CLEVELAND, July 26, 2016 /PRNewswire/ -- KeyCorp (NYSE: KEY) today announced second quarter net income from continuing operations attributable to Key common shareholders of $193 million, or $.23 per common share, compared to $182 million, or $.22 per common share, for the first quarter of 2016, and $230 million, or $.27 per common share, for the second quarter of 2015. During the second quarter of 2016, Key incurred merger-related expense totaling $45 million, or $.04 per common share, compared to $24 million, or $.02 per common share, in the first quarter of 2016. Excluding merger-related expense, earnings per common share were $.27 for the second quarter of 2016 and $.24 for the first quarter of 2016. No merger-related expense was incurred in the second quarter of 2015.

"During the second quarter, we maintained positive momentum in our core businesses and made significant progress on our upcoming acquisition of First Niagara," said Chairman and Chief Executive Officer Beth Mooney. "Excluding merger-related expense, we generated positive operating leverage relative to the year-ago period. Revenue was stable compared with the same period last year and up 3% from last quarter, despite lower interest rates and challenging market conditions. Expenses continue to be well managed, which allows us to make ongoing investments in our businesses. Credit quality remained solid, with net charge-offs to average loans below our targeted range."

"Additionally, we increased our dividend by 13% during the quarter, and we were pleased to receive no objection from the Federal Reserve to our 2016 capital plan. We look forward to resuming share repurchases upon completion of our First Niagara acquisition, and, subject to approval by our Board of Directors, increasing the quarterly dividend to $.095 per common share next year," continued Mooney.

"As we previously announced, we expect to close our First Niagara acquisition on or about August 1. Significant progress is being made as we move toward integration, including plans for our combined branch network that were shared earlier this month," added Mooney. "We are excited about the opportunity to bring these two companies together and deliver on the financial commitments we have made to our shareholders."

SECOND QUARTER 2016 FINANCIAL RESULTS, from continuing operations

Compared to Second Quarter of 2015

• Average loans up 5%, driven by 12% growth in commercial, financial and agricultural loans
• Average deposits, excluding deposits in foreign office, up 5% reflecting core deposit growth in Key's retail banking franchise, growth in escrow deposits from the commercial mortgage servicing business, and commercial deposit inflows
• Net interest income (taxable-equivalent) up $14 million, as higher earning asset balances and yields were partially offset by lower reinvestment yields
• Noninterest income down $15 million due to lower investment banking and debt placement fees, partially offset by an increase in other income and growth in core fee-based businesses
• Noninterest expense, excluding merger-related expense of $45 million, decreased $5 million, primarily attributable to lower personnel expense, net occupancy expense, and business services and professional fees partially offset by higher other and non-merger related marketing expense
• Net loan charge-offs to average loans of .28%, up from .25% in the year-ago quarter

Compared to First Quarter of 2016

• Average loans up 2%, primarily driven by a 3% increase in commercial, financial and agricultural loans
• Average deposits up 3%, due to growth in escrow deposits in Key's commercial mortgage servicing business, short-term inflows from commercial clients, and an increase in certificates of deposit and other time deposits
• Net interest income (taxable-equivalent) down $7 million driven by lower reinvestment yields and lower loan fees, partially offset by higher earning asset balances
• Noninterest income up $42 million, primarily due to an increase in investment banking and debt placement fees and higher net gains on principal investing
• Noninterest expense, excluding merger-related expense, increased $27 million, primarily driven by expense from certain real estate investments and higher non-merger related marketing expense
• Net loan charge-offs to average loans of .28%, down from .31% in the prior quarter

Taxable-equivalent net interest income was $605 million for the second quarter of 2016, and the net interest margin was 2.76%. These results compare to taxable-equivalent net interest income of $591 million and a net interest margin of 2.88% for the second quarter of 2015. The $14 million increase in net interest income compared to the year-ago quarter reflects higher earning asset balances and an increase in earning asset yields, largely the result of Key's loan portfolio re-pricing to higher short-term interest rates. The benefit to net interest income from these items was partly offset by lower reinvestment yields in Key's securities and derivatives portfolios. The 12 basis point decline in the net interest margin reflects higher levels of liquidity, lower reinvestment yields in the securities and derivatives portfolios, and lower loan fees. Key's Federal Reserve account averaged $5.6 billion during the second quarter of 2016, which increased $2.3 billion compared to the second quarter of 2015 and reduced the net interest margin by 7 basis points.

Compared to the first quarter of 2016, taxable-equivalent net interest income decreased by $7 million, and the net interest margin decreased by 13 basis points. The decrease in net interest income was primarily attributable to lower reinvestment yields and a decline in loan fees, which was partly offset by higher earning asset balances. The 13 basis point decline in net interest margin reflects higher levels of liquidity, as well as lower reinvestment yields and a decline in loan fees. Key's Federal Reserve account increased $2.1 billion during the quarter, driven by growth in short-term deposits from commercial clients, which resulted in 7 basis points of the decline in the net interest margin.

Key's noninterest income was $473 million for the second quarter of 2016, compared to $488 million for the year-ago quarter. The decrease from the prior year was largely attributable to lower investment banking and debt placement fees of $43 million, reflecting challenging market conditions, as well as $6 million of lower operating lease income and other leasing gains. These declines were offset by an increase of $17 million in other income primarily related to gains from certain real estate investments, along with continued growth in some of Key's core fee-based businesses, including corporate services and cards and payments.

Compared to the first quarter of 2016, noninterest income increased by $42 million. The primary driver of the increase was $27 million of higher investment banking and debt placement fees, reflecting improved capital markets conditions. Core fee-based businesses continued to perform well, as cards and payments income increased $6 million and corporate services income increased $3 million, along with $3 million in increased service charges on deposit accounts compared to the prior quarter. Net gains on principal investing also contributed $11 million to the increase from the prior quarter. Partially offsetting these increases was a decrease of $9 million in other income.

Key's noninterest expense was $751 million for the second quarter of 2016. Noninterest expense included $45 million of merger-related expense, primarily made up of $35 million in personnel expense related to technology development for systems conversions and fully-dedicated personnel for merger and integration efforts. The remaining $10 million of merger-related expense was nonpersonnel expense, largely recognized in business services and professional fees and marketing. In the first quarter of 2016, Key incurred $24 million of merger-related expense, while no merger-related expense was incurred in the second quarter of 2015.

Excluding merger-related expense, noninterest expense was $5 million lower than the second quarter of last year. The decrease is primarily attributable to $16 million in lower personnel expense related to lower performance-based compensation, along with lower net occupancy expenses and business services and professional fees. These decreases were partially offset by an increase in other expense, reflecting the impact of certain real estate investments and other miscellaneous items, along with increased non-merger related marketing expense.

Compared to the first quarter of 2016, excluding merger-related expense, noninterest expense increased by $27 million. The increase is primarily related to $23 million of higher nonpersonnel expense, including an increase in other expense reflecting the impact of certain real estate investments and other miscellaneous items. Additionally, Key incurred $8 million in higher non-merger related marketing expense and $4 million in increased personnel expense, related to higher performance-based compensation.

BALANCE SHEET HIGHLIGHTS

In the second quarter of 2016, Key had average assets of $99.2 billion compared to $93.9 billion in the second quarter of 2015 and $96.3 billion in the first quarter of 2016. The increase in average assets from both the year-ago period and prior quarter reflect growth in average loan balances as well as an increase in short-term investments related to higher levels of liquidity.

Average loans were $61.1 billion for the second quarter of 2016, an increase of $3.2 billion compared to the second quarter of 2015. The loan growth primarily occurred in the commercial, financial and agricultural portfolio, which increased $3.6 billion and was spread across Key's commercial lines of business. Consumer loans declined by $504 million mostly due to paydowns in Key's home equity loan portfolio and continued run-off in Key's consumer exit portfolios.

Compared to the first quarter of 2016, average loans increased by $992 million, driven by commercial, financial and agricultural loans, which grew $1 billion. Consumer loans declined $159 million, largely the result of a decline in home equity loans.

Average deposits, excluding deposits in foreign office, totaled $73.9 billion for the second quarter of 2016, an increase of $3.6 billion compared to the year-ago quarter. Interest-bearing deposits increased $4.9 billion driven by a $3.6 billion increase in NOW and money market deposit accounts and a $1.3 billion increase in certificates of deposit and other time deposits. The increase in average deposits from the year-ago quarter reflects core deposit growth in Key's retail banking franchise, growth in escrow deposits from the commercial mortgage servicing business, and commercial deposit inflows. These increases were partially offset by a $1.2 billion decline in noninterest-bearing deposits.

Compared to the first quarter of 2016, average deposits increased by $2.3 billion. The increase was driven by NOW and money market deposit accounts which increased $2.0 billion, and certificates of deposit and other time deposits which increased $524 million. Higher escrow deposits from Key's commercial mortgage servicing business, short-term inflows from Key's commercial clients, and core deposit growth in Key's retail banking franchise contributed to the linked-quarter increase in NOW and money market deposit accounts.

Key's provision for credit losses was $52 million for the second quarter of 2016, compared to $41 million for the second quarter of 2015 and $89 million for the first quarter of 2016. Key's allowance for loan and lease losses was $854 million, or 1.38% of total period-end loans, at June 30, 2016, compared to 1.37% at June 30, 2015, and 1.37% at March 31, 2016.

Net loan charge-offs for the second quarter of 2016 totaled $43 million, or .28% of average total loans. These results compare to $36 million, or .25%, for the second quarter of 2015, and $46 million, or .31%, for the first quarter of 2016.

At June 30, 2016, Key's nonperforming loans totaled $619 million and represented 1.00% of period-end portfolio loans, compared to .72% at June 30, 2015, and 1.12% at March 31, 2016. Nonperforming assets at June 30, 2016 totaled $637 million and represented 1.03% of period-end portfolio loans and OREO and other nonperforming assets, compared to .75% at June 30, 2015, and 1.14% at March 31, 2016.

CAPITAL

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

As shown in the preceding table, at June 30, 2016, Key's estimated Common Equity Tier 1 and Tier 1 risk-based capital ratios stood at 11.12% and 11.43%, respectively. In addition, the tangible common equity ratio was 9.95% at June 30, 2016.

In October 2013, federal banking regulators published the final Basel III capital framework for U.S. banking organizations (the "Regulatory Capital Rules"). 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. Key's estimated Common Equity Tier 1 ratio as calculated under the fully phased-in Regulatory Capital Rules was 11.07% at June 30, 2016. This estimate exceeds the fully phased-in required minimum Common Equity Tier 1 and Capital Conservation Buffer of 7.00%.

As previously reported, Key's existing share repurchase program is currently suspended due to the pending acquisition of First Niagara Financial Group.

Key's 2016 capital plan, effective as of the third quarter of 2016, received no objection from the Federal Reserve during the Comprehensive Capital Analysis and Review process and includes common share repurchases of up to $350 million. This authorization includes repurchases to offset issuances of common shares under our employee compensation plans. Share repurchases are expected to be executed following the completion of the pending acquisition of First Niagara Financial Group and through the second quarter of 2017.

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

• Positive operating leverage from prior year
• Net income increased to $81 million, 17.4% growth from prior year
• Commercial, financial, and agricultural average loan growth of $675 million, or 5.4% from prior year
• Average deposits up $3.0 billion, or 6.0% from the prior year

Key Community Bank recorded net income attributable to Key of $81 million for the second quarter of 2016, compared to $69 million for the year-ago quarter.

Taxable-equivalent net interest income increased by $29 million, or 8.0%, from the second quarter of 2015 due to favorable deposit rates and balance growth. Average deposits increased $3 billion, or 6.0%, from one year ago, and average loans and leases grew $229 million, or .7%. Commercial, financial and agricultural loans grew by $675 million, or 5.4%, from the prior year.

Noninterest income increased $9 million, or 4.5%, from the year-ago quarter. Service charges on deposit accounts increased $4 million, and cards and payments income and investment banking and debt placement fees each increased $3 million. These increases were partially offset by market weakness affecting Key's Private Bank as well as lower consumer mortgage income.

The provision for credit losses increased by $22 million from the second quarter of 2015. Net loan charge-offs decreased $3 million from the same period one year ago.

Noninterest expense remained relatively stable, decreasing by $3 million, or .7%, from the year-ago quarter.

Key Corporate Bank Summary of Operations

• Average loan and lease balances up $3.3 billion, or 13.1% from the prior year
• Net income increased to $135 million, 3.1% growth from the prior year

Key Corporate Bank recorded net income attributable to Key of $135 million for the second quarter of 2016, compared to $131 million for the same period one year ago.

Taxable-equivalent net interest income decreased by $6 million, or 2.6%, compared to the second quarter of 2015. Average loan and lease balances increased $3.3 billion, or 13.1%, from the year-ago quarter, primarily driven by growth in commercial, financial and agricultural loans. This loan growth was offset by spread compression due to higher funding costs and a decline in loan fees due to lower refinance activity from the prior year. Average deposit balances decreased $580 million, or 2.9%, from the year-ago quarter, mostly driven by lower public deposits.

Noninterest income was down $20 million, or 8.0%, from the prior year. Investment banking and debt placement fees declined $45 million, or 32.4%, due to challenging market conditions. Other noninterest income increased $15 million from the year-ago quarter mostly due to gains from certain real estate investments. Corporate services income was up $7 million, or 21.2%, due to growth in commitment fees and derivatives.

The provision for credit losses decreased $11 million, or 26.8%, compared to the second quarter of 2015 as lower provisioning related to unfunded commitments offset higher net loan charge-offs.

Noninterest expense increased by $3 million, or 1.2%, from the second quarter of 2015. Increases in various other expense items, including operating lease expense, were partially offset by lower personnel costs.

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 $24 million for the second quarter of 2016, compared to $31 million for the same period last year. This decline was largely attributable to spread compression.

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KeyCorp was organized more than 160 years ago and is headquartered in Cleveland, Ohio. One of the nation's largest bank-based financial services companies, Key had assets of approximately $101.2 billion at June 30, 2016.

Key provides deposit, lending, cash management and investment services to individuals and small and mid-sized businesses in 12 states under the name KeyBank National Association. 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, July 26, 2016. An audio replay of the call will be available through August 2, 2016.

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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 expense, 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.

On October 30, 2015, Key announced that it entered into a definitive agreement and plan of merger to acquire First Niagara Financial Group. As a result of this pending transaction, Key has recognized merger-related expense. The table below shows the computation for noninterest expense excluding merger-related expense, earnings per common share excluding merger-related expense, and return on average assets from continuing operations excluding merger-related expense. Management believes that eliminating the effects of the merger-related expense 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 expense. 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.

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SOURCE KeyCorp