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KeyCorp Reports Fourth Quarter 2017 Net Income Of $181 Million, Or $.17 Per Common Share

Earnings per common share of $.36, excluding $.19 per common share from notable items: merger-related charges and the estimated impact of tax reform and related actions

Company Release - 1/18/2018 6:30 AM ET

CLEVELAND, Jan. 18, 2018 /PRNewswire/ --                                                                                                                            


Earnings Per Share

Cash Efficiency(a)

Return on Tangible
Common Equity(a)





Reported

$.17

66.7%

6.4%





Adjusted (Non-GAAP)(b)

$.36

61.3%

13.6%



     (a)

Non-GAAP measure; see financial supplement for reconciliation

     (b)

Excludes notable items; see financial supplement for detail

 

KeyCorp (NYSE: KEY) today announced fourth quarter net income from continuing operations attributable to Key common shareholders of $181 million, or $.17 per common share, compared to $349 million or $.32 per common share, for the third quarter of 2017 and $213 million, or $.20 per common share, for the fourth quarter of 2016. During the fourth quarter of 2017, Key's results included a number of notable items resulting in a net impact of $.19 per common share, including merger-related charges and the estimated impact of tax reform and related actions. Notable items had a net impact of $.03 per common share in the third quarter of 2017 and $.11 per common share in the fourth quarter of 2016. Excluding notable items, earnings per common share were $.36 for the fourth quarter of 2017, compared to $.35 for the third quarter of 2017 and $.31 for the fourth quarter of 2016.

For the year ended December 31, 2017, net income from continuing operations attributable to Key common shareholders was $1.2 billion, or $1.12 per common share, compared to $753 million, or $.80 per common share, for the same period one year ago.


 

"Key's fourth quarter results were a solid finish to the year, with continued momentum in our core businesses. Revenue trends benefited from growth in our fee-based businesses, with investment banking and debt placement fees reaching new record levels for the fourth quarter and full year.  Expenses this quarter reflect the strength of our capital markets business, along with a number of notable items, including merger-related charges and the impact from recent tax reform. We expect the new tax law will benefit both Key and our clients, by strengthening the competitive position of U.S businesses and promoting stronger economic growth.

 

Our full-year results reflected growth in both our Community Bank and Corporate Bank, as well as the successful integration of our First Niagara acquisition. Key's return on average tangible common equity, excluding notable items, was 13.1%, and we generated positive operating leverage for the fifth consecutive year. We have also benefited from recent investments, including the acquisition of the investment banking firm Cain Brothers, which closed early in the fourth quarter.

 

Our capital position remains strong, which allowed us to complete the second increase in our common share dividend this year, along with the repurchase of $199 million in common shares during the quarter. We believe that we are well-positioned to return higher levels of capital to our shareholders."

     

 -  Beth Mooney, Chairman and CEO

 

Estimated Impact of Tax Reform and Related Actions

As a result of the recent passage of the Tax Cuts and Jobs Act on December 22, 2017, Key took a number of actions, including the revaluation of deferred tax assets and liabilities, as well as certain tax-advantaged assets. This revaluation resulted in an estimated tax expense of $147 million recognized in the fourth quarter of 2017. Noninterest expense increased by $29 million in the quarter related to the impairment of certain tax-advantaged assets and an additional contribution to employee retirement accounts. The total impact of tax reform and related actions was $.16 per common share in the fourth quarter of 2017. The changes resulting from recent tax legislation are reasonable estimates as of December 31, 2017, and may be refined in future periods.

Beginning January 1, 2018, the new tax law will lower Key's marginal federal corporate income tax rate from 35% to 21%. Key's effective tax rate will also continue to benefit from the company's investments in certain tax-advantaged assets. Key will be sharing the expected tax benefits with its employees by increasing its minimum wage and making the additional retirement plan contribution referenced above. These actions will benefit over 80% of our workforce and allow us to reward and invest in the financial wellness of our employees.

Selected Financial Highlights















dollars in millions, except per share data





Change 4Q17 vs.



4Q17

3Q17

4Q16


3Q17

4Q16

Income (loss) from continuing operations attributable to Key common shareholders

$

181

$

349

$

213


(48.1)%

(15.0)%

Income (loss) from continuing operations attributable to Key common shareholders per
   common share — assuming dilution

.17

.32

.20


(46.9)

(15.0)

Return on average total assets from continuing operations

.57%

1.07%

.69%


N/A

N/A

Common Equity Tier 1 ratio (a)

10.08

10.26

9.54


N/A

N/A

Book value at period end

$

13.09

$

13.18

$

12.58


(.7)%

4.1%

Net interest margin (TE) from continuing operations

3.09%

3.15%

3.12%


N/A

N/A

















(a)   12/31/2017 ratio is estimated.















TE = Taxable Equivalent, N/A = Not Applicable







 

INCOME STATEMENT HIGHLIGHTS














Revenue














dollars in millions





Change 4Q17 vs.


4Q17

3Q17

4Q16


3Q17

4Q16

Net interest income (TE)

$

952

$

962

$

948


(1.0)%

.4%

Noninterest income

656

592

618


10.8

6.1

Total revenue

$

1,608

$

1,554

$

1,566


3.5%

2.7%








TE = Taxable Equivalent

Taxable-equivalent net interest income was $952 million for the fourth quarter of 2017, and the net interest margin was 3.09%, compared to taxable-equivalent net interest income of $948 million and a net interest margin of 3.12% for the fourth quarter of 2016, reflecting the benefit from higher interest rates and low deposit betas, partly offset by a shift in funding mix into certificates of deposit. Fourth quarter 2017 net interest income included $38 million of purchase accounting accretion related to the acquisition of First Niagara, a decline of $54 million from the fourth quarter of 2016, which included $34 million related to the refinement of third quarter 2016 purchase accounting estimates. 

Compared to the third quarter of 2017, taxable-equivalent net interest income declined by $10 million, and the net interest margin decreased by six basis points. The decrease in net interest income and the net interest margin reflects a decline in purchase accounting accretion of $10 million. Additionally, higher interest rates and relatively low deposit betas partially offset a decline in average loan balances, resulting from paydowns and clients continuing to take advantage of attractive capital markets alternatives in the fourth quarter of 2017.

Excluding purchase accounting accretion, taxable-equivalent net interest income increased $58 million from the fourth quarter of 2016 and was stable compared to the third quarter of 2017.

Noninterest Income














dollars in millions





Change 4Q17 vs.


4Q17

3Q17

4Q16


3Q17

4Q16

Trust and investment services income

$

131

$

135

$

123


(3.0)%

6.5%

Investment banking and debt placement fees

200

141

157


41.8

27.4

Service charges on deposit accounts

89

91

84


(2.2)

6.0

Operating lease income and other leasing gains

27

16

21


68.8

28.6

Corporate services income

56

54

61


3.7

(8.2)

Cards and payments income

77

75

69


2.7

11.6

Corporate-owned life insurance income

37

31

40


19.4

(7.5)

Consumer mortgage income

7

7

6


16.7

Mortgage servicing fees

17

21

20


(19.0)

(15.0)

Net gains (losses) from principal investing

3

3

4


(25.0)

Other income

12

18

33


(33.3)

(63.6)

Total noninterest income

$

656

$

592

$

618


10.8%

6.1%








Key's noninterest income was $656 million for the fourth quarter of 2017, compared to $618 million for the year-ago quarter. Growth was largely driven by another record quarter of investment banking and debt placement fees, up $43 million from the year-ago period, related to the recent acquisition of Cain Brothers, as well as ongoing growth in the core Key franchise, including strength in commercial mortgage banking. Momentum continued in many fee-based businesses, as cards and payments income and trust and investment services income each grew $8 million from the year-ago period, as a result of higher credit card and merchant fees and strength in the equity markets, respectively. These increases were partially offset by a decline in other income, including $7 million of impairments of certain tax-advantaged assets, which were offset by a reduction of related income tax expense.

Compared to the third quarter of 2017, noninterest income increased by $64 million. The increase is largely driven by broad-based growth in investment banking and debt placement fees, which grew $59 million from the prior quarter. Operating lease income and other leasing gains increased $11 million, related to lease residual losses in the prior quarter. Slightly offsetting these increases was a decline in other income.

Noninterest Expense














dollars in millions





Change 4Q17 vs.


4Q17

3Q17

4Q16


3Q17

4Q16

Personnel expense

$

608

$

558

$

648


9.0%

(6.2)%

Non-personnel expense

490

434

572


12.9

(14.3)

  Total noninterest expense

$

1,098

$

992

$

1,220


10.7

(10.0)








Notable items (a)

85

36

207


136.1

(58.9)

  Total noninterest expense excluding notable items

$

1,013

$

956

$

1,013


6.0%








(a)

Notable items for the fourth quarter of 2017 includes $56 million of merger-related charges and $29 million of estimated impacts of tax reform and related actions. For the third quarter of 2017 and fourth quarter of 2016, notable items includes $36 million and $207 million of merger-related charges, respectively. See the table entitled "GAAP to Non-GAAP Reconciliations" in the attached financial supplement which presents the computations of certain financial measures related to "notable items."


Key's noninterest expense was $1.098 billion for the fourth quarter of 2017, and included a number of notable items, including merger-related charges and the estimated impact of tax reform and related actions. Merger-related charges included $26 million of personnel expense and $30 million of non-personnel expense, mostly reflected in net occupancy, marketing and other expense. The fourth quarter of 2017 was the last quarter that merger charges related to the First Niagara acquisition will be reported. The estimated impact of tax reform and other related actions had an impact of $29 million on expenses in the fourth quarter of 2017, including the impairment of certain tax-advantaged assets, as well as a one-time additional contribution to employee retirement accounts.

Excluding notable items, noninterest expense was unchanged from the year-ago period. Expenses related to acquisitions and investments, including Cain Brothers, as well as higher operating lease expense were offset by the realization of First Niagara cost savings.

Excluding notable items, noninterest expense increased $57 million from the third quarter of 2017. The increase in personnel expense was largely the result of the acquisition of Cain Brothers early in the fourth quarter, which added $36 million of noninterest expense, as well as increased incentive compensation related to a strong capital markets performance. The increase in nonpersonnel expense was primarily related to higher other expense, as well as increases in net occupancy and operating lease expense.

 BALANCE SHEET HIGHLIGHTS

Average Loans














dollars in millions





Change 4Q17 vs.


4Q17

3Q17

4Q16


3Q17

4Q16

Commercial and industrial (a)

$

41,289

$

41,416

$

39,495


(.3)%

4.5%

Other commercial loans

21,040

21,598

21,617


(2.6)

(2.7)

Home equity loans

12,128

12,314

12,812


(1.5)

(5.3)

Other consumer loans

11,549

11,486

11,436


.5

1.0

  Total loans

$

86,006

$

86,814

$

85,360


(.9)%

.8%








(a)

Commercial and industrial average loan balances include $119 million, $117 million, and $119 million of assets from commercial credit cards at December 31, 2017, September 30, 2017, and December 31, 2016, respectively.


Average loans were $86.0 billion for the fourth quarter of 2017, an increase of $646 million compared to the fourth quarter of 2016, reflecting growth in commercial and industrial loans and indirect auto lending. 

Compared to the third quarter of 2017, average loans decreased by $808 million. Reductions in commercial real estate loans reflected significantly higher debt placements and paydowns throughout the quarter. Additionally, commercial loan balances declined due to lower line utilization in the fourth quarter of 2017. On a period-end basis, commercial and industrial loans increased $712 million, with growth very late in the quarter, therefore having a limited impact on average balances for the quarter.

At December 31, 2017, the remaining fair value discount on the First Niagara acquired loan portfolio was $266 million, compared to $302 million at September 30, 2017.

Average Deposits














dollars in millions





Change 4Q17 vs.


4Q17

3Q17

4Q16


3Q17

4Q16

Non-time deposits

$

92,251

$

92,039

$

94,414


.2%

(2.3)%

Certificates of deposit ($100,000 or more)

6,776

6,402

5,428


5.8

24.8

Other time deposits

4,771

4,664

4,849


2.3

(1.6)

  Total deposits