CLEVELAND, July 20, 2017 /PRNewswire/ -- KeyCorp (NYSE: KEY) today announced second quarter net income from continuing operations attributable to Key common shareholders of $393 million, or $.36 per common share, compared to $296 million or $.27 per common share, for the first quarter of 2017 and $193 million, or $.23 per common share, for the second quarter of 2016. During the second quarter of 2017, Key's results included a number of notable items, including a gain related to our merchant services business, the finalization of purchase accounting, merger-related charges, and a charitable contribution. These notable items had a pre-tax net benefit of $43 million, or $.02 per common share for the second quarter of 2017.

"We were pleased with the strength and quality of our second quarter results, which reflect Key's continued business momentum and realization of value from the First Niagara acquisition," said Chairman and Chief Executive Officer Beth Mooney. "We also made investments for growth across our franchise, including the repositioning of our merchant services business and the recent acquisition of HelloWallet."

"We continued to generate positive operating leverage versus the prior year and prior quarter, and our cash efficiency ratio improved to 59.3%, or 59.4%, excluding notable items," Mooney continued. "Revenue growth was driven by both net interest income and fee-based businesses, and importantly, we achieved $400 million in annualized cost savings from First Niagara. We remain on track to achieve an incremental $50 million in savings by early 2018, and remain confident in our ability to achieve our targets and continue to deliver value for our shareholders."

"Our risk and capital positions remained strong in the second quarter," added Mooney. "We increased our common share dividend by 12% while also repurchasing $94 million of common shares. We were pleased to receive no objection from the Federal Reserve on our 2017 Capital Plan, which includes two additional dividend increases, subject to Board approval, and an increased common share repurchase authorization."

Second quarter 2017 net interest income included $100 million of purchase accounting accretion related to the acquisition of First Niagara, including $42 million related to the finalization of previous purchase accounting estimates. First quarter 2017 results included $53 million of purchase accounting accretion.

Taxable-equivalent net interest income was $987 million for the second quarter of 2017, and the net interest margin was 3.30%, compared to taxable-equivalent net interest income of $605 million and a net interest margin of 2.76% for the second quarter of 2016, reflecting benefit from the First Niagara acquisition, including purchase accounting accretion, as well as higher earning asset yields and balances.

Compared to the first quarter of 2017, taxable-equivalent net interest income increased by $58 million, and the net interest margin increased by 17 basis points. The increase in net interest income and the net interest margin reflects an increase in purchase accounting accretion and higher earning asset yields, partly offset by a decline in loan fees and higher interest-bearing deposit costs, largely the result of an increase in commercial deposit rates and growth in higher-yielding deposit products. Net interest income also benefited from one additional day in the second quarter of 2017.

Excluding purchase accounting accretion, taxable-equivalent net interest income increased $282 million from the second quarter of 2016 and $11 million from the first quarter of 2017.

Key's noninterest income was $653 million for the second quarter of 2017, compared to $473 million for the year-ago quarter. Growth was largely driven by the acquisition of First Niagara, as well as core business momentum and a $64 million one-time gain from acquiring the remaining ownership interest in a merchant services joint venture. Investment banking and debt placement fees grew $37 million, related to strong commercial mortgage banking, underwriting, and advisory fees.

Compared to the first quarter of 2017, noninterest income increased by $76 million. The largest driver of the increase was a $64 million one-time gain related to Key's merchant services business, realized in other income. Investment banking and debt placement fees continue to be a source of growth, up $8 million from the prior quarter, related to strong advisory fees. Operating lease income and other leasing gains grew $7 million, and cards and payments income increased $5 million.

Key's noninterest expense was $995 million for the second quarter of 2017, and included $44 million of merger-related charges. Merger-related charges for the quarter were made up of $31 million of personnel expense and $13 million of non-personnel expense, largely reflected in business services and professional fees and marketing expense.

Excluding merger-related charges, noninterest expense was $245 million higher than the second quarter of last year. The increase from the prior year, reflected in both personnel and non-personnel expense, was primarily driven by the acquisition of First Niagara. Higher incentive compensation related to stronger capital markets performance also contributed to the year-over-year increase.

Excluding merger-related charges, noninterest expense was $19 million higher than the first quarter of 2017, mostly related to seasonal trends, including higher marketing expense. Incentive and stock-based compensation and salaries expense increased but were more than offset by lower employee benefits expense. Other notable items which impacted the second quarter included a $20 million charitable contribution and $4 million benefit from purchase accounting finalization, both of which are reflected in other expense.

BALANCE SHEET HIGHLIGHTS

During the second quarter of 2017, Key finalized the fair value of the First Niagara acquired loan portfolio, adjusting the discount from $548 million to $603 million. At June 30, 2017, $345 million of the fair value discount remained.

Average loans were $86.5 billion for the second quarter of 2017, an increase of $25.4 billion compared to the second quarter of 2016, primarily reflecting the impact of the First Niagara acquisition, as well as growth in commercial and industrial loans which was broad-based and spread across Key's commercial lines of business.

Compared to the first quarter of 2017, average loans increased by $369 million. Commercial and industrial loans increased $664 million, with strength in middle market lending. Consumer loans decreased $110 million, mostly from continued declines in the home equity loan portfolio, largely the result of paydowns on home equity lines of credit.

Average deposits totaled $102.8 billion for the second quarter of 2017, an increase of $28.9 billion compared to the year-ago quarter, primarily reflecting the acquisition of First Niagara and core retail and commercial deposit growth.

Compared to the first quarter of 2017, average deposits increased by $701 million, driven by growth in certificates of deposits and NOW and money market deposit accounts, partly offset by a decline in escrow deposits. During the quarter, Key also experienced a shift in deposit mix from noninterest-bearing and low-cost interest-bearing deposits to higher-yielding deposit products. On a period-end basis, total deposits decreased $1.1 billion compared to the linked-quarter, largely the result of seasonal deposit growth that occurred in the first quarter of 2017.

Key's provision for credit losses was $66 million for the second quarter of 2017, compared to $52 million for the second quarter of 2016 and $63 million for the first quarter of 2017. Key's allowance for loan and lease losses was $870 million, or 1.01% of total period-end loans, at June 30, 2017, compared to 1.38% at June 30, 2016, and 1.01% at March 31, 2017.

Net loan charge-offs for the second quarter of 2017 totaled $66 million, or .31% of average total loans. These results compare to $43 million, or .28%, for the second quarter of 2016, and $58 million, or .27%, for the first quarter of 2017.

At June 30, 2017, Key's nonperforming loans totaled $507 million, which represented .59% of period-end portfolio loans. These results compare to 1.00% at June 30, 2016, and .67% at March 31, 2017. Nonperforming assets at June 30, 2017, totaled $556 million, and represented .64% of period-end portfolio loans and OREO and other nonperforming assets. These results compare to 1.03% at June 30, 2016, and .72% at March 31, 2017.

CAPITAL

Key's estimated risk-based capital ratios included in the following table continued to exceed all "well-capitalized" regulatory benchmarks at June 30, 2017.

Key's capital position remained strong throughout the first quarter. As shown in the preceding table, at June 30, 2017, Key's estimated Common Equity Tier 1 and Tier 1 risk-based capital ratios stood at 9.97% and 10.79%, respectively. In addition, the tangible common equity ratio was 8.56% at June 30, 2017.

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 9.87% at June 30, 2017. This estimate exceeds the fully phased-in required minimum Common Equity Tier 1 and Capital Conservation Buffer of 7.00%.

Consistent with Key's 2016 Capital Plan, during the second quarter of 2017, Key declared an increased dividend of $.095 per common share, representing a 12% increase compared to the first quarter of 2017. Key also completed $94 million of common share repurchases during the quarter, including $88 million of common share repurchases in the open market and $6 million of share repurchases related to employee equity compensation programs.

Key's 2017 Capital Plan, which received no objection from the Federal Reserve, includes two common share dividend increases (subject to Board approval), as well as a common share repurchase program of up to $800 million. This authorization includes repurchases to offset issuances of common shares under our employee compensation plans. Repurchases are expected to be executed over the next four quarters.

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 (2Q17 vs. 2Q16)

• Positive operating leverage compared to prior year
• Net income increased $117 million, or 146.3%, from prior year
• Average commercial and industrial loans increased $5.4 billion, or 41.2%, from the prior year
• Average deposits increased $25.9 billion, or 48.2%, from the prior year

Key Community Bank recorded net income attributable to Key of $197 million for the second quarter of 2017, compared to $80 million for the year-ago quarter, benefiting from momentum in Key's core businesses, as well as the impact of the First Niagara acquisition.

Taxable-equivalent net interest income increased by $284 million, or 72.4%, from the second quarter of 2016. The increase was primarily attributable to the acquisition of First Niagara, as well as the benefit from higher interest rates. Average loans and leases increased $16.5 billion, or 53.3%, largely driven by a $5.4 billion, or 41.2%, increase in commercial and industrial loans. Additionally, average deposits increased $25.9 billion, or 48.2%, from one year ago.

Noninterest income was up $130 million, or 63.1%, from the year-ago quarter, driven by the acquisition of First Niagara, including the addition of Key Insurance and Benefits Services. Strength in cards and payments and higher assets under management from market growth also contributed to the increase. The increase in other noninterest income was largely driven by the one-time gain related to Key's merchant services business.

The provision for credit losses increased by $22 million, or 88.0%, and net loan charge-offs increased $30 million from the second quarter of 2016, primarily related to the acquisition of First Niagara.

Noninterest expense increased by $207 million, or 46.5%, from the year-ago quarter, largely driven by the acquisition of First Niagara, as well as core business activity and investments. Personnel expense increased $76 million, while non-personnel expense increased by $131 million, including higher intangible amortization expense and higher FDIC assessment expense.

Key Corporate Bank Summary of Operations (2Q17 vs. 2Q16)

• Positive operating leverage compared to prior year
• Average loan and lease balances up $9.1 billion, or 32%, from the prior year
• Revenue up $145 million, or 32.2%, from the prior year
• Investment banking and debt placement fees up $40 million, or 42.6%, from the prior year

Key Corporate Bank recorded net income attributable to Key of $222 million for the second quarter of 2017, compared to $135 million for the same period one year ago.

Taxable-equivalent net interest income increased by $91 million, or 41.2%, compared to the second quarter of 2016 driven by higher earning asset yields and balances. Average loan and lease balances increased $9.1 billion, or 32%, from the year-ago quarter, primarily driven by the First Niagara acquisition as well as growth in commercial and industrial loans. Average deposit balances increased $2 billion, or 10.5%, from the year-ago quarter, mostly driven by the First Niagara acquisition.

Noninterest income was up $54 million, or 23.5%, from the prior year. This growth was mostly due to $40 million of higher investment banking and debt placement fees related to stronger commercial mortgage banking, underwriting, and advisory fees, as well as an increase of $7 million in operating lease income and other leasing gains related to higher originations. Additional increases of $4 million in both cards and payments income and other noninterest income were partially offset by a $2 million decrease in trust and investment services income.

The provision for credit losses decreased $11 million, or 36.7%, compared to the second quarter of 2016 due to $8 million of lower net loan charge-offs and improvement in the oil and gas portfolio.

Noninterest expense increased by $40 million, or 15.4%, from the second quarter of 2016. The increase from the prior year, reflected in both personnel and non-personnel expense, was largely driven by the acquisition of First Niagara, higher performance-based compensation and various other items, including operating lease, FDIC, and cards and payments 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 $28 million for the second quarter of 2017, compared to $25 million for the same period last year, driven by increases in operating lease income and other leasing gains and corporate-owned life insurance income.

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 June 30, 2017.

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 Thursday, July 20, 2017. An audio replay of the call will be available through July 30, 2017.

For up-to-date company information, media contacts, and facts and figures about Key's lines of business, visit our Media Newsroom at https://www.key.com/newsroom.

GAAP to Non-GAAP Reconciliations(dollars in millions)

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

Notable items include certain revenue or expense items that may occur in a reporting period which management does not consider indicative of ongoing financial performance. Management believes it is useful to consider certain financial metrics with and without merger-related charges and/or other notable items in order to enable a better understanding of Company results, increase comparability of period-to-period results, and to evaluate and forecast those results.

The tangible common equity ratio and the return on average 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 noninterest expense excluding merger-related charges, return on average tangible common equity excluding merger-related charges, return on average assets from continuing operations excluding merger-related charges, cash efficiency ratio excluding merger-related charges, and pre-provision net revenue excluding merger-related charges. For the second quarter of 2017, merger-related charges are included in the total for "notable items," the detail of which is provided below. Management believes that eliminating the effects of the merger-related charges and other notable items 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.

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SOURCE KeyCorp