other consumer.......................... 2,230.7 12.5 2,166.9 13.5 3,324.4 19.7
--------- ----- --------- ----- --------- -----
Total consumer........................ 3,266.8 18.3 3,243.4 20.2 4,433.0 26.3
Student loans held for sale............. 1,648.6 9.2 1,070.1 6.7
Lease financing......................... 1,213.2 6.8 923.8 5.8 724.7 4.3
Foreign................................. 63.3 .3 101.4 .6 76.9 .5
--------- ----- --------- ----- --------- -----
Total............................... $17,897.6 100.0% $16,031.5 100.0% $16,831.7 100.0%
========= ===== ========= ===== ========= =====
December 31,
-------------------------------------------
1990 1989
------------------- -------------------
% OF % OF
(dollars in millions) AMOUNT TOTAL AMOUNT TOTAL
- ---------------------------------------- --------- ----- --------- -----
Commercial, financial, and
agricultural.......................... $ 6,188.0 34.2% $ 7,045.9 38.4%
Real estate -- construction............. 1,331.8 7.4 1,177.4 6.4
Real estate -- commercial mortgage...... 2,396.9 13.2 2,359.3 12.8
--------- ----- --------- -----
Total commercial real estate.......... 3,728.7 20.6 3,536.7 19.2
Real estate -- residential mortgage..... 3,033.8 16.8 2,824.7 15.4
--------- ----- --------- -----
Total real estate................... 6,762.5 37.4 6,361.4 34.6
Credit card............................. 1,033.1 5.7 870.3 4.7
Other consumer.......................... 3,358.1 18.6 3,421.4 18.6
--------- ----- --------- -----
Total consumer........................ 4,391.2 24.3 4,291.7 23.3
Student loans held for sale.............
Lease financing......................... 662.6 3.7 597.7 3.3
Foreign................................. 72.5 .4 75.8 .4
--------- ----- --------- -----
Total............................... $18,076.8 100.0% $18,372.5 100.0%
========= ===== ========= =====
2
27
(FIG. 12) - COMMERCIAL MORTGAGE AND CONSTRUCTION LOANS
(in millions) DECEMBER 31, 1993 DECEMBER 31, 1992
COMMERCIAL MORTGAGE ---------------------------------- ----------------------------------
Nonowner-occupied properties: OHIO OTHER STATES TOTAL OHIO OTHER STATES TOTAL
-------- ------------ -------- -------- ------------ --------
Retail facilities..................... $ 252.6 $136.9 $ 389.5 $ 274.7 $175.0 $ 449.7
Multi-family properties............... 117.0 96.6 213.6 150.7 108.1 258.8
Office buildings...................... 115.0 31.1 146.1 123.9 31.7 155.6
Health facilities..................... 41.8 11.1 52.9 67.2 12.7 79.9
Manufacturing facilities.............. 34.3 19.8 54.1 37.1 27.7 64.8
Warehouses............................ 31.0 22.2 53.2 30.5 16.5 47.0
Other................................. 101.2 68.5 169.7 142.9 152.7 295.6
Owner-occupied properties............... 656.3 384.4 1,040.7 592.7 376.7 969.4
-------- ------------ -------- -------- ------------ --------
Total................................. $1,349.2 $770.6 $2,119.8 $1,419.7 $901.1 $2,320.8
-------- ------------ -------- -------- ------------ --------
-------- ------------ -------- -------- ------------ --------
(in millions) DECEMBER 31, 1993 DECEMBER 31, 1992
CONSTRUCTION ---------------------------------- ----------------------------------
Nonowner-occupied properties: OHIO OTHER STATES TOTAL OHIO OTHER STATES TOTAL
-------- ------------ -------- -------- ------------ --------
Retail facilities..................... $ 81.1 $ 47.0 $ 128.1 $ 122.4 $ 89.4 $ 211.8
Multi-family properties............... 61.4 16.5 77.9 55.1 14.7 69.8
Office buildings...................... 113.6 22.6 136.2 157.6 33.7 191.3
Health facilities..................... 2.8 4.1 6.9 4.2 2.8 7.0
Manufacturing facilities.............. 1.0 .9 1.9 3.5 2.3 5.8
Warehouses............................ 1.5 3.7 5.2 4.0 2.5 6.5
Other................................. 64.1 59.0 123.1 81.7 51.7 133.4
Owner-occupied properties............... 108.2 35.7 143.9 88.8 23.2 112.0
-------- ------------ -------- -------- ------------ --------
Total................................. $ 433.7 $189.5 $ 623.2 $ 517.3 $220.3 $ 737.6
-------- ------------ -------- -------- ------------ --------
-------- ------------ -------- -------- ------------ --------
SECURITIES
In December 1992, the Corporation transferred its U.S. Treasury securities from
the investment portfolio to the "available for sale" portfolio. At December 31,
1993, the book value of the securities portfolio, including securities available
for sale, totaled $6.4 billion, up $784.7 million, or 14%, from December 31,
1992. The year-end 1992 amount was $816.1 million, or 17%, higher than the
comparable amount for 1991. The growth from the 1992 year-end primarily resulted
from an increase of $1.2 billion, or 35%, in mortgage-backed securities and an
increase of $145.5 million, or 25%, in other securities. These increases were
partially offset by decreases in securities issued by states and political
subdivisions of $150.2 million, or 29%, and $384.1 million, or 34%, in
securities available for sale. The increase during 1992 primarily resulted from
purchases of U.S. Treasury securities, collateralized mortgage obligations
("CMOs") and other mortgage-backed securities. The securities portfolio
comprised 26% of total earning assets at December 31, 1993, up from 25% at
December 31, 1992, and up from 21% at December 31, 1991.
The yield on the securities portfolio declined to 6.49% at December 31, 1993,
from 7.61% at December 31, 1992. This reduction is attributable to prepayments
on higher-yielding mortgage-backed securities and lower reinvestment yields
resulting from the declining rate environment. The yield on the securities
portfolio has not declined as rapidly as market yields due primarily to prior
investment programs in which the portfolio was structured to benefit from the
declining interest rate environment. The portfolio's market value exceeded its
book value by $125.6 million at December 31, 1993, compared with an excess of
$111.7 million at December 31, 1992, and $192.9 million at December 31, 1991.
At December 31, 1993, the Corporation had $4.5 billion invested in
mortgage-backed pass-through securities and collateralized mortgage obligations
("CMO") within the investment securities portfolio, compared with $3.4 billion
at December 31, 1992. A mortgage-backed pass-through security depends on the
underlying pool of mortgage loans to provide a cash flow "pass-through" of
principal and interest. The Corporation had $2.9 billion invested in
mortgage-backed pass-through securities at December 31, 1993. A CMO is a
mortgage-
25
28
backed security that is comprised of classes of bonds created by prioritizing
the cash flows from the underlying mortgage pool in order to meet different
objectives of investors. The Corporation had $1.6 billion invested in CMO
securities at December 31, 1993. The CMO securities held by the Corporation are
primarily shorter-maturity class bonds that were structured to have more
predictable cash flows by being less sensitive to prepayments during periods of
changing interest rates. At December 31, 1993, substantially all of the CMOs and
mortgage-backed pass-through securities held by the Corporation were issued by
Federal agencies or backed by Federal agency pass-through securities.
(FIG. 13) - SECURITIES
STATES AND MORTGAGE-
FEDERAL POLITICAL BACKED OTHER
(dollars in millions) AGENCIES SUBDIVISIONS SECURITIES(1) SECURITIES TOTAL
- ------------------------------------- --------- ------------- -------------- ----------- --------
DECEMBER 31, 1993:
Maturity: One year or less........ $ 3.1 $ 156.5 $ 173.8 $ 138.6 $ 472.0
After one through five
years................... 4.0 179.2 1,976.8 425.4 2,585.4
After five through ten
years................... 3.3 33.1 2,230.2 49.8 2,316.4
After ten years........... .2 5.8 163.4 110.0 279.4
--------- ------------- -------------- ----------- --------
Book value......................... $ 10.6 $ 374.6 $4,544.2 $ 723.8 $5,653.2
--------- ------------- -------------- ----------- --------
--------- ------------- -------------- ----------- --------
Market value....................... $ 11.7 $ 390.2 $4,594.8 $ 738.5 $5,735.2
Weighted average yield............. 8.94% 8.52% 6.35% 5.78% 6.43%
Average maturity................... 4.3years 2.3years 6.6years 4.6years 6.0years
DECEMBER 31, 1992:
Book value......................... $ 6.9 $ 524.8 $3,374.4 $ 578.3 $4,484.4
Market value....................... 7.4 542.8 3,424.2 594.3 4,568.7
DECEMBER 31, 1991:
Book value......................... $ 735.6 $ 632.8 $2,763.1 $ 659.0 $4,790.5
Market value....................... 767.6 654.5 2,887.7 673.6 4,983.4
U.S. TREASURY WEIGHTED
AVAILABLE AVERAGE
(dollars in millions) FOR SALE YIELD(2)
- ------------------------------------- ------------- ---------
DECEMBER 31, 1993:
Maturity: One year or less........ $ 206.9 6.67%
After one through five
years................... 327.4 7.13
After five through ten
years................... 201.3 5.66
After ten years........... 2.5 7.08
-------------
Book value......................... $ 738.1 6.49%
-------------
-------------
Market value....................... $ 781.7
Weighted average yield............. 6.91%
Average maturity................... 3.5years
DECEMBER 31, 1992:
Book value......................... $ 1,122.2 7.61%
Market value....................... 1,149.6
DECEMBER 31, 1991:
Book value......................... 8.90%
Market value.......................
(1) Maturity is based upon expected average lives rather than contractual terms.
(2) Weighted average yields are calculated on the basis of book value. At
December 31, 1993, the weighted average yield by maturity represents the
combined yield for investment securities and U.S. Treasury securities
available for sale. Weighted average yields have been adjusted to a fully
taxable-equivalent basis using the statutory Federal income tax rate of 35%
for 1993 and 34% for 1992 and 1991.
ASSET QUALITY
The measurement and management of asset quality is the responsibility of the
Corporation's Credit Policy/Risk Management Group. This Group is responsible for
both commercial and consumer lending credit policy, credit systems development
and procedures, loan examination, providing additional controls in the early
identification of problem loans, and the monitoring of major loan workouts in
the subsidiary banks. The Group is also responsible for the determination of the
adequacy of the allowance for loan losses for each of Society's bank
subsidiaries. Each allowance is reviewed on the basis of three methodologies
which, when combined, determine the allocated and unallocated portions of the
allowance and provide management with a benchmark by which its adequacy is
measured. The methodologies are: (1) a review of internal loan classifications;
(2) an historical analysis of prior periods' charge-off experience; and (3) an
evaluation of estimated worst-case losses on internally-classified credits.
Management targets the maintenance of a minimum allowance equal to the indicated
allocated requirement plus an unallocated portion, as appropriate, in light of
current and expected economic conditions and trends, geographic and industry
concentrations, and similar risk-related matters.
The 1993 provision for loan losses was $72.2 million compared to $147.4 million
for 1992 and $280.0 million for 1991. The 1991 amount included an additional
provision of $93.9 million recorded by Ameritrust during the fourth quarter to
conform its approach with that of the Corporation to determine the adequacy of
the allowance. The significantly lower provisions in 1993 and 1992 reflect the
continued corporate-wide improvement in asset quality trends, including
significant declines in nonperforming loans.
Net loans charged-off in 1993 decreased $76.4 million, or 45%, from the 1992
level, following a decrease of $43.4 million, or 20%, from 1991. The significant
decrease in 1993 was due to lower net charge-offs in all loan categories with
the largest improvement occurring in the consumer and real estate-mortgage
portfolios. The 1992 decrease was largely due to a lower level of net
charge-offs in the commercial loan portfolio and the
26
29
consumer loan portfolio, partially offset by higher net charge-offs in the real
estate portfolios. The majority of the charge-offs in both 1993 and 1992
reflected losses on problem credits for which reserves were established in
previous periods.
The allowance at December 31, 1993, was $480.6 million, or 2.69% of loans, as
compared with $502.7 million, or 3.10% of loans, at December 31, 1992. The
allowance as a percent of nonperforming loans was 295.20% at December 31, 1993,
compared with 144.17% at December 31, 1992. Although used as a general
indicator, the allowance to nonperforming loans ratio is not a primary factor in
the determination of the adequacy of the allowance by management. As indicated
in Figure 14, the unallocated portion of the allowance increased in 1993,
reflecting the continued improvement in the overall quality of the loan
portfolios.
As shown in Figure 16, nonperforming assets totaled $224.4 million at December
31, 1993, down $272.5 million, or 55%, from the December 31, 1992, level. This
followed a decrease of $130.1 million, or 21%, in the previous year. The
significant improvement in 1993 resulted largely from a $185.9 million, or 53%,
decrease in nonperforming loans and an $85.2 million, or 63.9%, decrease in
other real estate owned. Other nonperforming assets, which are comprised
primarily of nonperforming venture capital investments, decreased $1.4 million,
or 9.4%, in 1993. The reduction in nonperforming loans was principally
attributable to decreases in nonaccrual commercial (including HLTs),
construction and commercial real estate loans. At the end of 1993, nonaccrual
loans in these categories comprised 40%, 17% and 24%, respectively, of total
nonperforming loans and totaled $131.9 million, down $173.8 million, or 57%,
from the previous year-end. This reduction reflected progress made in working
through the credit problems associated with the Ameritrust acquisition,
principally through the efforts of the Special Assets Group ("SAG"). As
indicated in Figure 17, the reduction in other real estate owned was primarily
due to the selective sale of assets.
At December 31, 1993, HLT loans classified as nonperforming amounted to $25.3
million, or 16% of total nonperforming loans. At December 31, 1992,
nonperforming HLT loans aggregated $4.6 million, or 1% of total nonperforming
loans. One individual nonperforming HLT loan represented $18.1 million or 72% of
the total at December 31, 1993.
The SAG was formed in conjunction with the acquisition of Ameritrust, and
charged with the responsibility to manage and resolve primarily problem assets
acquired in the merger. These assets totaled $865.3 million at March 31, 1992,
and were comprised of commercial loans, commercial real estate loans and other
real estate owned. At that date, the nonperforming portion of these assets was
$432.6 million, and represented 69% of the Corporation's total nonperforming
assets. As a result of the efforts of the SAG, total SAG assets declined $275.9
million, or 32%, to $589.4 million at December 31, 1992, and during 1993
declined $337.3 million, or 57%, to $252.1 million at December 31, 1993. The
nonperforming portion of SAG assets at year-end totaled $68.4 million and
represented 30% of the Corporation's total nonperforming assets, while
comparable amounts at December 31, 1992, were $254.8 million and 51%,
respectively.
In May 1993, the Financial Accounting Standards Board ("FASB") issued SFAS No.
114, "Accounting by Creditors for Impairment of a Loan." This standard affects
the definition and basis for measuring impaired loans and is more fully
discussed in Note 5, Nonperforming Assets, on page 48.
27
30
(FIG. 14) - ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
DECEMBER 31,
-------------------------------------------------------------------------------------------
1993 1992 1991 1990
------------------- ------------------- ------------------- -------------------
CATEGORY CATEGORY CATEGORY CATEGORY
PERCENT PERCENT PERCENT PERCENT
(dollars in millions) AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS
- ---------------------------- ------ -------- ------ -------- ------ -------- ------ --------
Commercial, financial and
agricultural.............. $114.8 27.0% $145.0 29.6% $152.0 30.8% $191.0 34.2%
Real estate-construction.... 12.4 3.8 16.5 4.9 8.5 5.0 7.3 7.4
Real estate-mortgage........ 25.7 41.2 50.6 36.9 58.6 33.1 67.1 30.0
Consumer.................... 53.3 20.1 89.3 21.7 94.4 26.3 87.2 24.3
Lease financing............. 9.9 7.5 2.7 6.2 2.7 4.3 4.2 3.7
Foreign..................... .4 1.5 .7 20.2 .5 19.5 .4
Unallocated................. 264.5 197.1 189.5 84.7
------ -------- ------ -------- ------ -------- ------ --------
Total..................... $480.6 100.0% $502.7 100.0% $525.9 100.0% $461.0 100.0%
------ -------- ------ -------- ------ -------- ------ --------
------ -------- ------ -------- ------ -------- ------ --------
1989
-------------------
CATEGORY
PERCENT
(dollars in millions) AMOUNT OF LOANS
- ---------------------------- ------ --------
Commercial, financial and
agricultural.............. $ 64.8 38.4%
Real estate-construction.... 6.4
Real estate-mortgage........ 17.8 28.2
Consumer.................... 52.2 23.3
Lease financing............. 1.0 3.3
Foreign..................... 35.2 .4
Unallocated................. 112.4
------ --------
Total..................... $283.4 100.0%
------ --------
------ --------
Amounts in the "Category Percent of Loans" column represent outstanding loans in
each respective portfolio as a percentage of the total loan portfolio at
December 31.
These percentages were computed excluding loans held for sale from the portfolio
total as no allowances were deemed necessary for such loans.
(FIG. 15) - SUMMARY OF LOAN LOSS EXPERIENCE
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
(dollars in millions) 1993 1992 1991 1990 1989
- ---------------------------------------- --------- --------- --------- --------- ---------
Average loans outstanding during the
year.................................. $16,952.1 $16,148.5 $17,426.6 $18,353.6 $18,051.7
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Allowance for loan losses at beginning
of year............................... $ 502.7 $ 525.9 $ 461.0 $ 283.4 $ 261.6
Loans charged off:
Commercial, financial and
agricultural....................... 44.6 56.2 108.9 119.2 65.4
Real estate - construction............ 19.5 17.2 21.9 30.0 2.2
Real estate - mortgage................ 22.7 43.8 20.7 38.0 62.7
Consumer.............................. 59.8 97.5 110.8 93.3 75.4
Lease financing....................... 1.2 9.0 4.5 4.0 3.7
Foreign............................... .8 2.3 15.1
--------- --------- --------- --------- ---------
147.8 223.7 267.6 286.8 224.5
Recoveries:
Commercial, financial and
agricultural....................... 12.7 15.1 21.0 17.0 8.7
Real estate - construction............ 5.7 .7 1.3 2.2
Real estate - mortgage................ 6.5 4.9 1.4 .6 1.7
Consumer.............................. 26.5 26.9 27.9 25.9 19.0
Lease financing....................... 1.1 4.5 .8 .7 .5
Foreign............................... .1 .2 .8 4.3
--------- --------- --------- --------- ---------
52.6 52.1 52.6 47.2 34.2
--------- --------- --------- --------- ---------
Net loans charged off................... (95.2) (171.6) (215.0) (239.6) (190.3)
Provision for loan losses............... 72.2 147.4 280.0 419.9 212.1
Allowances of subsidiaries purchased
(sold)................................ .9 1.0 (.1) (2.7)
--------- --------- --------- --------- ---------
Allowance for loan losses at end of
year.................................. $ 480.6 $ 502.7 $ 525.9 $ 461.0 $ 283.4
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net loan charge-offs to average loans... .56% 1.06% 1.23% 1.31% 1.05%
Allowance for loan losses to year-end
loans................................. 2.69 3.14 3.12 2.55 1.54
Allowance for loan losses to
nonperforming loans................... 295.20 144.17 107.39 78.46 77.32
28
31
(FIG. 16) - SUMMARY OF NONPERFORMING ASSETS AND PAST DUE LOANS
DECEMBER 31,
--------------------------------------------------
(dollars in millions) 1993 1992 1991 1990 1989
- --------------------------------------------- ------ ------ ------ ------ ------
Nonaccrual loans............................. $162.4 $347.8 $482.1 $577.5 $334.3
Restructured loans........................... .4 .9 7.6 10.1 32.3
------ ------ ------ ------ ------
Total nonperforming loans.................. 162.8 348.7 489.7 587.6 366.6
Other real estate owned...................... 48.1 133.3 125.6 73.2 27.1
Other nonperforming assets................... 13.5 14.9 11.7 2.7 4.1
------ ------ ------ ------ ------
Total nonperforming assets................. $224.4 $496.9 $627.0 $663.5 $397.8
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Accruing loans past due 90 days or more...... $ 16.2 $ 33.8 $ 31.3 $ 36.9 $ 43.1
Nonperforming loans to year-end loans........ .91% 2.18% 2.91% 3.25% 2.00%
Nonperforming assets to year-end loans plus
other real estate owned and other
nonperforming assets....................... 1.25 3.07 3.70 3.66 2.16
Nonperforming assets to total assets......... .83 1.99 2.45 2.54 1.45
(FIG. 17) - SUMMARY OF CHANGES IN NONACCRUAL LOANS AND OREO
SUMMARY OF CHANGES IN NONACCRUAL LOANS 1993 QUARTERS
- ---------------------------------------- FULL -----------------------------------------
(in millions) YEAR FOURTH THIRD SECOND FIRST
- ---------------------------------------- -------- ------ ------ ------ --------
Balance at beginning of period.......... $ 347.8 $199.4 $221.5 $308.0 $ 347.8
Loans placed on nonaccrual............ 154.9 41.8 25.1 27.6 60.4
Charge-offs(1)........................ (100.4) (19.0) (20.1) (27.8) (33.5)
Payments.............................. (145.1) (19.4) (16.3) (60.6) (48.8)
Transfers to OREO..................... (23.3) (2.0) (7.1) (11.8) (2.4)
Loans returned to accrual............. (73.4) (38.4) (4.5) (13.9) (16.6)
Acquisitions.......................... 1.1 1.1
Transfers from OREO................... .8 .8
-------- ------ ------ ------ --------
Balance at end of period................ $ 162.4 $162.4 $199.4 $221.5 $ 308.0
-------- ------ ------ ------ --------
-------- ------ ------ ------ --------
SUMMARY OF CHANGES IN OREO 1993 QUARTERS
- ---------------------------------------- FULL -----------------------------------------
(in millions) YEAR FOURTH THIRD SECOND FIRST
- ---------------------------------------- -------- ------ ------ ------ --------
Balance at beginning of period.......... $ 133.3 $ 90.9 $ 99.3 $127.4 $ 133.3
Additions............................. 25.7 2.5 7.6 13.0 2.6
Sales................................. (89.4) (40.7) (13.8) (29.2) (5.7)
Charge-offs and write-downs........... (13.9) (3.4) (.9) (6.6) (3.0)
Transfers to loans.................... (2.8) (2.8)
Acquisitions.......................... 3.2 3.2
Other................................. (8.0) (1.2) (1.3) (2.5) (3.0)
-------- ------ ------ ------ --------
Balance at end of period................ $ 48.1 $ 48.1 $ 90.9 $ 99.3 $ 127.4
-------- ------ ------ ------ --------
-------- ------ ------ ------ --------
(1) Excludes credit card charge-offs of $40.8 million and charge-offs of
approximately $6.6 million taken against other accruing loans in 1993.
DEPOSITS AND OTHER SOURCES OF FUNDS
Core deposits, defined as domestic deposits other than certificates of deposit
of $100,000 or more, are the Corporation's primary source of funding. These
deposits averaged $16.4 billion in both 1993 and 1992 and $17.5 billion in 1991.
In 1993 average core deposits were significantly impacted by the January 1993
acquisition of Society First Federal. Excluding the impact of Society First
Federal, core deposits declined $1.1
29
32
billion during the current year reflecting declining interest rates and other
alternatives pursued by consumers. Over the past year, balances have also
shifted significantly from the "Other time deposits" category, consisting
primarily of fixed rate certificates of deposit, to demand and savings deposits
(including NOW accounts) with higher liquidity, also principally as a result of
declining interest rates. Based on the amounts shown in Figure 3, and after
excluding the impact of Society First Federal, the $1.3 billion decline in the
"Other time deposits" category and the $407.0 million decline in money market
deposit accounts were partially offset by increases of $258.4 million in NOW
accounts, $244.6 million in savings deposits and $72.9 million in demand
deposits. The decline in core deposits in 1992 was primarily due to the sale of
approximately $1.0 billion in deposits late in the second quarter (as part of
the agreement reached with the United States Department of Justice and in
accordance with the Federal Reserve Board order to divest certain branches in
connection with the Ameritrust merger) and the pursuit of other alternatives by
consumers in response to declining interest rates.
Purchased funds, which are comprised of large certificates of deposit, foreign
office deposits, and short-term borrowings, averaged $5.6 billion for 1993, up
$1.1 billion, or 25%, from the prior year, following a decrease of $680.8
million, or 13%, in 1992. Average purchased funds were not materially impacted
by the acquisition of Society First Federal. Based on the amounts shown in
Figure 3, and after excluding the impact of Society First Federal, the 1993
increase was largely attributable to a $650.9 million increase in foreign office
deposits, a $416.9 million increase in Federal funds purchased and securities
sold under agreements to repurchase, and a $457.4 million increase in other
short-term borrowings due to the issuance of Medium-Term Notes in the current
year. These increases were partially offset by a $425.9 million decline in large
certificates of deposits.
(FIG. 18) - MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE
DECEMBER 31, 1993
---------------------
DOMESTIC FOREIGN
(in millions) OFFICES OFFICE
- ------------------------------------------------- -------- --------
Time remaining to maturity:
Three months or less........................... $498.0 $2,014.5
Over three through six months.................. 155.9
Over six through twelve months................. 103.4
Over twelve months............................. 175.7
-------- --------
Total....................................... $933.0 $2,014.5
-------- --------
-------- --------
LIQUIDITY
Liquidity represents the availability of funding to meet the needs of
depositors, borrowers, and creditors at a reasonable cost and without adverse
consequences. The Corporation's ALCO actively analyzes and manages the
Corporation's liquidity in coordination with similar committees at each bank
subsidiary. The bank subsidiaries individually maintain sufficient liquidity in
the form of short-term money market investments, anticipated prepayments on
securities and through the maturity structure of their loan portfolios. Another
source of liquidity are those securities classified as available for sale. In
addition, the bank subsidiaries have access to various sources of non-core
market funding for short-term liquidity requirements should the need arise. The
effective management of balance sheet volumes, mix, and maturities enables the
bank subsidiaries to maintain adequate levels of liquidity while enhancing
profitability.
During 1993, Society's lead bank, Society National Bank, issued $685 million in
debt securities under a Medium-Term Bank Note program. These securities have
maturities of less than one year and are included in other short-term
borrowings. At December 31, 1993, the lead bank was authorized to issue up to an
additional $2.3 billion of securities with maturities ranging from 9 months to
15 years under this program and an additional $1.0 billion under a separate,
Medium-Term Deposit Note program. The proceeds from these programs are to be
used for general corporate purposes in the ordinary course of business. During
both the second quarter of 1993 and the fourth quarter of 1992, the lead bank
issued $200 million in subordinated long-term debt to be used to supplement its
capital base and to provide funds for loans and investments. During 1993,
Society issued $111 million in debt securities under a separate Medium-Term Note
program. These securities have maturities in excess of one year and are included
in long-term debt.
30
33
During 1993, Society redeemed $100 million in long-term debt securities due in
1996 at par plus accrued interest. In addition, Society redeemed 1,200,000
outstanding shares of Fixed/Adjustable Rate Cumulative Preferred Stock at 103%
of its stated value of $60 million plus accumulated but unpaid dividends.
The liquidity requirements of Society, primarily for dividends to shareholders,
retirement of debt and other corporate purposes, are met principally through
regular dividends from bank subsidiaries. As of December 31, 1993, $76.0 million
was available in the bank subsidiaries for the payment of dividends to Society
without prior regulatory approval. Excess funds are maintained in short-term
investments. Society has no lines of credit with other financial institutions,
but has ready access to the capital markets as a result of its favorable debt
ratings.
CAPITAL AND DIVIDENDS
Total shareholders' equity at December 31, 1993, was $2.0 billion, up 9%, or
$170.5 million, from the balance at the end of 1992. This followed an increase
of $212.9 million, or 13%, in the prior year. In both years the increase was
principally due to the retention of net income after dividends on Common Shares.
Further information with respect to dividends is presented in the "Common Shares
and Shareholder Information" section which follows and in the dividend
restriction discussion included on page 56. In 1993, shareholders' equity was
also impacted by the redemption of preferred stock referred to above.
Capital adequacy is an important indicator of financial stability and
performance. Overall, Society's capital position remains strong with a ratio of
total shareholders' equity to total assets of 7.55% at December 31, 1993, up
from 7.48% and 6.47% at December 31, 1992 and 1991, respectively.
Banking industry regulators define minimum capital ratios for bank holding
companies and their bank and savings association subsidiaries. Based on the
risk-based capital rules and definitions prescribed by the banking regulators,
the Corporation's Tier I and total capital to risk-adjusted assets ratios at
December 31, 1993, were 8.65% and 12.88%, respectively. These compare favorably
with the minimum requirements of 4.0% for Tier I and 8.0% for total capital. The
Tier I leverage ratio standard prescribes a minimum ratio of 3.0%, although most
banking organizations are expected to maintain ratios of at least 100 to 200
basis points above the minimum. At December 31, 1993, the Corporation's leverage
ratio was 7.18%, substantially higher than the minimum requirement of 3%. Figure
19 presents the details of Society's capital position at December 31, 1993 and
1992.
Effective in December 1992, Federal bank regulators adopted new regulations to
implement the prompt corrective action provisions of the FDIA which group
FDIC-insured institutions into five broad categories based on certain capital
ratios. The five categories are "well-capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." Although these provisions are not directly applicable to
Society under existing law and regulations, based upon its ratios Society would
qualify, and the banks do qualify, as "well capitalized" at December 31, 1993.
The Corporation's capital category, as determined by applying the prompt
corrective action provisions of law, may not constitute an accurate
representation of the overall financial condition or prospects of Society or its
banking subsidiaries.
The OCC, the Federal Reserve, and the FDIC are proposing amendments to their
respective regulatory capital rules to include in Tier I capital the net
unrealized changes in the value of securities available for sale for purposes of
calculating the risk-based and leverage ratios. The proposed amendments are in
response to the provisions outlined in SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which takes effect for fiscal years
beginning after December 15, 1993. See Note 3, Securities, on page 46 for a more
complete description of SFAS No. 115. This new accounting standard establishes,
among other things, net unrealized holding gains and losses on securities
available for sale as a new component of stockholders' equity. If adopted as
proposed, the rules could cause the Tier I capital to be subject to greater
volatility. However, neither SFAS No. 115 nor the capital proposals would have
any direct impact on reported earnings. Based upon the Corporation's securities
portfolio classified as available for sale as of December 31, 1993, the
estimated impact of the new standard would be an increase to shareholders'
equity of approximately $28 million. The regulatory agencies are also proposing
to add an additional component to the risk-based capital requirements based upon
the level of an institution's exposure to interest rate risk.
31
34
(FIG. 19) - CAPITAL COMPONENTS AND RISK-ADJUSTED ASSETS
DECEMBER 31,
-----------------------
(dollars in millions) 1993 1992
- ---------------------------------------------------------------- --------- ---------
TIER I CAPITAL
Common shareholders' equity..................................... $ 2,038.6 $ 1,808.1
Qualifying preferred stock...................................... 60.0
Less: Goodwill.................................................. 181.0 161.5
Other intangible assets (1)............................... 1.8
--------- ---------
Total Tier I Capital.......................................... 1,855.8 1,706.6
--------- ---------
TIER II CAPITAL
Allowance for loan losses (2)................................... 270.8 253.1
Qualifying long-term debt....................................... 636.4 520.9
--------- ---------
Total Tier II Capital......................................... 907.2 774.0
--------- ---------
Total Capital.............................................. $ 2,763.0 $ 2,480.6
--------- ---------
--------- ---------
RISK-ADJUSTED ASSETS
Risk-adjusted assets on balance sheet........................... $18,045.5 $17,589.1
Risk-adjusted off-balance sheet exposure........................ 3,800.2 2,822.5
Less: Goodwill.................................................. 181.0 161.5
Other intangible assets (1)............................... 1.8
--------- ---------
Gross risk-adjusted assets.................................... 21,662.9 20,250.1
Less: Excess allowance for loan losses.......................... 209.9 249.7
--------- ---------
Net risk-adjusted assets...................................... $21,453.0 $20,000.4
--------- ---------
--------- ---------
AVERAGE QUARTERLY TOTAL ASSETS.................................. $26,047.0 $24,614.1
CAPITAL RATIOS
Tier I capital to risk-adjusted assets.......................... 8.65% 8.53%
Total capital to risk-adjusted assets........................... 12.88 12.39
Leverage (3).................................................... 7.18 6.98
(1) Intangible assets (excluding goodwill, purchased mortgage servicing rights
and purchased credit card relationships) recorded after February 19, 1992,
and deductible portions of purchased mortgage servicing rights and purchased
credit card relationships.
(2) The allowance for loan losses included in Tier II capital is limited to
1.25% of gross risk-adjusted assets.
(3) Tier I capital divided by average total assets for the quarter less goodwill
and other intangible assets as defined in (1) above.
COMMON SHARES AND SHAREHOLDER INFORMATION
On September 1, 1992, Society's Common Shares commenced trading on the New York
Stock Exchange under the symbol SCY. The sales price ranges of the Common Shares
and per Common Share net income and dividends by quarter for each of the last
two years are presented in Figure 20.
Common Shares outstanding and per Common Share data have been adjusted for a
two-for-one stock split declared on January 21, 1993, which was effected by
means of a 100% stock dividend paid on March 22, 1993, to Common Shareholders of
record on March 2, 1993. At December 31, 1993, book value per Common Share was
$17.37 based on 117,377,404 shares outstanding, compared with $15.49 based on
116,725,976 shares outstanding at December 31, 1992. At year-end 1993, the
closing sales price on the New York Stock Exchange was $29.75 per share. This
price was 171% of year-end book value per share and had a dividend
32
35
yield of 3.76%. On January 20, 1994, the quarterly dividend on Common Shares was
increased by 14% to $.32 per Common Share, up from $.28 per Common Share in
1993. The new quarterly dividend rate of $.32 per Common Share will be payable
on March 15, 1994, to shareholders of record on February 28, 1994. There were
36,331 holders of record of Society Common Shares at December 31, 1993.
FOURTH QUARTER RESULTS
As shown in Figure 20, net income for the fourth quarter of 1993 was $57.0
million, or $.49 per Common Share, compared with $86.5 million, or $.72 per
Common Share, for the same period last year. The 1993 period was impacted by
merger and integration charges of $53.9 million ($39.6 million after-tax, $.33
per Common Share) recorded in connection with the merger with old KeyCorp.
Excluding the impact of the merger and integration charges, net income was $96.6
million, up $10.1 million or 12%, from the prior year. This reflected a $4.8
million, or 2%, increase in taxable-equivalent net interest income and an $18.0
million, or 58%, decrease in the provision for loan losses, which were partially
offset by an increase of $10.3 million, or 4%, in noninterest expense. On an
annualized basis, the return on average total assets for the fourth quarter of
1993 was .87% compared with 1.40% for the fourth quarter of 1992. The annualized
returns on average common equity for the fourth quarters of 1993 and 1992 were
11.09% and 19.08%, respectively. Excluding the merger and integration charges,
the fourth quarter 1993 annualized return on average total assets was 1.47%,
while the return on average common equity was 18.80%.
The improvement in taxable-equivalent net interest income in the fourth quarter
of 1993, as compared to the fourth quarter of 1992, reflected a $1.4 billion or
6% increase in the level of average earning assets, offset in part by a 23 basis
point decline in the net interest margin to 5.10%. The higher level of average
earning assets was primarily due to the acquisition of Society First Federal in
January 1993. Excluding the impact of this acquisition, average earning assets
increased by $177.1 million, mainly due to an increase of $579.3 million in
average loans, principally those in the residential real estate portfolio, an
increase of $732.8 million in securities available for sale and an increase of
$146.2 million in mortgage loans held for sale. These increases were
substantially offset by decreases of $670.9 million in interest-bearing deposits
with banks and $573.0 million in investment securities. The decline in the net
interest margin reflected the narrowing of spreads available on the replacement
of matured and prepaid securities and interest rate swaps and the narrower
spread contributed by Society First Federal. The lower provision for loan losses
resulted from the overall improvement in asset quality, including a $185.9
million or 53% decline in nonperforming loans from December 31, 1992, to
December 31, 1993. The increase in noninterest expense, excluding merger and
integration charges, was primarily due to higher personnel expense, offset in
part by lower costs associated with professional services.
33
36
(FIG. 20) - SELECTED QUARTERLY FINANCIAL DATA
1993
(dollars in millions, ---------------------------------------------------
except per share amounts) 4TH 3RD 2ND 1ST
- ---------------------------- --------- --------- --------- ---------
FOR THE QUARTER
Interest income............. $ 460.1 $ 457.9 $ 474.7 $ 478.6
Interest expense............ 162.5 163.8 170.7 175.3
Net interest income......... 297.6 294.1 304.0 303.3
Provision for loan losses... 13.2 17.0 18.0 24.0
Noninterest income.......... 113.6 170.9(B) 114.4 110.9
Noninterest expense......... 311.3(A) 284.9(C) 257.0 248.7
Income before income
taxes..................... 86.7 163.1 143.4 141.5
Net income.................. 57.0 98.2 97.0 95.0
Net income applicable to
Common Shares............. 57.0 98.2 97.0 93.9
PER COMMON SHARE
Net income.................. $ .49 $ .83 $ .82 $ .79
Cash dividends.............. .28 .28 .28 .28
Book value at quarter end... 17.37 17.15 16.58 16.02
Market price:
High...................... 33.50 35.75 37.25 35.75
Low....................... 27.25 30.88 28.63 30.88
Close..................... 29.75 32.00 35.13 34.63
Weighted average Common
Shares (millions)......... 118.2 118.5 118.3 118.3
AT PERIOD END
Loans....................... $17,897.6 $17,019.3 $16,758.5 $17,036.3
Earning assets.............. 24,678.5 23,735.6 23,850.2 23,858.1
Total assets................ 27,007.3 25,760.6 25,919.8 25,957.5
Deposits.................... 19,880.7 17,765.0 18,147.0 18,780.2
Long-term debt.............. 952.7 1,077.8 1,091.6 996.8
Common shareholders'
equity.................... 2,038.6 2,008.0 1,939.5 1,871.4
Total shareholders'
equity.................... 2,038.6 2,008.0 1,939.5 1,871.4
PERFORMANCE RATIOS
Return on average total
assets.................... .87% 1.55% 1.52% 1.50%
Return on average common
equity.................... 11.09 19.81 20.39 20.82
Return on average total
equity.................... 11.09 19.81 20.39 20.60
Efficiency (f).............. 61.92 59.94 60.65 59.37
Overhead (g)................ 47.54 44.13 46.12 44.96
Net interest margin......... 5.10 5.25 5.35 5.32
CAPITAL RATIOS AT PERIOD END
Equity to assets............ 7.55% 7.79% 7.48% 7.21%
Tier I risk-adjusted
capital................... 8.65 8.71 8.32 7.93
Total risk-adjusted
capital................... 12.88 12.99 12.67 11.68
Leverage.................... 7.18 7.34 6.86 6.56
1992
(dollars in millions, -----------------------------------------------------
except per share amounts) 4TH 3RD 2ND 1ST
- ---------------------------- --------- --------- --------- ---------
FOR THE QUARTER
Interest income............. $ 463.7 $ 457.8 $ 475.4 $ 506.5
Interest expense............ 172.8 176.3 197.4 226.5
Net interest income......... 290.9 281.5 278.0 280.0
Provision for loan losses... 31.1 33.9 46.0 36.4
Noninterest income.......... 113.9 120.6 143.0(d) 124.0
Noninterest expense......... 247.2 246.0 247.0 305.7(e)
Income before income
taxes..................... 126.5 122.2 128.0 61.9
Net income.................. 86.5 82.8 87.7 44.2
Net income applicable to
Common Shares............. 85.0 81.3 86.1 42.6
PER COMMON SHARE
Net income.................. $ .72 $ .69 $ .74 $ .36
Cash dividends.............. .245 .245 .245 .245
Book value at quarter end... 15.49 14.97 14.51 14.00
Market price:
High...................... 33.44 29.88 31.63 29.88
Low....................... 28.13 26.13 25.32 24.25
Close..................... 32.13 28.25 29.13 27.38
Weighted average Common
Shares (millions)......... 117.8 117.3 117.3 117.0
AT PERIOD END
Loans....................... $16,031.5 $15,742.1 $15,880.0 $16,575.5
Earning assets.............. 22,587.2 22,052.0 21,291.2 22,194.6
Total assets................ 24,978.3 24,388.9 23,528.5 24,455.8
Deposits.................... 18,658.0 17,327.2 17,724.2 19,125.2
Long-term debt.............. 886.0 687.1 689.3 463.0
Common shareholders'
equity.................... 1,808.1 1,738.7 1,681.7 1,620.5
Total shareholders'
equity.................... 1,868.1 1,798.7 1,741.7 1,680.5
PERFORMANCE RATIOS
Return on average total
assets.................... 1.40% 1.43% 1.51% .73%
Return on average common
equity.................... 19.08 19.03 21.02 10.63
Return on average total
equity.................... 18.79 18.74 20.65 10.62
Efficiency (f).............. 60.15 60.36 60.59 63.39
Overhead (g)................ 44.90 43.89 43.67 48.64
Net interest margin......... 5.33 5.51 5.33 5.13
CAPITAL RATIOS AT PERIOD END
Equity to assets............ 7.48% 7.38% 7.40% 6.87%
Tier I risk-adjusted
capital................... 8.53 8.16 7.86 7.44
Total risk-adjusted
capital................... 12.39 11.15 10.92 9.70
Leverage.................... 6.98 7.16 6.78 6.22
(a) Noninterest expense included $53.9 million in merger and integration charges
recorded in connection with the merger with old KeyCorp.
(b) Noninterest income included a $29.4 million gain on the sale of ATC and
$25.1 million in net securities gains.
(c) Noninterest expense included $34.4 million in nonrecurring charges
principally related to system conversion write-downs, facilities-related
charges and charges recorded in connection with adoption of SFAS No. 112,
"Employer's Accounting for Postemployment Benefits".
(d) Noninterest income included a $20.1 million gain on the sale of branch
offices and loans recorded in connection with the merger with Ameritrust and
as part of an agreement with the United States Department of Justice.
(e) Noninterest expense included $50.0 million in merger and integration charges
recorded in connection with the merger with Ameritrust.
(f) Calculated as noninterest expense (excluding merger and integration charges
and other non-recurring charges) divided by taxable-equivalent net interest
income plus noninterest income (excluding net securities transactions, gain
on sale of subsidiary and gain on sale of branch offices and loans).
(g) Calculated as noninterest expense (excluding merger and integration charges
and other non-recurring charges) less noninterest income (excluding net
securities transactions, gain on sale of subsidiary and gain on sale of
branch offices and loans) divided by taxable-equivalent net interest income.
34
37
SIX-YEAR CONSOLIDATED BALANCE SHEETS
Society Corporation and Subsidiaries
COMPOUND
DECEMBER 31 ANNUAL RATE
-------------------------------------------------------------------- OF CHANGE
(dollars in millions) 1993 1992 1991 1990 1989 1988 (1988 TO 1993)
- ------------------------------------ --------- --------- --------- --------- --------- --------- --------------
ASSETS
Cash and due from banks........... $ 1,375.7 $ 1,345.1 $ 1,473.9 $ 1,673.5 $ 1,957.5 $ 1,861.8 (5.9)
Short-term investments............ 67.9 778.8 1,538.5 1,075.1 1,953.2 2,145.4 (49.9)
Mortgage loans held for sale...... 321.7 170.3 104.6 43.8 110.4 18.7 76.7
Securities available for sale..... 738.1 1,122.2 172.6 N/M
Investment securities............. 5,653.2 4,484.4 4,790.5 4,369.4 3,921.8 4,041.0 6.9
Loans............................. 17,897.6 16,031.5 16,831.7 18,076.8 18,372.5 17,627.3 .3
Less: Allowance for loan losses. 480.6 502.7 525.9 461.0 283.4 261.6 12.9
--------- --------- --------- --------- --------- --------- -----
Net Loans..................... 17,417.0 15,528.8 16,305.8 17,615.8 18,089.1 17,365.7 .1
Premises and equipment............ 421.8 406.6 327.0 351.5 328.2 365.1 2.9
Other real estate owned........... 48.1 133.3 125.6 73.2 27.1 14.2 27.6
Intangible assets................. 214.1 280.7 308.8 334.8 203.0 208.2 .6
Other assets...................... 749.7 728.1 610.9 584.3 687.2 674.4 2.1
--------- --------- --------- --------- --------- --------- -----
TOTAL ASSETS.................. $27,007.3 $24,978.3 $25,585.6 $26,121.4 $27,450.1 $26,694.5 .2
--------- --------- --------- --------- --------- --------- -----
--------- --------- --------- --------- --------- --------- -----
LIABILITIES
Deposits in domestic offices:
Noninterest-bearing............. $ 3,803.7 $ 3,658.9 $ 3,410.8 $ 3,587.1 $ 3,505.3 $ 3,585.3 1.2
Interest-bearing................ 14,062.5 13,883.9 16,302.9 17,312.9 17,199.4 16,371.5 (3.0)
Deposits in foreign office --
interest-bearing................ 2,014.5 1,115.2 301.1 495.0 1,058.7 550.0 29.7
--------- --------- --------- --------- --------- --------- -----
Total deposits................ 19,880.7 18,658.0 20,014.8 21,395.0 21,763.4 20,506.8 (.6)
Federal funds purchased and
securities
sold under agreements to
repurchase...................... 2,353.7 2,834.1 2,502.4 2,026.6 2,521.2 3,115.3 (5.5)
Other short-term borrowings....... 1,175.7 276.4 453.2 161.8 440.2 428.3 22.4
Other liabilities................. 605.9 455.7 496.2 420.9 553.5 411.2 8.1
Long-term debt.................... 952.7 886.0 463.8 471.1 468.9 463.1 15.5
--------- --------- --------- --------- --------- --------- -----
TOTAL LIABILITIES............. 24,968.7 23,110.2 23,930.4 24,475.4 25,747.2 24,924.7 .1
SHAREHOLDERS' EQUITY
Preferred Stock................... 60.0 60.0 60.0 25.0 25.0 N/M
Common Shares..................... 118.7 118.7 62.5 62.1 62.1 62.4 13.7
Capital surplus................... 635.5 632.8 809.9 797.1 821.6 832.8 (5.3)
Retained earnings................. 1,369.0 1,153.3 965.5 979.1 1,021.5 989.4 6.7
Loans to ESOP trustee............. (63.9) (65.5) (65.3) (67.2) (71.6) N/M
Treasury stock, at cost........... (20.7) (31.2) (177.4) (185.1) (155.7) (139.8) (31.8)
--------- --------- --------- --------- --------- --------- -----
TOTAL SHAREHOLDERS' EQUITY.... 2,038.6 1,868.1 1,655.2 1,646.0 1,702.9 1,769.8 2.9
--------- --------- --------- --------- --------- --------- -----
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY....... $27,007.3 $24,978.3 $25,585.6 $26,121.4 $27,450.1 $26,694.5 .2
--------- --------- --------- --------- --------- --------- -----
--------- --------- --------- --------- --------- --------- -----
N/M = Not Meaningful.
35
38
SIX-YEAR CONSOLIDATED STATEMENTS OF INCOME
Society Corporation and Subsidiaries
COMPOUND
ANNUAL RATE
YEAR ENDED DECEMBER 31 OF CHANGE
(dollars in millions, except per share --------------------------------------------------------------------- (1988 TO
amounts) 1993 1992 1991 1990 1989 1988 1993)
- -------------------------------------- --------- --------- --------- --------- --------- --------- -----------
INTEREST INCOME
Loans................................ $ 1,415.0 $ 1,430.9 $ 1,760.3 $ 2,016.0 $ 2,075.1 $ 1,785.2 (5.4)%
Mortgage loans held for sale......... 17.8 12.8 6.8 9.7 9.4 2.0 54.8
Taxable investment securities........ 330.0 397.6 379.1 308.8 277.7 232.0 10.9
Tax-exempt investment securities..... 28.2 36.8 44.2 53.8 60.7 72.5 (17.2)
Securities available for sale........ 63.8 .9 3.0 N/M
Short-term investments............... 16.5 25.3 73.5 132.2 138.2 130.6 (33.9)
--------- --------- --------- --------- --------- ---------
Total interest income.............. 1,871.3 1,903.4 2,263.9 2,521.4 2,564.1 2,222.3 (3.4)
INTEREST EXPENSE
Deposits............................. 504.2 642.9 1,041.4 1,271.4 1,246.0 1,040.3 13.9
Federal funds purchased and
securities
sold under agreements to
repurchase......................... 81.2 77.6 124.5 171.2 226.3 185.2 (15.2)
Other short-term borrowings.......... 24.0 11.9 17.5 21.1 24.1 24.7 1.6
Long-term debt....................... 62.9 40.6 33.3 35.2 41.6 42.5 11.2
--------- --------- --------- --------- --------- ---------
Total interest expense............. 672.3 773.0 1,216.7 1,498.9 1,538.0 1,292.7 (12.3)
--------- --------- --------- --------- --------- ---------
NET INTEREST INCOME.................... 1,199.0 1,130.4 1,047.2 1,022.5 1,026.1 929.6 5.2
Provision for loan losses.............. 72.2 147.4 280.0 419.9 212.1 147.3 (13.3)
--------- --------- --------- --------- --------- ---------
Net interest income after provision
for loan losses.................. 1,126.8 983.0 767.2 602.6 814.0 782.3 7.6
NONINTEREST INCOME
Trust income......................... 204.9 210.0 199.1 183.6 135.6 125.3 10.3
Service charges on deposit
accounts........................... 98.0 99.6 95.9 87.2 81.3 107.0 (1.7)
Credit card fees..................... 48.0 54.8 52.3 45.5 35.9 34.5 6.8
Gain on sale of subsidiary........... 29.4 N/M
Gain on sale of branch offices and
loans.............................. 20.1 (100.0)
Net securities gains (losses)........ 26.1 9.8 7.4 8.5 (2.8) 1.6 74.8
Other income......................... 103.4 107.2 100.3 135.8 111.1 63.7 10.2
--------- --------- --------- --------- --------- ---------
Total noninterest income........... 509.8 501.5 455.0 460.6 361.1 332.1 9.0
--------- --------- --------- --------- --------- ---------
NONINTEREST EXPENSE
Personnel............................ 506.7 491.7 487.2 492.5 462.8 427.2 3.5
Net occupancy........................ 92.6 89.1 90.4 85.6 73.6 67.2 6.6
Equipment............................ 79.0 77.0 72.9 75.7 84.1 69.0 2.7
FDIC insurance assessments........... 40.7 43.8 42.1 24.0 17.0 15.3 21.6
Merger and integration charges....... 53.9 50.0 93.8 26.9 N/M
Other expense........................ 329.0 294.3 326.1 360.4 341.8 287.7 2.7
--------- --------- --------- --------- --------- ---------
Total noninterest expense.......... 1,101.9 1,045.9 1,112.5 1,065.1 979.3 866.4 4.9
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes
and cumulative effect of
accounting change................ 534.7 438.6 109.7 (1.9) 195.8 248.0 16.6
Income taxes........................... 187.5 137.4 33.2 (60.7) 74.0 43.2 34.1
--------- --------- --------- --------- --------- ---------
Income before cumulative effect of
accounting change................ 347.2 301.2 76.5 58.8 121.8 204.8 11.1
Cumulative effect of accounting
change............................... 2.7 N/M
--------- --------- --------- --------- --------- ---------
NET INCOME......................... $ 347.2 $ 301.2 $ 76.5 $ 61.5 $ 121.8 $ 204.8 11.1
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Net income applicable to Common
Shares............................... $ 346.1 $ 295.0 $ 70.2 $ 56.3 $ 119.9 $ 202.7 11.3
Net income per Common Share:
Before cumulative effect of
accounting change.................. $ 2.93 $ 2.51 $ .61 $ .47 $ 1.00 $ 1.65 12.2
After cumulative effect of accounting
change............................. 2.93 2.51 .61 .49 1.00 1.65 12.2
Weighted average Common Shares and
Common Share equivalents outstanding
(000)................................ 118,323.5 117,348.7 115,266.8 115,465.1 119,729.8 122,858.9 (.8)
Full-time equivalent employees......... 12,038 12,451 13,507 14,927 15,380 15,795 N/M
N/M = Not Meaningful.
36
39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
The management of Society Corporation and its subsidiaries (the "Corporation")
is responsible for the preparation, content and integrity of the financial
statements and other statistical data and analysis compiled for this report. The
financial statements and related notes have been prepared in conformity with
generally accepted accounting principles and, in the judgment of management,
present fairly and consistently the Corporation's financial position, results of
operations, and cash flows. Management also believes that financial information
elsewhere in this report is consistent with that in the financial statements.
The amounts contained in the financial statements are based on management's best
estimates and judgments.
The Corporation maintains a system of internal controls designed to provide
reasonable assurance as to the protection of assets and the integrity of the
financial statements. This corporate-wide system of controls includes written
policies and procedures, proper delegation of authority and organizational
division of responsibility and the careful selection and training of qualified
personnel. In addition, an effective internal audit function periodically tests
the system of internal controls.
Management believes that the system of internal controls provides reasonable
assurances that financial transactions are recorded properly to permit the
preparation of reliable financial statements. The Board of Directors discharges
its responsibility for the Corporation's financial statements through its Audit
Committee which is composed of outside directors and has responsibility for the
recommendation of the independent auditors. The Audit Committee meets regularly
with the independent auditors and internal auditors to review the scope of their
audits and audit reports and to discuss any action to be taken. Both the
independent auditors and internal auditors have direct access to the Audit
Committee.
Management has made an assessment of the Corporation's internal control
structure and procedures over financial reporting using established and
recognized criteria. On the basis of this assessment, management believes that
the Corporation maintained an effective system of internal control for financial
reporting as of December 31, 1993.
ROBERT W. GILLESPIE
Chairman of the Board and Chief
Executive Officer
JAMES W. WERT
Vice Chairman of the Board and
Chief Financial Officer
37
40
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Society Corporation
We have audited the accompanying consolidated balance sheets of Society
Corporation and Subsidiaries as of December 31, 1993 and 1992, and the related
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1993. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Society
Corporation and Subsidiaries at December 31, 1993 and 1992, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1993, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young
Cleveland, Ohio
January 28, 1994,
except for Note 2,
as to which the
date is March 1, 1994
38
41
CONSOLIDATED BALANCE SHEETS
Society Corporation and Subsidiaries
DECEMBER 31,
---------------------------
(dollars in thousands) 1993 1992
- ---------------------------------------------------------------- ----------- -----------
ASSETS
Cash and due from banks....................................... $ 1,375,645 $ 1,345,085
Short-term investments........................................ 67,931 778,875
Mortgage loans held for sale.................................. 321,703 170,300
Securities available for sale (market value: $781,664 and
$1,149,577)................................................ 738,078 1,122,224
Investment securities (market value: $5,735,240 and
$4,568,734)................................................ 5,653,227 4,484,381
Loans......................................................... 17,897,647 16,031,488
Less: Allowance for loan losses............................ 480,634 502,744
----------- -----------
Net loans................................................ 17,417,013 15,528,744
Premises and equipment........................................ 421,765 406,560
Other real estate owned....................................... 48,095 133,341
Intangible assets............................................. 214,138 280,689
Other assets.................................................. 749,732 728,103
----------- -----------
TOTAL ASSETS............................................. $27,007,327 $24,978,302
----------- -----------
----------- -----------
LIABILITIES
Deposits in domestic offices:
Noninterest-bearing........................................ $ 3,803,677 $ 3,658,878
Interest-bearing........................................... 14,062,494 13,883,943
Deposits in foreign office -- interest-bearing................ 2,014,533 1,115,179
----------- -----------
Total deposits........................................... 19,880,704 18,658,000
Federal funds purchased and securities sold
under agreements to repurchase............................. 2,353,740 2,834,105
Other short-term borrowings................................... 1,175,752 276,357
Other liabilities............................................. 605,888 455,685
Long-term debt................................................ 952,657 886,052
----------- -----------
TOTAL LIABILITIES........................................ 24,968,741 23,110,199
SHAREHOLDERS' EQUITY
Preferred Stock, without par value; authorized 25,000,000
shares, none issued
Fixed/Adjustable Rate Cumulative Preferred Stock, $50 stated
value; authorized and issued 1,200,000 shares.............. 60,000
Common Shares, $1 par value; authorized 400,000,000 shares;
issued 118,658,008 shares.................................. 118,658 118,658
Capital surplus............................................... 635,508 632,789
Retained earnings............................................. 1,368,992 1,153,309
Loans to ESOP trustee......................................... (63,909) (65,478)
Treasury stock at cost (1,280,604 and 1,932,032 shares)....... (20,663) (31,175)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY............................... 2,038,586 1,868,103
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............... $27,007,327 $24,978,302
----------- -----------
----------- -----------
See notes to consolidated financial statements.
39
42
CONSOLIDATED STATEMENTS OF INCOME
Society Corporation and Subsidiaries
YEAR ENDED DECEMBER 31,
----------------------------------------------
(dollars in thousands, except per share amounts) 1993 1992 1991
- ------------------------------------------------------ ------------ ------------ ------------
INTEREST INCOME
Loans............................................... $1,414,999 $1,430,894 $1,760,277
Mortgage loans held for sale........................ 17,786 12,839 6,847
Taxable investment securities....................... 330,045 397,627 379,089
Tax-exempt investment securities.................... 28,231 36,794 44,177
Securities available for sale....................... 63,773
Short-term investments.............................. 16,462 25,280 73,483
------------ ------------ ------------
Total interest income............................ 1,871,296 1,903,434 2,263,873
------------ ------------ ------------
INTEREST EXPENSE
Deposits............................................ 504,239 642,944 1,041,395
Federal funds purchased and securities sold under
agreements to repurchase......................... 81,223 77,572 124,507
Other short-term borrowings......................... 24,002 11,932 17,460
Long-term debt...................................... 62,842 40,599 33,351
------------ ------------ ------------
Total interest expense........................... 672,306 773,047 1,216,713
------------ ------------ ------------
NET INTEREST INCOME................................... 1,198,990 1,130,387 1,047,160
Provision for loan losses............................. 72,240 147,366 280,047
------------ ------------ ------------
Net interest income after provision for loan
losses......................................... 1,126,750 983,021 767,113
NONINTEREST INCOME
Trust income........................................ 204,852 209,952 199,147
Service charges on deposit accounts................. 97,970 99,610 95,885
Credit card fees.................................... 48,032 54,771 52,336
Gain on sale of subsidiary.......................... 29,410
Gain on sale of branch offices and loans............ 20,074
Net securities gains................................ 26,078 9,775 7,431
Other income........................................ 103,442 107,352 100,265
------------ ------------ ------------
Total noninterest income......................... 509,784 501,534 455,064
------------ ------------ ------------
NONINTEREST EXPENSE
Personnel........................................... 506,716 491,718 487,150
Net occupancy....................................... 92,635 89,109 90,356
Equipment........................................... 78,950 76,958 72,888
FDIC insurance assessments.......................... 40,691 43,803 42,094
Professional fees................................... 20,371 31,370 29,759
Merger and integration charges...................... 53,906 50,016 93,828
Other expense....................................... 308,633 262,977 296,418
------------ ------------ ------------
Total noninterest expense........................ 1,101,902 1,045,951 1,112,493
------------ ------------ ------------
Income before income taxes....................... 534,632 438,604 109,684
Income taxes.......................................... 187,473 137,394 33,206
------------ ------------ ------------
NET INCOME....................................... $ 347,159 $ 301,210 $ 76,478
------------ ------------ ------------
------------ ------------ ------------
Net income applicable to Common Shares................ $ 346,121 $ 294,984 $ 70,229
Net income per Common Share........................... 2.93 2.51 .61
Weighted average Common Shares and
Common Share equivalents outstanding................ 118,323,452 117,348,656 115,266,844
See notes to consolidated financial statements.
40
43
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Society Corporation and Subsidiaries
LOANS TO COMMON
(dollars in thousands, PREFERRED COMMON CAPITAL RETAINED ESOP SHARES IN
except per share amounts) STOCK SHARES SURPLUS EARNINGS TRUSTEE TREASURY
- ------------------------------------ --------- -------- -------- ---------- -------- ---------
BALANCE AT JANUARY 1, 1991.......... $60,000 $62,147 $797,056 $ 979,086 $(67,226) $(185,064)
Net income........................ 76,478
Cash dividends on Common Shares,
$.92 per share.................. (60,449)
Cash dividends of pooled company
prior to merger:
Common Stock.................. (23,982)
Preferred Stock............... (6,283)
Issuance of 907,326 Common Shares
under stock option plans........ 410 12,833 16,025
Tax benefits attributable to ESOP
dividends....................... 622
Loan payments from ESOP trustee... 1,877
Purchase of 237,185 treasury
shares.......................... (8,340)
--------- -------- -------- ---------- -------- ---------
BALANCE AT DECEMBER 31, 1991........ 60,000 62,557 809,889 965,472 (65,349) (177,379)
Adjustments relating to pooling of
interests....................... (2 ) (132) (381)
Cancellation of treasury stock of
pooled company.................. (3,300 ) (124,793) 128,093
Net income........................ 301,210
Cash dividends on Common Shares,
$.98 per share.................. (101,547)
Cash dividends on Fixed/Adjustable
Rate Cumulative Preferred Stock,
$3.89 per share................. (4,670)
Cash dividends of pooled company
prior to merger:
Common Stock.................. (6,098)
Preferred Stock............... (1,556)
Issuance of 635,321 Common Shares
under stock option plans........ 74 7,154 18,111
Tax benefits attributable to ESOP
dividends....................... 879
Loan payments from ESOP trustee... (129)
Two-for-one stock split effected
by means of a 100% stock
dividend paid March 22, 1993.... 59,329 (59,329)
--------- -------- -------- ---------- -------- ---------
BALANCE AT DECEMBER 31, 1992........ 60,000 118,658 632,789 1,153,309 (65,478) (31,175)
Net income........................ 347,159
Cash dividends on Common Shares,
$1.12 per share................. (131,031)
Cash dividends on Fixed/Adjustable
Rate Cumulative Preferred Stock,
$1.297 per share................ (1,556)
Issuance of 651,428 Common Shares
under stock option plans........ 4,519 10,512
Redemption of 1,200,000 shares of
Fixed/Adjustable Rate Cumulative
Preferred Stock................. (60,000) (1,800)
Tax benefits attributable to ESOP
dividends....................... 1,111
Loan payments from ESOP trustee... 1,569
-------- -------- ---------- -------- ---------
BALANCE AT DECEMBER 31, 1993........ $118,658 $635,508 $1,368,992 $(63,909) $ (20,663)
-------- -------- ---------- -------- ---------
-------- -------- ---------- -------- ---------
See notes to consolidated financial statements.
41
44
CONSOLIDATED STATEMENTS OF CASH FLOWS
Society Corporation and Subsidiaries
YEAR ENDED DECEMBER 31,
-------------------------------------------
(in thousands) 1993 1992 1991
- ------------------------------------------------------------------------ ----------- ----------- -----------
OPERATING ACTIVITIES
Net income............................................................ $ 347,159 $ 301,210 $ 76,478
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses........................................... 72,240 147,366 280,047
Depreciation and amortization expense............................... 115,425 93,983 85,135
Gain on sale of branch offices and loans............................ (20,074)
Gain on sale of subsidiary.......................................... (29,410)
Deferred income taxes............................................... 56,811 68,272 12,997
Net securities gains................................................ (26,078) (9,775) (7,431)
Net increase in mortgage loans held for sale........................ (151,403) (65,671) (60,819)
Decrease (increase) in interest receivable.......................... 2,457 (16,431) 24,134
Increase (decrease) in interest payable............................. 1,166 (29,442) (33,709)
Other operating activities, net..................................... 94,083 (180,385) 61,441
----------- ----------- -----------
Net cash provided by operating activities...................... 482,450 289,053 438,273
INVESTING ACTIVITIES
Principal collected on loans held by nonbank subsidiaries and loans
sold................................................................ 626,773 359,912 411,671
Loans originated by nonbank subsidiaries and loans purchased.......... (409,623) (128,821) (154,203)
Net (increase) decrease in loans held by bank subsidiaries, excluding
loans purchased or sold............................................. (1,389,072) 132,097 611,184
Purchases of investment securities.................................... (3,210,342) (3,191,221) (1,572,478)
Proceeds from sales of investment securities.......................... 141,325 610,999 435,799
Proceeds from prepayments and maturities of investment securities..... 2,036,783 1,815,279 875,794
Net change in securities available for sale........................... 421,200
Net decrease (increase) in Federal funds sold and security resale
agreements.......................................................... 96,047 460,490 (250,822)
Net decrease (increase) in interest-bearing deposits with banks....... 750,950 301,067 (269,690)
Purchases of premises and equipment................................... (78,402) (185,809) (39,755)
Proceeds from sales of premises and equipment......................... 5,425 34,575 5,905
Purchase of thrift or bank subsidiary, net of cash acquired........... (117,858) (2,286)
Proceeds from sale of subsidiary...................................... 148,054
Other investing activities, net....................................... 2,352
----------- ----------- -----------
Net cash (used in) provided by investing activities............ (978,740) 206,282 55,757
FINANCING ACTIVITIES
Net increase (decrease) in deposits................................... 186,218 (469,102) (1,376,287)
Net increase in short-term borrowings................................. 419,030 153,177 767,229
Proceeds from issuance of long-term debt.............................. 310,499 396,179
Payments on long-term debt............................................ (229,776) (13,355) (12,485)
Redemption of preferred stock......................................... (61,800)
Proceeds from exercise of stock options............................... 12,047 20,104 27,003
Purchase of treasury stock............................................ (8,340)
Cash dividends........................................................ (132,587) (113,871) (90,714)
Sales of branch offices and loans:
Deposit liabilities assumed by purchasers........................... (1,032,006)
Loans sold.......................................................... 377,578
Long-term debt issued to fund branch sale........................... 36,154
Other, net.......................................................... 23,956
Other financing activities, net....................................... 23,219 (2,984)
----------- ----------- -----------
Net cash provided by (used in) financing activities............ 526,850 (624,170) (693,594)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS...................... 30,560 (128,835) (199,564)
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR............................ 1,345,085 1,473,920 1,673,484
----------- ----------- -----------
CASH AND DUE FROM BANKS AT END OF YEAR.................................. $ 1,375,645 $ 1,345,085 $ 1,473,920
----------- ----------- -----------
----------- ----------- -----------
Additional disclosures relative to cash flows:
Cash interest payments.................................................. $ 671,140 $ 802,489 $ 1,250,422
Cash income tax payments................................................ 121,783 95,156 13,874
See notes to consolidated financial statements.
42
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Society Corporation is an Ohio-based financial services company primarily
engaged in the business of commercial banking. It provides a wide range of
banking, fiduciary and financial services to corporate, institutional and
individual customers.
The accounting policies of Society Corporation and its subsidiaries conform with
generally accepted accounting principles and with general practices within the
banking industry. The following is a summary of the Corporation's significant
accounting policies.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Society
Corporation and its subsidiaries. All significant intercompany transactions have
been eliminated. Certain amounts previously reported in the financial statements
have been reclassified to conform with the current presentation.
As discussed in Note 2, Mergers, Acquisitions and Divestitures, the financial
statements give retroactive effect to the 1992 merger of Ameritrust Corporation
with and into Society, accounted for as a pooling of interests. Accordingly, all
financial data are presented as if both companies had been merged for all
periods presented.
BUSINESS COMBINATIONS
Business combinations accounted for as purchases include the results of
operations of the acquired businesses from the respective dates of acquisition.
The assets and liabilities are recorded at fair value at the acquisition date
and related purchase premiums and discounts are amortized over the remaining
average lives of the respective assets or liabilities. Goodwill, representing
the excess of the cost of acquisitions over the fair value of net assets
acquired, is amortized on a straight-line basis, over the estimated period to be
benefited, generally not exceeding 25 years. Other intangibles are amortized
using either straight-line or accelerated methods, generally over periods
ranging from 4 to 15 years.
In transactions accounted for as poolings of interests, the assets and
liabilities of the combined companies are carried forward at their historical
amounts, the companies' results of operations are combined and the consolidated
financial statements and notes thereto are restated as if the companies had been
merged for all periods presented.
On March 1, 1994, KeyCorp, ("old KeyCorp"), merged into and with Society
Corporation ("Society"), which was the surviving corporation under the name
KeyCorp. Because the merger, which was accounted for as a pooling of interests,
occurred subsequent to December 31, 1993, the financial statements do not give
retroactive effect to the merger. However, the supplemental financial statements
included on pages 65 to 94 of this report present the combined financial
condition and results of operations of Society and old KeyCorp as if the merger
had been in effect for all periods presented. Further details pertaining to this
merger are presented in Note 2, Mergers, Acquisitions and Divestitures.
STATEMENT OF CASH FLOWS
The Corporation defines cash and cash equivalents as cash on hand and
noninterest-bearing amounts due from banks as reported under the consolidated
balance sheet caption, "Cash and due from banks."
INVESTMENT SECURITIES
Securities which the Corporation has the ability and positive intent to hold to
maturity are carried at cost, adjusted for amortization of premiums and
accretion of discounts using the level yield method. Gains and losses on sales
of investment securities are computed using the specific identification method
and are included in net securities gains.
SECURITIES AVAILABLE FOR SALE AND TRADING ACCOUNT ACTIVITIES
Securities available for sale are carried at the lower of aggregate cost or
market value. Trading account assets include foreign exchange trading positions
and are carried at market value. Gains and losses on sales of securities
available for sale are computed using the specific identification method and are
included in net
43
46
securities gains. Market value adjustments for trading account assets (included
in short-term investments) and securities available for sale are included in
noninterest income.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are carried at the lower of aggregate cost or
market value.
LOANS
Student loans held for sale are included in total loans and are carried at the
lower of aggregate cost or market value. Interest income on loans is primarily
accrued based on principal amounts outstanding. Accrual of interest is
discontinued, and accrued but unpaid interest on a loan is reversed and charged
against current earnings, when circumstances indicate that collection is
questionable. Loans are returned to accrual status when management determines
that the circumstances have improved to the extent that both principal and
interest are deemed collectible.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is the amount which, in the opinion of management,
is necessary to absorb potential losses in the loan portfolio. Management's
evaluation of the adequacy of the allowance is based on the market area served,
local economic conditions, the growth and composition of the loan portfolios and
their related risk characteristics, and the continual review by management of
the quality of the loan portfolio.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Provisions for the depreciation of premises and equipment are
determined using the straight-line method over the estimated useful lives of the
respective assets. Leasehold improvements are amortized using the straight-line
method over the terms of the leases.
OTHER REAL ESTATE OWNED
Other real estate owned includes real estate acquired through foreclosure or a
similar conveyance of title and real estate considered to be in-substance
foreclosed when specific criteria are met. Other real estate owned is carried at
the lower of its recorded amount or fair value, less estimated cost of disposal.
Write-downs of the assets at, or prior to, the dates of acquisition are charged
to the allowance for loan losses. Subsequent write-downs, income and expenses
incurred in connection with holding such assets, and gains and losses resulting
from the sales of such assets, are included in other noninterest expense.
INCOME TAXES
The Corporation files a consolidated Federal income tax return. Effective
January 1, 1992, the Corporation prospectively adopted SFAS No. 109, "Accounting
for Income Taxes" which supersedes SFAS No. 96. The cumulative effect of
adopting SFAS No. 109 was not material.
INTEREST RATE SWAPS, FINANCIAL FUTURES AND OPTIONS
The Corporation uses interest rate swaps, financial futures and options to
manage the interest rate exposure of certain interest-sensitive assets and
liabilities as part of the Corporation's overall strategy to manage interest
rate risk. The net interest received or paid on interest rate swaps is
recognized over the lives of the respective contracts as an adjustment to
interest income or expense. Gains and losses resulting from the termination of
interest rate swaps are deferred and amortized over the remaining lives of the
related financial instruments. Gains and losses on futures and option contracts
are recognized when the related hedged financial instruments are sold.
COMMON SHARES
Net income per Common Share is computed by dividing net income, less any
dividend requirement on preferred stock, by the weighted average number of
Common Shares and Common Share equivalents outstanding during the year as
presented below. These amounts have been adjusted to reflect a two-for-one stock
split in the form of a 100% stock dividend effective as of March 22, 1993.
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47
YEAR ENDED DECEMBER 31,
-------------------------------------------
1993 1992 1991
----------- ----------- -----------
Weighted average Common Shares
outstanding........................... 116,976,477 115,951,058 114,385,402
Common Share equivalents-stock
options............................... 1,346,975 1,397,598 881,442
----------- ----------- -----------
Total.............................. 118,323,452 117,348,656 115,266,844
----------- ----------- -----------
----------- ----------- -----------
NOTE 2. MERGERS, ACQUISITIONS AND DIVESTITURES
On March 1, 1994, KeyCorp ("old KeyCorp"), a financial services holding company
headquartered in Albany, New York, with approximately $33 billion in assets as
of December 31, 1993, merged into and with Society, which was the surviving
corporation under the name KeyCorp. Under the terms of the merger agreement,
124,351,183 KeyCorp Common Shares were exchanged for all of the outstanding
shares of old KeyCorp (based on an exchange ratio of 1.205 shares for each share
of old KeyCorp). The outstanding preferred stock of old KeyCorp was exchanged on
a one-for-one basis for 1,280,000 shares of a comparable, new issue of 10%
Cumulative Preferred Stock of KeyCorp. The merger was accounted for as a pooling
of interests and, accordingly financial results for all prior periods presented
will be restated to include the financial results of old KeyCorp. The
supplemental financial statements presented on pages 65 through 94 of this
report present the financial condition and results of operations of Society and
old KeyCorp as if the merger had been in effect for all periods presented. The
following table presents consolidated net interest income, net income and per
Common Share reported by each of the companies and on a combined basis.
YEAR ENDED DECEMBER 31,
(in thousands, ----------------------------------------
except per share amounts) 1993 1992 1991
- --------------------------------- ---------- ---------- ----------
NET INTEREST INCOME
Society........................ $1,198,990 $1,130,387 $1,047,160
Old KeyCorp.................... 1,479,987 1,318,286 1,085,801
---------- ---------- ----------
Combined.................... $2,678,977 $2,448,673 $2,132,961
---------- ---------- ----------
---------- ---------- ----------
NET INCOME
Society........................ $ 347,159 $ 301,210 $ 76,478
Old KeyCorp.................... 362,767 290,888 237,218
---------- ---------- ----------
Combined.................... $ 709,926 $ 592,098 $ 313,696
---------- ---------- ----------
---------- ---------- ----------
NET INCOME PER COMMON SHARE
Society........................ $ 2.93 $ 2.51 $ .61
Old KeyCorp.................... 3.43 2.80 2.45
Combined....................... 2.89 2.42 1.31
On October 5, 1993, Society Asset Management, Inc., an indirect wholly-owned
subsidiary of Society, completed the acquisition of Schaenen Wood & Associates,
Inc. ("SWA"), a New York City-based investment management firm which manages
approximately $1.3 billion in assets. The transaction was accounted for as a
purchase.
On September 15, 1993, Society completed the sale of Ameritrust Texas
Corporation ("ATC") to Texas Commerce Bank, National Association, an affiliate
of Chemical Banking Corporation. ATC was based in Dallas, Texas, and provided a
range of investment management and fiduciary services to institutions,
businesses and individuals through 11 offices operating in Texas. For the period
through the closing date, ATC had net income of $3.2 million. The $29.4 million
gain on the sale ($12.2 million after tax, $.10 per Common Share) is included in
noninterest income.
On January 22, 1993, Society acquired all of the outstanding shares of First
Federal Savings and Loan Association of Fort Myers ("Society First Federal"), a
Federal stock savings bank, for total cash consideration of $144 million. The
transaction was accounted for as a purchase. Society First Federal had 24
offices in southwest and central Florida and approximately $1.1 billion in total
assets at the date of acquisition.
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On December 4, 1992, Society and three other bank holding companies formed a
joint venture in a newly-formed company, Electronic Payment Services, Inc. This
company is the largest processor of automated teller machine transactions in the
United States and a national leader in point-of-sale transaction processing. As
part of the agreement. Society contributed its wholly-owned subsidiary Green
Machine Network Corporation, and its point-of-sale business in return for an
equity interest.
On September 30, 1992, Society acquired all the outstanding shares of First of
America Bank - Monroe ("FAB - Monroe") from First of America Bank Corporation in
a cash purchase. The transaction was accounted for as a purchase. FAB - Monroe
operated 10 offices in southeastern Michigan and had approximately $160 million
in total assets at the date of acquisition.
On March 16, 1992, Ameritrust Corporation ("Ameritrust"), a financial services
holding company located in Cleveland, Ohio, with approximately $10 billion in
assets as of December 31, 1991, merged with and into Society. Under the terms of
the merger agreement, 49,550,862 Society Common Shares were exchanged for all of
the outstanding shares of Ameritrust common stock (based on an exchange ratio of
.65 shares of Society for each share of Ameritrust). The outstanding preferred
stock of Ameritrust was exchanged on a one-for-one basis for 1,200,000 shares of
a comparable, new issue of Fixed/Adjustable Rate Cumulative Preferred Stock of
Society. The merger was accounted for as a pooling of interests and,
accordingly, financial results for all prior periods presented have been
restated to include the financial results of Ameritrust. In connection with the
merger and as part of an agreement with the United States Department of Justice,
Society sold 28 Ameritrust branches located in Cuyahoga and Lake Counties in
Ohio in June 1992. Deposits of $933.3 million and loans or loan participations
totaling $331.8 million were sold along with the branches at a gain of $20.1
million ($13.2 million after tax, $.11 per Common Share) included in noninterest
income. In addition, in May 1992, deposits and loans totaling $98.7 million and
$45.7 million, respectively, were sold along with the four branches in Ashtabula
County, Ohio, in accordance with the Federal Reserve Board order that approved
the merger.
NOTE 3. SECURITIES
The book values, unrealized gains and losses, and approximate market values of
securities held to maturity and securities available for sale were as follows:
DECEMBER 31, 1993
-------------------------------------------------------
GROSS GROSS
BOOK UNREALIZED UNREALIZED MARKET
(in thousands) VALUE GAINS LOSSES VALUE
- --------------------------------- ---------- ---------- ---------- ----------
Federal agencies................. $ 10,585 $ 1,090 $ 11,675
States and political
subdivisions................... 374,671 15,601 $ 45 390,227
Mortgage-backed securities....... 4,544,178 58,951 8,289 4,594,840
Other securities................. 723,793 14,726 21 738,498
---------- ---------- ---------- ----------
Total investment
securities................. 5,653,227 90,368 8,355 5,735,240
U.S. Treasury-available for
sale........................... 738,078 43,595 9 781,664
---------- ---------- ---------- ----------
Total securities............. $6,391,305 $ 133,963 $ 8,364 $6,516,904
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
DECEMBER 31, 1992
-------------------------------------------------------
GROSS GROSS
BOOK UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
---------- ---------- ---------- ----------
Federal Agencies................. $ 6,869 $ 501 $ 7,370
States and political
subdivisions................... 524,825 18,317 $ 298 542,844
Mortgage-backed securities....... 3,374,364 74,118 24,244 3,424,238
Other securities................. 578,323 16,158 199 594,282
---------- ---------- ---------- ----------
Total investment
securities................. 4,484,381 109,094 24,741 4,568,734
U.S. Treasury-available for
sale........................... 1,122,224 32,042 4,689 1,149,577
---------- ---------- ---------- ----------
Total securities............. $5,606,605 $ 141,136 $ 29,430 $5,718,311
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
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The remaining maturities of the Corporation's securities were as follows:
DECEMBER 31, 1993
-----------------------------------------------------
U.S. TREASURY --
INVESTMENT SECURITIES AVAILABLE FOR SALE
------------------------- -----------------------
BOOK MARKET BOOK MARKET
(in thousands) VALUE VALUE VALUE VALUE
- --------------------------------- ---------- ---------- -------- ----------
Due in one year or less.......... $ 471,932 $ 479,921 $206,941 $ 208,504
Due after one through five
years.......................... 2,585,370 2,654,823 327,373 344,128
Due after five through ten
years.......................... 2,316,463 2,319,442 201,291 226,106
Due after ten years.............. 279,462 281,054 2,473 2,926
---------- ---------- -------- ----------
Total securities............. $5,653,227 $5,735,240 $738,078 $ 781,664
---------- ---------- -------- ----------
---------- ---------- -------- ----------
Mortgage-backed securities are included in the above investment securities
maturity schedule based on their expected average lives. Other securities
consist primarily of those collateralized by credit card and automobile
installment loan receivables, corporate floating-rate notes and venture capital
investments.
The proceeds from sales of securities were $724.6 million, $611.0 million and
$435.8 million in 1993, 1992 and 1991, respectively. Gross gains and losses
related to securities were $33.4 million and $7.3 million, respectively, in
1993, $10.7 million and $.9 million, respectively, in 1992 and $8.8 million and
$1.4 million, respectively, in 1991.
Corporate assets, primarily securities, with a book value of approximately $4.4
billion at December 31, 1993, were pledged to secure public and trust deposits
and securities sold under agreements to repurchase, and for other purposes
required or permitted by law.
In May 1993, the FASB issued SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." SFAS No. 115 requires that equity securities
having readily determinable fair values and all investments in debt securities
be classified and accounted for in three categories. Debt securities that
management has the positive intent and ability to hold to maturity are to be
classified as "held-to-maturity securities" and reported at amortized cost. Debt
and equity securities that are bought and held principally for the purpose of
selling them in the near term are to be classified as "trading securities" and
reported at fair value, with unrealized gains and losses included in operating
results. Debt and equity securities not classified as either held-to-maturity
securities or trading securities are to be classified as "available for sale
securities" and reported at fair value, with unrealized gains and losses
excluded from operating results and reported as a separate component of
shareholders' equity. Adoption of the standard is required for fiscal years
beginning after December 15, 1993, with earlier application permitted. The
Corporation will adopt the new standard in 1994. Based upon the Corporation's
securities portfolio classified as available for sale as of December 31, 1993,
the estimated impact of the new standard would be an increase to shareholders'
equity of approximately $28 million, with no impact on the results of
operations. With the adoption of SFAS No. 115 in 1994, the Corporation
anticipates that securities with an aggregate book value of approximately $3.2
billion will be designated as available for sale. Based upon the market values
of these securities at year end 1993, the reclassification of these securities
is not expected to have a material effect on shareholders' equity.
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NOTE 4. LOANS
Loans are summarized as follows:
DECEMBER 31,
-------------------------------------------
(in thousands) 1993 1992 1991
- ------------------------------------------------- ----------- ----------- -----------
Commercial, financial and agricultural........... $ 4,388,185 $ 4,430,027 $ 5,177,633
Real estate-construction......................... 623,245 737,583 839,418
Real estate-residential mortgage................. 4,574,503 3,204,349 2,948,769
Real estate-commercial mortgage.................. 2,119,857 2,320,787 2,631,174
Consumer......................................... 3,266,772 3,243,383 4,433,077
Student loans held for sale...................... 1,648,611 1,070,140
Lease financing.................................. 1,213,162 923,856 724,737
Foreign.......................................... 63,312 101,363 76,866
----------- ----------- -----------
Total.......................................... $17,897,647 $16,031,488 $16,831,674
----------- ----------- -----------
----------- ----------- -----------
Changes in the allowance for loan losses are summarized as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------
(in thousands) 1993 1992 1991
- ------------------------------------------------- ----------- ----------- -----------
Balance at beginning of year..................... $ 502,744 $ 525,916 $ 461,039
Recoveries....................................... 52,617 52,145 52,585
Charge-offs...................................... (147,816) (223,711) (267,624)
----------- ----------- -----------
Net charge-offs................................ (95,199) (171,566) (215,039)
Provision for loan losses........................ 72,240 147,366 280,047
Allowance of affiliates purchased (sold)......... 849 1,028 (131)
----------- ----------- -----------
Balance at end of year......................... $ 480,634 $ 502,744 $ 525,916
----------- ----------- -----------
----------- ----------- -----------
In 1991, Ameritrust recorded an additional $93.9 million provision for loan
losses to conform its approach to determining the level of the allowance for
loan losses to that used by the Corporation.
In the ordinary course of business, Society's banking subsidiaries have made
loans at prevailing interest rates and terms to directors and executive officers
of Society and its subsidiaries and their associates (as defined by the
Securities and Exchange Commission). Such loans, in management's opinion, did
not present more than the normal risk of collectibility or incorporate other
unfavorable features. The aggregate amount of loans outstanding to qualifying
related parties at January 1, 1993, was $135.0 million. During 1993, activity
with respect to these loans included new loans, repayments and a net decrease
(due to changes in the status of executive officers and directors) of $30.8
million, $76.5 million and $21.5 million, respectively, resulting in an
aggregate balance of loans outstanding to related parties at December 31, 1993,
of $67.8 million.
NOTE 5. NONPERFORMING ASSETS
Nonperforming assets were as follows:
DECEMBER 31,
-----------------------
(in thousands) 1993 1992
--------------------------------------------------------- -------- --------
Nonaccrual loans......................................... $162,448 $347,779
Restructured loans....................................... 370 934
-------- --------
Total nonperforming loans.............................. 162,818 348,713
Other real estate owned.................................. 48,095 133,341
Other nonperforming assets............................... 13,462 14,903
-------- --------
Total.................................................. $224,375 496,957
-------- --------
-------- --------
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The effect on interest income of loans classified as nonperforming at December
31 of each respective year was as follows:
(in thousands) 1993 1992 1991
---------------------------------------------- ------- ------- -------
Interest income which would have been recorded
if assets had been current under original
terms....................................... $17,482 $34,731 $52,880
Less: Interest income recorded during the
period...................................... 3,450 14,374 24,131
------- ------- -------
Net reduction to reported interest income... $14,032 $20,357 $28,749
------- ------- -------
------- ------- -------
At December 31, 1993, there were no significant commitments outstanding to lend
additional funds to borrowers with nonaccrual or restructured loans.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." SFAS No. 114 prescribes a valuation methodology for
impaired loans as defined by the standard. Generally, a loan is considered
impaired if management believes that it is probable that all amounts due will
not be collected according to the contractual terms as scheduled in the loan
agreement. An impaired loan must be valued using the present value of expected
future cash flows discounted at the loan's effective interest rate, the loan's
observable market price or the fair value of the loan's underlying collateral.
The Corporation expects to adopt SFAS No. 114 prospectively starting in the
first quarter of 1995. It is anticipated that adoption of the new standard will
not have a material effect on the Corporation's financial condition and results
of operations.
NOTE 6. PREMISES AND EQUIPMENT
Premises and equipment were as follows:
DECEMBER 31,
-----------------------
(in thousands) 1993 1992
--------------------------------------------------------- -------- --------
Land..................................................... $ 43,025 $ 28,742
Buildings and leasehold improvements..................... 348,117 356,076
Furniture and equipment.................................. 414,663 381,581
-------- --------
805,805 766,399
Accumulated depreciation and amortization................ (384,040) (359,839)
-------- --------
Total.................................................. $421,765 $406,560
-------- --------
-------- --------
Depreciation and amortization expense related to premises and equipment totaled
$57.1 million, $62.3 million, and $48.4 million in 1993, 1992 and 1991,
respectively.
At December 31, 1993, banking subsidiaries of Society were obligated under
noncancellable leases for land and buildings and for other property, consisting
principally of data processing equipment. Rental expense under all operating
leases aggregated $53.3 million in 1993, $56.4 million in 1992, and $49.6
million in 1991. Many of the realty lease agreements contain renewal options for
varying periods. In many cases, renewal terms must be negotiated at the renewal
date, including annual rentals to be paid under the renewed lease.
Minimum future rental payments under noncancellable leases at December 31, 1993,
were as follows: 1994 -- $37.3 million; 1995 -- $30.7 million; 1996 -- $29.0
million; 1997 -- $23.8 million; 1998 -- $21.6 million; and subsequent years --
$261.3 million.
NOTE 7. SHORT-TERM BORROWINGS
Short-term borrowings consist primarily of Federal funds purchased and
securities sold under repurchase agreements which generally represent overnight
borrowing transactions. Other short-term borrowings consist of fixed rate and
variable rate Medium-Term Notes with original maturities of one year or less,
Treasury, tax and loan demand notes, and other borrowings with original
maturities of one year or less.
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On November 30, 1992, Society National Bank authorized the issuance of up to $1
billion of Medium-Term Notes to be offered on a continuous basis. During 1993,
$685 million in debt securities were issued under this program. These securities
have original maturities of less than one year and are included in other
short-term borrowings.
The details of short-term borrowings are as follows:
(dollars in thousands) 1993 1992 1991
- --------------------------------------------- ---------- ---------- ----------
FEDERAL FUNDS PURCHASED
Balance at year end........................ $1,013,800 $1,316,567 $1,371,638
Average during the year.................... 1,063,530 807,654 968,500
Maximum month-end balance.................. 2,159,644 1,742,855 1,641,222
Weighted average rate during the year...... 3.06% 3.45% 5.72%
Weighted average rate at December 31....... 3.18 3.37 3.87
SECURITIES SOLD UNDER AGREEMENTS TO
REPURCHASE
Balance at year-end........................ $1,339,940 $1,517,538 $1,130,786
Average during the year.................... 1,665,644 1,504,562 1,272,282
Maximum month-end balance.................. 2,102,629 1,927,907 1,726,720
Weighted average rate during the year...... 2.92% 3.30% 5.43%
Weighted average rate at December 31....... 2.89 2.95 4.12
OTHER SHORT-TERM BORROWINGS
Balance at year-end........................ $1,175,752 $ 276,357 $ 453,229
Average during the year.................... 817,953 360,575 316,295
Maximum month-end balance.................. 1,175,752 546,340 520,375
Weighted average rate during the year...... 2.93% 3.31% 5.52%
Weighted average rate at December 31....... 3.16 2.42 4.30
NOTE 8. LONG-TERM DEBT
The components of long-term debt, presented net of unamortized discount where
appropriate, are as follows:
DECEMBER 31,
---------------------
(dollars in thousands) 1993 1992
- --------------------------------------------------------------------- -------- --------
8.125% Subordinated Notes, due 2002.................................. $197,902 $197,655
Medium Term Notes, due through 1996.................................. 110,600
8.875% Notes, due 1996............................................... 74,772 74,715
11.125% Notes, due 1995.............................................. 49,979 49,967
8.48% Notes, due 1997 through 2001................................... 48,864 48,864
8.33% Notes, due 1996................................................ 22,794 22,794
7.875% Notes, due 1993............................................... 99,952
8.625% Notes, due 1996............................................... 99,773
8.25% Notes, due 1993................................................ 25,000
9.56% Note, due 1995................................................. 14,922
Other long-term debt................................................. 384 4,514
-------- --------
Total Parent Company............................................ 505,295 638,156
-------- --------
7.85% Subordinated Notes, due 2002................................... 199,823 198,524
6.75% Subordinated Notes, due 2003................................... 198,823
10% Note, due 1995................................................... 36,735 36,735
Industrial revenue bonds............................................. 10,938 11,314
Other long-term debt................................................. 1,043 1,323
-------- --------
Total Subsidiaries.............................................. 447,362 247,896
-------- --------
Total........................................................... $952,657 $886,052
-------- --------
-------- --------
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On June 15, 1992, Society issued $200 million of 8.125% Subordinated Notes under
a shelf registration. The Notes are not redeemable prior to maturity. During
1993, Society issued $110.6 million of Medium-Term Notes with maturities
exceeding one year. The Notes had a weighted average annual interest rate of
5.19% at December 31, 1993, and have varying maturities through 1996. The 8.875%
Notes, issued under an earlier registration, and the 11.125% Notes are not
redeemable prior to maturity.
In 1989, the Ameritrust Corporation Employees' Savings and Investment Plan (the
"Plan") was amended to include a leveraged employee stock ownership plan
("ESOP"). To fund the ESOP, Ameritrust borrowed $71.7 million from several
institutional investors through the placement of unsecured notes totaling $22.8
million (the "8.33% Notes") and $48.9 million (the "8.48% Notes"). The interest
on those notes totaled $6.0 million in each of the years 1993, 1992, and 1991.
The ESOP trustee used the proceeds to purchase 5,847,102 shares of Ameritrust
Common Stock. These shares, as converted in the merger with Society, are held by
the ESOP trustee for matching employee contributions to the Plan. The net
difference between the cost of the treasury shares sold to the ESOP trustee and
their market value was recorded as a reduction to retained earnings. Except for
the repayment schedule, the loans to the ESOP trustee are on substantially
similar terms as the borrowings from the institutional investors and, in
addition, are secured by the unallocated shares held by the ESOP trustee. The
ESOP trustee will repay the loans from Society using corporate contributions
made by the Plan for that purpose and dividends on the Common Shares acquired
with the loans. The amount of dividends on the ESOP shares used for debt service
by the ESOP trustee totaled $3.9 million in 1993, $3.1 million in 1992, and $1.8
million in 1991. As contributions and dividends are received, a portion of the
shares acquired with the loans will be allocated to Plan participants. Interest
income recognized on loans to the ESOP trustee is netted against the interest
expense incurred on the notes payable to the institutional investors. Society's
receivable from the ESOP trustee, representing deferred compensation to the
Corporation's employees, has been recorded as a separate reduction of
shareholders' equity.
Society National Bank, Society's lead bank, issued $200 million of 7.85%
Subordinated Notes on November 3, 1992, and $200 million of 6.75% Subordinated
Notes on June 16, 1993. The Bank issued a 10% Note in connection with the sale
of branch offices and loans resulting from the merger with Ameritrust
Corporation. None of these notes may be redeemed prior to maturity.
Industrial revenue bonds issued by banking subsidiaries have varying maturities
extending to the year 2009 and had weighted average annual interest rates of
7.14% and 7.19%, respectively, at December 31, 1993 and 1992.
Other long-term debt at December 31, 1993 and 1992, consisted of capital lease
obligations and various secured and unsecured obligations of corporate
subsidiaries and had weighted average annual interest rates of 13.54% and
10.14%, respectively.
The 8.625% Notes were redeemed at par plus accrued interest on June 30, 1993,
and the 9.56% Note was assumed by the purchaser in connection with the sale of
Ameritrust Texas Corporation on September 15, 1993.
At December 31, 1993, the aggregate of annual maturities for all long-term debt
obligations for the years 1994 through 1998 were $.5 million, $148.5 million,
$147.2 million, $7.2 million, and $ 8.3 million, respectively.
Long-term debt qualifying as supplemental capital for purposes of calculating
Tier II Capital under Federal Reserve Board Guidelines amounted to $636.5
million and $520.9 million at December 31, 1993, and 1992, respectively.
NOTE 9. SHAREHOLDERS' EQUITY
PREFERRED STOCK AND COMMON SHARES
In August 1989, Society's Board of Directors adopted a Shareholder Rights Plan
("Rights") under which each shareholder received one Right for each Society
Common Share. Each Right represents the right to purchase a Common Share of
Society at a price of $65. The Rights become exercisable 20 days after a person
or group acquires 15 percent or more of the outstanding shares or commences a
tender offer that could result in such an ownership interest. Until the Rights
become exercisable, they will trade with the Common Shares,
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54
and any transfer of the Common Shares will also constitute a transfer of
associated Rights. When the Rights become exercisable, they will begin to trade
separate and apart from the Common Shares. Twenty days after the occurrence of
certain "Flip-In Events," each Right will become the right to purchase a Common
Share of Society for the then par value per share (now $1 per share) and the
Rights held by a 15 percent or more shareholder will become void. Society may
redeem these Rights at its option at $.005 per Right subject to certain
limitations. Unless redeemed earlier, the Rights expire on September 12, 1999.
On October 1, 1993, Society amended the Rights so that the pending merger with
old KeyCorp would not activate the provisions of the Rights.
On March 1, 1993, Society redeemed the 1.2 million outstanding shares of
Fixed/Adjustable Rate Cumulative Preferred Stock at 103% of its stated value
($60 million), plus accumulated but unpaid dividends.
Society effected a two-for-one stock split on March 22, 1993, by means of a 100%
stock dividend. All relevant Common Share amounts, per Common Share amounts and
related data in this report have been adjusted to reflect this split.
In connection with the merger with old KeyCorp, at a special meeting held
February 16, 1994, shareholders increased the authorized number of shares of
Society to 926.4 million, of which 1.4 million are shares of 10% Cumulative
Preferred Stock, Class A, par value $5 per share; 25.0 million are shares of
Preferred Stock, par value $1 per share; and 900.0 million are Common Shares,
par value $1 per share.
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
Society maintains various incentive compensation plans which provide for its
ability to grant stock options, stock appreciation rights, limited stock
appreciation rights, restricted stock and performance shares to selected
employees. Generally, the terms of these plans stipulate that the exercise price
of options may not be less than the fair market value of Society's Common Shares
at the date the options are granted. Options granted expire not later than ten
years and one month from the date of grant. Several option plans have been
acquired through mergers. These plans have expired or were terminated, but
unexercised options granted under the plans remain outstanding. At December 31,
1993 and 1992, options for Common Shares available for future grant totaled
1,237,965 and 1,233,958, respectively.
The terms of Society's plans stipulate that stock appreciation rights may only
be granted in tandem with stock options. The appreciation rights have the same
terms as do the options, except that, upon exercise, the holder may receive
either cash or shares for the excess of the current market value of Society's
Common Shares over the option's exercise price. Upon exercise of a stock
appreciation right, the related option is surrendered. During 1993, all stock
appreciation rights for which exercisability was limited to a period following a
change in control of the Corporation were cancelled.
The following table presents a summary of pertinent information with respect to
Society's stock options and stock appreciation rights.
STOCK OPTIONS
1993 1992
------------------------- -------------------------
SHARES OPTION PRICE SHARES OPTION PRICE
---------- ------------ ---------- ------------
Outstanding at beginning of year........... 5,161,748 $ 3.89-28.25 3,924,258 $ 2.49-25.87
Granted.................................... 1,218,500 32.41-33.94 2,654,800 28.25
Assumed in acquisition..................... 9,008 4.69- 7.61
Exercised or surrendered................... 656,428 3.89-28.25 1,288,658 2.49-22.92
Lapsed or cancelled........................ 59,515 14.44-33.94 128,652 12.30-28.25
---------- ----------
Outstanding at end of year (1)............. 5,673,313 4.79-33.94 5,161,748 3.89-28.25
---------- ----------
---------- ----------
Exercisable at end of year (2)............. 3,192,913 4.79-28.25 2,592,548 3.89-25.87
---------- ----------
---------- ----------
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STOCK APPRECIATION RIGHTS
1993 1992
------------------------- -------------------------
SHARES OPTION PRICE SHARES OPTION PRICE
---------- ------------ ---------- ------------
Outstanding at beginning of year........... 2,028,240 $11.69-28.25 1,828,708 $ 6.78-20.88
Granted.................................... 222,000 33.94 920,000 28.25
Exercised or surrendered................... 36,400 11.69-20.88 672,468 6.78-20.88
Lapsed or cancelled........................ 2,169,840 11.69-33.94 48,000 28.25
---------- ----------
Outstanding at end of year (1)............. 44,000 11.69 2,028,240 11.69-28.25
---------- ----------
---------- ----------
Exercisable at end of year................. 44,000 11.69 49,000 11.69
---------- ----------
---------- ----------
(1) Ordinary options outstanding at December 31, 1992 include 1,979,240 shares
granted in tandem with Limited SARs.
(2) Ordinary options exercisable at December 31, 1992 include 1,107,240 shares
granted in tandem with Limited SARs.
NOTE 10. MERGER AND INTEGRATION CHARGES
Merger and integration charges of $53.9 million ($39.6 million after tax, $.33
per Common Share), $50.0 million ($34.2 million after tax, $.29 per Common
Share), and $93.8 million ($68.2 million after tax, $.59 per Common Share) were
recorded in 1993, 1992, and 1991, respectively. The 1993 charges were incurred
in connection with the merger with old KeyCorp, while the 1992 and 1991 amounts
related to the merger with Ameritrust. The merger and integration charges
directly attributable to the old KeyCorp merger included accruals for merger
expenses, consisting primarily of investment banking and other professional fees
directly related to the merger ($12.6 million); severance payments and other
employee costs ($17.6 million); systems and facilities costs ($16.7 million);
and other costs incident to the merger ($7.0 million). These charges were
recorded by the parent company in the fourth quarter of 1993 at which time
management determined that it was probable that a liability for such charges had
been incurred and could be reasonably estimated. The merger and integration
charges recorded in connection with the Ameritrust merger in 1992 and 1991 were
similar in nature.
Although no assurance can be given, it is also expected that, as a result of the
old KeyCorp merger, cost savings will be achieved by the combined institution at
an annual rate of approximately $100 million by the end of the first quarter of
1995. These cost savings are anticipated to result from the integration of
operations and from efficiencies in certain combined lines of business.
Management presently expects that approximately 50% of the annual cost savings
will be achieved in 1994.
NOTE 11. EMPLOYEE BENEFIT PLANS
PENSION PLANS
Society and its subsidiaries have noncontributory pension plans covering
substantially all employees. Benefits paid from these plans are based on age,
years of service and compensation prior to retirement or termination and are
determined in accordance with defined formulas. The Corporation's policy is to
fund pension expense in accordance with ERISA standards.
Net pension income included the following components:
YEAR ENDED DECEMBER 31,
-----------------------------
(in thousands) 1993 1992 1991
- ---------------------------------------------------------------- ------- ------- -------
Service cost.................................................... $ 8,654 $ 9,961 $12,671
Interest cost................................................... 18,178 16,516 17,307
Actual return on plan assets.................................... (29,857) (34,427) (66,949)
Net amortization and deferral................................... (6,706) (1,772) 34,322
------- ------- -------
Net pension income......................................... $(9,731) $(9,722) $(2,649)
------- ------- -------
------- ------- -------
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The following table sets forth the funded status of these plans and the amounts
recognized in Society's consolidated balance sheets:
DECEMBER 31,
--------------------
(in thousands) 1993 1992
- ------------------------------------------------------------------------ -------- --------
Accumulated benefit obligations, including vested benefits of $234,050
and $187,670.......................................................... $244,498 $193,955
-------- --------
-------- --------
Fair value of plan assets, primarily listed stocks and fixed income
securities............................................................ $360,995 $348,433
Projected benefit obligations........................................... 268,421 210,789
-------- --------
Excess of fair value of plan assets over projected benefit
obligations....................................................... 92,574 137,644
Unrecognized net loss (gain)............................................ 42,392 (10,704)
Unrecognized prior service benefit...................................... (14,352) (17,701)
Unrecognized net asset at January 1, 1986, being recognized over 15
years................................................................. (26,824) (32,314)
-------- --------
Prepaid pension cost............................................... $ 93,790 $ 76,925
-------- --------
-------- --------
The weighted average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of projected benefit
obligations were 7.50% and 4.00%, respectively, at December 31, 1993, and 8.50%
and 4.50%, respectively, at December 31, 1992. The weighted average expected
long-term rate of return on pension assets used in determining net pension
income was 9.50% for 1993, 9.00% for 1992 and 9.16% for 1991.
In 1993, the Corporation recognized curtailment and settlement gains of $2.9
million resulting from the divestiture of ATC. Such amount was included in the
net gain from that divestiture. In 1992, the Corporation recognized curtailment
gains of $7.2 million resulting from merger-related staff reductions. A portion
of the retirement obligations associated with these reductions were settled by
lump-sum cash distributions which resulted in settlement gains of $1.4 million
and $3.0 million in 1993 and 1992, respectively. Both the curtailment and
settlement gains related to the merger-related staff reductions are included in
other noninterest income.
OTHER POSTRETIREMENT BENEFIT PLANS
The Corporation provides postretirement health care and life insurance benefits
to employees who retire at age 55 or later and have at least 10 years of
service. Additionally, such benefits are provided to participants in the
Corporation's long term disability plan. The postretirement health care plan is
unfunded and contributory, with retirees' contributions adjusted annually to
reflect certain cost-sharing provisions and benefit limitations. The
postretirement life insurance plan is noncontributory. Life insurance benefits
for participants who retired before 1993 are generally provided for through
outside insurance carriers. Life insurance benefits for employees retiring in
1993 or later years are to be paid from the Corporation's pension plan and are,
accordingly, included in the determination of the pension benefit obligation.
Effective January 1, 1993, the Corporation adopted the provisions of SFAS No.
106, "Employers Accounting for Postretirement Benefits Other Than Pensions."
This statement requires that employers recognize the cost of providing
postretirement benefits over the employees' active service period to the date
they attain full eligibility for such benefits. Postretirement benefits costs
for 1992 and 1991, which were recorded on a cash basis, have not been restated.
Net postretirement benefits expense was $11.9 million in 1993, including $4.7
million due to adoption of the new standard, $5.2 million in 1992 and $4.8
million in 1991.
Net postretirement benefits expense included the following components:
YEAR ENDED
(in thousands) DECEMBER 31, 1993
---------------------------------------------------------------- -----------------
Service cost.................................................... $ 1,627
Interest cost................................................... 6,415
Amortization of transition obligation over 20 years............. 3,848
-----------------
Net postretirement benefits expense........................ $ 11,890
-----------------
-----------------
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The following table sets forth the unfunded status of the postretirement benefit
plans reconciled with the amount recognized in Society's consolidated balance
sheet:
(in thousands) DECEMBER 31, 1993
---------------------------------------------------------------- -----------------
Accumulated unfunded postretirement benefits obligation:
Retirees...................................................... $ (63,953)
Fully eligible active plan participants....................... (6,998)
Other active plan participants................................ (14,722)
-----------------
(85,673)
Unrecognized transition obligation.............................. 72,699
Unrecognized net loss........................................... 6,166
-----------------
Accrued postretirement benefits cost....................... $ (6,808)
-----------------
-----------------
The assumed 1994 health care cost trend rate for Medicare-eligible retirees was
11.0%, while that for non-Medicare-eligible retirees was 13.0%. Both rates are
assumed to gradually decrease to 5.5% by the year 2009 and remain constant
thereafter. Increasing the assumed health care cost trend rates by one
percentage point in each future year would have an immaterial impact on
postretirement benefits cost due to cost-sharing provisions and benefit
limitations. The weighted average discount rate used in determining the
accumulated postretirement benefit obligation was 7.5% at December 31, 1993.
EMPLOYEE STOCK PURCHASE AND SAVINGS PLAN
Substantially all of the Corporation's employees are covered under a stock
purchase and savings plan that is qualified under Section 401(k) of the Internal
Revenue Code. Under provisions of this plan, the Corporation matches 100% of the
employee's pre-tax contribution, up to a maximum of 6% of eligible compensation,
with an equivalent amount of Society's Common Shares. Under an annual
discretionary profit sharing component, employees can receive additional
matching employer contributions from the Corporation based on a formula
established each year by Society's Board of Directors. Total expense associated
with this plan was $24.0 million, $18.1 million and $19.7 million in 1993, 1992,
and 1991, respectively.
POSTEMPLOYMENT BENEFITS
The Corporation adopted the provisions of SFAS No. 112, "Employers' Accounting
for Postemployment Benefits," during 1993. This standard requires that employers
who provide benefits to former or inactive employees after employment but before
retirement recognize a liability for such benefits if specified conditions are
met. Adoption of this standard increased noninterest expense by $4.0 million.
Postemployment benefits for 1992 and 1991, which were recorded on a cash basis,
were not restated.
NOTE 12. INCOME TAXES
During the first quarter of 1992, the Corporation adopted the provisions of SFAS
No. 109, "Accounting for Income Taxes." The adoption of this new standard did
not have a material impact on Society's consolidated financial condition or
results of operations.
At December 31, 1993, the net deferred tax liability totaled $146.0 million
compared to $80.2 million at December 31, 1992. The gross deferred tax liability
was $386.0 million at December 31, 1993, and $321.8 million at the prior
year-end. In both periods, deferred taxes relating to lease financing activities
comprised approximately 75% of the balance. Gross deferred tax assets were
$240.0 million and $241.6 million at December 31, 1993 and 1992, respectively,
and amounts related to loan loss provisions comprised approximately 70% of the
balance in both periods.
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The current and deferred components of the provision for income taxes were as
follows:
YEAR ENDED DECEMBER 31,
---------------------------------
(in thousands) 1993 1992 1991
- --------------------------------------------- -------- -------- -------
Current payable:
Federal................................. $126,601 $ 67,632 $18,802
State/Local............................. 4,061 1,490 1,407
-------- -------- -------
130,662 69,122 20,209
Deferred:
Federal................................. 55,707 67,577 12,834
State/Local............................. 1,104 695 163
-------- -------- -------
56,811 68,272 12,997
-------- -------- -------
Provision for income taxes.............. $187,473 $137,394 $33,206
-------- -------- -------
-------- -------- -------
Income taxes on securities transactions are provided for at the statutory income
tax rate and included in the current portion of the provision.
The following is a reconciliation of the provision for income taxes to the
amount computed by applying the Federal statutory tax rate of 35% in 1993, and
34% in 1992 and 1991 to income before income taxes.
YEAR ENDED DECEMBER 31,
---------------------------------
(in thousands) 1993 1992 1991
- --------------------------------------------- -------- -------- -------
Tax provision at statutory rate.............. $187,121 $149,125 $37,293
Adjustment due to:
Tax-exempt interest income.............. (13,852) (18,335) (24,124)
Leveraged leases and investment tax
credits............................... (2,014) (2,432) (2,244)
State and local income taxes (net of
Federal tax benefit).................. 3,357 1,442 1,036
Amortization of goodwill and other
intangible assets..................... 6,236 7,439 7,041
Nondeductible merger expenses........... 4,548 814 6,095
Other, net.............................. 2,077 (659) 8,109
-------- -------- -------
Provision for income taxes................... $187,473 $137,394 $33,206
-------- -------- -------
-------- -------- -------
At December 31, 1993, approximately $15.4 million of alternative minimum tax
credit carryovers existed for Federal income tax purposes only. These carryovers
have no fixed expiration date.
NOTE 13. COMMITMENTS, CONTINGENT LIABILITIES, AND OTHER DISCLOSURES
LEGAL PROCEEDINGS
In the ordinary course of business, Society and its subsidiaries are subject to
legal actions which involve claims for substantial monetary relief. Based on
information presently available to management and the Corporation's counsel,
management does not believe that any legal actions, individually or in the
aggregate, will have a material adverse effect on Society's consolidated
financial condition.
RESTRICTIONS ON CASH, DUE FROM BANKS, SUBSIDIARY DIVIDENDS AND LENDING
ACTIVITIES
Under the provisions of the Federal Reserve Act, depository institutions are
required to maintain certain average balances in the form of cash or
noninterest-bearing balances with the Federal Reserve Bank. Average reserve
balances aggregating $479.5 million in 1993 were maintained in fulfillment of
these requirements.
The principal source of income for the parent company is dividends from its
subsidiary banks. Such dividends are subject to certain restrictions as set
forth in the national and state banking laws and regulations. At December 31,
1993, undistributed earnings of $76.0 million were free of such restrictions and
available for the payment of dividends to the parent company. Loans and advances
from banking subsidiaries to the parent company are also limited by law and are
required to be collateralized.
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NOTE 14. FINANCIAL INSTRUMENTS
FAIR VALUE DISCLOSURES
The following disclosures are made in accordance with the provisions of SFAS No.
107, "Disclosures About Fair Value of Financial Instruments," which requires the
disclosure of fair value information about both on-and off-balance sheet
financial instruments where it is practicable to estimate that value. Fair value
is defined in SFAS No. 107 as the amount at which an instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale. It is not the Corporation's intent to enter into
such exchanges.
Financial instruments, as defined in SFAS No. 107, include the categories
presented on page 58 and exclude related intangible assets such as customer
relationships, mortgage servicing rights and core deposit intangibles. These
intangible assets, if considered an integral part of the related financial
instruments, would increase their fair values.
In cases where quoted market prices were not available, fair values were based
on estimates using present value or other valuation methods, as described below.
The use of different assumptions (e.g., discount rates and cash flow estimates)
and estimation methods could have a significant effect on fair value amounts.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts the Corporation could realize in a current market exchange. Because
SFAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements, any aggregation of the fair value
amounts presented would not represent the underlying value of the Corporation.
DECEMBER 31, 1993 DECEMBER 31, 1992
--------------------------- ---------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
(in thousands) AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- ------------------------------------- ----------- ----------- ----------- -----------
ASSETS
Cash and due from banks............ $ 1,375,645 $ 1,375,645 $ 1,345,085 $ 1,345,085
Short-term investments............. 67,931 67,931 778,875 778,875
Mortgage loans held for sale....... 321,703 321,703 170,300 170,300
Securities available for sale...... 738,078 781,664 1,122,224 1,149,577
Investment securities.............. 5,653,227 5,735,240 4,484,381 4,568,734
Loans.............................. 17,897,647 18,041,907 16,031,488 16,127,970
LIABILITIES
Deposits........................... $19,880,704 $19,968,500 $18,658,000 $18,746,149
Federal funds purchased and
securities sold under agreements
to repurchase................... 2,353,740 2,353,740 2,834,105 2,834,105
Other short-term borrowings........ 1,175,752 1,175,752 276,357 276,357
Long-term debt..................... 952,657 1,036,881 886,052 937,169
The following methods and assumptions were used in estimating the fair values of
financial instruments presented in the preceding table and in the following
paragraphs. For financial instruments with a remaining average life to maturity
of less than six months, carrying amounts were used as an approximation of fair
value. The carrying amounts reported for cash and due from banks, and short-term
investments are their fair values. The carrying value of mortgage loans held for
sale approximates fair value. Securities available for sale and investment
securities were valued based on quoted market prices. Where quoted market prices
were unavailable, fair values were based on quoted market prices of similar
instruments. A discounted cash flow model was used to estimate the fair values
for fixed-rate commercial, installment, construction and commercial real estate
loans. Carrying amounts for variable rate loans, including loans with no stated
maturity (e.g., credit card loans and home equity lines of credit), were used as
a reasonable approximation of their fair values. Residential real estate loans
and student loans held for sale were valued based on quoted market prices of
similar loans offered or sold in recent sale or securitization transactions.
Lease financing receivables, although excluded from the scope of SFAS No. 107,
were included in the estimated fair value for loans at their carrying amount.
The fair values of certificates of deposit and of long-term debt were estimated
based on discounted cash flows. Carrying amounts reported for other deposits and
short-term borrowings were used as a
57
60
reasonable approximation of their fair values. Interest rate swaps were valued
based on discounted cash flow models and had a fair value of $67.8 million and
$78.6 million at December 31, 1993 and 1992, respectively.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Corporation, mainly through its affiliate banks, is party to various
financial instruments with off-balance sheet risk. The banks use these financial
instruments in the normal course of business to meet financing needs of their
customers and to effectively manage their exposure to interest rate risk. The
financial instruments used include commitments to extend credit, standby letters
of credit, interest rate swap agreements, forward contracts, futures and options
on financial futures, and interest rate cap and floor agreements.
These instruments involve, to varying degrees, credit and interest rate risks in
excess of amounts recognized in Society's consolidated balance sheet. Credit
risk is the possibility that a counterparty to a financial instrument will be
unable to perform its contractual obligations. Interest rate risk is the
possibility that, due to changes in economic conditions, the Corporation's net
interest income will be adversely affected.
The Corporation mitigates its exposure to credit risk through internal controls
over the extension of credit. These controls include the process of credit
approval and review, the establishment of credit limits, and, when deemed
necessary, securing collateral. The Corporation manages its exposure to interest
rate risk, in part, by using off-balance sheet instruments to offset existing
interest rate risk of its assets and liabilities, and by setting variable rates
of interest on contingent extensions of credit.
The following is a summary of the contractual or notional amount of each
significant class of off-balance sheet financial instruments outstanding. The
Corporation's maximum possible accounting loss from commitments to extend credit
and from standby letters of credit equals the contractual amount of these
instruments. The notional amount represents the total dollar volume of
transactions and is significantly greater than the amount at risk.
DECEMBER 31,
---------------------------
(in thousands) 1993 1992
- ---------------------------------------------------------------- ----------- -----------
FINANCIAL INSTRUMENTS WHOSE CONTRACTUAL AMOUNTS REPRESENT CREDIT
AND/OR MARKET RISK
Loan commitments:
Credit card lines............................................. $ 3,095,458 $ 2,790,308
Home equity................................................... 1,628,273 1,115,172
Commercial real estate and construction....................... 654,225 331,673
Other......................................................... 5,127,700 4,694,235
----------- -----------
Total loan commitments..................................... 10,505,656 8,931,388
Other commitments:
Standby letters of credit..................................... 899,539 696,633
Commercial letters of credit.................................. 236,832 16,039
----------- -----------
Total loan and other commitments........................... $11,642,027 $ 9,644,060
----------- -----------
----------- -----------
FINANCIAL INSTRUMENTS WHOSE NOTIONAL OR CONTRACTUAL AMOUNTS
EXCEED THE AMOUNT OF CREDIT AND/OR MARKET RISK
Mortgage loan sale commitments.................................. $ 166,112 $ 104,600
Mortgage loan options........................................... 23,000 13,000
Futures and options on financial futures........................ 688,541 428,742
Interest rate swap agreements................................... 6,454,000 5,457,363
Interest rate cap and floor agreements.......................... 102,026 177,630
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 many of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent
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61
future cash requirements of the Corporation. Society evaluates each customer's
creditworthiness on a case-by-case basis.
Standby letters of credit are conditional commitments issued by the Corporation
to guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
Society's mortgage banking subsidiary enters into forward sale agreements and
option contracts to hedge against adverse movements in interest rates on
mortgage loans held for sale. Forward sale agreements commit the subsidiary to
deliver mortgage loans in future periods; option contracts allow the subsidiary
to purchase mortgage loans at a specified price, in future periods.
The banks enter into interest rate swap agreements primarily to manage interest
rate risk and to accommodate the business needs of customers. Under a typical
swap agreement, one party pays a fixed rate of interest based on a notional
amount to a second party, which pays to the first party a variable rate of
interest based on the same notional amount. The swaps have an average maturity
of 2.4 years, with selected swaps having fixed maturity dates through 2003. The
following is a summary of the notional amounts of outstanding interest rate swap
agreements:
DECEMBER 31, 1993
---------------------------------------------------
RECEIVE PAY FORWARD-
(in millions) FIXED FIXED BASIS STARTING TOTAL
- --------------------------------------------- ------- ----- ----- -------- ------
"Portfolio".................................. $4,490 $100 $150 $500 $5,240
Customer..................................... 623 561 30 1,214
------- ----- ----- -------- ------
Total interest rate swaps............... $5,113 $661 $150 $530 $6,454
------- ----- ----- -------- ------
------- ----- ----- -------- ------
The banks enter into interest rate cap and floor agreements in the management of
their interest rate risk and to accommodate the business needs of customers.
These financial instruments transfer interest rate risk at predetermined levels.
The banks receive a fee as compensation for writing interest rate caps and
floors. The risk from writing interest rate caps and floors is minimized by the
banks through offsetting transactions.
Financial futures contracts and options on financial futures provide for the
delayed delivery or purchase of securities, interest rate instruments or foreign
currency. The banks enter into forward contracts to manage their interest rate
risk and in connection with customer transactions, as well as to minimize the
interest rate risk exposure of mortgage banking activities.
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NOTE 15. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
Condensed financial information for Society Corporation (Parent Company only) is
as follows:
CONDENSED BALANCE SHEETS
Society Corporation (Parent Company)
DECEMBER 31,
-------------------------
(in thousands) 1993 1992
- ------------------------------------------------------------- ---------- ----------
ASSETS
Cash and due from bank subsidiaries........................ $ 56 $ 46
Interest-bearing deposits with bank subsidiaries........... 481,000 344,000
Securities purchased from bank subsidiaries under resale
agreements.............................................. 5,466 603
Other securities........................................... 1,502 13,786
Loans and advances to nonbank subsidiaries................. 56,766 79,833
Investments in subsidiaries:
Bank subsidiaries....................................... 1,790,878 1,882,694
Bank holding company subsidiaries....................... 80,824 50,986
Nonbank subsidiaries.................................... 179,880 136,906
Other assets............................................... 127,515 87,167
---------- ----------
TOTAL ASSETS............................................ $2,723,887 $2,596,021
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued interest and other liabilities..................... $ 180,006 $ 89,762
Long-term debt............................................. 505,295 638,156
---------- ----------
Total liabilities....................................... 685,301 727,918
Shareholders' equity (1)................................... 2,038,586 1,868,103
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $2,723,887 $2,596,021
---------- ----------
---------- ----------
(1) See Consolidated Statements of Shareholders' Equity on page 41.
CONDENSED STATEMENTS OF INCOME
Society Corporation (Parent Company)
YEAR ENDED DECEMBER 31,
----------------------------------
in thousands 1993 1992 1991
- ----------------------------------------------------------- -------- -------- --------
INCOME
Dividends from:
Bank subsidiaries..................................... $501,130 $ 63,653 $269,957
Bank holding company subsidiaries..................... 8,479 2,695 57,244
Nonbank subsidiaries.................................. 1,978 2,414 10,354
Interest on interest-bearing deposits with bank
subsidiaries.......................................... 10,413 7,832 3,420
Interest on securities purchased from bank subsidiaries
under resale agreements............................... 113 1,089 6,399
Interest on loans and advances to nonbank subsidiaries... 2,093 5,304 4,521
Gain on sale of subsidiary............................... 29,410
Other income............................................. 1,608 8,792 852
-------- -------- --------
Total income.......................................... 555,224 91,779 352,747
-------- -------- --------
EXPENSE
Interest expense......................................... 44,531 35,151 33,903
Merger and integration charges........................... 53,906 34,680 18,139
Other noninterest expense................................ 107,562 49,296 44,556
-------- -------- --------
Total expense......................................... 205,999 119,127 96,598
-------- -------- --------
Income (loss) before income taxes and equity in
undistributed net (loss) income of subsidiaries....... 349,225 (27,348) 256,149
Credit for income taxes.................................... (45,980) (32,686) (22,455)
-------- -------- --------
Income before equity in undistributed net (loss)
income of subsidiaries.............................. 395,205 5,338 278,604
Equity in undistributed net (loss) income of
subsidiaries............................................. (48,046) 295,872 (202,126)
-------- -------- --------
NET INCOME............................................ $347,159 $301,210 $ 76,478
-------- -------- --------
-------- -------- --------
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CONDENSED STATEMENTS OF CASH FLOWS
Society Corporation (Parent Company)
YEAR ENDED DECEMBER 31,
----------------------------------
(in thousands) 1993 1992 1991
- ------------------------------------------------------ -------- -------- --------
OPERATING ACTIVITIES
Net income.......................................... $347,159 $301,210 $ 76,478
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income tax credit....................... (21,711) (1,215) (1,774)
Gain on sale of subsidiary....................... (29,410)
Net (increase) decrease in other assets.......... (20,024) (30,337) 238
Net increase (decrease) in other liabilities..... 56,829 (2,023) 6,591
Net increase in accrued merger and integration
charges........................................ 37,176 18,930 12,114
Amortization of intangibles...................... 1,546 1,851 1,691
Equity in undistributed net loss (income) of
subsidiaries................................... 48,046 (295,872) 202,126
Other operating activities, net.................. 3,377 9,076 2,282
-------- -------- --------
Net cash provided by operating activities............. 422,988 1,620 299,746
INVESTING ACTIVITIES
Proceeds from maturities of investment securities... 419 2,236
Purchases of investment securities.................. (471) (7,334) (1,374)
Net (increase) decrease in security resale
agreements (1)................................... (4,863) 237,974 (180,029)
Net (increase) decrease in interest-bearing deposits
(1).............................................. (137,000) (273,071) 3,251
Net decrease (increase) in loans (1)................ 13,782 10,307 (22,531)
Proceeds from sale of subsidiary.................... 148,054
Purchase of subsidiary.............................. (137,431)
Increase in investments in subsidiaries............. (6,460) (24,893) (2,786)
Other investing activities, net..................... (816) (2,442) (88)
-------- -------- --------
Net cash used in investing activities................. (124,786) (59,459) (201,321)
FINANCING ACTIVITIES
Net decrease in commercial paper.................... (33,878) (19,678)
Proceeds from issuance of long-term debt............ 110,600 197,655
Payments on long-term debt.......................... (229,132) (11,660) (9,030)
Purchase of treasury stock.......................... (8,340)
Redemption of preferred stock....................... (61,800)
Net adjustment related to pooling of interests...... (515)
Proceeds from exercise of stock options............. 12,047 20,104 27,003
Cash dividends...................................... (132,587) (113,871) (90,714)
Other financing activities, net..................... 2,680
-------- -------- --------
Net cash (used in) provided by financing activities... (298,192) 57,835 (100,759)
-------- -------- --------
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS........ 10 (4) (2,334)
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR.......... 46 50 2,384
-------- -------- --------
CASH AND DUE FROM BANKS AT END OF YEAR................ $ 56 $ 46 $ 50
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash interest payments.............................. $ 45,713 $ 35,285 $ 34,357
Cash income tax payments............................ 121,783 95,156 13,874
(1) Transactions are primarily with subsidiaries.
61
64
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is set forth in the sections captioned
"ELECTION OF DIRECTORS" and "EXECUTIVE OFFICERS" contained in KeyCorp's
definitive Proxy Statement for the 1994 Annual Meeting of Shareholders to be
held May 19, 1994, and is incorporated herein by reference. KeyCorp expects to
file its proxy statement on or about April 20, 1994.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth in the section captioned "THE
BOARD OF DIRECTORS AND ITS COMMITTEES" and "COMPENSATION OF EXECUTIVE OFFICERS"
contained in KeyCorp's definitive Proxy Statement for the 1994 Annual Meeting of
Shareholders to be held on May 19, 1994, and is incorporated herein by
reference. The information set forth in the sections captioned "COMPENSATION AND
ORGANIZATION AND EXECUTIVE EQUITY COMPENSATION COMMITTEE JOINT REPORT ON
EXECUTIVE COMPENSATION" and "KEYCORP STOCK PRICE PERFORMANCE" contained in
KeyCorp's definitive Proxy Statement for the 1994 Annual Meeting of Shareholders
to be held May 19, 1994, is not incorporated by reference in this report on Form
10-K. KeyCorp expects to file its proxy statement on or about April 20, 1994.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth in the section captioned
"SHARE OWNERSHIP" contained in KeyCorp's definitive Proxy Statement for the 1994
Annual Meeting of Shareholders to be held May 19, 1994, and is incorporated
herein by reference. KeyCorp expects to file its proxy statement on or about
April 20, 1994.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth in the section captioned
"ELECTION OF DIRECTORS" contained in KeyCorp's definitive Proxy Statement for
the 1994 Annual Meeting of Shareholders to be held May 19, 1994, and is
incorporated herein by reference. KeyCorp expects to file its proxy statement on
or about April 20, 1994.
62
65
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS
The following consolidated financial statements of Society Corporation and
Subsidiaries, and the auditor's report thereon are included in Part II of this
report:,
PAGE
--------
Consolidated Financial Statements:
Report of Ernst & Young, Independent Auditors...................... 38
Consolidated Balance Sheets at December 31, 1993 and 1992.......... 39
Consolidated Statements of Income for the Years Ended December 31,
1993, 1992 and 1991............................................. 40
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1993, 1992 and 1991................................ 41
Consolidated Statements of Cash Flows for the Years Ended December
31, 1993, 1992 and 1991......................................... 42
Notes to Consolidated Financial Statements......................... 43
(A)(1)(A) SUPPLEMENTAL FINANCIAL STATEMENTS
On March 1, 1994, KeyCorp ("old KeyCorp") merged into and with Society
Corporation, which was the surviving corporation of the merger under the name
KeyCorp. Because the merger occurred subsequent to December 31, 1993, the
financial statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations included in this Form 10-K do not give
effect to the restatement to include old KeyCorp's financial results. The
following Supplemental Financial Statements restate the Corporation's 1993 and
prior years' financial statements, giving effect to the merger with old KeyCorp.
63
66
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
KeyCorp
We have audited the accompanying supplemental consolidated balance
sheets of KeyCorp and subsidiaries as of December 31, 1993 and 1992, and the
related supplemental consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1993. The supplemental financial statements give retroactive
effect to the merger of KeyCorp and Society Corporation on March 1, 1994, which
has been accounted for as a pooling of interests as described in the notes to
the supplemental financial statements. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the supplemental financial statements referred to above present
fairly, in all material respects, the consolidated financial position of KeyCorp
and subsidiaries at December 31, 1993 and 1992, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1993, after giving retroactive effect to the merger of
KeyCorp and Society Corporation as described in the notes to the supplemental
financial statements in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG
Cleveland, Ohio
March 1, 1994
64
67
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
KEYCORP AND SUBSIDIARIES
DECEMBER 31,
---------------------------
(dollars in thousands) 1993 1992
- ---------------------------------------------------------------- ----------- -----------
ASSETS
Cash and due from banks....................................... $ 2,777,438 $ 3,079,737
Short-term investments........................................ 107,219 985,502
Mortgage loans held for sale.................................. 1,325,338 938,541
Securities available for sale (market value: $1,794,845 and
$2,518,320)................................................ 1,726,828 2,458,641
Investment securities (market value: $11,340,206 and
$9,193,081)................................................ 11,122,093 8,976,300
Loans......................................................... 40,071,244 36,021,825
Less: Allowance for loan losses............................ 802,712 782,649
----------- -----------
Net loans................................................ 39,268,532 35,239,176
Premises and equipment........................................ 912,870 843,314
Other real estate owned....................................... 150,362 332,351
Intangible assets............................................. 549,348 601,620
Purchased mortgage servicing rights........................... 188,592 165,433
Other assets.................................................. 1,502,531 1,447,761
----------- -----------
TOTAL ASSETS............................................. $59,631,151 $55,068,376
----------- -----------
----------- -----------
LIABILITIES
Deposits in domestic offices:
Noninterest-bearing........................................ $ 8,826,300 $ 8,291,436
Interest-bearing........................................... 35,658,315 34,026,450
Deposits in foreign office -- interest-bearing................ 2,014,533 1,115,179
----------- -----------
Total deposits........................................... 46,499,148 43,433,065
Federal funds purchased and securities sold under agreements
to repurchase.............................................. 4,120,258 4,207,520
Other short-term borrowings................................... 1,776,192 874,887
Other liabilities............................................. 1,078,116 835,538
Long-term debt................................................ 1,763,870 1,790,078
----------- -----------
TOTAL LIABILITIES........................................ 55,237,584 51,141,088
SHAREHOLDERS' EQUITY
Preferred Stock, without par value; authorized 25,000,000
shares, none issued........................................ -- --
Cumulative Preferred Stock; authorized 10,000,000 shares:
Series A, $50 stated value; issued 479,394 shares.......... -- 23,970
Series B, $125 stated value; issued 1,280,000 shares....... 160,000 160,000
Fixed/Adjustable Rate Cumulative Preferred Stock, $50 stated
value; authorized and issued 1,200,000 shares.............. -- 60,000
Common Shares, $1 par value; authorized 400,000,000 shares;
issued 242,827,755 and 237,364,213 shares.................. 242,828 237,364
Capital surplus............................................... 1,433,861 1,336,556
Retained earnings............................................. 2,641,450 2,206,051
Loans to ESOP trustee......................................... (63,909) (65,478)
Treasury stock at cost(1,280,604 and 1,932,032 shares)........ (20,663) (31,175)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY............................... 4,393,567 3,927,288
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............... $59,631,151 $55,068,376
----------- -----------
----------- -----------
See notes to supplemental consolidated financial statements.
65
68
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
KEYCORP AND SUBSIDIARIES
YEAR ENDED DECEMBER 31,
----------------------------------------------
(dollars in thousands, except per share amounts) 1993 1992 1991
- ------------------------------------------------------ ------------ ------------ ------------
INTEREST INCOME
Loans............................................ $ 3,313,689 $ 3,254,085 $ 3,655,934
Mortgage loans held for sale..................... 74,062 59,392 46,990
Taxable investment securities.................... 556,381 676,908 678,221
Tax-exempt investment securities................. 107,363 119,788 126,263
Securities available for sale.................... 140,895 57,167 59,594
Short-term investments........................... 21,484 31,451 85,349
------------ ------------ ------------
Total interest income.......................... 4,213,874 4,198,791 4,652,351
------------ ------------ ------------
INTEREST EXPENSE
Deposits......................................... 1,233,331 1,468,974 2,135,651
Federal funds purchased and securities sold under
repurchase agreements.......................... 130,213 142,894 213,722
Other short-term borrowings...................... 44,451 31,165 74,498
Long-term debt................................... 126,902 107,085 95,519
------------ ------------ ------------
Total interest expense......................... 1,534,897 1,750,118 2,519,390
------------ ------------ ------------
NET INTEREST INCOME................................... 2,678,977 2,448,673 2,132,961
Provision for loan losses............................. 211,662 338,337 466,163
------------ ------------ ------------
Net interest income after provision for loan
losses...................................... 2,467,315 2,110,336 1,666,798
NONINTEREST INCOME
Trust income..................................... 244,646 250,788 235,757
Service charges on deposit accounts.............. 252,537 236,573 217,424
Mortgage banking income.......................... 93,626 88,700 74,323
Credit card fees................................. 73,466 80,947 71,403
Gains on certain asset sales..................... 29,410 22,906 23,975
Net securities gains............................. 28,319 14,627 18,939
Other income..................................... 279,702 230,652 207,440
------------ ------------ ------------
Total noninterest income....................... 1,001,706 925,193 849,261
------------ ------------ ------------
NONINTEREST EXPENSE
Personnel........................................ 1,100,724 1,013,644 925,328
Net occupancy.................................... 204,205 189,709 184,761
Equipment........................................ 161,281 151,615 134,074
FDIC insurance assessments....................... 98,707 96,179 84,661
Professional fees................................ 53,274 75,983 55,532
Merger and integration charges................... 118,718 92,716 93,828
Other expense.................................... 648,214 550,566 587,495
------------ ------------ ------------
Total noninterest expense...................... 2,385,123 2,170,412 2,065,679
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE................................... 1,083,898 865,117 450,380
Income taxes..................................... 373,972 279,632 136,684
------------ ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGE.............................................. 709,926 585,485 313,696
Cumulative effect of accounting change........... -- 6,613 --
------------ ------------ ------------
NET INCOME............................................ $ 709,926 $ 592,098 $ 313,696
------------ ------------ ------------
------------ ------------ ------------
Net income applicable to Common Shares................ $ 691,829 $ 568,069 $ 297,473
Net income per Common Share:
Before cumulative effect of accounting change.... $ 2.89 $ 2.39 $ 1.31
After cumulative effect of accounting change..... 2.89 2.42 1.31
Weighted average Common Shares outstanding............ 239,775,188 235,004,821 227,116,237
See notes to supplemental consolidated financial statements.
66
69
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
KEYCORP AND SUBSIDIARIES
LOANS TO COMMON
(dollars in thousands, PREFERRED COMMON CAPITAL RETAINED ESOP SHARES IN
except per share amounts) STOCK SHARES SURPLUS EARNINGS TRUSTEE TREASURY
- ----------------------------------------------- --------- -------- ---------- ---------- -------- ---------
BALANCE AT JANUARY 1, 1991..................... $ 83,970 $163,833 $1,272,585 $1,758,110 $(67,226) $(185,596)
Net income................................... 313,696
Cash dividends on Common Shares ($.92 per
share)..................................... (60,449)
Cash dividends declared by pooled companies
prior to mergers:
Common stock............................. (108,837)
Preferred stock.......................... (16,257)
Issuance of Common Shares:
Public offerings -- 11,333,523 shares.... 11,334 159,151
Dividend reinvestment, stock option,
grant and purchase plans -- 1,961,946
net shares............................. 1,421 25,351 16,557
Common Shares dividend -- 2,515,692 shares... 2,516 35,641 (38,187)
Issuance of Series B Preferred Stock public
offering -- 1,280,000 shares............... 160,000 (5,344)
Tax benefits attributable to ESOP
dividends.................................. 622
Loan payments from ESOP trustee.............. 1,877
Purchase of 237,185 treasury shares.......... (8,340)
--------- -------- ---------- ---------- -------- ---------
BALANCE AT DECEMBER 31, 1991................... 243,970 179,104 1,487,384 1,848,698 (65,349) (177,379)
Adjustments relating to pooling of
interests.................................. (2 ) (132) (381)
Cancellation of treasury stock of pooled
company.................................... (3,300 ) (124,793) 128,093
Net income................................... 592,098
Cash dividends on Common Shares ($.98 per
share)..................................... (101,547)
Cash dividends on Fixed/Adjustable Rate
Cumulative Preferred Stock ($3.89 per
share)..................................... (4,670)
Cash dividends declared by pooled companies
prior to mergers:
Common stock............................. (109,667)
Preferred stock.......................... (19,359)
Issuance of Common Shares:
Acquisitions -- 838,307 shares........... 838 8,255
Dividend reinvestment, stock option,
grant and purchase plans -- 1,956,516
net shares............................. 1,395 25,171 18,111
Tax benefits attributable to ESOP
dividends.................................. 879
Loan payments from ESOP trustee.............. (129)
Two-for-one stock split effected by means of
a 100% stock dividend paid March 22,
1993....................................... 59,329 (59,329)
--------- -------- ---------- ---------- -------- ---------
BALANCE AT DECEMBER 31, 1992................... 243,970 237,364 1,336,556 2,206,051 (65,478) (31,175)
Net income................................... 709,926
Cash dividends on Common Shares ($1.12 per
share)..................................... (131,031)
Cash dividends on Fixed/Adjustable Rate
Cumulative Preferred Stock ($1.297 per
share)..................................... (1,556)
Cash dividends declared by pooled company
prior to merger:
Common stock............................. (125,992)
Preferred stock.......................... (17,059)
Issuance of Common Shares:
Acquisitions -- 4,494,543 shares......... 4,495 79,364
Dividend reinvestment, stock option,
grant and purchase plans -- 1,620,479
net shares............................. 969 19,741 10,512
Redemption of 1,200,000 shares of
Fixed/Adjustable Rate Cumulative Preferred
Stock...................................... (60,000 ) (1,800)
Redemption of 479,394 shares of Series A
Preferred Stock............................ (23,970 )
Tax benefits attributable to ESOP
dividends.................................. 1,111
Loan payments from ESOP trustee.............. 1,569
--------- -------- ---------- ---------- -------- ---------
BALANCE AT DECEMBER 31, 1993................... $160,000 $242,828 $1,433,861 $2,641,450 $(63,909) $ (20,663)
--------- -------- ---------- ---------- -------- ---------
--------- -------- ---------- ---------- -------- ---------
See notes to supplemental consolidated financial statements.
67
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SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
KEYCORP AND SUBSIDIARIES
YEAR ENDED DECEMBER 31,
-------------------------------------------
(in thousands) 1993 1992 1991
----------- ----------- -----------
OPERATING ACTIVITIES
Net income............................................................ $ 709,926 $ 592,098 $ 313,696
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses........................................... 211,662 338,337 466,163
Depreciation expense................................................ 110,852 104,330 84,394
Amortization of intangibles......................................... 58,050 61,692 57,574
Amortization of purchased mortgage servicing rights................. 56,566 29,607 20,410
Gains on certain asset sales........................................ (29,410) (22,906) (23,975)
Deferred income taxes............................................... 49,431 68,700 19,480
Net securities gains................................................ (28,319) (14,627) (18,939)
Net increase in mortgage loans held for sale........................ (386,797) (156,911) (348,238)
Gains on sales of mortgage servicing rights......................... (25,494) -- --
Losses from the sales of other real estate owned.................... 748 3,082 5,135
Other operating activities, net..................................... 123,149 (408,475) 287,982
----------- ----------- -----------
Net cash provided by operating activities...................... 850,364 594,927 863,682
INVESTING ACTIVITIES
Net (increase) decrease in loans...................................... (1,807,283) (99,078) 4,535
Purchases of investment securities.................................... (5,441,846) (5,266,842) (3,822,950)
Proceeds from sales of investment securities.......................... 142,092 662,221 1,102,695
Proceeds from prepayments and maturities of investment securities..... 3,709,134 3,425,344 2,039,757
Net decrease in securities available for sale......................... 795,686 173,444 101,805
Net decrease (increase) in short-term investments..................... 1,040,389 835,503 (558,454)
Purchases of premises and equipment................................... (172,157) (270,787) (134,620)
Proceeds from sales of premises and equipment......................... 24,492 46,261 14,438
Proceeds from sales of other real estate owned........................ 189,571 162,961 86,899
Purchases of mortgage servicing rights................................ (77,312) (67,359) --
Proceeds from sales of subsidiaries................................... 153,254 4,800 --
Net cash (used in) provided by acquisitions........................... (37,427) 52,381 423,499
----------- ----------- -----------
Net cash used in investing activities.......................... (1,481,407) (341,151) (742,396)
FINANCING ACTIVITIES
Net decrease in deposits.............................................. (57,506) (26,545) (1,381,093)
Net increase (decrease) in short-term borrowings...................... 695,185 (32,795) 1,097,626
Net proceeds from issuance of long-term debt.......................... 556,439 700,337 298,911
Payments on long-term debt............................................ (568,529) (174,249) (224,888)
Net proceeds from issuance of common stock............................ -- -- 172,946
Net proceeds from issuance of preferred stock......................... -- -- 154,656
Redemption of preferred stock......................................... (85,770) -- --
Proceeds from issuance of common stock pursuant to employee stock
purchase, stock option and dividend reinvestment plans.............. 28,238 39,442 41,084
Cash dividends........................................................ (262,532) (233,480) (182,906)
Sales of branch offices and loans:
Deposit liabilities assumed by purchasers........................... -- (1,032,006) --
Loans sold.......................................................... -- 377,578 --
Long-term debt issued to fund branch sale........................... -- 36,154 --
Other, net.......................................................... -- 23,956 --
Other financing activities, net....................................... 23,219 (2,984) (8,340)
----------- ----------- -----------
Net cash provided by (used in) financing activities............ 328,744 (324,592) (32,004)
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND DUE FROM BANKS...................... (302,299) (70,816) 89,282
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR............................ 3,079,737 3,150,553 3,061,271
----------- ----------- -----------
CASH AND DUE FROM BANKS AT END OF YEAR.................................. $ 2,777,438 $ 3,079,737 $ 3,150,553
----------- ----------- -----------
----------- ----------- -----------
Additional disclosures relative to cash flows:
Interest paid......................................................... $ 1,529,058 $ 1,803,194 $ 2,573,578
Income taxes paid..................................................... 306,489 242,346 109,540
Noncash items:
Transfer of loans to other real estate owned.......................... 88,709 193,628 218,697
Transfer of investment securities to securities available for sale.... -- 2,632,085 --
Transfer of loans to mortgage loans held for sale..................... -- 86,155 --
See notes to supplemental consolidated financial statements.
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71
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
KeyCorp is a financial services holding company headquartered in Cleveland,
Ohio, and is engaged primarily in the business of commercial and retail banking.
It provides a wide range of banking, fiduciary, mortgage banking, insurance and
other financial services to corporate, institutional and individual customers.
The accounting policies of KeyCorp and its subsidiaries (the "Corporation")
conform with generally accepted accounting principles and prevailing practices
within the financial services industry. The following is a summary of
significant accounting and reporting policies.
KEYCORP-SOCIETY MERGER
On March 1, 1994, KeyCorp ("old KeyCorp") merged into and with Society
Corporation ("Society"), which was the surviving corporation under the name
KeyCorp. The merger was accounted for by the pooling of interests method. These
supplemental financial statements and notes have been restated to present the
combined financial condition and results of operations of both companies as if
the merger had been in effect for all periods presented. Further details
pertaining to the merger are presented in Note 2, Mergers, Acquisitions and
Divestitures, on page 71 of this report.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of KeyCorp and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. Certain reclassifications, including adjustments to
conform accounting practices, have been made to prior year amounts to agree to
the current year presentation.
BUSINESS COMBINATIONS
In business combinations accounted for as poolings of interests, the assets,
liabilities and shareholders' equity of the respective companies are carried
forward at their historical amounts, the companies' results of operations are
combined and the prior periods' financial statements are restated to give effect
to the merger.
In business combinations accounted for as purchases, the results of operations
of the acquired businesses are included from the respective dates of
acquisition. Net assets of the companies acquired are recorded at their cost to
the Corporation at the date of acquisition and related purchase premiums and
discounts are amortized over the remaining average lives of the respective
assets or liabilities.
STATEMENT OF CASH FLOWS
Cash and due from banks are considered as cash and cash equivalents.
INVESTMENT SECURITIES
Securities which the Corporation has the ability and positive intent to hold to
maturity are carried at cost, adjusted for amortization of premiums and
accretion of discounts using the level yield method. Gains or losses from the
sales of investment securities are computed using the specific identification
method and included in net securities gains.
SECURITIES AVAILABLE FOR SALE AND TRADING ACCOUNT ASSETS
Securities available for sale are carried at the lower of aggregate cost or
market value. Gains or losses from the sale of securities available for sale are
computed using the specific identification method and are included in net
securities gains. Market value adjustments for trading account assets (included
in short-term investments) and changes in net unrealized losses on securities
available for sale are included in noninterest income.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are carried at the lower of aggregate cost, market
value, or contracted sales value when fixed price commitments to sell exist.
69
72
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
LOANS
Loans are carried at the principal amount outstanding, net of unearned income,
including deferred loan fees. Certain nonrefundable loan origination and
commitment fees and the direct costs associated with originating or acquiring
the loans are deferred. The net deferred amount is amortized as an adjustment to
the related loan yield over the contractual lives of the related loans. Student
loans held for sale are carried at the lower of aggregate cost or market value.
Interest income on loans is primarily accrued based on principal amounts
outstanding. The accrual of interest is discontinued when circumstances indicate
that collection is questionable, or generally when payment is over 90 days past
due. In such cases, interest accrued but not collected is charged against the
allowance for loan losses. There after, payments received are first applied to
the principal. Depending on management's assessment of the ultimate
collectibility of the loan, interest income may be recognized on a cash basis.
Loans are returned to accrual status when management determines that the
circumstances have improved to the extent that both principal and interest are
deemed collectible and there has been a sustained period of repayment
performance.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is the amount which, in the opinion of management,
is necessary to absorb potential losses in the loan portfolio. Management's
evaluation of the adequacy of the allowance is based on the market area served,
local economic conditions, the growth and composition of the loan portfolios and
their related risk characteristics, and the continual review by management of
the quality of the loan portfolio.
INTEREST RATE SWAPS, FINANCIAL FUTURES AND OPTIONS
The Corporation uses interest rate swaps, financial futures and options to
manage the interest rate exposure of certain interest-sensitive assets and
liabilities as part of the Corporation's overall strategy to manage interest
rate risk. The net interest received or paid on interest rate swaps is
recognized over the lives of the respective contracts as an adjustment to
interest income or expense. Gains and losses resulting from the termination of
interest rate swaps are deferred and amortized over the remaining lives of the
related financial instruments. Gains and losses on futures and option contracts
are recognized when the related hedged financial instruments are sold.
PREMISES AND EQUIPMENT
Premises and equipment, including leasehold improvements, are stated at cost
less accumulated depreciation and amortization. Depreciation of premises and
equipment is determined using the straight-line method over the estimated useful
lives of the respective assets. Leasehold improvements are amortized using the
straight-line method over the terms of the leases.
OTHER REAL ESTATE OWNED
Other real estate owned includes real estate acquired through foreclosure or a
similar conveyance of title and real estate considered to be in-substance
foreclosed when specific criteria are met. Other real estate owned is carried at
the lower of its recorded amount or fair value less estimated cost of disposal.
Writedowns of the assets at, or prior to, the dates of acquisition are charged
to the allowance for loan losses. Subsequent writedowns, income and expenses
incurred in connection with holding such assets, and gains and losses resulting
from the sales of such assets, are included in other noninterest expense.
INTANGIBLE ASSETS
Goodwill, representing the excess of the cost of acquisitions over the fair
value of net assets acquired, is amortized using the straight-line method over
the estimated period to be benefited, generally not exceeding 25 years. Core
deposit intangibles represent the net present value of the future economic
benefits related to the use of deposits purchased. They are being amortized
using an accelerated method over periods ranging from 7 to 15 years. Other
intangibles are generally being amortized using the straight-line method over
periods ranging from 4 to 15 years.
70
73
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
PURCHASED MORTGAGE SERVICING RIGHTS
Purchased mortgage servicing rights represent the cost of the right to receive
future servicing income. Purchased mortgage servicing rights are amortized, as a
reduction to service fee income, over the estimated life of the related loans in
proportion to the recognition of estimated net servicing income. An evaluation
of the carrying amount of the purchased mortgage servicing rights is performed
on a disaggregated basis by discounting the expected future cash flows, taking
into consideration the estimated level of prepayments based upon current
industry expectations.
INCOME TAXES
Old KeyCorp and Society each filed consolidated Federal income tax returns for
the periods presented. Effective January 1, 1992, the Corporation prospectively
adopted Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes," which supersedes SFAS No. 96. The cumulative
effect of adopting SFAS No. 109 was not material.
EARNINGS PER SHARE
Earnings per Common Share is computed by dividing net income, less preferred
stock dividends, by the weighted average number of Common Shares outstanding.
These amounts have been adjusted to reflect stock splits.
NOTE 2. MERGERS, ACQUISITIONS AND DIVESTITURES
KEYCORP-SOCIETY MERGER
On March 1, 1994, KeyCorp ("old KeyCorp"), a financial services holding company
headquartered in Albany, New York, with approximately $33 billion in assets as
of December 31, 1993, merged into and with Society Corporation ("Society"), a
financial services holding company headquartered in Cleveland, Ohio, with
approximately $27 billion in assets at year-end 1993, which was the surviving
corporation and assumed the name KeyCorp. Under the terms of the merger
agreement, 124,351,183 KeyCorp Common Shares were exchanged for all of the
outstanding shares of old KeyCorp common stock (based on an exchange ratio of
1.205 shares for each share of old KeyCorp). The outstanding preferred stock of
old KeyCorp was exchanged for 1,280,000 shares of a comparable, new issue of 10%
Cumulative Preferred Stock of KeyCorp. The merger was accounted for as a pooling
of interests and, accordingly, financial results for prior periods presented
have been restated to include the combined financial results of both companies.
The following table presents net interest income, net income and net income per
Common Share reported by each of the companies and on a combined basis.
YEAR ENDED DECEMBER 31,
(in thousands ----------------------------------------
except per share amounts) 1993 1992 1991
- --------------------------------- ---------- ---------- ----------
NET INTEREST INCOME:
Old Keycorp.................... $1,479,987 $1,318,286 $1,085,801
Society........................ 1,198,990 1,130,387 1,047,160
---------- ---------- ----------
Combined.................... $2,678,977 $2,448,673 $2,132,961
---------- ---------- ----------
---------- ---------- ----------
NET INCOME:
Old KeyCorp.................... $ 362,767 $ 290,888 $ 237,218
Society........................ 347,159 301,210 76,478
---------- ---------- ----------
Combined.................... $ 709,926 $ 592,098 $ 313,696
---------- ---------- ----------
---------- ---------- ----------
NET INCOME PER COMMON SHARE:
Old KeyCorp.................... $ 3.43 $ 2.80 $ 2.45
Society........................ 2.93 2.51 .61
Combined....................... 2.89 2.42 1.31
71
74
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
JACKSON COUNTY FEDERAL BANK
On December 31, 1993, Jackson County Federal Bank of Medford, Oregon ("JCF")
merged into Key Bank of Oregon, an indirect wholly-owned subsidiary of KeyCorp.
A total of 1,430,813 KeyCorp Common Shares were issued to the holders of JCF
common and preferred stock. The transaction qualified for accounting as a
pooling of interests; however, financial statements for periods prior to the
merger have not been restated to include the accounts and results of operations
of JCF because the transaction was not material to KeyCorp. JCF had total assets
of approximately $338 million at the date of merger.
SCHAENEN WOOD & ASSOCIATES, INC.
On October 5, 1993, Society Asset Management Inc., an indirect wholly-owned
subsidiary of KeyCorp, completed the acquisition of Schaenen Wood & Associates,
Inc. ("SWA"), a New York City-based investment management firm which manages
approximately $1.3 billion in assets. The transaction was accounted for as a
purchase.
AMERITRUST TEXAS CORPORATION
On September 15, 1993, KeyCorp completed the sale of Ameritrust Texas
Corporation ("ATC"), a wholly-owned subsidiary of KeyCorp, to Texas Commerce
Bank, National Association, an affiliate of Chemical Banking Corporation. ATC
was based in Dallas, Texas, and provided a range of investment management and
fiduciary services to institutions, businesses and individuals through 11
offices operating in Texas. For the year-to-date period through the closing
date, ATC had net income of $3.2 million. A $29.4 million gain was realized on
the sale ($12.2 million after tax, $.10 per Common Share) and included in
noninterest income.
NORTHWESTERN NATIONAL BANK
On July 22, 1993, Northwestern National Bank of Port Angeles, Washington ("NNB")
merged into Key Bank of Washington, an indirect wholly-owned subsidiary of
KeyCorp. A total of 361,607 KeyCorp Common Shares were issued to the holders of
NNB common stock. The transaction was accounted for as a purchase. NNB had total
assets of approximately $49 million at the date of acquisition.
EMERALD CITY BANK
On July 2, 1993, Key Bank of Washington, an indirect wholly-owned subsidiary of
KeyCorp, assumed $7 million of deposits of the failed Emerald City Bank of
Seattle, Washington in an FDIC-assisted transaction.
HOME FEDERAL SAVINGS BANK
On June 30, 1993, Home Federal Savings Bank of Fort Collins, Colorado ("Home
Federal") merged into Key Bank of Colorado, a wholly-owned subsidiary of KeyCorp
formed for the purposes of consummating the merger. A total of 590,485 KeyCorp
Common Shares were issued to the holders of Home Federal common stock. The
transaction qualified for accounting as a pooling of interests; however,
financial statements for periods prior to the merger have not been restated to
include the accounts and results of operations of Home Federal because the
transaction was not material to KeyCorp. Home Federal had total assets of
approximately $230 million at the date of merger.
FIRST AMERICAN BANK OF NEW YORK
On March 25, 1993, Key Bank of New York, an indirect wholly-owned subsidiary of
KeyCorp, acquired all of the deposits and the majority of the assets of First
American Bank of New York ("First American"). Key Bank of New York acquired 40
branches and other business operations with approximately $1.0 billion in
deposits and approximately $600 million in loans, in addition to branch real
estate and other physical assets. The transaction was accounted for as a
purchase. Key Bank of New York paid a premium of $41 million on the acquired
deposits. In connection with the transaction, Key Bank of New York recorded a
core deposit intangible of $33 million and goodwill of $8 million.
72
75
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NATIONAL SAVINGS BANK OF ALBANY
On February 26, 1993, National Savings Bank of Albany, New York ("National")
merged into Key Bank of New York, an indirect wholly-owned subsidiary of
KeyCorp. A total of 2,111,638 KeyCorp Common Shares were issued to the holders
of National common stock. The transaction qualified for accounting as a pooling
of interests; however, financial statements for periods prior to the merger have
not been restated to include the accounts and results of operations of National
because the transaction was not material to KeyCorp. National had total assets
of approximately $671 million at the date of merger.
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
On January 22, 1993, KeyCorp acquired all of the outstanding shares of First
Federal Savings and Loan Association of Fort Myers ("Society First Federal"), a
Federal stock savings bank, for total cash consideration of $144 million. The
transaction was accounted for as a purchase. Society First Federal had 24
offices in southwest and central Florida and approximately $1.1 billion in total
assets at the date of acquisition.
PUGET SOUND BANCORP
On January 15, 1993, Puget Sound Bancorp ("PSB"), a bank holding company
headquartered in Tacoma, Washington, with approximately $4.7 billion in assets
as of December 31, 1992, merged into Key Bancshares of Washington, Inc., a
wholly-owned subsidiary of KeyCorp. A total of 31,391,544 KeyCorp Common Shares
were exchanged for all of the outstanding shares of PSB common stock (based on
an exchange ratio of 1.32 shares for each share of PSB). The merger was
accounted for as a pooling of interests and, accordingly, financial results for
prior periods presented have been restated to include the combined financial
results of both companies.
ELECTRONIC PAYMENT SERVICES, INC.
On December 4, 1992, KeyCorp and three other bank holding companies formed a
joint venture in a newly-formed company, Electronic Payment Services, Inc. This
company is the largest processor of automated teller machine transactions in the
United States and a national leader in point-of-sale transaction processing. As
part of the agreement, the Corporation contributed its wholly-owned subsidiary,
Green Machine Network Corporation, and its point-of-sale business in return for
an equity interest.
FIRST OF AMERICA BANK-MONROE
On September 30, 1992, KeyCorp acquired all of the outstanding shares of First
of America Bank-Monroe ("FAB-Monroe") from First of America Bank Corporation in
a cash purchase. The transaction was accounted for as a purchase. FAB Monroe
operated 10 offices in southeastern Michigan and had approximately $160 million
in total assets at the date of acquisition.
SECURITY PACIFIC BANK BRANCHES
On September 3, 1992, Key Bank of Washington ("Key Bank"), an indirect
wholly-owned subsidiary of KeyCorp, acquired 48 branches and other business and
private banking operations with approximately $1.3 billion in deposits and $709
million in loans in addition to branch real estate and other physical assets in
the state of Washington from BankAmerica Corporation. The transaction was
accounted for as a purchase. Key Bank paid a premium of $53.6 million on the
acquired deposits.
OLYMPIC SAVINGS BANK
On July 31, 1992, Key Savings Bank ("Key Savings"), an indirect wholly-owned
subsidiary of KeyCorp, acquired Olympic Savings Bank of Washington ("Olympic").
The transaction was accounted for as a purchase. Olympic had approximately $81
million in assets at the date of acquisition.
VALLEY BANCORPORATION
On June 4, 1992, Valley Bancorporation ("Valley") of Idaho Falls, Idaho was
merged with Key Bancshares of Idaho, a wholly-owned subsidiary of KeyCorp. A
total of 838,308 KeyCorp Common Shares were issued for all of the outstanding
shares of Valley common stock. The transaction qualified for accounting as a
pooling of
73
76
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
interests; however, financial statements for periods prior to the merger have
not been restated to include the accounts and results of operations of Valley
because the transaction was not material to KeyCorp. Valley had assets of
approximately $221 million at the date of merger.
AMERITRUST CORPORATION
On March 16, 1992, Ameritrust Corporation ("Ameritrust"), a financial services
holding company located in Cleveland, Ohio, with approximately $10 billion in
assets as of December 31, 1991, merged with and into the Corporation. Under the
terms of the merger agreement, 49,550,862 KeyCorp Common Shares were exchanged
for all of the outstanding shares of Ameritrust common stock (based on an
exchange ratio of .65 shares of KeyCorp for each share of Ameritrust). The
outstanding preferred stock of Ameritrust was exchanged on a one for-one basis
for 1,200,000 shares of a comparable, new issue of Fixed/Adjustable Rate
Cumulative Preferred Stock of KeyCorp. The merger was accounted for as a pooling
of interests and, accordingly, financial results for prior periods presented
have been restated to include the financial results of Ameritrust. In connection
with the merger and as part of an agreement with the United States Department of
Justice, the Corporation sold 28 Ameritrust branches located in Cuyahoga and
Lake Counties in Ohio in June 1992. Deposits of $933.3 million and loans or loan
participations totaling $331.8 million were sold along with the branches at a
gain of $20.1 million ($13.2 million after tax, $.11 per Common Share) which is
included in noninterest income. In addition, in May 1992, deposits and loans
totaling $98.7 million and $45.7 million, respectively, were sold along with
four branches in Ashtabula County, Ohio, in accordance with the Federal Reserve
Board order that approved the merger.
PENDING ACQUISITIONS
COMMERCIAL BANCORPORATION OF COLORADO
On March 24, 1994, Commercial Bancorporation of Colorado ("CBC"), a bank holding
company with subsidiary banks operating in the Denver, Colorado Springs,
Sterling and Fort Collins areas of Colorado, merged with Key Bank of Colorado, a
wholly-owned subsidiary of KeyCorp. Holders of CBC common stock received .899
KeyCorp Common Shares for each outstanding share of CBC common stock. CBC had
total assets of $390 million at December 31, 1993. The transaction qualified for
accounting as a pooling of interests; however, financial statements will not be
restated to include the accounts and results of operations of CBC because the
transaction was not material to KeyCorp.
THE BANK OF GREELEY
On October 5, 1993, KeyCorp agreed to acquire the Bank of Greeley, a single
branch bank headquartered in Greeley, Colorado ("Greeley Bank"). Under terms of
the agreement, all shares of Greeley Bank will be exchanged for approximately
240,000 KeyCorp Common Shares. Greeley Bank had total assets of approximately
$61 million at December 31, 1993.
3. SECURITIES AVAILABLE FOR SALE
The book values, unrealized gains and losses and approximate market values of
securities available for sale were as follows:
DECEMBER 31, 1993
-------------------------------------------------------
GROSS GROSS
BOOK UNREALIZED UNREALIZED MARKET
(in thousands) VALUE GAINS LOSSES VALUE
- ---------------------------------------- ---------- ---------- ---------- ----------
U.S. Treasury, agencies and
corporations.......................... $1,433,980 $ 64,136 $ (171) $1,497,945
Mortgage-backed securities.............. 269,735 4,165 (861) 273,039
Other securities........................ 23,113 753 (5) 23,861
---------- ---------- ---------- ----------
Total................................. $1,726,828 $ 69,054 $ (1,037) $1,794,845
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
74
77
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1992
-------------------------------------------------------
GROSS GROSS
BOOK UNREALIZED UNREALIZED MARKET
(in thousands) VALUE GAINS LOSSES VALUE
- ---------------------------------------- ---------- ---------- ---------- ----------
U.S. Treasury, agencies and
corporations.......................... $2,032,526 $ 61,731 $ (4,982) $2,089,275
Mortgage-backed securities.............. 405,812 6,183 (3,794) 408,201
Other securities........................ 20,303 564 (23) 20,844
---------- ---------- ---------- ----------
Total................................. $2,458,641 $ 68,478 $ (8,799) $2,518,320
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
The proceeds from sales of securities available for sale during 1993 and 1992
were $630.8 million and $661.9 million, respectively. Gross gains of $35.3
million and $9.6 million were realized on those sales in 1993 and 1992,
respectively, and gross losses of $24 thousand and $7.1 million were realized on
those sales in 1993 and 1992, respectively.
Securities available for sale by remaining maturity were as follows:
DECEMBER 31, 1993
-------------------------
BOOK MARKET
(in thousands) VALUE VALUE
- ---------------------------------- ---------- ----------
Due in one year or less........... $ 513,674 $ 520,190
Due after one through five
years........................... 739,081 771,946
Due after five through ten
years........................... 307,384 332,813
Due after ten years............... 166,689 169,896
---------- ----------
Total........................ $1,726,828 $1,794,845
---------- ----------
---------- ----------
Mortgage-backed securities are included in the above maturity schedule based on
their expected average lives.
In May 1993, the Financial Accounting Standards Board ("FASB") issued SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities." SFAS
No. 115 requires that equity securities having readily determinable fair values
and all investments in debt securities be classified and accounted for in three
categories. SFAS No. 115 is more fully described in Note 4, Investment
Securities.
4. INVESTMENT SECURITIES
The book values, unrealized gains and losses and approximate market values of
investment securities were as follows:
DECEMBER 31, 1993
---------------------------------------------------------
GROSS GROSS
BOOK UNREALIZED UNREALIZED MARKET
(in thousands) VALUE GAINS LOSSES VALUE
- ---------------------------------------- ----------- ---------- ---------- -----------
U.S. Treasury, agencies and
corporations.......................... $ 795,966 $ 11,601 $ (134) $ 807,433
States and political subdivisions....... 1,677,823 102,402 (394) 1,779,831
Mortgage-backed securities.............. 7,877,216 108,627 (18,582) 7,967,261
Other securities........................ 771,088 14,900 (307) 785,681
----------- ---------- ---------- -----------
Total................................. $11,122,093 $ 237,530 $(19,417) $11,340,206
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
75
78
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1992
-------------------------------------------------------
GROSS GROSS
BOOK UNREALIZED UNREALIZED MARKET
(in thousands) VALUE GAINS LOSSES VALUE
- ---------------------------------------- ---------- ---------- ---------- ----------
U.S. Treasury, agencies and
corporations.......................... $ 494,195 $ 11,830 $ (21) $ 506,004
States and political subdivisions....... 1,806,831 80,627 (863) 1,886,595
Mortgage-backed securities.............. 6,062,422 142,726 (33,393) 6,171,755
Other securities........................ 612,852 16,889 (1,014) 628,727
---------- ---------- ---------- ----------
Total................................. $8,976,300 $ 252,072 $(35,291) $9,193,081
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Investment securities by remaining maturity were as follows:
DECEMBER 31, 1993
---------------------------
BOOK MARKET
(in thousands) VALUE VALUE
- ---------------------------------- ----------- -----------
Due in one year or less........... $ 1,819,775 $ 1,841,524
Due after one through five
years........................... 5,590,121 5,715,782
Due after five through ten
years........................... 3,193,927 3,245,422
Due after ten years............... 518,270 537,478
----------- -----------
Total........................... $11,122,093 $11,340,206
----------- -----------
----------- -----------
Mortgage-backed securities are included in the above maturity schedule based on
their expected average lives. Other securities consist primarily of those
collateralized by credit card and automobile installment loan receivables,
corporate floating-rate notes and venture capital investments.
The proceeds from sales of investment securities were $142.1 million, $662.2
million and $1.1 billion during 1993, 1992 and 1991, respectively. Gross gains
and losses related to securities were $.8 million and $7.8 million,
respectively, in 1993, $13.0 million and $.9 million, respectively, in 1992, and
$26.2 million and $7.3 million, respectively, in 1991.
At December 31, 1993, investment and available for sale securities with a book
value of approximately $9.6 billion were pledged to secure public and trust
deposits and securities sold under agreements to repurchase, and for certain
other purposes required or permitted by law.
In May 1993, the FASB issued SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." SFAS No. 115 requires that equity securities
having readily determinable fair values and all investments in debt securities
be classified and accounted for in three categories. Debt securities that
management has the positive intent and ability to hold to maturity are to be
classified as "held-to-maturity securities" and reported at amortized cost. Debt
and equity securities that are bought and principally held for the purpose of
selling them in the near term are to be classified as "trading securities" and
reported at fair value, with unrealized gains and losses included in operating
results. Debt and equity securities not classified as either held-to-maturity
securities or trading securities are to be classified as "available for sale
securities" and reported at fair value, with the unrealized gains and losses
excluded from operating results and reported as a separate component of
shareholders' equity. Adoption of SFAS No. 115 is required for fiscal years
beginning after December 15, 1993, with earlier application permitted. The
Corporation will adopt SFAS No. 115 in 1994. Based upon the Corporation's
securities portfolio classified as available for sale as of December 31, 1993,
the estimated impact of the new standard would be an increase to shareholders'
equity of approximately $44 million, with no effect on the results of
operations. With the adoption of SFAS No. 115 in 1994, the Corporation
anticipates that securities with an aggregate book value ranging from $4.5
billion to $5.0 billion will be designated as available for sale. Based upon the
market values of these securities at year-end 1993, the reclassification of
these securities is not expected to have a material effect on shareholders'
equity.
76
79
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
5. LOANS
Loans are summarized as follows:
DECEMBER 31,
-----------------------------
(in thousands) 1993 1992
---------------------------------------------------- ----------- -----------
Commercial, financial and agricultural.............. $ 8,965,528 $ 8,869,032
Real estate -- construction......................... 1,160,480 1,448,032
Real estate -- commercial mortgage.................. 6,228,188 5,937,022
Real estate -- residential mortgage................. 11,026,319 8,289,386
Consumer............................................ 9,276,334 9,081,657
Student loans held for sale......................... 1,648,611 1,070,140
Lease financing..................................... 1,702,472 1,225,193
Foreign............................................. 63,312 101,363
----------- -----------
Total.......................................... $40,071,244 $36,021,825
----------- -----------
----------- -----------
Changes in the allowance for loan losses are summarized as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------
(in thousands) 1993 1992 1991
---------------------------------------- --------- --------- ---------
Balance at beginning of year............ $ 782,649 $ 793,519 $ 677,294
Charge-offs............................. (303,160) (440,396) (465,858)
Recoveries.............................. 90,385 79,930 74,042
--------- --------- ---------
Net charge-offs.................... (212,775) (360,466) (391,816)
Provision for loan losses............... 211,662 338,337 466,163
Allowance of affiliates purchased....... 21,176 11,259 41,878
--------- --------- ---------
Balance at end of year............. $ 802,712 $ 782,649 $ 793,519
--------- --------- ---------
--------- --------- ---------
In 1991, Ameritrust recorded an additional $93.9 million provision for loan
losses to conform its approach to determining the level of the allowance to that
used by the Corporation.
In the ordinary course of business, KeyCorp's banking affiliates have made loans
at prevailing interest rates and terms to directors and executive officers of
KeyCorp and its subsidiaries and their associates (as defined by the Securities
and Exchange Commission). Such loans, in management's opinion, did not present
more than the normal risk of collectibility or incorporate other unfavorable
features. The aggregate amount of loans outstanding to qualifying related
parties at January 1, 1993, was $241.3 million. During 1993, activity with
respect to these loans included new loans, repayments and a net decrease (due to
changes in the status of executive officers and directors) of $149.3 million,
$153.9 million and $40.3 million, respectively, resulting in an aggregate
balance of loans outstanding to related parties at December 31, 1993, of $196.4
million.
77
80
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
6. NONPERFORMING ASSETS
Nonperforming assets were as follows:
DECEMBER 31,
-----------------------
(in thousands) 1993 1992
--------------------------------------------------------- -------- --------
Nonaccrual loans......................................... $329,843 $550,522
Restructured loans....................................... 6,469 2,380
-------- --------
Total nonperforming loans........................... 336,312 552,902
Other real estate owned.................................. 186,052 350,266
Allowance for OREO losses................................ (35,690) (17,915)
-------- --------
Other real estate owned, net of allowance........... 150,362 332,351
Other nonperforming assets............................... 13,462 14,903
-------- --------
Total............................................... $500,136 $900,156
-------- --------
-------- --------
The effect on interest income of loans classified as nonperforming, at December
31, was as follows:
(in thousands) 1993 1992 1991
---------------------------------------------- ------- ------- -------
Interest income which would have been recorded
if assets had been current under original
terms....................................... $30,037 $52,002 $71,235
Less: Interest income recorded during the
period...................................... (7,900) (20,536) (28,877)
------- ------- -------
Net reduction to reported interest income... $22,137 $31,466 $42,358
------- ------- -------
------- ------- -------
At December 31, 1993, there were no significant commitments to lend additional
funds to borrowers with nonaccrual or restructured loans.
Changes in the allowance for OREO losses are summarized as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------
(in thousands) 1993 1992 1991
---------------------------------------------- ------- ------- -------
Balance at beginning of year.................. $17,915 $19,191 $13,754
Net charge-offs............................... (21,697) (33,793) (12,661)
Provision for other real estate owned
losses...................................... 39,132 32,517 15,513
Allowance of affiliates purchased............. 340 -- 2,585
------- ------- -------
Balance at end of year...................... $35,690 $17,915 $19,191
------- ------- -------
------- ------- -------
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," which takes effect for fiscal years beginning after
December 15, 1994. SFAS No. 114 prescribes a valuation methodology for impaired
loans as defined by the standard. Generally, a loan is considered impaired if
management believes that it is probable that all amounts due will not be
collected according to the contractual terms, as scheduled in the loan
agreement. An impaired loan must be valued using the present value of expected
future cash flows discounted at the loan's effective interest rate, the loan's
observable market price or the fair value of the loan's underlying collateral.
The Corporation expects to adopt SFAS No. 114 prospectively in the first quarter
of 1995. It is anticipated that the adoption of SFAS No. 114 will not have a
material effect on the Corporation's financial condition or results of
operations.
78
81
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
7. PREMISES AND EQUIPMENT
Premises and equipment were as follows:
DECEMBER 31,
-------------------------
(in thousands) 1993 1992
- ------------------------------------- ---------- ----------
Land................................. $ 116,335 $ 86,196
Buildings and leasehold
improvements....................... 741,043 715,762
Furniture and equipment.............. 759,721 681,058
---------- ----------
1,617,099 1,483,016
Accumulated depreciation and
amortization....................... (704,229) (639,702)
---------- ----------
Total................................ $ 912,870 $ 843,314
---------- ----------
---------- ----------
Depreciation and amortization expense related to premises and equipment totaled
$110.9 million, $104.3 million, and $84.4 million in 1993, 1992, and 1991,
respectively.
At December 31, 1993, KeyCorp's affiliate banks were obligated under
noncancelable leases for land and buildings and for other property, consisting
principally of data processing equipment. Rental expense under all operating
leases totaled $123.7 million in 1993, $116.5 million in 1992 and $103.4 million
in 1991. Minimum future rental payments under noncancelable leases at December
31, 1993, were as follows: 1994 -- $98.9 million; 1995 -- $89.0 million; 1996 --
$82.1 million; 1997 -- $74.2 million; 1998 -- $59.2 million; and subsequent
years -- $547.5 million.
8. INTANGIBLE ASSETS AND PURCHASED MORTGAGE SERVICING RIGHTS
Intangible assets, net of accumulated amortization, were as follows:
DECEMBER 31,
-------------------------
(in thousands) 1993 1992
------------------------------------------- -------- --------
Goodwill................................... $385,359 $361,290
Core deposit intangibles................... 139,501 132,402
Credit card intangibles.................... 16,648 20,240
Other...................................... 7,840 87,688
-------- --------
Total.................................... $549,348 $601,620
-------- --------
-------- --------
Purchased mortgage servicing rights........ $188,592 $165,433
The amortization expense for intangible assets was as follows:
YEAR ENDED DECEMBER 31,
----------------------------------
(in thousands) 1993 1992 1991
- --------------------------------- -------- -------- --------
Goodwill......................... $ 24,210 $ 21,589 $ 22,397
Core deposit intangibles......... 22,436 25,049 22,379
Credit card intangibles.......... 4,460 4,449 4,534
Other............................ 6,944 10,605 8,264
-------- -------- --------
Total.......................... $ 58,050 $ 61,692 $ 57,574
-------- -------- --------
-------- -------- --------
The amortization expense for purchased mortgage servicing rights totaled $56.6
million, $29.6 million and $20.4 million in 1993, 1992 and 1991, respectively.
The amount of purchased mortgage servicing rights capitalized during 1993 was
$77.3 million.
79
82
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
9. SHORT-TERM BORROWINGS
Short-term borrowings consist primarily of Federal funds purchased and
securities sold under repurchase agreements, which generally represent overnight
borrowing transactions. Other short-term borrowings consist primarily of
Medium-Term Notes with original maturities of one year or less, Treasury, tax
and loan demand notes and commercial paper which is issued principally in
amounts of $100,000 or more with maturities of 270 days or less.
On November 30, 1992, Society National Bank ("SNB"), KeyCorp's Ohio banking
affiliate, authorized the issuance of up to $1 billion of Medium-Term Notes to
be offered on a continuous basis. During 1993, $685 million in debt securities
were issued under this program. These securities have original maturities of
less than one year and are included in other short-term borrowings.
The details of short-term borrowings were as follows:
(dollars in thousands) 1993 1992 1991
- --------------------------------------------- ---------- ---------- ----------
FEDERAL FUNDS PURCHASED
Balance at year-end........................ $1,932,211 $1,826,522 $2,194,057
Average during the year.................... 1,828,606 1,519,406 1,412,714
Maximum month-end balance.................. 3,127,134 2,924,193 2,531,555
Weighted average rate during the year...... 3.06% 3.74% 5.72%
Weighted average rate at December 31....... 3.13 3.30 4.02
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Balance at year-end........................ $2,188,047 $2,380,998 $2,060,012
Average during the year.................... 2,549,582 2,542,522 2,394,966
Maximum month-end balance.................. 3,163,603 3,036,009 3,228,383
Weighted average rate during the year...... 2.91% 3.38% 5.42%
Weighted average rate at December 31....... 2.84 2.97 4.12
OTHER SHORT-TERM BORROWINGS
Balance at year-end........................ $1,776,192 $ 874,887 $ 833,465
Average during the year.................... 1,196,188 721,800 1,188,228
Maximum month-end balance.................. 1,776,192 1,144,870 900,611
Weighted average rate during the year...... 3.72% 4.31% 6.27%
Weighted average rate at December 31....... 3.16 3.57 3.86
At December 31, 1993, the Corporation had available lines of credit for general
corporate purposes aggregating $200 million, all of which were unused at
December 31, 1993. Standard fees were paid for these facilities, which were
cancelled subsequent to the end of the year.
10. LONG-TERM DEBT
The components of long-term debt, presented net of unamortized discount where
appropriate, were as follows:
DECEMBER 31,
-------------------------
(dollars in thousands) 1993 1992
- --------------------------------------------------------------------- ---------- ----------
Medium-Term Notes due through 2003................................... $ 546,230 $ 303,930
8.125% Subordinated Notes due 2002................................... 197,902 197,655
8.00% Subordinated Notes due 2004.................................... 125,000 125,000
8.40% Subordinated Capital Notes due 1999............................ 75,000 75,000
8.875% Notes due 1996................................................ 74,772 74,715
11.125% Notes due 1995............................................... 49,979 49,967
8.48% Notes due 1997 through 2001.................................... 48,864 48,864
8.33% Notes due 1996................................................. 22,794 22,794
12.63% Notes due 1994................................................ 1,860 1,860
7.875% Notes due 1993................................................ -- 99,952
80
83
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31,
-------------------------
(dollars in thousands) 1993 1992
- --------------------------------------------------------------------- ---------- ----------
8.625% Notes due 1996................................................ -- 99,773
9.45% Senior Notes due 1993.......................................... -- 75,000
5.25% Floating Rate Subordinated Notes due 1997...................... -- 50,000
8.25% Notes due 1993................................................. -- 25,000
9.56% Note due 1995.................................................. -- 14,922
7.75% Debentures due through 2002.................................... -- 13,533
All other long-term debt............................................. 384 4,514
---------- ----------
Total parent company................................................. 1,142,785 1,282,479
7.85% Subordinated Notes due 2002.................................... 199,823 198,524
6.75% Subordinated Notes due 2003.................................... 198,823 --
Federal Home Loan Bank Advances(1)................................... 165,100 246,350
10.00% Notes due 1995................................................ 36,735 36,735
Industrial revenue bonds............................................. 10,938 11,314
All other long-term debt............................................. 9,666 14,676
---------- ----------
Total subsidiaries................................................... 621,085 507,599
---------- ----------
Total................................................................ $1,763,870 $1,790,078
---------- ----------
---------- ----------
- ---------------
(1)Long-term advances from the Federal Home Loan Bank of Seattle (FHLB) are at
adjustable and fixed rates ranging from 3.125% to 12.125% at December 31,
1993, and mature at various dates through 2005. Real estate loans with a
recorded value of $472.6 million and $375.4 million at December 31, 1993 and
1992, respectively, collateralize FHLB advances.
Scheduled payments on long-term debt are as follows:
(in thousands) PARENT SUBSIDIARIES TOTAL
------------------------------------------------- -------- ------------ --------
1994............................................. $ 72,569 $ 37,371 $109,940
1995............................................. 160,179 103,386 263,565
1996............................................. 214,202 12,170 226,372
1997............................................. 47,758 1,623 49,381
1998............................................. 82,418 1,101 83,519
During 1993 and 1992, KeyCorp issued $305.1 million and $77.0 million,
respectively, of Medium-Term Notes with original maturities exceeding one year.
In addition to general corporate purposes, the proceeds from the issuance of
these notes were used to redeem and pay principal on notes and debentures; to
fund the purchase of OREO from affiliate banks by NCB Properties, Inc., an OREO
workout subsidiary; and to provide subordinated capital to affiliate banks. At
December 31, 1993, KeyCorp's Medium-Term Notes as presented in the table had a
weighted average interest rate of 6.61% and had varying maturities through 2003.
On June 15, 1992, KeyCorp issued $200 million of 8.125% Subordinated Notes under
a shelf registration. The Notes are not redeemable prior to maturity. The 8.875%
Notes, issued under a separate registration statement, and the 11.125% Notes are
not redeemable prior to maturity.
On March 26, 1987, KeyCorp issued $75 million of 8.40% Subordinated Capital
Notes due 1999 under an indenture dated March 1, 1987, between KeyCorp and
Chemical Bank, as Trustee. The Notes are unsecured obligations of KeyCorp and
will, at maturity, be exchanged for Capital Securities having a market value
equal to the principal amount of the Notes. Proceeds of this issue were used
primarily to fund the acquisition of Seattle Trust & Savings Bank in July 1987.
On June 29, 1992, KeyCorp issued $125 million of 8.00% Subordinated Notes.
Proceeds from these twelve-year notes were used to redeem without penalty all of
its 11.25% Senior Notes prior to maturity. Proceeds were also employed to
provide capital for Key Bank of Washington. This capital infusion was made in
anticipation
81
84
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
of Key Bank of Washington's purchase of 48 former Security Pacific Bank branches
from BankAmerica on September 3, 1992.
In 1989, the Ameritrust Corporation Employees' Savings and Investment Plan (the
"Plan") was amended to include a leveraged employee stock ownership plan
("ESOP"). To fund the ESOP, Ameritrust borrowed $71.7 million from several
institutional investors through the placement of unsecured notes totaling $22.8
million (the "8.33% Notes") and $48.9 million (the "8.48% Notes"). The interest
on those notes totaled $6.0 million in each of the years 1993, 1992 and 1991.
The ESOP trustee used the proceeds to purchase 5.8 million shares of Ameritrust
common stock. These shares, as converted in the merger with Society, are held by
the ESOP trustee for matching employee contributions to the Plan. The net
difference between the cost of the treasury shares sold to the ESOP trustee and
their market value was recorded as a reduction to retained earnings. Except for
the repayment schedule, the loans to the ESOP trustee are on substantially
similar terms as the borrowings from the institutional investors and, in
addition, are secured by the unallocated shares held by the ESOP trustee. The
ESOP trustee will repay the loans from KeyCorp using corporate contributions
made by the Plan for that purpose and dividends on the Common Shares acquired
with the loans. The amount of dividends on the ESOP shares used for debt service
by the ESOP trustee totaled $3.9 million in 1993, $3.1 million in 1992 and $1.8
million in 1991. As contributions and dividends are received, a portion of the
shares acquired with the loans will be allocated to Plan participants. Interest
income recognized on loans to the ESOP trustee is netted against the interest
expense incurred on the notes payable to the institutional investors. KeyCorp's
receivable from the ESOP trustees, representing deferred compensation to the
Corporation's employees, has been recorded as a separate reduction of
shareholders' equity.
SNB issued $200 million of 7.85% Subordinated Notes on November 3, 1992, and
$200 million of 6.75% Subordinated Notes on June 16, 1993. SNB also issued a 10%
Note in connection with the sale of branch offices and loans resulting from the
merger with Ameritrust. None of these notes may be redeemed prior to maturity.
The 8.625% Notes due 1996 were redeemed at par plus accrued interest on June 30,
1993, and the 9.56% Note due 1995 was assumed by the purchaser in connection
with the sale of Ameritrust Texas Corporation on September 15, 1993. On May 6,
1993, and May 27, 1993, KeyCorp redeemed prior to maturity, and without penalty,
all of its floating rate subordinated notes due 1997 and all of its 7.75%
debentures due through 2002, respectively.
Industrial revenue bonds issued by affiliate banks have varying maturities
extending to the year 2009 and had weighted average annual interest rates of
7.14% and 7.19%, respectively, at December 31, 1993 and 1992.
Other long-term debt at December 31, 1993 and 1992, consisted of capital lease
obligations and various secured and unsecured obligations of corporate
subsidiaries and had weighted average annual interest rates of 13.54% and
10.14%, respectively.
Long-term debt qualifying as supplemental capital for purposes of calculating
Tier II capital under Federal Reserve Board Guidelines amounted to $993.4
million and $799.1 million at December 31, 1993, and 1992, respectively.
11. SHAREHOLDERS' EQUITY
COMMON SHARES AND PREFERRED STOCK
In August 1989, KeyCorp's Board of Directors adopted a Shareholder Rights Plan
("Rights") under which each shareholder received one Right for each Common Share
of KeyCorp. Each Right represents the right to purchase a Common Share of
KeyCorp at a price of $65. The Rights become exercisable 20 days after a person
or group acquires 15% or more of the outstanding shares or commences a tender
offer that could result in such an ownership interest. Until the Rights become
exercisable, they will trade with the Common Shares, and any transfer of the
Common Shares will also constitute a transfer of associated Rights. When the
Rights become exercisable, they will begin to trade separate and apart from the
Common Shares. Twenty days after the occurrence of certain "Flip-In Events,"
each Right will become the right to purchase a Common Share of
82
85
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
KeyCorp for the then par value per share (now $1 per share) and the Rights held
by a 15% or more shareholder will become void. KeyCorp may redeem these Rights
at its option at $.005 per Right subject to certain limitations. Unless redeemed
earlier, the Rights expire on September 12, 1999. On October 1, 1993, KeyCorp
amended the Rights so that the Merger would not activate the provisions of the
Rights.
At December 31, 1993, KeyCorp had 10.0 million shares of $5 par value,
non-voting preferred stock authorized of which 1,280,000 shares of Series B were
outstanding represented by 6.4 million Depositary Shares. Each Depositary Share
represents a one-fifth interest in a share of 10% Cumulative Preferred Stock,
Series B, $125 liquidation preference per share. Preferred stock is reported on
the accompanying consolidated balance sheet at its stated value of $125 per
share. In the Merger, each of the Series B shares were converted into one share
of 10% Cumulative Preferred Stock, Class A.
On August 2, 1993, KeyCorp redeemed the 479,394 outstanding shares of Series A
Preferred Stock at its stated value ($24 million) plus accumulated but unpaid
dividends.
On March 1, 1993, KeyCorp redeemed the 1.2 million outstanding shares of
Fixed/Adjustable Rate Cumulative Preferred Stock at 103% of its stated value
($60 million), plus accumulated but unpaid dividends.
KeyCorp effected a two-for-one stock split on March 22, 1993, by means of a 100%
stock dividend. All relevant Common Share amounts, per Common Share amounts and
related data in this report have been adjusted to reflect this split.
In connection with the Merger, at a special meeting held February 16, 1994,
shareholders increased the authorized number of shares of KeyCorp to 926.4
million, of which 1.4 million are shares of 10% Cumulative Preferred Stock,
Class A, par value $5 per share; 25.0 million are shares of Preferred Stock, par
value $1 per share; and 900.0 million are Common Shares, par value $1 per share.
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
KeyCorp maintains various incentive compensation plans which provide for its
ability to grant stock options, stock appreciation rights, limited stock
appreciation rights, restricted stock and performance shares to selected
employees and directors. Generally, the terms of these plans stipulate that the
exercise price of options may not be less than the fair market value of
KeyCorp's Common Shares at the date the options are granted. Options granted
expire not later than ten years and one month from the date of grant. Several
option plans have been acquired through mergers. These plans have expired or
were terminated, but unexercised options granted under the plans remain
outstanding. At December 31, 1993 and 1992, options for Common Shares available
for future grant totaled 1,237,965 and 1,233,958, respectively.
The terms of KeyCorp's plans stipulate that stock appreciation rights may only
be granted in tandem with stock options. The appreciation rights have the same
terms as do the options, except that, upon exercise, the holder may receive
either cash or shares for the excess of the current market value of KeyCorp's
Common Shares over the options exercise price. Upon exercise of a stock
appreciation right, the related option is surrendered. During 1993, all stock
appreciation rights for which exercisability was limited to a period following a
change in control of the Corporation were cancelled.
83
86
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The following table presents a summary of pertinent information with respect to
KeyCorp's stock options and stock appreciation rights.
STOCK OPTIONS
1993 1992
------------------------- -------------------------
SHARES OPTION PRICE SHARES OPTION PRICE
---------- ------------ ---------- ------------
Outstanding at beginning of year........... 9,324,776 $ 3.36-32.06 8,457,547 $ 2.49-25.87
Granted.................................... 2,062,544 29.37-38.18 3,670,370 24.63-32.06
Assumed in acquisition..................... 9,008 4.69- 7.61 -- --
Exercised or surrendered................... 1,697,458 3.89-28.25 2,508,626 2.49-22.92
Lapsed or cancelled........................ 88,955 13.77-33.94 294,515 12.30-28.25
---------- ----------
Outstanding at end of year (1)............. 9,609,915 3.36-38.18 9,324,776 3.36-32.06
---------- ----------
Exercisable at end of year (2)............. 6,529,168 3.36-38.18 6,069,912 3.36-32.06
---------- ----------
---------- ----------
STOCK APPRECIATION RIGHTS
1993 1992
------------------------- -------------------------
SHARES OPTION PRICE SHARES OPTION PRICE
---------- ------------ ---------- ------------
Outstanding at beginning of year........... 2,028,240 $11.69-28.25 1,828,708 $ 6.78-20.88
Granted.................................... 222,000 33.94 920,000 28.25
Exercised or surrendered................... 36,400 11.69-20.88 672,468 6.78-20.88
Lapsed or cancelled........................ 2,169,840 11.69-33.94 48,000 28.25
---------- ----------
Outstanding at end of year (1)............. 44,000 11.69 2,028,240 11.69-28.25
---------- ----------
Exercisable at end of year................. 44,000 11.69 49,000 11.69
---------- ----------
---------- ----------
(1) Ordinary options outstanding at December 31, 1992 include 1,979,240 shares
granted in tandem with Limited SARs.
(2) Ordinary options exercisable at December 31, 1992 include 1,107,240 shares
granted in tandem with Limited SARs.
In 1991, KeyCorp's Board of Directors approved grants to certain officers of
KeyCorp and its subsidiaries under the Career Equity Program ("Program"). The
Program is designed to increase equity ownership by the participants, who make
an initial investment and elect to have options automatically exercised at
regular intervals when share value appreciation is present. At exercise,
replacement option grants are made at the current market value. Shares received
under the Program are restricted as to resale during the five-year period of the
Program.
12. MERGER AND INTEGRATION CHARGES
Merger and integration charges of $118.7 million ($80.6 million after tax, $.33
per Common Share), $92.7 million ($66.6 million after tax, $.29 per Common
Share) and $93.8 million ($68.2 million after tax, $.29 per Common Share) were
recorded in 1993, 1992 and 1991, respectively. The 1993 charges were incurred in
connection with the March 1, 1994, merger of old KeyCorp into and with Society,
while the 1992 charges related to the mergers with PSB and Ameritrust. The 1991
charges related to the merger with Ameritrust. The merger and integration
charges included accruals for merger expenses, consisting primarily of
investment banking and other professional fees directly related to the merger
($20.5 million); severance payments and other employee costs ($49.6 million);
systems and facilities costs ($35.7 million); and other costs incident to the
Merger ($12.9 million). These charges were recorded by the parent company in the
fourth quarter of 1993 at which time management determined that it was probable
that a liability for all such charges had been incurred and could be reasonably
estimated. The merger and integration charges recorded in connection with the
PSB and Ameritrust mergers in 1992, and the Ameritrust merger in 1991, were
similar in nature. The above mergers are described in greater detail in Note 2,
Mergers, Acquisitions and Divestitures, on page 71 of this report.
84
87
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
13. EMPLOYEE BENEFITS
PENSION PLANS
KeyCorp and its subsidiaries sponsor noncontributory pension plans covering
substantially all employees. Benefits paid from these plans are based on age,
years of service and compensation prior to retirement and are determined in
accordance with defined formulas. The Corporation's funding policy is to
contribute amounts to the plans which meet the minimum funding requirements set
forth in the Employee Retirement Income Security Act (ERISA) of 1974, plus such
additional amounts as the Corporation determines to be appropriate.
The following table sets forth the status of the unfunded plans and the amounts
recognized in the consolidated balance sheets:
DECEMBER 31,
-----------------------
(in thousands) 1993 1992
--------------------------------------------------------- -------- --------
Accumulated benefit obligations, including vested
benefits of $444,018 and $362,626...................... $454,831 $373,595
-------- --------
-------- --------
Fair value of plan assets, primarily listed stock and
fixed income securities(1)............................. $614,139 $583,235
Projected benefit obligations............................ 502,614 433,509
-------- --------
Excess of fair value of plan assets over projected
benefit obligations................................. 111,525 149,726
Unrecognized net loss (gain)............................. 56,834 (132)
Unrecognized prior service benefit....................... (2,850) (3,809)
Unrecognized net asset at January 1, 1986 being
recognized over 15 years............................... (38,609) (45,405)
-------- --------
Prepaid pension cost (included in other assets)........ $126,900 $100,380
-------- --------
-------- --------
(1)Including KeyCorp Common Shares valued at $27.8 million and $30.4 million at
December 31, 1993 and 1992, respectively.
The weighted average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of projected benefit
obligations were 7.37% and 4.00%, respectively, at December 31, 1993, and 8.08%
and 4.78%, respectively, at December 31, 1992. The weighted average expected
long-term rate of return on pension assets used in determining net pension cost
was 9.91% for 1993, 9.60% for 1992 and 9.69% for 1991.
The Corporation also maintains several unfunded, non-qualified, supplemental
executive retirement programs that provide additional defined pension benefits
for certain officers.
85
88
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The following table sets forth the status of the unfunded plans and the amounts
recognized in the consolidated balance sheets:
DECEMBER 31,
-----------------------
(in thousands) 1993 1992
--------------------------------------------------------- -------- --------
Accumulated benefit obligations, including vested
benefits of $47,288 and $35,300........................ $ 50,321 $ 36,211
-------- --------
-------- --------
Projected benefit obligations............................ $ 62,659 $ 42,414
Unrecognized prior service cost.......................... (5,352) (6,524)
Unrecognized transition obligation....................... (3,864) (4,362)
Unrecognized net loss.................................... (18,286) (6,868)
Adjustment to recognize minimum liability................ 11,653 10,897
-------- --------
Accrued pension cost (included in other liabilities)... $ 46,810 $ 35,557
-------- --------
-------- --------
Net pension cost (income) for the funded and unfunded plans included the
following components:
YEAR ENDED DECEMBER 31,
------------------------------------
(in thousands) 1993 1992 1991
- ----------------------------------------------------- ------- ------- --------
Service cost of benefits earned...................... $22,506 $21,424 $ 21,604
Interest cost on projected benefit obligations....... 39,098 34,687 33,487
Actual return on plan assets......................... (44,619) (51,773) (105,430)
Net amortization and deferral........................ (14,229) (4,360) 55,480
------- ------- --------
Net pension cost (income)....................... $ 2,756 $ (22) $ 5,141
------- ------- --------
------- ------- --------
In 1993, the Corporation recognized curtailment and settlement gains of $2.9
million resulting from the divestiture of ATC. Such amounts were included in the
net gain from that divestiture. In 1992, the Corporation recognized curtailment
gains of $7.2 million resulting from merger-related staff reductions. A portion
of the retirement obligations associated with these reductions was settled by
lump-sum cash distributions which resulted in settlement gains of $1.4 million
and $3.0 million in 1993 and 1992, respectively. Both the curtailment and
settlement gains related to the merger-related staff reductions are included in
other noninterest income.
OTHER POSTRETIREMENT BENEFIT PLANS
The Corporation sponsors postretirement health care and life insurance plans
that cover substantially all employees. The postretirement health care plans are
nonfunded and contributory, with retirees' contributions adjusted annually to
reflect certain cost-sharing provisions and benefit limitations. The
postretirement life insurance plans are noncontributory. The Corporation has
adopted a funding policy for one of its life insurance plans and annually
contributes the service cost of benefits earned plus one-thirtieth of the
unfunded accumulated postretirement benefit obligations.
Effective January 1, 1993, the Corporation adopted the provisions of SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
This statement requires that employers recognize the cost of providing
postretirement benefits over the employees' active service periods to the date
they attain full eligibility for such benefits. Postretirement benefits costs
for 1992 and 1991, which were recorded on a cash basis, have not been restated.
Net postretirement benefits cost was $16.9 million in 1993, including $8.2
million due to adoption of the new standard, $7.7 million in 1992 and $6.6
million in 1991.
86
89
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Net post retirement benefits cost include the following components:
YEAR ENDED
(in thousands) DECEMBER 31, 1993
------------------------------------------------------------- -----------------
Service cost of benefits attributed to service............... $ 2,873
Interest cost on accumulated postretirement benefit
obligations................................................ 8,713
Actual return on plan assets................................. (22)
Amortization of transition obligation over 20 years.......... 5,372
Net amortization and deferral................................ (10)
-----------------
Net postretirement benefits cost........................ $16,926
-----------------
-----------------
The following table sets forth the plans' combined funded status reconciled with
the amount shown in the consolidated balance sheet:
YEAR ENDED
(in thousands) DECEMBER 31, 1993
------------------------------------------------------------- -----------------
Accumulated postretirement benefit obligations:
Retirees................................................ $ (81,208)
Fully eligible plan participants........................ (10,624)
Other active plan participants.......................... (27,396)
-----------------
(119,228)
Fair value of plan assets.................................... 168
-----------------
Accumulated postretirement benefit obligations in excess of
plan assets................................................ (119,060)
Unrecognized transition obligation........................... 101,654
Unrecognized net loss........................................ 7,826
-----------------
Accrued postretirement benefits cost (included in other
liabilities).......................................... $ (9,580)
-----------------
-----------------
The assumed 1994 health care cost trend rate for Medicare-eligible retirees was
11.0% while that for non-Medicare-eligible retirees was 13.0%. Both rates are
assumed to gradually decrease to 5.5% by the year 2009 and remain constant
thereafter. Increasing the assumed health care cost trend rates by one
percentage point in each future year would have an immaterial impact on
postretirement benefits cost due to cost-sharing provisions and benefit
limitations. The weighted average discount rate used in determining the
accumulated postretirement benefit obligations was 7.4% at December 31, 1993.
EMPLOYEE STOCK PURCHASE AND SAVINGS PLANS
Substantially all of the Corporation's employees are covered under stock
purchase and savings plans that are qualified under Section 401(k) of the
Internal Revenue Code. Under provisions of these plans, employees may contribute
1% to 15% of eligible compensation, with up to 6% being eligible for matching
contributions from the Corporation in the form of KeyCorp Common Shares. Under
an annual discretionary profit sharing component, employees can receive
additional matching employer contributions from the Corporation based on a
formula established each year by KeyCorp's Board of Directors. Total expense
associated with these plans was $40.4 million, $30.4 million and $29.0 million
in 1993, 1992 and 1991, respectively.
POSTEMPLOYMENT BENEFITS
The Corporation adopted the provisions of SFAS No. 112, "Employers' Accounting
for Postemployment Benefits," during 1993. This standard requires that employers
who provide benefits to former or inactive employees after employment but before
retirement recognize a liability for such benefits if specified conditions are
met. Adoption of this standard increased noninterest expense by $4.0 million.
Postemployment benefits for 1992 and 1991, which were recorded on a cash basis,
were not restated.
87
90
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
14. INCOME TAXES
Income taxes included in the consolidated statements of income are as
follows:
YEAR ENDED DECEMBER 31,
----------------------------------
(in thousands) 1993 1992 1991
- --------------------------------------------- -------- -------- --------
Current payable:
Federal................................. $289,987 $182,277 $ 99,485
State................................... 34,554 28,655 17,719
-------- -------- --------
324,541 210,932 117,204
Deferred:
Federal................................. 55,043 68,297 17,580
State................................... (5,612) 403 1,900
-------- -------- --------
49,431 68,700 19,480
-------- -------- --------
Total income tax expense................ $373,972 $279,632 $136,684
-------- -------- --------
-------- -------- --------
The reasons for the differences between income tax expense and the amount
computed by applying the statutory Federal tax rate to income before taxes are
as follows:
YEAR ENDED DECEMBER 31,
----------------------------------
(in thousands) 1993 1992 1991
- --------------------------------------------- -------- -------- --------
Income before taxes times statutory tax
rate(1).................................... $379,364 $294,139 $153,129
State income tax, net of Federal tax
benefit.................................... 18,295 19,636 13,056
Amortization of non-deductible intangibles... 10,349 11,317 10,760
Tax-exempt interest income................... (40,610) (47,228) (52,073)
Tax credits.................................. (4,184) (3,120) (2,825)
Other........................................ 10,758 4,888 14,637
-------- -------- --------
Total income tax expense................... $373,972 $279,632 $136,684
-------- -------- --------
-------- -------- --------
- ---------------
(1) 35% for 1993, 34% for 1992 and 1991.
The significant types of temporary differences that gave rise to net deferred
income taxes include the provision for loan losses, lease income, merger and
integration charges and writedown of other real estate owned. Significant
components of deferred income taxes are as follows:
YEAR ENDED DECEMBER 31,
----------------------------------
(in thousands) 1993 1992 1991
- --------------------------------------------- -------- -------- --------
Provision for loan losses.................... $ (4,536) $ 8,164 $(24,957)
Leasing income reported using the operating
method for tax purposes.................... 101,859 66,304 49,699
Writedown of other real estate owned......... (14,105) (14,243) (6,100)
Merger and integration charges............... (33,949) 17,050 (27,016)
Other........................................ 162 (8,575) 27,854
-------- -------- --------
Deferred income tax expense................ $ 49,431 $ 68,700 $ 19,480
-------- -------- --------
-------- -------- --------
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NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Significant components of KeyCorp's deferred tax asset (liability) are as
follows:
DECEMBER 31,
----------------------------------
(in thousands) 1993 1992 1991
- --------------------------------------------- -------- -------- --------
Provision for loan losses.................... $259,082 $263,531 $265,731
Leasing income reported using the operating
method for tax purposes.................... (381,393) (282,006) (216,330)
Writedown of other real estate owned......... 25,289 24,393 9,174
Merger and integration charges............... 48,677 14,700 26,827
Other........................................ (50,523) (61,216) (64,990)
-------- -------- --------
Deferred tax asset (liability)............. $(98,868) $(40,598) $ 20,412
-------- -------- --------
-------- -------- --------
15. COMMITMENTS, CONTINGENT LIABILITIES AND OTHER DISCLOSURES
LEGAL PROCEEDINGS
In the ordinary course of business, KeyCorp and its subsidiaries are subject to
legal actions which involve claims for substantial monetary relief. Based on
information presently available to management and the Corporation's counsel,
management does not believe that any legal actions, individually or in the
aggregate, will have a material adverse effect on KeyCorp's consolidated
financial condition.
RESTRICTIONS ON CASH, DUE FROM BANKS, SUBSIDIARY DIVIDENDS AND LENDING
ACTIVITIES
Under the provisions of the Federal Reserve Act, depository institutions are
required to maintain certain average balances in the form of cash or
noninterest-bearing balances with the Federal Reserve Bank. Average reserve
balances aggregating $1.1 billion in 1993 were maintained in fulfillment of
these requirements.
The principal source of income for the parent company is dividends from its
affiliate banks. Such dividends are subject to certain restrictions as set forth
in the national and state banking laws and regulations. At December 31, 1993,
undistributed earnings of $535.4 million were free of such restrictions and
available for the payment of dividends to the parent company. Loans and advances
from banking affiliates to the parent company are also limited by law and are
required to be collateralized.
16. FINANCIAL INSTRUMENTS
FAIR VALUE DISCLOSURES
The following disclosures are made in accordance with the provisions of SFAS No.
107, "Disclosures About Fair Value of Financial Instruments," which requires the
disclosure of fair value information about both on-and off-balance sheet
financial instruments where it is practicable to estimate that value. Fair value
is defined in SFAS No. 107 as the amount at which an instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale. It is not the Corporation's intent to enter into
such exchanges.
In accordance with the provisions of SFAS No. 107, the estimated fair values of
deposits, credit card loans and residential real estate mortgage loans do not
take into account the fair values of long-term relationships, which are integral
parts of the related financial instruments. The disclosed estimated fair values
of such instruments would increase significantly if the fair values of the
long-term relationships were considered.
In cases where quoted market prices were not available, fair values were
estimated using present value or other valuation methods, as described below.
The use of different assumptions (e.g., discount rates and cash flow estimates)
and estimation methods could have a significant effect on fair value amounts.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts the Corporation could realize in a current market exchange. Because
SFAS No. 107 excludes certain financial instruments and all nonfinancial
89
92
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
instruments from its disclosure requirements, any aggregation of the fair value
amounts presented would not represent the underlying value of the Corporation.
DECEMBER 31, 1993 DECEMBER 31, 1992
--------------------------- ---------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
(in thousands) AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- ------------------------------------- ----------- ----------- ----------- -----------
ASSETS
Cash and due from banks............ $ 2,777,438 $ 2,777,438 $ 3,079,737 $ 3,079,737
Short-term investments............. 107,219 107,219 985,502 985,502
Mortgage loans held for sale....... 1,325,338 1,325,338 938,541 938,541
Securities available for sale...... 1,726,828 1,794,845 2,458,641 2,518,320
Investment securities.............. 11,122,093 11,340,206 8,976,300 9,193,081
Loans, net of allowance............ 39,268,532 40,023,240 35,239,176 35,813,114
Liabilities
Deposits........................... $46,499,148 $46,717,907 $43,433,065 $43,616,733
Federal funds purchased and
securities
sold under agreements to
repurchase...................... 4,120,258 4,120,258 4,207,520 4,207,520
Other short-term borrowings........ 1,776,192 1,776,192 874,887 874,887
Long-term debt..................... 1,763,870 1,908,159 1,790,078 1,830,945
The following methods and assumptions were used in estimating the fair values of
financial instruments presented in the preceding table and in the following
paragraphs. For financial instruments with a remaining average life to maturity
of less than six months, carrying amounts were used as an approximation of fair
value. The carrying amounts reported for cash and due from banks, and short-term
investments are their fair values. The carrying value of mortgage loans held for
sale approximates fair value. Securities available for sale and investment
securities were valued based on quoted market prices. Where quoted market prices
were unavailable, fair values were based on quoted market prices of similar
instruments. A discounted cash flow model was used to estimate the fair values
for certain loans. Certain residential real estate loans and student loans held
for sale were valued based on quoted market prices of similar loans offered or
sold in recent securitization transactions. Lease financing receivables,
although excluded from the scope of SFAS No. 107, were included in the estimated
fair value for loans at their carrying amount. In circumstances in which the
fair value of loans was not estimated, the carrying amount was used as a
reasonable approximation of fair value. The fair values of certificates of
deposit and of long-term debt were estimated based on discounted cash flows.
Carrying amounts reported for other deposits and short-term borrowings were used
as a reasonable approximation of their fair values. Interest rate swaps were
valued based on discounted cash flow models and had a fair value of $57.2
million and $75.8 million at December 31, 1993 and 1992, respectively.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Corporation, mainly through its affiliate banks, is party to various
financial instruments with off-balance sheet risk. The banks use these financial
instruments in the normal course of business to meet the financing needs of
their customers and to manage effectively their exposure to interest rate risk.
The financial instruments used include commitments to extend credit, standby
letters of credit, interest rate swap agreements, forward contracts, futures and
options on financial futures, and interest rate cap and floor agreements.
These instruments involve, to varying degrees, credit and interest rate risks in
excess of amounts recognized in the Corporation's consolidated balance sheet.
Credit risk is the possibility that a counterparty to a financial instrument
will be unable to perform its contractual obligations. Market risk is the
possibility that, due to changes in economic conditions, the Corporation's net
interest income will be adversely affected.
The Corporation mitigates its exposure to credit risk through internal controls
over the extension of credit. These controls include the process of credit
approval and review, the establishment of credit limits, and, when deemed
necessary, securing collateral. The Corporation manages its exposure to market
risk, in part, by using
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NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
off-balance sheet instruments to offset existing interest rate risk of its
assets and liabilities, and by setting variable rates of interest on contingent
extensions of credit.
The following is a summary of the contractual or notional amount of each
significant class of off-balance sheet financial instruments outstanding. The
Corporation's maximum possible accounting loss from commitments to extend credit
and from standby letters of credit equals the contractual amount of these
instruments. The notional amount represents the total dollar volume of
transactions and is significantly greater than the amount at risk.
DECEMBER 31,
---------------------------
(in thousands) 1993 1992
- ---------------------------------------------------------------- ----------- -----------
FINANCIAL INSTRUMENTS WHOSE CONTRACTUAL AMOUNTS REPRESENT
CREDIT AND/OR MARKET RISK
Loan commitments:
Credit card lines............................................. $ 4,561,794 $ 4,067,628
Home equity................................................... 2,690,127 1,940,505
Commercial real estate and construction....................... 1,184,443 866,816
Other......................................................... 8,382,207 7,655,666
----------- -----------
Total loan commitments........................................ 16,818,571 14,530,615
Other commitments:
Standby letters of credit..................................... 1,095,521 978,790
Commercial letters of credit.................................. 347,705 58,729
Loans sold with recourse...................................... 156,070 203,381
----------- -----------
Total loan and other commitments.............................. $18,417,867 $15,771,515
----------- -----------
----------- -----------
FINANCIAL INSTRUMENTS WHOSE NOTIONAL OR CONTRACTUAL AMOUNTS
EXCEED THE AMOUNT OF CREDIT AND/OR MARKET RISK
When issued securities:
Commitments to purchase....................................... $ 20,200 $ 1,200
Other......................................................... 4,152 115,697
Mortgage loan sale commitments.................................. 1,124,374 786,473
Mortgage loan options........................................... 68,000 63,000
Futures and options on financial futures........................ 688,541 428,742
Interest rate swap agreements................................... 9,573,171 5,649,563
Interest rate cap and floor agreements.......................... 102,026 207,630
KeyCorp's 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, have fixed expiration dates or other termination clauses, and
may require the payment of fees. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent actual future cash requirements of the Corporation. KeyCorp evaluates
each customer's creditworthiness on a case-by-case basis.
Standby letters of credit are conditional commitments issued by the Corporation
to guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
KeyCorp's mortgage banking affiliates originate and service residential mortgage
loans to be sold in the secondary market. In years prior to 1992, residential
mortgages were sold with provisions for recourse by companies acquired by
KeyCorp. At December 31, 1993, the amount of such loans sold with recourse was
$156.1 million. KeyCorp has not and does not sell residential mortgages with
provisions for recourse.
91
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NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
KeyCorp's mortgage banking affiliates enter into forward sale agreements and
option contracts to hedge against adverse movements in interest rates on
mortgage loans held for sale. Forward sale agreements commit the affiliates to
deliver mortgage loans in future periods; option contracts allow the affiliates
to sell or purchase mortgage loans at a specified price, in future periods.
The banks enter into interest rate swap agreements primarily to manage interest
rate risk and to accommodate the business needs of customers. Under a typical
swap agreement, one party pays a fixed rate of interest based on a notional
amount to a second party, which pays to the first party a variable rate of
interest based on the same notional amount. The swaps have an average maturity
of 1.8 years, with selected swaps having fixed maturity dates through 2003. The
following is a summary of the notional amounts of outstanding interest rate swap
agreements:
December 31, 1993
---------------------------------------------------
Receive Pay Forward-
(in millions) Fixed Fixed Basis Starting Total
- ------------------------------ ------- ----- ----- -------- ------
"Portfolio"................... $7,559 $150 $150 $500 $8,359
Customer...................... 623 561 -- 30 1,214
------- ----- ----- -------- ------
Total interest rate swaps... $8,182 $711 $150 $530 $9,573
------- ----- ----- -------- ------
------- ----- ----- -------- ------
The banks enter into interest rate cap and floor agreements in the management of
their interest rate risk and to accommodate the business needs of customers.
These financial instruments transfer interest rate risk at predetermined levels.
The banks receive a fee as compensation for writing interest rate caps and
floors. The interest rate risk from writing interest rate caps and floors is
minimized by the banks through offsetting transactions.
Financial futures contracts and options on financial futures provide for the
delayed delivery or purchase of securities, interest rate instruments or foreign
currency. The banks enter into forward contracts and options to hedge their
interest rate risk and in connection with customer transactions, as well as to
minimize the interest rate risk exposure of mortgage banking activities.
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NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
17. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
CONDENSED BALANCE SHEETS
DECEMBER 31,
-------------------------
(in thousands) 1993 1992
- ------------------------------------------------------------- ---------- ----------
ASSETS
Cash and due from banks.................................... $ 1,004 $ 827
Interest-bearing deposits with bank affiliates............. 481,000 344,000
Securities purchased from bank affiliates under resale
agreements.............................................. 5,466 603
Investment securities...................................... 46,936 61,410
Loans and advances to subsidiaries:
Banks and bank holding companies........................ 218,507 172,229
Nonbank subsidiaries.................................... 227,403 271,980
---------- ----------
445,910 444,209
Investment in subsidiaries:
Banks and bank holding companies........................ 4,515,267 4,259,452
Nonbank subsidiaries.................................... 192,953 194,309
---------- ----------
4,708,220 4,453,761
Other assets............................................... 226,770 168,061
---------- ----------
TOTAL ASSETS............................................ $5,915,306 $5,472,871
---------- ----------
---------- ----------
LIABILITIES
Short-term borrowings...................................... $ 27,600 $ 120,000
Long-term debt............................................. 1,142,785 1,282,479
Accrued interest and other liabilities..................... 351,354 143,104
---------- ----------
Total liabilities....................................... 1,521,739 1,545,583
SHAREHOLDERS' EQUITY......................................... 4,393,567 3,927,288
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $5,915,306 $5,472,871
---------- ----------
---------- ----------
CONDENSED STATEMENTS OF INCOME
DECEMBER 31,
----------------------------------------
(in thousands) 1993 1992 1991
- ------------------------------------------------------------- ---------- ---------- ----------
INCOME
Dividends from subsidiaries:
Banks and bank holding companies........................ $ 664,981 $ 218,764 $ 408,707
Nonbank subsidiaries.................................... 3,843 5,292 12,573
Management fees and interest income from subsidiaries...... 113,684 95,169 78,051
Other income............................................... 34,549 12,323 3,129
---------- ---------- ----------
817,057 331,548 502,460
EXPENSES
Interest on borrowed funds................................. 97,584 84,613 74,859
Merger and integration charges............................. 118,718 77,380 18,139
Personnel and other expenses............................... 198,136 82,743 99,571
---------- ---------- ----------
414,438 244,736 192,569
Income before income tax benefit and equity in
undistributed net income (loss) of subsidiaries......... 402,619 86,812 309,891
Income tax benefit......................................... 81,710 45,403 32,221
---------- ---------- ----------
484,329 132,215 342,112
Equity in undistributed net income (loss) of subsidiaries.... 225,597 459,883 (28,416)
---------- ---------- ----------
NET INCOME.............................................. $ 709,926 $ 592,098 $ 313,696
---------- ---------- ----------
---------- ---------- ----------
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NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
CONDENSED STATEMENTS OF CASH FLOW
YEAR ENDED DECEMBER 31,
----------------------------------
(in thousands) 1993 1992 1991
- ------------------------------------------------- -------- -------- --------
OPERATING ACTIVITIES
Net income..................................... $709,926 $592,098 $313,696
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes....................... (15,315) (63) (3,378)
Gain on sale of subsidiary.................. (29,410) -- --
Net increase in other assets................ (38,037) (53,552) (6,492)
Net increase in other liabilities........... 72,688 12,570 12,685
Amortization of intangibles................. 8,754 7,704 7,559
Net increase in accrued merger and
integration charges....................... 78,261 18,930 12,114
Equity in undistributed net (income) loss of
subsidiaries.............................. (225,597) (459,883) 28,416
Other operating activities, net............. 3,377 7,627 (179)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES........ 564,647 125,431 364,421
INVESTING ACTIVITIES
Proceeds from prepayments and maturities of
investment securities....................... 8,523 8,404 30,915
Purchases of investment securities............. (5,929) (15,834) (46,510)
Net (increase) decrease in security resale
agreements.................................. (4,863) 237,974 (180,029)
Net (increase) decrease in interest-bearing
deposits.................................... (137,000) (273,071) 3,251
Net decrease (increase) in loans
and advances to subsidiaries................ 116,676 (259,774) (206,115)
Proceeds from sale of subsidiary............... 148,054 -- --
Purchase of subsidiary......................... (137,431) -- --
Purchases of premises and equipment............ (10,895) (3,317) (1,367)
Increase in investments in subsidiaries........ (6,460) (24,893) (2,786)
Other investing activities, net................ -- (2,442) (88)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES............ (29,325) (332,953) (402,729)
FINANCING ACTIVITIES
Net increase (decrease) in short-term
borrowings.................................. (92,400) 64,122 (224,528)
Net proceeds from issuance of long-term debt... 305,100 451,655 222,630
Payments on long-term debt..................... (430,465) (115,630) (94,310)
Purchase of treasury stock..................... -- -- (8,340)
Net proceeds from issuance of preferred
stock....................................... -- -- 154,656
Redemption of preferred stock.................. (85,770) -- --
Net proceeds from issuance of common stock..... -- -- 122,885
Net adjustment related to pooling of
interests................................... -- (515) --
Proceeds from issuance of common stock pursuant
to employee stock purchase, stock option and
dividend reinvestment plans................. 28,238 39,442 41,084
Cash dividends................................. (262,528) (233,480) (182,906)
Other financing activities, net................ 2,680 -- --
-------- -------- --------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES..................................... (535,145) 205,594 31,171
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND DUE FROM
BANKS.......................................... 177 (1,928) (7,137)
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR..... 827 2,755 9,892
-------- -------- --------
CASH AND DUE FROM BANKS AT END OF YEAR........... $ 1,004 $ 827 $ 2,755
-------- -------- --------
-------- -------- --------
- ---------------
For the years ended December 31, 1993, 1992 and 1991, the parent company paid
interest on borrowed funds of $98.1 million, $78.2 million and $70.6 million,
respectively.
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(A)(2) FINANCIAL STATEMENT SCHEDULES
All financial statement schedules for Society Corporation and subsidiaries have
been included in the consolidated financial statements or the related footnotes,
or they are either inapplicable or not required.
(A)(3) EXHIBITS*
3.1 Amended and Restated Articles of Incorporation of KeyCorp. Filed as Exhibit 7
to Form 8-A/A filed on February 25, 1994, and incorporated herein by
reference.
3.2 Regulations of KeyCorp. Filed as Exhibit 6 to Form 8-A/A filed on February 25,
1994, and incorporated herein by reference.
4.1 Rights Agreement, dated as of August 25, 1989, between Society Corporation and
First Chicago Trust Company of New York, as Rights Agent. Filed as Exhibit 1
to Form 8-A filed on August 29, 1989, and incorporated herein by reference.
4.2 First Amendment to Rights Agreement, dated as of February 21, 1991, between
Society Corporation and First Chicago Trust Company of New York, as Rights
Agent. Filed as Exhibit 2 to Form 8, filed on February 28, 1991, amending
Registration Statement on Form 8-A filed August 29, 1989, and incorporated
herein by reference.
4.3 Second Amendment to Rights Agreement, dated as of September 12, 1991, between
Society Corporation and First Chicago Trust Company of New York, as Rights
Agent. Filed as Exhibit 4 to Schedule 13D filed September 23, 1991, and
incorporated herein by reference.
4.4 Resignation of First Chicago Trust Company of New York as Rights Agent and
appointment of Society National Bank as Rights Agent effective July 1, 1992.
Filed as Exhibit 4.4 to Form 10-K for the year ended December 31, 1992, and
incorporated herein by reference.
4.5 Third Amendment to Rights Agreement, dated as of October 1, 1993, between
Society Corporation and Society National Bank, as Rights Agent. Filed as
Exhibit 4 to Schedule 13D filed on October 12, 1993, and incorporated herein
by reference.
4.6 Deposit Agreement, dated July 27, 1991, by and between old KeyCorp and Chase
Manhattan Bank. Filed as Exhibit 4(c) to old KeyCorp's Registration Statement
on Form S-3 (Registration No. 33-40633), and incorporated herein by reference.
10.1 Society Corporation Management Incentive Compensation Plan (November 30, 1993
Restatement)
10.2 Society Corporation Long-Term Incentive Compensation Plan (November 30, 1993
Restatement)
10.3 Society Corporation Supplemental Retirement Plan (January 1, 1993 Amendment
and Restatement). Filed as Exhibit 10.3 to Form 10-K for the year ended
December 31, 1992, and incorporated herein by reference.
10.4 Society Corporation Excess Benefit Retirement Plan (April 26, 1990 Amendment
and Restatement). Filed as Exhibit 10.4 to Form 10-K for the year ended
December 31, 1990, and incorporated herein by reference.
10.5 Society Corporation Supplemental Stock Purchase and Savings Plan (December 30,
1992 Amendment and Restatement). Filed as Exhibit 10.5 to Form 10-K for the
year ended December 31, 1992, and incorporated herein by reference.
10.6 Compensation Continuance Agreement executed between Society Corporation and
certain executive officers of Society Corporation as of December 5, 1990.
Filed as Exhibit 10.5 to Form 10-K for the year ended December 31, 1990, and
incorporated herein by reference.
10.7 Compensation Continuance Agreement executed between Society Corporation and
certain executive officers of Society Corporation as of March 31, 1992. Filed
as Exhibit 10.7 to Form 10-K for the year ended December 31, 1992, and
incorporated herein by reference.
10.8 Compensation Continuation Agreements executed between Society Corporation and
certain executive officers of Society Corporation as of June 24, 1993.
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98
10.9 Amended and Restated Employment Agreement between Society Corporation and
Victor J. Riley, Jr., dated December 20, 1993. Filed as Exhibit 99(f) to
Registration Statement on Form S-4 filed on December 28, 1993 (Registration
No. 33-51717), and incorporated herein by reference.
10.10 Amended and Restated Employment Agreement between Society Corporation and
Robert W. Gillespie, dated December 20, 1993.
10.11 Employment Agreement between Society Corporation and Roger Noall, dated
February 4, 1994.
10.12 Agreement dated August 16, 1990, between Society Corporation and George H.
Cress. Filed as Exhibit 10.10 to Form 10-K for the year ended December 31,
1990, and incorporated herein by reference.
10.13 Society Corporation Director Deferred Compensation Plan (June 30, 1993
Restatement).
10.14 Society Corporation Compensation Arrangement Relating to Financial Planning
and Tax Services. Filed as Exhibit 10.12 to Form 10-K for the year ended
December 31, 1990, and incorporated herein by reference.
10.15 Society Corporation Corporate Universal Life Policy Program.
10.16 Society Corporation Supplemental Long Term Disability Program.
10.17 1985 St. Joseph Bancorporation, Inc. Master Stock Compensation Plan. Filed as
Exhibit 10.26 to Form 10-K for the year ended December 31, 1989, and
incorporated herein by reference.
10.18 Trustcorp, Inc. Excess Retirement Plan. Filed as Exhibit 10.27 to Form 10-K
for the year ended December 31, 1989, and incorporated herein by reference.
10.19 Society Corporation 1977 Stock Option Plan, as amended. Filed as Exhibit 10.14
to Form 10-K for the year ended December 31, 1991, and incorporated herein by
reference.
10.20 Society Corporation 1984 Stock Option Plan, as amended. Filed as Exhibit 10.15
to Form 10-K for the year ended December 31, 1991, and incorporated herein by
reference.
10.21 Society Corporation 1984 Stock Appreciation Rights Plan, as amended. Filed as
Exhibit 10.17 to Form 10-K for the year ended December 31, 1991, and
incorporated herein by reference.
10.22 Centran Corporation 1984 Stock Option Plan, as amended. Filed as Exhibit 10.19
to Form 10-K for the year ended December 31, 1991, and incorporated herein by
reference.
10.23 Society Corporation 1988 Stock Option Plan, as amended.
10.24 Society Corporation 1988 Stock Appreciation Plan, as amended.
10.25 1987 Stock Option Plan of Trustcorp, Inc. Filed as Exhibit 10.24 to Form 10-K
for the year ended December 31, 1989, and incorporated herein by reference.
10.26 1981 Incentive Stock Option Plan of Toledo Trustcorp, Inc. Filed as Exhibit
10.25 to Form 10-K for the year ended December 31, 1989, and incorporated
herein by reference.
10.27 Society Corporation 1991 Equity Compensation Plan. Filed as Exhibit 10 to Form
10-Q for the quarter ended March 31, 1991, and incorporated herein by
reference.
10.28 First Amendment to Society Corporation 1991 Equity Compensation Plan.
10.29 Restatement of the Ameritrust Long-Term Incentive Plan as the Ameritrust Stock
Option Plan Filed as Exhibit 10.25 to Form 10-K for the year ended December
31, 1991, and incorporated herein by reference.
10.30 Trust Agreement (Executive Benefits Rabbi Trust), dated November 3, 1988.
Filed as Exhibit 10.26 to Form 10-K for the year ended December 31, 1991, and
incorporated herein by reference.
10.31 Ameritrust Corporation Excess Benefit Plan. Filed as Exhibit 10.29 to Form
10-K for the year ended December 31, 1991, and incorporated herein by
reference.
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10.32 Ameritrust Corporation Deferred Compensation Plan. Filed as Exhibit 10.30 to
Form 10-K for the year ended December 31, 1991, and incorporated herein by
reference.
**10.33 Old KeyCorp Supplemental Disability Benefit Plan (Specimen Document).
**10.34 Old KeyCorp Performance Unit Plan.
10.35 Form of old KeyCorp Severance Agreement.
10.36 Form of old KeyCorp Employment Agreement.
10.37 Form of Amendment to Employment Agreement and Severance Agreement for Old
KeyCorp executives.
10.38 Form of Amendment to Change of Control Agreement for Society executives, dated
December 20, 1993. Filed as Exhibit 99(i) to Registration Statement on Form
S-4 filed December 28, 1993 (Registration No. 33-51717), and incorporated
herein by reference.
10.39 Form of Change of Control Agreement for old KeyCorp executives and Society
executives, dated December 20, 1993. Filed as Exhibit 99(j) to Registration
Statement on Form S-4 filed December 28, 1993 (Registration No. 33-51717), and
incorporated herein by reference.
10.40 Old KeyCorp Stock Option Plan.
10.41 Old KeyCorp Directors' Stock Option Plan.
10.42 Old KeyCorp 1988 Stock Option Plan, as amended.
**10.43 Old KeyCorp Executive Incentive Compensation Plan Description.
**10.44 Old KeyCorp Deferred Compensation Plan for Directors, effective June 1, 1990.
**10.45 Old KeyCorp Executive Deferred Compensation Plan, effective June 1, 1990.
**10.46 Old KeyCorp Survivor Benefit Plan, effective September 1, 1990.
**10.47 Old KeyCorp Directors' Survivor Benefit Plan, effective September 1, 1990.
**10.48 Old KeyCorp Supplemental Retirement Benefit Plan for Key Executives, effective
July 1, 1990 and restated August 16, 1990.
**10.49 Old KeyCorp Umbrella Trust for Executives, between KeyCorp and National Bank
of Detroit dated July 1, 1990.
**10.50 Old KeyCorp Umbrella Trust for Directors, between KeyCorp and National Bank of
Detroit dated July 1, 1990.
**10.51 Employment Agreement between old KeyCorp and William H. Dougherty dated August
15, 1991.
11 Statement re: Computation of Per Share Earnings.
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young, Independent Auditors.
24 Powers of Attorney.
Society hereby agrees to furnish the Securities and Exchange Commission upon
request, copies of instruments outstanding, including indentures, which define
the rights of long-term debt security holders.
All documents listed as Exhibits 10.1 through 10.51 constitute management
contracts or compensatory plans or arrangements.
- ---------------
* Copies of these Exhibits have been filed with Securities and Exchange
Commission. Shareholders may obtain a copy of any exhibit, upon payment of
reproduction costs, by writing Mr. Jay S. Gould, Investor Relations, at 127
Public Square 01-127-0406, Cleveland, Ohio 44114-1306.
** These Exhibits are incorporated by reference from old KeyCorp's Current
Report on Form 8-K dated March 9, 1992.
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(b) Reports on Form 8-K
October 13, 1993 -- Item 5. Other Events. On October 1, 1993, Society
announced the signing of a definitive agreement
providing for the merger of old KeyCorp into and with
Society.
November 19, 1993 -- Item 7. Financial Statements, Pro Forma Financial
Information, and Exhibits. Society filed certain pro
forma financial information that gives effect to the
proposed merger of Society and old KeyCorp, and
supplemental historical financial statements of old
KeyCorp and its subsidiaries.
No other reports on Form 8-K were filed during the three-month period ended
December 31, 1993.
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTIONS 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THE DATE INDICATED.
KEYCORP
CARTER B. CHASE
Executive Vice President,
Secretary and
General Counsel
March 31, 1994
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND
IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE TITLE
- ----------------------------------------------
*Victor J. Riley, Jr. Chairman of the Board,
Chief Executive
Officer, and Director
(Principal Executive
Officer)
*Robert W. Gillespie President, Chief
Operating Officer, and
Director (Principal
Operating Officer)
*James W. Wert Senior Executive Vice
President and Chief
Financial Officer
(Principal Financial
Officer)
*Lee G. Irving Executive Vice
President, Treasurer
and Chief Accounting
Officer (Principal
Accounting Officer)
*H. Douglas Barclay Director
*William G. Bares Director
*Albert C. Bersticker Director
*Thomas A. Commes Director
*Kenneth M. Curtis Director
*John C. Dimmer Director
*Lucie J. Fjeldstad Director
*Stephen R. Hardis Director
*Henry S. Hemingway Director
*Charles R. Hogan Director
*Lawrence A. Leser Director
*Steven A. Minter Director
*M. Thomas Moore Director
*John C. Morley Director
*Richard W. Pogue Director
*Robert A. Schumacher Director
*Ronald B. Stafford Director
*Dennis W. Sullivan Director
*Peter G. Ten Eyck, II Director
*Nancy B. Veeder Director
*By Carter B. Chase, attorney-in-fact
March 31, 1994
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