KeyCorp Reports Third Quarter 2016 Net Income Of $165 Million, Or $.16 Per Common Share; Earnings Per Common Share Of $.30, Excluding $.14 Of Merger-Related Charges

CLEVELAND, Oct. 25, 2016 /PRNewswire/ -- KeyCorp KEY today announced third quarter net income from continuing operations attributable to Key common shareholders of $165 million, or $.16 per common share, compared to $193 million, or $.23 per common share, for the second quarter of 2016, and $216 million, or $.26 per common share, for the third quarter of 2015. During the third quarter of 2016, Key incurred merger-related charges totaling $207 million, or $.14 per common share, compared to $45 million, or $.04 per common share, in the second quarter of 2016. Excluding merger-related charges, earnings per common share were $.30 for the third quarter of 2016 and $.27 for the second quarter of 2016. No merger-related charges were incurred in the third quarter of 2015.

"Third quarter results reflect strong momentum and performance in Key's core businesses, and we achieved a significant milestone with the completion of our First Niagara acquisition," said Chairman and Chief Executive Officer Beth Mooney. "Excluding the impact from the acquisition and merger-related charges, Key's revenue was up 6%, benefiting from solid loan growth and strong fee income, including a record quarter for investment banking and debt placement fees. Credit quality remained solid with net charge-offs as a percent of average loans remaining below our targeted range. Also, during the quarter, we leveraged Key's strong capital position by reinitiating our share repurchase program."

"With the completion of our acquisition, we were pleased to welcome our new colleagues and one million new clients from First Niagara," Mooney continued. "We successfully converted branches, ATMs, systems and client accounts to Key earlier this month, and I continue to be encouraged and energized by the opportunity we have ahead. Our focus remains on achieving our financial targets and delivering on the commitments we have made to our shareholders."

First Niagara Financial Group Acquisition

KeyCorp's third quarter results reflect its acquisition of First Niagara Financial Group ("First Niagara"), effective August 1, 2016, in exchange for total consideration paid of $4 billion, including the cash consideration of $811 million, the issuance of 240 million common shares valued at $2.8 billion, and the issuance of a new series of KeyCorp preferred stock to replace the First Niagara preferred stock valued at $350 million. Results of the operations acquired from First Niagara have been reflected in Key's results since the acquisition date. Assets acquired in the transaction totaled approximately $35.6 billion, while liabilities assumed were $33 billion, not reflecting the impact of branch divestitures.

In connection with Key's acquisition of First Niagara, third quarter 2016 results also include the divestiture of 18 branches on September 9, 2016. The impact of divested branches on Key's third quarter 2016 results included $439 million of loans and $1.6 billion of deposits.

 

 

The acquisition of First Niagara contributed approximately $175 million of net interest income in the third quarter of 2016, which included $19 million of related purchase accounting accretion. Third quarter 2016 net interest income included an additional $6 million of one-time merger-related charges.

Taxable-equivalent net interest income was $788 million for the third quarter of 2016, and the net interest margin was 2.85%, compared to taxable-equivalent net interest income of $598 million and a net interest margin of 2.87% for the third quarter of 2015. The net interest margin declined two basis points, reflecting higher levels of liquidity, partially offset by the benefit from the First Niagara acquisition. Excluding the impact of First Niagara and merger-related charges, net interest income increased 4% compared to the year-ago quarter, driven by higher earning asset balances.

Compared to the second quarter of 2016, taxable-equivalent net interest income increased by $183 million, and the net interest margin increased by nine basis points. The net interest margin increased primarily due to the acquisition of First Niagara, partially offset by lower reinvestment yields in Key's securities portfolio. Excluding the impact of First Niagara and merger-related charges, net interest income increased by $14 million, driven by higher earning asset balances.

 

 

The acquisition of First Niagara contributed approximately $53 million of noninterest income in the third quarter of 2016, which primarily impacted service charges on deposit accounts, trust and investment services income, and cards and payments income. Additionally, third quarter 2016 reported noninterest income includes $12 million of merger-related charges, including losses from investment portfolio repositioning.

Key's noninterest income was $549 million for the third quarter of 2016, compared to $470 million for the year-ago quarter. Excluding the impact of First Niagara and merger-related charges discussed above, noninterest income increased $38 million, or 8%, primarily driven by a record quarter in investment banking and debt placement fees. Also benefiting the quarter was continued growth in cards and payments income, as well as service charges on deposit accounts. These increases were partially offset by lower corporate services income, net gains on principal investing and operating lease income and other leasing gains.

Compared to the second quarter of 2016, noninterest income increased by $76 million.  Excluding the impact of First Niagara and merger-related charges, noninterest income increased $35 million, or 7%, primarily related to the record quarter in investment banking and debt placement fees. Cards and payments income also increased. Partially offsetting the increases were lower operating lease income and other leasing gains, net gains on principal investing and corporate services income.

 

 

Key's noninterest expense was $1.1 billion for the third quarter of 2016, including $140 million related to the operations of First Niagara, which primarily impacted personnel expense, net occupancy, business services and professional fees and other expense.

Additionally, noninterest expense included $189 million of merger-related charges, primarily made up of $97 million in personnel expense related to severance and technology development for systems conversions, as well as fully-dedicated personnel for merger and integration efforts. The remaining $92 million of merger-related charges were nonpersonnel expense, largely recognized in business services and professional fees, computer processing and other expense. In the second quarter of 2016, Key incurred $45 million of merger-related charges, while no merger-related charges were incurred in the third quarter of 2015.

Excluding the $140 million impact of First Niagara and $189 million of merger-related charges, noninterest expense was $29 million higher than the third quarter of last year. The increase was primarily driven by higher performance-based compensation, along with slight increases across various nonpersonnel line items, including FDIC assessment expense. These increases were partially offset by lower employee benefits expense.

Compared to the second quarter of 2016, excluding the impact of First Niagara and merger-related charges, noninterest expense increased by $47 million. The increase was primarily related to higher personnel expense reflecting higher performance-based compensation, as well as an increased FDIC assessment expense.

BALANCE SHEET HIGHLIGHTS

In the third quarter of 2016, Key had average assets of $125.1 billion compared to $94.8 billion in the third quarter of 2015 and $99.2 billion in the second quarter of 2016, primarily reflecting the acquisition of First Niagara.

Key's securities available-for-sale ($18 billion) and held-to-maturity securities ($6.2 billion) averaged $24.2 billion in the third quarter of 2016, compared to $19.2 billion in both the third quarter of 2015 and the second quarter of 2016.  The increase compared to both the year-ago quarter and prior quarter primarily reflects the impact of the First Niagara acquisition, which added $4.7 billion of average investment securities, or $9 billion of securities at period-end. During the quarter, Key completed the planned sales and repositioning of First Niagara's portfolio to more closely align with Key's portfolio and investment philosophy.

 

 

In the third quarter of 2016, the acquisition of First Niagara contributed approximately $15.4 billion of average loans, or $23 billion at period-end, impacting both the commercial and consumer loan portfolios.  These results include the estimated fair value adjustment on the acquired portfolio of $686 million and the divestiture of $439 million of loans.

Average loans were $77.7 billion for the third quarter of 2016, an increase of $18.4 billion compared to the third quarter of 2015.  Excluding the impact of the First Niagara acquisition, average loans were $62.3 billion for the third quarter of 2016, an increase of $3 billion compared to the third quarter of 2015.  The loan growth occurred primarily in the commercial, financial and agricultural portfolio, which increased $3.3 billion.  Consumer loans declined $537 million, largely due to paydowns in Key's home equity loan portfolio.

Compared to the second quarter of 2016, average loans increased by $16.5 billion, or $1.1 billion excluding the impact of First Niagara. This increase was driven by growth in commercial, financial and agricultural loans, which increased $1 billion, and reflects broad based growth across Key's commercial lines of business.

 

 

In the third quarter of 2016, the acquisition of First Niagara contributed approximately $18.9 billion of average deposits, or $27.3 billion at period-end, which are spread across deposit products and consist primarily of consumer deposits.  During the quarter, $1.6 billion of deposits were divested.

Average deposits, excluding deposits in foreign office, totaled $94.9 billion for the third quarter of 2016, an increase of $24.9 billion compared to the year-ago quarter.  Excluding the impact of First Niagara, average deposits increased $5.7 billion over the year-ago quarter.  Interest-bearing deposits increased $5.9 billion driven by a $4.7 billion increase in NOW and money market deposit accounts and a $1.2 billion increase in certificates of deposits and other time deposits.  The increase from the year-ago quarter reflects core deposit growth in Key's retail banking franchise and growth in escrow deposits from our commercial mortgage servicing business. 

Compared to the second quarter of 2016, average deposits increased by $21 billion.  Excluding the impact of First Niagara, average deposits increased $2.2 billion driven by an increase in escrow deposits from Key's commercial mortgage servicing business, core deposit growth in Key's retail banking franchise, and deposit inflows from Key's commercial clients. 

 

 

Key's provision for credit losses was $59 million for the third quarter of 2016, compared to $45 million for the third quarter of 2015 and $52 million for the second quarter of 2016.  Key's provision for credit losses in the third quarter of 2016 included $12 million related to the acquired credit card portfolio from First Niagara. Key's allowance for loan and lease losses was $865 million, or 1.01% of total period-end loans, at September 30, 2016, compared to 1.31% at September 30, 2015, and 1.38% at June 30, 2016. 

Net loan charge-offs for the third quarter of 2016 totaled $44 million, or .23% of average total loans, including $2 million of net charge-offs related to First Niagara. These results compare to $41 million, or .27%, for the third quarter of 2015, and $43 million, or .28%, for the second quarter of 2016.  

At September 30, 2016, Key's nonperforming loans totaled $723 million, which represented .85% of period-end portfolio loans, and include $150 million of nonperforming loans related to First Niagara. These results compare to .67% at September 30, 2015, and 1.00% at June 30, 2016. Nonperforming assets at September 30, 2016, totaled $760 million, and represented .89% of period-end portfolio loans and OREO and other nonperforming assets, and include $167 million of nonperforming assets related to First Niagara. These results compare to .69% at September 30, 2015, and 1.03% at June 30, 2016.

CAPITAL

Key's estimated risk-based capital ratios included in the following table continued to exceed all "well-capitalized" regulatory benchmarks at September 30, 2016.

 

 

As shown in the preceding table, at September 30, 2016, Key's estimated Common Equity Tier 1 and Tier 1 risk-based capital ratios stood at 9.55% and 10.52%, respectively.  In addition, the tangible common equity ratio was 8.26% at September 30, 2016. The declines from the prior quarter are primarily related to the acquisition of First Niagara.

As a "standardized approach" banking organization, Key's mandatory compliance with the final Basel III capital framework for U.S. banking organizations (the "Regulatory Capital Rules") began on January 1, 2015, subject to transitional provisions extending to January 1, 2019. Key's estimated Common Equity Tier 1 ratio as calculated under the fully phased-in Regulatory Capital Rules was 9.39% at September 30, 2016.  This estimate exceeds the fully phased-in required minimum Common Equity Tier 1 and Capital Conservation Buffer of 7.00%.

 

 

During the third quarter of 2016, Key issued 240 million common shares related to the acquisition of First Niagara. Key also resumed its share repurchase program under the 2016 Capital Plan following the close of the First Niagara acquisition. Accordingly, Key completed $65 million of common share repurchases in the third quarter of 2016, including repurchases to offset issuances of common shares under our employee compensation plans.

LINE OF BUSINESS RESULTS

The following table shows the contribution made by each major business segment to Key's taxable-equivalent revenue from continuing operations and income (loss) from continuing operations attributable to Key for the periods presented.  For more detailed financial information pertaining to each business segment, see the tables at the end of this release.

 

      

 

 

 

 

Key Community Bank Summary of Operations

• Net income increased $29 million, or 39.2% from prior year (up $11 million, or 14.9% excluding the impact of First Niagara)
• Average deposits increased $18.2 billion, or 35.5% from the prior year (up $3.8 billion, or 7.4% excluding the impact of First Niagara)
• Average loans increased $10.5 billion, or 33.9% from the prior year (up $206 million, or .7% excluding the impact of First Niagara)

Key Community Bank recorded net income attributable to Key of $103 million for the third quarter of 2016, compared to $74 million for the year-ago quarter. First Niagara contributed $18 million of the growth year-over-year.

Taxable-equivalent net interest income increased by $151 million, or 39.8%, from the third quarter of 2015. Excluding the impact of First Niagara, taxable-equivalent net interest income increased $27 million, primarily driven by deposit growth and higher interest rates.

Noninterest income increased $49 million, or 24.5%, from the year-ago quarter. Excluding the impact of First Niagara, noninterest income increased $8 million, or 4%, related to positive trends in cards and payments income and service charges on deposit accounts. Investment banking and debt placement fees also increased from the year-ago period. These increases were partially offset by declines in trust and investment services and consumer mortgage income.

The provision for credit losses increased by $19 million, or 105.6%, from the third quarter of 2015, primarily related to the acquired credit card portfolio from First Niagara. Excluding the impact of First Niagara, the provision for credit losses increased $3 million, or 16.6%, related to an increase in net loan charge-offs of $9 million from the same period one year ago.

Noninterest expense increased by $134 million, or 30.2%, from the year-ago quarter. Excluding the impact of First Niagara, noninterest expense increased $14 million, or 3.1%, mostly driven by the implementation of an FDIC surcharge and increased marketing expense.

 

 

Key Corporate Bank Summary of Operations

• Record quarter for investment banking and debt placement fees, up $46 million, or 43% from prior year (no impact from First Niagara)
• Net income increased $23 million, or 16.9% from the prior year (up $9 million, or 6.6% excluding the impact of First Niagara)
• Average loans and leases increased $8.1 billion, or 30.8% from the prior year (up $3.1 billion, or 11.7% excluding the impact of First Niagara)
• Average deposits increased $3.9 billion, or 20.7% from the prior year (up $1.5 billion, or 7.9% excluding the impact of First Niagara)

Key Corporate Bank recorded net income attributable to Key of $159 million for the third quarter of 2016, compared to $136 million for the same period one year ago.  First Niagara contributed $14 million of the growth year-over year. 

Taxable-equivalent net interest income increased by $55 million, or 24.9%, compared to the third quarter of 2015.  Excluding the impact of First Niagara, taxable-equivalent net interest income increased by $18 million, or 8%, compared to the third quarter of 2015.  Average loan and lease balances increased $8.1 billion, or 30.8%, from the year-ago quarter, primarily driven by the First Niagara acquisition as well as growth in commercial, financial and agricultural loans.  This loan growth was offset by spread compression due to higher funding costs.  Average deposit balances increased $3.9 billion, or 20.7%, from the year-ago quarter, mostly driven by the First Niagara acquisition as well as growth in commercial escrow deposits.

Noninterest income increased $44 million, or 18.9%, from the prior year.  Excluding the impact of First Niagara, noninterest income increased $40 million, or 17%.  This growth was mostly due to a record quarter for investment banking and debt placement fees, which were up $46 million, or 43%, related to strength in commercial mortgage banking, equity capital markets and merger and acquisition advisory fees.

The provision for credit losses decreased $5 million, or 16.7%, compared to the third quarter of 2015.  Excluding the impact of First Niagara, the provision for credit losses decreased $7 million, or 22.2%.  The decrease was mostly due to lower net loan charge-offs.

Noninterest expense increased by $57 million, or 22.8%, from the third quarter of 2015.  Excluding the impact of First Niagara, noninterest expense increased $39 million, or 15.4%.  Personnel expense increased $32 million, or 26%, mostly due to increases in incentive compensation and salaries.  Several other line items increased over the prior year, including operating lease, cards and payments, FDIC, and overhead expenses.

Other Segments

Other Segments consist of Corporate Treasury, Key's Principal Investing unit, and various exit portfolios.  Other Segments generated net income attributable to Key of $16 million for the third quarter of 2016, compared to $26 million for the same period last year.  This decline was largely attributable to spread compression.

*****

KeyCorp's roots trace back 190 years to Albany, New York. Headquartered in Cleveland, Ohio, Key is one of the nation's largest bank-based financial services companies, with assets of approximately $135.8 billion at September 30, 2016.

Key provides deposit, lending, cash management, insurance, and investment services to individuals and businesses in 15 states under the name KeyBank National Association through a network of more than 1,200 branches and more than 1,500 ATMs.  Key also provides a broad range of sophisticated corporate and investment banking products, such as merger and acquisition advice, public and private debt and equity, syndications and derivatives to middle market companies in selected industries throughout the United States under the KeyBanc Capital Markets trade name. For more information, visit https://www.key.com/. KeyBank is Member FDIC.

 

 

Notes to Editors:

A live Internet broadcast of KeyCorp's conference call to discuss quarterly results and currently anticipated earnings trends and to answer analysts' questions can be accessed through the Investor Relations section at https://www.key.com/ir at 9:00 a.m. ET, on Tuesday, October 25, 2016.  An audio replay of the call will be available through November 8, 2016.

 

 

 

 

 

 

GAAP to Non-GAAP Reconciliations
(dollars in millions)

The table below presents certain non-GAAP financial measures related to "tangible common equity," "return on tangible common equity," "Common Equity Tier 1," "pre-provision net revenue," certain financial measures excluding merger-related charges, and "cash efficiency ratio."

The tangible common equity ratio and the return on tangible common equity ratio have been a focus for some investors, and management believes these ratios may assist investors in analyzing Key's capital position without regard to the effects of intangible assets and preferred stock.  Traditionally, the banking regulators have assessed bank and bank holding company capital adequacy based on both the amount and the composition of capital, the calculation of which is prescribed in federal banking regulations.  In October 2013, the federal banking regulators published the final Basel III capital framework for U.S. banking organizations (the "Regulatory Capital Rules").  The Regulatory Capital Rules require higher and better-quality capital and introduced a new capital measure, "Common Equity Tier 1," a non-GAAP financial measure.  The mandatory compliance date for Key as a "standardized approach" banking organization began on January 1, 2015, subject to transitional provisions extending to January 1, 2019.

Common Equity Tier 1 is not formally defined by GAAP and is considered to be a non-GAAP financial measure.  Since analysts and banking regulators may assess Key's capital adequacy using tangible common equity and Common Equity Tier 1, management believes it is useful to enable investors to assess Key's capital adequacy on these same bases.  The table also reconciles the GAAP performance measures to the corresponding non-GAAP measures.

The table also shows the computation for pre-provision net revenue, which is not formally defined by GAAP.  Management believes that eliminating the effects of the provision for credit losses makes it easier to analyze the results by presenting them on a more comparable basis.

As previously disclosed, Key completed its purchase of First Niagara on August 1, 2016.  The definitive agreement and plan of merger to acquire First Niagara was originally announced on October 30, 2015.  As a result of this transaction, Key has recognized merger-related charges.  The table below shows the computation of merger-related charges, noninterest expense excluding merger-related charges, earnings per common share excluding merger-related charges, and return on average assets from continuing operations excluding merger-related charges.  Management believes that eliminating the effects of the merger-related charges makes it easier to analyze the results by presenting them on a more comparable basis.

The cash efficiency ratio is a ratio of two non-GAAP performance measures. As such, there is no directly comparable GAAP performance measure.  The cash efficiency ratio performance measure removes the impact of Key's intangible asset amortization from the calculation.  The table below also shows the computation for the cash efficiency ratio excluding merger-related charges. Management believes these ratios provide greater consistency and comparability between Key's results and those of its peer banks.  Additionally, these ratios are used by analysts and investors as they develop earnings forecasts and peer bank analysis.

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited.  Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

To view the original version on PR Newswire, visit:http://www.prnewswire.com/news-releases/keycorp-reports-third-quarter-2016-net-income-of-165-million-or-16-per-common-share-earnings-per-common-share-of-30-excluding-14-of-merger-related-charges-300350499.html

SOURCE KeyCorp