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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.
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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